Description

Primus Telecommunications Group:

Description:

This is a post-bankruptcy equity that still trades in OTC and hence it is not widely owned nor covered.  I believe that explains the significant discount for what has been a steady performer in the telecommunications industry.  In addition, the guidance provided by the company in its reorganization plan should prove very conservative.

Primus provides telecommunication services to consumers and SMBs  worldwide, with its main operations being Canada (where it also owns data centers) and Australia (where most of its growth comes from VoIP).  They also own (and lease) transmission facilities, with roughly 500 POPs throughout the world. This is a bread-and-butter telco, with significant exposure to declining voice products (the goal is to move away from standalone voice and offer more bundles, where the churn is more stable), but also offering some growth areas, such as data warehouses and broadband. As per their plan, the decline in voice should be roughly offset by the other growth drivers, resulting in a stable revenue level.  Note that in 3Q09, organic growth (ex FX) was almost flat as opposed to negative, suggesting the company is making progress on its plan to transition away from a declining business into higher growth areas.

Over 80% of its sales are outside the US, and thus non-dollar denominated, however its debt was predominantly in USD.  Given the spike in the USD in early '09, the company filed for bankruptcy on March 2009 (only the holding co went into bankruptcy, so apparently relationship with vendors and customers were not impacted).  The pre-packaged bankruptcy allowed the company to shed $316M in debt, and the company emerged on 7/1/09, with approximately $255M in debt (mainly consisting of $96M of first lien debt (12% with strict covenants and tight amortization schedule) and $123.5M of second lien debt).  The first liens were recently called and replaced by $130M of new first lien notes with longer duration (2013 vs 2011).

The reorganization plan, which gave a value of $10.86/share for the stock (as an aside, the stock options strike price is $12.22), gave projections for essentially flat EBITDA in '09 and '10 ($66.1M and $67M respectively, with $73.1M in '11).  However, the USD has weakened considerably since, and has helped in the translation of the results.  The plan assumed an FX rate of $0.65 for AUD and $0.80 for the CAD - at the end of the year those rates were $0.90 and $0.95 respectively. On an LTM basis, the company has already done $75.9M of EBITDAR, and for the first nine months of '09 $60.8M, versus a plan of $66M for the FY.  We believe they have been on a $20M pro-forma pace/quarter, so could end the year with $75-80M, aside from cost reductions.

FCF:

EBITDA                                $80M

Annual Cash Interest            $34.5M

Capex                                 $23M (max as per covenants)

Cash taxes                          $3M (max withholding taxes from moving cash between different jurisdictions)

FCF in 2010 (2009 still has some restructuring expenses left): $19.5M (company should be working capital neutral), which implies a FCF yield of 35%.  In order to get some comparable figure, albeit not perfect, let's look at some of the RLECs in the US, such as CTL, FTR (standalone), WIN, and even Q, which all have substantial exposure to declining voice revenues.  The ballpark FCF yield is ~15%, which would imply a stock price of approx $13.50, or more than a double.

 Capitalization:

Cash                                      $42M

New First Lien Notes                 $130M

Capital leases/other                5.1M

Second Lien Notes                   123.5M

Total Debt                             $258.6M

Market cap                            $55.2M (9.6M shares at $5.75 on 12/31/09)

Total EV                                $271.8M, or 3.4x EBITDA

There is no perfect comp, due to their geographic and business mix, but if we look at a wide universe of ATNI, NTLS, FTR, PAET, SURW, BCE CN, MBT CN, BA-U CN, TLS AU, TEL AU and IIN AU, we get an average multiple of around 5x.  This would imply another $13 to the stock price.

Risks: USD strength; operationally, if decline in voice is much steeper than expected and more than offsets the growth in other services; and dilution from a potential equity raise (to possibly refinance the second lien debt and also increase float for equity).

Bonus recommendations: the debt is also interesting. The first lien (13% coupon, due 2016), trading at par, yields 13% and creates the company at 1.1x EBITDA.  The second liens (14.25% coupon, due 2013), trading at 95-96, yields over 15% and creates the company at 2.6x.

Catalyst

 -FY numbers that beat plan guidance

-Accretive refinancing of its debt

-Listing in a major exchange/wider audience