Investor Update

Sep 11, 2015

Press Release

Thank you for standing by. Onward to Telia Sinero and Telenor Withdraw from Merger in Denmark 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 this conference is being recorded today, Friday, September 2015. I'd now like hand the conference over to your speaker today, Jesper Wilgut. Please go ahead. All right. Thank you, operator. Good morning, all, and welcome to this call regarding the decision to withdraw from the merger in Denmark. With me today in the room, I have Christian Luiga, our CFO and also Peter Borsoas, our Head of Communications. And by that, I would like to hand over to Christian for an introduction. Thank you very much. They are all, this will be held in English, as you understand, and this will also be a verbal conversation today without any pictures. I will start with a short introduction and then we will hand over quite quickly to Q and A. Today, we have announced our withdrawal for the merger between Telenor and Telia in Denmark. In December 2014, we announced the intention to merge, and we have really done our best to make this happen since then. We are, of course, extremely disappointed, but I would like to quote the commission saying that both parties have really had the best intention when trying to close this deal. And we have really worked hard until the last day to figure out a good way to handle this. So why did we have to withdraw? In short, we have given several proposals. We had a long and deep dialogue with the commission. In the end, we did not meet the expectations of the commission. And if we had gone further, it would have exceeded the level of which sufficient economic value would remain for the company. So now we are somewhat back to square one. And but we will not stop there, of course. We will review our strategic options in the Danish market and take a business that we have there, that we are building on and driving hard with a good management and good branch of employees further. And there was a reason for the planned merger, and that was the investment in the Danish market has decreased over the last five years, and it's been difficult to find return on investment. So that remains. And we will take our operation now that is cash flow positive still and which we are developing. We will take our customer focus and continue that towards our VIP customer and all our other customers in Denmark and take that to the next level and discuss what we can do instead. I think I will stop with that and leave to a Q and A. Thank you, Your first question comes from the line of Henrik Herbst. Please go ahead. Hi, this is actually Jacob Bluestone here from Credit Suisse. I have two questions please. Could you possibly, first of all, a little bit more color on what was the main stumbling block from the point of view of the commission? I know was it just that they wanted four networks? And then secondly, in the release you mentioned reviewing strategic options. Can you maybe talk a little bit about what the strategic options are, particularly if the business struggles to continue meeting its cost of capital? Thank you. Thank you for the questions. I on the approval process, we have as I said, we have come up with several proposals. We have tried to create a new MNO, a fourth player. As you have probably seen also in the press with an ownership stake in our network and also including customer base. We have had a very good dialogue with the commission, and we have had our best intentions. But in the end, it was not sufficient. And I can't comment on the You have to talk to them about that. But we could not go further at this point for the economic value for the company would have then not remained. So that's where I have to stop really. And on the strategic options, it's a good question. I mean, as I said, today, it's a little bit square one. We're back to that, and we need to review what to do. We have a good ongoing business that takes care of its customer in a good way. Still, we did start this merger process together with Telenor last year because the investment level and the return on investment is too low in the Danish market, maybe pretty much for everyone except one player. That, of course, needs to change. But there is many, many ways to do that. And it's including, if you look at our strategy map, both working with adjacencies, but also developing the core in different ways in this market. We are extremely open for all alternatives as always. And I think it's also shown in this very good process we have had with Telenor. And I want to state that we not only had a very good cooperation, we have developed even a better cooperation that was based on our city network before with Telenor during this process. So we will continue to work with all open alternatives going forward. It's a very vague answer, but today it's really back to square one and that's why I don't have so much more to say. Thank you. Your next question comes from the line of Nick Lyall. Please go ahead. Yeah. Good morning. It's Nick Soljen. Can I just maybe on just how you actually made your proposals? Could you tell us how the proposals developed over time that you made to the EU? And was there what would have been acceptable to the EU do you think? If you tweak one of those, was it the percentage owned in the JV by the new MNO? Was it another brand that had to be sold? Was it more spectrum? What do you think would have prompted the EU? Or what was most likely to make them accept the deal? Thank I start with we have come with several proposals. We started more with MNO in the market with roaming agreements and spectrum, etcetera. And as I said, in the end, we came up with being quite creative also on letting someone into our shared network and with customer base. And that was not enough. I cannot speculate and will not speculate in why the commission and how the commission looks at this. So I will have to leave that question for you to raise to them. I can just say that we could not go further and that's where I have to end. Thanks very much. Your next question comes from the line of Jim Davies. Please go ahead. Thanks very much. It's actually James Britton from Nomura. Just firstly, can you clarify whether you considered the MBA MVNO model from the German consolidation? And why was this precedent not acceptable in the Danish situation? And then secondly, do you think it will be difficult to increase investment in Denmark with no change to the current market structure? Thank you. On Germany, I don't want to speculate or discuss Germany. We have gone for a merger in Denmark, and we have tried to do something in Denmark, and the commission has evaluated us on that. And we didn't succeed, so that's where I will end on that. When it comes to the increased investment, of course, we have a challenge with return on investment. We're going to have to see overall strategic options in the core market, which Denmark is for us, and see what we can do. And that could include many different things. We are getting more creative as a group every day, both on the adjacency side, and you can see investments in new opportunities in Voss and others in especially starting in Sweden, but also in Denmark with similar agreements with Spotify, HBO and acquisitions like Siemens. But as I said, we are back to square one today. We will lick our wounds a little bit and take it from here. And but we never give up. And we have a strong company and a strong group and a good motivation, and we will take that to the next level. Just as a follow-up, can I just ask if you're able to give any specifics on the proposals that you put forward to the EC through the process? I don't want to go into those details actually. You have already in the papers, and I actually just answered, I think, a couple of minutes ago on what we have proposed in brief and how that looked like, and that's where I'm going to stay. If you want me to repeat that, I can do that. No, that's fine. Thank you. Okay. Thank you. Your next question comes from the line of Simon Please go ahead. Yes. Thank you very much for taking the call. It's Simon Weeden from Citigroup. I suppose there's an element of repetition here, but I just wondered what you felt you were trying to achieve as you were adding to the offer as you went along. Was it that the latest offer of share of the network was intended to provide to the EU that would help satisfy them? And did you get to the point where you could address questions that were beyond part ownership of the network infrastructure and went on to things like spectrum, customer market share, that kind of thing? I think that's a good question. I mean, first of all, what we try to achieve, of course, is a balance between the requirements of the commission, the what we think a taker can take in the market in Denmark and what we ourselves can defend from the group of both parties, Telenor and Telia. And that is a balance every day. And as I said, we have had a very good dialogue with the commission and also with Telenor in trying to be creative and have the best intention to try to find a solution to a situation, as I said, where return on investment is quite low in this market and needs to change. The what the commission I mean, what we have presented is, of course, something we have had a dialogue with the commission, and we have tried to meet those requirements. So the changes we have done is, of course, related to that dialogue. And creation of an MNO is, in a sense, creating a fourth player that could take ownership stake in our network and work in the market. So that is what we try to create. I'm with you. But I suppose looking at what has gone before in terms of the precedent, if you're removing an MVNO from an MNO from the market and you're adding a new one in with lower market share and hunger for growth, ordinarily, I think we would have all expected that to have been a sufficient remedy. So is it the lack of spectrum or something else that you felt that was the step that you couldn't take to get the remedy to the state where the commission would have accepted it? I don't want to comment that. You have to ask the commission, I mean, for judgment here. The only thing I can just comment on in detail is that if you share your network, you don't and the network company, you don't need to discuss spectrum because we all share the same spectrum. Okay. Okay. Okay. That clarifies that. Thank you. Your next question comes from the line of Paul Marsh. Please go ahead. Yes. Thank you and good morning. I have two questions. Do you think that the EC's reaction here was specific to the situation in Denmark? Or do you think that the attitude of the EC here has a more general EC wide implication? And then secondly, there's been a lot of commentary in the press about prices in some markets having increased specifically in certain markets that have already seen consolidation. Do you think that was an important factor in the way that the EC has looked at your transaction? On the first question, I cannot really answer. We have as I said before, I'm very boring in that sense. But we have done a merger proposal in Denmark and we worked on the Danish market with this proposal with the commission. And how that has an effect or is actually affected from the past from other markets, really can't comment on. When it comes to prices, I mean, the only thing I can say that since we announced this and before we announced this, there has not been a change in the price development in Denmark. It still continue to be a very high pressure downwards. Thank you. Your next question comes from the line of Peter Nielsen. Please go ahead. Thank you. Hi, Christian. Just a quick one. Were the discussions with EU and the negotiation purely focused on creating a new fourth player in the market was strengthening the existing number three player never viewed as an option? Thank you. I don't want to discuss any options or these dialogues with the commission. But in the end, we came up with a proposal from the dialogue with the commission and that was to let someone into our network and share a customer base. And that was not sufficient either in the end. So that's where we stopped. Okay. Thank you. Your next question comes from the line of Keval Khorojer. Please go ahead. I guess one very distinct part of this deal was that the proposed merger was between the number two and three player. Following on slightly from the previous question, I mean, do you think this would have been a lot easier if it would have been versus number three and four? Do you think that was the key stumbling block for the EC? Could you repeat? I actually lost you for a second there, sorry. Yes, sure. I guess the key feature of this deal was that we're trying to merge between the number two and three player in Denmark. Do you think it would have been a lot easier if this were the number three and four as it's been the case in other deals, for example? I don't want to speculate in how more or less difficult it would have been between the three and four and the two and three. But no, I don't want to speculate on that. Okay. Thank you. Your next question comes from the line of Dominic Klarman. Please go ahead. Yes. Thank you. Now in Austria, the latest evidence I would say suggests that MVNOs and the MVNO remedy there have a very clear impact on both not going up. And I was just wondering if that was part of your discussion at all with the commission and what you what we have in terms of evidence in the market in Europe that's been consolidated first. I think back to my previous discussion, it's actually really important to state that this is a Danish merger and we have worked with the commission on figuring out how this should work out in the Danish market, one of our core markets. And so that's the basis for all discussions. Okay. Thank you. Our next question comes from the line of Andreas Jorsten. Please go ahead. Yes. Good morning. It's Andreas at DNB. Maybe a too detailed question, but did you have discussions with a potential buyer into the MNO? Or did you never come that far? Too detailed question. Fair enough. Thanks. Your next question comes from the line of Jona Alkvist. Please go ahead. Yeah. Thank you. I'm just wondering, first of all, that you have pretty low margins in Denmark, guess you're running on negative cash flows or even close to at least. And I was just wondering on the short mid term view here. Should we expect you to sort of cut CapEx? Is that the short mid term strategy you will do to save cash flows? Or how do you view on that? And the second question I have is basically why is Denmark still core? Is it core at any price? And what is your patience within this market given the fact that you tried this consolidation track now? And as you see prices are continuing to deteriorate in Denmark? Thank you. Thank you very much. Just on the first question, I think the first six months, Telia Denmark made 15% margin on service revenue and cash flow positive. So it's not negative to the group and it's not sort of a pain for the group ongoing every day. And it's a market where you need to actually boost to take market share and develop. And that is one of the issues on return on investment over time, of course, but not for the moment. It's a core market. We are a strong Nordic Baltic player with a good presence in Eurasia. And we have many multinational companies, business to business customers, but also consumers that view that as very positive and a strength in our offering, and that is very important for us going forward as well. Okay. Thank you. We have another question from the line of Paul Marsh. Please go ahead. Yes. Thanks again. So I think in your earlier commentary you talked about alternatives looking into the alternatives now that the deal is not going to happen. Are you able to elaborate on what those alternatives might be? And how should we expect this outcome to change the way that you behave in the Danish market now? I mean, maybe in terms of relationships with MVNOs and other players. Thank you. I think I mean, we have really worked into the bitter end with this. So this is really the first day, square one, back to basic. And what we want to still say with this statement is that even though we have a solid foundation in ourselves building the future, and as I said, a positive cash flow, and we build our customer base every day. This is a difficult market. It's under pressure and it will not be without alternative strategic options that we will take it further. I mean, we said clearly last year in 2014 in December that there is a reason we need to do this this merger. And that kind of base statement still remains. And therefore, it would be strange to say that we don't need it any longer. So we need to look through and what we can do. What that will be exactly? We are extremely open and bold to all alternatives. And that's what we're trying to say with the statement. Thank you. Your next question comes from the line of Mandeep Singh. Please go ahead. Hi, thank you. You may or may not be able to give a view on this, but let's say the proposed M and A had involved the smallest player in the market rather than the number two and number three player. Do you think from what you've understood through the process that that type of field might have had a better chance of being approved? Or I don't want to speculate in the this is a question to the commissioner rather than to me. Okay. Thank you. Your next question comes from the line of Russell Waller. Please go ahead. Hello. Yes, it's Russell from New Street Research. I was wondering was the commission more concerned about the level of commitment from a potential new MNO or the structure of the arrangement that the new MNO would have? Thank you. Again, I don't want to speculate in the commission's views here. And then you should ask them rather than us. Okay. Thanks. We have a question from the line of Nicholas Hirst. Please go ahead. Hi. Yes. I just want to come back to earlier on how the remedy started getting creative or you had to start coming out with sort of creative solutions to cushion demand. Can you does that mean that in the end you went beyond what you'd been planning in terms of remedy proposals or you went beyond that which you had sort of expected to have to get? I like to just answer it like this. We went as far as we could to not exceed the level, which we had sufficient economic value to take this further. All right. We have a question from the line of Magnus Franklin. Please go ahead. Magnus Franklin, your line is open. Hello, Magnus here from Magnus. How long were you aware that the commission was planning to, let's say, block this merger? Clearly, an indication at some stage that it wouldn't go ahead. When was that point? Thank you. I mean, we have withdrawn today, and we have worked into the bitter end to figure out how we could meet the expectations from the commission. So we have worked into the last days. Your next question comes from the line of Vasyl Elhabir. Please go ahead. Hi, good morning. Thanks for taking my question. Actually just a quick one. I'm just wondering which kind of synergies and the value of synergies that you were expecting from this deal. Clearly, the value accretive that you were expecting to get for the merger have been undermined by the remedies. So it will be good to have just an idea of the total value that will have been generated for the market and clearly that would have been totally undermined by the remedies? Thank you. We thank you for the question. To remind us again why we started this, when we went out last year, we then announced that we targeted 800,000,000 in annual efficiency gains. And that came from OpEx synergies, overlapping shops, IT systems, processes and other duplicating costs. We talked about CapEx synergies. Even though we have a TT Network that we drive together today, we have some of the network parts outside that, and we could have gotten more synergies into that and including the purchasing power from it. And then the integration cost would be also similar to the synergies we said last year. So this is the feedback or just a recap on that statement. Okay. And clearly, these remedies will have totally destroyed these values? Well, we did not meet the expectations, as I said, without having to exceed the level which sufficient economic value would remain. And exactly that means that we could not defend it. Okay. Thank you. We have another question from the line of Paul Marsh. Please go ahead. Yes. Thank you. I just want to be clear that there was a remedy package that could have been acceptable to the EC. Is that correct? I can't comment that. You have to ask the commission. I I don't mean I'm just trying to understand. Mean is this do you think this is the EC just saying we're not happy with any kind of deal that goes from 4% to 3%? Or is it the reality that there could have been a synergy package that would have been accepted that you just weren't prepared to go there? I can't really answer that. Thank you very much. Thank you. We have another question from the line of Mandeep Singh. Please go ahead. Hi, look. I know you're limited in the things you can and can't say, but I'd like to follow-up a little bit on Paul's question. I mean, clearly, we've got a new commissioner here. This is the first of the European four to three deals that hasn't gone through. Are you of the view that four is a magic number for the European Commission right now? Remains to be seen. I can only talk about the deal we have today, but and I don't want to speculate in the future. I mean, we have this has been a Danish discussion and not European. So it remains to be seen, but you really should ask the question to the commission. Okay. Thank you. We have a question from the line of Dominic Klarman. Please go ahead. Maybe you can give some color on the potential recipients of the remedy package. And I mean, I can only really think of Stofa and Hutchison. And I guess would the commission have been happy to sort of some remedies go to one and the others go to the other? Or was Hutchison basically out of the equation completely? Is there anything you can share there? No, I would like to say I mean, first of all, I can't comment on any specific names. We believe and we believe there is potential takers for the packages that we have presented in the market, and we think there's opportunities for that. Otherwise, we would have not proposed what we did. And I would say it's hard for several players to share a package that includes entering into a network operation with the JV and in the same time receiving customers. That does answer your question a little bit? Yes. Well, that's interesting. Okay. Yes. In what way? Well, basically I mean, if I understand you correctly, it basically means it is hard if why it's basically hard to share remedies. And if one is not able or willing to take the full package, then the deal fails. Is that the right reading? I don't think that's the right reading. No. Wrong reading. But as I said, the package includes to participate in the network. And of course, that means that you are supposed to use that to find customers in the market. We shouldn't discuss and speculate too much on that. All right. I think we have time for one more question to round up. Operator, do we have any final questions? Operator? All right. I think we round up there. So thank you, everyone. I think there are no further questions. Thank you.