Trading Multiples Climb Higher

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Trading multiples for publicly-held cable
operators are on the rise, with research firm SNL Kagan
predicting they could pass the 7 times cash flow mark later
this year, the first time the sector has crossed that level since
2008.

According to SNL Kagan, trading multiples — enterprise
value divided by 2011 estimated operating income before
depreciation and amortization (OIBDA) — averaged about
6.5 times in January, a full point above the year-ago average.
Kagan said that the average weighted price of shares in the
sector on Jan. 25 was $35.19 each, to pass the 7 times mark
shares would need to rise about 9.5% for the full month.

It is no secret that MSO stocks are on the rise — share
prices of the five publicly traded cable companies (Comcast,
Time Warner Cable, Charter Communications, Cablevision
Systems and Mediacom Communications) rose
more than 40% in 2010. In January, the stocks were up
about 3.5%, according to Multichannel News estimates.

TWC LEADS WAY

According to Kagan, Time Warner Cable led the pack with a
6.8 times multiple, followed by Mediacom (6.7 times) and Cablevision
Systems (6.6 times). Comcast, which closed its NBC
Universal joint venture on Jan. 28, had the lowest multiple according
to Kagan at 5.3 times, but that was still almost a full
point higher than its 4.7 times multiple in January 2010.

“Now that the overhang on its share price from regulatory
limbo is dissipating, we expect multiples to improve,”
SNL Kagan wrote.

While some analysts differed in their calculations of
the stock multiples they all agreed that multiples should
climb higher.

Pivotal Research principal and media and communications
analyst Jeff Wlodarczak put current trading multiples for the
sector at 5.8 times 2011 OIBDA. He said that rising stock prices
and expanding multiples are the result of several factors.

“Multiples have expanded because cable has put up relatively
decent results, operators (led by Time Warner Cable
and Cablevision) are aggressively returning capital in
the form of dividends and aggressive buybacks, Comcast
stock is coming back as nervousness on the [NBC Universal]
deal approval/conditions has disappeared and cable
is demonstrating they have the best mousetrap when it
comes to broadband data which is allowing them to take
share and raise price,” Wlodarczak said.

Miller Tabak media analyst David Joyce, who put trading
multiples at about 6.1 times, agreed.

Joyce also pointed to lessened regulatory fears — worries
that the Federal Communications Commission would
impose onerous Title II regulations on the industry were
unfounded and the agency has appeared open to-usage
based pricing. Concerns about so-called over-the-top
viewing of video via the Internet, which had dragged the
stocks downward in earlier months, have also waned.

But, he added, public-market multiples are still 1.5 times to
2.5 times lower than private multiples.

MEDIACOM’S MOVE

That gap is one of the factors that is driving at least one MSO
from the public rolls. Mediacom Communications accepted
a buyout offer from chairman and CEO Rocco Commisso in
November, a move that will take the company private. Commisso,
who founded Mediacom in 1995, said in Securities and
Exchange Commission filings that part of the motivation for
going private was the disparity in what he believed the company
was worth and the public market’s valuation of the MSO.

According to a proxy filing with the SEC on Feb. 2, Commisso
had attempted to boost multiples by focusing on
free-cash-flow growth and improving other financial metrics
to no avail. The company noted that despite an aggressive
share repurchase program, generating a substantial
amount of free cash flow and growing revenue in tough
economic times, its stock still languished.

By the first half of 2010, the situation still hadn’t improved
— Mediacom was trading at about $5 per share — and Commisso
noted that much-larger MSOs, operating in bigger metropolitan
markets, were trading at even lower multiples. That
prompted him to seek other avenues.

Mediacom stock finished 2010 up almost double, with
the bulk of that appreciation coming after Commisso unveiled
his privatization plans.
Last week, Mediacom set a March 4 date for its shareholder
vote on the transaction.

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