Wildcat Urges Stockholders to Vote AGAINST
Proposed Transaction Which it Believes Greatly Undervalues
Consolidated Communications
Wildcat Continues to Support Company's Strategy
to Generate Significant Returns as a Standalone Public Entity
NEW
YORK, Nov. 3, 2023 /PRNewswire/ -- Wildcat
Capital Management, LLC (together with its affiliates, "Wildcat"),
which beneficially owns approximately three million shares of
Consolidated Communications Holdings, Inc. ("CNSL" or the
"Company") (NASDAQ:CNSL), today issued an open letter to CNSL's
Board of Directors opposing the Company's proposed transaction with
affiliates of Searchlight Capital Partners, L.P. and British
Columbia Investment Management Corporation, announced on
October 16, 2023.
Wildcat, the Company's fifth1-largest independent
stockholder, said in its letter that it believes the takeover offer
severely undervalues CNSL's equity. Based on its own analysis,
Wildcat believes CNSL merits an enterprise value of approximately
$4 billion, representing nearly a 30%
premium to the $3.1 billion
enterprise value implied by the proposed transaction at
$4.70 per share. Wildcat continues to
believe in the strategic value of the assets assembled by CNSL and
the Company's strong potential as a standalone entity, and called
for CNSL to terminate the agreement if a higher price cannot be
negotiated.
Wildcat intends to vote its shares against the proposed
transaction and strongly encourages CNSL's stockholders to do the
same.
Wildcat's first letter to the Company, dated July 12, 2023, which argued CNSL should continue
to pursue its strategic plan and not accept an offer that
undervalued the Company, can be found at the link here.
A full copy of its latest letter is below:
Consolidated Communications Holdings, Inc.
2116 South 17th Street
Mattoon, Illinois 61938
Attention: Board of Directors
November 3,
2023
Dear Members of the Board:
Wildcat Capital Management, LLC (together with its affiliated
investment vehicles, "Wildcat," "we" or "our") is a long-term,
patient investor and we think about sustainable equity value
creation on a greater than five-year timeline. We have been
investors in Consolidated Communications Holdings, Inc. ("CNSL" or
the "Company") since June 2021 and
currently own more than three million shares of CNSL, which we
believe, based on public filings, makes us the Company's
fifth2-largest independent stockholder. We strongly
believe in the strategic value of the assets assembled by CNSL and
management's vision for installing fiber to provide the best
broadband connectivity to its served communities while generating
attractive returns on capital.
At Wildcat, we are not activist investors, and we would prefer
to not have to make a public statement regarding our investment in
CNSL. However, we are fiduciaries on behalf of our investors
and when the take-private transaction of a public company we have
been invested in for more than two years was announced at a price
that we do not feel represents its fair value, we reluctantly felt
compelled to issue a public statement. We strongly believe
that the proposed acquisition announced on October 16, 2023 (the "Proposed Transaction") at
a price of $4.70 per share by
affiliates of Searchlight Capital Partners, L.P. ("Searchlight")
and British Columbia Investment Management Corporation ("BCI")
dramatically undervalues the Company's equity, and that the views
of minority investors have not been sufficiently taken into account
in the sale process. For those reasons, we intend
to vote our shares against the Proposed Transaction and encourage
other stockholders to do the same. If CNSL cannot negotiate a
higher price, we believe CNSL should terminate the sale process as
it would remain an attractive investment opportunity as a public
company.
Intrinsic Enterprise Value is Nearly 30% Above Proposed
Transaction Valuation
As stated in Wildcat's July 12,
2023 open letter (the "July Letter") to the Special
Committee of CNSL's Board, we believe, based on the Company's asset
value and certain transactional comparisons, that CNSL is worth
significantly more than the approximately $3.1 billion enterprise value implied by the
Proposed Transaction at $4.70 per
share. Our analysis presented in the July Letter supported an
enterprise value of approximately $4
billion, representing nearly a 30% premium to the current
Proposed Transaction valuation.
As we cautioned in our July Letter, the Company's current EBITDA
generation does not reflect the estimated $733 million invested in CNSL's fiber upgrade
project since 2021.3 Importantly, there is a significant
lag between the initial capital expenditure and meaningful EBITDA
generation from the investment in bringing fiber to consumers. As a
comparable industry data point, Frontier Communications Parent,
Inc.'s ("Frontier Communications") first quarter 2023 earnings
presentation highlights that its fiber builds between 2020 and 2022
contributed just $10 million of
EBITDA on a LTM basis, against direct build capital expenditure of
approximately $1.6
billion.4 Similarly, we believe CNSL's fiber
upgrade is currently contributing even less EBITDA (perhaps even
negative EBITDA) against its investment due to its less mature
go-to-market processes and lower penetration statistics. As such,
we believe it is misguided to value CNSL on an enterprise value to
LTM EBITDA basis until the fiber investments reach mature
penetration levels.
As management stated on the second quarter 2023 earnings call,
EBITDA and margins are expected to improve beginning in the second
half of 2023.5 Accounting for the maturation of just
the current fiber passings already built to 40% penetration and the
actions taken by the Company in July
2023 to drive $30 million in
annualized cost savings, we believe CNSL's normalized EBITDA should
be approximately $520 million, or
~70% higher than its run-rate in the second quarter of 2023. At
a purchase price of $4.70 per share,
CNSL is valued at approximately six times normalized
EBITDA.6 Mature fiber and cable assets have historically
been acquired by strategic or financial sponsors at implied
valuations of between 10 to 15 times EBITDA.7 We believe
that the vast majority of CNSL's normalized EBITDA is residential
fiber-to-the-home or commercial fiber, not legacy voice.
CNSL's New Fiber Passings Forecast Does Not Justify Proposed
Valuation
The incremental passings forecast presented under the "Revised
Standalone FTTP Build Plan" on page 5 of CNSL's October 16th presentation on the Proposed
Transaction does not persuade us that the $4.70 per share consideration is an attractive
valuation.8 We believe this scenario is presented to
illustrate an overly conservative view of how many fiber passings
CNSL could build if it were to become liquidity constrained,
ignoring the full benefits of access to its revolver and at least
$230 million of construction work in
progress and current construction inventory.9
Additionally, on August 8, 2023,
management stated that CNSL will receive $73
million of gross cash proceeds from the divestiture of its
Washington state
assets10 and, as we noted in our July Letter, we believe
CNSL may be eligible to receive between $200 and $450
million from the federal $42.5
billion Broadband Equity, Access and Deployment (BEAD)
program. As a result, we believe there will be additional liquidity
(and potentially a significant amount of additional liquidity) to
build new fiber passings on top of the operating cash flow that
CNSL will generate. Furthermore, if CNSL is expecting to have
issues meeting its maintenance covenants on its revolver (which
only limit the use of the revolver, not its term loan), we believe
that CNSL could approach its revolver lenders and negotiate a
maintenance covenant amendment for a reasonable fee.
In the last resort, even if CNSL found itself in a liquidity
constrained situation in the short term, we believe the maturation
of already built fiber passings will result in meaningful EBITDA
growth over the next several years (as discussed in the preceding
section) without building a single new fiber passing. With growing
EBITDA and significant free cash flow generation before capital
expenditures, we believe CNSL will naturally delever and generate
cash organically to invest in new fiber passings.
Recent Financing Market Developments Support Higher
Enterprise Value
Since our July Letter, the debt markets for mature fiber assets
have become materially more attractive, as Frontier Communications'
asset backed securitization ("ABS") transaction demonstrates,
mature fiber assets can be levered to approximately 8.5 times
annualized run rate revenue (an EBITDA proxy) at approximately 8.5%
cost of debt.11 In our view, the Company should be able
to take advantage of attractive terms in the ABS market within the
next few years. Frontier Communications' ABS transaction values its
fiber passings at $3,400 per passing
on debt alone.12 Valuing CNSL's existing fiber passings
at the same valuation per passing implies an enterprise value of
approximately $3.8 billion and a
$10.70 per share valuation, which
is well in excess of the proposed $4.70 per share consideration under the Proposed
Transaction.
Conclusion
We reiterate our strong opposition to the Proposed Transaction
at $4.70 per share and intend to
vote our shares against its approval. We strongly suggest
other stockholders take the above rationale into consideration and
vote against the Proposed Transaction as well.
Sincerely,
Tom McConnon
Managing Director, Head of Public Equities
Wildcat Capital Management, LLC
EXHIBIT A
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CNSL: Normalized
EBITDA
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Q2'23
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Change
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Normalized
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Note
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Fiber
Passings
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1,119,956
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-
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1,119,956
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8/8/23 CNSL 8K, as of
6/30/23
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Fiber
Subscribers
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153,860
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294,122
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447,982
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8/8/23 CNSL 8K, as of
6/30/23
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Penetration
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13.7 %
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40.0 %
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CNSL targeting 40% at
maturity - 8/8/23 CNSL 8K, as of 6/30/23
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ARPU (Per
Month)
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$68.29
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$75.00
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Mgmt assumed ARPU of
$75 in 2026 - 3/7/23 JPM conference presentation
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Incremental Revenue
($mm)
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$264.7
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New fiber subs
(294,122) x $75 / Month
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Incremental Fiber
Margin
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70.0 %
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65-75% industry
standard fiber incremental margins
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Incremental Fiber
EBITDA
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$185.3
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EBITDA
($mm)
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Q2'23
Annualized
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$307.8
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$307.8
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8/8/23 CNSL 8K, as of
6/30/23 - annualized (x4)
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Cost Takeout
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$30.0
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$30.0
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Announced during CNSL's
8/28/23 Q2'23 earnings call, cost takeout
executed in July
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Incremental
Fiber
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$185.3
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$185.3
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From above
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Total
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$307.8
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$523.0
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Offer
Price
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$4.70
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$4.70
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Equity Value
($mm)
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$547.5
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$547.5
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Debt
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$2,191.8
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$2,191.8
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6/30/23 CNSL
10Q
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Cash
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($202.6)
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($202.6)
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6/30/23 CNSL
10Q
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Unfunded
Pension
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$74.2
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$74.2
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12/31/22 10K (updated
annually)
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Searchlight
Preferred
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$498.3
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$498.3
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6/30/23 CNSL
10Q
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Enterprise Value
($mm)
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$3,109.2
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$3,109.2
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EV/EBITDA
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10.1
x
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5.9
x
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About Wildcat Capital Management LLC
Wildcat was established in 2011 as a single family investment
office. The firm has a long term, flexible, family office-driven
approach. Wildcat invests in multiple asset classes, including
private equity, public equity and real
estate.
THIS IS NOT A SOLICITATION OF AUTHORITY TO VOTE YOUR PROXY.
DO NOT SEND US YOUR PROXY CARD. WILDCAT CAPITAL MANAGEMENT, LLC IS
NOT ASKING FOR YOUR PROXY CARD AND WILL NOT ACCEPT PROXY CARDS IF
SENT. WILDCAT CAPITAL MANAGEMENT, LLC IS NOT ABLE TO VOTE YOUR
PROXY, NOR DOES THIS COMMUNICATION CONTEMPLATE SUCH AN
EVENT.
1 Per Bloomberg as of
November 1, 2023.
2 Per Bloomberg as of
November 1, 2023.
3 Wildcat estimate based on Company filings and
disclosures. Estimated 50% of total CapEx in 2021, 56% of total
CapEx in 2022 (per CNSL's CFO), $70
million in Q1'23 and $76
million in Q2'23.
4 Frontier Communications, First Quarter 2023
Results, May 5, 2023, available
at
https://s201.q4cdn.com/129601114/files/doc_financials/2023/q1/Frontier-First-Quarter-2023-Earnings-Presentation.pdf.
5 CNSL Q2 2023 Earnings Call Transcript, available at
https://seekingalpha.com/article/4625482-consolidated-communications-holdings-inc-cnsl-q2-2023-earnings-call-transcript.
6 See Exhibit A.
7 New Street Research, various analyses, including
"Frontier: The Alchemy of Turning Copper Into Gold, 4/17/21" and
"More Fiber Coming: Implications of Updated Fiber Analysis for
Frontier and Cable, 10/1/2021".
8 CNSL, Consolidated Communications to be Acquired by
Searchlight and BCI, October 16,
2023, available at
https://lufax.q4cdn.com/131964560/files/doc_presentations/2023/10/cnsl_transaction-presentationfinal_10-16-23.pdf.
9 CNSL, Annual Report on Form 10-K for the year ending
December 31, 2022 filed with the
Securities and Exchange Commission (the "SEC") on March 6, 2023.
10 CNSL Q2 2023 Earnings Call Transcript, available at
https://seekingalpha.com/article/4625482-consolidated-communications-holdings-inc-cnsl-q2-2023-earnings-call-transcript.
11 Frontier Communications, Current Report on Form 8-K
filed with the SEC on August 25,
2023.
12 Id.
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SOURCE Wildcat Capital Management