Cbeyond’s transition into cloud services is moving slower than planned – and slower than the deterioration of its legacy sales. Now the company, which was founded around IP connection services for small businesses, is contemplating whether to sell itself or pursue acquisitions to ignite its move to the cloud. We believe a sale is a more likely outcome of that review, given its limited M&A history, small amount of cash and depressed valuation.
In the most recent quarter, revenue from Cbeyond’s cloud services, including hosted applications, managed hosting and cloud PBX, grew 87% year over year to $17.8m, up only $1.7m sequentially. That’s not nearly enough to staunch the bleeding on its legacy business, where sales shrank by $16m, or 14% year over year, as cable providers like Time Warner Cable and Cablevision have encroached on that market, where it already faced heavy competition from incumbent carriers.
Cbeyond currently trades at 0.4x trailing 12-month revenue of $471m and 2.4x EBITDA, well below comparable companies such as CenturyLink (2.1x revenue, 5.2x EBITDA) and Windstream (2.3x revenue, 6.1x EBITDA). With a depressed stock price and only $25m in cash on its balance sheet, Cbeyond’s ability to make acquisitions is limited (though it does have options in the form of an untapped $75m line of credit).
In a sale, we believe Cbeyond would attract interest from a larger regional CLEC that would find Cbeyond’s core mid-Atlantic network a complement to its own. Other suitors may be midsized MTDC vendors considering their own datacenter interconnection backbone or perhaps hosting providers seeking an opportunity to become full-service ICT suppliers. A sale would certainly give a boost to shareholders. Over the past 24 months, the median multiple for communications services and Internet access businesses is 1.65x trailing revenue, according to The 451 M&A KnowledgeBase.
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