Dear Source Readers,
Some of you may have read a story in the May 27, 2004 edition of The Source about Innovative Communication Corporation (ICC). On behalf of ICC, I would like to the set the record straight.
First of all, it’s important to understand that while the Delaware Court announced a decision on May 5, 2004, that is not the same thing as a judgment. And, as I will point out in a minute, we have substantial grounds on which to base the appeal we are going to file. This case centers on a disagreement over the price that shareholders of Emerging Communication Corporation (now known as Innovative Telephone, a member of the Innovative Communication Corporation family of companies) should have been paid when that company went private in 1998.
Given that the Delaware Court’s ruling was based on a valuation model for Emerging Communication that was not validated with market information and comparable information, the conclusion the Court reached was inaccurate. Specifically, the Court used only a portion of a complex valuation model to arrive at its conclusion. What it should have done was to test its academic theoretical approach against comparable market information. Not doing so resulted in an estimated stock price that is out of line with what the marketplace would bear and the value of similar telephone companies.
And, apparently, just because of the disparity between the price that was paid to Emerging Communication’s shareholders, $10.25 per share, and the price the Court determined through its mode, $38.05, the Court determined that the actions of Emerging Communications CEO and Board Chairman Jeff Prosser, and Board members John Raynor and Salvatore Muoio were not in the best interests of their shareholders. Nothing could be further from the truth.
In fact, throughout the transaction that took Emerging Communication private, many of the world’s leading law and investment banking firms provided their advice and guidance to the board – which was followed – to ensure that the transaction was fair and equitable. The firms involved included Prudential Securities; Cahill Gordon & Reindel LLP; Paul, Hastings, Janofsky & Walker LLP; and Houlihan Lokey Howard & Zukin.
It is clear that the board hired the best advisers available – and then followed their expert advice.
I also want to emphasize that no attention would have been paid to these supposed unfair dealings had it not been for the wide divergence between the Court’s per share valuation and Emerging Communication’s offer.
Indeed, the divergence occurred because the Court used a theoretical discounted cash value academic approach and explicitly ignored marketplace economics including comparable prices paid for other telecommunications companies. Specifically:
• The valuation model the Court used was incomplete. While the mathematical portion of this equation was completed, the conclusion it yielded was not validated with market information and comparable information. The result was an estimate of a stock price that was out of line with what the marketplace would bear and the value of similar size telecommunications companies. Specifically:
o The Court was misled by inaccurate information that did not clearly state that prior to the privatization of Emerging Communication it was part of a company twice its size, Atlantic Tele Network (ANK). And so it stands to reason that once ANK was divided into two equal halves, the share price for each piece would be half of what it used to be.
o It also appears that the Court did not consider other, similar transactions in the telecommunications industry, thus depriving it of valuable information on industry comparables.
o And, for example, had Emerging Communication filed for an initial public offering with the Securities and Exchange Commission (SEC) at $38 per share (as per the recent court decision), there is no way the SEC would have approved that offering based on an academic theoretical valuation. It would have been instantly rejected.
• One commonly used benchmark for valuing telephone companies is $2,100 to $3,000 per access line. This methodology is used because only so much income can be generated per year from each customer based on a typical telephone per line bill.
• A value of $3,000 per access line would have yielded a price for Emerging Communication of about $5 per share – half what the company offered.
• This commonly used benchmark was reaffirmed by the marketplace on May 24, 2004 when the Carlyle Group agreed to acquire Verizon’s Hawaiian telephone operations for $2,300 per access line.
• To get to a $38 per share value for Emerging Communication, as the Court did, the per line access valuation would have to be almost $9,000 per access line.
• These facts make it clear that Emerging Communication’s offer of $10.25 per share was above the price the marketplace would have supported for the company, and as a result, it is clear that Emerging Communication’s offer was more than fair.
• Even if you used another commonly-used benchmark for telephone company valuation – 8x multiple for EBITDA (earnings before interest, taxes, depreciation, and amortization) – the result for Emerging Communication, at most, would have been roughly $16 per share. As a point of reference, the recent Verizon deal in Hawaii used a 6.5x multiple for EBITDA.
In conclusion, I would like to add that our focus on appealing this decision is unwavering. We owe it to our employees who depend on us and our hundreds of thousands of customers who rely on the essential telecommunications services ICC provides. In today’s litigious business environment all multi-national companies are subjected to litigation from time to time. Innovative Communications is well positioned to move forward with our business plan to grow the company and continue to provide quality telecommunications services to our all of our customers. Our confidence in winning this appeal and continuing to build a growing company remains steadfast.
Sincerely,
Holland L. Redfield II
Vice President for Corporate Affairs
Innovative Communication Corporation
