Bartok Communications
In early 2004 Warburg Pincus, one of the world’s successful private equity firms, was
considering the acquisition of Bartok Communications, a prominent Hungarian cable
company. Warburg Pincus was the first US private equity firm to make a commitment to
Europe. Since its first transaction in Europe in 1983, the firm had invested more than $2.5
billion in 64 transactions in 14 European countries. Warburg Pincus was also an
experienced investor in Eastern Europe, most notably in Slovakia and the Czech
Republic.
Warburg Pincus initially became interested in Bartok, knowing that the Hungarian cable
market was potentially very attractive, as it has been growing explosively over the past
several years. The original investor in Bartok was ARGUS Capital Partners - a CEE
private equity firm, whose strategy was to quickly assemble together a major cable
company through acquisitions of local cable operators. Now the firm wanted to exit this
investment because their fund was approaching the end of its life. Since Bartok was one
of the winners in their portfolio, the seller’s asking price for the company was 8.5 times
2003 EBITDA. Bartok was a fairly young company that was able to become one of the
major cable operators in the industry in a relatively short time span. However, WP
hesitated about a number of aspects relating to the potential deal. First, the transaction
was probably going to be small for Warburg Pincus. The firm generally invested in
companies with revenue of several hundred million dollars, whereas Bartok’s revenue
was projected to be approximately $37 million for 2004. A transaction of this size must
provide compelling returns in order to justify investment by the firm. Second, the
company was located in a less developed European country, which would complicate the
due diligence process and potentially create obstacles in obtaining debt financing.
Hungarian Cable TV Industry
The Hungarian cable industry, historically highly fragmented, has begun consolidating in
the past several years. The consolidation was initiated in the late 1990’s by the three
largest players: UPC Hungary, MatávkábelTV and Bartok. All three operators employed
similar strategy: 1) acquire local loop networks; 2) upgrade networks from loop to star in
order to combat piracy and offer more services, such as broadband internet;1 3) increase
prices as much as possible without breaching regulations; 4) improve content and
continue increasing average revenue per user (ARPU). However, the recently increased
attention of regulators (Hungary’s Competition Office; The National Communications
Authority) to the Hungarian cable industry together with Hungary’s recent membership
in the EU, which requires Hungarian regulatory regime to come in line with EU
requirements, implied that its regulatory environment could become tighter. As a result, it
was unclear how further price increases in the cable industry would be received by the
regulators.
1
Star network links individual subscriber via a direct connection that can be easily cut in case of piracy.
The operators in the Hungarian cable industry behave like local monopolies virtually
everywhere, apart from the capital city of Budapest, where there are parallel cable
networks. All cable operators have access to the same content at broadly comparable
prices, as they are supplied through a Hungarian cable association that negotiates with
content providers on their behalf. Since content providers are significantly larger in size
than the largest operators, only the three large players could go directly to the major
content suppliers to negotiate specific subscriber volume-based discounts that amount to
approximately 10-30%. Although there are no regulatory barriers to entry, the emergence
of new players is unlikely because of very high capital expenditure requirements. The
new entrant will inevitably be confronted by price competition from the incumbent and
most likely will find it virtually impossible to earn an adequate return on capital
investment. The cable industry in Hungary faces little threat from substitute offerings,
such as satellite or digital TV. Although satellite TV has better content, it is significantly
more expensive than cable TV. Digital TV is unlikely to grow significantly over the next
several years given the investment required by broadcasters as well as consumers.
Hungary is characterized by a relatively high cable TV penetration when compared to
other Eastern European markets. Cable networks can be further extended to cover more
households in additional residential areas, although this effort may not be economically
viable for most established operators. Further growth in the industry is expected to come
from developers of apartment complexes, as the government continues subsidizing
capital requirements for installation of cable networks in the new apartment blocs.
Exhibit 1 provides key historical data and projections for the Hungarian cable TV market.
The Bartok Opportunity
Bartok entered the Hungarian cable only in 1999 and, as a result, was in a weaker
position when compared to its rivals UPC Hungary and MatávkábelTV. Bartok provides
services to small towns and operates in only one of Hungary’s top twelve cities, as
compared to eleven cities served by UPC and nine cities served by MatávkábelTV. The
operator’s strategy to date has been focusing on acquisitions and upgrades of small cable
TV players in the regions. Going forward, the company was hoping to combine organic
growth with further acquisitions.
More than 90% of Bartok’s networks are not overlapped by other cable networks, thereby
allowing the operator to experience substantial growth. As of early 2004, the company
passed about 330,000 homes and attracted about 210,000 subscribers, which was
equivalent to a connection rate of 64%. Bartok recently undertook a series of technical
upgrades, with superior star/broadband network representing over 70% of all networks by
subscribers in 2004. Most remaining networks were scheduled for an upgrade over the
next two years.
During the past two years, Bartok enjoyed explosive revenue growth averaging 47% per
annum, with EBITDA margin averaging 42%. Management’s projections shown in
Exhibit 2 assumed that the revenue growth would slow in the future to approximately
2
10%. Future growth was assumed to come from both increased cable TV prices as well as
greater number of subscribers. In addition, management assumed improvements in
EBITDA margins, as they hoped that the price increases would not require significant
content enhancements, thereby keeping costs at approximately the same level. Moreover,
Bartok ’s executives expected capital expenditure to decrease, as most of the networks
had already been upgraded.
As Warburg Pincus management researched the opportunity of investing in Bartok, they
wondered if Warburg Pincus should at all go ahead with the transaction. They had
negotiated a loan package with an average cost of debt of 15% and were considering
financing 60% of the enterprise value with debt. Bartok expected to pay a tax rate of
35%. Warburg Pincus were worried whether the expected rates of return would justify the
risks that the Hungarian deal posed. Exhibit 3 provides information about private cable
transactions that took place in 2002 and 2003.
3
Exhibit 1: Key Statistics for Hungarian Cable TV Market, Actual and Projected
Population ('000)
Households ('000)
TV Households ('000)
Cable
Homes Passed ('000)
Homes Passed as % of TVHH
Basic Subs (000)
Basic Subs Growth
Pen of Homes Passed
Pen of TVHH (Basic Subs)
Avg Monthly Basic Rate
Basic ARPU Growth
Pay Cable
Total Pay TV Cable Subs ('000)
Growth
Avg Rev / Sub / Month
Pay Cable ARPU Growth
Broadband Internet
Ethernet / Cable Internet Subs ('000)
Growth
Avg Rev / Sub / Month
ARPU Growith
1997A
10,174
3,928
3,513
1998A
10,182
3,947
3,555
1999A
10,190
4,012
3,596
2000A
10,197
4,095
3,631
2001A
10,178
4,104
3,664
2002A
10,158
4,113
3,692
2003A
10,139
4,122
3,719
2004E
10,120
4,130
3,746
2005E
10,100
4,140
3,773
2006E
10,081
4,149
3,792
2007E
10,062
4,158
3,810
2008E
10,043
4,167
3,828
2009E
10,024
4,177
3,845
2010E
10,005
4,186
3,863
2011E
9,986
4,196
3,881
1,965
55.9%
1,277
65.0%
36.4%
$3.37
2,040
57.4%
1,428
11.8%
70.0%
40.2%
$3.47
3.0%
2,070
57.6%
1,511
5.8%
73.0%
42.0%
$3.58
3.2%
2,100
57.8%
1,605
6.2%
76.4%
44.2%
$4.00
11.7%
2,100
57.3%
1,596
-0.6%
76.0%
43.6%
$5.93
48.3%
2,226
60.3%
1,692
6.0%
76.0%
45.8%
$6.70
13.0%
2,338
62.9%
1,788
5.7%
76.5%
48.1%
$7.23
7.9%
2,408
64.3%
1,854
3.7%
77.0%
49.5%
$7.67
6.1%
2,456
65.1%
1,903
2.6%
77.5%
50.4%
$8.05
5.0%
2,505
66.1%
1,954
2.7%
78.0%
51.5%
$8.45
5.0%
2,555
67.1%
2,001
2.4%
78.3%
52.5%
$8.88
5.1%
2,606
68.1%
2,049
2.4%
78.6%
53.5%
$9.32
5.0%
2,632
68.5%
2,074
1.2%
78.8%
53.9%
$9.69
4.0%
2,659
68.8%
2,100
1.3%
79.0%
54.4%
$10.08
4.0%
2,685
69.2%
2,127
1.3%
79.2%
54.8%
$10.48
4.0%
2,153
1.2%
79.4%
55.2%
$10.90
4.0%
43
$5.86
51
18.6%
$5.86
0.0%
57
11.8%
$6.74
15.0%
71
24.6%
$7.28
8.0%
80
12.7%
$9.36
28.6%
93
16.3%
$10.86
16.0%
107
15.1%
$11.94
9.9%
121
13.1%
$12.78
7.0%
135
14.6%
$13.54
5.9%
156
15.6%
$14.36
6.1%
180
15.4%
$15.07
4.9%
205
13.9%
$15.83
5.0%
228
11.2%
$16.62
5.0%
252
10.5%
$17.28
4.0%
276
9.5%
$17.98
4.1%
301
9.1%
$18.69
3.9%
10
$24.25
-
20
100.0%
$39.82
64.2%
35
75.0%
$39.82
0.0%
58
65.7%
$35.84
-10.0%
87
50.0%
$28.67
-20.0%
126
44.8%
$25.80
-10.0%
177
40.5%
$24.51
-5.0%
234
32.2%
$23.53
-4.0%
285
21.8%
$22.59
-4.0%
333
16.8%
$21.69
-4.0%
370
11.1%
$20.82
-4.0%
407
10.0%
$20.20
-3.0%
436
7.1%
$19.59
-3.0%
-
-
-
2012E
9,967
4,205
3,898
2,712
Source: Kagan Eastern European Cable TV Guide (2003)
4
Exhibit 2: Management Projections for Bartok, February 2004
Revenue (M)
Revenue growth
EBITDA (M)
EBITDA margin
EBIT (M)
EBIT margin
CAPEX (M)
No of CATV Subsribers, EOY
No of Internet Subsrcribers, EOY
ARPU CATV
ARPU Internet
2002A
$18.8
58.5%
$7.8
41.4%
$4.1
21.5%
$9.6
2003A
$25.1
33.3%
$10.8
43.0%
$5.6
22.1%
$12.0
2004E
$37.6
49.9%
$14.4
38.3%
$8.4
22.3%
$17.6
2005E
$45.1
20.0%
$18.0
40.0%
$11.3
25.0%
$5.7
2006E
$54.1
19.8%
$21.9
40.5%
$14.9
27.5%
$5.7
2007E
$64.3
18.9%
$26.4
41.0%
$19.3
30.0%
$5.7
2008E
$72.8
13.2%
$30.2
41.5%
$23.7
32.5%
$5.7
2009E
$80.4
10.5%
$33.8
42.0%
$28.1
35.0%
$5.7
184,091
615
$7.7
$42.9
195,872
4,037
$10.0
$31.0
220,403
14,327
$12.4
$31.0
224,801
21,804
$14.0
$31.0
231,968
32,351
$15.5
$31.0
238,340
40,941
$17.5
$31.0
244,826
47,906
$19.0
$31.0
251,246
57,207
$20.0
$31.0
Source: Warburg Pincus Transaction Documents
Revenue: the total figure includes connection and installation fees
EOY – end of year
5
Exhibit 3: Cable Transactions 2002-2003
Announcement
Date
Name
Type
Country
Buyer
30 April 2003
TeleColumbus Group
Secondary
Buyout
Germany
BC Partners
24 April 2003
Com Hem
Buyout
Sweden
EQT Partners
05 February 2003
Eutelsat
Buyout
France
Eurazeo
EV (m)
EBITDA (m
est)
Multiple
€510
€90
5.7x
TeliaSonera
Skr 2,150
Skr 53
40.6x
France Telecom
€1,930
€506
3.8x
Seller
Deutsche Bank
01 February 2003
Est
Vidéocommunication
Buyout
France
SG Capital, Pehel
Industries
Fipares
€50
€17
2.9x
09 December 2002
Casema
Buyout
The
Netherlands
Providence,
Carlyle, GMT
Communications
France Telecom
€665
€85
7.8x
25 November 2002
Aster City Cable
Buyout
Poland
Argus, Emerging
Markets
Elektrim
Partnership, and Telekomunikacja
Hicks Muse
€110
€9.9
11.1x
Company Notes
Company Notes
Transaction Notes
The debt package amounted to €375m. The facility
TeleColumbus Group, comprising TeleColumbus GmbH and
TeleColumbus
Group
is a4 cable
levelservice
4 cable
service
provider
in Germany
with
than
a €170m
six-year loan
A at more
300bp over
TeleColumbus
Ost GmbH,
is a Level
provider
in comprises
Euribor, a €100m eight-year loan B at 367.5bp and a
Germany with more than 2.3 million cable customers and
2.3
million
cable
customers
and
revenues
of
around
€235m
and
a
profit
margin
of
revenues of around €235m and a profit margin of above 30% in €45m six-year revolver at 300bp. There is also a €60m
2002.
The group
in North,
West,
East and
South mezzanine
paying 4.5%
cash, 7.5% rolled-up
above
30%has
inoperations
2002. The
group
offers
broadband
cabletranche
television
programmes,
high
Germany comprising some 17 subsidiaries offering broadband
and warrants. Total net debt-to-EBITDA is less than 4x,
speed
internet
and internet
while senior net debt-to-EBITDA is about 3.2x.
cable
television
programmes,
high speedtelephony.
internet, internet
telephony and security services.
Based primarily in Stockholm, Com Hem is the largest cable TV The debt package amounted to Skr 800m. Many analysts
operator in Sweden and provides cable TV to 1.4 million
were surprised at the multiple that EQT paid for the
households
its basic in
tier Stockholm,
TV offering. The
company
also
is believed
that EQT
may help
Based with
primarily
com
Hem
is thecompany,
largesthowever
cable itTV
operator
in Sweden
offers approximately 70 pay TV and pay-per-view channels in a Com Hem to grow the customer base more aggressively,
and
provides
cable
TV
to
1.4
million
households
with
its
basic
tier
TV
offering.
As of
network which is 90% upgraded to enable digital TV
especially in the area of broadband internet. The
transmission.
Through
recent
investments
in the 72,000
cable network,
companysubscribers.
turned EBITDA positive
only in Q3 2002,
December
2002,
Com
Hem had
broadband
The company
netso
Com Hem offers more than 500,000 households broadband
the EV/EBITDA multiple may not be representative for
sales
amounted
to Skr2002,
1,017m
in 2002
but turned
EBITDA positive only in Q3 2002.
internet
access.
As of December
Com Hem
had 72,000
this deal.
broadband subscribers. The company's net sales amounted to
FX Conversion: 1 Skr = 0.1096 Euro
Skr 1,017m in 2002.
Eutelsat provides capacity on 23 satellite infrastructures offering Eurazeo purchased 19% stake of Eutelstat for €379m.
Under the terms of the deal, France Telecom will retain a
a portfolio of services including television and radio
broadcasting, professional video broadcasting, corporate
4% stake in Eutelsat as a financial investment and one
seat on its supervisory board. To accommodate the
networks, internet services and mobile communications. The
Eutelsat
provides
23 satellite
offering
a portfolio
of a special
company
is the first
in Europecapacity
to distributeinsatellite
televisioninfrastructures
of phone company's
wish, Eurazeo
has set up
DVB
standard (Digital
Video television
Broadcasting)and
for transmitting
digital holding company
that will purchase
services
including
radio broadcasting,
professional
video France Telecom's
television and has achieved a turnover of €659m. Based in
entire 23% stake in Eutelsat for €447 million. France
broadcasting
and corporate
communications.
in Paris,
Paris,
Eutelsat was founded
25 years ago.networks
With its fleetand
of mobile
Telecom
will then acquire 20%Based
in the holding
company
satellites, the company reaches four continents encompassing
for about €68 million. The holding company structure
with
its
fleet
of
satellites
the
company
reaches
four
continents.
Europe, the Middle East, Africa, Asia, eastern North America,
allows Eurazeo to have the benefits of being the largest
and South America.
single shareholder, in control of 23%, while its actual
direct holding in Eutelsat is only 19%.
The company is being acquired from Fipares, a
Strasbourg-based Est Vidéocommunication operates a cable
network
for more than 300,000
homes
in Eastern France, with operates
subsidiary of
de Strasbourg.
Newcothan
is
Strasbourg-based
Est
Vidéocommunication
a Electricité
cable network
for more
150,000 subscribers of analogue and digital TV and high speed controlled by Altice One and funded by the syndicate of
300,000
homes
in
Eastern
France,
with
150,000
subscribers
of
analogue
and
digital
internet services. The company achieved sales of €34m in 2002 investors. SG Capital Europe committed € 20m to
newco inachieved
return for a 40%
interest,
whilst Péchel
andTV
EBITDA
forecasted
in the
region ofservices.
€17m.
and ishigh
speed
internet
The company
sales
of €34m
in 2002
Industries and Altice Participations contributed
and EBITDA is forecaster in the region of €17m.
undisclosed amounts for equity stakes of 23% and 34%
respectively.
Casema is the third largest cable operator in the Netherlands. It Providence Equity and Carlyle have each acquired 46%
Casema
is
the
third
largest
cable
operator
in
the
Netherlands.
It has
has been in operation for around 30 years and today has 1.3m
ownership
of Casema, with
GMTbeen
owninginthe remaining
subscribers.
It isfor
located
mainly30
in the
centraland
and south-western
operation
around
years
in 2002 has8%.
around 1.3m subscribers. It serves
parts of the Netherlands and serves cities such as The Hague,
mainly the central and south-western parts of the Netherlands. Casema services
Utrecht and Breda. Casema's list of services, available now or in
theinclude
near future,
include: internet
viacable,
the cable,
pay-per-view,
internet
via the
pay-per-view,
telephony, data communication and
alarm systems, home shopping, telephony, data communication
video
on
demand.
and video-on-demand.
Aster cable television network, created in 1994, is the biggest
A consortium of investment funds acquired the cable TV
Aster
cable
network,
in 1994,
is the ofbiggest
cable operator
the joint
operations
Elektrim Telekomunikacja,
thein
Polish
cable
operator
in thetelevision
lucrative Warsaw
region,created
reaching more
than 500,000 households. It also offers its customers Internet
venture between Elektrim SA and Vivendi Universal SA,
lucrative
Warsaw
region,
reaching
more
than
500,000
households.
It
also
offers
its
for a total consideration of €110m. € 29.33m will be
access.
retained in Elektrim Telekomunikacja, the remainder will
customers Internet access.
be spread between Elektrim as way of debt repayment
and Vivendi.
Source: MergerMarket, Factiva
6