Teri Viswanath: Rural electric co-ops are somewhat uniquely positioned to tackle the challenge of providing internet services to their communities. But, is there a good time, after establishing these services, that they may want to figure out if there is an exit strategy for maybe selling the business…valuations are high, or maybe they need to focus their time and attention back on their core business.
Hello, I’m Teri Viswanath, the energy economist at CoBank, and your co-host of Power Plays. As always, I’m joined by my colleague Tamra Reynolds, a managing director here at the bank, who wanted to help co-ops answer the question of, “should I stay or should I go?” Hey Tamra.
Tamra Reynolds: Hey Teri. That’s correct. I had the opportunity to invite two distinguished experts from CoBank, who provided in-depth insights into the complexities of valuing these businesses. This discussion is highly valuable for cooperatives that currently broadband operators, considering potentially entering this sector, or they’re really thinking about reviewing and evaluating their existing operations to see if that’s where they still want to be want to be.
In this conversation, we’re joined by two industry experts, Jeff Johnston and Michael Robbins. Together, they’ll help us unpack what electric co-ops need to know about the broadband landscape, how to approach system valuations, and what to consider if approached with an offer to sell. But before we get started, Jeff, give the listeners a little bit of an overview of your background in the space.
Jeff Johnston: I’ve been with CoBank for over six years and I am the lead economist for digital infrastructure. I cover everything from your typical fiber networks to wireless networks, towers and data centers as well, as they become a growing part of the overall digital infrastructure market.
So that’s my focus, but prior to that I’d spent a number of years on Wall Street as an equity analyst covering tech, media and telecom. And prior to that, I was actually in the wireless industry in various business development and product management roles. So I’ve kind of got a analytical view of the world and a kind of a real-world operations view of things as well.
Reynolds: That’s great, Jeff. And I would be remiss if I did not say you are the host of All Day Digital, which is my favorite digital infrastructure podcast. To be fair, my only digital infrastructure podcast, but it’s still number one. So I want to make sure everyone knows that you can go check out Jeff’s podcast wherever you find Power Place podcasts as well.
Michael, how about you?
Michael Robbins: My name is Michael Robbins. I’m currently part of the credit leadership team here in the electric distribution space at CoBank. I’ve been at the bank for about 10 years.
Prior to my current position, I spent about seven plus years in the digital infrastructure group focused on analysis and underwriting within the broadband and telecom space, focusing notably around local exchange carriers, competitive fiber and transport providers, wireless and cable data centers. Specifically, I’ve kind of worked through various financing the M&A transactions, broadband build outs and other industry research that helps decipher valuations for credit underwriting purposes.
Reynolds: Just to sort of set the stage, Michael, how would you describe the current landscape for electric cooperative broadband projects and just the industry in general?
Robbins: What we’ve generally seen is that electric distribution cooperatives have entered the broadband space largely as a way to fulfill a mission to bridge the rural divide, throughout rural and underserved areas. So as these co-ops are often also seeking to improve grid efficiencies with smart grid integrations, there are a lot of natural synergies relating to the deployment of fiber to help serve their membership.
When also considering the vast amount of just government grant programs and funding mechanisms specifically targeted to underserved and unserved areas, whether it be CAF 2, RDOF, Reconnect or other grant programs, we’ve seen significant investment by electric co-ops over the last, say, five to seven years that helps subsidize their build-out costs. Co-ops have generally received this funding from these programs to support their builds and other near-net areas where we’re kind of seeing these projects start to come to completion.
As these projects are becoming completed, the co-op is then faced with really tough decision…are they OK with maintaining the investments they’ve already done or consider selling the operation. So, I think we’re at a pretty critical point in the build out process for them where we’ve seen some co-ops commit to additional success-based projects and we’ve seen some kind of slow the brake pedals a little bit.
Reynolds: Jeff, what are some of the trends that you’re observing in sort of the broader network and high-speed Internet industry, maybe from the telecommunications side and how is that maybe playing into what electric cooperatives are thinking about?
Johnston: Yeah. I think the sort of the recognition or acknowledgment that having a reliable broadband Internet connection at home is not “a nice to have”, it for most people, it’s really “a must have.” And this really started post COVID and specifically because of AI, right. A lot of talk about AI and how it’s going to transcend industries and how we live and how we work, and I really do believe in that. And in order to take advantage of that, you have to have a reliable broadband connection. So the value of broadband, I think has only strengthened over time and I think that will continue to be the case. So that’s a good thing.
Now, with a lot of industries, when you’ve got high, high demand and you’ve got underserved areas like we kind of had with broadband several years ago, it attracts a lot of new capital and it attracts a lot of new competition. So, competition right now in the broadband industry space is at a level we really haven’t seen in quite some time.
Reynolds: Jeff, that’s a great point. What are some of the more common motivations behind some of the providers today deciding to look at selling networks? We mentioned competition as a motivation. What else is out there?
Johnston: When operators are contemplating a sale, you know it could be a couple of different things. They’ve looked at the valuations, now they’re not as high as they used to be, but they’re still pretty rich. So, I think some are looking at this and saying, you know, is this a good time to sell from a valuation perspective because they still are pretty attractive if you compare valuations where they are today over the last say 10 years.
And then in some instances you see some companies that got into this business. and really underestimated how difficult it is to build a network and to compete effectively and to run the network and to grow it and to cash flow it. There’s a number of cases where they have not been hitting plan. So they’re not hitting the passes on time, they’re not getting the penetration rates as well. And so you’re seeing some of those more troubled operators as well looking to sell as competition intensifies and they kind of figure out that maybe this wasn’t necessarily the right business for them to enter, or the right market. There’s a lot of different reasons why people sell, but those are a couple of different reasons that I see as to why folks are looking at trying to get out.
Robbins: These asset sales, I kind of put it into three different buckets, one being it’s a way to recognize an immediate financial return. Two, it’s a way to streamline and home in your focus in some ways. And three, it’s a way to adapt to a changing market.
Reynolds: I think I’ve heard it a few times, “man, this project was easy to build and it’s sure hard to run a business.” I think that is becoming a reality is especially you see the competition increasing, you see the spend on recurring things or updating the network and the cost of financing today is different than it was five years ago.
What are some of the key components that that go into valuating a network and maybe if you could give our listeners some insights on how electric co-ops should maybe be evolving their thinking about valuations?
Johnston: Whether it’s a strategic investor or a strategic buyer or a private equity sponsor looking to acquire a new company, they primarily look at a few different areas. One is, what does the competitive market look like? What does the competitive environment look like for any one particular operator? That’s going to be something that a potential buyer is going to want to understand very clearly. It’s dynamic, it can change.
And then, what are the growth prospects look like? How many adjacent markets are there — that are underserved or unserved — where fiber can be deployed? What is the current penetration rate of the current market and is there upside to that penetration rate? Can they grow within the market sort of organically with what they’ve already got?
And then, they’re going to want to look at what does that strategic fit look like? From a lot of what I hear, it’s just location, you know is it within a one-hour drive from where the current operator is located. So, that would be more strategic. And then lastly management’s track record and execution is a big deal as well. So, has management been able to execute against their plan? Do they know what they’re doing? Can you keep that management team in place and grow?
So if it’s a strategic acquirer, chances are they’ll probably take over the operations of the network and don’t necessarily need existing management.
So, at the end of the day, this is all based on primarily the way these networks are evaluated it’s a multiple of EBITDA, right? So, and that’s where I think maybe electric cooperatives might have a little bit change in thinking around company valuation, right. I think it’s largely been an asset-based valuation discussion, whereas broadband networks tend to trade on a multiple of EBITDA and cash flow is very important as well.
Reynolds: Michael, there’s a lot that often goes into preparing yourself nimbly as an organization to look at the valuation process. What are some things that co-ops can be thinking about how they might prepare themselves to go through the process of looking at evaluation and going to market or entertaining an offer from someone?
Robbins: From a co-op’s perspective, they’ll likely want to ensure that there’s an efficient and accurate valuation process that attracts the most potential buyers. I think being able to identify EBITDA and EBITDA margins are a good place to start. Gross margins, other data including passings, subscribers by cohort and product, churn percentages and data, as well as other average revenue per user data is very beneficial.
And, tell the historical story of that operation. It’s beneficial to identify non-recurring revenues versus recurring revenues to kind of demonstrate that that strong recurring cash flow that that helps support valuations. I think also just on a side note, disclosure of outstanding grants or funding programs are important as well as any potential remaining build out obligations that could have the potential to impact future cash flows, as well as just highlighting pricing packages and how they compare to competitors.
From more of an operations standpoint, data such as fiber route miles, aerial versus buried fiber, as well as other network design items should probably also be handy.
Reynolds: Jeff, what types of buyers are typically interested in looking at cooperative broadband networks to purchase and what maybe are they thinking about or what priorities do they have when they’re negotiating for those types of transactions?
Johnston: Let me just first answer that question with the kind of buyers you’re not going to see. You’re not going to see T-Mobile or Verizon or AT&T, in my opinion, knocking on the door of local electric cooperatives to acquire them. I think those generally are just too small. I think people get excited because T-Mobile’s been fairly active in the market and paying pretty decent multiples for what they’ve acquired. But again, I think electric cooperatives are too small for them.
I think what you’ll probably see is a local ILECs acquiring some of these assets. You might see regional fiber operators who are looking at sort of tucking in very strategic acquisitions to that build out their footprint. Again, if there’s adjacent markets that makes sense to tuck them in, they’re always looking for those opportunities.
We haven’t seen a lot of it that I’m aware of, but private equity sponsors might be interested in as well. Or, it could be a private equity sponsored-backed company.
They’re going to be looking for a good deal. But again, these folks I think are going to want to be looking for growth opportunities.
Reynolds: Michael, what kind of considerations should boards and management teams be thinking about when approached with a sale offer?
Robbins: There might be considerations as far as co-op bylaws and provisions that could require membership approval to divest assets.
I think a third-party consultant is always valuable to navigate through that process.
And like any other material divestiture or decision-making process, the co-op just needs to weigh the near and long term financial and member considerations.
Johnston: So again, I think it’s important to just to be realistic about valuations and where you are. An advisor who’s got a lot of experience I think can really help you kind of navigate those things.
Reynolds: Anything you’d recommend they steer clear of, or any pitfalls that you’ve seen happen?
Johnston: Folks who think they can do this by themselves, that would be probably a path they don’t want to go down, right. So having an advisor is really important.
Reynolds: That’s great, I really appreciate both of your insights. Any closing thoughts before we wrap up?
Johnston: I would just reiterate, it’s a great business, it’s got great margins, and, I think that will be the case for quite some time. I think we’re just going to continue to see this sort of drumbeat of acquisitions over the next five or so years.
And then the other thing I would say is, don’t stick your head in the sand as a result to some of these technologies that people pooh-pooh. Being aware of some of these emerging, potentially disruptive technologies and large companies entering the market is an important thing to keep top of mind.
Robbins: And I would add that this is a very pivotal time for electric co-ops as they’re in a time of transition — do we want to move forward with more broadband or do we want to home in on what we’ve already done?
Reynolds: Awesome. Thank you, guys, so much.
Viswanath: Tamra, when I listened to your conversation with Jeff and Michael, I came away with a deeper appreciation. While making sure that communities have access to broadband services—certainly it’s never been a more important to have digital access—there might be a good jumping off point when those services could be provided by someone other than a co-op.
Reynolds: That’s right. Or maybe the priorities of the day require a difference focus for the co-op. What I enjoyed hearing is how to approach the mental process of assessing the business line from an arms-length perspective of a potential investor. Sometimes it’s difficult to really separate the commitment for serving our communities — which our co-ops are so fondly known for — with the practicalities of finding the right provider of these services and understanding the challenges of operating a competitive business. So I’m hoping this conversation was helpful for the audience.
Viswanath: You know I found it really helpful, and really took a lot away from that conversation, so I hope all of you have enjoyed this as well and will join us next month when we take stock of leadership lessons from experts that we think new and emerging co-op CEOs will find interesting. Until then, bye for now!