Cable Exit Wows

Oak Hill Capital Partners and ABRY Partners have bid farewell to a very profitable investment. The two private equity firms exited their joint interest in WideOpenWest, selling the Midwestern-focused cable company to Avista Capital in an approximately $800 million transaction. The investors garnered a 3x return on invested capital, according to a source with knowledge of the transaction.

WideOpenWest was formed by ABRY and Oak Hill in November 1999 to pursue opportunities in the cable industry. It only took one deal, though, to really get the company rolling. The two firms bought the assets of Ameritech New Media from SBC Communications for about $200 million in 2001, a deal that ultimately provided most of the cable operations to the WideOpenWest platform.

Previous to its ownership by SBC, Ameritech (a telecom operator) had invested about $1.2 billion to break into the cable television business—a trend many phone companies were following at the time. Once under SBC’s ownership, Ameritech’s cable expansion plans were put on hold while SBC decided whether or not to pull the plug on the operation as a whole. SBC ultimately decided to divest the division and, in 2000, attempted to sell the cable business via an unsuccessful Morgan Stanley-run auction.

“That’s when [ABRY and Oak Hill] were able to step in and buy the assets at a greatly reduced price,” the source said.

Today WideOpenWest operates under the WOW! banner and provides high-speed Internet and telephone services, in addition to its original cable television services. Its products reach more than 1.4 million households in Illinois, Indiana, Michigan and Ohio.

The two buyout shops were fortunate to get a hold of the cable assets just as the high-speed Internet and Voice over Internet Protocol (VoIP) segments were beginning to take off. Because of this, much of the company’s growth was organic, and the investors did not have to contribute any additional slugs of capital or debt.

Furthermore, adding high-speed Internet and VoIP services to WideOpenWest’s product offerings contributed to its success by reducing “churn,” an industry word for customer turnover.

“Specifically, the introduction of Voiceover IP to the platform greatly increased the stickiness of the customers,” the source said. “Often, when [customers] bought one service, they found it prudent to get the other two. And as a result, the churn rate today is one-third of what it is for customers who only use the visual package.”

WideOpenWest was a portfolio company in Oak Hill’s 1999-vintage fund, the $1.6 billion Oak Hill Capital Partners LP. ABRY, meanwhile, held the investment in its $580 million ABRY Broadcast Partners III LP fund, which closed in 1997.

ABRY and Oak Hill tapped Credit Suisse and Waller Capital to run the auction, which, as expected, was largely confined to financial suitors. “Given that most of the large, monopolistic players have business models that compete on price — and WideOpenWest’s model competes on value — we expected 100% that it would ultimately be sold to a financial buyer,” the source said.

Thompson Dean-led Avista Capital, with offices in New York and Houston, was the eventual winner of the auction. Dean is the former head of DLJ Merchant Banking, who recruited six former partners and nine former professionals from DLJ to join him at Avista. —A.N.