KCom revamp set to elicit BT interest
By Courtney Weaver
Published: March 18 2011 22:28 | Last updated: March 18 2011 22:28
In the centre of Hull, a drab Brutalist-era building casts a shadow over the former fishing town. The offending edifice is that of the telephone company Kingston Communications – and the residents of Hull cannot get rid of it.
While new shopping centres have shot up around Hull, the KC headquarters and the company’s ubiquitous cream telephone boxes are reminders that Hull is different from the rest of Britain: it is not covered by BT.
In 1917, Hull’s council decided boldly to keep control over the municipal phone company instead of merging with the rest of its peers to form British Telecom, a decision many of the council members’ descendants would come to lament.
Though KCom, KC’s parent company, made it on to the FTSE 100 during the dotcom boom, shares in the company have fallen more than 90 per cent since their peak, a blow to the 50,000 Hull locals that bought into the flotation.
Moreover, as competition heats up across the country between BT and alternative broadband providers such as British Sky Broadcasting and Virgin Media, Hull has been passed over.
To locals, it is a version of Waiting for Godot. “We always thought other services would come, but they never did,” Mark Rolands, a resident and early KCom investor, says. “KC has got better but it’s a lot worse than it should be.”
Aaron Cryan, another resident, is less kind, denouncing the company as a “rip-off, monopoly and not open to change”.
After years of complacency, the financial crisis has forced KCom to wake up to such criticisms in a desperate two-year drive to restructure its business.
But the restructuring seems to have worked better than KCom would have liked, and may end up accomplishing the unthinkable: making KCom’s Hull business an acquisition target for BT.
“What would have been inconceivable a while back is not inconceivable now,” says Mark James, an analyst at Liberum Capital.
Since taking over as chairman in 2008, Bill Halbert, a BT veteran, has forced the company to abandon hopes of becoming a national network operator and eliminated six of KCom’s eight brands.
The company is now focusing on the two remaining brands: its managed services business for companies – also called KCom – and KC, the Hull business, with an emphasis on rebranding. Plans are also under way to knock down KC’s headquarters and replace it with a building more worthy of the city’s slogan: “Welcome to the new Hull.”
Internally, KC used to be called the “legacy business”, Mr Halbert says. “And when you visited the people in it and looked at the way that they were interacting with their customers, it behaved as a legacy business ... No ambition. No plan to grow. Defensive attitude. It had built up a monopoly in its traditional business and was resting on its laurels. Do legacy businesses go anywhere?”
KCom’s new plan, he says, is to offer Hull customers fresh services, such as cloud-based computing, and encourage them to sign up for new bundled services. At the same time, the company will try to expand its reach to nearby northern cities.
The makeover has won few friends in Hull. “They’re trying to rebrand themselves without allowing for competition,” says Mr Cryan. But it has been well-received by investors who point to the reduction of the company’s debt to earnings before interest, tax, depreciation and amortisation from 3.7 times to 1.5 times in the past two years.
The company reported a pre-tax profit of Ł19m in the 2009-10 fiscal year, versus a loss of Ł11m the year before, while its free cash flow has doubled.
The next step, analysts say, is for KCom’s managed services and Hull businesses to both be acquired; the first by a smaller telecoms group, such as Daisy, which has been expanding through acquisitions; the latter by its rightful king.
While a BT takeover once might have been unthinkable from a regulatory perspective, the situation has changed, says Liberum’s Mr James. “The regulatory pendulum has swung in BT’s favour over the past few years because it’s had the heart pulled out of it by the bundlers of this world, like TalkTalk, and lost ... market share.”
Mr Halbert dismisses the notion that BT could convince shareholders to go through with the deal, because it could hardly make enough returns in Hull to justify buying the business.
In the interim, KCom is hoping its new KC tagline, “Proud to be part of local life”, will start winning it more fans in Hull. Yet, if Mr Rolands is any example, KCom might make more inroads by focusing on the financials.
He is still waiting for the 60p shares to reach their 225p initial offering price – and the 900p at which he bought them.
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