01 Jul 2007

The last five years have seen a €16bn capital injection into European cable. The expertise in cost-cutting and strategic focus that has accompanied this money has put more to rights in the cable industry in the last five years than the prior decade of shifting owners and strategic plans.

So who is behind this transformation? None other than the current scourge of the financial markets, the opaque industry that has been a lightening rod for all manner of critics from labour unions to politicians to even tax authorities: private equity. Private-equity owners have by several measures cured European cable of what ailed it - fragmentation, under-investment and failure to add new and competitive products. Private-equity companies led by Providence Equity, Cinven, Warburg Pincus, EQT and Carlyle have changed the fortunes of European cable and helped the industry double in value since 2000, with 2006 total revenue worth €17bn, according to Screen Digest. Some cable companies that have undergone private-equity investment and restructuring have seen their values rise four-fold, albeit from a low base.

Over the last five years a number of large private-equity backed cable entities have emerged. In France the fragmentation of the industry was such that strategic buyers came and went. However, Cinven and Altice have done the seemingly impossible, consolidating Numericable, France Télécom, Noos and UPC under one umbrella brand. Germany had a similar problem of fragmentation plus a legacy arrangement with the former monopoly cable operator Deutsche Telekom that crippled efforts to create viable businesses. Apollo, JP Morgan and BC Partners acted as a consolidator into what is now called Unity Media, while Providence Equity Partners (with help form Goldman Sachs and Apax in the first phase) repositioned the Deutsche Telekom systems into Kabel Deutschland GmbH (KDG). Today KDG and Unity control 73% of the German cable market at level three.

Similar stories have developed elsewhere with the result that most of the consolidation is over and the companies have embarked on upgrade plans to put them on a more competitive footing against the telcos and, in some markets, satellite broadcasters.

Across Europe, the triple-play strategy for cable has been the Holy Grail since the late 1990s but for the most part the three-product plan failed to work the first time round. But now the economics of triple-play have changed, driven by the arrival of voice-over-IP. Not only have the private-equity investors put money into upgrading the cable systems to digital, but the new products have taken off. In 2006 40% of cable revenues were generated by telecoms services (internet and phone), according to Screen Digest.

The growth trajectory is clear: cable internet services are set to double by 2010 and almost triple in eastern European countries. In addition, there will be 14m European cable telephone subs by 2011. The ARPU mix per service varies from market to market, but it is clear that cable TV subscriptions are flat or falling across Europe. Aggressive IPTV and DTT operators are taking a share, while in markets such as the UK the premium satellite broadcaster is attracting the highest value subscribers interested in HD and other services.

Given growing competition, operators must focus on driving ARPU. Telephony has worked but telcos offer similar services on DSL at competitive prices. The next phase is about growing the triple-play - or in some cases quadruple-play - into a strategy to stand up better against IPTV and satellite players such as BSkyB that are reshaping themselves into triple-play providers as well. This may not be smooth-sailing. There is some scepticism from the debt markets about funding private-equity involvement in this next phase. Making triple-play a growth story may not be as easy as consolidating franchises. But being able to offer attractive interactive, on-demand and localised content services is one way that cable could be able to stand out against its rivals.

Tellingly, there now seems to be growing interest from trade buyers in European cable. For example, the UK's Virgin Media has seen interest from both private-equity players and the biggest US cable operators, namely Comcast and Time Warner.

For the last few years the exit for private-equity companies invested in European cable has been limited to sales to other private-equity companies (a notable exception being the successful cable IPO of Multimedia Polska in Poland in late 2006).

But this may be changing as industry players look to buy into cable. Liberty Global is always eager to consolidate its European footprint but is more likely to be interested in less mature markets, namely those in eastern Europe, for growth. But there may be other potential buyers, including alternative network operators eager to grow their service footprints and perhaps even ambitious satellite players looking for a return path bigger than the one offered by satellite or DSL.