Cable Operators in Europe Eye IPOs, M&A as Digital Homes Boom
Owners of European cable companies haven’t had it this good for years.
Marred before by debt and losses, European cable operators, many of whose executives will gather today at Cable Congress in Lucerne, Switzerland, face an industry set to grow more than 30 percent by 2014 from about 19 billion euros ($25.6 billion) now. That may spur owners to sell part or all of their holdings or ride the growth of digitization of European homes, which is ringing in profits for operators with high-speed technologies.
“This year will be the acid test as to whether they can monetize those advantages,” said Mark Chapman, an analyst with researcher CreditSights in London.
An exploding appetite for high-definition content and broadband Internet is allowing cable companies with fast triple-play services -- television, Internet and phones -- to boost growth, making them attractive investments. Shares of Kabel Deutschland Holding AG (KD8), Germany’s largest cable-TV operator, have risen 73 percent since investors, led by Providence Equity Partners, sold a stake on the stock market in March last year.
In 2010, the European cable industry had revenue of about 18.8 billion euros, up 6 percent from 2009 and 38 percent from 2005, according to data provided by IHS Screen Digest analyst Guy Bisson. Digital TV subscription revenue more than tripled in those five years, while Internet revenue nearly doubled. Digital TV revenue for the first time exceeded that of analogue TV.
“The business model of cable operators has stabilized,” said Andreas Gentner, head of Deloitte Consulting GmbH’s technology, media and telecommunications practice in Dusseldorf. “By entering the triple-play business, they are generating huge operating profits.”
Spain’s Grupo Corporativo Ono SA returned to profit in 2009, the latest figure available, after a net loss in 2008 of 26.3 million euros. Operating profit at Liberty Global Inc., controlled by U.S. billionaire John Malone, rose 8.9 percent in 2009 to 4.75 billion euros, while that of Kabel Deutschland rose 16 percent last year to 659.2 million euros from the year ago.
“Cable multiples are becoming more attractive from a sellers’ perspective, so now you have the possibility of some relatively significant players coming to market,” Chapman said.
Companies that may come to market this year include Cinven Ltd. and Warburg Pincus LLC’s Dutch cable operator Ziggo B.V.; EQT Partners AG’s German cable operator Kabel Baden-Wuerttemberg GmbH & Co KG.; The Carlyle Group and Providence Equity’s Swedish cable firm Com Hem AB; and Ono, owned by investors and lenders including Providence Equity, GE Capital and Grupo Santander.
“Piece by piece initial public offerings are definitely likely to be a consideration and I wouldn’t be surprised to see three or four players come to market, half of them doing IPOs, half of them doing trade sales,” Chapman said.
Kabel Baden-Wuerttemberg spokesman Martin Herkommer declined to comment as did Com Hem spokeswoman Jessica Sjoeberg.
“The only thing one can say about that is an IPO is one of the possibilities to finance our company in the future,” Ziggo spokesman Erik van Doeselaar said in an e-mail. “There are no concrete actions planned and we don’t have a time schedule.”
Ono spokeswoman Estefania Somoza said the company has no timeline for a sale or a listing on the stock exchange. “We will do it when market conditions are good,” she said.
Cable operators have benefited from a technology called Docsis 3.0, which allows high-speed data transfer on a cable TV system and carries download speeds of up to 160 megabits a second. Phone operators currently offer digital subscriber lines, or DSL, and very high speed digital subscriber lines, or VDSL in some areas, with download speeds up to 50 megabits.
“Looking into 2011, we are fundamental bulls on the global cable industry from an operating perspective,” CreditSights analysts Chris Ucko and Mark Chapman wrote in a report published Feb. 13. “A relatively small investment in Docsis 3.0 proved to be the industry’s Holy Grail.”
German cable operators offering superior speeds compared with Deutsche Telekom AG (DTE), the country’s biggest phone company, are grabbing about half of all new broadband subscriptions.
“Cable is currently in the sweet spot,” Gentner said.
In its “Digital Agenda,” the European Commission calls for a download speed of 30 megabits per second for all citizens and above 100 mbps for at least 50 percent of European households subscribing to internet connections by 2020. Many cable providers in Europe are already at 100 mbps.
At the cable conference, participants are likely to brag about their technological lead while calling for consolidation in Europe to gain ground from telecommunications operators.
In Germany, attempts to consolidate have failed in the past because of antitrust concerns. Cable companies argue that their push into broadband and telephony means that they should be regulated as telecommunications companies rather than as television distributors.
“Antitrust authorities have to make a judgment whether this will lead to diminished competition in the cable sector, or whether they see the markets of telecommunication and cable as more or less integrated,” said Gentner.
If it is the latter, the authorities are likely to be less resistant to a merger between Kabel BW and either Liberty Global’s Unitymedia in Cologne or Kabel Deutschland, based on the outskirts of Munich.
Apart from consolidation, it is technology that cable companies will need to stay ahead, Gentner said.
“When every household is using video on demand, live stream, doing video chatting at the same time and is running not one but three high-definition flatscreens in various rooms, we quickly move out of this 100-megabit area and the cable operators will lose their competitive advantage,” he said.
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