Comcast Corp. discovered a novel way to take control ofanother MSO's 1 million subscribers: buy them on the installment plan.
Comcast announced last week that it cut a deal with JonesIntercable Inc. investor BCI Telecom Holdings (BTH) to buy its 37 percent stake in Jonesfor $500 million.
In about three-and-a-half years, Comcast will probably endup controlling Jones, after it repays BTH up to $200 million more for exercising anexisting option to buy control from Jones Intercable chairman Glenn Jones.
The deal ties up a hunk of Comcast cash in a minorityinvestment until, probably, early 2002. But at that time, Comcast -- the No. 4 MSO, withabout 3.9 million subscribers -- could acquire control of Jones' attractive, well-runsystems for a total price of around $700 million, which Comcast worked out to be 10 timesJones' estimated 1999 cash flow.
Some analysts put the cost higher, at more than 11 timescash flow. Either way, these days, it's a solid deal.
"We think that this is a hell of a deal," Comcastvice chairman Julian Brodsky said last week, adding that Comcast and BTH agreed on theprice about a month ago. BTH's investment bankers from Bear Stearns & Co.approached Comcast.
BTH wanted out because Jones hasn't performed at the$26-per-share level that was implied by the original investment, and because hoped-forsynergies between the companies never materialized.
Brodsky and other Comcast officials said they hope to findways to work with Jones between now and when the control option gets exercised -- about400,000 Jones subscribers are located in Virginia and Maryland, which is a Comcaststronghold -- but that's up to Jones, Brodsky added.
Founder, CEO and chairman Glenn Jones, who cut the originaldeal with BTH in late 1994, played no role this time. He said he was informed of thearrangement May 23, three days before the Memorial Day press release. But, he noted, hesurrendered the right to take part in those kinds of talks when he sold BTH an option tobuy his control stock.
Jones said he was nonetheless pleased thatPhiladelphia-based Comcast -- the chairman of which, Ralph Roberts, is a longtime friendof his -- was buying a stake in his Englewood, Colo.-based company.
"I think that this deal works because of thefriendship between the two companies and between the principals involved," he said.
Comcast is indirectly buying a stake in Jones'programming entities, Great American Country and Knowledge TV, Glenn Jones added, so thedeal should be good for those networks, too.
WILL HE LEAVE EARLY?
Comcast conceivably could come up with incentives for GlennJones to agree to sell his control before the end of 2001. Janco Partners analyst TedHenderson said expanded carriage of Jones' programming networks could be part of sucha package. As things stand now, Jones has little reason to retire, Henderson said.
Jones said last week that he expects to stay with thecompany over the next three-plus years.
BTH -- which is owned by Bell Canada's parent, BCEInc. -- provided Glenn Jones with about $360 million in cash, which helped him to carryout his strategy of rolling up the limited partnerships that built and bought JonesIntercable's systems. BTH started out buying 30 percent, and it then widened itsstake by participating in a secondary stock sale.
But in recent months, the structured investment -- whichgave BTH the power to block certain Jones Intercable transactions -- became a millstonefor the Jones chairman.
VETOED SBC DEAL
According to a Jones securities filing related to theComcast deal, BTH vetoed a February 1997 bid by Jones to buy SBC CommunicationsInc.'s cable systems in suburban Washington, D.C., for $675 million in cash andpreferred stock. Those systems -- with about 275,000 subscribers within a big Jonescluster -- later sold for a similar sum to Prime Cable.
"That would have been a fantastic move for thecompany," Glenn Jones said last week.
BTH did consent to other acquisitions and system exchanges.But in February, it sued Jones to block the launch of high-speed-data service JonesInternet Channel (which is owned by a separate Jones subsidiary) on Jones Intercablesystems.
Jones lost that case, and it is now negotiating deals withthird-party data suppliers, such as @Home Network and Time Warner Cable's RoadRunner.
Glenn Jones said his company is positioned to expand afterpretty much wrapping up the partnership-liquidation moves that will leave it with about 1million wholly owned subscribers (down from its current total of 1.4 million).
"I think that the potential for expansion and forgrowth is clearly magnitudinally better with Comcast," he said.
But as things stand, BTH keeps its three directors onJones' board, and it retains a say through those directors in Jones Intercabletransactions as part of BTH's shareholder agreement. One analyst said thisincreasingly contentious situation could prompt Glenn Jones to cut a deal and leave early,despite his $2.6 million annual salary.
VALUING JONES
The deal put a relatively high valuation on Jones stock.The payment of $500 million for 12.8 million shares works out to about $39 per share,although the real number is smaller -- possibly around $31 -- because Comcast also getsBTH stakes in other Jones International Inc. companies.
Despite that apparent endorsement, Jones Intercable'sshare price nudged up just 6 percent, to a $20.06-per-share close, last Tuesday, afterrising to as high as $22.25 during the first full trading day after the announcement.
Some Wall Street analysts said it was unclear whetherComcast would buy out other Jones holders, using Comcast stock, after taking votingcontrol of the company.
Henderson said that was a major question for him early on.But by last Thursday, he said, he was convinced that Comcast would buy out the remainingJones holders. That way, he added, Comcast would be able to eliminate more than $30million in Jones corporate overhead, improving the cash-flow performance of the Jonessystems.
Only by eliminating that overhead, Henderson said, canComcast claim that the deal works out to 10 times 1999 cash flow. Including that overhead,the price is more like 12 times cash flow.
Salomon Smith Barney analyst Spencer Grimes agreed, sayingthat Comcast would want complete ownership in order to "get its hands on the freecash flow."
Comcast will start off paying $400 million cash for 6.4million Jones Class A shares, plus a 49 percent stake in BTH units that control the other6.4 million A shares.
Then, Comcast will pay BTH another $100 million for theremaining 51 percent stake in the BTH units and the other 6.4 million A shares. Thatpayment will probably occur in December 2001.
At that time, BTH will likely exercise its option to buy2.9 million supervoting common shares from Glenn Jones for an estimated $175 million to$200 million. Comcast will then buy those shares from BTH, repaying what BTH paid Jones.
With the supervoting common shares, Comcast could electmost Jones directors.
