Tempted by Adelphia?

Cable companies are deal junkies. They find it hard to resist the opportunity to get bigger by gobbling up weaker competitors. Indeed, cable giants Comcast (NYSE: CMCSA  ) and Time Warner (NYSE: TWX  ) succumbed to the craving this week, mounting a joint $17 billion bid this week for bankrupt cable operator AdelphiaCommunications.

Is the deal a good one for Comcast and Time Warner? Or should they fight the urge to splurge on ailing Adelphia?

I think $17 billon is awfully pricey. That equates to about $3,600 for each Adelphia subscriber, or about the same value placed on each Comcast subscriber. But Adelphia is no Comcast. Two years of financial scandals and bankruptcy proceedings have left the company weak. Its EBITDA margins are an anemic 28%. By comparison, Comcast's are 38%. Investors shouldn't overlook the high cost of fixing up Adelphia's patchwork cable system, which hasn't kept up with rivals technologically.

More worrisome, a bunch of leveraged buyout firms -- including Providence Equity Partners and Kohlberg Kravis Roberts -- have reportedly submitted a competing bid for the whole company. A bidding war could push the price even higher in coming weeks.

Cable industry executives will tell you that the price is justified. Companies can gain tremendous economies of scale by growing their subscriber bases. But Time Warner is already huge. Sure, a company like CableVision (NYSE: CVC  ) , with 3 million subs, would be able to get better supplier deals and improve economies by adding 5 million subs. It's less obvious what the second-biggest cable operator, with 11 million subscribers, gains from getting the fifth-biggest operator -- and a struggling one, to boot.

For Comcast, the upside from the deal is clearer. That's largely because, for Comcast, it's not about grabbing subscribers. Comcast's real priority is to create a way to erase its 21% stake in Time Warner Cable -- a stake Comcast acquired, and assured regulators it would sell. Its Time Warner stake doesn't generate nearly the kind of cash flow that Comcast gets from the systems that it operates, so a tax-free swap of its Time Warner stake could give Comcast's bottom line a pleasing boost.

Stay tuned. This is the passion-ridden and hard-to-measure world of cable deal-making. Things could get very interesting.

Fool contributor Ben McClure doesn't own shares of any of the companies mentioned here.


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