After nearly eight months of negotiations, Comcast has agreed to buy Patriot Media & Communications for $483 million or about $6,000 per subscriber, a valuation that makes the deal one of the biggest in cable history.
Patriot, led by industry veteran Steve Simmons, has been on the block since August. The company has about 81,000 subscribers in 31 communities in Central New Jersey, including Princeton, Chatham and Mendham.
The deal comes just one day after Comcast agreed to unwind its Insight Midwest partnership April 2 with Insight Communications, gaining 684,000 subscribers in Illinois and Indiana.
HEFTY CASH FLOW
The Patriot deal, expected to close in the third quarter, falls in the range of 10 to 11 times estimated 2006 cash flow. Patriot, according to cable executives who were involved in the auction process, expects to generate more than $570 in cash flow per subscriber in 2006, growing to more than $615 in annual cash flow per customer in 2007, one of the highest marks in the industry. By comparison, Comcast generates about $450 per subscriber per year in cash flow.
For Comcast, the valuation is even lower — about 8.5 times — when significant programming-fee discounts and other cost savings are taken into account.
But at $6,000 per subscriber, the deal is one of the pricier ones in cable history — it trails only Adelphia Communications purchase of the Carlsbad, Calif. system owned by Daniels & Associates in 2000 for $6,879 per subscriber and Adelphia’s purchase that same year of systems owned by Prestige Cable TV in Virginia, North Carolina and Maryland, for $6,200 per subscriber.
“Patriot Media systems are fully upgraded, have superior demographics, strong penetration of advanced products and best of all, they geographically complement our systems in New Jersey,” Comcast chief operating officer Steve Burke said in a statement. “We are delighted at the prospect of adding these new customers to Comcast in the near future and look forward to providing them with our advanced products and services.”
Simmons sold his 350,000-subscriber Simmons Communications in the mid-1990s to several different operators, including Tele-Communications Inc. and Fanch Communications, before acquiring Patriot in 2003 with partners Spectrum Equity Investors and Spire Capital. (See “5:4 With Steve Simmons,” page 37.)
In buying Patriot, Comcast ends what has been a longer-than-expected auction process. Patriot went on the block in August and according to cable executives familiar with the process, it was initially looking for prices in the $6,000 to $7,000-per-subscriber range. While the final price came in at the low end of that range, it is still the third-highest price ever paid for a cable system on a per-subscriber basis.
But given that Patriot operates in several highly affluent communities — including Princeton, Chatham and Mendham, where annual median household incomes were about double the national average in 2005 — has completed an upgrade of 2,000 miles of its 2,900-mile plant to a state-of the-art 870 Megahertz, and offers digital cable, high-speed Internet and telephone service, the deal doesn’t look so pricey after all.
According to Sanford Bernstein cable analyst Craig Moffett, Patriot exceeds Comcast in several key metrics. Last year, its basic-video penetration rate was 68% of homes passed (versus Comcast’s 51%); high-speed Internet penetration was 41% of homes passed (compared to 25% at Comcast) and cash-flow margins (cash flow as a percentage of revenue) at Patriot were 46% (compared to 41% at Comcast).
“With another year of incremental penetration in all advanced services, it is likely that margins are now even higher than they were a year ago,” Moffett wrote. “And margins could conceivably expand even further as Patriot's programming contracts are shifted to Comcast’s lower-cost basis.”
BOUGHT IN 2003
For Patriot and its partners, Spectrum Equity Associates and Spire Capital Partners, the deal looks even better.
Spectrum and Simmons purchased the systems in 2003 from RCN for about $290 million — $245 million for the actual purchase and $45 million for system upgrades. But Spectrum got back most of its initial investment in Patriot in 2005 when the company refinanced its debt, which allowed Patriot to pay Spectrum a $90 million dividend.
While the actual total investment of each of the partners was never released, the RCN deal was likely highly leveraged, which also would add to higher returns for the initial investors. The deal also is encouraging in that it shows that well-run cable systems continue to garner strong prices.
“With a doubling in enterprise value in just four years, equity returns were nothing short of spectacular,” Moffett wrote. “As has long been the case, the appetite for cable investment among private-equity concerns remains voracious; the limitation — as has long been the case — continues to be supply rather than demand.”