|Shares Out. (in M):||16||P/E||0||0|
|Market Cap (in M):||1,079||P/FCF||0||0|
|Net Debt (in M):||-349||EBIT||0||0|
Atlantic Tele-Network (ATNI) is a small international telecommunciations conglomerate based in Beverly, MA. The company was founded in 1987 by former investment banker Cornelius Prior as a vehicle to invest in telecom assets. The company had an IPO in 1991 and used the proceeds to purchase 80% of Guyana Telegraph & Telecom, the dominant telecom carrier in the eponymous South American country. Over the years, ATNI has acquired various other niche telecom assets: cell subscribers in the Caribbean, a rural cellular "base station" business in the U.S. (similar to cell towers, but not as good a business), a fiber business in New England, and more recently, a small solar energy portfolio. The company hit a home run in 2009 with a $200m purchase of 895k ceullular subscribers from Verizon, which the latter was forced to divest as part of its Alltel acquisition. ATNI invested about $75m into that subscriber base over the following two years and proceeded to sell the business to AT&T in 2013 for $800m cash. After $225m taxes, the company cleared about $300m in net profit, or almost $20/share, from the transction, which is the source of the large net cash position today of $22/share.
Cornelius Prior is now 81 years old and is the Chariman of the Board. Michael Prior, his 50 year old son, has been CEO since 2005. The Priors own 31% of the company and I consider them to be good owner-operators. Their $345m stake in ATNI is a large percentage of their net worth. The plan is to grow the intrinsic value of the company long-term, and they are actively and patiently looking to redeploy their cash. The company has done well over the past 15 years, with the stock price appreciating from ~$4/share in 2000.
ATNI is comprised of one main business, U.S. Wireless ("Commnet"), and four smaller businesses: International Integrated Telephony ("IIT"), Island Wireless, U.S. Wireline, and Renewable Energy. Below are brief busines descriptions along with my estimate of 2016 value
Commnet = This business has 786 base stations in the rural U.S., mostly in the west, which are equipment on a tower that enables cell companies to offer service. Most of these are upgraded to 3G. ATNI builds these base stations in areas where telecoms would prefer not to invest. It is essentially a "shared infrastructure" business, where ATNI can offer lower costs to individual carriers by spreading those costs over multiple carriers. This is a nice business, worth $960m at 16x NOPAT.
Island Wireless = A retail cellular business in Bermuda, Aruba, and the U.S. Virgin Islands. ATNI owns 42% of the Bermuda business, the dominant carrier in that country, and that is where it makes its money in this segment. Worth $68m at 18x NOPAT.
International Integrated Telephony or IIT = The "Verizon & AT&T of Guyana", the company offers wireless and wireline services in this poor South American country. This business has struggled in recent years and I am hopeful the company will divest it at some point. They have been precluded from doing so thus far due to a 25 year holding period tax penalty that expires later this year. Worth $103m at 13x NOPAT. A Chinese company bought the 20% minority stake from the government in 2012 at $120m valuation.
U.S. Wireline = A fiber business in VT, NH, NY, PA, and the Navajo nation in the southwest. The company has spent $26m building out a fiber network in these states with the government kicking in another $66m, for $91m total investment. Book value was $42m at year-end and the company did $1m EBITDA on $25m revenue. This is currently ramping up.
Renewable Energy = ATNI spent $64m to buy 59 solar sites in CA, MA, and NJ in December 2014 that gave 46 MW of generating capacity. The IRR on this portfolio is 10%, per company estimate. ATNI may do more deals here in the future, they estimate at low teens IRR. IRR is higher because they get tax benefits they can utilize.
Corporate OH = I estimate $31m in 2016, at 16x NOPAT cost is $322m.
I estimate that on 2016 numbers, the company is worth $82/share. Commnet at 16x NOPAT of $60m = $960m, IIT at 13x NOPAT of $8m = $103m, Island Wireless at 18x NOPAT of $4m = $68m, U.S. Wireline is worth about book value of $42m, Renewable Energy is worth $70m or a little more than they paid for it in December 2014, and pretax Corporate OH of $31m at a 16x NOPAT multiple is $322m cost. The company should have $400m net cash at that point (ignoring cash flows from Renewable Energy, which get wonky, and looking at that via NPV). That is a total value of $1,321m @ 16m FDS = $82/share.
While that is not a huge upside from $67/share, I think that the downside is limited. Treating the Renewable Energy as basically a cash substitue, there is $29/share in cash & investments at FYE 2016. In addition, I think it more likely than not that management makes smart decisions. They could make a good acquisition with their cash pile, or they could divest some of the smaller pieces. They are owner-operators and their incentives are well-aligned with outside shareholders. I think there is a decent chance they do a bigger deal in the next year or two with the cash, and I also think they may sell off IIT once certain tax penalties related to holding period expire in the next year. In addition, the main business, Commnet, is a gem that has had very high growth at high ROIC since they bought it for $58m in 2005, and may see strong growth in the future.
I will focus on the Commnet business here and will answer question on the other pieces in the Q&A.
ATNI purchased Commnet from a private equity firm in 2005 for $58m. In 2006, the business did $14m EBIT and $42 revenue on $85m assets. In 2014, the business did $89m EBIT and $155m revenue on $188m assets, or a 58% EBIT margin and a 47% pretax ROA. As I mentioned above, this is a "shared infrastructure" business. Commnet has 786 cellular base stations in very rural areas, the large majority of which are 3G enabled. A base station is a unit of equipment on a cell tower that enables cell companies to offer service. ATNI goes out and builds stations in rural areas and leases them to cellular carriers. Essentially, the cellular companies are off-loading capex to ATNI. According to the CFO, who was a VP of Finance at American tower from 1998-2004, "This is starting to look and smell a lot like the tower business, especially as we move to longer-term contracts". The company deals with 55 cellular carriers and the business is concentrated with the main players.
Other quotes from the CFO: "It is a good niche business, not something you run into a lot. We don't have a ton of competition. We are putting up networks in areas of the country where bigger carriers don't want to build a network because they have no retail presence. They don't have or need stores as there are no people buying phones. We have a site near the Grand Canyon that has a lot of carriers, lots of places like that. Our forte is an area connecting Town A to Town B where there is a 75 mile barren stretch of highway that gets a decent amount of traffic."
Profit growth in this segment has been very high in the past few years because ATNI has been aggressively building out and their short-term contracts with carriers have been based on per-minute or per unit of data charges. As data use has exploded, the revenues and earnings have been higher than everyone thought they would be. The risk for ATNI is that carriers overbuild. As a result, they have been aggressive in looking to lower rates in return for longer-term contracts. The company has self-admittedly been overearning in this segment in the past few years, and I think it is a mistake to project high growth off 2014 numbers. They have signed new lower rate longer-term contracts (6 years) start kicking in this year, and I think EBIT in 2015 will dip before starting to grow off the lower base. I think there is a good chance that 2016 EBIT is above 2014 EBIT and that it grows from there.
I get comfort in the fact that ATNI's structural position should enable it to be the low cost provider. In addition, the size of the market just isn't that big and this isn't an area where the carriers want to spend capex. Another risk would be that a different third party could come in and compete. However, again, the market is relatively small, reliability is important and ATNI has long-term relationships with all the players, and there are enough quirky little things like spectrum issues, that I think would make it hard for others to compete.
One other note is that sometimes ATNI has contracts to build out base stations and run them for several years before selling them back to a carrier. These are very high NPV contracts for ATNI but the sale price, negotiated ahead of time, is low. For instance, ATNI sold assets in 2012 that did about $10m EBITDA for $15m. A relatively small amount of the current base is subject to provisions like this, but it's worth noting. The EBITDA stream can be somewhat lumpy as a result.
ATNI is spending about $35m capex in this segment this year and hopes to invest more going ahead. I think this is a nice niche business. The current stub value on it within the company is under 12x PE. Between the likelihood of this continuing to grow nicely and the chance of another good larger acquisition, I think ATNI stock is pretty attractive here.
Acquisition that puts large cash pile to work. Management will lever up for a good deal, as they did in 2009 in their acquisition from Alltel.