The deal between the two closely held companies, which could be announced as early as Wednesday, would add about one million subscribers to Charter's existing base of about 3.9 million. This would give Allen close to five million customers -- and counting. Pending the completion of previously announced deals, including yet another one that is likely to be announced later this week, Allen's cable business will have around 5.5 million subscribers. This puts him squarely in the cable big leagues.
As of Tuesday night, the two parties were still working on a definitive agreement, according to people familiar with the matter, leaving open the possibility that the talks could stall. The people close to the companies weren't anticipating any problems.
Allen is expected to pay around $3,600 for each of Falcon's approximately one million subscribers. This is a fat price but still short of the $4,600 that AT&T Corp. (NYSE:AT&T) recently agreed to pay for MediaOne Group subscribers.
Through St. Louis-based Charter, Los Angeles-based Falcon will get a deep-pocketed partner with established ties to the cable and Internet worlds. Falcon, along with the rest of the industry, has been spending heavily to upgrade its cable TV lines to handle phone, interactive video, high-speed data and Internet access. Still, only about 25% of Falcon's systems are currently upgraded, a fact reflected in the relatively modest per-subscriber price that Allen is paying. To help fund its upgrade program and take advantage of the heated market for cable stocks, Falcon had also been considering a public offering. Then Allen came calling.
Dream of a 'Wired World'
The deal, for Charter, would help further Allen's dream of creating a "wired world" to combine high-speed access with advanced interactive services. Allen, a co-founder of software powerhouse Microsoft Corp. (Nasdaq:MSFT) , has been on a cable-buying spree over the past year.
Some of his bigger purchases include St. Louis-based Charter for $4.5 billion and Dallas-based Marcus Cable Co. for $2.8 billion. Allen, a big proponent of high-speed services, recently bought a major stake in Go2Net Inc. (Nasdaq:GNET) , a Seattle-based company that owns a range of financial and community Web sites. Allen has said he plans to offer Go2Net services to his cable customers -- another part of the wired world.
To finance these dreams, Allen has been considering selling shares of Charter to the public. Allen recently confirmed that he is thinking of going that route, but indicated no final decision had been made. If he goes forward with such a plan, the initial public offering would be one of the largest ever in the industry.
The Falcon deal is the latest in a series of high-profile cable transactions transforming the industry's competitive landscape. AT&T got the merger ball rolling in June 1998 by announcing its intent to buy cable giant Tele-Communications Inc. for $48 billion in cash and stock. A string of smaller deals in the $3 billion to $5 billion range followed, building up to Comcast Corp.'s (Nasdaq:CMCSA) announcement in March that it planned to buy MediaOne for about $48 billion in cash and stock.
AT&T's Stunning Move
AT&T rocked Wall Street -- and Comcast -- by upping the ante a few weeks later. The telephone giant offered $54 billion in cash and stock for the Denver-based cable company. AT&T won the bidding war, but not before making some concessions to Comcast.
The merger frenzy has helped push up cable valuations to record highs on Wall Street, which has become enamored with the potential of "broadband" cable lines -- industry parlance for upgraded cable lines. This is one big reason a lot of closely held cable companies, including Falcon and Charter, have been considering public offerings. Cable operators that don't have the resources, or appetite, to upgrade their systems for broadband are instead selling out. This is exactly what Falcon is doing.
Falcon's subscribers are strewn throughout 27 states, with pockets of systems in the Pacific Northwest, where Allen has long been based. Falcon is headed by Marc Nathanson, a respected cable veteran who is expected to become vice chairman of the combined company, which will retain the Charter name.
Falcon is 54% owned by the Nathanson family, and 46% owned by AT&T. Under terms of its arrangement with AT&T, Falcon needed AT&T's blessing before it could sell out to the Allen organization. According to people familiar with the matter, Falcon got the green light from AT&T last week, paving the way for it to work out a deal with Charter.