Paul Allen Eyeing Bids for Century, Media One

Paul Allen wants to be the cable king of Los Angeles.

Sources close to the computer billionaire say he has had recent negotiations with Century Communications, soon to be the dominant cable supplier in Los Angeles, about an acquisition that would be valued at more than $4 billion.

Some sources say those talks broke off for the second time, but that if a deal isn’t struck with the New Canaan, Conn.-based firm, Allen will simply move down his shopping list.

Allen has approached every cable operator potentially in a position to sell--and some which he found are not. Near the top of his list are Adelphia Communications, the nation’s seventh-largest cable company, and Media One Group, the largest provider in Los Angeles and the third-largest nationally.

Rumors of an Allen-Media One matchup have circulated for weeks, with fresh speculation running up Media One’s stock price Tuesday by 10%--the biggest cable gain of the day.

Since April, Allen has become the most lavish spender yet on cable, paying $7.5 billion for 2.5 million subscribers in two acquisitions. Allen, who has been selling shares in Microsoft Corp., which he co-founded with Bill Gates, to help finance his purchases, envisions doubling his cable size in the near term, with an ultimate goal of reaching 10 million subscribers, making him one of the nation’s top three operators, beside Tele-Communications Inc. and Time Warner Inc.

Allen’s biggest concentration of subscribers is already in Los Angeles, where he is the third-largest cable owner. His recent acquisitions of Marcus Cable and Charter Communications give him more than 300,000 subscribers here.

Either Century or Media One would vastly expand that toehold, consolidating the stubbornly fragmented market and making advanced new services more economical to deploy.

Within the last few years, most major American cities have become dominated by a single owner, with Cablevision Systems predominant in New York; TCI owning the lion’s share in San Francisco and Chicago; and Cox Communications cornering San Diego, Las Vegas and Phoenix.

Los Angeles, the largest city yet to be consolidated, has remained splintered because of its sprawling geography, the scores of operators and the relatively low penetration of cable.

Allen’s home base is Seattle, where he owns two sports teams and Vulcan Ventures, which is invested in DreamWorks SKG, USA Networks and satellite provider United States Satellite Broadcasting.

Century has the best real estate in Los Angeles, with nearly 200,000 subscribers from Santa Monica and Pacific Palisades through Beverly Hills and east to Eagle Rock, plus an additional 250,000 in Orange County. It is in the process of teaming up here with TCI in a partnership that would give Century management control over nearly 900,000 subscribers in Southern California.

But those systems are far behind in the race to deliver the lucrative new services that enticed Allen to cable.

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Media One’s systems are in far better shape than Century’s, and in Los Angeles and some other cities already offer telephone service and high-speed connections to the Internet.

While buying ninth-ranked Century would bring Allen to 3.7 million subscribers nationwide, Media One would land him solidly in third place, with 7.3 million households.

Sources say Allen recently accumulated 15 million shares of Media One, giving him a 2.5% stake in the Englewood, Colo.-based cable company. While not enough to make a run, some analysts say the stake would allow Allen to profit from a stock jump should he agree to a purchase, helping him pay for the acquisition.

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Yet sources say Allen has homed in on Century because he has figured out what many in the cable industry have also concluded: Buying Media One is easier said than done because of the huge cost of the transaction, an uneasy partnership with Time Warner and uncertain tax consequences.

At $4 billion, Century is bite-size compared with the $35 billion or more it would cost to buy Media One. And it’s not only Media One’s size, but also the mix of its assets that makes it hard to swallow.

Of the $35 billion, $18 billion or more are minority positions--illiquid or international assets that are unattractive or difficult to value or borrow against. These include a slew of wireless operations in places such as Singapore, Hungary, Poland and the Czech Republic that are generating little cash.

Since bankers are unlikely to finance a purchase of Media One, a stock acquisition is a more likely merger vehicle. This may rule out Allen, who lacks a public vehicle and uses cash.

In addition to stakes in AirTouch, the cellular provider, and TeleWest, the troubled British cable operator, the biggest of Media One’s minority holdings is a 25.5% stake in a Time Warner partnership. Some analysts say the holding accounts for more than a third of Media One’s value.

The partnership consists of Home Box Office, the Warner Bros. studio, and roughly 10 million of its 12.5 million cable subscribers. Time Warner insists it is not interested in buying Media One, but Chairman Gerald Levin recently advised suitors to see him first because of rights he contends the company has to block any purchase.

Media One chief Chuck Lillis disputes that claim, but sources close to the company concede that an acquiring firm may be forced to forfeit Media One’s rights to 50% management control over the Time Warner cable systems in a sale, reducing the value of that asset.

If that isn’t enough to dissuade would-be suitors, there is also the uncertain affect of a purchase on the tax-free status of Media One’s spinoff in June of the US West regional telephone company. (The company unhinged the two businesses because they were constantly at odds over regulatory issues.)

Some analysts say two years must pass before the company can be sold without triggering a potential tax liability.

Media One has been the subject of takeover speculation since the spinoff, with rumors that Comcast Corp., Cox, Paul Allen, Time Warner, even TCI and its probable owner AT&T; were eyeing the company. For nearly a year, there have been rumblings that Amos Hostetter would also make a bid--and recent rumors have had Allen partnering in that pursuit.

Hostetter became Media One’s largest individual shareholder in 1996, when he sold his cable company, Continental Cablevision, to what was then mainly a phone company for $10.4 billion.

Hostetter may be itching to put his 8.5% stake--as well as his former managers’ additional holdings of 10% or so--to use. Sources close to Allen say the Seattle billionaire has had discussions with Hostetter.

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But a run-up in Media One’s stock in the last year would mean buying back the company at nearly double what Hostetter sold it for. And sources say his severance agreement may restrict him from participating in a bid for the company.

Such obstacles encouraged Allen to pursue a less complicated quarry: Century. Chairman Leonard Tow, who controls 85% of Century’s voting stock and is in his mid-70s, plays his hand close, but his recent sale of Centennial Cellular Corp. for $2 billion and a troubled cable venture in Australia have led some analysts and industry executives to believe that he is cleaning up the company for sale. And no buyer has paid higher prices than Allen--whose record purchases have infuriated expansion-minded rivals such as Comcast that must now pay more to grow.

Tow did not return phone calls to his office, but sources close to the company’s executives believe Century may be off the market by the end of this month.