Equity Research Telecommunications | European Telecom Services BT Group PLC 14 March 2018 Stock Rating OVERWEIGHT Lessons from New Zealand Unchanged

Industry View POSITIVE Ofcom and government continue to look to find the optimal route to driving FTTH in Unchanged the UK. Our research implies that the current approach (ducts & poles, wholesale Price Target GBp 350 caps, even regional franchises) can only lead BT to take an incremental approach, Unchanged gradually testing demand and costs. New Zealand (Structural Separation) is often held up as the case study of successful Fibre investment. A deep dive in this report Price (12-Mar-2018) GBp 235 shows that coverage/penetration levels are impressive. However, the FTTH Potential Upside/Downside +48.9% economic case is uncertain; BT’s “anchor tenant” argument still holds, in our view. Tickers BT/A LN / BT.L

Structural separation – NZ in focus; assessing success so far. Since 2011 separation, Market Cap (GBP mn) 23219 Chorus (NZ Openreach equivalent) now targets 87% FTTH coverage by 2022, has 42% Shares Outstanding (mn) 9921.90 penetration across the FTTH footprint, and an expected migration to a Utility-style RAB- Free Float (%) 84.21 based (Regulatory Asset Base) model post 2022 once the rollout is complete. However, 52 Wk Avg Daily Volume (mn) 22.4 one significant side effect is accelerating hard mobile substitution (7% lines/year) as 52 Wk Avg Daily Value (GBP mn) 63.22 Chorus’ customers look to optimize their costs (i.e. replace copper with owned mobile). Dividend Yield (%) 6.6 Return on Equity TTM (%) 22.10 Which model is best? BT “Anchor tenant” vs increased retail competition. BT argues Current BVPS (GBp) 82.34 that owning Consumer and Openreach provides an anchor tenant that is incentivized to Source: Thomson Reuters promote FTTH, thus helping the business case. Looking at the economic model, Chorus has driven high Fibre penetration, but EBITDA has remained static over the past years Price Performance Exchange-LSE despite much higher capex. Furthermore, higher wholesale prices for higher speeds 52 Week range GBP 3.46-2.24 have resulted in most customers only taking the 100mbps product and mobile being promoted over fixed in copper areas, all factors that make the business model for FTTH harder, which is especially relevant in the UK where there is a 40mbps VDSL price cap.

Where to from here? In UK Fibre - playing the long game (28 February 2018), we concluded that the lack of regulatory certainty in UK fixed line (and especially FTTH) means that BT will likely take an incremental approach towards Fibre, seeing how the Link to Barclays Live for interactive charting business model adapts (demand and costs) before committing to a wider capex-

intensive rollout. This is of course unless alternative FTTH build meaningfully accelerates (which is yet to be seen). Meanwhile the New Zealand case study shows European Telecom Services successful FTTH uptake, but the economic case applied to the UK appears less clear. Maurice Patrick +44 (0)20 3134 3622 BT.L: Financial and Valuation Metrics EPS GBp [email protected] FY Mar 2016 2017 2018 2019 2020 Barclays, UK

EPS 26.8A 28.9A 28.0E 28.8E 29.3E Mathieu Robilliard Previous EPS 26.8A 28.9A 28.0E 28.8E 29.3E +44 203 134 3288 Consensus EPS 32.8A 28.7A 27.3E 28.3E 28.6E [email protected] P/E 8.8 8.1 8.4 8.2 8.0 Barclays, UK

Source: Barclays Research. Daniel Morris Consensus numbers are from Thomson Reuters +44 (0)20 7773 2113

[email protected] Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with Barclays, UK companies covered in its research reports. As a result, investors should be aware that the Simon Coles firm may have a conflict of interest that could affect the objectivity of this report. Investors +44 (0)20 3555 4519 should consider this report as only a single factor in making their investment decision. [email protected] This research report has been prepared in whole or in part by equity research analysts Barclays, UK based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 22.

Barclays | BT Group PLC

European Telecom Services Industry View: POSITIVE

BT Group PLC (BT.L) Stock Rating: OVERWEIGHT

Income statement (£mn) 2017A 2018E 2019E 2020E CAGR Price (12-Mar-2018) GBp 235 Revenue 24,082 23,878 23,760 23,974 -0.2% Price Target GBp 350 EBITDA 7,645 7,505 7,536 7,571 -0.3% Why Overweight? We believe improving operational EBIT 4,135 4,016 4,012 4,034 -0.8% performance and continued cost-cutting can improve Finance costs - net -803 -746 -727 -685 N/A FCF generation at BT. The pension position is also Pre-tax income 2,354 2,684 3,186 3,250 11.4% likely to have materially improved by the next review, enabling BT to increase dividends and deleveraging. Tax rate (%) 19 20 19 19 0.4%

Net income 1,908 2,051 2,539 2,591 10.7% EPS (adj) (GBp) 28.9 28.0 28.8 29.3 0.5% Upside case GBp 475 Diluted shares (mn) 9,930 9,898 9,860 9,857 -0.2% If BT were to realise synergies higher than announced from its acquisition of EE (announced synergies are at DPS (£) 0.15 0.16 0.16 0.16 1.8% the low end compared with other European M&A

deals) we could see upside to our price target. Margin and return data Average

EBITDA margin (%) 31.7 31.4 31.7 31.6 31.6 Downside case GBp 200 EBIT margin (%) 17.2 16.8 16.9 16.8 16.9 An extended cable rollout combined with escalating Pre-tax margin (%) 9.8 11.2 13.4 13.6 12.0 content costs and increased aggression from TalkTalk Net margin (%) 7.9 8.6 10.7 10.8 9.5 represent the key downside risks to our price target. It Operating CF margin (%) 23.1 20.0 22.9 21.3 21.8 should be noted that we already assume elevated ROCE (%) 10.7 10.2 10.1 10.3 10.3 investment in Fibre. We estimate £3.1-3.3bn capex for RONTA (%) 21.0 19.4 19.7 19.7 20.0 BT (including EE) ROA (%) 7.8 7.5 7.6 7.7 7.7 ROE (%) 28.4 33.3 32.2 29.6 30.9 Upside/Downside scenarios

Cash flow and balance sheet (£mn) CAGR Cash flow from operations 6,725 5,617 6,436 6,471 -1.3% Capex and acquisitions -3,123 -3,460 -3,762 -4,584 N/A Free cash flow 2,438 1,340 1,676 518 -40.3% NOPAT 3,359 3,193 3,250 3,268 -0.9% Tangible fixed assets 16,498 16,489 16,578 16,656 0.3% Intangible fixed assets 15,029 15,029 15,029 15,029 0.0% Cash and equivalents 528 -115 -467 -1,792 N/A Total assets 42,372 42,865 42,342 40,864 -1.2% Short and long-term debt 12,713 14,979 14,679 14,579 4.7% Other long-term liabilities 2,703 1,445 1,287 -114 N/A Total liabilities 34,037 34,055 32,579 30,111 -4.0%

Net debt/(funds) 8,932 9,372 9,424 10,649 6.0% Shareholders' equity 8,335 8,810 9,763 10,753 8.9%

Valuation and leverage metrics Average P/E (adj) (x) 8.1 8.4 8.2 8.0 8.2 Prop. EV/EBITDA 5.7 5.8 5.4 5.1 5.5 Prop. EV/OpFCF 9.6 10.6 10.4 9.8 10.1 Prop. EFCF yield (%) 8.8 8.1 8.9 10.2 9.0 P/BV (x) 2.8 2.6 2.4 2.2 2.5 Dividend yield (%) 6.6 6.8 6.8 6.9 6.8 Total debt/capital (%) 60.4 63.0 60.1 57.6 60.2 Net debt/EBITDA (x) 1.2 1.2 1.3 1.4 1.3

Selected operating metrics (k) Average Total mobile subscribers - UK 23,712 23,377 23,177 23,017 23,321 Broadband lines retail - UK 9,276 9,366 9,447 9,520 9,402

Source: Company data, Barclays Research Note: FY End Mar

14 March 2018 2 Barclays | BT Group PLC

New Zealand/Structural Separation – What have we learnt?

New Zealand and structural separation – the plan Structural separation – the In 2011 New Zealand saw Structural Separation of the incumbent, which created Spark route to FTTH (incumbent retail arm plus mobile network – equivalent of BT Consumer), and Chorus (equivalent of Openreach). The catalyst for the separation was to allow Chorus to participate in the government UFB (Ultrafast Fibre Broadband) initiative. This was a plan to ultimately connect 75% of the population to Fibre (a target that was subsequently increased to 87%).

Separation intended to A key argument for full structural separation is that it enables the infrastructure provider (in accelerate/incentivise FTTH this case Chorus) to invest in FTTH with all service providers treated equally, and with no investments conflicts of interest as it also has a retail arm. Meanwhile the retail arm (Spark) can focus on retail service provision. New Zealand has seen energised Retail competition and many fixed service provider new entrants recently as a result.

Chorus claims healthy demand The original target for the UFB plan (UFB1) was 1.36m homes (1.05m premises). This was followed by subsequent additions (UFB2 and UFB2+) – to be completed by 2022, which will provide 87% FTTH population rollout by 2022. In terms of demand, Chorus points to 30- 50% fibre orders received within 3-4 years, with more recent cohorts having more rapid uptake levels. Overall penetration in the FTTH footprint is now 42% (and steadily rising).

Deployment costs have fallen In terms of cost, Chorus indicates c$2.1k per home passed for communal capex for UFB1 over time (i.e. excluding connection; fell to $1.65k in FY18), before rising to $2.3k for UFB2, and $2.7k for UFB2+. Connection capex is estimated at $1.5-1.7k for the UFB2+, compared to $1.1k in FY18. Chorus will also use vectored VDSL: rural areas, claiming c40% of lines (outside the UFB1/2 areas), would get >30mbps, c30% >50mbps, and c20% >100mbps.

FIGURE 1 FIGURE 2 Chorus: Fibre homes target (k) Chorus: First time fibre orders received as %age of fibre capable addresses (by rollout year)

1,600 1,400 1,200 1,000 800 600 400 200 0 Homes Passed Potential Connections

UFB1 UFB2 UFB2+

Source: Company Data, Barclays Research Source: Company Data

Chorus will transition to a Chorus will transition to a regulated utility model from 2022. In the Fibre areas (87% of regulated utility model from population), Chorus will be regulated via Regulated Asset Base (RAB) using depreciated 2022 actual cost for post 2011 assets. There will be a revenue cap with commercial geographically averaged pricing, except for anchor products (100/20mbps fibre). Copper will be deregulated in fibre areas (and can be withdrawn) and will be subject to continued regulation (including price) in non-fibre areas.

14 March 2018 3 Barclays | BT Group PLC

New Zealand has seen an impressive increase in FTTH Chorus Fibre momentum has Chorus has added c30-35k Fibre subs per quarter for the past few years, taking the total remained solid in recent number of Fibre customers (GPON) to 362k at December 2017. Fibre now accounts for 31% periods of total broadband connections and 42% uptake within the UFB-deployed footprint.

FIGURE 3 FIGURE 4 Chorus: Fibre net adds (k) Chorus: Broadband connections by product (k)

40 1,400

35 1,200

30 1,000 800 25 600 20 400 15 200 10 0 5 3Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Fibre Broadband (GPON) VDSL (includes Naked) 0 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Copper ADSL (includes Naked)

Source: Company Data, Barclays Research estimates Source: Company Data, Barclays Research estimates

100mbps now becoming the Fibre plus VDSL made up 58% of total broadband lines by December 2017. Chorus has seen dominant “Fibre” product steady upsell within the Fibre product range. In terms of speed of broadband, Chorus has indicated that less than 25% of broadband lines are now on entry level 50mbps products, vs 45% 18 months ago. Around 10% of lines (and modestly increasing) are on 200mbps or greater products (as we describe below, we believe this dynamic is due to the wholesale pricing models).

Average broadband speeds are now 64mbps, up from 59mbps in Sep 2017, and 25mbps a year ago, as can be seen below. Data usage has now reached 175GB/month, with Fibre at 250GB and Copper at 141GB.

FIGURE 5 FIGURE 6 Chorus: Split of broadband product by speed (%) Chorus: Average broadband speed (mbps)

100% 70 90% 60 80% 70% 50 60% 40 50% 40% 30 30% 20 20% 10% 10 0% 0 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 50mbps 100mbps >100mbps

Source: Company Data, Barclays Research estimates Source: Company Data, Barclays Research estimates

14 March 2018 4 Barclays | BT Group PLC

Fixed line seeing mobile substitution in copper areas Chorus is losing c7% However, growth in Fibre has been masked by overall declines in the Chorus customer base customers per year as non- – mostly inside the ADSL base. Total line losses have been 20-40k/quarter, representing a Fibre base declines c7% annualised reduction. Specifically over the past 12 months, Chorus has added 131k Fibre, 121k VDSL, and lost 285k Copper ADSL. There were also 84k Copper non-broadband customer losses.

FIGURE 7 FIGURE 8 Chorus: Net adds Chorus: Total net adds

0 100 80 -5 60 -10 40 20 -15 0 -20 -20 -40 -60 -25 -80 -30 -100 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 -35 Unbundled Copper Baseband Copper (no bband) -40 Fibre Broadband (GPON) VDSL (includes Naked) -45 Copper ADSL (includes Naked) Data services (Copper) 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Fibre Premium (P2P)

Source: Company Data, Barclays Research estimates Source: Company Data, Barclays Research estimates

Much of this appears to be lost Much of the cause of this line loss can be attributed to retail behavior at Chorus’ customers, to mobile; Chorus customers and especially at Spark, the former retail arm. Spark reported at its latest results that Copper are promoting Fixed-Wireless made up 55% of broadband connections, down from 74% a year previously and 91% the hard substitution to reduce year before that. Fibre now makes up 26%, up from 22% a year before and 9% the year costs before that. However, wireless broadband now makes up 19% of total broadband, compared to 4% a year ago. The company has also promoted a naked DSL service (broadband without voice line), which makes up almost 25% of the broadband base. In its results presentation, Spark cited cost optimization as a key driver for hard mobile substitution.

FIGURE 9 FIGURE 10 Spark: Broadband Split Spark: Naked DSL

100% 25% 90% 80% 20% 70% 60% 15% 50% 40% 10% 30% 20% 5% 10% 0% 0% 1H16 1H17 1H18 1H16 1H17 1H18 Copper Fibre Wireless Broadband

Source: Company Data Source: Company Data

14 March 2018 5 Barclays | BT Group PLC

EBITDA has been flattish for Chorus financials are below. Guidance for FY18 EBITDA is $625-650m. years FIGURE 11 Chorus: Revenues and EBITDA ($m)

Source: Company Data. *Dotted bars reflect revenue, EBITDA normalized for benchmark pricing.

Implications for the BT’s Anchor tenant argument BT argues that retail anchor BT has consistently made the argument that being fully integrated (Openreach plus BT tenant helps business case Consumer) makes the business case for FTTH more credible, as the retail arm is an anchor tenant supporting the fibre investment. We note the following:

 NZ has shown clear success of Fibre over Copper. The rise of Fibre in New Zealand is impressive, which we believe can be attributed to the superior speed and quality of the service over copper. The rise in number of Chorus retail partners has helped drive uptake. In addition to Spark and Vodafone, there are a number of other retail broadband players, such as Vocus, 2degrees, Trustpower and ROM, that have all grown market share over the past 3-4 years.

FIGURE 12 New Zealand: Broadband market share by retailer

Source: Company Data

14 March 2018 6 Barclays | BT Group PLC

 Demand – Limited demand (to date) for speeds >100mbps. The vast majority of Chorus customers are on 100mbps Fibre. We note Chorus charges $42/month wholesale for Copper with Broadband, $41/month for 50/10mbps Fibre, and $43/month for 100/20mbps Fibre. There is then a major step-up to $55 for 200/20mbps Fibre, and $65/month for 1Gbps Fibre. Openreach has seen very strong growth for its VDSL service over recent periods. BT questions the ability/desire of customers (retail and service provider) to pay more for higher speeds for the time being. The above supports this view. Also, capping the price of the 40mbps Fibre product makes the business model even tougher. In New Zealand, the 100mbps FTTH product will be subject to a price cap once Chorus moves to a RAB-based model, which could hinder upselling upside.

FIGURE 13 Chorus: Revenues and EBITDA ($m)

Source: Company Data

 Would Fibre create a two-tier broadband market? New Zealand should see FTTH rollout hit an impressive 87% by 2022. The rest of New Zealand will have to rely on vectored VDSL, where the quality improvement drops off with distance from the exchange. This theme is a subject we covered in detail in European Telecoms: Fibre wars: Quantifying fibre upside, 16 June 2016. Chorus estimates that using vectored VDSL c40% of lines (outside the UFB1/2 areas) would get >30mbps, c30% >50mbps, and c20% >100mpbs. As such the speed difference between Fibre and Copper will be accentuated in these areas – and accelerated levels of hard fixed-mobile substitution in the meantime will make the Fibre business case harder, not easier. The UK political case for FTTH is clear, and the Openreach consultation indicates a 10m potential target by the mid 2020s (c40%). In the UK (and EU) we note a desire to improve service quality/speed for the last 5% - something that Openreach is trying to achieve with VDSL plus other techniques. A voluntary proposal from Openreach was not accepted, and Ofcom is now consulting on this. Were Openreach separated, the business case for this would be harder to achieve.

 Return on capital in focus. Chorus has seen flat to declining EBITDA over several years despite a very intensive investment period, and the stock trades on c6x BBG consensus 2018E EV/EBITDA. We believe that returns becoming RAB-based from 2022 should boost longer-term FCF and visibility. An Openreach outcome that results in £6bn+ capital investment delivering flat to declining EBITDA is not an outcome that appears

14 March 2018 7 Barclays | BT Group PLC

attractive from an investment perspective, unless accelerating alternative infrastructure build threatens legacy copper investments. We cover this subject in detail later in this report.

 What about 5G? In 5G – A New Dawn, 9 September 2016, we argued that in a world of increased radio network densification, demand for Fibre connectivity to radio sites would increase significantly, likely putting upward pressure on wireless backhaul costs for mobile operators. We believe increasingly shared radio infrastructure is likely going forwards, consistent with our positive view on Cellnex (see On the road- numerous growth options, 2 March 2018) as being well placed to deliver this. Chorus sees itself in a similar role in facilitating infrastructure sharing in 5G. We note that New Zealand mobile operators have reacted negatively to this according to press reports (source: New Zealand Herald, 17 December 2017, link here). Mobile operators are requesting Dark Fibre access to Chorus infrastructure to help them reduce costs. For BT we anticipate a synergy from owning the Fibre infrastructure that can be leveraged to drive greater EE network quality.

14 March 2018 8 Barclays | BT Group PLC

UK Fibre – Currently taking a different (slower) approach Ofcom has confirmed/firmed On 23 February, Ofcom announced its draft decisions relating to the Wholesale Local up its view on UK Fibre, which Access Market Review (WLA), along with Ducts and Poles (Passive Infrastructure Access), is broadly unchanged from and Quality of Service. There was nothing new in the release, although confirmation of key previous drafts themes removes overhang risk. We summarise the key elements below.

 Ofcom to start price regulating BT’s GEA (or VDSL) service. Ofcom had already proposed pricing for BT’s VDSL/GEA fibre service (currently not subject to price regulation). The pricing for the standard copper service will be broadly unchanged, whereas the price for BT’s basic 40mbps VDSL service will fall 22% to £5.74/month, slightly improved from £5.66/month as previously indicated (copper was also slightly better; we cover the financial impact of this later in the report).

 The carrot of deregulation. Ofcom has indicated that in places where there is evidence of effective competitive pressure emerging, it would expect to deregulate. Also wholesale products above the 40mbps service (such as g.fast) would not be subject to price controls (this approach could always be reversed in the future). Also, to prevent BT from stifling new investment by rivals as network competition emerges, it will not be allowed to make geographically targeted reductions to wholesale rental charges in areas where competitors build new networks – this does not rule out selective overbuild, however.

 Ducts and poles/passive infrastructure access (PIA). Ofcom has confirmed it intends to improve access to BT’s ducts and poles. Ofcom estimates that the up-front costs of building fibre networks could be reduced by around 50% and be deployed quicker.

 Quality of service focus. Ofcom has also confirmed stricter requirements on Openreach to repair faults and install new lines (to be met by 2020/21).

FIGURE 14 FIGURE 15 Openreach: Regulated pricing (£/mth) – latest draft Openreach: Regulated pricing (£/mth) – September consultation

8 7.4 8 7.4 7.03 7.07 7.01 7.03 6.98 6.88 7 7 5.74 5.66 6 6 5 4.91 5 5 4 4 3 3 2 2 1 1 0 0 Actual Draft Draft Actual Sep Condoc Sep Condoc

FY18 FY19 FY20 FY18 FY19 FY20 MPF GEA MPF GEA

Source: Company data Source: Company data

14 March 2018 9 Barclays | BT Group PLC

Immediate financial impact Quick recap of UK Fibre history Fibre has been a significant source of growth for BT over the past few years as uptake has (and outlook) – rapid growth consistently exceeded expectations. Early take-up was predominantly by BT’s own retail over recent periods – and set arm, as can be seen below. However, in recent periods it is BT’s service providers (i.e. retail to continue competitors) that have provided much of the growth. Penetration is now c45% of broadband – c65% for BT Consumer, and c30% for resellers. We expect this growth to continue for the foreseeable future. Openreach revenues had also increased to >£1bn by March 2018E, a c£200m increase per year for the past couple of years, with estimated ROCE of c11%.

FIGURE 16 FIGURE 17 Openreach: Fibre momentum (k) Openreach: Fibre penetration (%)

14,000 80 12,000 60 10,000

8,000 40

6,000 20 4,000 0

2,000

3Q14 1Q18 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 3Q18

0 1Q14

1Q19E 3Q19E

Prop of Total Premises Retail Fibre Pen of Bband

1Q15 3Q18 1Q14 3Q14 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18

1Q19E 3Q19E Retail Fibre Other Fibre ULL Fibre Pen of BBand Total Fibre Pen of Bband

Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

FIGURE 18 FIGURE 19 Openreach: Fibre revenues (£m) Openreach: Fibre ROCE (%)

1,400 14 13.2 11.1 11.3 1,200 12 10 1,000 7.5 8 5.4 800 6 600 4 3.0 2 400 0.2 0 200 -2 0 -4 -3.2

-6

FY12 FY15 FY13 FY14 FY16 FY17

FY18E FY19E FY20E FY21E FY22E

FY16 FY17 FY14 FY15

Series1 Series2 FY13

FY18E FY20E FY19E Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

BT has already indicated the In terms of quantifying the impact of the Fibre price cuts, BT has indicated a financial expected impact, which is exposure of £80-120m for FY18/19 for Openreach, with further impacts in later years, and broadly in line with our Openreach’s cost base will rise to meet the more stringent QoS benefits. The net impact at estimates the group level will depend on the retail market dynamics (as some may be kept by BT Consumer/EE if there are no retail price cuts). It includes the impact of continued volume growth.

14 March 2018 10 Barclays | BT Group PLC

For Openreach we already model the proposed reduction to wholesale fibre rates. We also assume continued 2m fibre net adds, which help offset the significant cut to the wholesale rate. The net of this is a £70m reduction in Fibre revenues (vs BT estimate of £80-120m). We estimate c£200m cut due to the reduction in the wholesale rate, almost offset by volume growth, with ancillary charges also slightly lower. Note that the impact at the group level could be lower depending on the extent that lower wholesale prices are passed on to consumers.

FIGURE 20 FIGURE 21 BT: Fibre recurring revenues – internal and external (£m) BT: Fibre revenues (£m)

1,000 1,150

900 1,100 800 1,050 700 600 1,000 500 950 400 900 300 200 850 100 800 0 Base Cut to GEA Volume Other Cuts Total FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E Revenues Revenues External Recurring Revenues Internal Recurring Revenues

Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

For resellers such as TalkTalk, we expect a likely modest net increase in total Openreach costs.

 Lower wholesale cost for existing Fibre customers. TalkTalk has c4m broadband customers, of which c3m are retail. Fibre now makes up 1.18m lines (c30% of total, increasing c80k/quarter, and we would expect retail to over-index vs non-retail customers). With the wholesale fee falling £1.66/month (£20/year), this represents a tailwind of c£25m for FY19E vs FY18E.

 Higher volumes of Fibre. We model 300k Fibre net adds for FY19E vs FY18E. Applying the £5.7/month wholesale fee (£68/year) plus overall increase in the broadband customer base implies a c£40m additional cost.

14 March 2018 11 Barclays | BT Group PLC

FIGURE 22 FIGURE 23 TalkTalk: Fibre momentum (k) TalkTalk: Regulatory costs, FY19E vs FY18E

180 460 161 160 160 148 150 150 450 140 126 440 120 430 100 420 75 80 410 60 400 40 390 20 380 0 Base Cut to GEA Increase in Total Cost 2H16 1H17 2H17 1H18 2H18E 1H19E 2H19E Base/Fibre pen

Source: Company data, Barclays Research estimates Source: Company data, Barclays Research estimates

Where does this leave us? Implications for Openreach capex and strategy Openreach has an open consultation on FTTH to 10m homes by the mid 2020s. Based upon limited regulatory support, a detailed analysis of VDSL/FTTH wholesale models shows major continued uncertainties in the Openreach FTTH business model. This implies an incremental approach towards future FTTH build is most likely, where alternative models can be examined over time. Openreach has extended its 2020 commercial rollout to 3m (from 2m). The main disruptive factor appears alternative fibre investment build, of which there are many announcements (albeit limited build to date). Change in momentum here could change the pace of Openreach investment.

Openreach has made its strategic direction clear Openreach is committed to Openreach launched a consultation into a potential FTTH investment in July 2017, and in FTTH but needs a number of October provided an update on initial feedback. We summarise the significant areas as areas to be sorted first follows.

 Openreach proposed a c10m homes FTTH rollout, by the mid 2020s, costing £3-6bn capex. A number of commercial models were proposed, from simple “take or pay” solutions to “cutover” models (turning off the copper) and co-investment models. Pricing models were also proposed for the different models, with Openreach clear that the greatest savings for all (Openreach and its customers) would be from switchover/cutover models.

 Most CPs (communications providers) agreed FTTP would future-proof the UK and were supportive of a large-scale FTTP rollout, and Openreach indicated that there is strong support for Openreach to start engineering work sooner rather than later.

 There are still challenges to overcome, including a supportive regulatory environment, agreeing to a “switchover” model, recovery of investment costs and cost to build. These are of course non-trivial to resolve, especially with the rise of alternative fibre infrastructure models, which we consider below.

Openreach extends to 3m Openreach has subsequently announced (Feb 2018) a plan to roll out FTTH to 3m homes FTTH by 2020, on superior cost by 2020 (was 2m), and has indicated a cost of £300-400 per premise passed for up to 10m control homes, and £150-175 to connect (excluding battery backup costs). Openreach had passed 886k premises with FTTP/G.fast by December 2017. In the February release, there was no

14 March 2018 12 Barclays | BT Group PLC

mention of co-investment models (this idea had been mooted in the original consultation), but Openreach re-iterated that to maximize the potential of the network, it is essential to migrate all customers onto the network quickly once it is built – a “Switchover” process (we examine this point below).

Questions still remain – Business case, plus competitor build rates Openreach target increases to Openreach was able to justify an extension of FTTH to 3m homes (from 1m) on commercial 3m homes, but 10m is a long grounds due to lower costs. However, for many areas the business case for FTTH is still way off highly uncertain (hence the comments from Openreach above about Switchover models, and recovery of investment costs). In the original consultation, Openreach indicated an “incremental value” (i.e. value on top of c£15/mth wholesale) of £25/month for a standard FTTH build, with 30% penetration by year 10, falling to £7/month should costs be recovered over the entire Openreach base passed (i.e. 10m). Note the definition of “value” is higher wholesale revenues less reduced Openreach costs – hence a Switchover model would help Openreach reduce costs (which would be passed onto the CPs).

Base case – Openreach is One of the biggest challenges for Openreach, in our view, on setting wholesale rates for highly cash generative, VDSL FTTH is the existing annuity that comes from the existing Copper/VDSL network, which (and G.fast) provides remains very profitable and cash generative. We consider the base case VDSL base case, inexpensive upgrade route compared to an FTTH investment model, and also alternative Fibre provider build.

 Fibre (VDSL) penetration should continue to increase. As a working example, we use a region of c1m homes and assume 90% active line penetration (10% mobile-only homes, no Cable), and c84% broadband penetration (rising to 98% by 2025), and 40% VDSL (rising to 68% by 2025).

 Stable to growing revenue/FCF outlook. Using the known regulatory pricing, we estimate Openreach will create ongoing revenues of c£100-110m/year (even post the announced price cuts above), EBITDA of c£50-60m/year, FCF of £27-35m based up c15% in maintenance capex/sales.

 This yields a value of £588 per home, or 11x EV/EBITDA and 16x EV/OpFCF.

14 March 2018 13 Barclays | BT Group PLC

FIGURE 24 Openreach: NPV of current Copper/VDSL network (no FTTH investment)

Year to March FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Number of Homes (k) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Openreach Fixed Active Line Penetration 90% 90% 90% 90% 90% 90% 90% 90% Broadband Penetration (of active lines) 84% 86% 88% 90% 92% 94% 96% 98% VDSL Penetration (of active lines) 40% 44% 48% 52% 56% 60% 64% 68% FTTH Penetration (of active lines) 0% 0% 0% 0% 0% 0% 0% 0% ARPU Copper 7.0 7.1 7.0 7.0 7.0 7.0 7.0 7.0 VDSL 7.4 5.7 5.0 4.9 4.9 4.9 4.9 4.9 Revenues Copper 75.6 76.4 75.7 75.6 75.6 75.6 75.6 75.6 VDSL 32.0 26.0 24.8 26.6 28.7 30.8 32.9 35.1 FTTH ------Total 107.6 102.4 100.5 102.2 104.3 106.4 108.5 110.7 Opex/Line 5.0 5.0 4.9 4.9 4.9 4.8 4.8 4.8 yoy -1.0% -0.8% -0.6% -0.5% -0.4% -0.3% -0.3% Opex 54.0 53.5 53.0 52.7 52.4 52.2 52.0 51.9 EBITDA 53.6 48.9 47.5 49.5 51.9 54.2 56.5 58.8 Margin (%) 50% 48% 47% 48% 50% 51% 52% 53% Capex Growth Capex ------Maintenance Capex 16.1 15.4 15.1 15.3 15.6 16.0 16.3 16.6 Capex 16.1 15.4 15.1 15.3 15.6 16.0 16.3 16.6 Capex/Sales (%) 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% OpFCF 37.4 33.6 32.4 34.1 36.2 38.2 40.2 42.2 FCF 30.3 27.2 26.3 27.7 29.3 31.0 32.6 34.2 EV/EBITDA 11.0 EV/OpFCF 15.7 EV/Home 588 Source: Barclays Research estimates

Business case for FTTH is Below we look at the same market, but with an FTTH investment by Openreach, and tough vs VDSL compare the FCF/profitability/value with the VDSL/Copper case above.

 We assume 70% FTTH coverage of the 1m homes. We assume FTTH investment of £350/home capex, £170/home connection fee), with FTTH penetration reaching 18% of active lines by 2025 – we assume a £5/month increase in wholesale ARPU, and some opex/capex savings. EBITDA is stronger at £71m in 2025 (was £59m in our base case scenario above), but capex is £270m higher over the period.

 FTTH business case very sensitive. This reduces the EV/Home to £522, implying destruction of value compared to the base case above (and cashflow turns negative for 6 years). This model is highly sensitive to input assumptions – for example assuming 40% penetration would result in £622 EV/Home, all else equal.

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FIGURE 25 Openreach: NPV of Fibre Network

Year to March FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Number of Homes (k) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Openreach Fixed Active Line Penetration 90% 90% 90% 90% 90% 90% 90% 90% Broadband Pen (of active lines) 84% 86% 88% 90% 92% 94% 96% 98% VDSL Penetration (of active lines) 40% 44% 48% 52% 56% 60% 64% 68% FTTH Penetration (of active lines) 0% 0% 3% 6% 9% 12% 15% 18% ARPU Copper 7.0 7.1 7.0 7.0 7.0 7.0 7.0 7.0 VDSL 7.4 5.7 5.0 4.9 4.9 4.9 4.9 4.9 FTTH 5.0 5.0 5.0 5.0 5.0 Revenues Copper 75.6 76.4 75.7 75.6 75.6 75.6 75.6 75.6 VDSL 32.0 26.0 24.8 26.6 28.7 30.8 32.9 35.1 FTTH - - - 2.4 4.1 5.7 7.3 8.9 Total 107.6 102.4 100.5 104.6 108.3 112.1 115.8 119.6 Opex/Line 5.0 5.0 4.9 4.9 4.8 4.7 4.6 4.5 yoy -1.0% -0.8% -0.6% -2.0% -2.0% -2.0% -2.0% Opex 54.0 53.5 53.0 52.7 51.6 50.6 49.6 48.6 EBITDA 53.6 48.9 47.5 51.9 56.7 61.5 66.2 71.0 Margin (%) 50% 48% 47% 50% 52% 55% 57% 59% Capex Growth Capex - 40.8 45.4 45.4 45.4 45.4 45.4 4.6 o/w Coverage 40.8 40.8 40.8 40.8 40.8 40.8 o/w Connection - - 4.6 4.6 4.6 4.6 4.6 4.6 Maintenance Capex 16.1 15.4 14.6 13.9 13.2 12.5 11.9 11.3 Capex 16.1 56.2 60.0 59.3 58.6 57.9 57.3 15.9 Capex/Sales (%) 15.0% 54.9% 59.7% 56.7% 54.1% 51.7% 49.5% 13.3% OpFCF 37.4 (7.3) (12.5) (7.4) (1.9) 3.5 8.9 55.1 FCF 30.3 (13.6) (18.8) (14.6) (10.2) (5.8) (1.4) 43.8 EV/EBITDA 9.7 EV/OpFCF 13.9 EV/Home 522 Source: Barclays Research estimates. o/w = of which

What about infrastructure On this logic, given the uncertainties above, Openreach should roll out Fibre selectively to competition? Doing nothing better understand the supply/demand dynamics. This appears to be exactly the strategy could result in major share loss Openreach is adopting, given the longer-term regulatory uncertainty and business case sensitivity. However, the above analysis did not assume any market share loss to alternative Fibre Providers (or with the Project Lightening build).

Below shows the impact of Openreach losing significant market share to an alternative provider (such as CityFibre) with 90% penetration of homes falling to just 54% over 7 years. In this scenario, value per home falls to just £414. With Openreach having similar wholesale pricing for its VDSL product to CityFibre’s proposed FTTH service, service providers could well look to move platforms if the quality of service (and availability) was comparable – and credible.

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FIGURE 26 Openreach: NPV of current Copper/VDSL network – Loss of share to alternative fibre providers

Year to March FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Number of Homes (k) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Openreach Fixed Active Line Penetration 90% 90% 84% 78% 72% 66% 60% 54% Broadband Penetration (of active lines) 84% 86% 88% 90% 92% 94% 96% 98% VDSL Penetration (of active lines) 40% 44% 48% 52% 56% 60% 64% 68% FTTH Penetration (of active lines) 0% 0% 0% 0% 0% 0% 0% 0% ARPU Copper 7.0 7.1 7.0 7.0 7.0 7.0 7.0 7.0 VDSL 7.4 5.7 5.0 4.9 4.9 4.9 4.9 4.9 Revenues Copper 75.6 76.4 73.2 68.0 63.0 58.0 52.9 47.9 VDSL 32.0 26.0 24.0 23.9 23.9 23.6 23.1 22.2 FTTH ------Total 107.6 102.4 97.2 92.0 86.9 81.6 76.0 70.1 Opex/Line 5.0 5.0 4.9 4.9 4.9 4.8 4.8 4.8 yoy -1.0% -0.8% -0.6% -0.5% -0.4% -0.3% -0.3% Opex 54.0 53.5 51.3 47.4 43.7 40.0 36.4 32.9 EBITDA 53.6 48.9 45.9 44.5 43.2 41.6 39.6 37.2 Margin (%) 50% 48% 47% 48% 50% 51% 52% 53% Capex Growth Capex ------Maintenance Capex 16.1 15.4 14.6 13.8 13.0 12.2 11.4 10.5 Capex 16.1 15.4 14.6 13.8 13.0 12.2 11.4 10.5 Capex/Sales (%) 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% OpFCF 37.4 33.6 31.4 30.7 30.2 29.3 28.2 26.7 FCF 30.3 27.2 25.4 24.9 24.5 23.8 22.8 21.6 EV/EBITDA 7.7 EV/OpFCF 11.1 EV/Home 414 Source: Barclays Research estimates.

Are alternative Fibre builds credible? Many alternative providers There are now a number of UK FTTH investment plans on top of Openreach’s 3m plan. have indicated plans to roll out CityFibre has announced 1m homes, extendable to 5m; Hyperoptic had passed 350k by July FTTH (13m in total) 2017 and targets 2m by 2022 and 5m by 2025; GigaClear targets 150k by the end of 2020; and KCOM will complete the Hull and East Yorkshire area shortly. Most recently TalkTalk announced plans to roll out FTTH to 3m homes backed by infrastructure funds. All the business cases are different, but we analyse the CityFibre one below, as a “wholesale-only” model.

CityFibre – 1m homes, In November 2017 CityFibre announced a 1m FTTH plan, and that it had signed Vodafone Vodafone anchor tenant as a strategic partner. The key parts of the announcement are the following: 1) CityFibre will pass 1m homes across 12 existing CityFibre towns/cities, with a framework for an additional 4m homes. 2) Construction should start in 2018, peak in 2020, and be largely complete inside four years. 3) They target £350-480 per home passed capex (plus

14 March 2018 16 Barclays | BT Group PLC

connection), resulting in £500-700m total capex once complete (i.e. £500-700/home connected). 4) Vodafone has committed to 20% of total volumes, and the company estimates subscriber penetration will reach at least 50% within five years of each rollout phase; the revenue yield on net capital expenditure is targeted to be approximately 18-22% per cabinet at maturity, five to seven years following cabinet construction.

CityFibre business case relies Our analysis indicates that the FTTH build with Vodafone as strategic partner should be an on wholesale ARPUs similar to NPV-positive event. Assuming capex of c£550 per home (including connection fee, based that of Openreach VDSL upon c50% penetration) should yield ongoing revenues/EBITDA of c£80m/£70m. services; they are targeting Assuming a WACC of 8.5% and 0% terminal growth would give an NPV of c£100m, or an solid double-digit IRR IRR of c12%. The example of the York trial shows solid uptake of the service – now >26%. The estimated wholesale ARPU of c£12-15/month is also very competitive compared to Openreach VDSL rates (c£15/mth currently, albeit set to fall to £11-12/month over the coming years on current Ofcom proposals). Based upon its recent consultation (see BT press release of 17 July 2017, link here), Openreach has indicated a value uplift (ARPU less cost saving) from FTTH of c£7-25/month on top of the current c£14-17/month depending on implementation.

FIGURE 27 York: FTTH percentage of homes taking services (%)

Source: Companies data

CityFibre business case very With Vodafone agreeing to take 20% penetration of the 1m homes, the challenge is to sensitive to wholesale encourage other ISPs to also promote the service. As indicated above, a 50% terminal customer uptake penetration at £14/month ARPU gives a 12% IRR – should penetration be just 40% this falls to 10% - at 35% it is 8%. However, at 75% it is 15%. We believe that the end penetration rate is still unclear. On the one hand we believe that the £12-15/month wholesale ARPU for FTTH compares favourably with the Openreach wholesale price of c£15/month for VDSL (shortly to be c£11-12, although quite likely higher for FTTH), which should encourage other service providers to switch from Openreach to CityFibre. However, should Openreach overbuild CityFibre, this would likely limit total penetration, and other service providers could well be reticent to follow, especially if consumers don’t see value in the higher speeds (and availability/quality of service) of FTTH over VDSL.

Alternative Fibre providers The advantage alternative providers such as CityFibre have is the lack of legacy. have the advantage of a lack of Openreach’s decision to invest in FTTH has a hurdle rate that is the value of the existing legacy Copper/VDSL annuity stream, with incremental returns needed to offset higher capex. For CityFibre, there is no legacy revenue stream, and so on a similar capex profile, the hurdle rate should be lower (unless it has a structurally higher capex/opex base due to lack of national scale).

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Clear first-mover advantage First-mover advantage, so we We see a clear first-mover advantage in FTTH investment, as once one infrastructure expect some land grab, but provider covers the area, the economics of a second build deteriorate significantly. As such business model not clear in all we expect all providers to look potentially at “laying claim” to certain areas, especially those regions (yet) with most attractive economics. Openreach has listed Birmingham, Bristol, Cardiff, Edinburgh, Leeds, Liverpool, London and Manchester as the first phase of up to 40 towns. CityFibre has named Milton Keynes and most recently Aberdeen, and we would expect their rollout to mirror where they have existing infrastructure. However, from a build perspective, as indicated earlier, we believe Openreach is paid to wait before deploying significant capital, in the hope of resolving issues such as Switchover/Cutover models and potential improvements in the regulatory outlook.

In terms of wholesale cost, we estimate c£12-13/month for FTTH for CityFibre. This compares favourably to the c£12-13/mth that Openreach will charge next year (£7/month MPF + £5.70 VDSL) for just VDSL, and we note Openreach has indicated incremental value of £7-25/month (combination of higher price and cost savings passed on). We see a realistic scenario in which for a hard cutover model, Openreach opex/capex could be reduced by c£3/line/month; this could result in a total Openreach FTTH ARPU (£12-13 Copper/VDSL plus £4-5 FTTH) of below £20/month, putting it in line to below EU peers.

14 March 2018 18 Barclays | BT Group PLC

Stock implications - BT Headwinds decreasing but still Our Openreach forecasts are “derisked”. We model Openreach capex of £1.7-1.8bn/year for longer term forecast the next 3-4 years, compared to gross capex (i.e. pre BDUK funding) of c£1.5bn/year for the uncertainty past few years, with group capex of c£3.6-3.7bn. This is consistent with recent commentary from BT’s CFO at the latest results, when he talked about a c£100-120m increase in capex for FY19E vs FY18E (FY18E: £3.48bn, FY19E £3.61bn). We also model the regulatory headwinds to Fibre (40:10 cut highlighted above), with FY19E Openreach revenues -5.0% to £4.85bn, and EBITDA of £2.40bn (-5% vs FY18E). For later years we assume a take-up of higher speed Fibre (we model 30% of Fibre subs on FTTH/g.Fast by 2025) with an incremental wholesale ARPU of £5-6/month.

FIGURE 28 FIGURE 29 BT: Fibre customers (k) BT: Fibre – Penetration of >40mbps services (%)

20,000 35% 32% 18,000 30% 27% 16,000 14,000 25% 22% 12,000 20% 17% 10,000 8,000 15% 12% 6,000 10% 7% 4,000 5% 5% 2% 2,000

0 0%

FY23E FY18E FY19E FY20E FY21E FY22E FY24E FY25E

FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Source: Barclays Research estimates Source: Barclays Research estimates

FIGURE 30 FIGURE 31 BT: Openreach revenues (£m) BT: Group capex (£m)

2,600 3,800 3,750 2,550 3,700 2,500 3,650 2,450 3,600 3,550 2,400 3,500 2,350 3,450 3,400 2,300 3,350

2,250 3,300

FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

FY20E FY23E FY18E FY19E FY21E FY22E FY24E FY25E

Source: Barclays Research estimates Source: Barclays Research estimates

We estimate BT trades on 9x Mar 2019E P/E, an 8.7% equity FCF yield, 6.1% dividend yield, 5.5x EV/EBITDA, and 10.6x EV/OpFCF, when including the value of BT’s pension deficit and spectrum cost assumption. This is well below incumbent peers on 15x, 6.7%, 5.2%, 6.2x and 12.8x. The key for outperformance, in our view, is stabilizing group earnings/FCF and pension resolution.

14 March 2018 19 Barclays | BT Group PLC

Stock implications – Key competitors

Liberty Global – focus on ‘some of the parts’ In our view, LBTYA’s near-term equity story is predicated on M&A-driven value crystallisation, with both the recently announced disposal of the Austria cable asset to DTE and the Vodafone RNS announcement focusing attention on the myriad of opportunities within the current assets to increase asset values through merger synergy creation. Alongside, we continue to view European cable as positively exposed to the theme of rising ARPUs and falling churn as incumbents (and others) invest in fibre infrastructure and increased fixed-mobile bundling.

Vodafone’s Friday, 2 February 2018, RNS confirming early-stage discussion around a LBTYA asset acquisition brings a wide range of potential transactions into play, from a contained Germany disposal to a wide-ranging offload of assets across CEE, NL, Germany, and Ireland. We note press reports (Telegraph 28/11/17) have also suggested the potential for a Switzerland disposal and note that LBTYA’s Belgian asset Telenet is already listed. We detail various scenarios in our 15 February 2018 report Liberty Global: Exploring optionality and have a excel flexor tool available on request to explore different assumptions.

Regarding the UK specifically, we see a range of potential outcomes for Liberty’s footprint expansion plans:

 If competitors accelerate their fibre investments such that this reduces the take- up/penetration expectations for the LBTYA ‘lightning’ 4m homes coverage targets, we expect the operator to dial back its footprint expansion and repurchase stock instead. LBTYA has consistently presented return hurdles as the key decision factor in building in the UK (or not).

 If competitors continue to focus on a ‘slow and steady’ build-out of fibre in the UK, LBTYA’s early start to footprint expansion and accelerating build should allow it to remain one step ahead of peers and reach the c.35% penetration we assume in our published forecasts, whilst also enjoying the market wide ARPU uplift that should result from a broad transition to high speed (typically c.€5-10/month increase across European markets). This is our central case scenario for LBTYA.

 If the regulatory backdrop changes dramatically (e.g. should the UK go down a fibre co- financing model, per France), LBTYA may ‘pause’ to reassess its options, which could potentially include co-financing fibre in regions that they’re not currently present in to deliver a very efficient rollout cost per activated/penetrated home.

Should LBTYA achieve material continental Europe disposals, focus will increasingly shift to the UK ‘rump’ asset Virgin Media, which is in the midst of a network-expansion-driven growth phase as discussed previously. In a ‘cashflow’ scenario where LBTYA pauses its network expansion, we estimate UK OCF growth of c.3% and an extra $600m of FCF ($0.8/shr) would result, i.e. a considerable tailwind to group FCF.

TalkTalk – Near term costs tailwinds TalkTalk should benefit from lower wholesale pricing given the Ofcom proposals of price reductions for the 40mbps Fibre products. Despite this, we expect a likely modest net increase in total Openreach costs in FY19 vs FY18.

 Lower wholesale cost for existing Fibre customers. TalkTalk has c4m broadband customers, of which c3m are retail. Fibre now makes up 1.18m lines (c30% of total, increasing c80k/quarter and we would expect retail to over-index vs non-retail

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customers). With the wholesale fee falling £1.66/month (£20/year), this represents a tailwind of c£25m for FY19 vs FY18, on our estimates.

 Higher volumes of Fibre. We model 300k Fibre net adds for FY19 vs FY18. Applying the £5.7/month wholesale fee (£68/year), plus overall increase in the broadband customer base implies a c£40m additional cost.

Longer term, TalkTalk has also announced a move to its own FTTH build. The company has also indicated it has agreed on terms with Infracapital, with the potential to create an entity to invest in FTTH in the UK. The equity is to be £500m, of which TalkTalk will inject 20%/£100m (over time). The JV is expected to have £1.5bn total funds to cover >3m homes in the UK with FTTH. Initially TalkTalk will inject its York JV into the scheme.

CityFibre Holdings – Business model looks sensible, execution is key CityFibre has a window of As discussed above, we believe alternative providers such as CityFibre have an advantage opportunity over BT due to the lack of legacy. Openreach’s decision to invest in FTTH has a hurdle rate that is the value of the existing Copper/VDSL annuity stream, with incremental returns needed to offset higher capex. For CityFibre, there is no legacy revenue stream, and so on a similar capex profile, the hurdle rate should be lower (unless it has a structurally higher capex/opex base due to lack of national scale).

Successful rollout, FTTH With Vodafone agreeing to take 20% penetration of the 1m homes, the challenge is to uptake and execution is key to encourage other ISPs to also promote the service. As indicated above, a 50% terminal value creation penetration at £14/month ARPU gives a 12% IRR – should penetration be just 40% this falls to 10% - at 35% it is 8%. However at 75% it is 15%. We believe that the end penetration rate is still unclear. On the one hand we believe that the £12-15/month wholesale ARPU for FTTH compares favourably with the Openreach wholesale price of c£15/month for VDSL (shortly to be c£11-12, although quite likely higher for FTTH), which should encourage other service providers to switch from Openreach to CityFibre. However, should Openreach overbuild CityFibre, this would likely limit total penetration, and other service providers could well be reticent to follow, especially if consumers don’t see value in the higher speeds (and availability/quality of service) of FTTH over VDSL.

Vodafone – Slowly averaging into UK fixed line; CityFibre deal is very low risk (involves no capital) In our view, Vodafone has Vodafone currently has 316k fixed broadband customers in the UK, or just 1.2% market nothing to lose, much to gain, share. It has, however, been consistently adding c30-40k/quarter for the past two years, with no material capital which is c30% of net additions (c3-4% proportion of market gross additions). Through the investments CityFibre wholesale deal, Vodafone has committed to taking 20% of CityFibre volumes for 1m homes. Given wholesale pricing of c£12-13/month, and basic Dual Play VDSL market pricing of >£25/month, we would expect Vodafone to use aggressive pricing in the CityFibre areas to take market share, with key competitors unlikely to react with headline price cuts in order to prevent material backbook repricing risk in the other 27m UK homes. Should alternative wholesale FTTH models prove successful, we see Vodafone well placed to replicate the CityFibre model.

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ANALYST(S) CERTIFICATION(S): We, Maurice Patrick and Mathieu Robilliard, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). Availability of Disclosures: Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor, New York, NY 10019 or call +1-212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities, the profitability and revenues of the Markets business and the potential interest of the firm's investing clients in research with respect to the asset class covered by the analyst. All authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects the local time where the report was produced and may differ from the release date provided in GMT. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. Such non-US research analysts may not be associated persons of Barclays Capital Inc., which is a FINRA member, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://publicresearch.barcap.com/S/CM.htm. Barclays Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of Barclays Research may differ from those contained in other types of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise. The Barclays Research Department operates independently from the Absa Research Department. Absa Research is produced by Absa Bank Limited acting through its Corporate and Investment Bank division, which is a part of Barclays Africa Group Limited and affiliated with the Investment Bank of Barclays Bank PLC. Eligible clients may receive research reports from both research departments, which may reach different conclusions and may contain different and conflicting forecasts, recommendations, or trade ideas. Primary Stocks (Ticker, Date, Price) BT Group PLC (BT.L, 12-Mar-2018, GBp 235), Overweight/Positive, A/D/J/K/L/M/N Materially Mentioned Stocks (Ticker, Date, Price) CityFibre Infrastructure Holdings PLC (CITYC.L, 12-Mar-2018, GBp 45), Equal Weight/Positive, J/K/N Liberty Global (LBTYA, 12-Mar-2018, USD 33.89), Overweight/Positive, A/CE/D/E/J/K/L/M/N TalkTalk Telecom Group (TALK.L, 12-Mar-2018, GBp 112), Equal Weight/Positive, A/CD/D/J/K/L/M/N/Q Vodafone Group Plc (VOD.L, 12-Mar-2018, GBp 207), Overweight/Positive, CD/CE/D/J/K/L/M/N Prices are sourced from Thomson Reuters as of the last available closing price in the relevant trading market, unless another time and source is indicated. Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. B: An employee or non-executive director of Barclays Bank PLC and/or an affiliate is a director of this issuer. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by this issuer. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by this issuer. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within the next 3 months. FA: Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of a class of equity securities of this issuer, as calculated in accordance with US regulations. FB: Barclays Bank PLC and/or an affiliate beneficially owns a long position of more than 0.5% of a class of equity securities of this issuer, as

14 March 2018 22 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED calculated in accordance with EU regulations. FC: Barclays Bank PLC and/or an affiliate beneficially owns a short position of more than 0.5% of a class of equity securities of this issuer, as calculated in accordance with EU regulations. GD: One of the analysts on the fundamental credit coverage team (or a member of his or her household) has a financial interest in the debt or equity securities of this issuer. GE: One of the analysts on the fundamental equity coverage team (or a member of his or her household) has a financial interest in the debt or equity securities of this issuer. H: This issuer beneficially owns more than 5% of any class of common equity securities of Barclays PLC. I: Barclays Bank PLC and/or an affiliate is party to an agreement with this issuer for the provision of financial services to Barclays Bank PLC and/or an affiliate. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities of this issuer and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Not in use. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: This issuer is a Corporate Broker to Barclays PLC. T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer. U: The equity securities of this Canadian issuer include subordinate voting restricted shares. V: The equity securities of this Canadian issuer include non-voting restricted shares. Risk Disclosure(s) Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units. Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12- month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating.

14 March 2018 23 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED Below is the list of companies that constitute the "industry coverage universe":

European Telecom Services Altice NV (ATCA.AS) Bezeq (BEZQ.TA) Bouygues SA (BOUY.PA) BT Group PLC (BT.L) Cellcom Israel Ltd. (CEL.TA) Cellnex Telecom (CLNX.MC) CityFibre Infrastructure Holdings PLC (CITYC.L) Com Hem (COMH.ST) Deutsche Telekom AG (DTEGn.DE) DNA Oyj (DNAO.HE) Drillisch (DRIG.DE) Elisa Oyj (ELI1V.HE) Euskaltel SA (EKTL.MC) Freenet (FNTGn.DE) Gamma Communications PLC (GAMA.L) Iliad SA (ILD.PA) Inmarsat plc (ISA.L) INWIT (INWT.MI) KCOM (KCOM.L) KPN (KPN.AS) Liberty Global (LBTYA) Manx Telecom (MANX.L) Masmovil (MASM.MC) NOS (NOS.LS) Orange (ORAN.PA) Orange Belgium (OBEL.BR) Partner Communications Company Ltd. (PTNR.TA) Proximus (PROX.BR) Sunrise (SRCG.S) Swisscom (SCMN.S) TalkTalk Telecom Group (TALK.L) TDC (TDC.CO) Tele Columbus AG (TC1n.DE) Tele2 AB (TEL2b.ST) Telecom Italia SpA (TLIT.MI) Telecom Italia-RSP (TLITn.MI) Telefonica Deutschland (O2Dn.DE) Telefonica SA (TEF.MC) Telekom Austria (TELA.VI) Telenet Group Holding NV (TNET.BR) Telenor ASA (TEL.OL) Telia Company AB (TELIA.ST) United Internet (UTDI.DE) ViaSat (VSAT) Vodafone Group Plc (VOD.L)

Distribution of Ratings: Barclays Equity Research has 1632 companies under coverage. 43% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 56% of companies with this rating are investment banking clients of the Firm; 74% of the issuers with this rating have received financial services from the Firm. 40% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm; 70% of the issuers with this rating have received financial services from the Firm. 15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% of companies with this rating are investment banking clients of the Firm; 66% of the issuers with this rating have received financial services from the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Top Picks: Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant "industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While analysts may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks). To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com. Explanation of other types of investment recommendations produced by Barclays Equity Research: Trade ideas, thematic screens or portfolio recommendations contained herein that have been produced by analysts within Equity Research shall remain open until they are subsequently amended or closed in a future research report. Disclosure of previous investment recommendations produced by Barclays Equity Research: Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in this research report during the preceding 12 months. To view previous investment recommendations published by Barclays Equity Research in the preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations. Legal entities involved in producing Barclays Research: Barclays Bank PLC (Barclays, UK) Barclays Capital Inc. (BCI, US) Barclays Securities Japan Limited (BSJL, Japan)

14 March 2018 24 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Barclays Capital Canada Inc. (BCCI, Canada) Barclays Bank Mexico, S.A. (BBMX, Mexico) Barclays Securities (India) Private Limited (BSIPL, India) Barclays Bank PLC, India branch (Barclays Bank, India) Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

14 March 2018 25 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED BT Group PLC (BT/A LN / BT.L) Stock Rating Industry View GBp 235 (12-Mar-2018) OVERWEIGHT POSITIVE Rating and Price Target Chart - GBP (as of 12-Mar-2018) Currency=GBP Publication Date Closing Price Rating Adjusted Price 6.5 Target 6.0 08-Dec-2017 2.68 3.50 08-Nov-2017 2.51 4.20 5.5 12-May-2017 3.06 4.50 5.0 30-Jan-2017 3.06 4.75

4.5 06-Dec-2016 3.52 5.25 01-Jul-2016 4.10 5.50 4.0 15-Oct-2015 4.27 6.00 3.5 30-Sep-2015 4.20 5.80

3.0 05-May-2015 4.49 Overweight 6.00 On 13-Mar-2015, prior to any intra-day change that may have been 2.5 published, the rating and price target for this security were suspended.

2.0 Source: Thomson Reuters, Barclays Research

Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 Historical stock prices and price targets may have been adjusted for stock splits and dividends. Closing Price Target Price Rating Change Source: IDC, Barclays Research Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of BT Group PLC in the previous 12 months. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from BT Group PLC in the past 12 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by BT Group PLC and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from BT Group PLC within the past 12 months. L: BT Group PLC is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: BT Group PLC is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: BT Group PLC is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We use a SOTP and DCF methodoloy with a 7% WACC and 1% terminal growth rate. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Risks include TalkTalk's aggressive pricing on mobile and ability to execute synergies. The pension deficit remains volatile with changes in discount rates and mortality assumptions.

14 March 2018 26 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED CityFibre Infrastructure Holdings PLC (CITYC LN / Stock Rating Industry View CITYC.L) GBp 45 (12-Mar-2018) EQUAL WEIGHT POSITIVE Rating and Price Target Chart - GBP (as of 12-Mar-2018) Currency=GBP Publication Date Closing Price Rating Adjusted Price Target 0.80 09-Feb-2018 0.49 Equal Weight 0.50 0.75 Source: Thomson Reuters, Barclays Research Historical stock prices and price targets may have been adjusted for 0.70 stock splits and dividends.

0.65

0.60

0.55

0.50

0.45

0.40

0.35 Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 Closing Price Target Price Rating Change Source: IDC, Barclays Research Link to Barclays Live for interactive charting J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by CityFibre Infrastructure Holdings PLC and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from CityFibre Infrastructure Holdings PLC within the past 12 months. N: CityFibre Infrastructure Holdings PLC is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We value CityFIbre using DCF, a WACC of 8.5% and perpetual growth of 2.5%. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: If CityFibre extends its FTTH rollout beyond 1m homes with high penetration then we see upside potential. If CityFibre does not drive elevated penetration or sees a slower pace of rollout then this would negatively impact our DCF materially and create downside risk.

14 March 2018 27 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED Liberty Global (LBTYA / LBTYA) Stock Rating Industry View USD 33.89 (12-Mar-2018) OVERWEIGHT POSITIVE Rating and Price Target Chart - USD (as of 12-Mar-2018) Currency=USD Publication Date Closing Price Rating Adjusted Price Target 51 16-Feb-2018 33.40 41.50

48 21-Nov-2017 30.53 43.00 16-Oct-2017 32.59 43.50 45 22-Feb-2017 36.63 40.00 42 25-Jan-2017 35.23 41.00

39 06-Dec-2016 29.91 39.00 07-Nov-2016 32.13 40.00 36 17-Oct-2016 31.16 42.00 33 15-Sep-2016 32.65 45.00 01-Jul-2016 29.70 38.00 30 27-Jun-2016 26.99 39.00 27 10-May-2016 32.73 41.00

24 14-Apr-2016 34.47 40.13 Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 30-Mar-2016 33.75 39.25 Closing Price Target Price 26-Jan-2016 30.25 38.38 19-Jan-2016 28.68 39.25 06-Nov-2015 40.24 46.23 15-Oct-2015 39.95 47.98 15-Jul-2015 45.13 49.72 15-Jun-2015 46.15 47.81 15-Apr-2015 42.24 45.34 On 13-Mar-2015, prior to any intra-day change that may have been published, the rating for this security was Overweight, and the adjusted price target was 47.81. Source: Thomson Reuters, Barclays Research Historical stock prices and price targets may have been adjusted for stock splits and dividends.

Source: IDC, Barclays Research Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of Liberty Global in the previous 12 months. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by Liberty Global. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Liberty Global in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Liberty Global within the next 3 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Liberty Global and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from Liberty Global within the past 12 months. L: Liberty Global is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: Liberty Global is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: Liberty Global is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We use a DCF and sum-of-the-parts methodology to value the stock, assigning varying multiples depending on growth

14 March 2018 28 Barclays | BT Group PLC prospects. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Liberty Global's two major risks include currency movements and leverage risk. Due to the majority of operations being in Europe, EUR:USD exchange rate moves impact the share price.

14 March 2018 29 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED TalkTalk Telecom Group (TALK LN / TALK.L) Stock Rating Industry View GBp 112 (12-Mar-2018) EQUAL WEIGHT POSITIVE Rating and Price Target Chart - GBP (as of 12-Mar-2018) Currency=GBP 5.5 Publication Date Closing Price Rating Adjusted Price Target 5.0 08-Dec-2017 1.55 1.70 4.5 15-Nov-2017 1.78 2.00

4.0 13-Oct-2017 2.05 Equal Weight 2.15 10-May-2017 1.69 1.85 3.5 25-Jan-2017 1.57 2.40 3.0 07-Nov-2016 2.01 2.50

2.5 26-Jan-2016 2.03 3.50 11-Nov-2015 2.46 4.00 2.0 15-Jun-2015 3.81 5.00 1.5 14-May-2015 3.84 3.80 1.0 On 13-Mar-2015, prior to any intra-day change that may have been published, the rating for this security was Overweight, and the adjusted 0.5 price target was 3. Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 Source: Thomson Reuters, Barclays Research Closing Price Target Price Rating Change Historical stock prices and price targets may have been adjusted for stock splits and dividends.

Source: IDC, Barclays Research Link to Barclays Live for interactive charting A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of TalkTalk Telecom Group in the previous 12 months. CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by TalkTalk Telecom Group. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from TalkTalk Telecom Group in the past 12 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by TalkTalk Telecom Group and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from TalkTalk Telecom Group within the past 12 months. L: TalkTalk Telecom Group is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: TalkTalk Telecom Group is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: TalkTalk Telecom Group is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to TalkTalk Telecom Group. Valuation Methodology: We value TalkTalk using a DCF-based SOTP analysis, using a WACC of 8.6% and perpetual growth of 0%. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Fibre wholesale pricing, bundled quadplay content from media companies/telcos may increase competition. Fixed-mobile M&A may pose potential upside risk.

14 March 2018 30 Barclays | BT Group PLC

IMPORTANT DISCLOSURES CONTINUED Vodafone Group Plc (VOD LN / VOD.L) Stock Rating Industry View GBp 207 (12-Mar-2018) OVERWEIGHT POSITIVE Rating and Price Target Chart - GBP (as of 12-Mar-2018) Currency=GBP Publication Date Closing Price Rating Adjusted Price 3.0 Target 08-Dec-2017 2.29 Overweight 2.80 2.8 16-Nov-2017 2.28 2.30 19-May-2017 2.20 Equal Weight 2.6 21-Mar-2017 2.10 2.25 03-Feb-2017 1.94 2.10 2.4 06-Dec-2016 1.92 2.25 15-Sep-2016 2.20 2.60 2.2 13-Jul-2016 2.29 2.65 01-Jul-2016 2.29 2.55 2.0 27-Jun-2016 2.09 2.65 07-Mar-2016 2.18 2.60 1.8 13-Jul-2015 2.37 2.50 Jul- 2015 Jan- 2016 Jul- 2016 Jan- 2017 Jul- 2017 Jan- 2018 10-Apr-2015 2.29 2.60 Closing Price Target Price Rating Change On 13-Mar-2015, prior to any intra-day change that may have been published, the rating for this security was Overweight, and the adjusted price target was 3. Source: Thomson Reuters, Barclays Research Historical stock prices and price targets may have been adjusted for stock splits and dividends.

Source: IDC, Barclays Research Link to Barclays Live for interactive charting CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by Vodafone Group Plc. CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by Vodafone Group Plc. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from Vodafone Group Plc in the past 12 months. J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities by Vodafone Group Plc and/or in any related derivatives. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage services, if applicable) from Vodafone Group Plc within the past 12 months. L: Vodafone Group Plc is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: Vodafone Group Plc is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: Vodafone Group Plc is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. Valuation Methodology: We use discounted cashflow and multiples based valuation methodology to derive our price target. We use WACCs of 7%-13%, and perpetual growth in Europe of ca1%. Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: Increasing competitive intensity is a downside risk, especially in Italy, Spain, Netherlands and India. On the upside, continuing cost cutting and service revenue delivery would generate material FCF growth over the next few years.

14 March 2018 31

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