Here's part of the newest SSB report: they do a great job explaining the IXnet acquisition.
.....THE INDUSTRIAL LOGIC
Now that we've got the structure out of the way, it is more important to
talk about the industrial logic of this deal. As investors know, we view
GBLX as having built one of the world's most comprehensive set of network
assets. IXnet brings products, customers, and value-added service
capablility that will leverage these network assets. GBLX has an array
of assets that truly does span the globe. Its subsea assets include
Atlantic and Pacific Crossing, both of which are operational. The two
are well ahead of plan in terms of both getting operational and
revenue-generation. They also have a number of North-South routes in both
the Atlantic and the Pacific, as well as routes going into the southern
hemisphere on both the Atlantic and the Pacific. GBLX is building out a
Pan-European network that will be 7,000 km in length and will build
in-city fiber rings in a number of European cities. The first 5 or 6 of
these will be operational this year.
GBLX, of course, has a 20,000 fiber network in the US, an asset which it
acquired through Frontier. Via a joint venture with Hutchison, GBLX has
a 700 km network in Hong Kong, with 600 buildings connected and 9 voice
switches. In Japan, GBLX has a fiber network via a joint venture with
Marubeni (by the way, IXnet having a type 1 license in Japan really
allows GBLX to be a full player in the Japanes market.) Racal gave GBLX
almost 5,000 route miles in the UK, with 20 ATM switches covering 2,000
cities in the UK. This network from Racal is the most pervasive fiber
network in the UK outside of the BT. Of course, Global Center has 6
centers throughout North America and Europe, with 20 or more planned over
the next two years, and currently has 1.3 million square feet of hosting
center. All in, GBLX has 92,000 route miles of fiber around the world.
Counting subsea and terrestrial, GBLX has 1.5 million fiber miles, with
the network reaching into 200 major cities in 24 countries, with city
networks being built that will certainly reach the top 30-40 markets. In
addition, GBLX is developing services on the network, ranging from voice
to ATM/frame relay to wavelength/bandwidth-on-demand to complex
web-hosting, which obviously leverages Global Center.
WHAT DOES IXNET DO FOR GBLX?
We have always said that absolute value creation in this industry is
driven by reach of one's network on a geographic basis as well as the
ability to offer a full suite of services. As you go up the geographic
network reach and suite-of- service axis, you drive value creation,
especially as you add customers to networks. If one thinks about a chart
of value functions, GBLX is very high on the geographic network reach.
This deal with IXnet pushes GBLX further up the service creation ladder,
given IXnet's capabilities, while bringing 600 highly telecom-intensive
customers.
Furthermore, the most economic value is driven when high-end services are
riding on a network. IXnet is on top of GBLX's global network
infrastructure. GBLX currently gets 40% of revenue from Wholesale
customers and we expect this will drop to 20%-30%, with IXnet clearly
helping to drive up the commercial mix. Given GBLX's broad global
network, it can sell wavelengths around the world. Thus, GBLX's strategy
is to go to multi-national corporations and to sell network services
connecting top locations around the world. Clearly, IXnet's high-value
capabilities will help GBLX in its efforts to sell services globally to
large corporate accounts.
What IXnet brings to the table is traction in a very dense vertical
market, namely Financial Services. It is an industry segment with
massive communications needs and spending, we would believe, of at least
$30 billion if not closer to $50 billion annually, on a world-wide basis
for telecom services. IXnet has 71 POPs in 44 cities in 37 countries,
with 1,450 customer access nodes (CANs.) IXnet has an addressable market
that has 12,000 sites around the world. IXnet's revenues are truly
global with 31% in Europe, 17% in Asia, 52% in the US. Looking at it in
another way, IXnet's POPs are 80% outside of the US. What IXnet does for
GBLX is to put in place the upstream value services and the intelligence
to ride GBLX's network infrastructure. When you combine upstream
value-added services with network infrastructure, you drive economic
value. What IXnet also brings is 600 customers to the table. All of
these customers have massive telecom needs.
Thus, we view this as a perfect combination. IXnet has traction in a
very telecom-intensive vertical market. The deal brings GBLX much closer
to a marquee list of customers and IXnet brings product and service
capabilities to ride the GBLX infrastructure. The deal helps GBLX
leverage its geographic network reach with more services and marries
customers to this network reach, putting value-added capabilities on top
of a global bandwidth network.
Specifically, IXnet essentially manages a high-performance global
extranet to the Financial Services community where traders, dealers, etc.
from financial institutions worldwide talk to each other, send data,
stream video, and receive content delivery.
In actuality, IXnet is providing the highest-level managed
service/hosting/secure content delivery capabilities for mission-critical
applications. The company provides single-pipe IP conductivity to over
600 financial institutions on a global basis. IXnet hosts and
distributes market data, news, streaming video, analytics etc. for
content providers into IXnet's global customer base. All of these
functions are managed through IXnet's CANs, which reside at the customer
premise. Think of it this way: IXnet has a complex "point of presence"
(i.e.CANs) at a customer location and IXnet, with a single pipe to the
outside world, delivers content and provides a range of services, from
secured voice to streaming video. All of this is done on an IP-based
platform. What IXnet does not do is to actually provide the enabling
network services between locations. With GBLX's network, IXnet can now
offer a complete service package which has revenue potential that dwarfs
IXnet's current business with financial institutions.
OTHER BENEFITS AND SYNERGIES
IPC, which has a 60% share of desktop trading systems around the world,
clearly allows IXnet to get in front of these financial customers.
Obviously, GBLX will benefit from this. We believe that there is a
multitude of synergies that can be driven by this combination. In fact,
we argue that synergies do not do justice to what this combination can
bring. We truly believe (just like a small asset, namely UUNET, was able
to allow WCOM (who bought UUNET with MFS) to leverage itself into a
global player) that IXnet brings, with its multitude of large customers,
a global presence in a telecom-intensive industry, with a skill set of
core competencies that can truly leverage GBLX into a major global
provider of network-based services and solutions.
The net present value of the synergies are roughly $1.2 billion. As we
alluded to up front in this note: we believe that if IPC was trading
based on its stake in IXnet, GBLX would have really only paid a $500
million premium, all in, for both IPC and IXnet--since there was $1
billion of value for IXnet not reflected in the IPC stock price. Thus,
the net present value of synergies of $1.2 billion are more than double
the real premium that was paid by GBLX for these 2 entities. More
importantly, of the net present value of synergies, fully $700 million of
that is based on well known operating costs and SG&A synergies. About
$240 million represents capital expense synergies. About $240 million is
from revenue synergies with the EBITDA portion of the revenue synergies
assuming a 40% EBITDA margin on incremental revenue.
We believe these are conservative numbers. The easy part of the
synergies are on the cost side, where IXnet leases all of its network
services. We estimate that at least, over time, 50%-60% of the lease
costs of IXnet will disappear as it puts traffic on GBLX's network. As
GBLX builds out city networks, a higher percent of IXnet's traffic can be
on-net. The incremental revenue synergies start out at about $40 million
in 2001, ramping up to $200 million by 2009--which represents less than
1% incremental revenue in each and every year. Our point is that because
of IXnet's exposure to the financial services market, GBLX could easily
over time set an incremental 1% share point in this vertical market ($30
billion annually,) which alone is $300 million annually in new revenue,
growing at a 15%-20% clip. This alone would dwarf even the year-10
revenue synergies by many multiples. So, we feel quite good that the
network pull-through of bandwidth services, ATM, frame relay, and the
whole suite of voice services, based on the front-end of IXnet being in th
ese institutions, is massive.
The fact is that there are a lot of things that IXnet cannot do. Here,
they probably have the greatest global presence of any provider of
services to the financial institutional market, yet they really cannot do
global networks. They cannot do a full suite of ATM, frame-relay
services. IXnet provides value-added, high-end capabilities. Now, they
will be sitting on one of the most pervasive global bandwidth networks in
the world, which obviously could allow GBLX to sell a huge amount of
pull-through capabilities. Secondly, we denote the skill set of IXnet,
i.e. developing global extranet capabilities and very high-end
hosting/streaming type of capabilities -- not to mention secured
distribution. It certainly can offer applications in other industry segm
ents. Before, IXnet never would have gone into those other industry
segments. With GBLX, that skill set can obviously be transferred. There
is NO WAY of measuring that revenue intact.
The point is that IXnet brings a very fertile customer set and very
high-end capabilities allowing IXnet, on top of GBLX's network, to sell a
ton more of services into its existing customer base. IXnet also brings
to GBLX generic capabilities that GBLX can now use to break into
multi-national corporations in other industries. This really pushes GBLX
up the product service curve while giving them a tremendous foothold in a
very important industry segment.
Clearly, IXnet will be able to sell more complete services to its
existing customer base, while, at the same time, GBLX and Global Center
will benefit from IXnet's rich array of high-end capabilities. We also
believe that the timing of this transaction is quite good since IXnet is
about to offer its services to 9 equity exchanges in Europe and is about
to provide services to the NYSE electronic trading exchange. In
addition, IXnet has the bulk of the ECN market. Thus, most of the
off-exchange trading is done using the IXnet capabilities, in terms of
hosting and ASP-type services between traders on these ECNs
IXNET DOES NOT IMPACT NUMBERS YET, BUT IS A LIKELY SOURCE OF ONGOING UPSIDE SURPRISES
As far as the numbers are concerned, clearly a GBLX that was going to
have almost $2.2 billion of EBITDA in 2001 growing at 32% per year would
not cause the needle to move much by adding $30 million EBITDA in 2000
and $60 million EBITDA in 2001, even with that EBITDA growing at a 60%
clip.
However, we fundamentally believe that when the real synergies and
opportunities of this deal begin to manifest themselves in the results,
the reality will be that GBLX's growth rate for EBITDA will go from
32%-33%, up to 35%-36%. We estimate that revenue growth, which we expect
to be in the 21%-22% range, will also tick up by a couple points as
well. More importantly, we think that the mix of GBLX's business will
get much better as a result of this and thus margins will be enhanced by
a richer mix of revenues.
Currently GBLX, proforma for the 70 million new shares being issued, is
trading at a firm value/2001 EBITDA of 21x, which is roughly 60% of the
growth rate, and we would argue that it should trade much closer to
85%-90% of its growth rate, which would suggest our current stock price
target of $70. More importantly, if IXnet turns out to be the strategic
home run that we think it is, and it really does ramp up GBLX's ability
to leverage their network assets, we actually believe that the visibility
of a ramp-up in revenues and EBITDA will happen sooner than we are
modeling and will expect the price target to clearly step up.
The bottom line is that in the telecom market, one has to continue to
drive value by adding network, adding customers, and adding products.
GBLX has demonstrated the ability to do all three. The IXnet transaction
clearly impresses us with its ability to add the latter 2 attributes:
customers and products.
NET/NET: We would be aggressive buyers of GBLX stock. We think the stock
is greatly undervalued. We think the IXnet acquisition catapults GBLX to
a much different level than what the modest amount of the IXnet business
would currently suggest. |
