British telecom companyColt(LSE: COLT) is one of the the biggest risers today, with its stock up 21.3% at the time of writing, followinga final cash offerfrom Fidelity, which saidthat it intended to acquire the reminder of the shares thatit did not already own in Colt at 190p, valuing the targets total equity at roughly 1.7bn.
Reaction
Coltwas swift to announce that itsindependent directors have appointed Barclays Bank acting through its investment bank as independent financial adviser, and theybelieve that the offer undervalues the companyand its prospects.
Accordingly the independent directors, having been so advised by Barclays, consider that the financial terms of the offer are not fair to the independent shareholders of Colt, it said, noting that the board believes that the financial terms of the offer may be considered by some shareholders to be acceptable in the circumstances, and accordingly make no recommendation to shareholders whether or not to accept the offer.
This simply means raise the offer, and well recommend it. But just how likely it that?
A New Offer?
Under the terms of the offer, Colt shareholders will be entitled to receive 190 pence in cash for each Colt share held. This price will not be increased, Fidelity stated, adding that the offer values the entire issued and to be issued share capital of Colt at about1.7bn.
There are two options now: the deal gets done on these favourable terms, as it seems likely, and shareholders will accept 190p a share which is in line with Colts pre-crisis highs or shareholders may feel entitled to ask more on the back of Colts new business plan, which aims tosignificantly improve its financial performance, as Colt reiterated today.
190p A Share Is Fair Value
Colt trades at 190p a share, which suggests that this is a done deal.
The premium is21.3% to the closing price per Colt share of 157 pence on 18 June 2015, but stands at 34.4% and 28.6% for last 12 and three months, respectively.
On the back of flat revenues,, earnings before interest, tax, depreciation and amortisation (Ebitda) have dropped by 10% over the last three years.
Say, for the sake of argument, that Colt has now turned the corner.
Then, assuming constant trading multiples into 2018, and a steady 10% growth of rate for Ebitda over the period, it would take about a couple of years for Colt stock to rise to 190p a share, but there are obvious risks if shareholders decided to stay put.
Colts unaudited first-quarter results released on 29 May showed declining revenues, steady Ebitda, and improving free cash flow, among other things. Itscore businesses, network services and voice services, are showing encouraging trends, and management is confident it will deliver modestly positive cash flows for full year 2015.
I doubt thats enough to ignore Fidelity right now, however.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.