Back at the start of Q3, competitive network operators were seeing strong valuations following a quarter of good press, M&A activity, and lots and lots of rumors. But in the third quarter and on into the fourth now, the market has turned decidedly ambivalent toward the sector despite continued margin gains and solid results.
Over the break, I finished updating my competitive telecom trends data update for Q3, and I have made a few changes to how I present the data.
- First of all, I tweaked the 'latest' valuation datapoint to include a pro forma calculation for merger activity since the end of the quarter for which I have enough data. In this case, it just means that the last LVLT datapoint includes post-GLBC balance sheet and shares outstanding.
- Secondly, I changed the EV/EBITDA calculation to use an annualized EBITDA based on the current quarter's EBITDA rather than trailing 12 months. I found this to be necessary to better account for M&A activity for the likes of PAETEC and Earthlink, whose true EBITDA run rate would have not been represented for many distorted quarters otherwise. The main effect of this, other than a bit less smoothness, is a general lower ratio since EBITDA has generally been rising across the sector and ttm lags the annualized quarterly number in this scenario.
Ok, enough talk. Here's the latest chart:
Relative Valuation (EV/EBITDA) for Competitive Fiber Operators
Everyone has come down a lot since June, with the exception of PAETEC which of course got some boost (but not much!) from the Windstream merger announcement in August. Level 3 is still on top at a multiple of just over 8, but if one gives them credit for $300M in unrealized synergies they'd be down near an EV/EBITDA ratio of 6 - well back in the pack. The metro fiber troika of tw telecom, Cogent, and AboveNet pulled back from multiples of 7.8-8.3 to a mere 6.0-6.6 despite the steady organic improvements by each. Earthlink makes its first appearance on this chart, taking over Deltacom's former low multiples until they prove they can do better with the various CLEC assets they have assembled before their legacy access cash cow runs dry of milk. Fiber-light operator CBeyond has just been crushed since June.
I'm struggling with whether to include public hybrid CLEC/ILEC operators like HickoryTech, Lumos Networks, and especially Windstream (following the PAETEC deal) in these charts. Suggestions would be welcome.