|
Forum Report: Otelco Shareholder Survey
2018 Survey of Otelco Inc. Shareholders
Investment
Objectives
Business
Strategies
Financial
Policies
Shareholder
Comments and Questions
The shareholders of Otelco Inc. were invited
to report views during the week prior to the company’s scheduled reports of
third quarter performance results.[1] The survey
requested rankings of investment objectives, business strategies and
financial policies, with a participant’s anonymity assured by independent
moderation and secure data administration.[2]
The request for this survey was initiated by
Tim Bergin,[3] as a shareholder who has no other
relationship with Otelco or its management, for the purpose of determining
whether there is sufficient shareholder support of the current management
policies that he considers essential to long term investment in the company.
Two other investment professionals, each like Mr. Bergin owning over 5,000
shares of Otelco, were invited to participate in a workshop to guide the
Shareholder Forum’s definition of issues to be addressed in the survey.[4]
In addition to questions developed to
address the issues defined in the project workshop, the survey asked
participants to volunteer information that might be useful in analyzing
anonymous responses, about what kind of portfolio(s) they managed, how many
shares they owned, how long they had owned shares, and whether they had
recently increased or decreased their Otelco investment. Participants were
also offered an opportunity to present questions or comments anonymously for
the Forum to report for consideration by Otelco’s management or other
shareholders.
Investment
Objectives
The first of three survey subjects asked
participants “how you would rank the importance of each of the following
investment objectives” which are shown in the graph below, but re-sorted
here in order of the highest combined responses of “extremely important” and
“very important” rankings.
Notably, an analysis of responses by the
numbers of shares owned showed unusual consistency, with more than
two-thirds of all three categories of investors (shares under 1,000, between
1,000 and 5,000, and more than 5,000) providing “extremely important” or
“very important” rankings to both of the top categories above, “Growth of
earnings during the next 5 years” and “Stock price 3 or more years from
now.” Similarly, each category gave the lowest ranking of importance to
“Dividends during the next year.”
Participants were able to offer their
comments on other investment objectives. Responses generally addressed
refinements of the listed objectives or means of achieving them, rather than
the identification of other objectives, and were reinforced by subsequent
responses to rankings of business strategies and financial policies. The
largest number of these comments focused on a long term view of value, with
a variety of perspectives illustrated by the following examples:
■
I'm interested in long term growth with a growing dividend. Not
concerned with short term fluctuations of stock price or earnings as long as
business looks solid going forward.
■
Long term return on investment is always my
objective.
■
I
think the main objective should be de-risking the company. The investment
goals should be to secure the highest level of dividends 3 to 5 years in the
future, ie. by reducing debt now.
■
I
believe that this company's share price is very undervalued and that a
merger of some sort will be the likely key to unlocking value. That said, if
a dividend is structured to unlock that value over time I would continue to
be a holder of the [XX],000 shares currently owned in our several accounts.
Comments addressing other objectives were
generally not inconsistent with this more broadly expressed support of long
term investment perspectives, as illustrated in these examples of the range:
■
Very low debt and grow the company
■
Pay
down the debt as quickly as possible.
■
Is
it too much to ask for you to get the stock price back to where it was 10
years ago?
■
You have no scale and a non contiguous
footprint. Either get a lot larger or sell the company.
Business
Strategies
The second survey section asked participants
to rank the importance of listed “business strategies,” with the following
results re-sorted here in order of the highest combined responses of
“extremely important” and “very important” rankings.
As in the first section, responses to the
option for suggestions of other business strategies generally presented
observations relating to the listed business strategies or means of
achieving them. Most, like these examples, supported the current
management’s continuation of current policies:
■
The company is doing a good job of
optimising the cost structure and expanding under ACAM. I would encourage
them to keep doing that.
■
Go for the sure win of reducing debt. Reduce
leverage below 1.5 before considering new strategies.
■
The company should continue to focus on its
existing business.
Financial
Policies
The third survey section asked participants
to consider whether various listed “financial policies” were appropriate or
inappropriate for Otelco. The listed policies have been re-sorted here in
order of their combined responses of “extremely appropriate” and “somewhat
appropriate” rankings.
Responses to the invited suggestion of other
financial policies, as in previous sections, presented observations relating
to the listed alternatives. Most of these comments addressed either debt
management or a possible sale of the company, and often both, as illustrated
in these examples:
■
Restart dividends, even if a very modest
amount. Avoid adding debt, continue lowering debt.
■
keep an investment grade rating
■
I would like to see future dividends
secured, by lowering debt to a very low amount (1x to 1.5x). Any additional
capital, not needed to expand, should be used to repurchase shares. I think
a sale should only be done at an EV/EBITDA multiple north of 9x.
■
If selling the company is to the benefit of
shareholders long term I would be for that.
■
Consolidation is inevitable. Otelco is an
attractive target. The Board should be working to maximize sales price.
Stock buybacks (once permitted) at current to 50% higher prices would be
higher ROI than new projects. Company's largest shareholders understand
value of reducing share count over a taxable dividend.
■
Need to do what is best for the investors
but also make every attempt to make sure current employees are taken care of
if the company is sold.
Shareholder
Comments and Questions
In a section following the survey questions
for rankings, participants were offered an opportunity to present comments
or questions anonymously for the Shareholder Forum to report to Otelco’s
management, and also for consideration by other shareholders. All of the
comments presented prior to the survey’s conclusion are presented in this
report:
Comments submitted for Forum reporting to Otelco management and shareholders
(4 pages, 164 KB, in PDF
format)
All of the comments and questions submitted
by survey participants for reporting to Otelco’s management were
presented to the company, without editing, on November 13, the day after the
survey closed. The Forum will present Otelco’s responses to all survey
participants who provided an email address for reports of the survey
results.
Mr. Bergin
has responded as follows to a request for
his observations, as the initiator of the survey and also as an Otelco
shareholder:
This survey was initiated to answer a
simple question I had: what do the shareholders of Otelco want the company
to do?
This question is a necessary one to ask
now because Otelco is transitioning. It was a company with too much debt
and limited discretionary income. Management has successfully turned the
company around and it is now a company that is generating a large amount of
discretionary income. What should the company do with this cash? It is
often assumed that shareholders want dividends. I wanted to ask the
shareholders directly to see if this was true.
The responses were very interesting. It
is clear that the shareholders of Otelco have a long-term approach and a
more nuanced view of cash uses than dividends. Shareholders state a
preference for reinvestment in the business, followed by share buybacks and
the payment of dividends. The other consistent theme is debt reduction.
Shareholders like the idea of de-risking the balance sheet now to allow for
a more secure stream of dividends in the future. This approach makes sense
to me, and I am encouraged by the long-term perspective of my fellow
shareholders.
The Forum thanks Mr. Bergin as well as the
other workshop participants who helped define the issues to be considered,
and of course all of the shareholders who offered their views, for their
efforts to support the progress of Otelco’s management.
GL
– November 19, 2018
Gary
Lutin
Chairman, The Shareholder Forum
575
Madison Avenue, New York, New York 10022
Tel:
212-605-0335
Email:
gl@shareholderforum.com
©The Shareholder Forum, Inc. |
