Cable’s Next IPO Candidate Downplays Video

WideOpenWest is inching closer to a planned initial public offering, setting a price range for the stock that potentially could raise nearly $500 million to help pare down debt.

While the overbuilder has stressed it is focused on organic growth, it also points to a string of successful purchases over the past 15 years and is keeping its deal options open while moving deeper into a strategy that favors broadband over video.

Related: WOW Sporting New Logo

WideOpenWest was formed in 2001 and made its mark that same year when it bought SBC Communications’s Ameritech New Media, a state-of-the-art overbuild in Illinois and Michigan and Ohio that gave the upstart company instant credibility. WOW paid between $200 million and $300 million for the assets, which added about 300,000 subscribers. Using a popular metric from the period, the Ameritech deal was valued at about $1,000 per subscriber, or about one-quarter of SBC’s original asking price for the assets, according to reports.

From there, WOW set off on a string of acquisitions that beefed up subscriber rolls. Buying Sigecom in 2006 gave the company an inroad in the Indiana market, followed by five other deals that added 330,000 customers for a combined $1.6 billion.

New Organic Approach
WOW has focused on organic growth lately. Chairman Jeffrey Marcus, who joined the company after private-equity player Crestview Partners purchased a 35% interest in WOW in 2015, has said it will emphasize broadband rather than video going forward. But it also wants to take advantage of smaller tuck-in acquisitions.

Related: Marcus Helps Set WOW's Winning Strategy [subscription required]

Tuck-ins may be the only deals left to pursue. Altice USA, the domestic cable arm of European telecom company Altice N.V., is expected to unveil its IPO later this year and could be an aggressive buyer in the future. While Altice has said it is focused on integrating its past purchases of Cablevision Systems (2016) and Suddenlink Communications (2015), many expect it to at least kick the tires on midsized operators such as Cox Communications (which says it isn’t for sale) and others once it has a public deal currency.

Related: Testing Cable's Value Proposition

In the meantime, WOW will focus on growing the high-speed data business. That’s a tack many small operators have taken over the years in the wake of rising programming costs, most notably Cable One, the Phoenix-based cable operator that was the top-performing stock in the sector in 2016.

But that approach has pitfalls. While Cable One stock rose more than 40% in 2016, due largely to takeover speculation, its metrics have declined. Video subscribers have plunged from 436,370 to 293,726 between 2014 and March 2017. Broadband revenue increases have largely been the result of steep price hikes for service.

According to MoffettNathanson principal and senior analyst Craig Moffett, Cable One broadband subscribers increased by about 2.9% in the first quarter, above the 2.5% growth of the previous quarter, but still about half the growth rate for its peers. Video customers declined at about a 12.4% clip.

The big difference is that Cable One has little competition in its markets: customers who want high-speed internet either have to pay the increases or opt for inferior digital subscriber line service. According to its prospectus, 53% and 39% of WOW’s footprint is overlapped by Comcast and Charter, respectively.

The competitive dynamic with phone companies is a bit better. AT&T’s U-verse (a mixture of fiber and DSL) is available in about 63% of WOW’s footprint based on homes passed. Verizon Fios is in about 3.5% of the footprint and Frontier Communications operates in about 2.7% of WOW’s territory, according to the prospectus.

Allure of High Margins
The allure of high broadband margins — in excess of 95%, according to the prospectus — is strong, though, and led to a steep rise in net income ($26 million in 2016, a $53.6 million improvement over 2014) while revenue increased about 1% to $1.2 billion.

At the same time, video customers have declined steadily while broadband increases have been relatively minimal. Video revenue-generating units (RGUs) fell from about 635,000 in 2014 to 474,000 by this March, according to the prospectus. High-speed internet customers increased from 728,000 to 729,000 in the same time period. During that time, WOW sold its Lawrence, Kan., system with about 31,000 customers, to Midco.

WOW apparently sees greater upside in broadband, driven by increased data consumption from social media applications, OTT video and cloud-based computing. Customers who crave video are just going to have to pay more.