As the 2008 comes to a close, here is an update to where next generation fiber-based telecoms stand going into the new year. I have estimated 2009 EBITDA based on known trends or occasional wild guesses, just for kicks, and used current debt price estimates where available and educated guesses otherwise. One can assume rougher times and lower the EBITDA guesses but the numbers don’t actually change all that much. It’s still ugly out there of course, so without further ado:
One can see that for 2009 the market values next generation fiber-based telecoms right now at a EV/EBITDA ratio 3-5 using the market value of the debt, right down the line. It doesn’t seem to matter much whether your fiber is metro or longhaul or whether your customers are wholesale or enterprise. Mainly it’s how sticky your revenues are and how risky your debt balance is.
At the front of the pack is the little guy, Fibernet Telecom Group (FTGX: chart, news), followed by TW Telecom (TWTC: chart, news). Both have shown solid growth in 2008, and both have little in the way of risk from the credit crisis. The back of the pack is held up by Deltacom (news), Abovenet (ABVT: chart, news), and Paetec (PAET: chart, news), each of which has its own reason for being there. ITC Deltacom isn’t growing, Abovenet is still on the pinksheets and untrusted, and Paetec turned in by far the ugliest recession-induced pullback in guidance. The rest are just in the pack, very different companies having very different risks with amazingly similar valuations.
What conclusion can we draw? That’s easy. The market right now thinks that owning and operating fiber assets is worth about the same as a three week old tuna salad sandwich. I may disagree and so may others – there are good cash flows coming from fiber assets and they will start soon – but for now the market has moved from its ’skeptical’ gear all the way down to “we’re gonna die” and until the overall mood changes we’re probably going to stay down here.
Datapoint for you:
Yesterday Transwitch (TXCC) bought back a $15M of their $25M in convert debt, with a Strike well above current prices, 5.45% and due in Sep 2010. They paid $9.9M or 2/3 of the cost. I am told that the bondholders had the debt on their books for substantially less.
While the companies are in weak positions, the folks holding the debt need the money too. The people holding the debt don’t have an interest in bankruptcy and certainly don’t want to operate the assets.
It feels to me that we are nearing a conclusion. Both debt parties in this industry want to settle and mark things to market. This should be positive for stockholders.
I think the debt buybacks are very interesting here whether they be at CCOI, Level 3 or even a company like Liberty Media. One gentleman on this board argued to me that mark / market valuations for debt was irrelevant but given the debt buybacks below par it seems corporate leaders see the market inefficiency that has been pointed out here.