Spectrum Equity Investors and Steve Simmons, a former cable entrepreneur, recently reached an agreement with RCN Corp. to purchase its central New Jersey cable system for $245 million.
According to a source close to the deal, the purchase price is roughly 11 times EBITDA. The debt structure included a $118 million senior term loan and a $40 million revolver from Bank of New York. Spectrum has also committed $44 million to invest in the cable system, with plans calling for upgrades in the two-way modem and high-definition categories.
“Our prior relationship with [Simmons] allowed us to enter the picture with a distinct advantage,” said Bob Nicholson, a general partner with Spectrum.
According to a source close to the deal, Spectrum beat out AT&T Broadband and Cablevision Systems in its purchase of the 80,000-subscriber cable system.
This acquisition will serve as the platform for the newly formed Patriot Media & Communications LLC, which Simmons will lead as CEO. Jim Holander, formerly of Charter Communications, will serve as general manager for Patriot. Holander previously held a regional vice president role for Charter in its central division, and voluntarily left the company amid massive restructuring. Charter is currently awaiting the results of a federal grand jury investigation into subscriber counts.
“The current unrest in the [cable industry] is also due to the financial issues surrounding Adelphi and Charter and that they grew too fast, gained too many subscribers through acquisitions, paid too much for them and used too much debt to do it,” said Nicholson. “This leaves us with an opportunity to buy attractive assets from both companies as they restructure.” According to an analyst covering cable television, current valuations are at a five-year low, and Charter’s debt is leveraged north of eight times EBITDA.
“It was not in our core business,” said Kevin Kuryla, RCN’s investor relations director, in describing the reason for selling. “We average 150 subscribers per square mile, and [the central N.J. region] averages about 35 per.” Kuryla said RCN would use the equity from the sale – its first divestiture to a buyout shop – to “reinvest in remaining RCN assets.”
Spectrum and Simmons are not the only factions interested in snapping up cable carve-outs. Simmons, who sold his 350,000-subscriber Simmons Communications in 1994, has joined a list of ex-cable moguls looking to get back into the cable television business after cashing out. According to a source in the cable industry, Bill Bresnan, founder of Bresnan Communications, Amos Hostetter, one of AT&T’s largest shareholders, and ex-Charter CEO Jerry Kent are all looking for a seat at the table.
With over $3 billion in capital under management, Spectrum focuses exclusively on media communications and information technology, investing between $15 million and $250 million in more than 150 companies in the telecommunication, networking, information services and media business sectors.