VTL - Vital Telecommunications (formerly Team Talk)

[SilverBack]

First of all, my apologies for the length of this post but I have thought of a number of different facets around the SPK bid and the latest TTK/Voda play.

Interesting situation and the TTK board has thrown up a redoubt whilst under attack and fired a howitzer out of it with the sell-down of Farmside to Vodafone. All credit to Andrew and his team for this initiative.
As a key player in the Rural Broadband Initiative (RBI) funded by the Government, Voda can integrate Farmside into its overall rural offering and provide satellite service to those locations where their RBI wireless/cellular does not reach. SPK is not part of RBI except insofar as it purchases RBI services off Voda/Chorus at a wholesale level. Under RBI, Chorus provides fibre connection to rural hubs (usually adjacent to a rural school) and Voda connects cellular services to the fibre for interconnection with the national network.
I note that there is a call and a put on each side (Voda and TTK respectively) but the conditions of those arrangements have not been stated, unless I missed something in the announcement.
If SPK succeed in their bid (presumably with an increase in their offer), then they could quit Farmside altogether with the put on Voda, or Voda could take 100% control with their call. Presumably Voda will make the call in the event of a SPK buyout with $3M going to SPK, or 11c/share. That still leaves SPK with the fibre and urban ISP services within TTK along with the radio fleet services that TTK are moving to make increasingly digitalised and hence capable of being integrated with SPK's digital services. Whether Farmside was a critical element of the deal to SPK I doubt, but we will have to wait and see.

I wonder if some of the attraction to SPK from TTK is in its radio services that address trucking/taxi fleets, civil authorities, and other organisations that want widespread communications using frequencies that provide service outside the more restricted cellular frequencies. Back in the 1990s (I think) Telecom decided that VHF services were not worth their effort in maintaining and so sold them off to what is now TTK. TTK proceeded to make it a profitable niche and now that SPK has been separated from the local loop (ie Chorus) it wants to compete against Chorus using wireless services. This brings VHF services back into play. Recognise that technology has provided many more ways of providing digital services through VHF than were apparent when SPK sold this arm of their business off back in the 90s.

It is hard to see that SPK will fail to increase its offer (unless it abandons it all together) but since Voda have not moved in as a white knight for TTK as a whole, then we could still see SPK succeed with its bid even while (reluctantly) conceding Farmside to Voda.

As to the Grant Samuel valuation, in the absence of an alternative bidder for TTK as a whole it is hard to see even the minimum value of $1.51/share being realised, although a lift from SPK is most likely, even in the face of the Voda deal. Also, I do not have a lot of confidence in TTK peforming at a level whereby the market prices TTK at the Grant Samuel valuation within the next two years. One of the key drivers for TTK share price in the past has been its high div yield which has been abolished with a delayed return for it to recommence. Interesting to see in the latest announcement from TTK that more emphasis is being placed on restoring the dividend. If I get a decent price from SPK then I am happy to reinvest the proceeds in SPK with today's yield of 7.37%.

As for Andrew and his management team, it is likely that SPK will carry them on to manage the operation while introducing its own control at the board level. In other words, expect a number of the existing TTK board to be replaced by SPK appointees but it is up to Andrew & co if they want to work under the new regime. I suspect that this is likely since Andrew comes from a large corporate background at Alcatel and must have had many dealings with Telecom (now SPK) in the past.

[Bobdn]

Very interesting reading Silverback. Thanks for taking the time to set that out. Good Saturday morning coffee reading

[Bobdn]

"The deal values Farmside at $13 million, a premium to the $9.6 million-to-$12 million range placed on the unit in the independent adviser's report by Grant Samuel"

From: http://www.sharechat.co.nz/article/9...k-circles.html

I hadn't realized that the Vodafone deal was higher than the Grant Samuel valuation for Farmside by quite a big margin. Does this mean that the Grant Samuel valuation range ($1.52 to$2.11) for the whole shooting works might indeed be accurate?

[tim23]

It really highlights how woeful the 80c offer is Vodafone must be enjoying annoying SPK given the resistance to their merger with Sky.

[silverblizzard888]

I reckon $1.40 is fair value for this company given risk, assets and future forecast countered by bad prior history. TTK has stable assets, new management in place and its only the beginning of the fibre network.

[BlackPeter]

I reckon $1.40 is fair value for this company given risk, assets and future forecast countered by bad prior history. TTK has stable assets, new management in place and its only the beginning of the fibre network.

I assume you hold ?

Fair value is when a willing buyer and a willing seller agree on a price. Not so long ago this was 38 cents per share. What has changed in your view the value of this company so much in such a short time frame?

[silverblizzard888]

I assume you hold ?

Fair value is when a willing buyer and a willing seller agree on a price. Not so long ago this was 38 cents per share. What has changed in your view the value of this company so much in such a short time frame?

Firstly when I talk about fair value I actually mean intrinsic value, just to clear that up. Yes I'm a holder of this stock so perhaps a bias were to arise from this (and take my words with a grain of salt), but through some reasoning maybe you might see what I see or on the contrary something entirely different. At the end of the day share price is the metric in which a buy and sell will exist, but hardly in some cases a true and fair assessment of the underlying value of the business or else such opportunity of buying undervalued stocks would not exist for us (and we know these opportunities exist).

At 38 cents this company was in a shambles, a badly managed business that failed to generate appropriate return on assets for the past few years. Not to mention the heavy debt burden of $35 million played on the minds of investors. Through my time as an investor and watching companies fall apart nothing quite does it like massive debt on the balance sheet and secondly failing to even generate appropriate profits to service that debt. So yes at that time a terrible company in the view of everyone, with an uncertain business direction, uncertain debt management given earning power and just generally bad sentiment all round. #TourismHoldings

What changed? All recent developments show signs of progress.

Firstly we have a new CEO in Andrew Millar, which means a new direction.

Bank facility has been settled with Westpac, along with trend of debt reductions being made slowly, which meant no dividends for a while until a great signal for me was when they sold Farmside to Vodafone, not only to getting a possible $13 million in cash to reduce debt, but a good sign of starting anew and focusing on the core business in which TTK did well in.

I knew people who use to work at Farmside and the stories of management there never gave me anything positive, they had a very high turnover in staff and management and was always a loss making division for TTK, not to mention the investment and time that it required to turn the boat around. Before taking over Farmside, TTK was actually a thriving business, it really shows how a bad investment can drag the whole boat down #AlliedFarmers #HanoverFinance

We have a new valuation report that at the very least values assets at $1.50 per share, but of course asset values aren't exactly the thing to go on unless its very liquid when needed and their network value is only valuable to telecommunication companies willing to pay #NotSpark. Also management could easily erode this value down, so we can never place too much certainty on this, but its good sign of value in the company. I like that the fibre network is something that would be very hard to replicate without a lot of time and intensive capital cost, almost like the railway network and we know how well that does for Buffett.

The current business forecast $2 million in profit and next year to be $4-5 million, with the reduction in debt $2 million generated isn't too bad at present times and given improving business on their fibre network and possible cut in expenses it looks very good going into the future. Fibre is still making progress, but as we can witness with Chorus the profit is in Fibre and once everyone in Wellington converts to Fibre its only going to improve TTKs revenue and possibly profits (I hope). I'd expect their radio network business to decline slowly overtime unless tech is improved.

All these developments are quite recent, so yes you have share price jumping all of a sudden thanks to Spark's well you know spark on their share price (see what I did there^^). You have new management looking to change things up and focus on the core business, a road out of debt, better business focus with better profits on its way, a large asset base with a strong moat and good confirmation by Spark and Vodafone that TTK is still a competent business with assets still worth acquiring.

I hope that enlightens you and anyone else who is unsure of my view of this company. =)

[BlackPeter]

Good post and answer - cheers.

While I didn't check your data (TTK is not any more on my watchlist ...), you do raise some valid points, and yes getting rid of Farmside must definitely be a huge gain for them given that they didn't manage to make it profitable (though remind me how much they paid for this lemon in the first place - wasn't it something like 30 million?).

On the other hand ... providing access to remote rural places was in my view (when I still watched the company) their only realistic chance to survive ... what else is left? A bit of fibre? Sure, but then, they are a dwarf compared to Chorus, aren't they? And I am not even sure, whether their one and a half fibre spots are compatible and complementary to the Chorus system ... are they?

I don't see a future for them stand alone, but sure, current strategy must be to sell themselves as dear as possible to the highest bidder.

No view on the incumbent CEO, but agree that David Ware had his shortcomings (management style of the 1960'ies ..) - i.e. glad to hear that things are improving.

GLTAH!

[silverblizzard888]

Good post and answer - cheers.

While I didn't check your data (TTK is not any more on my watchlist ...), you do raise some valid points, and yes getting rid of Farmside must definitely be a huge gain for them given that they didn't manage to make it profitable (though remind me how much they paid for this lemon in the first place - wasn't it something like 30 million?).

On the other hand ... providing access to remote rural places was in my view (when I still watched the company) their only realistic chance to survive ... what else is left? A bit of fibre? Sure, but then, they are a dwarf compared to Chorus, aren't they? And I am not even sure, whether their one and a half fibre spots are compatible and complementary to the Chorus system ... are they?

I don't see a future for them stand alone, but sure, current strategy must be to sell themselves as dear as possible to the highest bidder.

No view on the incumbent CEO, but agree that David Ware had his shortcomings (management style of the 1960'ies ..) - i.e. glad to hear that things are improving.

GLTAH!

Yeah Farmside has been a big $30 million lemon to swallow, thats part of the reason confidence in the company has been rather low, sometimes bad decisions are made, whats important is the progress that can be made in the future. Farmside was actually getting slaughtered by Rural Broadband and its actually more endangered itself, if other network providers continue to upgrade their coverage it could signal an end to Farmside.

Actually Fibre is the future of this company. Chorus maybe big, but if you do some research into how Com Com has actually been trying breakdown Chorus's monopoly in the area by letting other smaller players gain control over networks. As you see TTK have parts of the network in Wellington and Auckland, another example would be how Enable run the network in Christchurch. Once the network is in place it makes it much harder for other players to come in and all internet providers in the area will have no choice but to use theirs unless they build their own. Its almost to say if Chorus owned a bridge in Auckland and Teamtalk own a bridge in Wellington, just because Chorus might own a bigger bridge in Auckland its has no relevance how big this bridge is, unless Chorus decide to build one in Wellington, which it then needs consent to do so and that will be another consideration in the future.

[Bobdn]

Another day in paradise. However, I'm starting to get twitchy.