Description

This is more a PA idea to buy on a pullback given the liquidity.

Business:  GCI is the largest integrated telco in Alaska, which is roughly 60% wireline and 40% wireless.  AK is a huge place with a small population, which makes capital intensive businesses like telecom tough.  The positive is that no sane person will ever overbuild these markets.

The wireless business is spectrum rich and #2 in subs to AT&T, but with port ratios roughly stable among carriers.  GCI is the price leader in the market and offers a quad-play bundle.  AT&T got into the business via acquisition several years ago and GCI recently combined its wireless business with former partner ACS.  VZ has a small retail presence only, a limited network and limited spectrum.

The wireline business is a hybrid fiber coax network.  They dominate the consumer business where they have three sources of opportunity: penetration of homes passed remains just 49%, ACS is de-emphasizing the business and ARPU is growing due to mix.  GCI offers usage based pricing and speed tiers (up to 1gbps) and is seeing good uptake among higher data plans.  ARPU is up ~$10 to $85 and subs are up about 7% over the last 2 years.  Business services have been a bit more stagnant with rate compression in data.   The local competitor ACS is backing away from consumer and focusing on the business market.  GCI also offers satellite broadband covering 98% of AK and a TERRA microwave broadband business for remote rural locations.  The managed broadband business seems very solid.

The wireless roaming business is going through a transition… basically this is mostly Verizon customers roaming on to the network while on vacation, leaving the major cities or even within the major cities because the Verizon network is porous.  In an attempt to thwart VZ’s build out of AK, GCI is lowering prices ~20% for a long-term agreement.  This makes sense.  What doesn’t make sense is VZ spending hundreds of millions to billions to build out a state with 700k people.  What makes the most sense is to buy GNCMA, but apparently AOL and Go90 are more important priorities.

Valuation:  GCI expects to do $335mm of EBITDA this year including EIP finance benefit (should deduct) and AWN transaction integration costs (should add back), which makes the EV/EBITDA about 6X.  Next year my guess is that you will see a LSD EBITDA increase offset by a 20% decline in roaming revenue (with 100% contribution margin)… so perhaps $319mm of EBITDA is a good base (reported EBITDA will likely be $25mm higher due to EIP).  Capex of $175mm (est. vs. $170mm in FY15), $81mm interest and $0 taxes gets us to FCF of $63mm.  FY17, assuming 3.5% EBITDA growth and $180mm capex gets me to $330mm of EBITDA and $69mm of FCF.  If GCI uses FCF in excess of debt amortization (~$5mm/yr) to buy back stock at the current share price, I have shares going from 42.2 > 39mm > 36mm in FY17.  At 15X FY17 FCF that’s $28.50.  At 8X FY17 EBITDA that’s $35.25.  The stock hasn’t ever traded well, but if either we are going to see a levered equity return situation due to new board membership or an eventual acquisition the past shouldn’t matter.

Other stuff: 

*GCI is a logical acquisition candidate.  Verizon has a small wireless presence in AK.  And if there are synergies between Altice in France, Israel, New York and Arkansas, why not Alaska?

*Searchlight financed the deal to consolidate their wireless partner – it was a sweet deal for them, but it doesn’t hurt to have CHTR’s Chairman on the board.

*High inside ownership (Duncan, 401k plan, Searchlight)

*Per usual, you are on your own with the details… 

Catalyst

execution, time, buybacks, buyout