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Entries by Adam Brissette (117)

Friday
Sep182015
DateFriday, September 18, 2015 at 5:40PM

Altice Pays $17.7b for Cablevision, Doubles Down on U.S. Cable

French telecom firm Altice announced on Thursday, September 17th that it had agreed to acquire Cablevision Systems Corporation (NYSE:CVC) at a headline price of $17.7b, or $34.90 per share.  The deal comes on the heels of Altice’s May purchase of Suddenlink for $9.1b, which marked its entrance into the U.S. cable market.  The combination of Suddenlink and Cablevision represents the 4th largest cable operator in the U.S. and continues the trend of large-scale M&A amongst U.S. cable operators.

Valuation Analysis and Deal Metrics

Transaction Facts

  • BC Partners and CPP Investment Board, from which Altice acquired its 70 percent stake in Suddenlink,  have an option to participate for up to 30 percent of the equity of Cablevision
  • $900m in annual synergies anticipated  
  • Expected close 3Q16-4Q16

Strategic Considerations

  • Provides greater scale to realize cost synergies across Suddenlink and Cablevision
  • 65 percent take rate of triple play services drives industry-leading ARPU of $155
  • Highly competitive network that is 100 percent digital, offering triple play--video, broadband and VoIP—throughout service area

JSICA’s Take

After Altice scooped up Suddenlink in May, we indicated that more U.S. cable deals were on the horizon for the acquisitive French telecom giant.  Cablevision, an oft-rumored takeover target in recent years, was a logical target.  At multiples of 2.8x trailing revenue and 6.9x pro forma EBITDA, Cablevision was less expensive than Suddenlink (3.9x revenue/8.1 pro forma EBITDA)—the discount largely attributable to Cablevision’s inability to deliver meaningful revenue and EBITDA growth over the past five years.

Existing high penetration rates and strong in footprint competition from Verizon will make it challenging for Altice to accelerate Cablevision’s top line growth, but founder Patrick Drahi is confident that between network modernization, the streamlining of operations and consolidation of management, there is ample room for cost savings--$900m worth to be exact.

The deal marks continued consolidation of U.S. cable/broadband providers in 2015, particularly amongst mid-sized operators.  Deal multiples averaging a lofty 3.6x revenue and 8.0x pro forma cash flow could entice the remaining regional/mid=sized cablecos to sell.  And with Altice looking to increase its overall revenue mix to 50 percent from its U.S. operations, there is at least one motivated buyer in the market. 

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Wednesday
Jun032015
DateWednesday, June 3, 2015 at 10:12PM

Altice Enters U.S. Cable Market with Suddenlink Deal

French telecom firm Altice announced on Monday, May 20th that it had agreed to buy a 70 percent stake of Suddenlink Communications valuing the company at $9.1b.  The deal marks the first purchase of a U.S. based cable property for the acquisitive Altice, a move spearheaded by founder and cable veteran Patrick Drahi.  Through the deal, Altice acquires a controlling stake in the seventh largest cable provider in the U.S. with operations largely concentrated in the south and midwest.

Valuation Analysis and Deal Metrics

Transaction Facts

  • Altice to acquire 70 percent stake of Suddenlink from BC Partners, CPP Investment Board and Suddenlink management valuing the company at $9.1b 
  • Existing shareholders retain 30 percent ownership (had acquired Suddenlink for $6.6b in 2012)
  • Deal financed with $5.10b in existing debt, $1.76b in new debt issued, a $500k vendor loan from BC Partners and CPP Investment Board and $1.2b in cash from Altice
  • $215m in annual synergies anticipated  
  • Total leverage including full synergies of 6.1x 2014 EBITDA
  • Expected close 4Q15

Strategic Considerations

  • Grants Altice entry into the U.S. cable market, laying the groundwork for future cable acquisitions and increased scale in the states   
  • Enhances geographic diversity of Altice’s revenue mix: France 64%; Portugal 14%; US 12%; Israel 5% and Other 5%
  • Balanced customer and revenue mix with 1.13m cable, 1.25m broadband and 600k telephone subs
  • Investments in fiber network over last several years provides Suddenlink with strong in-footprint competitive positioning to improve penetration, reduce churn and increase bundling

JSICA’s Take

Altice’s deal for Suddenlink continues the strong momentum of large-scale M&A in the U.S. cable market.  At 3.9x revenue and 10.0x trailing OIBDA, Altice appears to have paid a good premium for its entrance into the U.S. cable scene.  While Altice touts the potential for synergies at Suddenlink, its lack of existing network infrastructure and staff in the U.S. will make realizing these cost savings more difficult.  Drahi has been vocal that Altice is on the hunt for bigger deals in the U.S. that would grant it the scale to deliver meaningful cost savings.  Charter’s take out of Time Warner may have erased one target off of Altice’s wish list, but we do not expect Altice to be away from the deal table for long.  Cablevision and Verizon’s wireline ops have been rumored to be in the French telecom’s scope.  

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Tuesday
Sep162014
DateTuesday, September 16, 2014 at 8:37AM

Consolidated/Enventis Merger a Strategic Fit

The Deal

On June 30, 2014, Mattoon, IL-based Consolidated Communications announced it would merge with fellow publicly-traded ILEC, Minnesota-based Enventis (formerly HickoryTech) in an all-stock transaction valued at $350 million.  At the deal’s targeted close in 4Q14, Enventis shareholders will receive 0.7402 shares of Consolidated stock for each Enventis share—an implied value of $16.50 on announce date.  

During the past year, Consolidated CEO Bob Currey had indicated on earnings calls that CNSL would be open to deals if a property with right mix of assets hit the market.  Behind the scenes, Consolidated already had its sights set on Enventis. 

According to the proxy statement filed with the SEC, Currey and Enventis CEO, John Finke began discussing a possible transaction in June 2013, a year before the merger’s eventual announcement.  Consolidated’s initial merger proposal--offered on June 29, 2013--valued Enventis shares at $12.50, approximately 25 percent below the announced deal price.  The parties engaged in talks on-and-off over the next year negotiating terms—fixed vs. floating share exchange rates, number of board seats (Enventis wanted 2, got 1), and termination fees ($8.5m) among others. 

Strategic Considerations

Strategically, the merger makes sense as both companies have employed similar growth strategies over the last several years, focusing on enterprise-centric, broadband services.  Consolidated acquired SureWest in 2012, picking up FTTH-based networks in Kansas City and California.  HickoryTech, which officially changed its name to Enventis in April, acquired network provider Enventis Telecom in 2005 and added Fargo, ND-based IdeaOne in 2012 further expanding its fiber network.  Although the companies do not have contiguous footprints, their operations are both largely centered in the Midwest. 

The proxy statement indicates that Enventis’s management and board considered other strategic alternatives, but determined a merger with Consolidated was in the best interest of its shareholders.  In the board’s estimation, Consolidated was the most strategic acquirer and that Enventis was unlikely to fetch a higher price through an auction due to the limited number of strategic buyers and the lack of synergies present for financial buyers.

Financial Highlights

The deal values Enventis at implied multiples of 1.9x trailing revenue, 7.3x trailing OIBDA and 5.6x pro forma OIBDA factoring in $14m in annual operating synergies.  By comparison, Consolidated paid just 6.3x trailing and 4.8x pro forma cash flow for Surewest, indicating that the market for wireline telecom has stabilized during the past few years.

Structuring the deal as an all-stock merger allows Consolidated to delever its balance sheet. Factoring in synergies, Consolidated’s debt to OIBDA ratio will decline from 4.3x to 3.9x.  Additionally, the all-stock transaction frees up cash to invest in success-based capital projects including near-net opportunities on Enventis’s 4,200 mile fiber network.

Closing Thoughts

While Consolidated touts the organic growth opportunities granted by the merger, the truth is that delivering meaningful organic growth is difficult, and M&A remains the primary driver of growth for wireline telecom providers.  Consolidated has grown revenue from $349m in 2011 to $601m in 2013, but pro forma the SureWest acquisition, its revenue has actually declined year over year since 2011.  With shareholder pressure to maintain dividends and to keep stock prices elevated, another year of limited top-line growth is a difficult narrative to sell—M&A tends to offer a more compelling story.  Now the ball is in Consolidated’s court to translate the Enventis merger into value for its shareholders.

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Monday
Jun162014
DateMonday, June 16, 2014 at 5:43PM

Level 3 Deepens Metro Presence with tw telecom Acquisition

The Deal

On June 16th, long-haul Internet giant Level 3 Communications Inc. announced its acquisition of leading business Ethernet provider TW Telecom for approximately $7.6 billion.  Under terms of the deal, tw telecom stockholders will receive $10 cash and 0.7 shares of Level 3 common stock for each tw telecom share owned at the deal’s close; a value of approximately $40.86 per share based on the market close as of June 13, 2014.  Level 3 will also assume tw telecom’s outstanding debt which was approximately $1.9b as of March 31, 2014.

Strategic Considerations

The tw telecom acquisition nearly doubles Level 3’s metro fiber footprint in the U.S., adding a fiber network with 23,000 metropolitan route miles and 20,255 POPs across 75 U.S. metropolitan markets.  The combined network will span 50,000 metropolitan route miles in North America and 213,000 total fiber route miles globally. 

The metro focus of tw telecom’s network and its connections to thousands of businesses will enable Level 3 to keep more of its enterprise metro traffic on-network, leading to significant network cost savings.  Management anticipates $200m in annualized cost synergies, 55 percent of which is related to network expense savings.  Level 3 also anticipates approximately $40m in annualized capital expenditure savings generated from the deal.

Financial Highlights

Level 3 paid approximately 4.8x trailing revenue and 13.8x trailing OIBDA for tw telecom—a premium of 12 percent to where the public market was trading shares of TWTC.  Considering the anticipated $200m in annualized synergies, the deal’s pro forma OIBDA multiple to 10.1x.  Management expects that it will begin to realize $140m in annual cost savings within 18 months of the transactions close, with the balance of the synergies to come in subsequent years.  Level 3 expects to incur roughly $170m in integration costs associated with the transaction.

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Monday
Apr302012
DateMonday, April 30, 2012 at 10:01AM

Knology Rumors Now a Reality, Acquired by WOW! for $1.5b

Avista Capital-backed WOW! Pays 2.9x Revenue in Deal

After six months of a relatively quiet cable M&A market, WideOpenWest, LLC (WOW!) broke the silence with its $1.5 billion acquisition of Georgia-based Knology last week. It was just a year ago that the Denver-based WOW! was considered one of the front runners to land Insight Communications when it was on the block, but Time Warner swooped in to acquire Insight at the last minute. This time around, WOW! sealed the deal—agreeing to acquire all outstanding shares of Knology for $19.75 a piece, in one of the largest cable deals of the past few years.

The cash portion of the deal comes to around $750.3m, which combined with Knology’s $744.6m in outstanding debt leads to the announced transaction value of approximately $1.5b. WOW!’s press release indicates that the deal was structured as a merger agreement under which a subsidiary of WOW! will acquire Knology for cash.

Through the deal, WOW! acquires Knology’s customer base which is located primarily in the Southeastern U.S. In addition to its operations in Florida, Georgia, Tennessee and South Carolina, Knology also has smaller service areas in Minnesota and Iowa. Knology’s customers account for over 794k voice, video and broadband connections. The acquisition largely expands WOW!’s service footprint, which is currently contained largely to the Midwest.  WOW!’s networks pass 1.6m households in Illinois, Indiana, Ohio and Michigan. Post-close, the combined companies will serve approximately 800k broadband, television and voice customers.

While Knology is widely viewed as a cable operator, both telephone and Internet subs actually account for larger portions of its service mix than television subs (on a connection basis).  Its business model is largely built around bundling; with over 80% of its customers opting for two or more services.  The similarity of penetration levels for Knology’s various service offerings further bears out its emphasis on bundling. As of December 31, penetration for video, broadband and telephone at Knology was 23.6%, 24.1% and 25.4%, respectively.  WOW! also pushes triple play packages in its Midwest service areas, offering deep discounts for customers selecting multiple services, making Knology a logical acquisition target.

Although WOW! announced the acquisition on April 18, rumors of a Knology deal had been floated as early as February. A Wall Street Journal report on February 28 indicated that Knology had put itself on the block, and a Dow Jones story a month later identified WOW! and its private equity backers Avista Capital as the most likely buyers for the cableco.

Given the public nature of Knology’s vetting, WOW! paid a premium of just 7% compared to Knology’s recent trading high of $18.51. Wall Street factored a takeover bid into Knology’s price when acquisition rumors first surfaced, as Knology’s stock price jumped 10.5% on the day of the WSJ’s initial report. The $19.75 price per share paid by WOW! however represents a more sizable 34% premium compared to Knology’s average share price in the three months prior to the deal rumors being made public.

Turning to transaction multiples, WOW! paid 2.9x revenue and 8.4x trailing cash flow for Knology--levels in line with the bigger cable deals we observed in 2011, but slightly above recent overall cable averages. Time Warner paid similar price tags of 2.8x revenue and 9.4x trailing OIBDA for Insight and 2.8x revenue for systems it acquired from NewWave in 2011. Last year however, cable M&A was largely characterized by smaller “tuck-in” and “edge-out” acquisitions, and the average observed deal multiples were down around 1.9x revenue and 8x cash flow.

At $1,887 per connection, WOW! paid less per connection for Knology than Time Warner paid for Insight ($1,981/conn) and NewWave ($2,000). Though, given the differing service mixes offered by the acquired entities, connection multiples are not always direct comparisons. Knology’s average revenue per connection was also lower compared to Insight and NewWave, which is logical given its emphasis on bundling at discount prices.

WOW! has not yet indicated the synergies it expects to gain with its purchase of Knology, leaving us without a clear pro forma cash flow multiple for the deal. According to Knology’s 2011 annual report, the company maintains around $598k in usable state and federal net operating loss carryforwards which WOW! can utilize, however this amount is relatively immaterial compared to Knology’s $1.5b price tag.

With Knology off the block, there still remains at least one sizable cable deal on the table. Wave Broadband—which along with WOW! acquired the bankrupted Broadstripe’s cable assets in 2011—is reportedly shopping itself to multiple private equity firms, eyeing a bid in the $1b range. Avista Capital is at least one private equity firm investing heavily in cable in this market--we should find out soon if others are going to follow suit.

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