The Vocus Group Ltd (ASX: VOC) share price climbed 3% to $2.90 in morning trade and is now up 23 per cent over the past week after the group held an investor update today.
One of the main concerns investors have over the hastily amalgamated internet services and dark fibre business is debt levels that sit around $1 billion given the group's weak cash flows and significant upcoming capital expenditure commitments.
On its Australia Singapore Cable (ASC) alone the group is forecasting capex commitments of around US$156 million for construction to go live around July 2018.
Today it revealed that it had "20+ live prospects" in terms of revenue-generating customers for the ASC and the success of the strategic pivot towards the ASC will also be crucial.
The CEO boasting today that it has a decent number of potential clients "close to or in the documentation stage" in terms of signing deals for significant capacity on the cable.
In addition to the ASC the group's weaker-than-expected recent operational performance means it's walking a fine line in terms of its balance sheet management.
Asset sales
As a result of its debt problems the group today announced that the board has decided to put its Vocus New Zealand consumer-internet business up for sale, with a target for completion by June 2018.
The New Zealand business is a relatively strong performer for the group delivering steady growth in an albeit small market.
Vocus New Zealand business posted full year EBITDA of $57.5 million over FY 2017 and over Q1 2018 appears to have delivered steady growth as New Zealand consumers also transition to its government's ultra-fast broadband (UFB) network similar to Australia's NBN.
If the group is able to gain a competitive sale price on around 7x EBITDA when adjusting for any debt on an enterprise value basis then it could raise around $325 million to $400 million or more via a sale.
It's worth noting these are just back of the envelope calculations based on estimates for standard EBITDA sale multiples for group's growing at low-single digit rates. There are a number of other factors that could impact any sale price, including Vocus's perilous balance sheet, the New Zealand market, with the group itself not providing any sale price estimates.
Still, if Vocus is able to find a buyer for its New Zealand business that in itself could pay off a big chunk of its debt pile.
Data Centres
It also flagged that it has appointed advisers to sell its data centre business and Macquarie Group Ltd (ASX: MQG) has previously estimated Vocus's data centres could sell for 10x EBITDA or around $160 million.
If Vocus is able to sell both its desired assets its debt issues could be history and dividend payments are likely to return in a result that is likely to support the share price.
The CEO also acknowledged today that the interest of private equity groups recently who specialise in asset stripping and radical corporate restructures to fix up businesses might have prompted the move to sell the New Zealand business. Asset sales were the likely blueprint of both private equity suitors who approached the group earlier in 2017 and Vocus itself now appears to be following their modus operandi.
Vocus also confirmed it has appointed corporate trouble shooters, firefighters, and headcount-decimating specialists Bain Corp to help implement its ongoing transformation program.
After a diabolical FY 2017 better times may be ahead for Vocus particularly if it can execute on its asset sale plans. For now I would rate the stock as a hold, but would not be surprised to see it head higher if the New Zealand deal goes ahead on agreeable terms.
