MIRA, an asset management division of Macquarie, was recently confirmed as the winner in a secret race with Universities Superannuation Scheme (USS) to acquire British telecoms group KCOM. MIRA unexpectedly overtook its rival on the last lap, agreeing to pay £627 million ($766 million) for the company.
Seemingly a fait accompli, USS was in the process of formalising the acquisition of the business, the final steps of a process it had set up months in advance.
Unbeknownst to them, Macquarie had set up an acquisition attempt in parallel, announcing its superior bid price several weeks after USS went public.
Not to be defeated so easily, USS announced it was yet to make its final offer. The Takeover Panel, a UK regulator that was already involved in their respective processes, then announced an arbitration. Following a week-long auction, MIRA emerged as the winner.
KCOM Group is a provider of IT and communications services based in Hull. The company traces its history back over one hundred years to the birth of Hull’s own telephone system in 1902.
In 1987 the Hull Telephone Department became Kingston Communications (HULL) PLC in order to avoid constraints imposed on local government capital.
Kingston Communications listed on the London Stock Exchange in 1999 with Hull City Council retaining a 41.3% stake in the company (it sold its remaining shareholding in 2007). The listing permitted the business to roll out a national network taking in, among others, Bristol, Exeter, Manchester, Plymouth, and Reading.
Upon the sale of the council’s stake, company shareholders voted to rename the business KCOM to “more accurately reflect the changing shape and geographic reach of the company”.
Today, KCOM has a number of areas of business including:
- phone and internet services to 140,000 customers in Hull and East Yorkshire
- technology solutions for enterprise and public sector organisations
- national network services to UK-based multi-site organisations
However, not all of those areas have been performing as strongly as shareholders might have wished.
In a market update published in November 2018, new chief executive Graham Sutherland revealed that whilst its Hull and East Yorkshire offering was thriving, national network services and enterprise technology solutions were performing well below expectations.
Revenues were flat or declining, and order intake margins declining in both cases.
Issues cited were a prevalence of short-term management focus and a lack of robust medium-term plans.
Meanwhile net debt rose significantly within the space of a year. On 18 March 2018 it had been £63 million. This had leapt to around roughly £115 million a year later.
Full-year dividends were halved for FY 2019 compared to their FY 2018 value (6p down to 3p). EBITDA was expected to be 5% lower than market expectations.
The share price reaction was significant: it fell from 91.80 per share on 19 November 2019 to 64.50 the following day, a fall of almost 30%.
KCOM immediately became an appealing target. USS and Macquarie European Infrastructure Fund 6(MEIF 6) independently started investigations to take over the stricken business.
An (un)done deal
On 24 April 2019, USS announced its intention to take KCOM private in a process overseen by the Takeover Panel. A confidentiality agreement had been signed between the two parties on 4 March 2019 with USS known as ‘Fury’ and KCOM dubbed ‘Koala’.
USS agreed to pay 97p per ordinary share through takeover vehicle Humber Bidco, a wholly-owned indirect subsidiary. The price represented a valuation of £504 million. It had arranged facilities agreements with Lloyds Bank and Natwest.
At the time of the confidentiality agreement being signed, KCOM’s share price was 69.30p per share. The price leapt to 97p on the announcement of the USS’s intention to take private. The bid was endorsed by KCOM’s board.
Mike Powell, USS head of private markets, said: "We believe that KCOM is a high-quality business that is well-placed to grow and thrive under private ownership and that is why we have made this compelling offer to shareholders at an attractive premium."
The takeover was to be organised as a scheme of arrangement requiring the approval of 75% of KCOM shareholders. A vote was scheduled for 5 June.
MIRA’s MEIF 6, meanwhile, signed its own confidentiality agreement on 21 May using SPV MEIF 6 Fibre. It went public with its bid of 108p per share (£563 million) on 3 June 2019. KCOM’s board withdrew its recommendation for USS’ offer in favour of Macquarie’s.
The Takeover Panel, involved in each of the respective parties’ bids, announced a five-day auction to resolve the dispute, following both bidders declaring they were yet to make their final bids.
The auction proceeded as follows:
- Monday 8 July: £566 million, 108.5p per share (USS)
- Tuesday 9 July: £571 million, 109.5p per share (MIRA)
- Wednesday 10 July: £573 million, 110p per share (USS)
- Thursday 11 July: £578 million, 110.8p per share (MIRA)
Friday 12 July allowed one final bid each:
- £589 million, 113p per share (USS)
- £627 million, 120.3p per share (MIRA)
The winning bid represented a premium of 66% to the closing price of 72.5 pence for each KCOM Share on 23 April 2019.
KCOM’s board endorsed the new offer, and the scheme of arrangement was passed on 26 July 2019 by 99.48% of KCOM scheme shares.
The business was subsequently de-listed from the London Stock Exchange on 2 August 2019.
MEIF 6 is paying for the acquisition with 100% equity from the £6 billion it raised in late June. Following the completion of the transaction, a new capital structure is likely to be implemented, with third party debt a likely component.
KCOM’s advisers on the transaction are:
- Rothschild & Co – lead financial
- Peel Hunt – joint financial and corporate broker
- Investec Bank – joint financial and corporate broker
- Addleshaw Goddard – legal
Macquarie was advised by:
- Barclays – financial
- Freshfields Bruckhaus Deringer – legal
USS was advised by:
- Allen & Overy