Take-over of Versatel Telecom Positive outcome of bid by Tele2

Take-over of Versatel Telecom
Positive outcome of bid by Tele2 doubtful
Research report by BeursZout.nl
to support the initiative of TeleNo
August 11, 2005 (v. 1.2)
Index
Introduction
A. Valuation on basis of sector comparison.
Versatel experiences explosive growth.
European peer group.
Basis for valuation.
Net liquidity
A.1. Valuation of Versatel Telecom.
A.2. Valuation of Versatel Germany.
A.3. Conclusion.
B. Valuation on basis of recent take-overs.
B.1. Take-over value of Versatel Telecom.
Conclusion.
Progress 2005.
B.2. Take-over value of Versatel Germany.
B.3. Conclusion.
C. Valuation of independent Versatel.
C.1. Quarterly earnings above expectation.
Quarterly earnings above expectation.
Outlook.
C.2. Prognosis 2005-2010.
Method and assumptions.
Take-overs.
C.3. Conclusion.
D. Closing remarks
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Introduction
This report has been prepared to support the initiative of the Special Interest Group TeleNo. For more
information concerning the initiative of this group see www.TeleNo.nl and www.TeleNee.nl.
The press release of July 18 2005 concerning the intention of the Swedish telecom company Tele2 to
make a take-over bid on Dutch Versatel telecom International N.V. (Euronext: VRSA) forms the basis for
the preparation of this report.
The press release mentions the intended offer by Tele2 of approx. € 1,340M in cash on all outstanding
shares (519M) and convertibles bonds (€ 125 nominal). The offer represents a value of € 2.20 per share.
Subsequently, including the cash position of € 260M as of March 31 2005, the enterprise value is
determined by Tele2 at € 1,130M.
As part of fore mentioned transaction Tele2, Apax and Versatel have reached an understanding about the
immediate resale of Versatel Germany by Tele2 to Apax for approx. € 565M.
The board of Versatel, as well as major shareholder Talpa, supports the offer. TeleNo rejects the offer on
the basis of the quality of the recommendation by the management of Versatel.
The offer implies an amount of € 1,140M for the shares and € 200M for the convertible bonds of € 125M.
Excluding the means as obtained from the bonds Versatel’s net cash position per 12/31/2004 was €
144M. As of June 30 2005 this was € 128M.
Fig. 1: Proposed take-over bids Versatel
The value of Versatel and Versatel Germany has been investigated separately on the basis of fully
transparent, verifiable and factual information.
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A. Valuation on basis of sector comparison.
Versatel Telecom is an alternative telecommunication company with her own network at her disposal. By
the end of the nineties the expectations with respect to this sector were extremely high and stock market
valuations were running as high as 100x gross revenues, despite enormous losses and high debts levels.
At one point in time, Versatel was valued at 6 billion euro. However, high investments related to building
networks in full ownership did not result in the timely and rapid revenue growth as expected and brought
most of these companies on the brink of bankruptcy.
A number of companies managed to avoid bankruptcy by a timely financial restructuring and conversion
of bonds in additional shares. Versatel went through this process during the course of 2002. The holders
of bonds with a total value of € 1,700M received, in addition to 80% of the company’s shares, an amount
of € 340M in cash. The operation lead to a large dilution of shares but as a result Versatel could continue
her operations debt free.
The rapid growth of broadband Internet, VPN, VoIP and additional multi-media products, offer the sector
strong opportunities for growth. In particular to those owning the network that is being utilised
Versatel experiences explosive growth.
Since the completion of the financial restructuring Versatel’s business performance increased rapidly. In
2002 Versatel realised gross revenues of € 295M and reported net losses of € 695M. Today gross
revenues are approx. € 784M with increasing margins and the first profits have been reported. Since the
end of 2002 the quarterly revenue grew with 130% from € 83M to € 191M. From 1999 revenues grew
1100%.
Alternative telecom provider Versatel in The Netherlands is currently winning more new customers in the
business IPN/VPN market than the incumbent ex-monopolist KPN. Successful acquisitions in Germany
multiplied revenues, especially in the residential market. For the first time in the company’s history,
revenues of Versatel Germany last quarter were higher than from the operations in The Netherlands and
Belgium combined. Due to the enlarged foot print of Versatel’s network in Germany a similar trend is
noticed: most recently winning the prestigious contract of the German Parliament. Successful acquisitions
in Germany multiplied revenues, most noticeably in the residential market.
Fig. 2. Strong development operational results.
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Fig. 3. Operational results from 2002, with projection for 2H 2005.
European peer group.
The “peer group” of Versatel consists of public European alternative telecom companies with their own
high-speed network. Due to the ownership of that network higher margins are achieved than companies
such as CSP/ISP’s such as Tele2 or Tiscali. This is reflected in higher valuations.
Colt Telecom
Completel
Fastweb
Jazztel
QSC
Versatel Telecom
Country
England
France
Italy
Spain
Germany
The Netherlands
Index
FTSE 250
IT.CAC
Techstar
IBEX NM
TecDax
AEX
Ticker
CTM.L
CPT.PA
FWB.MI
JAZ.MC
QSC.DE
VERS.AS
Isin
GB0004246996
NL0000262822
IT0001423562
XS0158658228
DE0005137004
NL0000391266
Fig. 4. Growth in the alternative telecom sector.
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Basis for valuation.
For the peer-group multiples have been calculated for: revenue, gross profit and EBITDA, on the basis of
the operational results over 2004 and the actual market capitalisation as of August 1, 2005. The average
of multiples leads to a representative valuation for the sector.
Fig. 5. Multiples of the European “peer group” and calculation of sector average.
Note: As Jazztel and QSC in 2004 were not, or hardly, profitable, the P/EBITDA multiples have been
adjusted as follows:
• for Jazztel to 40 as if EBITDA was € 22.5M positive, in stead of € 10.1M negative, or as if
EBITDA margin was 10.9% in stead of -4.9%;
• for QSC to 30 as if EBITDA was € 12.6M positive, in stead of only € 0.9M positive, or, as if
EBITDA margin was 8.6% in stead of 0.6%;
The modifications ensure a conservative outcome of the sector average.
Net liquidity.
Because the net cash position is an important factor in the valuation of a company the multiples have also
been calculated with that function in mind.
High debts of a company such as Colt Telecom explain to a large extent why the company is optically low
valued. Per share of 60p, the company is 50p in debts. For Versatel and other peers the consolidated
balance sheet shows quite different ratios.
Cash from bonds have been eliminated in the determination of the net cash position as they influence a
fair comparison. For Versatel it means using a net cash position of € 144,5M per 12-31-2005 as opposed
to the reported cash position of € 269,5M.
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A.1. Valuation of Versatel Telecom.
Conversion of the multiples for the sector to a comparable valuation for Versatel leads to a value of €
2,100M or € 4.10 per share, see fig. 6. When incorporating the net liquidity of the company, the results
for Versatel are € 2,600M or € 5.00 per share.
These amounts are on a direct comparison basis, excluding a possible take-over premium.
Fig. 6. Valuation Versatel Telecom on the basis of their peer group.
A.2. Valuation of Versatel Germany.
The graph below gives an indication of the high growth level of operational results of Versatel Germany.
Fig. 7. Strong growth of Versatel Germany.
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Because of the recent acquisition of Berlikomm, which significantly contributed to the higher margins and
growth of Versatel Germany, the results for the 1H2005 have been taken into consideration and for
2H2005 a conservative projection has been made. See figure 8.
e
Versatel Germany shows excellent growth during the period 2003-2005 :
• revenue from € 78M to € 402M (+418%);
• gross profit from € 36M to € 232M (+538%);
• EBITDA from € 0.4M to € 96M (+25900%).
Fig. 8. Operational results Versatel Germany, period 2002-2005.
The fair value is calculated on the basis of the above. See figure 9.
Fig. 9. Valuation Versatel Germany.
The value of Versatel Germany is € 1,600M. An IPO of Versatel Germany would most likely bring this
value to surface.
Specific circumstances of Versatel Germany:
• penetration of broadband Internet in Germany is well below the European average. This implies
much room for growth;
• market share by cable companies is relatively low;
• costs of use of the “last mile” are relatively high, despite recent price reductions. Under pressure
by RegTP, the German regulator, a further drop in prices is likely which will result in improved
nd
margins for alternative telecom providers as related to the use of the DT infrastructure. The 2
quarter results already show the positive effects for Versatel Germany;
• Versatel Germany holds € 295M in tax return benefits due to losses over the past years.
A.3. Conclusion.
Despite the fair take-over premium as stated by Tele2 which is included in the offer of € 1,130M, a sector
comparison proofs the offer to be far from realistic.
The value of Versatel Germany alone amounts to € 1,600M and for Versatel as a whole € 2,600M, if the
net cash position is taken in to consideration.
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B. Valuation on basis of recent take-overs.
Recent years showed a rapid increase in consolidation. Economies of scale and cooperation offer many
advantages. An increased foot-print offers benefits to business clients through improved quality of the
selling proposition. A wide geographical coverage guarantees a combination of higher gross margins and
rapid revenue growth. Internet providers (ISP) and/or telecom companies without their own network
(CPS) such as Tiscali and Tele2 will encounter more and more problems in sustaining the continuing
price pressure by competitors. This is also the reason that Tele2 would like to take over Versatel. The use
of Versatel’s modern ADSL2+ infrastructure creates a synergy valued at € 50M p.a. states Tele2.
B.1. Take-over value of Versatel Telecom.
Table 10 below gives an indication of recent take-overs in local currency. In the following table 11 the
amounts have been converted to euros.
Fig. 10 Recent take-overs of alternative telecom companies in local currency.
Fig. 11. As Fig 10, converted to euros and with calculation of average.
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Conclusion.
The average multiples for take-overs were in 2004 and 2005: revenue at 3.80 and EBITDA at 21.82. The
trend is rapidly upwards. The multiples in 2005 were well above earlier years. However, for this report the
conservative average over 2004 and 2005 has been used as a point of departure (see fig. 11).
For Versatel a take-over valuation of € 2,432M or € 4.69 per share seems in line in comparison with its
peer group. See table 12.
Fig. 12. Take-over value of Versatel on the basis of realisation 2004.
Progress 2005.
By now the results of Versatel for the first half year 2005 are known. During 1H2005 revenues topped €
368M. On the basis of 5% autonomous growth for Q3 and Q4 (Q2 + 7.6%), total annual revenues of €
780M (+30%), excluding Triple Play income, may be expected. See also figure 3.
The EBITDA will be under temporary pressure due to the investment in Triple Play and the upgrade of the
network to ADSL2+. With an EBITDA of € 78M during 1H2005 the corporate guidance of € 115M for the
full year is maintained in the valuation calculations. We believe this approach to be conservative.
Projection for 2005 leads to a reasonable take-over price of € 3,282M or € 6.30 per share, see table 13.
E
Fig. 13. Calculation of take-over value on the basis of 2005 .
B.2. Take-over value of Versatel Germany.
Recently Versatel Germany signed a contract with Celox to further increase her foot-print. Versatel
Germany can proceed along its defined strategy with strong autonomous growth and careful acquisitions.
There are sufficient opportunities available for consolidation through acquisitions and joint ventures.
Versatel Germany makes an excellent example. In July, special interest group ADVC acclaimed Versatel
the most attractive Internet Provider across 3 market segments. Versatel is most innovative. In April
Versatel was the first company to launch high speed broadband for the residential and business market.
Well before Deutsche Telekom. For that achievement Versatel received the industrial award by the
‘Deutsche Internet-Kongress’ on July 29.
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The fair value take-over price of Versatel Germany is € 1,800M (see table 14). This price is determined
with the incorporation of a reasonable premium consistent with a value of € 1,600M as calculated on the
basis of the market capitalisation of comparable telecom companies.
Fig. 14 Calculation take-over value Versatel Germany.
B.3. Conclusion.
On the basis of the performance up to 2004E, a fair take-over price for Versatel Telecom is € 2,400M or €
4.48 per share. When the strong performance of 30% growth during 1H2005 is taken into consideration
we arrive at a value of € 3,200M or € 6.30 per share.
This price is decent in comparison with the recent take-overs in 2005 like Bredbandsbolaget and Web.de.
In those cases much higher multiples were paid.
The proposed bid by Tele2 of € 1,140M stands in great contrast with recent take-overs. Versatel
Germany alone must be valued at € 1,800M, including a take-over premium on the low side.
The price of € 565M for Versatel Germany, which has been agreed with Apax, is unrealistically low
considering today’s market valuations.
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C. Valuation of independent Versatel.
C.1. Quarterly earnings above expectation.
The quarterly earning as reported on August 3 took the analysts by surprise. Thijs Berkelder of Petercam
referred to the numbers as ‘fantastic’ and René Verhoef of Fortis Bank said the results to be “ammunition
for those who oppose the offer”.
The autonomous quarterly growth of 7.6% at a consensus of 2.8% was well beyond expectations.
Analysts expected a net loss of € 15M but the earnings report showed a very surprising net profit of €
1.8M, in which was included however a € 1.4M tax credit, but also about € 4M extra expenses for
marketing Triple Play.
Besides a profit of € 1M the first quarter of 2003 (due to a one-time gain of € 19.3M), this was, after many
years of investments, the first time ever for the company to report net profit. Due to planned
expenditures, soccer broadcasting rights and investments related to Triple Play a net profit is not
expected to be repeated for the coming quarters.
The on-net part of the revenues grew faster than the gross revenues and subsequently continue to raise
the gross margins to an exceptional good level of 55.9%; the core driver of Versatel’s business model.
Handling the majority of the revenues via their own network leads to rapidly increasing profits as the cost
base is relatively fixed. With the overcapacity available on the Versatel network this provides adequate
growth perspectives for the future.
Versatel intensified the already high investment in autonomous growth to € 66M or 35% of revenues. This
high investment level is unique but investments in growth, in a period of consolidation, is a logical
strategy. A large part of the extra investments is paid from free cash flow from operations. The latter
increased from 1H 2004 to 1H 2005 from € 35M to € 88M.
C2. Prognosis 2005-2010
The graph below shows the operational results from the year 2000 with an extrapolation for the period
mid 2005 until 2010. The extrapolation is justified in Fig. 16.
Fig. 15. Realisation Versatel 2000-2004 with projection 2005-2010.
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Method and assumptions.
The valuation in this section is based on a methodology with exclusion of the effects of Triple Play. Those
effects are currently difficult to quantify, in particular because of the number extra ADSL2+ and soccer
broadcast viewers that can be added on the basis of that innovative project. For the coming period Triple
Play is an uncertain factor in the consistent underlying operational performance as seen over the past 5
years. Especially that element would we like to make visible for the next 5 years.
However, if Triple Play becomes the success that is expected with 500,000 subscribers in 2008 it will be
an enormous cash machine. In the worst case about € 120M could be lost. That is not considered
significant for the valuation as a going enterprise for the future. The investments for the upgrade of the
network will keep their value and generate additional revenues. It is the initial expenditure for Triple Play
and soccer rights that is not off-set against revenues in the start-up phase and will reduce EBITDA and
net profit on the short term. Despite the substantial investments for Triple Play the business plan is fully
financed with € 270M in cash as confirmed by Versatel. There are no risks with respect to continuity.
Fig. 16 Realisation 2000-2004 with projection 2005-2010.
Comments accompanying Figure 16:
•
•
•
•
•
The 2005 estimate used factual data for the first half of the year (see Fig. 3).
The period 2006 – 2010 will most likely show a decrease in speed of revenue growth. The past
quarter autonomous growth was 7.6% or 34% on an annual basis. For 2005 it is expected to be
30% and from there onwards decreasing to 15% growth in 2010.
As was the case in the past, the gross profit may, on account of a gradually increasing margin,
grow slightly faster than the revenues. Was the gross margin in 2000 only 26%, currently it is
56%. As the on-net part of the revenues continues to grow the gross margin could continue to
rise to 61%. At this point in time Versatel Germany has a gross margin of 58%. That could grow
to 63-64%. In Belgium, where the activities are limited in size and gross margins relatively low at
38.4%, the gross margins should eventually move towards a corporate average of 56%.
In 2000 the Ebitda loss was nearly as large as revenues, but over 2002 Versatel realised a
positive Ebitda margin of 6%. By 2004 the Ebitda margin had increased to 19.7% and over the
past quarter to 21.1%. The gradually increasing Ebitda margin at a rapidly growing income,
resulted in a solid growth of Ebitda margin of 56% by 2004. That included the take-over of
Berlikomm. The coming years it is expected that the Ebitda margin will continue to rise. In our
estimate an extrapolation to 28% in 2010 is on the careful side. That could lead to a positive
Ebitda of € 565M in 2010.
In the estimates we assume that the investments will remain relatively high over the coming years
and will continue to grow slightly on an annual basis. As a percentage of revenues they could
drop significantly as a lower growth requires a lesser investment in the initial connections costs of
new customers.
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•
The fast growth of the positive Ebitda, at relatively constant depreciation and neglectable interest
(at one point in time the bonds will be converted) will lead to an extreme growth in net profits over
the coming years. At first stronger due to NOL tax benefits while in later years taxes will have to
be paid. This makes a net profit of € 300M in 2010 a real possibility.
Take-overs.
Take-overs are excluded from the extrapolation method. If opportunities present themselves, take-overs
will most likely add to a wider geographical presence and, on the basis of "economies of scale”, add to
net profits growth per share.
C.3. Conclusion.
Although the autonomous growth will most likely gradually decrease over the coming years, the
extrapolation method shows that annual revenues of € 2,000M can be realised by the year 2010. With a
slight increase in gross margin to 61% (from the current 56%) and an Ebitda margin of 28% (now 21%),
probable annual net profits after tax would be in the € 300M range.
An Ebitda margin of 35% is not uncommon among mature telecom companies. In that case the net profit
will be more than € 400M in 2010.
As Versatel will still be a company with significant growth, a market capitalisation of € 6,000M at an
assumed earnings/share ratio of 20 could be realised 5 years from now. This is the same value the
company reached 5 years ago. However, in 2000 that valuation was absurd with annual revenues of €
50M and € 1,700M in debts. Five years from now not any more. Considering the conversion of bonds and
stock option plans the number of shares could increase to 600M. That means that by 2010 a share price
of € 10 could be in reach.
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D. Closing remarks
This report attempts to demonstrate in a fully transparent, verifiable, logical and pragmatic approach that
an offer bid of € 2.20 per share is far below the acceptable fair value of Versatel Telecom International.
The results of the calculations are consistent. As a public company a going enterprise value of van €
2,100M or € 4.10 per share is considered to be in line with the market. Even as high as € 2,600M or €
5.00 per share if one considers the net cash position of the Versatel in relation to her peers.
As a take-over candidate an offer from € 2,400M or € 4.70 seems reasonable. Versatel Germany is the
crown jewel within the holding with a going enterprise value of € 1,600M and take-over value of € 1.800M.
After balancing the cash position of € 260M, the benefits of fiscal losses of Versatel Belgium over the
previous years for a total amount of € 179M, and the € 565M from Apax for Versatel Germany,Tele2
would purchase a company that generates € 50M in synergy benefits for close to nothing.
With The € 565M as agreed with Apax for the resale of Versatel Germany, the German operation is under
priced beyond believe. Further to the above, Versatel Germany holds € 295M in tax benefits due to
losses over the past years.
A take-over of Versatel demands a fair premium (approx. 20%) on top of the value as a going enterprise.
Not on the basis of an incidental low and fluctuating stock price since the financial restructuring, despite a
very stable operational development of the company. We would like to add that Versatel has her own
network and is leading as an innovative player in her sector. Whereas some companies are not profitable
at EBITDA level, Versatel is at the brink of writing structural net quarterly profits and is leading in
percentage growth and high margins. This would justify a higher premium at take-over.
Since October of 2003 the share price did not rise. The poor performance of the stock stood in no relation
with the strong operational improvements but, most likely, more with the remarkable trading methods of
the major shareholder. Talpa obtained a significant interest during the course of 2003 to sell again in
2004 which resulted in a sharp dip in the stock price. Talpa obtained a much larger share in Versatel of
42% soon after that. Once more Talpa would like to cash in on her interests. Talpa’s behaviour is more
that of speculative trader than a long term shareholder.
The proposal by Tele2 of July 18 means that despite the positive developments in 2005, a premium of €
0.07 (+3%) on top of the stock price in early 2005, while the AEX index moved up nearly 15%. It is
incomprehensible that the management of Versatel deems it appropriate to issue a positive advice.
Many shareholders who bought at € 10 and higher before the restructuring see their loyalty unattended.
At the point that the time has come to harvest their long term perspective and potential is denied. A long
term perspective of a market capitalisation of € 6.000M or € 10 per share within 5 years represents
excellent potential.
The value of Versatel Germany exceeds the offer by Tele2 by multiples. If the major shareholder is really
looking for an exit strategy there may be other and better possibilities. One could try to place the interest
with Investment Banks. Seeking an IPO for Versatel Germany might well be a proper means to realise
true shareholders value and could provide the means to buy out Talpa for € 2.20 per share. The
management seems to have neglected the various options as offered by the market at large to increase
shareholders value.
The question remains why the share price of Versatel dropped sharply after the purchase of the 42% by
st
Talpa and in the running up to take-over talks. Despite positive 1 quarter results, many positive signals
from Germany and a successful presentation concerning the roll-out of Triple Play. Question marks are
nd
placed with the proceeds and the way one tries to break-up the 2 telecom company in The Netherlands.
Versatel seems to become a victim of creative haute finance. Unless the remaining shareholders block
the take-over offer.
©BeursZout.nl, prepared to support the initiative of www.TeleNee and www.TeleNo.nl, August 11, 2005.
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This report has been created with the greatest care and accuracy. The figures referred to in this report are derived from original
corporate websites. BeursZout does not accept responsibility for errors, interpretations or consequential damages from actions or
statements based on information in this report.
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