Cable investors who saw the recent purchase of RCN Corp.'s Princeton, N.J., system as a sign that cable valuations were on the rise — and an indication that an influx of financing for cable deals is on the horizon — could be in for a rude awakening.
RCN sold its 80,000-subscriber Princeton system to former cable executive Steve Simmons for about $3,600 per subscriber in August. The size of the deal gave some cable stocks a brief lift, mainly because system valuations had been in the $2,100 per subscriber range for most of the year.
But according to panelists at the recent Kagan Broadband Summit in New York, RCN's was a unique situation.
"That property is a little bit of an anomaly," said DH Capital principal Mark Thorsheim. "You've got some major MSOs — Comcast [Corp.], Cablevision [Systems Corp.] or Time Warner [Cable] that would love to get their hands on it. But the MSOs are on the sidelines for making acquisitions. For a private-equity-backed venture to go out and make the acquisition, they know it's going to be back in play in a couple of years. If Steve Simmons can go in and do some of the upgrades and drive the cash flow, Comcast, Cablevision and Time Warner Cable can still pay a strong multiple" to buy the systems.
Simmons and Spectrum Equity Partners — his backers — agreed to pay about 13 times 2002 cash flow for the systems, a price that sounds rich in today's market.
Peter Markham, vice president of Daniels & Associates Inc. private capital group called the Simmons deal a prime example of how private equity players are more likely to jump into cable deals than other, more traditional sources.
"The big question is how much leverage can you put on these things," Markham said. He said that banks and other lenders typically are willing to lend amounts to about five times to seven times a property's annual cash flow. "There is leverage out there, but it is expensive," he said. "When you have public bond yields at between 11 [percent] to 20 percent, it's virtually impossible to get public debt. Private debt sources are the only guys in town."
FleetBoston Financial managing director Jeffrey McLaughlin said banks still like cable, but they haven't forgotten getting burned in the recent past, particularly by the bankruptcies of Classic Communications Inc. and Galaxy Telecom Inc. Galaxy emerged from Chapter 11 earlier this year.
"We're still fairly bullish on cable," McLaughlin said. "Clearly, our portfolio has been impacted by the Classics and Galaxys of the world, and certainly Adelphia [Communications Corp.] hasn't helped matters either. For the most part, the media portfolios have all held up pretty well."
McLaughlin added that cable has reported consistent revenue and cash flow despite negativism in the public arena.
Still, there is the overhang from the telecom meltdown this year, which GE Commercial Finance senior vice president Tim Huban said presents an opportunity for his company.
"Telecom was a huge meltdown," Huban said. "We like others suffered in that area. We've participated mainly in the senior debt and senior secured side. As a result we're seeing there's a more favorable environment for us to be able to capitalize on other people's uncertainty."
But though cable operators have shown consistent cash flow growth and are nearing the completion of their upgrade cycle, Huban said he remained "cautiously optimistic" about cable.