There is something magical about private equity groups. They can see money where others can only see debt, problems and grief. That, at least is what Faultline has always thought as we have witnessed private equity horse trading in virtually every global satellite fleet and every cable operator in Europe, over the past five to seven years.
So hearing on Bloomberg that EQT Partners AB, a long term player in cable TV operators, is planning to IPO Kabel Baden-Wuerttemberg about the third largest cable operator in Germany, suddenly rang alarm bells. Usually EQT would look at one of its bigger brethren in the private equity world, and simply pass on its investment and take a profit.
That’s what it did on the past when it sold Com Hem in its native Sweden to the Carlyle Group a few years ago (2005) and this process is fairly sacred. One company takes the company over, borrows cash to upgrade it, then sells the assets in a far more digitally prepared state, and so gets more money for it, whether or not it has more customers.
In that same way Cinven in 2006 sold out of Casema (which went on to be part of the dominant Ziggo in the Netherlands), having earlier that year bought out UPC in France and added it into the creation of what is Numericable today.
This is what these companies do, they buy one or two defunct cable operators which are debt laden, rejig their debt, take out more, spend it on upgrades, mergers or new marketing propositions and then sell them on. They do NOT take them public unless all else fails, because the public markets have not been vaiable since 2002 for this type of investment. So we have to ask the question, at least in Europe, is private equity about to get out of cable and end the endless pass the parcel process which is now established here.
Is it that they have plenty of private equity offers on the table but that an IPO is so much more attractive?
The news coverage suggests that Kabel BW may fetch a value as high as €2 billion ($2.7 billion). Kabel BW has around 2.3 million TV customers, and although it is private and does not give out its financials, we suspect this is a static to falling number, in line with other German operators such as the leading Kabel Deutschland, which lost 26,000 last quarter and over 200,000 since last year, but which has increased the number of RGUs (revenue generating units or customer deals) because it will have sold more double and triple play services, adding broadband and voice.
But just how anyone gets to the value of €2 billion when Kabel Deutschland has a market capitalization of just €3.3 billion is something of a mystery. Kabel Deutschland has just made a small loss for the past few quarters but has healthy growth in its broadband and phone lines and is 4 times larger in terms of total customers. It might be to do with the amount of debt that Kabel Deutschland carries compared to the debt that Kabel BW will end up with. Sure Kabel BW has lots of HD customers and is growing double and triple plays even faster than Kabel Deutschland. Kabel Deutschland IPO’d itself in March which was put down to the fact that it was so large that private equity groups couldn’t raise the money rather than the IPO markets being desperate for good deals.
Now it looks to us like private equity has lost its collective appetite, and we’ll look with interest if the IPO goes ahead, because if the rest of Europe’s smaller cable operators suddenly find a waning Private Equity appetite and a return to confidence in cable in public markets, there are another 25 IPOs possible in the coming year or two.
In November Liberty Global paid out about €2 billion euros for Unity Media a company with 4.5 million cable customers, ostensibly twice the size of Kabel BW, so if Liberty Global thinks that the German public market is ready to pay €2.3 billion for Kabel BW, then why wouldn’t it immediately IPO 50% of Unity Media and get all of its money back?
Which is why we are wondering just how much credibility to give this report, especially given that the EQT deal in 2006 to buy the company valued it only at €1.3 billion. That’s €1billion for holding the stock for 5 years. Back then Unity, Kabel Deutchland and Kabel BW had wanted to re-merge (they were all once part of Deutsche Telekom) and that was persistently blocked by the ‘Kartel Office’ anti-trust authority in Germany. That meant that German rivals were out of the bidding and surely that would have lowered the price, not raised it. And the Kartel office still has the same opinion.
All this speculation might be proved wrong if a late bid for Kabel BW emerges from another private equity firm, after all. But perhaps that was the real plan all along.