Filed by
Consolidated Communications Holdings, Inc.
pursuant to Rule 425 under the Securities Act of 1933,
as amended, and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934, as amended
Subject Company: North Pittsburgh Systems, Inc.
Commission File No.: 0-13716
The following is a transcript of a conference call held on July 2, 2007 by
members of management of Consolidated Communications Holdings, Inc.
("Consolidated") to discuss the proposed merger transaction. A link to the
webcast of this event was posted on Consolidated's external website.
CONSOLIDATED COMMUNICATIONS
Moderator: Robert Currey
July 2, 2007
10:00 am CT
Operator: Welcome to the Consolidated Communications conference
call. At this time, all participants are in a listen only
mode.
Following management's prepared remarks, we will hold a
question and answer session. To ask a question, please
press star followed by one on your touch-tone phone. If
anyone has difficulty hearing the conference, please press
star 0 for operator assistance. As a reminder, this
conference is being recorded today, July 2, 2007.
I would now like to turn the conference over to Steve
Jones, vice president of Investor Relations at
Consolidated Communications. Please go ahead Mr. Jones.
Stephen Jones: Thank you Kerry, and good morning everyone. And thank
you for joining us today, on the call to announce that we
have reached a definitive agreement to acquire North
Pittsburgh Systems.
As Kerry said, I'm Steve Jones, vice president
investor relations. And with us on the call today are Bob
Currey, president and chief executive officer, and Steve
Childers, chief financial officer. Earlier today we posted
a presentation on our website in the investor relations
section of consolidated.com.
Bob and Steve will walk through the presentation in a
bit, and then we will open it up for Q&A.
Before I turn the call over to Bob, let me read the
following. This material is not a substitute for the
prospectus and proxy statement Consolidated Communications
Holdings and North Pittsburgh Systems will file with the
Securities and Exchange Commission.
Investors are urged to read the prospectus and proxy
statement, which will contain important information,
including detailed risk factors when it becomes available.
The prospectus and proxy statement and other documents,
which will be filed by Consolidated Communications
Holdings and North Pittsburgh Systems with the Securities
and Exchange Commission, will be available free of charge
at the SEC's website www.sec.gov, or by directing your
request to either company. The company's appropriate
addresses were provided in this morning's release.
The final prospectus and proxy statement will be mailed to
shareholders of North Pittsburgh Systems. This
communication shall not constitute an effort 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. Consolidated
Communications Holdings and North Pittsburgh Systems and
certain of their respective directors, executive officers,
and other members of management, and employees, are
participant in the solicitation of proxies in connection
with the proposed transactions.
Information about the directors and executive officers of
Consolidated Communications Holdings is set forth in the
proxy statement filed in connection with their 2007 annual
meeting. Information about the directors and executive
officers of North Pittsburgh Systems is set forth in the
company's Annual Report on Form 10 K for the year ended
December 31, 2006, as amended.
Investors may obtain additional information regarding the
interests of such participants in the proposed transaction
by reading the prospectus and proxy statement for such
proposed transactions when it becomes available.
I will now turn the call over to Bob.
Robert Currey: Hey, good morning. I hope you are still awake after that
long introduction there. I want to thank you for joining
us this morning on such short notice. We are very pleased
to share with you our exciting announcement and
acquisition.
Why is this acquisition important to Consolidated? Every
call with you always seems to end with M&A questions. And
as you've heard me say many times in the past, we are
comfortable with our current size and don't have to do
anything to support our dividend.
However, if we find an attractive property, at the right
price, that meets the rest of our criteria -- quality of
network, ability to integrate, operating synergies, and
cash flow accretive, we would pursue it.
North Pittsburgh does fully meet our acquisition criteria,
and will be a great addition to our Illinois and Texas
properties. We have never been better positioned,
operationally or financially, to grow through acquisition.
So let me begin on Slide number 5. This transaction
expands Consolidated's footprint. North Pittsburgh
currently provides an ILEC service, edge out CLEC, and
Internet services. They have an extensive 300 fiber mile
network, and as of March 31st this year, they were serving
over 61,000 ILEC access lines, 66,000 CLEC, and 16,300 DSL
customers.
One of the real keys to this acquisition though is the
advanced network. The network investment has been made.
This property has over -- or will have, by the end of the
year, over 95% of their local loops will be less than five
thousand feet. I think that is industry-leading. So the
CAPEX has been spent, and it will enable us to roll out
IPTV in 2008.
There's also an opportunity to grow the products we
(unintelligible) increased penetration and improve
customer retention.
But most importantly, it also improves our dividend payout
ratio through operating efficiencies and driving annual
cash synergies.
There are strong cash flows from wireless partnerships,
similar to our Texas properties, and most importantly,
it's cash flow accretive in the first full year of
operations. This is a good transaction for Consolidated
for those reasons.
So let's now flip to Slide 6 and look at a map of the
territory. The dark green is the ILEC. The light green is
the CLEC. Over the last 12 months, North Pitt has
generated about 100 million in revenue, and 45 million in
adjusted EBITDA from this territory. It currently has
about 300 employees.
The ILEC territory is directly north of Pittsburgh. The
CLEC primarily edges out into the Pittsburgh metro area.
We actually have admired their approach. They've
experienced nice growth. They have been big pipes, and
they have the financial discipline on their payback
requirements.
In addition, we know the CLEC business very well. In the
'90s, we were the first facilities-based CLEC provider in
Illinois. And our senior management team has significant
experience in CLEC operations.
This ILEC property is contiguous, surrounded by CLEC, easy
to serve efficiently. For those of you who follow our
story, you are familiar with the slide on our criteria. So
now let's go to Slide 7 and talk for a moment about our
criteria and how does North Pitt match with our criteria?
I've also said, besides the criteria, I've also said that
for us to go into another state, we would need something
-- a minimum of 50,000 lines. So these affluent markets
with growth potential meet that 50,000 line criteria.
The CLEC is an edge out CLEC strategy. It builds the
brand, enhances the targeting of business customers with
multiple locations, and helps insulate the ILEC.
I mentioned the quality of the network. Ninety-nine
percent of the access lines are DSL capable today, and
with limited CAPEX, we will be ready to launch video.
They have an existing host remote architecture, very
similar to the consolidated architecture. And their most
recent focus on shortening loops will allow us to
(unintelligible) deploying fiber deeper into their
network.
We have substantial diligence on North Pitt. We have a
good understanding of their current processes and their
current structure. And feel very comfortable that we will
be able to integrate the business, and leverage our proven
processes when we -- that we have built while integrating
Illinois and Texas. We would expect to realize the full
synergies savings after Year Two.
So what is our strategy for North Pitt on Slide 8? Well
frankly, it's the same as Illinois and Texas. You've heard
all of this before. Its grow revenue, launch IPTV,
aggressively market broad band, lead with our DSL product,
and bundle the triple play.
We will retain customers. They have had significant line
loss with the recent cable launch of their voice products,
we feel that spike is behind us. We will leverage North
Pitt's new pricing in bundling strategy. We will create a
stickiness with our existing products. And again,
leveraging the triple play offer. And built on their
initiatives of implementing the best customer care and
community involvement practices from companies. Very
similar philosophies.
We feel confident in our ability to improve the margins.
We will move to a more functional structure. The
Consolidated team has experience successfully integrating
properties. And as you will note on Slide 9, we have a
road map to pull cost out of the business.
Synergies. Slide 9. As with all transactions, synergies
are the key. The team that performs our extensive due
diligence is our operations team. They are the same people
who made the projections, and they will be held
accountable for implementation. Exactly as we did in our
integrations of Illinois and Texas.
We feel comfortable with our synergy projections. We've
done it before. We will use the same proven processes we
used with previous acquisitions. We will set up an
integration office to oversee the project. It will be
restructured and designed to insure we meet or beat
initial projections for both revenue growth and cost
synergies. The ultimate plan will be built from the
bottoms up, and we will leverage the best practices from
both companies.
We have already completed our high level, first six
quarter plan. And detailed monthly plans and timelines are
being produced.
The integration team will provide a readout, at least
monthly, at my staff meetings and we will update you
quarterly on our progress. So to give you the transaction
summary highlights, let me turn the call over to Steve
Childers, our CFO.
Steven Childers: Thanks, Bob. On Page 10, I am pleased to briefly review
the key terms of our transaction. We will be financing the
deal with a combination of cash, stock, and modest
increase in our leverage.
Total consideration will be 80% cash, 20 percent stock.
The stock component is a fixed exchange ratio, no caps,
no collars. And, based on Friday's closing, represents a
17.6% premium on annum LTM adjusted basis, the multiple of
6.6 times after synergies -- after the first full year of
synergies we think is a fair and reasonable transaction,
based on prior deals that have been recently been
announced.
At close, on a pro-forma basis, we would expect to be --
our leverage to go to 4.4 times on a net debt basis for
the last 12 months.
And then on Page 11, the next steps for the transaction,
basically the deal requires approval from North Pittsburgh
shareholders, and our work starts today on obtaining the
necessary regulatory approvals from the SEC Pennsylvania
State Commission, Hart - Scott - Rodino. And we would
expect to complete the transaction, either in the fourth
quarter 2007, or early first quarter 2008. Bob?
Robert Currey: So in summary, on Slide 12, this acquisition
expands our footprint with affluent markets similar to our
Kathy and Conroe Texas markets. Provides an advanced
network that can easily be leveraged to roll out new
broadband products, such as our IPTV product. It provides
the opportunity to increase product penetration and
improve customer retention. And importantly, it improves
our financial profile and meets all of our stated
acquisition criteria.
We are very excited about this opportunity, and look
forward to working with our peers at North Pitt start this
integration.
So with that, Kerry, let's open it up to the audience
for questions.
Operator: Ladies and gentlemen, if you wish to register for a
question for today's question and answer session, you will
need to press star then the No. 1 on your telephone. You
will hear a prompt to acknowledge your request.
If your question has been answered and you wish to
withdraw your question, you may do so by pressing star
then the number 2. If you are using a speaker phone,
please pickup your handset before entering your request.
Again, we request that if you have pressed star one to ask
a question before this time, please press it once more to
insure that you enter into the queue. One moment please
for the first question.
Our first question is from Tom Seitz of Lehman
Brothers. Please go ahead with your question.
Tom Seitz: Thanks for taking the question.
It's been a bit of a busy day in telecom this morning. But
I was wondering if you could share with us what, sort of
the operational trends have been at North Pittsburgh?
You alluded to the fact that access line losses have been
high. Can you just sort of delve into that a little bit
more and talk about, you know, what the access online
trends have been, both at the ILEC and CLEC and when
competition came in, etc.
And then just another quick follow-up. Can you talk us
through what the approval process will be with
Pennsylvania PUC?
Robert Currey: Yeah, good morning, Tom, and thanks for the question.
The... You know, operationally, just an overall general
comment. This is a solid company with a very strong
service ethic. And obviously, high priority with their
network. It's as good a network... I'm very proud of our
network and our short loops and the condition of our
copper, as you have heard me talk about in the past. This
is just as good, if not better. They've done a great job
and we are looking forward to that.
Regarding the access line loss rate, prior to the launch
of the cable companies, North Pitt historically was among
the industry leaders in low access line erosion. You know,
in 2003 it was 2.7. In 2004 it was between three and four
percent; 2005 it was 2.1%.
Last summer when the cable companies launched they
certainly experienced this spike in line loss and have
since then. Based on our analysis and diligence work we
believe the line loss will moderate significantly in the
future. It averaged 10.1 by the way for 2006. But the low
fr... - the low hanging fruit is gone. North Pitt has
responded on pricing and broadband offerings. We believe
that by leveraging the new pricing and bundling strategy
that they recently put in place, launching video and
promoting the Triple Play we'll have the competitive offer
to be able to mitigate that line loss going forward. And
we're confident that we can do that.
Regarding I think the latter - the last part of your
question there, the Pennsylvania (PUC), you know, we
launched calls to them this morning, Tom, and hope to meet
this week or early next week if they can't meet with us
this week to introduce ourselves and, you know, we're
confident that with our reputation in Illinois and Texas
we'll be able to assure them that we're the right company
to acquire North Pitt.
Tom Seitz: Okay great. If I may, one other follow-up - can you
describe the CLEC in a bit more detail? I mean is it a
small business based, you know, UNE-L or UNE-resell or
is it fiber based, is it, you know, can you walk us
through some of the details there?
Robert Currey: Yeah well I think the first and most important
detail is it's cash flow positive. It's a good - it's a
good business. It is facility based, no UNEs. As I said
it insulates the ILEC with the brand location. It gives us
multiple locations for customer support. This is big pipe.
This is Ethernet kind of stuff, Tom. This is - we've been
impressed with the way they operate it and their edge out
strategy. It's all fibers to the colos. It averages nine
lines per customer so this is not a one and two line. We
think that's the appropriate way to go. And, you know, as
I mentioned we have significant senior level CLEC
experience.
And, you know, while there are some UNEs they're moving
up on that so it's a - we think it's a well run operation,
not only well run but strategically they've had the right
game plan.
Tom Seitz: Okay great, congratulations on the deal.
Robert Currey: Thank you, Tom.
Operator: Your next question comes from Jonathan Chaplin of JP
Morgan. Please go ahead with your question.
Jonathan Chaplin: Good morning guys, congratulations. I just had
two quick questions. Firstly the price that you guys are
getting here looks relatively attractive at least from our
perspective. I'm wondering if it was a competitive process
at all, you know, it's - if - I mean it seems like the -
that these lines are sort of close in proximity to some of
the other RLECs out there that have been going after -
that have been going after acquisitions. So, you know, I'm
surprised that you guys got as good a deal as you did
give, you know, some other guys are more proximate.
And then secondly if I'm looking at it correctly it looks
like on an (after synergies) basis it's sort of 12 - 13%
accretive sort of in 2009 and if I bake that into my old
model it would bring the payout ratio down to sort of 63 -
62 - 63%. Given that in the past you've been comfortable
with a payout ratio or up around sort of 75% is there a
prospect if the payout ratio does come down that far that
you guys would increase the dividend? Thanks.
Steven Childers: Jonathan, thank you for your questions. Let's
take - go back to the first one. Compared to - with this
competitive process it was not a formal auction process
but we do believe that the proc - that the Company over
time had, you know, considered different alternatives, had
informally seen what was available in the market place.
We've been talking to them awhile - for awhile.
We got serious about this in May when talks really, you
know, started coming to fruition and as Bob said we did
detail - have done detailed diligence over the last
several weeks and we think that we're ending up relative
to price, you know, really represents a fair premium for
the business - the potential synergies though that we'll
be able to get from the business and again we think it's a
fair deal particularly compared to some of the multiples
that have recently been announced. So we're pleased with
the price and we think it's a fair deal.
Relative to the payout ratio, you know, we're not giving
guidance on the numbers. You said we've been comfortable
where we've operated at in a 75 to 80% ratio. The deal is
accretive to us. You know, it might not be exac... - the
payout ratio might not get down into the early - low 60s
as you indicated maybe that fast but we do think it will
have a significant impact on the payout ratio over time.
And I think we just need to see how quickly we move on
getting our integration plan done. Synergy is getting our
organization aligned and before we really comment further
on what we might do with additional excess cash and things
like that.
Jonathan Chaplin: Great, thank you very much.
Operator: Your next question comes from Michael Rollins of
Citigroup. Please go ahead with your question.
Michael Rollins: Hi, good morning. Just a couple questions; first
I guess these - this market is very different than what
you historically had where, you know, when you've launched
the IPTV products you did it early in on the Triple Play
and you've had less aggressive cable competition. And I
guess here they're seeing accelerating line losses to the
first quarter of 07. And so I was wondering if you could
talk a little bit about, you know, how you're going to
approach these markets differently and how you're looking
at the trough of share loss from a telephony perspective
for the incumbent phone business.
The second question I had was can you just give us the
sense of how you feel the forward 07 EBITDA numbers look
like for the full year before and after what would be the
proposed synergy. Just tell - it just seems like, you
know, if you look at the EBITDA and I'm just going off the
reported financials - EBITDA was dropped about 15% year
over year in the first quarter of 07 and so I'm just
trying to get a better understanding as we exit 07 as you
look to close the transaction end of this year into 08 how
we should be thinking about the cash flow contribution to
the consolidated business. Thank you.
Robert Currey: Yeah Michael, let me take the first part of that
and hand the second off to Childers. I guess I would not -
I would not categorize that we've had less competition
than they have. You know, we had an aggressive launch and
we've had, you know, all the big players launch their
broadband product. We've been competing for a number of
years there. So I think we're prepared for that type of
competition.
To your main point though about they launched before we
will launch our Triple Play, that's absolutely correct.
But the advantage to that is as those of us who've
launched early we've got a more mature stable product now.
We've got a network that's in great shape and we'll be
able to launch much more aggressively than we did in both
Illinois and Texas.
HD recently came online and DVR are coming later in the
year, both excellent enhancements to our product. So along
with the technical improvements that we've made in the
product we're also much better at delivering it, the
install, the customer care, the follow up, the marketing
and sales activity. The last couple of years being in that
business we've learned a lot of lessons. So, you know, and
because of the launch in Texas we have experience now in
metro markets. So we're confident about our ability to add
that Triple Play, add it quickly. So with that let me give
it to Steve on the financial part of that question.
Steven Childers: Okay, Mike thanks for your question and I'm not
sure I caught all of it so let me try it and if I don't
get it come back to me. On an adjusted basis - on an LTM
basis through the end of the first quarter we are taking
their reported numbers to - and just consistent with how
we report cash distributions from sell partnerships we're
adding those numbers then they're averaged roughly on an
LTM basis was about $8.3 million.
And also at the end of the first quarter they ranked
relative to some restructuring charges with an early
retirement and pension plan re-measurements. They took
like a restructuring charge of about $6-1/2 million. You
know, we're adding that back as a one-time event. So we're
getting this sort of a mid $44 - $45 million EBITDA
contribution before synergies.
Michael Rollins: Okay and then - thanks - and then do you expect
those to decline through 07 to continue at the pace it was
in the first quarter? Is that something as we're thinking
about the cash contribution from this business that 07 is
a tough year and then in 08 you start putting back your
synergies?
Steven Childers: Well we actually expect in 07 to start seeing
some improvement later this year. I mean as Bob talked
about earlier in the access - just from an access line
perspective we believe that we'll - that we will see some
improvement in just the performance of the business from
an access line perspective the rest of the year. They
already have several cost restructuring initiative in
play. We think we'll start seeing some uplift in those
business - from those initiatives over the last remainder
of the year. So we think we'll see some improvement the
rest of this year before we start talking about our
synergy numbers.
Robert Currey: Okay, And Michael, they've also responded. They've
sharpened their product offerings. They've bundled -
they've come up with some fairly creative bundles on
rolling in a line charge with access charges, the SLC
etc. and they're doing some creative innovative things on
the marketing side. So we do - we do think - like all when
they first launch you get that spike. You have it for two
or three quarters and then, you know, then you get that
behind you, you find your legs and you move on.
Michael Rollins: Thank you very much.
Operator: Once again Ladies and Gentlemen as a reminder to register
for a question, please press star then the number 1 on
your telephone.
Your next question comes from the line of Charles Smith
of North Pitt Capital. Please go ahead with your question.
Charles Smith: Yes, good morning. Thanks for taking my call. Armstrong's
been very aggressive just recently especially in trying to
push their IP telephony product. You lay out $7 to $11
million in OPEX synergies. Is that in year 2?
Steven Childers: The $7 million in synergies is basically first full year
of operations.
Charles Smith: Okay, so that would basically be Calendar `08, you expect?
Steven Childers: Yes. That's - that's probably a fair way to look at it.
And that, I mean, that's also including whatever we need
to do to launch our video product as well.
Charles Smith: Okay so you expect to be able to launch video, marketing,
all in cost and still save $7 to $11 million in OPEX.
Steven Childers: Yes sir.
Charles Smith: Okay I'm just having a hard time. Maybe you can explain
how you would do that.
Robert Currey: Well we're not going to, you know, we're not prepared to
go into line item detail on where those synergies come
from. But I think if you - if you look at the most recent
deals and you look at some of the multiples of synergies
that have been forecasted against either revenue, revenue
of the acquired company, combined companies, or EBITDA
these numbers are right in the sweet spot. And again we
sent a very large and detailed due diligence team to
Pittsburgh and as I mentioned we've got the first six
quarters pretty well outlined right now and filling in the
detail behind that. We're very confident that we can
achieve those numbers.
Charles Smith: Okay I'm just sort of reflecting some of the other
concerns I've felt - heard on the call with regard to
North Pittsburgh just getting started in the video realm.
Robert Currey: Yeah well, you know, they haven't started in the
video. They've got - they've shortened their loops and
they've made the investment which is critical to launching
the IPTV product but, you know, they haven't - they
haven't ordered ahead and they haven't ordered the
service. We've done that a couple times. We're very good
at that. We have a track record at implementations and
integrations and have met or exceeded all of our past
goal. And I'm very confident. One thing this team does is
execute very well.
Charles Smith: Thank you.
Operator: Once again to register for a question, please press star
then the number 1 on your telephone. We'll pause for just
a moment to compile the Q&A roster.
There are no further questions at this time. Please
proceed with your presentation or any closing remarks.
Robert Currey: Well thank you Kerry. And again thank all of you
for joining us as I said on short notice this morning on a
very busy Monday morning. And I want to continue - I want
to thank you for your continued interest and support of
our Company. We - as you've heard this morning we're
excited about this acquisition. We're excited about our
current position and opportunities and we look forward to
getting out and meeting with you face to face and updating
you on the progress.
So thanks again and have a great day.
Operator: Ladies and Gentlemen, that concludes your Conference Call
for today. We thank you for your participation and ask
that you please disconnect your lines.
## END ##
Safe Harbor
Any statements other than statements of historical facts, including statements
about management's beliefs and expectations, are forward-looking statements and
should be evaluated as such. These statements are made on the basis of
management's views and assumptions regarding future events and business
performance. Words such as "estimate," "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 include the ability of Consolidated Communications
Holdings, Inc. (the "Company") to complete the acquisition, successfully
integrate the operations of North Pittsburgh Systems, Inc. ("North Pittsburgh")
and realize the synergies from the acquisition, as well as a number of other
factors related to the businesses of the Company and North Pittsburgh, including
various risks to stockholders of not receiving dividends and risks to the
Company's ability to pursue growth opportunities if the Company continues to pay
dividends according to the current dividend policy; various risks to the price
and volatility of the Company's common stock; the substantial amount of debt and
the Company's ability to incur additional debt in the future; the Company's need
for a significant amount of cash to service and repay the debt and to pay
dividends on the Company's common stock; restrictions contained in the Company's
debt agreements that limit the discretion of management in operating the
business; the ability to refinance the existing debt as necessary; regulatory
changes, rapid development and introduction of new technologies and intense
competition in the telecommunications industry; risks associated with the
Company's possible pursuit of acquisitions; economic conditions in the Company's
and North Pittsburgh's service areas in Illinois, Texas and Pennsylvania; system
failures; losses of large customers or government contracts; risks associated
with the rights-of-way for the network; disruptions in the relationship with
third party vendors; losses of key management personnel and the inability to
attract and retain highly qualified management and personnel in the future;
changes in the extensive governmental legislation and regulations governing
telecommunications providers and the provision of telecommunications services;
telecommunications carriers disputing and/or avoiding their obligations to pay
network access charges for use of the Company's network; high costs of
regulatory compliance; the competitive impact of legislation and regulatory
changes in the telecommunications industry; and liability and compliance costs
regarding environmental regulations. These and other risks and uncertainties are
discussed in more detail in the Company's and North Pittsburgh's filings with
the Securities and Exchange Commission, including our respective reports on Form
10-K and Form 10-Q.
Many of these risks are beyond management's ability to control or predict. All
forward-looking statements attributable to the Company, North Pittsburgh or
persons acting on behalf of each of them are expressly qualified in their
entirety by the cautionary statements and risk factors contained in this
communication and the companies' filings with the Securities and Exchange
Commission. Because of these risks, uncertainties and assumptions, you should
not place undue reliance on these forward-looking statements. Furthermore,
forward-looking statements speak only as of the date they are made. Except as
required under the federal securities laws or the rules and regulations of the
Securities and Exchange Commission, we do not undertake any obligation to update
or review any forward-looking information, whether as a result of new
information, future events or otherwise.