Market Watch

Charter, Bresnan Test Appetite for Cable Assets



A proposed secondary stock listing by creditors and equity-holders of US cable company Charter Communications, along with the separate auction of ex-Charter subsidiary Bresnan Communications (now backed by Providence Equity Partners), will test the appetite for investment in cable TV systems. Charter, which has five million subscribers, filed for clearance to sell up to $3bn worth of shares and Bresnan, which has 320,000 subs, is worth upwards of $1bn, according to various reports.

The St. Louis-based Charter is emerging from a 2009 bankruptcy and subsequent financial restructuring orchestrated by shareholder and Chairman Paul Allen. In the restructuring, Charter shed $8bn in debt, which gave creditors, including Allen, equity that many now want to sell. Charter also secured a $3bn infusion from insiders selling during the restructuring. The bankruptcy at Charter, which is the nation's fourth largest cable pay-TV operator, was a byproduct of acquiring cable systems and piling on debt to achieve an ambitious vision of a 'wired world' that did not materialize to the extent Allen had been banking on.

Meanwhile, Providence Equity Partners is looking at options regarding the sale of the more financially-steady Bresnan Communications. Cable giant Comcast has a 30% stake and the estate of founder Bill Bresnan, who died in 2009, also holds a stake; however at this stage it is not clear if Comcast is willing to sell its stake. The Comcast tie has strategic value because it enables Bresnan to come under the Comcast umbrella for volume discounts in TV channel carriage deals.

Credit Suisse First Boston and UBS are conducting the auction. Published reports speculate that pay TV operators Suddenlink Communications and Knology are actively bidding. Bresnan subscribers are located in Colorado, Montana, Wyoming and Utah.

Another potential cable pay TV seller is New York-based Cablevision Systems, which has 3.06 million video subs and which streamlined its operations with the February 2010 spinoff of its Madison Square Garden unit. Few big cable transactions occurred in the economic slide, though in March 2009 media conglomerate Time Warner Inc. spun off Time Warner Cable into a separate entity that currently has 12.8 million video subscribers.

Analysis
A window of opportunity seems to have opened for sellers. Publicly-traded cable pay-TV operators are reporting robust earnings gains and surprisingly light erosion of video subscribers, despite further encroachment from telco-offered IPTV. Media stock analysts are raising cable company valuations as a consequence, also noting the wind-down of analogue transmission in parallel with lower digital costs and greater capacity. The infrastructure cost of shifting to all-digital is now mostly complete, putting a lid on imminent capital expenditures. Analysts are also bullish on the prospect of higher advertising revenue from targeted and interactive advertising.

Finally, the broader economic landscape has improved while credit markets have loosened up, which has enabled buyers to finance cash bids. Interest rates are low. In the coming years, as interest rates begin to climb, the exit window may not be so clear for investors, particularly if the economic recovery stalls. Also, down the road, there is a threat that over-the-top video services may begin to undercut subscription TV.