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Transcript of Ziggy Research Note
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Please refer to the important disclosures and analyst certification on page 2 and the inside back cover of this
document, or on our website www.macquarie.com/disclosures.
NETHERLANDS
ZIGGO NA Outperform
Price (at 04:00, 30 Apr 2013 GMT) 27.22
12-month target 30.00
12-month TSR % +18.9
Upside/Downside % 10.2
Valuation 30.00 - EV/EBITDA
GICS sector Telecommunication Services
Market cap m 5,443
30-day avg turnover m 25.1
Market cap US$m 7,181
Number shares on issue m 200.0
Investment fundamentals
Year end 31 Dec 2012A 2013E 2014E 2015E
Revenue m 1,536.9 1,599.4 1,718.3 1,863.6 EBITDA m 880.4 911.2 959.5 1,012.7 EBITDA growth % 5.5 3.5 5.3 5.5 EBIT m 561.6 639.1 675.5 718.2 Reported profit m 192.8 361.1 401.8 429.5 Adjusted profit m 218.1 407.6 413.8 441.5
EPS adj 1.09 2.04 2.07 2.21 EPS adj growth % 3,131.8 86.9 1.5 6.7 PER adj x 25.0 13.4 13.2 12.3 Total DPS 1.45 2.00 3.75 3.75 Total div yield % 5.3 7.3 13.8 13.8 EV/EBITDA x 9.4 9.1 8.7 8.2
Source: FactSet, Macquarie Research, May 2013
(all figures in EUR unless noted)
Analyst(s) Alex Grant +44 20 3037 1964 [email protected] Guy Peddy +44 20 3037 4509 [email protected]
2 May 2013 Macquarie Capital (Europe) Limited
Ziggo Dutch mobile Initiate with Outperform rating and 30 TP
We initiate coverage on Ziggo with an Outperform rating and 30 target price.
Our sector thesis is positive on growth stocks / cable operators like Ziggo who
are market share winners. We see a number of positive catalysts for Ziggo from
2H13 including; upside to consensus estimates from 2014E from mobile
services, improving fixed line trends from 2H13, M&A upside from a possible
Liberty Global bid and DPS/FCF yield expansion from 2014E. Fundamental short
term upside is limited bar an LBTYA stake increase, but we would look to hold a
Ziggo position from 2H13 onwards and would be more active buyers below 27.
Our preferred European cable operator is Kabel Deutschland (OP, TP 80).
Mobile to drive 5% 2014E sales upgrades; 11% in 2015E
We expect Ziggo to launch small scale mobile services in late 2H13 with a major
launch in 2014. We see 5% upside to consensus sales estimates in FY14E /
11% in FY15E mostly driven by mobile. We view mobile more as a tool to protect
the core fixed line base as the Dutch market moves to quad play from 2H13/14.
We expect Ziggo to be competitive on price but not be highly disruptive. We
include 46m of mobility revenue in 2014E and 146m in 2015E which
represents a 0.8% mobile revenue market share in 2014E (2.6% in 2015E).
Ziggo a Liberty Global M&A target - 3438 M&A valuation
Ziggo is likely an M&A target for Liberty Global who already own 15% of the
company and have an existing Dutch cable business (UPC). We estimate that
operational and tax synergies from a Liberty Global bid could be worth c8 per
Ziggo share from 2014E (3.4 per share from tax). We have an M&A valuation
range of 3438 for Ziggo. Key strategic benefits for Ziggo / UPC are a national
Wi-Fi / fixed line network and better scale to compete with KPN. Regulatory
issues from a merger are material but remedies exist. A potential bid for KD8
may take priority for Liberty Global given Vodafones interest in the asset.
Expect improving fixed line performance from 2H13
We expect Ziggos fixed line KPI to show improvement from 2H13 and revenue
growth to accelerate. This reflects 1 February price increases, bundle
promotions, broadband speed increases and improved retention / churn
reduction activities. We expect competitive pressure from KPN to ease from
2H13 as it puts through 2% price increases and we expect a more constructive
fixed line environment. The addition of mobile services to Ziggos product suite
should drive further fixed line performance in FY14E through quad play bundles.
2014E Yield and FCF upside from refinancing
We expect Ziggo to increase both its dividend yield and FCF yields over the next
12 months. We target an FY13E dividend of 2 increasing to 3.75 in FY14E as
Ziggo increases leverage close to 3.5x following debt refinancing. This
represents an FY13E dividend yield of 7.3% and 13.8% in FY14E. Consensus
targets 1.92/2.40. We expect dividends to moderate to 1 by 2017E as we
assume degearing becomes a priority. Debt refinancing should save 60m pa in
finance costs from FY14E driving FCF yield expansion to 8.5% in FY14E.
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 2
Inside
M&A - Mobility and acquisition upside 3
Valuation, recommendation, risks 5
Dutch mobile success essential for Ziggo7
Ziggo a likely Liberty M&A Target 15
Expect improving fixed line trends from
2H13 18
Yield and FCF upside from refinancing 24
MacQ estimates versus consensus 26
Ziggo Company profile
Ziggo is a Dutch national media and communications services provider
(cable) serving around 3 million households, 1.8 million broadband Internet
customers, 2.2 million digital television customers and 1.4 million telephone
subscribers. Ziggo has the largest fibre optic network in the Netherlands with
a constant capacity per connection of 34 GB/s. Ziggo's network is 98% fibre
optic with an average of 300 metres from its customers' front doors.
Current Ziggo CEO is Bernard Dijkhuizen who started in February 2007 and is
due to retire at the end of 2013. Current Deutsche Telekom CEO Rene
Obermann will become CEO from January 2014. Bert Groenewegen is CFO
having started in March 2010, Marcel Nijhoff is CCO having started in
February 2007 and Paul Hendriks is CTO.
Liberty Global holds a 15% stake in Ziggo.
Fig 1 FCF yield and Dividend yield progression 201014E
Source: FactSet, Macquarie Research, May 2013
Fig 2 ZIGGO NA vs Stoxx600
Source: FactSet, Macquarie Research, May 2013
(all figures in EUR unless noted)
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010 2011 2012 2013 (E) 2014 (E)
FCF yield Dividend yield
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 3
Dutch mobile Initiate on Ziggo with Outperform rating target 30
We initiate coverage on Ziggo with an Outperform rating and 30 target price. Fundamental
short term upside is limited bar a stake increase by Liberty Global (LBTYA US, $74.08, Not
covered), but we would look to hold a Ziggo position from 2H13 onwards. We see a number
of positive catalysts for Ziggo from 2H13;
We see 5%/11% upside to consensus 2014E/15E sales estimates largely from the launch
of mobility services from late 2H13E / early 2014E.
We expect Ziggos fixed line performance to improve through 2013 as competitive
pressure eases from 2H13 in the Dutch fixed line market as KPN increases prices and
eases its aggressive bundles promotions to drive improved financial performance. Ziggos
self help activities should drive improving KPI. This is a market view; the short term risk is
that KPN continue to promote low end bundles aggressively and both KPN/Tele2
aggressively promote quad play bundles before Ziggo has a fully functional mobile product.
We expect Liberty Global to increase its stake in Ziggo. Liberty Global is accelerating its
acquisition of European cable assets; we estimate potential synergies from a UPC/Ziggo
merger worth around 8 per share. We believe Liberty Global is also interested in German
cable operator Kabel Deutschland (KD8 GR, 72.17, Outperform, TP: 80.00); the
purchase of KD8 may take priority given Vodafones (VOD LN, 1.96, Outperform, TP:
2.05) potential interest in KD8 (Bloomberg).
Ziggo debt refinancing should allow higher dividend payments as payout covenants are
removed and Ziggo should be able to lower its finance costs by around 60m pa from
2014E assuming funding is available at 4% (in line with recent debt refinancing).
Our 30 target price is based on an EV/EBITDA based valuation of 29.70 and an M&A
valuation of 33.89. Our 30 target price offers 10% upside and 18% TSR. We would be
more active buyers below 27 (below 9x 2013E EV/OIBDA).
Our sector thesis is positive on growth stocks / cable operators who are market share
winners. Ziggo faces operational challenges, largely through the fight back from KPN, a more
advanced incumbent than many. However operational issues are well known and Ziggo
remains a growth stock delivering market share gains. Our preferred European cable operator
remains Kabel Deutschland.
Mobile to drive 5% 2014E sales upgrades; 11% in 2015E
We expect Ziggo to launch small scale mobile services in late 2H13 with a major launch in
2014. We see 5% upside to consensus sales estimates in FY14E / 11% in FY15E mostly
driven by mobile services. We target 7.4% revenue growth in FY14E where we expect mobile
to add 3pp to revenue growth.
We assume Ziggo use their MVNO agreement with Vodafone to support its core homespot
WiFi network and 4G small cell services. We expect Ziggo to be a highly competitive operator
as upsells mobility / converged services to its fixed line base with all mobility revenue
incremental. Mobility is likely to be used to support its core fixed line products and lower
churn.
Tele2 is likely to provide an incremental challenge to Ziggo from 2014E onwards as they
launch MNO services (expect 2Q14E) and a more competitive quad play product.
We expect the Dutch market to aggressively move to quadplay offers from 2H13 (major
impact in 2014E) as KPN/Tele2 attempt to exploit their competitive advantage in mobile
versus cable operators UPC/Ziggo. The arrival of current DTE CEO Obermann is likely to
signal the launch of major mobile services; he knows the Dutch market through DTE-s Dutch
asset T-Mobile and is an advocate of mobile data.
Ziggo a likely Liberty Global M&A target material synergies exist
Ziggo is likely an M&A target for Liberty Global who already own 15% of the company and
already have a Dutch cable business (UPC). We estimate that operational and tax synergies
for a Liberty Global bid for Ziggo could be worth c8 or more per Ziggo share from 2014E.
We see a number of
positive catalysts
for Ziggo from 2H13
Ziggo is likely an
M&A target for
Liberty Global
Our sector thesis is
positive growth
stocks / cable
operators
We expect Ziggo to
launch mobility
services in late
2H13
Tele2 are likely to
provide an
incremental
challenge to Ziggo
We expect the Dutch
market to
aggressively move
to quadplay offers
from 2H13
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 4
We do not believe a full buyout is likely until 2H13 at the very earliest given Liberty Globals
management and balance sheet focus on the Virgin Media deal. Liberty Global are also likely
saving balance sheet capacity for a potential KD8 bid. Opportunistic stake increases are more
likely. We estimate the Ziggo share price already may have up to 2-3 of M&A premium
within it already.
Key strategic benefits for Ziggo / UPC are a national Wi-Fi / fixed line network and better
scale to compete with KPN in additional to material tax and cost synergies.
There are likely to be regulatory issues given the material size of New Co (Ziggo/UPC) but
not enough to stop a deal, in our view. The Netherlands fixed line market is already
dominated by cable and KPN and regulatory concessions can be made. KPNs strong fixed
line performance highlights there is already robust fixed line competition. Liberty Global may
wait until 2014E for M&A given current pressure on KPN.
Expect improving fixed line performance from 2H13
Our base case assumes that Ziggos fixed line KPI show improvement through 2013E and
revenue growth accelerates reflecting 1 February price increases, All in 1 bundle promotions,
3Q13 speed increases and improved retention / churn reduction activities. Improving fixed
line performance is a view held by the market and is explicit in Ziggo guidance, but we think
consensus underestimates the operating momentum for Ziggo entering 2014.
The major fixed line market disruptor remains KPN through its low end Telfort brand which
offers a triple play bundle with 2 set top boxes / TV subscriptions at c41 per month. We
believe KPNs competitive intensity will ease from 2H13 as KPN increases prices by around
2% and we believe they will not choose to compete aggressively in both the fixed and mobile
markets as Tele2 / Ziggo join the mobile market. KPN have confirmed they will increase their
fixed line pricing from 3Q13.
The short term risk is that KPN continue to compete aggressively in the fixed line market
through Telfort promotions, given positive fixed line trends in 4Q12/1Q13. This would be
negative for Ziggos market and KPI. Although Ziggos broadband / telephony KPIs are solid
the underlying subscriber loss (loss of TV / digital pay TV customers) must be reversed. 2Q
(18 July) and 3Q (18 October) results are key catalysts for Ziggo to show improvement.
We expect the Dutch market to move to quadplay in the course of 2013/2014 which is key to
our view that Ziggo need to get mobile right. Should KPN/Tele2 accelerate quadplay
materially ahead of Ziggos mobile launch, this would be a negative for Ziggo.
Yield and FCF upside on recapitalisation
Ziggo is likely to increase both dividend yields and FCF yields over the next 12 months.
We target an FY13E dividend of 2 increasing to 3.75 in FY14E as Ziggo increase leverage
following the refinancing of dividend restrictive bonds. This represents an FY13E dividend
yield of 7.3%, and 13.8% in FY14E. Consensus targets 1.92/2.40. We expect dividends to
moderate to 1 by 2017E as we assume degearing becomes a priority.
Ziggo has 2bn of higher coupon debt (6.125%/8%) which can be refinanced in the next 12
months. Refinancing allows a higher dividend to be paid but also has an annual financing cost
benefit of around 60m as Ziggo have recently issued debt at c4% coupon.
Lower finance costs should help improve FCF yields from 7% in FY13E to 8.5% in FY14E;
this compares favourably to KD8 at 1.5% and Telenet at 5.3% in FY14E.
Our base case
assumes KPI and
revenue improve
through 2013. This
is a market view
Fixed line market
disruptor is KPN
through its low end
Telfort brand
Key short term risk
is that KPNs
continues to erode
Ziggos subscriber
base and margins
Ziggos former PE
owners still own
17% which can be
placed
Regulatory issues
unlikely to stop
merger
Ziggo should
increase both
dividends and FCF
in FY14E
FCF yields should
expand from 7% in
FY13E to 8.5% in
FY14E
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 5
Valuation, recommendation, risks We rate Ziggo Outperform with a 30 target price. Our 30 target price is based on an
EV/EBITDA based valuation of 29.70 and an M&A valuation of 33.89. Our 30 target price
offers 10% upside and 18% TSR.
Fig 3 Ziggo valuation target 30 ( per share)
Target price 30.0
Macro DCF 24.1 See Figure 4 EV/OCF 25.6 Based on a 14x multiple EV/OIBDA 29.7 Based on a 9.5x multiple Other methodologies PER 29.1 Using a multiple of 14.3x 2013E EPS, computed using 1/(9.00% - 2.00%) Consensus PER 20.6 Using a consensus multiple of 18.0x 2013E EPS Consensus EV/OIBDA 27.8 Using a multiple of 9.4x consensus EV/OIBDA NPV of FCF 26.0 Using a WACC of 9.00% and perpetuity growth rate of 2.00% Cash flow per share 27.1 Using a multiple of 14.3x 2013E CFPS, computed using 1/(9.00% - 2.00%)
Source: FactSet, Macquarie Research, May 2013
M&A valuation of 34-38
We believe Liberty Global will likely increase its stake in Ziggo from 15% currently; this may
take the form of opportunistic stake purchases or a full bid. We analyse a potential bid from
Liberty Global in more detail later in this report and analyse operational and tax synergies.
Our base case M&A valuation is 33.89, which represents a 13% premium to our 30 target
price and around a 25% premium to the current share price.
We estimate an M&A valuation range of 33.89 to 38.26 which is based on a 9.5x-10x
2013E OIBDA valuation and 1.68bn of synergy benefits which we allocate 50%-75% to
Ziggo.
Fig 4 Ziggo M&A valuation ( per share)
EBITDA Multiple Synergies 9.5x 10.0x
EBITDA valuation 29.70 31.97 Synergy allocation per Ziggo share 50.0% 75.0% Base case synergies per share 1,678 4.19 6.29 Per share M&A valuation 33.89 38.26
Source: FactSet, Macquarie Research, May 2013
DCF Input and outputs
We highlight our DCF inputs and outputs (DCF valuation 24.12) below which imply an EV
multiple of just 7x 2013E, well below current levels at c9x.
Fig 5 DCF input and outputs
Implied EV/OIBDA 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Group 9.1x 8.1x 7.2x 7.2x 8.3x 7.9x 7.5x 7.2x 7.0x 6.8x 6.6x 6.5x Implied EV/OCF 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Group 9.1x 10.4x 10.8x 10.8x 13.5x 11.9x 11.0x 10.4x 9.9x 9.5x 9.3x 9.1x Valuation assumptions
WACC g Tax
Group 9.0% 2.0% 26.0%
Source: FactSet, Macquarie Research, May 2013
Our DCF valuation uses a 9% WACC in line with the WACC used for KPNs domestic
operations. Using an 8% WACC would generate a sensitised valuation of 30.45. We use a
2% perpetuity growth rate in line with other European cable operators, where we assume
cable TV operators can grow revenue at long-term inflation (c2%).
Our 30 target price
offers 10% upside,
18% TSR
We believe Liberty
Global will likely
increase its stake in
Ziggo
M&A valuation
range of 34-38
Ziggo DCF at 8%
WACC is 30.45
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 6
Fig 6 Sensitised DCF flexing perpetuity growth rates and WACC
Perpetuity growth rate
0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
WACC 6% 38.76 42.46 46.97 52.62 59.88 69.56 7% 30.53 32.97 35.86 39.32 43.55 48.84 8% 24.51 26.20 28.16 30.45 33.15 36.40 9% 19.90 21.13 22.52 24.12 25.95 28.10
10% 16.27 17.19 18.21 19.37 20.68 22.17 11% 13.34 14.04 14.81 15.68 16.64 17.72 12% 10.92 11.46 12.06 12.72 13.45 14.26
Source: FactSet, Macquarie Research, May 2013
Key Risks to Ziggo Outperform rating and 30 target price
We detail following risks to our Ziggo rating and target price.
Competition The Dutch telecoms market is competitive in both the fixed line and mobile
market. Ziggo may be subject to increased competition / promotions from KPN and others.
Our view is based on a constructive level of market competition.
Regulation If the Netherlands enforced a wholesale cable access obligation it would be
a negative to Ziggo.
Bond refinancing Our dividend assumptions and falling finance cost assumptions rely
on bond refinancing.
Price increases Our model assumes Ziggo continue to have pricing power for its fixed
line base.
Mobile launch Our estimates assume a mobile launch in from 2H13 with a material
increase in revenue growth in 2014 driven by the mobile launch. Tele2 is expected to
launch MNO services in 2014E which may increase competition levels detrimentally.
Dutch macro / consumer confidence. Ziggos results and pricing power may suffer if
Dutch consumer confidence falls or macro conditions deteriorate.
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 7
Dutch mobile success essential for Ziggo We assume Ziggo soft launch mobility services during late 2H13 to test the market and build
Ziggo mobile experience focussing on the Vodafone MVNO. We expect the WiFi roll out to
complete by the end of 2013 and Ziggo to launch wider market services from early 2014
primarily based on utilising the higher margin WiFi Ziggo network.
Mobile provides incremental revenue to Ziggo but Ziggo must choose if its strategy is more
focussed on price aggression/market share gains or a more conservative churn reduction
tool. The level of subsidies needed to drive mobile success and build the Ziggo mobile brand
is also key. Although Ziggo is playing catch-up to mobile peers we believe the key objective is
to defend the fixed line base. We believe Ziggo will launch highly competitive data focussed
offers based on offering Ziggos key fixed products (TV / broadband) everywhere.
We assume Ziggo will focus its mobile offer on its core homespot WiFi network and 4G small
cell services supported by its MVNO agreement with Vodafone where a customer is away
from the Ziggo network. Ziggo may partner with UPC to offer a national WiFi network.
We expect 2014 revenue growth to be materially above consensus and target 7.4% Ziggo
revenue growth in FY14E where we expect mobile to add 3pp to revenue growth.
Ziggo mobility services likely to focus on defending fixed line base
We expect Ziggo to be a reasonably disruptive operator as it upsells mobility / converged
services to its fixed line base and gains market share. We expect Ziggo to be competitive
rather than highly aggressive on price. Any mobility revenue is incremental and Ziggo do not
have a current mobile base to reprice. However Ziggo are playing catch up with peers and we
view defence of the fixed line base as the key objective for Ziggo.
We expect the Dutch market to aggressively move to quadplay offers from 2H13/2014 as
KPN/Tele2 attempt to exploit their competitive advantage versus cable operators UPC/Ziggo.
Ziggo propose a phased mobile roll out based on a regionalized WiFi modem roll out which
suggests the regional soft launch of mobility services in 2H13 but we do not expect a major
national launch of mobility services until the arrival of current DTE CEO Rene Obermann in
2014E and with the Wi-Fi modem roll out complete (YE 2013). Obermann knows the Dutch
market through DTEs Dutch asset T-Mobile and is an advocate of mobile data.
Mobility materially improves Ziggo revenue profile
The addition of mobility revenue in our estimates from 2014E leads us to target 7.4% revenue
growth in 2014E and 8.5% in 2015E. Excluding mobility revenue estimates (and Esprit Telecoms
consolidated from 3Q13E) we target 3.4% revenue growth in 2014E and 2.9% growth in 2015E.
Our 2014E group revenue estimates are 5.1% above consensus, 11.2% in 2015E.
We include 46m of mobility revenue in 2014E and 144m in 2015E which represents a 0.8%
revenue market share in 2014E and 2.6% in 2015E. We assume Ziggo adds around 540k
customers in 2014 which represents 20% of its TV base and a 2.4% SIM market share at
year end. In 2015E we assume Ziggo add a further 280k customers which represents
upselling to a further 14% of its TV base and a 3.7% SIM market share at year end. Tele2 has
only c535k customers after 10 years of operations, but Ziggo has a materially higher fixed line
base to upsell to.
We assume a major
mobile launch in
2014
We target 6.3%
revenue growth in
FY14E where we
expect mobile to
add 3pp to revenue
growth
Ziggo mobile focus
likely to be on
defending fixed line
base
Target 3pp of mobile
revenue growth in
2014E
We expect Ziggo to
gain 0.8% revenue
market share in
2014 and 2.6% in
FY15
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 8
Fig 7 Ziggo revenue growth (%) Fig 8 Ziggo revenue mix (m)
Source: Company Data, Macquarie Research, May 2013 Source: Company Data, Macquarie Research, May 2013
2H13/2014 crucial period for Dutch mobile
Late 2013/2014 is a crucial period for the Dutch wireless market as both Ziggo and Tele2 are
likely to disrupt the market with mobility services. We expect Tele2 to launch MNO 4G
operations in 2014 but it can ramp up its MVNO services before then. Tele2 won 4G
spectrum reserved for new entrants in the 4Q12 Dutch spectrum auction and have a current
3G MVNO agreement with T-Mobile (DTE).
The Dutch mobile market is already reasonably competitive from a European pricing
perspective given ongoing price pressure and App substitution (Whats App) from 1Q 2011.
However the launch of new mobility services by a cable payer with a large fixed line / TV
customer base (Ziggo) and an aggressive low capacity utilization MNO (Tele2) is likely to
both lower prices and lead to market share losses by incumbent players.
Mobile market challenging in 2013/14
Our base case for the Dutch wireless market assumes around 4.8pp of revenue contraction
over the next 2 years (-1.2% market revenue contraction in 2013E, -3.6% contraction in
2014E) and a return to 0.5% growth in 2015E. We assume market revenue growth of 23%
PA thereafter. We assume around 1pp of SIM growth pa into the mid term.
Fig 9 Dutch Service revenue growth (%) Fig 10 Dutch SIM growth (%)
Includes KPN, Tele2,T-Mobile, VOD, Ziggo Includes KPN, Tele2,T-Mobile, VOD, Ziggo and MVNOs
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2010 2011 2012 2013(E) 2014(E) 2015(E) 2016 (E)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2012 2013E 2014E 2015E
Standard TV revenue Digital Pay TV revenue
Broadband revenue Fixed line telephony revenue
Other revenue Business services
Mobile Telephony revenue
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2011 2012 2013E 2014E 2015E 2016E 2017E
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2012 2013E 2014E 2015E 2016E 2017E
Our base case
assumes -3.6%
market mobile
growth in FY14
Late 2013/2014
should see Ziggo
and Tele2 disrupt
the mobile market
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 9
Data focussed Ziggo mobile offer likely
We assume Ziggos mobile proposition is predominately data focussed for Smartphones /
tablets and is focussed on the Ziggo WiFi / home spot network for data offload which should
support higher margins. We assume use of a Smartphone calling App and use of Vodafones
MNO network for voice and data roaming away from the Ziggo network. Ziggo have not
disclosed details of their MVNO agreement with Vodafone but we would expect an agreement
to cover both 3G and 4G services. This provides Ziggo with operational flexibility albeit at a
margin cost.
Ziggo may choose to offer mobility services in combination with UPC given the pair jointly
own 2.6 GHz spectrum and the combined company could offer a national WiFi offload
network. However Ziggo can offer national services through the Vodafone MVNO agreement.
Simple and competitive Ziggo pricing likely
We assume Ziggo offer a simple mobile pricing structure with 2-3 offers with a focus on SIM
only with some handset subsidies. SIM only offers higher margins but Ziggo are likely to have
to invest in subsidies to drive material market share increases. The initial OIBDA contribution
of Ziggo Mobile is likely to be low due to marketing / promotional activity and subsidies. The
SIM only focus would aim to gain share from the three incumbent operators. Depending on
the use/economics of on net / versus off net traffic, the headline voice/SMS minutes offered
may vary.
Fig 11 Macquarie Ziggo tariff estimates
Operator Minutes SMS Data (MB) Price per month Duration
Ziggo 75 75 750 10 12 Ziggo 150 150 1500 20 12 Ziggo 250 250 2500 35 12
Source: Macquarie Research, May 2013
We assume a 2013/2014 ARPU of 17.50 for Ziggo, in line with KPN consumer at around
16 and below T-Mobile at around 24 and Vodafone at 28.
We highlight current Dutch SIM only pricing below which indicates the potential for Ziggo to
gain share. The table shows comparable offers from KPN/Vodafone at around 14-50 per
month versus our assumptions for Ziggo at 10-35 per month.
Fig 12 Current Dutch mobile pricing (Sim only)
Minutes SMS Data (MB) Price per month ()
Duration (Months)
Other
KPN 50 50 250 23.5 12 100 mins/SMS KPN 125 125 1000 32.5 12 250 mins/SMS KPN 300 300 2500 52.5 12 600 mins/SMS, 4G data KPN Unlimited Unlimited 5000 72.5 12 Unlimited, 4G data Telfort 300 None None 7 12 Telfort 300 100 None 9 12 Telfort 300 100 500 MB 16 12 Tele2 50 50 500 10 12 100 mins/SMS, 13 after 12 months Tele2 100 100 500 13 12 200 mins/SMS, 16 after 12 months Tele2 250 250 1000 24 12 500 mins/SMS, 29 after 123 months Tele2 350 350 2500 39.5 12 700 mins/SMS, 47 after 123 months T-Mobile 110 110 110 10 12 330 mins/SMS/MMS/MB T-Mobile 150 150 250 18 12 550 mins/SMS/MMS/MB T-Mobile 250 Unlimited 500 25 12 T-Mobile 450 Unlimited 900 34 12 T-Mobile 600 Unlimited 1000 38 12 VOD 100 Unlimited 500 14.3 12 6 months at 9.50, 6 months at 19 VOD 200 Unlimited 500 16.9 12 6 months at 11.25, 6 months at 22.5 VOD 400 Unlimited 500 34 12 VOD Unlimited Unlimited 1000 39 12 VOD Unlimited Unlimited 4000 50 12
Source: Company data, Macquarie Research, May 2013
We assume Ziggo
offer a simple
pricing structure
with 2-3 offers
Ziggo may offer
mobility services
with UPC
We assume Ziggos
mobile proposition
is data focussed
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 10
Expect margin compression as Ziggo ramp up mobile
We expect 1-2pp per annum of OIBDA margin compression for Ziggo from 2014E as lower
margin mobile revenue becomes a greater proportion of their revenue mix and the company
invests margin to support top line growth. The initial EBITDA contribution of Ziggo mobile is
likely to be limited as Ziggo increase marketing spend to build a mobile brand, subsidise
handsets and as initial mobile services are likely to be more MVNO dependent and hence
lower margin.
Mobility revenue generated through MVNO services is likely to be far lower margin than
mobility revenue generated through the fixed line network. The fixed line network generates
gross margins of 80%.
Assuming 75% WiFi off load of mobile data alone would generate gross margins of around
30% at our envisaged Ziggo price points. In the analysis below we assume a cost per voice
minute of 0.035, 0.01 per SMS and 0.02 per MB.
Fig 13 Ziggo mobile cost assumptions 75% data offload / no SMS/voice offload
Minutes SMS Data Price per month
Voice Cost SMS Cost Data cost (75% WiFi
Offload)
Cost Gross Profit
Gross Profit
Margin
Ziggo 75 75 750 10 2.625 0.75 3.75 7.125 2.875 28.8% Ziggo 150 150 1500 20 5.25 1.5 7.5 14.25 5.75 28.8% Ziggo 250 250 2500 35 8.75 2.5 12.5 23.75 11.25 32.1%
Source: Company data, Macquarie Research, May 2013
If Ziggo can offload 75% of all traffic (data, voice and SMS) then gross margin could be
materially higher at around 50-60%.
Fig 14 Ziggo mobile cost assumptions 75% data/ SMS/ Voice offload
Minutes SMS Data Price per month
Voice Cost (75% WiFi
Offload)
SMS Cost (75% WiFi
Offload)
Data cost (75% WiFi
Offload)
Cost Gross Profit
Gross Profit
Margin
Ziggo 75 75 750 10 0.66 0.19 3.75 4.59 5.41 54.1% Ziggo 150 150 1500 20 1.31 0.38 7.50 9.19 10.81 54.1% Ziggo 250 250 2500 35 2.19 0.63 12.50 15.31 19.69 56.3%
Source: Company data, Macquarie Research, May 2013
Belgian peer Telenet estimates 3/4 of their traffic is offload via WiFi; Ziggos extensive WiFi
network roll out plans support a similar amount of WiFi off load which should control the
mobile data cost. Low Dutch voice/SMS termination rates favour a challenger pricing model
by Ziggo and use of a IP based voice/SMS App from 2H13 should further reduce MVNO pay
away to Vodafone.
Material wireless market share gains for Ziggo in FY1416
We expect Ziggo to gain 3ppt of revenue market share by 2016E and 5.5pp of SIM market share.
We expect 1-2pp per
annum of OIBDA
margin compression
from 2014E
Mobile gross margin
likely to be 30-40%
versus fixed line at
80%
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 11
Fig 15 Dutch SIM market share Fig 16 Dutch revenue market share
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Comparison with TNET mobile launch
We compare the launch of mobile services by Belgian cable operator Telenet with our
expectations for Ziggo; where our Ziggo upselling and revenue estimates are more
conservative. We highlight our Ziggo mobile revenue growth and SIM market share
assumptions for 2013E/2014E versus Telenet. The revenue impact on Telenet is higher given
the higher price points of Ziggos King/Kong offers (c30 ARPU) versus our lower pricing
assumptions for Ziggo.
Fig 17 Ziggo total telephony revenue growth assumptions (%)
Fig 18 TNET total telephony revenue growth (%)
Source: FactSet, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
We assume Ziggo adds around 540k SIM adds in its first year (2H14E weighted), in line with
TNETs first 12 months performance (Mobile Launch 3Q12). We note Telenet mobile success
accelerated after they increased handset subsidises. Ziggo are likely to have to subsidise
handsets to gain success.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
KP
N
Co
nsum
er
- M
NO
KP
N
Busin
ess -
MN
O
VO
D-
MN
O
T-M
obile
-
MN
O
Tele
2 -
MN
O
Zig
go -
MV
NO
2011 2012 2013E 2014E 2015E 2016E
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
KP
N
Co
nsum
er
- M
NO
KP
N
Busin
ess -
MN
O
VO
D-
MN
O
T-M
obile
-
MN
O
Tele
2 -
MN
O
Zig
go -
MV
NO
2011 2012 2013E 2014E 2015E 2016E
0%
5%
10%
15%
20%
25%
30%
35%
1Q
13E
2Q
13E
3Q
13E
4Q
13E
1Q
14E
2Q
14E
3Q
14E
4Q
14E
1Q
15E
2Q
15E
3Q
15E
4Q
15E
1Q
16E
2Q
16E
3Q
16E
4Q
16E
Telephony launch
0%
10%
20%
30%
40%
50%
60%
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13E
2Q
13E
3Q
13E
4Q
13E
1Q
14E
2Q
14E
3Q
14E
4Q
14E
1Q
15E
2Q
15E
3Q
15E
4Q
15E
Mobile telephony
launch
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 12
Fig 19 Ziggo - SIM adds (000) Fig 20 TNET mobile adds (000) (3Q12 step-up)
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
We expect a slower pace of upselling mobile to a TV customer base by Ziggo relative to
Telenet as highlighted below.
Fig 21 Ziggo mobile customers / total customers (000)
Fig 22 TNET mobile customers / total customers (%)
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Ziggo growth estimates materially below Iliad growth
Our Ziggo SIM market share growth estimates are materially below the success enjoyed by
Iliad (Free Mobile). We expect Ziggo do have 2.4% SIM market share 1 year after launch,
well below the 7.3% of SIM market share gained by Iliad.
0
100
200
300
400
500
600
2013E 2014E 2015E 2016E
0
50
100
150
200
250
300
350
400
2012 2013E 2014E 2015E 2016E
0%
5%
10%
15%
20%
25%
30%
35%
40%
2014E 4Q15E 2016E
0%
10%
20%
30%
40%
50%
60%
70%
80%
2012 2013E 2014E 2015E 2016E
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 13
Fig 23 France SIM mobile market share (%) - 1Q11-4Q15E
Fig 24 Dutch mobile SIM market share (%) - 1Q11-4Q15E
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Our service revenue estimates show a similar level of market share gains for Ziggo; materially
below Iliad (Free Mobile).
Fig 25 France service revenue mobile market share (%) - 1Q11-4Q15E
Fig 26 Dutch service revenue mobile market share (%) - 1Q11-4Q15E
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13E
3Q
13E
1Q
14E
3Q
14E
1Q
15E
3Q
15E
Orange SFR Bouygues Free Mobile
0%
5%
10%
15%
20%
25%
30%
35%
40%
1Q
11
3Q
11
1Q
12
3Q
12E
1Q
13E
3Q
13E
1Q
14E
3Q
14E
1Q
15E
3Q
15E
KPN Consumer - MNO KPN Business - MNOVOD- MNO T-Mobile - MNOTele2 - MNO Ziggo - MVNO Other
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13E
3Q
13E
1Q
14E
3Q
14E
1Q
15E
3Q
15E
Orange SFR Bouygues Free Mobile
0%
5%
10%
15%
20%
25%
30%
35%
1Q
11
3Q
11
1Q
12
3Q
12E
1Q
13E
3Q
13E
1Q
14E
3Q
14E
1Q
15E
3Q
15E
KPN Consumer - MNO KPN Business - MNOVOD- MNO T-Mobile - MNOTele2 - MNO Ziggo - MVNO Other
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Ma
cq
ua
rie R
es
ea
rch
Z
igg
o
2 M
ay 2
01
3
14
Fig 27 Dutch mobile market summary
Source: Company data, Macquarie Research, May 2013
Dutch MobileWireless market 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Dutch SIMs 19,285 20,626 20,682 20,627 21,847 21,983 22,106 22,246 22,406 22586 22806 23026 23266 23526
Growth (subs) 1,341 56 -55 1,220 136 123 140 160 180 220 220 240 260
Growth (%) 7.0% 0.3% -0.3% 5.9% 0.6% 0.6% 0.6% 0.7% 0.8% 1.0% 1.0% 1.0% 1.1%
Dutch SIMs/ Dutch TV customers 3.51 3.55 3.37 3.26 3.36 3.31 3.25 3.18 3.14 3.09 3.07 3.07 3.07 3.07
SIM market share
KPN Consumer - MNO 30.3% 31.5% 27.1% 35.1% 34.5% 33.5% 31.5% 29.5% 29.3% 29.0% 28.7% 28.4% 28.1%
KPN Business - MNO 7.5% 8.0% 8.3% 9.6% 7.5% 7.8% 8.2% 8.5% 8.7% 8.7% 8.8% 8.9% 9.0%
VOD - MNO 0.0% 23.2% 23.9% 24.1% 24.1% 23.6% 22.5% 22.4% 22.4% 22.3% 22.3% 22.2% 22.1%
T-Mobile - MNO 21.9% 22.5% 21.5% 21.0% 20.0% 19.8% 19.8% 19.8% 19.8% 19.8% 19.7%
Tele2 - MNO 1.6% 1.5% 2.2% 3.2% 5.4% 6.7% 7.6% 8.4% 8.9% 9.3% 9.7%
Ziggo - MVNO 0.0% 0.0% 0.0% 0.0% 2.4% 3.7% 4.3% 4.6% 5.0% 5.2% 5.3%
Other - MVNO 17.1% 7.2% 10.3% 11.0% 10.0% 9.4% 8.1% 7.1% 6.5% 6.2% 6.1%
Market revenue (KPN/VOD/T-MO/Tele2/Ziggo) 6,097 6,144 5,855 5,784 5,577 5,648 5,798 5,961 6,125 6,291 6,465
Growth (%) 0.8% -4.7% -1.2% -3.6% 1.3% 2.6% 2.8% 2.8% 2.7% 2.8%
Revenue market share
KPN Consumer - MNO 41.0% 28.8% 28.1% 26.6% 25.9% 24.4% 21.8% 20.9% 20.8% 21.0% 21.3% 21.7%
KPN Business - MNO 19.3% 14.5% 16.4% 17.0% 17.9% 19.1% 20.0% 20.2% 20.2% 20.3% 20.4% 20.5%
VOD- MNO 21.8% 31.4% 30.9% 31.9% 30.4% 29.2% 28.2% 27.6% 27.1% 26.6% 26.1% 25.6%
T-Mobile - MNO 16.3% 24.3% 23.4% 23.3% 23.2% 22.2% 21.5% 21.0% 20.6% 20.3% 19.9% 19.5%
Tele2 - MNO 1.7% 1.1% 1.1% 1.2% 2.6% 4.3% 6.0% 6.9% 7.5% 8.0% 8.3% 8.5%
Ziggo - MVNO 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 2.6% 3.3% 3.7% 3.9% 4.1% 4.2%
ARPU
KPN Consumer - MNO 23.13 24.52 19.31 17.10 16.83 15.71 15.04 15.28 15.67 16.20 16.88 17.72
KPN Business - MNO 45.08 43.19 42.78 49.28 51.11 50.26 50.34 50.54 50.88 51.33 51.92 52.63
VOD- MNO 34.71 33.26 30.84 29.41 27.94 26.54 26.54 26.54 26.54 26.54 26.54 26.54
T-Mobile - MNO 0.00 34.87 24.99 23.75 23.93 22.77 22.80 22.80 22.78 22.77 22.76 22.75
Tele2 - MNO 14.56 15.07 17.76 14.90 20.65 20.65 20.65 20.65 20.65 20.65 20.65 20.65
Ziggo - MVNO 17.50 17.66 17.84 18.02 18.20 18.38 18.56
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 15
Ziggo a likely Liberty M&A Target Ziggo is likely an M&A target for Liberty Global who already own 15% of the company and
have an existing Dutch cable business (UPC). We estimate that operational and tax synergies
for a Liberty Global bid for Ziggo could be worth c8 per Ziggo share from 2014E.
We do not believe a full buyout is likely until 2H13 at the earliest given Liberty Globals
management and balance sheet focus on the Virgin Media deal. Opportunistic stake
increases are more likely. However Liberty are increasing the pace of their M&A activity and
can always issue equity as part of a deal.
There are likely to be regulatory issues given the material size of New Co (Ziggo/UPC) but
not enough to stop a deal, in our view. The Netherlands fixed line market is already
dominated by cable and KPN and regulatory concessions can be made. KPNs recent strong
fixed line performance highlights the robust fixed line competition.
UPC and Ziggo dont compete in the fixed line market and already cooperate on areas such
as mobile (spectrum). It would be very rational for Ziggo/UPC to offer nationwide wireless
services.
We believe Ziggo is an M&A target for a number of reasons;
Liberty Global have acquired a 12.65% stake in Ziggo on 28 March 2013 taking advantage
of an unsold block from a Barclays bookbuild paying 25 per share. The subsequent stake
increase to 15% was bought at 25.75.
Liberty Globals business model is based on high leverage and M&A. Post the VMED deal
80% of Liberty Globals revenue comes from 5 core markets; the UK, Germany, Belgium,
Switzerland and the Netherlands. Previous management comments have focussed on
potential acquisitions in these core markets.
Liberty Globals effective debt cost is 5.375% (Recent bond issuance for VMED
transaction), with Ziggos FY13E/14E dividend yield of 7.3%/13.8% suggest a positive
carry trade.
We believe there are material synergies in a merger of UPC Netherlands / Ziggo .A
combined UPC/Ziggo entity would be a better competitor to KPN given KPNs robust fibre
roll out plans and increasing mobile / convergent competition.
Solvable regulatory issues for a Ziggo/UPC merger
UPC and Ziggo have complementary network coverage (UPC cover 39% Dutch homes /
Ziggo 58% Dutch homes), jointly own mobile spectrum and are in a similar operational /
strategic position. Dutch digital TV / broadband upselling is reasonably mature and both
operators have enhanced mobile strategies for 2H13/2014.
Regulatory issues for a full merger are likely to be material; NewCo (UPC/Ziggo) would have
a c 54% FY13E home (fixed line) revenue market share, 44% FY13E broadband access
market share, 36% telephony FY13E access market share and a 54% FY13E TV market
share. A full merger may require asset spin off or regulatory concessions (cable wholesale
access).
However, the Netherlands is already dominated by cable (UPC/Ziggo) and KPN. UPC / Ziggo
do not materially compete against each other and the merger is unlikely to lead to materially
lower competition. Potential remedies may include wholesale cable access (product resale).
KPN are also becoming a more competitive threat to cable given fibre (FTTH) investment and
UPC/Ziggo merger concessions may create a more symmetrical regulatory model which may
limit potential KPN opposition to a merger.
Ziggo is likely an
M&A target for
Liberty Global
Regulatory issues
unlikely to stop
merger
Full buyout unlikely
until 2H13 at the
earliest
UPC and Ziggo have
complementary
network coverage
NewCo (UPC/Ziggo)
would have a
material market
share greater than
KPN
KPN are becoming a
more competitive
threat to cable with
FttH
Solid strategic
rationale for a Ziggo
bid
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 16
Fig 28 UPC, Ziggo and NewCo Netherland market shares
FY13E Home revenue
(fixed line) (m)
Home revenue
market share (%)
4Q13E Broadband
Accesses
4Q13E Broadband
Access market share
4Q13E Access lines
4Q13E Access line
market share
4Q13E TV Accesses
4Q13E TV Access
market share
UPC 982 20.7% 1,085 16.5% 1011 14.2% 1,660 20.7% Ziggo 1,580 33.2% 1,838 27.9% 1585 22.2% 2,654 33.2% New-Co Ziggo/UPC 2,563 53.9% 2,923 44.3% 2,596 36.4% 4,314 53.9% KPN Consumer 1,940 40.9% 2,757 41.8% 2,756 38.6% 2,025 25.3%
Source: Company data, Macquarie Research, May 2013
Material tax and opex synergies for UPC/Ziggo merger- base case assumes 8.4 per Ziggo share
We believe there are material operating and tax synergy benefits from a UPC/Ziggo merger.
Our base case assumes annual cost synergy benefits of 90m pa with an NPV of 1bn and
tax synergies with an NPV of 677m. These could be worth around 8.4 per share to Liberty
Global should they purchase Ziggo.
Fig 29 Ziggo synergies worth around 8.2 per Ziggo share NPV Cost synergies (m) base case NPV Tax Synergies (m) NPV Total Synergies (m) Value per Ziggo share (
per share)
1001 677 1678 8.4
Source: Company data, Macquarie Research estimates, May 2013
Cost savings of 90160m pa possible based on LBTYA/VMED deal
Our analysis of VMED-LBTYA synergy targets suggests UPC-Ziggo synergies could be 90
160m pa, equivalent to an NPV of 1.11.8bn. Our base case assumes 50% of VMED cost
synergies (70m pa) plus intra country synergies (20m pa). Intra country synergies could
well be materially higher than our 20m estimate.
In the recent Liberty Global VMED bid presentation, Liberty Global targeted $180m (c.140m)
in synergies comprised of $110m pa (c86m) opex synergies (network, IT support and
procurement) and capex synergies of $70m pa (55m) (procurement scale).
VMEDs FY13E group revenue is c 4.3bn (5.06bn) and we estimate newco joint revenue is
2.6bn (c.51% of VMEDs). VMEDs FY13E customer base (TV) is 5m and we assume
NewCo customer base is 4.3m (86% of VMEDs).
There are likely to be greater synergies from an intra-company merger for UPC/Ziggo beyond
the group synergies Liberty Global provide. We conservatively assume another 20m annual
opex synergies from intra country consolidation although this could be materially higher as
NewCo would not need 2 management teams, marketing departments and other group
functions. There are network synergies by avoiding network management / maintenance
duplication.
Fig 30 Potential UPC-Ziggo synergies based on LBTYA-VMED synergy targets
LBTYA-VMED synergies Synergies (m) Opex Synergies (m) Capex Synergies (m)
USD 180 110 70 EUR 140.1 85.6 54.5 VMED vs Ziggo KPI VMED NewCo NewCo proportion FY13E Revenue (m) 5060 2,557 51% TV Subs 4300 4,281 100% Synergy calculations Synergies (m) Opex Synergies (m) Capex Synergies (m) VMED Synergies @50% 70.0 42.8 27.2 VMED Synergies @100% 140.1 85.6 54.5 Intra country Synergy 20 10 10 Low Synergies (50%) 90.0 52.8 37.2 NPV synergies 1,001 587 414 Hi Synergies (100%) 160.1 95.6 64.5 NPV synergies 1,779 1,062 716
Source: Company data, Macquarie Research, May 2013
UPC/Ziggo
synergies worth
c8.4 per Ziggo
share
UPC-Ziggo
synergies could be
90160m pa
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 17
UPC/Ziggo tax Synergies Potentially worth 677m (3.4 per share)
We estimate the value of likely unutilised UPC tax losses for Ziggo is 677m (around 3.4 per
share). Liberty Global reported 4Q12 carry forward tax losses of $2,523m and related tax
assets of $631m with an expiration date of 2013-2021. Ziggos tax assets are expected to be
fully utilised by the end of 2014 with 2015 the first full year of full cash tax payments.
Given the size of UPCs tax loss carry forwards and UPCs revenue profile, UPC is unlikely to
fully utilise the tax losses itself. Ziggos 2013-2021E tax charges should be around 1.1bn
with Ziggos FY13E revenue approximately 50% higher than UPC.
Fig 31 UPC Netherlands tax assets
LBTYA Netherlands USD (m) EUR (m) Ziggo 2013-2021 tax Ziggo 2013E revenue UPC 2013E revenue
Tax losses cf 2,523 1,963 1,047 1,580 982 Related tax asset 631 491 Total tax assets 3,153 2,454
Source: Company data, Macquarie Research, May 2013
We estimate the NPV of the UPC tax losses for 2015-2021 for Ziggo are 677m. Ziggos use
of the innovation tax box should lower Ziggos effective tax rate to around 20% for the next
few years but UPCs tax assets would still provide a material benefit for non innovation
taxable profits.
Fig 32 NPV of UPC tax losses for Ziggo is 677m
(m) 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Ziggo tax (uses Ziggo tax asset)
-40 -100
Ziggo tax (uses UPC tax asset)
-107 -110 -121 -137 -156 -170 -170
Cumulative Ziggo tax losses used under UPC tax losses
971
NPV UPC tax assets 677
Source: Macquarie Research, May 2013
UPC tax asset are
material and
unlikely to be fully
used by UPC alone
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
-
Macquarie Research Ziggo
2 May 2013 18
Expect improving fixed line trends from 2H13 We expect Ziggos fixed line KPI to stabilise from 2H13 and revenue growth to accelerate
reflecting
February price increases across bundles and main products,
Discounts/promotions with triple play bundles discounted for 6 months versus 3 months at
peers,
Improved retention activities and focus on lowering churn,
Lower competition from KPN from 2H13E
Further upselling (Ziggo continues to gain broadband/telephony market share).
Fig 33 Ziggo fixed line revenue growth (%)
Fig 34 Ziggo Fixed line RGUs (000)
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Expect KPN competitive pressure to ease from 2H13
We believe KPNs competitive intensity will ease from 2H13 as KPN increases pricing by
around 2%/ KPN ease discounts and focus on improving financial performance. We do not
believe KPN want to compete aggressively in both the fixed and mobile markets as mobile
competition increases from 2H13E. KPNs fixed line KPI have stabilised and as long as their
base remains stable we believe improved financial performance is of greater focus. KPNs
key market disruptive offer is through the low cost Telfort brand with a triple play bundles with
2 set top boxes / TV subscriptions for 41 per month.
Ziggos share price and KPI suffered in 2H12 as KPN competed more aggressively in the
fixed line market; particularly through promotions at Telfort. However expectations have
materially lowered for Ziggo with FY13E guidance for revenue/OIBDA growth of 2.5%-3.5%.
Ziggo promotional activity stepping up
Ziggos new promotional activity should drive improving KPI. Ziggo started new sales
/promotional activity in February 2013 focussing on dual/triple play, and up-selling to
interactive Pay TV services. In 2Q13E Ziggo are expected to launch new churn reduction and
customer loyalty campaigns. In 3Q13E Ziggo plan a speed increase to improve the
competitive advantage vs DSL based competitors.
Fig 35 2013E fixed line RGU trends (000)
4Q12 1Q13 2Q13E 3Q13E 4Q13E
Standard Cable TV -46 -35 -30 -25 -20 Digital Pay TV services -28 0 0 5 10 Broadband Internet 18 20 22 22 22 Fixed Telephony 23 25 30 30 30 Source: Company data, Macquarie Research, May 2013
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1Q
12
2Q
12
3Q
12
4Q
12
1Q
13E
2Q
13E
3Q
13E
4Q
13E
1Q
14E
2Q
14E
3Q
14E
4Q
14E
-40
-30
-20
-10
0
10
20
30
40
50
60
1Q12 2Q12 3Q12 4Q12 1Q13E 2Q13E 3Q13E 4Q13E
Standard Cable TV Digital Pay TV services
Broadband Internet Fixed Telephony
We expect Ziggos
fixed line KPI to
stabilise through
2013 and revenue
growth to accelerate
We expect KPNs
competitive
intensity to ease
from 2H13E
Ziggo growth
expectations have
materially lowered
since 3Q12
Ziggos new
promotional activity
should drive
improving KPI
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 19
Ziggos bundle discounts support improving KPI
Telfort (KPN) is the most aggressive fixed line operator with a 2 TV / set top box subscription
in the market at a 41 price point. Ziggo now offer 6 months at a discounted rate rather than 3
months discounted at KPN/UPC which should ease the competitive dynamics. The Dutch
triple play market has 3 bundle types at the low, medium and high end. Ziggos post discount
pricing is competitive versus KPN (not KPN Telfort) at all levels.
Tele2 competes firmly at the lower of the triple play market (with Telfort) but KPN are
currently taking customer share from the mid/high end customer range (from Ziggo) through
its Telfort bundle which includes 2 TV subscriptions.
Fig 36 Dutch triple play bundle pricing Ziggo aggressively discounting
Operator Bundle names Download (MB) Upload (MB) Standard TV Channels Cost (inc discount + installation fees)
KPN Instap 8 1 60 channels, 11 HD 42.6 KPN Standaard 40 4 60 channels, 11 HD 50.2 KPN Premium 80 8 60 channels, 11 HD 57.8 KPN - Telfort Telfort All in 1 30 3 60 channels, 10 HD 41.0 Tele2 Allex in 1 pakker 20 1 44 channels, 3 HD 32.1 Ziggo Alles in 1 Basis 10 1 25 analogue, 60 digital, 16 HD 39.5 Ziggo Alles in 1 Plus 60 6 25 analogue, 60 digital, 16 HD 42.0 Ziggo Alles in 1 Extra 120 10 25 analogue, 60 digital, 16 HD 47.0 UPC Alles in 1 - Basis 30 3 30+ Digital, 3 HD 41.6 UPC Alles in 1 -
Standaard 60 6 70+ Digital, 10 HD 41.6
UPC Alles in 1 - Power 100 10 70+ Digital, 10 HD, Film1 52.1 UPC Alles in 1 - Extra
Power 150 10 70+ Digital, 29 HD, Film1 61.6
Source: Company data, Macquarie Research, May 2013
Expect Dutch market to move to convergent bundles
We expect the Dutch market to increasingly move to convergent/quadplay bundles from 2H13
and 2014 in particular. KPN / Tele2 already have convergent (4 play) bundles in the market
but we expect competition to shift to this bundle type through increased marketing /
promotions. The likely shift to convergent bundles increases the importance of mobile /
convergent bundles for Ziggo. KPNs recent success in triple play bundles through its Telfort
offers can be seen in Figures 37/38 below.
We continue to expect robust bundle revenue growth for Ziggo through price increases and
as Ziggo continues to upsell bundles to their customer base.
Fig 37 Dutch triple play subs (000) Fig 38 Ziggo triple bundle revenue growth (%)
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
0
20
40
60
80
100
120
140
160
180
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
KPN Ziggo
0%
2%
4%
6%
8%
10%
12%
14%
16%
2012 2013E 2014E 2015E
We expect the Dutch
market to focus on
quad play bundles
from 2H13 and in
2014 in particular
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 20
Expect Ziggo to continue to gain share of home revenue
We expect Ziggo to continue to gain market share of the Dutch home (fixed line/ TV
expenditure) as it upsells broadband/telephony and benefits from price increases. We target
33.2% 2012 home revenue market share growing to 34% by 2015E. We expect Ziggo (and
Tele2) to gain market share from KPN.
We target Ziggos fixed line business to grow at around 23% pa into the mid term. The
materially lower revenue growth rates from 2012 relative to 2010/2011 are due to lower
structural growth potential (more upselling done), increased competition, the erosion of
telephony usage revenue and less pricing power. The lower revenue growth rates drive our
view that Ziggo need mobile to be a success.
Fig 39 Dutch "home" market share (%) Fig 40 Ziggo fixed line revenue growth
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
Expect Dutch home to grow at 1-1.5pp pa
We target around 2.9% pa revenue growth for the Dutch home market in 2013 but only
1.1pp growth on a per household basis when new houses are considered. We target around
1-1.5pp of per household revenue growth thereafter. This compares to 1-2pp growth pa for
the German home and around 3pp growth pa for the UK home. The competitive environment
in the UK and German home market is however more favourable. Our sector thesis focuses
on market share winners (Ziggo in the Netherlands, Sky in the UK and KD8 in Germany).
Fig 41 Dutch "home" spend growth Fig 42 Dutch "home" spend per household growth
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2011 2012 2013E 2014E 2015E 2016E
KPN consumer Ziggo UPC Tele2
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010 2011 2012 2013 (E) 2014 (E) 2015 (E) 2016 (E)
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2012
2013 (
E)
2014 (
E)
2015 (
E)
2016 (
E)
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2012
2013 (
E)
2014 (
E)
2015 (
E)
2016 (
E)
We expect Ziggo to
continue to gain
market share of the
Dutch home
Target Ziggos fixed
line business to
grow at around 2-3%
pa into the mid term
We expect 1.1pp
growth for the Dutch
home in 2013
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 21
We target Ziggos broadband and telephony market share to increase by around 1pp pa for
the next 3 years before market share growth slows. We expect Ziggo to continue to gain
share from unbundlers/ resellers and to benefit from absolute market growth. We expect
KPNs consumer broadband market share to remain stable at around 42% but KPNs access
line market share to decline.
Fig 43 Dutch broadband market share by access (%) Fig 44 Dutch access line market share by access (%)
Source: Company data, Macquarie Research, May 2013 Source: Company data, Macquarie Research, May 2013
We detail summary tables for Dutch bundle pricing and analysis of the Dutch home (fixed
line / TV) in Figures 45 and 46 below.
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2012 2013E 2014E 2015E 2016E 2017E
KPN Retail UPC - CATV ZIGGO - CATV
10%
15%
20%
25%
30%
35%
40%
45%
2012 2013E 2014E 2015E 2016E
KPN Retail UPC - CATV ZIGGO - CATV
Target 1pp market
share growth for
Ziggo in broadband
and telephony for
the next 3 years
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Fig 45 Dutch triple play bundle pricing
Source: Company data, Macquarie Research, May 2013
Fixed line telephony
Operator Names
Download
(MB)
Upload
(MB)
Public
Hotspots
?
Free WiFi
Modem Standard TV Channels HD / Recording
On Demand / TV
Everywhere Telephone Other
Install/Delivery
and
connection
costs Discount
Headline
cost
Contract
length
Cost (inc
discount +
installation
fees)
KPN Instap 8 1 1500+ Yes 60 channels, 11 HD 5.08 for recording Both included Yes - .09 cents per minute 0 3 months at 35 46.77 12 42.6
KPN Standaard 40 4 1500+ Yes 60 channels, 11 HD Recording included Both included Yes - .09 cents per minute Free Spotify 0 3 months at 35 56.94 12 50.2
KPN Premium 80 8 1500+ Yes 60 channels, 11 HD Recording included Both included Yes - .09 cents per minute Free Spotify, PC Safe Security 0 3 months at 35 67.11 12 57.8
KPN - Telfort Telfort All in 1 30 3 Yes Yes 60 channels, 10 HD Recording 5 Both included
Yes - .09 cents per minute +
0.09 connection
2 Free interactive TV receivers
/ interactive TV on 2 TVs 30 No 38.50 12 41.0
Tele2 Allex in 1 pakker 20 1 No Yes 44 channels, 3 HD Recording 5 pm On demands only Yes - .09 cents per minute
HD TV+ 10 day catch up
currently free 40 6 months at 15 42.50 12 32.1
Ziggo Alles in 1 Basis 10 1 Yes Yes 25 analogue, 60 digital, 16 HD Recording included Both included Yes - free on net call 29.956 months at 30 (saves 83.70, or free HD reciever (cost 99), or 49 HD recorded (cost 150) 43.95 12 39.5
Ziggo Alles in 1 Plus 60 6 Yes Yes 25 analogue, 60 digital, 16 HD Recording included Both included Yes - free on net call 06 months at 30 (saves 143.70 53.95 12 42.0
Ziggo Alles in 1 Extra 120 10 Yes Yes 25 analogue, 60 digital, 16 HD Recording included Both included Yes - free on net call 06 months at 30 (saves 203.70 63.95 12 47.0
UPC Alles in 1 - Basis 30 3 Planned Yes 30+ Digital, 3 HD No recording Both included Yes - .09 cents per minute
Free unlimited calls, Eredivisie
football for 3 months 25 No 39.50 12 41.6
UPC Alles in 1 - Standaard 60 6 Planned Yes 70+ Digital, 10 HD No recording Both included Yes - .09 cents per minute
Free unlimited calls, Eredivisie
football for 3 months 25 3 months at 39.50 49.50 12 46.6
UPC Alles in 1 - Power 100 10 Planned Yes 70+ Digital, 10 HD, Film1 Recording included Both included Yes - .09 cents per minute
Free unlimited calls, Eredivisie
football for 3 months 25 3 months at 42.50 57.50 12 52.1
UPC Alles in 1 - Extra Power 150 10 Planned Yes 70+ Digital, 29 HD, Film1 Recording included Both included Yes - .09 cents per minute
Free unlimited calls, Eredivisie
football for 3 months 25 3 months at 49.50 69.50 12 61.6
Broadband TV
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Fig 46 Dutch home market summary
Source: Company data, Macquarie Research, May 2013
Dutch HomeDutch Home spend 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Dutch home spend (m) 4,216 4,210 4,648 4,624 4,758 4,882 5,019 5129 5227 5312 5395 5481
Growth -0.1% 10.4% -0.5% 2.9% 2.6% 2.8% 2.2% 1.9% 1.6% 1.6% 1.6%
Monthly spend per 'home' () 47.8 46.8 50.5 49.0 49.5 50.0 50.8 51.5 52.2 52.8 53.5 54.2
Growth -2.1% 8.0% -3.0% 1.1% 1.0% 1.6% 1.4% 1.4% 1.1% 1.3% 1.3%
Market revenue share of Big 4 operators
KPN consumer 41.4% 38.6% 40.9% 40.0% 40.8% 40.1% 39.3% 38.7% 38.3% 38.0% 37.7% 37.5%
Ziggo 30.5% 32.7% 31.8% 33.2% 33.2% 33.5% 33.5% 33.6% 33.7% 33.9% 34.0% 34.1%
UPC 19.4% 20.7% 19.7% 20.7% 20.7% 20.8% 20.8% 20.9% 21.1% 21.1% 21.2% 21.3%
Tele2 8.8% 8.1% 7.6% 6.1% 5.4% 5.6% 6.4% 6.7% 7.0% 7.0% 7.0% 7.1%
Broadband market 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Subscribers (000) 5,490 5,804 6,130 6,330 6,498 6,632 6,761 6,917 7,065 7221.1 7305.1 7385.1 7465.1 7545.1
Growth (subs) 314 326 200 168 134 129 156 148 156 84 80 80 80
Growth (%) 5.7% 5.6% 3.3% 2.7% 2.1% 1.9% 2.3% 2.1% 2.2% 1.2% 1.1% 1.1% 1.1%
Penetration of TV homes 77.0% 79.5% 83.4% 84.4% 84.7% 84.3% 84.5% 85.1% 85.8% 87.0% 87.6% 88.1% 88.9% 89.5%
Penetration growth (pp) 2.6% 3.8% 1.0% 0.3% -0.4% 0.2% 0.6% 0.8% 1.2% 0.6% 0.5% 0.7% 0.6%
KPN consumer market share 43.7% 43.7% 42.0% 40.7% 39.1% 40.9% 41.8% 41.8% 41.8% 41.8% 41.8% 41.8% 41.8% 41.8%
Cable market share 39.0% 38.1% 38.4% 40.5% 43.0% 45.4% 47.6% 49.6% 51.2% 52.7% 53.3% 53.9% 54.5% 55.1%
ow Ziggo market share na na 23.1% 23.9% 25.2% 26.6% 27.9% 28.9% 29.8% 30.6% 30.9% 31.2% 31.5% 31.8%
ow UPC market share 11.7% 11.8% 12.1% 13.3% 14.5% 15.6% 16.5% 17.4% 18.1% 18.8% 19.1% 19.4% 19.7% 20.0%
Unbundlers / reseller share 17.2% 18.2% 17.5% 15.9% 13.8% 10.6% 8.5% 8.2% 8.5% 9.1% 9.5% 9.8% 10.1% 10.4%
ow Tele2 share 0.0% 0.0% 6.8% 8.1% 7.3% 6.4% 6.1% 7.3% 7.9% 8.5% 8.8% 9.1% 9.5% 9.8%
Fixed line Telephony market share by line
KPN Retail 49.9% 47.1% 44.6% 41.3% 38.8% 38.8% 38.6% 38.3% 36.9% 35.3% 34.0% 32.8% 31.6% 30.3%
ZIGGO - CATV 0.0% 0.0% 13.7% 16.0% 18.7% 20.6% 22.2% 23.4% 24.2% 24.9% 25.7% 26.1% 26.6% 27.0%
UPC - CATV 6.6% 7.8% 8.6% 10.2% 11.9% 13.1% 14.2% 14.9% 15.5% 16.1% 16.4% 16.8% 17.2% 17.5%
Tele2 - wholesale 4.4% 5.3% 4.2% 3.2% 2.6% 2.0% 1.4% 2.5% 3.0% 3.6% 3.8% 4.1% 4.4% 4.7%
Other 39.1% 39.8% 28.9% 29.3% 28.0% 25.5% 23.7% 21.0% 20.4% 20.1% 20.1% 20.2% 20.3% 20.4%
TV market 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Dutch 'TV' homes (000) 7,134 7,297 7,352 7,500 7,669 7,865 8,003 8,133 8,233 8,301 8,341 8,381 8,401 8,429
TV 'home' growth 2.3% 0.8% 2.0% 2.3% 2.6% 1.8% 1.6% 1.2% 0.8% 0.5% 0.5% 0.2% 0.3%
Cable market share 81.2% 77.5% 75.0% 71.3% 67.6% 63.0% 59.5% 57.1% 55.2% 54.4% 53.9% 53.4% 53.0% 52.7%
Terrestrial / DTT / IPTV /Satellite market share 18.8% 22.4% 25.2% 28.9% 32.4% 37.0% 40.5% 42.9% 44.8% 45.6% 46.1% 46.6% 47.0% 47.3%
ow KPN market share 7.0% 10.6% 13.2% 16.0% 18.3% 22.5% 25.3% 26.9% 28.0% 28.5% 28.8% 29.2% 29.3% 29.5%
ow Ziggo market share 0.0% 42.6% 42.3% 40.3% 38.1% 35.3% 33.2% 31.9% 31.0% 30.8% 30.6% 30.5% 30.4% 30.3%
ow UPC market share 30.2% 28.0% 26.6% 25.2% 23.7% 22.0% 20.7% 19.7% 18.7% 18.2% 17.8% 17.5% 17.2% 17.0%
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 24
Yield and FCF upside from refinancing Ziggo is likely to increase both dividend yields and FCF yields over the next 12 months.
We target an FY13E dividend of 2 increasing to 3.75 in FY14E as Ziggo increase leverage
following the refinancing of dividend restrictive bonds. This represents an FY13E dividend
yield of 7.3%, 13.8% in FY14E. Consensus targets 1.92/2.40.
Ziggo has 2bn of higher coupon debt (6.125%/8%) which can be refinanced in the next 12
months. Refinancing allows a higher dividend to be paid but also has an annual financing cost
benefit of around 60m as Ziggo have recently issued debt at c4% coupon.
Lower finance costs should help improve FCF yields from 7% in FY13E to c8.5% in FY14E;
this compares favourably to KD8 at 1.5% and Telenet at around 5.3% in FY14E.
Higher dividends from FY14E as leverage and FCF increase
We target an FY13 dividend of 2 consisting of an interim dividend of 0.95 due in September
and a final dividend of 1.05 in 2014E. Ziggo have committed to an expected interim dividend
of 190m (0.95 per share) and a final dividend equivalent to an increase in leverage to
around 3.5x net debt/OIBDA (subject to senior unsecured note refinancing).
Ziggo could increase their FY14E dividend to above 3.75 given leverage levels but we
believe the company would prefer to have a more stable dividend policy. Consensus assumes a more conservative payout ratio.
Fig 47 Ziggo dividend profile
2012 2013(E) 2014(E) 2015(E) 2016 (E) 2017 (E) 2018 (E) 2019 (E) 2020 (E)
DPS 1.50 2.0 3.75 3.75 2.00 1.00 1.00 1.00 1.00 Net debt/OIBDA (x) 3.3x 3.2x 3.1x 3.3x 3.4x 3.2x 2.8x 2.5x 2.2x Dividend yield 5.4% 7.3% 13.8% 13.8% 7.3% 3.7% 3.7% 3.7% 3.7%
Source: Company data, Macquarie Research, May 2013
Our FY13E dividend expectation of 2 is 5% above a consensus target of 1.92 (vs 1.45 in
FY12) and our FY14E dividend expectation of 3.75 is 56% above consensus target of 2.40.
We note a diverse spread of consensus dividend estimates (Fig 49).
Fig 48 Ziggo 2013E-16E consensus and MacQ dividend expectations
Fig 49 Ziggo Hi-low DPS estimates
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
Refinancing should lower finance costs by 60m pa
We estimate Ziggo can save around 60m pa by refinancing its Senior unsecured notes
(c 1.2bn with 8% coupon due on May-18 and callable on May-14) and Senior Secured notes
(Term loan E, 0.75bn with a 6.125% coupon due on Nov-17 and callable on Nov-13).
2.00
3.75 3.75
2.001.92
2.40
2.13 2.05
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013E 2014E 2015E 2016E
MQG Consensus
0
1
2
3
4
5
6
2013E 2014E 2015E 2016E
High Low MGQ
Ziggo should
increase both
dividends and FCF
in FY14E
FCF yields should
expand from 7% in
FY13E to 8.5%in
FY14E
We target an FY13E
dividend yield of
7.3%, 13.8% in
FY14E
FY14E DPS target of
3.75 is >50% above
consensus
Debt refinancing
should save around
60m pa from 2014E
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 25
Ziggo recently issued 750m 2020 Senior secured notes priced to yield 3.658% which
provides an indicative new finance cost. We assume incremental refinancing at around 4%
coupon.
Fig 50 Refinancing should lower Ziggos finance costs by 60m
Debt type (m) Rate Maturity Annual Finance cost
Term loan E (Senior secured notes) 750 6.1% Nov-17 46 Senior Unsecured notes 1,209 8.0% May-18 97 143 Refinanced 2bn 2,000 4.0% Mar-20 80 Refinancing saving 63
Source: Company data, Macquarie Research, May 2013
Ziggos 1Q13 blended Finance cost is 6.6%, which is likely to decline due to recent
refinancing in 1Q13 to under 6% and approach 5% from 2014E due to further refinancing
expected over the next 12-18 months. However, absolute finance costs are likely to remain
around 180-200m pa as leverage increases for a higher dividend.
Fig 51 Ziggo financing cost profile
2012 2013(E) 2014(E) 2015(E) 2016 (E)
Finance costs (m) -260 -187 -163 -169 -188 Gross debt (m) 3,025 3,096 3,145 3,545 3,657 Average Finance cost -8.2% -6.1% -5.3% -5.0% -5.2%
Source: Company data, Macquarie Research, May 2013
Ziggos finance cost
should approach 5%
from 2014E
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 26
MacQ estimates versus consensus
Fig 52 Ziggo MacQTel vs. consensus - revenue
Fig 53 Ziggo MacQTel vs. consensus - OIBDA
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
Fig 54 Ziggo MacQTel vs. consensus - EPS
Fig 55 Ziggo MacQTel vs. consensus DPS
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
Fig 56 Ziggo MacQTel vs. consensus - OIBDA margin (%)
Fig 57 ZIGGO MacQTel vs. consensus - revenue growth (%)
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
0.9%
5.1%
11.2%
14.9%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2013E 2014E 2015E 2016E
0.3%
2.2%
4.6%
7.8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2013E 2014E 2015E 2016E
22.1%
16.2%17.6%
24.5%
0%
5%
10%
15%
20%
25%
30%
2013E 2014E 2015E 2016E
3.9%
56.0%
76.3%
-2.4%-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2013E 2014E 2015E 2016E
57.0%
55.8%
54.3%53.9%
57.2% 57.1%57.4%
57.1%
50.0%
51.0%
52.0%
53.0%
54.0%
55.0%
56.0%
57.0%
58.0%
2013E 2014E 2015E 2016E
MQG Consensus
4.1%
7.4%
8.5%
4.7%
3.1% 3.1%
2.5%
1.3%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2013E 2014E 2015E 2016EMQG Consensus
[email protected] BETH WEIS 07/09/13 03:23:37 AM William Blair & Company (Investments)
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Macquarie Research Ziggo
2 May 2013 27
Fig 58 ZIGGO MacQTel vs. consensus - Capex
Fig 59 ZIGGO DPS - MacQTel vs. consensus ()
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
Fig 60 ZIGGO MacQTel vs. consensus - capex/sales Fig 61 ZIGGO MacQTel vs. consensus - OCF Margin
Source: FactSet, Macquarie Research, May 2013 Source: FactSet, Macquarie Research, May 2013
0.7%
3.3%
9.5%
2.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2013E 2014E 2015E 2016E
2.00
3.75 3.75
2.001.92
2.40
2.13 2.05
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2013E 2014E 2015E 2016E
MQG Consensus
20.4%
18.9%
17.5%
16.8%
20.4%
19.2%
17.8%
18.9%
15%
16%
17%
18%
19%
20%
21%
2013E 2014E 2015E 2016E
MQG Consensus
36.7%
37.9%
39.7%
38.1%
36.6%36.9% 36.8% 37.1%
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
2013E 2014E 2015E 2016E
Consensus MAcQ
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Ziggo summary Ziggo NL OutperformUpside/(downside) to target price /share Key data points 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E)
Target price 30.00 Upside 10% RGU's - average
Current share price 27.22 Total return 18% Standard Cable TV RGU 3,147 3,052 2,962 2,834 2,689 2,617 2,569
Profit and loss (m) 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E) Digital Pay TV services RGU 695 843 925 937 900 935 975
Revenue 1,284 1,376 1,478 1,537 1,599 1,718 1,864 Broadband Internet RGU 1,409 1,504 1,619 1,726 1,805 1,881 1,944
Growth (%) 7.1% 7.4% 4.0% 4.1% 7.4% 8.5% Fixed Telephony RGU 924 1,090 1,267 1,428 1,540 1,648 1,723
Standard TV revenue 499 489 482 465 454 445 441 Mobile Telephony RGU 0 0 0 0 0 285 715
Digital Pay TV revenue 93 125 151 168 177 188 202 All in one subscribers 841 1,029 1,212 1,375 1,469 1,579 1,679
Broadband 351 381 416 442 468 493 510
Telephony subscription revenue 75 96 113 129 140 150 159 ARPU - average
Telephony usage revenue 135 156 171 180 178 179 180 Standard cable ARPU 13.2 13.3 13.5 13.6 14.0 14.1 14.3
Mobile Telephony 0 0 0 0 0 46 144 Digital Pay TV ARPU 11.5 12.5 13.7 14.9 16.4 16.9 17.4
Business 47 52 57 47 43 43 43 Broadband ARPU 20.9 21.3 21.6 21.5 21.8 22.0 22.0
Other 83 77 88 106 120 135 146 Fixed Telephony ARPU 19.3 19.6 19.0 18.2 17.4 16.8 16.4
Adjusted OIBDA 695 783 835 880 911 959 1,013 Mobile Telephony ARPU 0.0 0.0 0.0 0.0 17.5 17.5 17.7
Growth (%) 13% 7% 5% 3% 5% 6% Business ARPU 87.8 66.9 60.3 52.5 46.0 43.7 42.0
OIBDA 648 775 835 841 911 959 1,013 2013 (E) Revenue by division 2009-15E - RGUs
EBIT (Operating profit) 171 272 487 562 639 676 718
Net income -251 -200 15 193 361 402 429
Growth (%) -20% -107% 1229% 87% 11% 7%
Per share () 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E)
EPS -1.25 -1.00 0.07 0.96 1.81 2.01 2.15
EPS - Adjusted -1.25 -0.57 0.03 1.29 2.04 2.07 2.21
Growth (%) -55% -106% 3720% 58% 2% 7%
DPS 0.00 0.00 0.00 1.45 2.00 3.75 3.75
Cash flow and net debt 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E)
FCF - Company Def 167 258 303 391 390 462 397
Growth (%) 55% 18% 29% 0% 18% -14% Revenue and OIBDA growth Dividend and FCF Yields
OCF adj - 695 608 584 588 558 631 686
Growth (%) -13% -4% 1% -5% 13% 9%
Capex 252 175 250 280 326 325 326
Net debt 3,648 3,506 3,230 2,930 2,917 2,961 3,314
Ratios 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E)
Adjusted OIBDA margin 54.1% 56.9% 56.5% 57.3% 57.0% 55.8% 54.3%
EBIT margin 13.3% 19.8% 32.9% 36.5% 40.0% 39.3% 38.5%
OCF Margin - adj 54.1% 44.2% 39.5% 38.2% 34.9% 36.7% 36.8%
Net income margin -19.5% -14.6% 1.0% 12.5% 22.6% 23.4% 23.0%
Net debt/OIBDA (x) 5.2x 4.5x 3.9x 3.3x 3.2x 3.1x 3.3x
DPS - payout of adjusted EPS 0% 0% 0% 150% 111% 187% 175%
DPS - payout of FCF 0% 0% 0% 72% 106% 162% 189%
Valuation multiples 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E) Summary valuation methodologies ()
PER (x) -21.7 -48.1 806.7 21.1 13.4 13.2 12.3 Macro DCF 24.1
EV/OIBDA (x) 15.4 13.8 12.8 9.2 9.0 8.6 8.5 EV/OCF 25.6 Based on a 14x multiple
EV/OCF (x) 15.4 17.7 18.2 13.8 14.7 13.0 12.5 EV/OIBDA 29.7 Based on a 9.5x multiple
FCF yield 3.4% 5.7% 5.6% 7.4% 7.0% 8.5% 7.3% Cash flow per share 27.1 Using a multiple of 14.3x 2013E CFPS, computed using 1/(9.00% - 2.00%)
Dividend yield 0.0% 0.0% 0.0% 5.3% 7.3% 13.8% 13.8% Consensus EV/OIBDA 28.3 Using a multiple of 9.2x consensus EV/OIBDA
Return calculations 2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E) PER 29.1 Using a multiple of 14.3x 2013E EPS, computed using 1/(9.00% - 2.00%)
WACC 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Consensus PER 21.0 Using a consensus multiple of 16.3x 2013E EPS
ROCE -4.8% -4.0% 0.3% 4.0% 7.7% 8.8% 10.1% NPV of FCF 26.0 Using a WACC of 9.00% and perpetuity growth rate of 2.00%
FCF/Capital employed 3.5% 6.2% 6.1% 8.4% 8.1% 10.2% 9.4%
Source: Company data, Macquarie Research, May 2013 *FCF excludes associates but includes licences
0%
2%
4%
6%
8%
10%
12%
14%
2010 2011 2012 2013 (E) 2014 (E)
Revenue Adjusted OIBDA
Standard TV
revenue
29%
Broadband
29%
Telephony
subscription
revenue
9%
Other
8%Business
3%
Digital Pay TV
revenue
11%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2010 2011 2012 2013 (E) 2014 (E)
FCF yield Dividend yield
0
500
1,000
1,500
2,000
2,500
2009 2010 2011 2012 2013 (E) 2014 (E) 2015 (E)Digital Pay TV services RGU Broadband Internet RGU
Fixed Telephony RGU All in one subscribers
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Macquarie - European Telecommunications summary valuations01 May 2013 BELG BT BT Adj DTE FTE KPN PTC SCMN TIT TEF TKA VIV VOD Large cap BSY KD8 TALK TNET UTDI VMED ZIGGO Cable UK
Price 17.50 285.7p Pension 8.98 8.12 1.58 3.96 CHF437.8 0.64 11.14 5.21 17.20 196.1p Median 845.0p 72.17 257.0p 41.00 20.82 3169.0p 27.22 Median Median
Target 23.00 180.0p 7.70 12.00 2.10 4.30 CHF450.0 0.80 9.00 4.00 17.00 205.0p 900.0p 80.00 280.0p 31.00 21.00 2900.0p 30.00 (inc VMED)Rating OP UP UP OP OP OP OP OP UP UP OP OP OP OP OP N OP N OP
EV/Revenue
2010 1.1x 1.6x 1.5x 1.2x 1.6x 1.5x 2.6x 1.6x 2.0x 1.2x 1.4x 1.5x 1.5x 2.0x 5.6x 1.5x 5.2x 1.9x 3.7x 7.8x 5.4x 2.0x
2011 1.2x 1.7x 1.6x 1.2x 1.6x 1.7x 2.7x 1.5x 2.0x 1.3x 1.5x 1.4x 1.5x 2.0x 5.2x 1.6x 5.2x 1.9x 3.6x 7.2x 5.2x 2.0x
2012 (E) 1.2x 1.7x 1.5x 1.2x 1.7x 1.7x 2.7x 1.5x 1.9x 1.3x 1.6x 1.4x 1.5x 1.9x 4.8x 1.6x 5.0x 1.5x 3.5x 5.3x 4.9x 1.9x
2013 (E) 1.2x 1.7x 1.6x 1.3x 1.6x 1.7x 2.7x 1.5x 1.8x 1.5x 1.5x 1.4x 1.5x 1.8x 4.6x 1.5x 4.9x 1.4x 3.3x 5.1x 4.7x 1.8x
2014 (E) 1.2x 1.7x 1.5x 1.2x 1.5x 1.7x 2.7x 1.4x 1.8x 1.4x 1.4x 1.3x 1.5x 1.7x 4.3x 1.4x 4.7x 1.2x 3.2x 4.8x 4.5x 1.7x
2015 (E) 1.2x 1.7x 1.5x 1.2x 1.4x 1.6x 2.6x 1.3x 1.7x 1.3x 1.3x 1.3x 1.4x 1.6x 4.1x 1.4x 4.6x 1.1x 3.1x 4.6x 4.4x 1.6x
EV/OIBDA
2010 3.8x 5.8x 5.4x 3.9x 3.9x 3.9x 6.9x 3.9x 5.3x 3.4x 4.9x 4.7x 4.3x 9.4x 12.3x 11.7x 10.1x 10.2x 9.8x 13.8x 11.2x 9.8x
2011 4.0x 5.6x 4.6x 3.6x 4.1x 4.8x 6.8x 3.8x 5.5x 3.7x 5.2x 4.3x 4.5x 8.6x 11.2x 8.9x 9.8x 10.6x 9.1x 12.8x 10.5x 8.9x
2012 (E) 4.3x 5.4x 4.9x 3.9x 4.5x 5.1x 7.0x 3.7x 5.5x 3.8x 5.5x 4.8x 4.8x 8.3x 10.3x 8.7x 9.5x 11.3x 8.8x 9.2x 9.4x 8.7x
2013 (E) 4.6x 5.3x 5.3x 4.0x 4.5x 5.1x 7.1x 3.7x 5.3x 4.8x 5.5x 4.6x 5.0x 7.9x 9.6x 6.7x 9.7x 8.7x 8.2x 9.0x 9.3x 7.9x
2014 (E) 4.6x 5.3x 4.9x 3.9x 4.5x 5.0x 7.0x 3.6x 5.2x 4.6x 5.3x 4.4x 4.8x 7.7x 8.7x 6.2x 9.7x 7.1x 7.8x 8.6x 8.7x