Results January - March 2020
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Creating a leading communications provider in the UK Mr. José María Álvarez-Pallete Chairman & CEO
Transaction Summary • Telefónica and Liberty Global have agreed to combine their telecom assets in the UK (Telefónica UK and Virgin Media UK) ‒ 50/50 JV creates UK leading convergent player with complementary strengths in mobile, broadband, video and B2B ‒ Stronger, larger, more diversified; combined £11.0bn revs. £3.6bn(1) OIBDA and £1.5bn OIBDA-CapEx (2) (pre-synergies) ‒ Telefonica UK valued at 7.8x OIBDA 2019; Virgin Media UK at 9.3x ‒ Enterprise Value of the combined entity estimated at c.£38bn, including synergies. £12.7bn EV for TUK, £18.7bn for Key Terms VMED UK ‒ Pro forma combined entity will have 46.5m(3) accesses, of which, 32.6m correspond to mobile, 5.3m to broadband, 4.9m to fixed voice and 3.7m to Pay-TV • Liberty Global will make a cash payment to Telefónica of £2.5bn to equalize ownership in the JV • New joint venture will target leverage of 4.0-5.0x OIBDA ‒ Telefónica expected to receive £5.5-5.8bn of proceeds in total from the transaction (post dividend recap) • Complementary fit creates leading UK integrated player, significant cross-selling opportunities for B2B, B2C and wholesale ‒ Convergent capabilities’ platform with best-in-class infrastructure and a technological advantage over peers Value- • Transaction to unlock significant value, with synergies of c.£6.25bn NPV (after integration costs) creation ‒ Sizeable and highly visible synergies and efficiencies run-rate of c.£540m Rationale • Transaction to create significant value for Telefónica shareholders ‒ FCF accretive(4) for Telefonica from year 1 and expected to reduce Telefónica’s net debt by £5.5-5.8bn(5) ‒ Credit positive; improves competitive positioning and business sustainability, reduces net debt at Telefonica Expected Key • Transaction is subject to satisfactory approvals from relevant authorities and expected to close in mid-2021 Dates (1) Pre-IFRS 16; (2) OpCF = OIBDA-Capex, ex-spectrum Capex; (3) Figures as of 2019, ex-M2M subscribers; (4) Pro-Forma run-rate synergies basis; (5) Including leases. 2
Transaction Structure and Key Terms Key Terms Telefónica Liberty Global Pre- Transaction 100%Pre-Transaction Structure 100% • Based on the enterprise value of each business, and Structure after deducting Virgin Media UK’s £11.3bn net debt, Telefónica UK(1) Virgin Media UK(2) Liberty Global will make a cash payment to Telefónica of £2.5bn to equalize JV ownership ‒ Telefónica UK contributed to the JV on a debt and cash free basis £2.5bn ‒ Virgin Media’s Irish business to be carved-out Equalization Telefónica Payment to Liberty Global ahead of completion Telefónica 50% 50% ‒ Telefonica to contribute its 50% stake in CTIL Enterprise Value: £12.7bn Enterprise Value: £18.7bn Intermediate EV/OIBDA 2019: 7.8x EV/EBITDA 2019: 9.3x • The JV will target a leverage ratio of 4.0-5.0x OIBDA Pre-Transaction Structure Structure Proceeds from Proceeds from ‒ JV expected to raise new debt to reach its financing distributed financing distributed target leverage ratio; proceeds to be equally equally distributed equally between Telefónica and New debt to target leverage of Telefónica UK(1) + Virgin Media UK(2) Liberty Global 4.0x-5.0x OIBDA ‒ The deal will not trigger a change of control under Virgin Media’s existing third party debt • Following completion of the transaction, neither Telefónica Liberty Global Telefónica nor Liberty Global will consolidate the JV 50% 50% • Equal governance rights in line with 50-50 Structure at shareholding Pre-Transaction Structure Closing • Telefónica and Liberty Global have agreed to provide Telefónica UK(1) a suite of services to the JV post completion + Virgin Media UK(2) (1) Transaction perimeter includes 50% stake in CTIL; (2) Transaction perimeter excludes Virgin Media’s operation in Ireland. 3
Stronger, larger and more sustainable player 46.5 46.3 Accesses 22.7 20.2 11.6 (m; 2019) 9.0 (7) 13.5 (1) 11.3 9.4 5.5 Revenue 2.4 1.6 (2) (£bn; 2019) (4) (3) (5) (6) Margin (%) 31% 37% 26% 21% 30% 12% (1) 4.2 4.1 OIBDA Pre-IFRS 16 2.5 1.2 0.7 0.2 (2) (£bn; 2019) (4) (3) (5) (6) Margin (8) (%) 19% 19% 21% 19% 9% 12% 6% OIBDA-CapEx Pre- (1) 2.6 2.1 1.8 IFRS 16 (£bn; 0.5 0.3 0.1 (2) (4) 2019) (3) (5) (6) EUR/GBP converted at 0.877; HK/GBP converted at 0.100; USD/GBP converted at 0.808. Source: Companies Information, Analysys Mason, Ampere Analysis, GlobalCom. Excluding M2M subscribers and including MVNO subscribers. (1) Pro-forma of run-rate synergies; (2) Financials for BT are LTM Dec-19A, excluding Global Services and Openreach; (3) Financials for Vodafone are LTM Dec-19A (Vodafone reports regional results half-yearly); (4) Sky UK financials based on 2019E broker estimates; (5) 3 UK financials are 2019A (reported in December 2019); (6) Talk Talk financials are 2019A statutory results (reported in March 2019); (7) Excluding Virgin Media MVNO subscribers; (8) Excluding Project Lightning. 4
Compelling and differentiated value proposition • Broadband speeds up to 1GBps by 2021 Fastest broadband Customer Rich centric content mobile • Industry leader in NPS offering proposition • Only UK operator offering Netflix, • Sector leading loyalty Premium brands Amazon & all sports Complete Cyber portfolio of Leading digital technology • IoT with Big Data • Cloud solutions Attractive • State-of-the art platforms and • Cybersecurity • Advertising value product offering proposition • Wide MVNO offering and business • Growing B2B to leading sectors companies 5
National Connectivity Champion Telefonica UK network: Highly competitive and Virgin Media UK network: High performance & Ultrafast cost-effective 5G ready mobile infrastructure Today and Future proof for tomorrow 99% population 4G coverage and • 100% of VM UK homes DOCSIS 3.1 hardware ready consistently recognized as most • and 100% 1Gbps coverage in 2021 reliable and best coverage network • Access to the largest tower portfolio in the UK with • 15 million homes passed of which 14.3 million are 15k sites through its 50% stake in CTIL HFC and 0.7 million are FTTP/RFOG • Successful long term relationship with Vodafone • Access network 100% ducted in owned ducts, 0% extended to 5G & Industry-led single rural network aerial, creating flexibility in upgrade path to future progressing coaxial or fibre • O2 5G already live in 30 places and will reach 50 • 8m km of fibre strands of which the access network is towns and cities by summer 2020 7.3m km Strong holding of <1GHz frequency, resulting in best • Analogue TV and FM over cable radio services in-door coverage; ongoing network optimization with • decommission complete spectrum refarming ✓ Unique infrastructure in Europe to seize new opportunities arising from Fixed-Mobile convergence ✓ No network monetization to date – retains ownership of its mobile and fixed infrastructure ✓ Clear market leader in UBB (FTTP, HFC) 6
Identified synergies of c.£6.25 bn NPV, with 80% of full potential related to OpEx and CapEx synergies Identified synergies of c.£6.25bn(1) Run-rate operating and revenue synergies of c.£540m £6.25bn NPV Cash positive since £540m 2023 run-rate • Cross-selling and bundling opportunities Revenue c.20% for residential and businesses customers 100% by CapEx c.15% • Combination of regional and national 2026 network infrastructures and IT systems >75% within 42 months >50% within 30 • Migration of Virgin Media mobile traffic months to Telefonica UK’s network OpEx c.65% • Reduced marketing expenditures(2) Proven track record delivering synergies • Structure rightsizing • Both parties have completed several acquisitions over the last years with substantial value creation achieved through synergies SYN NPV • Extensive experience with respect to building business cases, leading integration phases and realizing identified synergies ▪ c.80% of full potential related to cost and capex synergies • Proven track-record of achieving and exceeding initial targets ▪ Financial / fiscal synergies not considered (1) Net of integration costs; (2) Synergies Plan not assumes single brand strategy, which will be evaluated in the future. 7
Transaction fully consistent with TEF’s strategy Creates a leading and fully integrated champion in one of the ✓ 4 core markets for TEF Partnering Significant value creation through synergies ✓ with VMED UK is the most Transaction compelling consistent with option for TEF’s global Telefonica UK strategy Secures superior next generation fixed infrastructure ✓ and best to drive customer experience, complementing TUK’s strategic path mobile network forward Stronger, more valuable and sustainable platform with high✓ dividends to continue reducing TEF’s net debt 8
Governance, Exit and Timetable • The JV Board of Directors will consist of eight members, four from each of Liberty Global and Telefonica Governance / • Certain matters will require unanimous approval of both companies’ representatives Shareholders • The position of Chairman of the JV will be held for alternating 24 month periods by a Telefónica or Liberty Global Agreement appointed director. The Chairman has no casting vote • Key management positions will be announced prior to completion of the transaction • 3 year lock-up • Each shareholder has the right to initiate an Initial Public Offering of the JV after the third anniversary of closing, with the opportunity for the other shareholder to sell shares in the IPO on a pro-rata basis Exit • The parties have agreed restrictions on other transfers of interests in the JV until the fifth anniversary of closing ‒ After the fifth anniversary, each shareholder will be able to initiate a sale of the entire JV to a third party, subject to a right of first offer in favour of the other shareholder • Transaction notifiable to the European Commission (EC) Expected • The transaction may be referred back and require clearance by the Competition and Markets Authority (CMA) Transaction • If approved at Phase 1, closing would take place in Q4 2020 - Q3 2021 Timetable (1) • If approved at Phase 2, closing would take place in Q2 2021 - Q1 2022 (1) External counsel estimation. 9
Closing Remarks • Creating a leading integrated player with significant cross-selling opportunities in the second largest European market, improving market positioning, group profile and business sustainability • Combining Telefonica UK’s leading mobile operations and Virgin Media UK’s extensive superfast broadband network to benefit consumers, businesses and the public sector through investment to accelerate digital infrastructure deployment and improving customer experience • Significant value creation: total cost, capex and revenue synergies with an estimated NPV of c.£6.25bn (after integration costs), additional financial / fiscal synergies not considered • M&A processes in 2 (UK and Brazil) out of 4 core markets, progressing on the New Telefonica strategy • Substantial value creation for Telefónica shareholders ‒ Stronger converged challenger in the UK market, leading in customers and profitability ‒ Improving growth profile and market positioning ‒ FCF accretive(1) from the outset ‒ Transaction expected to reduce Telefonica’s net debt by £5.5-5.8bn(2) ‒ Credit positive improving competitive positioning and long term business sustainability (1) On a Pro-Forma run-rate synergies basis; (2) Including leases. 10
COVID 19 implications Q1 20 highlights Mr. José María Álvarez-Pallete Chairman & CEO
Telecoms proving essential; responding all stakeholders Connectivity is critical Strengthened confidence on our resilience • Reliable, stable and secure networks • Increased Demand for connectivity& Guaranteed Sustainable digitalisation (B2C+B2B) continuity of – +40% bandwith demand; +50% model for the mobile data traffic; … service; long term; • Mobility work & security solutions rising demand resources built – >€90Bn CapEx since 2012 pays off experience in upon years • Ring-fence cash secure access to crisis situations • CapEx flexibility (~50% of annual OIBDA) liquidity Telefónica part of the solution… … doing good Caring for • Our people = our greatest asset We care • Increasing data allowances, broadband speeds employees • 95% working from home; about our • Enriching content bundles, children • Health & Safety come first; ahead of customers apps available any commercial initiative • Services & capabilities to Public Responding • Shortened payments to key suppliers Admin. (big data, mobility data) Caring about to society • Wiring and connecting field hospitals our vendors • Protect health or providers needs • Donating sanitary equipment; • Help vendors (problems of liquidity) • Free educational and training content Evidence-based mission: “Making our world more human by connecting lives” 11
Doing well; not immune, but relatively well protected Potential hit… …but relatively well protected • Managing impacts; yet uncharted territory • Demand for telcos on the rise; potential for further monetization • Pressure on B2B revs (SMEs; corporates with higher exposure to • Stable L/T revenue base: flat rate contracts, L/T customers COVID19; sales funnel, com. activity…) • High quality, future-proof asset base (e.g. Fiber networks) • Pressure on B2C revs (roaming, prepaid, lower traffic to stores) • OIBDA better covered than top line (costs relief, lower churn…) • Potential increase in bad debt • Social goodwill earned (close to society needs & all stakeholders) • Potential supply chain/network/handset inventory disruptions • Upselling of digital services, specially Cybersecurity and Cloud We need to adapt to new • Higher demand in some services (TV consumption, content fiction; VoD, higher BB speeds) reality FCF Buffers • Accelerate digitalization; strengthen on-line channels; transform network/ IT from top to bottom • Decrease in churn, commercial costs, advertising Levers to • Discretionary CapEx management = OIBDA-CapEx shelter secure FCF • Delay of spectrum auctions (Spain, UK, Brazil) 12
2022 Guidance and 2020 €0.4 dividend reiterated 2022 Guidance Confirmed Financial Targets (organic ex-contribution to growth from Guidance 2019-2022E ARG) Despite current uncertainty; confidence in future demand Revenues Revenue growth growth for connectivity, digital services… (OIBDA-CapEx)/ Revenues +2 p.p. by 2022 2020 Stable &Sustainable Dividend Confidence in business 2020 Dividend €0.40/Share model flexibility to weather 2020 calendar payments current environment, Interim Dec-20 €0.20/sh. (Voluntary Scrip) Jun/20 €0.20/sh. (Voluntary Scrip) coupled with solid liquidity Dec/20 €0.20/sh. (Voluntary Scrip) position & business resiliency Final Jun-21 €0.20/sh. 2020 Guidance Withdrawn; significant changes in context & high level of uncertainty Closely monitoring business evolution; 2020 current outlook: slightly managing negative to flat OIBDA-CapEx Opex+CapEx 13
Q1 20 Results Mr. Ángel Vilá COO
Financial summary Q1 20 Reported Organic Organic y-o-y € in millions Reported aggregated 4 y-o-y y-o-y core markets Revenues 11,366 (5.1%) (1.3%) 0.1% 65% BB & SoC/Service Revs; +2 p.p. OIBDA 3,760 (11.8%) (1.7%) 0.8% FX impact & Cap gains Q1 19 OIBDA margin 33.1% (2.5 p.p.) (0.1 p.p.) 0.2 p.p. OIBDA-CapEx Maintaining leading profitability 2,275 (16.6%) (3.8%) 3.2% (ex-spectrum) OIBDA-CapEx / Revenues 20.0% (2.8 p.p.) (0.5 p.p.) 0.7 p.p. (ex-spectrum) Net Income 406 (56.2%) EPS (€) 0.06 (62.0%) €0.11 Underlying EPS FCF 233 (83.4%) Q1 seasonal effect; Q1 19 tax refund (inc. leases principal payments) €702m Net Financial Debt 38,223 (5.3%) ex-leases Reduction of €14Bn since Jun-16 Q1 COVID 19 impacts; Revenues (-€77m); OIBDA (-€33m); CapEx (-€17m) 14
Spain | The most reliable and advanced telco in Europe Engaged customer base Proof-tested network y-o-y ✓ Outstanding delivery with record traffic (both retail & + 7 p.p. + 16 p.p. +4 p.p. + 1 p.p. flat +2 p.p. wholesale) 73% 94% ✓ Critical connectivity on top quality assets 65% 89% 61% 84% • Largest FTTH network & digitalisation ✓ Effective remote activity • Best in class Cloud, Security, Big Data o/FBB o/wholesale UBB FBB Contract TV • >50% activity in online/phone channel Fibre base Convergent penetration (consumer) ✓ Value added to the offer for free ✓ Churn improved y-o-y • MBB, Premium TV (even to non-customers) ✓ No TV lock in period Leading content platform Key financials Sound (OIBDA-CapEx)/Revs.; cash in focus y-o-y organic y-o-y organic 39.8% + 0.9 p.p. (1.6%) (1.2%) (1.8%) +1.4% 28.6% 3,078 3.014 11.2% 1,225 881 OIBDA/Revs. CapEx/Revs. (OIBDA-CapEx)/ Revenue Service Rev OIBDA OpCF Revs. Limited impact from COVID-19 so far Prudent OpEx/CapEx policy Proven success of transformation strategy 5G auction delayed 15
Germany | Robust start to year Good commercial performance Solid trading Accesses (m, y-o-y) O contract ARPU ✓ Good contract momentum of O brand; blended ARPU +2% 2 2 +6% stable and contract churn -0.1 p.p. y-o-y +12% +0.4% ✓ Sustained VDSL demand: +36k net adds; 76% o/FBB 43.6 ✓ Resilient network coping with COVID-19 traffic increase ✓ 22.7 O2 contract churn Supporting employees, customers and the wider society ✓ 4G/LTE steady progress; preparing 5G deployment 1.7 Stable at 1.3% Total mobile Mobile VDSL contract Gaining momentum across all revenue lines Improving profitability y-o-y organic Q4 Q1 Q4 Q1 6.0% 12.9% 3.8% 1.5% 3.4% 2.0% 0.2% (0.1%) Revenues Mobile business Fixed revenues (1.2%) OIBDA OIBDA-CapEx 16
UK | Once again outperforming the market Continued contract customer growth Another solid quarter Accesses (m; y-o-y) ✓ Largest UK network carrier +6% +1% +47% +6% ✓ Continued revenue and OIBDA growth ✓ Market leading loyalty with 1% contract churn 34.8 ✓ Exclusive agreement for mobile distribution of Disney+ ✓ Continued investment momentum in network 12.3 8.8 5.6 Total mobile Retail mobile M2M MVNO 15th consecutive quarter of y-o-y top-line growth COVID -19 – keeping communities connected y-o-y organic Q1 ✓ Network voice and data resilience 1.5% ✓ Industry cooperation and ongoing dialog w/ government 1.1% ✓ Existing processes supporting vulnerable customers ✓ Free access to NHS and 22 additional websites ✓ Connectivity provision for Nightingale hospitals Revenues OIBDA 17
Brazil | Predictable & resilient FCF generation Strengthened market leadership Resilient Business Market Share (Feb-20) ✓ Better fixed and mobile network in the market ✓ Low prepaid impact & handset exposure (~10% & 39.0% 22.1% ~5% of Total Revs) ✓ Highest contract penetration in the market 33.0% 20.8% ✓ Robust OIBDA-Capex/Revs (22.5% 2019; 27.7% Q1) ✓ Solid FCF generation Mobile Contract FBB FBB>12 Mbps Exposed to most valuable segments Sustainable business model Accesses Penetration (m; y-o-y) Q1 y-o-y organic +1 p.p. +12 p.p 7.1% • Accelerating Fiber 53% 45% deployment to 11.7m homes passed 3.4% • New alternative FTTH expansion models to boost Fiber connections Contract/ FTTH/ (1.4%) Total Mobile FBB Revenues OIBDA OIBDA-CapEx 18
Telxius | Growth and margin; continuing tower expansion Sites Tenants Revenues & OIBDA # # Q1 20 y-o-y organic Q1 20 y-o-y organic ex-capacity sale in Q1 19 (cable) +21.4% +18.6% Towers +11.5% y-o-y revs. y-o-y y-o-y 11.8% 2,270 27,181 Tenants 1,983 20.331 287 (ex anchor tenant) 5.8% 4.4% 24,911 18,348 -6.1% Dec-19 Net Adds Mar-20 Dec-19 Net Adds Mar-20 Revenues OIBDA Q1 20 Q1 20 BTS 56 Tenancy 1.34x €207M €135M Ratio 1.36x Acquired 1,927 ex acquisition CapEx (1) €22M OIBDA-CapEx (1) €113M Inorganic investment €133M (1) excluding M&A CapEx fom inorganic operations in the quarter (acquisition of towers in Brazil and Peru) 19
Q1 20 Results Ms. Laura Abasolo CFCO
Hispam | Working on transformation; increasing efficiencies Large accesses base Simplification to support cash generation Accesses (m) +10.9% UBB y-o-y ✓ Largest Fiber network in the region (9.0m FTTH 108.8 homes passed) ✓ Prepaid less relevant (~11% of Total Revenues) ✓ High contract penetration (24%) 21.9 16.8 5.4 2.9 ✓ Digitalisation process is still on-going ✓ Achieving CapEx efficiencies Total Contract Fixed FBB Pay TV Higher penetration in valuable segments Strongly affected by competition in Peru & Chile Accesses Penetration (m; y-o-y) y-o-y org. +1 p.p. +14 p.p. 54% Similar y-o-y trend vs Q4 19 9.0m FTTH homes passed (+1.7m in LTM) excluding ARG and one-offs 24% (4.8%) Co-investing with ATP & ATC in most MEX; Back to OIBDA growth relevant markets (10.6%) (transformation model paying off) Contract/ FTTH/ Revenues OIBDA Total Mobile FBB 20
Currency headwinds structurally neutralised Effects on FX moves FX impact neutralised at FCF level y-o-y €m; Q1 20 FX impact WC + ✓ BRL; major drag in Q1 Revenue & OIBDA y-o-y OIBDA CapEx Taxes Interest FCF + Others ✓ Revenue: Q1: -3.2 p.p. y-o-y ✓ OIBDA: Q1: -3.5 p.p. y-o-y 63 ✓ -€151m at OIBDA down to -€20m in FCF 66 2 (20) ✓ FX reduce net debt (-€824m 12 month rolling) (151) Actively hedging 2020 Cash flows of Brazil and UK 21
Slight debt increase on hybrids amortisation Net Financial Debt €m 479 ND/OIBDAaL ND/OIBDAaL 2.52x 2.60x 723 351 284 4 (651) 37,744 (233) 38,223 Dec-19 FCF Hybrids Shareholder Pre-retirement Net financial FX & Mar-20 remun. (incl. commitments investments Others hybrid coupons) €44.8bn incl. IFRS-16 Leases 2,275 (2) (640) (666) (173) (4) (557) 233 OIBDA-CapEx Non-cash Working Net interest Tax Dividend to Lease FCF ex-spectrum items & capital payment minorities principal accrued others payments 22
Strong liquidity position coupled with smooth maturity profile Liquidity position Financing activity from June 16 to YTD Mar-20 | €bn YTD | €bn 91% LT Avg coupon cost €2.3bn YTD reduced by 22.5 13.7 ~200bps/~€150m in annual payments 8.5 38.8 6.1 8.7 10Y 20Y 30Y 6.1 €1.4 €0.8 €4.5 10.0 6.7 Cash position Undrawn credit Liquidity position 1.5 lines & synd. credit facilities € Green USD Bonds € Bonds Hybrids Financing at Bank Total Financing* Subsidiaries Financing Net Debt maturities Strengthening debt profile Mar-20 | €bn; not considering hybrid NC dates Mar-20 Over 2/3 debt in fixed rates 10.7Y 3.49% Avg. debt life vs. Interest payment Cash > gross 4.3 5.1 5.6Y Jun-16 costs vs. maturities 4.58% Jun-16 2020E 2021E 2022E * Includes the €1,000M senior bond & €500 million green hybrid 23
Conclusion Mr. José María Álvarez-Pallete Chairman & COO
Conclusion | Sustainable; Long term focus 1 2 Telecoms proving essential… … responding socially to all stakeholders…. Delivering value for all stakeholders 3 4 … doing well; not immune… …committed to our strategy and guidance Resilient business • Robust, reliable and secure network • Good liquidity; BS in a good shape • Society; serve everyone everywhere • Protecting human rights in our value chain • Customers; enable safety through P&S • Employees; ensure protected continuity • Provide support to providers • Progression in sustainable model; growth, efficiency and trust 2020 Dividend and 2022 Guidance reiterated 24
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