For Digital TV Europe.net May 12, 2010

The recession has not treated the pay-TV business all that badly compared with free-to-air broadcasters, and the easing of the credit crunch put a renewed spring into the step of delegates at the recent Cable Congress in Brussels.

With some observers expecting an orderly private-equity withdrawal from European cable this year, the sense of relief from both the private-equity guys and cable executives who have been working under private-equity supervision was palpable at the conference. Not that the cable guys are ungrateful. Far from it. No-one else wanted to fund the business through its consolidation phase. And the transition to digital has been a good time to keep financials out of the public market gaze.

But now the markets – both credit and equity – are easing and opportunities are opening up for private-equity exits and for operators to consolidate. Before deciding in March to launch an IPO, Germany’s largest operator Kabel Deutschand (KDG) followed a dual track strategy, considering both a private sale and a public offering – until its owners concluded that the public market might yield a bigger payout. Selling to another private-equity group was shelved when Deutsche Bank came in with a public market valuation above the likely industry sale price.

Its owners believe that KDG “has a long way to run”, John Hahn, managing director of majority shareholder Providence Equity Partners told Cable Congress. “The IPO is about belief in the business.” Hahn said that Providence is a “patient investor” and that the best course is a “partial monetisation, not a full monetisation”. Cable is “a utility with growth”. So Providence figures the valuation it can get today is not as high as it could be, and floating about a third of the company, giving KDG a value of €5bn or so, is a way to take a partial exit but also stick around for the upside that should be coming in the next few years.

It is true that cable valuations in Europe are much lower than during the go-go years of the early 2000s. Then the average value per home was well over ?1,000, boosted by the promise of triple-play to come. But in more recent years the values have been half that, often with triple-play in place. Private equity companies that invested in 2003, when the average per-home value had plummeted, are much better-placed for a big upside on a sale or an IPO.And there are a bunch ready to happen: Com Hem’s owners in Sweden are looking at an exit, while Denmark’s YouSee just announced an IPO.

The owners of Numericable in France are looking for an exit, while those of Ziggo in the Netherlands will likely sell soon. And other German cablecos could be in play, including Kabel BW and Orion, while Primacom, which is 90.49% owned by Luxembourg-based Escalline Holding, is being looked at by Liberty Global among others, according to reports.

Interestingly, it was not so long ago that Germany’s second-biggest operator Unitymedia also looked at an IPO. Two weeks before the flotation was due to be announced, it opted for a sale to Liberty Global. That only happened because the price was right and the debt markets were favourable; Liberty was able to raise €2.66bn in very short order to buy out Unitymedia’s owners BC Partners and Apollo Management. Now, with the credit markets loosening, there is money to be had for re-financing the debt that cable companies took out in better times. There is as much as €250bn of debt that needs to be refinanced over the next four or five years. About half of that is bank debt, according to Providence’s Hahn. But given the new-found robustness of the credit markets, he is not worried about re-financing. Indeed the credit markets are eager to invest in what they see as utility businesses, with infrastructure as a hedge against anything really bad going wrong, as Marisa Drew, managing director of investment banking at Credit Suisse, told the Cable Congress.

Elsewhere, consolidators including Liberty Global are in the spotlight and although Shane O’Neil, Liberty’s chief strategy officer, has already been busy, he is not likely to slow down now. “Over the last two years we didn’t do much and we didn’t feel good about that,” said O’Neill. “We thought we had lost our mojo.” Liberty now has US$3bn (€2.2bn) to do transactions, and a willing debt market. Since its recent sale of its Japanese cable business to KDDI, the company is one to watch.

As private-equity exits or partly exits cable in Europe, where is the business heading? Triple-play and quadruple play are the watchwords. Certainly cable’s USP is fast broadband and a controlled environment for premium content to be offered and monetised. And with credit opening up, cable can move forward with that.

“Most of us operate on a leveraged basis of three to five times our cash flow,” said O’Neill at Cable Congress. “So when the capital dries up, the market starts to give cable a proctology exam. It was uncomfortable. But we got through it and now we are growing revenue and customers again.” Whew. Glad it’s 2010 and not 2009 any more.