Avalon Comes Back, Others May Follow

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Private-equity firms are beginning to trickle back into the cable business, with one New York venture-capital firm looking to devote up to $63 million to small-cable acquisitions.

Avalon Equity Partners managing director David Unger said his company has already purchased two cable systems-Ice Cable Holdings, with 7,000 subscribers in Colorado, and US Cable of Paramus, with 5,500 subscribers in Paramus, N.J.-and is in the process of buying another 8,000-subscriber system in Oregon.

Unger said he decided to get back into the cable game shortly after selling Cable Michigan Inc. to Charter Communications Inc. last year. Avalon paid about $435 million for Cable Michigan in 1998 and sold it to Charter less than a year later for $845 million.

"It seems the larger MSOs are busy incorporating the deals that they did-Avalon Cable being among them," Unger said. "There are opportunities for buying. It's a good buyer's market right now."

Unger said he is targeting small operations that need upgrades. He expects to spend about $3 million to revamp his current systems.

Avalon will pay about $40 million for the three systems, including the pending Oregon deal, Unger estimates. Of that, Avalon's equity investment is about $10 million. The Oregon deal is expected to close in January.

Unger said he was looking to buy systems for between $1,000 and $2,000 per subscriber. Avalon recently closed on $63 million in funding for acquisitions in the media and communications industries, he said.

"I can raise up to $150 million," Unger said. While not all of that money will be used for cable acquisitions, he added, "Cable is our forte."

Of late, most private-equity money in the cable market has been funneled toward overbuilders-about $5 billion so far. But Unger said that might be changing.

"You're going to start seeing some equity money go after plain old cable markets," he said.

Daniels & Associates Inc. executive vice president Greg Ainsworth said last week that a "small handful" of private-equity companies, some of which have been cable investors in the past, are sniffing around the industry, looking for deals.

While the deal market appears to have dried up after a few years of aggressive industry consolidation, Ainsworth said there are still opportunities, particularly in smaller systems that haven't been upgraded yet.

Those systems usually can be had for about eight to 10 times annual cash flow, compared with more than 20 times annual cash flow for fully upgraded systems.

Although the less-expensive systems would require a significant capital investment for upgrades-about $600 per home passed or $800 to $900 per subscriber, Ainsworth said-that may be enough to entice small operators to sell.

"For an independent operator to raise capital and to commit it in what appears to be a competitive environment, if they're not wedded to being in the business forever, now might be a time to consider a transaction," Ainsworth said.

Ainsworth declined to name the firms that are expressing interest, but said the market for companies looking to buy systems from larger MSOs that don't fit into their clustering strategies appears to be ripe. These firms are looking at properties that need upgrades that their current owners aren't willing to finance.

After spending the required capital to rebuild the systems, the buyers could then flip the rebuilt orphans to larger MSOs.

"We've had a variety of conversations both directly and indirectly with private-equity firms that are seriously considering and/or looking for opportunities to lead deals for systems," Ainsworth said in an interview. "Obviously they are looking for some scale or a single system that is particularly large."

The investment banker said he was optimistic some deals could wrap up in as soon as six months.

Unger said there are deals to be made, especially among those independent operators passed over in the last round of consolidation.

"They missed the bubble, they can't get anybody's attention to buy them now, their ability to finance is diminished and they want to get out of the business," Unger said. "They're not running for the exits, but they're trying to find the way.

"The problem is they have been reading all the papers and seeing [deals for] $3,000 to $5,000 per subscriber and saying, 'What about me?'"

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