|Shares Out. (in M):||47||P/E||0.0x||0.0x|
|Market Cap (in $M):||123||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||404||EBIT||0||0|
Only a northern (deleveraging telco) song...
ALSK is a telecommunication company with operations in Alaska. Its shares represent an interesting long opportunity at a good valuation. On next year’s numbers ALSK trades at 20% 2014 FCF and 5.0x 2014 EBITDA. Recent trends, including Q3 earnings that were reported today, show Alaska Communications has a durable business with the ability to pay down debt. I like the setup: a levered equity situation with a lot of potential torque.
The company has $445mm of debt. I'm modeling between $22 and $30mm of free cash to be generated in each of the next three years. This cash will reduce the company's term loan. As growth in ALSK’s broadband services more than offsets the declines occurring in voice portion of the company's wireline segment, net debtwill decrease to $350mm by 2016. Time should work in favor of patient shareholders here. Even using today’s undemanding multiples, it doesn’t seem a stretch for shares to double in the next two to three years.
Alaska Communications runs a long haul fiber network across most of the state’s urban areas. The company sells wireline services (including voice and broadband) to business and consumers across the state. Current market share is about 20%. The company had a wholly owned wireless business that covered the majority of the state, but back in June of 2012 it and GCI announced they would combine their wireless networks into a new entity called the Alaska Wireless Network (AWN). The joint venture would result in the largest wireless network in the state. The two retail parents, Alaska Communications (33% owner) and GCI (66%), would however continue to independently sell wireless services through their own sales channels.
The strategy behind the joint venture was meant to address the added competition Verizon’s entrance into the Alaskan market would bring. Back in 2010 Verizon acquired 700 megahertz spectrum with an obligation to cover about 45% of Alaska by July 2013. Verizon’s arrival was particularly problematic for Alaska Communications since Verizon had been the company’s primary roaming partner. Whenever VZ customers from the lower 48 states came up (on a cruise, to salmon fish, pan for gold on a reality tv show, etc) they'd use ALSK’s network. The partnership was material: roaming revenue was 15.0% of ALSK’s topline. That roaming revenue will decline significantly now that Verizon’s 4G data network is up and running. It’s hard to time and quantify the impact, but Verizon will also enter the retail market at some point and compete head to head with AWN and other encumbants.
When the transaction forming the Alaska Wireless Network closed this past quarter, GCI paid ALSK $100mm. $65mm of that immediately went to pay down debt. Going forward, the jointly held Alaska Wireless Network (AWN) will make monthly distributions to Alaska Communications. In the first two years of the joint venture, ALSK will receive up to $50mm a year. In years three and four, distributions decline to around $45mm a year. Starting in year five ALSK will receive distributions proportional to its 33% ownership AWN. In total ALSK will receive up to $190 million of preferred distributions over the first 4 years of the joint venture. The scheduled distributions should mitigate cash flow uncertainty that would otherwise have occurred with Verizon’s entry into the Alaskan market. As it is, the AWN joint venture provides ALSK a more competitive position and some operational synergies for when the wireless competition intensifies. Additionally, the predictability of cash distriutions from the wireless business derisks ALSK's path to lower debt levels.
ALSK stock rallied significantly on the joint venture’s official close last quarter. Soon after ALSK’s board approved issuing up to 10% of its shares to buyback a portion of the company’s convertible notes. This was adversely received by the market and caused the stock to trade down 20% from recent highs. A less punitive view of the dilution should have been taken. The company’s strategy is two pronged: grow broadband and paying down debt. On company calls and presentation you hear variations of “Free cash flow will be targeted to debt reductions” and “We know that every dollar of debt reductions creates value for shareholders.” At this point I think people watching this situation feel this is just talk, but get a few quarters of growth and debt paydown in, and investors should begin to think about what the equity could look like in 2016. The dilution fear that’s bogging the equity is a short term issue. Operationally the story is on track. The past few quarters have shown close to 20% growth in broadband revenues, compared to about 11% that was done in full year 2012. Management has been able to accelerate growth in broadband which is key part of this investment working out. They’ve also paid down close to $100mm of debt, or 1x pro forma turn, so far this year. So to some extent they’re already walking the walk.
It’s not the crux of this trade by any means, but when you look at a rural/regional play like ALSK it's hard not to wonder the possibility of a takeout. Alaska is a unique place to operate, and consolidation will likely continue to occur in that market. There’s certainly some very hard to replace parts of the company’s network. I imagine that even the declining wireline business, especially in those more remote parts of the state, will prove to be a lot more resilience than folks think. Additionally, the company has around $200mm of NOL they won't be used up anytime in the near future either. In all, I think there’s enough here, between the capital structure improvements, the growth in broadband, the newly founded wireless JV, and the outside chance of M&A, to view the stock, at today’s levels, as an asymmetric situation.
|Entry||11/07/2013 03:02 AM|
The yoy ebitda decline will be due to a $15mm discretionary increase in SG&A for product marketing, SMB sales, and process improvement. My 5.0x 2014 multiple was carrying these expenses as capex, since I viewed them as temporary in nature, but that's a flub on my part so thanks for pointing that out. There's also a $3mm hit from all of ALSK's wireless backhaul contracts moving away to the AWN joint venture. Management is guiding $105mm to $110mm for FY 2013 EBiTDA. So deducting that $18mm, with maybe 3% wireline topline growth and 20% ebitda, gets you to near 2014 consensus.
As for valuing the segments? For wireline multiples I've been looking at where winstream and frontier trade. The wireless peers are trade a little better than that. Here's a back of the envelope SOTP. I'm using a year end 2013 debt # to capture Q4 being heavy on capex.