Believing that the time may finally be right for private equity firms to reinvest in the commercial cable industry, Spectrum Equity Investors is backing a new acquisition and operating platform run by longtime cable entrepreneur Steve Simmons. The budding organization is named Patriot Media & Communications, and will feature Simmons as CEO and Spectrum as the preferred equity lender when buyout opportunities arise.
Patriot’s inaugural transaction occurred late last month, when Spectrum led a $245 million carve-out of RCN Corp.’s CATV cable systems in central New Jersey. Approximately half the deal was financed by equity from Spectrum’s third and fourth funds, with the rest coming through a credit facility from an undisclosed debt lender. Simmons himself also took a minority equity stake as part of the agreement.
“I can’t think of another large private equity deal done in the cable industry over the past two years,” says Bob Nicholson, managing general partner with Spectrum. “But we think, broadly speaking, that some will start getting done because fundamentally these businesses generate strong recurring cash flow and are out of favor in the public markets.”
Indeed, several large cable providers like Charter Communications are poised to sell non-core assets, while even RCN could jump back into the M&A market with offerings for some of its smaller systems in areas like Carmel, N.Y. or Lehigh Valley, Penn. While every cable deal differs slightly in terms of infrastructure quality and customer demographics, the CATV sale to Patriot and Spectrum will likely set a price point at approximately $3,000 per subscriber.
“If you look at major cable companies like Charter or Comcast, they are all trading at about $2,800 per head, and I valued the [CATV] subscribers there as well,” says Chris Roberts, a telecom analyst with Tejas Securities. “So Spectrum gave a little bit extra to get the deal, because $2,800 per head would have only worked out to $233 million and RCN got $245 million.”
Roberts added that the CATV sale was rumored to have included 10 firms, even though the unit requires an additional $44 million in legally mandated upgrades. So far, RCN has bumped up approximately 25 percent of the CATV network from 560 megahertz to 860 megahertz so as to offer broadband and two-way digital services, but Spectrum and Simmons will have to take care of the rest. Neither buyer should worry about the extra capital commitments, however, because the resulting services should significantly increase CATV’s revenue stream.
As for RCN, taking the expense off its books – and the incoming $245 million – should help it fund its business plan through the end of 2003. If the sale had not occurred, a First Call report from Bank of America Securities estimated that the Princeton, N.J.-based company would have faced a liquidity crunch in the middle of next year.
Morgan Stanley served as lead financial advisor on the deal, with Skadden, Arps, Slate, Meagher and Flom acting as legal advisor. A final closing is still awaiting certain state and federal regulatory approvals, although no problems are expected to arise.