After just three years of existence, Cebridge Connections, the St. Louis-based small market cable company headed by Jerry Kent, vaulted into the top-10 among the largest cable operators in the country by winning an auction to buy 940,000 subscribers from Cox Communications Inc.
The deal — estimated to be worth about $2.3 billion — will more than triple Cebridge’s subscriber base, to 1.3 million customers from 400,000.
But the deal came close to falling through, Kent said last week.
Kent’s company has long been considered the front-runner for the Cox systems — the former TCA Cable properties are located near several of Cebridge’s existing operations. But other suitors were interested as well. Bresnan Communications, Patriot Media & Communications Inc., private equity giant Providence Equity Partners and oil billionaire Robert Bass’s private equity fund Oak Hill Capital Partners were all said to have bid on the systems, on the market since this past March.
“Frankly, I thought we lost last week,” Kent said Nov. 2.
The former Charter Communications Inc. CEO said that as recently as Thursday, Oct.27, he was ready to concede the Cox systems to another bidder.
But that night he received notice from Cox bankers that a final round of bidding was being conducted. That got him and his backers — Goldman Sachs Capital Partners and Oaktree Capital Management — to increase their bid.
“Friday night [Oct. 28], I had a black-tie dinner to attend. And just as I was walking into the dinner I got an e-mail message saying the bankers at Cox wanted to talk to us. They invited us to come down to Atlanta first thing Saturday morning and from Saturday morning until 6 a.m. yesterday [Nov. 1] we worked straight through and got it done. It was one of the tougher deals we’ve been involved in.”
The deal was announced on Nov. 1.
Kent didn’t want to reveal the amount of the winning bid, but he said the deciding factor was a decision by him and partners Howard Wood and Dan Bernstein at Cebridge parent Cequel III to add to their equity positions in the deal.
“We threw a 'Hail Mary’ pass,” Kent said.
That increased commitment was enough to get Goldman and Oaktree to boost their equity in the deal, Kent said.
He would not reveal how much of an equity stake he and the other Cequel partners are taking, other than to say it was a serious commitment, representing a substantial piece of the partners’ personal worth.
Kent said a combination of the equity commitments and his personal desire to own the systems led to the successful outcome.
“When we started out, the goal was to find an acquisition that blended the overall quality of our assets and allowed us to achieve economies of scale and critical mass,” Kent said. “Frankly, at 400,000 customers, we don’t have the clout with our vendors and therefore it’s a much tougher proposition. Unless we found a good acquisition, we were really at a crossroads. Unless we found something that allowed us to get to critical mass, we were really looking at maybe potentially liquidating down the road.”
In getting to 1.3 million subscribers, Cebridge is about the same size Charter was in 1998 when Kent and his partners in that company decided to sell to Microsoft Corp. co-founder Paul Allen for $4.5 billion.
Kent pointed out it took Charter six years to reach that subscriber milestone. It took Cebridge only three years.
“Getting over 1 million subscribers was important to us,” Kent said, because increased scale means better prices from programmers and helps attract more experienced employees.
“It’s all about the people,” Kent said. “When you have 300,000 or 400,000 customers, and particularly in smaller markets, it’s more difficult to attract all the top management talent you’d like in order to run these properties. When you’re over 1 million customers, you’re a substantial company and it’s a different value proposition for employees and it’s easier to attract really good management talent.”
He said Cebridge is getting top management talent as part of the Cox deal, and expects to take on about 2,300 employees from the Cox systems, increasing total employment to 3,600 people from 1,300 people.
Kent said that while the Cox systems will need some minor upgrades in some areas, they already offer digital cable and high-speed Internet service.
A few of the former Cox markets also offer voice-over-Internet protocol telephony, which should help accelerate Cebridge’s own plans to roll out telephone service. Cebridge is launching VoIP this month in its first two markets.
The terms of the deal were not disclosed, but analysts had expected the systems to sell for about $2,500 per subscriber, which would put the value at around $2.3 billion.
That’s about half the $4 billion Cox paid for the systems in 1999, when it purchased TCA Cable.
The systems are in secondary markets in Texas; North Carolina; Humboldt County and Bakersfield, Calif.; Louisiana; Arkansas; Oklahoma; Mississippi; and Missouri.
Excluded from the sale are some Cox operations serving Northwest Arkansas and Lafayette, La.
Kent started Cebridge in 2003 via his private investment group Cequel III, which he started in 2002, months after resigning as Charter CEO in September 2001 after a well-publicized falling out with Allen.
Kent wasted little time expanding his footprint, buying Classic Cable’s 325,000 subscribers in 2003 and adding systems from Shaw Communications, Alliance Communications Partners and other owners in subsequent years.
Cox is selling the systems to help pare some of the debt parent Cox Enterprises Inc. incurred last year in buying the remaining 38% of Cox Communications’ publicly traded stock it didn’t already own, for about $8.5 billion.
Citigroup Global Markets, Lehman Brothers Inc., and JP Morgan Securities Inc. advised Cox on the system sale.