| 2017 | 2018 | ||||||
| Price: | 26.69 | EPS | 2.884 | 3.048 | |||
| Shares Out. (in M): | 89 | P/E | 9.25 | 8.76 | |||
| Market Cap (in $M): | 2,366 | P/FCF | 8 | 8 | |||
| Net Debt (in $M): | 2,881 | EBIT | 600 | 600 | |||
| TEV (in $M): | 5,247 | TEV/EBIT | 9 | 9 | |||
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- Private Equity (PE)
- Potential Takeover Target
- Telecommunications
- Acquisition Target
- Event-driven
- M&A (Mergers & Acquisitions)
- None found
Description
Company Summary
WSTC is a provider of communication services, including the largest audio conference call operator provider in the world.
The company first went public in 1996, was LBO'd by private equity sponsors (Thomas H. Lee Partners and Quadrangle Group) and management in 2006 and taken public in 2013.
Situation Overview
The West family and sponsors currently own 47% of WSTC’s outstanding common stock (of which TH Lee owns 21% with a 2006 year of initial investment).
TH Lee has had this investment since 2006 and is eager to exit. Discussions with sell side and industry participants indicate the West family isn’t keen on continuing to run a public company.
In late 2016, WSTC announced its working with Centerview Partners to explore options. New reports circulated in March 2017 that WSTC has attracted bids from Advent, Apollo and KKR.
On 4/27/17 it was reported that Apollo is near a deal to buy WSTC.
We believe the news reports are true and a deal will happen in the next few weeks for WSTC.
Recommendation – A long WSTC position with a takeout valuation of $31 to $34 a share.
A $31 valuation arrives from a SOTP based on precedent transactions as shown below.
A $34 valuation is 9.0x 2017 expected management’s EBITDA midpoint and the same valuation WSTC was taken private in 2006. It is also a valuation below peer Premiere Global Services, Inc. acquisition by Siris Capital Group in 2015 (’15 E EBITDA: 9.3x / Q3’15 LTM EV/EBITDA: 9.6x).
Downside
Initial break downside would be at $20 (7.1x EBITDA or a 17% 2017 after tax free cash flow) , with a final break price settling in at $23 (7.5x 2017 EBITDA or 15% 2017 after tax free cash flow), assuming no deal alternative.
Deal Alternative
If a deal fails, an alternative is WSTC selling its entire specialized agent business (call centers for health care benefits, the company’s lowest margin segment, WSTC sold part of this segment in 2015 to Alcoria).
If this happens, WSTC may use proceeds to delever, post-transaction we would expect WSTC to trade up and re-rate on this transaction.
A sale of this segment at 7.5x EBITDA would result in cash proceeds of $360MM (avg of 2016 / 2017 results), EBITDA margins would go from 28.2% to 29.9%, net leverage would go from 4.4x 2017 EBITDA to 4.2x, creating the equity at 8.0x pro-forma 2017 EBITDA, near the current valuation. Creating a 30% EBITDA margin company at 8x is low and we would expect a re-rating to 8.5x to 9.0x, or $30-$33/share.
Risk
Nothing happens, no deal w/ KKR and no asset sale of its specialized agent business.
WSTC’s levered balance sheet
Slowdown in Unified Communications segment. Traditional conference call hosting is WSTC’s largest segment with ~50% of total revenue and is in slow decline, compared with 50% of the business in growth, resulting in overall low single digit growth expected for 2017.
Risk reward could be better - at $26.69, you're playing for a takeout at $31 to $34, with an initial break at $20 and a final break at $23. However, given the motivated sellers as well as the potential for a segment sale if not a company sale (not to mention a red hot debt market), we view a very high change of an event occuring in the near future.
Timeline
4/27/17
Apollo near a deal to buy West Corp [Reuters]
03/02/2017
West Corp. Said to Attract Bids from Advent, Apollo and KKR [Bloomberg]
11/2/16
Late 2016 Announced strategic alternatives. West Corp. is working with Centerview Partners to explore options.
3/21/2013
IPO
6/1/2006
West Corp. Agrees to Be Acquired
Taken private by Thomas H. Lee Partners and Quadrangle Group in 2006 in a deal valued at about $4 billion.
https://www.sec.gov/Archives/edgar/data/1024657/000119312506192618/ddef14a.htm
Enterprise Value/Adjusted EBITDA Multiples
LTM 9.1x
2006 8.9x [25% EBITDA margins]
Company Overview
Four reportable segment overview:
1 Unified Communications Services,
Collaboration services, unified communications as a service (“UCaaS”) services and telecom services;
2 Safety Services
Carrier services, next generation 9-1-1, government solutions and advanced services;
3 Interactive Services,
Including outbound (proactive notification – voice/text/short message service (“SMS”) and chat), inbound speech solutions (IVR), cloud contact center technologies, web, mobile and professional services; and
4 Specialized Agent Services
Healthcare advocacy services (health care call centers, i.e. who you call when you have questions about your insurance), cost management services and revenue generation.
Segment Details
1 Unified Communication Services (UCaaS)
Slow Decline
Leading global provider of audio conferencing and events services. Audio - Dial-in with no operator and Events - Dial-in with operator host
Key Brand: InterCall
Peers: AT&T, Verizon, PGI, BT Conferencing
WSTC Deals: Intercall (2003), ConferenceCall.com (2003), ECI (2004), Sprint Conferencing (2005), Rain Dance
(2006), Genesys Conferencing (2008), CorVent (2009), Stream57 (2009), Unisfar (2011)
Industry Deals: PGI (2015)
Mkt: Audio conferencing market is $3.8B, declining at 4% CAGR [WSTC Analyst Day via Wainhouse Research p10]
Growth
UCS also has an Alerts & Notifications business that provides services such as utility outage calls, emergency updates for municipalities, reminders for prescription drug refills, flight status changes, physician reminders, etc. West provides these offerings through multiple delivery channels (phone, text, email, etc.), and is one of the few scale providers with the infrastructure, capacity, and operational excellence to execute mass communication blasts.
Provider of web-based conference calls, sells SaaS software for webcasts.
Key Brand: Intercall product + Resell Cisco (Web-X), MSFT, ADBE.
Peers (Web Conferencing): Cisco, Citrix, MSFT
Peers (Video Conferencing or Webcast): AT&T, Verizon, PGI, BT Conferencing, Cisco, Citrix, MSFT
Peers (Virtual Events hosting): BT conferencing, PGI, Arkadin, NASDAQ, ON24
WSTC Deals: SKT (2010), POSTcti (2011), Smootstone (2011), Magnetic North (2015)
Mkt: Web conferencing market is $3.3B, growing at 6% CAGR [WSTC Analyst Day via Wainhouse Research p10]
Other
Other offerings include local and national tandem switching services that facilitate an exchange of voice traffic between originating and terminating networks throughout the U.S.
Key Brand: HyperCube
Peers: Inteliquent, Peerless Network, CLEC (Competitive Local Exchange Carriers)
WSTC Deals: HyperCube (2012)
2 Safety Services.
Provide 9-1-1 call routing, call location creation and delivery, and call delivery and accuracy compliance tools to the majority of U.S.-based telecommunications service providers including all major Incumbent Local Exchange Carriers (“ILECs”), most Competitive Local Exchange Carriers (“CLECs”), as well as wireless carriers, VoIP service providers and telematics providers.
Platform is the next generation 9-1-1 offering for AT&T's 21-state footprint and nationwide
Announced a long-term agreement with AT&T to deploy a standardized, scalable nationwide architecture designed to support IP communications for public safety answering points
Peers: Telecommunications Systems (TSYS), Airbus DS Communications, EmergiTech
Mkt: Estimated long-term growth rate of 6-10% [WSTC Analyst Day p10]
WSTC Deals: Intrado (2006), HBF (2008), Positron Public Safety Systems division (2008), Contact One (2011), PivotPoint (2011), 911 Enable (2014)
Industry Deals: TSYS
3 Interactive Services.
Email and text reminders for education and air travel.
Peers: GovDelivery, Blackboard (college), Genesys, Interactive Intelligence, Nuance Communications, Plum Voice
Mkt: Estimated long-term growth rate of 6-10% [WSTC Analyst Day p10]
WSTC Deals: CenterPost (2007), TeleVox (2007), Holly Connects (2010), TuDox (2010), Twenty First Century Communications (2011), School Messenger & SchoolReach (2014), SharpSchool (2015), ClientTell (2015)
4 Specialized Agent Services.
Provider of healthcare advocacy products and services to employees of large organizations.
Helps health insurance payers, third-party administrators and self-insured employers improve cash flow and reduce healthcare costs by identifying and recovering overpaid and third-party liability claims. Offers business-to-business sales across multiple vertical markets with a focus on increasing our clients’ market share and improving customer relationships.
Peers: Connolly iHealth Technologies, Rawlings Group, Optum
Mkt: Estimated long-term growth rate of 6-10% [WSTC Analyst Day p10]
WSTC Deals: Health Advocate (2014), Omnium (2007), Specialty Pharmacy Networks (2010)
Partnerships
AT&T
2/28/17
Announced a long-term agreement with AT&T to deploy a standardized, scalable nationwide architecture designed to support IP communications for public safety answering
Customers
WSTC has ~25,000 clients, including 92 of the Fortune 100.
Top 100 clients account for 57% of revenue.
Average tenure of 11+ years for its top 10 clients.
43% of revenue is derived from clients who use 2+ services (i.e. sticky revenue).
Transactions
WSTC Deals
The acquisitions of SchoolReach and SchoolMessenger in 2014 and SharpSchool and ClientTell in 2015
2015 was primarily the result of the acquisition of Health Advocate in 2014
Industry Comparable Deals
Unified Communications - Segment Comparable Deal
Premiere Global Services, Inc. (PGi) Acquired by Siris Capital Group (Comparable to WSTC’s Unified Communications Segment)
Press Releases
Proxy
https://www.sec.gov/Archives/edgar/data/880804/000119312515352749/d62309ddefm14a.htm
Deal Stats
Announced: 9/10/2015
Completed: 12/9/2015
EV: $1bn
2015 Est EBITDA: $107.5MM [18.1% adj EBITDA Margins]
Q3’15 Adj EBITDA: $104.0MM [18.4% adj EBITDA Margins]
’15 E EBITDA: 9.3x
Q3’15 LTM EV/EBITDA: 9.6x
Before the transaction PGI was levered 3.1x LTM Q3’15 EBITDA and 3.0x est 2015 EBITDA.
Bankers
Target (PGI) - Allen & Company
Buyer (Siris) - William Blair & Company
One bidder – Siris Capital
Safety Services - Segment Comparable Deal
Comtech Telecommunications Corp (CMTL) acquisition of TeleCommunication Systems Inc. (TSYS)
Press Releases
Tender Offer
https://www.sec.gov/Archives/edgar/data/1111665/000157104915009829/0001571049-15-009829-index.htm
https://www.sec.gov/Archives/edgar/data/23197/000157104915009518/0001571049-15-009518-index.htm
Deal Stats
Announced: 11/23/2015
Completed: 02/24/2016
EV: $430.8MM
Q3’15 adj. LTM EBITDA: $51.8MM [16.9% adj EBITDA Margins]
EV/LTM EBITDA: 8.3x
Synergies: $12MM
EV/LTM adj. EBITDA: 6.75x [post-synergies]
Interactive Services - Segment Comparable Deal
Genesys Telecommunications Laboratories Inc (GCTI, owned by Permira Funds Technology Crossing Ventures) acquisition of Interactive Intelligence Group (ININ).
Press Release
https://www.sec.gov/Archives/edgar/data/1517650/000151765016000218/0001517650-16-000218-index.htm
Proxy
https://www.sec.gov/Archives/edgar/data/1517650/000104746916015573/a2229723zprem14a.htm
Deal Stats
Announced: 08/31/2016
Completed: 12/02/2016
EV: $1.4bn
Q3’15 LTM REV: $426.2MM
Q3’15 LTM EBITDA: $27.2MM [6.4%]
2016 E EBITDA: $28.0MM [6.5%]
2017 E EBITDA: $58.8MM [12.5%]
EV/LTM REV: 3.3x
EV/LTM EBITDA: 51x
EV/2016 E EBITDA: 50x
2017 E EBITDA: 24x
Specialized Agent Services - Segment Comparable Deal
6/2/16 Alorica to Acquire Expert Global Solutions (financing not disclosed)
Press Release
https://www.moodys.com/research/Moodys-assigns-B1-CFR-to-Alorica-Inc--PR_350118
One Equity Partners LLC acquired Expert Global Solutions Inc/Georgia for USD 1,212.75M. The transaction was announced on 05/16/2006 and completed on 11/16/2006.
Appendix
West Corp. Agrees to Be Acquired
6/1/2006
https://www.wsj.com/articles/SB114908337663667495
The transaction values the Company at approximately $4.1 billion, including debt as of the date of the definitive agreement. The purchase price per share to the public stockholders represents an approximate 13% premium over West's closing stock price on May 30, 2006 and an approximate 16% premium over the trailing five day average.
Proxy
https://www.sec.gov/Archives/edgar/data/1024657/000119312506192618/ddef14a.htm
page 43
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Enterprise Value/Sales Multiples |
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LTM |
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2.3 |
x |
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2006 |
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2.3 |
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Enterprise Value/Adjusted EBITDA Multiples |
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LTM |
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9.1 |
x |
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2006 |
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8.9 |
x |
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Enterprise Value/Adjusted EBIT Multiples |
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LTM |
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12.7 |
x |
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2006 |
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13.0 |
x |
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P/E Ratios |
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2005 |
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23.1 |
x |
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2006 (Mgmt.) |
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20.1 |
x |
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2006 (IBES) |
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21.2 |
x |
Bankers
Target (West Corp) - Goldman Sachs
Buyer (THL / Quadrangle) -
Goldman Sachs ultimately contacted a total of 23 parties for indications of possible interest in a transaction with our company. Eight of these parties (seven private equity firms and one strategic partner) expressed an interest in participating in the process.
Appendix
*Slight difference in segment totals vs corporate total due to discont assets / 2013 consolidated stmts restated - Segments not restated
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Pending company or asset sale, expected in the next few weeks.
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