Meager mergers, unless AT&T's in

Rural systems are available but are seen as not too attractive to MSOs, which find it hard to justify the buy

Ask cable executives for predictions about mergers and acquisitions for 2001, and their first response will almost invariably be along the lines, "There's not much out there to buy." Pause. "Unless AT&T comes back on the market."

Indeed, few outside AT&T Corp. believe that the company will be in the cable business for long. AT&T's decision to split into five parts is widely seen as Mike Armstrong's abandonment of his strategy to round out the company's telecommunications services by extending into the local- telephone business. Although AT&T executives deny it, industry executives believe AT&T's lucrative collection of metropolitan clusters will be back on the market.

"I firmly believe these systems will come back our way," says the CEO of one MSO.

"Obviously, we'd love it," adds a senior executive of one media company that has been studying AT&T's recent moves. "I would say it's 50-50 that these properties get resold."

Other than that, expectations for this year are low.

Cox Chairman James Robbins says that he's interested in developing his existing clusters in places like Southern California, Arizona and Florida and, secondarily, a really large deal. But he's not interested in diving back into small markets the way he did with his $4 billion takeover of TCA Cable TV Inc. two years ago.

"If there are opportunities for us to get bigger, we would look at that," he explains. "I'm not sure there's a whole lot out there that makes sense for us."

Adds Comcast Executive Vice President Larry Smith: "Maybe something will come up, but our folks are focused a lot on cleanup stuff around our own systems."

In sheer size, 2000 was a huge year, with cable systems accounting for about half the value of Time Warner Inc.'s $120 billion sale to America Online, and AT&T completing its $60 billion takeover of MediaOne Group Inc. But the effects were less dramatic than the previous year, when half the ranks of the top 10 MSOs were swept up.

Properties clearly up for sale in 2001 are rural systems that, while conceivably appealing at some price, are not terribly attractive now: 404,000-subscriber Classic Communications, 70,000-subscriber James Communicatons and 121,000-subscriber Galaxy Telecom. All three companies are at least in technical default on their bank loans. Their owners have been struggling for a year to find buyers or new equity sources to keep lenders satisfied, to no avail. Their portfolios are composed mostly of small-town, rural properties that lack the heft to be upgraded efficiently and, hence, have been ravaged by DirecTV and EchoStar. Other MSOs are having a hard time justifying such buys even as distress situations.

More-interesting activity could surround a slice of systems that AT&T is definitely putting up for sale. The company is shopping a 1.2 million-subscriber piece of its own rural operation to other MSOs, including Iowa, Utah and Montana. Industry executives say that several investment funds have started to circle but are looking to assemble management teams before they formally bid.

A couple years ago, established operators would have jumped at the chance, because some top players were looking merely for bulk buys. Cox Communications, Charter Communications Inc. and Adelphia Communications Corp. all bid for properties that made little geographic sense but offered an additional million or so subscribers for increased leverage with programmers, regulators and other MSOs.

Except for Mediacomm Communications, established MSOs are passing on the current slate of rural properties. "That extra million subs on hell's half acre?" asks a senior executive with one MSO. "Not us, thanks."

The good news for deal-makers is that the investors are more supportive of cable than of other media sectors. Some system stocks are trading around 16 to 18 times annual cash flow, notably Comcast and Charter. And while recession fears and spectacular telcom failures like ICG Communications and Northpoint Communications froze the junk-bond market solid, it has been cable operators that have led the way through the ice, Charter, Mediacomm and Adelphia raising almost $2 billion over the past 30 days at favorable rates.