CIAM• 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WIJ SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com
TelenetGroup Holding NV Attn:Board of Directors Neerveldstraat107 1200Brussels
Byemail: Mr.Bert de Graeve,Chairman of the Boardof Directors Mr.John Porter, CEO & Memberof theBoard of Directors Mr.Eric Ven den Eden, CFO Mr.Rob Goyens, VP Treasury, Investor Relations & StructuredFinance
****** Paris,27 th February2020, DearMr. Chairman and Members of the Boardof Directors, Fundsmanaged by CIAM(including the CIAMFund, CIAM Opportunities Offshore Fund and Satellite EventDriven UCITS Fund) collectively hold a totalof 1,447,600shares representing an equitystake of 1.26%in TelenetGroup Holding NV ("Telenet", the "Company"). CIAMseeks to investin undervalued,high-quality companies, wherein our in-depthfinancial analysis revealssignificant upside in the shareprice.
As an active shareholder,we regularlyengage in a constructivedialogue with the boards and managementteams of the companieswe investin, to ensurethey use the full rangeof actionablelevers theyhave at theirdisposal to createvalue for all shareholders.Since having invested in Telenet,we have had a numberof meetingswith the Company'smanagement to shareour viewson the Company's strategy,governance and financials.
However,we feelthat the significantunderperformance of Telenet's share price requires a differentform of engagement,to allowus to discussthe matteropenly with all minorityshareholders.
Wewould like to expressour strong concern regarding Telenet's financial performance and ask the Boardof Directorsto proposean additional€970m shareholder remuneration ahead of the AGM in the form of an extraordinarydividend payment. We also encourageall minorityshareholders in Telenetto publiclyendorse our requestand engage in a proactivediscussion with the Company.
1 CD CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street- LONDON WU SLF Tel : + 33 14387 1866 / + 44 20 3876 7981 www.ci-am.com
Ouranalysis of the situationand the argumentssupporting our requestare as follows:
I. Sincethe promisingand forward-looking Capital Markets Day on 5th December2018, Telenet's share price has declinedby 16.4%1,while its converged-cablepeers (Tele2,Altice Europe, Euskalteland NOS)and Belgiancompetitors (Proximus and OrangeBelgium) have seen their shareprices increase by an averageof 28.1% and 1.5%,respectively (see. Exhibit 1 ). Moreover, due to the share price underperformanceand despitebest-in-class profitability, Telenet is currentlytrading at a depressedvaluation level of 11.0xEV/OpFCF 2020e (see Exhibit 2).
We believethat this underperformanceis not a consequenceof regulatoryheadwinds and is whollyattributable to management'spoor execution and lack of "pro-shareprice" behavior.
Imperfectexecution materialized in disappointingbusiness trends (FY 2019's EBITDA contraction of 4%from 1 % in Q3 and2% in Q2,Q4's miss on marginand Q3's loss of 1,900broadband subs after3,000 losses in Q2) anda disappointingguidance for 2020(1-2% growth) as the causeof investors'capitulation driving the shareprice decline recently.
Moreover,we regretthe lackof ambitionand paradoxical tone of the lastconference call, where ErikVan den Enden commented on a "healthyfuture profitable growth" that would finally translate into a "stablerevenue and adjustedEB/TOA growth of around 1%".This guidanceis very conservativewhen considering the 6.5% to 8%OpFCF CAGR over 2018-2021 outlook at the last CMD.As a side note,we are also surprisedby the smallamount dedicated to sharebuyback (€55m)at a timewhen the stockis tradingat €36, whilethe companyconducted a substantial partof its latestshare repurchase program ("Share Repurchase Program 2018bis" of €300m)in the€43-50.
We believethat the managementis extremelyunambitious and is solelyfocused on meeting conservativeexpectations. We suspectthat LibertyGlobal, the majorityowner of Telenet,is satisfiedwith this statusquo in the shareprice (see Lucerne Capital Management's Letter to the Boardof Directors,8 May2018 2), anduses its influenceover the governing bodies to avoidtaking the requiredactions to revertthe shareprice trajectory.
1 All figures as of markets close of 27/02/2020 2 http://www. Iucerneca p.com/wp-content/u p loa ds/2019 /10/TN ET-Board-M ay-2018. pdf
2 CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WU SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com II. As a resultof the above,close to 60%of the sell-sideanalysts following the Companymaintain a neutraltone 3 on the Telenetshare:
■ KeplerCheuvreux, Matthijs Van Leijenhorst (12/02/2020)
''Theoutlook for 2020seems ok andis slightlyahead of expectations.Then again, the dividend fell slightlyshorl. Overall, we foreseeno significantchanges to marketestimates. 11
■ MorganStanley, Nawar Cristini (12/02/2020)
"Telenethas underperformedthe sector since mid-June 2019, and valuation is starlingto look attractivevs. peers ... but unexcitinglist of catalystsahead." "Q4mixed. 2020 guidance reassuring on revs& EB/TOAbut consensus on thehigh-end of the FCFrange."
■ Exane,Alexandre Roncier (12/02/2020)
"Thisis the firsttime in thelast 7 quarlersthat the cableoperators missed on margin.Similarly, the companyannounced a finalgross dividend of EUR143m(EUR1.30 per share)and a EUR55mshare buy-back program in 2020,overall 5-10% below consensus expectations of EUR242mand 43m respectively. 11
■ Bankof America,David Wright (13/02/2020)
"TNETis nowbroadly ex-growth (rev guidance 'stable', EB/TOA +1%, OpFCF +2%) [ ...] and facedincreasing competitive pressures through 2020 from cable wholesale and a revitalised Voo.11 "Wemaintain our Underperformrating as Te/enettransitions into incumbent status, i.e. ex growthwith regulatory and competitive pressures. 11
■ Barclays,Simon Coles (17/02/2020)
"Atis capitalmarkets day in 2018,Telenet provided its midtermoutlook which indicated material OpFCFgrowth in the comingyears. However, most of thiswas driven by a materialdecline in capex[. ..]. WithOBEL and PROX teaming on 5G, westruggle to seehow capex for Telenet candecline." "Weare EW on TNET,viewing the near-term outlook as cloudedby a likelylow growth 2019, plusrisks around a potentialnew 4 th mobileplayer and lower cable wholesale fees in 2019.11
3 Source: Bloomberg consensus as at 26/02/2020
3 en CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WU SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com
111. As of 27th February2020, equity investors in Telenetlost €1,05bn in valuesince December 2018. In ourview, the extremely small €55m share buyback and payout ratio of 53%of Adj.FCF (at the bottom-endof the targetrange of 50-70%set at the CMD)in the first yearof ordinarydividend distributionboth fail to compensateshareholders for the lossof valueincurred. We estimate that investorshave been (or will be)returned a totalof €377m: ■ €206.4min dividends ■ €55mthrough the "ShareRepurchase Program 2020" ■ €116mthrough the "ShareRepurchase Program 2018bis".
Moreover,according to Liberty'sfiling 4 (see Exhibit3), VodafoneZiggogenerated an Adjusted FreeCash Flow of €469.4munder the company'sdefinition (same as Telenet).In its Q4/FY release5, VodafoneZiggodisclosed having distributed €585m in cashreturns to shareholdersin 2019.Our reading of the previousreleases suggests that dividends represented c. €300mout of the €469m,implying an Adj. FCF payoutratio of 64% (comparedto 53% at Telenet).Finally, VodafoneZiggoended the yearwith a net leverageratio of 4.8x,well above Telenet's 4.0x.
Giventhe similaritiesof thesetwo corporatesand their markets,as well as their comparable leadingposition on the broadbandmarket, we see no reasonwhy they shouldoperate under different leverageratios and why the minorityshareholders (T elenet) or partner in JV (VodafoneZiggo)should have a differentiatedtreatment.
In lightof thisassessment, and considering that: ■ Telenetdoes not have any planned M&A activity; ■ Telenetis immunefrom the ongoingCovid-19 outbreak; ■ Telenetis supposedto decreasecapital intensity; ■ Telenetwill notface any major impact from spectrum renewal before 2021;
We ask the Boardof Directorsto proposethe paymentof an extraordinarydividend of €970m aheadof the nextAGM (29th April 2020).
Thisextraordinary dividend shall be financed with:
■ €130mfrom the remainingpart of the 2019Adj. FreeCash Flow as perthe guidelinesof the lastCMD regarding the useof extracash; ■ €840mfrom the releveragingof the balancesheet towards the upperend of the targeted netleverage range (4.5x Adjusted. EBITDA 2020e).
4 Page 19 - https://www.libertyglobal.com/wp-content/uploads/2020/02/Liberty-Global-Q4-2019-lnvestor-Call Presentation.pdf 5 Page 5 - https://www.libertyglobal.com/wp-content/uploads/2020/02/VodafoneZiggo-Fixed-lncome-Q4-2019-Release.pdf
4 cu CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WIJ SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com Wewould also like to emphasizethat, as partof our investmentprinciples, CIAM values best-in-class and transparentcorporate governance practices as expressedin our 18th November2019 pressrelease 6. Therefore,we will continueto supportany campaignaimed at improvingthe governancepolicies or act for governancechanges at Telenet.
In conclusion,we reiterateour confidencein Telenet'sbusiness prospects and trustthat the governing bodiesof the Companywill takeaccount of the necessaryactions to implement.
We remainat yourdisposal for continueddialogue and we lookforward to hearingfrom you. Yourssincerely, CatherineBerjal CEO
6 https://www.ci-am.com/news/2019/11/18/telenet-ciam-supports-appointment-of-independent-corporate-governance specialist
5 CD CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WIJ SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com APPENDIX
Exhibit1: Telenet has underperformed its cable& Belgiumpeers
SharePrice PcrformanC'C: as0(2.:7/02/2020 • Rchased100 asofos/!2/2018
4"
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00 ,,, ':,.,~..,,.;:.. c,''--' o-f\ ..,~t- ...... ,,.. , ,"'/ ...... ,,i)'°' "':!,....,,
Exhibit2 7: Telenethas the best margin profile but tradesat a steepdiscount to peers
EV/OpFCF 202oe Eiill:D.A.M;u:gi1:u..~oe 25.ox 60.0%
20.ox
15,ox
30.0% lQ,O:i..
5.ox
o,o'?o 0,0X Td-.met En~k,1llel Alt.ict! NOS Tele2 Proximus Orange NOS Tclc-7. Euskalld Altice Orange Proximu;; T<'lc11etI Europe Belgium turope Belgium
7 Source: S&P Capital IQ
6 CIAM 26 Bd Malesherbes - 75008 PARIS 11 Hill Street - LONDON WIJ SLF Tel : + 33 1 4387 1866 / + 44 20 3876 7981 www.ci-am.com Exhibit3: VodafoneliggoAdjusted Free Cash Flow (Source: Liberty Q4 Presentation)
Year ended December 31, 21>19 lnmllllons N t cashprovjd cJby operatinsact1vrt ie1, 1,311.2 E.l!pen,ie~ftn ne d by n nt rmeclfa~y 652.3 Interestrxt'l'ments on shareholclerloans 89.9 Capitalexpenditure~. net (320.9) Pnm;fpI paymentsoc ,1uno:i.r~ · mmoo t,y tU»,) 'i cl~!:$r\d nt ~di,11ri~$ PrinctP3lpayments on finance leases (9.7} dju~ ¢ F'CF
Mediacontacts
GreenbrookCommunications RobWhite, Gina Bell, Fanni Bodri [email protected] +442079522000
AboutCIAM
CIAMis a pan-Europeanasset manager co-founded by CatherineBerjal and Anne-Sophied'Andlau in 2010and hasoffices in Londonand Paris.The fund's strategy is event-driven,focused on mergerarbitrage and special situations. C!AM's investor base includesfamily offices, institutional investors and privatebanks. C!AM manages three vehicles.The flagshipCIAM OpportunitiesFund implements a strongconviction portfolio based on proprietaryresearch, focused on carefulassessment of risk. CIAMaims to providetruly uncorrelatedreturns through unlocking value in companiesto benefitinvestors and other shareholders.The fund donates 25% of its annualperformance fees to charitiesdedicated to improvingchildren's health and educationacross the world.
CIAMis an AIFMregulated by theAMF in Franceand registered with the FCAin the UK.CIAM manages the SICAV-SIFCIAM OpportunitiesFund under CSSF's supervision.
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