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.
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.
Disclosure: I own shares of WOW
Hey, another lovely read - thanks for continuing with this blog. I've had a quick read of the 10K and latest 10Q. Two things jumped out at me:ReplyDelete
1. Where do you get EBITDA of $283m from? Annualising March 10Q I get to about $196m and last year's continuing operations EBITDA was still sub $200m?
2. I know it's how everyone does it but EBITDA is a horrid metric for such a business. Looking at the cash flow statement, their Capex spend rate is about equal to the depreciation amount. Which means there really isn't a lot of free cash being thrown out, even at the level of leverage they have. So the only way a buyer would be able to lever it up to 5-6x as you say would be through operational efficiencies/synergies, rather than a simple refinancing. And if I'm right, in my experience it's rare for a seller to capture so much of the synergy value as assumed in your thesis.
How did you get comfortable on these two?
In their Q1 press release they guide to $281-$284MM of EBITDA, in my spreadsheet it is $282.5 but I just eliminated the decimoles.
They are doing some growth capex that is skewing the free cash flow metric some. I think part of the thesis here needs to be as video becomes less of their revenue, cash flow should improve. Additionally as video becomes less important to cable customers in general, WOW's product becomes more competitive with incumbents, pushing up their penetration rate which falls to the bottom line.
I agree that EBITDA isn't the best metric, but it is what credit people look at it and if you're using it to compare across similar peers it is not that bad. Plus it is what merger multiples are often quoted at, especially in the cable space, so when looking at a cableco in play, I think it makes sense to compare it to previous deals. I clearly wouldn't want to compare EBITDA multiples across different sectors, like comparing a Coal Company to a Rating Agency or something like that wouldn't make sense.
Thanks - got it. It looks like the $283m EBITDA figure is actually adjusted EBITDA - the main adjustments being adding back Stock Based Comp and Non-recurring professional fees and restructuring expenses. I'm really not an expert on this and am just trying to learn - are target M&A comps quoted based on adjusted EBITDA also? or is it more typical to use straight EBITDA? With a c30% difference between the two, if the latter that would eat up most of the investment thesis here.Delete
Thank you for this. A few Q’s / comments:ReplyDelete
- Why is EBITDA the right valuation metric to look at for these businesses? On-going amounts of growth capex to build out its fibre penetration lead to a progressively higher D&A base (ie current EBITDA over-states the steady state free cash flow this business will generate). This dynamic is particularly pertinent in an inflationary environment.
- Why not short Charter instead? A massively levered melting ice-cube in some ways (previous competitive advantage of procurement scale on video cable content is now becoming mute). Malone has made this mistake before ( ie unseen obsolescence) on Qurate
- I think anchoring on historic ND / EBITDA ratios when considering the leverage potential for financial buyers is a mistake caused by the last ten years of very low interest rates for these sorts of transactions. 5-6x ND / EBITDA on a growth capex story made sense when you were paying <3% annually on the interest. The maths on prospective returns changes significantly. One of the very many second-order effects of the recent monetary “regime change”.
Thank you sir!
As stated above, I use EBITDA a lot because that's often what M&A multiples are quoted in and when looking at a company that's in play, I think it makes sense and is an easy back of the envelope way of coming up with a target price.Delete
That's certainly the current sentiment on Charter, maybe you're right.
That's a good point too. WOW's current term loan is SOFR + 300, trading at 96ish, if they do lever it up 5-6x, between interest expense and capex, it would soak up almost all the FCF. But they do guide to growing EBITDA (I know we're back to EBITDA again) at high single digits through 2025. Back to Malone, if you're growth rate is higher than your interest expense, should be running a leveraged equity strategy.
Above comments already mention it - EBITDA definitely isn't the correct metric with the growth capex outlay. Net of taxes and this capex overhang the unlevered FCF conversion is dismal (maybe $283mm of EBITDA converts to $150mm unlevered at best. At $1.6bn market cap this is a $2.2bn TEV asset (at 7.5x EBITDA) with $150mm FCFF or 6.8% asset cash yield. How is xyz PE firm able to get 5-6x turns leverage or down to 75% LTV at blended rates <7% right now? I don't think it makes sense in this market - my 2 cents.ReplyDelete
Further to my point above... WOW's existing 1L TL S+300 trades at 96 or 6% yield and is $700mm leverage on $2.2bn TEV or 32% LTV. The supposed incremental financing from 32% to 70-or-75% LTV is going to be a much steeper yield / cost of debt than the 32% LTV TL at 6% market-implied cost of debt right now. Heavy capex intensity assets like this with bad depreciation cycles are likely unfavored by a lot of credit lenders and my best guess is that a package like this just doesn't get funded or goes at blended 8-9% which makes no sense for the PE investmentDelete
They've already sold 2 assets for 10-11x EBITDA, why talk about EBITDA being a bad metric? We see factual evidence that 3rd parties are interested in WOW's assets and are going to pay much higher multiples than the whole company is trading at (based on EBITDA or FCFF or whatever). This idea will work outDelete
Maybe asset sales but not a take private at a premium that is credit market contingent?Delete
Where/how did you get the ATUS EV/EBITDA? As I remember, IBKR shows me a much lower numberReplyDelete
TIKR, I believe they source their data from CapitalIQ, could be wrong about that. It's not critical to the thesis, the thesis is really that they've sold half the company last year for 10-11x, multiples have come down a bit, they have to interested bidders, etc.Delete
I don't see anything wrong with EBITDA, however, financial buyers always scare me especially considering today's volatile market conditions.ReplyDelete