NOVEMBER 2005
S T R I C T LY
P R I VAT E
AN D
C O N FI D EN TI AL
TMT SECTOR: "ONLY THE AGILE WILL SURVIVE"
In need for radical change with convergence as a catalyst
Telecoms and Media: 5 years of negative shareholder
returns…
Telecoms share price performance (rebased to 100)
Oct 97
AG I L E
" O N L Y
405
S E C T O R :
Company
TSR1
5 years
% pa
Deutsche Telekom
(16.38)
France Telecom
(23.77)
British Telecom
(11.58)
Vodafone
(11.69)
Oct 98
Oct 99
Oct 00
Oct 01
Nov 02
Nov 03
Nov 04
Nov 05
Media share price performance (rebased to 100)
605
T MT
Deutsche Telekom
Vodafone
320
220
120
20
T HE
W I LL
S U R VI VE "
920
820
720
620
520
420
France Telecom
BT Group
DJ Euro Stoxx - Telecom
Reed Elsevier
British Sky Broadcasting
DJ Euro Stoxx - M edia
505
Vivendi Universal
Reuters
TSR1
5 years
% pa
Company
Reed Elsevier
305
(2.88)
Vivendi Universal
(19.78)
British Sky Broadcasting
(14.13)
Reuters
(18.06)
205
105
5
Jul 96
Sep 97
Nov 98
Jan 00
Mar 01
May 02
Jul 03
Sep 04
Nov 05
Source: Datastream as of November 22, 2005, Bloomberg
1 Total shareholder return
IDATE
1
… despite significant operational and capital optimisation
efforts…
Telecoms and media market development (rebased to 100)
200
150
DJ Euro Stoxx index - Telecom
2001:
Bubble
burst
2002: Balance-sheet
restructuring
100
DJ Euro Stoxx index - M edia
2003: Focus on asset
optimisation
1
2
2004:Shareholder
returns
Need for a new catalyst
3
0
Jun-01 Oct-01 Jan-02 M ay-02 Aug-02 Dec-02 M ar-03
1
 Balance sheet and
liquidity issues
 Rights issues across
the sector
 Selected asset sales
T MT
Jul-03
Oct-03 Feb-04 M ay-04 Sep-04 Dec-04 Apr-05
2
 Refocus on cash-
flow generating
businesses
 “Run for cash” –
improve ROIC
 Organic de-
Jul-05
Nov-05
3
 Focus on dividends
and cash distribution
 Initiation of share
buy-back programs
 Increasing focus on
top-line growth
leveraging
 Increasing earnings
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
50
and cash flow
profile
Source: Datastream as of November 15, 2005
IDATE
2
… and a high growth environment which today has
subsided
Telecom industry revenue growth
New threats
New disruptive
Technologies
14%
12%
10%
8%
VOIP
T MT
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
6%
4%
Internet Downloads
2%
2001
2002
2003
2004
2005
Media industry revenue growth
Increasing competitive
intensity
9%
8%
7%
6%
5%
4%
MVNOs
New players
3%
2%
1%
1998
1999
2000
2001
2002
2003
2004
2005 E
2006 E
2007 E
Piracy
Source: DigiWorld, PricewaterhouseCoopers
IDATE
3
The rapidly changing consumer market is increasingly
driving the telecoms and media convergence
Yesterday
Today and Tomorrow
Voice:
 Wireless
 WiFi
Data:
 Newspaper
Video:
 Video rentals
 Theatre
 Pay TV
 Yellow pages
 Email
 Wi-max
Changing consumption
patterns are creating
threats and
opportunities
 VoIP
Data:
 Cable/DSL
 Internet portal
 Wireless data
Video:
 TVoDSL
 Hybrid set-top box
 Wireless video
T MT
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
Voice:
 Home phone
The composition of the consumer market is rapidly changing
Local
Voice
Video
Long
distance
Voice
Voice
Long
distance
Video
Data
Data
1980
Video
Traditional
Data
1995
2010
Slightly growing but increasingly fragmented market (access, distribution, content)
IDATE
4
Convergence of Network and IT infrastructure to move onto an all
IP platform is imminent
Reality
Revenues at risk
Lines lost1 (000)
% decline
2,558
4.8
Total Lines
Next gen Networks
Don't
56%
 Regulations on MVNOs
 Positioning of alternative carriers
know
Incumbents
No
Application
provider
Access
provider
Integrated
access
and
service
provider
Application
provider
Another
20%
IT infrastructure
THE PERFECT MITIGANT
 Regulations on LLU
Yes
S U R VI VE "
Criteria for revenues at risk
 PRICING OF SERVICES
Adoption in next 12 months
Access
provider
24%
 COMPOSITION OF REVENUES
AG I L E
W I LL
Voice over
traditional
lines
Outsourcing and IP transformation

VoIP
 Reduction in number of switches and
 VoIP to lead to lower voice revenues
T HE
 Voice to become an add-on service
 PC penetration
 PRICING
 Internet
 BUNDLING
penetration
 Number
" O N L Y
 Broadband
penetration
portability
 Contracts
 Data and video over IP to drive
revenues
 Next gen networks to reduce costs
through:
 Seamless migration
S E C T O R :
T MT
Mitigating the risk – Move to all IP
 Backward capability
Drivers
 Interoperability
1
simplifies network
 Improvement in operational efficiency
through sharp reduction in headcount and
resultant opex savings
 Reduction in capex by upto 10% through
de-layering of network and corresponding
increase in utilisation levels
 Build up of additional IT services:
 Networks: LAN, Firewalls, WAN
 Applications: e-Commerce, interactive
gaming, network based PVRs, VoD
 Support: Authentication, storage, digital
rights management
SBC company data
IDATE
5
The new environment is creating new dynamics and will
shape the new leaders
More risks
More opportunities
 Disruption of existing comfort
 Ability to reach adjacent
zone
markets (extended home)
 Ability to leverage
fundamental competitive
advantages (brand, reach,
scale, services, knowledge)
 New invaders
 But only for agile players
T HE
AG I L E
W I LL
S U R VI VE "
 Technological discontinuities
" O N L Y
Winners will be highly agile.
T MT
S E C T O R :
Status quo is the highest risk path.
Source: JPMorgan equity research note
IDATE
6
Over the next 3 to 5 years the European Telecom sector will be
characterised by an exceptionally high level of FCF generation
Cumulative excess cash at net debt/EBITDA of 2.25x (€bn)¹
169.0
193.3
Cumulative excess cash by operator
at net debt/EBITDA of 2.25x (€bn)¹
2008E — €bn
214.9
142.0
VOD
2010E — €bn
32.0
TEF
38.9
111.7
TEF
77.3
28.7
19.7
T MT
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
DT
FT
2005E
…
2006E
2007E
2008E
2009E
Source: JPMorgan equity research
¹ Post dividends, capex
Potential uses of excess cash
 Reduce leverage
 Return cash to shareholders
 Share repurchases
 Dividend increase
 Organic investment (Capex and Opex)
 M&A
2010E
15.0
O2
O2
11.5
Bouygues
9.4
VOD
34.7
28.8
DT
FT
20.6
O2
O2
13.7
Bouygues
12.9
BT
7.4
TNOR
9.1
Belgacom
6.8
OTE
7.5
TNOR
6.7
Belgacom
7.2
TS
6.5
TS
6.8
Swisscom
6.3
BT
6.6
OTE
5.7
Swisscom
6.1
PT
4.2
KPN
6.1
KPN
3.9
PT
5.3
TA
3.0
TI
4.2
TA
3.7
TI
0.0
Source: JPMorgan equity research
IDATE
7
The rationale for further de-leveraging, higher levels of
organic investment and higher dividends is limited
The European Telco sector is under-levered and
is likely to remain so…
… given decreasing capital requirements to finance organic
growth…
Net debt/EBITDA 2008E
Capex as % of sales—EU telco
20%
EU average 0.6x
TI
S U R VI VE "
W I LL
AG I L E
T HE
" O N L Y
S E C T O R :
14%
1.6
BT
1.4
KPN
1.4
DT
1.4
1999A
Cosmote
0.9
VOD
0.9
TEF
0.7
TA
0.6
PT
0.5
Bouygues
0.5
TS
0.3
TNOR
0.2
TEM
0.2
OTE
2000A
2001A
2002A
12%
2003A
13%
2004A
14%
2005E
13%
13%
13%
13%
2006E
2007E
2008E
2009E
12%
2010E
Source: JPMorgan equity research
Increasing sensitivity of organic-only strategies
by shareholders
… and already higher-than-average cash being returned to
shareholders
Average sector dividend yields
Utilities
EU Telco
Market
4.3%
4.2%
3.4%
3.3%
(0.2)
SCOM
(0.3)
O2
T MT
18%
2.5
FT
BCO
M
22%
(0.7)
(1.1)
EU Telco current
EU telco 2003
FTSE 350 Utilities
FTSE 100
Source: JPMorgan equity research
Source: JPMorgan equity research and Datastream as of October 26, 2005
IDATE
8
Private equity: A market-driven economic regulator
Contributions to the economy
Investment patterns
60%
40%
0%
 170 UK-based private equity firms have invested,
since 1983, over €91bn in around 26,000 companies
worldwide
Private equity’s presence is increasing as % of M&A activity
72%
78%
37%
33%
19%
11%
33%
18%
5%
World
20%
77%
46%
Europe
generate total sales of €273bn and contribute around
€34bn in taxes in the UK
21%
18%
7%
4%
Funding patterns
1993-2004
CAGR
44%
UK
S U R VI VE "
W I LL
AG I L E
T HE
" O N L Y
S E C T O R :
21%
56%
 It is estimated that private equity backed companies
T MT
100%
80%
 Restructure operations out of the public sight
Buyouts
2004
UK
volatility
Others
Development Capital
2000
 Insulate out-of-favour industries from stock market
Private equity
Venture Capital
World
an economic regulator
Europe
 The private equity industry is increasingly becoming
39.8%
Others
20%
Banks
21%
100%
80%
60%
40%
88.0%
80.0%
0.5%
12.0%
20.0%
1993
2003
2004
99.5%
20%
0%
Government agencies
6%
Pension finds
19%
Private individuals
8%
Insurance
companies
12%
Fund of finds
14%
2004: €28.5bn
Source: BCVA, ECVA/ Thomson Venture Economics, PricewaterhouseCoopers, IFSL, Schroder Investment Management, Broker reports
IDATE
9
Current available sector firepower could act as a catalyst
for further M&A consolidation …
Cumulative excess cash (€bn)1
Private equity
169.0
193.3
214.9
142.0
111.7
+
2006E
2007E
2008E
2009E
15% of
investments in
communications
sector
= c. €60bn
Source: JPMorgan equity research
1 Post dividends, at a Net Debt/EBITDA of 2.25x
Expected drivers of M&A
 Acquire technological/marketing skill-set
S E C T O R :
" O N L Y
AG I L E
 Need for scale on certain segments of the industry
 Need to consolidate operations to drive market/pricing to stability
T MT
=
>€230bn over next 3
years
2010E
T HE
W I LL
S U R VI VE "
77.3
2005E
Total available firepower
 Migrate across the value chain and gain access to the final customer
 Rebalance and optimise capital structure
 Gain full control of controlled assets (minority buyouts)
 Capitalise on regulatory hedge opportunities
Source: JPMorgan equity research note
IDATE
10
Technology is driving increasing waves of convergence and M&A
T MT
S E C T O R :
Telecoms and media: Consumer standpoint
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
Wanadoo
TI/TIMedia
Wireless
Operators
FT/
Content
+ ownership?
+
 Belgacom/ football
rights
 Movies
 Games
 Music
 News
 E-learning
 Classified
rights
 France
Telecom/Canal
plus
 Telecom
Italia/Mediaset
alliance
 Disney/ Living
Mobile
DTT
 Disney/ Minds Eye
 Universal
 e-learning
 e-commerce
Services
Technology
Ownership?
TI/TIM
Wireless
access
 Sport
TV
Broadcasting
+
FT/Orange
 H3G/ football
Content
Distribution
platform?
 Search
Music/Vodafone
alliance
 Swisscom/ Antenna
Hungaria
 BT/ Infonet
 France Telecom/
Arte France &
Telerama alliance
 Ebay/ Skype
 Microsoft/ Teleo
 Microsoft/
Mediastreams.com
 Elion/ Microlink
 British Telecom/
Sky Net Systems
 Alcatel/
Maplecroft
alliance
Public networks
Internet
Network equipment
Online
Private
networks
Manufacturer
Telecommunication equipment
DT /T-
Triple
play
convergence
 Cesky Telecom/
Microsoft alliance
Computer/
peripherals
Broadband
Voice/data
Enabling
technology
Today
Network & system management
Fixed-line
2nd wave
Communication
devices
1st wave
 Dating
 Messaging
Software
 Community
IDATE
11
In the last 6 months we have seen increasing signs of
convergence-driven M&A activity
Date
Acquiror
Target
/
Nov-05
Consideration
Rationale
Synergies Footprint Financial Convergence
Announced
Cash
1.0
Announced
Cash
Oct-05
1.5
Announced
Cash
Oct-05
31.5
Announced
Cash
Oct-05
0.4
Announced
Cash
0.4
Announced
Cash

Sep-05
3.4
Completed
Cash


Aug-05
1.6
Announced
Cash


Aug-05
1.2
Announced
Cash

Jul-05
2.0
Completed
Cash
Jul-05
0.5
Announced
Cash

Oct-05
S U R VI VE "
Status
2.4
Oct-05
(Sweden)














/
6.5
Announced
Cash


Jul-05
/
1.3
Completed
Cash


Jul-05
0.4
Announced
Stock



Jul-05
0.3
Announced
Cash



Jul-05
2.3
Announced
Cash



Jul-05
1.2
Completed
Cash

Jun-05
1.6
Announced
Cash
May-05
N/A
Completed
Stock
1.0
Completed
Cash
1.2
Completed
Cash
Note:
" O N L Y
T HE
AG I L E
Jul-05
S E C T O R :
/

Scale
T MT
W I LL
Size ($bn)
May-05
/
Apr-05








JPMorgan deals
IDATE
12
Recent M&A activity is more focused strategically v. the
2000 era
Deal type1
Financial
Ex-market
Buy-in of existing affiliate
450,000
In-market
Share buy-back
Number of deals
400,000
T MT
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
350,000
300,000
250,000
200,000
150,000
100,000
50,000
1
0
2000
2001
2002
2003
2004
2
2005
Source: Broker reports
1 Global; 2 Until July 2005
IDATE
13
The sector is providing considerable opportunities for
agile operators
Redefine market based
on customer needs
rather than product
offering
Inorganic growth
through bolt-on and
transformative
transactions
Revitalise management
and Board skill set
T MT
S E C T O R :
" O N L Y
T HE
AG I L E
W I LL
S U R VI VE "
Organic growth based
on innovation and
customer relationship
Promote financially
sound shareholder
focused business cases,
for organic and
inorganic strategy
Continued focus on cost
and cash-flow
optimisation
IDATE
14