Fixed Wireless Provider Expands in Los Angeles

Middletown, R.I.-based wireless broadband provider Towerstream Corp. (Nasdaq:TWER) announced October 31, 2011 that it has entered into a definitive agreement to acquire certain business assets from Los Angeles-based Color Broadband, in a transaction comprised of cash, common stock and assumed debt. Towerstream will acquire all customer contracts, network infrastructure and related assets of the fixed wireless service provider, and is expected to close the deal by the end of the year.

It’s Towerstream’s fourth buy over the past two years, and also the largest to date. The value of the deal was not disclosed, but the biggest deal prior to this announcement was for nearly $3.5m. Towerstream said that the Color Broadband business will increase its L.A. market revenue by 70%, implying annual revenue for the target of around $2.8m. That's based on the $1m Towerstream did in L.A. in 2Q11, as reported in the company's 10-Q. It’s still tough to guesstimate the deal value, however. While Towerstream trades for more than 5x revenue presently (see below), it paid just 1.2x revenue when it acquired the fixed wireless operations of Chicago-based Sparkplug in April of 2010.

Arguably, Towerstream is still in ramp-up mode, which justifies the relatively high trading multiple. The company has posted little in the way of positive cash flow over the past year, but is still actively seeking and building acquisition markets. At the end of 2Q11, Towerstream was serving an estimated 3,200 business customers with its fixed wireless solution, in a dozen markets.

Based on Towerstream's closing price on October 28, 2011, and backing out the company's substantial working capital surplus (some of which may now be committed to the Color Broadband deal), the market is valuing the company at about $146m, or 5.4x run-rate revenue. Based on the healthy margins reported in its more mature markets there may be a good deal of upside to the company's cash flow--IF it can maintain market share.

But it seems that everyone and his brother is going after the broadband and business markets these days; in order to hit those promising cash flow targets, Towerstream's wireless solution (which relies on both licensed and unlicensed spectrum as well as WiFi) will have to increasingly compete with fiber-based competitors. My guess is that the company is able to compete effectively on price--a wireless solution is generally cheaper than fiber--but the question will become one of capacity and speeds over the longer term.

Seller ERF Wireless Planning to Focus on Oil and Gas Vertical

Las Vegas-based KeyOn Communications Holdings (OTCBB:KEYO.OB) and ERF Wireless (OTCBB:ERFW.OB) announced on February 16, 2011 that KeyOn has acquired certain broadband wireless network assets and customers in east central Texas, including ERF’s Central Texas network west of Austin and the smaller North Texas network in Granbury.  Total consideration was $3m in cash and 100,000 shares of KeyOn stock, valued at $39,000 as of the deal close.  In fact, the deal was apparently popular with KeyOn investors, who bid the shares up from $0.32 the day before to $0.39 per share upon close, for a 22% one-day gain.

Financial details about the acquired assets were not disclosed, although KeyOn said that the buy will “contribute material revenue growth, positive EBITDA and strengthen its network footprint in East Central Texas.”

We do know that in KeyOn’s last reported purchase, subscribers were valued at $456 each, which would imply upwards of 6,700 customers if that metric applies this time around, but it’s not at all clear that the business included in this deal is necessarily similar to the Wells Rural Electric Co. deal in Nevada.  Also, there is a master services agreement (MSA) component whereby ERF will utilize certain KeyOn network services as it expands its operations in oil and gas markets, initially in Kansas and Texas. I may be able to back into the approximate revenue base of the business included in the KeyOn transaction once ERF’s 2Q11 results are reported; if possible, I’ll report back then on where the multiple lies.

ERF Wireless, which has historically generated the bulk of its revenue from its residential/commercial wireless broadband service offerings, has seen its revenue base decline in recent quarters.  In 3Q10, the Wireless Bundled Services division reported $1.1m in revenue, down 13% versus 3Q09.  ERF attributed the falling revenue to “a reduction in our retail wireless and dialup customer base.” 

In its press release announcing the deal close, ERF head Dr. H. Dean Cubley stated, “As our focus has migrated away from being solely a WISP to a WISP having multiple vertical markets, we have had to adjust our assessment of our own networks for the long-term benefit of our shareholders. We are very pleased to announce closing on this sale of a limited portion of our WISP networks as part of our plan to rapidly expand our higher-margin vertical markets and to improve our overall corporate posture. Our primary allocation of the initial cash proceeds will be to provide aggressive growth for our oil and gas vertical subsidiary, Energy Broadband."

For now, KeyOn continues its relentless foray into rural broadband wireless.  As I’ve pointed out before, KeyOn has now accumulated total losses of nearly $24m and revenue in 3Q10 was just $2m. And did anyone notice the action in ERF’s stock price last year?  Its 52-week range is from a high of $0.23 per share a year ago down to a low of a penny a share…though more recently it traded for just under $0.02 per share. 

What's that say about the underlying asset base and the prospects for the business KeyOn is so determined to enter?  Not that there won't be demand for rural broadband wireless service, there will, but with terrestrial/satellite LTE services on their way from LightSquared and the Verizon LRA program, plus new broadband wireless plan money to be distributed, I'm just skeptical about the prospects for a "bleeding edge" player like KeyOn.

Deal Values Rural Wireless Broadband Subs at $456 Each—Or Does It?

KeyOn Communications (OTCBB:KEYO.OB) announced on February 3, 2011 that it completed the purchase of substantially all of the wireless broadband assets of Wells Rural Electric Company (WREC) covering Wells and West Wendover, Nevada.  The purchase price, disclosed in an 8-K filing with the SEC in December, was $373,920 in cash, with 25% paid at close and the remaining balance paid over a two-year time frame.  The unpaid balance will accrue interest at a rate of 5.25% annually. 

Attached to the filing was the purchase and sales agreement between WREC and KeyOn, which indicates that the final closing price would be adjusted based on the total number of subscribers multiplied by $456.  That implies that WREC had a subscriber base of 820 as of December 9, 2010, the day the contract was signed, though the closing announcement did not indicate how many subscribers had been acquired or what the final price was.

KeyOn expects to integrate WREC’s network with its planned project to provide 4G wireless broadband access and VoIP services to rural Nevada.  KeyOn received $10.2m in ARRA funds last September and expects to provide the next-generation services to 93,000 POPs, more than 5,500 businesses and 849 critical community facilities. 

WREC represents the eighth acquisition of network assets and subscribers since the inception of Rural UniFi in the fourth quarter of 2009 and is the company’s twelfth acquisition overall. KeyOn also said that the transaction will add positive operating cash flow in its first month of operation under KeyOn’s ownership because of its assimilation into KeyOn’s centralized network and customer operations center.  Rural UniFi is KeyOn’s strategic acquisition initiative designed to aggregate independent wireless broadband companies. 

KeyOn’s press release indicated that it now covers 2.8m POPs across 55,000 square miles.

Beneath That Glossy Exterior…

We continue to have concerns about KeyOn’s business plan and ability to execute.  Most of the deals it’s done have been with stock, or cash over a period of time as in the WREC deal. Its quarterly revenue in 3Q10 was just over $2m, compared to about $1.5m in 2Q10, but the year-to-date totals were just $5.3m in 3Q10 versus just under $5.2m in 3Q09—that despite all these acquisitions! 

The stock that KeyOn’s been issuing willy-nilly has fallen to a price of just $0.30 per share—notice the most recent seller didn’t accept stock as payment?  At that price, the equity cap is about equal to the cash and marketable securities.

In November the company’s cfo resigned and in December KeyOn agreed to convert its outstanding $15m note to preferred equity valued at $1/share, along with warrants ranging in price from $0.25 to $0.60.  Looks to us like California Capital, LP is basically taking over.  As part of the conversion, KeyOn agreed to, among other things,

• "reduce our authorized capitalization from 175,000,000 shares to 145,000,000 shares;
• reduce the number of authorized shares of preferred stock from 60,000,000 shares to 30,000,000 shares;
• change the name of “Series CalCap Preferred Stock” to “Series A Preferred Stock”;
• eliminate the “Series KIP Preferred Stock”;
• provide the holders of Series A Preferred Stock with three votes for each share of common stock that the Series A Preferred Stock held by them is convertible into on all matters submitted to our stockholders for a vote; and
• provide the holders of Series A Preferred Stock with the right, so long as at least 10,000,000 shares of Series A Preferred Stock remain outstanding, to appoint a majority of the members of our board of directors;”

So California Capital now controls the board and gets 3x voting power for its shares, and they’ve reduced KeyOn’s ability to issue new shares.  And if all that doesn't give you pause, a recent post on the Yahoo! message board for investors in KeyOn said, "Keyon has to be the worst provider I have ever had, I can't wait for someone else to enter this local market. Dial up is almost as fast and much more reliable."  Granted, that might be someone shorting the stock....but ARRA funding notwithstanding, we’d think twice before selling a broadband wireless operation to KeyOn for anything less than 100% cold, hard cash at closing.