Fast one right this 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 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 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% increased than right this moment’s $18.00/share worth. After the asset gross sales, WOW is at the moment beneath levered at 1.9x web 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 test as a result of capacity to lever it up additional, this deal would probably 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 usually already included both Comcast’s (CMCSA) Xfinity model or Constitution’s (CHTR) Spectrum model (which I am lengthy by way of LBRDK). In an effort to persuade prospects 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 in the case 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.
Nonetheless, occasions are altering, as extra individuals 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 cheaper price. 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 shoppers look to chop prices. To offer some perspective, 90% of WOW’s new prospects are solely shopping for broadband. Cable valuations have come down just lately, partially as a result of rising competitors, new competitors is much less more likely to be a part of the fray into WOW’s already aggressive markets, moderately fiber-to-the-home overbuilders usually tend to deal with markets the place the incumbents are susceptible to new competitors.
On the draw back, WOW is at the moment 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 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 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