AVAYA INC AVYA
December 15, 2017 - 9:38am EST by
ValueGuy
2017 2018
Price: 1.00 EPS 0 0
Shares Out. (in M): 1 P/E 0 0
Market Cap (in $M): 1,527 P/FCF 0 0
Net Debt (in $M): 3,399 EBIT 0 0
TEV ($): 4,926 TEV/EBIT 0 0

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  • Went Bankrupt
  • Bankruptcy Emergence
 

Description

Avaya is expected to emerge from bankruptcy before year end 2017. The company filed for Chapter 11 in April 2017 because it could not both service its debt and continue to spend roughly 16% of sales on R&D to keep up with competition. Silver Lake took Avaya private in 2007 for TEV of roughly $8bn, and the bankruptcy allowed the company to cut its gross debt balance by roughly half. The post-reorg equity will trade OTC and move to NYSE in 1Q17. The 7% first lien bonds due 2019 would also be a mechanism (aside from the new equity trading OTC) to buy this insofar as one can still deliver the bonds in return for cash and new shares.

 

At exit the company is expected to have $2,925mm of debt and $350mm of cash – along with $1,536mm of pension liability ($824mm after tax adjustment) and $822mm of pro-forma 2017E EBITDAP. Normalized free cash flow, per the bankruptcy plan, is roughly $225mm now that the company has cut about $200mm of cash interest expense via Chapter 11.

 

The pre-petition 1st lien debt of $4,534mm will receive $2.1bn in cash, and 90.5% of the post-reorg equity. The 1st lien paper trades at 80c on the dollar. So, the market is implying that the post-reorg equity is worth: $4,534mm * 0.80 = $3,627; $3,627 - $2,100mm cash paid to bondholders = $1,527mm equity value.

 

$1,527mm of equity value corresponds to about 6x TEV/’17E EBITDAP of $822mm or ~ 7x $225mm of normalized free cash flow. This equity is fairly levered and therefore sensitive to changes, especially when the multiple is low. The share count is not in the latest Form 10 so I suspect we’ll get that closer to the listing date and can then calculate a share price more readily.

 

-Cash  $350mm

+Debt   $2,925mm

+Pension $824mm

=Net Debt  $3,399mm

+Equity Value $1,527

=TEV $4,926

 

EBITDAP  $822mm

TEV/EBITDAP 6.0x

Net Debt/EBITDAP 4.1x

 

The company has 8,700 employees, 6,700 channel partners and 4,800 patents. Avaya reports two segments. UC and CC, Unified Communication and Contact Center Management. Unified Communication 2017E revenues were $1.9bn, with 50% from software and hardware and 50% from maintenance and services. UC is the #2 player in office based ‘unified communications as a service’ (UCAAS) and their share is declining from internet based competition. The LBO leverage, R&D spending and the competitive losses led to the restructuing. This is the problem segment. The Form 10 was filed November 13th and is available here: https://www.sec.gov/Archives/edgar/data/1418100/000119312517339711/d427311d1012b.htm.

 

Contact Center Management 2017E revenues were ~$900mm, with 40% from software and 60% from maintenance and services. 90% of Fortune 100 companies buy from this segment, and in 2016 Clayton, Dublier and Rice offered to buy this portion of the company for ~$3.9bn (~9x EBTIDA). That’s interesting because the overall TEV implied today is only $4.9bn (see table above). That means if the bidder was right, the UC segment is trading now for about $1bn - or somewhat less than 50% of sales. 

 

It’s tough to command a multiple in the tech sector with the combined top line in decline. So, this may remain a value play unless UC turs the corner or one of the segments or is either acquired or spun-off. It’s worth noting that the pension agreement contemplates the potential for a split up of the company. Bankruptcy investors are not the most optimistic bunch so its not unlikely Mr. Market may assign a higer mulitple just becuase a co-hort of less pessimistic buyers will have access to the shares once they list on the NYSE in 1Q17.

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Emergence from bankruptcy before year end, listing on NYCE in 1Q17

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    Description

    Avaya is expected to emerge from bankruptcy before year end 2017. The company filed for Chapter 11 in April 2017 because it could not both service its debt and continue to spend roughly 16% of sales on R&D to keep up with competition. Silver Lake took Avaya private in 2007 for TEV of roughly $8bn, and the bankruptcy allowed the company to cut its gross debt balance by roughly half. The post-reorg equity will trade OTC and move to NYSE in 1Q17. The 7% first lien bonds due 2019 would also be a mechanism (aside from the new equity trading OTC) to buy this insofar as one can still deliver the bonds in return for cash and new shares.

     

    At exit the company is expected to have $2,925mm of debt and $350mm of cash – along with $1,536mm of pension liability ($824mm after tax adjustment) and $822mm of pro-forma 2017E EBITDAP. Normalized free cash flow, per the bankruptcy plan, is roughly $225mm now that the company has cut about $200mm of cash interest expense via Chapter 11.

     

    The pre-petition 1st lien debt of $4,534mm will receive $2.1bn in cash, and 90.5% of the post-reorg equity. The 1st lien paper trades at 80c on the dollar. So, the market is implying that the post-reorg equity is worth: $4,534mm * 0.80 = $3,627; $3,627 - $2,100mm cash paid to bondholders = $1,527mm equity value.

     

    $1,527mm of equity value corresponds to about 6x TEV/’17E EBITDAP of $822mm or ~ 7x $225mm of normalized free cash flow. This equity is fairly levered and therefore sensitive to changes, especially when the multiple is low. The share count is not in the latest Form 10 so I suspect we’ll get that closer to the listing date and can then calculate a share price more readily.

     

    -Cash  $350mm

    +Debt   $2,925mm

    +Pension $824mm

    =Net Debt  $3,399mm

    +Equity Value $1,527

    =TEV $4,926

     

    EBITDAP  $822mm

    TEV/EBITDAP 6.0x

    Net Debt/EBITDAP 4.1x

     

    The company has 8,700 employees, 6,700 channel partners and 4,800 patents. Avaya reports two segments. UC and CC, Unified Communication and Contact Center Management. Unified Communication 2017E revenues were $1.9bn, with 50% from software and hardware and 50% from maintenance and services. UC is the #2 player in office based ‘unified communications as a service’ (UCAAS) and their share is declining from internet based competition. The LBO leverage, R&D spending and the competitive losses led to the restructuing. This is the problem segment. The Form 10 was filed November 13th and is available here: https://www.sec.gov/Archives/edgar/data/1418100/000119312517339711/d427311d1012b.htm.

     

    Contact Center Management 2017E revenues were ~$900mm, with 40% from software and 60% from maintenance and services. 90% of Fortune 100 companies buy from this segment, and in 2016 Clayton, Dublier and Rice offered to buy this portion of the company for ~$3.9bn (~9x EBTIDA). That’s interesting because the overall TEV implied today is only $4.9bn (see table above). That means if the bidder was right, the UC segment is trading now for about $1bn - or somewhat less than 50% of sales. 

     

    It’s tough to command a multiple in the tech sector with the combined top line in decline. So, this may remain a value play unless UC turs the corner or one of the segments or is either acquired or spun-off. It’s worth noting that the pension agreement contemplates the potential for a split up of the company. Bankruptcy investors are not the most optimistic bunch so its not unlikely Mr. Market may assign a higer mulitple just becuase a co-hort of less pessimistic buyers will have access to the shares once they list on the NYSE in 1Q17.

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Emergence from bankruptcy before year end, listing on NYCE in 1Q17

    Messages


    SubjectEquity isn't even trading OTC yet...
    Entry12/15/2017 10:29 AM
    Memberaagold

    ... so how is this an investment idea?  When the post-reorg equity starts trading it may be fairly priced by the stock market, so I don't understand why you posted this.  Am I misunderstanding something?


    SubjectRe: Equity isn't even trading OTC yet...
    Entry12/15/2017 10:52 AM
    MemberRSJ

    You can still buy the bank debt I believe.


    SubjectInstalled base and cloud offering
    Entry12/15/2017 11:53 AM
    MemberRSJ

    Thanks for the write-up. Few qs:

    1) How big is the installed base of on-prem customers? what is the plan to convert them to the cloud?

    2) How competitive is their offering in UC given that 16% of revenue is spent on R&D (vs 9-10% for the comps)?

    3) Any thoughts on the new management team? sense of their retention package/bonus milestones?

    4) What are the economics for the contact center mgmt business (revenue growth? length of contracts? margins? capex? returns on capital? etc....)?


    SubjectRe: Equity isn't even trading OTC yet...
    Entry12/16/2017 11:00 AM
    MemberValueGuy

    You can buy the bonds or the bank debt - a comment about the bonds is in the first paragraph of the write-up.


    SubjectRe: Re: Equity isn't even trading OTC yet...
    Entry12/16/2017 11:23 AM
    Memberdd12

    ValueGuy called out for "how is this an investment idea" because the new equity isn't trading yet, but there's $4.5B face of paper trading and its equity implications could not have been more clear ... 8 thumbs up.  shocking.


    SubjectRe: Re: Re: Equity isn't even trading OTC yet...
    Entry12/16/2017 12:11 PM
    Memberaagold

    Fair enough, my comment "how is this an investment idea" was too strong.  It's a BK debt idea. 

    However, I do think the writeup is very brief and without any discussion of what the UC segment is worth and what the CC segment is worth today (as opposed to 1 year ago).  Also, the author notes that "Bankruptcy investors are not the most optimistic bunch... and a co-hort of less pessimistic buyers will have access to the shares once they list on the NYSE in 1Q17", but isn't that an argument to wait until the equity starts trading and to perhaps buy shares soon after that?  One of the main theories behind buying post-reorg equity is there's indiscriminant selling by bond investors who can't or don't want to hold equity securities.

     


    SubjectRe: Re: Re: Re: Equity isn't even trading OTC yet...
    Entry12/16/2017 01:14 PM
    Memberdd12

    it's an investment idea.  the debt is now equity.  i am not involved, i breezed through the disclosure statement as i found it interesting.  the write-up was brief but i appreciated it, and we all have to do our own work anyway.

    how the stock trades is anyone's guess.  post-BKs have done poorly lately, especially in energy.  there have been times when post-BKs trade up.

    there are 3 different ad hoc groups.  one controls 67% of the First Lien; one controls 21% of the First Lien and 58% of the Second Lien; and one controls 8% of the Second Lien.  indiscriminant retail, bag holders, etc. may overpower those committed and/or new buyers and thus dictate initital trading, who knows.  maybe the ad hocs buy equity in the aftermarket when they are unrestricted, maybe they are happy and they punt.  the point, i think, is that the market will sort out a value, so all we can do is assign our own value to it.  right now, the Ent Value is $4.9B as ValueGuy points out.  the Plan Value was settled at $5.7B, and Centerview had its midpoint at $6.1B.

    this leads to the projections used, which appear sandbagged.  EBITDA for FY16 was $940M, and the projection for FY17 was $844M.  throught the first 3 quarters of FY17, EBITDA is 15% ahead of the plan.  the EBITDA beats are gaining steam sequentially, going from 10% above plan in the 1Q to 20% above plan in the 3Q.

    the projections have EBITDA declining to $708M in FY18, then moving back upward over time to $839M in FY21.  there are some non-core IP sales in there, but i didn't see anything material that would have made FY17 to date so strong relative to plan.  i didn't look all that hard though.  anyway, given FY17 EBITDA appears like it will come in over $900M, it appears the projections are too conservative.  it looks like they are shedding crappy revenue and margins are higher than expected, upon a cursory look.

    so if you believe EBITDA can hang in at $850M, it looks like free cash flow can be about $350M (after pension contributions).  if so, you're looking at a FCF to the equity yield north of 20%, on an entity leveraged 4x.  there is real cause for disagreement on these stats, depending on if you deduct pension expense from EBITDA, and pension liability from net debt, or not.

    as far as what this biz looks like in 2 years, i have no idea.  above my pay grade, but it seems like a decent idea worth tracking down to me.


    SubjectRe: Re: Re: Re: Re: Equity isn't even trading OTC yet...
    Entry12/16/2017 03:10 PM
    MemberValueGuy

    Thanks for sharing your insights on who holds the debt, the path of TEV valuations over time and the trajectory of EBITDA vs plan. These and your other comments really add value to the post. Much appreciated.


    SubjectRe: Re: Re: Equity isn't even trading OTC yet...
    Entry12/16/2017 03:11 PM
    MemberValueGuy

    Thanks


    SubjectUp 52%
    Entry02/11/2018 11:22 AM
    MemberValueGuy

    The market cap of Avaya is now $2.32bn v $1.53bn at the time of the post on 12/15/17, up 52%. Thank you to the community for all your helpful comments and feedback.

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