More Cable System, Channel M&A Predicted

Small and mid-size deals along the lines of several that occurred in 2010 and late 2009 in the cable distribution and cable programming sectors seem on the horizon, said several executives. Recent deals include Cox’s sale of control of the Travel Channel to Scripps Networks Interactive, RCN’s $1.2 billion planned purchase by private equity firm Abry, and Jet Broadband’s pending acquisition for $148 million by Shenandoah Telecommunications. Bresnan Communications, with about 320,000 subscribers, is being auctioned, with Knology and Suddenlink potential bidders, analyst David Joyce of Miller Tabak wrote last week. Bresnan is partly owned by Providence Equity, among the private-equity firms either seeking to shed stakes or buy more.

"Like any enterprise funded with private equity, there is a natural term for their investment, usually between 5 and 8 years,” a Bresnan spokesman said. “Since our partners have been with us since 2003, it is self evident that they explore options for determining a value for and possibly monetizing that investment. This eventuality has been not only expected, but planned upon from Bresnan’s purchase of the Rocky Mountain systems 7 years ago."

Recent transactional activity in the cable sector should continue, said President Garrett Baker of cable brokerage Waller Capital: “We think it’s a pretty consistent wave of activity that will fill out the rest of this year and go into next two or three years.” Easy debt financing for cable transactions is helping fuel the market, he said. The financing environment is “hot,” he said. “It’s remarkably healthy. And we've seen commitments written for six to six and-a-half times EBITDA for cable deals. I don’t think anybody expected to see levels like that this soon after the debt market dislocation."

Potential buyers of cable systems include private equity groups, cable operators backed by private equity groups looking to expand their holdings, and local exchange carriers that want to get into the video business, Baker said. Large publicly traded cable operators probably won’t get very involved because valuations are too high, he said. “The private markets are at a substantial premium to where the public markets trade and that makes it difficult for the public operators to participate."

Cable operators are expected to continue a strategy pursued for over a decade of buying adjacent systems to spread costs for headends, switching equipment and other gear over a larger number of customers. “It still makes sense to consolidate eyeballs across the country -- there are just so many pockets of small systems across the country that need to be aggregated,” said CEO Peter Aquino of RCN. “In my opinion you'll see continuous consolidation.” Others he’s spoken with say they're in no hurry to sell because valuations are likely to remain stable, Aquino said. “I don’t sense that there’s a big rush in the marketplace for people to sell their properties. … A lot of them hold for 3-5 years and when you hit that number or hit that mark, you sell it."

Programmer consolidation also is seen, probably with more deals like the Scripps-Cox one, where an owner of multiple channels buys a single one, executives said. “I think you will see some of the one-offs,” said Senior Vice President Richard Ramlall of RCN. “What’s happening with potentially NBC and Comcast is you will see both vertical and horizontal consolidation.”

Private equity firms want “some cash back” and there will be more deals on both the programming and distribution sides, said HDNet Chairman Mark Cuban. “No question there will be acquisitions. As money becomes available there will be sellers trying to get cash out of deals. Liquidity will change the landscape without question."

Past consolidation has made for more-stable cable operators that can better add new services, said President Char Beales of the Cable & Telecommunications Association for Marketing. “There are more efficiencies to getting scale, so you will see companies continue to look to add scale smartly,” Beales said, noting she’s not privy to deals. Companies focused on small markets like Suddenlink “may want more of those smaller markets” while “certainly the bigger companies want to grow in a contiguous geography,” she said. “We're right on the cusp of a lot of interactivity on the TVs, and that could be something consumers really love. On-demand just keeps getting better as a product, another example where consumers are benefitting."

Some cable operators are likely to sit on the sidelines. “I don’t think we are making any major acquisitions,” said a spokeswoman for Washington Post Co.’s Cable One. “If we made any purchases, they would be small communities around the communities we currently serve. … Our growth and retention are from the current communities we serve. There hasn’t been a shift so far from our philosophy.”

With free cash flow growing at the larger cable operators, they are increasingly fielding investor questions about potential acquisitions. At Time Warner Cable, it “sounds like appetite for acquisitions has increased,” Wachovia analyst Marci Ryvicker wrote investors following the company’s quarterly teleconference Thursday. The operator “made a point to say it would not buy just to get bigger,” she said. “While the company did not distinguish between its appetite for core cable assets or CLECs, given the substantial growth in the small- and medium- enterprise business, we would tend to believe the latter is more likely."

On the programming side, Viacom told analysts Thursday it would look for small investments. Its last acquisition was of the Teenage Mutant Ninja Turtles TV franchise for $60 million, CEO Philippe Dauman said. “We continue to look at opportunities of that kind to the extent they're out there, but they're all small in amount and really just additive to our core business,” he said. “We continue not to see any major acquisitions in our future.”