2 Major Cable Firms Jointly Move to Buy Adelphia

Financially ailing Adelphia Communications Corp., the largest cable operator in Southern California, has struck a preliminary deal to be swallowed by the nation’s two industry leaders for about $17.7 billion in stock and cash.

The joint bid by Time Warner Inc. and Comcast Corp. was presented Thursday to a U.S. Bankruptcy Court judge in New York, sources familiar with the agreement said. Adelphia, whose stock plummeted after a financial scandal involving its now-convicted founder and one of his sons, filed for Chapter 11 bankruptcy protection in June 2002.

The deal must be approved not only by the judge but by creditors, who are owed about $20 billion. Thus, a final agreement could still be days or weeks away, the sources said.

Under the terms of the bid, Time Warner would grab the Southern California subscribers of Adelphia and Comcast, gaining a firm grip on the only big market in the country that remains fragmented among cable operators.

Time Warner’s reach would expand from fewer than 20% of Los Angeles area households to more than 70%. That would give the company a broader platform to sell advertising and increase operating efficiencies.

“Los Angeles would suddenly become the center of Time Warner’s attention,” said Craig Moffett, an analyst at Sanford C. Bernstein & Co. “And that’s likely to be a good thing for customers.”

The consolidation of the Southern California market would be unlikely to lead to higher costs for consumers. Cable companies face intense competition from satellite television providers DirecTV and Dish Network. These services have lured customers with their crystalline all-digital pictures, vast choice of channels and robust sports and foreign-language packages.

The cable companies, however, have fought back, spending $90 billion since 1996 to upgrade their networks with digital technologies, allowing them to offer customers not only better picture quality and more channels, but also services that satellite is unable to deliver, such as high-speed Internet access, video-on-demand and phone connections.

For Time Warner, the deal’s approval would represent a revival of sorts for the world’s largest media company. In 2000, Time Warner merged with Internet giant America Online, a deal that turned disastrous after the dot-com bust and disclosures of accounting irregularities.

Weighed down by debt and a plunging stock price, Time Warner has sold assets to pay off loans and paid $510 million to settle claims with federal regulators investigating alleged financial improprieties.

Time Warner Chief Executive Richard Parsons had promised investors that 2005 would be a year of growth for his New York-based conglomerate, after cleaning up the company’s legal problems and balance sheet.

A merger with Adelphia would make Time Warner Cable the nation’s second-largest pay TV provider -- second only to Comcast.

Cable generates enormous amounts of cash, and Comcast has shown that size matters. Since tripling its number of subscribers more than two years ago, Comcast has achieved huge cost savings from extracting discounts from programmers. Its heft also has allowed Comcast to strike lucrative partnerships with manufacturers and technology companies such as Gemstar-TV Guide International and TiVo Inc.

Parsons has said that new products such as telephone and wireless services being rolled out by Time Warner Cable should help the company win back subscribers from satellite rivals and ward off the threats from phone giants.

One obstacle the deal could still face is the eleventh-hour bid by yet another player in the pay-TV world, Cablevision Systems Corp., New York’s leading cable operator. Although the deadline for bids was Jan. 31, Cablevision was lured into the hunt by two private equity firms looking for a partner to help sweeten their own $15-billion bid.

Unable to come to terms with Kohlberg Kravis Roberts & Co. and Providence Equity Partners, Cablevision this week submitted an all-cash, $16.5-billion bid of its own, hoping to at least slow down the process, analysts and industry sources said.

Wall Street sources said Thursday that Cablevision’s financing was still not solid and that Cablevision was continuing to talk to KKR and Providence about teaming up. At the same time, Cablevision’s board voted late Thursday to shut down a money-losing satellite operation called Voom that had been a distraction for the cable company.

According to sources, Time Warner and Comcast threatened to walk away if Adelphia dragged out negotiations any longer, sources said.

Many on Wall Street consider the Time Warner-Comcast offer superior to that of Cablevision, despite the fact that it involves both cash and stock. Adelphia creditors have long said they prefer an all-cash deal. But analysts say that, in the end, the market clout and cachet of the joint bidders seemed more secure than the offer by Cablevision, a company half Adelphia’s size that is struggling with strategic and legal problems of its own.

Under the joint bid by Time Warner and Comcast, the two companies would be able to unwind an earlier arrangement. Comcast now owns a 21.5% stake in Time Warner Cable. Under the pending deal, Time Warner would take back that stake and in return give Comcast subscribers from Adelphia and from its own holdings. Time Warner, which is putting up most of the money in the bid, would have 14 million subscribers, up from nearly 11 million today. Comcast would jump to about 24 million subscribers, up from 21.5 million.

The sale of Adelphia would bring to a close one of the industry’s most stunning collapses. Once one of the nation’s fastest-growing cable companies, Adelphia had a reputation as high-minded operation that refused to air adult programming because of the moral convictions of its founder, John Rigas.

But in 2002, it was alleged that Rigas looted vast corporate sums for personal use and hid from investors billions of dollars in corporate loans. Rigas, 80, and son Timothy, 48, were convicted in July of conspiracy and fraud. They are scheduled to be sentenced in April.