Filed
by
Citizens Communications Company pursuant to Rule 425
promulgated
under the Securities Act of 1933, as amended,
and
deemed filed pursuant to Rule 14a-12 promulgated
under
the
Securities Act of 1934, as amended.
Subject
Company: Commonwealth Telephone Enterprises, Inc.
Commission
File No.: 0-11053
This
filing relates to the proposed merger transaction between Citizens
Communications Company (“Citizens”) and Commonwealth Telephone Enterprises, Inc.
(“Commonwealth”) pursuant to the terms of an Agreement and Plan of Merger, dated
as of September 17, 2006, among Citizens, Commonwealth and CF Merger Corp.,
a
wholly owned subsidiary of Citizens. On September 18, 2006, Citizens held
a
conference call to discuss the proposed merger transaction. A link to the
webcast of this event was posted on Citizens’ external
website.
The following is a transcript of the conference call.
Forward
Looking Statements
This
material contains forward-looking statements that are made pursuant to the
safe
harbor provisions of The Private Securities Litigation Reform Act of 1995.
These
statements are made on the basis of management's views and assumptions regarding
future events and business performance. Words such as “believe,” “anticipate,”
“expect,” and similar expressions are intended to identify forward-looking
statements. Forward-looking statements (including oral representations) involve
risks and uncertainties that may cause actual results to differ materially
from
any future results, performance or achievements expressed or implied by such
statements. These risks and uncertainties are based on a number of factors,
including, but not limited, to: Citizens’ ability to complete the acquisition of
Commonwealth, to successfully integrate their operations and to realize the
synergies from the acquisition; changes in the number of revenue generating
units; greater than anticipated competition from wireless or wireline carriers;
general and local economic and employment conditions; Citizens’ ability to
effectively manage its operations, costs and capital spending; Citizens’ ability
to successfully introduce new product offerings, including bundled service
packages; Citizens’ ability to sell enhanced services; changes in accounting
policies or practices; changes in regulation in the communications industry;
Citizens’ ability to manage its operating expenses, capital expenditures, pay
dividends and reduce or refinance its debt; adverse changes in the ratings
of
Citizens’ debt securities; bankruptcies in the telecommunications industry; the
effects of technological changes and competition on Citizens’ capital
expenditures and product and service offerings; increased medical, retiree
and
pension expenses; changes in income tax rates and tax laws; Citizens’ ability to
successfully renegotiate expiring union contracts; and general factors,
including changes in economic, business and industry conditions. These and
other
uncertainties related to the respective businesses of Citizens and Commonwealth
are described in greater detail in their respective filings with the Securities
and Exchange Commission, including the reports on Form 10-K and 10-Q. Citizens
and Commonwealth undertake no obligation to publicly update or revise any
forward-looking statement or to make any other forward-looking statements,
whether as a result of new information, future events or otherwise unless
required to do so by securities laws.
Additional
Information and Where to Find It
This
communication is not a substitute for the prospectus/proxy statement Citizens
Communications Company and Commonwealth Telephone Enterprises, Inc. will
file
with the Securities and Exchange Commission. Investors are urged to read
the
prospectus/proxy statement which will contain important information, including
detailed risk factors, when it becomes available. The prospectus/proxy statement
and other documents which will be filed by Citizens Communications Company
and
Commonwealth Telephone Enterprises, Inc. with the Securities and Exchange
Commission will be available free of charge at the SEC's website, www.sec.gov,
or by directing a request when such a filing is made to Citizens Communications
Company, 3 High Ridge Park, Stamford, CT 06905, Attention: Investor Relations;
or to Commonwealth Telephone Enterprises, Inc., 100 CTE Drive, Dallas,
Pennsylvania 18612, Attention: Investor Relations. The final prospectus/proxy
statement will be mailed to shareholders of Commonwealth Telephone Enterprises,
Inc.
This
communication shall not constitute an offer to sell or the solicitation of
an
offer to buy securities, nor shall there be any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful
prior
to registration or qualification under the securities laws of such
jurisdiction.
Citizens
Communications Company and Commonwealth Telephone Enterprises, Inc., and
certain
of their respective directors, executive officers and other members of
management and employees are participants in the solicitation of proxies
in
connection with the proposed transactions. Information about the directors
and
executive officers of Citizens Communications Company is set forth in the
proxy
statement for Citizens Communications Company's 2006 annual meeting of
shareholders. Information about the directors and executive officers of
Commonwealth Telephone Enterprises, Inc. is set forth in the proxy statement
for
Commonwealth Telephone Enterprises, Inc.’s 2006 annual meeting of shareholders.
Investors may obtain additional information regarding the interests of such
participants in the proposed transactions by reading the prospectus/proxy
statement for such proposed transactions when it becomes available.
CONFERENCE
CALL TRANSCRIPT
Citizens
Communications Company
September
18, 2006
9:00
a.m. EST
Operator
Ladies
and gentlemen, thank you for standing by and welcome to the Citizens
Communications Company Conference Call. At this time, all participants have
been
placed in a listen-only mode and the floor will be open for your questions
following the presentation.
Now
I’d like to turn the call to Donald Armour, Senior Vice President, Finance and
Treasurer at Citizens Communications.
Don
Armour - Citizens Communications - VP Finance and
Treasurer
Thank
you, Jessica. Good morning and thank you for joining us to discuss Citizens
Communications acquisition of Commonwealth Telephone Enterprises. Hosting the
call today will be Maggie Wilderotter, our Chairman and Chief Executive Officer,
and Don Shassian, Chief Financial Officer.
2
During
this call, we will be making certain forward-looking statements, particularly
on
matters relating to the acquisition and 2006 guidance. Please review the Safe
Harbor language found in our press release, Investor presentation, and SEC
filings.
I’ll
now turn the call over to Maggie.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Thank
you Don, and good morning everyone. We appreciate you joining us this morning.
All of us at Citizens are very excited about the announcement we made today
to
acquire Commonwealth Telephone Enterprises.
I
thought it would be good for me to start with the strategic rationale as to
why
this deal makes sense for us, so if you’d like to follow along on the webcast,
I’m turning now to slide number 4. If you think about this transaction, first
and foremost it gives us expansion in to rural markets, which is definitely
our
sweet spot with revenue upside opportunities.
In
addition, it’s free cash flow accretive in year 1, and there are substantial
synergies that will be realized. And then last, and certainly not least, it
maintains our strong balance sheet keeping our dividend intact, and also
improving our payout ratio. If you think about the payout ratio guidance we’ve
been giving, we’ve been saying when we become a full taxpayer in 2009, our
payout ratio would be around 75%. With this transaction, that would bring that
number down in 2009 to a little under 70%.
On
page 5, we have listed the acquisition criteria we use as a Company when
evaluating strategic opportunities. First and foremost, our rural profile,
I
think Commonwealth fits that quite well for us. They also have very fragmented
cable competition. There are 20 cable operators that operate throughout their
markets.
It’s
very attractive demographics; we’ve looked at the customer demographics and
business demographics in this market area, and the income growth there is
comparable to national averages.
Very
quality assets; Mike Mahoney and his team have done a great job of keeping
their
infrastructure current with an excellent quality of service.
There
is also upside for organic growth and considerable opportunities that I’m going
to talk a little bit more about, and we can leverage our scale economies into
those markets. We believe that there’ll be at least $30 million in annual
savings through those synergies. The deal, as I mentioned, is free cash flow
accretive in the first year, and of course, it improves our dividend payout
ratio.
Moving
on to slide 6 just gives you a sense for Citizens’ current operations; as you
can see through the end of the second quarter, we operate in 23 states, with
a
little over 2.1 million access lines. We have 350,000 high-speed Internet
customers, 5,434 employees; we cover quite a large territory, and we have access
lines per square mile at 16.
3
We
do operate as 4 regional organizations: the West, Central, East, and then
Rochester also operates as a stand-alone region.
Flipping
to page 7; this gives you a sense of the Pennsylvania operations that
Commonwealth has as well as the couple of markets that we already have in
Pennsylvania. Just to let you know, we do have several markets; the largest
markets for us where we operate are New Holland and Leola, so we are used to
doing business in Pennsylvania, and have done business there for a long
time.
Commonwealth’s
profile, again they have 454,000 access lines, 37,000 high-speed Internet
customers, a little over 1,000 employees, and their primary access lines per
square mile is at 52.
I
did want to mention that in addition to the telephone service that they offer
in
Pennsylvania, they’ve also been operating a CLEC as an edge-out strategy. We
sort of look at this CLEC as really an extension of the ILEC business. It’s a
way for them to actually have contiguous operations for businesses to their
current ILEC footprint, and it also gives them a sense to have businesses in
their footprint have reached into some of the major cities in
Pennsylvania.
But
the CLEC is a very small part of the Commonwealth footprint. It only represents
about 28% of their total revenues, and 16% of their EBITDA. And when you think
about combining Commonwealth with Citizens, those numbers change dramatically
where the CLEC would only be about 4% of combined Company revenue and a little
bit less than 2% of total EBITDA.
If
you move on to the next page, on page 8, I thought I would give you a sense
of
some of the revenue upside that we really see taking place once this transaction
is completed. If you look at the first chart on the left-hand side, were showing
the annualized ILEC revenue per access line. Commonwealth’s today is $852 per
line, and at Citizens we’re operating at about $873. These numbers both exclude
directory so we could give you an apples-to-apples comparison.
If
you go over to the right-hand side, you can see the high-speed Internet
penetration. Commonwealth is today at about 12%; Citizens is at 16%.
Long-distance penetration on the bottom left-hand side, Commonwealth is at
34%
penetration, where Citizens is at 64% penetration.
And
then finally, if you go over to the bottom right-hand side in looking at the
Q2
bundles penetration, and when you think about bundles, we’re really looking at
packages that are really local features and long-distance combined, Commonwealth
is at 8% and Citizens for that same package is at 18%. So basically we see
that
there is a lot of upside the current market of Commonwealth to really drive
penetration in market share of the lead products in that they already have
in
the market.
Moving
on to slide 9, some of the strategies that we have for this property would
be to
re-brand the entire operations to Frontier as soon as possible. We believe
with
single brand, we can increase visibility. We will be providing customer focus
revenue generating solutions throughout the market as well to continue to drive
the product penetration as I just talked about. But we also think that there’s
great efficiency in value in offering bundled services offerings, whether it’s
double plays or triple plays.
4
We
will also introduce customer contracts. Today, Commonwealth does not have any
of
their customers, even on bundles, with contractual commitments. Citizens has
over 35% of our customer base already on either 1- or 2-year contracts, and
we
are aggressively driving that number up higher. And we believe that by putting
contracts in place with some of the great offers that we have for customers
we’ll be able to reduce turn and enhance loyalty.
We
will also be introducing some of the enhanced value-added products that we
have
throughout Citizens’ footprint today, including our Ask.com co-branded portal,
our wireless modem for every high-speed Internet installation we do today,
we
offer a wireless modem to the customer, and the customer actually pays us a
monthly fee somewhere between $3 and $5, depending on the bundled offer that
they take.
We
will be introducing ESPN 360 to add more value to our high-speed Internet
product, just like we have throughout Citizens, and last but certainly not
least
our Frontier secure connection, which is our anti-spyware, anti-virus software
package that is also free to our bundled service customers with high-speed
Internet.
We
believe that the Pennsylvania properties for Commonwealth, once they’re part of
Citizens will also enjoy what we call our National Campaign Air Cover, where
we’ll be putting campaigns and promotions in place nationwide, and they’ll have
the opportunity to also take advantage of that.
Last
but not least, we will continue to support the CLEC edge-up strategy; we will
integrate marketing in order to get economies of scale there. We will continue
to use the direct sales team that’s currently in place in Commonwealth, but we
will also combine the management and the operations of that CLEC with the ILEC
again for economies of scale.
With
that, I’d like to turn this over to Don Shassian and to take you through those
financial parts of the deal.
Don
Shassian - Citizens Communications - CFO
Thank
you Maggie, and good morning everyone. On slide 10, let me walk through the
highlights in the transaction. A value each Commonwealth shareholder will
receive for each share, a unit comprised of cash and stock at our closing price
on Friday would equate to $41.72. They’ll be receiving $31.31 in cash and
shares, a fixed exchange ratio .768. As of Friday, the value for that share
is
$10.41. Total transaction value of $1.16 billion; I will walk you through how
we
get to that calculation in a few minutes.
The
price represents a premium to Commonwealth stock as of Friday of about 8% and
about 17% when compared to where their price was prior to their announcement
of
hiring an advisor to pursue strategic opportunities. The multiple is 6.76 times
EBITDA; I will again walk you through that in a few minutes as well, without
synergies and including synergies, it’s about 5.75 times. Their shareholders
will own about 6% of the combined enterprise. The transaction is taxable. Our
financing, this transaction does not have any financing contingency. We have
a
bridge facility from Citigroup for $990 million. That gives us, the seller,
confidence in our ability to finance. The bridge also gives us flexibility
on
when we go to the public debt markets.
5
Approvals;
Commonwealth needs to go to their shareholders, which we hope will be in
December/January timeframe. We need standard approvals from the Federal
Communications Commission, HSR, and the Pennsylvania State PUC. The last one,
obviously, is a longer timeframe, and we expect closing to be in
mid-2007.
On
slide 11, this simply lays out the sources and uses assuming the purchase price
at $41.72, as I mentioned, and there is common stock outstanding that needs
to
be exchanged for the cash in stock. There is a cash-out of the employee shares.
The do have a convertible bond, which we will be able to convert and we expect
the holders to convert in cash and stock. There is a small amount of debt they
have with one bank, co-bank, and then we have some year-1 integration costs,
transaction fees, some other items. And we’ll be financing that with the
issuance of equity, at the bottom, about 20.5 million shares; 16 million of
those are on the common, and 4.5 million are on the convert. The debt issuance
of $990 million, and there is some after-tax patronage dividends from the small
bank loan they have to cover the total sources, and there’s some cash on the
balance sheet that Commonwealth has that we’re utilizing as well.
If
you go to page 12, as Maggie mentioned this is a strategic acquisition; we
view
it as an extension acquisition.
This
slide shows on the left-hand side the proportion of Commonwealth lines to ours.
On a pro forma basis, we’ll have lines about 2.6 million; and Commonwealth lines
will represent 17%. On the right-hand side, using these last 12-months’ revenue,
pro forma basis about $2.4 billion in revenue and Commonwealth will represent
approximately 14%.
Going
to slide 13, the synergies; there are 3 main components on this slide. The
top
half is we’re looking at annual cash synergies of $30 million; identifying
corporate overhead and support functions, there’s a number of third-party costs.
These are all in the duplication effort when you look at combining these 2
enterprises.
There’s
also the opportunity to leverage our common systems that we have here that
are
leverageable in IT; software license, billing, a number of different areas
in
our operation of third-party processing fees. The $30 million we feel we’ll be
able to achieve about a third, a third, a third over 3 years, or potentially
earlier. We feel very comfortable that based on our detailed due diligence
that
we performed by our personnel, who will be responsible for the implementation,
that these cash savings are real, and they will be achieved.
The
second item on this page is a non-cash compensation cost. It’s important to
point out in Commonwealth’s reported earnings, they have non-cash compensation
costs in EBITDA of about $10 million, identifying the expense on the issuance
of
restricted stock, stock option expense as well as some amortization of expense
from the special dividend in 2005. That is an item that you’ll see on top of the
30; you’ll see as we go forward as to how we analyze their business; I’ll cover
that in a couple of slides, but it’s an important item for you to
notice.
6
Last
on the page, the 1-time integration cost we’re estimating at $35 million
primarily in severance; IT conversion costs this represents approximately a
1-year payback and again we feel very comfortable in our ability to achieve
the
savings and the implementation costs.
On
slide 14, this is a snapshot and it is, if I could use the term, an add-up
between the two; it is before synergies. The left-hand side are our numbers
as
of June 30; the middle column is Commonwealth as of June 30; and simply add
them
up if you would to get the pro forma without synergies. You can see the access
lines; the last 12 months of revenue, the EBITDA, our CapEx guidance and theirs,
our free cash flow guidance and theirs. And the important aspect on the free
cash flow is accretive obviously with dollar amounts, but if you look at the
shareholders, the number of shares outstanding, it is also free cash flow
accretive per share in year 1 without synergies. Putting the synergies on top
makes it even stronger for us.
Our
implied dividend ratio without synergies improves; obviously, with synergies
improves even more so, and we’re taking on the additional debt, you can see that
our leverage goes from 3.2 only up slightly to 3.5, which still puts our balance
sheet in a position that we feel very comfortable with as we’ve communicated in
the past. We like having a solid balance sheet and care for all of our
stakeholders. And we think that’s quite reasonable.
We
have contacted and have had discussions with the rating agencies last night.
They are obviously evaluating our information that we have sent them, and we
look forward to having continuing discussions with them.
On
page 15, this is simply to go back to some of the comments earlier; I want
to
walk you through how we come up with the calculations. On $1.158 billion, at
the
top lays out the equity value and the convertible and other debt, and you’ll
those numbers tied to the earlier part of this presentation. How we get to
the
6.76 times without synergies at the bottom is taking management’s guidance on
EBITDA of 157, adding back the non-cash compensation expense of 9.8, and then
also adding in something that they have recorded below the line of EBITDA.
Their
directory operation is a joint venture; they account for it on an equity basis
of income, so the equity income is recorded below EBITDA. There are some other
fees in connection with directories operation also below EBITDA, all cash;
we’ve
reflected those above because just for a comparable basis, but it is cash.
So
we’re putting them above to get to an adjusted number of 171, and then if you
put the cash synergies on top to get you 201, and that’s the basis for the
calculation we used to come to the 6.76 calculation.
Slide
16; well, just a couple of other pieces of financial information wanted to
cover. Our guidance for this year, I’m simply confirming our pre-cash flow
guidance of $500 $525 million is still intact. Looking at that, our capital
expenditures also 270 to 280; we have the announced $300 million share
repurchase plan that we had been pursuing. We had $135 million of that completed
as of June 30. As a result of performing our due diligence on this transaction
and now announcing it, we are prohibited from repurchasing our shares until
we
close. So we are on a hiatus on a share repurchase program; however, we will
be
going back to complete that once this transaction is completed so you would
anticipate seeing that our cash balances will be increasing over the next
several months as we continue to hold that and we’ll execute at the final
closing.
7
Lastly,
our $150 debt reduction plan that we had authorized, we are going to look at
that in connection with our transaction financing and we will continue to pursue
that in that mix.
With
that, let me pass back to Maggie.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Thanks
Don; so basically, on slide 18, which is just a summary I wanted to take this
back up a level to an overall Citizens Communications focus. We continue to
be
in a strong competitive position, and we do believe that this investment in
Commonwealth strengthens that we are customer focused; we have very high
satisfaction in our markets and have said so today, and we have strong product
penetrations that we think we can leverage into these markets.
Our
management team delivers results. We are consistent in our quarterly
performance, and we also have a lot of depth in our bench strength here at
Citizens. I’ll give you a good example; we will be managing this business by
promoting one of our Vice Presidents, Ken Arndt, to move down to Pennsylvania
to
run the combined Citizens and Commonwealth properties. Ken is a veteran with
Citizens; actually he used to work for Commonwealth many years ago and grew
up
in Pennsylvania, and he has run our Tennessee properties, and is currently
running all of sales and marketing for our East Region. So it’s great to have
that type of capability in order to manage this property in the long-run
internally. We will also have John Lass, who is our Senior VP and GM of the
Central Region have overall responsibility for Pennsylvania in addition to
the
other states that he manages.
We’ve
demonstrated our ability to deliver and sell products and services; we have
been
consistent in 2005 with product revenue growth year-over-year; also the same
thing through the second quarter of this year, and we have an ability to
integrate new properties. We’ve done many acquisitions in the past, and we
actually have the same integration leadership and lead teams here in the
Company, so we feel very comfortable that the integration of Commonwealth into
Citizens will go smoothly, and we will get the expected synergies. Jake Casey,
who’s our Executive Vice President, will be leading the integration team; Jake
has led many acquisition integrations for Citizens in the past.
Last,
but not least, we will focus on shareholder value, as we’ve always done. The
free cash flow accretion, even without synergies, was important to know that
we
were creating value immediately in this transaction. We will maintain and
improve our payout ratio through this transaction. We are also not leveraging
up
in order to do that, so we’re staying at a moderate leverage environment, so we
have a strong balance sheet that also provides us with financial flexibility
in
the long run, and we believe through the bench strength and the capabilities
that we have as a Company to perform that we also have the operational acumen
to
handle this transaction, and to integrate it into our business.
So
with that, I’m going to turn this back over for questions and
answers.
8
QUESTION
AND ANSWER
Operator
[OPERATOR
INSTRUCTIONS].
Simon
Flannery, Morgan Stanley.
Simon
Flannery - Morgan Stanley - Analyst
Okay,
thank you, good morning; I wonder Maggie if you could just give us a little
bit
of the background to the deal. You’ve obviously been, for a couple of years now,
following the return of cash to shareholders through the dividend and the
buyback. What happened here? Did Commonwealth approach you? Had you been looking
at a number of acquisitions and this came up? If you could help us with the
background?
And
also, how you thought about giving cash versus giving stock. What is the various
puts and takes there?
And
on the leverage Don, 3½ is -- have you sort of communicated that that’s where
it’s going to be over time, or would you like to get it back down to the low
threes?
Thanks
a lot.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Hi
Simon, thanks for your questions.
With
regard to the overall rationale, I think as we’ve talked about over the last
couple of years, we’ve really prioritized our business to focus on the markets
where we do business and to deliver operational execution in those
markets.
But
we’ve also said that we would be situational and opportunistic if we came across
an acquisition opportunity that would fit our criteria and our profile for
an
acquisition, and we have a pretty high standard. In looking at Commonwealth,
when Commonwealth decided that they wanted to look at some alternatives, we
felt
that they were the type of company that would be very strategic for us to look
at seriously. As I mentioned earlier, I think that Mike Mahoney and his team
have done a great job of running that business and growing that business over
the years. They have strong relationships in their communities; they have a
great reputation; they deliver good service. And we felt that it was a sweet
spot for us to really take a look at it.
We
also felt, from a value perspective because we could leverage our infrastructure
and our scale, that we would be able to get some substantial synergies out
of
the combination. So I think that overall was really the rationale. I think
we
would continue to always be opportunistic in looking at what happens in the
industry and does it make sense for our Company and our
shareholders.
9
The
combination of cash and stock I think was really a back and forth based upon
what was appropriate for us from a balance sheet perspective as well as what
was
appropriate for their shareholders. We consider our stock very valuable with
a
dollar dividend, so we felt that that provides upside for their shareholders
to
have some ownership in the Company, but we also had the issue of what’s the
right combination, and this is what worked for them and worked for us.
Don?
Don
Shassian - Citizens Communications - CFO
I’d
also just add that Maggie, that our competitive bidding situation as we
understood it, and the Commonwealth shareholders’ management I believe wanted to
make sure there was cash certainty for their shareholders, but we had to balance
that competitive dynamics with our view of what’s important for all of our
stakeholders, and we felt that the balance of 75/25 was appropriate. We were
not
willing to leverage up any further than that. We felt that was a good position
to be in.
In
terms of our leverage Simon, 3.5 we would like to be able to take it down a
little bit. We think basic operations will help us do that, and as we have
some
maturities that are coming up over the next couple of years, we think we’ll be
able to get it down a little bit lower and to get us back to where
we’re 3.2, 3.3 over the next year or so. We feel that after we close,
we’ll have those opportunities.
Operator
Frank
Louthan, Raymond James.
Frank
Louthan - Raymond James - Analyst
Good
morning; just quickly on the regulations with Commonwealth’s NEC-average casual
regulation, give us an idea of how that will be impacted if at all with the
transaction and how you’ll operate that.
And
can you give us any idea of where most of the synergies will come from, some
of
the other business on their income statement a little bit of a drag; do you
think you’ll be getting more of the synergies from that area or more of it comes
from CT or CTSI? If you can give us a little bit more color on that, that would
be great. Thanks.
Don
Shassian - Citizens Communications - CFO
Thanks
Frank, good morning; we don’t expect any change in their regulatory framework.
They’re an average-scheduled company; it will not change, and we don’t really
see any impact whatsoever. We’ll be operating this as a separate stand-alone
legal entity, and we will respect the rules and regulations within Pennsylvania
as well as what they’re filing with the FCC. So we do not see any negative
impact. We’re positive for that matter; I mean we just think they’ll continue to
operate as is on the regulatory framework.
10
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Hi
Frank; it’s Maggie. With regard to the synergies that you brought up, I do think
that in addition to the elimination of corporate overhead and the fact that
Commonwealth operates as a public company today, there’s a number of synergies
that we can get just overall from a corporation perspective.
But
we also believe that there are opportunities with some of the other business
entities that they have in terms of us getting some fairly major synergies
out
of those entities as well that you pointed out. So those are in addition to
the
system synergies that we really do believe can drive through automation a number
of other synergies that we could realize that is not headcount
related.
Frank
Louthan - Raymond James - Analyst
Okay
great; and are you able to give us any update on where you were with the buyback
quarter-to-date? I know what you said as of June 30; but is there any way you
could give us an update? Were you repurchasing shares up until you got involved
with the transaction?
Don
Shassian - Citizens Communications - CFO
Frank,
I’m not able to give you an update on that at this point in time, but we were
really very, very quiet during the quarter. As I mentioned in our earnings
call
for Q2 we had slowed down our repurchase activity in Q2 because we wanted to
make sure that the cash was in hand from Electric Light Wave, which we received
at the end of July. So I mean we were very, very light in the third
quarter.
Frank
Louthan - Raymond James - Analyst
Would
you consider shifting any of your cash return to shareholders more onto the
debt
side over the next 9 months? Or do you think, you said you’ll continue to
buyback program once it’s finished, but is there any, what criteria might change
you to shift more to paying down debt and less on completing the
buyback?
Don
Shassian - Citizens Communications - CFO
I
don’t think we have any restrictions; we’ve got a lot of flexibility. We already
have right now on our balance sheet in excess of $400 million, and that will
continue to grow as our operation generates cash, and we’ll get back into the
stock repurchase program as soon as we can.
The
debt repayment, we will just look at as part of our financing that we’re going
to do in the bond markets. As you know we do have a debt coming due in 2008.
We
are looking at ways of maybe refinancing, pushing some of that out, and all
of
that comes into the mix of how we evaluate the financing of this transaction
and
just continue to maintain and build upon a very strong balance
sheet.
11
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Frank,
I’ll just add that I believe that the announcements that we’ve made on
retirement, we’re going to stay the course on that and in conjunction with this
transaction. But we are, we still want to get back into the market share
repurchases. It’s a priority for us; it’s a priority for the Board, and you will
see us doing that once this transaction closes and we can legally get back
in
and start buying back stock.
Frank
Louthan - Raymond James - Analyst
Great,
that’s very helpful; thanks.
Operator
Chris
King, Stifel Nicolaus.
Chris
King - Stifel Nicolaus - Analyst
Good
morning, and congratulations; one quick question I had was with respect to
your
NOL carry-forward balance and how this deal may impact that, if you’ve had a
chance to take a look at that yet. I know you were to begin some cash taxes
as
early as next year, and obviously become a full tax payer by 2009. Does this
deal create any NOL going into the future? Obviously, Commonwealth was full-cash
tax payer.
Don
Shassian - Citizens Communications - CFO
Good
question; it really does not change. We have federal NOLs; we have state NOLs;
we have some A&T tax credit carry forwards. There is no significant real
change that is occurring that both our federal NOLs will be utilized in ‘06 and
‘07 assuming a mid-2007 closing. Our tax benefits, if you would, the latter
part
of ‘07 and ‘08 are more on the safe side than A&T tax credit carry forwards,
so they really don’t impact. So there’s no additional NOLs. We see the forecast
staying as is. No real acceleration and no real benefits.
Operator
Tom
Seitz, Lehman Brothers.
Tom
Seitz - Lehman Brothers - Analyst
Thanks
for taking the question; how do you view the $30 million cash synergy number
that you’re putting out there? Do you view that as conservative, aggressive,
just right? I mean I ask because it seems like $30 million on a business that
generates $155 million in EBITDA has already 65% EBITDA margins in the ILEC
and
has second line penetration north of 25% seems kind of aggressive, and I just
wondered if you could kind of give us your, how comfortable you feel in that
number.
12
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Tom,
I feel very comfortable in that number. I think there might be even more upside
as we get into this. We sort of look at this as kind of two-thirds wage-related
and one-third systems related. And we’ve done some pretty good due diligence on
the overall company itself, and we feel very comfortable that this number is
achievable.
Don
Shassian - Citizens Communications - CFO
And
if I could add on to give you a little bit of context Tom, our due diligence
was
performed by not a small team within Citizens. We had all of our functional
heads and their departments involved in analyzing information having discussions
with Commonwealth in developing plans. So essentially right now, we almost
have,
we have an operating plan in place, and our functional heads have signed off
on
what can be achieved, and we’re going to be held accountable for those, in
implementing those. We feel very comfortable that this is not a stretch by
any
stretch of the imagination. We feel very good that it’s going to
happen.
Tom
Seitz - Lehman Brothers - Analyst
Okay
great, thank you.
Operator
Jason
Armstrong, Goldman Sachs.
Jason
Armstrong - Goldman Sachs - Analyst
Great,
thanks, good morning and congratulations. I’d like to ask one more regulatory
question; maybe a bit broader and not tied specifically to the transaction.
CenturyTel, another company that was viewed as a likely bidder, has recently
talked about being hesitant to do any type of deal right now just because of
the
regulatory framework and sort of the uncertainty surrounding USF and
Inter-carrier compensation reform. I was just wondering if you guys can sort
of
go through what makes you comfortable with this risk, and how did you get there
on the deal, especially given the ratio of cash equity that’s involved here?
Thanks.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Well
I’ll start, and Don you can jump in too on this. We look at the regulatory
environment as an environment that affects not just what we would do with
acquisitions Jason, as you know, but the overall company. We do know that
there’s a lot going on in Washington with USF and Inter-carrier. We don’t see,
actually foresee any changes that would be negative for us happening in the
next
several years. We believe that those areas have lots of opportunity to fix,
and
we think that any fix would be positive. So we didn’t really feel that the
uncertainty around some of these national issues was going to be an issue for
us.
The
real regulatory issue for us is really a state PUC approval process in
Pennsylvania. The good news is Commonwealth has a relationship with the PUC;
they’ve operated in this state for a long time with a good reputation. We have
as well, and we have strong relationships and have done the same, so we don’t
really look at this as a big regulatory risk for the Company.
13
Don
Shassian - Citizens Communications - CFO
Jason,
let me also just mention the, on the federal side Commonwealth does not have
a
tremendous amount of exposure as we see it. They are not a recipient of the
federal high-cost fund, so that exposure does not exist. When we look at all
the
other elements that come through the federal side, and I think for Commonwealth,
the Interstate Common Loop is probably a piece where they get recipient on;
the
dollar amount is not that significant. I think the total dollar amount you’re
talking about is $16 million to $20 million annually, but the major one,
High-Cost Loop, they’re not exposed to.
So
we didn’t see the exposure that you mentioned others see on this. We are not as
concerned, and we’re very bullish that this industry makes a lot of sense, and
are very focused on executing on the revenue line and working with customers
and
delivering the best service possible.
Jason
Armstrong - Goldman Sachs - Analyst
Okay
great, thanks.
Operator
Phil
Oleson, UBS .
Phil
Oleson - UBS - Analyst
Thanks;
I have a couple of questions, actually 2 quick ones. Can you maybe give just
a
quick summary of the bridge that you obtained, specifically the kind of maturity
on it, whether or not it is a secured or unsecured facility? And then secondly
with respect to the ultimate financing for the transaction, how much of the
$400
plus million of cash-in-hand that you have currently would you intend to use
as
a purchase, and as a result how much of term do you think you’ll need to issue
as part of the deal? Thanks.
Don
Shassian - Citizens Communications - CFO
Phil,
the $990 million bridge facility from Citigroup is unsecured; it is
approximately 12 months from the day of closing, and we think it gives us a
great deal of flexibility as to the timing of when we want to go into the public
markets.
The
$990 million is a max number; we have as I mentioned earlier and you just
alluded to, we have a very significant amount of cash on the balance sheet.
It
is premature at this juncture to specifically lay out what we’ll be doing at
closing as we look at our business and the financing of that debt over the,
at
closing. And we’ll obviously be considering the cash that we have on hand. But
the $990 is a max number, so it could be less, but it’s difficult for me to give
guidance at this point in time as we analyze what our alternatives may be.
Does
that help?
14
Phil
Oleson - UBS - Analyst
I
guess just as a follow up; I think in the past you’ve indicated that the run
rate cash balances you’d be comfortable in the $50 million to $75 million range.
Has anything happened that would have caused you to have changed that
target?
Don
Shassian - Citizens Communications - CFO
No,
I’m not sure about the $50 to $75; I’ve always said that we’d want to be north
of $100; ballpark of about $125 million is what we feel comfortable with. That
is more of an appropriate level of cash for us on a recurring basis; $50 to
$75
is a little bit low from my standpoint.
Phil
Oleson - UBS - Analyst
That’s
great; thank you.
Operator
Anna
Goshko, Banc of America Securities.
Anna
Goshko - Banc of America Securities - Analyst
Hi,
thanks very much; just a quick follow up on the prior debt question. On the
$150
million of debt that was and still is to be repurchased with I think largely
the
proceeds from the ELI sale, is that something like your share repurchase that
is
now on hold until the whole transaction closes, or are you still free to go
into
the market and repurchase debt at this point? And if you are free, is that
something that you would pursue?
Don
Shassian - Citizens Communications - CFO
Anna
we are free to pursue the debt piece, but we are really trying to analyze that.
What we are planning to do in conjunction with the financings of this
transactions, and also with our ‘08s that are coming up in the next year beyond,
so we want to look at a total view of our debt portfolio and not look at it
in
isolation. So we answer yes, we are free to do, but we are looking at it in
totality to make sure we do things that are smart for our structure and how
we
balance things out, and schedule our maturities over the next many
years.
Anna
Goshko - Banc of America Securities - Analyst
Okay,
and then a second follow up on the question; I think you said that your bridge
loan is unsecured. If you were to put term loan permit financing, do you know
if
that would be secured, or would that also be unsecured?
Don
Shassian - Citizens Communications - CFO
Unsecured.
15
Anna
Goshko - Banc of America Securities - Analyst
Okay
great, thank you.
Operator
Jonathan
Chaplin, JP Morgan.
Jonathan
Chaplin - JPMorgan - Analyst
Good
morning, thanks for taking the question, and congratulations on the transaction.
A couple of housekeeping questions first. I missed the beginning of the call;
you probably said when you expect the deal to close, but I missed
that.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
It’s
mid-2007.
Jonathan
Chaplin - JPMorgan - Analyst
So
the synergies of a-third, a-third, a-third is that on a fully annualized basis,
or do you expect to get $10 million of synergies in 2007?
Don
Shassian - Citizens Communications - CFO
It’s
really saying a-third, a-third, a-third Jonathan; it all depends on the timing
of closing and also our ability to work with Commonwealth at the appropriate
time before closing, and what we’re able to really get moving on on the system
side. And I just think from a guidance perspective at this juncture, until
all
of those t’s are crossed and i’s are dotted, one-third, one-third is an
appropriate amount in the first full year and the next full year and the next
full year.
Jonathan
Chaplin - JPMorgan - Analyst
Okay,
so assuming you close in mid-’07, just so I understand the guidance correctly,
what you’re saying is you get $5 million in synergies in 2007.
Don
Shassian - Citizens Communications - CFO
It
certainly could be more than that, but it really depends on the success of
the
transition activities.
Jonathan
Chaplin - JPMorgan - Analyst
Okay,
and then touching quickly on the synergies; I know this has come up a couple
of
times already; I’m sorry to harp on about it, but the, if I look at the
synergies as a percentage of the target’s SG&A, it seems to be around 50%,
which is a lot higher than we’ve seen for transaction, for ILEC transactions in
the past. I’m just wondering if there is anything unusual about this particular
transaction or the Commonwealth cost structure which allows you to get a greater
percentage of synergies at the center of SG&A.
16
Don
Shassian - Citizens Communications - CFO
As
I’ve looked at them Jonathan I don’t see what we’re coming up with as being
disproportionate than the synergies that have been announced on other
transactions. We may be using different calculations, but as we’ve done it, and
I can chat offline, we feel it’s very comfortable. There is nothing that’s
unusual here. In this industry, there are 3 buckets of costs; there are field
costs, which is the people that are out in the field delivering service everyday
to customers in terms of installation and dealing with troubles in construction;
and then there are common costs across the infrastructure that are you have
IT
systems, you have various call centers, repair centers, network centers, and
many of those costs you can look at and potentially find ways of leveraging
some
of your own capabilities, different technologies, etc.
And
then the third bucket is what I call corporate governance, a cost which in
a
transaction like this also is very heavily weighted where you should be able
to
look at those as purely duplications.
So
we actually do not see that the number that we’re quoting here as
disproportionate at all, and the bankers we’ve utilized to help us look at
analyses of all the other transactions we think it s very much in line with
other transactions.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
I
would also add that if you think about our business today, we have over 40%
of
our costs today are really fixed costs that can be leveraged across multiple
markets. And about 60% of the costs are variable and a lot of them have to
do
with the field level. And as Don said, if you just really look at how
Commonwealth is set up today, there are a number of costs that are very easy
for
us to take out based upon the fixed cost structure we already have in
place.
We
have done a fairly deep analysis from an operating plan on how we would run
these markets, how we would manage them and how we would integrate them. So
I
think that we do have the capability and we do have the path to get to the
$30
million.
Jonathan
Chaplin - JPMorgan - Analyst
Okay,
and just in terms of understanding the opportunity for the reduction in field
costs, where are your closest existing properties to Commonwealth’s
properties?
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
We
don’t really see reductions in field costs. We think that our properties are
close, but they are not contiguous and we do believe that the field
infrastructure that Commonwealth has will remain intact, including the people
that are focused on taking great care of customers in those markets. Our primary
focus has really been in the other 2 buckets; the corporate governance bucket
and the system bucket.
17
Don
Shassian - Citizens Communications - CFO
And
their field force statistics, the service quality is very, very good, their
productivity is very good, they run a very good operation. There are very good
people there and delivering very, very good service, and we’re very comfortable
with that. So it is the other 2 buckets.
Jonathan
Chaplin - JPMorgan - Analyst
Okay,
and then you guys have recently sold off your SELIG business. Is there an
opportunity for you to monetize CTSI as well?
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Well,
I think we will take a look at all the options with regard to the SELIG, but
this is a very different SELIG than the SELIG we just sold. First of all,
Electric Light Wave was really not overlapping in any of the markets where
we
did business except for 1 market in California. So it wasn’t an edge-out
strategy. If you think about Commonwealth, they really used the SELIG as a
vehicle to service businesses in a greater service area. Because their footprint
is so rural, they have cities like Scranton or Wilksbury that are outside their
territory but it’s the common area for their customer base. So they use the
vehicle of a SELIG to really extend their business reach.
It’s
not very different than what we’ve actually done from a vehicle perspective in
Rochester where we actually have a SELIG entity as well, but we run it as part
of the ILEG operation, so we would probably see doing exactly the same thing
in
the Commonwealth markets that we can combine operations to get synergies and
also continue to offer business products that extend out of the reach but
contiguous to the markets where they do business.
Jonathan
Chaplin - JPMorgan - Analyst
Got
it; and then finally if I may where can I get a copy of these slides? The only
ones I’ve been able to find so far are attached to the webcast and we can’t
print those or scroll through them.
Don
Shassian - Citizens Communications - CFO
They’re
on our website; that probably is the best way to get them Jonathan. I believe
they should be on there, and that should be able to be printed down off of
that.
And if there is a problem, give us a yell. But my understanding is, people
in
the room are giving me the high sign that they are on our website. Jonathan,
it’ll be on after this call, it’ll be on after the call.
Operator
Thomas
Egan, JP Morgan.
Thomas
Egan - JP Morgan - Analyst
Oh
hi, thanks if you can stand one more bond question. Just to be clear, I wanted
to make sure the bridge facility, that will be at the parent company, Citizens
Communications?
18
Don
Shassian - Citizens Communications - CFO
It
will not be at the subsidiary level if that’s your question.
Thomas
Egan - JP Morgan - Analyst
Yes
it is.
Don
Shassian - Citizens Communications - CFO
No,
either the parent or some other parent affiliate, but it will not be down at
the
operating level. We do not see the debt as being an issue that will be put
forth
in the regulatory environment. It’ll be at the top level.
Thomas
Egan - JP Morgan - Analyst
Okay,
and then one other thing; you mentioned that you thought that the Commonwealth
Telephone owners of the converts would convert, and it looks like they probably
would. Do you have a sense of what the cash component of that is? I know there’s
a dividend adjustment. I could do the math and I get about $165 million for
straight-up convert, but I know this is dividend adjustment. Could you give
us
an idea what the total cash component of that would be in your
estimation?
Don
Shassian - Citizens Communications - CFO
There’s
2 components to that; the new convert is about $65 million in cash.
Thomas
Egan - JP Morgan - Analyst
Right.
Don
Shassian - Citizens Communications - CFO
And
let me see if I can pull up the other component of this. I’m not sure if I’ve
got it handy right in front of me.
Thomas
Egan - JP Morgan - Analyst
I
can check back after the call.
Don
Shassian - Citizens Communications - CFO
You
can check it, but we are expecting, the new component is about $65 million,
and
the balance then has the combination.
Thomas
Egan - JP Morgan - Analyst
All
right.
19
Don
Shassian - Citizens Communications - CFO
I’ll
have Don Armour give you a call afterwards.
Operator
Dean
Asofsky, Credit Suisse.
Dean
Asofsky - Credit Suisse - Analyst
Good
morning, thanks; just a couple of quick questions. On the Commonwealth side,
will they be continuing to pay their dividend until you close?
Don
Shassian - Citizens Communications - CFO
Yes,
this is business as usual for them. Obviously, you can ask them, but they’re
planning they would operate this business, will be operating this business
as a
separate stand-alone business as they are a public company, and they’ll continue
running that business as best they can; they’re dealing with all their stake
holders as they have been, in a very professional, upstanding way.
Dean
Asofsky - Credit Suisse - Analyst
Okay;
is there a breakup fee in this deal?
Don
Shassian - Citizens Communications - CFO
There
is, $37 million.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Three
percent.
Dean
Asofsky - Credit Suisse - Analyst
All
right, that’s it for now; thank you very much.
Operator
Mordy
Schnur, BNP Paribas
Mordy
Schnur - BNP Paribas - Analyst
Hi,
just a follow-up question on the CTCO outstanding convert; technically what
exactly are CTCO holders of the convert will be forced to convert out, or are
you just assuming that they’re going to convert out because of where the strike
price is?
20
Don
Shassian - Citizens Communications - CFO
It
is the latter; we assume that the strike price will make it very attractive
for
them to do so. If they don’t, we’ll have to put them into our own convertible,
but we would expect them to convert. It will be, I think, economically
attractive and smart for them to do.
Mordy
Schnur - BNP Paribas - Analyst
And
what portion of the convert holders will be treated the same way as the
shareholders in that you’re getting a fixed amount of cash and a fixed amount of
the stock ratio?
Don
Shassian - Citizens Communications - CFO
Both,
the same transaction, same economics.
Don
Armour - Citizens Communications - VP Finance and
Treasurer
We’ll
take one more question please.
Operator
Dimitri
Triantafyllides, Wachovia.
Dimitri
Triantafyllides - Wachovia - Analyst
Thank
you, good morning; either on the bridge and also on the transaction, is there
a
material adverse clause?
Don
Shassian - Citizens Communications - CFO
Yes.
Dimitri
Triantafyllides - Wachovia - Analyst
Okay.
Don
Shassian - Citizens Communications - CFO
And
they are the same. They are linked; the material adverse change clause in the
merger agreement is exactly the same as it exists in the financing commitment
bridge facility we have with Citigroup.
Dimitri
Triantafyllides - Wachovia - Analyst
Okay
fantastic; and then assuming are there any price adjustments if access line
trends on Commonwealth were to deteriorate further than recent trends, is there
room for a price adjustment on the transaction and let it still go
through?
21
Don
Shassian - Citizens Communications - CFO
Material
adverse change.
Dimitri
Triantafyllides - Wachovia - Analyst
Oh
and that is it?
Don
Shassian - Citizens Communications - CFO
Yes
sir.
Dimitri
Triantafyllides - Wachovia - Analyst
And
on the directories, or the JV for Commonwealth, who is the JV partner
there?
Don
Shassian - Citizens Communications - CFO
Oh
boy, why am I drawing a blank -- I apologize for this. I think it’s Donnelly.
I’m saying that with a little bit of hesitation; I’m drawing a blank. I
apologize.
Dimitri
Triantafyllides - Wachovia - Analyst
No
problem.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
But
it’s a different partnership than we have. It also has a contract where we can
make a change based upon change of control. So one of the things we would do
is
analyze the directory business to look at synergies with our directories as
of
today.
Dimitri
Triantafyllides - Wachovia - Analyst
Okay
great; Yes, that was - I was getting to that. Ok, fantastic. Well,
thank you very much. Appreciate it.
Operator
There
appear to be no further questions at this time. I will turn the floor over
to
Maggie Wilderotter for closing remarks.
Maggie
Wilderotter - Citizens Communications - Chairman, CEO
Well
again, I want to thank you all for spending the time with us this morning to
go
through this announcement. As I said in the beginning, we are very excited
about
this opportunity; we see it as very strategic for the Company; it’s an extension
of our basic business; it does provide for great financial flexibility for
us in
the long run. And it also allows us to take our sales and marketing approach
and
customer focus and extend that into the Commonwealth market.
22
I
also want to again mention that we believe that the Commonwealth leadership
team
has done a great job with these markets in managing them, and we will pick
up on
that momentum and take it to the next step.
So
thanks again for joining us this morning.
Operator
This
concludes today’s Citizens Communications Conference Call. You may now
disconnect.
23
Acquisition
of Commonwealth Telephone Enterprises
September
2006
Safe
Harbor Statement FORWARD
LOOKING STATEMENTSThis
presentation contains forward-looking statements that are made pursuant to
the
safe harbor provisions of The Private Securities Litigation Reform Act of
1995.
These statements are made on the basis of management’s views and assumptions
regarding future events and business performance. Words such as “believe”,
“anticipate”, “expect” and similar expressions are intended to identify
forward-looking statements. Forward-looking statements (including oral
representations) involve risks and uncertainties that may cause actual results
to differ materially from any future results, performance or achievements
expressed or implied by such statements. These risks and uncertainties are
based
on a number of factors, including but not limited to: our ability to complete
the acquisition of Commonwealth, to successfully integrate their operations
and
to realize the synergies from the acquisition; changes in the number of our
revenue generating units, which consists of access lines plus high-speed
internet subscribers; the effects of competition from wireless, other wireline
carriers (through voice over internet protocol (VOIP) or otherwise), high
speed
cable modems and cable telephony; the effects of greater than anticipated
competition requiring new pricing, marketing strategies or new product offerings
and the risk that we will not respond on a timely or profitable basis; the
effects of general and local economic and employment conditions on our revenues;
our ability to effectively manage our operations, costs, capital spending,
regulatory compliance and service quality; our ability to successfully introduce
new product offerings, including our ability to offer bundled service packages
on terms that are both profitable to us and attractive to our customers;
our
ability to sell enhanced and data services in order to offset ongoing declines
in revenue from local services, switched access services and subsidies; changes
in accounting policies or practices adopted voluntarily or as required by
generally accepted accounting principles or regulators; the effects of changes
in regulation in the communications industry as a result of federal and state
legislation and regulation, including potential changes in access charges
and
subsidy payments, and regulatory network upgrade and reliability requirements;
our ability to comply with federal and state regulation (including state
rate of
return limitations on our earnings) and our ability to successfully renegotiate
state regulatory plans as they expire or come up for renewal from time to
time;
our ability to manage our operating expenses, capital expenditures, pay
dividends and reduce or refinance our debt; adverse changes in the ratings
given
to our debt securities by nationally accredited ratings organizations, which
could limit or restrict the availability, and/or increase the cost of financing;
the effects of bankruptcies in the telecommunications industry which could
result in more price competition and potential bad debts; the effects of
technological changes and competition on our capital expenditures and product
and service offerings, including the lack of assurance that our ongoing network
improvements will be sufficient to meet or exceed the capabilities and quality
of competing networks; the effects of increased medical, retiree and pension
expenses and related funding requirements; changes in income tax rates, tax
laws, regulations or rulings, and/or federal or state tax assessments; the
effects of state regulatory cash management policies on our ability to transfer
cash among our subsidiaries and to the parent company; our ability to
successfully renegotiate expiring union contracts covering approximately
1,045
employees that are scheduled to expire during the remainder of 2006; our
ability
to pay a $1.00 per common share dividend annually may be affected by our
cash
flow from operations, amount of capital expenditures, debt service requirements,
cash paid for income taxes (which will increase in the future) and our
liquidity; the effects of any future liabilities or compliance costs in
connection with worker health and safety matters; the effects of any unfavorable
outcome with respect to any of our current or future legal, governmental,
or
regulatory proceedings, audits or disputes; and the effects of more general
factors, including changes in economic, business and industry conditions.
In
addition, we may be unable to implement some of our current business initiatives
if we fail to recognize the benefits we expect to receive from certain
transactions. These and other uncertainties related to our business are
described in greater detail in our filings with the Securities and Exchange
Commission, including our reports on Forms 10-K and 10-Q. We undertake no
obligation to publicly update or revise any forward-looking statement or
to make
any other forward-looking statements, whether as a result of new information,
future events or otherwise unless required to do so by securities
laws. ADDITIONAL INFORMATION AND WHERE TO FIND IT This material is
not a substitute for the prospectus/proxy statement Citizens Communications
Company and Commonwealth Telephone Enterprises, Inc. will file with the
Securities and Exchange Commission. Investors are urged to read the
prospectus/proxy statement which will contain important information, including
detailed risk factors, when it becomes available. The prospectus/proxy statement
and other documents which will be filed by Citizens Communications Company
and
Commonwealth Telephone Enterprises, Inc. with the Securities and Exchange
Commission will be available free of charge at the SEC’s website, www.sec.gov,
or by directing a request when such a filing is made to Citizens Communications
Company, 3 High Ridge Park, Stamford, CT 06905, Attention: Investor Relations;
or to Commonwealth Telephone Enterprises, Inc., 100 CTE Drive, Dallas,
Pennsylvania 18612, Attention: Investor Relations. The final prospectus/proxy
statement will be mailed to shareholders of Commonwealth Telephone Enterprises,
Inc. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy securities, nor shall there be any sale of
securities in any jurisdiction in which such offer, solicitation or sale
would
be unlawful prior to registration or qualification under the securities laws
of
such jurisdiction. Citizens Communications Company and Commonwealth Telephone
Enterprises, Inc., and certain of their respective directors, executive officers
and other members of management and employees are participants in the
solicitation of proxies in connection with the proposed transactions.
Information about the directors and executive officers of Citizens
Communications Company is set forth in the proxy statement for Citizens
Communications Company’s 2006 annual meeting of shareholders. Information about
the directors and executive officers of Commonwealth Telephone Enterprises,
Inc.
is set forth in the proxy statement for Commonwealth Telephone Enterprises,
Inc.’s 2006 annual meeting of shareholders. Investors may obtain additional
information regarding the interests of such participants in the proposed
transactions by reading the prospectus/proxy statement for such proposed
transactions when it becomes available.
2
Senior
Management Representations Maggie Wilderotter Chairman and Chief Executive
Officer Don Shassian Chief Financial Officer
3
Merger
HighlightsStrategic
acquisition that expands Citizens’ geographic presence
Rural
ILEC with fragmented cable competition (316K lines) Edge-out CLEC in
adjacent
markets (138K lines) CZN will have 493K (a) lines in Pennsylvania (19%
of pro
forma lines) Increased scale and scope provides ~ $30 million in annual
cash
synergies Opportunity to increase product penetration and customer retention
CTE
shareholders receive premium with significant liquidity
Ongoing
interest in a stronger combined company with a higher dividend yield
Transaction
improves Citizens’ financial profile Free cash flow accretive in year one Slight
increase in leverage (consistent with guidance) Reduces dividend payout
ratio
Maintains financial and operational flexibility (a) Includes 39K CZN
ILEC lines
as of 6/30/06.
4
CTE
Meets Our Acquisition Criteria Criteria Commentary Rural Profile
Fragmented cable competition Attractive Demographics Income growth
comparable to national averages
Quality
Assets Modern infrastructure with excellent quality of service Upside for
Organic Growth Considerable upside opportunities Leverage Scale Economies
~ $30mm in annual cash savings Free Cash Flow Accretive Free cash flow
accretive in first year Maintains Dividend Payout Profile Improves
dividend payout ratio
5
Citizens
- Our Current Operations
Western
Region Central Region Eastern Region Rochester Region Citizens - June 20,
2006
States 23
Access lines 2,162,712
HSI
customers 350,411 Employees 5,434
Square
miles 134,268 Access lines per sq mile16
6
Commonwealth
- Pennsylvania Operations
CTE
Telephone Company Citizens Communications CTE "Edge-Out" CLEC
Markets
Sayre
Williamsport Scranton Wilkes-Barre Stroudsburg Bloomsburg Hazleton
Harrisburg
Reading York Lancaster
CTE
Operations - June 30, 2006 States 1
Access
lines 454,297 HSI customers 37,126
Employees
1,131 ILEC square miles 5,000 Primary ILEC lines/ sq mile
52
7
CTE
ILEC Revenue Upside Opportunities 1H Annualized ILEC Revenue / Line Q2
HSI
Penetration $900 $880 $860 $840 $820 $852 $873 CTE CZN(a) 20% 15% 10% 5%
12% 16%
CTE CZN
Q2
LD Penetration Q2 Bundles Penetration 1005 75% 50% 25% 0% 34% 64% CTE CZN
25% 20% 15% 10% 5% 0% 8% 18% CTE CZN
Significant
potential for upside with increased HSI, LD and bundled penetration
Note:
CTE ILEC data based on adjusted access lines (assumes CTE second line
penetration equal to that of CZN (7.5% of primary lines as of June 30,
2006)).
(a)
Excludes directories revenue.
8
Market
Strategies Rebrand entire operations to Frontier
Single
brand, increased visibility Provide customer-focused revenue generating
solutions
Continue
to drive product penetration Focus on the efficiency and value of bundled
service offerings
Introduce
customer contracts Introduce enhanced value-added products
Ask.com
co-branded portal Wireless modem
ESPN
360 Frontier Secure Connections (featuring Computer Associates)
Participate
in national campaigns Market edge-out CLEC services
9
Key
Investment Highlights 1. Strong Competitive Position 2. Management Team Delivers
Results 3. Demonstrated Ability to Deliver and Sell Products and Services
4.
Proven Ability to Integrate New Properties 5. Focus
Transaction
Summary Parameter Term Value Per Share $41.72 (a)
75%
= $31.31 per share in cash 25% = 0.768 fixed exchange ratio of CZN stock
($10.41
per share as of signing)(a) Transaction Value $1.158 billion
Premium 8.3%
(1-day: 9/15 - $38.52) 17.2% (1-week: 9/8 - $35.60) Multiple
of 2006 EBITDA 6.76x – Adjusted 2006 EBITDA 5.75x – Adjusted 2006 EBITDA
(with synergies) CTE
Ownership 6% Structure Taxable merger Financing $990mm bridge
facility from Citigroup Required
Approvals CTE shareholders, FCC, HSR, PA state PUC Expected
Closing Mid-2007 (a)
Reflects CZN share price of $13.55 as of September 15, 2006.
10
Sources
and Uses TOTAL USES Purchase Price $41.72
Common
Stock Outstanding (20.8 mm) $870 Cash-Out Employee Shares / (Options (1.2
mm) (a) 39 Convertible
Bond - Cash and Stock (b) $908 313 Other Debt 40 Year
1 Integration Costs, Tax Liabilities, Other 80 Total Uses $1,341 TOTAL
SOURCES Purchase Price $41.72 CTE Cash (c) $69 Equity
Issued (20.5 mm shares) (d) 278 Debt Issued 990 AT
CoBank Patronage Div. 4 Total Sources
(a)
0.257mm ESPP shares, 0.004mm restricted shares, 0.545mm RSU's, and 0.384mm
options with option proceeds of $11mm. (b)
Assumes June 2006 conversion price of $39.93. (c) $99mm of PF 06/30/06 CTE
cash
less $30mm of retained cash. (d)
$217mm (16.0mm shares issued) for the common stock and $62mm (4.5mm shares
issued) for the convertible.
11
CTE
- An Extension Acquisition
Access
Lines LTM Revenue 454K $331MM
17%
2,163K 83% $331MM 14% $2,025MM 86% 6/30/06 Pro Forma: 2,617K LTM Pro Forma:
$2,356MM
Citizens
CTE
12
Targeted
Synergies Annual Cash Savings ~$30 million Corporate
Expense Corporate overhead and support functions Other
third-party costs Leverage Citizens Scale Across Operational Areas IT
software licenses and contractors Third party processing fees (eg. payroll,
etc.) Purchasing
Non-Cash Compensation Costs Annual Reduction ~$10mm One-Time
Integration Costs One-Time ~($35)mm
13
Key
Combination Metrics - Pre Synergies Citizens CTE Pro Form w/o
Synergies
Access
Lines (000s) 2,163 454 2,617 LTM Revenue ($MM) $2,025 $331 $2,356
LTM
EBITDA ($MM) (a) 1,130 166 1,296 2006 Capex Guidance $270 - $280 $44 - $47
$314
- $327
2006
Free Cash Flow $500 - $525 (b) $40 - $50 (c) $540 - $575 Implied 2006E Dividend
Payout Ratio 61% - 64% -- 60% - 63%
Shares
Outstanding 320.8 (d) -- 341.3 Net Debt (6/30/06) $3,601 (e) $960 (f)
$4,561
Net
Debt / LTM EBITDA (6/30/06) 3.2x -- 3.5x (a) Pre non-cash stock compensation
(CTE data does not reflect Directories income).
(b)
Based on management guidance. (c) CZN estimate, based on CTE management
guidance, adjusted for acquisition financing costs (excluding extraordinary
integration costs).
(d)
Shares outstanding as of July 31, 2006. (e) CZN pro forma for $247mm of debt
reduction from ELI transaction.
(f)
$990mm of debt less $30mm of retained CTE cash.
14
Transaction
Analysis Adjusted
EBITDA adds-back non-cash compensation expense ($10mm) and income from the
Directories partnership ($5mm)
Parameter
Share Price $41.72 Equity Value $908 Convertible Bond (a) 313 Other
Debt 40 Cash (b) (103) Firm Value $1,158
Firm
Value / Adjusted 2006 EBITDA 6.76x Firm Value / Adjusted 2006 EBITDA 5.75
CTE
Management Guidance: 2006 EBITDA $157.0 Non Cash Compensation 9.8
Directories
Cash Flow 4.5 Adjusted 2006 EBITDA $171.3 Annual
Cash Synergies (run rate) 30.0 Adjusted 2006 EBITDA (w/synergies)
$201.3
(a)
Assumes June 30, 2006 conversion price of $39.93. (b) Reflects June 30,
2006 cash of $110mm less $11mm tax on RTB gain plus $4mm AT Co-bank
proceeds.
15
Other
Financial Information 2006 Citizens guidance confirmed
Free
Cash Flow: $500MM - $525MM Capital Expenditure: $270MM - $280MM $300MM
share
repurchase plan authorized in February 2006
$135MM
completed as of June 30, 2006 Anticipate completion post-close
$150MM
debt reduction plan authorized in February 2006 Anticipate completion in
conjunction with transaction financing
16
Key
Investment Highlights
1.
Strong Competitive Position 2. Management Team Delivers Results
3.
Demonstrated Ability to Deliver and Sell Products and Services 4. Proven
Ability
to Integrate New Properties
5.
Focused on Shareholder Value - FCF accretion
-
Maintain or improve payout ratio - Maintain moderate leverage
-
Maintain operational and financial flexibility
17