ChannelVision Magazine

Separation can take different forms. The simplest is basic accounting sepa - ration. Functional separation, explains the research group, is typically where the wholesale and retail businesses are set up as independent units. In legal separation, meanwhile, new le - gal entities are established but overall ownership remains the same. While only a few telcos around the globe have attempted to undergo the mas - sive complexities of a breakup, McK - insey believes that the pressures of dramatically increasing infrastructure funding – in the face of investment- thick 5G network buildouts and fiber to the home – will cause more industry stakeholders to ask if breaking up can actually create more value in the long- term and is worth the risks. One place where the risks seemed to have paid off is the case of O2 Czech Republic, said McKinsey. In 2014, PPF Group, a local private- equity fund, bought O2 Czech Republic from Telefónica Group. The new owner separated the network from the retail business and took the infrastructure unit, now named CETIN, private, while keeping the retail unit listed publicly under the O2 Czech Republic name. “It didn’t take long for the move to pay off for the investors,” said McK - insey analysts. “The deal not only benefitted the new owners; the country received a significant infrastructure upgrade as well.” According to McKinsey, the creation of a pure network infrastructure player lowered borrowing costs and improved capital access such that CETIN in - creased its network capital expendi - tures by 40 percent a year after separa - tion. After the first year, capital expendi - tures increased by 13 percent annually. “This led to a jump in fiber coverage and broadband speeds at a level rarely seen in Europe,” said the firm. Elsewhere, in 2018, Denmark’s TDC Group was acquired by a Macquarie-led consortium of buyers at a 34 percent premium to the market price. A struc - tural separation initiative, according to a Reuter’s reports, was one of the core pillars of value creation justifying the takeover. Likewise, in 2018, Reuter’s reported that Telecom Italia had started to evaluate the possibility of setting up a separate NetCo, and Australian telco Telstra announced intentions to estab - lish a separate infrastructure business unit. Meanwhile, shareholders or board members of both British Telecom and Telefonica reportedly have requested their respective companies consider something similar. Of course, as the authors of the McKinsey report noted, PPF Group doubling its money on the O2 Czech Republic deal was likely the result of several factors, and how much of it was due to separation is up for debate. Even so, the research firm believes structural separation can fuel value creation in five general ways. Arguably the most obvious is regulatory relief. “Since separation invariably alters the existing market structure and typically increases retail competition, most cases result in some form of regulatory relief,” said the McK - insey report. In the EU, in particular, a new Euro - pean Communications Code, as of June 2018, states that regulators shall re- assess, amend or withdraw obligations if separation is voluntarily undertaken. Before separation, O2 estimated that retail price regulation impacted roughly 25 percent of its gross margin, and the company faced several preda - tory pricing cases. “With the lifting of these restraints, O2 and CETIN gained Separation in the Czech Republic created tremendous value for shareholders *NetCo privately held after separation, so no market valuation available Source: McKinsey & Company Sou Billions of Global Connected Devices Senior Managment (e.g., CEO, CMO, COO) CIO/IT Leadership Steering Committee Board of Directors Business Unit Heads Digital Transformation Transcends IT Source: BDO midmarket su v y 3% 5% 15% 31% 46% O2 market capitalization 99.1 72.3 30.2 68.9 68.9 68.9 68.9 68.9 67.3 82.8 77.0 66.8 136.2 151.7 145.9 135.7 10.1 16.9 36.9 33.6 32.0 +89% +97% CZK billion Before separation After separation NetCo* Jan 2015 Jun 2015 Jun 2016 Jun 2017 Jun 2018 Jun 2019 2012 2015 2016 2017 2018 ServCo Before separation After separation O2 return on invested capital % (including goodwill and intangibles) 35 30 25 Other (2.1%,3.9%) Tablets (4%,3%) PCs (7%,4%) Primary Leader of Digital Transformation Strategy INTERNATIONAL AGENTS 34 CHANNEL VISION | March - April, 2020