CABO - Cable One

[Munger_Disciple]

Dilution due to the stock offering is a good deal for long term shareholders and a bad deal for buyers of this offering. It is as if LT shareholders sold a portion of their holding at a very high price in a tax-free manner to the buyers.

[wabuffo]

https://www.lightreading.com/services/cable-one-snaps-up-valuenet-fiber-/d/d-id/761647

 

Cable One has a deal to acquire KS-based ValueNet Fiber.  Terms not disclosed.  You kinda saw this coming with the recent secondary and the use of the proceeds to pay down of debt.  In effect, CABO issued maybe overvalued shares in a roundabout way to make this acquisition.

 

wabuffo

[ValueMaven]

CABO is now 5x the market cap of Graham Holdings.  What a successful spinoff. 

[chrispy]

A grand slam.  Interesting to read the first page of this thread and see people's thoughts. In hindsight the broadband transition is so obvious but I can understand the skepticism back then

[ValueMaven]

Agreed.  I have not studied Graham or CABO at all....so cant really comment.  Really interesting to do a post-hoc analysis on this.  Great case study

[wabuffo]

I think the initial thesis was that CABO was going to be gobbled up by a bigger cableco after the two-year waiting period after the spin for tax purposes expired.  But then CABO pivoted and began making tuck-in acquisitions using its balance sheet capacity.  It is one of the only larger public cablecos that is still following the old Malone TCI playbook. 

 

Even before the spin, CABO's mgmt was a big proponent of lessening the reliance on video (which CABO claimed was unprofitable for them) and focusing on broadband internet (more profitable, less capex-intensive) before the strategy became accepted across the industry.  In that way they were a bit ahead of the curve vs even CHTR which only recently began to abandon the "triple-play" bundle.

 

I've owned it since the spin.  unfortunately - I should've sold the GHC portion of the position and reinvested those sales proceeds in more CABO at the time.  GHC has been a disappointment though I've since stopped following it (after selling it a few years ago).

 

wabuffo

[dwy000]

It's a well managed company but always very expensive compared to the big guys in the industry.  And I really struggle with their pricing.  They have some of the highest broadband pricing despite covering some of the poorest regions of the country.  The big players continually criticize them because they are the company that is most likely to result in regulated pricing for the industry because of their aggressive actions.

 

Hard to see how much growth is left given how few tuck ins there are remaining in the country (especially close to their core market).  And I don't know how much price increase can possibly be left in the region. 

 

But congrats to people who have held it for the past few years.

[Munger_Disciple]

CABO is a very well managed company and yes they were the first cable company to smartly pivot away from video to focus on broadband. However I think their valuation is almost absurd compared to other well managed and larger cable companies like Charter, Comcast Cable and Altice. Charter & Altice have been buying back a huge amount of their stock over the past 3 years and Comcast said it would start buying back in 2021 after de-levering from their ill fated Sky purchase. Unlike their peers, CABO has been selling stock at prices well below the current price to fund acquisitions. This shows that CABO management also believes their stock is overvalued. Ironically the significant over-valuation makes a buyout of CABO by a larger cable company highly unlikely at this point. My guess is that CABO will underperform their peers going forward.

[wabuffo]

CABO continues its Malone-like cableco roll-up strategy....

 

https://ir.cableone.net/news-events/investor-news/news-details/2021/Cable-One-to-Acquire-Hargray-Communications/default.aspx

 

Cable One, Inc. (NYSE: CABO) (the “Company” or “Cable One”) today announced it has entered into a definitive agreement to acquire the equity interests in Hargray Acquisition Holdings, LLC (“Hargray”) that it does not already own. The equity interests to be acquired by Cable One represent approximately 85% of Hargray on a fully diluted basis. Cable One has been a minority investor in Hargray since October 1, 2020, when the Company contributed its system serving Anniston, Alabama and surrounding areas to Hargray in exchange for equity interests representing approximately 15% of Hargray on a fully diluted basis. The transaction, which implies a $2.2 billion total enterprise value for 100% of the equity interests of Hargray on a debt-free and cash-free basis

 

This is a fairly big deal for CABO. They are currently running at a level of ~$650m adj. EBITDA and this deal adds $173m or +26% more on a fully-realized synergy basis.(though there's probably an adjustment for the 15% they already own that I should make but don't know how).

Hargray generated approximately $128 million in Adjusted EBITDA on an annualized basis for the quarter ended December 31, 2020 (“4Q LQA”). Cable One expects to realize approximately $45 million in estimated annual run-rate synergies within three years of closing the transaction.

 

to be financed with cash on hand and debt.  Though they may issue some equity (makes sense to me - equity might be a bit overvalued)

 

Cable One intends to finance the transaction with a combination of existing cash resources, revolving credit facility capacity, and proceeds from new indebtedness and/or equity capital. Cable One has received $900 million of definitive bridge loan commitments from J.P. Morgan and Credit Suisse to finance a portion of the purchase price.

 

wabuffo

[Munger_Disciple]

CABO continues its Malone-like cableco roll-up strategy....

 

The transaction multiple of 12.7x after taking into synergies seems pretty rich. Cable One should issue as much stock as possible given their own inflated valuation. 

[wabuffo]

Cable One should issue as much stock as possible given their own inflated valuation.

 

I think they have a shelf-registration from May that is still open from which they can issue common stock.  I bet they do as part of this transaction.

 

wabuffo

[KJP]

CABO continues its Malone-like cableco roll-up strategy....

 

The transaction multiple of 12.7x after taking into synergies seems pretty rich. Cable One should issue as much stock as possible given their own inflated valuation.

 

I agree it does look expensive.  If you assume the full synergies and assume they lever the transaction at 4x EBITDA, the purchase would require $1.5 billion cash and $700 million debt.  Assuming 4.5% interest on the debt, that's $30 million in annual interest payments.  That would leave ~$140 million in pre-maintenance CapEx, pre-tax cash flow on $1.5 billion cash investment, which doesn't look great.

 

But to get the full picture of what they bought I think we need to know what the potential for edgeouts are in Hargray's footprint.  Altice has given some disclosure on the economics of their edgeouts, and they are quite good.  But I believe you can only get those economics if you own the cable system adjacent to the new build area and are truly "edging out," rather than building in a new geography from scratch.  So, at the risk of invoking a very overused word, Hargray may have some "platform" value that is not apparent from its trailing numbers.  Another possibility is that Hargray's current penetration is low, and it could be substantially increased a very high incremental economics with relatively modest CapEx investments.

 

EDIT:  Or, as has been suggested, the deal could be cover to issue some quite expensive (to the buyer) equity.

[wabuffo]

That would leave ~$140 million in pre-maintenance CapEx, pre-tax cash flow on $1.5 billion cash investment, which doesn't look great.

 

Don't they get some tax-shield benefits from the amortization of the acquisition goodwill?  If that number becomes an after-tax number, its a very good investment.  The last few years they provision for like $55m in income taxes but pay close to zero actual cash taxes.  I thought that was part of the Malone strategy - when you start to use up your tax shield, make an another acquisition.  The leverage and tax strategy works because the operating income and synergies are predictable and consistent.

 

wabuffo

[KJP]

That would leave ~$140 million in pre-maintenance CapEx, pre-tax cash flow on $1.5 billion cash investment, which doesn't look great.

 

Don't they get some tax-shield benefits from the amortization of the acquisition goodwill?  If that number becomes an after-tax number, its a very good investment.  The last few years they provision for like $55m in income taxes but pay close to zero actual cash taxes.  I thought that was part of the Malone strategy - when you start to use up your tax shield, make an another acquisition.  The leverage and tax strategy works because the operating income and synergies are predictable and consistent.

 

wabuffo

 

I think you are right about the tax shield from goodwill amortization.  So then the question is what is the sustaining/maintenance CapEx for the Hargray system?  CABO's trailing CapEx has been above 40% of EBITDA, but I don't think that's really sustaining CapEx.  Based on Altice (which split outs it newbuild and FTTH CapEx), perhaps it's 15%, our about $26 million per year.  That would be pre-tax (and by hypothesis, post-tax) cash flow at $115 million.  That would be an initial 7.5% (and presumably growing) yield on a $1.5 billion equity investment, and that may understate things if the "equity" used is stock trading at a significantly higher FCF yield. 

 

I was underwhelmed at first blush because those types of yields are much lower that what I estimated Altice was earning on its edgeouts and its recent purchase of Service Electric.  But those are much smaller capital investments that this deal.

 

Your point about the goodwill amortization tax shield also reminds me that Altice has essentially run out of tax shields (perhaps one reason it was pushing the Atlantic Broadband transaction) and, as things stand, Charter will become a "meaningful" federal cash taxpayer in 2022  (See Slide 15:  https://ir.charter.com/static-files/cbf52522-d911-4258-8ddf-6243cce5eb49)  Sounds like a recipe for more dealmaking.

[wabuffo]

Sounds like a recipe for more dealmaking.

 

Cox would be the big prize still out there.  I would expect all three (Comcast, Charter, Altice) would make a play for it if the family put up the for-sale sign.  Beyond that, you mentioned Atlantic Broadband.  Mediacom is supposedly for sale but may be asking too high a price.  Of course, even CABO might be swallowed up.

 

But yeah - it feels like 2022 might be the right time for another round of industry consolidation if the debt markets are still offering cheap financing.  The big 3 are run by deal junkies - they can't help it.

 

wabuffo

[wabuffo]

CABO is issuing some convertible notes.  No details on the equity conversion terms - but I guess CABO mgmt continues to think its equity is somewhat overvalued and is selling it indirectly to raise funds for acquisitions.

 

https://www.sec.gov/Archives/edgar/data/1632127/000095015721000257/ex99-1.htm

 

wabuffo

[vince]

At 1700 its actually starting to look reasonably attractive as they are approaching 1 billion in ebitda

[Munger_Disciple]

At 1700 its actually starting to look reasonably attractive as they are approaching 1 billion in ebitda

 

Charter & Altice are also down significantly (-10%) YTD.

[vince]

yes charter trading at roughly 130 billion with current earning power of 8-9 billion, not bad considering the defensive nature, growth outlook, low interest rates, and the relative valuation to indexes.  The real question is what will their after tax earning power be in 5 years?  you can also buy them for 110 billion thru lbrda which seems almost too good to be true considering the excellent returns of the last few years. Now that lbrda will be selling into charters buyback, they will realize roughly 2.5-3 billion of cash flow with which to buy their own equity.  Even after the tax leakage of 5.5% they can pick up MORE exposure to Charter (buybacks of lbrda) for 116 billion. it's very interesting to me that Malone is buying lbrda much more aggressively than lsxma despite the bigger discount at lsxma.  With an expensive market it seems to me that lbrda and lsxma (siri tracker at 30% discount) are excellent securities to offset the damage from an inevitable correction. Altice is CHEAP on a fcf basis, no question about it and they have an aligned owner that does massive buybacks.  the entity just scares me with their "bet the farm" tendencies, high debt load and much more competitive product within their footprint.  lastly, I picked some more comcast at 48 recently as they are going to be a big beneficiary when society normalizes and their product innovation has been spectacular increasing the odds that they will penetrate further into their broadband markets.  If their streaming product continues to grow at a robust rate, they will be the best performing cable stock over next 3-5 years, imo.  They probably would have been better off trying to acquire Discovery instead of Sky for their global ambitions, thats just a wild guess on my part but sweems logical to me

[Munger_Disciple]

 

Don't they get some tax-shield benefits from the amortization of the acquisition goodwill?  If that number becomes an after-tax number, its a very good investment.  The last few years they provision for like $55m in income taxes but pay close to zero actual cash taxes.  I thought that was part of the Malone strategy - when you start to use up your tax shield, make an another acquisition.  The leverage and tax strategy works because the operating income and synergies are predictable and consistent.

 

wabuffo

 

I just read the transcript of Q4 2020 CABO conference call with management. In it the CFO said the following about Hargray transaction synergies:

 

From the synergy standpoint, there's not a lot of tax benefit. There's a little bit of tax benefit. The majority of it really is both expense and revenue synergies.

 

So it is really 12.7 times (EBITDA + synergies) and no tax benefit.