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Telecom Sector: an M&A perspective

Andrea De Vita, CFA


+39 02 43444031
Andrea.devita@bancaakros.it

January 2008

M&A: a key investment theme for 2008


-

Strong Cash Flows generated by incumbents


Better performances obtained by most alternative operators
Satisfactory visibility on the outlook
Resilient underlying market
Technological change
Regulatory pressure
Convergence
Regulatory harmonization
Attraction towards emerging markets

Corporate Action
3

M&A: a key investment theme for 2008

Our analysis
1 - Business convergence
a - Fixed-Mobile convergence
b - Telecom-Media convergence
c - Telecom-ICT convergence

2 - Domestic consolidation

3 - Pan European deals


4 - Emerging countries

M&A: a key investment theme for 2008

Our conclusion
1 Favourable opinions on small/alternative operators
Iliad/Neuf Cegetel (major reshuffling in French scenario)
Jazztel (last remaining target in Spain)
Tiscali (more focused business perimeter, interesting user base in Italy & UK)
United Internet (both a consolidator and a target)

2 KPN, BT and TeliaSonera likely consolidation targets among the mid-sized


players. Value creation from a financial angle, reduction in the number of
market participants, convergence.
3 - Pan European deals expected in the medium term also between
incumbents. Likely aggregation around four main poles (FT, DT, TEF, VOD).
Minority transactions likely to anticipate bigger deals (eg TEF/TI).
4 Positive stock-market implications from emerging countries deals, in spite
of inflated asset prices. Top-line growth combined with interesting margins and
two-way synergies (eg Vodafone).

1.a - Fixed/Mobile convergence


Fixed going mobile with
quadruple play

Wireless looking for broadband

Accelerate F2M substitution

Internalize F2M substitution

Increase customer retention

Increase customer retention

Increase ARPU

Reduce transport/Interconn. costs

Reduce transport/Interco cost

Business segment needs

Business segment needs

Alternatives:

Alternatives:

Agreements with mobile operators

Agreements with wireline operators

MVNO option

HSDPA

Wi-Max

Wi-Max

M&A

M&A

M&A route to speed up deployment and bypass


technological bottlenecks

1.a - FMC: recent M&A activity


Fixed line players buying mobile operators
Wireless operators buying broadband channel
Buy-out of mobile subsidiaries by incumbents
FMC: past M&A activity
Bidder

Target

Country

Ann. Date

Deal value

Note

Telecom Italia

TIM

Italy

December 2004

EUR >14bn

2/3 cash+stock for 44%

Telefonica

TEM

Spain

March 2006

EUR 3,458

For 7.5% free float

Eircom

Meteor

Ireland

July 2005

EUR 420m

Third mobile op in IE

PCCW

Sunday

Hong Kong

June 2005

USD 249m

Owned a 3G license

Mobilcom

Freenet

Germany

2005

na

Intra-group merger

NTL/Telewest

Virgin Mobile

UK

December 05

USD 1.62bn

MVNO

SBC/AT&T

BellSouth

US

March 2006

USD 67bn

Joint ownership of Cingular

KPN

Tele2 Versatel

Belgium

August 2007

EUR 95m

Vodafone

Tele2 Italy-Spain

Italy/Spain

October 2007

EUR 775m

OTE

CosmOTE

Greece

November 2007

EUR 2.9bn

To date, the M&A route is preferred by wireline operators

1.a - FMC: potential M&A


Transaction

(EUR bn)

Note

Mobistar/Telenet

3.4

Mobistar/Scarlet

na

Mutual partnerships more likely

Mobistar/Walloon cable

na

Mobistar currently does not succeed in launching a true ADSL offer

Tre/Tiscali

1.6

A deal could involve both Italy and the UK

Vodafone/Retelit

0.2

Looking for fibre, following the acquisition of Tele2 Italy

SFR/Neuf Cegetel

4.7

Minority buy-out, triggering a domino effect in the French market

Vodafone/Jazztel

1.0

Takeover (probably after an initial agreement). Looking for fibre,


following the acquisition of Tele2 Spain

Yoigo (old Xfera)/Jazztel

1+1

The MVNO could look for broadband outlet

Ono/Yoigo

na

Triple play operator going for mobile

1.b - Tlc/media Convergence


The triggers

The assets

Technological
Distribution networks
Content digitalization
Telephony uplink
PC penetration
mobile ubiquity, personal
STB
Infrastructure separation in both
Increased bandwidth
telecoms and broadcasting
High-Definition TV
Content
Mobile Television (DVB-h)
Multi-platform competition for content
Regulatory
Public good vs. exclusivity
Interconnection, roaming tariffs
Pay-TV vs. Tlc: content acquisition or
Access to the Local Loop
Market
new distribution channels?
Competition between alternative
Customer contact/audience
platforms (Sat, cable, DTT, DSL)
Pay-TV benefiting from close contact
Internet advertising
and profiling
Sociological
Telecoms having sophisticated CRM,
Social networks
single bill
Internet audience/media consumption
Traditional broadcasters at
disadvantage
Limited interaction with DTT

1.b - Converging actors drivers/barriers


CONVERGING MEDIA

CONVERGING TELCOS

Drivers

Drivers

Access to a flexible platform


(Interactivity, PPV, VOD, Mobile)
Access to digital tech. (storage,
distribution)
Access to advanced CRM (billing,
profiling)
Pay Content + advertising
business model

Barriers

Investment size
Regulatory barriers
Corporate Culture

ARPU increase
Customer fidelization
Pay Content+ad business model

Barriers

Arms length transactions vs. equity


deals
Exclusivity rights
Regulatory barriers (eg SIC in Italy)

10

1.b - TMC: past and likely M&A activity


Bidder

Target

Country

Ann. Date

Deal value

Note

Tre Italia

Canale7

Italy

November 2005

EUR 200m

Acquisition of TV infrastructure

Tiscali

Homechoice

UK

August 2006

11.5% of Tis UK

Access to IPTV technology

BSkyB

Easynet

UK

October 2005

GBP 211m

Access to DSL network

Movie investment

France

November 2006

na

Produce 10/15 films p.a.

Sidus FNH

Korea

September 2005

USD 28m

51% in SK largest film-maker

France Telecom
KT

Several rumoured bids did not materialize (SKY/TI, Mediaset/TI, Sky/Fastweb) in Italy
Main targets domestic broadband players
Customer base more important for traditional broadcasters
Infrastructure more important for Pay-TV
Minority equity deals also likely with incumbents
Likely telecom/media convergent deals

Transaction

Country

(EUR bn)

Note

Prisa/Jazztel

Spain

1.0

Integrated media group

Sky/Retelit

Italy

0.2

Also related to Wi-Max

Sky/Tiscali

Italy

1.6 (Ita+UK)

Possible deal in Italy and UK

11

1.c - TLC/ICT Convergence


Past M&A activity
Bidder

Target

Country

Ann. date

Deal value

Belgacom

Telindus

Belgium

set-05

EUR 575m

Eutelia

Getronics Solutions Italia SpA

Italy

mag-06

na

Eutelia

Bull Italia

Italy

dic-06

na

BT

Intl network services

nm

feb-07

na

BT

I.Net

Italy

feb-07

EUR 100m

KPN

Getronics

NL

jul-07

EUR 1,025m

FT

GTL

India

Jul-07

EUR 30m

Increased technological complexity requires system integration approach


Service bundle including outsourcing, application-on-demand
Defend the corporate segment from VoIP and altnets activity
Mostly unregulated business to expand in, vs. constrained residential segment

Likely M&A activity


Transaction
Belgacom/Belgian IT svcs & solutions cos
Spin-off of parts of T-Systems from DT
BT/ICT companies

Note
Belgacom has communicated clear criteria, plans to develop ICT/consulting business
French IT consulting companies are interested in strengthening their position in Germany. DT has
started talks with US-based EDS, could seek to sell or float a merged entity
Growing new wave revenues

12

2 - Local Consolidation
F2M/ICT/media convergence: see above
Portfolio restructuring
Tiscali focussing on Italy and UK only
AOL exiting the EU ISP market
Vodafone dismissing minority participations
Tele2 selling less profitable ventures
Regulation
Price control (roaming, recharge fees, termination rates)
Easier customer unlocking
Enlarging competitive environment, requiring higher investments:
MVNO
WI-Max
Fibre
Media

13

2 - Local Consolidation: past M&A


Country

Date

Bidder

Target

Price

Asset

Belgium

May 07

Ale/Brutele

Walloon cable

EUR 464m

Cable network 650K TV subscribers

Aug 07

KPN

Tele2 Versatel

EUR 95m

200K fixed line subs, 125 BB subs

Feb 07

Teliasonera

Debited Denmark

EUR 98m

110K fixed-line subscribers, 300K mobile consumers

May 07

TeleNor

Tele2 Denmark

EUR 112m

227K mobile customers, 75K BB consumers, 206K fixed-line

June 05

TI

Liberty Surf

EUR 248m

0.4m DSL subs, 0.8m n/band

Sep 06

Neuf

AOL France

EUR 288m

500K DSL subs

Oct 06

SFR

Tele2

SEK 3.3bn

Wireline + 300K DSL

May 07

Neuf

Club Internet

EUR 450m

600K DSL subs

Sep 06

TI

AOL Germany

EUR 675m

1.1m DSL subs, 1.3m narrowband

Feb 06

Freenet

Tiscali B2C

EUR 30m

386K DSL subs in wholesale mode

Sep 07

UI/Drillisch

Freenet

nm

Joint 20.05% stake

Dec 05

BT Albacom

Atlanet

EUR 80m

Mar 07

Swisscom

Fastweb

EUR 3.7bn

1.16m DSL subs, 20K km fibre infrastructure

Jun 06

KPN

Demon NL

EUR 69m

ISP

Sep 06

KPN

Tiscali

EUR 255m

276K DSL subs

Sep 07

DT

Orange NL

EUR 1.3bn

1.9m mobile, 600K DSL lines

Jun 07

Sonaecom

Tele2

EUR 16m

12K BB customers; 310K fixed

Jun 07

Sonaecom

ONI Res. & Soho

EUR 25m

104K customers (92% res.,8% Soho)

Jun 05

T-Online

Albura (REE)

EUR 52m

7,500km network

July 05

Tele2

Comunitel

EUR 257m

76K active subs, 191 ULL sites

Nov 05

ONO

Auna Cable

EUR 2.25bn

>1m customers, >500K in BB and TV

Oct 06

Carphone W

AOL UK

GBP 375m

300 unbundled sites, 600K BB, subs, 1.5m narrowband

Nov 06

BT

Plusnet

GPB 67m

200K BB subscribers

Jul 07

Tiscali

Pipex

GBP 187m

570K BB subscribers, 600K voice subs

Denmark

France

Germany

Italy

NL

Portugal

Spain

UK

14

2 - Local consolidation: potential M&A

Transaction
Fastweb/Tiscali
Wind/H3G (merger)

Country
Italy
Italy

(EUR bn)
1.6
12+8

Note
Would trigger the disposal of UK unit.
Combination of cash/stock
Following failed IPO for both companies,
combination of tower infrastructure

Italy

1.6

Would trigger the disposal of UK unit. Likely


all-paper deal, way to floatation

Neuf Cegetel/Alice France

France

0.7

TI not willing to invest in fibre or consolidate

Iliad/Neuf Cegetel (merger)

France

3.5-7.5

Network capex (FTTH) optimization


Explicit interest in consolidation, following
the failed bid on Portugal Telecom

Wind/Tiscali

SonaeCom/Cabovisao/TvTel /PT MM

Portugal

0.7-3.4

Elisa / Domestic wireline player

Finland

na

UK

4/5bn

Germany

T-Mobile/Three
O2 / Eplus

Explicit company statement


Already studying
Synergies and size in Germany

15

3 - Pan-European deals

FINANCIAL BENEFITS
Cheap cost of money vs. High Free Cash Flow Yield
Untapped re-leveraging potential
Fiscal advantages (Spain)

INDUSTRIAL SYNERGIES
Reduction in the number of market participants (eg UK, Germany)
Combination of local wireline/Wireless operations
International roaming
Multinational customer segment
Procurement

REGULATORY CONVERGENCE
Easier dealing with regulatory issues
Converging view on network separation and media developments

16

3 - Value creation potential from M&A


We consider M&A as a key driver to create value
FCF/EV yields higher than 5% are enough to create value for debt-financed M&A transactions between
operators
With 20% premiums the yield is reduced to a 4% level, in line with the after-tax cost of financing
FCF yield can be increased by 1pp thanks to synergies
Financial criteria: Debt/EBITDA > 3.5x increase risk of rating downgrade leading to a higher debt spread
Our simulation also considers different paper/cash packages to meet the threshold. Dilution limit is set at
100% of existing capital.
EU incumbent FCF Yield
12%
10%
8%
6%
4%

T e le n o r

T e le 2

O TE

T e le c o m
Ita l i a

B r i ti s h
T e le c o m

T e l e fo n i c a

KPN

D e u ts c h e
T e le k o m

F ra n c e
T e le c o m

T e lia S o n e ra

Source: ESN estimates

B e lg a c o m

V o d a fo n e

0%

P o r tu g a l
T e le c o m

2%

The lack of industrial synergies and the risk of FCF decline in the investment period (>5y) puts
at risk value creation for private equities. We expect however these operators to participate
industrial transactions

17

3 - Value creation potential from M&A


ASSUMPTIONS
*20% Premium over market valuations
*Maximum leverage= 3.5x net Debt/EBITDA
*Value Creation=(FCF targetfinancial charges)/ FCF bidder
*Synergies not included

If Debt/EBITDA > 3.5x which is the share capital increase to meet


debt ratio at 3.5x? And the respective FCF accretion?
BCOM
BT

Debt/EBITDA
Value creation per share

DT

Debt/EBITDA
Value creation per share

FT

KPN

TEF

TI

PT

2,6

2,7

27%

25%

2,7

3,3

3,2

2,7

10%

13%

15%

10%

TLS

2,6

3,2

3,2

2,6

3,4

Value creation per share

9%

13%

13%

8%

13%

Debt/EBITDA

3,5

Value creation per share

32%

Debt/EBITDA

2,5

3,1

3,0

2,6

3,3

Value creation per share

7%

11%

11%

7%

10%

Debt/EBITDA

Debt/EBITDA
Value creation per share

VOD

KPN

Debt/EBITDA

Value creation per share


TLS

BT

3,5
24%
3,3

3,5

28%

26%

Debt/EBITDA

2,1

2,9

2,7

2,2

3,0

Value creation per share

6%

9%

9%

6%

8%

Likley/attractive transactions, w/o dilution

For DT: BCOM, BT, KPN and PT

For FT: BCOM, BT, KPN, PT and TLS

For TEF: BCOM, BT, KPN, PT, TLS

For TI: BCOM

Likely/attractive transactions w/ dilution <100%

For DT: TLS

For KPN: PT

For TNOR: BCOM and PT

For TEF: TI

For BT: KPN

For TI: PT and TLS

For VOD: DT, FT

18

3 Pan-European deals
Strategic Matrix
Target

Buyer

Belgacom

BT

KPN

PT

Telenor

TeliaSonera

DT

Possible. Synergies with


Enterprise business

Possible. Synergies with


Enterprise business and
with
T-Mobile UK

Unlikely. Overlap in the


Netherlands and in Germany

Unlikely. No obvious
synergies

Unlikely. The
state will not
give up control

Unlikely. TeliaSoneras
international stakes still shifting

FT

Possible. Arbitrage of its stake


possible if it gets out of
Mobistar

Unlikely. Presence in the


UK but useless international
enterprise business

Unlikely. FT got out of the Dutch


market and KPNs German asset
is not enough

Unlikely. FTs
presence as a
Sonaecom
shareholder

Unlikely. The
state will not
give up control

Unlikely. TeliaSoneras
international stakes still shifting

TEF

Unlikely

Unlikely. Fixed-line strategy


already in place through BE,
50% national coverage
through ULL

Unlikely. Explicitly ruled out in


the last Investors Day. Other
small operators in Germany are
more attractive

Unlikely. Strong
political opposition in
Portugal. Telefonica is
only interested in Vivo
Brasil

Unlikely. The
state will not
give up control

Unlikely. Very far markets

VOD

Possible. The exit from


Belgium was related to the
disposal of a minority position

Possible. Fixed/mobile
convergence; network
separation would attenuate
antitrust concerns

Possible. Market share in


Germany to increase to 50%,
re-entry into Belgium. Antitrust
issues would force disposal of
Dutch asset

Unlikely. Antitrust
problems with
consolidation in a
three-operator mobile
market

Unlikely. The
state will not
give up control

Possible. Creating a
Scandinavian player + emerging
market assets

Source: ESN estimates

19

Pan-EU deals: Telefonica/TI


The industrial rationale
Synergies in a few markets
Brazil (TEF #1 with Vivo, 50% JV with PT, TI #2 with TIM do Brazil)
Investment protection vs. sale to a third party (America Movil)
Very unlikely aggregation, tough restrictions imposed by Anatel
Germany (TEF wireless player, TI with EUR 500m revenues in BB)

Main issues

Brazilian Antitrust/Anatel to closely monitor the behaviour of the two

In Italy:
Fixed-line infrastructure separation
National interest

20

4 - Emerging markets

Predominantly mobile markets (eg Nigeria, 32m SIMs against 1.6m fixed lines)
Strong opportunities with mobile penetrations still below 25%
Ongoing privatization processes
Easy migration of best practices and services
Higher efficiencies in infrastructure deployment (Tower sharing, Network outsourcing)
Emerging countries: Main operators exposure as a % of revenues (H1-07)
% Western Europe

% Eastern
Europe*

Middle East/
Africa

North America /
Latin America

Asia/Pacific **

Belgacom

100%

0%

0%

0%

0%

DT

68%

9%

0%

23%

0%

FT

72%

18%

10%

0%

0%

KPN

100%

0%

0%

0%

0%

Mobistar

100%

0%

0%

0%

0%

PT

58%

0%

<3%

39%

0%

Telefonica

58% (incl. 38% Spain)

4% (Cesky Tel)

0%

38%

0%

TI

84% (incl. 79% Italy)

0%

0%

15%

0%

Telenet

100%

0%

0%

0%

0%

TeliaSonera

81%

19%

0%

0%

0%

Vodafone***

75%

9%

9%

0%****

9%

Operator

Source: ESN estimates *Includes Turkey; **includes India, Australia; ***as reported H1 08; ****0% in reported revenues and 21% in proportional revenues

Geographical and linguistic reasons lead to Spain and Portugal in Latin America (i.e. Brazil)/Nordic
countries in Eurasia (i.e. Russia, Turkey)/Different operators in Africa (i.e. Algrie, Nigeria, Kenya)
Vodafone the most active (sector-specific, strong balance sheet)

21

4 - Emerging markets: recent M&A


Emerging markets: main deals 2005/2007
Bidder

Target

Country

Ann. date

Deal value

Vodafone

Telsim

Turkey

Dec 2005

USD 4.55bn

Cash offer for 100% Telsim

Vodafone

Vodacom

South Africa

Dec 2005

USD 2.43bn

Increase interest from 35% to 50%

France Tel

Jordan Telec

Jordan

Jun 2006

USD 180m

From 40% to 51% ownership

Vodafone

Vodafone Egypt

Egypt

Dec 2006

USD 180m

From 51% to 55% ownership

Vodafone

Hutch Essar

India

Feb 2007

USD 11.1bn

For 67%, USD 18.8bn for 100% if Essar sells its stake

Maroc Telecom
TI
France Telecom

Note

Gabon Telecom

Gabon

Feb 2007

EUR 150m

Around 35k fixed-line subscribers, 250k mobile


subscribers

Solpart

Brazil

Jul 07

USD 550m

Disposal of 8% indirect stake in Brazil Telecom

EUR 270m

Around 300k fixed-line subscribers, its mobile


subsidiary Safaricom jointly

Telekom Kenya

Kenya

Nov 07

Emerging market asset values have soared (From USD500/user Telsim to USD800 Hutch)
Competition coming from global incumbents as well as local players
Formation of strong emerging market players (Orascom, MTN)

22

4 - Emerging markets: potential M&A


Transaction

(EUR bn)

Note

Deutsche Telekom on Eastern European companies

na

Deutsche Telekom already announced its interest in further acquisitions in Eastern Europe

France Telecom on Algerie Telecom

na

Explicit interest in this market, privatisation process

France Telecom on TPSA

10.0

Polish government may prefer TPSA remain listed

TEF in Brazil: 100% TIM Brazil

7.5

At 100% EV, issues with TEF/TI and PT/Sonaecom transaction

TEF in Brazil: 50% of Vivo

7.3

Acquisition if 50% in Brasilcel

France Telecom/Vietnamese operators

na

Explicit interest in this market, privatisation process

Vodafone on Telkom SA

9.6

total EV on 100% value, co is 54% govt owned

Vodafone/Vietnamese operators

na

Explicit interest in this market, privatisation process

TeliaSonera/Megafon

14

TeliaSonera owns 43.8%, aims at majority/control

Tele2/Russian operators

na

Tele2 aims to expand in Russian mobile

Vodafone/Vodacom

8.2

GBP 5.5bn - Vodafone already owns 50% of Vodacom Break-up with fixed line

France Telecom/Ghana Telecom

na

Proposal submitted to Ghanas government to take a stake in the privatisation

Portugal Telecom/Sub-Saharan operators

na

Strategic partnership with an Africa-focused investment group

Portugal Telecom/Telemar/Brasil Telecom

16.5

Consolidation in Brazil which would include Portugal Telecom/Telemar/Brasil Telecom. Brasil


Telecom is backed by the Brazilian government

TeliaSonera/Turkcell

14

TeliaSonera owns 37.3%, aims at majority/control

Belgacom/International carrier services

na

Belgacom admits this could be a way for it to profit from increasing traffic

23

M&A: a key investment theme for 2008

COUNTRY DETAIL

24

Belgium
Telecom market:
The incumbent (Belgacom) is majority
owned by the Belgian State;
Presence of three dominant foreign
investors. In broadband mkt: Liberty Global
with Telenet and KPN with Tele2/Versatel.
In mobile mkt: France Telecom with
Mobistar and KPN with Base.

Players strategies

Belgacom
Possible M&A in order to become an integrated solution
provider with a dual market approach (residential/business
customers).
Mobistar
Possible M&A activities in international markets being
owned by a foreign investor (France Telecom)
Telenet
Key drivers
- Tariff regulation
Debt refinancing and re-leveraging:
roaming regulation by European Commission; -to pay Telenets shareholders;
Possible consolidation among MVNO players
-to finance a possible smaller acquisition
- Fixed-mobile convergence
Possible collaboration between Base (mobile)
Broadband market share H1-07
Mobile market share H1-07
and Tele2 (broadband);
KPN
Possible M&A between Mobistar and?
Scarlet
Base
6%
7%
Belgacom
23%
- Scarlet (owning a DSL network)
45%
- Telenet (a cable operator offering fixed voice,
Belgacom
51%
internet and tv)
Telenet
- VOO (consortium of Walloon cable
36%
operators)
Mobistar
32%

25

France
Key drivers
-Fourth licence
Additional price pressure in the mobile market due to
the possible entry of Iliad.
-The strategies of Vivendi and Bouygues
Possible sale of Bouygues Telecom and
consequently entry of a foreign operator in Frances
mobile market.
Possible acquisition by Vivendi of Vodafones stake
in SFR (44%) potentially implying:
1) search of another partner by Vodafone (Bouygues
or Iliad)
2) Acquisition of the minorities of Neuf Cegetel by
SFR
-Fibre optic
Investment plans in FTTH , possible synergies
between operators

Players strategies
France Telecom
Focused on emerging markets (Algeria and Vietnam)
Iliad
Possible acquisition of Alice France if it is put up for sale;
Possible network sharing agreements with Neuf Cegetel.
Alice France
Low market share, limited mobile presence, not looking to FTTH
Bouygues Telecom
Possible target by Altice/Cinven.
SFR
Possible acquisition by Vivendi of Vodafones stake in SFR (44%)
potential subsequent acquisition of Neuf Cegetel minorities by SFR

Broadband market share H1-07


Mobile market share H1-07
Bouygues
Telecom
17%

Other
4%

Other
8%

Alice
6%

France
Telecom
45%

France
Telecom
47%

Neuf Cegetel
18%

SFR
34%

Iliad
21%

26

France: potential M&A


1) Major wave of consolidation:
- Possible buyout of Neuf Cegetel minorities by SFR
- Possible disposal of Bouygues telecom (Orascom among potential bidders)
- Possible disposal of Alice France in 2008 (most likely buyer: Neuf Cegetel)

2) Disposal of Vodafones stake in SFR to Vivendi


- Entry of Vodafone in Bouygues Telecoms capital
- Vodafone looking for a local wireline/broadband partner

Operator/Owner

Action

Operator

Total EV
(Eur bn)

Bouygues

Disposal

Bouygues Telecom

high

Acquisition

SFR

22

medium

Buyout of minorities

Neuf Cegetel

7.5

high

Domino effect in the French market

Acquisition

Alice France

0.7

high

TI likely to exit the market

Vivendi or Vodafone
SFR
Neuf Cegetel or Iliad

Probability Note
EV includes 100% of fourth mobile licence risk
Increasing control stake

27

Germany
Players strategies

Key drivers
-Mobile call price cuts
It is due to aggressive pricing by network
operators KPN and O2.
-Fixed network regulation
End of a protective regulation for DT: European
commission asks for open network access
=> this should benefit alternative operators.
Mobile market share H1-07
O2
13%
Eplus

Deutsche
Telekom
37%

15%

Vodafone
35%

Broadband market share H1-07


Cable
operators
4%
Versatel
Freenet

Other

Deutsche Telekom
Unlikely consolidation move
Possible disposal of non-core assets i.e. T-System division-rumours
about talks between DT and EDS.
Freenet
Possible takeover bid by United Internet and Drillisch.
Telecom Italia
Possible search for further broadband target, looking for synergies
with Telefonica/O2.
Telefonica
Minimal presence in the broadband space.
United Internet
The company could be a consolidator, possible deal on Freenet and
Versatel.
Vodafone
Unlikely need of M&A to play its convergent strategy, considering
the ownership of Arcor.

2%

3%

7%

Deutsche
Telekom
44%

Arcor
13%

Hansenet
13%
United Internet
14%

28

Germany: potential M&A


recent deals
- United Internet /Freenet
- Freenet could be split up into its divisions.
- Drillisch is interested in the mobile business.
- United Internet is interested in 1.27m DSL subs and in reinforcing its online advertising and potentially web hosting businesses.
-United Internet/Versatel
- Freenet could be split up into its divisions.
- Broadband market could end up in an oligopolistic structure based on 4 players: United Internet (together with Freenet and Versatel),
Arcor, DT and Telefonica/TI.
- Impact on QSC: The company could lose United Internet as one of its larger customers.
and potential deals
- Telefonica could be interested in increasing its mobile market share
- Bidding for Freenet.
- Waiting for United Internet to complete the Freenet deal.

Bidder

target

Total EV
(Eur bn)

Un. Internet / Drillisch

Freenet

2.3

80%

Potential break-up of the company (broadband/mobile)

Freenet/ United Internet

2.3/4.2

40%

Increasing market share in Germany

Telefonica

Probability Note

29

Italy
Players strategies

Key drivers
- Tariff regulation
- roaming regulation by European Commission
- Bersani law
-MTR for Tre, Wind
- FTTX
- capex increase => joint deployment plans,
network sharing, aggregation or exit of some
operators
- Fixed-mobile convergence
- Telecom-media convergence
Mobile market share H1-07
Tre
9%

Wind
18%

TIM
40%

Vodafone
33%

Broadband market share H1-07


Tele2
Tiscali 4%
5%
Fastweb
13%
Wind
9%

Other
6%

TI retail
63%

Telecom Italia
Network sharing the main domestic issue
Possible disposal of the Dutch and French assets;
Looking for synergies with O2 in Germany
Vodafone
Tele2 acquisition to enter wireline/broadband
Possible further deals to strengthen infrastructure or customers.
Fastweb
Some probability of a minority buy-out by Swisscom
Low probability of active consolidation
Tiscali
In spite of renewed growth plans, a prolonged cash burn could
prompt the company to sell the Italian asset.
Tre
Still weak economics. Possible disposal by the parent company
Wind
The company is looking for a minority shareholder, tower disposal,
convertible financing
Retelit
The company is a likely partner for any operator or media company
in search of telecom infrastructure

30

Italy: potential M&A


recent deals
Swisscom/Fastweb (Mar 07)
No overlap, negligible synergies, limited impact on competition (short/long term trade-off, increased coverage)
Vodafone/Tele2 (Oct 07)
for Telecom Italia: neutral impact
for Fastweb: Vodafone becomes a competitor in higher end customers and the corporate market
for Tiscali: the company could be put at the margin by Vodafone in ADSL
and potential deals
Two scenarios regarding Tre:
1) Possible merger between Wind and Tre (tightening their relationship through the tower business) 1
2) Possible acquisition of Tre by a foreign incumbent (i.e. Deutsche Telekom) 2

Operator

Action

Operator

Total EV
(Eur bn)

Wind 1

Merger

Tre

12+8

>50%

Weak economics on a stand-alone basis, close ties between shareholdres

FT / DT / VOD 2

Acquisition

Tre

10%

Hutchinson could sell both in Italy and in the UK

Sky

Acquisition

Retelit

0.2

20%

Telecom/media convergence, broadband deployment

Sky

Acquisition

Tiscali

1.6

5%

Telecom/media convergence in Italy and in the UK, broadband deployment

Tre

Acquisition

Tiscali

1.6

10%

Fixed mobile convergence (possibly also in the UK),broadband deployment

Vodafone

Acquisition

Retelit

0.2

10%

Acceleration in fibre deployment

Wind

Acquisition

Tiscali

1.6

10%

Explicit interest by Sawiris, route to flotation

Probability Note

31

Italy/Local Consolidation: Wind/Tre


DRIVERS
Regulation
Elimination of top-up charges (Bersanis
decree)
Alignment of F2M rates to incumbent
Elimination of contract bounds
Competition
Defend from MVNOs
Defend from Wi-Max
Broadband convergence
Site sharing / Complementary technology

Disposal of unified tower network

BARRIERS
Stretched balance sheet
Control issue (merger of equals in case of no
cash infusion)

Wind/Tre aggregated KPIs (EUR bn)


2007 est.

Wind

Tre

3Wind

Mobile customers

15.3

8.0

23.3

Wireline Customers

2.3

0.0

2.3

DSL Customers

1.1

0.0

1.1

Revenues

5.2

2.5

7.7

EBITDA

1.8

0.1

1.9

Capex

0.7

0.4

1.1

Fixed assets

6.2

4.0

10.2

EV

12.0

8.0

20.0

Debt*

6.2

3.9

10.1

EV/EBITDA

6.7

nm

10.5

Debt/EBITDA

3.5

nm

5.3

Equity

5.8

4.1

9.9

Employees (000)

7.0

2.7

9.7

(*) Assumption: stock deal

The best scenario for the Italian mobile environment

32

Germany: UTDI M&A


Recent CEO statements:
Full take over of Freenet of Versatel is not on the near-term agenda.
UTDI interested in exploiting any synergy potential out of a possible combination with Versatel or Freenet as long as the broadband
market enjoys vital growth.
Currently no talks between United Internet and Apax (major Versatel shareholder) or Vatas (22.1% Freenet shareholder).
United Internet would however not decline to speak with them.
United Internet strives to increase its influence through Versatel and Freenet supervisory boards.
CEO Dommermuth does not see Telefonica in the current bidding process for Freenet or Versatel.
United Internet would be ready to sell the Versatel or Freenet stake, if prices were very high.
Nevertheless all options remain open.

Our scenario:
United Internet has not over-paid past acquisitions and will most likely seek to acquire Freenet and/or Versatel as cheaply as possible.
We would have expected United Internet at least to increase Freenet holdings to more than 25% before 31 December 2007 (currently
20.05% through joint venture with Drillisch) to secure an option that allows for improved Freenet tax loss carry forward usability. United
Internet could completely take over the joint venture with Drillisch after Freenets MSP business has been sold.
United Internet could start to purchase further Freenet and Versatel shares to acquire the majority. Holdings of more than 30% would
originate a mandatory public offer. United Internet could wait until lower price levels for such an offer are reached (average trading price of
past 90 days according to the Federal Financial Supervisory Authority).
Freenet could pay out another super-dividend.
We believe that the synergy potential through a combination between Freenet and Versatel is large. With its Freenet and Versatel
holdings, United Internet has placed poison pills for any third party acquirer. Hence, the upside for both Versatel and Freenet could be
limited. United Internet itself could be the best investment in the sector.

33

Italy/Local Consolidation: Wind/Tiscali


DRIVERS
Market rationalization
Technology (Video)
BB Customer base
Infrastructure (Colos)
Route to the stock market
Limited impact on debt position
assuming a stock deal and/or sale
of UK unit
BARRIERS
TIS Main shareholders decision
Management/corporate culture
Relative Valuation

Wind/TIS aggregated KPIs (EUR bn)


Wind

Tis ITA

NewCo
Ita

Mobile cust.

15.3

0.0

15.3

15.3

Direct WRL cust.

2.3

0.6

2.9

1.0

3.3

DSL customers

1.1

0.55

1.7

2.6

3.7

Revenues

5.2

0.28

5.4

0.93

6.1

EBITDA

1.80

0.06

1.9

0.17

1.96

Capex

0.70

0.08

0.78

0.2

0.90

EV

12.0

1.6

13.6

Debt*

6.2

EV/EBITDA

6.7

9.5

6.9

Debt/EBITDA

3.5

3.9

3.5

Equity

5.8

1.0

6.7

Employees (000)

7.0

2.8

9.8

2007 est.

0.9

7.9

Tiscali
PF**

Total

(*) Assumption: stock deal (**) pro-forma with 12m Pipex

34

Tiscali ...a take-over candidate


PROS
+ Main way into the Italian market for foreign players, possibly related to the acquisition
of Tre (FMC driver)
+ Interesting broadband channel for media groups both in Italy and the UK (TMC
driver)
+ Easier target with a narrower business perimeter following asset disposal
+ An acquisition by Swisscom followed by a Merger with Fastweb could help
rationalize the market and better segment the customer base
+ Possible floatation of the UK unit; keep attention to minorities and hidden liabilities
anyway
CONS
- Cash injection (EUR 150m share issue, EUR 400m bond) increases the likelyhood
of go-alone strategy
- Main shareholder considerations: emotional attachment to the company, political
issues
- Funding issue for a take-over by Wind

35

Netherlands
Players strategies
Key drivers
- Consolidation already happened
In Mobile from a 5 to a 3 player market (KPN took
out Telfort, T-Mobile bought Orange)
In broadband, KPN took out Tiscali and several
smaller players
Battle will be between KPN and the cable operators
KPNs move to All-IP likely to trigger further shake
out (Tele2, BBned)
Cable sector has consolidated to two main players
(Zesko and UPC).
Broadband market share H1-07
KPN
Scarlet
6%
7%

Belgacom
51%
Telenet
36%

Mobile market share H1-07

Base
23%

Mobistar
32%

Belgacom
45%

KPN
KPN focuses on small and medium-sized deals that strengthen
its existing businesses. Key examples have been the
consolidation of its position in broadband, Telfort, and Getronics
(transforming its position in the Benelux business market to
converged telco/IT services)
KPN may look for take-over of mobile operators in adjacent
countries, to leverage the challenger strategy of E-Plus (earlier
mentioned Sunrise as a possible example)
Management takes a disciplined approach to potential deals,
focusing on shareholder value (e.g. ruled out take over of
Bouygues Telecom). So far most of the FCF has been returned
to shareholders through dividends and buybacks

We expect KPN will become a target itself once panEuropean sector consolidation takes off:
Efficient operations, relatively high FCF yield, medium
size
the strategic value of the German mobile assets
the absence of State influence (contrary to most of the
other medium sized players)

36

Nordic countries
Players strategies
Teliasonera
Focused on expansion in the Eurasian region (now more than 40% ebit
comes from growth regions Turkey, Russia and Eurasia);
Potential acquisition target.
Telenor
Possible investments in eastern Europe, Asia and Northern Africa.
Tele2
Pulling back on non-core European investments; possible further asset sales;
Concentration on the mobile core business especially in Russia.
TDC
Focused on domestic market.
Elisa
Unlikely acquisitions outside Finland;
Likely consolidator in domestic market (with wireline players).
Sweden
Mobile market share H1-07
Telenor
18%

Tre Others
5% 1% TeliaSonera
47%

Tele2
29%

Broadband market share H1-07


Others
24%

TeliaSonera
37%

Ownership

Potential buyers

Teliasonera

SEK 264bn

Swedish state 37.3%;


Finnish state 13.7%

European operator

Telenor

NOK 216 bn

Norwegian state 53%

Not for sale

TDC

DKK 54 bn

Private equity 88%

European operator

Operator

Action

Operator

Total EV

TeliaSonera

Acquisition

Turkcell (Turkey)

EUR 14 bn

na

TeliaSonera

Acquisition

MegaFon (Russia)

EUR 14 bn

na

TeliaSonera

Acquisition

Emerging mkts /
Eurasia

na

na

Tele2

Acquisition

Russian operators

na

high

Telenor

Acquisition

Eurasia

na

high

Norway

Finland

Mobile market share H1-07


Other
Tele2 9%
8%

NextGenTel
13%

Other
8%
Telia
25%

Elisa
40%

Telenor
50%

Mobile market share H1-07

TeliaSonera
40%

Telenor
53%

Broadband market share H1-07


Other
37%

Others
1%

Finnet
14%

TDC
42%

Telenor
25%

Broadband market share H1-07


DNA
12%

Probability

Denmark

Mobile market share H1-07


DNA
19%

Netcom
30%

Com Hem
16%
Bredbandsbolaget
23%

Mkt cap

Others
11%

Elisa
34%

TeliaSonera
29%

Broadband market share H1-07


Other
22%
Telia
9%
Telenor
10%

TDC
59%

37

Nordic: potential M&A


relevant past deals
Tele2 Denmark and Debitel Denmark: As part of the ongoing consolidation of the Danish market Telenor in 2007 acquired the Danish operations of Tele2 and TeliaSonera
acquired the Danish operations of Debitel
Tele2 Norway and Network Norway Partnering: Following its MVNO agreement with TeliaSoneras Netcom (2008-10), Tele2 has formed a joint network company with Network
Norway to build a third GSM/3G network in Norway. We believe this will have significant market impact in the longer run. Tele2 can move its traffic to the new network in 2010.
Finnet split: The Finnish operators in the Finnet association has decided to split creating two new companies which in the future will compete. This will most likely create new
competition in the Finnish market.
and potential deals
No larger deals in the Nordic markets (consolidation): As the markets have come to a conclusion of the consolidation phase we do not expect any larger deals in the coming
period. We do however expect a number of minor rtasactions where privately held companies will be taken out as the established companies consolidate their customer
bases.
New entrants to the Nordic market: We see good changes for some of the Nordic operators to come in play as key shareholders might plan to exit the companies. No clear
signals have however been sent yet. The companies in focus are TDC (the private equity companies plan as exit as the company does not develop as expected, we believe),
TeliaSonera (the Finnish and Swedish states plan to reduce their holdings) and Tele2 (following the 2006-07 sales of non-core assets, the company might be put up for sale)
International expansion: Telenor, Tele2 and TeliaSonera are expected to expand further into Eurasia

38

Portugal
Key drivers
-Tariff regulation
-Consultation process initiated by regulator to
implement changes in MTR;
- Request to the regulator to reduce the high
spectrum cost in order to mitigate the MTR
impact.
-Fixed/Mobile convergence
protect own customer base
offer differentiated services
increase the ARPU
Bundled package w/fixed communications and
ADSL services by Vodafone;
Spin-off of PT Multimedia

Broadband market share H1-07

Novis
10%

ONI Other
5% 5%

Players strategies
Portugal Telecom
-Dominance in all major segments (broadband internet, fixed,
mobile, pay-tv) and leading mobile operator in Brazil (jv with TEF).
Possible disposal to TEF of its stake in Brasilcel and acquisition of
a stake in Telemar or Brasil Telecom (see slide 23)
- Aim to consolidate and restructure its operations in overseas
markets (besides Brasil also Africa see slide 23 ).
- Spin-off of its 58.43% stake on PT Multimedia (30th October)
PT Multimedia
After the spin-off, PT Multimedia can be a potential M&A target but
the company will likely maintain its independence (see slide 15).
Sonaecom
Increase of direct and indirect telecommunications services due to
consolidation process (acquisition of Tele2 Portugal and SoHo
business from OniTelecom see slide 14 )
Mobile market share H1-07

PT Multimedia
25%

Optimus
17%

Caboviso
10%
Portugal
Telecom
45%

Vodafone
37%

TMN
46%

39

Spain
Key drivers
-A Market 4-player market (TEF, VOD, Orange, ONO)
Small players are focused on special segment of the
business (i.e. Jazztel in broadband, Yoigo in mobile)
-Dominance of the incumbent in fixed-line business,
broadband and mobile
-TEF share in broadband SOHO (accounted as retail) is
over 70%. Penetration in this segment has reached 80%
- Strong spread in prices between incumbent and
competitors: EUR 35 Orange triple play vs. EUR 65 TEF
-Fixed-mobile convergence: first offer has recently
appeared (ONO, EUR 7/month flat tariff)
-Telecom-media convergence: TEF owns 17% of SGC
-Regulation: easy for the incumbent, network separation
not expected
Mobile market share H1-07

Players strategies
Telefonica
-Price hikes starting 1st of January: over 2% in most of the
cases (line rental fee, national calls, bundle offers)
-Migration from unique voice to bundle offers: still room
potential (only 30-35% with combined products)
Vodafone
-Mobile: similar prices than TEF, fostering on-net traffic
-Broadband: Tele2 is not enough in terms of accesses
Orange:
-Very aggressive pricing policy
ONO:
-Starting as MVNO (ONO io), completing the range of
services
-MVNOs
-Not very successful yet till they launch a flat tariff
Broadband market share H1-07

Orange
24%

Vodafone
31%

Telefonica
Moviles
45%

Jazztel
4%
Orange
15%

Other
9%
Telefonica
56%

ONO
16%

40

Spain: potential M&A


relevant past deals
ONO-Auna: EUR 2.3bn (11x EBITDA05 before synergies), with 1m customers, ow/ 500k broadband and 500k TV subs
Orange-Ya.com: EUR 320m. 390k broadband customers (228k ULL and 161k resellers). Operating parameters and
fiscal credit unknown.
Vodafone/Tele2 deal: acquired with italian assets, EUR 225m implicit price according to our estimates (1x sales07).
247k broadband customers (200k ULL) and 307k telephony users, negative EBITDA (fiscal credit: unknown)
and potential deals
Jazztel: see JAZZTEL slide
Yoigo: 240k mobile users (0.7% share), negative EBITDA. Teliasonera has not clarified its strategy yet.

Simple comparison approach among JAZ, Ya.com and Tele2

41

Telefonica

Europe
Germany: 4th largest mobile operator (12m clients), while in the other 20 markets TEF is the leader or the 2nd,
requiring size in a very competitive environment with double digit decline in ARPU. Likely candidates: Freenet (EUR
1.6bn. 5.5m mobile users and 1.2m DSL), United Internet (EUR 3.9bn), Versatel (EUR 1bn). Others: E-Plus (owned
by KPN), Hansenet (TI), Drillisch, Debitel (owned by venture capital).
Telecom Italia: deal is not envisaged in the short term, but likely in 3-year timeframe (contributing synergies in EuropeBrazil)

LatAm
Brazil: acquisition of 50% Brasilcel (owns 63% Vivo): blocked at the moment till Portugal Telecom finds another
operator in that market (Telemar?). The deal could cost ca. EUR 4bn (over 10x EBITDA08e), way above our
valuation, although potential synergies with Telespi and TIM (not right now due to regulator restrictions) can be justified
Mexico: searching an operator for broadband expansion in a market of over 100m pop. and totally dominated by
Telmex (>90% share)

Operators which are not in the pipeline: Bouygues Telecom, KPN and OTE

42

Jazztel ...a take-over candidate


PROS
+ Assets break-up value much higher than current EV (network+fiscal credit+customers)
+ Very interesting assets for competitors in terms of gaining market size: potential access to 2m
customers, while Tele2 can offer only 0.6-0.8m to Vodafone (15m mobile clients, ca. 5m
households)
+ Interesting assets for media companies wanting to enter in the broadband market as a way to
foster content consumption (Prisa?)
+ Ideal candidate for a pure mobile operator wanting to play the fixed and mobile convergence
(America Movil, Yoigo, KPN)
+ No shareholders blocking rights (main shareholder = 23% stake)
CONS
-

FCF destruction implies competitors may wait for a cheaper break-up value: CF burn has
been reduced strongly, with EBITDA break-even and very low CAPEX (below EUR 30m/year)
Very little progress in capturing new connections: no additions during the year
Bond convertible will mature in 2010: EUR 275m

43

UK
Players strategies

Key drivers
- Telecom-media convergence
-Acquisition of Easynet by Sky;
-Acquisition of Homechoice by Tiscali
- Fixed-mobile convergence
-Acceleration of F2M through M&A, especially by TMobile and 3.
- Telecom-ICT convergence
-BT aiming to become a global provider of IT and
networking (Infonet and I.net deals by BT)
Mobile market share H1-07
T-Mobile
24%

Vodafone
24%

Three
6%
O2
25%

Orange
21%

Broadband market share H1-07


Tiscali
13%

other
8%

BT retail
27%

SKY
5%
Orange
7%
CPW/AOL
16%

Virgin Media
24%

British Telecom
Possible further delas to increase its market share in broadband market;
Possible deals to strengthen in the ICT segment.
BSkyB
Possible of further deals to accelerate its growth trend in broadband
C&W
Possible split of its UK and intl operations in view of a separate sale to private equity.
Carphone warehouse
Possible active player in the telecom M&A.
O2
Possible player in the broadband M&A.
Orange
Looking for a recovery of its DSL activities
Three
Disposal option is more likely than external growth. T-Mobile is a potential bidder.
Tiscali
Gained critical mass with Pipex. More likely a target than an active consolidator.
Vodafone
Partnership model with BT in ADSL
Possible player in M&A (see the recent deal with Tele2) also abroad (see next slide)
Virgin Media
The company has put itself up for sale.

44

BT
Local Consolidation
Small broadband providers
BT has the financial capacity to buy small broadband providers and has already completed similar
deals like PluseNet. These add ons increase its broadband customer base and may also improve
its expertise in the area.

Private Equity Deals/Pan-European Deals


BT is a suitable LBO candidate
An European incumbent could also acquire BT
Bt has no blocking stake and significant scope to re-leverage in particular due to the utility nature of
Openreach. Potential buyers could sell off Global Services to raise funds. However, the sheer size
of BT may necessitate private equity houses joining forces in order to complete the deal.

Telecom/ICT convergence
ICT companies globally
BT has the financial capacity to buy ICT companies around the world and has already completed
similar deals such as Infonet and Albacom to broaden the geographic scope of BT Global Services
and its expertise.

45

46

47

Banca Akros S.p.A.


Viale Eginardo, 29
20149 Milano
Italy
Phone: +39 02 43 444 1
Fax: +39 02 43 444 302

Bank Degroof
44, rue de IIndustrie
1040 Brussels
Belgium
Phone: +32 2 287 91 11
Fax: +32 2 230 84 89

Egnatia Finance S.A.


8 Dragatsaniou St.
105 59 Athens
Greece
Phone: +30 10 32 79 200
Fax: +30 10 33 11 419

Equinet AG
Grfstrae 97
60487 Frankfurt am Main
Germany
Phone:+49 69 58997-0
Fax:+49 69 58997-299

Caixa-Banco de Investimento
Rua Barata Salgueiro, 33-5
1269-050 Lisbon
Portugal
Phone: +351 21 389 68 00
Fax: +351 21 389 68 98

Caja Madrid Bolsa S.V.B.


Serrano, 39
28001 Madrid
Spain
Phone: +34 91 436 7812
Fax: +34 91 436 7837

Mandatum Securities
Unioninkatu 22, P.O. Box 66
00131 Helsinki
Finland
Phone: +358 10 236 4702
Fax: +358 9 175 156

NCB Stockbrokers Ltd.


3 George Dock,
Dublin 1
Ireland
Phone: +353 1 611 5611
Fax: +353 1 611 5766

CM - CIC Securities
6, avenue de Provence
75441 Paris cedex 09
France
Phone: +33 1 45 96 77 04
Fax: +33 1 45 96 77 88

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invested. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in these reports. In addition, investors in
securities such as ADRs, whose value are influenced by the currency of the underlying security, effectively assume currency risk.
Unless agreed in writing with an ESN member, this research is intended solely for internal use by the recipient.

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