One last look at some post-Q4 numbers, specifically the ratio of enterprise value (EV) to adjusted EBITDA across the sector. This ratio isn't perfect of course, but it has more inherent comparability than other metrics, as it incorporates net debt (via EV) and alongside the capex/revenue plot gives a decent relative picture of the sector's various operating models. This plot incorporates not only data for the end of 2012, but includes a real time estimate as its last data point. One can clearly see a recovery in valuation in progress, following the sharp drop in Q3.
Relative Valuation (EV/EBITDA) for Competitive Network Operators
In the third quarter we had seen an across the board reduction in multiples for competitive network operators. Since then, however, things have turned around, at least for those with the most fiber in their diet. AboveNet, tw telecom, and Cogent are all trading right around a multiple of 8xEBITDA right now. The higher multiple may help any of the three justify making an M&A move for something private, but so far there has been no indication they are planning anything.
Meanwhile, Level 3 has started to get some credit for those integration synergies they are now actively working on -- although not as much as this plot seems to show. Because this plot annualizes Q4 EBITDA and for Level 3 includes $62M acquisition costs (not integration spending), taking out that one time piece would give them a multiple of 9.3xEBITDA. If (for argument's sake) you further take out the $300M in synergies they have forecast, Level 3's multiple right now would be about 7.5 - below from those of their smaller but currently more profitable fiber-operator brethren and not reflecting the relative premium they have historically gotten by this measure.
But the recovery in valuations has not helped the less fiber-centric of the network operators. Earthlink is getting little credit for its own integration work as the market waits for them to show they can make more of those CLEC assets than the previosu owners could. CBeyond is still getting less respect than ever, and with an EBITDA multiple of just over 2x one wonders if potential acquirers might not start sniffing around soon. Earthlink comes to mind actually, which would be able to reduce costs while finding CBeyond's cloud efforts possibly complementary.
New to this plot are freshly independent Lumos Networks and hybrid RLEC/CLEC Windstream following the PAETEC deal. There's not enough data to tell what's going on with either yet. The bottom end of this plot seems a bit bare nowadays, with Global Crossing, XO, Deltacom, and PAETEC no longer holding down the low multiple and low margin end of the spectrum.
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