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Testing Cable’s Value Proposition

Cable Operators have begun to seriously test the valuation waters, with Altice USA finally issuing preliminary documents for a long-awaited initial public offering and small operator Wave Broadband initiating an auction for a possible sale.

Altice USA, the domestic arm of European telecom company Altice N.V., filed its registration statement with the Securities and Exchange Commission on April 11, ending what had been months of speculation. Altice USA first said it was considering an IPO in October.

The documents left a lot of unanswered questions, as Altice has yet to reveal the number of shares, pricing and what percentage of ownership it will offer to the public. But some financial community sources have said that reports that claim Altice USA is prepared to offer a 20% stake in the company to the public are off the mark. They say the actual percentage is much lower.

That would align with what most analysts believe is the main reason for the IPO: to give some of Altice’s financial backers a path toward realizing their investment.

While an IPO could give Altice USA a deal currency to snap up other small cable operators, the company is currently busy digesting the two large deals it completed in the past 18 months: the $9.1 billion purchase of Suddenlink Communications in December 2015 and the $17.7 billion buy of Cablevision Systems in June.

Publicly held Cablevision was an all-cash purchase Altice needed help to finance. Suddenlink’s private-equity backers — BC Partners and the Canada Pension Plan Investment Board (CPPIPB), which kept a 30% stake in Suddenlink after that deal was completed — bought a 30% equity position in Cablevision for $1 billion.

The IPO would allow those private-equity partners to monetize some of their stake, but not likely all of it.

“Canada Pension is very long-term focused and it may be a little early for BC Partners to be lightening up aggressively,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. “I am assuming Altice itself raises very little new capital.”

Just how much Altice USA could raise and what value the IPO could place on the company will likely be in part determined by private valuations.

Those private assessments have been climbing rapidly.

Altice would be the second small cable operator to test the public markets this year: Overbuilder WideOpenWest filed a preliminary prospectus for an IPO in March that could raise as much as $750 million. WOW, with about 486,400 video subscribers, is about one-tenth of Altice USA’s size of about 4 million video customers.

Cable operators are usually valued on multiples of cash flow, and for the most part those numbers have been high. Valuations for small and large cable operators alike range from about 7.5 times cash flow to more than 11 times. NewWave Communications, which sold to publicly traded Cable One earlier this year for $735 million, was valued at about 11.5 times forward-looking cash flow, while Charter Communications trades at 9.5 times cash flow.

Backing out its NBCUniversal programming arm, Comcast trades at about 7.5 times cash flow, Wlodarczak said.

Cable One is valued the highest of the public operators at about 10 times, but that is mainly because it is considered a takeover candidate (with Altice as one of the possible buyers). Another key indicator could be the ongoing auction for Seattle-based Wave Broadband, which also has come on the block. According to sources in the financial community, Wave’s owners — private-equity players Oak Hill Capital and GI Partners — are seeking as much as $2 billion for the 138,000-subscriber cable company. At that price, Wave would be valued at about 10 times the estimated $200 million in annual cash flow.

For that reason Wlodarczak said he believes Altice USA will have a healthy valuation — 9 times cash flow or more — “if people start to think about upside from possible additional Altice acquisitions.”

Most analysts believe Altice USA will take at least a year to integrate its existing operations before it goes back out on the hunt. The new stock, though, would provide a strong new deal-making option.

“I think they still have some integration work to do,” Telsey Advisory Group media analyst Tom Eagan said. “I imagine they will trade in between Comcast and Charter, especially because of their growth and the increase in margins. I would not be surprised if they did use it [the stock] for acquisitions.”

Stock multiples for cable distributors have varied widely in the past few years. According to Eagan, Comcast, the largest cable operator in the country, had a trading multiple of 7.1 times in 2015, rising to 8.3 times in 2016 and is expected to be about 8.5 times in 2017. Charter, which has been much traded at 8.5 times in 2015, rising to 10.2 times in 2016.

The outlier has been Cable One, the midsized Phoenixbased cable operator that was the sector’s best performing stock in 2016, rising more than 43% for the year. Cable One is trading in the 10 times range, despite losing subscribers at a 20% pace. Most analysts see one catalyst for the appreciation in the stock over the near term — the potential that it will be purchased by another cable operator, probably Altice.

Altice USA has given no indication of an intention to buy Cable One, and most analysts don’t think it would be a good move to put the two together. Still, that hasn’t stopped the market from speculating.

“I don’t think the logical candidates — Altice, Charter or Comcast — are interested in buying Cable One,” Wlodarczak said.