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Telefonica O2 CZ - Buy Out Proposal

Telefonica O2 CZ - Buy Out Proposal

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Published by Jaideep Dhanoa
buy out proposal for Telefonica O2
buy out proposal for Telefonica O2

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Published by: Jaideep Dhanoa on May 07, 2013
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11/13/2013

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Telefonica O2 Czech Republic
Buy Out Proposal
Tomas Likar, Peter Gajdos, Jaideep Dhanoa
 
Opportunity Evaluation
Executive summary
Telecommunication sector in the Czech Republic
 –
Overview
Investment thesis
Transaction overview
Industry overview
Financials
Exit strategy
 
Executive summary
We believe
Telefonica O2 Czech Republic
(TO2 CR) is an ideal target for private equity buyout.
TO2 CR operates in a
stable market oligopoly
with
low subscriber churn
(~1% p.a.)
 
and one of the highest
mobile ARPUs
(~20 EUR/month)
and gross margins
(45%) in Europe. Czech Republicis a politically
stable economy
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
operational improvements
that could offset the
expected decline in ARPU
going forward.
We expect to entry at
$101.566bn CZK
(
 €
3.92bn) EV at
5.5x 2013E EBITDA
. This implies an
8%premium
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
strategic
(European and Asiantelecoms) as well as
non-strategic
(e.g., local private equity groups) buyers.

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