M&A Announcement

Jul 7, 2014

Thank you for standing by, and welcome to the 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 would now like to hand the conference over to your first speaker today, Jesper Wilgos. Thank you, sir. Please go ahead. Good morning all, and welcome to this call on Telesnero's acquisition of Telesu Norway. This is Jesper Willigot, Head of Investor Relations. With me today, I have our CEO, Johan Dannen, to present and our CFO, Kristallo Vega, is here as well. So by that, I would like to hand over to Johan. Thank you, Jesper. Good morning, all. Let me take you quickly through the presentation that is also available on our website, and then we go straight into Q and A. So this morning, we have announced that we will acquire Teletu Norway SEK 5,100,000,000.0 on a cash and debt free basis. It's going to strengthen our position in Norway on the mobile side to a clear number two with about 40% market share. Based on 2013, this is around 1.2 EV sales. And if we include the expected synergies, which will come back to around 5.5 EBITDA multiple. Obviously, this is subject to the approval from the Norwegian competition authorities, which we believe will take us some time through this year and maybe into Q1 twenty fifteen. We'll cover that later on. Briefly on the strategic rationale of the deal. This fits nicely in our core home markets and also in our commitment to strengthen our operations in the Nordic Baltics around network connectivity. We are also another pillar we have talked about is to enhance the network connectivity and our competitive operations. This is also a very good fit to that strategic pillar. If you look at the position in the market, as I mentioned, will take us up to above 40% on the mobile side. But if you look at the total telecom market, it's still reaching around 20 or slightly about 20%. So in the mobile space, clear number two. On the total pie, still not a dominant player at all. This is a good deal, we believe, for the Norwegian customers and society. It will enable us to bring better Internet services to more people faster. We are committing ourselves also to front load some of the CapEx that were planned for 2018 as a part of the license commitment of 98%. This will now be done already by 2016 to the benefit of both the Tele2 and the Telia Sonra and Netcom customers in Norway. Are also without going jumping any conclusions, we're also looking at the total set of brands attractive brands in the Norwegian markets that are now part of the will be part of our portfolio, which we'll obviously review and optimize leading up to next year, but it is a very strong position on many of these brands. Looking at the deal a bit more on the synergies side, we see this as a clear opportunity to extract concrete synergies of at least SEK 800,000,000. The full effect of those SEK 800,000,000 plus will come from 2016, but of course, they will already be visible in 2015 given the closing in Q1. In order to extract these synergies, there are some integration costs that we will incur, mainly related to the network and estimated to SEK $250,000,000 to SEK $450,000,000 in 2015. But we're also having to upgrade the network to cater for the traffic of Tele2 today, estimated to around SEK $350,000,000 additional CapEx. On top of this deal specific OpEx and CapEx, we are also, as I said, front loading some of the CapEx related to the license obligations estimated to SEK 300,000,000, which would have come in 2017, 2018 will now come in 2015 and 2016 to reach ninety eight percent four population coverage by 2016. And then brief summary, 5,100,000,000 on a cash and debt free basis. You got the multiples estimated. Next year, this is most likely neutral to EPS and positive in 2016, obviously, depending a bit on the actual timing of the closing. Clear strategic fit to our new strategic framework and no issues on the funding. We can come back to it later with Christian. And we are today starting the engagement with the Norwegian competition authorities to see what it will take to bring this deal to a closing in at the latest in Q1 twenty fifteen. So that is the very quick summary of the deal that we have announced today. And I'm sure you have listened into also the previous call and maybe you have answered some of your questions, but we are obviously here to answer any further questions you may have. So over to you Jespergen. Yes. I would say over to the operator and please open up for questions. Thank you, sir. Thank you, sir. Your first question comes from the line of Barry Zetterlun. Please ask your question. Hi, good morning guys. Just two questions, if I may. First is on concessions and whether you expect the Norwegian authorities to incur any concessions in doing the deal. And specifically, I'd like to address the mobile towers that you're buying. I think at last count, Talat, you had about 1,700 towers. Where do you expect to use those? Or indeed, you'll dismantle them or potentially maybe use them as part of a concession? And secondly, whether you would even consider selling one of the brands as part of a concession? And if there was to be a concession, the question that would follow that is, would there be a buyer? And have you sounded out whether ICE is potentially interested in any of those assets? Thank Thank you. Obviously, we are focused on getting this deal to where it is today announced. Next phase is now to get into discussions on what it takes to get this through. And we don't want to jump any conclusions or have any discussions outside the competitor authority. We want to start there and see what they how they view this deal. We obviously see this as a clear benefit for consumers and society. And to show that commitment, we're also front loading the CapEx, as I mentioned, to bring faster, better Internet services to 98% of the Norwegians in 2016. So I don't want to speculate, and we're not going to comment on kind of the details of the deal at this point of time. We're convinced that this will be a deal that we can bring to a closing. Otherwise, we would not have announced it, and that goes for our partner as well there. So we are just focusing now on completing this deal and see what it means. And we will keep you posted on any such findings through the process. And my second question is on the cost synergies. As a read across to total margin, do you expect to be able to maintain the current 30.6% margin that you did last year on the combined entity from 2016 onwards? Or do you think that could indeed be enhanced? Just to give us an idea of the base for the synergies. I mean, you looking at the synergies based on the kind of limited margin that Tele2 is doing today or effectively no margin that Tele2 Norway is doing today? Or should we think of it as synergies on top of the potential margin that Tele2 could have done two years from now? Well, look, we're not going to go into any details more than we have done. And I think you can probably do the math from your end. But just to remind you on a few things. The SEK 800,000,000 at least synergies is important. But it's also important to take into account the combined revenues or kind of intercompany trade that needs to be removed from the two P and Ls. You can't simply add the SEK 700 and SEK 4,100,000.0 together. You need to remove SEK 700,000,000 and then add the synergies of the 800,000,000 at least. And then you get to a margin number, which is you have to model. But we're very positive on the synergy side. They're clear, concrete and kind of predictable in that sense. So that's why we can commit to at least 800. Sure. Okay. Okay. Thanks very much and congrats on the deal. Thank you. Thank you. Your next question comes from the line of Georges Irocanu. Please ask your question. I have two questions, please. The first one is around the timing of the synergies. I mean, there's a similar deal in Germany where the synergies take five years to get to a maximum run rate. So I was wondering whether there's any specific reason why you are so confident you will get the synergies run rate already almost twelve years after the deal closes, being almost above 800,000,000 per annum? And then the second question is around fixed line. You are believers in convergence in Sweden, and I was wondering what are the options for you in Norway? And bear in mind that you're putting more capital in mobile, whether you have any ideas on how to future proof that with fixed? Thank you. Thank you. On the first one, it's pretty simple. As we say, most of those SEK 800,000,000 are related to traffic costs, and those are quite digital and predictable, as I said. And that's why we're very clear on the SEK 800,000,000 coming in early on. And that's a very important part and component of the value that we see. Otherwise, obviously, we would not have been able to argue the 5,100,000,000 that's quick, clear and concrete synergies. On the fixed side, the point that I want to make first is that this does not solve the full converged story in Norway. Also reminding you that Norway is not a converged market in that sense yet. So let's get back to that other pillar of our strategy further down the road. This is a mobile network and a competitive operations deal, I would say. And even if there are 60,000 fixed customers coming with this deal, these are mainly related to resell rather than own infrastructure. Perhaps if I could rephrase the first question then. If you can deliver more than €800,000,000 synergies next year in 2016, Does that mean when we look at 2018, 2019 with shops or towers or any other things that you could potentially sell that this synergy run rate will be significantly higher? We say at least 800,000,000 At this point in time and the clarity of the deal we have, the timing of the deal that we see, we can commit to 800,000,000 If that changes, we will update along the way. All right. Next question, please. Thank you. Your next question comes from the line of Andreas Jolfsson. Please ask your question. Yes. Good morning. A comment or question on the strategy that you briefly mentioned. Tele2, of course, has been the challenger in Norway. Is the intention to keep Tele2 as a sort of a low cost brand? Or do you plan to merge this and have a full NetComm brand position, so to say? And secondly, when you've done this deal, do you believe that you are ready for further M and A opportunities in The Nordics or in Europe overall? Or will this take too much of your time, so to say? Thank you, Andreas. On the brand side, we can just make the statement today that there are several attractive brands in Tele2 and in Teleasonra. We have NetComm and CHESS, and they have four brands. We will look at these now and see how we optimize them. And obviously, keeping the strong momentum that some of these brands have is important. Exactly how that will look like, we will get back to towards the end of this process before closing, and then we can talk about how the actual plan looks like. But we have some good ideas on how to take this to a good business in Norway, obviously. On the M and A side, I mean, this is something that will be a Norwegian deal. This is in market consolidation. And we believe that, that is not going to defocus us in our other activities that we also clearly have on our agenda, both operationally and business development wise. So we'll see what comes up and what's available and what makes sense. Thanks. Thank you. Your next question comes from the line of Maurice Patrick. Please ask your question. Good morning, guys. Yes, Maurice here. A couple for me. The first one is around confidence in the deal closure and regulatory approval. Pillar two seemed very confident that would go through. I guess some thoughts from yourselves in terms of why you have such high confidence given you are going from three to two players? And the second question relates to the CapEx spend. So you talk about an additional CapEx spend to handle the increased traffic and also bringing forward your four gs investment somewhat as well. Have you not made any assumption for using some of the Tele2 infrastructure yourselves, some of the radio sites, I think you may be able to keep as part of the deal to offset that? Or is that very much a worst case scenario? Thank you. Thank you. No, we are very confident that the deal will go through. I think we are as confident as Tele2 in our discussions at least. We see the same thing coming. It's not something we should take for granted. We need to be good in our engagement with the Norwegian authority competition authority. But it still makes sense. I mean, are still three networks after this deal in the market, several brands, two nationwide networks, which is our clear view that that's something very viable for customers and society. And that's why we're showing the commitment of upping our CapEx. So very confident indeed, but we will keep you posted on the sentiments on the other side. On the CapEx side then, we estimate this to be the net CapEx needed to upgrade and front load. And based on what we know today, that's the figure. If that changes, obviously, we will update again. But it's a combination of our own and existing. And just as a quick follow-up, in terms of the OpEx synergies, I'm assuming there's no assumption there for lower market subsidies as a result of lower competitive intensity. Is it purely just hard costs you can take out? Well, it's mainly traffic related. Obviously, are other natural synergies when you combine two large entities, but it's mainly related to traffic. Great. Thank you so much. Thank you. Your next question comes from the line of Peter Nielsen. Please ask your question. Good, thanks. Johan just literally just answered my question. Thank you. Thank you, Peter. Thank you. Your next question comes from the line of Stephane Baizan. Please ask your question. Yes, hi. Thank you. Just an additional comment on CapEx. And are you so in the EUR 800,000,000, just to make sure there is today no CapEx synergies that is expected? And second question, which is related, are you considering or are you ready to consider any sort of disposal of the network to a new market entrant? Thank you. Christian here. I'm just going to answer your first question, leave the second one to you on there. The synergies are only income statement synergies. So the CapEx and investments are not included in those. Thank you. Can you repeat the second question, please? Yes. The second question is, are you ready to consider selling bits and pieces of the network of Tele2 to a new entrant, if it is asked as a remedy? Look, go back to my early comment that we can't go into any things that we haven't discussed yet with the competition authorities. We are clear that we think this deal will go through with reasonable remedies. We have now taken one clear commitment to the Norwegian customers and society by front loading CapEx. And that's a very important commitment that we will, of course, use in our discussion. What else is required, let's see what comes. Thank you. Your next question? Yes, next question please. Thank you. Your next question comes from the line of Lina Osterberg. Please ask your question. Yes. I was going to ask you referring back to the question from Andreas earlier on further potential M and A. Denmark is a very fragmented market and you have a very weak position. Would you consider doing something to improve that if there was an opportunity? And also Spain, you've been looking to sell for a long time. And now given that you have a more positive EU stance on end market consolidation, do you think we should expect a deal there this year? Look, we wanted to speak about Norway mainly, but let's give you a couple of quick comments, Lena, on Denmark at least. I mean we have taken our first step there to strengthen the operation and get to a better situation with the network operation with Telenor, evaluating that obviously if that's enough or not, and very close to the development in the Danish market. And on Spain, let's come back to that when we talk about the Q2. Okay. Thank you. Thank you. Thank you. Your next question comes from the line of Russell Waller. Please ask your question. Yes. Hi. It's Russell from New Street Research. Just a very quick clarification. In terms of regulatory approval, is there a chance that DG Comp becomes involved? Or is this certainly going to be a matter for the Norwegian antitrust authorities only? Thank you. Well, we believe this is a Norwegian process with the Norwegian competition authorities only, but that's my view right now. We'll have to get back also on that one if that changes. Obviously, they're I'm sure they're looking at what's happening elsewhere, but this has to be seen on the merits on its own. Also with the backdrop of what happened in December when the auction process took place and the outcome of that. And as I mentioned, with three networks, several brands, two nationwide coverage operators, I think, is the main focus in our discussions now going forward. Thank you. Thank you. Your next question comes from the line of Manish Birra. Please ask your question. Yes, hi there. I just wanted to ask, is there any breakup close or concession that you might have to give to Talitu if the deal is not approved? We're commenting on the deal that will go through. We are convinced that it will and not give any specifics on any other points. Okay. Thanks a lot. Thank you. All right. Any further questions? No, sir. There are no further questions. Please continue. Okay. Thank you all, and hopefully speak to you in one point five weeks' time. Thank you very much. Thank you. That does conclude your conference for today. Thank you for participating. You may disconnect.