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Primus Telecom PMUG
January 28, 2011 - 9:21am EST by
cameron57
2011 2012
Price: 15.41 EPS $0.00 $0.00
Shares Out. (in M): 13 P/E 0.0x 0.0x
Market Cap (in $M): 200 P/FCF 0.0x 0.0x
Net Debt (in $M): 188 EBIT 0 0
TEV (in $M): 388 TEV/EBIT 0.0x 0.0x

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Description

PMUG is an attractive post-reorg equity with near-term catalysts to $20+.  I expect the Company to re-list on a major exchange within the quarter, and would expect a refinancing of the Company's high cost (13.5% WA) debt shortly thereafter.  New CEO Peter Aquino has a strong track record, and should be able to drive shareholder value through opportunistic asset re-positioning.
 

Primus Telecom (OTCBB:PMUG)

January 2011


  • Post-reorg equity with several near-term catalysts to ~$20
    • Relisting on a major exchange in Q1 2011

§         Drive liquidity & institutional coverage (daily volume of ~50k shares)

§         Potential secondary equity offering to improve float (ownership is highly concentrated amongst several distressed debt funds)

o        Refinancing of high rate debt could drive $1 to $1.50 in incremental FCF

§         Weighted average interest cost of 13.5%, despite PF net leverage of 1.9x

o        Headline numbers are misleading

§         LTM adjusted EBITDA of $88mm versus $83mm "reported"

§         Database projections do not make sense (CapIQ 2010E EBITDA of $67mm)

o        Acquisition of Arbinex offers a potential remedy for the sub-par, sub-scale global wholesale business

§         $28mm stock deal could be a decent transaction, given implied consideration of 3.5x (2.5x using the low end of synergy estimates)

o        New CEO Peter Aquino is a major upgrade for stakeholders

§         Former CEO of RCN Metro

  • Drove significant operational improvements in a similar situation (post bankruptcy company; eventual sale to ABRY)

§         Re-assessment of the assets & platform

§         Incentivized to drive long-term value for shareholders

  • Company Overview
    • Facilities-based integrated telecom company, with operations in Australia, Canada, United States, and a global wholesale switching business
    • Historical focus on traditional fixed-line communications, shifting focus towards growth areas (e.g. high-speed internet, VOiP, data centers, direct fiber leasing)
    • Filed for Chapter 11 in March 2009

§         Leverage issues were exacerbated by a spike in US$ (global operations with US$ denominated debt)

§         Emerged in July 2009 at $4 per share

  • Valuation Analysis
    • PF market cap and enterprise value of $201mm and $389mm (3.9x EBITDA)
    • PF net leverage of ~1.9x should allow for an accretive refinancing
    • Target 5x EBITDA multiple implies ~$23.50 stock price
    • Downside protection through low current multiple and anticipated "bump" from re-listing

 PMUG - Segment Analysis 









 Segment Revenue  YTD 9/30/10 2010 RR ARBX 2010 RR PF
 Canada                   172                  230                        -                  230
 Australia                   206                  274                        -                  274
 Wholesale                   138                  183                  330                  513
 Core Segments                   516                  688                  330               1,018
 US Retail                      39                     52                        -                     52
 Brazil                      21                     28                        -                     28
 Total Contribution                   576                  768                  330               1,098
 Corporate                         -                        -                        -                        -
 Total                   576                  768                  330               1,098






 Segment EBITDA  YTD 9/30/10 2010 RR ARBX 2010 RR PF
 Canada                      35                     47                        -                     47
 Australia                      30                     40                        -                     40
 Wholesale                        3                       4                     11                     15
 Core Segments                      68                     91                     11                  102
 US Retail                        4                       5                        -                       5
 Brazil                        1                       2                        -                       2
 Total Contribution                      73                     98                     11                  109
 Corporate                      (8)                   (10)                        -                   (10)
 Total                      66                     88                     11                     99






 Notes & Comments 




 PMUG has generated standalone LTM adjusted EBITDA of $88mm ($83mm "reported") 
 Paying $28mm for ARBX, which equates to ~3.5x EBITDA without synergies 
 - ARBX's historical reported results have numerous one-time items which are misleading 
 - Expect $3 to $7mm of operating synergies in the pro forma wholesale division 


Valuation Analysis





 share price  $15.41  comment 



 PF market cap                   200  includes ~3mm ARBX shares issued 

 less cash                    (50)  Q4 cash balance will be ~flat ($7mm asset sale, interest payments) 
 less ARBX cash                    (10)  acquired cash from ARBX 


 plus minority interest                        4  382 limitations cap annual NOL credit at $1.7mm 
 plus debt                   244




 PF enterprise value                   388











 PF EBITDA                      99  implied ARBX contribution plus $3mm (low end) of synergies 
 PF EV / EBITDA  3.9x




 PF net leverage  1.9x











 target EBITDA multiple  5.00x




 implied share price  $23.54




 upside / (downside)  53%





Catalyst

  • relisting on a major exchange
  • refinancing of high cost (13.5%) debt
  • potential secondary offering, combined with institutional coverage to increase liquidity
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