ROI Acquistion Corp. II SPAC Acquiring A Highly Attractive Asset In An Explosive-Growth Industry.

ROI Acquistion Corp. II: SPAC Acquiring A
Highly Attractive Asset In An Explosive-
Growth Industry
|Must Read Aug. 10, 2015 2:30 PM ET11 comments
by: Lester Goh
Summary
• Pending its acquisition of Ascend Telecom Holdings, ROIQ is severely
undervalued by the market - largely due to its SPAC structure which has left
it unnoticed by market participants.
• Ascend Telecom is a highly attractive asset for many reasons including
favorable long-term industry & regulatory tailwinds, structural competitive
advantages, high revenue visibility, and proven operational and
management excellence.
• Management's proven bolt-on acquisition strategy, as well as low debt loads,
imply the possibility of future highly accretive acquisitions.
ROI Acquistion Corp. II: SPAC Acquiring A Highly Attractive Asset In An Explosive-… Page 1 of 22
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• With industry-leading EBITDA growth and a long growth runway, relative
valuation gaps between peers should close fairly quickly.
• At 11.6x FY2016E EBITDA, ROIQ has 30%+ potential upside. If the
valuation gap between peers close, the actual upside potential is far greater.
Investment highlights
ROI Acquisition Corp. II (NASDAQ:ROIQ) is a special situation opportunity that
possesses many features of a great investment. These features include the
following:
• regulatory tailwinds,
• favorable long-term industry tailwinds,
• structural competitive advantages,
• high revenue visibility,
• a compelling value proposition to customers,
• proven operational and management excellence,
• potential for highly accretive bolt-on acquisitions in the future,
• and a lack of investor coverage which has resulted in a large price-value
disparity.
To be clear, ROIQ is a SPAC that has agreed to acquire Ascend Telecom, a highly
attractive asset which possesses the attributes listed above.
Due to the history of SPACs and their structure, ROIQ has more or less gone
unnoticed by market participants, something that is likely to change very quickly. As
a result of investor indifference, ROIQ is severely undervalued at current trading

prices, even with conservative assumptions. With industry-leading EBITDA growth
and a long growth runway, relative valuation gaps between Ascend Telecom's
competitors should close fairly quickly.
At 11.6x CY2015 (or FY2016E) EBITDA, ROIQ has 30%+ upside potential. Actual
upside potential is likely to be far greater if valuation gaps between peers close.
ROIQ's current valuation implies an ~10x CY2015 EBITDA multiple, which is far
lower than the EBITDA multiple the deal is agreed to be executed at. Further,
despite industry-leading EBITDA growth and rapid margin expansion, it trades at a
huge discount to Indian peers (who trade at ~15.9x CY2015 EBITDA).
I believe that there are two main reasons why ROIQ is cheap. One, its an SPAC
with zero research coverage (unlike IPOs which tend to be heavily promoted by lead
arrangers). Two, the company it is acquiring, Ascend Telecom, is a private limited
company, which similarly has zero bulge bracket/boutique coverage. I expect this
situation to change in the following months.
A background on SPACs and why this opportunity exists
ROIQ is a SPAC that was formed in 2013 in order to undertake an acquisition.
Unlike IPOs, SPACs are not heavily promoted or widely followed. Further, they are
misunderstood by the retail investor community at large and for good reason. In the
1980s, many SPACs developed a villainous reputation for operating purely for the
enrichment of their general partners. However, not many people are aware that
many shareholder protections have been instituted since then. One of the most
significant permutations of such shareholder protections are as follows (pg 85 of
prospectus):

We will provide our public stockholders with the
opportunity to redeem all or a portion of their shares of
common stock upon the completion of our initial business
combination at a per-share price, payable in cash, equal
to the aggregate amount then on deposit in the trust
account as of two business days prior to the
consummation of the initial business combination,
including interest (which interest shall be net of franchise
and income taxes payable), divided by the number of
then outstanding public shares, subject to the limitations
described herein. The amount in the trust account is
initially anticipated to be approximately $10.00 per public
share. The per-share amount we will distribute to
investors who properly redeem their shares will not be
reduced by the deferred underwriting commissions we
will pay to the underwriters. Our initial stockholders have
entered into letter agreements with us, pursuant to which
they have agreed to waive their redemption rights with
respect to their founder shares and any public shares
they may hold in connection with the completion of our
business combination."

In essence, if you purchase shares in ROIQ at ~$10/sh (shares currently trade at
$10.05 as of the time of writing), you are guaranteed zero downside. If you are
unhappy with the proposed acquisition, you can simply redeem your shares at little
cost. Although this may seem like a free lunch, it is not exactly one - there still
remains the opportunity cost of capital allocation. Regardless, it is as close to a free
lunch as it gets.
Additionally, SPACs also have a limited institutional follower base in their earlier
days, given that there is simply nothing much for equity research teams to write
about - an SPAC post-offering is simply looking around for potential acquisition
targets, which is hardly interesting per se.
As a result of a limited follower base (both retail and institutional), severe
mispricings can and do occur, allowing quick-witted and insightful investors to pile
on the bandwagon early. I believe ROIQ is a classic example of such a situation.
Ascend Telecom is a highly attractive asset
ROIQ is acquiring Ascend Telecom Holdings, a private limited company that
independently owns and provides passive telecom infrastructure to all 11 telecom
operators in India.
Its business model is rather simple to understand - Ascend Telecom generates its
revenues and cash flows from three main sources:
• base rental of towers,
• rental premiums,
• and energy management solutions.
At the risk of oversimplification, Ascend Telecom rents out its towers to telecom
operators, and charges fixed fees (the base rental) along with additional fees (the
rental premium) through long-term contracts (ranging from 10-15 years in length).
As a result, revenue visibility is extremely high.

Further, there is a significant degree of customer stickiness as contracts between
Ascend Telecom and telecom operators have a lock-in period within which the
service provider cannot terminate the contract. As this lock-in period (which is in the
range of a few years) expires, sunk costs and inertia would prevent the telecom
operator from leaving Ascend Telecom for a competitor. The potential for
operational disruption further decreases the probability of such a situation
materializing.
If the telecom operator still wants to terminate the agreement, he would have to
cough up the termination penalty, which could be as high as the NPV of rentals for
the remaining period until the lock-in expires. Thus, situations where telecom
operators terminate agreements with Ascend Telecom are few and far between.
Accordingly, customer retention is high.
Additionally, Ascend Telecom also provides telecom operators with energy
management solutions. These solutions are provided on a fixed-fee basis, which is
highly attractive to telecom operators given the possibility of realizing significant
operating leverage as a result of the presence of fixed costs.
Further, this initiative is also driven by regulatory tailwinds. According to Deloitte
research, there is significant public and regulatory pressure to reduce telecom
towers' energy consumption and pollution, considering that many towers are
powered by diesel generators.
Thus, to a telecom operator, not only would adopting Ascend Telecom's towers and
energy management solutions result in the potential for operating leverage, it would
also reduce regulatory pressure on the operator and decrease the probability of an
environment-related lawsuit. Clearly, Ascend Telecom's value proposition to a
telecom operator is highly compelling.
Apart from regulatory drivers, there are other tailwinds supporting Ascend Telecom
as well.
Favorable industry tailwinds include the following:
• attractive and young demographics,
• the explosive growth in data traffic in India,

• the imminent entry of Reliance Jio, a broadband service provider, as a result of
recent spectrum auctions,
• and further room for growth in the voice market.
Attractive and young demographics: According to a 2014 report by the World
Bank, India possesses a rapidly-growing population which is second only to China.
More importantly, the country is blessed with the youngest demographic profile with
a median age of 27 (according to Census India). Having a low median age is
significant as the younger generation tends to be more technology-savvy than the
older generation which leads to a high usage market. Per Nokia Networks
estimates, mobile data usage increased 74% in 2014 - 3G data traffic jumped 114%
while 2G rose by 59% over the same period.
Source: World Bank Population Report 2014

Source: McKinsey Global Institute 2010

Source: Government of India Ministry of Statistics 2015
As seen above, not only does India possess the second largest population in the
world (~1.267b people), its population has also experienced a huge rise in incomes
since the beginning of the century. This trend is expected to continue throughout the
next decade. The rise in incomes has resulted in greater amounts of discretionary
spending by the country. Similarly, this trend is expected to continue over the long-
term as the population becomes more competitive on a global scale and are able to
demand higher wages.

These factors would no doubt lead to increases in mobile and data penetration in
India. Accordingly, this would lead to an increase in demand for tower infrastructure,
which would be beneficial to Ascend Telecom. This assertion is supported by the
fact that mobile (per World Bank data) and internet penetration (per ITU data)
remains relatively low in India compared to other countries, as seen below.
Source: World Bank
Source: International Telecommunications Union
ROI Acquistion Corp. II: SPAC Acquiring A Highly Attractive Asset In An Explosive… Page 10 of 22

Explosive growth in data traffic: These two figures - mobile penetration at 75%
and internet penetration at 21% - are unlikely to remain at such low levels. Without a
doubt, the growth in discretionary spending would result in an increasing proportion
of the population in India gaining access to the internet and internet-connected
devices (such as smartphones). This assertion is supported by the 2015 Deloitte
report (pg 5) linked above. As seen below, smartphone penetration is expected to
grow from 13% in 2014 to 58% by the end of the decade while mobile data
consumption is estimated to grow from 94pb/month to 1,869 pb/month, representing
a CAGR of ~64% over the 2014-2020 period.
Source: Deloitte
Imminent entry of Reliance Jio: As a result of the recent spectrum auctions,
Reliance Jio, a broadband service provider, was able to acquire spectrum in
1800Mhz and 2300Mhz across 14 circles and 22 circles respectively. For reference,
the Telecom Regulatory of India has divided the country into 22 circles according to
teledensity - the number of telephone connections/per 100 persons in an area.

Following the auction, Reliance Jio intends to embark on an aggressive expansion
plan, presumably to capture its piece of the telecom pie in the country. The service
provider plans to provide seamless 4G services using LTE in 800Mhz, 1800Mhz,
and 2300Mhz bands. As a result, the demand for towers such as the one that
Ascend Telecom provides is sure to increase.
Further room for growth in the voice market: Wireless subscriptions have grown
at ~28% CAGR in the past 7 years (per IBEF research). However, despite these
double-digit growth rates, the voice market remains under-penetrated with 75%
teledensity. There are currently ~820m active telecom subscribers in India. To the
uninformed, this may seem like a significant degree of penetration (relative to India's
~1.2b population), but only ~18m broadband subscribers are on >1mbps plans.
Therefore, there is still further room for growth.
Competitive advantages
Ascend Telecom enjoys several competitive advantages. Apart from the obvious
and well-known barrier of entry of capital requirements (D&A has consistently
comprised of ~20% of revenues for Ascend Telecom) which form a meaningful
barrier of entry into the space, the firm is blessed with other competitive advantages
that are of the structural nature which are not as obvious or well-known.
Strategically located towers: Earlier, I mentioned that the country's telecom
authority has divided India into 22 circles according to teledensity. The majority of
Ascend's portfolio of towers and tenancies are located within circles that boast high
levels of teledensity such as Gujarat, Maharashtra, Kerala, and Assam. The highest
teledensity circles are known as Circles A, B, and C, which boast teledensities of
98%, 80%, and 73% respectively. As seen below, 47% of the firm's portfolio is
located in Circle A, 32% in circle B, and the remaining 21% in circle C. Thanks to
their strategic locations and the explosive growth in data traffic, demand for
Ascend's towers in these areas should experience huge growth going forward.

Source: Investor Presentation
Other competitive advantages: Apart from the above, Ascend is also blessed with
other competitive advantages. To understand these advantages, it is imperative to
understand the competitive landscape within India.
Management independence: Presently, there are ~400k telecom towers in the
country. Over 85% of these towers are "captive" towers. Captive towers are towers
that are either wholly-owned by telecom operators or are towers that these
operators hold a controlling interest. Ascend is not part of this herd - it is an
independent tower company. A captive tower company is likely to experience
potential conflicts of interest arising from the largest shareholder (the telecom
operator) being the largest customer (as telecom operators require towers to deliver
their services). In contrast, Ascend does not experience such conflicts.
Superior asset quality: A typical captive tower company owns legacy tower assets
that are simply not built to support multiple tenancies (hence the "legacy" in their
name). Thus, there is essentially a ceiling on scale benefits. In contrast, Ascend's
towers are relatively modern (most being no older than 8 years) and are built to

support multiple tenancies, thus there is a much higher ceiling on scale benefits.
Building towers requires significant amounts of capital and thus captive tower
companies are unlikely to be able to quickly replace and modernize their asset
portfolios, giving Ascend a competitive advantage. It follows that Ascend is likely to
achieve far greater levels of profitability compared to their rivals over the long-term.
Operational excellence: Due to the fact that Ascend owns modern towers, these
towers are capable of integrating operations which allow real-time monitoring as well
as automation and remote management. On the other hand, thanks to their legacy
towers, captive tower companies require manual intervention (hence resulting in the
need for significant manpower) to operate. Hence, Ascend operates with one of the
lowest cost structures in the industry (monthly operating expense/tower has been
steadily decreasing in recent years from ~$309/tower in FY12 to ~$260/tower in
FY15). In contrast, listed Indian competitors incur operating expenses per tower of
~$350/month (pg 7 of conference call).
Proven management excellence and the opportunity for bolt-on acquisitions
Additionally, Ascend also has a proven management team. It is headed by CEO
Sushil Kumar Chaturvedi, who has extensive experience within the telecom space.
He has been Ascend's CEO for 3 years, and brings with him 33 years of telecom
experience. Having previously served as a director of BNSL (which is India's largest
telecom service provider), as telecom expert of ITU and other stints at telecom-
related companies, it is clear that this is Sushil's area of expertise. He has also
proven himself in terms of acquisitions.
In FY12, Ascend looked to merge with India Telecommunications Infra Limited
("ITIL"). The merger gave Ascend the opportunity to triple its tower count and
increase its geographic presence from 13 to 19 circles in India. There was no
asset/administrative overlap between the companies and ITIL also possessed
quality tower infrastructure capable to supporting multiple tenancies. The acquisition
soon closed and Ascend managed to improve its tenancy ratio from 1.6x to 1.8x and
decrease its monthly operating expense/tower from ~$309/tower to ~$260/tower
over the FY12-FY15 period as seen below.

Clearly, this is a CEO that not only knows how what to look for in potential targets,
but also has the know-how to execute on his acquisitions - something that is rather
rare. Additionally, I believe that Ascend is poised to make further bolt-on
acquisitions in the future. This is due to the fact that holds little debt - its debt ratios
(as measured by net debt/EBITDA) are around the lowest in the industry at 3.5x as
seen below.

Given its high revenue (and essentially, cash flow) visibility, low debt load, and
proven management track record with respect to M&A, I believe that Ascend (and
eventually ROIQ, once the deal closes) will be used as a platform to consolidate
independent Indian tower companies in the future.

Valuation
As seen above, Ascend has consistently led the industry in terms of EBITDA
growth. The firm has achieved three-year CAGR EBITDA growth of 31% while its
competitors in India achieved a mere 12%, its US counterparts achieved 18% and
its global counterparts achieved 24%. LTM EBITDA growth of 32% is greater than
peers as while. Further, considering that LTM EBITDA growth is greater than that of
three-year CAGR EBITDA growth, this implies that EBITDA growth is actually
accelerating.

As seen above, Ascend currently generates ~$70m in revenues and ~$24m in
EBITDA. Management expects ~$80m in revenues and ~$29m in EBITDA for FY16.
Deal terms provide a pro forma enterprise value of $335m or ~11.6x FY2016E
EBITDA. Subtracting net debt of ~$82m, the equity is worth ~$253m. ROIQ
currently trades at about $150m, and if the transaction closes, ROIQ will own ~50%
of Ascend, implying a potential upside north of 30%.
Since Ascend possesses structural competitive advantages relative to its peers, and
have achieved and will continue to achieve industry-leading EBITDA growth, it
deserves a similar valuation multiple as its peers at the very least.
Indian listed tower companies trade at 15.9x CY2015 (which is Ascend's FY16)
EBITDA. If ROIQ manages to trade at a similar multiple, which I see no reason for it
not to, given its superior economics and structural advantages, the upside potential
would be ~75% ([CY2015 EBITDA of $29m * 15.9x] - net debt of $82m = equity
value of ~$379m compared to current ROIQ valuation of ~$150m). Note that post-
acquisition, ROIQ will own ~50% of Ascend Telecom.

Risks
As with every investment thesis, it is important to consider the risks associated. With
a capable CEO at the helm and the fact that Ascend is a highly attractive asset (for
the numerous reasons given above), I view operational risks as minimal. Although
threats stemming from competition is a possibility, I view this as unlikely for two
reasons:
• the telecom market in India is experiencing explosive growth, and thus most
industry players would be concerned with acquiring their share of a fast-growing
market, not competing with one another and hence pricing pressure is unlikely,
• and the fact that a majority (>85%) of telecom tower providers are captive tower
companies who experience significant disadvantages compared to Ascend as
detailed above, which makes it a horrible idea for them to even attempt to
compete with Ascend.
The most pertinent risk I believe exists is that the deal falls through due to the lack
of shareholder support. However, there are partial mitigants to this risk - initial
stockholders who own 20% of outstanding common shares, have agreed to vote in
favor of any acquisition. Furthermore, there is limited downside risk, given that
shares can be redeemed at $10/sh and ROIQ currently trades at $10.05/sh. As
shares of ROIQ trade higher, the incentive to not vote for the transaction becomes
smaller (e.g. if shares trade at $11, I am confident that no one would vote against
the transaction just to get redeemed at $10). With limited downside risk and the
huge potential for upside, shares of ROIQ are very compelling at current levels.
They are even more compelling when one considers that New Silk Route Advisors
("NSR"), who owns ~50% of Ascend's outstanding shares are not selling their stock
- instead, they are retaining it. This shows great commitment from existing
shareholders, and cements my belief that this transaction is not simply a liquidity
event for current shareholders.
As with every SPAC, it is highly likely there are a huge amount of "day 1 SPAC"
holders who are simply looking for a quick flip of their shares - they are not
interested in betting that the company would be run well after the transaction. This
assertion is supported by the trading volume of ROIQ as shown below.

Source: Google Finance
For reference, the press release announcing the transaction was dated on 23 July
2015. Since then, volume has spiked from near zero, with little change in price.
Normally, with a large increase in volume, one would expect shares to trade at far
higher levels. Instead, there is little change in trading prices, which can only be
explained by original ROIQ SPAC holders selling to new investors looking to own
Ascend Telecom.
With a share count of ~15m, this implies that there is still quite a lot of stock held by
"day 1 SPAC" holders, who would probably sell their stock as soon as shares rise
higher. Eventually, most if not all of the holders of ROIQ would be investors looking
to bet on the company post-acquisition, and thus the risk of the transaction not
closing will be very low.
Though this might seem like mere conjecture, it is not. Other recent SPACs such as
Lindblad (NASDAQ:LIND), Del Taco (NASDAQ:TACO), and AgroFresh
(NASDAQ:AGFS) has similar shareholders holding their stock as compared to
ROIQ. Names such as Fir Tree, Bluemountain, Del Mar Asset Management, and

more has consistently been top holders of SPACs. Shares of the aforementioned
SPACs have moved higher following their respective acquisitions, and I believe
ROIQ will be no different. History, it seems, has a habit of repeating itself.
Further, on the conference call discussing the merger, there were questions from
analysts at Oppenheimer (pg 13 of call transcript), Pacific Crest (pg 17), CRT
Capital (pg 19), and more. This indicates that ROIQ is slowly gathering an
institutional following, and it is likely that the company would receive coverage in the
following months, which will no doubt act as a catalyst to move shares higher.
Bottom line
ROIQ's proposed acquisition of Ascend Telecom allows it to acquire a highly
attractive asset with favorable tailwinds of the regulatory and industry nature. The
business is extremely high-quality, given the high degree of revenue visibility as a
result of long-term contractual agreements. Structural competitive advantages are a
huge plus as well. Due to the lack of investor coverage, this opportunity exists for
quick-witted and well-informed investors to exploit. Given such a huge potential for
upside, this opportunity is unlikely to persist.
Disclosure: I am/we are long ROIQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship
with any company whose stock is mentioned in this article.

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