GNCMA - General Communications

[HJ]

I'm just looking at the balance sheets in which the basic shares outstanding at period end progressed as below:

 

3Q 3013,        2012            2011            2010              2009

37,353          38,357          39,043          43,958       51,627

 

Post the Dec 31 2011, a cumulative 1.7MM was retired?

 

The conclusion may well be it's an average business, with cheap valuation, (it first traded close to $9 per share in 1997, just the passage of time ought to have worked its magic for any reasonable business not paying any dividend) and worth buying after all.  I just don't buy the argument that they are "superior capital allocators".

 

 

 

 

[Packer16]

I think if you examine them versus there industry they are good capital allocators if you compare them against others in better businesses you are correct but to a certain extent that is apples to oranges.  With the hand they have been dealt, they have done better than any one in there industry which in my mind is a nice achievement.  (Note: if you are interested in great businesses this is not the business for you but most great businesses have high values to match their prospects).

 

Packer

[gary17]

Just to add to that I have heard Buffett said telecommunications in general (cables, satellite, etc) is a capital intensive businesses that he does not interest him.

 

But over the last few years I started to change my own view... based on my own work that went into BlackBerry, I was convinced these companies will become "better" businesses in the future. so with the low valuation I felt there's enough margin of safety to place a bet. The Internet is going to be used more. Cloud computing. Businesses don't want filing cabinet. They want storage for large files accessible via secure network anywhere on the planet. And consumers what more content any time they are awake (have you seen people browsing thr web while crossing the road? ) ...

 

Gary

[HJ]

With the hand they have been dealt, they have done better than any one in there industry which in my mind is a nice achievement. 

 

That's where I'd love to learn more.  What's the basis for that statement?  What are the businesses you are comping them against, and on what metric?  How is one supposed to think about ebitda growth vs. capital intensity in this business?

 

If I were to look at this against a DTV, for example, which according to yahoo finance, is at 7.16x ebitda.  How is paying say 5x ebitda for GNCMA a better deal?  Or for that matter, why shouldn't I buy AT&T instead, also at 5x ebitda (once again according to yahoo finance), and getting a healthy dividend?  I can see the ebitda growth here, but if all is simply accomplished at an increased capital intensity, then I invest here simply for the right to "participate in future capital capex projects (like this $100MM project to upgrade cable modem speed, for example)".  Why is this a good project to participate in?  Is it not the right conclusion that all their past investments really have simply gone to service a higher debt load?

 

In a completely different capital intensive business, Charles Fabrikant of Seacor suggested looking at return on gross invested capital pre depreciation as a measure of management skill in his line of business.  In that spirit, how does this one comp against others in the industry?  Is there literature that you can suggest that talk about information like this in some way?

 

Sorry for sounding a bit confrontational here.  All that I'm trying to do is to learn and gleam insights for an industry that I know little about.

 

[Palantir]

I think in a sense, the key with GCI is that they are a dominant player in a small, geographically distinct market. Dominating a small niche makes it difficult for competitors to enter, and in the future they will not have as high CapX. Being a small market also makes it less attractive for a large player like VZ to attack them, as there just may not be enough profits to go around for three telecoms.

[HJ]

I think in a sense, the key with GCI is that they are a dominant player in a small, geographically distinct market. Dominating a small niche makes it difficult for competitors to enter, and in the future they will not have as high CapX. Being a small market also makes it less attractive for a large player like VZ to attack them, as there just may not be enough profits to go around for three telecoms.

 

If this dominance doesn't translate into tangible cash flow benefit then it shouldn't carry that much weight in valuation?  If it translates into, say this $100MM capex project can be spaced out over 5 years rather than front loaded 2 year, and whatever wasn't spent in the first  years is used to buy back stock or pay a dividend, then this dominance would mean a lot more in the valuation.  But that's not how they are behaving.

[Packer16]

You have 2 aspects to investment.  First there is return on current investment which can be measure in indicators like EBITDA/(FA + NCA).  With this metric other telecom cos have higher returns in the mid to high 20%s vs GNCMA in the low 20%s.  Second there is growth in EBITDA via investment which can be indicated via change in EBITDA/Cap EX.  For most of the telcos the EBITDA has declined despite cap ex investment due to competition.  In GNCMA's case EBITDA has increased with more investment (about a 13% increase in EBITDA for each $1 of cap-ex).  This is similar to cable cos who have been able to increase EBITDA with more cap ex.  Cable cos sell for high EBITDA multiples as a result of the opportunity to invest more money and increase EBITDA versus the telecos who do not.  The situation the telcos find themselves in is similar to Newspapers but they a slower decline rate.

 

Packer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[HJ]

Certainly agree that this has more the characteristics of a cable company rather than legacy telecom.  Thought they made that transition years ago when they purchased the cable systems, which was a very important decision that deserves lots of kudos.  Maybe the proper comparison would have been something like a Shaw Communications in Canada, with combination of cable and wireless, less the content contribution.  But then I guess the question becomes should GCI be at a discounted multiple to a Shaw, considering the reinvestment options, demographics within the confines of Alaskan economy vs. that of Western Canada, capital structure, capital allocation history, etc.

 

But if we were to take a further step back, in the spirit of punching a hole in the 10 investments that I can make in my life time, why wouldn't I simply invest in DTV rather than any of the cable systems?  On substantially similar ebitda multiple, you get significantly better capital efficiency and capex returns, and magnitudes better in capital return policies.  The negative is long term erosion to bundled offering of cable systems as they build it out further, the positive being the longer revenue runway in Latin America.  If one were to quantify those, it seem to me that unless you assume pretty drastic subscriber loss, the positive would substantially overwhelmed the negatives?

 

 

 

 

 

[gary17]

Shaw has wireless?  I didn't know that - 

 

I thought they only have cable. 

 

Telus , Rogers and Bell have wireless in Canada I believe.

[OracleofCarolina]

http://www.dailymail.co.uk/sciencetech/article-2552177/Forget-Internet-soon-OUTERNET-Company-plans-beam-free-wi-fi-person-Earth-space.html

 

Is this feasible? How would this affect the industry?

[HJ]

I think I meant Rogers.  There shows my knowledge of the industry.

 

[gary17]

http://www.dailymail.co.uk/sciencetech/article-2552177/Forget-Internet-soon-OUTERNET-Company-plans-beam-free-wi-fi-person-Earth-space.html

 

Is this feasible? How would this affect the industry?

 

Not sure - I believe there's the question of range , interference, etc. Otherwise if it only costs a few million bucks to do this why aren't big telcos / cable operators / DTV doing or at least investigating this?

 

Now, I am sure this is possible according to CNN: 

    there goes the free internet in China ;)

[racemize]

http://www.dailymail.co.uk/sciencetech/article-2552177/Forget-Internet-soon-OUTERNET-Company-plans-beam-free-wi-fi-person-Earth-space.html

 

Is this feasible? How would this affect the industry?

 

Note this quote:

Much like how you receive a signal on your television and flick through channels, Outernet will broadcast the Internet to you and allow you to flick through certain websites.

 

I haven't heard of this technology, but it sounds like it is multicasting, and thus you may not be able to interact and request data on the uplink.  This would be extremely limiting, and really only useful for people without internet access as we know it now.

[Packer16]

The EBITDA multiple for DTV is closer to 7.1x versus 4.8x for GNCMA.  Lets say both are FV at 8x EBITDA upside for DTV is 17% versus 243% for GNCMA.  GNCMA is also small enough to be bought out by a cable co or telco while DTV is not.  Also satellite TV is at a disadvantage in providing broadband versus cable cos.  So I agree with you that DTV has a nice company you are paying more for it than GNCMA.  I like Buffets' analogy but I think too many people are focusing on finding these moated businesses and they are not as cheap as other companies that have a few flaws but are still fundamentally sound.  Each to his own - maybe that is why GNCMA is priced as a 3 bagger and DTV is priced as a more modest bagger. 

 

The other question I always ask is who else knows this can they act on it.  For DTV just about any institutional investor can so the competition is pretty keen.  For GNCMA not too many institutional guys are interested in investing in a $400 million market cap levered telco in Alaska.  Think how hard it would be to convince a guy on an investment committee to invest in GNCMA ($1.5m/day trading) vs. DTV ($266m/day trading).  If you have to invest lets say $1 billion and you want invest 5% in each position it will take you 133 days to buy and sell GNCMA with 25% of the daily volume and less than a day with DTV.

 

Packer

 

[Palantir]

Hmm....you don't even need multiple expansion for this stock to spike, if not double. Taking the apparent EBITDA of 250, it's trading at a multiple of 1420/250= 5.7. Keeping the same multiple as the EBITDA grows to 300, we get an EV of 1704, backing out 1.02B of debt gets us a market cap of 684M!

[gary17]

The EBITDA multiple for DTV is closer to 7.1x versus 4.8x for GNCMA.  Lets say both are FV at 8x EBITDA upside for DTV is 17% versus 243% for GNCMA.  GNCMA is also small enough to be bought out by a cable co or telco while DTV is not.  Also satellite TV is at a disadvantage in providing broadband versus cable cos.  So I agree with you that DTV has a nice company you are paying more for it than GNCMA.  I like Buffets' analogy but I think too many people are focusing on finding these moated businesses and they are not as cheap as other companies that have a few flaws but are still fundamentally sound.  Each to his own - maybe that is why GNCMA is priced as a 3 bagger and DTV is priced as a more modest bagger. 

 

Very nicely stated - thanks

 

I would just add that though it seems that while the cheaper the price the consequence of being wrong is reduced, I have been wondering if fairly priced companies do have a higher probability of attaining their future earning potentials.

 

Like Malone said - if the company is growing at a rate faster than the cost of money theoretically businesses should be worth infinity. 

 

I look at this linearly - at the one end we have the deep, deep value stocks that's trading below what it is worth on paper with very little future certainty on earnings vs. the other end where we have companies like FB where there's a lot of POTENTIAL future earnings... but the consequence of being wrong is very great because of the high prices.

 

And then we have the companies in between.

 

I wonder if "great" companies - while expensive - do have the greater chance of attaining whatever the future earnings that the market projects.... in that the price reflects better management, a superior product, service, etc.

 

Ideally it'd be great to be buying great businesses at super cheap price - but that seems to only be possible during big recessions like 01 and 09.

 

[HJ]

Let's revisit the previous discussion of ev/ebitda calculation, I think the 190MM preferred payment out of AWN to ALSK should be considered debt by the way.  If you put that into EV, the multiple comparison is something like 7.1 vs. 5.5. 

 

I guess it comes down to what kind of discount do you assign to: 1) a more levered capital structure, 2) a worse organic revenue growth profile, and 3) a significantly less aggressive buy back program.  Now 1) and 3) are related, as 1) affords the flexibility to do 3). Let's say DTV is shrinking its ev/ebitda ratio by half a multiple each year through its buy back program, assuming buy back doesn't affect stock price, and let's say organic revenue growth rate is say 5-10% in difference each year, all else unchanged, you get to valuation "parity" in a little under 3 years between these 2 companies.  Now GCI will also be shrinking its multiple, but at a significantly slower speed, as it's only going to pay back the 190MM preferred payments over 4 years, and repurchase $10MM through buy back each year.  But that probably changes the time to valuation parity by 1 more year.  Now I don't know anything about DTV's Latam business other than seeing that it has been growing at a pretty ridiculous rate, and have no idea what the future trajectory for that really should be, and I'd love to get more clarity on that.  But is a multiple disparity of 7.1 vs. 5.5 that undeserved in this context? 

[Packer16]

Depending on how you calculate EBITDA the addition is the PV of the difference between the preferred payments and the 1/3 economic interest ALSK is suppose to get based upon their % ownership in AWN, this is closer to $70 million and my multiple includes this difference so we are at 4.8.

 

As to your assumptions, I agree with 1 but not 2 and partially on 3.  Both GNMCA and AWN have increased EBITDA about 2x since 2007.  So the question is the number going forward.  If you look at where the growth is coming from for DTV is in EMs and for GNCMA it is Alaska.  It think the Alaskan growth is worth more than the EM growth.  Alaskans have more wealth the EMs and the business and political risk is much less also.  As to 3, both have repurchased stock DTV more aggressively than GNCMA as GNCMA is somewhat constrained by its debt. 

 

DTV may very well be a good investment but I see GNCMA on the shelf for a cheaper price with supportable leverage that makes the equity a cheap call on the cheap enterprise value.  DTV is a modestly undervalued on the shelf with a smaller equity option.  If had a larger capital base I would prefer DTV for its liquidity but since I am individual liquidity is not that important.  The reason I am buying GNCMA vs DTV is in part due to the cheapness and the option value it has and DTV does not.

 

Packer

[Palantir]

Thing is, the preferred payments are only 47.5M a year. Which means if EBITDA=142M, then the pro rata stake is the same as the preferred payments, and if it exceeds that, then you should not need to capitalize anything as the prorata stake will be bigger than the preferred pmts.

[prevalou]

Dtv has more risk than gncma because it depends only on tv. Netflix is a disruptive competitor. Gncma wins even with Netflix customers because it has the last internet and tv mile. I would add that in Alaska satellite is less a competitive threat to cable than In other regions.

[PLynchJr]

I would add that in Alaska satellite is less a competitive threat to cable than In other regions.

 

Why?

[yitech]

Thing is, the preferred payments are only 47.5M a year. Which means if EBITDA=142M, then the pro rata stake is the same as the preferred payments, and if it exceeds that, then you should not need to capitalize anything as the prorata stake will be bigger than the preferred pmts.

 

The preferred payments are based on free cash flows or EBITDA - capEx, rather than simply EBITDA. Like what Packer described, it should be the excess over the 1/3 of economic interest (or free cash flows) that needs to be capitalized for the additional EV.

 

Page 5 of the GCI investor's slides mentioned that the premium is around $60M and by Packer's own calculation in the post above, it's around $70M.

 

That's my interpretations, but I may be mistaken. Feel free to point out if there's something wrong.

[HJ]

"Depending on how you calculate EBITDA the addition is the PV of the difference between the preferred payments and the 1/3 economic interest ALSK is suppose to get based upon their % ownership in AWN, this is closer to $70 million and my multiple includes this difference so we are at 4.8."

 

>>> Yes, you are right.

 

"As to your assumptions, I agree with 1 but not 2 and partially on 3.  Both GNMCA and AWN have increased EBITDA about 2x since 2007.  "

 

>>> I was not accurate in my statement.  Should have said a much less capital intensive form of growth, which would generate more distributable cash flow, not just EBITDA.

 

So the question is the number going forward.  If you look at where the growth is coming from for DTV is in EMs and for GNCMA it is Alaska.  It think the Alaskan growth is worth more than the EM growth.  Alaskans have more wealth the EMs and the business and political risk is much less also. 

 

>>> Don't know enough to call it one way or another, but a very important question to answer for an investment in DTV.

 

As to 3, both have repurchased stock DTV more aggressively than GNCMA as GNCMA is somewhat constrained by its debt. 

 

>>> I'm quite sure DTV is much more aggressive, both willing and capable of returning cash flow to share holders than GNCMA does.

 

 

DTV may very well be a good investment but I see GNCMA on the shelf for a cheaper price with supportable leverage that makes the equity a cheap call on the cheap enterprise value.  DTV is a modestly undervalued on the shelf with a smaller equity option.  If had a larger capital base I would prefer DTV for its liquidity but since I am individual liquidity is not that important.  The reason I am buying GNCMA vs DTV is in part due to the cheapness and the option value it has and DTV does not.

 

 

>>> I actually really don't know enough about DTV's forward looking business prospect to necessarily call it one way or another, but just on pure backward looking numbers, I can see why capital market is willing to pay up for DTV vs. GNCMA, and indeed one has been a much better performing stock than the other for a long time.

 

As it solely relates to GNCMA, I keep on coming back to this $100MM capex program.  What kind of incremental EBITDA will it generate?  Why can't they space it out over 5 years rather than 2, and use the early year savings to retire equity at the current valuation.  In fact this very action may be the catalyst that capital market needs to narrow the valuation gap that currently exists between GCI and other cable companies.

[Palantir]

The preferred payments are based on free cash flows or EBITDA - capEx, rather than simply EBITDA. Like what Packer described, it should be the excess over the 1/3 of economic interest (or free cash flows) that needs to be capitalized for the additional EV.

 

Page 5 of the GCI investor's slides mentioned that the premium is around $60M and by Packer's own calculation in the post above, it's around $70M.

 

That's my interpretations, but I may be mistaken. Feel free to point out if there's something wrong.

 

Could you post a link please? Thanks in advance.

[yitech]

The preferred payments are based on free cash flows or EBITDA - capEx, rather than simply EBITDA. Like what Packer described, it should be the excess over the 1/3 of economic interest (or free cash flows) that needs to be capitalized for the additional EV.

 

Page 5 of the GCI investor's slides mentioned that the premium is around $60M and by Packer's own calculation in the post above, it's around $70M.

 

That's my interpretations, but I may be mistaken. Feel free to point out if there's something wrong.

 

Could you post a link please? Thanks in advance.

 

Investor Presentation - November 2013

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTQyNDUxfENoaWxkSUQ9LTF8VHlwZT0z&t=1