Fool.com: Comcast Buys Philly Cable Operator (News) November 16, 1999

Comcast Buys Philly Cable Operator

By Richard McCaffery (TMF Gibson)
November 16, 1999

Cable company and programming provider Comcast (Nasdaq: CMCSK) has moved in to buy hometown cable operator Lenfest Communications from AT&T (NYSE: T) and the Lenfest family for about $6.8 billion in cash and debt.

The purchase gives Comcast, the nation's third largest cable operator, 1.25 million subscribers in Philadelphia, other parts of Pennsylvania, New Jersey, and Delaware, and further solidifies its stronghold in the Mid-Atlantic region. Lenfest is the country's ninth largest cable operator.

It also gives Comcast new customers in areas where it has already upgraded networks for revenue-rich broadband and digital television services.

For AT&T, the deal helps shed some of its cable assets to pave the way with regulators for its pending acquisition of MediaOne (NYSE: UMG). By federal law, no cable company is permitted to have more than a 30% share of the cable television market, and AT&T is still trying to get below that threshold.

It's all part of an industrywide race to provide a full basket of communications services to customers across the country.

The move to offer so-called bundled communications services is driving consolidation throughout the cable industry. ("Bundled" is just an easy way to describe services companies like Comcast and AT&T want to provide. It involves packaging services like cable television, high speed Internet, and telephone services into one offering for consumers).

Cable properties started looking like hot prospects in 1997 when Bill Gates invested $1 billion for a stake in Comcast. With lines into millions of homes, Gates and other industry moguls knew cable companies were in an ideal position to offer broadband services.

Then Michael Armstrong, AT&T's chief executive, stirred the waters, scooping up TeleCommunications Inc. (TCI) -- the country's second largest cable company -- and, most recently, MediaOne. AT&T snatched MediaOne away from Comcast last May.

As a result of consolidation, cable companies are fetching attractive prices. Comcast paid AT&T and Lenfest about $5,368 per subscriber -- a nice premium that also reflects Lenfest's strategic location since Lenfest is the number one cable company in Philadelphia, Comcast's base of operations.

For a reference point, look at Comcast's acquisition of Greater Philadelphia Cablevision earlier this year for about $3,402 per subscriber. (GPC has about 79,000 subscribers). US West Media Group (which became MediaOne) picked up Continental Cablevision for about $2,000 per subscriber back in 1996.

Phone companies and cable operators can't pass up the opportunity to offer bundled services, mainly because the cable TV and long distance phone businesses are slow growing, mature markets. The key to driving revenues for these companies, therefore, is locking up new revenue streams in fast growing markets. As a result, investors have to track these categories to help value cable and phone companies.

On this front, Comcast is making swift progress. It's roll out of digital cable services -- which offers consumers better reception and more channels -- is ahead of analyst estimates. It's added 325,000 digital cable subscribers in the last 12 months and now has more than 400,000. The service is available to more than 60% of its customer base. That means there are at least 2.3 million Comcast subscribers right now that could be signed up for digital cable, and the number is growing fast.

It's also added nearly 19,000 customers to its high speed Internet access service, giving it a total of about 113,000 subscribers.

Comcast's electronic retail division, QVC, is growing at a double digit rate, and operating cash flow for the subsidiary grew 20% last quarter. QVC television programming, which sells jewelry, housewares, collectibles, toys, electronics and cosmetics, reaches 85% of all cable homes in the U.S.

Comcast has spent a lot of money deploying a fiber optic system and upgrading its existing broadband network. In addition, it's divested non-core assets such as its cellular telephone division, improved margins and strengthened its balance sheet -- giving it the financial leeway it needs to expand.

The company is worth a closer look. Keep in mind it has competitors in a range of industries, including AT&T, Time Warner (NYSE: TWX), and Cox Communications (NYSE: COX), which makes comparisons a little tricky.

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