At least 15 buyout firms that own stakes in cable companies have generated huge returns in the last three months by selling to Paul Allen, the co-founder of Microsoft Corp. and majority owner of Charter Communications.
Since the beginning of the year, Charter has agreed to buy 12 cable platforms-10 of which were buyout firm portfolio companies. Mr. Allen’s vehicle currently is pursuing Bresnan Communications which was acquired earlier this year by The Blackstone Group and TCI Communications in a $1.25 billion buyout (BUYOUTS Feb. 22, p. 1).
Mr. Allen actually started Charter by acquiring platforms that had been built by buyout firms. He first bought Marcus Cable in April 1998 from Goldman Sachs Capital Partners, Hicks, Muse, Tate & Furst Inc. and Freeman Spogli & Co. among others (BUYOUTS May 18, 1998, p. 18), and in January acquired Charter Communications from Charterhouse Group International and Kelso & Co., and he merged the two and used it as the platform for his other buys.
Charter believes the broadband capabilities of cable systems will accommodate the convergence of cable television, computers and telecommunications. Mr. Allen believes this convergence, which he calls the “Wired World,” will rely on the cable modem to deliver an array of new services, such as digital video programming, high-speed Internet access, Internet telephony and electronic commerce, according to SEC records. Partners at Charter Communications did not return calls.
One Man’s Vision Begets Strong Returns
In short, Mr. Allen’s vision has provided a windfall for buyout firms.
ABRY Partners may have received the best return on its dollars. It invested $40 million in May 1998 in Avalon Cable and will receive $240 million back when Charter Communications buys Avalon in November.
“Paul Allen believes he has all these wonderful software services and that cable is the best way for him to reach the consumer,” said Joel Cohen, the chairman of Avalon. “He thinks that to buy a cable system that is in place and to upgrade the wire is less expensive than building a new system from scratch.”
As a result, Mr. Allen has been paying between a 15- and 20-times EBITDA multiple for companies for which financial buyers paid only a 10-times multiple little more than a year ago.
Although Mr. Allen is doing almost all of the buying from LBO shops, he is not solely responsible for the cable industry’s steep multiples. AT&T Corp. this winter set the pace when it agreed to acquire MediaOne in a $62 billion stock swap because of the potential value it saw in the company’s cable lines.
“AT&T was busy buying MediaOne and Paul Allen was buying everything else,” says one G.P. who sold his company to Mr. Allen.
In reality, other cable companies such as Comcast Corp. and Adelphia Communications Corp. also have been buying properties from buyout shops such as The Carlyle Group and J.P. Morgan Capital Corp.; however, these groups have not been as aggressive as Mr. Allen’s Charter. One investment banker said he believes Mr. Allen pays slightly more for cable companies than other strategic buyers because he can write off the losses recorded by his investments against his personal taxes. Most cable companies generate a profit until one factors in amortization costs-which drives down profits, the investment banker said.
The happy recipients of Mr. Allen’s largess include Morgan Stanley Capital Partners, which in April 1998 invested $100 million in Renaissance Media Group LLC and soon will receive a $200 million payday; Sandler Capital Management, a mezzanine investor, which contributed $12 million in April 1996 in Helicon Cable and will receive $36 million in return this July; and Providence Equity Partners and SG Capital Partners LLC (part of Societe Generale), both of which each invested $20 million in April 1998 in American Cable Entertainment and received $38 million each in May when the company completed its sale to Charter.
No less than Blackstone, Charterhouse Group International, Boston Ventures, Hampshire Equity Partners (formerly ING Equity Partners), Kelso & Co., Narragansett Capital Partners, Paine Webber, Veronis, Suhler & Associates and Willis Stein & Partners also all have generated similar returns through cable investments thanks to Paul Allen.
It started when LBO shops bought into an industry that they viewed as favorable because it saw consistent revenue stream, even though others stayed away from the industry.
“Financial buyers became interested when the telephone companies decided not to pursue local phone service and video services. Cable became the lone video survivor and financial buyers realized they could offer more services on cable,” Mr. Cohen said. “Financial buyers believed they could build up systems to have greater capacity and simply generate revenue through repetitive income.”
On the downside, buying cable companies required plenty of equity as banks were nervous about lending to cable companies in the mid-1990s, and the extra equity required kept some buyout firms away.
“We bought because we thought the basic infrastructure of cable was valuable,” said Tracey Rudd, a managing partner at Hampshire Equity Partners. “Other financial buyers were probably not contrarian thinkers, and this is an equity hungry business.”
In August 1995, Hampshire invested $23 million in Rifkin & Associates and two years later invested an additional $54 million to help Monroe Rifkin, the company’s founder, launch another cable roll-up called InterLink Communications. Mr. Allen has agreed to buy both cable platforms likely netting Hampshire $212 million for its $77 million equity investment.
In both cases, the buyout firm partnered with other financial buyers, Ms. Rudd said, because the equity slugs needed to roll up the cable companies were larger than it could have financed on its own.
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