N O V E M B E R   2 0 0 5

T M T   S E C T O R :   " O N L Y   T H E   A G I L E   W I L L   S U R V I V E "

In need for radical change with convergence as a catalyst

S T

 R I 

C T

 L Y

   P R

 I V A

 T E

   A N

 D   

C O

 N F

 I D E

 N T

 I A L

I D A T E

20

120

220

320

420

520

620

720

820

920

Oct 97 Oct 98 Oct 99 Oct 00 Oct 01 Nov 02 Nov 03 Nov 04 Nov 05

France Telecom Deutsche TelekomBT Group VodafoneDJ Euro Stoxx - Telecom

Telecoms and Media: 5 years of negative shareholder returns…

Telecoms share price performance (rebased to 100)Telecoms share price performance (rebased to 100)

Source: Datastream as of November 22, 2005, Bloomberg1 Total shareholder return

Company

TSR1

5 years

% pa

Deutsche Telekom (16.38)

France Telecom (23.77)

British Telecom (11.58)

Vodafone (11.69)

5

105

205

305

405

505

605

J ul 96 Sep 97 Nov 98 J an 00 Mar 01 May 02 J ul 03 Sep 04 Nov 05

Reed Elsevier Vivendi UniversalBritish Sky Broadcasting ReutersDJ Euro Stoxx - Media

Media share price performance (rebased to 100)Media share price performance (rebased to 100)

Company

TSR1

5 years

% pa

Reed Elsevier (2.88)

Vivendi Universal (19.78)

British Sky Broadcasting (14.13)

Reuters (18.06)

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I D A T E

… despite significant operational and capital optimisation efforts…

Source: Datastream as of November 15, 2005

Telecoms and media market development (rebased to 100)Telecoms and media market development (rebased to 100)

2002: Balance-sheet

restructuring

1 2 3

Balance sheet and liquidity issues

Rights issues across the sector

Selected asset sales

1

2001: Bubble burst

2003: Focus on asset optimisation

2004:Shareholder returns

Need for a new catalyst

Refocus on cash-flow generating businesses

“Run for cash” – improve ROIC

Organic de-leveraging

Increasing earnings and cash flow profile

Focus on dividends and cash distribution

Initiation of share buy-back programs

Increasing focus on top-line growth

2 3

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I D A T E

Telecom industry revenue growthTelecom industry revenue growth New threats

Media industry revenue growthMedia industry revenue growth

… and a high growth environment which today has subsided

Source: DigiWorld, PricewaterhouseCoopers

2%

4%

6%

8%

10%

12%

14%

2001 2002 2003 2004 2005

1%

2%

3%

4%

5%

6%

7%

8%

9%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007EE E

New disruptive Technologies

VOIP

Internet Downloads

MVNOs

New players

Piracy

Increasing competitive intensity

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I D A T E

The rapidly changing consumer market is increasingly driving the telecoms and media convergence

Voice: Home phone

Video: Video rentals Theatre Pay TV

Voice: Wireless WiFi Wi-max VoIP

Video: TVoDSL Hybrid set-top box Wireless video

YesterdayYesterday Today and TomorrowToday and Tomorrow

Data: Newspaper Yellow pages Email

Data: Cable/DSL Internet portal Wireless data

Changing consumptionChanging consumptionpatterns are creating patterns are creating

threats andthreats andopportunitiesopportunities

Data

VideoVoice

Data

VideoVoice

Data

Video

Voice

The composition of the consumer market is rapidly changingThe composition of the consumer market is rapidly changing

Local

Long distance

1980

Dia

l-upPager

Longdistance

Local

Wireless

1995

IPTV

Bro

ad

ban

d

Wire

less

Traditional

Wireless

VoIP

Wir

eles

s

2010

Slightly growing but increasingly fragmented market (access, distribution, content)

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I D A T E

Convergence of Network and IT infrastructure to move onto an all IP platform is imminent

RealityReality Revenues at riskRevenues at risk

Don't

know

24%

No

56%

Yes

20%

Adoption in next 12 monthsAdoption in next 12 months

Voice overtraditional

VoIPlines

Drivers

Criteria for revenues at riskCriteria for revenues at risk

Mitigating the risk – Move to all IP

Mitigating the risk – Move to all IP

PRICING OF SERVICES

Regulations on LLU

Regulations on MVNOs

Positioning of alternative carriers

COMPOSITION OF REVENUES

Next gen NetworksIT

infrastructure

THE PERFECT MITIGANT

Application

provider

Access provider

Application provider

Access provider

Integrated access

and service provider

Incu

mb

en

ts An

oth

er

VoIP to lead to lower voice

revenues

Voice to become an add-on

service

Data and video over IP to drive

revenues

Next gen networks to reduce

costs through:

Seamless migration

Backward capability

Interoperability

PC penetration

Internet penetration

Broadband penetration

PRICING

BUNDLING

Number portability

Contracts

Reduction in number of switches and simplifies network

Improvement in operational efficiency through sharp reduction in headcount and resultant opex savings

Reduction in capex by upto 10% through de-layering of network and corresponding increase in utilisation levels

Build up of additional IT services:

Networks: LAN, Firewalls, WAN

Applications: e-Commerce, interactive gaming, network based PVRs, VoD

Support: Authentication, storage, digital rights management

1 SBC company data

Outsourcing and IP transformationOutsourcing and IP transformation

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I D A T E

The new environment is creating new dynamics and will shape the new leaders

Source: JPMorgan equity research note

Winners will be highly agile.

Status quo is the highest risk path.

More risks

Disruption of existing comfort zone

Technological discontinuities

New invaders

More opportunities

Ability to reach adjacent markets (extended home)

Ability to leverage fundamental competitive advantages (brand, reach, scale, services, knowledge)

But only for agile players

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I D A T E

Over the next 3 to 5 years the European Telecom sector will be characterised by an exceptionally high level of FCF generation

77.3

111.7

193.3214.9

142.0169.0

2005E 2006E 2007E 2008E 2009E 2010E

Cumulative excess cash at net debt/EBITDA of 2.25x (€bn)¹

Cumulative excess cash at net debt/EBITDA of 2.25x (€bn)¹

Source: JPMorgan equity research¹ Post dividends, capex

…

Potential uses of excess cashPotential uses of excess cash

Reduce leverage

Return cash to shareholders Share repurchases Dividend increase

Organic investment (Capex and Opex)

M&A

Cumulative excess cash by operator at net debt/EBITDA of 2.25x (€bn)¹

Cumulative excess cash by operator at net debt/EBITDA of 2.25x (€bn)¹

32.0

28.7

19.7

15.0

11.5

9.4

7.4

6.8

6.7

6.5

6.3

5.7

4.2

3.9

3.0

0.0

VOD

TEF

DT

FT

O2

Bouygues

BT

Belgacom

TNOR

TS

Swisscom

OTE

PT

KPN

TA

TI

38.9

34.7

28.8

20.6

13.7

12.9

9.1

7.5

7.2

6.8

6.6

6.1

6.1

5.3

4.2

3.7

TEF

VOD

DT

FT

O2

Bouygues

TNOR

OTE

Belgacom

TS

BT

Swisscom

KPN

PT

TI

TA

2008E — €bn 2010E — €bn

Source: JPMorgan equity research

O2 O2

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I D A T E

The rationale for further de-leveraging, higher levels of organic investment and higher dividends is limited

Source: JPMorgan equity research and Datastream as of October 26, 2005

… given decreasing capital requirements to finance organic growth…

… given decreasing capital requirements to finance organic growth…

… and already higher-than-average cash being returned to shareholders

… and already higher-than-average cash being returned to shareholders

20%22%

18%

14%12% 13% 14% 13% 13% 13% 13% 12%

1999A 2000A 2001A 2002A 2003A 2004A 2005E 2006E 2007E 2008E 2009E 2010E

The European Telco sector is under-levered and is likely to remain so…

The European Telco sector is under-levered and is likely to remain so…

Capex as % of sales—EU telco

4.2%3.4%

4.3%

3.3%

EU Telco current EU telco 2003 FTSE 350 Utilities FTSE 100

Average sector dividend yields

Net debt/EBITDA 2008E

EU average 0.6x

2.5

1.6

1.4

1.4

1.4

0.9

0.9

0.7

0.6

0.5

0.5

0.3

0.2

0.2

(0.2)

(0.3)

(0.7)

(1.1)

TI

FT

BT

KPN

DT

Cosmote

VOD

TEF

TA

PT

Bouygues

TS

TNOR

TEM

OTE

SCOM

O2

BCOM

Source: JPMorgan equity research

Source: JPMorgan equity research

EU Telco Utilities Market

Increasing sensitivity of organic-only strategies by shareholders

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I D A T E

Private equity: A market-driven economic regulator

Source: BCVA, ECVA/ Thomson Venture Economics, PricewaterhouseCoopers, IFSL, Schroder Investment Management, Broker reports

The private equity industry is increasingly becoming an economic regulator Insulate out-of-favour industries from stock market

volatility Restructure operations out of the public sight

It is estimated that private equity backed companies generate total sales of €273bn and contribute around €34bn in taxes in the UK

170 UK-based private equity firms have invested, since 1983, over €91bn in around 26,000 companies worldwide

Contributions to the economyContributions to the economyInvestment patternsInvestment patterns

2004: €28.5bn

Banks21%

Pension finds19%

Fund of finds14%

Insurance companie

s12%

Others20%

Private individuals8%

Government agencies6%

Funding patternsFunding patterns

11% 19%33%

5% 7% 4%

37%

46%

18% 21%18%

56%44%

21%

77% 72% 78%

33%

0%

20%

40%

60%

80%

100%

UK

Euro

pe

Wor

ld UK

Euro

pe

Wor

ld

Venture Capital Development Capital Buyouts20042000

Private equity’s presence is increasing as % of M&A activity

Private equity’s presence is increasing as % of M&A activity

12.0% 20.0%

99.5%88.0% 80.0%

0.5%0%

20%

40%

60%

80%

100%

1993 2003 2004

Private equity Others

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Current available sector firepower could act as a catalyst for further M&A consolidation …

77.3

111.7142.0

169.0193.3 214.9

2005E 2006E 2007E 2008E 2009E 2010E

Cumulative excess cash (€bn)1Cumulative excess cash (€bn)1

Need for scale on certain segments of the industry

Need to consolidate operations to drive market/pricing to stability

Migrate across the value chain and gain access to the final customer

Acquire technological/marketing skill-set

Rebalance and optimise capital structure

Gain full control of controlled assets (minority buyouts)

Capitalise on regulatory hedge opportunities

Expected drivers of M&AExpected drivers of M&A

15% of investments in communications sector= c. €60bn

>€230bn over next 3 years

Private equityPrivate equityTotal available firepower

Total available firepower

+ =

Source: JPMorgan equity research note

Source: JPMorgan equity research1 Post dividends, at a Net Debt/EBITDA of 2.25x

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I D A T E

Tele

com

s a

nd

med

ia:

Con

su

mer

sta

nd

poin

tTele

com

s a

nd

med

ia:

Con

su

mer

sta

nd

poin

t

Technology is driving increasing waves of convergence and M&A

1st wave 2nd wave

Content

TV Broadcasting

Services

Fixed-line

Internet

Wireless

DT /T-

Online

FT/

Wanadoo

TI/TIMedia

Broadband

Voice/data

Wireless access

FT/Orange

TI/TIM

Triple play

convergence

Sport Movies Games Music News E-learning Classified

DTT

e-learning e-commerce Search Dating Messaging Community

Today

Operators

Content ownershi

p?

Distribution

platform?

Technology

Ownership?

+ + +

Belgacom/ football rights

H3G/ football rights

France Telecom/Canal plus

Telecom Italia/Mediaset alliance

Disney/ Living Mobile

Disney/ Minds Eye

Universal Music/Vodafone alliance

Ebay/ Skype

Microsoft/ Teleo

Microsoft/ Mediastreams.com

Elion/ Microlink

British Telecom/ Sky Net Systems

Alcatel/ Maplecroft alliance

Cesky Telecom/ Microsoft alliance

Swisscom/ Antenna Hungaria

BT/ Infonet

France Telecom/ Arte France & Telerama alliance

Enablingtechnology

Netw

ork

& s

yste

m m

an

ag

em

en

t

Manu-facturer

Com

pu

ter/

peri

ph

era

ls

Software

Tele

com

mu

nic

ati

on

eq

uip

men

t

Com

munic

ati

on

devic

es

Netw

ork

eq

uip

ment

Pri

vate

netw

ork

sPub

lic n

etw

ork

s

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I D A T E

In the last 6 months we have seen increasing signs of convergence-driven M&A activity

Note: JPMorgan deals

/

/

/

/

(Sweden)

/

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I D A T E

Recent M&A activity is more focused strategically v. the 2000 era

Deal type1Deal type1

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2000 2001 2002 2003 2004 2005

Financial In-marketEx-market Share buy-backBuy-in of existing affiliate

Number of deals

Source: Broker reports1 Global; 2 Until July 2005

1

2

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I D A T E

Organic growth based on

innovation and customer

relationship

The sector is providing considerable opportunities for agile operators

Inorganic growth through bolt-on and

transformative transactions

Revitalise management and

Board skill set

Continued focus on cost and cash-flow

optimisation

Promote financially sound shareholder focused business

cases, for organic and inorganic strategy

Redefine market based on customer needs rather than product offering

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