Overbuilders May Ride M&A Wave

Kagan: Competitors Could Play Key Role in Consolidation
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The top five cable overbuilders have been growing video and broadband customers at a healthy clip over the past five years and could play a key role in the expected upcoming wave of consolidation, according to research by SNL Kagan.

Video subscribers at the top five overbuilders — WideOpen- West, RCN, Wave Broadband, Grande Communications and Click! Networks — have risen by about 25% since 2009, while broadband subscribers have grown at more than three times that rate, according to Kagan.

“Given cable M&A’s lofty valuations in 2014, magnified by the consolidation atmosphere surrounding the industry, overbuilders could play a key role in the M&A market going forward, either as buyers or targets,” Kagan said.

While much of the video-subscriber growth was due to acquisitions — WOW had the greatest increase in video customers (73%) during the period and was the most aggressive buyer of systems — other overbuilders have seen broadband growth outpace video customer declines.

For example, the next largest overbuilder, RCN, has seen video customers decline by about 15% since 2009, while broadband customers have risen by 26% since then.

STRONG SURVIVORS

Overbuilders burst onto the video scene in a big way in the 1990s, as new regulation (the Telecommunications Act of 1996) and easy financing encouraged competition. While some fell on financial hardship after they couldn’t compete with incumbents, a handful survived and some have even managed to crack the top 10 among video distribution companies.

Today, according to Kagan, overbuilders represent about 1.26 million video subscribers across the country, or about 1% of the nation’s roughly 100 million TV households and 1.5 million broadband customers.

Waller Capital president Garrett Baker, who helped sell four of the top overbuilders — WOW, RCN, Wave Broadband and Grande — to their current owners, said the success of companies in the deal market is causing others to look toward nontraditional targets: “The overbuilders’ operating success has put them in a position to look outside their current footprints. That is likely to continue.”

A SHOT IN THE ARM

The cable deal market, stagnant for years after a big consolidation wave in the late 1990s and early 2000s, got a shot in the arm last year when Comcast agreed to purchase Time Warner Cable in a deal valued at about $69 billion in stock and assumed debt. As part of that deal — which is currently undergoing regulatory approval — Comcast and Time Warner Cable agreed to sell, swap and spin off about 6 million customers in a series of deals with Charter Communications.

When the smoke clears, expected early next year after the Comcast-TWC deal is closed, Charter will have doubled its owned-andmanaged customer base, and the combined Comcast-TWC will have about 30 million subscribers across the country, including 19 of the top 20 television markets.

Charter, which touched off the consolidation frenzy with its pursuit of TWC last year, isn’t expected to stop there. Both Charter CEO Tom Rutledge and one of the cable operator’s largest shareholders, John Malone’s Liberty Media, have said Charter — and GreatLand Connections, the publicly traded company that will hold the spun-off Comcast-TWC assets (and be 33% owned by Charter) — could serve as vehicles to further consolidate the industry.

Whether overbuilders like WideOpen-West, which was founded in 1999 and is backed by private-equity giant Avista Capital Partners, will be a target or a competitor for cable assets remains to be seen. But WOW, which has about 699,000 video customers and 770,000 broadband subscribers in seven states (Alabama, Georgia, Florida, Michigan, Ohio, South Carolina and Tennessee), has proven it has the stomach for acquisitions.

WOW’s first big purchase was in November 2001, about seven months after it opened for business, when it bought telco Ameritech’s Americast systems in Illinois and Indiana. WOW has done several deals since then, ranging from the $55 million purchase of bankrupt Broadstripe Communications’ 31,000 customers in 2011 to the $1.5 billion purchase of Georgia- based Knology’s 257,000 customers in 2012.

RCN, which was bought out by private-equity group ABRY Partners in 2010 for about $1.2 billion, has kept a low profile since then and has been more of a seller of systems than a buyer in its most recent deals. But RCN — the first overbuilder in the country, formed in 1993 — has a long history of aggressive deal-making.

Overbuilders could target each other for M&As, Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said, but if they want to compete for cable assets with the likes of Charter, they’ll likely lose unless they want to “dramatically overpay.”

The top five cable overbuilders have been growing video and broadband customers at a healthy clip over the past five years and could play a key role in the expected upcoming wave of consolidation, according to research by SNL Kagan.

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