Global Telecommunications

Global Telecommunications

Ben Asuncion Murtaza DhananiOlga Ryabchinskaya Ali Shahkarami

Ben Asuncion Murtaza DhananiOlga Ryabchinskaya Ali Shahkarami

Presented by:

OVERVIEWOVERVIEW

Introduction to the Telecommunications Industry

Manitoba Telecom

British Telecom

Sprint-Nextel

Summary

Introduction to the Telecommunications Industry

Manitoba Telecom

British Telecom

Sprint-Nextel

Summary

Telecommunications History

Telecommunications History

Early History 1792 1838 1839 1866 1876 1878 1901

Transatlantic Telegraph Cable

Morse & VailTelegraph RegisterSmoke &

Drums

Claude ChappeFixed Telegraphy

Bell Conventional

Telephone

Wheatstone & Cooke

Electrical Telegraph

Commercial Telephone

MarconiTransatlantic Wireless

Communication

Prior to modern communicationsPrior to modern communications

Telecom MonopoliesTelecom Monopolies

Alexander Graham Bell patented the telephone on March 7, 1876

Once the Bell patents expired in 1894, thousands of competitors began wiring the nation

By 1907, Bell rivals controlled 51 percent of local service

In response to the burgeoning competition, American Telephone and Telegraph (AT&T) began buying up rivals

Alexander Graham Bell patented the telephone on March 7, 1876

Once the Bell patents expired in 1894, thousands of competitors began wiring the nation

By 1907, Bell rivals controlled 51 percent of local service

In response to the burgeoning competition, American Telephone and Telegraph (AT&T) began buying up rivals

AT&TAT&T

Formation of government regulated “natural monopoly” “One Policy, One System, Universal Service” Gov’t raised barriers to entry The more difficult it was to launch competitive

service, the more secure was the company’s market share

“Competition resulted in duplication of investment,” and that states were justified in denying requests by rivals to deploy new lines

Firms that enjoy government protection from competition, and for whom rates of return are guaranteed through regulation, face less financial pressure to innovate or operate efficiently

Formation of government regulated “natural monopoly” “One Policy, One System, Universal Service” Gov’t raised barriers to entry The more difficult it was to launch competitive

service, the more secure was the company’s market share

“Competition resulted in duplication of investment,” and that states were justified in denying requests by rivals to deploy new lines

Firms that enjoy government protection from competition, and for whom rates of return are guaranteed through regulation, face less financial pressure to innovate or operate efficiently

AT&TAT&T

1970: FCC allows competition into the long distance services Local service was still protected

Mid 1970: US Justice Department files antitrust lawsuit based on complaints by MCA & other long distance service providers

1982: AT&T settled with government requiring them to divest their local operating companies, and restrict its services to the long distance market Formation of the “Baby Bells”

1970: FCC allows competition into the long distance services Local service was still protected

Mid 1970: US Justice Department files antitrust lawsuit based on complaints by MCA & other long distance service providers

1982: AT&T settled with government requiring them to divest their local operating companies, and restrict its services to the long distance market Formation of the “Baby Bells”

AT&TAT&T

“Baby Bells”Allowed to keep local servicesSBC, Verizon, BellSouth and Qwest

“Baby Bells”Allowed to keep local servicesSBC, Verizon, BellSouth and Qwest

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$.20/min

US Telecom StatisticsUS Telecom Statistics

Canadian Telecom Statistics

Canadian Telecom Statistics

Telecommunications History

Telecommunications History

Key Telecom Metrics

Current Telecommunications Industry

Wired Telecommunications Carriers

Wireless Telecommunications Carriers

Cable and other Program Distribution

Key Telecom Metrics

Current Telecommunications Industry

Wired Telecommunications Carriers

Wireless Telecommunications Carriers

Cable and other Program Distribution

Telecom MetricsTelecom Metrics EBITDA Margin

EBITDA / Total Revenue Churn Rate (1 - Retention Rate)

Proportion of contractual customers or subscribers who leave a carrier during a given time period

Reduced by creating barriers to exit Contracts Proprietary technology Loyalty programs

ARPU Avg Revenue Per Unit OR Avg Revenue per User Includes revenues billed to each customer for usage Also includes revenue generated from incoming calls

ARMU Average Margin per User Alternative to ARPU, which focuses narrowly on revenue per

unit Margin is based on profitability of customers

EBITDA Margin EBITDA / Total Revenue

Churn Rate (1 - Retention Rate) Proportion of contractual customers or subscribers who

leave a carrier during a given time period Reduced by creating barriers to exit

Contracts Proprietary technology Loyalty programs

ARPU Avg Revenue Per Unit OR Avg Revenue per User Includes revenues billed to each customer for usage Also includes revenue generated from incoming calls

ARMU Average Margin per User Alternative to ARPU, which focuses narrowly on revenue per

unit Margin is based on profitability of customers

Wired Telecommunications

Wired Telecommunications

Oldest & once largest sector of industry

Wires & Cables connecting to central offices maintained

Oldest & once largest sector of industry

Wires & Cables connecting to central offices maintained

All transmissions routed through switching equipment

All transmissions routed through switching equipment

Wired Telecommunications

Wired Telecommunications

Traditionally, voice used to be main type of data transmitted over wires

Now include transmission of all types of graphic, video, and electronic dataMainly transmitted over internetEfficiencies through technology

Traditionally, voice used to be main type of data transmitted over wires

Now include transmission of all types of graphic, video, and electronic dataMainly transmitted over internetEfficiencies through technology

Wired Telecommunications

Wired Telecommunications

Packet Switching NetworksPacket Switching Networks

Traditional One-Path Switching

Traditional One-Path Switching

Wired Telecommunications

Wired Telecommunications

Voice requires small capacity compared to data, video, and graphics

BandwidthFrequency band: specific range of

frequencies in the radio frequency spectrum (RF)

Voice signal = 3 kHzAnalog TV signal = 6 MHz (2000x as wide)

Channel Capacity: amount of discrete info reliably transmitted over a channel

Voice requires small capacity compared to data, video, and graphics

BandwidthFrequency band: specific range of

frequencies in the radio frequency spectrum (RF)

Voice signal = 3 kHzAnalog TV signal = 6 MHz (2000x as wide)

Channel Capacity: amount of discrete info reliably transmitted over a channel

Wired Telecommunications

Wired Telecommunications

Improvements from Telecom Co’sReplacing copper wires with fibre opticAllows for 25 times more data than cableAllowing for transmission of new services

Cable TV, Video-on-Demand, High-speed internet, and telephone

Mostly, carrier’s leverage existing copper lines to provide DSL

Lower transmission capacity & speedLess capital expenditures

Improvements from Telecom Co’sReplacing copper wires with fibre opticAllows for 25 times more data than cableAllowing for transmission of new services

Cable TV, Video-on-Demand, High-speed internet, and telephone

Mostly, carrier’s leverage existing copper lines to provide DSL

Lower transmission capacity & speedLess capital expenditures

Global Telephone CallsGlobal Telephone Calls

Wired Telecommunications

Wired Telecommunications

Wireline CapEx$Wireline CapEx$

Wireless Telecommunications

Wireless Telecommunications

Transmit voice, graphics, data, and internet access through the transmission of signals over networks of radio towersSignal is transmitted through an

antenna into the wireline networkNew technologies allow them to

compete with wireline

Transmit voice, graphics, data, and internet access through the transmission of signals over networks of radio towersSignal is transmitted through an

antenna into the wireline networkNew technologies allow them to

compete with wireline

How it worksHow it works

Wireless Telecommunications

Wireless Telecommunications

Generations of Wireless Access0G – mobile radio telephone systems

that preceded modern cellular mobile technology

1G – Analog cellphone standards that were introduced in the 1980’s

2G – PCS – second-generation wirelessDifference: radio signals are digital VS

analogMore efficient and greater receptionIntermediate advancements: 2.5G, 2.75G

Generations of Wireless Access0G – mobile radio telephone systems

that preceded modern cellular mobile technology

1G – Analog cellphone standards that were introduced in the 1980’s

2G – PCS – second-generation wirelessDifference: radio signals are digital VS

analogMore efficient and greater receptionIntermediate advancements: 2.5G, 2.75G

Wireless Telecommunications

Wireless Telecommunications

3G – Third GenerationAbility to transfer simultaneously both

voice and non-voice dataMomentous capacity and broadband

capabilities to support greater numbers of voice and data customers & higher data rates at lower incremental cost than 2G

Radio spectrum bands are subsequently licensed to operators (5MHz channel)

Greater capacity and improved spectrum efficiency

3G – Third GenerationAbility to transfer simultaneously both

voice and non-voice dataMomentous capacity and broadband

capabilities to support greater numbers of voice and data customers & higher data rates at lower incremental cost than 2G

Radio spectrum bands are subsequently licensed to operators (5MHz channel)

Greater capacity and improved spectrum efficiency

Canada ~ License CostsCanada ~ License Costs

US ~ License CostsUS ~ License Costs

License term usually 15 years

One of 8 similar auctions conducted

License term usually 15 years

One of 8 similar auctions conducted

Wireless Telecommunications

Wireless Telecommunications

High input fees for the 3G service licenses Great differences in the licensing terms Current high debt of many telecommunication

companies, making it more of a challenge to build the necessary infrastructure for 3G

Health aspects of the effects of electromagnetic waves

Lack of 2G mobile user buy-in for 3G wireless service

High prices of 3G mobile services in some countries, including Internet access

High input fees for the 3G service licenses Great differences in the licensing terms Current high debt of many telecommunication

companies, making it more of a challenge to build the necessary infrastructure for 3G

Health aspects of the effects of electromagnetic waves

Lack of 2G mobile user buy-in for 3G wireless service

High prices of 3G mobile services in some countries, including Internet access

Wireless Telecommunications

Wireless Telecommunications

4G – Fourth Generation Spectrally efficient system High network capacity (at least 10 times greater

than 3G) Nominal data rate at high speeds (100 Mbps at

stationary conditions and 20 Mbps at 100 miles/hr)

Smooth handoff across heterogeneous network Seamless connectivity and global roaming across

multiple networks High quality of service for next generation

multimedia support (real time audio, high speed data, HDTV video content, mobile TV, etc)

Interoperable with the existing wireless standards All IP system, packet switched network

4G – Fourth Generation Spectrally efficient system High network capacity (at least 10 times greater

than 3G) Nominal data rate at high speeds (100 Mbps at

stationary conditions and 20 Mbps at 100 miles/hr)

Smooth handoff across heterogeneous network Seamless connectivity and global roaming across

multiple networks High quality of service for next generation

multimedia support (real time audio, high speed data, HDTV video content, mobile TV, etc)

Interoperable with the existing wireless standards All IP system, packet switched network

Wireless Telecommunications

Wireless Telecommunications

$4.6$5.4 $6.0

$7.2$8.1

$9.5

$53.9$51.0

$47.4

$53.8 $55.7$59.3

-

2.0

4.0

6.0

8.0

10.0

12.0

1999 2000 2001 2002 2003 2004

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Wireless Service Revenue ARPU

Wireless Service Revenues & ARPU1999 - 2004Revenue

$ Billions

Source: CRTC data collection

ARPU ($)

International Wireless Investment

International Wireless Investment

Where is the industry now?

Where is the industry now?

Product MixProduct Mix

ProfitabilityProfitability

Capital ExpendituresCapital Expenditures

Cable & Other Service Providers

Cable & Other Service Providers

Provide television & other services Generate revenue through subscriptions &

service fees Primarily installation & advertising sales Charge a fee for services

Transmission of programming Cable Systems: fiber optic & coaxial cables Direct Broadcasting Satellite (DBS)

Orbiting satellites to customers’ receivers (mini-dishes)

Voice over IP Using existing networks to infiltrate the telecom

industry

Provide television & other services Generate revenue through subscriptions &

service fees Primarily installation & advertising sales Charge a fee for services

Transmission of programming Cable Systems: fiber optic & coaxial cables Direct Broadcasting Satellite (DBS)

Orbiting satellites to customers’ receivers (mini-dishes)

Voice over IP Using existing networks to infiltrate the telecom

industry

Third largest national provider in Canada

MTS AllStreamMTS AllStream

Table of contentsCurrent Financial PositionCompany History and OverviewCompany AnalysisFinancial AnalysisForecasting and Recommendations

Table of contentsCurrent Financial PositionCompany History and OverviewCompany AnalysisFinancial AnalysisForecasting and Recommendations

Current Market Position10/28/06

Current Market Position10/28/06

Industry: Telecom Ticker Symbol: MBT-T Share Price: 43.15 P/E: 29.80 EPS: 1.45 Dividend: 2.6 (Yield, 5.66%) Shares Outstanding: 68,098,707 Dividend payout expected: $175 million (2006)

Industry: Telecom Ticker Symbol: MBT-T Share Price: 43.15 P/E: 29.80 EPS: 1.45 Dividend: 2.6 (Yield, 5.66%) Shares Outstanding: 68,098,707 Dividend payout expected: $175 million (2006)

Return on MTS compared to TSXReturn on MTS compared to TSX

Share Performance This graph compares the cumulative total return on MTS’s Common Shares over the last nine years with the cumulative total return of the S&P/TSX Composite Index, assuming a $100 investment at

the initial offering price of $13.00 and reinvestment of dividends.

Share Performance This graph compares the cumulative total return on MTS’s Common Shares over the last nine years with the cumulative total return of the S&P/TSX Composite Index, assuming a $100 investment at

the initial offering price of $13.00 and reinvestment of dividends.

MTS Allstream Focused MarketsMTS Allstream Focused Markets

MTS offers a full suite of wireline voice, high-speed Internet and data, next generation wireless, directory, digital television, security and alarm monitoring services.

History on MTZHistory on MTZ

Manitoba Telecom Services Inc. (MTS) was founded by the Manitoba government in 1908.

In 1996 Manitoba was privatized.

In January 1999 MTS partnered with Bell Canada to form Intrigna, which was a company created to expand telecommunications options for the business market in Alberta and British Columbia.

In August 1999 MTS completed work on a new trunked (digital) radio system known as FleetNet 800 , technology licensed from neighboring Sasktel

2000 Initiated broadband service in Manitoba

In 2004, MTS acquired Allstream (formerly AT&T Canada) for $1.7 billion and merged both companies. This acquisition made MTS the third largest national telecom in Canada. MTS also ended its strategic alliance with bell in 2004

Manitoba Telecom Services Inc. (MTS) was founded by the Manitoba government in 1908.

In 1996 Manitoba was privatized.

In January 1999 MTS partnered with Bell Canada to form Intrigna, which was a company created to expand telecommunications options for the business market in Alberta and British Columbia.

In August 1999 MTS completed work on a new trunked (digital) radio system known as FleetNet 800 , technology licensed from neighboring Sasktel

2000 Initiated broadband service in Manitoba

In 2004, MTS acquired Allstream (formerly AT&T Canada) for $1.7 billion and merged both companies. This acquisition made MTS the third largest national telecom in Canada. MTS also ended its strategic alliance with bell in 2004

History Cont.History Cont.

July, 2005 MTS Allstream acquired Delphi Solutions Corp by purchasing its outstanding shares for $15 million in cash. The acquisition was an important step in positioning the company to take advantage of the migration of customer networks to converged

Internet Protocol (“IP”) technologies.

Dec 7th, 2005 former BCE executive Pierre Blouin was named new Chief Executive Officer of Manitoba Telecom Services Inc. and MTS Allstream Inc, replace longtime CEO Bill Fraser.

September 12, 2006 MTS Allstream acquires Valley Cable Vision (local cable company serving 3700 cable customers)

October 02, 2006 MTS Allstream announces Voluntary Reduction Program for Manitoba Employees. Part of TP2.

July, 2005 MTS Allstream acquired Delphi Solutions Corp by purchasing its outstanding shares for $15 million in cash. The acquisition was an important step in positioning the company to take advantage of the migration of customer networks to converged

Internet Protocol (“IP”) technologies.

Dec 7th, 2005 former BCE executive Pierre Blouin was named new Chief Executive Officer of Manitoba Telecom Services Inc. and MTS Allstream Inc, replace longtime CEO Bill Fraser.

September 12, 2006 MTS Allstream acquires Valley Cable Vision (local cable company serving 3700 cable customers)

October 02, 2006 MTS Allstream announces Voluntary Reduction Program for Manitoba Employees. Part of TP2.

Key IndividualsKey IndividualsPierre Blouin CEO 2005~ a seasoned telecommunications executive, who spent 20 years + at BCE Inc.2003 - 2005 Group President, Consumer Markets, Bell Canada. Responsible for all of Bell’s consumer products –nearly $10 billion in business annually. 2002 - 2003: CEO of BCE Emergis2000 - 2002: CEO of Bell Mobility

Kelvin A. Shepherd. President, MTS (Manitoba) 2006~CTO of MTS 2000 ~ 200520 years with Saskatchewan Telecom.

Key Individuals cont.Key Individuals cont.

Thomas E. Stefanson Current Positions:Manitoba Telecom Services Inc., chr. & dir.Associations:Fellow of the Institute of Chartered Accountants - F.C.A. Officer since 1989.

Wayne S. Demkey, CA Executive Vice President, Finance & CFO;

Joined MTS in 1996 1996.11 years as senior manager at KPMG

Company AnalysisCompany Analysis

Manitoba network coverage across Canada.

Manitoba network coverage across Canada.

Manitoba network coverage in Canada runs across majority of the country, with services in several fields

Operating Revenue 2001-2005Operating Revenue 2001-2005

0

500

1000

1500

2000

2500

2001 2002 2003 2004 2005

Revenue inMillions

Revenue Breakdown per Segment 2001-2005

Revenue Breakdown per Segment 2001-2005

0

100

200

300

400

500

600

700

2001 2002 2003 2004 2005

Data Revenues

Local VoiceRevenues

Long DistanceRevenues

WirelessRevenues

% change in revenue % change in revenue

Customer Growth Customer Growth

Enterprise Solution Customer base

Enterprise Solution Customer base

MTS Consumer and B2B solutions

MTS Consumer and B2B solutions

Consumer: MTS provides several services for its consumer based market. The major accountability for future growth in the consumer brand is from wireless services, IP-based data connectivity, high-speed internet and digital television.

B2B: Operating under the Allstream brand, Enterprise Solutions division is a strong national competitor in the Canadian telecommunications market. This division has a solid track record of developing innovative solutions that help mid-sized and large businesses compete more effectively.

Consumer: MTS provides several services for its consumer based market. The major accountability for future growth in the consumer brand is from wireless services, IP-based data connectivity, high-speed internet and digital television.

B2B: Operating under the Allstream brand, Enterprise Solutions division is a strong national competitor in the Canadian telecommunications market. This division has a solid track record of developing innovative solutions that help mid-sized and large businesses compete more effectively.

Consumer Market DivisionConsumer Market Division

MTS’s Consumer Markets division, is one of Canada’s strongest communications franchises.

During 2005, there was overall growth from its operations, with particularly strong performance from wireless, Internet and digital television services.

In total revenues from these growth services grew by 18% in 2005. Wireline telephony business faced competition from the long-anticipated entry of the cable companies in this market.

MTS’s Consumer Markets division, is one of Canada’s strongest communications franchises.

During 2005, there was overall growth from its operations, with particularly strong performance from wireless, Internet and digital television services.

In total revenues from these growth services grew by 18% in 2005. Wireline telephony business faced competition from the long-anticipated entry of the cable companies in this market.

Future Goals to Increase Profitability

Future Goals to Increase Profitability

In the fourth quarter of 2005, MTS launched its Transition Phase II – a two-year, $100 million cost reduction (now raised to 120 million) initiative designed to align its cost structure to the new market realities, and increase profitability. MTS has already achieved $30 million in annualized expense savings as at January 31, 2006. On 30th Sept they had reached $78 million of these savings.

On February 28, 2006, MTS announced the implementation of a new management structure that will help the team become a more cohesive organization, move closer to cost savings target, and drive more profitable growth in the marketplace.

In the fourth quarter of 2005, MTS launched its Transition Phase II – a two-year, $100 million cost reduction (now raised to 120 million) initiative designed to align its cost structure to the new market realities, and increase profitability. MTS has already achieved $30 million in annualized expense savings as at January 31, 2006. On 30th Sept they had reached $78 million of these savings.

On February 28, 2006, MTS announced the implementation of a new management structure that will help the team become a more cohesive organization, move closer to cost savings target, and drive more profitable growth in the marketplace.

EPS trend for the last 5 years

EPS trend for the last 5 years

The Sharp incline in EPS from 03 to 04 was due to the acquisition of Allstream

MTS EPS AnalysisMTS EPS Analysis

For the twelve months ended December 31, 2005, EPS from continuing operations climbed to $2.74, which is up by 10.9% or $0.27 from 2004. This increase is primarily attributable to the consolidation of Allstream’s financial results beginning June 4, 2004, together with growth in our Manitoba division and synergies realized.

EBITDA for the 5 year period ended 2005

EBITDA for the 5 year period ended 2005

Restructuring costsRestructuring costs

Reason for sharp increase in restructuring cost.

Reason for sharp increase in restructuring cost.

• Total predicted acquisition of Allstream would be approximately $90 million.

• These expenses included severance and other employee-related costs, as well as costs to consolidate facilities, systems and operations.

• This amount includes (i) costs of $24.0 million that were incurred and included in the accounting for the acquisition of Allstream; (ii) $23.0 million that was expensed and $23.0 million that was capitalized for restructuring and integration costs incurred in 2004 and 2005; and (iii) $19.7 million restructuring and integration costs that were recorded as a liability as part of the purchase price allocation.

CompetitionCompetition

Stock Price AnalysisMBT Vs Telus.

Stock Price AnalysisMBT Vs Telus.

MBT vs BCEMBT vs BCE

Information for 2006Information for 2006

Third Quarter dividend : $0.65 FCF increase: 24.1% ($191.8 million) Cost reduction under TP2: $70 million Revenue increase due to Growth: (15%) $44 million Data Connectivity Revenue Increase: 58.9% Wireless Revenue Increase: 12.9% Increase in Cellular Customers: 11.6% Digital Television Customer Increase: 36.8% High-Speed Internet Customer Increase: 18.2% No Tax expense until 2014, due to Purchase of

Allstream

Third Quarter dividend : $0.65 FCF increase: 24.1% ($191.8 million) Cost reduction under TP2: $70 million Revenue increase due to Growth: (15%) $44 million Data Connectivity Revenue Increase: 58.9% Wireless Revenue Increase: 12.9% Increase in Cellular Customers: 11.6% Digital Television Customer Increase: 36.8% High-Speed Internet Customer Increase: 18.2% No Tax expense until 2014, due to Purchase of

Allstream

Expected Financials for 2006

Expected Financials for 2006

MTS Allstream Income Trust?MTS Allstream Income Trust?

In evaluating a possible conversion to an income trust, management and the Board of Directors carried out an extensive review.

An analysis of MTS's current and future cash flows and requirements to sustain the Company was carried out. In addition to ongoing operations expenses included in EBITDA, MTS also incurs additional significant cash costs.

These include capital expenditures, interest expense, deferred charges and net funding of the MTS pension plan.

The Board believes long-term shareholder value can best be achieved by continuing to follow MTS's proven strategies for delivering value to shareholders. (2004)

In evaluating a possible conversion to an income trust, management and the Board of Directors carried out an extensive review.

An analysis of MTS's current and future cash flows and requirements to sustain the Company was carried out. In addition to ongoing operations expenses included in EBITDA, MTS also incurs additional significant cash costs.

These include capital expenditures, interest expense, deferred charges and net funding of the MTS pension plan.

The Board believes long-term shareholder value can best be achieved by continuing to follow MTS's proven strategies for delivering value to shareholders. (2004)

MTS Take over?MTS Take over?

With recent announcements regarding no tax protection for income trusts. MTS is becoming an attractive target to take over.

RBC Capital Markets analyst Jonathan Allen increased his price target from $50 to $54 on speculation the company would be a takeover target.

"We believe MTS's tax losses of $2.7 billion including depreciation have become more much attractive and there is a high probability of MTS being acquired over the next year in our view," Allen wrote in a note to clients.

In the absence of a take over bid Manitoba Tel shares are valued at $46 per share as a going concern.

With recent announcements regarding no tax protection for income trusts. MTS is becoming an attractive target to take over.

RBC Capital Markets analyst Jonathan Allen increased his price target from $50 to $54 on speculation the company would be a takeover target.

"We believe MTS's tax losses of $2.7 billion including depreciation have become more much attractive and there is a high probability of MTS being acquired over the next year in our view," Allen wrote in a note to clients.

In the absence of a take over bid Manitoba Tel shares are valued at $46 per share as a going concern.

Fisher’s Valuation Approach

Fisher’s Valuation Approach

Criteria Details

Superiority in Financial skills, Production, Marketing, Research

-Clear strongly positioned Annual Reports-CapEx, Asset Impairment costs: Fairly High-R&D: Moderate to High

People Factor -Management: Knowledgeable in the field, top management with plenty of experience. And history of long term presence within a company.

Investment Characteristics -Good Market position-Wireless Growth, Data tech growth, cable tv growth

P/E Ratio P/E  29.8

Stock Price over 9 yearsStock Price over 9 years

RecommendationRecommendation

Speculative Buy

Speculative Buy

British TelecomBritish Telecom

Company SnapshotCompany Snapshot

BT Group plc is a public limited company registered in England and Wales and listed on the London stock Exchange and NYSE

Price US$ 54.380 P/E  15.70Dividend & Yield: 2.83 (5.30%) Current Number of shares held

(millions) 8,876Full Time Employees: 104,400

BT Group plc is a public limited company registered in England and Wales and listed on the London stock Exchange and NYSE

Price US$ 54.380 P/E  15.70Dividend & Yield: 2.83 (5.30%) Current Number of shares held

(millions) 8,876Full Time Employees: 104,400

SharesShares

6,642 6,5927,406 7,383

8,377 8,668 8,676 8,581 8,422

1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Weighted Average Number of Shares

BTBT

BT vs. FTSE350BT vs. FTSE350

BT vs. DOW BT vs. DOW

Average Revenue per Customer

Average Revenue per Customer

265

271

265

254251

240

245

250

255

260

265

270

275

2002 2003 2004 2005 2006

265

271

265

254251

240

245

250

255

260

265

270

275

2002 2003 2004 2005 2006

BT HistoryBT History 1981- Formation of British Telecom 1982- End of BT’s monopoly w/grant of a license to

Mercury Communications 1984- Privatization 1990’s joint venture with “ Electricity Supply Board” 1991- trading name Change to 'BT' 1991- The remaining state holdings in the company

were sold 1994- Joint venture with MCI: “Concert Communication

Services”

2001- demerger 2005- BT acquired El Segundo, California-based

telecoms giant Infonet 2005- Openreach segment was opened 2006- BT acquired online electrical retailer Dabs.com

1981- Formation of British Telecom 1982- End of BT’s monopoly w/grant of a license to

Mercury Communications 1984- Privatization 1990’s joint venture with “ Electricity Supply Board” 1991- trading name Change to 'BT' 1991- The remaining state holdings in the company

were sold 1994- Joint venture with MCI: “Concert Communication

Services”

2001- demerger 2005- BT acquired El Segundo, California-based

telecoms giant Infonet 2005- Openreach segment was opened 2006- BT acquired online electrical retailer Dabs.com

GovernanceGovernance

ChairmanSir Christopher Bland Member of the Prime Minister's Advisory Panel on the

Citizen's Charter 1996-2001 chairman of the BBC Board of Governors 1982-1994 chairman of the Hammersmith and Queen

Charlotte's Hospitals 1995-1996 chairman of the Private Finance Panel 1977-1985 chairman of printers and publishers Sir Joseph

Causton & Sons 1972-1979 deputy chairman of the Independent

Broadcasting Authority and chairman of its Complaints Review Board

ChairmanSir Christopher Bland Member of the Prime Minister's Advisory Panel on the

Citizen's Charter 1996-2001 chairman of the BBC Board of Governors 1982-1994 chairman of the Hammersmith and Queen

Charlotte's Hospitals 1995-1996 chairman of the Private Finance Panel 1977-1985 chairman of printers and publishers Sir Joseph

Causton & Sons 1972-1979 deputy chairman of the Independent

Broadcasting Authority and chairman of its Complaints Review Board

GovernanceGovernance

CEO Ben Verwaayen Since joining BT Group 1997, he had been with Lucent

Technologies Inc ( his position on leaving was was vice chairman of the management board, he previously was executive vice-president )

Prior to joining Lucent, Ben worked for KPN in the Netherlands for nine years as president and managing director of its subsidiary PTT Telecom

Education: Master's degree in law and international politics from the State University of Utrecht, Holland.

CEO Ben Verwaayen Since joining BT Group 1997, he had been with Lucent

Technologies Inc ( his position on leaving was was vice chairman of the management board, he previously was executive vice-president )

Prior to joining Lucent, Ben worked for KPN in the Netherlands for nine years as president and managing director of its subsidiary PTT Telecom

Education: Master's degree in law and international politics from the State University of Utrecht, Holland.

GovernanceGovernance

CFO Hanif Lalani Since joining BT in 1983, he has held a variety of roles in the BT’s UK and international divisions:

1998, finance director BT Northern Ireland 1999, was appointed chief executive of BT Northern Ireland 1999-2000, chairman of OCEAN Communications (BT's subsidiary

in the Republic of Ireland) 2002, was appointed managing director BT Regions. 2002, Hanif returned to London as chief finance officer for BT

Wholesale

Education: BA Honours degree in mathematics, operations, research and economics from Essex University.

CFO Hanif Lalani Since joining BT in 1983, he has held a variety of roles in the BT’s UK and international divisions:

1998, finance director BT Northern Ireland 1999, was appointed chief executive of BT Northern Ireland 1999-2000, chairman of OCEAN Communications (BT's subsidiary

in the Republic of Ireland) 2002, was appointed managing director BT Regions. 2002, Hanif returned to London as chief finance officer for BT

Wholesale

Education: BA Honours degree in mathematics, operations, research and economics from Essex University.

Market Position & PowerMarket Position & Power

1984’s the Telecommunications Act

1984-1900 only BT and Mercury were licensed to provide fixed line telecom networks in the UK.

1990s, new national Public Telecommunications companies entered the market.

BT’s operations regulated by British telecoms operator Ofcom (imposing obligations such as meeting reasonable requests to supply services and not to discriminate)

1984’s the Telecommunications Act

1984-1900 only BT and Mercury were licensed to provide fixed line telecom networks in the UK.

1990s, new national Public Telecommunications companies entered the market.

BT’s operations regulated by British telecoms operator Ofcom (imposing obligations such as meeting reasonable requests to supply services and not to discriminate)

Current Market Share Data

Current Market Share Data

The FTSE 350 Index incorporates the largest 350 companies by capitalization which have their primary listing on the London Stock Exchange

The FTSE 350 Index incorporates the largest 350 companies by capitalization which have their primary listing on the London Stock Exchange

Current TechnologiesCurrent Technologies

Traditional Telephone exchanges or switches, trunk

network and local loop connections Universal Service Obligation (USO)

Newer Broadband internet service Bespoke solutions ( made to fit customer’s

needs) IT

Traditional Telephone exchanges or switches, trunk

network and local loop connections Universal Service Obligation (USO)

Newer Broadband internet service Bespoke solutions ( made to fit customer’s

needs) IT

BT Group BT Group

BT Retail-retail telecoms to consumers

BT Wholesale- Wholesale telecoms core trunk network

Openreach- fenced-off wholesale division, tasked with ensuring that all rival operators have equality of access to BT's own local network

BT Global Services- Business services and solutions (formerly BT Ignite and BT Syntegra)

BT Exact- Consultancy and internal IT solutions.

Group operations- handles security, research and development, and other functions for BT Group Plc such as legal services

BT Retail-retail telecoms to consumers

BT Wholesale- Wholesale telecoms core trunk network

Openreach- fenced-off wholesale division, tasked with ensuring that all rival operators have equality of access to BT's own local network

BT Global Services- Business services and solutions (formerly BT Ignite and BT Syntegra)

BT Exact- Consultancy and internal IT solutions.

Group operations- handles security, research and development, and other functions for BT Group Plc such as legal services

ConnectionsConnections

Broadband and Retail Connections

0

5000

10000

15000

20000

25000

30000

35000

2003 2004 2005 2006

Broadband customers ('000)

Retail connections (retail &residentials, in 000's)

BT's recent developmentsBT's recent developments

BT has recently announced its first step into 3G with the launch of a combined Wi-Fi, 3G and GPRS tariff, known as BT Datazone.

BT is investing 75% of its total capital spending, in its new Internet protocol(IP) based 21st Century Network (21CN)

In June 2006, BT launched BT Total Broadband - new broadband packages

BT Vision (a broadband Television service )

BT has recently announced its first step into 3G with the launch of a combined Wi-Fi, 3G and GPRS tariff, known as BT Datazone.

BT is investing 75% of its total capital spending, in its new Internet protocol(IP) based 21st Century Network (21CN)

In June 2006, BT launched BT Total Broadband - new broadband packages

BT Vision (a broadband Television service )

StrategyStrategy

Financial AnalysisFinancial Analysis

Headline financials - historical summaryHeadline financials - historical summary

Operation AnalysisRevenue Breakdown (2006)

Operation AnalysisRevenue Breakdown (2006)

Revenue by customer segment

35%

12%27%

26%0%

Major corporate

Business

Consumer

Wholesale

Other

Revenue by customer segment

35%

12%27%

26%0%

Major corporate

Business

Consumer

Wholesale

Other

Revenue Breakdown per Segment 2002-2006

Revenue Breakdown per Segment 2002-2006

Revenue by Customer Segment

01,0002,0003,0004,0005,0006,0007,0008,000

2002 2003 2004 2005 2006

in m

illio

ns

Major corporate Business Consumer Wholesale Other

financials - lines of business financials - lines of business

* Before specific items** Operating free cash flow (EBITDA less capital expenditure)

As of Q1 ended 30 June ’06:As of Q1 ended 30 June ’06:

Company AnalysisCompany Analysis

Free Cash FlowFree Cash Flow

Free Cash Flow ChartFree Cash Flow Chart

Year ended 31 March ’06

* Before specific items Free cash flow £1.6bn for 2006 Profit before tax* £2.2bn up 5% on last year

Year ended 31 March ’06

* Before specific items Free cash flow £1.6bn for 2006 Profit before tax* £2.2bn up 5% on last year

Earnings per Share Analysis

Earnings per Share Analysis

Earnings per Share AnalysisEarnings per Share Analysis

CapEx & ProfitCapEx & Profit

Revenue, Operating Profit, Net Cash inflow from Operating activities, CapEx

-5,000

0

5,000

10,000

15,000

20,000

25,000

2002 2003 2004 2005 2006

Revenue

Operating Profit

Net cash inflow fromoperating activities

Capital expenditure

PerformancePerformance

Fisher’s Valuation Approach

Fisher’s Valuation Approach

Fisher’s Valuation Approach

Fisher’s Valuation Approach

Criteria Details

Superiority in Financial skills, Production, Marketing, Research

-Clear Annual Reports-Britain’s first Wi-Fi cities & 3G-CapEx, Asset Impairment costs: reasonable-R&D: Moderate

People Factor -Management: Knowledgeable in the field, long-term managers-Long-term management & employees ( Training the management from within the org)

Investment Characteristics of Some Business

-Strong Market position & power-G3 & IT sectors potentials-Wireless Growth-Dow Jones Telecom Sustainable Index Award winner for last five years

P/E Ratio P/E  15.70

RecommendationRecommendation

Buy

Buy

AgendaAgenda

1. Company Background2. Products/services3. Financial analysis4. Fisher’s valuation approach5. Recommendation

1. Company Background2. Products/services3. Financial analysis4. Fisher’s valuation approach5. Recommendation

1. Company Background1. Company Background

Company SnapshotCompany Snapshot

Ticker Symbol: S Index Membership: S&P 500 S&P 100 S&P 1500 Super CompSector: Technology Industry: Diversified CommunicationFull Time Employees: 79, 900

Ticker Symbol: S Index Membership: S&P 500 S&P 100 S&P 1500 Super CompSector: Technology Industry: Diversified CommunicationFull Time Employees: 79, 900

Company SnapshotCompany Snapshot

Using avg growth based on Q3 results:(As of Nov 6/06)

Last Quote 19.05 52wk Range 15.95-26.89

P/E 40.53 Volume 33 962 100

# of Shares 2987.5M Market Cap 55.46B

Rev. 40 778.67B % Held by Insiders 1.25 NI 1 381.33M % Held by Institutions 86EPS 0.47 Div/Share 0.01Yield 0.5%

Using avg growth based on Q3 results:(As of Nov 6/06)

Last Quote 19.05 52wk Range 15.95-26.89

P/E 40.53 Volume 33 962 100

# of Shares 2987.5M Market Cap 55.46B

Rev. 40 778.67B % Held by Insiders 1.25 NI 1 381.33M % Held by Institutions 86EPS 0.47 Div/Share 0.01Yield 0.5%

Stock Price Behavior Daily(1985-2006)

Stock Price Behavior Daily(1985-2006)

Stock Price Behavior 1985-present Stock Price Behavior 1985-present

Sprint-Nextel vs. S&P Telecom

5-yr Daily (2001-2006)

Sprint-Nextel vs. S&P Telecom

5-yr Daily (2001-2006)

Sprint-Nextel vs. NASDAQ Composite 5-yr Daily (2001-

2006)

Sprint-Nextel vs. NASDAQ Composite 5-yr Daily (2001-

2006)

Sprint-Nextel vs S&P 5005yr Daily (2001-2006)

Sprint-Nextel vs S&P 5005yr Daily (2001-2006)

General BackgroundGeneral Background

Founded: 1899, Cleyson Brown, landline telephone

(Bell System’s competitor); HQ: Virginia Steady growth through acquisitions

Enter long-distance voice: acquire ISACOMM (1981), US Tel. (1984)

Sprint-MCI $129B merger (1995) falls through Mission: “To be No. 1 in providing a simple, instant,

enriching and productive customer experience.” Global Tier 1 backbone operator 3rd largest wireless network in US; 51.9M subscribers ($668

in revenues / subscriber in 2005) Largest independent local telephone provider Industry pioneer Secured spot in 2.5Ghz range

Founded: 1899, Cleyson Brown, landline

telephone (Bell System’s competitor); HQ: Virginia

Steady growth through acquisitions Enter long-distance voice: acquire ISACOMM (1981), US Tel.

(1984) Sprint-MCI $129B merger (1995) falls through Mission: “To be No. 1 in providing a simple, instant,

enriching and productive customer experience.” Global Tier 1 backbone operator 3rd largest wireless network in US; 51.9M subscribers ($668

in revenues / subscriber in 2005) Largest independent local telephone provider Industry pioneer Secured spot in 2.5Ghz range

General Background Con’t

General Background Con’t

Founded: 1987, Morgan O'Brien Focus on wireless 5th leading provider in US mobile phone industry 18.5M subscribers; southern US-popular Market-defining innovation Loyal customer base

Founded: 1987, Morgan O'Brien Focus on wireless 5th leading provider in US mobile phone industry 18.5M subscribers; southern US-popular Market-defining innovation Loyal customer base

General Background Con’t

General Background Con’t

Sprint-Nextel merger Aug. 12/05 Shareholders “overwhelmingly approved” Affiliates “strongly opposed” ($19.58B in problems over 3 yrs)

Post-Merger: Forced Acquisitions

Post-Merger: Forced Acquisitions

- $1.3B: Sprint’s PCS affiliate US Unwired (2005); 0.5M direct customers

- $4.3B (announce): PCS affiliate Alamosa Holdings (2005); 1.48M potential customers

- $98M: Enterprise Communications (2006); 52K customers to Wireless division

- $6.5B (announce): the largest of Nextel's affiliates to end Nextel Partners' opposition to any changes by Sprint in relation to the NEXTEL merger (2006); 2M direct customers

- $1.3B: Sprint’s PCS affiliate US Unwired (2005); 0.5M direct customers

- $4.3B (announce): PCS affiliate Alamosa Holdings (2005); 1.48M potential customers

- $98M: Enterprise Communications (2006); 52K customers to Wireless division

- $6.5B (announce): the largest of Nextel's affiliates to end Nextel Partners' opposition to any changes by Sprint in relation to the NEXTEL merger (2006); 2M direct customers

CompetitionCompetition

Timeline: Sprint, NextelTimeline: Sprint, Nextel

1976: $1bil. Rev (Sprint- S)1980s: Enter long distance; leader: fiber-optic network & packet

data network (S) 1990s: Global leader: voice & data services (S) 1992: Internet pioneer (S) 1993: First provider: local, long dist., wireless (S) 1996: 1st Digital wireless network (S) 1996: iDen tech. – talk of the industry (Nextel-N)1998: Fiber-optic connection (N)2000: Worldwide service: largest digital wireless coverage (N)2001: Walkie-talkie; 1st Java phone (N); Transatlantic IP

backbone (S)2002: 1st Wireless national network (S); 1st GPS phone (S)2003: 1st To begin conversion to next-generation packet

network (S) 2004: NASCAR partnership (N); EV-DO plans (S)

1976: $1bil. Rev (Sprint- S)1980s: Enter long distance; leader: fiber-optic network & packet

data network (S) 1990s: Global leader: voice & data services (S) 1992: Internet pioneer (S) 1993: First provider: local, long dist., wireless (S) 1996: 1st Digital wireless network (S) 1996: iDen tech. – talk of the industry (Nextel-N)1998: Fiber-optic connection (N)2000: Worldwide service: largest digital wireless coverage (N)2001: Walkie-talkie; 1st Java phone (N); Transatlantic IP

backbone (S)2002: 1st Wireless national network (S); 1st GPS phone (S)2003: 1st To begin conversion to next-generation packet

network (S) 2004: NASCAR partnership (N); EV-DO plans (S)

StrategyStrategy

Customer experience Innovation, R&D: pioneer in industry Focus on wireless, broadband Operational efficiencies: restructuring,

cost-savings, R&D direction: -ve EBIT

Customer experience Innovation, R&D: pioneer in industry Focus on wireless, broadband Operational efficiencies: restructuring,

cost-savings, R&D direction: -ve EBIT

Key AwardsKey Awards

Innovation - Outstanding Corporate Innovator 2005 - 1st In innovation category 2006 Management - 2nd most admired company in Telecom - Institutional Investor: #1 in Telecom:

most shareholder-friendly Fortune Magazine 2006: #59/100 of best

companies to work for Credit risk management HRC's Corporate Equality Index: 100%

Innovation - Outstanding Corporate Innovator 2005 - 1st In innovation category 2006 Management - 2nd most admired company in Telecom - Institutional Investor: #1 in Telecom:

most shareholder-friendly Fortune Magazine 2006: #59/100 of best

companies to work for Credit risk management HRC's Corporate Equality Index: 100%

ManagementManagement

Corporate Governance Quotient:

“Sprint-Nextel is better than 45.6% of S&P500 companies and 96.6% of Telecom. Services companies as of Oct 06.”

Corporate Governance Quotient:

“Sprint-Nextel is better than 45.6% of S&P500 companies and 96.6% of Telecom. Services companies as of Oct 06.”

ManagementManagement

Timothy M. DonahueExecutive Chairman

Nextel: Jan. 1996 President and Chief Operating Officer Fortune 200: record-setting performance Forbes: top-rated CEO in Telecom. 2005 John Carroll University, BA (Eng. Literature) NE regional president for AT&T Wireless Services

operations (1991-1996)

On the Boards of Kodak, John Carroll Univ., NVR, Inc.

Timothy M. DonahueExecutive Chairman

Nextel: Jan. 1996 President and Chief Operating Officer Fortune 200: record-setting performance Forbes: top-rated CEO in Telecom. 2005 John Carroll University, BA (Eng. Literature) NE regional president for AT&T Wireless Services

operations (1991-1996)

On the Boards of Kodak, John Carroll Univ., NVR, Inc.

ManagementManagement

Gary D. ForseePresident and Chief Executive Officer

Sprint: May 2003 Appointed to National Security Telecom. Advisory

Committee by Bush in 2004 BusinessWeek: 1 of best leaders 2005, 1 of 19 best

managers 2004 Sprint emerges as 1 of strongest competitors Sprint's equity value rises 72% University of Missouri (BS in engineering) Awarded an honorary Doctor of Engineering degree

(2005) 18 years at AT&T and Southwestern Bell VP of gov’t sales and programs (AT&T's Federal

Systems)

Gary D. ForseePresident and Chief Executive Officer

Sprint: May 2003 Appointed to National Security Telecom. Advisory

Committee by Bush in 2004 BusinessWeek: 1 of best leaders 2005, 1 of 19 best

managers 2004 Sprint emerges as 1 of strongest competitors Sprint's equity value rises 72% University of Missouri (BS in engineering) Awarded an honorary Doctor of Engineering degree

(2005) 18 years at AT&T and Southwestern Bell VP of gov’t sales and programs (AT&T's Federal

Systems)

ManagementManagement

Paul Saleh

Chief Financial Officer

Nextel: Sept. 2001: Executive VP and CFO Institutional Investor: best Telecom. CFO 2004, 2005, 2006 Treasury & Risk Management 2005: 1 of 100 most

influential people in finance Public Company CFO of the Year Award: 2003, 2006 Univ. of Michigan (MBA-Finance; MS, BS in electrical

engineering) VP, CFO: Walt Disney Int. (1997-2001) Senior VP, Treasurer: The Walt Disney Company

Paul Saleh

Chief Financial Officer

Nextel: Sept. 2001: Executive VP and CFO Institutional Investor: best Telecom. CFO 2004, 2005, 2006 Treasury & Risk Management 2005: 1 of 100 most

influential people in finance Public Company CFO of the Year Award: 2003, 2006 Univ. of Michigan (MBA-Finance; MS, BS in electrical

engineering) VP, CFO: Walt Disney Int. (1997-2001) Senior VP, Treasurer: The Walt Disney Company

Major holders

Holder Position # Shares % Reported

Foresee CEO 1,514,910 0.051 Aug 12/06

Donahue Executive Chairman 902,316 0.030 Aug 12/06

Saleh CFO 626,383 0.021 Aug 12/06

Capital Research & Mng Company 187,876,882 6.37% Jun. 30/06

Growth Fund of America Inc. 54,221,007 1.84% Jun. 30/06

All Insiders and 5% Owners 1.25%

Institutional, Mutual Fund Owners 86%

Current TechnologiesCurrent Technologies

3G wireless networks (EV-DO) (data network)

- upgrade Ev-Do Rev A (2007): faster speeds - old: 2.4Mbs download, 0.15Mbs upload - new: 3.1Mbs download, 1.8 upload - CapEx $7B by 20072G iDEN (Nextel)2.5, 2.75, 3G CDMA (Sprint) (voice networks) - marketing costs 2008 for conversion

3G wireless networks (EV-DO) (data network)

- upgrade Ev-Do Rev A (2007): faster speeds - old: 2.4Mbs download, 0.15Mbs upload - new: 3.1Mbs download, 1.8 upload - CapEx $7B by 20072G iDEN (Nextel)2.5, 2.75, 3G CDMA (Sprint) (voice networks) - marketing costs 2008 for conversion

Not Compatible NetworksNot Compatible Networks

Future TechnologiesFuture Technologies

VoIPMobile TVWiMax (4G: 15Mbits)

Data netowrkPioneer$3 CapEx100M people by 2008Broader coverageCompetitive edgeImplicationsOperate on 2.5Ghz

VoIPMobile TVWiMax (4G: 15Mbits)

Data netowrkPioneer$3 CapEx100M people by 2008Broader coverageCompetitive edgeImplicationsOperate on 2.5Ghz

Excited?Excited?

Not So Much!Not So Much!

2. Products & Services2. Products & Services

SegmentsSegments

Wireless: strong growth Local: spun off 2006: EMBARQ Long Distance: losing money

Wireless: strong growth Local: spun off 2006: EMBARQ Long Distance: losing money

Wireless SegmentWireless Segment

VoiceLocalLong distanceWalkie-talkie

Data transmissionWireless imaging Internet accessMessaging and email services Wireless entertainment

VoiceLocalLong distanceWalkie-talkie

Data transmissionWireless imaging Internet accessMessaging and email services Wireless entertainment

Local Segment Local Segment

Voice servicesData servicesSale of communication equipt.Switched access services

Voice servicesData servicesSale of communication equipt.Switched access services

Long Distance SegmentLong Distance Segment

Internet serviceEnd user ISPBackbone operations

Data servicesATMFrame relay

Internet serviceEnd user ISPBackbone operations

Data servicesATMFrame relay

Revenues & CostsRevenues & Costs

TotalRevenues

2005, 24%

2004, 23%

2003, 23%

2002, 23%

37%

39%

51%

26%

47%

30%

44%

33%

37%

39%

2001, 24%

Wireless

Long Distance

Local

TotalRevenues

2005, 24%

2004, 23%

2003, 23%

2002, 23%

37%

39%

51%

26%

47%

30%

44%

33%

37%

39%

2001, 24%

Wireless

Long Distance

Local

Total Costs2005, 15%

2004, 16%

2003, 17%

2002, 18%

20% 65%38%

46%

36%

47%

36%

46%

2001, 17%

44%

39%

Wireless

Long Distance

Local

Total

Revenues & CostsRevenues & CostsWirelessWireless

Wireless Costs

2005, 23%

2004, 20%

2003, 20%

2002, 20%

2001, 21%

34%

43%

34%

46%3%

26%

51%

1%

29%

50%

28%

51%

Costs of services and products

Selling, general andadministrative

Restructuring

Depreciation

Revenues & CostsRevenues & Costs

LocalLocalLocal

Revenues2005

19%

66%15%

2004 17%

70%

13%

2003 12%

76%

12%

2002 13%

77%

10%

2001 13%

78%

9%

Voice

Data

Other

Local Costs

2005, 23%

2004, 23%

2003, 25%

2002, 26%

2001, 25%

25%

50%2%

29%

47%1%

30%

44%1%

29%

44%

1%

28%

45%

2%

Costs of services and products

Selling, general andadministrative

Restructuring

Depreciation

Revenues & CostsRevenues & Costs

Long DistanceLong DistanceLong Distance

Revenues2004, 11%

2003, 12%

2002, 11%

2001, 10%

2005

61%24%

62%

24%

3%

63%

23%

2%

64%

21%

4%

66%

19%

5%

Voice

Data

Internet

Other

Long Distance Costs

2004, 10%

2003, 15%

2002, 16%

69%

2005, 8%

23%

18%

34%

38%

24%

17%

44%

27%

55%

2%

25%

14%

50%

2001, 11%

Costs of services and products

Selling, general andadministrative

Restructuring

Depreciation

Decreasing Long-Distance Voice Revenues (US$, millions)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2000 2001 2002 2003 2004 2005 2006

Decreasing Long-Distance Voice Revenues (US$, millions)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2000 2001 2002 2003 2004 2005 2006

Long Distance: Restructuring Costs

1,688 1,564

3,661

194 150

1,000

2,000

3,000

4,000

2001 2002 2003 2004 2005

Year

Co

st (

US

$, m

illi

on

s)

Long Distance: Restructuring Costs

1,688 1,564

3,661

194 150

1,000

2,000

3,000

4,000

2001 2002 2003 2004 2005

Year

Co

st (

US

$, m

illi

on

s)

3. Financial Analysis3. Financial Analysis

P/E 40.53 P/E 40.53

Revenues and Relationships from CF statement

-20,000

-10,000

0

10,000

20,000

30,000

40,000

2000 2001 2002 2003 2004 2005

Years

US

$ i

n M

illi

on

s

CF from Op.Activities

Net Cash Used inInvesting Activities

Net Cash Used inFinancing Activities

Net Increase in Cash& Equivalents

Revenues

ObservationsObservations

Revenue growth: slow down Misleading revenues; Rev > CF from Op. Act. Losing $, often saved by tax savings Growing revenues, CF from Op. Activities Good underlying business Lose $ from asset impairment, restructuring - $1.66B: litigation (2001) - $1.2B: BRS spectrum fair value decline (2003) - $3.54B: equipment (2004)

Revenue growth: slow down Misleading revenues; Rev > CF from Op. Act. Losing $, often saved by tax savings Growing revenues, CF from Op. Activities Good underlying business Lose $ from asset impairment, restructuring - $1.66B: litigation (2001) - $1.2B: BRS spectrum fair value decline (2003) - $3.54B: equipment (2004)

Interest Expense, Cap Ex, Net Investments (Cash)

-$10,000

-$8,000

-$6,000

-$4,000

-$2,000

$0

$2,000

$4,000

2000 2001 2002 2003 2004 2005

Time

Ex

pe

nd

itu

re (

mill

ion

s)

Interest expense

Capital expenditures

Net cash used in investingactivities

Net income/loss

Financing ActivitiesFinancing Activities

Constant interest expenseCash from financing activities:

used mainly to fund capital investments, working capital requirements, retire debt (2005)

2003-4: borrow little due to lower CapEx (mostly), continuously improving Operating CF

CapEx is expected to increase

Constant interest expenseCash from financing activities:

used mainly to fund capital investments, working capital requirements, retire debt (2005)

2003-4: borrow little due to lower CapEx (mostly), continuously improving Operating CF

CapEx is expected to increase

Observations Con’tObservations Con’t

Large CapEx vs. CF from Op. Activities CapEx: - ≈ $3B always there (to maintain network reliability, upgrade capabilities for providing new products/services, meet capacity demands) - iDen/CDMA tech, mkt, $7B Ev-Do Rev. A (2007) - $3B WiMax (2006-8) - $19.58B in acquisitions due to merger (2005-

2007) - TOTAL: $29.58B/4yrs = $7.4B/yr + $3B/yr = $10.4B/yr Borrow more debt to finance CapEx

Large CapEx vs. CF from Op. Activities CapEx: - ≈ $3B always there (to maintain network reliability, upgrade capabilities for providing new products/services, meet capacity demands) - iDen/CDMA tech, mkt, $7B Ev-Do Rev. A (2007) - $3B WiMax (2006-8) - $19.58B in acquisitions due to merger (2005-

2007) - TOTAL: $29.58B/4yrs = $7.4B/yr + $3B/yr = $10.4B/yr Borrow more debt to finance CapEx

Dividends & EarningsDividends & Earnings

Div 2006: $0.10 Buyback $6B common shares over 18 months (starting Aug

2006) Q3: 91M common shares for $1.5B ($16.48/sh; Aug. market

price/share: ≈ $16-17) 2006 shares 2987.5M (due to merger) BUT: cannot afford to buy back

Div 2006: $0.10 Buyback $6B common shares over 18 months (starting Aug

2006) Q3: 91M common shares for $1.5B ($16.48/sh; Aug. market

price/share: ≈ $16-17) 2006 shares 2987.5M (due to merger) BUT: cannot afford to buy back

Dividends & EarningsDividends & Earnings

Dividends/Share vs EPS

-1.25-1.00-0.75-0.50-0.250.000.250.500.751.001.25

2000 2001 2002 2003 2004 2005

Year

Va

lue

(U

S$

)

Diluted EPS (common)

Dividends/common share

More ObservationsMore Observations

Merger: double cash (buy back $6B)Cost of merger: goodwill, FCC licenses,

customer relationships

Merger: double cash (buy back $6B)Cost of merger: goodwill, FCC licenses,

customer relationships

Rev, Op Costs, Op Income, NI, CapEx Relationships

Rev, Op Costs, Op Income, NI, CapEx Relationships

Snapshot of Relationships

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

2000 2001 2002 2003 2004 2005

Years

US

$ in

Mil

lio

ns

Operating Revenues

Operating Costs

OperatingIncome/Loss

Net Income/Loss

CapEx

2006 Expectations2006 Expectations

Net Revenue: $41MWireless: high single-low double

digit growthLong distance: mid single digit lossCapEx $6.3B $14.5B NPV synergies from Nextel

merger

Net Revenue: $41MWireless: high single-low double

digit growthLong distance: mid single digit lossCapEx $6.3B $14.5B NPV synergies from Nextel

merger

4. Fisher’s Valuation Approach4. Fisher’s Valuation Approach

Fisher: Superiority in Financial skills, Production, Marketing,

Research

Fisher: Superiority in Financial skills, Production, Marketing,

Research

Annual reports: clear, desired info past 2000; prior: not enough info

Cost control: COGS, interest expense

Restructuring, Asset Impairment costs, CapEx

Innovation: high R&D Large mkt campaigns: not always

meet expectations Overall: 1.5/5

Annual reports: clear, desired info past 2000; prior: not enough info

Cost control: COGS, interest expense

Restructuring, Asset Impairment costs, CapEx

Innovation: high R&D Large mkt campaigns: not always

meet expectations Overall: 1.5/5

Fisher: People FactorFisher: People Factor

Fair treatment: pleased employees HRC's Corporate Equality Index: 100%

score Fortune 2006: #59 (from 67): Top 100 companies to work for

Corp. Gov: fair treatment shareholders, directors’ composition

Corporate Governance Quotient score Overall 4.5/5

Fair treatment: pleased employees HRC's Corporate Equality Index: 100%

score Fortune 2006: #59 (from 67): Top 100 companies to work for

Corp. Gov: fair treatment shareholders, directors’ composition

Corporate Governance Quotient score Overall 4.5/5

Fisher: Investment Characteristics of Some Business

Fisher: Investment Characteristics of Some Business

Position in market Market share Tier 1 implications Less licensing from others; more

to firm Wireless growth, WiMax potential Overall 4/5

Position in market Market share Tier 1 implications Less licensing from others; more

to firm Wireless growth, WiMax potential Overall 4/5

Fisher: P/E RatioFisher: P/E Ratio

Expected vs. realistic growth:

P/E 40.53 (NI for Earnings, 2006 data)

DDM: 9.75%Overall: 0/5

Expected vs. realistic growth:

P/E 40.53 (NI for Earnings, 2006 data)

DDM: 9.75%Overall: 0/5

5. Recommendation5. Recommendation

Not BuyNot Buy…in 1.5yrs at a cheaper price?…in 1.5yrs at a cheaper price?

SUMMARYSUMMARY

APPENDIX CHARTSAPPENDIX CHARTS

$5.1 $5.4 $5.9 $6.4 $5.3$6.5 $6.5 $6.9 $7.3 $6.9 $6.8

$7.9 $7.9 $7.7$8.4

$8.7$8.7 $8.7 $7.1 $6.7 $6.5 $5.9

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Local services Long distance services

Wireline Local & Long Distance Revenues1993 - 2004$ Billions

* 1997 local services decrease is due to survey method changeSource: CRTC data collection

11.6 11.8 12.0 12.2 12.2 12.4 12.7 13.2 12.8 12.8 12.7 12.5

5.15.7 5.9 6.2 6.6 7.2 7.6 7.4 7.2 7.3 7.1

5.4

-

5.0

10.0

15.0

20.0

25.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Residential line Business line

Source: CRTC data collection

Wired Access Lines 1993 - 2004Million Lines

2,025

2,933

2,4832,969

943

412

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2000 2001 2002 2003 2004

Dial up Cable DSL

Internet Service Subscribers2000 - 2004

Thousands

Source: CRTC data collection

AT&TAT&T