GNCMA - General Communications

[LC]

These are from my old notes so the numbers may be outdated:

 

___

 

GCI purchases 100m of assets from ALSK and contributes them to AWN

 

GCI owns 66% of AWN and receives a yearly royalty fee as follows:

-Y1&2: 4%

-Y3&4: 6%

-Y5+: 8%

 

ALSK received a preferential payment from AWN for the first four years (i believe 50m/50m/50m/40m?) to total 190m, GCI entitled to excess distributions.

 

Afterwards distributions are according to ownership % (66/33)

 

GCI extends a 50m letter of credit to AWN

 

___

 

The deal was structured to help delever ALSK

 

And at the time (again, about a year ago...#s may have changed), management was expectingAWN to generate 80m in FCF in year 1, GCI essentially receiving 30m (3.2m royalty + 26.8m excess) and ALSK receiving 50m.

[Laxputs]

Ok, that helps, thanks for that. So pretty important to readjust the value of GCI for the first 4 years given they'll make less FCF from AWN than it would seem.

[flixil]

I don't find GNCMA so cheap and I'm thinking that the minority interest was not counted when calculating the EV in the other posts.

 

Enterprise Value (Q: June. 2014 )

= Market Cap(today as google finance) +Preferred Stock +Long-Term Debt + Capital Lease

= 459.85M                                         +0                 +1,082.99            +70.609

+ Short-Term Debt Without Lease + Minority Interest - Cash and Cash Equivalents

+ 0                                         + 293.713            - 82.329

= 1,824.833

 

Data from http://financials.morningstar.com/balance-sheet/bs.html?t=GNCMA

 

Suposing EBITDA of 4x(2014-06 EBITDA) = 4x81.151 = 324.604M

 

That makes a EV/EBITDA of 1824/324 = 5.6

 

Suposing EBITDA TTM of 296.136M

 

That makes a EV/EBITDA of 1824/296 = 6.16

 

Compared with AT&T Inc (NYSE:T) EV/EBITDA of 4.99 and Verizon Communications Inc (NYSE:VZ) EV/EBITDA of 5.98 (according to http://www.gurufocus.com/term/ev2ebitda/VZ/EV%252FEBITDA/General%2BCommunication and http://www.gurufocus.com/term/ev2ebitda/T/EV%252FEBITDA/General%2BCommunication), I don't see why GNCMA is in such a wonderful position as there are already 4 players in the wireless space in Alaska (At&T, VZ, GNCMA and ALSK) and two providers of fiberoptic connections to the other 48 (GNCMA and ALSK).

 

Aren't all the competitors actually cheaper than GNCMA in terms of EV/EBITDA?

 

Thanks

[Packer16]

I think the big difference is the historical and future growth prospects. Since 2008 AT&T's cash flow growth has been up by 10%, VZs is actually down after the wireless sale but GNCMA's has increased by more than 100%.  Expected 5-yr growth rates are also reflected in the difference (VZ - 1.5%, T - 3%, GNCMA - 9%).  You are correct that GNCMA is not cheaper then legacy carriers but the business is much better illustrated by the better historical growth rates with EBITDA margins in the 30%+ range.  Cable firms have these types of growth rates.  There are many legacy telcos with lower valuation but they also having dieing businesses.  I would put VZ in that camp and T in the trying to keep CF stable by buying growing businesses (like DTV) typically not a good strategy.

 

As to the MI, the adjustments we have made to the EBITDA to reflect the proportionate EBITDA GNMCA will receive and pay to ALSK per the terms of there agreement.  This more accurately reflects the economics.  The details of AWN are found in the ALSK filing so we can estimate the proportionate cash flow and BS items. 

 

There are two other legacy carriers that are providing "triple-play" services (cable, data and internet) to most of there customers (SHEN and CNSL) and HCOM who is currently rolling it out.  SHEN and CNSL trade at close to 7.5x EBITDA (above the legacy telco of 5.5 to 6.5x) due to there data/cable capability (similar to GNCMA).

 

Packer

[flixil]

Thanks for the prompt reply Packer.

 

Anyway, looking at the P/E ratio of 459.85M USD (market cap) / 12.258M (TTM net income) that gives about 37.5 (40 with diluted earnings).

 

With the current s&p500 p/e at 19.81 and communication services industry at 13.1, 37.5 times earnings looks like a high price to pay for the most resilent company in Alaska, but one that never paid a dividend and one that is investing in gigabit broadband connection when it could probably wait.

 

Maybe GCI has the best infrastructure in Alaska, 2B$ of it, but when is it going to start being a cash flow cow?

 

flixil

[Packer16]

GAAP Earnings is rarely used to value/price growing telecom businesses like GNCMA.  EBITDA or Cash Flow (CFO) is typically used because the earnings arrive when the growth slows down.  If GNCMA had a 3% cash flow growth (like the legacy telcos) the earnings will work.  Graham had a formula 8.5 + 2g to estimate the multiple for a growth company.  For T the result will be close to 11.5 but for GNCMA it is closer to 26.5. 

 

In addition, the earnings include write-offs of acquisition amoritization, depreciation of equipment paid for in part by government grant which are not real cash flow expenses and GNCMA has a huge amount of NOLs which will offset the taxes included in the earnings number for years to come.  A cash flow metrics in typically used because of all these earnings adjustments have to be made for each company's earnings to be comparable.

 

Packer     

[merkhet]

Packer,

 

Do you have a sense of how aggressive they'll be repurchasing shares in the future?

 

Additionally, if memory serves, Malone liked to leverage his companies up to 5x EBITDA but GCI is leveraged a turn and a half below that -- any reason why?

[yadayada]

just look at the past 3-4 years, they seemed to buy shares back pretty aggressively.

[merkhet]

Yea, I saw in the last decade, they've been pretty good at buying back shares. 6 million in the first five years and around 10 million in the last five years.

 

I was just curious if they have given indications of wanting to move even faster. Another turn of the EBITDA and they could have $300 million lying around to repurchase shares. (They'd have to up their $116 million authorization though.)

[yadayada]

I think they will have to refinance some debt later this year so they are building up a cash position now. Or at least that is what I gathered from their Q call.

[merkhet]

What's really interesting to me in the conference call is the way that they are looking at video versus data. Some questioner mentions that their video revenues have gone down, and Duncan mentions that he's indifferent about it since data revenues are increasing.

 

Traditional video is a challenge business for all that very largest cable operators I am afraid hidden there that’s going to be margin pressure. We bear the bonds of programs price increases compare to over the top alternatives and we have to deal the programmers who sell their programming not only to us very high rate but then put some of it available through, over the top mechanisms.

 

The good news is that part of what you’re seeing in the growth of the data revenues is the migration to over the top. And at this point from a margin perspective we’re probably just as happy when our customer decides to bring their own programming and be over the top is when they buy a linear cables subscription because we’re about in different in what they have to buy more bandwidth when they spend all their time through over the top deliveries that somebody completely delivered the linear program completely the lead is a liner programming and we’re totally over the top let see a material increase and the data consumption.

 

And it sort of comes out in the wash, I think overtime what you’ll see is continued steps up in data speeds in average data revenues per user. And continued step downs in video margins, whether that hits the wall in four or five years, we completely change the paradigm of the video business that’s hard to say. But you don’t have to look any further than what’s happening with sports and programming rights, when every time your contracting news that doubles in price to understand what’s driving the margins in that business.

 

And at the end of that pipe is the same person over and over its the consumer, regardless of how it gets there when major league baseball gets 100% increase, when the NFL gets a 200% increase, when the NBA gets 150% increase in the television contracts it all comes out of the consumer's pocket. And they are going to pay it through the cable bill or through the over the top bill and at some point you question how much is affordable.

 

I found that to be really interesting and insightful -- and possibly a look into what Malone is seeing and why Malone has decided to come back into the fray with Charter and/or Liberty Global.

[bookie71]

fyi

http://www.adn.com/article/20140826/verizon-shows-new-high-tech-network-lead-alaska-rollout

[merkhet]

I thought Duncan had an interesting way of looking at Verizon in the CC as well.

 

This is Ron Duncan. I don’t think we have a completely clear picture of what’s going to happen with roaming at it turns out but the network that Verizon was roaming was blocking when we took it over. So last year we probably lost perhaps material amount of roaming revenue from bad network that could have been experienced. That blocking is gone now, and I don’t think we have, I don’t think we’ll get a good year-over-year comparison probably until the fourth quarter of this year to be able to see what’s really happening. Obviously, Verizon LTE traffic has been siphoned off their LTE network there is still substantial residual Verizon traffic both from legacy handsets and from LTE handsets that don’t connect to the LTE network.

 

And the trade-off really is how fast LTE handsets deploy and how you ubiquitous the LTE footprint. It is compare to how much growth there is year-over-year in subscriber use of the data on their individual handsets including their legacy handsets. The day the roaming seems to be holding up fairly well. We expect overtime to see diminishment in roaming but a substantial portion of where the roaming occurs is currently outside of the Verizon construction footprint as well.

 

And we’re seeing significant year-over-year growth in demand there, a portion of which relates to removing the blocking and a portion of which clearly relates to the fact that usage per handset keeps going up. So I think it will probably be all the way through this year, before we really have a good handle on how the increased customer usage trades off against the deployment of LTE handsets and network.

 

And:

 

When they sell an LTE handset to a Verizon customer Anchorage particularly a Verizon customer who used to be an AT&T customer and that customer heads down to the ski area at Girdwood or drives on down to Kenai or Stewart, the entire roaming that that customer does is going to be on our CDMA network.

 

And we have no doubt that as soon as they open the store somebody from Kenai is going to drive up here and decide they want to buy a Verizon phone instead of their AT&T phone and all of sudden you are going to have a permanent roamer in Kenai who is running all of his traffic on the GCI CDMA network.

 

So, I think it’s a mix bag. We are certainly not sitting here in fear of the Verizon entry. We think the pricing in the market is already set essentially by T-Mobile who is not ever here because the national carriers are responding to T-Mobile. It’s a vigorously competitive market as a result of that but we are not expecting any material adverse economic impact from the Verizon entry because a large piece of it will be offset by increased roaming.

[racemize]

yeah, I really enjoyed that portion of the call as well.  They were similar thoughts as to what I've been thinking, but it was nice to hear it from the horse's mouth.

[flixil]

I don't find GNCMA so cheap and I'm thinking that the minority interest was not counted when calculating the EV in the other posts.

 

Enterprise Value (Q: June. 2014 )

= Market Cap(today as google finance) +Preferred Stock +Long-Term Debt + Capital Lease

= 459.85M                                         +0                 +1,082.99            +70.609

+ Short-Term Debt Without Lease + Minority Interest - Cash and Cash Equivalents

+ 0                                         + 293.713            - 82.329

= 1,824.833

 

Data from http://financials.morningstar.com/balance-sheet/bs.html?t=GNCMA

 

Suposing EBITDA of 4x(2014-06 EBITDA) = 4x81.151 = 324.604M

 

That makes a EV/EBITDA of 1824/324 = 5.6

 

Suposing EBITDA TTM of 296.136M

 

That makes a EV/EBITDA of 1824/296 = 6.16

 

Compared with AT&T Inc (NYSE:T) EV/EBITDA of 4.99 and Verizon Communications Inc (NYSE:VZ) EV/EBITDA of 5.98 (according to http://www.gurufocus.com/term/ev2ebitda/VZ/EV%252FEBITDA/General%2BCommunication and http://www.gurufocus.com/term/ev2ebitda/T/EV%252FEBITDA/General%2BCommunication), I don't see why GNCMA is in such a wonderful position as there are already 4 players in the wireless space in Alaska (At&T, VZ, GNCMA and ALSK) and two providers of fiberoptic connections to the other 48 (GNCMA and ALSK).

 

Aren't all the competitors actually cheaper than GNCMA in terms of EV/EBITDA?

 

Thanks

 

I have to recognize that I added twice the value of minority interests in the previous quote, as it was already included in google data for Market Cap.

 

Suposing EBITDA of 4x(2014-06 EBITDA) = 4x81.151 = 324.604M

 

That makes a EV/EBITDA of 1531/324 = 4.72

 

Suposing EBITDA TTM of 296.136M

 

That makes a EV/EBITDA of 1531/296 = 5.17

 

Sorry for the inconvenience

 

flixil

[hardcorevalue]

I just wanted to mention that I exited General Communications last month. I still think it is very cheap and can easily see the equity value doubling but I've been moving to a more concentrated portfolio and it didn't make the cut (I may re-enter at some point). First off, I love cable business and the aspect of higher internet fees more than offsetting video subscriber losses. The cell phone segment is less clear cut for me as they have more serious competition than in the past. I also very much like the buybacks. What did have an effect on me were the related party transactions in the proxy statement.

 

I don't like the property capital lease with Duncan and subsequently his wife. Investor relations told me this was because there is only so many suitable office locations in Anchorage but it kind of comes off as questionable. What really made me a bit un easy is the second aircraft lease that belongs to Duncan. GCI actually paid the $1.5m deposit for Duncan's new aircraft, who then leased it back to GCI at $132k per month. I just don't like the dynamics of that. The counter argument to this is that they are relatively small transactions and more than priced in at these EV/EBITDA levels but anyways, I thought I'd share my two cents of the matter. Thanks to everybody on the board here, especially Packer for his excellent analysis.

[yadayada]

You have to wonder what he needs that airplane for. what is your best idea currently hardcore?

[hardcorevalue]

I read an article that Duncan's favourite hobby is flying.

 

I have a lot of the US financials that a lot of people on the board also own. I'm running low on good ideas and have been scaling back more in favour of cash, I'm well aware the market is still in the 'zone of reasonableness' and a high cash position could see me under perform for years. But hell, I live in Toronto and am used to seeing my friends get rich (on paper) with real estate. I'll keep waiting for my fat pitch.

[Patmo]

Isn't this company a fat pitch if you think it's worth double what it's trading at?

[bookie71]

In Alaska you must fly to visit most villages as their are not any roads.  That said you could fly commercial.

In fact GCI lost their #2 person as well as U. S. Senator Ted Stevens in a plane crash

http://www.huffingtonpost.com/2010/08/11/dana-tindall-gci-executiv_n_678632.html

She was a great lady and very smart.

[investor-man]

Looks like someone called Mast Capital Management bought a 7.4% stake.

 

http://www.sec.gov/Archives/edgar/data/808461/000092189514002039/sc13g08663gen_09022014.htm

 

I've never heard of them. Anyone familiar?

[Laxputs]

http://seekingalpha.com/pr/11080415-gci-first-in-nation-to-launch-lte-roaming-with-a-national-domestic-operator

[Gamecock-YT]

Briefly hit a new 52 week high this morning.

[krazeenyc]

Results out.

 

http://finance.yahoo.com/news/gci-reports-third-quarter-2014-210901938.html

 

Good looking quarter.

[Gamecock-YT]

Results out.

 

http://finance.yahoo.com/news/gci-reports-third-quarter-2014-210901938.html

 

Good looking quarter.

 

For earnings as measured by adjusted EBITDA, the Company had previously indicated that it expected to perform to the high end of the provided guidance of $285 to $305 million. At this time, however, GCI is revising the range upwards to $315 million to $325 million, reflecting the strong third quarter.

 

At this time, the Company is continuing its guidance for 2014 core cash capital expenditures of approximately $170 million, though it notes that there is a risk that it will come in less than that.