New York -- Three years ago, Insight Communications
Co. management came this close to selling the privately owned MSO in a merger with
Charter Communications Inc.
The deal fell through, so president Michael Willner and
chairman Sidney Knafel, who started the company in 1985, tried a new tack: beginning to
trade and buy systems. Fortunately, for a variety of well-chronicled reasons, the business
picked up, bailing them out.
Willner said last week -- days after closing the deal to
buy what is now Insight's biggest system (in Rockford, Ill.) -- that Insight's
attitude has shifted 180 degrees from the trough of 1995, when competition loomed and size
'Now we believe that the industry has a very strong
future, and we want to play a bigger part,' he said.
Subtext: Insight is in the market to buy, and it wants
people to know that.
Insight is an interesting case study in that, as Willner
said, its owners have held 'strong views, negative and positive,' about the
industry over the years. Like several up-and-coming MSOs -- including Charter, Mediacom
LLC and FrontierVision Partners -- Insight has taken advantage of the availability of
desirable cable systems to grow rapidly.
The $97 million, 66,000-subscriber Rockford purchase, from
Cablevision Systems Corp., bumped Insight up to nearly 250,000 subscribers. And it will
add another 170,000 subscribers under its control when it closes a pending deal with
Tele-Communications Inc. to combine Indiana systems into a 320,000-subscriber joint
New York-based Insight also benefited from the appeal that
cable now finds with well-heeled outside investors. Vestar Capital Partners, a private
equity-capital firm, agreed in December to pay $50 million for a 'significant
minority' stake in Insight, providing cash for acquisitions. That was the first cable
deal for Vestar, which manages about $1 billion in assets.
Vestar managing director Prakash Melwani said Vestar liked
Insight's focused acquisition strategy and its management team. 'The Insight
people really stood out' among the potential cable partners that Vestar met, he said.
John Waller, the cable investment banker whose firm helped
to bring Vestar and Insight together (and advised Insight on the Rockford deal), said
Insight's acquisition strategy was unusual in that it targeted systems that met
certain characteristics, rather than building around geographic clusters.
Insight wanted to be in 'larger-name markets'
that were big enough to deliver good investment returns on system rebuilds, but that were
not major metropolitan areas commanding premium prices. Rockford, he said, was a great
example. That's a market big enough to accommodate four broadcast stations, Insight
executive vice president Kim Kelly said, but its old cable system is badly in need of a
$30 million rebuild. It became available because it was no longer strategic to
Willner said he still wants to buy systems that meet that
'second- or third-tier' market definition. But now, Insight is in the geographic
clustering game, too. It would like to buy 'just about anything in the state of
Indiana' or near Rockford, he said. But an 80,000-subscriber system in Florida would
go nicely, as well.
To demonstrate his good faith as a buyer, Willner said he
is also willing to factor future revenue potential, such as from high-speed data, into
what he's willing to pay for a system today. For the most part, such potential value
hasn't played a role in setting private-market system prices, according to Waller.
Insight has demonstrated operational savvy in the past. It
was one of the few operators to grow cash flow during reregulation, partly because it had
kept rates below the Federal Communications Commission benchmarks, which allowed it room
to grow, and partly because of the systems' growth characteristics.
Willner and Kelly also referred proudly to the penetration
growth that they achieved with systems like the one in Gilbert, Ariz., which Insight
recently sent to Cox Communications Inc. in a trade for Cox's system in Lafayette,
Ind. From a mere 450 subscribers in 1988, the system now has 14,000 subscribers.
Similarly, Insight's Salt Lake City properties grew from about 15,000 subscribers in
1987 to almost 60,000 now, with one small (2,000-subscriber) acquisition along the way.
Insight recently agreed to trade the Utah systems for TCI properties in Indiana in a deal
related to the joint venture.
Knafel and Willner were also early players in the United
Kingdom's cable development, and they still serve on the board of NTL Inc., which
voted last week to acquire Comcast Corp.'s Comcast U.K. Cable Partners Ltd.
As it looks ahead, Insight has high hopes for high-speed
data. It recently launched a trial in Noblesville, Ind., with U.S. Robotics. And it
believes in the telephony business, but only through the selected construction of
competitive local-exchange carriers that will target commercial customers, Kelly said. She
expects to have at least one CLEC unit running by the end of the year.
Before the TCI deal, Insight executives said they
didn't think much of digital video. That changed when they started looking at
TCI's digital cable launches in Indiana, where demand is extremely strong, they say.
Insight doesn't want to be in the business of leasing cable modems or digital boxes,
though. The USR trial involves selling the modems, and Willner said the OpenCable
standards and the possibility of selling digital converters will play a big role in how
hard Insight markets digital video.
Even with the many joint ventures, swaps and sales of the
past year, Willner and Kelly think that there will still be plenty of opportunities in
1998 to make the kinds of deals that they want. 'We're bullish on the
business,' Willner said, 'and if the opportunities are there, we will make the