TMNG Global Develops A "Proof Of Concept" Toward The Possible Purchase Of A Bankrupt Local Provider

Challenge

Two years prior to the engagement, a Government entity had granted a license for a second carrier to provide local service. This second carrier had spent $18 million establishing a fiber loop running around the city of Hamilton. However, the carrier had run out of time and money, mostly because of delays resulting from the legal posturing of the incumbent. The carrier’s infrastructure was rumored to be for sale for between $1 million to $3 million and included a loop had three redundant OC-3 rings running into 41 buildings downtown feeding back to a backbone of redundant OC-12 rings.

Not long after the carrier’s failure, the environment changed, becoming more favorable to competing carriers. The Government had become more interested in competitive local service, and legislation had changed to prevent the incumbent from impeding the abilities of its competitors’ ability to enter the market. This and the apparent lack of reliable, fast last mile data service to connect to the outside world, made it seem worthwhile to investigate the idea of taking advantage of the liquidation price of the second carrier’s assets and resurrecting the failed local exchange carrier.

Little information had been formally amassed to support a business plan. Here, at the very earliest stages of planning, a “proof of concept” needed to be developed. Our client, a private equity firm, requested that TMNG Global undertake its development.

TMNG Global Solution

The first steps were to understand the controlling factors and issues at work in this particular environment, determine what information was readily available and what needed to be developed and formulate the structure for the “proof of concept.” If the client ultimately decided to proceed with the purchase, the “proof of concept” would be built with the intention of using it to obtain the funding required for the development of a well-conceived business plan.

The team met with key individuals and through interviews and research gathered as much information as possible about the following:

• Legal and regulatory environment
• Products
• Pricing
• Sales
• Network
• Operations
• Back-office systems
• Interconnection and resale
• Labor
• Management.

An understanding of the carrier’s history was of paramount importance in the evaluation process. The fundamental problem was the then-unclear regulatory situation, which had caused the carrier substantial legal delays in attempting to gain interconnection with the incumbent. As the company’s services were voice-based, interconnection delays resulted in substantially reduced revenues and therefore, unforecasted negative cash flow.

Going forward, we recommended regular and serious discussions with the Ministry to ensure that the regulatory environment had indeed changed to clearly support the concept of local competition. In addition, if the deal were to go through, our team cautioned the following:

• Initially, the client should provide innovative data services. These were not currently available to the client base and did not rely on interconnection with the incumbent; voice services were not to be considered a large portion of the revenue stream until later in the planning period.
• To reduce overhead expenses, the client should broker an arrangement with an international provider whereby that provider would perform the day-to-day operational functions of the company, wherever feasible.
• A financial model and projections should be developed, based upon discussions with the client community, to determine the acceptable costs, risks, and the resultant eventual value of the proposed venture.

We determined however, that the investment required to ensure success, far exceeded the original expectations of the investors; more on the order of $7 million to $10 million, rather than $1 million to $3 million. The revenue projections were not significant enough to reach EBITDA neutral until later in the study period, requiring the additional cash infusion. Our team looked at the possibility of developing strategic relationships that might help reduce costs and capital requirements, but these arrangements, although reducing capital costs, also reduced the attractiveness of the venture.

Benefits to the Client

By providing a clear evaluation of the circumstances, we illustrated for the client that the risk/reward ratio was less desirable than had first been imagined. Our client decided not to move forward with this investment. In our opinion, this saved the expenditure of substantial amounts of time and money.