Hi Paul, Here's an opinion as to what ICIX will look like post DIGX:
As with the sale earlier in the year, ICIX will likely pay down debt with the proceeds of a
sale. Importantly, in the earlier DIGX sale, which resulted in a taxable realized gain of
$864 million, ICIX used up much of its extensive collection of NOL's ($742 million total)
against that gain. The remaining stake in DIGX is worth, as we all know too well, roughly
$3.9 billion gross at $100 a share. The taxable gain on this event will likely be in the
neighborhood of roughly $3.4 billion, given that ICIX has $387 mm in NOL's left
(according to the 10Q) to offset that taxable income, and a cost basis in its DIGX stock
that is very minimal. Mr. Tax man will come along and lop off his share, probably in the
$1.35 to $1.4 billion range, leaving the company with $2 billion in proceeds. With that
money, ICIX can now address its debt situation, most of which will probably be paid down
with proceeds from this sale. This quarter just ended, ICIX says it paid down $500 mm of
outstanding debt with the cash it had on its balance sheet at 3/31/00. That figure was
$1.3 billion, so we should reduce cash on hand to $800 mm, and reduce the long term
debt figure from $2.883 billion to $2.383 billion. Adding the remaining cash on hand of
$800 mm to the post-tax DIGX sale proceeds of $2.0 billion, leaves ICIX with positive
cash on hand of roughly $400 mm and No Debt whatsoever.
What will ICIX look like in its Post-DIGX era? Well, for starters, the balance sheet will be
substantially improved, with the debt balance being essentially zero and the cash on hand
standing at $400 mm. I would assume that the preferred shareholders will not be
converted into common stock as a result of a DIGX stake sale. There's no real incentive
for them to convert at this point, since ICIX common doesn't pay dividends and will not be
realizing any DIGX-related payday.
The more important impact will be to ICIX income statement, wherein they paid interest in
the first quarter of the year 2000 of about $73 million dollars. If you remove this expense
by virtue of the debt paydown, and you also add back the expense DIGX was costing the
company, some dynamic change is seen. The core ICIX business had revenues in 1Q
2000 of $233.7 mm, and a net loss of $51 mm. Add back $73 mm in interest expense
that will no longer be present, and you have a $22 mm operting profit. DIGX as a sep.
entity provided $28 mm in revenues, but also cost $56 mm in expenses, to produce a
$28 mm operating loss. By selling DIGX, ICIX rids itself of that $28 mm operating loss in
DIGX. At the end of the day, ICIX shareholders will have an enterprise that's enjoying
reveues of approximately $235 mm per quarter, and positive cash flow to the tune of
roughly $40 mm to $50 mm per quarter.
Non-cash depreciation charges on ICIX's extensive PPE figure will offset this positive net
income number; the 2000 1Q figure was $90 mm, leaving us with a negative net income
number, which from a tax perspective at least is positive.
I calculate that even if all the preferred shares and warrants are converted, on a fully
diluted 77 mm shares out, ICIX can be cash flow positive to the tune of roughly $2.60 per
share ($200 mm per year, divided by 77 mm shares). Again, This will be offset by
depreciation, so ICIX will not be EPS positive, but that is not uncommon for CLEC's. If the
preferreds are not converted, ICIX will see per share cash flow of over $3.70 per share.
Plugging in a growth estimate of 6%, which is what the Year over year growth rate was for
1Q 2000 in the CLEC segment, ICIX could be seeing $2.75 (fully diluted) to $4.00
(undiluted) per share positive cash flow in this year (FY2000).
Comparative analysis with Broadwing, which trades at roughly 3.5 times revenues, shows
that the leftover ICIX business has a very low valuation at current. Even at a discounted 2x
revenues, ICIX (which will have a much cleaner balance sheet than BRW, by the way)
should have a remaining valuation of approximately $2 billion, $37 per undiluted common
share, or if measured over 77 mm fully diluted shares, $25 per share. If we apply a more
fully valued 3.0 times revenue, the value rises to $36 per fully diluted share.
Measured as a multiple of book value, ICIX presently has $3.9 bb in assets on its books,
a value of $50 per share. If we assume an offset of the debt for DIGX as outlined above,
and an addition of $400 mm in post-tax cash assets, the b.v. of ICIX improves to
approximately $4.3 b in assets less preferred interests of about $900 mm, or $3.2 b. Per
fully diluted share, that's about $41 per share. Again BRW trades at 2.9 times book value,
so we can certainly see some room for ICIX price improvement. |
