3 Telecom Stocks That Could Look for a Merger

telecom stocks - 3 Telecom Stocks That Could Look for a Merger

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Mergers and acquisitions among telecom stocks have picked up — for reasons that make some sense. 5G wireless and the growth of fiber to the home both can drive transformative change on the consumer side of the business. “Big data” and cloud adoption should drive commercial growth for years to come.

And so we’ve seen several deals in and around the industry of late. Of course, the most well-covered has been the merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S).

But in the fiber space, Zayo Group (NYSE:ZAYO) and North State both agreed to sales last year. Cincinnati Bell (NYSE:CBB) agreed to a buyout from Brookfield Infrastructure Partners (NYSE:BIP) in December, and received a second proposal a month later.

Unless markets decline — as appears increasingly likely — M&A are likely to continue. These three telecom stocks could be beneficiaries.

Consolidated Communications (CNSL)

The case for Consolidated Communications (NASDAQ:CNSL) is much like that of CBB before its sale to Brookfield: hard to see at first glance. Both stocks looked to have a dangerous combination of high leverage and low growth.

Indeed, Consolidated closed 2019 with nearly $2.3 billion in borrowings net of cash; its current market capitalization is just over $500 million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) declined almost 3% in 2019, and is guided roughly flat in 2020.

But both companies have fiber which may be more valuable than near-term earnings suggest. Indeed, looking at the valuation assigned Cincinnati Bell in its agreed-to sale, Consolidated could be worth as much as $20 per share. The stock closed Friday at $7.30, even after gaining 26% on Thursday following the fourth-quarter earnings report.

Those gains might lead some investors to believe that the easy money has been made. But CNSL traded at $12 as recently as April, before the company eliminated its dividend to focus on deleveraging. Meanwhile, CBB went from a low under $4 to its current $12. If CNSL is similar on that basis, too, there’s a lot of upside remaining.

WideOpenWest (WOW)

Cable “overbuilder” WideOpenWest (NYSE:WOW) is a slightly different version of the same story. WideOpenWest builds out cable networks in markets with existing providers like Comcast (NASDAQ:CMCSA) or Charter Communications (NASDAQ:CHTR).

Building out those networks unsurprisingly has left WideOpenWest with a leveraged balance sheet: the company, too, has roughly $2.3 billion in debt. That debt also can act as a springboard for the equity if sentiment changes, however.

Sentiment hasn’t changed: WOW stock has been one of the weaker telecom stocks out there since its 2017 initial public offering. But the company has some levers to pull to boost its share price. Capital expenditures can and should come down, boosting free cash flow. “Cord-cutting” may pressure video subscribers, but could drive higher-dollar plans with higher-margin data customers.

This is not a stock for risk-averse investors: in a worst-case scenario, over time, the debt can push WideOpenWest into a restructuring. But like other network infrastructure stocks, WOW looks more attractive than it first appears.

Alaska Communications Systems (ALSK)

Alaska Communications Systems (NASDAQ:ALSK) is a smaller, less-followed version of the stories at CNSL and WOW. As the name suggests, the company focuses on the Alaskan market, where it offers broadband and managed information technology services. ALSK also has a fiber-optic cable that connects its home state with the U.S. mainland.

The good news here is that the balance sheet is in better shape. Alaska Communications did close its third quarter with net debt of $156.6 million. But that’s less than 3x EBITDA guidance for 2019; Consolidated Communications, for instance, is levered more than 4x.

The worry is that the growth opportunity for the single-state operator might not be quite what it was for larger players. Similarly, ALSK might not be quite as attractive of a takeover target. But Cincinnati Bell did acquire Hawaiian Telcom in 2018, and Alaska Communications could be of interest to an infrastructure investor like Brookfield or a smaller private equity shop.

The lighter leverage does limit the odds of a big move, like CBB has delivered and CNSL and WOW might. But for investors interested in telecom stocks, ALSK is a lower risk as well as a lower-reward option.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/02/3-telecom-stocks-that-could-look-for-a-merger/.

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