AVYA - Avaya Holdings Corp

[Broeb22]

 

Avaya recently came out of Bankruptcy after a pre-crisis LBO by Bain that left the company limping and unable to invest with $7BN of debt and $1.5BN of pension obligations. Those numbers today are $2.5BN and ~$1.0BN.

 

Today the company is priced like it’s going out of business AGAIN in a couple years, and well below even the EV estimates ($5.1-7.1BN) produced during Bankruptcy. There are few viable companies selling at 5-6x EBITDA today, but I believe AVYA is trading at that level.

 

You can see the pro forma balance sheet in more detail below, and note the interest rate on the second lien notes at 9%. I couldn’t find terms of the first lien debt and don’t have good comparable bond data for similarly rated credits, but if the junk market is trading at

<400 bp premiums to Treasuries, then whatever the rate is, it probably won’t go higher from here (assuming business stability) and could very well be refinanced lower in the future. To ballpark that, 100-200bps of interest savings on $2.5BN is $25-50MM savings pre-tax, and worth $150-300 in equity value (10-20% of current market cap) tax-adjusted (30% assumed) at 8x EBITDA.

 

What’s it worth?

If you believe mgmt. estimates that the business will turn the corner starting in 2019, and grow from there, the business is certainly worth 7-8x EBITDA. With about $200MM in 2018 cash flow that grows towards $300 in 2020, the business is currently priced as a permanently melting ice cube.

 

Comps in the space are varied. It’s kind of a tale of two segments. AVYA’s cloud/software segment comps are RingCentral, 8x8, and Mitel, among others. These trade at high valuations, 4-5x sales, with the slower growing MITL at 1.2x, and other comps at 12-14x EBITDA.

 

Avaya’s slower growing segment, the Enterprise segment, has comps that are 7-9x EBITDA.

 

Would appreciate any insights from the board.

[kab60]

Just a couple of thought. Agree it looks cheap if you believe their budgets, but why would you? How aligned are shareholders with management? What is managements track record? Revenues have been declining, why should that suddenly change? Unless you have any insight into their solutions, the numbers suggest to me that their offering is poor and they're not competitive. Why will that suddenly change without increased capex? Isn't this a typical PE case of underinvestment, botched acquisitions and poor management? Thanks for the idea, will look a bit into it.