Editor’s note: This commentary is by Alan Wagener, who is on the board of directors for Keep Burlington Telecom Free Cooperative (KBTL).
[O]ver the past three years, the city of Burlington, with the help of management consultants Dorman & Fawcett, has been preparing Burlington Telecom (BT) for sale, as mandated by its settlement with Citigroup. At the same time, the Keep BT Local Cooperative, of which I am a member, has been organizing to purchase BT in order to insure that this valuable community asset continues to fulfill its mission to serve and benefit our community.
On the evening of Aug. 8, David Provost, chair of the Burlington Telecom Advisory Board, told the City Council that among the finalists in the bidding for the purchase of Burlington Telecom there were two “debt free” proposals from established businesses.
Given past issues with Burlington Telecom due to excessive debt, a buyer offering a newly minted, debt-free BT is undeniably attractive, but at what cost, especially if it’s a higher bid than ours? It’s not as if their money won’t have to be recouped; that money will come from subscribers, likely in the form of higher rates.
Who will claim and benefit from those profits for the next 30 years or more? Will it be the city and its residents, or someone else?
Our bid offers $12 million to the city in return for a BT that will be wholly owned by its subscribers. We fund the purchase with $10 million in debt, $1.5 million in equity for the city, and the balance from the sale of preferred shares to the community, of which we have already raised over $400,000 since our offer went public on Aug. 4.
With this in mind, there is one comparison we feel is appropriate and pertinent to the question of debt and BT.
First, we believe that it is highly unlikely that any of the other bids grant ownership of the purchased BT to its subscribers. This is important, because it means that both local, subscriber control and the future profits of BT would be lost to us, the residents of Burlington. This is especially important now, because BT has come a long way from its rocky startup days.
When Burlington Telecom initially became overburdened by debt, it had borrowed $50 million ($33 million from Citibank and $17 million from the city of Burlington) and it had around 4,000 subscribers. Thanks to the Citigroup Settlement, BT now has $6 million in debt (if you don’t count the $16.9 million) and 7,000+ subscribers. This is a very different, and much better ratio of revenue to debt. Unfortunately, also as a result of the settlement, now it must be sold.
In our proposal, BT will have an additional $4 million in debt, obviously more, yet well within what it can afford with over 7,000 subscribers. We have made certain that the debt proposed by our offer is readily manageable given the current operating environment.
Additionally, BT still has room to grow even without expanding. Since 2013, BT has almost doubled its number of subscribers from under 4,000 to the current 7,000, yet this number represents less than 50 percent of its potential base given that BT currently passes about 16,000 possible subscribers.
Put these two things together, 7,000 subscribers plus room for growth, add in some financial information that the Burlington Telecom Advisory Board looked at in April of this year (BT was on a pace to have over $3 million in cash flow after expenses), and it becomes clear that our $10 million in proposed debt is readily payable.
And while the debt is being repaid, any cash flow beyond debt service will be used to upgrade, expand and build equity for the subscribers of BT. Better yet, once the debt is fully repaid (five to 10 years) all cash flow will be used to do the same.
The City Council has been told that the other finalists include two established private companies with experience operating fiber-to-home systems, and a local private equity investor with a vision for “aggressive BT regional growth.” From this, it seems that BT’s capacity to serve the region is well recognized, which is why taxpayers and subscribers deserve a chance to recoup their original investments that have made BT a very successful, and currently profitable, telecom.
In short, this means that some debt now will go a long way to repaying Burlington for years to come by keeping BT local.
