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FTTH Conference 2009 Network Economy Group
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FTTH Conference 2009 Network Economy Group

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  • 1. Financing Local Fibre Access Infrastructure FTTH Council Copenhagen February, 2009 Network Economy Group Bern - Brussels - Frankfurt - London
  • 2. Company Background – Who we are Focus   Investment and management group focused on asset based projects in Telecommunications, IT and Renewables, founded 1995   7 partners spread over Europe linked with Remington Capital in the US   Co-investments and co-management roles in the joint businesses with strategic partners Key facts   Successful track record of joint public private partnerships over the last ten years - successfully built-up, grown and sold 14 local fibre access ventures with local utilities and municipalities - € 210m invested capital with an IRR > 100%   Developed FTTH/C business cases with FT and DT in 2005   Initiated and structured deals in 2007 to buyout incumbent infrastructure jointly with Terra Firma, to restructure an Eastern European Telco jointly with Citibank and in the NL with Waterland Private Equity   In 2006 founded and funded Biossence Ltd., leading alternative energy from waste company in the UK – now jointly with New Earth Solutions Strictly Confidential Network Economy Group Page 1 Bern - Brussels - Frankfurt - London
  • 3. Fiber is the ideal medium for the future communication Key choice driver Fiber Copper Wire   Future proof and affordable local access   Symmetric up and down loading of high volume data   Peer-to-peer communications   Increase in competition of communication services   Freedom of choice   Low operating expenses   Low initial investment Fibre (i) is technology agnostic; (ii) a shared medium ideal for symmetric network architecture; (iii) has nearly unlimited capacity, and (iv)reduced operating costs Strictly Confidential Network Economy Group Page 2 Bern - Brussels - Frankfurt - London
  • 4. However fibre access infrastructure development has to be carefully planned to substantially reduce the initial investment Main investment characteristic The cost per user can be reduced if..   Working jointly with municipality and   80% of the value is in the duct system local utilities - 40% of construction cost and access to buildings reduction   Long-term commitments from off-takers   Civil engineering and property business including local government to lower outweigh telecommunications elements interest rates and equity returns   Sharing the infrastructure between   Independence of the infrastructure from different Service Providers to enhance the services is key penetration rates   High penetration of usage ends to decrease implementation cost per user   Seamless fiber networks to decrease operating cost by around 40-50% € ~150m CapEx is needed to connect a one million inhabitant area Strictly Confidential Network Economy Group Page 3 Bern - Brussels - Frankfurt - London
  • 5. Among the three financing options the green- field is the preferred 1 2 3 Subsidization Structural Green field Success drivers: Option to separation finance   Consensus.If you want FTTH in Bayerischer Buy out the wire- Wald (D) or Nuenen Subsidization of Local initiative by Description line infrastructure (NL) first, take on the the government local government initiative of the incumbent to attract specific telco to set up an funds and the   Synergy.If you feel it is independent a competitive advantage local population infrastructure to invest to distribute water, business electricity or gas to the local community then optical fiber is the next logical step to whom and for No debt financing Key concern   Funding.Only what goals? available. government Political guarantees / funds can uncertainties bridge the gap induced by the current lack of available debt financing Strictly Confidential Network Economy Group Page 4 Bern - Brussels - Frankfurt - London
  • 6. Green field approach is preferred, however 3 main challenges remain Suggested approach Key challenges   How to get long-term off-take agreements   Local Government commitment to open access upfront? and to off-take for their own needs   Mobile operators moving into fixed mobile convergence and are willing to off-take   Set up a retail fund offering a financial product based on long-term infrastructure commitment,   How to get debt financing in place? promoted by the local government, local banks and local financial agencies   A retail fund is easier to set up, to capitalize and to manage than a cooperative solution. It could be backed partly by government guarantees too   How to convince the local mass market to use   If people invest in their own infrastructure they will fibre based services instead of DSL or Cable- use it TV based services? Strictly Confidential Network Economy Group Page 5 Bern - Brussels - Frankfurt - London
  • 7. Phased Process to Protect Downside Risk & Generate Attractive Returns for Infrastructure Investors 1 2 3 4 5 Growth/ Complete Refinance/ Economics value Planning Commitment Phases funding Exit creation Joint From local Attract strategic Local Marketing of   Marketing of a   IRR for project Descri- planning government investors (local network to retail investment will be 10%, if ption exercise and organisations and businesses and fund to re-finance only the local business as well as from international) residents to the network after public planning with operators and and set up retail achieve a network 4yrs organisation is local Service fund distributed usage of 50% over using the   Exit for strategic government Providers via local banks 5 years in network investors through and financial collaboration with trade sale to retail   IRR for project agencies local distribution fund at fair will be 20%, if partner. Target market value usage can be returns for increased to residential 50% over 5 investors: Libor years plus 2.5% pa   Attractive Return of 10% for local infrastructure investors (10-15%) Strictly Confidential Network Economy Group Bern - Page 6 Brussels - Frankfurt - London
  • 8. Project process structure Start to build core network for municipality locations Municipality Organizations Add off-take SPV Assets & Operations agreements Network SPV Economy Set up retail Retail Fund Roll-out marketing fund Private Equity Investors Raise fund Further network roll-out jointly with local distribution partner yr0 yr4 Step 1 Step 2 Step 3 Step 4 • Engagement of • Set up of SPV by NE/ • Start network rollout to •  Building assets point to point municipality / local PE connect local municipality •  Set up operations utilities to join NE • Municipality support of locations •  Rollout marketing business plan SPV by planning, • Set up retail fund with •  Further network roll-out will be • Engagement of Private ducts, locations, attractive structure funded by retail fund Equity to join NE marketing • Starting fund raising with business concept/plan • Municipality long-term local retail partner commitment to use SPV=Special Purpose Vehicle fibre Network Economy Group Brussels - Frankfurt – London – Bern
  • 9. SPV Process structure Private Equity/ Local Residents Network Economy €1k-10k retail distribution Buyout/ High wealth Network Economy Fibre Access Fund individuals refinancing With local partners € >20k direct distribution Local Institutional SPV Assets investors €1m Return b% yr0 yr4 Step 3 Step 5 • Set up Retail and Direct •  After fund raising the retail fund will Funds to attract different buy the assets from LFAI for the kind of investors and enterprise value attract local institutional •  Further network roll-out will be investors direct investing funded by retail fund into regional fibre access projects Network Economy Group Brussels - Frankfurt – London – Bern
  • 10. NE - combining sector expertise & development skills with asset management Partners Management Local Municipalities Local Access Fiber Fund Infrastructure Local Utilities Manager Projects Asset Management and Network Property Investments Economy Construction Team Fibre Network Telco Service Provider Operations Strictly Confidential Network Economy Group Bern - Page 9 Brussels - Frankfurt - London
  • 11. Reference project – Southern Europe Number of residents: 800 000 Market Penetration: 70% Number of connections: 290 000 Cumulated CapEx: €240m Steady-state annual sales: €70m EBITDA break-even: After 2 yrs Mid-term EBITDA margin: 60% Project return: 15% Strictly Confidential Network Economy Group Page 10 Bern - Brussels - Frankfurt - London
  • 12. Exit for strategic investors (step 5)   Based on developed business plan and financial model for identified region the initial investment of €30-50m is needed based on 50% debt leverage   Milestones and preconditions of retail fund Municipality commitment granted   Partnership with local utility agreed   First relevant ISP commitment secured   Initial Investment Structure and investment budget defined     Exit after 4 yrs by selling the SPV at enterprise value to the retail fund   Further fund raising of the retail fund will finance further rollout of the network infrastructure Strictly Confidential Network Economy Group Bern - Page 11 Brussels - Frankfurt - London