Paetec Feels Some Pressure

August 5th, 2009 by · 2 Comments

Competitive local exchange carrier PAETEC (news, filings) reported earnings this morning, showing some wear and tear from the economy but nothing terribly major.  Revenues of $395.2M were down sequentially from $399.8M in the first quarter.  According to the company, revenue pressure came primarily from usage based POTS service and access fees, while data services managed to grow a bit.  Economic pressures may be easing, but they are definitely still out there.   The company pointed simply toward fewer business calls being made by fewer employees, i.e. a direct effect of the increased jobless rate.

As they have done throughout this recession, Paetec held costs in check and managed EBITDA of $63.5M, down only slightly from $63.9M in the first quarter.  EBITDA margins actually went up to 16.1% from 16.0% sequentially.  Free cash flow of $36.3M was also quite solid, partly due to a lower capex number of $27.2M.  Net loss of $16.5M included $10.3 related to the company's balance sheet activity, raising $350M in new debt and paying back some $330.5M of their outstanding term loans.

Paetec's stock price has more than doubled since the beginning of the second quarter, partly due to valuation trends in the sector overall, but also partly due to the easing of concerns over meeting the financial covenants of its debt.  Right now, according to those companies the company's EBITDA of about $250M would support consolidated net debt of $1.25B, which they are easily within.

That higher stock prices makes me wonder if Paetec will soon be ready to make another M&A move.  Both Integra Telecom and itcd seem like good fits for both their main fiber-free business and the fiber footprint they picked up from McLeodUSA.  The recession has caused a pause in industry consolidation, but the driving force behind remains intact.

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Categories: CLEC · Financials

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2 Comments So Far


  • Brian Scully says:

    Rob,
    Both would be great targets. Integra would be my choice as Paetec is focusing on their west coast marketshare. However, they could use the fiber to support the east coast operations and add to their fiber footprint while increasing margins.

  • Anonymous says:

    Higher stock price? We are trading at the lowest multiples in the industry relative to unlevered cash flow. This stock has to make a bit more of a move higher before management would considering using it as a currency for acquistions.. $6-ish… maybe. Under $3, crazy… But everything is relative… so merging depressed stock with depressed stock could happen. Let the synergies create the excitement…

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