Adelphia Cable Tv

Up front, and as much as most of the stock market cares, the joint bid by Comcast and Time Warner to buy Adelphia Communications out of bankruptcy is purely a cable television/media play. Yet, scratch below the surface and an interesting telecom agenda for the would-be acquirers reveals itself as figuring into their proposed $17.6 billion cash-and-stock purchase equation.

Comcast and Time Warner - said to be the first and second largest U.S. cable operators, respectively - clearly sought to beat last-minute competitive bids by Cablevision Systems to gain Adelphia's 5.3 million base of traditional TV subscribers. But the companies also see a limited growth potential in existing analog-TV services, and they may be uncertain regarding the current digital-TV potential; as a result, telecom networking, voice telephony, cable- modem usage and Internet access are somewhat high priorities for both companies, including new forays into VoIP services.

Despite Cablevision, the nation's sixth largest cable operator, recently raising its bid from $16.5 billion to $17.1 billion for Adelphia, Comcast and Time Warner disclosed April 21 that that they reached a deal to purchase Adelphia's assets. Adelphia, the fifth largest cable operator in some 31 states, has been operating under bankruptcy protection since 2002 as its founders, the Rigas family, became embroiled in charges of bank and securities fraud (a timeframe that also saw similar but even higher-profile accounting and looting scandals at Enron, MCI and Tyco International).

The proposed transaction for Colorado-based Adelphia - subject to approvals by regulators and a bankruptcy court - is expected to close in the next nine to 12 months.

Inside The Deal

The deal calls for Comcast and Time Warner to pay $12.7 billion in cash and 16 percent of the stock in the Time Warner Cable (TWC) operating cable subsidiary, which will become a publicly traded entity at closing. Comcast will give back its 21-percent interest in TWC and will pay about $1.5 billion in cash; Comcast's stake in TWC was gained during its 2002 purchase of AT&T Broadband, but the approval by U.S. federal antitrust regulators was on the condition that Comcast divest the stake by 2007. This element in the Adelphia deal may also make the transaction more palatable to regulatory authorities.

The joint bid arrangement also calls for Comcast and Time Warner to redistribute or swap a number of their own and Adelphia's metro-area cable operations and customer bases in California, Colorado, Connecticut, Florida, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Vermont and Virginia.

If all goes according to plan, Comcast and Time Warner will gain an additional 1.8 million and 3.5 million cable TV subscribers, respectively, as a result of the transaction for a total of 23.3 million and 14.4 million, respectively.

The telecom angle comes into the picture as Comcast and Time Warner leverage the Adelphia base toward new services, including Internet access and telephony. Both companies have told analysts that such services are among the factors that can drive sustainable revenue growth for corporate totals, with capex and opex savings possible via faster deployments that include Adelphia's facilities.

Adelphia has seen a slightly declining subscriber base and no telephony services, so Comcast and Time Warner see this untapped market as an opportunity to not only retain Adelphia's users with voice services, but perhaps also to reverse the trend. According to Comcast, about 18 percent of its base has been penetrated by Internet access compared with the current 7 percent in Adelphia territories it will gain from the transaction. Likewise, Time Warner says about 21 percent of its base has been penetrated by Internet access compared with the current 13 percent in Adelphia territories it will gain.

As a legacy of the AT&T Broadband purchase, Comcast, which operates in 35 states, continues to offer a circuit-switched voice service called Comcast Digital Phone (CDP) over multiple carrier networks in some 18 of its markets. Its new VoIP offering, Comcast Digital Voice (CDV), is being introduced into a projected 18 markets during 2005 and is scheduled to be available in all Comcast markets by year-end 2006. These two voice services have a total of nearly 1.3 million subscribers at this time. Comcast's broadband access, designated as High Speed Internet Service (HSI), has nearly 7 million users.

TWC operates in 27 states and is said to have about 4 million subscribers to its high-speed broadband Internet access services marketed under the Road Runner brand name. Starting with an early 2003 launch, the company has been marketing its "Digital Phone" local cable and circuit-switched voice services in all operating divisions. The offering starts at about $39.95 per month and had some 220,000 subscribers as of year-end 2004.

Time Warner's more aggressive voice effort is expected to be its VoIP offerings through its America Online (AOL) subsidiary being unveiled in the United States (TPR, April 13). AOL is offering users three calling plans, and it has contracted wholesale carrier Level 3 Communications as its long-haul service provider.

Time Warner also continues to hold a 44-percent interest in Time Warner Telecom, a Colo.-based competitive local exchange carrier (CLEC) operating 19,000 route miles of its own metro and regional fiber in 44 markets among 22 states. It targets broadband communications and managed voice/data services at long-distance carriers, ISPs, wireless companies and government agencies. Its long-distance services are aimed at small and mid-sized business enterprises. The company started off as a joint venture with TWC in 1993, and it reorganized as a separate entity in 1998. It then issued an IPO as Time Warner Telecom in 1999. Time Warner corporate, however, has not considered the carrier to be a "strategic" asset.

In separate but related Adelphia news, as part of a tentative settlement to resolve claims and probes by the U.S. Securities and Exchange Commission and the U.S. Attorney General's Office for the Southern District of New York, the cable operator has agreed to pay $715 million to the federal government.

[Copyright 2005 Access Intelligence, LLC. All rights reserved.]

COPYRIGHT 2005 Access Intelligence, LLC.
COPYRIGHT 2005 Gale Group

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