Two weeks ago, I looked at the new valuations of nextgen facilities-based telecoms, and it seemed that the markets had decided on an enterprise value to EBITDA ratio of roughly 5-6. Well, the market apparently wasn’t done. While only LVLT has reported, the market has continued to devalue the sector indiscriminately. So let’s take a look at the same table I showed last time, updated to Friday:
| Symbol | Market cap | Cash | Debt | EV | 2008 est Ebitda | EV/ Ebitda | Cashflow Picture |
|---|---|---|---|---|---|---|---|
| LVLT | 1204 | 587 | 6650 | 7267 | 990 | 7.3 | Neutral to Slightly positive |
| XOHO | 33 | 440 | 1030 | 623 | 103 | 6.0 | Slightly negative |
| CCOI | 188 | 107 | 274 | 355 | 65 | 5.5 | Positive |
| GLBC | 501 | 318 | 1393 | 1576 | 320 | 4.9 | Neutral at best |
| FTGX | 43 | 6.1 | 14 | 50.9 | 11 | 4.6 | Slightly positive |
| TWTC | 750 | 335.5 | 1376 | 1790.5 | 390 | 4.6 | Positive |
| PAET | 161 | 85 | 885 | 961 | 224 | 4.3 | Positive |
| ITCD | 109 | 61.3 | 302 | 349.7 | 85 | 4.1 | Neutral at best |
- GLBC marketcap includes 18M preferred shares
- LVLT marketcap and debt reflects Oct debt/equity swap
- XOHO cash and debt reflect Q2 refinancing
So now most of the valuations check in at 4-5. Once again, XO and LVLT are too high mainly because their debt is so high relative to their marketcap and in this table I have used the face value of their debt. But to get a sense of where the market really values them, we would need the market value of their debt.
XO’s debt doesn’t trade, so we can only guess. LVLT’s debt however, does trade. Most of it anyway, and according to my research I now estimate the blended price of its debt as of late last week was 65 cents on the dollar. Using that estimate, the effective EV/EBITDA ratio for LVLT is 4.98 – which fits right into the 4-5 range for EV/EBITDA following the market’s punishment late last week.
Now LVLT has over $6.6B in debt and enough of it is due in the next couple years to make people worry, so the fact that it trades at a discount in this environment is, perhaps, not terribly surprising. But who would have thought that some of the debt (2.375% converts due 2026) of a company like TW Telecom would be trading this past week at 51 cents on the dollar. The company is in no danger at all, its revenues are sticky, it generates cash and has plenty of it, and it recently achieved profitability. If that doesn’t speak to the insanity of this market, I don’t know what does. I wonder if they are buying some of it back now like Cogent is…
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The converts trade at a low price because the convert option is worthless… you need to look at yield to maturity in order to understand the market evaluation of credit risk.
Rob,
Assuming the conversion option is regarded as worthless at this point then priced at 51 (by my calc) the convert offers a ~7.3% YTM. That is way too expensive in today’s market so I suspect the 51 quote is simply wrong, or the maturity date is wrong. Perhaps the holders have an earlier put option much like the CCOI convert?
Rob Robinson,
Isn’t it a bit presumptuous to telegraph “No Danger” in advance of TWTC’s quarterly report on November 6th?
I mean, especially regarding their forward guidance with respect to the rises we’ve been advised are in motion relating to off net, “access charges,” at least according to Jim Crowe’s perspective of current market conditions.
There seems to be a bit of overconfidence on your part, kind of like us foolishly focused LVLT shareowners, I guess. 🙂
You’re talking Donna’s book, and I’ll bet she loves ya! Considering Juice’s recent comments, he must be happy too.
The other thing that some might be overlooking is the huge A/R balance, which will rapidly go to the cash line, assuming Sunit’s crew doesn’t pull another Sun Rocket on us. This number is significantly higher than current payables.
Finally, there’s still a nice “restricted cash amount” as well. As I recall, those were in short term treasuries(3-6 months), and considering the direction of interest rates in the treasury complex-no price money ala Japan-those securities may continue to appreciate.
Stay tuned on Wednesday for more on that. Word is 50 down!
Carlk,
Presumptuous? Well if I posted only things *after* earnings then it would be pretty boring around here wouldn’t it? As for overconfidence, who knows really – but TWTC has no debt maturities and already warned revenue growth might get hit, I feel pretty safe. But you’re welcome to bet against me.
As for LVLT’s restricted cash… Actually I think I read in their filings that a good chunk of that is related to coal mining reclamation costs. Regardless, their restricted cash number is pretty steady and I wouldn’t expect to suddenly find that cash in the unrestricted column.
rob;
i have been watching the valuation of ccoi and twtc. below are my two calcs of their ev/ebitda. as you can see we are now in the 3.5 range although im not sure where lvlt is at this point. i will be cleaning up my lvlt model and will send it in soon. id be surprised if valuations fell to 3 but suspect that would have to be close to the bottom for those two co’s. remember when an analyst was arguing ccoi was worth 20 times! unreal.
TWTC CCOI
712 174 equity
325 129 cash
4 98 leases
0 2 other
1015 84 debt (market)
395 65 ebitda
3.56 3.51 ev/e
debt for TWTC (assumes term trades at .85)
400 0.8 320 (market)
374 0.51 190.74 (market)
593 0.85 504.05 (guess)
jeremy, thanks for all that work! I’d also be surprised if valuations on TWTC and CCOI fell to the 3 level. However, I’ve been surprised at the 4x and 5x levels already, so that’s not saying much…
Hi Rob,
Coal mines? How much are they worth? I noticed you avoided two questions pertaining to the subject of selling them, which you were part of on IV’s message board as follows:
1) Are coal mines finite or infinite, or do they carry very long production tails?
2) Do reclamation costs become more or less burdensome over time?
Finally, what are the odds of monetizing those assets at this hour?
carlk, I didn’t ‘avoid’ them so much as hoped someone else knew the answers, because I don’t. The coal business is definitely outside my realm of expertise. However, basic physics says coal mines aren’t infinite – not that it helps to know that… 🙂
i wanted to point out that even in 2003 (at the bottom) when we had stock prices at these levels we had 50% LESS ebitdas so valuation were actually double what they are now…..in the 6 ev/ebitdas range.
since that time we have had firms double ebitdas via growth and valuations doubled so you had huge increases in the stock prices. now we are going the other way…..but i still cannot believe how far we have fallen. at the bottom of 2003 TWTC/CCOI would have been trading around 7 today yet we are down ANOTHER 50%. unfrigginreal.
good lord Toes, at least TELL ME when you going to MOVE TWTC 36% in one day!!!
Nice Work!!!!