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N O V E M B E R 2 0 0 5N O V E M B E R 2 0 0 5 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E.

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Presentation on theme: "N O V E M B E R 2 0 0 5N O V E M B E R 2 0 0 5 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E."— Presentation transcript:

1 N O V E M B E R 2 0 0 5N O V E M B E R 2 0 0 5 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E " In need for radical change with convergence as a catalyst S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A LS T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

2 I D A T EI D A T E Telecoms and Media: 5 years of negative shareholder returns… Telecoms share price performance (rebased to 100) Source: Datastream as of November 22, 2005, Bloomberg 1 Total shareholder return Media share price performance (rebased to 100) 1 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

3 I D A T EI D A T E … despite significant operational and capital optimisation efforts… Source: Datastream as of November 15, 2005 Telecoms and media market development (rebased to 100) 2002: Balance-sheet restructuring 123 Balance sheet and liquidity issues Rights issues across the sector Selected asset sales 1 2001: Bubble burst 2003: Focus on asset optimisation 2004:Shareholder returns Need for a new catalyst Refocus on cash- flow generating businesses “Run for cash” – improve ROIC Organic de- leveraging Increasing earnings and cash flow profile Focus on dividends and cash distribution Initiation of share buy-back programs Increasing focus on top-line growth 23 2 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

4 I D A T EI D A T E Telecom industry revenue growth New threats Media industry revenue growth … and a high growth environment which today has subsided Source: DigiWorld, PricewaterhouseCoopers EEE New disruptive Technologies VOIP Internet Downloads MVNOs New players Piracy Increasing competitive intensity 3 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

5 I D A T EI D A T E The rapidly changing consumer market is increasingly driving the telecoms and media convergence Voice: Home phone Video: Video rentals Theatre Pay TV Voice: Wireless WiFi Wi-max VoIP Video: TVoDSL Hybrid set-top box Wireless video Yesterday Today and Tomorrow Data: Newspaper Yellow pages Email Data: Cable/DSL Internet portal Wireless data Changing consumption patterns are creating threats and opportunities The composition of the consumer market is rapidly changing Local Long distance 1980 Dial-up Pager Long distance Local Wireless 1995 IPTV Broadband Wireless Traditional Wireless VoIP Wireless 2010 Slightly growing but increasingly fragmented market (access, distribution, content) 4 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

6 I D A T EI D A T E Convergence of Network and IT infrastructure to move onto an all IP platform is imminent Reality Revenues at risk Adoption in next 12 months Voice over traditional  VoIP lines Drivers Criteria for revenues at risk Mitigating the risk – Move to all IP PRICING OF SERVICES Regulations on LLU Regulations on MVNOs Positioning of alternative carriers COMPOSITION OF REVENUES Next gen Networks IT infrastructure THE PERFECT MITIGANT Application provider Access provider Application provider Access provider Integrated access and service provider Incumbents Another VoIP to lead to lower voice revenues Voice to become an add-on service Data and video over IP to drive revenues Next gen networks to reduce costs through: Seamless migration Backward capability Interoperability PC penetration Internet penetration Broadband penetration PRICING BUNDLING Number portability Contracts Reduction in number of switches and simplifies network Improvement in operational efficiency through sharp reduction in headcount and resultant opex savings Reduction in capex by upto 10% through de-layering of network and corresponding increase in utilisation levels Build up of additional IT services: Networks: LAN, Firewalls, WAN Applications: e-Commerce, interactive gaming, network based PVRs, VoD Support: Authentication, storage, digital rights management 1 SBC company data Outsourcing and IP transformation 5 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

7 I D A T EI D A T E The new environment is creating new dynamics and will shape the new leaders Source: JPMorgan equity research note Winners will be highly agile. Status quo is the highest risk path. More risks Disruption of existing comfort zone Technological discontinuities New invaders More opportunities Ability to reach adjacent markets (extended home) Ability to leverage fundamental competitive advantages (brand, reach, scale, services, knowledge) But only for agile players 6 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

8 I D A T EI D A T E Over the next 3 to 5 years the European Telecom sector will be characterised by an exceptionally high level of FCF generation Cumulative excess cash at net debt/EBITDA of 2.25x (€bn)¹ Source: JPMorgan equity research ¹ Post dividends, capex … Potential uses of excess cash Reduce leverage Return cash to shareholders Share repurchases Dividend increase Organic investment (Capex and Opex) M&A Cumulative excess cash by operator at net debt/EBITDA of 2.25x (€bn)¹ 2008E — €bn2010E — €bn Source: JPMorgan equity research O2O2 O2O2 7 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

9 I D A T EI D A T E The rationale for further de-leveraging, higher levels of organic investment and higher dividends is limited Source: JPMorgan equity research and Datastream as of October 26, 2005 … given decreasing capital requirements to finance organic growth… … and already higher-than-average cash being returned to shareholders The European Telco sector is under-levered and is likely to remain so… Capex as % of sales—EU telco Average sector dividend yields Net debt/EBITDA 2008E EU average 0.6x 2.5 1.6 1.4 0.9 0.7 0.6 0.5 0.3 0.2 (0.2) (0.3) (0.7) (1.1) TI FT BT KPN DT Cosmote VOD TEF TA PT Bouygues TS TNOR TEM OTE SCOM O2 BCO M Source: JPMorgan equity research EU Telco UtilitiesMarket Increasing sensitivity of organic-only strategies by shareholders 8 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

10 I D A T EI D A T E Private equity: A market-driven economic regulator Source: BCVA, ECVA/ Thomson Venture Economics, PricewaterhouseCoopers, IFSL, Schroder Investment Management, Broker reports The private equity industry is increasingly becoming an economic regulator Insulate out-of-favour industries from stock market volatility Restructure operations out of the public sight It is estimated that private equity backed companies generate total sales of €273bn and contribute around €34bn in taxes in the UK 170 UK-based private equity firms have invested, since 1983, over €91bn in around 26,000 companies worldwide Contributions to the economy Investment patterns 2004: €28.5bn Banks 21% Pension finds 19% Fund of finds 14% Insurance companies 12% Others 20% Private individuals 8% Government agencies 6% Funding patterns 20042000 Private equity’s presence is increasing as % of M&A activity 9 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

11 I D A T EI D A T E Current available sector firepower could act as a catalyst for further M&A consolidation … Cumulative excess cash (€bn) 1 Need for scale on certain segments of the industry Need to consolidate operations to drive market/pricing to stability Migrate across the value chain and gain access to the final customer Acquire technological/marketing skill-set Rebalance and optimise capital structure Gain full control of controlled assets (minority buyouts) Capitalise on regulatory hedge opportunities Expected drivers of M&A 15% of investments in communications sector = c. €60bn >€230bn over next 3 years Private equity Total available firepower += Source: JPMorgan equity research note Source: JPMorgan equity research 1 Post dividends, at a Net Debt/EBITDA of 2.25x 10 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

12 I D A T EI D A T E Telecoms and media: Consumer standpoint Technology is driving increasing waves of convergence and M&A 1st wave2nd wave Content TV Broadcasting Services Fixed-line Internet Wireless DT /T- Online FT/ Wanadoo TI/TIMedia Broadband Voice/data Wireless access FT/Orange TI/TIM Triple play convergence Sport Movies Games Music News E-learning Classified DTT e-learning e-commerce Search Dating Messaging Community Today Operators Content ownership? Distribution platform? Technology Ownership? +++ Belgacom/ football rights H3G/ football rights France Telecom/Canal plus Telecom Italia/Mediaset alliance Disney/ Living Mobile Disney/ Minds Eye Universal Music/Vodafone alliance Ebay/ Skype Microsoft/ Teleo Microsoft/ Mediastreams.com Elion/ Microlink British Telecom/ Sky Net Systems Alcatel/ Maplecroft alliance Cesky Telecom/ Microsoft alliance Swisscom/ Antenna Hungaria BT/ Infonet France Telecom/ Arte France & Telerama alliance Enabling technology Network & system management Manu- facturer Computer/ peripherals Software Telecommunication equipment Communication devices Network equipment Private networks Public networks 11 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

13 I D A T EI D A T E In the last 6 months we have seen increasing signs of convergence-driven M&A activity Note: JPMorgan deals / / / / (Sweden) / 12 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

14 I D A T EI D A T E Recent M&A activity is more focused strategically v. the 2000 era Deal type 1 Number of deals Source: Broker reports 1 Global; 2 Until July 2005 1 2 13 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "

15 I D A T EI D A T E Organic growth based on innovation and customer relationship The sector is providing considerable opportunities for agile operators Inorganic growth through bolt-on and transformative transactions Revitalise management and Board skill set Continued focus on cost and cash-flow optimisation Promote financially sound shareholder focused business cases, for organic and inorganic strategy Redefine market based on customer needs rather than product offering 14 T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "T M T S E C T O R : " O N L Y T H E A G I L E W I L L S U R V I V E "


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