Investor Update

Dec 21, 2015

Slides

Thank you for standing by, and welcome to the Other Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Monday, 12/21/2015. I would now like to hand the conference over to your speaker today, Jesper Wilgott. Please go ahead. Yes. Good morning, and welcome, everyone, to today's call regarding the announcement that TSNER divest is holding in Enso. With me to present today, I have our CEO, Johan Denner Lind our CFO, Christian Luiga and our General Counsel, Jonas Beintzon. After the presentation, there will be time for a Q and A session as well. And by that, I would like to hand over to Johan. Thank you, Jesper, and good morning to all of you from Stockholm. We wanted to find a good reason to talk to you before Christmas, and I think we have found a good reason. I'm very happy to then announce that we are announcing the sale of EnCell in Nepal to Axiata. For those of you who want a short call, bear with us on the first slide, which will pretty much give you all you need. And then we will take you through a little bit more details also with the help of Christian and Jonas. But if we go first to then the rationale, which I'd like to remind you of the announcement we had September 17, where we have said that we are going to reduce our presence in our seven markets in Eurasia and not be a long term owner. Therefore, it's very pleasing to see that we, after three months, are able to reach an agreement with Axiata to divest our full exposure in Nepal. The transaction are really two that are conditional upon each other. The first one is our direct full ownership of 60.4%, which is then divested at a price of $1,030,000,000 approximately SEK 8,800,000,000.0 with today's currency rates. And this is on a cash and net free basis debt free basis, corresponding approximately to a five times EBITDA multiple. We're also at this time dissolving our economic economical interest in the local ownership of 20%. And for this, we will receive around USD 48,000,000, 400,000,000.0. We will also, as part of this transaction, get paid for the net cash position in ENSEL at the time of closing. As of September, that was approximately SEK 2,400,000,000.0. We will go in a bit more into details on what the financial effects are around this and we will also explain the difference between the EV and the expected cash to be received, which requires a little bit more explanation. There will be a minor impact from this transaction on net income, of course, dependent on the currency fluctuations between signing and closing. The deal is conditional on a couple of approvals. First of all, from Department of Industries in Nepal, but also the Nepalese telecom authorities. And on the Malaysian side, it is the obviously, the Axiata shareholder meeting and the Central Bank of Malaysia. We expect the deal to close during the 2016. We'll keep you updated on this going forward. Let's have a look then a little bit more into the details, reminding you first about how our current shareholder structure looks in Encell, where we on the top level together with Pfizer own 75.5% in the Telesinera Asia holdings. And then down to Encel level means that we consolidate a sorry, we have a 60.4% ownership. But also via the arrangement with our local shareholder, a 20% economical ownership is leading to a full 80.4% economical interest in Hemso. Maisor owns 19.6% through the same structure, excluding, of course, the local shareholder arrangements. This was put in place during 2012, I think it was the latest. The transaction, as I said, has two components. The first part is where we divest our 60.4% holding in Ansel to Axiata, where also Vysor sells its 19.6% stake as part of the same transaction, which means that Axiata then acquires the 80.4 the 80, sorry. On the local side, we will then dissolve our economical interest that was entered into 2012, which is 20%. And this is done through a release of pledge, which I'll go in a bit more detail shortly. The local partner, Sunnira Capital Venture in Nepal is owned by Ms. Balana Singh Cheshra, which we'll also come back to. Looking at the 60.4% divestment then, just for additional details seen on Page five, just showing how this is executed, where we will receive the SEK 1,030,000,000.00 from Axiata for the SEK 60,400,000,000.0 and where you also see that Vysrut divested is SEK 19,600,000.0. And the vehicle company in question is the Reinholds, which is then acquired by Axiata. Going to the local transaction. In order to dissolve our economical interest, we have then an arrangement where we will receive $48,000,000 from Sunnivera Capital Ventures in Singapore. And for that, we will release our pledge over the shares that is held by Neeraj Srestra, which then also as part of the same transaction will be transferred to Sunnyvara Capital Venture in Nepal. This is the chosen preferred solution from Axiata and it's the chosen partner local partner that Axiata has decided to have for its Nepalese ventures. We'll come back to a little bit more how we have scrutinized this deal when it comes to compliance, which will be covered by Jonas in a short while. Before that, I'd like Christian to go through a bit more in detail the financial effects of this divestments. Thank you, Johan. Good morning, everyone. And I will go through the financial effects. But first, let me say I'm happy about the transaction. I think it's in total a very good transaction for us. And just want to remind us that this is a majority owned company where we have management control. So therefore, we have consolidated this company into our books fully. And we have then taken in the economic interest of 80.4% by consolidating this and having 19.6% on a minority interest deducted in the income statement and in the balance sheet. So we have consolidated 100% of the company, but 80.4% has been the economic interest into our income statement and our balance sheet in the end. And we have then divested 60.4% of our holding, as Johan said, to Axiata. And for that, we have received approximately SEK 8,800,000,000.0 or will receive SEK 8,800,000,000.0. It corresponds to a multiple of five. And we think that's a fair and good price with the conditions we have at hand. We have also dissolved the economic interest of our indirect ownership. The economic interest in 20% has given us 400,000,000.0. Then we have a net cash position in the company. We have a cash position in our balance sheet, which we have reported in September of SEK 2,700,000,000.0. I will come back to that in a second. And that we have adjusted for different balance sheet items, which is customary and these kind of deals. And that gives us a SEK 2,400,000,000.0 and that is a small discrepancy that maybe you are wondering why it is. And so it's the customary differences that in the balance sheet you adjust for future and past in this deal. I will try to then let go through in a verbal way here how we get to the SEK 7,500,000,000.0 of the provisions in cash, which is the result of this transaction even though there is currency effects that may affect between now and closing. So I just went through the SEK 8,800,000,000.0 and the SEK 400,000,000.0 we get for the shares that we sell and the economic interest and that gives us SEK 9,200,000,000.0 in total. Then we have around SEK 2,000,000,000 in cash adjustment for the cash that we get paid for. So that gives us a value of SEK 11,200,000,000.0. Then we need to deduct the 100% consolidated cash of SEK 2,700,000,000.0 in the books that we have for September and that gives us a value of SEK 8,500,000,000.0. And then we have made different provisions for warranties, for taxes, for other things that may happen between now and closing that we could be liable for and we have made a provision that we think is cautious, but still realistic and that is SEK1 billion. And that leads us to SEK7.5 billion in total. So between now and closing, we will have then in addition to what we have reported here, we will get the effects of the cash that is accumulated in the company or 80% of that. And we will also be exposed to currency effects as this is a deal transaction that is happening in several jurisdictions, not the least in dollar and in Nepalese rupee. We will, of course, try to do the best to hedge for this during this period. The total result on from the transaction itself in our books, we expect at this point to be close to zero. And it could also vary between now and closing that assumption based on the currency effects. That is where I would like to leave it. Johan, to you. Thanks, Christian. And then on the next slide, just a quick couple of comments. We expect then the SEK 7,500,000,000.0 cash net to those adjustments to be arriving at closing, which will slightly ease the pressure on our net debt to EBITDA ratio to approximately 1.6. We then, as you know, have our dividend policy for 2015, where our rating is important part of that to be A minus BBB plus. This, of course, supports that. And then reminding you also that in conjunction with our Q4, we are expected to talk about the dividend policy going forward. Let's then turn to a very important part of our divestment, which we call responsible exit, where we have gone a long way to ensure that this transaction meets all our requirements on legal and ethical ways of exiting Nepal. And with me, as we said, we have Jonas Benksen, our General Counsel, and I will ask Jonas to take us through a few words on the next two slides. Over to you, Thomas. Okay. Thank you. Well, I think it's fair to say that we have had a strong focus on the responsible exit from day one and that we actually have gone the extra mile and even broken some new grounds here in this respect. And broadly speaking, you could divide the responsible exit into two parts. One, more forward looking, which I will go through on Slide nine, where we have from the beginning with the buyer focused on trying to preserve the good structure and the governance that we have built up and established in Encelad. And to ensure that that will continue and be maintained also under the new stewardship of Axiata. So for instance, we have had from the beginning a discussion with Axiata on their commitment and policies regarding responsible business, anti corruption and other compliance and sustainability issues. And we have a good and joint understanding of the importance of those matters. We have also, as I think we have informed about earlier, made a commitment ourselves to invest in professional certification of the local Ethic and Compliance Officers in all our countries, including in Nepal to train them and educate them and even go through certifications with TRACE International and other international organizations. And actually, the local Ethic and Compliance Officer in ENSEL have a double certification from both those institutes. And we'll try to ensure that, that commitment into building that kind of competence will continue. We have also introduced, we are ourselves a very active participant in the industry dialogue on freedom of expression. And we have introduced and engaged Axiata into that forum also to continue with those aspects of sustainability. And finally, as we communicated immediately after the terrible earthquakes a year ago or so, I think, we have made fairly substantial commitments to help rebuild and assist in to help to rebuild Nepal and after the earthquake. And we stand by those commitments also after this exit. The second part of the responsible exit is, of course, the more transaction related. And there we have, as I said, really gone the extra mile in order to ensure that we have done everything to comply with all applicable standards and even gone a bit further than that, I would say. We have done extensive background checks and KYC on all involved partners, not just direct partners, but also related partners. We have used both internal and reputable external international experts for these matters. We have ensured that all involved parties in these transactions have given contractual warranties and undertakings regarding anticorruption, regarding ultimate beneficial owners, so that they have guaranteed that there are no other owners involved in the entities. And we have also customer anti money laundering and other commitments in the contract. Obviously, we have strict anti bribery and anti corruption provisions in the contracts in order to ensure that we have full insight in what is going on up until closing. And we have also gone to the extent that we have really tried to ensure even in transaction where we are not a direct partner ourselves that there are mechanism introduced that there are minimize any potential risks that tax payments are not paid to the correct recipient. So that we have introduced that in the concept here that the cash flows will be paid directly to the correct recipients at the tax authorities. Very good, Jonas. Thank you. And then just a couple of closing remarks before we open up. As I said, the transaction is subject to certain approvals, which then relates to the Malaysian side, both on Axiata shareholders and the Malaysian Central Bank for the dollar denominated transaction. We also have on the Nepalese side both the telecom authority and the Department of Industries that need to approve this deal, which we then again expect to close during the first half of next year. As Jonas pointed out, we have engaged with expertise both internally obviously, but also externally. And you have them on the next slide, I think notably the risk advisers, both ControlRisk and Kroll, have been involved in the checks of related parties on this transaction. So allow me to summarize again a step an important step achieved in our ambition to reduce the presence in Eurasia in our seven markets. Hopefully, this will be brought to then closure and we have one transaction executed. We believe this is a fair and good valuation given the complexity and situation we've had with the setup from the past. We are solving one important issue, which is being paid for the cash generated as part of this transaction. The financial effects you heard, as Christian walked you through, also why there is a less cash expected than the EV obviously as well and mainly related to some provisions that we expect can happen both between signing and closing, but also after closing. And approvals, as you know, and expected closing. So all in all, this is, we believe, a good deal to announce. And hopefully this will then give us some more momentum into next year. Thank you very much and we'll open up for questions. Thank you. Your first question comes from the line of Peter Nielsen. Please go ahead. Thank you. Congratulations on this transaction. A couple of questions, please. Firstly, the fact that this will only have a minor impact on net profit, are we to interpret this as it basically means that you're sending it close to book value? My second question will be related to the accounting impact. How will you book for Encell in these results? And indeed, how will you sort of book your Eurasian assets considering the new situation here now that they are to be sold? And thirdly, can I just ask you, don't know if you will comment on this, but any updates you care to give us on the Fintur situation? Turkcell announced recently that they've given you a preliminary offer. Anything you have to update us on this situation? Thank you. Thanks, Peter. Let me take the last one, and then Christian will comment on the financial side. We don't give any updates today on the other processes. We have also noted, as you said, that we have indications from interested parties, and that's good. And we're building a good process here where I've said before that the interest is there, we believe we can have a competitive process on the remaining companies that we want also to exit over time. Okay. Good morning, Peter. Christian here. Your assumption is right. We are close to the book value, and that's why we expect it to be around zero. Secondly, as we are now clearly announcing that this is a transaction, will have to report Nepal as discontinued operation of the year end. How we do with the other assets, will have to come back about that are under exposure for sale. Okay. Thank you very much. Your next question comes from the line of Terence Tzu. Please go ahead. Yes. Thank you. Good morning, everyone. Just had a couple of questions, please. Firstly, you made some references during the presentation that the deal was quite a complex deal. When it comes to the disposals in other parts of Eurasia, would you say that they should be equally complex or even more complex to execute? And then secondly, I just wanted to push you just a bit more on the valuation. You mentioned a multiple of five times EBIT to EBITDA. Just given how strong Nepal is within the Eurasian group, growing revenues by double digit on a service revenue basis, do you think going forward this sets like a precedent for future multiples and future disposals at perhaps below less than five times EBIT to EBITDA? Thank you. Thanks, Terence. Let's stay on the Nepal transaction for now. And as we've said, it has been a pretty complex situation given the situation we've been in and how we wanted to make sure a responsible exit to happen. But we're happy that we have a situation which we can stand up for. And that doesn't mean that everything else in Eurasia is as complex. It has different considerations to take in when we move forward. On the valuation side, I think this is as we said, this is a deal we think is fair. And it does not, I think, set the precedent for other markets because there are different situations, different assets and different company structures, which we'll come back to in due course. So I think we'll leave it with that, Terence, for now. Okay. Thank you. Your next question comes from the line of Sunil Patel. Please go ahead. Good morning, everyone. So I just have three questions. Firstly, can you just expand on the €1,000,000,000 provision? What exactly is that meant to cover yourselves for? I was surprised to hear you say it could be potentially post closing events as well, which I thought most of these provisions were just for pre closing. Think the second part related to this is also in terms of the agreement with Axiata, I mean, there have reports of some wrongdoing, I think, in potentially some of the Eurasian assets. Outside of the provision you made, if the DOJ probe is expanded to Nepal, do Axiata indemnify you for that? Or are you still liable for future litigation in this asset? And third and final question is, when I look at the implied EV of the 20% from your co owner, it's just materially below what we're looking at as a total group. Why is that 20% being valued at such a low price versus the rest of the shares? Okay. Thank you, Patel. I will start with the provision. The provision is made for different aspects, as I said, and it's not unusual that you give warranties guarantees in a deal like this. And we have decided in the report we give to you now to take a cautious view on these warranties and put them into the calculation. So we have a clear picture of what we can expect from this deal. And of course, warranties do not only go into the timing between signing and closing. You may stay with certain warranties after closing as well that you guarantee that certain things will be fulfilled or be there after closing. And then we can't go into details on this. Some of them also relates to taxes, as said, and there could be some tax payments made before closing, but there will also maybe be some tax risks after closing depending on the package or the warranty. So I don't want to go into more details, but there's several parties in here and we have taken our view on our responsibility in these agreements and made a provision around that. And I think with just Johan here again. We need to at time of closing, we'll have better visibility on what remains and then we can be even more clear on that going forward. Jonas, on the DoJ question, I think that's for you to comment on. Yes. I don't know if I fully understood it correctly. But just in general, we have informed, of course, that there are ongoing investigation, Intralia in The U. S. And that The U. S. Authorities have asked for a cooperation regarding InterAlia and Uzbekistan and that we are cooperating fully and that we are supporting the authorities in their investigation. That means also that we are not at liberty to disclose any details on the investigations or go into any details on the scope of those investigations or not. So apart from that, well, those investigations were not an obstacle to announce this deal this morning, if that is your answer to your question? I think just to follow-up on that, to speak to that, what I'm asking is if the DHEA PRO is expanded into Nepal and wrongdoing is found in the future, who is responsible for paying those penalties? Is it yourself, which is what I assume? Or is there are Axiata taking over the responsibility of past deeds in the assets as well as obviously future deeds? Well, again, we cannot comment on the scope of the investigation that is for The U. S. Authorities and other authorities to decide if they want to share that or not. We will not comment on their scope of their investigation. But your second part of the question, well, it's obviously, if it's TeliaSonera that is the subject investigation. You. Sunil, your last question back to the devaluation. As I said, this is a transaction of two parts, where you also have to look at the conditions and the demand for the two different pieces. We have put them together in a transaction that overall makes sense and overall gives us a good value. And this solves our economic interest. But the demand for a local on the local side is and not as big as has been on the international side. Therefore, have a difference in the valuation. Okay. Thank you. Your next question comes from the line of Andreas Julesson. Two questions. First of all, when can you tell us a little bit when the talks were initiated with Axiata just to get a feel for how long the process has been? And then I started apparently to celebrate Christmas way too early. So the cash part, if you could explain that between the 2,000,000,000 that you received in cash versus the if I remember correctly or listened correctly, the consolidated of SEK 2,700,000,000.0, what the difference is between those two? Thanks, Andreas. On the first one, let's put it this way, it has been developing during the year where we've had a competitive process leading up to where we are and where we ended up. So it's been a good proper process with good competition. Christian? Okay. Thank you. So the difference is as follows. We have SEK 2,700,000,000.0 in September reported cash in Nepal. From that, we deduct certain balance sheet adjustment in the transaction. And then we have 80% of that cash value that we get paid for. So the SEK 2,700,000,000.0 is the 100% of the cash because on each line item, as I stated, we report 100% of the nCell company and then we deduct on the minority interest in our bookkeeping, both on the income statement and the balance sheet, the net of all these items. So 2,700,000,000.0 less some customary deductions that you do on the net cash bridge with the seller and then 80% of that, and that's how you get to our cash amount. Very clear. Thank you, Christian. Your next question comes from the line of San Dillon. Please go ahead. Hi, guys. Just one question. How should I think about your sale process in Eurasia? Is it more of an auction process whereby over a certain period of time, you'll just take the highest price that's on the table? Or is or would you be happy to own certain assets if they don't meet your threshold for valuation? Thanks. Well, thank you. It's an easy question and not as an easy answer. We have said that we are reducing our presence in Eurasia over time. That means rushing out. But of course, if we feel that we have a competitive process per the different assets and if we can justify the value and the risk and the timing of such a transaction, we will do it. And this was one of them. That doesn't set a precedent for the other six remaining countries, which have different complexities and different opportunities. I've always said to you that the Uzbekistan will probably be the last and the most complicated, which we'll come back to as we move along. And then we know that we have seen interest in the Fintur assets, which we'll come back to as well. And then that's how we proceed from here. Okay. Cheers, guys. Appreciate it. Thank you. Thank you. There are no further questions coming through at this time. Please continue. Well, thank you for dialing in on this couple of days before Christmas. Let us all here wish you a good holidays and see you on the other side to an exciting 2016. Thank you. Thank you very much. That does conclude our conference for today. Thank you all for participating, and you may now all disconnect.