Bankers Once Again Seek M&A Spurt7/15/2001 8:00 PM Eastern
Cable investment bankers, disappointed with a lack of deals following two years of major industry consolidation, hope that Comcast Corp.'s unsolicited bid for AT&T Broadband last week helps jump-start a sluggish mergers-and-acquisitions market.
For most cable investment bankers, 1999 and 2000 were banner years on the acquisition front. Most reported record revenue from fees gained from their participation in deals that involved most of the major MSOs.
The biggest one — America Online Inc.'s $114 billion purchase of Time Warner Inc. — was one that inspired hope that other programming companies would acquire distribution companies. Instead, that deal signaled an end to what had been a very lucrative party.
Overall, according to UBS Warburg LLC, 19 cable-system deals were done in the first half of 2001, averaging $774.7 million and 218,000 subscribers. That compares to 29 deals averaging $1.9 billion and 302,000 subscribers in the first half of 2000.
Waller Capital Corp. and Communications Equity Associates, two prominent cable investment banks, have also seen deal values decline. Many have turned their M&A focus from cable systems to telecommunications deals with much lower values.
Waller senior vice president Townsend Devereux said the deal volume so far this year is similar to last year. But prices are "tempered," mainly because of sluggish capital markets that have made it difficult for some potential buyers to raise money.
"With the capital markets doing what they've done and the larger MSOs not in that feeding frenzy, the larger buyers are being a little more selective," Devereux said.
Nonetheless, Waller has been in on some sizable deals this year, including Adelphia Communications Corp.'s purchase of 123,000-subscriber GS Communications Inc. for an estimated $750 million. Waller also represented Charter Communications Inc. in the $24 million sale of a system in Sebastian, Fla. — which sent 9,000 subscribers to AT&T — and AT&T in its sale of some Georgia systems to Mediacom Communications Corp.
Though Devereux said he still considers the cable deal market to be strong, Waller is making moves to diversify, including working with wireless firms and rural telephone companies.
"The rural ILECs [incumbent local-exchange carriers] are where the cable industry was a few years ago," Devereux said. "We still see a great continuing future in the cable industry."
CEA senior vice president Brian Sweeney said a Comcast-AT&T Broadband merger probably won't encourage other deals of that size, but may spur more small deals.
"Does this create Charter buying Adelphia? I don't think so," Sweeney said. "But looking below the radar, there are a group of private-equity investors that would really love to get back into cable."
Sweeney said these private-equity investors are attracted to small- and medium-sized cable operators that larger MSOs ignore. And they are interested in running these companies, not just investing in them, he added.
"They're not just nominally purchasing stock," Sweeney said. "They're supporting small management teams to buy cable systems. We're seeing this for the first time in 18-to-24 months."
Deal volume for this year is lower than it was at the same point in 2000, Sweeney said, but that's mainly because last year was so strong.
"The market is just not as good," Sweeney said. "There were few significant deals that have gotten done. We've probably seen the volume bottom out."
But Sweeney said he expects deal volume and system prices to tick up — not because of the possibility of an AT&T-Comcast deal, but due to private equity.
In the past, private-market multiples for cable systems have exceeded public-market values, with public valuations in the 7 times cash flow range and private deals in the 10 times range, Sweeney said. That trend has reversed — public valuations are now around 15 times cash flow and private values around 10 times — but private-market values are expected to rise.
"That means that a private acquisition that is at 10 times now could creep up into the 13 times or 14 times range," Sweeney said.
|Domestic Cable M&A Activity|
|Date||Deals||Average Price (millions)||Avg. Subscribers (thousands)|
|Source: UBS Warburg and Paul Kagan Associates