Clear No. 1 in L.A. Cable May Emerge

Time Warner Inc. would probably wind up controlling a majority of the Greater Los Angeles cable television market -- now splintered among five operators -- if it wins the auction for Adelphia Communications Corp., according to sources with knowledge of the bid.

The offer Time Warner submitted jointly with Comcast Corp. one week ago is worth about $17 billion, making it the front-runner, the sources said.

A winner may not emerge for several weeks, and the process could take several months because Adelphia is operating under Chapter 11 bankruptcy protection, which means any deal must be approved by creditors and a judge.

If the two leading U.S. cable operators prevail in their bid, they not only would divvy up Adelphia assets but, in a side deal, would trade some of their own systems to better consolidate their power in given markets, the sources said. After the expected swaps are complete, Comcast and Adelphia systems in Los Angeles would end up in Time Warner’s hands.

Neither Time Warner nor Comcast would comment.

A decade of mergers and asset swaps has left most other major cities controlled by a single cable operator, in a so-called clustering strategy that improves operating and marketing efficiencies.

“If you want to buy advertising on broadcast and you only own 20% of the market, 80% of your money is wasted,” said Craig Moffett, an analyst at Sanford C. Bernstein & Co.

In contrast, the telephone giants competing against cable in selling high-speed Internet access dominate entire states and regions, and satellite TV rivals sell their services nationally.

Cable companies have patched together local systems to control cities and, in some cases, states and regions. Comcast, for instance, serves 8 million customers from northern New Jersey to Washington, D.C.

Los Angeles has been left out of the consolidation push because of undesirable operating economics. Cable operators say geographic sprawl, hilly terrain, a transient population, heavy regulation, relatively low market penetration and high theft rates have hurt profitability.

“L.A.’s systems have been underinvested in because it’s nobody’s first priority,” Moffett said, adding that the situation would change if one provider controlled the entire market.

Time Warner, which already serves nearly 700,000 cable customers in Southern California, would be eager to make Los Angeles a top priority, said Moffett, in part because the nation’s second-largest cable operator controls so few big-city markets outside New York.

For Time Warner, “the chance to acquire any of these clusters is a once-in-a-lifetime event,” Merrill Lynch & Co. analyst Jessica Reif Cohen wrote in April, shortly after Adelphia went on the block.

Greater Los Angeles would give Time Warner dominance in four of the top 20 markets.

Comcast, the nation’s cable leader, operates in 17 of the top 20 markets, giving it clout in reducing its programming costs, increasing national advertising sales and launching regional sports and news channels.

According to its arrangement with Comcast, Time Warner would end up with the majority of Adelphia’s 5.2 million subscribers, the sources said. They said Time Warner, which is taking the lead in the bid, would put up $15 billion to $16 billion of the purchase price in stock and cash.

For its part, Comcast would give Time Warner $1 billion to $2 billion in cash as well as the 21% stake in Time Warner Cable that it acquired as part of its 2002 acquisition of AT&T; Broadband, the sources said.

In addition, Comcast would trade nearly 1 million of its own subscribers to Time Warner in exchange for about 3.5 million Time Warner and Adelphia subscribers.

More than half of the subscribers Comcast would trade -- about 580,000 -- are served by local systems in Los Angeles and Orange counties, the sources said. Under the pact, they said, Time Warner would take over Adelphia systems in the two counties that serve about 1.2 million customers.

Time Warner would then control more than 2 million of the approximately 3.5 million cable customers in Los Angeles and Orange counties.

Industry sources predict that Cox Communications Inc. and Charter Communications Inc., the remaining operators in the market, would be compelled to exit Los Angeles either by selling or trading their holdings.

If that happened, analyst Moffett said, “Time Warner would control the largest single cluster of cable subscribers in the country. It would redraw the lines of power on the U.S. cable map in a very profound way.”