West Corporation - Incentives Remain Aligned In This Highly Levered Public Offering

| About: West Corporation (WSTC)

West Corporation (NASDAQ:WSTC) made its public debut on March 22. Shares of the company, which provides technology-driven communication services, ended their first trading day with losses of 5.7% at $18.86 per share. Shares have traded around the $19 level ever since, closing Tuesday's trading session at $19.02 per share.

The Public Offering

West Corporation is a leading provider of technology driven communication services. The company provides multiple services including conferencing, collaboration services, emergency communications, business process outsourcing and interconnect services. By offering this broad range of services, West Corporation is able to provide high quality and reliable communication services for its clients.

The company's services are split up in two main categories: Unified Communications (UC) and Communication Services (CS).

West Corporation sold 21.3 million shares for $20.00 apiece. The company raised $426 million in gross proceeds in the offering process, valuing the equity of the company at $1.67 billion. All shares were offered by the company, with no shares being offered by selling shareholders.

The offering was a great disappointment. For starters, the offer price was set below the midpoint of the preliminary $22.00-$25.00 price range set by the firm and its bankers. This was followed by the disappointing trading action at the day of the public offering. Some 26% of the total shares outstanding were offered in the public offering. At Tuesday's closing price of $19.02, the firm is valued at $1.58 billion.

The major banks that brought the company public were Goldman Sachs, Barclays, Citigroup, Deutsche Bank, Morgan Stanley and Wells Fargo, among others.


West Corporation had already been founded back in 1986 and has ever since evolved into a diversified technological-driven service company. West's platform-based solutions have grown, generating the majority of total revenues and nearly all of its operating income.

Over the past seven years, West has invested some $2 billion in strategic acquisitions in order to enter new markets, including the lucrative conferencing market. According to research firm Wainhouse Research, the market for unified communication services is already $7.5 billion large, and expected to grow by 15% per annum through 2016 (the reference can be found in West's S-1 Filing).

West's more mature markets include the $56 billion customer care business process outsourcing market, which is expected to grow by 6% through 2015, according to International Data Corporation.

In these markets, West competes with the likes of major players including AT&T (NYSE:T), Cisco Systems (NASDAQ:CSCO) and Verizon Communications (NYSE:VZ).

For the year of 2012, West Corporation generated annual revenues of $2.64 billion, up 5.9% on the year before. Net income fell slightly, coming in at $125.5 million. Note that West's operating income was much greater for the year, coming in at $478.2 million. The bottom line has been severely impacted as the company carries along a sizable debt load.

West ended 2012 with a strong momentum. Fourth-quarter revenues rose 8.8% on the year to $680.2 million. Net income rose some 50%, coming in at $32.7 million.

The company raised $426 million in gross proceeds in the offering process. As such net proceeds are expected to come in around $400 million. The company operates with $179.1 million in cash and equivalents and $3.99 billion in short- and long-term debt. As such, West Corporation will operate with approximately $3.4 billion in net debt, following the offering.

Based on Tuesday's valuation of $1.58 billion, the market values the company at 0.6 times annual revenues and 12-13 times annual earnings.

Investment Thesis

As noted above, the offering of West Corporation has been a huge disappointment. Shares were offered some 15% below the midpoint of the preliminary offering range and are currently trading some 19% below that level.

The company plans to use the proceeds of the IPO to repay $450 million in senior subordinated notes outstanding. The debt, which matures in 2016, carries a high interest rate of 11%. As such the public offering could boost net income by some $30-$40 million per year, assuming statutory tax rates.

West Corporation has been around for almost 30 years, and in 2006 was taken public by Thomas H. Lee Partners and the Quadrangle Group LLC in a deal valuing the company at $4.1 billion. Just like many other private-equity deals, West was saddled with a lot of debt in the meantime. The company will have almost $4.0 billion in debt outstanding, before the repayment of its senior 11% notes, which will reduce the total debt position by merely 10%. The partners furthermore quickly paid out a $511 million dividend before the offering took place.

Unlike many other re-capitalizations, the private equity firms actually invested in the business as well, spending some $2 billion on acquisitions over the past six-seven years.

Obviously there are some risks to this offering, including fast technological changes and the very sizable debt load of the business. At the same time, the retirement of senior notes could boost annual profitability towards $150 million, valuing shares around 10 times earnings.

The company already proposed a quarterly dividend payout of $0.225 per share, for a fat annual dividend yield of 4.7%.

The disappointing offering of West Corporation, with shares trading one-fifth below the midpoint of the preliminary offering range, has created some opportunities for investors. Valuation-wise the earnings multiples and dividend yield look extremely attractive, it is just the very sizable debt position, which is a cause for concern.

Comforting should be the fact that private-equity sponsors Thomas H. Lee and Quadrangle will continue to hold a combined 53% equity stake in the company. As such the sponsors continue to put their money on the line.

At these discounted levels, shares of West are worth considering despite the debt overhang.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.