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Adelphia deal to shuffle cable
One in 10 subscribers to get new operator as a result of $17.6B purchase by Comcast, Time Warner.
April 21, 2005: 10:59 AM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - About one in ten U.S. cable subscribers would get a new provider as the result of the $17.6 billion deal unveiled Thursday in which Comcast Corp. and Time Warner Corp. agreed to jointly buy Adelphia Communications as well as swap some of their own cable customers.

Comcast (Research), the nation's largest cable operator, and media conglomerate Time Warner (Research) will pay $12.7 billion in cash as part of the deal. Time Warner will also pay 16 percent of the stock in its Time Warner Cable unit, the nation's No. 2 cable operator.

Bethpage, N.Y.-based cable operator Cablevision (Research) reportedly had expressed interest in bidding for Adelphia late in the process, but this deal apparently trumps those efforts.

Besides the normal regulatory approvals, the deal needs the consent of the bankruptcy court overseeing Adelphia's operations since the high profile collapse of what was then the nation's No. 6 cable operator three years ago.

Adelphia filed for bankruptcy in June 2002, about a month before its founder, chairman and CEO John Rigas was arrested and charged with looting the company's assets for their personal use. Two of his sons, who were also executives at the company, were also charged.

The elder Rigas and one of his sons were convicted of conspiracy, securities fraud and bank fraud in July 2004. They still await sentencing, while the other son charged in the matter faces a new trial after the jury couldn't reach a verdict on many of the counts against him.

One analyst said it shouldn't be assumed this is a done deal.

"We view this as the most logical deal and incrementally positive for Comcast and Time Warner," said Aryeh B. Bourkoff, an analyst with UBS, in a note to clients. "But the door remains open to competing bids given nature of the bankruptcy process." He said there is a $450 million breakup fee due if the deal is not completed.

Competition with satellite TV

Time Warner is getting a net gain of about 3.5 million basic cable subscribers as part of the deal. It is paying $9.2 billion in cash for the Adelphia assets in addition to issuing the stake in its cable unit, as well as paying $2.0 billion to Comcast for a stake it has held in Time Warner Cable.

The additional customers push Time Warner Cable ahead of the nation's two satellite television operators: DirecTV (Research) and EchoStar Communications' (Research) Dish Network.

Cable and satellite television operators are competing to provide not only television but also high speed Internet and phone service to U.S. households.

Officials from Time Warner and Comcast said that the deal will allow them to offer the Adelphia customers higher end services they might now have now, such as digital video recorders, programming on demand and a wider selection of programming on digital cable, in addition to the Internet and phone services.

They both said they expect Adelphia to lose some basic cable customers to satellite providers during the nine to 12 months it is expected to take to close the deal, due partly to the weaker product lineup Adelphia now offers. But they both expect to stop those losses once they get their new territories.

"The increased scale will provide us with a larger platform to market, sell and rollout new services," said Don Logan, chairman of Time Waner's media and communications group.

Comcast is acquiring a net gain of 1.8 million additional subscribers, as well as having its current 21 percent stake in Time Warner Cable redeemed.

Swapping customers

In addition to using Adelphia's territories to supplement their own system, Comcast and Time Warner will also swap certain cable operations as part of the deal to give each one greater concentration of customers in their new service area.

Time Warner will have 85 percent of its customers in five large clusters, with more than a third of its overall customer base in either the New York or Los Angeles metropolitan areas. Comcast will have much of its customer base concentrated in the Boston to Washington corridor, as well as the upper Midwest.

After the deal Comcast will have about 23.3 million basic cable customers of its own and an additional 3.5 million additional subscribers held in various partnerships. Time Warner will have 14.4 million basic subscribers of its own, and another 1.5 million in a continued partnership with Comcast.

Comcast has used acquisitions to grow, most recently with its 2002 purchase of AT&T Broadband, which brought it 13 million customers. It also made an unsuccessful bid for media conglomerate Walt Disney Co. (Research) in 2004.

Time Warner had until recently been a seller of assets, such as its Warner Music unit and its stake in cable channel Comedy Central, as it tried to cut debt levels. But last year, company officials announced the asset sales to be over and signaled their interest in buying more cable operations.

"As everyone on this call should know, we like this business. We've said it a gazillon times," said Time Warner Chairman and CEO Richard Parson on a call with analysts.

Time Warner said that the deal will boost its net debt levels by $11.2 billion. That will put net debt near levels seen at the company in 2002 before it started selling assets. The company had used profits and past asset sales cut its net debt to about $16.2 billion at the end of 2004.

But Chief Financial Officer Wayne Pace said that even that increased debt level is within the debt-to-earnings ratio targets previously disclosed by the company. Parsons said even with the new debt load, the company will still have the financial resources to look at future dividend increases or share buybacks.

Time Warner also owns CNN/Money.

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Adelphia Communications Corporation
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