Otelco Breaks the ILEC Deal Ice Dam
It’s been a while since we’ve seen an RLEC buy an RLEC! But after absorbing the news that Otelco (Nasdaq:OTT) will pay $4.5m for Shoreham, Vermont-based Shoreham Telephone Company, it’s pretty clear why Mike Weaver and the gang stepped up for the western Vermont-based RLEC, not only from an operational point of view but also from a financial point of view:
"The acquisition of Shoreham is a strategically important opportunity for Otelco to continue the expansion of our footprint in New England," said Mike Weaver, president and ceo of Otelco. "While Shoreham has similar roots to Otelco as a rural wireline telephone provider, its existing network in Vermont provides an excellent point from which our CLEC (OTT Communications) can begin serving our fourth state. We are very excited about this transaction and its impact as a catalyst for future growth."
Yes, the CLEC opportunity is compelling, but in my ranking of the reasons behind the deal, the first, second and third would be: The price! The price! The price! Fourth is the CLEC expansion opportunity throughout Vermont, including Burlington, and even further out into New England. Fifth: Shoreham fits the RLEC profile that Otelco has targeted from its inception.
Back in 2003 Gary Sugarman, who at the time owned Mid-Maine Communications of Bangor, Maine, tried to acquire Shoreham for a price reported to be roughly three times what Otelco is paying. The Vermont PUC killed that deal, in part because a PUC staffer argued the price was too high to be supported by Shoreham's earnings.
Somewhat ironically, Otelco acquired Mid-Maine back in 2006, so Weaver is arguably just finishing the quest started by Sugarman years earlier.
Let’s talk about the price and implied value multiples. The companies announced that Shoreham generated about $2.4m in revenue last year and served nearly 5,000 access line equivalents. I assumed a proforma 40% OIBDA margin, which implies about $1m in cash flow; the implied multiples then are 1.9x revenue and 4.7x OIBDA—the 5x cash flow barrier is breached! However, it’s possible 40% is high…At 30%, the cash flow would be about $700k and the multiple would be 6.3x. The truth probably lies somewhere in between, but no matter how you look at it, the recent dearth of RLEC deals has been broken by one done at relatively low values. The implications are troubling…
Almost eight years after the original Mid-Maine offer—Shoreham sells to Otelco. But the price is a fraction of what was rumored to have been offered back in 2003. Let's face it, the business has changed! At the end of the day, this feels like an opportunistic buy by Otelco based on the price as well as a begrudging sale by the owners of Shoreham that falls well short of what they might have received a few years back.