The Canada Pension Plan Investment Board is teaming up with a European private equity fund in a $6.6-billion (U.S.) takeover of the seventh-largest cable operator in the United States.
The cable company, Cequel Communications Holdings LLC, which does business as Suddenlink Communications, provides television, high-speed Internet and phone services to 1.4 million residential and commercial customers, mostly in Texas, West Virginia, North Carolina, Oklahoma, Arkansas and Louisiana.
CPPIB is partnering with European private equity firm BC Partners, as well as Suddenlink's management team, on the buyout.
The deal will see the group invest just under $2-billion in equity and $500-million of debt, with the rest of the price reflecting the assumption of existing debt.
The takeover came the same day Montreal-based Cogeco Cable Inc. announced a $1.36-billion acquisition of Atlantic Broadband, the 14th-largest cable operator south of the border, which operates in Pennsylvania, Florida, Maryland, Delaware and South Carolina.
CPPIB manages the Canadian Pension Plan's investment portfolio. It had previously identified the cable sector as one of interest, because of its potential to generate fairly strong cash flow and healthy profit margins.
When Suddenlink's owners – a consortium led by Goldman Sachs Capital Partners that also includes Quadrangle and Oaktree Capital Management – decided to consider a sale earlier this year, they contacted BC Partners and CPPIB.
"We've been really trying to cultivate this relationship with management for several months," said André Bourbonnais, senior vice-president of private investments at CPPIB.
He said the timing of the two cable deals is a coincidence, rather than a reflection of industry trends.
St. Louis-based Suddenlink's chief executive officer, Jerry Kent, who is participating in the deal, flew to London and Toronto to meet with the top officials at BC Partners and CPPIB.
BC Partners has experience in the cable industry. Its funds own Com Hem in Sweden, and previously helped to build up Unitymedia, Europe's third-largest cable operator (which has since been sold).
Some analysts argue that the cable industry will be hurt by increasing competition with telecom companies, as they fiercely battle for customers.
Mr. Bourbonnais said CPPIB was particularly interested in Suddenlink because it operates in markets where there is less competition than in major urban centres.
While the cable industry could see consolidation down the line, CPPIB is not looking at any other deals in the sector at the moment, Mr. Bourbonnais said.
The Canadian pension fund's private equity strategy outside Canada is to partner with the funds it supports, such as BC Partners, on specific deals of interest – meaning that it prefers to be a generalist, as opposed to a specialist in any particular sectors.
The group is paying about 8.6 times Suddenlink's earnings (before interest, taxes, depreciation, amortization and non-recurring expenses) based on the cable company's first-quarter profits.
Goldman Sachs Capital Partners originally invested in Suddenlink in March of 2004 and increased its stake in 2006.
At this purchase price, Goldman is believed to be reaping more than twice its investment.