Cable Operators

Bresnan Draws Six Bidders

4/26/2010 12:01 AM Eastern

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.

September