Private-equity firms have re-entered the cable business in force in recent months, reinvesting some of the profits they reaped in the consolidation-crazy 1990s.
As a result, system prices have risen, and that could crimp future deal activity.
But executives at a couple of big cable-investing firms say they think the deal market could heat up again, as big MSOs like Comcast Corp. — and especially Adelphia Communications Corp. — consider selling off non-core systems.
Both in the U.S. and abroad, Providence Equity has been one of cable's more active private-equity players.
In the past 12 months, it was lead investor in four big transactions: in the U.S., the Bresnan Communications Inc. buyout of 314,000 former AT&T Broadband subscribers from Comcast for $525 million in cash plus equity, as well as Northland Cable's acquisition of systems in South Carolina and Mississippi for about $20 million, according to securities filings.
In Europe, Providence was lead investor with other private-equity partners (Apax Partners and Goldman Sachs Capital Partners) in the acquisition of Deutsche Telekom AG's cable systems, with access to 10 million cable homes in Germany, for $1.9 billion.
It also led the acquisition of Casema N.V., with 1.3 million subscribers in The Netherlands, from France Telecom for $720 million, along with The Carlyle Group and GMT Communications Partners.
Providence started investing in cable more than 20 years ago, with Continental Cablevision, Fanch Communications and others. It slowed down in the late 1990s, when prices were high.
Providence Equity managing director Michael Angelakis said the firm sensed a shift in 2001 and 2002, about the time it partnered with Bresnan CEO Bill Bresnan and Northland CEO John Whetzell on several transactions.
Spectrum Equity Investors, a $3 billion private-equity fund based in Boston, backed Patriot Media & Communications's acquisition of 80,000 subscribers in Princeton, N.J., from RCN Corp. That was a return to cable for Spectrum, another longtime cable investor.
"We obviously bought [the Princeton systems] at a time when people thought the world was over for the cable industry," Spectrum general partner Robert Nicholson said. Some cable stocks had hit all-time lows, and the Adelphia accounting scandal and subsequent bankruptcy filing caused turmoil.
"Our experience in the industry is that it's always had its cycles," Nicholson said. "We feel that we made our first acquisition very much at the bottom of the cycle."
But since Patriot spent about $3,600 per subscriber for RCN's Princeton system (including upgrade capital), valuations are rising again.
"The public perception and the investor perception of the cable industry has changed pretty radically from a year ago," Nicholson said. "I don't think that it is obvious that the industry is undervalued, as it was a year ago."
Nicholson said Spectrum continues to look at cable properties and wants to help Patriot grow its subscriber base. Spectrum wants properties with scale and in communities that have the density and affluence to support keeping the cable plant.
"We don't have an interest in investing in rural cable, despite the fact that on a valuation-multiple basis, there are some very attractively priced systems," Nicholson said.
Spectrum was an early investor in Galaxy Telecom, the Sikeston, Mo.-based rural operator that filed for Chapter 11 bankruptcy protection in 2001.
Galaxy emerged from bankruptcy a year later, but with its equity transferred to bondholders. Spectrum got little return on that investment.
No rural aims
Nicholson didn't want to talk much about Galaxy, but noted Spectrum had made an investment in a direct-broadcast satellite retailer, Golden Sky Holdings Inc., at around the same time as its initial Galaxy investment. Golden Sky sold out to Pegasus Communications Corp. for $1 billion in stock and assumed debt in 2000.
"Our view, having been on both [the rural cable and DBS] sides, is that satellite is a better platform," Nicholson said. "If you don't have the mass of subscribers to offer a fully upgraded digital product, you're going to be constantly fighting against the satellite competition."
Nicholson said he's hopeful the deal market could heat up again in the next 12 to 18 months, when some bigger MSOs — notably Adelphia — are expected to begin selling off some non-strategic systems.
"My gut tells me that there will be more deals done," Nicholson said. "I think there will be good assets to trade."
He's most hopeful that Adelphia, which is slated to emerge from Chapter 11 bankruptcy next year, will be a system seller.
"Adelphia was created through so many disparate acquisitions," Nicholson said. "There are some obvious things that are very strategic to a couple of the big players. There are a lot of things that I think may find very different homes.
"At the end of the day, that's going to be an asset that needs rationalization."
Rising prices could make deals harder to get done, though.
"Look at where the public companies are trading: 13 [times] to 16 times [cash flow] on pretty well-upgraded, more-mature asset bases," Nicholson said. "You can't pay 16 times as a private equity investor and make the math work."
Angelakis was even more skeptical. "We think there will be transaction activity," he said.
But he added: "We are concerned that the expectations are beyond what will occur."