IPO Preview: CommScope

Oct.24.13 | About: CommScope Holding (COMM)

Based in Hickory, NC, CommScope (NASDAQ:COMM) scheduled a $750 million IPO with a market capitalization of $3.8 billion at price range mid-point of $19.50 for Friday, October 25, 2013.

Four IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

S-1 filed October 15, 2013.

Manager, Joint Managers: JPMorgan, Deutsche Bank Securities, BofA Merrill Lynch

Co-Managers: Barclays, Credit Suisse, Goldman Sachs, Jefferies, Morgan Stanley, RBC Capital Markets, Wells Fargo Securities, Allen & Company, Evercore, Raymond James, Mizuho Securities, SMBC Nikko, Drexel Hamilton

Summary

COMM is a leading global provider of connectivity and essential infrastructure solutions for wireless, business enterprise and residential broadband networks.

COMM was purchased January 14, 2011, by Carlyle, which then paid itself $750 million in dividends funded by debt. As a partial result COMM has an undesirable, very negative price-to-tangible book value.

Valuation

COMM has an accumulated deficit of $1 billion and current debt of $3 billion. On the IPO at the price range mid-point there will be an immediate tangible book value per share dilution of $29.56.

In other words, it has not made any money in recent history and has borrowed significant monies to pay Carlyle recent dividends. Pre-IPO COMM is owned by the private equity firm Carlyle.

Proceeds are allocated to paying down debt, much of it incurred to pay Carlyle dividends. Also Carlyle is cashing out by selling 18% of the IPO for itself.

For the September 13 quarter revenue was down -1% and adjusted operating income was down -3%. In general, it is not good to have a bad comparative quarter going into the IPO.

Plus, COMM's gross margin is only 34%. With a gross margin that low COMM hardly qualifies as a high-tech company.

Plus, for the six months ended June 30, 2013, COMM's interest burden was 55% of operating earnings, which is like having a ball and chain attached when COMM is trying to run toward higher profits.

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

annualizingSept qtr

Cap (mm)

Sls

Erngs

BkVlue

TanBV

in IPO

CommScope Holding (COMM)

$3,619

1.0

106

3.1

-1.9

21%

Price/EBITDA

5.3

Click to enlarge

Glossary

Conclusion

At a $3.8 billion market valuation, we don't like COMM. However, it is priced to sell at one times sales and institutional investors like branded companies selling at one times sales, without doing the underlying financial trend analysis.

The rating, therefore, is neutral to negative.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

COMM is a leading global provider of connectivity and essential infrastructure solutions for wireless, business enterprise and residential broadband networks.

COMM helps its customers solve communications challenges by providing critical radio frequency, or "RF," solutions, intelligent connectivity and cabling platforms, data center and intelligent building infrastructure and broadband access solutions.

Demand for its offerings is driven by rapid growth of data traffic from the continued adoption of smartphones, tablets, machine-to-machine communication and the proliferation of data centers, big data, cloud-based services and streaming media content.

COMM's has a team of about 12,500 people to serve customers in over 100 countries through a network of more than 20 world-class manufacturing and distribution facilities strategically located around the globe.

Operating segments, last 12 months percent of revenue, worldwide market position

Wireless: #1 in merchant RF wireless network connectivity solutions and small cell DAS solutions, 61% of revenue

Enterprise: #1 in enterprise network connectivity solutions for data centers and commercial buildings, 24% of revenue

Broadband: #1 in cables for hybrid fiber coaxial HFD networks, 15%

Products

COMM is a global leader in providing cable and communications products that support the multichannel video, voice and high-speed data services provided by MSOs. COMM believes it is the leading global manufacturer of coaxial cable for Hybrid Fiber Coaxial, or "HFC," networks and a leading supplier of fiber optic cable for North American MSOs.

Dividends

Since January 1, 2011, COMM declared and paid special cash dividends and distributions in an aggregate amount of $750.7 million to equity holders. As a partial result COMM has an undesirable, very negative price-to-tangible book value.

Carlyle (private equity firm) owns COMM

COMM was purchased January 14, 2011, by Carlyle, which then paid itself $750 million in dividends funded by debt. As a partial result COMM has an undesirable, very negative price-to-tangible book value of -1.9.

Intellectual Property

COMM has about 2,700 patents and patent applications worldwide.

Competition

Primary competitors include Amphenol Corporation, Belden Inc., Comba Telecom Systems Holding Ltd., Corning Incorporated, Emerson Electric Co., Ericsson Inc., Huawei Technologies Co., Ltd., KATHREIN-Werke KG, Panduit Corp., RFS (a division of Alcatel-Lucent SA) and TE Connectivity Ltd.

Use of proceeds

COMM expects to net $553 million from the sale of 30.7 million shares. Carlyle expects to sell 7.7 million shares.

Proceeds are allocated to repay debt, as are most proceeds from IPOs funded by Carlyle.

Disclaimer: This COMM IPO report is based on a reading and analysis of COMM's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

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. I have no business relationship with any company whose stock is mentioned in this article.