Georgia Telephone Association’s
90th Annual Meeting
June 16-19, 2012
Rob West, Senior Vice President
Investing in and Financing Business
Diversification
Overview:
•What
is an outside capital provider’s view/expectation?
• Where are the capital providers? (Private equity and lenders)
•Growth
•What
•Real
and/or monetizing strategies?
makes for a successful venture?
life examples?
Confidential and Proprietary
2
3/18/2016
CoBank’s Communications Portfolio
2000
2002
2004
2006
2008
2010
2011
169
164
154
151
155
137
125
9
9
9
16
26
25
24
Wireless
63
49
35
26
23
25
25
CLEC (Fiber
Transport) & Data
Centers
13
13
13
10
20
22
28
Total Customers
254
213
189
203
224
209
202
LEC
Cable
Confidential and Proprietary
3
3/18/2016
CoBank’s Communications Division
Total Portfolio by Commitments ~$3.5 Billion
December 31, 2011
Cable
13%
Wireless
19%
CLEC
1%
Transport
12%
LEC
54%
Confidential and Proprietary
4
3/18/2016
CoBank’s Communications Division
Total Portfolio: 202 Customers
December 31, 2011
Cable
24
Wireless
25
CLEC
8
Transport
20
LEC
125
Confidential and Proprietary
5
3/18/2016
The Current Landscape
Both mobile and fixed Data demand continues to grow robustly, driving growth in:
 Fiber optics transport
• Wireless backhaul
• Enterprise, institutional, government data networks
 Data Centers
• Storage, redundancy, connectivity for enterprise customers
 Wireless - smartphones, ipads, etc. drive data revenues and multi-device penetration
 LEC/Cable – streaming video and over-the-top content drives growth in broadband
revenues
Regulatory reform looms larger than ever – FCC approved a plan on October 27th
that established new rules for USF and Inter-carrier Compensation.
New technologies and trends threaten to disrupt traditional business models
 Over-the-top content (threat to all bundled video providers, especially cable)
 4G (threat to wireline broadband providers, opportunity for transport providers)
 Continued VoIP penetration (threat to ILECs, opportunity for competitive companies)
Confidential and Proprietary
6
3/18/2016
Evolution – Early Steps
Since the Telecommunications Act of 1996, companies have undergone a
profound evolution in the face of these technological and competitive issues.
The cable companies and the local exchange carriers originally enjoyed natural
monopolies – video for cable, and voice for LECs. After deregulation, they began to
compete with each other. They both started with a high speed data product, quickly
splitting the market. Then, they began to make intrusions into each other’s natural
core competencies.
Wireless started out primarily as a mobile voice play, but increasingly has become
a viable solution for all broadband needs, resulting in “cord-cutting.”
Satellite initially attempted a voice product, but failed spectacularly except in the
most remote rural areas (think the Alaskan outback). However, mini-dish satellite
video became a formidable competitor to the cable companies, taking close to 30%
of their video market share. But satellite has an inferior high speed data solution.
Recently, many LECs have partnered with dish satellite providers to provide their
video play, while the LEC concentrates on high speed broadband.
Confidential and Proprietary
7
3/18/2016
Evolution – Early Steps
Competitive local exchange carriers (CLECs) initially rose to compete with the
incumbent local exchange carriers in the late 1990s, basing their business around
retail and commercial internet connectivity. Many went bankrupt during the 2001
telecom crash.
Long-haul fiber optics carriers built out massive networks during that period, and
also saw high failure rates due to over capacity in the early 2000s. However,
regional areas continued to be bandwidth constrained and when the massive
growth in data demand accelerated in the mid 2000s, these regional networks
began to flourish.
Data Centers, which had a fast rise and fall in the late 90s as the “dot.com” bubble
was growing, have been reborn in recent years as IT outsourcing and cloud
computing have become mainstream thanks to the development of today’s ultra-fast
fiber backbones.
Confidential and Proprietary
8
3/18/2016
Evolution – The Integrated Broadband
Provider
The end-stage for adapting to this changing technological and competitive
landscape appears to be the rise of the fully-integrated broadband provider.
For wire-line companies, this means combining many aspects of these originally
stand-alone business models into their end-to-end networks.
 LECs are consolidating and buying up regional transport companies, data
centers, and CLECs. As their legacy voice business declines, they are
transitioning into broadband companies that focus on data at both the retail
and commercial level.
 Cable companies are also pushing fiber further into their networks,
increasingly focusing on the enterprise customer (formerly a core competency
and natural monopoly of the LEC). Some are investing in media/content
companies to capitalize on over-the-top content.
Wireless companies continue to upgrade networks and roll out faster data speeds.
4G hopes to provide a complete solution for both mobile and fixed broadband.
Confidential and Proprietary
9
3/18/2016
Real Life Examples – What are the Public
Companies doing?
•SureWest
•Cable
Television
•Windstream
•Frontier
•Shentel
•CenturyLink
•HickoryTech
Geographic
=
+
Product/Business
Diversification
•Knology
•Consolidated
•Cincinnati
•Warwick
•Lumos
•Towers &
Public
Institutions
•Data Centers
Bell
Valley
•Fiber
Transport
- Targeting
Small Business
+ Medium
Business
Enterprise
Change does not happen overnight. For many, it’s years in the making.
Private (commercial & cooperative) have been doing the same thing for
years. Talk to your neighbors and industry friends & partners.
(nTelos)
Confidential and Proprietary
10
3/18/2016
Local Exchange Carriers (ILEC/RLEC)
Strengths
 Dominant local market position, albeit gradually eroding.
 Access to universal service support and ROR recovery mechanisms that can support
fiber upgrades that might be uneconomical for cable competitors.
 Although declining, the legacy telephony business still spins off significant cash flow that
can be invested in non-regulated/broadband.
 Better reputation than cable companies in many rural areas.
Risks
 Loss of access lines, subscribers, and minutes of use due to competitive substitution
and technological obsolescence.
 Threat of regulatory reform that could reduce, cap, or freeze USF and inter-carrier
compensation for legacy network (30% USF/ICC at risk over 5 years).
 Cost and accessibility of video programming – higher revenues, but lower margins.
Corporate operation expense control is critical.
 Take rate for advanced broadband products in rural areas less than urban areas.
 Dividend payout models supported with deferred amortization can leave the creditors
holding the bag on future risk.
Confidential and Proprietary
11
3/18/2016
Cable Companies
Strengths
 Unlike ILECs, cable started from a position of strength with video, as opposed to voice
being their monopoly roots.
 First mover advantage with high speed data product
 Better control over programming costs and experience with entertainment bundling
 Adding voice is easier (with VoIP platform) than adding video
 Enterprise business represents a largely untapped source of growth.
Risks
 Over-the-top content model is potentially disruptive
 Declining basic subscriber counts
 Revenue generating unit growth slower than expected leading to underperformance of
original projections that can turn into liquidity and compliance issues in future years
 Looming threat of a fiber play by the ILEC offering a superior product – becoming less
likely over time it appears.
 Potential bandwidth constraints of the current hybrid fiber coax network – improved with
DOCSIS 3.0, channel bonding, and pushing fiber further into the network.
Confidential and Proprietary
12
3/18/2016
Fiber Transport Sector
Fiber Transport companies operate ultra-high speed fiber optics networks that
provide data transport for telecommunications carriers and enterprise customers.
Strengths
 Customer agnostic
 Explosive growth in data demand
• Wireless backhaul
• Carrier and enterprise network needs
 Regional areas and some metro areas continue to be bandwidth-constrained
Risks
 Customer concentration
 One-time revenues versus recurring monthly contracted revenues
 Potential for competition
 Potential for unrealistic valuations that could lead to excessive leverage
Names include Southern Light, Fiberlight, DukeNet, Sidera, Fibertech, Alpheus, and
others including RLEC-owned state fiber networks.
Confidential and Proprietary
13
3/18/2016
Wireless
Strengths
 Explosive demand for wireless applications
 Improved functionality and integration of handsets
 Technology of the medium matches the preferences of the modern user
Risks
 Requires continuous network upgrades (2G-3G-4G...)
 Spectrum constraints
 For rural carriers – roaming rates continue to decline, contract renegotiations
can result in sudden and unpredictable loss of cash flow.
 Churn and mix of pre-paid/post-paid is key to analysis
 Reliance on CETC USF support – the FCC’s reform initiatives threatened to reduce or
eliminate this. However, on October 27th, the FCC affirmed a $500 million annual fund for wireless
support and a $300 million one time mobility fund for broadband. This represents a 50% cut from the
$1 billion that wireless carriers were receiving. However, there is a five year phase out of the
existing rules and it appears that the FCC intends that support will not drop below $600 million a year
over the next five years. So, 40% of existing support appears potentially at risk.
Confidential and Proprietary
14
3/18/2016
Data Centers
Strengths
 Capitalizes on the seemingly insatiable demand for data storage, security, and
redundancy. As the world becomes increasingly web-based and cloudoriented, this business model will continue to grow.
 Is a relatively simple business model similar to the wireless tower business,
where you are essentially leasing space, power, cooling, and protection to an
enterprise customer to keep their file servers
 Generally 3-5 year contracts and all revenue is recurring
Risks
 Barriers to entry are far lower than for a telecommunications carrier, which
could lead to excessive competition in some markets.
 Customer concentration can be a concern, especially if there is too much
concentration on smaller web-based enterprise customers that are susceptible
to economic cycles.
Deals: Latisys, ViaWest, Xand, Cequal & increasingly the LEC community
Confidential and Proprietary
15
3/18/2016
Monetizing Your Franchise: (Assets)
What are your assets and can you monetize them?
 I’d contend that each organization begin by assessing their:
•Network
•Customer
•Business
Base/Market
Practices
•Reputation
•People
•Systems
•Joint
•What
Ventures (Existing) – Any Dividends?
unique aspects are there to your business or location?
Confidential and Proprietary
16
3/18/2016
Growth/Monetizing Strategies:
Diversity
 Video (can be expensive, if not sizeable)
 Fiber Transport (Commercial)
 Data Centers
 Services (Geek Squad & Security Monitoring)
 Remote Data Storage
Expand
• Acquire (RLECs & Cable TV)
• Build (Fiber Transport & Data Centers)
• Add Geographic Diversity
Partnerships/Joint Venture
• If too expensive, pursue through partnerships
• Seeking dividends
• Operating cost savings
Confidential and Proprietary
17
3/18/2016
Challenges to your Monetizing Options
Critical Traits that CoBank looks for in Projecting a Project’s Success?
• Thorough and Accurate Due Diligence
• Acceptable ROI
• Positive Cash Flow Generation
• Contingency Planning
• Strategic Rationale
• Competitive Landscape
• Cost Cutting
• Financial Flexibility – How much debt leverage are you carrying?
Confidential and Proprietary
18
3/18/2016
CoBank Portfolio Overview
As of 03/31/12
$ in Millions
Sector
Commitments
Outstanding
1,870
1,440
54.0%
54.5%
Cable
674
475
19.5%
18.0%
Wireless
460
383
13.3%
14.5%
Competitive
Wired
459
345
13.3%
13.0%
3,462
2,643
100.00%
100.00%
LEC
Total
% of Comm
% of O/S
Fiber transport companies, a major growth area for the portfolio, make up about
95% of the “Competitive Wired” sector. The rest is represented by Competitive
Local Exchange Carriers (CLECs and Data Centers). Competitive Wired 13.1% of
commitments, compared with 10.1% as of 09/30/2011.
Confidential and Proprietary
19
3/18/2016
Opportunities for New Deal Formation
Seek Opportunities with Existing & New Customers
 RLECs, Cable, Fiber Transport
• Continued Consolidation (CenturyLink, Windstream, Frontier, Consolidated
Communications, Eatel, etc.)
• Acquisitions of data centers, fiber assets, and CLECs
• Broadband Stimulus Funds
– Layer in Additional Debt Capital for Successful Applicants
– Provide Capital to Unsuccessful Applicants
• Asset Rationalization and estate planning
• Debt Refinance (GE, CIT, RTFC & RUS)
 Wireless
• Expand & Enhance Footprint through Acquisition and/or Construction
• Strategic partnering agreements with Sprint and Verizon
Confidential and Proprietary
20
3/18/2016
CoBank Telecom Syndications
$126,250,000
Acquisition Financing
$575,000,000
$370,000,000
Refinancing
Refinancing
October 2011
October 2011
Lead Arranger
Administrative Agent
Joint Lead Arranger,
Book Runner and
Administrative Agent
January 2012
Lead Arranger
Administrative Agent
$45,00,000,000
$79,000,000
$264,000,000
Refinancing
Refinancing
Refinancing
August 2011
July 2011
February 2011
Lead Arranger
Administrative Agent
Joint Lead Arranger
Administrative Agent
Lead Arranger
Administrative Agent
21
$150,000,000
Refinancing
August 2011
Lead Arranger
Administrative Agent
$1,700,000,000
Refinancing
January 2011
Senior Managing Agent
CoBank Telecom Syndications
$375,000,000
$440,000,000
$22,000,000
Term Loan Financing
Refinancing
Acquisition Financing
May 2012
April 2012
March 2012
Lead Arranger,
Book Runner and
Administrative Agent
Lead Arranger
Administrative Agent
Lead Arranger,
Book Runner and
Administrative Agent
Thank You
Rob West
Senior Vice President
Communications Banking Group
CoBank
303-740-4030
rwest@cobank.com