Good morning, everyone. Welcome to Shenandoah Telecommunications conference call to discuss the announcement of its definitive agreement to acquire Horizon Telcom. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kirk Andrews, Director of Financial Planning and Analysis for Shentel.
Good morning, and thank you for joining us. The purpose of today's call is to discuss Shentel's acquisition of Horizon Telcom. A press release announcing the acquisition was distributed yesterday after the market closed. The presentation we'll be reviewing this morning is included on the investor page at our website, www.shentel.com. Please note that an audio replay of this call will be made available later today. The details are set forth in the press release announcing this call. In addition, we expect to soon file a Form 8-K with the SEC that will contain more information about the transaction and will include attached copies of the material transaction agreements. With us on the call today are Chris French, President and Chief Executive Officer, Ed McKay, Executive Vice President and Chief Operating Officer, and Jim Volk, Senior Vice President of Finance and CFO.
After our prepared remarks, we will conduct a question and answer session. As always, let me refer you to slide two of the presentation, which contains our safe harbor disclaimer, and remind you that this conference call may include forward-looking statements subject to certain risks and uncertainties. These include our ability to obtain the required regulatory approvals and satisfy the closing conditions for the Horizon transaction, to obtain the financing for the transaction, to close on the transaction, and to realize the expected savings and synergies from the transaction within the expected timeframe or at the expected cost. These and other factors may cause our actual results to differ materially from the statements. Therefore, we have provided a detailed discussion of various risk factors in our SEC filings, which you are encouraged to review. We caution you not to place undue reliance on these forward-looking statements.
Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements. With that, I will now turn the call over to Chris. Go ahead, Chris.
Thanks, Kirk. Good morning. We appreciate everyone joining us for this call. We're excited to announce the execution of a definitive agreement to acquire Horizon Telcom, a leading commercial fiber provider in Ohio, with an early-stage fiber-to-the-home line of business. As noted on slide four, we believe this will be a transformative transaction that checks a lot of boxes for us to accelerate our fiber-first strategy. Horizon will contribute expertise and strong commercial customer relationships that will double the size of our commercial fiber business. Just as importantly, Horizon's 7,000-mile fiber network will create a new beachhead for our Glo Fiber expansion, opening up new markets with 100,000 targeted passings. We believe owning the middle-mile fiber network that connects our Glo Fiber markets provides cost and reliability advantages over competitors with island networks.
We also believe the best way to maximize the return on investment of a high-capacity fiber network is to serve both residential and commercial customers. We anticipate that the Horizon acquisition will allow us to replicate this strategy in new markets in Ohio, while providing benefits of geographical diversification outside of our Mid-Atlantic footprint. Operating scale has been an important driver of profitability in the telecommunications industry. The Horizon acquisition will allow us to increase the size of our overall business by approximately 25% across most key metrics. We have identified approximately $10 million in annual run rate synergy savings that we anticipate realizing within 18 months following closing and integration. We expect the improved operating scale will contribute to margin expansion in the coming years. We've always taken a long-term view in our capital allocation and investments to increase shareholder value.
We anticipate the Horizon acquisition, along with continued execution in our Glo Fiber expansion, will make the combined company's long-term growth rates among the leaders for publicly traded broadband companies over the next several years. Moving to slide five, we provide a map of the anticipated combined company's network. With a minor investment, we plan to connect the Shentel and Horizon networks to provide a contiguous super regional network covering nine states. From a commercial business perspective, the combined 16,000 route mile fiber network will provide on-net connections in key data centers in Ashburn, Virginia, and Chicago, Illinois, and many unique routes in the rural parts of Ohio, Virginia, and West Virginia. We expect this to create many compelling opportunities to grow the combined company commercial business at a faster pace than the individual companies could on a standalone basis.
Horizon has been verbally awarded a hundred...a $27 million grant with NTIA to expand its middle Mile network into eight underserved counties and upgrade network capacity to up to 400 Gbps. We expect this grant and our co-investment to further our network competitive advantage, especially in the wireless and carrier customer verticals. The unique and rural nature of the Horizon network also provides ample opportunities to expand our Glo Fiber business. As I mentioned earlier, we identified 100,000 new passings that met our underwriting criteria to construct by 2026. The residential opportunity could increase beyond 2026, with smaller markets that the network passes and unserved homes that are not in our business plan today. The Broadband Equity Access and Deployment program, or BEAD, has allocated approximately $800 million to the state of Ohio to construct broadband to unserved homes.
We will closely monitor this program as application and award processes develop. Turning to slide six, Shentel and Horizon share a similar history and strategy of deploying state-of-the-art technologies in rural markets and providing outstanding local service to our customers. In addition, I expect the complementary core competencies of Shentel's residential focus and proven fiber-to-the-home platform, coupled with Horizon's advanced commercial fiber business expertise, will provide foundational building blocks that will lead to a smooth integration of our respective teams. We're excited about the future of our combined organization and look forward to working with the Horizon team to collectively deliver great service to our communities, provide growth opportunities for employees, and deliver long-term value creation to our shareholders. I'll now turn the call over to Jim.
Thank you, Chris, and good morning, everyone. Please refer to slide eight for to review the transaction summary, our financing plans, and implied transaction multiples. Shentel has entered into a definitive agreement to acquire Horizon for a purchase price of $385 million, consisting of $305 million payable in cash and $80 million payable in common shares to be issued to GCM Grosvenor, one of Horizon's equity holders. We anticipate the transaction will close in the first half of 2024, subject to obtaining necessary regulatory approvals and satisfying other closing conditions. Horizon has agreed to invest in the network expansion between signing and closing, and we will reimburse them at closing for the amount of capital expenditures during this interim period.
We announced last night in our press release that we have raised $436 million in capital to finance the transaction and growth capital to expand the combined company expansion plans. As previously noted, GCM will roll over $80 million of its equity into Horizon into approximately 4.1 million common shares of Shentel when the transaction closes. GCM will own approximately 7% of Shentel after the transaction closes. We also announced that we entered into an agreement to raise $81 million in equity by issuing a 7% participating, exchangeable, perpetual preferred stock to Energy Capital Partners, an existing shareholder. The preferred equity is expected to close in conjunction with the Horizon transaction. The preferred dividend can be paid in cash or in kind at the option of Shentel.
We plan to pay the preferred dividend in kind until we reach positive free cash flow in 2027. The preferred equity can be exchanged into Shentel common shares at an exchange price of $24.50. At closing, this would translate to approximately 3.3 million common shares on an as-exchanged basis. The combined equity raises will increase our fully diluted common shares at closing on an exchange basis to approximately 58.1 million shares. Our credit facility was amended and upsized by $275 million, for a total credit facility of $675 million. The commitments for the new facility were received from our existing lenders. The new credit facility includes a $225 million Delayed Draw Term Loan A-3 and a $50 million credit facility.
We expect to use cash on hand, proceeds from the equity financings, our revolving line of credit, and a portion of the new term loan to fund the transaction at closing. Please note that we have $250 million of our existing credit facility still undrawn and available to us. We believe we have taken a balanced view in developing our capital structure for this transaction and the related expansion plan, and will continue to target our peak net leverage in 2025 and 2026 at the 4x range. We also plan to raise additional growth capital over the next year to fund network expansions, which may include exploring strategic alternatives for our non-core tower portfolio, among other sources of capital. Horizon generated $65 million in revenue and $19 million in adjusted EBITDA in 2022.
We anticipate realizing approximately $10 million in annual run rate OpEx synergies over the next eight-- over the 18 months following the closing. The savings have identified in overlapping back office systems and resources, as well as excess office space. We also expect to realize $16 million in income tax benefits from the present value of expected utilization of $68 million in net operating losses and $18 million in interest deduction deferrals, that are both carried forward after considering Section 382 limitations from the change in control. After netting the tax benefits from the purchase price, we are acquiring Horizon at an implied multiple of 12.9x 2022 adjusted EBITDA net of synergies. This also translates into a purchase price of approximately $51 ,000 per fiber route mile.
We believe the $385 million purchase price was an attractive price point to invest when considering Shentel's higher trading multiple today, the estimated $75,000 per route mile replacement costs to overbuild a comparable fiber network, and Horizon's commercial book of business with over $200 million in expected remaining contract value. Turning to slide nine, we expect pro forma 2022 revenues to increase approximately 24% and pro forma adjusted EBITDA net of synergies to increase approximately 38% over standalone Shentel. We expect adjusted EBITDA margins, net of synergies, to increase 300 basis points pro forma due to synergy impact and anticipated economies of scale of the combined business. On slide 10, we present the expected impact the transaction will have in accelerating our fiber-first business plan.
Total 2026 passing target is expected to increase 25% from 686,000 passings on a standalone basis to 860,000 passings on a pro forma basis. Please note that the pro forma passings include 50,000 additional Glo Fiber passings in Shentel markets from prior guidance. On a technology basis, fiber passings are expected to increase 36% and be approximately 75% of total pro forma passings. 2026 revenue mix related to our Glo Fiber and commercial fiber lines of business is expected to increase from approximately 47% to 52% pro forma, assuming about 25% penetration of our Glo Fiber markets. As Glo Fiber penetration approaches terminal penetration, we expect Glo Fiber and commercial fiber revenue will be approximately 2/3 of consolidated revenues. And now I'll turn the call over to Ed.
Thanks, Jim, and good morning, everyone. I'll begin on slide 12 with an overview of Horizon's commercial fiber business, which represented about 64% of Horizon's 2022 revenue. Horizon has over 1,100 commercial customers with total expected remaining contract value of around $218 million as of June 2023. Horizon has clear visibility on future commercial fiber revenue streams, with an average remaining contract term of approximately 4.5 years. The Horizon low average monthly churn and compression rate of 0.4% reflects the competitive advantage that they maintain in terms of unique fiber routes in rural markets, robust speeds, and a high-quality network with backbone upgrades underway to increase capacity up to 400 Gbps.
Horizon has developed a strong commercial book of business with approximately two-thirds of their existing commercial revenues coming from national wireless carriers and other large carrier customers. Their experienced sales leadership team has grown commercial revenues at a compounded annual growth rate of approximately 11% since 2020. Horizon's commercial fiber business operates in 4 major markets, including Southeastern Ohio, Columbus, Indianapolis, and Dayton. Southeastern Ohio represents 63% of their fiber route miles and covers approximately 35 counties, including Horizon's headquarters in Chillicothe. Horizon has operated a fiber network in this market since 2010. Columbus was Horizon's second commercial fiber market and offers attractive demand trends as the second-largest MSA in Ohio and is a key national connectivity hub between the East Coast and Midwest.
Horizon entered the Indianapolis market after acquiring Urban Systems in 2019 and further expanded their presence in Indiana with the acquisition of Infinity Fiber in 2021. The expansion into the Dayton, Ohio, market was anchored by a small cell contract with a major wireless carrier. After completing construction of the dense small cell fiber network, Horizon expanded its sales efforts to focus on the enterprise customer vertical. Horizon owns 85% of its fiber network, with an average of 111 strands per owned route mile and only 24% of the strands utilized, providing ample capacity for new customers. The remaining 15% of Horizon's fiber network consists primarily of indefeasible right of use agreements, with the largest route connecting Indianapolis to a key data center in Chicago.
Moving to slide 13, the acquisition of Horizon will increase Shentel's fiber network route miles and strand miles by approximately 80% and 120%, respectively. Shentel's monthly recurring and amortized commercial revenue will more than double with the addition of Horizon. One of the strong points of Horizon's commercial business is the recent sales booking success. As reflected in the backlog chart, Horizon has over $500,000 of contractual monthly recurring and monthly amortized revenue in their backlog, pending installation and customer delivery. We expect most of this backlog to be installed and generating revenue by the end of 2024. I will now shift over to discuss the fiber-to-the-home opportunity of the combined business on slide 14.
We have upsized the projected Glo Fiber 2026 passings target from 450,000 to 500,000, with our recent success in executing new franchise agreements in central Pennsylvania. We believe the Horizon acquisition will create a new beachhead for fiber-to-the-home in Ohio, with our initial target of 100,000 homes and businesses passed by 2026. Horizon launched their first greenfield fiber- to- the- home market in the second half of 2021 and has approximately 18,000 greenfield passings in three markets as of June 2023. The unit economics, technology, and bandwidth speeds offered in the Horizon target markets are very similar to those of our Glo Fiber markets. Lastly, Glo Fiber and Horizon have both won government grants through state agencies in Maryland and Ohio, respectively, representing a total of $50 million of grants to build to 8,000 unserved homes.
The cost per passing net of subsidies is approximately $1,500 or very similar to the Glo Fiber cost per passing. Overall, the pro forma combined company expects to construct over 600,000 greenfield fiber passings by 2026, an expected increase of 33% from our prior target. With penetration rates as of June 2023 at 17% and expected average terminal penetration of 37%, the combined company has a very large opportunity to grow revenues at high rates over the next several years. Slide 15 reflects the incumbent cable business of Shentel and the fiber-to-the-home business in Horizon's local exchange carrier market in Ross County, Ohio. Shentel has 212,000 passings today, with a mature customer base that is close to our expected terminal penetration. Horizon recently overbuilt 14,000 legacy copper passings with fiber.
We believe there is a significant opportunity to increase the penetration of these fiber homes from 16% to 40% over the next few years. All of the Horizon fiber passings compete with an incumbent cable provider, whereas only 25% of Shentel's passings are expected to compete with another broadband provider. In addition to these incumbent passings, Shentel has been granted $70 million to construct broadband to 24,000 unserved homes surrounding our cable footprint, primarily in Virginia. The cost to pass net of subsidies is expected to be between $2,500 and $3,000. With limited broadband competition, we expect terminal penetration of over 60%. In summary, we expect to have over 250,000 passings in our incumbent broadband markets by 2026, and most of the subscriber growth is likely to come from government-subsidized passings.
Shentel is very excited about our opportunity to work with the Horizon team as we leverage our extensive combined fiber network to grow our commercial business, as well as our fiber-to-the-home business. Thank you, and operator, we're now ready for questions.
Thank you. As a reminder, to ask a question, simply press star one one on your telephone, and to remove yourself from the queue, press star one one again. One moment while we compile the Q&A roster for your first question. Our first question is from Frank Louthan with Raymond James. Please proceed.
Great. Thank you. A couple quick ones, and then one more, maybe more complex. Just, just to verify, the $57 million in the grants, is that one time, or is that kind of an ongoing multiyear where you get that $57 million? And then, and then, how much of the, the Horizon, the Horizon commercial revenue is, is cash revenue versus amortized revenue? And then the same math for the EBITDA, and then I've got a follow-up.
So I'll answer the grant question and let Jim take the other one. But those are one-time grants. It's not an ongoing payment over many years.
Great.
It's a one-time for the construction.
Yeah, Frank, most of the revenue is cash revenue. There's a small piece that is being advertised in both the backlog and in what's in the revenue today.
All right, great. That's very helpful. All right, so last question, then maybe I'll come back. Well, just looking at Horizon's incumbent fiber revenue, only 16% penetrated. Just curious why it's that low on the incumbent side, and then the expansion at 5% penetrated. I assume those are just more recent builds, but how long have those properties been in place, and how should we think about that? Thanks.
Yeah. This is Ed, so I'll take that one. So in the incumbent areas, Horizon was late upgrading to fiber. So that's very recently, over the past several years, that they upgraded to fiber. That's why that penetration is so low in the ILEC territory. And you're right, in the greenfield markets, those are very new. Really, the first customers came on in the second half of 2021 in one small market. They've been expanding since then, so these are very early stage greenfield markets. That's why we're seeing the low penetration.
All right, great. Thank you very much.
Yeah. Frank, the other thing to add there is, you know, Horizon is primarily a commercial fiber business. They recently got into, you know, greenfield, fiber-to-the-home expansion, and this is an area of strength for Shentel. So as Chris mentioned earlier in the call, we think our core competencies will complement each other well, and we think, our team can help the residential, growth, quite a bit here in the future.
Great. Sounds like it. All right. Thanks, guys.
Thank you. One moment for our next question, please. All right, and it comes from the line of Dan Day with B. Riley Securities. Please proceed.
Hey, guys. Thanks for taking the questions. So just first one, the hundred thousand passings, new greenfield passings with Horizon, are those markets, I assume, all in Ohio, like, already identified, or is that more of an educated guess on, you know, where you're going to target over the next few years? Or is it kind of like, hey, these are the markets we're going to go into, and they have them permitted and all that?
Yeah, I'll, I'll take this, and this is Ed. So, so those are 100,000 passings in Ohio, primarily, on, on Horizon's existing fiber backbone. You know, we do have those identified. You know, we're not ready to announce all those at this point, but we will provide more details after close.
Okay, great. Another quick one. Just, you know, we had talked about you guys becoming a cash taxpayer around 2025 or 2026, with the deferred tax assets. Does that meaningfully change and get pushed out?
Yes, Dan, it, it will. With the, you know, the NOLs that we're getting as part of the transaction, we're probably looking—we're not gonna pay any meaningful taxes until about 2028 or 2029 now.
Okay. Last one. Are you guys gonna use the Glo Fiber brand and sort of take the Horizon markets and tuck it all under one Glo Fiber brand, or are you gonna continue with the Horizon brand?
So at this point, we're still working through the branding decisions. As we get closer to the closing, we'll be able to announce that, but no final decision at this point.
Okay, great. That's all I had, guys. Thanks.
Thank you. One moment for our next question, please. It comes from Hamed Khorsand with BWS Financial. Please proceed.
Good morning. Just a couple of questions. One was, why does this opportunity exist for you? And then second, Chris, could you expand upon, what you had said in your, remarks about the expertise Horizon has? What is that expertise that you were looking for?
So, I'll take the second part of that question first, Hamed. The expertise, we feel they have expertise across all their lines of business. We're particularly attracted to their commercial fiber business. That seems to be the leading part of their business and one that we feel is complementary to us, and certainly an area where we're always looking to expand and improve. And as I think Ed mentioned, as we put these networks together, it just enhances the attractiveness and the capabilities of both networks.
Yeah, Hamed, if you want to repeat the first question, I, I wasn't quite sure-
Oh, sure.
what you were asking.
It was, it was about why does this opportunity exist, about acquiring Horizon?
Why are we interested in acquiring Horizon?
Yeah, or why did Horizon just want to sell at this juncture?
I think that's a question probably for their sponsors, but it appeared to us that they were capital constrained, and they needed to either do a transaction or raise additional money to keep investing in the business. As you know, our balance sheet is relatively light in form of debt. This transaction fit well at this time with our strategy to expand our fiber business.
Okay, thank you.
Thank you. As a reminder, to ask a question, simply press star one one on your telephone. One moment, please. And we have a follow-up from the line of Frank Louthan with Raymond James. Please proceed.
Yeah, great. Thank you. So as far as being able to fund this longer term, you know, when do you think you'll have a book out on the towers? And do you think... And how long will it take to close this transaction? And then how long do you have with your banks and so forth, to get some permanent funding in place? And maybe I missed this, but can you characterize the total capital needed to kind of fund the losses and the fiber-to-the-home expansion? When does this deal become free cash, break even, and that sort of thing? Thanks.
Okay. So Frank, we expect the combined business to be free, free cash flow positive in 2027. We were previously guiding Shentel with term free cash flow positive in 2026, so we are pushing this out one year, due to not only the acquisition, but the expansion opportunity of, you know, building fiber-to-the-home in Ohio. From a financing perspective, the upsize of credit facility of $275 million will close on the day of closing. The equity, preferred equity, the financing will also close... expected to close on the day of financing. We expect the Horizon transaction to close in the first half of next year.
As far as for additional growth capital, you know, we will consider selling our towers, you know, to be determined exactly on the timeframe related to that. But we do not need the growth capital to close the transaction or immediately afterwards. We have plenty of existing facilities to fund the business, along with the new financings I just mentioned. You know, we have a good year plus of runway before we need to bring on the growth capital.
Okay. What kind of rates are you getting on the funding?
On the credit facility, similar rates that we have today, probably, you know, market is a little tighter than it was from two years ago when we did the original, you know, credit facility. So I'm expecting the rates on the new term loan to be up about 25-50 basis points from what we have today.
Great. That's very helpful. Thanks, guys.
Thank you. This concludes the Q&A session period. I will now turn the call over to Jim Volk for final comments.
Well, thank you, everyone, for joining our call today. We're very excited about this transaction and how it will help accelerate our fiber-first growth strategy, and we look forward to talking to you next week when we release our third quarter earnings. Thanks, everyone. Have a great day.
Thank you. With that, we thank you everyone for participating. You may now disconnect.