Expected higher offer – 90%+ upside
Andrew Walker and LB Partners have recently issued open letters addressed to the management and shareholders of WideOpenWest. WOW is currently targeted by a takeover bid from a consortium led by its largest shareholder. Both activists oppose this opportunistic offer and argue that the situation presents an intriguing opportunity for a higher offer to emerge.
WOW is a $440m market cap company that provides cable television and broadband services, with a focus on Midwest and Southeast. In early May, the company received a takeover bid at $4.8/share from a buyer consortium comprised of PE firm Crestview Partners (owns 38%, controls 4/9 board seats), and digital infrastructure investment firm DigitalBridge. WOW has formed a special committee to evaluate the bid. The stock is currently trading 6% above the proposed price as the market is seemingly expecting a higher offer. The transaction has been opposed by several of WOW’s equity holders, including Andrew Walker and the largest minority shareholder, LB Partners (owns 8%). Both activists have stated that the offer dramatically undervalues the company. Several aspects suggest that a higher bid might be on the horizon:
- The offer seems highly opportunistic, coming at the height of WOW’s ongoing fiber buildout expansion program. The company has spent $170m in growth capex (c. $2 per share) over the last two years, with the overwhelming majority of this spending occurring in the two most recent quarters. These capital expenditures have significantly increased WOW’s net debt without yet improving profitability, due to the natural time lag required before these investments can start generating meaningful EBITDA.
- The bid values WOW at an undemanding 5x EBITDA, substantially below comparable cable industry M&A transactions, which have been completed at 8x-10x EBITDA multiples. The most notable example is the recent acquisition of WOW’s more levered peer CNSL at 10x EBITDA. While, there were also several transactions completed at 5-6x EBITDA multiples (see slide from CNSL’s presentation below), these involved lower-quality DSL/copper assets compared to WOW’s modern cable infrastructure. WOW sold several of its lower-quality assets back in 2021 at c. 11x EBITDA.
- Crestview’s offer also undervalues WOW on a replacement cost basis, valuing the company at only $700 per home passed. This is well below the c. $1,000 per home passed that the company has spent on new fiber passings over the past three years. For reference, Searchlight’s acquisition of CNSL valued the target at $2,500 per fiber home passed. Note that the edge out build cost does not ascribe any value to WOW’s existing cable network/infrastructure that is profitable and cash-generative.
- Crestview, a PE firm with $11bn in AUM, has been involved with WOW for over a decade and thus is clearly aware of the underlying value. Another positive here, validating WOW’s value, is the involvement of DigitalBridge, a digital infrastructure investment firm with $80bn in AUM and significant exposure to the fiber space.
By how much could the offer get raised? WOW’s asset sales in 2021 were completed at 11x EBITDA, in line with peer CHTR’s valuation at the time. Valuing WOW in line with CHTR’s current valuation (6.7x) would imply a share price target of c. $10/share (90%+ upside). Meanwhile, at the low end of the historical cable M&A transaction range (8x-10x), the company would be valued at approximately $15 per share.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
So the downside risks include:
(1) No competing offers emerge, and $4.8 is the final offer, leading to 6-7% loss (plus another 3-5% for immediate exit because spot price has to fall to maybe $4.6 to produce a typical arb spread in a 5% risk-free rate environment).
(2) Crestview/DigitalBridge walk away and stock price goes back to $3 to $4 range, leading to 20-40% loss.
Do I understand the situation correctly?
I assume risk 2 is a small prob event, but would appreciate any inputs.
CNSL received non-binding offer in April 2023, signed definitive agreement in October and expects to close in Q1 2025. I don’t know if it could be a similar timeline here (closing in 2026?).
Very helpful. CNSL price moved to $4.1/share after its definitive agreement was signed, nearly 13% below the offer price of $4.7.
If CNSL’s post-def spread is any guide, and WOW signs a def with Crestview this coming November at the original $4.8/share offer, stock price will likely have to adjust down to $4.2, nearly 18% below current price of $5.1.
This downside risk is too large.
Maybe the probability tree could be something like:
40%*7 (present value of $8 deal) $2.8
40%*4.2 downside (1) $1.68
20%*3.5 downside (2) $0.7
total: $5.18
Your probability parameters seem reasonable to me. So at $5.03 currently WOW is fairly priced.
i think the probabilities you assign to the deal getting done at current terms are wildly off. there is zero chance the deal gets done at 4.8 – zero. the largest non-insider shareholder has already rubbished it publicly and said (essentially) they will sue the board if they agree to the deal.
the analysis should rather be, what is the right bump % to use, and of course what is the bump vs no-deal probability. i will leave you to opine on the ‘right’ % probabilities, but one thing you may want to consider – lost in the comments thus far- is that the pre-deal price of mid-$3s was artificially low because the bid occurred two days before 1Q earnings, which were very positive – for a very financially levered stock. So the ‘break’ price here is not the pre-deal extant price (at whatever probability you assign for that scenario – it is that price, plus the earnings bump – 50c? $1? – you think the market would have accorded had the deal never landed. of course the cynicism of that timing is another reason why the buyer prob wants to get the deal done here.
my personal probabilities are something like 10% no deal and drop to $4; 60% deal bump to $7-$8; and 30% deal bump to $8-$11 (you pick your numbers its all guesswork anyway given the leverage). i really think this is one of those few deals you could see a gargantuan renegotiation between first indication of interest; and final agreed price (maybe like Hoengh LNG if you remember that deal). keep in mind also CNSL was bumped 70% between first indication of bid and final agreed price – and even though that entity was highly, highly distressed it went off at a higher multiple than this transaction is currently priced.
so if you rerun your expected value math with the idea that downside is $4 and the no-deal scenario is actually very low, you get something like $7… clearly i dont expect the stock to trade there pre-deal but $5 with evertything we know (current prices) seems a very fat pitch.
@puppyeh, thanks for the inputs!
On CNSL, the bump in SearchLight’s offer was 17% (not 70%), from $4 to $4.7, right? between first indication of bid in April and final agreed price in Oct 2023.
Has anyone dove into the bid’s withdrawal requirements?
Andrew dropped another letter to WOW’s special committee. The gist is that the offer for WOW is way too low, especially since the industry has picked quite a lot. Closest peer CHTR is up 40% since the announcement, which outperforms WOW, even with the backing of the offer. https://www.yetanothervalueblog.com/p/an-open-follow-up-letter-to-wows
another drop to deal levels/buying opp……I hope?
Anyone hearing anything?
Nothing. I emailed IR last week requesting an update. Didn’t expect a response and didn’t get one. Earnings report comes out tomorrow. This is the only time in the last five years they’ve reported on a Friday. Don’t know if that means anything? It’s been long enough and I hope for something soon.