C&W Price Calculation on KeyTech purchase

Cable & Wireless this week revealed the basis on which it had calculated its offer of $17 a share to acquire KeyTech. (Since KeyTech has subsequently issued a share dividend in the form of shares, the offer from Cable & Wireless, which stands, now equates to $15.45 per share.)
The Cable & Wireless offer represents a 35 percent premium on the weighted average price at which KeyTech’s shares traded on the Bermuda Stock Exchange in the month prior to the bid being made. Curiously, because of the relatively low volume of KeyTech shares traded on the Exchange, the offer also represents a 35 percent premium on the trading value of the shares over the three months and the six months prior to the bid being made.
“It’s worth pointing out, if you look at KeyTech’s balance sheet, that they had $35 million in cash,” explained Cable & Wireless Bermuda Chief Executive Officer Eddie Saints. “Obviously, you don’t pay a premium for cash, which you buy at one dollar for each dollar. So, if you take the cash out of the equation, the premium we are offering shareholders actually represents a 45 percent premium, on a net equity value basis, over the trading value of the KeyTech shares.”
Research carried out by Cable & Wireless also shows that the proposed premium is in line with, and even exceeds, premiums that have applied to telecommunications company takeovers in the United States, Mr. Saints said. He presented The Royal Gazette with analysis that showed how the Cable & Wireless bid stacks up against three measurements of US takeover activity in the telecomms sector:
* The premiums paid in 2006 US takeovers, based on the prevailing stock value a day before the bid, was 27 percent; on that basis Cable & Wireless’s bid would represent a 33 percent premium.
* Based on the one-week value, the average US takeover premium was 29 percent; the Cable & Wireless bid on that basis would represent a 40 percent premium.
“Our proposed offer is a unique liquidity event for KeyTech’s shareholders,” said Richard Dodd, the company’s chief executive for the Middle East & Islands, on a telephone call from London. Bermuda falls under Mr. Dodd’s management in the Cable & Wireless set-up.
“Only 25 percent of KeyTech’s shares have traded since 1998, in part because Bermudians tend to buy and hold until circumstances are right for a sale,” Mr. Dodd said. “Only 6.7 percent of KeyTech’s shares have traded in the past three years. We believe that this is the right set of circumstances for KeyTech shareholders to realise the value of their investment.”
Another method of valuing a company’s shares is its price/earnings ratio. The “P/E ratio” looks at how much a company earns and compares it with the price at which its shares trade. For illustrative purposes, a company earning $3 of profit, whose shares traded at $36, would have a P/E ration of 12; in other words, on that basis, its share price of $36 would represent 12 years of prospective earnings.
“Our offer for KeyTech would translate to an implied P/E of 17.6,” Mr. Saints said. “Our research shows that, in 2006, average P/Es for telecomms companies around the world have been 14.3 in Western Europe, 14.2 in central and eastern Europe, 13.3 in the Middle East and Africa, 13.5 in the US and 17.4 in Latin America.”
Some individual European 2006 P/Es cited by Cable & Wireless for telecoms companies included BT, the British giant, at 13.2; Deutsche Telekom at 11.7; France Telecom at 9.3; and Telecom Italia at 12.2. In the US, AT&T has a 13.8 P/E, while Verizon Communications is at 13.1.
“All these comparison assume that the value at which KeyTech carries its investments in affiliated companies is accurate,” Mr. Saints said. “We don’t know if they are. KeyTech affiliates over the years have made consistent and ongoing operational losses, which makes us wonder whether their value is fairly stated in KeyTech’s books.”
For its part, KeyTech this week issued a statement from the company’s chief executive officer, Sheila Lines as part of a letter to shareholders which outlined the Board’s reasons for considering that the proposal significantly under valued KeyTech
“In light of the recent publicity, speculation and queries about the desire by Cable and Wireless to buy KeyTech Limited, we wish to confirm that KeyTech has not received new or revised terms from Cable & Wireless to purchase KeyTech Limited since a suggested value of $205 million was discussed at KeyTech’s annual general meeting on July 21.”
Ms Lines continued: “At the AGM, the chairman, Dr. James King, told shareholders that ‘having considered the inherent value for the KeyTech group’s operations, its various assets and its current strategic position your Board is not recommending this price as being in the shareholders’ best interests’.”
That remains KeyTech’s position: that the offer is not sufficiently high, although, as Dr. King said earlier, the ultimate outcome of the bid “all comes down to price.”

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