Pitchbook US templateI D A T E
N O V E M B E R   2 0 0 5
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
In need for radical change with convergence as a catalyst
S T R I C T L Y   P R I V A T E   A N D   C O N F I D E N T I A L
I D A T E
Telecoms and Media: 5 years of negative shareholder returns…
Telecoms share price performance (rebased to 100)
Source: Datastream as of November 22, 2005, Bloomberg
1 Total shareholder return
1
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
Company
TSR1
… despite significant operational and capital optimisation efforts…
Source: Datastream as of November 15, 2005
Telecoms and media market development (rebased to 100)
2002: Balance-sheet restructuring
Selected asset sales
2004:Shareholder returns
Organic de-leveraging
Initiation of share buy-back programs
Increasing focus on top-line growth
2
3
2
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
… and a high growth environment which today has subsided
Telecom industry revenue growth
3
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
The rapidly changing consumer market is increasingly driving the telecoms and media convergence
Voice:
Local
Long
distance
1980
Dial-up
Pager
Long
distance
Local
Wireless
1995
IPTV
Broadband
Wireless
Traditional
Wireless
VoIP
Wireless
2010
4
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
Convergence of Network and IT infrastructure to move onto an all IP platform is imminent
Reality
Voice over
traditional VoIP
Mitigating the risk – Move to all IP
PRICING OF SERVICES
Regulations on LLU
Regulations on MVNOs
Incumbents
Another
Voice to become an add-on service
Data and video over IP to drive revenues
Next gen networks to reduce costs through:
Seamless migration
Backward capability
Improvement in operational efficiency through sharp reduction in headcount and resultant opex savings
Reduction in capex by upto 10% through de-layering of network and corresponding increase in utilisation levels
Build up of additional IT services:
Networks: LAN, Firewalls, WAN
Support: Authentication, storage, digital rights management
1 SBC company data
Outsourcing and IP transformation
5
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
Lines lost1 (000)
I D A T E
The new environment is creating new dynamics and will shape the new leaders
Source: JPMorgan equity research note
Winners will be highly agile.
Status quo is the highest risk path.
More risks
Technological discontinuities
New invaders
More opportunities
Ability to leverage fundamental competitive advantages (brand, reach, scale, services, knowledge)
But only for agile players
6
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
Over the next 3 to 5 years the European Telecom sector will be characterised by an exceptionally high level of FCF generation
Cumulative excess cash at net debt/EBITDA of 2.25x (€bn)¹
Source: JPMorgan equity research
¹ Post dividends, capex
Reduce leverage
M&A
Cumulative excess cash by operator at net debt/EBITDA of 2.25x (€bn)¹
2008E — €bn
2010E — €bn
O2
O2
7
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
The rationale for further de-leveraging, higher levels of organic investment and higher dividends is limited
Source: JPMorgan equity research and Datastream as of October 26, 2005
… given decreasing capital requirements to finance organic growth…
… and already higher-than-average cash being returned to shareholders
The European Telco sector is under-levered and is likely to remain so…
Capex as % of sales—EU telco
Average sector dividend yields
8
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
Private equity: A market-driven economic regulator
Source: BCVA, ECVA/ Thomson Venture Economics, PricewaterhouseCoopers, IFSL, Schroder Investment Management, Broker reports
The private equity industry is increasingly becoming an economic regulator
Insulate out-of-favour industries from stock market volatility
Restructure operations out of the public sight
It is estimated that private equity backed companies generate total sales of €273bn and contribute around €34bn in taxes in the UK
170 UK-based private equity firms have invested, since 1983, over €91bn in around 26,000 companies worldwide
Contributions to the economy
2004
2000
Private equity’s presence is increasing as % of M&A activity
9
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
1993-2004
CAGR
39.8%
I D A T E
Current available sector firepower could act as a catalyst for further M&A consolidation …
Cumulative excess cash (€bn)1
Need for scale on certain segments of the industry
Need to consolidate operations to drive market/pricing to stability
Migrate across the value chain and gain access to the final customer
Acquire technological/marketing skill-set
Gain full control of controlled assets (minority buyouts)
Capitalise on regulatory hedge opportunities
Expected drivers of M&A
15% of investments in communications sector
= c. €60bn
Private equity
Source: JPMorgan equity research
10
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
Technology is driving increasing waves of convergence and M&A
Telecoms and media: Consumer standpoint
1st wave
2nd wave
Alcatel/ Maplecroft alliance
Enabling
technology
11
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
In the last 6 months we have seen increasing signs of convergence-driven M&A activity
Note: JPMorgan deals
12
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
Rationale
Rationale
Date
Acquiror
Target
I D A T E
Recent M&A activity is more focused strategically v. the 2000 era
Deal type1
1
2
13
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
I D A T E
The sector is providing considerable opportunities for agile operators
Organic growth based on innovation and customer relationship
Inorganic growth through bolt-on and transformative transactions
Revitalise management and Board skill set
Continued focus on cost and cash-flow optimisation
Promote financially sound shareholder focused business cases, for organic and inorganic strategy
Redefine market based on customer needs rather than product offering
14
T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "
Company
TSR
1
5
years
% pa
11%
19%
33%
5%
7%
4%
37%
46%
18%
21%
18%
56%
44%
21%
77%
72%
78%
33%
0%
20%
40%
60%
80%
100%
UK
Europe
World
UK
Europe
World
32.0
28.7
19.7
15.0
11.5
9.4
7.4
6.8
6.7
6.5
6.3
5.7
4.2
3.9
3.0
0.0
VOD
TEF
DT
FT
O2
Bouygues
BT
Belgacom
TNOR
TS
Swisscom
OTE
PT
KPN
TA
TI
38.9
34.7
28.8
20.6
13.7
12.9
9.1
7.5
7.2
6.8
6.6
6.1
6.1
5.3
4.2
3.7
TEF
VOD
DT
FT
O2
Bouygues
TNOR
OTE
Belgacom
TS
BT
Swisscom
KPN
PT
TI
TA
Rationale
Rationale
Date
Acquiror
Target
20
120
220
320
420
520
620
720
820
920
Oct 97 Oct 98 Oct 99 Oct 00 Oct 01 Nov 02 Nov 03 Nov 04 Nov 05
France TelecomDeutsche Telekom
5
105
205
305
405
505
605
Jul 96 Sep 97 Nov 98 Jan 00 Mar 01 May 02 Jul 03 Sep 04 Nov 05
Reed ElsevierVivendi Universal
British Sky BroadcastingReuters