Description

WideOpenWest (WOW) is the 6th largest cable company in the US and we think it represents a great opportunistic buy after a disastrous first year as a public company.  This is a simple idea and the writeup will be in summary form, just going to hit the major points.

What they are:

• The 6th largest cable company in the US with 777k subscribers and 3.1mm homes passed.

• Operates in 19 markets in the Midwest and South including Detroit, Chicago, Columbus, Pinellas, Cleveland, Huntsville and Baltimore

• IPO’d in May 2017 at $17/ share, trading at $6.90 today.

• Backed by two private equity firms including Avista (legacy investment from years ago – primarily interested in exiting) and Crestview (new investment from 2015/2016; invested at a higher basis than where the stock trades)

• $1.2b in revenues, $411mm EBITDA (2018), $2.7b EV (6.7x 2018 EBITDA)

Why we like it:

It’s really all about valuation.  Cable companies have a relatively tightly clustered valuation range.  There are 4 public comps to look at and then a long list of M&A comps over time, and many transactions in the last 2 years in particular.  The public comps range from 7.3x at the low end (Comcast) to ~10.5x at the high end (Cable One). Comcast’s valuation I would note is dragged down by their legacy media assets (networks, broadcast television etc). On the M&A side there were three assets that traded in 2017 for in excess of 11x EBITDA (Metrocast, Wave Broadband and NewWave Communications).  Going back a few years you can see the range of multiples below; they cluster around a median in the mid 9s.

WOW is a nice cable asset and one of the few left to be acquired that has scale.  One of the things they are particularly noted for is network quality and speed. Take a look at Netflix’s ranking of broadband providers by speed of service.  WOW ranks 4th out of 66 in their analysis.

https://ispspeedindex.netflix.com/country/us/?small=True

WOW is an “overbuilder”.  Their history is in building networks alongside those of the incumbent cable companies.  There are positives and negatives to being an overbuilder. The positive is that they can keep growing through “edge outs” and they can also cherry pick the best neighborhoods (most affluent etc) to serve in a given market.  The negative is that they compete against an incumbent cable company (Comcast or Charter), but over time these markets have evolved into very stable ones with small incremental share gains and losses amongst the players in the market.  Overall, we think WOW deserves to trade at a multiple largely in line with comps taking into account their superior network and that they are an “overbuilder”.

Where does WOW trade?  The initial range for the IPO was $20-22/share which would have valued the company at a mid 9s multiple.  At the $17 IPO price, this was discounted to a mid 8s multiple (the very low end of the comps). After two weak quarters and a CEO change, the stock cratered to $10 (7.0x and my original entry price J).  And then after a reset on guidance for 2018 so that the new CEO can make a few necessary investments in customer care and sales and marketing we are now at $6.90 equating to 6.75x EBITDA.

We think this is an anomalous valuation for a cable asset and a result of a classic severely broken IPO.  We think at the lower end of the comp range the equity is worth around $15/share and at the high end of the range ~$30/share.

We really like the new CEO and think she brings the exact right perspective and energy to the company.  This is not a broken asset, it is simply one that requires some new energy.

I would note that insiders have bought stock recently and at today’s price you are investing well below the 2015 price where Crestview invested (led by cable industry veteran Jeff Marcus).  Cable industry valuations have only increased since the Crestview investment, while we are getting WOW at a discount today. A final indicator on valuation: WOW has historically carried debt on its balance sheet in excess of where the whole company trades today.  In other words the credit markets have historically underwritten debt in excess of the current EV.

We think as the year plays out investors will discover the valuation disparity and by the 4th quarter the company will start seeing some tangible results from the investments being made in 2017.

If all else fails, there are enormous benefits to consolidation in this space and the math on selling the company anywhere close to the current price is a no brainer for strategic acquirers.

Catalyst

Results, Sale of the company