KCOM Drops Sale to USS in Favour of £563m Bid from Macquarie

In a surprise 11th hour twist the incumbent telecoms and broadband ISP for Hull in East Yorkshire, KCOM, has rejected a £504m cash offer for its business from a subsidiary of pension fund Universities Superannuation Scheme Ltd (USS) and gone with a £563m takeover bid from Macquarie Infrastructure (MIRA).

Under the new proposal KCOM and Macquarie Infrastructure (aka – MEIF 6 Fibre) are said to have reached agreement on the terms of a recommended cash offer for the entire issued and to be issued ordinary share capital of the telecoms operator, which will see MEIF 6 Fibre pay £1.08 in cash for each KCOM share (USS offered 97p). This marks a premium of 49% on the Closing Price of 72.5p for each KCOM Share on 23rd April 2019.

The announcement comes shortly after KCOM quietly confirmed the completion of their £85 million “Lightstream” deployment (here), which has deployed their 1Gbps capable Fibre-to-the-Premises (FTTP) based ultrafast broadband network to cover around 96% of their addressable network area (200,000 premises); the remaining 4% have gained 75Mbps capable Fibre-to-the-Cabinet (FTTC / VDSL2) technology.

Today’s announcement also helps to explain why KCOM has so far chosen to hold off on making a bigger and more public announcement about Lightstream’s completion, even though it was technically completed around a month ago (a few small patches are still waiting but should be fixed soon).

KCOM Statement

In light of the superior proposal put forward by MEIF 6 Fibre as compared to the USS Offer, the KCOM Directors, who have been so advised by Rothschild & Co as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing its advice to the KCOM Directors, Rothschild & Co has taken into account the commercial assessments of the KCOM Directors.

Accordingly:

· The KCOM Directors intend to recommend unanimously that KCOM Shareholders vote in favour of the Scheme at the Court Meeting, and in favour of the General Meeting Resolution to be proposed at the General Meeting; and

· The KCOM Directors have withdrawn their recommendation of the USS Offer and the KCOM Board proposes to adjourn the USS Scheme Meetings convened for 5 June 2019 to consider the USS Offer.

Leigh Harrison, Head of MIRA EMEA, said:

“We are pleased that the KCOM Board is recommending our takeover offer. KCOM has a strong local heritage that has been developed over more than a century and is well-positioned to continue to meet the evolving telecommunications needs of the region, which is why we have made this compelling offer to shareholders at an attractive premium.

As an experienced, long-term telecommunications investor, we are committed to supporting KCOM’s sustainable growth. We look forward to partnering with management to increase broadband take-up in its core region and beyond, enhancing the quality of service delivery while giving local businesses and residents greater access to the opportunities that high-speed broadband can provide.”

Macquarie Infrastructure and Real Assets (MIRA) is one of the world’s leading alternative asset managers and they’ve also invested in Arqiva, which is one of the UK’s main wireless infrastructure developers. At the time of writing KCOM’s share price has already shot up by around 13% on early trade.

The announcement included a rough outline of MIRA’s plan for KCOM, which among other things seems to include expanding their “fibre network beyond the current footprint” and making the network available via more third-party ISPs (they’ll need to come up with a better wholesale proposition for that).

MIRA’s Own Plans

MIRA’s own plans at this stage do not contemplate significant redundancies in the KCOM Group. However, as a result of the early stage of MIRA’s work and KCOM’s ongoing strategic review, MIRA has been unable to determine the precise impact on the KCOM Group’s headcount going forwards.

Nevertheless, MIRA believes that the skills of the employees within the KCOM Group will be key to delivering high quality services to customers, and MIRA’s vision for growth. MIRA believes that the expansion of KCOM’s existing footprint will increase fibre accessibility to the region and contribute to the ever-growing “Northern Powerhouse”. Following completion of the Acquisition, MIRA intends to:

• work with KCOM’s management team to review the strategy of the HEY business with the aim of maximising network utilisation and consumer choice. MIRA is intending to work with KCOM to increase the number of households and businesses being served by its best in class network, by both increasing the number of customers buying KCOM’s own retail offerings, and by increasing the amount of business with third party Internet Services Providers;

• work with KCOM’s management to establish opportunities to use additional investment to expand the fibre network beyond the current footprint of the HEY business, to drive growth and employment opportunities. Whilst no decisions have yet been taken on whether additional investment would be made, if such additional investment was made, it would be funded from KCOM’s existing cash resources, new equity from MEIF 6 Fibre, and/or third party debt;

• review initiatives to improve the performance of the National Network Services and Enterprise businesses to enhance customer experience, provide relevant and profitable services to customers, and improve platform efficiency to enhance margins;

• undertake a review of the strategic options for the National Network Services and Enterprise businesses. The review will focus on operating performance, viability of its offerings and long-term strategic fit in relation to MIRA’s overall strategy. MIRA will work closely with management to evaluate different possible outcomes. At this stage, MIRA does not have sufficient insight to conclude on any outcomes, however it would expect potential options to include disposal of these businesses to a third party, refocusing of product catalogues, and integration into other business lines, among others; and

• work with KCOM’s management to understand and implement any recommendations as to costs efficiencies, service improvements and organisational structure which result from the KCOM Review.

MIRA has not yet begun to carry out the detailed evaluation referred to in the paragraph above or made any decisions in relation to specific actions that may be taken as a result of this evaluation, including in relation to any impact on organisational structure and headcount. Independently of the KCOM Review, MIRA plans to carry out its own strategy review in close collaboration with KCOM management over three to six months following the Effective Date and expects to start implementation of any additional actions resulting from that review as soon as possible thereafter.

Once KCOM ceases to be a listed company, some central management, corporate and support functions, including PLC-related functions, may be reduced in scope, which is likely to require reduced headcount in these areas.

MIRA intends to safeguard the existing employment rights of the management and employees of the KCOM Group in accordance with applicable law and does not envisage any material change to the balance of skills and functions of existing employees and management of the KCOM Group, or in their conditions of employment (other than the possible implementation of incentivisation arrangements for certain members of management as described below).

MIRA confirms it is also fully supportive of KCOM’s initiatives to help foster a diverse local employment pool by actively encouraging participation in STEM subjects. MIRA intends for KCOM to continue its current local initiative during its stewardship as the benefits of a diversified workforce are also a high priority to MIRA – both as an owner and employer.

The non-executive directors of KCOM have informed MIRA that they intend to resign as KCOM Directors with effect from completion of the Acquisition.

As usual the new deal will be subject to all of the usual approvals and could be signed off by around the middle of 2019.