Time Warner, Comcast Snare Adelphia

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After nearly one year of negotiations and a last-minute bid from Cablevision Systems Corp., Time Warner Inc. and Comcast Corp. have apparently emerged as the winners of Adelphia Communications Corp.’s 5.3 million cable subscribers, striking a deal in principal worth about $17.6 billion-$18 billion in cash and stock.

While a deal is not signed yet, the tentative agreement marks the end of what has been a sometimes-contentious auction. While Time Warner and Comcast have been considered the front-runners from the start, they did face some competition from a $15 billion all-cash bid from leveraged-buyout giant Kohlberg Kravis Roberts & Co. and private-equity group Providence Equity Partners Inc. And earlier this week, Cablevision lobbed in a surprise $16.5 billion all-cash bid that seemed to throw the process into turmoil.

But in the end, Adelphia decided that the Time Warner-Comcast bid was the most viable -- published reports said Cablevision’s offer was submitted on one page and contained little financial detail.

Time Warner officials declined comment. Comcast and Adelphia also declined comment.

According to sources, the Time Warner-Comcast bid consists of $12.5 billion in cash ($10.5 billion from Time Warner and $2 billion from Comcast) and the rest in stock. The agreement also includes a $500 million breakup fee, sources familiar with the deal said.

In addition to the $2 billion in cash, Comcast is contributing its 21% interest in Time Warner Cable in return for about 2 million subscribers. It is not clear whether those systems will come from Adelphia, Time Warner Cable or a mixture of both.

The deal will give Time Warner what it has craved for more than one year -- additional scale in its cable operations.

Time Warner Cable -- already the No. 2 cable operator in the country, with 10.9 million subscribers -- would grow to more than 14 million customers in the deal. In addition, it will consolidate the Los Angeles market -- where it already has about 335,000 subscribers -- adding Adelphia’s 1.2 million customers in such affluent communities as Beverly Hills and Brentwood.

Comcast was expected to contribute its 500,000 customers in three Los Angeles counties to Time Warner, but it is not clear whether that is part of the Adelphia deal or whether it will come later.

The Adelphia acquisition will also fill out existing Time Warner clusters in Ohio and western New York.

Also in question is what the fallout from the acquisition will be. Time Warner is expected to shed at least some of the Adelphia systems.

Adelphia -- which filed for Chapter 11 bankruptcy protection in June 2002 after an accounting scandal that led to the conviction on federal fraud charges of two of its top officers, founder and former chairman John Rigas and his son, former chief financial officer Timothy Rigas -- had first planned to emerge as a new entity.

But after pressure from bondholders, Adelphia decided April 22, 2004, to pursue a dual-track of emergence and an asset sale. In September, Adelphia split itself into seven geographic clusters -- ranging in size from 500,000-1 million subscribers -- to facilitate a sale.

More than 50 interested parties submitted bids, including several smaller cable operators and private-equity firms. But as the deadline for bids approached, it became clear that the auction was Time Warner’s and Comcast’s to lose.

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