Adelphia Plum Dangles Before Hungry Rivals

Comcast serves 21.5 million basic cable subscribers, while Time Warner Cable serves 10.9 million households with basic cable.

The tax-efficient nature of the transaction makes it attractive for Comcast, UBS analyst Aryeh Bourkoff wrote in a research note Monday. "We view favorably any opportunity Comcast has to rationalize a portion of its unconsolidated holdings in order to make its valuation and asset holdings more transparent in consolidating its assets and cash flow," Bourkoff wrote.

The deal is "potentially a precursor to joint asset acquisitions by Comcast and Time Warner," Bourkoff writes. "Importantly, Comcast has the option to rationalize a portion of its Time Warner Cable stake but has not exercised this option yet. We believe that Comcast could be waiting for a potentially bigger transaction through which it would collaborate with Time Warner in the near future," writes Bourkoff, who has a neutral rating on Comcast's stock. While such a "bigger transaction" could conceivably include Adelphia, Bourkoff doesn't mention it; his firm has been enlisted as one of Adelphia's advisers for its auction.

Time Warner likely agreed to Monday's deal "in order to maintain flexibility to pursue an acquisition of Adelphia," Credit Suisse First Boston analyst William Drewry wrote Monday. "We believe Time Warner has long had the negotiating leverage due to the illiquid nature of Comcast's investment. However, with Adelphia on the auction block, timing has now played into Comcast's hand, which we believe has allowed the company to pressure Time Warner into this deal." Drewry has an outperform rating on Time Warner; his firm has done recent banking for both Time Warner and Comcast."

In late July, Merrill Lynch analyst Jessica Reif Cohen concluded it was feasible for Time Warner to acquire Adelphia by merging the bankrupt company into Time Warner Cable. In that report, Cohen argued Comcast was best served by taking Time Warner Cable subscribers as payment for its stake in the operator, rather than taking less-tax-efficient cash or stock in the merged Time Warner/Adelphia.

As a condition of acquiring AT&T's (T) cable systems in November 2002, Comcast promised the Federal Communications Commission that it would divest itself of its interest in Time Warner Cable, which it inherited from AT&T, by mid-2008.

Though Comcast originally requested a Time Warner Cable IPO last December, most outsiders believe that Comcast would prefer a more tax-efficient transaction than a stock sale to realize the value of its Time Warner Cable stake.

Time Warner, however, has said it doesn't believe the Securities and Exchange Commission would allow it to IPO Time Warner Cable until it has settled a dispute with the SEC over onetime revenue recognition practices at Time Warner's America Online subsidiary.

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