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⚡️GTT Communications Pursues a Sale (Long Massive Strategy Shifts)⚡️
GTT Communications Inc. ($GTT) is a provider of global cloud networking services to large enterprises and carriers through its global Tier 1 IP network. At its height, GTT owned and operated three trans-Atlantic subsea cables connecting North America and Europe (including the industry leading, lowest latency Hibernia Express subsea cable system), and more than 72,000 route kilometers of terrestrial fiber (including an expansive pan-European transport network). Today, the business is a broken telecom-rollup story with a grisly stock chart ⬇️.
The story began in 2005 with … naturally … a SPAC. In 2006, Mercator Partners merged Global Internetworking Inc. and European Telecommunications & Technology and renamed the business Global Telecom & Technology Inc. (GTT). In December 2009, GTT acquired Denver-based WBS Connect, beginning its transition from a virtual network operator and telecom solutions integrator to a network operator, providing IP Transit and Ethernet services. This kicked off the company’s massive acquisition spree, detailed here ⬇️
GTT’s business strategy … if you want to call it that … was to position itself as an asset-lite and capex-lite telecommunications business which its management team believed would allow it to compete effectively against deeply entrenched, well-capitalized incumbents such as AT&T Inc. ($T), BT Group ($BTGOF), and Verizon Inc. ($VZ). While these legacy players had huge asset footprints and tremendous scale, their assets were capital intensive. Legacy telcos were already spending billions in capex to maintain existing speeds of their networks, and would need to spend billions more to prepare these networks to handle increased workloads in the future. GTT’s management saw these legacy players as the ‘dinosaurs’ of a cloud-based, 5G-enabled future; they believed that by leasing network assets rather than owning them outright, their nimble, “cloud-native” company could take market share from the incumbents. Management expressed this view through its acquisition strategy, buying up a mix of cloud networking and managed services providers. The equity market loved the thesis; GTT’s stock rose ~28x between 2011 and 2016!
However, in January 2017, GTT made a drastic pivot in strategy. GTT acquired Hibernia Networks for $590mm.
Hibernia was a leading provider of global, high-speed network connectivity solutions and owner of terrestrial and subsea fiber assets including Hibernia Express, the lowest latency transatlantic cable system (PETITION Note: think of undersea cable for high frequency traders). With this acquisition, GTT was no longer just owning capex-lite “cloud networking” services; it was buying up capex-heavy undersea cables too!
In May 2018, GTT doubled down on this new asset-heavy strategy, acquiring Interoute, the owner and operator of a large European fiber network, for $2.3bn. Interoute was GTT’s biggest acquisition yet, and the equity market cheered them on, sending the stock above $60/share. Naturally GTT financed these acquisitions with a boatload of debt — roughly $3.2bn of debt, to be exact, which brought the company’s leverage above 7x. Post-acquisition, the capital structure looked like this:
$1.7bn L+7.25% US 1L Term Loan due 2025
$950mm L+3.250% EUR 1L Term Loan due 2025
$575mm 7.875% Unsecured Notes due 2024
In hindsight, GTT’s acquisition of Hibernia and Interoute could be viewed as a Band-Aid strategy for a business model that was never going to work. A possible explanation for why asset-lite telecom businesses don’t work is that controlling the asset footprint is critical to ensuring customers are receiving a consistent, high speed experience. GTT’s management did everything they could to make sure their investors were among the last to figure this out.
In March 2018, right after announcing the Interoute transaction, GTT’s CEO Rick Calder went on Jim Cramer’s Mad Money. He pitched GTT as an “asset-light” telecom business competing against large incumbents in a $300-$400b market with less than 1% market share. Jim Cramer raved about the business’ potential.
Cramer: “We love growth on this show, because growth ultimately brings great profits. But…we like your trajectory. You [GTT] keep buying to [own] the space, which is what we want!”
***Cue Narrator Voice: This is NOT what the Mad Money audience wanted.***
On Mad Money, Rick Calder talked about how GTT had experienced tremendous growth “over the past 5yrs of 50% per annum,” and stated that GTT can grow “even faster.” Impressive as it may have been, the problem with Calder’s growth statistic was that it was almost entirely attributable to inorganic growth from GTT’s acquisitions, not organic customer demand. Calder actually alludes to this later in the discussion, acknowledging that GTT “bought a whole series of companies that aren’t growing.” Curiously, the market willfully ignored this critical point, latching on to a pipe dream that GTT was a disruptive force in a huge market, able to serve customers more effectively than the incumbent telco giants.
Other so-called “gurus” in the financial press also fell for GTT’s snake oil. Per TopOperator.org:
One emerging champion of the enterprise business is GTT. This expertly managed mid-sized telco, who recently joined the billion-dollars-a-year in revenue club, is rapidly growing market share and acquiring global assets like Hibernia Networks.
In the bragging rights department, Fortune Magazine recently put GTT in its Fortune Future 50 list of companies best positioned for strong future growth. (No other telecom operator made that list.)
What the market failed to appreciate is the pitfalls of a company levering up to buy a bunch of no-growth SMB companies. While more customers were getting added to GTT’s list with every acquisition, a larger and larger portion of the overall base was falling away. The problems are evident when we look at GTT’s revenue growth on a pro forma, constant FX basis:
Despite GTT’s slowing revenue and accelerating customer churn, CEO Rick Calder projected optimism on the company’s Q219 earnings call:
“From the beginning of 2017 until now, we have closed and integrated 10 acquisitions and nearly quadrupled the size of the firm…Each of the companies we acquired had a flat or declining trajectory at close…And while we have not yet returned to growth, we have assembled all the right components to return to growth in the future.”
Meanwhile, Chief Marketing Officer Gina Nomellini also touted GTT’s integration. Ms. Nomellini stated that GTT’s ability to quickly integrate newly acquired businesses was an advantage relative to its larger competitors. Per TopOperator:
Top Operator: …And the ability to unify systems was always the Impossible Dream at large telcos. Can you provide an example of how [your client management system] gives you leverage?
CMO Gina Nomellini, GTT: Perhaps the best example is when we’re acquiring another telco or asset. A large telco finds this process very challenging. When they make a purchase, they need to report across multiple different platforms and ask many different people for data. That’s why it’s a real advantage when you can reach into a single system with a couple of keystrokes and pull out the data you need.
When GTT buys another company, we set a goal of completing integration within two to three quarters — the speed depends on the size of the organization or asset we buy. So far, we’ve stuck to that goal and met all of our guidance around integration.
While GTT had shown some ability to acquire and integrate small portfolios of “asset-light” businesses along with their SMB customer base, integrating the large hard-asset footprints of Hibernia and Interoute was a completely different animal. GTT bit off more than it could chew, and it began to miss its quarterly targets.
As GTT’s growth story began to show cracks, investors started to question the telecom rollup thesis. In August 2019, management disclosed they would look to sell non-core assets in an attempt to de-lever the business. The entire GTT investment thesis got bolloxed. Here’s a look at the new market underwrite:
Declining Revenue Growth + Churning Customer Base + High Fixed Costs + Limited Asset Footprint + High Leverage + Levered FCF Burn = Huge Clusterf*ck
Investor confidence in management fell off a cliff. Securities prices subsequently IMPLODED. GTT’s stock fell from $41.85 in April 2019 to $6.71 in August 2019, with its term loan falling into the 70s and its notes plummeting into the 40s. While COVID-19 has seen a pull-through of demand for many telecommunications businesses, GTT hasn’t experienced the same tailwind. Even worse, internal controls seem to be failing. On August 10, 2020, GTT filed an 8-K stating the company would be unable to file its Q220 10Q on time, as it “identified certain issues related to the recording and reporting of Cost of Telecommunications Services and related internal controls.” In September, Fitch Ratings outlined the serious repercussions of this reporting delay in a downgrade note:
Fitch Ratings has downgraded the Long-term Issuer Default Rating (IDR) of GTT Communications, Inc. (GTT) and GTT Communications BV to 'CCC' from 'B-'….The rating actions follow the company's announcement that it received a notice of default on Sept. 2, 2020 from holders representing 25% or more of outstanding principal ($575 million) of the company's senior unsecured notes, due to its noncompliance with a reporting covenant under the notes indenture that required the company to file 2Q20 financials within the stated time frame (allowing for extensions).
GTT has entered into a cure period of 60 days that ends on Nov. 1, 2020, and the failure to cure default during this period would lead to an event of default. The indenture also includes acceleration provisions which would declare the entire principle due and payable immediately, should the noteholders opt for the same.
On October 19, GTT waved the white flag. GTT announced it would sell its entire hard asset footprint — both Hibernia Networks and Interoute — to I Squared Capital for just over $2b. I Squared, however, included a sneaky contractual put option in the deal; the private equity firm has the right to cancel the transaction if GTT fails to obtain, by Wednesday, Oct. 28, at 6 p.m. ET, an amendment, waiver or forbearance agreement from its lenders for failing to file its Q220 quarterly report. Rumors in the marketplace indicate GTT is negotiating with its lenders to obtain that forbearance agreement, but nothing has been signed yet. While this transaction likely solves GTT’s capital structure time bomb, it effectively returns the company to its origins as a capex-and-asset-light telecom provider — a huge strategic about-face.
Which has us scratching our heads. If it didn’t work before, why would it work now? 🤔
💄Revlon: Lipstick on a Pig? Part IX (The Yard Sale Continues)💄
Damn. We can’t even keep up. We published “💄Revlon: Lipstick on a Pig? Part V (Perelman’s Plight)💄,” on Thursday and ALREADY Ronald Perelman has additional assets on the market! Homeboy seeks $90mm for Alberto Giacometti’s monumental sculpture “Grande femme I” in a clearly-not-so-anonymous “anonymous” sale through Sotheby’s. It could make for an excellent show piece in your brand new luxury yacht!! Perelman also listed a 281-foot long beast for the Euro-equivalent of $106.4mm. Come on down!!!
We can’t wait to see what goes on sale next. His baseball card collection?
💰How Are the Investment Banks Doing? (Long Differentiation)💰
Moelis & Company ($MC) announced Q320 earnings this week, reporting $208mm in revenue, an increase over a COVID-depressed Q220. On the restructuring side of things, CFO Joe Simon radiated:
Our restructuring-related activity was the highest, it's ever been exceeding last year's record third quarter contribution. We experienced particular strength in out-of-court restructurings a specialty of ours. We continue to excel in offering innovative solutions which in certain cases can accelerate the timeline, to the resolution and avoid a lengthy Chapter 11 process.
Mr. Simon highlighted that restructuring retainers are “significantly elevated over the prior year.” What’s interesting about this is that there was definitely a race to secure professional help at the onset of the pandemic: as capacity strained the big(ger) firms almost instantaneously, corporates had to engage professionals earlier than they might have otherwise and, given opportunity cost considerations, lock in those professionals with hefty retainers. None of this is surprising.
Notably, the firm only had $28mm of non-comp expenses. Management must be wondering whether travel — which typically falls under this category and therefore elevates the figure — actually returns on investment given all of the business coming through the door sans traditional “business development.” Which begs the question: will restructuring bankers go back to being road warriors if and when the pandemic lifts? If we had to bet, we’d wager ‘no’ based on professional need (or at least ‘not as much’) but ‘yes’ based on a personal need (to get the f*ck out of the house). Just sayin’.
The only other notable bit from the earnings call was Mr. Moelis’ emphasis that his firm specializes in out-of-court solutions — something he takes great pains to establish as a differentiator. The implication, of course, is that competitors push for in-court solutions in order to ratchet up fees. We’d love to see data that supports this proposition. After all, it seems that a large subset of the bankruptcy industry is, to the extent it can, running on out-of-court exchanges these days. Hence the recent drop in large filings yet still-elevated-though-not-quite-as-elevated-as-expected default rate.
We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.
Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.