|Pe deals of the year|
The sale of FiberTech Networks LLC to Court Square Capital Partners in December was only one of numerous deals involving fiber-optic systems, but it was distinct in many ways. The purchase price hit a double-digit multiple of Ebitda, raising expectations of fiber-networking auctions. And while its sponsors, Nautic Partners LLC and Ridgemont Equity Partners, took nearly a decade to exit the Rochester, N.Y., fiber company, they did so with impressive returns.
FiberTech's $535 million price tag in the secondary buyout equated to more than 10 times Ebitda -- by some accounts 12 times Ebitda -- for the 12 months prior to the sale. Relative to FiberTech's growth, which exceeds 20% per year, the valuation is more modest versus forward-looking results. The buyout translates to 9.2 times annualized fourth-quarter Ebitda and 8.6 times projected 2011 results.
FiberTech chairman and CEO John Purcell says one reason the company attracted robust attention is that it has long-term deals with clients that assured bidders about long-term revenue. "Our average contract is between eight and nine years," says Purcell, who declined to comment on the price or multiples.
Nautic, then known as Navis Partners, was FiberTech's first investor in 2000. Ridgemont, part of Bank of America Corp. at the time, led a 2001 funding. Through the two rounds, FiberTech raised $50 million in equity.
FiberTech's clientele includes a roughly 50-50 mix of telecommunications carriers and large enterprises, such as financial services companies, hospitals, educational institutions and government offices. The company provides clients in 23 markets with either "dark" fiber strands, which the customer activates and runs itself, or "lit" fiber, which FiberTech supports. Lit services have lower margins because they require operating expenses, but have higher growth.
Companies that provide critical pieces of Internet infrastructure have benefited as smartphones, cloud computing, online gaming, video streaming and other data-intensive applications have driven up demand for bandwidth. One industry source suggests that the FiberTech sale helped to distinguish companies that sell fiber strands as infrastructure from the competitive local exchange carriers, or CLECs, that provide a full range of telecom services. The CLECs often compete head-to-head with large carriers, such as AT&T Inc. and Verizon Communications Inc., and have lower valuation multiples than fiber infrastructure providers.
What makes FiberTech a little different from other fiber companies is that it is focused on smaller markets, says Gregg Lemos Stein of Standard & Poor's.
FiberTech has developed a "tier 2" strategy, targeting markets that range in size from Worcester, Mass., to Pittsburgh. These cities have less growth potential than, say, New York or Los Angeles, but they also have less competition. The focus on midsize markets and its avoidance of long-haul fiber routes that stretch between cities has economic benefits, Lemos Stein says.
"They have very good margins," he explains, "but also not much free cash flow generation because of a combination of a high debt load and the significant amount of capex that they are incurring to build out to new customers."
In early 2010 Nautic and Ridgemont retained Oppenheimer & Co. banker Jeffrey Berson, who has since moved to UBS Investment Bank, and a team from Duff & Phelps Corp. to shop FiberTech. The auction was heated. From May to June of 2010, the company received offers from 19 parties. Eight bidders visited Rochester in July to give FiberTech a closer inspection. In the final round were strategics and two financial firms, although one of the bidders may not have formally submitted an offer. In August, FiberTech's backers went with Court Square, whose offer included $293 million in equity, a Securities and Exchange Commission filing shows.
The sale of FiberTech came amid a slew of deals, with traditional telecoms and private equity firms buying up companies with fiber in metropolitan areas. A number of companies, from AboveNet Inc. to privately held FiberLight LLC, are also exploring the market.
Although it was a long time coming, Nautic and Ridgement collected a nice payday. The PE firms are said to have achieved a return on investment between 26% and 27% per year.
FiberTech backer Ridgemont was on either side of the dealmaking. As it exited FiberTech, the PE firm took a majority stake in Kansas City, Mo., fiber operator Unite Private Networks LLC.
In the age of the iPod, Pandora and Netflix, it can be difficult to imagine a bandwidth surplus. But the last Internet bust serves as a reminder that there can be too much of a good thing.