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Where Have All The Values Gone?

Our Annual Review of ILEC Values Indicated By Deals Announced During the Prior Year

2011 was a slow year for ILEC deals. We counted a measly six deals announced during the year, fewer than half of the 16 announced deals during the previous year. We surmised that the uncertainty surrounding the NPRM related to USF and ICC reform was keeping many would-be players on the sidelines.  And when ICC/USF funding is such a large component of some rural companies’ revenue streams, it’s not hard to imagine value estimates coming in all over the map. Who wants to buy a company if the buyer isn’t reasonably confident in the future revenue estimates of the target company? And there are probably a number of potential acquisition targets out there that turned down deals because the owners felt the target company was worth more than the price being offered.

When we analyze deals, we typically calculate multiples of revenue, OIBDA and connections, which give us an apples to apples comparison of different deals.  For example, during 2010, buyers paid an average of 2.8x revenue and $2,060 per connection. Any deal multiples coming in significantly different than the averages indicates we should take a look to see if something else is going on with the target property.  In 2009 and 2008, the average multiples were 2.1x and 2.7x revenue and $1,650 and $3,193 per connection, respectively. So clearly there was a downward trend from 2008 to 2009, but 2010 multiples indicated values were perhaps on the rebound. And 2011?

Because only one of the six announced deals during 2011 disclosed the price – Otelco agreed to pay $4.5m to acquire Shoreham Telephone – we’re unable to calculate the multiples implied by the other five observed deals.  Based on Shoreham’s 2010 revenue of approximately $2.4m and 4,975 access line equivalents, Otelco paid 1.9x revenue and $905 per connection for Shoreham Telephone.  Based on this data point, it appears values have fallen precipitously since 2010.  Without any other 2011 deal multiples it’s difficult to know where in the range these multiples fall, from average to outlier. Nevertheless, this is a deal values article, and it’s important to look at the few data points available to estimate what has happened to deal values over the last year, and what to expect in the future. 

A second data point for us to analyze is Consolidated Communications’ recently announced deal to acquire SureWest. Announced on February 6, 2012, Consolidated will pay 2.2x revenue and $1,548 per connection for SureWest. These multiples are higher than the Shoreham/ Otelco deal, but still down from 2010 multiples.  Based on these two deals, one announced in 2011 and one in 2012, we could infer a couple of different trends.  It’s possible that deal values have hit their lows, and are just bouncing along the bottom.  Or, more likely, we are starting to see a greater divergence between the values of large and small properties.  Large companies such as SureWest can command a premium because of the scale and diversity of operations.  Generally speaking, smaller companies with fewer connections and less diverse operations have more difficulty adapting to the changing telecommunications industry, and values suffer as a result.  Nevertheless, in the past, industry averages that included large public companies provided a reasonable benchmark against which we could compare smaller transactions.  This may no longer be the case. 

It used to be the case that a buyer would pay more than $3,100 per connection, as each connection provided for a relatively stable recurring revenue stream.  And historically, there was little competition for rural ILECs.  These were the glory days, and for a while it seemed they would last forever.  But all that has begun to change.  Access lines have declined in recent years as customers switch to wireless and VoIP.  If the connection multiple for the SureWest acquisition is any indication, buyers are only willing to pay about half of what they would have paid a few years ago for each connection (less than a third if the Shoreham multiple is the new norm), and if connections are falling….well, you get the idea.  Generally speaking, this doesn’t bode well for the value owners of ILECs can realize through sales of their companies.  Additionally, although there is far more certainty surrounding ICC/USF reform now that the NPRM has been released, future USF funding will be targeted more towards expanding broadband and wireless services to unserved areas.  Of course many ILECs already provide other services, be it Internet, video, or wireless, and those that can refocus investment on new revenue streams and maintain some level of high cost support may well see a resurgence in value.