Mr. Smith Goes To Wall Street

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.