The attractions of European cable

Callahan Associates has built an impressive portfolio of European cable investments for itself. Having raised its 55 per cent stake in Baden Wurttemberg’s cable operations from Deutsche Telekom to 60 per cent and secured options to increase its 60 per cent holding to 100 per cent, the firm is hoping for a consolidation of the European cable industry.

Last month Callahan Associates raised its 55 per cent purchase of Baden Wurttemberg’s cable operations from Deutsche Telekom to 60 per cent and announced that it had secured options to increase its 60 per cent holding to 100 per cent. It has also secured the option to buy the remaining shareholding in Nord Rhein Westfalia that Deutsche Telekom owns, having bought 55 per cent from Deutsche Telekom last year. Callahan has committed E972 million equity to buy 55 per cent of Nord Rhine Westfalia. It has put E600 million equity into Baden Wurttemberg and will buy the remaining 40 per cent at the same prices on a pro-rata basis. Paul Ward, the CFO for Callahan Associates’ European operations and CFO of Kabel NRW in Germany, is not giving away the time line on either the Baden Wurttemberg or Nord Rhine Westfalia options.

Callahan has also acquired the level 4 provider DeTeKS in Nord Rhein Westfalia and Baden Wurttemberg. According to Ward, this acquisition of DeTeKS is the first of a series of acquisitions of level 4 providers that Callahan would like to make. Level 4 is the final customer interface.

Callahan is an operator more than a financial buyer, according to Ward, although the firm obviously invests to achieve a profit for itself and its investors. Callahan’s operating interests in Germany have become vast.

In North Rhine Westfalia Callahan won one of the jewels of Germany’s cable regions. North Rhine Westfalia encompasses more than eight million homes and runs throughout North Rhine Westphalia, one of Germany’s most prosperous regions, which accounts for 22 per cent of the country’s GDP, includes 11 of the country’s 20 largest cities and has a total population of 18 million. The cable network in North Rhine Westfalia already reaches 4.2 million customers and Callahan will upgrade it to a state-of-the-art, broadband, two-way network capable of delivering high speed Internet access, data, direct access telephony and digital television services.

Baden Wurttemberg encompasses more than four million homes, runs throughout Baden Wurttemberg, one of Germany’s most prosperous regions contribuing more than 13 per cent of Germany’s total GDP. The cable network in Baden Wurttemberg currently has 2.2 million customers.

Ward explains that the simple reason Callahan is investing in European cable comes down to cost. In the US cable costs per subscriber, he says, are registering as much as $4,000 but for its 55 per cent interest in North Rhine Westfalia, bought from Deutsche Telekom last year and now called Kabel NRW, Callahan paid only euro860 per subscriber. The cost of the 55 per cent in Baden Westfalia came in at euro767 per subscriber.

And these costs reduce as more subscribers are added. Of North Rhine Westfalia’s 18 million population, Callahan believes some 50 per cent of homes are service enabled. Ward notes the standard metrics for testing whether a household is service enabled include GDP per capita (i.e. can they pay for it), the cost to Callahan and population density.

There is another reason Callahan prefers European cable over US cable: “US networks are built to a low quality and they are very hard to upgrade,” says Ward. He notes that this fact caused Callahan to go through an education process with its debt providers. In particular the high yield bond investors had got used to US cable companies telling them how expensive the whole process is.

The fact is that in the US upgrading cable networks often means digging up cable laid in the ground. Callahan found when it looked at the North Rhine Westfalia and Baden Westfalia operations it bought from Deutsche Telekom that those cables had been laid in the ground within thick ducts. Consequently, the upgrades have involved running new cables through these underground ducts rather than needing to dig up the ground in order to place new cable in the ground. Ward also notes that ever-efficient German engineering has meant that despite investigating literally hundreds of manholes each one was constructed pretty much the same.

Callahan’s Spanish cable company, Cableuropa, is building from new and is putting three ducts into each hole dug. As Ward points out, only two are currently needed but it’s likely that someone will want that third duct in the future.

Ward doesn’t rule out stock market listings for some of Callahan’s cable investments at a future date when markets are more receptive and Callahan has done the operational work it has set its sights on. But he also says: “If there is a big pan-European cable consolidation there is every chance we will be the consolidator.”