Bresnan's Back - Multichannel

Bresnan's Back

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Cable pioneer Bill Bresnan, who last week hammered out a deal to buy several former AT&T Broadband systems with 317,000 subscribers from Comcast Corp., could soon be looking around at some familiar faces as he tries to boost that footprint in the future.

While major MSOs have stepped back from acquisitions because of a desire to keep costs down in a sluggish economy, some former cable executives may be looking to get back into the fray.

Bresnan, who negotiated for nearly a year with AT&T and Comcast for his systems — located in Montana, Wyoming, Colorado and Utah — reached an agreement to purchase the systems for $525 million in cash and an undisclosed amount of equity.

UBS Warburg cable debt and equity analyst Aryeh Bourkoff estimated the equity portion of Bresnan's deal to be worth about $150 million, placing the total value of the transaction at about $675 million.

Bresnan — who sold the 690,000-thousand-subscriber Bresnan Communications Inc. systems to Charter Communications Inc. in 2000, for $3.1 billion — has been itching to get back into the industry for more than a year. But other former cable executives have re-entered the industry on a smaller scale.

Last year, former Simmons Communications Corp. founder Steve Simmons teamed up with Spectrum Equity Associates to purchase 80,000 subscribers in Princeton, N.J. from RCN Corp. for $289 million. Other former executives — including former Vista Communications Inc. CEO Neil McHugh, Buford Media president Ben Hooks and former Charter vice president Dan Ryan — have also made smaller deals.

Former Millennium Digital Media executive Steve Weed is also said to be close to a deal to purchase about 20,000 subscribers in the Seattle area from Northland Cable Communications Inc. Sources in the mergers-and-acquisitions community said Weed could reach a deal by the end of March.

The Kent factor

But perhaps most intriguing is the executive who appears to be waiting in the wings — former Charter CEO Jerry Kent.

Kent, who formed St. Louis-based investment company Cequel III shortly after his 2001 resignation from Charter, has been assembling a cable-management team that has some in the industry speculating when he will make his move.

In January, Kent hired three former Charter executives, including former vice president of operations William Shreffler as his new operations chief. And last week, former Charter programming vice president Patty McCaskill signed on with Cequel, although the company has not yet revealed her new title or duties.

In the past, Kent has said he is always on the lookout for good cable talent and that his interest in cable is no secret. Several industry observers see the recent hires as a signal that a cable deal is imminent.

Already, Kent has been looking at systems in West Virginia, Ohio, Pennsylvania, Illinois, Indiana and southeast Missouri owned by Alliance Communications. Sources also said that the former Charter executive could be close to a deal to purchase Shaw Communications Corp. systems in Texas, with about 26,500 subscribers.

The Shaw systems have been on the block since April and are located outside of Houston, which is Time Warner Cable territory. Sources said the systems are likely to fetch about 10 times annual cash flow, or about $87 million.

Kent is also said to be interested in forging an agreement to manage Classic Communications Inc., the 300,000-subscriber MSO that emerged from bankruptcy in December.

"It's no secret that Cequel III's goal from the day it was founded a year ago has been to look at, evaluate, and as appropriate invest in and manage both cable and telecommunications properties," Cequel III spokesman Pete Abel said. "Since last year the one investment that has been finalized to date was in May with AAT Communications. Is Cequel III actively looking to expand its base of operations through investment and acquisition? Yes. In anticipation of one or more of those coming to fruition, Jerry's looking at the right talent in the marketplace."

He declined to identify what properties it is interested in.

Prices are low

Salomon Smith Barney Inc. cable analyst Niraj Gupta said that the time is right for former cable executives to get back into the industry, as valuations are at their lowest point in years and several private-equity firms want to get back into the business.

A case in point is the Bresnan deal. When it was first announced in April, Bresnan agreed to pay $735 million in cash for the systems. But he ran into trouble when the high-yield market bottomed out — Bresnan had been seeking a high-yield deal to fund system upgrades, estimated to cost about $300 million over three years.

Sources said Bresnan also was looking to lower the price of the deal because of the decline in cable valuations, and was looking for some kind of seller financing.

That's just what happened — the seller financing was essentially Comcast's acceptance of equity in Bresnan. The new deal works out to about $2,100 per subscriber, or 10 times 2002 cash flow, compared to the $2,300-per-subscriber value of the original deal.

And because Comcast has taken an equity stake in the company, Bresnan gets to take advantage of programming discounts from the nation's largest MSO. One source in the M&A community estimated that Comcast would take about a 35 percent equity stake in Bresnan, the minimum amount for programming discounts to take effect.

"Bill's going to save himself about $8 million of cash flow," said the M&A source of the programming discounts.

"One reason people are looking to come into the market is that the prices aren't out of whack," Gupta said. "You can make money buying cable properties at 10 times to 11 times cash flow, the kinds of multiples where the deals were getting done before we had the bubble in cable."

Equity backers are in

Adding to the intrigue is the fact that several private-equity firms have expressed interest in cable.

Providence Equity Partners, which participated in the Bresnan deal, has in recent months been part of groups who've purchased cable systems in Germany and the Netherlands.

For the most part, Gupta said, private-equity firms like to purchase operations for 10 to 11 times cash flow, the going rate for cable.

"If you can get deals done at 10 to 11 times cash flow, and assets need to get sold because companies are in stretched circumstances, you'll have some of the industry pioneers and former executives step back in because, at those levels, you can get good equity returns on cable," Gupta said.

Coupled with the lower multiples is the promise that more inventory will come on the market, Gupta added. Both Charter, which is trying to pare down $20 billion in debt, and Adelphia Communications Corp., which is in Chapter 11 bankruptcy, are expected to put at least some subscribers on the block.

Last week, sources said Charter has about 100,000 subscribers in Pennsylvania up for sale that are attracting several interested parties, including Susquehanna Communications Corp. No deal is imminent, though.

"I think you could easily see 2 million subscribers in the next year and a half come up for bid," Gupta said.

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