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TCI Exchanges Subscribers for 40% Stake in Falcon Holdings

Deals: Nation's largest cable operator will not rid itself of debt in transaction, as in other recent pacts.


In another step toward shedding far-flung cable systems, Tele-Communications Inc. has agreed to give up 310,000 subscribers to Falcon Holdings Group in exchange for a 40% equity stake in the Los Angeles-based company.

But unlike similar deals planned and announced by TCI, Falcon will not assume any debt in the deal, which is estimated to be worth about $600 million.

In the last month, the nation's largest cable operator has unloaded more than $600 million in debt to cable partners in similar deals.

Falcon, the nation's 12th-largest cable operator, with about 1 million subscribers, would take over TCI's subscribers in Missouri, Alabama and California, and become the second-largest cable operator in Oregon and Washington through the deal.

The transaction would increase Falcon's borrowing power and pushes the company's value to about $2 billion, according to Marc Nathanson, Falcon chairman and chief executive, who retains 51% voting control.

Earlier this month, TCI traded 166,000 subscribers to Adelphia Communications Corp. for a stake in the company and gave up an additional 820,000 New York subscribers--along with $669 million in debt--to Cablevision Systems Corp. for a third of the Long Island cable company.

The firm is in negotiations for similar agreements with Charter Communications and Time Warner Inc.

The deals are expected to pare debt to about $13 billion and bring TCI's subscriber base from 14 million to about 12 million--the size of Time Warner's cable business.

In addition to cleaning up the balance sheet, TCI hopes the deals will improve its mediocre operating margins by improving management of the systems. Under new President Leo Hindery, TCI has broken up the company into regional operating groups in an attempt to improve dismal customer relations.

In Falcon, TCI is aligning with one of the most profitable operators.

Falcon's operating income last year of $250 million on revenues of $500 million gave it a profit margin of 50%. The cable industry's average operating margin is 40%.

Falcon could assume control of other TCI subscribers down the road under a similar arrangement, Nathanson said.

About half of TCI's customers are located in rural communities that are not part of urban clusters that enjoy better economies of scale. Nathanson says Falcon specializes in small towns, calling his company the "Wal-Mart of cable operators."

He said 70% of the residents in those towns subscribe to cable, largely to improve their television reception.

Because Falcon now will be an affiliate of TCI, he said, the company will be entitled to the same bulk discounts on programming enjoyed by its partner. The cable industry blames the rise in rates largely on a spike in the cost of programming from networks like ESPN and MTV.

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