As expected, Cox Communications Inc. announced last week
that it won the auction for the 319,000-subscriber Las Vegas cable system, agreeing to pay
$1.325 billion in cash and stock and establishing a new benchmark for recent big sales.
Now the question is: Does it make a difference to cable
The widely anticipated deal is hard to evaluate on a
per-subscriber basis because Prime South Diversified Inc.'s assets also include a
hospitality unit that provides video to 77,000 hotel rooms in the city, 35 percent of a
competitive local-exchange carrier and a one-third share of a local news channel.
Using another benchmark, though, the deal works out to
about 13.2 times cash flow at the cable system and hospitality network level and 13.8
times annualized cash flow for all the assets, according to information Cox gave analysts.
That compares with about 10 times running-rate cash flow for most system sales and an
estimated 11 times multiple in the recent Marcus Cable Co. L.P. deal.
Las Vegas merits a high valuation because of its population
density and high growth characteristics: It's already a top-10 cable system and the
local population has been swelling by 7 percent annually throughout the decade. Last year,
the city drew 32 million visitors.
As one participant in the deal said, it wasn't as if
Cox bid a lot more than its rivals. Tele-Communications Inc., Charter Communications Inc.
and Comcast Corp. all bid on the system, with Cox and TCI ending up as finalists,
according to sources.
The Greenspun family, who own about 64 percent of Prime
Cable Las Vegas and the Hospitality Network, will retain about a 20 percent stake. Prime
Cable of Austin, Texas, and its institutional investors will sell their 21 percent stake
to Cox. The remaining interest consists of a warrant to buy 15 percent of the operation,
held by BellSouth Corp. Cox will buy out BellSouth as part of the deal, sources in the
Cox's partners in the CLEC operation are NextLink Inc.
(35 percent), the Greenspuns (10 percent) and Prime Cable (10 percent).
The Greenspuns liked Cox as a brand-name partner with the
credibility to help sell new services like cable modems to hotels, the participant said.
Brian Greenspun, vice president of Community Cable TV (the
local operator) and editor of the Las Vegas Sun newspaper, said his family liked
that Cox, although a publicly held company, has its roots as a family-owned business.
He said he also liked Cox's track record of
introducing new services, such as @Home Network and telephony, in its rebuilt systems.
"What we needed was a partner who was committed to
growing this system and taking it to the next level," he said. "Cox is not only
committed to doing that -- they're already doing it."
Cox CEO James Robbins, in a statement, described Las Vegas
as "the most sought after cable property in the country," and said Cox was
"uniquely positioned to capitalize on [the Greenspuns' and Prime Cable's]
combined successes to take these businesses to the next level." By the end of the
year, a rebuild to 750 megahertz should be about two-thirds complete, Cox said.
Last October, Prime, backed by the Carlyle Group, agreed to
buy SBC Communications Inc.'s Washington, D.C.-area cable systems in a deal that
should close this summer. Prime senior vice president Jerry Lindauer said the company has
a few other deals in the works, which he would not disclose, adding that Prime was
"still in the acquisition mode."
For Cox, the deal helps create a Southwest
"mega-cluster," adding to operations in Phoenix (584,000 subscribers); and San
Diego (484,000), Orange County (249,000) and Santa Barbara/Bakersfield, Calif. (92,000).
Cox also is negotiating to buy TCI's Tucson, Ariz., system, with about 100,000
Cox will add about 500,000 passed homes to its existing 2.2
million homes in the fast-growing Southwest.
While the announcement didn't have a perceptible
effect on cable stocks overall, Cox's share price, already trading at a market
premium on a multiple basis, rose 50 cents per share the day the deal was announced and
another $2.88 (6 percent) the following day before giving back 13 cents on Thursday.
"I think it's hugely bullish," one Wall
Street analyst said, adding that the price affirms the Marcus valuation but that events
like those have less impact now that the stocks have entered "rarefied
Cox agreed to pay $291 million in cash, $245 million in
common stock (about 5.5 million shares) and $134 million in preferred shares, along with
assuming $655 million in debt. The preferred shares -- with a conversion price of $44.313
per share -- account for the Greenspuns' continuing interest, according to Cox
Daniels & Associates represented the sellers, while
Salomon Smith Barney advised Cox.