Charter Communications continued its shopping spree last
week, cutting deals for two more cable operators -- Avalon Cable Inc. and Vista Broadband
Communications LLC -- for a combined price tag of about $970 million.
The prices appear to indicate that cable valuations are
holding steady at their current elevated levels.
Last week, Charter agreed to buy Avalon -- which has about
260,000 subscribers in Michigan and New England -- in a cash and debt deal valued at about
$845 million.
A few days later, the St. Louis-based MSO agreed to buy
Vista -- with just 26,000 subscribers in Smyrna, Ga. -- for what sources said was about
$125 million.
Vista's system, owned by Boston Ventures Limited
Partnership V, is located about 15 minutes from Atlanta, adding to Charter's
300,000-subscriber cluster in Georgia. The system is undergoing an upgrade to
750-megahertz, two-way capacity.
The Avalon deal works out to about $3,463 per subscriber,
or about 19 times annualized 1999 cash flow of $45 million, CIBC Oppenheimer Corp. analyst
Aryeh Bourkoff estimated. Vista went for about $4,800 per subscriber.
Vista and Avalon weren't around for very long. Vista,
run by cable veteran Neil McHugh, closed its deal to buy the Georgia properties from Cable
Holdings Inc. in April 1998. And Avalon bought the Michigan systems from Cable Michigan
Inc. about one year ago.
They joined a growing list of start-ups that have agreed to
sell out to Charter, which is owned by Microsoft Corp. cofounder and billionaire Paul
Allen. Others include American Cable Entertainment Inc. and Renaissance Media Group LLC.
John Waller, chairman of cable-system broker Waller Capital
Corp., said the common factor was that those MSOs were backed by financial investors that
typically expected to wait about five years to get a return on investment of 20 percent or
more. These days, the returns are available in less than one year, so recent buyers became
sellers.
Waller partner Jack Woodruff represented Avalon and Vista
in the deals.
Avalon chairman David Unger said Charter's offer was
just too good to pass up.
"Basically, the multiples people are getting are far
in excess of what we thought we would be getting and far in excess of what we would be
willing to pay," Unger said. "Venture funds are looking for a return on
investment. You expect an exit multiple to be comparable with the entrance multiple. In
the past couple of years, if you got in at [a multiple] of 10 or so, you expected to get
out at 10 or so."
Avalon was able to get out for a lot more. The company
bought the Michigan systems from Cable Michigan last year in a cash-for-stock deal valued
at $435 million.
Unger left the door open to re-enter the market at a later
date. "There might be an 'Avalon II' someday, but you can't be a buyer
and a seller," Unger said. "In a big way, we are out of the cable
business."
These deals -- which boost Charter's pro forma
subscriber base to 3.9 million -- are its seventh and eighth since January. Including
Avalon and Vista, Charter has acquired systems with more than 1.6 million subscribers for
a total of about $5 billion.
Since the beginning of the year, Charter has agreed to buy
Helicon Cable Communications, Renaissance, Greater Media Cablevision Inc., Rifkin &
Associates Inc., InterMedia Partners and ACE.
Unger said the Michigan systems were in the middle of an
upgrade to 750-MHz, two-way capacity when his company bought them about a year ago. That
upgrade will continue -- about one-third to one-half of the systems have been completed.
"We tend to go in [to upgrade] in more densely
populated areas," Unger said. "We've done a large percentage of the
upgrades in areas that needed it economically."
Unger said the two biggest systems are in Traverse City and
Grand Haven, Mich., with about 35,000 subscribers each.
Avalon has also been offering high-speed Internet service
in Traverse City, in a 200-customer trial, and it has about 11,000 dial-up Internet
customers in the state.
In New England, Avalon has about 27,000 customers,
including about 8,000 in Richfield County, Conn., adjacent to an existing Charter system.
The company also has smaller operations in Hadley and
Charleston, Mass., and it is closing on a deal later this month for 5,000 subscribers in
Chatham, N.Y.
Avalon has a total of about 450 franchises, all of which it
expects to transfer to Charter with relatively few problems.
"Charter has an excellent reputation, and Paul Allen
has an excellent reputation," Unger said.
While most Avalon subscribers are located in Michigan,
where Charter does not operate, the New England systems, with about 20,000 subscribers,
are near Charter clusters in central Massachusetts, Charter spokeswoman Anita Lamont said.
Lamont added that the rebuild of the Avalon systems might
even be completed before the deal closes, which is expected in November.
Unger said it is likely that Charter will have to continue
the upgrades on its own.
"With cable plant, there is always money to be
spent," he added.
