The cable landscape has transformed dramatically over the years and no one knows that better than the deal brokers who helped shape the industry from a fragmented amalgamation of thousands of small, midsized and large regional operators to one of the most tightly clustered and consolidated industries in the country.
As the cable industry has transformed, so too have the deal-makers — firms such as Waller Capital, which opened its doors in 1982 and took advantage of the first wave of consolidation in the late 1990s and early 2000s, when several sales a week wasn’t uncommon. Today, the deals aren’t as plentiful — although Waller claims 2012 was its best year in more than a decade in terms of cable transactions — so firms have been forced to branch out into digital media, telecom and other industries.
Multichannel News editor in chief Mark Robichaux and senior finance editor Mike Farrell sat down with Waller Capital founder and chairman John Waller, president Garrett Baker and managing director Brian Stengel late last month to talk about that changing landscape and about the biggest opportunities in the industry they have tracked for more than three decades. An edited transcript follows.
MCN: What’s been the biggest change in the brokerage business since you set up shop 30 years ago?
John Waller: It was beginning to consolidate, but it was very fragmented and it was tons of mom and pops selling to other mom and pops who were starting to grow, like Alan Gerry or Leonard Tow or Glenn Jones. But it’s become a lot more interesting and a lot more complicated than it was back then.
MCN: Now you’ve got essentially five big cable operators.
Garrett Baker: Well, the five big cable operators are about 75% of the U.S. market, depending on how you measure it. And the other quarter is midsized [and small] MSOs. There are still mom and pops out there, private-equity backed operators. There’s a lot of activity in and among that category and there are a lot of companies — hundreds of companies — still left in that category.
JW: We did $4.5 billion worth of deals in three years, 37 deals — half of which were cable, the rest were telecom and digital and traditional media. Half of our business is still what you call pure cable. We’ve done deals recently with Time Warner [Cable] and with entrepreneurs; a broader mix of people.
But it’s not like it used to be, where a lot of these companies are getting out; a lot of them are just getting into new hands, you know? If you look at some of the deals — the [BCI Broadband] deal that was announced [Jan. 16], that was in the hands of private equity. It’s going to another private equity firm, a relatively new entry into the business.
GB: If you think about it, none of the deals over the past three years were one of the top five [operators] selling to one of the top five. Very few of them were one of the top five buying anybody. A very small minority of the deals were Time Warner [Cable], Comcast or Cablevision [Systems] as the buyer.
MCN: And has that business increased, decreased over the last five to 10 years? Or stayed relatively the same?
GB: It’s a very cyclical business. In 1999 to 2000, there were an overwhelming amount of transactions. Since then, it’s been probably about the same volume on an average basis, but up and down based on where the economy is and how the cable market is going. So we’re in an upswing right now over that 10-year period; 2006 and 2007 were high points. 2008 and ’09 were low points, and now we’re back up to a high point again.
JW: And a lot of it is credit market-driven. It’s a combination of a couple of things — the credit markets and then the performance of particularly the big cable companies, and then the analysts’ view of their performance.
And [it’s] a much broader group of buyers than it was five years ago or even three years ago: Rural telephone companies basically that are seeing their businesses decline, and they’re buying cable for the growth. That’s a phenomenon that’s been going on for two, three, four years now.
MCN: What are buyers looking for? Ten years ago the upside was in broadband.
GB: It’s all commercial services. The U.S. cable operators’ share of [domestic] commercial- services businesses … we estimate is probably about $10 billion in revenue a year and growing like crazy. There is a lot of value pouring into cable operators across the spectrum by commercial-services business leaving the traditional [competitive local-exchange carriers] and the people that they got the business from [regional Bell operating companies] and coming to cable operators.
So that’s a big part of where people see growth and that’s where the big MSOs see growth too. Time Warner announced they’re building a couple of hundred million dollar data center in Charlotte. Wave Broadband bought a fiber operator in Seattle.
JW: The cable operators are looking at several different ways to get to pieces of this pie. And it’s not just by offering their own services — they’re looking to buy fiber companies, they’re looking to build or buy data centers, they’re looking at several different ways to go after it.
GB: That, combined with [the fact that] cable has proven [itself] over the downturn. Now what we see is an upswing [and] the financial community has taken notice. People aren’t cutting the cord in a down market.
From a private-equity standpoint, if you’re looking to put money to work and generate good returns with low risk on the heels of what’s happened over the last few years, cable looks like a very attractive defensive investment. Paired with upside related to commercial services, that’s really attractive to people. You can finance it based on the core cash flow, but from an equity investor’s standpoint, you’ve still got upside.
MCN: And most of the buyers in this market are midsized and smaller cable operators?
GB: It’s across the board. There have been three private-equity funds that [emerged as] buyers. BC [Partners] bought Suddenlink; Oak Hill and GI [Partners] bought Wave [Broadband]; and Brown Brothers [Harriman] just bought Allegiance. There haven’t been any private-equity buyers of cable assets in three or four years prior to the last six months, and now there’s been three. So that’s big news. There are still telcos actively buying. So it’s a broad variety of different types of buyers. And the big MSOs are back too.
MCN: How has the run-up in cable stocks affected how the bigger operators look at deals? For the past few years it seemed like they were more interested in repurchasing their own shares.
GB: [They were] hamstrung because they could buy back stock and have it be a much higher IRR [internal rate of return] than if they bought assets, even for low values.
But now that their stocks have traded up, it’s become more expensive to buy back the stock and they can justify accretive deals much more easily and compete with the private-equity funds and the midsized operators who can pay eight to nine times and still buy assets. We haven’t seen a lot of that yet, but the dynamic has definitely shifted in the last six months.
MCN: As you’re looking to grow other parts of your business, what excites you most about the new parts of the industry?
JW: I guess the two things that we’re really excited about, one is the whole data-center, data-hosting area, that is just huge and it’s very popular within our core client groups, whether it’s the cable operators or the private-equity guys. It’s a lot like the cable industry was 25 years ago, where you had a lot of $50 [million] to $300 million deals.
MCN: And that’s again because of the business-services aspect of this, right?
JW: Yes, exactly right. And, well, the data centers are more like the tower business, where you just collect the rent.
MCN: And you see that part of the business growing?
JW: Yeah, I do, definitely. There is tons of opportunity in that and it feeds into a lot of our more traditional media client base, the big media companies. But there’s still a lot of venture and private equity looking at that.
MCN: What do you mean by digital media?
GB: There are all kinds of new technologies and new systems being developed to help the digitization of the content distribution business. We do a lot in the gaming space; we do music-publishing deals and some technology related to the digitization of musical files over the Internet. We call it digital media; it’s really broader technology. But the number of different ways that those types of companies touch old media and that old media is trying to take advantage of that to reposition itself for this new economy, that’s all they’re thinking about.
MCN: What exactly is your role here?
JW: Our role is either to sell the companies, or raise capital for them. And sometimes find a strategic partner.
GB: The commercial relationships we introduce them to, often those conversations start out as being about a commercial relationship and transition into an M&A conversation. So it’s a lot more sort of strategic advice along the way as opposed to just a definitive sales process.
MCN: What’s a common request these days?
JW: Our biggest clients, they want to look at two things. I put it in the category of distribution, but I put data centers in that category, so call it infrastructure. So it’s either cable or fiber or data centers. Those are all under one category.
Then you’ve got another team that’s going to look at more of [what I] put under the digital media category.
MCN: But in other words, when they call and say, ‘Hey, we’re really having trouble getting our TV Everywhere system going — ’
GB: If they are asking for anything, they’re [usually] asking for technology expertise. They’re saying we’re looking to make our social media application for our customers look better, stickier, more profitable, whatever. And do you know any companies that are in that space? We’ll identify some companies for them potentially.
It’s very difficult in that world to go out looking for a very specific thing and then find it and have it be available to buy. It’s more about meeting lots of companies and then thinking outside the box to see if there are ways that that technology could be added after what you’re already doing or trying to do.
MCN: Where do you see the most opportunities in the digital space?
Brian Stengel: I’d say one is the rise of alternative platforms for distributing content out of this core cable MSO, [direct-broadcast satellite] environment and predominantly through platforms like YouTube. So, I’d say video is one big idea.
[There is a] device proliferation on a global basis and a shift from Wintel-, Windows- and Intel-based PCs and laptops toward iOS- or Android-powered smartphones and tablets. So the rise of mobile, I think, is a really huge opportunity.
And then there are 100 subsector opportunities underneath this mobile theme. It could be content consumption; it could be e-commerce; it could be interactive entertainment or games. So there are lots of themes that I think fit really well into this smartphone, mobile phone device proliferation.
There are 5½ billion cellphone subscriptions globally and 1 billion smart devices currently. And when we’re selling more iOS and Android smartphones and tablets than we are laptops and PCs for the first time, that shift, that pivot happened in the last six to nine months.
I think increasingly the cable companies are saying we really need to understand this; we really need to see how this fits into our business, understand where we might be vulnerable to well-capitalized attackers or new entrants to the market and understand whether or not we need to participate, collaborate or compete with these guys.
MCN: Is the end game ultimately that the cable operators own more different digital companies?
GB: I think so.
MCN: Has technology changed the way you look for systems for a client? With fiber, does clustering matter that much anymore?
GB: It’s funny, it doesn’t matter as much. The midsized guys are willing to use fiber to interconnect systems over longer distances, [to] generate synergies through systems that used to not be synergistic.
The larger MSOs are really averse to doing that. They are really focused on tight clustering.
MCN: Let’s talk about metro fiber; competitive local-exchange carriers (that own their own plant. How much activity is there now going forward with the cable guys?
GB: They are buyers of fiber in their markets. The problem that they have had is that the footprints don’t line up. So most of these fiber providers own footprint and assets that overlap with Cox and Cablevision and Charter, and one of them is not going to compete with the other ones in their markets. So that’s made it a little bit difficult to find a perfect match.
JW: Some CLECs have a mixture of owned fiber and leased fiber. So some of those companies will get looked at but they won’t put much value on the reselling part. They put more value on the owned part.
A lot of them are the legacy [providers] all the money that got thrown in that business in the late ’90s, early 2000s. A lot of them went bankrupt and [were acquired] by the debt holders and then the debt holders parsed them out and resold them. So it’s the second generation of people that came in. Cable just keeps churning along. So it’s beholden on us to keep satisfying the demands for that as the cable business expands and diversifies and everything else; it’s beholden on us to keep up with that.
AT A GLANCE
Waller Capital Partners
Chairman: John W. Waller III
President: Garrett Baker
Headquarters: 1 Rockefeller Plaza, New York
Recent Transactions: Served as adviser to Allegiance Communications in its sale to BCI Broadband; with RBC Capital Markets, co-advised Wave Broadband in its sale to Oak Hill Capital Partners and GI Partners; advised US Cable in sales of systems to Charter Communications, Midcontinent Communications and Baja Broadband.
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