Charter Exec Takes Aim at Rural Systems

A soon-to-be former Charter Communications Inc. executive is striking out on his own, forming a company that will focus on acquiring systems in the sometimes scary rural cable market.

Dan Ryan, vice president of operations for Charter's Rocky Mountain Group, has formed Ryan Management Group, a vehicle to buy rural MSOs. Ryan already has lined up a backer in Boston-based Housatonic Partners, which has invested more than $10 million in the venture.

Ryan, who is slated to leave his job at Charter on Aug. 3, said he would like to initially grow the company to between 10,000 and 20,000 subscribers. The goal is to eventually reach about 100,000 subscribers.

Ryan said he is currently looking to raise additional debt financing for the venture, and is targeting MSOs with at least 500 subscribers.

Ryan has been in charge of Charter's Rocky Mountain Group — which has about 160,000 subscribers in Colorado, New Mexico, Kansas, Oklahoma, Nebraska, Utah and Nevada — for about two years. Prior to joining Charter, Ryan spent eight years with Rifkin Associates Inc., a Denver-based consulting firm and MSO that sold its cable operations to Charter in 1999.

Housatonic Partners is a private-equity firm with over $250 million under management and a prior history in cable. It's biggest system investment was in Fundy Communications Inc., the 192,000-subscriber New Brunswick, Canada, cable operator that was sold to Shaw Communications in 1999 for $312 million.

In addition, Housatonic has invested in Rapid Communications Partners LP — which had 22,000 subscribers in seven states — and Cambridge Communications, which operated rural systems in New Mexico, Oregon and Washington and was sold to USA Media in 1999.

Current Housatonic cable holdings include investments in Central Valley Cable, which has about 4,800 subscribers in three rural systems located in California.

Housatonic managing partner Will Thorndike said his company has been looking to get back into cable for about six months. He said the company decided to return to the cable business after system valuations came down and new technology was introduced to reduce the cost of providing new services like digital and high-speed data to smaller markets.

"We know this end of the market, and we have an exceptionally proven manager in Dan [Ryan]," Thorndike said. "We're very focused on the management teams we partner with."

Charter's Rocky Mountain Group is practically a mirror image of what Ryan would like his company to be. Most of the Charter division's systems are scattered throughout the territory, with average subscriber counts of 500 to 1,000 customers.

Despite that relatively small size, the group has flourished, even with stiff competition from direct-broadcast satellite services. And even though the Rocky Mountain Group derives programming cost advantages from being part of the 6.4-million-subscriber Charter — and his new company will not — Ryan maintained that there are ways to make even small systems profitable.

Charter helps to keep costs down primarily by focusing its investment on improving the analog signal of its rural markets, then introducing digital cable through AT&T Broadband's HITS2Home service, a strategy Ryan said his new company would follow.

"The tack has been to clean up the analog signal to go into a digital product like HITS2Home and roll through in a systematic fashion," Ryan said.

High-speed data service, he added, can also be offered at a lower cost by establishing relationships with local Internet-service providers.

Ryan also believes that offering a local product with strong customer service will assist with retention. He also may take another cue from the Charter playbook and offer dish buybacks in markets that he purchases.

"I feel that a local presence and a good focus on customer service overrides anything DBS has to offer," Ryan said.

Still, the rural cable market can be rife with pitfalls. Although acquiring rural operations was in vogue just a few years ago — especially after TCA Cable Inc. sold its operations to Cox Communications Inc. in 1999 for $4 billion — others who have tried to make a go of it in these smaller markets have stumbled.

Mallard Communications LP, which planned to grow to between 400,000 and 500,000 subscribers solely in rural markets, has stagnated at 90,000 subscribers. And rural operators like Galaxy Telecom Inc. and Classic Communications Inc. have found the costs of upgrading rural systems to be a heavy burden on their balance sheets.

The volatility in the market is most apparent in Classic's publicly traded stock, which had been priced as high as $39 per share shortly after the company went public in December 1999. Classic's stock closed at 30 cents per share July 18.

Thorndike said that Housatonic and Ryan Management would likely buy systems in the $1,000 per subscriber range, not including the cost of upgrades. He added that both companies would keep a close eye on costs.

"I think we will be very focused on what we pay going in," Thorndike said. "We have sort of a grow slow-type approach."