City Releases City Cable Appraisal and Purchase Agreement

CustomerValue
Posted by Brian Becker  /   March 25, 2014  /   Posted in Business, Features, FrontSlider, General Articles, Open Access, Political/Government, Sticky  /   31 Comments

City Cable – 2013 Yields Highest Profits Since Inception of $642,693

I have now received both the City Cable purchase agreement and consultant’s appraisal of City Cable. If you read something in the agreement that you think needs to be known, please comment below. For your protection, you are welcome to stay anonymous by commenting under the name “Visitor” and the email address of “questions@semo.net” if you prefer.

One of the first things I noticed was how much money that City Cable profited in 2013. I was under the impression that council members were told that City Cable was losing money. But according to page 104-105 of the Purchase Agreement PDF file, the city actually profited more than $642,000 in 2013. That’s not fuzzy “EBITDA” numbers either, that’s pure profit. I get that number from:

REVENUE OVER (UNDER) EXPENDITURES       $275,429
                                        PLUS (+)
TRANSFER TO BUILDING CORPORATION        $367,264*

* This is the bond payment for the city cable bond. City Cable includes this principal payment in their books as an expense for cash flow reasons, but it is always removed by the auditors because one cannot both depreciate an asset and expense the principal payment used to purchase that same asset. Therefore, when the audit is complete this summer, the City Cable will show a $642k profit.

 

 

This means that we just sold an asset for a $11M profit which generated the citizens $642,000 in a single year and, with proper management, could be generating over $1,000,000 in revenue each year for the city while maintaining control over this extremely vital service for years to come.

Ord. 7483 – Cable Asset Purchase Agreement

3-17-14_City-of-Poplar-Bluff_Cable-System-Appraisal

31 Comments

  1. Visitor March 25, 2014 1:36 pm Reply

    I just started reading this and noticed in the Cable History in 2000 we closed on a $9 Million bond and in 2001 closed on an additional $7.5 Million bond. So we have $16.5 million in bonded money in this system?

    • Brian Becker March 25, 2014 1:46 pm Reply

      I believe the first one was to build City Cable, the second one was to buy the Enstar/Falcon/Charter network. So yes, $16.5M is the total of those two.

  2. Visitor March 25, 2014 3:45 pm Reply

    Using your numbers, that profit on an investment worth $17.5 million represents a return of 3.67%. To be sure I understand, your argument is that the city was wrong to liquidate an investment providing that level of return?

  3. Brian Becker March 25, 2014 3:54 pm Reply

    EBITDA is $1.9M and is a rate of return of more than 11%.

  4. Visitor March 25, 2014 4:06 pm Reply

    the “I” (interest) is a true economic cost – the interest on the bonds will be extinguished with the proceeds of the sale.
    there is no “T” (taxes) for the city.
    the “D” (depreciation) is a true economic cost – those assets have a useful life that will end, correct?
    there is no “A” (amortization of intangibles)

    those items are excluded when a purchaser evaluates the investment they’ll make, because their financing (interest costs) will be different, their basis in the fixed assets will be different, intangibles, if any, would be restated on the acquired balance sheet.

    and an 11% pre-tax rate of return on private equity, in an industry that’s not certain to even be around in 10 years, seems a little thin, to me.

    • Brian Becker March 25, 2014 5:37 pm Reply

      Typically, when looking at a return on investment, you do not include the cost of the investment (depreciation) or the cost to make the investment (interest).

      If I borrow $1M to buy an asset for $1M, I want to know how much profit that $1M made. To include depreciation or interest in that return on investment calculation would improperly skew your results.

      • Visitor March 25, 2014 5:47 pm Reply

        This is partly true when making an investment, and the concept you’re going for is a cap rate. However, it’s not the whole story – cap rates are definitely influenced by interest rates: only a fool would borrow $1 million at 10% to produce an EBITDA result of $100,000/yr.

        Likewise, only a fool would invest $1 million to produce an EBITDA result of $100,000 per year on a property that will likely be worth $0 in ten years.

        • Brian Becker March 25, 2014 6:43 pm Reply

          I want an ROI which I can use to determine how long it will take to pay back the investment. If you include depreciation in ROI then it confuses everything.

          Same goes for interest, the word “investment” means you have money to invest. If you have to borrow it, that should be part of the post-ROI determination but should not skew ROI.

          Also, Interest decreases as the principle is paid down. Your rate of return “appears” to falsely go up each year because the interest-expense decreases.

          Let’s say I have 1 million dollars sitting in the bank. I see an opportunity to spend that 1 million dollars to build a generator. At the end of the first year of operation, I have $300k in income, $100k in operating expenses. According to my calculations, I’ve got a $200k ROI (20%). According to yours view, I have to depreciate that plant over 5 years and my ROI drops to $0 ROI. Then in year six (after the $1 million has fully depreciated and paid off my investment), I have $200k ROI.

          Back to my numbers: I would see the $200k and think, I can pay off my investment in 5 years or I can apply $100k a year to that and pay off the investment cost in 10 years.

          But your numbers tell me my ROI is $0 for the first five years…and $200k after that. Your number sounds more like RFI “Results from investment”.

          If you leave depreciation and interest into the “investment” calculation.

          Brian

  5. Visitor March 25, 2014 4:09 pm Reply

    can you give the time stamp from your video posting where the council was told that the operation was losing money?

  6. Visitor March 25, 2014 8:03 pm Reply

    payback period, ebitda, these are all useful measures. but none of them are the one measure by which a transaction can be evaluated. I don’t know how much of the city’s reported depreciation is economic (what represents the actual cost of fixed assets over time that will have to be repaired/replaced), and how much is accounting (simply depreciating it over the life dictated by policy or standards).

    if I told you I was going to invest in a newly-completed brick and steel office building at a 10% cap rate, but changed my mind because I was able to invest in used FEMA trailers at a 12% cap rate, you’d rightly call me foolish, because the useful life of the office building is certainly longer than the trailers.

    You might achieve a three-year payback on an investment, but if it worth nothing at the end of the three years, what was the point? All you did was take risk and lose the use of your invested funds.

    • Brian Becker March 25, 2014 8:08 pm Reply

      Which is why not having depr in the ROI so that as the investor you can self-determine that. Thanks for making my point.

  7. Visitor March 25, 2014 8:25 pm Reply

    Who wrote these words?

    “the city actually profited more than $642,000 in 2013. That’s not fuzzy “EBITDA” numbers either, that’s pure profit.”

  8. Visitor March 25, 2014 8:34 pm Reply

    will the physical assets acquired be the final investment needed to always and forever guarantee the future cash flows from city cable? there will never be additional expenditures required?

    • Brian Becker March 25, 2014 8:45 pm Reply

      You used my profit info to argue ROI and when I showed you were wrong you went back and tried to twist my word ‘profit’ again. Now you are trying to argue whether the investment needs to spend more on capital. I’ve indulged your grasping at straws long enough. You’ve been weighed and measured and been found wanting…it’s time for you to go to back to Topix.

  9. Visitor March 25, 2014 8:58 pm Reply

    I pointed out that the profit figure you were all excited about was pretty measly compared to the city’s ability to cash out risk-free. You’ve come back and tried to argue that EBITDA is all that matters, you’re trying to argue ROI without factoring in what will go into the “I” over time. If I’ve been weighed and measured by you it’s probably using five different scales that are all rigged to give you the answer you’re looking for. $10 million, $40 million, whatever it takes to show that the city council is corrupt even though your hand-picked members vote to approve the transaction.

  10. Visitor March 25, 2014 9:02 pm Reply

    the reason to use EBITDA within an industry to get an apples-to-apples comparison of transactions is that the fixed assets used to generate a cashflow will typically have comparable lives entity to entity within the industry. (it’s not perfect – wouldn’t be fair to compare two transactions if one was turn-key, and the other required significant upgrades/repairs.)

    But it is not sufficient to take the EBITDA and say that is your economic return.

  11. Brian Becker March 25, 2014 9:14 pm Reply

    It’s not apples to apples when you compare a municipal EBITDA to a private company EBITDA. The ctiy’s consultant had a deer in the headlights look and could only say “EBTIDA is what it is” — but EBITDA is ONLY good for comparing LIKE entities. The consultant used EBITDA multipliers of four private transactions to evaluate this sale. It’s very inaccurate. The city has never tried to maximize profits, using EBITDA is only good for the buyer…not the city.

  12. Pingback: Becker & Anonymous Debate ROI, Profits and EBITDA | SEMO.net

  13. Pingback: Becker & Anonymous Debate ROI, Profits and EBITDA | SEMO.net

  14. Visitor March 25, 2014 9:47 pm Reply

    you’re actually making this worse. The point of someone who wants to use EBITDA is to strip down to an “operating net income” so that these items (interest, depreciation in the city’s case) that will not be the same for the BUYER as they were for the SELLER, and are likely to be the same for BUYER whether they buy the city of PB or the city of Dexter’s cable system, are not included. You don’t solve for the relative efficiency of a public unit versus a for-profit by going from EBITDA to GAAP – they both include operating expenses.

    the city doesn’t really care how the buyer arrives at their value, what the city cares about is the potential for future cash flows. they can take $17.5 million cash in hand today, risk free, or maybe they can continue to improve their cash flows over time. you point out that this $640,000 accounting profit is the best they’ve ever done. what are the odds it’s going to get better? what are the odds future investment in the system will be required (negative cash flows)? what are the odds there will continue to be a loss of subscribers (impairment of cash flows)?

    these are hard questions to answer, short of a crystal ball. it’s a lot easier to throw bombs and accuse the UNANIMOUS council of stupidity/corruption.

    • Brian Becker March 25, 2014 9:52 pm Reply

      You don’t do comps on residential property for commercial property appraisals. It is the same for EBITDA with muni vs private. EBITDA is about how well the operator drove up earnings and drove down expenses. But a muni does neither of those. They make sure that operating expenses are always less than earnings. It is two totally different mindsets and why EBITDA is a ridiculous measure of a municipally owned asset.

    • Visitor March 25, 2014 9:55 pm Reply

      Cash flow might increase for another year or to but then get worse, in my opinion.

      They mentioned in the meeting that it’s hard for a smaller company to operate in the cable business anymore. To use the example from the council meeting, ESPN charges around $5 per subscriber. If City Cable goes in and says we’re not going to pay that, ESPN will say ok bye. They don’t care about 6000 subscribers, thats a drop in the bucket.

      City Cable’s purpose was to provide quality internet and cable tv to Poplar Bluff. It’s served that purpose and now it’s time to move on.

  15. Maye April 3, 2014 10:13 am Reply

    I agree! A city owned asset cannot be compared to a privately owned asset fairly. Unless of course you have such waste in your city that it levels out the difference!

  16. Brian Becker April 3, 2014 10:58 am Reply

    Ah…you are contradicting yourself, Maye. The precise reason you cannot compare the two is “because” of the waste in the city. That waste reduces the EBITDA which reduces the private-evaluation metric used. Maybe you meant to say: A city owned asset cannot be compared to a privately owned asset fairly BECAUSE you have such waste in your city!

    Sadly, our city council voted 6-0 because they bought the consultant’s lie that this was a good deal. It was a good deal…for his buyer and for his commission but not for our city.

Leave a Reply

  • About Us

    Bluff Technologies, Inc.
    d.b.a. SEMO.net

    1899 N Westwood Blvd #218
    Poplar Bluff, Mo 63901