Wave Broadband’s Sale Shows Health of Cable Market

Posted by Jamie Holland on June 11, 2012

Wave Broadband’s deal to sell out to agroup of private-equity players and management last week proved once again that the market for well-run cable operations is increasingly healthy. But the price of the deal — estimated by some to be about $950 million — could push larger, publicly traded cable companies out of the consolidation picture, according to some analysts. 

Wave agreed June 1 to be acquired by private-equity groups Oak Hill Capital Partners and GI Partners, and a group of Wave’s managers, including founder and longtime CEO Steve Weed. The deal ended a months-long auction process and provided a profitable exit for Wave’s original backers, Sandler Capital Management. 

The deal also should give Wave —which has about 382,000 video, voice and data customers, primarily in suburban areas near Seattle; Portland, Ore.; San Francisco; and Sacramento, Calif. — capital to expand. 

Two Ways to Grow

“From our perspective, we’re just going to keep doing what we’ve been doing,” Wave Broadband founder and CEO Steve Weed told Multichannel News. “Not only does this give us the ability to grow faster, it gives us the time. This allows us to restart and know that we’ve got a partner that is in it for the long run. Sandler Capital had been in it for nine years. We knew at some point they’d want to get some liquidity.” 

Weed said Wave would invest in growing within existing territories and also look for acquisition opportunities. 

Wave did not disclose deal terms, but several members of the cable financial community estimated the price at about $950 million. At that level, those executives said, Wave was valued at about 8.5 times to 8.9 times its 2011 cash flow of $107 million. 

That valuation is a full three points higher than public valuations for Comcast (which trades at 5.5 times cash flow) and Time Warner Cable (about 5.9 times). 

The Wave sale is the latest in what has been a trio of strong deals for privately owned MSOs. Earlier, Avista Capital Partners (parent of overbuilder WideOpenWest) agreed to buy Knology for $1.5 billion (or about 7.5 times cash flow). In December, Time Warner Cable agreed to buy Insight Communications for $3 billion in cash, a deal some analysts pegged at 8 times cash flow. 

Sanford Bernstein cable and satellite analyst Craig Moffett said the recent private deals could have two consequences: They could help push up public cable multiples, or they could price publicly traded operators out of future deals. 

Were public cable operators valued at the same multiples as their private counterparts, Moffett said, stock prices would soar. For example, in a research report he noted that at an 8 times valuation, Comcast’s stock price would be 51% higher than its current value, Time Warner Cable stock would be 70% higher and Cablevision Systems would be 184% higher. 

On the consolidation front, Moffett noted that several top operators have said they would not acquire systems at multiples that are higher than their own stock prices. They think their cash would be better used to repurchase their own shares. 

While additional scale could help operators lower programming costs, Moffett said, the synergies aren’t great enough to justify acquiring systems. 

“In a market where private valuations are so much higher than public valuations, industry consolidation is unlikely,” Moffett wrote. “Deals like TWC’s acquisition of Insight would appear to be the exception, not the rule.” 

Not every analyst agreed. Greater scale allows operators to wring a lot of cost out of the business, Pivotal Research Group principal and media and communications analyst Jeff Wlodarczak said. 

“In addition, lower home-density markets are likely to get increasingly more attractive, given relatively low levels of competition,” Wlodarczak said. “The question on whether or not to do a deal is if it is large enough to make a difference and it enhances existing subscriber clusters.” 

Free-Cash Measures

Wlodarczak said the Wave Broadband valuation could be skewed if it is generating a large amount of free cash flow, comparable to its peers. 

He used Cablevision as an example. While that stock looks relatively expensive on an operating cash-flowmultiple basis — about 6.1 times — it’s relatively cheap as a multiple of free cash flow. Cablevision trades at six times 2013 free cash flow, compared with nine times for Comcast and TWC, according to Wlodarczak. 

While rising private multiples and declining stock prices can entice companies to raise the funds to go private — something that has been speculated about Cablevision — Wlodarczak said that could be challenging. Cablevision tried unsuccessfully to go private three times between 2005 and 2008, at prices more than double its current share price of $11.44. 

“I think the more likely way that companies can take advantage of declining public multiples is to go borrow capital cheaply and buy back stock ever more aggressively,” Wlodarczak said.

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