Cable valuations, at their lowest point in about five years, got a boost last week after RCN Corp. said it had reached a definitive agreement to sell its cable systems in the Princeton, N.J., area for about $3,100 per subscriber.
RCN agreed to sell the systems — with about 80,000 subscribers in 31 communities in Central New Jersey — to private equity firm Spectrum Equity Investors and former cable executive Steve Simmons for $245 million in cash. The deal is expected to close in the first quarter of 2003.
Once the deal is closed, the systems will be partly owned and managed by Simmons.
Simmons and Spectrum will form a new company for the properties, called Patriot Media & Communications, with Simmons serving as president and CEO.
Based on the sale price, the deal works out to about $3,062 per subscriber. Once upgrade costs of about $44 million are included, the price per subscriber rises to about $3,600 each.
While that price is a far cry from the $4,500 to $5,000 per subscriber cable properties attracted last year, it is well above the average system valuation in 2002.
POSITIVE POINT
According to SunTrust Robinson Humphrey cable analyst Gary Farber, about 12 system deals have been done this year at an average price of about $2,100 per customer, or 12 times cash flow. The RCN deal works out to be about 13.3 times cash flow.
"It's a small data point, but it's a positive one," Farber said.
Salomon Smith Barney Inc. cable analyst Niraj Gupta also was heartened.
"Despite the limited number of strategic buyers [given leverage issues in the group] and RCN's relatively weak negotiating position, the transaction still represents a premium to the cable group's public market valuation of $2,900 per basic subscriber" and 10.7 times estimated cash flow in 2002, Gupta said in a report.
The deal also marks the first substantial private equity deal in the sector in more than a year. Despite that inactivity, analysts and other industry observers still expect a large cash infusion from private equity players to emerge.
Spectrum is a $3 billion private equity fund, and managing partner Robert Nicholson said the company has "north of $1 billion" left to invest. A good portion of that could be aimed at cable, he added.
"This is probably the first of a number of deals we hope to do," Nicholson said.
While not tipping his hand about any future deals, Nicholson added that Spectrum won't limit itself to small deals.
"Our appetite can be pretty large," Nicholson said. "It depends on finding a good opportunity. With Steve, we're backing somebody that is a proven entrepreneur in the industry. We don't have a goal [as to how large he wants to get], but we don't have a limit either."
Simmons is a long-time cable executive, first with his own Simmons Communications Corp., a 350,000-subscriber MSO.
Simmons said he sold parts of the company in the mid-1990s to various operators, including Tele-Communications Inc., Falcon Communications and CableVision Industries Inc. Later, after he had left the company, what remained of Simmons joined forces with then Time Warner Inc. and the Blackstone Group to form American Cable Entertainment in 1996.
ACE eventually sold out to Charter Communications Inc.
BACKED GALAXY
Spectrum also has been an investor in the cable industry, most recently with Galaxy Communications Inc., the Sikeston, Mo.-based MSO that emerged from Chapter 11 bankruptcy earlier this year.
Before that, the company had been an investor in Golden Sky DBS Inc., a reseller of direct-broadcast satellite service from DirecTV Inc. that was purchased by Pegasus Communications Corp. in 2000 for $1 billion in stock and assumed debt.
"We hadn't done a cable deal since 1995 or 1996," Nicholson said. "But we've always loved the cable industry and given what has been going on with the public companies, we thought it would make a lot of sense to have an experienced entrepreneur and private equity to get back in the industry."
Simmons said he is currently assembling "a team of cable veterans" to run Patriot, and will be making announcements in the near future.
While he wouldn't say who would be on that team, Simmons has stayed in touch with industry executives ever since he left cable in the mid-1990s. A Pioneer member of the Cable Center in Denver, Simmons also is chairman of the Cable Entrepreneurs Club, a group of former and current cable executives that meets twice a year.
According to sources in the financial community, Simmons and Spectrum Equity beat out initial bids from Cablevision Systems Corp., and Washington, D.C.-based private equity firm The Carlyle Group.
RCN was supposed to decide on the winning bidder back in June, but sources said that it had tried to push the price of the systems higher.
Multichannel News
reported in June that RCN was fielding offers from several different bidders for the New Jersey systems, with bids coming in at about $3,600 per customer.
"I think they bid down in the second round," said one source familiar with the process.
Wrote Kids' Books
Since leaving the industry, Simmons had been spending his time investing in various companies and writing five children's books — including the best selling Alice and Greta
series, the No. 1 children's picture book when it was published in 1997.
Simmons said he decided to get back in the cable industry for several reasons.
"I'm very excited about the new services cable is offering — high-speed data, digital programming, multiplexing of pay [TV], video-on-demand, and possibly down the road IP telephony," Simmons said. "I think the cable business, in terms of valuation, is going through one of its down cycles while the fundamentals of the business have never been stronger. I thought there was a good window of opportunity to start a new MSO before the whole industry gets completely consolidated."
The Princeton market is a pretty good place to start.
Although the systems need work — only about 20 percent have been upgraded to 750-Megahertz capacity with the rest between 450MHz and 550MHz — the area is one of the more affluent in the country. According to U.S. census data, Princeton is in the top 1 percent regarding average annual income per household. In addition, RCN said sell-in rates of new services to new subscribers in the areas where it could offer them is more than 20 percent of homes passed, well above the average for the rest of the industry.
"It's just a terrific market," Simmons said, adding that all 80,000 subscribers are serviced from a single headend.
Simmons said that the RCN transaction is the first of many. Although he would not say what other deals he is working on, he added that Patriot will be opportunistic. He said that he would not limit potential deals to specific geographic areas or system-size and added that if Adelphia Communications Corp. systems come on the market, Patriot will be in the hunt.
"If they do [come on the market], we would be looking at them aggressively," Simmons said.
RCN'S VIEW
RCN, which has been in financial trouble as the bottom has fallen out of the telecom market, will reinvest the proceeds in its existing network.
RCN chairman David McCourt said in a statement that the Princeton systems weren't strategic for RCN, which is focusing more on its larger metropolitan markets.
RCN has concentrated its efforts on selling its ResiLink package — voice, video and high-speed data over a single network. Because RCN is prohibited from offering voice service in New Jersey and because the homes per mile in Princeton are below that of other larger RCN markets — 45 homes per mile as opposed to 150 homes per mile — RCN decided to put the properties on the block.
Morgan Stanley served as the lead financial advisor to RCN on the transaction. Skadden, Arps, Slate, Meagher & Flom served as legal advisor.
