www.jsicapital.com RLEC Ownership Strategies IP Possibilities April 12 - 14, 2011 Kansas City, Missouri Bill King JSI Capital Advisors, LLC [email protected]
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RLEC Ownership Strategies
IP PossibilitiesApril 12 - 14, 2011
Kansas City, Missouri
Bill KingJSI Capital Advisors, LLC
www.jsicapital.com
Change fueled by technological advances is changing the RLEC business model Competition brought by rapidly advancing technology is eroding market share
Emerging regulatory change will make it worse Regulatory support is being challenged
The future business model will not support the current number of small RLECs The old model encouraged, sustained and protected small RLECs
RLECs can only change what they can control “The folks sitting in this room don’t drive the ecosystem”
RLEC MERGERS AND SALES Change is Coming….Do You have a Plan?
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Predictions are hard to make…especially about the future.
Yogi BerraModern Day Soothsayer
True, Oh So True
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OwnershipStrategies
HorizontalGrowth
OrganicGrowth
H arvest
M ode
HarvestMode
VerticalGrowth
CurrentExit
SmartSale
?
OWNERSHIP STRATEGIESSix Ownership Strategies….and One Default
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OWNERSHIP STRATEGIESEXIT STRATEGIES: Current Exit
Exit
Growth
Maintain
CurrentExit
The benefits of a current sale outweigh the benefits of continued ownership
Family members no longer active in the company
Concern about declining equity values
Realignment to achieve scale benefits
Bank or equity “motivated” sales
Preservation of wealth and security
Caution!
A sale process can take nine months to a year (or longer)
There may not be a qualified or motivated buyer for your property
You may not be happy with the answer
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OWNERSHIP STRATEGIESEXIT STRATEGIES: Smart Sale
Exit
Growth
Maintain
SmartSale
Typically involves using tax-advantaged techniques to maximize the after-tax
proceeds (as opposed to before-tax proceeds) realized from the sale of a
business
Lifetime gifting/valuation discounts
S corporation conversions
Employee stock ownership plans
Reverse Morris Trust
The goal of maximizing sale proceeds is often subordinate to the ability to
structure the transition of ownership to a target group (e.g., the next
generation)
Usually unfold over longer periods of time and are engineered by professionals
Caution!
Complex, costly and require significant advanced planning
Are values declining too quickly?
Who gets left holding the bag?
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Alltel S/Hs
Valor S/Hs
OWNERSHIP STRATEGIESEXIT STRATEGIES: Smucker Structure - 1
SmartSale
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OWNERSHIP STRATEGIESEXIT STRATEGIES: Smucker Structure - 2
SmartSale
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OWNERSHIP STRATEGIESMAINTENANCE STRATEGIES: Harvest Mode
Exit
Growth
Maintain
HarvestMode
The goal of the Harvest Mode is to maximize benefits realized by shareholders
and owners of the company
Is sometimes the default strategy in cases where a current sale is not an
alternative
Benefits are not limited to financial gain Can include sustaining a family legacy
Employing friends and family members
Honoring real or perceived commitments to communities
But typically manifests in the form of enhanced salaries, dividends, benefits or perquisites
Properly executed, the strategy can extend the viability
Caution! An emotionally draining process in a declining business
Can be viewed with suspicion or outright contempt, particularly by employees and regulators
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth
Exit
Growth
Maintain
HorizontalGrowth
Grow by acquiring additional ILEC properties
But with values declining, why are groups aggressively pursuing horizontal
acquisitions that, if recent history is an indication, will likely be worth less
tomorrow than today? Capitalize on real or perceived synergies with existing operations
Realize the scale necessary to realize operational efficiencies
Capitalize on vertical and organic growth opportunities
Attract capital and management talent
Mask the decline of existing operations
I can do anything you can do better, I can do anything better than you
Caution! The strategy can work, but frequently fails to enhance value
Success is contingent on the ability to buy right and execute well
Doesn’t the strategy simply create a bigger melting ice cube?
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth
Exit
Growth
Maintain
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Horizontal Growth
Exit
Growth
Maintain
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth
Exit
Growth
Maintain
VerticalGrowth
Involves expanding into complimentary vertical services, typically via acquisition
Can be an effective strategy for those that lack internal capabilities necessary to
penetrate a new market, or lack the time necessary to gain an adequate foothold
Service Cross Pollination
Horizontal growth enables the provision of legacy services to new customers while vertical growth allows for the provision of legacy and new services to legacy and new customers
Properly executed, vertical growth can enrich customer relationships and protect against churn
Caution!
Execution risks and risks that expected synergies and cross selling opportunities do not materialize
New, unfamiliar business line and dependence on acquired management
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth
Exit
Growth
Maintain
Windstream’s growth strategy
looks very different from the
approach taken by Frontier of
CenturyLink. Nuvox
Kentucky Data Link
Norlight
Hosted Solutions
Even the Windstream’s RLEC
acquisitions had vertical
growth attributes Iowa Telecom
D&E Communications
Lexcom
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth
Exit
Growth
Maintain
Strategies:
Facilities based Retail and wholesale Multiple products Disciplined Capex Leverage brand Leverage common costs
Wholesale wireless revenues of $133m (primarily Sprint)
Repositioning wireline as high-speed data provider
Acquiring FiberNet for $170m
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Vertical Growth
Exit
Growth
Maintain
OrganicGrowth
Typically realized by either increasing the number of customers served (other than by acquisition) and/or increasing the number of products and services sold to any given customer
Caution!
The most difficult growth strategy to execute
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Hybrid Strategies
Exit
Growth
Maintain
Nuvox – Acquired 2/10
Iowa Telecom – Acquired 6/10
D&E Communications – Acquired 11/09
Lexcom – Acquired 12/09
2/3rds of SHAL came with IWA deal. Remaining purchased from New Ulm
Target Closed Price
D&E Communications 11/09 $330m
Lexcom 12/09 141m
Nuvox 2/10 643m
Iowa Telecommunications 6/10 956m
Kentucky Data Link/Norlight Pending 782m
Hosted Solutions Pending 310m
$3,162m
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OWNERSHIP STRATEGIESGROWTH STRATEGIES: Hybrid Strategies
Exit
Growth
Maintain
Hybrid Growth
Strategies
8.3%
7.7%
8.4%
9.0%
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OWNERSHIP STRATEGIESTHE DEFAULT STRATEGY
Exit
Growth
Maintain
Melting ice cube, poached frog, deer in the head lights….call it what you want! Arguably the strategy currently followed by most RLECs
The Default Strategy
TechnologyCompetitionRegulation RLECs
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OWNERSHIP STRATEGIESTHE DEFAULT STRATEGY
Exit
Growth
Maintain Denial, ineffectiveness and/or inaction are not strategies
Remember – the deer rarely survives impact
The Default Strategy
TechnologyCompetitionRegulation
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WHO WILL BE MAXIMUS?Choose Your Weapons Carefully
Aggressively pursue growth opportunities Target a current or smart exit
Harvest the maximum benefits
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The only thing we know about the future is that it will be different.
Peter DruckerManagement Guru
So, Where are We Heading?
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Bill Had it Right!Can You Say Over-The-Top
“Television shows will continue to be broadcast as they are today for synchronous
consumption. After they air, these shows – as well as thousands of movies and virtually
all other kinds of video – will be available whenever you want to view them.”
A joint venture of NBC Universal, Fox Entertainment and ABC (Walt Disney) with funding by Providence Equity
Started in 2007
Publicly traded (Nasdaq:NFLX) had 17m subs at the end of 3Q10 (up 2m during the quarter) and generated $1.6b of 3Q revenues. Stock currently trading at P/E of 64.3x
Started in 1997
Jointly developed by Google, Intel, Sony and Logitech
Announced in May 2010
Use an HDTV set to view photos, play music and watch video from the Internet or a local network
2G Launched Sept. 2010
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“Movies, television programs, and all sorts of other digital information will be stored
on ‘servers,’ which are computers with capacious disks. Servers will provide
information for use anywhere on the network. If you ask to see a particular movie,
check a fact, or retrieve your electronic mail, your request will be routed by switches
to the server or servers storing that information. You won’t know whether the
material that arrives at your house is stored on a server down the road or on the other
side of the country, nor will it matter.”
Bill Had it Right!Storm Clouds on the Horizon
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“If other people are visiting the same [location], you will be able to choose to see them
and interact with them or not, as you please. Your visits needn’t be solitary experiences.
Some locations will be used purely for cyberspace socialization; in others no one will be
visible. Some will force you to appear to some degree as you are; others won’t. The
way you look to others will depend on your choices and the rules of the particular
location.”
Bill Had it Right!Living Life On-Line
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“You’ll be able to keep all these and more in another information appliance we call the
wallet PC. It will be about the same size as a wallet, which means you’ll be able to carry
it in your pocket or purse. It will display messages and schedules and also let you read
and send electronic mail and faxes, monitor weather and stock reports, and play both
simple and sophisticated games. At a meeting you might take notes, check your
appointments, browse information is you are bored, or choose from among thousands of
easy-to-call-up photos of your kids…..Rather than holding paper currency, the new wallet
will store unforgeable digital money.”
Bill Had it Right!The Digital Wallet
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It is evident that the Telecommunications Act of 1996 has failed to produce the consumer
benefits policy makers promised because competition has failed to take hold across the
communications industry. The Act's failure is not because, as some have suggested, the Federal
Communications Commission was overly regulatory in seeking to create conditions ripe for
competition. The fundamental problem is that the huge companies that dominate the telephone
and cable TV industries prefer mergers and acquisitions to competition. They have refused to
open their markets by dragging their feet in allowing competitors to interconnect, refusing to
negotiate in good faith, litigating every nook and cranny of the law, and avoiding head-to-head
competition like the plague.
Consumers UnionLessons From 1996 Telecommunications Act:
Deregulation Before Meaningful Competition Spells Consumer Disaster
The FCC…Not So Much!Little in the Way of Consumer Benefits
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In general, while the universal service sections of the Act remain under threat, they have been
the most successful provisions of the Telecommunications Act. The provisions to encourage
competition have failed. President Clinton's promise of protection against monopolies in
promotion of diversity would be laughable if the consequences were not so tragically opposite.
Mark LloydThe Leadership Conference:
Successes and Failures of the 1996 Telecommunications Act
The FCC…Not So Much!Regulation-Motivated Competition Underwhelming
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Google and Verizon reached an agreement in which they both opposed complete network
neutrality. The agreement details that ISPs should be "prohibited from preventing users of its
broadband Internet access service from (1) sending and receiving lawful content of their
choice; (2) running lawful applications and using lawful services of their choice; and (3)
connecting their choice of legal devices that do not harm the network or service, facilitate
theft of service, or harm other users of the service." They went on to say that wireless ISP's,
such as cellphone companies should not be required to provide neutral networks for their
customers. The rationale for this statement was that wireless networks are still being
developed.
Ivan Seidenberg recently told the Wall Street Journal that companies such as Sprint Nextel
Corp. and T-Mobile USA, along with other smaller wireless operators, should join forces.
“There are too many players in the industry. I think it would be healthy if there’s more
consolidation.”
Everyone has a hidden agenda, except me!
Michael Crichton
Ivan, Why are You Smiling?
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Only one man in a thousand is a leader of men – the other 999 follow women
Groucho Marx
The RegulatorsThe Rich NerdsCool Guys
OR
So, Who are You Betting On?
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AT&T estimates that embedded devices will drive U.S. wireless penetration from 90% today
to 300% by 2013
Verizon Wireless expects to have nationwide LTE coverage by 2013
JSI Capital Advisors estimates 71.9m access lines in service as of the end of 2013, down
from 115.2m as of the end of 2009
Cisco predicts: Annual global IP traffic will exceed three-quarters of a zettabyte (767 exabytes) in four years (up
from 176 exabytes in 2009)
Global IP traffic will quadruple between 2009 and 2014
It would take 72 million years to watch the amount of video that will cross the global IP networks in 2014
Video will represent 91% of all consumer Internet traffic in 2014 I have seen the future, brother; it is murder!
Leonard Cohen
2013
Do You See What I See?
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Typical Bandwidth Usage
NetFlix Video
iTunes Download
Picture
30 Days of Smart Meter Data
0 20 40 60 80 100 120 140 160
31.36 minutes of Netflix streaming video sent to an iPad over a 3G cellular network
143.2 Mb
3.5 Mb
2.0 Mb
0.5 Mb
Source: Vern Dosch of NISC (and The iPad Guide)
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Typical Bandwidth Usage
NetFlix Video
iTunes Download
Picture
30 Days of Smart Meter Data
0 20 40 60 80 100 120 140 160
31.36 minutes of Netflix streaming video sent to an iPad over a 3G cellular network
143.2 Mb
3.5 Mb
2.0 Mb
0.5 Mb
Source: Vern Dosch of NISC (and The iPad Guide)
Tweet Smart Meter Burst0
100
200
300
400
500
600
700
In Kbps
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How will network owners be compensated for their network?
Is the “linear” video gatekeeper model doomed? Are Over-the-Top
video providers a friend or foe?
How will 4G (5G and 6G?) wireless impact communications?
Is the “Smart Grid” a dumb idea?
What will Steve Jobs come out with next?
And, yes, what about future regulatory change?Take hold of the future, or the future will take
hold of you!
Patrick Dixon
Future Frontiers?
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How are rural telcos repositioning themselves in light of regulatory, technological and
competitive uncertainty?
What’s working? Is it enough to cover what we’re losing?
What role will small, rural telcos play in the future?
Is the business case sustainable? If so, how?
Are the industry’s advocacy efforts on target?
Was Ivan right - consolidation is not only inevitable but a good thing?
Our job is not to make up anybody's mind, but to open minds and to make the agony of the decision-making so intense you can
escape only by thinking
Some Unknown Guy
Questions to Ponder
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Might you be a “poached frog”?
Take hold of the future, or the future will take hold of you!
Patrick Dixon
Who (What) Will You Be?
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Might you be a “poached frog”?
Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)?
Take hold of the future, or the future will take hold of you!
Patrick Dixon
Who (What) Will You Be?
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Might you be a “poached frog”?
Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)?
Do you fancy yourself a “fast follower” (a/k/a a “second mover”)?
Take hold of the future, or the future will take hold of you!
Patrick Dixon
Who (What) Will You Be?
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Might you be a “poached frog”?
Perhaps you’re a “melting ice cube” (a/k/a a “deer in the headlights”)?
Do you fancy yourself a “fast follower” (a/k/a a “second mover”)?
Or, are you “Ensign Ricky” (a/k/a a “Red Shirt”)?Take hold of the future, or the future will take hold of you!
Patrick Dixon
Who (What) Will You Be?
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The future will soon be a thing of the past.
George CarlinLegendary Visionary
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and Women
Let’s Get Mad, Men
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Efficiency through savings and scale Save until you can grow
Despite all our efforts, will it be enough? In the absence of regulatory support, is the business model viable/sustainable?
Considerations for consolidation and combination Can consolidation sustain or revitalize small RLECs?
RLEC MERGERS AND SALES Change is Coming….Do You have a Plan?
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Customers continue to cut the cord CDC says 24.5% have cut the cord as of June 30, 2010 (another 20+/- leaning wireless)
JSI Capital Advisors estimates 71.9m access lines by the end of 2013
AT&T estimates that embedded devices will drive U.S. wireless penetration from 90% today to 300% by 2013
4G wireless is just getting started Clearwire has been providing service since January 2009 (Portland was the first market)
Verizon Wireless expects to have nationwide LTE coverage by 2013 (110m by YE 2011)
MetroPCS and T-Mobile on board as well
AT&T is coming
Internet traffic is exploding Cisco says global IP traffic will quadruple between 2009 and 2014
Annual global IP traffic will exceed three-quarters of a zettabyte (767 exabytes) in four years (up from 176 exabytes in 2009)
WHAT WILL THE FUTURE HOLD? Change Over the Next Few Years will be Dizzying
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Traditionalists and Baby Boomers are fading fast into the sunset 76m Baby Boomers start retiring in 2011 (11,500 per day, 8 every second)
11,000 new births in the U.S each day
Boomers control 80% of financial assets/more than 50% of discretionary spending power
Moore’s Law is still chugging along Moore expected the trend to last “at least through 1965
Now expected to continue through 2105
And Apple is still making really cool stuff
Life is what happens to you while you are busy making other plans
John Lennon
WHAT WILL THE FUTURE HOLD? Change Over the Next Few Years will be Dizzying
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WHAT WILL THE FUTURE HOLD? The Past Ten Years Has Not Been Kind to the Access Line
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Small ILECs served approx. 3% of all voice connections
Small ILECs will serve < 1% of all voice connections
WHAT WILL THE FUTURE HOLD? The Industry is Heading in the Wrong Direction
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WHAT WILL THE FUTURE HOLD? 52m access lines in Service by 2019?
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IT’S A SMALL, SMALL WORLDThe RBOCs – 83% of Lines over 43% of Area
7.8m square miles in the contiguous U.S.
3.39m square miles served by RBOCs
1.87m square miles served by the “Mini BOCs”
2.54m square miles served by all other telephone companies
RBOCs served 94.1m access lines at the end of 2009
RBOCs served an average of 27.8 access lines per square mile
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IT’S A SMALL, SMALL WORLDThe Mini BOCs – 12% of Lines over 24% of Area
7.8m square miles in the contiguous U.S.
3.39m square miles served by RBOCs
1.87m square miles served by the “Mini BOCs”
2.54m square miles served by all other telephone companies
Mini BOCs served 13.7m access lines at the end of 2009
Mini BOCs served an average of 7.3 access lines per square mile
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7.8m square miles in the contiguous U.S.
3.39m square miles served by RBOCs
1.87m square miles served by the “Mini BOCs”
2.54m square miles served by all other telephone companies
The “741” telcos served 5.8m access lines at the end of 2009
The “741” telcos served an average of 2.3 access lines per square mile
IT’S A SMALL, SMALL WORLDThe “741” – 5% of the Lines over 33% of Area
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771* total ILEC
(combining multiple
ILEC ownership)
98% serve less than
100k lines
68.7% serve less
than 5k lines
45.4% serve less
than 2k lines
25% serve less than
1k linesServe a combined 104k access lines
Serve a combined 213k access lines
IT’S A SMALL, SMALL WORLD52% of “741” Serve Less Than 2,500 lines
* Includes AK, HI, GU, PR, etc.
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IT’S A SMALL, SMALL WORLDFixed Broadband Growth Showing Signs of Fatigue
“Fixed” broadband growth is slowing down
“Mobile” broadband is taking off!
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Changes to traditional regulated revenue streams are eroding the regulatory
guarantees that have for so long defined the industry
Existing and emerging competition from wireless and cable providers is eroding
customer bases and reducing market share
Projected increases in Internet traffic are forcing telcos to invest heavily to prepare
their networks for the future and keep up with competition, without the regulatory
recovery guarantees of the past
Debt and equity providers are reassessing the industry’s investment and value
propositions in light of a changing risk profile
A CHANGING BUSINESS MODELRLECs and their Stakeholders must Reassess their Risk Profile
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Can we expect regulatory support to remain forever?
Can we lessen competition?
Can we slow down technological change?
Can we really influence the buying wants of our customers?
Can we adapt our operating structure to deal with current risk profile?
A CHANGING BUSINESS MODELHow can RLECs Influence their Risk Profile?
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COOPERATIVE MERGERSHancock Telecom and Central Indiana Power
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COOPERATIVE MERGERSSynergy Technology Partners and Telcom Management Services
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Technology and competition are increasingly impacting the RLEC business model
Regulatory change will make things worse
The business model no longer supports as many small RLECs
It is not a question of whether or not consolidation will happen or makes sense
because circumstances will force sales, mergers, consolidations, etc.
The industry needs leaders who will stand up and start this process because it is
logical and it is time
Who will that be?
RLEC MERGERSWhere Do We Go From Here?
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DON’T BE AN ENSIGN RICKY
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