TMNG Global Assesses Risk/Reward Ratio Of Acquisition Of Distressed Telecom's Assets

Challenge

An international provider of telecom services was in distress. Our client, a leading private equity firm, wanted to determine whether the company’s assets were undervalued and, therefore, at what price a bid for the company’s bonds would provide upside potential. In particular, the client was interested in obtaining an insight as to what the company’s fiber plant was worth. The firm enlisted TMNG Global’s assistance in this process.

TMNG Global Solution

The TMNG Global conducted extensive secondary research and analyzed background materials provided by the company in order to determine what was known and what needed to be determined in order to provide a valuation. Synthesizing this data, the team developed a preliminary evaluation (including as much comparable cost data for fiber as possible in the time available).

As the target company was distressed, there were several reports available estimating the value of the company and its assets. We obtained these reports and determined what was included and compared the given costs estimates for plant and fiber with those within our experience. Most notably, we looked for areas where costs were omitted or costs varied substantially from TMNG estimates.

One of the biggest issues was to determine exactly how much fiber the company actually owned. For example, there were fibers under construction and as such not currently (publicly) reported as part of its fiber network. Similarly, there was fiber that was not lit but could be made readily available. Another major issue is that fiber has substantially different values depending upon whether it is being sold as part of a business entity (i.e., providing service and therefore generating revenue) or as equipment (which may represent a cost for dismantling and relocating). Finally, the cost for any operating fiber plant is affected greatly by the alternative facilities covering essentially the same geographic area. This last issue is also directly affected by the projected supply/demand for bandwidth, which clearly, at least in the short term, was causing severe downward pressure on related revenues and therefore bandwidth value.

Our team was able to develop a range of values for the fiber and related company assets. These also included various scenarios, including the probability of occurrence. These scenarios included selling lit fiber in situ, selling the fiber as equipment but ensuring all costs/assets were included properly, and selling the plant as a part of a working entity (including the client base).

Benefits to the Client

The client was able to better measure the potential risk/reward ratio for investing in the distressed company. As a result of our information, management decided that the risk outweighed the reward and chose not to enter into the investment.