Mergers & Acquisitions: Cable One Purchases Ownership Stakes In Fixed Wireless Broadband Providers NextLink & Wisper ISP

August 8, 2020 – Cable One, Inc. has disclosed the details of equity investments it made in two fixed wireless Internet service providers – NextLink and Wisper ISP.

The Phoenix-based cable operator made the disclosures in its Form 10-Q report to the Securities and Exchange Commission on financial and operating results for the second quarter of 2020.[1]

$27.2 Million Minority Equity Investment In NextLink

According to the SEC 10-Q report, in May 2020, Cable One made a $27.2 million minority equity investment in AMG Technology Investment Group, LLC, a fixed wireless service provider doing business as NextLink.[2] The money reportedly bought Cable One a “less than 10% interest” in Nextlink.[3]

NextLink was a big winner in the FCC’s Connect America Fund Phase II auction, receiving a total of $281.28 million in universal service support over ten years to serve 100,581 locations in six states.[4]

When it won CAF II auction funding, NextLink was a five-year old “Texas-based Internet Service Provider delivering High Speed Internet and Voice Services throughout North Texas and Central Texas to residential, business, K-12 Education and government customers.”[5] In comparison to NextLink’s service footprint at the time, the broadband deployment obligations attached to the CAF II auction support were orders of magnitude larger. It required expansion into five new states. On top of that, NextLink was a winning bidder in many census blocks to provide 100 Mbps service, a level of broadband service it currently did not offer anywhere.

A year later, in September 2019, NextLink joined Microsoft’s Airband Initiative.[6] Microsoft describes the Airband Initiative as an ambitious plan to help bring affordable broadband to the millions of rural Americans that lack broadband service with speeds of 25 Mbps downstream. Through the initiative, Microsoft  partners with rural telecommunications companies by covering certain capital costs of deploying TV White Space networks. As an Airband partner, NextLink will help close the broadband gap in Iowa, Illinois, Kansas, Nebraska, Oklahoma and Texas, the same states in which NextLink received CAF II auction funding. The press release announcing the Airband partnership stated that “Nextlink will deploy a variety of broadband connectivity technologies to bring these areas under coverage, including wireless technologies leveraging TV white spaces (e.g., unused TV frequencies) in select markets. Nextlink will continue its deployments in Texas and Oklahoma and immediately begin deployment efforts in Kansas, Nebraska, Iowa and Illinois, with rollouts planned through 2024.”

Following the CAF II auction, broadband pundits questioned whether NextLink would be able to pull off the broadband network deploying requirements. The CAF II deployment obligations require support recipients to offer broadband service to 100% of locations in the sixth year of receiving support. This was and still is a huge expansion for NextLink. However, it appears NextLink has put itself into position to pull this off.

Indeed, this is something Cable One would have considered before purchasing the $27.2 million minority ownership interest. Under the CAF II funding rules, one of the penalties for failing to meet broadband deployment obligations is a loss of support. Other penalties for noncompliance include additional reporting, support recovery, drawing on the support recipient’s letter of credit, potential revocation of ETC designations, and suspension or debarment. Cable One’s due diligence would have considered all of these scenarios. By moving forward with the investment, Cable One is obviously confident that NextLink can meet its CAF II deployment obligations. Of course, the Microsoft partnership and the Cable One money will help. A fixed wireless provider flush with CAF II money is much more attractive than one without.

$25.3 Million Minority Equity Investment In Wisper Internet

The SEC 10-Q report discloses that Cable One closed a minority equity investment in Wisper ISP, LLC for $25.3 million in July 2020.[7] Cable One reportedly obtained a 40% stake in Wisper.[8]

Fixed wireless Internet service provider Wisper was also a big winner in the FCC’s CAF II auction, receiving roughly $220.3 million in universal service support over ten years to serve 80,149 locations in six states. Here’s how that breaks down: Arkansas $399,565.60 – to serve 102 locations; Illinois $35,079,137.70 –8,907 locations; Indiana $123,648.00 – 14 locations; Kansas $1,607,524.30 – 414 locations; Missouri $176,319,409.30 – 68,269 locations; and Oklahoma $6,790,089.80 – to serve 2,443 locations.[9]

The SEC 10-Q report further reveals that Cable One has been heavily involved in Wisper’s operations since January of 2020. Specifically, Cable One issued letters of credit totaling $22.0 million on behalf of Wisper to guarantee its CAF II auction broadband deployment obligations. To issue the letters of credit, Cable One drew down on a revolving credit facility.[10] Here’s the relevant paragraph from the 10-Q:

In January 2020, we issued letters of credit totaling $22.0 million under the Revolving Credit Facility on behalf of Wisper to guarantee its performance obligations under an FCC broadband funding program. The fair value of the letters of credit approximates face value based on the short-term nature of the agreements. We would be liable for up to $22.0 million if Wisper were to fail to satisfy all or some of its performance obligations under the FCC program. Wisper pledged certain assets in favor of us as collateral for issuing the letters of credit, which pledge was terminated in the third quarter of 2020 at the same time that we closed an equity investment in Wisper, and Wisper has agreed to guarantee and indemnify us in connection with such letters of credit. As of June 30, 2020, we have assessed the likelihood of non-performance associated with the guarantee to be remote, and therefore, no liability has been accrued within the condensed consolidated balance sheet.[11]

The SEC 10-Q report also discloses Cable One issued a $7.3 million note to Wisper:

The $287.7 million decrease in net cash used in investing activities from the prior year period was due primarily to $356.9 million of cash outflows related to the Clearwave acquisition in the first quarter of 2019, partially offset by a $28.3 million increase in cash paid for capital expenditures, the $27.2 million equity investment in Nextlink, the $7.3 million issuance of a note and other receivables to Wisper that did not occur in the prior year period and lower proceeds from sales of property, plant and equipment during the first six months of 2020.[12]

The same things that were said above about NextLink apply to Wisper as well. There were doubts that Wisper could meet the broadband deployment obligations that come with all that CAF II auction money. It seemed Wisper had bit off more than it could chew, and maybe it has, who knows. Of course, Cable One investigated these doubts before making the minority ownership investment, finding the likelihood of non-performance to be remote. But, Cable One’s $22 million in letters of credit is also on the line here. And, Cable One had already loaned Wisper $7 million. Whatever the case may be, the $25.3 million injection of Cable One cash should help Wisper meet its broadband deployment requirements.

$38.4 Million Valu-Net LLC Acquisition

Additionally, Cable One’s 10-Q report discloses that in July 2020, Cable One acquired Valu-Net LLC, an all-fiber internet service provider headquartered in Kansas, for a base purchase price of $38.4 million, subject to customary post-closing adjustments.[13]

Minority Equity Interest In Hargray Communications

The SEC 10-Q report discloses that during the third quarter of 2020, Cable One entered into an agreement with Hargray Communications whereby Cable One will contribute its Anniston, Alabama system in exchange for a minority equity interest in Hargray. The Hargray transaction is expected to be completed in the fall of 2020, subject to certain regulatory approvals and other customary closing conditions.[14]

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[1] Cable One, Inc., Form 10-Q, For the quarterly period ended June 30, 2020, U.S. Securities and Exchange Commission (Aug. 7, 2020) (Cable One 10-Q), http://ir.cableone.net/Docs.

[2] Cable One 10-Q, p. 18. See also Cable One Invests In Two Fixed Wireless ISPs, LightReading.com (Aug. 6, 2020), https://www.lightreading.com/services/cable-one-invests-in-two-fixed-wireless-isps-/d/d-id/763035.

[3] For what it’s worth, if that $27.2 million did get 10%, it would mean NextLink was valued at 272 million.

[4] See Connect America Fund Phase II Auction (Auction 903) Closes Winning Bidders Announced FCC Form 683 Due October 15, 2018, AU Docket No. 17-182, WC Docket No. 10-90, Public Notice, DA 18-887 (Aug. 28, 2018).

[5] http://nextlinkinternet.com/about/.

[6] Nextlink Internet and Microsoft closing broadband gap in central US, Microsoft News Center (September 18, 2019), https://news.microsoft.com/2019/09/18/nextlink-internet-and-microsoft-closing-broadband-gap-in-central-us/.

[7] Cable One 10-Q, p. 18. See also Cable One Invests In Two Fixed Wireless ISPs, LightReading.com (Aug. 6, 2020), https://www.lightreading.com/services/cable-one-invests-in-two-fixed-wireless-isps-/d/d-id/763035.

[8] For what it’s worth, this values Wisper at roughly $63 million.

[9] Connect America Fund Phase II Auction (Auction 903) Closes Winning Bidders Announced FCC Form 683 Due October 15, 2018, AU Docket No. 17-182, WC Docket No. 10-90, Public Notice, DA 18-887, Attachment A (Aug. 28, 2018), https://www.fcc.gov/document/connect-america-auction-expand-broadband-713176-rural-locations.

[10] In May 2020, Cable One completed a public offering of 287,500 shares of its common stock for total net proceeds of $469.8 million, after deducting underwriting discounts and offering expenses. It used a portion of the net proceeds to repay in full its outstanding borrowings of $100 million under its revolving credit facility in May 2020 and for the Valu-Net and Wisper transactions. Cable One 10-Q, p. 29.

[11] Cable One 10-Q, p. 28.

[12] Cable One 10-Q, p. 27.

[13] Cable One 10-Q, p. 18.

[14] Cable One 10-Q, p. 18.