A line from Otelco's 3Q earnings release:
"By the end of 2015, Otelco expects to have reduced our senior debt by over $60 million from the level prior to restructuring."
Otelco filed for Chapter 11 on March 24, 2013. This $60 million only represents what the company reduced on its own. It does not include the approximately $109 million that was retired in bankruptcy when the Income Deposit Security holders agreed to trade their subordinated debt for new stock in the company. Prior to the restructuring Otelco had around $271 million debt. In just over two years time Otelco's debt has been reduced by $171 million.
The last trading day before Otelco filed for bankruptcy, March 22, 2013, when it still had $271 million debt on its balance sheet, its stock closed at $1.62/share. If you adjust for the reverse split that happened before Otelco emerged a couple months later in May, that $1.62/share equals $8.10/share today.
So we have a security here that had a higher Market Cap just over two years ago than it does now that had:
*$171 million more debt on its balance sheet.
*Uncertainty regarding how EBITDA would hold up and at what pace the company could reduce debt. Both of those questions have been answered positively.
*It's odd Otelco never provides guidance. They had to before the Bankruptcy Court in the form of a Disclosure Statement and were very close to the mark the past couple years in its EBITDA & debt reduction numbers.
*The only uncertainty left is the new credit line. Should that be a problem in light of its performance since restructuring? And should Otelco's stock price trade lower now than when it was in much worse financial shape prior to the restructuring? Stay tuned.
A lot of people thought LICT was reducing debt for a potential sale.
Maybe Mario has changed strategy. LICT Is in the process of acquiring a small telco in Iowa and now this in the 3Q report:
"The Board of Directors and management have implemented measures which have improved liquidity and reduced the Company’s debt position. At this time, the Board is considering whether the Company should acquire additional leverage which would enable us to explore broader opportunities both within and outside our current operations in broadband and telecommunications."
Although Otelco's year-to-date stock price has appreciated by 40% based on today's close, the Market still values the company the same or slightly lower than this past January if EV/EBITDA is used as the measurement stick.
Because of declining debt and a steady EBITDA this year ($28.9 million on a trailing twelve month basis) Otelco's EV/EBITDA number is still at 4. Extremely cheap relative to most in this space. Lots of room to run here. Hopefully the pending credit agreement results in the Market adjusting Otelco's current dirt cheap valuation higher from its depressed level relative to its peers.
Sometimes Otelco trades 100k and sometimes zero shares in one day. It only has 3 million available to trade.
By my conservative calculations, I think Otelco finishes 2015 with a leverage ratio of 3.39. That assumes they only pay down $2 million in debt in the fourth quarter with a $7.2 million EBITDA. Can't remember when Otelco only paid down $2 million debt in a quarter. And $7.2 million EBITDA is very do-able.
So Otelco's leverage ratio has gone from the low-4's to the low-3's in just two years. Few, if any in this wireline sector have made a move like that.
Otelco has been quietly transforming itself from the slowly dying traditional residential biz to a sustainable model serving business. I say quietly because fortunately for us, nobody on Wall Street has been, or still is for that matter, paying attention. That's why you got a sub $5/share cost basis. Congrats!
Taking it back a bit further, Otelco's operating income in all of 2014 was $16.9 million. They are at $14.2 right now with a quarter to go. I expect Otelco to end the year at $19 million.
2014 EBITDA was $28.7 million. I expect Otelco's 2015 EBITDA to be $29.5 million.
Correct. Seem to recall a conference call question last quarter where taxes were virtually non-existent in the first two quarters of this year because they had overpaid.
EBITDA of $7.2 million.
Trailing twelve month EBITDA unchanged at $28.9 million.
Debt reduced $3.1 million in the 3Q for a decreased leverage ratio of 3.53 from 3.63 last quarter.
Diluted EPS of $0.56/share for 3Q.
Trailing twelve month EPS is now exactly $2.00/share. Keep in mind Otelco will roll off a $0.29/share number in the 4Q that was impacted by one-time items in 4Q/14. Otelco's final 2015 EPS number will be large.
Business lines (the growing segment) now represent almost 55% of all access lines.
Get the credit deal done and we'll be good to go here.
For comparison purposes, Otelco in 3Q/14 did $7.2 million EBITDA and a diluted EPS of $0.44/share. It's possible the tax situation this quarter will suppress EPS, but Otelco will be paying around $200k less in interest expense than they did in the same quarter last year. Comparisons for the current 4Q really get easy due to one-time items last year.
For me, this is all about where the credit facility is at. If it gets done on reasonable terms Otelco is worth far north of its current $23 million Market Cap.
Actually its November 2nd...but you're probably right. However, it sounds like everything is set between Otelco and the lenders once regulatory approval is given. Approval possibly on the 2nd and earnings on the 4th. Either way, its close to getting done. IMO.
Otelco doesn't need approval from any of the other states it serves. MPUC approval is it.
Do you disagree with my statement that Otelco's leverage reduction in the past two years should lead to less-restrictive terms on a new credit line? At this point, that's all I hope for. As I said, what things Otelco can or can't do should be reserved until after the terms are made public. Which they have to disclose after the agreement is signed. BTW, book value right now is alot less negative than it was two years ago :-)
Also, when the new credit agreement is signed the six banks involved with the old agreement will see their Class B shares (about a 232k cumulative total) instantly convert to Class A. From what I know of banks, they will be eager to sell them. The catalyst of the new agreement being signed should offset this selling pressure, but if not I plan to be ready to purchase more.
Speculation on what should or shouldn't be done is probably best saved for after the credit agreement is signed. Otelco has reduced its leverage considerably in just two years. Logic dictates that should be beneficial to its terms with the lenders, but we'll just have to wait.
Steady progress with the MPUC.
"I think someone had plenty of opportunity to acquire 100K shares under $5 over the past year."
I agree with that...one of my accounts has a less than $5/share cost basis. What I meant is I'm surprised that right now, at this point in time, somebody could find 100k shares at
$6/share, and there were that many available at that price in a one hour time frame.
I highly doubt that feat can be duplicated at that price after the credit agreement is signed.
Surprised the buyer(s) found enough seller(s) at these depressed prices. Particularly since a new credit agreement appears near. The buyers purchased Otelco at half the price it traded at two years ago when it had $28 million more debt on its balance sheet. Nice work!