Friday
Oct242008

CBC to Acquire Champion Broadband Assets

New CLEC to Enter Western Markets

Champion Broadband California and CBC Broadband Holdings filed an application on October 24, 2008 for CBC to acquire Champion’s operating assets.  This deal comes one week after CBC had been certified by the FCC to operate an open video system.  CBC had not engaged in carrier operations or had any affiliations with any carriers prior to certification.

According to the application filed with the FCC, “Pursuant to an Asset Purchase Agreement, CBC will acquire, subject to certain limited exceptions, the customer base, network facilities, licenses, franchises, goodwill, and other tangible and intangible assets that are used by Champion for the delivery of local exchange and interexchange telecommunications services.” 

Champion, which was formed in February 2003, is a competitive local exchange company that offers telephone, broadband Internet, and Cable TV services to customers in parts of Los Angeles, California, as well as several rural markets in Colorado and Wyoming.

CBC is a Delaware LLC that does not currently engage in carrier operations or have any affiliations with a telecommunications carrier.  CBC is a joint venture by several equity groups, led by Scorpion Capital Partners, LP, Greenwoods Capital Partners I, LP, and IG US Telecom, LLC.

JSICA Observations:  While the financial terms and the subscriber counts of Champion have not been specified, the company appears to be a strong competitor in the markets it serves.  It has approximately 25% market share of cable and satellite video services and approximately 30% market share of high-speed Internet...at least according to its website.  Over 60% of its customers have bundled services.

Tuesday
Oct212008

Optimum Lightpath Closes 4Connections Acquisition

Optimum Lightpath Buys Dark Fiber Provider

Jericho, N.Y.-based Optimum Lightpath, a division of Cablevision Systems Corporation (NYSE:CVC), announced October 21 that it has completed the acquisition of 4Connections LLC, for $49.7m.  With the addition of 4Connections, Optimum Lightpath now has more than 3,694 route miles of fiber in the ground and 3,060 lit commercial buildings across Connecticut, New York and New Jersey. 

4Connections LLC is a dark fiber provider focused exclusively on the New Jersey market.  Founded in 2001, 4Connections serves customers across multiple key vertical markets including financial services, healthcare, government and education, in ten counties across New Jersey (Middlesex, Monmouth, Somerset, Union, Hudson, Essex, Morris, Bergen, Ocean and Passaic Counties).

"Optimum Lightpath has been successful in bringing the benefits of direct fiber Ethernet connectivity to enterprise headquarters and buildings located in large metropolitan areas including Newark and New York City, and we are excited by this new opportunity to bring those high quality Ethernet based services to businesses in suburban business centers or remote, branch and back offices within New Jersey," said Dave Pistacchio, evp and general manager, Optimum Lightpath. "With the acquisition of 4Connections, which adds the capability of nearly 500 route miles of fiber across key areas of New Jersey, Optimum Lightpath can better serve New Jersey businesses with the expertise, network and services in place to address the demand for fiber Ethernet connectivity in key markets throughout the state."

Under terms of the agreement, 4Connections will operate as a wholly-owned subsidiary of Optimum Lightpath. The existing management team and employees will remain based in Parsippany.

JSICA Observations:  We first profiled this deal back in August (The Deal Advisor, 8/08, p.16). Based on 4Connections’ nearly 500 fiber route miles, the price works out to approximately $100,000 per route mile.  Revenue information was not provided, but some back of the envelope analysis provides a ballpark.  As of September 30, Optimum Lightpath was generating approximately $240m in revenue on an annualized basis, or roughly $75k per mile (assuming 3,200 miles without 4Connections).  4Connections less urban markets probably don’t generate revenue at that level, but if it averaged $50k per mile annually, then $25m in revenue would be implied, and a deal multiple of just under 2x would be indicated.  Of course, 4Connections revenue could be substantially less, making the multiple higher.

Friday
Mar142008

2007 RLEC Values

Last year, we predicted 2007 values would come in slightly below 2006 levels, “but only marginally.”  We based that conclusion on values implied by deals already in the pipeline as of March 2007 including Citizens Communications’ then pending $1.16b acquisition of Commonwealth Telephone and CenturyTel’s then pending $830m acquisition Madison River Communications, which we indicated had “come in consistent with 2006 values,” and FairPoint Communications’ pending $2.7b “spin/merge” with Verizon’s Northern New England properties, which was “coming in a tad lower than 2006 levels.”  We also concluded that for “the next few years industry values will reflect the effect of increased demand for RLEC properties, the by-product of enhanced industry liquidity.”

The final numbers are in and 2007 values were, in fact, below 2006 levels.  We’ll leave the subjective definitions of “slightly” and “marginally” to you.

After staying relatively flat during 2006, median values resumed their decline during 2007.  The median observed revenue multiple for the 20 ILEC deals closing in 2007 was 2.9x, down 12.1% from the 3.3x multiple observed for 2006 closings.  The median observed OIBDA multiple for 2007 was 6.7x, down from 7.1x in 2006.  Since 2001, observed revenue multiples have fallen 25.6% and observed OIBDA multiples have decline 27.3%.

At least for purposes of gauging 2007 RLEC values, it’s perhaps a good thing that the FairPoint/Verizon deal won’t close until the end of this month.  Values implied by that deal are significantly below  2007 median values, particularly after last-minute financial concessions made by Verizon to get the deal through the Vermont, New Hampshire and Maine PUCs.

As in prior years, we often need to make a few estimates to fill in for missing data.  We needed to do some estimating for eleven of the 20 deals closing in 2007.  However, the nine deals closing in 2007 for which we had verifiable metrics represented $3.4b of the $3.5b of 2007 deal value, or 96.5% of total deal value.

We also changed our approach for estimating per line values.  In the past, we calculated an implied price per access line by dividing the implied telco enterprise value by the number of ILEC access lines.  This approach led to volatile swings in per access line multiples, in part because of the effect of other connections that might be relevant such as, for example, broadband connections.  Given the increasing significance of broadband, video and CLEC connections, our 2007 price per connection now considers all wireline connections.  Although comparison of 2007 implied price per connection to prior year price per access line calculations is impaired, we believe this change results in a more meaningful and predictable indicator of value and will enhance analysis of future trends.

As we enter 2008, it appears that values are heading for yet another downward adjustment.  The FairPoint/Verizon deal, which is expected to close on March 31, 2008, should come in at around 5x OIBDA and $1,400 per connection after consideration of last-minute Verizon concessions.  And, as indicated by the multiples associated with American Broadband’s acquisition of The Champaign Telephone Company, lower multiples are being realized in the smaller deals as well.  While we continue to observe the value effect of recent liquidity events, particularly in the form of increased activity for and values of Minnesota properties, it’s unlikely those deals will have a material impact of median and average observed values for 2008.

Friday
Mar162007

2006 RLEC Values

As you no doubt recall from your ECON 101 days, an increase in supply and an equal increase in demand will result in prices remaining constant.  On the other hand, an increase in supply greater than an increase in demand will result in prices falling.  And an increase in demand greater than an increase in supply results in an increase in price.

The number of deals—or the supply of ILEC properties—increased in 2006.  And, after five long years of watching values decline, we’re happy to say our analysis indicates values—or price if you will—ticked up slightly in 2006.  So, if both supply and price are up, solving for the unknown indicates demand is up as well.  But let’s not get too excited!  While ae are comfortable saying values increased, in some cases we need to go out a few extra decimals to support our claim.  So for all practical purposes it may be more fair to say that we saw an equal increase in both supply and demand.

But what comes first, supply or demand?  Has demand for RLEC properties increased because there are more properties available for sale or, conversely, are there more properties available for sale because there are more players willing to step up to the plate and pay the market price for the property?  That’s more or less the economic equivalent of the old chicken and egg cliché but our vote goes with the latter.

Last year we predicted values would stay stable or increase as pressures resulting from rising interest rates were offset by what we believed would be increased demand for available properties.  We largely based our assessment on the flood of industry IPOs and pending spin-offs that, we believed, would stoke consolidation activity within the industry.  Otelco’s July 2006 acquisition of Mid-Maine CommunicationsIowa Telecom’s July 2006 acquisition of Montezuma Mutual Telephone Company and CenturyTel’s pending acquisition of Madison River Communications partially validated our assessment but as the year progressed we believe two other liquidity-related trends likely stoked the deal market as much if not more than the rash of 2004 and 2005 IPOs.  In particular, we believe cash windfalls associated with the liquidation of the Rural Telephone Bank and proceeds from a large number of significant sales of wireless interests played conspicuous roles in the direction of 2006 values.  It’s difficult to directly link such an event with a specific transaction—we’d argue that the acquisition of Hector Communications by a consortium of Minnesota RLECs flush with cash from their recent sale of interests in Midwest Wireless Holdings is as good an example as any—but it’s not such a stretch to believe that a significant increase in cash available to RLECs resulted in an increased willingness by many to aggressively participate in the RLEC deal market.

Running the Numbers

Let’s go to the overall results before we start to peel back the onion.  Our analysis indicates that implied revenue multiples for ILEC deals closing in 2006 ranged from 2.44x to 3.85x, with an average multiple of 3.23x and a median multiple of 3.30x.  That’s up from a median revenue multiple of 3.25x for deals closing in 2005.  Excluding system sales, the median implied revenue multiple for 2006 was 3.33x.  The weighted average revenue multiple fell from 3.21x in 2005 to 2.95x in 2006.

In terms of cash flow multiples, 2006 closings ranged from a low of 5.67x to a high of 9.18x with an average of 7.36x operating cash flow.  The median 2006 deal came in at 7.14x operating cash flow, flat with our median 2005 observation.  Excluding system sales, the median implied cash flow multiple rose to 7.39x.  The weighted average cash flow multiple fell to 6.90x in 2006, compared to 7.37x in 2005.

Finally (and begrudgingly), in terms of price per access line, we saw values range from $2,140 per line to $12,500 per line, with an average of $4,567 per line and a median of $3,462 per line.  Excluding system sales, the median value per line rose to $3,644, up from a median of $3,251 observed in 2005.  On a weighted average basis, each of the 23m lines sold in 2006 went for about $2,747 per line, up from the $2,666 the 775k lines changing hands in 2005 garnered.

While the median revenue multiple increased 1.8% from our 2005 observations, and operating cash flow observations were a virtual dead heat, price per access line observations showed a more discernable upward trend.  The median observed price per access line for all deals closed jumped 6.5% in 2006 while the median observed price per access line for deals other than system sales jumped 12.1%.  The weighted average price per line climbed by 3%.

The Footprint Deals

Of the 23 deals that closed in 2006, 14 were what we consider efforts to rationalize the service footprints of either the buyer or the seller.  For buyers, this would include acquisitions of contiguous or neighboring RLECs or exchanges so that existing plant and personnel can be leveraged to provide service more efficiently.  For sellers, this includes sales of remote or non-core properties as well as sales of exchanges to neighboring RLECs whose CLEC initiatives, in some cases, have eroded the seller’s ILEC line base.

The 14 “footprint” deals, which collectively involved the sale of almost 54k access lines, included Hector Communications’ November 2006 sale to a consortium of Minnesota RLECs including Arvig EnterprisesNew Ulm Telecom and Blue Earth Valley Communications.  That deal alone represented roughly 70% of the $290.6m of deal dollars spent on footprint deals in 2006.  Other major footprint deals included Twin Valley Telephone’s $18m acquisition of 13 rural Kansas exchanges from Sprint (soon to be Embarq), Rural Telephone Service Company’s $17m acquisition of 12 rural Kansas exchanges from Embarq, Iowa Telecom’s $11.7m acquisition of Montezuma Mutual Telephone Company and Partner Communications Cooperatives $8.4m acquisition of the Baxter, Melbourne, Rhodes and State Center, Iowa exchanges from Iowa Telecom.

Overall, we calculated that the median footprint deal came in at around 3.4x revenue, 8.2x cash flow and $3,644 per access line.  While revenue and cash flow information was available for the Hector deal, we needed to call in a few chits and/or get a little creative to arrive at estimated revenue and cash flow amounts associated with most of the other footprint deals.

Take Twin Valley’s March 1, 2006 acquisition of 5,200 rural Kansas access lines from Sprint.  Information laid out in Sprint’s filings with the SEC revealed the number of access lines sold and the $18m purchase price.  SEC filings also disclosed that Sprint realized a $7m gain on the sale.  But while we could calculate the resulting implied price per line—$3,461—Sprint did not provide data regarding revenues or cash flow generated from the properties.  Assuming a $75 average monthly revenue per access line and a generous 45% cash flow margin, we figure the deal implies a pro forma 3.85x revenue and 8.55x cash flow multiple.

Frankly, some of the Iowa deals made us pause.  For example, Iowa Telecom’s 10-Q for the quarter ending September 30, 2006 disclosed the basic terms of Heart of Iowa Communications Cooperative’s April 2006 deal with Iowa Telecom.  Heart of Iowa acquired Iowa Telecom’s Conrad, Eldora and Steamboat Rock, Iowa exchanges, consisting of 600 access lines, for $4.8m, or a brow-raising $8,000 per line.  Taking Iowa Telecom’s average monthly revenue per access line of $56 per line the deal pans out to a hard to swallow 11.9x revenue and 21.65x cash flow.  Even if Heart of Iowa manages to double Iowa Telecom’s monthly revenue per line figures, the deal still comes in at almost 11x pro forma cash flow… or even more if Heart of Iowa can’t keep pace with Iowa Telecom’s hyper-efficient 55% operating cash flow margin.

The Twin Valley and Rural Telephone deals in Kansas and the Lost Nation-Elwood Telephone Company,Partner Communications Cooperative and Heart of Iowa deals in Iowa demonstrate the ability of small RLECs to shake loose strategically located rural exchanges deemed non-core to the larger carrier.  However, don’t confuse the price paid for these exchanges with the intrinsic value of the properties.  Iowa Telecom, in disclosure regarding exchange sales to Heart of Iowa, Partner Communications Cooperative and Lost Nation contained in its 10‑Q for the quarter ending September 30, 2006, noted that it had “agreed to exchange sale transactions in cases we believe the sale price makes the disposal economically compelling.”  Translated to Don Corleone-speak that means they made an offer Iowa Telecom couldn’t refuse.

The RLEC Consolidators

Unlike a few years back, when players such as FairPoint Communications, Madison River Communications and Seaport Capital pretty much single-handedly (or is that “triple-handedly”?) established the market for RLEC properties and defined value for the industry, today’s rural consolidators seem much more likely to pass on a deal if the pricing gets too lofty.  Consolidators nonetheless continue to play an important role in the industry by providing liquidity to owners interested in cashing in their chips.  American Broadband, Otelco and FairPoint accounted for seven of the 23 deals closing in 2006, which collectively totaled $178m in deal value and involved telephone properties serving more than 38k lines.  By our calculations, the consolidators paid median implied values of roughly 3.2x revenue, 6.9x cash flow and $3,837 per line.

Selling the Spin

The two “spin” deals of 2006 included Sprint’s spin-off of its wireline telephone properties to the newly-formed Embarq and Alltel’s “spin-merge” of its wireline properties to Valor Telecom, later renamed Windstream Communications.  As we’ve previously indicated, we don’t typically consider the Embarq deal alongside other ILEC or RLEC sales and mergers because the deal did not represent the acquisition of one company by another but, rather, the separation of one company into two.  Based on initial trading prices of Embarq shares, we figured the market was valuing Embarq’s operations at roughly 1.9x revenue and 4.5x cash flow when the spin occurred.  By the end of the year, the market had pushed the price of an Embarq share from the low $40’s to over $51 per share, implying a still relatively cheap 2.2x revenue and 5.6x cash flow.

The Alltel/Valor/Windstream “spin-merge” represented what in form was the acquisition of Alltel’s wireline properties by Valor Telecom, but what was in substance the acquisition of Valor by Alltel’s wireline operations.  When the deal was announced way back at the end of 2005, we figured the multiples came in at 3.1x revenue, 6.4x cash flow and $3,128 per line.  The market pushed a share of Windstream from $12.24 (Valor pre-announcement price) to $13.94 per share as of the end of the year, implying 3.8x revenue and 7.5x cash flow.

Outlook for 2007

In the final analysis, values were arguably up in 2006, albeit nominally.  Liquidity events occurring over the last few years, including the monetization of interests in wireless partnerships, proceeds from the liquidation of the Rural Telephone Bank and a surge in initial public offerings by ILEC-rooted companies, managed to overcome value-eroding developments such as higher capital costs and increased sector risk.

As we enter 2007, the pipeline of deals slated to close during the year is already chock-full.  Citizens Communication’s acquisition of Commonwealth Telephone, CenturyTel’s acquisition of Madison River Communications, and FairPoint’s proposed “spin-merge” with Verizon’s Northern New England properties pretty much guarantee a robust year in terms of total deal dollars.  In terms of values, the Commonwealth Telephone and Madison River deals look to have come in consistent with 2006 values.  The FairPoint deal, on the other hand, looks to be coming in a tad lower than 2006 levels.  So early signs indicate 2007 values might be slightly below 2006 levels, but only marginally.  Where values go beyond 2007 might be the real question.

Overall we think the RLEC market is considerably more disciplined than it was a few years ago.  You’re right!—the valuable lessons learned from what is now approaching eight years of The ILEC Advisor surely commands some of the credit.  But much of the current discipline is the result of self-inflicted wounds suffered during the irrationally exuberant years of the dot.com boom and a post-boom realization that “growth” and “RLEC” are oxymoronic.  For the next few years industry values will reflect the effect of increased demand for RLEC properties, the by-product of enhanced industry liquidity.  But a few years down the road today’s cash hoards will have been long spent and inevitable consolidation will deplete the ranks of consolidators, dampening demand for RLEC properties and, perhaps, RLEC values.       

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