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Telecoms Sector

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2 Telecoms Sector – M&A Insights 2010

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Welcome to the fourth edition of Telecoms M&A Insights from PricewaterhouseCoopers (PwC). Here we explore the impact of the fi nancial-market downturn on telecommunications transactions in 2009 and look at some of the key trends set to shape 2010 and beyond.

Despite its reputation as a recession-proof industry, M&A activity in the tele-communications sector continued its downward course in 2009 as telecoms operators concentrated on reducing capital expenditure (capex) and head counts. As they were reluctant to spend cash on larger acquisitions, total deal volume fell 10% to 365 deals in Europe, the Middle East and Africa (EMEA). Driven by lower deal volumes and a lower share of deals with a disclosed transaction value, deal value in 2009 decreased by 55% to some €22.7 billion.

Germany was no exception to the overall development in the EMEA region. In 2009 a total of 31 telecoms deals involved German companies as either a target or an acquirer. This equates to a drop of 23% compared to 2008. Nevertheless, the total disclosed deal value remained nearly constant at €5.7 billion. As in previous years, Germany did see mega-deals that drove disclosed deal value. However, smaller deals by corporate buyers and sellers dominated the market.

Market saturation and intense competition have shaped the telecoms sector in recent years. Broadband and mobile data use were the only areas with promising growth. Yet average revenue per user has already come under pressure, and with steadily increasing data use and a higher demand for capacity,

additional investments are due in both the fi xed-line and mobile sectors. Consolidation is a natural consequence.

With cash saved last year, telecoms operators are in good shape to strengthen their cross-media services and drive consolidation within the sector. Last year, deals were more likely to be initiated by large operators, as fi nancial markets constrained deal activities for fi nancial buyers. Only three of the major telecoms transactions in 2009 were backed by fi nancial investors, and we expect cash-rich corporate buyers – mostly European telecoms incumbents and large conglomerates – to dominate deal activity in 2010 as well.

The PwC Telecoms team has actively supported clients in securing and positioning their businesses to develop their strategy and business models.

One of our continuing objectives is to maintain a dialogue and build on our relationships with companies throughout the telecoms sector. We hope that this publication will help facilitate this and look forward to receiving your feedback.

If you would like any further information or have comments, please do not hesitate to contact us.

Welcome

Werner BallhausTMT Sector Leader TransactionsPhone: +49 211 981 5848E-mail: [email protected]

Dr. Arno WilfertStrategyPhone: +49 69 9585 6289E-mail: [email protected]

Telecoms Sector – M&A Insights 2010 3

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Capital markets suffered throughout 2008 and 2009. Yet both fi xed-line and mobile stocks have held up well, affi rming telecoms’ status as a relatively defensive investment in recessionary times.

Amid the near-collapse of the fi nancial system in 2008–2009, there was a lot of head-scratching about how this event would impact deal-making activities overall. Telecoms’ reputation as a defensive sector was reaffi rmed through most of 2009 as share prices held up well – despite the fact that many operators had to service large amounts of debt due to past heavy investments in infrastructure and M&A activities.

Debt roll-over benefi ted from low market interest rates, as well as lower risk premiums than in other industries. Hence, telecoms operators were able to service debt throughout the downturn and even renewed and extended debt. Furthermore, since consumers do not normally cut tele-communications services even in bad times, telecoms companies managed to generate stable earnings and cash fl ows. Added to this, West European telecoms companies have actively sought out segments to off-set lower growth in their core markets (for example, investing in companies in higher-growth areas like the Middle East, Africa and Asia).

Notable examples are France Télécom, which has a long history of investment in Africa, and Telenor of Norway, whose investment portfolio includes operators in India and Bangladesh.

Despite the stock market crash of 2008– 2009, investors in West European telecoms companies recovered – not surprisingly – almost 80% of their investment from three years ago, while companies in other sectors could hardly recover 70% of their initial investments. When the stock market bottomed in March, telecoms investors

were down some 30%, compared with nearly 60% in other sectors.

With the benefi t of hindsight, we can say that the telecoms sector proved quite resilient to the global downturn and is in good shape to expand its position in the aftermath of the recession.

Telecoms investments outperformed other sectors despite turbulent markets

04/0

7

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9

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Source: STOXX Ltd

DOW JONES EURO STOXX Telecom Index DOW JONES STOXX 50 Index

European Telecoms stocks performance 2007–2009

This chart shows the development of the DJ Euro Stoxx Telecom Index relative to the DJ Euro Stoxx 50 Index. Both are rebased to 100 as of January 2007.


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Telecoms deals in 2009 cannot compete with previous years in terms of total disclosed deal value. Disclosed deal value was also adversely affected by a much lower number of deals where the value of the transaction was actually disclosed.

Despite relatively positive investment performance, telecoms deal activity in EMEA countries could not rebound from the near collapse of the fi nancial system. In 2009, overall telecoms deal value and volume in EMEA countries declined noticeably. Deal volume decreased by 10% from 406 to 365 deals, and disclosed deal value fell by 55% to some €22.7 billion.

While total deal value was down signifi cantly from previous years, it is worth noting that our analysis focuses on transactions with disclosed deal values only. The large number of deals with an undisclosed deal value (not included in our published numbers) may be explained by a high involvement of non-public companies not required to disclose deal-related information and investors wanting to avoid disappointing sales volumes.

2009 saw a few deals with a transaction value of more than €1 billion. However, the market was dominated by smaller deals with a value of less than €100m.

European telecoms operators concentrated on deals within EMEA, notably in West, Central and East European countries, and selected operators diversifi ed their low-growth business at home by extending into regions like Africa. However, telecoms deal volume in Africa decreased by 6% compared to 2008. With a total number of

EMEA telecoms deals per acquirer region

Source: Thomson Reuters, Mergermarket

500

400

300

200

100

0 2004 2005 2006 2007 2008 2009

Africa CEE Middle-East Western Europe

Dea

l Vol

umes

17 deals, deal activity is still small given the size of the area.

The most active region was southern Africa, which saw ownership changes at the local mobile network operator Vodacom. Other large deals took place in Morocco, where Zain of Kuwait bought a 31% stake in Wana Telecom for some €240m, and Mali, where Maroc Telecom bought a 51% stake in Mali’s incumbent operator Sotelma valued at €240.5m.

For EMEA telecoms operators, the most attractive region outside EMEA was the Americas, with a total of 24 deals in 2009.

Deal activity there was positively infl uenced by the bankruptcy fi ling of Nortel Networks and the subsequent sales of its different business divisions, such as Ericsson’s acquisition of Nortel Network’s CDMA business and LTE assets for €933m or Radware Ltd. Israel’s investment in Nortel’s Application Switches unit.

2009 telecoms deal volume in EMEA fell below its level of 2004

Middle-East 9

ESAT17%

S/W and IT

70%

Africa 17Americas 24

Asia 14Australia 3

CEE 113

WesternEurope 185


EMEA telecoms deals per target region in 2009


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Among EMEA countries, deal volume was highest in Russia. Deal activity rose by 68% in 2009 over 2008. The Russian government took an active part in the largest deals.

The strongest growing region for telecoms deals within EMEA was Central and Eastern Europe (CEE), where deal volume increased by 22% compared to 2008. As East European countries like Romania, Hungary or Bulgaria reached saturation, the focus has shifted to countries where markets are less developed and the population is still growing.

Deal activity was highest in the Russian Federation, where 79 deals were conducted in 2009 – an increase of 68% over the previous year. Russia saw some of the largest telecoms transactions, such as the acquisition of a 30% stake in Rostelecom by the Russian Deposit Insurance Agency and the Russian development bank, Vnesheconombank, for €1.5 billion. Furthermore, the Russian government took an active role by acquiring a 20% stake in the Indian mobile network Sistema Shyam TeleServices Ltd for €530m. The deal is part of India's debt settlement scheme with Russia.

While most of the transactions were concerned with telecoms services, some 40% of the deals completed in the Russian Federation involved investments in related and unrelated industries, such as telecoms equipment or even oil. For example, the Russian conglomerate Sistema, which has a large telecoms division, was also heavily engaged in several oil-related transactions.

In terms of telecoms deals, the Russian mobile operator MTS was the most active company within the country in concentrating on increasing its share in telecoms services.

We expect the momentum in Russia to last beyond 2010, as Russian telecoms operators are likely to continue their expansion at home and in other Commonwealth of Independent States (CIS) countries. Moscow is especially likely to play a pivotal role in deals in other parts of Eastern Europe in the next years. As CIS countries are in stages of development similar to African countries, where

telecommunications infrastructure is just evolving, we expect deal activity to intensify and attract foreign investment by corporate and fi nancial investors.

Deal momentum in Russia is likely to be sustained beyond 2010

EMEA deals 2009Top 10 target countries

Country No of deals

Russian Fed 79

United Kingdom 34

Germany 21

France 19

Denmark 17

Italy 15

Sweden 14

Poland 12

United States 12

Spain 11



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Major telecoms deals in EMEA in 2009

Date Value (€m) Target Target country Acquirer Acquirer country

Nov 09* 3,500 Unitymedia GmbH Germany Liberty Global Inc USA

Nov 09 2,974 GVT (Holding) SA Brazil Vivendi SA France

Mar 09 2,788 Vodacom Group Ltd (35%) South Africa Telkom SA Ltd (controlled by Vodafone Group Plc)

South Africa

Mar 09 1,657 Vodacom Group Ltd (15%) South Africa Vodafone Group Plc UK

Mar 09 1,513 Rostelecom (30%) Russian Fed ASV; Vnesheconombank Russian Fed

Aug 09 1,412Comstar United Telesystems

(50.91%)Russian Fed Mobile Telesystems Russian Fed

Apr 09 1,374 France Telecom España SA (18.2%) Spain France Télécom SA France

Mar 09 949 Unitech Wireless Ltd (67.25%) India Telenor ASA Norway

Nov 09* 900 HanseNet GmbH Germany Telefónica SA Spain

Mar 09 795 Nortel Networks (CDMA/LTE) Canada Ericsson AB Sweden

Apr 09 674 Hellenic Telecoms Org OTE (5%) Greece Deutsche Telekom AG Germany

Apr 09 530 Sistema Shyam TeleServices (20%) India Government of Russia Russian Fed*Note: closed January 2010


Among the major telecoms deals of 2009, only three were backed primarily by fi nancial investors. All other major deals were driven by corporate investors, mostly the largest European incumbents.

The lack of debt fi nancing created a signifi cant barrier to M&A activity for fi nancial investors in 2008 and 2009. Of the 365 deals last year, only some 64 were backed by fi nancial investors, a share of 17.5%. Corporate investors, particularly the incumbents in Western Europe, managed to increase their deal activity thanks to available cash fl ows and bond fi nancing.

With the exception of Russian deals, telecoms activity last year was shaped by established West European operators seeking growth opportunities outside their home territory. For example, Vodafone increased its investment in South Africa’s Vodacom, Telenor acquired a majority share of India’s mobile operator Unitech Wireless (renamed Uninor in September), and

Deutsche Telekom continued its expansion in Greece. However, by far the largest deal was the acquisition of Unitymedia by Liberty Global. John Malone, founder of Liberty Global, surprisingly revived his attempt to enter the German TV market. In November he bought out private equity investors BC Partners and Apollo, which had initially prepared Unitymedia for an IPO in 2010.

Corporate beat fi nancial investors in EMEA telecoms deals


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Major telecoms deals in Germany in 2009

Date Value (€m) Target Target country Acquirer Acquirer country

Nov 09* 3,500 Unitymedia GmbH Germany Liberty Global Inc USA

Nov 09* 900 HanseNet GmbH Germany Telefónica SA Spain

Apr 09 674 Hellenic Telecoms Org OTE (5%) Greece Deutsche Telekom AG Germany

Nov 09 270 Strato AG Germany Deutsche Telekom AG Germany

May 09 125 Freenet DSL Germany United Internet AG Germany

Dec. 09 54.6 MSP Holding GmbH (50%) Germany Drillisch AG Germany

Aug 09 50 Devas Multimedia PvT (17%) India Deutsche Telekom AG Germany

Nov 09 36.8 Net mobile AG (84.7%) Germany DOCOMO Deutschland GmbH Japan

Aug 09 26.7 Carlo Gavazzi Space SpA Italy OHB Technology AG Germany

Sep 09 20 EXDS Inc Data Center Frankfurt Germany Equinix Inc US*Note: closed January 2010


Consolidation of the fi xed-line market shaped German deal activity in 2009The consolidation of Germany’s fi xed-lined market continued in 2009. A total of 31 telecoms deals involved German companies as either a target or an acquirer – a drop of 23% from the 42 deals of 2008.

Notwithstanding Liberty’s €3.5 billion deal to buy Unitymedia and Telefónica’s €900m acquisition of Telecom Italia’s German fi xed-line operator HanseNet – both announced in the fourth quarter of 2009 and completed in January 2010 – German deal activity followed the global trend. Deal activity in 2009 was limited, and smaller transactions prevailed. The slight increase in deal value to €5.7 billion, driven mainly by Telefónica and Liberty, deceives actual market conditions.

The largest completed deal was the acquisition by Deutsche Telekom of an additional 5% of Greek telecoms incumbent OTE for some €674m.

With high cash fl ows, corporate investors were able to get more favourable deal terms than during the peak years of the past. This was particularly apparent in the market for fi xed-line broadband services. Freenet’s DSL business was estimated to sell for €300m–400m when it started the sales

process in 2008. It eventually sold the business last spring for €125m to United Internet. Telefónica took advantage of the lengthy sales process for HanseNet, which was eventually sold with a price discount of some €100m.

The other large deal of 2009 was the sale of Freenet’s web-hosting business Strato to Deutsche Telekom – a transaction that was highly competitive, with several private equity funds courting the target as well.


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Capex saving and further consolidation will shape the German telecoms market next yearA majority of deals was completed in Germany. But given the maturity of the German market, investors increasingly need to look outside Germany for attractive targets.

While consolidation has already shaped German deal activity, we expect this trend to continue throughout 2010. Fuelled by intense competition from cable TV operators, there will be further consolidation among the larger fi xed-line operators, DSL and cable TV operators, and city carriers.

Compared to its West European counterparts, the German fi xed broadband market is highly fragmented, with city carriers dominating regional markets but frequently lacking economies of scale, regional and local cable operators offering broadband internet access in addition to TV services, and large integrated operators like, Vodafone, Deutsche Telekom and Telefónica O2.

We do not expect all major cable operators to merge into a nationwide cable company in the near future for antitrust reasons. However, in the wake of the Unitymedia acquisition, we do expect to see more ownership changes at Germany’s largest cable network operators. We also expect more network layer 4 operators to be bought by network layer 3 operators in order to obtain direct access to customers.

In the mobile sector, we expect consolidation among service providers and potentially even some among the smaller network operators if they fail to gain a foothold in the upcoming spectrum auction.

With the German market reaching maturity, we should also see more capex-avoiding, network-sharing deals in the future. As in other countries in Europe, German operators have to increase capex both in fi xed-line infrastructure due to fi bre roll-outs and in mobile operations as new spectrum is auctioned in spring.

Operators in other countries, like Switzerland and the UK, have already taken steps towards bundling their networks. In September, Orange and T-Mobile announced plans for a joint venture in the UK hoping to create synergies worth €4 billion. Furthermore, Orange and TDC agreed to merge their subsidiaries in Switzerland, with France Télécom paying €1.5 billion for a 75% stake in the new company. The operators expect to generate synergies of €2.1 billion, largely from consolidating their networks.

While local competition authorities watch these steps carefully, the German regulatory agencies have signaled a more lenient approach towards network pooling.

The need for fast roll-outs of high-speed services and the early introduction of innovative products has driven cooperations on fi bre roll-outs, and we expect to see a more progressive step towards network sharing with mobile operators as well.

As margins from core business decline and large goodwill entries on balance sheets are scrutinised, operators are rethinking their investment strategies. We look ahead to further divestures in non-core investments.

On the other hand, we should see intense deal activity involving content services as competition between telecoms companies and cable operators grows and telecoms operators try to gain a foothold in services beyond network access and voice.


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EMEA outlook: increased deal activity in high-growth countriesFixed-line and mobile markets are increasingly consolidated in Western Europe. M&A activity is likely to be driven by higher-growth markets like CEE and Africa. European incumbents are likely to strengthen their portfolios in these regions.

While deal activity in Germany should be driven by consolidation to achieve synergies in costs, revenues and investments, we expect to see more deals in EMEA, with a focus on targets in emerging markets.

Corporate buyers should dominate M&A in EMEA countries. However, fi nancial buyers may selectively execute deals as the leveraged lending market sees some easing.

Attractive assets are likely to be located in higher-growth regions like CEE, the Middle East and Africa, where corporate markets are just developing. South Africa is of particular interest as infrastructure has been upgraded ahead of the football World Cup and demand for telecoms services is still growing. Added to this is a more open regulatory environment allowing foreign ownership and a clear legal framework that reduces legal uncertainty and makes investments more interesting.

The Middle East should itself continue to benefi t as it is a high-growth area, not to mention home to telecoms operators that are cash-rich and have already started to expand their business to Africa and Asia.

In addition to investing in growth regions, telecoms operators are likely to branch out in other lines of services. West European operators have already successfully implemented systems integration and outsourcing divisions to generate ancillary business. This has proven successful because systems integration has become more and more about systems communications integration, whereby communications equipment is at the core of the service. Similarly, outsourcing focuses mostly on IT systems and communications networks. Higher economies of scale are achieved when operations are centralised among several operators.

Finally, M&A activity will be driven by the acquisition of content assets. While telecoms operators provided the distribution network for media and internet assets in the past, operators now acknowledge the importance of media content for growth beyond pure data provision, since additional value creation takes place with content and advertising. Hence, telecoms operators started to offer IPTV services to compete with cable TV operators and have been buying internet assets to capture a higher audience share to in turn benefi t from growing advertising revenues.

We expect this convergence-driven trend to continue, yet we are cautious as to whether such deals generate the expected returns.

Despite a more optimistic outlook than last year, wider economic uncertainty remains and might constrain larger deals in the short term. Nevertheless, rumors of two viable mega-deals have already made it to the press: the potential takeover of Telecom Italia by Telefónica and KDG’s IPO.

Methodology

The Telecoms M&A Insights for EMEA countries includes deals where the target or the acquirer was in fi xed-line telecoms, or was a cable network operator, mobile/satellite telecoms carrier or hardware manufacturer for voice/data/satellite communications and cable equipment. The analysis focuses on transactions with disclosed deal values only.

For more information visit our website at:

www.pwc.de/de/tmtThis publication has been prepared as general information and incorporates aggregated data from various third party sources and respondents. PricewaterhouseCoopers (PwC) has not independently verifi ed, validated, or audited the data received from such third parties. PwC makes no representations or warranties with respect to the accuracy of the information contained in this report, and in no event will PwC, its related partnerships or entities, or the partners, agents or employees thereof be liable to the user (subject to any agreement with the user to the contrary) or to any third party (including any of the user’s clients) for any inaccuracy of information contained in this publication (including any errors or omissions in its content, regardless of the cause of such inaccuracy, error or omission), for any usage of, decision made or action taken in reliance on the publication, or for any consequential, special or similar damages even if advised of the possibility of such damages. This publication is not intended to give legal, tax, accounting or other professional advice. No user should act on the basis of any matter contained in this publication without considering and, if necessary, taking appropriate professional advice on their individual requirements.

Important notice for US residents: In the US, corporate fi nance services are provided by PricewaterhouseCoopers Corporate Advisory & Restructuring LLC. PricewaterhouseCoopers Corporate Advisory & Restructuring LLC is owned by PricewaterhouseCoopers LLP US, a member fi rm of the PricewaterhouseCoopers Network, and is a member of the FINRA and SIPC. PricewaterhouseCoopers Corporate Advisory & Restructuring LLC is not engaged in the practice of public accountancy.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member fi rms of PricewaterhouseCoopers International Limited (PwCIL). Each member fi rm is a separate legal entity and does not act as agent of PwCIL or any other member fi rm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member fi rms nor can it control the exercise of their professional judgment or bind them in any way. No member fi rm is responsible or liable for the acts or omissions of any other member fi rm nor can it control the exercise of another member fi rm’s professional judgment or bind another member fi rm or PwCIL in any way.

For further information, except for US residents enquiring about corporate fi nance-related services, please contact

Germany Werner Ballhaus +49 211 981 5848 [email protected]. Arno Wilfert +49 69 9585 6289 [email protected] Grindley +49 69 9585 3191 [email protected] Hartmann +49 89 5790 6372 [email protected] Späth +49 89 5790 6415 [email protected] Mackenroth +49 40 6378 1309 [email protected]

UK Andy Morgan +44 118 938 3191 [email protected] Cross +44 207 213 4485 [email protected]

France Noël Albertus +33 1 56 57 85 07 [email protected] Julian Brown +34 91 568 4405 [email protected] Marco Tanzi Marlotti +39 02 80 646 330 [email protected] Johan Rosenberg +46 8 5553 3552 [email protected] Andries Mak van Waay +31 20 568 6509 [email protected] Michael Eriksen +45 39 45 92 71 [email protected] Frederic van Hoorebeke +32 2 710 4115 [email protected] Philipp Hofstetter +41 1 630 1506 [email protected]

For US residents requiring information on corporate fi nance-related services, please contact our FINRA-registered broker-dealer in the US, PricewaterhouseCoopers Corporate Finance LLC, at:

US Rakesh Kotecha +1 312 298 2895 [email protected]

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