Puerto Rico’s Ripe for a Rollup

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The next cable market to get consolidated might well be Puerto Rico. That was evident last week after one of the island’s biggest cable providers, Centennial Communications Inc., hired New York cable investment banker Waller Capital Corp. to help explore strategic alternatives.

Among those options: a sale of its 73,500-subscriber system there.

Centennial is going back to the well, having hired Morgan Stanley & Co. in April 2002 to seek a buyer, only to pull back after it received few attractive offers.

Why now? The market was jolted in April, when a group of private-equity investors led by former FrontierVision Partners CEO James Vaughn made an unsolicited bid for Adelphia Communications Corp.’s 140,000-subscriber systems in San Juan and the surrounding area.

Vaughn bid $625 million for the Adelphia systems, or about $4,500 per subscriber — a huge valuation, given that recent cable sales were generally for about $3,200 to $4,000 per subscriber.

Using the Vaughn bid as a benchmark, Centennial could receive as much as $330 million for the properties.

Centennial got the Puerto Rico systems in two separate deals, for a total of $277 million. It bought 55,000 subscribers from Pegasus Communications Corp. for $170 million in cash in 2000, and 37,000 subscribers from Teleponce for $107 million in 2001.

One possible suitor is Vaughn’s group, which has private-equity backing from M/C Venture Partners and Wachovia Capital Partners.

Another, of course, is Liberty Media Corp., which owns Liberty Cablevision of Puerto Rico, which counts about 120,000 subscribers in 37 municipalities in the eastern, central and northern regions.

Liberty has plans to spin off the Puerto Rico systems, as well as its interests in Jupiter Telcommunications Ltd., Jupiter Programming Co. and UnitedGlobalCom Inc., into a separate publicly traded entity (Liberty Media International) to shareholders on June 7. Liberty could use LMI shares as deal currency to roll up Puerto Rico.

Sources in the financial community say Puerto Rico’s always been promising but difficult, plagued by signal theft and high direct-broadcast satellite penetration.

But since systems have upgraded to digital, signal theft has been reduced.

And new services, like high-speed Internet access, have helped trim the losses to DBS.

The Puerto Rico systems pass more than 300,000 homes in resort communities like Ponce, Aguadilla and Mayaguez. Centennial has upgraded the systems to carry two-way digital and high-speed Internet traffic.

They’re considered to be in good shape. Centennial launched high-speed Internet service only this year, and claims about 3% penetration of HSI-ready homes.

The 73,500 customers are all consolidated on one headend (there are two backup headends in the system).

Still, Centennial said that in the three months ended Feb. 29, basic subscribers declined by 6.2%. Since 2002, Centennial has lost about 20,000 subscribers in Puerto Rico.

<p>Company</p><p>Locations</p><p>Subscribers</p>

Liberty Cablevision of Puerto Rico

37 municipalities

120,000

Adelphia Communications Corp.

San Juan, Levittown

140,000

Centennial Communications

Ponce, Aguadilla, Mayaguez

73,500

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