CommScope (COMM) Christopher Karlin Aquitania Capital Management, LLC. Wide Moat Investing Summit 2015

Transcription

1 CommScope (COMM) Christopher Karlin Aquitania Capital Management, LLC Wide Moat Investing Summit 2015 July 7, 2015

2 Disclaimer The discussion of portfolio investments represents the views of the investment manager. These views are current as of the date of this commentary but are subject to change without notice. As of the date of this publication, Aquitania Capital Management has a position in the securities mentioned herein and may purchase or sell shares at any time without notice. All information provided is for information purposes only and should not be considered as investment advice or a recommendation to purchase or sell any specific security. Security examples featured are samples for presentation purposes and are intended to illustrate our investment philosophy and its application. While the information presented herein is believed to be reliable, no representations or warranty is made concerning the accuracy of any data presented. Portfolio composition will change due to ongoing management of the portfolios. References to individual securities are for informational purposes only and should not be construed as recommendations by Aquitania Capital Management or its members.

3 Aquitania Capital Management Aquitania Capital Management seeks to maximize riskadjusted returns by identifying and capitalizing on securities trading at values significantly divergent from their respective fair values through: an intensive fundamental research discipline a private equity valuation methodology an event-oriented perspective Long-Biased, global investor across the capital structure Seeking dislocations where our counterparties are making uneconomic decisions Asymmetric reward-to-risk situations with high conviction in a variant thesis through intensive independent research Securities that are either being accidentally overlooked or actively avoided by most investors

4 Wide Moats Moat = Competitive Advantage that protects and defends business Driven by relationship with customers Challenges All moats erode over time and technology increases speed of erosion Great businesses can entrench weak managements Markets are generally efficient at identifying and pricing great businesses Great businesses at bad prices are likely to be a disappointing investment Opportunities Identifying the best businesses isn t enough - look for the few that are markedly better than the market perceives Particularly, look for businesses that are significantly less risky than consensus view KALU, CIM

5 CommScope (COMM) $30.58 Leading provider of wired and wireless connectivity solutions $5.7B market capitalization Moat driven by systems vs. components market strategy Provides suite of ancillary products necessary to running a network Low percentage of total network spend Providing components as suites with performance guarantees High customer retention, deep customer relationships Escapes competing on price, allows for price premium Recent acquisition creates opportunity to expand moat

6 CommScope - Business

7 CommScope - History

8 Transformative Acquisition

9 Strategic Rationale

10 CommScope Acquistion Has Spinoff Characteristics TE Connectivity s Broadband Network Solutions was a tangential business to it s former parent Business did not receive full attention or investment Earnings growth should markedly accelerate in coming years Driven by margin improvement and deleveraging Business will be better positioned for revenue growth Market leader in fiber and wireless connectivity

11 Proven Management Eddie Edwards, CEO & Mark Olson, CFO Joined via Andrew Corp Acquisition in 2007 Managed integration of Andrew and cost reductions post LBO Managed debt reduction post Andrew in 2007 and post LBO in 2010

12 Mr. Market Has Been Paying Attention

13 Enterprise Value Current Capital Structure Pro Forma Capital Structure Share Price $ Share Price $ Diluted Shares 200 Diluted Shares 200 Market Capitalization $ 6,116 Market Capitalization $ 6,116 Cash $ (735) Cash $ (411) Debt 2,721 Debt 5,471 Other (50) Other (50) Net Debt $ 1,936 Net Debt $ 5,010 Enterprise Value $ 8,052 Enterprise Value $ 11,126 Multiple Yield Multiple Yield LTM EBIT x 7% LTM EBIT x 7% LTM EBITDA x 10% LTM EBITDA 1, x 13% LTM Capex (39) LTM Capex (78) LTM PTFCF x 10% LTM PTFCF x 12% Debt/EBITDA 3.3x Debt/EBITDA 5.2x EBITDA/Interest Exp 5.0x EBITDA/Interest Exp 3.2x

14 Cost of synergies: $150MM Synergies

15 Deal Economics Attractive BNS purchase price $ 3,073 less: tax shield $ (350) Adj. purchase price $ 2,723 Adj. LTM (3/15) EBIT on BNS $ 215 add: run- rate synergies $150 - $200 Pro Forma run rate EBIT $365 - $415 EBIT Yield 13.4% % Incremental interest expense $ 165 Incremental tax expense $37 - $56 incremental income $163 - $194 Equity Contribution $ 324 Return on Equity 50% - 60%

16 Earnings Growth Base $2.3B debt reduction over 4 years Baseline - 0% Revenue Growth, $150MM Synergies LTM PF Revenues 5,569 5,569 5,569 5,569 5,569 PF EBIT Synergies Cost of Synergies - (75) (50) (25) - EBIT EBIT% 11% 11% 12% 14% 14% Interest exp Pretax profit Tax expense Net income Shares o/s EPS $ 1.06 $ 1.11 $ 1.30 $ 1.69 $ 1.83 EPS g 5% 18% 30% 8% EBITDA 1,032 1,078 1,184 1,210 Debt/EBITDA 4.8x 4.1x 3.2x 2.6x EBITDA/Interest Exp 3.3x 3.6x 4.3x 4.7x

17 Earnings Growth - Bullish $2.5B debt reduction over 4 years Bullish - 2.5% Revenue Growth, $200MM Synergies LTM PF Revenues 5,569 5,708 5,851 5,997 6,147 Synergies Cost of Synergies - (75) (50) (25) - EBIT EBIT% 11% 12% 13% 14% 15% Interest exp Pretax profit Tax expense Net income Shares o/s EPS $ 1.06 $ 1.36 $ 1.65 $ 1.96 $ 2.29 EPS g 28% 22% 19% 17% EBITDA 1,110 1,187 1,267 1,350 Debt/EBITDA 4.4x 3.7x 2.9x 2.2x EBITDA/Interest Exp 3.5x 4.0x 4.6x 5.3x

18 Valuation LTM 3/ EPS $ 1.06 $ 1.36 $ 1.65 $ 1.96 $ x P/E $ $ $ $ EBIT x EBIT 10,275 11,409 12,594 13,831 less: net debt 4,937 4,337 3,691 2,996 equity 5,337 7,072 8,904 10,836 shares o/s Implied price $ $ $ $ EBITDA 1,088 1,408 1,485 1,565 1,648 8x EBITDA 11,264 11,877 12,517 13,185 less: net debt 4,937 4,337 3,691 2,996 equity 6,326 7,540 8,826 10,189 shares o/s Implied price $ $ $ $ PTFCF 1,010 1,038 1,113 1,192 1,274 10x PTFCF 10,380 11,132 11,917 12,737 less: net debt 4,937 4,337 3,691 2,996 equity 5,442 6,795 8,226 9,741 shares o/s Implied price $ $ $ $ 48.71

19 Risks Company will be highly leveraged Volatility of Wireless segment Potential synergies may not be realized Competitive threats

20 Summary De-risked earnings growth story driven by cost reductions & deleveraging Proven management team Industry tailwinds Should be able to compound investment ~12% p.a. over next four years Downside to mid-$20s

21 Contact AQUITANIA CAPITAL MANAGEMENT