Fast one at present that I discussed briefly in my Mid-Yr publish 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 belongings final yr 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 (price noting that the 2 asset gross sales have been to strategic consumers, each of those corporations could be monetary consumers). Absolutely 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% greater than at present’s $18.00/share value. After the asset gross sales, WOW is presently underneath levered at 1.9x web debt/EBITDA (a PE purchaser would seemingly lever a cable firm as much as 5-6x); taking WOW out at a cheapish value with a comparatively small fairness test as a result of skill to lever it up additional, this deal would seemingly 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 by way of LBRDK). With a purpose to persuade clients to modify 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 relation 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 minimize the twine and transfer away from the broadband/video cable bundle to only looking for out a broadband web supplier, WOW’s worth oriented proposition begins to look fairly good, providing comparable speeds at a cheaper price. With a recession probably on the horizon, WOW may additionally profit from the twine chopping pattern 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 because of rising competitors, new competitors is much less prone to be part of the fray into WOW’s already aggressive markets, reasonably 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, perhaps a flip price. I pulled the above public comparables from TIKR, I understand 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