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Crowded Cable Field Unlikely to Consolidate

Don't expect the bidding for low-hanging fruit AT&T Broadband to ripple through an empire-building industry.

Comcast (CMCSK) may be turning heads with its offer to buy AT&T Broadband, but the company doesn't appear to be setting fashion trends in the cable industry.

Unlike past major cable deals, Comcast's $53.6 billion stock-and-debt bid is unlikely to spark further consolidation among cable operators in the near future, say cable analysts and investors. That means that investors hoping for big takeouts of cable companies such as

Adelphia Communications

(ADLAC)

,

Cablevision

(CVC)

or

Charter Communications

(CHTR) - Get Charter Communications, Inc. Class A Report

better not bank on any windfall.

"I wouldn't hold my breath," says Neil Begley, senior credit officer at

Moody's Investors Service

. "They all might still be here five years from now."

Perhaps reflecting that theory, shares of major cable operators on Thursday were little changed from their Friday closes, before Comcast's announcement Sunday of its unsolicited proposal.

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It Already Happened

The short answer for why a merger wouldn't spark consolidation the way major deals did in the 1980s and early 1990s is that virtually all of the consolidation has taken place. The top-10 cable operators account for 86% of the 69 million cable subscribers in the U.S., according to statistics compiled last year by the

National Cable & Telecommunications Association

trade group. In 1988, by comparison, the top 25 cable system operators accounted for a mere 68% of market share, a

Michigan State University

study found.

Few Players at the Table:
The Nation's Biggest Cable Operators

Sources: National Cable & Telecommunications Association, Nielsen Media Research, Paul Kagan Associates

Among the remaining companies, says Begley, there are a few reasons at play why people wouldn't be willing sellers. One is that several cable operations, such as Cablevision and Adelphia -- not to mention Comcast -- are controlled by founders and their relatives, most of whom aren't willing to walk away from the patriarch's cable domain. "It ends up being a full-employment act for the whole family," Begley says. "And a lot of these people are very young."

Even if that isn't the case, the cable operators left at the top of the industry heap have already demonstrated their desire to be empire builders, not empire sellers. Once Comcast,

Cox Communications

(COX)

or Paul Allen-controlled Charter Communications own a property, says Begley, the company is unlikely to sell it off.

Containment

Of course, someone might be tempted if system prices were to rise significantly beyond their current private-market levels, says Begley. That would mean $5,000 or $6,000 per subscriber, above Comcast's offer, which was worth around $4,000. But such prices aren't likely to be reached soon, says Begley, because the remaining buyers are smart players unlikely to overpay. And the only thing that would make them willing to pay up would be higher levels of free-cash flow than cable operators will be generating in the foreseeable future. And that free-cash flow -- that is, operating cash flow after capital expenditures have been subtracted out -- won't grow until operators finish their current rounds of capital expenditures and generate deeper subscriber acceptance of new products, such as high-speed Internet connections and additional digital television programming.

Yet another reason there won't be much more consolidation, says one portfolio manager, is that the high-yield debt market isn't big enough to pay for it. "There just isn't enough flexibility out there for other cable companies to do big deals," says the manager, speaking on condition of anonymity. They might be able to raise $1 billion or $2 billion at a time for a purchase, but not the $10 billion or $40 billion that might be necessary for a big deal. Charter could manage a purchase, the manager speculates, if Allen were willing to finance it with his

Microsoft

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stock. "The only way Charter could do it is if Allen wrote a big check," the buy-sider says.