Avalon Cable, a start-up MSO run by cable veterans David
Unger and Joel Cohen, landed a big one last Wednesday, agreeing to buy 210,000-subscriber
Cable Michigan Inc. for $435 million in a cash-for-stock deal.
The deal is a true sign of the times. The buyers are
typical of several well-financed newcomers hungry for cable deals at a time when prices
are high but the supply of available properties is low.
And the cable systems in question were on the market a
couple of years ago, but they were pulled back because no buyer could be found.
The price -- $40.50 per share for the publicly traded stock
-- was about a 15-percent premium above Cable Michigan's closing price of $35.25 last
Monday. As part of the deal, Avalon also authorized Cable Michigan to buy the 38 percent
of Mercom Inc. that is owned by the public, at $11 per share. Mercom's systems are
consolidated into Cable Michigan's results because Cable Michigan owns 62 percent of
Mercom.
The companies pegged the purchase price at 11 times 1998
cash flow at the systems. By another measure, it's between $2,000 and $2,100 per
subscriber. That's in the range of other big system deals lately.
Some brokers and at least one other MSO that thought about
making a bid found the price surprisingly high. One called it "phenomenal."
Among other factors, buying stock, instead of buying
depreciable assets, adds to the buyer's real cost because of potential taxes. And
executives familiar with the deal said there was a potential tax liability of "zero
to $50 million" associated with Cable Michigan's spinoff from C-TEC Corp. last
September.
That potential liability would only come into play if the
Internal Revenue Service concluded that C-TEC's tax-free spinoff of Cable Michigan was
done with an eventual sale in mind, the executives said. Avalon principals said they felt
sure that risk was minimal.
Cable Michigan said it only explored the possibility of
selling the company because of the "recent jump in the valuation of cable
properties." On May 21, Cable Michigan announced it had hired Merrill Lynch & Co.
(which shopped the assets in 1995) to explore strategic options, including a possible
sale.
The other units created when Cable Michigan spun off from
C-TEC were RCN Corp. and Commonwealth Telephone Enterprises Inc.
Avalon principals said they weighed those factors that
bothered other would-be buyers, and concluded the deal was worth the price.
Avalon president Joel Cohen said the price, at 11 times
cash flow, wasn't "out of the ballpark for what cable is doing today. These are
well-clustered systems and well-managed systems." New home growth in the Cable
Michigan markets is about twice as fast as the national average, enhancing their value, he
added.
Cohen said Avalon, backed by Boston-based ABRY Partners
Inc., which manages an investment fund with $575 million in assets, acted fast with a
"better than reasonable" bid to head off rivals. Avalon's backers also include
Lehman Bros., which will raise the remainder of the purchase price through the sale of
debt securities.
Cohen said Avalon's ability to close the deal relatively
quickly also helped. They hope to close sometime in the fourth quarter.
ABRY principal Jay Grossman said the deal gets Avalon's
plan to grow to between 200,000 and 500,000 subscribers, preferably in clusters in the
Midwest and New England, off to a fast start. Avalon already had acquired 20,000
subscribers in closed or pending deals involving systems in Massachusetts and Connecticut.
Previously, New York City-based Avalon bid for and came
close to winning an auction for former Marcus Cable Co. L.P. properties with 63,000
subscribers in Connecticut and Virginia. They were sold to TMC Holdings Inc. for $150
million.
The Cable Michigan (and Mercom) systems contain principal
clusters surrounding Grand Rapids, Traverse City, Lapeer and Monroe, Mich. Most of the
systems have 330 or 450 megahertz capacity, but Avalon plans to follow through on Cable
Michigan's plans to upgrade them to 550 or 750 MHz, Cohen said.
