New Opportunities in Services and Territory for Louisiana RLEC

The sale of BV Investment Partners’ Vision Communications to Gonzales, Louisiana-based RLEC EATEL, announced in September 2011, wrapped up last week. EATEL, under president and vice chairman John D. Scanlan, looks to gain new customers, expanded service area, and a plethora of communications services from the deal. According to the BV Investment Partners press release on the deal closure, “Vision provides a comprehensive suite of residential and commercial services, including digital video, high-speed Internet, local and long distance telephone, alarm monitoring, and commercial data services.” Add this to EATEL’s extensive100%  FTTH network, FiberEdge, and EATEL appears well-poised for a competitive advantage in its new and existing Southern Louisiana service areas.

Vision and EATEL have long-standing histories in rural Louisiana, as both were founded to bring service to areas not seen as profitable by the Bell system. Vision (formerly SJI, LLC) was founded in 1945 and family-owned until 2007 when it was sold to BV Investment Partners; and EATEL, also family-owned, dates back to 1935 and “has earned a reputation as a communications pioneer.” Despite humble beginnings, both companies grew throughout the generations, continually innovated and added infrastructure—EATEL claims to have started one of the first 100% FTTH networks in the country, and both companies were early entrants in other advanced services.

When JSI Capital Advisors first reported this deal in September, we estimated a value of $11-12m. Since financial information about the deal has not been made public, our rough estimate was based on access lines. Our Phone Lines 2011 lists 10,156 access lines and 1,710 broadband lines for Vision and 28,854 access lines and 11,542 broadband lines for EATEL in 2010. The deal appears to add a nice-sized chunk of access lines to EATEL’s holdings, but JSI Capital Advisors also noted that Vision experienced an unusually high annual line loss of 9% (The Deal Advisor: EATEL to Acquire Vision Communications).

Given rampant line loss throughout the market, it is unlikely that any RLEC deal is going to be based solely on adding new telephone subscribers, so the purchase of Vision presumably is providing a strategic advantage for EATEL. It appears as though the deal will add new services and territory as well as potential opportunities for future growth for EATEL. The service areas, although not directly adjacent, are relatively comparable in size and both located in Southern Louisiana. Although rural, the respective service areas are also close to Baton Rouge (EATEL’s) and New Orleans (Vision’s). One can make the argument that an RLEC located in close proximity to an urban/suburban hub is fairly attractive in terms of opportunities for population growth and new business.

EATEL also appears to be experiencing a “just go for it” moment as Vision is not their only expansion project right now. EATEL’s website shares one of the company’s key objectives: “Grow the customer base and market area through planned expansion by market segment and by geography.” The Vision deal may help EATEL achieve the geography component, but EATEL is hoping to edge into the 4G wireless market through a partnership with LightSquared.

Following in its footsteps of being one of the first 100% FTTH providers, EATEL was also the first RLEC to partner with LightSquared. According to LightSquared’s press release announcing the partnership on November 28, “This agreement will allow EATEL, an Incumbent Local Exchange Carrier, to provide its customers with a world-class broadband service that competes on price and quality with any wireless carrier in the nation.” EATEL ceo Arthur “Smokey” Scanlan commented that “LightSquared’s unique ability to offer both broadband and satellite connectivity over the same device will be a breakthrough product for our customers.” Of course, approval for LightSquared’s extensive 4G service is pending approval, but this has not stopped multiple carriers of all shapes and sizes from entering partnerships with the wholesale 4G/satellite provider whose mission is “to revolutionize the U.S. wireless industry.”

LightSquared uncertainty aside, EATEL appears to be determined to forge ahead in achieving its growth objectives in both service territory and market segments. Coming at the end of a year with only 6 ILEC deals, the EATEL-Vision deal may prove to be a sign of a turn-around in this market as companies begin to have some closure regarding regulatory issues and realize that it will take more than simply keeping the lights on to be attractive to potential buyers.

Will a Little Regulatory Certainty Kick-start this Tepid Market in 2012?

Despite fervent deal activity in most telecom sectors in 2011, ILEC deals were incredibly slim. Sixteen deals were announced in 2010, but JSI Capital Advisors only tracked 6 new deals in 2011—plus one more that didn’t quite make it to the finish line. Although there could be a variety of reasons why ILEC deals were so few and far between in 2011, the single most likely culprit is regulatory uncertainty surrounding USF and ICC. The question is:  did small ILECs miss the boat on a good deal before USF/ICC took a dark turn, or will there be a revitalization of ILEC deals once the fog clears and companies (hopefully) have a somewhat brighter future?

Of the 6 small ILEC deals in 2011, less than half were RLECs buying other RLECs, one involved an RLEC buying a telecom utility, and two involved investment firms on one side or another:

2011 was not the first year for a decrease in ILEC deals, but definitely the first year for such a steep decline- JSI Capital Advisors reported 16 deals in 2010, 18 deals in 2009, 19 in 2008 and 20 in 2007 (The Deal Advisor: ILEC Sales Closing in 2010 Approach $10b). Many of you may remember “The Great Dallas Debate” at the 2011 NTCA annual meeting where National Broadband Plan director and Aspen Institute fellow Blair Levin faced off against RLEC duo Randy Houdek (Venture Communications Cooperative) and Delbert Wilson (Hill County Telephone Cooperative). This debate became notorious for a lot of things, but Levin did make one point that even the most dedicated RLEC advocate would have a hard time denying—the “deal” that the rural industry could have gotten with USF/ICC reform a few years ago would have been relatively better than the deal they got in 2011, and the deal we ended up with in 2011 is probably better than the one we would get in the future. Can the same logic be applied to ILEC mergers and acquisitions?

If so, can we expect less than 6 small ILEC deals in 2012? It may depend on how the USF/ICC changes impact the value of these companies. Even though the sheer fact that USF/ICC reform has technically been achieved (assuming the pending appeals cases don’t change anything significantly), it sure doesn’t seem like there is a whole lot of “regulatory certainty”—at least not the level of certainty that could help increase valuations and make RLECs attractive to buyers as they were back in the day. An industry that was once considered safe, profitable and solid as a rock is starting to look like anything but when you factor in the regression analysis-induced “race to the middle,” reduced access revenue, declining landline connections and myriad competitive forces.

A couple of 2011 deals, like La Motte Telephone purchasing Andrew Telephone (both in Iowa) and Otelco acquiring Vermont-based Shoreham Telephone Company were fairly straightforward examples of convenient deals that would boost the buyer’s footprint and create various operating and strategic synergies. Interestingly the Otelco-Shoreham deal reflects the issue mentioned above—that RLECs have possibly missed the boat on a good deal—as Shoreham was reportedly offered three times more from a prospective buyer in 2003 than what Otelco offered in 2011 (The Deal Advisor: Otelco to Acquire Shoreham Telephone for $4.5m).

Also interesting is that the FCC has made no effort to hide its desires that small RLECs merge—consolidated switching is strongly recommended in the ICC section of the Order. The FCC may not have considered that its very own actions on USF/ICC are prohibiting a vibrant market for high-value small rural telephone company deals, but there are more factors to consider than just regulatory uncertainty. The almost-merger between small Minnesota RLECs Farmers Mutual Telephone Company and Federated Telephone Company illustrates this point quite effectively. It was the members of one of the cooperatives who killed a deal that (on paper at least) appeared to be a perfect match (The Deal Advisor: Farmers Mutual Fails to Approve Merger with Federated Tel.).

Is there any optimism for an upswing in ILEC deals in 2012? If prospective buyers are willing to accept the regulatory risks and if ILECs can figure out how to build value in this environment, then it is certainly possible. But will we look back at the 6 deals of 2011 as an unusually low outlier simply because of the year’s heightened regulatory uncertainty, or are single-digit deals the new norm?