Thursday, April 18, 2024

Cable Overbuilder Rumored for Sale


Fast one at the moment that I discussed briefly in my Mid-Yr put up as a watchlist thought.

WideOpenWest (WOW) ($1.6B market cap) is a cable/broadband overbuilder primarily centered on secondary and tertiary markets within the southeast that trades for 7.5x EBITDA, whereas it offered property final 12 months for 10-11x EBITDA (right here and right here).  WOW is rumored to be in a late stage course of to promote itself with each Morgan Stanley Infrastructure Companions and International Infrastructure Companions reported as bidders (value noting that the 2 asset gross sales have been to strategic consumers, each of those corporations can be monetary consumers).  Totally acknowledge that we’re not in the identical 2021 M&A setting, however the PE bid and financing are nonetheless there for digital infrastructure like companies.  Even a takeout at a 9.5x EBITDA a number of would equate to $24.30/share or 35% larger than at the moment’s $18.00/share value.  After the asset gross sales, WOW is at present beneath levered at 1.9x web debt/EBITDA (a PE purchaser would doubtless lever a cable firm as much as 5-6x); taking WOW out at a cheapish value with a comparatively small fairness test because of the skill to lever it up additional, this deal would doubtless be a house run for the customer.

A bit extra concerning the enterprise, as an overbuilder, WOW is the “challenger” cable supplier that enters established markets which generally already included both Comcast’s (CMCSA) Xfinity model or Constitution’s (CHTR) Spectrum model (which I am lengthy through LBRDK).  With the intention to persuade prospects to change from an incumbent supplier, WOW has to supply some mixture of sooner speeds, decrease costs and higher customer support.  Moreover, WOW lacks the size and buying energy of a Comcast or Constitution in terms of negotiating with content material suppliers, additional squeezing margins within the already declining video enterprise.  All including as much as an overbuilder like WOW having decrease penetration charges (28% of properties handed), thus decrease margins and customarily seen as an unfavorable enterprise mannequin in comparison with the incumbents.

Nevertheless, instances are altering, as extra folks minimize the wire and transfer away from the broadband/video cable bundle to simply in search of out a broadband web supplier, WOW’s worth oriented proposition begins to look fairly good, providing comparable speeds at a lower cost.  With a recession doubtlessly on the horizon, WOW may also profit from the wire slicing pattern accelerating and their place as a price providing as customers look to chop prices.  To supply some perspective, 90% of WOW’s new prospects are solely shopping for broadband.  Cable valuations have come down just lately, partially attributable to rising competitors, new competitors is much less more likely to be part of the fray into WOW’s already aggressive markets, quite fiber-to-the-home overbuilders usually tend to give attention to markets the place the incumbents are weak to new competitors.

On the draw back, WOW is at present buying and selling at solely a slight low cost to Constitution and the struggling Altice USA (ATUS), the place CHTR/ATUS have higher enterprise fashions as a incumbent cable suppliers.  So there may be some deal premium baked into WOW, perhaps a flip value.  I pulled the above public comparables from TIKR, I notice every is a bit totally different, particularly throwing DISH in there.  I do not love the concept of including one other speculative merger place to my portfolio, however this one simply appears to make an excessive amount of sense for a PE purchaser to take personal.

Disclosure: I personal shares of WOW

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