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Pricey Charter System Sale Cheers Brokers

Cable-system valuations got another shot in the arm last Thursday, when Charter Communications Inc. said it has reached a definitive agreement to sell its roughly 25,500-subscriber Port Orchard, Wash., system to WaveDivision Holdings Inc. for about $91 million, or $3,600 per subscriber.

WaveDivision is headed by former Millennium Digital Media executive Steve Weed. In March, WaveDivision purchased systems in Washington state with 22,000 subscribers from Northland Communications Inc. for about $40 million.

WaveDivision is backed by New York private-equity firm Sandler Capital Management.

With the Charter deal, WaveDivision has a total of about 52,000 subscribers.

More sales ahead?

According to a press release, the Port Orchard system has 12,900 digital-cable customers and 11,000 cable-modem customers. The deal is expected to close by the end of the year.

Denver-based cable investment banker Daniels & Associates represented Charter in the transaction.

Last year, Charter had identified several geographically nonstrategic systems for sale, with about 600,000 subscribers. In a press release, Charter said that Port Orchard is one of those systems.

Though Charter hasn't identified its other systems for sale, sources familiar with the matter have said that its Miami Beach, Fla., system — with about 50,000 subscribers — is on the block, and at least three private-equity firms have expressed interest.

Charter also may exchange some nonstrategic properties as part of a three-way deal involving chairman Paul Allen and Comcast Corp. Comcast has put rights for its stake in a Charter subsidiary, which it can compel Allen to buy for $725 million.

Comcast and Allen are negotiating a deal through which Comcast would put the membership units to Allen and, in a simultaneous transaction, Allen would pay Charter $725 million for certain cable systems, and then transfer them to Comcast.

It is expected that Charter will contribute systems in New England and Texas as part of the three-way deal.

Comcast has acknowledged that it is in negotiations with Allen regarding the put arrangement, and had extended the deal until May 30.

Though Comcast declined to comment, a person familiar with both companies said the negotiations would be extended for up to six months.

While it is not connected to the Comcast/Allen puts, the Port Orchard sale could bode well for Charter in that deal.

The Port Orchard deal, valued at about $3,600 per subscriber, could mean that Charter would have to transfer fewer systems for the money.

While $3,600 per subscriber is far from the industry high valuation of $5,700 per customer in 2000 — according to Kagan Media — it is at the high-end of recent deals.

Daniels & Associates president Brian Deevy said the deal was encouraging because it shows that private equity groups are willing to pay strong prices for well-built systems.

"We've said all along that there are a lot of people in private equity that see the upside and the advantages of high-speed data and digital," Deevy said. "This is clearly good news for Charter, good news for Steve Weed and good news for the guys that are watching the industry."

Simmons led off

Last year, the cable industry got a brief boost after Patriot Media & Communications — headed by former Simmons Communications founder Steve Simmons — announced it would purchase RCN Corp.'s Princeton, N.J., cable systems for $245 million. Including upgrade costs, that deal — which closed in February — was also valued at about $3,600 per subscriber.

In February, Shaw Communications Inc. sold its Houston-area systems with about 27,000 customers to Cequel III, the St. Louis investment group headed by former Charter CEO Jerry Kent, for $85 million. Shaw sold its Florida systems with about 44,000 subscribers to TWEAN Subsidiary LLC, a partnership managed by Advance/Newhouse Communications, at the same time for about $112 million.

DH Capital Inc. principal Joe Duggan — who represented Weed in the Northland deal but not on the Charter transaction — said that the industry shouldn't read too much into the sale.

"I'm not sure valuations are climbing," Duggan said. "These deals just didn't get done. I wouldn't call this a bellwether. This thing [Port Orchard] was worth $3,600 [per subscriber]."

Duggan added that Port Orchard, a suburb of Seattle, has strong demographics and a high median household income, which makes it worth the price.

Weed's model

According to 2000 U.S. Census data, Kitsap County — where Port Orchard is located — has a median household income of $46,840, compared to $42,490 for the state of Washington and $41,994 for the entire country.

Even though Port Orchard has a high digital and data penetration — about 50% for digital and 43% for cable modems — Weed said he believes there is more room for growth.

For example, Charter had offered only one data product. Weed plans to make several tiers of service available.

"Our model is to have a product that will compete with dial-up," Weed said. "In our previous system, when we launched a multiple speed service we doubled our sell-in rate."

He added that because Port Orchard has already been upgraded to 750-Megahertz capacity, it lends itself to a subscription video-on-demand service in the future. However, telephony services are not on the drawing board for now.

"That [telephony] doesn't make the short list," Weed said.

Since his last purchase, Weed also has assembled a management team, hiring former Summitt Communications executives Steve Friedman (chief operating officer); Angela Higham (director of marketing); and Dave Dein (vice president of broadband deployment). Weed said that WaveDivision has about 55 employees, which should double after the Charter deal is closed.