A Passing Thought on Public Company Valuations…
November 17, 2009
An interesting thought has occurred to me that I’d like to share with private company CEO’s and various Telecom analysts.
Why are carriers trading at mundane multiples, while data centers are trading much higher though they are codependent?
Here is my theory: I believe analysts have seen inside a number of private carrier companies, a.k.a. “the numbers,” and they are seeing those of us who survived the downturn out-performing most public companies.
If my theory holds water, it creates an interesting Catch 22 situation. Public comps are muted because private companies are bursting at the seams with growth. But a public company will not acquire a private healthy company because they limit themselves to their current EBITDA multiple, and can’t figure out how to explain paying up for a private concern to Wall Street.
Interesting conundrum isn’t it?
I do have one exception to my theory, as I believe this company represents more what many healthy private carrier companies look like. That company is AboveNet. The analysts need to start placing AboveNet in a category of its own, given what we are seeing in their results. Also very reflective of many private carrier companies.
My opinion, knowing thoroughly the AboveNet business model, is that they should be trading at least 10x -12x forward EBITDA in comparison to peer companies. An all data/IP business with no legacy, limited type 2 circuits is an efficient, growth oriented profitable business. I say get ready to get bored with AboveNet – they will be predictable in continued positive growth and results without changing a thing for at least the next three years easily. They are not weighed down by legacy infrastructure, ILEC reliance for pieces and parts and are selling a reliable platform for anyone to use – an open network! No applications with thin margins, high churn, high sales costs and high back office costs. What’s there not to like?
Written by Dave Rusin - Telecom Executive
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Maybe the fact that they had to go through a Chapter 11 to get there. I don’t want to sound too naive, but this does represent unfair competition against the few companies who didn’t make their original shareholders loose everything in a Chapter 11 proceeding
This is something we talk about quite frequently here at Global Telecom & Technology (aka “GTT” trading under ticket symbol GTLT). Some conventional wisdom is that those who build fiber networks have so commonly over-extended themselves with debt, which causes price and margin erosion in the market, that the Street has gotten wise. On the other hand, data center builders maybe don’t have the same traumatic track record, and therefore collective valuations are greater?
Not sure… but at the end of the day EBITDA generation is key, and in the long term, the Street will value the companies at the proper multiples of EBITDA, and ratio of operations profit to debt.
Let’s hope that day comes soon!