EC proposals on broadband development under SIngle Market

EC speech (230206, Helsinki)

• 6G: Launches R&D project Smart Networks and Services Joint Undertaking (to lead the conception & standardisation of 6G)
• Broadband:
• Access regulation:
• plans Broadband Cost Reduction Directive Feb 2023
• plans Gigabit Recommendation (guidance for NRAs on how to use tools at their disposal to incentivise faster network deployment)
• Operating models: proposes morphing telcos from connectivity providers to infrastructure-as-a-service providers
• Fair share contribution (Internet Traffic Tax): plans consultation on "the future of connectivity and infrastructure": what is the infrastructure that Europe needs and how to timely mobilise investments? "raises the question of who pays for the next generation of connectivity infrastructure" (European Declaration on Digital Rights and Principles for the Digital Decade already established that all market players benefiting from the digital transformation should make a fair & proportionate contribution to public goods, services & infrastructure)
• Harmonisation, consolidation: how we can build a true Single Market for telecoms (curently based on business models based on national markets & high costs for national spectrum licenses), requires reflection on encouraging cross-border consolidation

Vodafone to acquire Liberty Global assets

Vodafone acquires Liberty Global assets for EUR 18.4b o/w 10.8 cash, 7.6 existing Unitymedia debt.

• Operations
• DE (Unitymedia; together 25m HP = 2/3)
• HU (1.8m HP = 43%)
• RO (3.1m HP = 41%)
• CZ (1.5m HP = 33%)

• Valuation
• EV EUR 18.4b
• 10.9x EBITDA 2019 (pre synergies)
• 8.6x EBITDA (post synergies 5 yr)
• 12.5x OpFCF (post synergies 5 yr)

• Closing
• To close mid 2019
• Break-up fee EUR 250m payable to Vodafone, or payable to Liberty if for antitrust issue.

• Synergies
• Cost/capex synergies (network integration, IT/billing simplification, procurement, consolidating overlapping functions) 535m EUR/yr from yr 5 (before integration costs)
• NPV EUR 6b (after integration costs) o/w rev synergies NPV EUR 1.5b (from cross-selling)
• Integration cost EUR 1.2b (in first 5 yr).

• Accreditive to FCF from yr 1.

• Increases targeted net debt/EBITDA to 2.5-3.0x (pro forma at high end).

• Liberty Global to provide transitional services to Vodafone (IT, TV platform tech, connectivity, other support) max. 4 yr; pro forma EUR 128m in 2019.

Tele2 acquires Com Hem: target 'untapped customer demand'

Merger announcement & presentation:

• Acquires Com Hem
• HH coverage 60%, 1100 employees
• Results TTM: rev SEK 7.1b, adj EBITDA SEK 2.9b, OFC SEK 1.8b)
• Merger, Tele2 absorbs Com Hem.
• Cash (per share: SEK 37.02 SEK) + stock (per share: 1.0374 B-shares) = SEK 6.6b + 26.9% of Enlarged Tele2 = 146 SEK/share (11.8% premium over 180109 closing price, 15.9% premium over -30 trading days)
• To issue 184.8m new B-shares, total 687.6m shares (o/w 22.8m A, 664.8m B); Kinnevik (to own 27.3% & 41.9% of votes) supports (lock-up 6 mo after completion).
• To close 18H2 (latest 190331).
• Refers to EC, prepared to effect pro-competitive measures if required to complete the merger.
• Total synergies
• 50/50 from costs (mostly opex) & rev (complementary, cross-selling)
• Total 900m SEK/annum in yr 5 (65% in yr 3, 80% in yr 4)
• Integration costs SEK 600m
• Rentention bonus 12-24 mo base salary for mgt & key employees
• Accreditive to FCF from yr 1.
• Management
• Anders Nilsson (Com Hem) to replace Allison Kirkby as CEO.
• New Board to be chaired by Georgi Ganev (Tele2), >= 2 Com Hem members (incl Andrew Barron).
• Targets
• Increase shareholder remuneration.
• Target leverage remains 2.0-2.5 (at closing net debt/EBITDA TTM 2.8).
• Rationale
• Untapped customer demand
• Value accreditive
• Complementary, complete proposition to improve customer satisfaction & loyalty
• Greater scale & diversification
• Unlock synergies
• Revenue & CF diversification
• 2017
• Dividend 2017E: 4 SEK/share for Tele2, 6 SEK/share for Com Hem.
• Combined results TTM: rev SEK 31.8b, adj EBITDA SEK 9.2b, OCF SEK 6.1b.
• Sweden 72% of revenues & 78% of EBITDA (TTM).
• Market shares in Sweden pro forma: 28% mobile, 22% FBB, 39% DTV.

7 Predictions for 2018 for the Dutch market: consolidation, newcomers and an IPO

1. T-Mobile NL/Tele2 NL a strong #3
This merger seems inevitable. What is more intriguing, is options for creating an even stronger challenger to the KPN/VodafoneZiggo 'duopoly'. Candidates include the M7 Group (Canal Digitaal, Online, Stipte, Fiber NL) and EQT's Dutch assets (Delta, CIF, Caiway).

2. VodafoneZiggo IPO
Greater independence from the 50/50 parent companies would instantly create value. Hundreds of millions of euros are extracted from the company every year.
Alternatively, either Vodafone or Liberty Global could buy out its fellow shareholder, but this seems unlikely. Both are actively trying to get rid of assets in countries where there is no overlap.

3. KPN creating PTT network
KPN will want to be part of a new wave of consolidation. Most multinationals are ruled out, for various reasons (Orange not looking to expand its footprint, Altice not in takeover mood currently, etc). Bloomberg recently suggested Proximus, TDC and Elisa could be partners. In fact, there could be many more in this league (Swisscom, Eir, Telenor).

4. KPN will start losing broadband market share
Leapfrogging is rather predictable. ADSL, Docsis 3.0, VDSL and next .... Docsis 3.1. Once VodafoneZiggo turns on Docsis 3.1, it may herald a new phase of growth. KPN's broadband market share will decline and at some point it may relaunch FTTH and do a number of small takeovers to regain share.

5. Eurofiber to bid in 5G auctions
Eurofiber is actively exploring value-creating innovation. It has an extensive fiber network, connecting anything (including bridges & traffic lights) outside the FTTH segment. A 5G network could be devised as wholesale-only. The company could consider bidding through a consortium with T-Mobile/Tele2.

6. Talpa Netwerk to bid for Eredivisie summaries
John de Mol, having sold part of his assets to ITV, has re-created a wide-ranging media company, Talpa Netwerk (TV, radio, streaming video & music, web, events). It appears as a no-brainer to buy the very valuable Eredivisie summaries for the SBS channels.

7. Subsidisation moving to high-value plans
Operators will start realising that subsidisation (handsets, mobile data, content) may reduce churn but destroys value by offering it to all subscriptions. Vodafone's Passes may be too expensive for the Dutch market, but the concept or providing benefits to high-value plans deserves to be copied.

All providers are potential preys in ongoing consolidation

Consolidation is ongoing. International groups consider takeovers, as well as exits. Local companies are acquired.

Europe

The hunters:

• Telcos: DT, Orange, Telefónica, América Móvil
• Mobile: Vodafone, Hutchison, SoftBank, VimpelCom etc.
• Cable: Liberty Global

The hunted:

• Telcos: KPN, Belgacom, Swisscom, TDC, eircom, BT, PT, TI, etc.
• Mobile: Bouygues Télécom, Yoigo (TeliaSonera), etc.
• Cable: Com Hem, RCS&RDS, R Cable, Publifin/Voo (formerly Tecteo), etc.
• Challengers: FastWeb (Swisscom), Eurofiber (Doughty Hanson), Iliad

Undecided:

• Telcos: TeliaSonera, Telenor
• Other: Tele2, Altice, M7 Group

Some considerations:

• A certain required rate of return.
• Being #1 or #2 in any given market (segment).
• Owning sufficient mobile licenses and network assets (for minimal COGS, to maximise gross margins).
• Aternatively: virtual service provider (asset-light).
• Substantially increased scale and/or synergies.
• Willingness to incur start-up losses.

Netherlands

Let's look at the Netherlands as an example. There are 7 nationwide groups, consolidating to 6:

1. KPN: mostly a local telco, with a small operation in Belgium. It will receive EUR 5 bn from selling E-Plus, and a 20.5% stake in Telefónica Deutschland (worth another EUR 1.5 bn). Perhaps it finds ways to expand.
2. Tele2: among the largest holdings of the group, with a strong core/backbone network and a strong fixed-line business market presence. Tele2 NL is on the ladder of investment that is so central to the group's strategy. Still, T-Mobile could buy Tele2 NL to re-enter the fixed-line market. But as the Tele2 Group is getting out of Norway (after exiting Russia), it is becoming a takeover candidate itself.
3. Vodafone: it remains to be seen if it can build substantial presence on the fixed-line market. Takeover candidates are Tele2 and Eurofiber. Alternatively, it could partner with these companies, as well as Reggeborgh (once it gets out of Reggefiber) and CIF (which owns a string of small cable companies, which are structurally separated and overbuilt with FTTH - service provider Caiway is for sale) to create a competitor to incumbent FTTH (much like Vodafone is doing in Spain and Ireland). Alternatively, if the fixed-line market is unpenetrable Vodafone may decide to exit.
4. T-Mobile: it sold off Online.nl, making it a mobile-only provider. This doesn't sit well with DT's stance, but it could be tolerated (T-Mobile NL being billed as a 'smart attacker' - perhaps evolving into an 'un-carrier'). Otherwise, it could be a takeover candidate for Tele2, Liberty Global or a new entrant (América Móvil, Orange, Iliad, Altice). Or buy Tele2 NL.
5. Ziggo and UPC are in the process of merging, with ~92% coverage. Liberty Global may subsequently sell the merged entity if it doesn't comply with the group's goals.
6. M7 Group: controls CanalDigitaal (sat-TV) and Online.nl and is a 3P service provider on FTTH networks. Could be a takeover candidate for a group that believes in virtual service provisioning: Caiway (= CIF), Scarlet or a large MVNO group such as Lebara or Lyca.

Other companies that could be for sale:

• Cable: Delta Kabel, Rekam, Kabelnoord, Kabeltex, SKV Veendam, Edam-Volendam, Pijnacker, Waalre, Bleiswijk, Assendorp, Rozendaal, Hoogvonderen; service providers Caiway and Cbizz.
• Other: Eurofiber, Scarlet, Solcon and a long list of FTTH service providers.

Conclusion: the future is uncertain for all players, but more consolidation seems to be on its way. There are a few dead-certain predators, but even Vodafone, Liberty Global or Tele2 could turn into a prey.

With email newsletters like these, who needs spam?

One of the possible implications of the AT&T/DT deal could be that American telcos would become interested in acquiring European incumbents. Except, they won't. Because:

• They are not very interested in cross-border deals to begin with. In the 20th century, companies such as SBC picked up strings of stakes in European telcos, but that was during the privatisation phase. Any foreign interest will most likely be focused on Latin America, Canada, or perhaps even Africa and CIS countries.
• Regulation will deter them.
• There will be more important investment cases, such as buying out DT from AT&T and Vodafone from VZW. But also FTTH and LTE.

You have to remember further that the T-Mobile sale from DT's perspective has everything to do with the April 2009 profit warning. In other words, it is a one-time event and will not set a new trend.

And so it is fun to read two contrary commentaries landing in my mailbox from respected consultancy firms. Who's going to teach whom a lesson?

Brand X:

Until quite recently, the US was generally seen as being somewhat backward in comparison with Europe when it came to mobile. Those days are definitely over. The US now "gets" mobile – in a big way. In developed economies, the growth in mobile is no longer being driven by telecoms, but by software and the internet. US companies have long been the dominant internet services brands (Google, Facebook, Amazon, etc), and the recent Nokia/Microsoft announcement put the cap on North American dominance of the market for smartphone platform software. Having shown Europeans how to win in internet services, and in smartphone software, perhaps the Americans' next lesson for Europeans may be how to win in consumer mobile.

Brand Y:

An evil person might say that T-Mobile employees that had the experience and knowledge about how T-Mobile had experienced massive competition in Germany and Holland from successful competitors might not want to share that information - because nobody wants to admit that they got thoroughly beaten up by their much smaller competitors! In conclusion: The American T-Mobile venture has been scrapped, those that ought to be held responsible for this sad turn of events will not be accused of anything and the shareholders will once again realise that they have invested in a company that despite all their experience and knowledge could not perform.

With email newsletters like these, who needs spam?

Acquisition targets in the Netherlands

It's deal time. And what could that mean for the Netherlands? A short summary:

• International operators could do a little portfolio management and decide they don't need an NL asset: Deutsche Telekom (perhaps increasingly likely now), Liberty Global, Vodafone and most of all Tele2, which requires from its operations an ability to be a Top 2 (hence the name) player. Of course business providers such as BT, Verizon, AT&T, Orange are in a different game, as are Colt, Easynet (private equity owned).
• Private equity investments: Ziggo (possibly heading for an IPO) and CanalDigitaal (could be attractive to any challenger on the TV market: KPN, Tele2, possibly T-Mobile or Vodafone).
• Cable providers: CIF focuses on passive network assets, but has a majority stake in CAIW. How about an IPO for this multi-MSO service provider? And then there are 20+ MSOs, in which CIF is presumably interested, but Ziggo and UPC as well. And perhaps even Reggefiber.
• Fiber assets: OBR (Rotterdam) and LomboXnet (Utrecht) could be targets for Reggefiber or CIF. Reggefiber itself has only one way to go: to KPN.
• Other: Scarlet (owned by Belgacom), Solcon (privately owned) and a long list of newcomers on the FTTH market.

KPN, the hoovering company, is a little unclear in its strategy right now. Under CEO Ad Scheepbouwer it has acquired someting like 40 companies (most importantly: Telfort, Getronics, Tiscali NL, iBasis). Recently, focus was moved from ISPs to MVNOs, but also Atlantic Telecom (business services) and NL-ix (Internet exchange). In the meantime, several assets were sold: fiber and business in Belgium, fiber in Germany, towers in the Netherlands. All quite helpful in reaching the free cash flow target.

So what could be next for KPN:

• Sell E-Plus and Base, by the same logic that DT sells T-Mobile USA: there is a step change coming for the roll-out of LTE.
• Sell more passive network assets. CIF is dying to buy them.
• Sell Getronics. Sort of a u-turn, but perhaps focus is moving to network assets (but not passive assets).
• Buy WiFi assets.
• Buy more MVNOs, esp. those focused on the business market.
• Buy CanalDigitaal (see above).
• Buy out Reggeborgh from Reggefiber.

To round off: one type of asset is out of reach of KPN: cooperatives. This could be the way forward on the FTTH market, but in light of the above (NL-ix), it implies that Ams-IX may be a desirable target, but cannot be folded into KPN.

Wither Orange NL's broadband unit (2)

The balance seems to be tipping in favor of holding on to the former Wanadoo unit.

What is happening? Deutsche Telekom bought Orange NL to merge it with T-Mobile NL. However, Orange NL also operates an LLU unit (the former Wanadoo operations). So far, Deutsche Telekom appears to have either a PTT (eatern Europe) or a mobile-only strategy 'abroad' (even as Vodafone is entering the fixed-line business). I therefore assumed that the BB unit would be put up for sale.

Now Deutsche Telekom has spoken, in Barcelona. It aims to reduce its dependence on the domestic business by expanding abroad - in both mobile and ISP assets. The latter is really new to the strategy. (remember that Club Internet (France) and Ya.com (Spain) were sold). See also the recent Q3 report (page 17, under Group Strategy): "Grow abroad with mobile communications" (which, by the way, is repeated in the Barcelona presentation).

This addition to the strategy could have quite far reaching consequences, as T-Mobile operates (mobile-only) units in the UK, the USA, Poland, Austria, the Czech Republic and the Netherlands. Deutsche Telekom could be a major consolidating force, but it remains to be seen if the company truly pursues this strategy.

More corporate action to trigger the telco sector

Continuing on this post, I dug up some more ongoing business dealings.

Operators for sale:

• Alltel
• Pipex (and C&W?) in the UK; possibly Lycos Germany, Jazztel (Spain), and PT's PT Multimedia unit
• FastWeb (Italy) could attract a counterbid (next to Swisscom's).
• Telefonica not only has Endemol up for sale (late March), but Airwave (UK) as well.
• Deutsche Telekom is shopping Ya.com (Spain) and Club Internet (France) around.
• TDC's owners are looking for buyers for HTCC (Hungary), sunrise (Switzerland) and Talkline (Germany).
• Both Lebanon and Libya are selling two state-owned mobile operators.
• Stakes in state-owned PTT's may change hand: OTE, TI, DT, PT, TeliaSonera, as well as the operators of Bulgaria, Uganda, Botswana and Algeria.

IPOs:

• Infamous Versatel (Germany) and Flag Telecom may re-enter.
• Several wireless operators: MetroPCS, Colombia Movil, GrameenPhone, Safaricom and Spice Telecom.

Licenses:

• Fixed line, SNO: Saudi Arabia and Kenya.
• Wireless (2G and/or 3G): Iceland, Germany (2008), France (2008), Canada (2008), Russia (2007 and 2008), Vietnam, Norway (2007), Sweden (2007)
• WiMAX: Ireland (2007), Italy (2007), Portugal (2007), Sweden (2007), UK (2007).

Product/service launches:

• DT will launch a secondary brand in Germany, aimed at the youth market (summer 2007).
• Handsets: Apple's iPhone (June) and perhaps news around the 'Google Phone'
• FTTN may come to Australia.
• FTTH in Paris will be launched by Neuf and Iliad.
• MVNOs from KPN and BT may come to Spain.
• Wireless VoIP tests at Vodafone (Starfish) and StarHub (pfingo) may have some impact.
• Breaking down the wireless walled garden at Hutchison 3G (X-Series) will be followed by Amp'd Mobile's launch of the MOTO Q (with Sling and Orb).

Regulation:

• EC on international roaming (June)
• EC v. Germany regarding DT's FTTN/VDSL network (any day?)
• OPTA on KPN's All-IP network (June)

Deutsche Telekom: strategy update brings little news

Deutsche Telekom has a strategy update and investor day, which unfortunately bring little real news.

Summary:

A. Four key areas.

1. Improve competitiveness in Germany.

• IP-technology.
• Productivity in customer care.
• Savings targets remain: EUR 2.0bn for 2007; EUR 4.2-4.7 mrd for 2010 relative to 2005.
• Broadband for IPTV and triple play:
  Available to 17m homes by year-end 2007. Target 1.5m IPTV-subs by late 2010.
  VDSL (50 Mbps) for HDTV: 50 cities by end of 2008.
  ADSL2+ (16 Mbps) for SDTV: 750 towns and villages.
• T-Mobile:
  Focus on existing products web'n'walk and @Home.
  New products, such as MyFaves (personalisation, proven success in the US)
• Branding:
  T-Home for the home, T-Mobile for on the road, T-Systems for businesses.
  A second brand, to be launched before the summer, for basic products, F/M bundles, low tariffs, young demographics.
  T-Mobile for outside of Germany.

2. Growth abroad with mobile, possibly with acquisitions.

• FMS.
• Data: WiFi, data handsets/terminals, web'n'walk handsets.
• Takeovers, both in existing and new markets.

3. Mobilizing the internet and the Web 2.0 trend.

• Personal & social networking, like mobile blogging.
• Open, multiportal internet access.
• Partnerships.

4. Developing key ICT accounts with a strategic partner.

• International footprint & scale are essential.
• A partner.

B. The planned sale of non-core assets:

1. T-Systems Media & Broadcast
2. DeTeImmobilien and Sireo (real estate)
3. Club Internet and Ya.com (triple play providers in France and Spain)
4. Tower business in Germany (Deutsche Funkturm) and the US (US Towers).
   

Comments:

1. The German fixed network is where the trouble is. Moving to IP and increased efficiency is all fine and dandy, but almost meaningless when the associated cost savings are hard to reap.
2. Germany gave its go-ahead to the VDSL-network, including a regulatory holiday, but the EC started a procedure to hault it. Also, the target of 1.5m IPTV subs looks uninspiring (cf. BT aiming for 2-3m in the mid-term).
3. Will the regulator allow DT to introduce a new F/M convergence brand? I'm not sure about this (over here in the Netherlands, OPTA wouldn't allow KPN to do this, but apparently the German governent is much more lenient on the local PTT).
4. Abroad, DT aims for a purely mobile approach (unlike FT/Orange in the UK and Spain). That makes a lot of sense: mobile markets are larger and more profitable than broadband markets. Acquisitions could be expensive though. Focus must be on Easter Europe and France, where a fourth UMTS license will be auctioned off.
5. T-Mobile is leading the way, with 3UK and Vodafone, in opening it's network for internet access and web 2.0 partnerships. As long as they can do the rebalancing act, that looks OK.
6. The planned sale of Club Internet and Ya.com is not a surprise. It is part of the new mobile focus. Should T-Mobile buy Orange NL, it will sell-on the DSL-network. FT/Orange will not bid for Club Internet (giving it too much market share), but Ya.com certainly makes sense. Similarly, Telefonica will not buy Ya.com but may look at entering France through both Club Internet and the new UMTS license.
7. DT is committed to the ICT-market, which will add to growth. Therefore, no sale of T-Systems, but no acquisition either, as the unit is now looking for a partner.
   

CONSOLIDATION://Orange NL for sale

A newspaper in the Netherlands reports France Telecom has hired Lazard to shop Orange NL around. The unit has 600k BB subs and 2.0m mobile subs and should bring in EUR 800-850m.

Observations:

• Fixed NL: KPN is forcing a choice upon altnets, building its All-IP network: retreat (or be a reseller) or step up investments to make SLU work, as the old paradigm (FTTEx + ADSL2+ = LLU from up to 1300 exchanges) is replaced by a new one (FTTN + VDSL2 = SLU from up to 28k street cabinets). The outcome is still up in the air, as OPTA seems to be backtracking on earlier support of KPN's plans, but Orange seems to think neither option is very attractive. Telecom Italia, through bbned, and Tele2/Versatel seem to be committed to the Dutch market.
• Mobile NL: The mobile market is going to a three-player model if T-Mobile or Vodafone moves in. T-Mobile could even go from a mobile-only strategy (as in the UK) to a triple play offering (as in France). Unless of course China Mobile, Weather, Telefonica, Telecom Italia, Belgacom, Swisscom, CPW or TeliaSonera (cf. Xfera in Spain) deems the time right for a new market entry.
• France Telecom: Going from 5 to 4 countries for its triple play offering (France, UK, Spain, Poland).

Consolidation is continuing, driven by a need for scale economies in mobile and LLU (not to mention SLU). More units could be put up for sale (DT France, DT Spain, Tiscali UK, Tiscali Italy, SFR). What is intriguing is:

• Companies are abandoning saturated markets, like Scandinavia and now the Netherlands (the Tiscali NL sale to KPN is pending at the NMa) and are turning to emerging markets.
• Vodafone, according to the newspaper, wouldn't be interested in Orange NL. Puzzling. Could this be the first step of Vodafone putting even more focus on emerging markets?
• If T-Mobile isn't interested, they might as well leave the market altogether.
• Telefonica is definitely a consolidator. Will they bid for Orange NL, or target the bigger prize: KPN?
• Will this be the European entry of an 'eastern' company (after Hutch and Weather)?
• As PTTs are fighting each other in their home markets, could this sale mark the formation of a pan-European kartel, e.g. FT and DT getting out of each other's markets?

UPDATE: obviously, existing players could strengthen their current presence:

• Telecom Italia: to add a retail business (and mobile) to their bbned offering.
• Tele2: to gain scale and a mobile license, in order to migrate their current reseller business.
• Scarlet: to mirror Tele2's strategy of turning into a facilities-based operator.
• Cableco: to add mobile and to sell the fixed business to somebody else.