Colt's £200m plan to foil hedge fund

Colt, the telecoms company under siege from a hedge fund that is attempting to force it into administration, is planning to buy back up to £200m of its own bonds.

It is understood that Colt, run by former Fidelity fund manager Steve Akin, is planning to purchase the bonds early in the new year if it wins a court case against the fund, Highberry.

Colt's bonds are trading at around 50 per cent of their face value. If it bought back another £200m of bonds, then its debt would fall to £750m and its cash pile reduce from £980m to £780m, according to Investec Securities.

A subsidiary of the New York hedge fund Elliott Associates, Highberry owns £75m of Colt's bonds but believes the company won't be able to repay or refinance its bonds when they mature between 2005 and 2009. It is seeking to force the company into administration or into a debt-for-equity restructuring deal through the High Court.

Last week both sides presented their cases in court. Highberry, represented by law firm Cadwalader Wickersham & Taft, a specialist in debt restructuring, claimed that Colt had overstated the value of its fixed assets. It argued that Colt's liabilities exceeded its assets by £48m.

But Colt, represented by Slaughter & May, hit back, claiming this analysis was "fundamentally flawed". It accused Highberry of intimidation and attempting to transfer the value of its equity to bondholders.

Both sides will formally present their written evidence to the judge on Tuesday. A ruling on the case could be made the same day.

Most analysts believe that Colt will defeat Highberry.

Over the last two weeks the company's shares have fallen 10.5 per cent against a 6.7 per cent drop in the FTSE All-share index, indicating only limited shareholder concern about the action.

Fraser McLeish, telecoms analyst at Investec Securities, said that a victory for Colt "would enable more radical balance sheet restructuring moves through the debt buyback programme".

While Colt is not expected to make a profit until 2005, it has £980m of cash and no bank debt.

Recent cases in which bondholders have attempted to restructure companies – such as Marconi and Telewest – have been triggered when the companies admitted they were unable to meet their covenants.

However, if Highberry succeeds it will set an important precedent, possibly opening the door to rebel bondholders targeting other cash-rich companies. One target could be Cable & Wireless. While it still has £3.8bn in cash, many investors have lost faith in its strategy and management.

Although Colt survived the collapse in the telecoms sector, its shares have fallen 99.1 per cent since their 2000 peak. Its majority shareholder is Fidelity. In July the fund manager installed Mr Akin, who had worked for Fidelity since 1992, as chief executive.