Monday, 28 August 2017

FSNN: 68% to 300%+ Upside After Deal With Birch Communications

Fusion Telecommunications International, Inc. (FSNN) rose 86% to $2.29 on Monday after it announced a definitive agreement to acquire Birch Communications' Cloud and Business Services Business. This is effectively like a reverse takeover as Birch shareholders will hold a majority of FSNN's shares once complete and most of Birch's business is going into the transaction. We first sent out an alert on FSNN around noon hour Eastern when it had pulled back to around $2.00 after an early morning spike. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 277 followers despite not giving out a lot of alerts, a fact that we think is indicative of a diligent and prudent stock picking history.

What's most important to traders and value seekers looking at FSNN after today's spike is that this deal still has a 68% upside from current prices as Birch valued FSNN at $3.85 per share as part of the transaction. However, the combined company itself could be worth close to $10 per share once the transaction is complete. Highlights of Monday's press release:

  • Fusion to acquire Birch's Cloud and Business Services business, including its customers, operations and infrastructure
  • Combined company is expected to have total pro forma annual revenue of approximately $575 million and more than $150 million in pro forma annual adjusted EBITDA, including anticipated cost synergies
  • Transaction is expected to be significantly accretive to Fusion's adjusted EBITDA immediately upon closing, generating positive free cash flow while dramatically reducing the company's overall leverage ratio, with net debt expected to be less than 4.0x pro forma adjusted EBITDA
  • Birch shareholders will exchange their equity position in Birch's Cloud and Business Services business, valued at approximately $280 million, for common equity of the combined company
  • All-stock transaction in which Birch shareholders will receive approximately 73 million common shares of Fusion valued at $3.85 per share, a premium of more than 200% versus the prior trading day's closing price, representing approximately 5x the pro forma adjusted EBITDA of Birch's Cloud and Business Services business including anticipated synergies
  • Combined company will serve more than 150,000 business customers throughout the United States and Canada, and will have strong distribution through direct sales, inside sales and more than 800 distribution partners
  • Significant opportunities for growth through cross-selling and upselling new services into the combined customer base
73 million FSNN shares will be issued to Birch shareholders which will represent 75% of the estimated 97.3 million shares outstanding. FSNN will also assume $458 million of Birch's debt. Cloud Services and SaaS companies had an average EBITDA multiple of 19.4 and Revenue multiple of 5.1 in 2016 (see pages 30 to 32 of this report).

With expected EBITDA of $150 million once this deal is complete, an EBITDA multiple of around half of the average of 10 would lead to an enterprise value of $1.5 billion. Subtract the $578 million of debt (Birch plus FSNN's debt and accounts payable of $120 million) and that leads to a $922 million market cap, or about $9.50 per share. An EBITDA multiple of 19.4 would lead to a stock price of $24.00.

The revenue multiple at a $1.5 billion enterprise value would be 2.6 based on expected pro forma revenue of $575 million. Using a 5.1 revenue multiple would also lead to a stock price of around $24.00.

This deal clearly has very high upside beyond the $3.85 price of the shares to Birch. Watch for FSNN to run over the next several days as people begin to understand this lucrative opportunity.

Disclosure: We are long FSNN

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