Leveraged Cash Flow Growth Spirals

"Suddenly, McCaw knew he could grow as fast as he could hustle. The revelation was as powerful as hearing "there was life after death," McCaw said later. If bankers were offering life after death, McCaw became an apostle of that religion. He started a simple process: buy a system at its undervalued price; bring in professional management to improve service; raise rates and find more customers to goose cash flow; then get a new loan and use that new money to buy another system."

"Since banks loaned at a multiple of cash flow, every new dollar of cash flow expanded a cable company's borrowing power. At first the multiple was 4.5, so a bank would lend $450,000 on cash flow of $100,000 a year. The multiples grew, eventually reaching eight times cash flow. An operator could increase his cash flow, and thus his borrowing ability, by consolidating costs such as billing offices and maintenance crews and obtaining volume discounts from HBO, CNN, and other providers. A company with 500,000 customers paid CNN 7 c" a household per month, while a company with 2 million paid 5#, for example. In other words, the bigger you got, the bigger you could get. At McCaw, "we understood we had to grow or leave the business," says Perry."

"The word went out: Anyone in the Northwest and Alaska with a cable system to sell should call the McCaws. Soon a predictable pattern emerged. The company would find a system, figure out how to boost cash flow, and buy it under the cheapest terms possible. Sometimes the seller agreed to finance the sale. Other times the company managed to borrow more than the sale price by persuading a lender that the"

"Occasionally, the owner would see the first signs of the growing prof- itability of the system he was selling. In one deal, McCaw took control of a system sold at $21 million and negotiated a loan for $10 million more than the sale price because of the increased cash flow. The extra $10 million went toward—what else?—the next purchase."