Telecom M&A and why $WOW's current bid is too cheap

TL;DR: earlier this week we sent WOW’s special committee a letter on why we think their current take private offer is (far) too cheap. The post below provides some added details on cable M&A and why we think WOW’s special committee should demand a large premium.

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Last year, Consolidated Communications (CNSL) received a public bid from their majority shareholders (Searchlight and BCI) to take the company private at $4/share. The bid was at a large premium to CNSL’s previous closing price of $2.76/share, and if you read the merger’s background section it’s clear that the company and independent directors responsible for negotiating a possible take private didn’t think the company was in a great spot. For example, the management team’s internal standalone plan prepared just after the bid notes,

increasing challenges relating to trends in the Company’s operating and financial performance, changes in the interest rate environment and increasing capital expenditure requirements due to supply chain issues and rising costs, all of which were operating to further impair the Company’s near-term liquidity position and to constrain planned investment, including because the Company’s weakened performance and record of making unbudgeted expenditures would limit access to borrowings under the Company’s existing revolving credit facility as a result of the Company’s forecasted inability to comply with the maximum consolidated first lien leverage ratio thereunder.

On top of those issues, CNSL notes that their debt structure made it almost impossible for any party other than Searchlight / BCI to bid on CNSL; indeed, despite a very public acquisition proposal, no other acquirer bothers to call CNSL on even cursory due diligence for a competing offer on the heels of the initial Searchlight offer. And it seems likely that CNSL’s operational issues ran deeper than management let on; the proxy notes that Searchlight forecasted CNSL’s “2028 EBITDA to be approximately $120M lower than that reflected in the” standalone plan.

Despite all of those issues, CNSL ultimately succeeds in getting Searchlight / BCI to bump their initial offer by almost 20% to $4.70/share, which represents an incredible ~70% premium to the unaffected price before the initial bid.

Why does Searchlight bump their bid when CNSL seemed so clearly on the ropes?

A skeptic might say Searchlight / BCI saw huge value potential in CNSL’s burgeoning fiber upgrade program, and they designed the whole process to take CNSL out just before the fruits of that labor really bore fruit. And there may be a kernel of truth there (though I personally think the liquidity and execution problems facing CNSL were very real)…… but, if you read the proxy, it makes clear that a big reason the special committee is so forceful in demanding a bump is because minority shareholders are being very vocal in noting how much higher they view CNSL’s intrinsic value. Again, from the proxy,

The Special Committee and representatives of Rothschild & Co and Cravath also discussed the letter issued by Wildcat on July 12, 2023. A discussion ensued regarding the most recent public information available to Company stockholders as compared to the June Standalone Plan and the potential impact of such information on Company stockholders’ assessment of the April 12 Proposal, including certain stockholders’ more aggressive views with respect to the value of the Company than that reflected in the current trading price of the Company common stock or the April 12 Proposal. The Special Committee and representatives of Rothschild & Co and Cravath further discussed that Company stockholders’ views likely assumed the Company would not face near-term liquidity challenges.

Without CNSL’s minority shareholders very vocally expressing their views that fair value was much higher than the initial price, I do not think CNSL’s special committee would have felt they had as strong a leg to stand on in demanding a large bump.

Why do I mention all of this history?

On May 2, WideOpenWest’s (WOW) largest shareholder, Crestview, partnered with DigitialBridge to offer to take WOW private at $4.80/share.

I personally think the offer is an affront to minority investors; at anything close to that level, Crestview would be stealing the company.

On just about every metric, WOW is in a much better place than CNSL was when CNSL got their bid. WOW’s balance sheet is better, WOW’s assets are more modern, and WOW has no liquidity needs (WOW could easily turn into a cash gusher by limiting growth capex). Given that combo, WOW’s special committee should have a much better / stronger leg to stand on when negotiating a deal.

But it’s not easy to stand up to a majority (or near-majority) shareholder as a special committee. After all, as a member of a special committee, if you negotiate too hard against a buyer, you could easily cause a deal to fall through and find yourself replaced by a more compliant board member at the next annual meeting.

For that reason, I think it’s critically important for all of WOW’s minority shareholders to let WOW know that, while a take private could make sense, it needs to be at a price that properly reflects WOW’s asset value (i.e. much higher than the initial bid).

WOW’s largest minority shareholder, LB Partners, took a step towards making their voice heard on WOW’s value by filing a 13-D laying out their thoughts on the process last week.

And I took another step towards making minority shareholders voice heard by sending a letter to WOW’s special committee earlier this week. You can see that letter here.

If you’re a shareholder of WOW, I’d encourage you to send a letter expressing your views and make sure your voice / views on value are heard. You don’t have to agree with everything I’ve written (LB Partners and I certainly see some things at WOW quite differently), but if you’re in agreement that the current price is too cheap, the most important thing you can do is let the special committee know… and know that minority shareholders are watching.

PS- there are any number of other angles we could discuss on WOW (the timing of the bid, partnering with DigitalBridge, etc.; in fact, I’ve talked about many of them on the premium side), but I think the most important thing minority shareholders can do is just let the special committee know their view on value.