Former Charter Communications Inc. CEO Jerry Kent is back on the cable-acquisition hunt, at his current shop, Cequel III, while his former MSO employer claws its way back from accounting and debt woes. Kent spoke withMultichannel News national editor Steve Donohue last week.
MCN: How's the deal market?
Jerry Kent: The deal market is drastically different than it was a couple of years ago. There are fewer quality properties available, but on the other hand there are fewer buyers and the credit markets — at least from a senior bank perspective — are just downright awful. You can't get the same leverage out of the banks that you could a couple of years ago, which is putting a ceiling on the multiples at which properties are trading.
MCN: When you formed Cequel in January 2002, you said you had access to $6 billion in funding. Do you still have access to that much money?
Sure. For the right opportunity, we have plenty of access to capital.
MCN: Were you originally looking to make a run at Adelphia Communications Corp. with that money?
JK: Yes, some of the Adelphia properties.
MCN: What kind of systems are you looking to acquire now?
JK: We're not necessarily looking for just size. We're looking for the right amount of properties that mesh with our current holdings. Currently, we have a large contingent of rural cable properties. We want to end up with a nice mix between rural and metropolitan area systems, but we're looking for the right mix — not just scale.
MCN: Isn't it still difficult to compete with DirecTV Inc. on price in rural markets?
It's interesting. In a number of markets you're [cable] no longer the largest multichannel provider — satellite is. You can now afford to be much more price competitive, because you're not the largest provider anymore. It doesn't take that many subs added to make up for a price reduction.
MCN: What other challenges do you face in operating these small cable systems?
JK: First of all, working with the programmers to try to get affordable programming costs so that our rural cable customers aren't discriminated against. Secondly, intense satellite competition. Third, you're not as well-clustered as the larger cable systems, so you don't get the same economies of scale, so your margins will be lower. Fourth, attracting a world-class management team to provide their skills. Fortunately, we have a stable of good managers who are ready, willing and able to run these properties. The fifth: You don't get the same additional revenue streams in rural cable as you do in metro cable, in particular ad sales.
MCN: How big could Cequel get in terms of cable holdings?
We're only limited by our imagination.
MCN: How big do you want to get?
JK: We're not looking to be a 7-million [subscriber] cable MSO again. We really want to be opportunistic and not so much on trying to get to a certain size, but to be opportunistic and to build a cable operation that we could be proud of and that allows us to really serve our customers as best we can. After all, I've always had the mantra in the cable industry: guard your customers as jealously as you guard your children. We just want to build a cable operation that allows us to provide superior customer service because we do that, we win.
MCN: Have your ties to Charter made it more difficult for Cequel to raise money?
No, it's probably enhanced it because we were the best performing cable stock up until I left. We had a great operation, and that's obviously opened a lot of doors for us. I don't understand the question.
MCN: What about the fact that Charter restated earnings from 2000 and 2001 and the fact that you were running the ship during most of that period — doesn't that reflect poorly on your reputation?
No, not at all. The last full audit year that I was on board was the year 2000, and all of the items they talked about were reviewed intensely by the audit committee, by the auditors and, in some cases, reviewed by the SEC. I don't know if there have been rule changes since that may have prompted some of the restatement, but I can assure you at the time, we obviously had opinions that all of the financials were in accordance with [Generally Accepted Accounting Principles].
MCN: Have you been subpoenaed by the SEC for their investigation?
I really don't want to talk about any aspects of the investigation. I've been gone for so long, I'm just totally removed from it.
MCN: Do you ever think that you may have been too aggressive with accounting when you were at Charter? For example, the idea of counting cable-modem-only subscribers as basic-cable subscribers — that's something that Charter has since changed.
JK: No. In fact, for the one example you talk about, there was an additional charge to the modem-only customers and because we provided video service to them too, they were obviously video customers because we charged extra for it. We're very proud of the financial results that we reported and we have opinions that were in accordance with GAAP, and we'll leave it at that.
More from this interview — including Kent's extensive take on the economics of rural cable operations — can be found online at www.multichannel.com.