Is Cable One Beefing Up for Slaughter?
Is Cable One positioning itself to be acquired by gobbling up smaller cable operators?
That's the big question that some on Wall Street are asking after Cable One Inc. swung a deal earlier this week to buy NewWave Communications. As previously reported, Cable One plans to shell out $735 million in cash for the privately held MSO, which operates mainly in rural areas and small towns spread across seven states in the US heartland -- Arkansas, Illinois, Indiana, Louisiana, Mississippi, Missouri and Texas. The deal will make the new Cable One probably the sixth-largest cable operator in the land with somewhere north of 800,000 customers. (See Cable One Bids $735M for NewWave.)
In a blog post to clients, Craig Moffett, principal analyst of MoffettNathanson LLC , noted that many investors expected Cable One to be selling itself off by this point, not buying another cable operator. But he argued that investors shouldn't be all that surprised because the company's executives have expressed interest in expanding their 19-state footprint before.
Besides, Moffett continues, the New Wave acquisition "arguably only makes it more likely," not less, that Cable One will get bought out by some larger, hungry MSO like Altice somewhere down the line. "Getting bigger, given their small starting scale, certainly doesn't preclude eventually being acquired themselves," he wrote.
In the meantime, Cable One will undoubtedly work to bring NewWave's cable systems up to snuff and make them more attractive to future suitors, applying what Moffett calls its "unconventional broadband-first, video-lite strategy" to the NewWave properties. Under that strategy, Cable One has been heavily promoting its broadband service and rolling out 1-Gig speeds while cutting back on its much less profitable traditional pay-TV service and relying more on online video offerings.
Taking that approach, Cable One has boosted its once dismal broadband penetration rate to a more respectable 31% while letting its video penetration rate sink to just 20%. As a result, the Phoenix-based MSO, which passes nearly 1.7 million homes, closed the third quarter with 467,000 broadband subscribers but merely 316,000 video subs.
Interestingly, NewWave's customer take figures are not that radically different. The MSO, which passes nearly 420,000 homes in its non-urban footprint, has a broadband penetration rate of 26% and a video penetration rate of 24%. So, as Moffett argues, "there may not be too much heavy lifting required to align the two."
— Alan Breznick, Cable/Video Practice Leader, Light Reading