WEBVTT 1 00:00:06.800 --> 00:00:09.800 Hello on Welcome to the analysis of 2 00:00:09.800 --> 00:00:12.500 an operation, which is currently under process. 3 00:00:13.300 --> 00:00:17.500 And which mobilizes the world of telecommunication operators? 4 00:00:18.500 --> 00:00:21.600 But iPhone and three UK subsidiary of 5 00:00:21.600 --> 00:00:24.300 the CK Hutchinson conglomerate. 6 00:00:25.400 --> 00:00:28.500 I've just confirmed that discussions whose aim 7 00:00:28.500 --> 00:00:31.700 is to merge their UK operations. 8 00:00:31.700 --> 00:00:34.100 The agreement would lead to 9 00:00:34.100 --> 00:00:37.500 the creation of a joint venture 5149. 10 00:00:38.200 --> 00:00:41.200 51 for Vodafone 49 for 11 00:00:41.200 --> 00:00:41.700 Hutchinson 12 00:00:42.500 --> 00:00:46.000 Who's announced objective is to reach critical 13 00:00:45.500 --> 00:00:48.900 mass and Financial profitability? 14 00:00:50.500 --> 00:00:54.200 Altogether, they would generate synergies which 15 00:00:53.200 --> 00:00:56.800 are high enough to pay the walk 16 00:00:56.800 --> 00:00:59.700 which is about financial performance while 17 00:00:59.700 --> 00:01:03.000 in the meantime being able to challenge the market 18 00:01:02.700 --> 00:01:04.400 leaders locally. 19 00:01:05.600 --> 00:01:09.400 One point of uncertainty is obviously the 20 00:01:08.400 --> 00:01:12.300 potential approval or not 21 00:01:11.300 --> 00:01:14.600 from the CMA, which 22 00:01:14.600 --> 00:01:17.400 is the institution in charge of competition in 23 00:01:17.400 --> 00:01:18.100 the UK. 24 00:01:19.300 --> 00:01:23.100 Now it's not the first time that we discuss the telecommunication operators 25 00:01:22.100 --> 00:01:25.700 in the academy. If you 26 00:01:25.700 --> 00:01:29.200 remember in April 2020, I introduce 27 00:01:28.200 --> 00:01:31.900 a concept of mobile virtual Network 28 00:01:31.900 --> 00:01:32.700 operator. 29 00:01:33.500 --> 00:01:36.700 concept which was created by Richard Branson Virgin 30 00:01:36.700 --> 00:01:38.100 Mobile UK 31 00:01:38.700 --> 00:01:42.000 in February 2021. I mentioned 32 00:01:41.400 --> 00:01:44.300 the telecommunication towers and 33 00:01:44.300 --> 00:01:47.400 described the evolution of American Tower and 34 00:01:47.400 --> 00:01:49.600 sell next its competitor in Europe. 35 00:01:50.500 --> 00:01:54.400 In both cases, it's about the major strategic challenges 36 00:01:53.400 --> 00:01:57.000 for telecommunication operators, which 37 00:01:56.400 --> 00:02:00.100 come from the huge Capital intensity of 38 00:01:59.100 --> 00:02:02.300 this business. You have to invest 39 00:02:02.300 --> 00:02:05.200 a lot in capital expenditures. You have to 40 00:02:05.200 --> 00:02:08.700 invest in Brands and you have to pay the licenses the ability 41 00:02:08.700 --> 00:02:09.400 to operate 42 00:02:10.800 --> 00:02:14.100 As a consequence, there's a couple of natural obvious 43 00:02:13.100 --> 00:02:14.400 questions. 44 00:02:15.800 --> 00:02:19.600 The first one is how can you saturate operating 45 00:02:18.600 --> 00:02:22.100 assets entirely using 46 00:02:21.100 --> 00:02:24.700 the capacity of your production process 47 00:02:24.700 --> 00:02:27.800 an answer will the mvno in 48 00:02:27.800 --> 00:02:31.000 the UK created by Richard Branson 49 00:02:30.600 --> 00:02:33.500 again? The second one is how do you 50 00:02:33.500 --> 00:02:37.000 finance growth when growth is consuming huge financial 51 00:02:36.000 --> 00:02:37.800 resources? 52 00:02:39.500 --> 00:02:42.800 A solution might be to sell the towers the telecommunication 53 00:02:42.800 --> 00:02:45.800 Towers which are regarded and considered 54 00:02:45.800 --> 00:02:48.300 as non-strategic assets and 55 00:02:48.300 --> 00:02:50.900 to the evaluated at the very high price. 56 00:02:52.700 --> 00:02:55.500 If you try to describe the iPhone in 57 00:02:55.500 --> 00:02:58.200 a few days, the first one is a creation of 58 00:02:58.200 --> 00:03:01.400 the company under the name of rackle Telecom in 59 00:03:01.400 --> 00:03:03.200 1984. 60 00:03:04.300 --> 00:03:07.300 The company became Vodafone group in 61 00:03:07.300 --> 00:03:11.000 1991. The story is going to really accelerate 62 00:03:10.200 --> 00:03:13.200 for Vodafone in 1999. 63 00:03:14.200 --> 00:03:16.500 the company mergers with airtouch 64 00:03:16.900 --> 00:03:19.600 The company buys 35% of 65 00:03:19.600 --> 00:03:22.600 management in 99 which is 66 00:03:22.600 --> 00:03:24.700 going to be complemented in 2000. 67 00:03:25.500 --> 00:03:28.600 And the company is also going to create together with bell 68 00:03:28.600 --> 00:03:32.000 Atlantic a real diamond Verizon Wireless. 69 00:03:33.200 --> 00:03:36.400 Now today in 2022, but iPhone is 70 00:03:36.400 --> 00:03:39.800 number six worldwide. We is 2021 revenues 71 00:03:39.800 --> 00:03:43.800 of 45 billion euros approximately. 72 00:03:44.500 --> 00:03:47.400 There's one thing which characterizes the 73 00:03:47.400 --> 00:03:51.900 evolution of metaphor is permanent Acquisitions 74 00:03:50.900 --> 00:03:53.400 and divestments. 75 00:03:54.200 --> 00:03:57.700 I mentioned the fact that in 99 the company acquired 35% 76 00:03:57.700 --> 00:04:00.500 of management were remaining 77 00:04:00.500 --> 00:04:03.600 65% were acquired in 2000. 78 00:04:04.200 --> 00:04:08.000 The total cost is 112 billions Sterling 79 00:04:07.300 --> 00:04:10.800 Pounds in order to reduce the financial 80 00:04:10.800 --> 00:04:13.900 needs, but I thought is going to sell or range 81 00:04:13.900 --> 00:04:16.700 to France Telecom ft in 82 00:04:16.700 --> 00:04:19.400 2000 and FC will take a few years 83 00:04:19.400 --> 00:04:23.600 to recover from these acquisition by the way in 2012, 84 00:04:22.600 --> 00:04:25.800 but I found buys cable 85 00:04:25.800 --> 00:04:27.700 and wireless worldwide. 86 00:04:28.500 --> 00:04:32.200 And one year later for 130 billion 87 00:04:32.200 --> 00:04:35.400 dollars a fantastic capital gain, but iPhone 88 00:04:35.400 --> 00:04:39.300 is going to sell its stake of 45% in 89 00:04:38.300 --> 00:04:40.500 Verizon Wireless. 90 00:04:41.600 --> 00:04:44.500 Today the company is in Africa Egypt South 91 00:04:44.500 --> 00:04:47.000 Africa Ghana Cameroon a little 92 00:04:47.100 --> 00:04:48.900 bit in South America in Chile. 93 00:04:49.700 --> 00:04:52.800 A little bit in Asia, of course in India, 94 00:04:52.800 --> 00:04:55.400 but in Japan the operations were sold 95 00:04:55.400 --> 00:04:59.400 to soft bags and in Europe Hungary island 96 00:04:58.400 --> 00:05:01.500 Italy Spain and 97 00:05:01.500 --> 00:05:03.400 obviously UK. 98 00:05:04.100 --> 00:05:07.800 Now the consequence of all these Acquisitions is intangible Assets 99 00:05:07.800 --> 00:05:11.500 in the balance sheet Brands Goodwill by 100 00:05:10.500 --> 00:05:14.500 itself Goodwill at the end of 2021 represents 101 00:05:13.500 --> 00:05:16.600 a little bit more than 30 102 00:05:16.600 --> 00:05:20.500 billion euros, which is almost 30% of 103 00:05:20.500 --> 00:05:23.400 the total invested Capital total Capital 104 00:05:23.400 --> 00:05:24.500 employed of the company. 105 00:05:25.600 --> 00:05:28.200 Now the constant evolution of the perimeter of 106 00:05:28.200 --> 00:05:32.100 consolidation and of activity of the company makes the 107 00:05:31.100 --> 00:05:34.500 analysis of revenues quite difficult. 108 00:05:35.500 --> 00:05:39.300 The one thing we can observe is that in 2004 the 109 00:05:38.300 --> 00:05:41.600 company generates about 25 110 00:05:41.600 --> 00:05:44.600 to 30 billion euros of turnovers, and 111 00:05:44.600 --> 00:05:47.700 it's going to accelerate and starting in 112 00:05:47.700 --> 00:05:50.300 2009. The revenues are going to be in 113 00:05:50.300 --> 00:05:53.800 a range between 40 and 50 billion euros 114 00:05:53.800 --> 00:05:57.400 today. As I said earlier 45 billion 115 00:05:56.400 --> 00:05:58.500 euros of turnover. 116 00:05:59.400 --> 00:06:03.600 That's about revenues. But what about commercial profitability? The 117 00:06:02.600 --> 00:06:06.200 company is publishing its adjusted 118 00:06:05.200 --> 00:06:08.300 a bit da adjusted means 119 00:06:08.300 --> 00:06:11.300 you get rid of everything which is not right around. 120 00:06:11.800 --> 00:06:14.900 It was absolutely outstanding in 2004 121 00:06:14.900 --> 00:06:18.400 with 45 50% of 122 00:06:18.400 --> 00:06:21.200 a big da as a percentage to revenues then 123 00:06:21.200 --> 00:06:26.500 it started getting jammed stabilized around 2010-2011 124 00:06:24.500 --> 00:06:27.700 then went 125 00:06:27.700 --> 00:06:30.400 down again to 25% of sales. 126 00:06:31.200 --> 00:06:35.300 And now we observe that it's gradually up but 127 00:06:34.300 --> 00:06:38.200 stabilizing at around 30% 128 00:06:39.600 --> 00:06:43.000 The eBay itself is a bit da 129 00:06:42.400 --> 00:06:45.700 minus the Precision and amortization. But If 130 00:06:45.700 --> 00:06:48.200 You observe the actual a bit and 131 00:06:48.200 --> 00:06:50.300 not the current or adjusted a bit. 132 00:06:51.300 --> 00:06:54.500 Then if it is a bit minus depreciation and 133 00:06:54.500 --> 00:06:57.600 amortization, but plus minuses exceptional events, 134 00:06:57.600 --> 00:07:00.800 including impairments and the consequence of 135 00:07:00.800 --> 00:07:04.100 Acquisitions, which prove to be poor Acquisitions 136 00:07:03.100 --> 00:07:07.000 in terms of price paid is impairment 137 00:07:06.700 --> 00:07:10.800 in 2005, 2013 and 138 00:07:10.800 --> 00:07:14.100 2018 for the last one. There 139 00:07:13.100 --> 00:07:17.100 were a huge right offs of Goodwills 140 00:07:16.100 --> 00:07:19.900 in the p&l of the company. This 141 00:07:19.900 --> 00:07:22.900 is why the EBT is quite chaotic in 142 00:07:22.900 --> 00:07:26.100 the long run. Now that was about commercial profitability. 143 00:07:25.100 --> 00:07:28.500 If you want to assess the financial performance of 144 00:07:28.500 --> 00:07:32.100 a company, you have to calculate the return on Capital employed, 145 00:07:31.100 --> 00:07:34.800 which is return on sales already mentioned 146 00:07:34.800 --> 00:07:37.600 multiplied by the assets turnover, which 147 00:07:37.600 --> 00:07:40.400 is very much about the capital intensity. I already 148 00:07:40.400 --> 00:07:41.100 mentioned 149 00:07:42.300 --> 00:07:45.700 The assets turnover is sales revenues divided 150 00:07:45.700 --> 00:07:47.400 by Capital employed. 151 00:07:48.100 --> 00:07:52.600 The main item in the capital employed is non-current assets 152 00:07:52.600 --> 00:07:55.100 tangible and intangibles. 153 00:07:55.900 --> 00:07:59.200 These non current assets are mostly explained 154 00:07:58.200 --> 00:08:01.400 by the evolution of capital expenditures. 155 00:08:02.300 --> 00:08:05.800 Not only increase in property plant and Equipment, but also purchase 156 00:08:05.800 --> 00:08:07.300 of intangible assets. 157 00:08:08.400 --> 00:08:11.900 When you look at the evolution of capital expenditures 158 00:08:11.900 --> 00:08:14.400 as a percentage to revenue, it's quite big. 159 00:08:14.400 --> 00:08:18.000 It was about 20% in 2004 160 00:08:17.600 --> 00:08:20.400 went down to 15 went up 161 00:08:20.400 --> 00:08:23.900 to 20 again. There's a peak in 2015 162 00:08:23.900 --> 00:08:26.400 with about 30% But now 163 00:08:26.400 --> 00:08:30.000 it's stabilized around 20% 20% to revenues. 164 00:08:29.300 --> 00:08:31.700 It's a very high figure. 165 00:08:32.900 --> 00:08:36.000 But it's also quite interesting to observe the Dynamics 166 00:08:35.100 --> 00:08:38.500 of this figure comparing the 167 00:08:38.500 --> 00:08:40.900 investment today was investment yesterday. 168 00:08:41.800 --> 00:08:44.700 The impact of the investment yesterday's deprecision 169 00:08:44.700 --> 00:08:47.400 and amortization today. So there is 170 00:08:47.400 --> 00:08:50.800 a very interesting indicator which is intensity investment 171 00:08:50.800 --> 00:08:54.400 intensity, which is capex today divided 172 00:08:53.400 --> 00:08:56.500 by depreciation amortization, which 173 00:08:56.500 --> 00:08:59.700 is average investment average capex yesterday. 174 00:09:00.700 --> 00:09:03.100 If the indicator is higher than one it means 175 00:09:03.100 --> 00:09:07.200 that you are investing more today than yesterday. But if 176 00:09:06.200 --> 00:09:10.200 it is going down and Below one, 177 00:09:09.200 --> 00:09:11.900 it means that you are investing less. 178 00:09:12.800 --> 00:09:16.000 Interestingly it was about one 179 00:09:15.100 --> 00:09:18.400 a little bit less than one in 180 00:09:18.400 --> 00:09:21.400 2004. Then it reaches a level of one. 181 00:09:21.400 --> 00:09:25.300 It is 1.2 in 2015. This 182 00:09:24.300 --> 00:09:27.000 figure capex divided by 183 00:09:27.200 --> 00:09:30.200 the Precision amortization but starting in 184 00:09:30.200 --> 00:09:33.500 2016, it is less than one and 185 00:09:33.500 --> 00:09:36.900 it's dramatically down today Capital expenditures 186 00:09:36.900 --> 00:09:39.700 represent an average of 60% of 187 00:09:39.700 --> 00:09:43.000 the Precision on amortization. So definitely 188 00:09:42.500 --> 00:09:45.900 the company has decided to reduce its 189 00:09:45.900 --> 00:09:48.600 effort in investment and capex. 190 00:09:49.600 --> 00:09:52.700 The second item which you add to non-current assets 191 00:09:52.700 --> 00:09:55.400 when you want to calculate the capital employed is 192 00:09:55.400 --> 00:09:56.700 working capital requirement. 193 00:09:57.300 --> 00:10:00.600 But as far as telecommunication operators are concerned 194 00:10:00.600 --> 00:10:03.500 it's negative or it's 195 00:10:03.500 --> 00:10:07.100 very close to zero low inventories accounts 196 00:10:06.100 --> 00:10:10.000 receivable prepaid sometimes accounts payable. 197 00:10:09.600 --> 00:10:12.500 So definitely working capital requirement 198 00:10:12.500 --> 00:10:13.400 is not an issue. 199 00:10:14.400 --> 00:10:17.800 What is really an issue in the calculation of 200 00:10:17.800 --> 00:10:21.100 the capital intensity is capital expenditures? 201 00:10:21.700 --> 00:10:24.300 Now once we have observed the evolution of 202 00:10:24.300 --> 00:10:27.400 the capital intensity, we can calculate the assets 203 00:10:27.400 --> 00:10:30.400 turnover multiplied by the return on 204 00:10:30.400 --> 00:10:33.800 sales. We already mentioned in order to get the return on Capital 205 00:10:33.800 --> 00:10:34.400 employed. 206 00:10:35.500 --> 00:10:38.400 Interestingly in 2004 after the 207 00:10:38.400 --> 00:10:42.700 huge prices paid during the internet bubble 208 00:10:42.700 --> 00:10:45.800 for telecommunication operators the assets turnover 209 00:10:45.800 --> 00:10:47.500 of an iPhone was about 0.2. 210 00:10:48.700 --> 00:10:52.400 Then as a consequence of among others impairments. 211 00:10:53.300 --> 00:10:57.200 The assets turnover went up gradually reached a 212 00:10:56.200 --> 00:10:59.800 high point in 2018 with 213 00:10:59.800 --> 00:11:00.800 0.5. 214 00:11:01.800 --> 00:11:04.500 And is now 0.4. Which means 215 00:11:04.500 --> 00:11:07.700 that when the company invests 100 Euros 216 00:11:07.700 --> 00:11:10.600 in its business operations, the annual revenues 217 00:11:10.600 --> 00:11:13.000 are limited to 40 euros. 218 00:11:13.800 --> 00:11:16.100 This is a very low figure which is multiplied by 219 00:11:16.100 --> 00:11:20.100 the commercial profitability. You remember quite chaotic 220 00:11:19.100 --> 00:11:20.300 figure. 221 00:11:21.300 --> 00:11:25.600 Then at the end of the day you understand that up to 2012 222 00:11:24.600 --> 00:11:27.200 the return on 223 00:11:27.200 --> 00:11:30.900 capitals about 10-15 percent which pays 224 00:11:30.900 --> 00:11:35.000 the work but starting in 2013. The 225 00:11:33.100 --> 00:11:36.700 return on capital for the company is 226 00:11:36.700 --> 00:11:39.600 in the range of four five six percent after 227 00:11:39.600 --> 00:11:42.000 tax. It does not pay the wac. 228 00:11:42.700 --> 00:11:45.300 Of course, if you take the current a bit 229 00:11:45.300 --> 00:11:48.300 under the actual a bit, which you can read in the 230 00:11:48.300 --> 00:11:51.200 p&l you improve a little bit the picture because you 231 00:11:51.200 --> 00:11:54.700 get rid of bad news, which are supposedly non-req around. 232 00:11:55.600 --> 00:11:58.700 If you calculate the economic profit generated 233 00:11:58.700 --> 00:12:01.300 by the company in percentage, its return 234 00:12:01.300 --> 00:12:04.300 on Capital employed after tax less the weighted 235 00:12:04.300 --> 00:12:05.700 average cost of capital. 236 00:12:06.600 --> 00:12:09.900 In order to have a kind of recurrent perspective of 237 00:12:09.900 --> 00:12:13.000 the company you calculate the current Ro 238 00:12:12.200 --> 00:12:15.400 say not with the actual a bit. That 239 00:12:15.400 --> 00:12:17.700 was a current and adjusted a bit. 240 00:12:18.300 --> 00:12:20.500 The result of the observation is quite interesting. 241 00:12:21.500 --> 00:12:24.500 In 2004 2005 as a consequence of 242 00:12:24.500 --> 00:12:25.900 huge investment. 243 00:12:26.800 --> 00:12:29.300 What is happening is economic profit is 244 00:12:29.300 --> 00:12:29.500 negative. 245 00:12:30.500 --> 00:12:33.700 Then it is about 0 then it turns positive 246 00:12:33.700 --> 00:12:36.300 and significantly positive riches a 247 00:12:36.300 --> 00:12:39.100 point of 4% from 2010 to 248 00:12:39.100 --> 00:12:42.600 2012. And then he's collapsing starting 249 00:12:42.600 --> 00:12:45.400 in 2013 will be a little 250 00:12:45.400 --> 00:12:48.700 bit positive because it's current and not actual a 251 00:12:48.700 --> 00:12:52.200 bit in 2020 and in 2021. 252 00:12:53.400 --> 00:12:56.700 It's always very interesting to confront the 253 00:12:56.700 --> 00:12:59.800 evolution of the market to book which is a relative value creation 254 00:12:59.800 --> 00:13:02.500 generated by the company and it's economic 255 00:13:02.500 --> 00:13:05.900 performance, which is economic profit in percentage Market 256 00:13:05.900 --> 00:13:08.800 to book is Enterprise Value divided 257 00:13:08.800 --> 00:13:10.000 by Capital employed. 258 00:13:10.600 --> 00:13:13.400 Capital employees, what was invested on the 259 00:13:13.400 --> 00:13:16.400 price value is a value of what was invested in 260 00:13:16.400 --> 00:13:19.100 the business operations and at the price 261 00:13:19.100 --> 00:13:22.500 value is calculated as a sum of market cap plus net 262 00:13:22.500 --> 00:13:23.300 financial debt. 263 00:13:24.400 --> 00:13:27.700 Interestingly up to 2007 the 264 00:13:27.700 --> 00:13:30.000 market to book was more than one. 265 00:13:30.600 --> 00:13:33.400 But starting in 2008, it is less 266 00:13:33.400 --> 00:13:36.300 than one and it will never reach the level 267 00:13:36.300 --> 00:13:41.800 of one today. It's about 0.75 0.8. 268 00:13:43.100 --> 00:13:47.000 Now interestingly when the economic profit is 0% 269 00:13:46.900 --> 00:13:49.400 It means that the return Capital 270 00:13:49.400 --> 00:13:52.100 after tax matches with the cost 271 00:13:52.100 --> 00:13:55.000 of Capital Performance is Neil. There is no 272 00:13:55.300 --> 00:13:58.200 value creation. No value destruction. This is why 273 00:13:58.200 --> 00:14:01.400 the market to book should be one when the economic 274 00:14:01.400 --> 00:14:03.200 profit is zero. 275 00:14:03.900 --> 00:14:06.200 And then you can observe the correlation between 276 00:14:06.200 --> 00:14:09.700 the economic profit and the market to book taking one 277 00:14:09.700 --> 00:14:12.500 as a benchmark for Market to book which corresponds to 278 00:14:12.500 --> 00:14:15.800 0% as a benchmark for the economic profit. 279 00:14:15.800 --> 00:14:18.700 There is a correlation of course 280 00:14:18.700 --> 00:14:21.800 as the current EBG is quite chaotic the 281 00:14:21.800 --> 00:14:24.600 correlation is not that obvious year after 282 00:14:24.600 --> 00:14:27.300 year. But in the long term What You observe is 283 00:14:27.300 --> 00:14:30.200 that the company is not performing and the market 284 00:14:30.200 --> 00:14:33.800 to book is less than one which is about value destruction. 285 00:14:35.300 --> 00:14:38.300 It's also quite interesting to make a kind 286 00:14:38.300 --> 00:14:41.600 of virtual calculation. What should be the market 287 00:14:41.600 --> 00:14:44.400 to book assuming that there is no growth in a 288 00:14:44.400 --> 00:14:47.200 cash flow in a revenue and in a performance of the company 289 00:14:47.200 --> 00:14:50.400 and compare this no growth Market to 290 00:14:50.400 --> 00:14:53.400 book with the actual one. When you observe 291 00:14:53.400 --> 00:14:56.200 these two indicators. You understand that they are quite 292 00:14:56.200 --> 00:14:58.200 correlated one with each other. 293 00:14:59.100 --> 00:15:02.900 Which basically means that the market does not anticipate any 294 00:15:02.900 --> 00:15:05.900 Improvement in the financial performance of 295 00:15:05.900 --> 00:15:06.300 the company? 296 00:15:07.200 --> 00:15:11.300 As a conclusion, what do You observe permanent value 297 00:15:10.300 --> 00:15:13.500 distraction consequence of 298 00:15:13.500 --> 00:15:16.500 poor financial performance and no 299 00:15:16.500 --> 00:15:19.300 expected recovery on the market 300 00:15:19.300 --> 00:15:22.400 perspective. This suggests me a comment, which 301 00:15:22.400 --> 00:15:25.800 I made in Americano Libre film 302 00:15:25.800 --> 00:15:28.400 dated, July 2021. 303 00:15:29.200 --> 00:15:33.700 If you remember Mercado libraries a very successful company against 304 00:15:32.700 --> 00:15:35.800 Amazon in South 305 00:15:35.800 --> 00:15:36.100 America. 306 00:15:37.200 --> 00:15:40.700 And macadole bread decided not to buy customers 307 00:15:40.700 --> 00:15:44.100 but to attract customers with the 308 00:15:43.100 --> 00:15:46.600 quality of execution and with customer 309 00:15:46.600 --> 00:15:49.800 satisfaction interestingly the competitor 310 00:15:49.800 --> 00:15:53.200 of Mercado Libre took the opposite strategy 311 00:15:52.200 --> 00:15:55.600 and decided to buy and buy and 312 00:15:55.600 --> 00:15:59.300 buy a game customers through Acquisitions and 313 00:15:58.300 --> 00:16:01.900 a winner is Mercado Libre 314 00:16:01.900 --> 00:16:04.900 which eventually bought its competitor. 315 00:16:04.900 --> 00:16:07.400 So really the question is is it 316 00:16:07.400 --> 00:16:10.500 more profitable to attract customers rather than 317 00:16:10.500 --> 00:16:13.700 buy customers and you understand 318 00:16:13.700 --> 00:16:16.300 what my answer is now let's 319 00:16:16.300 --> 00:16:19.300 have a quick look at the second act of the game 320 00:16:19.300 --> 00:16:23.400 CK Hutchinson three UK a 321 00:16:22.400 --> 00:16:26.100 conglomerate based in Hong Kong created and 322 00:16:25.100 --> 00:16:28.700 managed by Lee cashing the 323 00:16:28.700 --> 00:16:31.800 very well known person. You were 324 00:16:31.800 --> 00:16:35.000 the CEO and chairman of the board of the conglomerate 325 00:16:34.100 --> 00:16:36.700 from 1950 to 326 00:16:37.200 --> 00:16:40.400 2018 which is absolutely outstanding. 327 00:16:41.500 --> 00:16:44.600 Currently is a revenues generated by the conglomerate are 328 00:16:44.600 --> 00:16:48.500 about 58 billion dollars telecommunication. It's 329 00:16:47.500 --> 00:16:50.200 a bit more than one-fifth of 330 00:16:50.200 --> 00:16:53.800 the revenues, but it is almost 40% of 331 00:16:53.800 --> 00:16:54.700 ebida. 332 00:16:55.200 --> 00:16:58.500 So this is absolutely phenomenal as a contribution. 333 00:16:58.500 --> 00:17:01.600 Now, if you deep dive in the annual report 334 00:17:01.600 --> 00:17:05.500 of the company and you look at what happens in UK, you 335 00:17:04.500 --> 00:17:07.400 can't really be done you subtract 336 00:17:07.400 --> 00:17:10.300 Capital expenditures and what you have to pay each and 337 00:17:10.300 --> 00:17:13.400 every year for licenses and the figure which is a kind of 338 00:17:13.400 --> 00:17:15.500 free cash flow is negative. 339 00:17:16.200 --> 00:17:19.400 When the free cash flow to the firm is negative. It means that the company's 340 00:17:19.400 --> 00:17:23.400 worth nothing except if the market anticipates 341 00:17:22.400 --> 00:17:25.400 that there might be some kind 342 00:17:25.400 --> 00:17:28.300 of recovery in order to boost the 343 00:17:28.300 --> 00:17:29.300 potential recovery. 344 00:17:30.200 --> 00:17:33.500 Hutchinson tried to merge a business operations in 345 00:17:33.500 --> 00:17:36.200 UK with telephonica UK if you remember 346 00:17:36.200 --> 00:17:37.900 the former O2 347 00:17:38.700 --> 00:17:41.500 but the authorities rejected the project 348 00:17:41.500 --> 00:17:45.300 in 2016 because of competition 349 00:17:44.300 --> 00:17:47.500 now the institution in charge 350 00:17:47.500 --> 00:17:50.600 of accepting or rejecting this kind 351 00:17:50.600 --> 00:17:53.500 of project is taking its opinion 352 00:17:53.500 --> 00:17:56.400 from the ofcom of is a 353 00:17:56.400 --> 00:17:59.400 regulator of telecommunication operators in 354 00:17:59.400 --> 00:17:59.900 the UK. 355 00:18:00.800 --> 00:18:03.500 And a company published a very interesting study 356 00:18:03.500 --> 00:18:06.500 in December 2020 observing the 357 00:18:06.500 --> 00:18:09.700 impact of mergers in the telecommunication industry 358 00:18:09.700 --> 00:18:10.500 in Europe. 359 00:18:11.500 --> 00:18:14.500 And to make it simple a merger implies less 360 00:18:14.500 --> 00:18:15.100 investment. 361 00:18:16.200 --> 00:18:20.100 And stabilization of customer satisfaction or less 362 00:18:19.100 --> 00:18:22.500 investment again and lower and 363 00:18:22.500 --> 00:18:25.500 decreasing customer satisfaction. So you 364 00:18:25.500 --> 00:18:28.300 understand that the objective is definitely to reduce 365 00:18:28.300 --> 00:18:29.500 Capital expenditures. 366 00:18:30.400 --> 00:18:34.000 Sometimes even at the expense of customer satisfaction, 367 00:18:33.200 --> 00:18:36.800 which is completely confirmed by a 368 00:18:36.800 --> 00:18:39.700 very interesting book published by a professor 369 00:18:39.700 --> 00:18:43.000 of New York University Tomas Philippine the 370 00:18:42.400 --> 00:18:46.000 great reversal published in 2019. He 371 00:18:45.300 --> 00:18:48.700 observed the evolution of the North American industry 372 00:18:48.700 --> 00:18:51.700 among other Industries observed by 373 00:18:51.700 --> 00:18:54.700 the professor telecommunication operators in 374 00:18:54.700 --> 00:18:55.300 North America. 375 00:18:56.200 --> 00:18:59.400 It's a dual pulley plus a few 376 00:18:59.400 --> 00:19:03.100 additional actors. It's very expensive and 377 00:19:02.100 --> 00:19:05.700 a quality of service is quite poor. 378 00:19:05.700 --> 00:19:08.900 It's rainforces the offcom opinion 379 00:19:08.900 --> 00:19:11.300 on the European market. So of course 380 00:19:11.300 --> 00:19:14.800 it will be less investment. Of course, there will be savings the 381 00:19:14.800 --> 00:19:17.500 savings are estimated and announced at 382 00:19:17.500 --> 00:19:20.300 a level of 400 million pounds per 383 00:19:20.300 --> 00:19:22.200 year, which is quite significant. 384 00:19:23.200 --> 00:19:27.100 Now if you want to grasp this opportunity, you 385 00:19:26.100 --> 00:19:30.200 can select an acquisition Vodafone 386 00:19:29.200 --> 00:19:32.400 buys three UK or create a 387 00:19:32.400 --> 00:19:35.800 joint venture. The joint venture was decided 388 00:19:35.800 --> 00:19:38.400 for a very simple reason which is it's very 389 00:19:38.400 --> 00:19:40.100 difficult for that fun to buy. 390 00:19:40.900 --> 00:19:43.600 The gearing of the camp is a financial structure 391 00:19:43.600 --> 00:19:46.600 is already quite overloaded by 392 00:19:46.600 --> 00:19:47.000 that. 393 00:19:47.900 --> 00:19:50.800 And if you look at the evolution of the financial structure 394 00:19:50.800 --> 00:19:53.500 gearing and leverage throughout the 395 00:19:53.500 --> 00:19:56.600 years it's up on up and up 396 00:19:56.600 --> 00:19:59.600 today. The net financial debt is 397 00:19:59.600 --> 00:20:03.100 about 1.6 times the market 398 00:20:02.100 --> 00:20:05.600 capitalization of the company and the 399 00:20:05.600 --> 00:20:09.300 same net financial debt represents about 3.5 years 400 00:20:08.300 --> 00:20:11.800 of a dab. So there's no 401 00:20:11.800 --> 00:20:14.500 possibility to finance the acquisition by that, 402 00:20:14.500 --> 00:20:17.200 of course, it could be Finance by 403 00:20:17.200 --> 00:20:20.300 equity and all stock transaction, but then it 404 00:20:20.300 --> 00:20:23.700 would be at the expense of the delusion of Vodafone shareholders 405 00:20:23.700 --> 00:20:26.300 and to this stock price of an iPhone 406 00:20:26.300 --> 00:20:29.400 is a little bit gloomy. So they are probably 407 00:20:29.400 --> 00:20:32.900 not willing to take this alternative conclude this 408 00:20:32.900 --> 00:20:36.400 vidcast. Let's go back to customer satisfaction. We 409 00:20:35.400 --> 00:20:38.500 understood the financial rationality. But 410 00:20:38.500 --> 00:20:40.500 what is the impact for the customers? 411 00:20:41.100 --> 00:20:44.200 Of calm Publishers each and every year 412 00:20:44.200 --> 00:20:47.900 a report which is about satisfaction customer satisfaction 413 00:20:47.900 --> 00:20:51.200 benchmarking all the telecommunication operators 414 00:20:50.200 --> 00:20:52.100 in the UK. 415 00:20:52.700 --> 00:20:55.800 If you look at the score of the default, it's 416 00:20:55.800 --> 00:20:56.900 about the average. 417 00:20:57.600 --> 00:21:00.700 92% of satisfaction the 418 00:21:00.700 --> 00:21:03.700 best among the best is Tesco Mobile give 419 00:21:03.700 --> 00:21:07.300 Gaff also has a great score and Vodafone 420 00:21:06.300 --> 00:21:10.200 is average now significantly 421 00:21:09.200 --> 00:21:13.200 below. The average is three UK 422 00:21:12.200 --> 00:21:16.100 with 86% of satisfaction. 423 00:21:15.100 --> 00:21:18.400 Not interestingly. The bad 424 00:21:18.400 --> 00:21:21.500 pupil in the list is Virgin Mobile, which 425 00:21:21.500 --> 00:21:24.900 is quite strange when you remember that 426 00:21:24.900 --> 00:21:28.000 Richard Branson creating Virgin Mobile 427 00:21:27.900 --> 00:21:30.700 created a company, which was absolutely 428 00:21:30.700 --> 00:21:34.200 fantastic in terms of customer reputation 429 00:21:33.200 --> 00:21:35.200 and satisfaction. 430 00:21:36.300 --> 00:21:39.900 A few things happens in then just another illustration 431 00:21:39.900 --> 00:21:42.300 of the reasons why the level 432 00:21:42.300 --> 00:21:45.600 of satisfaction is quite low. Look at 433 00:21:45.600 --> 00:21:48.400 the complaints received by ofcom. 434 00:21:49.200 --> 00:21:52.500 Who are the highest three well three 435 00:21:52.500 --> 00:21:55.200 Virgin Mobile again, which is 436 00:21:55.200 --> 00:21:57.900 number one by far and for that fun. 437 00:21:58.400 --> 00:22:01.300 So you understand that customer satisfaction is not 438 00:22:01.300 --> 00:22:02.200 that great. 439 00:22:03.200 --> 00:22:07.100 So maybe it's going to be accepted by the institution 440 00:22:06.100 --> 00:22:10.900 in charge of competition CMA. 441 00:22:09.900 --> 00:22:12.300 Maybe they are 442 00:22:12.300 --> 00:22:15.300 going to generate synergies. But what are they going to do with this 443 00:22:15.300 --> 00:22:18.600 synergies? Are they going to return this 444 00:22:18.600 --> 00:22:21.400 synergies to the shareholders? You remember they want 445 00:22:21.400 --> 00:22:24.700 to improve the financial performance on profitability or are 446 00:22:24.700 --> 00:22:27.200 they going to use the synergies and the 447 00:22:27.200 --> 00:22:30.600 cash which is generated to improve the quality for the 448 00:22:30.600 --> 00:22:33.900 customer. The customers satisfaction. The 449 00:22:33.900 --> 00:22:37.100 answer is a little bit in a calculation. If 450 00:22:36.100 --> 00:22:40.800 you look at what happened since 2004 up 451 00:22:40.800 --> 00:22:44.300 to today more than one handed billion 452 00:22:43.300 --> 00:22:47.000 euros of cash where return 453 00:22:46.100 --> 00:22:49.800 to the shareholders and it is significantly more 454 00:22:49.800 --> 00:22:52.800 than the current net earnings generated 455 00:22:52.800 --> 00:22:55.400 by the company, which means that when 456 00:22:55.400 --> 00:22:59.000 the company made a great investment and generated 457 00:22:58.400 --> 00:23:01.700 a capital gain instead of investing this 458 00:23:01.700 --> 00:23:02.700 capital gain, 459 00:23:03.300 --> 00:23:06.500 Into the Improvement of customers satisfaction, they return 460 00:23:06.500 --> 00:23:09.400 the cash to the shareholders. So this figure gives 461 00:23:09.400 --> 00:23:12.300 you my opinion about the answer 462 00:23:12.300 --> 00:23:15.900 to this question shareholder versus customers. 463 00:23:16.900 --> 00:23:17.600 Thank you very much.