The Ovum View: Colt bondholders bite back

Beware investor self-interest...

Not all telcos are cooking the books or shovelling around their mountains of debt. Which makes Colt's predicament all the more worrying, says Ovum analyst Charlie Davies... The recent announcement by Colt's bondholder, Highberry Limited, to apply to have telco Colt put into administration came as a shock to many. With the industry lurching from one disaster to another it may seem like an understandable move. In actual fact, Highberry's action is an example of how panicked self-interest might prolong the downturn. Highberry Limited is a UK hedge fund owned by the Elliot Group (known for successfully suing the Peruvian government over non-payment of bonds). It holds senior notes in Colt, which are due to be paid back in 2005. And the significance of 'senior'? Well this means it would be at the head of the queue for payment if Colt were to be put into administration and its debtors paid-off. But hang on a minute. Telcos only have debts, not cash, don't they? Well, no. Colt is one of a select group of telcos, along with behemoth Cable & Wireless, who have cash in the bank. So Highberry would benefit immediately if Colt were to go into administration. Starting to make sense? So it's obvious what Highberry is up to. What is interesting is its accusation: that Colt will fail to deliver on its goal of turning cash-flow positive in 2005 and that its business model is unsustainable. In our view, Colt is actually one of the better telcos around. OK, so it has made some mistakes with over-investment in data centres and has suffered asset write-downs (like every single player on the telecoms scene). But it has managed to survive the wave of the last year's consolidation and has a solid and growing retail customer base. The company is also cutting its costs and has won a bunch of awards for consistently high-quality service. The demise of the competitive landscape in some of its markets has provided it with a boost combined with the fact it has a reasonable level of debt. So what would administration achieve for a company that is already cutting costs and restructuring - apart from unnecessary pain for employees, customers and investors? The point is that if Colt's business model is labelled as unsustainable then the same is true of other telcos, such as Equant. All telcos - from France Telecom to Verizon - have had to confront the same realities as Colt. Many of them will not recover from their recent beatings sufficiently enough to start paying dividends for a long while. Forcing those few telcos with cash into administration for short-term gains will have a negative effect on the industry as a whole. Recovery will occur over the long term and benefit only those who are patient enough to wait. For more information email info@ovum.com or visit www.ovum.com/research .