Sunday, January 01, 2017

Vodafone & Liberty Global extract cash from & load debt on VodafoneZiggo

Observations from the establishment of the VodafoneZiggo joint venture:
  • Cash was extracted & debt was loaded by the parent companies. Future annual shareholder charges have been raised.
  • Leverage a la Liberty Global (4.5-5.0), even though mobile (with structurally lower margins & growth) is a large part of the business.
  • Vodafone comes first in the name & supplies the CEO, even though Ziggo is larger.
  • According to rumors, T-Mobile paid €90m for Vodafone Thuis, which had negative FCF of €73m in the 12 months to 20160930 only. The JV loses 150k subs to the KPN camp (T-Mobile NL & KPN Wholesale) as a result of the sale of Vodafone Thuis. Good deal for both.
  • IPO possible from 20200101, sale from 20210101. Any acquirer can save from cutting the annual shareholder charges.
A staged retreat from NL, by both Vodafone and Liberty Global, seems far from unlikely. If both agree, it can be done even before 20210101.

Saturday, December 31, 2016

VodafoneZiggo established on last day of 2016 with EUR 10 billion gross debt

The Vodafone Group and Liberty Global closed the creation of their 50/50 JV on the last day of 2016, calling it VodafoneZiggo. Here are the details:

  • 7.1m HP, nationwide 4G, 9.6m fixed (4.0m video, 3.1m BB, 2.5m fixed voice) + 5.2m mobile RGUs at 160930
  • rev -12 mo EUR 4b, gross debt EUR 10b at 160930
  • synergies NPV EUR 3.5b (unchanged; capex/opex run-rate savings EUR 210m by 2021 (reduced from 280m), Vodafone Thuis sold (FCF -73m), integration costs 280m (down from 350m due to Vodafone Thuis sale), rev synergies >= 1b)
  • shareholder charges for services provided increased (EUR 182m in 2015, EUR 211m in 2017E (97 for Liberty, 114 for Vodafone))
  • Vodafone to receive EUR 0.6b cash, Liberty Global to receive EUR 2.2b cash, based on recapitalisation & equalisation payment Liberty to Vodafone (EUR 0.8b, original estimate EUR 1b; down due to increased net debt at Ziggo)
  • plans predictable dividend, recapitalisations, minimum cash balance, leverage 4.5-5.0
  • brands Vodafone & Ziggo
  • plans converged propositions
  • partners retained cash from subsidiaries since 160215 (JV announcement): EUR 500m from Ziggo, EUR 300m from Vodafone NL
  • not to be consolidated by parents (equity affiliate or associate)
Gross debt EUR 10 billion compares to KPN's EUR 8 billion.

Vodafone Thuis (sold to T-Mobile NL) for the 12 months to 160930:
  • rev EUR 53m
  • EBITDA EUR -29m
  • capex EUR 44m

Friday, December 30, 2016

Analysts and arbitrariness

Certain recommendations appear questionable (whether sell-side or buy-side), due to arbitrariness. The reasoning is in three steps:

  1. The analyst sums up an arbitrary number of positives. This is a very selective process, which includes downplaying the negatives.
  2. All these issues are based on public information and hence discounted into the share price.
  3. The analyst could argue that his views are superior to those of the rest of the investment community, and hence these issues are either under-discounted or over-discounted. What follows, is a buy or a sell recommendation.
  4. His superiority could be determined by looking at his past recommendations.
Analysts use arbitrariness to help them achieve their own business goals.

Friday, December 23, 2016

What makes an internet company?

The ECJ recently raised the question: is Uber a transport company or a digital service? Apart from the legal and regulatory consequences, the question is interesting on a conceptual level.

Having a side job in the vacation home business, we have some thoughts to share.

At first sight, these companies appear to be genuine internet companies. Booking & customer support, advertising & marketing, administration & accounting support - all goes through the internet, after all. However, as all of the economy is moving onto the internet, every company would soon appear to be a 'digital' service.

I would propose that Uber, Airbnb and my vacation home are, at heart, still 'analogue' services: taxi and home rental.

Media are an interesting sector since the heart of the business is immaterial. Or, from a different perspective: there is little to distinguish the service from the distribution. We have come to see a book, a track and a film as a file, rather than as a story in words, a piece of music or a story in sound and audio.

More 'packetisation' needs to be done before Uber and Airbnb can be seen as internet services. For Uber, it will take something to the order of teleportation. For Airbnb the future may be closer than it seems. VR is just around the corner.

Thursday, October 01, 2015

FTTH-related news round-up

  • In the Netherlands, CIF is reaching the limits of growth, owning a range of small cable companies. Now they are looking to do rural FTTH, with partners, in a ‘line-rental’ model.
  • FTTH is expanding in South Africa, of all places.
  • Reggeborgh is selling a majority stake of Deutsche Glasfaser to KKR. Is that an early exit or a way to raise massive funds?
  • Impressive cost savings from NG-PON2. It is being trialed by Vodafone.
  • Structural separation in the UK? Vodafone appears to be the company with the strongest belief in both FTTH and Open Access. People cannot even agree on the UK’s performance in an international perspective. Of course, BT claims a top position, but others, speaking from experience, disagree strongly.
  • A Hyperoptic survey points to real estate value increase from FTTP.
  • Italy seems to be committed to nationwide FTTH, but remains a bit unclear on where they are.
  • Google Fiber: a new unit in Alphabet and much more than a ‘hobby’Challenged by Google, several operators are doing cross-state FTTH now: AT&T, TDS, CenturyLink and others. Comcast’s 2 Gb/s service: over FTTH and later over Docsis 3.1? It remains somewhat unclear. And the price is pretty outrageous.
  • Speculation in Australia over NBN Co returning to FTTP, with Malcolm Turnbull as Prime Minister.
  • Sandvine’s September 2015 edition of Global Internet Phenomena Report.
  • The ITU State of Broadband 2015 report: 148 nations have an NBN plans.
  • Akamai’s latest State of the Internet report.

Thursday, July 02, 2015

Why we need FTTH-based gigabit internet access

Streaming requires only so much bandwidth, but there remain several reasons to want gigabit FTTH.

There are really a limited number of reasons. The first and last are relevant to operators, the others to end-users.
  1. Opex. FTTH brings large savings to operators.
  2. Speed, bandwidth. FTTH can handle speeds of 1 or more Gb/s.
  3. Downloading. It can never go too fast. And uploading is generally slow on any other infrastructure. The asymmetric nature of traffic has nothing to do with this argument.
  4. Redundancy, reliability, dedicated & future-proof access.
    • Only on FTTH are real-world speeds comparable to headline speeds.
    • Screens are getting bigger.
    • Growing video traffic.
    • Quality is getting better (HD, UHD, etc.)
    • Web pages are becoming heavier, with more graphics, auto-play video etc.
    • There will be more devices, more users.
    • New applications.
    • Backhaul for (offloaded) traffic, including tethering, mobile hotspots.
    • Multi-tasking, including app updates, software updates, photo/video uploading etc.
  5. Latency. FTTH beats other technologies. This is especially important for critical (but low-bandwidth!) IoT services.
  6. Marketing. No matter what, speed sells.

Friday, May 15, 2015

The risks of banning free streaming tiers

The music majors are negotiating with streaming music providers (Spotify) about curtailing free services. The free service could be capped:
  • Max 3 months, or 6 for existing users.
  • Possibly shorter or longer for selected artists.
Before banning free music altogether, one must bear in mind:
  • Free users do convert to paying users.
  • Free users do generate revenues: from advertising. This could possibly be extended.
  • Banning free will only lead to more piracy.
YouTube is the sector's biggest player. The above goes for YouTube as well: it tries to convert users to YouTube Music Key (or Google Play Music) and it has sophisticated ad models.

Thursday, March 05, 2015

Why we love to hate the entertainment industry

The entertainment industry is suing Bredbandsbolaget, the Swedish ISP, over refusing to block The Pirate Bay. The trial is set for October 23, 2015, in Stockholm.

Bredbandsbolaget has a compelling argument: “It is an important principle that Internet providers of Internet infrastructure shall not be held responsible for the content that is transported over the Internet. In the same way that the Post should not meddle in what people write in the letter or where people send letters”. From the article it is not clear what the entertainment industry's fundamental argument is, beyond The Pirate Bay being illegal.

Why do we 'love to hate' the entertainment industry anyway?
  • The industry is completely commercialised. Unhampered by any originality whatsoever, more of the same is produced, resulting in a global mass of morons. There is no internal urge to create, there is just the urge to produce crap that all the morons of the earth want to consume.
  • They have been forcing even worse junk upon ignorant consumers in the form of lousy 'b-sides', album fill-ups and worthless sequels and prequels.
  • They claim to have an important role in safeguarding diversity and funding upcoming stars, but in fact they are very bad at that. Only one in 10 movies reaches break-even.
  • Remember the days of PolyGram, runs by overpaid windbags. And not just PolyGram.
  • They have been overcharging for ages, when sales were focused on physical formats.
  • They have completely missed the distribution technology evolution away from physical to file-sharing, downloads and streaming. In this respect, they are totally responsible for creating piracy in the first place.
In short, unless they come up with a compelling argument, and unless they start to put creativity before money again, we passionately support Bredbandsbolaget.

Friday, January 02, 2015

Structural separation revisited

Premise #1: Telecoms market characteristsics
  • High entry barriers (network duplication cost, mobile license cost).
  • Scale business. The network effect is essential.
  • There is ample legacy (incumbent operators inherited formerly state-owned assets).
  • Telcos have a tendency to outsource network management to specialised firms such as Ericsson. Apparently, it is not considered core-business by many.

Premise #2: Private company characteristics
  • The agency problem: management has its own personal agenda, targeted at personal wealth maximisation.
  • Company targets are aligned with private management targets through stock & options rewards.
  • Listed companies focus on short-term rather than long-term value creation in order to be able to pay out a predictable dividend.
  • They have a tendency to repair instead of replace in order to minimise capex & maximise dividends. This comes at the risk of supporting outdated technology with 'regret investments'.
  • Companies strive for low risk i.e. steady returns and hence predictable capex.

Premise #3: Government characteristics
  • Civil servants are not entrepreneurs.
  • Governments have extensive experience in running passive network grids (electricity, gas, water, roads, railroads).

Premise #4: Infrastructure vs. services
  • Grids are vital for the economy & national security.
  • They are typically long-lived assets, providing a steady but low return.
  • Building a network requires high capex; technology shifts lead to periodical capex spikes.
  • Networks thrive at a maximum utility level. More service providers means more business and a higher utility level.
  • Services are high-risk business, requiring high opex, in a highly competitive market.

Premise #5: Regulation
  • Regulation is a way to repair market failure.
  • Market failure occures when cometition is insufficient.
  • Insufficient competition leads to sub-optimal prices, quality, service levels, innovation, investment.

Issue #1: How to measure market failure?
  • It should not be a matter of opinion, but of thorough & independent research.
  • When are prices 'low'? How to benchmark?

Issue #2: How much is enough?
  • In fixed, it famously sounds 'two is not enough'.
  • In mobile, the OECD recently said 'three is not enough' (please do network sharing instead).
  • Does network duplication make sense or destruct value since it undermines the utility level?

Issue #3: Are OTT services full substitutes for managed?
  • Are managed services, with 99.999% availability & reliability, required for vital communication (emergency calls)?
  • Which level of QoS or QoE is required or sufficient?

Issue #4: Is the active layer part of the network or part of the services layer?
  • Active equipment coupled with a passive network raises the technology risk, leads to frequent technology shifts & capex spikes and thus undermines the low risk/return profile of grids.
  • Active equipment coupled with the service provider layer introduces technology risk to the services business & raises the entry barrier. It also creates physical space-related & technology issues for service providers trying to compete.

Issue #5: Which role fits a government agency?
  • Can a governement-controlled body act as an entrepreneur and run a business?
  • Which role suits such a body (passive only, providing permits? or active, investing goverment funds & taking ownership?).

Solution: Structural separation. This model ...
  • ... creates a state-owned natural monopoly grid (NetCo), which maximises the utility rate. Goverments are well-equipped for this. It doesn't compete with any company at the services level.
  • ... could be a joint venture of market participants in a different model. For instance, all interested Italian telcos (Telecom Italia, Vodafone, Wind, ...) could jointly buy Metroweb and injects their network assets to create a national jointly owned grid. The NetCo in time may be spun off because of its low risk/low return profile that doesn't match the profile of its owners.
  • ... frees up funds for services companies (ServCo) to improve services, to innovate & to keep prices low.
  • ... creates an incentive to maximise competition at the services level in order to maximise the utility rate. In other words, the NetCo will treat all ServCos equally.
  • ... incentivises the NetCo to support net neutrality because it raises the utility rate. As a result, competition is enhanced with pure OTT providers.
  • ... connects to operator strategies of outsourcing network management.
  • ... probably caters to the markets best if it allows for both access at the passive layer (unbundling) and at the active layer (resale). Service providers can chose what fits them best. This also allows for a specialised OpCo to arise (as in Singapore).

Thursday, December 11, 2014

What next for KPN in 2015?

Let's look at the big picture:
  • KPN heavily outsources and offshores functions. This implies de-emphasising the network, at least at the management level. Things are left to vendors such as Ericsson. NFV/SDN will only add to this. As a consequence, the emphasis is more on services.
  • Market shares are high in general, leaving little room for domestic takeovers.
  • There is ample cash, even taking into account debt reduction (€ 2 bn), pension fund (€ 200 mn), the Reggefiber buy-out (€ 770 mn) and cash outflow at Reggefiber (a total of probably half a billion or so over the next few years). The sale of E-Plus left KPN with € 5 bn and a 20.5% stake in Telefonica Deutschland (value € 2.5). Further, Base (€ 800 mn or more) and iBasis (pocket change) can be sold. In all, the war chest could be € 5.5 to 6 bn.
  • KPN ended its pan-European MVNO strategy a few years ago.
  • KPN wasn't willing to sell to America Movil (at 8 €/share), a very unfortunate decision.
Based on this, KPN is more of a hunter than a target (E-Plus was the company's prime asset). Assets for sale:
  • Netherlands: Caiway, Delta Cable, T-Mobile NL,  Eurofiber (all impossible because of concentration issues), Film 1 (no interest), M7 Group.
  • Europe: Bouygues Telecom, Orange Swiss, Sunrise, Yoigo, fibre operators in Germany & Italy, Telefonica Deutschland.
Creating value, other than focusing on the core businesses, could involve a major strategy shift:
  • Structural separation. Spinning off is a good idea. Network & services are different animals. KPN could retain a stake in the NetCo. Vodafone and Tele2 could buy into the NetCo to speed up FTTH overbuilding.
  • Acquire M7 Group (compare AT&T/DirecTV). This will strengthen KPN's position on the TV market. Vodafone and Tele2 may also be interested.
  • Gain control of Telefonica Deutschland to re-enter Germany, but now as a full-service provider.
  • Buy fibre operators abroad to export the expertise built up in Reggefiber.
  • Buy independent mobile operators across Europe. A tie-up with Proximus could be considered. Or even TeliaSonera, bundling together more incumbents.
  • Takeovers in other parts of the value chain (compare Telstra/Ooyala or Verizon/EdgeCast).
  • Expand in content through a broadcaster: SBS or RTL (compare Comcast/NBC).
  • Sell the company. Possible buyers: Altice, private equity.