The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Cable Bahamas is predicting that its almost $100 million worth of US acquisitions will triple annual revenue and operating income growth rates beyond what it would achieve if its activities remain confined to this nation.

The BISX-listed communications provider, in the proxy form issued to shareholders as it seeks their approval for its four Florida purchases, forecasts that the acquisitions will see it achieve compound annual growth rates for revenue and EBITDA (operating income) of 9.6 per cent and 11.8 per cent, respectively, for the five years to end-2017.

This compared to revenue and earnings before interest, taxation, depreciation and amortisation (EBITDA) growth forecasts of 2.3 per cent and 4 per cent, respectively, if Cable Bahamas’ remained a Bahamian-centric company as it is now.

Outlining the rationale for its bid to acquire Summit Broadband, Marco Island Cable/Nu Vu and US Metropolitan Telecom, the Cable Bahamas’ proxy projected that by 2017, its Florida interests would account for 31.7 per cent of total EBITDA.

This would equate to $20.5 million, out of Cable Bahamas; total operating income of $64.6 million - a major leap from the $44.1 million the company is projected to earn if it remains 100 per cent concentrated in the Bahamas.

In similar fashion, Cable Bahamas is projecting that its US purchases - if finally consummated - will generate 40.8 per cent of company-wide revenue in 2017.

At that point, the BISX-listed communications provider is forecasting that $86.7 million in revenues will come from Florida, taking the total to $212.6 million - as opposed to the $125.9 million that would be generated if it remained focused solely on the Bahamas.

Anthony Butler, Cable Bahamas’ president and chief executive, last night told Tribune Business that the company’s growth prospects - and returns to shareholders - were “limited” if it remained focused solely on the Bahamas.

While this again indicates that Cable Bahamas may be ‘hedging its bets’ when it comes to its prospects of winning a cellular licence and going ‘head to head’ with the Bahamas Telecommunications Company (BTC), the Florida expansion strategy - while a calculated risk - could spark a significant boost in Bahamian shareholder earnings if properly executed.

“We’ve got limited room for expansion in the Bahamas,” Mr Butler told Tribune Business.

“The Board had identified a five-year growth plan, and acquisitions are always going to be our focus. That acquisition plan started with Systems Resource Group, which allowed us immediate access to fixed-line voice.

“The US market is currently seeing a rebound, and we see good opportunities for the company and growth prospects in the US, where we’re already connected.”

Cable Bahamas’ strategy was shaped via a five-year strategic review that began in 2011, and the advice of Deloitte & Touche’s Canada-based Telecom and Business Group.

“It was Deloitte’s view that the electronic communications market in the Bahamas was maturing and that Cable Bahamas should look abroad for growth opportunities,” the proxy form said.

Meanwhile, indicating weariness at the length of time taken to obtain Bahamian government approval, Mr Butler added: “We’re nearing the end of a long process. The first application was made in October 2012, involving both US and Bahamian regulators.

“The proxy statement has been issued to hold an Extraordinary General Meeting (EGM) on July 31. It’s to approve the acquisition of the target companies we’ve identified in the US.”

The main negative for Cable Bahamas’ shareholders is that the way the Summit Broadband transaction is being financed will dilute their stakes in the company.

This is because the deal calls for the issuance of one million new Cable Bahamas shares to Summit Broadband, plus the release of one million warrants to acquire Cable Bahamas shares, at a $15 price, prior to December 31, 2016.

However, sources close to the transaction said the dilution would be more than offset by the increase Cable Bahamas shareholders would see in the value of their holdings.

“It is important to note that the proposed transaction involves the issuance of one million ordinary shares of Cable Bahamas to Summit Broadband, and if approved, there will be a dilution of shareholders’ holdings of approximately 6.8 per cent,” the proxy form warned.

“Further to the extent that Cable Bahamas’ stock price reaches $15 before December 31, 2016 and the warrants are exercised, this would represent: a 39 per cent premium to Cable Bahamas’ current share price of $10.81 (as of June 30, 2013); a $15 million consideration to be paid to Cable Bahamas; and a further 6.3 per cent dilution.”

The proxy document, which has been seen by Tribune Business, shows that Cable Bahamas is attempting to build a ‘mirror image’ of itself in Florida.

The acquisitions will give it an instant entrance into the cable TV, Internet and fibre-optic infrastructure markets - all areas in which it is involved in the Bahamas.

While Cable Bahamas’ four targets all appear to be in the development stage, the company’s strategy seems to be that by bringing them together under one roof, the ‘sum of the parts’ will add up to a large whole and each will be able to leverage off the others for expansion - aided by the BISX-listed communications provider’s deeper pockets.

“For the past two years, the target companies have achieved cumulative revenues and EBITDA in excess of $18 million and $3 million, respectively,” Cable Bahamas’ proxy form said.

“This represents a growth rate of 29.9 per cent and 95.5 per cent, respectively.”

Cable Bahamas indicated that the risks involved in the deals, collectively valued at $99.65 million, would be mitigated to some extent by its relationships with their existing management, particularly at Summit Broadband.

Apart from the equity interests held in that company by two Cable Bahamas directors, it is run by the man who helped establish the company in this nation, Richard Pardy.

“Marco Island Cable, NuVu and US Metro, together with Summit Broadband, present a unique opportunity with significant potential growth for Cable Bahamas,” the proxy form said.

“This opportunity is unique because the target companies’ infrastructure in Florida is effectively geographically contiguous with Cable Bahamas’ fibre optic network.

“The combined businesses will also offer a platform and business model for additional acquisitions within Florida. Given that Florida’s economy is at or near the bottom of the macro cycle, this creates upside for Cable Bahamas as the Florida economy continues to rebound.”

Suggesting that there were “significant economies of scale” to be obtained by bringing them together. the proxy form described Marco Island as the cable provider in the set-up.

NuVu, it added, had “a significant backlog of signed and committed contracts that will be the basis of its growth over the next 24 months”.

US Metro was said to have enjoyed ‘consistent growth’ over the past two years by leveraging its 200-mile fibre optic network, which NuVu will use to expand its service reach.

“The combined businesses will yield immediate scale and cost synergies, as well as create revenue expansion opportunities along the enhanced network corridor,” the Cable Bahamas proxy form said.

Adding that the other three companies would boost operating margins by using Summit Broadband’s back office infrastructure, the proxy form said the latter had doubled the number of Orlando-based hotel rooms it served between 2009 and 2013.

And it had also extended its fibre optic network from 65 miles in 2009 to 260 miles in 2013.

When it comes to purchase price allocation, Cable Bahamas is paying $10.75 million each for Marco Island Cable and Nu Vu, some $23.256 million for US Metropolitan Telecom, and $54.9 million for Summit Broadband.

While the first three deals will be financed in cash from Cable Bahamas’ existing facilities, the Summit Broadband transaction is more complex.

Of that $54.9 million, some $7 million is paid in cash, with another $10.8 million to come through the issuance of one million Cable Bahamas shares to Summit Broadband’s shareholders.

A further $11.3 million is to be raised from a 10-year preference share issue, paying interest at 6 per cent, and one million warrants will be issued to allow Summit Broadband shareholders to acquire Cable Bahamas shares at a price of $15 prior to December 31, 2016.

Another $5 million performance-related preference share issue is also on the cards, and the payout is completed by Cable Bahamas assuming Summit Broadband’s $14.2 million debt and reimbursing it for $6.4 million in capital expenditures undertaken between the deal’s signing and closing.

The $7.67 million in non-refundable deposits paid by Cable Bahamas will be deducted from the purchase prices.

To finance the purchases, Cable Bahamas’ existing financiers, Royal Bank of Canada and Scotiabank (Bahamas), have agreed to replace its existing $105 million credit facility with one worth $135 million. Another bank, CoBank, will also join the lending syndicate.

“The proposed $135 million, five-year senior facility will comprise a $15 million revolving credit facility, a $100 million term credit facility and a $20 million incremental credit facility,” the proxy form said.

“The company’s total debt leverage ratio (total debt/EBITDA) will increase from its current position of 2 to 3.1 times at closing of the transaction, when new debt will be taken on. The ratio will be reduced to under 1 times through the end of the forecast period.”