Comcast to leapfrog MediaOne

Taking steps toward becoming No. 3 multisys op

NEW YORK — Comcast Corp.’s $500 million purchase of Bell Canada’s 30% stake in Jones Intercable is the first step in an effective takeover of the cabler that will make Comcast the No. 3 U.S. multisystem operator.

While Comcast has so far acquired only Bell Canada’s 30% stake (which itself has only 15% voting rights), the cabler will also effectively buy an option that the Canadian telco has over Jones CEO Glenn Jones’ controlling stake in the company.

The option is not exercisable until December 2001, but Lehman Bros. analyst Larry Petrella said in a note to clients Tuesday that Comcast may try to speed up exercise of the option. Once this option is exercised, at a cost Petrella estimated to be $200 million, Comcast will have 47% of the vote in Jones Intercable and the ability to control the Jones board.

Takeover of Jones will add its 1 million subscribers to Comcast’s 4.4 million, catapulting the Philadelphia-based concern over MediaOne to be the No. 3 U.S. cabler behind Tele-Communications Inc. and Time Warner.

Jones is currently the eighth-biggest cabler, while Comcast is the fourth-biggest.

Comcast will emerge with a sizable cluster of systems in the Washington D.C./Baltimore area because 400,000 of Jones’ subscribers are in Maryland and Virginia, adjacent to systems with 450,000 subscribers owned by Comcast in Baltimore.

Comcast has two other big clusters, in Philadelphia and New Jersey, so the cabler would dominate systems in the Washing-ton-New York corridor.

Ultimate offer

Petrella predicted that Comcast “will ultimately offer to buy the remaining public shares” in Jones Intercable, which he esti-mates would cost roughly $700 million, depending on the future course of Jones’ stock price. Jones stock closed up $1.37 to $19.37 Tuesday while Comcast rose 12¢ to $36.37.

Comcast declined comment Tuesday on whether it might try to speed up exercise of the option over Jones shares.

Comcast VP for finance Bill Dordelman noted that Comcast was not currently proposing to buy the option itself, but rather the underlying shares from Bell Canada when the telco exercises the option.

Part of the reason for not buying the option directly is that Glenn Jones has to approve sale of the option and so far has not been involved in negotiations with Comcast, Dordelman said. Jones shows no sign of unhappiness with the deal, however, as he said in a Comcast statement that he was “absolutely delighted to have Comcast as a shareholder.”

A matter of time

Dordelman downplayed the significance of when the option might be exercised. “The control block of stock is now secured. How the remainder gets dealt with over time, that will play itself out.”

On a conference call with analysts, Comcast CEO Brian Roberts also dodged questions about whether Comcast would try to buy the outstanding stock anytime soon, according to people who were on the call.

A spokesman for Jones Intercable said it was “certainly within the terms of the agreement” that the option exercise would be brought forward, although he said there were no plans for that to occur at this point. He said the 67-year-old Jones was telling people he planned to stay with the company until December 2001.

Jones, who increasingly has been focusing his attention on his cable television education programming businesses such as Knowledge TV, has in recent months been selling a block of 3.1 million low-voting shares he owned in addition to his supervot-ing block, SEC filings show. Jones is believed to have been using the money he raised from the sales, done at roughly $19 a share, to invest in his educational businesses.

Disappointing synergy

Bell Canada bought into Jones in 1994 at a time when telco-cabler mergers were seen as the wave of the future. While several deals were announced, few actually closed, of which this investment was one.

Sources say Bell Canada grew frustrated with the investment, however, as the promised convergence of cable and telephony did not pan out. There has been talk on Wall Street in recent months that the telco was looking to sell.

Jones Intercable has been streamlining its structure in the past couple of years as well, putting itself in a position to be acquired. Jones has historically managed a big chunk of subscribers covered by systems that were owned by investment partnerships, and it has been selling off its partnerships gradually.

Right now Jones manages systems with 1.4 million subscribers. Of those, 1 million subscribers are in systems directly owned by the cabler.

The deal was a natural fit for Comcast, given the geography of the systems. Jones’ systems are regarded as high quality in technical terms, which was an important issue for Comcast, Dordelman said.

The systems “generate very high average revenues and have a superior system profile,” said Lehman’s Petrella.