WOW can blame IPO flop on debt load

By : Rob Cartwright

When you want to start a business, hitting the bank up for a loan might seem like a good idea. It might even be the only avenue for funding that you can get. However, loans are fickle things. One day they are helping you build up your business and set up your infrastructure. The next day, they could be tearing down your business. Just last week venture-backed real estate magnate Five Pint Holdings almost didn’t make it in its first issuance because of debt. On Thursday WideOpenWest got off to a bad start because of indebtedness.

WideOpenWest “WOW” is one of the largest operators of cable services in the US. The company deals in everything from broadband to business-class services. Colorado-based WOW was founded in 2001 and despite its success in competing favorably in the market did not appeal to investors because of debt.

Backtrack a bit to when WOW got that loan. WOW at the time was not doing badly. According to the company, the loan was supposed to help it laterally expand its services. You should note that this is the same reason that the firm gave for holding its issuance in the first place. So WOW got a few long-term loans (which are almost due). WOW piled up on debt in the form of stockholder deficit in addition to $1.9 billion in goodwill and franchise right debt. By the first quarter of 2016, the company’s balance sheet was leveraged to the hilt. Even the 400 million IPO that WOW planned could not put a dent in the glaring $2.8 billion debt.

And if the debt was not enough to wave off any potential investors, the company’s plans were. What are some of the things you look for when you want to put your money in a highly leveraged company? You look at how the firm plans to make enough money to cover that debt and return your money. For WOW, that plan is expansion. A look at the company’s prospectus will show you that WOW plans on a few more M&As and improving their existing services. That would mean piling more broadband services on WOW’s portfolio and being done with it. Even the company’s CEO Steven Cochran thinks that the company can capitalize on the ‘growing market for cable services.’ But how much of a market is that?

The cable market is highly fragmented, and that’s why one-in-all firms like AT&T and Verizon are so well-known. Operating in that market is hard enough on WOW’s balance sheet. And that is before you consider that the customer base itself is shrinking. In the past cable companies have been getting their millions by giving commercial services. Their services were used in homes and other small-scale areas. The Millennial generation may have more purchasing power than their predecessors, but it usually opts for cheaper better services. Such consumers will take cheap streaming services like Netflix over the more expensive cable purchase option. That leaves the question of who WOW plans on giving its services to after the expansion which may or may not happen after the company starts paying its debts.