Deutsche Bank-European Telcos 1+1 = (O)2. Consolidation could be the answer buy 1 1.-此為英文文檔

Distributedon:11/08/202304:01:07GMT

DeutscheBank

Research

Europe

Germany

Spain

Telecommunications

WirelessServices

Industry

EuropeanTelcos

Date

11August2023

ForecastChange

1+1=(O)2.Consolidationcouldbethe

answer.Buy1&1.

+41%relative1&1outperformancevsTEFDEsincecontractswitch

Weupgraded1&1toBuyinMayanddowngradedTEFDEtoHold(seenote),arguingforupsideto1&1anddownsidetoTEFDEfromthepotentialtransferof1&1traffic.1&1hasnowoutperformedTEFDEby+41%since1&1lastweekannounceditwasswitchingitsnationalroamingcontracttoVOD.Inthisnote,weconclude(1)thereislikelystillupsidefor1&1(+43%withanetworkbuild,>230%withconsolidationorwholesale-only);(2)TEFDEshouldseeamaterialhittoEFCF,andwedowngradeourEFCF/shareestimatesby-41%and(3)consolidationbetweenTEFDEand1&1maynowbeevenmoreappealing,whilstunlockingsignificantEFCF/shareaccretionattheTEFDEandTEFlevel.Weexploreapotentialscenariointhisnote.

TEFDE(Hold):EFCFcut-41%andpricetargettoEUR1.6

WereduceourTEFDEEFCFestimatesby-41%andthisdrivesa-56%reductioninourDPSestimates.TEFDE'spoorFCFgenerationnowbecomesmorevisible,withaheadline2026EFCFyieldof6.0%(2.5%onapostspectrumbasis).AsTEFDEseekstorebuildanequitystory,consolidationcouldappearmoreattractive.WepresentascenariowhereTEFDEcouldpurchase1&1forEUR40/share,morethandoublingitsEFCF/shareandallowingTEF(parent)tobenefitfrom+46%EFCF/shareaccretion.For1&1,thiscouldunlockmoreupsidethanwouldbeofferedunderanetworkbuildscenario.PleaseemailusforanExcelfilewhichcanbeflexed.

KevalKhiroya,CFA

ResearchAnalyst

+44-20-754-18164

RobertGrindle,Ph.D.

ResearchAnalyst

+44-20-754-58490

RoshanRanjit,CFA

ResearchAnalyst

+44-20-754-52908

KeyChanges

TargetPrice3.10to1.60

Rating

-

Company

O2Dn.DE

5.00to4.60

-

TEF.MC

Source:DeutscheBank

Companiesfeatured

11AG(1U1.DE),EUR11.92Buy

Hold

TelefonicaDeutschland

(O2Dn.DE),EUR1.79

Telefonica(TEF.MC),EUR3.57Hold

Source:DeutscheBank

1&1(Buy):upsidewithnetworkbuild,wholesale-onlyorconsolidation

1&1hasanumberofoptionsandtheregulator'splansonspectrum(rulesexpected

inQ12024)maybehelpfulinshaping1&1'sthinking.Inthenote,weillustratean

improvingEFCFprofilefor1&1withanetworkbuildwhichdrives+43%upsideto

thecurrentshareprice.Webelievetheupsidecouldbemoresignificantwitheither

ashiftbacktoawholesalemodel(fullorpart),orconsolidation(>230%upside).Our

forecastsimplyaheadlineEFCFyieldof10.0%by2026andwithgrowth.

TEF(Hold):pricetargetfallstoEUR4.6;FCFkeytodebtreduction

WereduceourTEF(TEFDEparent)pricetargettoEUR4.6,reflectingalower

valuationforGermany.AlthoughtheGermanEFCFdowngradesareoffsetbyother

forecastchangesandlowerminoritydividends,theTEFequitystorystillneedsa

strongerFCFbaseandaclearerpathtodebtreduction.SeeourTEFdowngrade

fromFebruaryhere.ConsolidatingGermanycouldunlockthis.

DeutscheBankAG

IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.DeutscheBankdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.MCI(P)097/10/2022.

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09-Aug-23

2022

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11August2023

WirelessServices

EuropeanTelcos

ExecutiveSummary

1&1lastweekannounceditwillswitchitsnationalroamingagreementfrom

TelefonicaDeutschlandtoVodafone.InourMay2023report,Timeforareversal-

1&1toBuy,TEFDEtoHold,wehighlighteddownsidetoTelefonicaDeutschland

fromapotentialcontractlosstogetherwithupsidefor1&1intheeventthemarket

getsmorecomfortoverthenetworkrolloutorstartstoconsiderotheroutcomes

(switchingbacktoawholesalemodelorconsolidation).Thesharepriceshave

followedthispath(1&1up+14%sincethenews,TEFDEdown-27%).

Wearguethereismoretogoandweexpect1&1tocontinuetooutperformTEFDE.

Whilst1&1hasoutperformedTEFDEby+41%sincetheannouncement,thestock

performanceforbothstocksonaoneyearviewhasbeensimilar.Asweflaggedin

May,thebackdropwasonewherethemarkethaddisproportionatelyrewardedTEF

DEforthestickinessofshort-termwholesalerevenues(ignoringlong-termrisks

andpoorFCFgeneration)whilstpenalising1&1fornear-termnetworkrolloutdrags

(ignoringlong-termupsidefromotherstrategicoptionsortherolloutitself).We

believethemediumtermoutlook(andFCFpath)favours1&1.

Figure1:1&1vsTEFDEshareprice(-1Y)

140

120

100

80

60

40

20

0

O2D1&1

Source:DeutscheBank

Figure2:1&1offersimprovingFCF,TEFDEdeclines

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

1&1headlineEFCFyield

TEFDEheadlineEFCFyield

Source:DeutscheBank

Inthisnote,wedowngradeourTEFDEestimatesforthelossofthecontractwhich

drivesanaverageannualEFCFdowngradeof-41%from2026to2028andourprice

targetfallstoEUR1.6.WithTEFDEneedingtorebuildanequitystoryandFCFbase,

whilstcomplex,weargueconsolidationwith1&1couldbealogicalstep.Werecap

onourM&AanalysisandwearguethatTEFDEcouldmorethandoubleitsEFCF/

shareevenwitha1&1take-outpriceofEUR40(currentlyEUR12).Telefonica

(parent)wouldalsobenefitfrompotential+46%EFCF/shareaccretionandapath

tolowerleverageatatimewhenitsstrategyisforFCFtodrivelowerleverage.

1&1meanwhilebenefitsfromarangeoutoutcomes(networkbuild,switchtoa

wholesalemodelorM&A).AnimprovingFCFpathleaves+41%upsideeveninthe

eventofnetworkbuild,whilststrategicactioninvolvingatransitionbacktoa

wholesalemodelorconsolidationcouldleadto>230%upside.

Page2

DeutscheBankAG

Page3

DeutscheBankAG

11August2023

WirelessServices

EuropeanTelcos

Figure3:Summary1&1financialsandcomps(EURm)

202220232024202520262027202820292030

Shareprice(EUR)

11.9

11.9

11.9

11.9

11.9

11.9

11.9

11.9

11.9

Numberofshares(m)

176

176

176

176

176

176

176

176

176

Dilutednumberofshares(m)

176

176

176

176

176

176

176

176

176

Marketcap(EURm)

2,101

2,101

2,101

2,101

2,101

2,101

2,101

2,101

2,101

Reportednetfinancialdebt(AdjustedforLeases)

378

393

361

1,520

1,318

1,137

978

740

498

Leases

71

89

198

373

523

644

765

875

974

Reportednetfinancialdebt(IFRS16)

450

482

559

1,893

1,841

1,780

1,743

1,615

1,472

Adjustednetdebt(AdjustedforLeases)

1,363

1,445

1,485

1,520

1,318

1,137

978

740

498

Adjustednetdebt(IFRS16)

1,435

1,534

1,683

1,893

1,841

1,780

1,743

1,615

1,472

CoreEnterprisevalue(AdjustedforLeases)

3,465

3,547

3,586

3,622

3,420

3,238

3,080

2,842

2,600

CoreEnterprisevalue(IFRS16)

Summaryfinancials

3,536

3,636

3,784

3,995

3,942

3,882

3,844

3,716

3,573

Revenues

3,964

4,041

4,104

4,165

4,226

4,290

4,354

4,415

4,468

AdjustedEBITDA(adjustedforleases)

680

644

651

691

735

762

750

793

810

AdjustedEBITDA(IFRS16)

693

661

687

759

830

879

889

952

987

ReportedEBITDA(companydefinition,IFRS16)

693

661

687

759

830

879

889

952

987

EBIT

535

442

400

426

492

536

540

598

630

AdjustedNetIncome

367

302

274

277

309

344

351

395

422

AdjustedEPS

2.08

1.71

1.56

1.57

1.75

1.95

1.99

2.24

2.40

ReportedDPS

0.05

0.05

0.05

0.05

0.05

0.30

0.40

0.45

0.50

Capexexcludingspectrum

249

320

455

473

321

321

321

263

263

Capexincludingspectrum

EFCFbreakdown

249

320

455

1,673

321

321

321

263

263

EBITDA

693

661

687

759

830

879

889

952

987

Cashcapex(exspectrum)andincvendorfinancing

-249

-320

-455

-473

-321

-321

-321

-263

-263

Cashinterest

-3

-11

-8

-30

-50

-44

-39

-34

-26

Hybridcoupons(wherenotcapturedininterest)

0

0

0

0

0

0

0

0

0

Cashtaxes

-164

-129

-118

-119

-132

-147

-150

-169

-181

Minoritydividendpayments

0

0

0

0

0

0

0

0

0

Associate/JVdividendincome

0

0

0

0

0

0

0

0

0

Changeinworkingcapital

-350

-120

-30

-20

-20

-15

-10

-10

-10

Other

0

0

0

0

0

0

0

0

0

Leasepayments(ifstartingwithIFRS16EBITDA)

-13

-16

-36

-68

-95

-117

-139

-159

-177

TotalEFCF(prepensionandrestructuring)

-87

64

41

50

211

234

229

317

330

Restructuringcosts

0

0

0

0

0

0

0

0

0

Pensionrepayments

0

0

0

0

0

0

0

0

0

TotalEFCF(postpensionandrestructuring)

-87

64

41

50

211

234

229

317

330

Multiples(AdjustedforLeases)

EV/EBITDA

5.1x

5.5x

5.5x

5.2x

4.7x

4.2x

4.1x

3.6x

3.2x

EV/OpFCF(prespectrum)

8.0x

10.9x

18.3x

16.6x

8.3x

7.3x

7.2x

5.4x

4.7x

UnleveredFCFyield

-2.4%

2.0%

1.3%

2.0%

7.2%

8.2%

8.3%

12.0%

13.4%

Reportednetdebt/EBITDA(AdjustedforLeases)

0.6x

0.6x

0.6x

2.2x

1.8x

1.5x

1.3x

0.9x

0.6x

Adjustednetdebt/EBITDA(AdjustedforLeases)

0.6x

0.6x

0.6x

2.2x

1.8x

1.5x

1.3x

0.9x

0.6x

Multiples(IFRS16)

EV/EBITDA

5.1x

5.5x

5.5x

5.3x

4.8x

4.4x

4.3x

3.9x

3.6x

EV/OpFCF(prespectrum)

8.0x

10.7x

16.3x

14.0x

7.7x

7.0x

6.8x

5.4x

4.9x

Reportednetdebt/EBITDA(IFRS16)

0.6x

0.7x

0.8x

2.5x

2.2x

2.0x

2.0x

1.7x

1.5x

Adjustednetdebt/EBITDA(IFRS16)

0.6x

0.7x

0.8x

2.5x

2.2x

2.0x

2.0x

1.7x

1.5x

EFCFyield

-4.1%

3.1%

1.9%

2.4%

10.0%

11.2%

10.9%

15.1%

15.7%

Dividendyield

04%

04%

04%

04%

04%

25%

34%

38%

42%

P/E

5.7x

7.0x

7.7x

7.6x

6.8x

6.1x

6.0x

5.3x

5.0x

AdjustedP/E

5.7x

7.0x

7.7x

7.6x

6.8x

6.1x

6.0x

5.3x

5.0x

Source:DeutscheBank,companydata

11August2023

WirelessServices

EuropeanTelcos

Figure4:SummaryTEFDEfinancialsand

comps(EURm)

2022

2023

2024

2025

2026

2027

2028

2029

2030

Shareprice

1.8

1.8

1.8

1.8

1.8

1.8

1.8

1.8

1.8

Numberofshares

2,975

2,975

2,975

2,975

2,975

2,975

2,975

2,975

2,975

Dilutednumberofshares

2,975

2,975

2,975

2,975

2,975

2,975

2,975

2,975

2,975

Marketcap

5,304

5,304

5,304

5,304

5,304

5,304

5,304

5,304

5,304

Reportednetfinancialdebt(AdjustedforLeases)

-48

40

47

1,372

1,429

1,471

1,527

1,579

1,580

Leases

3,260

3,300

3,437

3,540

3,644

3,750

3,857

3,966

4,001

Reportednetfinancialdebt(IFRS16)

3,212

3,340

3,483

4,911

5,073

5,221

5,384

5,545

5,581

Adjustednetdebt(AdjustedforLeases)

1,849

1,958

1,985

1,904

1,859

1,792

1,733

1,661

1,662

Adjustednetdebt(IFRS16)

5,109

5,258

5,422

5,443

5,503

5,542

5,590

5,626

5,662

CoreEnterprisevalue(AdjustedforLeases)

6,575

6,704

6,778

6,717

6,682

6,635

6,603

6,569

6,570

CoreEnterprisevalue(IFRS16)

Summaryfinancials

9,835

10,004

10,215

10,257

10,326

10,385

10,460

10,535

10,571

Revenues

8223

8489

8618

8511

8437

8626

8816

9012

9207

AdjustedEBITDA(adjustedforleases)

1900

1901

1961

1756

1603

1635

1654

1681

1711

AdjustedEBITDA(IFRS16)

2540

2596

2683

2499

2367

2420

2460

2509

2546

Restructuringcosts

-17

-36

-36

-36

-36

-36

-36

-36

-36

ReportedEBITDA(companydefinition,IFRS16)

2523

2560

2647

2463

2331

2384

2424

2473

2510

EBIT

240

360

497

363

331

384

424

473

510

AdjustedNetIncome

249

263

359

244

200

236

262

297

324

AdjutedEPS

0.08

0.09

0.12

0.08

0.07

0.08

0.09

0.10

0.11

ReportedDPS

0.18

0.18

0.08

0.08

0.08

0.08

0.08

0.08

0.08

Capexexcludingspectrum

1,209

1,155

1,172

1,157

1,122

1,130

1,155

1,172

1,197

Capexincludingspectrum

EFCFbreakdown

1,209

1,155

1,172

2,557

1,122

1,130

1,155

1,172

1,197

EBITDA

2,540

2,560

2,647

2,463

2,331

2,384

2,424

2,473

2,510

Cashcapex(exspectrum)andincvendorfinancing

-1,209

-1,155

-1,172

-1,157

-1,122

-1,130

-1,155

-1,172

-1,197

Cashinterest

-36

-35

-35

-66

-98

-102

-105

-105

-105

Hybridcoupons(wherenotcapturedininterest)

0

0

0

0

0

0

0

0

0

Cashtaxes

-56

-80

-55

-36

-28

-34

-38

-44

-49

Minoritydividendpayments

0

0

0

0

0

0

0

0

0

Associate/JVdividendincome

0

0

0

0

0

0

0

0

0

Changeinworkingcapital

-128

-40

-25

-10

0

0

0

0

0

Other

-1

0

0

0

0

0

0

0

0

Leasepayments(ifstartingwithIFRS16EBITDA)

-640

-695

-722

-743

-764

-785

-806

-828

-835

TotalEFCF(prepensionandrestructuring)

470

555

637

450

319

334

319

324

324

Restructuringcosts

0

0

0

0

0

0

0

0

0

Pensionrepayments

0

0

0

0

0%

0

0

0

0

TotalEFCF(postpensionandrestructuring)

470

555

637

450

319

334

319

324

324

Multiples(AdjustedforLeases)

EV/EBITDA

35x

35x

35x

38x

42x

41x

40x

39x

38x

EV/OpFCF(prespectrum)

9.5x

9.0x

8.6x

11.2x

13.9x

13.1x

13.2x

12.9x

12.8x

UnleveredFCFyield

7.8%

8.6%

9.8%

7.4%

5.8%

6.1%

6.0%

6.1%

6.1%

Reportednetdebt/EBITDA(AdjustedforLeases)

0.0x

0.0x

0.0x

0.8x

0.9x

0.9x

0.9x

0.9x

0.9x

Adjustednetdebt/EBITDA(AdjustedforLeases)

0.3x

0.3x

0.3x

1.1x

1.2x

1.1x

1.0x

1.0x

1.0x

Multiples(IFRS16)

EV/EBITDA

3.9x

3.9x

3.8x

4.1x

4.4x

4.3x

4.3x

4.2x

4.2x

EV/OpFCF(prespectrum)

7.4x

6.9x

6.8x

7.6x

8.3x

8.0x

8.0x

7.9x

7.8x

Reportednetdebt/EBITDA(IFRS16)

1.3x

1.3x

1.3x

2.0x

2.1x

2.2x

2.2x

2.2x

2.2x

Adjustednetdebt/EBITDA(IFRS16)

1.5x

1.5x

1.5x

2.2x

2.4x

2.3x

2.3x

2.3x

2.3x

EFCFyield

89%

105%

120%

85%

60%

63%

60%

61%

61%

Dividendyield

10.1%

10.1%

4.5%

4.5%

4.5%

4.5%

4.5%

4.5%

4.5%

P/E

22.9x

23.3x

16.4x

25.6x

32.6x

26.8x

23.8x

20.6x

18.7x

AdjustedP/E

21.3x

20.1x

14.8x

21.8x

26.5x

22.5x

20.2x

17.8x

16.4x

Source:DeutscheBank,companydata

Page4

DeutscheBankAG

11August2023

WirelessServices

EuropeanTelcos

TEFDE'sEFCF&DPShit

TEFDEEFCFandDPSforecastsfallsharplypost1&1trafficloss

Weillustrateourforecastchangesbelow,basedonthetrafficfullymigratingfrom

2026(weassumehalfthecontributionstillremainsin2025).WeexpectTEFDE's

EFCFtofallbyapproximately41%andweexpectalargedividendcut.

nEstimatedEBITDAfalls-12%,EFCFfalls-41%.Weestimatethat1&1todaycontributesEUR450mtoTEFDE'sEBITDA,andwehadassumedmoderatedeclines,leavingalowerstartingpointin2026.ThefullremovalofthisEBITDAstreamleadstoa12%annualEBITDAdowngrade(2026-28)andthecompany'spoorFCFconversionleavesamaterialEFCFimpact(-41%perannum).

nWeassumea-56%DPScutfrom2026.WediscussTEFDE'sleverageinthenextsectionandweassumea56%dividendcutfrom2024,reflectingtheFCFdowngradesandpressureonleverage(onanIFRS16basis).WebelieveTelefonica,theparent,isalsolikelytosupportadividendcutatTEFDEasthishelpsreduceminoritydividendleakage.

nCompensatingforlosttrafficdifficult.Beyondcapexreductiontocapturelowernetworkgrowth,wedonotassumesignificantoffsets.AlthoughTEFDEislikelytowanttorecapturerevenuesthroughitsretailandwholesalebusiness,webelievedoingsocouldprovechallengingwithoutdisruptingthewidermarket(whichinturncouldimpactTEFDE'sownbackbook).Wediscussthisfurtheronpage14.

Figure5:Summaryforecastchanges(EURm)

2025

85118723-2.4%

57845995-3.5%

24992717-8.0%

11571195-3.1%

450 621-27.5%

49115127-4.2%

0.08 0.18-55.6%

2026

84378829-4.4%

56266018-6.5%

2367 2726-13.2%

11221183-5.1%

319 597-46.6%

50735307-4.4%

0.08 0.18-55.6%

2024

861886090.1%

597559670.1%

26832691-0.3%

11721179-0.6%

637 650-2.0%

348334720.3%

0.08 0.18-55.6%

2028

88169132-3.5%

58296145-5.1%

2460 2757-10.8%

11551205-4.2%

319 510-37.5%

53845803-7.2%

0.08 0.18-55.6%

2027

86268966-3.8%

57296068-5.6%

2420 2735-11.5%

11301184-4.5%

334 553-39.7%

52215533-5.6%

0.08 0.18-55.6%

2023

848984840.1%

592859230.1%

259625960.0%

11551167-1.0%

5555530.3%

33403342-0.1%

0.180.180.0%

Newrevenues

Oldrevenues

%change

Newmobileservicerevenue

Oldmobileservicerevenue

%change

NewEBITDA

OldEBITDA

%change

NewCapex

OldCapex

%change

NewEFCF

OldEFCF

%change

NewNetDebt(incleases)

OldNetDebt(incleases)

%change

NewDPS

OldDPS

%change

Source:DeutscheBank

DeutscheBankAG

Page5

Page6

DeutscheBankAG

2022

2023

2024

2025

2026

2027

2028

2029

2030

11August2023

WirelessServices

EuropeanTelcos

DivergingFCFpaths

TEFDEfacesadecliningFCFpath;1&1offersgrowth

InourMayreport,wearguedthatTEFDEwasexposedtoadecliningFCFpathand

anexpensiveFCFbasedvaluationwhichwouldbeapparentovertimeas1&1

migratedtraffictoitsownnetwork,leavingadecliningbalanceonnational

roaming.Theshiftofthenationalroamingagreementmeanstheendpointtolower

FCFwillbebetterunderstoodbythemarketandrealisedearlier.Bycontrast,we

expect1&1toseeFCFimprovementsovertime-eveninanetworkbuildscenario,

weseeupsidetoEUR17/sharefor1&1(+43%upside)andwithmorematerial

upsideintheeventofstrategicaction.WeillustratethedivergingFCFtrendsand

valuationsinthechartsbelow.

Figure6:TEFDEand1&1EFCF(EURm)

700

600

500

400

300

200

100

0

-100

-200

2022

2023

2024

2025

2026

2027

2028

2029

2030

1&1EFCF(prespectrum)

TEFDEEFCF(prespectrum)

Source:DeutscheBank

Figure7:TEFDEand1&1EFCFyields

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%

1&1headlineEFCFyield

TEFDEheadlineEFCFyield

Source:DeutscheBank

TEFDEfacesadecliningFCFpathandalowEFCFyield

nHeadlineEFCFyieldof6%.WeshowourTEFDEEFCFprojectionsinFigure

8.WhenTEFDE'ssharepricewasoutperformingearlierthisyear,themarketfocusedontheattractiveEFCFofferedin2023and2024.However,aswelookat2026andbeyond,TEFDElikelyoffersaheadlineEFCFyieldofonly6%andwithlimitedroomscopeforgrowth.WhilstwedoassumeEBITDAgrowthoncethe1&1contributionwashesout,wealsoexpectoffsetfromhigherleasecosts,highertaxesandhigherinterest(refinancingandnewdebttocoverspectrum).

nPostspectrumyieldof2.5%.Ifwelookatthevaluationonapostspectrumbasis(asspectrumhasanexpiry,soaportiongetsusedeveryyear),theEFCFyieldisanticipatedtoonlybe2.5%in2026.TEFDEEFCFyieldthereforeeithercallsforimprovedFCFgenerationorsharepricedownside.

nUnleveredFCFyieldalsolow.WeacknowledgethatpartofthepoorFCFconversionisduetotheweightofleasepayment(TEFDEsolditstowers).Thebenefitmeanwhilecomesfromlowerleverage,asTEFDEiscurrentlyclosetoanetcashposition(onaNetDebtALbasis).However,evenwhenwelookatunleveredmetrics,TEFDE'sFCFyieldremainsbelowpeerswitha2026headlineunleveredFCFyieldof5.8%(sector8.5%).

nFCFdrivesdividenddownside.WereducedourDPSforecastsby56%(toEUR0.08fromEUR0.18),toleavethecompanybelowitstargetleverageofatorbelow2.5xnetdebt/EBITDA(includingleases).OurestimatesassumespectrumspendofEUR1.4bnin2025andbalancesheetheadroomwould

450319334319324324

202220232024202520262027202820292030

EBITDA

2,523

2,560

2,647

2,463

2,331

2,384

2,424

2,473

2,510

Cashcapex(exspectrum)

-1,209

-1,155

-1,172

-1,157

-1,122

-1,130

-1,155

-1,172

-1,197

Cashinterest

-36

-35

-35

-66

-98

-102

-105

-105

-105

Cashtaxes

-56

-80

-55

-36

-28

-34

-38

-44

-49

Changeinworkingcapital

-141

-40

-25

-10

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

0

Leasepayments

-640

-695

-722

-743

-764

-785

-806

-828

-835

TotalEFCF(prespectrum)

441

ImpliedEFCFyield8.3%10.5%12.0%8.5%6.0%6.3%6.0%6.1%6.1%

Annualspectrumcharge(normalised)

-187

-187

-187

-187

-187

-187

-187

-187

-187

TotalEFCF(postspectrum)254368450263131147132137137

ImpliedEFCFyield4.8%6.9%8.5%5.0%2.5%2.8%2.5%2.6%2.6%

ReportedNetDebt/EBITDA(incleases)AdjustedNetDebt/EBITDA(exleases)

1.3x

03x

1.3x

03x

1.3x

03x

2.0x

11x

2.2x

12x

2.2x

11x

2.2x

10x

2.2x

10x

2.2x10x

Source:DeutscheBank

889

-321

-39

-150

-10

0

-139

952

-263

-34

-169

-10

0

-159

759

-473

-30

-119

-20

0

-68

830

-321

-50

-132

-20

0

-95

987

-263

-26

-181

-10

0

-177

879

-321

-44

-147

-15

0

-117

202220232024202520262027202820292030

EBITDA

Cashcapex(exspectrum)Cashinterest

Cashtaxes

ChangeinworkingcapitalOther

Leasepayments

693

-249

-8

-164

-350

5

-13

TotalEFCF(prespectrum)-87644150211234229317330

ImpliedEFCFyield-4.1%3.1%1.9%2.4%10.0%11.2%10.9%15.1%15.7%

Annualspectrumcharge(normalised)

-159

-159

-159

-159

-159

-159

-159

-159

-159

TotalEFCF(postspectrum)-246-95-118-110527570158171

ImpliedEFCFyield-11.7%-4.5%-5.6%-5.2%2.5%3.6%3.3%7.5%8.1%

11August2023

WirelessServices

EuropeanTelcos

behigherintheeventofspectrumprolongationratherthananauction.

However,thecompanywouldstillneedtoplanforspectrumspendafew

yearslater,evenifitdidn'ttakeplacein2025.

Figure8:TEFDE:summaryEFCF,leverageandyields(EURm)

637

555

1&1offersexposuretoFCFgrowthandEFCFyieldimprovements

Weexpect1&1meanwhiletofacetheopposite,withFCFcurrentlyimpactedbythe

networkrolloutbutwewouldexpectatleastsomesavingsfromtrafficmigrating

to1&1'sownnetworkovertime(weassume50%oftrafficison-netby2028).We

illustrateour1&1FCFestimatesinthechartbelowandourestimatesimplythat1&1

isleftonapathtodoubledigitEFCFyieldsonaheadlinebasis(or8.1%by2030on

apostspectrumbasis,whichcomparesto2.6%atTelefonicaDeutschland).

Themarket'smainfocusuntilrecentlyhadbeenonTEFDE'snear-termFCF

generationbutwiththeendtothenationalroamingshiftingthefocustothe

mediumterm,wenoteourforecastsimplythat1&1andTEFDEwillgenerate

similarheadlineEFCFby2029.Thedifferenceinmarketcap(1&1'smarketcapis

60%lowerthanTEFDE's)leaves1&1'sEFCFyieldmoreattractiveandwitha

growinggapbetweenthetwocompanies(Figure7).

Figure9:1&1:summaryEFCF,leverageandyields(EURm)

687

-455

-8

-118

-30

0

-36

661

-320

-11

-129

-120

0

-16

0.8x06x

0.7x06x

ReportedNetDebt/EBITDA(incleases)AdjustedNetDebt/EBITDA(exleases)

0.6x06x

2.0x15x

2.0x13x

2.2x18x

1.5x06x

1.7x09x

2.5x22x

Source:DeutscheBank

DeutscheBankAG

Page7

11August2023

WirelessServices

EuropeanTelcos

Consolidationupside

Positivefor1&1,TEFDEandTEFevenwithalarge1&1premium

Historytellsusthatoperatorswhichhaveembarkedonnewnetworklauncheshave

oftenreevaluatedtheirpositionandpursuedin-marketconsolidation.Forexample,

IliadofferedtobuyVodafoneItalylastyear,Tele2NLcombinedwithT-Mobile,Three

UKisintalkstomergewithVodafoneUKandMasmovilhasreachedagreement

withOrangeinSpain.

WeseesimilarmeritsforapotentialdealinGermany,andinour1&1initiation,Deep

dive:Consolidationcouldbetheanswer(October2022),wearguedanendgame

couldbeaconsolidationbetween1&1andTEFDE(or1&1withanotheroperator).

FromtheTEFDEperspective,thiscouldbeawayofdeliveringmuchneeded

improvementsinEFCF/share(whichisnowevenmoreimportant)andfromthe1&1

perspective,therecouldbeanopportunitytocreatemoreupsidethanwouldbe

achievedbythenetworkrollout.Telefonica(asparentofTelefonicaDeutschland)

wouldalsoseebenefitsfromEFCF/shareaccretionandapotentialpathtolower

leverage.Inthissectionwereviewapotentialdealstructureandbeforelookingat

ascenario,wenotethefollowing:

nSpectrumauctions.Consolidationhasattimeshappenedaheadofspectrumauctions,asthelargeroperatorslikelywanttoavoidcompetitivebiddingintheauctionandsmalleroperatorsmayotherwisefacelargeoutlaysinanauction,unlessspectrumisringfencedforthem.Forexample,Tele2andT-MobileNetherlandsreachedanagreementtomergetheirDutchassetsin2018(oneyearbeforethespectrumauctionwasmeanttotakeplace),andeveninGermany,TEFDEandE-Plusreachedadealin2013(twoyearsaheadofanauction).Intheeventtheregulatoristhinkingaboutanauctionratherthanprolongation,therecouldbeanincentivetoconsiderconsolidationaheadofthis.

nRegulatoryapproval.Regulationhasbeenthekeybarriertoin-marketdealsinEurope,althoughtheT-MobileandTele2Netherlandsdealwasapprovedandwithnoremedies.Thereareunlikelytobeanyobstaclesinfixedbroadband(combinedmarketshareof17%)andintheeventofacombinedmobilemarketshareofover40%beinganissue,TEFDEcouldproposetodisposeofpartofthesubscriberbase.Whilstregulatoryclearanceisbynomeanscertain,TEFDEcouldtryandpersuaderegulatorsbykeepingthe1&1brandandtheexistingpricepoints.Initscurrentform,1&1maybelesslikelytopushlargedatabundlestoitssubscriberbase,andTEFDEcouldarguethatitisinabetterplacetopushthesecustomersupthedatacurve,asgovernmentscareaboutdigitalisation.

nDealstructure.Thereareanumberofwaysinwhich