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Nathan Mitchell

Tele Columbus’ new management presented stark results in today’s (28 April) Q4 22 conference call. The German cable operator continues to burn cash and with Q4 EBITDA down 47.1% YoY a further liquidity injection is likely to be needed.

Despite the worrying numbers, management guided a refinancing at the end of the year and for a healthy increase in EBITDA for 2023. When quizzed, new CFO, Dr Jeannette von Ratibor, said that they see EBITDA stabilising above a 40% margin, quite a bit higher than Q4’s 22% margin.

Their refinancing assumptions appear optimistic with significant fibre rollout capex ongoing and a declining legacy business. Market trading levels reflect this, with the €650m SSNs due May 2025 down from 74.9-mid at today’s opening to 67-mid at the time of publishing. They have traded downwards since the start of 2022, with November’s €75m equity injection offering some respite before dropping again.

Management also revealed that cash stood at €105m at the end of 2022. With Q3’s ending cash balance of €69m plus the €75m injection in November, we calculate a cash burn of €39m, noticeably higher than previous quarters. When pushed for a Q1 23 cash balance, management refused to provide further details but stated that the number is “still very favourable” and that no further facilities have been entered into.

Capex on the fibre rollout continues at an aggressive pace and is unlikely to slow down with “stable” FY 23 guidance provided on the call. The fibre expansion strategy in 2020 proposed a €2bn investment into the company’s network between 2021 and 2030. But, with extensive projects typically lasting 18 months or more, the impact of the investment is still barely being felt.

Highlighting this, capex to revenue is up from an average of 27% for 2019-2021 to 66% in Q4 22.

The majority owner, Kublai, owned by Morgan Stanley Infrastructure fund (60%) and United Internet (40%), has already injected €550m into the group. €475m following its 2021 acquisition of Tele Columbus, which was partially used to deleverage from 6.1x to 4.5x, and a further €75m just last November.

Given the current cash burn rate and the aim to refinance this year another injection is likely required. When asked about liquidity woes and any new money, management responded by saying there is still a strong value proposition for the shareholders.

The Q4 EBITDA decline was attributed to higher signal and maintenance costs in the B2B business as well as increased personnel and opex costs. A negative €8.8m non-recurring figure for internal audit consulting expenses is also included in the number

Cable TV continues its structural decline with a loss of nine thousand revenue generating units (RGUs) in the quarter. The first wave of migration from bulk to individual contracts is also underway. In total, 16 thousand of the original 30 thousand under bulk contracts have migrated over to individual contracts, with management targeting a 60% conversion rate across all migrations.

On this target, Tele Columbus will lose 40% of its Cable TV RGU’s once converted into individual contracts. CEO, Markus Oswald, anticipates the shift into individual contracts will see an average revenue per unit (ARPU) increase of 10-20%, and the increased likelihood of cross- and up-selling to customers.

Despite these problems, management remains optimistic about its internet segment. Annual growth of 6.6% in FY 22 continues the trend of increasing growth rates since FY 20. A dip was seen in Q4 22’s YoY growth rate, but management explained that this was due to the disposal of a subsidiary. Without that there is a continued steady increase they explained.

Current debt figures are unavailable, as the presentation and report are not yet published (management explained that they have until Sunday 30 April under the bond docs). But if we assume the same level of gross debt as at Q3-end, €1,124m, and use management’s €105m cash figure then net debt sits at €1,018m, 5.6x FY 22’s €182m EBITDA.

Just 0.1x lower than at Q3-end, even after the €75m injection. If we take management’s 40% minimum stabilised margin and revenue guidance of a moderate increase on FY 22’s €447m number, then this puts EBITDA in a similar region for FY 23. With cash burn inevitable, leverage will increase making the refinancing less likely.

The group has a €462m (as of Q3-end) term loan maturing October 2024 and the previously mentioned €650m SSNs maturing May 2025. Without significant EBITDA improvement, a cash injection or other alternative solutions will be required.

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