NTelos Holdings – Where There is Smoke There is Fire

It wasn’t even a month ago when I published my research article on NTelos Holdings (NTLS), I Found NTELOS In The Liquidation Bin: A Misplaced Stock With 30%+ Upside. Yesterday August 10th, it was announced that NTELOS was being acquired by Shenandoah Telecommunications (SHEN), for $9.25 a share. My “30%” uspside instantly turned into a “95%” home run. I wish I could tell you I have a crystal ball or a voodoo doll telling me what to do and I assure you that I have none of that. I did an analysis and luck was on my side.

Shentel acquiring NTELOS shouldn’t come as a surprise. Back in May there were rumors that Shentel had an agreement to buy NTLS. After nothing happened NTLS’s stock collapsed to a depressing level that didn’t reflect the true value of NTELOS. That’s when it got really interesting to invest in NTELOS, it was an opportunity too good too pass, even if the takeover rumor was nothing.

Announcement link
Conference call transcript

The transaction is expected to close in early 2016.  The $586 million implies a 5.6x multiple of NTELOS management estimate 2015 EBITDA guidance.  I think they could have got more, a minimum of 6x times EBITDA at least. Here’s the offer:

Net Transactions Consideration
$ in Millions
nTelos Equity $208
Net Debt (as of June 30, 2015) $378
Total nTelos Enterprise Value $586
Less:
Reduction in future fees, discounted $225
Accounts Receivable (nTelos) $57
Tax Expense ($26)
Net Payments $256
Net Consideration $330

Below is the takeover segment taken from my article on NTELOS. Full Article Link


Takeover Rumors

NTLS plays in a big boy league that has much greater financial resources, marketing resources, brand awareness, and customer bases. The competition is intense as carriers focus on taking market share and spectrum from competitors. The trend is ongoing with AT&T acquiring Leap, T-Mobile acquiring MetroPCS, and Softbank’s acquisition of a controlling stake in Sprint. The big four nationwide operators manage more than 95% of the mobile connections in the country, while regional players are left with crumbs. The big four operators would set the technology and the device agendas, and the smaller carriers would follow their lead. The regional and rural operators would build the same networks in the country’s surrounding areas, which the big operators would use to extend their footprints through roaming agreements. The small operators could then get access to the same devices used by their larger counterparts. That’s Sprint’s strategy. Or to save the hassle a big operator just buys the little guys off like AT&T did. What are you buying? Subscribers, the wholesale business, the spectrum, and the cell towers. Spectrum is pretty much the oxygen of the wireless industry.

NTLS is occasionally subject to takeover rumors with various names thrown around such as Dish (NASDAQ:DISH), Sprint and others. I want to reiterate that the buzz is pure speculation and none of this has ever been confirmed by the parties involved. With that out of the way, here’s the latest takeover rumor:

The latest rumor was printed on May 13, 2015, by The Financial Times’ Alphaville and revealed that Shenandoah Telecommunications has been putting together a $200m offer for NTLS, which is $9.25 per share (if it’s true the actual offer is worth $205,316,904 = $9.25*22,196,422 shares). Compared to today’s NTLS price, that represents an 85% premium but near 50% premium at the time of the rumor. Seeking Alpha also republished it. The FT Alphaville has labeled the rumor “raw,” which is information that has not been tested through traditional journalistic channels (PRs etc.) So the story might be complete rubbish. All the parties involved declined to comment. However, NTELOS’s CEO Rodney Dir said that the company’s board is focused on improving shareholder value and potential strategic opportunities. Does it sound like double speak for “yes, we are open to proposals”? Below is a calculation of SHEN’s speculative offer.

Whether it’s true or not, SHEN is a “natural buyer” and a takeover makes sense. The two companies have quite a bit of overlap in Virginia, West Virginia, and Maryland. SHEN is bigger with a market cap of ~$824m and with 438,861 wireless subscribers vs. 290,100 for NTELOS, both Q1-2015 numbers. SHEN is slightly bigger, commands a richer valuation because it’s more profitable, less levered, and pays a dividend. SHEN has the financial muscle to afford NTLS. SHEN buying NTLS would eliminate a close competitor, almost double the size of SHEN, and it adds scale benefits and synergies. NTELOS would also make an interesting target because it’s adding customers and is steadily growing in the Western Markets. It’s much harder to command a higher price when your subscriber base is declining. NTELOS has a good base in the Western Markets unlike what it had in the Eastern Markets, which suffered from the lack of scale and intense competition. I discovered an interesting non-material observation: NTELOS’s headquarters is on Shenandoah Village Drive.

Already mentioned in one of the segments above, another major piece of influence is private equity firm Quadrangle Capital Partners LP (QCP) who owns approximately 4,180,837 shares or 18.84% of NTELOS, or 6.90% of their stock’s portfolio (more detail in the valuation segment below). This is a paragraph of importance on page 22 of the 2014 10-K:

Quadrangle continues to have significant influence over our business and could delay, deter or prevent a change of control, change in management or business combination that may not be beneficial to our stockholders and as a result, may depress the market price of our stock.

As of December 31, 2014, Quadrangle beneficially owned approximately 4.2 million shares of our common stock, or approximately 20% of our outstanding common stock. In addition, three of the eight directors that serve on our board of directors are representatives or designees of Quadrangle. By virtue of such stock ownership and representation on the board of directors, including a representative of Quadrangle being Chairman of the Board of Directors, Quadrangle continues to have the ability to influence corporate and management policies and all matters submitted to our stockholders, including the election of the directors, and to exercise significant control over our business, policies and affairs. Quadrangle’s interests as a stockholder may not always coincide with the interests of other stockholders. Additionally, such concentration of voting power could have the effect of delaying, deterring or preventing a change of control, change in management or business combination that might otherwise be beneficial to our stockholders and, as a result, may depress the market price of our stock.

To summarize the important pieces, QCP owns a chunk of NTLS and they control the board. NTLS’s Chairman is QCP’s President and Managing Principal (see bio link).

This is a table of the top 8 U.S. wireless carriers during Q1-2015. The table hasn’t adjusted for NTELOS exiting the Eastern Markets. If you look at the ranking, you have the top 4 and it just falls off. There’s no middle. U.S. Cellular, with its 4.7m subscribers, is a fraction of 4th place Sprint with its 56.7m subscribers. NTELOS has almost 300,000 customers in the Western Market, that’s nothing compared to the 500,000 plus that Verizon (NYSE:VZ) added last quarter. Even Shentel or anybody above on that list could swallow NTELOS without blinking.

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