Denver-Based Overbuilder WideOpenWest is the latest pay TV distributor to test the public markets, filing documents for an initial public offering last week that some believe could pump as much as $750 million into its coffers.
And while the company is dipping its toe into the IPO waters at a time when talk of consolidation in the distribution business is at a high point, small cable operators — with one big exception — have had mixed success with public investors.
Since 1999, five small cable operators and overbuilders have gone public: Insight Communications, Classic Communications, Mediacom Communications, Knology and Cable One, to mixed results.
Displeased with a stock market they believed did not appropriately value their assets, Insight and Mediacom went private in 2005 and 2011, respectively. Insight sold out to Time Warner Cable for $3 billion in 2012. Mediacom, led by industry icon Rocco Commisso, completed a $35 million headquarters in upstate New York in 2013 and has been humming along nicely. Knology, which ran into some hiccups after its 2004 IPO, was purchased by WideOpenWest 2012 for $1.5 billion.
The lone exception appears to be Cable One, which was spun off from Graham Holdings in 2015 and was the best-performing stock in the sector in 2016, rising more than 43% to close at $621.73 per share on Dec. 31. The stock closed at $625.10 on March 29.
A sale or perhaps even a buying spree could be in the cards for WOW — public stock can provide a currency for deals or set a price floor for a sale. An IPO also can provide an exit strategy for partners — WOW’s two biggest shareholders are private-equity player Avista Capital (60%) and Crestview Partners (35%), which could be interested in cashing out at least a part of that stake.
WHEN AND HOW MUCH?
WOW hasn’t set a date or a price for the IPO — it said in the prospectus it could raise $100 million, but Renaissance Capital estimates that could grow to $750 million. And whatever price it decides could serve as a barometer for another long-awaited IPO, Altice USA, which is expected later this year.
While many analysts are puzzled at Cable One’s ascension — it has been losing basic-video subscribers at a 20% clip over the past few years, and its stock primarily reflects its potential as a takeout candidate — in many ways, it is similar to WOW. Cable One has been a pioneer in focusing on higher-margin broadband customers, often at the expense of video subscribers. And in the past few years, WOW has done the same.
WOW offers broadband speeds ranging from 10 Megabits per second to 1 Gigabit per second at prices between $29.99 and $99.99 per month.
“This ‘good, better, best’ approach provides competitive speed and price-value differentiation while simplifying the overall customer value proposition,” WOW said in its prospectus.
While Cable One has taken a laissez-faire attitude toward video — it dropped Viacom’s youth-oriented cable networks in 2014 — WOW’s disdain hasn’t been quite so palpable. In its preliminary IPO prospectus filed in late March, though, the overbuilder has clearly placed its emphasis on broadband customers.
WOW, which has 11,500 route miles of inter- and intra-market fiber to go with 33,500 miles of coax, has always prided itself on its fiber network. It competes alongside the two biggest cable operators (Comcast and Charter Communications) in the bulk of its markets. According to the prospectus, AT&T U-verse TV overlaps 63% of its market, followed by Comcast (53%) and Charter (39%). Its two largest markets — Detroit with 670,865 homes passed and Chicago, with 472,432 homes passed — are squarely in Comcast territory.
In the prospectus, WOW said it intends to focus on increasing broadband speeds, not ignoring video but shifting its marketing approach to push those customers that value the video service toward “adoption of HSD [high-speed-data]-centric bundles.”
Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said the emphasis on broadband is becoming more common with smaller operators out of necessity more than choice, mainly because profits are hard to come by with a video service.
Overbuilders have managed to survive by offering service at a steep discount to the incumbents, he added. That’s fine, he said, unless they really start to make an impact.
“I am sure these guys can make nice returns offering a substantial discount,” Wlodarczak said. “But if they start to have a material effect on Comcast or whoever they are competing against in the small markets they operate, Comcast, etc., can cut the price and potentially seriously hurt players like this.”
VIDEO DOWN, BROADBAND UP
Despite that tough competition, WOW has managed to hold its own, at least for now. According to the prospectus, WOW has 718,900 high-speed data customers, 486,400 basic video customers and 251,000 telephony subscribers. While video customers have dipped from about 540,900 at the end of 2015, high-speed Internet subscribers were up 3% from the 698,300 customers reported during the same period.
Crestview Partners’s $125 million investment in WOW in 2015 pumped some needed capital into the company and brought cable veteran Jeffrey Marcus, founder of Marcus Cable and a Crestview partner, on board as chairman.
Marcus told Multichannel News last summer that that while video wasn’t being pushed to the sidelines, WOW would be more open to alternative ways to deliver content and data service.
WOW has regularly been at the top of J.D. Power Customer Satisfaction surveys, and at the time Marcus said the company would build on that customer service edge by giving customers what they want and “not forcing big packages on people.”
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