Mr. Smith Goes To Wall Street

by Dave Michels

Mitel CEO Don Smith describes his company’s recent IPO as a success. He told the Ottawa Business Journal, “It’s the biggest IPO in Ottawa and also the biggest communications equipment IPO in the last 10 years in North America.” That’s impressive, but why would Mitel do an IPO last month? Wall St. has more jitter these days than VoIP. Why would a company do an IPO in this economic climate?

Simple answer: They had to.
Longer answer: They had to and it worked.

Mitel got themselves in debt just before a big time recession and drop in telephony and UC spending. Adding injury to the situation, they didn’t have much benefit to being private. Because Mitel (Canadian) has so many US shareholders, the SEC required them to publicly file their financial results. Basically, they had public reporting burdens despite being a private company like Avaya or Siemens Enterprise Communications.

Mitel acquired Inter-Tel in 2007. Was the Inter-Tel acquisition a good move? Well it certainly wasn’t the best timing. Still, it’s a hard question to answer. On the downside, the product portfolios are not that complementary and the two channels are largely still two. However, a lot of good came out of the acquisition. Mitel gained a lot of quality staff (Inter-Tel had a much stronger N. American sales team), a private branded carrier business, a financing business, a distribution capability, a slew of upgrade-eligible customers, a network of branch offices, and of course one less competitor.

The problem was the debt – Telecom equipment sales in general dropped in 2009 and the forecasts for the Mitel-InterTel combination were way up. Mitel’s IPO prospectus stated it would use the funds for three things; two of which were paying off $100M in debt. That isn’t exactly what investors want to hear, but it made sense. My guess is it killed existing Mitel owners to do the IPO now. Even worse, the IPO performed lower than expectations. The official spin was it was a crowded day for IPOs and too few dollars chased too many IPOs. It would be interesting to see how the other IPOs on that day performed.

After the IPO, on April 29, Standard & Poor’s (S&P;) Rating Services raised Mitel’s long-term corporate credit rating and attached an outlook of “stable” to Mitel’s credit rating. “Proceeds from the IPO will reduce adjusted debt by about 31 per cent and meaningfully improve the company’s financial flexibility,” S&P; said in a research update. “The stable outlook reflects our view that Mitel should be able to sustain its improved adjusted debt leverage and corresponding credit metrics in the near term.”

On May 21, Moody’s raised Mitel’s rate to B3 from Caa1 and revised its rating outlook to stable from negative. Moody’s said in its press release that “with good liquidity and expectations of modest cash flow surpluses, the ratings outlook is stable”. Moody’s confirmed the proceeds from the IPO allowed Mitel to reduce its book debt by nearly $102 million.

Mission Accomplished.With stronger financials, is Mitel ready to grow in an industry under metamorphosis? Mitel has been transitioning its TDM product lines to an IP-services-heavy portfolio over the past decade. CFO Steve Spooner said “Roughly 95 per cent of what Mitel sells today is IP-based solutions, while only about 60 per cent of our competitors’ ship is IP communications. We’ve made the transition to become a software company … and that heavy lifting was done while private.” That’s impressive, but obviously he must only be counting Mitel’s traditional competitors – Microsoft, Siemens, Cisco I believe are predominately IP based sales.

The company is betting on several fronts including virtualization and hosted voice. Mitel was the first voice platform to announce a strategic agreement with VMWare. Its latest release of its call processing software is targeted to service providers with a multi-instance capability. Mitel’s recent announcements include a partnership with IBM and it recently launched a cellular offering through its network services unit.

Mitel developed a strong partnership with Sun. Its call processing software runs on Sun computers, and Mitel offers a thin client solution where the phone runs the keyboard, mouse, and monitor. Sun has also emerged as a major reseller for Mitel. However, Sun’s own strategy may be in flux as it was recently acquired by Oracle. Mitel also benefits from the Terry Mathews ecosystem of companies. Mathews, the Sage of Kanata, and chairman of Mitel has a network of companies that can or may leverage each other. Watch Wesley Clover on Wall St., Magor with telepresence, Counterpath with NomadPBX, etc. Also watch Mitel distribution help these companies.

The biggest challenge for Mitel is to increase awareness of its portfolio and capabilities. The company has grown its presence significantly over the past decade, but it is still less known than many of its smaller competitors.

Mitel Execs on IPO by Eric Krapf