Whither Goest Colt?

June 25th, 2015 by · 18 Comments

Following up on last week’s bid for the remainder of Colt it doesn’t already own, Fidelity confirmed this week that it won’t be increasing its bid despite the view of independent directors that it undervalues the company. So what happens next? We wait to see if another bid emerges, and then we find out what Fidelity really wants.

TRImage_299 Jun. 19The obvious buyer, at least from my viewpoint, was, is and remains Level 3. While they are busy with the tw telecom integration, a European move wouldn’t overlap with that effort. Colt’s reach and enterprise customer base is basically an ideal target for their European rejuvenation, and has been for a long time. The current price of 190p per share that Fidelity is offering should be easy to beat.

But you have to figure Colt, Fidelity and Level 3 had this conversation a few times, so why go this route? Why not just seal the deal?  The European infrastructure world is in flux right now, and there are perhaps more potential buyers than there have been in some time.

From the outside you have US private equity interests, the most obvious of which would be headed by Zayo, but also wildcard billionaires like Carlos Slim or Naguib Sawiris. Meanwhile, CenturyLink has been talking up the international angle, and AT&T has been busy in Mexico so they can’t be totally ruled out either.

And from the inside, one of the continent’s incumbents could easily decide to step in. DT already bought GTS a while back, and making a similar move on Colt would fit well with those assets. Teliasonera’s International Carrier division could also easily do the job. Another could be Vodafone, which could add some more fiber glue to its other European assets to go with the C&W footprint.

And the other possibility is that Fidelity really does just want to take the company private and intends to play a bit of hardball to get it at the lowest possible price. They don’t have to sell to anyone, and so it doesn’t matter if someone else makes a bid that Colt’s independent directors do approve of unless Fidelity’s itch is scratched. If that sounds a bit like what Carl Icahn did at XO a few years ago, then welcome to the cynics club.

Honestly, though, it seems more likely that this whole charade is aimed at squeezing a better bid out of Level 3. While other buyers could make sense, it’s Level 3 that has the most motivation at present, as well as a longer list of synergies to derive than just about anyone.  By drawing a few others into the mix, Fidelity can perhaps extract a bit more from them than via private negotiations.

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Categories: Fiber Networks · Mergers and Acquisitions

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18 Comments So Far

  • schmuckinsurance says:

    You mentioned private equity Rob but I think a specific subset would be very interested bidders: private equity with synergies to bring to bear namely Aleph Capital & , Sandoz & Crestview(Interoute) , Antin(Eurofiber) , Columbia(euNetworks) , GNFT(Cinven)

    My rank order of the publics:
    -L3 which seems clear as day.
    -AT&T who has previously bid for Colt. AT&T is Colt’s #1 supplier.
    -NTT has publicly talked about wanting more European enterprise exposure
    -Zayo, though seems like too many lit svcs.
    -Vodaphone has approached Colt as its preferred option before buying competitor C&W Worldwide.
    -Altice which has purchased enterprise assets, rebuffed in France and is in the mood to strike while the debt iron is hot especially at multiples like this on net cash companies with lots of NOLs.

    -Liberty Global
    -Tata (bid for CWW)

    • Rob Powell says:

      A comprehensive list to be sure! I’d tend to doubt NTT’s real willingness to go this deep into European enterprise and fiber operation, so I’d move them down the list. Altice is an interesting possibility I should have considered. KDDI and Tata seem really unlikely at present.

      The European private equity-backed alternatives you mention are possible, I agree. I’m just not sure their appetite stretches as far as the $3B range yet unless the final deal is unignorably cheap. And if it is, Level3 would have to be in a coma.

    • Morty says:

      If you believe that there will be stock as a part of a deal, time favors LVLT . I believe that LVLT stock will outperform Colt stock as we go forward. This can make the deal a lot cheaper for LVLT !


  • C-nonymous says:

    In response to your statement, “And the other possibility is that Fidelity really does just want to take the company private and intends to play a bit of hardball to get it at the lowest possible price. ”

    It just doesn’t click. I posted the below on your original story but the amount they would be stealing is even lower than I previously implied. In fact, they would be denigrating their brand for anything more pittance given they only have to come out of pocket FOR JUST THE 32% of the upped premium that is not in their or their related parties control.

    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 trillions or even billions but what probably is a a few hundred hundred million.

  • Rob Powell says:

    I generally agree, going private and playing hardball to get there doesn’t make sense to me for Fidelity either. But the shadow of such a thing is there in the background nonetheless.

  • C-nonymous says:

    Especially with Longleaf as their top independent shareholder who knows a little something about the sector as its cornerstone investor in Level 3 for over a decade. Knows something about how painful it is to get a company stolen like Dell and who has been able to be so effective in activism with the likes of Sun, Chesapeake, TXI, Pioneer, etc.

    They acquired 47mn shares last year, which is something like 2/3rds of all the shares that traded – I don’t think they go quietly into the night for a 7x a depressed ebitda.

  • jojogumabew says:

    IMHO, if they simply wanted to trigger an auction, why not just say so, appoint xyz banker to evaluate strategic options? Why also put the December 31, 2016 no sale condition? There’s a lot of language that puts pressure on minorities to sell (loss of listing, liquidity, lower standards of reporting and compliance) etc.

    In addition FMR says they are long term SH and yet they imply they will sell in 18 months, in fact maybe just 13 months after this is supposed to close.

    If you’ve been a long term minority, and they’ve used your capital for a long time, and when a 2x sale looks likely in 1-2 years, all of a sudden they say before that happens we want to take you out at a 20-30% premium ….uncool.

    Seems like there was a review of the private equity group.
    Boss: Hey our colt returns suck.
    Mgr: LVLT will buy it at 2x market. ATT already offered 250p
    Boss: The IRR still sucks. We’ve been in it for 15 yrs.
    Mgr: Why don’t we LBO the minorities then flip it?
    Boss: Why will the minorities sell?
    Mgr: Let’s offer a 21% premium to mkt. And, I know, lets put a condition where we won’t sell for another 18 months.
    Boss: Yeah…

    • jojogumabew says:

      Pure speculation of course. No offense.

    • schmuckinsurance says:

      Many people believe and I think they are right that an auction isn’t the way to maximize value, private negotiations are with the threat of an auction. I think private negotiations weren’t bringing the price or terms. Maybe a 250p bid from L3 was all cash and they wanted stock( as I do) and 275p.

      What fidelity has now is a reserve price for the auction which they believe will increase the ultimate sale price and end what I assume are some prolonged negotiations.

  • Peter says:

    While a listed vehicle there are many restrictions on restructuring which Colt may need to do but cannot. Taking it private, with a lockout does give a new management team the space to restructure – possibly split the organisation into 2 behind the curtains and then make a move in 2017.

    Colt has underperformed and despite many business plans still shows a telco approach to new products/ideas/innovations (ie tortoise slow) whereas a a service co they could be freed up to much more.

    Second their fibre while good, needs some real investment going forward to pick up on 10Gbps opportunities – eg what % of their network is used for mobile backhaul? LTE-A and upcoming 5G need 10Gbps+ dark fibre in huge quantities especially in dense urban street scenes around London. But that means big cash.

  • schmuckinsurance says:

    Colt this morning announced its exit of IT Svcs division, saving the pain of a 25mn loss. This will cost them 50m in severance which is one time but more importantly will be more than made up for by this year’s fcf where they guided to an impressive 75mn and further called out core fcf set to grow 47% next year which implies a 4.7% fcf yield more than double Zayo’s 2.2% fcf yield and nearly at L3’s 5.2% fcf yield(MS estimate).

    What is striking about this is that those numbers do not assume a deal between the two materializes. Level 3 has long said that they want the deal to be fcf accretive. Assuming MS’ $1bn is right for L3 2016 FCF and Oppenheimer has it right that $140mn in synergies are available in a deal with Colt – FCF accretion is much larger than it was yesterday implying more headroom for L3 to make the offer that Fidelity would accept.

    Colt’s EV is 1.65bn pounds/2.329bn euros. Based on the midpoint of FCF guide of 110mn plus 140mn in synergies implies 250mn in fcf or an 11% fcf yield available to L3 which as you can see from the above is more than 2x even L3’s vaunted FCF next year in a deal scenario.

    You would assume L3 would be happy with even mild FCF accretion given Colt’s(lifted from my original posting):

    “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(vs. 2k at L3) 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.”

    -If you assume 250mn Euros of FCF would be available to L3 and you were willing to pay 6.2% FCF yield instead of the 5.2% L3 currently trades at, you are looking at 4Bn Euros offer available for Colt.
    -Given that Fidelity offered 2.68bn euros or $3bn USD, I think L3 can make it pencil for $4bn USD which looks like a bargain vs 4bn Euros math implied above.
    -$4bn dollars also is a full $1bn more than Fidelity offered. If the board was presented with an offer so staggeringly larger than what the minorities were offered by Fidelity I would expect them to act courageously again and push Fidelity into it if they have to.

  • schmuckinsurance says:

    If you look back, the multiple offered by Icahn for XO to us back in 2011 was more fair(didn’t include the NOLs) then Fidelity is offering here. Back then, XO was 2 points below a market multiple for a badly damaged & heterogeneous asset. Fidelity is offering 4-6x lower with incredible scarcity value as detailed above.

    What is astounding to me is that Icahn, Corvex and especially Longleaf are not trying to shame Fidelity into allowing a fair price at least to minorities. If Fidelity won’t sell for 5 quarters(not a very long timeline bc it might take that long for a deal to close and that is if the Fido bid for Colt happens tomorrow), it seems like a strategic has a lot to gain by offering something to the independent board. If they offer 250p(the price that me and many of the other minorities are asking), an owner can surely ignore the bid it doesn’t want but can this owner?? CAN FIDELITY ? I don’t think so.

    C-nonymous says it well, Fidelity is a brand built on trust, can they really offer 7x but be unwilling to accept at 10x – I don’t think those things line up. It would be so easy to shame Abby Johnson into taking it, a strategic likely wouldn’t even have to team up but if needed an activist should be happy to do the dirty work for 60p or higher if an auction gets going.

    Even if a bidder were just to tender to the minorities at half of the discount of or 9x, they would get 1/3rd of a company at a few multiple point discount to the market. Worst case you are Aleph Capital buying into Interoute with the Sandoz family controlling it at a cherry price.

    The market is acting like an activist is involved, you just wonder if it is in concert with a strategic.

    For those strategics or activists on the board, Rob knows how to find me if you need my vote.

    • jojogumabew says:

      Southeastern and LVLT are probably waiting for FMR’s published Offer (due in a week or so?). Colt’s strategy presentation with the forecasted FCF just came out last week.

      At least I hope they are just waiting for this info before taking action…

  • C-nonymous says:

    Looks like the Fidelity offer has been published.

    I covered the activist playbook earlier but it seems like the strategic window is more wide open than being currently mentioned. Word around the campfire is that L3 isn’t bidding b/c they have a handshake agreement with Colt 16 months after the vote.

    If you were AT&T, Altice, Zayo, Interoute, DT, Orange, VOD or Teliasonera why not bid? Worst case, Fidelity STILL won’t sell to you. Best case, you derail the L3 local-to-national-global business vector by putting up a 210 bid and you get the minorities who apply all the pressure needed on Colt’s independent board to recommend and leave Fidelity on the defensive to reconcile their brand versus their actions. Even if the minorities aren’t effective enough to get you the whole thing on their own, is there another chance where Fidelity would be so vulnerable? A buyer could prevent the ultimate buyer from being L3 for a small premium to the $850mn implied for the minorities.

    Fidelity then has to explain why they won’t accept a bid they were unwilling to offer to the general public and its a race to acquire shares from every activist who has ever invested in TMT. From the strategic prospective, you have a very legitimate chance of testing Fidelity, derailing L3 and getting a sound financial and strategic deal for 46bps of AT&T’s mkt cap.

  • jojogumabew says:

    Well I read through the offer circular. I feel the same way, Fidelity is pushing the minorities out at a low ball price. Nothing in it makes me believe it’s just a roundabout way of putting colt in play.

    Can a direct competitor bid for the minority stake? I don’t think so. Wouldn’t there be all sorts of conflicts of interest?

    I think the only viable competitive bidder is someone who can hold the minority stake even if it’s not a public company. So I am not sure Southeastern can do it. Probably some private equity firms can. But they are still stuck with having to deal with Fidelity who it seems wants to take most of the upside.

    If I were a Fidelity customer, I’d write to the boss or the boss of that Fidelity director on Colt or his boss.

  • Scmuckinsurance says:

    No. Novartis has a stake in Roche but telecom is even incestuous look no further than carlos slim in mci, at&t, kpn and tele austria. Telefonica has been a long time telecom italia despite the battle raging in their brazilian subsidiaries. Even dan caruso is a direct investor in euNetworks.

    There was a recent shareholder buyout of direct competitor euNetworks, difference was it was at 11.5x ebitda. Not sure why columbia(behind eunetworks) wouldn’t help fidelity solve the problem for fidelity – shateholders are opposed at Colt and the independent board wont endorse the offer. Why wouldnt private equity save fidelity from years of litigation, get a great asset on the cheap and take out the minorities for them by getting an offer of 215 to the shareholders that would solve both the independent director, minority shareholder and may even get them more scale if you partner with columbia, sandoz, antin, icahn(xo), etc.

    • jojogumabew says:

      Ok I hear you. Well I will keep my fingers crossed and register my shares for the EGM and vote against it.

      • jojogumabew says:

        2q colt transcript


        from the q&a

        Austin Hopper, AWH Capital – Analyst

        “Well, I’d like to just state affirmatively that I think this offer from Fidelity severely undervalues the business, and I think that this is a real disservice to the minority shareholders. And I think that the Board — you mention that you’ve spent a lot of time, and I’m sure a lot of fees on a lot of advisors but, at the end of the day, you’re doing nothing to protect our interests and I think that that’s a severe disservice. And I don’t understand the position at all, how you could serve on the Board and not really look out for the interests of minority shareholders? “

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