Colt secures £400m injection from Fidelity

Telecom shares rebound as big investor places its faith in one of the UK's leading alternative carriers

Colt Telecom caught the market offguard yesterday by unveiling plans to raise £400m to £516m in a move that solves its funding requirements and puts paid to speculation over its future.

Fidelity, the investment group which founded Colt and which still owns a 47.7 per cent stake in the business, will, under the terms of the deal, inject between £200m and £400m of cash, increasing its stake to between 54 per cent and 72.7 per cent.

The sum dwarfs the estimated $150m (£102m) figure that Fidelity has invested in Colt in the nine years since first setting the business up.

The huge vote of confidence from Colt's biggest shareholder, which presented the company with the proposed funding solution just one week ago, pushed shares in Colt up 33.8 per cent to close at 83p.

The stock had come under extreme pressure recently as investors fretted over how it would come up with the money, in the current tough economic environment, to fund its plans and stay in business.

"The business plan we've got at the moment is fully funded at £400m," said Peter Manning, the president and chief executive, adding: "The reason why we've moved now is very simple. The shares and bonds were under severe pressure. Fidelity made the offer and, taking into account the current state of the financial markets generally, the board took the view that they should accept it. It's an offer we couldn't refuse."

Colt said yesterday that it planned to raise approximately £400m through an open offer of 649.4 million shares at 62 pence each, although should the exercise go well, it could end up with as much as £516m. Shareholders can apply for 92 offer shares for every 100 ordinary shares they hold.

The extra funds will add to Colt's existing cash pile, which at the end of June stood at £1.265bn. While Colt recently shelled out £85m on buying back some of its bonds, that move also wiped £145m off its £1.4bn of debt.

The company, which, for some time, had openly stated that it needed in the region of £600m more to take it through to "free cash flow positive" said yesterday that it had cut its capital expenditure plans back by a further £200m to £300m. It means the plans to raise £400m announced yesterday should see it through to profit.

Analysts expect Colt to get to "free cash flow positive" during 2004.

Having cut its 2001 capital expenditure by £150m to about £850m in August, Colt is now lopping up to a further £150m off the 2002 budget to £750m and reducing the 2003 budget by up to £150m to £650m.

Colt still plans to have 32 City telecoms networks by the end of this year but is now planning on having 18 internet hosting centres in service by the end of 2001 rather than 24. It also still aims to complete its long distance network by the middle of next year but said it would now only "selectively" deploy DSL (digital subscriber line) or broadband technology.

"The UK is one area where we probably won't be putting equipment into the central offices primarily because BT is being so slow in unbundling the local loop and has an unfair advantage, in my view," Mr Manning said. He said Colt would now provide DSL services to its customers by reselling BT's wholesale service.

Analysts described the funding exercise as extremely positive for Colt but were divided on whether the move would whet investors' appetites for telecoms stocks again. Nevertheless, shares in the other so-called 'alternative telecoms carriers' rebounded sharply yesterday. Energis closed up 15 per cent at 34.5p while Kingston rose 6 per cent to 64p.

Chris Godsmark, an analyst at Investec Henderson Crosthwaite, said: "I think you have to see this as a vote of confidence. It was getting to the stage where the market was saying BT was the only game in town."

Another analyst, who did not want to be named, said: "This [Fidelity] is effectively a venture capitalist stepping up to protect their existing investment because they saw their existing investment being destroyed by a funding gap. It's not somebody saying, it's oversold and let's look for value."

That analyst argued that since both Energis and Kingston claim to be fully funded already, Colt's announcement should not really have affected their share prices.

Most, however, were impressed by Fidelity's commitment to Colt, given the harsh economic environment, the risks its business model still entails, and the telecoms sector's dramatic fall from grace. At the peak of the internet boom, Colt shares traded as high as 4,000p.

Others, however, took the view that Colt's hand had been forced since it would not be able to raise debt and said Fidelity had simply acted to protect its own investment.

Mr Manning, who said Colt had been looking at all manner of funding opportunities, described yesterday's deal as "an opportunity as well as a huge endorsement by our major shareholder".

Fidelity has agreed to subscribe for its pro rata share of the stock, representing 309.6 million shares or a total cash outlay of £192m.

Furthermore, Fidelity has underwritten the entire offer which, should no other shareholders take up their allocations, would see it having to shell out the full £400m, increasing its stake to 72.7 per cent.

In an extra show of commitment, Fidelity has agreed to take on an additional 186.6 million shares, at a cost of £116m, to boost its shareholding to 54 per cent in the event that other shareholders take up all their entitlements.

While the City accepted that the company's immediate funding problem had been removed, some remained to be convinced that Colt was completely safe.

Although analysts at JP Morgan acknowledged that Colt had bought itself some "breathing space", they said they were still inclined to err on the side of caution given that its plans depended on the economic environment holding up and its business model was "not proven by any means".