Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Private equity firms sure love cable operators.

TPG on Monday agreed to a $2.25 billion deal for RCN Telecom Services and Grande Communications Networks, snapping up the two companies from a smaller buyout firm, Abry Partners.

It's a deal that was likely inspired by TPG's insight into growing demand for affordable, high-speed internet from its various content-related investments. These include music-streaming service Spotify, broadcast television network Univision and film and television studio STX Entertainment as well as talent agency CAA, which negotiates advertising and other deals for clients, including YouTube stars.  Such is the demand for broadband that it gives cable companies such as RCN and Grande ample cover from cord cutters.

TPG's foray into cable comes on the heels of successful transactions in the industry by rivals, who have found willing buyers for their own companies thanks to ongoing consolidation. And before a long-awaited sale to a strategic, many buyout firms bolster their returns by loading up such companies with additional borrowings to pay themselves dividends. That's been achievable because debt investors have welcomed exposure to what has traditionally been a stable, high-margin industry. 

Path Well Trodden
Cable operators traditionally have strong cash flows, which can support dividend payments to their private equity owners
Source: Company filings
*Also, secondary share sales ** CPPIB is among a handful of pension funds that directly invest alongside private equity firms in specific deals

The same applies in Europe, where buyout firms have a bigger pool of targets, due to the number of providers across various countries. 

Across the Pond
Buyout firms in Europe have successfully bought and sold many cable companies to strategics
Source: Company filings

TPG doesn't seem to have overpaid for RCN and Grande: It forked out an average of $5,973 per video subscriber, according to Bloomberg Intelligence analysts. That's cheaper than the $7,300 that Altice paid for both Cablevision and its majority stake in Suddenlink and the $6,840 that Charter paid for Time Warner Cable and Bright House Networks, in part because the latter targets could command premiums for their scale. 

RCN-Grande new

But RCN and Grande have been gaining share, something likely not lost on their acquirer. Bloomberg Intelligence estimates their respective data subscribers have risen 24 percent and 35 percent, respectively, since 2012. If both can continue their march forward, a lucrative exit for TPG may lie ahead. 

-Rani Molla contributed graphics to this article

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net