Bresnan Communications, the nation’s 13th largest cable operator with 308,000 customers in Colorado, Montana, Wyoming, and Utah, has been sold to Cablevision for $1.36 billion dollars — $4,300 a subscriber — well above the asking price of one billion dollars, including the company’s debt obligations.

Providence Equity Partners Inc. of Providence, Rhode Island, majority owner of Bresnan unloaded the cable company to help boost its earnings for clients.  Private equity firms like Providence have been suffering in the current economic climate, turning in their worst returns since 2000.  Many are selling off holdings to pay investors.

Bresnan spokesman Shawn Beqaj said the sale had nothing to do with founder William Bresnan’s death last November at age 75.

Bresnan, 30 percent owned by Comcast, today specializes in providing service in the sparsely populated mountain west states that have been ignored by larger companies.  At least 44 percent of Bresnan’s business is in Montana, where 688 of the company’s 1,300 employees work.  But the company’s founder, William Bresnan didn’t start out providing service in any of the states where the company operates today.

The acquisition by Cablevision, known mostly for its suburban New York City-area cable systems, would bring Bresnan’s current owners a considerable bonus over the asking price, and Cablevision (and the debt-financing banks) will pay in cash.

Other bidders included Suddenlink and a company controlled by former cable czar Dr. John Malone.

Cablevision managed to leverage the deal with less than $400 million of its own equity, financing the remaining $1 billion dollars between Citigroup and Bank of America Merrill Lynch in non-recourse debt.  That means if Cablevision’s buyout of Bresnan falters, the banks can only recoup their losses by seizing and selling the acquired Bresnan systems.  They can’t go after Cablevision’s other cable systems or sports ventures to make up the difference.

Considering Bresnan subscribers in the Northern Rockies face little prospect of robust competition, and Bresnan cable broadband can easily exceed broadband speeds offered by telephone rival Qwest, most analysts expect few problems from the deal.

CNBC explains the Bresnan-Cablevision Deal.  (3 minutes)

Bresnan Founder’s Story Is Echoed Across the Entire Cable Industry

The late William Bresnan -- Founder, Bresnan Communications

Bresnan’s journey through the cable industry over several decades tells the story of the often-ruthless deal-making, horse-trading, and customer-financed  mergers and acquisitions starting after cable deregulation in 1984.  Rates spiked to pay ever-increasing sums to buy and sell cable properties.  To own a cable system, it was said in the late 1980s, was a license to print money.

Bresnan’s involvement in the cable industry began with a job in the engineering department of a midwestern cable company and moved into management at a number of companies, most now long-gone after waves of consolidation.  Those with cable television dating back to the 1970s may even recall some of the names:

H&B American Cablevision: Operator of rural cable systems, most with around 12 channels, offering residents clear reception of over-the-air television signals.  They had a loyal customer base, stable earnings, but little potential for growth.

TelePrompTer: The nation’s largest urban and suburban cable operator through much of the 1970s, but a 1972 bribery scandal for a cable franchise agreement in Trenton, N.J., lead to bribery and perjury charges for TelePrompTer’s principal owner, Irving Berlin Kahn.  The famous songwriter’s nephew ordered the company to spend nearly everything to help mount his defense.  The TelePrompTer scandal would ultimately force the company to sell itself to…

Group W Cable: Westinghouse acquired the financially-troubled TelePrompTer in 1981.  Group W itself would exit the business by 1986 with an acquisition feeding frenzy among four other cable operators — American Television and Communications Corp.; Tele-Communications Inc.; Comcast Corp. and Daniels & Associates Inc.  Ironically, only Comcast would survive merger-mania intact.  ATC systems eventually became a part of Time Warner Cable.  TCI systems were acquired by Comcast.  Daniels was itself a buyer and seller of cable systems.

Bresnan Communications was founded in 1984, not in the mountain west, but in the upper peninsula of Michigan where Bresnan acquired and ran several small cable systems thanks to the help of cable czar Dr. John Malone, CEO of Tele-Communications, Inc., (TCI).  Millions of Americans are familiar with TCI’s own journey through consolidation, first becoming AT&T Broadband and then later as a part of Comcast.

Over the next 14 years, Bresnan expanded operations with Malone’s help.  At one point Bresnan jointly operated cable systems with TCI in northern Michigan, Wisconsin, Minnesota, Nebraska, Georgia and Mississippi serving approximately 660,000 customers. The company even bought cable systems in post-Communist Poland and in Chile, the latter eventually sold outright to TCI.

Bresnan Customers Benefit from Founder’s Technical Background

What set Bresnan Communications apart from the rest of the smaller players in the industry was the founder’s in-depth understanding of cable technology.  Bresnan understood where the industry was going, and had an insatiable appetite for new technology that would also leverage additional growth in the business.

Bresnan spent heavily to upgrade his cable systems, deploying the hybrid fiber-coaxial cable architecture (HFC) in 1997 which is still in use at most cable systems today.  HFC would set the stage for Bresnan to compete with satellite television’s multi-hundred channels, and would let him sell telephone and broadband service to his customers.

That was unprecedented for smaller cable operators.  In the 1990s, it was still common to find small cable systems running only a few dozen channels.  If these legacy cable systems didn’t upgrade, DISH and DirecTV could eat them for lunch.  For those that would raise the necessary money, upgrades were performed.  For those that couldn’t, many would exit the business, selling their cable systems to larger, better-equipped enterprises.

Buy Low, Sell High

Beyond anything else, Bresnan was a businessman.  He had a track record of acquiring cable systems at fire sale prices and selling them for a tidy profit.  So during the height of the dot.com boom, he could hardly ignore a 1999 call from Microsoft co-founder Paul Allen.  Flush with cash to spend, Allen saw cable systems as a key component of his dream for a “wired world.”  Cable companies owned dozens of networks brimming with content that he believed could help drive people to broadband.  Owning both the content and the pipeline to deliver it could drive up the value of both, and Allen could control both.  He had already established himself as owner of Charter Communications, itself a medium-sized cable operator.

Allen’s cable acquisition shopping spree inflated values of cable systems to all-time highs, finally reaching nearly $5,000 per subscriber in crazed bidding wars.  Allen offered $3.1 billion dollars for Bresnan’s small cable empire.  Bresnan sold.

Bresnan Communications Recreated

By 2003, the dot.com boom was well over and done with, and those high-spending online tycoons saw the value of their acquisitions and enterprises erode away.  For Allen, his much-treasured vision had become a cash-sucking albatross.  Charter Communications’ stock by then had lost 95 percent of its original value.  Consumer protection regulation had also arrived in 2003, putting a stop to subscriber rate increase-fueled bidding wars.  Cable rates had risen 61 percent from the time the industry was deregulated in 1984 until legislative relief took effect in early 2003.  When the Money Party ended, stock prices for cable operators crashed.

Bresnan saw the deflation in the industry as an opportunity to buy his way back in, and started shopping.  That year AT&T Broadband, formerly TCI, found itself considering an acquisition offer from rival Comcast.  AT&T owned cable systems large and small, several of which were in the Northern Rockies, hardly cable’s fast lane.  While Comcast had big plans for AT&T cable systems in larger areas, it would be willing to part with smaller systems acquired as part of the deal.

By the time Bresnan arrived with an offer in hand, cable system values dropped further, and his bid for the roughly 300,000 subscribers that comprise today’s Bresnan Communications would be accepted at the fire sale price of $2,100 per subscriber.

Since the acquisition, Bresnan upgraded its systems, offering speeds up to 15/1 Mbps in its rural service area and maintains a reputation in the industry for running well-managed cable operations.

A controversial proposal by Montana’s largest cable operator to use public funding for construction of a fiber optic network linking the state’s seven Indian reservations has been rejected by federal officials.

Bresnan Communications sought $70 million broadband stimulus grant to construct the 1,885-mile fiber-optic network to improve broadband connectivity.  Independent and cooperative telephone providers objected, claiming the proposal would duplicate services they already provide.

The debate over broadband stimulus funding in rural Montana has been contentious, particularly after incumbent telephone providers accused Bresnan of lying on their application — implying funds would directly improve broadband service to Native American communities.  They accused the cable operator of using public funds to enhance their own “middle mile network,” infrastructure that helps Bresnan distribute broadband traffic between its central offices and data centers, but not “the last mile” connection customers actually rely on to obtain service.

Montana is not alone in the debate over how federal broadband stimulus money should be spent.  With a limited pool of funds, and an overwhelmed National Telecommunications and Information Agency tasked with processing an unexpected flood of applications, funding decisions have become increasingly political, and many incumbent providers have learned they can jam up an applicant just by flooding federal agencies with comments opposing projects that impact on their service areas.

KULR-TV in Billings covered the NTIA Grant Broadband Workshop held last January and also covered Montana’s woeful existing broadband speeds in these two reports. (1/19/2009 & 8/30/2009 – 2 minutes)

Because “last mile” projects are the most threatening to incumbent providers, these applications typically get the most opposition.  The NTIA, in an effort to reduce their workload, has in turn started focusing on “middle mile” projects which often benefit incumbents, pushing public tax dollars into pre-existing private networks.  That looks great on provider balance sheets — that’s money they don’t have to raise from stockholders or other investors.  Diverting those funds away, even from currently unserved areas, also protects providers’ flanks from the potential threat of competition, both now and in the future.

In Montana, chasing few potential customers spread out over vast distances in rural areas makes the potential threat from competition even scarier.  There, many small phone companies exist as co-ops, less concerned with raking in profits.  They fear the potential threat Bresnan Communications could bring to their viability if the cable operator gets a stronger foothold in their territories, especially when using tax dollars to do so.  But is the threat that large for well-run, customer-oriented companies and co-ops?

Many rural areas served by co-ops and other small independent companies actually receive better and faster broadband service than their more urban counterparts, argues Bonnie Lorang, general manager of Montana Independent Telecommunications Systems, an independent phone company trade group.  That’s because the state’s large urban phone company – Qwest, does not provide DSL into more distant suburban and rural service areas, and has only reached 75 percent of its customers with broadband service.  Smaller independent providers, particularly member-owned cooperatives, are accustomed to serving residents Qwest has been slow to reach.

While true for those forced to rely on Qwest DSL service, those with access to cable modem service can do better.  Bresnan provides up to 8Mbps service for residents in its mountain west region covering parts of Wyoming, Montana, and the western slope of Colorado.  Expanding Bresnan’s service where economically feasible remains a priority for the company, and broadband stimulus funding may make the difference between an “unprofitable” area and one that can be profitable if certain infrastructure costs are underwritten.

“Bresnan has a history of investing in communities that are not considered larger communities,” according to said Shawn Beqaj, spokesman for Bresnan. “Our philosophy is that smaller communities deserve every bit of the services that large communities have.”

Bresnan’s grant application received support from Montana governor Brian Schweitzer, the state’s Native American population, and some consumers unhappy with their current broadband choices, if any.

Montana's phone companies are running these print ads objecting to the broadband stimulus proposal from Bresnan Communications (click to enlarge and see the full ad)

On the other side, the phone companies and their trade groups: the Montana Telecommunications Association and Montana Independent Telecommunications Systems, and the state’s utility oversight agency.  They protested Bresnan was unnecessarily duplicating existing service, and potentially getting taxpayer money to do so.  They also hinted Bresnan exploited Native Americans in an application tailor-written to appeal to federal officials seeking improved service for disadvantaged and challenged minority groups.  Besides, the phone companies argued, Bresnan broke the rules from the outset by only agreeing to provide $6 million in company-provided matching funds, less than the 20 percent in matching dollars required by the stimulus program.

“If an area is unserved, prove it and spend the money on that,” Geoff Feiss, a representative of the Montana Telecommunications Association (MTA), told the Billings Gazette.  “But don’t spend $70 million on an overbuild network that’s going to deprive investment from existing networks and leave behind collateral damage that we’ll never recover from.”

Montana’s Public Service Commission ended up on the side of the MTA, calling Bresnan’s proposal “seriously flawed.”

Bresnan and their allies shot back that phone companies complaining about federal dollars being spent on broadband projects was hypocritical, considering many of those companies receive government assistance from the Universal Service Fund to stay in business themselves.

Consumers looking for broadband were left in the middle or left out entirely.  Many residents of the state are forced to rely on dial-up, satellite, or have been left indefinitely on waiting lists for future DSL expansion projects that take forever to materialize.  Choice is an option too many residents don’t have.  The Great Falls Tribune shared a story familiar to many Montanans:

Tim Lanham can’t get Qwest DSL at his eastside Great Falls home. It’s available to his neighbors across the street and at his office a block away.

He’s called Qwest about the situation, but typically can’t get through to a real person. The whole thing is frustrating, he said.

Lanham used to use Sofast. After its service went down, he switched to a Verizon Wireless card, but that can only be used on one computer at time. Now he has broadband Internet through Bresnan. Still, he wishes he had more options.

“I’d like the different options,” Lanham said. “Essentially they leave us with very few choices.”

At the heart of the debate is how to address the “digital divide” between those with Internet access and those without, and improving connectivity for those stuck with outdated, expensive, and slow “broadband.”

The state’s utility commission believes Montana’s primary problem exists in “the last mile,” namely getting broadband service to rural residents who currently are forced to use dial-up or satellite fraudband service that offers slow speed, tiny usage allowances, and a high price tag.  In most cases, telephone companies have deemed these rural residents too few in number and too far apart to make investments in DSL service worthwhile.  Using broadband stimulus money to subsidize the costs of providing service to rural America provides a direct path to broadband for those who may not obtain access any other way short of moving.

Larger providers have been urging that less money be spent on “last mile” projects and that funding be redirected into “middle mile” projects, which could dramatically reduce the costs companies have to pay to maintain and upgrade their own backbone infrastructure.  Examples of these kinds of projects include installing fiber optic cables between telephone company central offices or extended service “remotes” which reduce the distances between customers and telephone company facilities, extending the distance DSL can cover in rural areas.

For now, Montana will have to wait for both.

Bresnan officials will meet with tribal and state commerce officials before deciding what to do next.

Walter White Tail Feather, director of economic development for the Assiniboine and Sioux tribes on the Fort Peck Indian Reservation in northeastern Montana, told the Gazette he hopes Bresnan reapplies for the funding.

“We think we can make a better proposal this second round,” he said. “This first one was a learning experience. … What we really are doing is working with the state to empower ourselves as a tribal government to create a business, to create opportunities that we don’t have.”

The state’s small phone companies may have won the battle, but are now concerned they could ultimately lose the war over obtaining broadband stimulus money themselves, at least from the NTIA.

Jay Preston, chief executive officer of Ronan Telephone Co., told the Gazette two federal agencies now will be deciding who gets broadband stimulus money: The National Telecommunications and Information Administration and the Rural Utilities Service.

The NTIA “seems to be really, really focusing on the middle-mile idea,” Preston said, while RUS probably will approve funds for rural telephone companies that already are the federal agency’s customers. The RUS loans money to rural co-ops for a variety of projects.

Regardless of where the money comes from, frustrated Montana residents just want better service.  The state ranks dead last, tied with Alaska, in broadband speed, according to a study from the Communications Workers of America.  Residents enjoy an average broadband speed of just 2.3Mbps.

Already-broadband-challenged Montana residents faced a major headache when one of the state’s large Internet Service Providers, SoFast, suddenly shut down last November.  KFBB-TV in Great Falls followed the story over three days in these three reports from November 10-13th, 2009.  (5 minutes)

The Billings Gazette mapped out Montana's fiber landscape