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Cable values may tick higher if buyout firms enter bidding

by Chris Nolter | Published June 6, 2012 at 4:44 PM

The sale of WaveDivision Holdings LLC marks a re-emergence of financial buyers in cable auctions, and reopens questions about how cable assets are valued in private and public markets.

Recent auctions of cable operators such as Bresnan Communications LLC, Insight Communications Co. and Knology Inc. have resulted in sales to other cablers, although Knology's buyer is backed by private equity.

But most recently, Oak Hill Capital Partners and GI Partners said they would purchase WaveDivision from investors including Sandler Capital Management, in a deal announced earlier this month.

Though the parties did not announce a sale price, Craig Moffett of Bernstein Research suggested in a report that the valuation was roughly $950 million, or by his estimate 8 times 2012 Ebitda. An industry source said that the price came to 8.5 times "run-rate" Ebitda, calculated by annualizing the most recent quarter, which would be at the high end of recent sales.

Bernstein Research values Comcast Corp. at 5.5 times 2012 Ebitda, while Time Warner Cable Inc. and Cablevision Systems Corp. have multiples of 5.9 and 5.5, respectively.

"One needs to be careful comparing small systems being swapped between private equity firms and large publicly traded names," Moffett wrote. WaveDivision has a network that is "well upgraded" with attractive demographics and "strong management."

Still, he observed, "the comp set by the WaveDivision sale is nevertheless dramatically higher than public equity valuations."

Cable operators, which can factor savings and other deal benefits into their bids, have won several recent prominent auctions.

Cablevision agreed in 2010 to buy Bresnan from Providence Equity Partners for $1.37 billion.

Time Warner Cable purchased Insight from Carlyle Group, MidOcean Partners LP and Crestview Partners LP for $3 billion in a deal that closed earlier in 2012.

WideOpenWest Holdings LLC, which has funds from Avista Capital Partners, is buying Knology for $1.5 billion.

WaveDivision, of Kirkland, Wash., has operations in Washington, Oregon and California. Because WaveDivision is an overbuilder in some markets, competing with the established cable operator, the company's incumbent markets arguably would have supported a higher multiple than 8.5 times annualized Ebitda.

Though cable companies have stepped forward in recent auctions, there is a history of private equity investment in the sector.

Avista bought WideOpenWest in 2006 from Abry Partners LLC and Oak Hill for between $800 million and $850 million.

And Abry has other cable investments. The Boston firm purchased RCN Corp., which had cable and telecom assets, for $1.2 billion in 2010. Abry also put money behind San Marcos, Texas, cable operator Grande Communications Holdings Inc. through a September 2009 recap.

Another portfolio company, Atlantic Broadband, is on the market. Abry and Oak Hill created Atlantic Broadband in 2003 to pick up systems from Charter Communications Inc., which was then controlled by Microsoft Corp. co-founder Paul Allen. The Daily Deal reported in early May that the Quincy, Mass., company hired Credit Suisse Group.

During Charter's 2009 bankruptcy, Apollo Global Management LLC, Crestview Partners and Oaktree Capital Management LP were at the forefront of a bondholder group that invested $1.6 billion in the St. Louis cable operator.

Carlyle Group acquired Insight Communications in a $2.1 billion management buyout in December 2005, and sold stakes to Crestview Partners and MidOcean Partners in 2010.

Spectrum Equity Investors and cable entrepreneur Steven Simmons formed Patriot Media & Communications CNJ LLC in 2002 with management to acquire cable systems from RCN. Spire Capital Partners LLC later took a position in the company, which it sold to Comcast for $483 million in 2007.

Of course, the sale of WaveDivision is not necessarily a model for other auctions.

Just because Oak Hill Capital and GI Partners prevailed in the bidding, which was said to include other cable operators, does not mean that PE will consistently place high bids.

However, the sale to a financial group may validate the outlook for growth in the industry.

Moffett noted that a disconnect between public market and private market valuations could stunt the motivation for cable operators to combine with their peers.

"In a market where private valuations are so much higher than public valuations, industry consolidation is unlikely," he suggested.

WaveDivision retained RBC Capital Markets and Waller Capital Corp. The advisers included RBC bankers Randy Wells, Mike Talamantes and Brian Deevy, and Waller's Garrett Baker, Rajive Kumar, James Pierce and Amish Kuvadia.

WaveDivision also retained lawyers from Dow Lohnes PLLC.

Oak Hill Capital retained a Deutsche Bank AG team including Noel Volpe, Stephanie Perry, Prem Parameswaran and Jorida Banda, and Wells Fargo Securities LLC bankers including Stancel Riley, Marc Birenbaum and Battle Moore.

Paul, Weiss, Rifkind, Wharton & Garrison LLP lawyers Ariel Deckelbaum, Eric Goodison, Patrick Campbell and Joel Karansky counseled Oak Hill.

Kirkland & Ellis LLP lawyers Stephen Oetgen and David Dixon represented GI Partners.

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Tags: Bresnan Communications LLC | Craig Moffett | Insight Communications Co. | Knology Inc. | WaveDivision Holdings LLC

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Cable values may tick higher if buyout firms enter bidding

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