Entries in Time Warner Cable:TWC (12)


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.


4G Wireless Front-Runner Verizon Scooping Up $3.6b in AWS Spectrum

Cable Sellers Get a 57% Premium Over Purchase Price, Plus Agent Arrangement

You have to admit, Verizon Wireless is run by some pretty slick operators. The company is far and away the leader in terms of 4G deployment (while pioneer Clearwire flounders, more on that below) after spending billions in the 2008 auction for 700 MHz licenses. And today, even as rival AT&T struggles to keep its ill-advised T-Mobile acquisition alive, Verizon announced that it will acquire 122 Advanced Wireless Services (AWS) spectrum licenses from the cable consortium that laggard Sprint used to date.  It just goes to show you that not all giants have the same vision, despite their lofty vantage point.

First, the deal details. SpectrumCo, LLC, a joint venture between Comcast, Time Warner Cable and Bright House Networks, will sell its 122 AWS licenses covering 259m POPs to Verizon Wireless for $3.6b. That’s a nearly 57% premium over the $2.3b that SpectrumCo paid for the licenses at the FCC’s auction in 2006, a fact which should cheer the many ILECs nationwide that have owned AWS licenses since the auction.

The FCC’s web site is still using 2000 Census data for POPs, but in the press release announcing the deal SpectrumCo said that there are 259m POPs included. Back when the auction was held in 2006, the FCC said that the subject licenses covered about 253.6m POPs, which implies a 2.1% increase since the auction. Based on 259m POPs, the Verizon Wireless deal implies a weighted average value per MHz POP of $0.706—or 53.5% more than the $0.435/MHz POP that the cable consortium paid in 2006.

Notably, the price per MHz POP isn’t too far below the final average price/MHz POP paid in 2008 for 700 MHz spectrum at auction, which came out at about $0.81/MHz POP. That said, the implication is that spectrum assets are still increasing in value, due to the more attractive propagation characteristics of lower spectrum bands. The AWS licenses lie at 1.7 and 2.1 GHz, which implies that more cell sites are necessary for build out—Verizon is presumably looking to bulk up its capacity in urban markets, which makes sense given the rapid uptake of its 4G service.

As a reference, I've taken the auction price and POPs for each of the 122 markets included in the sale and shown what the implied value/MHz POP is based on my estimated 53.5% premium over Auction 66 prices--some readers who own nearby AWS licenses may be interested in the "comparables," although admittedly there may be few buyers out there willing to pay the kind of premium that Verizon has ponied up.

Beyond the spectrum value implications, this deal highlights the shifting landscape in the wireless—nay, communications—world. AT&T is buying spectrum from Qualcomm in order to increase capacity, but that deal seems like a consolation prize now that the FCC has signaled that it is unlikely to support AT&T’s attempt to acquire T-Mobile (which was also a big AWS spectrum buyer in the 2006 auction).

I think Verizon’s tactics have been far more clever than AT&T’s, and the latter is now wasting vast resources on legal efforts to make the T-Mobile deal happen while Verizon races ahead in terms of 4G coverage nationwide.

And then there’s Sprint, which has tried off and on to work with the major cable players for more than a decade, but been unable to gain traction. Come to think of it, Sprint hasn’t played nice with partner Clearwire either, despite its commitment yesterday to provide up to $1.6b in funding for the floundering WiMax system operator. I would have expected more from Dan Hesse…

The transaction also reiterates what cableco Cox Communications indicated over the past few months when it first abandoned its effort to build and run its own wireless operations and then later shut down its reseller arrangement with Sprint. Running a wireless business isn’t necessarily an easy add-on for other communications providers (ILECs included). But it IS necessary in a competitive sense.

Ironically, Comcast, Time Warner and Brighthouse are now effectively getting in bed with the enemy. (Take it from someone who gleefully cancelled Comcast service just one month ago and is now happily streaming Netflix and Hulu video content over a Verizon 4G connection.) But it’s a smart alliance.

As stated in the press release, “The agreement comes at a time when consumer demand for wireless services and bandwidth is increasing rapidly...[this] is an important step toward ensuring that the needs and desires of consumers for additional mobile services will not be thwarted by the current spectrum shortage. While government action to free more spectrum is expected, this transaction ensures that the spectrum which is already available for mobile services is used effectively to serve customers.”

It’s interesting that the cable companies are the ones to say this now, considering that they were the target of accusations (not untrue) last spring that they were ‘warehousing’ spectrum, in particular, AWS spectrum. NAB head Gordon Smith railed against the cablecos at that time as he resisted efforts on the part of the government to make broadcasters relinquish additional spectrum.

And sure enough, five years after acquiring the licenses, the cablecos are not only making a handsome return on their original investment, but they’ve also leveraged the licenses into a deal with the most powerful wireless operator in the country. The SpectrumCo transaction includes agreements which will allow both the cablecos and Verizon to become agents for the other and the companies have also agreed to form “an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.” And that, my friends, is the wave of the future.


Windjammer Deals More of its Cable Assets

All West Communications Expands Wyoming Footprint

Utah-based All West Communications has expanded its presence in Wyoming, acquiring cable assets and customers from Kansas-based Windjammer Cable. In a deal announced on September 26th, the broadband service provider will acquire Windjammer’s 1,300 customers in Evanston, an area that All West has served for the past ten years.

Headquartered in Kamas, Utah, All West is an independent telecommunications company that provides Internet, phone, and cable television services. The company’s history dates back to 1912, when it began offering telephone services in Rich County, Utah. It has since expanded its service area to include Wasatch and Summit Counties in Utah, and Uinta and Lincoln Counties in Wyoming. 

According to Phone Lines 2011, All West serves around 6,000 access lines and 5,114 broadband connections in its territories. Since 2003, All West has served the new service areas that it has entered, including its Evanston market, with FTTH technology and is in the process of migrating 100% of its customers to fiber based services.

The Evanston system deal is the second cable sale for Windjammer in 2011 and its fourth since May 2010. On August 1st, Windjammer completed the sale of its Georgia and Alabama cable systems and 17k customers to Charter (Nasdaq:CHTR). The deal followed a busy 2010 for Windjammer, during which it sold its Greenville, Mississippi-based cable system and 8,000 customers to Suddenlink and also dealt cable assets in Bonners Ferry, Idaho to Country Cable. After unloading these properties, Windjammer still operates cable systems in California, Montana, Missouri and Texas, among other areas.

The cable assets Windjammer is dealing are former Adelphia-operated cable systems that have switched hands frequently in the past five years. As part of Adelphia’s bankruptcy proceedings in 2006, Time Warner (NYSE:TWC) and Comcast (Nasdaq:CMCSA) acquired multiple Adelphia cable systems and 5.1m customers across the United States. Time Warner held onto the systems it acquired in the more heavily populated, urban areas and jettisoned the remaining cable systems to private equity firm, MAST Capital Management, and Florida-based cable operator, Communication Construction Services in 2008. The pair in turn created Windjammer, which has operated the former Adelphia/Time Warner systems which serve 80k rural customers.

While financial terms of the All West purchase have not been disclosed, some recent sales of Windjammer’s cable assets provide us with a reference point for the deal’s potential value.

Time Warner reportedly paid $3,500 per sub when it acquired its 3.3m customers from Adelphia in July 2006. Upon selling the more rural systems to Windjammer in 2008, Time Warner lost around $45m—or about $563 per sub—translating to a price tag of $235m paid by Windjammer ($2,940 per sub). More recently, Suddenlink paid $20.3m for Windjammer’s Mississippi cable system at a cost of $2,538 per sub. Given a potential range of $2,500-$3,000 per customer, the price tag for the Evanston system can be estimated around $3.3m to $4m. 

The All West cable purchase is consistent with a developing trend in recent cable deals: buyers are expanding their service areas around existing footprints and more often than not are looking to offer fiber-based services to the cable customers they acquire. Given Windjammer’s remaining stable of cable systems across the U.S. and its eagerness to sell during the past two years, look for similar cable deals involving adjacent providers down the road.


Sprint, Clearwire and the Cablecos Dance Around a Deal 

Clearwire Shares Double on Word of Renewed Talks

Earlier this month I commented on the untenable situation that has developed between Sprint (NYSE:S) and Clearwire (Nasdaq:CLWR), and also wondered about the wisdom of the announcement Sprint made that it had entered into a nine year, $13.5b network deployment deal with startup LTE wholesaler LightSquared. 

Specifically, I pointed out that if Sprint continues to ignore Clearwire’s financial woes, it stands to lose its nearly 50% ownership position should Clearwire end up restructuring via bankruptcy….I also mentioned the fact that LightSquared’s spectrum is still constrained by interference issues with GPS providers.

Well according to a report published by Bloomberg last Friday, Sprint hasn’t completely lost sight of its investment in, not to mention reliance upon, Clearwire. In fact, the two may be in deal discussions as I write, and their cable step-brothers Time Warner Cable (NYSE:TWC) and Comcast (Nasdaq:CMCSA) may also be seated at the table.

Shares in Clearwire skyrocketed on the rumor last Friday, more than doubling from the sub-$2/share level they had fallen to in the wake of the Sprint/LightSquared announcement.  While Clearwire was trading at present levels (around $3/share) just a month or so ago, after tumbling to a low of $1.32 in early August, $3+ per share suddenly looks a lot better.

But what does it imply in terms of Clearwire’s value?  Back in June I wrote a story on Clearwire’s ongoing struggles to raise capital via a spectrum sale or a broader deal.  At the time, Pardus Capital’s Karim Samii had written a letter to interim ceo John Stanton bemoaning the fact that, at $4.60/share, Clearwire’s massive spectrum holdings were valued at less than $0.20 per MHz POP.  Samii urged Stanton to sell off some of Clearwire’s excess spectrum in order to get the company’s business plan back on track.

After Friday’s run-up, Clearwire appears to trade at an even more discounted $0.15/MHz POP, and at its low two weeks ago, Clearwire’s public market cap indicated a value of just $0.12/MHz POP….But according to the FCC, not to mention AT&T in its T-Mobile lobbying efforts, U.S. wireless carriers are facing a serious spectrum shortage!

I’ve been flummoxed by Sprint’s refusal to step up and support Clearwire for some time now…clearly the company’s bet on WiMax technology has proven to be a misstep in hindsight, but in the meantime Sprint keeps adding 4G customers, to the tune of 1.7m net new 4G customers on the Clearwire network in the second quarter.

Sprint needs every advantage it can get its hands on in the face of the AT&T/Verizon Wireless duopoly.  Why bet billions on LightSquared’s fledgling plan when it already bet billions on Clearwire’s 4G plan years ago?  And why haven’t the cable guys stepped up sooner?  They desperately need a wireless strategy—and that’s what their investments in Clearwire was supposed to be…but the partnerships have floundered in recent years; the vast majority of Clearwire’s wholesale customers have come from Sprint.

Clearwire’s 2.5 GHz spectrum isn’t as desirable as the 700 MHz licenses that Verizon and AT&T will use to deploy their 4G systems on, but it has LOTs of it. Furthermore, the FCC is still considering a proposal to raise the out of band emission limits, which would enable Clearwire to use 20 MHz of spectrum and deliver speeds of 90 Mbps.

It just makes sense for Sprint and the cable players to really get behind Clearwire and make it the basis of their next generation wireless strategies. But after the drubbing the stock has taken this year, due largely to Sprint’s relative lack of support, Clearwire’s existing backers may now be in a position to take over for a much lower price than would have been demanded last winter.  Maybe that was the point?


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.