Hugo Eales: We’re looking at a market where there
has been a lot of consolidation. Ultimately it’s a
question of us delivering
Colt is winding down its IT services business and will be focusing on its network. But the company’s new management team has a tough target: by 2017 it has to persuade its near 100% owner, the investment group Fidelity, that its long-term business is viable. Otherwise — well, the future is uncertain.
“This year and 2016 will be critical for us, and that’s what I’ve said to Carl,” says Hugo Eales, who has been group CFO since November 2014.
“Carl” is Carl Grivner, the executive VP of network services, who takes over in January 2016 as CEO of the group from Rakesh Bhasin, the head of the company for nine years. Bhasin is going back to Fidelity.
Grivner is even newer to Colt than Eales. Until the end of 2014 he was CEO of Pacnet, leaving after Telstra announced its $697 million purchase of the company, which runs networks and data centres in Hong Kong, Singapore and across the Asia Pacific region.
Grivner joined London-based Colt in May 2015. His new company is more than three times the size of Pacnet — Fidelity’s deal in June to buy the Colt shares it didn’t own valued the group at £1.73 billion, equivalent to $2.36 billion.
Despite change at the top, there will be no sudden adjustments to Colt’s five-year plan, which was agreed at the end of May, says Eales. “We decided to focus on the network and close down IT services.”
That in itself was a remarkable about-turn. What used to be Colt Telecom was renamed Colt Technology Services in 2010, when Bhasin told GTB: “Our primary focus is managed services — that complements our network assets.”
Now, says Eales, as he gets ready for the post-Bhasin era, “IT services was the right thing at the time, but for the next two to three years the network is the focus.”
Colt will wind down IT services “over two to three years”, he says. It is a decision “that had a level of finality. It helps customers to manage their expectations.”
Why? It makes financial sense. “If we can invest the capex in the network that we would have spent on IT services, the returns are better. That is the core for us.”
The change means no cloud services, though “the networking part of the cloud is still very important”, and a renewed focus on delivering network connections — and a focus on cutting the costs by using software-defined network and network functions virtualisation technology, something in which Grivner’s old company Pacnet was a pioneer.
“We are investing in NFV and SDN,” says Eales. “Carl Grivner certainly understands the network.”
This will help Colt in its three priorities, he explains: growth, managing customer experience, and efficiency. “This is a market that typically sees 3-5% a year price erosion,” he points out. Hence the need for efficiency, “but efficiency is not just cost cutting”. The company wants “more volume at the same time” as “Fidelity do want a return on their investment”, and “if we don’t grow, we don’t deliver a good customer experience. It’s important we deliver all three.”
SDN should be a key enabler for this, he notes, by allowing the company to operate with less hands-on management.
Colt has already started its investment in SDN. “We know we want to go that way, and we have tested it with one or two customers. We want to ensure [the service] is resilient.” Expect an announcement later in October.
“I do think we have a unique opportunity to be faster. We’re not the biggest company on the planet. We can be incredibly competitive in price. [Colt] is a less complex business.”
And the company will be investing in its sales force in order to build up business, he says. “Some of them are street fighters.” Colt will be encouraging them with higher commissions, he says. The aim will be to get better usage of the Colt network — which reaches 22,000 buildings via 45 metro networks — and reduce the temptation to sign customers that require off-net connections.
“We might need some capex” to increase the number of on-net connections, “but 90% [of business] is renewal in this industry.”
Behind all this will be hard research to find out which companies are in each of those buildings, and “that means knocking on doors” to find out “who won last time”.
There’ll be some network efficiencies as well, says Eales. “Technology has changed so much, and the need to have multiple nodes in a city has changed. We will look at that in the long term. We’ll be looking at how that works in making us leaner and more efficient with the equipment that is available.”
But that’s not the immediate task. The biggest issue is that “we have a very good execution plan to deliver against”, says Eales. “I’m confident that we have the right plans for customer experience and efficiency, and the focus is growth. We will continue to invest in the sales force.”
Meanwhile, though, the company has changed radically since Eales arrived a year ago, after spending the previous four years at BT Global Services, a year as CFO of the UK operation, then three years for all of BT’s international wholesale and enterprise operation.
When he joined Colt, it was a public company, quoted on the London stock exchange. In June 2015 Fidelity, which had been a key shareholder since Colt was set up in 1992 as a metropolitan network for central London, bid £569 million for the 38% of shares it didn’t own, offering £1.90 a share.
Despite some grumbles from a few shareholders they recognised it was a good offer — Colt’s shares were only £1.27 in late January 2015 — and virtually all accepted, helped by Fidelity’s insistence that it would not increase the offer.
“Now 97.5% of shares are owned by Fidelity,” says Eales, and the company will begin a squeeze-out process to take over the rest.
The change means Eales’s world is different from what he expected a year ago, as Colt is no longer a public company. No more analyst meetings, for example, though “they were fun to do”, he says.
“But we are still a separate company, privately owned rather than publicly listed.” Expectations are no different from the guidance Colt was giving the market when it was still public, he says.
Fidelity had always been the largest shareholder since the company started. “They kept it together,” says Eales.
Will Fidelity still keep it together? Back in June, when it insisted it would not raise its bid from £1.90, Fidelity made a curious statement: “Fidelity has committed to holding its investment in Colt and not to sell or take any other steps to dispose of its Colt shares to any third party prior to 31 December 2016,” it said. “This commitment stands whether as a consequence of the offer Colt becomes a private company, or remains as a public listed company should the offer lapse.”
That’s effectively a deadline, and the new management knows it. “The Fidelity view is to get it in into shape and do what [should be done] with it,” says Eales, who is reassured that there is a five-year plan from May 2015.
The plan includes what used to be KVH, a Japanese network operator that was also owned by Fidelity — Bhasin headed the unit before he came to London. KVH was acquired in January 2015 and is now Colt Asia, with operations in Tokyo, Singapore, Hong Kong and Seoul.
“It gives us a better footprint and the opportunities that come from it,” says Eales. And a network in Asia means Colt will not need so many off-net deals for its European customers that want connections there.
“The market used to say, ‘When will we see return on investment? When will Colt have positive cash flow?’” says Eales. Now the company needs “to deliver against what we’ve committed to do, even though we’re private.”
But the end of next year is clearly marked in his calendar. “Fidelity went out and said there are no plans for a sale before 2017. We’re looking at a market where there has been a lot of consolidation. Ultimately it’s a question of us delivering.” GTB