Signs of M&A Return May Be Misinterpreted

Apr 4, 2005  •  Post A Comment

To see all of the hubbub surrounding the auction for Adelphia Communications, one might conclude that the mergers-and-acquisitions craze has once again visited the world of cable.

Indeed, the list of candidates chasing Adelphia and its 5.3 million subscribers is a veritable who’s who of heavy hitters, in both the cable space and the private-equity arena. They include multiple system operators Comcast Corp. and Time Warner Cable, private-equity firms Kohlberg Kravis Roberts & Co. and Providence Equity Partners and a raft of smaller cable operators and private-equity players. All appear to be making a big bet that the cable sector is poised to be a cash cow for years to come, especially now that cable plant rebuilds are largely over and most MSOs are offering advanced services such as high-speed data, high-definition television and phone service.

Another sign that there could be keen interest in the cable sector: Though Adelphia’s systems are regarded as only average in terms of quality and location, many analysts believe a final transaction price could peg Adelphia’s per-subscriber value at between $3,200 and $3,500-a price range above industry averages.

But the apparent excitement doesn’t stop with Adelphia. Cablevision Systems is another cable operator that has market players excited about the fulfillment of a long-held dream that the cable operator doing business mainly in the New York area might one day be sold to a larger operator, such as Time Warner or Comcast. The recent internal strife between members of the controlling Dolan family has only turned up the heat on speculation that a sale is in the offing.

Yet even if Adelphia and Cablevision are sold, analysts say one can’t conclude that the M&A madness that this year has gripped everything from the software sector to the telecommunications industry has moved to the cable sector. Most analysts suggest that the consolidation craze in the cable sector has long since passed.

What Adelphia and Cablevision represent instead are unique situations that could result in a sale.

Adelphia, for example, is under federal bankruptcy protection and has explored a sale as a way of repaying creditors affected by a massive financial fraud and accounting scandal first discovered in 2002. And while Comcast and Time Warner, whose joint bid is considered the offer to beat at this point, would get bigger as a result of winning the Adelphia race, increasing their respective sizes is only part of the motivation to go after Adelphia.

Comcast now holds a 21 percent stake in Time Warner Cable, and sources say the company hopes that the Adelphia deal can facilitate a swap of sorts, in which Comcast gets specific cable systems in exchange for the Time Warner Cable stake.

The story is different at Cablevision, which operates cable systems mainly in the New York area. While Time Warner has long had an interest in snapping up Cablevision’s systems to further bolster its presence in the New York area, Cablevision has rebuffed Time Warner’s overtures.

Analysts believe Cablevision Chairman Charles Dolan’s tune might be different this time because he is locked in a pitched battle with his son, CEO James Dolan, and several board members over the fate of Voom, a struggling satellite service that Charles Dolan has championed but that James Dolan and other board members have sought to shut down. If Charles Dolan finds it difficult to obtain outside funding for Voom, analysts believe he will sell his stake in Cablevision in order to keep Voom going.

Emergence of Clusters

Once those two companies’ respective situations are re-solved, though, don’t expect other cable companies to hang out a for sale sign, analysts say.

Why? Analysts say the consolidation wave has pretty much played itself out at this point, with the key players pretty much owning what they need.

That’s a far cry from as recently as six years ago, when smaller cable operators were being snapped up to create larger companies. The trend took place for most of the 1990s and culminated in 2002 with the $54 billion purchase by Comcast of AT&T Broadband, which has resulted in Comcast being the largest MSO, with 21.5 million subscribers, most of whom are located in the top 25 U.S. markets.

Since that mammoth deal, the industry’s focus has been on building and creating clusters, obtaining the kinds of efficiencies that cable operators get when they have a strong regional presence.

“From a pure M&A perspective, Adelphia and Cablevision are the last two large chunks for sale,” said Alan Bezoza, a cable analyst at Friedman, Billings, Ramsey in New York. “I suspect you would see operators trade properties” on the belief that cable operators can squeeze out efficiencies better when systems are clustered together.

However, the emergence of clusters has changed the industry’s dynamics. Whereas once any cable system was a possible target, buyers, especially the large MSOs, are becoming increasingly picky, said Craig Moffett, a cable analyst at Bernstein.

“We are on the brink of a real bifurcation in the cable market, in which you have well-clustered cable systems in metro areas and then everything else,” he said.

That means large operators such as Comcast and Time Warner will increasingly focus on buying cable systems that enhance already existing clusters, leaving private-equity players interested in buying cable systems to choose among smaller and rural cable systems not part of clusters.

“It has been a very long time since an attractive, well-clustered cable system has been available to private-equity players,” Mr. Moffett said.

Another trend that could keep a lid on consolidation in the cable market is that of companies going private. With the stock market having beaten up cable operators for the past several years, a growing number of MSOs are looking at exiting the public market altogether. Analysts say that while such a move illustrates management’s commitment to the cable business, it also sends the message that large-scale mergers-the kind funded through stock deals-are not in the offing.

Cox Communications started the trend last year when its controlling shareholder Cox Enterprises paid $8.5 billion to purchase the 38 percent of Cox Communications that it didn’t already own. Just a few weeks ago Insight Communications, a smaller cable operator, an-nounced that its management was teaming up with private-equity firm The Carlyle Group to take Insight private.