Warwick Valley Telephone is a small, mainly rural ILEC that
operates in New York state and parts of
northern New Jersey. They have approx 26k access lines, and the
population in their service area is 50k.
They also own a 7.5% stake in a cellular partnership and this
partnership is where the majority of their value comes from. At $21.50 the market cap is $115mm.(This was
last written up on VIC in early 05, the fundamental story is pretty much
identical but I believe the timing is better this time around for reasons
discussed below.)
Competitively they are in the same boat as all the other
wireline operators, i.e. they are facing new sources of competition and access
lines are decreasing. WWVY also has had
some issues getting into compliance with Sarbanes-Oxley and have had huge
expenses relative to their revenues to get in compliance(they had $4mm of SOX
expenses in 05, so they are spending 15% of their total revenues just on
SOX).
Given their small size and the large % of sales eaten up by
overhead and compliance costs there isn’t a good reason for them to remain
independent in their current form. A
strategic buyer would be able to extract significantly more profit out of
WWVY’s wireline assets.(WWVY spent 66% of sales on SG&A last yr which is
way out of line with comps)
Comps trade anywhere from $2k/access line to $4k/access
line. If you take the low end of the
range and value WWVY at $2k/line then you get a value of $52mm for their 26,000
access lines, at $3k the lines are worth $78mm.
The wireless partnership is the Orange County
– Poughkeepsie Limited Partnership.
Verizon Wireless is the GP and owns 85%.
Warwick Valley owns 7.5% and Farpoint
Communications(FRP) owns the remaining 7.5%.
Below I list the last 5 years of results for the partnership(the
partnership’s annual report is attached to the 10-k):
05: revs = $180mm, net = $147mm
04: revs = $163mm, net = $139mm
03: revs = $144mm, net = $121mm
02: revs = $114mm, net = $97mm
01: revs = $82mm, net = $67mm
WWVY’s share of 2005 earnings was $11mm. The partnership has recently been
distributing approx 80-90% of net income as cash to the partners(WWVY received
a $10mm cash distribution from the partnership in 05). However, in the 10-K they state that the
partnership will be reducing wholesale rates in 2006 and this will depress
results. In Q1 WWVY’s share of
partnership income delined by 7%. At
this rate they will earn $10.2mm in 06 from the partnership. I believe their stake in the partnership is
worth at least $100mm, and that is probably a conservative number.
Valuation:
$7mm net cash + ($52mm to $78mm from wireline assets) +
$100mm from the partnership = $159mm-$185mm, or $30-$35/sh.
Another thing to note is that they have a net cash position,
when comps are mostly in 2x-4x debt/ebitda range. This gives them the flexibility to do a large
buyback or one-time dividend which would be another way to realize value.
Timing:
I believe the timing is better now than it has been in the
past. Santa Monica Partners has been
involved in this for at least a couple of years but the past election was the
first where more than 20% of votes were withheld, a significant level.
Management also hired an I-Banking firm at the beginning of
this year to explore strategic alternatives, which I feel is significant
because management is finally acknowledging that the current state of affairs
is far from ideal. They expect a
recommendation sometime this summer.
There have also been some recent comprable
transactions. In Nov 05 Alltel purchased
Midwest Wireless, a similarly structured wireless partnership that was owned by
a consortium of local phone operators, for $1.075bn including assumption of
debt. This works out to a P/E of 16x and
EV/EBITDA of 10x. WWVY’s stake in the
OCP partnership would be worth $160mm at that valuation although I would balk
at assigning it a value this high based on the hiccup in results this year at
the OCP partnership.
And just a few weeks ago at the end of June HCT agreed to be
bought out by a consortium of local operators in Minnessota for $36.40/sh or
$147mm. HCT is one of the owners of the
Midwest Wireless Partnership, they will receive $39.5mm in proceeds from the
sale so the wireline business is being valued at $107mm for the equity and an
EV of $157mm. This works out to 10x
EV/EBITDA and about $4,200 EV/access line.
Again, I wouldn’t apply this access line valuation to WWVY as their lines
have been decreasing at a faster rate, but it shows that $2k-$3k/line for WWVY is
a reasonably conservative number.
So there are buyers out there for WWVY’s assets but another
thing on our side is that Sprint has recently spun-off their wireline assets
into EQ and Alltel will comlete the spin-off of its’ wireline assets sometime
this month. You had two parent companies
that wanted rid of the declining wireline business, but now there are two new
large, independent wireline operators that will likely be in the market for
strategic acquisitions.
Most of the comps have been rallying lately, likely because
of the improved chances of deals happening, but WWVY has not joined in. IMO, this is because of worry regarding the
decline in partnership results so far this year and because of the fact that
the RLEC assets appear very bad compared to comps. I don’t believe the RLEC assets are as bad as
people think, for example revs/access line for WWVY are right in line with
comps, but their overhead and huge SOX costs have made them look pretty
awful.
Catalyst:
- sale or financial engineering to unlock the sum of the
parts value
-sale or financial engineering to unlock sum of parts value