Now that Comcast Corp. has emerged as the winner of AT&T Broadband, the industry's newest parlor game appears to be guessing which MSO will be next to consolidate.
Speculation has run wild since Dec. 19, when Comcast's $72 billion bid for Broadband was accepted, and Cox Communications Inc., Cablevision Systems Corp. and Adelphia Communications Corp. have been among the names circulated as both buyers and sellers. But most industry analysts believe that the next deals won't be blockbusters.
Instead, coming deals are more likely to involve smaller system swaps and rationalizations of the combined AT&T Comcast Corp.'s nonstrategic operations. Once the merger closes, that MSO will have 22 million subscribers.
According to analysts, the most likely candidates for rationalization include Broadband's 340,000 subscribers in Montana, Wyoming and parts of Colorado. They had been put on the block before Broadband was thrust into play by Comcast's unsolicited bid in July.
Sources familiar with the matter said that AT&T was close to a deal to sell those systems to Bresnan Communications Inc. president Bill Bresnan, before it was put on hold after Comcast's bid. Bresnan could not be reached for comment last week.
Systems in Texas — a stronghold of Charter Communications Inc. and Time Warner Cable — are also thought to be expendable.
AT&T's 352,000 subscribers in the Los Angeles market — which has two other major operators, Charter and Adelphia Communications Corp. — could be fodder for swaps or sales.
In 2000, AT&T tried to exchange its St. Louis system for Charter's operations in Dallas-Fort Worth. Charter backed out of that deal after the companies couldn't agree on valuations, but Charter eventually obtained the St. Louis operation for $1.79 billion in cash and systems.
Texas also could be a factor in AT&T Comcast's negotiations with AOL Time Warner Inc. regarding AT&T's 25.5-percent interest in Time Warner Entertainment. AT&T has a large system in the Houston area, where Time Warner Cable also has about 638,000 subscribers.
But it remains to be seen whether AT&T Comcast would sell those systems, or use them as trade bait for other properties.
"I do think consolidation is inevitable," said Salomon Smith Barney Inc. cable analyst Niraj Gupta. "One thing you have to remember is that these companies are not compelled to do anything. The scale economics of being part of a 10- to 15-million subscriber company is better than being part of a 3- to 6-million subscriber company, but that doesn't mean a deal has to be done."
If AT&T Comcast decides to rationalize its systems, Gupta said, the Montana operations are likely to be first to go. But he added that like its Los Angeles property, AT&T Comcast could swap those Montana systems for other cable operations.
"The Robertses [Comcast's controlling shareholders] still own their [first] system in Tupelo, Miss., partly out of nostalgia and partly because they feel cable is a great business," Gupta said. "The company is financially pretty strong. They don't necessarily need to monetize assets."
Salomon Smith Barney bond analyst Stevyn Schutzman agreed, adding that AT&T Comcast may look to grow in Los Angeles itself.
"Comcast is a big boy," Schutzman said. "They could do business in L.A."
If AT&T Comcast does decide to shed systems, Schutzman said, they likely would be smaller properties that AT&T acquired in its 1999 purchase of Tele-Communications Inc., rather than those it acquired from MediaOne Group Inc. He added that the new AT&T Comcast may also want to unwind some of the partnerships AT&T inherited from TCI.
One of AT&T's best-known joint ventures is its 50 percent interest in Insight Midwest, a partnership that controls much of the cable operations of Insight Communications Co.
Unwinding the partnerships also is a possibility, Gupta said.
"There's an ability to buy out Insight in that partnership," Gupta said. "The question is, do they buy them out or sell that ownership stake to someone else?"
"The JVs are assets that are more likely to be sold than systems the company owns," he added. "But at the same time, if your JV partner is someone you can swap the ownership stake for other assets, you'd like to do that too."