Presentation on theme: "Current Cable Landscape"— Presentation transcript:
1 Current Cable Landscape Citi Corporate and Investment Banking | MediaApril 24, 2013Current Cable LandscapePerspectives on Value and Recent M&A TransactionsStrictly Private and Confidential
2 Table of Contents 1. Public Market Update 1 2. M&A Market Update 13 3. M&A Case Studiesa. Cablevision’s Sale of Optimum West to Charter24b. Cogeco’s Acquisition of Atlantic Broadband27c. Apollo, Oaktree and Crestview’s Sale of Charter Shares to Liberty Media30
3 Citi Corporate and Investment Banking | Media 1. Public Market Update
4 Cable Stocks Have Outperformed 1-Year Stock Price PerformanceSince 4/19/2012CableRBOCDBSS&P500Note: 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.1
5 Performance Drivers Differed by Operator Drivers of 1-Year Share Price PerformanceNote: Data current as of 4/19/2013.(1) Other reflects changes in minority interest, non-cable assets, unconsolidated investments and preferred shares.2
6 EBITDA Multiples Have Increased Public cable multiples have recovered from 2008 and private market multiples have expanded.Public and Private FV / EBITDA Multiples Over TimeCable Deal Hiatus3Note: Multiples represent averages. No private cable transactions announced during 2008 – 2009.
7 Public Valuations Reflect Recent Performance Firm Value / 2013E EBITDACableDBSTelcoConsolidated FV / ’13 EBITDA(1)(1)(1)(1)2013E – 2015E EBITDA CAGRSource: Company filings and Wall Street research.Note: Market data as of 4/19/2013.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…HY CCC IndexHY B IndexHY BB index10-yr TreasuryYield To Worst…That Are Highly Supportive of Cable5
9 Large Players Focused on the Landscape Residential(subscribers in millions)Wireless(subscribers in millions)--VideoDataEnterprise(2012 Revenue, $ in millions)Other6Source: Company filing, Equity Research.9999999999999
10 Demand for Data is Primary Driver of Outperformance… Cable is Advantaged in Reach… (US Household Fiber / Cable Coverage, HH in mm)#FiOS HH#U-Verse HHFiber % US HH PassedCable % US HH PassedCable Homes Passed: 97% of HHsTelco Homes Passed: 43% HHsInitial Telco Fiber Rollout Complete…And HSD Technology (Download Speed in Mbps)Cable offers a superior product across 54% of its homes passed7
11 …Commercial Opportunity is a Secondary Driver… Enterprise: A $100 billion Market Opportunity… (Revenue Market Share)CableOtherCable Operators Plan to Expand Capabilities to Drive Market Share Gains (2012E Enterprise Revenue, $ in bn)Estimated Opportunity: $25bnAcquired a CLEC and VoIP providerEstimated Opportunity: $20bnAcquired Navisite, an enterprise hosting providerEstimated Opportunity: ~$9bn in Tier 2/ 3 CitiesProvides services in the New York metro area through Optimum LightpathRecently acquired cloud communications provider TelovationsOther8
12 …Both Contributing to Revenue Growth Revenue Growth Contribution 2011A – 2012A Growth in Revenue & Segment Growth Contribution9
13 Growth Profiles Enhanced by “Catch-up” Opportunity Cable Penetration % of Homes Passed; as of 12/31/12HSD Penetration (% of HP)PSU Growth2012A10
14 Investors Focused on Costs Programming Costs Increasing Faster than ARPU… % GrowthPrimarily Driven by Sports Rights & Retrans Fees (Affiliate Fees: ’09A – ’15E) ($bn)SportsRetransCable Nets’12 – ’15 CAGR9.2%’09 – ’12 CAGR8.7%6.8%7.2%23.7%27.8%10.3%9.1%Video Gross Profit Margin11Source: Wall Street research.
15 Programming Costs Pressuring Margins Change in Programming Cost / Sub 2012A vs. 2011AEBITDA Margin 2012AEBITDA Margin Y-o-Y Change (bps)12
16 Citi Corporate and Investment Banking | Media 2. M&A Market Update
18 Further Consolidation Likely Current Cable Landscape (Subscribers in 000s)CableDBSTelco14
19 Three Groups of Acquirors Acquiror TypeMotivationsExampleLarge OperatorsLeverage programming costsReduce tax paymentsOperating cost reductionCharter/ Optimum WestWestRoll-ups / Platform ExpansionConsolidate rural systemsAdjacent marketsLeverage SG&A costsCogeco / Atlantic BroadbandFinancial BuyersLiberty / CharterLow risk investmentNeed leverage / scaleWhat is exit?15
20 Wide Range of Processes Type of ProcessBroad AuctionLimited AuctionBilateral NegotiationCatalyst for ProcessSponsor nearing end of investmentNot aligned with Company’s core marketsSponsor nearing end of investment Death of founderFocus parent’s businessPrior Processes3Total Number of Parties Involved7+Did not sell12+2616
21 Scale is Increasingly Valuable to Operators 2012A Capex per Subscriber2012A Programming Cost per SubscriberLargest firm pays ~20% less than smallest firms(1)(1)Programming Costs ($ per sub per month)Capex Per Subscriber(1)(1)Subscribers (mm)Subscribers (mm)17(1) Based on regression curve including CMCSA, CHTR, CVC, TWC DTV and DISH.
22 Synergies Have Been Meaningful Precedent Transaction Synergies(1)Source: Company filings, Wall Street research.Represents tax shield of incremental interest cost.18
23 Synergy Potential Will Drive View of Value Large StrategicMid-Sized StrategicFinancial SponsorsRevenueSomePenetration?NoneCost Structure% SynergyProgramming20%5%0%Field Costs10%Marketing15%Customer ServiceCorporate Overhead50%25%Other Operating Costs2.5%Total Synergies10 – 15%5 – 10%1 – 2.5%19
24 Tax Assets Can Be Valuable Larger Operators Looking to Reduce Taxable Income (2013E Taxable Income)Value of A Tax Step-up Can Be Attractive Illustrative $750mm Tax Step-up ExamplePotential Fully Utilized Value of Tax Step-up20(1) Based on regression curve including CMCSA, CHTR, CVC, TWC DTV and DISH.
25 Seller and Buyer Have Different Perspectives Transaction ATransaction B0.8x EBITDA2.4x EBITDA(1) Includes debt and swap breakage costs and other transaction costs.21
26 Financial Sponsors Focused on Cable Sector Numerous Sponsors Bidding On Cable AssetsWhat Are Sponsors Looking For?Management TeamCan back existing teamsProvide additional expertisePlatform for Roll-upsSpreads costs across marketsIncreases exit alternatives“Catch-up” OpportunitiesUnderpenetrated “rural” systemsChance to upgrade plantScale / LeverageabilityNeed scale and an exitLeverage required to hit returns22
27 Returns Dependent on Scale and Leverage Illustrative Cable LBOMinimum scale required for sufficient leverage and to preserve exit opportunitiesLenders attracted to recurring free cash flow, physical assets, high marginsBond market can be accessed for additional leverage if issuance is above ~$150mmMarket conditions have increased leverage available to acquirors23
28 Citi Corporate and Investment Banking | Media 3. M&A Case Studies
29 a. Cablevision’s Sale of Optimum West to Charter Citi Corporate and Investment Banking | Mediaa. Cablevision’s Sale of Optimum West to CharterWest
30 Charter / Optimum West Transaction Overview ProcessOn February 7th, 2013, Cablevision Systems Corporation entered into a definitive agreement to sell Bresnan Broadband Holdings, LLC (“Optimum West”) to Charter Communications Inc. for $ billionPurchase price represents 10.0x Optimum West’s LTM Adjusted Operating Cash FlowOptimum West serves approximately 366,000 customers in Montana, Colorado, Wyoming and UtahCablevision had acquired Bresnan in June for $1.4 billion (8.1x LTM EBITDA)Citi advised Cablevision on the transactionLimited number of targeted participants13 weeks from beginning of process to signingDistribution of information package in first roundFull diligence in second roundImplied Transaction Multiples24
31 Optimum West Asset Overview Geographic OverviewKey Operating Metrics(September 30, 2012)MetricPerformancePremises Passed665,500Basic Penetration(% of Premises Passed)45.7%Digital Penetration(% of Basic Subscribers)83.3%HSD Penetration42.9%Voice Penetration25.4%3-Product Bundling(1)40.6%% above 750 MHz90.0%Principal CompetitorsCenturyLink (No IPTV video offering)DirecTV, DISHMontanaKalispellHavreMissoulaGreat FallsHelenaBillingsBozemanSheridanCodyGilletteJacksonCasperWyomingLaramieCheyenneGrand JunctionCedar CityCanon CityDurangoLamarUtahColoradoOptimum West HeadendsOptimum West States Served(1) 3-product bundling defined as the percentage of unique customers who subscribe to three of Optimum West’s core products (video, HSD, voice).25
32 Optimum West Transaction Rationale Attractive MarketsStrong household and population growthHigh levels of employment and stable economic baseSignificant new home constructionStrong Competitive Position and Unmatched Product OfferingMarket leader in video and HSD with 45.7% and 42.9% penetration, respectivelyIn 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)Fully Upgraded, High Quality SystemsCarrier class plant and network with 90% two-way 750 – 860 MHz capacityState-of-the-art Network Operations Center, Regional Operations Center and principal call centers all within Optimum West’s footprintSignificant Investment and Operating Improvements by Cablevision$80 million in capital to migrate off net2phone, introduce higher HSD speeds and connect additional headendsRevamped sales and marketing team by adding door-to-door sales resources and dedicating resources to SMB, bulk and Enterprise customer segments26
33 b. Cogeco’s Acquisition of Atlantic Broadband Citi Corporate and Investment Banking | Mediab. Cogeco’s Acquisition of Atlantic Broadband
34 Transaction Overview Overview Key Terms On July 18th, 2012, Cogeco announced the acquisition of Atlantic Broadband (“ABB”) for $1.36 billion in cashTransaction valued at 8.8x forward EBITDA (8.3x net of tax structure)Cogeco is a leading cable operator based in Montreal, CanadaAtlantic Broadband is the 14th largest cable provider in the U.S., serving 251,000 basic cable subscribersABB was previously owned by ABRY Partners and Oak Hill Capital Partners (acquired from Charter in 2004)Structure provides meaningful tax benefits back to CogecoCogeco will acquire 100% of ABB in an all-cash dealCogeco received incremental financing for $660mm of the purchase priceCogeco funded the remaining portion of the purchase price with cash and its own credit facilityTransaction closed in December 2012Implied Transaction Multiples27
35 Atlantic Broadband Asset Overview Business OverviewKey Operating Statistics(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 mile92% of the platform fully upgraded to all digital or operating 750MHz capacity or higherDOCSIS 3.0 covers 85% of homes passed98% of homes passed are internet and telephone ready and two-way connection capableSource: Company materials.(1) As a percentage of homes passed.Geographic Footprint(As of 6/30/2012)Atlantic BroadbandHeadquartersQuincy, MAWestern PennsylvaniaHomes Passed: 243,177Basic Customers: 122,419Maryland/DelawareHomes Passed: 60,530Basic Customers: 21,126Aiken (South Carolina)Homes Passed: 56,114Basic Customers: 22,641Miami BeachHomes Passed: 155,525Basic Customers: 85,532Note: Basic Customers include Basic Television and Digital Video customers.28
36 Atlantic Broadband Transaction Rationale Attractive Entry into U.S. Markets7,900 miles of network with average density of 65 homers per mileUnderpenetrated markets imply room for growthLess competitive markets suggest ability to maintain pricingHigh Quality Network Infrastructure92% of platform was fully upgraded to all digital or operating at 750MHz or higherDOCSIS 3.0 covers 85% of ABB’s homes passedCommercial Growth Opportunity~30% commercial revenue CAGR despite having less than 10% of market shareApproximately 40,000 businesses within existing networkProvides Platform for Future GrowthPlatform allows Cogeco to explore other ways to deploy capital in the U.S. cable sectorNeighboring markets facing limited competition as well29
37 Citi Corporate and Investment Banking | Media c. Apollo, Oaktree and Crestview’s Sale of Charter Shares to Liberty Media
38 Apollo, Oaktree and Crestview’s Sale of Charter Shares to Liberty Media OverviewPro Forma OwnershipOn 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 $2.617bnShares were sold for $95.50 per share, representing a premium of 6.0% to Charter’s closing share price on March 15th, 2013Values Charter at 8.0x FV / 2013E EBITDAThe transaction is expected to close in the first half of the 2nd quarter of 2013Citi acted as financial advisor to Apollo and Oaktree on this transactionImplied Valuation of CharterGovernanceUnder the terms of the stockholder’s agreement, Liberty Media has the right to name up to four directorsLiberty is restricted from acquiring a stake exceeding 35% until January 2016 and 39.99% into perpetuity30(1) Total proceeds includes warrants.
39 Charter Asset Overview Business OverviewFourth largest U.S. cable operator based on homes passed and basic video customersDiverse geographic footprint spread across mid-tier metropolitan and rural areasThomas Rutledge joined as CEO in Nov 2011 and has hired other legacy Cablevision key executivesSignificant capital invested in plant upgradesKey Operating Stats4,197,000 basic video subs (1)3,484,000 digital video subs3,917,000 high speed data subs1,979,000 telephone subs13,577,000 total RGUsGeographic Footprint (As of 12/31/2012)31(1) Includes commercial video and residential video.
40 Charter Transaction Rationale Strong Cable Operating ExperienceInvestment 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 countriesConsistent with Liberty Media Investment StrategyBest opportunity for re-entry for Liberty Media as large stake with governance rights could be acquired at a modest premiumCharter operations large enough to benefit from scale with a path to more over timeCapital Investment Has Been MadeCharter’s owners have made significant capital investments in infrastructure upgradesLiberty investment comes at time when Charter is primed for growth32
41 Citi Corporate and Investment Banking | Media Q&A33
42 Christina Mohr Managing Director, Mergers & Acquisitions Citi Corporate and Investment Banking | MediaCiti Contact InformationChristina Mohr Managing Director, Mergers & AcquisitionsOffice: 1 (212)Derek Van Zandt Managing Director, Global Communications GroupOffice: 1 (212)34