WideOpenWest (Pending:WOW) filed an S-1/A with the Securities and Exchange Commission for its upcoming initial public offering.

The company plans to sell 19,047,619 shares at a marketed price range of $20 to $22. The company also has an additional 2,857,142 shares over-allotted for its underwriters.

The joint book-running managers are UBS Investment Bank, Credit Suisse, RBC Capital Markets, SunTrust Robinson Humphrey, Evercore ISI and Macquarie Capital. The co-managers are LionTree and Raymond James.

The company is expected to make its debut on Thursday, 5.24 and expects to raise $400M. Assuming it prices at the mid-point of its proposed price range, it would command a market cap value of $1.81B and trade at a price/sales ratio of 1.51x.

Business overview

WideOpenWest is a large, regional cable provider that is based in Englewood, Colorado. Services provided include: high-speed data, cable television, Voice over IP-based telephony, and business-class services.

As of its IPO, it is the sixth-largest cable provider in the nation with its service area covering approximately 3 million homes and business in more than 300 communities. It primarily operates in the Midwest, including: Tennessee, Alabama, Indiana, Illinois, Georgia, Florida, South Carolina, Michigan, Maryland and Ohio. Services are available either as a bundle or as an individual service to residential and business services customers and as of its IPO, it had 780,100 subscribers.

The company was acquired by PE firm, Avista Capital Partners in December 2005. Prior to that, the company was owned by Oak Hill Capital Partners and ABRY Partners. In December 2015, Crestview Partners made a $125.0 million primary investment in units held by Avista and other unit-holders.

Executive management overview

Steven Cochran is the chief executive officer and a director of WOW, positions he has held since April 1, 2014. Previously, he served as the chief financial officer from Oct. 2002 until July 2012 and as the chief operating officer from 2008 to April 1, 2014. Before joining the company, Cochran held positions at Millennium Digital Media from May 1998 to Oct. 2002, leaving as its senior vice president and chief financial officer. Cochran holds an undergraduate degree in economics and a Master's degree in accounting science from the University of Illinois - Urbana-Champaign.

Richard E. Fish, Jr. is the chief financial officer of WOW, and he has served in that role since joining the company in Jan. 2013. He has more than 24 years of experience serving in leadership roles in business development, operational development and financial development in the telecommunications industry. He holds an undergraduate degree from the University of Nebraska and is a certified public accountant.

Financial highlights and risks

Revenue generated increased steadily from 1,264.3M, $1,217.1M, and $1,237.0M in 2014, 2015, and 2016, respectively. The drop in revenue between 2014 to 2015 was due to a large divestiture. The company appears on track to report strong sales growth in 2017. For the three months ended on March 31, 2017, WOW reported total revenues of $300 million and a net income of $72.4 million, compared to total revenues of $302.3 million and a net income of $4.3 million for the same period in 2016.

Gross margins have steadily increased to 19.7% in 2016. The company generated a net loss of $48.7M and a net gain of $26.3M in 2015 and 2016, respectively. As of its IPO, it had $86.5M in cash and cash equivalents and $2.89B in total debt.

The company intends to use net proceeds from the IPO to pay down debt, in particular to redeem $364 million in aggregate principal amount of our 10.25% Senior Notes due 2019.

Competitors

Top competitors include: Charter Communications, Inc. (Nasdaq:CHTR), Comcast Corporation (Nasdaq:CMCSA), Frontier Communications Corporation (NYSE:FTR), Mediacom Communications Corporation (Private), Cox Communications, Inc. (Private), AT&T Inc. (NYSE:T) and Verizon Communications, Inc. (NYSE:VZ), and Dish Networks (Nasdaq:DISH).

As shown in the table below, WOW is one of the smaller plays in the space. Its proposed valuation puts it in-line with peers; however, it operates on a much smaller profit margin.

(GoogleFinance)

Conclusion: Consider Caution

We are cautious on the future for cable providers, particularly small players like WOW.

Increasingly, the younger generation is swapping cable for skinny, less expensive bundle providers such as Hulu or Netflix.

With options like these, there is no longer a need to pay for hundreds of channels. Additionally its high debt, although to be expected from a PE-owned firm, makes us nervous.

WOW operates in a capital intensive industry and high debt load in an increasing interest rate environment could make it difficulty to raise additional capital in the future.

Due to these factors we recommend investors avoid this upcoming IPO at the time.