WideOpenWest, Inc. (WOW) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the WideOpenWest Market Sales Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Andrew Posen, Head of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today to review this morning -- this press release we issued this morning announcing the sale of certain markets. With me today is Teresa Elder, WOW!'s Chief Executive Officer; and John Rego, WOW!'s Chief Financial Officer. Before we get started, I would like to remind everyone that during our call, we will make some forward-looking statements about our expected operating results, the expected effects of the announced transaction, our business strategy and other matters relating to our business. These forward-looking statements are made in reliance on the safe harbor provisions of the federal securities laws and are subject to known and unknown risks uncertainties and other factors that may cause our actual operating results, financial position or performance to be materially different from those expressed or implied in our forward-looking statements. You are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update such forward-looking statements. For additional information concerning factors that could affect our financial results or cause actual results to differ materially from our forward-looking statements, please refer to our filings with the SEC, including the Risk Factors section of our 10-K filed with the SEC as well as the Forward-Looking Statements section of our press release announcing the transactions. In addition, please note that in today's call and in the press release we issued this morning, we may refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures may provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliation between GAAP and non-GAAP metrics for our historical reported results can be found in our earnings releases and our trending schedules, which can be found on our website. Now I'll turn the call over to WOW!'s Chief Executive Officer, Teresa Elder.

Thanks, Andrew, and welcome to everyone joining us. In addition to the press release, we're using a short presentation here on this webcast to complement our prepared remarks. This morning, we announced that we have reached agreements with Atlantic Broadband and Astound Broadband in 2 separate transactions to sell 5 service areas for gross proceeds of approximately $1.8 billion at an implied combined multiple of 11x adjusted EBITDA. It's worth noting that the gross proceeds from these 2 sales exceed our current market capitalization of approximately $1.6 billion as of yesterday's market close. These transactions continue what we have done over the company's history, strategically buying and selling markets in our business. The sale also highlights the tremendous value and attractiveness of our service areas and provides us with increased financial capacity and enhanced flexibility to expand our position as a trusted provider of fast, reliable and affordable broadband products and services, while also creating significant shareholder value. Here's a quick summary of the transaction. Atlantic Broadband, a subsidiary of Cogeco Communications, has agreed to acquire the Cleveland and Columbus Ohio service areas for $1.125 billion; and Astound Broadband, a subsidiary of Radiate HoldCo, a telecommunication holding company, has agreed to acquire WOW! Chicago, Evansville, Indiana, and Anne Arundel, Maryland service areas for $661 million. These transactions are a significant step towards strengthening WOW!'s balance sheet and supporting our future growth. We expect to use the transaction proceeds to reduce our debt and to further our broadband-first strategy for growth at a pivotal time in our industry. Specifically, we expect to invest in Edge-Out and focus on increasing penetration in our markets. We also expect to invest in new greenfield markets that leverage the strength of our IP fiber network. This is the strategy that enables us to expand into new markets not constrained by adjacency, so it opens up many opportunities for us. Our broadband-first strategy is working as reflected by the last 12-plus months of strong results and customer additions, and we are now seizing the opportunity to build on this momentum. We're also very confident that Atlantic Broadband and Astound Broadband will be good stewards for our operations across these markets. They share our employee and customer-centric culture and have the resources and steadfast commitment to providing customers with the same great quality of service our customers have come to expect from WOW!. They also both have strong cable and high-speed data networks and they view these markets as clear opportunities for growth and expansion. Importantly, our sale of these service areas to strong, customer-first operators is also in keeping with our brand promise to continuously provide our customers with fast, reliable and affordable broadband and video solutions. Before I turn the call over to John to go through more details of the transaction, I would like to emphasize how pleased we are today to announce these deals. These transactions reflect our commitment to improve our capital structure by lowering our leverage and create opportunities to accelerate our broadband-first strategy, both meaningful catalysts to driving shareholder value. And now I'll pass the call over to our CFO, John Rego.

Thanks, Teresa. The transactions we've announced this morning represent the culmination of a robust sales process that generated a significant amount of interest from multiple buyers. After a thorough review of the various alternatives, we felt that these 2 transactions presented the best cable and high-speed data networks for our customers in the respective markets as well as providing significant value to our shareholders. The value that we received reflects an 11x multiple on our trailing 12-month adjusted EBITDA through March 31, 2021, and assumes a proportionate reduction in corporate overhead over a 3-year period. Since I joined WOW! a little more than a year ago, we've said repeatedly that we are very focused on reducing our leverage and increasing our free cash flow. Today's transactions are a significant in achieving those objectives. At the end of the first quarter this year, we reported that we had organically lowered our leverage ratio to 5x. That was WOW!'s lowest level since our IPO in 2017. After closing these transactions, we expect our leverage ratio to be about 2.5x calculated off of a significantly lower level of net debt. I would also like to remind people that with the nearly $1 billion in NOLs, this is a very tax-efficient transaction. We'll file an 8-K until the transaction closes, including a pro forma financial statement. We expect to complete the transactions in the second half of this year subject to certain regulatory approvals and the satisfaction of other customary closing conditions. After closing, we plan on holding Analyst and Investor Day to outline our strategy and to provide an update on our financial model as well as our longer-term targets. Today, however, I'd like to highlight several key data points that underscore the significant value of the transactions we are announcing. After the transaction closes, we will continue to operate in 14 service areas in Alabama, Florida, Georgia, Michigan, South Carolina and Tennessee. Excluding the 5 service areas sold as of March 31, 2021, on a pro forma basis, we would have had 532,000 total subscribers and 506,000 high-speed data RGUs. The total number of homes passed would have been over 1.9 million, and our subscriber penetration rate would have increased to 29%, up from 26% before giving effect to the sale. Our financial model remains extremely robust after these sales are taken into account. In addition to increasing our overall penetration rate, our total revenue in high-speed data revenue would have been $731 million and $369 million, respectively, with growth rates remaining at approximately 1% and 10%, respectively. Again, for the 12 months ended March 31, 2021, our adjusted EBITDA would be $288 million with an adjusted EBITDA margin of 39%. We still expect the solid results of last quarter will carry over into our second quarter results, which we will report to you in early August. Demand for broadband remains high in our markets and beyond, and WOW! is extremely well positioned with the right people and the right strategy to continue capturing this exciting opportunity. And now we'll open up the call for some questions.

[Operator Instructions] Your first question comes from Frank Louthan from Raymond James.

Great. Congratulations on getting the deal done. I have a couple of questions on the pro forma EBITDA. So the trailing 12 months, $288 million, is that reflective of what we should expect going forward? Are there any stranded costs that you'll need to absorb some overhead and so forth that's not necessarily going away? That's my first question. And then the second question is sort of how should we think about the nature of your Edge-Out markets, where were -- what percentage of the Edge-Out markets that you were working on for the transaction are going with the new buyers versus how much of it we're in the markets that you're keeping?

I guess on the first question, Frank, that would be the EBITDA once we get through the corporate realignment. So just like when companies acquire other companies, they have the synergies, we have to pro forma get the corporate overhead to fit the new size of the business. So that will take a little bit of time.

And then I'll go ahead and dive in on the second half of your question, Frank. on Edge-Out, there are some Edge-Outs that are in some of the markets that we're selling. In addition, we have some very attractive Edge-Outs in markets that we're keeping. So we still have a great opportunity with ones we've already built. But I think the nature of this transaction really puts us on a great course to further our Edge-Out and our greenfield strategy in new locations as well.

Okay. So John, just to clarify, so will that $288 million be lower once you absorb more of that overhead? Or is that already kind of assuming the full impact of that?

That's assuming we absorb the overheads.

Your next question comes from Batya Levi from UBS.

Can you provide a little bit more color on how this transaction came together and the decision maybe to retain the remaining assets? On the -- if you could also talk about maybe the cost basis of these assets and how much of the $1 billion NOL remain after that? And I had a follow-up question.

So firstly, we've been talking for a while about the company's need really to delever a bit and the company was fairly highly levered, as you recall. In fact, when I joined a year ago, we were at 5.5x and organically, we got down to 5x as of March 31. But still, compared to our peer group, we were too highly levered. So we took that and also looked at a lot of the M&A that was happening in our space with multiples that were significantly higher than what was trading at. Company today trades at an 8.5x multiple, and we just sold markets at 11x multiple. A year ago, we were at 5.5x multiple. So it seemed to us that if conditions were right, we could sell off a small piece of the company, do a nice delevering and maybe start to realign everything. That was sort of the impetus of the transaction to look at what to sell or how to think about it. I mean, we're in 19 markets, predominantly in the Midwest and the Southeast. And we had to look at things geographically and consider what's left after we did it. And I think the stars were aligned here. So we were able to do this transaction, which leaves us with a nice sized company and massively delevered company when we're done. And I think, overall, it's a big win for the equity holders of the company.

And the NOLs?

Yes. So the NOLs going into this were close to $1 billion. And post this transaction, I know you understand Section 382 and all the other stuff that happens with NOLs, we'll still walk away from the post transaction actually with NOLs in excess of $200 million. So we still have a sizable NOLs. But because we can use a nice portion of the NOL that we do have that will enable us to keep most of the cash on the transaction.

Got it. And maybe just a final question on the remaining assets. The EBITDA you mentioned absorbing the corporate overheads. Are there any step-ups in other costs that we should also think about maybe on the programming side, given the new size of the company? And maybe the way you approach capital intensity of the remaining assets going forward?

Yes. So I'm not expecting any large step-up in programming costs. We will do an Analyst Day probably in fourth quarter. Once the deal closes, then we're going to reset to you all and everything will give you our multiyear target. But it's sort of a reimagining of the whole company. So we're going to fuel our growth and the growth, are sure of it the growth will be fueled by few things, like the data [indiscernible] right, in our commercial operations. And now we'll add greenfield opportunities to that. So we'll have a better plan to lay out for you in a couple of months that you were going to do that will get more clarity [indiscernible].

Your next question comes from James Ratcliffe from Evercore ISI.

Two, if I could. First of all, you -- it sounds like the NOLs will shield the bulk of any tax gains here. Are there any other costs we should be thinking of? Or will there be taxes? Or is the $1.786 billion pretty close to the actual cash you expect to receive? And secondly, just following up on capital intensity and the like. How do we think about the baseline capital intensity for the businesses you're keeping, say, as a percentage of revenue versus the footprint as it exists today before we start thinking about Edge-Out?

Yes. So to the first one, I think the NOLs will cover us to the tune about 88%, 89%. So we there will be some taxes to pay on this. The way NOLs work, there's limitations, state NOLs we would never would have gotten. But I think the lion's share of the money will stay with the company on the transaction, which is important. Because, again, we want to get our leverage down significantly and then have some dry powder if you will to fuel future growth. So that's the tax picture. And we'll give you more clarity on that probably on the [indiscernible] ultimately exactly how that plays out. We'll still be left with a fairly sizable NOL to go forward with, but we had a great opportunity to really use the NOLs for this transaction. So that's really helpful. The CapEx efficiency of the company, when we look at our sales versus other companies, our CapEx efficiency is always sort of an excess of 20%, we're obviously low 20%. So in sort of the transformation of the company, if we can get ourselves to a place more like our peer group, and [indiscernible].

Sorry, I lost you there at the end.