Charter Cancels L.A. Auction

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Charter Communications has quietly pulled its Los Angeles systems off the market, after receiving a series of bids below its target price for the systems.
Charter put the properties up for sale in April, hiring Goldman Sachs and Citigroup to run the process. But according to sources familiar with the matter, bids came in substantially lower than the $2.5 billion the company was hoping to attract for the systems. Those same sources said that while several companies did participate in the first round of bidding, Charter informed the parties earlier last month that the auction process is canceled.
Charter executives declined comment.
The price is what seems to have caused some potential suitors to balk. At $2.5 billion, the L.A. systems would be valued at around 10 times cash flow, making it one of the pricier deals in recent memory. In the past 9 months, cable system sale multiples have topped out in the 8 times cash flow range, although none were in a top urban market like Los Angeles.
Miller Tabak media analyst David Joyce has estimated Charter Los Angeles was worth between $1.8 billion and $2 billion. Some observers had said Charter would sweeten the pot by including its Fort Worth operations with about 178,000 customers in any deal, pushing the total value up another $400 to $800 million. Fort Worth would also be most attractive to Time Warner Cable, which has about 600,000 subscribers in nearby Dallas.
Charter has about 539,000 subscribers in California and Nevada (about 377,000 in the Los Angeles area). Sources earlier this year said the company had tried to engineer a swap with Time Warner Cable - L.A. for TWC's Wisconsin systems but the larger MSO balked at the deal. TWC has about 1.8 million subscribers in Los Angeles, but didn't feel adding to that footprint was worth giving up its Wisconsin properties. Charter has about 537,000 subscribers in Wisconsin that would have meshed nicely with TWC's 560,000 subscribers in Green Bay, Milwaukee and Appleton.
With that avenue blocked, Charter began interviewing investment bankers to run an auction process for the systems in April, finally deciding on Goldman Sachs and Citigroup.
According to some industry executives, Charter could still entertain offers from potential suitors, just not within a formal auction structure. They noted that is how Time Warner Cable dealt with its most recent acquisition, Insight Communications.
TWC agreed to pay $3 billion in cash for Insight's 700,000 video customers in Indiana, Ohio and Kentucky in mid-August. But TWC did not participate in Insight's formal auction process, which some industry executives said saved it about $250 million. Several industry executives with knowledge of the process said that TWC first approached Insight prior to the formal auction, offering $3.25 billion for the systems. Insight's owners - private equity giants Carlyle Group, Crestview Partners and MidOcean Partners -- turned them down in favor of the auction process, which after five months produced no solid winning bidder. When TWC stepped back in July after the formal process had ended, they ended up getting the properties at a relative bargain.
Whether TWC employs the same strategy with Charter for its L.A. systems remains to be seen. But some investment bankers said there is something to be learned from the Insight auction.
"Time Warner Cable is very careful about what they pay," the investment banker said. "If you own a property where Time Warner is the logical buyer, don't think it's going to be above 8 times [cash flow]. That's the lesson from the Insight deal."