Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to March 2020 Results Conference Call. At this time, questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Agiron, Global Director of Investor Relations.
Please go ahead, sir.
Good morning and welcome to Telefonica's conference call to discuss January March 2020 results. I'm Pablo Yiron, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first quarter 2020 has been prepared under international financial reporting and standards as adopted by the European Union. This financial information is analytic This conference call webcast, including the Q And A session, may contain forward looking statements and information relating to the Telefonica Group, These statements may include financial or operating forecast and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward looking statements involve risks and uncertainties, including, relating to the effect of the COVID-nineteen pandemic.
That would cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filled with relevant securities market regulators. If you don't have a copy of the relevant press release, and the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and Chief Executive Officer, Mr. Jose Maria Alberto.
Thank you, Pablo. Good morning and welcome to Telefonica's 1st quarter conference call results. Today with me are Angel Villa, Chief Operating Officer and Laura Avasolo, Chief Financial Officer. During the Q And A session, we will take any questions you may have. I would like to start today's presentation highlighting the exciting announcement we are making today that will transform the telecom landscape in the UK.
Aligned with our strategy to focus on our core operations, we have agreed with Liberty Global to combine Telefonica UK and Virgin Media UK in a fifty-fifty joint venture that creates the leading integrated operator in the UK, with complementary strengths in mobile, broadband, video, and B2B. Enterprise value of the JV is estimated at 1,000,000,000. The combined entity is larger, stronger and more diversified, with GBP 11,000,000,000 of revenues, GBP 3,600,000,000 of ETA and GBP 1,500,000,000 of ETA minus CapEx pre synergies. On a pro form a basis, it will have more than 46,000,000 accesses, including 33 mobile, more than 5,000,000 broadband, and 4,000,000 pay TV. Liberty Global will make a cash payment to Telefonica of 1,000,000,000 to equalize ownership in the JV.
And in total, we expect to receive between GBP 5,500,000,000 and GBP 5,800,000,000 of proceeds from the transaction, post dividend recap. We are again fostering in market consolidation, convergence, combining best in class infrastructure assets, while unlocking significant value. We expect to deliver 6,650,000,000 of synergies on a net present value basis after integration costs of £400,000,540,000,000 run of, of, £540,000,000 run rate. We are therefore creating significant value for Telefonica's shareholders. The transaction is free cash flow accretive from year 1.
And expected to reduce Telefonica's net debt by between 1,000,000,000 and 1,000,000,000. Accordingly, a credit positive move that improves our competitive positioning and business sustainability, whilst reducing net debt at Telefonica. Slide 3 shows the transaction structure and key terms. Telefonica UK enterprise value has been set at 1,000,000,000 or 7.8 times OIBDA and is contributed to the JV on a debt and cash rebases. Considering PG Media, UK's enterprise value and after deducting its GBP 11,300,000,000 net debt Liberty Global, we make a cash payment to Telefonica of £2,500,000,000 to equalize JV ownership.
The JV will target a letters ratio of 4 between 4 to 5 times OEDA. We expect to raise new debt to reach this target leverage ratio and proceeds to be distributed equally between Telefonica and Liberty Global. Following completion of the transaction, neither Telefonica nor Liberty Global will consolidate the JV. Both companies will have equal governance, right, in line with the fiftyfifty shareholding and have agreed to provide a suite of services to the JV post completion. On Slide 4, we can see that we'll be turning into a stronger, larger and more sustainable player.
The combined entity will become the largest player in the market in terms of accesses with a slightly lower revenues than the market's incumbent, though at a significantly higher operating margin, benchmark for the sector in the UK. Same for the FDA minus CapEx over revenues and cash conversion rates. So we are creating a stronger competitor with significant scale and financial strength to invest in the UK Digital Infrastructure and give millions of consumer businesses and public sector customers more choice and value. Among premium brands of O2 and BD Media and fully converged providers. The JV will provide more competition in the marketplace, choice for consumers as shown on Slide 5.
The value proposition will be different as we have the following foundations. Customer centric proposition, industry leader in Net Promoting Score And Sector Leading Loyalty. Fastest broadband, with broadband speed up to 1 gigabit per second by 2021, reach content offering, only UK operator offering Netflix Amazon and all sports, leading technology, state of the art platforms and product offering, and an attractive value proposition for wholesale wide MVNO offering ready to be a relevant wholesale player and a complete portfolio of digital solution, Internet of Things with Big Data Cybersecurity, cloud and advertising. On Slide 6, with 5G rolling out across O2's footprint and gigabit broadband soon available to all 15,000,000 Vision Media Homes, There is no question that overcoming together will accelerate the UK's digital future, being the national connectivity champion. We are going to meet a unique infrastructure in Europe to seize new opportunities arising from fixed mobile convergence, and there is no network monetization to date we are retaining of both mobile and in fixed infrastructure, whilst being clear market leaders in ultra broadband, including both fiber to the premises and HPC, HFC.
On Slide 7, we go into detail about identified synergies. As previously stated, as much as 80 percent of total identified synergies relates to OpEx and CapEx, with lower execution risk. As regards to revenue synergies, we are being rather conservative, same for other financial and fiscal potential synergies, which we are not even considering. We have a proven track record in delivering when promising. Both parties have completed several acquisitions over the last few years, systematically overachieving initial targets, both in terms of total sizes and timings.
We expect synergies run rate to be reached by 2026, though turning cash positive, including integration costs, as early as from 2023, with more than 75% of synergies materializing in the first 42 months. Moving to Slide 8, I would like to again highlight the strategic fit of this transaction within the new Telefonica strategy we announced last November. With the purpose of generating shareholder value and creating relationship of trust, growth, and efficiency, we needed to focus in our most important markets and the UK is and remains a core market for us. This transaction creates a leading and fully integrated champion in 1 of our 4 core markets. A significant value creation through synergies, secure superior next generation of fixed infrastructure to drive customer experience, complementing Telefonica UK's mobile network, We will be a stronger, more valuable and sustainable platform with high dividends to continue reducing Telefonica's net debt.
All in all, partnering with Vision Media UK is the most compelling alternative for Telefonica UK and the best strategic path forward. Slide 9 explains governance, exit and timetable of the transaction. On governance and shareholders agreement, the JB Board of Directors will consist of 8 members, 4 from each of Liberty Global And Telefonica, and the Post Office Chairman of the JV will be held for alternating 24 months periods by a Telefonica or Liberty Global Appointed Director on exit, there are some windows after the 3rd anniversary and after 5th. And finally, on timetable, closing will be expected for the fourth quarter of 2020, 2021 or first quarter of 2022, the latest after approval of this of the 2nd phase of European Commission And Competition Markets Authority CMA. To conclude on today's announcement and before moving on to rapidly review first quarter results and current environment, I would like to stress that we remain committed to our strategy.
No matter, covering certain times, it is the long term sustainability that drives our decision We believe this is the best and the only way creating a leading integrated player with significant cross selling opportunities in the 2nd largest European market, improving our market positioning the group's profile and business sustainability. We are combining Telefonica UK's leading mobile operation and BG Media UK's extensive super fast broadband network to benefit consumer businesses and the public sector through investment to accelerate digital structured deployment and improving customer experience. Whilst doing so, we create significant value. Total OpEx CapEx and revenue synergies with an estimated net present value of GBP 6,250,000,000 after integration costs, with potential additional financial and fiscal synergies not being considered. Creating substantial value creation for Telefonica's shareholders.
Today, we are changing the UK Telecom's market landscape via fostering in market consolidation in one of our core markets. We are as well fostering in market consolidation in Brazil, all aimed at granting a more predictable future to our shareholders. Moving now to Slide 11. It is worth highlighting our mission to make the world more human by connecting lives. It has turned even more evident than ever during this crisis.
Connectivity has proven even more critical and thanks to the focus and investment in our infrastructure over the last over 1,000,000,000 since 2012, we have been able to warranty continuity of service. And this service has been key to society being able to stay connected and mitigate the impact of the crisis. Our networks have proven resilient, reliable and stable, managing traffic peaks, as an example, in Spain, the company has been able to cope with an increasing bandwidth demand of almost 40%, a growth of mobile data traffic of 50%, and mobile bills of 25% in the fleet in the 1st week of the confinement by COVID-nineteen. This has enabled to be in a position to use our capabilities to support public administrations and health institutions. Helping to maintain the supply chain.
The COVID 19 outbreak has also demonstrated that our business model is sustainable. And we are now more confident on its resilience. Our resilient model built on digital transformation over recent year, enable us to cope with increased demand for connectivity and remote working solution, whilst also working with public bodies to keep society connected. We have responded to our stakeholders' need in a responsible manner. We needed to care about our employee and we promoted working from home as for as much as 95% of our workforce.
For our vendors, we have shortened payment terms while trying to help them with some of their liquidity issues. We care as well about our customers showing flexibility with payment while increasing data allowances and offering faster speed and Richard content offering. And above all, we needed to respond to our society needs, making all our service and capabilities available to institution. We feel that through these responses, we have as well taken care of our shareholders' show and responsibility. On slide 12, we go through a revision of potential COVID-nineteen impacts.
Let me start by saying that this is uncharted territory, extension of lockdowns, based on lifting of restrictions, and economic impacts in each of the countries in which we operate are still to be seen. In any case, the civilian business model I referred to in my previous slides make us not immune, but much better protected than others. Of course, we will face negative revenue impacts. Overall, commercial activity has been stopped and both consumer and corporate customer had to suffer in one form or another. But whilst in the short term, we may see lower roaming, reduced prepaid recharges SME customers navigating through difficult times, long term prospects remain, if any, intact.
Demand for connectivity is on the rise need for speeding up digitalization in the corporate world has proven real and changes within consumer habits are here to stay. At the beginning of the short term, we have levers to weather this storm. Yes, our top line will be negatively affected, as mentioned, through a thought to a lesser extent than for many other industries. This will nevertheless be bar milled at the ELD level as lockdowns as well, bring down churn and overall commercial expenses. Not to mention, prepaid B2B revenues or handset sales have lower than average margin.
We count with additional levers in the form of discretionary investment despite we remain focused on our growth opportunities. All in, you have enough tools to preserve free cash flow, which allow us to be better prepared for future opportunity Moreover, delays in spectrum auction will occur, like Spain, the UK and Brazil. Moving to the next slide, we reiterate our 2022 guidance and 2020 dividend of per share. Due to the significant changes in the guidance scenario, and context and the current level of uncertainty, 2020 financial guidance is withdrawn. Nevertheless, we will closely monitor the evolution of our businesses and will manage CapEx and OpEx accordingly to focus on OIB minus CapEx stability.
In the current context, the outlook for 2020 OIBDA minus CapEx is to be a slightly negative to flat year on year. As for the mid term, 2022 guidance of revenue growth and 2 percentage points improvement in OIBDA minus CapEx over revenues is reiterated. To note that this crisis has accelerated the digitalization processes in all processes increasing our relevance significantly. Confidence in our business model flexibility to weather current environment coupled with a solid liquidity position and business resiliency allow us to confirm the announced 0.4 dividend for 2020. The payment of the 2nd tranche of 2019 dividend 0.2 per share to be paid in June and the 1st tranche of 2020 dividend per share to be paid in December will be voluntary script, giving more flexibility to both our financial position and our shareholders in this unprecedented situation.
I now hand over to Aja to go through a detailed review of the business unit's performance.
Thank you, Jose Maria. Turning to slide number 14, let me summarize our main financials. Reported figures for the first quarter reflected the negative evolution of Forex. Revenues topped almost 1,000,000,000, declining 5.1% year on year on a reported basis and just 1.3% in organic terms and grew 0.1% in the core 4 markets, Spain, UK, Germany and Brazil. It is worth highlighting the continued transformation of our top line.
Especially in the context of this COVID-nineteen crisis, with 65% of our services revenues already coming from Broadband and services of our connectivity, 2 percentage points more than a year ago. OIBDA reached 1,000,000,000, and though reported annual evolution is impacted by ForEx and capital gains registered in Q1 'nineteen, In organic terms, it shows a drop of 1.7%, which turns into as much as a 1% annual growth if we look at our 4 core markets. Leading Profitability is maintaining organic basis. We saw EBITDA margin flat versus January March 2019 to stand at 33.1%. And OIBDA minus CapEx over revenues, reaching 20%, just 0.5 percentage point lower organically, but increasing 0.7 percentage points in the 4 core markets.
Net income reached EUR406 1,000,000, and earnings per share stood at EUR 0.60 per share or 0.11 in underlying terms. Free cash flow is impacted by the usual first quarter seasonality. Year is distorted by the tax refund received in Spain. Finally, net financial debt stood at 38 point 2,000,000,000 declining 5% year on year and reflected the punctual increase in Q1 due to the exercise of the outstanding hybrid first call date in March 2020 and the hybrid issued out of Colombia. Regarding COVID 19 impacts.
Those were minus 77,000,000 in revenues, minus 33,000,000 in OIBDA, minus 17,000,000 in CapEx in Q1, approximately the last 15 days of March. And we see risks but also opportunities going forward. On Slide 15, we review our Spanish operation. After strong after, sorry, after strong investment efforts in past years, owning the largest and most powerful fiber to the home network in Europe has proven critical during the quarter to support stable and reliable connectivity to our customers and to the overall society. Our network delivered at the time when both our retail and wholesale customers required an additional effort from us.
Despite lockdown, having an impact on our commercial activity, we stood by our clients through our online channels, and we responded to our customer and corporate customers' needs, providing free extra data and enriching our content and digital services offering. Being the most reliable and advanced platforms allows us to have the most valuable customer base. Mostly in high end services, video and Ultra broadband fiber and sitting mostly in convergent bundles. Despite not having locking closers, churn improved in Q1, showing how resilient our business stands within this environment. So far, impacts from COVID 19 have been limited but noticeable already in the month of March.
Revenues showed a slight decline, mainly concentrated on the Retail segment, But efficiency gains net OIBDA minus CapEx to increase by 1.44% year on year. Cash generation is our focus. And we will prioritize OpEx and CapEx to continue delivering benchmark cash conversion in the coming months. Moving to Slide 16. After COVID-nineteen environment started, Telefonica Deutschland has supported employees' customers and the wider society through a variety of initiatives, such as offering complimentary app access for limited time period, and launching a series of live streamed O2 Comsearch.
The network is coping well with the new traffic patterns, and the company maintained a clear focus on improving customer experience, also underpinned by strong network resilience. Despite this tough environment, telephonic adoption delivered a robust start to the year, maintaining its profitable momentum across all revenue lines. Despite softer trading trends, following the government imposed lockdown. The company posted a strong 3.8% year on year revenue growth. OIBDA turned positive and improved by 1.5% year on year.
As such, OIBDA minus Cap Placking minus CapEx increased by 12.9% year on year in January to March. Moving to Slide 17, where we review the performance of our UK business. In the COVID-nineteen environment, Telefonica UK has split a in keeping the UK's customers, businesses and public services connected. Our response has included doubling our network capacity helping our customers and strongly supporting due to the later timing of lockdown. Within this environment, Telefonica UK posted the 15th consecutive quarter revenue growth year on year, with a sector leading contract churn at 1%, confirming its market leading position in a highly competitive market.
While growing mobile customer base by 6% year on year. Worth highlighting in the quarter is the exclusive launch of Disney plus. The company continues to outperform the market and posted plus 1.5% year on year revenue growth, OIBDA improved by 1.1% year on year, and OIBDA margins stood at 29.7% stable year on year. Thus OIBDA minus CapEx, our revenues ratio improved by 3.7 percentage points quarter on quarter in January to March. We now move to Slide 18 where we review the performance of our Brazilian operations.
This economic and social context, Telefonica Brazil plays a relevant role as an enabler of connectivity to its customers. In this respect, and along with other measures, we have decided to offer higher data allowances across our plans for an additional cost and to open more than handed DB channels for all customers. During Q1, Vivo maintained its leadership in the mobile business with a 33% market share. And a remarkable 39% market share in the contract settlement. In the fixed business, it's worth mentioning the new alternative fiber expansion models, such as the agreement with ATC or the franchise model, that allow the company to boost connections and reach almost 2,700,000 accesses connected with fiber to the home at the end of March.
Operating wise, And for another quarter, the company posted very solid OIBDA and OIBDA Minus CapEx growth. Despite initial impacts from COVID-nineteen mainly prepaid and enhanced sales, the ongoing transformation of the company towards fiber the continued migration to contract and the steady digitalization process we have been undertaking for the last few years, allow the company to be confident on the continued free cash flow generation going forward. On Slide 19, we can see how Telxius growth and margin increase, along with its continued tower expansion. In the first quarter of the year, Telxius acquired 1900 towers in Brazil and Peru that, combined with new towers built, grew the portfolio by 21% at our portfolio by 21% year on year. Moreover, debt use has doubled its size in a relevant market, such as Brazil, consolidating itself as an industry leader with a total portfolio of over 20,000 towers in March, with a tenancy ratio of 1.34 times or 1.36 ex acquisitions.
Revenues and OIBDA grew by 6% and 12% year on year organically, respectively, excluding the exceptional Subsea cable capacity sale of the first quarter 2019. This acceleration in the quarter drove OIBMA CapEx growth up to 11% year on year, excluding the new Pacific cable construction. Now I hand over to Laura.
Thank you, Angel. Moving to Slide 20. Telefonica is banned, like for the rest of our unit, a taking initiatives to offer special benefits to clients in order to improve and expand connectivity, such as free browsing through certain applications for higher data allowances across mobile plants. In the region, the telecom sector appears initially more exposed to COVID-nineteen potential impacts. Due to mobile prepaid exposure.
However, the ongoing digital transformation, the continuous migration to high value and achieve CapEx efficiencies make us still confident about the resiliency and strength of our business. Revenue and OIBDA year on year trend continued to be highly affected by tough competitive situation in Peru and Chile. On the other side, It's worth highlighting that the more suitable model just implemented in Mexico is already showing positive results. With OIBDA year on year growth in Q1 for the first time in 9 quarters. Moving to Slide 21.
We look in detail on how FX impacts our first quarter results. Again, proving currency headwinds are structurally neutralized. Even more, we actively hedge cash flows of Brazil and U. K. FX dropped 3.2 percentage points in revenue and 3.5 percentage points in OIBDA's year on year variation.
In the Brazilian real, currencies are mostly appreciated against the euro. Nevertheless, the negative effects of EUR 151,000,000 in OIBDA levels translated into just 1,000,000 in free cash flow terms. And at regards to net debt, in the 12 month rolling period to March 2020, FX had a positive impact of 1,000,000. As anticipated in 2019 full year results, net debt in March had a slight increase by nearly EUR 500,000,000. Mainly explained by the amortization of the couple of hybrid references with non call dates in March 2020.
Other than this temporary effect of SEK 700,000,000, net debt could have continued downward trendstone in previous quarters. Free cash flow generation in the quarter amounts to 1,000,000, and it's expected to improve for the remaining Australia. Slide 23 shows Telefonica a strong liquidity cushion amounting to 1,000,000,000. Covering well in excess of next year debt maturities without considering cash generation, additional financing, nor credit lines extension. It is to know the high quality of Telefonica and drawn credit lines, mainly with maturities of 2 years or beyond and no MAC losses.
Additionally, it is to highlight our practice and extensive financing activity undertaken in the last years. Nearly EUR 39,000,000,000 funds rate in total since June 2016 to date. During this quarter, we have continued with this activity issuing 1,000,000,000 of new debt benefiting from minimum costs including a 10 year bond and the first green hybrid issue in the telecom sector of 1,000,000 with respective coupons of 0.66 percent 2.5 percent. We have approached different buckets of liquidity, extended our average debt life from 5.6 years to 10.7 years, while achieving the lowest coupons ever in recent years. As a result, our effective interest payment cost has reduced to 3.49% in March 2020.
109 basis points lower than in June 2016. In summary, we have been successful year strengthening our balance sheet in the last years. I will now hand back to Jose Maria to recap.
Thank you Laura. To conclude, in this environment of coronavirus pandemic, the telecom sector is proving essential and our mission which is to make the world more human by connecting lives has turned more critical than ever. We are one of the most protected and resilient sectors And inside the sector, Telefonica continues showing its strength remaining ahead of the curve in crucial aspects, such as the state of the art infrastructure, and network modernization. We have, as well as solid liquidity position, result of the prudent and strict financial discipline we have followed, over the last few years. We are obviously not immune to the current crisis, but our sustainable model will by being committed to our strategy and our values has allowed us to respond to our stakeholders' needs, both employees, customers, suppliers, and the society in general.
We will continue to progress in this sustainable model on its 3 fronts, growth, efficiency and trust. By doing so, we believe we will continue to deliver long term value creation for all our stakeholders. Thank you very much for listening and we are now ready to take your questions.
Ladies and gentlemen, questions. We would kindly ask and answer session. There will be a short silence while questions are being registered. Our first question comes from Jacob Bluestone from Credit Suisse. Please go ahead.
Hi, good morning. A couple of questions from me. Thank you very much. Firstly, can you maybe elaborate a little bit on the thinking behind the dividend, keeping it at $0.40. You obviously have gone to voluntary scrip, but just sort of in terms of thinking, why didn't you go for full script or sort of create a little bit more flexibility?
Is that sort of a reflection of your confidence that you can sustain your equity free cash flow generation. Is that sort of how we should read that? So if you can just help us understand the process a little bit in that. And secondly, on Spain, you reported, I think, was a 3% decline in your retail revenues. Can you maybe give us a little bit more sort of color on what's going on in that it looks like particularly the sort of decline came through on the non convergent revenues.
And so any sort of clarity or additional detail you could give on what's going on with that part of your revenues would be helpful. And then finally on the UK transaction, I guess one of the big parts of the synergies is getting the Virgin MVNO back to your own network. Are there any sort of costs associated with that?
Taking your first question on the dividend. As you might imagine, we have analyzed all scenarios. Considering also the low level of visibility that anybody has on what might happen in the macroeconomic scenario. While we know for sure as we were detailing on the presentation is that we are not immune, but we are more resilient than others. And the impact that we are having in revenues, we have levers to neutralize part of that at the level of OIBDA through the manageable OpEx that we have.
And additionally farther on the road in terms of CapEx, trying not to compromise the strength that the networks or the network that we have built. And therefore, considering all circumstances, we think that in terms of free cash flow and also considering that some the spectrum auctions are likely to be delayed free cash flow generation enable us to have a very good coverage of the dividend But in order to preserve more financial flexibility, we have decided to include the optionality of our script dividend, our voluntary script dividend. And therefore, depending on how, what's the percentage of shareholders that might come, we could, might build up additional financial flexibility. So we think this is the more prudent approach. And at the same time, preserving an attractive dividend policy and showing the confidence that we have
Regarding the question on the evolution of Spanish revenues, in the first quarter, total revenues declined 1.6% year on year, reflecting certain COVID-nineteen related impacts in particular handset sales. Service revenues declined 1.2 percent year on year, less than total revenues, mostly due to non convergent revenues. Not offset by the growth in IT and wholesale. So if we look at the retail to your question, minus 3.4% year on year, this is due to this lower non convergent communication non convergent communication revenues despite the IT growth. The convergence and new services show a minor decrease, mostly in line with the convergent ARPU decline.
So, the evolution of this line is linked to the non convergent communication revenues. At the same time, wholesale revenues have increased 10.8 percent, very positively impacted by NEBA and TV and despite the abandoned local loop decline. Sorry. The 3rd question. I thought it was a maximum of two questions.
And the third question on UK transaction synergies, we have identified synergies with a net present value of 6,250,000,000. Pounds, you can see them on Slide 7. Of this level of synergies, 65% are to be coming from OpEx. 15% from CapEx or 80 percent of the total synergies are OpEx and CapEx related. And only 20% are related to revenue.
If one does the ratio of these synergies over the combined cost and CapEx base of the entities combined, you will see that it stands slightly above 4% of those which compares very favorably to previous transactions being presented to the market in which the median of that ratio is between 5 0.5% 6%. So these are synergies, which we believe are achievable and which compare well with the benchmarks of other transactions. Among the OpEx synergies, we include the migration of the Beer Gen Media Mobile traffic to Telefonica's UK network. It's the largest component in this OpEx bar of synergies, but they cannot disclose further details.
Thank you, Jacob. Next question, please. And please ask no more than 2, because we have a long list of analysts way to ask, please.
Our next question comes from Michael Bishop from Goldman Sachs. Please go ahead.
It's Michael Bishop from Goldman Sachs. Just two questions, please. Firstly, on the relative valuation of O2 and Virgin Media, could you just give us a little bit more color on the discussions there? Because clearly, it's a very complex job valuing the 2 companies. And especially I was thinking about things like your stake in CTIL potential tax losses at Virgin Media and really what did the discussions center around to end up at the 2 relative valuations?
And my second question is you've highlighted the impact of hedging, mitigating a lot of the negative FX headwinds at free cash flow level. And if I'm right, it looks like the offset at least in the first quarter from hedging was quite a lot more than the impact that you disclosed has changed or evolved to drive that better offset as you face the FX headwinds. And thank you very much.
Thank you, Michael. I'll take the first question on the relative evaluation. We have brought to to this merger, the perimeter of Telefonica UK, including the 50% stake in CTIM. At the same time, Virgin Media is contributing the asset in the UK, including the projects that they have on fixed ultra broadband project lining, but excluding the IDH business. When approaching the relative valuations that led to the equalization payment given the leverage that each one of the assets is bringing.
We have been focusing on the 2 fundamental valuation first on discounted cash flows of each one off of the businesses. And we have also been taking into account the valuation of precedent transactions. Clearly, a third, traditional metric that you have in this situation is a market multiples comparable is not a proper reference given the situations that we are navigating through in the market. So if one looks at the DCF valuations for each one of the assets, the values agreed for the transaction and the multiples agreed to for the transaction seat squarely in the middle or close to the middle of the DCF range for each one of the two assets. But also, if one looks at the transaction presence, and there have been quite a few, present transactions of fixed mobile conversions in across Europe, you will see that those multiples are also consistent with those ranges.
Yeah. If I may continue on the free cash flow and hedging, I think the numbers, this quarter show the hedge we have throughout the free cash flow and net income that we have been discussing for many quarters. This quarter, the Brazilian real and other LatAm have been a lot affected. And in the case of Brazil, as you know, we have minorities, we have the higher over revenue than the remaining of the portfolio. And all of that makes that we don't only have revenue effective by also other cash outflows.
And the result thing is that that free cash flow finally impact has got minimized. The bank, on the other way, this quarter on average has appreciated. So I think it has to do with the mix. And this particularly quarter shows how the FX coming from LatAm currency's final impact can get minimized as we go down the free cash flow line. It is true that this year on top of that, but it's not affecting the figure you saw in Q1 given the volatility we were forecasting both for the real and the pound and the difficulty to preview or forecast the FX We did some hedging on the free cash flow that will come throughout the year, but that's a different hedging that we have done in order to have a more predictable free cash flow coming from those geographies, but it's not the explanation for the Q1 that was your specific question has to do with the mix of the currencies.
Thank you. Thank you, Michael.
Our next question comes from David Rice from Bank of America.
The questions and congratulations on the deal. My question is around Project Lightning that Virgin Media has injected. There has been a lot of commentary from management of Liberty that they could look to even spin that assets out with an infrastructure investor or that they could look to accelerate build and provide wholesale services. What is the strategy for Project Lightning in the JV, please?
Well, we, as you know, have been, proponents and believers of, Ultra broadband in particular fixed. The Spanish market is the most developed in terms of fiber across Europe. So we look at this deal, looking at project lining as one of the attractions of the project. At the same time, Liberty Global valued significantly the experience that Telefonica has in the industrialization of the fiber process, which has led us to achieve one of the most efficient ratios, of speed and cost in deployment of fiber also combined with the standardization of all the equipment around the fiber system. The project lining as it's progressing at this point, at the end of 2019, it was 1,900,000 homes passed.
There is a plan, which was already in the market by Bursi Media to more than double that by 2024. The ultra broadband infrastructure of Virgin Media at this stage is covering 15,000,000 of homes passed in the UK with speeds at around 500 megabits per second, but ready to upgrade to DOCSIS 3.1 to get to 1 gigabit per second, but also in new areas is through deployment of fiber. For us, this is, the way, going forward, and we are supportive, obviously, of this project. And if conditions allow we would support the JV to progress more decisively across this. This deployment also is being done through owned ducts, which provides sustainability to the whole deployment.
So project planning is part of the project. Strategic alternative regarding project lining, how to structure or restructure it to make it even more ambitious, will be in due course discussed by the partners. We are open minded on this. So We are open to explore alternatives to use in the most smart way infrastructure that both partners are bringing to the table, but it being a lighting or being CTIL.
I see. And just a follow-up please, Angel. Are there any within the synergies, within the current business plan, are there any plans to wholesale at all, the fixed line network, whether that be existing cable or aligning further? Thank you.
That will be something to agree between the partners when the JV is in place post completion.
I I see. Okay. But it's not in any synergies or business plan right now. No holes. Yeah.
But it's not it's not it's
it's a huge variable, I think, on this particular deal that Liberty has talked about a lot, but really isn't commented at all in the releases.
It's not included in the synergies. Sorry, it's not included in the synergies.
Our next question comes from Joshua Mills from Exane.
Hi there guys. Thank you very much for taking questions. Just two from me. Just the first regards to cash in drawn year 1 of the transaction. So you're guiding for about 1,000,000,000 worth of dividend up to stream.
I'd just like to know where that leaves the joint venture in terms of leverage. My assumption would be that's probably towards the the higher end of the 45 times range. So just to confirm, that would be great. And then secondly, it'd be great if you could give us a bit of insight into the Spanish operating trends. You mentioned COVID-nineteen is clearly having an impact, but perhaps if you could give us an update on how your customer mix is is between Qsy on O2 highmidlowendband as you, as you often do, would be very helpful.
Joshua, I may answer the the first question if you want. The O2U claim is going to be contributed to the JV and debt free and Liberty will be contributing to the JV with about 11,300,000,000 pump of leverage. And on top of that, we are estimating a recap of approximately 6,000,000,000 that will lead to the high end of the range. Although it will obviously depend on the final figures by year end and at the time of closing.
Regarding
your question in on the operating trends in Spain. First, on the quarterly trading, net adds have, shown a slight decrease on lower gross adds and gross adds impacted by tough commercial dynamics that took place in January, February. And the lockdown in March, not allowing for recovery for a weak first half of the quarter. At the same time, fiber fixed broadband net adds improved both quarter on quarter and year on year. The fiber base is reaching 6,700,000 subscribers both 4.4 retail, 2.3 wholesale, which is 16% up.
And we have been recovering in turn even before, the lockdown in mid March. So even before that, we were back to usual figures around 1.5%. And despite the end of promos, and, more for more. Shows reaches 1000000. This is the ARPU of convergent products plus SME convergent products and digital services related to convergent customers.
It's 1.1% down, and this was due to consumer upselling, a positive, a higher ratio of additional mobile lines, minus dilutive effect from multi brand options, mainly, driven from the higher weight in the mix of O2 and lower extra consumption outside outside the bundle. We have no longer disclosing the guide of the value mix in the ARPU because we think that that's commercially sensitive and good. Also, given the different price points of the different segments of what we used to define as high medium and low that was becoming misleading in interpretation of the information. We continue to have average ARPUs, which are significantly higher than our next competitor and the average of the industry, but also because of our customers have more services in their bundle.
Thank you, Hughes. Next question please.
Our next question comes from Matthew Robilliard from Barclays. Please go ahead.
Yes, good morning and thank you. I had two questions, please. First, coming back at the dividend question maybe for a different angle. I see that one of the rating agencies has put your, rating to a negative outlook. And I was wondering how do you prioritize your current debt rating versus the cash remuneration to shareholders?
More important than the other, and you can manage those at this stage. And then with regards to Latin America and M and A, I TVT there. It seems that in Brazil, things are progressing well despite the current crisis. On the other hand, we saw the Costa Rica deal not being finalized. And I don't know how much color you can give in terms of other initiatives and maybe the impact of the current crisis on your plan is enough there.
Thank you.
Let me take the dividend and the link to the credit rating. I think what we have done with this decision is a balanced approach. It's showing prudence. It's showing the liquidity and credit rating quality is important and fortunately, we are strong in both terms, but also showing commitment to shareholder remuneration. We have done the homework to sustain an attractive dividend policy, but we are also looking for flexibility.
And we are giving flexibility to our shareholders because we are giving the option to have dividend in cash, which is important to some of our shareholders and it also shows consistency and it's also preserving free cash flow for the other shareholders that are fine also with that decision and taking more shares out of Telefonica. It's not one goal versus the other. We want to create value to our shareholders and we want to be within our solid investment rate credits. And I think with this proposal, it's a heavy solution is a balanced approach. So cyber resilience, both from a shareholder perspective, but also is in the right direction for in protecting our solid investment chain.
So it's not it's a balanced equation. If I may, on the Eastbank, we continue working at full speed in the operational carve out. And we have done lots of things and you have seen some of the movements some of the shareholders to a vehicle throughout the first quarter of the year, end of March, for instance, in Peru and in Colombia and in other of this, and we are also working in preparing ourselves for a potential financial spinoff, but there are also alternatives open from an M and A perspective. So we are doing all the homework at full speed remotely as everything else in the new Telefonica at the moment and we are getting prepared. On the financing market, it's true that the situation today is not ideal.
We will never be ready for a financial SBA testing in any case today. So if there's a still a month to come and month of work pending. And hopefully, the situation will be calmer and we will be able to approach the market in BUKAR.
Thank you very much. Our next question comes from Georgios, Liradiyakano from Citi. Please go ahead.
Yes. Good morning and thank you for taking my questions. I have 2. One is around Cornest on, and at the Gilante last year, you alluded to this when you are discussing options around the fixed line. I'm curious about the process for the tower sale at Cornerstone, whether that is impacted at all, whether you will wait until the transaction is completed, or whether there could be a parallel disposal of the towers at Cornerstone?
And my second question is around other initiatives to monetize your infrastructure. It's possible to update us where we are with some of these initiatives and there was some articles around the German situation a couple of weeks ago any delays or any fiscal or other hurdles that may either delay or cancel some of these initiatives? Thank you.
Thank you, Georgios. Regarding Cornerstone, CTIL. We have been preparing the asset in terms of, all the model, operational model, financial model, for what would be a market oriented to our company. This phase of preparation is basically complete. Now, the transaction to create the UK JV, has meant 2 things.
First, that CTIL is part of the asset, 50% of CTIL is part of the assets contribute into the perimeter of the transaction, of the JV transaction. So, the asset will be held by the JV. And second, the 2 options that you were talking about are possible. Monetization could take place once the JV deal completion has finished, or it could be approached in between signing and closing, of course, if the different parties that have interest in this situation wanted or agreed in going ahead with such a potential monetization. So it's possible.
It's not that it cannot take place before completing the JB deal. But, we would need, to talk with, with the different parties involved now. In the situation. It's, the asset is ready for such possibility. Other initiatives to monetize infrastructure, we have been very active, with, tower bills so far in the year.
Some, tower bills have been incorporated, to Telenci's, as I was, saying in my presentation, so 2000 towers and rough numbers from Brazil and Peru have been contributed into Celsius. We have also solved outside of the group and monetized towers in other Latin American geographies, Colombia, Ecuador in particular, which were of less interest to 30s and we sold them out of the group. We are very advanced in potential tower deal in Germany as was expressed by my colleagues of Telefonica Tochland yesterday in the conference call. This would be a substantial number of of towers. Our preferred route is to contribute those to Telxius with our partners in Telxius, contributing cash to maintain their percentage in the company.
And therefore, we are achieving effective monetization as we transfer those towers to Telxius. The deal is advanced, is still pending some elements of the negotiation as soon as there would be a deal achieved, of course, we would communicate it accordingly to the market.
Thank you, Julius. Next question please.
At this time, no further questions will be taken.
Sorry, I think that there are more people waiting. I think we have time for one final question, at least. I know that there are more people waiting. But there are a lot of commitments and a full agenda today. So one operator, please, one more, and then we can finish because there are someone is still waiting there.
Our next question comes from Charlotte Perfect from Arete Research. Please go ahead.
Around the Spanish trends was asked earlier. But if I may just follow-up on that, and I understand you don't want to give the split into premium mid and low tier amidst your convergent base. But I was just wondering what's your outlook as we go into a recession and over the next 6 months and as consumers become a bit more price sensitive, are you expecting further downspinning market. I guess also as the Virgin branch rolls out and Massimo continues its advance as well. So just really sort of would like to understand your outlook on downspin and Spain.
Thank you.
Thank you for the question. Regarding the outlook for Spain. No? 3, COVID 19, we were targeting operating cash flow growth on a trend of growing, key accesses, launching new services and with a positive outlook, which still there for wholesale revenues. Also, at the ETA level, corporate decommissioning and digitalization were to keep providing benefits on top of improved trends in costs in content and personnel.
And then, of course, having stable CapEx, Now what we see is that uncertainty is, is maybe main attribute for for the year. So we foresee pressure on the top line. In any case, Given this pressure on the top line, we can no longer aim to for stable top line and OIBDA but we have room. We have room for acting on OpEx And CapEx and aim to preserve operating cash flow. At OVA level, part of the lows in revenues, would be compensated by OpEx savings in supplies and in commercial cost and efficiencies that were already up and running.
So, should allow us to maintain OIBDA margins at around 40% approximately. And then when we translate this into operating cash flow, given our, flexible CapEx model, we are aiming for the Spanish operation for slightly negative to flat operating cash flow.
Okay, that's helpful. Thank you.
Thank you. With this, we will finish all of us. I'll hand over to Jose Maria to close the call.
Thank you very much for your participation, and we certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relationship department. Good morning, and thank you very much.
Telefonica's January to March 2020 results conference call is over. You may now disconnect your line.