Anybody that has considered selling in the last decade years knows that valuation multiples have been stagnant and somewhat low by historic standards. A lot of properties have changed hands during that time with multiples in the range of 4.5 to 6.5 times EBITDA (earnings before interest, taxes, depreciation, and amortization). Some ISP properties have sold outside of that range based upon the unique factors of a given sale.
In November, Jeff Johnston of CoBank posted a long blog talking about how valuations might be on the rise – particularly for companies with a lot of fiber or with other upsides. He pointed to three transactions that had valuations higher than historic multiples for the sector.
- Zayo sold their network of 130,000 route miles of fiber transport for a multiple of 11.1 times EBITDA.
- Bluebird Network in Missouri and nearby states sold a 6.500-mile fiber transport network for a multiple of 10.4 times EBITDA.
- Fidelity Communications of Missouri sold an ISP with nearly 135,000 customers for a multiple of 11.7 times EBITDA.
Johnston doesn’t say that these high multiples are the new standard for other ISPs. However, he does surmise that the high multiples probably indicate an uptick in valuation for the whole sector. That’s something that’s only proven over time by seeing higher valuations coming from multiple and smaller transactions – but the cited transactions raise the possibility that we’re seeing an increase in valuation for fiber-based businesses.
It’s important to ask why any buyer would pay 10 or 11 times EBITDA. A buyer paying that much will take a decade to recoup their investment if the purchased business continues to perform at historic levels. Nobody would pay that much for a business unless they expect the margins of the acquired business to improve after acquisition – that’s the key to higher valuations. The buyers of these three businesses are likely expecting significant upsides from the purchased properties.
Buyers often see a one-time bump in margin from the increased efficiency of adding an acquisition to their existing business. This is often referred to as an economy of scale improvement – overheads generally become more affordable as a business gets larger. However, buyers rarely will reward a seller for the economy of scale improvements, so this is rarely built into valuation multiples.
A buyer is usually only willing to pay a high multiple if they foresee the possibility of significant growth from the purchased entity. The purchased company needs to be operating in a footprint with upside potential, or else the purchased company needs to demonstrate that they know how to grow. A buyer must believe they can grow the acquired business enough to recoup their purchase price and also make a good return. For a fiber ISP to get a high valuation they have to be able to convince a buyer that the business has huge upside potential. An ISP needs to already be growing and they need to be able to demonstrate that the growth can be ongoing into the future.
One of the more interesting aspects of getting a high valuation multiple is that a buyer might expect the core management team to remain intact after a sale. That often means that part of the compensation from the sale might be incentive-based and paid in the future based upon post-sale performance.
To summarize, an ISP can get a higher valuation if they can convince a buyer that there is future upside to the business. ISPs that don’t have growth potential will not see the higher valuation multiples cited above – although many potential sellers will think these multiples apply to them. The bottom line is that if your ISP is growing and can keep growing, and you can paint that picture to a buyer, your business might be worth more than you expected.