Bargain-Hunters

When Independent telcos get sold today, they generally don't fetch the prices they would have a few years ago. But there are still exceptions to the rule. That was the consensus of financial industry stakeholders who were in the spotlight at Telephony's Insights for Next-Generation ILECs conference last month.

Allen Oppenheimer, president of A.M. Oppenheimer, consults with owners of Independent telcos who are interested in selling their companies. Addressing attendees at a VIP lunch at Insights, Oppenheimer said his consultancy has a formula it uses to estimate the value of a company that considers balance-sheet equity and the net present value of estimated revenues for the next five years. But he emphasized the need to also give that formula a reality check by asking potential buyers how they would value a company with equivalent parameters.

“Formulas don't mean much unless the value is substantiated in the marketplace,” he said.

In a separate Insights panel focused on Independent telco consolidation, Bill King, president and managing principal for JSI Capital Advisors, noted that Independent telcos, on average, sold at a multiplier of seven times annual cash flow in 2007, down from an average multiplier of eight or nine in 2000.

But another participant on the panel emphasized that multipliers can deviate significantly above or below those averages. “We've seen deals done in the five-times range and some in the 10-times range,” said Francis Gallagher, managing director for Stifel Nicolaus. In an era when many incumbents are losing landlines to cable companies, Gallagher noted that a telco with a strong cable competitor could be worth considerably less than one without such competition. A key focus of potential buyers' due diligence efforts today involves the local cable company, he said.

Geography also can be critical to a company's value. “I look a lot at the broadband access market and IPTV,” Vince Vittore, program manager for Yankee Group, told attendees at the consolidation panel. “We see a thought process that says, ‘I need to have local scale to make IPTV work.’ You have to have a consolidated toehold.”

Noting that potential advertisers are accustomed to buying airtime in direct marketing areas established by traditional media companies, Vittore said, “Think of the market not as a town, but as a direct marketing area.” That recognition drove cable companies to consolidate geographically in the past, and Vittore predicted that the same logic will drive future telco consolidation.

But at the same time that IPTV plans could drive the biggest telcos to acquire smaller companies, it also could create opportunities for smaller telcos looking to acquire lines from their big counterparts.

Vittore expects to see the largest telcos continue to divest rural lines — in large part because of their IPTV plans. Noting, for example, that Verizon could face regulatory pressure in markets where it does not plan to deploy its IPTV and high-speed FiOS offering, Vittore said, “I'm recommending they get out of all non-FiOS markets.”

Such divestitures, however, could take the form of a spin-off, rather than a sell-off, Vittore said. Pointing to Verizon's sell-off of rural lines in New England to Fairpoint Communications, he added, “The Verizon/Fairpoint transaction was extremely painful for Verizon and Fairpoint.”

But King challenged the notion that the deal was a bad one for Fairpoint. Noting that Verizon sold its lines at a relatively low price, he said, “Fairpoint got bloodied up in the process, but I'll take a couple of belly blows for $350 million.”

Virtually all Insights participants questioned the likelihood of M&A among the smallest Independent telcos. Oppenheimer noted that the smallest Independents often sell through business opportunity brokers, who work with individuals who may want to buy a business — and the process of matching such buyers and sellers can be challenging.

As vice-president for the National Telecommunications Cooperative Association, Kevin McGuire represents some of the smallest U.S. telcos. Also participating on the consolidation panel, he said small cooperative telcos could seek alternatives to consolidation. “They'll start sharing intellectual capital and maybe management teams,” he predicted. One chief executive could manage multiple companies, he added. Or the operations staff at one small telco might support several others, which would be billed for the services.