Thinking Big About Small Companies

NTS: Still Cheap

October 22nd, 2013 | Posted by Torin in NTS

That title is a play on a previous post. NTS actually got a lot less cheap yesterday, when the company announced that it has agreed to be acquired for $2.00 per share. NTS shares traded up 23% on the news, to a $1.95/$1.96 spread. I have advocated a $3.00 per-share value for NTS elsewhere in these pages, however that estimate of value is based on what I think NTS might earn three years from now, when the company’s base of fiber customers will be much larger. I do not think $3.00 is warranted today.

But I’m not sure $2.00 is enough, either. I think there may be room for another buyer, whether a fiber operator or a private equity firm with existing fiber investments, to pay a higher price for NTS and still earn a very attractive return.

As I discussed in a previous post, the “synergies” a strategic buyer can achieve in the telecom industry are significant. Recent Zayo deals, for instance, have contemplated cost savings equal to about 15% of revenue. Assuming a similar level of savings is achievable in the case of NTS, a strategic buyer would be looking at an effective 7x EBITDA purchase price based on NTS’ EBITDA profitability today.

But NTS is basically assured of seeing its profits and subscriber base grow for years to come, because of the large infrastructure and sales investments it has mostly already made. That means that for an acquirer, the future growth will come on the cheap. Here is a guess is how the numbers might look for a strategic acquirer:


This is a quick and dirty analysis.It ignores future cash flows and their effects on the balance sheet. The point is to illustrate that $2.00 may look like a healthy price—and for a financial buyer it probably is—but $2.00 might actually be cheap enough to leave room for an increased bid from a strategic buyer with the ability to reduce costs.

The deal as agreed upon includes a 30 day “go shop” period during which NTS may solicit alternative proposals.

Perhaps a few will turn up.

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