Fidelity: Japan market entry the patient and careful way
Fidelity’s Colt to acquire KVH for YEN 18.595 billion (€ 130.3 million = US$ 160 million)
Both Colt and KVH were founded with investments by Fidelity Investments and associated companies, Colt in London in 1992, and KVH in 1999 in Tokyo, as telecommunications service providers for the financial industry and other industrial customers. While KVH remained 100% owned by Fidelity and associated companies, Colt was listed on the London Stock Exchange in 1996.
Initially founded as telecommunications companies, both Colt and KVH have developed into “information delivery platforms” based on networking infrastructure, data centers, optical fibre networks and associated management and information services.
On November 12, 2014, Colt announced the plan to acquire KVH for YEN 18.595 billion (€ 130.3 million = US$ 160 million) in cash from KVH’s owner Fidelity Investments.
Since KVH is 100% owned by Fidelity Investments, and Colt have also been founded by Fidelity which is still a shareholder, the acquisition needs to be approved by independent Directors and by independent shareholders of Colt.
A General Meeting of Colt’s shareholder has been announced for December 16, 2014 at 10:00am in Luxembourg where the approval of shareholders of Colt will be sought.
Colt – the “information delivery platform”
Colt operates 20 data centers and substantial optical fiber networks, and has more than 5000 employees.
Colt’s annual revenues are € 1,575.8 million (= US$ 2 billion) in 2013.
Colt market capitalization currently is UKL 1.19 billion (= US$ 1.9 billion).
KVH – “Asia’s information delivery platform”
KVH was founded by Fidelity Investments and related companies on April 2, 1999 in Tokyo.
KVH operates 9 Data Centers, owns optical fiber networks in Japan and to major financial centers in the world, and has about 590 employees.
KVH annual revenues are approx. € 133.6 million (= US$ 170 million) in FY2013, i.e. Colt is about 10 times bigger in terms of market cap and sales than KVH.
The planned acquisition values KVH at YEN 18.595 billion (€ 130.3 million = US$ 160 million), i.e. COLT is about 12 times bigger than KVH in terms of market capitalization/value.
Implications of acquisition of KVH by Colt – view as a Japan (and Asia) market entry by Colt
From the point of view of Colt, the acquisition of KVH – which has always been a sister company via the common investor Fidelity Investments, and common founder Jim Hynes – is a relatively low risk market entry into Japan and several other major Asian markets, and promises to have a very high chance of success for all parties.
We need to keep in mind, that essentially all other large scale market entries into Japan by infrastructure based telecommunication operators have failed: Vodafone, Cable & Wireless, WorldCom’s market entries into Japan’s telecom markets have all failed, and to our knowledge KVH is the only remaining internationally owned telecom infrastructure company in Japan today.
You can read a detailed discussion about why Vodafone failed in Japan in our blog here “Vodafone Japan could have been a business worth US$ 50 billion today. Why did Vodafone Japan fail and sell to SoftBank?”.
Essentially, both Vodafone and Cable & Wireless failed in Japan’s telecom markets, because they did not have the multitude of skills and know-how needed to manage a telecommunications business in Japan in a competitive manner. Colt with the acquisition of KVH acquires this know-how, and KVH at the same time has been an internationally managed company from the outset, so that Colt avoids the risks of acquiring a 100% Japanese companies such as Vodafone had done by acquiring Japan Telecom, with all the cultural issues that this entails.
At the same time, we also need to keep the scale in mind. While KVH has a market capitalization (i.e. the purchase price) of US$ 160 million, it can be argued that Vodafone-Japan could be expected to have a capitalization of around US$ 60 billion today had it been successful – i.e. about 375 times larger than KVH.
Japan’s largest telecommunication operator NTT currently has a market capitalization of US$ 62 billion, i.e. about 390 times larger than KVH, while SoftBank’s market capitalization is about 500 times larger than KVH’s.
Thus, if we see Colt’s acquisition of KVH as a market entry into Japan by a European telecom operator, then this is on an approx. 300-400 times smaller scale than Vodafone’s failed market entry into Japan, and with far better circumstances, and a far higher chance of success, and in our view with very carefully controlled risks.
Without doubt, a merger of KVH with Colt was on the minds of Fidelity Investments and Jim Hynes, when they founded both KVH and Colt in the 1990s.
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