ATN International, Inc. (ATNI) Earnings Call Transcript & Summary

Good morning and welcome to the ATN International conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Justin Benincasa, Chief Financial Officer. Please go ahead.

Thank you, Andrew. Good morning, everyone, and thank you for joining us on our call today to discuss our recently announced agreement to acquire Alaska Communications. Here with me is Michael Prior, ATN's Chief Executive Officer. But before I turn the call over to Michael for his comments, I would encourage you to read the cautionary language concerning forward-looking statements in the press release and under additional information and where to find it in the press release as this call and our press release contain forward-looking statements based on estimates, projections, beliefs and assumptions and are not guarantees of future events or results. Actual future events and results could differ materially from the events and results indicated in these statements. Also in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details on these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect future operating results, please refer to both our website at atni.com and Alaska Communications' website at alsk.com or the 8-K filing provided to the SEC by Alaska Communications on November 4, 2020. And with that said, I'll turn the call over to Michael for his comments first.

Thank you, Justin, and good morning, everyone, and Happy New Year. We appreciate you joining us on this call on such short notice. And as you've seen and Justin referenced, we have signed a definitive agreement to acquire Alaska Communications, and we are enthusiastic about the prospect of entering this new domestic market and working together with the Alaska Communications team to provide industry-leading products and services to customers. We view Alaska Communications and the nature of this transaction as an excellent strategic fit for ATN. First, it provides entry into what is a new domestic market for us. While it is a distinct market, it has a competitive and operating environment that are similar to those we have encountered in other markets in which we've succeeded in growing revenue and improving margins. And like those markets, it is one with an increasing demand for high-capacity and reliable data connectivity. Second, it pairs us with the leading communications, technology, infrastructure and services provider in the market; managed by a team that has deep market knowledge and experience; is familiar and comfortable with the operating environment; and has helped Alaska Communications develop a great reputation as a customer-centric organization with a particular focus on business and carrier customers. Third, we believe our continued investments in and enhancements to high-quality shared services platform and other operational and technical resources should enable Alaska Communications to build on their recent successes and drive additional revenue opportunities over time. These include strengthening our capabilities in support of fiber infrastructure expansion and bringing the latest technologies to market, including next-generation managed services and private network solutions. And while we do not anticipate direct operating expense synergies in market, we expect to achieve efficiencies by utilizing shared technology platforms for IT security, data warehousing and procurement and by reducing financing and public company costs. Additionally, the size and scale of Alaska Communications should benefit the scope and capability of our overall platform. And just to give you a sense of the company's current scale and operations, Alaska Communications employs approximately 600 people and operates over 157,000 miles of fiber network, has approximately 7,000 fiber-to-the-home locations and nearly 900 fiber-fed commercial and government buildings. As I alluded to in my opening remarks, I believe the post-closing capital structure of this transaction, which Justin will elaborate on in a moment, illustrates the strategic growth potential for ATN that we've been speaking about over the last several months. The ATN operating platform and our ability to source and develop expansion opportunities make us an excellent partner for capital providers looking to invest in critical communications infrastructure. Our partner in this transaction, Freedom 3 Capital, knows the market and the company well and was looking for an operating partner who could enhance and accelerate execution and reduce risk. We believe there will be more opportunities like this, and the financial structure of this transaction gives us the flexibility to pursue them. A non-recourse facility at the ACS level, together with additional capital injected by Freedom 3, allows us to take advantage of the existing capacity of our balance sheet and the relatively low cost of debt capital to make a substantial investment without constraining our ability to make additional investments and fund further expansion. After closing this transaction, we expect our consolidated net debt to be well under 2x EBITDA, providing us with significant resources to fund future growth. And now I'll turn the call back to Justin to provide additional financial information on this transaction and on Alaska Communications. Justin?

Great. Thank you, Michael. The acquisition is an all-cash transaction valued at approximately $332 million, comprised of 58.6 million shares at $3.40 per share and net debt of $139 million per Alaska Communications' September 30, 2020, balance sheet. As indicated in the agreement, ATN has already secured $235 million of committed bank financing for the transaction, comprised of a $200 million term loan and a $35 million revolving credit facility. The debt financing will be recoursed to Alaska Communications in the acquiring entity and not to ATN. 51% of the remaining purchase price will be equity financing provided by ATN and 49% by Freedom 3. We intend to use a combination of cash on hand and borrowing under ATN's current bank facility to fund our portion of the equity contribution. ATN will operate and consolidate the acquiring entity and Alaska Communications through its majority ownership stakes. To provide context to those who are not familiar with either ACS or us, for the first 9 months of 2020, Alaska Communications reported net income of approximately $7 million, adjusted EBITDA of just under $50 million on revenues of $178 million, which compares to ATN's 9 months net income of approximately $6 million and EBITDA of $90 million on revenues of $332 million. So this transaction is significantly additive to our operations. I should note also that Alaska's 9-month EBITDA includes approximately $4.9 million of amortized deferred capacity revenue on cash received prior to the reported period. Included with the third quarter 2020 earnings release, Alaska Communications reaffirmed their full year 2020 revenue guidance of $232 million to $237 million, and noted that they expect to be at the high end of their full year adjusted EBITDA guidance of $63 million to $65 million. They also increased guidance for adjusted free cash flow, excluding prefunded projects of $14 million to $16 million. We encourage our investors to visit Alaska Communications' website at alsk.com for more detail of the breakdown of revenues and other financial and operating metrics. As Michael noted, this transaction still leaves us with a strong balance sheet post transaction, giving us the flexibility to continue to invest in organic projects as well as other strategic uses. I would like to note that this acquisition represents another example of how ATN's financial capacities and company culture enables it to act quickly to capture an opportunity that is aligned with our strategy, significantly additive to our operations and has considerable long-term growth potential. I'll turn it back to Michael for his closing remarks.

Thanks, Justin. So to sum up, we are pleased with opportunities we see ahead to create value together with the Alaska Communications team. This has been a difficult year across most industries, and the Alaskan economy has faced specific economic headwinds tied to lower oil prices. Despite that, ACS continued to make progress across key financial metrics, which is a strong indication of their knowledge of the market and their commitment to address and overcome challenges. As noted in today's release, the acquisition has been approved unanimously by Alaska Communications' Board of Directors, but is subject to approval by their stockholders, regulatory approvals and other customary closing conditions. We are anticipating the completion of the transaction in the third quarter of 2021, and we'll keep investors up-to-date as the time line moves forward. In the meantime, you can stay current on developments at Alaska Communications through their releases and filings. There's not that much more information that we can provide at this time, but we are happy to take your questions, and we'll do our best to respond effectively. So I will now hand it back to the operator to start the Q&A portion of the call.

[Operator Instructions] The first question comes from Ric Prentiss of Raymond James.

Couple of quick ones to make sure I understood. I think I picked up you guys, ATNI, are going to own 51% of the equity on the transaction done as far as consolidated with that 51%?

It's correct. That's correct.

Okay. And obviously, this has been a long process. Macquarie was in there. Talk a little bit about the process and what was interesting about the transaction, but how it went from kind of Macquarie? And then it looks like Alaska has already paid a $6.8 million termination fee. And do you expect any other competition for the asset?

Yes, Ric, the -- I mean, I don't want to comment on all of that back and forth. I don't think that's really our place to do that. I think it's more Alaska Communications'. But basically, we became aware of this when Alaska went out in their Go-Shop under the Go-Shop provisions of their agreement with Macquarie. And we formed a view as to its value to us and had, obviously, conversations with Freedom 3 and decided on a structure and so on. So we had to do all that in very quickly. It helped, of course, that Alaska is a public company. There's public company disclosure out there to review. And of course, during the Go-Shop, the management was very helpful to us to get us up to speed quickly. And we knew the company as the company and had discussions with them in the past over strategic items some years ago. So it didn't take as much as it might have for us to get up to speed. And as to your second part of your question, we really don't know in the market. It's a different process at this stage, but we're just -- we'll move forward on the basis of getting regulatory approval and stockholder approval and closing.

Okay. You mentioned the financing and public company costs. Any thoughts on where the cost of the debt is going to be for the transaction? And how much public company cost is there in the numbers at Alaska on an annual basis, do you think, roughly?

On the debt piece, we -- the debt we've secured so far will be less expensive than the existing debt on the business today. So I think we'll come out better there. And we're still kind of evaluating that, but we probably anticipate there's a couple of million dollars of public company costs in there between professional services and other.

Right. And what's the existing debt cost at Alaska, I must admit, I don't know.

It's L plus 450, I believe.

Oh, wow, okay. Okay. And Justin, I think you had mentioned there was $4.9 million of non -- what I interpreted as noncash in the EBITDA number for the 9 months?

Correct.

What do you expect on an annual basis? And as you guys report adjusted EBITDA, is that something that would not be in there?

I think our purchase accounting actually will actually pick it up, but we felt the need to, at least, mention it is that it's kind of pre-transaction, right? So it's been cash received. So -- and I think if you annualize that number, it's pretty close. That's a 9-month number.

Got you. And you talked about you guys still have the dry powder to pursue both organic as well as the M&A. Any updated thoughts on what else is out there or time frame? And I did notice Alaska Communications also has some CBRS spectrum.

Yes. I think in terms of time frame, I think we have a number of things really already under development internally, including private network, expansion and some fiber builds and things like that. But I think in terms of M&A and strategic deals, I mean, we really think there could be other opportunities like this. I'm not thinking of specific opportunities, but I do think there is an interest in financial investors that are investing in assets like this and the types of assets that, I think, we can help both structured transactions and operate.

[Operator Instructions] The next question comes from Greg Burns of Sidoti & Company.

Could you just talk about the Alaska's mix of business, the different revenue line items and where they are actually seeing growth? It seems like there hasn't been much growth in the business over the last couple of years, but maybe more recently, that's starting to pick up. So if there's not really many operating synergies, where do you see the value being driven here in terms of big growth opportunities?

Yes. I think that they're -- so I think -- what I think attracted us, too, is they have managed to shift the mix of their business significantly over the past few years. And so a little over 2/3 of their revenue, as I reference, comes from what they call their business and wholesale services. And the other 1/3 is roughly split between consumer and regulatory. And we think in the business and wholesale side, there's continued ability to build out, particularly, rich fiber solutions, which is what they've been doing, and we think there's opportunity to grow off those sort of anchor tenant builds that they've undertaken recently and expand commercial revenue and wholesale revenue. So I think that's probably the #1 place for focus, and we're also -- we will be looking in the coming months at other areas that we think we can work on with them to expand and improve growth and margins.

And we have a follow-up from Ric Prentiss of Raymond James.

I also noticed the CapEx guidance for Alaska was $37 million to $39 million. What do you think as far as deployment of capital into the future in those markets? You kind of alluded to it a little bit on Greg's question.

Yes. I think that most of their capital, again, has been going into next-generation or the latest generation anyway, fiber builds, high-quality, high-capacity build. And we see continuing to do that. So -- and we don't see any great change in their overall maintenance expense.

Okay. And then -- and you brought up margins, I think, a couple of times. Looks like the Alaska operations are kind of in the high 20% range of margins. Where do you think that could go over time and why?

Well, I think as you grow revenue, and particularly, as you grow on to the back of some of these recent fiber builds, you will be bringing in higher-margin revenue. I think that's the #1 thing because there are -- that's a tough operating environment. You're not necessarily, in that operating environment, going to see the types of margins you might see in other markets. So there may be ways I think we can help them do what they've been working on anyway, some of the things they've done recently to improve building costs and other costs like that. So we're certainly going to work on that. But I think primarily it will be increasing the contribution of higher-margin revenue.

Okay. And can you give us a little further detailed background on Freedom 3 Capital?

Yes. I don't want to speak too much for them, but they're folks that know the industry well, they've come from various places, and their funding is primarily large -- very large family offices, particularly in the Midwest. And they have both a equity approach and a credit approach. So they typically have a mix of the two in their investments. But there are people that were known to us in kind of a 6-degree separation way, and I think we feel like there's a good cultural fit.

Okay. And when you think about -- I think you also mentioned the private network stuff, you guys have got some of your subsidiaries working on that. How do you see this fitting into the private network, private 4G, private 5G type of networks? And what industries are there in Alaska that might be of interest in that?

Yes. Well, there's government, both federal and state. There's, obviously, oil and gas. And there's hospitality. And there's a couple of other operating situations, ports and the like, that we think are all good segments for private networks. And I -- as I referenced before, they have just under 900 -- I think the number's -- just under 890 fiber-fed buildings, right? And a number of those buildings could be good places to deploy private network, though, not all, but a number of them should be. And I think with continued fiber builds, that number will expand.

Okay. And last one for me. So they gave a lot of guidance. You guys thinking that might be something you would start doing.

Let's not talk crazy, Ric, on.

We'll help them along as we go, though.

All right. And I appreciate knowing the ownership stakes, too, because it always helps us know what percent ATNI owns at these different ventures.

Yes. It appears.

This concludes our question-and-answer session. I would like to turn the conference over to management for any closing remarks.

I don't have any further remarks, operator. Thank you, everybody, for joining us on the call. We look forward to keeping you updated as we move through approvals.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.