TPG and Stonepeak have today agreed to the largest cable deal in the last five years, for Astound Broadband, valued at $8.1bn. Astound Broadband generates ~$650m of EBITDA, and thus Stonepeak is paying 12.5x EBITDA for the business.

Below, we discuss Stonepeak’s $8.1bn acquisition of Astound Broadband from TPG Capital, why cable companies are considered as a way to play the fiber theme of digital infrastructure and ultimately the convergence going on between publicly-traded fiber companies and publicly-traded cable companies.

Transaction Overview

Private equity firm Stonepeak Infrastructure Partners has agreed to acquire Astound Broadband, the sixth largest United States cable operator, for an enterprise value of $8.1bn, from TPG, another private equity firm. Based on the reported $4.5bn of debt which Astound Broadband has, the purchase price equates to $3.6bn. The transaction, which is the largest cable deal in the past five years, is expected to close in the second quarter of 2021.

Formation of Astound Broadband by TPG

Astound is comprised of RCN and Grande, which TPG bought for $2.3bn in 2016. Subsequently, in 2017, TPG purchased Wave Broadband in a $2.4bn deal. Finally, in February 2020, TPG acquired EnTouch Systems, an operator that serves 22k customers in the Houston area. Together, these companies form Astound Broadband which serves over 1 million customers with 23k miles of fiber. Astound’s top 6 markets by subscribers include Philadelphia, Chicago, Seattle, New York City, Boston, and San Francisco.

Stonepeak will keep the management of Astound in-place, through a partnership with Patriot Media. Helpfully, Patriot Media is a company that currently manages Astound and is led by two cable industry veterans. Chairman Steve Simmons and Chief Executive Officer Jim Holanda, of Patriot Media will manage Astound going forward.

Stonepeak is a Key Digital Infrastructure Investor

Stonepeak Infrastructure Partners is a North America-focused private equity firm with an opportunistic approach to infrastructure investing. Founded in 2011 and headquartered in New York, Stonepeak manages over $18bn of capital for its investors. Stonepeak specializes in digital infrastructure investing and owns a portion of many of the same companies as Colony Capital.

Stonepeak Owns Companies in all Four Verticals of Digital Infrastructure

Stonepeak’s portfolio companies include Towers, Data Centers, Fiber, and the combination of Small Cells & Distributed Antenna Systems:

  • Vertical Bridge (Towers) is the fourth largest owner of towers in the United States. Specifically, the company has more than 4k towers, giving it a market share of ~2.6% of the towers in the U.S.
  • Cologix (Data Centers) operates 24 data centers, representing 315 megawatts of power capacity and 2.7 million sqft. All of Cologix’s facilities are located in the United States and Canada. Key markets for Cologix include Ashburn, Columbus, Dallas, Jacksonville, Minneapolis, Montréal (Canada), New Jersey, Toronto (Canada) and Vancouver (Canada)
  • euNetworks (Fiber) is a bandwidth infrastructure company, owning and operating a long-haul network spanning 23.2k route miles across Europe. Specifically, this network includes 14 fiber-based metropolitan networks connected with a high capacity intercity backbone covering 49 cities in 15 countries
  • ExteNet Systems (Small Cells & DAS) operates 31.0k small cell nodes, 600 C-RAN hubs, 4.0k owned fiber route miles and 16.0k leased fiber route miles across the U.S.

Hybrid Fiber-Coaxial (HFC) Network

Cable has a close relationship and interaction with fiber, making it a key component of digital infrastructure. In turn, the cable sector has become a significant area of interest for digital infrastructure investors like Stonepeak. In order to understand the relationship between cable and fiber, we can review some history for the two technologies. As discussed below:

Hybrid Fiber-Coaxial Network

Hybrid fiber-coaxial (HFC) networks (shown above) were created in 1992, allowing for the utilization of fiber to transmit data. Television signals were sent from the cable head-end (depicted by the top left part of the diagram above), which is a distribution facility that typically receives television content via satellite, to local neighborhoods through optical fiber (signified by the yellow lines on the diagram). The fiber terminates at a neighborhood or optical node (signified by the orange boxes on the diagram), where the signals are then converted and distributed to residences through coaxial cable lines (which are copper-based). Overall, this hybrid fiber-coaxial (HFC) technology improved the reliability of the network, lowered costs, and raised bandwidth capacity.

DOCSIS Standard

In 1997, the DOCSIS standard (known as Data over Cable Service Interface Specification) was created. This allowed for two-way Internet services over the hybrid fiber-coaxial (HFC) plant. DOCSIS capabilities allowed cable operators to offer superior speeds as compared to telco DSL (Digital Subscriber Line) services. In turn this resulted in cable gaining dominant market share for Internet services, which still exists today for consumer broadband.

With the further development of DOCSIS standards, theoretical download and upload capacities have increased to 10 Gigabits per second down / 10 Gigabits per second up, under DOCSIS 3.1 Full Duplex, which was released in 2017. Compared to telco broadband projects such as fiber-to-the-home – splitting nodes, thereby creating capacity and DOCSIS 3.1 improvements have been comparatively less of a strain on cable company’s capital expenditure budgets.

For example, Charter Communications upgraded its network to DOCSIS 3.1 at a cost of just $9 per passing, or $450m in total. This dramatically increased the speed and capabilities of Charter’s network to its 52 million households and small- & medium-sized businesses across the United States. These customers now have 1 Gigabit per second service available to them.

Delivering Internet Service to Customers

Overall, cable has demonstrated that it is a cost-effective way to deliver broadband services to both consumers and businesses, much in the same way fiber does. Therefore, the digital infrastructure nature of fiber, which delivers utility-like services, being Internet connectivity, is a relevant characteristic for cable companies, since cable can deliver similar or superior services for end customers.

Because of this, digital infrastructure investors like Stonepeak are increasingly investing in cable companies like Astound Broadband, as shown through its $8.1bn purchase from TPG. As the need for higher broadband speeds accelerates driven by trends like Over-the-top (OTT) media services (e.g., Netflix), 4K video streaming, the Internet of Things, augmented reality & virtual reality, and cloud gaming, which will all continue to grow over time and in turn need more digital infrastructure.

The Blurring of CableCos and FiberCos

Fiber is a key vertical in digital infrastructure. This is because it is the “connective tissue” that binds everything together, to make everything “work” including fiber-to-the-home. Many of the largest fiber companies such as Lumen Technologies and Zayo, focus more on providing business-to-business services. These services include dark (or wholesale fiber) that is carrier-to-carrier traffic or enterprise fiber which supplies connectivity services to businesses.

However, business-to-consumer services are a significant part of fiber company revenues as well. These services include providing fiber-to-the-home for broadband connections. Uniti Group and Consolidated Communications are two examples of fiber companies that provide fiber-to-the-home services. However, beyond these fiber companies, a significant portion of the broadband connectivity that is provided across the United States is done by cable companies. Cable companies like Comcast (through Xfinity), Charter (through Spectrum), Altice (through Optimum and Suddenlink), and Cable One provide the vast majority of broadband connectivity to consumers.

Stonepeak and the Case for Astound Broadband

Based on the above trends, there is becoming a blurring of the lines between digital infrastructure investors like Stonepeak, investing in pure fiber companies, as shown on the left below, and cable companies which have significant exposure to fiber, as shown on the right below. By briefly describing each of the fiber and cable companies below, it will help to explain that while certain companies may be categorized as fiber or cable, both groupings have significant fiber and connectivity assets deployed across the United States.

Blurring of CableCos and FiberCos

Fiber Companies

  1. Lumen Technologies owns ~450k route miles of fiber optic cable globally. The company is among the largest providers of communications services to domestic and global enterprise customers. Lumen’s fiber connects to 170k buildings, and the company also owns 340 data centers globally
  2. Zayo Group is a provider of bandwidth infrastructure in the U.S. and Europe. Zayo’s services include leasing dark fiber, fiber to cellular towers and small cells, Wavelength connections, Ethernet, and IP. Zayo owns 133k fiber route miles and 13 million fiber strand miles. Specifically, this fiber connects to 35.0k buildings, in the United States and Europe
  3. Uniti Group acquires and constructs fiber optic broadband networks, copper and coaxial broadband networks. Uniti owns 118k fiber route miles, 6.5 million fiber strand miles and 2.4k small cells
  4. Cogent Communications is a provider of low-cost, high-speed Internet access, private network services, and data center colocation space. Cogent owns 95k fiber route miles, connected to 1.8k office buildings and 1.0k carrier-neutral data centers. Additionally, the company is present across 200 metropolitan markets globally

Cable Companies / Multiple-System Operators (MSOs)

  1. Comcast Corporation is a global media and technology company with three primary businesses: Comcast Cable, NBCUniversal and Sky. Focusing on Comcast Cable, the division is a provider of high-speed internet, video, voice and wireless to United States customers. Comcast’s cable system has 32.7 million customers, including 30.3 million residential and 2.4 million business customers. The company’s network passes more than 59 million homes and businesses
  2. Charter Communications is the second largest cable operator in the U.S. and a leading broadband communications services company. Charter provides video, Internet, and voice services to more than 30 million residential and SMB customers. Charter’s network passes over 52 million households and small- and medium-sized businesses across the United States
  3. Altice USA provides broadband, video, and telephony services to 5.0 million residential and business customers under two brands: Optimum, in New York, and Suddenlink, in the south-central United States. Altice’s footprint extends across 21 states through a fiber-rich broadband network with 9.0 million homes passed. Additionally, the company plans to deploy a fiber network across its legacy Optimum markets over the next five years rather than upgrade its network to DOCSIS 3.1 like other Multiple-System Operators (MSOs)
  4. Cable One provides broadband, video, and voice services in 21 Western, Midwestern and Southern states to 907k residential and business customers in primarily non-metropolitan, rural markets. The majority of Cable One’s 2.3 million homes passed are located in seven states. These states include, Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma, and Texas

Examples of Convergence Between Fiber and Cable

Ultimately, there is significant convergence occurring between publicly-traded fiber companies and publicly-traded cable companies. Particularly, this point is evident between companies that focus on consumer and small & medium-size business Internet connectivity.

Uniti Group, for example, has committed to fund $1.75 billion of network investments over 10 years, known as Growth Capital Investments for a fiber-to-the-home initiative in partnership with Windstream. Uniti will deliver 1 Gigabit per second broadband speeds to consumers.

Additionally, Consolidated Communications (NASDAQ: CNSL) is another fiber company that entered into an agreement with Searchlight Capital, who will make a strategic investment of $425m into the company. This investment will enable Consolidated to upgrade more than 1 million homes with fiber passings to consumer and small business customers.

Framing the Stonepeak acquisition of Astound Broadband from TPG within Digital Infrastructure

The rationale is clear as to why Stonepeak agreed to acquire Astound Broadband, the sixth largest United States cable operator, for $8.1bn from TPG. Indeed, the transaction fits neatly within Stonepeak’s digital infrastructure investment strategy. Although cable companies may not appear like digital infrastructure companies initially, the blurring of fiber and cable as a form of Internet connectivity is increasing the interest of investors like Stonepeak to invest further capital into the cable sector.

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