The European Cable industry pulled itself together in Luzerne, Switzerland for its annual jamboree and look in the mirror and for the most part if liked what it saw. But Europe remains a regulatory nightmare, with cable companies having their hands tied as four or five giants, propped up by the world’s largest private equity Groups, try to consolidate the remaining 7,000 European cable companies into a semblance of a coherent industry.
But it is perhaps the past which haunts European cable and every word spoken at this event was designed to shore up the image of an industry that let itself and investors down ten years ago and still can’t be completely forgiven for it.
For a variety of reasons, but mostly down to meeting the costs of government imposed build out targets, cable operators were never the most loved of investments across the European region, so much so that with the exception of the UK, private equity has come to the rescue of the mostly analog community and began during the 90s and early 2000s, the job of upgrading European cable from analog to digital. In the UK it was, of course, far worse, where debt for equity swaps at NTL and Telewest turned the two remaining (out of 21) cable operators, into investment pariahs, as the banks took 99% ownership of the cablecos they bailed out with borrowings, squeezing mostly US investors down to a meager few percent. Today, after a merger with Virgin Mobile UK, that business is an accomplished quadruple play, with the new name of Virgin Media and some of the tarnish has washed away from the investment.
But those same banks have the same problem as all of Europe’s private equity held cable assets, and that’s how to market them to the public investor as a good, safe and valuable investment, and it is this that is on everyone’s mind as most of these investments are coming up for being 5, 6 or 7 years old and ripe for divestment.
So every world spoken at the show, while studiously failing to mention this state of affairs, is pointed at this problem. The messages were that cable is at the heart of ‘tectonic change’, that it is on the verge of broadband supremacy against Telcos, that the shift to digital is unassailable and that it is the ONLY option for a broadband strategy in Europe, meeting all its obligations now which were set for 2020 by European Ministers, and that it is on the verge of invading the enterprise businesses of Europe with 1 Gbps class broadband services.
We’re not saying that these message aren’t true, but we are saying that the ‘Lady Doth Protest too much,’ and that all of this will come to nothing if cable cannot find suitors to buy them out of their hock to the major Private Equity groups around the world who have met the bill.
A few weeks ago it was made clear that there is an answer to both of cable’s questions, consolidating all the smaller businesses and placing a value on cable, simply by those which are already public, pulling on the public coffers to buy mid-tier players. Kabel Deutschland Group (KDG), freshly public in Germany itself and current valued at €3.5 billion and Liberty Global, public in the US and with valuation of $10 billion and $3.2 billion cash in hand, are among the declared bidders for Kabel Baden-W’rttembergs (Kabel BW). All the papers were reporting that the company could sell for as much as €3 billion ($4.07 billion), which is clearly a rumor placed out there for the wider delectation of the cable industry and not likely to be a true figure.
Kabel Deutschland today is worth €3.5 billion on the German public markets, so how would it raise almost the same again to buy a company with revenues of about one third of its revenues (In US$ Kabel BW is on track to deliver around $750 million for the year, from 2.3 million TV homes, while KDG is on track to deliver around $2.13 billion from 8.6 million homes this year. No, the €2.5 to €3 billion figure is a pure fiction, unless if includes repayment of debt as well, and even then it’s a value way beyond any that have been seen before in Europe, despite the fact that this is very much seen as the fight for German TV. Liberty Global paid €3.5 billion for Unity Media, although that included around €1.5 billion in debt, which was immediately cancelled, so the enterprise value was more like €2 billion but this was for 4.5 million TV customers.
There was a lot of rhetoric surrounding this deal at the show. Liberty Global CEO Mike Fries told us, ‘We have not revealed what we are bidding and cannot say anything about a deal, and anyway the bids are not due in yet.’ It’s thought that bids are due in the next few days.
Adrian Hammerstein, CEO for KDG stood up at the show and implored the German authorities, ‘Cable MUST be allowed to consolidate,’ a direct call to the German Bundeskartellamt (Kartel Office) to not intervene in his company’s bid for what was once its stable-mate. KDG, Kabel BW, and several parts of Unity Media were once owned by Deutsche Telekom, and every year his company has tried to pull the strings to bring them all back together into single ownership.
Interestingly, early in the show, at the kick off press conference, Manuel Kohnstamm, president of Cable Europe (the industry association which runs the show), and also Managing Director, Public Policy & Communications at Liberty Global, had said that the industry did not need government aid or intervention, a jibe at the way some Telcos have been propped up within the EU, and a call to allow the continued consolidation led by Liberty Global, across Europe. He also said that there was no evidence that DTH would be taken to the heart of the German public, a valid point given that cable reached into 18.5 million German homes out of 35 million total TV homes. Sky Germany has just 2.3 million subscribers and is the only pay DTH player of note.
Perhaps the feelings at the Bundeskartellamt have changed since the last time it said no to KDG, and a lot hangs in the balance. If it blocks a deal with its one time stable-mate KDG, then the price of Kabel BW (being sold by Swedish Private Equity group EQT) could collapse, and no deal may get done. On the other hand, why should the German authorities allow a sale to another stable-mate in Unity Media, especially as it is now held by the largest cable group outside of the US. If its job is to prevent market distortion, then it can hardly side with an organization that dwarfs KDG.
But if it blocks both, then the only other buyer is going to be another Private Equity group and that’s not a permanent solution. The right answer is for Kabel BW to go public and early on in proceedings that’s what its preferred option was supposed to be. However it no longer talks about an IPO, and right there is the quandary for all European cable.
However it must be said that German cable is notoriously weak financially. It has ARPUs in the €10 range, and although it can see them coming to be in the mid-teens, it casts a jealous eye at more digital, better prepared, triple play markets (like the Netherlands) which boasts ARPUs close to €30. Ziggo is a case in point with an ARPU around €32.90, which is perhaps why organizations like the Moody debt agency is only slowly raising its appraisal of KDG, which just slipped upwards one notch to ‘Ba2.’ Without that shift, KDB would have been unable to re-schedule all of its debt and push it back into the wide blue yonder, when it may have a high enough share value to raise money through rights issues. Already it has seen a 70% stock rise since its IPO, but it still remains ‘untrusted’ by usual German blue chip investment standards.
Ziggo itself is the next financial event on the Cable Horizon (no pun intended, the new Liberty global DVR devices is code named Horizon). Ziggo is the largest cable network operator on the Dutch market and came about as a result of a three-way merger, led by shareholders Warburg Pincus and Cinven, which ate up €5.6 billion, which means simply that when it IPOs it needs to attract a value up around €7.3 billion, and once again, if it fails, it will continue to leave questions over what cable companies in Europe are worth. And for as long as that question remains unanswered, and there remains uncertainty that major corporate investment funds will chase these shares, then there is little hope for the 7,000 little guys scattered around the European Union cable market, eking out a living waiting for some big public entity to come along and buy them out.