FTTH Conference 2011 Workshop Financing FTTH Networks Thomas Langer WEST LB

1,551 views

Published on

FTTH Conference 2011 Workshop Financing FTTH Networks Thomas Langer WEST LB

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

FTTH Conference 2011 Workshop Financing FTTH Networks Thomas Langer WEST LB

  1. 1. Equity Research Financing FTTH Networks Private Financing – Players and Motivations FTTH Conference 2011 Milano, 8 February 2011 Thomas Langer
  2. 2. Next generation broadband is at our heartWestLB AG Equity Research 8 February 2011 Thomas Langer Page 2
  3. 3. Who are potential investors?  Private households  (Investment) banks  Pension funds  Insurance companies  Private Equity  Public-Private-Partnerships  Utilities  Other? Wealthy individuals, Souvereign Wealth Funds, equipment vendors …WestLB AG Equity Research 8 February 2011 Thomas Langer Page 3
  4. 4. The State of the Union  Penetration numbers in Europe as a whole are still low  We are still lacking a string of attractive applications  Consumer pull-demand appears unconvincing, premium pricing appears difficult  Regulation for network neutrality not always supportive (UK vs US)  Regulation for NGA remains mostly unclear  Deeply rooted interested, intellectual inertia but also respectable legal concerns  The risk-return aka capex-cash flow profile seems unattractive  Yet, consumers spend c. US$ 1 trillion on consumer electronics p.a.WestLB AG Equity Research 8 February 2011 Thomas Langer Page 4
  5. 5. Network Neutrality Discussing Network Neutrality means entering a minefield. We doubt that deals between operators and Over-the-top players can solve the funding problems of NGA. But deals (QoS) between operators and end-customers can.WestLB AG Equity Research 8 February 2011 Thomas Langer Page 5
  6. 6. Private Households  Economic objectives:   Regulatory dynamics – not relevant   We need to differentiate between two aspects (1) service access and (2) financial returns   High service price sensitivity of single households   Increase value of real estate  Main opportunities   Main obstacles   Low price sensitivity to private home installation   Consumer inertia costs in greenfield scenarios   Lack of a killer service in urban markets   Social context: peer pressure  Examples (anecdotes?)   Verdict:   A Google representative had the idea that individuals or   Highly relevant for local communities with high shre households buy the local loop of private real estate/greenfield   “In Sweden, homes with fiber connections sell at a 5 to 10   Best of all worlds: combine service contract with a percent premium. As a result, residents there and elsewhere in Europe actually are willing to pay some of the capital dedicated municipality bond or local infrastructure costs of getting connected.” fund.   Brigham City (Utah), Nuenen (NL), some German citiesWestLB AG Equity Research 8 February 2011 Thomas Langer Page 6
  7. 7. (Investment) Banks  Economic objectives   Regulatory dynamics   Need to distinguish between investment and   Basel III commercial banks   Investment banks   Main obstacles   Direct investments   Not many when looking at the bank as a financial   Infrastructure fund intermediary   Commercial bank: debt instruments   Many if banks should invest equity capital   Verdict:  Main opportunities   Commercial banks can provide leverage at a later   Provide leverage once predictable cash flows project phase have emerged   Investment banks can provide leverage to private   Anticipate floatations equity and/or place equity and debt instruments to   Bond placements institutional and retail investors  Examples   Australia´s NBNWestLB AG Equity Research 8 February 2011 Thomas Langer Page 7
  8. 8. (Public & Private) Pensions funds  Economic objectives   Regulatory dynamics   Usually realistic to ambitious return expectations   Fiduciary duties   Return does come without risk in times of   Corporates required to provide additional funding if seemingly inflated assets prices funding gap exceeds hurdle rate   Looking for long-term, sustainable returns   Trend towards direct vs indirect (fund) investment   Main obstacles   Matching principle – assets and liabilities   Probably not interested in early stage ventures   Individual projects might individually be too small  Main opportunities   Financial returns might also resonate with the political agenda (public pension funds)   Verdict:   Close resemblance to real estate and utility models   This is highly likely to be a very important funding   Connotation to sustainable or socially responsible partner for fiber infrastructure investing   However, TMT has a bit of bad reputation…   … funds will likely not invest in early roll-out phases  Examples   Calpers, AIMCo, Ontario Teachers go direct   Dutch Communication Infrastructure FundWestLB AG Equity Research 8 February 2011 Thomas Langer Page 8
  9. 9. Insurance companies  Economic objectives   Regulatory dynamics   Looking for long-term investments with reliable   Solvency 2 implies… (regulated?) returns   Higher (expensive) equity requirements   Seeking direct equity participation…   Avoiding market risk volatility on the balance sheet   … in non-listed ventures a positive  Main opportunities   Main obstacles   Huge capex requirements,   Very small and limited investment opportunities   “national” assets need renovation   Equity not available, “crowding out” by municipalities, local utilities  Examples of project investments   Uncertainty about regulation and end-demand   Purchase of 40 windmills for a low triple-digit million amount by MEAG (Munich Re) Dec 2010   Purchase of Windpark Langres Sud (France, 52   Verdict: Regulate and funding will come! Megawatt) by Allianz May 2010   Purchase of Solarpark Brindisi (Italy) by Allianz May 2010WestLB AG Equity Research 8 February 2011 Thomas Langer Page 9
  10. 10. Private Equity  Economic objectives   Regulatory dynamics   Invest own funds, use management expertise and   Private Equity carries systemic risk as skills and sell at a higher price   … financial leverage has raised concerns   Time horizon: 3-5 years   Europe-wide regulation of alternative investment fund managers (AIFM)  Main opportunities   Topics are approval, activity, taxation, disclosure,   Use the first-mover advantage transparency, sanstions   Invest in fibre-related, adjacent businesses   Main obstacles  Example   Private Equity is different from Venture Capital   Investment by Ventizz Partners in conlinet (Vitronet)   Thus, they usually invest in companies with a mature business model   What is the exit scenario, esp. for a company investing in passive infrastructure?   Verdict: Private Equity are likely to seize opportunities only in very select circumstancesWestLB AG Equity Research 8 February 2011 Thomas Langer Page 10
  11. 11. Public-Private-Partnerships  Economic objectives   Regulatory dynamics   Communications infrastructure seen as a location   EU oversight regarding “market economy investor factor principle”   Synergies with other utilities   Potential conflict of interest with regard to state   Contributions in kind (ducts, dark fibre) possible ownership of the incumbent   Exit scenario could be financially attractive   Need to design the PPP according to targeted   Main obstacles position or scope in the value chain   Lack of incentives to maximise valuation throughout the early phase of PPP  Main opportunities   Public partner loses “control” over time   Public partner can help to reduce information and   Clash of cultures in a horizontal project company transaction costs (civil works etc.)   Reputation and credibility   Verdict   Adequate sharing of financing and risk   Looks good in theory,   … but little evidence in practice that PPP (shared  Examples ownership) is offering a promising avenue   FTTH roll-out in AmsterdamWestLB AG Equity Research 8 February 2011 Thomas Langer Page 11
  12. 12. Utilities  Economic objectives   Regulatory dynamics   We need to distinguish between local and national   Emission trading phase 3 (starting in 2013E, CO2 utilities emissions become more expensive)   Clear trends towards localisation (local power   Regulation of water prices (Germany) generation, local grids, …)   Localisation of the energy value chain and related   National champions need to cater for other revenue services (smart power, smart grids) streams (dividend stability)   Main obstacles  Main opportunities   Political stress   (National) Utilities have deep pockets   Regulatory uncertainty   Direct customer relationsships   “Telco” carries negative connotations   Leverage know how in building access networks   Verdict  Examples   The pressure will rise!   DONG Energy sold ist Fibernet (oops!)   Hafslund sold Fibernett AS to PE EQT (oops!!)   RWE cooperates with Vodafone GermanyWestLB AG Equity Research 8 February 2011 Thomas Langer Page 12
  13. 13. Three dimensions of private financing return liquidity risk Financial accounting parameters Degree of vertical Short term integration Mid-term Investment Value horizon proposition Long-term Position in value chainWestLB AG Equity Research 8 February 2011 Thomas Langer Page 13
  14. 14. Example: A financing structure could be complex Wealthy individuals Bank debt X% Y% Z% Private Pension fund Public PE Equity PPP vehicle Passive Co Manage Co after 3-5 years A% Pension fund B% Public Passive Co Manage Co C% Insurance IPOWestLB AG Equity Research 8 February 2011 Thomas Langer Page 14
  15. 15. We anticipate two key scenarios  TOP DOWN   Government and regulator opt for functional/structural separation   Final transformation of the incumbent   Government offers funding and/or guarantees for outside investors   Contributions in kind would be welcome   BUT could this be enforced (ie nationalisation)?   Split in NetCo and ManageCo possible  BOTTOM UP   Local initiatives with varying roll-out sizes   Economic and scale arguments need to win over local egos   Network and marketing consolidation will be necessary over time   Financing models need to take into account local specifics and require ingenuity and flexibilityWestLB AG Equity Research 8 February 2011 Thomas Langer Page 15
  16. 16. … and there is a wildcard in Europe dividends dividends or investments?WestLB AG Equity Research 8 February 2011 Thomas Langer Page 16
  17. 17. Contact us: Thomas Langer Head of Technology & Telecoms Equity Research Thomas.Langer@westlb.de +49-211-826-6938 Andreas Weiss Head of TMT, Managing Director Corporates and Structured Finance (GSA) Andreas_Weiss@westlb.de +49-211-826-2196WestLB AG Equity Research 8 February 2011 Thomas Langer Page 17
  18. 18. WestLB AG WestLB AGDisclaimer London Branch Herzogstrasse 15 Woolgate Exchange D-40217 Düsseldorf 25 Basinghall StreetImportant Notice Germany London EC2V 5HA T: +49 (0)211 826 71841 United Kingdom F: +49 (0)211 826 6154 T: +44 (0)20 7020 2000 F: +44 (0)20 7020 4209Regulator: WestLB AG is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht and by the Financial Services Authority for the conduct of UK business.Disclosures of potential conflicts of interest relating to WestLB AG, its affiliates and subsidiaries (together “WestLB”) as required by regulatory authorities can be accessed at http://www.westlb.de/disclosures_eq_en or obtained by writing to theCompliance Department at one of the addresses above.* Companies from which WestLB AG or an affiliate or subsidiary has received compensation for investment banking services within the past 12 months.This research report was prepared by WestLB AG, an affiliate of WestLB Securities Inc. (“WSI”) or other person that may not be registered as a broker-dealer in the United States. The company that prepared this report may not be subject to US rulesregarding the preparation of research reports and the independence of research analysts.WSI accepts responsibility for the contents of this research report to the extent that it is delivered to a person that is not a “major U.S. Institutional Investor” or a “U.S. Institutional Investor” as those terms are defined in Rule 15a-6 under the U.S.Securities Exchange Act of 1934, as amended, or to any person resident in the state of California, Colorado, Louisiana, New Mexico, Ohio, Tennessee or Vermont. Any US person who desires to effect transactions in any security in this report shouldwrite or call WSI, 1211 Avenue of the Americas, New York, NY 10036, phone (212) 403 3939.The relevant research analyst(s), as named on the front cover of this report, certify that (a) all of the views expressed in this research report accurately reflect their personal views about the securities and companies mentioned in this report; and (b)no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views expressed by them in this report.The remuneration of WestLB Research Analysts is not related to specific investment banking transactions. It is in part linked to the overall profit made by the firm, which includes the profit of the Investment Banking Department.WestLB’s investment recommendations are kept under continuous review. It follows that no date can be given for the next update of the conclusions of this report.Conflicts of InterestWestLB’s Policy on Management of Conflicts of Interest in Research (the Research Policy) is available at http://www.westlb.de/research_policy_en. This report complies with the Research policy.Valuation and Risk assessment; Recommendations.Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of thisfundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment.Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demandvariations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas marketsand instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, political and social conditions. This discussion of valuation methods and risk factors is not comprehensive. Further information is available uponrequest.Stock ratings are based on the analyst’s expectation of the stock’s total return during the twelve months following assignment of the rating. This view is based on the target price, set as described above, and on the analyst’s opinions on general market and economicdevelopments.Within that overall framework, a Buy rating means that the total return from the stock is expected to exceed 20%; Add means between 10% and 20%, Reduce means between 0% and minus 10%; Sell means the stock is expected to return less than minus 10%; aNeutral rating means that we believe the share is fairly valued at current share price levels. For this reason we do not specifically provide a numeric target price for this rating, as by definition this corresponds closely to the market price that is determined on a daily basisuntil such time that we change our rating.Distribution and Use of ReportThis research report has been prepared by a research department of WestLB AG. Communication in the United Kingdom is by WestLB AG London Branch. In the United Kingdom this report is available only to Eligible Counter-parties and Professional Clients not RetailClients, as defined by the rules of the Financial Services Authority. Individuals who do not have professional experience in matters relating to investments should not rely on it.This report is for information purposes only. The information contained herein has been obtained from sources believed by WestLB AG to be reliable, however no guarantees, representations or warranties are made as to its accuracy, completeness or suitability for anypurpose. Any opinion or estimate expressed in this report reflects the judgement of the author or authors on the date of this report and is subject to change without notice. The past performance of securities or financial instruments is not indicative of future results. Noassurance can be given that any portfolio or investment described herein would yield favourable investment results. This material is not intended as an offer or solicitation for the purchase or sale of any security, financial instrument or any other action and will not formthe basis or a part of any contract.Further information may be obtained from your usual contact within West LB AG. No part of this publication may be copied or redistributed to persons or firms other than the authorised recipient without the prior written consent of WestLB AG. The manner of distributingthis document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves of, and to observe such restrictions.WestLB AG Düsseldorf is a member of the London Stock Exchange. WestLB AG London Branch is a member of the International Capital Market Association.Copyright: 2011 WestLB AG. All rights reserved.WestLB AG Equity Research 8 February 2011 Thomas Langer Page 18

×