B Riley media analyst Daniel Day raised his 12-month price target on WideOpenWest to $30 per share from $28, adding in a note to clients that the overbuilder’s decision to sell off some assets for about $1.8 billion will lead to more robust cash flow growth and better position it for continued network expansion.
WOW said Wednesday that it would sell systems in five markets -- Cleveland and Columbus Ohio; Anne Arundel, Maryland; Chicago; and Evansville, Indiana -- to Atlantic Broadband and Astound Broadband for $1.786 billion. The deal is expected to close in the second half of the year.
Day, who earlier in the week raised his target on WOW to $28 from $26 per share, said the deal warranted another price increase, based on new projections for cash flow growth. In his July 1 note, Day said that while his earlier price increase took potential asset sales into consideration, the size of the actual deal “was a surprise to us.”
WOW has said it will use the proceeds from the deals to reduce leverage from its current 5 times cash flow to about 2.5 times, as well as fund ongoing edge-out and greenfield expansion to its network.
WOW stock soared on news of the deal, rising as much as 17% ($3.09) to $21.34 per share on June 30, before closing at $20.71 each, up 13.5%. Shares were up about 1% in early trading July 1 to $20.92 each.
“In our view, yesterday's positive market reaction to the announcement was warranted, and we see continued upside for shares,” Day said in his July 1 note to clients. He based his new price target on the shares on revised 2022 cash flow estimates ($320 million versus his prior estimate of $288 million) and a boost in the assigned enterprise value/EBITDA multiple on the stock to 10.5 times from 10 times.
Day had pointed out in an earlier note the disparity between private and public valuations of cable, noting that the WOW deal is valued at about 11 times cash flow while the company’s public trading multiple is about 8 times. Other past private cable deals have been valued between 12- and 15- times cash flow, he noted.
WOW is expected to use its nearly $1 billion in Net Operating Loss carry-forwards to offset the tax hit on the sales -- Day estimated that net proceeds to the company would be about $1.4 to $1.5 billion.
Day also was encouraged by the increased penetration rates at the systems it will keep -- WOW estimated that after the deal, overall penetration of services will rise to 29% from 26%. That, according to Day, likely means that WOW is keeping properties where it is more “incumbent-like” instead of an overbuilder, which should also lead to further multiple expansion.
“By pursuing edge-out and expansion strategies in markets that have higher expected penetration rates, WOW lowers the capex associated with each new inorganic subscriber added,” Day wrote.
As a result, Day is lowering his capex estimates for 2022 to $155 million from $225 million.
Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.
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