Warwick Valley Telephone WWVY
July 12, 2006 - 2:34pm EST by
joe661
2006 2007
Price: 21.48 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 115 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

Warwick Valley Telephone is a small, mainly rural ILEC that operates in New York state and parts of northern New Jersey. They have approx 26k access lines, and the population in their service area is 50k.  They also own a 7.5% stake in a cellular partnership and this partnership is where the majority of their value comes from.  At $21.50 the market cap is $115mm.(This was last written up on VIC in early 05, the fundamental story is pretty much identical but I believe the timing is better this time around for reasons discussed below.)
 
Competitively they are in the same boat as all the other wireline operators, i.e. they are facing new sources of competition and access lines are decreasing.  WWVY also has had some issues getting into compliance with Sarbanes-Oxley and have had huge expenses relative to their revenues to get in compliance(they had $4mm of SOX expenses in 05, so they are spending 15% of their total revenues just on SOX). 
 
Given their small size and the large % of sales eaten up by overhead and compliance costs there isn’t a good reason for them to remain independent in their current form.  A strategic buyer would be able to extract significantly more profit out of WWVY’s wireline assets.(WWVY spent 66% of sales on SG&A last yr which is way out of line with comps)
 
Comps trade anywhere from $2k/access line to $4k/access line.  If you take the low end of the range and value WWVY at $2k/line then you get a value of $52mm for their 26,000 access lines, at $3k the lines are worth $78mm.
 
The wireless partnership is the Orange County – Poughkeepsie Limited Partnership.  Verizon Wireless is the GP and owns 85%.  Warwick Valley owns 7.5% and Farpoint Communications(FRP) owns the remaining 7.5%.  Below I list the last 5 years of results for the partnership(the partnership’s annual report is attached to the 10-k):
 
05: revs = $180mm, net = $147mm
04: revs = $163mm, net = $139mm
03: revs = $144mm, net = $121mm
02: revs = $114mm, net = $97mm
01: revs = $82mm, net = $67mm
 
WWVY’s share of 2005 earnings was $11mm.  The partnership has recently been distributing approx 80-90% of net income as cash to the partners(WWVY received a $10mm cash distribution from the partnership in 05).  However, in the 10-K they state that the partnership will be reducing wholesale rates in 2006 and this will depress results.  In Q1 WWVY’s share of partnership income delined by 7%.  At this rate they will earn $10.2mm in 06 from the partnership.  I believe their stake in the partnership is worth at least $100mm, and that is probably a conservative number.
 
 
 
 
Valuation:
 
$7mm net cash + ($52mm to $78mm from wireline assets) + $100mm from the partnership = $159mm-$185mm, or $30-$35/sh.
 
Another thing to note is that they have a net cash position, when comps are mostly in 2x-4x debt/ebitda range.  This gives them the flexibility to do a large buyback or one-time dividend which would be another way to realize value.
 
Timing:
 
I believe the timing is better now than it has been in the past.  Santa Monica Partners has been involved in this for at least a couple of years but the past election was the first where more than 20% of votes were withheld, a significant level.
 
Management also hired an I-Banking firm at the beginning of this year to explore strategic alternatives, which I feel is significant because management is finally acknowledging that the current state of affairs is far from ideal.  They expect a recommendation sometime this summer.
 
There have also been some recent comprable transactions.  In Nov 05 Alltel purchased Midwest Wireless, a similarly structured wireless partnership that was owned by a consortium of local phone operators, for $1.075bn including assumption of debt.  This works out to a P/E of 16x and EV/EBITDA of 10x.  WWVY’s stake in the OCP partnership would be worth $160mm at that valuation although I would balk at assigning it a value this high based on the hiccup in results this year at the OCP partnership.
 
And just a few weeks ago at the end of June HCT agreed to be bought out by a consortium of local operators in Minnessota for $36.40/sh or $147mm.  HCT is one of the owners of the Midwest Wireless Partnership, they will receive $39.5mm in proceeds from the sale so the wireline business is being valued at $107mm for the equity and an EV of $157mm.  This works out to 10x EV/EBITDA and about $4,200 EV/access line.  Again, I wouldn’t apply this access line valuation to WWVY as their lines have been decreasing at a faster rate, but it shows that $2k-$3k/line for WWVY is a reasonably conservative number. 
 
So there are buyers out there for WWVY’s assets but another thing on our side is that Sprint has recently spun-off their wireline assets into EQ and Alltel will comlete the spin-off of its’ wireline assets sometime this month.  You had two parent companies that wanted rid of the declining wireline business, but now there are two new large, independent wireline operators that will likely be in the market for strategic acquisitions. 
 
Most of the comps have been rallying lately, likely because of the improved chances of deals happening, but WWVY has not joined in.  IMO, this is because of worry regarding the decline in partnership results so far this year and because of the fact that the RLEC assets appear very bad compared to comps.  I don’t believe the RLEC assets are as bad as people think, for example revs/access line for WWVY are right in line with comps, but their overhead and huge SOX costs have made them look pretty awful. 
 
 
Catalyst:
 
- sale or financial engineering to unlock the sum of the parts value

Catalyst

-sale or financial engineering to unlock sum of parts value
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