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Cable One, Inc. -- Moody's affirms Cable One's ratings including the Ba3 CFR, outlook is stable on planned acquisition of Hargray

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Rating Action: Moody's affirms Cable One's ratings including the Ba3 CFR, outlook is stable on planned acquisition of HargrayGlobal Credit Research - 16 Feb 2021New York, February 16, 2021 -- Moody's Investors Service ("Moody's") affirmed Cable One, Inc.'s ("Cable One" or "the Company") Ba3 Corporate Family Rating (CFR) and the Ba3-PD Probability of Default Rating (PDR). Moody's also affirmed the B2 senior unsecured rating and Ba3 senior secured bank credit facility rating. The SGL-1 Speculative Grade Liquidity Rating is maintained. The outlook is stable.Cable One announced [1] today it has entered into a definitive agreement to acquire the equity interests in Hargray Acquisition Holdings, LLC, the ultimate parent of Hargray Communications Group, Inc. that it does not already own. The equity interests to be acquired by Cable One represent approximately 85% of Hargray on a fully diluted basis. Cable One has been a minority investor in Hargray since October 1, 2020, when the Company contributed its system serving Anniston, Alabama and surrounding areas to Hargray in exchange for equity interests representing approximately 15% of Hargray on a fully diluted basis. The transaction, which implies a $2.2 billion total enterprise value, will expand Cable One's presence into the Southeastern U.S. and enable Cable One to capitalize on Hargray's experience and expertise in fiber expansion.According to Cable One management, Hargray generated approximately $128 million in Adjusted EBITDA on an annualized basis for the quarter ended December 31, 2020 ("4Q LQA"), and they expect to realize approximately $45 million in estimated annual run-rate synergies within three years of closing the transaction. The purchase price represents multiples of Hargray's 4Q LQA Adjusted EBITDA of 17.2x before taking into account estimated run-rate synergies; and 12.7x after assuming the immediate realization in full of the $45 million in estimated run-rate synergies.Cable One intends to finance the transaction with a combination of existing cash resources, revolving credit facility capacity, and proceeds from new indebtedness and/or equity capital. Cable One has received $900 million of definitive bridge loan commitments from J.P. Morgan and Credit Suisse to finance a portion of the purchase price.The transaction is subject to certain regulatory approvals and other customary closing conditions and is expected to be completed during the second quarter of 2021.We expect this transaction to add scale and geographic diversity, but also initially increase leverage and capital intensity, and reduce EBITDA margins. The affirmation of the ratings reflects our view that governance risk is unchanged, with leverage that will remain within our tolerances for the Ba3 CFR and aligned with management's financial policy which targets leverage at or below 4.0x to 4.5x. Hargray will contribute and represent approximately 16% and 13%, respectively, of the pro forma combined revenue and EBITDA (Moody's adjusted 2021 projections, at year end following acquisition). Hargray operates in 4 states, with footprint added in South Carolina, Georgia, Northern Florida, and Alabama. We expect Cable One's ownership of the assets will produce up to $45 million in synergies, will lower capital intensity, and improve EBITDA margins and free cash flows.In connection with the transaction there is some uncertainty about the ultimate capital and organizational structure and mix of claim priorities. To the extent the financing mix for Hargray includes a significant component of unsecured debt, there could be upward rating pressure on the Ba3 senior secured rating. LIST OF AFFECTED RATINGS: Affirmations: ..Issuer: Cable One, Inc. .... Probability of Default Rating, Affirmed Ba3-PD.... LT Corporate Family Rating, Affirmed Ba3....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)....Senior Unsecured Regular Bond/Debenture, Affirmed B2 (LGD5) from (LGD6) Outlook Actions: ..Issuer: Cable One, Inc. ....Outlook, Remains StableRATINGS RATIONALECable One, Inc.'s ("Cable One" or "the Company") Ba3 Corporate Family Rating (CFR) reflects the Company's strong balance sheet supported by moderate leverage, despite a very active, but disciplined M&A growth strategy. The Company also benefits from a diversified footprint, superior network speeds, a favorable competitive environment, and a very profitable business model that produces EBITDA margins approaching 50%. Constraining the rating is the Company's declining video (and voice) services which exhibit low penetration, and high loss rates. The service offering is subject to intense competition and is being harvested for cash and profits. There is moderate governance risk, with a tolerance for leverage at or below 4.0x-4.5x for M&A, and dividends. This event risk is the primary constraint to a higher rated credit profile.The Company has very good liquidity, supported by positive operating cash flow, an undrawn $500 million revolving credit facility, and covenant cushion. The credit profile also benefits from a favorable maturity profile with no maturities until 2025.RATING OUTLOOKThe stable outlook reflects our expectation that revenue will rise to near $1.7 billion and EBITDA will rise to over $900 million, over the next 12-18 months, with EBITDA margins rising to the high 50% range. Net of capex (about 25% of revenue) and interest (about 4% weighted average borrowing cost), we project free cash flow to rise near $200 million. Free cash flow to debt will be 3%- 6%. We expect liquidity to remain very good. Unless otherwise notes, all figures are Moody's adjusted and include Hargray, over next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that Could Lead to an Upgrade» Gross debt / EBITDA (Moody's adjusted) sustained comfortably below 3.5x with commitment by management to sustain metrics at this level» Free cash flow to gross debt (Moody's adjusted) sustained above 10%We could also consider a positive rating action if financial policy was more conservative, the scale of the Company was larger, or there was more diversity in the business model without negative implications on profitability.Factors that Could Lead to a Downgrade» Gross debt / EBITDA (Moody's adjusted) sustained above 4.5x» Free cash flow to gross debt (Moody's adjusted) sustained below 5%We could also consider a negative rating action if liquidity deteriorated, financial policy turned more aggressive, or there was a material and unfavorable change in the scale, diversity or operating performance.The principal methodology used in these ratings was Pay TV published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1134554. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Phoenix, AZ, Cable One, Inc. offers traditional and advanced video services including digital television, video-on-demand, high-definition television, as well as high-speed Internet access and phone service. The Company passes 2.3 million homes, in 21 states across the West, Mid-West, and South (including Arizona, Idaho, Illinois, Mississippi, Missouri, Oklahoma, and Texas), serving more than 900 thousand residential and commercial customers. Revenue for the last twelve months ended September 30, 2020 was approximately $1.3 billion.Founded in 1947, Hargray is a regional telecommunications company providing advanced Internet, television, and telephone communications services to residential and business customers in 14 markets across Alabama, Florida, Georgia, and South Carolina. Hargray offers gigabit-capable services to approximately 99% of its customers. Approximately 60% of Hargray's total revenues for the 12-month period ended December 31, 2020 were derived from residential data and business services customers.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Cable One Press Release 15-Feb-2021Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. 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