PRIMUS TELECOMM GROUP INC PTGI
October 21, 2011 - 9:29am EST by
cuyler1903
2011 2012
Price: 11.03 EPS $0.00 $0.00
Shares Out. (in M): 14 P/E 0.0x 0.0x
Market Cap (in $M): 151 P/FCF 5.4x 4.9x
Net Debt (in $M): 210 EBIT 0 0
TEV ($): 361 TEV/EBIT 0.0x 0.0x

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Description

Primus Telecom is a special situation investment opportunity with a major near-term potential catalyst that could easily lead to a 50%+ upward re-valuation of the stock prior to year end and an ultimate upward re-valuation of 100-150%+ as the story plays out and hidden assets are fully realized.  The company engaged Jefferies to explore strategic alternatives on October 4th, and since then the stock is down 7 cents on limited volume.  Because PTGI is not covered by the Street and has limited liquidity, the market mistakenly values the company like a CLEC and does not understand the two areas of tremendous hidden value in PTGI that appear very likely to be unlocked in the near term: (i) a fast-growing data center business generating $25mm+ of standalone EBITDA, and (ii) 7,000 miles of owned metro fiber in 5 major Australian cities passing >1,000 buildings that are just now beginning to generate revenue.

While there are many ways substantial value could be realized in the near term, I believe that the most likely outcome of the Jefferies process is a sale of PTGI's data center business, which consists of 13 data centers (7 in Canada, 3 in Australia, 3 in U.S.).  This asset is hidden as the financials are not broken out in the SEC filings or press releases, however PTGI's CEO for the first time recently disclosed (verbally) in a presentation that this business generates run-rate $50mm of standalone revenue and $25mm of direct EBITDA, and stated that each of PTGI's businesses is fully separable from the rest of PTGI's businesses without disruption. 

PTGI's data centers are fast growing, and these are high multiple businesses likely to command a 12-15x EBITDA multiple in a sale.  This implies that PTGI could very well generate $300-375mm of cash proceeds from a sale of this lone business unit, which as you'll see below represents roughly the company's entire existing enterprise value.  Assuming the data centers are sold at the low end of this range, you would be left with a company with $61mm of enterprise value, $60mm of EBITDA and nearly $90mm of net cash, plus 7,000 miles of owned metro fiber in the ground in key Australian business districts - an asset that clearly also has tremendous strategic value.  If one were to assume the data centers are sold at the low end of the range and assign a very conservative 4x EBITDA multiple to the non-data center business and ignore the strategic value of the installed metro fiber assets, you achieve a $24+ share valuation.  If data centers are sold at high end of the range, and you assume a more aggressive 6x EBITDA multiple for the remaining business, you achieve a $38+ valuation.  See data table below illustrating potential PTGI share price levels, which for simplicity excludes the modestly dilutive impact of warrant exercise (1mm warrants struck at $12.22, $16.53 and $20.50) and CVR value (struck at $35.95):

 

 

Data Center Valuation (x EBITDA)

 

 

12x

13.5x

15x

Remaining

4.0x

$24

$26

$29

Business

5.0x

$28

$31

$33

Valuation ($60mm EBITDA + fiber)

6.0x

$32

$35

$38

Potential buyers of the data center assets include, but are not limited to:

  • Q9 Networks (an ABRY Partners portfolio company headquartered in Toronto, acquired for $325mm representing 20x LTM EBITDA/15x NTM EBITDA in October 2008 per CapIQ, www.q9.com) *note relationship CEO has with ABRY below
  • Equinix, Inc. (Nasdaq: EQIX, $6.4 billion EV, trades at 24x LTM EBIT, http://www.equinix.com/)
  • Digital Realty Trust Inc. (NYSE: DLR, $9.4 billion EV, trades at 32x LTM EBIT, http://www.digitalrealtytrust.com/)

It is also possible that the company realizes value by selling (i) its Canadian telecom business to Rogers, Bell Canada or Telus; (ii) its Australian business, including its installed base of metro fiber, to a financial or strategic buyer (i.e. Telstra, AboveNet), and/or (iii) its VoIP-based telephony business, a small competitor to Vonage and several others.  I believe a sale of the entire company to a private equity or strategic buyer is also possible but perhaps less likely as this may not maximize value to shareholders, which is the sharp focus of Aquino and lead director Neil Subin.

Background

Based in McLean, VA, PTGI is a leading provider of advanced communications solutions, including traditional and IP voice, data, broadband Internet, colocation, hosting and outsourced managed services to business and residential customers in Canada, Australia, the U.S. and Brazil.  Pro forma for an acquisition closed in 2011, PTGI generates annual revenue and adjusted EBITDA of approximately $1.1 billion and $84 million, respectively.  Peter Aquino, the CEO of RCN until its highly successful turnaround and sale to ABRY Partners in August 2010, took over as CEO of PTGI in October 2010.  Since that time, due to his equity-driven compensation plan, Aquino now owns 476,746 shares of PTGI stock.  Aquino is a mercenary in the world of public company CEOs:  he appears motivated 100% by the stock price.  To that end, when the closing price of the stock reaches $16, Aquino will receive an additional grant of 54,834 RSUs.  On August 30th, Aquino added to his stake with a $63,000 open market purchase at $11.50.  The company approved a $15mm stock repurchase program on August 9th but has probably had to suspend it due to the Jefferies process.

Rather than go into detail on all of the company's businesses, I will point you to the company's presentation which does a nice job of illustrating the company's various businesses and financial contribution metrics:  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQyMjk4fENoaWxkSUQ9NDY0NjU5fFR5cGU9MQ==&t=1.  It is important to note, however, that the company's margins are low in the aggregate due to the high revenues and very low margin associated with the company's international carrier services business, which generates roughly $500mm of revenue and $5mm of EBITDA prior to expected $3-7mm of synergies relating to the recent Arbinet acquisition, which comprises the bulk of this business.  Finally, an aggressive investor can also acquire one of 3 classes of thinly-traded, out-of-the-money warrants outstanding (PMUGW, PMUOW, PMUPW).

Standalone Valuation, Capital Structure and Cash Flows

Stock Price

$11.03

 

Shares

   13.7

 

Market Cap

$151.1

 

 

 

 

10% Notes due 2017

$240.0

Exchange offer completed July 2011

13% Notes due 2016

     2.0

Likely to be retired with excess cash flow

Less: Cash

    31.5

 

   Net Debt

$210.5

 

 

 

 

TEV

$361.6

 

 

 

 

Revenues

$1,100.0

Pro forma for Arbinet acquisition

EBITDA

      84.0

Excluding expected $7mm of Arbinet related synergies

Total Capex

      30.0

Focused on Australia metro fiber and data center growth

EBITDA-Capex

$    54.0

 

 

 

 

TEV/EBITDA

     4.3x

If one excludes $12mm of corp. o/h, this goes to 3.7x

TEV/(EBITDA-Capex)

     6.7x

15% unlevered FCF yield

 

 

 

Leveraged FCF Yield:

 

 

 

 

 

EBITDA

$   84.0

 

Capex

     30.0

 

Interest

     24.2

 

Cash Taxes

       2.0

 

   Levered FCF

$   27.8

18% levered FCF yield

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.

Catalyst

- Sale of data center business
- Sale of metro fiber assets
- Sale of one or more geographic businesses (i.e. Canada or Australia)
- Sale of VoIP business
- Sale of entire company
    sort by    

    Description

    Primus Telecom is a special situation investment opportunity with a major near-term potential catalyst that could easily lead to a 50%+ upward re-valuation of the stock prior to year end and an ultimate upward re-valuation of 100-150%+ as the story plays out and hidden assets are fully realized.  The company engaged Jefferies to explore strategic alternatives on October 4th, and since then the stock is down 7 cents on limited volume.  Because PTGI is not covered by the Street and has limited liquidity, the market mistakenly values the company like a CLEC and does not understand the two areas of tremendous hidden value in PTGI that appear very likely to be unlocked in the near term: (i) a fast-growing data center business generating $25mm+ of standalone EBITDA, and (ii) 7,000 miles of owned metro fiber in 5 major Australian cities passing >1,000 buildings that are just now beginning to generate revenue.

    While there are many ways substantial value could be realized in the near term, I believe that the most likely outcome of the Jefferies process is a sale of PTGI's data center business, which consists of 13 data centers (7 in Canada, 3 in Australia, 3 in U.S.).  This asset is hidden as the financials are not broken out in the SEC filings or press releases, however PTGI's CEO for the first time recently disclosed (verbally) in a presentation that this business generates run-rate $50mm of standalone revenue and $25mm of direct EBITDA, and stated that each of PTGI's businesses is fully separable from the rest of PTGI's businesses without disruption. 

    PTGI's data centers are fast growing, and these are high multiple businesses likely to command a 12-15x EBITDA multiple in a sale.  This implies that PTGI could very well generate $300-375mm of cash proceeds from a sale of this lone business unit, which as you'll see below represents roughly the company's entire existing enterprise value.  Assuming the data centers are sold at the low end of this range, you would be left with a company with $61mm of enterprise value, $60mm of EBITDA and nearly $90mm of net cash, plus 7,000 miles of owned metro fiber in the ground in key Australian business districts - an asset that clearly also has tremendous strategic value.  If one were to assume the data centers are sold at the low end of the range and assign a very conservative 4x EBITDA multiple to the non-data center business and ignore the strategic value of the installed metro fiber assets, you achieve a $24+ share valuation.  If data centers are sold at high end of the range, and you assume a more aggressive 6x EBITDA multiple for the remaining business, you achieve a $38+ valuation.  See data table below illustrating potential PTGI share price levels, which for simplicity excludes the modestly dilutive impact of warrant exercise (1mm warrants struck at $12.22, $16.53 and $20.50) and CVR value (struck at $35.95):

     

     

    Data Center Valuation (x EBITDA)

     

     

    12x

    13.5x

    15x

    Remaining

    4.0x

    $24

    $26

    $29

    Business

    5.0x

    $28

    $31

    $33

    Valuation ($60mm EBITDA + fiber)

    6.0x

    $32

    $35

    $38

    Potential buyers of the data center assets include, but are not limited to:

    • Q9 Networks (an ABRY Partners portfolio company headquartered in Toronto, acquired for $325mm representing 20x LTM EBITDA/15x NTM EBITDA in October 2008 per CapIQ, www.q9.com) *note relationship CEO has with ABRY below
    • Equinix, Inc. (Nasdaq: EQIX, $6.4 billion EV, trades at 24x LTM EBIT, http://www.equinix.com/)
    • Digital Realty Trust Inc. (NYSE: DLR, $9.4 billion EV, trades at 32x LTM EBIT, http://www.digitalrealtytrust.com/)

    It is also possible that the company realizes value by selling (i) its Canadian telecom business to Rogers, Bell Canada or Telus; (ii) its Australian business, including its installed base of metro fiber, to a financial or strategic buyer (i.e. Telstra, AboveNet), and/or (iii) its VoIP-based telephony business, a small competitor to Vonage and several others.  I believe a sale of the entire company to a private equity or strategic buyer is also possible but perhaps less likely as this may not maximize value to shareholders, which is the sharp focus of Aquino and lead director Neil Subin.

    Background

    Based in McLean, VA, PTGI is a leading provider of advanced communications solutions, including traditional and IP voice, data, broadband Internet, colocation, hosting and outsourced managed services to business and residential customers in Canada, Australia, the U.S. and Brazil.  Pro forma for an acquisition closed in 2011, PTGI generates annual revenue and adjusted EBITDA of approximately $1.1 billion and $84 million, respectively.  Peter Aquino, the CEO of RCN until its highly successful turnaround and sale to ABRY Partners in August 2010, took over as CEO of PTGI in October 2010.  Since that time, due to his equity-driven compensation plan, Aquino now owns 476,746 shares of PTGI stock.  Aquino is a mercenary in the world of public company CEOs:  he appears motivated 100% by the stock price.  To that end, when the closing price of the stock reaches $16, Aquino will receive an additional grant of 54,834 RSUs.  On August 30th, Aquino added to his stake with a $63,000 open market purchase at $11.50.  The company approved a $15mm stock repurchase program on August 9th but has probably had to suspend it due to the Jefferies process.

    Rather than go into detail on all of the company's businesses, I will point you to the company's presentation which does a nice job of illustrating the company's various businesses and financial contribution metrics:  http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQyMjk4fENoaWxkSUQ9NDY0NjU5fFR5cGU9MQ==&t=1.  It is important to note, however, that the company's margins are low in the aggregate due to the high revenues and very low margin associated with the company's international carrier services business, which generates roughly $500mm of revenue and $5mm of EBITDA prior to expected $3-7mm of synergies relating to the recent Arbinet acquisition, which comprises the bulk of this business.  Finally, an aggressive investor can also acquire one of 3 classes of thinly-traded, out-of-the-money warrants outstanding (PMUGW, PMUOW, PMUPW).

    Standalone Valuation, Capital Structure and Cash Flows

    Stock Price

    $11.03

     

    Shares

       13.7

     

    Market Cap

    $151.1

     

     

     

     

    10% Notes due 2017

    $240.0

    Exchange offer completed July 2011

    13% Notes due 2016

         2.0

    Likely to be retired with excess cash flow

    Less: Cash

        31.5

     

       Net Debt

    $210.5

     

     

     

     

    TEV

    $361.6

     

     

     

     

    Revenues

    $1,100.0

    Pro forma for Arbinet acquisition

    EBITDA

          84.0

    Excluding expected $7mm of Arbinet related synergies

    Total Capex

          30.0

    Focused on Australia metro fiber and data center growth

    EBITDA-Capex

    $    54.0

     

     

     

     

    TEV/EBITDA

         4.3x

    If one excludes $12mm of corp. o/h, this goes to 3.7x

    TEV/(EBITDA-Capex)

         6.7x

    15% unlevered FCF yield

     

     

     

    Leveraged FCF Yield:

     

     

     

     

     

    EBITDA

    $   84.0

     

    Capex

         30.0

     

    Interest

         24.2

     

    Cash Taxes

           2.0

     

       Levered FCF

    $   27.8

    18% levered FCF yield

    Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.

    Catalyst

    - Sale of data center business
    - Sale of metro fiber assets
    - Sale of one or more geographic businesses (i.e. Canada or Australia)
    - Sale of VoIP business
    - Sale of entire company
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