TC1 - Tele Columbus

[ni-co]

This might be a recent IPO you will actually like: Tele Columbus is the third largest cable network operator in Germany. They serve ~1.7 million households in the eastern part of Germany (Europe’s largest cable market). IPO in January at €10/share though I was unable to get my hands on any of the shares at this price… It's still very cheap, though.

 

Market cap as of today is ~€710m

they are going to carry ~€350m in debt and

EBITDA 2014 is ~€99m

 

This adds up to an EV/EBITDA of 10.7. Doesn't look cheap, does it? Until you realize that they do about ~€13.9 ARPU – for comparison: that's less than half of the ARPU LBTYA does in Europe (€36.5) and only ~60% of what LBTYA does in Germany (€22). LBTYA is doing ~€66 ARPU in Great Britain – that's a long way to go from €13.9… – I think this is how John Malone and Mike Fries are looking at this and there'd have to be large synergies, too.

 

So, natural catalyst would be a takeover. I think Tele Columbus would make an outstanding target for LBTYA. Their networks would fit perfectly because they don't have any overlap in Germany as far as I could see. Of course there would be regulatory hurdles, although, from what my understanding is, German authorities probably wouldn't block such a takeover because LBTYA and TC are covering different regions and wouldn't be direct competitors from a regulatory point of view (they haven't been looking at the monopsony aspect of such takeovers so far). Chances are much smaller for Vodafone/Kabel Deutschland as they have some regional overlap. Also keep in mind that the large stakeholders have a 6 month lock-up.

 

Anyway, leaving takeover speculations aside, TC is a great asset in my favorite market. Oh, and York Capital (Jamie Dinan's hedge fund) bought is holding at least 10% of the company as of February.

[kab60]

If they're a suitable takeover target (not saying they're not), wouldn't it make more sense to sell the company directly instead of going through all the hassle of an IPO that basically requires all of managements attention for a long stretch of time? Who were the owners prior to the IPO?

[ni-co]

If they're a suitable takeover target (not saying they're not), wouldn't it make more sense to sell the company directly instead of going through all the hassle of an IPO that basically requires all of managements attention for a long stretch of time? Who were the owners prior to the IPO?

 

Sure. It was a matter of price, I guess. You could ask the same question with Charter, though.

 

Apart from some PE companies Kabel Deutschland was interested (see this article in the WSJ) but couldn't do it because of regulatory concerns. I've read nothing about LBTYA being interested though. From the prospectus:

 

Certain shareholders of Tele Columbus Holdings SA informed the Company, that their indirect shareholdings in the Company (on a look-through basis) were as follows as of December 31, 2014 (after certain outstanding warrants held by shareholders of Tele Columbus Holdings SA would have been converted in shares of Tele Columbus Holdings SA): York Global Finance Offshore BDH (Luxembourg) S.a`r.l.: 23.2%, Burlington Loan Management Limited: 9.7%, Silver Point Luxembourg Platform S.a`r.l.: 7.6%, Citigroup Global Markets Limited: 5.5% and Goldman Sachs: 5.3%. The identity of other shareholders that directly or indirectly hold more than 3% in the Company’s shareholdings is not known to the Company.

 

As far as I understand it the rest was held by TC's management and 100+ smaller shareholders pre-IPO. [York was already invested pre-IPO, I edited my post above, sorry.]

[topofeaturellc]

It had filed for bankruptcy. It was one of those weird situations where the uk courts were used to adjudicate the restructuring, so the people selling are mostly the old bond holders.  They tried to do a trade sale or a private equity sale to get the exit.  Given where some of the rumored bids were it doesn't sound like the IPO netted then much more.  It was def for sale for an extended period of time. 

[ni-co]

It had filed for bankruptcy. It was one of those weird situations where the uk courts were used to adjudicate the restructuring, so the people selling are mostly the old bond holders.  They tried to do a trade sale or a private equity sale to get the exit.  Given where some of the rumored bids were it doesn't sound like the IPO netted then much more.  It was def for sale for an extended period of time.

 

This would be very similar to the CHTR IPO wouldn't it?

[topofeaturellc]

Only in the sense that they both filed.  Existing shareholders in charter aka Paul Allen maintained control through the pre-pack.

[Liberty]

Interesting, thanks ni-co.

[ni-co]

Tele Columbus to Buy Cable Rival PrimaCom for $778 Million

 

Tele Columbus AG, Germany’s third-largest cable-television operator, agreed to buy PrimaCom Holding GmbH for 711 million euros ($778 million) to gain users and expand its network.

 

http://www.bloomberg.com/news/articles/2015-07-16/tele-columbus-agrees-to-buy-primacom-for-711-million-euros

 

They pay at least 13x EBITDA 2014. I don't know why but their German press release only mentions the price of €711m "before cash/debt". I'd guess that Primacom doesn't have a net cash balance.

 

If my calculations are correct they will have to stretch quite a bit to finance this takeover. As of Q1 2015 TC had a net debt balance of €292m, now they are loading €711m on top. That's ~€1bn in debt with a combined 2014 EBITDA of €154m ramping up the leverage to 6.5x debt/EBITDA.

[wisborough]

TC1 has its EGM on Monday 14th.  It is seeking approval from shareholders for an increase in its capital authorisation as it looks to continue the consolidation of German cable industry - the next target is likely to be Pepcom.  If it is able to purchase Pepcom, it will complete the roll up having just bought Primacom.  In addition it will raise capital in the fall to pay back the equity bridge loan that it incurred from buying Primacom.  York Capital are the largest shareholders.  TC1 is likely to be bought out eventually by either Vodafone or Liberty Global. 

[BraveChieftain]

If German regulators don't change their stance, they may block LBTY or VOD acquiring these guys.

[wisborough]

TC1 has now completed its capital raise.  It should shortly complete the acquisition of Pepcom.  The stock should now become much more liquid and you will see the big institutions crawling all over it as this is one of the only cable/telco assets in Europe that has decent unit growth.  The management is all ex Telenet (listed in Belgium but now owned by Malone's Liberty Global )- which is the best of all the European cable assets.  The footprints (homes covered) of Telenet is about the same (4mln households) as TC1 but due to higher penetration the enterprise value of Telenet is roughly 5x that of TC1. Huge long term potential upside or likely rolled up by either Vodafone or Liberty GLobal.

[whistlerbumps]

Does anyone have a good handle on PF EBITDA for TC1+Primacom+Pepcom before and post synergies?

[muscleman]

United internet acquired 25% stake.

 

http://advanced-television.com/2016/02/11/united-internet-takes-25-1-stake-in-tele-columbus/

 

I checked both United Internet and TC1's website. No English. Cannot understand anything. How did you get the English reports? Or do you read German?

[Aman1]

I'm not mega close to TC1 but I've spent a lot of time looking at KDG and Unity (Liberty Global) in Germany.

 

Things to note:

 

Regulator

- KDG had agreed a takeover for TC1 before it was listed, it was a done deal - but the German Cartel Office (competition commission) vetoed the deal due to overlap in networks.

- More generally, the Cartel Office are a nightmare when it comes to consolidation. After the EU (see later point) allowed Liberty Global's Unity Media to buy KBW previously, the Cartel Office later decided to take LG to court to overturn this decision. It's one of these things that will be in court forever and eventually LG will probably pay a token fine; but it should help you get a grip on how anti-consolidation the domestic regulator is.

- Quirk of Europe - if 75% of the company's group revenues involved in M&A are in it's domestic market (such as TC1) then the local regulator will adjudicate. If however it is a multinational (LG, Vodafone) then the EU will adjucate on such matters. The EU is far more favourably predisposed to cable consolidation, as seen in their decision to allow Ziggo and UPC Netherlands (LG) combine in the Netherlands.

- So basically TC1 buying smaller players - German Cartel Office and Bnetza (Telco regulator) likely adjudicate while if someone tried buying TC1 it's probably the EU (although the local guys will stick kick up a lot of noise).

 

German Cable

- In terms of the veto in the KDG & TC1 tie-up, the problem was competition in the market for MDUs (multi-dwelling units). Basically in Germany, cable is the way that basic TV is received. Landlords in apartment blocks (MDUs) actually pay wholesale for this, then recharge it on to the tenants as part of their rent- think of this as maybe costing EUR 2-5 per tenant.

- The bulk of the customer base is on the above contract.

- The organic growth story in German cable is to offer high quality TV and get the German consumer to pay EUR 40 for this. The ARPU numbers you see for Liberty (Unity Media) and KDG (Vodafone controlled but they have a minority listing and report standalone) is basically the blended average between the basic EUR 2 group and the small number of higher value subs.

- This has generally driven high single digit growth in top line from selling better quality triple play (think the US in the 80s?).

- HOWEVER - the German consumer is notoriously frugal. Sky TV (high quality satellite TV) has been in the market forever and continues to run very few subs and at a loss. Most Germans do not pay for high quality content. The danger is that the final ARPU will remain at levels far lower than other markets, so I would be wary of comparing it to other European markets and particularly the UK, which is probably the second best Pay TV market after the US. It's hard to ignore the runway in the medium term however, due to the low level of penetration at the moment. BUT - unlike Unity and KDG, TC1's network needs serious investment to offer premium services (DOCSIS 3.0) so while you can drive sales and EBITDA growth from upselling, expect seriously high capex to deliver this and therefore FCF to look much worse than the EBITDA or revenue story.

 

English Reports / IR

The old KDG Investor Relations guy, Elmar Bauer is now the IR at Telecolumbus so knows the sector well and is excellent (he also speaks perfect English). I'd recommend you contact him for information - tho all the info is definitely available in English. The website has an English option in the top right hand corner???

 

https://ir.telecolumbus.com/websites/telecolumbus/English/0/investor-relations.html

 

United Internet

I'm a bit more outside of my knowledge with these guys, but they have a relatively successful "asset light" strategy where they re-sell Deutsche Telekom's broadband due to regulation driving broadband competition. They have been growing rapidly in mobile in Germany in recent years, again asset-light using an MVNO strategy. This TC1 stake is a bit at odds although they obviously are heavily involved in data networks in Germany. I suspect (with no other knowledge!) that this is designed to be a blocking stake? But I have no insight on this.

 

Primacom / German insolvency

This also went bust and (I think) is being sold out of insolvency. The reason whey English courts get used is that continental insolvency law is a slow process and value destructive, so most bondholders ensure (the creditor friendly) English Law is the reference court used in bond docs. Also it often gets used if the finance vehicle used to issue the bond or a holding company is in an English tax haven island or the bonds are listed in Ireland.