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Systems' Sale Helps Charter

Charter Communications Inc. is halfway to its goal of shopping 500,000 to 600,000 subscribers in nonstrategic markets, selling off 235,000 customers in six states to Atlantic Broadband LLC for $765 million in cash.

About a year ago, Charter said it would sell subscribers in nonstrategic markets to help pay down debt. With this deal, and one in June to sell 25,500 customers in Port Orchard, Wash., for $91 million ($3,600 per subscriber), Charter has sold about 260,500 customers.

The cash will pay down bank debt and fund future capital spending. Charter has about $19 billion in debt and scuttled a planned high-yield bond offering for about $1.7 billion last month, citing unfavorable bond prices.

Miami beach in

The deal works out to about $3,255 per subscriber (between 10.5 and 11 times cash flow) and includes Charter's Miami Beach, Fla., system with about 51,000 subscribers, and 184,000 customers in systems in Pennsylvania, Maryland, Delaware, New York and West Virginia.

The systems also have about 79,000 digital and 33,000 high-speed data customers.

Sources familiar with the deal said the Miami Beach systems went for about $4,000 per subscriber (11 times cash flow), driving up the average price.

But coupled with the $3,600 per customer Charter got in the Port Orchard sale, some analysts saw the deal as affirming rising cable valuations and was an overall positive.

"We are seeing an uptick in the size of transactions, compared to the average divestiture size of 8,000 subscribers this year," SunTrust Robinson Humphrey cable analyst Gary Farber said in a report. "In addition, for systems with upgraded plant and significant new-product penetrations, deals are occurring well in excess of $3,000 per customer compared to the year to date average of approximately $2,500."

The deal helped Charter's stock a little: it closed at $4.50, up 12 cents (3%), last Thursday. Other cable stocks didn't move much, up or down, although Comcast Corp. did gain $1 (3.5%), to $29.19.

Two-year search

Officials with Atlantic Broadband, headed by former Continental Cablevision Inc. executives David Keefe and Ed Holleran, said the company had been looking for systems for about two years.

"We thought there would be an opportunity in the U.S. for guys like us, backed by private equity, to purchase some systems given the circumstances of the MSOs," Holleran said. "We think we are fortunate to have found something that is a very attractive opportunity."

Atlantic Broadband is backed by Boston private-equity firm ABRY Partners, Oak Hill Capital Partners and Merrill Lynch & Co. ABRY's past cable deals include investments in Avalon Cable (which sold out to Charter in 1999) and overbuilder WideOpenWest.

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

Keefe would not break out financing details, but said layers of debt and equity will be involved.

The systems outside Miami Beach are in smaller locations, including Johnstown and Altoona, Pa.; Cumberland, Md., and Middletown, Del.

"In Pennsylvania, Maryland and Delaware, the nature of these systems are not rural," Holleran said. "Ninety-five percent of them are suburban areas in core cities, like Johnstown and Altoona, that have good densities. These systems generally are in the 70, 80, 90 homes-per-mile density and good, solid demographics."

Holleran said most of the systems have high-speed data service, but growth potential is high. Overall broadband penetration is about 12%, which could double or triple over the next few years.

Mostly upgraded

Atlantic Broadband won't have to spend a lot to upgrade systems, either, Keefe said. About 75% of homes passed are at 750 megahertz or better capacity, with about 88% of homes passed at 550 MHz or better. He estimated upgrade costs for Maryland and Delaware would be less than $5 million.

Keefe and Holleran also hope Atlantic Broadband will get bigger: There are several independently owned systems near these Charter properties. But for the time being, they'll focus on what they're buying now.

"We don't have a lot of ego wrapped around having to be at 1 million customers in three years," Holleran said. "The focus is to really run these properties well. We're not going to go on a feeding frenzy."

Holleran said Atlantic would keep on existing management, although they'll look to beef up the team in Maryland and Delaware. Atlantic Broadband's own corporate staff, currently at five people, will likely grow to about 12 employees. "The corporate staff is going to be lean," Keefe said.

Key Staffers

So far, the company has signed on Matt Murphy, a former investment banker with Merrill Lynch, as senior vice president of development and former Continental executive Al Kuolas as chief technology officer. Donna Garofano, the former local franchising official for Cablevision Systems Corp. and Ameritech New Media, will be helping Atlantic secure the estimated 120 to 150 franchise transfers required.

Kuolas and Garofano also worked with Holleran at American Broadband Inc., an overbuild venture that folded when capital dried up in 2001. It had planned to build out systems in Rhode Island, Maryland and Buffalo, N.Y.