Quick one today that I mentioned briefly in my Mid-Year post as a watchlist idea.
WideOpenWest (WOW) ($1.6B market cap) is a cable/broadband overbuilder primarily focused on secondary and tertiary markets in the southeast that trades for 7.5x EBITDA, while it sold assets last year for 10-11x EBITDA (here and here). WOW is rumored to be in a late stage process to sell itself with both Morgan Stanley Infrastructure Partners and Global Infrastructure Partners reported as interested bidders (worth noting that the two asset sales were to strategic buyers, both of these firms would be financial buyers). Fully acknowledge that we’re not in the same 2021 M&A environment, but the PE bid and financing are still there for digital infrastructure like businesses. Even a takeout at a 9.5x EBITDA multiple would equate to $24.30/share or 35% higher than today’s $18.00/share price. After the asset sales, WOW is currently under levered at 1.9x net debt/EBITDA (a PE buyer would likely lever a cable company up to 5-6x); taking WOW out at a cheapish price with a relatively small equity check due to the ability to lever it up further, this deal would likely be a home run for the buyer.
A bit more about the business, as an overbuilder, WOW is the “challenger” cable provider that enters established markets which typically already included either Comcast’s (CMCSA) Xfinity brand or Charter’s (CHTR) Spectrum brand (which I’m long via LBRDK). In order to convince customers to switch from an incumbent provider, WOW has to offer some combination of faster speeds, lower prices and better customer service. Additionally, WOW lacks the scale and purchasing power of a Comcast or Charter when it comes to negotiating with content providers, further squeezing margins in the already declining video business. All adding up to an overbuilder like WOW having lower penetration rates (28% of homes passed), thus lower margins and generally viewed as an unfavorable business model compared to the incumbents.
However, times are changing, as more people cut the cord and move away from the broadband/video cable bundle to just seeking out a broadband internet provider, WOW’s value oriented proposition starts to look pretty good, offering similar speeds at a lower price. With a recession potentially on the horizon, WOW might also benefit from the cord cutting trend accelerating and their position as a value offering as consumers look to cut costs. To provide some perspective, 90% of WOW’s new customers are only buying broadband. Cable valuations have come down recently, partially due to rising competition, new competition is less likely to join the fray into WOW’s already competitive markets, rather fiber-to-the-home overbuilders are more likely to focus on markets where the incumbents are vulnerable to new competition.
On the downside, WOW is currently trading at only a slight discount to Charter and the struggling Altice USA (ATUS), where CHTR/ATUS have better business models as a incumbent cable providers. So there is some deal premium baked into WOW, maybe a turn worth. I pulled the above public comparables from TIKR, I realize each is a bit different, especially throwing DISH in there. I don’t love the idea of adding another speculative merger position to my portfolio, but this one just seems to make too much sense for a PE buyer to take private.
Disclosure: I own shares of WOW
