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Cable Operators

Orange Balks at Cerritos Buyout

1/16/2005 7:00 PM Eastern

Cerritos, Calif., once the keystone of an ambitious interactive video plan by GTE Corp., is on the block again after a deal to sell the 8,000-subscriber cable system to startup Orange Broadband fell through.

Orange Broadband had agreed in May to purchase the system from Knology Inc. for $14.8 million in cash. Knology said Orange Broadband was unable to reach an agreement with the city of Cerritos for the franchise transfer, which prompted the would-be buyer to terminate the deal.

'PRESSURE POINTS’

Orange CEO William Schuler did not want to get into specifics concerning the Cerritos deal last week.

“There are a lot of dynamics going around when you are trying to buy a system from a company and simultaneously get a franchise,” Schuler said. “There are a lot of pressure points and a lot of things going on, but fundamentally we could not reach an agreement with the city.”

City officials in Cerritos indicated they did everything in their power to complete a deal with the proposed new provider but just ran out of time by the Dec. 31 due date for the completion of the acquisition by Orange Broadband.

Annie Hylton, a city spokeswoman, said the cable plant in the city is only 550 Megahertz and has not been improved to allow for provision of cable-modem service.

Consumers have access to only 80 channels, she added.

After Cerritos was notified of the proposed sale last September, a community needs assesment was completed. It found that citizens’ No. 1 request was for broadband plant.

Unfortunately, city officials hadn’t come to an agreement on many specifics before window for the sale elapsed, she said.

Schuler said the Cerritos system needed a lot of work — but the startup cable company was willing to upgrade the plant to 860 MHz.

“We were willing to go in with a full-blown, state-of-the-art HFC rebuild,” Schuler said. “That was not an issue.”

FIRST DEAL

The Cerritos system would have been the first cable operation for Charlotte, N.C.-based Orange Broadband, formed in 2003 by 22-year cable veteran Schuler.

Schuler had been CEO of Carolina Broadband, a Charlotte-based overbuilder that planned to build out networks in several communities there. It folded in 2001, having failed to secure debt financing.

Some of Orange’s current backers were the same private equity groups that had invested in Carolina Broadband: JP Morgan Partners, M/C Venture Partners, Columbia Capital and Oak Investment Partners.

Orange has previously been active in the deal market.

It made a bid for the Western Integrated Networks LLC assets in Sacramento, Calif. (sold to SureWest Communications), as well as for RCN Corp.’s Princeton, N.J. assets (sold to Patriot Media) and Carmel, N.Y., system (sold to Susquehanna Media).

Schuler said while it was disappointing the Cerritos deal could not be worked out, Orange has its sights set on other properties.

“This [Cerritos] was not the be-all and end-all for us, it was just one stepping stone along the way,” Schuler said. “We’ve been multitasking and parallel tracking, looking at a variety of properties.”

He declined to comment what systems Orange might be looking at.

Knology was expected to revisit the past bidders for the Cerritos property, and could find another buyer “relatively quickly,” UBS Investment Research analyst Aryeh Bourkoff said in a note last week. But he also downgraded his equity rating on Knology to “Neutral2” from “Buy2” after the sale fell through, saying it increased the risk for Knology’s liquidity profile.

Possible candidates include WOW (formerly WideOpenWest) and Wave Broadband, the Seattle-based MSO that last year purchased Avenue TV Cable Services Inc., a small cable operator with about 9,100 subscribers) in nearby Los Angeles.

Knology’s share price slid from $3.32 on Jan. 10 to $2.85 on Jan. 11, down 47 cents (14%), on news of the sale falling through.

Knology bought the Cerritos system in December 2003 from Verizon Media Ventures Inc., as part of a larger $17 million deal in which Knology acquired systems in Pinellas County, Fla. with about 53,000 subscribers.

“We are disappointed in Orange Broadband’s decision to no longer pursue the Cerritos franchise, however we are pleased with the interest we have received in the Cerritos property, and we are confident in our ability to reach an agreement with another buyer for the Cerritos assets,” Knology CEO Rodger Johnson said in a prepared statement.

“We believe the city of Cerritos is excited about the opportunity to upgrade the cable system in Cerritos and is looking forward to negotiating a franchise providing for these system upgrades.”

Knology said it will continue to engage DH Capital LLC as its exclusive adviser in its efforts to sell the Cerritos property.

GTE DREAMS

At one time, GTE had big plans for cable, saying it wanted to be in 66 cable markets, passing 7 million homes, by 2004. It launched Cerritos — one of its flagship operations and home to GTE MainStreet, an interactive news and information service, and GTE CenterScreen, a pay-per-view suite — in 1987.

It acquired or built systems in California, Florida and Hawaii, amassing 123,000 customers, before merging into Verizon in 2000, which wasn’t interested in maintaining cable holdings.

Verizon had originally signed a deal to sell the systems to Adelphia Communications Corp. in 2002, but that deal was scrapped after an accounting scandal forced Adelphia into bankruptcy.

Linda Haugsted contributed to this story.

Cable In Cerritos: A Short History
How an ITV innovator has changed hands:
Source: Multichannel News research
February 1987: Cerritos signs contract with telco GTE Corp. and Apollo CableVision to build an innovative cable system that would come to include GTE MainStreet, an interactive news and information service, and a pay-per-view suite called GTE CenterScreen. GTE later withstood the cable industry’s challenges to the system’s legality at the Federal Communications Commission.
1995-96: GTE obtains cable franchises in Ventura County, Calif., and Pinellas County, Fla., and begins to build out cable systems. (GTE later launched a wireless video system in Oahu, Hawaii.)
June 2000: Bell Atlantic Corp. and GTE combine to form Verizon Communications Inc.
July 2000: Verizon starts shopping the former GTE cable systems.
March 2002: Adelphia Communications Corp. agrees to buy former GTE cable systems in Florida and California — including Cerritos — with 67,000 customers from Verizon.
June 2002: Verizon pulls the plug on Adelphia sale because of Adelphia’s legal problems.
July 2003: Knology Inc. agrees to buy the former GTE systems from Verizon. The sale closes in December.
January 2004: Knology raises $56 million in an initial public offering, a little more than a year after emerging from Chapter 11 bankruptcy reorganization.
May 2004: Knology agrees to sell Cerritos system, with 8,000 customers, to startup Orange Broadband Inc.
January 2005: Orange Broadband terminates deal, blaming difficulties reaching agreement with Cerritos city officials over a franchise transfer.

September