Cable a tough sell to lenders

Even with healthy cash-flow rates for MSOs, Bresnan struggles to finance his AT&T deal

The return of ex-cable entrepreneurs to the business is having mixed results. The biggest player, Bresnan Communications' Bill Bresnan, is facing a sour financial market and struggling to get loans for his $735 million deal to buy systems from AT&T Broadband.

Ex-Simmons Communications CEO Steve Simmons won the bidding for a group of systems being sold by RCN Corp., buying the properties for $245 million, or $3,100 per sub. RCN executives had been hoping for more but badly need the cash to meet the terms of bank loans.

The return of the cable veterans is important because they're about the only ones willing to do cable deals. The slumping stock market has the big players—Cox, Cablevision, Charter and Comcast—touting how they're conserving their cash, not expanding. Anxiety over the Adelphia scandal, fears of other accounting games and some MSOs' debt levels have driven cable stocks down 75%-90% so far this year, even though all the MSOs are posting 12%-18% growth in operating cash flow. Some companies' bonds are trading for just 30-50 cents on the dollar.

But giant private equity funds are snooping for some fire-sale deals and need strong cable management to run properties after the deal. That's drawing cable veterans who sold their companies during the late 1990s gold rush back into the game.

But even fire-sale prices can be tough to complete. "It's not an easy task putting together a deal in this market," said Bresnan last week. "There's been fairly significant disruption in the debt markets."

Bresnan—one-time Teleprompter president who sold his last company to Charter for $1.4 billion—said finance markets are the toughest he has seen in perhaps 30 years.

Bresnan's deal was the first and the biggest. After 18 months of dancing, he snagged a deal in April for 320,000 AT&T Broadband subscribers in 41 smaller cities and towns throughout Colorado, Wyoming and Montana. The rural properties were pretty much starved for capital. So in addition to the $735 million purchase price, Bresnan needs another $300 million to rebuild the neglected properties.

Major fund Providence Equity had agreed to put up about $350 million in equity, sources said. But Bresnan was planning to finance the rest with bank loans and junk bonds. Investment banker Salomon Smith Barney was to cover the junk-bond portion with a short-term "bridge" loan, then organize the sale of long-term bonds to repay it.

But Salomon Smith Barney backed out, saying it can't sell bonds at any interest rate Bresnan would be willing to pay. "The whole debt market is a shambles," said another former cable executive.

So Bresnan is trying to restructure the deal. He is reportedly looking for AT&T Broadband—and its soon-to-be owner Comcast—to keep a piece of the venture so it qualifies for Comcast's programming discounts. That could increase the systems' operating cash flow by around 5% and possibly make lenders happier.

Simmons's RCN deal is simpler. Although RCN is primarily in the risky game of building systems in markets that have well-entrenched cable operators, the properties for sale are good old monopolies.

RCN CEO David McCourt had reportedly been hoping to raise $4,000 per subscriber. But, with its stock trading for 50 cents and bonds as low as 20 cents on the dollar, RCN is taking Simmons's offer.

Simmons is backed by Spectrum Equity. The systems serve 80,000 subscribers in several New Jersey towns. But only 20% have been rebuilt so he expects to spend another $550 per subscriber.

Still, "this is a great time to get back into the business," said Simmons, whose new company is Patriot Communications.