Patriot’s Game: Cashing Out

Author:
Updated:
Original:

A little more than three years after purchasing RCN Corp.’s cable systems in central New Jersey, Patriot Media & Communications is on the block and its owners are looking for a record price for the midsized cable company — as much as $7,000 per subscriber.

According to several executives in the financial community, UBS Investment Bank — which is handling the auction for Patriot’s owners, cable veteran Steve Simmons and Boston-based private-equity firm Spectrum Equity Associates — began circulating initial notification via e-mail to possible buyers last week, inviting them to access the sale books on the systems. Patriot has about 80,000 customers in 31 communities in central New Jersey, including affluent Princeton, Chatham and Mendham.

POTENTIAL BUYERS

Possible buyers include Comcast Corp. and Cablevision Systems Corp., both of which have systems near Patriot.

Private-equity players such as Providence Equity Group and Bain Capital could also be potential buyers.

If it could be sold for $6,000 to $7,000 per subscriber, a Patriot sale would be one of the biggest deals in cable history on a per-subscriber basis. The price would have to top the previous No. 1, Adelphia Communications Corp.’s 2000 purchase of Daniels Cablevision’s Carlsbad, Calif. system for $6,879 per subscriber.

Patriot, at least for the time being, isn’t talking.

“I have no knowledge of that [a potential sale],” Patriot president and general manager Jim Holanda said.

But six executives in the cable-investment community countered Holanda’s denial, with one cable executive saying he received an e-mail notification from UBS Investment Bank last week.

Simmons, who had sold his 350,000-subscriber Simmons Communications in the mid-1990s before starting Patriot in 2003, was said to be on vacation and could not be reached for comment.

Nicholas Massard, a principal at Spectrum Equity who is handling the Patriot investment, did not return phone calls for comment.

Given the strength of the Patriot systems, a $6,000-to-$7,000-per-subscriber valuation may not be outrageous.

According to the cable executive who received the e-mail solicitation, the Patriot systems generate annual cash flow of about $540 per subscriber.

At that rate, a $480 million to $560 million price tag would represent an 11 to 13 times cash-flow multiple.

Most recent deals have been in the range of 10 times cash flow.

“That’s got to be some kind of world record,” Sanford Bernstein & Co. cable analyst Craig Moffett said of Patriot’s cash flow-per-subscriber mark. “But does that say something about the unique demographics of the market or the way they’re managing the business? Is there a risk that they’re starving the business of cash? There’s no reason to believe that, since the service levels in Princeton are good. It’s a really attractive market.”

Still, the shock factor of $7,000 per subscriber could spook some potential buyers.

“The question is, would Comcast be willing to pay two times its own per-subscriber value?” Moffett added. He said that Comcast is currently trading at about $3,500 per subscriber, with Cablevision trading at around $4,000 per customer.

Moffett added that the 11 times to 13 times multiple could also scare off some private-equity players, who may not see the opportunity for upside in such a deal.

“At these kinds of multiples, north of 10 times [cash flow], it’s hard to see any private equity getting involved,” Moffett said. “You can’t lever it up enough to make it appealing. The goal of any private-equity investor is to buy an asset, lever it up and fix the performance. Steve Simmons has already done that.”

In the three years since taking over the systems, Patriot has boosted high-speed Internet penetration from 15% of homes passed to 41% of homes passed. Digital cable penetration rose from 7% of basic subscribers in 2003 to 41% this year and the company began offering its own telephony service in October, adding about 5,700 customers since the launch.

Janco Partners cable analyst Matt Harrigan said that the attraction for any Patriot buyer resides in the ability to grow the phone base.

“That has a lot of upside,” Harrigan said.

If Patriot were able to attract a $6,000 to $7,000 subscriber price, it would represent a 44% to 68% return on Patriot’s initial investment — $289 million plus about $45 million for upgrades.

SPECTRUM’S BEEN PAID

The profit would be even bigger for Spectrum, which recouped much of its original investment in Patriot after the cable company refinanced its debt in 2005, enabling it to issue a dividend of about $90 million to Spectrum.

One possible sticking point is that while both Cablevision and Comcast have adjacent systems to Patriot, the size of the properties is relatively small and may not represent a must-have for either company. In addition, Comcast is in the process of integrating its portion of its joint acquisition with Time Warner Inc. of Adelphia. And Cablevision may be distracted by internal and outside investigations into possible discrepancies in stock option grants it awarded during 1997 to 2002.

“It certainly is in the category of something they would want to have at the right price,” said one cable executive familiar with Comcast’s thinking. “But if it’s more important to someone else, let it be more important to someone else.”

Related