Winding Down the Partnerships

A string of moves by Comcast to unwind partnerships with other cable operators could soon be drawing to a close.

In early 2007, the nation's largest cable provider is expected to pull the trigger on dissolving its Insight Midwest partnership, possibly gaining about 650,000 customers in the process.

The biggest of the recent unwinding maneuvers by Comcast came earlier this year when it exchanged a 21% interest in Time Warner Cable for systems with about 750,000 subscribers, part of the joint purchase of Adelphia Communications with Time Warner Inc.

Shortly after that deal closed on July 31, Comcast unwound its Texas Cable Partners and Kansas City Cable Partners ventures with Time Warner, gaining about 800,000 subscribers in Houston in exchange for its interest in roughly the same amount of customers in Kansas City, southwest Texas and New Mexico.

In May, Comcast bought out the 70% of Susquehanna Communications it didn't already own for $540 million, picking up 230,000 cable customers.

In buying AT&T Broadband in 2002, Comcast got a 50% interest in Insight Midwest, the Insight Communications unit that houses most of the cable systems in Illinois, Indiana, Kentucky and Ohio.

Comcast has had the right to dissolve the partnership since Dec. 31, 2005, but so far hasn't pulled the trigger.

While it can accept either cash or cable systems, because of tax implications, Comcast is likely to ask for systems, mainly in Indiana.

In August, Comcast executive vice president and co-chief financial officer Lawrence Smith said Comcast couldn't unwind the Insight partnership earlier because of tax implications. In order to avert a big tax hit, the partnership had to remain intact for at least seven years. AT&T Broadband formed Insight Midwest in 1999.

Smith said then that Comcast would revisit the partnership issue in November — and that it wouldn't attempt a deal to take control of all of Insight. “I don't think they want that,” he said during the August interview, speaking of Insight's owners. “They're a private company, and certainly, we would never do anything hostile with them.”

Insight CEO Michael Willner and chairman Sidney Knafel, backed by The Carlyle Group, bought out Insight's public shareholders last year in a deal valued at $720 million. Comcast vice president of corporate communications D'Arcy Rudnay declined to comment on Comcast's plans for Insight.

Executives familiar with both companies said not to expect a deal to happen this year.

“We have nothing new to report” was Willner's response on the topic during a conference call with analysts Nov. 8 to discuss third-quarter financial results. Willner did not return a phone call seeking comment.

Despite Comcast's previous denials, UBS Securities cable debt and equity analyst Aryeh Bourkoff believes Brian Roberts and company would consider buying Insight outright.

Bourkoff values Insight at $4,000 per subscriber, or about $5 billion.

“Given Comcast's confidence in the prospects of the bundle, they could elect to own the entire asset,” Bourkoff said.

Should Comcast elect to take only half of Insight, the remaining operator could see its programming costs spike.

Insight currently buys most programming under Comcast's volume discounts, paying much less than it would on its own. Bourkoff said Insight likely would attempt, in negotiating the split-up, to retain the Comcast volume discounts.

A smaller, independent Insight also could be an acquisition target for a bigger operator – such as Time Warner Cable, which has a presence in Illinois, Ohio and Kentucky, where major Insight systems are clustered.