Up Next for Buyouts: Cable TV
Not so long ago, the field of cable TV was a small-time business. Dozens of local networks, often run by families—think John Rigas' Adelphia Communications, for example—operated within tiny jurisdictions that regulators carved out as franchises. Now, with the cable industry scaling up to take on telecom in traditional telephony areas, those local barriers and small family players are giving way to giants—many of which may soon go global with private equity buyouts.
The Carlyle Group's bid for British cable company Virgin Media (VMED) is a sign that investment dollars are clamoring to push into the global cable market. New York-based Virgin Media, which counts billionaire Richard Branson as its largest shareholder, confirmed July 2 that it had received a buyout bid. While it didn't identify the identity of the bidder, one person familiar with the talks confirmed earlier media reports that private equity giant Carlyle had offered to buy the company. Dow Jones Newswires (DJ), citing a person familiar with the talks, reported that Carlyle was offering $8 billion to $10 billion. With Virgin's debt, the total value of any deal could reach $20 billion.
Unlike its new, fierce rivals in the telecom business, cable remains a picture of fragmentation, with more than a dozen major companies in the U.S. alone. The $200 billion telecom market is split mostly among two players—AT&T (T) and Verizon Communications (VZ)—and a handful of independent companies such as Qwest Communications International (Q). Contrast that with the $60 billion U.S. cable market: 15 sizable players and thousands of operating franchises.
Add to that scenario the coming battle royal with telecom as cable companies expand into new areas such as fixed line and wireless voice and Internet services. Cable operators also will need greater scale to give them leverage in the squabbles over marketing and programming.
"M&A happens when change is occurring, because things are bad or because things are getting to a new plateau, and both conditions exist in communications," says Robert Profusek, co-chair of the M&A practice at global law firm Jones Day.
Telecom's Growing Popularity
The Virgin talks represent private equity's growing interest in telecom, an area once considered too risky. Global private equity volume for the first half of this year hit a record $630.9 billion, up 37% from a record $459.2 billion during the first half of 2006, according to researcher Dealogic. Telecom was the private equity sector leader, with $113 billion in deals—four times more than in the first half of last year.
Look for convergence of various traditionally telecom services in the cable arena to be the main theme as the merger-and-acquisition activity unfolds, investment bankers say (see BusinessWeek.com, Deal Flow, 10/21/05, "Cable and Wireless Convergence"). Rupert Murdoch and News Corp., (NWS) and Liberty Media's John Malone have done well building global satellite companies. Cable companies are following suit, with operators such as Comcast (CMCSA) expected to look abroad for growth.
Private equity players such as Carlyle are likely to be interim buyers of assets such as Virgin, which has been losing subscribers in the face of competition from rivals in satellite TV, telecom, and the Internet. A private equity firm can afford losses for a few years while addressing the investment's problems, and then sell the improved property to a strategic buyer in two to four years.
Who's likely to be next? Investment bankers say there are several targets attracting attention in the European cable TV market. Malone's Liberty Global (LBTYA) is the largest of the lot, with 13 million video subscribers. Its operations are scattered, however, with a presence in markets from Poland to the Czech Republic and Austria. Some of its subscribers are outside Europe, spanning the globe from Japan to Puerto Rico. It wouldn't be surprising to see Liberty operate as both a buyer and seller of assets, building more concentrated customer clusters in certain markets and leaving others.
There are plenty of potential buyers for European cable assets. Wireless carrier Vodafone (VOD) is considered a potential buyer of assets on the continent. Just as cable companies including Comcast ponder acquisitions of wireless companies such as Sprint Nextel (S), wireless companies are pondering acquisitions in the cable sector (see BusinessWeek.com, 10/25/06, "Bulking Up to Take On Cable"). "Would it be surprising if wireless companies such as Vodafone were looking at acquisitions in cable? No, it wouldn't," Profusek says.
The next largest European cable operators are concentrated in Germany: Kabel Deutschland and Orion Cable. Kabel was founded during the 1990s tech boom with capital from investors such as Apax Partners. Current investors include U.S. private equity giant TPG.
Consolidating the U.S. Market…and Beyond
There's quite a bit of room for consolidation in the U.S. market as well. Insight Communications, which has 1.4 million subscribers in four Midwestern states, has put itself on the block. The company already has a deal to sell about half of its subscribers to Comcast, and private equity firms are looking to acquire the remaining customers, investment bankers say. Bresnan Communications, which serves Montana and other Western states, also is considered a target, according to investment bankers.
The cable market outside of the U.S. and Europe is in its nascent stages. The greatest opportunity for cable acquisitions in Asia may exist in the highly fragmented Indian market. India's consumer economy is booming, as is the M&A market. M&A in India hit $46 billion during the first half of 2007, more than doubling the volume for all of 2006, The Economic Times reported, citing comments by Dun & Bradstreet's (DNB) chief executive for India, Manoj Vaish. D&B said telecom deals helped lead the way. The market contains a plethora of possible targets such as Hathaway Cable and Datacom.
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