Northland Cable Cleaning Up Partnerships

Buying and Selling at Limited Partnerships Seven and Eight

Seattle-based Northland Communications has filed for four separate cable TV system sales in Georgia and Alabama. Three of the systems are owned by Northland Cable Properties Seven Limited Partnership (Northland Seven); the fourth is owned by Northland Cable Properties Eight Limited Partnership (Northland Eight).  Northland Communications owns and operates smaller-market cable systems in Alabama, California, Georgia, Idaho, North Carolina, South Carolina, Texas and Washington.

In two of the transactions, Northland Cable Television, Inc. (Northland CATV), an affiliate of Northland Communications and managing general partner of the LPs, will acquire the systems. In the other two, Truvista Communications of Georgia, LLC and Charter Communications are the buyers. Because both of the limited partnerships file with the SEC, relatively detailed data was available with which to crunch multiples and evaluate the systems.

In the first transaction, Northland Seven is selling its systems in Vidalia, Georgia  to Northland CATV for $5.4m. Vidalia (home of the onion!) is midway between Savannah and Macon, and the system there passed about 9,500 homes. Basic subscribers as of the end of the latest quarter were estimated to be around 3,200 based on year-end 2010 reported figures and the percentage decline experienced by the three Northland Seven systems in the aggregate through September 30. Similarly, the Vidalia system revenue was estimated based on Northland Seven average ARPU across the three owned systems, as was OIBDA and margin. Using these assumptions, the deal for Vidalia in a sale to the managing general partner comes in at about 1.6x revenue and more than 8x OIBDA.

Next, Northland Seven is selling its Toccoa, Georgia system to Truvista Communications for $8.9m. Toccoa is in northeastern Georgia near the South Carolina border and the system passes about 13,000 homes. I estimate the Toccoa system was serving just under 4,000 basic customers and generating nearly $4.2m in annual revenue. Based again on LP-wide margins, OIBDA would be in the $807k range, indicating a revenue multiple of 2.1x and a cash flow margin of 11x.

Finally, Northland Seven will sell its Sandersville, Georgia system to Charter Communications for $3m, or about 1.5x revenue and 7.9x cash flow. Sandersville is also between Macon and Savannah and the systems pass about 4,600 homes.

In the aggregate, Northland Seven is liquidating its systems for $17.3m, or 1.8x actual LQA revenue and 9.4x actual aggregate cash flow.

In the final transaction, Northland Eight is selling its systems in Aliceville, Alabama and Swainsboro, Georgia to Northland CATV for $5m, or 1.2x actual LQA revenue and 6.5x actual LQA cash flow (excluding the impact of an $860,000 writedown in the quarter for the fair value of the LP’s franchises).

Judging by comments made in the public filings as well as the 19% cash flow margins at both partnerships, it seems the systems may have been struggling recently. Subscriber losses for Northland Seven were around 9% year over year through September, compared with an average YoY loss of less than 3% for the major publicly-traded cable companies. Northland Eight’s subscriber base fell by 6% YoY through September.


PAETEC Deal Clears Key Hurdles

Shareholders Approve Deal, City Opposition Withdrawn

Since we last looked at Windstream’s (Nasdaq:WIN) pending $2.3b PAETEC acquisition on TDA, the deal has received key regulatory approvals, and Windstream has navigated some key opposition to the purchase, keeping it on track for its late 4Q11/early 1Q12 close.

In late August, PAETEC announced that it had received notice from the Federal Trade Commission of early termination of the waiting period for its merger. And on October 30th, PAETEC shareholders voted overwhelmingly (99% approval of voters present) to approve the deal, through which PAETEC stockholders will receive 0.460 shares of Windstream common stock for each share of PAETEC common stock.

While Windstream sailed through the FTC and PAETEC shareholder approvals, garnering support from PAETEC’s hometown, Rochester, NY, and New York state proved more difficult (and costly). On September 29th, the city decided to wage war with Windstream, filing its formal opposition to the PAETEC deal with the FCC. The subject of the complaint: concern that Windstream would renege on a PAETEC commitment to relocate its headquarters to downtown Rochester.

This past January, Arunas Chesonis, ceo of PAETEC, along with then mayor of Rochester, Robert Duffy, signed an agreement that would see PAETEC construct its corporate headquarters in downtown Rochester, creating what would be the flagship building in the city’s redevelopment. In what was dubbed “The PAETEC Project,” Rochester invested $60m of state and city funds to create a shovel-ready building site for PAETEC. In return, PAETEC's commitment was to construct a new building, to move existing jobs downtown, and to occupy the 225 square foot facility for 20 years. To fund the construction, PAETEC committed to obtain $34m in loans and use $5m of its own equity.

When Windstream announced its merger with PAETEC in August, the initial reaction in Rochester was that “The PAETEC Project” was dead before it even started. After Chesonis confirmed that 800 Rochester-area workers would lose their jobs post-merge, it became even more evident that Windstream didn’t plan to make good on PAETEC’s commitment. As job threats loomed, animosity towards the deal built.

The city filed its comments with the FCC and the New York public service commission, arguing the deal would adversely impact Rochester residents. US Senator Charles Schumer joined the city, putting pressure on Windstream to honor PAETEC’s commitment. Initially, Windstream and PAETEC fired back at city and state’s criticism, filing a joint response to the FCC.  The pair argued that concerns about the city and job losses were not within the FCC’s power to review, and that efficiencies (job losses) are created in every merger and couldn’t be used to block the deal. Political pressure however mounted, and Windstream decided to compromise.

At a press conference Monday, Windstream ceo Jeff Gardner announced that the company will move 335 employees to downtown Rochester. It will occupy 67k square feet of office space under a 15-year lease with annual payments around $1.2m, compared to the initial PAETEC agreement of a 225k square foot building and a 20-year lease.  

The city subsequently withdrew its complaints from the FCC and New York Public Service Commission. While Gardner maintains that the agreement to stay in Rochester was not a political move, the lease agreement included a stipulation that the city withdraw its complaints and support Windstream’s efforts to get regulatory approval. The New York Public Service commission is set to weigh in on the deal during its session on November 17th.

With the end of the regulatory hurdles in sight, the real work for Gardner and Windstream is set to begin after the deal’s close. Both Windstream and PAETEC turned in lackluster 3Q11 results, and Windstream has set aggressive cost synergy targets following the deals close—$50m in the first year and $100m per year after three years.

PAETEC reported a loss of $17.1m in 3Q11, on revenues of $536.3m. While its revenue was up 31% YoY in 3Q11, the gains were due to its acquisition of Cavalier Telephone. PAETEC, like Windstream, has generated top line growth through M&A in recent years, but the company has been in the red since 2007. In that time frame, PAETEC has spent $2.65b on its six acquisitions, but the deals have not benefited PAETEC’s bottom line.

We recently reviewed Windstream’s 3Q11 results in Phone Numbers, and the story once again was: where’s the growth?  Pro forma revenue was down at Windstream YoY in 3Q11 to $1.02b, as earnings and operating margins dropped as well. Acquisition and merger related costs, not cost synergies appear to be having the largest impact on Windstream’s earnings.

The struggle and compromise between the city of Rochester and Windstream reveals just how difficult (and ugly) a road Windstream has ahead of it in order to meet the $100m cost savings it projects. Windstream is set to invest around $18m into the Rochester development, and take on around $1.2m in annual lease payments—costs it had not factored in when projecting the PAETEC deal’s synergies. And while the city’s opposition to the deal was ultimately withdrawn, the root of the city’s complaint and the main driver of the deal’s synergies— the loss of 800+ jobs at PAETEC—is still likely to occur.


Systems Provider Tekelec Selling to Investment Group

Lawsuits Fly and Investors Bid Shares Above Offer Price

Telecommunications solution provider Tekelec (Nasdaq:TKLC) announced November 7 that it has agreed to be acquired by a private equity consortium led by Siris Capital, for $11/share or about $780m. The company, based in Morrisville, NC, has historically provided global signaling systems which help communications providers manage their voice traffic. The company initiated a restructuring earlier this year, however, and is increasingly focused on data and video solutions for 3G and 4G networks.

Tekelec’s share price has been trading above the $11 offer price since the announcement was made, based on investor opinion that a bidding war could emerge. TKLK has risen as much as 80% off its lows of a year ago, but nevertheless, the $11 offer provided a mere 11% premium over the closing price prior to the news.

As a result, several shareholder lawsuits have been filed, alleging that the Board, which unanimously approved the transaction, shirked its fiduciary duty in accepting a sub-par bid. Siris Capital Group LLC and its affiliates (including The ComVest Group, GSO Capital Partners LP, Sankaty Advisors LLC, ZelnickMedia and other Siris limited partners and affiliates) have secured committed debt and equity financing.

Tekelec’s management team will remain, and Merle Gilmore, former president of Motorola’s Communications Enterprise and chairman of the board of Airvana Network Solutions, will serve as executive chairman following the closing. “Tekelec presents a unique opportunity to acquire market leading products in the Signaling, Policy, and Diameter Routing markets, a global customer base that includes 16 of the top 20 wireless service providers, and a highly skilled employee workforce,” said Gilmore. “We will continue investing in and building on Tekelec’s reputation for innovation, scalability and reliability to extend the company’s mobile data products to new markets and applications.”

The company’s new product line has been growing rapidly—which prompted some analysts to characterize the offer as low—but Tekelec still generates the vast majority of its top line via its legacy global signaling product line, which is in decline. In the third quarter orders for the legacy business fell by 16% and overall revenue was down by 2% YoY. Due to a 12-18 month lag time between when orders are placed and revenue is recognized, it appears likely that Tekelec’s revenue will continue to fall in 2012.

The $780m valuation comes in at 1.8x revenue, but comes in at about 10x last quarter annualized cash flow—if you ignore more than $5m in restructuring charges. Using actual 2010 cash flow the multiple climbs to nearly 16x. The company expects to cut between $20m and $30m in annual expenses through its ongoing restructuring.


Twin Valley Telephone Eyes Growth in the Cloud

Independent Telco Sees Growth Potential in Managed Services

On November 1st, Miltonvale, Kansas-based Twin Valley Telephone Company (TVT) announced that it had acquired a majority stake in cloud services provider, Salina, Kansas-based ISG Technologies. While financial terms of the deal have not been disclosed, the combined company will generate around $90m per year. The purchase signals a pivot for TVT to target more small to medium-sized business customers—a shift that many telcos and communications providers of all types are making. With the increased competition in managed services, the question remains: Who is best positioned for success?  

An independent, family-owned telephone company, Twin Valley has provided telecommunications services to customers since 1947, with its company’s roots dating back to 1900. It currently serves 6.6k subscribers and 7.4k access lines over a footprint of 2.4k square miles in north-central Kansas. The telco completed a fiber build over its entire footprint in 2009, and offers IPTV, and broadband Internet in addition to its phone services.

As a competitive telco for over 60 years, Twin Valley has gone through many transformations in its day. It got into the cable television business in 1983, and amid increasing access line losses in the 1990’s and early 2000’s it turned to IPTV as a revenue replacement growth strategy in 2003. In March 2006, it nearly tripled its size, purchasing 5,200 access lines in 13 Kansas exchanges from Sprint.

In acquiring ISG Technologies, TVT adds a portfolio of managed services and data center solutions along with an established based of 2,500 SMB clients. While the term “cloud services company” can conjure up the image of a crew of 5 to 10 people operating out of a basement somewhere, ISG is an experienced IT company with 28 years in the business and 140 employees. Like many IT companies, ISG has found a niche in “cloud services”—which it admits is essentially a metaphor for utilizing the Internet for your computing and communications needs.

Twin Valley had its own experiences in “the cloud” which led to its interest in ISG. According to ceo Ben Foster, TVT realized the potential of selling cloud services after the company itself moved over to a virtualized server infrastructure.

“Our realization that a business-focused cloud strategy was going to be our growth opportunity outside of our footprint occurred just after we went to a virtualized server infrastructure.  We began to save significant amounts of money by reducing the number of servers that vendors were selling us and charging us to maintain. It became evident that what we really had was a mini-data center that could be leveraged to sell hosted services and disaster recovery.”

TVT experienced first hand the economic benefit that cloud services could provide to small businesses, and saw a potential revenue stream for its own business. It decided to offer services such as web hosting and disaster recovery, which it offers along with its hosted VoIP services. With the ASG acquisition, TVT is doubling down on the cloud. 

TVT however is not alone. In addition to regional telcos like Warwick Valley Telephone (Alteva) and TVT moving into managed services, massive corporations like Amazon and Google are getting into the same space. Best Buy just acquired IT services firm mindSHIFT for $167m, commenting that the combined companies are looking to capture a greater share of the $40b small and mid-sized business MSP market.  While bigger doesn’t necessarily mean better, a company like Best Buy, armed with its strong distribution channels and Geek Squad service expertise appears to be well positioned for success as an MSP. 

Despite the growing competition, Foster believes there is plenty of room on the cloud for the giant companies and smaller providers alike. Specifically, he feels Twin Valley and ISG are better suited to provide quality service that meets the business needs of small to mid-sized companies.

“In our market research, we identified a gap in the type of support these corporations provide business customers versus what they expect for the investment they are making.  If you are a fellow Fortune 500 company, Amazon and Google would be happy and probably better-equipped to support you.  If your company is smaller than that, you aren’t really hitting their radar screen.  Companies of all sizes can’t operate without an efficient, capable IT partner and infrastructure. We are far better equipped to handle that next tier of companies’ needs and will do so aggressively.”  

That LECs are competing in similar areas to an Internet search giant like Google, and retail companies like Best Buy lends more credence to what we already know: the telecommunications landscape is changing rapidly, and media providers of all shapes and sizes are a part of this giant shake up. 

As this convergence in telecommunications is taking place, some providers are content to maintain a strategy that has worked for them for years--focusing on their core businesses: telephone, cable television, and Internet. Others are taking a more proactive approach to their future. With its acquisition of ISG Technologies and its move to the cloud, Twin Valley is proving that it is the latter.


California-based CLEC Utility Telephone Agrees to Buy Nevada ISP

CLEC Adds 2.7k Internet and VoIP Customers in CA, NV

Stockton, California-based CLEC Utility Telephone announced on October 28, 2011 that it has entered into an agreement to acquire Reno, NV-based Internet and VoIP service provider, Great Basin Internet Services, Inc (GBIS). The deal is expected to close within the next sixty days. Financial terms of the agreement have not been disclosed. This is not the first time GBIS and Utility have sat together and hashed out an agreement on a deal; just a year ago, Utility acquired WPTI Telecom from Great Basin.

Utility Telephone was founded in 1996 by Jason Mills, who chose to focus exclusively on providing telecommunications services to small and medium sized businesses. Currently, Utility serves SMB customers all across California and in Northern Nevada with basic voice, VoIP, data, Internet and managed IP services.

GBIS provides similar SMB centric services in and around Utility’s footprint in Northern Nevada and Eastern California, making it a logical acquisition target. At the time Great Basin was founded in 1994, Reno, Nevada was void of ISPs and founder Bruce Robertson, seeking his own web access, decided to start a company that would provide Internet connectivity. Great Basin started out providing DSL to customers, and eventually expanded into web hosting and web design in 1997. Today GBIS serves approximately 2,700 wireless broadband, DSL, VoIP and collocation customers in Nevada and California that Utility Telephone will inherit.

Unlike Utility’s customer mix, residential subscribers represent a sizable portion of GBIS’ client base; this led to some financial difficulties for the ISP in 2008. The company acquired WPTI Telecom and Broadband in February 2008, gaining CLEC status and a landline voice offering. At the time of the WPTI acquisition, AT&T and Charter began to steal residential Internet subs in GBIS’ markets. Its revenue streams began to dry up, and GBIS was forced to file for bankruptcy protection in August 2008.

As part of its Chapter 11 reorganization plan, GBIS began to target more SMB customers, suiting Utility’s business model well. In 2009, GBIS opened a new data center in an attempt to attract more business clients seeking co-location services. And the company then sold off WPTI Telecom to Utility Telephone in September 2010 in an effort to raise cash, although financial terms of the deal were not disclosed. After nearly three years working to get back on track financially, Robertson decided selling GBIS to Utility was in the best interest of the company and its customers.

Utility’s acquisitions of both WPTI and GBIS represent significant expansions into Nevada for the CLEC.  In Douglas County, a market it expanded into with its WPTI purchase, Utility is competing with Frontier for business customers. Both LECs are new to the area as Frontier (NYSE:FTR) acquired the landlines in Douglas County from Verizon (NYSE:VZ) in 2010. The GBIS purchase deepens Utility’s penetration in Reno and Carson City. 

From a revenue perspective, the GBIS acquisition will increase Utility’s top line approximately 25%. According to its bankruptcy filings, Great Basin had $2.3m sales in 2008, $2m in sales in 2009, and according to Hoover’s, the company’s 2010 revenue jumped to $2.5m in 2010. Utility currently generates approximately $10m annually.

With a pair of deals under its belt in the past year, Utility remains active on the M&A front. On November 1st, just two days after announcing its agreement to purchase GBIS, Utility Telephone filed an application with the FCC to acquire a California-based long distance telephone reseller, US Telestar.

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