Wildcat Capital Management, the family office managing the wealth of TPG Capital’s co-founder David Bonderman, issued a stern letter to Consolidated Communications (CNSL) on Tuesday. CNSL shares rallied +14% in the early trading hours of Wednesday on the news as investor excitement rose.
Wildcat, owning approximately 2.6% of the outstanding shares of CNSL, urged the company’s special committee to reject the recent go-private transaction proposal by Searchlight Capital and British Columbia Investment Management. The proposition put forth in April sought to purchase CNSL at $4.00 per share, a deal Wildcat declared as a severe undervaluation.
Wildcat’s letter boldly affirmed its faith in CNSL’s current strategic course and staunchly supported the company’s value as a standalone public entity. Wildcat estimates the fair value to be no lower than $14.00 per share, a stark contrast to the $4.00 per share offer from the consortium led by Searchlight Capital, a 34% stakeholder in CNSL.
The New York-based firm backed up its claims by referencing a detailed analysis, stating the non-binding proposal significantly undervalues CNSL’s equity by a factor of 3.5x. Further adding, “We have confidence in the operating strategy that CNSL management is executing and believe that CNSL can, and will, create significant shareholder value as a standalone public entity.”
Wildcat’s intervention comes as CNSL has faced declining revenues and profitability, along with high debt levels in recent years. This led to the broadband services provider’s shares dropping about 70%, trading at their lowest point in five years.
The proposed go-private offer, made by the consortium in April, led to the formation of a special committee by CNSL later that month to consider the proposal. However, the committee has been silent since its inception. The Wildcat letter could potentially reignite the discourse surrounding the future of CNSL.
This is not the first time that Wildcat has been involved in shareholder activism. In 2016, the firm sued Sorrento Therapeutics (SNRE) management on a weak financing deal that would leave investors worse off. Since this time, SRNE’s shares have fallen to almost nothing, trading at a mere 34 cents now as a penny stock. This begs us to question if CNSL will follow the same fate if this deal were to fall through.
JP Morgan analysts back in April viewed the proposal as Searchlight simply following through on its earlier plan expressed in a March 2022 filing with the SEC. However, they cautioned that as a private entity, CNSL might face less disclosure and the risk that Searchlight could look to improve its own financial position at the expense of bondholders in the future.
Fintel’s consensus target price of $4.00 suggests the broader market is valuing the stock below its closing price today.
The dispersion of ratings by analysts’ shown in the chart below, is skewed to hold, sell, and strong sell recommendations.
Given these factors, CNSL’s special committee now has an arduous task ahead of it. It must weigh the relative merits of the go-private offer against Wildcat’s assertion that a significantly higher value could be realized by maintaining the current strategic trajectory.
Other side of the argument
Even though Wildcat has made its own assessment on what they believe a fair valuation is for the company, the declining cash flows generated by the business and in turn the market driven valuation explains that investors are not willing to pay up for a company facing these headwinds.
The chart provided on the Fintel metrics and ratios page for CNSL helps visually understand how the performance has deteriorated since the beginning of the pandemic.
This article originally appeared on Fintel
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