From Briefing.com today---
Updated: 16-Mar-00
Global Light: Another Fiber Play?
[BRIEFING.COM - Gregory A. Jones] On Wednesday, Robert V. Green profiled a reasonably-priced fiber optic play in Carolina Power & Light (CPL). In that spirit, we profile another below-the-radar fiber play: Global Light Telecommunications (GBT). It's Canadian, it's the product of a reverse merger, and it is a holding company rather than an operating company. All are potential red flags, but in this case, the company overcomes these red flags and makes for a compelling story.
Global Light would like to sell itself as a fiber network incubator, and that is in fact an accurate description of its business. The company, whose shares trade on the AMEX, holds stakes in four other telecommunications firms. Two of these firms are already publicly traded in Canada, one has plans for a US IPO in Q2, and one is a joint venture with two other companies that is still in the financing phase. What follows is a brief look at these four companies.
Bestel
We start with the most compelling of the four companies, Bestel, which operates a fiber optic network in Mexico. Bestel is a joint venture between Grupo Varo and Global Light, with the former owning 51% and the latter 49%.
Bestel has already completed Phase I of its network, which consists of a 1,400 mile fiber network with 60 strands of fiber (or 84,000 route miles of fiber). There are two empty conduits into which Bestel can "blow" (that's how it's done now) more strands, allowing for the inexpensive addition of fiber in the future. Phase II will add another 1,100 miles of fiber to the network, with completion expected shortly.
Bestel is expected to file for its IPO any day now, with pricing expected before the end of Q2. The lead underwriter will be Salomon Smith Barney, with JP Morgan and CSFB also participating.
In terms of Bestel's likely valuation, perhaps the best way to approach this calculation is to consider a conservative approach based on an already-completed Bestel transaction. In June 1999, Bestel sold four of its 60 strands of dark fiber to Global Crossing (GBLX) for $53 mln. Bestel's business plan is not to sell dark fiber -- it intends to sell higher-priced services to carriers. This transaction and a few others like it to such firms as Qwest (Q) were carried out with the specific goal of helping to fund the network build-out.
In short, the dark fiber sales are the lowest price that Bestel should obtain for its network; selling value-added services should produce larger recurring revenue streams. So a valuation of Bestel based on the four strands sold to GBLX is conservative. Four strands at $53 mln is $13.25 mln per strand. There are 60 strands; that's $795 mln. Its post-IPO valuation will probably be even greater, but we'll use that number as a benchmark.
Global Light will own roughly 45% of Bestel after the offering, which places the value of their stake at roughly $360 mln vs Global Light's current market cap of $524 mln. There is certainly upside potential with the Bestel IPO and the prospects for the success of the company, but...
One unknown here is whether or not Global Light will still be an owner of Bestel by the time of the IPO. Grupo Varo, the majority holder, has an option to find a new investor for either 25% of Bestel shares or the entire 49% owned by GBT prior to the offering. GBT has hired CSFB to advise it regarding liquidation options concerning Bestel. Such a transaction, which is by no means assured, might remove the post-IPO upside for GBT, but probably does not significantly impact our conservative valuation.
The Bestel situation will be key to Global Light and one which we will watch closely in the weeks and months ahead.
Highpoint Telecom
Now the Global Light story gets even more complicated -- it owns 54% of Highpoint (HGP: Vancouver), but Highpoint itself is a holding company. Making the valuation game a bit easier is the fact that Highpoint is already publicly traded in Canada. At its current price of C$20.95, the GBT stake is worth $208 mln.
There is certainly a strong case to be made for Highpoint's upside potential given its investments:
North American Gateway: HGP owns 51%. NAG is a voice and data carrier which was the first alternative long distance carrier in Canada and serves North America, Europe, and Asia.
Vine Telecom: HGP owns 50%. Vine is still in the financing stage, but has plans for a fiber optic network serving second and third tier European cities using waterway rights of way. Its business plan is similar to Bestel's in Mexico.
Kast Telecom: HGP owns 40%. Kast is merging with HGP subsidiary Axxon. The companies offer competitive local exchange services in Europe. These companies are already operating and combined revenue should be about $70 mln in 2000. The company will come public in Canada via a reverse merger in about a month.
Aduronet: HGP owns 38%. Still in development phase, Aduronet will deploy an IP-services network in Europe; top management from Qwest.
As with GBT itself, HGP might well be undervalued on a sum of parts basis, but to be conservative, we will use the market's valuation of $208 mln for GBT's stake.
NeTrue Communications
NeTrue is also publicly traded on Canada, but still carries the name Pickle Crow (PKLu: Vancouver) following a recent reverse merger. The name will soon be officially changed.
NeTrue is based in California and is a voice-over-IP company. Its network has more than 50 nodes worldwide, and the company has a joint venture in China with Tangsheng Investment, China's largest telecom equipment provider.
NeTrue had $10.5 mln in revenues last year and expects $30 mln this year. At NeTrue current price of $22, GBT's 6 mln share stake is valued at $132 mln.
ARCOS-1
The latest addition to the GBT incubator is a joint venture with Siemens Project Ventures (an investment arm of Siemens AG) and New World Network Holdings. New World is planning to deploy a 5,300 mile undersea fiber optic network connecting the US, Mexico, Central America, South America, and 15 Caribbean islands.
Once ARCOS-1 obtains debt financing, GBT will commit equity capital of $50 mln for its equity stake of 51%.
As with many of the Highpoint subsidiaries, it is premature to place a value on ARCOS-1, but here again we see Global Light following the same game plan as they did with Bestel. In the case of a holding company that has many unproven assets, it is encouraging to see GBT pursue a consistent strategy, and one that has worked before with Bestel.
Putting It All Together
The success with Bestel speaks to GBT's credibility -- GBT's total equity investment in Bestel was just $20 mln for a stake that we now conservatively estimate at $360 mln. And though the reverse mergers and Canadian market listings might seem to raise a red flag, we see here again a consistent strategy focussed on inexpensive and efficient means of taking companies public in an effort to facilitate the financing of network build-outs. Finally, we see credible management at both Global Light and its subsidiaries, with veterans of many established telecom companies such as ICG Communications, Qwest, and British Telecom.
Global Light is not without its risks. With the exception of Bestel, most of the company's ventures are at very early stages which make valuation analysis difficult. But even taking the Bestel valuation estimate and the two market valuations of Highpoint and Netrue gives us a GBT valuation of $700 mln versus the current market cap of $524 mln.
That's a compelling story as is, but we also like the business model for their fiber networks, including Bestel, ARCOS-1, and Vine. As we have written in the past, it is far cheaper to add bandwidth to an existing fiber network than it is to build a new network. First movers therefore have a large and sustainable cost advantage versus newcomers in the fiber network industry. Global Light appears to understand this well, and in targetting second tier markets such as Mexico, the Caribbean, and smaller European cities, it is achieving first mover advantage. On both a sum-of-parts basis and on the outlook for the operations of its subsidiaries, we like the prospects for GBT.
Greg Jones - gjones@briefing.com |
