Are other cable mergers on the horizon?

Cable World, Jan 7, 2002 by K.C. Neel, Mavis Scanlon

In the wake of Comcast Corp.'s $72 billion deal to buy AT&T Broadband and create the world's largest cable operation, industry observers disagree over how much further industry consolidation can go.

The vast majority of cable subscribers--85%--are already customers of the nine largest MSOs. Comcast's buyout of AT&T Broadband, which when completed will put over 60% of cable subscribers in the hands of the top three companies, underscores the notion that MSOs must either get big or get out.

Robert Winikoff, a partner at Sonnenschein Nath & Rosenthal who sits on Mediacom Communications' board and also works with Insight Communications, is convinced consolidation will continue, if for no other reason than to strengthen MSO leverage in buying programming.

In a recent research note from Merrill Lynch, analyst Jessica Reif Cohen says the Comcast-AT&T deal will likely set off another wave of cable consolidation. While it's unlikely the industry will be left with just two mega-MSOs, "at the end of the day, we have long anticipated the industry to mirror the [regional Bell operating companies] with only a handful of operators [i.e., three to five] remaining."

The company to be known as AT&T Comcast Corp. will have direct cable access to 22 million homes in 41 states and 17 of the 20 biggest U.S. metropolitan areas. The agreement, signed Dec. 19, ended a three-way battle for AT&T Broadband between Comcast, AOL Time Warner and Cox Communications. Microsoft Corp. offered to back the bids by Comcast and Cox to thwart its bitter rival AOL.

Insight Communications CEO Michael Willner says the industry can still accommodate several large players. "There have been a number of events over the years that have raised this exact speculation--that the event is so seminal that it will change the face of the industry," says Willner. "But it's not happened, and it won't happen this time either. This deal made sense for them [Comcast and AT&T], and it will create a large and dominant player. But that doesn't mean other companies won't thrive. You can have a wonderful business with 1 million or 2 million customers."

Says Daniels & Associates CEO Brian Deevy: "I'd love to think that this deal will lead to further consolidation, and it may have some effect. But I don't think there will be only two MSOs anytime soon."

Still, the AT&T-Comcast move could spur smaller acquisitions, industry watchers say. Operators such as Mediacom Communications may be able to pick up properties that AT&T Comcast is likely to shed after the Comcast deal closes, predicts UBS Securities analyst Tom Eagan.

If the merger is approved, some analysts believe certain operators will be willing to sell out eventually. Cablevision Systems Corp. and Adelphia Communications are buyout targets, with both companies saying publicly they would consider selling out.

It's harder to predict what larger players such as Cox Communications or Charter Communications will do, analysts say. Cox could be a buyer or seller, says John Martin, an analyst at ABN Amro. Paul Allen, the majority shareholder of Charter Communications, hasn't telegraphed his intentions, but some experts believe he could be convinced to sell if the price is right.