IPOs, takeovers and mergers are the preferred flavours of restructuring in the cable TV market just now. Don’t fall into the trap of believing that private equity investors have been excluded; they have simply missed a trick, albeit temporarily… 

Hype rises to the surface quickly when you dip a digit into the melting pot of the cable TV industry in Europe and beyond. ‘Triple Play’ – the notion of a converged offering of voice, broadband and entertainment – has grabbed the attention of analysts and to a lesser extent investors.

Recent months have seen a string of ownership transfers involving Auna in Spain, Versatel in Holland, Telenet in Belgium, Cablecom in Switzerland and Telewest in the UK. More than €12bn in equity is sloshing around as part of the small print in these deals: it ain’t peanuts.

History thing
Placing a value on cable TV properties has always been difficult. It’s a history thing.

In certain parts of Europe, they began life with oodles of (mostly American) investment and high hopes. US enthusiasm for such investments tended to be exhausted before critical mass was reached, thanks to domestic pressures faced by the US RBOCs post-1996 Telecom Act. At the time, ‘triple play’ was scarcely a twinkle in the eyes of American trade investors.

Elsewhere, cable TV networks were the province of municipal authorities and/or national telco monopolies, for the simple reason that their monopoly ‘rights of way’ all but excluded third parties from taking a significant position. Just as North American interest waned in ‘open’ CATV markets, municipal and state interest waned in the ‘closed’ ones.

In either scenario, investors were over-extended by the investment required to build alternative loops capable of delivering the breadth of services that would ultimately come to be known as ‘triple play’. Telcos, other utilities, North American investors lost patience and either reduced their support or exited their position altogether.

By the end of the 1990s, the clanging chimes of Chapter 11 doom were resounding in the ears of those who would stand fast, while the less committed got out in whichever way possible. The vacuum thus created was filled by the private equity investors (PEIs) and venture capitalists, not because they had the faintest idea about what was going on but because they could afford to intervene.

Cable TV was ‘low rent’. Private equity investors seized the opportunities. In shorthand form, we can describe this evolution as initial enthusiasm, followed by expensive disappointment, followed by mess-clearing conducted by the vulture capitalists. Briefly, they were the kings of cable.

Now it looks like the private equity investors are cutting, selling and running. This smacks of poor judgement. PEIs may be turning their attention to more conventional telcos. ‘Slash and burn’ might be a credible strategy for the management or the undoing of mis-management in the sub-US$20bn market cap telcos (a huge list, which can be viewed by clicking here), but is it at base a cowardly response on the part of the big boys of ‘red in tooth and claw’ capitalism?

Coming second
Here’s a proposition. Private equity is being squeezed out of the bids for cable TV company control; the reason is that the trade – telcos – have more cash and more ambition than the vultures. So have the latter missed their chance? The authorities looking after the sale of 35% of Tunisie Télécom in Tunisia, stressed in the original tender document that their invitation was open to “strategic investors and consortia led by a strategic investor” (click here). For PEIs, it’s a fairly insulting piece of graffito written indelibly on their favourite wall. Even developing countries don’t seek their involvement if it means companies being run by the Gucci loafer-shod denizens of Wall St or Pall Mall.

Here are five reasons why:
1) Auna: the Spanish CTV operator was the makeweight in this year’s sale of cellular operator Amena to France Telecom. The PEIs, armed with break-up value spreadsheets, were undone and then outbid by the resolution of buyer France Telecom and seller Auna to place the cable TV operation firmly in the hands of ONO, thus creating a nationwide threat to telco Telefónica. For Auna’s utility and banking owners, there was the small matter of €2.25bn into the bargain. The PEIs bleated that they had been used as ‘stalking horses’ for the purpose of flushing out trade/telco interest: hey guys, that’s capitalism. It’s also a case of trade buyers behaving like PEIs (for more details, click here);

2) Versatel: in July of this year, Tele2 paid some €750mn for the Dutch cable interests of Versatel. As part of the deal, private equity firm Apax took control of Versatel’s German interests for some €565mn (click here if you are interested). What drove the deal through two months of prolonged haggling which featured Belgacom, among others, was the Dutch end of the equation (observers might care to note that missing out on gilt-edged opportunities is in Belgacom’s mission statement).

3) Telenet: based in Flanders, Belgium’s industrial heartland, Telenet is a surprising example of a municipally-backed cable company that realised the potential for adding telecom services onto its core TV offering at an early stage. In this it was abetted by US group Liberty Media, which retained a 21% stake in the venture after this month’s IPO by buying additional shares – a pointer, missed by most including me, to Liberty’s subsequent strategy in Switzerland (see below). The IPO valued Telenet at more than €2.5bn (click here for details) – not bad for a company that covers just half of Belgium. Its value to Tele2, who as we have seen are the new owners of Versatel with a contiguous footprint to that of Telenet, might comfortably be twice that amount.

4) NTL/Telewest: there’s a permanent indentation on the middle finger of my right hand – it’s the finger I use to type – that is forever indebted (as well as indented) thanks to the reporting of the endless saga of the merger between two UK cable companies, NTL and Telewest (for some tedious background, click here). It emerged early this month that NTL is to pay US$6bn for Telewest, creating a company, and a unified competitor to incumbent British Telecom, worth somewhere in the region of US$18bn. Since BT’s market cap is just shy of US$35bn, this is not to be sneezed at in the fixed-line world. Indeed, alternative operators are already canvassing that the cable monopoly’s access network be unbundled.

5) Cablecom: the IPO of this cable operator in the high-spending high-density Swiss market was expected to follow the sale of Telenet in Belgium. Instead, and perhaps because of the wan demand for Telenet shares, Liberty Media (itself a Telenet shareholder) went nuclear, scrapping the IPO and buying the company outright for a cool SFr4.4bn (€2,85bn). Bruno Claude, Chief Executive Officer and President of Cablecom, said: “this transaction represents the culmination of a tremendous turnaround of the company in just four years. This transformation is a tribute to our employees. The outcome announced today will deliver a strong number two telecommunications market position in Switzerland, which is our long-term objective.”

And...?
You can run some rules over these by and large separate events and arrive at some staggering and startling conclusions.

Let’s start with the staggering ones.

For all that US investment did invigorate the European cable sector, it’s involvement is now negligible. To all intents and purposes only Liberty remains, and even then there is a suspicion that Liberty is more of a PEI by nature than a trade investor. Events in Switzerland will tell us.

PEIs are departing the European cable arena, not always willingly, but there is no safeguard (and nor should there be) against the prospect of an early return. Cable companies may have been satisfied with the way that they have flirted with bankruptcy and then emerged from it; they are still encumbered with debt, however, while stakeholders constrain their freedom of action. Given the pressing need to upgrade the cable network in the case of more established operators of continental Europe, this is a worry.

So what’s startling about all of this?

If you subscribe (sorry, poor choice of word) to the theory that old-style telcos are a waning force in today’s wireless/VoIP environment, you have to concede that cable operators armed with ‘triple play’ service offerings ought at least to match the telcos within months. If VoIP really does erode telephony revenues and mobile feasts on the rest, it’s suddenly the PTOs that appear enfeebled; by contrast, the cable companies look bright, not least because it is surely going to be a long time before the mobile operators can match their broadband data and infotainment services, whatever the mobile operators themselves might say.

More startling, therefore, as millions of euros sloosh around in the sector, is the fact that few people recognise the potential of cable operators to become next-generation telcos. This may be the fault of the companies themselves. Staff from the mild-mannered municipalities and pencil-chewing BSDs from the financial world might just have failed to realise what they have at their disposal.

This is the most startling thing of all and it might yet be where the PEIs find a way back into the sector. At a conservative estimate you could buy up the entire EU cable base for say, €150bn. In the great scheme of things and in a booming market that is really not a lot of money. With a modicum of insightful management, it would be a goldmine.
Jim Chalmers