This week, Durig Capital looks at a broadband services provider who has managed outstanding growth through acquisition. Consolidated Communications (CNSL) recently acquired FairPoint Communications – a move that effectively doubled the size of the Illinois-based broadband / communications company. Since the acquisition, the company has reaped the benefit of the addition of FairPoint’s revenues.
- Q4 2017 revenues more than doubled over the previous year, and full year 2017 revenues also increased handsomely.
- Full year 2017 net income grew by over 4x as compared to 2016,
- Interest coverage is an outstanding 3.7x.
Consolidated Communications has a history of acquiring and successfully integrating smaller broadband / communications providers – four times since 2002. This most recent acquisition is its biggest yet, but management appears extremely adept at integrating and combining the two companies quickly and efficiently. As an example, only 6 months after acquisition, CNSL had already realized $30 million of the projected $55 million in cost synergies. The company’s 2022 bonds are currently at a slight discount, giving these 6.5% couponed notes a bump in their yield-to-maturity to ~8.57%. Given CNSL’s successful track record and excellent interest coverage, Durig Capital has identified these bonds as an ideal addition to its Fixed Income 2 (FX2) managed income portfolio, the recent performance of which is displayed below.
CNSL recently released the results for its fourth quarter and full year 2017. The company’s most recent acquisition (see below) has proven to be accretive based on the numbers posted.
- Revenues more than doubled for Q4, increasing from $175.9 million in Q4 2016 to $356.4 million in Q4 2017.
- 2017 full year revenues also showed a robust increase growing from $743.2 million in 2016 to $1.1 billion in 2017.
- Net income for Q4 increased from $48,000 in 2016 to $100 million in Q4 2017. Full year net income also showed an impressive increase from $15.2 million in 2017 to $65.3 million in 2017, growing by over 4x.
Consolidated looks to have hit the jackpot, so to speak, with its most recent acquisition in July 2017. While Consolidated has acquired several smaller service providers since 2002, the FairPoint Communications acquisition is CNSL’s largest acquisition to date.
In July 2017, Consolidated Communications completed its acquisition of FairPoint Communications. This transaction effectively doubled the size of Consolidated Communications. Some of the highlights of the acquisition:
- Acquiring FairPoint added 22,000 fiber route miles, expanding the combined company’s fiber network to more than 36,000 miles across 24 states. Consolidated Communications is now the ninth largest fiber provider in the United States.
- FairPoint and Consolidated had complementary business strategies, giving the combined company significant operational and financial scaling abilities.
- Consolidated expects annual run-rate cost savings of approximately $55 million within two years. Consolidated has demonstrated its ability to successfully integrate its acquisitions to meet or exceed synergy goals.
- Consolidated expects this acquisition to be accretive to free cash flow in the first year after acquisition completion.
About the Issuer
Consolidated Communications is a leading broadband and business communications provider serving consumers, businesses of all sizes, and wireless companies and carriers, across a 24-state service area. Leveraging its advanced fiber optic network, spanning more than 36,000 fiber route miles, Consolidated Communications offers a wide range of communications solutions, including: data, voice, video, managed services, cloud computing and wireless backhaul. Headquartered in Mattoon, Illinois, Consolidated Communications has been providing services in many of its markets for more than a century. The company’s most recent acquisition of FairPoint Communications made Consolidated Communications the ninth largest fiber provider in the United States.
Opportunities from the FairPoint Acquisition
In its most recent earnings call, Consolidated Communications CEO, Bod Udell, talked about the opportunities that the FairPoint acquisition brings to the now combined company. Initially, the company looks to increase broadband speeds to its newest customer base acquired with FairPoint. First up, it plans to increase broadband speeds to over 500,000 residents and small businesses across its northern New England territory by the end of the year. Upon completion, these customers will be able to get speeds up to 3x faster than what is currently available in the area. Consolidated has noted that in its legacy markets where it enhanced broadband speeds, it was able to raise overall penetration rates to the 35% range, according to Udell. Across the FairPoint areas, penetration rates are a little over 15%, so there is ample opportunity to increase penetration rates just based on that comparison. An additional benefit of increasing broadband speeds for Consolidated is an increase in consumer ARPU (average revenue per user).
“These higher-speed services drive higher consumer value and over the past year, we have increased our legacy Consolidated consumer ARPU by 7%. We expect to see similar impacts in the former FairPoint markets as we implement our fiber network improvements”, Udell added.
Growth in Broadband Services
Around the globe, fixed broadband networks have become an integral part of societies, economies and communities, with all things internet relying heavily upon broadband. The ability to deliver various ever-emerging technologies depends largely on fiber broadband networks. According to Global Market Intelligence, fiber is predicted to grow from 4.5 percent to 23.2 percent by 2025, while cable remains about the same and DSL drops 50 percent to 23.5 percent. DSL is steadily being replaced by fiber, which has increased from 15 percent to 21.2 percent. Broadband deployment continues to progress around the world, with an emphasis on fiber infrastructure. In the United States, providers’ bundled services is the fastest growing sector of the overall telecommunications market.
A History of Dividends
Since its initial public offering in 2005, Consolidated Communications has declared a quarterly dividend for its shareholders. Even with the FairPoint acquisition, the company fully expects to continue these dividend payments. In its most recent quarterly results, the company announced the continuation of the dividend, paying out approximately $0.38 per share ($1.55 annually). While these distributions do not directly affect bondholders, bondholders should be encouraged as this dividend level provides an extra cash cushion in the event the company experiences quarterly volatility in its cash flows.
Interest Coverage and Liquidity
Interest coverage is of particular interest for a company’s bondholders as it indicates the company’s ability to pay bond interest when payments come due. For its latest reported quarterly results (Q4 2017), Consolidated Communications reported operating income (without accounting for non-cash depreciation and amortization) of $111.3 million and interest expense of $29.9 million, for an interest coverage 3.7x. In addition to this excellent interest coverage, as of December 31, 2017, Consolidated Communications had cash and cash equivalents of $15.7 million.
The risk for bondholders is whether Consolidated can fully capitalize on the FairPoint acquisition, realizing the full projected cost-saving synergies, balancing increasing revenues with increasing capital expenditures to drive growth and also balancing the debt load that came with the acquisition. Consolidated has done a fantastic job since acquiring FairPoint in the area of cost synergies, realizing $30 million of the projected $55 million in synergies as of the end of Q4 2017. As far as debt management, the company does not have any major debt coming due until 2021, with the bulk of its debt coming due in 2023. The FairPoint acquisition looks to be a very shrewd move by Consolidated management. The over 8.5% yield-to-maturity on the company’s 2022 bonds does appear outweigh the risks identified.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
Consolidated Communications has grown through a series of smart acquisitions. The company’s most recent acquisition of FairPoint Communications was a big one – effectively doubling the size of the company. Nine months after acquisition completion, Consolidated has already realized a sizeable portion of the cost synergies and there are many opportunities to grow revenues in the new markets gained through FairPoint. Consolidated’s 2022 bonds are currently discounted, giving them a very competitive yield-to-maturity of over 8.5%. CNSL’s excellent track record for integrating acquired companies makes this outstanding yield even more attractive and these bonds a perfect candidate for addition to Durig’s Fixed Income 2 (FX2) managed income portfolio.
Issuer: Consolidated Communications
Ratings: B3 / B
Yield to Maturity: ~8.57%
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About Durig Capital
Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 Portfolio (Discretionary Management) over time has greatly outperformed our FX1 Portfolio (Non-discretionary), giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services.
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Disclosure: Durig Capital and certain clients may hold positions in Consolidated Communications 2022 bonds.
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