Cable Operators

2004: A Year of Dealing Modestly

1/02/2005 7:00 PM Eastern

Cable operators promised that 2004 would be a year of financial restraint and discipline. And they delivered in spades.

The biggest deal of the year was Cox Enterprises Inc. spending $8.5 billion to buy out other holders in its cable subsidiary, Cox Communications Inc.

Finishing a distant second was Atlantic Broadband Inc.’s $735 million purchase of 230,000 subscribers from Charter Communications Inc.

“It was awfully quiet in 2004,” said Stifel, Nicolaus & Co. cable analyst Ted Henderson.

DISNEY DIDN’T SELL

Not that the year didn’t start off with the promise of another round of mega-mergers. In February, Comcast Corp., a little less than two years removed from its $54 billion purchase of AT&T Broadband in November 2002, announced a $59.9 billion unsolicited offer for entertainment icon The Walt Disney Co.

But investors immediately showed their disdain for the deal, and Disney management rejected it as being too low — driving Comcast stock down 9% ($2.84 per share) on Feb. 11, the day the MSO announced its offer. Disney stock rose 15% ($3.52) the same day, in anticipation of a competing bid that never materialized.

Comcast threw in the towel a few months later, withdrawing its Disney bid in April.

While no analyst blames the failed Disney bid as the reason for the scarcity of deals in 2004 — one cited the poor performance of cable stocks, which limited operators’ ability to do transactions for stock as the biggest obstacle — it did send a message to cable company executives: grow the business that you have.

That was especially important in the wake of increasing competition from direct-broadcast satellite providers — which grew their subscriber base by 1.45 million in the first nine months of the year, compared to cable’s loss of 300,000 customers — and the threat of telephone companies entering the video business.

Cox also sent a message to Wall Street last year: Goodbye and good riddance.

Cox, one of the strongest performers in the sector, apparently had its fill of persistent stock price declines despite consistent revenue and cash flow growth.

Prior to the tender offer announcement, Cox had reported 16 consecutive quarters of double-digit pro forma operating cash flow growth, while its stock was trading 25% below its Jan. 2 price of $34.49.

A TENDER BUMP

News of the tender offer goosed the stock — it eventually closed in its last day of trading Dec. 8 to $34.77, slightly above the tender offer of $34.75 per share.

On the systems sales front, several small deals were made, capped by Charter’s sale of 230,000 subscribers in Miami Beach, Fla.; western Pennsylvania; Maryland; Delaware; West Virginia; and New York to Atlantic Broadband. The $735 million deal was announced in 2003 but closed in March 2004. A smaller deal, but one that reestablished the high-point of system valuations, was Susquehanna Communications Inc.’s purchase of 30,000 subscribers in Carmel, N.Y. from RCN Corp. for $120 million, or $4,000 per subscriber.

Other small deals included Orange Broadband’s purchase of 8,000 subscribers in Cerritos, Calif., from Knology Inc. (which bought those systems, along with about 50,000 subscribers in Florida from Verizon Media in 2003), for $14.8 million. That deal is expected to close in the first quarter.

Fulcrum Global Partners media analyst Richard Greenfield said the Cox transaction sent a message to Wall Street that even high-growth MSOs were focusing on internal growth, not necessarily growth through acquisition.

“It was a sign of the times,” Greenfield said. “When you look at the fact that Cox is going private and the fact that Cox’s underlying growth is probably second to none in the group; when you look at Cablevision [System Corp.]’s rapidly accelerating growth in penetration of digital and data, does size really matter that much, or are strength of clusters and focus of an operation even more important?”

Greenfield said that the failed Disney bid did not discourage Comcast from acquiring content, but it focused more on smaller deals. Comcast purchased Techtv from Paul Allen’s Vulcan Investments Inc. for an estimated $300 million, became a partner in Sony Corp.’s purchase of Metro-Goldwyn-Mayer Inc. (for another $300 million) and swapped some of its Liberty Media Corp. stock for a 10% interest in E! Entertainment (it already owned 80%) and full ownership of the International Channels.

Greenfield added that Comcast would have likely gone after another content giant if one was available. “If there were another company like Disney that was available, they [Comcast] would be interested,” he said.

That lack of availability also seemed to sum up the market for cable systems in 2004.

According to Greenfield, the reasons behind the lack of cable systems deals last year were twofold: the scarcity of attractive properties and the ongoing auction for Adelphia Communications Corp.

WAITING FOR ADELPHIA

“Everyone is waiting to see how the pieces fall on Adelphia,” Greenfield said. “Nobody wants to step up and do anything substantial.”

Henderson said that once the Adelphia situation is resolved — expected by the end of the year — there will likely be a resurgence in the market for cable systems.

Adelphia put itself on the block in April, and said in December that it expects final bids to come in mid-January. The MSO has said it expects to make a final decision on whether to sell or emerge from bankruptcy as a new entity by the end of the first quarter.

Adelphia is expected to attract prices in the $17 billion to $20 billion range, placing a value of between $3,269 and $3,846 each on 5.2 million subscribers. So far, more than 40 parties have expressed interest in the properties, including several private equity firms and Time Warner and Comcast.

Most industry watchers expect the joint bid by Time Warner and Comcast to be the ultimate winner, although how the systems will be broken up remains a mystery.

In September, Adelphia split itself into seven separate pieces ranging in size from 500,000 to 1.5 million subscribers, in an effort to facilitate broader interest. Whether Time Warner/Comcast will buy the entire company, or just pieces, is unclear.

But no matter how Adelphia is carved up, it is likely to fuel additional M&A activity in 2005. It is believed that Time Warner will keep systems near its existing clusters, exchange others with Comcast in return for Comcast’s 21% stake in Time Warner Cable, and sell off the rest.

Henderson said that the Adelphia deal could also kick-start the sale of other systems, in particular Insight Communications Co.

Comcast owns 50% of Insight through a partnership called Insight Midwest. At any time after Dec. 31, 2005, either party has the right to trigger a dissolution of the partnership.

LOOKING TO CHARTER

Henderson added that the private equity firms that are left out of the Adelphia auction could turn their attention to Charter — which has been trying to sell non-strategic systems with about 250,000 customers for more than a year — Cablevision, and even second-tier MSO Mediacom Communications Corp.

Cablevision has been rumored as a take-over target for years and nothing has happened. But it may be involved in a big deal this year after all.

On Dec. 21 Cablevision announced it would suspend the planned spin-off of its Rainbow Media Entertainment unit, and would seek strategic alternatives for its Rainbow DBS satellite unit.

Most analysts took that to mean Cablevision would either shut down or sell Rainbow DBS, which has long been a drag on its stock. EchoStar Communications Corp. is the likely buyer, because it lacks satellite capacity, especially for HDTV, and has an existing satellite at the 61.5-degree slot, the same location where Voom’s satellite is in orbit.

Deals of the Year
Cable-related mergers and acquisitions in 2004
Buyer Seller Property Price
Cox Enterprises Cox Communications 38% of CCI Stock $8.5 billion
Sony-led Consortium Metro-Goldwyn-Mayer MGM $4.9 billion
Atlantic Broadband Charter 230,000 customers $735 million
Comcast Vulcan Programming TechTV $300 million
Susquehanna Comm. RCN 30,000 subscribers $120 million
Source: Multichannel News research

September