GNCMA - General Communications

[OracleofCarolina]

one of the few good things about all the political ads is it helped GNCMA's earnings.

[Laxputs]

Strong quarter.

 

I get 300mm EBITDA pro-forma 2014 after subtracting minority interests, adding the 5mm management fee, and subtracting the non-recurring subsidies.

 

I have them just under 6x EV/EBITDA but it depends on how much of their cash on the balance sheet from last quarter they used to pay down 66mm worth of debt and how much was cash flows.

 

I think the IRR is tricky to calculate and a lot depends on the market valuing their obscured FCF reasonably. I'm waiting to see them spending less on m-capex than the ~160mm they are currently.  If industry standard is ~15% of revenue for m-capex, is 17% reasonable given the harsh landscape? There is just so much debt for my liking that they can't have any operational hiccups. I think there are cheaper companies with no debt. But it's interesting.

[OracleofCarolina]

http://finance.yahoo.com/news/gci-purchase-wireless-subscriber-alaska-210500578.html?.tsrc=applewf

 

Big news!

[krazeenyc]

http://finance.yahoo.com/news/gci-purchase-wireless-subscriber-alaska-210500578.html

 

GNCMA -- buys the rest of AWN.

[krazeenyc]

http://finance.yahoo.com/news/gci-investment-private-equity-firm-213500839.html

 

Searchlight takes GCI Stake

 

$75 Million Loan unsecured - 7.5% coupon.

Stock Appreciation rights $13 > of 3 million shares.

[locatevalue]

This sale should knock of most of balance sheet issues of ALSK, It should take down long term debt to 120million from 420million for Alaska which is good for their bonds and it share price should swing a lot t'rrow. Long term its good for GNMCA since its got all wireless business. I guess good for both but for short term ALSK should benefit more.

[investor-man]

This sale should knock of most of balance sheet issues of ALSK, It should take down long term debt to 120million from 420million for Alaska which is good for their bonds and it share price should swing a lot t'rrow. Long term its good for GNMCA since its got all wireless business. I guess good for both but for short term ALSK should benefit more.

 

It also makes the valuation process of GNCMA more straightforward which should help kick up the share price.

 

... And here I was wondering if low oil prices would negatively impact GNCMA via lower Alaska income

[gary17]

What should ALSK be valued at ?

[blainehodder]

Should? Maybe 6 X 50m ebitda?  What will it be valued for? Less.

[mbrock77]

What are people's thoughts on the private equity investment from Searchlight? Could they not have borrowed this amount without giving away those stock appreciation rights?

[krazeenyc]

What should ALSK be valued at ?

 

I thought ALSK didn't get a great deal. But, it's interesting they're saying that simply by doing the transaction they can boost Ebitda by $12 Mill by removing costs associated with having the Wireless retail business and a larger/less focused organization (that's sort of stunning).

 

The questions with ALSK are the same.

 

1) Can they grow broadband and how much?

2) What is their maintenance capex -- how much longer do they spend growth capex/how good is the ROI on this spend?

3) How will they ultimately bridge their ebitda to generate cash flow

 

Even at $54MM Ebitda - $10MM Debt Payments - $40MM in CapEx = $4MM FCF (not enough). Of course, if they grow in 3 years to say $60MM Ebitda - $10MM Debt Payments - $20MM Steady state CapEX = $30MM  FCF that's quite different.

 

For GNCMA, I think they paid a good price. Additionally, with ALSK getting out of the wireless (retail) -- that reduces competition for GNCMA and should make their wireless business stronger (less promotional). I'm not sure what I think of the searchlight deal as of yet -- it's definitely interesting -- it's like a semi convertible bond.

[krazeenyc]

AWN LTM Ebitda was $148MM.

So they are essentially paying 6.1x ebitda.

 

But due to the value of the retail customers $20-25MM and tax benefits $50-60MM. they're paying 4.1x Ebitda.

If you add the $4million of cost synergies -- it'd be 3.8x.

 

They will borrow a bit more than $225MM.

Leverage increases from 3.8x - 4.2x. (Debt is increased by only $175MM b/c of the preferential payments disappearing).

FCF is > $30MM per year.

 

Not bad.

[abitofvalue]

Looks like the $275mm debt they issued for the acquisition ended up costing them a little bit more than planned - final terms ended up at L+375 (vs initial price talk of L+325-350).  So they are paying about 4.75% on this debt.  The company is pretty leveraged at 4.2x with this debt and then add the searchlight stake / stock appreciation rights so I guess 4.75% is pretty cheap all things considered. 

 

I think what will really help the valuation is reducing capex. Once GNCMA can demonstrate that its capex is truly growth and not just the cost of doing business it will give investors confidence in the valuation. Unfortunately, I think the acquisition may actually lead to increased cap-ex in the near term.

[investor-man]

Anybody else getting somewhat nervous about what oil prices will do to the Alaskan economy if this continues much longer? Does anyone have insight into how well cable companies do during an economic downturn? I'm worried unemployment will rise in Alaska and people will start canceling their cable contracts and move away. Thoughts?

[krazeenyc]

Anybody else getting somewhat nervous about what oil prices will do to the Alaskan economy if this continues much longer? Does anyone have insight into how well cable companies do during an economic downturn? I'm worried unemployment will rise in Alaska and people will start canceling their cable contracts and move away. Thoughts?

 

Not nervous about this. As the shale boom has played out oil production in Alaska has declined over the last half decade or so. In order to combat this the state politicians passed what is basically a huge tax break for the oil companies -- the oil companies have already responded by boosting capital spending (in a pretty big way). My understanding (I'm not close to being an expert) is that it's significantly cheaper to extract oil out of Alaska than most of the other states.

 

Of course the tax break isn't good for the state budget (especially in short run) -- good thing Alaska has a $50 Billion balance in its Permanent Fund.

[bookie71]

Having been in the middle of the oil price drop (dive) in the 1980's, I'll tell you what happened back then.  We lost about 1/4 of our population.  First the weak local banks failed, then the stronger local banks failed because the value of their collateral dropped so much. A large company would fail, then you would get what was referred to as the second and third generation ob failures because the smaller companies had depended on getting their receivables paid, didn't.

FDIC owned a ton of real estate from the bank failures.  You could buy a house for less than the cost of the land and they  would throw in a house.

You might also want to check with folks who were in Louisiana, Texas, or Oklahoma, to see what happened in those states.

This was in this morning's paper:

http://www.adn.com/article/20141218/second-credit-ratings-agency-issues-warning-alaska-budget-risk

[krazeenyc]

Having been in the middle of the oil price drop (dive) in the 1980's, I'll tell you what happened back then.  We lost about 1/4 of our population.  First the weak local banks failed, then the stronger local banks failed because the value of their collateral dropped so much. A large company would fail, then you would get what was referred to as the second and third generation ob failures because the smaller companies had depended on getting their receivables paid, didn't.

FDIC owned a ton of real estate from the bank failures.  You could buy a house for less than the cost of the land and they  would throw in a house.

You might also want to check with folks who were in Louisiana, Texas, or Oklahoma, to see what happened in those states.

This was in this morning's paper:

http://www.adn.com/article/20141218/second-credit-ratings-agency-issues-warning-alaska-budget-risk

 

YIKES! How much of that was solely due to the price of oil dropping? The 1980s were a rough time for a lot of state economies. For what it's worth the Fed Funds rate hit 18% in 1982!  I live in NYC -- it was a completely different time in NYC during that time as well. Since those days violent crimes are down 98%.  Real Estate was super cheap in NYC. You could buy properties in NYC for 20-30x the monthly rental income in some places.  Currently you have to pay 250-300x the monthly rental income to buy those properties now.  I think for us to get back to the problems we had in the early 1980s a lot more would have to occur than just oil prices declining.

[investor-man]

Having been in the middle of the oil price drop (dive) in the 1980's, I'll tell you what happened back then.  We lost about 1/4 of our population.  First the weak local banks failed, then the stronger local banks failed because the value of their collateral dropped so much. A large company would fail, then you would get what was referred to as the second and third generation ob failures because the smaller companies had depended on getting their receivables paid, didn't.

FDIC owned a ton of real estate from the bank failures.  You could buy a house for less than the cost of the land and they  would throw in a house.

You might also want to check with folks who were in Louisiana, Texas, or Oklahoma, to see what happened in those states.

This was in this morning's paper:

http://www.adn.com/article/20141218/second-credit-ratings-agency-issues-warning-alaska-budget-risk

 

YIKES! How much of that was solely due to the price of oil dropping? The 1980s were a rough time for a lot of state economies. For what it's worth the Fed Funds rate hit 18% in 1982!  I live in NYC -- it was a completely different time in NYC during that time as well. Since those days violent crimes are down 98%.  Real Estate was super cheap in NYC. You could buy properties in NYC for 20-30x the monthly rental income in some places.  Currently you have to pay 250-300x the monthly rental income to buy those properties now.  I think for us to get back to the problems we had in the early 1980s a lot more would have to occur than just oil prices declining.

 

1/3 of all jobs in Alaska are in the oil industry, which is concerning. If this oil price decline keeps up for a few months, which is likely, people will start to lose their jobs, and it'll probably impact revenues. That paired with an increase in debt could be looked at unfavorably.  I appreciate the responses, especially from bookie71. bookie71 do you hold GNCMA? and are you planning to keep it if so?

[bookie71]

It is really hard to describe, I had a CPA firm at the time.  Everyone was hurting.  I had tough men start crying in my office because they were losing everything they had worked, scraped and done without to build up.

In the mid 1990's someone came in and was starting a project, suddenly I remembered how much fun it had been prior to the drop.  I think it was probably 2000 before we had fully recovered.

[bookie71]

P.S.

No I don't have any of GNCMA as it is way outside my comfort range.

[Libs]

$55 Oil is the last thing I was worried about when I bought GNCMA. Anyway, here is some info on Alaska ( link at bottom).

 

- Oil accounts for 85% of unrestricted revenues in AK - see page 26.

- When oil was $30 (real price)  look how low revenues were from the mid 80's to early 2000's. There were some tough times then.

- Look how revenues shot up after 2004.

- So it's clear the oil industry pays for a very large share of local and state gov't employees.

 

However, that permanent fund may cushion the blow. It's big enough to do so, judging by that article, but they may cut budgets instead.

 

In summary, I 'm worried, but struggling to quantify all this.

 

By the way, I also noticed there are only (as of 2012) 710,000 people in the state. With an average of 2.7 per household, that's 258,000 households. What's GNCMA's penetration? from the 10-K:

 

<We ended the period with 141,500 wireless subscribers, 129,300 cable modem subscribers and 136,700 basic video subscribers>

 

Not sure how to interpret this, but doesn't that imply roughly 50% penetration already?

 

2012 report:

 

http://www.iser.uaa.alaska.edu/Publications/presentations/2012_02-Introduction_to_Economy_of_Alaska.pdf

 

[bookie71]

Don't forget in the 80's we lost about 1/4 our population, many small banks failed as the value of their collateral (primarily real estate)had dropped so much.  It wasn't pretty. First the marginal banks failed,then the stronger average banks failed.  It was a snowball effect. A larger contractor would fail, then their subs would fail.

You could buy a house from the FDIC for about what the lot had sold for without the house.

I would also worry about North Dakota as they appear to be where Alaska was at the  end of the building of the pipeline.

[krazeenyc]

So I've sold down my GNCMA (average price $14.50) from 6% to 1%, even though I think there is still a lot to like.

 

I partly mainly shrunk my position due to Bookie's warning of what could happen (experience of what happened) if oil prices were to remain depressed for a long time. I think people would do everything they can to keep their broadband internet and wireless service, but if they're not in the state they can't be a customer. I still think this is a long shot, but I guess it's a possibility and something to be aware of even if it's just a 1-2% possibility. I'm also a bit worried about the national price wars in wireless and whether or not they'll spill over into Alaska. 

 

GNCMA will have ebitda of $370MM ($320MM+$50MM), Debt of $1.37B, Market Cap of $618MM.  So we're looking at an EV/Ebitda of  5.37 -- if you have a target upside of 6.3x you have 55% upside not bad! I think the AWN deal is a good one both in terms of price as well as for their business -- good for the competitive dynamics of the wireless business in Alaska (it was also bad for them to have a disinterested partner in Alaska). Additionally, I think Searchlight is very smart money -- and I think the possibility of them teaming up with Liberty or someone to buy out GNCMA is always a possibility -- perhaps this also explains why the stock has rallied.

 

[Laxputs]

Good post. Thanks for that.

[investor-man]

So I've sold down my GNCMA (average price $14.50) from 6% to 1%, even though I think there is still a lot to like.

 

I partly mainly shrunk my position due to Bookie's warning of what could happen (experience of what happened) if oil prices were to remain depressed for a long time. I think people would do everything they can to keep their broadband internet and wireless service, but if they're not in the state they can't be a customer. I still think this is a long shot, but I guess it's a possibility and something to be aware of even if it's just a 1-2% possibility. I'm also a bit worried about the national price wars in wireless and whether or not they'll spill over into Alaska. 

 

GNCMA will have ebitda of $370MM ($320MM+$50MM), Debt of $1.37B, Market Cap of $618MM.  So we're looking at an EV/Ebitda of  5.37 -- if you have a target upside of 6.3x you have 55% upside not bad! I think the AWN deal is a good one both in terms of price as well as for their business -- good for the competitive dynamics of the wireless business in Alaska (it was also bad for them to have a disinterested partner in Alaska). Additionally, I think Searchlight is very smart money -- and I think the possibility of them teaming up with Liberty or someone to buy out GNCMA is always a possibility -- perhaps this also explains why the stock has rallied.

 

I've done the same thing with the same worries, but I sold at $14.00/share. Watching it rally has been tough, and I keep thinking, "why did you make a macro call, dumb*ss?". C'est la vie

 

I've been looking at the recent telco Packer posted, NTLS. That one looks quite interesting.