While there are a few stragglers out there who haven't issued Q3 results, I have updated the competitive telecom trends plots to reflect data through the end of the third quarter. One of the interesting items to note is the clear upward trend in relative valuations, i.e. the ratio of enterprise value to annualized EBITDA lately. Here's the chart:
Relative Valuation (EV/EBITDA) for Competitive Network Operators
Other than those network operators making a long term transition from CLEC revenues to managed services and the cloud, i.e. EarthLink and Cbeyond, and the hybrid ILEC/CLEC Windstream which is in part doing something similar, the third quarter and the weeks since have seen the prior quarter's uptick extend into a full blown expansion in valuations.
Cogent's efforts to return cash to shareholders are clearly going over well at the moment. Meanwhile, tw telecom, Level 3, and GTT all now sport EV/EBITDA ratios in the mid to high 9s, while Lumos is now up in the high 8s. For Cogent, tw telecom, GTT and Lumos, this is the most respect the street has given them since I've been collecting data. And for Level 3, we last saw these lofty levels when everyone was pro-actively counting the Global Crossing synergies.
While M&A is still on the table, I wouldn't say that environment is more active now than in the past year or two, so these shifts in valuation would seem to suggest growing respect for network operators from the market as a whole.
Inteliquent's valuation has also been surging, but since they sold their data networking business to GTT and have been finding new life in the voice business that's a different story. As their business model has changed I may decide to drop them from this comparison, but I'm curious where things will settle down.
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