Entries in Cable Deals (15)

Wednesday
Dec142011

Cable Deal Multiples Decline in 2011

Buyers Paid an Average of 1.9x Revenue and $2,286 Per Sub

In the first half of 2011, cable acquisitions were few and far between. Aside from a sprinkling of system sales, all was quiet on the cable M&A front. Then June hit, and with it came a flurry of deals, mostly mid-sized, involving both the larger cablecos and regional operators looking to edge-out their service areas. Year to date there have been 21 cable deals announced involving nearly 1.1m cable subscribers. Of the 21 transactions, there were 12 priced deals that totaled $3.58b.

Time Warner was the biggest and also one of the most frequent buyers in 2011, spending more than $3.26b on three acquisitions. It started off small in May, picking up a cable system in Ohio from CoBridge Communications, but then made the year’s two largest cable buys shortly after: a $260m systems purchase from NewWave in June, and its $3b acquisition of Insight in August. Time Warner picked up 826k subs in its 2011 deals, paying around $3975 per sub. For Insight’s 750k customers, it paid an average of $4,000 per sub, the steepest multiple observed during the year.

Another frequent visitor to the deal table has been Charter, involved in four separate deals in 2011. Much of Charter’s activity was centered on building a cluster of cable systems in a pair of Southeastern states. In March, Charter cut a deal to with Windjammer to acquire cable assets in Georgia and Alabama, and it later swapped systems in the same states with James Cable. Then, in July, Charter agreed to buy another Georgia cable system from Northland Cable. In total, Charter’s acquisitions were on a much smaller scale compared with Time Warner’s activity, as it netted only 26k subs overall.

While Time Warner and Charter were repeat buyers, there were two companies more than willing to take the other side of the deal in 2011. US Cable exited the cable business completely with a trio of system sales during the year; while CoBridge Communications unloaded a handful of its cable systems in three separate transactions, just months after it entered the cable space.

Backed by The Gores Group, CoBridge began investing in cable in October 2010, acquiring 36 systems from Charter for an undisclosed amount. The ink on that deal was barely dry before CoBridge sold off a portion of those same systems to Knology in February 2011 for $30m. Later in the year the company dealt more cable assets to NTS Communications and Time Warner. While CoBridge’s strategy upon entering the cable business was to acquire undervalued, turnaround properties, the company may have bought into the industry at an inopportune time.

A comparison of deal multiples from 2011 to 2010 indicates that values in the cable industry have dropped off this year. The average revenue multiple we have observed for deals announced in 2011 has been around 1.9x, compared to an average price tag of 2.8x revenue for cable deals announced in 2010. Prices have fallen off about 23% on a per sub basis as well in 2011. Buyers on average have paid $2,286 per cable subscriber this year, compared to $2,976 per sub in 2010 cable deals.

Some private equity players, perhaps recognizing a softer cable market, decided 2011 was the time to exit its cable investments: MCG Capital sold its share in Avenue Broadband, and the Carlyle Group sold its stake in Insight to Time Warner. Other potential cable sellers had difficultly attracting acceptable bids on properties they were looking to deal. Charter pulled its LA systems off the auction block in September after bids came in much lower than the $2.5b, or $4,500 per sub, it was hoping to attract.

The decline in observed deal multiples however can be partially explained by the type of properties that were dealt in 2011. Many of the systems that changed hands were either located in rural, sparsely populated regions or were in need of maintenance and thus more capital investment. Wave Broadband and Baja Broadband for example targeted outdated properties at “value” prices that were in need of repairs and upgrades, but which also offered the opportunity to expand ARPU. In its purchase of cable systems from Broadstripe, Wave paid just $533 per sub, the lowest per customer multiple observed this year.

The presence of opportunistic buyers such as Wave and Baja implies that even in a down cable market, the cable M&A scene promises to remain active. But with companies looking to make more strategic, “tuck-in” and “edge-out” acquisitions around their current footprints, we are more likely to see a steady dose of small to mid-sized cable purchases in 2012 and less Insight-sized deals.

Tuesday
Oct252011

Satview Broadband Targets Cable Systems in Nevada

WENR Subsidiary Signs Letter of Intent to Acquire NV Cable Assets

On October 12, Nevada-based WENR Corporation (OTC:WNRC.PK) announced that its wholly-owned subsidiary, Satview Broadband signed a letter of intent to acquire its seventh cable system in Nevada. Earlier in 2011, Satview expanded its Nevada cable footprint in a deal with Baja Broadband, and it continues to target more properties in the rural towns located near its current service areas.

Reno-based Satview Broadband was started in 1999 by president Tariq Ahmad as an MSO, initially operating three cable systems in Nevada. After ten years of operations, Satview was purchased by WENR, a media holding company, in a deal that closed July 1, 2010. Ahmad received 5m shares of WENR in the deal, valued at approximately $300k, and continues to manage the day to day operations of the company. Shortly after the WENR deal, Satview turned into a buyer, acquiring three cable systems in northern Nevada from Baja Communications for $800k.

Dan Green, ceo of WENR Corporation, commented on WENR’s cable system acquisition strategy following the system purchase from Baja Broadband. "We are in the process of integrating two cable providers (Satview and Baja). We know exactly what we are looking for in opportunities and believe we have found several acquisition targets," noted Dan Green, CEO of WENR Corp.

The opportunities that WENR and Satview seek: to expand service area around Satview’s existing footprint in Nevada, and to increase ARPU through the bundling of services and system upgrades. The company is currently investing to upgrade Internet and voice services in its service areas in Elko, Carlin and Battle Mountain that were acquired from Baja Broadband. Its goal is to increase market saturation to 50% of the 16k homes in the region, up from the approximate 25% penetration level at the time the systems were acquired.

Following the Baja Broadband asset purchase, Satview now operates cable systems in six Nevada markets: Elko, Battle Mountain, Carlin, Jackpot, Wells and Topaz Lake. It generates approximately $3m annually in revenue and will more than double that figure following the close of its most recent purchase. In WENR’s press release announcing Satview’s system acquisition, the company indicated that the target property generates over $3m per year. 

According to a June 2011 presentation to investors, WENR indicated that Satview was looking at three specific systems in close proximity to its current operations as acquisition targets. It indicated that system #1 serves 900 subs and generates $700k annually, and system #2 serves 1,200 customers and generates $1m annually.  The third property WENR mentions, presumably the subject of its recent letter of intent, serves 3,300 customers and generates around $3.2m per year, or approximately $1k per customer.

Using the numbers from of Satview’s Baja purchase as a benchmark, we can derive an estimate for the price tag of its recent target. In that deal, Satview acquired 4,000 customers and paid only around $200 per sub, shelling out $800k for the three systems. Based on a price of $200 per sub and 3,300 subs, we can imply a purchase price of around $660k for its recent cable purchase, translating into a revenue multiple of well under 1x. The low deal multiples in both cases make sense given that the systems are located in sparsely populated, rural areas. 

While the targeted cable property and its current owner remain unnamed, a handful of cable systems in Nevada are logical targets for Satview. Charter, which divested cable assets in Nevada in 2006 and looked to sell its Los Angeles systems earlier in 2011, operates multiple systems near Satview’s Topaz Lake operations. 

Based on WENR’s presentation to investors in June, Satview doesn’t figure to be away from the deal table for long following the close of this acquisition. When forecasting forward looking revenues for Satview, WENR management estimated $9m per year, factoring in revenues for all three targeted systems mentioned above.  One down, two to go.

Tuesday
Aug302011

WideOpenWest and Wave Broadband to Purchase Broadstripe Cable Assets

Former Broadstripe Exec Now Wave Broadband CEO

Denver-based WideOpenWest LLC may have dropped out of the auction for Insight’s cable systems in early-August, but that did not mean the cable provider was done seeking deals. WOW! announced last week that it will purchase Dallas-based Broadstripe LLC’s cable assets in Michigan. The bankrupt Broadstripe has also agreed to sell its cable systems in Washington and Oregon to Seattle-based Wave Broadband. The sales will leave Broadstripe with properties only in Maryland, which a few of its current executives will purchase under a new entity, Ann Arundel Broadband, for $8m. All deals are contingent on approval from the United States Bankruptcy court.

Broadstripe, a provider of bundled communication services, has been in Chapter 11 since January 2009. The company was formed in 1999 as Millennium Digital Media Systems—a venture of four cable veterans looking to acquire, develop and operate cable systems. It acquired a number of properties across the country, but ultimately took on far too much debt. Shortly after failing to pay licensing fees to the National Cable Television Cooperative in December 2008, the company filed for bankruptcy. Over two and a half years later, Broadstripe is giving up its Chapter 11 fight and has decided to sell its assets.    

WideOpenWest will add approximately 48k customers in the deal, expanding its existing footprint in Michigan. WOW!’s networks currently pass 1.5m households in Illinois, Indiana, Ohio and Michigan and the Broadstripe systems will add another 92k houses to its territories. It will pay $55m to Broadstripe in the deal—a fraction of the $3b it was ready to pony up in the Insight auction.

The other buyer in the deal, Wave Broadband has agreed to pay $32m for around 60k Broadstripe customers. In the past few years, Wave has purchased a number of cable systems on the West Coast including many from Charter Cable while it was dealing with its own bankruptcy issues. The systems targeted by Wave and its ceo Steve Weed have shared similar traits: they have been outdated and in need of repair, but have also offered potential to expand ARPU. Wave looks to upgrade these systems and generate more revenue per user, providing digital phone and television along with high speed Internet options to its customers.

For Wave’s ceo, the deal must provide a feeling of déjà vu. Weed was the coo of Summit Communications when it sold the same exact Northwest networks that Wave is acquiring to a startup cable provider in 1999. The startup? Millennium Digital Media. The connection between Wave and Broadstripe goes even deeper, as after the Summit sale, Weed served as Millennium’s Northwest vice president from 1999 to 2003. Weed left Millennium in 2003 to start his own cable venture—Wave Broadband. Wave later attempted to purchase cable systems from Broadstripe in deals that fell through.  

A glance at the different multiples paid by Wave and WOW! suggests that Broadstripe’s more profitable subscribers are located in Michigan. WOW! will pay around $1,145 per subscriber for its 48k Michigan customers. Wave on the other hand will pay less than half of that at $533 per customer for its 60k Washington and Oregon subs. This differential points to the fact that the systems acquired by Wave may be outmoded and in need of upgrades, which is consistent with its past purchases.

As expected from a bankruptcy deal, the revenue multiple paid by Wave, WOW! and the Broadstripe execs reflects a deep discount.  The entities combined will pay just over 1x trailing revenue, with the run rate multiple being about the same. By comparison, Time Warner paid around 3x for Insight, which was consistent with levels observed in other recently announced cable deals. To put the discount into perspective, Wave and WOW! will pay a combined $87m for Broadstripe’s Michigan and Northwest assets, while just five years ago Broadstripe turned down a $157m bid from Wave to buy the same systems.

Cable M&A has been active over the past few months—even among small to medium sized providers.  The smaller cablecos are expanding carefully however, purchasing systems located close to their existing operations: Baja Broadband in the Mid and Southwest, WOW! in the Central Region, and Wave in the Northwest. Cable providers are expanding regionally as opposed to nationally—just the opposite of the growth strategy that Broadstripe tried and failed with just twelve years ago.   

Wednesday
Aug172011

US Cable to Sell Cable Systems to Baja Broadband

Third Deal for US Cable Since June

In June, US Cable sold its cable systems in Minnesota and Wisconsin to Midcontinent Cable and shortly after sold its cable operations in Missouri to Charter Communications (Nasdaq:CHTR). After Tuesday, you can add Texas, Colorado and New Mexico to the list of states in which the MSO will no longer operate. US Cable announced its third deal in under three months—an agreement to sell cable systems serving 60k revenue generating units to South Carolina-based Baja Broadband.

Similar to the Charter and Midcontinent deals, financials on the Baja purchase were not disclosed, nor was there detail on the number of customers served by the systems that were sold. We can estimate from the RGU totals however around 30k customers. After accounting for the 50k customers acquired by Midcontinent and Charter, US Cable has sold territories serving around 80k of its subscribers since June. 

Prior to June, US Cable had reported in a press release that it served only around 90k customers, suggesting that after its recent sales, its time in the cable business is coming to a close. US Cable is a partnership between Comcast and private investors led by Steven Myers. While Comcast is not getting out of the cable business any time soon, Steven Myers and company have decided the time to exit is now.

Taking the opposite view point, the owners of Baja Broadband—private equity firm, MC Ventures—feel that cable operations remains a strong investment. Gilles Cashman, a chairman at Baja and general partner at MC Ventures commented on M&A in cable earlier this year.

“In the fiber sector, it’s compelling to do acquisitions because there are such economies of scale. The more properties you acquire, the more you can leverage those relationships to sell the same customer over a broader geography.  Your sales momentum increases when you’ve got more footprint to sell.”

Baja currently serves 60k customers across New Mexico, Colorado, Utah and Nevada. The US Cable purchase will expand its footprint in New Mexico and Colorado, helping to provide the economies of scale that Cashman references. He also provided some insight into the type of cable companies MC Ventures would look to invest in during 2011. The firm targets cablecos that have not yet achieved strong penetration with digital video and broadband internet products, leaving room for ARPU growth.

“Where we are focused with respect to cable is guys that don’t have huge penetrations in video and have not been able to penetrate the digital product as much as others. They’re going to be better positioned to make the transition to more of a broadband provider than those who have $120 video ARPU’s,” commented Cashman.

An interesting aspect to this deal is that MC Ventures—a communications focused firm—is betting on cable while many private investors are getting out of their cable investments.  In the past year, Virginia-based MCG Capital sold its stakes in Avenue Broadband and JetBroadband, while Carlyle recently agreed to sell its ownership in Insight Communications. In cable M&A of late, the story has been the big get bigger—recent buyers have been the large cablecos such as Time Warner and Charter. Baja Broadband is one smaller provider bucking that trend.

Monday
Aug152011

Time Warner Emerges as Buyer for Insight Communications

Cable Giant to Pay $3b Cash for Ninth Largest CATV Provider in U.S.

After the Carlyle Group announced the auction of its stake in Insight Communications back in March, Time Warner Cable (NYSE:TWC) stayed out of the bidding due to the lofty rumored price target of $4b. The second-largest U.S. CATV provider expressed interest in a deal, but only if the auction price fell below $3b. Time Warner ultimately compromised from its initial position and announced on Monday that it will acquire Insight for $3b in cash.

In June, it was reported that final bids in the Insight auction came it at around $3.1b, with the likely buyer being either WideOpenWest LLC or Mediacom Communications. In the end, Time Warner emerged as a buyer, moved off of its $2.5b price target and negotiated the $3b deal.

The deal comes on the heels of a disappointing quarter for Time Warner’s residential cable television business. It lost 130k video subscribers in 2Q11, but strong growth from its enterprise division—Time Warner Cable Business Class—led to overall revenue and earnings growth in the quarter for the provider. The addition of Insight and its 750k customers in the midwest will expand Time Warner’s customer base to 15.25m subscribers.

Insight, the ninth largest cable provider in the U.S., has grown its top line 10% annually since 2009, and perhaps more importantly for Time Warner, has invested heavily in digital television and DOCSIS 3.0 conversions over the past two years. With these capital intensive projects completed, Time Warner foresees lower capital requirements for Insight in the near future, and as a result, Time Warner cfo Irene Esteves believes its shareholders stand to gain.

“Taking into account Insight’s recent performance, $300 million in net operating loss value, the anticipated net cost synergies and lower capital intensity, this acquisition presents an attractive opportunity to enhance TWC shareholder value. With these benefits, the purchase price multiple is favorable to current TWC and peer average trading multiples,” said Esteves.

 A comparison of the levels at which Wall Street is trading Time Warner shares to the Insight deal multiples, however, brings the favorability of Insight’s price into question. As of Friday’s close, the public was trading Time Warner at around 2.3x revenues and 6.1x OIBDA. At $3b, Time Warner paid 2.8x revenues and 8.3x OIBDA for Insight—21% and 36% higher than Time Warner’s public trading levels. Granted, public multiples are generally lower than private multiples, but the comparison does not project an immediate upside for shareholders.

After accounting for the projected cost benefits of the deal, the acquisition looks more attractive. Time Warner suggested in its press release that the cost efficiencies created through the purchase will be in the ballpark of $100m annually. Adding cost savings of $100m to Insight’s $360m annual OIBDA, Time Warner expects to generate an additional $460m of annual operating income with the purchase, translating into a purchase price multiple of 6.5x OIBDA—much closer to Time Warner’s public trading level of 6.1x. 

Compared to recent priced cable deals, the Insight price appears reasonable. Its multiples are in line with the observed averages for the sample I examined (2.9x revenue and around 7x OIBDA) though Insight’s per connection price of over $1,900 is around 20% higher than the $1,600 per connection observed for recent deals.

The deal’s financial impact will ultimately hinge on Time Warner’s ability to realize the cost synergies that it projects. Insight’s revenue growth has slowed in recent quarters, and its OIBDA per connection in 1Q11 was the lowest reported of all cablecos in JSI’s recent per unit analysis. There is one trend, however, that the Insight purchase is guaranteed to reverse: Time Warner’s streak of ten consecutive quarters with video subscriber losses.