It looks as if Christmas has come early for Teletouch Communications, Inc. (OTCBB: TLLE) as the wireless services, cellular, consumer electronics and public safety equipment provider has finally reached a comprehensive settlement agreement with AT&T (NYSE: T), ending a two-year arbitration battle that nearly wiped out the company’s cellular business. News of the long-awaited settlement renewed interest from investors as TLLE jumped to a 52-week high of 0.89 on Monday, well above their 50-day moving average of 0.625 and their 200-day moving average of 0.507, while their trading volume spiked above the 237,000 mark, a level they have already surpassed on Tuesday.
The lawsuit brought against AT&T was filed by TLLE’s wholly-owned subsidiary Progressive Concepts Inc., doing business as Hawk Electronics, and related to its dealership relationship with the NYSE company. As part of the settlement Hawk, which operates 20 stores in the Dallas/Fort Worth; San Antonio; Houston; Austin; Tyler and Arkansas service areas, will have the right to sell AT&T wireless products as well as the right to sell, activate and provide service to Apple iPhone and iPad customers as a distributor.
Obviously the big win for TLLE was the right to sell, activate and provide service to Apple iPhone and iPad customers given the fact that the company believed their steady decline in cellular subscribers was due to their inability to accommodate the demand for these Apple products. It goes without saying TLLE’s cellular business segment was hammered by this dispute and has taken a serious toll on the company’s operating earnings as they were forced to focus on lower margin business segments that did little in the way of impressing shareholders.
To ease the financial burden that TLLE has been carrying since the lawsuit was filed the settlement agreement with AT&T included “Cash and other consideration in excess of $18.5 million, including: $5 million in cash and a $5 million credit against PCI’s outstanding accounts payable to AT&T at closing, and an agreement for the transfer of all remaining subscribers to AT&T by the end of the 3-year Distribution Agreement term for a maximum cash payment of $8.5 million, subject to certain terms and conditions, at which point, such Distribution Agreement ends, and PCI then acts solely as a Dealer for the remaining three year term of the Dealer Agreement.”
That 3-year Distribution Agreement was amended and renewed for all of PCI’s current and prior market areas including the DFW, San Antonio, Houston/South Texas, Austin/Central Texas, Tyler/East Texas and Arkansas service areas. In addition to this Distribution Agreement a new 6-year Exclusive Dealer Agreement was finalized with the first three years running in step with the Distribution Agreement and the last three years continuing after that agreement expires.
According to T. A. “Kip” Hyde, Jr., President, Chief Operating Officer and Director of Teletouch, the impact that the two agreements will have on business is substantial, “we estimate that the renewed three year Distribution Agreement and related six year Dealer Agreement, will generate an additional $25-30 million incremental contribution margin to the Company over the term, based on historical results.”
Hyde continued, “With the cellular business stabilized and growing, we will once again have a solid operating platform to facilitate future organic growth in each of our business segments, as well as support for complementary acquisitions.”
Looking at TLLE’s last filing it was clear that the company’s other business segments were not capable of carrying the load. Even with impressive revenue increases in their Two-Way Radio/Public Safety Equipment business and their Wholesale Distribution business both of these segments lacked a meaningful profit margin. TLLE made it clear that their success was essentially contingent upon working out an agreement with AT&T, saying “the negative impact to ongoing operating earnings will subside as cellular subscriber losses begin to abate” and once that deal was in place the company would “shift its focus and resources in its cellular business to subscriber acquisition to begin restoring its subscriber base and build its recurring revenues.”
TLLE certainly tried their best to survive without AT&T, turning to new relationships with Clearwire Communications (NASDAQ: CLWR) and Sprint (NYSE:S) subsidiary, Sprint Solutions, Inc. but both those agreements were eventually terminated “due to lower than expected activations and a variety of sales and operational support issues encountered.”
Of course even with the AT&T agreement now finalized TLLE still has a long way to go before shareholders see value. The lengthy battle resulted in significant legal costs incurred by TLLE and the loss of revenue has put them behind the eight-ball with, as they state in the October filing, “certain debt obligations are near maturing that the Company has been unable to refinance to date, primarily due to the degradation of the business caused by the ongoing dispute with AT&T.” In addition to these debt obligations, as of August 31, 2011 the company reported a working capital deficit of $7,472,000.
Needless to say TLLE has their work cut out for them and while the AT&T battle is over it could take some time before they truly deliver the financial results investors are seeking.
