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Falcon TV sells to Charter

Los Angeles Times

LOS ANGELES -- Propelling himself into the big leagues of cable, computer billionaire Paul Allen has agreed to buy Falcon Cable TV, the only Los Angeles-based cable systems operator, for $3.6 billion in cash and stock.

Disclosing the transaction from his office in Santa Monica, Falcon founder and chairman Marc Nathanson said the deal would give Allen an additional — million subscribers, making his fast-growing St. Louis-based Charter Communications the nation's fourth-largest cable operator, serving 5.5 million customers.

With the acquisition of privately held Falcon, the nation's eighth-largest operator, Charter will add another 175,000 customers in California for a total of 725,000 statewide. Its subscribers will be concentrated in Southern California.

Falcon provides cable service the Medford area as well.

The purchase, expected to be formally announced today, is part of Allen's goal of bringing cutting-edge new services being rolled out by the cable industry -- such as high-speed Internet connections and interactive television -- to small-town America. The top companies -- AT&T Corp., Time Warner Inc., Comcast Corp. and Cox Communications Inc. -- are concentrating on providing these high-tech offerings in the nation's big cities. But Charter, though having designs on major markets including Los Angeles, has so far acquired cable systems such as Falcon that are concentrated in rural areas.

Falcon was formed in 1975 to bring no-frills cable services to remote communities underserved by broadcast television, with most of its systems capable of delivering only 35 channels, compared to 100 or more that have become standard as the industry has undertaken an expensive modernization program.

The harsh economics of upgrading systems in sparsely populated communities, where there are fewer houses for each mile of cable line, have kept small operators like Falcon behind the competitive curve -- forcing more and more of them to sell out.

The future of the cable business requires deep pockets, said Nathanson, who will become vice chairman and a member of the Charter board as a result of the transaction. In talking to Paul Allen, I heard a vision I could believe in. He is going to put small-town America at the forefront of new technology because he believes people in these towns will have insatiable appetites for Internet services.

In the last year, 12 of the nation's top 20 cable operators have been snapped up in a consolidation aimed at gaining economies of scale for rolling out these new services, which are the industry's competitive weapon against satellite television and local phone rivals.

Within a few years, analysts expect the family-pioneered cable industry to be dominated by conglomerates AT&T and Time Warner and just a handful of family-owned cable giants including Comcast, Cox Communications, Charter, Adelphia and Cablevision Systems Corp.

Allen is a late entry in the race. In the last year, the Microsoft co-founder, who is ranked by Forbes magazine as the third-richest American, has tapped his personal cash horde of more than $20 billion to become a major player in reshaping the cable and entertainment landscape.

Falcon is fetching $3,600 per subscriber in the sale, a rich purchase considering that only about 25 percent of its systems are ready to deliver advanced services.

Nathanson, who with his family and management controls 54 percent of the company, says Allen is paying half in cash and half in stock. Charter has plans for an initial public offering in the fall.

AT&T, which owns the remaining 46 percent of Falcon, will sell its shares to Charter. That should help reduce its ownership position at a time when its cable dominance is under review by federal regulators. After its March purchase of cable giant Tele-Communications Inc. and its proposed acquisition of MediaOne Group, AT&T will control cable systems that reach about 26 percent of the nation's households.