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Otelco, Inc. Message Board

  • djay.r714 djay.r714 Mar 22, 2013 11:12 AM Flag

    Valuation

    Walk,
    I agree that OTT is undervalued. It may be undervalued by a considerable amount. My take on valuation, based on the current BK plan, is as follows.

    Post BK the sub debt holders will own 83.25% of New OTT (100%-7.5%=92.5%*90%=83.25%).
    The pro forma financials establish the New OTT book value at $51.5 million, of which the sub debt holders will own $42.87 million.
    With 14.36 million sub debt notes being converted to equity, the book value per share will be $2.99.
    According to Professor Aswath Damodaran at NYU, Telecom utilities have a price/book value of 1.77, which would indicate a market value of around $5.28 a share for New OTT.

    Ira needs a higher value to break even. That, along with the 13G filing and the delay in reporting the count is why I think Ira is negotiating with Management and the Senior Debt Holders to improve the outcome for Sub Note Holders. I wish him well.

    Sentiment: Strong Buy

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    • ?? Not sure how you get a valuation other than zero. According to the conference comments, the existing equity gets wiped out and 100% new equity is given to sub det or senior secured bond holders. What am I missing?

      Our proposed plan reduces the debt through a combination of cash payment to the senior lenders and conversion of subordinated notes to equity. Each IDS unit that you and I own today consists of a common stock and a subordinated note. Under our plan, the common stock will be cancelled and the subordinated debt including all deferred interest will be exchanged for new Class A common stock. Subject to dilution by management equity plan, the existing subordinated note holders will save approximately 92.5% of the equity to company including 7.3%, which will be distributed to the non-IDS holders of subordinated debt.

      The remaining 7.5% of the equity of the companies will be given to the senior lenders in a lieu of a cash fee remanding and extending the senior credit facility. This conversion of the subordinated debt to equity will result in a reduction of $108 million in debt. We plan to further delever the company by using approximately $27 million of our cash on hand at closing to pay down our senior lenders.

    • ratherbefishing23@ymail.com ratherbefishing23 Mar 22, 2013 11:59 AM Flag

      Good stuff. Not sure if I agree with putting that multiple on BV - mostly due to the eventuality of shrinking business... However - due to the leverage, I see big potential upside to the equity if just a few small positive things happen to the business. I also like management getting a good chunk of the equity as they have a very big incentive to make good things happen. A small upside to annual cash flow (maybe from skimping on capex or minimizing sg&a) has a big impact on loan pay down and the overall sentiment around the company's prospects... Ira's involvement could be a big deal if he can have some influence at the board level. Not that I dont trust management (they acted decisively through the problems over last year), but I think our prospects would be much better if there was a good capital allocator watching over things.

      Sentiment: Strong Buy

      • 1 Reply to ratherbefishing23
      • Rather,
        You make a good point regarding the decline in the wireline business for Telco's. The 1.77 PBV is an average for telecom utilities. I take it as a ball park indicator.

        As a frame of reference, Prof. Damodaran's PBV numbers for 98 industries (I exclude the tobacco industry as an exteme outlier) range from .72 to 6.65, with only 10 industries' PBV's above 4.0. Excluding a couple of high outliers, the PBV range for telecom utilities is .52 to 4.17.

        I expect that the market would need a couple of quarters of good result reported to get OTT near an average valuation following the conclusion of the BK.

    • I do too. Good analysis. At minimum I believe the reorganized OTT is worth $3/share. Ira's basis is around $6.80/unit.