LAST MILE OPTICAL SOLUTIONS PROVIDER ON A TEAR
FIBERNET TELECOM GROUP, INC. (FTGX $11 ½)
RATING: INITIATING COVERAGE WITH A BUY
PRICE TARGET: $28
MARKET CAP: $563MM
F/D SHARES: 49MM
Kaufman Bros. L.P.
Mr. Vik Grover, CFA
Earlier this week, we met with management of FTGX to discuss the company's carriers' carrier
strategy for major markets across the U.S. The company intends to deploy metropolitan fiber rings,
construct multiple carrier hotels, and develop in-building optical networks in financial hubs
throughout the U.S. and abroad. By doing so, we believe FTGX is replicating the [copper-based]
capabilities of the ILECs by deploying a fiber-optic last mile network to large multi-tenant unit
(MTU) locations. In the future, we believe the company's wholesale, facilities-based offering will
be in high demand by other carriers, ISPs and corporate customers that increasingly need last-mile
broadband capabilities but lack the finances, manpower, or rights of way to deliver solutions to
customers over their own facilities.
Over the past several quarters, FTGX has executed a remarkable turnaround and, in our view, is
poised for a major move in the capital markets. The company has employed new management,
raised more than $25MM in capital from institutional investors, cut a significant dark fiber deal with
Metromedia Fiber Network (MFNX $45 ¾, BUY), and proven its concept by constructing last
mile facilities in several major high-rise buildings in New York and leasing bandwidth on those
networks to other carriers.
We believe the company's business model is highly attractive to landlords, in that it connects their
buildings with virtually limitless bandwidth (e.g., OC48+ on every floor). We believe major
property owners will find FTGX's strategy to become the long-term, sole provider of optical
bandwidth into their properties a “no brainer”, since it promises to give them an annuity, pure
profit revenue share of the services delivered over the company's networks. In addition, we believe
FTGX's business model will enable property owners to attract and retain a high caliber of tenants
that will find it difficult to change locations by virtue of their connectivity to the Internet.
Because FTGX is installing optical nodes on every floor of its targeted buildings, the company is
able to offer its last mile solutions at relatively low price points with short installation cycles. Since
a significant portion of the company's traffic is carried on-net, we estimate that FTGX, in its
mature buildings, will be able to turn highly profitable, generating long-term EBITDA margins
north of 60%.
We are currently working on an earnings model for FTGX. Details of the company's last mile,
carriers' carrier plan are still unfolding. On a preliminary basis, to derive a target valuation for the
company, we believe investors should apply a multiple to estimated cumulative capital expenditures
over a five-year period. Under its current business plan (which is subject to significant upward
revision), we estimate that FTGX will deploy roughly $500MM in capital in several cities across the
U.S., including New York, Chicago, San Francisco, Los Angeles, and Boston. In addition, we
anticipate that the company will take its business plan abroad, through a partnership with an
international carrier or infrastructure firm, which could provide significant upside.
The CLEC group, for lack of a better set of comparables, is currently trading at a median total
capitalization/adjusted PP&E of roughly 6.7x. We believe FTGX currently has roughly 49.0MM
diluted shares outstanding. We believe it is appropriate to assume the company finances $500MM
in cumulative capital expenditures through 2004 by using a combination of $300MM in debt,
$100MM in vendor financing, and $100MM in equity. Multiplying 6.7x $500MM generates a long-
December 23, 1999
kbroresearch.com
Vik Grover, CFA
Communications Services
212-292-8123
vgrover@kbro.com
Morning Notes
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