Finance

Private Equity Moving in on Cable

Well-Run Small Systems Are Seen as Economic Hedge 2/17/2013 7:00 PM Eastern

NewWave Communications’ recent sale to Rural Broadband Investments is indicative of a growing trend in the industry — private equity-backed management aggressively looking for opportunities in the rural cable business.

Last week, NewWave agreed to sell its 90,000 subscribers in rural parts of Illinois, Indiana, Missouri and Arkansas to RBI, a new entrant in the space headed by former Everest Broadband CEO Phil Spencer. RBI, in turn, is backed by Chicago-based private-equity group GTCR, which specializes in growth companies in the financial-services, technology, health care and information-technology industries. RBI appears to be its first foray into the cable business, but the firm is taking an aggressive stance.

In a statement announcing the deal, GTCR managing director Phil Canfield said the firm has been evaluating several opportunities in the space, adding that NewWave is the “ideal starting point from which to build our investment in the industry.”

In the same statement, RBI said it intends to grow its cable business to between 300,000 and 400,000 subscribers.

Terms of the NewWave deal were not disclosed, but sources in the cable financial community estimated it could be worth about $300 million.

Waller Capital Partners served as adviser to RBI in the deal. SunTrust Robinson Humphrey was financial adviser to GTCR.

GTCR isn’t alone in its enthusiasm for cable. The firm is the fourth new private-equity group to enter the space in the past eight months. Oaktree Capital started the trend in June with its estimated $950 million acquisition of Wave Broadband and was followed in November by BC Partners and CPP Investment Bureau’s $2 billion equity investment in Suddenlink Communications. Both Wave and Suddenlink have said the new investments will give it the flexibility to expand. And last month, Brown Bros., Harriman teamed up with BCI Broadband, a group headed by former Bresnan Communications’ CEO Jeff DeMond and chief financial officer Andrew Kober, to purchase Allegiance Communications, a 40,000-subscriber operation with systems in Oklahoma, Kansas, Missouri and Arkansas. BCI also has indicated that it will seek out more deals in the space, calling the Allegiance acquisition “the first transaction in an aggressive growth plan by the company.”

Even NewWave’s sellers plan to get back into the act.

This is the second deal for NewWave president Jim Gleason in about two years — New- Wave sold about 70,000 subscribers to Time Warner Cable in 2011 for $260 million. In an interview last week, Gleason said his management team will remain intact and start looking for opportunities right away, with the help of long-time backers Pamlico Capital.

“This is a great opportunity for us,” Gleason said of the RBI deal. “It’s kind of a culmination of a lot of efforts over the last nine or 10 years of acquiring a lot of orphan assets and tying them together and fixing them up. Our management team is still going to be around; we’re going to be out looking for new opportunities.”

Gleason said that buyers have been looking at small cable operations differently in the past few years, particularly because well-run operations can be a defensive investment in a down economy.

“If you look over the last three or four years, at least well-clustered, upgraded rural cable is better valued than it was five or 10 years ago,” Gleason said. “It does look like the market is pretty good.”

Broadband appears to be the main differentiator, Gleason said, particularly because in rural markets most cable operators are competing against inferior digital subscriber line service.

ISI Group media analysts Vijay Jayant and David Joyce believe a lot of the interest in small operators is a combination of favorable capital markets and well-run systems.

“The low-interest-rate environment is a significant driver for deals getting done these days,” the analysts said in an e-mail message. “But it does boil down to the attractiveness of the recurring monthly revenue streams, growth in high-speed Internet service usage and revenue, and stable customer retention of the overall cable model that makes this such an attractive proposition for private equity.”

Waller Capital president Garrett Baker, whose firm has served as an adviser on three of the last four cable private-equity deals, said proven growth in broadband and commercial services coupled with resiliency make the industry an “ideal investment for private equity.”

“Many funds have been aggressively seeking new cable platforms over the past few years, but only in the past nine months has inexpensive debt enabled them to pay the multiples necessary to buy into the sector,” Baker said.

September