The Value of Technology
Those walking the halls of the June 19-22 SCTE Expo in Orlando might sound like they’re greeting each other with friendly calls of "how are ya?" But listen close and you may hear the ka-chinging of "Avaya!" Takeover rumors surfaced May 29, and on June 4 it was confirmed that Silver Lake and TPG Capital, two private-equity buyout groups, will pay $7.4 billion for the venerable telephone equipment provider, whose parents’ original names you may recall: Western Electric and Lucent.
That the $35-plus billion TPG is interested in the supposedly dull business of enterprise phones and services is not a surprise. It has moved from buying retailers like J. Crew, Neiman Marcus and Petco, to tech types like Seagate and SunGard. More relevant to cable, last month it joined with Goldman Sachs to pay $29.2 billion for wireless provider Alltel. (One of Avaya’s strong suits is VoIP.) TPG also joined with KKR, Goldman, Lehman, Morgan Stanley and Citigroup on February 26 to pay $44 billion for TXU (ex-Texas Utilities). That’s the biggest private-equity buyout ever, surpassing the 1988, $25 billion KKR-led acquisition of RJR. The barbarians are no longer at the gates; they own the keys.
All this ran through my mind as TPG and friends paid 10x projected cash flow for Avaya and 8.5x for TXU, because 11 cable operators on three continents trade at an average 9.4x, and broadband providers like Arris, Convergys, CSG and Motorola are valued by the public at an average 8.3x. Though private equity — once cable’s most important source of equity money — has dabbled recently in systems like Insight and Patriot, their biggest obstacle is the seller’s debt. TXU’s debt-to-cash flow ratio is only 0.23 and Avaya’s is a more-minuscule 0.02. This is the true definition of a "leveraged buyout," which is the old name for what private equity still does: using someone else’s money to buy previously risk-averse companies.
In historical terms, most cable operators — whose dependable cash flows still tempt the private buyer field — are much less leveraged than they used to be (see table), and their suppliers often have no debt. MSOs once traded publicly at 15-20x cash flow and $5,000-$6,000 per subscriber. They have since achieved the targets those valuations envisioned, but their stock prices have not. One or more of them could catch the eye of the new kings of ka-ching.
Analyst/investor Paul Kagan is chairman/CEO of PK Worldmedia, Inc., in Carmel, Calif. He owns shares of Arris, Cablevision, Comcast, General, Liberty Global, Mediacom and Virgin Media. Information in his columns is not intended to be a recommendation to buy or sell securities.
