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Source: The New York Times | Fair Game, July 26, 2015 column


Business Day

Fidelity Seen as Muscling Investors Out of Upside in a Telecom Deal


JULY 24, 2015

As 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.

But as 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.

During 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 stock exchange.

Colt 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 own.

The 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.)

The bid translates to a multiple of seven times Colt’s earnings before interest, taxes, depreciation and amortization.

That’s 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 data centers, including Telx in the United States and Telecity in Europe, have received even higher multiples for their operations recently.

These 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.

Even 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.

Andrew 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 deal.

“Just 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.”

Vin 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.

But the unhappy Colt shareholders are not alone. The company’s independent directors have also expressed dismay at the bid.

In a 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.”

The 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.”

The 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.

But 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 2016.

“It has always been known that Fidelity is a long-term investor unwilling to sell its interest in the company,” Mr. Loporchio said.

This 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.”

The 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.

“We 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 amortization.

Maybe 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 Fidelity.

 


© 2015 The New York Times Company

 

 

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