This morning’s M&A announcement certainly caught me off guard – although perhaps it shouldn’t have -and I’m still trying to get my brain around it. Windstream’s activity lately in targeting the business marketplace outside its ILEC territory has been very aggressive. But until now geographically they were still very much a regional company even as a CLEC, just as the NuVox and KDL/Norlight footprints were. Buying PAETEC takes what was already a rather radical hybrid ILEC/CLEC plan and takes it immediately national.
I’m a bit surprised though that PAETEC sold out as cheap as they did, which ties in with why I hadn’t seriously considered a sale on their part right now. I had thought that perhaps the continuing integration of all that fiber into their business might boost margins over the next few years in ways that would give them more bang for their buck than the apparent valuation of 6xEBITDA of this deal. Of course, the sale does come at a nice premium to Friday’s close and their shareholders will still stand to gain from those improvements as 13% owners of the combined company – but still. All indications had been that things were going pretty well with PAETEC’s integration too, but we will see more on that front when the company releases earnings next week.
It’s fascinating to see that the largest and perhaps most successful CLEC rollup will probably become the flagship in an ILEC’s effort to leave leave behind *both* LEC abbreviations on a course for fiber and the cloud. I do look forward to the day when these acronyms are finally retired, although that will certainly take some time. Yet while Windstream’s plans are definitely bold, but it remains to be seen if PAETEC’s rather unique competitive approach is something they can operate effectively. KDL and NuVox were entirely different beasts.
This deal probably takes two of the industry’s most aggressive consolidators out of the game for quite some time: PAETEC for obvious reasons but also Windstream in that this deal has a feel of mid-term goal completion for them that its earlier purchases didn’t. I think they’re going to be done & working the integration for some time to come following the close.
That leaves several likely targets in the next few years with two less potential buyers. Integra Telecom, Broadview Networks, and XO could all easily have been targets of both Windstream and PAETEC, and hence this may reduce the likelihood they will be next – at least for a while.
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Categories: CLEC · ILECs, PTTs · Mergers and Acquisitions
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So if you are Zayo, XO or others looking for new equity investors or buyout does this change your strategy ? 6X ebitda is low and the valuation modeling that Zayo has done of there business has been much higher multiple. Is this market comparable driving down value of metro fiber assets now or is this an anolomaly. One can go from hunted to hunter if that has shifted and they see value in buying now.
I think this doesn’t really affect Zayo or Abovenet’s approaches given the vast difference in business model. However, it does give us a datapoint when it comes to more similar SME focused CLECs with underlying fiber like XO, Broadview, Earthlink, Integra, etc.
How do you get to 6x EBITDA?
$2.3B for the deal with EBITDA at a $380M run rate. However, as I look at it further I think run-rate EBITDA is probably closer to $400M taking into account the XETA acquisition etc and I suppose I need to subtract the cash on hand. That would seem to take it down to a multiple of 5.5. Still trying to figure it all out though, what multiple do you get?
I did a very quick calculation and got trailing 12 month EBITDA of $261M and 2010 EBITDA of $233M which puts the deal in the 9-10x range. Are you annualizing quarterly CY1Q11 figures?
Projections for the company’s 2011 are $375-395M and include Cavalier and XETA results. Q1’s EBITDA was $91.4M – trailing 12 months won’t capture the changes since last year’s M&A.
MS analyst estimate for 2011 is $397 million. That gets you to 6x.
If you are going to do comps you need to be consistent and use trailing 12 months, not forward estimates.
One would need to use trailing 12 months numbers from not only PAETEC but also XETA and Cavalier which it acquired during that period – adding EBITDA and incurring additional debt along the way to do so. I don’t have enough numbers yet to do that, hence my dependence on an estimate of their run-rate EBITDA instead.
Rob,
Below is Morgan Stanley’s estimates on the deal
“The deal highlights the rural carrier trend to move away
from voice/regulatory revenue to growth areas. FCF
accretive nature enhances dividend sustainability. Integration
risks exist, but management has a proven
track-record of good execution. Synergies look realistic.
From Windstream’s perspective the deal is sound:
PAETEC (rated Overweight), combined with the other
recent acquisitions (ie NuVox, Q-Comm) should accelerate
top line recovery. The new entity will derive 70%
(60% before) of revenues from business/broadband.
What’s new: Windstream announced today the acquisition
of PAETEC in an all stock deal (0.460 shares of
WIN for each PAET share for an implied price of $5.62).
Importantly, the $1 dividend remains unchanged. The
deal, valued at $2.3B, implies a 2011 EV/EBITDA of
6.0x (using the midpoint of PAETEC’s guidance). Including
synergies and adjusting for the NOLs, the 2011
multiple is 4.3x (management says it will be able to
utilize $130M of PAETEC’s NOLs in each of the first 5
years and have an NPV of $250M). With or without
synergies, the multiple is well below Windstream’s 6.6x.
Windstream will issue $891M in shares (~73M shares)
and will assume PAETEC’s $1.4B net debt. Leverage
increases to 3.7x (ex synergies) from 3.6x, but with
synergies it comes down to 3.5x. The deal is expected
to close in 6 months, and needs the approval of ~22
States in addition to FCC, DOJ and PAETEC shareholder
vote (unclear when). Post close, PAETEC
shareholders will own 13% of Windstream.
Synergies look achievable: $100M in cost synergies
(by year 3) are ~6% of PAETEC’s cash opex – the
lowest we have seen in the space in a number of years
(see side table). Integration opex and capex are expected
to be $50M (in year 1) and $55M (over 3 years).”
Thanks Rob… I wasn’t trying to be a jerk but my comments sounded that way. I neglected to figure in the buys too…
Is Windstream continuing to make acquisitions to defend against them self being acquired? I’ve always contended this was their reason behind their recent aquisitions but am far from the M&A expert many of you are here.
I tend toward the position that the things one ought to do to avoid acquisition are the same that one ought to do to get the best price in an acquisition – how you spin it depends on your orientation. I think Windstream isn’t trying to fend of suitors so much as it is trying to fend off the oblivion of residential copper and an eventual unfavorable acquisition by leapfrogging into a new business model where they are valued more highly whether for M&A purposes or not.
What about the total debt load and the dividend payout? How will both be seen going forward?
Thanks to all for the insight!
Any chance that this isn’t approved by shareholders?
I assume you mean PAETEC’s shareholders? I think we will need to test the winds for a day or two to see what folks think.
this is quite a collection of formerly BK clec’s, RLEC’s with line losses, a few flyers (hosted solutions? kentucky data?). we’ll see where this goes but hard to discern a strategy here?
Hope PAETEC folks are looking forward to layoffs and work being transferred to Little Rock/Greenville/Charlotte/Hudson. WIN is so far behind the times, in relation to having folks work in places OTHER than those four, that it’s not even funny. Or staff managers/supervisors being clueless on how to manage their remote staffs.
Their loss as good, long-term folks will leave. It might come as a surprise to WIN senior management that the world does NOT revolve around Little Rocl.
If WIN was smart they would leave their national business sales operations in NY. We’ll see if they are smart or stubborn.
Is there much overlap with Win and Paetec in regards to regional offices, etc?
Doesn’t Paetec have an energy division too? WIN won’t know what to do with that.