More Cable System M&A, Few Programming Deals Seen by Executives,

Fears that cable channels will get lower subscriber fees from pay-TV providers, who are paying more for broadcast retransmission consent deals, may be keeping a lid on programming M&A, industry officials said. The last major deal was in November 2009 when Cox Communications agreed to sell control of the Travel Channel to Scripps Networks Interactive. A dearth of other, major independent channels that are widely distributed on cable, satellite and telco-TV is another reason there are few likely deals, executives and brokers said.

HDNet “will continue to try to out hustle everyone, but we are probably the last individually owned and programmed network to reach 20 million” pay-TV subscribers, said Chairman Mark Cuban. “Our risk is purely because we are an independent. Without the leverage of a major media company behind us, we are truly at the whim of the major distributors.” The “real moneymakers” among cable programmers “are the big channels with the big subscriber fees,” said senior partner Ed Adler of MediaLink. The former Time Warner executive advises media clients on strategy.

"I don’t think people want to overpay” for cable channels, as happened in the past, Adler said. “People might be a little hesitant, and part of it I think is that people want to see the future of these channels in the digital world before ascribing a value.” Programmers are “a fairly consolidated group,” said Managing Director Jeffrey Brandon of Waller Capital, a cable-system broker. “By and large, the programming channels are held by operators” and the Weather Channel’s sale in 2008 to NBC Universal and others “was one of the big exceptions,” he said. “One of the uncertainties in the industry” is “how is the negotiations over retransmission fees are going to play out, and what will be the impact on programmers” that are not part of a broadcast network, said partner John Senior of Bain & Co., who advises media clients. “That may have caused some uncertainty, which may have dampened the acquisition activity around programming assets."

The availability of cheap debt has fueled an increase in system M&A this year, primarily involving smaller properties, said analysts and industry executives. Eighteen deals were announced or proposed in 2010 through October, three times as many as a year earlier, according to SNL Kagan. Some of the increase is due to pent-up demand, said Michelle Ow, an analyst there. “There were deals that were benched because the capital wasn’t available.” And some private equity firms that bought cable systems in the early part of the decade are ready to cash out, she said. “There’s a set amount of time that private equity groups tend to hold their assets and those sales are just now starting to reach the mark.” Industry executives offered a similar assessment about private equity cashing out.

'Robust Market'

More likely than the blockbuster cable system deals of years past is M&A like recent transactions, industry officials said. They pointed to deals this year such as RCN being taken private by Abry Partners for about $500 million, Virginia operator Jet Broadband selling for $150 million to nearby Shenandoah Telecommunications, Sunflower Broadband’s $135 million purchase by Knology, and Charter Communications’ agreement to sell some systems. This week’s agreement by Mediacom’s board to sell the company in a $600 million deal to Chairman Rocco Commisso, who already controls it, doesn’t necessarily signal other operators soon will go private, analysts said (CD Nov 16 p7). “There’s always a robust market on the system side as people want to expand their footprint and consolidate geographically,” said Adler.

Most of the recent deal activity is focused on smaller systems. That’s because many of them have yet to introduce or fully deploy new products such as VoIP, broadband, HD video and DVRs, which have generated significant growth for larger cable operators, said CEO Scott Widham of Cobridge Communications. It’s buying some systems from Charter and is backed by the Gores Group private equity firm. “I wouldn’t want to buy a cable system that has all those products and is deeply penetrated and has a high” average revenue per subscriber, Widham said. “We like to build things and fix things and create value that way.” Of the 36 systems serving about 65,000 households in seven states that Cobridge is acquiring from Charter (CD Oct 25 p11), only one offers voice, video and broadband, he said.

"While prices aren’t going to stupid levels, there is active interest in everything you take to market, and the good operators are seeing premium rewards for that,” said Chairman Joe Duggan of DH Capital, a system broker. “This is the best liquidity we've had in the market in years. Every single transaction we're bringing to the table, we've had multiple bidders.” A small system that Duggan was about to put up for sale got a pre-emptive bid, a sign of brisk interest in cable operators, he said. “There’s still room for private equity in cable,” with more deals like RCN being acquired by Abry, Duggan said. Existing operators mainly are looking to buy neighboring systems, though there aren’t many such properties now for sale, he said.

The prospect of net neutrality and reclassification, which would affect cable broadband, hasn’t sapped interest among private equity firms and others to buy systems, industry officials said. “I don’t think it’s changed the investment thesis much -- the net neutrality conversation has been going on for some time,” said Bain’s Senior. Broadband has been a “very strong driver” of cable operators’ financial performance, he added. “Potential buyers are aware of the issues” of regulation but think the industry won’t soon face more rules, Brandon said.

More deals are on the horizon, agreed all industry officials we spoke with. “I think people are trying to get deals done as soon as possible,” Ow said. “Even as we speak today, there are private equity deals” ready to go. Valuations have increased, making it more attractive for sellers to part with their assets, and buyers are attracted to the free cash flow prospects of cable systems, she said. The prospects of having to pay higher capital gains taxes next year is also motivating sellers, she said.

Well-run systems that have been upgraded are selling for around $4,000 per subscriber, Brandon estimated. A glut of system sales that owners had hoped to complete in 2008 and 2009 are getting done now, he said. “I think what we're seeing now is the burn off of a little bit of a backlog,” he said. “There’s very strong interest from the private equity community. Cable systems were built to carry substantial debt."

Publicly traded operators have to justify any acquisitions to shareholders, and buying cable systems is not always the top priority, Cablevision Executive Vice President Gregg Seibert told investors during his company’s Q3 teleconference earlier this month. Acquisitions rank third on the list of ways Cablevision will spend money, after reinvesting in its core business and returning money to shareholders through stock buybacks or dividends, he said. The company’s deal to acquire Bresnan came with some attractive tax attributes, he said. “The high satellite penetration within Bresnan markets …. lead us to believe we'll be able to produce a higher rate of return out of an investment in Bresnan, or another investment like Bresnan, than we will be able to through the share repurchase program.” But, “At this point in time we don’t see any other Bresnan’s out in the marketplace,” he said. “I'd love to see more … but there is nothing on the horizon.”