Sandler Capital Management Inc., the New York investment
bank, has bought out the remaining partnership interests in James Cable Partners L.P.
In a report issued Wednesday, CIBC Oppenheimer Corp.
high-yield cable analyst Joseph Galzerano estimated the enterprise value of the deal at
about $160 million. Galzerano added in the report that the Sandler buyout is a
"significant positive since it heightens the potential sale of the company."
James Cable, based in Bloomfield Hills, Mich., has about
72,000 subscribers in mostly rural areas in Oklahoma, Texas, Georgia, Louisiana, Colorado,
Wyoming, Tennessee, Alabama and Florida.
Sandler purchased an interest in James Cable in December,
shortly after James' shareholders decided to hire cable brokerage firm Communications
Equity Associates to find a buyer. Although CEA said it had fielded several offers from
interested parties, a deal could never be finalized.
Part of the reason for that is that the companies that
would have been most interested in James Cable -- Cox Communications Inc. and Charter
Communications Inc. -- were busy closing earlier deals.
Another potential suitor could be Classic Communications
Inc., which has systems in mostly rural markets in Texas, Kansas, Oklahoma, Louisiana,
Nebraska, Missouri, Arkansas, Colorado and New Mexico.
Now that a lot of those transactions have been closed --
Cox finalized a major system swap with AT&T Broadband earlier this month, while
Charter closed on its acquisition of Bresnan Communications Corp. in February -- those
MSOs may be ready to make more deals.
The Sandler buyout values James Cable at about $2,200 per
subscriber, which is in line with the average prices paid for rural cable systems.
But with a growing digital subscriber base -- through its
AT&T Broadband Headend In The Sky service -- and a popular high-speed data service
called NetCommander, James Cable may ultimately sell for much higher.
Sandler Capital managing director Douglas Schimmel said the
decision to buy out the rest of the limited partners -- mostly institutional investors --
was made to give those partners an opportunity to exit quickly.
"We were able to offer liquidity to the
partners," Schimmel said. "We were able to do a fast close, which was more
attractive to the limited partners. It was a way for them to clear their books by the end
of the year."
James Cable's general partner, president William James,
keeps his 5 percent to 10 percent interest in the cable company, Schimmel said. James and
the rest of James Cable's management will continue in their roles.
Schimmel declined to comment on Sandler Capital's plans for
James Cable, but it is likely that a buyer will be sought.
"Certainly our goal is to maximize the value of the
company," Schimmel said. "That could be by growing the company, or making
acquisitions or some type of business combination."
Sandler Capital has been involved with William James and
James Cable for about 10 years. Sandler had been mezzanine lenders to James Cable and
serves on its advisory board. In addition, some of the partners at Sandler Capital are
individual investors in James Cable. However, prior to the buyout, Sandler only owned
between 6 percent and 7 percent of the James Cable.
James Cable should complete most of a major system upgrade
by the end of the year. It also offers digital cable in some systems through HITS and its
NetCommander business is also growing.
In his report, Galzerano predicted that James Cable would
report revenue of about $9.3 million in the fourth quarter, up by about $200,000 compared
with the third quarter of the same year. He also expected earnings before interest, taxes,
depreciation and amortization to decline slightly in the fourth quarter to about $3.3
million, reflecting an increase in costs associated with the launch of NetCommander.
But NetCommander appears to be the growth engine for the
company, and Galzerano wrote in his report that in one Oklahoma system, the high-speed
data service is adding $11 per subscriber per month, bringing total revenue per subscriber
to $54 monthly.
"We expect the Internet service to reach breakeven
during 2000," Galzerano wrote.
According to sources, per-subscriber cash flow at the
Oklahoma system is well over $300 annually.
James Cable has already spent about $12 million on upgrades
last year, and capital expenditures should reach about $10 million in 2000 to bring about
half of its systems up to 750-megahertz capacity. Galzerano predicted that James Cable
would need another $5 million to $10 million during the third quarter, an amount he