30 Years of ‘Sudden’ Success

Suddenlink CEO Jerry Kent’s Second Act Grows Into Major Player on Cable Stage

By Mike Farrell -- Multichannel News, 12/19/2011 12:01:00 AM

Jerry Kent could just have easily abandoned the cable industry a decade ago when, in a bit of a surprise move, he resigned as CEO of Charter Communications, then the fourth-largest MSO in the country, to take a step back from the pressures of running the company he’d helped to found.

“Could have” is the operative part of that sentence because, in reality, he couldn’t stay away for long.

“I told the world I was going to drive the car pool for a while and relax,” Kent recalled. “We’d been through a pretty long ride, and a very intense ride, with a number of acquisitions, executed what was then the third-largest IPO in U.S. history, dealing with the industry issues and my relationship with Paul,” meaning Paul Allen, the Microsoft co-founder and then-Charter chairman.

“It was a pretty trying time. On the second day of my simulated retirement, my wife made me put in another phone line because I was tying up the phone too much for her.”

Kent drove in the car pool for exactly four months. Then, he formed Cequel III, an investment vehicle to look into partnering with and creating opportunities in the telecommunications and cable industries.

That set Kent back on a cable trajectory that has put his company, Suddenlink Communications, at No. 7 on the list of top U.S. cable operators, with 1.3 million customers and $1.7 billion in revenue. It employs close to 6,000.

Along the way, Kent has forged and maintained strong relationships with other companies and executives in the industry, grown the business and maintained a stellar reputation in the cable community. For those reasons, Multichannel News has named Suddenlink Communications chairman and CEO Jerry Kent its 2011 Executive of the Year.

“He’s a good friend and a terrific executive,” said Insight Communications CEO and co-founder Michael Willner. “He confirms our strong belief that you don’t have to be huge in this business to be successful.”

EARLY DEALS

After starting Cequel III in his home base of St. Louis, Kent quickly began building a management team and the firm eventually raised about $8 billion in capital.

Tapping partially into that war chest, Cequel cut a deal to manage Classic Communications, which had about 325,000 subscribers in rural and secondary markets in 13 states. Oaktree Capital Management owned it and Cequel got a small equity stake.

In 2006, Cequel made its biggest steps forward, buying 940,000 customers from Cox Communications, for a thenreported $1.55 billion, and 240,000 subscribers in West Virginia from his old company, Charter, for $770 million.

Cequel also morphed into Cebridge Communications and then, with so many new subscribers coming in, opted for a clean slate and a new, modern-sounding brand: Suddenlink Communications.

While Kent’s mergers team has been less active recently — the most recent deal was the $350 million purchase of 83,000 customers from NPG Cable in 2010 — that hasn’t been for want of interest.

Suddenlink has looked at practically every cable deal that has come up, and been listed among early bidders for such major properties as Bresnan Communications (bought by Cablevision Systems) and Insight Communications (now pending a sale to Time Warner Cable).

Kent wouldn’t comment on specific properties, but said Suddenlink isn’t afraid to make acquisitions as long as they make strategic sense and represent a sufficient return. “We’re a buyer, but we’re a cautious buyer.”

OPERATING GAINS

As far as operating what Kent and co. have bought, Suddenlink has managed to outperform much-larger peers on financial metrics, posting 20 consecutive quarters of positive revenue growth, with cash flow rising by more than 9% since 2008.

In terms of investing in the business, in late 2009 Suddenlink launched a $350 million plant upgrade — Project Imagine — that will boost HD channel capacity and high-speed Internet speeds throughout its footprint. That project is slated to be completed in the first half of next year.

Miller Tabak media analyst David Joyce said Kent and his team have managed to squeeze out strong returns, despite economic challenges.

“Jerry Kent clearly knows the cable business,” Joyce said. “Suddenlink was still adding subs organically when most of the cable industry was losing them (although they went a little negative recently). They are doing a good job upgrading (Project Imagine, to go all-digital and eventually become more interactive) and integrating acquisitions.”

Back in 2003, when Kent was managing Classic Cable, his return to the industry didn’t look quite so promising.

Classic had just come out of bankruptcy protection and its rural systems, thought to be growth engines just a few years before, weren’t living up to their billing.

Kent’s first agenda item was to clean up the existing business by shutting down 100 headends and selling off another 500, consolidating operations and beefing up service offerings.

Along the way, Suddenlink has managed to grow its digital-cable penetration to more than 50%, its high-speed data penetration to 33% and its phone penetration to 18%.

“We’re very proud of how we built Suddenlink,” Kent said. “It was a unique challenge. We love this business, we think there is still significant growth and opportunity in cable. It’s in my blood. And frankly, we thought there was some unfinished business to accomplish in Suddenlink.”

ABOUT THE BACKBONE

Ask Kent what has been the biggest factor in Suddenlink’s success and he won’t talk about complicated deals.

Instead, it’s all about the backbone.

Suddenlink’s national backbone, the fiber-optic network that connects about 90% of its customers, has allowed the MSO to deploy services rapidly and efficiently.

It has also contributed to huge leaps in customer service: Suddenlink’s J.D Power & Associates customer-satisfaction numbers have improved by 101 points since 2007.

The backbone has also been the foundation of customer growth.

Since the third quarter of 2008, Suddenlink’s digital cable customers have risen 54%, from 488,700 to 753,600; high-speed-data subscribers increased 42%, from 661,000 to 937,200; and phone customers grew 164.5%, from 161,100 to 426,100 in the third quarter of this year.

In the same span, penetration of homes passed also has increased significantly for high-speed data (from 26.2% to 33%), phone (from 7.9% to 18%).

Digital customers made up just 38.2% of video customers in third-quarter 2008. Now they account for 59.4%.

The financial figures are just as impressive. In the third quarter of 2011, despite a sluggish economy that has served as a drag against most of the larger cable companies, Suddenlink again outdid its peers. Revenue rose 7.3%, compared to an average of 3.3% for its peer group, and cash flow rose 9.2%, compared to an average of 4% for its peer group.

Kent credits his team for much of the company’s success. He has fostered a special kind of loyalty from employees who have worked for or with him for several years, through several different companies.

Howard Wood, chairman of Cequel III, has stayed with Kent the longest. He and Kent left Arthur Andersen & Co. together to start their own cable company, Cencom Cable Associates, in 1982, with attorney Barry Babcock.

Cencom later sold out to Charter, where Wood served on the board of directors for several years. “Jerry Kent has been my partner and friend for 30 years,” Wood said. “Those that know anything about business partnerships know this is exceptional. Jerry is loyal, smart and has great business instincts. He is a tough, demanding manager, which accounts for his extraordinary success. Jerry has very insightful business skills. He loves the cable business and the industry would be well-advised to listen to his advice.”

Kent has recruited several Charter executives over the years to join him at Cequel, current programming chief Patty McCaskill, chief technology officer Terry Cordova, senior vice president and treasurer Ralph Kelly and senior vice president of corporate development Heather Wood.

Others have taken a different route to Suddenlink’s front door. Chief financial officer Mary Meduski worked at AAT Communications when Cequel III took over management in 2002. She moved to the parent company when Suddenlink sold AAT to SBA Communications in 2006.

“Jerry’s strategic vision, steadfast leadership, high expectations, financial genius, integrity and customer focus are the drivers of Suddenlink’s success,” Meduski said. “Jerry’s passion for and dedication to his family, employees, customers, investors, community and industry inspire respect, confidence and loyalty.”

‘HIS DRIVE TO WIN’

One of the newer members of the team, chief operating officer Tom McMillin, joined in 2006 from Dallas broadcast TV and radio station developer First Broadcasting. He had also served stints with Marcus Cable and Cencom.

“Jerry’s drive to win, his courage to lead, his focus on putting the customer first and his willingness to generously give back have been a tremendous influence on all of us who have been fortunate to work with him,” McMillin said. “Over the course of his cable career, he has unselfishly invested his time and energy to positively influence the thousands of employees (and their families) he has led, and he has lent a steady hand to assist in guiding our industry through tremendous change. I have no doubt his influence will continue to serve our company and the cable industry well for many years to come.”

Goldman Sachs senior partner Gerry Cardinale, who led the firm’s private-equity investment in Suddenlink, said Kent is one of the most entrepreneurial and successful CEOs in his unit’s portfolio over the past 20 years.

“I’ve personally known Jerry since the mid-1990s and have always been struck by his commitment to excellence, his unwavering integrity and his passion for world-class customer service,” Cardinale said.

In many ways, Kent is cut from the same cloth as other smaller market MSO chiefs, such as Insight’s Willner and Mediacom Communications chairman and CEO Rocco Commisso.

Willner said that he and Kent have shared philosophies over the years and exchanged information on what worked in their particular footprints.

“I think Jerry is a true and pure entrepreneur,” Willner said. “He really likes the cable business, and from a structural and fundamental point of view. It’s not just emotional with him.”

Willner also pointed to Kent’s willingness to take leadership roles on industry issues, whether it be in Washington regarding regulatory and programming cost issues, or as the 2011 co-chair of the National Cable & Telecommunications Association’s Cable Show in Chicago. Kent will assume Willner’s role as chairman of CablePAC, the industry’s political-action committee in Washington, and in June was named chairman of The Cable Center, the industry’s nonprofit educational arm.

Commisso said that Kent, like himself, is the last of a dwindling number of ownerentrepreneurs in the cable industry. And he added that Kent’s track record speaks for itself.

“I think Jerry has done a great job wherever he’s been,” Commisso said. “He’s got the knack and the ability to do the three things you need to do to be successful in this business — the ability to raise capital, the ability to make smart acquisitions and the ability to operate the systems. He’s had stellar performance.”

DILEMMA: RISING COSTS

Like most other cable MSO chiefs, Kent is concerned that pressure from escalating programming fees coupled with strained customer wallets could mean tougher times for the industry.

“I am concerned that we are reaching that point where we may be pricing some of our customers out of the market,” Kent said of the industry as a whole. “We see programming costs going up in double-digit percentages, and that’s not sustainable. We’re going to have to revisit our business model and provide better, lower-cost alternatives for our customers in order to be successful as an industry.”

Suddenlink is investigating lower-cost packages, like the ones Comcast and Time Warner Cable have introduced, but for now, Kent believes the answer may be in more innovative bundling.

“I think that over the next couple of years, we’re going to have to find additional ways to bundle our services,” Kent said. “If we continue on the current path, we as a multichannel industry are [either] going to lose customers, which is not healthy for operators or programmers, or we’re going to invite government scrutiny of rates, because we can’t cont inue to have these kinds of increases to our customers year in and year out.

“One of the two is likely to happen. Either we as an industry take care of our problem, or we’re going to have someone else come in and try to take care of the problem for us.”

In the meantime, Suddenlink is also channeling its energies toward new products, launching a TV Everywhere application — Suddenlink2Go — earlier this year.

Last year, it launched what was (and still is) the highestspeed Internet service of any MSO: a 107 Megabits-per-second service dubbed MAX 107.0.

“We even have 107 Mbps service in rural places like Pomeroy, Ohio and Ripley, W.Va,” Kent proudly noted. “Having that national backbone allows us to push new tech, including the fastest Internet speeds, into smaller communities.”

That extension of broadband into rural areas has come without need of federal stimulus funds. “We’ve done this with all of our own capital,” Kent said.

Kent said the idea to build the national backbone came from a development at his old job as CEO of Charter.

PICKING THE RIGHT MARKETS

“Back in the Charter days, we partnered with Southwestern Bell in looking at acquiring cable systems in the top 20 metro markets and competing against other telephone companies,” Kent said. “This was in the mid-1990s, way ahead of its time. It gave us some insight in how competition could evolve.

“We felt comfortable that that type of landline telco competition was not likely to occur in suburban and second- tier markets,” he added. “We’ve purposely focused on those markets, and it’s been a great strategy for us.”

That strategy has also paid off for Suddenlink’s backers, Goldman Sachs Capital Partners, Oaktree Capital Management and Quadrangle Group. While private-equity groups tend to want to monetize their investment after three to five years, Suddenlink has kept its backers happy by issuing a dividend earlier this year of about $500 million.

“When you’re growing EBITDA 10% a year, you continue to build significant value,” Kent said. “At some point, our investors will look for liquidity, but we’ve already given them a dividend and we continue to grow revenue, so there is no current pressure for a sale.”

SUDDENLINK AT A GLANCE

Products and services: Digital TV; HDTV; digital video recorders, including TiVo Premiere; video on demand; caller ID on TV; phone; high-speed Internet; home security; wireless home network (WiFi@Home); online video (Suddenlink2GO); and commercial TV, Internet and phone services.

Major areas of operation: Texas, West Virginia, Louisiana, Arkansas, North Carolina, Oklahoma, Arizona

Corporate headquarters: St. Louis

Regional headquarters: Greenville, N.C.; Charleston, W.Va.; Tyler, Texas; Lubbock, Texas

Customer call centers: Greenville, N.C.; Parkersburg, W.Va.; Lubbock, Texas; Tyler, Texas; St. Joseph, Mo.; Lake Havasu City, Ariz.

Employees: 5,880

2010 revenue: $1.69 billion

SOURCE: Suddenlink Communications

FROM CEQUEL TO SUDDENLINK
How the midsized MSO has evolved through the years:

January 2002: Cequel III is formed by former Charter Communications CEO Jerald (Jerry) Kent, former Charter co-founder Howard Wood and telecommunications lawyer Dan Bergstein.

May 2002: Cequel announces it has partnered with Charterhouse Group International to buy a controlling interest in AAT Communications, which operates and manages 5,700 wireless communications sites.

February 2003: Cequel enters into a management agreement to run Classic Communications, a ruralmarket cable operator with about 325,000 subscribers that emerged from bankruptcy protection in 2002.

February 2003: Cequel buys 27,000 cable subscribers in Houston from Shaw Communications.

August 2003: Cequel buys 81,000 subscribers in nine states from Alliance Communications for $81 million.

June 2003: Cequel partners with Corvis Communications to buy broadband infrastructure provider Broadwing for $91 million.

September 2003: Classic changes its name to Cebridge Connections.

March 2004: Cebridge buys 60,000 cable subscribers in two separate deals, with Tele-Media Corp. and USA Media Group. Terms are not disclosed, but the deal is estimated to be worth a combined $120 million.

November 2005: Cebridge announces deal to buy Cox Communications systems with 940,000 subscribers in 11 states. The deal, later valued at $2.5 billion, will triple Cebridge’s size.

February 2006: Cebridge announces deal to purchase 240,000 subscribers in Charleston, W.Va., from Charter Communications. The transaction is later valued at about $770 million.

March 2006: Cequel sells AAT Communications to SBA Communications for $1 billion.

April 2006: Cebridge changes name to Suddenlink Communications.

April 2006: New York private-equity firm Quadrangle Group invests $150 million for 17% equity stake in Suddenlink.

May 2006: Suddenlink closes Cox deal. July 2006: Charter West Virginia deal is closed.

February 2008: Suddenlink reaches 100,000-- phone-customer milestone.

December 2009: Suddenlink embarks on $350 million upgrade, dubbed “Project Imagine.”

August 2009: Suddenlink reaches 250,000 phone customers.

March 2010: Launch of MAX 107.0 ultra-high-speed Internet service in Texas.

November 2010: Suddenlink agrees to purchase NPG Cable and its 83,000 customers from News-Press & Gazette Co. for $350 million.

April 2011: NPG deal closes

June 2011: Suddenlink launches TV Everywhere product, Suddenlink2Go.

SOURCE: Multichannel News research