Humble Beginnings to Cable’s Top Tier

How CEO Kent Grew Suddenlink from Turnaround Job to Major Player
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Jerry Kent has a knack for taking cable systems that no one seems to want and turning them into enviable — and profitable — properties that appeal to customers as well as investors.

Ten years after taking management control of the antiquated and financially tenuous Classic Communications, Suddenlink Communications has become the nation’s seventh-largest MSO, counting 1.4 million customers.

The St. Louis-based operator has upgraded its networks; posted revenue growth for six consecutive years in the worst economic environment in decades; tripled its original equity owners’ investment; and lured new, deep-pocketed equity partners.

In July, Kent, Suddenlink’s chairman and CEO, and his top management team, including executive vice president and chief operating officer Tom McMillin and EVP and chief financial officer Mary Meduski, engineered a $6.6 billion buyout of Suddenlink by investment funds BC Partners and the Canadian Pension Plan Investment Board.

CAPITAL INFUSION

The deal, which closed in November, kept Suddenlink’s management team in place; provided a profitable exit for original investors Goldman Sachs Capital Partners, Oaktree Capital Management and Quadrangle; and gave Suddenlink the financial strength to expand its footprint and product offerings.

Armed with $2 billion in financing from its new equity partners, Suddenlink is now poised for its next chapter in the cable telecommunications arena.

“Our investment in Suddenlink is a unique opportunity to have an ownership interest in one of the most attractive cable businesses in the U.S.,” André Bourbonnais, senior vice president of private investments at the CPPIB, said. “[Management’s] business rigor and customer focus, along with Suddenlink’s strong network, will undoubtedly continue to yield significant benefits for all stakeholders.”

For his part, Kent intends to say the course. “We’re going to do pretty much what we’ve always done — offer quality customer service, undertake infrastructure upgrades and pick up systems where it makes sense,” he said.

This isn’t Kent’s first cable rodeo. He has a reputation as a consummate deal-maker and Suddenlink’s management team is as experienced as he is. McMillin has held senior executive stints at Clearwire Technologies, Marcus Cable, Crown Cable and Cencom Cable. Meduski had a long banking career, at TD Securities and Bank- Boston Securities. She was CFO at AAT Communications, which at one time was the largest privately owned wireless-tower company in the U.S.

Kent’s Cequel invested in that firm, and it’s where she first teamed up with him.

A majority of Suddenlink’s senior management team have worked with Kent for a decade or more. Nearly all have worked with him at two or more companies.

Loyalty is big with Kent and his staff feels the same way. They are quick to point out his strengths, but he is just as quick to note that every acquisition he has made over the years has brought in talent and ideas that improved whichever company he was running.

“Jerry has a winning record and everyone wants to be on a winning team,” Todd Cruthird, senior vice president of operations for the Texoma Region, and the most-senior Classic executive still with Suddenlink, said.

Cruthird started his cable career at Tele- Communications Inc. and when that company was purchased by AT&T Broadband, he was recruited to help take Classic out of bankruptcy. He was one of the executives who lured Kent and his team to take control of the struggling MSO. “We knew Jerry could take Classic to the next level, and he did that and beyond,” Cruthird said.

Suddenlink’s origins began in February of 2003, 15 months after Kent left Charter Communications. Kent had had a fallout with Charter chairman Paul Allen, who bought that MSO from Kent and his partners in 1998.

Kent was done with that chapter of his career, but he wasn’t done with cable. He formed Cequel III to manage and invest in telecommunications- related companies.

Cequel III’s first cable gig: managing the just-out-of-bankruptcy Classic Communications. The company was a mess.

It had 550 headends serving an average of less than 700 customers each. Only 3% of the company’s 325,000 rural customers, scattered across 13 states, were served by systems upgraded to 750 Megahertz. Most systems were 450 MHz, and several were only at 330 MHz.

In 2003, some 12% of Classic’s customers had digital channels. High-speed Interent was available in only half of the systems, according to Cruthird.

“Looking back, it was a challenge and harder than I thought it would be,” Kent said. “But I knew I could get a great management team to run it and the Classic systems gave us the critical mass we needed to attract investors and build the company.”

Cequel changed its name to Cebridge Communications about six months after it took management control of Classic. The company divested or shut down about 300 systems and started upgrading its existing properties and acquiring others.

GROWTH SPURT

By 2006, Cebridge had become Suddenlink, and the company was on an acquisition roll.

In May of that year, Suddenlink bought systems serving some 940,000 customers in at least six states from Cox Communications for about $2.55 billion.

Two months later, it acquired properties serving 240,000 customers in West Virginia and neighboring states from Kent’s old company, Charter, for $770 million.

In 2009, Suddenlink undertook a huge three-year, $350-million upgrade/consolidation project dubbed Project Imagine. Project Imagine investments helped Suddenlink more than triple the average number of HD services it offers; increase HD availability to 96% of customers; double the availability of video-on-demand service; expand phone service to new markets; and increase the availability of DOCSIS 3.0 technology by nearly 8 times, to 93% of customers.

FULL-SERVICE FIRM

Today, Suddenlink offers high-speed Internet service with download speeds up to 107 Megabits per second in many areas; phone service to essentially all its customers; wireless home networking; more than 100 high-definition TV channels in some systems; TV Caller ID; a video-ondemand library with more than 10,000 titles; an online video service known as Suddenlink2GO; home security; and a suite of commercial services, including advertising and carrier services.

It’s been a financial success as well, as Suddenlink has posted 10% compounded annual EBITDA growth (before nonrecuring expenses) for the past four years, according to Meduski.

There is plenty of room for further growth. About 25% of the company’s residential customers take Suddenlink’s triple play product bundle, and the churn rate for those customers is about one-third that of single-product customers, Meduski said.

About 90% of the company’s Internet competition comes from telcos offering DSL. “That’s not a very good mechanism for delivering video, so we are well positioned in that area,” Kent added.

“Suddenlink combines a footprint with limited wireline competition, attractive demographics, a well-invested network with ample available bandwidth, solid growth prospects in both penetration and ARPU, and a cohesive, high-quality and hungry management team with considerable depth,” Raymond Svider, co-chairman and managing partner at BC Partners, said. “In many respects, it was an easy decision to partner with Jerry Kent and his team.”

Kent and his team like second- and third-tier markets, and size is just one factor in determining financial viability.

“They are not rural markets, but there is less competition,” Kent said. “We also look at the demos of the market; the management team; the penetration levels of the products and services offered; the technologies available and the competitive landscape.”

Internet service has become Suddenlink’s leading growth engine and phone subscriptions continue to expand at a substantial clip.

HARD CHOICES AHEAD

But video remains at the core of it all, McMillin said. “Video is our most mature business, but it is by no means dead in our minds.”

It is, however, causing some major headaches for management these days. Rising programming costs of between 8% and 11% a year are “pricing many households out of video,” Kent said. “There will be a day of reckoning.”

“If the industry doesn’t fix this problem, the government will likely step in,” the Suddenlink CEO continued. “ We are dealing with an oligopoly. Five companies control 80% of the channels available today. We try to push back but their market power is strong.”

At some point, Suddenlink may be forced to drop some channels, Kent said. “We’re going to have to make some difficult decisions.”

In the meantime, Suddenlink is focusing on delivering the best product it can offer.

It cut a deal with TiVo to provide access to thousands of hours of entertainment from Suddenlink’s VOD library, as well as from the web, to customers.

And it’s been cautiously acquiring systems, buying NPG Cable and its 83,000 customers in 2011 and Windjammer Communications LLC, with a cable system serving about 8,200 customers in and around Greenwood, Miss., in 2010.

“The evolution of this company is by far the greatest professional accomplishment I’ve ever been part of,” Cruthird said. “I have never worked for a company as dynamic and successful as we are.”

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