COLT ... CWW MARK II?

Around this time last year I managed to single out Cable & Wireless Worldwide [CW/ LN] as likely to receive a bid approach. CWW stood out as it had reportedly received prior approaches, had a key asset in terms of its fibre network, offered the potential for generating significant cash from merger synergies, retained a stack of tax assets for a would be buyer, and above all it seemed cheap on both an NAV and relative basis. I bought the shares when they were trading at 17p/shr, which was a 43% discount to its NAV of 30p/shr. Even if one were to strip out CWW’s goodwill and other intangibles, the book value would still have been 16p/shr (i.e. roughly where I bought it). In the event I sold too early (in the high 20s) prior to Vodafone’s (VOD LN) final bid being revealed at 38p/shr.

Several months later Vodafone highlighted the potential synergies from its purchase of CWW.

“With respect to the CWW acquisition, we expect to incur cumulative integration costs of approximately £500 million by March 2016. This is expected to deliver cash flow synergies of £150 million to £200 million per annum by March 2016, resulting in operating free cash flow for the Group in that year of £250m to £300 million from the acquisition. A high proportion of the targeted synergies will come from clearly quantifiable cost savings and network integration benefits.”

Vodafone Enterprise Open Office Event, 27 September 2012

Vodafone’s targets demonstrate the significant cash synergies which it is expecting to extract from CWW. On my estimate, CWW generated £38m in free cash flow during 2012 (2011: £62m); I have excluded pension scheme cash funding of £127m in 2012 (2011: £15m) and acquisitions and disposals of £18m in 2012 (2011: £14m), but included finance lease repayments of £34m (2011: £22m) to arrive at this. Therefore, VOD is targeting an additional c. £240m in free cash flow pa from CWW by 2016.

VOD paid £1,044m for CWW’s share capital and assumed its net debt of c. £168m, suggesting an EV of c. £1,212m. This equated to a 2012 multiples of 0.56x EV/Sales and 3.2x EV/EBITDA. However, CWW also brought with it UK tax benefits of up to £1bn. It would appear that not only did I sell too early, but in the light of VOD’s anticipated cash generation, that CWW went at a cheap price.  

This brings me to COLT (COLT LN, mkt cap £926m). COLT shares many features similar to CWW pre its acquisition. COLT has reportedly received prior bid approaches, it has key assets in terms of its European network and data centres, is likely to offer a trade buyer significant merger synergies (see above for potential scale), retains sizeable tax assets, and is cheap on an NAV and relative basis.

I have bought at 101p/shr. Now trading at 104p/shr, COLT is capitalised at £926m. However, it retains net cash of c. €343m (£294m), equating to 33p/shr. It also has tax assets which are potentially worth up to €747m (£639m) or 72p/shr. I.e. its net cash and potential tax assets equates to its entire market cap. I would not expect all of the tax assets to be realisable, but even so ...

COLT is an infrastructure play comprising connectivity over 100 cities, 20 data centres and over 35,000km of network. In terms of network infrastructure, equipment, software and computing, this has cost €5.4bn to develop and has been depreciated to a net book value of €1.27bn. The group’s net asset value is c. 150p/shr, i.e. with the shares priced at 104p/shr it is at a 31% discount to its NAV.

The key issue is its shareholder base. Fidelity owns 51% of it and have been reported to be too greedy in the past when bid approaches have been touted. Management may also be uninspiring. But it does looks too cheap. There is consolidation in the sector (hunt for growth as organic growth is so low) and its capital structure is truly ridiculous. Net cash of €343m when most of its peers are geared 2-3x appears odd and it doesn't pay a dividend. I think someone (BT, AT&T, SingTel, Vodafone, TATA Comms, private equity, etc) may come up with a bid of 160p/shr this year. So I’m happy to buy around this level, sit and wait. 

COLT share price
Source: Bloomberg

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