Missed again. MidOcean Partners, a London private equity firm, is eager to acquire a German cable company. After bidding unsuccessfully on several deals, MidOcean late last year took a close look at North Rhine-Westphalia's ish, which has 4.1 million subscribers. But again it dropped out when the bidding got too pricey.
Yet if current offers hold up, ish could soon be sold for up to $2.3 billion, a hefty 10 times the company's cash flow. And every other big German cable company is either being stalked by, or is already in the hands of, private equity investors. Germany's largest cable provider, Kabel Deutschland (KDG), is owned by Apax Partners, Providence Equity Partners, and Goldman Sachs (GS). Kabel Baden-Württemberg (Kabel BW), a Heidelberg provider with 2.3 million subscribers, is owned by Blackstone Group. In May, 2003, BC Partners of London bought Berlin's Tele Columbus Group from Deutsche Bank (DB) for $664 million.
On its face, the German cable-TV industry seems an unlikely candidate for investment fever. Although 56% of German households subscribe to some kind of cable service, they generally pay no more than $15 a month, much less than the $50 to $100 monthly fees typically shelled out in the U.S. Because Germany offers a large number and variety of free-to-air channels, it will be hard to persuade families to pay more for cable. Moreover, many of the cable businesses up for sale are in terrible financial shape. Ish is just one of several cable companies that private investors bought out of bankruptcy.
So what's the great appeal? Investors say that they like cable's steady cash flows, and they are generally optimistic about the industry's potential as a high-growth "triple play" provider of digital-TV, Internet, and telephony products. KDG has equipped five German cities for broadband and added its first digital television offerings, which include premium sports and entertainment programs from providers such as pay-TV company Premiere. Kabel BW also currently offers 750,000 of its 2.3 million subscribers broadband Internet.
However, the obstacles to a big broadband rollout are high. The German cable biz remains fragmented into thousands of providers. KDG has direct access to only one-third of the 10 million households for which it provides service. As for broadband, only 0.3% of the country's 50 million households get it from cable companies, according to London media researcher Screen Digest. A larger share, 17.7%, buy broadband Internet services via telephone lines using DSL technolgy, but former phone monopoly, Deutsche Telekom, has 86% of that market. Broadband cable "is going pretty much nowhere," says Screen Digest senior analyst Guy Bisson. "Cable has lost out to DSL."
So how can one explain the investors' intense interest in cable properties? Some of it is purely financial. "They're not in it for the long haul," says Lars Godell, principal analyst at Forrester Research Inc. (FORR) in Amsterdam. "I see more interest in milking a cash cow than in upgrading the cable networks." KDG's issuance of $518 million in floating-rate notes last November did not inspire much confidence. Rather than invest in new technology, the company used the proceeds to pay a dividend to investors. Ratings agency Standard & Poor's then lowered KDG's corporate rating from BB- to B+, on the grounds that it had failed to pursue a "prudent financial strategy."
Even investors admit they are not willing to wait years for Germany to morph into a cable powerhouse. "I expect that all financial investors who are currently owners of German cable are sellers at the right valuation," says Wolfgang Schwerdtle, vice-president at MidOcean Partners. There could be a long wait for the payback.
By Mary Lisbeth D'Amico in Munich