Time Warner, Comcast Get Adelphia

After a grueling 12-month auction process and fending off a last-minute bid by Cablevision Systems Corp., Time Warner Inc. and Comcast Corp. emerged as the winner of Adelphia Communications Corp.’s 5.2 million subscribers Thursday with an offer valued at about $17.6 billion in cash and stock.

The complicated deal, which involves several system swaps between the three parties, further strengthens the Nos. 1 and 2 cable operators, significantly boosting their clusters in key markets.

According to the deal terms, Adelphia will receive $12.7 billion in cash and 16% equity in a combined publicly traded Time Warner Cable. Time Warner Cable will gain about 3.5 million subscribers, boosting its footprint to some 14.4 million customers.

As part of the deal, Time Warner Cable will take control of Adelphia systems in Buffalo, N.Y. (growing its New York state cluster to 3.1 million subscribers); Cleveland; Los Angeles; the Carolinas; and Maine.

In addition, Time Warner Cable will receive Comcast’s 750,000 subscribers in Los Angeles (making it the dominant provider in that area, with 1.9 million customers) and 600,000 subscribers in Comcast’s Dallas market.

Comcast -- which will contribute about $2 billion in cash and its 21% interest in Time Warner Cable to the deal -- will get Adelphia customers in Florida (West Palm Beach and Miami); Boston; Pittsburgh; Hartford, Conn.; Colorado Springs, Colo.; and Vermont.

It will also receive customers from Time Warner Cable in Minneapolis; Memphis, Tenn.; Jackson, Miss.; Louisiana; and Cape Coral and St. Augustine, Fla. In total, Comcast will add about 1.8 million subscribers, boosting its footprint to 23.3 million customers.

The deal is expected to take between nine and 12 months to close.

“This is a unique and smart way to grow our company,” Time Warner Inc. chairman and CEO Richard Parsons said in a conference call with analysts.

Time Warner Cable expects to glean about $200 million in cost savings in the merger, mostly through lower programming and overhead costs and the ability to roll out more advanced services. The No. 2 MSO expects to spend about $650 million over the next three years to upgrade some of the Adelphia systems. Time Warner Cable said about 85% of Adelphia is upgraded to 750-megahertz capacity or better.

The deal is expected to be nearly immediately accretive to both Comcast and Time Warner Cable. In a conference call with analysts, Comcast estimated that the combined Adelphia and Time Warner Cable systems it will control will generate $750 million-$1 billion in free cash flow over the first three years after closing the deal.

For Time Warner Cable, the deal is equally attractive, creating a combined company with $13.3 billion-$13.8 billion in revenues and adjusted operating income before interest, depreciation and amortization (AOIBDA) of $4.7 billion-$5 billion in the first year after closing.

Time Warner Inc. and Comcast were considered to be the front-runners for the Adelphia assets almost from the start. That status was threatened earlier this month when Cablevision lobbed in a $16.5 billion, all-cash bid, which was increased earlier this week to $17.1 billion, for the Adelphia assets.

While Cablevision could still sweeten its bid, a $440 million breakup fee attached to the Time Warner Inc.-Comcast deal could dampen the Bethpage, N.Y.-based MSO’s enthusiasm.

Parsons said the likelihood that its joint bid would be trumped by Cablevision is minimal. “The fat lady has sung,” Parsons said in a conference call with reporters Thursday.

In an interview, Adelphia chairman William Schleyer said the Denver-based MSO tried to accommodate Cablevision in its last-minute bid, but the hurdles proved to be too much.

“We never had a deal with Cablevision,” Schleyer said. “They were very, very late to the process. We had a bid deadline of Jan. 31, and they jumped in late March. We tried to facilitate their participation, and they just clearly were pushing a rock uphill and couldn’t push it far enough to keep us from doing the Time Warner deal.”