WideOpenWest chief financial officer John Rego said the company had been looking for some time to sell off some assets to take down leverage, adding that the deal unveiled Wednesday with Astound Broadband and Atlantic Broadband represented an opportunity to take down that leverage quickly, and give the company more breathing room to execute its strategy.
Rego, who joined WOW last year from Telaria Inc., said on a conference call to discuss the sale of systems in five markets Wednesday that the company’s leverage ratio was at about 5.5 times forward-looking cash flow in 2020. While leverage was reduced to about 5 times by March 31 of this year, he still believed it was too high.
“Compared to our peer group, we were too highly levered,” Rego said on the call, adding that at the same time deal multiples were rising above the public market trading level for WOW stock. WOW stock was trading at about 8 times cash flow prior to the deal announcement. It valued the June 30 sale at about 11 times cash flow.
“It seemed to us if conditions were right, we could sell off a piece of the company and do a nice deleveraging...The stars were aligned here,” he said on the call.
Rego added that due to WOW’s hefty Net Operating Loss carry-forwards -- about $1 billion worth -- the company won’t have to take a large tax hit on the sales. He estimated that NOLs will cover about 88% or 89% of the taxes associated with the deal. In addition, WOW will retain more than $200 million of its NOLs after the deal is closed.
WOW CEO Teresa Elder said that some of the proceeds from the sale will be used to continue edge-out and greenfield expansion programs for its network. While some of the company’s current edge-out efforts were located in the markets it is selling, she said on the call that there remains ample opportunity to expand the network.
WOW has said all along that it is focusing on building out and improving its network, and at the Credit Suisse Virtual Communications conference earlier this month noted that the goal is to move all of its services onto its IP network, which he said at the time could be completed in a couple of years. Investors should get more insight into the company’s strategy at its upcoming Investor Day, expected in the fourth quarter.
WOW said that after the deal closes it will provide service in 14 markets with about 532,000 total customers and 502,000 data subscribers. While WOW did not release details on how many subscribers were involved in the sales, Atlantic Broadband parent Cogeco said in a separate release that the Columbus and Cleveland systems had 196,000 internet, 61,000 video and 35,000 telephony customers as of March 31. In its own press release, Astound Broadband said the WOW Chicago, Anne Arundel and Evansville systems had about 128,000 residential and business customers. WOW also said that after the deal closes, its total service penetration rate will rise to 29% from 26% previously.
In a research note, B Riley Securities analyst Daniel Day estimated the sale price works out to about $5,616 per broadband subscriber, higher than the company’s current valuation of $4,500 per broadband customers.
Day wrote the sale could serve as a catalyst for other stocks in the sector, adding that if WOW’s current 8-times trading multiple were increased to 11 times -- the value of the sale -- its stock would be trading at between $33 and $34 per share. Day had raised his 12-month price target on WOW to $28 per share on June 23.
WOW stock rose as much as 17% ($3.09 each) in early trading Wednesday to $21.34 each. The stock was priced at $19.42 each (up 9%) at 1:42 p.m.
