GCI buys ACS wireless business
Alaska Communications System Group Inc., has agreed to sell its wireless subscriber business to General Communications Inc. for $300 million in cash. Alaska Communications will also sell its 33 percent share of the Alaska Wireless Network to GCI.
The transition will take place the first quarter of 2015. Both companies stressed that customers will experience no service interruption.
“We are pleased to reach these agreements that allow each company to pursue its own strategy,” said Alaska Communications President and CEO Anand Vadapalli and GCI President and CEO Ron Duncan in a joint statement issued Dec. 4. “We are committed to a seamless service transition for wireless customers. Alaskans will continue to benefit from a vibrant competitive market for wireless services.”
According to ACS’s and GCI’s 2014 third quarter reports, GCI will add 109,000 wireless customers to increase their subscriber base to about 253,000, which is somewhere between 30 percent and 40 percent of the Alaska wireless market.
Also on Dec. 4, GCI announced a $75 million, unsecured investment by private equity firm Searchlight and that the company CEO Eric Zinterhofer was named to its board of directors.
“Searchlight is thrilled to make this investment in GCI, as we hold CEO Ron Duncan and his team in high regard,” Zinterhofer said in a formal statement. “The catalyst for our investment, namely the announced purchase of certain wireless assets of Alaska Communications Systems Group, Inc., is an important milestone for the company.”
The transition plays to Alaska Communications’ existing structure and strengths in broadband services according to ACS Chief Financial Officer Wayne Graham, who said broadband profit margin can be 50 percent or higher. Vadapalli hopes that focusing on broadband with the addition of managed IT solutions will raise company margins without affecting market positioning.
“It’s the right price,” Vadapalli said. “All our progress with our wireline is clouded by our overhang from being in the wireless industry.”
The transition has labor costs. Over time, 150 to 200 wireless-related ACS jobs will be lost, accounting for nearly 20 percent of the workforce. Vadapalli says ACS will offer some employees voluntary leave severance packages, while others will be offered lateral position changes within the company. The focus on broadband and IT will create management and engineering positions. GCI will gain 150 jobs.
ACS currently controls 20 percent of the Alaska broadband market. Their main competitor is GCI. Both companies’ executives say they have no plans on lowering their broadband prices and delving into a price war.
Alaska Communications has recently secured contracts as the broadband provider for the State of Alaska, an in-state federal agency, and a regional health consortium.
ACS once attracted investors with a dividend payout program, but suspended dividends in November of 2012 in the face of their massive debt, which at one point amounted to more than $560 million. The company’s board of directors has yet to decide whether it will reinstate dividends.
GCI shares were trading for about $11.90 per share on Dec. 8, off from the 52-week high of $12.50 and from a price of $12.22 per share after the deal was announced.
ACS shares, which traded at more than $5 per share before it eliminated the dividend, were trading at $1.77 on Dec. 8, down from $1.99 after the deal was announced and off the 52-week high of $2.70.
Vadapalli says say that the increased free cash flow from debt payoff should yield lucrative options for investors, and that ACS expects share prices to rise due to exiting the hyper-competitive wireless arena.
The company typically reinvests $35 million to $40 million in capital investment. Now that ACS has no low-margin, high-competition wireless services to stress about, executives say they will only pour that capital into projects and strategies that meet a high return threshold.
ACS and GCI launched the Alaska Wireless Network in July 2013, intending the combination of their wireless networks to compete more effectively with national carriers AT&T, which accounts for roughly 50 percent of the current Alaska wireless market, and Verizon, which entered the market in September.
ACS has been aggressive about tackling its debt and has paid down $125 million in the last since 2012 with cash from its dividend elimination and about $100 million from GCI in the original Alaska Wireless Network transaction.
After taxes, fees, and price adjustments, the $300 million from the GCI sale will be whittled down to $250 million, every penny of which Vadapalli said will go towards paying down ACS’s remaining $415 million in debt.
With only $165 million of debt, ACS will have a net leverage ratio of 3.1. This is lower than the broadband industry average of 3.4, which ACS says should loosen up more investment dollars for broadband and IT management.
“The more debt you have, the more interest you’re paying,” Vadapalli said. “It ties up capital. For the last three years, our bill on interest alone was extraordinarily high. We were like a family that maxed out its credit card and only makes payments on the interest.”
DJ Summers can be reached at email@example.com.