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.