Classic Communications Inc., the Austin, Texas-based MSO,
is the latest cable operator to throw its hat in the public-offering ring, filing for a
stock sale to raise about $201 million.
Classic wants the cash to reduce debt and finance its $130
million acquisition of Star Cable Associates. Star Cable has 57,000 subscribers in
Louisiana, Texas and Ohio.
The prospectus did not reveal how many shares or what
percentage of its total equity the company plans to sell to the public.
Chief executive officer J. Merritt Belisle declined to
comment on the IPO, citing that Classic is in its "quiet period."
Classic would be the third IPO in the cable industry this
year after nearly a 10-year drought. Insight Communications Co. Inc. went public in March,
while Charter Communications Inc. is expected to go public next month. Before Insight's
$517 million offering, the last IPO in the cable industry was Cox Communications Inc., a
spin-off of Cox Enterprises Inc., in 1995. But for pure cable plays, the last true cable
IPO was Cablevision Systems Inc. in 1986.
Classic has about 360,000 subscribers -- which will
increase to 416,000 customers after the Star Cable deal is closed -- and is made up
primarily of rural and secondary-market systems in such states as Texas, Kansas, Oklahoma,
Louisiana, Nebraska, Missouri, Arkansas, Colorado and New Mexico.
In June, the company sold a 64.4-percent interest to Brera
Capital Partners LP, a New York City private equity investment fund, for about $100
million.
The investment positioned Classic as a rural market
aggregator for Brera, which is a relative newcomer to the cable industry. Classic was
expected to begin accumulating other non-metropolitan cable systems, as did TCA Cable TV
Inc., another small-market cable company that was acquired by Cox Communications in June.
But Classic is different from the other cable IPOs in that
its plant is in dire need of upgrades.
According to the prospectus, roughly 72 percent of
Classic's subscribers are on 27 percent of its headends, and the MSO plans to further
consolidate.
However, its subscribers-per-mile ratio is low at 20.8, and
the bulk of its systems -- 249 -- have a 30-to-39-channel capacity, which is quite low
compared with other operations of similar size. Classic also averages about 680 customers
per headend, compared to other operators of its size with between 5,000 and 10,000
subscribers per headend.
"The question is, 'Could they go public at that size?'
" asked one MSO executive who asked not to be named. "They have a significant
number of headends, low subscriber density, low channel capacity and they haven't invested
in infrastructure. The issue is, 'Could a company like that go public?' "
But Classic isn't just sitting around and letting its plant
rust out. Plans are to roll out digital offerings in the majority of its systems and to
upgrade most systems to between 550 megahertz and 750 megahertz capacity.
According to the prospectus, Classic plans to spend about
$126 million to upgrade its plant and another $22 million for addressable converters for a
digital-service offering.
The company currently uses AT&T Broadband &
Internet Services' Headend In The Sky to provide digital service to 10 systems passing
83,000 homes. As of June 30, the company had 3,300 digital customers.
The Classic offering also begs the question of who will be
next to try and tap the public markets. Speculation in the industry has been that Mediacom
LLC, a Middletown, N.Y.-based MSO with roughly 750,000 pro forma subscribers, could be the
next at the IPO altar.
Mediacom would not comment on its IPO plans.
CIBC Oppenheimer Corp. cable and telecommunications analyst
Aryeh Bourkoff said he expects Mediacom to file for its IPO within the next six months.
And Mediacom should do well, given its more modern plant, he added.
"Mediacom's size and technical profile give it a leg
up on Classic," Bourkoff said.
Belisle, a former banker and CEO of Community Cable Inc. in
Austin, Texas, formed Classic in 1992 with Steven Seach, another former investment banker
and president and chief financial officer of the company. Modeled after other rural cable
operations such as TCA Cable Inc. (now a part of Cox Communications Inc.), Classic has
grown from 166,000 subscribers in 1997 to 416,000 customers and counting today.
Unlike Insight, which has about 1 million subscribers and
expects to have 90 percent of its plant upgraded to greater than 750 megahertz by the end
of next year; and Charter, which has 6 million pro forma subscribers and is headed by
Microsoft cofounder Paul Allen; Classic may have a rough time convincing investors to put
their money in the company.
Bourkoff said he expects Classic's IPO to do well, given
the euphoria that has surrounded cable stocks. But with the Insight offering just
completed in the past few months and Charter expected to hit the market soon, he added,
Classic may have some difficulty.
"Given the size of the two offerings [Insight and
Charter] there is some doubt about the follow-up demand for additional cable equity,
especially when the plant characteristics and scope characteristics differ significantly
from Charter or Insight," Bourkoff said.
