Description

GTT TL provides an attractive risk / reward with asymmetric skew and a path to >35% IRR over the next 12-months. As noted in previous threads, GTT filed its RSA with the proposed treatment of the Credit Facility Claims, Unsecured Noteholder Claims and Equity. Ultimately, the US TL (let’s keep it focused on this security) will be receiving 3 items: 1) ~51.5 pts of value from the Infrastructure sale (most will be received in next 30-days, small amount held in escrow until emergence), 2) ~30.1 pts of “take-back” paper that will have a L + 650 (inside of ~4x of leverage), should be a par-equivalent piece of paper, and 3) ~60% of the equity (pre-MIP dilution) or ~54% factoring in MIP dilution.

As noted further below, there is a very logical path to a $1.4 - $1.5Bln value in the near-term (standalone basis) and possibility of a >$1.75Bln+ strategic take-out over the medium-term (i.e. >$100 - $200MM of synergies and Comcast recently paid ~13x EBITDA for Masergy’s customer list, one could argue GTT remainco has a better “customer list”). Using a ~7x multiple on my guestimate of ~$250MM attainable EBITDA (I’d argue a strategic would pay that multiple on >$300+ of “synergized EBITDA”), gets to $1.75Bln TEV which implies a ~108 value on the US TL (versus ~89 current). Given ~51.5 pts of pay-down in the the next 30-days, effectively “creating” the US TL at ~37.5 pts (~89 current – 51.5) and getting take-back paper + equity that is likely worth in excess of ~56 – 57 pts versus ~37.5 pts of create. IRR math penciled out further below, results in >35% IRR over the next 12-months with very limited downside.

Net debt on the remainco (post Infra sale) will be inside of $830MM (assume $25MM cash at emergence) and the implied TEV at the current ~89 US TL price implies ~$1.05Bln of value (i.e. around $220MM of implied market capitalization). The Noteholders also have a valuable package (12% of pre-MIP dilution equity, $50MM rights offering option to take the TL equity but required to pay TL at par + accrued value or equivalent of $1.45Bln + 5-yr warrants for ~30% of the equity at >$1.45Bln strike). However, the US TL provides is attractive as very little downside risk at ~89 entry and there should be a path to par + accrued. Factoring in the ~51.5 pts from the Infrastructure sale over next 30-days, there is a path to >35% IRRs on the US TL at current levels.

Re: the biz plan, this is the obviously the most important topic.  After doing multiple industry checking, our conclusion is that there should be a path (standalone or in a larger entity) to >40% gross margins (i.e. >300 – 500 bps of margin improvement) and >20% EBITDA margins. Ultimately, this implies a biz that should be able to grow into $250 - $300 of EBITDA and drive >$100+ of FCF (i.e. market cap implied of ~$220MM is punitive per above)

Couple key findings below but ultimately this is a bet on the new management team of GTT and we’ve heard multiple positive reviews on their ability to block & tackle (this reminds me of the Time Warner Cable analog from years’ ago when nobody believed the operational turnaround could be fixed, but ultimately Charter proved that out).

1)      lot of low-hanging fruit to fix operations – as example, fragmented customer base at the tail creates path to efficiencies, i.e. >45% of SBM customers drive ~3% of revenues

2)      Remainco suffered from acquisition indigestion – too much activity and no time to digest / and buying distressed properties (fixer-uppers)

3)      Need 1.5-yrs on average to fix, so NOW there has been time to re-set and fix service delivery

4)      Churn should abate if (w/ time per above) and good execution

5)      Favorable comments on the new team (CEO and COO)

6)      Service delivery and customer satisfaction are the 2 guideposts and these KPIs are starting to flash stable / green

7)      COVID hammered the biz as couldn’t be on site … so new install engine was turned off … this is detrimental to GTT as they are the “disruptor” re: market share opp

8)      MPLS (old technology) is in decline (being leap-frogged) thus price compression … and incumbents exposed = benefits GTT as selling SD-WAN (disruptor product). Challenge is MPLS are 3-5 yrs duration so sticky so takes time

9)      GTT is well positioned as tier 1 backbone w/ direct ntk-to-ntk interface w/ all cloud service providers

10)   Churn is the ultimate by-product of all the work noted above (service delivery and customer satisfaction) + simplification of the customer base (i.e. remove the ~45% SMB that is low-margin and ~3% of revenues) is logical

11)   Additionally, old mgmt. team was focused on “elephant hunting”, new team is shifting “downmarket” a little bit = easier to reduce churn in the SMB sandbox       

IRR math on the US TL at ~89 entry is below:

Catalyst

RSA provides clarity on the splits, voting deadline tomorrow (9th) but likely already at well north of >70% support on Credit Facility Claims and Noteholder Claims