NORGES HANDELSHYSKOLE Bergen, June 2008

BusinessAnalysisandValuation ofVodafoneGroup

IrynaSaplitsa

Supervisor:ToreLeite

NORGES HANDELSHYSKOLE
ThisthesiswaswrittenasapartoftheMasterofScienceinEconomicsandBusiness Administration program Major in International Business. Neither the institution, northeadvisorisresponsibleforthetheoriesandmethodsused,ortheresultsand conclusionsdrawn,throughtheapprovalofthisthesis.

Acknowledgments
Thisthesisiswritteninconjunctionwithmyfinalsemesterasa Masterstudentat the Norwegian School of Economics and Business Administration. The process of completingthispaperhasbeenbothrewardingaswellaschallenging.Iwouldlike to express my sincere gratitude towards a person that has been very helpful in finalizingthisthesis.Myacademicadvisor,AssociateProfessorToreLeite,deserves special thanks for his support and guidance through the challenges of applying financial theory into practice. I am very grateful for his invaluable help, all constructivecommentsandtimelyrecommendations. IrynaSaplitsa Bergen,June2008

ExecutiveSummary
Every asset, both financial and real, has a value. The main factor of successful investmentsandmanagementoftheseassetsisintheunderstandingnotonlywhat the value is, but the source of the value. Vodafone Group, the worlds leading mobile telecommunications company with presence in both emerging and mature markets, is in the centre of attention of this thesis. The valuation of companys equity will be performed, based on publicly available information about the main risks and opportunities that could influence this value. I will also attempt to develop a possible Vodafone Groups strategy that might enhance the companys value.

Contents
CONTENTS ........................................................................................................................................ 4 INTRODUCTION .............................................................................................................................. 6 1. 2. 2.1 PRESENTATIONOFVODAFONEGROUPANDITSAFFILIATES .......................... 8 ANALYSISOFVODAFONEANDITSBUSINESSENVIRONMENT ...................... 11 ANALYSISOFMACROENVIRONMENT ............................................................................... 12 POLITICALFACTORS ........................................................................................................... 12 ECONOMICFACTORS .......................................................................................................... 14 SOCIALFACTORS ................................................................................................................. 17 TECHNOLOGICALFACTORS ................................................................................................ 19 2.2 ANALYSISOFTELECOMMUNICATIONSINDUSTRY ........................................................... 20 BUYERS ................................................................................................................................ 20 RIVALRY .............................................................................................................................. 22 SUBSTITUTES ....................................................................................................................... 24 ENTRANTS ........................................................................................................................... 25 SUPPLIERS ........................................................................................................................... 26 2.3 SWOTANALYSIS ............................................................................................................... 27 STREGTHS ............................................................................................................................ 27 WEAKNESSES ...................................................................................................................... 28 OPPORTUNITIES .................................................................................................................. 28 THREATS ............................................................................................................................. 29 3. 3.1 COMPANYVALUATION ................................................................................................... 30 VALUATIONMODELS ......................................................................................................... 30 DISCOUNTEDCASHFLOWVALUATION ............................................................................. 31 RELATIVEVALUATIONMODELS ........................................................................................ 33

5
3.2 VODAVONEVALUECALCULATIONS ..................................................................................34 COSTOFCAPITAL ...................................................................................................................34 NORMALIZEDCASHFLOWS...................................................................................................40 VALUEWITHDISCOUNTEDCASHFLOWSCENARIOAPPROACH ..........................................44 4. RECOMMENDATIONSONFUTURESTRATEGY .......................................................49

CONCLUSION ..................................................................................................................................56 REFERENCES ....................................................................................................................................57 APPENDIX .........................................................................................................................................60

Introduction
Withtheunprecedentedgrowthofmobilecommunicationssincethemid1980s,the effects on other sectors, the wider economy and society as a whole have been far reaching. Changes in communications have underpinned the development of the whole IT industry, helped economic growth, particularly in developing markets, and enabled families, friends and communities to communicate across countries andtimezones. Therearecurrentlyaroundthreebillionmobilecustomersglobally1.Atthemoment, themajorityareinthewesternworld.However,70%ofthegrowthincustomersin the next five years is predicted to come from emerging markets, especially China, India and the rest of Asia. The challenges and opportunities that a telecommunicationscompanyfacesinthesemarketsareverydifferentfromthosein Europeanandmaturemarkets. ThecompanyinfocusofthisthesisisVodafoneGroup,whoisoperatingthebiggest mobile network worldwide with presence in both emerging and mature markets. TheobjectiveofthispaperistoestimatethevalueofVodafoneGroup,takinginto considerationthemainrisksandopportunitiesthatcouldinfluencethisvalue,and tosuggestapossibleVodafoneGroupsstrategy,thatmightenhancethecompanys value. The structure of the thesis is the following: in Chapter 1 a brief presentation of VodafoneGroupisgiven.Chapter2focusesontheanalysisofVodafonesbusiness environment, including analysis of its macroenvironment, strategic analysis of telecommunications industry and a short SWOT analysis. Chapter 3 contains the company valuation, including the description of main valuation models and

GSMWorldthewebsiteoftheGSMAssociation:http://www.gsmworld.com

7 Vodafones value calculations, using the discounted cash flow scenario approach. RecommendationsoncompanysfuturestrategyaregiveninChapter4. In order to keep this paper as practical and focused as possible, the applicable theoryisincorporatedinthetextwherenecessarytoexplaincertaindevelopments ortojustifytheanalyticaldecisionstaken.Thethesisisbasedonpubliclyavailable informationaboutthecompany,theindustryandthemacroeconomicdevelopment ofworldeconomyfromvarioussources.Allanalysesareperformedgiventhedata andinformationavailableuptoMay2008.Anypublicinformationreleasedbeyond thatdatemaychangethevalueofthecompany,asfinancialvaluationisdynamicin nature.

1. PresentationofVodafoneGroupanditsaffiliates
VodafoneGroupPlc.isamobilenetworkoperatorwithheadquartersinNewbury, Berkshire, England. It is the worlds leading mobile telecommunications company with mobile operations in 25 countries around the world with over 260 million customersworldwide,aswellas38partnernetworks,generatingaturnoverin2007 of31billion.VodafonenetworkscanbefoundonalmostallcontinentsinEurope, the Middle East, Africa, Asia, Pacific and the United States. The name of the company (Vodafone) comes fromVoicedatafoneanditwaschosenbythecompany to reflect the provision of voice and data services over mobilephones.2 The companys goal is: To be the communications leader in an increasingly connected world.3 In order to achieve it, Vodafone does not only offer basic telecommunications services (calls and SMS4), but also many other advanced services: Vodafone At Home and Vodafone Office are integrated mobile and fixed line communications services designed to deliver on customers total communications needs and to introduce Vodafone into the household and businessasatotalcommunicationsprovider. Vodafone Passport enables customers to take their home tariff abroad, offering greater price transparency and certainty to customers when using roamingservicesabroad.

2 3 4

Vodafonewebsite:http://www.vodafone.com/start/about_vodafone.html VodafoneAnnualReport,31March2007 SMS=ShortMessageService,textmessagingplatformdesignedformobilephones

9 Vodafone Live! is Vodafones integrated communications and multimedia solutionavailabletomobilephonesaswellasstandardnotebookcomputers. Vodafone3Gservicesassociatedwith3Gthatprovidecustomerswiththe abilitytosimultaneouslytransferbothvoicedata(atelephonecall)andnon voicedata(suchasdownloadinginformation,exchangingemail,andinstant messaging). Vodafone Mobile Connect data cards and Mobile applications provide simple and secure access to existing business systems such as email, corporateapplications,companyintranetsandtheinternetforcustomerson themove. VodafoneismanagedandorganisedthroughtwogeographicregionsEuropeand EMAPA(EasternEurope,MiddleEast,AfricaandAsia,PacificandAffiliates). Europe includes the Vodafones principal mobile subsidiaries, located in Germany, Spain and the UK, its joint venture in Italy. Other subsidiaries in this geographic area are Albania, Greece, Ireland, Malta, Netherlands and Portugal. The EMAPA region covers Vodafones subsidiary operations in the Czech Republic, Hungary, Romania, Turkey, Egypt, Australia and New Zealand, joint ventures in Poland, Kenya, South Africa and Fiji, associated undertakings in France and the US and the Groups investments in China andIndia. Historically, the Europe region is the primary source of Vodafones growth, generatingapproximately79%oftherevenueofthewholecompany(Appendix1). However, with an average penetration more than 100%5 (Figure 1), this market is

VodafoneAnnualReport,31March2007

Over100%penetrationispossibleduetocustomersowningmorethanoneSIMcard

10 now maturing and delivering lower growth. Whilst growth in this region has slowed, significant growth is now to be seen in EMAPA region where the penetration rates in some countries are below 30%. The expansion of Vodafone to new emerging markets has contributed with greater diversity to Vodafones traditional market portfolio. Transactions in Turkey, South Africa, India and Romaniaarejustafewexamplesofthenewbroadorientationthathasevolvedin thelastcoupleofyears.

Figure1:EstimatedpenetrationEuropeandEMAPA

11

2. AnalysisofVodafoneanditsbusiness environment
AccordingtoJohnson(2005)theenvironmentofcompanycanbeviewedinaseries oflayers: Themostgenerallayeroftheenvironmentisoftenreferredtoasthemacro environment. It consists of broad environmental factors that impact to a greaterorlesserextentonalmostallcompanies. Withinthisbroadgeneralenvironmentthenextlayeriscalledanindustryor a sector. This is a group of organisations producing the same products or services. Within industries or sectors there will be many different companies with different characteristics and competing on different bases. Similarly customers expectations are not all the same, they have a range of different requirements. So the most immediate layer of the companys environment consistsofcompetitorsandmarkets.

Figure2:Layersofthebusinessenvironment

12

2.1 Analysisofmacroenvironment
The PEST analysis is a framework that is used to scan the external macro environment in which a company operates. PEST is an acronym for the following factors: political, economic, social and technological (Appendix 2). These factors playanimportantroleinthevaluecreationopportunitiesofacompanysstrategy. Howevertheyareusuallyoutsidethecontrolofthecompanyandmustnormallybe consideredaseitherthreatsoropportunities(Johnson,2005). ThemainPESTfactorsofexternalinfluenceonVodafonesvaluearethefollowing:

Politicalfactors
Vodafoneisgenerallysubjecttoregulationsgoverningtheoperationofitsbusiness activities. Such regulations typically take the form of industry specific laws and regulations covering telecommunications services and general competition (anti trust)lawsapplicabletoallactivities. Most member states of the EU have now implemented the EU Regulatory Frameworkforthecommunicationssector,whichwasadoptedin2002.Itaimsto encourage competition in the electronic communications markets, to improve the functioningofthesinglemarketandtoguaranteebasicuserintereststhatwouldnot beguaranteedbymarketforces6. TheimpactofEUFrameworkonVodafonewassignificant.Aftermemberstatesof the EU enacted national laws implementing the EU Framework, Vodafone had to reduce its mobile phone termination rates considerably, for example: 23% in

EuropesInformationSociety,thematicportal

13 Germany (from 14.32 eurocents to 11.0 eurocents), 19% in Italy (from 14.95 eurocentsto12.10eurocents)and10.57%inSpain7. Spectrum liberalisation has been one of the key issues in mobile regulation for a number of years. At its heart is the simple proposition that markets, rather than regulators, are better placed to decide the most efficient use of the spectrum. In September 2005, the European Commission published proposals for spectrum reform across the EU, including proposals to allow holders of spectrum greater flexibilityontheusetowhichitisput,toallowholderstotradespectrumwithina spectrum market and to improve harmonisation of certain bands. The European Commissionhasproposedthatthesereformsbeenactedby20108. The initiatives concerning consumer protection might become the most important factor for the future of European mobile phone market. In February 2006, the European Commission proposed new EU Roaming Regulation, which seeks to reduce by up to 70% of the charges consumers have to pay for using their mobile phoneabroad9.Theseproposalscameintoforceon30June2007. The regulation requires mobile operators to offer a Eurotariff under which the cost of making calls within the EU is capped at 49 eurocents and the cost of receivingcallswithintheEUiscappedat24eurocents.Theregulationalsorequires thatwholesaleroamingchargeswithintheEUarecappedatanaveragerateof30 eurocentsperminutewithin2monthsoftheregulationcomingintoforceandthat operatorsprovidecertaintarifftransparencyservicestocustomerswhentheyroam. The level of the retail and wholesale caps will fall further 12 and 24 months

7 8 9

VodafoneAnnualReport,31March2006 MobileEurope:http://www.mobileeurope.co.uk/magazine/features.ehtml?o=2787 EuropesInformationSociety,thematicportal

14 following the application of the regulation. The roaming regulation will terminate after3years10.

Economicfactors
The most common indicator for measuring a nations economic activity is gross domestic product (GDP). This indicator covers the production activity of resident producers,calculatedasthesumofgrossvalueaddedfromallactivities/industries within an economy. Figure 3 shows the evolution of constant price GDP (at fixed 2000exchangerates)between1995and2008inthethreeTriadeconomiesoftheEU 27,JapanandtheUnitedStates(forecastsaremadefor2007and2008)11.

Figure3:GDPatmarketpricesinconstantprices(EURbillion,chainlinkedvolume,at2000 exchangerates)19952008

10 11

EuropesInformationSociety,thematicportal Europeanbusinessfactandfigures.Eurostatstatisticalbook,2007edition.

EU27EuropeanUnionof27MemberStates:Belgium,Bulgaria,theCzechRepublic,Denmark,Germany, Estonia,Ireland,Greece,Spain,France,Italy,Cyprus,Latvia,Lithuania,Luxembourg,Hungary,Malta,the Netherlands,Austria,Poland,Portugal,Romania,Slovenia,Slovakia,Finland,Sweden,theUnitedKingdom

15 Forthewholeofthisperiod,GDProseonaverageby2.4%perannumintheEU27, which was below the average rate of 3.1% per annum for the United States, but abovethe1.4%perannumgrowthraterecordedinJapan12(Figure4).

Figure4:RealGDPgrowthrate(%changeonpreviousyear)19972006

A mild deceleration in global growth is expected because of the U.S. economic downturnin20072008andtightercreditconditionsinglobalfinancialmarkets.The offsettingeffectsofsolidgrowthinAsiaandLatinAmerica,thanksinlargepartto resilient domestic demand growth and trade diversification, will keep world economicgrowthclosetoitspotential.Thesesamefactorsalsowillsupportgrowth inEurope,thoughataconsiderablyslowerpace.TheInternationalMonetaryFund forecaststhegrowthofGDPineuroareaasof1.25%for200913.

12 13

KeyfiguresonEurope.Eurostatpocketbook,2007/08edition MoodysEconomy:http://www.economy.com/dismal/default.asp

16 Harmonised indices of consumer prices (HICP) are used for monitoring inflation. Indeed, the European Central Bank (ECB) uses this index as a prime indicator for monetary policy management within the euro area. The ECB has defined price stability as a yearonyear increase in the HICP for the euro area of close to but below2%overthemediumterm14(Figure5and6).

Figure5:Consumerpriceindexandinflationrate,EU25,19972005

Figure6:Inflationrate

14

Europeinfigures.Eurostatyearbook200607

17 The International Monetary Fund raised its forecast for consumer price growth in euro area, which expects to remain above 3% in 2008. For 2009, the growth is forecasted to slow to below 2% by the end of the year, which the IMF believes wouldallowroomfortheECBtoeasemonetarypolicy15.

Socialfactors
TheEUandotherregionsarefacingunprecedenteddemographicchangesthatwill haveamajorimpactonmanyareasofsocietysuchassocialsystems,consumption patterns,education,andjobmarketsinthecomingdecades.Peoplearelivingmuch longer and in better health, while fertility rates have dropped. These factors have resultedintheprofileoftheEUspopulationbecomingincreasinglyolder. Eurostats trend scenario for population projections suggests that by 2050 the EU willhave15millionfewerchildrencomparedwith2005,whilethenumbersofolder peoplewillrise.By2045,theEUislikelytohaveasignificantlyhigherproportionof olderpersonsthanitsmainglobalcompetitors16(Figure7).

Figure7:Proportionofpopulationaged65andover(%oftotalpopulation)

15 16

MoodysEconomy:http://www.economy.com/dismal/default.asp Europeinfigures.Eurostatyearbook200607

18 The evolution of the EUs population is part of a wider trend, as all parts of the worldwillwitnessdemographicageingoverthenextcentury.Nevertheless,while thepopulationofneighbouringregionsinEurope,AfricaandtheMiddleEastwill starttoage,theywillcontinuetogrow,aswillthepopulationoftheUnitedStates. Despite its somewhat faster growth in recent years, the EUs population is developing at a relatively slow pace when compared with other world regions. Between1960and2005theworldspopulationmorethandoubled,risingfrom3024 millioninhabitantsto6465million.Duringthesameperiod,thepopulationofthe EUrosebyonly22.6%to461millioninhabitants,whichwasequivalentto7.1%of theworldtotal. Thefastestexpansioninworldpopulationduringthelast45yearswasreportedin the developing world, in particular, Africa, Latin America and parts of Asia. The numberofinhabitantsineachofIndia(1103million)andChina(1316million)was overabillionpersons,andtogetherthesetwocountriesrepresentedmorethanone third(37.4%)oftheworldspopulationin2005. According to United Nations forecasts, the pace at which the worlds population will increase in the coming decades is expected to slow in many regions. The proportion of the worlds population living in more developed regions including theEU,Japan,theRussianFederationandtheUnitedStateswillfallbetween2000 and 2050 from 19.6% to 13.6%. Less developed regions of the world, including Africa and Latin America are expected to account for the majority of the worlds populationgrowthinthenext45years17.

17

Europeinfigures.Eurostatyearbook200607

19

Technologicalfactors
Research and development (R&D) is a driving force behind economic growth, job creation,innovationofnewproducts,andincreasingqualityofproducts. R&D intensity for the EU showed a positive evolution in the six years up to 2003. However, when compared with the United States and Japan, the EU lags behind (Table1).GrossdomesticexpenditureonR&D(GERD)intheEU25wasequivalent to1.9%ofGDPin2005;thisproportionrosetoover3%injusttwooftheMember States, namely, Finland and Sweden18. One structural weakness often cited in relation to Europes research effort is the lack of business financed research. Business enterprise R&D accounted for over 2% of GDP in Japan and the United States,whilethecorrespondingproportionfortheEU25in2004was1.2%.

Table1:GrossdomesticexpenditureonR&D(%ofGDP)

Government budget appropriations or outlays for research and development (GBAORD) are the amount governments allocate towards R&D activities. Comparisons of GBAORD across countries give an impression of the relative importance attached to statefunded R&D. In 2005, GBAORD, expressed as a percentageofGDP,amountedto1.06%,0.74%and0.71%fortheUnitedStates,the EU25andJapanrespectively19.

18 19

Europeinfigures.Eurostatyearbook200607 Science,technologyandinnovationinEurope.Eurostatpocketbook,2007edition

20

2.2 Analysisoftelecommunicationsindustry

Figure8:Portersfiveforcesmodel

Porters five forces analysis is a framework that is usually used for the industry analysis and business strategy development. It derives five forces (Figure 8) that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. Porter (1979)referredtotheseforcesasthemicroenvironment,tocontrastitwiththemore general term macroenvironment. They consist of those forces close to a company thataffectitsabilitytoserveitscustomersandmakeaprofit.Achangeinanyofthe forcesnormallyrequiresacompanytoreassessthemarketplace. In the following analysis, the attractiveness of the European telecommunications industrywillbeexaminedbyelaboratinguponPorters(1979)fiveforcesmodel.

Buyers
The main factor that have marked recent developments in the mobile services market is the enlargement of subscriber bases in the developing economies, particularlyinthemajoremergingmarketsbutalsointheindustrialisedcountries, despitealreadyhighpenetrationrates.

21 Duringtheperiod20022006mobilesubscriberbasesexpandedatanannualrateof 2126%. The number of mobile subscribers passed the 2billion mark during 2005 andthe3billionmarkduring200720. A large part of the increase in the subscriber base is fuelled by the developing countries.Bytheendof2007,70%oftheworldsmobilesubscribersarefoundina developingcountry,comparedwith50%atyearend2003(Figure9).In20062007, these countries generated nearly 90% of the net increase in the worldwide subscriber base. Particularly strong growth is displayed by the major emerging economies of Asia (China, India, Indonesia, Pakistan), Latin America (Brazil, Colombia) Europe (Russia, Ukraine, Turkey) and Africa (South Africa, Algeria, Nigeria).

Figure9:Regionalmobiledensity,2003/2007numberofmobilesubscribersper100inhabitantsat yearend

Inthematuremarketsoperatorsfacefiercecompetitionandconsumerdemandfor morefeatures,minutesandtexts,forlessmoney.Thisleadstocompaniestryingto cutcostsandtransferthesebenefitsintheformofpricecutstoconsumers.Buyers are becoming increasingly sophisticated and make use of the wider range of servicesthatmobileoperatorshavetoofferincludingbroadband,dataavailability, MMS and 3G. Yet, prepaid customers already account for 63% of active mobile users and, despite operator efforts to convert them to contract subscriptions, this

20

IDATE,Mobile2008

22 will remain a substantial segment of the mobile market for at least the next five yearsrestrainingtheexpenditureofconsumersasopposedtocontractsubscriptions (SalanaveandKalmus,2007).

Rivalry
AstheEuropeantelecommunicationsmarketishighlysaturatedandregulated,itis characterizedby highlevelsofcompetition,whereasthe situationintheemerging market is more favourableforVodafone. TelefnicaO2, TMobile, Orange and 3 arethemaincompetitorsofVodafoneinthetelecommunicationsmarket. 1. TelefnicaO2: Telefnica is originally a Spanish company with affiliates in 19 countries and operateswithbothfixedandmobilelines.Itisatelecommunicationscompanywith more than 140 million customers in total. From that 93.5 million customers worldwide are customers of mobile branches of Telefnica company. Its most important regions are Spanishspeaking countries, i.e. Spain and South America, and some other European countries where it operates as Telefnica O2 United Kingdom,Germany,Ireland,CzechRepublic,andSlovakia21. 2. TMobile: The company has strongly increased its presence within the European area. T Mobile has 12 direct and indirect shareholdings in mobile communications companiesworldwide.TheGroupisthesoleormajorityshareholderinGermany, the United States, the United Kingdom, Austria, the Netherlands, the Czech Republic and Poland. It also has a stake in telecommunications companies in

21

Telefonicawebsite:http://www.telefonica.es/acercadetelefonica/eng/

O2website:http://www.o2.com/

23 Hungary,Croatia,Slovakia,MacedoniaandMontenegro.TMobilehasaround120 millioncustomersattheendof2007.EventhoughismorelikelyEuropeanoriented company,itsUSbranchisgrowingveryrapidly22. 3. Orange: Orange is the key brand of France Telecom, one of the worlds leading telecommunications operators. France Telecom serves more than 172 million customersinfivecontinentsasofMarch 31,2008,ofwhichtwothirdsareOrange customers23. 4. 3 3, a new European competitor, has recently entered the European market, intensifyingcompetitionfurther.Thestrategypursuedisoneoflowpricesanditis expected to remain unchanged for the next couple of years. At the same time, the company has been offering innovative services such as the Dual Download, allowingcustomerstodownloadatunebothontheirmobileandtheirPC24. Inadditiontotraditionalcompetition,tariffrateshavebeenhighlydrivenbythe emergenceofanalternativemobilebusinessmodel:MobileVirtualNetworkOperator. The term Mobile Virtual Network Operator defines a company that offers mobile services without actually possessing any frequency allocation and which is financially very dependent on its host Mobile Network Operator25. Their appearance wastriggeredbythemarketsaturationandtheincreasedeffortofsupplierstofind alternative outletstoreachthefewremainingpotentialconsumers.Theregulatory

22 23 24 25

TMobilewebsite:http://ghsinternet.telekom.de/dtag/cms/content/TMOI/en/343728 Orangewebsite:http://www.orange.com/en_EN/group/ 3website:http://www.three.co.uk/aboutus/newkind.omp IDATE,Mobile2007

24 framework has also been favourable for their development26. Increasing further competition, their development inevitably has resulted in a further fall in the AverageRevenuePerUser(ARPU). What is also interesting within the European telecom business is that the market caution towards the sector has prompted low valuations and this, in turn, has resultedinaveryhighnumberofmergersandacquisitions.IthasproducedM&A activityofnolessthan100billionsince2005(SalanaveandKalmus,2007).

Substitutes
The increasingly vague scope of the market boundaries has drawn considerable interest within the industry. Fixedmobile line conversion is a real future prospect for network operators. Research shows that the total number of fixed lines fell by 1% in 2004 and by 1.8% in 2005. One of the main driving forces of this change is their substitution by mobile service. A survey by the European Commission indicatesthatwithinEurope5countries,15%ofthehouseholdsaremobileonly27.

Figure10:MobileonlyhouseholdsinEurope,end2005

26 27

IDATE,Mobile2007 SalanaveandKalmus,IDATE,Consulting:TelecomsinEurope2015AreportfortheBrusselsRoundTable

25 Thesefindingsallpointtowardsthepossibilityofanewerawhereconsumerswill becompletelymobileaprospectthatishighlyattractivetomobileoperators. Atthesametimethough,InternetcallingservicesthroughVoIPsuchasSkypeare experiencing enormous growth. A wave of concern arose in 2005 and is still ongoing.Skypeessentiallyoffersinternationalcalling atthepriceofnationalcalls. EventhoughSkypesmarketshareisstilllowwithonly3%onapayingschemeand 1% of global paying international traffic according to Salanave and Kalmus(2007), itsinitiativeisexpectedtotriggerareactionandanimitationpatternthatwillcause furtherpricepressurewithintelecommunicationsindustry.

Entrants
Newinitiativesfromoutsidersarenotlikelyinanindustrythatishighlyregulated and protected by significant barriers to entry and high initial fixed cost requirements. Yet the increasing interdependence between mobile network operatorsandonlineentertainmentproviders(music,video,datadownloads)leads toaredefinitionoftheindustryboundaries.Inthelongrun,communicationsusage and purchases will be increasingly intertwined with those of other digital goods. ThisisalreadyhappeningnowwithVoIP28,cablecosandInternetaccessproviders (who)arenowaddressingthetraditionalfixedvoicemarketoftheincumbentsand plan to enter the mobile voice segment as MVNOs. Making the opposite move, incumbents are pushing TV through their IP pipes, and mobile carriers have introducedmobileTVthrough3G.Asamajordriverintheindustry,fixedmobile convergence (FMC) will increasingly drive fixed and mobile carriers to the same battlefield29.

28 29

VoiceoverInternetProtocol:ThetechnologythatallowsvoicecommunicationthroughtheuseoftheInternet SalanaveandKalmus,IDATE,Consulting:TelecomsinEurope2015AreportfortheBrusselsRoundTable,

p.68

26 Simultaneously, retailers are entering the business in the form of the virtual operatornetwork concept,leveragingontheirdistribution channel andcompeting on commodity services. Even though at present the effect of this complementary services competition has not had a substantial effect on the market, its effect is expectedinthelongrunastheyredefinetheofferings,raisingthestandardsforall players.

Suppliers
In the context of the mobile network operators market, the concept of suppliers should be redefined indicating the providers of mobile devices, but also the providersofnetworkinfrastructure,softwareandadditionaldigitalservices.While itisveryimportantfornetworkoperatorstosustainacloserelationshipwithdevice providers,therehasbeenashifttoincreaseindependence.Indicatively,Vodafones global presence means it has significant purchasing power allowing it to secure exclusive deals with phone manufacturers. Yet it is known in the industry that Vodafone is keen to develop its own, branded phones in an attempt to break the power of Nokia on the phone market, thus at the same time reducing the firms dependenceandmakingitsofferingsmorecomplete.

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2.3 SWOTAnalysis
Strengths
INTERNAL Leadershipposition Globalbrandstrength Highgeographicalreach

Weaknesses
Centralisedcontrollow flexibility Highcustomerchurnrates

Opportunities
EXTERNAL Expandingmarket boundaries Growththrough3G Strategicalliances

Threats
Increasedcompetition MarketsaturationinEurope EmergenceofLowCost Brands/MVNO

Figure11:VodafoneSWOTanalysis

Stregths
The main strength of Vodafone within the telecommunications market lies in its brand image and recognition. Vodafone, having established a global presence and having invested highly in marketing a differentiated image by promoting a Vodafone life style, currently enjoys a differentiating advantage that, if exploited properly,canofferaleadincompetition. The presence of Vodafone in numerous countries within Europe as well as in all partoftheworldenhancesthisimage.Itallowscustomerstotravelandenjoyeasily the services of their home country operator. In the few countries that Vodafone is notphysicallypresent(e.g.Norway)ithaswellestablishedstrategicallianceswhich allowforabetterserviceofmobileclients.

28

Weaknesses
TheexpansionofVodafonehasbeencompletedattheexpenseofdirectcontrolof its operations. The company grew through a process of acquisitions of national telecommunications companies (e.g. the acquisition of the third biggest Czech mobile phone operator, Cesky mobile) rather than organic growth. This increased its subscribers base quickly, offering direct market knowledge and immediate additions of customer bases at the expense of direct effective control of the subsidiaries. At the same time though, it implicitly imposed a centralised operationalstructureforthegroup,nominatingtheUKheadquartersastheleading business unit running a much centralised marketing and handset procurement at grouplevel.Thishasresultedintheneglectoflocalmarketsandlocaldifferences, allowingmarketsharetobegainedbysmallerlocalcompetitors30.Duetothehighly saturated Western European market this has resulted in an increase in the price elasticity of demand, with consumers becoming continuously price oriented. This has resulted in high customer churn rates reaching the level of 32.8% in the UK comparedtoO2s24%31.

Opportunities
The telecommunications market, even though highly saturated in some regions offers great potential due to the ageing population and the sophistication of the consumers.Itoffersgreatopportunitiesthroughacarefulmarketsegmentationand exploitation of particular profitable segments. Different strategies should be pursuedsimplephonesandsimplifiedpricingplanstotheageingpopulationand more updated, sophisticated solutions for younger generations. The expanding boundariesofthemarketcouldprovidefurtheropportunitiesbyallowingVodafone

30 31

Telegraph:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/30/ccvoda30.xml Telegraph:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/30/ccvoda30.xml

29 toentermoreaggressivelyintofixedlineserviceandtobetterenjoythebenefitsof itshighinvestmentin3Gtechnology. Moreover the company has undertaken its first steps in establishing strategic alliances to develop customised solutions for endusers: Vodafone recently announcedtwonewpartnerships,onewithsupermarketgroupASDAtolaunchan ASDAbranded mobile service in the UK, and another with electrical retailer DSG Internationaltoprovidemobilesolutionstosmallbusinesses32.Thiscouldfurtherbe enhanced to avoid being a lateentrant in this new method of distribution which offersaccesstoawidepotentialcustomerbase.

Threats
TheEuropeanpartofVodafonesmarketischaracterisedbyexistinghighlevelsof competition. Major brands such as O2 and TMobile are exploiting the price sensitivity of customers and in this way they are building a stronger image and presenceinthemarket.Indirectcompetitionisalsoincreasingfurther,throughthe presence of Skype and other related (not only voice) Internetbased services. This, combined with the upcoming European legislative measures is expected to limit further the tariffs for the network providers imposing further need for price cuts whichcouldharmthebottomlineprofitabilityofthecompany.

32

Reuters:http://www.reuters.com/article/technologymediatelcoSP/idUSL3014013720070330?pageNumber=1

30

3. Companyvaluation
Valuation plays a key role in many areas of finance in corporate finance, in mergersandacquisitionsandinportfoliomanagement.Iftheobjectiveincorporate finance is the maximization of firm value, the relationship between financial decisions,corporatestrategyandfirmvaluehastobespecified,asthevalueofthe firmcanbedirectlyrelatedtodecisionsthatitmakesonwhichprojectsittakes,on howitfinancesthem,andonitsdividendpolicy.Valuationalsoplaysacentralrole inacquisitionanalysis.Thebiddingfirmorindividualhastodecideonafairvalue for the target firm before making a bid, and the target firm has to determine a reasonablevalueforitselfbeforedecidingtoacceptorrejecttheoffer.Therolethat valuationplaysinportfoliomanagementisdefinedbytheinvestmentphilosophyof the investor. Valuation plays a minimum role for a passive investor, whereas it playsalargerroleinportfoliomanagementforanactiveinvestor.

3.1 ValuationModels
Damodaran (2002) distinguishes three general valuation methods. The first is intrinsic or discounted cash flow valuation, where the value of a firm or asset is estimatedbydiscountingtheexpectedcashflowsbacktothepresent.Thesecondis relativevaluation,wherethevalueofafirmisestimatedbylookingatthewaythe market prices similar firms. The third is contingent claim valuation, which uses option pricing models to estimate the value of an asset that share option characteristics. These models were initially designed to value traded options, but latelyareappliedalsointraditionalvaluationtopriceassetswithoptionfeatures likepatentsorundevelopedreserves.

31

DiscountedCashflowValuation
Whenvaluingabusiness,thediscountedcashflowvaluationcanbeusedinoneof twoways.First,onecandiscounttheexpectedcashflowtoequityinvestorsatthe costofequitytoarriveatthevalueofequityinthefirm;thisisequityvaluation.
Value of Equity =
t =1 t =

Expected Cashflow to Equity in period t (1 + Cost of Equity) t

Adopting the narrowest measure of the cash flow to equity investors in publicly traded firms gives us a special case of the equity valuation model the dividend discountmodel.Abroadermeasureoffreecashflowtoequityisthecashflowleft after capital expenditures, working capital needs, and debt payments have been made;thisisthefreecashflowtoequity. Secondly,onecandiscountthecashflowsgeneratedforallclaimholdersinthefirm, debtaswellasequity,attheweightedaverageofthecostsdemandedbyeachthe costofcapitaltovaluetheentirebusiness.
Value of Firm =
t =1 t =

Expected Free Cashflow to Firm in period t (1 + Cost of Capital) t

Ascashflowscannotbeestimatedforever,simplificationisusedforbothequityand firm valuation models: estimate cash flows for only a period and then estimate a terminalvalueattheendofthatperiod.Applyingthistothefirmvaluationmodel wouldyieldthefollowing:

32
Value of Firm =
t =1 t=N

Expected Cashflow to Firm t Terminal Value of Business N + t (1 + Cost of Capital) (1 + Cost of Capital) N

Although a variety of approaches exist in practice, the most consistent with a discounted cash flow method for estimating the terminal value is based on the assumption that cash flows will grow at a constant rate beyond year N33, so the terminalvaluecouldbecalculatedasfollows: Terminal Value of Business Indiscountedcashflowmodels,theeffectofriskisusuallyisolatedtothediscount rate. In equity valuation models, the cost of equity becomes the vehicle for risk adjustment,withriskiercompanieshavinghighercostsofequity.Ifthecapitalasset pricing model is used to estimate the cost of equity, the beta carries the entire burdenofriskadjustment.Infirmvaluationmodels,morecomponentsareaffected by risk. The cost of debt also tends to be higher for riskier firms, and these firms oftencannotaffordtoborrowasmuchleadingtolowerdebtratios. Thecashflowsindiscountedcashflowmodelsrepresentexpectedvalues,estimated either by making the most reasonable assumptions about revenues, growth, and margins for the future or by estimating cash flows under a range of scenarios, attaching probabilities for each of the scenarios and taking the expected values acrossthescenarios.
t=N

Expected Chashflow in year N + 1 (Cost of Capital - Constant Growth Rate)

33

Damodaran(2002)

33

RelativeValuationModels
In relative valuation models, stock is valued based on how similar companies are pricedbythemarket.Inpractice,relativevaluationstaketheformofamultipleand comparablefirms;afirmisviewedascheapifittradesat10timesearningswhen comparable companies trade at 15 times earnings. The main problem lies in the definition of comparable firms and how analysts deal with the differences across thesefirms. Therearethreebasicstepsinrelativevaluation.Thefirststepispickingamultiple to use for comparison, which could be categorized into four groups: Multiples of earnings, Multiples of book value, Multiples of revenues and Multiples of sector specificvariables. The second step in relative valuation is the selection of comparable firms. A comparable firm is one with cash flows, growth potential, and risk similar to the firmbeingvalued. The last step in the process is the comparison of the multiple across comparable firms. Because it is impossible to find firms identical to the one being valued, the waysofcontrollingfordifferencesacrossfirmsonthesevariableshavetobefound. Inmostvaluations,thispartoftheprocessisqualitative. According to Damodaran (2002) risk adjustment in relative valuation can range frombeingnonexistenttobeinghaphazardandarbitraryatbest.Initsnonexistent form,analystscomparethepricingoffirmsinthesamesectorwithoutadjustingfor risk,makingtheimplicitassumptionthattheriskexposureisthesameforallfirms in a business. Relative valuations that claim to adjust for risk do so in arbitrary ways. Analysts will propose a risk measure, with little or no backing for its relationshiptovalue,andthencomparecompaniesonthismeasure.Theywillthen followupbyadjustingthevaluesofacompanythatlookriskyonthismeasure.

34

3.2 VodavoneValueCalculations
The discounted cash flow model is chosen for Vodafone valuation, moreover predictionandcalculationofthevalueofentirebusinessunderthreescenarioswill be performed. The DCF scenario model gives the most details about the company development, but this approach relies heavily on detailed information about the company itself and its market and might be hard to achieve in countries with limiteddisclosurepractices.

Costofcapital
Firmsraisemoneyfrombothequityinvestorsandlenderstofundinvestment.Both groups of investors make their investments expecting to make a return. The expectedreturnforequityinvestorswouldincludeapremiumfortheequityriskin theinvestments;thisexpectedreturnisthecostofequity.Theexpectedreturnthat lendershopetomakeontheirinvestmentsincludesapremiumfordefaultrisk,and whichiscalledtheexpectedreturnthecoatofdebt.Ifonetakesintoconsideration all the financing that the firm takes on, the composite cost of financing will be a weightedaverageofthecostsofequityanddebt,andthisweightedcostisthecost ofcapital. CostofEquity AcommonlyusedCapitalAssetPricingModel(CAPM)statesthatfirmsexpected returnonequity re isgivenas

re = r f + (rm r f )

35
where

rf

istheriskfreerateofreturn

rm istheexpectedreturnonthemarketportfolio

is the firms beta which measures the correlation between the firms
returnsandthemarketsreturns. TheRiskfreeRate The riskfree rate is the expected return on a riskless asset, and it is known with certainty for the time horizon of the analysis. The duration of the default free securityusedasariskfreeassetshouldmatchtothedurationofthecashflowinthe analysis.AstheriskfreerateIwillusethe5yearsUStreasurybondyield,whichis 3.42%34. TheRiskPremium Thedifferencebetweentheexpectedreturnonthemarketportfolioandtheriskfree rate

(rm rf )

iscalledtheriskpremium.AccordingtoDamodaran(2002),inpractise

oneusuallyestimatestheriskpremiumbylookingatthehistoricalpremiumearned bystocksoverdefaultfreesecuritiesoverlongtimeperiod,despitethefactthatthe best estimate of the risk premium would be forward looking. Several issues arise whencalculatinghistoricalriskpremiums:

Firstly,thereisthequestionofwhichtimeperiodtouse.Usingalongperiod of time, say 50 years, yields a standard error of the risk premium of 2.8%, while a shorter period of 10 years yields a standard error in excess of 6%.

34

Yahoo!Financewebsite:http://finance.yahoo.com/bonds

36
However, using a long period ignores the fact that the risk aversion of the averageinvestormighthavechanged.

Secondly,thereisthechoiceofwhatriskfreesecuritytouse,treasurybonds or bills. If the yield curve is upward sloping, as it has been for most of the pastdecades,theriskpremiumwillbelargerusingbillsthatbonds.

Thirdly,onehastochoosebetweenageometricandanarithmeticcalculation method.Damodaran(2002)arguesfortheuseofarithmeticaverages,stating that it will yield the best unbiased estimate given that annual returns are uncorrelatedovertime.

As a risk premium I use the spread suggested by Damodaran35 as the average spreadfortheWesternEuropemarketof5.2%. TheBeta Therearetheeapproachesavailableforestimatingthebeta:

Usehistoricaldataonmarketpricesforindividualinvestments Estimatethebetaformthefundamentalcharacteristicsoftheinvestment Useaccountingdata

Usingthefirstapproach,themarketbetaofasecurityisdeterminedbyregression of returns on the investment against returns on a market index, where the slope coefficientoftheregressionisthebetaofthestock. WhileapplyingdirectregressionofVodafonesreturnsovertheS&P500index,the betais1.06(Figure12).

35

Damodaranwebsite:http://pages.stern.nyu.edu/~adamodar/

37

RegressionBetaforVodafone

0.25 0.2 0.15 0.1 Vodafone 0.05 0 0.15 0.1 0.05 0.05 0 0.1 0.15 0.2 0.25 S&P 500 0.05 0.1 S eries1 Linear(S eries1) y=1.0676x+0.008 R2 =0.2375

Figure12:RegressionBeta Although this approach is relatively straightforward, the regression betas have a problemofhighstandarderrors. Fundamental beta should be more accurate estimate of the market risk for the company, because it takes into account the current or desired structure of the company.Itisdeterminedbythreevariables:

Thetypeofbusiness Theoperatingleverageofthecompany Thefinancialleverageofthecompany

The challenges with this approach are to define comparable firms, to choose an averaging method and to control for differences in business risk and operating leverage.

38
ForestimatingtheVodafonesbetaIhavechosenthefollowingtelecommunications companies: Telefonica AS, Deutsche Telekom and France Telecom. The bottomup approach of calculating beta requires to unlevel the average beta of comparable firms by their average debt to equity ratio; and relever again the beta of the companybeingvaluated.

Unlevered Beta =

Beta (1 + (1 - tax rate )(D/E ratio))

Applying the average tax rate of 39.88% and debt to equity ratio of 60.34% to the above formula, the calculated unleveredbetais1.46. Furtherapplyingthe taxrate anddebttoequityratioofVodafone,Ireceiveabetaof1.69(Appendix3). OtherdatabasesprovideanotherbetaforVodafone.ThusBloombergsbetais1.55, whileYahoo!Financegivesthebetaof1.31. For further calculation of weighted average cost of capital for Vodafone, I use the averagebetweenthesefourbetas,whichis1.40. Data Regressionbeta Fundamentalbeta Bloombergbeta Yahoo!Financebeta Average
Table2:Vodafonebetas

Beta 1.06 1.69 1.55 1.31 1.40

39
Costofdebt Thecostofdebtmeasuresthecurrentcosttothefirmofborrowingfundstofinance projects.Ingeneralterms,itisdeterminedbythefollowingvariables:

The riskfree rate. As the riskfree rate increases, the cost of debt for firms willalsoincrease.

The defaultriskof the company.Asthe defaultriskof afirmincreases,the costofborrowingmoneywillalsoincrease.

The tax advantage associated with debt. Since interest is tax deductible, the aftertaxcostofdebtisafunctionofthetaxrate.Thetaxbenefitthataccrues frompaying interestmakes theaftertaxcost of debt lowerthanthepretax cost.Furthermore,thisbenefitincreasesasthetaxrateincreases.

ThespreadsheetfromDamodaranswebsite36allowsestimatingthecostofdebtfor Vodafone,whichis5.78%(Appendix4). WACC Sinceafirmcanraiseitsmoneyfromequityanddebt,thecostofcapitalisdefined as the weighted average of each of these costs. The cost of equity reflects the riskiness of the equity investments in the firm and the aftertax cost of debt is a function of the default risk of the firm. The weights on each of these components shouldreflecttheirmarketvalueproportions,sincetheseproportionsbestmeasure howtheexistingfirmisbeingfinanced.

WACC =

E D re + rd (1 TC ) V V

36

Damodaranwebsite:http://pages.stern.nyu.edu/~adamodar/

40
While the market value of debt is assumed to be approximately equal to it book value,whichis22,615mln.Themarketvalueofequityiscalculatedbymultiplying the share price of 135.2p by the number of shares 58,085,695,29837. Using these numbersaswellasCorporateTaxRateof25%,IarriveatWACC=9.28%(Appendix 5).

NormalizedCashFlows
Financial statements remain the primary source of information for most investors and analyst. There are differences, however, in how accounting and financial analysisapproachesinterpretanumberofkeyquestionsaboutthefirm. Theoperatingincomethatisusedasabaseforprojectionsshouldreflectcontinuing operations and should not include any items that are onetime or extraordinary. Thus, the operating profit before interests, taxes, depreciation and amortization (EBITDA)shouldbeadjustedandnormalizedforthefollowingitems:

Gains/lossesfromsalesofassets,oneoffgains/losses,thatarenotexpectedin thefutureornotformoperatingcoreassets

Nonrecurring, restructuring gains/losses, that should not be expected to happenregularly

Normalizedaccruals(baddebt,writedownofinventory,provisions) Income from sold businesses or badwill, as income form purchased businesses

Financialpartofpensioncosts

Normalized cash flow to the firm is also should be deducted for reinvestments. Therearetwocomponentsinthereinvestmentpart:

37

VodafoneAnnualReport,31March2007

41
Net capital expenditures, which is the difference between capital expendituresanddepreciation

Investmentsinnoncashworkingcapital.

Theestimatingofnetcapitalexpendituresrequiresdeductionofdepreciationfrom capital expenditures. The reason is that the positive cash flow from depreciation paysforaportionofcapitalexpenditures,andthatitisonlytheexcessthatfirms cashflowshavetocover. The second component of reinvestment is the cash that need to be set aside for working capital needs. Increase in working capital tie up more cash and hence generatenegativecashflows.Conversely,decreasesinworkingcapitalreleasecash and positive cash flow. Working capital is usually defined as difference between accounts receivables, inventory and accounts payable, taxes payable, employee accruals. The last component to be considered is the effective tax rate. After deducting the normalized cash flows for the tax part, one gets normalized operating cash flows aftertax,whichcouldbedirectlyusedindiscountedcashflowmodels. Asthemaingoalistofindtheequityvalueofthecompany,theremainingstepisto adjusttheenterprisevaluetothemarketvalueoffinancialassets/debt:

Addexcesscash/bankdeposits Addvalueofshares,bonds Addinvestmentsinassociatedcompanies/longterminvestments Addotherfinancialassets,notincludedinoperatingincome Subtractshortterminterestbearingdebt(loans,bonds) Subtractnetpensionliabilities Subtractdeferredtaxassets/debt Subtractmarketvalueofminorityinterest

42
ThefollowingassumptionsandadjustmentstoVodafonefinancialstatementswere madeinordertogettheestimateforVodafoneexpectedcashflowsduringnextfive years:

The consolidated Income Statement of the company for the financial year 2007showstheincreaseof6%inrevenuesofthecompanycomparedtothe financial year 2006. This increase can be attributed to the 41.4% increase in revenues of the EMAPA region, while the Europe region has a decrease of 0.6% in revenues compared to previous year (Note 3 to 2007 consolidated financialstatements).Allrevenuesaregeneratedbycontinuingoperationsof thecompanyanddonotrequireanyadjustments.

Costofsaleshasshownafairlystableproportionoftherevenueswithinlast yearswith60.2%oftherevenuesin2007and58.2%in2006.AsVodafoneisa maturecompany,Iassumethatthecurrentstructureofthecompanysfixed assetsisusedatoptimum,soanygrowthinrevenuesshouldbefollowedby similar increase in the infrastructure, in away that the level ofcost of sales wouldbeconstantwith60%oftherevenues.

Selling/distribution expenses and administrative expenses also had constantproportionoftherevenues:6.4%and11.6%oftherevenuesin2006 and6.9%and11.1%in2007.Theimplementationofthelongtermcorecost reduction programmes, which were announced in 2006, will lead to cost savings within next five years and as the result it could be assumed a constant level of these expenses in the revenues as of 6.6% for selling/distributionexpensesand11.3%foradministrativeexpenses.

As the share of result in associated undertakings should be taken only operating profit, excluding other nonoperating income and expanse, so the adjustednumbersare3,133mlnfor2006and3,390mlnfor2007(Note14to 2007consolidatedfinancialstatements),whichis16.5%oftherevenues.

43
Impairment losses and other income and expense are onetime or extraordinaryitems,sotheyhavetobeexcludedfromthecalculations.

Additional adjustments to the operating profit of 4,774mln in 2006 and 5,188mln in 2007 consist of depreciation of property, plant and equipment and amortization of intangible assets (Note 4 to 2007 consolidated financial statements),aswellasafinancialpartofpensioncosts(Note4,25and34to 2007 consolidated financial statements). The average level of additional adjustmentsintherevenuesof16.5%willbeusedinfuturecalculation.

Normalizedinvestmentsistheaverage, normal investmentlevel needed to keep the current property, plant and equipment and intangible assets on todayslevel.AftercarefulexaminationofVodafoneinvestmentsduringlast threeyears(Note13,14and15to2007consolidatedfinancialstatements)the level of normalized investments in the revenues assumed to be 30%. Such level could be explained by Vodafones strategy of expanding and gaining newcustomersmainlythroughacquisitionsintheemergingmarkets,which requireshighlevelofinvestments.

The level of working capital, as well as the change in working capital, is negative duringlastthreeyears.A firm thathasa negative workingcapital is, in a sense, using supplier credit as a source of capital, especially if the negativeworkingcapitalbecomeslargerasthefirmbecomeslarger,asinthe casewithVodafone. However,inthelong term itis notlikelythatnoncash working capital will become more and more negative over time. I assumed thatVodafoneschangeinworkingcapitalwillincreasewith20%everyyear, inordertoarriveatapositivenumber.

Theeffectivetaxrateisassumedtobe25%. Theleveloffinancialassets/debtiscalculatedasof19,977mln.

44

ValuewithDiscountedCashFlowScenarioapproach
DrawingfromtheanalysesofVodafoneanditsenvironment,themajorinfluencing risks,thatwillbethemostcriticalintermsofthefutureprofitabilityandhencethe valueofthecompanyindifferentscenarios,arethefollowing:

3Gmarkettakeup Fixedmobilelinesubstitution Regulation

Theobjectiveofthefollowinganalysisisnottodeterminethemostprobablefuture for the mobile network operations sector. Instead, the intention is to stress the differentunderlyinganduncontrollablerisksandtoexaminetheirinfluenceonthe valueofthecompany. Inthefollowingpart,threepotentialscenariosforthefutureoftheindustryandits immediate implications on the policy and profitability of Vodafone will be examined. DownsideScenario This scenario represents the downturn development of the company due to the followingreasons. First, Vodafone fails to engage in 3G market: consumers are put off by the complexityoftheservice,thedesignofthephoneandthehightariffs.Atthesame time,fixedlinenetworksexpandfurtherduetothegreateravailabilityofInternet based providers. Moreover, there is high level of regulation with the purpose of increasingthegenericcompetitionwithintheindustryforthebenefitofconsumers. Increases in the use of Skype and other internetbased competitors decrease the poweroftheconventionalnetworkprovidersandincreasepricepressure.

45
Overall, the above scenario demonstrates an adverse situation for the whole telecommunications industry, as well as for Vodafone and its competitors. Low price level determines a poor growth in revenues, which could be assumed of 5% duringnextfiveyearsand2%inperpetuity. Thoseassumptionsresultintheequityvalueof52,792mln(Appendix6). In order to check how vulnerable the estimated value is to errors in inputs I have conductedsensitivityanalysisoftheequityvaluetowardstheWACCestimateand thelongtermgrowthrate(Table3).Thehighlightedvaluesshowtherangewithin whichthecompanyiscurrentlytraded. Longterm growth 1%
16320 18972 22035 25610 29837 34913 41121 48885 58873 72195

EquityValue52792 16% 15% 14% 13% 12% 11% 10% 9% 8% 7%

2%
17656 20581 23996 28031 32876 38797 46201 55721 68417 86194

3%
19196 22458 26313 30938 36589 43652 52732 64836 81779 107191

4%
20994 24677 29094 34490 41231 49894 61439 77596 101823 142187

5%
23118 27339 32493 38930 47199 58216 73630 96737 135228 212179

6%
25668 30593 36742 44638 55157 69868 91916 128638 202039 422153

WACC

Table3:Downsidescenariovaluesensitivityanalysis

IntermediateScenario Thisscenariorepresentsthemostlikelyoutcomeofmanagedcompanyinthefaceof theopportunitiesoffered. The 3G market enjoys noticeable takeup. Consumers are attracted to the new services offered, Vodafone, having invested substantial amounts on the developmentof3Ginfrastructure,gainsacompetitivefootholdintheindustry.The substitutionoffixedlinesbymobileservicescontinuesandisfurtherreinforcedby

46
theageingpopulation.Regulationintermsofthe3Gnetworksremainsatlowlevels as the adoption of the service is gradual and providers demonstrate the need to obtain the required return on investment. At the same time, the remaining low tariffsfortheregular2Gservicessafeguardcustomerinterests. The ARPU within the saturated Western markets for 2G networks is expected to remainatthecurrentlowlevelsorevendecreasefurtherasnewtechnologies(3G) starttodominatethemarket.Atthesametime,the3Gservices,duetohighlevelsof data transfers involved, offer increase of ARPU for Vodafone. As the result a moderate growth in revenues could be predicted as of 8% during next five years and4%asaconstantgrowthrateafterwards. The WACC related assumptions remain unchanged, resulting in equity value of 84,814mln(Appendix7). The sensitivity analysis in this scenario (Table 4) shows that the company is currentlycorrectlypricediftheWACCrangesbetween6%and10%withlongterm growthratesofupto4%. Longrungrowth 2% 3% 4%
22033 25373 29272 33886 39426 46204 54682 65590 80144 100532 23802 27528 31934 37223 43691 51779 62181 76057 95489 124644 25867 30076 35127 41302 49021 58946 72181 90710 118505 164831

EquityValue84814 1% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7%

20499 23525 27021 31105 35937 41744 48849 57741 69184 84457

5%
28306 33133 39030 46401 55874 68503 86180 112690 156865 245204

6%
31234 36869 43909 52956 65012 81883 107178 149322 233586 486324

WACC

Table4:Intermediatescenariovaluesensitivityanalysis

47
UpsideScenario The third scenario represents the upward development of both the company and themarket. Substantialgrowthin3Gmarket:consumersespeciallyyoungersegmentswhich constitutethebasisofthefuturemarkettakeuptheuseof3Gandexploitthenew services despite higher prices. The fixedline network declines sharply as young consumers grow older and retain their dependence on mobile devices and do not demand fixedline service. Minimum levels of regulation regarding the mobile networksectorandhigherregulationforthenewInternetserviceprovidersbecome a reason for Skype and similar Internetbased competitors to fail to attract substantialmarketshareofthetelecommunicationsindustry. Following the most optimistic forecasts, the future growth in revenues could be predictedasof13%fornextfiveyearsand5%insucceedingyears. Theequityvalueunderthisscenariowillamountat132,534mln(Appendix8). ThesensitivityanalysisunderthisscenarioisshownintheTable5. Longrungrowth 2% 3% 4%
17656 20581 23996 28031 32876 38797 46201 55721 68417 86194 19196 22458 26313 30938 36589 43652 52732 64836 81779 107191 20994 24677 29094 34490 41231 49894 61439 77596 101823 142187

EquityValue132534 16% 15% 14% 13% 12% 11% 10% 9% 8% 7%

1%
16320 18972 22035 25610 29837 34913 41121 48885 58873 72195

5%
23118 27339 32493 38930 47199 58216 73630 96737 135228 212179

6%
25668 30593 36742 44638 55157 69868 91916 128638 202039 422153

WACC

Table5:Upsidescenariovaluesensitivityanalysis

48
Combining the tree scenarios with the appropriate probabilities, it results into equity value of 87,954mln. Provided that the assumptions on which the forecasts are based and the probability distribution are correct, the Vodafone is currently underpricedbyalmost11%. Scenario Downsidescenario Intermediatescenario Upsidescenario TotalValue Probability 0.2 0.6 0.2 Value 52792 84814 132534 87954

Table6:VodafonevalueunderDiscountedCashFlowsScenarioapproach

49

4. RecommendationsonFutureStrategy
Themaingoaloftheoptimalstrategyistocreatesustainablevalueforshareholders, considering both opportunities for benefit (upside risk) and threats to success (downsiderisk). Thevalueofafirmcangenerallybeconsideredasafunctionoffourkeyinputs.The firstisthecashflowfromassetsinplaceorinvestmentsalreadymade.Thesecond istheexpectedgrowthrateinthecashflowsduringaperiodofbothhighgrowth and excess returns. The third is the time before the firm becomes a stablegrowth firm earning no excess returns. The final input is the discount rate reflecting both theriskoftheinvestmentandthefinancingmixusedbythefirm. Cashflowtothefirm Mostfirmshaveassetsorinvestmentsthattheyhavealreadymade,generatingcash flows. To the extent that these assets are managed more efficiently, they can generate more earnings and cash flows for the firm. Isolating the cash flows from theseassetsisoftendifficultinpracticebecauseofthemixtureofexpensesdesigned togenerateincomefromcurrentassetsandtobuildupfuturegrowth. Expectedgrowthfromnewinvestments Firms can generate growth in the short term by managing existing assets more efficiently.Togenerategrowthinthelongterm,though,firmshavetoinvestinnew assets that add to the earnings stream of the company. The expected growth in operatingincomeisaproductofafirmsreinvestmentratethatis,theproportion of the aftertax operating income that is invested in net capital expenditures and changes in noncash working capital, and the quality of these reinvestments, measuredasthereturnonthecapitalinvested.

50
Afirmcangrowitsearningsfasterbyincreasingitsreinvestmentrateoritsreturn oncapitalorbydoingboth.Highergrowth,though,byitselfdoesnotguaranteea highervaluebecausethesecashflowsareinthefutureandwillbediscountedback at the cost of capital. For growth to create value, a firm has to earn a return on capital that exceeds its cost ofcapital. As long as these excess returns last, growth willcontinuetocreatevalue. Lengthoftheexcessreturn/highgrowthperiod Itisclearlydesirableforfirmstoearnmorethantheircostofcapital,butitremains arealityincompetitiveproductmarketsthatexcessreturnsfadeovertimefortwo reasons. Thefirstis thattheseexcessreturns attract competitors, andthe resulting pricepressurepushesreturnsdown.Thesecondisthatasfirmsgrow,theirlarger size becomes an impediment to continued growth with excess returns. In other words,itgetsmoreandmoredifficultforfirmstofindinvestmentsthatearnhigh returns. As a general rule, the stronger the barriers to entry, the longer a firm can stretchitsexcessreturnperiod. Discountrate Discountratereflectstheriskinessoftheinvestmentsmadebyafirmandthemixof fundingused.Byholdingconstanttheotherthreedeterminantscashflowsfrom existingassets,growthduringtheexcessreturnphase,andthelengthoftheexcess returnphaseonecanreducethediscountratetoraisethefirmvalue. In summary, to value any firm, one begin by estimating cash flows from existing investmentsandthenconsiderhowlongthefirmwillbeabletoearnexcessreturns andwhenreturnsfade,thenestimateaterminalvalueanddiscountallofthecash flows,includingtheterminalvalue,tothepresenttoestimatethevalueofthefirm. Figure13summarizestheprocessandtheinputsinadiscountedcashflowmodel.

51
Cash flows form Growth rate during

existingassets Function of both quality of past investments and efficiency with which theyaremanaged Length of period of excessreturns Reflects sustainability of competitiveadvantages Discountrate Reflects the riskiness of investmentsandfunding mixused

excessreturnphase Depends upon

competitive advantages and constraints on

growth

Figure13:Determinantsofvalue Withthese inputs, itisquiteclearthatfora firm to increaseitsvalue, it hastodo oneormoreofthefollowing.

Generatemorecashflowsfromexistingassets Growfasterormoreefficientlyduringthehighgrowthphase Lengthenthehighgrowthphase Lowerthecostofcapital

52
Currently, Vodafone is confronted with a greatly changing environment: competitionisincreasingnotonlyfromestablishedmobileoperators,butalsofrom new types of competitors; the regulatory environment remains challenging; developed markets, particularly in Europe, are maturing and delivering lower growth.Allofthesefactorsareputtingpressureoncompanysprofitabilityandits value. The following actions could constitute the strategy that will maintain strong performanceanddelivervaluetobothcustomersandshareholders: ReduceCost InordertomaintaincompetitivenessinEuropeVodafoneshouldreducetheircost structurethroughfurtheroutsourcingandexploitingtheeconomiesofscaletotheir fullest extent. Integration across the Vodafone Groups operating companies, particularlyinEurope,mighthelptomaximizethebenefitsofVodafonesscaleand scope.Atthesametime,asthesizeoftheGroupevolves,theappropriate balance between regional and global levels must be ensured for the effect of flexibility, particularlyinrespectofcentralfunctions. IncreaseRevenue Vodafone faces intensifying competition, but the focus of competition in many of the Groups markets continues to shift from customer acquisition to customer retention as the market for mobile telecommunications has become increasingly penetrated. So Vodafones aim should be to stimulate additional voice usage and substitutefixed line usage for mobile in a way that enhances both customer value and revenue. Such stimulation initiatives are expected to increase ARPU in the medium and longer term as higher usage more than offsets the reduced average revenueperminuteorpermessage.

53
This could be done through more customer friendly pricing: minute bundles that allowcustomerstotalkmoreforlonger,targetedpromotions,familyplans;aswell asimprovingnetworkservicequalitytoensurethatcustomerscanusetheirmobile phone whenever and wherever they want. Vodafone has already initiated the substitution of fixed line usage for mobile in homes through offerings such as VodafoneZuhauseinGermanyandVodafoneCasainItalyandaimstotargetoffice communications38. DevelopandOfferNewProducts In increasingly competitive local markets where value for money is an important consideration, improving use of existing products and developing a range of new offeringsforcustomerscouldhelpVodafonetocontinuetogrowtotalrevenueand delivervaluetoshareholders. Customershaveaccesstonewtechnologies,devicesandservices.Asacomplement tomobility,theywouldlikeVodafonetoprovideanumberofnewserviceswithin thehomeandtheoffice:integratedfixedandmobileservices,suchashigherspeed internet access, as well as integrated mobile and PC offerings, such as VoIP and instantmessaging.IncreaseinnonvoiceservicescouldbecomeapartofVodafone strategy to stimulateusageofitsnetworksresultingin revenue growth. However, therearehighrisksassociatedwithofferingtheseservices.Forexample,Vodafone may experience significant delays due to problems such as the availability of new mobile handsets or higher than anticipated prices of new handsets. In addition, even if these services are introduced in accordance with expected time schedules, there is no assurance that revenue from such services will increase ARPU or maintain profit margins. Holding the real option could significantly reduce such kindofrisk.

38

VodafoneAnnualReport,31March2007

54
ThisalsorelatestoVodafonessubstantialinvestmentsintheacquisitionoflicences andinitsmobilenetworks,including3Gnetworks.TheGroupexpectstocontinue tomakesignificantinvestmentsinitsmobilenetworksduetoincreasedusageand theneedtooffernewservicesandgreaterfunctionalityaffordedbyneworevolving telecommunicationstechnologies39.Failureoradelayinthecompletionofnetworks and the launch of new services, or increases in the associated costs, could have a negativeeffectonVodafoneandshouldbeprotectedbyusingrealoption. ExtendtoNewMarkets Asourceofgrowthcouldbeinemergingmarkets.Theyarelesspenetrated,sothe customergrowthistheprincipalsourceofrevenuegrowth.Gainingnewcustomers depends on many factors, including network coverage and quality, customer satisfaction,productofferingsandhandsetrangebutakeyfactorisoftenthepricing ofhandsetsandtariffs.However,thehighlevelofrevenuesinsuchmarketsisnot sustainable.Aspenetrationratesriseinamarket,competitionintensifiesalongwith a downward pressure on ARPU and result in increased acquisition and retention costs. SellUnprofitableBusinesses As the main goal of the company to generate superior returns for shareholders, Vodafoneshouldinvestintransactionsthatyieldareturnabovethecostofcapital and overall create substantial value for shareholders. Equally, it should sell businesseswhichdonotmeetperformancerequirements.

39

VodafoneAnnualReport,31March2007

55
However, no matter how good the strategy is, it still has to be implemented in practise.Asuccessfulimplementationwillrequiresomeofthefollowing:

Ahandfulofskilledmanagerswhohaveclearvisionofthestrategyandare abletoinspiretherestofthecompany;

Fast, reliable and easy way of communications within the organisation that allowstoinformeveryindividualaboutthestrategyanditschanges;

Anorganisationalculturethatproducesinnovativethinkingandastaffthat iswillingtochange.

It should be remembered that the company is a dynamic unit and operate in dynamicenvironments.Changesintheorganisationandtheenvironmentinwhich it operates (especially competitors moves) must be identified and appropriate modificationsmadetothestrategyonacontinuousbasis.

56

Conclusion
Valuation plays a key role in many areas of finance in corporate finance, in mergersandacquisitionsandinportfoliomanagement.Thevalueofthecompany canbedirectlyrelatedtodecisionsthatitmakesonwhichprojectsittakes,onhow itfinancesthem,andonitsdividendpolicy.Understandingthisrelationshipisthe keytomakingvalueincreasingdecisionsandtosensiblefinancialrestructuring. In the focus of this thesis was the value of Vodafone Group, who is operating the biggest mobile network worldwide with presence in both emerging and mature markets. Drawing from the analyses of Vodafone and its environment, the major influencing risks, that are the most critical in terms of the future profitability and hencethevalueofthecompany,werefoundasfollowing:3Gmarkettakeup,fixed mobilelinesubstitutionandlevelofregulations.TheequityvalueofVodafonewas calculatedusingthediscountedcashflowscenariomethod(87,954mln).Provided that the assumptions on which the forecasts were based and the probability distributionarecorrect,theVodafoneiscurrentlyunderpricedbyalmost11%. The following actions could constitute the strategy that will maintain strong performance and deliver value to both customers and shareholders of Vodafone Group:costreductionandrevenuestimulationinmaturemarkets,developmentof new products and services, extension to new emerging markets and selling unprofitablebusinesses. Asaconcludingremark,onehastokeepinmindthatalthoughthediscountedcash flow framework, along with other valuation models, is a quantitative tool, but the inputs leave plenty of space for subjective judgements. A mixture of financial theory, accounting methodology, industry knowledge and sound assumption was usedtoevaluatetheequityofthecompany.Astheunderlingassumptionschange, theestimatedvalueofthefirmmaychangeaswell.

57

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60

Appendix
Appendix1
Voicerevenue Messagingrevenue Datarevenue Fixedlineoperatorsrevenue Otherservicerevenue Totalservicerevenue Acquisitionrevenue Retentionrevenue Otherrevenue Totalrevenue Interconnectcosts Otherdirectcosts Acquisitioncosts Retentioncosts Operatingexpenses Acquiredintangibles amortisation Purchasedlicenceamortisation Depreciationandother amortisation Shareofresultinassociates Adjustedoperatingprofit Adjustmentsfor: Nonoperatingincomeof associates Impairmentlosses Otherincomeandexpense Operatingloss Nonoperatingincomeand expense Investmentincome Financingcosts Lossbeforetaxation Incometaxexpense Lossforthefinancialyear Lossforthefinancialyearfrom discontinuedoperations Lossforthefinancialyear

2007FinancialYearComparedto2006FinancialYear
Europe EMAPA Common Elimina Functions tions m m m m 17357 2925 1300 1397 8 22987 1004 354 247 24592 3668 1914 2604 1543 5462 22 849 2888 5 5647 11600 1 5952 5089 667 138 75 8 5969 381 21 70 6441 1045 784 677 212 1472 392 43 779 2719 3756 3 508 4267 168 168 66 206 181 1 128 7 121 70 5 10 85 12 97 85 3 9 Group Group 2007 2006 m 22376 3587 1428 1472 28871 1385 375 473 31104 4628 2761 3281 1755 6719 414 892 3848 2725 9531 m %change organic 4.7 4.3 4.2

21405 3289 1098 1290 27082 6.6 1295 448 525 29350 6.0 4463 2096 2968 1891 6166 157 947 3674 2411

9399 1.4 17 23515 15 14084 2 353 1120 14853 2380 17233 4588 21821

3 11600 502 1564 4 756 1579 2383 2423 4806 491 5297

61

Appendix2

PESTfactors,examples

Political(incl.Legal) Environmental regulationsand protection Taxpolicies

Economic Economic growth Interestrates& monetary policies

Social Incomedistribution

Technological Government researchspending

Demographics, Populationgrowth Industryfocuson rates,Age technologicaleffort distribution Labor/social mobility Lifestylechanges Newinventionsand development Rateoftechnology transfer

Internationaltrade Government regulationsand spending restrictions Contractenforcement Unemployment law policy Consumerprotection

Work/careerand Lifecycleandspeed Employmentlaws Taxation leisureattitudes oftechnological Entrepreneurialspirit obsolescence Government Energyuseand Exchangerates Education organization/attitude costs (Changesin) Competition Inflationrates Fashion,hypes Information regulation Technology Healthconsciousness Stageofthe (Changesin) PoliticalStability &welfare,feelingson businesscycle Internet safety Consumer (Changesin)Mobile Safetyregulations Livingconditions confidence Technology

62

Appendix3

VodafoneFundamentalbeta
Beta 1.35 0.85 1.13 Average 1.11 1.46 Vodafonebeta 1.69 MarketDebttoEquity 54.31% 68.85% 57.85% 60.34% 22.56% TaxRate 26.33% 34.96% 58.34% 39.88% 32.57%

TELEFONICA DEUTSCHETELEKOM FRANCETELECOM VODAFONEGROUP Unleveredbeta

Source:Bloomber,http://www.bloomberg.com/index.html?Intro=intro3

63

Appendix4

Inputsforsyntheticratingestimation
1 no 5196 1612 4.08%

Enterthetypeoffirm= Doyouhaveanyoperatingleaseorrentalcommitments? EntercurrentEarningsbeforeinterestandtaxes(EBIT)= Entercurrentinterestexpenses= Entercurrentlongtermgovernmentbondrate=

Output

3.22 A 1.70% 5.78% Spreadis D C CC CCC B B B+ BB BB+ BBB A A A+ AA AAA

Interestcoverageratio= EstimatedBondRating= EstimatedDefaultSpread= EstimatedCostofDebt= Forlargemanufacturingfirms Ifinterestcoverageratiois > 100000 0.2 0.65 0.8 1.25 1.5 1.75 2 2.25 2.5 3 4.25 5.5 6.5 8.50 to 0.199999 0.649999 0.799999 1.249999 1.499999 1.749999 1.999999 2.2499999 2.49999 2.999999 4.249999 5.499999 6.499999 8.499999 100000 Ratingis

20.00% 12.00% 10.00% 7.50% 6.50% 5.65% 4.50% 3.65% 3.20% 2.50% 1.70% 1.50% 1.40% 1.25% 0.75%

Source:Damodaranwebsite:http://pages.stern.nyu.edu/~adamodar/

64

Appendix5
rf rmrf E D V=D+E D/V E/V Tc re rd WACC

WACCcalculations
3.42% 5.20% 1.4 78532 22615 101147 0.22 0.78 25% 10.70% 5.78% 9.28%

riskfreerate riskpremium beta equity debt totalvalue corporatetax costofequity costofdebt

WACC =

D E re + rd (1 TC ) V V

65

Appendix6Downsidescenario
Revenue Costofsales Grossprofit Sellinganddistributionexpenses Administrativeexpenses Shareofresultinassociatedundertakings Operating(loss)/profit Adjustments EBITDA Normalizedinvestments Normalizedworkingcapital Normalizedoperatingcashflows Effectivetax25% Operatingchashflowsaftertax WACC Longrungrowth TerminalValue PresentValue Enterprisevalue Financialassets/debt Equityvalue 2005 26678 15800 10878 1649 2856 1980 7878 2006 29350 17070 12280 1876 3416 2428 14084 2007 2006adj 2007adj %ofrevenue 31104 29350 31104 5.0% 18725 17070 18725 60.0% 12379 2136 3437 2728 1564 12280 1876 3416 3133 10121 4774 14895 9357 4162 6002 1501 4502 12379 2136 3437 3390 10196 5188 15384 7337 4626 8511 2128 6383 4603 30.0% 20.0% 6.6% 11.3% 10.8% 16.5% 2008 32659 19596 13064 2156 3690 3527 10745 5389 16134 9798 371 6707 1677 5030 4365 2009 34292 20575 13717 2263 3875 3704 11282 5658 16940 10288 297 6950 1737 5212 4151 2010 36007 21604 14403 2376 4069 3889 11846 5941 17787 10802 238 7223 1806 5417 3957 2011 37807 22684 15123 2495 4272 4083 12439 6238 18677 11342 190 7525 1881 5643 51914 3779 2012 39697 23818 15879 2620 4486 4287 13060 6550 19611 11909 152 7853 1963 5890

9.28% 2.00% 72769 19977 52792

66

Appendix7Intermediatescenario
Revenue Costofsales Grossprofit Sellinganddistributionexpenses Administrativeexpenses Shareofresultinassociatedundertakings Operating(loss)/profit Adjustments EBITDA Normalizedinvestments Normalizedworkingcapital Normalizedoperatingcashflows Effectivetax25% Operatingchashflowsaftertax WACC Longrungrowth TerminalValue PresentValue Enterprisevalue Financialassets/debt Equityvalue 2005 26678 15800 10878 1649 2856 1980 7878 2006 29350 17070 12280 1876 3416 2428 14084 2007 2006adj 2007adj %ofrevenue 31104 29350 31104 8.0% 18725 17070 18725 60.0% 12379 2136 3437 2728 1564 12280 1876 3416 3133 10121 4774 14895 9357 4162 6002 1501 4502 12379 2136 3437 3390 10196 5188 15384 7337 4626 8511 2128 6383 4727 30.0% 20.0% 6.6% 11.3% 10.8% 16.5% 2008 33592 20155 13437 2217 3796 3628 11052 5543 16595 10078 371 6888 1722 5166 4607 2009 36280 21768 14512 2394 4100 3918 11936 5986 17922 10884 297 7335 1834 5501 4505 2010 39182 23509 15673 2586 4428 4232 12891 6465 19356 11755 238 7839 1960 5879 4417 2011 42317 25390 16927 2793 4782 4570 13922 6982 20904 12695 190 8399 2100 6300 82195 4340 2012 45702 27421 18281 3016 5164 4936 15036 7541 22577 13711 152 9018 2255 6764

9.28% 4.00% 104791 19977 84814

67

Appendix8Upsidescenario
Revenue Costofsales Grossprofit Sellinganddistributionexpenses Administrativeexpenses Shareofresultinassociatedundertakings Operating(loss)/profit Adjustments EBITDA Normalizedinvestments Normalizedworkingcapital Normalizedoperatingcashflows Effectivetax25% Operatingchashflowsaftertax WACC Longrungrowth TerminalValue PresentValue Enterprisevalue Financialassets/debt Equityvalue 2005 26678 15800 10878 1649 2856 1980 7878 2006 29350 17070 12280 1876 3416 2428 14084 2007 2006adj 2007adj %ofrevenue 31104 29350 31104 13.0% 18725 17070 18725 60.0% 12379 2136 3437 2728 1564 12280 1876 3416 3133 10121 4774 14895 9357 4162 6002 1501 4502 12379 2136 3437 3390 10196 5188 15384 7337 4626 8511 2128 6383 4934 30.0% 20.0% 6.6% 11.3% 10.8% 16.5% 2008 35148 21089 14059 2320 3972 3796 11564 5799 17363 10544 371 7190 1797 5392 5025 2009 39717 23830 15887 2621 4488 4289 13067 6553 19620 11915 297 8002 2000 6001 5140 2010 44880 26928 17952 2962 5071 4847 14765 7405 22171 13464 238 8944 2236 6708 5274 2011 50714 30429 20286 3347 5731 5477 16685 8368 25053 15214 190 10029 2507 7521 2012 57307 34384 22923 3782 6476 6189 18854 9456 28310 17192 152 11270 2817 8452 126714 5423

9.28% 5.00% 152511 19977 132534