The bidding war for BWNG may start soon
BWNG is on the brink of being profitable with net cash position of $70 million while the stock’s enterprise value is only a little more than a quarter of its forwarding annual revenue - about $900 million.
If we put BWNG’s financial data, starting from the current earning report (2005Q1), into a spreadsheet, we find that Broadwing may be Cash Flow Positive by Q3 or Q4 2005 with the assumption that they will reduce capital expenditures Q by Q and excluding the PIPE payment by CASH.
Currently, BWNG has “Cash, cash equivalents and investments were $237.2 million at March 31, 2005”. Excluding the debts $169.54, they have a net cash position of $67.66 with the remaining 3 PIPE installment payments and other debts completely being paid by cash. Assuming the CapEx for the next 4 quarters be $20, 15, 15, and 10 million respectively, BWNG might become fully profitable in 12 months and become the only fully paid-off national network.
That’s a long time before it gets there. However, QWest and other parties may knock BWNG's door for acquisition even before the next PIPE payment.
QWest will be the most eager acquirer because they were just off from the $10 billion acquisition war with Verizon for MCI, and they need BWNG's 6000+ enterprise customers, the 20000 miles long haul networks, the 23 tier-one markets, the 20 video centers, and the technologies and know-how, and the near $1 billion revenue.
Price: $750 - $900 million. Why?
Qwest was one of the early Corvis equipment customers besides Broadwing, WilTel, French Telecom, and the US governments. Huber can help QWest save Q’s capital expenditures, thanks to Corvis' technologies and their equipment business, and cut QWest's $1.7 billion per year CapEx in half, and year after year - the savings alone will fully compensate the price QWest pays for the acquisition.
Even though QWest has heavy debts and pays $1.7 billion per year in interest, QWest is cash flow positive because their OpEx is very low since they don't have to pay others for termination. If you look at the Q’s 2004 Income Statement closely, you’ll find QWest paid $88 million tax in 2004. Broadwing/Corvis’s forward tax credit from BWNG/CORV’s multi-billion dollar tax loss is worth more than half of the purchase price.
With the BWNG acquisition, Q and BWNG will get much better chances in growing market shares and government contracts such as Networx with the new coast-to-coast nationwide networks. Q can absorb and cut more than half of BWNG’s $280 million/year SG&A cost, and at least 1/3 of BWNG’s current $600 million/year OpEx. Total saving is at least $340 million per year. The saving in 2 years in BWNG’s SG&A and OpEx costs alone will be more than compensating the purchase, too.
The synergy and saving’s alone are worth $1 billion per year, and year after year in addition to the multi-billion dollar forwarded tax loss credit for the new QWest.
Then, of course, it comes to the value of the “naked” Broadwing/Focal/Corvis with $12.6 per share and $542K per work in revenue:
$200 m for Focal ($245 m/year revenue)
$450 m for Broadwing ($630/year revenue)
$100 m for the technologies ($20 m for OCS, $20 m for Dorsal, and $60 m for the Longhaul).
There is currently a lot of cash waiting on the sideline from the market. Besides Qwest, there are a lot of potential buyers are out there: Comcast, Time Warner, BT, Google, Microsoft/MSN, and many other savvy investors like Leucadia who bought WilTel with the 11000-miles Corvis-equipped long haul backbone only network for $1.05 billion in 2003.
The only hurdle for the acquisition is Huber’s personality and the poison pill.
How bad is the poison pill to the acquirer? Any input? |
