TPG Makes Big Bet on Small Cable, Internet Providers

Private-equity firm TPG agreed to buy two small cable providers, RCN Telecom Services LLC and Grande Communications Networks LLC, in a $2.25 billion bet on demand for faster internet connections and video.

August 17, 2016

3 Min Read
Green Cyber World

By Pino Vallejo

Private-equity firm TPG agreed to buy two small cable providers, RCN Telecom Services LLC and Grande Communications Networks LLC, in a $2.25 billion bet on demand for faster internet connections and video.

TPG will acquire RCN for $1.6 billion and Grande for $650 million from private-equity firm Abry Partners LLC to create a top 10 cable company in the U.S., according to a statement Monday. Google Capital, Alphabet Inc.’s investment fund, will acquire a minority stake in the companies, according to a representative, who declined to provide additional details.

Amid consolidation in the cable industry, private-equity firms have been quietly buying smaller operators, merging them together and upgrading internet bandwidth and speed with the goal of injecting more competition in the market and, in some cases, attracting takeover interest. With networks in Texas, New York, Boston, Chicago and Washington, D.C., TPG could bring another super-fast internet provider to territories where AT&T Inc., Verizon Communications Inc. and even Google have service available or in the works.

On their own, cable’s tiny mom-and-pops seldom become the deal targets of the likes of cable giants Comcast Corp. or Charter Communications Inc. Some serve sparsely populated corners of the country, while other “over-builders” like RCN struggle to keep their TV businesses profitable as they compete against entrenched incumbents. Yet the game changes once they’re rolled up. In an industry where consolidation or acquisitions are necessary for survival, a cobbled-together, regional cable system is one of the few options left — for both big and small providers.

TPG said RCN and Grande will challenge existing phone and cable operators by expanding gigabit-per-second, high-speed data services, and “focusing on providing high-quality and more reliable communications services along with better value and customer service.”

TPG’s purchases come after a wave of deals in the cable industry. Charter bought Time Warner Cable Inc. and Bright House Networks LLC and Altice NV acquired Cablevision Systems Corp. and Suddenlink Communications.

RCN has about 289,000 video subscribers in markets including New York, Boston and Philadelphia, while Grande serves 88,000 TV customers in Dallas and Austin, Texas, according to SNL Kagan.

For Google Capital, the investment in the two companies gives the search-engine giant another toehold in the market for TV and broadband delivery. In addition to providing these services directly to consumers in some cities through Google Fiber, the Mountain View, California-based company has been exploring various ways to get more involved in television, from YouTube programming to cable set-top boxes. Grande was actually the first cable provider to introduce a gigabit service in Austin following Google Fiber’s push into the city. Google Capital, which specializes in later-stage investments, operates as a separate entity from Google Fiber.

Abry bought Grande in 2009 and RCN in 2010. JPMorgan Chase & Co. analyst Phil Cusick said the deal is probably about 8.25 times earnings before interest, taxes, depreciation and amortization, lower than the 8.8 times Ebitda that Altice paid for Cablevision and the 9.1 times that Charter paid for Time Warner Cable. Given their concentration in New York and Texas, RCN and Grande likely didn’t fetch interest from Altice-Cablevision, which already serves New York, and Charter, which has systems in both New York and Texas, Cusick said.

The combined company will continue to be led by Chief Executive Officer Jim Holanda through Patriot Media, TPG said in the statement. The deal value includes the assumption of debt, according to a person familiar with the transaction who asked not to be identified.

PJT Partners Inc., UBS Group AG, Cleary Gottlieb Steen & Hamilton LLP, and Deloitte are TPG’s advisers on the deal. Credit Suisse, Kirkland & Ellis LLP, Locke Lord and PwC are serving as advisers to Abry, Patriot Media, RCN and Grande.

The transactions, subject to regulatory approvals, are expected to close in the first quarter of 2017.

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