SG European Cable Sector initiation (Alejandro Nunez 201104)

Macro Commodities Forex Rates Equity Credit Derivatives

21April 2011

Credit

Initiating Coverage

www.sgresearch.com

Europe

DIVERSIFIED TELECOM SERVICES European Cable’s gilded age: pipe dreams no longer

Positive Event: In this report we initiate coverage of the European cable sector with an analysis

of the sector and its principal players, Kabel Deutschland, ONO, Telenet, Unitymedia

and Virgin Media, as well as providing an update on UPC Holding.

Analysis: A confluence of favourable secular and sector cycle factors support a

positive operational and financial outlook for the European cable sector. The secular

trends supporting positive operating momentum in the near to medium term are: rising

Internet usage, higher bandwidth requirements for video and other data-intensive

applications, growth in Internet-connected devices, and convergence in fixed-mobile

media and communications. These trends coincide with operators' deployment of higher

speed next-generation networks, an increasing focus on communications services

bundles, capital expenditure focused on customer acquisitions, and even benign neglect

from incumbents in terms of fibre network rollouts. Financially, European cable operators

look well placed to reap a long-awaited cash flow harvest, in our view, driven by

declining proportional and increasingly flexible capital expenditures, EBITDA and

operating cash flow increases due to high operational leverage, and moderately

declining leverage. We don’t envision any dramatic releveraging risk for most players in

the sector, and we note that the sector’s more geared companies clearly articulate their

higher leverage policies. M&A risk is on the rise, however, although we consider it to be

manageable for most operators.

SG Sector opinion: We are initiating coverage with a Positive opinion. From a

fundamental perspective, we are most positive on Kabel Deutschland, Virgin Media,

ONO and Telenet. From a relative value perspective, we most favour ONO and Nara

bonds, Unitymedia 2019s, and the UPC € 9.75% 2018 and 8.375% 2020s. Although

VMED is now approaching investment-grade territory, we also see value in VMED £

2019s and $ 2016s on the back of its solid execution and good operating momentum.

(Initiating coverage)

Credit Spread Evolution

Source: Markit

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

Societe Generale (‚SG‛) does and seeks to do business with companies covered in its research reports. As a result, investors should be

aware that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a

single factor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE

ANALYST(S) CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS

400

500

600

700

800

900

1000

1100

1200

Jan-

10

Feb-

10

Mar

-10

Apr-

10

May

-10

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr-

11

iBoxx HY Media iBoxx HY Telecoms

This document is being provided for the exclusive use of ALEJANDRO NUNEZ at SOCIETE GENERALE

http://www.euromoney.com/FixedIncome2011

Diversified Telecom Services

21April 2011

2



21April 2011 3

Contents

4 European cable’s gilded age: pipe dreams no longer

15 KABEL DEUTSCHLAND

16 Network

16 Strategy

18 Competition and consolidation

20 Debt summary

22 ONO

23 Network and markets

29 IPO and refinancing

32 TELENET

33 Network and market

36 Strategy

42 UNITYMEDIA


45 Strategy


51 UPC HOLDING


54 Strategy


59 Debt summary

61 VIRGIN MEDIA

62 Network and markets



21April 2011

4

European cable’s gilded age: pipe dreams no

longer

We are constructive on the European cable sector in the near to medium term as we believe

the sector’s business model is now coming into its own after years of network investments,

tough competition and the recent credit crisis. The sector is benefitting from structural, market

and financial trends which position the sector very favourably vis-a-vis the competition –

incumbent telecoms, satellite pay-TV, alternative telecoms, and free-to-air broadcasting

operators. The structural trends are driven by a constant, secular rise in bandwidth demand in

order to facilitate a myriad of data-hungry applications (High-Definition TV, high-speed

broadband, high definition internet video, smartphones and PC tablets, amongst others).

Although the majority of today’s European broadband customer base’s bandwidth demand

requirements to date have largely been satisfied by the bandwidth provided by operators’

products in the 2-25 Mbps range, the proliferation of data-intensive and video-centric devices

in the home drawing on the same bandwidth source are raising the bar for required

bandwidth. The technological superiority of hybrid fibre-coaxial cable networks compared to

copper-based infrastructure is significant, indisputable and plays well into this structural trend

for ‚fatter pipes‛. This technological advantage can only be matched by fibre optic cable (and,

specifically, FTTH or Fibre To The Home) which most European telecom incumbents have

been slow to embrace and reluctantly at that. The rollout of DOCSIS 3.0 across the majority of

European cable networks in 2010-11 has accentuated cable networks’ speed and functionality

advantages over copper-based xDSL networks which support their marketing and growth

efforts. On the basis of estimated negative or low return payback for incumbents’ fibre

network development and their own announcements of moderate buildout plans, we don’t

foresee an accelerated fibre network rollout in the next few years. Thanks to this technological

edge, cable networks’ marketing campaigns have been able to lead with high-speed

broadband offers, often as part of value-priced bundles, at price points lower compared to

incumbents’ xDSL offers. And, contrasted with the incumbents’ and unbundlers’ advertised

speeds, cable networks’ actual realized speeds are often close to, if not higher than, their

advertised speeds due to their lines’ higher quality, reliability and lower signal loss despite

distance from the local exchange.

European (and global) cable networks’ advantages underscore their push for service bundles

which can increasingly maximize their networks’ robust capabilities, not only for high-speed

broadband but also for interactive pay-TV accessed through advanced set-top boxes (such as

TiVo) and Voice-over-IP (VoIP) telephony. Multi-play services penetration growth, coupled with

conversion to digital (digitalization) of basic analog cable TV customers, have helped drive

total revenue, Average Revenue Per User (ARPU), operating margins and free cash flow

growth over the last three years. As cross-selling and up-selling services, and especially

higher margin high-speed broadband and telephony services, generally have higher gross and

operating margins for cable operators than pay-TV services, there is a clear rationale

underlying bundle offerings. And, as trends in non-linear, open-sourced video content,

distributed through Over-The-Top (OTT) channels, increasingly transform the way video is

sourced, transmitted and consumed we believe cable’s position as the medium which offers

the widest, most multi-functional pipes will become even more entrenched. In this vein, we

don’t see OTT as a near-term or even medium-term threat to cable operators as we believe

most will find a way to incorporate it into their pay-TV platforms as a defensive response to

third-party OTT content providers.



21April 2011 5

Financially, operating leverage – which was the sector’s Achilles heel a decade ago amidst

debt-financed network overbuild - is ironically today its strength. This is especially true for

products, such as broadband and telephony, where there are no significant marginal

operating costs (such as programming costs for pay-TV) and gross margins can therefore be

in excess of 80%. As most European cable operators have completed the majority of their

network expansion and improvement investments, their capex budgets are now largely

focused on success-based capex, or spending related to customer acquisitions (such as for

set-top boxes). This not only reinforces capex discipline but more importantly grants

operators a degree of cash flow flexibility. How European cable operators choose to distribute

that cash flow is another matter.

The relevant credit risks that we foresee for the European cable sector are shareholder-

oriented event risk, especially in the form of releveraging for increased dividends and share

repurchases, M&A, and, to a lesser extent, regulatory risks and the potential for accelerated

fibre rollout by telecom incumbents. While we believe European cable networks are well

placed to face their competitive challenges and will continue to generate significant cash flow

in the medium term, we view their financial and investment policies as being the key drivers of

credit quality during at least the next two years.

The network edge

Although the speed, reliability and overall quality of European cable operators’ DOCSIS 3.0

networks has been often been touted, it should nevertheless not be underestimated. Without

overstating the topic, we’ll highlight two main points: 1) not only are European cable networks’

current speeds and reliability superior to those of their xDSL based competitors but their

infrastructure can also be scaled flexibly and economically to provide speeds of at least 5x

current speeds, and 2) European cable operators are poised to maintain this competitive edge

for the foreseeable medium-term future as their main competitors, European incumbent

telecom operators, will continue to slowly and selectively implement fibre networks where they

see the potential for at least marginal or breakeven returns on investment. To highlight the first

point, we refer to the table below outlining illustrative bundle offers and pricing from various

major European cable operators. Compared to incumbents’ xDSL, copper-based broadband

services, which are typically advertised at speeds of 20-40 Mbps, the cable networks’ mid-tier

broadband services offer 20-50 Mbps while their higher speed broadband services offer

speeds of 100-120 Mbps (typically at a €10-25/month premium).

Selected European cable bundle package prices (as of 01 March 2011)

Source: Company data (as of 1 March 2011)

Company Country

Cost (€/sub. per

month) Package description Comments

Kabel Deutschland Germany € 12.90 6 MB/s + phone line Plus analog TV fee; + €7/mo after 1st yr.

€ 17.90 6 MB/s + phone line + flat-rate phone Plus analog TV fee; + €10/mo after 1st yr.

€ 19.90 32 MB/s + line + flat-rate phone Plus analog TV fee; + €10/mo after 1st yr.

Unitymedia Germany € 25.00 32 MB/s + basic digital TV + flat-rate phone Plus €17.90 for analog TV; + €5/mo after 1st yr.

€ 30.00 32 MB/s + premium digital TV (HDTV) + flat-rate phone Plus €17.90 for analog TV; + €5/mo after 1st yr.

€ 40.00 64 MB/s + 53 digital channels+ flat-rate phone Plus €17.90 for analog TV; + €10/mo after 1st yr.

UPC Netherlands € 40.00 25 MB/s + phone + 50 TV channels + €5/mo. after 1st 4 months

€ 45.00 60 MB/s + phone + 50 TV channels + off-peak calls + €10/mo. after 1st 4 months

€ 55.00 60 MB/s + 90 TV channels + off-peak calls + €10/mo. after 1st 4 months

Ziggo Netherlands € 42.00 2 MB/s + 30 analog + 65 digital channels + phone line

€ 52.00 22 MB/s + 30 analog + 65 TV channels + phone line


Zon Portugal € 31.00 6 MB/s + 15 TV channels + off-peak calls

€ 42.60 12 MB/s + HD TV + off-peak calls

€ 52.80 30 MB/s + HD TV + off-peak calls

ONO Spain € 24.90 6 MB/s + unlimited national calls €35.90 after 1st year; + €16.52 for line rental

€ 29.90 30 MB/s + 70 digital channels + unlimited national calls €45.90 after 1st year; + €16.52 for line rental

€ 29.90 50 MB/s + 70 digital channels + unlimited national calls €50.90 after 1st year; + €16.52 for line rental

Virgin Media U.K. £20.00 (€23.40) 10 MB/s + 65 TV channels + off-peak calls +£13 for phone line; half-price for 1st 6 months

£31.50 (€37.00) 50 MB/s + 65 TV channels + off-peak calls +£13 for phone line; half-price for 1st 6 months

£47.56 (€55.50) 30 MB/s + 160 TV channels + off-peak calls +£13 for phone line; half-price for 1st 6 months



21April 2011

6

Operators such as Kabel Deutschland (KD) have launched aggressive broadband promotions

offering their 100 Mbps service, for example, at a comparatively low €19.99/month for the

initial promotional year in the hopes that the services’ inertia will see customers roll the service

into at least a second year during which it would be charged at double the rate of

€39.99/month. In fact, given that most operators have completed or are close completing their

DOCSIS 3.0 network upgrades, at least 75% of their network footprints are capable of offering

speeds of at least 100 Mbps.

European cable operators DOCSIS 3.0 network development

Cable operator Network status

Kabel Deutschland 45% of network on DOCSIS 3.0 offering 100 Mbps; 100% rollout targeted for

summer 2012

ONO 73% of footprint DOCSIS 3.0 enabled offering at least 50 Mbps; 100% coverage

target for mid-2011

Telenet 100% of network upgraded to DOCSIS 3.0 offering speeds of up to 100 Mbps

Unitymedia 81% DOCSIS 3.0 footprint coverage offering speeds of 128 Mbps; 90-100%

coverage target by end-2011

UPC Europe 90% of footprint has access to 60-120 Mbps DOCSIS 3.0 speeds

Virgin Media DOCSIS 3.0 rollout nearly fully complete, offering 100 Mbps; 100% footprint

coverage by end-2011

Ziggo 100% of network DOCSIS 3.0 enabled offering speeds up to 120 Mbps

Source: Company data, SG Cross Asset Research

Furthermore, we highlight that cable operators’ actual speeds delivered typically are close to,

if not equal to, those advertised whereas the same is not generally the case for incumbents’

and alternative operators’ DSL-based services. We highlight the U.K. regulator’s 2010 data

demonstrating that BT’s ADSL broadband speeds typically achieved approximately 50% or

less of their advertised speeds (of 10–20 Mbps) whereas Virgin Media’s comparably

advertised broadband services typically achieved over 90% of their advertised speeds. In the

absence of similar data from other European markets, we would nevertheless note that as the

underlying DSL and cable technologies are essentially the same in other European markets,

we believe the BT/Virgin Media example above is illustrative of advertised vs. actual

broadband download speeds for other European DSL and cable operators.

The incumbents’ counter-attack has been reluctant and sluggish, in part due to economic

considerations and partly due to protracted discussions regarding regulatory frameworks.

Most have opted for a compromise route implementing some variation of xDSL technology

which could be described as ‚DSL plus‛. Most of these network upgrades offer speeds 3-5x

faster than ordinary ADSL speeds (i.e., 25-40 Mbps) and so satisfy current and near-term

bandwidth demand levels without incurring capex into the billions of euros. Albeit an

improvement over regular ADSL and useful for inclusion in bundles and perhaps some level of

IPTV, these technologies go only halfway toward meeting cable’s DOCSIS 3.0 speed

challenge. Their main drawbacks are that they are not future-proofed against rising bandwidth

demand and their actual delivered speeds are inversely proportional to the distance between

customer premises’ distance from the local cabinet typically tapering significantly beyond 1

km. Only FTTH is genuinely on the same (or better) technological level as DOCSIS 3.0 speeds.

Without significant government subsidization of fibre network deployment, as there has been

in Japan and Korea, we believe the cable networks’ competitive threat has goaded

incumbents into formulating some sort of strategic response. In this respect, most

incumbents’ fibre network plans are and have not been proactive. Although the take-up of

European cable networks’ higher speed broadband services to-date has been modest, at

around 10% of the addressable market within the first 6-12 months post-launch, we believe it

is still early days to gauge whether there will be a broader mass-market appeal for these types

of services. What we can observe, however, is that directionally the trend certainly is toward



21April 2011 7

higher bandwidth needs, such as HD video, for an increasing number of data-intensive

devices, both in the home and for mobile. So, the upshot is that cable networks are well-

invested and prepared for that inevitable rise in bandwidth demand to come over the next two

to three years.

W. European broadband penetration (2009) W. European pay-TV penetration (2009)

Sources: Screen Digest Source: Screen Digest

Western European average broadband download and upload speeds

Source: Speedtest.net, SG Cross Asset Research

2432

2330

147 10

6353

57 40

5356 44

87 8580

7067

63

54

0

20

40

60

80

100

%

Cable DSL/Other

58

5249

45

26 25

18

0

10

20

30

40

50

60

70

%

% of TV households

23

.7

23

.3

18.8

18

.3

18

.0

16.6

15

.9

15

.0

14

.7

14

.4

13

.9

13

.3

12

.6

11

.6

11

.4

10

.2

9.5

8.3

6.6

6.4

5.8

4.6

9.4

9

5.1

6

2.2

8

2.1

7

1.5

6

8.3

6

7.5

2

1.4

2 3.1

3

6.9

7

2.4

2

3.1

5.0

9

1.3

3

1.6

7

1.3

3

1.2

1

1.4

1

0.9

6

0.6

3

0.7

6

0.8

1

0.0

5.0

10.0

15.0

20.0

25.0

Bro

ad

ba

nd

sp

ee

ds

(M

b/s

)

Download Speed (Mb/s) Upload Speed (Mb/s)



21April 2011

8

European telecom incumbents’ fibre deployment plans (as of April 2011)

Notes: FTTH: Fibre-To-The-Home; FTTC: Fibre-To-The-Cabinet; VDSL: Very-high-bitrate Digital Subscriber Line;


FTTH Homes Passed and Penetration Rates

Source: FTTH European Rankin, FTTH Council Europe (Sep 2010)

Comparative fibre and cable network speeds

Source: Company data, Screen Digest, Solon, Cable Europe, FTTH Council

Operator Country Coverage program FTTH (%) VDSL/FTTC (%) Combined (%)

Swisscom Switzerland

FTTH to 1m homes by 2015 (€1.4bn cost);

70% VDSL coverage already 33 70 70

Portugal Telecom Portugal FTTH to 1m homes (completed 2009-10) 33 0 33

KPN Netherlands

FTTH to 1.1-1.3m homes by 2012;

FTTC/VDSL to 0.6-0.8m homes by 2012 18 6 24

TeliaSonera Finland FTTH to 0.4m homes by 2012 18 0 18

France Telecom France FTTH to 7-8m homes by 2015 13 0 13

TeliaSonera Sweden €260m for 0.5m homes by 2010 11 0 11

Deutsche Telekom Germany FTTH 10%, 31% VDSL/FTTC 10 31 41

British Telecom U.K.

£2.5bn cost to pass 67% homes, w/20%

FTTH & 80% FTTC, by Dec-15 10 30 40

Telecom Italia Italy FTTH to 1.3m by 2012 6 4 10

Belgacom Belgium Currently 73% FFTC/VDSL; no FTTH plans 0 73 73

Telefonica Spain

FTTH/FTTC trials; no announced buildout

or plan 0 0 0

0% 20% 40% 60% 80% 100%

Lithuania

Slovenia

Portugal

Bulgaria

Sw eden

Denmark

Latvia

France

Finland

Estonia

Norw ay

Russia

Italy

Netherlands

Sw itzerland

Hungary

Czech Rep.

Spain

Germany

Turkey

UK

FTTH/B + LAN Subscriber Penetration FTTH/B Homes Passed

0

50

100

150

200

0km 1km 2km 3km 4km 5km

Sp

ee

d in

Mb

it/s

Distance between DSLAM and CPE

Cable Docsis3.0

Cable Docsis2.0

VDSL2

VDSL

ADSL2+

ADSL

FTTH/100M

FTTH/1G ~€1,500

~€1,000

~€300

~€120~€100

FTTHFTTBVDSLEuroDOCSIS 3.0

ADSL2+



21April 2011 9

The operating momentum

As previously mentioned, European cable operators have built up a good deal of momentum

over the last few years, both operationally and financially. Operationally, 2010 was principally

the year for DOCSIS 3.0 rollouts and we expect European cable companies to capitalize on

the DOCSIS 3.0 marketing buzz for at least the next year or two while they enjoy their network

head-start. This, along with value-priced bundles propositions, helped to drive increasing

double- and triple-play penetration along with consistent ARPU gains. As multi-play

penetration has risen steadily for most operators, not only do their ARPU’s tend to rise but

their churn levels also tend to be positively affected by increased customer ‚stickiness‛. A

greater number of revenue generating units (RGU’s), or services, per customer also afford

operators the opportunity to up-sell variable services across a wider range of categories. As

up-selling and cross-selling additional services to a captive customer base is a lower-cost

(both in terms of opex and capex), and therefore a higher-margin, method of raising revenues

and earnings, operators are clearly motivated to capitalize on these opportunities within their

existing customer base. Although network growth, either through organic network extensions

in markets such as the U.K. or through bolt-on acquisitions in markets such as Germany, is

still viable and planned where economically attractive it comes at a higher capex and

customer acquisition cost so will be moderate for most European cable operators.

We anticipate 2011 will be more the year of leveraging the upgraded networks to take

advantage of their interactive capabilities and functionalities in other service areas, such as

pay-TV, mobile and small business/corporate (B2B) services. In pay-TV, certain cable

operators, such as Virgin Media and ONO, have struck agreements with TiVo in order to offer

customers a wider array of content source options via the advanced TiVo media gateway.

Such gateways incorporate more user-friendly interfaces with Internet connectivity via home

network connections in order to seamlessly dovetail over-the-top content (e.g., YouTube,

Lovefilm) with their other premium video service content such as Digital Video Recorder (DVR),

Pay-Per-View (PPV), Video-On-Demand (VOD), and HD and 3D content. In addition, in-home

network connectivity will offer the opportunity to display content on screens beyond the TV

and PC. For example, Telenet in Dec-10 launched its Yelo multi-screen service which offers its

pay-TV video content on mobile and tablet screens as part of its subscription packages. Other

European operators are likely to introduce similar services in 2011. Operators also continue to

explore a measured expansion of their mobile offerings, mostly through MVNO platforms,

which they see as additional revenue stream sources. Mobile is also a way for operators to

capitalize on increasing fixed-mobile convergence by using their traditional strength in fixed-

line networks. They can leverage their robust backhaul networks, customer-end bandwidth

and network infrastructure to extend the reach of their hitherto fixed presence. Adding an

additional service category is yet another ‚hook‛ into the customer which can also help to

further reduce churn levels, as Virgin Media has touted in its strategy to expand its emphasize

its mobile offering to its customer base. Finally, further optimizing their fixed-line networks’

utilization rates by offering network capacity and associated services to SME’s and the

corporate segment (B2B services) is another way for cable operators to augment their revenue

and earnings growth opportunities.



21April 2011

10

The cash flow machine

With much of their core network growth spend complete, European cable operators now have

more flexibility in the type and level of their capital expenditures. On average, more than 75%

of the operators’ capex spend is now success-based, that is, tied to customer acquisition

growth. Such expenditure includes customer hardware (CPE) such as set-top boxes (STB’s).

This is a positive aspect of operators’ capex profiles today, as spend is now more closely

aligned with visible revenues and cash flow streams than it had been during the operators’

growth phase a decade earlier. In addition, the European cable sector’s aggregate capex

levels as a proportion of sales (but not in absolute terms) have also declined by about 20%

over the last few years to c20% of sales. Given the cable operators’ high operating leverage,

this reduction and additional flexibility in capex coincides with the growth trends discussed

earlier to translate into steadily increasing EBITDA margins and operating free cash flow.

Over the last two years, European cable operators have addressed their debt profiles through

amend-and-extend exercises, debt refinancing in the capital markets, overall debt reduction

largely from free cash flow generated, and have also sought lower cost debt relative to that

raised in 2008-2009. As a result, a moderate reduction in finance charges is also contributing

toward free cash flow generation. Overall, 2011-12 now sees these operators at a positive

operational inflection point which gives rise to important financial policy decisions. Aside from

differences in the maturity levels of the various European cable markets, divergences in these

financial policies are also driving distinctions in credit quality amongst the cable operators. We

explore those differences as they relate to specific issuers throughout this review.



21April 2011 11

European Cable sector - operating and financial summary

European Cable sector – Operating Key Performance Indicators (31-Dec-2010)

KD ONO Telenet Unitymedia UPC Virgin Media Ziggo

RGUs - Video (000s) 10,152 953 2,215 4,488 9,148 3,779 3,087

RGUs - Internet (000s) 1,153 1,380 1,227 780 4,319 4,302 1,549

RGUs - Telephony (000s) 1,190 1,686 1,014 779 2,968 7,356 1,167

RGUs - Total (000s) 12,495 4,019 4,456 6,047 16,435 15,437 5,803

ARPU (blended) (€/month) 13.32 51.50 40.00 15.07 27.51 47.51 34.39

RGUs / Customer (x) 1.42 2.22 1.90 1.33 1.66 2.49 1.88

Triple-play penetration (%) 14.5 44.3 31.6 15.0 23.1 63.0 18.9

Source: Company data, SG Cross Asset Research; NOTE: Figures are as of 31-Dec-10; ARPU is in € for all except VMED which is in £

European Cable sector – Financial summary (31-Dec-2010)

KD ONO Telenet Unitymedia UPC Virgin Media Ziggo

Revenues 1,502 1,472 1,299 935 3,740 3,858 1,376

EBITDA 659 725 669 521 1,776 1,510 783

Capex 327 244 246 261 803 628 202

Operating FCF (OpFCF) 150 164 258 28 280 429 310

Free Cash Flow (FCF) 178 289 8 28 280 395 302

Revenue growth 9.6% -2.7% 8.5% 6.4% 8.3% 5.3% 7.1%

EBITDA growth 15.5% -0.6% 10.0% 10.5% 6.8% 12.0% 12.6%

EBITDA margin 43.9% 49.3% 51.5% 55.7% 47.5% 39.1% 56.9%

Capex / Sales 21.8% 16.6% 18.9% 27.9% 21.5% 16.3% 14.7%

Total debt 3,137 3,652 2,530 2,753 7,998 6,020 3,591

Net debt 2,865 3,593 1,890 2,694 7,875 5,541 3,532

Total debt / EBITDA (x) 4.8 5.0 3.8 5.3 4.5 4.0 4.6

Net debt / EBITDA (x) 4.3 5.0 2.8 5.2 4.4 3.7 4.5

Source: Company data, SG Cross Asset Research; NOTE: Figures are as of 31-Dec-10; Absolute amounts, in €m for all except VMED which is in £m



21April 2011

Relative value

European cable sector bonds

Issuer

Coupon

(%) Maturity Security

Curre

ncy

Amount

Issued (m)

S&P issue

rating

Moody's

issue

rating

Fitch

issue

rating

Next Call

Date

Next Call

Price Bid price Ask price

YTW (Ask)

(%)

STW (Ask)

(bp)

Z-spread

(Ask) (bp)

Total Debt

/ EBITDA

(x)

Net Debt /

EBITDA

(x)

Z-spread

/Total Lev.

(bp)

UNITYMEDIA GMBH 9.625 01/12/2019 SR SUBORDINATED EUR 665 B- B3 NR 01/12/2014 104.813 108.92 109.80 7.78 455 486 5.4 5.3 90

UNITYMEDIA HESSEN / NRW 8.125 01/12/2017 SR SECURED EUR 1430 BB- B1 NR 01/12/2012 108.125 104.72 105.41 6.85 385 376 4.1 4.0 92

UNITYMEDIA HESSEN / NRW 8.125 01/12/2017 SR SECURED USD 845 BB- B1 NR 01/12/2012 108.125 105.46 106.38 6.49 439 446 4.1 4.0 109

UPC HOLDING BV 8.000 01/11/2016 SECURED EUR 300 B- B2 NR 20/05/2011 106.000 103.98 104.89 6.05 490 426 4.5 4.4 95

UPC HOLDING BV 9.750 15/04/2018 SECURED EUR 400 B- B2 NR 15/04/2013 104.875 107.03 107.94 7.54 447 455 4.5 4.4 101

UPC HOLDING BV 8.375 15/08/2020 SR SECURED EUR 640 B- B2 NR 15/08/2015 104.188 102.42 103.19 7.94 466 448 4.5 4.4 100

UPCB FINANCE II LTD 6.375 01/07/2020 SR SECURED EUR 750 B+ Ba3 NR 01/07/2015 103.188 95.52 96.36 7.04 375 343 3.6 3.5 95

UPCB FINANCE III LTD 6.625 01/07/2020 SR SECURED USD 1000 B+ Ba3 NR 01/07/2015 103.313 97.88 97.88 6.94 415 372 3.6 3.5 103

UPCB FINANCE LTD 7.625 15/01/2020 SR SECURED EUR 500 B+ Ba3 NR 15/01/2015 103.813 103.08 103.88 7.01 378 363 3.6 3.5 101

NARA CABLE FUNDING 8.875 01/12/2018 SR SECURED EUR 700 B B2 BB- 01/12/2013 108.875 102.60 103.41 8.26 589 499 4.4 4.3 113

ONO FINANCE II PLC 11.125 15/07/2019 SR UNSECURED EUR 295 CCC+ Caa2 CCC 15/07/2014 111.125 107.80 108.67 9.47 629 609 5.0 5.0 122

ONO FINANCE II PLC 10.875 15/07/2019 SR UNSECURED USD 225 CCC+ Caa2 CCC 15/01/2014 110.875 107.50 109.50 8.73 662 635 5.0 5.0 127

TELENET FINANCE III LUX 6.625 15/02/2021 SR SECURED EUR 300 NR Ba3 BB+ 15/02/2016 103.313 97.55 98.40 6.97 365 332 3.8 2.8 87

TELENET FINANCE LUX 6.375 15/11/2020 SR SECURED EUR 500 NR Ba3 BB+ 15/11/2015 103.188 97.32 98.19 6.74 348 311 3.8 2.8 82

VIRGIN MEDIA FINANCE PLC 9.500 15/08/2016 SR UNSECURED EUR 180 BB- Ba2 BB+ 15/08/2013 104.750 112.14 113.05 5.43 268 290 3.5 3.2 83

VIRGIN MEDIA FINANCE PLC 8.875 15/10/2019 SR UNSECURED GBP 350 BB- Ba2 BB+ 15/10/2014 104.438 111.14 111.91 6.17 357 388 3.5 3.2 111

VIRGIN MEDIA FINANCE PLC 9.125 15/08/2016 SR UNSECURED USD 550 BB- Ba2 BB+ 15/08/2011 104.563 106.13 106.13 3.67 157 341 3.5 3.2 97



VIRGIN MEDIA SECURED FIN 7.000 15/01/2018 SR SECURED GBP 867 BBB- Baa3 BBB- 15/01/2014 103.500 106.47 107.09 5.28 227 257 2.1 1.8 122

VIRGIN MEDIA SECURED FIN 5.500 15/01/2021 SR SECURED GBP 650 BBB- Baa3 BBB- n.a. n.a. 97.54 98.43 5.71 222 207 2.1 1.8 99

VIRGIN MEDIA SECURED FIN 6.500 15/01/2018 SR SECURED USD 999 BBB- Baa3 BBB- 15/01/2014 103.250 109.25 109.25 4.02 62 280 2.1 1.8 133

VIRGIN MEDIA SECURED FIN 5.250 15/01/2021 SR SECURED USD 500 BBB- Baa3 BBB- n.a. n.a. 100.97 100.97 5.12 173 176 2.1 1.8 84

ZIGGO BOND CO 8.000 15/05/2018 SENIOR NOTES EUR 1209 B B2 NR 15/05/2014 104.000 104.77 105.39 6.84 384 368 - - -

ZIGGO FINANCE BV 6.125 15/11/2017 SR SECURED EUR 750 BB Ba2 NR 15/11/2013 103.063 100.94 101.64 5.79 295 273 - - -

Source: Company data, Moody’s, S&P, Fitch, SG Cross Asset Research



21April 2011

13

Z-spread/Leverage (bps)

Source: SG Cross Asset Research

Z-spread by rating


LBTYA 9.625 19

LBTYA 8.125 17

LBTYA 8.125 17

LBTYA 8 16

LBTYA 9.75 18LBTYA 8.375 20

LBTYA 6.375 20

LBTYA 6.625 20

LBTYA 7.625 20

ONOSM 8.875 18

ONOSM 11.125 19

ONOSM 10.875 19

TNETBB 6.625 21

TNETBB 6.375 20VMED 9.5 16

VMED 8.875 19

VMED 9.125 16

VMED 9.5 16

VMED 8.375 19

VMED 7 18

VMED 5.5 21

VMED 6.5 18

VMED 5.25 21

75

85

95

105

115

125

135

2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0

Z-s

pre

ad

per

x o

f T

ota

l D

ebt/

EB

ITD

A

Total Debt / EBITDA (x)

LBTYA 8 16

LBTYA 8.125 17

LBTYA 9.75 18

LBTYA 9.625 19

LBTYA 7.625 20LBTYA 6.375 20

LBTYA 8.375 20

LBTYA 8.125 17

LBTYA 6.625 20

ONOSM 8.875 18

ONOSM 11.125 19

ONOSM 10.875 19

TNETBB 6.625 21

TNETBB 6.375 20

VMED 9.5 16

VMED 7 18

VMED 8.875 19

VMED 5.5 21

VMED 9.125 16

VMED 9.5 16

VMED 6.5 18

VMED 8.375 19

VMED 5.25 21

150

250

350

450

550

650

Z-sp

read

(b

ps)

Bond issue credit ratings

BBB-Baa3

BBBa2

BB+ Ba1

BB-Ba3

B+B1

BB2

B-B3

CCC+Caa1

CCCCaa2

CCC-Caa3

CCCa

CC

DD



21April 2011

14

European Cable sector 5-year CDS


100

200

300

400

500

600

700

800

Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11

5-y

ea

r C

DS

(b

ps)

TLNET KABEGR VMED LBTYA LBTYA ONOSM iTraxx Europe


Kabel Deutschland

21April 2011

15

Diversified Telecom Services / Initiation of coverage

KABEL DEUTSCHLAND Good growth and balance sheet makeover; Initiate with a Hold on PIK loan

Positive We believe KD’s good growth prospects, deleveraging profile and above-average

valuations are more than captured at current prices. We also initiate coverage on KD

with a Hold recommendation on the 2014 PIK loan.

Event: We initiate coverage on Kabel Deutschland (KD). The company is the largest

cable operator in Germany and one of Europe’s largest cable companies. It provides

analogue and digital TV, broadband internet and telephony services to nearly 9m of

15.3m marketable households in 13 of 16 German federal states, representing a 58%

penetration rate within its footprint. KDG was formed in 2003 through the consolidation

of six of the nine regional cable systems previously developed and owned by Deutsche

Telekom. Following a sale of secondary shares by its main shareholders in March 2010,

43.7% of KD is currently owned by a consortium comprising Providence Equity, Ontario

Teachers Pension Plan and KD management while the remaining 56.3% is free float.

SG Credit Opinion: We initiate coverage with a Positive credit opinion as we believe:

KD is well positioned continue its growth path through continued momentum in upselling

premium digital TV and Internet & Phone customer base expansion; and, that it should

achieve its objective of deleveraging toward its net leverage target range of 3.5-4.0x

within the next 12 months. Through its higher-speed DOCSIS 3.0 cable network, which

KD aims to offer to 45% of its footprint by March 2011, KD is able to offer innovative and

attractive products and services. Packaged into bundles, these products are not only

favoured by households looking to enjoy TV, internet and fixed line telephony services at

a cost-effective bundled price but they also afford KD higher Average Revenue Per User

(ARPU), higher margins, reduced churn and greater opportunities for upselling and

cross-selling higher value premium services such as HD and Video-on-Demand TV.

Importantly, much of the capex required for these network improvements is scalable, as

it is largely success-driven, and comes at a fraction of the cost of competing

technologies’ (e.g. fibre) investment requirements for the same bandwidth. As a result,

we expect KD to continue generating a healthy free cash flow stream over FY 2011/12.

We expect a drop in leverage from 4.3x at March 2010 to under 3.5x by March 2012.

SG Bond Recommendation: We initiate coverage with a Hold recommendation on KD’s

2014 PIK loan given its high running yield at over 8.3% balanced by limited capital gain

upside. The PIK’s terms preclude dividend upstreaming to shareholders so, in light of

the Nov/Dec 2010 Amend & Extend exercise allowing repayment of junior debt ahead of

senior secured debt, we anticipate KD will further prepay its PIK loan during late 2011 in

order to enable dividend payments in FY 2012. The PIK loan has been callable at par (+

accrued & unpaid interest) since May-09 and KD announced on 31-Mar-11 a

prepayment of €200m of the PIK. In 5-year CDS, we consider current levels of 255/270

to be tight particularly when compared with higher rated, crossover Virgin Media 5y CDS

currently at 281/291.

Next calendar events: KD will report Q4 and FY 2010/11 results on 8 June 2011.

Market value

Benchmark €+700 11 2014

Price 104 Hold

Rating

LT ST Outlook

MDY Ba2 NR Stable

S&P BB- NR Stable

Fitch BB- NR Positive

Key financials

(€m) 2010A 2011E

Revenues 1,502 1,601

EBITDA 659 725

FFO 477 507

Net debt (w/PIK) 2,865 2,746

Key Ratios

2010A 2011E

EBITDA margin (%) 43.9 45.3

EBITDA/net int. (x) 3.8 3.9

FFO/ Adj. net debt

(%)

22.0 27.3

Net debt/EBITDA (x) 4.3 3.8

5-year CDS Evolution

Inser

t

grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

200

300

400

500

600

700

5-y

ea

r CD

S / 5

-ye

ar X

O C

DS

(x

)

5-ye

ar C

DS

(bps

)

KABEGR CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyKABEGR / XO CDS (RHS)


Kabel Deutschland

21April 2011 16

Network

KD’s network covers all but three – Hesse, North-Rhine Westphalia and Baden-Wuerttemberg

- of Germany’s 16 federal states. It is a Level-3 cable network operator distributing analogue

and digital cable signals directly to end-customer households and, indirectly, to housing

association residences via Level-4 operator networks. Its network is now fully upgraded to bi-

directional capability with spectrum bandwidth capacity of 614 MHz (862 MHz in some areas).

In January 2011, KD recently launched its higher speed DOCSIS 3.0 enabled serviced in

Dresden, Potsdam and Wuerzburg and aims to cover 100% of its footprint with DOCSIS 3.0

upgrades by Summer 2012. This allows KD to offer reliable analogue and digital video,

sophisticated interactive television services and higher broadband internet speeds than its

DSL-based competitors such as Deutsche Telekom. KD is rolling out its DOCSIS 3.0 initiative

with attractive promotional pricing of €19.90/month during the first year ( + connection fee of

€29.90 and monthly fee doubling after year 1) for its market leading Internet & Phone 100Mb/s

broadband speed and fixed flat rate telephony bundle. Competitors such as DT will likely need

to make considerably larger investments than KD has made over the next few years in order to

provide comparable broadband speeds and services array.

Strategy

KD bases its strategy on four pillars: 1) maintaining and increasing penetration of its Basic

Cable TV business; 2) growing revenue by upselling customers to bundled offerings including

Internet & Phone services; 3) expanding premium services such as HD, DVR and Video-on-

Demand; and 4) optimizing its capital structure.

Upselling to “triple-play” products to drive revenue growth

By converting cable customers to the double- and triple-play offerings as well as selling

additional pay-TV services, the company should be able to increase its revenues in the

coming years. In order to do so, KD intends to aggressively promote its products line to

existing and future customers. Bundling products represent good value for money for

consumers as the company is able to provide very high quality products at a lower price than

when taken individually. Furthermore, the fastest speeds are only available through the

bundled packages, providing further incentive for customers to switch to bundled offers. By

the end of FY 2010 (Mar 2011), 45% of KD’s network will be upgraded to DOCSIS 3.0

technology offering those upgraded areas’ customers broadband speeds of up to 100Mbps,

representing the fastest broadband speed in Germany. Thanks to the digital set-top box, TV

content and interactive options are constantly being improved. Some options are free of

charge (such as HD TV) while the most interesting and innovative ones are charged to

customers, i.e. Video-On-Demand (VOD) services or 3D movies.

KD network footprint

Source: SG Cross Asset Research + Company

data


Kabel Deutschland

21April 2011 17

Revenue Generating Units (RGUs) Revenues (ARPU)

Source: SG Cross Asset Research, Company data Source: SG Cross Asset Research, Company data

Maintaining a high level of operating margins

With its differentiated products and strong value proposition versus competitors, we believe

pricing pressure going forward will be relatively limited, allowing KD to protect its profit

margins. The company has a low churn rate, which we think reflects the significant

investments in customer care over the past few years. Low churn has contributed to the

company’s operational efficiency and also enables KD to invest more in sales and marketing

as it focuses on upselling its customer base. With a certain portion of its cost base fixed, e.g.

network operations and billing, KD also benefits from good operational deleveraging.

Cash generation and rapid deleveraging

With its network 45% upgraded to higher speed DOCSIS 3.0 technology, we believe KD can

limit its level of its network investment to incremental success-based upgrades required by

new customer subscriptions and increased usage. We expect low capex and high operating

margins to enable KD to allot FCF toward its medium-term leverage target of 3.5x by FY2011.

Capex / Sales (%), 2008-2011 Strong Free Cash Flow conversion rate

Source: SG Cross Asset Research, Company data

9,184 9,111 9,045 9,002 8,969 8,966 8,930

982 1,008 1,039 1,073 1,108 1,135 1,222

787 851 906 966 1,029 1,089 1,153797 871 938 1,007 1,067 1,124 1,190

1.30

1.31

1.33

1.35

1.37

1.39

1.42

1.20

1.25

1.30

1.35

1.40

1.45

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

RG

Us/S

ubscri

ber

RG

Us (

000s)

Basic Cable (incl. TKS) Premium TV (KD+, KD Home & KD Int.)

Internet Phone

Total RGUs / Subscriber

11,750 11,841 11,928 12,048 12,173 12,31412,495

257 250 253 256 254 256 258

75 82 90 95 100 104 112

35 36 36 36 36 36 35

0.3%

3.0%

2.1%

0.8%

1.5%

2.3%

9.3%9.8%

5.6% 5.3%

4.0%

7.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0

100

200

300

400

500

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

€m

Television Internet and phoneOther Total Revenue growth (%)Internet and phone revenue growth (%)

367 368 379 387 390 396 405

316

373

327

345

2627

22 22

0

5

10

15

20

25

30

280

290

300

310

320

330

340

350

360

370

380

2008 2009 2010 2011

%

Capex

(€m

)

Capex (€m) Capex/Sales (%)

457

571

659

720

-62

85

178 160

-14

27

22 22

-20

-15

-10

-5

0

5

10

15

20

25

30

-100

0

100

200

300

400

500

600

700

800

2008 2009 2010 2011

%€m

EBITDA (€m) FCF (€m) FCF/EBITDA (%)


Kabel Deutschland

21April 2011 18

Competition and consolidation

Cable’s penetration rate is comparatively low in Germany by European standards given its

later development relative to other European markets. Although Deutsche Bundespost (and

later Deutsche Telekom) began developing Germany’s national cable network in the early

1980s, more rapid expansion and upgrades of the network have occurred during the last

decade by the current regional network operators. The cable network in Germany is divided

into four network levels. Network Levels 1 and 2 transport signals from broadcasters to

regional distribution networks. Network Level 3 reaches to the transfer points outside of the

subscriber`s home. Network Level 4 is the portion of the network from the transfer point to the

cable jack in the subscriber`s home. Level 4 cable networks, in particular, typically benefit

from multi-year contracts directly with residential housing associations providing them a

degree of utility-like revenue and cash flow stability. Roughly one-third of KDG’s customers

are supplied directly on Level-4 networks and two-thirds indirectly via Level-3 networks.

Despite its later development compared to other European markets, German cable networks

nevertheless have a majority of German TV platform market share. Their main competition in

TV distribution is Satellite (including Free-to-Air, FTA) but cable’s medium offers greater two-

way functionality, speeds, flexibility (e.g., for multi-room access) and opportunities for

interactivity. The main satellite TV provider in Germany, Sky Deutschland, has struggled to

gain subscriber traction versus German cable over the last four years. However, DT is now in

talks to resell Sky Deutschland services aside its own IPTV offering which could bolster the

appeal of DT’s TV packages. Although competitive headwinds for the cable TV segment will

gradually increase over the next two years, more from satellite competitors and increasingly

from DT’s IPTV offering, we believe KD’s large installed basic cable TV customer base, the

fact that it does not compete directly with other regional Level-3 operators (Unitymedia, KBW)

nor with Level-4 operators, along with low churn levels (~11%) support KD’s cash flow

visibility and quality.

In terms of broadband products, cable again holds the technological upper hand with regard

to speeds, especially where DOCSIS 3.0 upgrades have been completed, relative to

incumbents’ DSL technologies. Although competition in this segment is higher than in cable

TV, we believe the German cable networks’ structural advantages (in terms of direct and

indirect contracts with housing associations), low but growing penetration, inherent

technological superiority over DSL and its customer value proposition as part of a product

bundle position KD’s Internet & Phone products well vis-a-vis competitors.

In terms of consolidation and M&A risk, KD has demonstrated acquisition discipline by

sticking more to tuck-in acquisitions of Level-4 subscriber bases. Given its relatively low

(12%) broadband penetration of marketable homes, KD has ample organic growth runway to

support its broadband growth rates of 5-6%. We suspect KD was absent from the latest

round of bids in February 2011 for Kabel Baden-Wuerttemberg (KBW), one of Germany’s two

other Level-4 cable networks, underscoring not only its preference for Level-4 consolidation

but also its willingness to refrain from overpaying for acquisitions particularly in situations

carrying substantial regulatory risk (i.e. anti-trust) such as in the case of KBW.


Kabel Deutschland

21April 2011 19

European pay-TV penetration (%) Market share of German TV platforms (%)

Source: Screen Digest Source: SG Cross Asset Research, Company data

German broadband market evolution German broadband market shares (%)


KD – Corporate structure


58

5249

45

25

18

0

10

20

30

40

50

60

70

NL UK DK BE CH D

%

% of TV Households

Cable48%

Satellite40%

Digital Terrestrial (DTT)10%

Internet-Protocol (IPTV)

2%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0

100

200

300

400

500

600

700

800

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Net subscri

ber

additio

ns (0

00s)

German BB market net adds (000s) KD share of net adds1

DT46%

DSL Resellers43%

Cable11%


Kabel Deutschland

21April 2011 20

Debt summary Estimated gross debt profile as of end-Jan 2011 – (pro forma for refinancing)


Debt maturity profile

Debt instrument Obligor Guarantor Currency Size (m)

Out-

standing (m)

Interest

Rate Base Maturity

Margin

(bps) Rate (%)

Revolver B KDVS KDVS, KDG € 101.0 0.0 E+225 31-Mar-12 225 3.283%

Revolver B1 KDVS KDVS, KDG € 224.0 80.0 E+350 31-Mar-14 350 4.533%

Term Loan A KDVS KDVS, KDG € 140.8 136.4 E+225 31-Mar-12 225 3.283%

Term Loan A1/A2 KDVS KDVS, KDG € 1,009.2 988.6 E+350 31-Mar-14 350 4.533%

Term Loan C KDVS KDVS, KDG € 38.5 38.5 E+325 31-Mar-13 325 4.283%

Term Loan C1 KDVS KDVS, KDG € 497.0 497.0 E+350 31-Mar-14 350 4.533%

Term Loan D KDVS KDVS, KDG € 400.0 400.0 E+400 31-Dec-16 400 5.033%

Senior Bank Debt 2,140.5

Sr. Unsecured Notes KDG € 250.0 0.0 10.75 01-Jul-14 10.750% 10.750%

Sr. Unsecured Notes KDG $ 610.0 0.0 10.625 01-Jul-14 10.625% 10.625%

Sr. Unsecured Notes 0.0

PIK Notes KDH € 480.0 715.0 6ME+700 19-Nov-14 700 8.288%

Subordinated Debt 715.0

Total Debt 2,855.5

Liquidity

Obligor Guarantor Currency Size (m)

Interest

Rate Maturity

Drawn

(m)

Available

(m)

Revolver Facility B KDVS KDVS, KDG € 101.0 E+225 31-Mar-12 0.0 101.0

Revolver Facility B1 KDVS KDVS, KDG € 224.0 E+350 31-Mar-14 80.0 144.0

Revolvers TOTAL 325.0 80.0 245.0

Cash 226.6 226.6

TOTAL Available Liquidity 471.6

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Liquidity 2011 2012 2013 2014 2015 2016 2017

€m

Cash Revolver B (undraw n) Revolver B1 (undraw n) Revolver B (draw n) Revolver B1 (draw n)

Term Loan A Term Loan A1/A2 Term Loan C Term Loan C1 Term Loan D

Sr. Unsec. Nts (€) 2014 Sr. Unsec. Nts ($) 2014 PIK


Kabel Deutschland

21April 2011 21

Kabel Deutschland Financial Summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 1,197.0 1,370.1 1,502.0 1,601.1 1,705.2

Normalised EBITDA 457.5 570.7 659.3 724.6 777.1

Revenue growth 9.4% 14.5% 9.6% 6.6% 6.5%

EBITDA growth -19.8% 24.8% 15.5% 9.9% 7.3%

EBITDA margin 38.2% 41.7% 43.9% 45.3% 45.6%


Cash interest, net -175.1 -203.4 -174.6 -185.2 -157.0

Cash taxes -2.5 -3.6 -2.6 -8.0 -62.0

Other -22.0 25.9 -4.9 -25.0 0.0

Change in provisions 0.0 0.0 0.0 0.0 0.0

Working capital 11.0 76.9 -0.2 2.0 -5.0

Restructuring cash costs, other 0.0 0.0 0.0 0.0 0.0

Cash Flow from Operations 268.9 466.6 477.0 508.4 553.1

Capital expenditures -316.4 -373.0 -327.2 -345.0 -385.0

Acquisitions / Divestitures 8.6 -513.7 54.9 0.0 0.0

Other Investing 0.0 0.0 0.0 0.0 0.0

Cash Flow from Investing -307.8 -886.7 -272.3 -345.0 -385.0

Dividends / Shareholder returns -14.3 -8.1 28.4 0.0 0.0

Debt issuance 391.0 785.0 199.0 240.0 700.0

Debt redemption -331.1 -310.2 -199.1 -470.0 -922.0

Other Financing -7.2 -8.3 -9.1 0.0 0.0

Cash Flow from Financing 38.4 458.4 19.2 -230.0 -222.0

Change in Cash -0.5 38.2 224.0 -66.6 -53.9

Cash 15.5 52.1 271.3 204.7 150.8

Revolver (drawn) 0.0 0.0 0.0 190.0 185.0

Senior Bank debt 1,210.0 1,685.0 1,685.0 2,060.0 2,060.0

Senior Secured notes 0.0 0.0 0.0 0.0 550.0

Senior Unsecured notes 755.6 755.6 755.6 0.0 0.0

Sr. Subordinated debt 0.0 0.0 0.0 0.0 0.0

PIK Loan 587.0 656.0 696.0 724.9 0.0

Total debt w/o PIK 1,966 2,441 2,441 2,060 2,610

Total debt w/PIK 2,553 3,097 3,137 2,975 2,795

Net debt w/o PIK 1,950 2,389 2,169 1,855 2,459

Net debt w/PIK 2,537 3,045 2,865 2,770 2,644

Financial summary (€m) 2008A 2009A 2010e 2011e 2012e

Revenues 1,197.0 1,370.1 1,502.0 1,601.1 1,705.2

Adj. EBITDA 457.5 570.7 659.3 724.6 777.1

EBITDA margin 38.2% 41.7% 43.9% 45.3% 45.6%

Funds From Operations (FFO) 257.9 389.7 477.2 506.4 558.1

FFO - Capex -58.5 16.6 150.1 161.4 173.1

Free Cash Flow (FCF) -61.8 85.4 178.3 163.4 168.1

EBITDA / net interest 2.6x 2.8x 3.8x 3.9x 4.9x

FFO / Net debt (w/ PIK) 13.2% 16.3% 22.0% 27.3% 22.7%

FFO - Capex / Net debt (w/ PIK) -2.3% 0.5% 5.2% 5.8% 6.5%

FCF / Net Debt (w/ PIK) -2.4% 2.8% 6.2% 5.9% 6.4%

Capex / Sales 26.4% 27.2% 21.8% 21.5% 22.6%

Net Senior Debt / EBITDA 2.6x 2.9x 2.1x 2.8x 2.5x

Net Senior Notes / EBITDA 4.3x 4.2x 3.3x 2.8x 3.2x

Net debt (w/ PIK) / EBITDA 5.5x 5.3x 4.3x 3.8x 3.4x

Cash 15.5 52.1 271.3 204.7 150.8

Revolver Availability 325.0 325.0 325.0 135.0 140.0

Liquidity 340.5 377.1 596.3 339.7 290.8



ONO

21April 2011 22


ONO Resilience and refinancing: sun after the rain in Spain

Positive We initiate coverage on ONO Group (ONOSM) with a Buy recommendation on its

€700m 2018 Sr. Secured notes, €295m 2019 notes and a Sell on 5-year CDS.

Event: We initiate coverage on ONO. ONO is Spain’s largest cable operator and the

only cable operator with national coverage. ONO offers analog and digital TV,

broadband Internet, fixed and mobile telephony services.

SG Credit Opinion: We have a Positive credit opinion on ONO as we believe its

operational and financial positive momentum will continue in the near to medium term.

We anticipate ONO will refinance over the coming year at least a portion of its

substantial €2.25bn (62% of total debt) senior bank facilities maturing in 2013. The

alleviation of this refinancing risk overhang along with expected continued operational

cash flow improvement and deleveraging should further support ONO’s improving credit

story. Operationally, despite evidence that the subdued Spanish macroeconomic

environment continues to dampen Spanish consumer sentiment and spending overall,

including ONO’s customers’ spending on variable discretionary products (e.g., variable

phone charges, Video-on-Demand, Pay-Per-View), ONO has done well to maintain, and

even slightly grow, its fixed monthly subscription fee base, Average Revenue Per User

(ARPU), gross and EBITDA margins, and Free Cash Flow. We believe ONO will resume

top-line and EBITDA growth from H2 2011 as its bundling strategy, underpinned by its

differentiated high-speed internet services and a host of new developments in its digital

pay-TV offering, continues to perform well. In conjunction with this stabilization in its

growth trends, we see ONO continuing in 2011-12 its cost containment and capital

expenditure discipline such that its operating earnings and free cash flow can continue

to allow for gradual deleveraging. We expect ONO to continue generating operating FCF

in the range of €170-210m p.a. over 2011-12 and apply a good part of that toward debt

reduction such that YE2011 and YE2012 net leverage fall to 4.75x and 4.4x, respectively.

SG Bond Recommendation: We initiate with a Buy recommendation on ONO € 8.875%

2018 Senior Secured notes (@ 103.5 price, YTW 8.2%, STW 589bps, Z-sp. 499bps) and

€ 11.125% 2019 Subordinated notes (@ 108.25 price, YTW 9.6%, STW 640bps, Z-sp.

620bps). The subordinated notes in particular offer an attractive current yield for what is

an improving credit story, as ONO modestly grows its operational cash flow and

addresses its 2013 maturities, and in our view there’s a potential further tightening of

30bp through year-end 2011. Giving up 120bp and 0.6x leverage, the structurally and

contractually senior secured notes also offer good yield and spread/leverage of 113bp

for those who may still consider the credit as speculative. At 6.5/7.5 points up-front

(675/705bps equivalent) with potential tightening to 600bps we recommend a Sell on

ONOFII 5-year CDS.

Next calendar events: ONO’s Q1 2011 earnings results will be announced by end-May.

Market value

Benchmark 11.125% 07 2019

Price 108.25 Buy

Rating

LT ST Outlook

Moodys B3 NR Positive

S&P B NR Stable

Fitch B NR Stable

Key financials

(€m) 2010A 2011E


EBITDA 725 722

FFO 433 500

Net debt 3,593 3,423

Key Ratios

2010A 2011E

EBITDA margin (%) 49.3% 49.6%

EBITDA/net int. 2.5x 3.3x

FFO/ Adj. Net debt

(%)

12.1% 14.6%

Net debt/EBITDA (x) 5.0x 4.7x


Inser

t

grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

200

400

600

800

1,000

1,200

1,400

1,600

1,800

5-ye

ar C

DS

/ 5-y

ear X

O C

DS

(x)

5-ye

ar C

DS

(bps

)

ONOFII CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyONO / XO CDS (RHS)


ONO

21April 2011 23

Network and markets

ONO is the only cable operator in Spain with national coverage with 2m unique customers and

offering its services to 7 million Spanish homes. ONO offers analog and digital cable pay-TV,

broadband, fixed telephony, mobile telephony, and business services throughout most of

Spain’s regions (excluding Extremadura and the Basque regions). ONO is the main triple-play

telecoms competitor in Spain to the incumbent Telefónica and to its pay-TV operators. Aside

from the residential market, in which ONO has 1.9m fibre and ADSL customers, ONO offers

voice, Internet, data solutions and telecommunications equipment to large corporations as

well as to approximately 72,000 SMEs.

ONO’s fibre network spans a broad geographic area encompassing most Spanish regions

with ADSL network coverage in Galicia and Asturias (and no coverage in Extremadura and the

Basque regions). ONO’s fibre network alone covers 84% (14.7m) of Spain’s 17.5m homes, of

which slightly less than half have been released to ONO’s marketing. Within its marketing

footprint, ONO serves 1.8m residential fibre customers (26% penetration), an additional

88,000 residential ADSL customers and 72,000 SME customers. Nearly 78% of ONO’s

FY2010 revenues derived from residential fibre and ADSL services while another 21% were

from services to large corporations and small and medium enterprises (SMEs).

Through the end of 2010 ONO had deployed DOCSIS 3.0 technology, capable of reliably

delivering high-speed broadband of at least 50 Mbps, to 5.1m homes within its fibre network

footprint which represents a 73% coverage level. Through upgrades, DOCSIS 3.0 network

speeds can reach at least 200 Mbps and ONO trialled in Q4 2010 speeds of 100 Mbps. ONO

expects the upgrade of its entire fibre network to be complete by the end of Q2 2011. One of

the key operational trends underpinning ONO’s operational resilience in 2010, which we

expect should continue into 2011-12, has been customers subscribing to higher Internet

speeds and premium TV packages resulting in higher net monthly fee revenues which offset

declines in variable revenues from discretionary call charges, pay-per-view TV (‚PPV‛) and

pay Video-On-Demand (‚VOD‛). We note that as of YE2010 85% (€43.70/month) of ONO’s

monthly ARPU derives from fixed monthly subscription fees. For instance, in 2010 ONO’s

broadband product offered double the speed at a €2/month subscription fee increase and

ONO’s pay-TV offering began including GOL TV and premium-content Canal+. Given that

coverage and penetration rates are yet modest, ONO’s broadband speeds are high relative to

the national and European averages, ONO’s innovative new pay-TV offers are compelling

particularly when combined into bundles, and that ONO is focussing on higher-ARPU

customers we see scope for modest earnings growth from H2 2011 into 2012.


ONO

21April 2011 24

ONO network footprint

Source: Company data

ONO network coverage and penetration (31-Dec-10)

Residential (000s)

Homes in Spain 17,545

Homes in areas covered by

ONO's fibre network 14,741

% of Homes in Spain 84%

Homes released to marketing 7,030

% of Homes in areas covered

by ONO's fibre network 48%

Residential Fibre customers 1,811

Fibre penetration 26%

Residential ADSL customers 88

Total residential customers 1,898

Business

SME customers 72 Source: Company Data

ONO Group revenue split (2009-2010)

(€m) 31-Dec-10 % of total 31-Dec-09 % of total % chg

Residential - Fibre 1,120 76.1% 1,124 74.3% -0.4%

Residential - ADSL 39 2.6% 34 2.2% 14.7%

Business - SMEs 72 4.9% 70 4.6% 2.9%

Business - Corporations 142 9.6% 166 11.0% -14.5%

Business - Wholesale / Other 88 6.0% 98 6.5% -10.2%

Indirect access 8 0.5% 10 0.7% -20.0%

Disc. ops (Teuve) 3 0.2% 11 0.7% -72.7%

Total revenues 1,472 100.0% 1,512 100.0% -2.6% Source: Company Data

Across all its markets – analog and digital pay-TV, broadband Internet, fixed and mobile

telephony services – ONO competes primarily against the Spanish telecoms incumbent

Telefónica (TEF). Given ONO’s redirected focus on margins and cash flow, contrasted with its

previous aims of network buildout, geographic expansion and revenue increases, ONO now

prefers to not compete with TEF on the basis of price but instead on value by touting the

benefits of its higher-speed broadband, more interactive and multi-functional pay-TV platform,

and bundled services. For example, TEF and Vodafone have recently pitched low-speed

broadband services at low price points hoping to attract straitened Spanish customers (TEF:

€13.45/month, ex-VAT, during first 3 months and €26.90/mo for the following 9 months +


ONO

21April 2011 25

€14/month line rental for 10 Mbps broadband + national calls and a monthly quota of fixed-to-

mobile calls; Vodafone: €4.90/month, ex-VAT, during first 6 months and €9.90/mo afterwards

without a tied contract + €15/month line rental for up to 20 Mbps broadband + national calls

and a monthly quota of fixed-to-mobile calls; ONO: €19.90/month during 1 year, rising to

€35.90/mo after first year + €14/mo line rental for 12 Mbps broadband + national calls and a

monthly quota of fixed-to-mobile calls). ONO, however, is focusing its efforts on attracting

customers to its bundled services - especially its core trio of broadband, pay-TV and fixed

telephony - where value to customers is higher and ARPU and churn levels to ONO are more

attractive. ONO points out that new subscribers are joining at an average of 2.45 Revenue

Generating Units (RGUs) per customer. In line with this strategy, ONO has eschewed pursuit

of all customers at all costs and instead focusing on higher-ARPU customers while actively

pruning its customer portfolio in order to remove low-margin and delinquent customers.

Further adding value to its bundles by rounding out a ‚quad-play‛ offering, ONO has begun

offering to its existing customers mobile telephony and mobile broadband services. ONO is

providing these services as a capex-light Mobile Virtual Network Operator (‚MVNO‛) and the

fact that it is initially providing these services only to its existing customer base should limit

the bulk of its mobile services cost base to handset subsidies. Although in its early stages,

mobile services can allow ONO to leverage its fibre network by offering fixed-mobile

convergence services while also adding additional revenue streams and reducing churn levels.

Customer base evolution Revenue Generating Units (RGUs) per customer

Source: Company data Source: Company data

Fibre Services subscription trends Average Revenue Per User (ARPU) trends

Source: Company data Company data

1,646 1,647 1,648 1,666 1,675 1,682 1,679 1,686

1,295 1,302 1,303 1,326 1,343 1,356 1,361 1,380

1,016 991 977 975 970 966 948 953

3,958 3,940 3,929 3,967 3,987 4,004 3,988 4,019

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

Rev

enue

Gen

erat

ing

Uni

ts (

000s

)

Telephony Internet TV TOTAL

2.15 2.15

2.16

2.17

2.19

2.20 2.20

2.22

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

RG

Us

/ Cus

tom

er (x

)

51.90

51.20

50.20

51.00

51.5051.60

50.80

51.50

26.5 26.2 26.0 26.1 26.0 25.9 25.7 25.8

15.7 15.917.3

13.9 14.213.4

15.1 15.5

0

5

10

15

20

25

30

49.00

49.50

50.00

50.50

51.00

51.50

52.00

52.50

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

%

€/m

onth

ARPU (€) Penetration (%) Net Churn (%)

43.6 43.8 43.8 43.5 43.7

5.3 5.2 5.1 4.8 4.6

2.1 2.6 2.72.5 3.1

51.0 51.5 51.6 50.8 51.5

30

35

40

45

50

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

AR

PU

(€/m

onth

per

subscri

ber)

Monthly subscription Variable Tel./TV

Other variable-revenue Total


ONO

21April 2011 26

ONO’s Fibre Services segment (formerly labelled Residential Cable) generates revenues from

connection, activation and fixed subscription fees as well as variable charges for its

broadband, telephony and TV bundled and individual services. ONO is moving away from

offering these services on an individual basis and is pushing two-, three- and four-play

bundles instead. The success of these efforts can be seen in ONO’s bundled services (defined

as a combination of at least 2 services per customer) take-up rate of 83% at Dec 2010. In

addition, ONO’s overall Revenue Generating Units (RGUs) per customer stood at 2.22x at 31-

Dec-10 which compares favourably to other European cable operators. This bundle strategy is

beneficial for a number of reasons, ranging from higher ARPU, greater potential for additional

value-added revenues, ‚stickier‛ customer relationships resulting in reduced churn rates, and

higher operating margins.

In its Internet Services segment, ONO has been offering increasingly higher broadband

speeds at marginally higher rates in order to provide greater bundle value. In late Q3 2010 it

launched a 50 Mbps service to all homes in its footprint. As of YE2010 ONO registered good

traction in its higher speed broadband services take-up with 126k subscribers representing

9% of its broadband customer base. Year-over-year (yoy) growth in Residential Fibre Services

Internet RGUs in 2010 was 4.0% aided by higher speeds offered and inclusion of these

services in bundles. In 2011, ONO will begin to roll out 100 Mbps and begin trialling 200 Mbps

services and will also complete DOCSIS 3.0 rollout across its network footprint.

In its Television segment, ONO has suffered customer attrition throughout most of 2009 and

2010. However, in Q4 2010 ONO managed to add 5k RGUs in its TV segment which can be

attributed to the marketing emphasis on bundles and could represent a bottoming out in the

customer attrition trend. ONO ascribes the improvement in its television subscribers growth

trend to both bundling and to the success of its new channel offers GOL TV (127k subs at

YE2010) and premium-content channels Canal+ (19k subs at YE2010). In late 2010 ONO also

struck a new strategic agreement with TiVo in order to offer a more advanced TV service

integrating broadcast and digital content with enhanced interactive functionality. This service

will include an interactive Personal Video Recorder (PVR), higher bandwidth High-Definition TV

(HDTV), as well as numerous options (such as pay-per-view, VOD, over-the-top (OTT) internet

content) for digital and broadcast content sourcing. ONO intends to include these innovative

services into bundles targeting higher ARPU customers by H2 2011. We see ONO’s strategic

agreement with TiVo as a defensive reply to the risk from OTT content. While the full

functionality and interface experience for customers remains to be seen, we believe this offer

should provide ONO with a complementary platform for integrating multiple content source

streams as opposed to allowing its content and TV subscriptions to be cannibalized or even

cancelled. On the upside, it should also provide additional upsell opportunities for incremental

value-add variable pay-TV revenues. More importantly, it will also reinforce the essential

nature of the bundled high-speed broadband connection in order to facilitate full multimedia

use of the TiVo set-top box as an Internet-connected residential multimedia hub. Furthermore,

we note that ONO expects overall programming costs will rise marginally in 2011 as ONO

selectively adds content and programming suited to its new pay-TV platform.


ONO

21April 2011 27



Western European average broadband download and upload speeds

Source: Speedtest.net, SG Cross Asset Research

ONO bundled services Spanish broadband market share

Source: Company data Source: CMT

2432

2330

147 10

6353

57 40

5356 44

87 8580

7067

63

54

0

20

40

60

80

100

%

Cable DSL/Other

58

5249

45

26 25

18

0

10

20

30

40

50

60

70

%

% of TV households

23

.7

23

.3

18.8

18

.3

18

.0

16.6

15

.9

15

.0

14

.7

14

.4

13

.9

13

.3

12

.6

11

.6

11

.4

10

.2

9.5

8.3

6.6

6.4

5.8

4.6

9.4

9

5.1

6

2.2

8

2.1

7

1.5

6

8.3

6

7.5

2

1.4

2 3.1

3

6.9

7

2.4

2

3.1

5.0

9

1.3

3

1.6

7

1.3

3

1.2

1

1.4

1

0.9

6

0.6

3

0.7

6

0.8

1

0.0

5.0

10.0

15.0

20.0

25.0

Bro

ad

ba

nd

sp

ee

ds

(M

b/s

)

Download Speed (Mb/s) Upload Speed (Mb/s)

29.320.8 18.5 17.1

31.134.1 35.6 38.6

39.6 45.1 46.0 44.3

FY 07 FY 08 FY 09 FY 10

Bu

nd

le /

To

tal C

us

tom

ers

(%

)

Single-play Double-play Triple-play

1,859 1,8981,853 1,825

57 56 56 55 54 53 52 51

20 21 21 22 22 23 23 23

23 24 23 23 24 25 25 26

0

10

20

30

40

50

60

70

80

90

100

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

%

Telef onica Cable Other xDSL


ONO

21April 2011 28

ONO also provides voice, data and Internet communications services to SMEs, large

corporations and Spanish government agencies. Services to SMEs can be offered individually

or as bundles while services to larger institutions are often more tailored to specific client

needs. In 2010 ONO stepped up its focus on the competitive SME market allowing it to return

to positive subscriber and growth trends. In the SME segment in 2010, ONO served 72k

customers, 132k RGUs (1.78 RGUs/customer) and generated €72m of revenues. In contrast,

the more challenging Large Accounts and Corporations segment experienced a 14% yoy

revenue decline attributable to lower variable revenues as well as renegotiated contract price

reductions. As these business segments have higher capex requirements, higher customer

turnover, are more economically sensitive and price competitive than the Residential segment,

ONO will focus selectively on growing this segment.

Improving FCF generation and gradual deleveraging

ONO’s FY2010 improvement of 73% in Operating Free Cash Flow (OpFCF) to €164m was

driven primarily by an improvement in its working capital position. We don’t expect ONO to

benefit from the same level of reduction in working capital in 2011 yet expect a reduction in

cash interest charges to €222m such that OpFCF increases slightly to €170m. We also expect

ONO to maintain its capex levels in the €250m p.a. range (equivalent to 17% Capex/Sales) as

expenses for network growth continue to be contained and subscriber-growth based capex

comprise a larger proportion of capex spending and TiVo set-top box subsidies are not

expected to result in an expansion in overall capex spending. We anticipate ONO will apply a

good proportion of its free cash flow toward debt reduction reducing 2011 leverage to 4.7x.

Capex and FCF Capex breakdown (31-Dec-10)


Leverage EBITDA / net interest


441466

433

-140

95

164

23%

15%17%

-3.5%

2.4%4.6%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-150

-50

50

150

250

350

450

550

2008 2009 2010

€m

FFO (€m) OpFCF (€m)Capex / Sales (%) OpFCF / Net debt (%)

Buildout3%

Installation28%

CPE16%

Network24%

Projects and other20%

Commissions9%

5.04.8

3.43.1

1.8

5.75.4

4.3

4.13.8

5.75.4

5.04.7

4.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2008A 2009A 2010A 2011E 2012E

Net Sr. Debt / EBITDA (x) Net Senior Notes / EBITDA

Net Debt / EBITDA (x)

2.0

2.5

3.0

3.5

4.0

2008A 2009A 2010A 2011E 2012E

x


ONO

21April 2011 29

IPO and refinancing

ONO has publicly announced its interest in pursuing an IPO over the coming one to two years.

Given ONO’s current leverage of 5.0x and its need to first focus on refinancing its substantial

2013 maturities, we see this as more of a 2012 event. We also note the favourable valuation

multiples that have been associated with other European cable flotations, either executed

(e.g., KDG at 9.25x EV/EBITDA) or planned (e.g., Kabel BW 9.0x EV/EBITDA). Given ONO’s

improved operating prospects, its size and implicitly improved valuation we consider the risk

that ONO would be either an M&A target or an acquirer as low. We believe company

management will be more focused over the coming year on the final steps of extending its

maturity profile by refinancing its senior credit facilities maturing in 2013. ONO made

considerable headway over the last year in its refinancing and maturity extension exercises

and we believe the final steps to address the 2013 maturities should be consummated within

the coming year. In the meantime, we consider the c.20% headroom in ONO’s Senior Bank

Facility financial covenants to be adequate and sustainable throughout 2011-12. These

include Total debt to LTM EBITDA of 6.25x (YE10 at 5.0x), Senior debt to LTM EBITDA of 5.5x

(YE10 at 4.3x), EBITDA Interest cover of 2.5x (YE10 at 3.5x), and a capital expenditure limit of

€290m (YE10 actual spend of €244m).

ONO corporate structure


NOTES:(1) Shows amount drawn under the Senior Bank Facility as of 31 December 2010; Total commitments of €3.5bn.(2) Other credit facilities and State subsidies of €4 million and €21 million respectively.(3) Cash and cash equivalents of €59 million.


ONO

21April 2011 30

ONO debt profile (at 31-Dec-10)

31-Dec-10 LTM EBITDA (x) Rate base Margin Rate Maturity Maturity (Years)

Senior credit facilities 2,491 3.4 EUR 3M 1.43% 2.69% 3.3

Sr. Secured Notes 700 1.0 8.88% 01-Dec-18 7.6

Sr. Subordinated Notes 461 0.6 11.03% 15-Jul-19 8.3

TOTAL 3,652 5.0 4.8

Cash 59 5.0

Revolver, other credit available 280

Total liquidity 339

Floating-rate debt (%) 68

Fixed-rate debt (%) 32

Secured debt (%) 87

Unsecured debt (%) 13

Wtd. avg. debt maturity (yrs) 4.77


Debt maturity profile (at 31-Dec-10)


339 330129

450104

360 700

-188

-654

842

43

150

200

-39

-135

174

700

295

166

-1,000

-500

0

500

1,000

1,500

2,000

2,500

Liquidity 2011 2012 2013 2014 2015 2016 2017 2018 2019

€m

RCF (Tranche C) (undrawn) RCF (Tranche C) (drawn) Tranche A TL Tranche B TL

Tranche D Tranche E (Forward Start Fac.) Tranche I TL Tranche I (FSF)

Senior Secured Notes Other sr. credit f acilities State subsidies & other € Sr. Sub. Notes

US$ Sr. Sub. Notes

339 61

181

702

461

2,248


ONO

21April 2011 31

ONO financial summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 1,602.0 1,512.0 1,471.9 1,457.2 1,479.0


Revenue growth -5.6% -2.7% -1.0% 1.5%

EBITDA growth 3.8% -0.6% -0.4% 1.3%

EBITDA margin 43.9% 48.3% 49.3% 49.6% 49.5%



Cash taxes 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0

Change in provisions -15.0 0.0 0.0 0.0 0.0

Working capital -146.7 -66.0 0.0 -35.0 -25.0

Restructuring cash costs, other -60.0 -85.0 -25.0 -40.0 -30.0



Acquisitions / Divestitures 16.6 0.0 0.0 0.0 0.0



Dividends / Shareholder returns -2.8 0.0 125.0 0.0 0.0

Debt issuance 574.8 0.0 725.0 200.0 750.0

Debt redemption -97.8 -184.6 -1,165.5 -241.5 -1,016.0

Other Financing 0.0 -14.0 -27.0 0.0 0.0

Cash Flow from Financing 474.2 -198.6 -342.5 -41.5 -266.0

Change in Cash 336.1 -103.6 -178.2 128.9 -52.3

Cash 342.0 238.0 59.0 187.9 135.6

Revolver (drawn) 0.0 0.0 0.0 0.0 0.0

Senior Bank debt 3,883.0 3,712.0 2,491.0 2,449.5 1,433.5

Senior Secured notes 0.0 0.0 700.0 700.0 1,450.0



Total debt 4,383 4,172 3,652 3,611 3,345

Net debt 4,041 3,934 3,593 3,423 3,209

Financial summary (€m) 2008A 2009A 2010A 2011E 2012E

Revenues 1,602.0 1,512.0 1,471.9 1,457.2 1,479.0

Adj. EBITDA 703.0 730.0 725.3 722.4 731.4

EBITDA margin 43.9% 48.3% 49.3% 49.6% 49.5%


FFO - Capex - W/C Chg. (OpFCF) -139.7 95.0 164.3 170.4 213.7



FFO / Net debt 10.9% 11.8% 12.1% 14.6% 16.1%

FFO - Capex / Net debt 1.7% 6.3% 5.3% 7.2% 8.4%

FCF / Net Debt -3.9% 2.4% 8.1% 5.0% 6.7%

Capex / Sales 23.3% 14.6% 16.6% 17.5% 16.8%



Net debt / EBITDA 5.7x 5.4x 5.0x 4.7x 4.4x

Cash 342.0 238.0 59.0 187.9 135.6


Liquidity 342.0 238.0 339.0 467.9 415.6



Telenet

21April 2011 32


TELENET Mature cable operator with limited M&A and regulatory risk

Stable We initiate coverage on Telenet (TNETBB) with a Hold recommendation on its €500m

2020 and €300m 2021 senior secured notes and Neutral on 5-year CDS.

Event: We initiate coverage on Telenet, a Belgian cable system operator 50.2% owned

by Liberty Global Inc. (LGI), the largest cable company outside the U.S. and which

operates in 14 countries with 17.7m customers. Telenet is Belgium’s second-largest

cable operator with 2.3m unique customers in Flanders and Brussels. Telenet offers

analog and digital TV, broadband Internet, fixed and mobile telephony services.

SG Credit Opinion: We have a Stable credit opinion on Telenet as we believe it is a

relatively mature European cable operator positioned for moderate revenue and earnings

growth through increasing conversion of analog video subscribers to video services,

upselling of premium digital TV services (such as HD and DVRs), in addition to growth in

mobile telephony and business services. However, Telenet’s shareholder returns policy

will limit FCF generation and debt reduction maintaining total leverage instead in the 3.5x

area. Importantly, we underscore the fact that this leverage policy also allows debt-

financed acquisitions to push leverage, albeit temporarily, beyond this range. Currently,

Telenet is considering the acquisition of Numericable for a purchase consideration of

approximately €300m which should be manageable within Telenet’s target leverage

range. Otherwise, we see M&A risk as manageable and limited to small and mid-sized

targets given Telenet’s intention to focus its M&A on the Belgian market. Over the

medium term we also see a limited degree of regulatory risk given that Belgium’s

telecoms and media regulatory bodies have recently issued proposals to open access to

Belgium’s cable networks. In summary, we believe Telenet has good counter-arguments

to the regulators’ proposals and also highlight the defeat of similar proposals last year in

the Netherlands.

SG Recommendation: We initiate with a Hold recommendation on Telenet € 6.625%

2021 Senior Secured notes (@ 98 price: YTW 7.0%, STW 372bps, Z-sp. 339bps). They

offer a fair yield in light of Telenet’s credit profile but we’d also highlight Telenet’s

financial leverage policy as well as moderate M&A risk and limited regulatory risk. In

addition, we initiate with a Neutral on 5-year CDS within a range of 200-275bps.

Next calendar events: Telenet’s Q1 2011 earnings results are scheduled for 3 May. EC

comments on Belgian regulatory proposals by end-Q2 2011.

Market value

Benchmark 6.625% 02 2021

Price 98 Hold

Rating

LT ST Outlook

MDY Ba3 NR Stable

S&P NR NR NR

Fitch BB NR Stable

Key financials

(€m) 2010A 2011E


EBITDA 669 709

FFO 521 555

Net debt 1,890 2,396

Key Ratios

2010A 2011E



FFO/ Adj. net debt

(%)

27.6% 23.1%



Inser

t

grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

0.00

0.10

0.20

0.30

0.40

0.50

(600)

(400)

(200)

0

200

400

600

800

5-ye

ar C

DS

/ 5-y

ear X

O C

DS

(x)

5-ye

ar C

DS

(bps

)

TLNET CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyTNET - XOTNET / XO (RHS)


Telenet

21April 2011 33

Network and market

Telenet operates primarily in the region of Flanders in Belgium and in parts of Brussels,

offering analog and digital cable pay-TV, broadband, fixed (Voice-Over-IP, VoIP) telephony,

mobile telephony, and business services in Belgium and parts of Luxembourg. At 31-Dec-10

Telenet had 2.3m analog and digital cable TV Revenue Generating Units (RGUs), 1.3m

broadband RGUs, 0.8m fixed telephony RGUs and 0.2m mobile telephony RGUs. As there is

no cable overbuild in Belgium Telenet’s network does not overlap with nor competes directly

with that of Voo, which operates in Wallonia, Belgium’s southern region. They do compete,

however, against the telecom incumbent, Belgacom, but their respective products and

services are based on hybrid fibre-coaxial cable technologies as opposed to copper-line

based (e.g., DSL) technologies. Cable network coverage in Belgium is virtually ubiquitous

largely due to its relatively early deployment over 35 years ago by local governments and

utilities. In addition, historically basic cable TV in Belgium has been provided at low price

points much as in other European markets like Germany, for example. As a result, cable TV

has developed to be and remains the dominant TV distribution medium with Satellite TV,

Digital Terrestrial Television (DTT) and, more recently, Belgacom’s Internet-Protocol TV (IPTV)

being secondary distribution alternatives. Satellite-TV and DTT comprise just over 2% and

less than 1%, respectively, of all TV usage in Belgium. Telenet’s market position and share in

pay-TV services in its Flanders footprint is 54% whereas it has #2 market positions in its other

service streams – broadband, fixed-line and mobile telephony.

Telenet’s cable network is fully upgraded to DOCSIS 3.0 (at 600 MHz bandwidth) allowing it to

currently offer its residential and business customers broadband speeds of up to 100 MB/s

(through its ‚FiberNet 100‛ service). In addition, it has initiated a further network upgrade plan

to ‚future-proof‛ its network, termed ‚Digital Wave 2015‛, in order to be able to offer speeds

of up to 200 MB/s within a few years’ time. Although fibre (FTTH) networks that could

potentially be developed by Belgacom would compete with these speeds, to-date Belgacom

hasn’t announced any such plans. Instead, Belgacom intends to cover 73% of the Belgium

with a higher-speed DSL technology (VDSL) capable of offering theoretical speeds of up to

50MB/s. In reality, however, broadband speeds using VDSL diminish in proportion to the

distance between the end-user and the operator’s local loop, typically tapering off more at a

distance beyond 1km. Telenet’s current network and ‚Digital Wave 2015‛ program will afford

it a medium-term technological competitive advantage over the incumbent’s network.

In mobile telephony, Telenet does not own or operate its own full-scale mobile network but

instead opts for a more asset-light option of a full Mobile Virtual Network Operator (MVNO)

contract with Mobistar (53% owned by France Telecom). Telenet’s full-MVNO mobile platform

became operational in October 2010 and is so far attracting higher-quality post-paid and

higher-usage new customers. Through this arrangement, Telenet is able to manage marketing

(including subscriber acquisitions costs, SACs, and handsets offered) and billing for its mobile

customers. In this way, Telenet is still able to append mobile telephony as a fourth service

completing a ‚quad-play‛ bundle offering without the significant capital expenditure entailed in

building and upgrading a mobile network. At a time when most mobile network operators are

investing in network upgrades and expansion in order to deal with rapidly increasing mobile

data traffic, Telenet is still able to offer services that connect mobile telephony customers to

its fixed-line network (convergence) thereby capitalizing on its fixed-line network’s strength.

We also highlight that Telenet has reiterated that at the current time it is not interested in

building and owning its own mobile network. This is not only sensible in light of the cost of

building the current generation of mobile networks (LTE) capable of handling higher data


Telenet

21April 2011 34

traffic but it is also consistent with LGI’s approach to mobile telephony services in most of its

other markets.

Telenet network footprint

Source: Company Data

Belgian communications market summary

Telenet Belgacom Mobistar BASE TV Vlaanderen

Services

Internet, Phone,

CATV, Mobile

Internet, Phone,

IPTV, Mobile

Internet, Phone,

CATV, Mobile Mobile Satellite TV

Footprint Flanders National National National Flanders

Core Technology Cable DSL / 3G DSL / DTH / 3G 2G / 3G

Market share

(National)

TV: 54% (#1)

Fixed-line Tel.: 25%

(#2)

BB Internet: 36%

(#2)

Mobile: 2% (#4)

Fixed-line Tel.: 65%

(#1)

Mobile: 45% (#1)

BB Internet: 50%

(#1)

TV: 17% (#2)

Fixed-line Tel.: 4%

(#3)

Mobile: 35% (#2) Mobile: 18% (#3) TV: 3% (Flanders only)

Competitiveness ● ● ◓ ◔ ◔

Source: Company Data, SG Cross Asset Research

European broadband penetration (2009) European pay-TV penetration (2009)

Sources: Screen Digest, Euromonitor Source: Screen Digest

2432

2330

147

6353

57 40

5356

0

10

20

30

40

50

60

70

80

90

100

DK NL CH BE UK D

%

Cable Other

8785

80

7067

63

58

5249

45

25

18

0

10

20

30

40

50

60

70

NL UK DK BE CH D

%

% of TV Households


Telenet

21April 2011 35

Belgian broadband penetration Telenet subscribers evolution


Telenet revenues (2010) Telenet revenues (2009)


65.0

67.0 68.0

70.0 71.0

73.0 74.0

76.0

54.0 55.0

56.0 57.0 57.0 57.0

58.0 59.0

60.0

62.0 63.0

64.0

66.0 67.0

68.0 69.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4

%

Flanders Wallonia Belgium

1085 1116 1150 1174 1197 1227

857938

10031056

11091183

715 741 763780 795 815

104 129 152 170 182 199

2.9 3.02.1 1.9 2.5

9.5

6.95.3 5.0

6.7

3.63.0

2.2 1.9 2.5

24.0

17.8

11.8

7.1

9.1

0

5

10

15

20

25

0

200

400

600

800

1,000

1,200

1,400

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

Subscri

bers

(000s)

Internet Digital TV

Telephony Mobile

Internet Subs growth (%) TV Subs growth (%)

Tel. Subs growth (%) Mobile Subs growth (%)

Basic Cable TV, €325.1m, 25%

Premium Cable TV, €150.7m,

12%

Dist. / Other, €55.7m, 4%

Residential Broadband,

€426.7m, 33%

Residential Telephony,

€255.9m, 20%

Business Services,

€84.9m, 6%

Basic Cable TV, €322.3m, 27%

Premium Cable TV, €115.4m,

10%

Dist. / Other, €56.5m, 5%

Residential Broadband,

€402.0m, 33%

Residential Telephony,

€224.3m, 19%

Business Services,

€76.9m, 6%


Telenet

21April 2011 36

Strategy

Telenet has a clear four-pronged approach to its growth strategy, generally centred on a

continuation of gradual expansion and penetration in established segments such as Internet

and Digital TV complemented with growth from a lower base in newer segments such as

Mobile and Business Services (B2B). In broadband, Telenet’s main growth objective is

premised upon expanding its footprint to reach at least 90% coverage by the end of FY 2013

and on prominently marketing the fact that its network’s DOCSIS 3.0 speeds outperform

competitors’ DSL-based alternatives. In Digital TV, Telenet’s aim is to continue converting

analog cable TV (basic cable TV) subscribers to digital cable TV customers who exhibit

approximately double the ARPU levels of analog cable TV customers. Telenet targets an

annual 10% increase in its analog-to-digital conversion rate (digitalization rate). We note

Telenet increased its digitalization rate from 42.7% at the end of 2009 to 54.6 % at year-end

2010, an increase of nearly 12 percentage points. In Mobile, Telenet seeks to offer mobile

telephony as a complement to its fixed-line platform through, for instance, combined access

to Telenet’s 1,200 WiFi points in Belgium. Through its full-MVNO agreement with Mobistar,

Telenet is focussing on higher-tier smartphone users and targeting post-paid customers

through selective handsets subsidization. In light of the capital intensity of building and

maintaining a competitive mobile network, especially amidst growing data traffic demands on

current mobile networks, we view Telenet’s full MVNO strategy as sensible while it assesses

synergy opportunities with its fixed-line and B2B segments. In this context, we note that

Telenet will not bid for Belgium’s fourth 3G mobile license on 6 June 2011 although it has

piloted gradual investments in LTE (4G) in certain Belgian cities in 2010. In terms of its

strategy of targeting smartphone users, we also see this as a judicious choice given that

smartphones are projected to account for nearly half of the global mobile handset in the next

five years (according to Ovum) and can generate additional data-based ancillary ARPU for

operators. We also highlight that Telenet is set to offer the iPhone 4 in 2011 as part of its

mobile strategy. In B2B, through which Telenet offers connectivity, security and hosting

solutions to Small and Medium Enterprises (SMEs), Telenet is targeting 8-10% top-line growth

by leveraging its DOCSIS 3.0 speed advantage and integrating security and hosting solutions.

Subscriber net adds Churn levels


30 3134

24 23

30

64

81

65

53 52

74

2126

2217 15

20

4

24 2318

1316

0

10

20

30

40

50

60

70

80

90

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Subscri

ber

net

additio

ns (0

00s)

Internet Digital TV Fixed Telephony Mobile Telephony

7.4 7.4

6.9

6.5

7.87.6

6.5

9.1

10.3

8.5 8.68.8

6.4

6.8 6.9

6.1

6.9

7.2

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

Internet Basic Cable TV Telephony


Telenet

21April 2011 37

Average Revenue Per User (ARPU) Revenue Generating Units (RGUs) / Subscriber


Service penetration rates Multi-play penetration and digitalization


Low FCF generation, deleveraging from EBITDA growth

Telenet’s FY2010 improvement of 55% in Free Cash Flow (FCF) to €258m (prior to

shareholder disbursements) was driven primarily by EBITDA growth, stable interest expenses

and lower capex. We project Telenet in 2011 will grow EBITDA at c6%, maintain its capex

levels in the €280-290m p.a. range (equivalent to 20-21% Capex/Sales) and interest expenses

in the €150-155m range over 2011-12. As a result, its FCF (prior to shareholder

disbursements) should be in the range of €250-260m in 2011 and c.€300m in 2012. In keeping

with its 3.5x leverage target we anticipate Telenet will relever to that 3.5x level by returning

excess FCF to its shareholders and so project net leverage to remain in the 3.25-3.5x band

during 2011-12.

35.3

36.8

37.7

38.4

39.0

40.04.2

2.4

1.9

1.6

2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

32.0

33.0

34.0

35.0

36.0

37.0

38.0

39.0

40.0

41.0

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

€/m

onth

per

subscri

ber

ARPU (€/month) ARPU growth (%)

1.76

1.79

1.83

1.85

1.87

1.90

1.7

2.2

1.1 1.1

1.6

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1.75

1.77

1.79

1.81

1.83

1.85

1.87

1.89

1.91

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

RG

Us / S

ubscri

ber

(x)

RGUs/Sub RGUs/Sub. growth (%)

84.8 83.8 82.8 82.1 81.480.7

38.9 39.9 41.1 41.8 42.6 43.5

25.6 26.5 27.2 27.8 28.3 28.9

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Serv

ice p

enetr

ation

rate

s (

%)

Cable TV Broadband Fixed Tel.

50.448.5

46.545.1

43.441.9

23.1 23.7 24.4 25.026.1 26.5

26.527.8

29.0 29.9 30.531.6

38.8

42.7

45.9

48.5

51.1

54.6

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Penetr

ation and dig

italization r

ate

s (

%)

Single-play subs (%) Double-play subs (%)

Triple-play subs (%) Digitalization (%)


Telenet

21April 2011 38

Capex Capex breakdown (31-Dec-10)


EBITDA and Operating Cash Flow generation Free Cash Flow from Operations (OpFCF)


M&A

Recent Reuters reports state that Telenet has been to be interested in bidding c.€300m for

Numericable. Potential buyers had until 24 February to submit their indicative bids.

Numericable is one of the last Belgian regional cable companies to not be owned by either

Telenet or Voo and is active in Brussels and in two nearby municipalities (Wemmel and

Drogenbos). At year-end 2010, Numericable had 120,000 to 150,000 customers, generated

revenues of €70m and EBITDA of €40m. Although recent reports have stated Telenet may no

longer be actively bidding in the auction for Numericable, should Telenet decide to bid for

Numericable we believe a €300m acquisition price should be manageable within Telenet’s

target leverage range. Otherwise, we see M&A risk as contained to small and mid-sized

targets given Telenet’s stated intention to focus its M&A on the Belgian market.

Regulation

On 21 December 2010, the Belgian national telecom regulator (BIPT) along with the three

Belgian regional media authorities (CSA, Medienrat and VRM) announced proposals to open

Belgium’s cable networks with regards to analog cable TV, digital cable TV and broadband

access. In Belgium, BIPT’s remit covers telecommunications regulation while the regional

media authorities are responsible for regulating Belgium’s broadcast markets. Key to the

regulators’ arguments is that their market analyses assessing significant market power (SMP)

231

274

246

289 282

22.7% 22.9%

18.9%

21.0%

19.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

50

100

150

200

250

300

350

2008A 2009A 2010A 2011E 2012E

Capex

/ S

ale

s (

%)

Capex

(€m

)

Capex (€m) Capex / Sales (%)

Customer Installations, €63m, 20%

Set-Top Box Rental, €52m,

16%

Network growth, €95m, 30%

Maintenance / Other, €75m,

24%

DTT License, €31m, 10%

506

608

669709

748

352

486521

555591

121167

258 260299

0

100

200

300

400

500

600

700

800

2008A 2009A 2010A 2011E 2012E

€m

Adj. EBITDA Funds From Operations (FFO) FFO - Capex - W/C Chg. (OpFCF)

121

167

258 260

299

23.9

27.5

38.636.7

40.0

6.6

11.413.6

10.912.5

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

300

350

2008A 2009A 2010A 2011E 2012E

%€m

FCF (€m) FCF / EBITDA (%) FCF / Net debt (%)


Telenet

21April 2011 39

treat each cable operator’s respective coverage areas (i.e., footprint) – Flanders, Wallonia and

Brussels - as the addressable market rather than the national territory. The regulators’ key

findings are:

Belgacom only is dominant in the provision of broadband on a national level.

Each individual cable company is found to hold SMP on the relevant market corresponding

to its geographic footprint, on the basis of a) high and persistent entry barriers; b) tendency to

inhibit effective competition behind those entry barriers; and c) insufficiency of competition

law.

The key remedies proposed include:

Analog TV resale

Open wholesale access to the digital TV platform of cable operators and Belgacom

Resale of broadband internet access, in conjunction with digital cable TV access

Resale rates would be regulated using a ‚retail price-minus‛ (e.g., RPI-x) framework

In their scope these proposals are unprecedented in the EU and similar attempts at opening

cable access networks have only been attempted in the Netherlands in 2010, where they were

defeated by the Dutch trade tribunal. In essence the proposals are contrary to the EC norm for

such market analyses and, in fact, push or even exceed the regulatory powers of these

authorities. Of particular concern is the regulators’ joint attempt to regulate as bundles

analog/digital cable TV and broadband internet access, which fall under distinct regulatory

remits and whose market dominance needs to be separately assessed by the relevant

regulatory authority. Telenet has quickly and vehemently contested these proposals, on the

justified grounds that Belgium’s cable operators represent the main competitive counterweight

to the incumbent telecom operator Belgacom, that 1) cable TV services are already regulated

with Belgium’s basic analog cable TV prices already amongst the lowest in Europe; 2) that

there are multiple distribution platforms (cable, IPTV, DTT, satellite) currently available to

Flemish consumers; 3) that in broadband internet Telenet still only has a 36% market share; 4)

that the TV market is not an area subject to regulation by the European Commission (EC); 5)

and, that regulation of broadband internet has been tacked on based on the authorities’

determination that cable operators’ hold SMP in regional TV markets. In terms of the process,

interested parties’ initial comments were due by 18 February, after which the proposals will go

through rounds of advice at the European Competition Commission and European

Commission in Phase I discussions though Q2 2011, then iterative Phase II discussions with

Belgian regulators through Q3-Q4 2011. We share Telenet’s opposition to the regulators’

proposals which we see as largely unfounded. Moreover, we deem the proposals and their

associated remedies to lack sufficient merit in order to be enacted as proposed. The

proposals mooted will likely face stiff opposition at the EC level and we expect the EC to find

‚serious doubts‛ with the proposals requiring at least lengthier Phase II review into the end of

2011. In a downside case, should the EC side with BIPT and the Belgian regional regulatory

authorities, Telenet would likely appeal the decision in Belgian (and potentially EU) courts

thereby further delaying any eventual implementation of wholesale cable access resale until

mid-2013 at the earliest. A plausible but not dramatically adverse scenario could see open

access to the cable operators’ (including Telenet’s) analog cable TV offerings, which would

represent a compromise of sorts but still not be overly disadvantageous to Telenet.


Telenet

21April 2011 40

Telenet corporate structure


Telenet debt profile (as at 31-Dec-2010)

Facility Currency Facility amount (m) Outstanding amount (€m) / LTM Adj. EBITDA (x) Maturity

Revolving Credit Facility € 80.0 80.0 0.0 31-Dec-14

€ Sr. Secured Notes € 1,430.0 1,430.0 0.8 01-Dec-17

US$ Sr. Secured Notes US$ 632.2 632.2 0.4 01-Dec-17

Sr. Unsecured Notes € 665.0 665.0 0.4 01-Dec-19

Total Debt 2,807.2 1.6

Cash 58.7 0.0

Net Debt 2,748.5 1.5




Telenet Group Holding

NV

Telenet NV (Sr. Credit

Facility Co-borrower &

Co-guarantor) (4)

Telenet International

Finance S.A. (Sr. Credit

Facility Co-Borrower

and Co-Guarantor(4)

Other Operating

Subsidiaries (5)

Senior Credit

Facility

€300m Notes (2)

Facility O (3)

Telenet Finance

Luxembourg III

S.a.r.l (Issuer) (1)

Finco Loan

(1) Telenet Finance Luxembourg is a special purpose financing company formed for the primary purpose of facilitating the offe ring of

the Notes and is owned 100% by a foundation established under the laws of The Netherlands.

(2) The Notes will be senior obligations of the Issuer. The Notes will be secured by, among other things, a first ranking sec urity interest over the Issuer’s rights to and benefit in the Finco Loan (including all rights of the Issuer as a lender under the Senior Credit

Facility).

(3) The proceeds from the issuance of the Notes will be used by the Issuer to fund a Finco Loan, denominated in euro, under an

additional facility borrowed by Telenet International Finance under the SeniorCredit Facility.

(4) Both Telenet NV and Telenet International Finance are, and will continue to be following the offering of the Notes, the funding of

the Finco Loan and the application of the proceeds of the Finco Loan, borrowers and guarantors under the Senior Credit Facility See

‘‘Description of the Senior Credit Facility and the Related Agreements—The Senior Credit Facility’’.

(5) Substantially wholly owned subsidiaries of Telenet NV that are not part of the Guarantor group under the Senior Credit Facility:

Telenet Vlaanderen NV, Hostbasket NV, Telenet Mobile NV, T-VGAS NV, C-CURE NV, Telenet Luxembourg Finance Center S.A. and Telenet Solutions Luxembourg S.A.

815

0 0 0

175

0 79 100

1,471

80

500

300

0

200

400

600

800

1,000

1,200

1,400

1,600

€m


Telenet

21April 2011 41

Telenet financial summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 1,018.8 1,197.4 1,299.0 1,376.9 1,445.8


Revenue growth 17.5% 8.5% 6.0% 5.0%

EBITDA growth 20.0% 10.0% 6.0% 5.5%

EBITDA margin 49.7% 50.8% 51.5% 51.5% 51.7%



Cash taxes 0.0 -0.3 0.0 0.0 -5.0

Other -6.6 -6.8 -10.5 0.0 0.0


Working capital -0.1 -45.6 -17.0 -5.0 -10.0

Restructuring cash costs, other 0.0 0.0 0.0 0.0 0.0



Acquisitions / Divestitures -202.7 -5.7 -2.0 0.0 0.0



Dividends / Shareholder returns 0.0 -55.8 -249.8 -756.0 -299.0

Net Debt redemption 77.1 5.0 526.2 0.0 0.0

Other Financing -6.6 -30.3 -38.3 -10.0 0.0

Cash Flow from Financing 70.5 -81.1 238.1 -766.0 -299.0

Change in Cash -11.0 80.1 493.9 -505.7 0.1

Cash 65.6 145.7 639.6 133.9 134.0

Revolver (drawn) 0.0 0.0 0.0 0.0 0.0

Senior Bank debt 1,900.0 1,613.4 2,529.8 2,529.8 2,529.8

Senior Secured notes 0.0 0.0 0.0 0.0 0.0



Total debt 1,900 1,613 2,530 2,530 2,530

Net debt 1,834 1,468 1,890 2,396 2,396


Revenues 1,018.8 1,197.4 1,299.0 1,376.9 1,445.8

Adj. EBITDA 506.4 607.7 668.7 708.8 747.8

EBITDA margin 49.7% 50.8% 51.5% 51.5% 51.7%


FFO - Capex - W/C Chg. (OpFCF) 121.2 166.9 257.8 260.3 299.1

Free Cash Flow (FCF) 121.2 111.1 8.0 -495.7 0.1


FFO / Net debt 19.2% 33.1% 27.6% 23.1% 24.7%


FCF / Net Debt 6.6% 7.6% 0.4% -20.7% 0.0%

Capex / Sales 22.7% 22.9% 18.9% 21.0% 19.5%




Cash 65.6 145.7 639.6 133.9 134.0


Liquidity 240.6 320.7 814.6 308.9 309.0



Unitymedia

21April 2011 42


UNITYMEDIA Good EBITDA growth, FCF breakeven, limited short-term M&A risk

Stable We initiate coverage on Unitymedia (LBTYA) with a Buy recommendation on its €

9.625% 2019, a Hold on the € 8.125% 2017 notes, and a Sell on 5-year CDS.

Event: Unitymedia is an indirect subsidiary of Liberty Global Inc. (LGI), the largest

cable company outside the U.S. and which operates in 14 countries with 17.7m

customers. Unitymedia is Germany’s second-largest cable operator with 4.6m

customers in North Rhine-Westphalia (NRW) and Hesse, Germany’s first and fifth most

populous states, respectively. Unitymedia offers analog and digital TV, broadband

Internet, fixed and mobile telephony services.

SG Credit Opinion: We initiate coverage on Unitymedia with a Stable credit opinion as

we believe it is well positioned for further revenue and earnings growth through

increasing multi-play products penetration, conversion of analog video subscribers to

video services, and upselling of premium digital TV services (such as HD and DVRs). We

expect this growth, coupled, with flattening capex levels over 2011-2012 will result in

positive and moderately improving FCF generation over that period.With regard to LGI's

successful bid for KBW, we note that, should the acquisition be approved by the

German regulatory authorities, LGI could eventually seek to combine KBW with

Unitymedia within two years. Were this to happen, we would expect this to be done

subject to the combined entity's leverage being at or under 5.0x. Moreover, we consider

a combined Unitymedia/KBW could afford Unitymedia greater scale, efficiencies, cash

flow and ultimately deleveraging potential. In the interim, Unitymedia's incurrence

covenants and financial policy - 4.0x Senior Debt and 5.0x Total Debt to EBITDA (based

on last two quarters) - effectively limit not only Unitymedia’s deleveraging to a range of

4.0x-5.0x Total Debt/EBITDA, but also cap the potential for increased leverage in such

scenarios.

SG Bond Recommendation: We initiate with a Buy recommendation on Unitymedia

GmbH € 9.625% 2019 senior subordinated notes (@ 109.5 price: YTW 7.87%, STW

465bps, Z-sp. 478bps) and a Hold on the Unitymedia Hessen/NRW € 8.125% 2017 Sr.

Secured notes (@ 105.5 price: YTW 6.8%, STW 384bp, Z-sp. 376bp). The 2019s offer an

attractive yield in light of Unitymedia’s credit profile whose credit downside is limited

despite a degree of M&A and releveraging risk. We see the current 5-year CDS spreads

at 460/475, partially due to these risks, which we feel is overdone and see 430bps as a

target over 6 months so recommend a Sell on 5-year CDS.

Next calendar events: Unitymedia Q1 2011 results are expected on 05-May-11.

Market values

Benchmark 9.625% 12 2019

Price 109.5 Buy

Benchmark 8.125%

12 2019

12 2017

Price 105.5 Hold

Ratings

LT ST Outlook

MDY B1 NR Stable

S&P B+ NR Positive

Fitch NR NR NR

Key financials

(€m) 2010A 2011E

Revenues 935 980

EBITDA 521 559

FFO 237 266

Net debt 2,694 2,633

Key Ratios

2010A 2011E

EBITDA margin

(%)

55.7% 57.0%


FFO/ Adj. net debt

(%)

8.8% 10.1%



Inser

t

grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

(400)

(200)

0

200

400

600

800

1,000

5-ye

ar C

DS

/ 5-y

ear X

O C

DS

(x)

5-ye

ar C

DS

(bps

)

IESY CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyUPC - XOUPC / XO (RHS)


Unitymedia

21April 2011 43

Network and market

Unitymedia is Germany’s second largest cable operator, behind Kabel Deutschland (KD), as

measured by video subscribers, and is a subsidiary of Liberty Global Inc. (LGI). Unitymedia

provides analog and digital cable television services as well as internet and telephony services

across its network area in the German federal states of North Rhine-Westphalia (NRW) and

Hesse. NRW is Germany’s largest state, with over 18m inhabitants and Hesse is its fifth-

largest state, with over 6m inhabitants, and their combined populations comprise 30% of

Germany’s total population. NRW and Hesse are also amongst the German states with the

highest population density, which benefits the operational efficiency and reach of cable

networks, and also constitute one of Europe’s main industrial regions. Unitymedia’s network

dates back to the former state-operated network of Deutsche Bundespost. The network’s

core infrastructure was created by uniting the cable operators ish in NRW and iesy in Hesse in

2005 to form the Unitymedia Group, into which the activities of the provider Telecolumbus

West were also integrated. In November 2009, Liberty Global announced its acquisition of

Unitymedia for €3.5bn (equivalent to 7.4x Unitymedia’s 2009 adjusted EBITDA). LGI’s

acquisition financing package included €2.7bn of bonds issued out of UPC Germany in

November 2009.

Upgraded by Unitymedia to a hybrid fibre coaxial (HFC) network, Unitymedia’s network today

is 100 % digital and its technical design allows for the provision of competitively priced and

advanced Triple-Play communications services. As of 31 December 2010, Unitymedia’s

network covered 8.72m households equating to 77% of all households in NRW and Hesse. By

year-end 2010, 94% (8.2m homes) of Unitymedia’s network was bi-directional (863 MHz) up

to the street cabinet and 81% of those upgraded homes (6.6m) had access to next-generation

high-speed internet services (EuroDOCSIS 3.0) offering internet speeds of up to 128 Mb/s. At

year-end 2010, Unitymedia had 4.56m unique customers resulting in a 52% penetration rate.

Unitymedia network geographic coverage Unitymedia network services

Source: SG Cross Asset Research Source: Unitymedia (April 2010)


Unitymedia

21April 2011 44

Unitymedia Revenues (FY 2010) Unitymedia Revenues (FY 2009)


Subscriptions -Video, €618.0m,

66%

Subscriptions -Internet,

€88.8m, 9%

Subscriptions -Telephony,

€117.5m, 13%

Other, €110.9m,

12%

Subscriptions -Video, €610.0m,

70%

Subscriptions -Internet,

€95.9m, 11%

Subscriptions -Telephony, €72.9m, 8%

Other, €90.8m,

11%


Unitymedia

21April 2011 45

Strategy

Key pillars of Unitymedia’s revenue and earnings growth strategy are: 1) to increase the

penetration of its advanced services (digital cable, internet and telephony) which offer

enhanced digital video functionality and content; 2) promote bundled offerings which provide

for better customer value, lower churn and higher Average Revenue Per User (ARPU); and, 3)

migration of and upselling to single-play analog cable customers to digital video and other

advanced services as well as to multi-play subscription packages.

In 2010, this strategy continued to gain traction as Unitymedia’s total Revenue Generating

Units (RGUs) increased 6% year-over-year to just over 6m, with the highest growth rates in

internet and telephony RGUs while digital cable RGUs more than offset analog cable RGU

losses. In 2010, the increase in digital RGUs was driven by the conversion of analog cable

subscribers into digital services as well as through the strong take-up of Unitymedia’s triple-

play services branded Unity3play. At 31 December 2010, advanced services comprised 51%

of Unitymedia’s total RGU base (up from 44% at year-end 2009) while digital video

penetration increased to 34% from 30% at year-end 2009. Unitymedia’s increased

penetration of digital and advanced services RGUs has also translated into higher RGUs per

customer and ARPU, both of which support lower customer churn and position Unitymedia for

upselling its digital customer base higher-value pay-TV, High-Definition (HD) and Digital Video

Recorder (DVR) subscriptions. Amongst its advanced services, most notable are the 32 Mb/s

and 64Mb/s high-speed internet connection speeds available as part of Unitymedia’s premium

Unity3play bundle (currently available free of charge for 3 months to new subscribers and

subsequently at €40.00/month for 12 months) and its HD/DVR functionality for digital video

services.

In 2010, RGUs/customer increased 6% vs 2009, in line with total Revenue growth, and

blended ARPU/customer increased 8% to €15.07 vs €13.96 at YE 2009. Internet and

telephony services drove much of this growth, albeit from a low base, with 33% y-o-y growth

in each of those service segments. Nearly all subscribers adding internet services also

subscribed to telephony services while 75% of internet additions became Unity3play bundle

subscribers. This highlights the benefits of positioning Unitymedia’s differentiated, higher-

speed internet services as the anchor service in Unitymedia’s marketing and growth strategy.

We expect the trends discussed above to continue in 2011 despite heightened price- and

service-based competition particularly from DT and Vodafone in both video and internet

services.


Unitymedia

21April 2011 46

Revenue Generating Units (RGUs) Subscriber net adds (000s)


Average Revenue Per User (ARPU) Revenue Generating Units (RGUs)/Subscriber


Product penetration rates Multi-play penetration (31-Dec-10)


Low FCF generation, deleveraging from EBITDA growth

Unitymedia’s relatively high capex levels, compared to other European cable operators, at

28% of Sales in 2010 largely absorbed its Funds From Operations generated in 2010. We

estimate Unitymedia will maintain its capex levels between €260-275m p.a. (equivalent to 27%

Capex/Sales) over the next two years. Most of Unitymedia’s capex is related to subscriber

growth and/or new product development. As a result, we estimate Unitymedia’s Free Cash

Flow (FCF) over the next two years will be positive but not material, averaging €18m p.a.

3.26 3.17 3.11 3.05 3.01 2.95

4.56 4.53 4.52 4.51 4.50 4.49

0.54 0.590.64

0.68 0.73 0.78

0.54 0.59 0.64 0.68 0.73 0.78-2.7 -2.0 -1.8 -1.5 -1.8

4.7 3.92.8 2.5 2.8

-0.6 -0.2 -0.4 -0.2 -0.3

8.78.5

6.7 6.57.5

-5

0

5

10

15

20

25

0

1

2

3

4

5

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

RG

Us

(m)

Analog Cable Total Video

Internet Telephony

Analog Cable subs growth (%) Digital Cable subs growth (%)

Total Video subs growth (%) Internet subs growth (%)

-48.0

-86.5

-62.0-56.0

-45.0-53.6

36.0

61.353.0

41.037.0

42.1

-12.0

-25.2

-9.0-15.0

-8.0 -11.5

-100

-80

-60

-40

-20

0

20

40

60

80

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Analog Cable Digital Cable Total Video

13.91

14.26

14.68

14.84

15.1715.072.5

2.9

1.1

2.2

-0.7

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

13.20

13.40

13.60

13.80

14.00

14.20

14.40

14.60

14.80

15.00

15.20

15.40

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

€/m

onth

per

subscri

ber


1.24

1.26

1.27

1.29

1.31

1.331.6

0.8

1.6 1.6 1.5

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1.18

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

RG

Us / S

ubscri

ber

(x)


28.530.0

31.332.3

33.234.2

6.9 7.3 7.9 8.3 8.8 9.5

6.8 7.2 7.9 8.3 8.8 9.5

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

Digital Cable / Video Total (%) Internet / 2-way Homes Passed (%)Telephony / 2-way Homes Passed (%)

1-play, 83%

2-play, 2% 3-play, 15%


Unitymedia

21April 2011 47

Capex Free Cash Flow from Operations


237 258 261 260 276

28.8

29.4

27.9

26.5

27.0

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

0

100

200

300

400

500

600

700

800

900

1,000

2008A 2009A 2010A 2011E 2012E

Cap

ex /

Sal

es (

%)

Cap

ex (€m

)

Capex Capex / Sales

-7

41

28

1

35

-1.6

8.7

5.3

0.2

5.8

-0.4

2.7

1.0

0.1

1.3

-4

-2

0

2

4

6

8

10

-10

0

10

20

30

40

50

2008A 2009A 2010A 2011E 2012E

%€m



Unitymedia

21April 2011 48


Although growth in the German broadband market slowed in 2010 Unitymedia accounted for 70%

of the market’s broadband net additions. In Digital Cable, Unitymedia also continues to exhibit

solid growth having added 173,000 digital cable net additions in 2010. Competition from Vodafone

and DT is also intensifying, however. In 2010, Vodafone announced its intention to provide bundled

DTH TV, DSL-based broadband and telephony in Unitymedia’s market. Although it is early to tell

whether this new competitive product from Vodafone could result in lower RGU growth or higher

churn for Unitymedia, we believe the superiority of Unitymedia’s cable platform particularly in terms

of its available broadband speeds should shield it to an extent from these competitive pressures.

In terms of M&A activity, Unitymedia’s parent, Liberty Global (LGI) on 21-Mar-11 announced its

€3.16bn acquisition Germany’s third-largest cable operator, Kabel Baden-Wuerttemberg (KBW)

(FY2010 revenues: €563m, +14.2% yoy; FY2010 EBITDA €316m, +21.5% yoy), which had been

put up for sale by its largest shareholder, private equity firm EQT Partners. EQT ran a dual-track

process by also exploring an IPO option, akin to Providence Equity’s approach with its Kabel

Deutschland (KD) asset in March 2010 in which it raised €759m valuing KD at 6.85x 2010 EBITDA.

We note that LGI’s acquisition will be subject to German regulatory scrutiny by the German Federal

Cartel Office given that Unitymedia is Germany’s second largest cable operator. KBW is a very

attractive asset for LGI in a core growth market now squarely within LGI’s footprint. We believe LGI

may seek within the next 2-3 years to combine KBW with Unitymedia once combined leverage is

under 5.0x (also pending regulators’ agreement) and thereby refinance the KBW acquisition debt at

this combined entity.

Unitymedia corporate structure


100%

Other subsidiaries

LGI

LG Europe

Liberty Global Europe

Intermediate HoldCo's

UPC Germany Holding BV

Unitymedia GmbH

Unitymedia Management

Unitymedia Hessen

Unitymedia NRW GmbH

100%

99.9%

100%

iesy Hessen Verwaltungs

Arena Sport Rechte und

100%

Operating subsidiaries

Operating subsidiaries

€665m Sr. Unsecured

€80m Revolving CF€1,430m Sr. Sec. Notes$845m Sr. Sec. Notes

Note: The €1,430m and $845m Senior Secured Notes issued by UPC Germany in Nov-09 were pushed down to Unitymedia Hessen-Unitymedia NRW group; the €665m Senior Unsecured Notes also issued by UPC Germany


Unitymedia

21April 2011 49

Unitymedia debt profile (as at 31-Dec-10)

Facility Currency Facility amount (m) Outstanding

amount (€m)

/ LTM Adj. EBITDA

(x)

Maturity

Revolving Credit Facility € 80.0 80.0 0.2 31-Dec-14

€ Sr. Secured Notes € 1,430.0 1,430.0 2.7 01-Dec-17

US$ Sr. Secured Notes US$ 632.2 632.2 1.2 01-Dec-17

Sr. Unsecured Notes € 665.0 665.0 1.3 01-Dec-19


Cash 58.7 0.1

Net Debt 2,748.5 5.3




58.70.0 0.0 0.0

80.00.0 0.0

2,062.2

0.0

665.0

0.0

0

500

1,000

1,500

2,000

2,500

Liquidity 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

€m


Unitymedia

21April 2011 50

Unitymedia financial summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 823.4 879.1 935.2 979.6 1,021.3

Normalised EBITDA (OCF) 409.7 471.3 520.9 558.7 595.0

Revenue growth 6.8% 6.4% 4.8% 4.3%

EBITDA growth 15.0% 10.5% 7.3% 6.5%

EBITDA margin 49.8% 53.6% 55.7% 57.0% 58.3%



Cash taxes -24.8 -20.7 -11.5 -39.6 -47.0

Other 1.8 5.3 0.0 0.0 0.0


Working capital -12.0 14.5 52.0 -5.0 -2.0

Restructuring cash costs 0.0 0.0 0.0 0.0 0.0



Acquisitions / Divestitures 244.0 0.0 0.0 0.0 0.0

Other Investing 10.8 7.1 -1,880.1 0.0 0.0

Cash Flow from Investing 17.6 -251.2 -2,141.4 -259.6 -275.7

Dividends / Shareholder returns 0.0 -45.6 0.0 0.0 0.0

Net Debt redemption 30.0 -30.0 -612.0 0.0 0.0

Other Financing -232.0 0.0 2,530.8 0.0 0.0

Cash Flow from Financing -202.0 -75.6 1,918.8 0.0 0.0

Change in Cash 46.3 17.9 66.4 1.4 34.7

Cash 214.9 185.0 58.7 60.1 94.8

Revolver (drawn) 30.0 0.0 80.0 20.0 0.0

Senior Bank debt 100.0 100.0 0.0 0.0 0.0

Senior Secured notes 1,024.0 1,024.0 2,022.5 2,022.5 2,022.5



Other debt 0.0 0.0 0.0 0.0 0.0

Total debt 1,729 1,699 2,753 2,693 2,673

Net debt 1,514 1,514 2,694 2,633 2,578


Revenues 823.4 879.1 935.2 979.6 1,021.3

Adj. EBITDA 409.7 471.3 520.9 558.7 595.0

EBITDA margin 49.8% 53.6% 55.7% 57.0% 58.3%


FFO - Capex - W/C Chg. (OpFCF) -6.5 86.4 27.7 1.4 34.7



FFO / Net debt 16.0% 21.8% 8.8% 10.1% 12.1%

FFO - Capex / Net debt 0.4% 4.7% -0.9% 0.2% 1.4%

FCF / Net Debt -0.4% 2.7% 1.0% 0.1% 1.3%

Capex / Sales 28.8% 29.4% 27.9% 26.5% 27.0%




Total debt / EBITDA 4.2x 3.6x 5.3x 4.8x 4.5x

Cash 214.9 185.0 58.7 60.1 94.8


Liquidity 214.9 185.0 58.7 60.1 94.8



UPC Holding

21April 2011 51

Diversified Telecom Services / Update of coverage

UPC HOLDING Continued growth through solid execution across a diversified European footprint

Stable We believe UPC’s consistent operating track record, strategic repositioning toward

Western Europe, good growth outlook, and clear (albeit above-average) leverage

policy, position the credit well. We rate UPC Holding (LBTYA) a Buy on its cash

bonds.

Event: UPC is an indirect subsidiary of Liberty Global, the largest cable company

outside the U.S. and which operates in 14 countries with 17.7m customers. UPC is

Europe’s largest cable operator with 8.9m customers in nine Western, Central and

Eastern European countries, in addition to 1.1m customers in Chile. UPC offers analog

and digital TV, broadband Internet, fixed and mobile telephony services.

SG Credit Opinion: We update our coverage on UPC with a Stable credit opinion as we

believe it is well positioned to continue its revenue and FCF growth path through

digitalization of its significant analog TV customer base (4.6m at YE2010), the upselling

of premium digital TV services (such as HD and DVRs), and declining capex levels, as its

network upgrade program abates and growth capex becomes increasingly success-

based. UPC’s two-pronged growth engine is driven by accelerating demand for HD TV

and DVRs as well as by the technological superiority of its ‘Fiber Power’ (DOCSIS 3.0)

high-speed broadband products, which are now available to over 90% of its marketable

homes. As a result, we anticipate UPC will continue to generate healthy free cash flow

averaging over €275m p.a. during FY 2011/12. Despite UPC’s solid FCF levels, we

expect it to manage UPC group leverage levels to its leverage policy and incurrence

covenants of 4.0x Senior Debt and 5.0x Total Debt to EBITDA. These effectively limit not

only UPC’s deleveraging to a range of 4.0-4.5x Total Debt/EBITDA, but also its credit

ratings, all other things being equal, to the low-to-mid BB/Ba range.

SG Bond Recommendation: We reiterate our Buy recommendation on UPC Holding

(UPCH) € 9.75% 2018 (@ 107.5 price: YTW 7.7%, STW 462bps, Z-sp. 469bps) and €

8.375% 2020 (@ 103 price: YTW 8.0%, STW 471bp, Z-sp. 454bp) notes. In our view they

offer a good yield in light of UPC’s credit profile where, in our opinion, the credit

downside is quantifiably bounded, notwithstanding M&A and releveraging risk. We see

the current 5-year CDS spreads as fairly valued (485/500) and are Neutral within a range

of 460-520.

Next calendar events: UPC Q1 2011 results are due to be released on 05-May-11.

Market value

Benchmark 8.375% 08 2020

Price 103 Buy

Rating

LT ST Outlook

MDY Ba3 NR Stable

S&P B+ NR Positive

Fitch NR NR Positive

Key financials

(€m) 2010A 2011E


EBITDA 1,776 1,869

FFO 1,108 1,115

Net debt 7,875 8,873

Key Ratios

2010A 2011E



FFO/ Adj. net debt

(%)

3.6% 2.7%



Inser

t

grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

400

450

500

550

600

650

700

750

800


UPC Holding

21April 2011 52

Network and market

UPC’s cable network is unique in that it spans nine countries in Europe along with operations

in Chile (VTR). In Western Europe, UPC is present (in order of revenues) in the Netherlands,

Switzerland, Austria and Ireland. In Central and Eastern Europe (CEE), it is present in Poland,

Hungary, the Czech Republic, Romania and Slovakia. In addition, UPC is also present in Chile

through its 80%-owned subsidiary VTR. In Ireland, Austria, Switzerland, Poland, Hungary, the

Czech Republic, the Slovak Republic and Chile, UPC operates the largest cable network. UPC

distributes video content via its coaxial cable networks in most of its key markets but in

certain markets, primarily in Eastern Europe, it also distributes video via satellite. In all of its

ten markets, UPC offers its core suite of analog and digital TV, broadband Internet, and fixed-

line telephony services. In certain European markets and in Chile, UPC is also gradually

introducing mobile telephony services. In the majority of its markets, UPC has also completed

bidirectional network upgrades on over 70% of the network. DOCSIS 3.0 high-speed

broadband products, offering 60-120 MB/s speeds and branded as ‘Fiber Power’, are also

available to nine million homes passed by UPC, which represents a 90% rollout level. With this

rollout level, UPC is well poised to reap the benefits of its DOCSIS 3.0 capex spend over the

last two years and to begin to use it as a key differentiating advantage over its incumbent and

other competitors.

UPC European network footprint



UPC Holding

21April 2011 53

UPC Holding Revenues (9M to 30-Sep-10) UPC Operating Cash Flow (9M to 30-Sep-10)


UPC Holding Network description


European incumbents’ fibre deployment plans

Source: SG Cross Asset Research, Companies’ data; Notes: FTTH = Fibre To The Home; VDSL = Very-high-bitrate Digital Subscriber Line; FTTC: Fibre To The Cabinet

Netherlands, €648m, 23%

Switzerland, €595m, 22%

Austria, €255m,

9%Ireland,

€206m, 8%

Poland, €176m, 6%

Hungary, €166m, 6%

Czech Republic, €146m, 5%

Romania, €92m, 3%

Slovakia, €40m, 2%

Chile, €441m, 16%

Other, €5m, 0%

Netherlands, €377m, 27%

Switzerland, €330m, 23%W. Europe -

Other, €212m, 15%

CEE, €309m, 22%

Chile, €183m, 13%

Country % two-way Internet speed (MB/s) 1-play penetration 2-play penetration 3-play penetration

Netherlands 94 5-120 59 9 32

Switzerland 85 0.25-100 67 17 16

Austria 100 4-120 49 24 26

Ireland 69 1-120 74 15 11

Hungary 99 1-120 60 25 15

Czech Republic 79 1-100 60 28 12

Poland 94 1-120 60 24 15

Romania 92 0.25-24 74 17 9

Slov akia 90 2-120 80 11 10

Chile 75 1-15 36 22 42

2012 planned coverage

Operator Country Coverage program FTTH (%)

VDSL/FTTC

(%)

Combined

(%)

Swisscom Switzerland FTTH to 1m homes by 2015 (€1.4bn cost); 70% VDSL cov erage already 33 70 70

Portugal Telecom Portugal FTTH to 1m homes (completed 2009-10) 33 0 33

KPN Netherlands FTTH to 1.1-1.3m homes by 2012; FTTC/VDSL to 0.6-0.8m homes by 2012 18 6 24

TeliaSonera Finland FTTH to 0.4m homes by 2012 18 0 18

France Telecom France FTTH to 7-8m homes by 2015 13 0 13

TeliaSonera Sweden €260m f or 0.5m homes by 2010 11 0 11

Deutsche Telekom Germany FTTH 10%, 31% VDSL/FTTC 10 31 41

British Telecom U.K. £2.5bn cost to pass 67% homes, w/20% FTTH & 80% FTTC, by Dec-15 10 30 40

Telecom Italia Italy FTTH to 1.3m by 2012 6 4 10

Belgacom Belgium Currently 73% FFTC/VDSL; no FTTH plans 0 73 73

Telef onica Spain FTTH/FTTC trials; no announced buildout or plan 0 0 0


UPC Holding

21April 2011 54

Strategy

In most of these markets UPC offers its triple-play bundles, featuring its high-speed

broadband ‘Fiber Power’ (DOCSIS 3.0) product, as well as advanced digital TV services such

as High Definition (HD) broadcasts and multi-functional Digital Video Recorders (DVRs).

Although leading with its two principal growth drivers of high-speed Internet and digital TV,

UPC seeks to achieve further revenue and margin growth by expanding its ratio of services

per customer by adding fixed-line voice and gradually mobile telephony (through a measured

and capital-light entry as an MVNO in Europe) as part of bundle offers. Throughout 2010,

UPC’s number of Revenue Generating Units (RGUs) per customer grew steadily at a quarterly

pace of 1.25% to 1.66. This suggests that UPC’s strategy to emphasize triple-play bundles to

new and existing customers, combined with its target of converting an existing customer base

of basic analog cable subscribers, which numbered 4.5m RGUs at Q4 2010, is working. Not

only do multi-product customers exhibit lower churn, but they also generate materially higher

ARPU than single-play customers, who are typically analog TV cable customers (as outlined in

the bundled price packages table below).

From a customer standpoint, bundled products also represent good value. Successfully

executing this marketing strategy is conducive to higher margins and Free Cash Flow (FCF),

as the requisite opex and capex are lower than for a new customer acquisition, yet still yield

additional revenue-generating streams. In 2010 UPC demonstrated that ‘Fiber Power’ type

products can drive growth and we believe this trend is set to continue at least over the course

of 2011 and 2012 as incumbents in most of UPC’s markets have been slow off the mark in

developing and marketing broadband fibre services. In the medium term, DOCSIS technology

is capable of upgrades to provide even higher bandwidth speeds than are currently available,

and fibre is and will be the only technology that can effectively compete with cable networks’

DOCSIS offerings.

Among the fibre deployment options available to incumbents, only Fibre-To-The-Home (FTTH)

is on par technologically with DOCSIS technology, as the 50-100 MB/s speeds theoretically

possible through VDSL, VDSL2 and Fibre-To-The-Cabinet (FTTC) are only truly available

within a certain distance (generally up to 1km) from the local cabinet or node. While UPC’s

incumbent telecom competitors trial and gradually deploy fibre to varying degrees in UPC’s

different markets, UPC should be able to capitalize on its head-start in this respect. Finally,

the increasing media-telecoms convergence – highlighted, for example, by the increasing

demand for internet-connected TV and more internet-connected, video-throughput consumer

devices in the home (e.g. laptops, tablets, smartphones) – will drive higher bandwidth

requirements playing to cable networks’ and UPC’s strengths.


UPC Holding

21April 2011 55

Selected European cable operators’ bundle package prices (as at 01-Mar-2011)


Revenue Generating Units (RGUs) Subscriber net adds (000s)


Average Revenue Per User (ARPU) Revenue Generating Units (RGUs)/Subscriber


Company Country

Cost (€/sub.

per month) Package description Comments

Kabel DeutschlandGermany € 12.90 6 MB/s + phone line Plus analog TV f ee; + €7/mo af ter 1st y r.

€ 17.90 6 MB/s + phone line + f lat-rate phone Plus analog TV f ee; + €10/mo af ter 1st y r.

€ 19.90 32 MB/s + line + f lat-rate phone Plus analog TV f ee; + €10/mo af ter 1st y r.

Unity media Germany € 25.00 32 MB/s + basic digital TV + f lat-rate phone Plus €17.90 f or analog TV; + €5/mo af ter 1st y r.

€ 30.00 32 MB/s + premium digital TV (HDTV) + f lat-rate phone Plus €17.90 f or analog TV; + €5/mo af ter 1st y r.

€ 40.00 64 MB/s + 53 digital channels+ f lat-rate phone Plus €17.90 f or analog TV; + €10/mo af ter 1st y r.

UPC Netherlands € 40.00 25 MB/s + phone + 50 TV channels + €5/mo. af ter 1st 4 months

€ 45.00 60 MB/s + phone + 50 TV channels + of f -peak calls + €10/mo. af ter 1st 4 months

€ 55.00 60 MB/s + 90 TV channels + of f -peak calls + €10/mo. af ter 1st 4 months

Ziggo Netherlands € 42.00 2 MB/s + 30 analog + 65 digital channels + phone line



Zon Portugal € 31.00 6 MB/s + 15 TV channels + of f -peak calls

€ 42.60 12 MB/s + HD TV + of f -peak calls

€ 52.80 30 MB/s + HD TV + of f -peak calls

ONO Spain € 24.90 6 MB/s + unlimited national calls €35.90 af ter 1st y ear; + €16.52 f or line rental

€ 29.90 30 MB/s + 70 digital channels + unlimited national calls €45.90 af ter 1st y ear; + €16.52 f or line rental

€ 29.90 50 MB/s + 70 digital channels + unlimited national calls €50.90 af ter 1st y ear; + €16.52 f or line rental

Virgin Media U.K. £20.00 (€23.40) 10 MB/s + 65 TV channels + of f -peak calls +£13 f or phone line; half -price f or 1st 6 months

£31.50 (€37.00) 50 MB/s + 65 TV channels + of f -peak calls +£13 f or phone line; half -price f or 1st 6 months

£47.56 (€55.50) 30 MB/s + 160 TV channels + of f -peak calls +£13 f or phone line; half -price f or 1st 6 months

5.8605.607

5.3355.090

4.8544.589

0.564 0.582 0.572 0.566 0.563 0.607

3.822 3.9494.044

4.128 4.206 4.319

2.586 2.677 2.767 2.832 2.883 2.968

-4.3 -4.8 -4.6 -4.6 -5.5

3.1

-1.7 -1.1 -0.4

7.8

3.32.4 2.1 1.9 2.73.5

3.3

2.3 1.82.9

-10

-5

0

5

10

15

20

25

0

1

2

3

4

5

6

7

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

RG

Us

(m)

Analog TV Video - Other

Internet Telephony

Internet Subs growth (%) TV Subs growth (%)

Tel. Subs growth (%) Mobile Subs growth (%)

-383.4

-253.2-271.8

-245.8 -235.5-265.4

162.9

215.2183.0 175.0

153.9

209.1

-5.0

17.5

-9.7 -6.4 -2.4

43.7

-500

-400

-300

-200

-100

0

100

200

300

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Analog TV Digital TV Video - Other

24.95 24.99

26.19

27.21

27.91

27.51

0.2

4.8

3.9

2.6

-1.4

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

23.00

23.50

24.00

24.50

25.00

25.50

26.00

26.50

27.00

27.50

28.00

28.50

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

€/m

onth

per

subscri

ber


1.56

1.58

1.60

1.62

1.64

1.66

1.31.3

1.31.2

1.2

1.0

1.1

1.1

1.2

1.2

1.3

1.3

1.50

1.52

1.54

1.56

1.58

1.60

1.62

1.64

1.66

1.68

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

RG

Us / S

ubscri

ber

(x)



UPC Holding

21April 2011 56

Multi-play subscriber penetration Triple-play subscriber growth


Good FCF generation, but no deleveraging

Given that UPC has completed the largest part of its network upgrade, UPC group capex

(excluding Chilean 4G capex spend) should be more success-based (i.e. spend specific to a

customer acquisition) over the next few years, thereby also improving UPC’s FCF-generating

ability. We expect UPC’s capex level will be flat at 22% of capex/sales in 2011 and decline

moderately in 2012 to 21% of sales. We estimate this will result in FCF from Operations of

€242m in 2011 and €327m in 2012. UPC has also said its acquisition of the Polish cable asset,

Aster, will be financed within the UPC Holding credit pool in Q2 2011, representing

approximately €613m of investing cash flow. We nevertheless expect UPC to continue to

manage its leverage within a close range of its 4.0-5.0x leverage targets.

Capex Free Cash Flow from Operations


63.1 62.0 60.6 59.6 58.6 57.6

17.7 18.0 18.6 18.8 19.1 19.3

19.2 20.0 20.8 21.6 22.2 23.1

10.0

20.0

30.0

40.0

50.0

60.0

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

Multi-

pla

y penetr

ation

rate

(%

)

Single-play subs (%) Double-play subs (%)

Triple-play subs (%)

1.95

2.03

2.10

2.16

2.21

2.30

4.2

3.3

3.0

2.3

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4

%

Subscri

bers

(m

)

3-play subs 3-play growth (%)

980

854803

868 862

28.2

24.7

21.5 22.021.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

0

100

200

300

400

500

600

700

800

900

1,000

2008A 2009A 2010A 2011E 2012E

Cap

ex /

Sal

es (

%)

Cap

ex (€m

)

Capex Capex / Sales

195180

280

242

327

11.810.8

15.8

13.0

16.7

2.5 2.4

3.62.7

3.7

0

2

4

6

8

10

12

14

16

18

0

50

100

150

200

250

300

350

2008A 2009A 2010A 2011E 2012E

%€m



UPC Holding

21April 2011 57


UPC faces different varieties of competitive threats in its Western European and Eastern European

markets, but we believe it is well placed to tackle them in the foreseeable future. In its more

developed Western European markets, UPC faces competition primarily from telecom incumbents

with respect to its main triple-play products (broadband, TV, fixed-line telephony) as incumbents

gradually invest in and roll out fibre networks, market Internet Protocol TV (IPTV) and also market

their own triple- and quad-play bundles. However, we view these threats as being manageable and

medium-term in nature, given the relatively slow and low take-up rates of IPTV as well as the

limited degree of planned fibre networks deployment in most of UPC’s Western European markets.

In the meantime, we think UPC will have time to prepare for those looming competitive threats by

investing in further DOCSIS network upgrades, which will enhance the speed and functionality of

its cable networks.

In terms of its Central and Eastern European markets, we consider the current and near-term

competitive threats to UPC’s video products as more significant due especially to fierce price-

based competition in the Direct-To-Home (DTH) satellite services segment. The Romanian market

(3% of 2010 revenues) has been particularly challenging for UPC over the past few years, but we

would also highlight the fact that recent 2010 results indicate not only a notable decline in that

market’s video subscriber losses but also revenue growth in larger markets such as Hungary and

especially Poland. We also take some comfort from the fact that we see UPC methodically

repositioning itself increasingly in the Western European region, where we believe it has greater

scope to successfully and efficiently execute its growth strategy.

In terms of M&A activity, Unitymedia’s parent, Liberty Global (LGI) on 21-Mar-11 announced its

€3.16bn acquisition Germany’s third-largest cable operator, Kabel Baden-Wuerttemberg (KBW)

(FY2010 revenues: €563m, +14.2% yoy; FY2010 EBITDA €316m, +21.5% yoy), which had been

put up for sale by its largest shareholder, private equity firm EQT Partners. EQT ran a dual-track

process by also exploring an IPO option, akin to Providence Equity’s approach with its Kabel

Deutschland (KD) asset in March 2010 in which it raised €759m valuing KD at 6.85x 2010 EBITDA.

We note that LGI’s acquisition will be subject to German regulatory scrutiny by the German Federal

Cartel Office given that Unitymedia is Germany’s second largest cable operator. KBW is a very

attractive asset for LGI in a core growth market now squarely within LGI’s footprint. We believe LGI

may seek within the next 2-3 years to combine KBW with Unitymedia once combined leverage is

under 5.0x (also pending regulators’ agreement) and thereby refinance the KBW acquisition debt at

this combined entity.

European Broadband penetration European Pay-TV penetration

Source: Screen Digest, Euromonitor Source: Screen Digest

2432

2330

147

6353

57 40

5356

0

10

20

30

40

50

60

70

80

90

100

DK NL CH BE UK D

%

Cable Other

8785

80

7067

63

58

5249

45

25

18

0

10

20

30

40

50

60

70

NL UK DK BE CH D

%

% of TV Households


UPC Holding

21April 2011 58

Digital Video Recorder (DVR) penetration


UPC Holding Corporate Structure


62

20

15 14

2

0

10

20

30

40

50

60

70

BSkyB UPC Virgin Media Zon Kabel Deutschland

%

% of Customers


UPC Holding

21April 2011 59

Debt summary UPC Holding debt profile (as at 31-Dec-2010)




Facility Currency

Facility

amount (m)

Outstanding

amount (€m)

/ LTM Adj.

EBITDA (x) Maturity

UPC Broadband Hldg Facility L € 129.7 0.0 0.0 03-Jul-12

UPC Broadband Hldg Facility M € 566.6 566.6 0.3 31-Dec-14

UPC Broadband Hldg Facility N US$ 357.2 267.2 0.2 31-Dec-14

UPC Broadband Hldg Facility O HUF/PLN 50.6 0.0 31-Jul-13

UPC Broadband Hldg Facility P US$ 188.6 141.1 0.1 02-Sep-13

UPC Broadband Hldg Facility Q € 422.0 0.0 0.0 31-Jul-14

UPC Broadband Hldg Facility R € 290.7 290.7 0.2 31-Dec-15

UPC Broadband Hldg Facility S € 1,740.0 1,740.0 1.0 31-Dec-16

UPC Broadband Hldg Facility T US$ 1,071.5 795.0 0.4 31-Dec-16

UPC Broadband Hldg Facility U € 1,250.8 1,250.8 0.7 31-Dec-17

UPC Broadband Hldg Facility W € 269.1 0.0 0.0 31-Mar-15

UPC Broadband Hldg Facility X US$ 1,042.8 780.2 0.4 31-Dec-17

Senior Bank Debt 5,882.2 3.3

UPC Fin Ltd 7.625% 2020 € 500.0 496.0 0.3 15-Jan-20

Sr. Secured Notes 500.0 496.0 0.3

UPC Hldg 8% 2016 € 300.0 300.0 0.2 01-Nov -16

UPC Hldg 9.75% 2018 € 400.0 375.9 0.2 15-Apr-18

UPC Hldg 9.875% 2018 US$ 400.0 279.2 0.2 15-Apr-18

UPC Hldg 8.375% 2020 € 640.0 640.0 0.4 15-Aug-20

Other, capital leases € 25.1 25.1 0.0

Sr. Unsecured Debt 1,620.2 0.9


Cash 123.1 0.1

Net Debt 7,875.3 4.4

674.8

0.0 0.0

191.7

833.8

290.7

2,835.0

2,031.0

655.1

0.0

1,136.0

0

500

1,000

1,500

2,000

2,500

3,000

Liquidity 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

€m


UPC Holding

21April 2011 60

UPC Holding financial summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 3,472.9 3,453.9 3,739.9 3,945.6 4,103.4

No malised EBITDA (OCF) 1,646.1 1,662.8 1,775.5 1,868.7 1,952.8

Revenue growth - .5% 8.3% 5.5% 4.0%

EBITDA growth 1.0% 6.8% 5.3% 4.5%

EBITDA margin 47 4% 48.1% 47.5% 47.4% 47.6%

Normalised EBITDA 1,646.1 1,662.8 1,775.5 1,868.7 1,952.8


Cash taxes -12.0 -6.5 -7.5 -13.0 -14.0

Other 140.5 -184.6 -250.0 -225.0 -225.0


Working capital -16.3 -61.2 -25.0 -5.0 -10.0

Restructuring cash costs 0.0 0.0 0.0 0.0 0.0

Cash Flow from Operations 1,174.5 1,034.1 1,083.1 1,110.4 1,188.5


Acquisitions / Divestitures -44.0 120.0 -2.7 -613.4 0.0

Other Investing -18.5 -9.5 -0.7 0.0 0.0

Cash Flow from Investing -1,042.0 -743.4 -806.1 -1,481.4 -861.7

Dividends / Shareholder returns 0.0 0.0 0.0 0.0 0.0

Net Debt redemption -113.2 -166.9 131.1 0.0 0.0

Other Financing -15.7 -78.7 49.9 350.0 -200.0

Cash Flow from Financing -128.9 -245.6 181.0 350.0 -200.0

Change in Cash 3.6 45.1 458.0 -21.0 126.8

Cash 108.6 159.7 123.1 102.1 228.9

Revolver (drawn) 0.0 0.0 0.0 0.0 0.0

Senior Bank debt 6,654.0 6,644.6 5,882.2 4,404.4 4,404.4

Senior Secured notes 0.0 0.0 496.0 2,937.2 2,937.2

Senior Unsecured notes 1,100.0 1,100.0 1,595.1 1,595.1 1,595.1


Other debt 21.7 24.2 25.1 25.0 25.0

Total debt 7,776 7,769 7,998 8,962 8,962

Net debt 7,667 7,609 7,875 8,860 8,733


Revenues 3,472.9 3,453.9 3,739.9 3, 45.6 4,103.4

Adj. EBITDA 1,646.1 1,662.8 1,775.5 1,868. 1,952.8

EBITDA margin 47.4% 48.1% 47.5% 47.4% 47.6%

Funds From Operations (FFO) 1,190.8 1,095 3 1,108.1 1,115.4 1,198.5


Free Cash Flow (FCF) 195.0 180.2 280.4 242.4 326.8


FFO / Net debt 15.5% 14.4% 14.1% 12.6% 13.7%


FCF / Net Debt 2.5% 2.4% 3.6% 2.7% 3.7%

Capex / Sales 28.2% 24.7% 21.5% 22.0% 21.0%




Total debt / EBITDA 4.7x 4.7x 4.5x 4.8x 4.6x

Cash 108.6 159.7 123.1 102.1 228.9


Liquidity 108.6 159.7 674.8 653.8 780.6



Virgin Media

21April 2011 61


VIRGIN MEDIA Raising the bar

Positive We initiate coverage on Virgin Media with a Buy recommendation on £350m 2019

Senior Notes and a Sell on 5-year CDS.

Event: We initiate coverage on Virgin Media (VMED). VMED is the 2nd largest

communications company in the U.K. and the U.K.’s largest cable operator offering pay-

TV, broadband Internet, fixed and mobile telephony services.

SG Credit Opinion: We have a Positive credit opinion on VMED as we believe its

operational and financial positive momentum will continue in the near to medium term.

We expect that VMED should attain its Net debt/OCF leverage target of 3.0x within two

years and, in that context, would be well positioned to achieve investment-grade credit

quality and ratings within that timeframe. Operationally, we expect core cable subscriber

and revenue growth to abate relative to 2009 yet remain positive in 2011-12. We expect

VMED’s new convergence pay-TV offering, supported by a strategic partnership with

TiVo, will support bundle subscriber growth and supplemental pay-TV ARPU while

helping to limit churn. We also expect VMED will exploit new business opportunities in

its Mobile and Business segments in order to offset slowing growth in its core residential

cable services segment. In addition, we expect the higher ARPU and lower churn

associated with expected higher growth in VMED’s triple-play customer base will

continue to support overall revenue and earnings growth. Financially, we view favourably

VMED’s optimized balance sheet with its nearest maturities being c.£700m of term loan

maturities in 2015. We also consider VMED’s £700m Capital Return Programme in 2011

to still be consistent with its deleveraging target. We also anticipate VMED will have

capacity of £120m under its Capital Return Programme to repurchase debt even after

accounting for an additional £213m of authorized share repurchases to be effected by

Aug-11. We forecast VMED will generate nearly £1bn of free cash flow over 2011-12 yet

and expect VMED to flexibly manage its shareholder capital returns post-2011 such that

it can achieve its leverage target by 2013.

SG Bond Recommendation: We initiate with a Buy recommendation on VMED £ 8.875%

2019 Senior Unsecured notes (@ 111.25 price: YTW 6.4%, STW 378bps, Z-sp. 408bps)

These unsecured notes offer exposure to one of the sector’s better operational

performers with near-term deleveraging and the potential for investment-grade ratings

over a 12-24 month horizon which would provide further upside. At 281/289 bps and

potential tightening to 225bps through year-end we recommend a Sell on VMED 5-year

CDS.

Next calendar events: VMED’s Q2 2011 earnings results will be announced 27/07/11.

Market value

Benchmark 8.875% 10 2019

Price 111.25 Buy

Rating

LT ST Outlook

Moodys Ba1 NR Positive

S&P BB NR Stable

Fitch BB+ B Stable

Key financials

(€m) 2010A 2011E


EBITDA 1,510 1,586

FFO 1,125 1,156

Net debt 5,541 5,686

Key Ratios

2010A 2011E



FFO/ Adj. Net debt

(%)

20.2% 20.3%



grap

h

here

Analyst

Alejandro Núñez

(+44) 20 7676 7136 [email protected]

0.0

0.2

0.4

0.6

0.8

1.0

1.2

200

400

600

800

5-ye

ar C

DS

/ 5-y

ear X

O C

DS

(x)

5-ye

ar C

DS

(bps

)

VMED CDS EUR SR 5Y CorpXOVER CDSI GENERIC 5Y CurncyVMED / XO CDS (RHS)


Virgin Media

21April 2011 62

Network and markets

VMED is the U.K.’s #2 telecommunications company, behind BT, the U.K.’s #2 pay-TV

operator, behind BSkyB, the U.K.’s 3rd-largest broadband Internet provider (behind BT and

TalkTalk) and mobile telephony providers. VMED’s network passes approximately 50% of the

U.K.’s households, or nearly 13m U.K. homes, and provides services to 4.8m cable customers

(a 37% penetration rate). In addition, VMED provides mobile telephony services to 1.9m

prepay mobile customers and 1.2m post-paid contract customers as the U.K.’s leading

Mobile Virtual Network Operator (MVNO) over T-Mobile’s network. In addition, VMED provides

voice, data and internet solutions to businesses, public sector organizations and service

providers in the U.K. through Virgin Media Business (re-branded from the former ntl: Telewest

Business). VMED also has a 50% interest in the UKTV television companies through a joint

venture with BBC Worldwide (after the sale of Virgin Media TV, its TV content division, in June

2010). VMED’s Consumer division (85% of 2010 revenues) comprises VMED’s cable TV, on-

(via VMED’s own cable network) and off-net (via wholesale access to ADSL lines) broadband

and fixed telephony, and Virgin Mobile telephony and mobile broadband services. VMED’s

Business division (15% of 2010 revenues) provides voice and data solutions to businesses

and the public sector. In its Consumer division, VMED offers services within service bundles

who can take between two and up to four of VMED’s service categories (cable TV, broadband

Internet, fixed-line and mobile telephony). Amongst its 4.8m cable customers (as of 31-Dec-

10), 23% (1.1m) took two (‚double-play‛) services, 63% (3.0m) subscribed to three (‚triple-

play‛) services, while 12% (0.6m) were ‚quad-play‛ subscribers taking four services.

The markets for all of VMED’s main operating segments are highly competitive. In fixed-line

telephony, broadband and pay-TV it competes primarily against the U.K. telecoms incumbent

BT as well as BSkyB. VMED’s broadband market share is approximately 24% vs BT’s 26%

among the U.K.’s 19.5m broadband subscribers. BT has a £2.5bn budget to develop a fibre

network passing 67% of U.K. homes focusing mainly on urban areas (of which 20% would be

through higher speed Fibre To The Home, FTTH, and 80% would be Fibre To The Cabinet,

FTTC) by 2015. In addition, Fujitsu has plans to spend £2bn in order to build an optical fibre

based network covering 5m homes in rural Britain. Once built, Fujitsu plans to provide

wholesale access to this network to BT’s competitors including Virgin Media and TalkTalk. We

see this as a positive for VMED as it would allow it to cost-effectively provide its services in

areas outside its current network footprint thereby affording it an opportunity to not only

access new subscribers but also to cross- and upsell its other services to them.

One of VMED’s strategic objectives is to exploit its technologically superior network

infrastructure to offer differentiated products and services while retaining strong cost and

financial discipline. Against a backdrop of declining pricing power in most segments and

tapering cable customer growth, in 2011 VMED will also focus on cross-selling mobile

services to its existing cable customer base (representing approximately 10m individuals

across 4.8m U.K. homes) while seeking to grow its Business segment revenues by focusing

on managed data services.

Virgin Media network coverage and penetration

Residential Cable (000s)

U.K. Households (2011E) 26,200

Homes in areas covered by Virgin Media's cable network 12,970

Network coverage 50%

Cable customers 4,800

Penetration 37% Source: Company data, Office for National Statistics, SG Cross Asset Research


Virgin Media

21April 2011 63

Revenues (FY 2010) Revenue and EBITDA growth and margins


VMED purchases BSkyB wholesale premium content on the basis of carriage agreements

entered into in June 2010 which provide for the wholesale distribution of BSkyB’s basic

channels and its premium sports and movies channels on VMED’s cable TV service. This

agreement provides for security of supply of Sky premium sports and movie channels until

June 30, 2013 at which time VMED will need to negotiate a new commercial agreement

pending a pay-TV market access decision by Ofcom which VMED is appealing. However, for

standard definition (SD) VMED is exposed to BSkyB changing the ratecard terms of supply on

short notice, and to wholesale price changes for Sky Sports 1 and 2 which can occur under

Ofcom’s price regulation mechanism following changes to BSkyB’s own retail prices. Also,

with regards to HD and certain other proprietary content (e.g., Sky Atlantic), BSkyB continues

to offer the Sky Sports 3 and 4 HD channels exclusively to its digital satellite customers and

not to VMED. Other significant programming suppliers include the BBC, ITV, Channel 4,

UKTV, Five, Viacom, ESPN, Discovery and Turner.

In December 2010, VMED launched TiVo set-top boxes (STBs) following a strategic

partnership with TiVo to develop an advanced STB that provides converged TV and

broadband internet capabilities. Under the agreement with TiVo, TiVo will become the

exclusive provider of user interface software for VMED’s next generation STBs and VMED will

be the exclusive distributor of TiVo services and technology in the U.K. TiVo’s STB is a next-

generation entertainment STB bringing together TV, on-demand and web services via a single

STB and unique interactive content discovery and personalization tools. This service is being

rolled out to customers during 2011. Although still new to the market, we believe this

innovative and advanced TV platform interface should complement well VMED’s various pay-

TV services such as High Definition (HD), Video-On-Demand (VOD), Pay-Per-View (PPV). It

should also give it the opportunity to provide a degree of Over-The-Top (OTT, largely Internet-

sourced) content via the TiVo STB that would complement VMED’s other content sources. We

see ONO’s strategic agreement with TiVo as a defensive reply to the risk from OTT content.

While the full functionality and interface experience for customers remains to be seen, we

believe this offer should provide VMED with a complementary platform for integrating multiple

content source streams as opposed to allowing its content and TV subscriptions to be

cannibalized or even cancelled. On the upside, it should also provide additional upsell

opportunities for incremental value-add variable pay-TV revenues. More importantly, it will

also reinforce the essential nature of the bundled high-speed broadband connection in order

to facilitate full multimedia use of the TiVo set-top box as an Internet-connected residential

multimedia hub. Initially, VMED will target higher ARPU customers with this new service

offering. Once rolled out more extensively, and if successful, it should also help maintain low

churn levels across the entire customer base.

Cable, £2,642m,

68%

Mobile, £560m, 15%

Business, £597m, 15%

Non-cable, £77m, 2%

0

5

10

15

20

25

30

35

40

1,000

2,000

3,000

4,000

5,000

2008A 2009A 2010A 2011E 2012E

%€m

Revenues (€m) EBITDA (€m)Revenue growth (%) (RHS) EBITDA growth (%) (RHS)EBITDA margin (%) (RHS)


Virgin Media

21April 2011 64

In broadband Internet services, VMED’s fibre optic network is technologically superior to BT’s

ADSL based network in terms of speed and reliability. VMED’s DOCSIS 3.0 enabled fibre optic

network is currently of offering customers speeds of up to 100 Mbps which will be marketed

throughout VMED’s footprint in 2011. The same network is also capable of offering speeds of

up to 400 Mbps through upgrades achievable at modest costs and as needed depending on

customer take-up levels thereby increasing service value without incurring proportionately

higher capex costs. We view VMED’s broadband offering as the strongest prong of its quad-

play offering and believe it should be able to leverage this in marketing its services bundles

amidst the secular trends of increasing residential bandwidth demand, fixed-mobile and

Internet-TV convergence. While fibre-based offerings from BT will pose a competitive

challenge to VMED in the medium term, we believe VMED is well positioned in this segment to

maintain and grow its customer base.

In Mobile, VMED sees ‚low-hanging fruit‛ opportunities which, with an enhanced focus, it

believes it can better reap through cross-selling to its existing cable customer base. Currently,

85% of VMED’s cable customers do not subscribe to VMED mobile services (either prepay or

post-paid contract customers). However, in 2010 VMED realized 21% growth in mobile

contract subscribers who were also VMED cable subscribers. We see this trend continuing in

2011. In addition, VMED will support the Mobile growth campaign with a new ‚Mobile Credits‛

marketing program and targeted advertising to existing cable customers.

In its Business segment, VMED sees similar growth opportunities. With the U.K.’s 2nd largest

communications after BT, covering 85% of U.K. businesses, VMED is capable of increasing its

penetration in this admittedly competitive market segment. Aside from services to local

governments, where its market share is 21%, VMED’s market shares for corporate, SMEs and

the central government clients are 3% or lower. In addition, providing services to businesses

achieves a more optimal utilization of VMED’s high-bandwidth network during the off-peak

daytime working hours. As part of VMED’s refocused efforts on this segment, it has rebranded

the division with the Virgin name, and assigned it new management and regional sales forces.

Customer base evolution Revenue Generating Units (RGUs) per customer


3,761 4,217 4,245 4,286 4,326 4,330 4,322 4,302

3,6523,672 3,709 3,694 3,730 3,752 3,767 3,779

3,9773,981 4,027 4,104 4,180 4,208 4,243 4,287

3,2683,234 3,196 3,175 3,060 3,073 3,067 3,069

14,65815,104 15,177 15,259 15,295 15,363 15,399 15,436

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

Rev

enue

Gen

erat

ing

Uni

ts (

000s

)

Telephony TV Broadband Mobile

2.41

2.43

2.45

2.47

2.48

2.49 2.49 2.49

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

RG

Us

/ Cus

tom

er (

x)


Virgin Media

21April 2011 65

Cable subscriber trends Average Revenue Per User (ARPU) and churn trends

Source: Company data Company data

Subscriber net additions Bundle customers


Mobile customers


4,762 4,736 4,744 4,7244,762 4,769 4,783 4,800

247246 255 267

271 273 274 277

5,0094,982 4,999

4,9915,032 5,042 5,057 5,077

-0.6

0.2

-0.4

0.8

0.1 0.30.4

-0.6

4.0 4.7

1.3

0.70.5

1.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

4,000

4,200

4,400

4,600

4,800

5,000

5,200

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

Cus

tom

ers

gro

wth

(%

)

Cus

tom

ers

(000

s)

Cable Customers Non-Cable CustomersCable Customers growth (%) Non-Cable Customers growth (%)

42.2943.27

44.2445.28 45.01

45.8846.38

47.51

57.0

58.359.5

61.161.9 62.4 62.7 63.0

1.1

1.3

1.5

1.2

1.1

1.3

1.6

1.3

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

40

45

50

55

60

65

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

%

ARPU (LHS,£/mo) 3-play penetration (LHS,%)

Net Monthly Churn (RHS,%)

13 -128 42 39 29

-89

3120

3734 36

26

1512

42

4

47

76 76

28

3544

-75

-34 -38-21

-115

14

-6

2

10

-11

74

131 36

97

36

67

-150

-100

-50

0

50

100

150

200

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

Net C

able

and N

on-C

able

additio

ns (0

00s)

Telephony TV Broadband Mobile TOTAL

1,183 1,159 1,140 1,121 1,103

2,886 2,949 2,977 2,997 3,024

4,069 4,108 4,117 4,118 4,127

86.1 86.3 86.3 86.1 86.0

61.1 61.9 62.4 62.7 63.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

%

Bundle

Custo

mers

(0

00s)

Double-play Triple-play 2 or 3-play % Triple-play %

712 785 873 950 1,031 1,097 1,155 1,211

2,556 2,450 2,323 2,225 2,029 1,976 1,912 1,858

3,268 3,234 3,196 3,1753,060 3,073 3,067 3,069

9.7 10.211.2

8.8 8.6

6.45.2 4.9

-5.1-4.2

-5.2-4.2

-8.8

-2.6-3.2 -2.8

-10.0

-5.0

0.0

5.0

10.0

15.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10

%

Mobile c

usto

mers

(0

00s)

Contract Customers (000s) Prepay Customers (000s)

Contract Customers Growth (%) Prepay Customers Growth (%)


Virgin Media

21April 2011 66



In summary, we expect VMED to continue executing well and maintain its positive operating

momentum. Potential risks to this view include an accelerated fibre network buildout and

marketing rollout by B, sustained quarterly core cable customer losses, materially increased

content programming costs upon expiry of current contracts, and higher costs associated

with the growth plans for Mobile and Business segments.

Gradual deleveraging despite shareholder returns

We expect VMED to apply a portion of its considerable Free Cash Flow (FCF) generation

averaging nearly £500m p.a. over 2011-12 toward its medium-term leverage target of 3.0x Net

debt / OCF, as defined by VMED. VMED defines Operating Cash Flow as operating income

before depreciation, amortization, goodwill and intangible asset impairments, and

restructuring and other charges. Although we forecast VMED will dedicate £213m by August

2011 to repurchasing shares, we also expect it to apportion at least £100-120m of the amount

remaining under its Capital Return Programme to the repurchase of debt (potentially its

9.125% 2016 $ notes first callable in mid-August 2011) or other similar operations. In Feb-11,

VMED obtained creditor consent to amend its senior credit facilities to not only reduce

maintenance and incurrence covenants but to also ease restrictions on dividend payments.

Over the course of one year, from Q3 2010 through Q3 2011, VMED will have returned at least

£580m to its shareholders so we would expect that over the next two years it gives priority to

achieving its leverage target.

We expect VMED’s operating cash flow and FCF growth to continue in 2011-12 driven by

EBITDA growth, albeit at reduced levels of 4-5% when compared to 2010, disciplined capital

expenditure within a 15-17% Capex/Sales range, moderately declining interest charges as a

result of recent refinancing and deleveraging, and modest working capital consumption.

2432

2330

147 10

6353

57 40

5356 44

87 8580

7067

63

54

0

20

40

60

80

100

%

Cable DSL/Other

58

5249

45

26 25

18

0

10

20

30

40

50

60

70

%

% of TV households


Virgin Media

21April 2011 67

Capex and FCF Capex breakdown (31-Dec-10)


Leverage EBITDA / net interest


With £480m of available cash and nearly £250m of availability under its Revolving Credit

Facility, we consider VMED’s liquidity to be strong. We also forecast VMED’s liquidity levels

will be at or above 2010 levels over the next two years. In addition, VMED should be able to

maintain decent covenant headroom even under the covenants set in February 2011 under its

amended senior credit facility agreement terms. These include: a) a maintenance covenant of

total net leverage of 3.75x from year-end 2011 (down from 4.3x), and b) incurrence covenant

of 3.0x senior secured debt / OCF. We also highlight that VMED’s recently issued 2021 $ and

£ senior secured notes have fall-away provisions releasing collateral and certain operating

subsidiary guarantees should VMED attain investment-grade ratings from at least two rating

agencies and the same collateral and guarantees are released from other pari passu debt

(e.g., the senior credit facilities). Even in this instance, however, these notes would remain

structurally and contractually senior to the $ and € senior unsecured 2016 notes, the $ and £

2019 senior unsecured notes, as well as the 2016 convertible notes.

803

967

1,125

279323

429

13%

16%16%

4.7%5.8%

7.7%

-10%

-5%

0%

5%

10%

15%

20%

0

200

400

600

800

1,000

1,200

2008 2009 2010

€m

FFO (€m) OpFCF (€m)

Capex / Sales (%) OpFCF / Net debt (%)

61.9 72.5 65.850.9

44.152.0

50.3

45.0

22.0

22.522.2

19.6

31.2

29.225.5

18.4

8.0

7.57.3

5.2

5.5

7.2

3.2

2.2

172.7

190.9

174.3

141.3

0

50

100

150

200

250

Q1 10 Q2 10 Q3 10 Q4 10

€m

CPE Scaleable infrastructure Commercial

Support capital Upgrade/rebuild Line extensions / other

3.1

2.0

0.2 0.1 0.0

3.1

2.01.8

1.6 1.5

4.0

3.6

3.2

2.92.6

4.6

4.1

3.73.4

3.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008A 2009A 2010A 2011E 2012E

x

Net Bank debt / EBITDA Net Sr. Sec. Nts / EBITDA

Net Sr. Unsec. Nts / EBITDA Total Net debt / EBITDA

2.0

2.5

3.0

3.5

4.0

2008A 2009A 2010A 2011E 2012E

x


Virgin Media

21April 2011 68

Virgin Media corporate structure



Virgin Media

21April 2011 69

Virgin Media debt profile summary

31-Dec-10 LTM EBITDA (x) Wtd. Avg. Rate Maturity Maturity (Years)

Senior credit facilities 718 0.5 4.24% 4.4

Sr. Secured Notes 2,452 1.6 6.25% 7.9

Sr. Unsecured Notes 2,068 1.4 9.13% 6.4

Sr. Convertibles 535 0.4 6.50% 15-Nov-16 5.6

Other 247 0.2

TOTAL 6,020 4.0 6.5

Cash 480 3.7

Revolver, other credit available 250

Total liquidity 730

Floating-rate debt (%) 12

Fixed-rate debt (%) 88

Secured debt (%) 53

Unsecured debt (%) 47

Wtd. avg. debt maturity (yrs) 6.5

Wtd. avg. debt cost (%) 6.77


Debt maturity profile (at 31-Dec-10)


730 718

1,495

957

1,344

724

535

247

730

0 0 0 0

718

2,126

0

1,495

724

0

957

500

1,000

1,500

2,000

2,500

Liquidity 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

€m

Liquidity Senior credit f acilities Sr. Secured Notes Sr. Unsecured Notes Sr. Conv ertibles Other


Virgin Media

21April 2011 70

Virgin Media financial summary

€m 2008A 2009A 2010A 2011E 2012E

Total revenues 3,655.0 3,663.9 3,858.0 3,973.7 4,093.0


Revenue growth 0.2% 5.3% 3.0% 3.0%

EBITDA growth 3.6% 12.0% 5.0% 4.5%

EBITDA margin 35.6% 36.8% 39.1% 39.9% 40.5%



Cash taxes -0.1 2.5 23.0 0.0 0.0

Other 16.8 19.4 29.4 0.0 0.0


Working capital -45.6 -35.4 -14.2 -15.0 -10.0

Restructuring cash costs, other 0.0 -40.4 -53.0 -30.0 -10.0

Cash Flow from Operations 757.0 891.2 1,057.7 1,110.7 1,212.1


Acquisitions / Divestitures 2.1 -13.3 203.4 0.0 0.0

Other Investing 7.1 10.0 13.6 0.0 0.0


Dividends -29.3 -33.3 -34.1 -40.0 -45.0

Shareholder returns 0.0 0.0 -366.9 -213.0 -300.0

Debt issuance 447.7 1,610.2 3,072.0 957.0 0.0

Debt redemption -846.3 -1,737.4 -3,239.8 -1,077.0 -200.0

Other Financing 0.6 90.8 17.0 0.0 0.0

Cash Flow from Financing -427.3 -69.7 -551.8 -373.0 -545.0

Change in Cash -139.0 250.2 94.5 101.9 32.7

Cash 181.6 430.5 479.5 581.4 614.1

Revolver (drawn) 0.0 0.0 0.0 0.0 0.0

Senior Bank debt 4,189.4 3,112.8 718.3 718.3 518.3

Senior Secured notes 0.0 0.0 2,452.2 2,452.2 2,452.2

Senior Unsecured notes 1,256.1 2,189.6 2,067.9 1,947.9 1,947.9

Sr. Convertible 545.9 504.5 535.4 535.4 535.4

Other (Cap. Leases) 178.7 167.8 246.7 246.7 246.7

Total debt 6,170 5,975 6,020 5,900 5,700

Net debt 5,989 5,544 5,541 5,319 5,086


Revenues 3,655.0 3,663.9 3,858.0 3,973.7 4,093.0

Adj. EBITDA 1,301.7 1,348.9 1,510.2 1,585.7 1,657.1

EBITDA margin 35.6% 36.8% 39.1% 39.9% 40.5%

Funds From Operations (FFO) 802.6 967.0 1,124.9 1,155.7 1,232.1


Free Cash Flow (FCF) 249.8 289.9 395.2 434.9 532.7


FFO / Net debt 13.4% 17.4% 20.3% 21.7% 24.2%


FCF / Net Debt 4.2% 5.2% 7.1% 8.2% 10.5%

Capex / Sales 13.1% 15.5% 16.3% 16.0% 15.5%

Net Bank debt / EBITDA 3.1x 2.0x 0.2x 0.1x -0.1x

Net Sr. Sec. Nts / EBITDA 3.1x 2.0x 1.8x 1.6x 1.4x

Net Sr. Unsec. Nts / EBITDA 4.0x 3.6x 3.2x 2.9x 2.6x

Total Net debt / EBITDA 4.6x 4.1x 3.7x 3.4x 3.1x

Cash 181.6 430.5 479.5 581.4 614.1


Liquidity 261.6 510.5 729.5 831.4 864.1



Virgin Media

21April 2011 71

CROSS ASSET RESEARCH – CREDIT ANALYSIS GROUP Global Head of Research Head of Sector Research Head of Credit Research Deputy Head of Credit Research

Patrick Legland

Fabrice Theveneau

Tim Barker

Hervé Gay

(33) 1 42 13 97 79 (33) 1 58 98 08 77 (44) 20 7676 7168 (33) 1 42 13 87 50

[email protected] [email protected] [email protected] [email protected]

Financials (Banks)

Hank Calenti, CFA Stéphane Le Priol

Jean Luc Lepreux

(44) 20 7676 7262 (33) 1 42 13 92 93 (33) 1 42 14 88 17 [email protected] [email protected] [email protected]

Financials (Insurance)

Rötger Franz

(44) 20 7676 7167 [email protected]

Auto & Transportation

Pierre Bergeron

(33) 1 42 13 89 15 [email protected]

Consumers & Services

Caroline Duron

Marc Blanc

Torstein Jorstad

(33) 1 58 98 30 32 (33) 1 42 13 43 87 (44) 20 7676 7030 [email protected] [email protected] [email protected]

Industrials

Roberto Pozzi

Barbora Matouskova

Bob Buhr

(44) 20 7676 7152 (44) 20 7676 7023 (44) 20 7676 6454 [email protected] [email protected] [email protected]

Telecom & Media

Juliano Hiroshi Torii, CFA

Alejandro Núñez

(44) 20 7676 7158 (44) 20 7676 7136 [email protected] [email protected]

Utilities

Hervé Gay

(33) 1 42 13 87 50 [email protected]

CROSS ASSET RESEARCH – CREDIT STRATEGY GROUP Global Head of Research

Patrick Legland

(33) 1 42 13 97 79

[email protected]

Strategy

Suki Mann (Head)

Juan Esteban Valencia

(44) 20 7676 7063 (44) 20 7676 7059 [email protected] [email protected]

ABS

Jean-David Cirotteau

(33) 1 42 13 72 52 [email protected]


Virgin Media

21April 2011 72

APPENDIX

ANALYST CERTIFICATION

Each author of this research report hereby certifies that (i) the views expressed in the research report accurately reflect his or

her personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or

will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Alejandro Núñez

EXPLANATION OF CREDIT RATINGS

SG credit research may contain both a credit opinion of the company and ratings on individual bonds issued by the company.

Credit Opinion:

Positive: Indicates expectations of a general improvement of the issuer's credit quality over the next six to twelve months,

with credit quality expected to be materially stronger by the end of the designated time horizon.

Stable: Indicates expectations of a generally stable trend in the issuer's credit quality over the next six to twelve months,

with credit quality expected to be essentially unchanged by the end of the designated time horizon.

Negative: Indicates expectations of a general deterioration of the issuer's credit quality over the next six to twelve months,

with the credit quality expected to be materially weaker by the end of the designated time horizon.

Individual Bond Ratings:

Buy: Indicates likely to outperform its iBoxx subsector by 5% or more

Hold: Indicates likely to be within 5% of the performance of its subsector

Sell: Indicates likely to underperform its subsector by 5% or more

CONFLICTS OF INTEREST

This research contains the views, opinions and recommendations of Société Générale (SG) credit research analysts and/or

strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or

relative value, it may differ from the fundamental credit opinions and recommendations contained in credit sector or company

research reports and from the views and opinions of other departments of SG and its affiliates. Credit research analysts

and/or strategists routinely consult with SG trading desk personnel in formulating views, opinions and recommendations in

preparing research. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and

reports. Therefore, this research may not be independent from the proprietary interest of SG trading desks which may conflict

with your interests. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their

analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter, SG and/or its affiliates

normally make a market and trade as principal in fixed income securities discussed in research reports.

IMPORTANT DISCLOSURES

Deutsche Telekom SG acted as co manager in Deutsche Telekom bond issue.

Deutsche Telekom SG acted as co-lead manager in Deutsche Telekom's bond issue (3.625% 20/07/20 EUR).

Kabel Deutschland SG acted as co-lead manager in the Kabel's IPO.

Telenet SG acted as passive joint bookrunner in Telenet's senior bond issue (Eur300mio, due 2021).

Total SG provided an opinion to Total as to the fairness of the planned disposal of one of its businesses.

Ziggo SG acted as co-manager for Ziggo's senior bond issue.

CANAL+ SA SG will act as joint lead manager and joint bookrunner in Canal + France's potential IPO.

France Télécom SG acted as joint boorkunner in France Telecom's GBP bond issue.

France Télécom SG acted as as sole Structuring advisor and Joint Dealer Manager in France Telecom's tender offer.

France Télécom SG acted as joint bookrunner of France Telecom's bond issue (3.875% 09/04/20 EUR).

Telecom Italia Spa SG is acting as advisor to Telecom Italia to evaluate various strategic options

TELEFONICA SA SG is mandated in Telefonica Emisiones SAU's bond issue.

TELEFONICA SA SG acted as Joint Bookrunner in Telefonica's senior bond issue (5.445% 08/10/29 GBP).

TELEFONICA SA SG acted as Financial Advisor and Mandated Lead Arranger in the acquisition financing of Portugal

Telecom's stakes in Vivo by Telefonica.

TELEFONICA SA SG acted as joint bookrunner in Telefonica's senior bond issue.

SG and its affiliates beneficially own 1% or more of any class of common equity of Deutsche Telekom, Telefonica SA.

SG or its affiliates act as market maker or liquidity provider in the equities securities of Deutsche Telekom, France Télécom,

Telecom Italia Spa, Telefonica SA, Total.

SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months

from Deutsche Telekom, France Télécom, Telecom Italia Spa, Telefonica SA, Total.SG or its affiliates have received


Virgin Media

21April 2011 73

compensation for investment banking services in the past 12 months from Deutsche Telekom, France Télécom, Kabel

Deutschland, Telecom Italia Spa, Telefonica SA, Telenet, Ziggo.

SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Deutsche Telekom, France

Télécom, Kabel Deutschland, Telefonica SA, Telenet, Ziggo.

SGAS had a non-investment banking non-securities services client relationship during the past 12 months with Deutsche

Telekom, France Télécom, Total.

SGAS received compensation for products and services other than investment banking services in the past 12 months from

Deutsche Telekom, France Télécom, Total.

SGCIB received compensation for products and services other than investment banking services in the past 12 months from

Deutsche Telekom, France Télécom, Telecom Italia Spa, Total, Vodafone.

IMPORTANT DISCLAMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities

and has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness. SG does, from

time to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or derivatives thereof, of

persons, firms or entities mentioned in this document and may be represented on the board of such persons, firms or entities. SG does, from time to

time, act as a principal trader in debt securities that may be referred to in this report and may hold debt securities positions. Employees of SG, or

individuals connected to them, may from time to time have a position in or hold any of the investments or related investments mentioned in this

document. SG is under no obligation to disclose or take account of this document when advising or dealing with or on behalf of customers. The views

of SG reflected in this document may change without notice. In addition, SG may issue other reports that are inconsistent with, and reach different

conclusions from; the information presented in this report and is under no obligation to ensure that such other reports are brought to the attention of any

recipient of this report. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or

information contained herein. This research document is not intended for use by or targeted to retail customers. Should a retail customer obtain a copy

of this report he/she should not base his/her investment decisions solely on the basis of this document and must seek independent financial advice.

The financial instrument discussed in this report may not be suitable for all investors and investors must make their own informed decisions and seek

their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein. The value of

securities and financial instruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on the price of such

securities or financial instruments, and investors in securities such as ADRs effectively assume this risk. SG does not provide any tax advice. Past

performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.

Investments in general and derivatives in particular, involve numerous risks, including, among others, market, counterparty default and liquidity risk.

Trading in options involves additional risks and is not suitable for all investors. An option may become worthless by its expiration date, as it is a

depreciating asset. Option ownership could result in significant loss or gain, especially for options of unhedged positions. Prior to buying or selling an

option, investors must review the "Characteristics and Risks of Standardized Options" at

http://www.optionsclearing.com/publications/risks/riskchap.1.jsp.

Important European MIFID Notice: The circumstances in which material provided by SG Forex, Rates, Commodity and Equity Derivative Research

have been produced are such (for example, because of reporting or remuneration structures or the physical location of the author of the material) that it

is not appropriate to characterize it as independent investment research as referred to in the European Markets in Financial Instruments Directive and

that it should be treated as marketing material even if it contains a research recommendation (‚recommandation d’investissement à caractère

promotionnel‛). However, it must be made clear that all publications issued by SG will be clear, fair and not misleading. For more details please refer to

SG’s Policies for Managing Conflicts of Interest in Connection with Investment Research posted on SG’s disclosure website referenced herein.

Notice to French Investors: This publication is issued in France by or through Société Générale ("SG") which is authorized and supervised by the

Autorité de Contrôle Prudentiel and regulated by the Autorite des Marches Financiers.

Notice to U.K. Investors: This publication is issued in the United Kingdom by or through Société Générale ("SG"), London Branch . Société Générale is

a French credit institution (bank) authorised and supervised by the Autorité de Contrôle Prudentiel (the French Prudential Control Authority). Société

Générale is subject to limited regulation by the Financial Services Authority (‚FSA‛) in the U.K. Details of the extent of SG's regulation by the FSA are

available from SG on request. The information and any advice contained herein is directed only at, and made available only to, professional clients and

eligible counterparties (as defined in the FSA rules) and should not be relied upon by any other person or party.

Notice to U.S. Investors: For purposes of SEC Rule 15a-6, SG Americas Securities LLC (‚SGAS‛) takes responsibility for this research report. This

report is intended for institutional investors only. Any U.S. person wishing to discuss this report or effect transactions in any security discussed herein

should do so with or through SGAS, a broker-dealer registered with the SEC and a member of FINRA, 1221 Avenue of the Americas, New York, NY

10020. (212)-278-6000.

Notice to Singapore Investors: This document is provided in Singapore by or through Société Générale ("SG"), Singapore Branch and is provided only

to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act, Cap. 289. Recipients of

this document are to contact Société Générale, Singapore Branch in respect of any matters arising from, or in connection with, the document. If you are

an accredited investor or expert investor, please be informed that in SG's dealings with you, SG is relying on the following exemptions to the Financial

Advisers Act, Cap. 110 (‚FAA‛): (1) the exemption in Regulation 33 of the Financial Advisers Regulations (‚FAR‛), which exempts SG from complying

with Section 25 of the FAA on disclosure of product information to clients; (2) the exemption set out in Regulation 34 of the FAR, which exempts SG

from complying with Section 27 of the FAA on recommendations; and (3) the exemption set out in Regulation 35 of the FAR, which exempts SG from

complying with Section 36 of the FAA on disclosure of certain interests in securities.

Notice to Hong Kong Investors: This report is distributed in Hong Kong by Société Générale, Hong Kong Branch which is licensed by the Securities

and Futures Commission of Hong Kong under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) ("SFO"). This document

does not constitute a solicitation or an offer of securities or an invitation to the public within the meaning of the SFO. This report is to be circulated only

to "professional investors" as defined in the SFO.


Virgin Media

21April 2011 74

Notice to Japanese Investors: This publication is distributed in Japan by Société Générale Securities (North Pacific) Ltd., Tokyo Branch, which is

regulated by the Financial Services Agency of Japan. This document is intended only for the Specified Investors, as defined by the Financial

Instruments and Exchange Law in Japan and only for those people to whom it is sent directly by Societe Generale Securities (North Pacific) Ltd., Tokyo

Branch, and under no circumstances should it be forwarded to any third party. The products mentioned in this report may not be eligible for sale in

Japan and they may not be suitable for all types of investors.

Notice to Australian Investors: This document is issued in Australia by Société Générale (ABN 71 092 516 286) ("SG"). SG is regulated by APRA and

ASIC and holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this document is only directed

to recipients who are wholesale clients as defined under the Act.

Notice to Canadian Investors: This document is for information purposes only and is intended for use by Permitted Clients, as defined under National

Instrument 31-103, Accredited Investors, as defined under National Instrument 45-106, Accredited Counterparties as defined under the Derivatives Act

(Québec) and "Qualified Parties" as defined under the ASC, BCSC, SFSC and NBSC Orders.

Additional information available upon request. This publication may not be reproduced or redistributed in whole in part without the prior consent of SG

or its affiliates.

http://www.sgcib.com Copyright: The Société Générale Group 2011. All rights reserved.


http://www.sgcib.com/

Documents

SG European Cable Sector initiation (Alejandro Nunez 201104)