Wed, 27 Sep 2023

SEATTLE, WA / ACCESSWIRE / May 31, 2023 / LF Partners' Charles Frischer sent the following letter to the Special Committee of Consolidated Communications:

Charles Frischer
3156 East Laurelhurst Drive, NE
Seattle, WA 98105

May 10, 2023

Consolidated Communications
Attn: Mr. Robert J. Currey
Chairman of the Board
Head of the Special Committee
2116 South 17th Street
Mattoon, IL 61938

Dear Mr. Currey:

My wife and I currently own 1,400,000 shares of Consolidated Communications, a position we started buying about 18 months ago after the company announced its strategy of focusing on fiber optics broadband. I decided to allocate capital to Consolidated shares because, while the transition from copper to fiber is quite messy, the subsequent result will be a fantastically valuable enterprise. Within 12 to 24 months from today, Consolidated will be completely transformed into a superhero with the strength of Superman, the high tech toys of Batman and the speed of the Flash. Consolidated 2.0 will have highly recurring income streams, based upon providing critical broadband to its customers, should experience extremely low rates of churn, enjoy high margins and strong pricing power. Similar fiber companies have been valued in the recent past at levels of at least 10 to 13 times EBITDA. These multiples are based upon the very strong characteristics of owning a highly competitive fiber optics network, which further benefits from limited competition due to the rural location of most of our network. After the network is built out and appropriate levels of subscribers are in our system, I do not expect to experience the overbuilding that has occurred in more urban markets. Consolidated has the right strategy, the right team and is making great progress on this journey. This is the wrong time to sell the company for a price that will be a fraction of the value of Consolidated shares in just 1, 2 or 3 years.

This is exactly why in this letter I will argue that the company should reject the proposal by Searchlight Capital to take our company private. I am going to outline an alternative proposal that I believe would help Consolidated accomplish its goals, while also allowing Searchlight and their partners to benefit from our transition from horny toad to handsome prince.

As we all know, in the last twelve months, companies with leveraged balance sheets have seen their share prices get cut as the Federal Reserve has been raising the cost of financing through their rate hikes. Indeed, telecom companies like Lumen have seen drastic reductions in their valuations due to pressure on their business and the loss of cash flow due to high interest expenses. While Consolidated has seen our share price decline from the $6-7 dollar range less than one year ago, our intrinsic value has actually been increasing as we build out our fiber network and embark on transitioning both our existing and new customers to our fast and reliable broadband service. The company has been spending significant capital on this buildout and is now in the early stages of properly marketing this product. For approximately $15 more per month, customers can upgrade from slow copper wires to high speed fiber internet. This is a dramatic improvement in the service and I expect it will be greeted enthusiastically by our customers. Given the importance of high speed internet to virtually all consumers, this will not be a hard sell. We will likely just need to knock on doors and offer this upgrade. In fact, this is already happening. It is critical to note that we needed to reach closer to 40 or 50% fiber coverage before it made sense to aggressively market this product. There is no benefit to marketing a product that 80% or more of your customers can't buy, even if they want it badly. 2023 is now the year for the company to dramatically grow their fiber customer base and this is already happening. As the our CEO noted on the most recent conference call, we added 5,200 new fiber customers in March and close to 6,000 in April. This is against our highest previous month of 4,300 new users. I would expect that with warmer weather, the continued rollout of our marketing efforts and college students available to hire for the summer, we will see that 6,000 monthly number grow dramatically. In real estate, leasing is everything. In our business, getting new fiber subscribers is everything and the wind should now be at our back as we seek to grow our revenues and increase our EBITDA margins.

This is exactly why the company is projecting that EBITDA growth and margins will start to turn positive in 2024. Why would we agree to sell a business at the exact time it is about to see the efforts of its transformation emerge. Since we don't have to sell, why should we even consider this effort to bottom fish for our company.

My family's ownership position represents about 1.22% of the outstanding shares of Consolidated and would generally not be considered an important stake. Since this letter will address the recent proposal by Searchlight Capital and the British Columbia Investment Management Fund, this relatively small position becomes more important. Searchlight has agreed that their proposal must be approved by the majority of the minority. This is the most appropriate way to approve such a transaction and I assume the folks in British Columbia pushed for this fair and reasonable voting threshold. In full disclosure, my wife was raised in Canada and we generally spend 30 days per year in Whistler skiing, so my family is both Canadian and loves BC. We are Kraken fans though.

Since there are approximately 114.7 million shares outstanding of Consolidated and Searchlight/BCIM own 39.3 million of those shares, there are 75.4 million shares not owned by Searchlight. In a shareholder vote, I would assume that at least 15.4 million or 20% of the shares will not end up voting for or against the merger, no matter how much money is spent by proxy solicitors. Therefore, the company will need to get 30 million yes votes to get a deal done. Now my 1.22% position becomes a 4.67% no position. I can't sway the vote myself, but it won't take more than 10 or 15 million more no votes to make passage of this takeover highly unlikely.

Therefore I am offering an alternative proposal to both the Board of Consolidated and to Searchlight.

Consolidated and Searchlight has agreed to a standstill agreement that limits their ownership level to 35%. Consolidated will agree to increase that level to 70% as long as Searchlight is willing to tender for the additional 35% of the company at a price of no less than $5.00.

Searchlight may argue that under their full ownership they will be able to further accelerate the deployment of our fiber network by increasing the capital expenditures at the company. Therefore, I would further propose that Consolidated agree to sell to Searchlight a 5-year $200 million zero coupon convertible bond with an initial conversion price of $8.00, with an 8% interest rate. This note will mature in 5 years and will be then either convertible into 25 million Consolidated common shares or will become an obligation in 2027 of $293.9 million.

Assuming that this capital plan was agreed to by both parties, the outlook for both Searchlight and Consolidated would be terrific. Any and all shareholders who want to exit their positions will be given a fair and reasonable opportunity to sell their shares. While I believe this price does not reflect anywhere near the intrinsic value of the company, many owners will choose to take this cash tender option. The extra $200 million will be used to accelerate the deployment of the fiber network and will generate meaningful returns to shareholders at a fair and equitable cost. Searchlight would end up owning 75.4% of the outstanding shares upon the conversion of the $200 million convertible note. The common shares of Consolidated would likely rise upon such a transaction, the management team can continue running the company and Searchlight owns the vast majority of the enterprise. This is far better than a contentious fight with both the Special Committee and the minority shareholders. I want to be an owner of Consolidated shares for the long run. This structure allows for all interested parties to get virtually everything they want. We are all taught in pre-school to be flexible and to let other kids play with your toys. I think this solution allows everyone to share in the future capital appreciation of Consolidated shares on reasonable terms for all parties. I would also not fall prey to the argument that his structure is too complicated - it is very straightforward and the team at Searchlight can easily understand this approach.

Finally, given the leverage at the company and the potential for less than 140 million shares upon conversion, the value of Consolidated shares could easily be $30 to $40 each in 3-4 years. Consolidated has previously outlined achieving $1.5 billion in revenue by 2026 or 2027, with EBITDA margins between 45 and 50%. Using 45% EBITDA margins, 2027 EBITDA would pencil out to $675 million. Based upon recent comps, that company might be valued at 11.5 times $675 million or $7.7 billion. This would be against $2.5 billion in debt, leaving $5.2 billion of value for the equity. Assuming 140 million shares, that equates to over $37.00 per share in value to the common. No wonder why Searchlight wants to pay $4.00 for the company. You can argue with my numbers, but they are in a different universe than the current offer.

Thank you for giving this proposal your full consideration. Please forward to the entire Special Committee as well.


Charles Frischer

SOURCE: Charles Frischer

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