Telecoms market consolidation: dream or reality?

1. Telecoms market consolidation:dream or reality? APSI DAY Chamber of Commerce • Olivier Lemaire • 28 November 2013

2. Telecoms share performance – last five yearsEurope underperforms other regions as dividend sustainability, macroeconomic concerns and structural pressures weigh down share prices • Telco perform best relative to other sectors when markets are suffering: • Strong cash flow and dividend yield underpins the investor view • European telcos underperformed in 2012 due to dividend cuts but investor view is recovering • Long-term structural challenges in terms of regulation, e.g., market structures, roaming/termination fees, spectrum licence lifetimes • Investor expectation of M&A has led to recovery of European telco stocks in H2 2013 Telecoms safe haven status under threat Global telco share performance by region¹ Investor sentiment varies by region Telco profitability and capital intensity by region 2013F² • Investor sentiment varies due to factors specific to certain regions: • High leverage seen as a key risk for European telcos, while number of competitors • Asia-Pacific and Middle East telcos viewed positively due to strong dividend payout ratios, balance sheets and margin development (%) 50 EBITDA margin 40 30 20 Capital intensity 10 0 Americas Europe Asia-Pacific EEMEA 1 Capital IQ, accessed October 2013. 2 Morgan Stanley “Global Telecom” 12th December 2012. M&A in telecommunications

3. Consolidation, diversification driving M&A worldwideOperators seeking in-market scale and growth in adjacent segments • Consolidation is driving more rational market structures in mobile, e.g., Germany, United States • Some players are engaged in footprint growth, i.e., Asian telcos in legacy and adjacent market services, Americas operators entering Europe • Some players are shedding non-core assets, typically in smaller markets Consolidation and footprint growth Global telco share performance by region¹ Cross-sector ambitions drive partnerships Top 5 announced deals in telecoms 9M 2013 • Operators are conscious of the risks associated with large-scale M&A: • Regulatory barriers to in-market deals • Political and regulatory uncertainties can undermine emerging market assets • Telcos are partnering with players in other industries, e.g., automotive, financial services Verizon/Verizon Wireless Stake increase Footprint growth/product scope expansion In-market consolidation Product scope expansion Product scope expansion Liberty Media/Virgin Media Telefonica Deutschland/E-Plus Vodafone/Kabel Deutschland DISH Network/Clearwire 1 ‘EY Research. US$m M&A in telecommunications

4. Consolidation has benefitted the US marketA history of mergers has positioned the market for growth • Cingular / AT&T Wireless (Feb 2004) • Cingular – the JV between SBC and BellSouth Corp – acquired AT&T Wireless for US$41bn • Created the US market leader, with a combined 46 million customers and spectrum in 49 states 2004 2005 2006 • AT&T Wireless / Dobson Comms (June 2007) • AT&T acquires Oklahoma’s Dobson Communications • Dobson’s network reaches 13 million customers in 17 states, expanding AT&T’s reach in rural areas • US mobile market characteristics • Historic consolidation has paved the way for higher capex-per-subscriber compared to Europe • Smartphones and LTE services introduced at a much earlier stage of penetration growth • US market has assumed leadership in the global LTE market – a turnaround from the 2G era when GSM and CDMA networks competed against each other • Leading US operators generate higher data as % service revenue compared to European peers 2007 2008 • Verizon / Alltel (June 2008) • Verizon agrees to acquire Alltel for US$28.1 billion, becoming the market leader in the process • Combined entity has 80 million subscribers, with increased coverage in Midwest and South 2009 2010 • T-Mobile / MetroPCS (October 2012) • Number four and five mobile providers announce a merger – with MetroPCS shareholders receiving US$1.5 billion in cash and a 26% stake in the new entity • Merger creates a stronger number four, especially in the prepaid market, with LTE spectrum in the same frequency band 2011 2012 2013 Sources: GSA, Informa (Regional data as of March 2013). M&A in telecommunications

5. A new wave of deals is finally underway in EuropeConsolidation and footprint growth are driving transactions as local and overseas players seek opportunities United Kingdom Germany • Vodafone / Kabel Deutschland • Vodafone acquired 76.6% of Kabel for US$10bn in 2013 • Vodafone adds 5m bb and 7.6m TV customers – positioned for quad-play • E300m annual cost synergies • Telefonica O2 / E-Plus • US$11.6bn merger of no.3 and no.4 mobile operators • Creates player with 38% market share, 43m customers , €8bn revenue • Still to be approved by regulators • Market structure • Mobile: 3 MNOs following Telefonica/E-Plus deal • Fixed-line and cable: Cable market still highly fragmented although super-fast broadband household coverage is high (61%) • Liberty / Virgin Media • Liberty acquired Virgin Media for US$24bn • Following the deal, Liberty has 25m customers taking 47 services in 14 countries • Market structure • Mobile: 4 MNOs • Fixed-line and cable: Cable consolidated by 2006. Vodafone acquired Cable & Wireless Worldwide in 2012 for £1bn • Future deal-makers? • Overseas players such as America Movil, AT&T and Hutchison Whampoa – attracted by low valuations and, in some cases, eager to diversify to offset home market competition e.g. Mexico Telecoms reform • Existing players such as Vodafone, Telefonica – either to take advantage of the consolidation story or to sell off non-core assets to reduce debt (e.g. Telefonica) • Disruptive players – Ambitious TMT giants that can create a unique service proposition. Google had been building privately-backed fibre in the US (Kansas City, Provo, Austin) Ireland • 3 Ireland / O2 Ireland • Hutchison Whampoa’s Irish subsidiary acquires O2 Ireland for €780m in 2013 • 3 Ireland has 37.5% market share and 2m active users • Market structure • Mobile: 3 MNOs following 3 / 02 deal • Fixed-line and cable: Four players including incumbent Eircom. Vodafone acquired BT’s residential customers in 2009. Abortive takeover of Eircom by Hutchison Whampoa in 2012 M&A in telecommunications

6. Spectrum needs are an important M&A driver worldwideLTE is already available in most regions but spectrum is a scarce resource • Telus acquires Public Mobile • Telus acquires 100% of Public Mobile in October 2013 • Telus will leverage Public Mobile’s PCS G block spectrum – which is not subject to transfer restrictions • Tele2/RosTelecom merger • Talks are ongoing over a merger and possible network spin-off • Tele2 lacks 3G and LTE spectrum • AT&T acquires Leap Wireless • AT&T acquired Leap for US$15 per share in cash in July 2013 • AT&T will leverage Leap’s unused spectrum – which covers 41m people – for its own LTE deployment • Axiata acquires Axis • Malaysia’s Axiata acquires 95% of Axis in September 2013 • Provides additional spectrum capacity to Axiata to improve network quality and improve asset utilization • LTE key success factors • Harmonized, sub 1GHz spectrum • Further network rationalization (e.g., Tower sharing) • Compatible, appealing devices • Bharti/Loop Mobile in talks • Indian mobile market leader Bharti in talks to acquire Mumbai-based Loop Mobile • Loop seeking extension to its licence in the 900 MHz band, which is well suited to in-building coverage • Vodacom acquires Neotel • Vodacom announces it is in talks to acquire number two fixed-line player Neotel • Aside from a fiber network and enterprise service capability, Neotel also holds attractive 800 MHz spectrum, which would boost LTE rollout Commercial LTE available LTE network deployment planned and underway LTE trial systems underway Sources: GSA, Informa (Regional data as of March 2013). M&A in telecommunications

7. Comments from the C-suite on M&A, partnering and investment “If you don’t have in-market consolidation, if you don’t look at the EU as one big market, then we will always lag behind the US.” CEO Portugal Telecom, May 2013 “Consolidation can be a by-product of a single market, but there are many other factors also in the game” EU Telecoms Commissioner, May 2013 “I just find Europe fascinating right now” CEO AT&T, May 2013 • Multiple considerations for management “We are rapidly expanding our capabilities to provide cloud and telecommunications solutions worldwide and the deal with RagingWire is critical to increasing our overall capacity” CEO NTT, November 2013 “As technology evolves and our demography changes our hospitals, medical centres, pharmacies and health professionals will need better ways of serving patients and we are looking to play a part in enabling this“ Head of Health, Telstra, August 2013 The need for consolidation Moving into adjacent market segments Attitudes to partnering Differentiation through network investment • “Co-operating makes sense to safeguard effective capacity utilisation and to push the broadband rollout” • CEO Deutsche Telekom, March 2012 • “When creating a new market with multiple players, competitive forces make it difficult to gain consensus” • CEO EE, July 2013 • “1GB broadband era requires partnership with verticals” • CEO KPN, October 2013 • ‘Now is the time for Vodafone to step up its (network) investment and move ahead of the pack. We expect the number of people using video on their smartphones to double over the next three years”. • CEO Vodafone, September 2013 • “We’re strengthening our position as the leading network provider for our customers. No other telecommunications company invests as much as Deutsche Telekom“ • CEO Deutsche Telekom, September 2013 M&A in telecommunications

8. Operator strategies for M&A and partnerships M&A and partnership strategies • Reviewing core competencies as a precursor to acquisitions and divestments • Acquisitions and divestments help play a vital role in helping operators strategically reposition themselves – deciding what are core and non-core activities is vital • Operators also should consider how acquisitions can bring immediate benefits in terms of credibility in new market segments • Providing clarity on the benefits of consolidation • Operators need to take steps to outline the benefits of consolidation scenarios — in terms of improved customer experience and rational market structures • Operators should consider a range of alternatives, from network-sharing joint ventures to synergy-centric partnerships • Striking more productive partnerships with players from other industry sectors • Operators should view partnerships as more aggressive vehicles to support growth. This involves highlighting the benefits to each partner up-front, while regularly revisiting strategic aims, medium-term targets and governance structures M&A in telecommunications

9. THANK YOU M&A in telecommunications