Some good discussion this morning - its nice to have actual news to work from!
Necessary, but not sufficient: I am not surprised by the relatively low upward price movement so far. This is a good step but not nearly enough, by itself, to close the valuation gap. One way of looking at this is as follows: Today’s deal represents roughly 3.5% of 2021P EBITDA ($0.3B/$8.5B). Based on the low end of the management model for share value ($24 - $35) there is a gap of roughly $12/share from today’s opening price to management’s asserted value. So, 3.5% of EBITDA that now has a true private market multiple should close the gap by raising the price roughly $0.42 (3.5% * $12). Discount this for some uncertainty that the deal actually closes and that it doesn’t happen until next year and it results in a relatively minor move. While it doesn’t significantly close the gap, I do think this deal is probably sufficient to ‘raise the floor’, so I think it’s likely the $9 and $10 targets some analysts have will get raised.
The key phrase of the above paragraph is “by itself”. After all, if the market is convinced that the multiples used in last summer’s valuation deck are legitimate then the entire gap would close fairly quickly. I doubt Storey, SEAM and the rest of the Board believed that the LATAM sale alone would be enough to convince investors, so I believe there will be more forthcoming announcements, likely still in the third quarter.
To me, most likely seems some portion of the CTL consumer business. Facilitating such a transaction had to be one of the drivers of moving to the CTL/Quantum/Lumen structure last fall. The Apollo rumor seems credible and reasonable in terms of scope and probable valuation parameters so I view this as the most likely. If this is not ready to be announced by next week’s ER call, I think we would hear Storey use similar language from the last call about continuing to pursue deals to unlock value. I also expect him to go back to talking about the guiding objective of increasing FCF per share which they moved away from since the pandemic started. I continue to be of the view that using proceeds from asset sales so that roughly three fourths go to debt reduction and one fourth to share repurchases is appropriate given the current low share price.
I doubt they sell the European assets. They have always seemed more committed to Europe (LVLT was interested in Colt for a while) and there seems much greater linkage for US enterprise clients to Europe than to LATAM. It’s a small clue, but I doubt they would have put out a PR last Friday talking about extending the European network only to turn around and sell it. Also, I think they just finished upgrading to the ULLL Corning fiber like they have done in the US. I see it as more likely they try to expand their European network in the future (perhaps get involved in the GTT situation?) than try to sell it now.
Outside of asset sales, the item that could materially move the share price is positive commentary on new sales/revenue. I don’t expect any positive surprise in actual Q2 results, but I won’t be surprised if there is specific mention of actual new wins that get announced. I think there is a reasonable chance we hear something positive this week from TMUS or next week from Lumen about EIS contract awards. EIS awards are given to bidders based on responses that vendors provide to RFP’s. Lumen/TMUS did not need to issue the PR they did a couple of weeks ago saying they were working together. Once Lumen had an agreement with TMUS, as an authorized EIS bidder they could have just started including wireless services in their responses to RFP’s. To me, the fact that they did issue a joint PR, signals that they expect to have something positive to announce.