Comcast, Insight Divvy Up Midwest

Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Insight Communications Co. Inc. have agreed to split up a long-standing cable system partnership, giving Comcast direct control of systems in the Midwest that pass about 1.2 million homes and serve 684,000 basic video subs.

The expected move divvies up the Insight Midwest partnership, under which Insight and Comcast each holds a 50 percent stake. Comcast inherited the partnership through its buyout of AT&T Broadband in late 2002.

Although the partnership is divided down the middle, Comcast will take on a bit more debt when the deal is consummated. Comcast said it will assume $1.335 billion of partnership debt, while Insight will add $1.26 billion.

Comcast and Insight did not attach a specific valuation to the deal. But Craig Moffett, an analyst with Sanford C. Bernstein & Co. Inc. , values the deal at $2.4 billion for Comcast when applying the operator's current 8.5x multiple on profits. That figure rises to $3 billion when the firm's target 9.0x earnings multiple for 2008 is applied.

"Either way, it's far in excess of our sum of the parts carrying value of $700 million, or 22 cents per share," Moffett said in a research note issued Monday.

The deal, expected to close by the end of 2007, will give Comcast the cable systems serving portions of Illinois (Rockford/Dixon, Quincy/Macomb, Springfield, Peoria, and Champaign/Urbana), as well as a set of cable properties in Indiana (Bloomington, Anderson, and Lafayette/Kokomo).

Comcast said it expects its new cable systems to generate roughly $290 million in operating cashflow for 2007. These systems serve 296,000 digital video customers and 300,000 high-speed Internet subs.

Insight, which completed its plan to go private in December 2005, will retain full control of systems serving Kentucky (Louisville, Lexington, Bowling Green, and Covington); Evansville, Ind.; and Columbus, Ohio. Those systems pass 1.3 million homes, and serve 639,000 basic video, 325,000 digital video, and 308,000 high-speed Internet subs, respectively.

Moffett said Comcast is also getting its hands on some high-quality systems, with the penetration of homes passed in those markets slightly higher than Comcast's overall rate of 57 percent. However, those systems are behind Comcast's national average in terms of digital video penetration. Comcast's average across the board for digital is 52 percent, versus 43 percent for the Insight systems.

Having direct control of those properties will shore up Comcast's clustering strategy in the region. Comcast currently operates systems in Indianapolis and the Chicago area.

The winding down of the Insight partnership also completes a four-year process for Comcast, which has been simplifying its balance sheet through recent restructurings, Moffett said. He pointed to its previous deals with Time Warner Cable Inc. (NYSE: TWC), Adelphia Communications (now split between Comcast and Time Warner Cable), and Susquehanna Communications.

Moffett also wondered whether the agreement would spark Time Warner Cable to pick up the rest of Insight, whose remaining systems "are a near perfect fit" with some Time Warner cable properties.

A Time Warner Cable spokesperson declined comment on such speculation but said the MSO "remains opportunistic regarding growth opportunities."

— Jeff Baumgartner, Site Editor, Cable Digital News

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