The year 2011 is on track to be the busiest year for cable system deals since 1999. According to IHS Screen Digest's research, 23 sale agreements for cable systems have been announced since the beginning of the year. In aggregate, the deals covered systems serving over 1.1m basic subscribers and fetched approximately $3.9bn, with an average per-basic-subscriber price tag of $3,530. The systems were concentrated in rural and semi-rural communities in the South and Midwest. These sales will result in the disappearance of five small-to-mid size operators: Broadstripe, Insight, Avenue Broadband, Maricopa Broadband and Vision Communications.
While the average per-deal subscriber count was approximately 50,000 subscribers, the median was less than 10,000 subscribers, indicating that the great majority of the deals were on the smaller side. In fact, of the 23 announced deals, nine deals were smaller than 5,000 subscribers. Only one deal was bigger than 100,000 subscribers - the Insight acquisition by Time Warner Cable. Besides the Insight deal, only three deals crossed the 50,000 basic subscriber mark. This is a far cry from 1999 when the average per-deal subscriber count was over 350,000 subscribers.
This shopping spree is partly caused by historically low interest rates, which largely benefited small cable operators who would not have been able to make such acquisitions if it had not been for affordable credit. Operators like TruVista, NTS Communications and Orbitel Communications fall in this category of buyers. During 2011, these operators have entered into deals that increased their subscriber bases by 30-40 per cent.
Secondly, some of the small operators making the acquisitions were beneficiaries of federal broadband stimulus grants to build out advanced FTTH networks to underserved communities in rural America. While these funds may not be spent directly on the acquisitions, they provide these small operators with added incentive to spend their own money on strategic buys. For example, NTS Communications, which made two acquisitions in 2011, received approval in 2010 from the Broadband Initiative Program of the American Recovery and Reinvestment Act, for a total $99.9m funding. Similarly, Troy Cablevision, which acquired Knology systems in Alabama earlier this year, was the recipient of a $26m grant from the federal government.
Another major driver of increased M&A activity is the survival instinct of larger operators who are trying to position themselves favorably in an increasingly competitive entertainment landscape. Faced with escalating programming costs and softening demand for TV services from consumers, operators are increasingly under economic pressure to consolidate their operations in order to cut costs and maintain market share. For example, Time Warner Cable, the second largest cable operator in the US, was one of the biggest buyers in 2011, acquiring systems serving 750,000 basic subscribers from Insight, NewWave and an unknown small cable operator. Once finalised, the deals will bring the operator's subscriber count back to Q4 2009 levels, essentially reversing the accelerated subscriber shedding TWC has witnessed over the past seven quarters.
The fourth major cause of this M&A spree is accelerated activity in the investment community with many private equities (PE) attempting to exit the cable industry. For example, the sale of Insight to Time Warner Cable marks the exit of the Carlyle Group from the cable space. The other two owners of Insight, Crestview and MidOcean, have reportedly put up their remaining cable property, OneLink Communications, for sale. Other PEs have also expressed interest in parting with their cable assets for the right price, which could result in another flurry of M&A activity in 2012.
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