While some analysts saw Cable One’s pending $735 million all-cash acquisition of NewWave Communications as a slight snub to its hefty stock price, investors apparently felt differently, driving shares up more than 3% on Wednesday, the day the deal was announced.
Cable One was the top performing distribution stock in 2016, topping $600 per share and rising more than 40% on what many analysts believed was sentiment that it would soon become an acquisition target of either Charter Communications, Altice USA or any number of private equity groups. But some saw the stock as overvalued – it is trading at an 11 times multiple of cash flow, or about 40% higher than the largest cable operator in the country, Comcast with about 22 million subscribers.
While the stock has slipped a bit in the New Year – Cable One shares were down 7% ($43.26 each) between Dec. 30 and Jan. 17 – news of the NewWave deal drove shares as high as $598.67 each in earlier trading Wednesday, up about 3.5%. The shares closed at $597.09 each, up 3.2%, or $18.62 per share.
News of the NewWave purchase surprised some analysts, who expected Cable One to be a seller, not a buyer. And though the operator could still sell out in the future, the NewWave deal does provide some opportunity.
Cable One has embarked on a “broadband-centric” strategy over the past few years, focusing on broadband customer growth instead of video subscriber gains. That was evident in its proxy statement prior to going public in 2015, when it said it saw no future in the video business, and in past moves to drop major programming networks like Viacom in 2014.
In a blog published shortly after the deal was announced, MoffettNathanson principal and senior analyst Craig Moffett, who has been critical of Cable One’s valuation in the past, said perhaps the most surprising aspect of the NewWave deal isn’t the price – high at about 11.7 times cash flow – but that it is all in cash. That would seem to hint that NewWave owner, Chicago-based private equity group GTCR, isn’t so confident that Cable One will be able to maintain its lofty public valuation.
But Moffett added that NewWave’s strategy doesn’t seem that far from Cable One’s. The smaller operator has similar video penetration – 24% vs. 20% for Cable One -- and broadband penetration at NewWave is lower – 26.1% vs. 30.8% – suggesting there may be room for growth.
“Much of the value here can therefore be assumed in raising penetration (and, no doubt, prices),” Moffett wrote.
Seller’s skittishness over high stock valuations isn’t new. When Cablevision Systems agreed to sell to Altice N.V. in 2015, it insisted on taking cash instead of the European telecom company’s shares, which were priced at about $24 each at the time. That proved to be a very smart move – Altice’s stock plunged on the Amsterdam Exchange market over that year, losing about 40% of its value between the September 2015 announcement and the June 2016 closing of the Cablevision deal.