Eurozone crisis hits pay TV: Punters pick broadband over telly

As Norway's GET cable company puts up a "for sale" sign, it demonstrates that the pay TV scene in Europe is starting to realise a home truth – and it may take something as big as the Eurozone crisis to prove it – that pay TV is NOT as resilient as broadband, which continues to grow in the Eurozone. You cannot apply for a job without broadband – how else are you going to send your CV – but you can cut the TV bill by taking a cheaper package and that pressure, usually referred to as cord thinning, is taking place.

This has been happening across Europe as ARPU's have tumbled, and despite there being a constant whining and moaning about cord thinning, there is no question that in at least some parts of Europe – and we're pretty sure this includes Norway – there is a lessening of pay TV spend, without anyone actually cutting off the relationship for good.

GET, of course, is a cable company, so has broadband, but it remains on around 370,000 pay TV homes and it has been up and down around this number for the past five years, unable to break through the 400,000 mark and stay above it. It doesn't produce public figures, but its parents are private equity group Quadrangle and Goldman Sachs Capital Partners, the merchant bank. They have clearly had enough, because there is no other reason to sell.

When they bought the business in 2007 from Candover, it was always assumed they would borrow money against the asset, upgrade the network and make most customers digital and get as many as possible onto broadband, and then sell it or take it public. Right now the prospects of either are fairly poor, and only cash-rich rivals, such as UPC – which once owned it in the early part of the noughties – are being thought of as likely to want to take GET on.

It was almost precisely a year ago that Telenor made it clear that it wanted out of cable. It tried to sell its Canal Digital services on cable in Sweden to close rival Com Hem, offering it 220,000 pay TV homes at a cut down price, a move that the regulator, mistakenly in our view, knocked back and refused to endorse, killing the deal last Christmas.

The price was only 85 million Swedish Krona, or $13.4m (at the time) – and was seen as a pittance, with each cable home changing hands for about $61, massively beneath any other recent deal values in Europe which have been closer to $800 per home. So thinking that in neighboring Norway, where Telenor is the leading cable operator with 508,000 cable homes, values would be closer to being normal, is wishful thinking.

Ideally the Telenor and GET homes should be merged into a single viable cable operator, owning 878,000 pay TV homes, out of the 2.2 million total TV homes in Norway and the 1.6 million pay TV homes, but of course Norway's regulator could not agree a deal like that, which would cede over 50 per cent of the pay TV market to a single company. So Telenor cannot buy GET and GET cannot acquire the Telenor cable operation, not even if it could afford an operation which is larger than itself.

And it is this impossibility of getting a solution to the Pay TV balance in Scandinavia that legislates against GET realizing the $1.2bn (€1bn, £787.57m) that the cable operator is hoping for in a sale. Com Hem, also controlled by private equity groups, the Carlyle Group and Providence Equity Partners (since 2006) could make a bid for GET, merge it with Com Hem, and gain traction and scale that way, instead of purely within its Swedish borders. There could be little complaint that this limited choice in Norway and it would retain the ability to go public on a local public market – at some distant point in the future.

Should it hold off on the sale and wait for better weather?

But most people's favourite idea is that one way or another Liberty Global will end up with this asset, and even if a private equity group buys into Scandinavian cable through GET or anywhere, it would only be seen as fattening frogs for snakes and waiting until either the public markets are back (at best unpredictable, at worse laughable) or until Liberty Global has inflated its cash pile after recent acquisitions and is ready for another surge.

But even the idea that Canal Digital wants out of cable and only wants to remain in satellite TV operations is not clear. The company has failed to grow its satellite operations to anything like the scale of its cable operations and telco rival, TeliaSonera‟s IPTV services are pitiful in terms of traction, in a market where pay TV is mostly cable.

Naturally the merchant bank arm of Goldman Sachs will handle the sale of GET, but we wonder if perhaps this asset will be on the market for a while, offers will come in at a derisory level and it will be then taken off the market, and a Plan B discussed. Or plan C.

Right now Liberty Global has $25bn in debt and $1.6bn in the bank and is not hungry because it has just eaten, twice in Germany if you include Kabel BW and the previous deal at Unity Media. It has identified Germany as a strong growth market, but will have to accept a slow grind there to drive up ARPU.

Meanwhile the other rumour (put out by the Hollywood Reporter) is that Liberty Global is also looking at buying Poland‟s Multimedia Polska, which has 765,000 pay TV customers, and is larger than the Liberty Global existing operation there.

The company is just a few weeks away from completing on its deal to spend $4 billion on its second German cable operator Kabel BW, and although it has also sold its stake in Austar for $1.1 billion in Austra- lia, the company has a reputation for buying cheap rising assets and selling not expensive falling assets, not the other way around, and with the prevalent low ARPU in Poland, this would be buying more trouble, and we don‟t see it, not unless any particular cable assets be- comes extremely stressed, not unlikely with the current debt scarcity, and sell for almost nothing. Admittedly ARPU in Germany is even lower, but there are signs that German pay TV is on the turn and that the German public, with one of the only growing economies in the Euro zone, are now looking for a quality TV experience.

Copyright © 2012, Faultline

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