Wildcat Capital Management Issues Letter to Consolidated Communications' Special Committee Urging it to Reject the Recent "Take Private" Proposal at $4.00 Per Share

Wildcat Capital Management Supports the Company's Strategy as a Standalone Public Entity

Believes the Current "Take Private" Proposal Significantly Undervalues Consolidated Communications

NEW YORK, July 12, 2023 /PRNewswire/ -- Wildcat Capital Management, LLC (together with its affiliates, "Wildcat"), which beneficially owns approximately 2.6% of the outstanding shares of Consolidated Communications Holdings, Inc. ("CNSL" or the "Company") (NASDAQ:CNSL), today sent a letter to the Special Committee of CNSL's Board of Directors regarding its significant concerns with the non-binding takeover offer, dated April 12, 2023, from Searchlight Capital Partners, L.P. and British Columbia Investment Management Corporation. Wildcat is a long-term investor and one of the Company's largest shareholders. Wildcat supports the Company's current strategic trajectory and firmly believes in CNSL's value as a standalone public entity. In its letter, Wildcat urged the Special Committee to not pursue an offer that it believes significantly undervalues CNSL's equity by a factor of 3.5x. Based on analysis detailed in its letter, Wildcat believes that any offer for the Company that the Special Committee recommends should be no lower than $14.00 per share.

A full copy of the letter is below:

Consolidated Communications Holdings, Inc.
2116 South 17th Street
Mattoon, Illinois 61938
Attention: Special Committee of the Board of Directors

Dear Members of the Consolidated Communications Special Committee:

Wildcat Capital Management, LLC (together with its affiliated investment vehicles, "Wildcat," "we," or "our") is a long-term, patient investor which currently owns more than three million shares of Consolidated Communications Holdings, Inc. ("CNSL" or the "Company"), which we believe, based on public filings, makes us the Company's fifth-largest independent shareholder. As a sizeable shareholder of CNSL, we are delivering this letter to the Special Committee of CNSL's Board of Directors (the "Board") to detail our updated views on the contemplated take-private proposal from Searchlight Capital Partners, L.P. ("Searchlight") and British Columbia Investment Management Corporation ("BCI"), following our previous letter to the Special Committee dated June 15, 2023. We are not activist investors but have concluded, somewhat reluctantly, that at this juncture it is in the best interests of all CNSL shareholders for us to also make our views publicly known.

At a high level, we have confidence in the operating strategy that CNSL management is executing and believe that with its existing liquidity and build/financing flexibility, CNSL does not need to pursue strategic alternatives at this juncture. We are confident that CNSL can, and will, create significant shareholder value as a standalone public entity.

Further, Wildcat believes that Searchlight's and BCI's non-binding proposal to acquire all of CNSL's outstanding shares not already owned by such parties for $4.00 per share significantly undervalues CNSL's equity by a factor of 3.5x. As detailed in this letter, our view is based on several analyses, including our assessment of the long-term asset value of CNSL and a review of the most relevant precedent transaction – the acquisition of certain incumbent local exchange carrier ("ILEC") assets from Lumen Technologies ("Lumen") by funds managed by affiliates of Apollo Global Management, Inc. (the "Apollo-managed funds") to create "Brightspeed." Both analyses imply a current fair value of approximately $14.00 per share.

1)      Wildcat Supports CNSL Management and its Current Strategy 

• We commend Chief Executive Officer Bob Udell and the CNSL Board for leading the industry in identifying the attractive copper-to-fiber upgrade opportunity. Numerous peers followed CNSL's September 2020 fiber upgrade plan announcement and identified their own large scale upgrade projects. This list includes AT&T Inc., Frontier Communications Parent, Inc. ("Frontier") and Lumen, as well as financial sponsors like Apollo/Brightspeed and Searchlight/Ziply Fiber, to name a few.
  
  
• Wildcat recognizes the significant strategic and operational value contributed by Searchlight to CNSL following its September 2020 investment.
  
  
• In our view, CNSL has made key strategic decisions that support its ability to achieve desired penetration rates, including key personnel additions (most notably Gaurav Juneja, formerly of MetroNet, as the new President of Consumer) and refocusing on the door-to-door channel to drive subscriber growth. We believe that the recent operating results of AT&T Inc., Frontier and Ziply Fiber clearly show that CNSL's penetration targets can be achieved.
  
  
• CNSL management has communicated clearly that CNSL is on the brink of accelerating its fiber subscriber additions. CNSL's estimated $657 million¹ fiber investment in the ground is not yet reflected in EBITDA, but we are confident it will be soon and, as a result, believe that CNSL can achieve sustained mid-teens EBITDA growth in 2024 and beyond.

2) We Contend that CNSL Is Not in Duress and Does Not Need to Sell Itself at this Time 

• Wildcat agrees with management's confidence in having a fully-funded fiber build plan. Since management publicly voiced this confidence in October 2021, CNSL has raised over $600 million in additional liquidity via asset divestitures and has expressed assurance in its ability to complete and finance the upgrade opportunity.
  
  
• Wildcat believes (i) available balance sheet liquidity, (ii) soon to be quickly growing EBITDA and declining leverage levels, (iii) flexibility in build timing, and (iv) the ability to access additional funds (which, in our view, would be minimal if required and only necessary in 2025-2026) means CNSL does not need to pursue strategic alternatives or dilutive financing at this time. In fact, in our opinion, this is the worst time for CNSL to contemplate a strategic transaction, as its EBITDA and free cash flow are temporarily depressed as a result of the massive capital expenditures being incurred in connection with the fiber upgrades, while the incremental revenues and EBITDA from the fiber build have yet to be realized.
  
  
• Further, the emergence of the fiber-to-the-home asset-backed securitization market offers incremental borrowing capacity at lower rates than the traditional debt market. Recent examples of companies accessing this market include MetroNet and Ting Inc., each of which raised leverage at 8.5x Securitized Net Cash Flow at 7.7-8.2% all-in rates.²
  
  
• Details revealed on June 26, 2023 regarding the federal $42.5 billion Broadband Equity, Access, and Deployment (BEAD) Program that is part of President Biden's Infrastructure Investment and Jobs Act suggest that CNSL may be eligible to receive between $200 million and $450 million in incremental subsidies to offset the costs of and/or extend its build plan.

3) We Believe that CNSL is Extremely Undervalued at Searchlight's and BCI's Proposed $4.00 per Share Acquisition Price and that the Special Committee Should Not Recommend a Sale of CNSL at Lower than $14.00 per Share

Our Analysis of the Future State Value Implies a Higher Valuation:

• Using publicly disclosed inputs from CNSL's management team combined with industry benchmarks and standards, Wildcat believes the terminal enterprise value of CNSL post-fiber upgrade within 5 years is conservatively $7 billion, translating into approximately $28.25 per share. We contend that CNSL has line of sight to achieving this valuation over the next 5 years as EBITDA expands materially.
  
  
• In our view, it would be a mistake to use current trough EBITDA to value CNSL's assets given that CNSL is not yet generating EBITDA from its fiber investments already in the ground. As such, our analysis focuses on asset value (Enterprise Value/Fiber Passing) and is based on conservative assumptions, including the cost to complete the upgrade and achieve mature penetration targets. Wildcat's "future state" value discounted back five years -- even at a risk-adjusted equity rate of return of 15%-implies a current fair value of $14.00 per share, or 250% higher than the $4.00 per share non-binding offer. As a result, we believe the implied current "fair" enterprise value is $4 billion, approximately 40% above the $2.9 billion enterprise value at the proposed $4.00 per share proposal. Because of CNSL's temporarily elevated leverage levels (as discussed in the prior section), this results in a magnified difference in equity value and the Company's share price. Further details on our analysis can be found in Appendix A of this letter.

Recent Comparable Transaction Analysis Supports our Valuation Assumptions:

• Wildcat believes the Apollo-managed funds' $7.5 billion acquisition of mostly rural ILEC assets in 20 states from Lumen to create Brightspeed is the most relevant, recent precedent transaction, and an analysis of this transaction supports our belief that the proposed offer from Searchlight and BCI significantly undervalues CNSL's shares.
  
  
• The Brightspeed transaction valued a passing at $1,154 on dramatically lower existing total fiber passing mix (Brightspeed's fiber passings are currently 4.5% of total passings vs. 40.4% for CNSL). The same valuation per total passing would value CNSL at $5.40 per share, a 35% premium to the $4.00 non-binding offer. Relative to Brightspeed, Wildcat believes CNSL should also be given credit for its existing fiber spend ($250/passing compared to the uninvested Brightspeed footprint) and the CNSL build cost advantage relative to Brightspeed ($121/passing). As a result, the Brightspeed transaction implies that CNSL is conservatively worth approximately $14.00 per share, or 250% greater than the $4.00 non-binding offer.
  
  
• Further, there are important differences between Brightspeed and CNSL that, in our view, favor CNSL: (i) CNSL is an operating entity with a strong management team in place rather than a corporate carve-out, (ii) CNSL's footprint has a higher target fiber mix (76% vs. 46%), and (iii) CNSL has an upgrade cost advantage relative to other ILECs given its 80% aerial plant. To be conservative, our analysis ignores (i) and (ii) and only gives credit to the upgrade cost advantage and the fact that CNSL has already deployed approximately $657 million upgrading copper to fiber (which hasn't produced incremental EBITDA to date). We offer further detail on this analysis in Appendix B.

In conclusion, Wildcat has full faith in CNSL's strategy and existing liquidity, build and financing flexibility, and does not view strategic alternatives to be necessary at this time to support CNSL's long-term objectives. In the interest of all CNSL shareholders, Wildcat urges the CNSL Special Committee to stay the course and not direct CNSL toward a full sale or dilutive financing that does not adequately value CNSL's assets. As detailed herein, we firmly believe that the non-binding proposal from Searchlight and BCI significantly undervalues CNSL's equity and that the reserve price of any offer should be no lower than $14.00 per share, a share price which we believe accurately reflects the true fair value of CNSL. 

Sincerely,

Tom McConnon
Managing Director, Head of Public Equities
Wildcat Capital Management, LLC

About Wildcat Capital Management

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.

Media Contact:

Eliza Ruggiero / Abigail Ruck
H/Advisors Abernathy
wildcatcap@h-advisors.global
+1 (212) 371-5999

APPENDIX A

This analysis computes the future state value of CNSL in 5 years following its fiber upgrade project by burdening the valuation for the upgrade and success-based costs. Under this analysis, Wildcat conservatively estimates that CNSL's price per share post upgrade at $28.37, or $14.10 discounted back 5 years at a 15% discount rate.

Key Assumptions:

• CNSL upgrades to 2 million total fiber passings (publicly disclosed target)
• Fiber penetration reaches 40% (a benchmark other ILECs, e.g., Frontier, have achieved)
• Upgrade costs including success-based costs:
• Build costs of $650 per fiber passing (publicly disclosed target)
• $750/subscriber cost to connect (publicly disclosed target)
• $400 marketing cost per gross add (conservative estimate based on industry benchmarking)
• Enterprise Value/Passing based on the lower-end of industry estimated ranges
• Assumes $3,000 EV/Passing for a "mature" fiber passing at 40% penetration; triangulation based on metrics Frontier shared at its August 2021 analyst day and where publicly traded cable companies trade; in addition, Ting recently completed a debt financing at $2,500/Passing (without giving value for the equity)
• Commercial & Carrier enterprise value in line with Lumen EV/Revenue

CNSL: Future State Value
					Future
			Current	Change	State (2028)		Notes
Passings
Copper Passings			1,564,889	(937,482)	627,407
Fiber Passings			1,062,518	937,482	2,000,000		2mm target shared by CNSL mgmt - Q4'22 earnings presentation
Total Passings			2,627,407	-	2,627,407
Fiber Subscribers
Fiber			135,209	664,791	800,000
Fiber Penetration			12.7 %	27.3 %	40.0 %		40% target shared by CNSL mgmt - Q4'22 earnings presentation
Upgrade Costs/Passing and Subscriber
Cost per Fiber Passing			$650				Shared by CNSL mgmt - Q4'22 earnings presentation
Cost to Connect per Subscriber			$750				Shared by CNSL mgmt - Q4'22 earnings presentation
Marketing Cost per Subscriber			$400				Conservative estimate based on industry benchmarking
Upgrade Costs ($mm)
Cost per Fiber Passing				$609			$650 x 937,482 new fiber passings
Cost to Connect				$499			$750 x 664,791 new fiber subscribers
Marketing Cost				$266			$450 x 664,791 new fiber subscribers
Total Upgrade Costs				$1,374
Enterprise Value/Passing
EV/Copper Passing					$300		Low end of $300 to $600 industry standard; see footnote (1) for further triangulation
EV/Fiber Passing - Terminal (40%+ Penetration)					$3,000		Low end of $3,000 to $4,000 industry standard; see footnote (2) below for further triangulation
Enterprise Value ($mm)
Commercial & Carrier EV at 1.5x Sales					$852		Inline with LUMN (1.5x 2023 Revenue)
Residential Copper EV					$188
Residential Fiber EV					$6,000
Implied Enterprise Value					$7,040
Debt					$2,186		3/31/23 CNSL 10Q
Cash					($336)		3/31/23 CNSL 10Q
Unfunded Pension					$74		12/31/22 10K(updated annually)
Searchlight Preferred					$488		3/31/23 CNSL 10Q
Upgrade and Success-Based Costs					$1,374		See above--includes passing upgrades, cost to connect, and marketing to reach 40% penetration
Implied Equity Value					$3,253
Share Price					$28.37
Share Price Discounted 15%/5 Years					$14.10
Vs. $4.00 Non-Binding Offer					252.6 %
(1) Frontier (FYBR) noted $300 to $600 EV/copper passing at their 2021 analyst day
(2) Frontier (FYBR) noted $3,000 to $4,000 EV/fiber passing at their 2021 analyst day; Ting raised ABS debt financing at $2,500 debt/fiber passing (before any equity value) in May '23;
public cable companies (e.g. CHTR) valued at $2,800 EV/HFC passing (which is an inferior technology to fiber due to higher operating costs and higher maintenance capital expenditures)

 

APPENDIX B

This analysis computes CNSL's valuation based on the results of the Apollo/Brightspeed transaction precedent, and then adjusts the valuation for (i) CNSL's existing fiber CapEx spend in 2021-2023 (Apollo/Brightspeed had de minimis fiber at acquisition) and (ii) CNSL's fiber build cost advantage versus its peers while burdening for CNSL's higher cost to connect. To be conservative, this analysis does not give CNSL credit for a number of other factors that should favorably impact valuation relative to Brightspeed. Wildcat conservatively estimates CNSL's price per share based on the most relevant transaction precedent at $13.90.

Key Assumptions:

• CNSL has already spent $657 million upgrading copper to fiber since 2021
• Brightspeed will build at Frontier's estimated costs ($1,000 upgrade, $600 cost to connect)
• Fiber penetration reaches 40%

CNSL: Implied Valuation Using Brightspeed Transactional Comparable $ in MM
					Apollo /		CNSL vs. Brightspeed Valuation Adjustments
		Searchlight Offer			Brightspeed		Already Spent		CNSL Cost		Adjusted
		for CNSL at $4.00			Trans. Comp.		Fiber CapEx		Advantage		Valuation		Notes
Enterprise Value		$2,871			$7,500								Source: LUMN
Total Passings (Thousands)		2,627			6,500								Source: Brightspeed press release, 4/4/23
Value/Total Passing ($/passing)		$1,093			$1,154
Existing Fiber Passings (Thousands)		1,063			290								Source: LUMN Q3'22 earnings call (November 2022)
Target Fiber Passings (Thousands)		2,000			3,000								Source: Brightspeed press release, 8/22/22
% Fiber - Target		76.1 %			46.2 %
% Fiber - Existing		40.4 %			4.5 %
CNSL EV Based on Value/Total Passings ($mm)		$2,871			$3,032		$657	(1)	$318	(2)	$4,007		See footnotes (1) and (2) below
Debt		$2,186			$2,186						$2,186		3/31/23 CNSL 10Q
Cash		($336)			($336)						($336)		3/31/23 CNSL 10Q
Unfunded Pension		$74			$74						$74		12/31/22 10K (updated annually)
Searchlight Preferred		$488			$488						$488		3/31/23 CNSL 10Q
Equity Value ($mm)		$459			$619		$657		$318		$1,594
Value per Share		$4.00			$5.40		$5.73		$2.77		$13.90
Premium vs. $4.00/Share Non-Binding Offer					35.0 %						247.5 %
(1) 56% of CapEx in 2022 (per CFO); estimated 50% in 2021 and $70mm in Q1'23
(2)Value of CNSL cost advantage based on Brightspeed targets
ADJUSTMENTS
(1)CNSL Fiber CapEx Already Spent
Existing Fiber CapEx ($mm)					$657								56% of CapEx in 2022 (per CFO); estimated 50% in 2021 and $70mm in Q1'23
Value/Total Passing					$250								Divided by 2,627k CNSL total passings
(2)CNSL Net Cost Advantage
Brightspeed Cost to Pass/Fiber Passing					$1,000								"Similar to peers" - Aaron Sobel (Apollo Partner), November 2021;
CNSL Cost to Pass/Fiber Passing					$650								Shared by mgmt - Q4'22 earnings presentation
Delta/Fiber Passing					$350
Value of CNSL Cost Advantage to Brightspeed ($mm)					$949								Delta x Brightspeed's target incremental fiber passings
Brightspeed Cost to Connect/Subscriber					$600								Assuming metrics similar to Frontier (FYBR) metrics
CNSL Cost to Connect/Subscriber					$750								Shared by mgmt - Q4'22 earnings presentation
Delta/Subscriber					($150)
Value of CNSL Cost Disadvantage to Brightspeed ($mm)					($163)								Delta x Brightspeed's incremental fiber x 40% penetration
Total Value of Net CNSL Cost Advantage to Brightspeed ($mm)					$786								Total value if Brightspeed could build/connect as cheaply as CNSL
Value/Total Passing					$121								Divided by 6,500k Brightspeed passings
Total Value of Cost Advantage to CNSL Enterprise Value ($mm)					$318								Value/total passing multipled by 2,627k CNSL passings

 

¹ Estimated by Wildcat as the sum of 56% of total capital expenditures in 2022 (disclosed by the Company); estimated 50% of total capital expenditures in 2021 and $70 million in Q1'23.
² Based on data from Bloomberg.

 

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SOURCE Wildcat Capital Management