Description
($C) GT secured bank/vedor claims - 40-45 cents on the dollar should buy paper - Current face amount outstanding Sr. Sec. Claim =$535m trading at 45% = $240m impled cost of enterpries
Group Telecom (GT) is Canada’s largest independent, facilities-based telecommunications company. GT owns a coast-to-coast fiber network delivering data, Internet, application, and voice services to over 14,500 business in 17 markets across 9 provinces in Canada. GT raised $2b in 2000 to fund its national expansion. By 12/31/01 GT had 2,253 On-net buildings. Shaw Communication & Goldman are the current controlling shareholders.
Bob Wolfe (former COO) left GT in November. Following Wolfe’s departure the Company announced it would focus on cost cutting. On Feb 19, 2002, GT cut 350 jobs in an effort to improve its cost structure.
On March 22, 2002, GT announced that it hired Morgan Stanley to advise the Company on possible pursuit of capital structure enhancements (restructuring).
Canadian Telecom
Incumbents Revenue Up Starts Revenue
Bell Canada $18b AT&T Canada $1.5b
Telus $10b Call-Net (Sprint) $1b
GT $230m
Security - Bank & Vendor claims are secured by substantially all of GT’s fixed assets. (Bank/Vendor’s security interest is mentioned in the annual report, but The Company did not file the Bank or Credit agreement – I am still waiting to see the documentation of the Secured interest)
Liquidity/Cash - At 12/31/01 GT had $300m in cash & $289m availability($43m Bank, $45m Cisco, and $200m Lucent). The junior part of the debt structure is PIK until 2005. This liquidity would appear to allow the Company to avoid liquidation until 2004.
Pricing at 40-45% of sr. sec claim – 1x LTM revenue, .17x Net PP&E, .80x Cash Balance (12/31) – Unlike most VC funding, GT is available on a secured basis with a 17-21% current yield.
Positives
Addressable Market – If successful in gaining market penetration, the Company’s target market (mid size & enterprise business customers) is large enough ($15-20b) to support a revenue base of many times the current $230m.
Management – GT appears to have become more realistic with the departure of Bob Wolfe. Management has remained despite losing tons of money on the Stock. They likely want to recap & get a slew of new options & make another go. Chairman Leo Hindery, former president of TCI, AT&T broadband & spent 8mths as CEO of Global Crossing; CEO Dan Millard, former President of Adelphi Business Solutions. Added Jozef Straus, CEO of JDS Uniphase, to Board in Q1 of 2002.
Canada – The Canadian market is considered less competitive than the US. This is partially based on ownership laws that prohibit foreigners from owning over 46.7% of a Canadian telecom Company.
Margin Improvement - The Company’s GM & SG&A as a % of sales have improved in the last year.
Long-Term Demand – IP & Data Telecom traffic has been increasing 30-50% annually.
Negatives
Cash Burn – The Company is not EBITDA positive & according to Mng/Street Projections is at least 1yr away from FCF.
Competition – Bell Canada & Telus are better financed and spending billions to develop systems in the parts of Canada where they were not traditionally strong.
Capex Needs- The Company will spend $150-170m in Capex in 2002. Half of the 12/31/01 cash balance.
Vendor Financing – Lucent & Cisco provide the Company’s vendor funding. I wouldn’t want to rely on Lucent to feed me.
Technology – Despite demand for telecom traffic, supply could be created by the next great invention leaving GT’s network less valuable.
Outlook – Near term out look is dismal. Pricing pressure & over supply.
Growth Needs – GT does not have enough revenue to become profitable or support the secured lenders. The company needs more than a capital structure & cost structure change, it needs to grow revenues.
Canada – Bank/Vendor debt is in Canadian dollars. Canadian Bankruptcy/Reorganizations tend to be overly friendly to junior claimants. We have less experience in Canadian reorganizations than in the US. This might be a nice opportunity to partner up with the people at Brascan(Trilon) who had expressed an interest in working with us.
Liquidation Value – Installed telecom equipment has been auction off in the range of 10 cents. At 45% the Bank/Vendor debt trades at 17% of net PP&E. Though interesting, this analysis is not particularly relevant because the Company’s cash & liquidity position ensures that GT will not be liquidated in the next 2 years.
Catalyst
Current yield of 17-20%