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