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.

ShenTel Complete's Buy of Suddenlink's Maryland and West Virginia Properties

ShenTel Adds 7,000 Homes Passed to CATV Reach

Shenandoah Telecommunications (Nasdaq:SHEN,“ShenTel”) announced on December 1, 2010 that it has completed its purchase of cable systems serving the communities of Salem, West Virginia and Oakland, Maryland from Suddenlink Communications.  The deal was first announced on October 6, 2010.  The systems pass approximately 7,000 homes.  Financial terms of the transaction were not disclosed.

JSICA Observations:  ShenTel has been making a strong push into video lately, with acquisitions of cable systems from Suddenlink, JetBroadband Holdings, and Rapid Communications.  With the addition of the Suddenlink systems, ShenTel’s cable system passes an estimated 177k homes and serves approximately 70k basic subs. 

Knology Scoops Up Sunflower Broadband

Through its second quarter earnings press release on August 4, 2010, Knology (Nasdaq:KNOL) reported that it has signed a definitive agreement to acquire the assets of Sunflower Broadband from The World Company for $165m in cash.

Sunflower, based in Lawrence, Kan., provides video, voice and data services passing approximately 54k homes in Douglas County, Kan.  At the end of 2009, Sunflower served 29k basic video subscribers, 15k voice connections and 28k broadband customers.  Sunflower was started back in 1970 by The World Company, a multi-media company also based in Lawrence, Kan.

According to the press release, Sunflower is expected to generate $51m in revenues and $22m in OIBDA during 2010. The deal is expected to generate $5m in synergies.

Overbuilder KNOL, based in West Point, Ga., served 232k basic video subscribers, 212k broadband customers and 256k voice connections as of 2Q10.  Its operations pass roughly 962k homes in Alabama, Florida, Georgia, South Carolina, South Dakota, and Tennessee.

The deal is expected to close in the fourth quarter of 2010 and is structured as an asset deal, providing KNOL the benefit of stepping-up the tax basis of the assets acquired.  KNOL expects to pay for the transaction with cash on hand and issue debt financing for the remaining amount.

JSICA Observations: The cable market remains hot. After being in the mix on some other recent deals, most notably the Bresnan Communications deal, KNOL finally lands one.  In Sunflower, KNOL picks up a well established cable company with a quality hybrid fiber/coax network offering a package of video, data and voice services similar to its own in a geographical area that begins to bridge its southeast operations with its upper midwest operations.

It’s a strategic move for KNOL since there is not much upside potential in purchasing the operations alone.  Sunflower enjoys strong penetration rates in its market.  Its basic video penetration of homes passed is roughly 53% while broadband penetration of basic video subs is very high at roughly 96%.  Sunflower’s estimated 2010 OIBDA margin comes in strong at 43%.  Besides the $5m in synergies, most likely from centralizing some operations, there isn’t much room to improve operating margins, and due to Sunflower’s high penetration rates, KNOL will have a tough time adding to the top line.  Increasing premium services sold is KNOL’s best chance at expanding the top line.  However, the deal does put KNOL in a good position to grow the Kansas business through expansion.  A point KNOL made clear in its press release, “Geography offers attractive edge-out possibilities, tack-on acquisition and larger acquisition opportunities…” 

KNOL was no doubt referring to the immediate geographical area around Lawrence, Kan. as well as the larger geographical area between the upper edge of its southeast operations in Tennessee and its upper midwest operations in South Dakota.  Lawrence, Kan. sits 41 miles west of Kansas City, Kan. and 25 miles east of Topeka, Kan. and is considered a “growth” area for the outward expansion of the two cities– an area well suited for KNOL’s edge-out expansion style, which the company has employed in its other markets.  On a larger scale, if KNOL can grow through additional acquisitions in this central region of the country, it can capitalize on economies of scale by running operations from South Dakota down to Florida.       When rumors of the deal first started floating around last month, analysts had it pegged at 8.0x to 8.5x OIBDA.  But, in the end, after backing out the value of Sunflower’s 700 MHz wireless license (at auction price), KNOL is paying 7.4x OIBDA, 3.2x revenue and $2,268 per connection.  The revenue and OIBDA multiples come in slightly below the last two major cable deals—Cablevision System Corporation’s (NYSE:CVC) pending acquisition of Bresnan Communications and Shenandoah Telecommunications’ pending acquisition of Jet Broadband while the price per connection is slightly above.  Although analysts are currently bullish on cable deal multiples, the slight pullback in the revenue and OIBDA multiples of this deal is most likely due to KNOL not expecting much in the way of organic growth from the operations.  The price per home passed came in at $3,028 and price per basic video subscriber came in at $5,638—both higher than any other cable deal this year, thanks no doubt to Sunflower’s high penetration rates.

ShenTel to Buy Suddenlink's Maryland and West Virginia Properties

ShenTel Continues the Transformation; Buys More Cable Systems

Shenandoah Telecommunications (Nasdaq:SHEN,“ShenTel”) announced on October 6, 2010 that it had agreed to purchase cable systems serving the communities of Salem, West Virginia and Oakland, Maryland from Suddenlink Communications.  The systems pass approximately 7,000 homes.The closing will occur upon receipt of regulatory approvals which should occur within 90 to 120 days. 

JSICA Observations:  We’ve said it before, we’ll say it again; despite its deep roots in the industry, we no longer view ShenTel as an ILEC.  Actually, we consider it to be more of a wireless company than anything else, but recent deals foretell its move into the video arena. 

Back in 2009, ShenTel spent $600k buying tiny North River Telephone Cooperative (The Deal Advisor, 10/09, p.7) but that was less an indication of Chris French’s desire to expand his ILEC base than an opportunistic move to mop up a struggling neighbor.  Contrast that to the money French and his team are spending on cable and it’s clear what’s getting all the real attention. 

Back at the end of 2008, ShenTel closed a $10m acquisition of 17,200 former Rapid Communications cable subs in Virginia and West Virginia (The Deal Advisor, 12/08, p.17).  To put an exclamation mark on its move to the video world, in April 2010 ShenTel announced it was buying JetBroadband Holdings’ cable operations in southern Virginia and West Virginia for $148m (The Deal Advisor, 5/10, p.10).  That deal closed at the end of July 2010 (The Deal Advisor, 8/10, p.8).  Add the 7k new homes to be added with the Suddenlink deal and, by the time the dust settles, ShenTel’s cable systems will pass an estimated 177k homes and serve an estimated 70k basic subscribers.  If French and his team are able to spruce up the systems and increase penetration closer to typical industry measures, ShenTel should be able to add another 10k to 20k subs on existing systems over the next few years.

DEAL ANALYSIS: Sunflower Broadband

AUGUST 2010 DEAL OF THE MONTH: Knology Scoops Up Sunflower Broadband

Through its second quarter earnings press release on August 4, 2010, Knology, Inc. (Nasdaq:KNOL) reported that it has signed a definitive agreement to acquire the assets of Sunflower Broadband, Inc. from The World Company for $165m in cash. 

Sunflower, based in Lawrence, Kan., provides video, voice and data services passing approximately 54k homes in Douglas County, Kan.  At the end of 2009, Sunflower served 29k basic video subscribers, 15k voice connections and 28k broadband customers.  Sunflower was started back in 1970 by The World Company, a multi-media company also based in Lawrence, Kan. 

According to the press release, Sunflower is expected to generate $51m in revenues and $22m in OIBDA during 2010. The deal is expected to generate $5m in synergies. 

Overbuilder KNOL, based in West Point, Ga., served 232k basic video subscribers, 212k broadband customers and 256k voice connections as of 2Q10.  Its operations pass roughly 962k homes in Alabama, Florida, Georgia, South Carolina, South Dakota, and Tennessee. 

The deal is expected to close in the fourth quarter of 2010 and is structured as an asset deal, providing KNOL the benefit of stepping-up the tax basis of the assets acquired.  KNOL expects to pay for the transaction with cash on hand and issue debt financing for the remaining amount. 

JSICA Observations: The cable market remains hot. After being in the mix on some other recent deals, most notably the Bresnan Communications deal (The Deal Advisor, 06/10, p.1), KNOL finally lands one.  In Sunflower, KNOL picks up a well established cable company with a quality hybrid fiber/coax network offering a package of video, data and voice services similar to its own in a geographical area that begins to bridge its southeast operations with its upper midwest operations. 

It’s a strategic move for KNOL since there is not much upside potential in purchasing the operations alone.  Sunflower enjoys strong penetration rates in its market.  Its basic video penetration of homes passed is roughly 53% while broadband penetration of basic video subs is very high at roughly 96%.  Sunflower’s estimated 2010 OIBDA margin comes in strong at 43%.  Besides the $5m in synergies, most likely from centralizing some operations, there isn’t much room to improve operating margins, and due to Sunflower’s high penetration rates, KNOL will have a tough time adding to the top line.  Increasing premium services sold is KNOL’s best chance at expanding the top line.  However, the deal does put KNOL in a good position to grow the Kansas business through expansion.  A point KNOL made clear in its press release, “Geography offers attractive edge-out possibilities, tack-on acquisition and larger acquisition opportunities…” 

KNOL was no doubt referring to the immediate geographical area around Lawrence, Kan. as well as the larger geographical area between the upper edge of its southeast operations in Tennessee and its upper midwest operations in South Dakota.  Lawrence, Kan. sits 41 miles west of Kansas City, Kan. and 25 miles east of Topeka, Kan. and is considered a “growth” area for the outward expansion of the two cities– an area well suited for KNOL’s edge-out expansion style, which the company has employed in its other markets.  On a larger scale, if KNOL can grow through additional acquisitions in this central region of the country, it can capitalize on economies of scale by running operations from South Dakota down to Florida. 

When rumors of the deal first started floating around last month, analysts had it pegged at 8.0x to 8.5x OIBDA.  But, in the end, after backing out the value of Sunflower’s 700 MHz wireless license (at auction price), KNOL is paying 7.4x OIBDA, 3.2x revenue and $2,268 per connection.  The revenue and OIBDA multiples come in slightly below the last two major cable deals—Cablevision System Corporation’s (NYSE:CVC) pending acquisition of Bresnan Communications (The Deal Advisor, 6/10, p.1) and Shenandoah Telecommunications’ pending acquisition of Jet Broadband (The Deal Advisor, 5/10, p.10) while the price per connection is slightly above.  Although analysts are currently bullish on cable deal multiples, the slight pullback in the revenue and OIBDA multiples of this deal is most likely due to KNOL not expecting much in the way of organic growth from the operations.  The price per home passed came in at $3,028 and price per basic video subscriber came in at $5,638—both higher than any other cable deal this year, thanks no doubt to Sunflower’s high penetration rates.