Tag Archives: European telecom sector

COLT calls time

COLT announced plans this week to cut €175 million of low margin voice wholesale business and take a €30 million restructuring charge in an attempt to address declining margins and halt operating cash burn, issues which I highlighted in a previous post. The stock took a hit and is down about 10% on the month. Press reports, like this FT article and this Guardian article, speculate that majority shareholder Fidelity is losing patience and the business is effectively for sale. Robert Powell at Telecom Ramblings is also speculating on potential buyers.

The graph below shows my rough estimates of the revenue and EBITDA margin (excluding restructuring charges) for 2014 and 2015 based upon COLT’s guidance (2015 is purely based upon my guestimates). The execution risk in the restructuring based upon the firm’s recent history doesn’t match up against any potential M&A upside in my opinion. This one is best to watch from the side-line. It should be interesting.

click to enlargeCOLT Telecom 2006 to 2013 Revenue & EBITDA Margin 2014 & 2015 forecast

COLT needs to show more progress

There has been an outburst of deal activity in European cable markets with Vodafone and Liberty Global squaring up on Spain’s Ono. Other European cable assets such as Com Hem, Get AS, and Galicia in Sweden, Norway and Spain respectively are reportingly also up for sale. Despite the economic woes in Europe and the regulatory uncertainty across the broader European telecom sector, valuations relative to the US have improved in 2013 returned to close to historical averages around 6 times EBITDA. The European incumbents are expected to see stabilisation, or at least a slowdown in decline, of revenue in 2014 and many are hoping that the environment is becoming more conducive to the long predicted European consolidation.

Against this background, I had a quick look over COLT Group SA, previously COLT Telecom, one of the start-up pan European telecoms from the heady days of the telecom bubble in the late 1990s/early 2000s. A previous post on the telecom sector touched on the past of COLT and the graph below shows the firm’s operating history to YE2012 and illustrates the pressure on cash-flow (e.g. EBITDA less capital expenditure) as a result of the changes COLT have undertaken since the mid-2000s to focus on being a pure pan-European data and managed services provider.

click to enlargeCOLT 2003 to 2012 Operating History

Digging a bit deeper, the breakdown of revenue by source shows that COLT has been making progress in reducing their exposure to lower margin voice revenues. However, annualising H1-2013 results shows that progress on EBITDA margins has slowed in the highly competitive sector and that returns on investment have yet to materialise operationally in a significant manner.

click to enlargeCOLT 2006 to H12013 Revenue Breakdown & EBITDA Margin

COLT is debt free but cash has reduced to €160 million as at Q3 (from €280m at YE 2012 & €340m at YE 2011) due to data centre infrastructure expense. COLT’s valuation, at below 5 times EBITDA, is less than many in the sector and also below recent acquisition multiples such as Deutsche Telecom’s purchase of GTS Central Europe for approx 6.3 times EBITDA. However, for me, recent sluggish revenue growth and EBITDA margins show that COLT still has much to prove in demonstrating the success of its investment in its strategy.

On the upside, a firm like COLT may get caught up in M&A speculation with someone like Vodafone looking to buy fixed line assets in Europe.