Up Next for Buyouts: Cable TV

Why cable companies beyond Virgin Media are popping up on the radar screens of private equity firms

by Steve Rosenbush

Not so long ago, the field of cable TV was a small-time business. Dozens of local networks, often run by families—think John Rigas' Adelphia Communications, for example—operated within tiny jurisdictions that regulators carved out as franchises. Now, with the cable industry scaling up to take on telecom in traditional telephony areas, those local barriers and small family players are giving way to giants—many of which may soon go global with private equity buyouts.

The Carlyle Group's bid for British cable company Virgin Media (VMED) is a sign that investment dollars are clamoring to push into the global cable market. New York-based Virgin Media, which counts billionaire Richard Branson as its largest shareholder, confirmed July 2 that it had received a buyout bid. While it didn't identify the identity of the bidder, one person familiar with the talks confirmed earlier media reports that private equity giant Carlyle had offered to buy the company. Dow Jones Newswires (DJ), citing a person familiar with the talks, reported that Carlyle was offering $8 billion to $10 billion. With Virgin's debt, the total value of any deal could reach $20 billion.

Still Fragmented

Unlike its new, fierce rivals in the telecom business, cable remains a picture of fragmentation, with more than a dozen major companies in the U.S. alone. The $200 billion telecom market is split mostly among two players—AT&T (T) and Verizon Communications (VZ)—and a handful of independent companies such as Qwest Communications International (Q). Contrast that with the $60 billion U.S. cable market: 15 sizable players and thousands of operating franchises.

Add to that scenario the coming battle royal with telecom as cable companies expand into new areas such as fixed line and wireless voice and Internet services. Cable operators also will need greater scale to give them leverage in the squabbles over marketing and programming.

"M&A happens when change is occurring, because things are bad or because things are getting to a new plateau, and both conditions exist in communications," says Robert Profusek, co-chair of the M&A practice at global law firm Jones Day.

Telecom's Growing Popularity

The Virgin talks represent private equity's growing interest in telecom, an area once considered too risky. Global private equity volume for the first half of this year hit a record $630.9 billion, up 37% from a record $459.2 billion during the first half of 2006, according to researcher Dealogic. Telecom was the private equity sector leader, with $113 billion in deals—four times more than in the first half of last year.

Look for convergence of various traditionally telecom services in the cable arena to be the main theme as the merger-and-acquisition activity unfolds, investment bankers say (see BusinessWeek.com, Deal Flow, 10/21/05, "Cable and Wireless Convergence"). Rupert Murdoch and News Corp., (NWS) and Liberty Media's John Malone have done well building global satellite companies. Cable companies are following suit, with operators such as Comcast (CMCSA) expected to look abroad for growth.