Defensive but fundamental concerns remain

1. European Equity Research Telecom Services James Britton (44) 20 7102 4571 james.britton@nomura.com Vikram Karnany (44) 20 7102 9164 vikram.karnany@nomura.com Amit Singh (44) 20 7102 9675 amit.singh.1@nomura.com Anna Oldinger (44) 20 7102 9694 anna.oldinger@nomura.com  Satellite/Broadband Henrik Nyblom (44) 20 7102 1871 henrik.nyblom@nomura.com Robert Berg (44) 20 7102 1499 robert.berg@nomura.com Industry specialist Jonathan Smith (44) 20 7103 0206 Jonathan.D.Smiith@nomura.com Defensive but fundamental concerns remain EPS momentum to stay negative, dividend stress tests signal growing risk to payouts September 2011 ANY AUTHORS NAMED ON THIS REPORT ARE RESEARCH ANALYSTS UNLESS OTHERWISE INDICATED PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON SLIDE 42

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3. EPS momentum still negative; dividend stress tests signal risk to payouts Sector rating: Bearish on sector fundamentals • Earnings momentum remains firmly negative. After 3% cut post the Q1 results and 4% cut with the Mid year outlook report , we cut 12m fwd EPS by a further 1.7% after Q2 results. We expect further earnings pressure. • 2008/2009 recession showed sector’s defensive qualities but mobile was not as resilient as expected. • Austerity is expected to drive further downgrades. • The move to smartphones / mobile data is cannibalising existing revenue. Smartphones are not creating value. • Domestic competition is increasing, not decreasing. Three is gaining traction, new entrants are coming in 3-player markets. • Dividend stress tests show dividend security is fading. Payout rises from 69% to 88% on combined EBITDA and capex stress test. • Sector valuation 9.3x 2011 PE, a 5% discount to the market (ex-financials). Historic valuation discount is 10-15%. • We have cut sector rating to Bearish. • Operating leverage is key in telecoms. We retain a preference for structural growth where we can find it. • TELENOR, TELE2 are top conviction picks. We like ZON / TELENET / LIBERTY GLOBAL in the cable space • DT, TDC and Swisscom are our core defensives to own. • We have Reduce ratings on TI, Belgacom, Telefonica and TeliaSonera. • Telecom performance in inflationary environments is not encouraging given the lack of pricing power. In addition, deflationary pressures continue as legacy mobile transitions to a more efficient data platform. Expectations of 2012 recovery are at risk. Sector valuation is above its historical discount range at a 5% discount against the European market (ex-financials). • Our sector rating on European Telecom is Bearish. 1

4. EPS momentum still negative; dividend stress tests signal risk to payouts Sector Traffic Lights Source: Reuters, Company data, Nomura estimates 2

5. EPS momentum still negative; dividend stress tests signal risk to payouts European Telecom Comparables – EV/EBITDA, P/E, Cash P/E Source: Reuters , Company data, Nomura estimates. Priced on close 23 Sep 2011 The benchmark index for these stocks is Dow Jones STOXX® 600 Telecommunications

6. EPS momentum still negative; dividend stress tests signal risk to payouts European Telecom Comparables – Unlevered FCF %, FCFE %, Dividend % Source: Company data, Reuters, Nomura estimates, dividends are t +1 i.e. 2011E dividends are paid in 2012 (for most companies). Priced on close 23 Sept 2011 4

7. EPS momentum still negative; dividend stress tests signal risk to payouts Telecom underperforms under rising inflation • Nomura economists expect inflation to increase above 2% across Europe in 2011. • Telecom has underperformed in four of the past five periods of rising inflation. • Average underperformance 15%. • Telecom’s ability to inflate has not materially improved • Some examples of RPI-linked wholesale prices, eg, UK • Some examples of regular indexation of tariffs, eg, Belgium • Termination rates accelerating down, retail pricing pressure on mobile voice unlikely to stop • Cost inflation not far behind … The Communication Workers’ Union in Germany secured up to 5.15% wage hike for 2011 European sector performance during rising inflation periods Global sectors’ sensitivity to interest rates Average performance This chart shows average sector performance through 5 periods of rising inflation identified over past 20 years Source: Datastream, Nomura strategy research Source: Datastream, Nomura research 5

8. EPS momentum still negative; dividend stress tests signal risk to payouts Earnings momentum sharply negative and with additional risk • Following 0.6% cut to forward Revenue estimate during Q1 and a further 1% cut in our mid-year outlook report (July), we cut revenues by 0.3% after Q2 results. • Owing to operating leverage effects, we cut harder on EBITDA, -0.3% for 2012 and -0.5% for 2013. • After 3% cut post the Q1 results and 4% cut with the Mid-year outlook report, we cut EPS by a further 1.7% after Q2 results. • Telecoms saw the most negative EPS revisions balance of all sectors in Q1 2011. • Nomura estimates are 2-2.5% below consensus on 2012 EBITDA. Earnings revisions balance (consensus) Nomura telecom sector forecast changes (one-year fwd) Source: Company data, Nomura research Source: Bloomberg, Nomura estimates 5

9. EPS momentum still negative; dividend stress tests signal risk to payouts Earnings momentum sharply negative and with additional risk • Expectations of revenue and EBITDA recovery in 2012 are at risk for the following reasons: • - Economic recovery in Europe is stalling. • - Usage-based mobile revenues may be cannibalized as operators transition customers into flat-rate packages. • - Mobile regulation is not yet over. MTR regulation eases up a little in 2012 but regulation of data roaming increases from mid 2012. • - Forecasts of PSTN churn reducing may prove optimistic as cable strengthens its competitive advantage. • - Austerity impacts threaten to increase as a drag, benefiting the discount operators in the market. • Q2 update: • - organic growth remains on a declining trend at -0.7% in Q2, 20bp worse than Q1. • - organic EBITDA decline is c.-2%, broadly similar to the Q1 level. Organic revenue growth (by operator) Organic Revenue and EBITDA growth Source: Company data, Nomura estimates 5

10. EPS momentum still negative; dividend stress tests signal risk to payouts Stress test under no GDP growth in Europe and US would lead to 7% sector EPS cuts • Having tested the GDP correlation to telecom spend under previous slowdowns, we assume each 1% reduction in GDP would affect fixed revenue by 0.8% and mobile revenue by 1.2%. • Under a no-growth scenario in European and US markets, we estimate a negative 7% impact to our 2012 EPS estimates. • The companies with the most downside risk from a one-year forward earnings perspective under our stress test are OTE, Telekom Austria and TDC. • Meanwhile, we conclude that Telenor, Telefonica and Tele2 are in a better position in our sector owing to their diversification away from the US and Europe. Source: Nomura research estimates 5

11. EPS momentum still negative; dividend stress tests signal risk to payouts Austerity is the biggest driver of telecom spend • Austerity effects can have far more dramatic impact on operating trends than industry fundamentals. • An extreme example is Greece which has slumped for the past three years – revenues are now 37% lower than three years ago. This is in spite of benign regulation and three-operator market structure. • There was marginally less divergence between north and south in Q2, as Nordic markets pulled back and Italy and Greece improved slightly • With the sovereign crisis unresolved, we expect sustained austerity effects in the heavily-indebted countries. • We now forecast convergence of mobile growth rates between North and South Europe by 2015. North vs South mobile revenue growth (ex-regulation) Greek mobile revenue trend Source: Company data, Nomura estimates Source: Nomura research estimates 5

12. EPS momentum still negative; dividend stress tests signal risk to payouts Transition to smartphones / mobile data is not adding value • European mobile revenue growth deteriorated to -3.3% y-o-y in Q2 (Q1 -2.5%). • Ex-regulation, we estimate that underlying growth fell to 0.3% in Q2 (Q1 +0.6%). • Growth has not materially improved since the European recession in 2008/2009 in spite of accelerated smartphone penetration. • Mobile EBITDA fell -5.0% in Q2 ( Q1: -5.1%), implying margin contraction of 100bp y-o-y. • The investment in smartphone subsidies and the lack of churn improvement have been the main causes for margin contraction. The Apple iPhone continues to appeal beyond the high-end user segment, keeping the cost of subsidies high. • One positive is that the capital costs of smartphone users has remained fairly limited. Average smartphone usage is just 150MB/ user in Europe (vs. 700MB in the US). European operators have adopted speed throttling, tiered usage and WiFi offload to reduce mobile usage. European mobile revenue (ex-regulation) • European Mobile revenue and EBITDA growth Source: Company data, Nomura estimates Source: Company data, Nomura estimates 5

13. EPS momentum still negative; dividend stress tests signal risk to payouts Transition to smartphones / mobile data is not adding value • More mobile usage is moving over to data platforms. • KPN – SMS has moved over to instant messaging (Facebook, BBM, Ping, Viber, WhatsApp), WhatsApp has reached 90% penetration on smartphones, SMS usage collapsing, overage voice now falls within bundles. • UK mobile – O2 UK referenced ongoing usage optimisation as one reason for a fall in service revenue growth from 1% in Q1 to -4% in Q2. • This transition to mobile data will likely force a move away from usage-based pricing to flat-rate pricing. • But a lot of revenue is currently driven by usage and may be cannibalised as usage moves to data. • For example, T-Mobile Germany warned that revenue slumped in Q2 as customers moved to its new flat rate plans. KPN example – change in usage impacts customer ARPU • TEF O2 UK – Voice volume trends Source: Company data, Nomura estimates Source: Company data, Nomura estimates 5

14. EPS momentum still negative; dividend stress tests signal risk to payouts Transition to smartphones / mobile data is not adding value • We estimate usage-based Consumer revenues are c. 50% of European mobile revenues. • Vodafone estimate 45% - see European mobile revenue pie-chart (right) • Highest markets are Italy (74%) and Portugal (69%) owing to high prepaid elements. Belgium has highest SMS and roaming. • At group level (including all operations), the highest exposure to usage-based revenues are at VOD (27%), TKA (26%), KPN (24%) and TI (21%) • Operators need to increase the monthly flat fee to substitute for the usage-based revenues. Source: Vodafone Overage as % of group consolidated revenue (by operator) • Overage as % of mobile revenue (by market) Source: Company data, Nomura estimates Source: Company data, Nomura estimates 5

15. EPS momentum still negative; dividend stress tests signal risk to payouts Transition to smartphones / mobile data is not adding value • We ranked all operators across the four main risk factors we identified and concluded that KPN, FT, Vodafone and Telekom Austria have the greatest exposure to mobile cannibalisation. • DT, Tele2, Swisscom and TDC have the lowest exposure to this risk, in our view. • At the sector level, we have assumed the following scenario: - 10% of voice traffic is cannibalised by VOIP and substitution to messaging. - 50% of text is cannibalised by messaging applications - 40% of roaming is cannibalised by mobile VOIP applications, such as Viber. • Post mitigation by move to bundles, we believe risk is c. 3% for European mobile revenues. Revenue risk split by country Summary rank for telco exposure to mobile cannibalisation Source: Nomura research estimates Source: Nomura research estimates 5

16. EPS momentum still negative; dividend stress tests signal risk to payouts Domestic competition outlook remains tough • Domestic assets a/c for the majority of EV and often more than 100% of equity value. • Markets with potential for new competition: - France - Belgium - Netherlands - Poland • Markets with potential for consolidation - Germany - Italy - Spain - Austria - Switzerland - Denmark - Norway • However, consolidation focus is more on network-sharing and retail distribution. • Without full operator consolidation, competition will remain on the increase. Source: Company data, Nomura estimates 5

17. EPS momentum still negative; dividend stress tests signal risk to payouts Dividend stress tests signal dividend security is at risk • Payout ratios are approaching 60% on earnings and 55% of proportionate cash flows as shown by the valuation comparables. • But payout on recurring FCF is c.69%. • We apply two stress tests to dividend payout ratios: • 1) EBITDA decline sustained at the current rate (-2% yoy) vs forecast for stabilization. • 2) Capex / sales 1 point higher • On the combined stress tests, sector payout would increase to 88%. Eight out of 18 operators would move above 90% Current payout ratios 2013 stress test ratios Source: Nomura research estimates 5

18. EPS momentum still negative; dividend stress tests signal risk to payouts Growth remains key driver to preserving and creating value • Mgt teams treat the operating cost base as broadly stable. • Ongoing cost efficiencies can offset inflationary pressures (energy costs, site rental, wage costs) • Hence, operating leverage is high and profitability is acutely sensitive to top-line growth. • We show a good correlation between revenue and EBITDA growth in 2011. • Tele2 and Telenor offer premium top-line growth. • Of large caps, Vodafone offers best growth on top-line on both consolidated and proportionate basis. Organic revenue growth – Q2 2011 Greek mobile revenue trend Source: Company data, Nomura estimates Source: Nomura research estimates 5

19. EPS momentum still negative; dividend stress tests signal risk to payouts Appetite for telco credit remains strong • Telco remains fifth most leveraged sector. However, leverage ratios are robust – average net debt / EBITDA 1.9x for 2011, 1.7x for 2012. • Large-cap operators have successfully tapped bond markets in 2010 and 2011 YTD. • Appetite for telco credit remains strong. Even TI, our most leveraged incumbent, raised seven-year money at 4.75% in May 2011.   • The sector is still posting the highest premium for equity dividend yield over bond yield (c. 300bp). • Earnings pay-out has normalized at 60%, forward FCFE payout currently at 55% (long-term average 60%). • We do not expect dividends to move higher. Headroom likely to be kept for spectrum and consolidation flexibility. Five-year CDS spreads for the large caps Europe ex-UK sector dividend yield less corporate bond yield Source: Nomura estimates Source: Company data, Nomura estimates 5

20. EPS momentum still negative; dividend stress tests signal risk to payouts Valuation: Telecoms firmly above its historic range against market • EV/EBITDA (based on Bloomberg) of 5.5x remains more expensive than in early 2010 and from Oct 2008 to Oct 2009. • Sector is trading at a 2011E P/E of 9.3x. • This represents a c. 3% premium vs. 9.0x for Europe and a 5% discount vs. 9.8x for Europe (ex-financials). • Average EPS payout is 60%. • Sector dividend yield is 8.1%, compared with the European market average of 4.2%. • Telecom dividend yield exceeds corporate bond yield by 300bp – largest yield gap of any sector. • European Telecom P/E relative to Europe • European Telecom EV/EBITDA (absolute) Source: Worldscope, FTSE, Nomura research Source: Company data, Nomura research 5

21. EPS momentum still negative; dividend stress tests signal risk to payouts Q2 was another tough reporting quarter, but expectations were low • Organic revenue growth fell 20bp to -0.7%. Organic EBITDA growth remained broadly in line with Q1 at -2.0% • Tele2 and Telenor screen favorably on organic revenue growth. • Vodafone bucked the revenue trend at the group level but only owing to strong emerging performance. VOD Europe organic growth was -1.3% (Q4 11: -0.8%). • Commercial costs continue to rise as operators invest in smartphones. Sector EBITDA margin fell 60bp y-o-y. • No material variances on capex to note. Organic revenue growth in Q2 2011 Sector organic revenue and EBITDA growth Source: Company data, Nomura estimates Source: Company data, Nomura estimates 5

22. EPS momentum still negative; dividend stress tests signal risk to payouts Fixed revenue trend also under pressure • Despite more favourable regulation, fixed revenue trends worsened further (-5.0% in Q2 vs. -4.6% in Q1). • Fixed EBITDA trend remained under pressure, down -3.0% in Q2 vs. -4% in Q1 ( Q4 10: -3%) . • Traditional access line loss was stable at -6.2% y-o-y and broadband has now matured. • European cable has largely upgraded to EuroDOCSIS 3.0, enabling superior broadband connectivity for its catchment areas. • Incumbents will increasingly contemplate FTTH rollout where population density is highest • Ongoing uncertainty on FTTH regulation remains a constraint for ambitious rollouts. • And incumbents are unwilling to stomach the full bill.  Expect forms of public financing to emerge and more noise around passing costs onto content owners (challenging concept of ‘net neutrality’). Broadband net adds • European fixed quarterly growth rates Source: Company data, Nomura estimates Source: Company data, Nomura research 5

23. EPS momentum still negative; dividend stress tests signal risk to payouts Summary for sector growth outlook • We calculate an organic top-line growth forecast of -0.9% for the major European telecom stocks in 2011. • Revenue inflexion is deferred to 2013 (f/c +0.3%). • We forecast European mobile service revenues to grow -2.5% in 2011 (after -1.5% in 2010) . • We forecast incumbent fixed revenues to grow -4.5% (after -3.8% in 2010). • We forecast sector organic EBITDA growth of -2.0% for 2011 implying margin contraction of 50bp • We expect 7% growth in mobile capex and -5% growth in fixed capex in European markets. • Positive organic revenue growth is only expected for Tele2, Telenor, TeliaSonera, Vodafone and Telecom Italia Sector Organic growth (2009 – 2013E) European mobile growth (2009 – 2013E) Source: Company data, Nomura estimates 30

24. EPS momentum still negative; dividend stress tests signal risk to payouts Mobile data revenue growth has slowed despite strong smartphone adoption • Non-voice revenue growth has been held back by disappointing trends in Southern Europe. • Norway surprisingly registered a weak data growth rate which may be a reaction to Telenor’s speed restrictions for heavy users.   • However, smartphone adoption has been strong, forecasting to upgrade penetration assumptions. • We now forecast penetration of active smartphone users to increase from 16% for end-2010 to 25% for 2011 and 35% for 2012. • This will drive smartphone connections growth of 30% in 2011. Falling unit costs and more mid-market smartphones will limit the increase in commercial investments costs to 5% on our estimates. • Loss of iPhone exclusivities will support a more stable competitive marketplace. Smartphone penetration in Europe Mob data revenue growth slowed despite strong smartphone adoption Source: Company data, Nomura research Source: Nomura estimates 5

25. EPS momentum still negative; dividend stress tests signal risk to payouts After capex guidance increases early in 2011, capex pressures are under control • At the start of 2011, six major telecom operators increased capex guidance. There were two main reasons: • - Around 50% of the increase was explained by mobile network swaps in readiness for 4G and designed to deliver efficiency savings. • - Around 50% was attributable to increased fibre rollouts – both FTTH and FTTC (eg, France, Switzerland). • In reality, capex has been slightly below forecast year-to-date and we do not expect material changes in capital intensity. • - There is increased use of mobile network-sharing – both in rural areas and more active sharing arrangements in certain markets. • - Mobile operators are managing data volumes with speed-throttling, tiered data and WiFi offload. • - Management teams remain sceptical on the business case for FTTH (standalone). • - No management team is looking to clearly differentiate on network quality. Wireline capex / sales • Wireless capex / sales Source: Nomura estimates Source: Nomura estimates 5

26. Conviction Buy: Tele2, TP SEK 155 Premium revenue and profit growth • Management’s long-term incentives are entirely geared to total shareholder return (TSR) and high ROCE thresholds (20%-24%). We believe a tight management focus on both categories of return will contribute to stock outperformance over a sustained period. • Tele2 recorded Q2 organic revenue growth of 6% and EBITDA growth of 7% - best-in-class. We f/c a 3-yr EBITDA CAGR of 8.2% for 2011-2014 and a FCF CAGR of 20% for this period. • Tele2 Russia recorded Q2 revenue growth of 23% and EBITDA growth of 32% in local currency. Management expects that the new regions (0% margin today) can reach the same profitability as the old regions (c. 45%margin). We forecast a long-term margin of 42%. • Sweden’s mobile market is growing almost 10% faster than European mobile and mobile spend is further buoyed by the strong economic backdrop. • Valuation: Tele2 trades at a 2012E EV/EBITDA of 6.0x vs. the sector on 4.9x and a 2011E dividend yield of 15.8% ( sector: 8.1%) Source: Nomura estimates 18

27. Conviction Buy: Telenor, TP NOK 114 Strong structural growth mainly driven by Asia • We still promote Telenor for structural growth (driven by Asia). At the same time, the CFO is prioritizing group efficiency, which is critical amid a slower revenue environment in mature Europe. • Telenor reported organic growth of 21% from its Asian operations in Q2. All the operations maintained double-digit growth rates and the benefits of operational leverage drove group margin expansion of 90bp • The Norwegian market is going through a difficult period, but the consolidation of Tele2 Norway and Network Norway can restore the market to equilibrium, in our view. • With Telenor’s announcement of a further 3% buyback, total cash return is expected to increase from NOK 8.7bn in calendar 2010 to NOK 10.3bn in calendar 2011. Net Debt/ EBITDA at 0.7x is well below the self-imposed 1.6x ceiling • Valuation: Telenor trades at a 2012E EV/EBITDA of 4.4x or 3.7x (stripping out India). Meanwhile, Telenor’s 3-year EBITDA CAGR is 6.4%, considerably better than the sector on -0.2%. Source: Nomura estimates 18

28. Conviction Buy: Deutsche Telekom, TP EUR 11.8 Excellent value stock with low austerity risk • DT screens as having low austerity risk and good dividend security. Competition appears stable in Germany with medium-term prospects for consolidation, in our view. • Domestic EBITDA performance remains stable in Germany with Q2 margin expansion of 140bp to reach 40.7%. This compares favourably against domestic EBITDA down 7% for FT and 11% for TEF. • DT seeks to de-risk the fibre project by agreeing access with regional and city authorities well ahead of time, pre-selling to test demand and being ready to co-invest with public partners. We believe DT’s stewardship of capital will prove reasonable as they seek to drive ROCE as their top priority. • Looking into the 2011E guidance our EBITDA forecast (ex USA) is broadly in line at c. EUR 14.9bn while we sit at 3% below the FCF guidance of at least EUR 6.5bn. • Our US team now holds a balanced view on whether the deal will progress. In our view, DT’s valuation discount remains attractive given its solid German core, management’s sensible focus on ROCE and valid option value for the US asset. 18

29. Conviction Buy: Swisscom, TP CHF 430 Strong domestic market support • Swisscom continues to remain one of our top defensive picks and the few beneficiaries from the sovereign fallout. Its defensiveness is supported not only by its dominant market positions but also by its exposure to a robust Swiss economy and a more affluent population less prone to discount offers. • The strong Swiss franc may have a negative impact on Fastweb’s contribution but we believe the positive FX impact on the cost base is far more substantial. We estimate 25% of its domestic cost base is denominated in foreign currency, the appreciation of the Swiss franc against the dollar and euro will likely bring material medium-term cost savings and support domestic profitability. • Swisscom’s average cost of debt is 3.5%, which compares with 5-6% for most incumbents. Swisscom also has a strong case for a lower cost of equity, in our view. Dividend security remains high and Swisscom’s bond-like status (5.7% yield) remains an advantage. • We believe Swisscom’s premium rating is justified because of domestic market dominance and impressive cost management in the relative context of a telecom sector under pressure. Source: Nomura estimates 18

30. Buy: KPN, TP EUR 12.3 Exposed to good market structures • We like the relatively benign nature of competition in the Dutch market where all three operators have recently rebalanced tariffs, effectively increasing prices for data. Without a disruptive operator in the market the consumer will find it harder to get around these price increases, and data cannibalisation impacts will be more limited. • Dutch fixed and broadband prices have been resilient for some time. Although KPN has been losing market share to cable, it has been able to defend broadband pricing levels and increase fixed call prices in 2010. • However, KPN is now less differentiated on cash returns, now focusing on preserving current shareholders’ equity and not returning cash beyond net income. • KPN trades at a 2012E EV/EBITDA of 4.8x, at a discount to its domestic-centric peers on 5.3x. We continue to support KPN for its cost flexibility and the market structures it is exposed to relative to its incumbent peers. Source: Nomura estimates 18

31. Neutral: VOD,TP GBP 215p European headwinds offset brighter AMAP outlook • After a 100bp decline to 1.5% organic growth in Q1, the CFO expects a further fall in growth in Q2 before H2 recovery. We advertise Italy as a market likely to slow owing to MTR cuts and tough comps, besides Spain and Turkey already highlighted by management. Enterprise mobile was the area of telecom spend most affected in the last economic slowdown. • Management has talked about challenges of transitioning mobile revenues into a flat-rate pricing structure. 45% of European revenues are usage driven from the consumer segment (18% contract, 27% prepay). VOD appears to be on top of managing this issue. • VOD is finally crystallising value from its US asset. VZW Board’s approval to pay USD 10bn (GBP 2.8bn VOD share) dividend in Jan. 2012 has led VOD to announce a special dividend of 4p per share. Although, there is no ongoing dividend policy at VZW yet, VZ needs an annual payment to fund its group dividend. We raised our FY12 dividend estimate to 13.5p (from 9.5p) and FY13 to 14.1p (10.2p previously) • Valuation: VOD trades at a 2012E EV/EBITDA of 4.9x vs. the sector on 4.7x and a 2011E dividend yield of 8.5% ( sector: 8.7%) Source: Nomura estimates 18

32. Neutral: France Telecom, TP EUR 15.6 Earnings stabilisation visibility remains weak • We do not expect the market to price in management’s target of stabilising domestic and group EBITDA in 2013 above the 2011 level. Although the regulatory drag will continue to ease in the domestic market, we believe the market will remain sceptical around stable profitability until it is clear that Iliad is unable to materially rebase mobile pricing. • Management’s policy on M&A appeared to focus on divestments over acquisition. FT has confirmed its intention to sell the Consumer business in Switzerland and to deliver a more than 50% proceeds to shareholders. Negotiations are ongoing to exit minority stakes in Austria and Portugal. • Q2 Organic revenue growth was broadly stable at -1.3%, but organic EBITDA growth was -5.9% (after -5.2% in Q1). This was in spite of exceptional factors (VAT issue, Ivory Coast & Egyptian crises) affecting Q1 negatively and FT trying to reduce commercial costs in Q2. • FT should appeal to those looking for yield in the near-term (EUR 1.40 targeted for 2011 and 2012. However, we expect investors will have to discount a dividend cut beyond 2012 – our forecast is for a cut to EUR 1.20 for 2013, an FCF pay-out of 60%. 18

33. Conviction Reduce: Telecom Italia, TP EUR 0.95 Waning consumer confidence may jeopardise recovery • TI’s fixed-line unit generates double the revenue of its mobile business and yet investors’ key source of concern remains mobile revenue growth. We believe fixed should soon become the overriding source of concern. • All things being equal, TI should be set for improving trends in H2. However, macro uncertainty in Italy may yet have a marked impact on consumer confidence in H2 and the prepaid nature of the Italian market means that soft demand will be directly reflected in its financials. • TI’s operations in both Brazil and Argentina continue to mitigate the domestic weakness. TIM Brazil continues to steadily win mobile market share with its strategy of selling cheap long-distance and on-net calls, unhampered by the risks of fixed substitution faced by its rival operators. Meanwhile, Telecom Argentina is benefiting from strong interest in mobile data. • Our rating is Reduce on the most leveraged incumbent in European telecoms. We feel a bullish stance can only be justified by a positive view on domestic mobile consolidation. We are not ready to anticipate a 3 Italia exit from the market, given 3 Group’s strong traction across Europe. Source: Nomura estimates 18

34. Conviction Reduce: Belgacom, TP EUR 23.50 High exposure to SMS cannibalisation • Belgacom generates 25% of its Consumer revenues from SMS, and we estimate that Belgium has among the highest level of overage revenue in Europe. We foresee material cannibalisation risk for revenues and EBITDA for the medium term. • Belgacom continues to achieve good adoption of its TV product, and the strategy of selling multiproduct ‘packs’ is progressing. However, it is difficult to identify any benefits in terms of customer stickiness. Line loss continues to fall at a steady rate; broadband additions remain limited; and Belgacom appears to be losing mobile share • Belgacom cited voice substitution to text as a reason for its lower revenue outlook in Q1. In Q2, normalised MOU growth was -1% (Q1 -2%) in the Consumer unit. However, the smartphone phenomenon has been slow to develop in the Belgian market and we expect voice substitution to increase in coming quarters. • Our rating is Reduce as we feel the Belgian mobile operators are likely to be heavily exposed to the loss of out-of-bundle revenues in the transition to a flat rate pricing model over time. Source: Nomura estimates 18

35. Conviction Reduce: TEF, TP EUR 16.5 Valuation premium to large cap peers not warranted given domestic headwinds • TEF Management does not expect a revenue turnaround in H2 and see maximum FY erosion of 200bp ( vs. 110bp in H1). After a weak Q2, we cut fwd EBITDA by 2% and EPS by 6-7%. • Organic growth was 0.4% in Q2, 100bp lower than Q1, split between the regions as -6.6% in Spain, -2% in Europe and +5.6% in LatAm. LatAm growth is materially boosted by inflation so TEF growth in real terms is now below sector average. • Its ‘value over volume’ strategy is helping to preserve cash flow, but TEF’s growth potential is being negatively affected. In the UK, TEF is now losing material market share. • TEF’s net debt and commitments / EBITDA multiple has reached 2.56x, despite intentions to be back below 2.5x by year-end. Its dividend pay-out screens at risk under our plausible dividend stress test. • Valuation: Telefonica trades at a 2012E EV/EBITDA of 5.3x, almost 20% higher over its large cap peers (4.5x average). Although its exposure to Brazil remains appealing, we believe the current valuation premium is overstating medium-term growth potential, given its domestic headwinds. Source: Nomura estimates 18

36. BT, Reduce, TP GBP 182p • BT has signalled a strategic shift to stimulate revenue growth, refocusing management incentives on growth and arguing for a return to top line growth in FY13. Growth remained weak in Q1 (-6% on reported basis, -3% on underlying basis). • We believe that growth will be difficult to achieve in three of the four targeted areas. Fibre may support some market share recovery, but ARPU uplift will be weak owing to low TV interest. Global Service recovery is looking unlikely in the context of an economic slowdown. And selling convergence products into a captive SME base is not likely to deliver material results under a weak economic climate. • Cost restructuring is losing its strategic focus and hence we see less scope for earnings upside. • A bear market in equities would materially increase BT’s pension deficit (which we currently value at c. 40% of BT’s market value). Market concerns over the deficit had faded, but we still feel the pension trustees will remain cautious and potentially shorten the period over which BT must close the funding shortfall. We do not expect a material decrease in the current funding (GBP 525m) and hence forecast no step-change in the dividend. • Valuation: BT trades at a 2012E EV/EBITDA of 4.4x and 13.4% FCFE yield. Investors have warmed to the prospect of a rising dividend, but it only yields 4.9% for 2011 on our estimates and we do not expect a material increase over the medium-term. Source: Nomura estimates 18

37. EPS momentum still negative; dividend stress tests signal risk to payouts APPENDIX: European mobile market revenue growth Source: Company data, Nomura estimates 27

38. EPS momentum still negative; dividend stress tests signal risk to payouts APPENDIX: European mobile market revenue growth (ex-regulation) Source: Company data, Nomura estimates 27

39. EPS momentum still negative; dividend stress tests signal risk to payouts APPENDIX: Mobile termination rates (absolute and absolute reduction) Source: Company and regulatory data, Nomura estimates 30

40. EPS momentum still negative; dividend stress tests signal risk to payouts APPENDIX: European fixed market revenue growth and EBITDA margins Source: Company data, Nomura research 31

41. EPS momentum still negative; dividend stress tests signal risk to payouts APPENDIX: Stock performance 2011 YTD Source: Bloomberg, Nomura research Note: Prices as of 23rd Sep close 35

42. Important Disclosures Analyst Certification I, James Britton, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.  Important Disclosures Conflict-of-interest disclosures Important disclosures may be accessed through the following website: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx . If you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877-865-5752) or email grpsupport-eu@nomura.com for assistance. Online availability of research and additional conflict-of-interest disclosures Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://go.nomuranow.com/research/globalresearchportal or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport-eu@nomura.com for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 41% of companies with this rating are investment banking clients of the Nomura Group*. 40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 14% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June 2011. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy',indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. 36

43. Important Disclosures (cont’d) Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. A 'Neutral' recommendation indicates that upside or downside is less than 10%. A 'Reduce' recommendation indicates that downside is between 10% and 20%. A 'Sell' recommendation indicates that downside is more than 20%.

44. Important Disclosures (cont’d) SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr ); Nomura Singapore Ltd. 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