Geez, the deals just keep rolling in. I had speculated several times this year about who might buy itcd, but while I was right they were for sale my thoughts as to the buyer turned out to be way off the mark! Today, Earthlink (NASDAQ:ELNK, news, filings) announced its intention to purchase the southeastern CLEC for $3.00 per share. Including net debt, the total purchase price therefore is $516M. That’s an enterprise value of 4.7 times adjusted EBITDA, which seems reasonable at first glance. Deltacom doesn’t focus much on its metro fiber and has never traded at the higher multiples of this sector.
Deltacom comes with 35 metro rings and 16,400 total route miles of fiber across 14 states. Their revenue is running at about $440M annually at its current run-rate, with adjusted EBITDA margins of around 20%. In the past year, the former has been falling while the latter has been rising, as the company has churned off some lower margin revenue. They tend to serve smaller businesses by reselling the ILEC’s last mile via colocations in central offices. They have some 32,000 customers across their footprint.
So what is Earthlink up to? They’ll combine the Deltacom assets with their existing New Edge Networks business of course. But this is the first time the ISP has delved in actual fiber. Whether it was dialup, DSL, or wireless MVNO, they have mostly sold other people’s infrastructure. Only in their municipal wifi foray did they get their hands dirty somewhat, and that didn’t turn out so well. Lately they have been doing little more than turning their existing businesses into cash as their modem customers continue to dwindle, albeit quite profitably and intelligently.
But now… Does this move suggest that Earthlink has a new plan for the future? Might they take more of that cash and put it into fiber? Ought we be considering them when other metro and intercity fiber assets come up for sale? Hmmm….
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Categories: Mergers and Acquisitions · Metro fiber
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Cheap enough to have had a customer of a competitor turn most of its lights out and outsource to the competitor?
Rob– I just posted the below over at the XO board
This a.m. EarthLink announced they had a deal to acquire ITC Deltacom (ITCD) at an enterprise value of $516 million. ITCD is a CLEC with fiber in the Southeast states, serving SME’s mostly through leased facilities and has been stagnant in terms of revenue for as long as I can remember. Total revenue for the six months ended 6/10 were $222 million compared to $240 million in the same period last year– a 7.5% decline YOY. Some value metrics:
— The headline price equates to a 5.8 times EBITDA multiple– $89 million in LTM EBITDA
— The estimate provided for synergies (cost savings) was $20 million. This represents 12.5% of ITCD’s run rate SG&A
— Post synergies the deal represents a 4.7 EBITDA multiple
— The revenue multiple is 1.2 times
— ITCD is running at an EBITDA margin of 20%
— ITCD is running FCF breakeven
Now what might this imply for XO. Some thoughts below:
— The acquiror here is not another CLEC so cost savings (12.5% of SG&A) are probably (far) lower that could be achieved if XO were sold to another large scale operator
— XO’s EBITDA margins at 10.5% are way lower than ITCD suggesting again more upside for any acquiror
— XO’s revenues are not declining at a 7.5% annual clip– and that will have been a huge factor in the price ITCD got
If we want to do a calculation of what this might imply for XO’s value in the market I will assume the following:
— An acquiror would project cost synergies equal to 20% of XO’s SG&A. This equals $100 million
— XO would get a premium to the price ITCD achieved. XO has greater scale, revenues are NOT declining, and there is more room for upside in operations (XO has a pathetic 10.5% EBITDA margin)
Using a 5.5 multiple of post synergy EBITDA gets you to an enterprise value of $1.43 billion which translates to a fully diluted value per share of $2.08. A more optimistic comparison (and probably less justified) would be to use a 1.2 multiple of revenue– that gets you to a comparable price of $2.70 per share.
This is all back of envelope stuff but I do think it has some value– a crappy, shrinking CLEC business just got sold at a price that suggests XO’s value is arguably $2.00+ per share. It’s probably worth holding on.
I agree with your back of the envelope logic however you cant overlook XO’s churn at 2.5-3% per month & the capex it takes to keep the business at break-even. That’s the real issue with the CLEC business model – ie it’s difficult to grow sales to overtake churn. Margin compression & churn are the CLEC’s greatest threats/challenges, as you know.
anon– agreed but the churn is captured in the gross revenue trend and CapX is captured in their FCF #’s. XO is not by any means knocking the ball out the park (bloop singles if that) but they are doing OK compared to ITCD which seems to be a balloon with a small hole.
What’s going on with XO today? Nearly 2 million shares have traded hands in two hours. That’s more than the last 5 months combined.