Investing

Activist Searchlight Capital Leads Opportunistic $4 Bid for Consolidated Communications

Ben Ward

Published: April 17, 2023 10:27 pm

A bid for Consolidated Communications (US:CNSL) by activist investors Searchlight Capital Partners and British Columbia Investment Management to acquire all outstanding shares of the company for $4.00 each could be read in several ways.

The offer comes at a time when the company’s shares are trading at their lowest point in five years, down around 70%, prior to their 38.8% surge on April 12 following news of the bid. CNSL stock closed Friday’s extended trading hours at $3.77. A year ago, they were at $6.11 a share.

Searchlight III CVL, L.P. and BCI, which currently hold 34.3% of Consolidated’s outstanding shares, submitted a letter to the board of directors of the company setting forth the non-binding proposal.

CNSL issued a press release announcing receipt of the “go private” transaction to investors. The company’s management team intends to establish a special committee consisting of independent directors to review and consider the proposal, as well as any other alternative proposals or strategic alternatives that may be available to the company. The committee will be advised by independent legal and financial advisors.

Mattoon, Illinois-based Consolidated Communications provides broadband, business, and entertainment communications services to customers across 23 states in the United States. The 130-year-old company has faced declining revenues and profitability, as well as high debt levels in recent years.

The proposal by Searchlight and BCI includes plans to invest additional capital into the company to complete the fibre build-out and fully fund the plan through the company with the aim of turning free-cash-flow positive which could be a better outcome for the company.

Low-Priced Cash Flow

One of the ways to read the bid is evident in a chart from Fintel’s financial metrics and ratios page for CNSL. What we see there is declining free cash flow generation from operating activities by the company.

Since Consolidated is a smaller-tier residential and business communications services provider that operates in a few states, this could give Searchlight and BCI potential access to the bottom floor of a long-term cash-flow operation.

The pursuers said in their SEC filing that they plan to “invest incremental capital into the company to complete the fiber build-out and fully fund the plan through the company turning free-cash-flow positive.”

While the proposal remains under consideration by the board and a special committee, the activists and their affiliates and representatives expect to discuss the proposal and related matters with the company, board and special committee.

Likely Deal

TD Cowen equity analyst Gregory Williams thinks the deal has a high likelihood of completion and does not expect resistance from management given the company’s need for capital in 2024 and 2025 and the challenging backdrop from volatile capital markets.

“A deal provides Consolidated immediate liquidity, a commitment to fully fund the FTTH build, and importantly out of the public spotlight for a company eventually needing capital and facing legacy operational challenges,” Cowen told clients. “We see an approval and no overbids.”

Searchlight already owns Ziply Fiber, a Pacific Northwest company which Fierce Telecom’s Linda Hardesty noted gives the investor fiber-to-the-home expertise and depth.

Williams thinks the proposal multiple is healthy in the current environment and does not think an alternative overbid would be likely. TD Cowen has a ‘market perform’ call on the stock with a $4.50 target price.

Target Match

Fintel’s consensus target price of $3.74 suggests the Street expected weaker performance from in the year ahead with slightly weaker annual sales.

Institutional Dearth

Research from the Fintel platform highlights the dearth of institutional interest in CNSL stock in recent months. The Fintel Fund Sentiment Score of 31.64 is bearish on the stock, ranking the telecom firm in the bottom 20% out of 36,279 globally screened securities for the highest levels of institutional buying activity.

There are 365 institutions currently on the register that collectively own a total of 96.79 million shares of the float. The number of owners on the register has decreased by 1.62% during the last quarter alone, adding additional selling pressure to the shareprice.

Investors and analysts will be closely watching the developments in the coming weeks as the company’s board reviews and considers the proposal and any other alternative proposals or strategic alternatives that may be available to the company.

Consolidated Communications will have to weigh the benefits of the proposed investment and the potential for long-term cash-flow operations against the potential for losing control of the company.

This article originally appeared on Fintel