Let’s Make A Deal

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Cablevision Systems
$1.4 billion acquisition of
Bresnan Communications last
week could continue a miniwave
of systems deals.

The Bresnan transaction was
the third cable-systems deal announced
in the past four months.
In March, ABRY Partners announced
a $1.2 billion plan to take
overbuilder RCN private, and in
June, Mediacom Communications
chairman and CEO Rocco Commisso
announced a $6-per-share
offer to exit the public market.

While past deals have been
driven by a thirst to expand the
footprint or to better cluster existing
operations, the more recent
wave seems more motivated
by frustration with the low value
the market places on cable systems.
Cablevision agreed to pay
$1.365 billion for the Bresnan systems,
located in Colorado, Utah,
Wyoming and Montana, which
works out to about 8.3 times 2010
cash flow. Before the deal was announced,
Cablevision was trading
at about 6.5 times cash flow.

In a research report last week,
Sanford Bernstein cable and satellite
analyst Craig Moffett wrote
that applying the same 8.3 times
multiple would nearly double
Comcast’s stock price from $18 to
$32 to per share and Time Warner
Cable’s per-share price from
$54 to $106.

Cablevision also engineered
a highly favorable deal, creating
a separate subsidiary which will
borrow about $1 billion from BofA
Merrill Lynch and Citigroup. The
MSO’s own equity commitment
will be less than $400 million.
What’s more, the tax benefits associated
with the deal — mainly
through higher depreciation
— will eventually cover Cablevision’s
equity contribution over
time.

On a conference call with analysts
last week, Cablevision CEO
James Dolan said the deal does
not signal that the Bethpage,
N.Y.-based MSO would buy every
system that comes up for
sale. But several analysts noted
that Dolan did not rule out acquisitions
altogether.

Miller Tabak media analyst David
Joyce said that Cablevision
could tap the deal market again,
adding that the next logical step
for the company is Charter Communications’
New England cluster,
which has about 336,000
customers in parts of Connecticut,
Massachusetts, Vermont,
New York and Rhode Island.

Joyce noted that several smaller
operators are entering the market,
which could fuel the deal
fires. Wave Broadband recently
kicked off its auction to replace
majority backer Sandler Capital.
And Broadstripe Communications,
which filed for Chapter 11 bankruptcy protection last year,
has hired two investment bankers
in the last several months
— DH Capital and El Molino Advisors
— to investigate selling its
93,000 subscribers.

Another privately held cable
company, Atlantic Broadband,
which has about 285,000 subscribers
in Florida, Maryland,
Delaware, South Carolina and
Central Pennsylvania, is expected
to test the market soon. And
Charter Communications, which
emerged from Chapter 11 bankruptcy
in November, has been
the subject of intense speculation
that it would divest some of
its systems.

Joyce said that aside from the
more attractive private valuations,
investors also appear to
favor the way that Cablevision
structured the Bresnan deal. It
kept the debt separate from the
parent entity, minimizing the
equity contribution while at the
same time allowing for a full
consolidation of the acquired
company’s cash flow.

“There is a lot more financial
flexibility,” Joyce said.

Seven other bidders joined Cablevision
in the final round of the
Bresnan auction — Ascent Media
(headed by Liberty Media chairman
John Malone); Alaskan cable
company General Communication
Inc.; and a handful of privateequity
players, including TPG.

Although Bresnan is wellrun
— it has 65% digital penetration,
38% high-speed data
penet ration and 22% phone
penetration — Cablevision
chief operating officer Tom
Rutledge noted that there is a
$200-per-home annual cashflow gap between the Bresnan
propert ies and Cablevision’s
core systems in metropolitan
New York. Narrowing that gap
through selling advanced services
will be a priority.

Cablevision also sees a big opportunity
in converting satellite-
TV customers in the Big Sky
country to cable. The Bresnan territory
currently has 38% directbroadcast
satellite penetration,
Rutledge said, making the region
ripe for conversion.

“That’s exactly what we hope
to do, with robust products, better
TV than satellite and putting
together packages to save them
money,” Rutledge said.

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