GNCMA - General Communications

[mbrock77]

I thought this exchange during the conference call was comforting in that they are fine operating with little revenue growth and they see ample opportunities on the cost side.

 

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John Park

 

Perfect. And then when we think about the 2017 as a whole, I know revenue guidance wasn’t given but directionally when we look at this year most, maybe all the revenue decline was from the roaming and backhaul and the rest of the business was flat to up 1%. So directionally should we expecting similar flattish revenue for 2017?

 

Peter Pounds

 

Yes, that would be my expectation. We are given the recession that the state of Alaska is in and we didn’t feel comfortable giving specific revenue guidance. But I would not expect it to be terribly far off of last year’s performance absent the roaming.

 

John Park

 

Got it. And then when we are trying to get to the EBITDA guidance, I know $5 million is coming from the billing system. There are going to be some circuit cost savings and procurement initiatives. In total how much cost savings can we have that would get us to a midpoint of our EBITDA guidance?

 

Peter Pounds

 

I guess I would take a look at what our EBITDA margins are and what the industry is, and I think that would leave you with an opportunity set that’s north of 5% EBITDA margin growth. I don’t think that all comes in during 2017 because that would give you EBITDA guidance even above where we are at right now. But over a period of several years we’ve got meaningful opportunities. And just note that we got where we are today because we have been aggressively growing the business. We have spent 20% to 22% of our revenues historically on CapEx and the focus was on building a great network just as quickly as we could.

 

Now as we are in a market that has fewer growth opportunities we are going back and we are looking at networks that don’t need to exist, old GSM networks, old CDMA networks that are no longer needed, we are looking at old billing systems that are no longer needed, going back and getting those efficiencies. And there are several points of EBITDA margin opportunity there. And noting the relative lack of revenue growth expectation going forward here into 2017, you should assume that most of the EBITDA growth in 2017 comes from trimming the cost, particularly cost that we are paying to our vendors.

[kab60]

Yep, pretty uplifting conference call. Not sure what the market noticed that I missed. Potential for north of 5 pct. EBITDA margin growth would be huge, and it sounds like they have a bunch of levers to pull. Since they're pretty comfortable with the leverage I'd expect more buybacks.

 

[RedDaruma]

Thanks for the corrections. I forgot about the GAAP/cash roming delta plus the preferred dividend.

 

Packer

 

Hi Packer,

Any thoughts on the sell-off following the earnings?

Thanks,

RD

[Gamecock-YT]

I hope it keeps dropping.

[OracleofCarolina]

Great news this morning for GNCMA!

[Liberty]

http://www.businesswire.com/news/home/20170404005774/en/Liberty-Interactive-Enters-Agreement-Acquire-General-Communication

 

Liberty Interactive Enters into Agreement to Acquire General Communication, Inc., Combine with Liberty Ventures Group and Split-off Combined Company from Liberty Interactive

[gfp]

Thanks Packer!  This one has been a gem

[mbrock77]

This is awesome, but wtf with this deal structure. Can someone spell it out in english?

[kab60]

Ugh. Sold five days ago. It was a quick 70% return but I wouldn't mind an extra 70 pct. Oh well. Thanks again Packer.

[Gamecock-YT]

This is awesome, but wtf with this deal structure. Can someone spell it out in english?

 

Ha. That was my thought reading through the press release. Have a nice 4 hour flight to read through the docs. Hopefully the UNC fans will leave me alone.

[xtreeq]

Congrats to all the holders!

[gary17]

Congrats to the shareholders & Packer !!!!! What a great return for the last few years 

I figure if someone had initially bought ALSK , get a double, and now get another 5x that's a 10x in 3 or 4 years !!!  $100K -> $1M USD  LOL    and if for a Canadian , add the 30% appreciation  that's a 13 bagger !   

Gary

[mbrock77]

Why is GNCMA trading above the $32.5 offering price? Isn't that fixed or would GNCMA shareholders participate in any CHTR upside between now and the closing of the deal? It looks to me that we would not (i.e. if CHTR appreciates, we would still receive $32.5 assets/share and just own less of the new company).

[Packer16]

As a GNCMA shareholder, you receive 23% of a combined Liberty Ventures/GNCMA entity's equity plus Pfd security with a face of $5/share that will yield initially 5% then 7% (once GNCMA is incorporated into Delaware).  I get the implied value today per share is .72* Liberty Ventures + $5 pfd stock or about $40 per GCI share.  Can someone confirm the math?

 

Packer

[Munger_Disciple]

I get the implied value today per share is .72* Liberty Ventures + $5 pfd stock or about $40 per GCI share.  Can someone confirm the math?

 

Hi Packer,

 

The math is incorrect. I get 0.584*Liberty Ventures + $5 preferred stock, which approximates to $34.15 per GNCMA share. Congrats to everyone!

 

 

[Grox]

where are you getting your #s?  I see 0.63 shares GCI Liberty common + 0.20 shares $25 GCI Liberty preferred as fixed consideration (p 19 presentation)

[Packer16]

You are correct I just noticed this.  Thanks.

 

Packer

[Grox]

at today's LVNTA close of $50.42, then the GCI shares should be worth $36.76 ($5+0.63x$50.42).  That's a hefty 10% gross spread on today's $33.40 GNCMA closing price, and a little better annualized if deal closes in Q1 2018. 

 

[Munger_Disciple]

You are correct. I was using last year's GNCMA share count. They now have fewer shares so the 0.63 multiple is the correct one.

[Munger_Disciple]

Yes, the presentation shows it on page 19. I did the calculation the hard way by taking the 21.6m GCI Liberty shares and divided by the current GCI shares outstanding before realizing that the presentation already had the necessary ratio.

[ABM]

Some questions / thoughts on questions

 

1) After reading the K for GNCMA, I realized the "Wireless" segment is different then what many of you may think.  It is a wholesale business that sells capacity on its network to other carriers and notes Vz is its largest customer.  The "retail" wireless business is included in the Wireline segment.  That being said, look at the segment disclosures to see the margins in the Wireless segment (>60% EBITDA margins) while cap ex only consumers about 20%-30% of that EBITDA implying a very high FCF conversion for this business.  Diamond in the rough?

 

Btw, Company hasn't paid material cash taxes in about a decade and have $270M in NOLs.

 

I am trying to think about how this maybe a strategic asset given its the only network available in Alaska, apparently, so Vz and T have no choice but to lease space on their assets to service their own customers.  I realize there is some accounting noise here around deferred payments that are amortized on the P&L for cash received in prior periods while other contracts are rolling off but if this is strongly position asset then it may be used as leverage to negotiate with Vz in the US via CHTR.  Worth digging into to understand more, imo

 

3) Upside from improvement in capital efficiency and margins given the pivot away from growth to operations.  The CEO sounded almost exhausted on the call after recounting the decade long M&A boom so may be a lot of low hanging fruit as they shift to integration.

 

4) This is about as levered as it gets.  Round numbers, LVNTA paid 8.5x EBITDA and paid 5.6x of that with debt (including assumption and treating preferreds as debt).  This means they only put up about 35% of EV so even at a 3% or 4% FCF yield with 5% EBITDA growth will allow them to leverage that growth (remember target 5x debt target) delivering a mid to high single debt yield on such a small equity base.  I see a 14% IRR on the investment assuming 4% FCF yield +5% growth +5% yield from debt issuance spent on buybacks with a 8x exit and 5x of debt.  Trying to be conservative (irony appreciated given the leverage levels employed)

 

5) This appears to be a major tailwind for QVC as it now retains the interest tax shield on the exchangeables rather than paying it to LVNTA.  This could add $130M FCF in nearterm growing to $400M recurring in a few years.  On a base of say $950M FCF, this is significant for the IV of the business. 

 

3) I spoke with IR today and they implied a holistic approach was used to evaluate the merits of the transaction looking at total value created across LVNTA and QVCA.  So even if its dilutive to near term NAV/share at LVNTA it reduces complexity narrowing the discount and the leverage benefit to QVCA plus higher FCFs should create value over there.  In other words, sum of the parts vs premium paid for the acquisition justifies it. 

 

Some Math

LVNTA is now the nearly the most levered it has ever been as defined by tangible FMV assets / market cap, with pro-forma assets per share of $90 on a market PPS of $50 implying 1.8x leverage ratio. I asked the IR about this and they implied that growth in the underlying assets is considered  reliable so increasing leverage to benefit the equity makes sense.  I expect the $500M raised from the LBRDK margin loan will be used to repurchase LVNTA stock combined along with the $600M in FCF and incremental debt that GNMCA should generate over the next 5 years.  If NAV discount remains 20% then we should see repurchases reduce the share count by about 20% leading to a high teens IRR on investment.  Ideally, and typical Malone, I would expect for them to exhaust all balance sheet capacity and shrink the equity before they work on collapsing the discount, which is likely a 3-5 year event (ex. a Vz bid) leading to >20% IRR due to LVNTA discount and LBRD discounts collapsing from CHTR merger. 

 

All for now but I'll be back

 

[Munger_Disciple]

Can someone point me to the recorded conference call (or a transcript of it) conducted by Maffei & Duncan after the General Communication deal was announced? TIA

[RedDaruma]

Can someone point me to the recorded conference call (or a transcript of it) conducted by Maffei & Duncan after the General Communication deal was announced? TIA

 

Transcription attached. Hope this helps.

RD

Acquisition_of_General_Communication%2c_Inc_by_Liberty_Interact_58E6C27A01F404B0011E09D8.pdf

[Munger_Disciple]

Thank you RedDauma! Much appreciated.

[mbrock77]

What's the rationale for the issuance of preferred shares as part of this transaction?