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Cable’s Valuation Gap Grows …

… And That Could Make Consolidation a Pricey Play: Analysts 6/15/2015 8:00 AM Eastern

Cable valuations got another shot in the arm with Atlantic Broadband’s recent $200 million purchase of MetroCast Connecticut, a deal that in some respects reflects the widening gap between public and private-market valuations for cable companies.

 

That could mean the consolidators expected to roll up the remaining U.S. cable operators in the wake of Charter Communications’s pending $78.7 billion acquisition of Time Warner Cable could end up paying a stiff price for their quarry.

 

Atlantic Broadband is owned by Canadian cable operator Cogeco, which bought the Quincy, Mass.-based cable company in 2012 for about $1.4 billion, or about 8 times forward- looking cash flow. The MetroCast Connecticut deal is valued at about 7.9 times cash flow after taxes, or about 9.5 times before taxes and other synergies are considered.

 

At the latter valuation, based on MetroCast’s estimated2015 cash flow of $21 million, the deal is the third cable transaction in about a month that has been in excess of 9 times cash flow — Time Warner Cable was valued at 9.1 times before synergies, and Altice’s $9.1 billion deal for Suddenlink Communications values the St. Louis-based operator at about 10 times cash flow.

 

Prior to those deals, the last sizeable cable M&A transaction with a 9 times multiple was in 2013: Charter’s $1.6 billion purchase of Cablevision Systems’s Optimum West (the former Bresnan Communications), valued at about 9 times pre-synergies (and about 8 times after synergies are considered).

 

While some smaller deals have crossed the 10 times threshold — ShenTel’s $148 million purchase of Jet Broadband in 2010 and TDS Telecom’s $267.1 million buy of Baja Broadband in 2013 are two such transactions, according to sources — they have been few and far between.

 

Ever since Charter began its pursuit of Time Warner Cable in 2013, spurred by cable legend John Malone’s belief that scale is the thing, valuations have been on the upswing. And with more and more companies eyeing cable — and cheap debt still readily available for deals — that could drive prices even higher.

 

The climate has at least some small operators looking seriously at both the buy and sell side of the equation. For small MSOs like Buford Media, which has 7,200 subscribers in Texas, Louisiana and Mississippi that could mean making some tough choices in the near future.

 

“There are a number of smaller companies expanding the size of their companies by acquiring smaller companies like mine,” said Buford Media CEO Ben Hooks, adding that he believes those companies will probably wait until after larger deals like Charter-TWC are completed. “This could be the last of the remaining consolidation efforts within our industry.”

 

For years, cable has complained that Wall Street has undervalued the industry, and publicly traded MSOs are trading at about 7 times forward-looking cash flow today. Though that is beginning to change, at least in the private market, one analyst believes that multiples could go even higher.

 

In a recent report, New Street Research analyst Jonathan Chaplin argued that cable operators should be valued higher because investors underestimate the revenue companies can generate through broadband in both the residential and commercial markets.

 

Broadband is due for a price hike, mainly because pricing has remained relatively stagnant for years, according to Chaplin. In the past decade, he estimated, broadband ARPU (average revenue per unit) has risen about 10%, from $40.50 per month in 2004 to $44.10 per month in 2014. At the same time, pay TV ARPU has climbed more than 56%.

 

“If the companies reprice broadband services as we think they should, the disconnect between expectations and reality will be even greater,” Chaplin wrote, adding that cable operators should be assigned multiples of 10 times to 12 times cash flow, comparable to telecom infrastructure companies.

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