Breakingviews - Broadband pass-the-parcel still has shiny wrapper

A trader points to a stock chart on the floor of the New York Stock Exchange shortly before the closing bell in New York July 2, 2014. REUTERS/Lucas Jackson

NEW YORK (Reuters Breakingviews) - Dumb pipes can make for smart deals. TPG Capital and Patriot Media Management said on Monday they are selling a U.S. cable internet rollup to a buyout rival for $8.1 billion including debt. That’s a hefty profit. Yet there’s room for the buyer to capitalize on Americans’ growing demand for streaming entertainment.

Stonepeak Infrastructure Partners, a private equity firm that specializes in infrastructure, is buying Astound Broadband and plans to invest further. It’s keeping operator Patriot around too for good measure. Astound is available in eight of the 10 top cities in the United States including Washington and New York and has more than 1 million customers.

Somewhat unusually, TPG took the trouble to put RCN, Grande, Wave, and enTouch together to create Astound. While giant operators were busy, with Charter Communications swooping in for Time Warner Cable in 2015 after Comcast failed to close the deal because of regulatory scrutiny, there was an opportunity to do something similar with less powerful regional players.

All told, the businesses cost TPG about $5 billion including debt. Assume the buyout shop stumped up as little as a quarter in equity leaving the remaining $3.8 billion in debt. After all, these businesses tend to throw off cash. Then assume that further investments and any dividends are a wash and that the debt level has remained the same. At the sale price, TPG’s equity would be worth about $4.3 billion, or nearly three-and-a-half times its original investment.

It’s no fading cable business, though. Broadband is only gaining steam even though more than 80% of U.S. households have it already. In the past quarter, Comcast, Charter and Altice USA all reported knockout subscriber additions. More people are working from home and are ditching cable-TV packages and opting instead for streaming services from Netflix, Walt Disney and more. That means they need more bandwidth. Stonepeak’s edge for making its own profit on the parcel TPG has passed on is Americans’ need for speed.


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