M&A announcement

Dec 21, 2015

Thank you for standing by, and welcome to the Telia 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, at which time if you wish to ask a question, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Monday, the 21st of December, 2015. I would now like to hand the conference over to your speaker today, Jesper Wilgodt. Please go ahead. Good morning and welcome everyone to today's call regarding the announcement that TeliaSonera Divest is holding in Ncell. With me to present today, I have our CEO, Johan Dennelind, our CFO, Christian Luiga, and our General Counsel, Jonas Bengtsson. After the presentation, there will be time for a Q&A session as well. 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 am very happy to then announce that we are announcing the sale of Ncell 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. If we go first to the rationale, which I would like to remind you of the announcement we had 17th of September, 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 is very pleasing to see that we are, 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 USD 1.03 billion, approximately SEK 8.8 billion with today's currency rates. This is on a cash and net debt-free basis, corresponding approximately to a five times EBITDA multiple. We are also at this time dissolving our economical interest in the local ownership of 20%, and for this, we will receive around $48 million, SEK 0.4 billion. We will also, as part of this transaction, get paid for the net cash position in Ncell at the time of closing. As of September, that was approximately SEK 2.4 billion. 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 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 the Department of Industry in Nepal, but also the Nepalese telecom authorities, and on the Malaysian side is obviously the Axiata shareholder meeting and the Central Bank of Malaysia. We expect the deal to close during the first half of 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 Ncell, where we, on the top level, together with Visor, own 75.5% in the TeliaSonera Asia holdings, and then down to Ncell level means that we have a 60.4% ownership. Also via the arrangement with our local shareholder, a 20% economical ownership is leading to a full 80.4% economical interest in Ncell. Visor owns 19.6% through the same structure, excluding, of course, the local shareholder arrangement. 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 Ncell to Axiata, where also Visor sells its 19.6% stake as part of the same transaction, which means that Axiata then acquires the 80%. 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 will go in a bit more detail shortly. The local partner, Sunivera Capital Ventures in Nepal, is owned by Miss Bhavana Singh Shrestha, which we will 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 then the SEK 1.03 billion from Axiata for the 60.4%, and where you also see that Visor divests its 19.6%. The vehicle company in question is the Reynolds Holding, 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 million from Sunivera Capital Ventures in Singapore. For that, we will release our pledge over the shares that is held by Niraj Shrestha which then also as part of the same transaction will be transferred to Sunivera Capital Ventures in Nepal. This is the chosen preferred solution from Axiata, and it's the chosen local partner that Axiata has decided to have for its Nepalese ventures. We will 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 would like Christian to go through a bit more in detail the financial effects of this divestment. Thank you, Johan. Good morning, everyone. 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. 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. 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. We have then divested 60.4% of our holding, as Johan said, to Axiata, and for that, we have received approximately SEK 8.8 billion, or will receive SEK 8.8 billion. It corresponds to a multiple of five, 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 SEK 0.4 billion. 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 2.7 billion. I will come back to that in a second. That we have adjusted for different balance sheet items, which is customary in these kinds of deals. That gives us SEK 2.4 billion, that is a small discrepancy that maybe you are wondering why it is. It's the customary differences that in the balance sheet you adjust for future and past in this deal. I will try to then go through in a verbal way here how we get to the SEK 7.5 billion 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. I just went through the SEK 8.8 billion and the SEK 0.4 billion we get for the shares that we sell and the economic interest, that gives us SEK 9.2 billion in total. We have around SEK 2 billion in cash adjustment for the cash that we get paid for. That gives us a value of SEK 11.2 billion. We need to deduct the 100% consolidated cash of SEK 2.7 billion in the books that we have per September, that gives us a value of SEK 8.5 billion. 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, we have made a provision that we think is cautious but still realistic, that is about SEK 1 billion, that leads us to SEK 7.5 billion in total. 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. We will also be exposed to currency effects as this is a deal transaction that is happening in several jurisdictions, not the least in U.S. dollar and in Nepalese rupee. We will of course try to do the best to hedge for this during this period. The total result from the transaction itself in our books, we expect at this point to be close to 0, 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. On the next slide, just a quick couple of comments. We expect the SEK 7.5 billion cash net debt adjustment to be arriving at closing, which will slightly ease the pressure on our Net Debt/EBITDA ratio to approximately 1.6. We, as you know, have our dividend policy for 2015, where our rating is important part of that to be our A-/BBB+. This, of course, supports that. Reminding you also that in conjunction with our Q4, we are expected to talk about the dividend policy going forward. Let's 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. With me, as we said, we have Jonas Bengtsson, our General Counsel, and I would ask Jonas to take us through a few words on the next two slides. Over to you, Jonas. 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. 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 Ncell, and to ensure that will continue and be maintained also under the new stewardship of Axiata. 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. We have a good 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. Actually, the local ethic and compliance officer in Ncell have a double certification from both those institutes. We'll try to ensure that commitment and that investment into building that kind of competence will continue. We have also introduced, we are ourself, a very active participant in the industry dialogue on freedom of expression. We have introduced and engaged Axiata into that forum also to continue with those aspects of sustainability. 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 Nepal after the earthquake. We stand by those commitments also after this exit. The second part of the responsible exit is, of course, the more transaction-related, 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 KYCs on all involved partners, not just the 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 anti-corruption, regarding ultimate beneficial owners so that they have guaranteed that there are no other owners involved in the entities. We have also customary anti-money laundering and other commitments in the contracts. 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. 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 mechanisms introduced, that there are minimized 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 recipient at the tax authorities. Very good, Jonas. Thank you. Just a couple of closing remarks before we open up. As I said, the transaction is subject to certain approvals, which 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 Industry that need to approve this deal, which we 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. You have them on the next slide. I think notably, the risk advisors, both Control Risks and Kroll have been involved in the checks of related parties on this transaction. Allow me to summarize again, an important step achieved in our ambition to reduce the presence in Eurasia, in our seven markets. Hopefully, this will be brought to a 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 less cash expected than the EBITDA, obviously, as well, and mainly related some provisions that we expect can happen both between signing and closing, but also after closing. Approvals, as you know, and expected closing. All in all, this is, we believe, a good deal to announce, and hopefully, this will give us some more momentum into next year. Thank you very much, and we'll open up for questions. Thank you. As a reminder, if you would like to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. 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 selling it at close to book value? My second question will be related to the accounting impact. How will you book for Ncell in these results? Indeed, how will you sort of book your Eurasian assets considering the new situation here now that they are to be sold? Thirdly, can I just ask you, I don't know if you will comment on this, but any updates you care to give us on the Fintur situation? Obviously, 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, then Christian will comment on the financial sides. 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, that's good. 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, that's why we expect it to be around zero. Secondly, as we are now clearly announcing that this is a transaction, we will have to report Nepal as a discontinued operation after year-end. How we do with the other assets, we 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 Teo. Please go ahead. Yeah. 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? Secondly, I just wanted to push you just a bit more on the valuation. You mentioned a multiple of five times EV 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 a precedent for future multiples and future disposals at perhaps below less than five times EV to EBITDA? Thank you. Thanks, Terence. Let's stay on the Nepal transaction for now. 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. We're happy that we have a situation which we can stand up for, 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 a precedent for other markets because there are different situations, different assets, and different company structures, which we'll come back to in due course. 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. I just have three questions. Firstly, can you just expand on the SEK 1 billion 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. The second part related to this is also, in terms of the agreement with Axiata, there have been 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 the future litigation in this asset? Third and final question is, when I look at the implied EV of the 20% from your local owner, it is just materially below what we are 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 is not unusual that you give warranties and guarantees in a deal like this. 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. 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 we cannot go into details on this. Some of them also relates to tax, as I 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. I don't want to go into more details, but there are several parties in here, and we have taken our view on our responsibility in this agreement and made a provision around that. I think, Johan here again, 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. Yeah That's for you to comment on. Yeah. I don't know if I fully understood it correctly, but just in general, we have informed, of course, that there are ongoing investigation, inter alia, in the U.S., and that the U.S. authorities have asked for our cooperation regarding inter alia, 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. Apart from that, those investigations were not an obstacle to announce this deal this morning, if that is an answer to your question. I think just to follow up on that, specifically what I'm asking is, if the DOJ probe 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 are Axiata taking over the responsibility of past deeds in the asset 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. Your second part of the question, well, it's obviously, if it's TeliaSonera, that is the subject of the investigation. Yes. Thank you. Sunil, your last question, back to the valuation. 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 economical interest. The demand on the local side is not as big as it has been on the international side. Therefore, you have a difference in the valuation. Okay. Thank you. Once again, if you would like to ask a question, it is star and one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Your next question comes from the line of Andreas Joelsson. Please go ahead. Yes. Good morning. Two questions. First of all, 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? Then I started apparently to celebrate Christmas way too early, the cash part, if you could explain that between the SEK 2.0 billion that you receive in cash versus the, if I remember correctly or listened correctly, the consolidated of SEK 2.7 billion, what the difference is between those two. Thanks, Andreas. On the first one, let us put it this way. It has been developing during the year, where we have had a competitive process leading up to where we are and where we ended up. It has been a good, proper process with good competition. Christian? Okay. Thank you. The difference is as follows. We have SEK 2.7 billion 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. The SEK 2.7 billion is the 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. SEK 2.7 billion, 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. Once again, that's star and one if you would like to ask a question and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Your next question comes from the line of Saim Tillon. Please go ahead. Hi, guys. Just one question. How should I think about your sell 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 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 that we are not rushing out. 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. 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 Uzbekistan will probably be the last and the most complicated, which we'll come back to as we move along. We know that we have seen interest in the Fintur assets, which we'll come back to as well. 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 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.