Sale of Cerritos Cable System Expected Soon

The cable system in Cerritos, Calif., once a key to GTE Corp.’s video aspirations before that telco sold out to Verizon Communications Inc., is about to change hands again — likely going from one cable overbuilder to a former overbuilder.

Owner Knology Inc. would not reveal the buyer, but sources in the financial community say the front-runner is Orange Broadband, a Charlotte, N.C.-based operator headed by former Carolina Broadband CEO Bill Schuler. A deal could be announced this week, those sources said.

Schuler declined to comment. DH Capital, the New York cable investment banker said to be brokering the deal, also declined to comment.

According to those same sources, Knology attracted a price of between $11 million and $12 million for Cerritos, or $1,375 to $1,500 per customer for 8,000 subscribers.

Knology bought Cerritos about five months ago, in a larger deal with Verizon Media Ventures Inc. that brought systems in Pinellas County, Fla., with about 53,000 customers, into the Knology fold.

Knology — a publicly owned telecom provider that operates several competitive cable systems — said on a May 12 conference call with analysts to discuss first-quarter results that it was close to a deal, but wouldn’t release details.

Knology CEO Rodger Johnson said on the call that several interested parties made bids, and that Knology expects to receive substantially more than it paid for the assets. He declined to elaborate.

The Florida properties overbuild Bright House Networks LLC systems.

The Cerritos system — known for having once hosted GTE Main Street, an early ITV system — is an incumbent operation.

Knology had long been expected to sell Cerritos, mainly because it wasn’t contiguous to its existing Southeastern clusters.

According to one source in the cable mergers-and-acquisitions community, Knology practically received the Cerritos systems for free in its deal to purchase the other Verizon systems.

In an interview, Knology chief financial officer Robert Mills said Knology paid about $17 million, including working capital, for Pinellas County and Cerritos combined.

He said the Cerritos systems are not upgraded — they don’t have access to digital cable or high-speed data service — but they have good demographics and average annual revenue of between $3 million and $4 million.

The cable properties came from GTE, with which Bell Atlantic Corp. merged in 2000, creating Verizon.

GTE at one time had big plans for cable, saying it wanted to be in 66 cable markets, passing 7 million homes, by 2004.

It acquired or built systems in California, Florida and Hawaii, amassing 123,000 customers, before merging into Verizon, which wasn’t interested in maintaining cable holdings.

Verizon had originally signed a deal to sell the systems to Adelphia Communications Corp. in 2002, but that deal was scrapped after an accounting scandal forced Adelphia into bankruptcy.

Orange Broadband has no current cable systems, but it is backed by four strong private equity groups: JP Morgan Partners, M/C Venture Partners, Columbia Capital and Oak Investment Partners. The four firms have combined assets of $30 billion.

Orange Broadband has been active in the deal market — it was one of the bidders for WINfirst’s assets in Sacramento, Calif., (ultimately won by SureWest), as well as RCN Corp.’s Princeton, N.J. assets (won by Patriot Media) and RCN’s Carmel, N.Y. system (won by Susquehanna Media).

Carolina Broadband, Schuler’s former outfit, had planned to overbuild the Charlotte, N.C. area, but scrapped those plans in 2001 after it was unable to attract sufficient financing.

Aside from Schuler, Orange Broadband’s management team consists of vice president of marketing and business development Robert Calgi; chief technology officer Phil Emer; vice president of broadband engineering James Romanelli; and interim chief financial officer Sharon Levesque.

The deal would come on the heels of another small cable system sale in the Los Angeles area. Last month Wave Broadband, a Seattle-based operator headed by Steve Weed, reached an agreement to purchase Avenue TV Cable Services Inc., a small operator with about 9,100 customers in Ventura, Calif., for about $20 million. The deal is expected to close in July.

Avenue filed for Chapter 11 bankruptcy protection on Aug. 8, 2003. Family-owned Avenue had run into financial difficulty after completing an $8.4 million upgrade, which increased its system capacity to 860 Megahertz.

According to published reports at the time, the cable operator defaulted on a $4.5 million loan for the upgrade, which sent it into Chapter 11 protection.

The George family, which started Avenue Cable in 1951, has a short-term consulting agreement to run the system until the deal is closed, after which it will be run by Wave Broadband.

Denver-based cable investment banker Daniels & Associates brokered the sale.

Weed started Wave Broadband in 2002 after running Millennium Digital Media’s Seattle cable system for four years. Prior to that, Weed had been CEO of Summit Communications, which sold the Seattle system to Millennium in 1999.

Wave Broadband has about 50,000 subscribers in Washington state.