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FTTH Conference 2011 Workshop Financing FTTH Networks Thomas Langer WEST LB


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FTTH Conference 2011 Workshop Financing FTTH Networks Thomas Langer WEST LB

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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 +49-211-826-6938 Andreas Weiss Head of TMT, Managing Director Corporates and Structured Finance (GSA) +49-211-826-2196WestLB AG Equity Research 8 February 2011 Thomas Langer Page 17
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