26 February 2015 Europe/United Kingdom Equity Research Integrated Telecommunication Services
BT Group (BT.L) Rating OUTPERFORM* Price (24 Feb 15, p) 447.00 INCREASE TARGET PRICE FOCUS LIST STOCK
Target price (p) (from 440.00) 495.00¹ Market cap. (£ m) 37,410.40 Enterprise value (£ m) 42,914.0 Raise price target to 495p on EE deal
*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ We reiterate our Outperform rating on Credit Suisse Europe Focus List ¹Target price is for 12 months. stock BT Group and raise our price target to 495p. We believe the upside from Research Analysts the EE deal and lower than previously forecast TV content costs more than offset Paul Sidney the negative impact of (1) Virgin Media's (VMED) 4m footprint expansion and (2) 44 20 7888 6015 uncertainty over a possible Labour government in the upcoming election driving [email protected] lower forecast fixed price rises. Post EE acquisition, at our 495p price target, BT would trade on 8x adjusted Mar-17E EV/EBITDA with EBITDA growth of ~4% pa. ■ BT fixed line forecasts cut 3-4% to reflect VMED footprint expansion and lower fixed price increases. We assume 30% VMED take-up 3 years after build with an additional 1.2m VMED customers in these new areas by 2023. We assume half of these customers taken from BT Retail and half from unbundlers (reducing Openreach LLU lines). Uncertainty over Labour telecoms policy drives much lower line rental increases. These are partially offset by lower Sports content costs (30% inflation now vs. 50% previously). ■ Everything Everywhere deal to boost FCF/share 8%. Despite cuts to UK wireline forecasts we see substantial share price upside from the announced £12.5bn EE deal with high probability of the deal completing. We calculate the deal is 8% FCF/share accretive in year 3 post-deal completion and boosts BT's EBITDA growth over the period Mar-16-21E to 4% per year. ■ Fibre to continue to boost BT revenue/line. We continue to see strong UK demand for high-speed broadband/fibre. This mix effect drives continued BT Retail rev/line (RPL) growth of ~4% p.a. over the next few years. We forecast BT to achieve 5m fibre retail subs by end December 2017. ■ Catalysts: BT will report FYMar15 results in early May. ■ Valuation: BT trades on 7.4x Mar-17E adjusted EV/EBITDA including EE.
Share price performance Financial and valuation metrics
Year 03/14A 03/15E 03/16E 03/17E Revenue (£ m) 18,288.3 17,888.5 18,044.7 18,108.0 412 EBITDA (£ m) 6,115.55 6,225.56 6,266.87 6,374.33 362 Pre-tax Profit Adjusted (£ m) 2,304.72 2,666.08 3,026.90 3,233.78 312 CS adj. EPS (p) 28.11 31.19 31.71 33.60 262 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Prev. EPS (p) — 31.48 32.53 35.32 Price Price relative ROIC (%) 37.21 44.04 39.66 37.30 P/E (adj., x) 15.90 14.33 14.09 13.30 The price relative chart measures performance against the P/E rel. (%) 108.9 91.5 101.9 107.8 FTSE ALL SHARE INDEX which closed at 3742.58 on EV/EBITDA 7.3 6.9 6.7 6.4 24/02/15 On 24/02/15 the spot exchange rate was £.73/Eu 1. - Dividend (03/15E, p) 12.43 IC (03/15E, £ m) 6,434.00 Eu .88/US$1 Dividend yield (%) 2.8 EV/IC 6.7
Performance Over 1M 3M 12M Net debt (03/15E, £ m) 5,503.6 Current WACC 8.79 Absolute (%) 4.9 10.3 7.7 Net debt/equity (03/15E, %) 591.6 Free float (%) 99.94
BV/share (03/15E, £) 0.11 Number of shares (m) 8,369.22 Relative (%) 3.0 6.2 5.7 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
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26 February 2015 Table of contents
Updating forecasts for recent events 4 Cutting BT wireline forecasts 3-4% 7 Virgin Media to pass 4m new UK premises 7 Labour Party policy presents an uncertainty 10 UK demand for high-speed broadband to remain strong 12 Recent English Premier League (EPL) auction cost below expectations 14 Conclusion—Cut UK wireline forecasts 3-4% 15 EE deal to boost FCF/share 7% 16 Our base case synergy assumptions could prove conservative 17 Combined BT/EE has 4% EBITDA growth on our scenario 19 Raise price target to 495p 19 Actuarial pension deficit £7bn 21 EC requests Ofcom re-designs "margin squeeze test" 22 Appendix 1—BT Group financials 23
BT Group (BT.L) 2 26 February 2015
BT Group BT.L Price (24 Feb 15): 447.00p, Rating: OUTPERFORM, Target Price: (from 440.00) 495.00p Income statement (£ m) 03/14A 03/15E 03/16E 03/17E Per share data 03/14A 03/15E 03/16E 03/17E Revenue (£ m) 18,288 17,888 18,045 18,108 No. of shares (wtd avg) 7,857 8,107 8,367 8,390 EBITDA 6,116 6,226 6,267 6,374 CS adj. EPS (p) 28.11 30.93 31.71 33.60 Depr. & amort. (2,696) (2,541) (2,450) (2,430) Prev. EPS (p) — 31.48 32.53 35.32 EBIT (£) 3,420 3,685 3,817 3,944 Dividend (p) 10.90 12.43 14.29 16.08 Net interest exp. (597) (549) (500) (421) Div yield 2.44 2.78 3.20 3.60 Associates (3) — — — Dividend payout ratio 38.78 40.17 45.06 47.85 Other adj, (515) (490) (290) (290) Free cash flow per share 34.39 36.81 35.33 36.83 PBT (£) 2,305 2,645 3,027 3,234 (p) Income taxes (292) (529) (605) (647) Key ratios and 03/14A 03/15E 03/16E 03/17E Profit after tax 2,012 2,116 2,422 2,587 valuation Minorities — — — — Growth (%) Preferred dividends — — — — Sales 0.1 (2.2) 0.9 0.4 Associates & other 196 392 232 232 EBIT 2.3 7.7 3.6 3.3 Net profit 2,208 2,508 2,654 2,819 Net profit 5.6 13.6 5.8 6.2 Other NPAT adjustments (196) (392) (232) (232) EPS (0.1) 5.0 (1.1) 4.6 Reported net income 2,012 2,116 2,422 2,587 Margins (%) EBITDA margin 33.4 34.8 34.7 35.2 Cash flow (£) 03/14A 03/15E 03/16E 03/17E EBIT margin 18.7 20.6 21.2 21.8 EBIT 3,420 3,685 3,817 3,944 Pretax margin 12.6 14.8 16.8 17.9 Net interest (597) (549) (500) (421) Net margin 12.1 14.0 14.7 15.6 Cash taxes paid (423) (426) (612) (662) Valuation metrics (x) Change in working capital (380) (250) (130) — EV/sales 2.4 2.4 2.3 2.3 Other cash & non-cash items 3,029 2,871 2,729 2,571 EV/EBITDA 7.3 6.9 6.7 6.4 Cash flow from operations 5,048 5,330 5,303 5,433 EV/EBIT 13.1 11.6 11.1 10.4 CAPEX (2,346) (2,345) (2,347) (2,343) P/E 15.9 14.5 14.1 13.3 Free cashflow adj. — — — — P/B (56.8) 40.1 14.0 8.1 Free cash flow to the firm 2,702 2,985 2,956 3,090 Asset turnover 0.73 0.73 0.70 0.68 Acquisitions — — — — ROE analysis (%) Divestments — — — — ROE stated-return on (444.3) 1,477.8 135.2 70.7 Other investment/(outflows) (330) (423) (443) (232) equityROIC 37.2 43.7 39.7 37.3 Cash flow from investments (2,676) (2,768) (2,790) (2,575) Interest burden 0.67 0.72 0.79 0.82 Net share issue/(repurchase) (50) 1,062 35 — Tax rate 12.7 20.0 20.0 20.0 Dividends paid (790) (917) (1,094) (1,251) Financial leverage (15.9) 8.8 2.7 1.3 Issuance (retirement) of debt — — — — Credit ratios (%) Other (247) (15) 139 (147) Net debt/equity (1,240.7) 591.6 177.9 77.2 Cash flow from financing (1,087) 130 (920) (1,399) Net debt/EBITDA 1.2 0.9 0.8 0.6 activitiesEffect of exchange rates (325) (850) (900) (250) Interest coverage ratio 5.7 6.7 7.6 9.4 Changes in Net Cash/Debt 960 1,841 693 1,209 . Net debt at start 8,305 7,345 5,504 4,810 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities Change in net debt (960) (1,841) (693) (1,209) (EUROPE) LTD. Estimates. Net debt at end 7,345 5,504 4,810 3,602
Balance sheet (£ m) 03/14A 03/15E 03/16E 03/17E Assets Cash and cash equivalents 695 695 695 695 Accounts receivable 2,933 2,962 2,992 3,022 412 Inventory 190 190 190 190 362 Other current assets 1,888 1,888 1,888 1,888 Total current assets 5,706 5,735 5,765 5,795 312 Total fixed assets 13,840 13,645 13,542 13,455 262 Intangible assets and goodwill 3,087 3,087 3,087 3,087 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Investment securities 34 34 34 34 Other assets 2,231 2,158 3,412 4,263 Price Price relative Total assets 24,898 24,659 25,840 26,634 Liabilities The price relative chart measures performance against the FTSE ALL SHARE Accounts payable 5,261 5,261 5,261 5,261 INDEX which closed at 3724.11 on 23/02/15 Short-term debt 1,873 1,873 1,873 1,873 On 23/02/15 the spot exchange rate was £.73/Eu 1. - Eu .88/US$1 Other short term liabilities 553 533 533 533 Total current liabilities 7,687 7,667 7,667 7,667 Long-term debt 7,941 6,100 5,406 4,198 Other liabilities 9,862 9,962 10,062 10,102 Total liabilities 25,490 23,729 23,135 21,967 Shareholders' equity (618) 904 2,679 4,641 Minority interest 26 26 26 26 Total equity & liabilities 24,898 24,659 25,840 26,634 Net debt (£ m) 7,345 5,504 4,810 3,602
BT Group (BT.L) 3 26 February 2015 Updating forecasts for recent events In Figure 2 we set out changes to our BT forecasts to reflect:
■ BT's Q3Mar15 results;
■ Virgin Media's (VMED) announcement that it is to invest an incremental £3bn over the next 5 years to pass an incremental 4m homes;
■ June 2014 actuarial pension valuation announcement; and
■ Conclusion of the 2016/17-2018-19 English Premier League (EPL) TV rights auction. At this stage we do not update our base case forecasts for the Everything Everywhere transaction as we typically don't include acquisitions until deal approval and completion. However, we include a merger scenario later in this report showing how a combined BT/EE would look. Changes to forecasts We discuss the impact of these material events in more detail later in this report but in summary:
■ We make immaterial underlying changes updating for the Q3 results, which were broadly in line with our forecasts;
■ We increase our BT Retail line loss assumptions by ~100,000 per year over the next 5 years to reflect VMED taking around 1m customers over this time period in its extended footprint of 4m premises. We assume half of these incremental 1m VMED customers are taken from BT Retail or are new customers joining VMED that otherwise would have signed up with BT Retail;
■ We reduce the number of Openreach LLU lines by ~100,000 per year over the next 5 years to again reflect VMED taking around 1m customers over this time period in its extended footprint of 4m premises. We assume half of these incremental 1m VMED customers are taken from unbundlers (mainly Sky and TalkTalk) or are new customers joining VMED that otherwise would have signed up with unbundlers;
■ We now include the new pension top-up payment schedule as per the recently announced actuarial pension valuation as at June 2014;
■ Following the most recent EPL TV rights auction we assume content costs (excluding Champions League costs) rise on average 30% every 3 years to reflect the recent 30% inflation paid on the most recent EPL rights. Previously we assumed 50% inflation every 3 years so this this boosts our BT Group EBITDA forecasts by around £70m per year;
■ We update for the equity placing of £1bn increase number of shares by 222m. BT Group underlying (ex-EE) EPS estimates cut 3-6% Overall we cut FYMar16-18 revenue estimates by 1% and EBITDA estimates by 1-3% for the same period. Our EPS estimates of 3-6% due to:
■ the greater line loss we now forecast, due to VMED network expansion; and
■ an increase in the number of BT shares by 222m following the recent £1bn equity placing. CS vs. pre-Q3Mar15 consensus It is currently difficult to get accurate consensus estimates for BT Group given some Bloomberg estimates now include EE and some (as we do in our base-case forecasts) exclude EE. Furthermore, we believe the majority of consensus forecasts have yet to factor in the impact of VMED's footprint expansion.
BT Group (BT.L) 4 26 February 2015
Q3Mar15 results were broadly in line with consensus estimates, EPL cost inflation of 30% was only slightly below consensus expectations of ~40% so we believe the best comparison of us vs. consensus remains the pre-Q3Mar15 consensus compiled by BT Group.
Figure 1: BT Group: CS vs. pre-Q3Mar15 consensus GBP in millions, unless otherwise stated March March March March March March March March 2015E 2015E Diff 2016E 2016E Diff 2017E 2017E Diff 2018E 2018E Diff CS Cons. (%) CS Cons. (%) CS Cons. (%) CS Cons. (%) Revenue 17,888 17,987 -0.5% 18,045 18,201 -0.9% 18,108 18,554 -2.4% 18,232 18,880 -3.4% EBITDA 6,226 6,234 -0.1% 6,267 6,276 -0.1% 6,374 6,447 -1.1% 6,595 6,583 0.2% EBIT 3,685 3,693 -0.2% 3,817 3,775 1.1% 3,944 3,973 -0.7% 4,175 4,137 0.9% Adjusted EPS (p) 30.9 31.1 -0.7% 32.7 32.3 1.1% 34.7 34.8 -0.3% 37.2 37.1 0.2% (pre-equity placing) Adjusted EPS (p) 30.9 31.7 33.6 36.0 (post-equity placing) DPS (p) 12.4 12.5 -0.6% 14.3 14.2 0.6% 16.1 15.8 1.7% 18.1 17.4 3.9% Normalised FCF 2,664 2,653 0.4% 2,704 2,705 0.0% 2,917 2,912 0.2% 3,095 3,081 0.5% Source: Credit Suisse estimates, BT pre-Q3 consensus On our new forecasts excluding EE but incorporating the changes discussed on the previous page we are 3% below pre-Q3Mar15 consensus forecasts for FYMar17 and FYMar18 revenue— however, these consensus numbers will not, in our view, include any impact from VMED's recent announcement. We are in line to slightly below consensus EBITDA out to FYMar17 but 2%+ ahead from FYMar18 onwards.
BT Group (BT.L) 5 26 February 2015
Figure 2: BT Group: Changes to forecasts GBP in millions, unless otherwise stated YE March 2015E 2015E 2016E 2016E 2017E 2017E 2018E 2018E Summary New Old Change New Old Change New Old Change New Old Change Revenue 17,888 17,938 -0.3% 18,045 18,135 -0.5% 18,108 18,341 -1.3% 18,232 18,592 -1.9% EBITDA 6,226 6,235 -0.1% 6,267 6,347 -1.3% 6,374 6,543 -2.6% 6,595 6,864 -3.9% EBIT 3,685 3,702 -0.5% 3,817 3,897 -2.1% 3,944 4,113 -4.1% 4,175 4,444 -6.0% Adjusted net income * 2,509 2,499 0.4% 2,654 2,679 -0.9% 2,819 2,916 -3.3% 3,020 3,235 -6.6% Adjusted EPS (GBp) * 30.9 31.1 -0.4% 31.7 32.5 -2.5% 33.6 35.3 -4.9% 36.0 39.2 -8.1% DPS (GBp) 12.4 12.5 -0.9% 14.3 14.4 -0.9% 16.1 16.6 -3.0% 18.1 19.1 -5.1% Normalised FCF 2,664 2,608 2.1% 2,704 2,635 2.6% 2,917 2,982 -2.2% 3,095 3,272 -5.4%
YE March 2015E 2015E 2016E 2016E 2017E 2017E 2018E 2018E P&L New Old Change New Old Change New Old Change New Old Change Revenue Global Services 6,835 6,901 -1.0% 6,895 6,958 -0.9% 6,961 7,025 -0.9% 7,029 7,094 -0.9% BT Business 3,143 3,135 0.3% 3,082 3,211 -4.0% 3,074 3,263 -5.8% 3,059 3,304 -7.4% BT Consumer 4,285 4,294 -0.2% 4,528 4,434 2.1% 4,611 4,599 0.2% 4,686 4,754 -1.4% Wholesale 2,121 2,086 1.7% 2,060 2,011 2.4% 2,033 1,972 3.1% 2,015 1,939 3.9% Openreach 5,004 5,022 -0.4% 4,981 5,021 -0.8% 4,930 4,981 -1.0% 4,944 5,001 -1.2% Other 80 80 0.0% 80 80 0.0% 80 80 0.0% 80 80 0.0% Eliminations (3,580) (3,580) 0.0% (3,580) (3,580) 0.0% (3,580) (3,580) 0.0% (3,580) (3,580) 0.0% Total revenue 17,888 17,938 -0.3% 18,045 18,135 -0.5% 18,108 18,341 -1.3% 18,232 18,592 -1.9% Headline growth -2.2% -1.9% 0.9% 1.1% 0.4% 1.1% 0.7% 1.4% Growth ex-Transit and FX -1.2% -0.9% 1.0% 1.4% 0.9% 1.7% 0.0% 0.0%
UK wireline revenue 11,053 11,037 0.2% 11,150 11,176 -0.2% 11,147 11,315 -1.5% 11,204 11,499 -2.6% Global Services 1,051 1,084 -3.1% 1,139 1,167 -2.4% BT Business 1,041 1,060 -1.8% 1,036 1,059 -2.2% BT Consumer 1,020 1,018 0.2% 995 1,017 -2.2% Wholesale 532 506 5.1% 521 518 0.7% Openreach 2,587 2,586 0.0% 2,588 2,610 -0.9% Other (5) (20) (12) (24) -48.3% Total EBITDA 6,226 6,235 -0.1% 6,267 6,347 -1.3% 6,374 6,543 -2.6% 6,595 6,864 -3.9% EBIT 3,685 3,702 -0.5% 3,817 3,897 -2.1% 3,944 4,113 -4.1% 4,175 4,444 -6.0% Adjusted net income * 2,509 2,499 0.4% 2,654 2,679 -0.9% 2,819 2,916 -3.3% 3,020 3,235 -6.6% Number of shares 8,344 8,212 1.6% 8,390 8,258 1.6% 8,390 8,258 1.6% 8,390 8,258 1.6% Adjusted EPS (GBp) * 30.9 31.1 -0.4% 31.7 32.5 -2.5% 33.6 35.3 -4.9% 36.0 39.2 -8.1% DPS (GBp) 12.4 12.5 -0.9% 14.3 14.4 -0.9% 16.1 16.6 -3.0% 18.1 19.1 -5.1% YE March 2015E 2015E 2016E 2016E 2017E 2017E 2018E 2018E Free cash flow New Old Change New Old Change New Old Change New Old Change EBITDA 6,226 6,235 -0.1% 6,267 6,347 -1.3% 6,374 6,543 -2.6% 6,595 6,864 -3.9% Capex (2,345) (2,364) -0.8% (2,347) (2,371) -1.0% (2,343) (2,375) -1.4% (2,352) (2,391) -1.6% Interest (569) (598) -4.8% (500) (549) -8.9% (421) (467) -10.0% (400) (400) 0.0% Tax (ex. pension shield) (426) (544) -21.6% (612) (619) -1.0% (662) (686) -3.6% (714) (768) -7.0% Working capital (250) (150) (130) (200) 0 0 0 0 Other 29 29 0.0% 27 27 0.0% (32) (32) 0.0% (34) (33) 3.0% Normalised FCF 2,664 2,608 2.1% 2,704 2,635 2.6% 2,917 2,982 -2.2% 3,095 3,272 -5.4% Cash tax benefit of pension 100 75 189 127 58 127 158 127 deficit payment Specific items (250) (250) (250) (250) (250) (250) (250) (250) FCF pre pension deficit 2,514 2,433 3.3% 2,643 2,512 5.2% 2,725 2,859 -4.7% 3,004 3,149 -4.6% Net pension top-ups (850) (550) 54.5% (900) (550) 63.6% (250) (550) -54.5% (688) (550) 25.1% FCF post pension deficit 1,664 1,883 -11.6% 1,743 1,962 -11.2% 2,475 2,309 7.2% 2,316 2,599 -10.9% Source: Credit Suisse estimates. * EPS forecasts may be different to the databox owing to different adjustments made in the above table vs. the standard Credit Suisse databox adjustments.
BT Group (BT.L) 6 26 February 2015 Cutting BT wireline forecasts 3-4% Within our BT Group forecast changes we are cutting our UK wireline revenue by up to 3% and cutting our UK wireline EBITDA by up to 4% over FYMar15-18E (Figure 3). The main drivers of these wireline cuts are:
■ Virgin Media (VMED) recently announced it is to pass an additional 4m UK premises (homes and business) with the aim of increasing the number of its premises passed to ~17m by 2020;
■ Uncertainty over Labour Party policy on UK telecoms driving lower BT Retail line rental increases going forward in our published BT Retail forecasts; and
■ Lower Sports content costs following the recent English Premier League Auction—we now assume 30% content rights inflation (excluding Champions League) vs. 50% previously. Despite these cuts we still see BT retail rev/line growing ~4% per annum over the next 8 years as demand for UK high-speed broadband continued to be strong and improves the mix of BT Retail broadband.
Figure 3: BT Group: Changes to UK wireline forecasts GBp in millions, unless otherwise stated YE March 2015E 2015E 2016E 2016E 2017E 2017E 2018E 2018E Summary New Old Change New Old Change New Old Change New Old Change UK wireline revenue 11,053 11,037 0.2% 11,150 11,176 -0.2% 11,147 11,315 -1.5% 11,204 11,499 -2.6% UK wireline EBITDA 5,175 5,150 0.5% 5,128 5,180 -1.0% 5,180 5,291 -2.1% 5,345 5,558 -3.8% Source: Credit Suisse estimates We discuss these key drivers in more detail below. Virgin Media to pass 4m new UK premises VMED had already publicly discussed its desire to extend its UK footprint over the past 12 months but the additional 4m premises passed is, we believe, more than consensus was expecting. Extending VMED’s cable footprint to ~60% of UK premises is expected by us to raise competitive levels in UK wireline gradually over the next 5 years as VMED builds out and is likely lead to VMED taking incremental broadband and telephony market share in the UK 3play market. We estimate there are ~29m total premises in the UK (26m homes + 3m business) so VMED is targeting 59% UK coverage by 2020. To achieve the additional 4m premises VMED will invest an additional £3bn or £750/premise passed (including some installation costs). VMED is wholly- owned by Liberty Global.
Figure 4: LBTY forecasts for new build penetration
Source: Liberty Global, February 2015
BT Group (BT.L) 7 26 February 2015
The decision by VMED to expand its network faster follows trials in Teesside and Glasgow. Liberty explains that it has seen initial take-up of 25% of homes passed and expects demand to rise to 40% over time, suggesting attractive returns for such expansion. Even so, Virgin Media is targeting largely the gaps in its network, expecting to build in streets within 50m of its existing network, reflecting the rather chaotic way UK cable was built in the 1990's. The new build will start in Spring of 2015. Given that Virgin Media is unregulated, we would also expect VMED to be aggressive in how it prices its service. VMED is seeing an ARPU of £45 on its trial (just 10% below the £50 ARPU on its existing customer base), but introductory prices may be substantially lower. Whether LBTY really gains c.40% demand on new 4m homes passed remains to be seen. Virgin has 37% broadband penetration of homes passed today. However:
■ Broadband churn is low. Once customers are on broadband, it takes time for them to switch;
■ BT will be expanding its BT Infinity service during this time-frame, and is likely in our view, to target areas VMED is focusing on. VMED is likely to offer faster speeds than BT Infinity (given that G.Fast is more likely to be commercialised towards the end of Virgin's 5 year project plan), but whether this is enough to get customers to switch remains to be seen – the majority of customers today are likely to be happy with 50Mbps or so;
■ BT lacks the SkyTV offer that Virgin offers. We estimate that around a third of BT retail broadband customers take SkyTV over the Sky platform. However, Virgin's own TV penetration is 30% of homes passed, lower than broadband. TV is unlikely to be the factor that drives Virgin Media uptake on its new-build to 40%;
■ Sky and Talk are also likely to fight hard to keep their customers, potentially improving their offers at their own expense;
■ Post EE, BT will (if necessary) be able to replicate the mobile bundle offer of Virgin Media, a point of differentiation today; and
■ LBTY has explained the project will be demand-led and scaled back if insufficient demand. So VMED may not build out the whole 4m in any case. KPN has achieved only 29% uptake of Reggefibre (relative to homes passed) despite having 40% broadband share of the Dutch market so a target of c. 40% uptake looks challenging to us. We assume 25% uptake on the whole 4m build by 2020 (it would still rise to 30%+ after 2020). This may itself be conservative (from a BT point of view) if BT is successful at targeting these VMED new build areas with BT Infinity or VMED reduces the size of the build plan due to insufficient up- front demand. In Figure 5 we summarise our assumptions for VMED's extended 4m footprint expansion and our new customer forecasts.
Figure 5: VMED homes passed and new customer forecasts in new footprint 000s Year to Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E VMED extended footprint homes passed 442 1,312 2,213 3,161 4,161 VMED extended footprint customer forecasts 111 328 553 790 1,040 Source: Company data, Credit Suisse estimates BT line loss forecasts increased to reflect additional VMED build out To reflect the additional build out by VMED over the next 5 years we have increased both our BT Retail line loss (defined by us as lines sold through BT lines of business) forecasts (Figure 6) and Openreach LLU forecasts (Figure 7).
BT Group (BT.L) 8 26 February 2015
Figure 6: BT line loss* forecasts increased due to VMED Figure 7: BT Openreach LLU net adds forecasts cut due incremental build-out to VMED incremental build-out 000s Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E 900 0 800 (100) 700 (200) 600 (300) 500 (400) 400 300 (500) 200 (600) 100 (700) 0 (800) Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E
BT Line loss (new) BT Line loss (old) Openreach total LLU net adds (new) Openreach total LLU net adds (old)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates * Defined as lines sold through BT lines of business VMED currently has around 4.5m broadband customers in its existing 13m footprint, equivalent to around 35% penetration of total premises passed while VMED has seen ~25% uptake in the first few months of new build in Teesside/Glasgow and it expects this to grow to 40% (as customers gradually come out of contract). In the footprint of the additional 4m UK premises VMED intends to pass we assume 25% take-up within 5 years or an additional 1m VMED customers in these areas. We assume half of these customers are taken from BT Retail and half are taken from unbundlers (reducing Openreach LLU lines). The bigger risk of VMED footprint expansion could be a new price war For the past five years we have observed the whole UK wireline market growing with the number of fixed lines, broadband penetration, high-speed broadband demand strong, pay-TV penetration growing and headline prices rising. Over this period, while there has been enough growth for all the main wireline players (BT, Sky, VMED and TalkTalk) BT's line loss has been falling consistently (Figure 8).
Figure 8: BT line loss* 000s 0 0.0%
(100) -2.0%
(200) -4.0% (300) -6.0% (400) -8.0% (500)
(600) -10.0%
(700) -12.0%
Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Sep-12 Sep-09 Sep-10 Sep-11 Sep-13 Sep-14 BT Retail line loss (000s) Line loss (%)
Source: Company data * Defined as lines sold through BT lines of business
BT Group (BT.L) 9 26 February 2015
One potential bigger risk of VMED's 4m footprint expansion is a new price war with VMED's new build potentially upsetting the positive UK wireline market dynamic we have seen over the past 5 years. VMED remains unregulated and, in our view, could look to offer either cheaper regional pricing in its new footprint areas or look to offer bigger promotions in new build areas. There are, however, 2 compensating factors:
■ Sky and TT are likely to accelerate migration of subs to BT Infinity; and
■ Supports Ofcom's light touch regulatory approach to fibre regulation, making it less likely Ofcom will regulate BT Infinity more aggressively. VMED extending its footprint potentially reduces regulatory risk for BT As per Ofcom's latest review BT will continue set its wholesale fibre rate (subject to a regular "margin squeeze" test) until March 2017 so we have good regulatory visibility on fibre for BT Group over the next 2 years. With VMED aiming to cover 60% of the UK with its own infrastructure by 2020 we believe the pressure from Ofcom to regulate fibre will potentially reduce and even if Ofcom chooses to regulate BT's wholesale fibre rate this may only be in non-VMED areas. Furthermore, VMED and BT (G.fast) continuing to invest in UK telecoms infrastructure should be seen by Ofcom as a sign that its current regulatory framework is succeeding in stimulating investment. BT to invest in G.fast technology Furthermore, BT recently announced its intention to invest in G.fast technology (aimed at delivering broadband speeds of up to 500MBps) which we believe it will offer on an open-access basis so BT, TalkTalk and Sky should also be able to offer substantially higher broadband speeds over the next 5-10 years. Labour Party policy presents an uncertainty With Labour and the Conservative parties reported to be neck-and-neck in the polls ahead of the May 2015 general election, and the SNP reported to be ready to vote on UK issues in the UK Parliament and open to a coalition with Labour but not the Conservatives, a Labour government looks at least a 50% possibility, in our view. In January 2014 Shadow Communications Minister Helen Goodman MP of the Labour Party published the Labour Party's "9-point plan" to resolve the what she called " the great phone rip-off". This included:
■ A reduction in BT line rental charges to protect consumers—"The government must act to reduce BT's charges now," said MP Goodman,"Having a mobile or a fixed line should not be a luxury item – most people need them in their everyday life. It's time the government took action to protect consumers against the great phone rip-off."
■ The option to receive paper bills without a financial penalty; Free caller ID to prevent nuisance calls; Outlawing of mid-contract price rises; Free mobile calls to 0800 numbers; A cap on the amount a customer has to pay for bills run up before reporting a phone lost or stolen; Easier switching between mobile networks, and between combined phone, TV and broadband suppliers; and the plan also included comments on avoiding bill shock and premium rates for government services. The attack on BT line rental follows the steady increases in the line rental of the major UK wireline operators in recent years (Figure 9), and appeared to be timed ahead of another 54p line rental increase in early 2014. BT pointed out the time that it already offers a basic line rental package of £4.95 to low income households. Any UK government could try and use existing or new anti-trust regulation to intervene in UK fixed line pricing, over-riding Ofcom, with judicial process the main obstacle for such a government to wrestle with (UK anti-trust decisions typically being subject to court appeal).
BT Group (BT.L) 10 26 February 2015
Figure 9: UK Line rental increases since December 2011 GBP Line rental Operator Date Product Old price New price Price change BT 1-Dec-11 Line rental £13.90 £14.60 BT 1-Dec-11 Scrapping of online billing discount -£1.25 £0.00 BT 2-Mar-12 Line rental - 12 months in advance discounted price £120 £129 TalkTalk 1-May-12 Line rental £13.80 £14.50 Sky 30-Sep-12 Line rental (for new customers) £12.25 £14.50 Sky 1-Dec-12 Line rental (for existing customers) £12.25 £14.50 BT 5-Jan-13 Line rental £14.60 £15.45 Virgin Media 1-Feb-13 Line rental £13.90 £14.99 TalkTalk 1-Jan-13 Line rental £14.50 £14.95 TalkTalk 1-Oct-13 Line rental £14.95 £15.50 BT 1-Jan-14 Line rental £15.45 £15.99 Virgin Media 1-Feb-14 Line rental £14.99 £15.99 Sky 1-Sep-13 Line rental £14.50 £15.40 TalkTalk 1-May-14 Line rental £15.50 £15.95 BT 1-Dec-14 Line rental £15.99 £16.99 Virgin Media 1-Feb-15 Line rental £15.99 £16.99 TalkTalk 1-Dec-14 Line rental £15.95 £16.70 Sky 1-Sep-14 Line rental £15.40 £16.40 Source: Company data A group of Labour MPs, backed by shadow business secretary Chuka Umunna, have more recently (September 2014) called for a £10bn plan to make UK a leading digital economy in September 2014. One of the proposals was to mandate BT to provide broadband to homes without requiring a telephone line for voice calls, effectively avoiding the customer needing to pay line rental. Helen Goodman had by then moved onto Shadow Work and Pensions, with Deputy Leader Harriet Harman taking on the Shadow Culture, Media and Sport role as well. MP Harman's few comments on UK Telecoms have so far focused on the lack of UK rural broadband coverage than pricing.
Figure 10: Change in real prices of telecoms and utilities (%)
Source: BT Group presentation, ONS As Ofcom has noted in recent UK market surveys, UK fixed line has generally offered a substantially better deal over recent years, as increases in broadband speed and GB usage have outpaced price substantially (Figure 10). Unbundlers such as TalkTalk and Sky have also kept basic double-play and triple-play prices low. The ~50p/m line rental increase Goodman targeted compares with very substantial rises in UK consumer utility and transport prices in recent years (Figure 10). For this reason, press coverage and Consumer Association interest in Goodman's 9-
BT Group (BT.L) 11 26 February 2015 point plan was minimal, in contrast with Labour's plans for gas/electricity, a major political success for Leader of the Opposition Ed Miliband. Conclusion—Scope for BT to raise fixed prices reducing With a Labour government looking at least a 50% possibility, in our view, and much uncertainty surrounding Labour UK Telecoms policy we have cut our forecasts for BT consumer line rental price increases (Figure 11). Labour may have calculated that there aren't many votes to be had from telco-bashing, whilst the anti-trust process to intervene in UK fixed line pricing would also be lengthy and cumbersome. This suggests Labour could well take a constructive role to UK fixed line, if and when in power, and focus its market intervention elsewhere. However, for now we believe it is prudent to reduce our line rental pricing forecasts, at least until we have greater clarity on UK government and policy.
Figure 11: BT UK Consumer line rental forecasts cut GBP (ex-VAT) 18.0 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0 Mar-13 Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Mar-22E BT Consumer line rental (£ ex-VAT) NEW BT Consumer line rental (£ ex-VAT) OLD
Source: Company data, Credit Suisse estimates UK demand for high-speed broadband to remain strong Despite VMED extending its UK cable footprint we continue expect strong UK household demand for high speed broadband to continue. High speed broadband demand is being driven by more internet devices per home and increasing video usage on each device. WiFi enabled tablets, smartphones, and connected gaming consoles have all added to the demand for broadband in the home that used to come just from the desktop PC and the odd laptop. High speed broadband penetration (i.e. customer demand) is now up to 35% of broadband lines in the case of VMED and approaching 35% for BT Infinity (Figure 12).
BT Group (BT.L) 12 26 February 2015
Figure 12: High-speed broadband penetration of total retail broadband customers 40%
35%
30%
25%
20%
15%
10%
5%
0% 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 Q313 Q413 Q114 Q214 Q314
BT Retail FTTC DT FTTC TEF FTTH KPN FTTH Orange FTTH Talk Talk Fibre TI NGN
Source: company data Revenue per line growth 4% pa over next eight years despite lower price increases BT is currently seeing a positive ARPU uplift when a customer migrates to a fibre broadband line from a DSL line. We believe there are three main reasons for this uplift:
■ Price. The fibre retail price is higher (helped by regulation);
■ Less discounting on fibre. BT typically runs fewer promotions on its fibre products;
■ Customers trading up – we believe around 50% of BT’s fibre customers choose the 76Mbps package vs. the 38Mbps package. BT’s 76Mbps product costs £25 per month, £7 pcm more than the comparable unlimited usage 38MBps package and £17.50 pcm more than the entry level fibre product (usage capped at 20GB).
Figure 13: Fibre growth has contributed to BT Revenue per line growth GBP (ex-VAT) 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Mar-13 Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Mar-22E RPL (BT Retail ex-BTSports)
Source: company data We believe around half of customers trading up to BT’s fibre product choosing the 76Mbps package reinforces our view that customer demand for high-speed broadband in the UK will continue. Fibre growth is expected by us to continue to grow BT Retail revenue per line (RPL) by around 4% per annum over the next few years (Figure 13).
BT Group (BT.L) 13 26 February 2015
Our fibre assumptions are set out in Figure 14 within our UK broadband market model summary. We forecast BT to achieve 5m fibre retail subs by the end of December 2017, i.e. 18 months from now. By this time we expect wholesale fibre subs to total around 3m.
Figure 14: UK broadband market model summary 000s UK broadband Dec-11 Dec-12 Dec-13 Dec-14 Dec-15E Dec-16E Dec-17E Households 24,986 25,236 25,489 25,744 26,001 26,261 26,524
BT - DSL 5,724 5,494 5,205 4,848 4,289 3,791 3,259 BT - Fibre 420 1,075 1,906 2,744 3,579 4,283 4,992 Total BT Retail 6,144 6,569 7,111 7,592 7,868 8,074 8,251
Wholesale - DSL 2,407 2,084 1,886 1,873 1,343 991 793
LLU 7,941 8,693 9,241 9,593 10,463 11,125 11,584 ….of which Fibre (non-BT) 23 175 425 994 1,659 2,331 3,044
Cable broadband 4,103 4,272 4,376 4,537 4,805 5,056 5,296
BB subs inc. Business ('000) 20,595 21,618 22,614 23,595 24,479 25,246 25,925 Net adds ('000) 287 307 291 331 284 251 234 Business BB subs (000) 1,843 1,971 2,133 2,278 2,361 2,422 2,475 Household BB subs (000) 18,752 19,647 20,481 21,317 22,119 22,824 23,450 Household penetration (%) 75.0% 77.9% 80.4% 82.8% 85.1% 86.9% 88.4% Source: Company data, Credit Suisse estimates Recent English Premier League (EPL) auction cost below expectations The auction for the national English Premiership League football rights for the three years starting in the 2016/17 season recently concluded. In the auction BT won 2 packages out of 7, details below: ■ Package B includes 28 Saturday evening games with a 5.30pm kick off;
■ Package F includes 14 games including 8 Saturday evening games 5.30pm k.o. & 6 games mid-week; and
■ BT has 12 first picks from the 2016/17 season compared to 18 under its current rights package. BT will pay £320m/season or 30% more than it pays under the current deal which runs until the end of the 2015/16 season. On a cost-per-game basis BT has paid ~18% more as it has secured the rights to 4 more games than it currently shows. Sky secured 5 packs at a cost of ~£1.4bn/season. The 30% inflation in the EPL price paid by BT was less than the 40% expected by consensus (according to widespread UK press reports) and it is substantially less than the ~50% assumed in our previously published BT Group financial forecasts. BT has only secured the rights to 2 packs with similar content (BT currently has the rights to the Saturday lunchtime games and some mid-week games) thus removing the risk of BT bidding substantially more for more EPL packs. Furthermore, over the next 2-3 years there are few major sports content rights auctions coming up so the overall content risk for BT Group has reduced materially. In fact, BT will start showing Champions League content for 3 years at the start of the 2015/16 season which has the potential to boost the overall quality of its BTSports channel. As a result of the most recent auction we now assume BT continues to pay 30% more in future content costs every 3 years (for the same content) vs. ~50% previously. We set out
BT Group (BT.L) 14 26 February 2015 our content cost assumptions in Figure 15 excluding Champions League which we model separately.
Figure 15: BT Group: We now assume 30% cost inflation for (non Champions- League) content GBP in millions, unless otherwise stated Cost Notes Premiership Football 738 for 3 years Rugby 152 for 3/4 years Other Sports bought from ESPN 30 £10m per year Other Linear content (22 channels) 44 £2m/ch/yr TV costs 3-yrs to Aug-2016 964
Inflation 3 yr Content Costs to mid-2019 1,253 30% 3 yr Content Costs to mid-2022 1,629 30% 3 yr Content Costs to mid-2025 2,118 30% Total content costs to mid-2025 5,964 Source: Company data, Credit Suisse estimates. Note: Assumes BT retains 2 EPL packs at each renewal Margin squeeze test risk reduced The modest 30% EPL cost inflation reduces the risk of BT failing any future Ofcom fibre margin squeeze test, in our view, and could potentially allow BT to continue to offer BTSports free to existing BT broadband customers. We note that the higher costs would not be included in Ofcom’s margin squeeze test for 18 months anyway. Conclusion—Cut UK wireline forecasts 3-4% As set out earlier in this report the above drivers lead to us cutting our UK wireline revenue by up to 3% and cutting our UK wireline EBITDA by up to 4% over FYMar15-18E. We repeat the summary of changes to our standalone UK wireline forecasts below (Figure 16) for reference.
Figure 16: BT Group: Changes to UK wireline forecasts GBp in millions, unless otherwise stated YE March 2015E 2015E 2016E 2016E 2017E 2017E 2018E 2018E Summary New Old Change New Old Change New Old Change New Old Change UK wireline revenue 11,053 11,037 0.2% 11,150 11,176 -0.2% 11,147 11,315 -1.5% 11,204 11,499 -2.6% UK wireline EBITDA 5,175 5,150 0.5% 5,128 5,180 -1.0% 5,180 5,291 -2.1% 5,345 5,558 -3.8% Source: Credit Suisse estimates
BT Group (BT.L) 15 26 February 2015 EE deal to boost FCF/share 7% BT recently announced it was (subject to regulatory approval) acquiring EE for £12.5bn which assumed BT Group took on £2.3bn of EE net debt (as at the end of 2014). BT also announced it was issuing new shares through firstly, a £1bn equity placing (now complete), and secondly, by issuing new BT shares to DT and Orange so that they end up with 12% and 4% of the enlarged group, respectively. Synergy targets were announced by BT of £3.5bn of combined opex and capex synergies and £1.6bn of revenue synergies as well as integration costs of £500m (on an NPV basis). These details were broadly in line with those announced in December 2014. BT has stated that the timing for the deal to complete is c. 8 weeks if the deal is approved at the Phase 1 stage but could take up to an additional c.24 weeks if the deal goes to Phase 2. BT expects the deal to be reviewed by UK anti-trust. We believe this is a strategically positive deal for BT. We continue to see strong strategic logic for in-market fixed-mobile deals and believe BT buying EE (rather than pursuing an organic mobile strategy) makes sound strategic sense. This deal should enable BT to lead the UK market towards greater levels of convergence with BT able to offer attractive fixed-mobile bundles. EE Deal FCF accretive in year 3 post-deal assuming no revenue synergies We set out our detailed BT Group/EE merger model in Figure 23. Key assumptions:
■ The deal completes in the year to March 2016; ■ Funding of the deal is consistent with BT's announcement; ■ Opex synergies equal to 4% of the combined UK opex of BT (ex-Global Services) and EE can be saved in year 4 after the transaction completes. We set out our opex synergy assumptions in Figure 17. Figure 17: BT Group: opex synergies from EE acquisition GBP in millions, unless otherwise stated BT/EE Opex synergy calculation Year 0 1 2 3 4 5 £'m Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Combined Opex 10,824 10,815 10,725 10,636 10,548 10,460 % Combined Opex saved 0.0% 1.0% 2.0% 3.0% 4.0% 4.0% Combined Opex saved 0 108 215 319 422 418 Source: Credit Suisse estimates
■ CAPEX synergies equal to 4% of the combined UK CAPEX of BT and EE can be saved in year 4 after the transaction completes. We set out CAPEX synergy assumptions in Figure 18. Figure 18: BT Group: CAPEX synergies from EE acquisition GBP in millions, unless otherwise stated BT/EE CAPEX synergy calculation Year 0 1 2 3 4 5 £'m Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Combined CAPEX 3,114 3,117 3,134 3,142 3,161 3,182 % Combined CAPEX saved 0.0% 1.0% 2.0% 3.0% 4.0% 4.0% Combined CAPEX saved 0 31 63 94 126 127 Source: Credit Suisse estimates
■ We expect combined opex and CAPEX synergies in the 4th full year after the deal completes of £547m or 4% of combined opex and CAPEX. This compares to BT Group's announced £360m (Figure 19).
BT Group (BT.L) 16 26 February 2015
Figure 19: BT Group: Management synergy estimates from EE acquisition GBP in millions, unless otherwise stated
Source: BT Group EE acquisition presentation
■ No revenue synergies (BT has reported it expects to generate £1.6bn NPV of revenue synergies); and
■ £600m of integration costs as guided by BT in its EE acquisition presentation. Our base case synergy assumptions could prove conservative We see the BT-EE combination as, in theory, generating similar synergies to the few cable-mobile combination deals signed to date (Figure 20). These cable-mobile combination deals suggest a range of synergies between 3.4% (Vod-KDG) and 10.9% (Num-SFR) of the combined opex and capex of the two operations pre integration vs. the 4% in our base case BT-EE assumptions. Confidence in such synergies is growing:
■ Zon has recently doubled its estimate of the synergies of its combination with Optimus, from an initial estimate of €35-45m p.a. (full run rate) to eu85m p.a.
■ Vodafone's recently proposed synergies from integrating Ono of 5.9% compare to the 3.4% claimed for KDG in June 2013
■ In the most recent deal, Numericable estimates of synergies of around 11% of combined costs includes revenue synergies (boosting the synergies by 2pp of costs on an equivalent basis).
BT Group (BT.L) 17 26 February 2015
Figure 20: Full run rate synergies from cable and mobile claimed to date eu'm Revenues Opex CAPEX Combined % of homes covered Kabel Deutschland – June 2013 491 633 1124 50% Vodafone Germany 6510 1290 7800 100% Synergies* 300 Synergies as % of combined costs 3.4%
Zon – Dec 2012, updated Feb 2014 531 123 654 80% Optimus 489 129 618 100% Synergies 85 Synergies as % of combined costs 6.7%
Numericable – March 2014 1355 721 364 1085 35% SFR 9840 7425 1624 9049 100% Synergies 215 515 375 1100 Synergies as % of combined costs 10.9%
Ono – March 2014 918 264 1182 47% Vodafone Spain 3203 500 3703 100% Synergies 240 Synergies as % of combined costs 4.9% Source: Company data, Credit Suisse estimates * Vodafone guidance was synergies of "at least eu300m" full run rate We have been supportive of such mobile-cable and mobile-fixed combinations, seeing considerable savings in a number of areas:
■ Mobile backhaul—replacing leased lines with fibre access lines;
■ Common core network—integrating the transmission and core networks of the fixed and mobile networks;
■ Common customer support—migrating to a single billing and customer care system;
■ Distribution—cutting overlapping sales and distribution functions;
■ Corporate—cutting overlapping central functions; and
■ Monetising content—owning a mobile network increases the value BT is likely to extract from offering mobile access to its existing content, a necessary offer to compete with the OTT providers. e.g. offers to bundle content such as BTSports and Champions' League football. BT/EE—Impact on EPS and FCF per share In Figure 21 we set out the impact on both EPS and FCF/share for a combined BT-EE scenario based on the assumptions we outline above. We calculate that the deal will be 1-2% EPS accretive over years 1-5 post deal. This is partly reflective of the substantial increase in the number of shares issued as part of the deal—BT has already placed an additional 222m shares and will issue 16% of the new combined entity to DT and Orange. On our assumptions we calculate the deal is ~7-8% FCF/share accretive from year 3 post deal completion.
BT Group (BT.L) 18 26 February 2015
Figure 21: BT Group: Impact of EE acquisition on EPS and FCF per share GBp or % OUTPUT - Calendar year Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Full Year post-transaction 1 2 3 4 5 EPS of combined BT/EE (p) 33.9 36.4 40.9 45.1 48.2 EPS of old BT Group (p) 33.6 36.0 40.3 44.1 47.8 EPS accretion/(dilution) (%) 0.8% 1.1% 1.6% 2.1% 0.8%
FCF/Share combined BT/EE (p) 36.7 39.4 44.1 48.4 51.3 FCF/share of BT Group (p) 36.5 39.7 41.0 44.6 48.0 FCF/share accretion/(dilution) (%) 0.4% -0.9% 7.5% 8.4% 6.8% Source: Credit Suisse estimates BT's competitive position improved post-EE BT's acquisition of EE substantially improves the competitive position of BT's business. It makes BT's business more diversified and means BT will be able to offer attractive fixed-mobile bundles in the future if convergence takes off in the UK. Combined BT/EE has 4% EBITDA growth on our scenario Our merger model Figure 23 output shows on the above assumptions we forecast EBITDA CAGR of 4.5% over Mar2016-2021E for the enlarged Group. Impact on BT valuation We set out BT's valuation post the EE deal on our scenario and assumptions outlined above in Figure 22. Under this scenario BT would trade on a Mar-17E EV/EBITDA multiple of 7.4x falling to 6.9x Mar-18E EV/EBITDA. These multiples treat the actuarial pension deficit of £7bn as debt but make no adjustment for BT's operating lease commitments. Typically the debt rating agencies would adjust for BT's operating lease commitments (by treating this as debt) but add back to EBITDA the annual lease payments.
Figure 22: BT Group valuation post-deal scenario GBP in millions, unless otherwise stated Valuation Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E BT Group MCap 45,603 Net debt (inc. pension IAS 19 pension deficit) 16,396 14,480 12,921 11,111 9,123 7,118 EV (inc. Pension but ex-lease commitments) 61,999 60,083 58,524 56,715 54,726 52,722 EBITDA on BT post-EE 7,867 8,098 8,442 8,883 9,319 9,622 EV/EBITDA (inc. £7bn pension as debt) 7.9 7.4 6.9 6.4 5.9 5.5 FCF yield (pre-pension top-ups) 7.5% 8.0% 8.6% 9.6% 10.5% 11.2% FCF yield (post-pension top-ups) 5.5% 7.4% 7.1% 8.1% 9.0% 9.6% PE ratio (ex-Spec Items) 14.1 13.2 12.3 10.9 9.9 9.3 Source: Credit Suisse estimates Raise price target to 495p In conclusion we view the EE deal as transformational for BT with cost synergies boosting a combined BT/EE EBITDA growth to 4% per year over FYMar16-21E. We believe this justifies a 8x FYMar-17E multiple which implies a BT share price of 495p per BT share, which we set as our new price target (from 440p previously).
BT Group (BT.L) 19
GroupBT (BT.L) Figure 23: BT Group/EE merger scenario (base case) GBP in millions, unless otherwise stated Acquistion cost OUTPUT - Calendar year Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E BT share price 4.47 Full Year post-transaction 1 2 3 4 5 Total cost £ 12,500 m EPS of combined BT/EE (p) 33.9 36.4 40.9 45.1 48.2 One-off integration costs 600 m EPS of old BT Group (p) 33.6 36.0 40.3 44.1 47.8
£ EE 2015 adj. EBITDA £ 1,600 m EPS accretion/(dilution) (%) 0.8% 1.1% 1.6% 2.1% 0.8% Implied 2015E EV/EBITDA multiple 7.8 times FCF/Share combined BT/EE (p) 36.7 39.4 44.1 48.4 51.3 Funded by: FCF/share of BT Group (p) 36.5 39.7 41.0 44.6 48.0 Rights issue £ 1,000 m FCF/share accretion/(dilution) (%) 0.4% -0.9% 7.5% 8.4% 6.8% Price of rights issue 4.55 ORA/DT share in combined entity £ 6,810 m BT Group Financials EE debt on acquistion £ 2,300 m £'m Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Cash £ 2,390 m Revenue 18,288 17,888 18,045 18,108 18,232 18,190 18,388 18,613 Blended interest rate on new/assumed debt @ 3.0% EBITDA 6,116 6,226 6,267 6,374 6,595 6,916 7,232 7,522 Total deal value £ 12,500 m BT Group opex (12,172) (11,663) (11,778) (11,734) (11,637) (11,274) (11,156) (11,091) D&A (2,696) (2,520) (2,450) (2,430) (2,420) (2,410) (2,400) (2,390) BT shares post-transaction: EBIT 3,420 3,685 3,817 3,944 4,175 4,506 4,832 5,132 Shares issued to existing shareholders 222 Interest (597) (549) (500) (421) (400) (285) (204) (117) Shares post rights issue 8,344 PBT 2,306 2,646 3,027 3,234 3,485 3,931 4,338 4,725 TERP of BT post-rights 4.59 Tax (611) (627) (663) (705) (755) (844) (926) (1,003) ORA/DT share in combined entity 16.0% Adjusted Net income 2,209 2,509 2,654 2,819 3,020 3,377 3,702 4,012 Number of BT shares issued to ORA/DT 1,589 Number of shares (end) 7,871 8,344 8,390 8,390 8,390 8,390 8,390 8,390 BT shares post-deal 9,933 m Adjusted EPS 28.2 30.9 31.7 33.6 36.0 40.3 44.1 47.8 CAPEX 2,346 2,345 2,347 2,343 2,352 2,352 2,364 2,376 OUTPUT - BT buys EE proforma 16-21E FCF pre-pension 2,168 2,664 2,704 2,917 3,095 3,440 3,743 4,030 £'m Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E CAGR Adj. FCF per share 27.5 30.7 31.4 36.5 39.7 41.0 44.6 48.0 Revenue 18,288 17,888 24,435 24,562 24,751 24,773 25,037 25,329 Cash Dividends (917) (1,094) (1,251) (1,408) (1,584) (1,782) (2,004) Opex (12,172) (11,663) (16,568) (16,464) (16,309) (15,890) (15,718) (15,707) DPS 10.9 12.4 14.3 16.1 18.1 20.3 22.9 25.8 EBITDA 6,116 6,226 7,867 8,098 8,442 8,883 9,319 9,622 4.1% Reported Net debt (end) 7,028 5,320 4,636 3,412 2,503 1,433 266 - 956 EBITDA margin 33.4% 34.8% 32.2% 33.0% 34.1% 35.9% 37.2% 38.0% Actuarial Pension deficit 7,000 7,000 D&A (2,696) (2,520) (3,377) (3,366) (3,365) (3,365) (3,364) (3,364) Adjusted net debt 14,028 12,320 Integration costs (400) (200) Adj. Net debt/EBITDA 2.29 1.98 EBIT 3,420 3,706 4,090 4,533 5,076 5,519 5,955 6,258 BT UK wireline Opex 6,063 5,910 6,034 5,977 5,839 5,701 5,563 5,425 Interest (597) (549) (656) (577) (556) (441) (360) (273) Source: CS BT estimates 16 Feb 2015 wip Interest rate 8.1% 8.9% PBT 2,823 3,156 3,434 3,956 4,520 5,078 5,595 5,985 EE Financials (Calendar yr) Tax (611) (627) (687) (791) (904) (1,016) (1,119) (1,197) £'m 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E Tax rate 20% 20% 20% 20% 20% 20% Subscribers 24,774 24,608 24,959 25,310 25,661 26,012 26,363 26,363 Adjusted net income 2,212 2,529 3,147 3,365 3,616 4,063 4,476 4,788 Revenue 6,482 6,327 6,390 6,454 6,519 6,584 6,650 6,716 Number of shares (end) 7,871 8,344 9,933 9,933 9,933 9,933 9,933 9,933 Adjusted EBITDA 1,574 1,589 1,600 1,616 1,632 1,648 1,665 1,682 EPS ex-Int. costs/spec items (p) 28.2 30.9 31.7 33.9 36.4 40.9 45.1 48.2 Margin 24.3% 25.1% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% CAPEX 2,346 2,345 3,114 3,086 3,071 3,047 3,035 3,055 D&A (934) (916) (927) (936) (945) (955) (964) (974) FCF (ex-integration costs) 2,168 2,664 3,410 3,644 3,910 4,380 4,805 5,097 D&A % of sales 14.4% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5% FCF per share (p) 27.5 30.7 34.3 36.7 39.4 44.1 48.4 51.3 CAPEX 587 596 767 775 782 790 798 806 DPS 12.4 14.3 16.1 18.1 20.3 22.9 25.8 CAPEX/Sales 9.1% 9.4% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Cash Dividends (1,296) (1,479) (1,663) (1,871) (2,105) (2,368) FX rate (eu1 = GBP) 0.85 0.83 0.83 0.83 0.83 0.83 0.83 0.83 Pension top-ups (900) (250) (688) (699) (711) (724) Opex (GBP) 4,908 4,738 4,790 4,838 4,887 4,935 4,985 5,035 Adjusted Net debt 14,028 12,320 16,396 14,480 12,921 11,111 9,123 7,118 Source: Company data, Credit Suisse estimates. Net debt/EBITDA (inc. pension) 2.29 1.98 2.08 1.79 1.53 1.25 0.98 0.74 Net debt/EBITDA (Rating agencies) 2.58 2.28 2.02 1.73 1.44 1.20 BT/EE Opex synergy calculation Year 0 1 2 3 4 5 £'m Mar-15E Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Valuation Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E Combined Opex 10,824 10,815 10,725 10,636 10,548 10,460 BT Group MCap 45,603 % Combined Opex saved 0.0% 1.0% 2.0% 3.0% 4.0% 4.0% Net debt (inc. pension IAS 19 pension deficit) 16,396 14,480 12,921 11,111 9,123 7,118 Combined Opex saved 0 108 215 319 422 418 EV (inc. Pension but ex-lease commitments) 61,999 60,083 58,524 56,715 54,726 52,722 EBITDA on BT post-EE 7,867 8,098 8,442 8,883 9,319 9,622 BT/EE CAPEX synergy calculation Year 0 1 2 3 4 5 EV/EBITDA (inc. pension) 7.9 7.4 6.9 6.4 5.9 5.5 £'m Mar-16E Mar-17E Mar-18E Mar-19E Mar-20E Mar-21E FCF yield (pre-pension top-ups) 7.5% 8.0% 8.6% 9.6% 10.5% 11.2% Combined CAPEX 3,114 3,117 3,134 3,142 3,161 3,182 FCF yield (post-pension top-ups) 5.5% 7.4% 7.1% 8.1% 9.0% 9.6% % Combined CAPEX saved 0.0% 1.0% 2.0% 3.0% 4.0% 4.0% February26 2015 PE ratio (ex-Spec Items) 14.1 13.2 12.3 10.9 9.9 9.3 Combined CAPEX saved 0 31 63 94 126 127
Source: Company data, Credit Suisse estimates
20
26 February 2015 Actuarial pension deficit £7bn In Figure 24 we set out the most pension deficit repayment plan for BT Group. We now assume these payments in our BT cashflow statement. We have included the new top-up payment schedule in our model.
Figure 24: BT Group: June 2014 actuarial pension deficit repayment schedule GBP in millions, unless otherwise stated
Source: Company data, Credit Suisse estimates
BT Group (BT.L) 21 26 February 2015 EC requests Ofcom re-designs "margin squeeze test" Ofcom has had the power to proactively assess the margin BT makes in retail fibre broadband since the FAMR (Fixed Access Market Review) in 2010. In June 2014 Ofcom published its provisional conclusions on its “margin squeeze test” (the “VULA margin” test as Ofcom refers to it or the “ERT” as the EC refers to it in its letter) which was essentially aimed at ensuring BT Retail was not selling fibre below cost in simple terms. On 15 January Ofcom published an update to the test which was subject to EC review. Ofcom’s final proposal (the June 2014 proposal slightly amended in January 2015) was to conduct the margin squeeze test every 6mths and allocate the costs of BTSports on a static period-by-period approach looking at a 6mth intervals in isolation. At that time Ofcom ruled that BT was broadly compliant with the test although we believe that the treatment of BTSports costs (effectively amortised over the life of the Sports rights and not the average life of a BT fibre customer) potentially restricted BT’s ability to bundle future content for free and reduced BT’s overall pricing flexibility. The EC recently published its response to Ofcom’s "margin squeeze test" following Ofcom submitting its measures to the EC in mid-January 2015. The response is in the form of an open letter on its website (link below). According to the FT, Ofcom said it would consider the commission’s comments. A final statement is expected from Ofcom in the coming weeks. Link to EC letter to Ofcom: https://circabc.europa.eu/sd/a/a29958dc-8283- 4710-a08e-56f9e8aad72a/UK-2015-1692_Adopted_EN%20PUBLIC.pdf EC recommendations We have picked out the most important (in our view) recommendations from the EC in its letter:
■ The Commission requests Ofcom to re-visit the design of its proposed ERT in its final measure
■ The Commission requests sufficient flexibility is given to BT to recover the considerable costs for BT Sport over a longer time horizon, in particular in light of uncertainties relating to scale and costs of future auctions
■ BT should be allowed to potentially defer costs to future periods where demand for fibre is higher (i.e. BT has more fibre customers) build scale
■ The EC further comments that Remedies could have significant impact on non- regulated markets in which it does not have SMP Conclusion If the EC request is implemented by Ofcom we believe this would be positive for BT as it potentially allows BT much more flexibility on both retail pricing of fibre going forward and the ability to have greater flexibility to bundle content with fibre. Ofcom needs to take “utmost consideration” of the EC requests but is not obliged to implement these requests. However, in our view, if Ofcom does not take notice of the EC request then it potentially strengthens the case of BT in any potential legal challenge to Ofcom’s final measure on the margin squeeze test.
BT Group (BT.L) 22 26 February 2015
Appendix 1—BT Group financialsFigure 25: BT Group: P&L forecasts GBP in millions, unless otherwise stated Profit & Loss Mar-13 Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E Global Services 7,170 7,041 6,835 6,895 6,961 7,029 Retail 7,228 7,528 7,684 7,745 Business 3,143 3,082 3,074 3,059 Consumer 4,285 4,528 4,611 4,686 Wholesale 3,601 2,422 2,121 2,060 2,033 2,015 Openreach 5,069 5,061 5,004 4,981 4,930 4,944 Other 50 131 80 80 80 80 Eliminations (4,848) (3,894) (3,580) (3,580) (3,580) (3,580) Total Revenue 18,270 18,288 17,888 18,045 18,108 18,232 % change actual -5.4% 0.1% -2.2% 0.9% 0.4% 0.7% Transit revenue 872 697 557 457 357 307 Revenue ex-transit 17,580 17,616 17,412 17,588 17,751 Growth ex-transit/FX -3.1% 0.5% -1.2% 1.0% 0.9%
Global Services 626 932 1,051 1,139 Retail 1,935 1,931 Business 1,041 1,036 Consumer 1,020 995 Wholesale 1,172 614 532 521 Openreach 2,314 2,601 2,587 2,588 Other 139 128 115 108 Revised IAS19 pension (90) (120) (120) charge Total EBITDA 6,185 6,116 6,226 6,267 6,374 6,595 % change 2.0% -1.1% 1.8% 0.7% 1.7% 3.5% margin (%) 33.9% 33.4% 34.8% 34.7% 35.2% 36.2% D&A (2,843) (2,696) (2,520) (2,450) (2,430) (2,420)
Operating profit 3,342 3,420 3,685 3,817 3,944 4,175 Net finance costs (653) (597) (549) (500) (421) (400) Associates & JVs 9 (3) 0 0 0 0 Special items (inc. pension (193) (515) (490) (290) (290) (290) interest) PBT * 2,505 2,306 2,646 3,027 3,234 3,485 % change 2.6% -8.0% 14.8% 14.4% 6.8% 7.8%
Underlying tax (606) (611) (627) (663) (705) (755) effective tax rate (%) 22.5% 21.7% 20.0% 20.0% 20.0% 20.0% Tax on specific items 196 319 98 58 58 58 Net Income 2,095 2,013 2,117 2,421 2,587 2,788 % change 4.8% -3.9% 5.1% 14.4% 6.8% 7.8% Adjusted net income 2,092 2,209 2,509 2,653 2,819 3,020 % change 14.1% 5.6% 13.5% 5.8% 6.2% 7.1% Adjusted EPS 26.6 28.2 30.9 31.7 33.6 36.0 Reported EPS 26.8 25.6 26.1 28.9 30.8 33.2 DPS (GBp) 9.5 10.9 12.4 14.3 16.1 18.1 % change 15.0% 14.2% 14.0% 15.0% 12.5% 12.5% pay-out ratio (%) 35.7% 42.5% 47.6% 49.4% 52.1% 54.4% No. of shares 7,835 7,871 8,344 8,390 8,390 8,390 Source: Company data, Credit Suisse estimates. * PBT and EPS forecasts may be different to the databox owing to different adjustments (particularly for specific items) made in the above table vs. the standard Credit Suisse databox adjustments.
BT Group (BT.L) 23 26 February 2015
Figure 26: BT Group: Cashflow statement GBP in millions, unless otherwise stated Cash flow statement Mar-13 Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E
EBITDA 6,185 6,116 6,226 6,267 6,374 6,595 Special items (366) (356) (250) (250) (250) (250) Change in working capital (190) (380) (250) (130) 0 0 Provisions and other 63 92 31 29 (30) (32) Cash generated from 5,693 5,471 5,757 5,915 6,094 6,313 operations Tax relief on pension 560 77 100 189 58 158 payment Income tax (624) (423) (426) (612) (662) (714) Net cashflow from 5,629 5,125 5,430 5,492 5,490 5,757 operating activities
Interest received 0 0 0 0 0 Dividends from associates 3 (2) (2) (2) (2) (2) & JVs Proceeds from disposals 330 0 0 0 0 0 Acquisition of mobile (267) 0 0 0 0 0 licences/subsids Capex (2,439) (2,346) (2,345) (2,347) (2,343) (2,352) Net cash used in (2,373) (2,347) (2,347) (2,349) (2,345) (2,354) investing activities
Equity dividends paid (680) (790) (917) (1,094) (1,251) (1,408) Dividends paid to minorities 0 0 0 0 0 1 Interest paid (692) (608) (569) (500) (421) (400) Share buyback/equity (302) (77) 803 0 0 0 issuance Proceeds on issue of 109 27 259 35 0 0 shares Net cash used in (1,565) (1,448) (424) (1,559) (1,672) (1,807) financing activities
Pension top-ups (325) (325) (850) (900) (250) (688) Premier League payment 0 (47) timing difference
Change in net debt 1,365 958 1,809 684 1,223 909
Opening net debt (9,082) (7,793) (7,028) (5,320) (4,636) (3,412) Other movements in net (76) (193) (102) 0 0 0 debt
Closing net debt (7,793) (7,028) (5,320) (4,636) (3,412) (2,503)
Free cash flow pre 2,304 2,450 2,664 2,704 2,917 3,095 pension Source: Company data, Credit Suisse estimates
BT Group (BT.L) 24 26 February 2015
Figure 27: BT Group: Balance sheet GBP in millions, unless otherwise stated Balance Sheet Mar-13 Mar-14 Mar-15E Mar-16E Mar-17E Mar-18E
Intangible assets 3,258 3,087 3,087 3,087 3,087 3,087 P,P&E 14,153 13,840 13,645 13,542 13,455 13,386 Derivative financial 1,080 539 539 539 539 539 instruments Investments 64 34 34 34 34 34 Associates & JVs 28 18 20 22 24 26 Trade & other receivables 184 214 214 214 214 214 BTPS retirement benefit 0 0 307 1,767 2,673 4,079 assets Deferred tax assets 1,438 1,460 1,078 871 813 655 Total non current assets 20,205 19,192 18,924 20,075 20,839 22,020
Inventories/programme 103 190 190 190 190 190 rights Trade & other receivables 2,946 2,933 2,962 2,992 3,022 3,052 Derivative financial 170 114 114 114 114 114 instruments Investments 531 1,774 1,774 1,774 1,774 1,774 Cash and cash equivalents 924 695 695 695 695 695 Total current assets 4,674 5,706 5,735 5,765 5,795 5,825
Total assets 24,879 24,898 24,659 25,840 26,634 27,845
Loans and other 1,736 1,873 1,873 1,873 1,873 1,873 borrowings Derivative financial 74 139 119 119 119 119 instruments Trade and other payables 5,574 5,261 5,261 5,261 5,261 5,261 Current tax liabilities 100 315 315 315 315 315 Provisions 120 99 99 99 99 99 Total current liabilities 7,604 7,687 7,667 7,667 7,667 7,667
Loans and other 8,277 7,941 6,100 5,406 4,198 3,303 borrowings Derivative financial 802 679 679 679 679 679 instruments Other payables 883 898 998 1,098 1,138 1,178 Deferred tax liabilities 1,209 829 829 829 829 829 Retirement benefit 5,856 7,022 7,022 7,022 7,022 7,022 obligations Provisions 510 434 434 434 434 434 Total non-current liabilities 17,537 17,803 16,062 15,468 14,300 13,445
Called up share capital 408 408 408 408 408 408 Reserves (696) (1,026) 496 2,271 4,233 6,300 Minority interests 26 26 26 26 26 25 Total equity (262) (592) 930 2,705 4,667 6,733
Total equity & liabilities 24,879 24,898 24,659 25,840 26,634 27,845 Source: Company data, Credit Suisse estimates
BT Group (BT.L) 25 26 February 2015
Companies Mentioned (Price as of 24-Feb-2015) BT Group (BT.L, 447.0p, OUTPERFORM, TP 495.0p) British Sky Broadcasting (SKYB.L, 974.0p) Deutsche Telekom (DTEGn.F, €16.06) Liberty Global (LBTYA.OQ, $53.35) Numericable (NUME.PA, €52.36) Orange (ORAN.PA, €16.13) TalkTalk (TALK.L, 325.4p) Vodafone Group (VOD.L, 226.5p)
Disclosure Appendix
Important Global Disclosures Paul Sidney, Jakob Bluestone and Justin Funnell each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for BT Group (BT.L)
BT.L Closing Price Target Price Date (p) (p) Rating 11-Apr-12 213.20 250.00 O 12-Sep-12 235.20 300.00 12-Jun-13 309.30 350.00 20-Feb-14 415.30 440.00 * Asterisk signifies initiation or assumption of coverage.
OUTPERFORM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the les s attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresh olds replace the +10- 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
BT Group (BT.L) 26 26 February 2015
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (54% banking clients) Neutral/Hold* 38% (49% banking clients) Underperform/Sell* 15% (44% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Price Target: (12 months) for BT Group (BT.L)
Method: We derive our target price of 495p for BT Group by putting BT Group on 8x EV/EBITDA including the Everything Everywhere acquisition. Risk: Impact of economy on Global Services division and residential business, strength of competition in domestic broadband/fixed line market, pension obligations, potential heavy investment in network upgrade, ability to execute on cost cutting plans.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (BT.L, LBTYA.OQ, NUME.PA, ORAN.PA, DTEGn.F) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (NUME.PA, ORAN.PA, DTEGn.F) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (DTEGn.F) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (NUME.PA, ORAN.PA, DTEGn.F) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (BT.L, NUME.PA, SKYB.L, ORAN.PA, DTEGn.F) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (LBTYA.OQ). As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (NUME.PA, VOD.L). Credit Suisse has a material conflict of interest with the subject company (NUME.PA) . Credit Suisse Securities (Europe) Ltd is acting as financial advisor to Numericable Group and as Joint Bookrunner and Mandated Lead Arranger for the debt financings by Altice SA and Numericable Group to support the proposed acquisition of SFR.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BT.L, LBTYA.OQ, NUME.PA, SKYB.L, TALK.L, VOD.L, ORAN.PA, DTEGn.F) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
BT Group (BT.L) 27 26 February 2015
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BT Group (BT.L) 28 26 February 2015
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BT 25 Feb 15 Draft 9.doc BT Group (BT.L) 29