Tag Archives: vodafone

European Telecom Frenzy

After many years of forecasted telecom consolidation in Europe, the recent uptick in M&A activity in the European communications sector is turning into frenzy. The catalyst includes European regulator’s agreement to allowing consolidation from four to three operators in mobile markets in Germany, Ireland and Austria. Declining mobile revenues & ARPU, the capital expense required to upgrade networks to 4G and buy spectrum, and the popularity of the quad play (bundled mobile and fixed telephone, broadband & TV) in certain markets are other catalysts. The graph below from the Wall Street Journal highlights the trends in the European mobile market.

click to enlargeEuropean Mobile Telcom Revenues

BT is a central player in the frenzy and reported to be looking at accelerating its mobile strategy by purchasing either EE (owned jointly by Orange and T-Mobile) or O2 (owned by Telefonica) in the UK. Vodafone will need to respond to such a development and is reported to be assessing a bid for Liberty Global. Hutchison Whampoa, owner of mobile provider Three, is also reported to be considering its options. Sky and TalkTalk are talked about as possible targets in the UK.

The list of recent deals is long. O2 and KPN’s E-Plus merged in Germany. Vodafone purchased Ono in Spain and Kabel Deutschland in Germany with its Verizon booty. Liberty Global recently completed its acquisition of Ziggo in the Netherlands. Altice, owner of cable operator Numericable, bought SFR in France and, in Portugal, it’s just announced a deal for the Portuguese assets of Portugal Telecom from Brazil’s Oi. Hutchison Whampoa bought Orange in Austria and O2 in Ireland. France’s Orange is buying Jazztel in Spain.

The attraction of combining mobile traffic with fixed assets is highlighted by the growth in data traffic over connected devices like smart-phones as an exhibit from the Ericsson Mobility report below shows.

click to enlargeGlobal mobile data traffic 2010 to Q3 2014

A recent article from the FT speculated on other combinations in the European telecom sector. France’s Iliad, who made an audacious yet unsuccessful bid for T-Mobile in the US, may have another crack at Bouygues Telecom (maybe with SFR-Numericable taking some assets). In Italy, Hutchison Whampoa, owner of 3 Italia, may have a go at the debt heavy Wind, although the part ownership by the Russian Vimplecom may be an issue.

I haven’t taken an active (or economic) interest in the sector in Europe since Virgin Media came out of Chapter 11 and was subsequently bought out by Liberty Global a few years later. Although I have looked at Liberty Global a few times since, I couldn’t get over the valuation at the time or the massive goodwill/intangible items from its acquisitive history (currently over 40% of total assets). Liberty’s debt load of over 4.5 times EBITDA is scary but not overtly so given its strong cash-flow. At a current enterprise value (EV) to EBITDA multiple of 9.5, a merger with Vodafone would not be cheap (which currently trades around a 7.6 EV/EBITDA multiple with a lower net debt to EBITDA ratio of less than 2.5). A Vodafone/Liberty merger would be a fascinating test for European regulators as such a match-up would have been unthinkable just a few quarters ago.

The only European telecom firm that I have kept up with is the disappointing COLT (who I posted on here and here). COLT may get caught up in the merger frenzy as a target. I suspect majority owner Fidelity is looking to exit whilst maximising its value (or minimising its loss is more accurate in this case). COLT recently bought the Japanese operator KVH (who also had Fidelity as an owner). I updated my projections, as below, but given that COLT will likely spend most of its cash pile on the KVH acquisition and integration, the medium term operational outlook for COLT looks uninspiring. COLT does have a €150 million debt facility which is more than enough to get it to free cash-flow (I estimate that will not be until 2017 with KVH integration costs), unless of course it goes shopping!

click to enlargeCOLT Telecom Revenue & EBITDA Margin 2006 to 2016 incl forecast

So overall, the European sector is getting really interesting and, although I can’t see any obvious way to play it that excites me, it will be fascinating to watch from the side-lines.

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.