Amtelecom Communications Inc. Financial Condition and Valuation

Analysis

Corporate Strategy

         Amtelecom did not follow its strategic long term plan to expand its core telephone, cable television and internet businesses through mergers or acquisitions with other independent service providers within the same regional markets. Perhaps the M&A strategy was not well planned, or perhaps this was too much of an ambitious strategy. This report outlines that the advantages to selling the Amtelecom business outweigh the benefits of selling the ICS business or continuing as a bifurcated business.

Amtelecom Communications Inc. Financial Condition and Valuation

        Operating expenses accounted for 90% of total revenue for the 9 months ended Sept, 30 2002. Profitability is attributed to positive growth in telecom, cable, and internet product lines over the next few years. Profit margins increase over the forecasted period (2002-2008) mainly due to growth in the different segments. Still, the control over debt repayment and adequate dividend payout will ensure enough liquidity to sustain the ICS operations. Amtelecom Communications (as of 2003) is valued at $98 million CAD (intrinsic value) based on a 5 year DCF representing 8.3 times EBITDA. Amtelecom received an offer of $64.4 million CAD on June 1, 2001 representing 5.7 times EBITDA. The offer was abandoned later in 2002. An alternative M&A deal would have been the ideal scenario for Amtelecom’s telecommunications business where management may retain ownership.

        AGI Groups Inc’s stock trades at a discount as of 28/10/02 where market value of equity is lower than its book value. The case mentions AGI’s closing stock price on the TSE at $1.85. Therefore, market value of equity equals total shares outstanding times stock price (=11,405,627*$1.85= $21,100,409.95.) Book value equals total assets minus total liabilities (=73,586,000- (46,985,000+1,280,000+626,000) = $24,695,000.) Obviously the market value is lower than the book value, meaning AGI is trading at a discount. In addition, a multiples valuation approach yields similar results. Appendix G outlines multiples market values relative to book.

        Despite positive growth rates for telecom, cable, and internet businesses over the next 5 years, the potential for sales growth and expansion beyond current markets is limited due to CRTC regulations and competition from large well funded players like Bell, Rogers, Telus, and Shaw. The CRTC is meant to protect consumers. A strategic buyer for Amtelecom would have to comply with the stringent non-Canadian voting rights and common share limits. A strategic buyer’s analysts may pass on making an offer (Option 1) due to the high operating expenses, competing technologies (substitutes), centralized regulations, fierce competition, and poorly executed strategies of AGI Group Inc. As a whole the TSE Telephone Utilities Index was negatively trending having lost 22% value further weakens the prospects of an M&A deal for the Amtelecom communications business.  

Telecommunications Regulation in Canada

        The CRTC as a government body that heavily regulates the industry. CRTC issued decisions 96-6, 2001-756, and 99-16 throughout 1996-2001. Telecom decision 96-6 permitted competition for long-distance and local services within independent ILEC’s markets. This regulation may erode market share for Amtelecom’s Communications services within the smaller rural markets. Local services accounted for 38% of revenues for Amtelecom in 2001. Amtelecom did not express concern over 96-6 however the fact that competition is permitted within Amtelecoms markets demonstrates concern over growth rates in new customer acquisition. Telecom decisions 2001-756 and 99-16 also pose a threat to the Amtelecom sales growth and expansion into other markets. CRTC regulations moved to cap price setting but do not limit profits. And with the poor timing of 99-16 the SIP forced Amtelecom to spend $10.6 million CAD demonstrating that earnings may not be distributed according to shareholder value maximization and further demonstrates how heavily regulated the telecom sector is in Canada. Although registration and licensing (Class I,II,III) may pose a deterrent to new entrants, the fees associated with this type of license continue to be accrued under non-interest expenses.

Canadian Markets

        Population density in rural Canadian markets may allow AGI to meet its 1-3% growth in telecom and 10% in internet sales but increasing competition from local providers and the major players such as Bell and Rogers may limit growth in all product lines. Also, penetration into urban areas requires investing in infrastructure, offices, marketing and those markets are highly competitive. AGI is looking to divest and reduce expenses in lieu of their poorly managed acquisition of ICS Courier. We agree with AGI executives on selling the telecom business. Only an aggressive growth strategy would ensure the prosperity of AGI operations coupled with financing the failed ICS acquisition.