Liberty Global offer for Sunrise

Offer

• Sunrise board & shareholder Freenet (24%) support
• 110 CHF/share cash (premium 28% to 200811, 32% over last 60 days average)
• Tender to start end Aug 2020 for 40 business days
• Unconditional on reaching two-thirds, to squeeze out minorities & delist, expects approval end 2020
• To be financed from cash (CHF 3.5b) & new debt (CHF 3.2b o/w 1.6b for refinancing Sunrise debt)
• Break-up fee CHF 50m for Sunrise

Valuation

• Equity CHF 5.0b, EV CHF 6.8b
• 7.5x adj EBITDA or 10.3x adj OpFCF after synergies
• 10.0x adj EBITDA or 17.6x adj OpFCF before synergies

Synergies

• NPV after costs CHF 3.1b (o/w CHF 2.6b from low-risk cost & capex)
• Annual run rate from rev, costs, capex CHF 275m (46m from rev, 187m from opex, 42m from capex)

Pro forma combination

• >3500 employees
• Rev CHF 3.1b
• 2.1m postpaid subs, 1.2m BB subs, 1.3m TV subs, market share in each ~30%
• Target gigabit BB coverage 90% of HH by 2021 (UPC 75%, Sunrise 30%)
• To upgrade to 10 Gb/s over time
• UPC/Sunrise to become part of UPC credit pool, target leverage 5.0x
• May consider IPO of the merged business in the future

Quotes

• "attractive opportunity to deploy existing cash to unlock substantial synergies and sustainable free cash flow growth."
• “This transaction is another significant step on our path to create fixed-mobile champions in all of our core markets"
• " ... after this deal, and assuming completion of our recently announced UK transaction, we will continue to have approximately $7 billion of liquidity to drive value-creation for shareholders."

Ziggo: preview 13Q1

Ziggo reports on 13Q1 tomorrow, April 16, at 7:30 AM local time.

Relevancy to investors is limited, since the Liberty Global share price drives Ziggo's stock. Apart from the performance relative to consensus and the outlook (can it be maintained?), this is what to look for on the consumer market:

• Analog TV losses and conversion to digital. Analog penetration will drop below 15%, bringing analog switch-off discussions into the spotlight. It's the last quarter including subscribers on the Kabelnoord network.
• Network utility rate: dropping to just over 60%.
• Broadband market: net additions, penetration to cross the 70% mark.
• Mobile market: not quite reaching 100k (YE 2013: 33k).
• Organic revenue growth (excl. the Esprit takeover): further improvement expected in line with management goals coming from broadband and telephony.
• EBITDA margin: may drop after heavy ad spending, but management target is flat for the year.
• Capex: guidance EUR 370 for the year.

When it comes to the business market, it remains to be seen if there is any growth at all. Excluding Esprit, revenues have been flat for a while.

Further operational details:

• How is the WiFi network developing. How many homespots? Are public hotspots being added? Usage stats.
• Usage stats on Ziggo's apps (TV app, voicemail app and the new Bapp VoIP app).
• Netflix impact, both on traffic and revenues.
• Other subscriber numbers, such as HBO subs and digital pay-TV subs.
• Commercial plans, campaigns.

Announcements to be expected for the Dutch market

What's up for 2014 in NL?

• KPN starts to roll out vectored VDSL from February 2014 to 2.1m HP. FTTH to roll out to 250k HP more to a total of almost 2m. There supposedly is a trial of LTE Broadcast and from April FON will be integrated. A new CFO will be appointed. E-Plus will be sold, Reggefiber will be consolidated and America Movil will probably sell its stake.
• Tele2 is rolling out its LTE network, but will probably launch in 2015. Plans are to unbundle FTTH, not with a time-frame. A new CEO will be appointed.
• Vodafone is also set to unbundle FTTH and appears to be closer than Tele2. It will appoint a new MD for Vodafone Business.
• T-Mobile will appoint a new CEO.
• UPC will launch the Horizon Phone app.
• Ziggo will probably launch a similar app. It remains to be seen what the next step in mobile will be.
• NPO will launch NPO Plus, a paid version (better quality, fewer ads) of its catch-up service.
• NPO, RTL and SBS will launch NLziet, bringing together their respective catch-up services (extended and non-free).

The case for regulating the new Ziggo

Ziggo and UPC are trying to get their merger approved. What are the chances the regulator will approve this?

Primarily, footprints don't overlap, so nothing in fact will change and hence the merger should be approved. However, Ziggo becomes a near-nationwide player and hence the market does change, in regulator terms.

There may be some issues as a result of the fact that the new Ziggo will operate near-nationwide:

• A level playing field with KPN is created and as a result 'symmetric' regulation would make sense, i.e. regulation of Ziggo or deregulation of KPN. Relevant markets: mostly broadband, but digital TV and triple play as well. One could assume that so far, Ziggo and UPC were not regulated because they were not nationwide - kind of a trade-off with the regulator.
• Going nationwide will allow the company to expand, especially on the mobile market and on the business market. But these are new markets for Ziggo and as such no hurdle for approval of the merger.
• Theoretically, both Ziggo and UPC have the option to compete against each other using KPN's networks and so the merger would reduce the number of potential competitors. Apparently, it is a non-official gentlemen's agreement that stops them from doing so. Also, technology (based around DVB-C and Docsis) prevents them from connecting their services to the KPN network (IP-based). But what really stops them, is the fact that they are vertically integrated and have no intention of becoming resellers or unbundlers. (Any provider globally could be seen as a potential competitor, so this point doesn't seem to make too much sense.)
• On the wholesale content market, the company will have increased buying power.

Another consideration is synergy benefits. Will they be passed on to customers, or will they be re-invested into the company? Or will they be added to the dividend? The latter is the most likely choice, especially now that KPN is shifting focus from FTTH to VDSL - which could signal a truce and a duopoly.

We'll see what ACM makes of all this.

Outlook 2014 for Dutch telecoms market

We have produced a number of articles looking ahead to 2014 for each of the majors on the Dutch telco market. Here are the main questions:

• KPN:
• who will be the new CFO?
• offer from America Movil: unlikely?
• what to do with EUR 5bn from selling E-Plus?
• consolidate the Belgian market and become the prime reseller?
• buy Ziggo and UPC NL to create a national open access infrastructure?
• Tele2 NL:
• what will a new CEO mean for Tele2?
• when will the LTE-network be activated? will it lead to pricing pressure?
• how can the downturn on the fixed market be stopped? when will it start unbundling FTTH?
• Ziggo:
• the new CEO (Obermann from DT): his arrival alone would imply either no deal with Liberty Global, or a guaranteed career for Obermann within LGI.
• expanding the mobile strategy: nomadic rather than a full MVNO?
• OTT-partnerships: unlikely?
• UPC NL:
• will the merger with Ziggo happen? or will a reversed deal take place: Ziggo acquires UPC?
• what can the company do on a standalone-basis to improve its performance? will it follow in Ziggo's footsteps regarding mobile and WiFi?
• will it launch the UPC Phone app?
• will it hold on to the Horizon box, or explore alternatives? (cloud-based solution, TiVo, RDK, Frog by Wyplay, ...)
• Vodafone NL:
• when will it start unbundling FTTH?
• takeovers on the business market?
• T-Mobile NL:
• a new CEO is due, after Thomas Berlemann was sacked.
• how disruptive will the mobile-only strategy be? attack the DSL-market? deploy TD-LTE? follow T-Mobile USA's uncarrier strategy?
• how dependent will it become on Tele2? (2G/3G MVNO income, 4G network sharing income; network sharing cost savings) will it explore more wholesale opportunities?

There are so many opportunities for operators to return to growth, but resources (euros, management time) are scarce. One would wish that the operators would be aggressive, opportunistic and on the offensive, rather than following a me-too strategy, avoid risk and be on the defensive, but that remains to be seen. Ultimately, this is a matter of short-term versus long-term vision.

Ziggo outlook 2014: questions on Liberty Global, mobile and CEO

The main items for 2014 are the new CEO (René Obermann, from Jan. 1), expansion of the mobile strategy, the impact of Netflix, and obviously: an offer from Liberty Global.

Here are the details:

Corporate:

• Will LGI and Ziggo agree on an offer price? Or will Ziggo resist, like Telenet did?
• If Ziggo and UPC NL merge, what will be the consequences: improved financials, complex integration, regulation possibly.
• DT's René Obermann will take over January 1. What will his plan be?
• There is a chance of more small acquisitions in the business market.

Network and broadband:

• Docsis 3.1 is coming (2015?), but copper networks can match this (albeit over very short distances) with G.fast. Other competitors are FTTH, LTE and possibly Redstone's new technology.
• Further down the road are options such as all-IP and extension of the spectrum beyond 1 GHz.
• Alliances with OTT service providers cannot be ruled out, like ONO/Sony for PlayStation users.
• What is the impact of Netflix, on data usage and capex?
• Service provision over third-party cable networks may come to an end. After Kabelnoord, Cogas and Borculo will probably choose for exclusive provisioning by Caiway.

Television:

• The end of analog TV is nearing. This will release a large amount of spectrum.
• The Ziggo TV app may be extended with new options, such as nationwide usability (i.e. outside the Ziggo footprint) or a version for Xbox One and PlayStation 4.
• Ziggo could cooperate with Netflix to bring the latter's CDN (Open Connect) to its network. Or Ziggo could go one step further, like Com Hem and do a distribution deal.
• Will Ziggo endorse HbbTV?
• Possibly Ziggo will work with the Comcast RDK or Wyplay's Frog for STB innovation, i.e. a Horizon-like connected device.

Mobile:

• The WiFi network will be extended, using both CPE and public locations.
• So far, mobile services are SIM-only and for TV subs only. Will the service go nationwide, become a full MVNO? And become part of a quad play? Possibly with handset subsidies?
• Will the company ever use its 2600 spectrum? (Will the opex advantage outweigh the capex effect?)
• Will there be a VoIP app such as UPC Phone or BT SmartTalk? (Possibly as an extension of the current Visual Voicemail app.)

Conclusions

• Uncertainty and risk are at a maximum, simply because of the large numbers of questions (see above), exemplified by the arrival of a new CEO. DCF valuations will vary widely - giving Ziggo's management an easy job to claim a very high offer from Liberty Global.
• Assuming René Obermann takes up the CEO position January 1, he can either work with or against Liberty Global. Resisting like Telenet, will surely see him get sacked in the next few months. In other words: if Obermann indeed takes up the CEO position, a deal with Liberty and a friendly takeover are highly likely.
• A full MVNO strategy (with VoIP app) seems likely, since the current limited mobile strategy probably doesn't do enough for growth.
• OTT partnerships seem less likely than at ONO, Com Hem and Virgin Media.

MPJC: no visionaries

Last Thursday was the annual Mediapark Jaarcongres (MPJC) of the public broadcasting sector in the Netherlands. Not quite as interesting as last year's edition, but well worthwhile. No real visionaries, apart from the 4K contribution, but that was done last year as well. Here are a few common themes.

Trends

It was all about:

- Smartphones, tablets, touch screen, swiping

- Connected TV, TV everywhere, second screen

- Social media and social TV

- Consumer is in control

i.e. nothing really new.

Hybrid TV

UPC and others pointed out that there still is very little true integration of broadcast and broadband, despite all the connected TVs. We have come to the same conclusion (report available at 50% discount for readers of this blog), which is well worth stating explicitly, because the term 'interactivity' is used much to easily for functions that aren't really worth it. Such as pausing live TV - nothing more than a very basic feature exploring the two-way connection of an 'interactive' TV. There is still a lot to be done.

Kevin Slavin

Excellent talk from Kevin Slavin of Starling TV and Area/Code about the role of the audience. From the laffbox (LFN: laugh from nowhere - check out this) to Facebook/Twitter, parasocial relationships, the audience becoming a character (see Brand Fiction Factory), a character as the audience and finally Everyware (... is where the laughter comes from): social media replace the laugh track.

Twitters problems: hashtags are not unified; there are simply too many tweets.

RTL, Sanoma

Both are pusuing a strategy of 'follow the consumer' - not surprising.

Sanoma NL (revenues: EUR 500m) took some effort defending its takeover of SBS (3 TV channels, program guide) for EUR 1.2bn (shared with Talpa). The problem is not so much SBS's current underperformance (that's simply due to a 'cycle'), the real problem is that this is essentially a change of control where the acquirer has no clue how to run a TV company. Talpa (TV productions) is included in the deal, taking a 33% share, but they don't know how to run a company like SBS either. Which is why they will have a very hard time realising synergies.

UPC

Solid statements: Google lacks a unifying UI across all devices; social TV is still embryonic. No news on the Horizon box (see page 5 of this journal: trial coming to the Netherlands in July, commercial launch September).

Glashart Media (Reggefiber)

Reggefiber has ~700k homes passed and ~200k homes activated (for more details on the Dutch FTTH market: our FTTH NL 2011 report will be out next week - here is last years' edition). Glashart Media services 130k TV homes, of which 45k use interactive services.

Its claimed USPs: picture and sound quality; number of channels; EPG (providing access to apps); 3-D ready; content (local TV, VOD, catch-up TV, Eredivisie Live). OTT services are drawn into the managed services domain, while providing open access to all content parties (0900-TV).

2010 Was the year of 'fix the basics', 2011 is the year of 'boost the base'. A new box will be launched, allowing 3 TV sets to be connected and with a 250 GB hard disk optional. They also want to experiment with a kind of prepaid card, giving access to certain content for a limited time. Intriguing plan: an off-footprint break-out is coming, i.e. Glashart Media providing TV services outside the Reggefiber footprint.

NOS

Launch of the new site m.nos.nl/video.

NLbuzz

Some stats on Eredivisie Live: 550k subscribers, 1m unique visitors/month, 1.5m views/month, 300k live streams/year. A new site will be launched at the end of June 2011, relying completely on adaptive streaming. It will offer a single-sign-on (across devices). They see an interest in niche content, such a waterpolotv.nl (just 30k active sportsmen, but no fewer than 28-30k views per video).

TNO/Waag Society

Wonderful demo of 4K, which is predicted to come to market in 2011. What it claims to be is an even sharper image, creating the illusion of 'really being part of it'. But 4K also offer a more dynamic picture and a much better opportunity to zoom in. Japan expects 8K by 2020. SD (720x576) implies 0.4 megapixels, HD (1920/1080) implies 2 mp, 4K (4096x2160) goes to 8.8 mp and 8K to 33 mp. And then you can combine 4K (or 8K) with 3-D. Bandwidth consequences are apparent.

Public Broadcasting

The day started off with the PO (public broadcasting) commenting on government plans to reduce support by EUR 127m. This number is supported by a recent BCG report. Broadcasters (essentially production companies) will be forced to merge to reduce the field to 8 players, from 21 currently. (According to the PO, this will supply only 30% of the targeted savings and the plans will force 20% lay-offs.)

Dual track started for selling off Ziggo

Warburg Pincus and Cinven apparently have entered the dual track: besides shopping Ziggo to Liberty Global, they are now also looking at an IPO. The company's value could be around the rather familiar EUR 7 billion level. Liberty Global is out of cash, after buying KBW, and may be forced to sell more assets before it could turn to Ziggo.

HFC: lines are 97% fiber, but route km just 6%

Claims from the cable industry concerning the amount of fiber in their networks (97%) are realistic and unrealistic at the same time. It all depends on your perspective. If you are an end-user, the claim is defensible. If you own the network and think in terms of route kilometers, you will agree that it's not, because just 20% is fiber (source: FTTH Platform NL). In reality, this number is even worse and closer to just 6% (an informed source tells me).

End-user perspective

Cable operators in the Netherlands claim that 97% of their network is fiber. This would be the portion of the network (line) between your home and the Internet. The last mile is on average 300 meters (in the Netherlands). If the signal travels over non-fiber, this may function as a bottleneck, but over short distances like these (or 90 meters in early FTTH deployments, which were in fact FTTC) its doesn't really matter that much. In fact, in-home networking at 10 meters can be just as much as of a bottleneck.

Once this bottleneck needs to be taken out, fiber needs to be extended to let's say the home's WiFi router. And an interesting argument for this is gaining importance: the number of connected devices (directly or via WiFi) is exploding:

• Computer (desktop, laptop)
• Connected TV, hybrid STB
• Blu-ray player
• Game console
• Smartphone, iPhone
• LiveView (Sony Ericsson's new 'data pager')
• E-reader, Kindle, Nook
• iPad, notebook, tablet, netbook, smartbook, speedbook, booklet, ....
• Femtocell
• umi (Cisco's video calling box)

Network-owner perspective

Once the cable operator decides to extend fiber to each subscriber, he will realise that he will need to dig a lot more than just 3%. UPC NL (2,777,300 homes passed) and Ziggo (4,107,000 homes passed) would probably need to spend FTTH-like amounts of cash, say 800 EUR/home. That translates into EUR 2.2 billion for UPC and EUR 3.3 billion for Ziggo. Large sums for their controlling (Liberty Global owns UPC) and prospective (Ziggo's IPO may come in 2011) shareholders to reckon with.

Will KPN pull out a wild card?

It's the time of year to make predictions. On December 15, KPN is set to clarify its FTTx Roadmap, but it doesn't look like there will be any fireworks. Here are a few possible outcomes that don't seem to be on anybody's cards:

• MAYBE they will accelarete FTTH. That would be a u-turn to previous statements, and construction capacity (currently at an annual run rate of 250k homes per annum) doesn't have much room to grow.
• MAYBE they will bet the farm on VDSL2. It is what they have announced, but it could be more than just an interim strategy (in theory).
• MAYBE have an acquisition to report. BBned is for sale and would add a handsome business provider (the wholesale provider would lose all its customers no doubt, and the retail business may have to be sold on). Still, they could replace BBned on a couple of FTTH networks.
• MAYBE they have a retail partnership to report. Perhaps Online Breedband is finally ready to live up to its promises (made in April). Or Tele2. But the real big fish would be Ziggo. Imagine Ziggo becoming an operator/RSP on the Reggefiber FTTH networks! (UPC would be a harder nut to crack - they suffer from a severe case of incumbofobia).
• MAYBE they have a content deal up their sleeve. Connected TV is all the rage. This would enhance the triple play.

UPDATE But the biggest surprise would be:

• MAYBE there will be a switch to GPON technology (in the larger cities), in order to be able to re-use VDSL investments.

Land of war and mystery

Being part of the Fiber Ring sometimes brings along a Lord of the Rings feel. Fiberland too is full of war and mystery.

Take Italy. The government is preparing to pump EUR 1bn into a nationwide broadband effort at a total cost of EUR 10bn (at this price level one can only assume we are talking NGN or FTTC/VDSL, not NGA or FTTH - unless of course the government is thinking of creating a nice and big digital divide by only hooking up the north). Yesterday AGCOM added that Telecom Italia indeed needs this kind of government and PPP support, because it cannot do it on its own.
Interestingly, the whole effort is supposed to add 1.5-2.0 pp to GDP.

Can anyone explain to me how any such investmmnet could not be justified, in light of this GDP enhancement? (Doing a little Wikipedia research, it looks like the economic benefit could be something like EUR 28bn a year.)

Or take the Netherlands. UPC is usually fighting the threat of superior fiber bandwidths by launching extremely aggressive pricing. This time around however, things are turned upside down.

UPC (part of Liberty Global) is rolling out DOCSIS 3.0 (advertised as 120 Mb/s, but we all know this is shared and not symmetrical), and at the same time the Reggefiber/XMS combo is waiving installation costs (normally EUR 150) and maintains a very competitive promo (20 EUR/mo for the first 6 months).

KPN to intensify cableco assault

OPTA, the Dutch NRA, has released preliminary regulatory changes for the Dutch telephony, broadband and leased line markets for the period 2009-2011. A consultation period will run from July 29 to September 8 2008. Definitive new regulation is set to be written into law before the end of this year.

1. Main findings (more detail below, under 4):

• End to fixed telephony retail price regulation for consumers. KPN can step up its competitive efforts against cable.
• Services-based competiotion on FTTC (WBA, since SDF access is not viable) and infrastructure-based competition on FTTH (ODF access). It looks like we will have a regulatory patchwork in geographical terms. MDF locations serving no less than 50% of the population will remain open. (I'm not sure if the 50% is new to the market.)
  
• Service-based competition on cable networks, but no access for KPN. I doubt if this will catch on among cash-strapped altnets or new entrants.
  
• Fixed termination will move to symmetry next year. Will KPN's charges go up or altnets' charges go down? Probably the latter, in which case the long-term benchmark for mobile termination goes down as well.
  

KPN was quick to cry victory and point out that this will help it better compete against cable (basically a two-player market: UPC, owned by Liberty Global, and Ziggo, owned by Warburg Pincus and Cinven). Let's put this into a perspective.

2. Telco/cableco convergence
Telcos and cablecos are converging in the sense that their product portfolios are starting to look like mirror images. Independent ISPs are struggling and selling out, so now incumbent telcos are increasingly taking aim at cablecos.

Let's first see how cablecos and telcos are moving toward each other:

• Both offering triple play, even though IPTV remains a complex product. On the other hand, cable lacks a mobile offering (other than cheap resale) of its own.
  
• Cablecos (and satcos) moving into the LLU market. Sky of course, now even looking at FTTC. Numericable is a wholesale LLU customer of Completel. Versatel is looking at AKF (but the Zon/Sonaecom merger is not going to happen).
• Several cablecos are considering FTTH (Cox, Wow, Videotron, Compton).
• CableLabs, the US cable association, is trying to turn Tru2way (middleware) into an interactive TV platform for both cable and telco networks.
  

3. Telco strategies against cable
Next, let's see what telcos are doing to kill the cable guy:

• In the US, AT&T, Verizon and Qwest have set up Movearoo.com. Customers moving to an area served by a different Bell are helped to remain telco customers, instead of defecting to cable.
• In the Netherlands, KPN hasn't exactly made much of secret of how much its Digitenne (DTT) product earns them: zip, or rather a negative sum (see it as a SAC). Digitenne has just one mission: pull away as many cable customers as possible.
• Thanks to OPTA, KPN can now follow competitors into targeted price reductions for fixed telephony. We can expect a price war that will erode KPN's margins further, but it will serve their priority #1: expand market share.
  

4. Main points from the new rules
Here are some more details.

• Fixed telephony consumer market: end to retail regulation (both minimum and maximum tariffs). OPTA says competition is sound, due to CPS, WLR (which will be extended to the business market) and cable telephony. However, after 2011 it expects it will be able to abolish regulation of the wholesale services (CPS and WLR) as well.
  
• Business markets: increased wholesale regulation to stimulate competition, after which the retail market may be deregulated.
  
• NGN, NGAN: KPN is moving away from MDF access to both SDF access (for FTTC networks) and ODF access (for FTTH networks) as regulated wholesale products. OPTA has decided not to demand WBA (wholesale broadband access) wherever ODF access is available, since it wants to stimulate infrastructure-based competition as much as possible. At the same time OPTA acknowledges that SDF access is not a viable platform for competition, and therefore it will demand WBA offerings in FTTC markets. In both cases, KPN will be granted a decent return, based on the EDC system (embedded direct cost), which by the way is contested by competitors. Fortunately, OPTA appears to be aware of the necessity of a long-term view (longer than the traditional 3-year regulatory review period) and regulatory certainty for FTTH investors.
  
• Broadcasting: UPC and Ziggo will have to open their networks to services-based competition, because Digitenne, IPTV and Sat-TV haven't been able to really change the cable market (in terms of market shares or prices). Third parties will be able to take over the customer relationship (but they will have to take care of the related broadcasting rights for analogue TV themselves). This is aimed at third-parties; should KPN be granted a license to resell cable TV, then it could be incentivised to delay investments in IPTV and All-IP. In other words, KPN will not be a cable reseller (just as cablocos are not allowed to be KPN resellers).
  
• All-IP: KPN is planning the closure of many MDF locations. There is an MoU with the biggest unbundlers (Tele2/Versatel, T-Mobile/Orange, BBned/TI). MDF locations covering 50% of the population will remain open for existing LLU offerings. No detailed migration deals have been signed however for the other locations. Therefore, LLU and WBA regualtion will remain in place.
• Fixed termination: OPTA will end the asymmetry (KPN charges are lower than competitors') at the start of 2009.