Cable system broker Jay Dugan is getting used to airports. Like most other investment bankers specializing in mergers of cable systems, the recent frenzy of consolidation in the cable industry has helped Dugan wrack up frequent flier miles.
“So far this year I’ve spent 35-40% of my time on the road,” says Dugan, speaking from an airport as he waited for his next flight. That’s up 50% from last year.
In recent months more than $16 billion worth of cable system deals have been negotiated, with major players like Viacom and Times Mirror selling out and independents such as Cablevision Industries and TeleCable being swallowed up by industry giants Time Warner and TCI.
The latest cabler on the auction block is Sammons Enterprises’ cable subsidiary Sammons Communications, a fragmented 1 million-subscriber group of systems that last week drew bids from a seven-system consortium led by TCI, and two other groups, one led by Adelphia Communications and the other by Hicks Muse Tate & Furst.
Sammons’ sale, which is expected to be finalized this week, “is probably one of the last big deals that will be done,” says Dugan, who is a senior VP in the Tampa office of Communications Equity Associates. (Though Viacom’s sale of its systems may be renegotiated with a new buyer if Congress eliminates the minority tax certificate program).
Other bankers agree that the big cable mergers seem to have run their course. “We are moving away from the phase of mega-cable deals. The next trend is the consolidation of the major urban areas,” says Gregg Seibert, managing director at Merrill Lynch.
Driving the consolidation has been the oncoming competition with telephone companies, which requires “a relatively seamless market coverage,” Seibert says. Fred Nichols, prexy of TCA Cable, says cablers want their footprint “to look like the telephone footprint.”
Now that the big deals have been done, however, cablers will concentrate on tiny acquisitions that fill the holes in their service areas, bankers and industry execs say.
The process of plugging these holes has begun. TCA’s Nichols said TCA had just signed with TW to buy one of its non-clustered systems with 34,000 subscribers and it had a few other similar deals in the works. Time Warner’s purchase of KBLCOM filled out parts of New York City it didn’t control and left Gotham divided between TW and Cablevision Systems.
Consolidation is still to come to Los Angeles, which is host to nine separate operators, including Century Communications, Continental Cablevision and Charter Communications. “That’s crying out” for rationalization, one banker said.
Century, for instance, is looking to buy up any systems it can in Southern California, says Century prexy Bernard Gallagher. He agreed that the number of operators could be rationalized down to two or three in time although he said the operaters may also agree to upgrade their networks for telephone and interconnect.
One way to achieve the remaining consolidation throughout the country is by swapping groups of subscribers between operators, a practice that, Seibert says, is “going to become very active going forward.” That is “an excellent way to rationalize particular markets.”
Last week TCI swapped 50,000 subscribers in Kansas for 40,000 served by Multimedia Inc.’s cable division in Illinois and Oklahoma. The swap increased Multimedia’s Kansas coverage to 95% of the market, Multimedia treasurer Alan Austin said.
As well as forwarding consolidation, these swaps can often be tax effective, bankers say.
Also likely to become more common will be consortia bids, along the lines of the Sammons deal although not as big. Sammons has slightly more than 1 million subscribers spread across 60 systems in 18 states, with the smallest being a 7,000 subscriber system in Moses Lake, Wash.
Before passage of the 1992 Cable Act, an entrepreneurial buyer could have bought Sammons and divided it up in subsequent sales. But the 1992 legislation introduced the “anti-trafficking” rule, which prevented cablers from selling systems within three years of their acquisition.
Bankers expect the new Republican congress to junk this rule as part of a rewriting of the cable law. In the meantime, however, it has led to consortia like the seven-operator group bidding for Sammons under the leadership of TCI.
TCI’s group, which is expected to win the bidding, plans to allocate Sammons systems to fit with each partner’s existing clusters. Len fest Communications, a TCI affiliate which is a partner in the group, has systems in New Jersey where Sammons is strong. TKR, another TCI affiliate and partner in the consortium, has systems in Pennsylvania where Sammons has a big presence.
TCI itself is likely to take Sammons’ Fort Worth, Texas, systems. Century is a partner as well, looking to buy Sammons’ systems in Southern California.
One banker said these consortia can be hobbled by squabbling between the partners over valuations and how much money each should contribute.
Bankers say that at least one more mega-deal may still be done – the sale of Cablevision Systems which could fetch $4.6 billion. TW and its partner US West are known to have negotiated with Cablevision’s controlling shareholder Chuck Dolan in late 1993, but the company was taken off the market after a few months.
Some bankers think Dolan will eventually sell the company. If so, TW or US West would grab it: A combination of TW Cable and Cablevision would create a hugely valuable system covering New York City and Long Island.