Broadband Boosts Small Ops’ Fortunes

TPG Capital’s surprise $2.25 billion purchase of over-builder RCN and small Texas-based cable operator Grande Communications could signal a new wave in the cable M&A space: new entrants that are laser-focused on broadband and the potential to offer over-the-top and short-form video services, rather than stodgy old pay TV.

TPG, which is paying $1.6 billion for RCN and about $650 million for Grande, is teaming up with Google Capital, the investment arm of the Internet search conglomerate, on the deal. It’s expected to close in the first quarter of 2017.

Google Capital is taking a minority financial interest in the deal, but at least initially there is no mechanism for the company to increase that stake.

The relatively high price surprised some members of the financial community: At 8.4 times cash flow for RCN and 8.6 times for Grande, the deal is valued nearly on par with the Charter Communications’s $78.7 billion buy of Time Warner Cable and Bright House Networks (9.1 times). It seems to place a premium on pay TV providers for their broadband infrastructure, rather than their video businesses.

As TPG Capital partner David Trujillo noted in announcing the deal: “High-speed data has become, and will remain, the essential connection for both consumers and businesses.”

That mindset is not new, and operators such as Cable One and Wave Broadband have been de-emphasizing video for years. But it could bode well for smaller operators that have been forced to concentrate on high-speed data as programming costs have skyrocketed.

“This is likely the beginning of a mini-boom,” said Garrett Baker, founder of Garrett M. Baker Advisors, LLC, who has advised on dozens of large and small cable deals over the years. “Many private operators are finally deciding, ‘This is my big chance to get out.’ ”

RCN and Grande are in similar straits as the rest of the industry: They’re watching their video customer base decline as younger viewers migrate to over-the-top services and skinny bundles for their entertainment needs. Like many other operators, both have put a greater emphasis on their broadband business, providing the pipe for those smaller content packages.

While Grande has had a higher profile — it has moved to launch 1 Gigabit-per-second service in Austin, Dallas and San Antonio, Texas, three markets where Google Fiber has expressed interest — RCN has maintained its broadband presence, offering services ranging from 10 Megabits per second to 330 Mbps in its markets.

While RCN has basically been managed for cash flow since Abry purchased it in 2010 and was not initially marketed with Grande for sale, it has been growing broadband customers organically and was the property that drew TPG’s interest.

“Grande is a little too small to build a platform asset,” said one source in the cable community familiar with the company.

TPG is expected to continue to test the deal waters after it closes the RCN-Grande deal, sources familiar with the company said this transaction will do for the time being.

“I’m sure they’d love to do more,” said one source in the cable financial community. “But this deal can stand on its own.”