ML on LBTA/TGNT:
Investment Highlights:
· On June 1, Liberty Media Group (LMGA,
C-1-1-9, $66) announced that it will acquire
The Associated Group in a tax free stock swap.
With a 41% stake, Associated is currently
Teligent's largest shareholder. This transaction
is expected to close late 4Q98/early 1Q99.
· Although we see some positive long-term
strategic impacts as a result of this deal, we
make no change to our estimates at this time.
Our opinion remains intermediate term
Accumulate and long term Buy with a 12-18
month price objective of $66 or 20%
upside. Our valuation is based on our 10-year
DCF model, a 15% discount rate, 9x terminal
multiple, 39% terminal EBITDA margins, 4%
share of its addressable market by ‘08E and
no public market discount.
· We see this transaction as having 3 main
positive strategic implications for Teligent:
· First, the “Malone factor”. We view Liberty's
stake in Teligent as yet an additional
endorsement of fixed broadband wireless as a
strategically valuable local entry strategy.
Although fixed wireless has recently received
endorsements from major industry players
such as AT&T, MCI WorldCom and Sprint,
the addition of a highly regarded strategic
investor such as John Malone (Liberty's
Chairman and CEO) is clearly a plus.
· Second, we view this deal as a possible
precursor to strategic alliances between Liberty
and Teligent. These alliances could involve the
utilization of Teligent's wireless local
broadband infrastructure and Liberty's
“content” to address high growth areas such as
e-commerce, general internet and specialized
services, specialized data and content delivery.
· Third, with approximately $4B in cash,
Liberty could serve as an important back-up
source for new capital to Teligent.
· What Does This Deal Mean For Teligent's
Valuation? Although the tax-free nature of
this transaction makes valuation analysis a
little difficult, we derived an implied valuation
for Teligent of $50 based on the following
assumptions: a) $760M in net value to
Associated shareholders (11.5M Liberty
shares at $66); b) $187M in assumed
Associated debt; c) $250M estimated value for
“other assets” at Associated (primarily True
Position, radio broadcast assets and Mexican
cellular); d) $400M in assumed avoided capital
gains tax liability ($800M in total, split 50/50
between Associated and Liberty); e) 41%
Associated ownership stake in Teligent; and,
f) 53M shares outstanding.
· Additional Thoughts On Valuation: Although
we note that this transaction was at a 24%
discount to our YE ‘00 private market value
estimate and only a $1 premium over Friday's
close, we note the following: 1) there is no
control premium associated with the deal;
2) the transaction is tax-efficient for the seller;
and 3) there is great potential for new business
opportunities between Liberty and Teligent.
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