Tele Columbus today announced the end of the tender offer period whereby Morgan Stanley Infrastructure Partners (MSIP), through bidding entity Kublai GmbH (BidCo), is taking-private Tele Columbus at €3.25 per share. At the same time, existing Tele Columbus shareholder, United Internet AG, is rolling-over its minority interest of 29.9% into the new entity. In turn, United Internet will retain its shareholding in the newly private Tele Columbus. Together, Morgan Stanley and United Internet intend to build-out fiber infrastructure across Tele Columbus’ footprint in Germany.
Transaction Overview – Tele Columbus
Transaction Structure – Post-Settlement of Take-Private
Overall, the takeover by Morgan Stanley values Tele Columbus’ equity at €415m, which represents a 38% premium to the pre-announcement three-month volume-weighted average price per share. Additionally, the deal implies an enterprise value for Tele Columbus of €1.8bn, equivalent to 8.1x EBITDA and 23.9x Operating Cash Flow (i.e., EBITDA less capital expenditures).
Tele Columbus, operating under the brand PŸUR, is the second-largest cable company in Germany in terms of number of households passed, with 3.4 million homes connected.
Fixed Broadband Subscribers and Net Additions (in 000s) – Tele Columbus
Overall, Tele Columbus has 602k fixed broadband customers (24% penetration) in Germany. Additionally, the company has 2.1 million cable television subscribers.
Capital Increase – Tele Columbus Backed by Morgan Stanley
Following receipt of EU Antitrust Clearance, which is expected in Q2 2021, Tele Columbus will launch a €475m capital increase through a rights issue. The full €475m rights issue will be backstopped by Morgan Stanley, once it is launched, in May 2021. Notably, the price of the capital increase will not be higher than the take-private price of €3.25 per share.
In addition to the €475m capital increase, the Kublai BidCo (Morgan Stanley and United Internet) will inject a further €75m, at a to-be-determined future date, in order to further accelerate the implementation of Tele Columbus’ strategy (see below).
Investments and Pro Forma Ownership
United Internet will invest between €140m to €190m as part of the €475m capital increase. Moreover, United Internet has committed to supporting the future €75m capital injection with a €30m to €40m investment.
Therefore, United Internet’s post-capital raise ownership in Tele Columbus will end up between 29.9% and 40%, depending on its level of participation in the capital increases. Indeed, Morgan Stanley Infrastructure Partners (MSIP), through the Kublai BidCo, will comprise the remaining majority interest in Tele Columbus.
Use of Proceeds from €475m Capital Increase
Firstly, Tele Columbus will use the proceeds from the €475m capital increase to reduce the company’s debt levels. Specifically, Tele Columbus will bring its 6x debt-to-EBITDA capital structure down by more than 1x (i.e., €227m+ reduction in debt) to be less than 5x debt-to-EBITDA.
Secondly, Tele Columbus will use the remaining proceeds to begin funding its Fiber Champion Strategy (see below).
Fiber Champion Strategy – Tele Columbus and Morgan Stanley
Tele Columbus’ Fiber Champion Strategy is a three-pillar approach. In aggregate, the plan requires a total network investment of €2.0bn over the next 10 years.
(1) Fiber Infrastructure Upgrade
Firstly, Tele Columbus will pass 2.4 million total homes with an upgraded fiber network, equating to €833 per passing. Specifically, these premises will be over-built, replacing cable with fiber, in the company’s dense urban multi-family footprint. Therefore, Tele Columbus is not targeting “white spots” (i.e., areas without existing coverage) for its fiber infrastructure build-out.
Additionally, of the total 2.4 million homes target, Tele Columbus has already passed 15% of these premises with fiber-to-the-building (FTTB) and fiber-to-the-home (FTTH) technology.
(2) Fiber Broadband Penetration
Secondly, Tele Columbus plans to generate returns on this fiber investment by increasing internet penetration within its PŸUR customer base. Notably, the company’s internet penetration, on its own infrastructure, currently stands at only 21%, which is very low.
Additionally, Tele Columbus plans to grow its internet penetration by offering its infrastructure as an open access wholesale fiber network. To this end, Tele Columbus signed a wholesale pre-contract with 1&1 Drillisch, for the company’s use of Tele Columbus’ network.
As Tele Columbus builds-out more fiber infrastructure, its network will become more competitive relative to portions of Deutsche Telekom’s network, which operates on VDSL technology, and that 1&1 Drillisch currently uses on a wholesale basis. Notably, 1&1 Drillisch’s ownership base includes key Tele Columbus shareholder, United Internet.
(3) Long-Term Customer Relationships
Finally, Tele Columbus holds 200k housing association concession agreements, which have a term, on average of 8 to 10 years. Specifically, billing for these concession agreements can be in bulk form, via the housing association. Alternatively, the billing can be on an individual contractual basis with the tenants and residents. Overall, this structure creates natural customer lock-in for residents to choose Tele Columbus as their internet service provider (ISP).