Bresnan Draws Six Bidders

Suddenlink, Steve Simmons, Knology In Running

By Mike Farrell -- Multichannel News, 4/26/2010 12:01:00 AM

The auction for Bresnan Communications has entered the second stage, with about six bidders successfully navigating the first round, including Suddenlink Communications, former cable entrepreneur Steve Simmons and overbuilder Knology, according to sources familiar with the auction.

But questions surrounding the level of programming discounts the operator receives from Comcast could put a snag in negotiations. While all bidders are assuming that the relationship with Comcast, which owns 30% of Bresnan, will end someday, it is the level of those discounts that has come under some dispute. According to sources familiar with the process, bankers are insisting that the Comcast discounts are low — about $10 million to $12 million per year — while bidders dispute they are three to four times that amount.

The level of the discounts is important because it directly affects cash flow, which is perhaps the most vital metric in valuing these deals. A bidder that assumes it would only take a $10 million hit to the cash-flow line if and when the Comcast relationship disappeared could pay a much higher price than one that assumes it would take a $30 million to $40 million cash flow hit.

“That is a gigantic difference,” said one executive in the cable-investment community. Comcast has made no indication of what it plans to do with the partnership.

Still, bidding has been robust, according to people familiar with the auction process, with bids coming in at multiples that mirror private-cable valuations of seven to 10 times cash flow.

Suddenlink, Simmons and Knology all declined comment.

Providence Equity Partners began talking to bankers about selling its majority stake in Bresnan earlier this year. In March, it hired Credit Suisse First Boston and UBS to manage the auction. Both Credit Suisse and UBS also have agreed to provide as much as $1 billion in staple financing for the winning bidder.

According to sources in the cable banking community familiar with the auction process, the next step for the six bidders — the remaining three are private-equity funds — will involve a series of management presentations beginning this week.

With about 1.3 million subscribers in Texas, West Virginia, Louisiana, Arkansas, North Carolina and Oklahoma, Suddenlink wouldn’t appear to be the obvious candidate to acquire Bresnan, but the Bresnan systems could serve as a gateway to the West Coast for the privately held operator. And the systems are large enough and clustered enough on their own to warrant a purchase by an operator that knows how to run a secondary-market operation.

The same could hold true for Knology, which has about 234,000 customers mainly in Georgia, Florida, Alabama, Tennessee, South Carolina and South Dakota.

For Simmons, who sold his Simmons Communications in parts to various operators in the 1990s, a successful bid would mean a third return to the cable business. He re-entered the market in 2003 with the purchase of 80,000 customers in New Jersey from RCN Corp. for about $245 million. Simmons sold those systems, which he named Patriot Media & Communications, to Comcast in 2007 for about $483 million.

Bresnan generated about $160 million of cash flow last year, so a seven to 10 times multiple would put prices in the $1.1 billion to $1.6 billion range. Bresnan founder Bill Bresnan, who died in November after a battle with cancer, originally bought the systems from Comcast in 2003 for about $675 million.

Bresnan has about 320,000 subscribers in Montana, Wyoming, Utah and Colorado. The systems are considered to be extremely well run.

While that success could go against Bresnan in an auction — some observers have said there is little upside in expanding already highly penetrated phone and highspeed data services — others are encouraged by recent deal multiples, which appear to be on the rise.

In February, ABRY Partners agreed to buy overbuilder RCN for $1.2 billion, representing a 5.5 times multiple to 2009 cash flow. On April 16, Virginia telephone company ShenTel agreed to buy Jet Broadband for $148 million, representing a 10.7 times multiple.

In a conference call with analysts on April 19, ShenTel CEO Christopher French said that while the price may seem a little high — ShenTel estimated it was a 9.5 times multiple, if corporate overhead were eliminated — it was warranted.

He added that high-speed-data penetration is less than 20% of homes passed and phone penetration is at 20%, but available in only 10% of the footprint.

Adding to the upside is that there is almost no competition from telephone companies for high-speed data in Jet’s service territory — most of the Internet subscribers are dial-up.

“It’s an untapped market,” ShenTel chief operating officer Earl Mackenzie said.