multichannel connect
careers
all access

Cable Operators

Time Warner Cable Ends Deal Drought

6/20/2011 12:01 AM Eastern

Time Warner Cable’s five years on the M&A
sidelines came to an end last week, after the nation’s
second-largest cable operator agreed to purchase 70,000
subscribers from NewWave Communications for about
$260 million in cash.

The deal ends what had been a long drought on the
mergers and acquisitions front for Time Warner Cable.
While the New York-based MSO somewhat regularly does
smaller transactions, this is its first systems acquisition
valued at more than $100 million since it jointly acquired
Adelphia Communications with Comcast in 2006. And
according to some sources in the financial community,
this deal also sends a strong signal to other cable systems
that may be on their radar: TWC isn’t going to pay
too much.

According to sources familiar with the deal, the price
represents a multiple of under 8 times cash flow, which
some considered low given that the NewWave assets are
adjacent to existing TWC properties and considered synergistic.

SENDS A STRONG SIGNAL

While Time Warner Cable has been outspoken about
its financial discipline when it comes to acquisitions
— and has reportedly bowed out of another high-profile
systems auction for Insight Communications —
some observers said that this transaction sends a strong
signal that the MSO means business.

Insight is reportedly asking for $3.5 billion to $4 billion for
its 693,000 subscribers, or an estimated 11 times cash flow.

And Charter Communications hired Goldman Sachs and
Citigroup in May to possibly shop its Los Angeles properties,
with about 551,000 subscribers. Time Warner Cable is
the most logical strategic buyer for both of those properties.

While Time Warner Cable has been silent on Insight and
Charter, in a statement, chief operating officer Rob Marcus
touted the financial aspects of the NewWave transaction.

“This deal is yet another example of our disciplined approach
to capital allocation and M&A,” Marcus said in the
statement. “Taking into account a full tax step-up and signifi
cant operational synergies, the deal enables us to expand
our cable footprint at a purchase price that compares
favorably with Time Warner Cable’s current trading multiples.
We look forward to serving these customers and
bringing to them all the dynamic products and services
Time Warner Cable has to offer.”

In a research note, Miller Tabak media analyst David
Joyce wrote that the deal should be accretive to Time Warner Cable. He estimated that the price works out to $3,714
per subscriber, which matches the $3,706 TWC is trading
at on an enterprise value-per-subscriber basis. In addition,
Joyce wrote that the tax step-up means that Time Warner
Cable can increase its depreciation expense and lower
its cash taxes. Operating synergies could include lower
programming costs — Joyce estimates that TWC could
lower NewWave’s programming costs by about 10% per
subscriber.

“And since TWC owns other cable systems in the region,
there could be some managerial cost savings as
well,” Joyce wrote.

FIRST FORAY INTO TENNESSEE

The NewWave properties are located in Kentucky and
western Tennessee. Time Warner Cable has about 100,000
customers in southern Kentucky; this will be its first foray
into Tennessee.

The deal is expected to close in the fourth quarter. RBC
Daniels acted as exclusive financial adviser and K&L Gates
LLP acted as legal adviser to NewWave, which is exiting
those states, on this transaction. Edwards, Angell, Palmer
& Dodge LLP served as legal adviser to Time Warner Cable.

NewWave was founded in 2003 by the Gleason family
and Pamlico Capital and after the deal is completed will
serve about 80,000 subscribers in Illinois, Indiana, Missouri
and Arkansas.

“This transaction allows NewWave to realize a return for
our investors while allowing our team to concentrate on
our ongoing operations in our other service areas,” New-
Wave CEO Jim Gleason said in a statement.

“The NewWave team has done a tremendous job of improving
the overall products and service to our customers
in Kentucky and Tennessee since acquiring these systems
and we thank them for their efforts.”

September