Time Warner Cable chief financial officer Irene Esteves said the cable giant sat out the initial rounds of the Insight Communications auction mainly because of the asking price, but re-entered the fray for the Midwest cable operator as it became clearer that a favorable deal could be reached.
Insight put itself on the block in March at an estimated asking price between $3.5 billion and $4 billion. At the time, Time Warner Cable believed that at that price -- an estimated 11 to 12 times cash-flow multiple -- it wasn't worth the company's time to participate in the auction process.
That process included several large cable operators at the beginning -- including Charter Communications, Suddenlink Communications and Cablevision Systems -- but as the process wore on, that field was whittled down to overbuilder WideOpenWest and Mediacom Communications.
The auction ended in mid-July with no clear winning bidder, opening up Insight to conduct separate talks with prospective suitors outside of the process.
Esteves said that Time Warner Cable started talks with Insight around July 15 when it became clear that it could get a discussion going that would "allow us to purchase a very attractive asset at a very attractive price."
Combined with about $300 million in tax benefits and about $100 million in annual operating synergies, the deal is valued at about 6 times cash flow, in line with Time Warner Cable's own trading multiple of about 5.9 times cash flow. That, she said, fits in with TWC's disciplined approach to deals.
From a seller's perspective, the deal looks good too. According to Morgan Stanley media analyst Ben Swinburne, excluding cost synergies and tax benefits, that value works out to be about 8.5 times 2011 annualized cash flow of about $370 million, a strong private market valuation that should be encouraging to other operators. Public valuations of cable operators range from 4 times to 6 times cash flow.
Insight has about 700,000 basic video customers in Ohio, Kentucky, and Indiana, adjacent to existing Time Warner Cable properties in those areas. Insight has a solid reputation as a strong operator, but financial growth, which had been in double digits between 2005 and 2009, has slowed in recent periods. In the first two quarters of this year, revenue and cash flow at Insight has ticked up about 2% each, well below prior periods.
Esteves said that like TWC, Insight has had challenges, but she sees opportunities for growth in enhancing its products with Time Warner Cable offerings like Start Over and Look Back, pricing and on the commercial side of the business.
The deal will be funded through TWC's existing cash reserves -- it had $3.5 billion in cash and cash equivalents as of June 30 -- and will have no effect on the company's ongoing share repurchase plan. TWC said in November that it would buy back as much as $4 billion of its own stock over the next several years. So far, Esteves said that the MSO has repurchased about $2.5 billion of its own shares as part of that program.
The Insight deal is the second large acquisition TWC has made this year. In June it agreed to purchase NewWave Communications for about $260 million.
Esteves added that the company sees no compelling deals on the immediate horizon. "There is nothing else on our radar screen," Esteves said.
That would appear to put TWC out of the running for Charter's Los Angeles systems, which went on the block earlier this year. Time Warner, which has about 1.8 million customers in the Los Angeles area, would be the most logical buyer for the Charter properties.
Miller Tabak media analyst David Joyce said that a Charter deal wouldn't be hard for TWC to swallow, provided it could quickly return to its target 3.25 times leverage goal.
"They can afford to be patient with Charter L.A.," Joyce said.