Adelphia Communications Corp. continued its acquisition
tear last week, agreeing to buy the privately held stock of Harron Communications Corp.
for $1.17 billion in cash.
The deal -- the third major acquisition for Adelphia in the
past six weeks -- will boost the Coudersport, Pa.-based MSO's subscriber base to 5
million, making it the fourth-largest cable operator in the country.
Harron has about 300,000 subscribers in six states: New
York, Massachusetts, Michigan, New Hampshire, Vermont and Pennsylvania.
The purchase comes on the heels of two big acquisitions by
Adelphia -- its $5.2 billion deal to purchase Century Communications Corp. and its $2.1
billion deal for FrontierVision Partners L.P. -- which more than doubled Adelphia's
subscriber base to 4.3 million.
Adelphia vice president of finance Jim Brown said the
Harron systems fit well with his company's major clusters in Philadelphia and New
England, increasing its presence there to 200,000 and 800,000 subscribers, respectively.
Although Harron is a relatively small operator, its systems
are well-run, located near major Adelphia clusters and mostly upgraded. Average subscriber
growth at the company has been a healthy 3 percent annually for the past five years.
Adelphia added that by the time the deal is closed -- March
2000 -- 67 percent of Harron's systems will be upgraded to 750-megahertz capacity.
Credit Lyonnais Securities analyst Richard Read said that
given the location of some of the Harron systems, Adelphia's buying spree may not be
over yet.
"The name of the game is geographic
concentration," Read said. "Adelphia [will have] 800,000 subscribers in New
England, but they're scattered all over the place. To get meaningful clusters,
they're going to have to continue to fill in."
Read added that although he believes that the Harron
systems fit in well with Adelphia's systems in New England, Adelphia may keep a
lookout for any independent operators in that area with around 100,000 subscribers. (There
may not be any left, given the consolidation that has been led by FrontierVision and
Adelphia.)
Adelphia may look to swap some Harron systems outside of
Adelphia clusters -- especially systems in Michigan.
CIBC Oppenheimer Corp. cable and telecommunications
high-yield analyst Aryeh Bourkoff said the Michigan systems could be attractive to
operators like Avalon Cable LLC and Bresnan Communications, which have large Michigan
clusters.
Brown would not rule out swapping some of the Harron
properties, but he added that it is not a priority now.
Harron -- founded by Paul Harron and now run by his son,
also named Paul Harron -- built its first cable system in Utica, N.Y., in 1963, and
quickly built itself into one of the top 30 MSOs.
Harron also owns five television stations in Utica and
Elmira, N.Y.; Portland, Maine; and Monterey and Santa Barbara, Calif., which Harron
retains.
By selling cable, Harron returns to its broadcast roots. In
fact, it built the cable system in Utica to protect its broadcast station there from cable
competition.
Harron spokeswoman Linda Stuchell said it didn't take
long for the family-owned company to see the consolidation handwriting on the wall.
"Given the recent state of consolidation, the [Harron] family recognized that it
would be a better opportunity if they were going to sell the business," she said.
"The timing was right."
And so was the price.
The deal works out to about $3,900 per subscriber, or 13.9
times next year's pro forma cash flow of $84 million,or 15.4 times 1998 cash
flow of $76 million. Pro forma revenue for the Harron systems is expected to be $139
million in 1999, growing to $153 million in 2000.
Read believes that the deal is a good one for both parties,
but he wondered why Adelphia would do it strictly for cash. Most recent cable deals --
including past Adelphia acquisitions -- have involved a combination of debt and equity.
Brown said the reason why the deal is being done for cash
is simple: That's the way that the Harrons wanted it. He added that Adelphia is
issuing a lot of stock for other deals -- 49 million shares for the Century deal alone.
"We've done a lot of equity," Brown said.
"Cash seemed appropriate."
Although Harron made the decision to sell several months
ago -- Communications Equity Associates Inc. executive vice president Thomas MacCrory is
representing the company -- it had not yet begun soliciting bids before Adelphia swooped
in.
"We were getting ready to go out to the market and
Adelphia pre-empted the deal," MacCrory said.
