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Cable Operators

Charter Pulls Back L.A. Systems

9/12/2011 12:01 AM Eastern

Charter Communications has quietly
pulled its Los Angeles systems off the market, after receiving
a series of bids below its target price.

Charter put the properties up for sale in April, hiring
Goldman Sachs and Citigroup to run the process. But, according
to sources familiar with the matter, bids came in
substantially lower than the $2.5 billion the company was
hoping to attract for the systems. Those same sources said
that while several companies did participate in the first
round of bidding, Charter informed the parties earlier last
month that the auction process is canceled.

Charter executives declined comment.

‘10’ MULTIPLE STOOD OUT

The price is what seems to have caused some potential
suitors to balk. At $2.5 billion, the L.A. systems would be
valued at more than 10 times cash flow, making the deal
one of the pricier transactions in recent memory. In the
past 9 months, cable systems have sold for between 6 times
and 8 times cash flow, although none were in a top urban
market like Los Angeles.

Miller Tabak media analyst David Joyce had estimated
Charter Los Angeles was worth between $1.8 billion and
$2 billion. Some observers had said Charter would sweeten
the pot by including its Fort Worth, Texas, operations with
about 178,000 customers in any deal, pushing the total value
up another $400 million to $800 million. Fort Worth would
also be most attractive to Time Warner Cable, which has
about 600,000 subscribers in nearby Dallas.

Charter has about 539,000 subscribers in California and
Nevada (about 377,000 in the Los Angeles area). Sources
earlier this year said the company had tried to engineer a
swap with Time Warner Cable —
L.A. for TWC’s Wisconsin systems
— but the larger MSO balked at the
deal. TWC has about 1.8 million
subscribers in Los Angeles, but
didn’t feel adding to that footprint
was worth giving up its Wisconsin
properties. Charter has about
537,000 subscribers in Wisconsin
that would have meshed nicely
with TWC’s 560,000 subscribers
in Green Bay, Milwaukee and
Appleton.

With that avenue blocked, Charter
began interviewing investment
bankers to run an auction process for
the systems in April, finally deciding
on Goldman Sachs and Citigroup.

TWC: AVOIDED AUCTION

According to some industry executives,
Charter could still entertain
offers from potential suitors, just
not within a formal auction structure.
They noted that is how Time
Warner Cable dealt with its most
recent acquisition, Insight Communications.

TWC agreed to pay $3 billion in cash for Insight’s
700,000 video customers in Indiana, Ohio and Kentucky
in mid-August. But TWC did not participate in Insight’s
formal auction process, which some industry executives
said saved it about $250 million.
Several industry executives with
knowledge of the process said that
TWC first approached Insight prior
to the formal auction, offering
$3.25 billion for the systems. Insight’s
owners — private-equity
giants Carlyle Group, Crestview
Partners and MidOcean Partners
— turned them down in favor of the
auction process, which after five
months produced no solid winning
bidder. When TWC stepped back in
after the formal process had ended
in July, they ended up getting
the properties at a relative bargain.

Whether TWC employs the
same strategy with Charter for its
L.A. systems remains to be seen.
But some investment bankers said
there is something to be learned
from the Insight auction.

“Time Warner Cable is very careful
about what they pay,” the investment
banker said. “If you own a
property where Time Warner is the
logical buyer, don’t think it’s going to be above 8 times [cash
flow]. That’s the lesson from the Insight deal.”

September