Fidelity Seen as Muscling Investors Out of Upside in a Telecom Deal
JULY 24, 2015
steward of a
$5.2 trillion mutual fund and
asset management empire, Fidelity Management and Research promises to
treat investors fairly and put their interests first.
a private and controlling investor in the Colt Group, a small British
telecom company, Fidelity is taking a decidedly different approach,
some Colt shareholders say. They contend that the
mutual fund giant is putting its
own interests ahead of other Colt owners by forcing them to accept its
buyout offer for the company at a bargain-basement price.
The Colt Group, which generated
$1.6 billion in revenue last year, owns data centers and fiber-optic
and voice networks in Britain, elsewhere in Europe and in parts of
Asia. Fidelity, which has four seats on the Colt board, owns 66
percent of Colt’s shares, an investment it has held for decades.
the run-up to the early-2000s technology stock bubble, Colt was a
star, with its shares trading as high as 10,000 pence each. The stock
collapsed when that bubble burst, and for the last decade Colt shares
have rarely traded above 200 pence (about $3) in trading on the London
has been struggling: Its revenue declined 5.1 percent in 2014. But the
company’s fortunes may at last be turning, Colt’s beleaguered
shareholders say. And that’s why they are objecting to a 190-pence bid
Fidelity made on June 19 for the company’s shares it doesn’t already
bid, made by Lightning Investors Limited, a unit of Fidelity
Management and Research and Fidelity International Limited, values
Colt at $2.7 billion. On Aug. 11, shareholders will vote on an interim
step that would let the transaction go forward. The deal requires the
support of a majority of outside shareholders.
Fidelity has told Colt shareholders that its offer for the company is
fair, representing a 34.4 percent premium to the company’s average
closing share price over the previous 12 months. It will not increase
its offer, Fidelity says. (No independent fairness opinion was
provided on the deal.)
bid translates to a multiple of seven times Colt’s earnings before
interest, taxes, depreciation and amortization.
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a steal, minority Colt shareholders say. They point to recent
acquisitions of operations similar to Colt’s that were done at much
higher prices, between 13 times and 16 times earnings before interest,
taxes, depreciation and amortization.
Lightower Fiber Network’s
April merger with Fibertech
Networks is a prime example. That deal went for 13 times earnings
before interest, taxes, depreciation and amortization. Companies with
including Telx in the United
States and Telecity in Europe, have received even higher multiples for
their operations recently.
companies are not exactly like Colt, but the prices paid for them,
some of the minority shareholders say, reinforce the notion that
Fidelity’s is a lowball bid.
more disturbing, they say, is that Fidelity’s cheap bid emerged as
companies are buying up fiber networks across Europe. And the
shareholders wonder if the offer was made after the four Fidelity
directors saw internal signs that Colt was turning the corner.
Shortly after Fidelity made its offer, Colt announced a new business
plan that involved exiting information technology services and
refocusing on its core businesses. By jettisoning its money-losing
information technology operation, the company said, it expects to
begin generating free cash flow for the first time since 2011.
Sinwell, a longtime telecom investor and chief executive of N2 Capital
Management, a Dallas-based private investment firm that owns Colt
shares, is one of those who don’t like the timing or the price of the
when there’s light at the end of the tunnel for Colt’s minority
shareholders,” he said, “Fidelity is squeezing them out at a
below-market price so they can capture the premium for themselves.”
Loporchio, a Fidelity spokesman, defended the proposed deal. In a
statement, he said that the company believed its offer “fully and
fairly values Colt and reflects the anticipated plans of Colt’s
management for the business and its prospects.” He also noted that the
deal had support from two large Colt investors, Standard Life and
Ruffer L.L.P., investment managers in Britain.
the unhappy Colt shareholders are not alone. The company’s independent
directors have also expressed dismay at the bid.
letter to Colt shareholders, those directors, who were advised by
Barclays, said they believed Fidelity’s offer “undervalues the company
and its prospects” and said they “consider that the financial terms of
the offer are not fair to the independent shareholders of Colt.”
independent directors went on to say that they believed that a sale of
the company to a third-party purchaser with a strategic interest in
Colt’s assets “could potentially achieve a price significantly higher
than the offer.”
dissenting Colt shareholders agree that an auction of the company,
where a number of interested companies could make their best offers,
is the right thing to do.
Fidelity has slammed the door on this possibility. In its bid it noted
that it would not sell its shares to any third party before December
has always been known that Fidelity is a long-term investor unwilling
to sell its interest in the company,” Mr. Loporchio said.
decision hurts Colt’s outside shareholders, Mr. Sinwell said. “In this
situation where Colt is an illiquid stock, it’s difficult for a white
knight to show up and protect the minorities.”
independent directors concede that some shareholders, tired of waiting
for a turnaround at the company, might support Fidelity’s offer.
Because Fidelity’s acquisition of the minority shares in Colt would
not be an acquisition of control, the spokesman said, the transaction
is not comparable to typical mergers and acquisitions, which include a
premium for control. He questioned the comparison to the Lightower
deal and others done at similar price-to-earnings ratios.
also strongly disagree with the multiple range of 13 to 16 times
Ebitda” for the company, Mr. Loporchio said.
Instead, he said, the best comparable transaction was the 30 percent
purchase of Interoute, a European
network operator that’s 70 percent privately held. That deal went for
seven times earnings before interest, taxes, depreciation and
so, but that isn’t stopping many Colt shareholders from suspecting
that Fidelity is trying to grab the company’s upside potential for
itself — and using strong-arm tactics to do so.
A version of this article appears in print on July 26, 2015, on page
BU1 of the New York edition with the headline: Good Deal, at Least for
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