Searchlight Evaluates Acquisition of Consolidated Communications

Searchlight Capital Partners, a private equity firm, currently owns 34.6% of the outstanding common stock of Consolidated Communications (NASDAQ: CNSL), a fixed broadband provider in 22 states across the U.S., and this week Searchlight filed an amended Schedule 13D stating that it intends to evaluate the “full acquisition” of Consolidated Communications, amongst other strategic options. Specifically, Searchlight Capital plans to:

• Consider making open-market purchases of Consolidated Communications’ common stock
• Evaluate the possibility of a further investment in or full acquisition of Consolidated Communications
• Have discussions with Consolidated Communications and sources of co-investment and debt financing

Presently, Searchlight owns 39.3 million common shares in Consolidated Communications through its third fund, Searchlight Capital III, which has total committed capital of $3.4bn.

Situation Overview – Searchlight Weighs Consolidated Communications Acquisition

On March 3, 2022, Consolidated Communications reported its Q4 and full-year 2021 earnings, as well as an agreement to sell its Kansas City operations to Alinda Capital Partners, in a transaction that is expected to generate net proceeds of ~$90m at closing.

As part of its earnings release, Consolidated provided its 2022 outlook, with the company’s guidance range for its key metrics as follows:

• Adjusted EBITDA: $410m to $425m
• Capital Expenditures: $475m to $495m. Of this total, the composition is as follows: 45% fiber build, 35% success-based, and 20% maintenance

Notably, Consolidated’s adjusted EBITDA guidance for 2022 came in well below investor expectations and, in turn, the stock closed down 21.5% on March 3rd.

YTD Stock Price Performance – Consolidated Communications

Drivers of the company’s lower EBITDA guidance included asset sales (Ohio and Kansas City), a $42m loss in subsidies from the Connect America Fund (CAF) II program, a $10m to $12m decline from contract renewals with major wireless backhaul customers, which use Consolidated’s fiber-to-the-tower (FTTT) services, and a $15m degradation from increased sales & marketing expense to drive customer acquisitions for its new Fidium Fiber brand.

Over the subsequent trading days, the company’s stock price reached a 52-week low of $4.51, a 38.6% decline from Consolidated’s closing share price of $7.34 on March 2nd, prior to earnings being announced. However, the company’s stock price has since recovered somewhat, following Searchlight’s disclosure, to ~$5.60 as of mid-day on March 9th.

Searchlight Capital – Ownership in Consolidated Communications

In October 2020, Consolidated Communications received an initial $350m investment from Searchlight Capital Partners. Concurrently, the company was able to execute a debt refinancing, raising $2.25bn in new secured debt. Following these recapitalizations, Consolidated began investing in its network to upgrade, over five years, ~1.6 million residential and small business locations to fiber-to-the-premises (FTTP).

In December 2021, Searchlight Capital invested an additional $75m into Consolidated Communications. As such, Searchlight has cumulatively invested $425m in Consolidated, in return for a combination of its Series A perpetual preferred stock and 34.6% of the company’s outstanding common stock.

Overall, Searchlight Capital’s investments provide Consolidated Communications with the capital to fund its accelerated fiber network expansion and growth plans. Specifically, the company plans to upgrade 1.6 million passings to fiber by 2025, of which more than 1 million passings will be upgrades within its northern New England service areas.

5-Year Fiber Build Plan – Consolidated Communications