strategic and financial analysis & valuation of tdc a/s · strategic and financial analysis and...

Master Thesis December 2011

Strategic and Financial Analysis & Valuation of TDC A/S

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

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

Supervisor: Jesper Banghøj, Department of Accounting and Auditing Institution: Copenhagen Business School Std. pages: 80 Characters: 160.406 Exhibits: 27

Strategic and Financial Analysis and Valuation of TDC A/S

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EXECUTIVE SUMMARY In December 2010, the former Danish state monopoly TDC A/S was reborn in the stock

market. This dissertation is concerned with uncovering the theoretical value of TDC as

of September 30th 2011 with the purpose of assessing the level of the market price.

A comprehensive strategic analysis and financial analysis lay the ground for carefully

forecasted pro forma statements.

On a macroeconomic level, many factors were found to represent either a risk element

or opportunity element. Of the risk elements, the national Telecom regulation and eco‐

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

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

On the meso level, there were likewise identified several factors. The economic growth

in the Telecom sector is diminishing, and combined with high fixed costs, unpredictabil‐

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

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

Hence, the first priority is basically to keep this position, which, however, is far from

easy facing the intensified competition.

There are two main points concerning TDC’s historical performance, namely 1) that

revenue growth has been negative, which mainly can be ascribed to the conditions of the

industry, and 2) that both profit margin and the turnover rate on invested capital has

improved significantly, as a result of seemingly successful reorganizing and cost‐cutting.

The value has then been calculated using two different direct present value models,

namely Discounted Cash Flow to Equity and Residual Income model. The discount rate,

i.e. the owners required return, used was 8,275%. With a most likely pro forma state‐

ment as input, the theoretical price of TDC was calculated to be 48,30 DKK per share,

which is roughly 6% above the price of the valuation date.

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

pecially on certain input factors. The most prominent were the cost and intangible and

tangible assets forecast and the required return on equity.

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

underpriced.

Nadja Remahl Copenhagen Business School December 2011

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TABLE OF CONTENTS 1. INTRODUCTION........................................................................................................................5 1.1 Motivation ........................................................................................................................................ 5 1.2 Problem identification ................................................................................................................. 5 1.3 Problem statement........................................................................................................................ 7

2. METHODOLOGY........................................................................................................................8 2.1 Structure and approach ............................................................................................................... 8 2.2 Empiricism .....................................................................................................................................10 2.3 Models and theoretical reflection ..........................................................................................11 2.4 Delimitations .................................................................................................................................13

3. EMPIRICISM ............................................................................................................................14 3.1 Company presentation...............................................................................................................14 3.2 The Telecom sector .....................................................................................................................21

4. STRATEGIC ANALYSIS.......................................................................................................... 28 4.1 PEST..................................................................................................................................................28 4.2 Porters Five Forces......................................................................................................................35 4.3 Internal analysis...........................................................................................................................44 4.4 SWOT................................................................................................................................................52

5. FINANCIAL STATEMENT ANALYSIS.................................................................................54 5.1 Preparing the financial statements .......................................................................................54 5.2 Profitability Analysis ..................................................................................................................56

6. FORECASTING AND PRO FORMA STATEMENTS..........................................................66 6.1 Template design and assumptions ........................................................................................66 6.2 Most likely scenario ....................................................................................................................67 6.3 Best case scenario........................................................................................................................72 6.4 Worst case scenario ....................................................................................................................72 6.5 Comparing estimated ROE ........................................................................................................73

7. VALUATION.............................................................................................................................75 7.1 Required Rate of Return on Equity ........................................................................................75 7.2 Stock price calculation per 30th September 2011.............................................................79 7.3 Sensitivity Analysis......................................................................................................................80

8. CONCLUSION...........................................................................................................................82

9. REFERENCES...........................................................................................................................84 10. APPENDIX .............................................................................................................................87


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Figures and tables Figure 1‐1 Stock price developments ........................................................................................................6

Figure 2‐1 Project structure...........................................................................................................................8

Figure 3‐1 Organizational chart ................................................................................................................15

Figure 3‐2 Corporate strategic priorities ..............................................................................................20

Figure 3‐3 Revenue distribution ...............................................................................................................22

Figure 3‐4 Fixed line subscriptions .........................................................................................................23

Figure 3‐5 Mobile market shares..............................................................................................................24

Figure 3‐6 Internet subscriptions.............................................................................................................25

Figure 3‐7 Bundled services subscriptions ..........................................................................................26

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

Figure 4‐2 Households ..................................................................................................................................32

Figure 4‐3 The Investment Path................................................................................................................38

Figure 4‐4 Productivity .................................................................................................................................47

Figure 4‐5 Boston Matrix..............................................................................................................................49

Figure 4‐6 SWOT..............................................................................................................................................52

Figure 5‐1 Revenue Growth ........................................................................................................................59

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

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

Table 3‐1 Selected key figures ...................................................................................................................20

Table 4‐1 Productivity measures..............................................................................................................46

Table 5‐1 Restructuring costs ....................................................................................................................55

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

Table 5‐3 Selected Turnover Rates ..........................................................................................................62

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

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

Table 7‐3 Sensitivity calculations, re and g combined .....................................................................81 Equation 1 Required rate of return on equity, re ...............................................................................75


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1. INTRODUCTION In December 2010, the Danish Telecom giant TDC was reintroduced to the stock market

after five years under ownership by 5 capital funds under the name NTC, and so, the

TDC stock has again become a publicly available stock listed on Nasdaq OMX Nordic. As

a consequence, the public and medias interest in the company has increased noticeably.1

Allegedly, the stock is set to become a people’s stock again.

1.1 Motivation

I have been a student assistant at TDC for approximately two years. Naturally, I have

hereby gained a load of knowledge about the company and the Telecom industry as a

whole. Moreover, I have become fascinated with the challenges faced by a Telco such as

TDC.

Likewise, I have always been fascinated with the subject valuation, in this thesis I am

taking the option to work into depth within this field in order to enhance my own un‐

derstanding and extend my competences accordingly.

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

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

company.

1.2 Problem identification

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

nologies are developed and improved at an almost extremely fast pace. One could argue,

that telecommunication, as a business, is a natural monopoly, as a basic prerequisite of

course is an infrastructure. As most people can recall, the case used to be a state of mo‐

nopoly.

Today an infrastructure is no longer a prerequisite, as a company such as TDC is forced

by law to provide access to its infrastructure under certain given circumstances. Hence,

the market is open and accessible to new entrants, and, of course, existing competitors

at this moment are not utopia.

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


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

ated with the large investments – based on those expectations for the future – that are

necessary to rip benefits in the telecom market which is characterized by intense com‐

petition is in my opinion very interesting.

In Figure 1‐1 the index on stock price for TDC, Telenor, and Telia along with the OMX

C20 index for the past year is depicted.

Figure 1‐1 Stock price developments2

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

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

Besides the dominating position, the recent events, and the interesting challenges faced

by TDC, the fact, that I am currently employed as a student assistant and through that

also have become a stockholder, has made the choice of subject for this thesis very easy.

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

2 Euroinvestor.dk

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1.3 Problem statement

The environment in which TDC is operating has undergone enormous changes over the

past decades. Faced by ever more intensive competition, pressure from NITA (The Dan‐

ish National Internet and and Telecom Agency) and shifts in technologies TDC must

strive to free itself from the negative legacy of once being a state affair if they are to con‐

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

teriorated.

What is the theoretical value of TDC A/S as of Septemer 30th 2011, and hence is the

stock correctly priced?

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

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

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

What indications of future profitability and risk can be identified based on historical performance?

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

The problem statement is sought answered through a valuation based on a fundamental

analysis of TDC. The objective is to find the market value of equity and subsequently the

value per stock in order to evaluate the level of the stock price and provide recommen‐

dations with regard to investment decisions regarding the TDC stock.

Despite my current working position in TDC, I have chosen to write this thesis from an

external analyst’s perspective. I will not be taking advantage of my position. It is my ob‐

jective, to perform a by the book case analysis, demonstrating how a number of theories,

tools and techniques combined can produce a decision ground for stock investment

when applied appropriately.


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2. METHODOLOGY 2.1 Structure and approach

Figure 2‐1 Project structure

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

sections each component will be introduced.

2.1.1 Company presentation The company TDC as well as the Telecom sector will be presented and described to a

fairly detailed level. This section is important, as it provides an overall view of the case

and serves as point of departure for the strategic – and the financial statement analysis.


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

ings and growth potential in TDC. Analysis are carried out at three different levels,

namely macro ‐, meso – and, micro level, respectively.

In the analysis of the macro environment the PEST (Politcal, Economic, Sociocultural,

and Technological factors) model will be applied. It is both straightforward and flexible

in the sense that it simply works as a framework in which I can plot the factors I find to

be relevant.

In the analysis of the industry Porter’s Five Forces(Porter, 1980) will be used as a main

framework. Hence, the intensity of competition is assessed by analyzing the 5 forces

driving it, namely ‘threat of new entrants’, ‘intensity of rivalry among existing competi‐

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

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

source analysis will be carried out with the purpose of identifying key resources and

assessing their value creation potential (Elling & Sørensen, 2005, p. 76). Second, apply‐

ing the Boston growth/share matrix from a technology/product perspective will assess

strategic positioning in each product line(Porter, 1980, p. 362). Third, an analysis of

growth strategy will be carried out with Ansoff’s growth strategies(Elling & Sørensen,

2005, p. 99) as point of departure. In the analysis, I also intend to draw upon Product

Life Cycle(Porter, 1980, p. 158), and Technology Platforms(Christensen, 2009).

The chapter will be wrapped up with a SWOT matrix, presenting the key findings of the

analysis in an easy to grasp manner – split by internal/external and positive/negative

nature.

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

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

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

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

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

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

and invested capital among others.


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A comprehensive profitability analysis will be carried out with special emphasis on

revenue, but also a bunch of other core value drivers, which are to be explicitly fore‐

casted. Inspired by the DuPont pyramid, ROE and ROIC is calculated and decomposed as

much as necessary and feasible in order to assess the historical indications for future

trends in the selected core value drivers.

2.1.4 Forecast and Pro Forma Statements In this chapter, the findings of the previous two, combined, provide a basis. First, a num‐

ber of assumptions and methodological issues are addressed. Second, core value drivers

will be carefully selected and forecasted explicitly for the years I find relevant and pos‐

sible.

Using Christian Petersen and Thomas Plenborg’s template (2010) I construct pro forma

statements. It is important, that they articulate so that I know with certainty that there

will be consistency between the two valuation models I have chosen to apply.

2.1.5 Valuation The valuation will be based on two present value models ‐ the DCFE (Discounted Cash

Flow to Equity holders) and the RI (Residual Income) model.

Since both models are direct, aimed at estimating the equity value, it will be necessary to

calculate the required rate of return on equity (re). This is done using Capital Asset Pric‐

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

1960s3.

A sensitivity analysis will be carried out, assessing the models vulnerability with regard

to main assumptions.

2.2 Empiricism

This thesis is written from an external investor’s point of view, and therefore exclusively

based on secondary information. Information gathered from TDC’s own website, such as

annual reports, press releases, company vision etc. represents a large part of the data

basis for the thesis. Annual reports are generally written in a way as to shed the best

possible light on the company. They are subjective but an impartial auditor, however,

audits the content. Moreover, annual reports for listed companies are subjected to nu‐

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


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merous regulations and requirements regarding structure and form. Considering the

previously stated, I consider that the annual reports of TDC are sufficiently reliable and

valid.

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

ferent banks have also been used extensively. Newspaper and web articles, even if not

considered highly trustworthy, are believed to be reliable. Lastly, a number of databases

have been used for different purposes. These are considered highly reliable.

In addition, validity is improved further by accessing several sources to insure that the

found information was reliable when relevant and possible.

2.3 Models and theoretical reflection

In this section, I will attempt to pick up on the methodological and theoretical choices

presented in section 2.1 in order to discuss and assess the value and applicability in this

particular thesis as compared to any other case. Also, some of the alternative mod‐

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

brought up for comparison.

2.3.1 Life cycle The traditional original life cycle model is based on products, i.e. the PLC (Product Life

Cycle). Life cycle analysis is also an important tool with regard to innovation, i.e. the so‐

called ILC (Innovation Life Cycle). The framework is very simple, with four stages,

namely ‘introduction’, ‘growth’, ‘maturity’, and ‘decline’ and thus easy to apply. The

model has been subject to some portion of criticism. As Porter(1980, p. 158) notes, the

usefulness as a planning tool is limited, since stages vary considerably from industry to

industry, and even within an industry. Second the suggested pattern of the four stages

may not be followed – far from it. Therefore, I have chosen also to draw upon Christen‐

sen’s(2009) alternative lifecycle model.

Christensen suggests that we can speak of a CLC (Convergence Life Cycle), which is a

lifecycle consisting of three stages, namely ‘emergent product market’, ‘evolving ecosys‐

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

work, rather it is dynamic and continuous. Secondly, three types of business dynamics

can be identified, namely ‘product market formation’, ‘product market convergence’, and

‘product market divergence’.


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Christensen’s framework is very suitable for analysis in an industry such as the Telecom

sector, because the product markets very much are characterized by these business dy‐

namics. Hence, it will be useful for understanding the underlying dynamics. Seeing as it

is quite comprehensive to carry out a detailed analysis and simply goes out of scope for

this thesis, the notions will rather be used on a high‐level perspective.

2.3.2 Valuation models I have chosen not to use any indirect present value model, e.g. DCFF (Discounted Cash

Flow to Firm) or EVA (Economic Value Added). It is my impression that the indirect

methods are actually the most commonly applied. This does, however, not mean that

they are better models. In fact, if applied correctly, they too yield the exact same result

as the direct models. In this case, I am really not interested in nothing but the equity

value, which is why direct models are chosen. The indirect models require implementing

an iteration process when calculating the WACC (Weighted Average Cost of Capital) with

the found value of equity, which is not exactly straightforward.

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

However, I have chosen not to include this, mainly because other subjects where valued

more important for inclusion, when keeping the problem statement in mind. Neverthe‐

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

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

and II.

2.3.3 CAPM According to CAPM, the expected return on equity equals the beta of the stock times the

market risk premium, plus the risk free interest rate.

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

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

lated as the difference between return on market portfolio and the risk free interest

rate. Beta represents the systematic risk, i.e. the asset specific risk.

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

sumptions regarding investor income taxes and time horizon just to mention a few. In

lack of a perfect model, the CAPM is, however, widely accepted.


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2.4 Delimitations

Only publicly available information will be used throughout the entire thesis, as it is my

objective to perform an external valuation.

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

mark. The contribution in terms of revenue from Nordic activities is considerable, which

makes this a serious limitation. The explanation is straightforward; the analysis in itself

is already to be more than complex considering multiple business lines and multiple

product markets. Furthermore, TDC’s market position differs significantly from that in

home markets, and thus, an inclusion would require double the work effort, time and

space at least; also limiting the options for going in to detail with home market. Holding

that against the benefits of an inclusion, the delimitation is fair. In addition, overall mac‐

roeconomic conditions and market conditions are considered to be fairly the same,

which to some extend mitigates the damage.

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

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

pany operates in both in the Television sector and the Telecom sector, even before IPTV

became an option through YouSee’s cable TV activities. Focus in this thesis will be on the

Telecom sector, as this is where TDC has its main operations. IPTV lies somewhere in

between the two industry demarcations, for this moment however, it will be treated as a

part of the main sector in question, namely the Telecom sector.

During the period of working on this thesis, TDC acquired Onfone. As the analysis will

reveal, the relevance on a strategic level is rather high, while the economic effect is very

limited. Roughly said, Onfone is just another small fish eat up by TDC. I have therefore

chosen not to deal with the acquisition as an independent subject in the forecasting.


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3. EMPIRICISM 3.1 Company presentation

3.1.1 History The history of TDC can be traced all the way back to 1882, when the activities of the

American company Bell, which had entered the Danish “market” a year before with 22

subscribers all located in Copenhagen, were overtaken by the new‐established Danish

telephone company, Kjøbenhavns Telefon‐Aktieselskab (KTAS).

As the interest in communicating via telephone rose quite rapidly, small local companies

began shooting up allover in Denmark. Around 1950 these where gathered in 3 larger

companies that operated in each of their own region and in 1986 a fourth and a fifth

company was established – one was to operate Southern of Jutland and the other to

handle international telephone activities.

Then, on 14th of November 1990 the Danish Parliament passed the act that enabled the

establishment of a national telephone company. Tele Danmark was established and

functioned as a mother company of the 5 large companies. In 1994 the company got

listed on the stock exchange and thereby issued stocks amounting to 18,5 billion DKK – a

historic moment as it was the largest international stock issue ever seen. The following

year all the companies were merged in to one large company, which kept the name Tele

Danmark.

At this point, Tele Danmark was still partially state‐owned, however it did not last for

long. The telecom market was fully liberalized in 1996, and the following year Tele

Danmark entered a strategic partnership with Ameritech, an American Telco, which

then owned around 42 percent of the stocks. In 1998 then, Tele Danmark took over the

remaining state‐owned stocks and so, the company’s position as state‐owned was his‐

tory.

In 2000 the company changed its name to TDC and at the same time big changes in the

organizational structure were made and new subsidiaries were established in order to

enhance customer focus. A year later, Ameritech went in to a strategic partnership with

SBC, which in 2004 sold all its stocks in TDC, meaning that TDC no longer had one domi‐

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

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


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

stocks.

In December 2010 NTC issued a large number of stocks for private investors in Denmark

and institutional investors both in Denmark and abroad. Thereby their share of the TDC

was reduced to 59,1 percent.

3.1.2 Organizational structure TDC is a large and complex corporation, employing 10.107 full‐time employees by the

end of 2nd quarter 2011, of which employees in domestic operations accounted for

8.884. 4

Figure 3‐1 Organizational chart5

A glimpse at the corporate management team, consisting of 9 people (of which 6 are

men and 9 are women), gives a clear impression of a high level of competency. Hence, 7

out of 9 have a Master’s degree. With an average age of 48, the team is quite “young”;

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

4 TDC A/S. TDC Second Quarter Report 2011, p 5. 5 TDC A/S. TDC Annual Report 2010, p 10. 6 TDC A/S. (u.d.). TDC Company profile Corporate Management Team.


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

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

spite serving the same segments as TDC Consumer. In the following sections each main

business line will be described.

3.1.3 TDC Consumer TDC Consumer's products are fixed telephony, VoIP7, mobile telephony, Internet, mobile

broadband, bundles, TV, and music for domestic private consumers.8 The unit has three

subsidiaries affiliated at the end of 2010, Telmore and M1, which are both primarily fo‐

cused on mobile telephony in the low‐price segment, and then Fullrate, which provide

broadband. On August 11th 2011, yet another low‐price mobile telephony company, On‐

fone, was added to the list. The president of TDC Consumer, Anders Jensen, stated in a

press release on the day of the acquisition:

“Onfone has performed quite well and has built a strong position. They fit very well to

TDC’s multi brand strategy. Onfone will like M1, Telmore and Fullrate continue as a

separate company within the TDC group,”9

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

bile broadband, security, and home office.10 The unit serves the following customer

segments: groups & the public sector, large enterprises and small businesses. The unit

offers complete solutions, if necessary tailored, to meet business’ communication needs.

Examples of this is that the TDC, 14 December 2009 to issue a press release stating that

TDC should deliver at home jobs for state employees. Already supported TDC also data

network for government institutions. Segregation from the TDC Consumer has ensured

that there would be emphasis on those customers special needs. TDC Business has a sin‐

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

tions.

7 Fixed line telephony through a broadband cable. 8 TDC A/S. TDC Annual Report 2010, p 32. 9 TDC A/S. (2011, May 11). TDC acquires Onfone. Press release. 10 TDC A/S. TDC Annual Report 2010, p 39.


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3.1.5 TDC Nordic TDC Nordic offers fixed line telephony, VoIP, mobile telephony, Internet, and mobile

broadband primarily for business customers in Sweden, Norway and Finland.11 TDC

Nordic sells to customers via its own fiber network, which is from the former Song Net‐

works acquired by TDC. Here TDC Hosting is also to be found, which caters to the entire

Nordic region. TDC Hosting provides IT and operational solutions for the enterprise,

primarily managed hosting, co‐location, and shared hosting. Managed hosting means

that TDC is primarily responsible for the business customers’ IT. With co‐location cus‐

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

Shared hosting is services such domains, email, etc.

3.1.6 YouSee YouSee is the former TDC Cable TV. It was given a new name in order to be marketed as

a stand‐alone brand in relation to TDC. YouSee’s main product is TV via coax net. The

company also provides broadband over their networks, and IP telephony. In addition,

both music and films are a in the product portfolio.12 YouSee is the largest cable pro‐

vider in Denmark.

YouSee subsidiaries Danish cable TV, which is primarily an installation business, and

Real TV, which sells TV over fiber optic network.

3.1.7 TDC Wholesale TDC Wholesale sells access for fixed telephony, VoIP, mobile telephony, Internet, mobile

broadband, and TV on TDC’s networks.13 Customers are service providers and brand‐

partners, in addition to other network operators. Many of these are competitors of TDC

on the end‐user market. Until 2009, it has primarily been on the Internet and mobile

network, while fixed network constitutes a minor part. This might be about to change,

though, as a consequence of new ruling by NITA regarding both coax and fiber.

11 TDC A/S. TDC Annual Report 2010, p 43. 12 TDC A/S. TDC Annual Report 2010, p 59. 13 TDC A/S. TDC Annual Report 2010, p 49.


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TDC is currently required to provide regulated bit stream access, access to leased lines,

and access at the infrastructure level. In addition to these three obligated products, TDC

offers commercial resale products.14

3.1.8 TDC Operations TDC Operations handles the operation of all the networks, both mobile and fixed, and

installation. Furthermore, the unit has a number of other cross‐functional tasks includ‐

ing IT, ‘Strategic sourcing’, and ‘Business development and logistics’.15 The networks of

TDC will be presented in the next section.

3.1.9 Networks

Fixed networks TDC’s network is quite complex as it is mixing several different technologies. The fixed

network covers nearly 100% of all Danish households with an Access net, which consist

of a mix of three different platforms, namely a copper pair net, a cable net, and an optical

fiber net. The structure can be compared to the public transportation infrastructure in a

big city; trains are the backbone, with high capacity, few lines and (possibly) high opera‐

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

frastructure; busses are the access, with low capacity and many lines, they pass through

almost every area and they pass by the train stations as well, i.e. providing “access”. As a

part of the backbone net, we also find the distribution net, which is the one that the ac‐

cess nets connects to.

Fiber has many advantages over copper, and hence, TDC is spending a lot on expanding

in that area, e.g. DONG ENERGY’s fiber net was acquired in December 2009, a net cover‐

ing the densely populated area of Copenhagen and North Zealand.

To support the access net, TDC also has a backbone‐net, which is completely fiber based,

and is operated by ring structure, in order to damage control against net breakdown and

such.

Mobile networks The mobile network consists of several nets as well. Firstly, the GSM 900 ‐ and GSM

1800 network (2G technology), which covers 99% of the population, and secondly, the

14 NITA. (2011). Markedsafgrænsning Engrosmarkedet for bredbåndstilslutninger (marked 5), p 25. 15 TDC Annual Report 2010, p 49.


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UMTS network (3G technology) covering 94%.16 Recently, TDC also launched availability

of LTE (4G technology) to both private and business customers, a technology promising

huge advancements with regard to speed:

“There will be even better opportunities for everything from gaming and streaming

direct television to downloading music and sharing videos with the rest of the world.

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

Johan Kirstein Brammer, Director of TDC Mobile

3.1.10 Corporate strategy TDC has stated an ambition of becoming “the best performing incumbent telecom player

in Europe by 2012 measured on customer satisfaction, value creation, and employee pride,

while remaining the backbone of a worldclass Danish communications infrastructure”18.

It could appear as clear goals, however measures on each of these indicators can be cal‐

culated in numerous ways, thus it is somewhat blurry.

The ambition is to be achieved through a strategy anchored in the strategic platform

consisting of the following four elements:

Market leadership across all segments in domestic market

Unmatched technology and brand platforms in domestic market

Strong challenger positions in Nordic markets

A sustained focus on the provision of telephony, internet, TV, data communications, and

integration and hosting solutions as well as related contents and services

Furthermore, a set of strategic priorities has been listed. The list can be seen in the

Figure 3‐2. It is divided into two categories, one focused on transformation and the

other focused on marketing and innovation.

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

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

proved efficiency / cost cutting. One could wonder why ‘Customer satisfaction’ is on the

left and not the right side, apparently however, the bullet refers to a organization‐wide

16 TDC A/S. TDC Annual Report 2010, p 51. 17 TDC A/S. (10. October 2011). TDC opens 4G to customers. Press release. 18 TDC A/S. (2011). TDC Corporate strategy.


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

wards customer satisfaction and value creation.

Transformational Marketing and Innovation

1. Customer satisfaction

2. Revitalization of behavior and cul-

ture

3. Flexible and efficient organization

4. Focus on improved IT

5. Rigorous financial discipline

6. Landline retention

7. Mobility growth

8. “TV Everywhere”

9. Growth within business solutions

10. Improved distribution channels

Figure 3‐2 Corporate strategic priorities

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

‘Landline retention’ nor ‘Mobility growth’. Bullet number 8 concerns the “flexibility” of

YouSee’s product portfolio; meanwhile number 9 is concerned with TDC Business and

TDC Nordic, and number 10 with TDC Consumer.

3.1.11 Key figures To get a grasp of the overall status in TDC, I have chosen to present at set of key figures

from the annual report 2010 in Table 3‐1.

DKKm 2008 2009 2010

Revenue 26.917 26.079 26.167 Landline telephony 6.929 6.087

5.683

Mobility services 6.635 7.061 7.175 Internet and network 7.073 7.114 7.021 Terminal equipment, etc. 3.026 2.360 2.428 Cable TV 2.480 2.822 3.298 Other 774 635 562

EBITDA 10.054 10.536 10.772 Group profit after tax

557 2.383 3.007 Total assets, ultimo 100.005 86.423 64.786 Total equity, ultimo 31.680 27.078 20.855 FTE 11.772 11.277 10.423

Table 3‐1 Selected key figures20

Overall, stability seems to be characterizing most of the trends. However, there are a few

points to be noted. First, steady growth in EBITDA despite declining revenue, which in‐

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

19 In English: TRC, Take Responsibility for the Customer 20 TDC A/S. TDC Annual Report 2010.


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

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

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

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

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

3.2 The Telecom sector

The market forms are mainly oligopoly, i.e. a small number of large actors competing in

a predominantly heterogeneous market. These are, besides TDC, Telia, Telenor, and

Hi3G. Being the “leftover” from the governmental telecom enterprise, TDC is in deed

considered the largest Telco on the Danish market, measured by both market shares and

coverage degrees of the infrastructures. Besides these large corporations, small compa‐

nies are entering the market now and then.

3.2.1 General trends

Negative growth in total net revenues21 The aggregated revenue anno 2010 for Telco’s in Denmark was 40,6 billion DKK –

slightly lower than the year before (40,7 billion DKK). Compared to 2008, however,

there has been a decrease of 2,6 percent measured by fixed prices.

With the negative growth in 2009, the Danish Telecom sector ranged number 9 among

27 other EU countries – the overall drop was 5 percent, while only Finland and Holland

experienced growth, high growth in fact; 23% and 17% respectively.

Fixed line has, of course, dropped heavily (10,3%, current prices). Mobile telephony

shows a drop from 2008 to 2009, but then an increase 2010. This turning trend could

quite possibly be the effect of smartphones having kicked in the door on the market for

real.

‘Data communication and Internet’22 along with ‘Other income’23 tells positive stories

with growth of 1,1% and 2,5% (current prices). Representing 20% and 27% of the total

revenue, respectively, these areas are clearly of great strategic importance.

21 NITA. (2011). Økonomiske nøgletal 2010, p 4. 22 Includes revenue from Internet services (fixed and mobile) and data transfer and use of dial‐up connec‐tions from the provider's own end users. This includes subscription fees, MB payments etc.


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Decrease in investments and number of employees24 The total number of FTE’s in the sector has been dropping every year since 2001 except

for one year, i.e. 2007. Revenues have been dropping, and it seems that the Telco’s are

adjusting. From 2008 to 2010 there was an overall decrease of 6,6%.

Investments, on the other hand, were actually increasing from 2004 to 2008 but from

then it has dropped – in 2010 the level was below that of 2005 measured in fixed prices.

It does make sense, that it takes a little longer to adjust investments, as projects can be

long running and expenses are capitalized continually when looking at a range of years.

3.2.2 Markets The telecom market is under constant change, as new technologies are invented and

continuously developed. The attractive market opportunities, therefore also shifts over

time.

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

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

In Figure 3‐3 the revenue distribution by business is depicted. It clearly demonstrates,

that the size of each business is changing, and this to some extend interdependently.

Figure 3‐3 Revenue distribution25

23 Other revenue from electronic communications networks and services in Denmark, including revenues from cable TV, IPTV, directory services, wholesale sales, rental of their own infrastructure, and other revenues that are not included in any of the other categories. 24 NITA. (2011). Økonomiske nøgletal 2010, p 1013.

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

24% 29% 32% 34% 36% 39% 40%

39% 38% 39%

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

18% 20% 20%

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Revenue distribution

Other revenue

Data com. and Internet

Mobile Network

Fixed Network


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Fixed network, which in this case is equivalent to fixed line telephony, is diminishing

quite dramatically. A positive movement within mobile network has offset this trend, far

along the way, at least through the first half of the decade. In recent years, however, the

other two categories have begun to take serious size again. The data communication

part can partially again be explained by a shift in technology – as communication

through other medias, e.g. Facebook, Skype etc., has become increasingly popular, and

the revenue generated in here falls under this category. Other revenue includes impor‐

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

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

In the following section, status on each of these markets will be described shortly. As it

seems reasonable, I have chosen to pick out 3 subcategories of the category ‘Other’,

namely bundled services, IPTV, and wholesales.

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

Mobile technology has taken over to a high degree. Furthermore, there is a shift in the

underlying technology the subscriptions are based on. This can be seen in Figure 3‐4,

where the total number subscriptions for both PSTN and VoIP are depicted. Broadband

telephony, formally IP telephony, has gained significantly in numbers since 2005.

Figure 3‐4 Fixed line subscriptions26

Seeing that the underlying TDC network, supporting PSTN is fully rolled out long ago,

and therefore it contributes with a high EBIT margin combined with the fact, that TDC’s

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

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

1H11

2H

10

1H10

2H

09

1H09

2H

08

1H08

2H

07

1H07

2H

06

1H06

2H

05

1H05

Mill

ions

Subscriptions

PSTN/ISDN

VoIP


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

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

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

The shift towards VoIP is per definition not a good thing, since the market share here is

at mere 39,4 percent28, however when adding up those of the remaining shares, that are

held by a TDC subsidiary, the total market share for the TDC group actually exceeds that

of PSTN. Telenor and FirstCom with 10,3 and 3,8 percent respectively are the main

competitors in this market. FirstCom is purely a B2B company.

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

ber of mobile subscriptions per capita grew by 2,4 percent from June 2010 to June

201129, but the growth is declining as mentioned earlier.

The market is characterized by intense competition with four main actors, namely TDC,

Telenor, Telia, and Hi3G, and a number of other actors of which most are subsidiaries of

one of the four main, in particular TDC. In Figure 3‐5 a chart depicts the distribution of

market shares measured by number of subscriptions.

Figure 3‐5 Mobile market shares30

27 Appendix I, Figure A I‐I. 28 Appendix I, Figure A I‐II. 29 Source: NITA. (2011). Telestatistik første halvår 2011, p 5.

27,7%

8,3%

1,3%

1,3%

6,2% 3,0% 1,9% 2,9%

17,4%

17,0%

10,0%

2,8%

Mobile market shares

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


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Out of the 7 largest, besides the main four, four are subsidiaries of TDC, which provides

the TDC group with a total market share of 43,8 percent.

Internet The market for Internet is in growth, see Figure 3‐6; and by 2010 Denmark ranked

number one in the world with full 74 percent of all households and companies subscrib‐

ing for broadband through either of three access platforms; fiber, Coax, or xDSL31. Like

mobile telephony, however, the market for fixed line Internet seems to be in a phase of

diminishing growth.

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

lephony, thus, TDC is the largest actor with 35,4 percent, followed by subsidiary YouSee

with 16,4 and then Telenor and Stofa (Telia) with 10,8 and 7,1 percent respectively.32

Figure 3‐6 Internet subscriptions33

The fairly new sub‐market, mobile broadband has grown in to a size of importance with

nearly 900 million subscriptions by the end of June 2011. The chart of market shares

looks remarkably similar to that of mobile telephony, only Lebara and M1 are not among

the disclosed companies34.

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

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

30 Source: NITA. (2011). Mobile.xls. 31 TDC A/S. TDC Annual Report 2010, p 12. 32 Appendix I, Figure A I‐III. 33 Source: NITA. (2011). Internet.xls. 34 Appendix I, Figure A I‐IV.

0,0

0,5

1,0

1,5

2,0

2,5

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

Mill

ions

Subscriptions

Fixed line internet

Mobile broadband


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nology with sufficient capacity to begin with. This is, of course not always the case,

which is also why TDC managed to gain market share in this market from 0 to 62 per‐

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

beginning of the year35.

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

picted. The development is clearly very positive with more than 50.000 new subscribers

on bundled services semiannually.

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

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

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

stead a housing – or antenna association, for instance these represented 64 percent of

YouSee’s RGUs as of ultimo 201036.

Figure 3‐7 Bundled services subscriptions37

The number of IPTV subscriptions in total (both stand alone and triple‐play) is almost

identical to that of total triple‐play subscriptions.38

Wholesales The wholesales market is in deed very complex. The divided multi technology structure

of the infrastructure presented in section 3.1.9, has made it possible to arrange the mar‐

35 TDC A/S. TDC Annual Report 2009, p 33. 36 TDC A/S. TDC Annual Report 2010, p 57. 37 NITA. (2011). Other.xls. 38 Appendix I, Figure A I‐V.

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

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

Mill

ions

Subscriptions

Bundled services in total

Triple‐play


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

competitors of TDC, who are not in possession of a nation covering net can chose almost

freely how close to the core net, they whish to plug and access. TDC’s nationwide pres‐

ence in large scale with all the three access platforms means that on these markets TDC

is the sole supplier. Within mobile resale e.g. the case is different, however, as compa‐

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


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4. STRATEGIC ANALYSIS 4.1 PEST

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

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

mark was one of the leading countries in getting the process of liberalization moving, by

privatizing the state‐owned Telco, TDC, and subsequently deploying the Telecommuni‐

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

ing and innovative market for electronic communication infrastructure and services for

the benefit of end users.40

There is a strong political interest in the functioning and innovativeness of services that

Telco’s provide, basically because it is an important part of any nations infrastructure in

general. What really kick‐started the liberalization, was the ‘Lisbon Strategy’ which

European Heads of State and Government agreed upon in March 2010. The objective of

the strategy was to make Europe ‘the most competitive and dynamic knowledge‐based

economy in the world, capable of sustainable economic growth with more and better

jobs and greater social cohesion’. Some strategic actions to attain the objective where

outlined as well; and it was out of these the liberalization process was initiated.

The Telecommunication Act states that NITA is to conduct market‐analysis on markets

that are defined based on recommendations by the EU Commission, with the purpose of

assessing whether they are effectively competitive. When markets are found not to be

effectively competitive, undertaking(s) with significant market power (SMP) are ap‐

pointed, and suitable obligations are imposed on them with the purpose of enhancing

the level of competition, e.g. access to interconnection or price‐control41. In short, the act

has forced TDC to provide access to all the fixed infrastructures to competitors at price‐

rates settled by NITA.

39 International Discussion Forum. (2002). Status Report of Denmark’s Progress in Telecom Reform and Information Infrastructure Development. 40 LOV nr 169 af 03/03/2011, Ministeriet for Videnskab, Teknologi og Udvikling, §1. 41 LOV nr 169 af 03/03/2011, Ministeriet for Videnskab, Teknologi og Udvikling, Chap. 13 and 14.


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There is currently a pending case concerning TDC in relation to the subsidiary, YouSee’s

cable broadband network, which may be about to come under regulation, and thus

opened up competitors42. The case is quite controversial, as no other country (at least

within EU) has ever regulated access to cable networks. To the story comes also the fact,

that in no other European country, except for Denmark, a Telco owns the former state

monopoly cable network.43 Therefore it generated a fiery debate, with politicians and

competitors of TDC on one side, arguing that competitors of TDC too should have the

option of offering high capacity internet services to their customers in the name of free

competition, and TDC on the other side, arguing that it would impose unreasonable

costs to adjust the cable network for such arrangement. Furthermore, competition al‐

ready existed in all three markets, that the cable network could serve, i.e. fixed line, TV

and internet; only no‐one could provide it all together through one single cable.44

Danish Competition Act and the EU law are in deed of importance for the telecom sector,

as few large corporations are dominating, and hence, mergers and acquisi‐

tions/divestitures will by all means be controlled stringently. One example of this was

the long‐drawn‐out process of divesting the Swiss subsidiary, Sunrise, in 2010.45 An‐

other example is the decision made by the European Parliament to set maximum tariffs

on roaming. The aim of this is ultimately to fade out any price differences, i.e. making

calls within EU priced equally with domestic calls.

4.1.2 Economic Generally speaking, the Danish economy is considered rather strong, as Denmark is one

of the richest countries in the world, measured by GDP per capita. The global economy is

still in a crisis, however, and so is the Danish.

In Figure 4‐1, the annual real growth in GDP per capita for Denmark, Finland, Norway,

Sweden, and the EU altogether is shown. Clearly, and not surprisingly, they are all corre‐

lated to a high degree, sharing a drop from 2007 to 2009 and subsequently a rise the

following year, i.e. a slighter decrease in the case of Norway.

42 Skouboe, J. (2009, December 23). Styrelsen slår til mod kabel‐tv selskab. Borsen.dk . 43 NITA. (2011). Markedsafgrænsning Engrosmarkedet for bredbåndstilslutninger (marked 5), p 66. 44 Vos, E. (17. March 2009). European Commission endorses Danish plan to open wholesale access to cable network. Muniwireless.com. 45 TDC A/S ‐ Annual Report 2010, p 7‐8.


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Figure 4‐1 Growth in Real GDP per capita46

To what extend the recession has affected the telecom sector, is difficult to determine,

because the market is under constant change with regard to both the access to services

and use of the services, and, even more so; shifts in technology. Generally, though, it is

fair to state, that the telecom sector is less cyclical compared to industries such as con‐

struction, since it is an absolutely essential part of the infrastructure in any developed

economy. Yet, I do believe that the connection is strong.

According to the International Monetary Fund, GDP per capita is estimated to change as

depicted in the figure, i.e. marked by the dotted lines. Predicting the trend in GDP is

naturally no easy task. Hence, there are a number of other sources providing their esti‐

mates. One is the Danish Economic Councils, which in spring 2011 published estimates

of changes in total GDP to be 1.6, 2.0, and 2.0 for the years of 2011, 2012, and 2013 re‐

spectively.47 In a country report on Denmark published by Economist Intelligence Unit

estimates are calculated to be 1.2, 1.6, 1.9, 2.0, and 2.0 for the period from 2011 to

46 Source: Eurostat Statistics, and International Monetary Fund. 47 Danish Economic Councils. (2011). English summary: Dansk Økonomi, forår 2011, p 4.

-9,0%

-7,0%

-5,0%

-3,0%

-1,0%

1,0%

3,0%

5,0%

7,0%

% Growth in GDP per capita

Denmark Finland Norway Sweden EU(25) Est Denmark Est Finland Est Norway Est Sweden


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2015.48 Those are somewhat more positive estimates. I find it, well – not funny, but per‐

haps comforting that these expert seemingly believe in the rule of thumb, that I have

come to know, which is the 2% of annual growth in GDP, will be realized in near future.

This may not be the case, however, despite being a qualified of its kind it is still a guess.

Unfortunately, the rather detailed numbers published annually by NITA on the telecom

sector’s revenue cannot be compared from 2007 to 2008/2009, as there has been a shift

in the definition and, hence, scope of the revenues, which makes it difficult to determine

whether some affect of the financial crises can possibly be traced. However, if we look at

some numbers on the subscriptions on different services it seems clear, that only fixed‐

line subscriptions have declined noticeably over the entire period from 2002 to 2010.49

This decline can undoubtedly be traced directly to the increase in mobile subscribers,

since mobile technology ‐ as expected – is taking over gradually. According to predic‐

tions by Deutsche Bank50 this shift in technology is expected to continue, and in fact, it is

set out to be the most important short‐to‐middle term factor in terms of growth recov‐

ery.

Quantities are, of course, only one of two pillars determining the revenue. It is very

likely, that a recession can affect the necessity for consumers and businesses to reassess

their current provider and search the market for something cheaper, which inevitably

will cause pressure on prices and, perhaps, even create a price‐war. Signs of this effect

are obviously the entrance of numerous MVNO’s (Mobile Virtual Network Operator)

such as Onfone, Telmore, and M1, which will be discussed further in section 4.2.4.

The adjusted revenue of TDC, disclosed in the 2010 Annual Report, has decreased every

year in the period 2006‐2009, and from 2009 to 2010 there is a slight growth. Seemingly

this could be seen as an effect of the financial crisis, yet this is probably not the case, or

at least it is not as simple as that. Firstly, the greatest decrease is from 2006 to 2007.

Secondly, there are many strategic and competitive aspects, which also have explanatory

value; these will be discussed further in the industry analysis.

48 Economist Intelligence Unit. (2011 ). Country Report – Denmark, p10. 49 NITA. (2011). Det digitale samfund 2010, pp. 14. 50 Deutsche Bank. (2010). European Telcos, Growth recovery and rerating set to continue, pp. 21.


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4.1.3 Sociocultural factors There are many sociocultural factors with direct or indirect influence on the business

environment of TDC in terms of both demographic and social traits and alteration.

One of the most important factors for a company like TDC is households, more precisely

the total number and the changes in the construction of each. In Figure 4‐2 a chart

shows the number of households with 1, 2, 3, 4, and 5+ persons, respectively, and how

they add up to the total number of households from 1986 to 2011. As can be seen from

the chart, the total number of households has steadily increased over the period. This

trend is of course very positive, simply because the potential private consumer cus‐

tomer base for fixed line telephony, broadband and TV is close to 100 percent correlated

with the total number of households. There are two reasons for the rise in number of

households; first, the population is growing – from 1986 to 2011 the population grew by

almost half a million (nearly 10 percent); second, the average number of persons per

household is decreasing – from 1986 to 2011 it went from 2,3 persons per household to

2,14. It should be noted, that the average has been 2,14 the last five years which could

indicate a stabilization.51

Figure 4‐2 Households52

51 Appendix II, Table A II‐I. 52 Statistics Denmark.

0

500

1.000

1.500

2.000

2.500

3.000

'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Thou

sand

1 person 2 persons 3 persons 4 persons 5- persons


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There is of course a natural limit to the decrease in average number of persons per

household, and as mentioned above, there are indications, that the limit has been

reached. Likewise, there is also a limit to the growth in total population; this limit, how‐

ever, does not seem to have been reached, hence, it can be expected that the total num‐

ber of households will continue to rise. Besides these demographic changes, there are

also some general changing trends in lifestyle, that are of importance for TDC, some of

which will be discussed in the following.

There is a clear tendency towards more individualization and less family orientation.

The public debate on core‐family values has been going on for at least a couple of dec‐

ades. The saying goes that the time spent altogether in the family is decreasing, leaving

everyone in an individual community rather than a joint one. Put differently, families are

fragmented into cellular households in which each member does their own activities

independently of the others. Whether product developments such as microwave ovens,

walkmans and cell phones has fostered or simply serviced this trend is not clear, and

need not be. What is important is, that the tendency exists, and there will continue to be

opportunities for further facilitating these cellular households.

Life stages and family roles are changing as well. Children become individuals much ear‐

lier, and adults become parents later – those are well known facts. The latter perhaps

somewhat of a myth, nevertheless children as consumers (not customers) is a very sub‐

stantial segment in terms of value. 30’s are the new 20’s, 40’s are the new 30’s, and so

on; life stages are shifting. One interesting and relevant example of this is the elderly and

their adaption to “new” technologies. Statistics show, that 89 percent of the Danish

population at age 16‐74 have used the Internet within the last three months in 2010

compared to 77 percent in 2005. It is clear that a large part of those ‘not using’ the In‐

ternet is those in the high end of the age scale. However, the same statistics also show,

that 56 percent in the age‐group 65‐74 has used the internet within the last three

months; going up 10 percent points since 2008. This trend should continue, firstly be‐

cause the younger generations are up close to 100 percent, and as they grow older it will

come more natural to them, and secondly, because the entire society is becoming digital‐

ized in the sense that interactions with various public and private institutions is moved

to electronic platforms.


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To begin with, the digitalization is simply an alternative; but more and more, it is becom‐

ing the main way of interacting, especially since the introduction of nemID in 2nd half of

2010. Generally speaking, there is great interest in digitalizing because it is very cost‐

effective and ‐ if running smoothly – it will also be more efficient and convenient for the

citizens.53

4.1.4 Technological Technological progress in the modern society has without any doubt facilitated radical

changes in the lifestyle of most. Face‐to‐face meeting is replaced by electronic communi‐

cation in many contexts. Convenience, availability, reliability, and usability has all in‐

creased/improved, and hence, as a positive spiral the use of these options has spread

throughout the population counting even large parts of the elder and traditionally more

skeptical people. The attractiveness of any given communication technology must nec‐

essarily rely on the features of the technology (i.e. possibilities, convenience, price, etc.)

and, equally important, the number of customers using the technology and/or the com‐

patibility with other (similar) technologies.

Government institutions and private companies are increasingly becoming digitalized in

interaction and transactions. For private consumers, the options available with the In‐

ternet are many, i.e. net banking, online‐shopping, tax return, medical prescriptions and

much more. An important note here is that it is going from being an alternative offering

to being the way to go. One example of this is SU54, which practically only can be applied

through the Internet. Probably, this is possible because applicants are expectedly young,

and thus knows their way with computers. The same does not go for the elder part of

the population; cf. the previous chapter, there is good reason to believe that this will

change, and if so, the model used by the SU Office should be expected to spread through‐

out other governmental institutions.

In the world of business, E‐business where information sharing, order‐placement, pay‐

ment etc. takes place with Internet both in B2B and B2C relationships.

These technological trends should not be viewed as random occurrences. As mentioned

earlier, there is strong political interest in this type of development.

53 NITA. (2011). Det digitale samfund 2010, pp 26‐27; 62. 54 SU ‐ The Danish students' Grants and Loans Scheme


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4.2 Porters Five Forces

The purpose of applying Porter’s model here is to determine the strength of the com‐

petitive forces and hence industry profitability.

4.2.1 Threat of new entrants When determining the threat of new entrants, we assess the prevailing barriers to entry

to which there are 6 major sources according to Porter, i.e. economies of scale, product

differentiation, switching costs, access to distribution channels, cost disadvantage inde‐

pendent of scale, and government policy.

Economies of scale Economies of scale are most certainly present in almost any aspect of the telecom indus‐

try. Given simply the nature of the industry, i.e. large‐scale investments in infrastruc‐

tures, the more RGU’s a company such as TDC can get onto its networks, the greater the

revenue and – all else equal – the higher the EBITDA and EBIT margin. Another aspect of

economies of scale can also be identified, i.e. those that are present in multi business

firms in which there are joint costs among the different units. Different products can be

provided through the same conduction, e.g. fixed line telephony and Internet and/or TV.

In the Telecom industry, it is in fact mirrored in the products, as HomeDuo and

HomeTrio are examples of sharing the benefits from shared costs with the customer.

Product differentiation Product differentiation is somewhat present. Clearly, we are not dealing with particu‐

larly differentiated products even though there is difference between qualities of differ‐

ent networks of course. There is more to the term than just the product. Brand identifi‐

cation and loyalty represents value for existing companies in the industry. Being per‐

haps not the most popular of companies, however, it is fair to state that the value is

somewhat limited. Furthermore, there are some areas in which differentiation have

played and in the future will continue to play a role. With services such as WiMP55 and

PLAY, music available as an extra service for all customers of certain segments, or Telias

movie Tuesday which gave all Telia customers the option of inviting a friend to the mov‐

ies for free, are all examples of how the companies are differentiating themselves even

though the core product is basically the same. Also, quality of service is an option for

55 Wireless Music Player


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differentiation, e.g. with web shopping, a physical store is not a necessity but on the

other hand; a physical store gives the customer the option of “experiencing” the product

and getting face to face customer service.

Switching costs Switching costs are also present. Within mobile telephony and mobile broadband it is

more than common for subscribers to commit themselves for 6 months when purchas‐

ing a new product in order to get a discount in return. Besides this general construction,

switching costs are not the most serious barrier, as NITA has taken initiatives to make it

easier for the customers.

Access to distribution channels Access to distribution channels is present to some extent. In addition to TDC’s own dis‐

tribution channels, which consists of the online store and may physical stores, TDC sells

its products through a number of retailers and sales agents and other distributers, of

which some are also dealing with competitors of TDC.56

Cost disadvantage independent of scale Cost disadvantage independent of scale is likewise present to some extent, in the form of

knowhow, i.e. an accelerated learning curve. If the firms are able to keep their valuable

experience proprietary, it represents an advantage, as costs for R&D and equipment

should be lower. As Porter also notes, however, pursuing experience curve cost declines

may well require substantial up‐front capital investments. Seeing that telecommunica‐

tion not is straight forward, it is clear, that know‐how is a prerequisite for actually oper‐

ating an infrastructure.

Government policy Government policy is indeed relevant in the case of the Telecom sector. However, its

interference represents more of a facilitating than prohibiting factor. Forcing TDC to

provide access as wholesales, it is currently possible for any company to enter most of

the markets in the telecom industry without any investment in infrastructure. This fac‐

tor has without a doubt taken its torn on the industry – the so‐called “Onfone war”

which it has been labeled, tells the story of “fortune hunters” aggressively chasing mar‐

ket shares through allegedly unsustainable business models, with the aim of gaining suf‐

ficient size in terms of subscribers for being an interesting object of acquisition. Accord‐

56 TDC A/S. TDC Annual Report 2010, p 109.


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ing to JP Morgan, the likelihood of history repeating itself is improbable if Onfone’s

strategy remains unchanged.57 This is basically due to a number of reasons, including

the low acquisition price for one. Further more, in the accessed report, an argument

goes, that if Telia and Telenor were to enter a partnership, it would eliminate the future

competition from MVNOs, and this is exactly what has happened.

Assessment Overall, exit barriers are strong mainly because of economies of scale and shared costs.

However, NITA has loosened these barriers, which has resulted in a number of new en‐

tering MVNOs, e.g. Onfone, M1 etc. According to some experts, however, this door should

be closed again with the new cooperation between Telia and Telenor.

4.2.2 Intensity of rivalry among existing firms In relation to the intensity of rivalry among existing firms, Porter lines out a number of

interacting structural factors, which combined result in more or less intense rivalry.

Slow industry growth Slow industry growth is perhaps the most prominent factor when it comes to intensity

of rivalry. The case is clear, where there is market growth, firms can grow without com‐

peting firms having to suffer directly from it. This does not mean however, that no ri‐

valry will exist if the industry growth is high; rather it simply implies that firms may not

be as hungry and thus aggressive in their pursuit of snatching market shares from one

another, as they otherwise could be.

The Telecom sector is made up of several sub markets as described in the company

presentation. To speak of an overall growth, therefore, is a bit utopia. Generally speak‐

ing, though, this is not a stagnant industry. Developments in technology play an impor‐

tant role in relation to market growth, as future market growth with all probability lies

in “new markets” – or i.e. new products/services for existing markets. If all technological

progress were to stop this second, the Telecom sector would ultimately have to face a

future of slow growth. E.g. there would not have been any need for higher speed in the

mobile net such as what 4G technology supports if not the smartphone had been devel‐

oped. It is of course difficult to predict what will happen in the future; up until now,

however, telecommunication has been an area of great growth. The unpredictability fac‐

57 Wittig, H., Morris, D., & Achtmann, T. (12. May 2011). TDC ‐ Improved visibility, p 3.


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tor in itself actually makes rivalry more intense, as keeping what one has already got

seems crucial when having to face the unknown.

As described in section 3.2.1, the market for fixed line telephony is in a phase of serious

negative revenue growth, while mobile seems to be stagnating. The market for fixed line

Internet is somewhat stagnating as well, while mobile broadband is experiencing

growth. The most positive outlook currently lies in TV.

Numerous or equally balanced competitors Numerous or equally balanced competitors is about whether or not companies within

the industry will “fight” directly or indirectly one another, or alternatively live their own

lives. In an industry characterized by duopoly the two firms are highly likely to follow

each other’s every move, seeing that a move on one part almost inevitably will have in‐

fluence on the other. With TDC being the big dominator in Denmark, things are not as

intense as they otherwise could be.

Figure 4‐3 stems from the European Commission, and was developed in the process of

preparing recommendations for regulation of next generation’s access networks. It illus‐

trates the different levels of “in‐house” versus bought network a Telco can chose to pick

from. Accordingly, the more refinement, actors aside the dominator chose to handle

themselves, the more intense will competition be in a given market.

Figure 4‐3 The Investment Path58

58 Source: NITA. (2011). Markedsafgrænsning – Engrosmarkedet for bredbåndstilslutninger (marked 5), p 22.


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Still having the “Onfone war” in mind, it could seem absurd, since competition in the

mobile market has intensified by companies employing a business model based on re‐

sale, which according to the model does not imply intense competition. However, it may

well be true, that these business models are in fact unsustainable; and in that case the

market has clearly been disrupted in a most unfortunate sense for existing operators.

The relation should be acknowledged since it makes perfectly good sense. As companies

move up the path of increased investments, they attain 1) economies of scale as com‐

pared to resale companies for instance, who pay per customer and therefore incur rela‐

tively high variable costs and 2) increased control over products and hence, there are

options for differentiation. Both of these factors, naturally implies more intense compe‐

tition.

Recently, Telia and Telenor announced, that they plan to cooperate, i.e. share and co‐

build their mobile infrastructures. According to CEO of Telenor, Jon Erik Haug, they now

aim at building Denmark’s best mobile infrastructure. Clearly it is unfavorable for TDC

and 3 if carried out successfully. Only days before the announcement, however, a stock

analyst named Paul Ernst Jessen expressed concern regarding the financial situation of

the two companies; stating that the only solution would be to engage in cooperation.59

This certainly tells something about the size of investments necessary to compete with

own infrastructure. Both companies are large on an international scale; however market

shares are not won over night; and expending and sharpening an infrastructure is so

costly, that it must be a gradual process.

High fixed or storage costs High fixed or storage costs are other factors potentially affecting the rivalry. It is basi‐

cally the problem of sunk costs that comes into play here. Seeing that most of the prod‐

ucts are in fact “capacity” so to speak, storing it is not an option. Given that variable costs

are low, any incremental increase in revenue equals contribution for covering the high

fixed costs. Thus, firms in the industry should – all else equal – have greater incentive for

e.g. lowering prices to conquer market shares.

59 Rasmussen, P. D. (14. June 2011). Telia og Telenor: Vi bygger Danmarks bedste net. Computerworld .


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Price wars have been seen, which must be seen as a result of or in action intense rivalry.

On the other hand, it seems there is some sort of discipline among the large actors,

probably because price wars in the long or perhaps even short‐middle run are unsus‐

tainable. The solution, it seems, has been brand diversification strategies. I.e. the market

is divided into two, a low‐price segment and a high‐price segment; the large actors then

“fight” for both segments, only they use different names in each. So long as it works in

keeping the high‐price segment a live; the problem is indeed reduced. However, it does

seem a little too easy, and evidently the low‐price companies are continuously emerging.

Lack of differentiation or switching costs The above notes on price discrimination very much relates to this point. For most peo‐

ple, a subscription is a subscription – it is the price and service that matters. In contra‐

diction to competition based on product differentiation that provides consumer prefer‐

ences and loyalty, this form of competition implies high volatility, and hence risk.

Assessment The overall intensity of rivalry among existing competitors is moderately strong. We are

not dealing with duopoly or perfect competition markets. TDC is dominating and some‐

what controlling and few competitors have climbed far up the investment path. Gener‐

ally this would imply little intensity. On the other hand; only few have real options of

differentiation leaving price as the (sole) areaa of adjustment and competition. Slow in‐

dustry growth contributes a great deal to what should perhaps be termed intensified

rivalry.

4.2.3 Threat of substitutes For anything to become a real substitute for telephony and/or data communication, it

would probably have to be based on a new technology. E.g. data communication such as

MSN etc. are of course substitutes for telephony, however as those market opportunities

were new, companies in the Telecom sector were the ones to bring it out and about. As

such, the real threat is that coming from emerging technologies. There will always lay a

danger in this industry, that other industries suddenly see opportunities for using what‐

ever they do to somehow gain a bite of this enormous market.

4.2.4 Bargaining power of buyers Buyers in relation to TDC consist of a number of different segments, which all have dif‐

ferent characteristics, namely consumers, business customers, and wholesale customers.


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Consumers There are a number of circumstances under which a buyer group is powerful. First, if it

is concentrated or buys in large scale relative to the company’s total sales, as this makes

the buyer relatively important. In a general sense, this is definitely not the case in the

Telecom industries; customers are acting on their own and their purchase represents a

minimal fraction of total revenue. Second, if the purchase represents a large fraction of

the buyers total purchases, as this provides greater incentive for the buyer to invest the

time needed for finding favorable prices and they purchase selectively. Determining

whether a fraction is large or small is a rather subjective task, judged by the preliminary

success of price discrimination, it does not represent a fraction sufficiently high for lead‐

ing to action, not for most part (for now) at least. Another circumstance brings about the

same effect, namely when buyers are earning low profit, or in this case when consumers

have less money. Third, if there is no or little differentiation or few switching costs, as

everyone, i.e. both the buyer and the company, knows that there is an equally good offer

which the buyer can easily pursue instead. As discussed earlier, this is very much the

case here, i.e. “a subscription is a subscription”.

Business customers Business customers, in most cases being larger than a consumer RGU and in some cases

even much bigger, have significantly more bargaining power. For these buyers, there is

assumable a lot more value in product differentiation, both in terms of quality and qual‐

ity of service. Most companies cannot cope with unreliable equipment or network, nor

will they have the incentive to cut the need for fast service in case of issues occurring in

return of low prices. However, in the light of the financial crises, many are still strug‐

gling to keep the wheel going, implying greater incentive for searching the market for

the best and cheapest possible solution. Nevertheless, the business customers have sig‐

nificantly more bargaining power than consumer due to the effect of their size.

Wholesales Sales in the wholesale segment are purely intersectoral; however it still makes sense to

assess the power relationship in the non price‐regulated markets. The price‐regulated

markets do not function regularly by market powers; moreover prices are decided by a

third part and it therefore does not make sense to speak of bargaining power. Informa‐

tion on the non‐regulated products, however, is not available, since neither NITA nor

TDC seems to put much focus on these areas. Seeing the size of TDC, it is fair to argue,


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that the bargaining power of wholesale buyers is fairly vague. Returning to the Invest‐

ment Path, the more the buyer chooses to refine in‐house, the less dependent it is on the

supplier, and hence, bargaining power is stronger.

Assessment Overall, with regard to retail customers the buyers bargaining power is quite strong,

mainly because switching costs are low. Product differentiation is in most cases of little

significance/importance for the customer, and with economic downturn, many both

consumers and business customers are attempting to cut down on expenses, just like

TDC self is doing.

4.2.5 Bargaining power of suppliers The circumstances under which suppliers are powerful have much resemblance with

those under which buyers are powerful. First, if the supplier group is dominated by a

few companies and is more concentrated than the industry it sells to, as the “other

equally good offer” is not available. Second, if the suppliers are single source, i.e. no sub‐

stituting products are available. Third, if the industry is not an important customer to

the supplier group, as suppliers in such case will have tendencies to not care. Fourth, if

the purchase in case is of high importance for the industry (the buyer). Fifth, if the prod‐

uct is differentiated or switching costs are involved. Sixth if the supplier group repre‐

sents a credible threat as new entrant through forward integration. TDC has pointed to

specific suppliers, of which they are critically dependent60; these will be discussed sepa‐

rately in the following sub sections.

Outsourced activities First, operations and development within IT activities have been outsourced to CSC

(Computer Science Corporation), and operation and expansion activities related to the

mobile network have been outsourced to Ericsson. Since these are both critical elements

of TDC’s operations, the dependency is of course very high. Both suppliers operate glob‐

ally, and therefore TDC is assumable to represents only a very small fraction of all cus‐

tomers. There are other available suppliers within these fields; however switching are

high, in the sense that solutions often are specialized in such a way that it is difficult to

transfer the task to a different supplier. Especially within IT solutions, it is often all or

nothing kind of deals. Commitments, thus, are long term, and with good cooperation



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present, power may not be what settles the deal. Good cooperation is more than likely to

be present, since outsourcing of these areas otherwise would be foolish to follow

through with.

Mobile phone manufacturers Second, TDC is highly dependent on supply of telephones, in particular smartphones.

There are several large companies competing in the smartphone industry. It is crucial

for TDC, or any other given company for that matter, to be able to access a broad portfo‐

lio of supply, preferably including all the big manufacturers – simply because product

differentiation is everything in the business of mobile phones. The suppliers here are

global companies as well, which means that TDC also here represents a very small frac‐

tion of their business. The dependency is mutual, however it seems fair to claim, that

TDC is somewhat more dependent than the other way around.

Recently, there was in fact an example of incapability of reaching a satisfactory agree‐

ment with a supplier of Smartphones, namely Apple with its iPhone. Allegedly, TDC

stated back in December 2009 that the market for iPhones was thought of as full, and

compared with existing suppliers the profitability was lacking, and the company found it

sufficient to stick with those they already had.61 Tele analyst, Torben Rune argued that it

was more likely to be the fact that a satisfactory agreement with Apple was unattainable

that played the decisive role. Also, he predicted that iPhone would be to find in TDC’s

product range at the latest by 2011, simply because TDC would be pressured by iPhones

at that point growing market share. On August 13th 2010 TDC announced, that the new

model iPhone 4 would become part of TDC’s products62. Interestingly, at the point of

launch there were already 116.000 iPhones on TDC’s network63, which obviously sup‐

ports Torben Rune’s argument but also implies a somewhat level of customer loyalty.

On the domestic level, TDC is undoubtedly market leader in all areas; competitors such

as Telenor and Telia are facing TDC’s many comparative advantages. From a global view,

however, TDC is a small fish with revenue in 2010 amounting to 26.167 DKK millions.

61 Frederik Danvig. (18. December 2009). TDC kan blive tvunget til at sælge iPhone. Computerworld. 62 TDC A/S. (13. August 2010). TDC to launch iPhone 4. Press release. 63 TDC A/S. (17. August 2010). 116.000 iPhones i TDC's net. Press release.


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With Telia’s revenue of 106.582 SEK millions64 and Telenor of 94.843 NOK millions65 the

implication is clear; when it comes dealing with global companies these large competi‐

tors have an advantage.

Taken as a whole, the bargaining power of the Smartphone suppliers is presumably

strong.

Content providers Third, certain areas of TDC’s business is highly dependent on the supply of attractive

content, this goes especially for YouSee’s cable TV business, where Viasat and TV2 Net‐

works are main suppliers. The dependency here is very much mutual, keeping TDC’s

market shares in mind. Hence, supplier bargaining power here is expected to be only

moderately strong.

Assessment On a national scale, TDC is one of largest companies; hence, suppliers of many sorts have

very little bargaining power. There are nonetheless a number of suppliers, which seem‐

ingly have very strong bargaining power. These are in particular electronic giants such

as Apple, Samsung, Nokia etc., who TDC very much depend upon for supply of a competi‐

tive range of products – mainly phones and smartphones.

4.3 Internal analysis

4.3.1 Key resources Not only will key resources be identified, their latest development and strength will be

assessed as well. As these resources are key, it is important to look at what the company

is doing in order to shape and build them.

Material assets Some of TDC’s most important ressources are the infrastructures. During the last 5 years

the level of investments in infrastructure has been around 14‐15 percent of revenue,

which is high.66

By the end of 2010 TDC’s fixed net in terms of triple‐play standard definition(i.e. an

access line with capacity bare up to all three; telephone, broadband, and TV) coveres 90

64 Telia. TeliaSonera Annual Report 2010, p 4. 65 Telenor. Telenor Group Annual Report 2010, p 16. 66 TDC A/S. TDC Annual Report 2010, p 76.


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percent of all households.67 Not setting standard on the speed(capacity) of the

connection, however, the net covers nearly the entire population.68 It is well known by

now, that the option of providing bundled services presents TDC with a significan

advantage over its competitors. Also, the “aggressive” action with the acquisition of

Dong’s fiber net has resulted in TDC having the largest fiber net, and with the

advantages of fiber, this could prove to be an essential investment.

Mobile networks are a prime ressource as well. Basic coverage is very close to 100

percent, nevertheless TDC is not resting, i.e. heavily investments have been made in the

new 4G network. Seeing that many services increasingly become mobile, not to mention

Telenor and Telias alliance, it seems more than reasonable to keep up in this field.

Immaterial assets

Brands Immaterial assets are also important resources. Especially the many brands the TDC

possesses, most of which have been added by acquisition of companies, is a strong fac‐

tor. It is, of course a balance, seeing that too many brands in the same market ultimately

will lead to some sort of chaos. However, momentarily with the developments in the

industry with regard to the consumer segment particularly, i.e. the price discrimination

discussed in section 4.2.2, there is good reason to be present with many faces.

According to JP Morgan, the recent acquisition of Onfone was very favorable deal for

TDC – i.e. a price of 0,3 billion DKK is low compared to revenue contribution of up to 0,5

billion DKK (0,3 billion EBITDA). Before the acquisition, Onfone was a valuable whole‐

sale customer of Telenor – allegedly paying Telenor around 0,2‐0,3 billion DKK. There‐

fore, integrating the activities into TDC’s net would turn the annual loss into profit.69

Customer relations Another important immaterial asset is customer relations. With the first two of the

transformational strategic priorities, especially the first ‘customer satisfaction’ but also

the second ‘revitalization of behavior and culture’, TDC is certainly directing much atten‐

tion towards customers. Not having full access to all information, it is somewhat difficult

to assess level and trend in customer satisfaction.

67 TDC A/S. TDC Annual Report 2010, p 12. 68 Ibid, p 50. 69 Wittig, H., Morris, D., & Achtmann, T. (12. May 2011). TDC ‐ Improved visibility, p 1‐2.


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An important measure, however, is RGUs. Positive development within most markets

from 2008 to 2010 can be observed – i.e. VoIP, mobile telephony, mobile broadband,

broadband wholesale and retail, all TV activities, and bundled services. Fixed line te‐

lephony (PSTN/ISDN) is expectedly dropping, while the trend within wholesale mobile

telephony and retail prepaid cards is a bit more turbulent.70 With very positive trends

especially within TV and bundled services things look good.

Development in total RGUs however, only depicts the gross change, i.e. customer reten‐

tion is not reflected. TDC has given information on churn rates71 only for TDC Consum‐

ers mobile telephony subscribers. Despite a very dramatic rise in the first two quarters

of 2010, the churn rate has by the fourth quarter gone down to a level of 28,7 percent,

which is 13,4 percent points lower than in the first quarter of 2008, thus an overall very

positive development.72

Human assets Employees are an equally important resource in TDC. Clearly, the task of transforming

an organization is not easy, and it certainly affects people a lot, since headcount reduc‐

tions have been a part of the process. Over a period of two years, the number of FTEs

has been reduced by 11,5 percent73. Seen from an economic point of view rationalization

is positive, if executed properly that is. Table 3‐1 is to help address exactly this issue.

Growth in Revenue/Employee FTE change (’07-‘10) 2007 2008 2009 2010 TDC Consumer -24,0% 3,77 4,48 4,50 4,61 TDC Business -33,3% 4,01 5,28 5,19 5,11 TDC Nordic -13,0% 2,42 2,38 2,45 2,94 Operations & Wholesale -30,4% 0,65 0,62 0,59 0,66 YouSee 10,9% 2,55 2,72 2,84 3,26

Growth in EBITDA/Employee TDC Consumer 1,39 1,76 1,85 1,98 TDC Business 1,58 2,26 2,44 2,47 TDC Nordic 0,27 0,28 0,35 0,41 Operations & Wholesale 0,26 0,34 0,32 0,29 YouSee 0,73 0,81 0,90 1,10

Table 4‐1 Productivity measures74

70 See appendix II, Figure II‐II to VI 71 The annual percentage of lost customers based on average number of total customers. 72 See appendix II, Figure A II‐I 73 From 11.772 in 2008 to 10.423 in 2010, see Table 3‐1 Selected key figures 74 Appendix II, Table A II‐II


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From the table can be seen reported EBITDA per FTE and revenue per FTE for each of

the five business units. These are two key productivity indicators over time or benched

marked against one another, and when combined they provide information on 1) the

“success” of market activities reflected in revenue per FTE and 2) the “success” of inter‐

nal processes reflected in the discrepancy between the two.

An overall impression comes from observing the numbers, that TDC has become sub‐

stantially more effective on every measure, except that of Operations and Wholesale. It

is not surprising to see, that the level of both measures is higher for TDC Business than

TDC Consumer. In terms of the revenue measure, TDC Business is the only unit with de‐

clining trend in the last two years.

It is important to remember, naturally, that it is a balance that any company needs to

trade off, i.e. the quality of service etc. versus personnel costs. Therefore, these trends in

themselves being “positive” are not necessarily implication of positive change.

The relationship between the two measures is key. Figure 4‐4 depicts this relationship

based on average growth in the last two fiscal years. The idea is that growth in revenue

per employee alone tells only half the truth – more precisely; if a positive change in

revenue per employee is not accompanied by a positive change in EBITDA per employee

the company is not capturing value from the growth.

Figure 4‐4 Productivity75

75 Based on reported numbers on segment revenue, EBITDA, and FTE. The growth rates are calculated as an average of the growth from 2008 to 2009 and the growth from 2009 to 2010. See appendix II, Table A II‐I, Table A II‐II, and Table A II‐III.

-15%

-5%

5%

15%

25%

-5% 0% 5% 10% 15%

Gro

wth

in E

BIT

DA

/FTE

Growth in Revenue/FTE

TDC Consumer

TDC Business

TDC Nordic

Operations & Wholesale

YouSee


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Headcount reductions in the business units should all else equal be reflected in a higher

EBITDA/FTE than revenue/FTE growth. It is important to note, that the other side of the

equation, i.e. development in revenues has a large impact, with respect to analysis how‐

ever, it is best treated in the financial statement analysis. For now we are focusing only

in relation to FTEs.

YouSee and TDC Nordic take the lead both with more than a 50% higher growth in

EBITDA/revenue indicating solid change for the better. TDC Consumer and TDC Busi‐

ness show moderate change, the latter has managed to grow in terms of EBITDA/FTE

while actually experiencing a decline in revenue/FTE. Operations and Wholesale is by

nature very different from the other units, as it operates across and handles everything

that relates to operations.

Overall, it seems that TDC is succeeding in trimming the organization as to fit with the

market conditions. Determining how much more potential there is in efficiency im‐

provements is close to impossible, interim report for 1H2011 showed a total number of

FTEs of 10.107, which is a reduction of another 316 compared to ultimo 2010.

When NTC’s stock emission became a reality all employees were granted a one‐off allo‐

cation of stocks, amounting to a total value of DKK 145 millions. In addition, a stock in‐

vestment bonus program for all members of the top management was established. The

program is subject to “lock‐up”, which means that the granted stocks are locked for

trade for 12‐18 months.76 Clearly, this provides management with very strong incen‐

tives – the total number of shares possessed by members of the management committee

as of ultimo 2010 4.389.894, which is more than 5 per thousand of the total number of

outstanding stocks, and represents a current market value of nearly 200 DKK millions77.

4.3.2 Boston growth/share model The Boston model is to help assess the current current position of each product division.

The underlying assumption is that the experience curve is working and hence that the

company with the largest relative market share is able to produce at the lowest cost, and

the area is then divided into four quadrants, i.e. Dog. (low/low), Question mark

76 TDC A/S. TDC Annual Report 2010, p 156157. 77 Total number of outstanding stocks is 825.000.000, and the closing price of TDC A/S was 45,53 as of Semptember 30th – 4.389.894/825.000.000 = 0,0053 and 4.389.894*45,53 DKK = 199.871.874 DKK. Source: euroinvestor.dk.


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(low/high), Star (high/high), and Cash Cow (high/low) with the parentheses represent‐

ing high or low relative market share and market growth respectively. The idea is then,

that the chart helps detect where cash generation stems from and where cash should be

used. Ideally, then, the excess cash generated in a Cash Cow unit should be used for ex‐

panding activities in Question Mark units, where market growth is high but penetration

in terms of current market share is low or dogs with potential of becoming Star or Ques‐

tion Mark.78

Since TDC is market leader within all divisions, Figure 4‐5 is somewhat different than when for the most part applied. It seems there are

only Stars and Cash Cows, which – given positive cash flows – is very positive in deed.

Figure 4‐5 Boston Matrix79

There is currently no obvious receiver in terms of cash flow generated from the Cash

Cows, which fits with current policy of dividend payout, which is to be discussed in fur‐

ther detail in the financial statement analysis. Note that both mobile broadband and

IPTV are cannibalizing on fixed broadband and cable TV respectively. Focus therefore

should be on maintaining and perhaps building positions of current product lines. Addi‐

tionally, since there is room for it, TDC could seek new opportunities, i.e. Question

Marks.

78 Porter, M. E. (1980). Competitive strategy, p 362. 79 See appendix II – Table A II‐V

-20,0%

0,0%

20,0%

0,0 5,0 10,0 15,0 20,0

Mar

ket G

row

th

Relative Market Share

Fixed telephony

Mobile telephony

Fixed broadband

Mobile broadband IPTV

Cable TV


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4.3.3 Strategy assessment Apparently, TDC is in a favorable position with regard to domestic markets. Keeping this

position, however, is not an easy task. As markets mature, growth options become lim‐

ited, and competition intensifies. There is always a natural limit of penetration in any

given market with an existing product, and it seems that many of the current markets

are in fact very close to if not definitely in the mature category or, in the case of PSTN in

a declining phase. Seeing as these phases are characterized by falling prices and, there is

very strong implications pointing towards that TDC must pursue either new markets or

new products (or both).

Fitting the organization to market activity is certainly an important strategic objective,

however downsizing should not be considered a long‐term solution for TDC. Using An‐

soff’s terminology, there is a call for product development, market development or di‐

versification if growth is to be achieved in the future. Clearly, expanding Nordic activities

either through acquisitions or by adding to the current infrastructures is one option. The

other option, which naturally is much more complex, is to develop new prod‐

ucts/services.

Based upon TDC’s stated 10 strategic priorities, product development does not appar‐

ently seem to be a point of special focus. This is not entirely true though; energy is fo‐

cused on extending and refining current product portfolio, yet perhaps not in the cate‐

gory of actual innovation. Point 6. Landline retention is sought achieved through offer‐

ing multi‐play products, Home Entertainment etc. Point 7. Mobile growth is partially

aimed at mobile broadband, and sought achieved through the new 4G net. Also the con‐

cept of mobile payment is set out to become an important area. Lastly, point 8. “TV eve‐

rywhere” is sought achieved through advanced product offerings, such as TV on de‐

mand.80 Hence, there is some focus on product development. Also, it is important to

note, that the size of TDC does not call for technology innovation on large scales.

The four big Telco’s operating in Denmark have engaged in a partnership to create a

joint platform for a digital wallet.81 The idea is basically, that it will become possible to

have your entire wallet in your mobile – from membership cards and library cards to

80 TDC A/S. TDC Annual Report 2010, p 17. 81 TDC A/S. (23. June 2011). Telecom providers join forces to create digital wallet. Press release.


51 of 118

credit cards and debit cards etc. Making this a reality, however, may not be as easy as it

seems, as it is ultimately the consumers, who dictates success and failure, unless of

course it is decided on a higher level that the society is to become cash‐less. Additionally,

these Telco’s are unlikely to be the only ones having their eye on this opportunity, i.e.

mobile telephony and software producers such as Apple, Google and Nokia.82 TDC and

the competitors seem to be making a smart move by joining forces, seeing as it will im‐

prove the likelihood of success, all else equal.

In relation to the mobile industry, there are many examples of product (/service) mar‐

ket convergence, as smartphones increasingly supports many tasks in everyday life; the

mobile wallet is yet another example that the boundaries of the industry is constantly

changing through what Christensen terms ‘convergence via context embedding innova‐

tion’. It is natural for the boundaries of an industry to converge or disintegrate, as mar‐

kets are maturing and companies seek new opportunities. Ultimately, it will leave win‐

ners and losers. One very obvious example of a looser in this context would be Nokia,

who in contrast to Samsung were not on the market for personal computers, and there‐

fore lost its leading market position, as smartphones became the new thing. Besides

Samsung, there are indeed other winners, namely in particular Apple who entered the

market, and now is considered market leader.

In the case of TDC, it seems fair tot state that pursuing these types of convergence based

product innovation is more attractive than autonomous product innovation for instance.

82 Datamonitor. (2011). Five Consumer Technology Predictions for 2011 5: Mobile and social payments take off, p 2.


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4.4 SWOT

In the figure below, a SWOT matrix is presented. I believe, that it is no coincidence that

most points are found in the categories of strengths and threats, it reflects the facts that

TDC is in a very good position momentarily; weaknesses are few, but threats are many.

Strengths Weaknesses • Market leader in all domestic markets

• Very strong possession of infrastructures

• Multiple brands

• More room for continuous investments than main

competitors

• “Single-right” on triple-play products

• Declining churn rate in mobile telephony

• Successful activity and cost resizing – increased

productivity in business units

• Large sum tied up in infrastructure

• Most current products are in a mature/maturing

phase

• Vague bargaining power towards suppliers of e.g.

mobile telephones

Opportunities Threats • Increased digitalization of public sector and private

sector

• Lifestyle shifting – “cellular households”, life stages,

and family roles

• Increased options for differentiation

• TV and bundled services not exhausted

• Changing industry boundaries - product market

convergence, e.g. mobile wallet

• High uncertainty concerning macroeconomic

growth

• Continuous shifts in technology platform, i.e. fixed

vs. mobile

• Further strengthening of buyer bargaining power –

especially with regard to business customers

• High unpredictability of future technological

change

• Changes in regulations

• Running out of growth opportunities

• Competitors successful with alliance

Figure 4‐6 SWOT


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4.4.1 Strengths and Weaknesses TDC stands in a very strong position – market leader on all markets without exceptions,

the infrastructures, the brands etc. The weaknesses are few; the largest weakness is,

however, weak indeed, namely the fact that most products are in the mature phase.

In addition, it worth noting, that whiles the fixed infrastructure of TDC is superior com‐

pared to competitors, the case is not quite as clear when it comes to the mobile network.

Also, market shares are not as large in mobile business as in fixed.

4.4.2 Opportunities and Threats The threats are many and the sources multiple. On a macroeconomic level, the economic

pressure on all entities in the industry – ranging from consumers to business customers,

suppliers, competitors etc – represents the main threat, or perhaps more appropriate a

scotch for the strong opportunity embedded in the continually increased digitalization

of society, both public and private sector along with consumers/individuals.

The shift from mobile to fixed represents a very big threat, seeing as TDC is not as supe‐

rior in the mobile field as the fixed line field. Put differently, competition is much more

intense. This is in spite of the fact, that chances of new Onfone‐like aggressive MVNOs

entering are found improbable. Maturing markets in its own causes increased intensity

of competition among existing competitors.

At the same time, it could seem difficult for TDC to find opportunities for growth. There

are, however, a number of areas in which these opportunities may be found, namely TV

and bundles for one, which seemingly cannot stop growing, and the changing bounda‐

ries of the industry. Especially the latter will become of great strategic importance in the

future.


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5. FINANCIAL STATEMENT ANALYSIS 5.1 Preparing the financial statements

In order to ensure, that the financial statements are as good indicators of future earn‐

ings as possible, adjustments are made on a number of areas. On the income statement I

need to adjust so as to calculate operating profit before special items, EBITDA, EBIT,

NOPAT, and NFE before and after tax. On the balance sheet, I need to calculate net oper‐

ating assets, and its components, i.e. intangible and tangible assets and net working capi‐

tal, and invested capital including Equity and NIBD.

The historical period will reach back to 2007. A longer period would generally have

been preferable in the light of the economic turmoil the financial crisis has brought

about. Because of large divestments, however, extending the period even by one year as

to include 2006 was found to be to complex weighed against the incremental increase in

informational value, as obscurity in the numbers would be inevitable.

5.1.1 Classifying activities In order to calculate profit measures of operational activities, it is necessary to regroup

items in the statements. In Appendix III the reported income statement (Table A III‐I)

and balance sheet (Table A III‐II) can be found. A mark for classification into either op‐

erational or financial activity has been added in the last column.

5.1.2 Changes in accounting policies The changes in accounting policies over the period are minimal. Moreover TDC has ad‐

justed the historical numbers for comparison. The noise here is therefore limited. Had a

longer period been chosen, however, this issue would have been big, since the company

has undergone numerous changes, and combined with the many divestments and acqui‐

sitions the noise would have been substantial.

5.1.3 Special items After a close examination of the underlying components of special items, I have identi‐

fied one post, which I believe should be included when measuring operating profit be‐

fore special items, namely restructuring costs. Table 5‐1 depicts reported special items

before tax and the share of which is restructuring costs


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DKKm 2007 2008 2009 2010 Specials items before tax 1.809 -3.183 -1.119 -1.347

Restructuring costs -461 -1.238 -982 -1.172

Table 5‐1 Restructuring costs83

TDC has undoubtedly undergone an extraordinary change, which has driven the restruc‐

turing costs up. Restructuring costs, however, expected to reoccur to some extend any

given year. An option would have been to smooth out the restructuring costs based on

an estimate of “normally occurring restructuring costs”, seeing as this inevitably would

be a very subjective task, the information value would not improve. Therefore, I have

chosen to simply remove it from special items, and present it as a separate item.

In FY2008, special items make up a very large post, mainly due to impairment losses and

adjustment of goodwill related to Nordic activities, i.e. TDC Sweden and TDC Norway.84

These items are considered a part of operations but they are not expected to reoccur,

hence, they will remain as a part of special items85, and will be included when calculat‐

ing NOPAT.

5.1.4 Tax on Net Financial Expenses In order to complete the separation of financial and operational activities, income taxes

must be divided accordingly. This can be done using either the marginal tax rate or the

effective tax rate.

The effective tax rate has been fluctuating. In FY2007, there was actually a positive tax

rate. Therefore, I have chosen to apply the Danish marginal tax rate, when calculating

the tax on net financial expenses. Tax on NFE is thus calculated as shown in appendix III,

equation A III‐I. Tax on NOPAT is then calculated as the residual of total taxes paid and

the calculated tax on NFE.

This solution is not optimal, basically for two reasons, i.e. 1) the company has domestic

as well as non‐domestic activities, and 2) NFE includes more than mere interest ex‐

pense/income, namely fair value adjustments and currency translation adjustments.

Since non‐domestic operations takes place only in the Nordic countries, where the mar‐

ginal tax rate is fairly close the Danish of 25%, i.e. Finland with 26%, Norway with 28%,

83 TDC A/S. TDC Annual Report 2010., TDC A/S. TDC Annual Report 2008; for 2007 numbers. 84 TDC A/S. TDC Annual Report 2010, p 7071. 85 Petersen, C. V., & Plenborg, T. (2010). Financial Statement Analysis, p 102.


56 of 118

and Sweden with 28% up to 2008 and then 26,3 from 2009 and onwards86, however, I

found this to be the best solution.

5.1.5 Discontinued operations Discontinued operations are presented explicitly, and since there are no further divest‐

ments in view, there is no need for further adjustments, i.e. these will be excluded when

calculating the financial ratios.

5.1.6 Acquisitions TDC has acquired Onfone during the period of writing this thesis. For forecasting pur‐

poses it would have been ideal to incorporate this, however information was found in‐

sufficient and therefore it will not be handled here.

5.1.7 Analytical Income Statement and Balance Sheet The complete reformulated statements are found in appendix III, Table A III‐III and IV.

5.2 Profitability Analysis

The period of analysis is four years, since a longer period was unfeasible. Since financial

ratios are best calculated using average (primo/ultimo) numbers from the balance

sheet, this unfortunately leaves only 3 periods. I have chosen to calculate numbers on

FY2007 in despite of this, simply by using ultimo numbers only. Clearly, this is not opti‐

mal, however, the little information value, that it may add could turn out important. A

grey font marks the ratios affected by this.

5.2.1 Return on Equity Return on Equity (from here on ROE) reflects the stockholders return on equity from a

fully comprehensive viewpoint, i.e. including both operational and financial effects. ROE

on group level is calculated as shown in appendix III, equation A III‐II.

In prior fiscal years, there have been minority interests, which means that not all profit

has been attributable to the parent company. For formula and example calculation on

ROE on parent level see appendix III (Equation A III‐I and II).

86 SKAT. (2011). Selskabsskattesatser i EU landene. Retrived November 2011 from http://www.skm.dk/tal_statistik/skatter_og_afgifter/4607.html


57 of 118

ROE on both group and parent level is depicted in Table 5‐2 along with the underlying

components, namely Return on Invested Capital (ROIC from here on), NFE expressed as

a percentage (labeled Net Financial Costs), and Financial Leverage.

2007 2008 2009 2010 ROE Group 7,10% 0,03% 6,67% 7,53% ROE Parent 6,26% -0,45% 6,54% 7,53% ROIC 5,94% 2,18% 5,39% 5,52% NFC 5,04% 3,95% 4,33% 3,86% Leverage 1,28 x 1,22 x 1,22 x 1,21 x

Table 5‐2 Return on Equity and components87

ROE is positive around 6‐7 percent in the period except from FY2008, where it was close

to zero on group level and slightly negative after minority interests. From 2009 to 2010

there was an increase of 0,86 percent‐points. In 2010 the minority interests are no

longer present, which is why ROE on group and parent level is identical.

Examining the underlying components of ROE will help determining the cause of both

level and trend. ROE is also calculated as ROIC plus/minus the spread (difference be‐

tween ROIC and NFC) multiplied by leverage. This basically implies, that ROE, besides

depending directly on ROIC, also depends on whether the company generates more re‐

turn on its total invested capital than the cost of debt financing combined with the por‐

tion of invested capital, that is financed by debt. Moreover, when the difference between

ROIC and NFC is positive, equity owners benefit from the company financing a portion of

its activities through debt.

It appears from the table, that fluctuations in ROIC is the root cause of the dramatic

drop. The level of the financial leverage is very stable, while NFC has gone up and down

– reaching a level as low as 3,86 percent in 2010. In FY2008 the level of ROIC is below

the level of NFC – despite NFC actually being quite low also – and hence, financial lever‐

age has a negative influence on ROE. Minority interests share has a negative effect on

ROE for the parent, pushing it below zero. In the following two years, i.e. 2009 and 2010,

ROIC has returned to a level above NFC, resulting in a positive spread, and hence, a ROE

greater than ROIC.

87 Source: Own contribution, based on reformulated statements. See formulas and example calculations in appendix III.


58 of 118

Since TDC’s debt is based on floating rate loans, changes in interest rate represent a risk

factor, especially seeing that the level now certainly is very low. By the end of 2010, 76%

of TDC’s gross debt was covered in terms of this risk, limiting the risk substantially.88

Furthermore, exchange rate changes also represent a risk; not a large one, though, since

97% of all gross debt in 2010 is in euro.

To understand matters further, the next section will be focused on analyzing ROIC by

decomposing it into sub ratios and analyzing the underlying drivers through index and

common‐size analysis.

5.2.2 Return on Invested Capital ROIC is calculated as the turnover rate of Invested Capital multiplied by the Profit Mar‐

gin. The turnover rate reflects revenue generation per e.g. 1 DKK Invested Capital in op‐

erations, also corresponding to Net Operating Assets. The profit margin reflects the per‐

centage of revenue remaining after all operation related posts have been included, i.e.

NOPAT as a percentage of revenue. Since revenue is a stand‐alone driver, included in

both measures, first step will be to analyze it as thoroughly as possible.

Revenue TDC’s revenue has as already discovered not been subject to positive growth during the

analyzed period, except for the most recent fiscal year, 2010 where there was a slight

increase in total revenue of 0,34%.

Figure 5‐1 depicts the annual growth in total revenue along with its underlying elements

in total numbers, i.e. revenue in DKK millions, split by business division.

The accumulated negative growth in total revenue from 2006 to 2009 is substantial. It

reflects the increased competition TDC is subject to.

Particularly TDC Consumer and TDC Business show very unfavorable development with

decreasing revenue in all periods, they have suffered loss of 726 and 1.318 DKK millions

respectively from 2007 to 2010. Operations & Wholesale has experienced a revenue de‐

crease over the period, i.e. from 2007 to 2010, of 1.051 DKK millions, however the big

drop was from 2007 to 2008, and the trend has diminished substantially the following

two years.



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YouSee’s revenue contribution has developed basically in the exact opposite direction

compared to TDC Consumer and TDC Business, i.e. steady and substantial growth

throughout the period, with a total increase of 1.183 DKK millions from 2007 to 2010.

This alone, however, has not been sufficient to outweigh the negative developments in

the remaining domestic activities. Hence, TDC the turning trend in TDC Nordic combined

with the diminishing drops in Operations & Wholesale has been a decisive force in turn‐

ing the overall trend in 2010.

Figure 5‐1 Revenue Growth89

In the following subsections the development within each business unit will be analyzed

more closely. Figures depicting the revenue of each unit split on product lines are found

in appendix III (Figure A III‐I to V). Since revenue will be forecasted separately for each

unit, this understanding of the underlying drivers of the revenue of each unit is crucial.

TDC Consumer The decrease in TDC Consumers revenue over the entire period can be ascribed to losses

on fixed line telephony, which is not surprising at this point.

Internet and network revenue has increased all years, except the latest. 90 A closer ex‐

amination, however, tells that the growth from 2008 to 2009 was inorganic, i.e. it was

89 See numbers in appendix III, Table A III‐VIII 90 Appendix III, Figure A III‐I

-4,28% -3,70%

-3,11%

0,34%

-6,0%

-5,0%

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

0

2.000

4.000

6.000

8.000

10.000

2007 2008 2009 2010

Pct g

row

th in

tota

l rev

enue

DK

K m

illio

ns

Revenue growth

Consumer

TDC Business

TDC Nordic

Operations & Wholesale

YouSee


60 of 118

mainly the effect of acquiring Fullrate. ARPU has in fact decreased over the last two

years.91

On the positive side, the mobile business has grown, in the last two years this is mainly

because of an increase in the number of RGUs, which was only partially dragged down

by decrease in ARPU (Average Revenue Per Unit). Being the largest business, a favorable

development here is crucial.

TV activities have, also not surprisingly, grown by large factors in terms of revenue. The

contribution is still minimal with total increase of 208 DKK millions in 2010 the revenue

from TV activities still only represent a mere 4%92. The fact, that not only RGUs but also

ARPU has increased, is very positive indeed.

With total revenues decreasing all of the past four years, the outlook is seemingly not

very positive. TV is likely to continue to grow, as the market is far from mature in terms

of triple‐play. Provided that mobility will continue its positive trend, and Internet and

network services will remain stabile, the trend is likely to turn or at least “stop”, as the

drop in fixed line telephony fades out.

TDC Business Seen over the entire period, the revenue in generated from each product line in TDC

Business has decreased.93 Again landline telephony, which does not drop as hard as in

TDC Consumer, which probably is due to the different nature of needs for consumers

versus companies.

Mobile services changes only marginally ‐ up and down ‐ over the period, leaving it at a

level in 2010 that is just below that of 2007. Mobile broadband has been the positive

story of the mobile services, which has grown over the period. However, decreases in

ARPU on mobile telephony are observed in the last two years.94

Internet and network revenue has decreased in all of the periods. The drop is explained

partially by a decrease in RGUs and ARPU on broadband. The decrease in revenue from

other sources can mainly be explained by divestments, i.e. inorganic (growth).

91 TDC A/S. TDC Annual Report 2010, p 7980. 92 374/9.389 = 3,98 93 Appendix III, Figure A III‐II 94 TDC A/S. TDC Annual Report 2010, p 8283.


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In terms of organic growth – i.e. keeping the effects of divestments out – the main source

of the native trend is fixed line telephony and Internet and network services. The out‐

look is not positive and should the trend continue TDC Business is out of business. This

is unlike to be the case, in my opinion. The decreases stemming from organic growth is

certainly felt, however I do believe, that it reflects the economic downturn in the sense

that business clients are dealing with their own economic limitations, forcing them to

scrutinize the elements of their profit margin, perhaps even making quality of the net‐

work or quality of service less of a priority, when choosing supplier.

TDC Nordic The decrease in TDC Nordic’s revenue from 2008 to 2009 can mainly be attributed to

unfavorable exchange rate movements95, which also explains why the decrease is re‐

flected in all the product lines96. Likewise, the increase from 2009 to 2010 was much

affected by exchange rate movements; only it was in a positive manner. Additionally,

however, there was organic growth to discover in all three countries.

Seeing as TDC Nordic has been kept out in the strategic analysis, making sound judg‐

ments here is very difficult. What can be said, however, is that the overall trend is posi‐

tive and with organic growth in all countries the last year, the outlook is seemingly

somewhat positive.

YouSee The very positive development in the revenue of YouSee over the entire period can in

fact be attributed to growth within all product lines.97 As with TDC TV, it is a mixture of

higher ARPU and increases in the number of RGUs.98 A part of the positive development

is in fact also attributable to the success of TDC TV.

The outlook on YouSee’s revenue is certainly positive. There is always some natural

limitation to high growth, but increasing ARPU tells that it is far from reached in this

case. Value is being added by offering still more options such as video on demand etc.

95 TDC A/S. TDC Annual Report 2010, p 8586. 96 Appendix III, Figure A III‐III 97 Appendix III, Figure A III‐IIII 98 TDC A/S. TDC Annual Report 2010, p 9192.


62 of 118

Operations & Wholesale The decrease in Operation & Wholesales revenue over the period is basically only at‐

tributable to the drop in fixed line telephony.99 Wholesale alone presented a revenue

growth of 1,2% mainly due to the acquisition of DONG’s fiber net.

The acquisition of Fullrate had a negative effect, because the company as a stand‐a‐lone

MVNO was a wholesale customer of TDC.100 Onfone, on the contrary, was a wholesale

customer of Telenor; and hence the acquisition will not have a similar effect.

It is important to note here, that the negative trend has gradually declined and from

2009 to 2010 there was only a slight decrease. It seems that the drops in fixed line te‐

lephony is reaching its limits. Hence, this implies a stabile outlook on operations &

wholesale. However, seeing that MVNO competition may be eroded, the outlook is more

of a steady negative one, as competitors increasingly rely on their own network, and

traffic is shifting from fixed to mobile.

Turnover rate of Invested Capital All else equal, declining revenue implies challenges in terms of turnover rate on invested

capital. It is important to note however, that invested capital – at least from a theoretical

point – also is a driver of revenue to some extend and vice versa, especially in the case of

Telco’s. This is because infrastructure quality, which is highly dependable upon the

amount of Invested Capital, is expected to have impact on customer satisfaction, which

is a driver of customer retention, and thus affects the net revenue more or less. How‐

ever, there is also the fact, that revenue growth in terms of won market shares drives the

investment in tangible assets, when an access line to the customer has not already been

established.

Table 5‐3 shows the turnover rate of Invested capital along with a number of selected

sub turnover rates based on items from Net Operating Assets, appendix III, Table III‐IV.

2007 2008 2009 2010 Turnover rate – Invested Capital 0,38 x 0,38 x 0,40 x 0,49 x Turnover rate - Intangible assets 0,50 x 0,50 x 0,51 x 0,62 x Turnover rate - Property, plant and equipment 1,32 x 1,23 x 1,23 x 1,47 x Turnover rate - Recivables 3,67 x 3,35 x 3,39 x 4,50 x Turnover rate - Trade and other payables -3,46 x -3,21 x -3,12 x -3,70 x Table 5‐3 Selected Turnover Rates101

99 Appendix III, Figure A III‐V 100 TDC A/S. TDC Annual Report 2010, p 8889.


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It appears from the table, that the overall turnover rate in fact has improved during the

period, despite the negative trend in revenue. The increase from 2009 to 2010 certainly

helps to explain the positive change in ROIC in that same period.

It is especially the development in the turn over rates on Intangible and Tangible assets,

which have contributed to the overall improvement. From 2009 to 2010 there has been

substantial the company generated 0,11 and 0,24 DKK more per 1 invested DKK in In‐

tangible and Tangible assets respectively, mainly as a result of divesting Sunrise. Receiv‐

ables have improved as well; implying that TDC is has become better at collecting them.

The same apparently goes for TDC’s suppliers, i.e. the turnover rate on payables has in‐

creased as well. Nevertheless, the net effect is still positive.

Since we know, that revenue has decreased from 2007 to 2009 and only grown slightly

from 2009 to 2010, we now have some more explanation on the trend of the turnover

rate on invested capital. Intangible and tangible assets have been reduced in equivalence

to total revenue in the period from 2007 to 2009. From 2009 to 2010, however, the

turned trend, presenting a close‐to‐zero growth in revenue was not matched by a steady

state of intangible or intangible assets, and thus neither in invested capital.

Profit Margin Declining revenue similarly implies pressure on the profit margin. Adjustments in the

organization as to fit with the level of activity are rarely made on a day‐to‐day basis.

Rather, these adjustments, such as staff size, size and place of office buildings, number of

physical stores, etc. take time, implying that profit margin in deed is at risk when facing

declining revenue, since these adjustments drive changes in costs such as wages and

rent, and depreciations (which, despite not having cash effect, reflects investments). It

can be referred to the important distinction between variable and fixed costs.

Figure 5‐2 depicts the profit margin along with special items as a percentage of revenue

(measured on the right side axis) and indexes of selected items of the reformulated in‐

come statement, i.e. revenue, TC and COGS, other external expenses, wages and salaries,

and depreciations. For full tables see of both common‐size and index on income state‐

ment and balance sheet see appendix III, Table A III‐VI and VII.

101 Own contribution based on TDC A/S. TDC Annual Report 2010.


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TC and COGS are variable, while the remaining cost items are variable. The revenue is

included to hold the other items up against, as it is the relationship between revenue

and those items that determines the profit margin.

Figure 5‐2 Return on Invested Capital, and selected driving components102

The development in the profit margin over the period is unfavorable – besides hitting a

low point of 5,74%, which is nearly 10 percent‐points lower than in 2007; there is an

overall declining trend.

The variable costs basically follow the revenue trend, albeit by a factor stronger than 1,

showing a decrease of 18,9% from 2007 to 2009, and a decrease over the entire period

of 15,08%, which is a lot compared to the revenues total decrease of 6,38%. Seeing as

this item is the largest cost‐item, amounting to 25,8% of revenue in 2010, this is in deed

a very favorable improvement.

Wages and salaries are decreasing steadily over the period, reflecting the headcount

reductions identified and discussed earlier, even throughout 2010, presenting a total

102 All are based on index‐numbers on reformulated income statement, except special items which is based on common‐size (i.e. calculated as a percentage of revenue) and ROIC which is based on previous calculations. See appendix III for both index and common size tables.

15,59%

5,74%

13,46% 11,18%

4,0%

-7,3%

-0,5% -0,7%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

70

80

90

100

110

120

130

2007 2008 2009 2010

Perc

enta

ge, S

peci

al It

ems

and

Prof

it M

argi

n

Inde

x (F

Y200

7=10

0)

PM Special items in percentage of revenue

Revenue TC and COGS

Other external expenses Wages and salaries

Depr., amort. and imp. losses


65 of 118

decrease of 23,54 %. Other external expenses follow the same pattern, only less dra‐

matic, i.e. a decrease of 13,9%. Both items are large, taking up 16,5% and 17,3% respec‐

tively of revenue in 2010.

Depreciations are the last big stabile recurring item (except tax) included in NOPAT,

representing 20,5% of the revenue in 2010, which is almost identical to the level of

2007. The level should be expected to lie around here – all else equal – since the change

can be traced to 1) a higher amortization rate of customer relations (immaterial asset)

due to a methodological change in calculations and 2) a number of acquisitions made

during the year, i.e. DONG’s fiber net, A+, M1, and Fullrate103. There was however a large

decrease from 2007 to 2008. It could therefore seem strange, that the profit margin

dropped so hard in the exact same period, as all items presented till now have decreased

more than revenue – all else equal implying a positive change in profit margin.

The answer lies in special items, which changed by 11,3% percent‐points in the period,

and thus, went from adding extra 4% of revenue to being a negative post taking up 7,3%.

In the following two years, special items amounts to only ‐0,5% and ‐0,7% of revenue.

In addition, restructuring costs were low in 2007 compared to the remaining fiscal

years, i.e. 1,6% compared to 4,6%, 3,8%, and 4,5% respectively.

From the above analysis, it has now become evident, that movements in several underly‐

ing drivers are to “blame” for the course of event in relation to profit margin.

First, TDC has managed to present cost decreases in larger scale than that of revenue.

There are a number of exceptions, however, working against these positive trends. With

repeated large restructuring costs since 2008, the overall level has been pushed down 2‐

3 percent‐points. Furthermore, in 2010 depreciations, amortizations and impairment

losses return to a level corresponding to that of 2007 ‐ that is measured as a portion of

revenue. Lastly, special items are to blame for the dramatic drop in 2008.



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6. FORECASTING AND PRO FORMA STATEMENTS

6.1 Template design and assumptions

In this case, I have chosen to apply Petersen and Plenborg’s template for designing pro

forma statements.104 A few modifications and extensions with have been made mainly

because it was actually possible. I.e. the forecast is based on 12 value drivers, rather

than the 8 in Petersen and Plenborg’s template. This is because rather than forecasting

all cost items between revenue and EBITDA implicitly through the EBITDA margin, I

have chosen to forecast each item explicitly.

Despite actually having knowledge of TDC’s dividend policy, I have chosen not use this

knowledge, thus, as in the template referring to all of the equity free cash flow is as‐

sumed paid out as dividends. Basically it is an incorrect assumption, however, I found it

necessary because major modifications otherwise would have been substantial, and I

believe the time is better spent on getting the forecasts spot on.

Revenue growth is forecasted per business unit – simply because most of the analyses

carry that split as well. Hence, the growth in total revenue is calculated as a weighted

average of growth in the units.

Special items excluding restructuring costs and profit from Joint Ventures are excluded

from the template. Forecasting special items is basically impossible as it is transitory by

nature, and the company is no longer engaged in any Joint Ventures, therefore it is rea‐

sonable to keep them out – also meaning that the value in future is expected to be zero.

The basis of the forecast is naturally the strategic and financial statement analysis. This

means, that qualitative findings must be transformed into quantitative measures. This is,

however, with the exception of revenue growth in TDC Nordic, which is estimated using

national GDP change for each of the three countries in which operating.

Forecasting is carried out in 3 scenarios, namely most likely, best case, and worst‐case

scenario. The revenue is only forecasted on the top level for the two alternative scenar‐

ios. There is simply insufficient space for presenting that many arguments. Additionally,

104 Petersen, C. V., & Plenborg, T. (2010). Financial Statement Analysis, chapter 8.


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it is certainly my intention still to keep the underlying units and markets in mind when

forecasting.

The most likely scenario is the most important one in this case, because that is the sce‐

nario that will be used for sensitivity analysis, multiple‐analysis, and the final conclu‐

sion. Therefore it makes great sense to spend extra energy on this scenario.

Tables of forecast assumptions and related pro forma statements are found in appendix

IV.

6.2 Most likely scenario

This scenario TDC’s financial performance is certainly very dependent on the on the

conditions of the surrounding macro environment. Seeing as the company is facing ma‐

turing markets, and competition is becoming increasingly intense, however; TDC will

have to struggle just to maintain the current position, even provided that the economies

of Scandinavian countries will recover as estimated by experts. Put more precise, given

the current circumstances, chances are, that TDC will lose size in spite of the industry

gaining size. Using GDP projections as a direct driver, i.e. in mathematic terms, is there‐

fore found to have little value with regard to domestic operations.

In the following subsections grounds for forecasting estimates on each value driver is

presented.

6.2.1 I ‐ Revenue

TDC Consumer The revenue of TDC Consumer is estimated to continue its negative trend till 2017 –

with 2012 decline as the low point of ‐4%, followed by a steady diminishing trend of 0,5

percent points till 2016, after which the trend shifts to 1 percent point. Then from the

zero growth in 2018, it is estimated to climb up by 0,5 percent points the following two

years. Growth in the terminal period is estimated to be zero.

The reason for the “curved” trend is, that the situation right now implies intensified

competition within mobile and broadband, and still declines in fixed line telephony,

however, on a bit longer perspective, losses from fixed line will be fading out, competi‐

tion within mobile perhaps stabilize somewhat. Additionally, TV and new opportunities

are expected to add in terms of revenue in the future. Nevertheless, a perhaps somewhat

conservative terminal growth is applied, simply reflecting, that in the long run, TDC can


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not rely on further growth in this market, as market shares within mobile are artificially

high in my opinion. Provided that growth in the market, and TDC loosing share will off‐

set each other, zero growth seems most likely. Also, the Q2 financial report supports the

revenue decline, as decrease of 3,4% compared to Q2 2010 is presented, which is 0,1%

lower than my estimate for the year 2011, and hence fits perfectly with the fact that

revenue growth from 2009 to 2010 was 3,3%.105

TDC Business The overall pattern of the forecasted revenue for TDC Business is very similar to that of

TDC Consumer described above. Despite decrease in 2010 larger than that of TDC Con‐

sumer, revenue of TDC Business is expected to recover without a low point in 2012.

More specifically, the decrease in revenue is estimated to be equal to that of TDC Con‐

sumer in 2011, after which it will decline by 0,5 percent points till 2014, a rate that

changes to 1 percent point the following two years. Then, after zero growth in 2016,

positive growth of 0,5%are estimated for the period from 2017‐2019. In the last year

explicit forecast year growth is zero, and the same goes for the terminal period.

The arguments, naturally, bares many resemblances to TDC Consumer as well. Fixed line

telephony is dropping, but not to the same extend as for TDC Consumer, which explains

the faster paced recovery. However, future growth opportunities are not found as ap‐

parent, hence explaining why growth does not reach above 0,5%, and again is estimated

as 0% in the terminal period. Again, the estimate for 2011 finds strong support in the Q2

2011 report, in which a decrease of 3,3%, i.e. 0,2 percent points lower than my estimate.

TDC Nordic TDC Nordic presented very good results in 2010, namely a growth of 16,3%. However,

the root cause was favorable exchange rate changes. Nevertheless, organic growth was

still observed; and would there not be? In these markets TDC is not in a dominating po‐

sition, and provided a) that the economies of these countries are gaining strength and b)

that TDC will be able to continue to take its share of the markets in which operating, the

revenue generated in TDC Nordic is most likely to follow the positive trends of those

economies.

105 TDC A/S. TDC Second Quarter Report 2011, p 6.


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Estimates of GDP growth for Finland, Norway, and Sweden by the International Mone‐

tary Fund are used along with the revenue split among these units to compound a

weighted average growth for the total revenue of TDC Nordic. Seeing as TDC Nordic en‐

compasses another division, namely TDC hosting, which across all three countries in

addition to Denmark, it is somewhat misleading. However, since the revenue fraction

stemming from here is very small, it is by no means serious. The estimates by IMF only

exist for the years 2011 to 2016. For the remaining period, including the terminal pe‐

riod, the rule of thumb is used, and growth is forecasted to be 2%.

YouSee YouSee has in deed been the positive story over the last couple of years, presenting very

high growth rates. There is still substantial doubt regarding potential future regulation

of YouSee’s cable network. In addition, with TDC Consumer products such as TDC TV

and HomeTrio, cannibalization is expected to occur in the long run.

The growth rate of YouSee’s revenue estimated to be 7% in 2011 after which it will di‐

minish by 1 percent point annually till hitting 2% in 2016. For the remaining explicit

period, it is estimated to be 2%. Growth in the terminal period is estimated to zero. The

drop in growth from 2010 to the forecast of 2011 could seem too dramatic, yet this is

not the case; in fact, the Q2 report presents growth of only 6,9% as compared to Q2

2010, actually making it a bit optimistic.

Operations & Wholesale Despite showing a pattern of diminishing revenue loss from 2007 to 2010, the outlook is

not assumed positive. In the long run, the argument is, that MVNO competition is dimin‐

ishing and large competitors increasingly depend on their own infrastructures. The Q2

report supports this view with presented growth decrease of 1,7 and 8,9 respectively for

the units now known as Wholesale and Operations & Headquarters. Wholesale repre‐

sents a very dominating fraction, and hence, growth for 2011 is estimated to be ‐1,7%,

followed by ‐1,5% in the remaining periods including the terminal period.

Total revenue The overall revenue growth rate is calculated as a weighted average. I have chosen that

estimates for growth in ‘other including eliminations’ is zero, as I do not know better.

TDC Consumer and TDC Business being the largest contributors, the pattern of the total

growth rate is much similar to the pattern of those.


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6.2.2 II ‐ Transmission Costs and Costs of Goods Sold These costs have developed favorably in relation to revenue over the period from 2007

to 2010. This trend not is expected to continue, however – quite on the contrary. In the

Q2 report, these costs increase by 4,9% as compared to Q2 2010, which is substantially

more than the revenue. Hence, from presenting a fraction of 25,8% of the revenue in

2010, the item is forecasted to represent a fraction of 26% throughout the entire fore‐

casting period including the terminal period.

TC and COGS are very much dependent on the product mix. Having insufficient knowl‐

edge hereof however, prevents me from making actual predictions based on the strate‐

gic analysis. The chosen level is perhaps a bit optimistic, but it is difficult to assess.

6.2.3 III ‐ Other External Expenses Other external expenses have developed in a favorable direction over the past years,

because the company is resizing its activities. Value here is believed to not be completely

exhausted. Hence, it is estimated to constitute a fraction of 16,5% throughout the entire

period including the terminal period. This view is also supported by the Q2 report.

6.2.4 IV ‐ Wages, Salaries and Pension Costs The story on wages salaries and pension costs is basically the same as that of the previ‐

ous. I.e. headcount reduction is not fully completed. Hence, it is estimated to drop from

representing a fraction of the revenue of 16,5% to decline by 0,1 percent point till reach‐

ing a level of 16%, and that level is then fixed throughout the remaining period. Again

this view I also supported by the Q2 report.

6.2.5 V ‐ Other Income and Expenses Not having sufficient knowledge of a better approximate, other income and expenses are

forecasted represent a fixed fraction of revenue corresponding to its level in 2010,

namely 0,7%.

6.2.6 VI ‐ Restructuring Costs Restructuring costs have been quite high in past few years. I believe, restructuring costs

will reoccur every year, albeit in a smaller scale in 2 years from now. I.e. restructuring

costs are estimated to be 4% in 2011 and 2012, after which it will drop and remain at

3% throughout the entire period including the terminal period.


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6.2.7 VII ‐ Depreciations Depreciations are forecasted as a percentage of intangible and tangible assets. This is, in

my opinion one of the most difficult items to forecast. The level was particularly high in

2010; I do not believe it will be that high in the future, seeing as the asset base has di‐

minished substantially. Hence it is estimated to be 9% throughout the entire period in‐

cluding the terminal period. Looking at the outcome in the pro forma statement, it seems

reasonable.

6.2.8 VIII ‐ Interest Rate The interest rate has fluctuated in the historical period, with 5,3%, 5,8%, and 5,1% in

the period from 2008 to 2010. The interest is estimated to be 6% throughout the period,

which is somewhat conservative considering the current state.

6.2.9 IX ‐ Tax Rate It was my original intention, to use the marginal tax rate of 25%, i.e. the Danish marginal

tax on corporations. This would, however underestimate the taxes payable, and hence,

would lead to a distorted conclusion, as tax rates in the countries in which TDC Nordic is

represented is slightly higher. To adjust for this effect, I have chosen to apply a tax rate

of 26%. This is by no means an exact adjustment, but I believe it is reasonable.

6.2.10 X ‐ Intangible and Tangible assets Intangible and tangible assets are expected to remain at a level where it represents a

fraction of the revenue slightly higher than that of 2010. The fraction has been diminish‐

ing over the past years, and it seems reasonable to believe, that it will remain around the

current level. Hence it is estimated to be 195% of revenue.

6.2.11 XI ‐ Net Working Capital Net working capital is estimated to be 25% throughout the entire period including the

terminal period. This is perhaps somewhat pessimistic seeing the overall steady state

assumptions regarding assets and the level in 2010 of 23%. This is to be on the safe side,

as the previous years 2008 and 2009 were characterized by a fraction of 27% and 29%

respectively.

6.2.12 XII ‐ Net interest bearing debt The case of net interest bearing debt is the same as with intangible and tangible assets,

except the fact that it is calculated as a fraction of invested capital rather than revenue. It


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has fluctuated up and down between 53% and 56% approximately of revenue. The level

of 52,9% is estimated to stick, yet with a roundup of 0,1 to 53%, because it looks better.

6.3 Best case scenario

The best case scenario is based on an overall assessment of how well thing might go, if

most turns in the future are in favor of TDC. Hence, it is not a pie in the sky; rather it is a

very positive scenario, but within the realm of reality. Not all factors are adjusted; only

those I find relevant.

In the short run, revenue is estimated to be 1%, shifting to 1,5% in 2014 and to 2% in

2016, where it will remain, also for the terminal period. The argument is, that despite

the perhaps artificial large market shares of TDC, there is no sure saying, that it is about

change. In addition, perhaps it is with good reason, that TDC has such large market

shares even in markets that do not reach back to the monopoly days. Hence, best case is

based on TDC being able to keep its position and that the macroeconomic conditions will

stabilize.

Restructuring costs are downsized from 3% to 1% from 2013 to 2020 and the terminal

period. Restructuring costs of 3% of revenue is quite substantial. Perhaps TDC has found

the about right size. Also the interest rate is adjusted downward from 6% to 5,2% corre‐

sponding to the level of 2010, reflecting the currently very favorable borrowing condi‐

tions.

Lastly, intangible and tangible assets as a percentage of revenue is adjusted slightly

downward, which implies that TDC is able to generate the revenue growth, without hav‐

ing to invest relatively more. I.e. the level is set to be 190% throughout the entire period.

6.4 Worst case scenario

The estimates in of the worst case scenario are based on an overall assessment of how

things potentially could go, if most factors were to take unfavorable courses. Hence, it is

not literally the worst case; rather it is a very bad case.

The revenue is estimated to continues its diminishing course after 2011, with negative

growth of 1% till 2014 followed by annual negative growth of 0,5% till 2020. For the

terminal period, negative growth of 1% is estimated.


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Transaction costs are adjusted up by 1 percent point to 27% throughout the period. Ad‐

ditionally, intangible and tangible assets as a percentage of revenue is adjusted so that it

is steadily increasing by 10 percent points, resulting in a level of 240% in 2020. For the

terminal period, a level is set to be 250%.

The argument is, that the competition is intensifying, and TDC may accept negative

growth in all foreseeable future. The steadily increasing level of assets reflects that TDC

could be forced to “throw” more money into assets, without this being sufficient for gen‐

erating actual growth in net revenue, because market shares are lost.

6.5 Comparing estimated ROE

In Figure 6‐1 below, ROE is depicted for each scenario along with the historical level.

From looking at the figure, it becomes evident, that the starting point of ROE in the fore‐

cast period is substantially higher than the last fiscal year in all 3 scenarios. If not know‐

ing better, this graphic illustration would lead one to believe, that the scenarios are un‐

realistic. It even took me some time to digest it.

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

It is necessary to look further into the underlying components of ROE, in order to under‐

stand it. In appendix V Table A IV‐VII, the financial ratios for all 3 scenarios are found.

Taking the most likely case or any of the other, it is obvious, that it is the profit margin,

which is to blame for high ROE in 2011. There are however a number of explanations

supporting this level. First, the adjustments made in terms of lowering the proportion of

wages and salaries, other external expenses, and restructuring costs are based on strong

evidence. Second, the rate of depreciation was abnormally high in 2010 as compared to

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

ROE ML ROE BC ROE WC ROE historical


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the other periods; hence, a downward adjustment was justified. I believed, the scenarios

when I forecasted them, and hence, I believe that sticking to them is the way to go.


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7. VALUATION 7.1 Required Rate of Return on Equity

For calculating the required rate of return on equity (re) the Capital Asset Pricing Model

(CAPM) is applied. According to CAPM, re can be calculated as follows:

€

re = rf + βe (rm − rf )

Equation 1 Required rate of return on equity, re

Where rf represents the risk‐free interest rate, rm the return on the market portfolio, and

βe the systematic risk on equity. In the following subsections, inputs for the model are

found and discussed. Note that I have chosen to find an explicit measure of the differ‐

ence between rm and rf, better known as the risk premium.

7.1.1 Risk‐free Interest Rate Estimating the risk‐free interest rate (rf) is straightforward. Seeing as the time horizon

in this case is infinite, applying a zero‐coupon rate based on a local, i.e. Danish, 10 or 30‐

year government bond.106 In this case I have chosen the 10‐year bond, as I believe it is

the most commonly applied. Data extractions from the Danish national bank show that

the rate is 1) fluctuating and 2) very low.107 For this reason I have chosen to calculate a

simple average based on the period from October 2010 to and November 2011.

Hence the measure of the riskfree interest rate is estimated to be 2,885%

7.1.2 Market Risk Premium Estimating the market risk premium is not an easy task. First, one must choose from

either calculating, reasoning or conducting a survey.

Calculations can be either based on historical events (co‐variability between market

portfolio returns and returns on risk‐free investments) or based on current situation

and expectations of the future using Gordon’s Dividend Model.108 There are advantages

and disadvantages connected to both methods. Jyske Bank has attempted to rate the

quality of four different methods in estimating the risk‐free interest rate and the market

106 Petersen, C. V., & Plenborg, T. (2010). Financial Statement Analysis, p 309. 107 Appendix V, Table A V‐I. 108 Petersen, C. V., & Plenborg, T. (2010). Financial Statement Analysis, p 322.


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risk premium – i.e. since both can be estimated using either historical data or actual cur‐

rent level and/or outlook, there are four different optional combinations. The highest

rated was the one, in which actual levels are used for estimating both inputs. Since the

risk‐free interest rate applied is based on actual levels, I have to choose between this

combination and the middle rated combination.109

While reliability of using the ex‐post method is clearly high, however the validity of es‐

timates calculated on historical events suffer the underlying assumption, that historical

events are good indicators of future events. In addition, there are a number of methodo‐

logical issues to consider, when calculating. First, the time period chosen for calculations

naturally affects the results to a great extent, i.e. calculations in a study made by the

Danish national bank showed levels of 2,1%, 7,2%, and 5,2% for the periods of 1970‐

1982, 1983‐2002, and 1970‐2002 respectively.110 Secondly are mainly two different cal‐

culation techniques, i.e. arithmetic and geometric average. Cooper(1996) argues, that

when the purpose of calculating past returns is to estimate capital costs for use in capital

budgets, the arithmetic is seemingly more correct. The point is that the discount rate

used in capital budgeting is used to discount the expected cash flow, where the expecta‐

tion involved is arithmetic. Thus an arithmetic estimate of the discount rate involved is

consistent with the procedure, whereas a geometric estimate is not.

Basing the estimate on a survey is naturally does not score very high on the reliability

scale, one positive side to this method is, that it is forward looking.

Given all these different methods of estimating the market risk premium experts’ claims,

empirical studies, surveys etc are not few, and moreover, there is no prevailing consen‐

sus about what the appropriate level is. Hence, a survey conducted by PwC in 2010

showed that respondents were allegedly were calculating with market risk premiums

ranging from 4% to 7,2%, yet with 82% of respondents having their answer between

4% and 5%; and the average risk premium was 4,9%.111 This is also supported by an‐

109 Møller, R., & Jørgensen, A. (2010). Estimation af danske aktiers risikopræmie. Jyske Bank. 110 Danmarks Nationalbank. (2003). Kvartalsoversigt 1 kvartal 2003. Danmarks Nationalbank. 111 PricewaterhouseCoopers. (2010). Prisfastsaettelsen på aktiemarkedet, p 2.


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other empirical study, in which it is argued, that historically based estimates should be

adjusted for transitory items.112

Based on extensive empirical research, Claus Parum (2004) has found, that based on

historical period from 1925 up to date (i.e. 2004), the market risk premium in Denmark

of stocks held against government bonds was 3 percent points. Ole Risager (2005) found

estimates of 4,2% and 5,7% based on a historical approach (1950‐2004) and a forward

P/E approach.

I have chosen to apply the average risk premium found in the survey of PwC. Knowing

that many of the respondents in the survey are basing their estimates on historical data,

seemingly it is not completely future oriented. However, I do believe, that it actually is a

long way – simply because it is difficult to imagine that anyone would calculate a cost of

capital in neglect of the economic turmoil. Also, the level is way above that found by Pa‐

rum, and well in‐between Risagers estimates. The level is also within the recommenda‐

tions from the Danish Tax and Customs Administration (2009), as it falls in the interval

between 4 and 5.

The market risk premium is estimated to be 4,9%

7.1.3 Beta Beta (βe) is a reflection of the systematic risk of a stock, i.e. the non‐diversifiable risk. In

other words it measures the co‐variation between returns on the market portfolio and

returns on a specific stock. A beta value above one indicates that the stock bares less

systematic risk, while a beta value above indicates more systematic risk. The ‘e’ denotes

that it is the systematic risk on equity; we are dealing with the levered beta.

Seeing as an empirical approach is infeasible in this case, I must chose from a number of

other options. One option is to estimate the beta value based on reasoning. Another op‐

tion is to simply use a beta value from one of the stock analysis of TDC and/or competi‐

tors. A third and last option is to use a pre‐calculated average value based on industry.

I have chosen to approach the problem using the third method, i.e. an average industry

measure. Aswath Damodaran a professor of Finance provides these numbers on a suffi‐

ciently detailed level, i.e. the beta used is based on 5 years data, i.e. the period from

112 Dimson, E., Marsh, P., & Mike, S. (Fall 2003). Global Evidence on the Equity Risk Premium, p. 27‐38.


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2006‐2010, on EU companies operating in ‘Telecommunication Services’ with a market

capitalization above $5 million held against the locally most followed stock index.113

The advantage of using this measure is, that it will be completely unbiased, as it based

on empirical data, which I hypothetically could have extracted myself. Seeing as underly‐

ing data tables are available, I am presented with the option of calculating a different

average – i.e. perhaps leaving out companies of certain countries, which seem to be

more than just different or perhaps leaving out those which can not really be compared

to TDC in terms of size or business model. However, as it is based on EU companies, and

the Danish economy was found highly correlated to EU in terms of GDP per capita, I see

no reason to do so.

The beta is estimated to be 1,10114

7.1.4 Calculating re Putting the found inputs into Equation 1, the required rate of return on equity is found

to be:

re = 8,275%115

113 Damodaran, A. (January 2011). 114 Damodaran, A. (January 2011). 115 2,89%+1.1*4,9%


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7.2 Stock price calculation per 30th September 2011

Based on the most likely scenario, the value of TDC is calculated through the RI and the

DCF model. As a result of the underlying assumptions of the template, the two models

generate identical results as expected – which can be seen from Table 7‐1 below.

Valuation of TDC as of September 30th 2011 Joint input values re 8,28% g 0,27% Number of shares, millions 825

RI model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Net Earnings 2.848 2.835 3.023 3.027 3.041 3.045 3.061 3.087 3.117 3.148 3.153 Equity, primo 20.855 20.721 20.518 20.36

8

20.26

3

20.22

2

20.235 20.331 20.49

3

20.689 20.89

3 COC 1.726 1.715 1.698 1.685 1.677 1.673 1.674 1.682 1.696 1.712 1.729 Residual income 1.123 1.120 1.325 1.342 1.364 1.371 1.387 1.405 1.422 1.436 1.424 PV of RI 1.037 955 1.044 976 917 851 795 744 695 649 Book value of equity, primo 20.855 PV of RI in forecast horizon 8.662 PV of RI in terminal period 8.030 Est. market value of Equity0 37.547 Price per share 01/01/2011 45,512

DKK

Calculation examples COC2011= 20.855*8,28%=1.726 PV of RI2011= 1.123/((1+8,28&)^1)=1.037 PV of RI in terminal = (1.338/(8,28%-0,27%))*(1/((1+8,28%)^10))=7.530

DCF model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E FCFE 2.983 3.037 3.173 3.132 3.083 3.031 2.965 2.925 2.921 2.944 3.097 PV of FCFE 2.755 2.591 2.500 2.279 2.071 1.881 1.700 1.549 1.428 1.330 PV of FCFE in forecast horizon 20.083 PV of terminal period 17.465 Est. market value of Equity0 37.547 Price per share 01/01/2011 45,512

DKK Calculation examples PV of FCFE2011= 2.983/((1+8,28%)^1)=2.755 PV of FCFE in terminal= (3.097/(8,28%-0,27%))*(1/((1+8,28%)^10))=17.465

Discounting forward Share price 30/09/2011 45,512*((1+8,28%)^(273/365))= Price per share 30/09/2011 48,300 DKK Table 7‐1 Valuation, September 30th 2011

The value is found to be 48,30 DKK per share as of September 30th 2011. The value is

based on the most likely scenario; however, two alternative scenarios have been fore‐

casted as well. These will be presented in the next section, where the sensitivity is as‐

sessed.

In the best case scenario, the value is found to be 68,03 DKK per share; while the value in

the worst case scenario is 30,51 DKK per share ‐ see appendix V Table A V‐II and III. The

discrepancy is large, which is not surprisingly considering the level shifts in ROE from

one scenario to the other. The alternative scenarios deviate from the base with +40,9%

and ‐36,8%.


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7.3 Sensitivity Analysis

The valuation resulted in a value of the TDC stock of 48,3% which is roughly 6% above

the observed closing price on the date of valuation of 45,53 DKK.

The gap is not hefty, however, the quality of the valuation is highly dependent on the

underlying assumptions and estimates. The different value output of the two alternative

scenarios certainly demonstrated the sensitivity towards some of the inputs, namely the

forecast inputs on costs in particular and also asset turnover.

The purpose of this section is to address the sensitivity towards input estimates in terms

of required return on equity and the terminal growth rate.

In Table 7‐2, sensitivity calculations on elements of re along with the growth rate are

depicted. Obviously, the sensitivity is limited. I am not suggesting, that the models are

insensitive, due to the long explicit forecasting period; however, the sensitivity is dimin‐

ished substantially as compared to a case of a very short explicit forecasting period. This

does not necessarily make the result more valid though, as the sensitivity on estimates

for the pro forma statements, which was reflected in the different levels of ROE across

the three scenarios. It does, however imply less sensitivity towards re and g. Provided

that the most likely case is “true”, however, it is fair to argue, that the sensitivity is lim‐

ited, and hence, the reliability fairly high.

βe Price rf Price rm Price g Price 1,4 43,7 4,39% 43,6 6,40% 43,2 -2,73% 44,9 1,3 45,0 3,89% 44,9 5,90% 44,6 -1,73% 45,8 1,2 46,5 3,39% 46,5 5,40% 46,3 -0,73% 46,9 1,1 48,3 2,89% 48,3 4,90% 48,3 0,27% 48,3

1 50,4 2,39% 50,4 4,40% 50,7 1,27% 50,1 0,9 52,9 1,89% 53,0 3,90% 53,6 2,27% 52,4 0,8 55,8 1,39% 56,0 3,40% 57,1 3,27% 55,8

Table 7‐2 Sensitivity calculations, all else equal

Beta should not be expected to fall out of the interval, and neither should risk free inter‐

est rate. However, the risk premium actually does, remember Parum’s historically based

estimate of 3%. Nevertheless, the chosen intervals are covering, in my opinion.

Having seen the effects of marginal changes in the inputs for re and the growth rate, it is

time to do a crossed sensitivity of these two factors. Thus, in Table 7‐3 a matrix with

prices based on the effects of changing the two estimates simultaneously.


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The most interesting part of table is highlighted with the ellipse across the table; these

are the scenarios in which both estimates are changed in the same direction, i.e. either

with positive or negative effect on the value.

Terminal growth rate, g

-3,73% -2,73% -1,73% -0,73% 0,27% 1,27% 2,27% 3,27% 10,78% 39,9 40,2 40,5 40,9 41,4 42,0 42,8 43,7 10,28% 40,5 40,9 41,3 41,8 42,4 43,2 44,1 45,3

9,78% 41,3 41,7 42,2 42,8 43,6 44,5 45,7 47,2 9,28% 42,1 42,6 43,3 44,0 44,9 46,1 47,5 49,5 8,78% 43,1 43,7 44,4 45,4 46,5 47,9 49,8 52,3

Required rate of

return, re 8,28% 44,2 44,9 45,8 46,9 48,3 50,1 52,4 55,8

7,78% 45,4 46,3 47,4 48,7 50,4 52,7 55,7 60,1 7,28% 46,8 47,9 49,2 50,9 53,0 55,8 59,8 65,8 6,78% 48,4 49,7 51,3 53,4 56,0 59,7 64,9 73,2 6,28% 50,2 51,8 53,8 56,3 59,7 64,4 71,5 83,3

Table 7‐3 Sensitivity calculations, re and g combined

Evidently, the upper bound is significantly higher than the lower. However, a terminal

growth rate of 3,27% is in deed overly optimistic. The positive point is the lower bound,

implying that the value of TDC really is not as dependent on negative growth in the long

run as the company could be.


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8. CONCLUSION The aim of this thesis, declared in the problem statement, has been to uncover the theo‐

retical value of TDC as of September 30th 2011 with the purpose of assessing the fairness

of stock’s market price. The value has been sought uncovered based on present value

valuation models, building on a comprehensive strategic and financial analysis.

The strategic analysis was carried out at three levels. At the macroeconomic level, sev‐

eral factors were found to be of great importance for TDC. First, the economic growth

and stability sets the overall temperature. The outlook here is still very unstable, despite

positive development in the most recent year. Second, political interest in high‐class in‐

frastructure is constraining TDC’s possibilities and in some areas even controlling price

setting. Third, the changes in lifestyle and the continuously increased digitalization are

likely to continue to present new business opportunities. Fourth, technological

changes/advancements represents risk as well as opportunities for TDC.

In the industry analysis, the intensity of competition was assessed. The key word here

was intensification. It is mainly the competition among existing competitors, which is

found to be intensifying. TDC is the obvious victim, because of its domestically large size.

The Telecom sector is under pressure in terms of growth, however, the changing indus‐

try boundaries caused by some of the macroeconomic effects are likely to present op‐

portunities.

TDC’s current strategic position is found to be very strong. The most important

strengths include the nation‐covering infrastructure, market leader position in all mar‐

kets, and the multiple brands. The position has been stronger, however but the intensi‐

fied competition, for one, has “already” taken its torn on the company. The weaknesses

are few, but some very significant, i.e. the large amounts tied up in infrastructure and

the unfavorable “product mix” with most businesses maturing. Additionally, vague bar‐

gaining power towards key suppliers presents an uncomfortable weakness.

From the financial statement analysis it became evident, that TDC has experienced con‐

siderable negative growth. Unfortunately, it is TDC’s largest business units, namely TDC

Business and TDC Consumer, which have underperformed. YouSee and Nordic, on the

other hand, represent positive contributions in terms of growth. Also on the positive

side, TDC has managed to resize in such a manner, that the profit margin has in fact in‐


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creased. Additionally, the turnover‐rate on invested capital has improved substantially,

and hence both ROIC and ROE as well. Solid positive progress has in other words been

made in terms of productivity.

After constructing pro forma statements of three different scenarios came the crucial

task of setting the discount rate, i.e. the owners required return on equity. Beta was set

by an industry average, the risk free rate on the 10‐year government bond, and the risk

premium to the average value found in a survey. This resulted in a re of 8,275%.

TDC was valued using the RI model and the DCFE model. Both models are based on the

pro forma statements and the discount factor.

The value per share of TDC was calculated to be 48,30 DKK as of September 30th 2011.

The alternative scenarios resulted in significantly different values, implying that this

level rests heavily and especially upon the assumption of improved profit margin.

The sensitivity towards the terminal growth rate was found minimal, while the sensitiv‐

ity towards the discount factor was somewhat significant; especially in terms of the up‐

per bound.

Based on the actual price of 45,53 DKK, which is lower than the level I have found, I am

able to reach the conclusion, that the TDC stock is fairly priced, if not slightly under‐

priced.


84 of 118

9. REFERENCES Books Brealy, Myers, & Allen. (2008). Principles of Corporate Finance (9th edition ed.). McGrawHill.

Elling, J. O., & Sørensen, O. (2005). Regnskabsanalyse og værdiansættelse en praktisk tilgang. Gjellerup.

Petersen, C. V., & Plenborg, T. (2010). Financial Statement Analysis. Frederiksberg: Thomson Reuters.

Porter, M. E. (1980). Competitive strategy. New York: The Free Press.

Academic articles Christensen, J. F. (2009, May 25). Towards a Framewoek of Open Business Dynamics. Department of Innovation and Organizational Economics, Copenhagen Business School.

Cooper, I. (1996). Arithmetic versus geometric mean estimators: setting discount rates for capital budgetting. European Financial Management , 2 (2), pp. 157‐167.

Dimson, E., Marsh, P., & Mike, S. (2003, Fall). Global Evidence on the Equity Risk Pre‐mium. Journal of Applied Corporate Finance, 15 (4), pp. 27‐38.

Parum, C. (2004). Risikopræmier. IFNYT , pp. 32‐33.

Risager, O. (2005). The value premium on the Danish stock market: 1950‐2004. Working paper, Department of economics.

Articles Danvig, F. (2009, December 18). TDC kan blive tvunget til at sælge iPhone. Computerworld.

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

Rasmussen, P. D. (2011, June 14). Telia og Telenor: Vi bygger Danmarks bedste net. Computerworld.dk.

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

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

Financial reports TDC A/S. TDC Annual Reports 20062010

TDC A/S. TDC First Quarter Report 2011.

TDC A/S. TDC Second Quarter Report 2011.


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Telenor. Telenor Group Annual Report 2010.

Telia. TeliaSonera Annual Report 2010.

Industry/market reports Danish Economic Councils. (2011). English summary: Dansk Økonomi, forår 2011. Danish Economic Councils.

Datamonitor. (2011). Five Consumer Technology Predictions for 2011 5: Mobile and social payments take off. Datamonitor.

Deutsche Bank. (2010). European Telcos, Growth recovery and rerating set to continue. London: Deutsche Bank A/G .

Economist Intelligence Unit. (2011 ). Country Report Denmark . London: Economist In‐telligence Unit.

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

International Monetary Fund. (2011). WORLD ECONOMIC OUTLOOK April 2011.

Kersley, R., & O'Sullivan, M. (2011). Credit Suisse Global Investment Returns Yearbook 2011. Credit Suisse Research Institute.

Møller, R., & Jørgensen, A. (2010). Estimation af danske aktiers risikopræmie. Jyske Bank.

NITA. (2011). Det digitale samfund 2010. NITA.

NITA. (2011). Telestatistik første halvår 2011.

NITA. (2011). Økonomiske nøgletal 2010.

Wittig, H., Morris, D., & Achtmann, T. (2011, May 12). TDC ‐ Improved visibility. Europe Equity Research . JP Morgan Securities Ltd.

Other publications Damodaran, A. (2011, January).Eurocompfirms.xls. Retrieved November 2011 from Use‐ful datasets: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html?pagewanted=all

Danmarks Nationalbank. (2003). Kvartalsoversigt 1 kvartal 2003. Danmarks National‐bank.

NITA. (2010). Analyse af engrosregulering på bredbåndsmarkedet.

NITA. (2011). Markedsafgrænsning Engrosmarkedet for bredbåndstilslutninger (marked 5).

NITA. (2011). Fixed network telephony.xls. Retrieved 9 15, 2011 from Statistics ‐ Back‐ground data for the telecom statistics: http://en.itst.dk/statistics/data/telecom‐statistics

NITA. (2011). Internet.xls. Retrieved 9 15, 2011 from Statistics ‐ Background data for the telecom statistics: http://en.itst.dk/statistics/data/telecom‐statistics


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NITA. (2011). Mobile.xls. Retrieved 9 15, 2011 from Statistics ‐ Background data for the telecom statistics: http://en.itst.dk/statistics/data/telecom‐statistics

NITA. (2011). Other.xls. Retrieved 9 15, 2011 from Statistics ‐ Background data for the telecom statistics: http://en.itst.dk/statistics/data/telecom‐statistics

PricewaterhouseCoopers. (2010). Prisfastsaettelsen på aktiemarkedet. Pricewater‐houseCoopers.

SKAT. (2009, August 21). 4.1.2.3. Markedsrisikopræmie. Retrieved 11 2011 from skat.dk: http://www.skat.dk/skat.aspx?oId=1813217&vId=202463#1813219

SKAT. (2011). Selskabsskattesatser i EU landene. Retrieved 11 2011 from http://www.skm.dk/tal_statistik/skatter_og_afgifter/4607.html

TDC A/S. (2010, August 13). TDC to launch iPhone 4. Press release.

TDC A/S. (2010, August 17). 116.000 iPhones i TDC's net. Press release.

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

TDC A/S. (2011, June 23). Telecom providers join forces to create digital wallet. Press release.

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

TDC A/S. (2011). TDC Fact Sheet 2010.xls. From Investor Relations ‐ Financial Reports: http://investor.tdc.com/annuals.cfm

Databases Datastream

Eurostat Statistics

International Monetary Fund

Nationalbankens Statistikbank

Statistics Denmark

Web pages www.tdc.dk

www.nita.dk

www.euroinvestor.dk

http://pages.stern.nyu.edu/~adamodar/

www.telenor.com

www.telia.com


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10. APPENDIX Appendix I Figure A I‐I Fixed line telephony, as of ultimo June 2011 ..............................................................89

Figure A I‐II VoIP, as of ultimo June 2011.............................................................................................89 Figure A I‐III Fixed line Internet, as of ultimo June 2011...............................................................90

Figure A I‐IV Mobile broadband, as of ultimo June 2011 ...............................................................90

Figure A I‐V IPTV, as of ultimo June 2011.............................................................................................91 Figure A I‐VI Bundles, as of ultimo June 2011.....................................................................................91

Figure A I‐VII Mobile telephony subscriptions in total ...................................................................92

Figure A I‐VIII IPTV subscriptions by type ...........................................................................................92

Appendix II Figure A II‐I Churn rate for TDC Consumer mobile voice customers .......................................94

Figure A II‐II TDC RGUs, fixed line telephony......................................................................................94

Figure A II‐III TDC RGUs, Mobile telephony.........................................................................................95 Figure A II‐IV TDC RGUs, Fixed line internet and mobile BB........................................................95

Figure A II‐V TDC RGUs, TV .........................................................................................................................96 Figure A II‐VI TDC RGUs, bundles.............................................................................................................96 Table A II‐I Households, Denmark ...........................................................................................................93

Table A II‐II Reported numbers, FTE, Revenue, and EBITDA.......................................................97 Table A II‐III Growth in EBITDA/Employee.........................................................................................98

Table A II‐IV Growth in Revenue/Employee .......................................................................................98

Table A II‐V Boston model input ...............................................................................................................99 Table A II‐VI Notes for Boston model input .........................................................................................99

Appendix III Figure A III‐I TDC Consumer revenue split by product................................................................ 108

Figure A III‐II TDC Business revenue split by product................................................................. 109 Figure A III‐III TDC Nordic revenue split by product.................................................................... 109

Figure A III‐IV YouSee revenue split by product............................................................................. 110

Figure A III‐V Operations & Wholesale revenue split by product ........................................... 110 Table A III‐I Income Statement............................................................................................................... 100

Table A III‐II Balance Sheet ...................................................................................................................... 101 Table A III‐III Analytical Income Statement...................................................................................... 102

Table A III‐IV Analystical Balanca Sheet ............................................................................................. 103


88 of 118

Table A III‐V Return on Equity, Parent................................................................................................ 104

Table A III‐VI Common size and index, Income Statement......................................................... 106

Table A III‐VII Common‐size and index, Balance Sheet ............................................................... 107 Table A III‐VIII Revenue split by business units, and total revenue growth....................... 108

Equation A III‐I Tax on Net Financial Expenses .............................................................................. 104 Equation A III‐II Retur non Equity, Group ......................................................................................... 104

Equation A III‐III Return on Equity, Parent....................................................................................... 104 Equation A III‐IV Return on Equity, ratio based.............................................................................. 104

Equation A III‐V Return on Invested Capital..................................................................................... 104

Equation A III‐VI Minority Interests Share........................................................................................ 105 Equation A III‐VII Net Borrowing Costs.............................................................................................. 105

Equation A III‐VIII Financial Leverage ................................................................................................ 105 Equation A III‐IX Profit Margin ............................................................................................................... 105

Equation A III‐X Turnover rate, Invested Capital ........................................................................... 105

Appendix IV Table A IV‐I Most Likely Scenario.......................................................................................................... 111

Table A IV‐II Best Case Scenario............................................................................................................. 111 Table A IV‐III Worst Case Scenario ....................................................................................................... 111

Table A IV‐IV Pro forma statements, most likely scenario ......................................................... 112 Table A IV‐V Best case ................................................................................................................................ 113

Table A IV‐VI Worst case ........................................................................................................................... 114

Table A IV‐VII Financial ratios, pro forma ......................................................................................... 115

Appendix V Figure A V‐I RI versus DCF........................................................................................................................ 118

Table A V‐I Zero‐coupon on 10‐year Danish Government Bond.............................................. 116 Table A V‐II Valuation – Best case scenario ...................................................................................... 116

Table A V‐III Valuation – Worst case scenario ................................................................................. 117 Equation A V‐I Residual Income to Equity ‐ two stage model ................................................... 117 Equation A V‐I Discounted Cash Flow to Equity ‐ two stage model........................................ 117


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I. Company Presentation

Figure A I‐I Fixed line telephony, as of ultimo June 2011116

Figure A I‐II VoIP, as of ultimo June 2011117

116 NITA. (2011). Fixed network telephony.xls. 117 NITA. (2011). Fixed network telephony.xls.

79,7%

0,1% 4,6%

5,9%

5,6% 4,0%

Fixed line telephony subscriptions

TDC

Dansk Kabel TV

DLG Tele

Telenor

Telia

Others

39,4%

0,7% 0,7%

4,2% 3,8%

8,5% 0,4%

10,3% 4,4%

27,6%

VoIP subscriptions

TDC

Canal Digital

Company Mobile

Dansk KabelTV

FirstCom

Fullrate

Onfone

Telenor

YouSee

Others


90 of 118

Figure A I‐III Fixed line Internet, as of ultimo June 2011118

Figure A I‐IV Mobile broadband, as of ultimo June 2011119

118 NITA. (2011). Internet.xls. 119 NITA. (2011). Internet.xls.

35,4%

1,0% 0,1% 5,9%

1,5% 5,7% 7,1%

10,8% 2,5% 0,7%

12,9%

16,40%

Broadband subscriptions TDC

Canal Digital

Company Mobile

Dansk Kabel TV

DLG Tele

Fullrate

Stofa

Telenor

Telia

Telmore

YouSee

Others

28,9%

5,5% 1,5% 0,8%

10,9%

3,4% 4,0%

16,6%

18,9%

7,9% 1,6%

Mobile broadband subscriptions

TDC

CBB Mobil

Company Mobile

DLG Tele

Hi3G

M1

Onfone

Telenor

Telia

Telmore

Others


91 of 118

Figure A I‐V IPTV, as of ultimo June 2011120

Figure A I‐VI Bundles, as of ultimo June 2011121

120 NITA. (2011). Other.xls. 121 NITA. (2011). Other.xls.

59,3%

7,1%

6,9% 0,3% 4,2%

4,2%

4,8% 13,1%

Fixed IPTV subscriptions

TDC

Dansk Bredbånd

EnergiMidt

Fullrate

SE

TRE‐FOR Bredbånd

Waoo

Others

61,2%

4,8% 1,2%

12,3%

2,6%

3,4% 14,4%

Triple play subscriptions

TDC

Dansk Bredbånd

DLG Tele

Stofa

Telia

Waoo

Others


92 of 118

Figure A I‐VII Mobile telephony subscriptions in total122

Figure A I‐VIII IPTV subscriptions by type123

122 NITA. (2011). Mobile.xls. 123 NITA. (2011). Other.xls

0 1.000.000 2.000.000 3.000.000 4.000.000 5.000.000 6.000.000 7.000.000 8.000.000

1H11 2H10 1H10 2H09 1H09 2H08 1H08 2H07 1H01 2H06 1H06 2H05 1H05

Mobile telephony subscriptions

0

50.000

100.000

150.000

200.000

250.000

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

IPTV subscriptions

Fixed network IPTV

Mobile IPTV


93 of 118

II. Strategic analysis

Table A II‐I Households, Denmark124 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97

1 person (1000) 720,4 738,2 751,7 769,4 784,4 802,4 818,4 830,1 840,7 854,9 865,7 876,6

2 persons (1000) 705,2 716,4 727,1 737,4 745,9 752,8 759,7 765,5 770,4 776,4 780,7 785,6

3 persons (1000) 334,3 336,1 336,8 337,3 338,0 338,5 338,2 337,2 335,1 332,4 329,2 326,9

4 persons (1000) 316,4 312,2 308,5 303,1 298,3 294,3 291,7 289,6 288,4 286,2 287,0 286,5

5 persons (1000) 91,9 88,7 86,5 84,2 83,0 82,1 81,6 82,4 83,4 84,5 86,5 88,5

6 persons (1000) 20,0 19,2 18,8 18,4 18,3 18,5 18,7 18,9 19,4 19,9 20,8 21,5

7 persons (1000) 5,1 5,0 5,1 5,0 5,0 4,9 5,1 5,4 5,4 5,7 5,8 6,0

8+ (1000) 5,5 5,6 5,5 5,4 5,3 5,3 5,3 5,3 5,3 5,3 5,4 5,5

Total (1000) 2.199 2.221 2.240 2.260 2.278 2.299 2.319 2.334 2.348 2.365 2.381 2.397

Population (1000) 5.059 5.067 5.075 5.078 5.086 5.099 5.117 5.136 5.154 5.173 5.204 5.232

Average 2,30 2,28 2,27 2,25 2,23 2,22 2,21 2,20 2,19 2,19 2,19 2,18

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

1 person (1000) 899,7 906,1 911,5 918,6 925,4 936,3 951,8 967,5 978,2 985,9 994,0 994,8 998,9

2 persons (1000) 800,6 807,2 813,3 816,9 821,2 824,0 828,8 832,1 834,6 840,0 842,7 847,2 849,6

3 persons (1000) 315,0 309,8 305,4 302,8 300,3 298,3 295,4 292,9 291,7 292,2 295,1 298,1 300,5

4 persons (1000) 287,2 287,2 288,1 288,7 288,7 289,3 288,9 289,8 291,4 292,0 293,3 293,8 295,4

5 persons (1000) 91,8 93,6 95,3 96,4 97,7 98,6 99,5 99,7 100,8 101,6 103,0 103,6 104,2

6 persons (1000) 22,3 23,0 23,1 23,7 24,1 24,0 23,7 23,8 23,9 24,2 24,3 24,5 24,4

7 persons (1000) 6,1 6,2 6,4 6,5 6,5 6,5 6,6 6,5 6,5 6,6 6,6 6,6 6,7

8+ (1000) 5,4 5,3 5,5 5,5 5,4 5,2 5,0 4,9 4,9 4,9 5,0 4,8 4,8

Total (1000) 2.428 2.438 2.448 2.459 2.469 2.482 2.500 2.517 2.532 2.547 2.564 2.573 2.584

Population (1000) 5.273 5.290 5.310 5.330 5.346 5.361 5.377 5.396 5.420 5.449 5.485 5.509 5.534

Average 2,17 2,17 2,17 2,17 2,16 2,16 2,15 2,14 2,14 2,14 2,14 2,14 2,14

124 Statistics Denmark


94 of 118

Figure A II‐I Churn rate for TDC Consumer mobile voice customers 125

Figure A II‐II TDC RGUs, fixed line telephony126

125 TDC A/S. (2011). TDC Fact Sheet 2010. 126 TDC A/S. (2011). TDC Fact Sheet 2010.

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10

Churn rate ‐ mobile voice

‐

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

PSTN/ISDN ‐ Retail

PSTN/ISDN ‐ Wholesale

VoIP


95 of 118

Figure A II‐III TDC RGUs, Mobile telephony127

Figure A II‐IV TDC RGUs, Fixed line internet and mobile BB128


‐

500

1.000

1.500

2.000

2.500

3.000

Thousands

Mobile‐ Prepaid cards

Mobile ‐ Subscriptions (incl. Telmore/M1)

Mobile ‐ Wholesale voice

‐

200

400

600

800

1.000

1.200

1.400

Mobile broadband

Broadband, retail

Broadband, wholesale

Non‐broadband


96 of 118

Figure A II‐V TDC RGUs, TV129

Figure A II‐VI TDC RGUs, bundles130


‐

200

400

600

800

1.000

1.200

1.400

‐ YouSee Clear

‐ YouSee Plus

‐ TDC TV

‐

50

100

150

200

250

300

350

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

Dual‐play bundles

Triple‐play bundles


97 of 118

Table A II‐II Reported numbers, FTE, Revenue, and EBITDA FTE

2007 2008 2009 2010 Consumer 2.681 2.212 2.160 2.037 TDC Business 2.212 1.620 1.528 1.476 TDC Nordic 1.596 1.619 1.437 1.388 Operations & Wholesale 5.557 4.406 4.409 3.868 YouSee 1.110 1.174 1.265 1.231

Reported Revenue

2007 2008 2009 2010 Consumer 10.115 9.901 9.711 9.389 TDC Business 8.864 8.546 7.926 7.546 TDC Nordic 3.863 3.854 3.515 4.087 Operations & Wholesale 3.601 2.748 2.582 2.550 YouSee 2.829 3.188 3.597 4.012

Reported EBITDA

2007 2008 2009 2010 Consumer 3.717 3.902 3.995 4.041 TDC Business 3.495 3.659 3.721 3.644 TDC Nordic 425 458 497 564 Operations & Wholesale 1.420 1.500 1.413 1.114 YouSee 814 954 1.141 1.353

EBITDA/Employee

2007 2008 2009 2010 Consumer 1,39 1,76 1,85 1,98 TDC Business 1,58 2,26 2,44 2,47 TDC Nordic 0,27 0,28 0,35 0,41 Operations & Wholesale 0,26 0,34 0,32 0,29 YouSee 0,73 0,81 0,90 1,10

Revenue/Employee

2007 2008 2009 2010 Consumer 3,77 4,48 4,50 4,61 TDC Business 4,01 5,28 5,19 5,11 TDC Nordic 2,42 2,38 2,45 2,94 Operations & Wholesale 0,65 0,62 0,59 0,66 YouSee 2,55 2,72 2,84 3,26


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Table A II‐III Growth in EBITDA/Employee Growth in EBITDA/Employee

Growth in EBITDA/Employee 2009 2010 Average

Consumer 5% 7% 6,05% TDC Business 8% 1% 4,60% TDC Nordic 22% 17% 19,87% Operations & Wholesale -6% -10% -8,00% YouSee 11% 22% 16,43%

Table A II‐IV Growth in Revenue/Employee Growth in Revenue/Employee

2009 2010 Average Consumer 0% 3% 1,48% TDC Business -2% -1% -1,56% TDC Nordic 3% 20% 11,57% Operations & Wholesale -6% 13% 3,23% YouSee 5% 15% 9,67%


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Table A II‐V Boston model input Input for Boston model

Market growth Note Relative MS Note Revenue Note Largest com-petitor

Fixed telephony -13,1% 1 13,6 4 4.355 5 Telenor

Mobile telephony 0,9% 2 2,5 4 6.591 5 Telenor

Fixed broadband 1,4% 1 5,6 4 7.021 Telenor

Mobile broadband 14,3% 1 2,4 4 584 5 Telia

IPTV 15,4% 1 9,6 4 628 6 Energi Midt

VoIP 15,8% 1 5,6 4 4.355 5 Telenor

Cable TV 5,0% 3 2,5 3 2.670 6 N/A

Terminal equipment, etc. 2.428

Other 562

Total 29.194

Table A II‐VI Notes for Boston model input Note Base Source

1 Growth in total subscriptions in market 1H2010-1H2011 (Telestatistik første halvår 2011)

2 Growth in total market revenue 2009-2010. (Økonomiske nøgletal 2010)

3

An estimate, market share is disclosed as 50% in the

Annual Report. Closest competitors market share is est.

to 20 percent.

(TDC Annual Report 2010)

4

Includes subsidiaries, to the extent that they are not

disclosed in the group of 'others'.

5

The split is calculated based on RGUs on each product

line as of ultimo 2010, naturally somewhat distorted, as

revenue per RGU is unlikely to be equal. (TDC Fact Sheet 2010)

6

IPTV is calculated as TDC Business' activities and

YouSee's contribution, and Cable TV becomes a residual (TDC Annual Report 2010)

Calculations for note 5

PSTN/ISDN 1.407 76,6%

VOIP 429 23,4%

Mobile 2.903 91,9%

Mobile BB 257 8,1%


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III. Financial statement analysis

Table A III‐I Income Statement131 TDC - Income Statements 2010

TDC Group (DKKm) 2007 2008 2009 2010 Revenue 27.951 26.917 26.079 26.167 Transmission costs and cost of goods sold -7.945 -7.239 -6.444 -6.747 O Gross profit 20.006 19.678 19.635 19.420 Other external expenses -5.246 -4.909 -4.731 -4.517 O Wages, salaries and pension costs -5.659 -5.185 -4.598 -4.327 O Other income and expenses 275 470 230 196 O EBITDA 9.376 10.054 10.536 10.772 Depreciation -2.455 -2.433 -2.385 -2.660 O Amortization -2.294 -1.937 -2.170 -2.603 O Impairment losses -1.027 -177 -104 -93 O Depreciation, amortization and impairment losses -5.776 -4.547 -4.659 -5.356 O Operating profit (EBIT), excluding special items 3.600 5.507 5.877 5.416 Special items 664 -3.212 -1.119 -1.347 Operating profit (EBIT) 4.264 2.295 4.758 4.069 Profit from joint ventures and associates 266 200 76 13 O -of which special items -76 -22 77 10 S Fair value adjustments 388 -686 -253 115 F Currency translation adjustments 216 770 -257 -20 F Financial income 1.515 2.160 825 401 F Financial expenses -4.882 -4.292 -2.379 -1.992 F Net financials -2.763 -2.048 -2.064 -1.496 Profit before income taxes 1.767 447 2.770 2.586 Income taxes related to profit, excluding special items 321 -722 -1.085 -1.035 O Income taxes related to special items 198 284 276 253 F Total income taxes 519 -438 -809 -782 Profit for the period from continuing operations 2.286 9 1.961 1.804 Profit for the period from discontinued operations 1.346 548 422 1.203 N - of which special items 1.148 196 -153 790 S Profit for the period 3.632 557 2.383 3.007

131 TDC A/S. (2011). TDC Fact Sheet 2010, sheet ’Income Statement’ . Retrieved from Investor Relations - Financial Reports: http://investor.tdc.com/annuals.cfm


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Table A III‐II Balance Sheet132 TDC - Balance sheet, December 31th 2010

TDC Group (DKKm) 2007 2008 2009 2010 Intangible assets 55.365 53.361 49.550 34.799 O Property, plant and equipment 21.227 22.396 19.998 15.531 O Investments in joint ventures and associ-

ates

5.897 171 168 137 O Other investments 7 9 7 7 O Deferred tax assets 125 65 52 66 O Pension assets 5.270 7.030 7.606 7.487 O Receivables 95 96 231 241 O Derivative financial instruments 39 11 0 0 O Prepaid expenses 147 211 243 270 O Total non-current assets 88.172 83.350 77.855 58.538 O Inventories 641 489 323 307 O Receivables 7.575 8.282 6.758 4.404 O Income tax receivables 14 9 2 0 O Derivative financial instruments 781 372 49 91 F Prepaid expenses 665 785 673 615 O Cash 8.297 6.718 763 831 F Assets held for sale 0 0 0 0 F Total current assets 17.973 16.655 8.568 6.248 Total assets 106.145 100.005 86.423 64.786 Share capital 992 992 992 992 Reserves 263 -1.295 -644 -621 Retained earnings 30.130 29.887 26.730 20.484 Proposed dividends 636 2.035 0 0 Equity attributable to Company share-

holders

32.021 31.619 27.078 20.855 Minority interests 189 61 0 0 Total equity 32.210 31.680 27.078 20.855 Deferred tax liabilities 7.666 7.430 7.313 6.486 O

Provisions 1.275 1.355 1.519 974 O Pension liabilities 296 365 244 73 O Loans 45.667 37.037 30.611 23.428 F Derivative financial instruments 141 23 0 0 F Deferred income 956 1.350 1.245 971 O Total non-current liabilities 56.001 47.560 40.932 31.932 Loans 4.146 4.713 3.787 216 F Trade and other payables 8.080 8.691 8.004 6.141 O Income tax payable 1.856 820 1.270 861 O Derivative financial instruments 312 2.007 1.205 659 O Deferred income 2.953 3.449 3.183 3.072 O Provisions 587 1.085 964 1.050 O Total current liabilities 17.934 20.765 18.413 11.999 Total liabilities 73.935 68.325 59.345 43.931 Total equity and liabilities 106.145 100.005 86.423 64.786

132 TDC A/S. (2011). TDC Fact Sheet 2010, sheet ’Balance Sheet’. Retrieved from Investor Relations - Financial Reports: http://investor.tdc.com/annuals.cfm


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Table A III‐II Analytical Income Statement TDC - Analytical Income Statement

TDC Group DKKm 2007 2008 2009 2010 Revenue 27.951 26.917 26.079 26.167 Transmission costs and cost of goods sold -7.945 -7.239 -6.444 -6.747 Gross profit 20.006 19.678 19.635 19.420 Other external expenses -5.246 -4.909 -4.731 -4.517 Wages, salaries and pension costs -5.659 -5.185 -4.598 -4.327 Other income and expenses 275 470 230 196 (EBITDA) 9.376 10.054 10.536 10.772 Profit from joint ventures and associates 266 200 76 13 - of which special items 76 22 -77 -10 Restructuring costs(from special items) -461 -1.238 -982 -1.172 Operating profit before special items 9.257 9.038 9.553 9.603 Special items 664 -3.212 -1.119 -1.347 - of which restructuring costs 461 1.238 982 1.172 Special items (Profit from JV and assoc) -76 -22 77 10 EBITDA 10.306 7.042 9.493 9.438 Depr., amortisation and impairment losses -5.776 -4.547 -4.659 -5.356 EBIT 4.530 2.495 4.834 4.082 Tax on operating profit -172 -950 -1.325 -1.156 NOPAT 4.358 1.545 3.509 2.926 Fair value adjustments 388 -686 -253 115 Currency translation adjustments 216 770 -257 -20 Financial income 1.515 2.160 825 401 Financial expenses -4.882 -4.292 -2.379 -1.992 NFE before tax -2.763 -2.048 -2.064 -1.496 Tax on net finansial expenses 691 512 516 374 Net financial expenses -2.072 -1.536 -1.548 -1.122 Profit for the period from continuing

operations

2.286 9 1.961 1.804 - of which Minority interests 280 151 41

Profit for the period from disc. operations 1.346 548 422 1.203 Group profit after tax 3.632 557 2.383 3.007


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Table A III‐IV Analystical Balanca Sheet133 TDC – Analytical Balance sheet

DKKm 2007 2008 2009 2010 Non-current assets Intangible assets 55.365 53.361 49.550 34.799 Property, plant and equipment 21.227 22.396 19.998 15.531 Intangible & tangible assets 76.592 75.757 69.548 50.330 Investments in jJV and associates 5.897 171 168 137 Other investments 7 9 7 7 Deferred tax assets 125 65 52 66 Receivables 95 96 231 241 Prepaid expenses 147 211 243 270 Pension assets 5.270 7.030 7.606 7.487 Current assets Inventories 641 489 323 307 Receivables 7.575 8.282 6.758 4.404 Income tax receivables 14 9 2 0 Prepaid expenses 665 785 673 615 Total operating assets 97.028 92.904 85.611 63.864 Deferred tax liabilities 7.666 7.430 7.313 6.486 Provisions 1.275 1.355 1.519 974 Deferred income 956 1.350 1.245 971 Trade and other payables 8.080 8.691 8.004 6.141 Income tax payable 1.856 820 1.270 861 Deferred income 2.953 3.449 3.183 3.072 Provisions 587 1.085 964 1.050 Pension liabilities 296 365 244 73 Total operating liabilities 23.669 24.545 23.742 19.628 Net working capital -3.233 -7.398 -7.679 -6.094 Net operating assets 73.359 68.359 61.869 44.236 Total equity 32.210 31.680 27.078 20.855 - of which Minority interests 189 61 Loans 45.667 37.037 30.611 23.428 Derivative financial instruments 141 23 0 0 Loans 4146 4.713 3.787 216 Derivative financial instruments 312 2.007 1.205 659 Interest bearing debt 50.266 43.780 35.603 24.303 Derivative financial instruments 39 11 0 0 Cash 8297 6.718 763 831 Derivative financial instruments 781 372 49 91 Interest bearing assets 9.117 7.101 812 922 . Net interest bearing debt 41.149 36.679 34.791 23.381 Invested capital 73.359 68.359 61.869 44.236


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Table A III‐V Return on Equity, Parent

2007 2008

2008

2009 2010 ROE Group 7,10% 0,03% 6,67% 7,53% ROE Parent 6,26% -0,45% 6,54% 7,53% ROIC 5,94% 2,18% 5,39% 5,52% M.I. share of profit 0,88 -15,81 0,98 1,00 NBC 5,04% 3,95% 4,33% 3,86% Leverage 1,28 1,22 1,22 1,21 PM 15,59% 5,74% 13,46% 11,18% AT 0,38 x 0,38 x 0,40 x 0,49 x

Equation A III‐I Tax on Net Financial Expenses

€

Tax on NFE = 25% ⋅ NFETax on NFE 2010 = 25% ⋅1.122 = 374

Equation A III‐I Retur non Equity, Group

€

Return on EquityGroup =Profit for the periodGroupAverage EquityGroup

Return on EquityGroup2010 =1.804

27.078 + 20.8552

= 7,53%

Equation A III‐II Return on Equity, Parent

€

Return on EquityParent =Profit for the periodParentAverage EquityParent

Return on EquityParent2009 =1.920

31.619 + 27.0782

= 6,54%

Equation A III‐III Return on Equity, ratio based

€

Return on EquityParent = (ROIC + (ROIC − NBC) ⋅ Leverage) ⋅ Minority Interests ShareReturn on EquityParent2009 = (5,39% + (5,39% − 4,33%) ⋅ 0,979 = 6,54%

Equation A III‐IV Return on Invested Capital

€

Return on Invested Capital =NOPAT

Average Invested Capital

Return on Invested Capital 2010 =2.026

61.869 + 44.2362

= 5,52%


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Equation A III‐V Minority Interests Share

Equation A III‐VI Net Borrowing Costs

€

Net Borrowing Costs =Net Financial Expenses

Average Net Interest Bearing Debt

Net Borrowing CostsNet Borrowing Costs 2010 =1.122

34.791+ 23.3812

= 3,86%

Equation A III‐VII Financial Leverage

€

Financial Leverage =Average Net Interest Bearing Debt

Average Equity

Financial Leverage 2010 =

34.791+ 23.3812

27.078 + 20.8552

=1,21

Equation A III‐VIII Profit Margin

€

Profit Margin =NOPATRevenue

Profit Margin 2010 =2.02626.167

= 7,74%

Equation A III‐IX Turnover rate, Invested Capital

€

Turnover Rate on Invested Captial =Revenue

Average Invested Captial

Turnover Rate on Invested Captial 2010 =26.167

61.869 + 44.2362

= 0,49 x

!

Minority InterestsShare =

NetEarings after MI

NetEarings beforeMI

Equity parent

Equitygroup

Minority InterestsShare 2009 =

1.920

1.96127.078

27.078

= 0,979


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Table A III‐VI Common size and index, Income Statement

Common-size Index 2007 2008 2009 2010 2007 2008 2009 2010

Revenue 100,0% 100,0% 100,0% 100,0% 100,0 96,3 93,3 93,6 TC and COGS -28,4% -26,9% -24,7% -25,8% 100,0 91,1 81,1 84,9

Gross profit 71,6% 73,1% 75,3% 74,2% 100,0 98,4 98,1 97,1 Other external expenses -18,8% -18,2% -18,1% -17,3% 100,0 93,6 90,2 86,1 Wages and salaries -20,2% -19,3% -17,6% -16,5% 100,0 91,6 81,3 76,5

Other income and expenses 1,0% 1,7% 0,9% 0,7% 100,0 170,9 83,6 71,3 Profit from joint ventures and associates 1,2% 0,8% 0,0% 0,0% 100,0 64,9 -0,3 0,9 Restructuring costs(from special items) -1,6% -4,6% -3,8% -4,5% 100,0 268,5 213,0 254,2

Operating profit before special items 33,1% 33,6% 36,6% 36,7% 100,0 97,6 103,2 103,7 Special items 4,0% -7,3% -0,5% -0,7% 100,0 -175,5 -12,2 -15,6

Special items (Profit from JV and assoc) -0,3% -0,1% 0,3% 0,0% 100,0 28,9 -101,3 -13,2

EBITDA 36,9% 26,2% 36,4% 36,1% 100,0 68,3 92,1 91,6 Depr., amort. and imp. losses -20,7% -16,9% -17,9% -20,5% 100,0 78,7 80,7 92,7

EBIT 16,2% 9,3% 18,5% 15,6% 100,0 55,1 106,7 90,1 Tax on operating profit -0,6% -3,5% -5,1% -4,4% N/A N/A N/A N/A

NOPAT 15,6% 5,7% 13,5% 11,2% 100,0 35,5 80,5 67,1 NFE before tax -9,9% -7,6% -7,9% -5,7% 100,0 74,1 74,7 54,1 Tax on net finansial expenses 2,5% 1,9% 2,0% 1,4% 100,0 74,1 74,7 54,1

Net Earnings 8,2% 0,0% 7,5% 6,9% 100,0 0,4 85,8 78,9


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Table A III‐VII Common‐size and index, Balance Sheet

Common-size Index

2007 2008 2009 2010 2007 2008 2009 2010

ASSETS Intangible and tangible assets 104,4% 110,8% 112,4% 113,8% 100,0 98,9 90,8 65,7 Intangible assets 75,5% 78,1% 80,1% 78,7% 100,0 96,4 89,5 62,9 Property, plant and equipment 28,9% 32,8% 32,3% 35,1% 100,0 105,5 94,2 73,2

Net working capital -4,4% -10,8% -12,4% -13,8% 100,0 228,8 237,5 188,5 OPERATING ASSETS Investments in JV and associates 8,0% 0,3% 0,3% 0,3% 100,0 2,9 2,8 2,3

Other investments 0,0% 0,0% 0,0% 0,0% 100,0 128,6 100,0 100,0 Deferred tax assets 0,2% 0,1% 0,1% 0,1% 100,0 52,0 41,6 52,8

Receivables 0,1% 0,1% 0,4% 0,5% 100,0 101,1 243,2 253,7 Prepaid expenses 0,2% 0,3% 0,4% 0,6% 100,0 143,5 165,3 183,7 Inventories 0,9% 0,7% 0,5% 0,7% 100,0 76,3 50,4 47,9 Receivables 10,3% 12,1% 10,9% 10,0% 100,0 109,3 89,2 58,1 Income tax receivables 0,0% 0,0% 0,0% 0,0% 100,0 64,3 14,3 0,0

Prepaid expenses 0,9% 1,1% 1,1% 1,4% 100,0 118,0 101,2 92,5 Pension assets 7,2% 10,3% 12,3% 16,9% 100,0 133,4 144,3 142,1

OPERATING LIABILITIES Deferred tax liabilities -10,4% -10,9% -11,8% -14,7% 100,0 96,9 95,4 84,6

Provisions -1,7% -2,0% -2,5% -2,2% 100,0 106,3 119,1 76,4 Deferred income -1,3% -2,0% -2,0% -2,2% 100,0 141,2 130,2 101,6 Trade and other payables -11,0% -12,7% -12,9% -13,9% 100,0 107,6 99,1 76,0

Income tax payable -2,5% -1,2% -2,1% -1,9% 100,0 44,2 68,4 46,4 Deferred income -4,0% -5,0% -5,1% -6,9% 100,0 116,8 107,8 104,0

Provisions -0,8% -1,6% -1,6% -2,4% 100,0 184,8 164,2 178,9 Pension liabilities -0,4% -0,5% -0,4% -0,2% 100,0 123,3 82,4 24,7

Invested capital (Net operating assets) 100,0% 100,0% 100,0% 100,0% 100,0 93,2 84,3 60,3 LIABILITIES

Total equity 43,9% 46,3% 43,8% 47,1% 100,0 98,4 84,1 64,7 Net interest bearing debt 56,1% 53,7% 56,2% 52,9% 100,0 89,1 84,5 56,8 INTEREST BEARING LIABILITIES Loans 62,3% 54,2% 49,5% 53,0% 100,0 81,1 67,0 51,3 Derivative financial instruments 0,2% 0,0% 0,0% 0,0% 100,0 16,3 0,0 0,0 Loans 5,7% 6,9% 6,1% 0,5% 100,0 113,7 91,3 5,2 Derivative financial instruments 0,4% 2,9% 1,9% 1,5% 100,0 643,3 386,2 211,2 INTEREST BEARING ASSETS Derivative financial instruments -0,1% 0,0% 0,0% 0,0% 100,0 28,2 0,0 0,0 Cash -11,3% -9,8% -1,2% -1,9% 100,0 81,0 9,2 10,0 Derivative financial instruments -1,1% -0,5% -0,1% -0,2% 100,0 47,6 6,3 11,7

Invested capital (Equity + NIBD) 100,0% 100,0% 100,0% 100,0% 100,0 93,2 84,3 60,3


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Table A III‐VIII Revenue split by business units, and total revenue growth134 DKKm 2006 2007 2008 2009 2010 TDC Consumer 10.115 9.901 9.711 9.389 TDC Business 8.864 8.546 7.926 7.546 TDC Nordic 3.863 3.854 3.515 4.087 Operations & Wholesale 3.601 2.748 2.582 2.550 YouSee 2.829 3.188 3.597 4.012 Other, incl. eliminations -1.321 -1.320 -1.252 -1.417 Total 29.200 27.951 26.917 26.079 26.167 Revenue growth -4,28% -3,70% -3,11% 0,34%

Figure A III‐I TDC Consumer revenue split by product135


3.414 3.094 2.675 2.341

4.082 4.207 4.418 4.449

1.589 1.621 1.734 1.632

14 55 166 374

1.016 924 718 593

0

2.000

4.000

6.000

8.000

10.000

12.000

2007 2008 2009 2010

Other

TV

Internet and network

Mobility services

Landline telephony


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Figure A III‐II TDC Business revenue split by product136

Figure A III‐III TDC Nordic revenue split by product137


2.218 2.072 1.968 1.826

2.308 2.346 2.251 2.290

2.604 2.569 2.526 2.307

1.734 1.559 1.181 1.123

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

8.000

9.000

10.000

2007 2008 2009 2010

Other


Mobility services

Landline telephony

1.038 937 852 984

69 62 106 190

1.395 1.424 1.385 1.523

1.361 1.431 1.172

1.390

-

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

2007 2008 2009 2010

Other


Mobility services

Landline telephony


110 of 118

Figure A III‐IV YouSee revenue split by product138

Figure A III‐V Operations & Wholesale revenue split by product139


1.912 2.211 2.433 2.646

90 100

150 197

582 640

725 817

47 54

72 98

198 183

217

254

-

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

2007 2008 2009 2010

Other

Landline telephony

Internet services

YouSee Plus

YouSee Clear

1.489 990

599 550

652

551 658 590

983

982 945 941

477

225 380 469

-

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

2007 2008 2009 2010

Other


Mobility services

Landline telephony


111 of 118

IV. Forecasting

Table A IV‐I Most Likely Scenario Forecast

assaumptioans

Historical period Explicit forecasting period Terminal Assumptions 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

I Revenue Growth -3,7% -3,1% 0,3% -0,89% -0,98% -0,73% -0,51% -0,20% 0,07% 0,47% 0,80% 0,96% 0,99% 0,27% TDC Consumer -2,1% -1,9% -3,3% -3,5% -4,0% -3,5% -3,0% -2,5% -2,0% -1,0% 0,0% 0,5% 1,0% 0,0% TDC Business -3,6% -7,3% -4,8% -3,5% -3,0% -2,5% -2,0% -1,0% 0,0% 0,5% 0,5% 0,5% 0,0% 0,0% TDC Nordic -0,2% -8,8% 16,3% 3,0% 2,5% 2,4% 2,4% 2,3% 2,3% 2,0% 2,0% 2,0% 2,0% 2,0% YouSee 12,7% 12,8% 11,5% 7,0% 6,0% 5,0% 4,0% 3,0% 2,0% 2,0% 2,0% 2,0% 2,0% 0,0% Oper. & Wholesale -23,7% -6,0% -1,2% -1,7% -1,5% -1,5% -1,5% -1,5% -1,5% -1,5% -1,5% -1,5% -1,5% -1,5% Other incl. elimin.

-0,1% -5,2% 13,2% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% II TC and COGS 26,9% 24,7% 25,8% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% III Other external exp. 18,2% 18,1% 17,3% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% IV Wages, salaries and

pension costs (% of revenue)

19,3% 17,6% 16,5% 16,4% 16,3% 16,2% 16,1% 16% 16% 16% 16% 16% 16% 16% V Other inc and (exp) 1,7% 0,9% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% Profit from JV and ass. 0,8% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%

VI Restructuring costs 4,6% 3,8% 4,5% 4,0% 4,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% Special items ex-

crestructuring costs (7,4%) (0,2%) (0,6%) 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%

VII Depr/(Int+tang.)

6,0% 6,7% 10,6% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% VIII Interest rate (av NIBD) 5,3% 5,8% 5,1% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% IX Tax rate N/A N/A N/A 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% X (Int. + tang. Ass.)/Rev 281% 267% 192% 195% 195% 195% 195% 195% 195% 195% 195% 195% 195% 195% XI NWC/Revenue 27% 29% 23% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

XII NIBD/INV CAP 54% 56% 53% 53% 53% 53% 53% 53% 53% 53% 53% 53% 53% 53%

Table A IV‐II Best Case Scenario Forecast

assaumptioans


I Revenue Growth -3,7% -3,1% 0,3% 0,05% 1,00% 1,00% 1,50% 1,50% 2,00% 2,00% 2,00% 2,00% 2,00% 2,00% II TC and COGS 26,9% 24,7% 25,8% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% III Other external exp. 18,2% 18,1% 17,3% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% 16,5% IV Wages, salaries and


19,3% 17,6% 16,5% 16,4% 16,3% 16,2% 16,1% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% V Other inc and (exp) 1,7% 0,9% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% 0,7% Profit from JV and ass. 0,8% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0% 0,0%




6,0% 6,7% 10,6% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% VIII Interest rate (av NIBD) 5,3% 5,8% 5,1% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% IX Tax rate N/A N/A N/A 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% X (Int. + tang. Ass.)/Rev 281% 267% 192% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% 190,0% XI NWC/Revenue 27% 29% 23% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0%

XII NIBD/INV CAP 54% 56% 53% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0% 53,0%

Table A IV‐III Worst Case Scenario Forecast

assaumptioans


I Revenue Growth -3,7% -3,1% 0,3% 0,05% -1,00% -1,00% -1,00% -0,50% -0,50% -0,50% -0,50% -0,50% -0,50% -0,50% II TC and COGS 26,9% 24,7% 25,8% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% 27,00% III Other external exp. 18,2% 18,1% 17,3% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% 16,50% IV Wages, salaries and


19,3% 17,6% 16,5% 16,40% 16,30% 16,20% 16,10% 16,00% 16,00% 16,00% 16,00% 16,00% 16,00% 16,00% V Other inc and (exp) 1,7% 0,9% 0,7% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% 0,70% Profit from JV and ass. 0,8% 0,0% 0,0% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%




6,0% 6,7% 10,6% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% 9,00% VIII Interest rate (av NIBD) 5,3% 5,8% 5,1% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% IX Tax rate N/A N/A N/A 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% 26,00% X (Int. + tang. Ass.)/Rev 281% 267% 192% 195,00

% 200,00

% 205,00

% 210,00

% 215,00

% 220,00

% 225,00

% 230,00

% 235,00

% 235,00

% 235,00%

XI NWC/Revenue 27% 29% 23% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% 25,00% XII NIBD/INV CAP 54% 56% 53% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00% 53,00%


112 of 118

Table A IV‐IV Pro forma statements, most likely scenario Historical period Explicit forecasting period Terminal

2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Income Statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 Revenue 26.917 26.079 26.167 25.933 25.680 25.492 25.361 25.309 25.326 25.446 25.648 25.894 26.149 26.219 TC and COGS -7.239 -6.444 -6.747 -6.743 -6.677 -6.628 -6.594 -6.580 -6.585 -6.616 -6.668 -6.732 -6.799 -6.817 Gross profit 19.678 19.635 19.420 19.191 19.003 18.864 18.767 18.729 18.741 18.830 18.979 19.161 19.350 19.402

Other external exp. -4.909 -4.731 -4.517 -4.279 -4.237 -4.206 -4.185 -4.176 -4.179 -4.199 -4.232 -4.272 -4.315 -4.326 Wages and salaries -5.185 -4.598 -4.327 -4.253 -4.186 -4.130 -4.083 -4.049 -4.052 -4.071 -4.104 -4.143 -4.184 -4.195 Other inc and exp. 470 230 196 182 180 178 178 177 177 178 180 181 183 184 Profit from JV 222 -1 3 0 0 0 0 0 0 0 0 0 0 0

Restructuring costs -1.238 -982 -1.172 -1.037 -1.027 -765 -761 -759 -760 -763 -769 -777 -784 -787 Special items -1.996 -60 -165 0 0 0 0 0 0 0 0 0 0 0 EBITDA 7.042 9.493 9.438 9.803 9.733 9.942 9.916 9.921 9.928 9.975 10.054 10.150 10.250 10.278 Depr., amort. and il. -4.547 -4.659 -5.356 -4.551 -4.507 -4.474 -4.451 -4.442 -4.445 -4.466 -4.501 -4.544 -4.589 -4.601

EBIT 2.495 4.834 4.082 5.251 5.226 5.468 5.465 5.479 5.483 5.509 5.553 5.606 5.661 5.676 Tax on EBIT -950 -1.325 -1.156 -1.365 -1.359 -1.422 -1.421 -1.425 -1.426 -1.432 -1.444 -1.458 -1.472 -1.476 NOPAT 1.545 3.509 2.926 3.886 3.867 4.046 4.044 4.055 4.057 4.077 4.109 4.148 4.189 4.200 NFE before tax -2.048 -2.064 -1.496 -1.402 -1.395 -1.383 -1.375 -1.370 -1.369 -1.372 -1.381 -1.393 -1.407 -1.415

Tax on NFE 512 516 374 365 363 360 357 356 356 357 359 362 366 368 Net Earnings 9 1.961 1.804 2.848 2.835 3.023 3.027 3.041 3.045 3.061 3.087 3.117 3.148 3.153 Earnings (disc oper.) 548 422 1.203 0 0 0 0 0 0 0 0 0 0 0 Other compr. Income -665 1.075 -371 0 0 0 0 0 0 0 0 0 0 0

Balance Sheet -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 Int. and tang assets 75.757 69.548 50.330 50.570 50.075 49.709 49.454 49.353 49.385 49.619 50.013 50.492 50.990 51.126 Net working capital -7.398 -7.679 -6.094 -6.483 -6.420 -6.373 -6.340 -6.327 -6.331 -6.361 -6.412 -6.473 -6.537 -6.555 Inv. Capital (NOA) 68.359 61.869 44.236 44.087 43.655 43.336 43.113 43.025 43.054 43.257 43.601 44.019 44.453 44.572 Total equity 31.680 27.078 20.855 20.721 20.518 20.368 20.263 20.222 20.235 20.331 20.493 20.689 20.893 20.949 Total equity, primo 32.210 31.680 27.078 20.855 20.721 20.518 20.368 20.263 20.222 20.235 20.331 20.493 20.689 20.893

+ compr. Income -108 3.458 2.636 2.656 2.645 2.834 2.839 2.854 2.857 2.873 2.897 2.926 2.955 2.959 Trans. with owners -422 -8.060 -8.859 -2.791 -2.847 -2.984 -2.944 -2.895 -2.844 -2.777 -2.736 -2.730 -2.751 -2.903 Total Equity, ultimo 31.680 27.078 20.855 20.721 20.518 20.368 20.263 20.222 20.235 20.331 20.493 20.689 20.893 20.949

NIBD 36.679 34.791 23.381 23.366 23.137 22.968 22.850 22.803 22.818 22.926 23.109 23.330 23.560 23.623 Inv ca (Equ + NIBD) 68.359 61.869 44.236 44.087 43.655 43.336 43.113 43.025 43.054 43.257 43.601 44.019 44.453 44.572

Cash flow statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

NOPAT 1.545 3.509 2.926 3.886 3.867 4.046 4.044 4.055 4.057 4.077 4.109 4.148 4.189 4.200 Depr., amor and il 4.547 4.659 5.356 4.551 4.507 4.474 4.451 4.442 4.445 4.466 4.501 4.544 4.589 4.601 +/- ΔNWC 4.165 281 -1.585 389 -63 -47 -33 -13 4 30 51 61 64 17 +/- Net investments -3.712 1.550 13.862 -4.791 -4.012 -4.107 -4.196 -4.341 -4.477 -4.699 -4.896 -5.023 -5.087 -4.737 FCFF 6.545 9.999 20.559 4.036 4.298 4.366 4.267 4.143 4.029 3.873 3.765 3.731 3.755 4.082

+/- New net fin. obl. -4.470 -1.888 -11.410 -15 -228 -169 -118 -47 15 108 182 221 230 63 - NFE after tax -1.536 -1.548 -1.122 -1.038 -1.032 -1.024 -1.017 -1.014 -1.013 -1.016 -1.022 -1.031 -1.041 -1.047 FCFE 539 6.563 8.027 2.983 3.037 3.173 3.132 3.083 3.031 2.965 2.925 2.921 2.944 3.097 - Dividends -636 -8.071 -9.000 -2.983 -3.037 -3.173 -3.132 -3.083 -3.031 -2.965 -2.925 -2.921 -2.944 -3.097

Of which own 1 141 0 0 0 0 0 0 0 0 0 0 0 Capital infusion 213 11


113 of 118

Table A IV‐V Best case Historical period Explicit forecasting period Terminal

2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Income Statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 Revenue 26.917 26.079 26.167 26.179 26.441 26.705 27.106 27.513 28.063 28.624 29.197 29.781 30.376 30.984 TC and COGS -7.239 -6.444 -6.747 -6.807 -6.875 -6.943 -7.048 -7.153 -7.296 -7.442 -7.591 -7.743 -7.898 -8.056 Gross profit 19.678 19.635 19.420 19.373 19.566 19.762 20.058 20.359 20.767 21.182 21.605 22.038 22.478 22.928 Other external exp. -4.909 -4.731 -4.517 -4.320 -4.363 -4.406 -4.472 -4.540 -4.630 -4.723 -4.817 -4.914 -5.012 -5.112 Wages and salaries -5.185 -4.598 -4.327 -4.293 -4.310 -4.326 -4.364 -4.402 -4.490 -4.580 -4.671 -4.765 -4.860 -4.957 Other inc and exp. 470 230 196 183 185 187 190 193 196 200 204 208 213 217 Profit from JV 222 -1 3 0 0 0 0 0 0 0 0 0 0 0




Balance Sheet -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 Int. and tang assets 75.757 69.548 50.330 49.741 50.238 50.740 51.501 52.274 53.319 54.386 55.474 56.583 57.715 58.869 Net working capital -7.398 -7.679 -6.094 -6.545 -6.610 -6.676 -6.777 -6.878 -7.016 -7.156 -7.299 -7.445 -7.594 -7.746 Inv. Capital (NOA) 68.359 61.869 44.236 43.196 43.628 44.064 44.725 45.396 46.304 47.230 48.174 49.138 50.121 51.123 -553 Total equity 31.680 27.078 20.855 20.302 20.505 20.710 21.021 21.336 21.763 22.198 22.642 23.095 23.557 24.028 Total equity, primo 32.210 31.680 27.078 20.855 20.302 20.505 20.710 21.021 21.336 21.763 22.198 22.642 23.095 23.557



Cash flow statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

NOPAT 1.545 3.509 2.926 4.010 4.070 4.723 4.814 4.907 5.005 5.105 5.207 5.311 5.417 5.526 Depr., amor and il 4.547 4.659 5.356 4.477 4.521 4.567 4.635 4.705 4.799 4.895 4.993 5.092 5.194 5.298 +/- ΔNWC 4.165 281 -1.585 451 65 66 100 102 138 140 143 146 149 152 +/- Net investments -3.712 1.550 13.862 -3.887 -5.019 -5.069 -5.396 -5.477 -5.844 -5.961 -6.080 -6.202 -6.326 -6.452 FCFF 6.545 9.999 20.559 5.050 3.638 4.287 4.153 4.236 4.097 4.179 4.262 4.348 4.435 4.523

+/- New net fin. obl. -4.470 -1.888 -11.410 -487 229 231 350 356 481 491 501 511 521 531 - NFE after tax -1.536 -1.548 -1.122 -890 -885 -894 -905 -919 -935 -954 -973 -992 -1.012 -1.032 FCFE 539 6.563 8.027 3.673 2.981 3.624 3.598 3.672 3.643 3.716 3.790 3.866 3.943 4.022 - Dividends -636 -8.071 -9.000 -3.673 -2.981 -3.624 -3.598 -3.672 -3.643 -3.716 -3.790 -3.866 -3.943 -4.022

Of which own 1 141 0 0 0 0 0 0 0 0 0 0 0 Capital infusion 213 11


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Table A IV‐VI Worst case Historical period Explicit forecasting period Terminal

2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Income Statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11

Revenue 26.917 26.079 26.167 26.179 25.917 25.658 25.402 25.275 25.148 25.023 24.897 24.773 24.649 24.526 TC and COGS -7.239 -6.444 -6.747 -7.068 -6.998 -6.928 -6.858 -6.824 -6.790 -6.756 -6.722 -6.689 -6.655 -6.622 Gross profit 19.678 19.635 19.420 19.111 18.920 18.731 18.543 18.451 18.358 18.266 18.175 18.084 17.994 17.904 Other external exp. -4.909 -4.731 -4.517 -4.320 -4.276 -4.234 -4.191 -4.170 -4.149 -4.129 -4.108 -4.088 -4.067 -4.047 Wages and salaries -5.185 -4.598 -4.327 -4.293 -4.225 -4.157 -4.090 -4.044 -4.024 -4.004 -3.984 -3.964 -3.944 -3.924 Other inc and exp. 470 230 196 183 181 180 178 177 176 175 174 173 173 172 Profit from JV 222 -1 3 0 0 0 0 0 0 0 0 0 0 0




Balance Sheet -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 Int. and tang assets 75.757 69.548 50.330 51.049 51.835 52.599 53.344 54.341 55.326 56.301 57.264 58.216 57.925 57.636 Net working capital -7.398 -7.679 -6.094 -6.545 -6.479 -6.415 -6.350 -6.319 -6.287 -6.256 -6.224 -6.193 -6.162 -6.131 Inv. Capital (NOA) 68.359 61.869 44.236 44.505 45.356 46.185 46.993 48.022 49.039 50.045 51.040 52.023 51.763 51.504 62 Total equity 31.680 27.078 20.855 20.917 21.317 21.707 22.087 22.570 23.048 23.521 23.989 24.451 24.329 24.207 Total equity, primo 32.210 31.680 27.078 20.855 20.917 21.317 21.707 22.087 22.570 23.048 23.521 23.989 24.451 24.329



Cash flow statement -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 NOPAT 1.545 3.509 2.926 3.729 3.625 3.712 3.609 3.526 3.424 3.324 3.224 3.126 3.110 3.094 Depr., amor and il 4.547 4.659 5.356 4.594 4.665 4.734 4.801 4.891 4.979 5.067 5.154 5.239 5.213 5.187 +/- ΔNWC 4.165 281 -1.585 451 -65 -65 -64 -32 -32 -31 -31 -31 -31 -31 +/- Net investments -3.712 1.550 13.862 -5.314 -5.451 -5.499 -5.545 -5.888 -5.965 -6.042 -6.117 -6.192 -4.922 -4.898 FCFF 6.545 9.999 20.559 3.461 2.774 2.883 2.801 2.497 2.407 2.318 2.230 2.142 3.370 3.353

+/- New net fin. obl. -4.470 -1.888 -11.410 206 451 440 428 545 539 533 527 521 -138 -137 - NFE after tax -1.536 -1.548 -1.122 -1.043 -1.057 -1.077 -1.096 -1.118 -1.142 -1.166 -1.189 -1.213 -1.221 -1.215 FCFE 539 6.563 8.027 2.624 2.168 2.245 2.133 1.924 1.804 1.685 1.567 1.451 2.011 2.001 - Dividends -636 -8.071 -9.000 -2.624 -2.168 -2.245 -2.133 -1.924 -1.804 -1.685 -1.567 -1.451 -2.011 -2.001

Of which own 1 141 3.729 3.625 3.712 3.609 3.526 3.424 3.324 3.224 3.126 3.110 3.094 Capital infusion 213 11


115 of 118

Table A IV‐VII Financial ratios, pro forma 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Most likely ROE ML 13,70% 13,75% 14,79% 14,90% 15,02% 15,05% 15,09% 15,12% 15,14% 15,14% 15,07%

ROIC 8,80% 8,81% 9,30% 9,36% 9,41% 9,43% 9,45% 9,46% 9,47% 9,47% 9,44%

PM 15,0% 15,1% 15,9% 15,9% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0% 16,0%

AT 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x 0,59x

r -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4%

Leverage 1,12 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13

Best case ROE BC 15,07% 15,61% 18,58% 18,73% 18,83% 18,89% 18,89% 18,89% 18,89% 18,89% 18,89%

ROIC 9,13% 9,37% 10,77% 10,84% 10,89% 10,92% 10,92% 10,92% 10,92% 10,92% 10,92%

PM 15,3% 15,4% 17,7% 17,8% 17,8% 17,8% 17,8% 17,8% 17,8% 17,8% 17,8%

AT 0,60x 0,61x 0,61x 0,61x 0,61x 0,61x 0,61x 0,61x 0,61x 0,61x 0,61x

r -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8% -3,8%

Leverage 1,12 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13

Worst case ROE WC 12,78% 12,16% 12,25% 11,48% 10,78% 10,01% 9,27% 8,57% 7,90% 7,74% 7,74%

ROIC 8,37% 8,07% 8,11% 7,75% 7,42% 7,06% 6,71% 6,38% 6,07% 5,99% 5,99%

PM 14,2% 14,0% 14,5% 14,2% 13,9% 13,6% 13,3% 13,0% 12,6% 12,6% 12,6%

AT 0,59x 0,58x 0,56x 0,55x 0,53x 0,52x 0,51x 0,49x 0,48x 0,47x 0,47x

r -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4% -4,4%

Leverage 1,12 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13 1,13


116 of 118

V. Valuation

Table A V‐I Zero‐coupon on 10‐year Danish Government Bond140 ’10-10 ’10-11 ’10-12 ’11-01 ’11-02 ’11-03 ’11-04 ’11-05 ’11-06 ’11-07 ’11-08 ’11-09

End of month 2,613 2,822 2,981 3,151 3,173 3,39 3,27 3,03 2,98 2,8 2,35 2,06

Average 2,885

Table A V‐II Valuation – Best case scenario Valuation of TDC as of 30th September 2011

Joint input values

re 8,28% G 2% Number of sshares, millions 825

RI model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E NOPAT 3.120 3.184 3.829 3.909 3.988 4.070 4.151 4.234 4.319 4.405 4.493 Equity, primo 20.855 20.302 20.505 20.71

0

21.02

1

21.33

6

21.763 22.198 22.64

2

23.095 23.55

7 COC 1.726 1.680 1.697 1.714 1.739 1.766 1.801 1.837 1.874 1.911 1.949 Residual income 1.394 1.504 2.132 2.195 2.248 2.304 2.350 2.397 2.445 2.494 2.544 PV of RI 1.288 1.283 1.680 1.597 1.511 1.430 1.347 1.269 1.195 1.126 Book value of equity, primo 20.855 PV of RI in forecast horizon 13.726 PV of RI in terminal period 18.307 Estimated market value of Equity0 52.888 Price per share 01/01/2011 64,106 DKK

DCF model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E FCFE 3.673 2.981 3.624 3.598 3.672 3.643 3.716 3.790 3.866 3.943 4.022 PV of FCFE 3.392 2.543 2.855 2.618 2.468 2.261 2.130 2.006 1.890 1.781 PV of FCFE in forecast horizon 23.944 PV of terminal period 28.944 Estimated market value of Equity0 52.888 Price per share 01/01/2011 64,106 DKK

Discounting forward Share price 30/09/2011 64,106*((1+8,28%)^(273/365))= Price, 30/09/2011 68,034

DKK

140 Danmarks Nationalbank. (2011). Nationalbankens Statistikbank. Retrieved November 2011 from Rentestatistikker : http://nationalbanken.statistikbank.dk/statbank5a/default.asp?w=1280


117 of 118

Table A V‐III Valuation – Worst case scenario Valuation of TDC as of 30th September 2011

Joint input values

re 8,28% G -0,5% Number of sshares, millions 825

RI model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E NOPAT 2.687 2.568 2.635 2.513 2.408 2.282 2.158 2.035 1.913 1.889 1.879 Equity, primo 20.85

5

20.917 21.317 21.70

7

22.08

7

22.57

0

23.048 23.521 23.98

9

24.451 24.32

9 COC 1.726 1.731 1.764 1.796 1.828 1.868 1.907 1.946 1.985 2.023 2.013 Residual income 961 837 871 716 580 414 251 88 -72 -134 -134 PV of RI 887 714 686 521 390 257 144 47 -35 -61 Book value of equity, primo 20.85

5

PV of RI in forecast horizon 3.550 PV of RI in terminal period -689 Estimated market value of Equity0 23.71

6

Price per share 01/01/2011 28,747

DKK

DCF model 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E FCFE 2.624 2.168 2.245 2.133 1.924 1.804 1.685 1.567 1.451 2.011 2.001 PV of FCFE 2.424 1.849 1.769 1.552 1.293 1.120 966 830 709 908 PV of FCFE in forecast horizon 13.41

9

PV of terminal period 10.29

7

Estimated market value of Equity0 23.71

6

Price per share 01/01/2011 28,747

DKK

Discounting forward Share price 30/09/2011 28,747*((1+8,28%)^(273/365))= Price, 30/09/2011 30,508 DKK

Equation A V‐I Residual Income to Equity ‐ two stage model

€

Market value of Equity0 = Book value of Equity0 +RIt

(1+ re )t +

RIn+1

re − g⋅

1(1+ re )

nt=1

n

∑

Equation A V‐II Discounted Cash Flow to Equity ‐ two stage model

€

Market value of Equity0 =FCFEt

(1+ re )t +

FCFEn+1

re − g⋅

1(1+ re )

nt=1

n

∑


118 of 118

Figure A V‐I RI versus DCF

20.855 19.467

8.125 17.043

7.530

0 5.000 10.000 15.000 20.000 25.000 30.000 35.000 40.000

RI model DCFmodel

DKK millions

Book value of equity, primo PV of FCFE in forecast horizon PV of RI in forecast horizon PV of terminal period PV of RI in terminal period

strategic and financial analysis & valuation of tdc a/s · strategic and financial analysis and...

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