Tele Columbus AG (TC1) Earnings Call Transcript & Summary

Hi, everyone. Ladies and gentlemen, thanks for dialing in shortly before Christmas. It's my pleasure to welcome you in the name of Tele Columbus management team to our -- today's conference call following the publication of the voluntary public takeover offer. This call is limited to 60 minutes. If you came with any follow-up questions, Manuel and myself are available to discuss. I'm here today with Daniel Ritz, our Chief Executive Officer; and Eike Walters, our Chief Financial Officer. Now I would like to remind you that if any lenders or rating agencies are on the call right now that this is a public conference call in which only publicly available information will be discussed. I would therefore ask you to refrain from questions containing information not belonging to the public domain. This conference call is intended for capital market participants only and not for press representatives. If any journalists are on the line right now, we would highly appreciate if you were leaving the conference call now. Press representatives are welcome to call my colleague, Sebastian Artymiak, to discuss any outstanding questions. Please be aware that there might be a delay between the slides and the webcast and the voice transmission. Moreover, due to the current situation, it might have happened that there's a different manner when it comes to Q&A later on normally. Having said that, it's my pleasure to hand over to you, Daniel. The floor is yours.

Thank you, Leo. Good morning or good afternoon, everyone. Warm welcome also from my side shortly before Christmas. Sorry to bother you at this time of the year, but we have some very good news to announce today. We're excited about it that we have a short presentation for you to take you through the highlights of what we have announced early this morning. As you're well aware, we have developed our Fiber Champion strategy, which calls for a significant and a very large investment into fiberizing our footprint. We have presented the highlights of this during our Q1 presentation. Later on, during Q2, we gave you some more color on the Fiber Champion strategy. And we have, at that time, said that we would come back to you with a funding update on how we want to fund the strategy and delever the company within calendar Q4. This is still happening within calendar Q4. So we're very happy to talk to you today about our achievements over the last couple of weeks and months. So we have run a very extensive and very thorough evaluation of our multiple funding options, and we have gone through a competitive process. We have reached out quite a while ago to, I would say, around 10 potential investors, and we have gone through a multistage process. And we have, and I'm happy about that, reached an agreement with Morgan Stanley Infrastructure Partners and United Internet to finance the implementation and execution of our Fiber Champion strategy. To this end, an existing investment vehicle, and here named BidCo, currently 100% owned by Morgan Stanley Infrastructure Partners, intends to launch a public takeover offer to all the shareholders at what we see as an attractive price of EUR 3.25 per share. Mind you, this is a bit more than 37% premium over the 3-month volume weighted average price. United Internet, our anchor shareholder, will contribute its minority interest of 29.9% to the BidCo if the offer is successful. Morgan Stanley Infrastructure Partners, however, will always be the majority owner of the BidCo. Once we're done with the transaction, Tele Columbus will seek to obtain shareholder approval for a subscription rights capital increase of EUR 475 million, which is backstopped -- which BidCo has agreed to backstop to the full amount. Which means that if we go ahead with the capital increase following the completion of the offer, we will, as a company, have a capital inflow of EUR 475 million. This will be used for 2 things: one, to delever the company, which today, as you know, is levered more than -- around 6x EBITDA. Our aim is to lever it below 5x EBITDA, so more than 1x down. And secondly, we will also then start funding the execution of our Fiber Champion strategy. Furthermore, we're very happy that BidCo has agreed to inject an additional equity of EUR 75 million, again guaranteed to further accelerate the implementation of our strategy. Lastly, also, we have, over the weekend, signed a binding wholesale precontract with [indiscernible], which is a very good achievement and further validates our open access strategy. Mind you that this precontract is subject to closing of the transaction that we have announced today. These are the key messages. On Page 2, just by way of reminder, we have shown this to you during Q1 at a high level. This is the 3 pillar strategy, our Fiber Champion strategy, which calls for a total network investment of around EUR 2 billion over the next 10 years. This strategy has been validated by the investors in BidCo. They're fully supporting it. They're fully behind it. So nothing has changed in this regard. We now just have the means or will get the means to actually fund it. On the left-hand side of Chart 3, you -- we have plotted again what we showed you during Q2 where we said now that we're done with the strategy, we're looking for -- we're evaluating funding options to delever and to fund the growth plan. And we have told you at the time that we're in the process of evaluating multiple funding options and that we would get back to you with a comprehensive funding update during calendar Q4, which is exactly what we are doing today. On the right-hand side of the chart, again, by a way of reminder, we have run a competitive process, as I just mentioned, of multiple potential investors, and we have reached, and I'm very happy about that, the agreement with Morgan Stanley Infrastructure Partners and United Internet to support us in executing and founding the Fiber Champion strategy and in delivery. Here, the key Page 4, which shows you the key transaction parameters and the structure overview. So as mentioned already, a public takeover offer to all shareholders with a price of EUR 3.25 per share. As mentioned before, 3 months volume weighted average price premium of 37.5% and also the premium to the share price the day before the AGM invitation on 7th December of around 41%. This offer values the equity of Tele Columbus at around EUR 450 million. If you add to this the current net debt of a bit more than EUR 1.4 billion, you get to an implied enterprise value of EUR 1.834 billion. This corresponds to an EBITDA multiple Q3 '20, last 12 months, of 8.1x and an operating free cash flow multiple of the same parameters of 23.9x. Also worth mentioning that our second largest current shareholder, Rocket Internet, which currently stands at around 13.36% of Tele Columbus share cap, and has agreed irrevocably to tender its shares into the takeover offer, which is being announced today. There are 3 main offer conditions: one, a minimum acceptance threshold of 50%. I'd like to explain that the 50% does include the 29.9% of United Internet, which will be rolled over if the transaction is successful. And of course, it also includes the 13.36% Rocket Internet has agreed to tender irrevocably. So as of today, we're already at slightly north of 43%. There's another -- a bit less than 7 percentage points that are missing to reach the acceptance threshold of 50%. Second offer condition is a waiver by bond and loan creditors of termination rights due to change of control in sufficient numbers, which means that what -- we would have to pay back for those who are not agreeing to waive their rights needs to be less than what we have as an inflow in terms of the capital raise. We're quite confident that this also -- this condition can be met. And lastly, the customary regulatory and cartel approvals, which, in this case, should not be an issue as there is no market concentration happening due to this transaction. Once the offer conditions have been satisfied and the transaction has closed, there's going to be a rights issue to be launched, a subscription rights issue around May 2021 for EUR 475 million, which, as we have said, is backstopped by BidCo. And then later on, at a date still to be determined, an additional EUR 75 million, again, backstopped up to the full amount by BidCo. There's going to be no DPLTA required. None of that is foreseen and required. So that's also good news. On the right-hand side, you can see the structural overview following the successful settlement of the public takeover offer. Starting from the bottom, Tele Columbus AG, which will be majority owned if the offer condition has been met by BidCo, which in turn will be majority-owned by Morgan Stanley Infrastructure Partners and minority owned by United Internet. And there's always going to be the remaining free float that still is in there and does not have tendered shares. That's basically the structure. In terms of timeline, so this is announced today, but still a few months out until we actually do have the capital inflow from the capital raise. Starting at the top with the public takeover process, following the signing of an announcement of the transaction today, we're expecting the publication of the offer document of the BaFin review and launch of the takeover offer beginning of the offer period around in January. This will take 6 plus 2 weeks. So the end of the offer period is expected end of March. And if the offer is successful, then -- the public takeover offer is successful, then we will launch the capital raise. There's going to be an AGM to approve the rights issue backstopped by BidCo on 20 January. This will be followed by the launch and execution of the change of control waiver process during the month of February. And if everything then goes as per plan, in May, there will be the launch of the rights issue to inject the envisaged capital of EUR 475 million. This is when we will have additional capital available within the company. And there's going to be an additional equity injection of EUR 75 million further on to accelerate the implementation of our strategy timing, still to be determined. So in conclusion, we are strongly convinced that this is a win-win transaction for all stakeholders. For our shareholders, this is an opportunity to sell the shares at what we believe is an attractive price of EUR 3.25 per share, and they will get full liquidity as of the completion of the offer and will be released to further funding obligations. Secondly, there is no need to inject significant capital, as I just mentioned, or be diluted as a result of the significant capital increase, which we're planning thereafter and which is required to execute and implement our Fiber Champion strategy. For the bondholders and lenders, this is also, in our view, good news because they will benefit from a delayered capital structure due to a significant reduction of our net debt and the partial repayment of the outstanding instruments. And we also expect that this should have a positive impact on the ratings that Tele Columbus has. For our customers, they will -- there are 3 -- actually 3 groups of customers. They are the housing association customers. There are the end customers living in the apartments of the housing associations. And of course, also our B2B customers. And we should also not forget our partners, our wholesale partners. There are now 2 of them, or going to be 2 of them and possibly more. They will benefit from the accelerated investment into fiber optic networks. And our tenants, the tenants living in these apartments will benefit from multiple choices of internet service providers, thanks to having -- being able to access either the PŸUR brand or the brand of our wholesale partners. As mentioned, we plan to invest significantly into our network over the next 10 years. And last but not least, also, this is a good news and a good day for our employees because the investment and deleveraging ensures a long-term sustainable company and provides a great perspective for all, and we will remain a stand-alone company. That concludes our short presentation. Thank you very much. We'll now hand over to the operator for questions.

[Operator Instructions] And the first question is from James Ratzer.

Congratulations on the transaction. I had 2 questions, please, specifically. The first one was, just love to understand a bit more about the new build that you are planning now over the next 10 years, EUR 2 billion for 2 million homes. Does this include also the cost to connect the homes as well as to pass them? Just be interested to hear about how we should think about the connection cost as well. And where are you thinking about buildings? It seems like it's becoming quite a kind of crowded area. Are you looking at areas that don't have existing cable coverage from Vodafone? Are you thinking about some of the white spot areas? Just be interested to hear about that. And then the second question I had, just would love to get your response, please, to the new draft that we've seen as the telecoms law and how you feel that actually affects your existing core business, especially this proposal to change contract length to 2 years? Does this put some of your housing association contracts at risk?

Thank you, James. Well, so first of all, on the CapEx envelope. So the EUR 2 billion that we have mentioned over the next 10 years is network investments. So that includes layer 3, layer 4, layer 2 and also backbone, right? So it's not just the cost to connect because, I guess, you've probably done the math and you've divided the amount by the number of homes, and you've come the conclusion this is quite expensive. Actually, the opposite. We've given you -- I think, last time or the time before, we've given you a number of FTTP cost to connect of around EUR 400 to EUR 500. So that math doesn't stack up for you. I can understand where your question is coming from. So one, this is not just layer 3 and layer 4, but also layer 2 and backbone. And therefore, the cost to connect remains at the level that we have mentioned in previous presentations, nothing has changed there. In terms of where, maybe I wasn't very clear. We're not deviating from our previous strategy. We're going to overbuild ourselves in the existing footprint. So we're not going to white spots. This is overbuilding ourselves where we today have cable, we'll drive fiber first to the building and then to the home over time to have a great fiber network in our existing footprint. And then to generate returns on that fiber investment by driving up Internet penetration within that network, which today, as you may remember, stands at around 21% average, which is very low. But on the flip side of that, provides significant upside in terms of additional IP penetration through both retail, reinforced and wholesale. And lastly, on the telecoms law. Look, so we have obviously also seen the broader draft that has been published. Mind you, this is still draft legislation, nothing more than that. The contract length of the housing association contract is not actually affected by the law. What they're talking about is to have a transition period, kind of a grandfather rights period of 2 years rather than 5 years, which was initially mentioned or spoken about when this was first mentioned. So there's no impact on the housing association contracts. And I should also like to clarify that even if the law gets passed, what changes is the way these CATV services are being built. So you can no longer build them in bulk with the housing association. You have to have individual contracts with tenants, but the concession agreement as such and its length, which on average is 8 to 10 years, is not affected by that telecoms law.

And there are currently no further questions. [Operator Instructions] And the next question is from Christoph Stefan.

Congratulations on the transaction. I just have one question on the proposed deleveraging. Do you have any plans yet on how you will use the proceeds? I mean you have a couple of different instruments. I mean, are there any instruments that will be sort of favored over others? Or will it all be applied pro rata?

Thank you, Christoph. Very good question. Unfortunately, it's a bit early to answer this question. I think debt level below 5 is something which is sustainable for Tele Columbus, but we don't have any precise plans by now.

And the next question is from Mr. [indiscernible], [indiscernible] Capital.

[indiscernible] calling. You mentioned that this is a win-win situation for all shareholders. But clearly, I can say or I have to say, it's definitely not a win situation for the existing minority shareholders. So I think you have -- you missed that point to sell the infrastructure 1 year ago for more than EUR 2 billion. So I think the only winners are United Internet, the Samwer brothers and Morgan Stanley and not the other investors. Can you elaborate in detail of how competitive this process went in the last couple of months, given that I think the outcome is not very satisfactory for the existing shareholders? That's the first question.

Thank you, [indiscernible]. Daniel here. Yes, look, so obviously, I respect your views. Well, there is 2 parts to your question. I think one is whether we missed an opportunity to sell the infrastructure a year ago and the other one is about the competitiveness of the process. Let me start with the first one. As I mentioned already at Q1 and Q2, we have evaluated several options, including the one that you mentioned. And I don't call this a missed opportunity because when you look at it in a bit more detail, the carve-out of the NetCo and the ServCo would have been a very complex exercise with lots of uncertainties. One would have to have not just done the carve-out, but also to transfer lots of contracts. So you would have to have established service agreements, which are obviously -- raise potential conflicts of interest in terms of governing them. Secondly, I would have envisaged or we would have envisaged a very complex governance, one, a listed HoldCo which owns 100% of ServCo and X percent, whatever, of NetCo. We have an investor in Netco. I imagine a very complex governance structure that would have followed this. And lastly, the carve-out would not have just been a very long and complex process, but also triggered possibly significant tax implications of unknown quantities, but possibly very large. So we have, therefore, decided against it. And secondly, there has been no external validation by binding offers post due diligence of the numbers that have been contemplated in the press. So that's on the TowerCo. Now on the competitiveness of the process, as I mentioned, we have reached out initially to 10, I can say that number, 10 potential investors. And we have gone through multiple stages. That's also why it's taken quite some time, right? We had a lot of people asking why are you taking so long. Well, this is a complex process. It's gone through multiple stages. We've done it properly and thoroughly. But I hope you understand that we cannot disclose no details of who was involved eventually, but the initial number that we reached out to was 10.

And the next question is from Mary Pollock, CreditSights.

I'm sorry if this is a simple question. It's just not -- I want to be clear on this. So for the tender offer to be successful, that is what is required for Morgan Stanley to fully backstop the rights issue. And just so I'm clear on this. For the tender to be successful, what exactly does that mean? How many minorities need to agree to tender their shares for Morgan Stanley to be successful?

Okay. Look, so it's not just Morgan Stanley, it's BidCo, which today is, as I said, 100% owned by Morgan Stanley. And if the offer is successful then United Internet will contribute its 29.9% stake into BidCo. For the order to be successful -- sorry, for the offer to be successful, as I mentioned, there are 3 main conditions, 50% plus 1 share, eventually, technically speaking. Today, there's already the 29.9% plus the 13.36%, which is a bit more than 43%. So we need the offer -- in order for the offer to meet the 50% plus 1 share threshold, another -- a bit less than 7 percentage points of shares out there need to be tendered to satisfy that condition. Secondly, it is the change of control waiver process. And thirdly, there is customary cartel and regulatory approvals, which we don't envisage to be an issue as there is, as I said, no market concentration happening here.

And the next question is from [indiscernible], Jefferies.

I have 2 questions, please. The first one would be, is the separation of the network from the retail operation a particular element of the buyout plan? Can you comment on that whether that was part of the discussions already? The second question is coming back to James' question on the German telecoms law. You're saying this has no impact or no bearing on the contract with the housing associations. In the 9 December draft, which I think is the one that was actually approved by the cabinet, there is -- in the explanatory note, there's a comment that the change to the law potentially changes the [indiscernible], the business basis of these contracts, and therefore, it might have an effect. And so are you essentially saying that you checked this question or the suggestion in the explanatory notes and you're disagreeing with it? Or is there any other sort of background to what you just said that it has not bearing?

Yes. Look, so on your first question, as I mentioned just a moment ago when I responded to [indiscernible] question, there is not going to be a network carve-out. This is a Holdco transaction or a TopCo transaction. So there's going to be no network carve-out. And secondly, on the telecoms law -- on the draft telecoms law. Look, so already today, some of our housing association contracts are based on individual agreements for the CATV services with the tenants living in these apartments, but there's still a concession agreement, right? Because the concession agreement is what basically where the housing association says to us, Tele Columbus, or whoever is the provider for their housing -- for their tenants. You shall have exclusive access, prop and distribution network access for level 4 for the duration of this housing association contract, and that does not change. What changes is the way the bill is being settled for the CATV services delivered over this level 4 network. Today, it is still possible to have bulk agreements where the contract is between the provider, in this case, us and the housing association. In the future, once this bill gets passed and is enacted then the great period of 2 or whatever the number of is going to be over, all the remaining -- still remaining bulk agreements will have to be transferred to individual agreements with tenants, right? That has its intricacies, yes, that's going to be worked. But this is already a mechanism in place today. It's nothing new. Yes. And the level 4 exclusivity remains. I think that's what is very important. And the concession agreement itself remains as well.

And the next question is from Christian Fangmann, HSBC.

My question is actually on the debt holder consent. I mean in the end, you're raising equity to pay down debt and the leftover is there to kind of fund the network rollout or the upgrade of the existing network. So I mean, what are you expecting in terms of what's left over, roughly speaking? And then secondly, related to that, EUR 75 million is a future equity injection. I mean how likely is that it's going to happen soon? Or what's the timeline there? And why EUR 75 million, why not EUR 100 million or EUR 150 million or whatever the number could be?

Okay. Look, so on the deleveraging and what's left, I mean, we've given you a pointer that today, we're at roughly 6x EBITDA, and we would like to bring this down to below 5. So by at least 1x, all right? And our EBITDA, as you know, is roughly around EUR 230 million last 12 months. So you can do your own math on this one. And secondly, on the second capital raise, look, so that's the commitment that we have received from the BidCo, subject to the settlement of the offer, of course, up to now. And therefore, I think it's too early to speculate on when the second capital raise might happen and what might follow, but that's what we know at this stage.

And the next question is from Klaus Schlote, Solventis.

I have a question regarding the outcome of the offer. And let's assume that the minorities will take the offer to a large extent. So BidCo might end up with the share of about -- of more than 75% of Tele Columbus or maybe even higher, maybe 90% or 95%. Question then is for me, would you exclude that -- the company will see structural measure like [indiscernible] and [indiscernible] or a squeeze out? Or would you exclude delisting, generally speaking?

Okay. Look, so as we have mentioned on the chart, I think it was Chart #4, DPLTA is excluded, so that's a given. And look on delisting and squeeze out, that's all very early, right? So it would be difficult to either include or exclude anything at this stage. But mind you that a delisting is not something or a squeeze out is not something that the company triggers. This will be triggered, if at all, and if and when by BidCo or the main shareholder at that stage. So therefore, it's too early to talk about that. And on the squeeze out, you know exactly what the thresholds are, and I don't think we'll see initially a threshold being achieved in this regard. So -- but that's -- it's too early to tell. We cannot expect anything because it's not in our powers.

Well, it's Rocket Internet, the company initiated the squeeze out, by the way.

Yes, that's Rocket Internet, we're Tele Columbus. So look, again, it is -- this is not for me to comment on because this is a shareholder matter rather than a company management matter.

And the next question is from Yemi Falana, Goldman Sachs.

Just a quick one on the change of control provision. Do you foresee this as a significant hurdle, presumably not? And are there any data points or proof point that you can point to demonstrate why this won't be a hurdle for the transaction closing?

Yemi, thank you. So we don't see any significant hurdle. As Daniel said, we believe that this transaction is also very positive for our lenders credit. So our rating will evolve positively. And we believe since our investors, long-term investors have come through much more difficult times in the last 2 years, we believe that they will stick and support us also in the future.

And the next question is from James Ratzer, New Street Research.

I had 2 further follow-up questions. You've mentioned a couple of times that the transaction might delever you by about 1x of net debt to EBITDA. Just wondering if you could walk us through that. I mean, my math, maybe I was missing something, but the EUR 475 million capital injection, I thought, should be around a 2x reduction. So I mean, are you planning a sudden step-up in capital investment in year 1 to offset that? And secondly, just wondering if you could talk to us a little bit more about the terms around the wholesale contract with Drillisch. I mean will they now be exclusively with you in your footprint rather than using Deutsche Telekom at all in your area? And I mean can you say anything about the terms? I mean, is this going to be around EUR 18 to EUR 20 per month wholesale fee? I mean, just anything you could say on that would be helpful.

Yes. James, thank you. Look, so on the EUR 475 million, that's the total amount that's going to be backstopped by BidCo. How we use that has not been decided. So you should not, therefore, conclude that we will releverage, no. The only thing I can say, one, we'll get EUR 475 million, we can -- which we can use for, one, deleveraging; two, start funding the Fiber Champion strategy. And secondly, 1x of EBITDA down is the equivalent of about EUR 230 million. That's all I can say at this stage, right? Now on the wholesale precontract -- binding wholesale precontract with Drillisch no, look, so they are, of course, are and will remain also a whole buyer of Deutsche Telekom. They just have then once this is done and implemented, and I remind you that this is subject to the closing of the transaction, they also have an option, of course, to use Tele Columbus network in our footprint. And I would guess, but you would have to ask them, that this will become more and more attractive as we implement more and more fiber and our offer to higher -- are able to offer significantly higher speeds than is possible through the VDSL network of Deutsche Telekom. Now let's be very clear, we have an open access strategy which is nondiscriminatory. The fact that Drillisch is partly owned by United Internet does not make any change in this regard whatsoever. This is completely nondiscriminatory.

And the next question is from Julian Lilienthal, CVC Credit Partners.

On the EUR 2 billion that you mentioned for the next 10 years, based on the rights issue and kind of quick math, that's about 1 to 2 years of prefunding for that. Do you or the -- or Morgan Stanley have any thoughts on how to finance the remainder of that 10-year plan?

Yes. Look, so this is to get us started, right? That's the commitment we have from BidCo up to now. Anything else that may follow in the future is speculation at this stage. And you should also be aware, of course, that we are creating positive EBITDA, right? And so therefore, not all of the EUR 2 billion will have to be funded by additional capital coming in. So I think that's the math you should have in mind. But at this stage, we have a commitment for EUR 475 million plus an additional EUR 75 million and everything else will follow if and when required and will obviously be also subject to the performance that we show with the initial investment. I think that's quite clear. It's a free check.

And there are currently no further questions. [Operator Instructions] And we haven't received any further questions at this point. So I hand back to the speakers for closing remarks.

Thank you very much. Yes. Thanks for your questions. Thanks for participating in today's call. And we wish you a very merry Christmas and a nice finish of the year. And any closing remarks from you, Daniel or Eike?

Yes. Thank you, Leo. So thank you, everyone. Again, apologies for having you join this call on short notice just before Christmas, but we had promised to get back to you within calendar Q4. This is what we have done. We're very excited about the prospects of -- that are ahead of us, and we will work very hard to justify the trust that the investors are putting in us. Thank you.