Low valuation makes Cable One a 'plausible acquisition target' – analyst

Cable One's low valuation could make the mid-size operator a "plausible acquisition target" amid the recent chatter that Charter Communications is sizing up a takeover bid for Altice USA, an industry analyst suggests.  

In a research note (registration required) outlining why he is upgrading Cable One shares from "neutral" to "buy," MoffettNathanson analyst Craig Moffett stresses that there's no evidence that Cable One is in play, nor is he suggesting that Charter or a private equity investor will (or should) go after Cable One.

But he does believe Cable One's low valuation makes it a potentially attractive M&A target. Last week, Moffett estimated that Cable One's enterprise value has dropped to about $1,800 per home passed, well below a high of $6,100 in Q4 2020. That also puts Cable One below peers such as Altice USA ($2,668) and Charter ($2,519).

"To be clear, we are not suggesting here that Cable One is 'in play.' It isn't," Moffett noted. "We make the observations about private market/M&A valuations only to highlight that Cable One's valuation is low enough that it provides for significant upside optionality."

And Cable One's current valuation "inevitably invites speculation about a possible acquisition," Moffett explained. "M&A is made possible by valuations, and the stark fact here is that Cable One assets are trading below replacement cost" of its assets. That same scenario, he points out, is also what is believed to be driving Charter's purported interest in Altice USA.

Given that Charter is spending about double Cable One's current valuation to build fiber into new (and generally non-competitive) areas, Cable One's valuation is "at the very least, eye-catching," he notes.

"[W]e are simply making the point that the same circumstance that makes a possible acquisition of Altice a worthy discussion – i.e. that its assets are trading below replacement value – also makes Cable One worthy of discussion as well," Moffett explained.

And while he does see the logic of Charter sizing up a bid for Altice USA, he's likewise skeptical that it will come together given the staggering size of Altice USA's debt along with some regulatory hurdles in New York that such a deal would face.

But he thinks Cable One represents a smaller and cheaper option with lower broadband penetration (thus, more opportunities for growth) than Altice USA. Cable One, he points out, also faces much less fiber competition than Altice USA. Moffett also believes that a play for Cable One would not face nearly the same level of regulatory scrutiny as a move for Altice USA.

Accounting for Cable One's 'headwinds'

But Moffett acknowledged that Cable One is not without its own "headwinds." Faced with growing competition from fiber and fixed wireless access (FWA) service providers, Cable One, like its peers, is struggling to grow its broadband subscribers on a consistent basis (though it did add 1,700 residential broadband subs in Q4 2023).

And the pace of growth of Cable One's industry-leading broadband average revenue per unit (ARPU) could be threatened as the operator continues to get more aggressive with discounts and promotions designed to blunt FWA competition.

"Broadband ARPU growth is their ONLY growth engine; if they forgo broadband ARPU growth, they won't grow at all," the analyst writes.

Moffett's also wary of the possible financial implications of Cable One's 2020 acquisition of a 45% stake in Mega Broadband Investments Holding (MBI) for $574.1 million.

That deal came with a call option for Cable One to acquire the rest of MBI during a window of January 1, 2023, and June 30, 2024. MBI, formed through the acquisitions of Vyve Broadband, Northland Communications and the broadband assets of Eagle Communications, also has a put option that could force Cable One to acquire the rest of MBI in a window of July 1, 2025, through September 30, 2025.

Moffett's concern is that cable valuations have dropped significantly since the original deal was announced in 2020, rendering Cable One's future MBI put and call options financially unattractive.

Cable One seemed to say as much in its latest 10-Q filing: "We have not yet obtained the capital that we believe will be necessary to pay the purchase price if either the Call Option or the Put Option are exercised. At this time, we do not expect to exercise the Call Option," the company said.

In the wake of Moffett's upgrade, Cable One shares were up $17.75 (+3.99%) to $462.75 each in Tuesday morning trading.