Every quarter I like to take a look at where the sector stands in terms of its valuation of fiber assets. One of the major metrics used to compare valuation amongst competitive telecoms is the ratio between Enterprise Value and EBITDA, or EV/EBITDA, which incorporates the company’s debt and ignores depreciation and amortization. The latter are of course real costs, but they tend to be hard to compare against each other due to the distortions introduced over the last 10 years in the sector. The economic environment of course has become so toxic, that the market value of the corporate debt in the sector is generally below par, and for accurate comparison that discount must be applied to its EV. I have compiled the following list, which seeks to calculate (or estimate where necessary) the current EV/EBITDA ratios for publicly traded, competitive, fiber-based telecoms. With no futher ado, here is the current spreadsheet:
EBITDA projections are the low end of guidance where available, and are my own guesses elsewhere (intentionally conservative). As you can see, EV/EBITDA ratios lie generally between 3 and 6 throughout the sector. Companies with better cash flow outlooks and a greater focus on metro connectivity tend to have better relative valuations. Those with either longhaul or greater CLEC focus tend to have lower ones. What about the trend? I last compiled the list just before New Years, this table shows the change since then:
So Q1 was actually pretty good for fiber, relatively speaking. With the exception of glbc which didn’t change much, everyone’s valuation rose in the quarter. It was particularly good for abvt, which finally emerged from under its rock and posted solid numbers in actual SEC documents at last. They trade on the pinksheets and quite infrequently, but it is clear that the market liked what they saw.
Valuations remain far far lower than the heady days when EV/EBITDA multiples of 10-12 were common. It isn’t really the cash flows which have changed since then, just mood – from a high level of optimism to a similarly low level of pessimism. But things haven’t gotten worse, and now it is springtime – maybe for fiber as well?
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Categories: CLEC · Financials · Internet Backbones · Metro fiber
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Thanks Rob… you might want to add an extra column with a measure of “% increase in value of common stock per unit increase in EV/EBITDA multiple”… this delta measure would tell your readers which stocks would benefit the most from a recovery of valuation multiples towards historical “normals”… equity investors would see where they would get the most leverage in such a recovery (you could probably use EV with debt @ par for these measures… at these normal EV/EBITDA ranges debt usually trades close to par).
Great stuff Rob, thanks.
AboveNet EBITDA seems a bit low. 2008 Q4 annualized was over $100MM based on the 10-Q.
David, you are absolutely correct – I had simply neglected/forgotten to update Abovenet’s number from my guess in December to reality as demonstrated by their filings. I have updated both numbers using a conservative 120M for 2009, which moves them way down the list in terms of relative valuation. They still went up a bunch, but if their resurgence continues and they gain trust and perhaps a real listing they seem to have room to surge left.
This analysis is good to see.
These multiples do not reflect one thing as the markets/analysts usually participate in a herd-like mentality — replacement value or cost to overbuild facilities. (Especially metro/access)
I suggest as bandwidth demand keeps soaring, those with unique routes will fair much better than those with shared routes (IRU’d or otherwise).
It still costs more to build out fiber today than it did a year ago or 10 years ago — the cost of labor, fee’s, franchises, cable, etc. always go up.
The reason why consolidation has slowed to a crawl is primarily due to 2 reasons: (1) Most of the fiber junk has been bought leaving healthy companies that could care less about M&A at these multiples and (2) the credit freeze.
It will be interesting to watch all hell break loose as the credit markets continue to thaw … the pent up demand to restructure balance sheets and drive consolidation will make one big sucking sound.
The synergies of healthy companies are huge and integration less risky compared to most junk buys of distressed assets. Assets are “distressed” when they are not differentiated – like diversity, as one example.
Even today, the government of Australia announced a program to drive national access to a minimum of 100 megabits across Australia —
America is slowly figuring things out …
As your trend points out, good days are ahead not behind telecoms.
Dave, the cost of labor, fee’s, franchises, cable, etc. does not “always go up”.
For example 96-strand single-mode cable has trended down in price.
Financing costs have gone up and down.
Labor costs may have gone up but that doesn’t relate linearly to cost/ft of trenching & laying cable/conduit.
Go to higher fiber counts the labor is the same for 96 strands as it is 432-strands. Having the higher count gives you all sorts of options in lighting the fiber at low cost, leasing fiber and offering secure dedicated fiber pairs for large Enterprises.
The fiber is the least costly item. Thin cab; les cost less than high fiber count cables. My philosophy why pay twice once you exhaust a low low fiber count cable? Do it right in the first place.
Labor and franchises — never go down, I have not witnessed these costs go down in my career – anyone else reading this ever had franchises lowered? Attachments lowered? Real estate taxes on the fiber lowered?
Then there is the revenue side of the cable. Over-built routes, fire sold IRU’s to multiple carriers, etc. have a tendency to stress those assets.