Cable Operators

Beyond Adelphia, Cable Deals Were Few

1/05/2007 7:00 PM Eastern

The cable-systems deal market was dominated in 2006 by one deal, and it was a doozy — the $17.4 billion joint acquisition of Adelphia Communications by Time Warner and Comcast.

But for the most part, systems deals in 2006 were few and far between, with the next largest cable-system deals below the $1 billion mark — perhaps another example of how industry consolidation has limited the number of properties available for sale.

Biggest Deals of 2006
Two big deals dominated a short list of sizeable cable and satellite transactions last year.
Buyer Seller Price Subscribers
Time Warner/Comcast Adelphia $17.4 billion 4.8 million
Liberty Media DirecTV $11 billion 15.5 million
Avista Capital WideOpenWest $800 million 357,000
Suddenlink Charter $770 million 240,000
Comcast Suscom $735 million 225,000
Source: Company and published reports

SUDDENLINK WAS BIG

Aside from the Adelphia deal, the next biggest cable-systems acquisition in 2006 was Suddenlink Communications’ $770 million acquisition of 240,000 subscribers in West Virginia and Virginia from Charter Communications.

On the satellite side, Liberty Media finally ended speculation on how it would monetize its 19% voting interest in News Corp., agreeing in December to acquire News Corp.’s 39% interest in DirecTV and three regional sports networks for the voting stock and $550 million in cash. That deal, valued at about $11 billion, is expected to close in the first half of 2007.

But for most of the year, the cable-systems deal market was characterized by smaller deals, including Comcast’s $735 million acquisition of Susquehanna Communications’ 225,000 subscribers in April, and private-equity firm Avista Capital Partners’ estimated $800 million purchase of overbuilder WideOpenWest.

Miller Tabak media analyst David Joyce said operators were likely waiting for the Adelphia deal to close before making acquisitions. With that deal done, Joyce believes that there will be another consolidation wave in the industry in 2007, although on a much smaller scale.

Joyce said in an interview that he expects smaller operators like Bresnan Communications, Suddenlink and larger, privately held operators like Cox Communications and Advance/Newhouse Communications to be more involved in systems deals and swaps in 2007.

“It’s not going to be a big year in terms of the size of deals,” Joyce said. “But I think you’ll see a lot of smaller systems swaps.”

RATIONALIZING

UBS Securities cable debt and equity analyst Aryeh Bourkoff said 2006 was more of a rationalization year for operators, with several engineering swaps and sales that better clustered their footprints. And he believes another large consolidation wave is not that far off in the future.

“2006 was actually characterized by more clean-up and opportunistic divestitures from companies like Cox and Charter which will give way toward more consolidation activity and expansion,” Bourkoff said.

Bourkoff said that even with the wave of cable consolidation in the late 1990s and earlier part of the decade, the cable business is still relatively fragmented.

While the industry is dominated by five top operators — Comcast, Time Warner Cable, Charter, Cox and Cablevision Systems, accounting for nearly 80% of the 65.6 million cable homes nationwide — there are more than 1,000 smaller operators (many with fewer than 100 subscribers) scattered across the country.

“Ultimately, you will see three surviving cable companies of size — Comcast, Time Warner and a private-equity owned rural consolidation play,” Bourkoff explained. “That could transpire over the next few years.”

Bourkoff said he expects the rural play to be a rollup of privately and publicly held operators that already have private-equity backers, like Bresnan Communications, RCN, Knology Holdings, Suddenlink and others. As far as other larger operators like Charter, Bourkoff sees them as eventual targets of strategic operators like Time Warner and Comcast.

Fueling that thesis is the expectation that Time Warner Cable will be spun off as a separate cable stock this year. With a pure cable deal currency, Time Warner Cable could begin its own acquisition binge, most likely starting in 2008.

CABLEVISION IN SIGHTS

Time Warner Cable’s first target would probably be Cablevision, although any potential deal would depend on whether the Bethpage, N.Y.-based company goes private — that possible transaction is still pending — and whether its ruling Dolan family wants to sell. Bourkoff also sees Time Warner setting its sights on operators like Charter and Insight Communications.

Although Insight is half-owned by Comcast — a partnership that could be dismantled in 2007, with Comcast taking half of Insight’s 1.3 million subscribers — Bourkoff said the Insight systems could ultimately be a better strategic fit for Time Warner, which has systems near Insight strongholds in Illinois, Ohio and Kentucky.

“I think 2006 was characterized as a positioning of the asset base in terms of getting ready for the bundle, and operational improvements,” Bourkoff said. “In 2007, the operational strategies for most of the cable companies look similar – focused on the bundle priced around $100 with all the products looking very similar. There will continue to be some cleanup work in terms of aligning the portfolio of properties more efficiently across the country. Then, I think the next stage, as we go into later this year and in 2008, will be more of a concentration of assets around a few names.”

CABLE BUYING CONTENT

Content will continue to be a target of cable operators, a continuation of deals that were struck in 2006, like Comcast’s purchase last year of the remaining 39% of E! Networks it didn’t already own for $1.23 billion and Time Warner Inc.’s purchase of the remaining 50% of Court TV from Liberty Media for $735 million.

Joyce expects more content acquisitions in 2007, augmenting operators’ existing offerings.

For example, Joyce expects Comcast to eventually make a play for movie studio Lionsgate, which provides content for Comcast’s FearNet horror web site. “That is easily digestible for Comcast,” Joyce said.

Joyce also expects Cablevision to divest its Rainbow Media Holdings programming unit. While media reports last week had Rainbow being the subject of informal talks with Liberty about a possible sale, Joyce doesn’t expect a Rainbow to happen until after the Dolan family takes Cablevision private. That would enable the family to reap all of the proceeds of a sale and use it to pay down debt.

September