Interim Report for the 6 months ended 30 June 2017

ZEGONA COMMUNICATIONS PLC
("Zegona")

 

Interim report for the six months ended 30 June 2017

 

29 September 2017

 

Zegona, the LSE Main Market company established to acquire and operate businesses in the European Telecommunications, Media and Technology (''TMT'') sector, announces its interim results for the six months ended 30 June 2017.

 

 

Enquiries:

 

Tavistock (Public Relations Adviser)

Tel: +44 (0) 20 7920 3150

Jos Simson / Lulu Bridges / Andrew Dunn

 

 

 

Notes to Editors:

 

About Zegona

 

Zegona was established with the objective of acquiring businesses in the European Telecommunications, Media and Technology sector with a "Buy-Fix-Sell" strategy to deliver attractive shareholder returns. Zegona is listed on The London Stock Exchange's Main Market and is led by former Virgin Media executives, Eamonn O'Hare and Robert Samuelson.

 

Forward-looking Statements

Certain statements in this Announcement are forward-looking statements which are based on Zegona's expectations, intentions and projections regarding its future performance, anticipated events or trends and other matters that are not historical facts. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Given these risks and uncertainties, prospective investors are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, Zegona undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The information contained in this Announcement is subject to change without notice and Zegona does not assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.

 

 

Zegona Communications plc

 

Condensed Consolidated Interim Financial Statements

 

For the six months ended 30 June 2017

 

 

Overview

The results for the first half of the year have been significantly impacted by the sale of the Telecable business on 26 July 2017 and the requirement to show the results of Telecable within discontinued operations from 15 May 2017 when the sale and purchase and share exchange agreement was signed. Since Telecable was Zegona's only operating business, substantially all of Zegona's revenues and costs for both the current and prior periods have been recorded as discontinued operations.

 

Sale of Telecable

On 16 May 2017, we announced an agreement to sell Telecable, the leading quad play cable telecommunications operator in the Asturias region of north west Spain to Euskaltel, S.A. ("Euskaltel"), the Spanish telecommunications company in the Basque Country and Galicia. The sale completed on 26 July 2017.

 

When Zegona acquired Telecable in 2015, we identified the opportunity for substantial value creation through the combination of the three independent Northern Spanish cable telecommunications operators. This transaction turns our vision into reality.

 

On completion of the transaction, Zegona received cash consideration of €176.7 million[1], with further deferred payments of up to €15 million, and 26.8 million shares in Euskaltel, which represent approximately 15% ownership of the combined group. In addition, Robert Samuelson, Zegona's Chief Operating Officer, has been appointed to the Euskaltel board and its committees, including the newly created Strategy Committee.

 

The transaction has generated very attractive returns for our shareholders. On completion of the transaction, the implied value of Telecable was €677.9 million[2], comprising an Enterprise Value of €662.9 million and up to €15 million deferred payment. This corresponds to an implied Zegona share price of £1.93 per share[3] and a 37% implied total shareholder return[4] versus the initial investment by Zegona's shareholders.

 

We also believe the transaction structure provides opportunity for additional shareholder value through the continued ownership of the Euskaltel investment. The combined business creates the leading integrated telecommunications operator in the North of Spain, with enhanced scale and exceptional cash generation. There are also substantial synergies, valued by Euskaltel at €245 million, equivalent to €1.37 per share in the combined business. Zegona will have significant influence in Euskaltel through its Board representation and the Strategy Committee. All of these factors combine to create an opportunity to close the current shareholder value gap since Euskaltel trades at a discount to many of its industry peers.

 

Return of capital

On the completion of the Telecable sale, we announced our intention to return up to £140 million of capital to shareholders through a tender offer, which was selected as the mechanism to return capital as it is quick and tax efficient. On 30 August 2017, we delivered on this commitment and the circular detailing the tender offer and the required general meeting was published. This return of capital means that, if the 2017 target dividend is paid as expected, total cash returned to Zegona shareholders will total up to £158.6 million, equivalent to 55% of the initial equity invested[5]. This substantial return to shareholders has been possible because of the value generated by Zegona during its period of ownership, reflected in both the increase in the Enterprise Value compared to the original acquisition price of €640 million and the strong cash generation of the business during our ownership.

 

Returns have also benefitted from the favourable timing of the acquisition, which has allowed shareholders to crystallise part of the value from an appreciation in the Euro during Zegona's period of ownership.

 

Further returns will be possible as Zegona retains valuable assets following the tender offer, including the rights to the contingent payment, cash on hand and the investment in Euskaltel. Our approximate 15% holding in Euskaltel represents an exposure to underlying operating cash flows which are of a similar magnitude to those of Telecable on a standalone basis.

 

Under the tender offer, each qualifying holder of Zegona's ordinary shares has the option to sell approximately 36% of their shares at a price of at least £2.00 per share. This share price represented a premium of at least 19% to the market price of Zegona's shares at the announcement of the tender offer. Further details of the tender offer are provided in note 10 to the interim financial statements.

 

Zegona's shareholders approved the resolution enabling the tender offer at a General Meeting on 22 September 2017 and the tender offer is scheduled to close at 1 p.m. on 5 October 2017 with cash payments to be made shortly thereafter. All shares purchased under the tender offer will be cancelled.

 

Business performance

During the first half of the year, Telecable performed in line with our expectations, with revenue growth of 2.6% compared to the first half of 2016, leaving it well positioned to provide a solid platform for growth as part of the enlarged Euskaltel business.

 

Operating profit in Telecable was €4.6 million in the six months to 30 June 2017 compared to €7.0m in the same period in 2016. Operating profit in the first half of 2017 was impacted, as expected, by our continued investment in premium football content and higher mobile access costs from our legacy mobile arrangements. We expect the impact of both of these items will be substantially reduced in the second half as a result of the transition to the new mobile access agreement in July 2017 and active management of the football cost base. Operating profit was also impacted by one-off items, mostly related to the sale of Telecable. These included a benefit to operating profit from ceasing amortisation and depreciation of Intangible Assets and Property, Plant and Equipment from the date Telecable was classified as held for sale as required by IFRS 5. This was offset by a number of one-off costs in the period including an accrual for a new universal service tax backdated to 2014 and a number of administration and personnel costs related to the sale, including the acceleration of certain employee incentive arrangements. The net impact of these one-off items was an increase to operating profit of approximately €1 million. Net cash flows delivered by Telecable were €11.6 million in the six months to 30 June 2017 compared to €6.4 million in the same period in 2016. The increase was mainly driven by working capital benefits generated during 2017.

 

Dividend

In April, we paid a second interim dividend in lieu of a final dividend in respect of 2016 of 2.25 pence per share. We have also reconfirmed our target to make a total dividend payment of £9.8 million in respect of 2017. This payment is equivalent to 5 pence per share based on the number of shares outstanding prior to the completion of the tender offer.

 

We anticipate declaring an interim dividend for half of the total amount shortly after the tender offer is completed and intend to adjust the dividend per share such that a total dividend of £9.8 million is paid in respect of 2017. Assuming all shareholders participate in the tender offer at a price of £2 per share, this would result in a full year dividend of 7.8p per share.

 

Anticipated dividends from Euskaltel will help fund future Zegona dividends. Euskaltel's current dividend is €0.36 per share and Euskaltel has stated that it intends to increase its annual dividend pay-out at a double-digit rate.

 

Strategy and outlook

We expect to help drive Euskaltel's performance improvement, leveraging our influence at the Euskaltel Board and Strategy Committee and our positive relationship with Euskaltel's largest shareholders.

 

We also continue to search for new investments and identify opportunities in the European TMT industry where the Zegona management team can again successfully apply the Company's innovative 'Buy-Fix-Sell' strategy.

 

Risks

Risks prior to the disposal of Telecable. The Directors are of the opinion that the principal risks and uncertainties faced by the Group prior to the disposal of Telecable were the same as in 2016. A more detailed explanation of risks and uncertainties is set out on pages 13 to 15 of the Annual Report for the year ended 31 December 2016.

 

Risks following the sale of Telecable. Upon the sale of Telecable, the risks faced by Zegona changed fundamentally and will continue to develop as Zegona pursues or completes further acquisitions. Following the disposal of Telecable, the Directors have revised their assessment of the principal risks facing Zegona and have concluded that the principal risks are:

 

Acquisition of Targets

The success of the Group's acquisition strategy depends on identifying and successfully acquiring suitable target businesses. There is a risk that Zegona will not be able to identify suitable targets at a price that allows for acceptable returns. Zegona may also be unable to obtain any consents or authorisations required to complete an acquisition or procure the necessary financing, be this from equity, debt or a combination of the two. There is also the risk that suitable acquisitions cannot be made before Zegona exhausts its cash and available liquidity. In making acquisitions, there is also a risk of unforeseen liabilities being later discovered which were not uncovered through the due diligence process.

 

Further, as per the Group's strategy to buy and fix businesses that require active change and fundamental improvement to realise full value, once an acquisition is completed there are risks that the Group will not succeed in driving strategic and operational improvements to achieve the expected post-acquisition trading results or value which were originally anticipated, that the acquired products and technologies may not be successful or that the business may require significantly greater resources and investment than anticipated. If anticipated benefits are not realised or the trading results of acquired businesses fall below expectations, it may be necessary to impair the carrying value of these assets. The Group's return on shareholder investment may fall as a result. The Group's financial performance may also suffer from goodwill or other acquisition related impairment charges, or from the identification of additional liabilities not known at the time of the acquisition.

 

Zegona has a disciplined approach to valuation and ultimately is only prepared to make acquisitions at the right price and after undertaking a very structured and thorough due diligence process. When evaluating potential acquisitions, we focus on targets that have strong fundamentals, high-quality offerings and leading market positions but which are underperforming their potential and have scope to generate sustainable performance and cash flow improvements. Furthermore, in assessing the amount of cash to return to shareholders, the Directors have ensured that there is sufficient cash on hand, available liquidity and saleable assets to enable the business to continue to operate for the foreseeable future.

 

Once a business has been acquired, it is Zegona's intention that management takes a hands-on role in delivering tangible improvement actions, including the development of strategic plans, restructuring actions and business development opportunities.

 

Key Management

On a day-to-day basis, the Group is led by the Executive Directors, the CFO and two Investment Directors. The absence of key management could result in the failure of the Group to achieve its objectives. The Group aims to retain its key staff by offering remuneration packages at market rates, and through the long term incentivisation provided through the key staff's holdings of management shares.

 

Risks Relating to the Investment in Euskaltel

Following the sale of Telecable, Zegona's principal asset is its approximate 15% holding in Euskaltel. Although the Euskaltel shares, other than those used as pledged assets, can be distributed in specie to Zegona's shareholders at any time, Zegona is not permitted to sell any of the shares until July 2018 at the earliest. The value of this investment is subject to variation based on the performance of the Euskaltel share price, which in turn is influenced by a number of factors, both specific to Euskaltel's performance but also more general sentiment about the Spanish Telecommunications industry, the Spanish and European economies more broadly and general macro-economic conditions. There is a risk that any one, or a combination of, these factors could cause the value of the Euskaltel investment to drop significantly, materially impacting the return on investment. The Directors will regularly review the risk-adjusted returns of the Euskaltel investment and consider whether it is appropriate to retain ownership.

 

Zegona has exercised its right to appoint a representative to Euskaltel's board of directors and each of its board committees. Zegona believes there is additional value in the Euskaltel investment, both as a result of the strength of the underlying business and from the relevant knowledge and experience Zegona's management team can provide. However, if the other members of Euskaltel's board have interests which are inconsistent or in conflict with Zegona's, we cannot ensure they will not oppose or suggest an alternative strategy to any strategy suggested by Zegona's representative. In addition, disputes among the Group or its representative and any such third parties could result in litigation or arbitration. Any of these events could impair the Group's objectives and strategy, which could have a material adverse effect on the value of the Euskaltel interest. 

 

Foreign Currency Risk

Foreign currency translation risk exists due to the Company operating, and having equity denominated, in a different functional currency (GBP) to that of its investment in Euskaltel (EUR) and of many of its likely acquisition targets. Transactional foreign currency risk is limited and the principal ongoing impact is on the Company's ability to maintain the GBP value of dividends paid by Euskaltel in EUR in order to maintain its dividend policy.

 

Based on the anticipated cashflows of the Group and the Board's ability to reduce or delay any return to shareholders should it be necessary, the Board believes that this risk would not have a material effect on the Group in the ordinary course of business. However, fluctuations in the GBP/EUR rate could have far more significant impact on the GBP value of the investment in Euskaltel, meaning that the GBP value of the proceeds from any future sale of Euskaltel shares that Zegona may distribute to shareholders may be reduced.

 

Similarly, fluctuations in the exchange rate between GBP and other European currencies could cause potential future acquisitions to become more expensive in GBP, and therefore less desirable if equity were raised in GBP to fund a material portion of the acquisition price.

 

The Board and the Chief Financial Officer control and monitor financial risk management, including foreign currency risk, in accordance with the internal policy and the strategic plan defined by the Board.

 

Interest Rate Risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Other than a small overdraft facility, which is currently undrawn, Zegona currently has no exposure to interest rate risk. It is however highly likely that a material portion of any future acquisition would be funded by a debt facility. Any significant increase in relevant global interest rates could result in the funding for future acquisitions becoming more expensive, or returns becoming less attractive.

 

Zegona has a disciplined financial approach and is ultimately only prepared to make acquisitions at the right price and using an appropriate capital structure after considering the risk-adjusted returns. In the event funds are raised, Zegona also has the ability to hedge any exposures. 

 

Brexit

Euskaltel operates entirely in Northern Spain and, therefore, it is not expected that the value of the investment will be materially impacted by any market impacts directly due to the United Kingdom's referendum decision to leave the European Union. Uncertainty is however likely to continue until the UK's future relationship with the EU becomes clearer and this could have an impact on the number or attractiveness of acquisition opportunities available to Zegona, although no such impact has been apparent so far. Given the complex negotiations involved, a clearer picture is not expected to emerge for some time and, with Article 50 only having been invoked in March 2017 and exit negotiations in their early stages, it is too early to determine what the likely effects on Zegona might be.

 

 

Statement of Directors' Responsibility

We confirm to the best of our knowledge:

 

·      the unaudited condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting; and

 

·      the interim management report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R and Disclosure and Transparency Rule 4.2.8R.

 

Neither the Company nor the directors accept any liability to any person in relation to the half-year financial report except to the extent that such liability could arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with section 90A and schedule 10A of the Financial Services and Markets Act 2000.

 

Details on the Company's Board of Directors can be found on the Company website at www.zegona.com.

 

By order of the Board

Eamonn O'Hare

Chairman and CEO
28 September 2017

 

 

 

			For the six months ended 30 June
			2017		2016 Restated[6]
			Unaudited
			€000		€000
Continuing operations
Administrative and other operating expenses			(2,293)		(1,954)
Significant project costs			(3,785)		(2,688)
Operating loss			(6,078)		(4,642)
Finance income			24		23
Gain on FX forwards measured at fair value through profit or loss			21		-
Exchange differences			35		26
Loss for the period before income tax			(5,998)		(4,593)
Income tax			(18)		(30)
Loss for the period from continuing operations			(6,016)		(4,623)
Discontinued operation
Profit for the period from discontinued operation			888		2,236
Loss for the period attributable to equity holders of the parent			(5,128)		(2,387)
Earnings per share - total operations
Basic and diluted loss per share attributable to ordinary equity holders of the parent (€0.01)			-2.6		-1.2
Earnings per share - continuing operations
Basic and diluted loss per share attributable to ordinary equity holders of the parent (€0.01)			-3.1		-2.4

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

 

			For the six months ended 30 June
			2017		2016
			Unaudited
			€000		€000
Loss for the period			(5,128)		(2,387)
Other comprehensive income
Exchange differences on translation of foreign operations			(52)		(438)
Total comprehensive loss for the period, net of tax, attributable to equity holders of the parent			(5,180)		(2,825)

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

 

			As at 30 June 2017		As at 31 December 2016
			Unaudited		Audited
	Note		€000		€000
Assets
Non-current assets
Property, plant and equipment			4		122,227
Intangible assets			1		559,779
Non-current financial assets	5		1,620		1,927
			1,625		683,933
Current assets
Inventories			-		626
Trade and other receivables	6		95		17,831
Cash and cash equivalents			1,050		22,435
Assets held for sale	4		717,103		-
			718,248		40,892
Total assets			719,873		724,825
Equity and liabilities
Equity
Share capital			2,738		2,738
Other reserves			376,086		381,155
Share-based payment reserve			84		60
Foreign currency translation reserve			(1,140)		(1,088)
Accumulated losses			(25,508)		(20,380)
Total equity attributable to equity holders of the parent			352,260		362,485
Current liabilities
Trade and other payables	7		2,458		31,317
Current financial liabilities			-		13,104
Deferred revenue			-		701
Liabilities directly associated with the assets held for sale	4		365,155		-
			367,613		45,122
Non-current liabilities
Non-current financial liabilities			-		267,045
Deferred revenue			-		2,667
Deferred tax liabilities			-		47,506
			-		317,218
Total liabilities			367,613		362,340
Total equity and liabilities			719,873		724,825

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.