Telefonica O2 Czech Republic
(TO2 CR) is an ideal target for private equity buyout.
TO2 CR operates in a
stable market oligopoly
low subscriber churn
and one of the highest
and gross margins
(45%) in Europe. Czech Republicis a politically
with forecasted GDP growth of 1% in 2013.
Majority owner of TO2 CR, Spanish telecommunications group Telefonica has been
selling most of its international assets
to cover upcoming debt payments, so we are convinced TO2 CR would be
available for sale at favorable terms
Even though the Czech telecommunications
market is saturated
(130% penetration), we stillidentified
some growth opportunities
(mainly mobile data) as well as
that could offset the
expected decline in ARPU
We expect to entry at
3.92bn) EV at
5.5x 2013E EBITDA
. This implies an
over current market price.
With the assumed exit in 2018 for the same multiple (5.5x), we forecast
IRR of 25.9% and MoM of 3.1x.
These forecasts are very
sensitive to the entry multiple
(given the high leverage) and
assumptions about future EBITDA margins
. If the market was to become more competitive (e.g.,because of a new market entrant), the situation could resemble the market situation in Austria,where margins declined from 40% to 10% within a time frame of 2 years. However, we see thisscenario as less likely.
Since this is an attractive asset, we identified
multiple exit strategies
. Most viable is exit through
stock market offering
, but we also see a number of potential
(European and Asiantelecoms) as well as
(e.g., local private equity groups) buyers.