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Finding the right price for a cable IPO

WideOpenWest Inc.'s recent initial public offering did not go as expected, raising questions for Altice USA Inc. as it plans its own offering later this year.

Colorado-based WOW!, which ranks as the sixth-largest U.S. cable operator, according to Kagan data, priced its IPO of 18,235,295 shares of common stock May 24 at $17 per share. Less than a week earlier, WOW! had said it planned to offer more than 19 million shares of common stock at a price range between $20 and $22.

John Fitzgibbon Jr., owner of the independent research firm LLC, said in an interview that the price reduction and tepid market response to the IPO indicated low demand for the shares. As of May 30, the newly public WOW! stock closed at $17.77 per share on the NYSE.

"Like Macy's if they are not moving merchandise, they knock the price down. Wall Street is not that different," Fitzgibbon said.

In an online post, the IPO research firm Renaissance Capital noted a number of factors likely hurt WOW!'s valuation. Pointing to the company's "heavy debt burden, stagnant growth and … history of negative free cash flow," Renaissance said, "Investors demanded a solid discount to get on board."

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WOW! ended the first quarter with total debt of $2.76 billion, slightly more than its total assets of $2.66 billion. For the full year in 2016, the company reported net income of $26.3 million; but in the four prior years, it saw consecutive net losses.

But behind these financials, Kagan analyst Tony Lenoir said WOW! has a positive story to tell.

He noted that based on the company's initial pricing and the number of total homes the company has passed with its network, WOW!'s value per home passed is just north of $1,300. In comparison, TPG Capital Management LP's pending $2.37 billion acquisition of WaveDivision Holdings LLC valued each passing at more than $3,500, according to Lenoir. Like WOW!, Wave Broadband is a cable overbuilder, meaning they compete against other cable operators in their markets.

"Any way I look at it, WOW! is currently undervalued," Lenoir said in an interview.

One of the other major concerns Renaissance Capital raised about WOW! is consumers dropping their pay TV subscriptions. "Cable cutting trends likely cut into its valuation," the firm said.

Concerns about cord cutting span across the cable industry, meaning that this sentiment could also impact Altice USA's upcoming IPO. The company, a unit of Netherlands-based Altice NV, filed its Form S-1 registration statement April 11, officially declaring its intention to raise an unknown amount in a forthcoming offering.

But Lenoir said that a move away from video service could help smaller companies like WOW! and even larger entities like Altice USA given that video margins are substantially lower than the margins on high-speed data packages.

"A lot of people still associate cable operators with multichannel TV. To me, today they are mostly broadband providers. And that's a great way to generate very steady cash flows, cash flows that are going to be increasing in the next few years because people keep moving up to higher faster tiers that are pricier and offer higher margins," Lenoir said.

"We're living in an increasingly connected world so you just can't go wrong owning a broadband distribution network," he said.

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