Description

 Tele Columbus is a German cable company. 

German cable companies are disappearing fast!  Liberty Global acquired Unitymedia in 2010 and KBW in 2011; Vodafone acquired Kabel Deutschland in 2013 (Kabel Deutschland’s Head of IR is now Tele Columbus’s Head of IR).  After Vodafone and Liberty, Tele Columbus is the country’s third largest cable company.

Tele Columbus IPO’d in January 2015 at €10/share (after a long history with twists and turns including a spell in bankruptcy).  It then used the IPO proceeds, along with another rights issue in November 2015, to engage in two consolidation transactions (#4 operator Primacom closed in Aug 2015; #5 Pepcom in Dec 2015). 

Thesis

·         Long tailwind of growth as cable continues to take share in broadband from Deutsche Telekom’s and resellers' DSL.  Internet penetration on Tele Columbus’s connected footprint of two-way homes is only 22%.

·         Equity return boosted by Tele Columbus’s levered equity status.

·         Attractive price at 8x 2017 EBITDA (including synergies from Primacom and Pepcom).

·         Opportunity to continue to consolidate smaller cable assets, as Tele Columbus has done in 2015 with Primacom and Pepcom.

Background

·         Passes 3.6 mm households – close to 10% of all households.

·         61% of those households, or 2.2 mm, are two-way upgraded – which means Tele Columbus can serve those households with broadband.

·         Capex is currently high because of the “Level 3 overbuild”: Tele Columbus is converting its one-way cable networks (level 4 assets, the last mile into the apartment building) into two-way assets (level 3, which feeds into the last mile) by building out its own fiber.  Converting into two-way allows Tele Columbus to sell internet to its customers that it already sells TV to.  Today 61% of the network is connected to its own signal.

History of German Cable

·         In Germany, cable broadband got started very late.  As a result, cable broadband didn’t start really taking share from DSL until the late 2000s / early 2010s.  This has provided Liberty Global, Kabel Deutschland, and now Tele Columbus with a significant growth tailwind.

·         DT, the original builder, was forced to divest its cable holdings; they were sold to three PE firms in 2003 and those PE firms didn’t really invest.  Three big pieces were Unitymedia (later acquired by Liberty), Kabel BW (later acquired by Liberty), and Kabel Deutschland (KDG; later acquired by Vodafone).

·         In 2006, Providence Equity, which owned part of KDG, bought out its PE partners and started investing seriously.  This kicked off the cable era.

o   One key area of investment was upgrading the network from a one-way network (video only) to a two-way network, which enables broadband and fixed voice.  This involved swapping out one-way amplifiers for two-way amplifiers.  This is what Tele Columbus is doing now.

o   Additionally, the initial cable network had very little fiber; that coax cable and system of amplifiers had to be replaced with fiber.  Fortunately, Tele Columbus's network today is fairly fiber rich.

Market Environment

·         As of 2014, cable has 20% market share of broadband in Germany but represents 80% of net adds.

·         Deutsche Telekom is the main competitor. 

o   Lately, DT has been investing a lot of money in rolling out fiber deeper into its network, which increases DSL speeds.  DSL getting faster and becoming sufficient for customer needs is a risk to Tele Columbus's growth (although cable will always be faster on an absolute basis).

o   Cable broadband will continue to take share, but growth is slowing somewhat. 

§  Liberty Global CEO Mike Fries: “Three years ago Germany was 25% price 75% in volume, when we looked at what was driving growth in Germany, last year was close to 50-50 this year, it's actually two-thirds price, which I prefer.” (5/18/2016)

Disclaimer: This memorandum is for discussion purposes only and is not intended to be, nor should it be construed or used as, financial, legal, tax or investment advice or a general solicitation.  This memorandum is as of the date posted, is not complete and is subject to change. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. Certain information has been provided by sources believed to be reliable, but has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such.

Catalyst

EBITDA compounding.