Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's Rights Issue Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If you should require assistance during the call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Pablo Eguidazu, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Telefónica Conference Call to discuss the EUR 3 billion rights issue. I'm Pablo Eguidazu, Head of Investor Relations. Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties. The certain results might differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filled with the relevant securities market regulators.
If you don't have a copy of the relevant facts and the slides, please contact Telefónica's Investor Relations Team in Madrid by dialing the following telephone number, 34914828700. Now, let me turn the call to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.
Thank you, Pablo. Good afternoon, and welcome to Telefónica EUR 3 billion rights issue conference call. I will first go through the presentation and then open the line for Q&A, where you will have the opportunity to address any questions you may have. On slide two, we have summarized the key terms of the offering. We will raise EUR 3 billion through a rights issue, corresponding to 281 million new shares. The proceeds from the offering will be used to partially fund the acquisition of GVT by Telefónica Brasil through the subscription of the Telefónica Brasil capital increase, at least in proportion to our stake and for general corporate purposes. Every existing share will have one right, and the subscription ratio has been set as one new share every 16 rights. The subscription price is EUR 10.84 per share.
The subscription and rights trading period will open on March 28th and will end on April 12th. Last day of cum rights trading will be March 27th. The results of the offering and the potential run placement of unsubscribed shares are expected to happen on April 17th. The new shares will be trading on April 22nd. The company has committed to 150 days lockup, subject to certain exceptions. The transaction is fully underwritten by the bank syndicate. On slide three, we would like to remind you of the main parameters of the transaction we agreed with Vivendi back in September 19th, 2014. The agreement contemplates the acquisition by Telefónica Brasil of GVT for a cash consideration of EUR 4.66 billion. A payment in shares representing 12% of the share capital of Telefónica Brasil after its combination with GVT.
The EUR 4.66 billion cash contribution will be financed through a capital increase at Telefónica Brasil. Telefónica will subscribe its proportional share of Telefónica Brasil capital increase, corresponding approximately to EUR 3.4 billion. Partially funding this cash contribution through the EUR 3 billion rights issue, a smaller amount to minimize shareholders' dilution. As part of the agreement, Vivendi will acquire from Telefónica shares in Telecom Italia, currently representing 8% of Telecom Italia's voting share capital in exchange for 4.5% of Vivendi's stake in Telefónica Brasil after its combination with GVT. As a result of the transaction, Telefónica will hold a 70% stake in the enlarged Telefónica Brasil, with Vivendi holding a 7% and the remaining 23% as free float. The transaction has been approved by Anatel and CADE, subject to certain conditions.
Turning to slide four, I would like to review with you why we believe Telefónica Brasil and GVT represent a perfect strategic fit. First, they are both leaders in the Brazilian market, Telefónica's number one mobile operator, sorry, and GVT, the number one ultra broadband player. Second, they have two very complementary infrastructure platforms. On the one hand, Telefónica's leadership in the São Paulo market is supported by the best 3G and 4G coverage in the market and the best mobile network. On the other hand, GVT has a solid and widespread fiber network throughout Brazil, with the majority of its ultra-broadband clients located outside São Paulo. Third, both companies are the best quality brand names in their respective businesses. Finally, Telefónica Brasil and GVT share a strong commitment towards quality and client satisfaction.
Moving to slide number five, we will create the undisputed national leader in the Brazilian telecom and pay TV markets. From our leading national footprint to our solid three-play position, we have the core fundamentals needed to deliver the best product to each of our customers. Customer satisfaction and brand awareness are the foundations for taking advantage of significant drivers of growth and profitability. On top of this, we are ready to offer our customers the best-in-class integrated offer, given our four-play readiness in our key markets. Furthermore, we are poised to create significant shareholder value as we extract substantial upside from synergies and continue to deliver leading financial performance and shareholder returns, as we have done consistently over the years. The new Telefónica Brasil is the gold standard for investing in the Brazilian telecom sector.
We provided a detailed update on our strategy and positioning during our Q4 earnings call on February 25th, 2015. On slide six, let me remind you of the key investment highlights for Telefónica, which I will discuss in more detail on the following slides. First, our ongoing transformation is bringing us back to profitable growth. Second, we are positioned for growth acceleration. Third, this growth will be compatible with sustained financial discipline and shareholder returns. Please turn to slide number seven to review the business deep transformation carried out in the 2012-2014 period. During the past two years, we have made significant advances. We invested in capturing growth opportunities in mobile data and digital services, took initiatives to improve efficiency through simplification. We reinforced our asset portfolio and de-risked our balance sheet.
As a result of this, we have built a solid platform. We have clear proof points of this transformation, which allows us to upgrade our ambitions for the 2015 and 2016 period. Looking ahead to 2015 and beyond on slide eight, we are very well positioned for further growth acceleration. In Spain, one of our largest markets, macro and market trends look positive, increasing the appetite for higher-value services. We are also working to increase our differentiation by broadening our infrastructure and assets in fiber, pay TV, and LTE technologies. At the group level, we will focus on monetizing the new mobile data and video opportunity. We plan to create an environment where everything is connected, either through multi-device or multi-user plans, or through improving connectivity with fiber and LTE, leading to the adoption of new data services.
We will leverage our differentiated mobile and fixed infrastructures and IT upgrades to enhance customer insights. Our focused portfolio management will create significant value in Brazil and Germany through synergies. We will also continue concentrating on savings over the coming years from simplification across markets. External factors, whether related to macro, regulatory, or the telecoms industry, have turned from negative to positive. Moving to the next slide, let me remind you of our financial priorities for the next two years, which will be focused on three targets. First, strengthening our balance sheet. A substantial part of the proceeds from the proposed disposal of O2 UK will be used to achieve a leverage ratio of net debt to OIBDA below 2.35 times. Second, maintaining an attractive shareholder remuneration with sustainable dividend payments coupled with treasury share cancellations.
Third, supporting sustainable operating growth by both growing organically and analyzing inorganic opportunities to accelerate value creation as our portfolio strengthening policy remains in place. To finish, on slide 10, you will find a summary of the expected key milestones of the GVT and O2 UK transactions. On GVT, we received approval from Anatel on December 22nd, 2014. CADE has also approved the transaction on March 25th, 2015, and the transaction is expected to close in the second quarter of 2015. With regards to the O2 UK disposal, we announced signing of the definitive agreements on March 24th, 2015. Completion of the transaction is subject to the approval of the applicable regulatory authorities and the obtaining of waivers to certain change of control provisions expected no later than June 30th, 2016. This date may be extended to September 30, 2016, under certain circumstances.
Thank you very much. We are now ready to take your questions on the rights issue terms and conditions.
Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. If you would like to cancel your question, please press star two. Once again, that's star one to register a question and star two to cancel. We would kindly ask you to keep your questions to a minimum of one per participant. We would like to kindly ask you to relate your questions to the rights issue, and if possible, we recommend you not to use your cell or hands-free phone. There will be a short silence while questions are being registered. We can now take our first question from David Wright of Bank of America, Merrill Lynch. Please go ahead, sir.
Yes. Hello. Thank you very much for taking the question. Ángel, if I could just understand the contribution of the rights issue cash within the guidance framework. You've obviously included the slide in reference to the potential O2 sale. I think your guidance for 2015 net debt to EBITDA is less than 2.35 times. I'm assuming that obviously includes all of the proceeds. Do you assume within that, because that's obviously ex U.K., ex O2 UK, does that assume any of the proceeds from O2 UK? What is the debt that you deconsolidate from O2 UK? I'm just trying to understand how the rights issue and the sale just fit into that guidance. Thanks.
Hi, David. The guidance that we presented at the end of February when we announced the full year results and the guidance and outlook included a medium-term target of less than 2.35 times net debt to EBITDA, contemplating or including the future proceeds of the O2 divestment. We will have, during 2015, a reported figure of net debt and net debt to EBITDA that would be higher than this 2.35 times. We will be, at the same time, reporting what would be the adjusted or the pro forma figure and ratio, including the proceeds from U.K. that will not be received until some point in the first half of 2016, according to our expectations.
I see. Okay. Just to be clear, that's the GBP 9.25 billion, correct? You don't include the GBP 1 billion from the earn-out clause.
We include the GBP 9.25 billion, plus the NPV of the GBP 1 billion, because that is a deferred payment, it's not an earn-out, that will be collected starting from the point when the combined U.K. entity achieves an agreed level of combined cash flow. It's a deferred payment, not an earn-out. We have our models where we project when that could be. We do the NPV of that figure, and that would be the full expected collection that we would have from the U.K. divestment that we will be using when we report on a quarterly basis, the adjusted net debt and net debt to EBITDA figure.
That's clear. Thank you.
Thanks. Thank you, David. Next question, please.
Thank you. We'll take our next question from Mandeep Singh from Redburn. Please go ahead, sir.
Hello. Thank you for taking the question. I have, I don't know, maybe a simple question. You've guided for your group to return to sustainable growth. You've guided for Spain to return to growth in 2015, and you have guided to pro forma net debt to EBITDA of below 2.35 times after the U.K. is sold. I'm really asking the question, why are you having a rights issue at all, given where the cost of money is? If your EBITDA is supposed to grow, why do you need this financial flexibility? The context obviously is when you announced the GVT deal, you hadn't announced the O2 UK sale, and you hadn't announced the return to growth for Spain, but since then you have.
I'm just really questioning why you need to do the rights issue at all, and whether this gives you financial flexibility to pursue any further inorganic operations, such as buying in the O2 Deutschland minority or Brazilian consolidation. Thank you.
Yes. Hi, Mandeep. Since this transaction is subject to very strict capital market regulations and constraints, I cannot comment on forward-looking expectations. Avoiding the first part of your question, why are we doing a rights issue? Well, basically, we are going to be closing the GVT transaction in the second quarter of this year, and the expected financial flexibility from the O2 UK divestment would be at some point in the first half of next year. We wanted to have this period with enough financial flexibility and not be subject to any type of constraints.
Can you give any more color on what you might feel constrained?
When analyzing what could be the use of proceeds from the O2 UK transaction, we wanted to balance the three items that you have on slide nine on the presentation. On the one hand, to improve the balance sheet. Second, to improve our shareholder remuneration, third, to have and maintain enough flexibility for organic growth and at the same time, potentially exploring inorganic options. We didn't completely eliminate the rights issue, we decided to downsize it from the originally expected close to €3.5 billion to the €3 billion that we finally have dimensioned it. In this way, we are alleviating part of the dilution from issuings of new shares.
Also at the same time, this was announced back on February 25th, we announced that we're going to be canceling some shares held in treasury, 1.5% this year, upon completion of the O2 UK transaction, another 1.5%. This way, we also contribute to mitigate dilution on all the variables per share, EPS, free cash flow per share, and so on. We think that, first, we have reduced the amount of the rights issue, second, we have provided with two additional EPS-enhancing measures that all of them are targeting a more attractive shareholder remuneration.
Thank you, Ángel. That's very clear. Can I just have a very brief follow-up, please?
Yeah, of course.
What do you think for a company like yours with sustainable EBITDA growth going forward, what is the right capital structure?
Again, we are in the middle of a capital markets transaction, and I am very much constrained in the type of comments that I can do on this conference call. I cannot respond these type of questions.
Okay.
I see what I mean.
No, thank you very much.
Thank you, Mandeep. Next question, please.
Thank you. We'll now take our next question from Georgios Ierodiaconou from Citi. Please go ahead.
Good afternoon. Thank you for taking the questions. I've got one question on the transaction, which is around the remedies that have been asked as part of the transaction. Is it possible to give us some idea of when will you be able to act as a single company, any restrictions with regards to the offers you can have in the market in the next couple of years? In general, what were these type of demands from some of your competitors that you have to meet? My second question, I know it's not relevant to this transaction, but I was wondering whether after signing the agreement with Hutchison, you have already hedged the Forex risk around the U.K. transaction. Thank you.
Okay, since it's public, I can comment on the remedies of the transaction. We got approvals from the Brazilian Competition Authority, CADE, and the Brazilian Telecommunications Regulator, Anatel. Such approvals are both subject to the satisfaction of certain conditions. CADE has approved the Telefónica GVT deal subject to concentration control terms, which aim to address matters similar to those that Anatel imposed some weeks ago, and also to impose some restriction regarding the temporary indirect stake that Vivendi will hold in Telefónica do Brasil, and the temporary indirect stake that Telefónica will hold in Telecom Italia. Telefónica has committed with CADE, after taking control of GVT, to comply the same obligations set forth by Anatel, in particular, to keep for a minimum of three years, the current geographical services coverage of GVT and Telefónica do Brasil.
Second, to keep the current services plans and combine offers for a minimum of 18 months. Third, to expand the operations to 10 new cities outside the state of São Paulo not yet served by the extended economic group within a maximum period of three years. We have also undertaken to keep nationwide for three years the broadband access average speed contracted by GVT's clients for a minimum of the measured level in the month of December 14th. On a corporate level, we have, Telefónica, undertaken not to exercise any political right in connection with the stake held in Telecom Italia to divest such stake to a third party, subject to conditions set forth in the Concentration Act and not share Telefónica do Brasil's sensitive information with Telecom Italia and subsidiaries in Brazil.
Also, we have undertaken to bar Vivendi's action that could cause direct or indirect control of Vivendi over Telefónica do Brasil. Having said this, we do not see those remedies having a relevant impact in our capacity to compete, nor it will have any impact on CapEx, as some of the obligations were already included in our plans for the company. This is what I can disclose at this stage, given the limitations that I was alluding to before. With respect to the O2 transaction, FX has evolved since the time of announcement in our favor, and we were partially hedged already by debt in GBP that was existing in the company around two times EBITDA. We are considering hedging policies, which I cannot disclose on this call.
Could I ask just one follow-up on the operational remedies? The three years of keeping the company separate and then the 18 months before you can launch combined offers. The relevant one, I guess, is the second one. You have 18 months where you can't have combined offers, but could, for example, GVT use the Vivo network as an MVNO in the meantime as a way of having some offer out there?
Again, I'm sorry, given the restrictions that we have, I cannot comment on this. I would encourage you to ask these questions to my Brazilian colleagues.
Thank you.
Thank you, Georgios. Next question, please.
As a reminder, please press star one if you would like to ask a question. We can now take our next question from Ivón Leal from BBVA. Please go ahead.
Yes. Hello, good afternoon. Maybe following this one on operational remedies, I don't know if you could share with us what's the size of all those 10 cities you have to cover, just to have an idea of increased CapEx. Do you need to cover that with fiber? Do you need to cover that with copper?
I don't know exactly the size of those cities, but what I know is that those remedies, we do not expect them to have a relevant impact on our capacity to compete, nor do they have any significant impact on CapEx, as these type of obligations were already included in our plans for the company. It would be probably fiber, not copper.
Okay. Thanks a lot, Ángel.
Gracias, Ivón.
At this time, we have no further questions in the queue.
Thank you very much for your participation. We certainly hope that we have provided some useful insights for you. Should you have any further questions, we kindly ask you to contact our investor relations department. Thank you and good afternoon.
Telefónica's rights issue conference call is over. You may now disconnect your lines. Thank you.