Cable Operators

Wave Broadband’s Sale Shows Health of Cable Market

6/11/2012 12:01 AM Eastern

Wave Broadband’s deal to sell out to a
group of private-equity players and management last week
proved once again that the market for well-run cable operations
is increasingly healthy. But the price of the deal —
estimated by some to be about $950 million — could push
larger, publicly traded cable companies out of the consolidation
picture, according to some analysts.

Wave agreed June 1 to be acquired by private-equity groups
Oak Hill Capital Partners and GI Partners, and a group of
Wave’s managers, including founder and longtime CEO
Steve Weed. The deal ended a months-long auction process
and provided a profitable exit for Wave’s original backers,
Sandler Capital Management.

The deal also should give Wave —which has about 382,000
video, voice and data customers, primarily in suburban areas
near Seattle; Portland, Ore.; San Francisco; and Sacramento,
Calif. — capital to expand.

TWO WAYS TO GROW

“From our perspective, we’re just going to keep doing what
we’ve been doing,” Wave Broadband founder and CEO Steve
Weed told Multichannel News. “Not only does this give us the
ability to grow faster, it gives us the time. This allows us to restart
and know that we’ve got a partner that is in it for the long
run. Sandler Capital had been in it for nine years. We knew at
some point they’d want to get some liquidity.”

Weed said Wave would invest in growing within existing territories
and also look for acquisition opportunities.

Wave did not disclose deal terms, but several members of
the cable financial community estimated
the price at about $950 million. At that level,
those executives said, Wave was valued
at about 8.5 times to 8.9 times its 2011 cash
flow of $107 million.

That valuation is a full three points higher
than public valuations for Comcast (which
trades at 5.5 times cash flow) and Time Warner
Cable (about 5.9 times).

The Wave sale is the latest in what has
been a trio of strong deals for privately
owned MSOs. Earlier, Avista Capital Partners
(parent of overbuilder WideOpenWest)
agreed to buy Knology for $1.5 billion (or
about 7.5 times cash flow). In December,
Time Warner Cable agreed to buy Insight
Communications for $3 billion in cash,
a deal some analysts pegged at 8 times
cash flow.

Sanford Bernstein cable and satellite analyst
Craig Moffett said the recent private
deals could have two consequences: They
could help push up public cable multiples, or
they could price publicly traded operators out of future deals.

Were public cable operators valued at the same multiples
as their private counterparts, Moffett said, stock prices would
soar. For example, in a research report he noted that at an
8 times valuation, Comcast’s stock price would be 51% higher
than its current value, Time Warner Cable stock would be 70%
higher and Cablevision Systems would be 184% higher.

On the consolidation front, Moffett noted that several top
operators have said they would not acquire systems
at multiples that are higher than their own stock
prices. They think their cash would be better used
to repurchase their own shares.

While additional scale could help operators lower
programming costs, Moffett said, the synergies
aren’t great enough to justify acquiring systems.

“In a market where private valuations are so
much higher than public valuations, industry consolidation
is unlikely,” Moffett wrote. “Deals like
TWC’s acquisition of Insight would appear to be the
exception, not the rule.”

Not every analyst agreed. Greater scale allows
operators to wring a lot of cost out of the business,
Pivotal Research Group principal and media and
communications analyst Jeff Wlodarczak said.

“In addition, lower home-density markets are
likely to get increasingly more attractive, given relatively low
levels of competition,” Wlodarczak said. “The question on
whether or not to do a deal is if it is large enough to make a
difference and it enhances existing subscriber clusters.”

FREE-CASH MEASURES

Wlodarczak said the Wave Broadband valuation could be
skewed if it is generating a large amount of free cash flow,
comparable to its peers.

He used Cablevision as an example. While that stock
looks relatively expensive on an operating cash-flowmultiple
basis — about 6.1 times — it’s relatively cheap as
a multiple of free cash flow. Cablevision trades at six times
2013 free cash flow, compared with nine times for Comcast
and TWC, according to Wlodarczak.

While rising private multiples and declining stock prices can
entice companies to raise the funds to go private — something
that has been speculated about Cablevision — Wlodarczak
said that could be challenging. Cablevision tried unsuccessfully
to go private three times between 2005 and 2008, at prices
more than double its current share price of $11.44.

“I think the more likely way that companies can take
advantage of declining public multiples is to go borrow
capital cheaply and buy back stock ever more aggressively,”
Wlodarczak said.

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