Fiber M&A: Colt Gets An Offer From Fidelity

June 19th, 2015 by · 14 Comments

Over in Europe, another pan-European fiber operator just might leave the public markets and go private. Colt has received an offer from its majority shareholder, Fidelity, for the 37.6% of the company it doesn't already own. The price tag of £569m sent Colt's stock up 20% today in London.

TRImage_299 Jun. 19Colt has been treading water for years, reorganizing on a regular basis and generally not pulling out of it. Despite an on-net footprint of more than 20,000 buildings across the major markets of the continent and a growing data center business as well, the company's exposure to voice churn and general regional economic headwinds has kept them from establishing a growth trend.

Now, why would Fidelity be moving to take the company private? The one thing it does not mean is the status quo will remain. Last year they had Colt buy its sister company KVH for a presence in Asia, and this move will let them take the whole bundle out of the public eye. Fidelity either wants to put more money into consolidation of the industry without having to justify it to investors, or it wants to wrap it all up with a pretty bow to sell off later for even more.

Actually though, one could argue that Fidelity's move to acquire the rest of the company is an effort to get an auction rolling.  Colt's independent directors wasted no time saying the offer was insufficient and undervalued the company, but didn't actually recommend against it. In other words, 'someone please bid more'.  There does seem to be room, as the offer seems to value the company at $2.73B which is an EBITDA multiple of less than 6.

I've long speculated that the company's destiny is to be acquired by Level 3, with whom there are obvious synergies. At this price, Level 3 surely would have to be interested despite the fact that its busy with the tw telecom integration. And they might not be the only potential US-based buyer. Zayo nowadays could be in the running, although their potential synergies would be lower just because the footprint overlap is smaller. Interoute is perhaps another potential bidder, and in fact gave signs of being more aggressive in consolidation recently as well.

But for now it's Fidelity making the offer.

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Categories: Fiber Networks · Mergers and Acquisitions

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14 Comments So Far


  • schmuckinsurance says:

    Does anyone have insight into Fidelity’s 12/31/2016 date, i.e. are their structural, tax or other reason that they couldn’t part with their shares before then? Assuming Fidelity gets their EGM by the end of the summer and trade bids come after 190 fails does a trade buyer just need to offer a 15 month close? If the 12/31/16 date is soft then the auction start doesn’t have to be so slow and i’d say that Rob is right that this is an “effort to get the auction rolling” with 190 being the reserve price.

    With eunetworks, eufiber and geo all going 11-14x ebitda in the past year – Fidelity and its independent board know 7x on this depressed ebitda is not a real price. This morning Altice bid 10bn-euro for Bouygues Telecom, 2x what was offered 2 years ago. 7x ebitda Fidelity knows their Colt bid is a 2013 price.

    On Colt’s cash flows, the Ebitda trajectory will benefit from lowball kvh cost synergies and some rev synergies, it svcs losses winding down, awakening of the networks business, and datacenter margins & sales pacing 1/2 of the segment peers levels. The company has already guided to fcf positive in 2015 which tells you how far the asset and mkt has come in the past 2 years. The board knows this and unlike XO, the Colt board did its job not recommending the Fidelity bid. I think that is why we are unlikely to be in litigation with Colt the same way we are with XO years later.

    I am inclined to agree with the Oppenheimer initiation on Colt last week where they said 10x ebitda is fair considering the scarcity of the assets, hundreds of millions in NOLs, the fact that Colt has net cash(yes, net cash) and no mortgage on its NOC; you couple this with the cost avoidance & time delay l3 would have if they want to add 22,000 European buildings to their network and the customer relationships that aren’t there upon that speculative build, Colt’s product portfolio in finance & insurance as well as the attractive beachhead in Asia. Given the scarcity value and feverish pace of Euro telecom M&A I think a premium to 10x is appropriate if there are industrial synergies to be had or any auction does develop.

    As an interested party here, I understand that the Brits may want to see cash but I would guess the American shareholders may even outnumber the Brits and I don’t think they want to sell for cash, especially if it is under midpoint of the 11-14x ebitda range Colt’s peers have been selling for. I am not saying Colt’s ultimate buyer needs a XO premium of 90% but 21% I doubt is any more than that reserve price to see who is actually interested. If any of those potential bidders are reading this, providing a stock option at least to the minorities will be looked upon favorably especially if it comes out of Broomfield.

  • Grant Lewis says:

    Anyone know if Fidelity had a piece in Pacnet? i know the primary investors were not fidelity but i wonder given the strong performance at pacnet by Carl Grivner to clean it up and sell it seems like they would want to do the same thing again at COLT.

  • C-nonymous says:

    They did not, it was Ashmore, Spinnaker Capital and Clearwater Capital. It brings up another important point though related to what Fidelity did own, KVH.

    KVH which was Fidelity private equity controlled until December 2014. As schmuckinsurance mentions above, KVH is an important leg to the stool that Colt was underearning but there is a more important question: Why would Fidelity sell KVH to the public mkts(via Colt)only to buy it back at a premium less than 6 months later. Selling KVH was very much a clean-up trade to get all the Fidelity telecom investments under one roof. Why not do it as a private entity would be cleaner for one and secondly it would not be as expensive.

    Why would Fidelity sell the company to Colt, 35% of which was controlled by the public, let word get out about how good the synergies could be only to buy it back from Colt and those minority shareholders with a public mkt premium(I use premium loosely given the 7x the underearning ebitda that was offered) attached?

    It makes no economic sense unless your motivation was just what mentioned above. Get the best asset you could out there for all too see, peak the minorities interest to drive up the price, put up an auction with the safety net of your reserve price of 190 and allow the bidding to begin.

  • Anonymous says:

    Addition by subtraction perhaps?

  • C-nonymous says:

    Having less telecom companies is a net benefit but if you intended to take down Colt, doing this clean-up in the private markets would be immensely easier and significantly cheaper.

    Doing so after KVH was acquired by Colt makes little sense and further puts Fidelity at risk.

    Fidelity is a brand that they want to mean retirement, mutual funds and individual brokerage. The key here is trust with the retail investor. Trying to steal Colt from minority shareholders, (“going Icahn”) seems like a strange move and even stranger after the company has reorganized, brought into new mgmt and got public minorities excited about KVH.

    Unless Fidelity fully intends to pervert their brand, why go the take private route? It isn’t like cutting your nose to spite your face, it is like cutting a nose hair to spite your face. Fidelity has 24 million individual investor and 5.2 trillion in AUM – why desecrate your brand if you aren’t talking about trillons or even billions but what probably is a a few hundred hundred million.

    Given the levels of disconnectedness in this bid, I believe Level 3 offers 250p thereby getting the asset they want at a price high enough where Fidelity will “have to overcome” their reservations about selling before the end of next year. If you read the release, they went to lengths to underline that the bid won’t be raised but the date was a simple reiteration. I think 60p changes their mind. As a top 5 shareholder of Level 3, I think Fidelity also takes stock as a part of a negotiated transaction that keeps this auction from dragging on.

    • Grant Lewis says:

      so net net if they get the assets they will strip and clean up balance sheet for a longer term transaction (asset investment with possible future return) or if they don’t get the deal done they will benefit indirectly due to positions in other SP’s such as Level 3. I think its a calculated move on Fidelity’s part to transact this either way. Will be interesting to see this outcome as its clear COLT’s been struggling recent years and this may be the very catalyst to drive/improve it going forward.

      • C-nonymous says:

        No.

        The balance is in an incredible position in that they are net cash and own some of their real estate owned outright inside of triple net leasing it the way TW and others have done.

        What Fidelity would do with them if they can steal them from the minority shareholder is an open book. I would not rule out a merger with interoute. More likely, Fidelity would let this new mgmt team with the KVH synergies and cleaned up asset base run their 3 year business plan. This is a crime bc this business trajectory belongs to the minority shareholders where ebitda would likely hit 400 in 3 years(my est as Oppenheimer has just 370) and the multiple goes inline with where the industry had after the past months of 11-14x. This implied price at 400 pence does not include the hundreds of millions of value for the NOLs or the cash that would build over that 3 year period which Oppenheimer estimates to be an addition to their net cash position of 235M euro. Discount this back at a 10% without the cash generated or NOLs and it implies 330 today which makes the 190 so nauseating.

  • schmuckinsurance says:

    Remember that the difference between the low ball 190 offer and a more economic or arms length price wouldnt cost fidelity the entirety of the upped premium, it would only be 32% of that figure given that their shares would also get marked up if someone external was going to bid 250 as they control 62% or 68% when including related shares.

    • jojogumabew says:

      I read through the relevant docs on the colt’s site. They are obvious to find, but they are here below:

      http://www.colt.net/investor-portal/rns/

      I’m not a lawyer, though have some experience with agreements. Apart from my distaste at FMR’s opportunism, I thought the following were interesting points:

      1) The FMR press release is not a binding document, only the Offer is which coming out 28 days from the press release.

      2) The Offer is not subject to the takeover code. I tried reading through this in detail, but decided to take this at face value.

      3) Fidelity’s actions actually breach the Relationship Agreement with Colt (i.e. they will not take any actions to delist) which is why a majority of the independent shareholders need to agree to waive this.

      4) The commitments by Standard Life and Ruffer to sell 70mn shares to FMR are terminated by a Competing Offer (i.e. for all the shares of Colt), unless FMR ups the offer (Revised Offer) or reconfirms they won’t sell.

      So…in spite of the Dec 2016, no sale, no steps to sell, final offer statements by Fidelity, which they say is binding upon them (and they will repeat this in the offer), there does seem to be some wiggle room for a competing offer. The identical documents from Ruffer and Standard life contemplate this possibility as well as a higher offer from FMR.

      Also, based on No. 3 above where FMR changed their minds, who’s to say they won’t change again with respect to 2016. I suppose this would also be subject to a majority of minority vote, but who wouldn’t vote for a higher selling price.

      Grasping at straws? But I suppose that’s why there’s quite a bit of volume at 190p – speculate at 190p, your downside is somewhat limited) but still a lot of upside to 300p.

  • C-nonymous says:

    The stock is acting like another offering is coming.

    Like I said, I won’t be voting for the Fidelity offer and expect most of the people in this community won’t either but I think it is important to get a stock option presented.

    Jojo, you intimated you went long Colt as a backdoor way to own L3; schmuckinsurance said he wanted stock out of broomfield.

    When CTL which mentioned the potential for intl enterprise expansion in their shareholder meeting yesterday, I think we can assume an auction is underway. If centurylink offers stock my opinion is it is a net reduction in value relative to that same cash price but if Level 3 would offer stock – I agree with the others that the price doesn’t need to be the 11-14x of peer transactions and take it to be an accretion of value vs. that same amount in cash.

    • Rob Powell says:

      I’d be stunned if CenturyLink were to win an auction for Colt, but Ive been stunned before I suppose. They have few if any synergies compared to almost any other strategic buyer. Level 3 would have to have the easiest bid here, whether cash or stock.

  • C-nonymous says:

    I am sure they would not mind driving up the price for Level 3.

  • jojogumabew says:

    Yup, I’d like to add to my 3. Not at market. I feel unless rev growth accelerates, we’re stuck at these levels, maybe 10% up for 12-18 months (gone up a lot, everyone owns it, good news factored in). I buy the long term story in a big way. I thought colt would be a way to get more 3 at a 40% discount.

    Tempted to add more colt at 190. If the tender is rejected, downside is 150 in the short term, if accepted you are more or less even, if there’s a competing offer u can get 300+? But seems a bit complicated, so will see how it goes first.

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