Tele Columbus - Rolling out
All,
Please find our updated analysis here.
The Tele Columbus (TC) balance sheet restructuring is nearly complete, and the company can now focus on its fiber rollout. The bonds carry equity risk and need to yield accordingly. We see a route to TC delivering its ambitious plan, but there is significant execution risk in the build-out and increasing revenue. A legal restructuring process would have been far worse for bondholders, so agreeing to the restructuring is the right decision. TC's current valuation is impaired due to regulatory changes in Germany, and the need to upgrade the network.
Investment Considerations:
- TC has secured €300m in equity and the rescheduling of its debt, but it is at the beginning of a €2bn, 10-year plan to transform itself into a Fibre business.
- An investment in TC needs to return at least 15%, which implies a price of 45c/€.
- TC needs significant growth in internet subscribers to justify the equity investment and we are sceptical that it can hit those targets.
The bonds are expensive at 60c/€:
- Given the banning of bundling from 2024 and the poor state of the network we do not see it as an easily sellable asset without the capex programme. TC has had to commit to the upgrade and bondholders are now along for the ride. We do see the potential for success but need to be paid an equity return.
- Under the new 5-year, 10% PIK bond, we see a value of 45c/€. A yield of 15% is needed to reflect the equity nature of the investment => 45c/€ as a current valuation.
- If we use 4.5x 2024 EBITDA, we could spin a valuation of 65c/€, but given the capex plans and the poor state of the network, we think this would be a stretch so early in the process.
- A 10-year DCF calculation implies the bonds are covered with a €500m equity cushion. TC only becomes FCF positive in 2027, so a five-year DCF shows no equity value.
TC is near securing the liquidity:
- On 13 December, TC announced that
- TC is on the verge of completing its debt restructuring. In return for an equity injection of €300m (including €100m previously committed). In return, bondholders have agreed to extend maturities to October 28 and to move to an all-PIK 10% coupon. The banks will also extend to October 2028 with a margin of 400 bp. TC will move from a German to a Double LuxCo structure, so in any future restructuring, bondholders will be in a better position.
- Management’s is to replace DSL/ADSL with faster fiber, taking advantage of growing consumer demand.
- The plan requires
Execution on the plan to upgrade 680k homes in its network by the end of 2028.
Addition of 880k new internet subscribers by the end of 2028.
Management of the decline in the legacy TV business.
Increase EBITDA margins from 50% to 65% (internet margins are higher).
The restructuring transaction is near completion:
- 90% of the SSNs and the SFA have now consented to the restructuring which is expected to complete in Q1 2024.
- Bondholders had few options. The GMBH structure would have meant that bondholders had little control over any administration process.
- The new bonds will have a 10% PIK coupon and mature in Oct-28. The banks have also agreed to extend maturities to Oct-28. The bank debt will continue to receive a cash coupon of EURIBOR +4%.
- Tele Columbus has a €2bn capex program over the next nine years (€1.5bn by 2028), and it also will need to roll out fiber to the pavement and the home.
- TC has secured funding for its fiber rollout, but the projected pace of growth will be challenging to deliver. TC will need a total revenue CAGR of 8% between now and 2028 (19% for Internet/Telephony). Internet penetration is forecast to rise from 22% to 55%, whilst EBITDA margin is forecast to rise from 45% to 65%.
- TC will not generate free cash until 2027.
- FTTH/FTTB penetration is only 36% in Germany (vs 70% in other industrial countries). Germany was an early adopter of DSL/ADSL. The emergence of streaming services is driving demand for faster broadband.
- Our model matches management projections.
The Tele Columbus plan is ambitious:
- The growth is likely to be volatile and dependent on the release of homes to marketing. TC does have a relationship with the customers already, so upselling will be less challenging than a new build. Even with pent up demand for more speed, TC will have to have near perfect execution.
- We do not yet know the pace at which the network will be upgraded, and released to marketing. We have assumed that the process is smooth, in line with the projected capex spend. Management has given very little detail on the expected development of the network.
- Tele Columbus traditionally delivered its broadband product vis DSL (or variants), which has limited speed. Speed has been increased through upgrades to DOCSIS 3.1. However, the growth of streaming and homeworking has prompted consumer dissatisfaction and demand for higher speeds.
- Traditionally, TC was the sole supplier to buildings it had wired. The cable TV fee was rolled into the rental payment. From June 2024, this bundling will no longer be allowed in Germany. TC’s broadband connections are via DSL, and the network needs upgrading.
- TC is also vulnerable to 5G (particularly from Vodafone).
- Current Internet penetration is 22%, growth in 2023 has been 7%. TC needs to deliver 6% CAGR at a flat average revenue per user (ARPU) between now and year-end 2028.
- EBITDA margin needs to grow from 50% to 65% in the same period.
CAPEX of €1.5bn in the next five years:
- Getting the capex right, and getting the marketing done is crucial for TC. In the original UK build, one of the issues that emerged was homes being passed but no money to market them. The existing relationship with tenants will help reduce this risk, but TC will have to get both right.
- in the next two years Capex will be around €530m with interest of around €100m. Using management projections EBITDA will be around €450m => cash outflows of €180m.
- The 10-year plan is for €2bn in capex (including maintenance).
- Annual spend 2024-2028 will be c€260m pa.
- Management projections assume that the operating cash flow of around €200m will grow as the internet penetration grows.
I look forward to discussing this with you all,
Aengus
T: +44 203 744 7055