SBC Sells For a Song

Denver— SBC Communications Inc. confirmed last Thursday that it agreed to sell its 310,000-subscriber Ameritech New Media cable unit to cable overbuilder WideOpenWest LLC.

The deal, which sources familiar with negotiations said was between $200 million and $300 million, would make the Denver-based overbuilder roughly the No. 13 domestic MSO. SBC's Americast-branded properties pass about 1.5 million homes in Michigan, Ohio and Illinois.

The selling price would be only about $1,000 per subscriber, or about a quarter of what SBC had sought in shopping the systems, an MSO executive familiar with the deal told Multichannel News.

The sale requires local franchise approvals, which could take months.

first reported the pending transaction in print on May 14.

In a press release, SBC senior executive of corporate development James Kahan said: "WideOpenWest is a well- respected, customer-focused company with a strong commitment to providing the same type of high-quality programming and customer service subscribers have come to expect from Americast."

SBC has spent years shedding both the cable assets it built — such as a system in Richardson, Texas — or those it bought from such sellers as telcos Pacific Bell Corp. and Southern New England Telecommunications Corp. or MSO Hauser Communications Inc.

SBC bought Ameritech Corp. in 1999 and put its cable systems on the market more than a year ago.

WOW president Mark Haverkate, an industry veteran who helped launch RCN Corp. overbuilds in Boston and San Francisco, last week said adding high-speed data to the Americast-branded systems would be "our top priority."

"None of these systems provide Internet access, so it's a wide-open opportunity for us to go in there and offer that product," he said last week. "That will make us a cash-flow-positive company, rather than a cash-burning company."

SBC's reluctance to offer cable-modem service on the relatively new cable systems contributed to their low cash-flow generation, depressing the systems' sale price, analysts said.

"That's incredibly cheap," said Paul Kagan Associates analyst John Mansell. "Do you realize there are people who would pay that much for an unbuilt franchise?"

Added Stu Chapman, an Illinois-based municipal consultant who works with 65 communities in the Chicago suburbs: "Those kind of numbers haven't been seen in 15 years."

WOW said the Americast systems generated about $150 million in revenue last year. Officials would not comment on cash flow at the systems.

Haverkate said WOW plans to install data-transmission equipment at the Americast headends so it can immediately begin offering cable-modem service.

Over time, WOW must also to move its headends from SBC's local-telephone central offices, Haverkate said.

Financing for the SBC deal is being arranged by Fort Worth, Texas-based Oak Hill Capital Partners and by ABRY Partners, a Boston-based private-equity fund. Those firms also put up the initial $50 million used to launch WOW.

Haverkate said the Americast franchises are about 90 percent built out. Remaining construction involves hooking up 400,000 multiple dwelling units to the network, and building the network past another 200,000 homes, located mostly in the Chicago area.

The Americast systems were built in towns where other cable companies were already operating. One such incumbent is Insight Communications Co., which competes against Americast in Columbus, Ohio.

"We have a competitor now; we'll have a competitor then," Insight president and CEO Michael Willner said last week.

The deal was a logical move for WOW. Though it couldn't raise money to build new networks in its franchised areas, it was able to find the capital to acquire a proven commodity, said Bob Lane, telecommunications analyst with Boston-based research firm The Yankee Group.

"These properties have a proven track record," Lane said. "And if there's one thing a market likes, it's a certainty."

Naperville, Ill., spokesman Gary Karafiat, said his suburban Chicago community typical of towns that thought they'd never get high-speed broadband services from an SBC-owned cable provider.

Karafiat also said WOW may force AT&T Broadband to reconsider its Chicago-area strategy. The MSO recently said it would delay upgrades to its suburban Chicago systems for as long as five years while it reorganizes its local operations.

"Hopefully, this will light a fire under them," he said.

With respect to Americast's cable rates, WOW will likely continue SBC's practice of implementing "small" annual increases to cover higher programming costs, Haverkate said.

When WOW gets its package together, it's likely to look like its offering in Colorado.

In the Denver suburbs, WOW's packages range from 3 megabits of Internet access and 1,000 minutes of state-to-state long-distance service for $74 to a $124 bundle of Internet service, 75 broadcast and analog-cable TV channels, 45 digital channels and 1,000 long-distance minutes.

WOW is building new systems in Colorado. It's launched in Denver, where it has signed up 200 of 800 homes passed for its bundled package of video, data and long-distance phone service.

Officials in the Denver suburbs of Greenwood Village and Aurora — where WOW is overbuilding AT&T Broadband — last week expressed concerns that the deal would consume capital the overbuilder needs to build out systems in 13 franchises that would serve 800,000 consumers along Colorado's Front Range.

But Haverkate said cash flow from the Americast systems would help WideOpenWest deploy its new networks in Colorado, Texas and Arizona.

The overbuilder has already run afoul of franchises in both Greenwood Village and Aurora, however. Its Greenwood Village franchise called for 57 miles of fiber-optic plant to be built by May 1, 2000. In the latter, another 215 miles of plant were supposed to be in place by the same date. As of last week, construction had not started in either location.

WideOpenWest vice president for market development Dave Haverkate blamed the Colorado slowdown on a change in the technology the company is deploying. The plan now calls for a dual architecture that will use traditional hybrid fiber-coaxial cable to deliver video, and CAT5 fiber optic cable for Internet access and IP telephony.

"Everybody is eager to get it done, as are we," he said. "But we believe the customer is going to get a better product, or we wouldn't have done it.

"Plus, the network will be totally scalable, which means I won't have to go back later and dig up their streets again."

Aurora spokesman Joe LaRocco was taking a wait-and-see attitude.

"If we don't see some activity by the fall, we're going to have to see what we can do," he said, noting that the city's franchise permits it to impose fines of up to $2,000 a day. "But we like the idea of competition, and certainly don't want to do anything that will hurt them. That would only help AT&T."

Two other area communities were taking the delays in stride.

In Denver and Boulder, officials said they hoped WOW would be further along by now, but are not concerned about the ultimate outcome of its competitive build.

"We wanted competition for AT&T yesterday," said Boulder telecommunications coordinator Richard Varness. Dual-wire technology would allow WOW to deliver speeds in excess of franchise specifications, he said.