British telecom company Colt (LSE: COLT) is one of the the biggest risers today, with its stock up 21.3% at the time of writing, following a “final cash offer” from Fidelity, which said that it intended to acquire the reminder of the shares that it did not already own in Colt at 190p, valuing the target’s total equity at roughly £1.7bn.
Reaction
Colt was swift to announce that its independent directors “have appointed Barclays Bank acting through its investment bank as independent financial adviser“, and they believe that the offer undervalues the company and its prospects.
“Accordingly the independent directors, having been so advised by Barclays, consider that the financial terms of the offer are not fair to the independent shareholders of Colt,” it said, noting that the board believes that the financial terms of the offer may be considered by some shareholders “to be acceptable in the circumstances, and accordingly make no recommendation to shareholders whether or not to accept the offer“.
This simply means ‘raise the offer, and we’ll recommend it’. But just how likely it that?
A New Offer?
“Under the terms of the offer, Colt shareholders will be entitled to receive 190 pence in cash for each Colt share held. This price will not be increased“, Fidelity stated, adding that the offer values the entire issued and to be issued share capital of Colt at about £1.7bn.
There are two options now: the deal gets done on these favourable terms, as it seems likely, and shareholders will accept 190p a share — which is in line with Colt’s pre-crisis highs — or shareholders may feel entitled to ask more on the back of Colt’s new business plan, which aims to significantly improve its financial performance, as Colt reiterated today.
190p A Share Is Fair Value
Colt trades at 190p a share, which suggests that this is a done deal.
The premium “is 21.3% to the closing price per Colt share of 157 pence on 18 June 2015,” but stands at 34.4% and 28.6% for last 12 and three months, respectively.
On the back of flat revenues,, earnings before interest, tax, depreciation and amortisation (Ebitda) have dropped by 10% over the last three years.
Say, for the sake of argument, that Colt has now turned the corner.
Then, assuming constant trading multiples into 2018, and a steady 10% growth of rate for Ebitda over the period, it would take about a couple of years for Colt stock to rise to 190p a share, but there are obvious risks if shareholders decided to stay put.
Colt’s unaudited first-quarter results released on 29 May showed declining revenues, steady Ebitda, and improving free cash flow, among other things. Its core businesses, network services and voice services, are showing encouraging trends, and management is confident it “will deliver modestly positive cash flows for full year 2015“.
I doubt that’s enough to ignore Fidelity right now, however.
