GTT - GTT Communications

[valueinvestor]

I was going to do more research but thought I could defer to the collective wisdom of our board.

 

$4-6 EBITDA per Share.

$2.50 Share Price.

Debt $3.2B.

Announced Asset Sale of $2.1B.

 

 

The crux of this problem is are the cash-flow real? It's an asset light business model that sells internet to large corporations, hence how can they not generate a cash-flow unless there's a huge fraudulent scheme going on? They are currently paying an interest expense of $123M through their operating income. As a business they effectively rent assets and resell it as a bundle to corporations that have a footprint globally, so they can work with one vendor. Assuming EBITDA is only $150M versus $300M, it still trading at less than 1x EBITDA.

 

Maturities are not bad - basically $30M for five years and $3B after five years.

 

Sequoia and other value investors are invested in this - typically a red flag for me, but it seems an empire building company that is going through a transition. Bankruptcy is in the air too, but not sure how that could be a possibility. The $2.1B sale is not impaired - it's infrastructure assets of networks and data centers, which are still useful, if not more useful than it was when it was announced.

 

It seems like it could be a multi-bagger or leave equity holders holding the bag. I'll report back when I see a silver lining or what the market is not seeing.

[ratiman]

Bonds at $22. Equity is probably worthless.

[5xEBITDA]

The equity is worthless here.

 

Bond maturities aren't the problem, the problem is they can't file financials with the SEC which is a violation of their bond covenants. They have been operating under a waiver / grace period for several months and are in the process of negotiating an in court restructuring (Chapter 11).

 

Management swears the financial issues are limited to accrual accounting related to several large acquisitions they did and is not a cash receipt / disbursement problem, but the market is probably rightly suspicious of this.

 

They have an LOI (or PSA) signed for their European infrastructure business, this part of the Company is not asset-lite, that will fetch them about $2 billion. Proceeds will be used to repay debt at European subsidiaries as well as a bridge loan they obtained from bank lenders. Bonds are suing the Company saying they actually have a priority claim on European asset sale proceeds. If they slip into bankruptcy this issue becomes much more complicated. At the end of the day the point is that zero of this benefit will accrue to the equity.

 

Absent the European infrastructure, this is not a good business you'd want to own which is another problem as reflected by the price of the bonds.

 

There may be some option value in the equity worth punting around based on process-related catalysts, but I would stay away or invest elsewhere in the capital structure.

[valueinvestor]

Thanks for the input! Seems that way. I'll see if there's anything different.