By Jonathan Shieber
© Dow Jones LBO Wire
SHANGHAI (Dow Jones)–Bidders are beginning to line up for the sale by auction of Taiwanese cable and broadband company China Network Systems Co. by pan-Asian buyout firm MBK Partners, people with knowledge of the situation told LBO Wire.
Morgan Stanley (MS) is running the book for Taipei-based China Network Systems, and MBK is seeking up to $2.5 billion for the company. Private equity firms Permira Holdings Ltd. and Kohlberg Kravis Roberts & Co. have expressed interest in the cable operator, those people said. Neither firm responded to a request for comment, while Morgan Stanley declined to comment.
Seoul-based MBK, which also has offices in Hong Kong, Shanghai and Tokyo, bought a 60% stake in China Network in July 2007. Media reports pegged the value of that deal at about $936 million.
Cable companies in Taiwan have the lion’s share of the national television market, with 80% penetration of homes across the country.
“Taiwan is dominated by cable television and cable television has dominated media consumption,” said Vivek Couto, co-founder and executive director of the media and telecommunications analysis and consulting firm Media Partners Asia.
Private equity players have taken notice. In September 2009, Carlyle Group LP entered an agreement for a $1 billion equity swap with Taiwan Mobile Co. through which it acquired a stake in the cable television operator Kbro Co. “Taiwan is growing quite rapidly, but it is an inherently small market,” Couto said. “It does not have the top-line growth that India and China offer, but because [the cable companies] are entrenched and because they are the first pipe into the home and have the first share of the broadband market, they have upside potential [and] they are very strong generators of [earnings before interest, taxation, depreciation and amortization] and free cash flow.”
In other words, although penetration rates may be slowing down in a market that’s already pretty saturated, there are significant opportunities to bundle cable with broadband Internet and up-sell on features, while the basic cable business continues to print money.
One person following the bidding said that the reason why MBK could be so confident in a high sticker price for China Network was the easy credit available in Taiwan.
“One of the things that has been driving the M&A markets in Taiwan has been the leverage that’s available domestically. That’s a key theme of the market that makes it stand out from other markets,” the person said.
Other industry watchers are not so sure that the companies like China Network can attract the kind of prices that its sellers are asking. They said that, given the high penetration rates of the cable business, any growth would have to come from new services, which would require significant additional investments.
(Dow Jones LBO Wire covers news about private equity.) 8621-6120-1200; jonathan.shieber@dowjones.com