In The News
SOURCE: Multichannel News

BUYERS WANT QUALITY
Size Matters Less, Small-System Owners Say

By Mike Farrell
Multichannel News
9/22/2003

New York- Cable valuations are on the rise, given some recent systems deals, but buyers are paying more for quality, not size, according to an industry panel last week.

Two recent deals -RCN Corp. sold its Carmel, N.Y., system to Susquehanna Communications Inc. for about $4,000 per subscriber, and Charter Communications Inc. sold its Port Orchard, Wash., system to Wave Division Broadband for about $3,600 per subscriber - have helped boost overall valuations into the $2,700 per subscriber range.

That's still a far cry from peak valuations in the 1990s, when cable systems sold for as much as $5,000 per subscriber. But it is an improvement over the past few years, when systems sold in the $2,500-per-subscriber range.

Behind the numbers
In a presentation at the Kagan Broadband Summit here last Tuesday, Kagan Media senior vice president and senior analyst Robin Flynn said that current valuations get higher when new services are added on. According to Flynn, core cable operations are valued at $2,300 per subscriber or 10 times cash flow.

Adding digital boosts that valuation to $3,000 (12.1 times cash flow) and with high-speed data, the value rises to $4,200 per subscriber (12.4 times cash flow).

With telephony service, the valuation increases to $4,600 per subscriber (13.4 times cash flow) and commercial services add another $100 per subscriber to the valuation.

Flynn estimated that revenue for new services, especially voice-over-Internet protocol, will rise substantially in the coming years. Flynn projected that cable revenue will triple from $52.5 billion in 2003 to $118.2 billion by 2013, largely because of advanced services and voice-over-Internet protocol telephony.

Advanced services made up about 24% of cable operators' total revenue base in 2003, but will increase to 40% of total revenue by 2013, Flynn said. Key to that will be VoIP, which will grow to an $8-billion (annual revenue) market in the next decade, she added. Cable-telephony subscribers, estimated to be about 1.8 million by 2006, will rise to 17 million by 2013, Flynn said.

Galaxy Cable Inc. CEO Ron Dorchester, speaking at the Kagan Broadband Summit here last Tuesday, said that average valuations can be deceiving.

Dorchester said that in the past two years, about 62 cable systems with a combined 14.3 million subscribers were sold for a total of $53 billion. That works out to an average valuation of $3,706 per subscriber.

Take out Comcast Corp.'s acquisition of AT&T Broadband in November 2002, though, and Dorchester said that three transactions for more than 100,000 subscribers were made in that period, at a value of $2,275 per customer. The highest valuation was for the three deals that were done for systems with between 25,000 and 50,000 subscribers ($3,219 per customer). The lowest valuation was for the seven deals done in the period for systems that had less than 1,000 subscribers ($524 per customer).

This year, Dorchester estimated that 27 systems deals were done, adding that valuations for small systems - deals for under 1,000 subscribers - doubled to $1,085 per customer.

Not prime time
But he doesn't expect valuations to return to the heyday of the 1980s and 1990s. One of the founders of Prime Communications Inc., Dorchester started off by telling the audience that Prime paid 50 times cash flow for its first cable acquisition.

"The only way we got financing was by having the [systems] broker throw in his commission and become a partner [in the deal]," Dorchester said.

But the Galaxy Cable president also dismissed the notion that the deal market is dead.

"I don't think the deal market went away and now it's back," Dorchester said. "Deals are out there with one difference - there are significant numbers of strategic buyers and there are some interesting prices being paid.

"Vista III Media president and CEO Neil McHugh, who has about 25,000 subscribers in mostly rural areas of Mississippi, said that while buyers are looking at small markets in a different light, they still have to be reasonably upgraded.

"If you don't have digital and two-way high-speed data, you're going to lose customers to satellite," McHugh said.

McHugh also looks for systems that are large enough where he can eliminate at least some headends. Where subscriber growth is flat, he looks for new-home growth.

"In markets where there is home growth, in two years they can support $75 in revenue per month, per home. Then you can build real clusters. These characteristics all move to build value internally.

"McHugh used one of his own systems, in New Albany, Miss., as an example. Before the New Albany market was rebuilt, it had 4,249 customers, dropping minimally to 4,242 customers after the upgrade. But by eliminating headends and offering digital and high-speed data - which went from zero to 743 and 243 customers, respectively, Vista increased its average monthly revenue per subscriber by about 27% from $38.72 to $49.17.

Unsexy business
DH Capital LLC partner Mark Thorsheim said that while the rural market is not "sexy," there is money to be made in it.

"If you can put a collection of systems together, there are some efficiencies to be gained," Thorsheim said. "As long as you're buying rate is 2, 3, 4 or 5 times EBITDA (earnings before interest, taxes, depreciation and amortization), as opposed to 10 to 14 times.

"Daniels & Associates executive vice president Greg Ainsworth said cash-flow multiples for cable systems are rising. He suggested that averages multiples are about 12 times 2003 cash flow and above for rebuilt systems, up from the high-single digit multiples of just a few years ago.

"As operators have increasing success at providing upside opportunity, especially in telephony, the multiples could go up from there," Ainsworth said.