Cox Communications Inc. added to the growing list of
mega-deals this year with last week's agreement to pay $4 billion in cash, stock and
assumed debt for Tyler, Texas-based TCA Cable TV Inc.
Cox's pending purchase of TCA, which is slated to
close by the end of the year, is about the 10th multimillion-dollar-plus cable
deal since January and the second for Cox in one month.
On the same day when AT&T Corp. topped Comcast
Corp.'s buyout offer for MediaOne Group Inc., Cox announced its agreement to buy
Media General Inc.'s northern Virginia systems in a cash deal valued at $1.4 billion,
or $5,400 per subscriber
Since January, the cable industry has seen such MSOs as
Century Communications Corp., Renaissance Media Group LLC, InterMedia Partners, Rifkin
& Associates Inc., MediaOne, FrontierVision Partners L.P. and Harron Communications
Corp. gobbled up.
Unlike many of those deals, which focused on expanding the
purchaser's existing geographic clusters, the TCA deal represents a shift in strategy
for Atlanta-based Cox.
Sure, Cox gains scale with the addition of TCA's
883,000 subscribers, vaulting it past Adelphia Communications Corp. as the pro forma No. 4
MSO in the nation, with about 5 million customers. But TCA's systems are relatively
small and quite a ways from Cox's existing cable properties.
Cox also gets control of VPI Communications Inc., an
advertising-insertion company doing business as CableTime, which provides turnkey
advertising services to 82 MSOs nationwide representing 3.5 million subscribers.
The deal marks the demise of the only sizable publicly
owned cable operator that also turns a profit and pays dividends to its shareholders.
Most MSOs lose money due to heavy investments in buying and
building plant. But TCA has kept its debt costs low, and its ad-sales business is
profitable.
Last year, TCA reported a $42.5 million profit, equal to 85
cents per share of stock. The company also paid a cash dividend of 32 cents per share.
Cox sees the TCA acquisition as a way to break into
secondary markets, and it is believed that TCA and its management team -- headed by
chairman Fred Nichols -- will serve as an acquisition vehicle for Cox to further expand
into those markets.
"From our standpoint, putting the two companies
together makes a tremendous amount of sense," Cox president James Robbins said during
a conference call with reporters. "There remain growth opportunities in our business.
We will continue to pursue midmarket opportunities, as well as large-market
opportunities."
The vehicle for those midmarket opportunities will be TCA.
Nichols and his management team will remain with the company once it merges with Cox, and
it is a good bet that Nichols will continue TCA's proven strategy of accumulating
systems that have fairly modern infrastructures and the opportunity to provide advanced
services to customers.
"TCA excels at operating smaller, nonurban
markets," Stephens Inc. analyst John Corcoran said. "Its average system size is
12,000 subscribers. Cox appreciates that in order to survive, it needs to do a couple of
things: have a low-cost operating structure and a management team that understands the
customer base, providing not only services they can afford, but services they want. It
sounds like Cox is not going to make demands on TCA that it can't handle."
Corcoran added that there is still ample opportunity in
midsized markets -- he estimated that between 20 million and 25 million cable subscribers
are in systems with fewer than 50,000 customers. And TCA has a proven track record of
managing small systems well.
"I think TCA managing this acquisition strategy for
Cox at the midmarket level is a shrewd move," Corcoran said. "[TCA] is not just
good at it: It's great at it."
Corcoran pointed to TCA's high margins despite having
one of the lower revenue-per-subscriber numbers in the industry. The company, he said, is
able to do this by managing costs very well.
"This company is not about having big [management]
perks or too many people," Corcoran said. "And it can cluster a lot of small
systems near one another. It was into clustering well before Wall Street heard about
it."
It was that attractive balance sheet that helped to lure
Berkshire Hathaway Inc. to TCA earlier this year. Berkshire, headed by investment guru
Warren Buffet, purchased 4 million shares of TCA stock in February, making Buffet the
company's fourth-largest shareholder, with 8.1 percent of TCA's outstanding
stock.
Buffet could prove to be a conduit between TCA and a
potential acquisition target -- Cable One, a division of The Washington Post Co.
Hoak Breedlove Wesneski & Co. analyst Murray Arenson
said Cable One would be a nice fit for TCA.
"There is a whole lot of value to be unlocked on the
buy-side [at Cable One]," he added.
Corcoran agreed that Cable One would fit well with TCA, but
he cautioned that the price the system might attract could be too high.
'The question is: At what price would Cable One become
interested in exiting its position?" Corcoran said. "It is a quite natural fit,
but one-half of the equation is price. The bottom line is if you give up pricing
discipline when you do an acquisition, you have to manage those systems a whole lot
better."
In an interview last week, after the TCA deal was
announced, Cable One president Thomas Might said selling the company, although an
alternative, is something his bosses are not interested in at the moment.
"The Post Co. is very happy to be in the
business," Might said. "There's a lot of contentment with the operations
and performance of Cable One at The Washington Post Co."
Still, Might said, the dramatic increases in cable
valuations put pressure on the Post, as well as himself, to at least consider selling out.
While TCA has one of the better balance sheets in the
industry, one thing that spurred the merger with Cox was TCA's belief that it could
not enter the telephony market effectively.
Nichols said that although he believed TCA could make it on
its own, providing telephony was another matter.
He added that the MSO had investigated doing telephony on
its own, but the time line to provide telephone service has compressed rapidly ever since
AT&T Corp. and Tele-Communications Inc. announced their merger last year.
"When AT&T and TCI announced their combination, I
don't think there was a cable operator in the country that didn't stand back and
say, 'Where are we?'" Nichols said.
"We had a fine video and entertainment company, but we
didn't have a chance of doing telephony in the next 24 to 36 months without a
combination."
Arenson said telephony probably played a role in TCA's
decision to sell out, but he added that the price the company was able to attract was also
a major factor.
"[Telephony] was part of it, but mostly, I think, they
got an offer they couldn't refuse," Arenson said. "This gives them the
opportunity to grow beyond what they were capable of before."
According to the agreement, TCA shareholders will receive
$63.89 per share -- $31.25 in cash and 0.3709 shares of Cox class A common stock -- for
each TCA share they own. Cox will also assume about $736 million in TCA debt.
The total deal works out to about 16.1 times TCA's
estimated 2000 cash flow, or approximately $4,115 per subscriber.
Arenson said the deal was a good one for both companies, as
TCA gets a deep-pocketed partner and Cox gains scale.
"I didn't think as early as a week ago that [TCA]
would be able to pull off something like this," Arenson said. "This gives Fred
Nichols the chance to try to build this midsized market. He knew TCA couldn't grow to
2.5 million to 3 million subscribers. Now perhaps it can do that."
