Monday, March 27, 2023

Cable Overbuilder Rumored for Sale

Fast one right this moment that I discussed briefly in my Mid-12 months put up as a watchlist thought.

WideOpenWest (WOW) ($1.6B market cap) is a cable/broadband overbuilder primarily targeted on secondary and tertiary markets within the southeast that trades for 7.5x EBITDA, whereas it bought belongings final 12 months for 10-11x EBITDA (here and here).  WOW is rumored to be in a late stage course of to promote itself with each Morgan Stanley Infrastructure Partners and Global Infrastructure Partners reported as bidders (price noting that the 2 asset gross sales had been to strategic consumers, each of those companies could be monetary consumers).  Absolutely acknowledge that we’re not in the identical 2021 M&A surroundings, 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 right this moment’s $18.00/share worth.  After the asset gross sales, WOW is presently underneath levered at 1.9x internet debt/EBITDA (a PE purchaser would probably lever a cable firm as much as 5-6x); taking WOW out at a cheapish worth with a comparatively small fairness verify because of the means to lever it up additional, this deal would probably be a house run for the client.

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 a purpose to persuade clients to modify from an incumbent supplier, WOW has to supply some mixture of quicker speeds, decrease costs and higher customer support.  Moreover, WOW lacks the size and buying energy of a Comcast or Constitution with regards to 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 houses handed), thus decrease margins and usually seen as an unfavorable enterprise mannequin in comparison with the incumbents.

Nevertheless, instances are altering, as extra individuals reduce the wire and transfer away from the broadband/video cable bundle to simply searching for 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 probably on the horizon, WOW may also profit from the wire slicing development accelerating and their place as a worth providing as shoppers look to chop prices.  To offer some perspective, 90% of WOW’s new clients are solely shopping for broadband.  Cable valuations have come down lately, partially on account of rising competitors, new competitors is much less prone to be a part of the fray into WOW’s already aggressive markets, quite fiber-to-the-home overbuilders usually tend to deal with markets the place the incumbents are weak to new competitors.

On the draw back, WOW is presently 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’s some deal premium baked into WOW, possibly a flip price.  I pulled the above public comparables from TIKR, I notice every is a bit completely different, particularly throwing DISH in there.  I do not love the thought 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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