Cable TV Giants MediaOne and Comcast to Join

The nation’s third- and fourth-largest cable television companies, both with expansive interests in Southern California, have agreed to merge in the biggest transaction in the industry’s history, propelled by the race to roll out new services in competition with phone giants and satellite services.

Philadelphia-based Comcast Corp. agreed Monday to buy MediaOne Group for stock valued at $47 billion and to assume more than $11 billion of the Englewood, Colo.-based company’s debt.

The deal would catapult Comcast into the top tier of the cable industry, combining its nearly 6 million subscribers with MediaOne’s 5 million. If the deal is approved by shareholders and regulators, Comcast would also become the largest cable company in Southern California, serving more than 800,000 subscribers in Los Angeles and Orange counties.

Nationally, Comcast would rank just behind Time Warner Inc., which has about 12.6 million subscribers, and AT&T;, whose $44-billion purchase of Tele-Communications Inc. this month gives it 11 million subscribers and an additional 11 million owned jointly with other cable operators.

Comcast would also get a prized piece of Hollywood, taking over MediaOne’s quarter-interest in a partnership that includes Home Box Office, Warner Bros. studios and most of Time Warner’s cable subscribers.

Microsoft Corp., which invested $1 billion in Comcast two years ago, hoping to spur new Internet services, would maintain a 5% stake in the combined company.

The deal is the latest in an industry consolidation wave that has been driven by competition and new technology. Since telecommunications was deregulated in 1996, cable companies have spent an estimated $20 billion to retrofit their facilities to offer such services as telephone, high-speed Internet connections and digital television in competition with phone rivals that are putting together their own offerings.

The race has set off a merger frenzy in both spheres, with cable companies amassing geographic “clusters” of subscribers in hopes of lowering the costs of delivering these services. Analysts expect only a handful of phone and cable giants to remain standing after the consolidation, with each industry controlling one wire into the home that will deliver the full complement of telecommunications, possibly at a discount to today’s prices.

The merger between the two cable giants isn’t expected to have an immediate impact on rates or quality of service, but local officials in Orange County cities still were apprehensive about possible impact on customers’ monthly bills.

“We’re hoping it will give people better service, but we’re not sure about that,” said Dave Kiff, Newport Beach assistant city manager. “Right now we get more complaints from Comcast customers than we do from the other cable provider in the city, which is Cox.”

Kiff’s biggest concern is the upcoming federal deregulation of the cable industry this month, which will allow cable companies to charge whatever the market will support for non-premium cable channels such as CNN, ESPN, CSPAN and others.

The merger also is making Tustin nervous. MediaOne, the current cable provider, is scheduled to revamp its cable service by the end of the year, increasing the number of channels from about 55 to more than 100.

“We just hope the acquisition doesn’t hinder that upgrade,” said Joe Meyers of the Tustin public works department, which oversees the city’s cable contract.

Analysts said Comcast expects savings in the neighborhood of $500 million annually from layoffs and shutting down MediaOne’s personnel-heavy headquarters; and in programming costs.

Brian Roberts, president of Comcast, would not estimate the scale of layoffs. But MediaOne is considered one of the most inefficient operators in the cable industry, with low margins and a top-heavy structure that sources say stems from its origin as a phone company. The company split from parent US West last year.

“MediaOne has some of the worst management statistics in the industry,” said Jessica Reif Cohen, an analyst with Merrill Lynch, who noted that its overhead is twice Comcast’s even though it has fewer subscribers. “Comcast is the best-managed company in the industry, so there’s a lot of upside potential here.”

‘Beachfront Property’

Comcast’s deal may put greater pressure on mid-sized cable operators, including Cox Communications, Cablevision Systems and Adelphia Communications Corp., which this month agreed to buy Century Communications, a major supplier in Los Angeles. Those companies serve between 3 million and 5 million customers each--too few, analysts say, to achieve the economies needed to remain competitive. The sale this month of both MediaOne and Century is a particular blow to computer billionaire Paul Allen, who has bought three leading cable operators in the last year as part of a drive to bring Internet and interactive television services to American households under his “wired world” scenario. Allen lost Century to Adelphia in an auction and lacked a public currency in the form of stock to buy MediaOne.

“This is the final inning in simplifying the industry,” said Christopher Dixon, an analyst at PaineWebber Inc. “Scale is important in ordering set-top boxes, programming and systems.”

Indeed, the rapid consolidation of the industry into a few cable giants has already put pressure on Hollywood studios that sell movies and license cable channels. The biggest operators get discounts over the mom-and-pop operators, who until three years ago dominated the industry.

Comcast’s proposed acquisition of MediaOne, kept secret until the announcement Monday morning, took the cable industry by surprise because of its rich price tag and the riskiness of the transaction.

Comcast is paying a record price--higher than Adelphia’s proposed acquisition of Century and AT&T;’s purchase of TCI, which were both steep by Wall Street standards.

Indeed, after the announcement, Comcast stock dropped $5.38 a share to close at $64.75 on Nasdaq, while MediaOne jumped $7.75 to $68.50 on the New York Stock Exchange.

Under the deal, MediaOne shareholders will receive 1.1 shares of Comcast for each of their shares. Based on Friday’s close, the price represented a 32% premium, valuing MediaOne shares at $80.16.

Deal Lacks a ‘Collar’

Some analysts were surprised that the transaction does not have the “collar” common in all-stock deals, allowing the seller to renegotiate the terms if the buyer’s stock falls below a certain threshold. Despite the lack of a collar, MediaOne is obligated to pay Comcast $1.5 billion if the deal collapses or is surpassed by a higher offer.

AT&T; had been viewed as a natural buyer of MediaOne because it could singularly absorb the huge proportion of international wireless assets, which account for more than a third of MediaOne’s value. MediaOne said Monday that it would sell the international wireless assets as part of the transaction.

Chuck Lillis, president and chief executive of MediaOne, would become vice chairman and a director of Comcast, whose top executives will remain in their positions.

“We paid a big premium so we have to prove the synergies,” Roberts said in an interview Monday. “This is a once-in-a-lifetime opportunity--there is no more beachfront property like this around.”

Roberts said the overlap between the companies made for a perfect fit and a clustering bonanza, with 55% of their systems in the same markets and 80% of the combined company’s subscribers in the nation’s top 20 markets.

Both companies have already spent heavily to upgrade their technology, and by the end of this year, when the deal is expected to close, about 70% of their systems will be ready to deliver two-way services. In contrast, AT&T; will have to spend billions to upgrade TCI’s rickety systems.

Roberts said the deal will give Comcast the scale to innovate and invest in new interactive, Internet and electronic-commerce properties. Comcast already controls two professional sports teams, the QVC and E! Entertainment Television cable channels, an online shopping site, a stake in the @Home high-speed Internet service and investments in such new technology as the Intertainer video-on-demand service.

Analysts say the combination could push Comcast into the telephone business more quickly. While MediaOne has been among the most aggressive cable operators to enter the phone business, offering the service in Los Angeles, Comcast has stayed on the sideline, emphasizing high-speed Internet services and digital TV capabilities that expand channel lineups and improve picture quality.

Lillis said the merger plan developed in the last two months when Comcast, MediaOne and Cox were trying to negotiate a partnership with AT&T;, which is seeking to use cable wires to compete with local phone companies.

Analysts say MediaOne’s stake in its partnership with Time Warner has a value of roughly $14 billion.

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Times staff writer Phil Willon in Orange County contributed to this report.

* WEB ACCESS: Cable deal linked to drive to build a more robust Internet. C1

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Changing Channels

Residents in four O.C. cities will have a new provider when Philadelphia-based Comcast Corp buys Media One Group. The merger will make the company one of the largest cable providers in Southern California.

Media One cities

Tustin

Cypress (less than 10% of city)

La Palma

Costa Mesa

Comcast cities

Buena Park

Fullerton

Newport Beach (west side)

Placentia

Santa Ana

Seal Beach

Sources: Comcast and Media One Group