General Communication Loses Subscribers Prior to Merger

Alaskan telecommunications company General Communication (GNCMA) reported its first-quarter results after the market closed on May 3. The company announced in April that it was merging with Liberty Ventures Group in a deal that will give shareholders a stake in the new company, GCI Liberty. The bottom line was negatively affected by one-time charges related to this deal, as well as an abnormally large tax expense. Here's what investors need to know about General Communication's first-quarter report.

General Communication: The raw numbers

Data source: General Communication.

Image source: General Communication.

What happened with General Communication this quarter?

General Communication agreed to a complicated deal that will see it merged with certain assets of Liberty Ventures Group, creating a new company, GCI Liberty. General Communication shareholders will receive 0.63 shares of a reclassified GCI Class A common stock and 0.20 shares of a new GCI Series A preferred stock, worth a total of $32.50 per share of existing GCI common stock. The deal is expected to close during the first quarter of 2018.

During the first quarter, weakness in consumer wireless and video drove a revenue decline.

• Consumer revenue was $107 million, down 6% year over year, driven lower by declining wireless plan fees and a 6% decline in video subscribers. Total wireless subscribers declined by 500 during the quarter, but the company pointed out that its "Better than Unlimited" wireless plan was gaining traction.
• Business revenue was $121 million, up 3% year over year. Strong sales of data products drove the increase, offset by declines in video and voice sales.
• Pro forma adjusted EBITDA, which adds back a $4 million one-time charge related to the Liberty transaction, was $73 million, up $2 million year over year. General Communication pointed to savings achieved in procurement initiatives and circuit costs to explain the increase.
• Selling, general, and administrative expenses totaled $94 million, up 2% year over year excluding $4 million of costs related to the Liberty transaction.
• The steep decline in net income was mostly driven by much higher income tax expense. General Communication stated that the $46.6 million tax charge is more than it expects to record for the full year.
• General Communication expects pro forma adjusted EBITDA between $300 million and $325 million in 2017, with capital expenditures of approximately $165 million.

What management had to say

General Communication CEO Ronald Duncan discussed on the conference call how the company expects to return to growth:

I think we can get back on a growth mode, I don't expect it to be spectacular growth, but the losses last year really had to do with the consolidation of the billing platforms in the merger of multiple subscriber bases into a single unit. We've got almost all billing platforms shut down at this point. We're rapidly integrating on the LTE platform. We have a consistent set of plans and they are compelling plans in the market. We're a little late in the first quarter with the launch [of] "Better than Unlimited" and we got jumped on by the second round of national price reductions, but I think we got it. Good plan for the rest of the year. I would expect to see slow but steady growth and the cessation of the erosion.

Looking forward

General Communication is focusing on operating efficiency and cost savings in an environment of subscriber declines. Pro forma EBITDA margin rose to 32% during the quarter, up from 30.6% in the prior-year period, thanks to those efforts.

The Liberty transaction isn't expected to close for nearly a year, assuming it receives the necessary regulatory approvals. Shares of General Communication surged on the news, and they should remain elevated as long as the deal remains on track. The new company, GCI Liberty, will have increased scale as well as diversification beyond Alaska, and further acquisitions and mergers are possible once the deal closes.