System Dominoes

With the Adelphia Communications Corp. sale expected to yield little chaff for smaller MSOs and private-equity firms to buy, acquisitive minds in the cable industry are beginning to turn to other opportunities to gain scale.

Tops on most lists are the 900,000 subscribers in the Southwest portion of the country offered up by Cox Communications Inc. Cox announced in early March its intention to sell off the systems, located mainly in second-tier markets in Texas (Lubbock, Midland, Amarillo, San Angelo and Abilene); North Carolina (Greenville, Rocky Mount, New Bern and Kinston); Humboldt County, Calif.; and smaller systems in Louisiana, Arkansas, Oklahoma, Mississippi and Missouri. Cox acquired most of those systems in 1999, as part of its acquisition of TCA Cable Inc.

Adelphia agreed April 21 to accept a $17.6 billion cash and stock joint bid from Time Warner Inc. and Comcast Corp. for its 5.2 million subscribers. While cable investment bankers had expected that deal for months, the prospect of either company shedding non-strategic systems after the deal's close (in the next nine to 12 months) is limited.

The main reason for that is that Time Warner and Comcast are splitting up Adelphia very close to their existing territorial lines. In a conference call with analysts April 21, Comcast chief operating officer Steve Burke said he expected some systems to eventually hit the market “but none that jumps off the page.”

“One of the beauties of this transaction is that the vast majority [of systems] are a perfect fit,” Burke added on the conference call.

That leaves MSOs and private-equity firms that fell short in the Adelphia auction to look elsewhere.

Aside from the Cox systems, other cable properties on the block include 250,000 nonstrategic subscribers from Charter Communications Inc., and 233,000 subscribers in Pennsylvania and Carmel, N.Y. from Susquehanna Media. UBS Investment Bank is advising Susquehanna on its possible sale.

But the Charter systems have been on the market for more than a year and Susquehanna has been on the block for less than a month, so most potential acquirers are probably looking closest at the Cox systems, sources in the cable investment community said last week.

Former Susquehanna Media CEO Peter Brubaker has expressed interest in buying the Susquehanna systems, saying a few weeks ago that he would be open to a deal that includes the media company's radio stations as well. Brubaker retired from Susquehanna in February.


Books on the Cox systems are expected to go out within the next two to four weeks, and according to sources inside the cable M&A community, will attract interest from several different parties.

Cox Communications spokesman Bobby Amirshahi confirmed that the books on the Cox systems are about to go out soon, but said it is too early in the process to speculate. Citigroup Global Markets, Lehman Brothers Inc. and JP Morgan Securities Inc. are serving as advisors to Cox on the possible sale.

Cox is selling off the systems to raise money to help offset the cost of taking the company private. In December, Cox Enterprises Inc. spent $8.5 billion to buy the remaining 38% of Cox Communications' outstanding stock it didn't already own.

While the Cox properties are not in major metropolitan areas, they are upgraded, well-run and could attract relatively high prices. While most cable deals have been valued at between $3,500 and $3,700 per subscribers, sources in the M&A community said the Cox systems could at least attract $2,500 per customer.

At that price, Cox could fetch $2.25 billion in a sale, or a little more than half the $4 billion Cox paid for the systems in 1999.


One of the more enthusiastic bidders on the Cox properties is expected to be Cebridge Connections, the small-market MSO run by longtime cable executive Jerry Kent. Cebridge, which has about 500,000 subscribers in 23 states, is a perfect candidate for the Cox systems because many of the properties are near existing Cebridge markets.

“Cox would be the most attractive to them,” said one source with knowledge of Cebridge. “They are pretty close to what Cebridge owns, and they are in bigger markets than they are currently in.”

But Cebridge isn't expected to be the only one interested in the Cox systems.

Private-equity players have shown increasing interest in cable — several made bids for at least part of the Adelphia systems — and that appetite is not expected to wane.

For example, Carlyle Group is backing Insight Communications in its bid to go private, Spectrum Equity Associates is behind Patriot Media & Communications, ABRY Partners is backing Atlantic Broadband and WideOpenWest; Boston Ventures is behind Vista Communications, Sandler Capital Management is backing Wave Broadband and Oak Hill Capital Management is also backing WideOpenWest.

“There are a lot of guys going after cable,” said Avalon Equity Partners managing partner David Unger.

Unger added that the one thing that may discourage a big deal is the fact that the high-yield debt market has been hammered in recent months.

“The debt market is getting ugly right now,” Unger said. “That could hurt stuff. It really all hinges on the debt markets. The high-yield market is up 100 to 200 basis points and for every 100 basis points you're talking a half to one multiple [of cash flow]. You have to be cognizant of the debt markets.”


Aside from the private equity firms, other smaller MSOs like Patriot Media & Communications and Bresnan Communications Inc. could be interested as well.

Bresnan spokeswoman Maureen Huff did not want to comment on any specific interest, but added, “Bresnan is always looking to grow where it makes financial sense.”

Andrew Cole, a spokesman for Providence Equity Group, declined to comment. Officials at Patriot Media could not be reached for comment.

Peter Abel, a spokesman for Cebridge, would not comment on whether the company is interested in bidding on the Cox systems. But he said Cebridge is open to any opportunities.