Tele Columbus – Options
All,
Please see our updated analysis here.
As we feared, Tele Columbus (TC) is struggling to get traction in upgrading its network and signing up customers. We forecast a funding gap of €165m in funding the planned network upgrades, with fresh cash needed soon. TC has a couple of options: raise further shareholder loans (we see this as unlikely), or raise additional debt on the network assets (also hard, given the existing leverage. The bonds are trading at around fair value, and we see significant volatility if cash is not raised soon. Without continuing its investment, we do not see any benefit from the investments already made.
Investment Rationale:
- We would go short these bonds if it were not for the risk that TC manages to plug its funding gap. Our model assumes that the network upgrades are backend to preserve cash, but we still anticipate a funding gap of €150m - €250m, with fresh cash required from Q1 2026. We would expect the bonds to trade beneath recovery value if additional debt were raised (on the network), before eventually trading back to fair value.
- The fair value of the bonds is 67c/€ vs a current price of 69c/€. We see 10 points of upside if TC raises fresh cash and customer additions improve in line with our model; this would be a return to where the bonds traded before the disappointing Q1 results. In contrast, there are 3 points of downside if the bonds trade to their fair value.
- Initial progress has given way to a quicker-than-expected fall in TV subscribers, a slower-than-expected signing up of new subscribers and higher-than-expected costs of customer acquisition.
- We forecast a funding gap of €150m, starting in Q1 2026, which TC will try to fund through raising further cash against the NetCo (which has been separated from the operating company). We see an infrastructure deal as marginal, given that the network is still mainly HFC.
- The bonds currently yield 20%, a decent equity-style return, but not yet compelling, given the upcoming operational challenges (TV) and network buildout.
- We need to see success in upgrading homes and adding fibre customers.
- We will review our model and cash flow requirements again at the Q2 2025 numbers, where we will be looking at whether the TV business is stabilising, whether the promised fibre roll-out is happening and whether customers are signing up.
Key Conclusions:
- As we highlight in the Background section, 2021 - 2031 will see €3bn of Capex (€2bn upgrades and €1bn in Maintenance). The growth requirements are significant, and Tele Columbus is already falling behind => a funding gap is going to emerge. There is pent-up demand for higher-speed internet, which will support demand, but selling internet upgrades is easier when you have a customer relationship already. The question is whether a 20% running yield is enough when it is 100% PIK.
- Tele Columbus trades at a higher EV/EBITDA multiple as the market places a premium on its growth potential. We see an EV/EBITDA multiple of 8.0x as more reflective of the balance between growth potential and the cost of upgrading the network (Trading Comps).
- We have backdated the capex in our model to preserve cash.
- The recent Trading segment shows that Tele Columbus is already falling short of its planned customer additions, and we are concerned that the losses in TV revenue will take too long to be replaced by fibre revenue. We also accept that customers will pay for an improvement on ADSL speeds, but are less convinced as to how much they will pay.
- Our DCF calculations had to be stretched to 10 years as we do not see FCF generation before 2031. We cannot see how Morgan Stanley makes a return on its investment. We ran another DCF calculation to value the existing business (assuming stability from 2026), and this shows the bonds are worth 67c/€. Creditors will need to roll their debt in 2031, as without positive free cash flow, we do not expect Tele Columbus will be able to execute a market refinance.
- Our Model forecasts a funding gap €150m of cash needed, and balance sheet cash running out in Q1 2026. We expect €200m to be needed to provide some wriggle room.
- The NetCo section demonstrates how that gap could be filled with some additional debt raised at the Asset company levels, but the multiples would be at the wide end of what is possible.
Q1 2025 Trading was weaker than our expectations:
- The numbers point to some progress in adding customers, with 2025 guidance pointing to additional progress, if slow. The company forecasts flat revenue in 2025, which is around 4% ahead of our estimates. EBITDA guidance is 6.5% above our estimate of €187m.
- Q4 revenue was in line with our guidance, and EBITDA was slightly above. The net Internet customers were 21k, shy of our forecast of 30k. Capex is running below expectations, which reflects a slower-than-anticipated roll-out.
- Management pointed to rising promotional activity in Q1 as a reason for the slow pace of adds. We don't see this improving in 2025.
- Tele Columbus needs to stabilise its unique subscribers and show it can sell its faster internet access. So far, there is not sufficient evidence that this is happening.
- PYUR (the internet brand) is adding subs, but too slowly.
Liquidity is needed, but raising debt at the NetCo level will not be easy:
- We forecast that fresh cash is needed by Q1 2026, and that TC has a minimum €150m funding gap.
- TC has separated the OpCo and NetCo to try to raise debt on the Network. To raise any cash, TC would need to achieve a valuation of 11x, which we see as difficult for a 60% NFC network.
- The NetCo debt would be expensive and would need to be structured as a top slice on any recovery proceeds. However, if the value of the network in a distressed sale topped out at 6.5x => the recovery for bondholders would fall from 67c/€ to 58c/€.
- There is some upside potential from wholesaling capacity on the upgraded network, but this is still a modest part of revenue.
- We do not see Morgan Stanley putting more money in, unless we have underestimated take-up rates.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055