In one of the year’s biggest and most profitable cable deals, Denver overbuilder WideOpenWest has agreed to sell its 357,000 subscribers to private-equity newcomer Avista Capital Partners for an estimated $800 million.
The deal represents a huge windfall for WOW’s two largest equity partners, Boston-based Abry Partners and Fort Worth, Texas-based Oak Hill Capital Partners. Abry and Oak Hill initially invested about $50 million in WOW in 1999, but according to executives in the mergers and acquisitions community, the private-equity groups placed a total of about $200 million in WOW over the years, meaning they realized a four-fold return on their outlay.
Officials at Oak Hill declined to comment. Abry managing partner Jay Grossman did not return calls by press time.
“They made a lot of money on this deal,” said one cable executive who asked not to be named.
Avista beat out two other bidders for WOW — Princeton, N.J.-based overbuilder RCN Corp. and New York-based private-equity firm Diamond Castle Partners, which was formed earlier this year by several former DLJ Merchant Bank employees.
Avista is a spin-off of DLJ Merchant Bank, the private-equity arm of Credit Suisse First Boston. Credit Suisse and New York City investment bank Waller Capital Corp. advised WOW on the sale.
The deal also represents a big premium over what WOW paid for the bulk of its systems in 2001, when it was said to have paid about $230 million ($741 per customer) for 310,000 subscribers in the Midwest from SBC Communications Inc. (now AT&T Inc.). SBC inherited the former Americast systems as part of its 1998 purchase of regional Bell operating company Ameritech Corp.
WOW has customers in big markets including the Detroit suburbs (where it competes with Comcast); Columbus, Ohio (Insight and Time Warner); South Chicago, Ill., and surrounding communities (Comcast); and in the Cleveland suburbs (Adelphia).
Although terms of the deal were not officially disclosed, executives in the cable mergers and acquisitions community said it was for between 9 and 9.5 times WOW’s cash flow, which is estimated at $90 million annually. At that price, the deal is worth about $2,200 per subscriber.
UBS Warburg cable debt and equity analyst Aryeh Bourkoff said the WOW deal represents a resurgence of interest in cable.
“This shows that private-equity continues to be interested in the broader cable sector at relatively robust valuations,” Bourkoff said. “It also supports the valuations for the incumbent cable operators.”
While other deals this year were bigger — Time Warner Inc.’s and Comcast’s joint purchase of Adelphia Communications Corp., expected to close by the first half of next year is estimated at $3,300 per subscriber — recent overbuilder deals have been for considerably less. Last year, Knology Inc. purchased about 57,000 subscribers in Pinellas County, Fla., an overbuild of Bright House Networks, for about $25.4 million, or $445 per subscriber.
All of WOW’s 930 employees, including senior management, will stay on, said WOW president and CEO Colleen Abdoulah. A 20-year veteran of the cable industry with Tele-Communications Inc. and AT&T Broadband, Abdoulah will remain in that role under new ownership.
“Just like with our current partners, we’re always on the lookout for growth opportunities that make sense. I think that will continue,” Abdoulah said of future acquisitions. “There isn’t a set acquisition plan that says we’re going to be 1 million customers in five years.”
Abdoulah said that WOW, which passes 1.4 million homes, has been growing and running smoothly, although she declined to give specific subscriber counts.
The company offers a triple play of video, high-speed Internet service and telephone service, having launched the latter in March. Although she wouldn’t disclose the number of WOW telephone customers, she said customer acceptance has “more than exceeded expectations.”
WOW also offers digital video recorders and high-definition TV and is investigating whether to roll out video-on-demand service in the near future.
Abdoulah added that Abry and Oak Hill decided to start the sale process in May, primarily because the companies had reached the end of their typical investment cycle. The deal is expected to close by the end of May.
Avista, headed by former DLJ managing partner Tom Dean, hasn’t completed raising money for its fund but is said to have enough interested investors to do the WOW deal.
According to its Web site, Avista is interested in making controlling or influential minority investments in U.S.-based companies in the energy, healthcare and media sectors.
Northwestern Mutual, based in Milwaukee, and Standard Life Investments (USA), headquartered in Edinburgh, Scotland, have committed to be minority co-investors in the acquisition.
