Just when it seemed there were no sizable US cable deals to be had, there were.
WideOpenWest (WOW) announced today it has inked two separate deals to sell off a handful of cable systems for a combined $1.8 billion. Two WOW markets – serving Cleveland and Columbus, Ohio – are going to Atlantic Broadband, the US subsidiary of Cogeco, for $1.12 billion. Astound Broadband (a company comprised of RCN, Grande Communications, Wave Broadband and enTouch Systems) will snare WOW's Chicago; Evansville, Indiana; and Anne Arundel, Maryland, service areas for $661 million.
WOW appears to be getting in while the market for cable operators and broadband infrastructure is hot amid a dearth of significant M&A opportunities. WOW said the deals reflect an implied multiple of 11x adjusted EBITDA for the service areas being divested. WOW will continue to own and operate its remaining 14 service areas after these two transactions, and has made no outward indication that it might try to place any of those remaining systems on the block sometime down the road.
"Given shares currently trade around 8.0x EV/EBITDA, we believe the transactions highlight the share price discount to the private market value of the assets and expect the market to react positively to the announcement," B. Riley Securities said in a research note that also reiterated a "Buy" rating on the stock. WOW shares jumped $2.01 (11.03%), to $20.26 each in Wednesday morning trading.
Deals cut debt, support pursuit of more "edge-outs" and greenfield builds
WOW reasoned that the two sales will enable the company to cut debt and put it in position to pursue further "edge-outs" (network builds into areas that are adjacent to existing networks), continue expanding into greenfield areas and explore additional commercial services opportunities. With respect to debt-cutting, WOW estimates that its leverage ratio will be two-and-a-half times at closing, compared to five times as of March 31, 2021.
The competitive cable operator added that the move will also support an ongoing "broadband-first" strategy that focuses on high-margin high-speed Internet services and de-emphasizes pay-TV. WOW, whose video penetration fell to 8.9% at the end of Q1 2021, has previously indicated the company expects to lose more than half its pay-TV subscriber base in the next three years or so.
WOW said it will continue to own and operate its remaining 14 service areas in parts of Alabama, Florida, Georgia, Michigan, South Carolina and Tennessee when the transactions close sometime in the second half of 2021.
It's not yet clear how the deals specifically will impact WOW's employee base in the areas being sold. WOW said it expects some employees from each of the sold markets to remain with WOW, with a portion of them to be integrated into Atlantic Broadband and Astound Broadband or possibly leave the business.
Will more cable M&A enter play?
The value of WOW's pair of deals could set the ball in motion for further US cable consolidation among small and midsized operators, or open the door for M&A opportunities that have been somewhat lacking, or at least inconsistent.
Cogeco, the Canada-based parent of US-focused Atlantic Broadband, spurned Altice USA's plan to acquire Cogeco and then sell Cogeco's Canadian properties to Rogers Communications.
Meanwhile, Astound Broadband, a beneficiary of one of the WOW deals announced today, is coming off a deal in which it was acquired by private equity company Stonepeak Infrastructure Partners for $8.1 billion.
- Cable One must become an 'acquisition machine' – analyst
- WideOpenWest's pay-TV penetration falls to 8.9%
- Altice USA gives up on Cogeco
- Private equity firm snaps up Astound Broadband for $8.1B
- Altice USA gives up on Cogeco
- WOW expects to lose more than half its pay-TV base
— Jeff Baumgartner, Senior Editor, Light Reading