Paul Allen to Buy Cable Firm for $4.46 Billion

In a deal valued at $4.46 billion, Microsoft billionaire Paul Allen today will announce an agreement to purchase Charter Communications Inc., a deal that would make him a major player in the cable TV business in Los Angeles and move him closer to his goal of building a high-tech cable empire, sources said.

Allen is expected to invest aggressively in upgrading the systems to deliver a host of services, including Internet, e-mail, high-quality video and phone service over cable wires, particularly in Los Angeles, the location of his largest customer base.

Three months after entering the cable business by buying Dallas-based Marcus Cable Co., Allen would pay $2.5 billion in cash to acquire Charter, a privately held St. Louis-based cable operator that serves 1.1 million subscribers nationwide and roughly 230,000 in Los Angeles. Allen would also assume Charter’s approximately $1.9 billion in debt, valuing the transaction at $4.46 billion, a rich price even by the standards of the merger-crazed cable industry.

Values have soared as the industry has consolidated to take advantage of new technologies that are bringing long-anticipated services such as digital television, telephone and high-speed Internet connections to reality. AT&T;’s agreement last month to pay $44 billion for cable giant Tele-Communications Inc. also escalated the worth of cable entities.

Under the transaction, Allen would combine Marcus and Charter, giving him 2.3 million subscribers nationwide and making him the seventh-largest cable operator in the country. Sources expect Allen to continue his buying spree in the industry.

The largest concentration of customers in Allen’s company would be in the Los Angeles area, where he’ll be the No. 3 operator. Marcus serves roughly 120,000 customers in Burbank and Glendale, while Charter reaches 240,000 homes in the San Gabriel Valley as well as Riverside.

Only Century, which will soon serve roughly 650,000 cable households, and Media One, with 575,000 subscribers, would be larger.

The purchase of Charter would be Allen’s biggest investment to date--about seven times his $660-million bet on DreamWorks SKG, of which he owns 24%, and a bit larger than his $4-billion purchase of Marcus, which serves 1.2 million cable customers. He also owns stakes in Barry Diller’s USA Networks Inc. and a variety of high-tech ventures.

Like his former partner Bill Gates, Allen sees cable as the most efficient means of speeding the convergence of computers and television and particularly increasing the use of the Internet by consumers. Allen is still a major shareholder in Microsoft, which in addition to controlling the desktop is embedding its software in advanced digital set-top boxes that promise to allow cable customers to surf the Internet and even make phone calls over their televisions.

But these new services cannot be rolled out until cable facilities are upgraded to allow fast two-way communication. While Gates invested $1 billion in fourth-ranked cable company Comcast Corp. in hopes of speeding the process, Allen has been seeking direct control, shopping aggressively to patch small cable systems together.

Sources say Allen, whose personal fortune is valued at about $20 billion, has a short-term aim of reaching 5 million subscribers, which could rank him third in the nation.

Most of the large cable operators are racing to grow bigger to help justify the huge expense of the upgrades as well as receive mass discounts on programming. In particular, they have been looking for large concentrations of customers in urban areas, where population density lowers costs.

Because of its historic large number of operators and its vast geographic reach, Los Angeles has lagged other major cities in consolidating. That has delayed the delivery of new services here, where seven companies serve 85% of the roughly 3 million customers in Los Angeles and Orange counties and an additional 30 carve up the remainder.

Last year, Century and TCI agreed to merge their Los Angeles subscribers into a partnership that cable experts predicted would speed consolidation.

Indeed, while both Marcus and Charter have fallen behind industry leaders in upgrading their facilities, a source close to Allen said he would accelerate the company’s capital investments. Because of the size of its cluster here, Los Angeles could be an early recipient.

The acquisition of Charter is expected to be completed by the end of the year. Though Marcus is based in Dallas, the headquarters of the merged entity could move to St. Louis. Sources said Jerald Kent, who co-founded Charter, would become chief executive, ending a search by Allen that began when Chairman Jeffrey Marcus, who co-founded Marcus, become chief executive of Chancellor Media Corp., a radio, television and outdoor advertising operator.