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K.C. Neel and Joshua Cho
Once dismissed by Wall Street as likely candidates for the auction block, both Adelphia Communications Corp. and TCA Cable TV last week continued to flex their acquisition muscles with the purchase of cable properties around the U.S.
What's more, analysts now say the two companies are likely to swallow up more properties if the opportunity is right.
Adelphia will pony up almost $1.2 billion to buy privately held Harron Communications Corp. - which counts about 300,000 customers in New England, Philadelphia and the northern suburbs of Detroit - in a deal expected to close early next year. TCA, meanwhile, agreed to acquire systems counting some 23,000 subscribers in Georgetown, Williamson County, Pflugerville and Leander, Texas.
Indeed, both MSOs have been pegged by analysts and industry observers alike as sellers of cable properties surprising Wall Street with their aggressive acquisition strategies. The Harron deal was Adelphia's third major acquisition in less than two months, and its fifth purchase since last November.
"There are certain swap and trade opportunities that will enable us to rationalize our strategy," said Adelphia VP-finance Jim Brown. "We believe we can handle more acquisitions and we're not taking ourselves out of the game, but we're not actively recruiting either."
In addition to the Harron properties, all but one of which are contiguous to its existing systems, Adelphia has agreed to buy Century Communications Corp. for $5.2 billion and FrontierVision Partners LLP for $2.1 billion. The deals put the Coundersport, Pa.-based Adelphia customer count up to about 5 million and positions it fourth on the list of top U.S. MSOs.
Analysts said last week that the Harron deal is pricey at $3,900 per subscriber, or 13.9 times next year's pro forma cash flow of $84 million. Still, it is well below the $60 billion Comcast Corp. is paying for MediaOne Group.
What's more, prices for cable systems have climbed in recent months because of the potential new revenue streams from new services including telephony and high-speed Internet access.
TCA, on the other hand, historically doesn't pay mega prices for subscribers because of the mid-size markets it operates in. The company declined to say how much it paid for the Texas properties.
Since last fall, TCA has traded systems counting some 27,500 customers in Oklahoma and Texas with Washington Post Co. subsidiary CableOne and formed a joint venture partnership with Tele-Communications Inc. - now AT&T Broadband & Internet Services. The company has also been quietly and selectively picking up small rural systems in its service territory of Texas, Louisiana and Oklahoma.
"Subscribers in downtown Manhattan are worth much more than ones in Round Rock, Texas," said Stephens Inc. analyst John Corcoran, who noted that the highest TCA ever paid was $2,300 per subscriber. "They're not interested in buying Houston. These guys want to stick to what they know best."
Tyler, Texas-based TCA operates in mid-sized markets with an average system size of around 12,000 subscribers. Their largest system has 60,000 customers. The company operates primarily in Arkansas, Louisiana and Texas.
Both Adelphia and TCA are acquiring systems that can be easily integrated into their existing operations. For its part, Adelphia is seeking technically advanced operations. Century has been aggressively upgrading its operations but Adelphia will have its hands full upgrading the FrontierVision properties. About two-thirds of Harron's cable systems are slated to be upgraded to at least 550 MHz by the time the Adelphia deal closes, Brown says.
Harron's internal growth of about 3% a year - about double the industry average - coupled with the fact that the systems are located in areas where the median income exceeds national averages made the properties highly attractive to a number of MSOs. But it was Harron's executive team that approached Adelphia with a buyout proposal, according to Brown.
"The Rigas family (which control Adelphia's stock and dominate its management team) and the Harrons have been talking for 20 years about joining forces," Brown said last week. "Rather than auction their properties on the open market, they asked Tim (Rigas, Adelphia's top finance guru and EVP) whether he'd like to deal with them and he jumped at the chance."
Harron, a family-owned company since its inception in 1958, is selling all its cable interests. It will retain its broadcast interests, including a TV station in Portland, Maine, in addition to some other investments.
"It is becoming increasingly evident that consolidation in the industry needs to continue in order to offer customers advanced services and the highest levels of customer service and technical support,' said Paul Harron Jr., president-CEO, in a prepared statement.
Unlike other recent Adelphia deals, the Harron transaction is strictly cash. The MSO will use existing credit lines to borrow the money to buy the Harron properties. That may lift Adelphia's debt-to-cash flow ratios just a bit but Brown said economies of scale more than outweigh any leveraging aspects of the deal.
Analysts last week agreed. News of the deal lifted Adelphia's stock to $69.38 a share on April 14, up $61 a share a week earlier.
"They're my heroes," joked Mediacom LLP CEO Rocco Commisso. "Seriously, they've got a phenomenal management team and are among the best in the industry. They're issuing stock but will continue to control the company. It's a win/win for everyone."
Meanwhile, TCA continues to prowl for additional acquisitions. The properties it agreed to buy last week are also well positioned to grow nicely in the future. The communities picked up in the acquisition include those that are home to Dell Computer Corp. and retirement community Sun City in Georgetown, which has plans to build 10,000 homes there. The deal is expected to close in June.
The acquisitions will give TCA around 900,000 customers. The announcement boosted TCA's stock close to its all-time high, closing April 14 at $46.94, up $3 from its April 7 close of $43.94.
The deals came as no surprise to those familiar with the company. During an analyst conference on March 12, TCA's CEO/president, Fred Nichols expressed an interest in scooping up systems saying the company is hot to pick up even more systems from big MSOs.
"There's been tremendous consolidation in the last six months and we think this will offer some opportunities for TCA. We're very dominant in our geographic area and some systems were bought into by companies who don't have a presence in these areas. We're making sure we have the right contacts to pursue those," Nichols said.
MSOs are well aware that "TCA is there and that we're ready to talk about systems that don't fit into their long-term strategy," TCA VP Bob Roseman said.
Analysts said large MSOs often shy away from the mid-sized markets, partly because they levy "super-high" rate increases like they can in larger markets. However, the company has attracted the interest of investment maven Warren Buffett and his holding company Berkshire Hathaway, which has an 8% stake in the company.
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