Allen to Buy Falcon Cable for $3.6 Billion

Propelling himself into the big leagues of cable, computer billionaire Paul Allen has agreed to buy Falcon Cable TV, the only Los Angeles-based cable systems operator, for $3.6 billion in cash and stock.

The deal--confirmed by Falcon founder and Chairman Marc Nathanson--would give Allen an additional 1 million subscribers, making his fast-growing St. Louis-based Charter Communications Inc. the nation’s fourth-largest cable operator, serving 5.5 million customers.

With the acquisition of privately held Falcon, the nation’s eighth-largest operator, Charter would add 175,000 customers in California for a total of 725,000 statewide. The subscribers are concentrated in Southern California in communities such as Pasadena, Altadena, La Canada Flintridge, Glendale, Burbank, Long Beach, Malibu, Calabasas, Victorville, Rancho Cucamonga, San Bernardino and Lake Arrowhead.

The purchase, expected to be formally announced today, should serve Allen’s goal of bringing the cutting-edge new services being rolled out by the cable industry--such as high-speed Internet connections and interactive television--to small-town America. The leading companies--AT&T; Corp., Time Warner Inc., Comcast Corp. and Cox Communications Inc.--are concentrating on providing these high-tech offerings in the nation’s big cities. But Charter, though it has designs on major markets, including Los Angeles, has so far acquired cable systems like Falcon that are concentrated in rural areas.

Falcon was formed in 1975 to bring no-frills cable service to remote communities underserved by broadcast television. Most of its systems are able to deliver only 35 channels, compared with the 100 or more that have become standard as the industry has undertaken an expensive and ambitious modernization program to compete.

The harsh economics of upgrading systems in sparsely populated communities, where there are fewer houses for each mile of cable line, have kept small operators like Falcon behind the competitive curve--forcing more and more of them to sell out.

“The future of the cable business requires deep pockets,” said Nathanson, the chairman and founder of Falcon, who would become vice chairman and a member of the Charter board as a result of the transaction. “In talking to Paul Allen, I heard a vision I could believe in. He is going to put small-town America at the forefront of new technology because he believes people in these towns will have insatiable appetites for Internet services.”

In the last year, 12 of the nation’s 20 leading cable operators have been snapped up in a consolidation aimed at gaining economies of scale for rolling out these new services, which are the industry’s weapon against competition from rivals in satellite television and local phone service.

Within a few years, analysts say, the family-pioneered cable industry will be dominated by conglomerates AT&T; and Time Warner and just a handful of family-owned cable giants including Comcast, Cox Communications, Charter, Adelphia Communications Corp. and Cablevision Systems Corp.

Allen is a late entry in the race. In the last year, the co-founder of Microsoft Corp., has tapped his personal cash hoard of more than $20 billion to become a major player in reshaping the cable and entertainment landscape.

He has acquired a handful of cable companies and invested in scores of high-tech ventures as part of his vision for a brave new “wired world” in which computer and television technologies converge in the home.

Charter has concentrated on rural America in part because of his lack of success in buying larger, urban-oriented systems.

Sources say Allen still has designs on becoming the dominant cable provider in Los Angeles, which continues to be served by a crazy quilt of operators at a time when consolidation has reduced service in most major cities to one or two providers.

Cable operators say they need to control an entire market to gain operating, marketing, investment and advertising efficiencies.

Allen lost out in his pursuits of Los Angeles’ two top operators, MediaOne Group and Century Communications, which are being bought by AT&T; and Adelphia, respectively.

Though Allen’s home base is in the Pacific Northwest, where he owns two professional sports teams and runs his Vulcan Ventures investment company, the high-tech entrepreneur seems intent on becoming a fixture in Los Angeles. In 1997, he bought the former Rock Hudson estate in Beverly Hills to better tend to his growing entertainment portfolio, which includes big investments in DreamWorks SKG and USA Networks Inc.

Sources say now that Allen has achieved his goal of amassing 5 million cable subscribers, he may move more aggressively into investing in the programming to send down his distribution pipeline.

Allen has never himself publicly articulated his vision.

For his part, Nathanson, 54, who founded Falcon in 1975 with $25,000, is cashing in on the rich values of the cable business. Prices, propelled by the voracious appetites of well-heeled buyers, have climbed to more than $5,000 per subscriber, up from a top price of $2,000 a year ago.

Falcon would fetch $3,600 per subscriber in the sale, a rich price considering that only about 25% of its systems are ready to deliver advanced services.

Nathanson, who with his family and management controls 54% of the company, said Allen is paying half in cash and half in stock. Charter has plans for an initial public offering in the fall.

AT&T;, which owns the remaining 46% of Falcon, would sell its shares to Charter. That should help reduce its cable ownership position at a time when its cable dominance is under review by federal regulators. After its March purchase of cable giant Tele-Communications Inc. and with its proposed acquisition of MediaOne Group, AT&T; would control cable systems that reach about 26% of the nation’s households. In addition, it has minority interests in systems that serve an additional 35% of American homes.

Nathanson said the 200 employees at Falcon’s headquarters on Wilshire Boulevard in Westwood would be “well taken care of.” Several top Falcon managers would become millionaires in the sale.

Nathanson said he plans to write checks to many of the 1,500 other employees nationwide based on their tenure with the company.