Centennial Communications (CYCL)

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Corporate Profile

Based in New Jersey, Centennial Communications Corp. (CYCL) is a regional communications carrier that operates under licenses covering specific areas. The company has three operating segments U.S. wireless (55% of fiscal year 2007 revenues), Caribbean wireless (33%), and Caribbean broadband (12%). CYCL's U.S. operations provide digital wireless services to customers in the Midwest (including parts of Indiana, Michigan, and Ohio) and the Southeast (parts of Louisiana, Mississippi, and Texas). Wireless services are operated mainly through its own network, which has been recently upgraded from the older TDMA to the GSM/GPRS technology. In the Caribbean, Centennial has wireless operations, using CDMA-based technology, and acts as a competitive local exchange carrier offering services using its own high-capacity terrestrial and undersea fiber-optic network. The company derives most of its Caribbean revenues from Puerto Rico, where it provides wireless and broadband Internet services. Additionally, CYCL provided wireless and wireline services in the Dominican Republic and wireless services in the U.S. Virgin Islands. On March 13, 2007, CYCL completed the sale of its Dominican Republic subsidiary to Trilogy International Partners for approximately $80 million in cash. Two leading private equity firms Welsh, Carson, Anderson & Stowe and The Blackstone Group (as well as their affiliates) collectively hold a significant percentage of CYCL outstanding shares.

Investment Thesis

Centennial continues to benefit from favorable wireless and broadband industry trends, but its highly leveraged financial position, the competitive environment, and high valuation compared to peers may all negatively affect the stock price.

Centennial's clustering strategy of setting up operations in neighboring areas with relatively low population density has proven to be somewhat ambiguous. Although this strategy provides CYCL the opportunity to build its brand image and critical mass in outer urban areas, CYCL had to undertake substantial investments to create the necessary infrastructure and the return on capital for these rural networks has been less than satisfying. In addition, since the clusters are within driving distance of major metropolitan areas, users venturing into the company s territory bring in only transient roaming revenues. CYCL has roaming arrangements with numerous wireless carriers, including AT&T (Cingular) Wireless and T-Mobile, which enables it to offer nationwide rate plans at competitive prices. The company continues to forecast a long-term decline in roaming revenue, with an approximately $10 million decrease during fiscal 2008.

Moreover, the company has a highly leveraged balance sheet with $2.0 billion of loan, following the recent issuance of $550 million of high-interest long-term debt, followed by a 10.75% subordinate note offering that raised $145 million.

Recent operating performance has been mixed, and we believe the company is currently trading at a premium to the industry group based on 2008 EV/EBITDA of approximately 7.0x estimated 2008 EBITDA. Moreover, the company's highly leveraged capital structure and geographically dispersed service territory may reduce its attractiveness to a potential acquirer (unless the company is broken up).

Also, the Federal Communications Commission (FCC) auctioned wireless spectrum in August 2006, leading to new market entrants, including cable television companies.

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