Now that former Charter Communications Inc. chairman Jerry Kent has pulled the cover off his new cable and telecom investment vehicle, the question on many minds is: What will he buy?
Kent, who resigned from Charter four months ago, last week announced the formation of CEQUEL III, his new investment fund. Joining Kent at CEQUEL are Charter co-founder Howard Wood and Daniel Bergstein, a partner in the New York law firm of Paul, Hastings, Janofsky & Walker.
With access to about $6 billion in funding — enough to buy 1.3 million to 1.7 million subscribers at current prices — CEQUEL could become a major industry player in a relatively short period of time. But even Kent concedes that it's unlikely to make a big impact right off the bat.
CEQUEL would be interested in any non-strategic systems that may be shed as part of the pending merger of AT&T Broadband and Comcast Corp., as well as Adelphia Communications Corp. systems that are on the block, Kent added.
"We're certainly interested in buying cable operators in metro to second- and third-tier markets," Kent said. "Obviously, in the metro markets, there is not going to be much available because most of those are in the hands of companies that aren't going to move them.
"I think, by definition, you're looking at more second-tier type markets."
While cable will be an important part of CEQUEL's strategy, it won't be the only one, Kent said. The company will also focus on telecommunications investments, including competitive local-exchange carriers, tower services and regional phone companies, he said.
"We are looking at cable, but the opportunity to piece together another 5 million to 7 million subscriber MSO — those opportunities have passed this industry unless we do a major acquisition of a fairly large company," Kent said. "We want cable to be a leg of the stool."
Many in the industry expect non-strategic systems to come on the market in the wake of AT&T-Comcast merger, Waller Capital Corp. chairman John Waller said, but there are few current opportunities for large acquisitions.
"There's no question that the 'big event' caused a lot of discussion and movement," Waller said. "But there is no specific, big block of subscribers on the market now."
Last year, Adelphia said it would sell non-strategic systems with about 700,000 subscribers, but to date, no deal has been reached.
Other observers have said MSOs like Insight Communications Co. Inc. and Mediacom Communications Corp. — with market capitalization of $1.3 billion and $2.1 billion, respectively — could be targets. But both companies have strong owners who control most of the stock vote and have shown no indication they would sell.
That could leave The Washington Post Co., which owns 750,000-subscriber MSO Cable One Inc. But the Post
held off selling during the consolidation craze of the past few years and it too has given no signals it is willing to sell.
"There are certainly things he [Kent] can roll up," said Banc of America Securities LLC cable analyst Doug Shapiro. "But it seems to me he will roll up something that is a little under the radar. "Here's a guy who made himself a lot of money over the years and enjoys doing something entrepreneurial. I wouldn't be surprised if he doesn't have a firm vision in mind over where this is going."
Waller said that with an executive of Kent's caliber hunting for systems — along with several other former MSO executives who have reentered the game — dealmaking should increase.
Former cable executives who have re-entered the industry include Bresnan Communications Inc. president Bill Bresnan, former Vista Communications president Neil McHugh and former Buford Cable president Ben Hooks.
Bresnan, who sold his systems to Charter in 1999 for $3.1 billion, was one of the bidders for AT&T Broadband's Montana systems. McHugh and former backers Boston Ventures started Vista III Media last year to acquire systems in secondary cable markets.
Hooks, the president and CEO of Buford Media, also is looking for systems. He has about 7,000 subscribers, mainly in the South.
"The fact that [Kent] is looking, along with other people, is going to provoke some activity," Waller said.
And CEQUEL certainly has the money to do deals.
Kent said he began talking to potential sources of funding a few months ago, and confirmed that he has spoken with Toronto Dominion Bank and Kelso & Co., a private equity fund that was one of Charter's early backers. He declined to identify any other sources of funding.
"We've talked to all of the usual suspects," he said.
According to sources, one private equity fund the company has been in touch with is Providence Equity Partners, a Rhode Island fund that has made several small investments in cable.
NO COMMITMENTS, YET
CEQUEL does not yet have formal commitments from any backers, but Kent said financing would be provided on a deal-specific basis.
"We have to look at each deal separately," Kent said. "No one wants to commit to a blind pool, and I wouldn't want to commit to a blind pool. Depending on what part of the telecom space we're in, some private equity sources are better than others and we want to fit the deal to each of the firms."
Although he is looking at opportunities across the telecom spectrum, no deals are imminent, said Kent. And he has no set target for how large he wants CEQUEL to be.
"We're only limited by our imagination," he said.
Kent added that he'll be involved in the management of any property that CEQUEL buys.
"I've always been known as a hands-on manager, I think that's where the value-added comes in," Kent said. "With my track record the last thing I want to do is toy around with something."