INVESTOR MEETING HIGHLIGHTS; CAPITALIZING ON ATTRACTIVE M&A MARKET CONDITIONS
THE TD COWEN INSIGHT
Yesterday, we hosted meetings with CEO David Nyland and VP, Finance Pearl Gupta. Aided by its strong capital position and continued attractive M&A market conditions, LMN is poised to continue generating superior M&A-driven growth. We continue to like LMN looking at its revenue growth/margin/FCF profile, but at 22.8x EV/EBITDA (C2025E), we believe the shares are fairly valued.
Impact: NEUTRAL
Robust M&A pipeline with little competition. LMN has a few thousand vetted targets in its M&A pipeline, including >500 companies with active dialogues. Carve-out deal flow remains healthy, as LMN is viewed as a carve-out specialist (5 of the last 6 deals were carve-outs; 13 in total). PE/VC deal flow has picked up, but it is seeing less owner/operator opportunities, given the macro challenges impacting valuations. Larger (broker-led) opportunities are more prevalent, given its higher profile, aided by the WideOrbit deal.
LMN is seeing little competition for deals, which it attributes partly to the high-level domain expertise required to succeed in communications/media markets.
M&A to remain centralized. Given its communications/media focus, M&A will be managed centrally. LMN added a third M&A team this year, with plans to add a fourth in 2026 based on expected deal flow.
Nokia/Casa acquisitions progressing well. Despite the increased complexity of the Nokia/ Casa carve-outs, the Nokia deal being its largest carve-out, and the Casa deal being its first bankruptcy deal with no Transition Services Agreement (key for carve-outs), LMN is happy to have both businesses, and indicated that the post-close optimization work is going well. LMN indicated that Verizon (~85% of revenue) was relieved it won the Casa auction and that other customers have increased buying activity, now that the assets are in financially strong hands.
Flexible on deal financing. Exiting Q1/F24 and including the Nokia/Casa payouts in April, we estimate LMN has ~$400mm in available capital to execute on its M&A pipeline. Management stated that it would not slow deal-making if it ran short of cash/available credit, as it would consider other financing sources/structures, including equity, assuming IRRs still exceeded its hurdle rate.
Margins expected to remain in the low-30%s. LMN indicated that Q1/F24 EBITDA margins (33.0%) are a good medium- to long-term target for the business, as Q1/F24 included a good mix of the benefits of the post-close strengthening of businesses and headwinds from M&A expenses (Nokia, Casa) and restructuring charges. We forecast F2024/2025 EBITDA margin of ~32%.