An open follow-up letter to $WOW's special committee

TL;DR: Below is a lightly edited version of a letter we sent the WideOpenWest (WOW) board and special committee earlier this week. This letter serves as a follow-up to our letter from early June, which detailed why we thought Crestview’s initial bid (which would have been perhaps the cheapest telecom deal in the past decade) was inadequate. You can read that letter here (as well as some additional background on telecom M&A here). (Disclosure: we’re long WOW and CHTR)

(Letter begins below):

Dear Special Committee of the WideOpenWest Board,

We are writing to follow up on our letter last month. In it, we detailed why we believed the Crestview / DigitalBridge initial $4.80/share offer for WOW was much too cheap. We believe the past two months have largely borne out our thesis that Crestview’s initial offer undervalued WOW. 

In particular, we would point to the performance of Charter’s stock. Since May 1^st (the unaffected date used in the Crestview offer) through market close on July 26^th, Charter’s stock is up 40%. Crestview’s $4.80/share offer represented a 32% premium to WOW’s unaffected price May 1^st, so Charter’s stock has actually outperformed WOW’s despite WOW having the “support” of a take private offer.

What has driven Charter’s share price? It’s tough to point to any one factor, but we would point to:

1. Competitive headwinds (fixed wireless, fiber overbuilds) seem to be slowing

2. Continued broadband ARPU growth

3. Fantastic wireless results

4. Relentless margin expansion

5. ACP roll off proving to be, at least, manageable

6. Declining interest rates

Importantly, all of these factors (except for wireless results) apply to WOW; in fact, we would argue many of them apply more to WOW than to Charter.

While we have focused on Charter due to its pure play cable nature and easily comparable stock price, note that in no way is Charter’s performance unique. We have seen similar operational results at Comcast and a variety of fiber players. Not to be left out of the party, just this month T-Mobile reaffirmed the strategic importance of fiber with a multibillion-dollar acquisition / JV (Metronet)².

As we mentioned in our first letter, we understand the logic of taking WOW private. As the only pure play cable overbuilder and with a market cap a fraction of their loose peers, WOW will likely never realize its full value in the public markets. However, it is imperative for the special committee to realize a full and fair price to take WOW private. The simple fact of the matter is that the initial Crestview bid comes nowhere close to meeting that bar; they must substantially raise their offer to better reflect fair value. Failing a substantial raise, we’d encourage WOW to turn the bid down and begin an aggressive capital return program.

We’d be happy to further discuss our views with the special committee or the committee’s advisors.

Sincerely,

Andrew P. Walker, CFA