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Grimes, Backe Fund Eyes Cable Deals

New York -- On the theory that there's always
room for one more savvy buyer with a niche and an edge, BG Media Investors, an investment
fund headed by former ESPN CEO J. William Grimes and ex-CBS president John D. Backe, is in
the market for lots of small cable systems.

Its aim is to stitch together a 100,000- to
150,000-subscriber MSO, preferably in one section of the country, by picking off privately
owned systems with as few as 2,000 subscribers each.

True to that strategy, BG has two small cable systems under
contract, with a total of about 5,500 subscribers, in Utah and Southern California. Their
point man in the effort, David Kinley, also expects to fold in the systems of Sun Country
Cable (14,500 subscribers), of which he is the general partner, after BG buys out the
limited partners.

A longtime cable executive with operators Viacom Cable and
Time Inc.'s ATC (now Time Warner Cable), Kinley was also a founder of the Small Cable
Business Association, a lobbying group for about 300 small operators, so he has operating
experience and lots of contacts.

Kinley said last week that he had some 13 outstanding
offers to buy cable systems, adding that about two-thirds of them were systems with 2,000
or fewer subscribers.

Connections like those could be vital, since there are so
many potential buyers now and -- according to the buyers and to the brokers working for
them -- there are few sellers, even with high sales prices.

"The problem right now is the supply," Waller
Capital Corp. president John Waller said.

One executive at another fund-backed cable buyer said he
had heard of some not-so-major MSOs being dangled at $4,000 per subscriber -- even more
than Paul Allen is paying in his benchmark Charter Communications Inc. deal.

But, Waller said, "we don't even have much of
that." The shortage in supply is surprising, as even overbuilt systems in Huntsville,
Ala.; Anne Arundel County, Md.; and Columbus, Ohio, found buyers this year, he added.

Charles Benaiah, vice president at BG, said Kinley
"believes that there are still enough privately owned, small systems in
geographically clustered areas that we can build a company."

The fund would like to get systems serving 2,000 to 7,000
subscribers per headend, so that it can afford to economically introduce high-speed-data
and digital TV services.

Its price range is 7 to 8.5 times cash flow, so that even
with upgrades, the total cost will be less than 10 times cash flow. It would go higher
than that for better systems: One bid, for 10.2 times cash flow, is for a 750-megahertz
system, Benaiah said. The fund's investment horizon is eight years.

Grimes and Backe got together in mid-1996, after Backe --
whose Backe Group had made media investments on its own -- decided to raise investment
funds from institutions. The two executives and former Backe Group chief financial officer
Ted Carroll are the general partners.

They set out to raise $100 million or more, and they ended
up realizing about $143 million, Grimes said in a recent interview.

Grimes said they brought in 14 investors, each kicking in a
minimum of $5 million. The most that any one investor could contribute was 30 percent:
That role fell to huge Canadian investment fund Caisse de Depot et Placement du Quebec.
Other investors include Chase Capital Partners, BankBoston and -- in the one exception to
the $5 million minimum -- investment banker Herb Allen.

BG is investing in more than cable: The fund caps
investments in any one firm, like Kinley-led SunTel Communications LLC, at 20 percent of
its pool. BG is targeting investments of between $5 million and $15 million in 10 to 15
companies. Some investors have said that they would put up more capital independently if
the right, bigger deal came along, though.

BG's first investment was $5 million, with the right
to invest $5 million more later, in Dolan Media Co., a legal-newsletter-publishing venture
run by former News Corp. executive James Dolan (not the Cablevision Systems Corp. CEO).
Grimes said that deal has already generated an internal return of about 20 percent.

BG isn't the first fund to target the media niche:
Veronis Suhler & Associates Inc. is working on its third such fund, VS&A
Communications Partners III, which is targeting $800 million. The first two took in $57
million and $330 million, respectively.

Waller Capital and Sutton Capital Associates Inc. raised
$100 million for a fund last year that has put money into a company that sites rooftop
communications antennas, one that provides interactive television to hospitals and one
that owns community newspapers.

Grimes said he and Backe hope that their operating
experience will give them an edge with companies seeking venture capital. Those companies
will know that they are around to provide advice, he said. After his stint at ESPN, Grimes
was CEO at Spanish-language programmer Univision Holdings and at Multimedia Inc.