Deutsche Bank Markets Research Emerging Markets Company Date Bosnia-Herzegovina 15 January 2018 Serbia United Group Slovenia Vivek Khanna HY Corporate Credit Research Analyst Media, Cable & Satellite (+44) 20 754-72905 Telecommunications [email protected] Chaitanya Terala, CFA Initiating with CreditSell on Fixed Rate Research Associate [email protected] Notes, relative value not attractive Recommendation Summary We initiate on the €4.375% Sr. Sec ’22 and € 4.875% Sr Sec '24 with a CreditSell recommendation and on the € Sr Sec FRN ’23 with a CreditHold recommendation, on valuation grounds as we don’t believe a 3-4% return is attractive considering the acquisitive nature and FCF profile. We recognize that management has successfully integrated a number of acquisitions and has delivered on the identified synergies and we are confident they will deliver on Figure 1: Outstanding Issues the CME acquisition savings. While we recognize the asset cover, we don’t Instrument Px YTW Z-sprd Rec. believe the current price levels reflect the limited de-leveraging and see a few (ask) points of downside. €4.375% Sr Sec '22 104.5 2.7% 289 C-S Leverage levels higher on M&A and PIK push-down € Sr Sec FRN's '23 101.9 0.2% 23 C-H Leverage levels of 5.2x net debt / LHA EBITDA including synergies and 5.8x excluding synergies increased from c. 4.0x cash-pay leverage pre the €4.875% Sr Sec '24 104.75 3.7% 349 C-S Source: Deutsche Bank, Bloomberg Finance LP recapitalization. The increase was driven by the refinancing of the outstanding PIK note at the operating entity (+0.9x) and on the back of M&A. On July 9, 2017, the company announced the acquisition of CME Croatian and Slovenian Figure 2: YTC Table - € 4.375% Sr TV Assets for a total consideration of €230m, equivalent to an EV/LTM EBITDA Sec Nts' 22 (offer price: 104.5) multiple of 13.9x, and 5.5x, when adjusting for synergies (€25m). The transaction is subject to regulatory approvals and €200m of the proceeds Call date Call price YTC spread raised from the bond deal are being held in escrow until May 2018 (par return 1-Jul-19 102.188 2.7% 326 of €200m 4.375% Sr Sec '22, if transactions don’t close). 1-Jul-20 101.094 2.9% 342 Asset cover – need to adjust accounting 1-Jul-21 100.000 3.0% 334 As a potential comparable, Digi Communications (RCS&RDS, last closing price: 1-Jul-22 100.000 3.3% 347 RON38) trades at an EV/ 2017E EBITDA of 5.6x and EV/ 2018E EBITDA 5.2x. Source: Deutsche Bank, Bloomberg Finance LP EV/OCF trading multiples are 10.5x and 8.7x, respectively. At face value this would suggest limited asset cover at our issuer. However, when adjusting Digi Communications EBITDA to align accounting for content costs, we believe Digi Figure 3: YTC Table - € 4.875% Sr trades on 6.6x 2017e and 6.2x 2018e EBITDA multiples and 24x and 17x on Sec Nts' 24 (offer price: 104.75) OCF multiples. Call date Call price YTC spread Leading TV channels in respective countries 1-Jul-20 102.438 3.8% 431 Pop TV in Slovenia and Nova TV in Croatia are leading TV Groups in their respective countries. The POP Slovenia portfolio includes five channels with 1-Jul-21 101.219 3.7% 410 POP TV being the flagship channel with a 81% TV ad market share which 1-Jul-22 100.000 3.7% 389 historically was transmitted free-to-air).The Nova Croatia portfolio includes 4 1-Jul-24 100.000 4.0% 393 channels including the flagship Nova TV with a 54% TV ad market share. Both Source: Deutsche Bank, Bloomberg Finance LP groups include numerous internet portals and VOD/subscription systems. Update on regulatory approvals In Slovenia, they have received a positive decision from the Ministry of Culture by which the transaction was de facto approved while they are still waiting Key Risks: Positive risks include greater approval from the Slovenian national competition authority which is expected pricing power and customer growth and soon. However, in Croatia, the company faced a setback as the Croatian Agency for Electronic Media blocked Nova TV takeover, citing restrictions on lower capital intensity. Negative risks include cross ownership considering its existing Total TV asset with 30K subscribers. value destructive M&A, declining margins, On the Q317 call, management mentioned that they are reviewing potential inability to increase prices, increase in options and on Jan 12, 2018, announced the disposal of Total TV. The CME assets purchase agreement is valid only if both assets receive approval. content cost and higher capex levels _____________________________________________________________________________ ___________________________________ Deutsche Bank AG/London Distributed on: 15/01/2018 12:54:27 GMT DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 7T2se3r0Ot6kwoPa 15 January 2018 HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group Opportunistic vertical integration Strengthening the asset mix + convergence Acquisition of Media Assets in Croatia and Slovenia On July 9, 2017, United Group announced an agreement to acquire Figure 4: EBITDA split (pre/post) broadcasting operations of Central European Media Enterprises (CETV) in 35.0 Croatia and Slovenia for €230m and the transaction is expected to close by 30.0 30.0 year-end. Acquired assets include POP TV in Slovenia and Nova TV in Croatia, 25.0 the most watched channels in their respective countries (All-day audience 20.0 21.8 15.8 market share of 42% and 30%, respectively), will enhance the pay-TV channel 15.0 7.6 portfolio and help differentiate the product offering in the long-term. During 10.0 the year, other acquisitions include Fight Channel Croatia (€2.5m), and Cable 5.0 8.2 8.2 Target (€10m). 0.0 LTM Jun 17 PF LTM Jun 17* CME - Croatian Assets CME - Slovenia Assets Valuation (pre and post synergies) We estimate the assets were are acquired for 9.2x EV/EBITDA (LHA incl. IFRS Source: Deutsche Bank, Company data adj) and 5.5x when adjusting for synergies. In context, LHA EBITDA of the *PF adjustments for the incremental carriage to be added from acquired assets was €25m (incl. IFRS adj.) and management has indicated 2019 on a run rate basis at Slovenia €16.5m in synergies. The synergies are a combination of both revenue, related to the introduction of the carriage fees (€14m), and cost synergies of €2.4m, equivalent to c. 3% of operating cost base of the acquired assets. Refinancing of existing Notes, PIK Facility, and fund M&A To fund the acquisition, United Group refinanced the entire capital structure. As highlighted in our initiation report on Nov 28, 2016, the company also refinanced the existing PIK facility through debt at the operating entity. The company issued €1.35bn of new debt and redeemed the existing €775m 7.875% Sr. Sec Nts ’20, credit facilities and €230m of PIK facility. The company also part funded the CME assets acquisition (€200m) with the remaining €30m to be funded from other sources of liquidity at the time of closing (€100m RCF and €80m Serbian Facilities undrawn). Acquisition of Cable Target for €10m will also be funded from the available liquidity. Leverage We have shown leverage levels of the old and new Bonds structure with and without synergies related to UG historic acquisitions and those related to the proposed CME acquisition. It has always been our base case that a re- financing of the 2020 Notes will result in a re-leveraging event with the push down of the legacy PIK loan. M&A has led to slightly higher pro-forma leverage level. Page 2 Deutsche Bank AG/London 15 January 2018 HY Corporate Credit,Media, Cable & Satellite,Telecommunications United Group Figure 5: Leverage Levels – Old and New Capital structure Jun 30, 2017 PF Sep 30, 2017* Net Lev. Net Lev. Net Lev. Net Lev. LHA LHA LHA LHA (incl. Syn) (excl. Syn) (incl. Syn) (excl. Syn) New RCF '22 (€100m, Super senior) - 96 New Serbian RCF '20 (€20m and €60m, unsecured) - - Existing RCF 121 - € 7.875% Sr Sec Nts '20 775 - € 4.375% Sr Sec Nts '22 - 575 € (E+4.375%) Sr Sec FRN's '23 - 450 € 4.875% Sr Sec Nts '24 - 325 Capital leases 10 8 Other Debt 7 7 Total Debt 913 4.0 x 4.0 x 1,461 5.2 x 5.8 x PIK 175 Total Debt (incl. PIK) 1,088 4.8 x 4.8 x LHA EBITDA (excl. Synergies) 221 248 Synergies and increase in carriage fees 3 27 LHA EBITDA (incl. Synergies) 224 275 Source: Deutsche Bank, Offering Memorandum, Company data PF adjustments for the Refinancing and the acquisition of CME’s Croatia and Slovenia assets. Also includes adjustments for the use of RCF to fund the remaining €30m of the acquisition price of CME assets, acquire Cable Target(€10m) and deferred payment for Fight Channel In addition to United Group’s cable roll-up strategy, the recent CME TV assets not only adds vertical integration and diversifies the business further, but also leads to a significant synergy potential which we have detailed below. Figure 6: Synergies Breakup Acquired CME Stations estimated synergies and other adjustments 25.0 of which, accounting adjustments (US GAAP to IFRS) 8.5 of which, impact of additional carriage fees 14.2 of which, estimated cost synergies on a PF basis 2.4 Acquired Cable assets 3.7 of which Cable Target acquisition estimated synergies on a PF basis 0.6 Of which Ikom expected synergies (as of Q217) 3.1 Total Synergies 28.7 Source: Deutsche Bank, Offering Memorandum, Company data Structural considerations – largely unchanged As was also the case in the legacy notes, the subsidiaries in Serbia, Macedonia, Croatia and Montenegro will not guarantee the obligations.