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Perspectives on Value and Recent M&A Transactions Current Cable Landscape April 24, 2013 Citi Corporate and Investment Banking | Media Strictly Private.

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Presentation on theme: "Perspectives on Value and Recent M&A Transactions Current Cable Landscape April 24, 2013 Citi Corporate and Investment Banking | Media Strictly Private."— Presentation transcript:

1 Perspectives on Value and Recent M&A Transactions Current Cable Landscape April 24, 2013 Citi Corporate and Investment Banking | Media Strictly Private and Confidential

2 Table of Contents 1.Public Market Update1 2.M&A Market Update13 3.M&A Case Studies a. Cablevisions Sale of Optimum West to Charter24 b. Cogecos Acquisition of Atlantic Broadband27 c. Apollo, Oaktree and Crestviews Sale of Charter Shares to Liberty Media30

3 1. Public Market Update Citi Corporate and Investment Banking | Media

4 Cable Stocks Have Outperformed 1-Year Stock Price Performance Since 4/19/2012 Note: Cable based on volume weighted average of Cablevision, Charter, Comcast, and Time Warner Cable. DBS based on DirecTV and Dish. RBOC based on Verizon and AT&T. Cable RBOC DBS S&P500 1

5 Performance Drivers Differed by Operator Note: Data current as of 4/19/2013. (1) Other reflects changes in minority interest, non-cable assets, unconsolidated investments and preferred shares. Drivers of 1-Year Share Price Performance 2

6 EBITDA Multiples Have Increased Cable Deal Hiatus Note: Multiples represent averages. No private cable transactions announced during 2008 – 2009. Public cable multiples have recovered from 2008 and private market multiples have expanded. Public and Private FV / EBITDA Multiples Over Time 3

7 Public Valuations Reflect Recent Performance Firm Value / 2013E EBITDA Telco Cable DBS 2013E – 2015E EBITDA CAGR Consolidated FV / 13 EBITDA (1) Source: Company filings and Wall Street research. Note:Market data as of 4/19/2013. (1)Represents Cable Firm Value / 2013E Cable EBITDA. CVC / Charter pro forma for sale / acquisition of Bresnan. CMCSA pro forma for acquisition of 49% stake in NBCU. 4

8 Debt Markets Love Cable Robust Financing Markets… Yield To Worst HY CCC Index HY B Index HY BB index 10-yr Treasury …That Are Highly Supportive of Cable 5

9 Large Players Focused on the Landscape Enterprise (2012 Revenue, $ in millions) Other Residential (subscribers in millions) Wireless (subscribers in millions) -- Source: Company filing, Equity Research. Video Data 6

10 Demand for Data is Primary Driver of Outperformance… #FiOS HH #U-Verse HH Fiber % US HH Passed Cable % US HH Passed Initial Telco Fiber Rollout Complete Cable Homes Passed: 97% of HHs Telco Homes Passed: 43% HHs Cable is Advantaged in Reach… (US Household Fiber / Cable Coverage, HH in mm) …And HSD Technology (Download Speed in Mbps) Cable offers a superior product across 54% of its homes passed 7

11 …Commercial Opportunity is a Secondary Driver… Enterprise: A $100 billion Market Opportunity… (Revenue Market Share) Other Estimated Opportunity: $25bn Acquired a CLEC and VoIP provider Estimated Opportunity: $20bn Acquired Navisite, an enterprise hosting provider Estimated Opportunity: ~$9bn in Tier 2/ 3 Cities Provides services in the New York metro area through Optimum Lightpath Recently acquired cloud communications provider Telovations Cable Operators Plan to Expand Capabilities to Drive Market Share Gains (2012E Enterprise Revenue, $ in bn) CableOther 8

12 …Both Contributing to Revenue Growth Revenue Growth Contribution 2011A – 2012A Growth in Revenue & Segment Growth Contribution 9

13 Growth Profiles Enhanced by Catch-up Opportunity HSD Penetration (% of HP) Cable Penetration % of Homes Passed; as of 12/31/12 PSU Growth 2012A 10

14 Investors Focused on Costs Video Gross Profit Margin Programming Costs Increasing Faster than ARPU… % Growth Source: Wall Street research. Primarily Driven by Sports Rights & Retrans Fees (Affiliate Fees: 09A – 15E) ($bn) Sports Retrans Cable Nets 8.7% 9.2% 6.8% 7.2% 27.8% 23.7% 9.1% 10.3% 09 – 12 CAGR 12 – 15 CAGR 11

15 Programming Costs Pressuring Margins Change in Programming Cost / Sub 2012A vs. 2011A EBITDA Margin Y-o-Y Change (bps) EBITDA Margin 2012A 12

16 2. M&A Market Update Citi Corporate and Investment Banking | Media

17 Private Market Multiples Have Expanded Target: Acquiror: FV / Forward EBITDA Jun 2012Jul 2012 Jun 2012 2010 – 2011 Average Average: 8.4x Feb 2013 8.8x (1) (1) Multiple without tax adjustment. 13

18 Further Consolidation Likely Telco Cable DBS Current Cable Landscape (Subscribers in 000s) 14

19 Three Groups of Acquirors Large Operators Roll-ups / Platform Expansion Financial Buyers Leverage programming costs Reduce tax payments Operating cost reduction Consolidate rural systems Adjacent markets Leverage SG&A costs Low risk investment Need leverage / scale What is exit? Acquiror TypeMotivationsExample Charter/ Optimum West Cogeco / Atlantic Broadband Liberty / Charter West 15

20 Wide Range of Processes Process 1Process 2Process 3Process 4Process 5 Type of Process Broad AuctionLimited AuctionBroad Auction Bilateral Negotiation Limited Auction Catalyst for Process Sponsor nearing end of investment Not aligned with Companys core markets Sponsor nearing end of investment Death of founder Sponsor nearing end of investment Focus parents business Prior Processes 30000 Total Number of Parties Involved 7+Did not sell12+26 16

21 Scale is Increasingly Valuable to Operators 2012A Programming Cost per Subscriber Programming Costs ($ per sub per month) Subscribers (mm) 2012A Capex per Subscriber Largest firm pays ~20% less than smallest firms Capex Per Subscriber Subscribers (mm) (1) (1) Based on regression curve including CMCSA, CHTR, CVC, TWC DTV and DISH. 17

22 Synergies Have Been Meaningful Precedent Transaction Synergies (1) Source: Company filings, Wall Street research. (1)Represents tax shield of incremental interest cost. 18

23 Synergy Potential Will Drive View of Value Large StrategicMid-Sized StrategicFinancial Sponsors Revenue Some Penetration? None Cost Structure % Synergy Programming 20%5%0% Field Costs 10%5%0% Marketing 15%10%5% Customer Service 0% Corporate Overhead 50%25%15% Other Operating Costs 5%2.5%0% Total Synergies 10 – 15%5 – 10%1 – 2.5% 19

24 Tax Assets Can Be Valuable (1) Based on regression curve including CMCSA, CHTR, CVC, TWC DTV and DISH. Larger Operators Looking to Reduce Taxable Income (2013E Taxable Income) Value of A Tax Step-up Can Be Attractive Illustrative $750mm Tax Step-up Example Potential Fully Utilized Value of Tax Step-up 20

25 Seller and Buyer Have Different Perspectives (1) Includes debt and swap breakage costs and other transaction costs. 0.8x EBITDA 2.4x EBITDA Transaction ATransaction B 21

26 Financial Sponsors Focused on Cable Sector Numerous Sponsors Bidding On Cable AssetsWhat Are Sponsors Looking For? Management Team Platform for Roll-ups Catch-up Opportunities Scale / Leverageability Can back existing teams Provide additional expertise Spreads costs across markets Increases exit alternatives Underpenetrated rural systems Chance to upgrade plant Need scale and an exit Leverage required to hit returns 22

27 Returns Dependent on Scale and Leverage Illustrative Cable LBO Minimum scale required for sufficient leverage and to preserve exit opportunities Lenders attracted to recurring free cash flow, physical assets, high margins Bond market can be accessed for additional leverage if issuance is above ~$150mm Market conditions have increased leverage available to acquirors 23

28 3. M&A Case Studies Citi Corporate and Investment Banking | Media

29 a. Cablevisions Sale of Optimum West to Charter West Citi Corporate and Investment Banking | Media

30 Charter / Optimum West Transaction Overview On February 7 th, 2013, Cablevision Systems Corporation entered into a definitive agreement to sell Bresnan Broadband Holdings, LLC (Optimum West) to Charter Communications Inc. for $1.625 billion Purchase price represents 10.0x Optimum Wests LTM Adjusted Operating Cash Flow Optimum West serves approximately 366,000 customers in Montana, Colorado, Wyoming and Utah Cablevision had acquired Bresnan in June 2010 for $1.4 billion (8.1x LTM EBITDA) Citi advised Cablevision on the transaction Implied Transaction Multiples Limited number of targeted participants 13 weeks from beginning of process to signing Distribution of information package in first round Full diligence in second round ProcessOverview 24

31 Optimum West Headends Optimum West States Served Kalispell Havre Great Falls Missoula Helena Bozeman Billings Jackson Cody Sheridan Gillette Casper Laramie Cheyenne Cedar City Grand Junction Lamar Canon City Durango Montana Utah Colorado Wyoming Geographic Overview Key Operating Metrics (September 30, 2012) (1) 3-product bundling defined as the percentage of unique customers who subscribe to three of Optimum Wests core products (video, HSD, voice). Optimum West Asset Overview MetricPerformance Premises Passed665,500 Basic Penetration (% of Premises Passed) 45.7% Digital Penetration (% of Basic Subscribers) 83.3% HSD Penetration (% of Premises Passed) 42.9% Voice Penetration (% of Premises Passed) 25.4% 3-Product Bundling (1) 40.6% % above 750 MHz90.0% Principal Competitors CenturyLink (No IPTV video offering) DirecTV, DISH West 25

32 Carrier class plant and network with 90% two-way 750 – 860 MHz capacity State-of-the-art Network Operations Center, Regional Operations Center and principal call centers all within Optimum Wests footprint Market leader in video and HSD with 45.7% and 42.9% penetration, respectively In the areas it serves, Optimum West is the only integrated triple-play provider in the market (CenturyLink has limited HSD speeds (3 Mbps) and no proprietary video product) Strong household and population growth High levels of employment and stable economic base Significant new home construction $80 million in capital to migrate off net2phone, introduce higher HSD speeds and connect additional headends Revamped sales and marketing team by adding door-to-door sales resources and dedicating resources to SMB, bulk and Enterprise customer segments Optimum West Transaction Rationale Attractive Markets Strong Competitive Position and Unmatched Product Offering Fully Upgraded, High Quality Systems Significant Investment and Operating Improvements by Cablevision 26

33 b. Cogecos Acquisition of Atlantic Broadband Citi Corporate and Investment Banking | Media

34 Transaction Overview On July 18th, 2012, Cogeco announced the acquisition of Atlantic Broadband (ABB) for $1.36 billion in cash Transaction valued at 8.8x forward EBITDA (8.3x net of tax structure) Cogeco is a leading cable operator based in Montreal, Canada Atlantic Broadband is the 14 th largest cable provider in the U.S., serving 251,000 basic cable subscribers ABB was previously owned by ABRY Partners and Oak Hill Capital Partners (acquired from Charter in 2004) Structure provides meaningful tax benefits back to Cogeco Implied Transaction Multiples Cogeco will acquire 100% of ABB in an all-cash deal –Cogeco received incremental financing for $660mm of the purchase price –Cogeco funded the remaining portion of the purchase price with cash and its own credit facility Transaction closed in December 2012 Key TermsOverview 27

35 Atlantic Broadband Asset Overview Business Overview Geographic Footprint (As of 6/30/2012) 14th largest cable provider in the U.S. Technologically advanced network –~7,900 miles of network plant with an average density of 65 homes per mile –92% of the platform fully upgraded to all digital or operating 750MHz capacity or higher –DOCSIS 3.0 covers 85% of homes passed –98% of homes passed are internet and telephone ready and two-way connection capable Key Operating Statistics (As of 6/30/2012) Source: Company materials. (1) As a percentage of homes passed. Western Pennsylvania Homes Passed: 243,177 Basic Customers: 122,419 Maryland/Delaware Homes Passed: 60,530 Basic Customers: 21,126 Aiken (South Carolina) Homes Passed: 56,114 Basic Customers: 22,641 Miami Beach Homes Passed: 155,525 Basic Customers: 85,532 Note: Basic Customers include Basic Television and Digital Video customers. Atlantic Broadband Headquarters Quincy, MA 28

36 ~30% commercial revenue CAGR despite having less than 10% of market share Approximately 40,000 businesses within existing network 92% of platform was fully upgraded to all digital or operating at 750MHz or higher DOCSIS 3.0 covers 85% of ABBs homes passed 7,900 miles of network with average density of 65 homers per mile Underpenetrated markets imply room for growth Less competitive markets suggest ability to maintain pricing Platform allows Cogeco to explore other ways to deploy capital in the U.S. cable sector Neighboring markets facing limited competition as well Atlantic Broadband Transaction Rationale Attractive Entry into U.S. Markets High Quality Network Infrastructure Commercial Growth Opportunity Provides Platform for Future Growth 29

37 c. Apollo, Oaktree and Crestviews Sale of Charter Shares to Liberty Media Citi Corporate and Investment Banking | Media

38 Apollo, Oaktree and Crestviews Sale of Charter Shares to Liberty Media Implied Valuation of Charter On March 19, 2013, Apollo, Oaktree, and Crestview entered into a definitive agreement with Liberty Media to sell 26.9 million shares and 1.1 million warrants of Charter Communications for $2.617bn Shares were sold for $95.50 per share, representing a premium of 6.0% to Charters closing share price on March 15 th, 2013 Values Charter at 8.0x FV / 2013E EBITDA The transaction is expected to close in the first half of the 2nd quarter of 2013 Citi acted as financial advisor to Apollo and Oaktree on this transaction Pro Forma Ownership (1) Total proceeds includes warrants. Under the terms of the stockholders agreement, Liberty Media has the right to name up to four directors Liberty is restricted from acquiring a stake exceeding 35% until January 2016 and 39.99% into perpetuity Overview Governance 30

39 Charter Asset Overview Business Overview Fourth largest U.S. cable operator based on homes passed and basic video customers Diverse geographic footprint spread across mid-tier metropolitan and rural areas Thomas Rutledge joined as CEO in Nov 2011 and has hired other legacy Cablevision key executives Significant capital invested in plant upgrades Key Operating Stats 4,197,000 basic video subs (1) 3,484,000 digital video subs 3,917,000 high speed data subs 1,979,000 telephone subs 13,577,000 total RGUs (1) Includes commercial video and residential video. Geographic Footprint (As of 12/31/2012) 31

40 Charters owners have made significant capital investments in infrastructure upgrades Liberty investment comes at time when Charter is primed for growth Best opportunity for re-entry for Liberty Media as large stake with governance rights could be acquired at a modest premium Charter operations large enough to benefit from scale with a path to more over time Investment in Charter represents a re-entry into U.S. cable market (Sold TCI to AT&T in 1999) Liberty Global owns numerous international cable assets across 13 countries Charter Transaction Rationale Strong Cable Operating Experience Consistent with Liberty Media Investment Strategy Capital Investment Has Been Made 32

41 Citi Corporate and Investment Banking | Media Q&A 33

42 Citi Contact Information Christina Mohr Managing Director, Mergers & Acquisitions Office: 1 (212) 816-9247 E-mail: Derek Van Zandt Managing Director, Global Communications Group Office: 1 (212) 816-0633 E-mail: Citi Corporate and Investment Banking | Media 34

43 Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce our own environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citis unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change Position Statement, the first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology, and other carbon-emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh of carbon neutral power for our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing of electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions. Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks. efficiency, renewable energy and mitigation © 2013 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

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