Entries in Charter:CHTR (14)


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.


Northland Cable Cleaning Up Partnerships

Buying and Selling at Limited Partnerships Seven and Eight

Seattle-based Northland Communications has filed for four separate cable TV system sales in Georgia and Alabama. Three of the systems are owned by Northland Cable Properties Seven Limited Partnership (Northland Seven); the fourth is owned by Northland Cable Properties Eight Limited Partnership (Northland Eight).  Northland Communications owns and operates smaller-market cable systems in Alabama, California, Georgia, Idaho, North Carolina, South Carolina, Texas and Washington.

In two of the transactions, Northland Cable Television, Inc. (Northland CATV), an affiliate of Northland Communications and managing general partner of the LPs, will acquire the systems. In the other two, Truvista Communications of Georgia, LLC and Charter Communications are the buyers. Because both of the limited partnerships file with the SEC, relatively detailed data was available with which to crunch multiples and evaluate the systems.

In the first transaction, Northland Seven is selling its systems in Vidalia, Georgia  to Northland CATV for $5.4m. Vidalia (home of the onion!) is midway between Savannah and Macon, and the system there passed about 9,500 homes. Basic subscribers as of the end of the latest quarter were estimated to be around 3,200 based on year-end 2010 reported figures and the percentage decline experienced by the three Northland Seven systems in the aggregate through September 30. Similarly, the Vidalia system revenue was estimated based on Northland Seven average ARPU across the three owned systems, as was OIBDA and margin. Using these assumptions, the deal for Vidalia in a sale to the managing general partner comes in at about 1.6x revenue and more than 8x OIBDA.

Next, Northland Seven is selling its Toccoa, Georgia system to Truvista Communications for $8.9m. Toccoa is in northeastern Georgia near the South Carolina border and the system passes about 13,000 homes. I estimate the Toccoa system was serving just under 4,000 basic customers and generating nearly $4.2m in annual revenue. Based again on LP-wide margins, OIBDA would be in the $807k range, indicating a revenue multiple of 2.1x and a cash flow margin of 11x.

Finally, Northland Seven will sell its Sandersville, Georgia system to Charter Communications for $3m, or about 1.5x revenue and 7.9x cash flow. Sandersville is also between Macon and Savannah and the systems pass about 4,600 homes.

In the aggregate, Northland Seven is liquidating its systems for $17.3m, or 1.8x actual LQA revenue and 9.4x actual aggregate cash flow.

In the final transaction, Northland Eight is selling its systems in Aliceville, Alabama and Swainsboro, Georgia to Northland CATV for $5m, or 1.2x actual LQA revenue and 6.5x actual LQA cash flow (excluding the impact of an $860,000 writedown in the quarter for the fair value of the LP’s franchises).

Judging by comments made in the public filings as well as the 19% cash flow margins at both partnerships, it seems the systems may have been struggling recently. Subscriber losses for Northland Seven were around 9% year over year through September, compared with an average YoY loss of less than 3% for the major publicly-traded cable companies. Northland Eight’s subscriber base fell by 6% YoY through September.


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.


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.


James Cable, aka CommuniComm, Doing Deals

Recent Georgia Buy and Swap with Charter

Bloomfield Hills, Mich.-based James Cable, LLC, which does business as CommunicCom Services, was involved in two transactions this month involving cable systems in Georgia. First, it and Charter Communications (Nasdaq:CHTR) announced on July 5 that they had reached an agreement to exchange systems in Georgia and Alabama. Then, on July 11, James Cable closed on Waycross, Georgia-based Mediastream.  Terms of that transaction were not released.

James Cable operates systems in primarily rural markets and according to one source, passes some 133,000 homes in nine states. Its ceo is Kate Adams and the company, which was started as James Cable, LP in 1988, is presumably backed by New York-based private investment firm GoldenTree Asset Management. Steven Shapiro, a founder of GoldenTree, sits on James Cable’s board.

In the first transaction Charter, which already cut one deal earlier this year for cable systems in Georgia and Alabama, said that it will take over James Cable’s systems in Eatonton, Georgia and Roanoke and Gu-Win, Alabama.  There are 9,500 subscribers in these systems. In return, James Cable receives Charter’s Douglas, Georgia system, serving 5,500 customers. A Charter representative noted that the wide differential in the number of customers received is related to the upgrades that Charter will have to perform on the former James Cable systems.

Still, being the numbers geek that I am, I figured I could use Charter’s public trading value to back into a rough estimate of value for the transaction. First, I looked at Charter’s current trading level. By my calculation, Wall Street is valuing the company at about 2.7x revenue, 7 to 7.5x OIBDA and about $2,000 per connection.

Notice that the press release said 9,500 and 5,500 “customers” not connections, so I’m equating that to a video subscriber. Charter trades at more than $4,400 per video customer presently—if we apply that figure to the 5,500 customers it’s “paying” James Cable with, the implied value is in the $24m range.  If we then divide that by the 9,500 customers that James Cable is paying, you get an implied value per customer of just over $2,500—well below where most recent cable deals have been cut. As the chart below shows, the recent transactions for which we have pricing came in around $1,600 per connection--but in most cases that translates to between $3,500 and $4,500 per customer, or video subscriber.  This is consistent with the Charter spokesperson’s implication that these systems need substantial upgrades.

The Mediastream deal is a little tougher to guestimate in terms of value…there are 9,000 customers involved, but the value could be anywhere from $2,000 to $5,000 per sub. That yields a nice tight value estimate range of $18m to $45m—though I’m guessing the real answer will be closer to the low end than to the high end.