Valuations, Margins Steady in Q1, Except for Cogent, AboveNet, Level 3

May 22nd, 2012 by · 18 Comments

I have updated my competitive telecom trends pages with all Q1 data, and also adding Inteliquent to the list of companies tracked.  Except for companies with significant short term news driving their numbers in some way, both EBITDA margins and EV/EBITDA were relatively stable during the quarter.  Here's the current relative valuation chart:

Relative Valuation (EV/EBITDA) for Competitive Network Operators

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Here the second to last data point for each series represents the end of the quarter, while the last data point updates the valuation based on yesterday's close with Q1 data for a real-time estimate.  As you can see, there were two big movers since the beginning of the year.  The obvious case is AboveNet, which jumped above the 9x plateau due to its pending acquisition by Zayo.  This will probably be the last datapoint we get for AboveNet.

But more interesting perhaps is the fact that Cogent's relative valuation jumped even larger, which reflects the hit to the company's EBITDA from the MegaUpload fiasco and the fact that except for short term fluctuations the company's stock price did not suffer the consequences.  To me this is an obvious flag that the market thinks Cogent is in play.

As for margins, here's the latest trend plot:

Adjusted EBITDA Margin for Competitive Network Operators

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Existing trends mostly continued, with Zayo continuing to blast northward.  Cogent's margins took a tumble that will probably bounce back in part next quarter as the company balances the revenue hit with some cost cutting.  The newcomer to this chart, Inteliquent, saw its EBITDA margins grow slightly again following a few quarters of comperssion.

And Level 3 started to pick things up, beginning the march back toward its recent mid-twenties levels as the Global Crossing integration continues.  Given the M&A/integration-related sharp shifts in the company's EBITDA and margins over the past two quarters, it's interesting that the stock price has matched the moves, keeping the overall relative valuation rather steady.

I put the relative capex trends plot into a post the other day looking at Infonetics' recent analysis.  The relative revenue growth plot is still around, although with the M&A in the sector it is less useful than I'd like - still looking for a better way to look at that.  As for the (EBITDA-Capex)/Revenue plot, the numbers were a bit less messy this quarter as there was a strange convergence to the range of 0.10-0.15 by most operators - I've no idea what that means.

Categories: CLEC · Fiber Networks · Financials

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18 Comments So Far


  • Anonymous says:

    with the zayo bombshell og Abovent what is the likllihood that Level 3 will follow suit with a larg move on XO or even TW telecom. This strategy would be customer focused on services to end users is not Fiber network expansion.

    Seems they are content to let Zayo rollup dark fiber focused providers like AFS, Abovenet and likely more like Fibertech, Fiberlight, Suneysys.

    Perhaps setting up the mega merger in 5 years of a Level 3 ( with XO / TW rolled up) and Zayo ( with Abovenet,Fibertech, Fiberlight rolled up)

    That would a behemoth that would parallel ATT, VZ and large cable companies which has always been the Level 3 goal

  • beetlejuice says:

    As a happy tw telecom employee, I would rather shoot myself in the face than work for Level 3 again. Please Larissa, say it ain’t so! If we don’t get in the M&A game ourselves soon, though, acquisition target has got to be what people are assuming about tw… unfortunate.

  • IMHO, Level 3 is less and less likely to be looking for more US assets any time soon. If they make a move this year, I expect it to be in Europe or South America. Zayo will probably be busy with AboveNet for a bit longer than its usual integration.

    Perhaps that actually leaves the field clear for tw and Larissa to do a little M&A of their own at last? I’ve long been a proponent of a tw/xo consolidation event from a strategic and financial point of view.

  • Anonymous says:

    If tw and XO merge that would have to be a large dagger in the Level 3 USA heart. A competitor that has enterprise figured out quite nicely in TW telecom combined with more metro assets and a nationwide backbone woudl severly limit Level 3 USA future. Can Level 3 compete with VZ, ATT, Comcast, Time Warner, and a larger stronger more efficient tw telecom and make the mid markets growth they stated they require ?

    Xo may have themselves in the middle of a bidding war , hate carl icahn but he knows how to make money even if he screws thousand of common folk to do so.

  • Anonymous says:

    I don’t see TWTC making any large scale acquisitions. It is not in their nature. Even though their last acquisition went fairly well, I have heard they were still struggling with much of the integration. I think they are content on growing organically and are awaiting the day someone makes an offer they cannot refuse.

    • For all the organic growth it is chasing, it’s all depth. tw has added thousands of buildings to its network, but few new metro markets or intercity routes. They are conservative, but M&A is simply a cheaper way for them to take their business model to new markets without changing what they have found to work..

  • Jeff Peters says:

    @beetlejuice: that was a violent analogy, but an appropriate one. Having spent many years at TWTC and then later being managed by people with LVLT in their “managerial DNA” I can see where you’re coming from.

    As Robert and anyone else who follows TWTC knows, they are an extremely conservative company (and that’s a good thing). I think an XO merger would be a disaster, if for no other reason than the fact that the cultural differences are huge. I have no doubt that the M&A team at TWTC will do what is right for the company, its employees, and its shareholders.

    • Xo would be gutted says:

      They would acquire XO not merge if a deal with Carl is possible. While the cultural differences may be huge the majority of XO would be gutted and the employees that stay would be thrilled to be out from under Carl ICON’s thumb.

    • Fancy Pants says:

      Agreed. I would think their acq thoughts are toward assets and reach. And aren’t they sitting on large cash reserves and stock they have been quietly buying back for years now?
      All due respect and condolence to XO employees, but their portfolio, customer, and network quality are about as polar opposite from Time Warner telco as you can measure without causing a rip in the spacetime continuum to emerge. TWTC would have a very hard time integrating such an awful mess into their culture and rigid standards, unless their plan was to take the fiber and run. Some national backbone and maybe Northeast reach would make them an indisputed powerhouse.

  • Morty says:

    Nobody seems to know when XO’s use of the lvlt network expires—-my guess is that Icahn got it extended as a deal to withdraw his objection to the LVLT/GLBC deal . I believe at one point it was to expire in 2018 ,with one possible extension [do not know the length of the extension].

    • The text of the original IRU deal describes the term as having a minimum period but that it was for the economically useful life of the conduit and fiber as determined by the grantee (i.e. XO now). I have yet to find anything suggesting there was or is an expiration date on XO’s L3 fiber IRU. http://contracts.corporate.findlaw.com/operations/services/3167.html

      XO’s aim with the L3/GLBC objection was IMHO about restoring settlement-free peering, which they were apparently successful at.

      • CarlK says:

        Rob, is there a day before or after the “minimum period” in which that fiber and/or the conduit it sits in, becomes a handicap or detriment for xoHO in delivering “non discretionary, essential,” communication services to their customers?

        Will you be at the ASM tomorrow? If so, would you be so kind to ask a question to Jim Crowe for me.

        Mr. Crowe, Is there a LIMIT to the amount of “bits” by way of fiber overtime you can deliver inside of your “multi-conduit” network, and if so, at today’s “prices” for bandwidth as well as other communication services delivered over your network, what is the aggregate amount of “dollars” in “LIMIT” reach?

        This might get to the heart of the “useful life” question tied to “plastic conduits” in the ground according to their half lives, as well as how many human hologram experiences in the universe it would take to fill those conduits with fiber to the brim where nothing more could be delivered as a result.

        http://en.wikipedia.org/wiki/Holography

      • Hammerdinger says:

        Rob,There is definitely a term associated with XO’s IRU’s & Morty CI has not renegotiated them with L3. They were renegitiated in XO’s bankruptcy proceedings I finalized in Feb 2003. Here is an excerpt from L3’s 10K on page 77, http://www.wikinvest.com/stock/Level_3_Communications_(LVLT)/Filing/10-K/2003/F2745045 “In February 2003, Level 3 and XO Communications (“XO”) completed the amendment of their 1998 cost sharing and IRU agreement. As part of the 1998 agreement, XO purchased 24 fibers and one empty conduit along Level 3’s North American intercity network. The amendment, among other things, requires XO to return six fibers and the empty conduit to Level 3. In return Level 3 will 1) reduce the annual operations and maintenance (“O&M”) charges XO was required to pay under the original agreement, 2) provide XO an option, expiring in July 2007, to acquire a 20 year IRU for a single conduit within or along Level 3’s intercity network and 3) provide XO an option to purchase up to 25% of the fiber installed in the next conduit within or along each segment of the intercity network.”

        Additional options were negotiated in which L3 sued XO upon launching their Infinera built network & lost. There is a fuse Icahn address.

        • Hammerdinger says:

          typo – I didn’t negotiate them however I was there & to finish my statement. There is a fuse Icahn must address that L3 is looking forward to, it will be messy.

      • WGJ says:

        You are correct.

  • schmuckinsurance says:

    Agree with fancy pants, seems like L3 would be best off looking at network reach.

    • Fancy Pants says:

      I meant TWTC. You will note I said lots of cash on hand and buying back stock – both of which Level 3 has proven to be incapable of!

  • Eponymous says:

    Hammerdinger et al., see my posts at http://www.telecomramblings.com/2012/03/wow-zayo-to-buy-abovenet/

    XO owns the network, or at least that’s what they will be telling the judge, like they did last time they took L3 to court.

    “3.02 Notwithstanding anything contained herein to the contrary: (a) if and
    to the extent not prohibited by the Required Right(s)for a particular Segment,
    and (b) if the Required Right(s) with respect to such Segment do not and will
    not impose upon Grantor any additional fees, costs or charges as a result
    thereof (unless Grantee shall pay the same or make arangements satisfactory to
    Grantor to assure such payment), Grantor shall, upon the request of Grantee and
    on a Segment-by-Segment basis on the Acceptance Date with respect to such
    Segment and without the need for any further action or execution of documents by
    Grantor to Grantee: (i) transfer title to the Grantee Fibers and the Grantee
    Conduit to Grantee free and clear of all Liens attributable to Grantor;
    (ii)grant to Grantee a lease, subeasement or similar agreement providing
    rights (at no additional cost to or monetary obligations of Grantee, except to
    the extent provided in clause (b) above) to Grantee substantially identical to
    the rights held by Grantor under the relevant Required Right(s) (a
    “Sublease”); and (iii) continue the grant of the IRU in the Associated
    Property. “

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