Tele Columbus – Low and Slow
All,
Please find our updated analysis here.
Shareholders and creditors are lining up their plans to restructure Tele Columbus’ (TC) liabilities. TC’s business is based around Housing Association (HA) relationships; with the TV/Telephone service bundled into the rent. It operated a low-ARPU business where residents had no alternatives. The German Pay TV market is losing ground to internet streaming, and TV revenue has been declining for some time. New German regulation will give customers a choice of provider from June 24, and TC will be the most vulnerable. TC’s answer is to roll out a fibre network. However, to fund this, creditors have to agree Onan extension of their debt and hope for jam tomorrow.
Investment Rationale
- We are not keen on getting involved yet. Because the creditor position is relatively weak, we think there is ample scope for the parties to reach an agreement allowing for a consensual restructuring. However, for the same reasons and in light of the poor quality of the assets, we doubt the restructured debt will trade far north of 80c/€, providing only 15cents of upside.
- We see the fundamental valuation of the shrinking TV business as covering 50c/€ today and will accept if that puts us into the lower range of estimates. But for lack of any feasible way in which creditors can gain control of these assets, we are not convinced the bonds would stop falling at 50c/€ if the process did fail.
- So, accepting that the upside is the more likely scenario, we are not in a rush to take a long or a short position, at the moment. We could easily imagine a sombre opening gambit from the shareholders to send bonds down another 10 points before negotiations begin in earnest, at which point we would be more inclined to go long.
The new regulation is not Big Bang:
- The changes mean that TC’s Housing Association business is open to competition, but we expect the pace of losses to be modest.
- Overbuilding is not likely, but there will be some competition from mobile (5G Wireless routers).
- Customers will be free to leave when block contracts end, but stickiness will mean customer losses will be lower than some fear.
- Most lost customers will continue to use the TC network with wholesale fees paid to TC.
Bonds are weakly positioned:
- We see limited upside in the bonds, and any snags in putting a deal together could see significant downside.
- The bonds and term loan rank pari passu - effectively behind some €200m of leases, but are principally secured by share pledges that will be difficult to enforce.
- The share pledges are in German law, which requires a trigger with a court filing and subsequent process to publicly auction the assets (shares). Shareholders would therefore lose control and hand the company over to an administrator.
- The share pledges are only at subsidiary level, lacking a single point of enforcement that would allow to keep the assets together. The result would be a string of independent auctions of the company’s various subsidiaries - clearly not a feasible scenario.
- For a StaRUG restructuring plan, creditors would effectively need to win over management. We don’t think this is a likely scenario either.
The Value is in the CapEx, not the existing assets:
- Without the expansion capex, TC will generate cash, but its network will be increasingly slow relative to competitors and more vulnerable to mobile internet.
- Our DCF calculation comes at 50c/€, and we are concerned that any amend and extend will have that as its base level.
- Using our peer multiple, the bonds are trading in line with valuation at 66c/€. However, there is no clear route to achieving this valuation unless the shareholders agree to an auction - which we consider unlikely as we think they would recover zero.
I look forward to discussing it with you all
Aengus,
T: +44 203 744 7055