does vodafone's quadplay m&a strategy make economic sense brief ss 19 feb 2015
TRANSCRIPT
Vodafone – Quadplay M&A strategy- Does it make economic sense ?
Saravanan SFreelance Consultant – Telecom Strategy & [email protected]
18 Feb 2015
Many thanks to Sundararaman & friends…
NOTE : In this Document – Wired covers Fixed line, Cable, Fiber AND Full 3-play including Voice, Broadband, Pay TV AND Data services.
Executive Summary : Voda will find it very difficult (if not impossible) to achieve an adequatecash flow return on investment from its Cable / Fiber/ wired M&A investments.
• Voda performance on Revenues and EBITDA in decline for a long time now. True Mobile Industry has been seeing tough times and decliningIndustry revenues. But Voda has also been losing Revenue Share and EBITDA margins in its key markets of Germany, UK, Italy, Spain and SouthAfrica over the last 5-6 years
• Voda has spent some $22.5 Bn in Wired (Cable / Fiber 3-play) M&As across Germany (Kabel), Spain (ONO), UK (C&W) and South Africa (Neotel).They have also indicated interest in picking up Wired businesses in Portugal and Italy and announced a Unified Comms (Quad Play) Retail +Enterprise Strategy.
• However some serious issues to consider :• It is not just Mobile, but the whole of the Telecom + Pay TV industry that has been shrinking across most of Europe and in the top 5 Voda
markets over the last few years. Trends and Driver analysis indicate this shrinkage will continue for the long term into 2020 and beyond.• M&A acquisitions come with baggage in Infrastructure, Operations and Balance sheets, even forgetting the issues of Time, Costs and
Complexity involved in Integration of Organisation, Operation Processes, IT, Value chain partnerships and Service portfolios• Case Study review of the German and Spanish market projections for Voda and preliminary financial modeling indicates that :
• Vodafone + Kabel / Vodafone + ONO in Germany and Spain will Realistically see a shortfall of $4.5 Bn each in discounted Cash flowto 2020 when compared to a standalone pre-M&A Vodafone (Mobile + DSL) business model.
• To achieve the same level of Discounted Cash Flow as the pre-M&A Vodafone model,• Vodafone in Germany will need to achieve
• 33% Combined Comms + TV Industry Revenue share vs. 17% in Standalone / 23% in Realistic Voda + Kabel• 40% EBITDA margin vs. 30% in Standalone / 37% in Voda + Kabel Realistic Scenarios
• Vodafone Spain will need to achieve• 37% Combined Comms + TV Industry Revenue share vs. 10% in Standalone / 24% in Realistic Voda + ONO• 46% EBITDA margin vs. 18% Standalone / 39% in Realistic Voda + ONO Scenarios
• All this is without counting in some significant additional investments needed to clean up the Kabel / ONO operations, balancesheets, infrastructure, retail, marketing and customer engagement capabilities to fully drive up the Quad Play revenues
• AND without taking into account Time, Money and Organisation costs of Integration, and building a true Quad Play business modelin the midst of a rapidly changing Customer, Market, Industry, Competition, Value Chain environment
• One is forced to ask – Has Voda bitten more than it can chew… - and• Does Voda’s Wired M&A strategy as executed so far make economic sense ?
21% 21% 20% 20% 21% 20% 21% 21% 20% 22% 23%
19% 19% 18% 18% 18% 16%20% 17% 16% 14% 13%
8% 7% 8% 9% 8% 9%9%
9% 11% 12% 11%
9% 12% 12% 13% 12% 14%14%
14% 14% 13% 12%
5%6% 7%
7% 7% 8% 7% 8% 9% 9% 10%14% 12% 12% 9% 9% 7% 8% 7% 6% 6% 5%
4% 4% 4% 4% 4% 4% 4% 5% 4% 4% 5%0% 1% 1% 2% 2% 2% 2% 3% 3% 3%4% 5% 4% 4% 4% 4%
4% 4% 4% 4% 4%3% 3% 3% 3% 3% 3%3% 3% 3% 2% 3%
7% 8% 8% 9% 8% 8% 6% 7% 7% 8% 7%
0%
10%
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90%
100%
1H 09/10 2H 09/10 1H 10/11 2H 10/11 1H 11/12 2H 11/12 1H 12/13 2H 12/13 1H 13/14 2H 13/14 1H 14/15
Country wise Contribution to EBITDA - 1H09/10 --> 1H14/15
Germany Italy UK Vodacom India Spain Netherlands Turkey Egypt Portugal Romania Greece Others
Vodafone’s mobile business has been under pressure on Revenues over the last few years and onEBITDA margins for even longer. The top 6 markets Germany, UK, Italy, Spain, RSA, India 80% of Vodagroup. Voda has been losing Revenue share and EBITDA in 5 of these 6 markets (exception = India)
2160622544 22482
23102 23394 22877
21315 21344 2166121007
20480
7469 7487 7507 7335 75567006 6867 6843 6571 6158 5909
34.6%
33.2% 33.4%
31.8%32.3%
30.6%
32.2% 32.1%
30.3%
29.3%28.9%
24%
26%
28%
30%
32%
34%
36%
38%
40%
0
5000
10000
15000
20000
25000
1H 09/10 2H 09/10 1H 10/11 2H 10/11 1H 11/12 2H 11/12 1H 12/13 2H 12/13 1H 13/14 2H 13/14 1H 14/15
Voda Group Rev and EBITDA 1H 09/10 to 1H 14/15
Grp Rev Grp EBITDA Grp EBITDA % Margin
18% 18% 17% 17% 18% 18% 18% 19% 18% 21% 21%
14% 13% 13% 12% 12% 12% 15% 14% 13%12% 12%
12% 11% 12% 12% 11% 12%12% 12% 15%
15% 15%
9% 11% 12% 12% 12% 12%12% 12% 11%
11% 10%7% 7% 8% 9% 9% 9%
9% 9% 9% 9% 10%14% 12% 12% 11% 11% 10%
9% 9% 8% 8% 8%4% 4% 4% 4% 4% 4%
4% 4% 4% 4% 4%3% 3% 3% 3% 4% 4%4% 5% 5% 5% 5%3% 3% 3% 3% 3% 3%3% 3% 3% 3% 3%3% 3% 3% 2% 2% 2%2% 2% 2% 2% 2%
9% 10% 11% 11% 11% 11% 7% 8% 8% 8% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1H 09/10 2H 09/10 1H 10/11 2H 10/11 1H 11/12 2H 11/12 1H 12/13 2H 12/13 1H 13/14 2H 13/14 1H 14/15
Country wise Contribution to Revenues - 1H09/10 --> 1H14/15
Germany Italy UK Vodacom India Spain Netherlands Turkey Egypt Portugal Romania Greece Others
15%
20%
25%
30%
35%
40%
45%
50%
55%
VOD - DE VOD - UK VOD - IT VOD - SPN VOD RSA VOD IN
Voda - Mobile Revenue Share % - Top 6 Markets - 2007 to 2014 (e)
2007
2008
2009
2010
2011
2012
2013
2014e
10%
15%
20%
25%
30%
35%
40%
45%
50%
VOD - DE VOD - UK VOD - IT VOD - SPN VOD RSA VOD IN
Voda EBITDA % Margin - Top 6 markets - 09/10 to 14/15
1H 09/10 2H 09/10 1H 10/11 2H 10/11
1H 11/12 2H 11/12 1H 12/13 2H 12/13
1H 13/14 2H 13/14 1H 14/15
Voda appears to believe that going quadplay with cable / fiber is their best bet to get back togrowth and profitability in Europe and have spent $22.5 Bn on M&A and might spend more
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Mobile + Wired + Pay TV % of GDP - All inclusive
Germany Italy UK Spain South Africa India
However, our projections (based on OECD GDP estimates and Industry Share of GDP trends)indicate that the Top 5 markets will shrink in terms of Total Communications + Pay TV markets –Retail + Enterprise; going forward… - with increasing competition & value chain disruption
1.5%
2.5%
3.5%
4.5%
5.5%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Mobile + Wired + Pay TV % of GDP - All inclusive
Germany Italy UK Spain South Africa India
2.66 2.752.77 2.63 2.73 2.83 2.85 2.87 2.92 2.98 3.01 3.04 3.07 3.10 3.13
1.70 1.72 1.70 1.61 1.64 1.64 1.61 1.58 1.58 1.60 1.63 1.66 1.69 1.72 1.752.06 2.13 2.12 2.01 2.04 2.06 2.07 2.10 2.17 2.23 2.29 2.35 2.42 2.49 2.56
1.24 1.28 1.29 1.24 1.24 1.24 1.22 1.21 1.22 1.24 1.27 1.29 1.32 1.34 1.36
0.43 0.45 0.47 0.46 0.48 0.49 0.51 0.51 0.53 0.55 0.58 0.61 0.64 0.68 0.71
2.72.9
3.13.3
3.63.9
4.14.3
4.54.8
5.05.3
5.7
6.0
6.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
OECD Projections - Country GDP in $ Bn.
Germany Italy
UK Spain
South Africa India
94.7
83.8
90.3 90.1
82.3 81.4
76.279.6
75.873.5
71.469.3
67.3
62.5 61.059.3
57.154.8
49.4 48.6 48.2 48.0 47.9 47.7 47.5 47.3
63.5 63.1 62.9 61.9 61.8 60.7 60.8 60.6 60.3 59.9 59.6 59.3 58.964.3
57.353.5 53.5
46.143.3 42.0 41.0 40.3 39.6 38.8 38.0 37.2
21.6 21.5 21.6 20.7 20.0 18.6 18.4 18.2 18.3 18.5 18.6 18.5 18.5
41.645.1 44.3
47.749.4
49.9 50.6 51.8 53.0
54.1 55.2 56.1 57.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Voda Top 6 markets - Target Industry Projections $ Bn
Germany M + W + TV Italy M+ EW + TV
UK M + W + TV Spain M + W + TV
South Africa Mob + Wired India Mobile
Case Studies on Germany and Spain are a preliminary top down modelling of the financials forthe 3 scenarios – basing our operating cash flow modelling on Market Revenue Share, EBITDAmargins, Capex and WACC – under 3 Scenarios
Particulars … Old Model – Pre M&AOLD REALISTIC
Scenario 1
New Model – with Wired M&ANEW REALISTIC
Scenario 2
New Model – with Wired M&AREQUIRED FOR Sc. 1 OFCF
Scenario 3Business Structure Pre – M&A Business – Mainly
Mobile + whatever minimal ULL /Wholesale DSL business exists..
Post M&A Business – Mobile + Wired (DSL + Cable / Fiber) incl. Voice, Broadband,Data and Pay TV for Retail & Enterprise segments
Revenue Shareperformance
Assumed that Mobile Revenueshare will continue at similar trend(decline / rise) as in the past 5-6years…Ditto for the small Wired DSLbusiness in pre-M&A
Assumed that Bundling and Fullservice play will result in gains inMobile and in the Wired play –including share of Enterprise / SMBbusiness
Targeted to achieve the Discounted OFCF as inScenario 1; I have presumed Mobile and Wiredmarket revenue shares which go well beyond“Optimistic” into the “Barely Plausible” rangeof values
EBITDA Margins Assumed that there will be someattempts to improve EBITDAespecially if the business is tankingas in case of Spain. But we have notassumed any majortransformational Marginimprovement.
Assumed the benefits of Sunergyfrom merger in Network,Operations and Channel / RetailOperations will generate someincremental margin improvementsto the business.
Improvements well beyond that postulated inScenario 2 – so as to achieve the targetDiscounted Operational Free Cash Flow(OFCF). Combined Mobile + Wired Marginshave been raised to over 40% in an effort toachieve the desired financial outcome
Capex / Investments Future Capex taken at 12% ofRevenues – in line with generalindustry average. No specialinvestments / projects / scopeexpansions / etc,,, envisaged.
Future Capex taken for Mobile @ 12% of Revenues and Cable at 20% of Revenues.This is conservative. For the kind of improvements in market share required, Capexdemands would actually be higher – esply in Scenario 3. Also – no Capex /Investment plans included for Integration, for improving basic performance / balancesheet clean ups / etc.. At Kabel / ONO post the Merger AND No special / additionalinvestments for things like Content & Apps / OTT / IoT / IT & Cloud services / etc..Included.
WACC Assumed 10% WACC for discounting future operating free cash flows
In Scenario 1 – based on what we see across Spain, Switzerland, Netherlands and Austrian markets, wetake the view – that – Mobile only operators do not necessarily lose out against a Quad Play operator interms of Mobile Revenue Share … In fact, some markets see Rev Share gains by Mobile only players …
60% 60% 61% 61% 59% 56% 55%
19% 19% 19% 20% 22% 23% 23%
20% 20% 20% 19% 19% 20% 22%
0%
10%
20%
30%
40%
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60%
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100%
2007 2008 2009 2010 2011 2012 2013
Switzerland Mobile Revenue Share %
Swisscom Sunrise Orange
47% 46% 46% 45% 43% 40% 39% 39%
35% 34% 34% 33% 31%30% 28% 31%
18% 18% 18% 19% 21% 23% 24% 24%
0% 1% 2% 4% 5% 7% 9% 6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 9M14
Spain Mobile Revenue Share %
TEF Voda Orange Yoigo
47% 47% 47% 47% 46% 44% 45%
27% 29% 30% 30% 31% 32% 31%
25% 24% 23% 23% 23% 24% 24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013
Netherlands Mobile Revenue Share %
KPN Voda T-Mob + Orange
42% 45% 45% 44% 44% 43% 46%
34% 32% 32% 31% 31% 30% 30%
24% 23% 23% 25% 26% 27% 25%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013
Austria Mobile Revenue Share %
M-1 / A-1 T-Mob Orange + 3 Hutch
• Sunrise – Switzerland gains Rev share – despiteSwisscom Quad play strategy since 2010/11 • Voda & Orange maintain / grow share despite
Telefonica (TEF) Quad play strategy since 2012
• Voda & T-Mobile maintain share despiteKPN Quadplay strategy since 2011/12
• A-1 / M-1 gains are in line with past trends, noreal change despite Quad play strategy launchedin 2011/12
Deep Dive – Vodafone Germany Scenario Analysis : Very big asks from Voda Germany.To achieve the same Discounted OFCF as a standalone Voda model, The new Voda+Kabelbusiness needs to achieve a 33% (vs. 17.5%) Rev share and a 40% (vs. 32%) EBITDA
Scenario Projections :2014 2020
Old Model – No KabelOLD REALISTICScenario 1
New Model – With KabelNEW REALISTIC
Scenario 2
New Model – With KabelREQUIRED FOR Sc. 1 OFCF
Scenario 3Total Industry Size $ Bn $ 74 Bn - $ 63 Bn $ 74 Bn - $ 63 Bn $ 74 Bn - $ 63 Bn
Revenue Market Share %Mobile, Wired + Pay TV;Total Comms + TV
Mobile = 27% 26%Wired = 7% 8%
Total = 17.5% 16.5%
Mobile = 27% 30%Wired = 7% 16%
Total = 17.5% 23%
Mobile = 27% 33%Wired = 7% 33%
Total = 17.5% 33%
EITDA Margin %Voda Core (Mob + DSL)Kabel Core (3-play incl. TV)
Voda Core = 32% 30%Kabel Core = Not Applicable
Total = 32% 30%
Voda Core = 32% 35%Kabel Core = 48% 50%
Total = 32% 37%
Voda Core = 32% 35%Kabel Core = 48% 50%
Total = 32% 40%
CAPEX as % of RevenuesVoda Core & Kabel Coreseparate.
Voda Core = 12% assumedKabel Core = Not Applicable
Total = 12% assumed
Voda Core = 12% assumedKabel Core = 20% assumed
Total = 12% assumed
Voda Core = 12% assumedKabel Core = 20% assumed
Total = 12% assumed
Discounted Operating CashFlow (OFCF) @ WACC 10%2014 – 2020
$ 11.8 Bn $ 7.3 Bn(M&A Cost $10 Bn included)
$ 4.5 Bn LESS than Scenario 1
$ 11.8 Bn(M&A Cost of $10 Bn included)
Comments Scenario 3 requires Voda to improve on Scenario 2 performance levels byTotal Incremental Revenue share gain required of 10% (33% vs. 23%)EBITDA Improvement of 3% (40% vs. 37%)to achieve the same Discounted OFCF - $11.8 Bn – as in Scenario 1No incremental costs of Integration included. Capex / Rev maintained at Indy Standard – Mobile12% and Wired + TV 20%.No separate additional costs for improvement in Consumer Revenuisation, Debt reduction inKabel OR incremental Infrastructure build out. No incremental spend on Content Rights / OTT / e-Commerce included.
Spain Market – Voda Projections and Review : Near Impossible asks from Voda SpainTo achieve the same Discounted OFCF as a standalone Voda model, The new Voda+ONObusiness needs to achieve a 37% (vs. 12.43%) Rev share and a 46% (vs. 21%) EBITDA
Scenario Projections :2014 2020
Old Model – No ONOOLD REALISTICScenario 1
New Model – With ONONEW REALISTIC
Scenario 2
New Model – With ONOREQUIRED FOR Sc. 1 OFCF
Scenario 3Total Industry Size $ Bn $42 Bn $ 37 Bn $42 Bn $ 37 Bn $42 Bn $ 37 Bn
Revenue Market Share %Mobile, Wired + Pay TV;Total Comms + TV
Mobile = 26.5% 22.5%Wired = 2.1% 3.0%Total = 12.3% 9.7%
Mobile = 26.5% 31%Wired = 2.1% 20%Total = 12.3% 24%
Mobile = 26.5% 36%Wired = 2.1% 37%Total = 12.3% 37%
EITDA Margin %Voda Core (Mob + DSL)ONO Core (3-play incl. TV)
Voda Core = 18% 18%ONO Core = Not Applicable
Total = 18% 18%
Voda Core = 18% 30%ONO Core = 43% 50%
Total = 21% 39%
Voda Core = 18% 40%ONO Core = 43% 50%
Total = 21% 46%
CAPEX as % of RevenuesVoda Core & ONO Coreseparate.
Voda Core = 12% assumedONO Core = Not Applicable
Total = 12% assumed
Voda Core = 12% assumedONO Core = 20% assumed
Total = 12% assumed
Voda Core = 12% assumedONO Core = 20% assumed
Total = 12% assumed
Discounted Operating CashFlow (OFCF) @ WACC 10%2014 – 2020
$ 1.4 Bn - ($ 2.9 Bn)(M&A Cost $10 Bn included)
($4.3 Bn Less than Scenario 1)
$ 1.4 Bn(M&A Cost of $10 Bn included)
Comments Sceanrio 3 Demands that Voda achieve performance improvement over Scenario 2 in terms ofIncremental Revenue share gain required of 13% (37% vs. 24%)EBITDA Improvement of 7% (46% vs. 37%)to achieve the same Discounted OFCF - $1.4 Bn - as in Scenario 1No incremental costs of Integration included. Capex / Rev kept at Industry conservative levels(12% Mobile and 20% Wired + TV). No separate additional spends assumed for improvement inONO – for Penetration, Consumer Revenuisation and Wired / TV RGU growth is included forScenario 2 or 3. No special investments in Content Rights / e-Commerce & OTT initiatives included