While there are a few stragglers out there who haven’t issued Q3 results, I have updated the competitive telecom trends plots to reflect data through the end of the third quarter. One of the interesting items to note is the clear upward trend in relative valuations, i.e. the ratio of enterprise value to annualized EBITDA lately. Here’s the chart:
Relative Valuation (EV/EBITDA) for Competitive Network Operators
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Other than those network operators making a long term transition from CLEC revenues to managed services and the cloud, i.e. EarthLink and Cbeyond, and the hybrid ILEC/CLEC Windstream which is in part doing something similar, the third quarter and the weeks since have seen the prior quarter’s uptick extend into a full blown expansion in valuations.
Cogent’s efforts to return cash to shareholders are clearly going over well at the moment. Meanwhile, tw telecom, Level 3, and GTT all now sport EV/EBITDA ratios in the mid to high 9s, while Lumos is now up in the high 8s. For Cogent, tw telecom, GTT and Lumos, this is the most respect the street has given them since I’ve been collecting data. And for Level 3, we last saw these lofty levels when everyone was pro-actively counting the Global Crossing synergies.
While M&A is still on the table, I wouldn’t say that environment is more active now than in the past year or two, so these shifts in valuation would seem to suggest growing respect for network operators from the market as a whole.
Inteliquent’s valuation has also been surging, but since they sold their data networking business to GTT and have been finding new life in the voice business that’s a different story. As their business model has changed I may decide to drop them from this comparison, but I’m curious where things will settle down.
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Categories: CLEC · Fiber Networks · Financials
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Thanks for doing this, Rob!
Hey Rob. What I find most interesting when EBITDA multiples are compared is the wideness the range. (is wideness a word?) The low end of your range is 2.5x and the high end is 15x. If wideness isn’t a word, it should be.
Consistent with industry norm, Zayo uses EBITDA Multiple as a shortcut for estimating enterprise value. We remind ourselves though that EBITDA is not cash flow — and that maximizing EBITDA is not one and the same as maximizing Enterprise Value. Investors (over time) will focus on determining the Enterprise Value of the firm, and EBITDA Multiple will be the simple math equation of dividing EV by EBITDA. Properties vary substantially. It follows that EV/EBITDA would as well.
How will Enterprise Value be derived? Investors will focus on the long term cash flow that is likely to flow from a set of assets. They will factor into whether the assets will remain as a stand alone business, or whether they are likely to be combined with other assets. Given that bandwidth is still in its infancy, it is hard to predict future cash flows — hence valuations will fluctuate. The bottom line, though, is all bandwidth providers should focus on cash flow capabilities of their property.
When I first started collecting the data, I was looking for commonalities in business models showing up in the range. It’s there, but of course it’s not nearly so cut and dried as that.
Now I mostly look at it to spot general trends versus the company-specific ones. However, it should be noted that the companies getting the higher EV/EBITDA ratios from the market right now are clearly the ones focusing on the cash flows of their fiber footprints and not the ones working on their clouds.
Well, except for GTT perhaps, which starts at the wavelength level rather than fiber, but I don’t have enough data for GTT post-Inteliquent-deal to really have a feel for them and I suspect neither does the market.
Dan– “wideness’ certainly is a word but I would agree with you that it sounds awkward. Perhaps when taking about a range the alternative words might be extent/breadth/magnitude?
I think you hit on a couple of key points. An EV/EBITDA is a simple shortcut to describing a valuation benchmark (and for earlier stage and often leveraged businesses is more instructive than traditional metrics such as book value or EPS). For more mature businesses with “traditional” balance sheets perhaps a better shortcut is FCF yield. I am, I know, preaching to the choir here but any asset whether a bond, an equity or even a painting is worth the present value of the cash it throws off– in the case of a painting the amount you think it can be sold for somewhere down the road.– and the assumptions used in reaching that present value are the real determinants of EV. They are:
— assumed growth rate ( or lack of) in cash flows
— an appropriate discount rate to reflect the risks in the business model
— the terminal valuation assumption
I think Rob does a great service by aggregating valuation metrics across the competitive telcom space but there should be no surprise in the huge discrepancy in EV/EBITDA multiples ascribed by the market when businesses like CBEY or WIN are compared to say TWTC, LVLT or CCOI. They are completely different models with different growth profiles and different risks.
I don’t want to be anonymous but somehow my comment above was logged that way.