ALSK - Alaska Communications

[alertmeipp]

buying opp i think, the con price is 30percent above current price, over done imo, no cash tho >:(

[ok22]

tombgrt:  If you do not think it is expensive, then why did you sell?  Not trying to be rude, just trying to understand your logic/reasoning between selling the new purchase and your belief that their is upside.

 

alertmeipp:  yes, the convert price is significantly higher than the current price.  But why does that change the valuation of the company?

 

Thanks.

[alertmeipp]

tombgrt:  If you do not think it is expensive, then why did you sell?  Not trying to be rude, just trying to understand your logic/reasoning between selling the new purchase and your belief that their is upside.

 

alertmeipp:  yes, the convert price is significantly higher than the current price.  But why does that change the valuation of the company?

 

Thanks.

 

Where did I say the valuation of the company is changed today?? (it did change very tiny bit)

 

The transaction is merely 2.5 millions yet the market cap down is down almost 10 millions today. The market over worries that the company will do more with lower share price which I think it's low chance.

[Packer16]

They do have debt locked in until 2016 at a rate of 6.25% so if they can get EBITDA to grow from the $90 m level (which is conservative given language in presentation), the coverage ratio is around 3 which should get them a BB rating.  Now BB rates are at 5.0%.  So once the dust settles and if EBITDA grows there may be a re-fi opportunity to increase FCF.  This would increase FCF by about $5 million per year from the projected $15 to $20 million figure.  So $25 m in FCF on an equity value of $133 million is a FCF yield of 19%.  Not too bad. 

 

Packer

 

[alertmeipp]

They do have debt locked in until 2016 at a rate of 6.25% so if they can get EBITDA to grow from the $90 m level (which is conservative given language in presentation), the coverage ratio is around 3 which should get them a BB rating.  Now BB rates are at 5.0%.  So once the dust settles and if EBITDA grows there may be a re-fi opportunity to increase FCF.  This would increase FCF by about $5 million per year from the projected $15 to $20 million figure.  So $25 m in FCF on an equity value of $133 million is a FCF yield of 19%.  Not too bad. 

 

Packer

 

BB rates probably will be north of 5% when they do the refinancing.

[gary17]

I've been following this thread with interest; nice discussions and looking at various ways of valuing this company.

 

I just look it at very simply as a) what's the chance of the company getting itself out of the current situation and b) is the company's current valuation cheap relative to its potential future earnings. 

 

I think the new management team has a solid plan and appears to know what they are doing.  There's a very good chance they will manage the debt situation.

 

In terms of its future earning potential - I think about what others would pay for a similar asset .... 

 

Verizon valued the 45% of Verizon Wireless at about $3000/subscriber -  I think Alaska's 115K ish sub should fetch about the same given the higher GDP than national average.  So that's about $340M market cap.  I might not be precise but there's enough margin that tells me the $130M valuation today seems insanely cheap. 

 

I think the significant drop today was probably propelled more by the fact Verizon bought Vodafone and also said they are not interested in entering the Canadian market, which could be regarded as that they don't plan on doing any other acquisition any time soon.  So some are just getting out and taking the profit if they had got in a few months ago.

[alertmeipp]

nice observation on VOD deal.

[Cunninghamew]

I picked ALSK back up the other day during the sell off and it felt real good. Then today after chatting with a guy on twitter (@rubicon59) and reading Ok's comments I realized that I made a flaw in my calculations. I had assumed they would be able to continue to pay down debt at a fast clip like they did in Q1 and Q2 of this year, but never really checked to see if it was true. Talking to these guys lead me to reread the presentation. The main conclusion was the rate at which they would continue to pay down debt was going to slow a lot in 2014 and 2015. With this piece of information in hand, the annualized rate of return on my investment no longer looked so hot.

 

The $15mm of FCF is really all they have to pay down debt with post the AWN transaction. The company already trades at about my fair EV/EBITDA multiple (using $90mm in EBITDA) of 6x, so debt pay down is crucial to the thesis.  Is there something I am missing? For example, is the CAPEX guidance temporarily high or anything like that? A good reason why FCF will be greater than $15mm?

 

Below is my logic in a strange format (from two different angles)

 

 

Sanity Check 1

1) Current market cap is $125mm

2) 2013 FCF guided to be $20-25mm

3) Post AWN... ALSK is guiding for $15mm FCF

3) So it currently trades at a 18% FCF Yield, but after FCF falls to $15mm that is 12%

Conclusion) This is cheap, but how cheap? not a multi bagger

 

Sanity Check 2

1) Current EV is $569mm  (includes the $65mm used to pay down debt in July)

2) They will pay down more debt this year and are targeting net debt of about $425, so you have EV of $545 given todays mkt cap

3) Lets say fair multiple is 6x EV to EBITDA

4) Post AWN EBITDA (includes pref distribution) is guided to $90

5) So fair value right now is 6 x $90mm = $540mm

6) The implied market cap $540 minus YE net debt of $425 = $115mm  (so slighly less than todays mkt cap of $134, which is okay bc mkt discounts the future)

9) Each dollar used to pay down debt will transfer value from debt holders to equity holders if multiple is assumed to be constant

10) Again, they said $15mm of FCF

11) So equity value should increase from implied $115mm + $15mm FCF (it was used to pay down debt) + interest savings = not a large number

12) you can do this for years 2, 3, 4, but the point is the same

conclusion) the rate at which they can pay down debt is slower than I orginally anticipated... i.e. the compound annual return wont be that high by they time they get to a net debt target of 3.5x

 

[Guest wellmont]

one thing I can think of is you have to put a different multiple on the wireless business. and even if you don't, 12% fcf yield in a relatively stable security with capital allocation taken care of for a few years is not such a bad thing. also is 6 x the trading valuation or the private market valuation of the company?

[Packer16]

You also have to remember the wireless business that ALSK owns 1/3rd of has little or no debt.  There is a $50 million credit line with GNCMA and that is it.  The JV will generate on the order of $150 m in EBITDA post synergy so in theory money could be borrowed at the JV level and sent to each partner.  Typically wireless firms have at least 2 to 3x EBITDA of debt so that equates to $250 to $400 m if you assume $50 m debt today or $83 to $133 m of value to ALSK that can borrowed via AWN.  You also have to remember that both GNCMA and ALSK's EBITDA should be increasing a rarity in the telecom world.

 

BTW the takeout multiples have been 6.5 to 7.5x for wireless business (in the lower 48) which implies a total value of AWN of $975 to $1125 m.  Less debt gives you a value of $308 m to $375 m for ALSK's stake in AWN.  The current EV is $535 so the remaining high speed wireline business is worth $160 to $227m with a growing base EBITDA of $40 million.  So getting a high speed internet business for 4 to 5x EBITDA is not too bad.  This assumes no future growth in one of the richest states in the US.

 

They did have an additional $15 million in S,G& A forecast for Year 1.  If they cannot at least generate an equal amount of revenue growth then this should be able to be reduced.

 

Packer

[tombgrt]

Expecting no growth would be insane. :) They are investing an additional $15m yearly in SG&A to improve the service they offer. Management is focussed on a better customer experience and simplifying the business. I believe earnings will generally exceed expectations. Leverage on share price will come from EBITDA growth and to a lesser extent lower interest expenses. Taking cash out of AWN would be a icing on the cake, good point Packer.

 

edit: You beat me with the SG&A edit there Packer. :) That was my line of thinking as well. Growth has been great to say the least while I have heard plenty of comments about how awful their service is. New management has clearly been doing a stellar job since they got on board and I'm excited to see what they can do with an additional $15m for SG&A in terms of growth.

[tombgrt]

tombgrt:  If you do not think it is expensive, then why did you sell?  Not trying to be rude, just trying to understand your logic/reasoning between selling the new purchase and your belief that their is upside.

 

 

Fair question. Full disclosure after some self-reflection: I decided it was too soon to jump in again with a 20%+ position. Greed drove me when I bought as I mainly felt like I got a good discount on my previous selling price. I have learnt my lesson in that regard and try to be more patient. Oh and did fairly well the last few months so I figured I was in no hurry after all. The news announced was just the trigger that got me thinking about my motives.

[tombgrt]

To what extent do bigger business customers watch indebtness of their telecom provider? Might the deleveraging help boost revenues in this segment or would the effect be marginal at best? Just a random thought...

 

Edit: Almost feeling like I trader here but I bought back everything today. Funny market. 1/3th drop from the 52w high or $60M, ha.

[zippy1]

some more conversion of convertible debt to common. This time at slightly less than $3 per share.

http://biz.yahoo.com/e/130912/alsk8-k.html

[Packer16]

Not the best of news but at least the total conversions will be limited to 4.5 million (or about 10% dilution).

 

Packer

[alertmeipp]

Looks look the management is firm believer of sell when someone is willing to buy.

 

Anything restricted them to do a strict secondary rather than bit and piece meals?

[gary17]

This (debt conversion to equity ) is not really my thing

but my take is that management thinks it is in the interest to dilute shareholders now than having to refinance in a few years ....... perhaps because they expect in the interest rate to be higher and now that their shares have risen it is strategically a good thing to do. Thoughts?

 

So for those that have taken a position in ALSK - I am wondering if you see this as a cigar butt or that management does have a chance of turning it around and also start to grow top and bottom lines. Myself - I am in the latter camp. 

 

Thanks

 

[tombgrt]

I'm in the latter camp as well. Love the price action on this little news release. More please!

[zippy1]

Not the best of news but at least the total conversions will be limited to 4.5 million (or about 10% dilution).

 

Packer

Does anyone understand why the authorization is 4.5million shares? Any reason behind this?

[alertmeipp]

I'm in the latter camp as well. Love the price action on this little news release. More please!

 

tombrgt, are u still holding on to your FTP shares? Are u adding?

[gary17]

Quote from: Packer16 on Today at 06:12:34 AM

Not the best of news but at least the total conversions will be limited to 4.5 million (or about 10% dilution).

 

Packer

Does anyone understand why the authorization is 4.5million shares? Any reason behind this?

 

I take this to mean that management saw the big drop in share price when they converted last time and put in a cap to let the market know what to expect for the maximum conversion -

[Packer16]

That is what I think.  Some folks may assume worst case that all of the debt would be converted to equity which is clearly not their intention.

 

Packer

[gary17]

Just reading berkshires letter and noticed warren's view on interest coverage.  Just wondering if this applies to telecom.

 

I'm slightly concerned about telecom's decreasing pricing power over time , not being able to keep up with inflation, but hopefully this will be offset by greater usage.

 

Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed.

[Packer16]

I think your concern is correct for telecom in general where you have many options to purchase bandwidth.  However, in Alaska you options are limited so I think it is not as much of a factor as in the lower 48.

[Olmsted]

I thought about this a bit more, and think there may be more going on with the redemption of these few million in converts besides just a desire to deleverage.  I mean why just do 4.5m? The small number seems very deliberately chosen. And after paying the senior facility down $65m.  One explanation could be that they are targeting a specific coverage ratio or some other ratio, that they have reason to believe will allow them to negotiate some changes to their senior credit facility.  Like a lower rate.

 

This is just rank speculation, but the explanation does fit the facts.  That of course does not mean that other, perhaps more accurate explanations exist.  I would like to think this is the game plan, because the those newly-issued shares will be accretive in very short order.