Strategic and Financial Analysis & Valuation of TDC A/S

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Master Thesis December 2011

Strategic and Financial Analysis

& Valuation of TDC A/S

[ F i r m a a d r e s s e ]

Author: Nadja Remahl

Programme: M.Sc. in E&BA, Accounting, Strategy, and Control

Supervisor: Jesper Banghøj, Department of Accounting and Auditing Institution: Copenhagen Business School

Std. pages: 80

Characters: 160.406 Exhibits: 27

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EXECUTIVE SUMMARY

In December 2010, the former Danish state monopoly TDC A/S was reborn in the stock market. This dissertation is concerned with uncovering the theoretical value of TDC as of September 30^th 2011 with the purpose of assessing the level of the market price.

A comprehensive strategic analysis and financial analysis lay the ground for carefully forecasted pro forma statements.

On a macroeconomic level, many factors were found to represent either a risk element or opportunity element. Of the risk elements, the national Telecom regulation and eco‐

nomic growth are the most prominent. Of the opportunity elements, especially the con‐

tinuous changes in life style and technological development were found to be significant.

On the meso level, there were likewise identified several factors. The economic growth in the Telecom sector is diminishing, and combined with high fixed costs, unpredictabil‐

ity of shifts in technology platforms and regulation, the competition has intensified.

TDC’s is in a dominating position in all domestic markets in terms of market shares.

Hence, the first priority is basically to keep this position, which, however, is far from easy facing the intensified competition.

There are two main points concerning TDC’s historical performance, namely 1) that revenue growth has been negative, which mainly can be ascribed to the conditions of the industry, and 2) that both profit margin and the turnover rate on invested capital has improved significantly, as a result of seemingly successful reorganizing and cost‐cutting.

The value has then been calculated using two different direct present value models, namely Discounted Cash Flow to Equity and Residual Income model. The discount rate, i.e. the owners required return, used was 8,275%. With a most likely pro forma state‐

ment as input, the theoretical price of TDC was calculated to be 48,30 DKK per share, which is roughly 6% above the price of the valuation date.

Two alternative scenarios along with a sensitivity analysis revealed high sensitivity es‐

pecially on certain input factors. The most prominent were the cost and intangible and tangible assets forecast and the required return on equity.

The final conclusion of this dissertation is that the TDC stock is fairly priced if not slightly underpriced.

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Figures and tables

Figure 1‐1 Stock price developments ...6

Figure 2‐1 Project structure...8

Figure 3‐1 Organizational chart ...15

Figure 3‐2 Corporate strategic priorities ...20

Figure 3‐3 Revenue distribution...22

Figure 3‐4 Fixed line subscriptions ...23

Figure 3‐5 Mobile market shares...24

Figure 3‐6 Internet subscriptions...25

Figure 3‐7 Bundled services subscriptions ...26

Figure 4‐1 Growth in Real GDP per capita...30

Figure 4‐2 Households ...32

Figure 4‐3 The Investment Path...38

Figure 4‐4 Productivity ...47

Figure 4‐5 Boston Matrix...49

Figure 4‐6 SWOT...52

Figure 5‐1 Revenue Growth ...59

Figure 5‐2 Return on Invested Capital, and selected driving components...64

Figure 6‐1 Return on Equity, Historical and Pro Forma...73

Table 3‐1 Selected key figures ...20

Table 4‐1 Productivity measures...46

Table 5‐1 Restructuring costs ...55

Table 5‐2 Return on Equity and components...57

Table 5‐3 Selected Turnover Rates...62

Table 7‐1 Valuation, September 30th 2011 ...79

Table 7‐2 Sensitivity calculations, all else equal ...80

Table 7‐3 Sensitivity calculations, re and g combined ...81

Equation 1 Required rate of return on equity, re...75

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1. INTRODUCTION

In December 2010, the Danish Telecom giant TDC was reintroduced to the stock market after five years under ownership by 5 capital funds under the name NTC, and so, the TDC stock has again become a publicly available stock listed on Nasdaq OMX Nordic. As a consequence, the public and medias interest in the company has increased noticeably.¹ Allegedly, the stock is set to become a people’s stock again.

1.1 Motivation

I have been a student assistant at TDC for approximately two years. Naturally, I have hereby gained a load of knowledge about the company and the Telecom industry as a whole. Moreover, I have become fascinated with the challenges faced by a Telco such as TDC.

Likewise, I have always been fascinated with the subject valuation, in this thesis I am taking the option to work into depth within this field in order to enhance my own un‐

derstanding and extend my competences accordingly.

Furthermore, I have been enrolled in a stock program along with all other TDC employ‐

ees. This has given me the inspiration to carry out a stock valuation of this particular company.

1.2 Problem identification

IT and telecommunication is playing a still larger part in society worldwide, and tech‐

nologies are developed and improved at an almost extremely fast pace. One could argue, that telecommunication, as a business, is a natural monopoly, as a basic prerequisite of course is an infrastructure. As most people can recall, the case used to be a state of mo‐

nopoly.

Today an infrastructure is no longer a prerequisite, as a company such as TDC is forced by law to provide access to its infrastructure under certain given circumstances. Hence, the market is open and accessible to new entrants, and, of course, existing competitors at this moment are not utopia.

1 Nymark, J., & Mortensen, S. W. (12. November 2010). TDC‐boss: C20‐entre et spørgsmål om tid.

borsen.dk.

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The challenges in terms of foreseeing future trends and demands; and the risks associ‐

ated with the large investments – based on those expectations for the future – that are necessary to rip benefits in the telecom market which is characterized by intense com‐

petition is in my opinion very interesting.

In Figure 1‐1 the index on stock price for TDC, Telenor, and Telia along with the OMX C20 index for the past year is depicted.

Figure 1‐1 Stock price developments²

Before the official re‐introduction to the stock market, there where still some stocks be‐

ing traded but in such small numbers, that it was officially viewed as a non‐traded stock.

Besides the dominating position, the recent events, and the interesting challenges faced by TDC, the fact, that I am currently employed as a student assistant and through that also have become a stockholder, has made the choice of subject for this thesis very easy.

It is by all means topical to carry out a valuation of the TDC stock.

2 Euroinvestor.dk

0 5 10 15 20 25 30 35 40 45 50

70,0 80,0 90,0 100,0 110,0 120,0 130,0

Volume in millions

Index (Oktober 1st, 2010 = index 100)

TDC TDC Telenor TeliaSonera C20

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1.3 Problem statement

The environment in which TDC is operating has undergone enormous changes over the past decades. Faced by ever more intensive competition, pressure from NITA (The Dan‐

ish National Internet and and Telecom Agency) and shifts in technologies TDC must strive to free itself from the negative legacy of once being a state affair if they are to con‐

tinue to make profits because the benefits of just that position are slowly but surely de‐

teriorated.

What is the theoretical value of TDC A/S as of Septemer 30^th 2011, and hence is the stock correctly priced?

 Which external factors are of most crucial importance for the future performance of TDC, and what is the outlook on these factors?

 How intense is the competition on the main markets in which TDC is operating, and which threats and opportunities can be identified?

 What is the strategic position of TDC, and which strengths and weaknesses can be identified?

 What indications of future profitability and risk can be identified based on histori

cal performance?

 What is the underlying risk of TDC activities, and hence, which re is appropriate?

The problem statement is sought answered through a valuation based on a fundamental analysis of TDC. The objective is to find the market value of equity and subsequently the value per stock in order to evaluate the level of the stock price and provide recommen‐

dations with regard to investment decisions regarding the TDC stock.

Despite my current working position in TDC, I have chosen to write this thesis from an external analyst’s perspective. I will not be taking advantage of my position. It is my ob‐

jective, to perform a by the book case analysis, demonstrating how a number of theories, tools and techniques combined can produce a decision ground for stock investment when applied appropriately.

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2. METHODOLOGY

2.1 Structure and approach

Figure 2‐1 Project structure

The figure above shows the disposition or structure of the thesis. In the following sub‐

sections each component will be introduced.

2.1.1 Company presentation

The company TDC as well as the Telecom sector will be presented and described to a fairly detailed level. This section is important, as it provides an overall view of the case and serves as point of departure for the strategic – and the financial statement analysis.

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2.1.2 Strategic analysis

The overall aim of the strategic analysis is to provide support for estimating future earn‐

ings and growth potential in TDC. Analysis are carried out at three different levels, namely macro ‐, meso – and, micro level, respectively.

In the analysis of the macro environment the PEST (Politcal, Economic, Sociocultural, and Technological factors) model will be applied. It is both straightforward and flexible in the sense that it simply works as a framework in which I can plot the factors I find to be relevant.

In the analysis of the industry Porter’s Five Forces(Porter, 1980) will be used as a main framework. Hence, the intensity of competition is assessed by analyzing the 5 forces driving it, namely ‘threat of new entrants’, ‘intensity of rivalry among existing competi‐

tors’, ‘threat of substitutes’, ‘buyer bargaining power’, and ‘supplier bargaining power’.

In the internal analysis a number of models and theories will be applied. First, a re‐

source analysis will be carried out with the purpose of identifying key resources and assessing their value creation potential (Elling & Sørensen, 2005, p. 76). Second, apply‐

ing the Boston growth/share matrix from a technology/product perspective will assess strategic positioning in each product line(Porter, 1980, p. 362). Third, an analysis of growth strategy will be carried out with Ansoff’s growth strategies(Elling & Sørensen, 2005, p. 99) as point of departure. In the analysis, I also intend to draw upon Product Life Cycle(Porter, 1980, p. 158), and Technology Platforms(Christensen, 2009).

The chapter will be wrapped up with a SWOT matrix, presenting the key findings of the analysis in an easy to grasp manner – split by internal/external and positive/negative nature.

2.1.3 Financial statement analysis

The financial statement analysis will be initiated with adjustments to the historical fi‐

nancial statements of TDC, i.e. adjustments for changes in accounting principles, ac‐

counting estimates and transitory items, to the extent that it is found 1) relevant 2) pos‐

sible and 3) improves rather than distorts for the purpose of making them a good indica‐

tors for future earnings. The financial statements will then be reformulated for analyti‐

cal purposes, i.e. operational and financial items are separated in order to obtain NOPAT and invested capital among others.

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A comprehensive profitability analysis will be carried out with special emphasis on revenue, but also a bunch of other core value drivers, which are to be explicitly fore‐

casted. Inspired by the DuPont pyramid, ROE and ROIC is calculated and decomposed as much as necessary and feasible in order to assess the historical indications for future trends in the selected core value drivers.

2.1.4 Forecast and Pro Forma Statements

In this chapter, the findings of the previous two, combined, provide a basis. First, a num‐

ber of assumptions and methodological issues are addressed. Second, core value drivers will be carefully selected and forecasted explicitly for the years I find relevant and pos‐

sible.

Using Christian Petersen and Thomas Plenborg’s template (2010) I construct pro forma statements. It is important, that they articulate so that I know with certainty that there will be consistency between the two valuation models I have chosen to apply.

2.1.5 Valuation

The valuation will be based on two present value models ‐ the DCFE (Discounted Cash Flow to Equity holders) and the RI (Residual Income) model.

Since both models are direct, aimed at estimating the equity value, it will be necessary to calculate the required rate of return on equity (re). This is done using Capital Asset Pric‐

ing Model (CAPM) developed by William Sharpe, John Lintner and Jack Treynor in the 1960s³.

A sensitivity analysis will be carried out, assessing the models vulnerability with regard to main assumptions.

2.2 Empiricism

This thesis is written from an external investor’s point of view, and therefore exclusively based on secondary information. Information gathered from TDC’s own website, such as annual reports, press releases, company vision etc. represents a large part of the data basis for the thesis. Annual reports are generally written in a way as to shed the best possible light on the company. They are subjective but an impartial auditor, however, audits the content. Moreover, annual reports for listed companies are subjected to nu‐

3 Brealy, Myers, & Allen. (2008). Principles of Corporate Finance, p 214.

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merous regulations and requirements regarding structure and form. Considering the previously stated, I consider that the annual reports of TDC are sufficiently reliable and valid.

Throughout the industry analysis, especially, industry reports from both NITA and dif‐

ferent banks have also been used extensively. Newspaper and web articles, even if not considered highly trustworthy, are believed to be reliable. Lastly, a number of databases have been used for different purposes. These are considered highly reliable.

In addition, validity is improved further by accessing several sources to insure that the found information was reliable when relevant and possible.

2.3 Models and theoretical reflection

In this section, I will attempt to pick up on the methodological and theoretical choices presented in section 2.1 in order to discuss and assess the value and applicability in this particular thesis as compared to any other case. Also, some of the alternative mod‐

els/theories that I have considered but chosen not to apply for any given reason will be brought up for comparison.

2.3.1 Life cycle

The traditional original life cycle model is based on products, i.e. the PLC (Product Life Cycle). Life cycle analysis is also an important tool with regard to innovation, i.e. the so‐

called ILC (Innovation Life Cycle). The framework is very simple, with four stages, namely ‘introduction’, ‘growth’, ‘maturity’, and ‘decline’ and thus easy to apply. The model has been subject to some portion of criticism. As Porter(1980, p. 158) notes, the usefulness as a planning tool is limited, since stages vary considerably from industry to industry, and even within an industry. Second the suggested pattern of the four stages may not be followed – far from it. Therefore, I have chosen also to draw upon Christen‐

sen’s(2009) alternative lifecycle model.

Christensen suggests that we can speak of a CLC (Convergence Life Cycle), which is a lifecycle consisting of three stages, namely ‘emergent product market’, ‘evolving ecosys‐

tem’ and ‘changing boundaries of industry’, however it is not a start‐to‐finish frame‐

work, rather it is dynamic and continuous. Secondly, three types of business dynamics can be identified, namely ‘product market formation’, ‘product market convergence’, and

‘product market divergence’.

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Christensen’s framework is very suitable for analysis in an industry such as the Telecom sector, because the product markets very much are characterized by these business dy‐

namics. Hence, it will be useful for understanding the underlying dynamics. Seeing as it is quite comprehensive to carry out a detailed analysis and simply goes out of scope for this thesis, the notions will rather be used on a high‐level perspective.

2.3.2 Valuation models

I have chosen not to use any indirect present value model, e.g. DCFF (Discounted Cash Flow to Firm) or EVA (Economic Value Added). It is my impression that the indirect methods are actually the most commonly applied. This does, however, not mean that they are better models. In fact, if applied correctly, they too yield the exact same result as the direct models. In this case, I am really not interested in nothing but the equity value, which is why direct models are chosen. The indirect models require implementing an iteration process when calculating the WACC (Weighted Average Cost of Capital) with the found value of equity, which is not exactly straightforward.

Valuation by using multiples is an interesting alternative to the present value models.

However, I have chosen not to include this, mainly because other subjects where valued more important for inclusion, when keeping the problem statement in mind. Neverthe‐

less, I do believe, that an inclusion would have lifted the validity of the conclusions.

The two‐stage edition of the chosen models is depicted in appendix V, equation A V‐I and II.

2.3.3 CAPM

According to CAPM, the expected return on equity equals the beta of the stock times the market risk premium, plus the risk free interest rate.

The market risk premium expresses the compensation the investor requires from in‐

vesting in the market portfolio as opposed to the risk free asset, and hence, it is calcu‐

lated as the difference between return on market portfolio and the risk free interest rate. Beta represents the systematic risk, i.e. the asset specific risk.

The model is basically standard, despite relying on a number of basically unfulfilled as‐

sumptions regarding investor income taxes and time horizon just to mention a few. In lack of a perfect model, the CAPM is, however, widely accepted.

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2.4 Delimitations

Only publicly available information will be used throughout the entire thesis, as it is my objective to perform an external valuation.

The strategic analysis will be focused on the home markets, i.e. the operations in Den‐

mark. The contribution in terms of revenue from Nordic activities is considerable, which makes this a serious limitation. The explanation is straightforward; the analysis in itself is already to be more than complex considering multiple business lines and multiple product markets. Furthermore, TDC’s market position differs significantly from that in home markets, and thus, an inclusion would require double the work effort, time and space at least; also limiting the options for going in to detail with home market. Holding that against the benefits of an inclusion, the delimitation is fair. In addition, overall mac‐

roeconomic conditions and market conditions are considered to be fairly the same, which to some extend mitigates the damage.

TDC is in a unique position, as the company is in possession of nation covering fixed in‐

frastructures counting both copper and a hybrid net of fiber and coax. Hence, the com‐

pany operates in both in the Television sector and the Telecom sector, even before IPTV became an option through YouSee’s cable TV activities. Focus in this thesis will be on the Telecom sector, as this is where TDC has its main operations. IPTV lies somewhere in between the two industry demarcations, for this moment however, it will be treated as a part of the main sector in question, namely the Telecom sector.

During the period of working on this thesis, TDC acquired Onfone. As the analysis will reveal, the relevance on a strategic level is rather high, while the economic effect is very limited. Roughly said, Onfone is just another small fish eat up by TDC. I have therefore chosen not to deal with the acquisition as an independent subject in the forecasting.

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3. EMPIRICISM

3.1 Company presentation 3.1.1 History

The history of TDC can be traced all the way back to 1882, when the activities of the American company Bell, which had entered the Danish “market” a year before with 22 subscribers all located in Copenhagen, were overtaken by the new‐established Danish telephone company, Kjøbenhavns Telefon‐Aktieselskab (KTAS).

As the interest in communicating via telephone rose quite rapidly, small local companies began shooting up allover in Denmark. Around 1950 these where gathered in 3 larger companies that operated in each of their own region and in 1986 a fourth and a fifth company was established – one was to operate Southern of Jutland and the other to handle international telephone activities.

Then, on 14^th of November 1990 the Danish Parliament passed the act that enabled the establishment of a national telephone company. Tele Danmark was established and functioned as a mother company of the 5 large companies. In 1994 the company got listed on the stock exchange and thereby issued stocks amounting to 18,5 billion DKK – a historic moment as it was the largest international stock issue ever seen. The following year all the companies were merged in to one large company, which kept the name Tele Danmark.

At this point, Tele Danmark was still partially state‐owned, however it did not last for long. The telecom market was fully liberalized in 1996, and the following year Tele Danmark entered a strategic partnership with Ameritech, an American Telco, which then owned around 42 percent of the stocks. In 1998 then, Tele Danmark took over the remaining state‐owned stocks and so, the company’s position as state‐owned was his‐

tory.

In 2000 the company changed its name to TDC and at the same time big changes in the organizational structure were made and new subsidiaries were established in order to enhance customer focus. A year later, Ameritech went in to a strategic partnership with SBC, which in 2004 sold all its stocks in TDC, meaning that TDC no longer had one domi‐

nating stockholder. This changed quite rapidly as 5 large Capital Funds established Nor‐

dic Telephone Company A/S (NTC) in 2005 with the purpose of taking over the majority

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of stocks in TDC. They succeeded and thereby ended up owning 87,9 percent of the stocks.

In December 2010 NTC issued a large number of stocks for private investors in Denmark and institutional investors both in Denmark and abroad. Thereby their share of the TDC was reduced to 59,1 percent.

3.1.2 Organizational structure

TDC is a large and complex corporation, employing 10.107 full‐time employees by the end of 2^nd quarter 2011, of which employees in domestic operations accounted for 8.884.⁴

Figure 3‐1 Organizational chart⁵

A glimpse at the corporate management team, consisting of 9 people (of which 6 are men and 9 are women), gives a clear impression of a high level of competency. Hence, 7 out of 9 have a Master’s degree. With an average age of 48, the team is quite “young”;

worth noticing is the fact, that the CEO, Henrik Poulsen is in the lower end at age 44.⁶

4 TDC A/S. TDC Second Quarter Report 2011, p 5.

5 TDC A/S. TDC Annual Report 2010, p 10.

6 TDC A/S. (u.d.). TDC Company profile Corporate Management Team.

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TDC has organized its activities based on the segments that are served: Consumer, Busi‐

ness, Nordic and Wholesale. YouSee is kept separate from the other business‐units de‐

spite serving the same segments as TDC Consumer. In the following sections each main business line will be described.

3.1.3 TDC Consumer

TDC Consumer's products are fixed telephony, VoIP⁷, mobile telephony, Internet, mobile broadband, bundles, TV, and music for domestic private consumers.⁸ The unit has three subsidiaries affiliated at the end of 2010, Telmore and M1, which are both primarily fo‐

cused on mobile telephony in the low‐price segment, and then Fullrate, which provide broadband. On August 11^th2011, yet another low‐price mobile telephony company, On‐

fone, was added to the list. The president of TDC Consumer, Anders Jensen, stated in a press release on the day of the acquisition:

“Onfone has performed quite well and has built a strong position. They fit very well to TDC’s multi brand strategy. Onfone will like M1, Telmore and Fullrate continue as a separate company within the TDC group,”⁹

3.1.4 TDC Business

TDC Business’ products are fixed line telephony, VoIP, mobile telephony, Internet, mo‐

bile broadband, security, and home office.¹⁰ The unit serves the following customer segments: groups & the public sector, large enterprises and small businesses. The unit offers complete solutions, if necessary tailored, to meet business’ communication needs.

Examples of this is that the TDC, 14 December 2009 to issue a press release stating that TDC should deliver at home jobs for state employees. Already supported TDC also data network for government institutions. Segregation from the TDC Consumer has ensured that there would be emphasis on those customers special needs. TDC Business has a sin‐

gle subsidiary, Netdesign, which is specialized in customized IP communication solu‐

tions.

7 Fixed line telephony through a broadband cable.

9 TDC A/S. (2011, May 11). TDC acquires Onfone. Press release.

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3.1.5 TDC Nordic

TDC Nordic offers fixed line telephony, VoIP, mobile telephony, Internet, and mobile broadband primarily for business customers in Sweden, Norway and Finland.¹¹ TDC Nordic sells to customers via its own fiber network, which is from the former Song Net‐

works acquired by TDC. Here TDC Hosting is also to be found, which caters to the entire Nordic region. TDC Hosting provides IT and operational solutions for the enterprise, primarily managed hosting, co‐location, and shared hosting. Managed hosting means that TDC is primarily responsible for the business customers’ IT. With co‐location cus‐

tomers buy server space and become responsible of the administration and operation.

Shared hosting is services such domains, email, etc.

3.1.6 YouSee

YouSee is the former TDC Cable TV. It was given a new name in order to be marketed as a stand‐alone brand in relation to TDC. YouSee’s main product is TV via coax net. The company also provides broadband over their networks, and IP telephony. In addition, both music and films are a in the product portfolio.¹² YouSee is the largest cable pro‐

vider in Denmark.

YouSee subsidiaries Danish cable TV, which is primarily an installation business, and Real TV, which sells TV over fiber optic network.

3.1.7 TDC Wholesale

TDC Wholesale sells access for fixed telephony, VoIP, mobile telephony, Internet, mobile broadband, and TV on TDC’s networks.¹³ Customers are service providers and brand‐

partners, in addition to other network operators. Many of these are competitors of TDC on the end‐user market. Until 2009, it has primarily been on the Internet and mobile network, while fixed network constitutes a minor part. This might be about to change, though, as a consequence of new ruling by NITA regarding both coax and fiber.

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TDC is currently required to provide regulated bit stream access, access to leased lines, and access at the infrastructure level. In addition to these three obligated products, TDC offers commercial resale products.¹⁴

3.1.8 TDC Operations

TDC Operations handles the operation of all the networks, both mobile and fixed, and installation. Furthermore, the unit has a number of other cross‐functional tasks includ‐

ing IT, ‘Strategic sourcing’, and ‘Business development and logistics’.¹⁵ The networks of TDC will be presented in the next section.

3.1.9 Networks Fixed networks

TDC’s network is quite complex as it is mixing several different technologies. The fixed network covers nearly 100% of all Danish households with an Access net, which consist of a mix of three different platforms, namely a copper pair net, a cable net, and an optical fiber net. The structure can be compared to the public transportation infrastructure in a big city; trains are the backbone, with high capacity, few lines and (possibly) high opera‐

tional reliability, they pass through critical areas and together form the basis of the in‐

frastructure; busses are the access, with low capacity and many lines, they pass through almost every area and they pass by the train stations as well, i.e. providing “access”. As a part of the backbone net, we also find the distribution net, which is the one that the ac‐

cess nets connects to.

Fiber has many advantages over copper, and hence, TDC is spending a lot on expanding in that area, e.g. DONG ENERGY’s fiber net was acquired in December 2009, a net cover‐

ing the densely populated area of Copenhagen and North Zealand.

To support the access net, TDC also has a backbone‐net, which is completely fiber based, and is operated by ring structure, in order to damage control against net breakdown and such.

Mobile networks

The mobile network consists of several nets as well. Firstly, the GSM 900 ‐ and GSM 1800 network (2G technology), which covers 99% of the population, and secondly, the

14 NITA. (2011). Markedsafgrænsning Engrosmarkedet for bredbåndstilslutninger (marked 5), p 25.

15 TDC Annual Report 2010, p 49.

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UMTS network (3G technology) covering 94%.¹⁶ Recently, TDC also launched availability of LTE (4G technology) to both private and business customers, a technology promising huge advancements with regard to speed:

“There will be even better opportunities for everything from gaming and streaming direct television to downloading music and sharing videos with the rest of the world.

You can do everything you can do today, just 10 times faster and better,”¹⁷

Johan Kirstein Brammer, Director of TDC Mobile 3.1.10 Corporate strategy

TDC has stated an ambition of becoming “the best performing incumbent telecom player in Europe by 2012 measured on customer satisfaction, value creation, and employee pride, while remaining the backbone of a worldclass Danish communications infrastructure”¹⁸. It could appear as clear goals, however measures on each of these indicators can be cal‐

culated in numerous ways, thus it is somewhat blurry.

The ambition is to be achieved through a strategy anchored in the strategic platform consisting of the following four elements:

 Market leadership across all segments in domestic market

 Unmatched technology and brand platforms in domestic market

 Strong challenger positions in Nordic markets

 A sustained focus on the provision of telephony, internet, TV, data communications, and integration and hosting solutions as well as related contents and services

Furthermore, a set of strategic priorities has been listed. The list can be seen in the Figure 3‐2. It is divided into two categories, one focused on transformation and the other focused on marketing and innovation.

As can be seen, TDC is very much focused on the organization and the internal proc‐

esses, especially number five, ‘Rigorous financial discipline’ bears a clinging sound of im‐

proved efficiency / cost cutting. One could wonder why ‘Customer satisfaction’ is on the left and not the right side, apparently however, the bullet refers to a organization‐wide

17 TDC A/S. (10. October 2011). TDC opens 4G to customers. Press release.

18 TDC A/S. (2011). TDC Corporate strategy.

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initiative, called TAK¹⁹, which is aimed at directing the entire organizations focus to‐

wards customer satisfaction and value creation.

Transformational Marketing and Innovation

1. Customer satisfaction

2. Revitalization of behavior and cul- ture

3. Flexible and efficient organization 4. Focus on improved IT

5. Rigorous financial discipline

6. Landline retention 7. Mobility growth 8. “TV Everywhere”

9. Growth within business solutions 10. Improved distribution channels

Figure 3‐2 Corporate strategic priorities

Among the marketing and innovation oriented priorities, it is not surprisingly to find

‘Landline retention’ nor ‘Mobility growth’. Bullet number 8 concerns the “flexibility” of YouSee’s product portfolio; meanwhile number 9 is concerned with TDC Business and TDC Nordic, and number 10 with TDC Consumer.

3.1.11 Key figures

To get a grasp of the overall status in TDC, I have chosen to present at set of key figures from the annual report 2010 in Table 3‐1.

DKKm 2008 2009 2010

Revenue 26.917 26.079 26.167

Landline telephony 6.929 6.087 5.683

Mobility services 6.635 7.061 7.175

Internet and network 7.073 7.114 7.021

Terminal equipment, etc. 3.026 2.360 2.428

Cable TV 2.480 2.822 3.298

Other 774 635 562

EBITDA 10.054 10.536 10.772

Group profit after tax 557 2.383 3.007

Total assets, ultimo 100.005 86.423 64.786 Total equity, ultimo 31.680 27.078 20.855

FTE 11.772 11.277 10.423

Table 3‐1 Selected key figures²⁰

Overall, stability seems to be characterizing most of the trends. However, there are a few points to be noted. First, steady growth in EBITDA despite declining revenue, which in‐

dicates that costs have been cut. Second, the big drop in profit for the fiscal year 2008

19 In English: TRC, Take Responsibility for the Customer

20 TDC A/S. TDC Annual Report 2010.

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can be directly traced to a write‐down of goodwill. Third, with a drop of roughly 33 per‐

cent in both total assets (/liabilities) and owner’s equity from 2008 to 2010 the com‐

pany is clearly sizing down. This is also reflected in FTE (Full Time Equivalent) num‐

bers.From the specified revenue, especially two tendencies are clear. First, landline te‐

lephony has expectedly dropped, and second, TV has grown substantially.

3.2 The Telecom sector

The market forms are mainly oligopoly, i.e. a small number of large actors competing in a predominantly heterogeneous market. These are, besides TDC, Telia, Telenor, and Hi3G. Being the “leftover” from the governmental telecom enterprise, TDC is in deed considered the largest Telco on the Danish market, measured by both market shares and coverage degrees of the infrastructures. Besides these large corporations, small compa‐

nies are entering the market now and then.

3.2.1 General trends

Negative growth in total net revenues²¹

The aggregated revenue anno 2010 for Telco’s in Denmark was 40,6 billion DKK – slightly lower than the year before (40,7 billion DKK). Compared to 2008, however, there has been a decrease of 2,6 percent measured by fixed prices.

With the negative growth in 2009, the Danish Telecom sector ranged number 9 among 27 other EU countries – the overall drop was 5 percent, while only Finland and Holland experienced growth, high growth in fact; 23% and 17% respectively.

Fixed line has, of course, dropped heavily (10,3%, current prices). Mobile telephony shows a drop from 2008 to 2009, but then an increase 2010. This turning trend could quite possibly be the effect of smartphones having kicked in the door on the market for real.

‘Data communication and Internet’²² along with ‘Other income’²³ tells positive stories with growth of 1,1% and 2,5% (current prices). Representing 20% and 27% of the total revenue, respectively, these areas are clearly of great strategic importance.

21 NITA. (2011). Økonomiske nøgletal 2010, p 4.

22 Includes revenue from Internet services (fixed and mobile) and data transfer and use of dial‐up connec‐

tions from the provider's own end users. This includes subscription fees, MB payments etc.

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Decrease in investments and number of employees²⁴

The total number of FTE’s in the sector has been dropping every year since 2001 except for one year, i.e. 2007. Revenues have been dropping, and it seems that the Telco’s are adjusting. From 2008 to 2010 there was an overall decrease of 6,6%.

Investments, on the other hand, were actually increasing from 2004 to 2008 but from then it has dropped – in 2010 the level was below that of 2005 measured in fixed prices.

It does make sense, that it takes a little longer to adjust investments, as projects can be long running and expenses are capitalized continually when looking at a range of years.

3.2.2 Markets

The telecom market is under constant change, as new technologies are invented and continuously developed. The attractive market opportunities, therefore also shifts over time.

As defined by NITA, the sector can be divided into four main categories of business, i.e.

‘Fixed network’, ‘mobile network, ‘Data communication and Internet’, and ‘Other’.

In Figure 3‐3 the revenue distribution by business is depicted. It clearly demonstrates, that the size of each business is changing, and this to some extend interdependently.

Figure 3‐3 Revenue distribution²⁵

23 Other revenue from electronic communications networks and services in Denmark, including revenues from cable TV, IPTV, directory services, wholesale sales, rental of their own infrastructure, and other revenues that are not included in any of the other categories.

24 NITA. (2011). Økonomiske nøgletal 2010, p 1013.

38% 37% 33% 31% 27% 24% 20% 17% 15% 14%

24% 29% 32% 34% 36% 39%

40% 39% 38% 39%

11% 13% 16% 16% 17% 18% 19%

18% 20% 20%

26% 21% 19% 20% 20% 19% 21% 26% 26% 27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue distribution

Other revenue Data com. and Internet Mobile Network Fixed Network

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Fixed network, which in this case is equivalent to fixed line telephony, is diminishing quite dramatically. A positive movement within mobile network has offset this trend, far along the way, at least through the first half of the decade. In recent years, however, the other two categories have begun to take serious size again. The data communication part can partially again be explained by a shift in technology – as communication through other medias, e.g. Facebook, Skype etc., has become increasingly popular, and the revenue generated in here falls under this category. Other revenue includes impor‐

tant areas such as TV and music service. Furthermore it includes the wholesale reve‐

nues, i.e. the revenue which is generated intersectorally.

In the following section, status on each of these markets will be described shortly. As it seems reasonable, I have chosen to pick out 3 subcategories of the category ‘Other’, namely bundled services, IPTV, and wholesales.

Fixed line telephony

The market for fixed line telephony has long been in a phase of reduction revenue wise.

Mobile technology has taken over to a high degree. Furthermore, there is a shift in the underlying technology the subscriptions are based on. This can be seen in Figure 3‐4, where the total number subscriptions for both PSTN and VoIP are depicted. Broadband telephony, formally IP telephony, has gained significantly in numbers since 2005.

Figure 3‐4 Fixed line subscriptions²⁶

Seeing that the underlying TDC network, supporting PSTN is fully rolled out long ago, and therefore it contributes with a high EBIT margin combined with the fact, that TDC’s

25 Own contribution based on: NITA. (2011). Main Indicators.xls.

26 Own contribution based on: NITA. (2011). Fixed network telephony.xls.

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5

1H11

2H10 1H10

2H09 1H09 2H08

1H08 2H07

1H07 2H06

1H06 2H05 1H05

Millions

Subscriptions

PSTN/

ISDN VoIP

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market share on PSTN/ISDN was 79,7 percent as of ultimo June 2011²⁷, makes this mar‐

ket one of great importance for TDC. Besides TDC, there are three other actors with ap‐

proximately 5 percent share of the market each, namely Telia, Telenor and DLG Tele.

The shift towards VoIP is per definition not a good thing, since the market share here is at mere 39,4 percent²⁸, however when adding up those of the remaining shares, that are held by a TDC subsidiary, the total market share for the TDC group actually exceeds that of PSTN. Telenor and FirstCom with 10,3 and 3,8 percent respectively are the main competitors in this market. FirstCom is purely a B2B company.

Mobile telephony

The market for mobile telephony is still experiencing growth to some extend; the num‐

ber of mobile subscriptions per capita grew by 2,4 percent from June 2010 to June 2011²⁹, but the growth is declining as mentioned earlier.

The market is characterized by intense competition with four main actors, namely TDC, Telenor, Telia, and Hi3G, and a number of other actors of which most are subsidiaries of one of the four main, in particular TDC. In Figure 3‐5 a chart depicts the distribution of market shares measured by number of subscriptions.

Figure 3‐5 Mobile market shares³⁰

27 Appendix I, Figure A I‐I.

28 Appendix I, Figure A I‐II.

29 Source: NITA. (2011). Telestatistik første halvår 2011, p 5.

27,7%

8,3%

1,3%

6,2%

3,0%

1,9%

2,9%

17,4%

17,0%

10,0%

2,8%

Mobile market shares

TDC CBB Mobil Company Mobile Dansk Kabel TV DLG Tele Hi3G Lebara M1 Onfone Telenor Telia Telmore Others

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Out of the 7 largest, besides the main four, four are subsidiaries of TDC, which provides the TDC group with a total market share of 43,8 percent.

Internet

The market for Internet is in growth, see Figure 3‐6; and by 2010 Denmark ranked number one in the world with full 74 percent of all households and companies subscrib‐

ing for broadband through either of three access platforms; fiber, Coax, or xDSL³¹. Like mobile telephony, however, the market for fixed line Internet seems to be in a phase of diminishing growth.

The market is characterized by intense competition, quite similar to that of mobile te‐

lephony, thus, TDC is the largest actor with 35,4 percent, followed by subsidiary YouSee with 16,4 and then Telenor and Stofa (Telia) with 10,8 and 7,1 percent respectively.³²

Figure 3‐6 Internet subscriptions³³

The fairly new sub‐market, mobile broadband has grown in to a size of importance with nearly 900 million subscriptions by the end of June 2011. The chart of market shares looks remarkably similar to that of mobile telephony, only Lebara and M1 are not among the disclosed companies³⁴.

Bundled services and IPTV

The market for bundles is fairly new and carries a lot of potential, seeing that an in‐

crease in the number of products per fixed line equals pure profit, if the line is of a tech‐

30 Source: NITA. (2011). Mobile.xls.

32 Appendix I, Figure A I‐III.

33 Source: NITA. (2011). Internet.xls.

34 Appendix I, Figure A I‐IV.

0,0 0,5 1,0 1,5 2,0 2,5

1H11 2H10 1H10 2H9 1H09 2H08 1H08 2H07

Millions

Subscriptions

Fixed line internet

Mobile broadband

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nology with sufficient capacity to begin with. This is, of course not always the case, which is also why TDC managed to gain market share in this market from 0 to 62 per‐

cent during 2009 after having launched HomeTrio (TDC’s triple‐play product) in the beginning of the year³⁵.

In Figure 3‐7 total subscriptions for bundles, and the here off share of triple‐play, is de‐

picted. The development is clearly very positive with more than 50.000 new subscribers on bundled services semiannually.

The market for triple‐play is somewhat more rigid in the sense that changing TV net‐

work supplier does not come across as simple as changing Internet supplier e.g.. Moreo‐

ver, the decision is in many instances not for the individual household to make, but in‐

stead a housing – or antenna association, for instance these represented 64 percent of YouSee’s RGUs as of ultimo 2010³⁶.

Figure 3‐7 Bundled services subscriptions³⁷

The number of IPTV subscriptions in total (both stand alone and triple‐play) is almost identical to that of total triple‐play subscriptions.³⁸

Wholesales

The wholesales market is in deed very complex. The divided multi technology structure of the infrastructure presented in section 3.1.9, has made it possible to arrange the mar‐

37 NITA. (2011). Other.xls.

38 Appendix I, Figure A I‐V.

0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8

1H11 2H10 1H10 2H09 1H09 2H08 1H08

Millions

Subscriptions

Bundled services in total

Triple‐

play

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ket in a way so that the level of “in‐house” refinement can be set at different levels, i.e.

competitors of TDC, who are not in possession of a nation covering net can chose almost freely how close to the core net, they whish to plug and access. TDC’s nationwide pres‐

ence in large scale with all the three access platforms means that on these markets TDC is the sole supplier. Within mobile resale e.g. the case is different, however, as compa‐

nies like Telia, Telenor and Hi3G are very much present.

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4. STRATEGIC ANALYSIS

4.1 PEST 4.1.1 Political

Over the past decades, the telecom sector all over Europe has went from being orga‐

nized as state‐owned monopolies to liberalized markets with intense competition. Den‐

mark was one of the leading countries in getting the process of liberalization moving, by privatizing the state‐owned Telco, TDC, and subsequently deploying the Telecommuni‐

cations Act.³⁹ The purpose of The Telecommunication Act is to enhance a well function‐

ing and innovative market for electronic communication infrastructure and services for the benefit of end users.⁴⁰

There is a strong political interest in the functioning and innovativeness of services that Telco’s provide, basically because it is an important part of any nations infrastructure in general. What really kick‐started the liberalization, was the ‘Lisbon Strategy’ which European Heads of State and Government agreed upon in March 2010. The objective of the strategy was to make Europe ‘the most competitive and dynamic knowledge‐based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion’. Some strategic actions to attain the objective where outlined as well; and it was out of these the liberalization process was initiated.

The Telecommunication Act states that NITA is to conduct market‐analysis on markets that are defined based on recommendations by the EU Commission, with the purpose of assessing whether they are effectively competitive. When markets are found not to be effectively competitive, undertaking(s) with significant market power (SMP) are ap‐

pointed, and suitable obligations are imposed on them with the purpose of enhancing the level of competition, e.g. access to interconnection or price‐control⁴¹. In short, the act has forced TDC to provide access to all the fixed infrastructures to competitors at price‐

rates settled by NITA.

39 International Discussion Forum. (2002). Status Report of Denmark’s Progress in Telecom Reform and Information Infrastructure Development.

40 LOV nr 169 af 03/03/2011, Ministeriet for Videnskab, Teknologi og Udvikling, §1.

41 LOV nr 169 af 03/03/2011, Ministeriet for Videnskab, Teknologi og Udvikling, Chap. 13 and 14.

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There is currently a pending case concerning TDC in relation to the subsidiary, YouSee’s cable broadband network, which may be about to come under regulation, and thus opened up competitors⁴². The case is quite controversial, as no other country (at least within EU) has ever regulated access to cable networks. To the story comes also the fact, that in no other European country, except for Denmark, a Telco owns the former state monopoly cable network.⁴³ Therefore it generated a fiery debate, with politicians and competitors of TDC on one side, arguing that competitors of TDC too should have the option of offering high capacity internet services to their customers in the name of free competition, and TDC on the other side, arguing that it would impose unreasonable costs to adjust the cable network for such arrangement. Furthermore, competition al‐

ready existed in all three markets, that the cable network could serve, i.e. fixed line, TV and internet; only no‐one could provide it all together through one single cable.⁴⁴

Danish Competition Act and the EU law are in deed of importance for the telecom sector, as few large corporations are dominating, and hence, mergers and acquisi‐

tions/divestitures will by all means be controlled stringently. One example of this was the long‐drawn‐out process of divesting the Swiss subsidiary, Sunrise, in 2010.⁴⁵ An‐

other example is the decision made by the European Parliament to set maximum tariffs on roaming. The aim of this is ultimately to fade out any price differences, i.e. making calls within EU priced equally with domestic calls.

4.1.2 Economic

Generally speaking, the Danish economy is considered rather strong, as Denmark is one of the richest countries in the world, measured by GDP per capita. The global economy is still in a crisis, however, and so is the Danish.

In Figure 4‐1, the annual real growth in GDP per capita for Denmark, Finland, Norway, Sweden, and the EU altogether is shown. Clearly, and not surprisingly, they are all corre‐

lated to a high degree, sharing a drop from 2007 to 2009 and subsequently a rise the following year, i.e. a slighter decrease in the case of Norway.

42 Skouboe, J. (2009, December 23). Styrelsen slår til mod kabel‐tv selskab. Borsen.dk .

43 NITA. (2011). Markedsafgrænsning Engrosmarkedet for bredbåndstilslutninger (marked 5), p 66.

44 Vos, E. (17. March 2009). European Commission endorses Danish plan to open wholesale access to cable network. Muniwireless.com.

45 TDC A/S ‐ Annual Report 2010, p 7‐8.

Strategic and Financial Analysis & Valuation of TDC A/S