Fast one immediately 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 targeted on secondary and tertiary markets within the southeast that trades for 7.5x EBITDA, whereas it offered property 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 (value noting that the 2 asset gross sales have been to strategic patrons, each of those corporations can be monetary patrons). 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% increased than immediately’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 doubtless 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 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). So as 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 dimensions and buying energy of a Comcast or Constitution relating 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.
Nonetheless, occasions are altering, as extra folks reduce the twine and transfer away from the broadband/video cable bundle to only searching for out a broadband web supplier, WOW’s worth oriented proposition begins to look fairly good, providing related speeds at a lower cost. With a recession probably on the horizon, WOW may additionally profit from the twine reducing development accelerating and their place as a price 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 not too long ago, partially because of rising competitors, new competitors is much less more likely to be a part of the fray into WOW’s already aggressive markets, slightly 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 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 may be some deal premium baked into WOW, perhaps a flip value. 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 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 non-public.
Disclosure: I personal shares of WOW