On The Block

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Interest is heating up in a pair of small distributors serving cable customers in the mideastern and mid-Atlantic states.

A little more than five years after launching its initial overbuild of the Evansville, Ind., market, Sigecom LLC is on the block. A partnership between Vectren Corp. (an Indiana electric and gas utility), Boston-based Utilicom LLC and private-equity group Blackstone Capital Partners, Sigecom has about 29,000 cable subscribers in the Evansville area.

While a number of parties are eyeing Sigecom — a preliminary offer by Wide Open West LLC has been nixed — bidding has entered the second round for Gans Communications LP’s systems in Maryland (Boone and St. Mary’s counties, Chesapeake Beach and North Beach), Virginia (King George County) and Pennsylvania (Berwick, Schuykill, Spruce Creek and Sugar Grove). That deal, which is being brokered by cable investment banker Daniels & Associates, involves about 60,000 subscribers.

In addition to its video offerings, overbuilder Sigecom also offers telephone and high-speed Internet services in Evansville, with 90% of cable customers taking telephone service and 28% taking high-speed Internet, according to public filings.

Sigecom passes about 68,000 homes in Evansville, and also owns franchises in Indianapolis and Dayton, Ohio.

QUICK START

Sigecom enjoyed quick success during its initial launch in 1998 in Evansville, where incumbent cable operator Insight Communications Co. had yet to offer digital-cable and high-speed data service. But the company scaled back its ambitious buildout plans earlier this year.

Sigecom had planned to expand its reach by building a 3,500-mile fiber-optic network in Indianapolis (passing 330,000 homes) and a 1,000-mile network in Dayton (passing 108,000 homes), but ran into trouble finding debt financing for the project.

According to its 10-Q quarterly report, filed with the Securities and Exchange Commission in April, Vectren said Utilicom was unable to find debt financing at attractive rates. As a result, Vectren would no longer continue to invest in the project unless long-term commitments to fully fund the project were made.

According to the 10-Q, Vectren said it owned a 19% stake in Sigecom and had already invested about $32 million in the partnership.

That inability to obtain acceptable debt financing, coupled with a desire by Blackstone — which had invested about $100 million in the venture — to exit the partnership prompted the sale.

“A lot of it has to do with the life cycle of the fund, and you have a utility company involved, so you have different interests,” said one member of the investment community who asked not to be named.

STRONG INTEREST

“Performance-wise, I think they are very happy with where it is today. These are phenomenal properties. They’re managed well, they’re marketed well and technologically, they’re state of the art. There’s going to be a lot of interest in this deal.”

According to sources inside the cable mergers-and-acquisitions community, Sigecom could announce a deal as early as July.

New York cable and telecom investment banker DH Capital LLC is said to be brokering the sale for Sigecom. DH Capital declined to comment.

What price Sigecom will attract remains to be seen. According to Vectren’s 10-Q, Sigecom has been generating consistent positive cash flow.

Sources in the financial community say that the systems also generate positive free cash flow (cash flow after interest payments and capital expenditures are made), which should also add to the price.

“You can say it’s competitive, but it’s making money hand over fist,” said one source in the financial community. “They should sell for a hefty multiple.”

Sources in the investment community estimated that Sigecom generated about $10 million in cash flow last year and expects to generate about $13 million in cash flow in 2004.

Already one overbuilder — WideOpenWest — made a preliminary bid that was considered to be too low. According to one source in the financial community, WOW’s bid was between $90 million and $100 million.

Although the systems are in good shape and new-service penetration is high, one source in the M&A community said that potential buyers may be put off somewhat by the market’s size.

TOO SMALL?

With about 280,000 TV households, Evansville ranks as the 97th largest TV market in the U.S., according to Nielsen Media Research.

“All of the other overbuilders have been in the top 30 markets and they couldn’t make it work,” the source said. “This is a much smaller market.”

But with the paucity of systems on the market, and the high multiples paid in recent deals — around 10 times estimated 2005 cash flow — several interested bidders are expected to enter the fray.

“Everybody is going to be nervous because they’re an overbuilder,” the source said. “But this is a nice-sized deal.”

GANS DEAL SOON

While suitors may be getting ready to circle around Sigecom, the process for Gans Communications’ Mid-Atlantic-area properties is said to be further along. With bidding into the second round, sources in the M&A community anticipate that a deal would be closed shortly.

Hazleton, Pa.-based Gans Communications was started in the 1950s by cable pioneer Joseph Gans, who built one of the first cable TV systems in Pennsylvania.

Gans remains chairman and his son, Joseph Gans III, serves as CEO. Gans officials did not return calls for comment.

Last year, the company raised about $88 million — through an equity investment and bank loan to finance its rebuild to between 750-Megahertz and 860-MHz capacity. Nautic Partners, a Providence, R.I., private-equity firm, invested about $38 million in that deal (the other $50 million came from a bank loan through General Electric Capital Partners and National City Bank), which was also handled by Daniels & Associates. Nautic was Gans Communications’ first outside investor.

Daniels executive vice president Greg Ainsworth did not return calls for comment.

Nautic Partners principal Brad Wightman did not return calls seeking comment.

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