Going Private, Getting Ready

The bullet behind the Insight deal
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Insight Communications' decision last week to go private will end the
frustration that comes with being a public company buffeted by Wall Street's
short-term demands. But the company's move won't do anything to head off a
deal drama lurking in the wings: a confrontation that will pit Insight's
Michael Willner, one of the few entrepreneurs who remain significant industry
players, against the biggest cable operator in the world, Comcast's Brian
Roberts.

And Roberts has a key bit of leverage over Insight that industry
executives expect him to exploit: the threat of leaving Insight a company too
small to thrive.

Willner and Insight Chairman Sid Knafel surprised the market March 7 by
teaming up with giant buyout firm Carlyle Group. They proposed to acquire the
86% of the New York-based company owned by public shareholders for $10.70 per
share, or $650 million. Investors expect Carlyle to increase its bid and sent
Insight's stock $1 above that offer price.

Carlyle has been hovering around the cable industry for years but
hasn't used the $47 billion it manages for significant U.S. investment in the
industry since 1997. The firm was former FCC Chairman Bill Kennard's first
stop after exiting the commission, joining a legion of former government
officials tapped by Carlyle over the years, mostly to ease their investments in
the defense sector.

Carlyle was one of several firms that approached Insight over the past
year as the company's stock price dropped as much as 70%, partly because of
the downdraft hurting all cable operators and partly due to Insight's
substantial operating problems, which have hammered cash-flow growth. When the
family behind Cox Communications decided to take that cable company private
last fall, the move only sharpened financial players' interest in Insight,
which seemed ripe for a similar step.

Where does Comcast fit in? Insight is a top-10 cable operator only
because of a partnership with the No. 1 cable operator. The cable giant
doesn't own Insight's stock but owns 50% of Insight's systems, a
portfolio of 1.3 million subscribers worth perhaps $5 billion.

How did Comcast come to own that piece of the action? Insight was
embedded in Tele- Communications Inc. (TCI) when that company was bought by
AT&T Broadband, which was in turn acquired by Comcast. The Insight-Comcast
partnership has a trigger set for later this year that could break it up.

FRIENDLY HAGGLING?

By taking Insight private, Carlyle is betting the Comcast showdown will
end more favorably than shareholders believe. The negotiations might run
amicably, of course. Willner, after all, is well-liked by industry leaders, as
demonstrated by his two recent terms as chairman of the National Cable
Telecommunications Association and his skill in getting cable's
often-clashing giants onto the same page.

But friendly haggling would be uncharacteristic for Comcast. Typically,
when Brian Roberts has an advantage in a negotiation, he grabs it and hits the
other side hard. Ask John Malone about the time Roberts tried to snatch control
of TCI away from him. Or talk to any shell-shocked cable network from which
Comcast has been trying to extract price cuts and video-on- demand programming
lately.

Insight is a bit of an oddity, an artifact of the cable industry's
infamous “summer of love” when Leo Hindery, then-president of TCI, remade
much of the cable business by putting about a third of the cable giant's
systems into the hands of smaller companies.

Mike Willner was one of the entrepreneurs who benefited. He had risen
through the ranks of Vision Cable, a small operator based in northern New
Jersey. Willner started off running Vision's Bergen County system, and in
1979 (at age 26) he became chief operating officer.

In 1985, a few years after co-founder and Chairman Knafel sold to
Advance Newhouse, he and Willner teamed up to create Insight. Knafel controls
the company's shareholder votes, but Willner runs the company.

Today, Insight is surprisingly well-clustered in midsize markets,
including Rockford, Ill., Lexington and Louisville, Ky., Columbus, Ohio, and
suburban Indianapolis. After a tough 18-month period in which cash-flow growth
stalled, subscribers jumped to satellite television and COO Kim Kelly got
squeezed out, the company is finally rebounding. Fourth-quarter revenue
increased a healthy 11%, and average revenue per customer jumped 12% to $68.
But cash flow has been slow to keep pace, growing just 6%. Any further progress
hinges on a successful resolution of the Comcast negotiations.

The worst-case scenario for Insight: Comcast decides to break up the
partnership, take its half of the business and go home, leaving Insight with
just 650,000 subscribers. In a world where anything less than 5 million
subscribers is considered small, that would make Insight tiny.

But the bleeding wouldn't stop there. Insight buys programming through
Comcast at the same substantial discounts networks accord to the largest cable
operator, 10% to 20% less than smaller operators pay. Since programming
accounts for 43% of Insight's expenses, separating from Comcast could leave
Insight both dramatically reduced in size and less profitable.

LIKELY OUTCOME

There's another, more likely outcome: Comcast bids for all of Insight.
That could be an excellent result for Insight or an underwhelming one,
depending on the price.

I'd bet on the latter, because the threat of Plan A will give Brian
Roberts plenty of leverage in Plan B to squeeze the numbers.

And then there's a third way (my personal favorite) for all of this to
turn out: Insight becomes a chip in the negotiations between Comcast and Time
Warner. Comcast owns 20% of Time Warner Cable but is under FCC order to exit.
One of the reasons Comcast and Time Warner are jointly bidding for Adelphia is
to grease the unwinding of Comcast's stake.

Insight's Ohio systems are a particularly nice fit with Time
Warner's existing operations, so it could become part of a bigger trade if
Comcast wants to go that route.

Maybe everyone will walk away happy from the impending Insight-Comcast
face-off. But it's a reminder to all executives entering into partnerships:
Breakups can be painful.

E-mail comments to
jhiggins@reedbusiness.com

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