Philip Carse, Telecoms Analyst at IS Research, reports on the recent performance of leading companies in the comms space.
The last month has been relatively eventful for the megabuyte Hosting and Fixed Line peer group, with a bid for Cable&Wireless Worldwide from Vodafone, solid to positive results from BT, Virgin, TalkTalk and COLT, and three acquisitions for managed data services buy and build Six Degrees.
First, the results and trading updates, which have been generally positive despite economic headwinds. BT reported full year revenues to March 2012 down 6% to £18.9bn, but hit its target of £6bn EBITDA one year early and gave a relatively upbeat outlook for cash flows. Meanwhile, Virgin Media reported 2.4% revenue growth in its Q1, to £1bn, though EBITDA and FCF were flat due to spending on TiVo and broadband. The star for Virgin was its Business comms division, with revenues up 7.1% to £170m. TalkTalk continues to suffer falling revenues (down 4% in FY11/12), but surprised with an increase in medium term EBITDA margin from 20% to 25%, though FY12/13 will be impacted by the costs of the new YouView TV service.
Adept Telecom managed to maintain EBITDA at £3.6m and reduce debt by another £2m to £5.3m, despite revenues falling 10% in the year to March 2012. COLT Telecom reported a surprisingly high 5.2% revenue growth to 397m euro in its Q1, though half was due to low margin carrier voice traffic, and the outlook for the rest of the year is for much lower growth. Last, but not least, Telecity said that its first quarter was generally positive, though a weaker Europe will negatively impact about half its revenue. The company also alluded to new data centre capacity announcements in due course.
After much to-ing and fro-ing, Vodafone announced an agreed bid for Cable&Wireless Worldwide at 38p per share, valuing the company at £1.04bn and 3.1x 2011/12 EBITDA. Vodafone noted that the acquisition would double its UK business activities, elevating it from 4th to 2nd in UK telecoms, and would yield cost synergies, including mobile backhaul. However, we view the acquisition as opportunistic, hard to justify on strategic grounds, and expensive given that debt, pension shortfalls, restructuring costs and making up for under-investment will take the total cost to perhaps as much as £2bn. Vodafone admitted that it will take four years for the acquisition to be more accretive to earnings and cash flow than a simple share buyback.
At the other end of the scale, managed data services firm Six Degrees completed the first phase of its buy and build, acquiring two managed services companies (FirstServ and ServerStream) and a datacenter interconnection business (DataHop). The ten acquisitions have taken less than a year, and take Six Degrees to a run rate of £44m revenue and £11m EBITDA.
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