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Wide Open Midwest

WideOpenWest LLC plans to transform itself from a Western startup to a major Midwestern MSO by purchasing cable properties from SBC Communications Inc.'s Ameritech New Media in Illinois, Michigan and Ohio.

Talks between the two parties have proceeded to a point at which an announcement is "imminent" and could come perhaps as soon as today (May 14), sources close to the deal told Multichannel News.

"There are still some issues out there, but they're getting close," said an industry insider familiar with the negotiations. The source would not specify what those issues were.

The deal would give WOW access to Ameritech's estimated cable customers and systems passing an estimated 1.5 million households. The company's last release on the subject, shortly before SBC closed its purchase of Ameritech Corp. in October 1999, stated Ameritech New Media had 113 cable franchises.

Financial terms could not be determined, but cable analysts said they assumed the sale price would be well below the $4,000 to $5,000 per subscriber that many well-built cable systems have recently commanded. That would put the price below $1.2 billion.

SBC has been trying to sell the Ameritech systems for more than a year.

"They must have gotten a great deal, I'm sure of that," speculated Paul Kagan Associates cable analyst John Mansell.

Executives at both SBC and WOW declined to comment on the rumored sale last week.

WOW's equity backers are Boston-based ABRY Partners, a private-equity investment fund, and Oak Hill Capital Partners, a Fort Worth, Texas, fund formed by Robert M. Bass.

The two parties put up $50 million in 1999 to get the overbuilder off the ground.

ABRY backed Avalon Cable, which bought a similar-sized MSO — 262,000-subscrber Cable Michigan Inc. — from RCN Corp. in 1998 for about $520 million, then sold it to Charter Communications Inc. for $845 million a year later.

"ABRY's very good at raising money," one cable equity-fund principal not involved in the deal said last week.

That principal noted that WOW's management includes president Mark Haverkate, a former RCN executive. RCN had looked at the Ameritech properties.

Haverkate and ABRY probably figure they can run the systems more efficiently, improve cash flow and deliver a return on debt providers' investment, the principal said.

Ameritech had been underpricing at least some of the incumbent cable operators they had overbuilt. Its systems also have not yet introduced cable-modem service, which would compete against SBC's digital subscriber line offerings.

WOW would be expected to offer the same package of cable, high-speed Internet access and long-distance telephone service it's currently rolling out in Denver.

The overbuilder had wanted to build in Texas and along Colorado's Front Range, but capital constraints have forced it to focus on the broadband network it's building in the Denver suburb of Lakewood, Colo.

Since it launched on April 1, WOW has signed up 125 customers in 600 homes passed.

Ameritech New Media, which launched in 1996 in the Detroit suburbs, has clusters in Columbus, Ohio; South Chicago, Ill., and surrounding communities, and in the Cleveland suburbs.

As money to build new systems becomes hard to find, WOW backers have apparently opted to take the acquisition route. That runs counter to its earlier plan to build new, state-of-the-art networks capable of supporting a business model built around high-speed access to the Internet.

"It reverses the overbuilders' mantra, 'We have a green field,' " said Keith Kennebeck, an analyst with the Strategis Group and co-author of a recent white paper judging the viability of overbuilders. "The business plan most competitive providers create is based on the fresh construction of a two-way, redundant, easily scalable plant — a super high-tech network."

By contrast, Ameritech's cable plant isn't even two-way, Kennebeck said.

"I question why [WOW] would do such a thing," Kennebeck said, adding the sale would only make sense if SBC were offering the cable systems "at an extremely good price."

Sources said WOW believes "a little tweaking" will make the Ameritech properties suitable for providing high-speed Internet access.

Other overbuilders have bought out overbuilders, he noted. RCN Corp. bought out start-up bundled services provider 21st Century Telecom Group Inc. in Chicago.

But that deal hasn't been rosy, Kennebeck said. "They still have issues today, blending different technologies. And I hear it's extremely frustrating."

Sources indicated that by selling to WideOpenWest, SBC could avoid the public-relations problem it had to deal with in Connecticut, after it said it wanted to shut down the Connecticut cable system it acquired in its purchase of Southern New England Telecommunications Corp.

In that case, the regional Bell operating company turned a deaf ear to state regulators, as well as 30,000 customers in 26 communities who wanted service to continue.

"There are a lot of elected officials who are going to be interested in keeping competition alive," one industry observer said. "If they tried to do what they did in Connecticut, it wouldn't go over very well."

Transferring more than 100 Ameritech New Media cable franchises will be no easy task, said Mansell, who noted that local governments often use the transfer process to "extort" concessions from the incoming operator.

The fact that WOW doesn't have SBC's deep pockets to fall back on won't matter to local officials, Mansell said.

"But so what?" he asked. "These systems have already been built. So it will be easier to get a good return on your investment."

Not surprisingly, officials in some cities served by Ameritech New Media say a WOW deal would be contingent on municipal approval of a transfer of ownership.

The new owner will, at minimum, have to live up to commitments made by Ameritech New Media. One location to watch will be Chicago's South Side, otherwise known as Area 5. Ameritech still has not completed its build out there, which means WOW would inherit that obligation.

"They are a little behind schedule, but not significantly so," said city cable administrator Joyce Gallagher. As for a new owner: "I welcome anyone who continues to offer the citizens of Chicago an opportunity for competition."

Naperville, Ill., may be typical of what WOW will find when it moves to transfer franchises in the Chicago suburbs. Some officials in the area will want to know how soon WideOpenWest can deliver high-speed Internet access, now that AT&T Broadband has put its system upgrades on a five-year time schedule.

"Right now, our biggest issue is that whoever comes in here start rolling out cable- modem service as quickly as possible," said Naperville spokesman Gary Karafiat, who noted that the city logs about 15 contacts a week from consumers seeking high-speed Internet access. "We would hope that would be part of the game plan for whoever bought these systems."

The fact that the prospective new owner doesn't have much of an operational track record "concerns us," said Paul Sincock, city manager of Plymouth, Mich.

The city has fresh experience with system transfers. The incumbent cable system recently changed hands from MediaOne Group Inc. to, ultimately, Comcast Corp. Sincock predicted a thorough review by legal staff with a focus on planned technological changes and anticipated upgrades.

A spokesman for Westland, Mich., was more resigned with respect to change.

"We just hope we continue to get prompt service and that a new owner would fulfill current contract obligations," he said.