Cable, guys?

The recent completion of the sale of the remaining German cable franchises held by Deutsche Telekom to a consortium of private equity buyers made up of Apax Partners, Goldman Sachs and Providence Equity Partners for €1.725 billion was a landmark transaction for the sector. This conclusion has been a long time coming: the debt-burdened DT completed the first stage of its asset sale, selling its North Rhine-Westphalia regional network to Callahan Associates, at the beginning of 2000.

For the analysts and commentators who have covered the sector, one of the most difficult aspects has always been attempting to assess what the value of cable businesses really is. In many countries, Germany included, but most notably the Low Countries (such as The Netherlands) as well as Switzerland, a cable connection is viewed in the way the rest of us would regard the provision of water, gas or electricity. In other words, a straightforward utility that most don't notice unless something goes wrong: a regular payment that once in a while we may look at, but most of the time we don't. Yet in other markets such as the UK and, to a degree, France where single providers such as BSkyB and Canal+ have succeeded in marketing ?premium? services and cable connection penetration is at a much lower level, it is perceived very differently. In this sense, the choice available to investors was between low quality, low cost, but high penetration and low ?churn? (i.e. the number of customers cancelling the service) franchises such as those in central Europe; or higher quality, premium charge, but low penetration and in need of considerable future development, such as those in the UK.

In financial terms, the profitability and investment requirements for these two types of cable business varied broadly. In the UK and France, for example, simply putting wires in the ground and persuading people to connect to them was the greatest challenge. In the established markets, putting in newer, higher capacity connections was seen as the priority in order to achieve the holy grail of service provision, the so-called ?triple-play option?. This refers to the ability to provide not just television, but also telephony and internet connections. Unsurprisingly, and with capital aplenty, this led to a wide variety of prices being paid for the cable firms. Most would now agree now though that, however measured, too much was paid.

But that still leaves the question of how to make comparisons across cable transactions. Not unusually, in the case when simple financial ratios don't work, most reverted to key business parameters for such purposes. The measure chosen, not illogically, was subscriber numbers and the effective price paid to acquire each one. Sometimes, this would be broadened to look at ?homes passed? in order to reflect penetration levels and to take into account potential future growth.

Going back to Deutsche Telekom, it split its original cable business, which it first began to develop way back in 1982, into nine regional franchises in 1999. The sales of stakes in three of these were agreed during 2000: for the regions of North Rhine-Westphalia and Baden-Wuerttemburg (both to Callahan Associates) and of Hesse (to a consortium led initially by Gary Klesch and later including NTL). The prices paid for each at that time were equivalent to approximately €870, €754 and €910 per subscriber, respectively, or €567, €505 (based on an estimated penetration rate of 67 per cent, as was broadly the case across Germany as a whole) and €651 per ?home passed?. Given the amount to be invested across each of these businesses, at the time, this appeared reasonable, particularly when contrasted with the prices paid by NTL for each of Cablecom and Cable & Wireless' consumer business, which came in at a whopping €2,864 and €10,064 per subscriber or (perhaps more meaningfully, given the difference in penetration in the businesses) €2,750 and €2,013 per home passed. Given that Cablecom is Switzerland's dominant provider, with a 96 per cent penetration rate, and the C&W business was as much a domestic telephone business as it was a supplier of broadcast services (therefore with higher spend per customer) comparison is difficult, but the premium, relative to DT, was clearly considerable.

To appreciate how great – or better perhaps, inflated – such prices were, contrast them with more recent events. In late December 2002, a private equity consortium consisting of Carlyle, Providence Equity Partners and GMT Communications Partners paid €665 million to France Télécom for its Dutch cable business, Casema. Despite the characteristics of that market, this represented €512 and €460 per subscriber and home passed, respectively: quite some way below the prices paid back in the heady days of 1999/2000. Yet, when we consider the disposal by DT, the assets sold should be much more comparable. And the price paid in this latest deal? Even adding in the deferred consideration of €375 million, which will only be paid if the value of the businesses rises above agreed thresholds on future dates, the Apax consortium paid €206 and €138 per subscriber and home passed, respectively. That represents a discount to the average price paid for the first three disposals of more than 75 per cent.