Deutsche Bank Markets Research Emerging Markets Bosnia-Herzegovina Serbia Slovenia HY Corporate Credit Media, Cable & Satellite Telecommunications Company United Group Date 15 January 2018 Initiating with CreditSell on Fixed Rate Notes, relative value not attractive ________________________________________________________________________________________________________________ Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Vivek Khanna Research Analyst (+44) 20 754-72905 [email protected]Chaitanya Terala, CFA Research Associate [email protected]Recommendation Summary We initiate on the €4.375% Sr. Sec ’22 and € 4.875% Sr Sec '24 with a CreditSell recommendation and on the € Sr Sec FRN ’23 with a CreditHold recommendation, on valuation grounds as we don’t believe a 3-4% return is attractive considering the acquisitive nature and FCF profile. We recognize that management has successfully integrated a number of acquisitions and has delivered on the identified synergies and we are confident they will deliver on the CME acquisition savings. While we recognize the asset cover, we don’t believe the current price levels reflect the limited de-leveraging and see a few points of downside. Leverage levels higher on M&A and PIK push-down Leverage levels of 5.2x net debt / LHA EBITDA including synergies and 5.8x excluding synergies increased from c. 4.0x cash-pay leverage pre the recapitalization. The increase was driven by the refinancing of the outstanding PIK note at the operating entity (+0.9x) and on the back of M&A. On July 9, 2017, the company announced the acquisition of CME Croatian and Slovenian TV Assets for a total consideration of €230m, equivalent to an EV/LTM EBITDA multiple of 13.9x, and 5.5x, when adjusting for synergies (€25m). The transaction is subject to regulatory approvals and €200m of the proceeds raised from the bond deal are being held in escrow until May 2018 (par return of €200m 4.375% Sr Sec '22, if transactions don’t close). Asset cover – need to adjust accounting As a potential comparable, Digi Communications (RCS&RDS, last closing price: RON38) trades at an EV/ 2017E EBITDA of 5.6x and EV/ 2018E EBITDA 5.2x. EV/OCF trading multiples are 10.5x and 8.7x, respectively. At face value this would suggest limited asset cover at our issuer. However, when adjusting Digi Communications EBITDA to align accounting for content costs, we believe Digi trades on 6.6x 2017e and 6.2x 2018e EBITDA multiples and 24x and 17x on OCF multiples. Leading TV channels in respective countries Pop TV in Slovenia and Nova TV in Croatia are leading TV Groups in their respective countries. The POP Slovenia portfolio includes five channels with POP TV being the flagship channel with a 81% TV ad market share which historically was transmitted free-to-air).The Nova Croatia portfolio includes 4 channels including the flagship Nova TV with a 54% TV ad market share. Both groups include numerous internet portals and VOD/subscription systems. Update on regulatory approvals In Slovenia, they have received a positive decision from the Ministry of Culture by which the transaction was de facto approved while they are still waiting approval from the Slovenian national competition authority which is expected soon. However, in Croatia, the company faced a setback as the Croatian Agency for Electronic Media blocked Nova TV takeover, citing restrictions on cross ownership considering its existing Total TV asset with 30K subscribers. On the Q317 call, management mentioned that they are reviewing potential options and on Jan 12, 2018, announced the disposal of Total TV. The CME assets purchase agreement is valid only if both assets receive approval. Figure 1: Outstanding Issues Instrument Px (ask) YTW Z-sprd Rec. €4.375% Sr Sec '22 104.5 2.7% 289 C-S € Sr Sec FRN's '23 101.9 0.2% 23 C-H €4.875% Sr Sec '24 104.75 3.7% 349 C-S Source: Deutsche Bank, Bloomberg Finance LP Figure 2: YTC Table - € 4.375% Sr Sec Nts' 22 (offer price: 104.5) Call date Call price YTC spread 1-Jul-19 102.188 2.7% 326 1-Jul-20 101.094 2.9% 342 1-Jul-21 100.000 3.0% 334 1-Jul-22 100.000 3.3% 347 Source: Deutsche Bank, Bloomberg Finance LP Figure 3: YTC Table - € 4.875% Sr Sec Nts' 24 (offer price: 104.75) Call date Call price YTC spread 1-Jul-20 102.438 3.8% 431 1-Jul-21 101.219 3.7% 410 1-Jul-22 100.000 3.7% 389 1-Jul-24 100.000 4.0% 393 Source: Deutsche Bank, Bloomberg Finance LP Key Risks: Positive risks include greater pricing power and customer growth and lower capital intensity. Negative risks include value destructive M&A, declining margins, inability to increase prices, increase in content cost and higher capex levels Distributed on: 15/01/2018 12:54:27 GMT 7T2se3r0Ot6kwoPa
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Company United Grouppg.jrj.com.cn/acc/Res/CN_RES/INVEST/2018/1/15/9136d88d... · 2018. 1. 26. · company issued €1.35bn of new debt and redeemed the existing €775m 7.875% Sr.
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Deutsche Bank Markets Research
Emerging Markets Bosnia-Herzegovina Serbia Slovenia
HY Corporate Credit Media, Cable & Satellite Telecommunications
Company
United Group
Date 15 January 2018
Initiating with CreditSell on Fixed Rate Notes, relative value not attractive
________________________________________________________________________________________________________________ Deutsche Bank AG/London
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
Recommendation Summary We initiate on the €4.375% Sr. Sec ’22 and € 4.875% Sr Sec '24 with a CreditSell recommendation and on the € Sr Sec FRN ’23 with a CreditHold recommendation, on valuation grounds as we don’t believe a 3-4% return is attractive considering the acquisitive nature and FCF profile. We recognize that management has successfully integrated a number of acquisitions and has delivered on the identified synergies and we are confident they will deliver on the CME acquisition savings. While we recognize the asset cover, we don’t believe the current price levels reflect the limited de-leveraging and see a few points of downside.
Leverage levels higher on M&A and PIK push-down Leverage levels of 5.2x net debt / LHA EBITDA including synergies and 5.8x excluding synergies increased from c. 4.0x cash-pay leverage pre the recapitalization. The increase was driven by the refinancing of the outstanding PIK note at the operating entity (+0.9x) and on the back of M&A. On July 9, 2017, the company announced the acquisition of CME Croatian and Slovenian TV Assets for a total consideration of €230m, equivalent to an EV/LTM EBITDA multiple of 13.9x, and 5.5x, when adjusting for synergies (€25m). The transaction is subject to regulatory approvals and €200m of the proceeds raised from the bond deal are being held in escrow until May 2018 (par return of €200m 4.375% Sr Sec '22, if transactions don’t close).
Asset cover – need to adjust accounting As a potential comparable, Digi Communications (RCS&RDS, last closing price: RON38) trades at an EV/ 2017E EBITDA of 5.6x and EV/ 2018E EBITDA 5.2x. EV/OCF trading multiples are 10.5x and 8.7x, respectively. At face value this would suggest limited asset cover at our issuer. However, when adjusting Digi Communications EBITDA to align accounting for content costs, we believe Digi trades on 6.6x 2017e and 6.2x 2018e EBITDA multiples and 24x and 17x on OCF multiples.
Leading TV channels in respective countries Pop TV in Slovenia and Nova TV in Croatia are leading TV Groups in their respective countries. The POP Slovenia portfolio includes five channels with POP TV being the flagship channel with a 81% TV ad market share which historically was transmitted free-to-air).The Nova Croatia portfolio includes 4 channels including the flagship Nova TV with a 54% TV ad market share. Both groups include numerous internet portals and VOD/subscription systems.
Update on regulatory approvals In Slovenia, they have received a positive decision from the Ministry of Culture by which the transaction was de facto approved while they are still waiting approval from the Slovenian national competition authority which is expected soon. However, in Croatia, the company faced a setback as the Croatian Agency for Electronic Media blocked Nova TV takeover, citing restrictions on cross ownership considering its existing Total TV asset with 30K subscribers. On the Q317 call, management mentioned that they are reviewing potential options and on Jan 12, 2018, announced the disposal of Total TV. The CME assets purchase agreement is valid only if both assets receive approval.
Figure 1: Outstanding Issues
Instrument Px (ask)
YTW Z-sprd Rec.
€4.375% Sr Sec '22 104.5 2.7% 289 C-S
€ Sr Sec FRN's '23 101.9 0.2% 23 C-H
€4.875% Sr Sec '24 104.75 3.7% 349 C-S
Source: Deutsche Bank, Bloomberg Finance LP
Figure 2: YTC Table - € 4.375% Sr
Sec Nts' 22 (offer price: 104.5)
Call date Call price YTC spread
1-Jul-19 102.188 2.7% 326
1-Jul-20 101.094 2.9% 342
1-Jul-21 100.000 3.0% 334
1-Jul-22 100.000 3.3% 347
Source: Deutsche Bank, Bloomberg Finance LP
Figure 3: YTC Table - € 4.875% Sr
Sec Nts' 24 (offer price: 104.75)
Call date Call price YTC spread
1-Jul-20 102.438 3.8% 431
1-Jul-21 101.219 3.7% 410
1-Jul-22 100.000 3.7% 389
1-Jul-24 100.000 4.0% 393
Source: Deutsche Bank, Bloomberg Finance LP
Key Risks: Positive risks include greater
pricing power and customer growth and
lower capital intensity. Negative risks include
value destructive M&A, declining margins,
inability to increase prices, increase in
content cost and higher capex levels
Distributed on: 15/01/2018 12:54:27 GMT
7T2se3r0Ot6kwoPa
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 2 Deutsche Bank AG/London
Opportunistic vertical integration
Strengthening the asset mix + convergence
Acquisition of Media Assets in Croatia and Slovenia On July 9, 2017, United Group announced an agreement to acquire broadcasting operations of Central European Media Enterprises (CETV) in Croatia and Slovenia for €230m and the transaction is expected to close by year-end. Acquired assets include POP TV in Slovenia and Nova TV in Croatia, the most watched channels in their respective countries (All-day audience market share of 42% and 30%, respectively), will enhance the pay-TV channel portfolio and help differentiate the product offering in the long-term. During the year, other acquisitions include Fight Channel Croatia (€2.5m), and Cable Target (€10m).
Valuation (pre and post synergies) We estimate the assets were are acquired for 9.2x EV/EBITDA (LHA incl. IFRS adj) and 5.5x when adjusting for synergies. In context, LHA EBITDA of the acquired assets was €25m (incl. IFRS adj.) and management has indicated €16.5m in synergies. The synergies are a combination of both revenue, related to the introduction of the carriage fees (€14m), and cost synergies of €2.4m, equivalent to c. 3% of operating cost base of the acquired assets.
Refinancing of existing Notes, PIK Facility, and fund M&A To fund the acquisition, United Group refinanced the entire capital structure. As highlighted in our initiation report on Nov 28, 2016, the company also refinanced the existing PIK facility through debt at the operating entity. The company issued €1.35bn of new debt and redeemed the existing €775m 7.875% Sr. Sec Nts ’20, credit facilities and €230m of PIK facility. The company also part funded the CME assets acquisition (€200m) with the remaining €30m to be funded from other sources of liquidity at the time of closing (€100m RCF and €80m Serbian Facilities undrawn). Acquisition of Cable Target for €10m will also be funded from the available liquidity.
Leverage We have shown leverage levels of the old and new Bonds structure with and without synergies related to UG historic acquisitions and those related to the proposed CME acquisition. It has always been our base case that a re-financing of the 2020 Notes will result in a re-leveraging event with the push down of the legacy PIK loan. M&A has led to slightly higher pro-forma leverage level.
Figure 4: EBITDA split (pre/post)
8.2 8.2
7.6
21.815.8
30.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
LTM Jun 17 PF LTM Jun 17*
CME - Croatian Assets CME - Slovenia Assets
Source: Deutsche Bank, Company data *PF adjustments for the incremental carriage to be added from 2019 on a run rate basis at Slovenia
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 3
Figure 5: Leverage Levels – Old and New Capital structure
Net Lev. Net Lev. Net Lev. Net Lev.
LHA LHA LHA LHA
( incl. Syn) (excl. Syn) ( incl. Syn) (excl. Syn)
New RCF '22 (€100m, Super senior) - 96
New Serbian RCF '20 (€20m and €60m, unsecured) - -
Existing RCF 121 -
€ 7.875% Sr Sec Nts '20 775 -
€ 4.375% Sr Sec Nts '22 - 575
€ (E+4.375%) Sr Sec FRN's '23 - 450
€ 4.875% Sr Sec Nts '24 - 325
Capital leases 10 8
Other Debt 7 7
Tota l Debt 913 4.0 x 4.0 x 1,461 5.2 x 5.8 x
PIK 175
Tota l Debt ( inc l. P IK) 1,088 4.8 x 4.8 x
LHA EBITDA (exc l. Synergies ) 221 248
Synergies and increase in carriage fees 3 27
LHA EBITDA (inc l. Synergies ) 224 275
PF Sep 30, 2017*Jun 30, 2017
Source: Deutsche Bank, Offering Memorandum, Company data PF adjustments for the Refinancing and the acquisition of CME’s Croatia and Slovenia assets. Also includes adjustments for the use of RCF to fund the remaining €30m of the acquisition price of CME assets, acquire Cable Target(€10m) and deferred payment for Fight Channel
In addition to United Group’s cable roll-up strategy, the recent CME TV assets not only adds vertical integration and diversifies the business further, but also leads to a significant synergy potential which we have detailed below.
Figure 6: Synergies Breakup
Acquired CME Stations estimated synergies and other adjustments 25.0
of which, accounting adjustments (US GAAP to IFRS) 8.5
of which, impact of additional carriage fees 14.2
of which, estimated cost synergies on a PF basis 2.4
Acquired Cable assets 3.7
of which Cable Target acquisition estimated synergies on a PF basis 0.6
Of which Ikom expected synergies (as of Q217) 3.1
Total Synergies 28.7 Source: Deutsche Bank, Offering Memorandum, Company data
Structural considerations – largely unchanged As was also the case in the legacy notes, the subsidiaries in Serbia, Macedonia, Croatia and Montenegro will not guarantee the obligations. On an LTM basis as of Q117, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented 54.0% of Total Assets. However, Revolving Credit Facility will be guaranteed by the Guarantors and will also be guaranteed and secured by certain assets of subsidiaries located in Serbia.
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 4 Deutsche Bank AG/London
Acquisition review
Strengthens an already strong content position
From a historical perspective, UG has already been more active in content acquisition relative to other cable operators in Western Europe (which are getting more active). The lack of competition from an entrenched and well capitalized content aggregator in the region allowed UG to strengthen its position as a leading content aggregator even before the recent acquisition.
CME Synergy review – substantial but achievable We have provided a summary of the CME related synergies below which would increase PF EBITDA to €41.5 from €25.0m on an LHA basis. While typically we would be skeptical of synergies of such magnitude, in this case as discussed below we are relatively comfortable with the communicated targets.
Figure 7: CME Synergies vs acquired EBITDA of €16.5m
Acquired CME Stations estimated synergies and other adjustments 25.0
of which, accounting adjustments (US GAAP to IFRS) 8.5
of which, impact of additional carriage fees 14.2
of which, estimated cost synergies on a PF basis 2.4 Source: Deutsche Bank, Offering Memorandum, Company data
Carriage fee review – synergies achievable In January 2017, POP Slovenia shifted broadcasting Pop TV from free-to-air DTT to offering through pay-TV platforms. This move has significantly changed the financial profile of the asset, as the operators started to pay, for the first time, recurring carriage fees to transmit the channels. Slovenian market already has a relatively high pay-TV penetration at 75% (would be further higher if second homes are excluded), and this move would further help increase the penetration as PoP TV’s prime time audience share is relatively high at 52% (All day audience share of 42%). The company now expects to realize c. €15m in incremental annual revenues by 2019 compared to €2m in FY16. The revenue increase is expected to be phased as currently distributors are offered discounts. Cable operators would hope to gradually pass on the costs to the customers.
Accounting review – EBITDA synergies will be delivered but no impact to FCF As CME’s financial information is prepared under U.S. GAAP, while UG’s financial information prepared under IFRS, the company could capitalize certain programming costs, which have been historically expensed by CME. This change in accounting will result in an increased annualized EBITDA of c.€8.5m. The change in accounting will have no impact on FCF as it will lead to an increase in Capex by similar amount.
Other Cost Synergies In addition to the above, the company also expects €2.4m of cost savings related to news production in Croatia, and overhead costs/multiplex costs at Slovenia which are no longer needed following Pop TV’s shift to pay-TV from DTT.
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 5
Market positioning - enviable
United Group is acquiring the leading TV stations in both Croatia and Slovenia. The assets command leading viewership positions across the target “prime-time” audience share in addition to a leading position on an “all day” audience basis. The market position in the commercially attractive time and demographical segments has allowed the CME assets to capture and even higher share of the TV advertising revenue in each market.
Market share Both Pop TV in Slovenia and Nova TV in Croatia are the most watched channels with an All-day audience market share of 42% and 30% at Q2 17, respectively. In the more commercially important “prime time” segment, the respective market share in the last quarter were even higher at 52% and 37%, respectively.
Television remains the most prominent advertising media in CEE markets representing c. 54% of total advertising spend vs c. 40% in developed markets. The leading audience share driven by a strong content line-up including market leading local content portfolio, has lead consistently to an even higher advertising revenue share - 81% in Slovenia and 54% in Croatia.
In Slovenia, TV ad market increased 7% in FY15 and FY16 whereas in Croatia it increased 4% in FY15 and 2% in FY16.
Figure 8: Slovenia – PoP TV audience
market share
Figure 9: Croatia – Nova TV audience
market share
Figure 10: TV Ad Revenue share
46%44%
42%
39%
42%
49%
52%50%
49%
52%
35%36%
35%
32% 32%
41%42%
41%
37%
42%
20%
25%
30%
35%
40%
45%
50%
55%
Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217
Prime Time Audience Share All Day Audience Share
36% 36%
33%
36%
34% 34% 34%35%
38%37%
27%28%
26%
29%
27% 27% 27%28%
31%30%
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217
Prime Time Audience Share All Day Audience Share
76%
78%
70%
80%
73%
78%
70%
77%
71%
81%
56% 55%
58%56% 55%
52%
56%
53%55% 54%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217
Slovenia - Ad Revenue share Croatia - Ad Revenue share
Source: Deutsche Bank, Company presentation Source: Deutsche Bank, Company presentation Source: Deutsche Bank, Company presentation
Strong market position highlighted in Power ratio Both Pop TV in Slovenia and Nova TV in Croatia have high power ratios (2.0x in FY16). Power ratio is a measure to assess the relationship between advertising market share and TV audience share, with the higher the number indicates a more commercially valuable audience share. Power ratio is calculated as follows: Share of Market TV Advertising Revenue / Audience share. Strong content and leadership positions in both these markets helping generate more revenues from TV advertising. Power ratios are more relevant in the CEE due to the lesser developed advertising markets and generally lower pay-TV penetration levels.
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
Source: Deutsche Bank, Company Presentation * Quarterly Power ratios are calculated
Historical financial review
Revenues have been growing again an annual basis since FY2015, following two years of decline. EBITDA on an LTM basis is up significantly on a YoY basis helped by the introduction of carriage fees in Q1 17, albeit on a staggered basis with the full impact back end loaded to Q1 19 on an annualized basis.
.Figure 12: Slovenia Revenues (in € m) and Growth Figure 13: Slovenia EBITDA (in € m) and Margins
1014
8
1711
149
1811
17
5450
46 49 5255
-2.2%
6.2%6.9%
9.2%
3.8%
4.8%
10.6%
4.2%
8.6%
17.4%
-6.4%
-7.5%
5.4%5.3%
9.9%
-10%
-5%
0%
5%
10%
15%
20%
0
10
20
30
40
50
60
Revenue YoY Growth
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Revenues in Croatia on the other hand have been declining to flat for the last three years. EBITDA contribution on the other hand has been largely stable at a little over HRK 1m supported by margins expanding modestly from 13% to 15% over the same period.
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 7
Figure 14: Croatia Revenues (in HRK m) and Growth Figure 15: Croatia EBITDA (in HRK m) and Margins
1.82.4
1.52.5
1.72.5
1.52.5
1.62.4
10.110.8 10.8 8.1
8.2 8.0
-27.3%
-32.5%
-23.0%
-13.8%
-4.0%
5.0%
0.3%-1.2%
-6.5%
-1.8%
7.0%
-0.5%
-24.5%
0.3%-2.2%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Revenue YoY Growth
0.3
0.7
-0.1
0.3 0.2
0.7
-0.1
0.50.2
0.8
1.4 1.4 1.4 1.11.3 1.3
16%
31%
-9%
11% 12%
27%
-5%
18%
10%
31%
13% 13% 13%14%
15% 16%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
EBITDA margin
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Historical GDP review
Free-to Air TV revenue trends, especially in the CEE region, have been highly correlated to GDP trends. With key /prime channels such as PoP TV in Slovenia moving to a pay-TV world would reduce the volatility and dependence on advertising revenue by the increasing and more stable “carriage fee” revenue stream.
Figure 16: Slovenia – GDP Growth (const prices) Figure 17: Croatia- GDP Growth (const prices)
1.2%
0.6%
-2.7%
-1.1%
3.1%
2.3%2.5% 2.5%
2.0% 2.0%1.8% 1.8% 1.8%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-1.7%
-0.3%
-2.2%
-1.1% -0.5%
1.6%
2.9% 2.9%2.6%
2.5%2.3% 2.2% 2.1%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Source: Deutsche Bank, IMF Source: Deutsche Bank, IMF
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 8 Deutsche Bank AG/London
IPO Scenarios
Exit scenarios
The current ownership structure consists of management and founding partners owning c. 30% of the equity with balance owned by KKR which bought in to the company in March 2014 for an EV of €1bn.
We don’t think a trade sale or equity listing is imminent in the short term as the business needs to close and integrate the acquired assets. As such, any potential listing would thus take place closer to the call dates of the capital structure, limiting any capital upside.
Furthermore, there is also the question of whether management would like to eventually exit through as sale to a strategic or remain invested? A desire to continue to remain invested would probably favour a share listing vs an outright sale.
We believe that any equity sales, especially if executed earlier rather than later, will largely be a primary share to de-lever the balance sheet.
Figure 18: IPO Assumptions
IPO share issues Primary Secondary Size of offering
Value of issue (€ m) 300 25 325
FY 2018 Net Debt 1,357
PF FY 2018 EBITDA 285
Net Leverage FY 2018 4.8x
Deleveraging 1.1x
Net Leverage FY 2018 post IPO 3.7x
Source: Deutsche Bank
We see EV values well ahead of the valuation at the time of the KKR acquisition, adjusted for all the bolt-on acquisitions completed or about to be completed.
340 2,040 2,210 2,380 2,550 2,720 2,890 3,060 3,230 3,400 Source: Deutsche Bank
However, pre-money equity valuation continues to be negatively impacted by the relatively high leverage level, especially relative to other competitors.
Figure 20: Implied Pre-money Equity Value
EV EBITDA multiple
2018E
EBITDA
6.0x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x
260 203 333 463 593 723 853 983 1,113 1,243
270 263 398 533 668 803 938 1,073 1,208 1,343
285 350 493 635 777 920 1,062 1,204 1,346 1,489
300 443 593 743 893 1,043 1,193 1,343 1,493 1,643
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
340 683 853 1,023 1,193 1,363 1,533 1,703 1,873 2,043 Source: Deutsche Bank
Due to the leverage levels, we believe any equity raise will be largely primary shares in order to de-lever the business to better reflect leverage levels in the broader public markets and also in order to improve the FCF generation of the business.
Figure 21: Deleveraging with the Primary Share Sale
EUR (m) Primary Share Issue
2018E
EBITDA
150 200 250 300 350 400 450
260 -0.6x -0.8x -1.0x -1.2x -1.3x -1.5x -1.7x
270 -0.6x -0.7x -0.9x -1.1x -1.3x -1.5x -1.7x
285 -0.5x -0.7x -0.9x -1.1x -1.2x -1.4x -1.6x
300 -0.5x -0.7x -0.8x -1.0x -1.2x -1.3x -1.5x
330 -0.5x -0.6x -0.8x -0.9x -1.1x -1.2x -1.4x
340 -0.4x -0.6x -0.7x -0.9x -1.0x -1.2x -1.3x
Source: Deutsche Bank
The necessity to raise equity, to lower leverage and reduce cash interest (which could add c. €10-15m in annual FCF) is highlighted by the implied PF FCF Yield of the Group post listing, which would need to be accompanied by above average growth, for the investment case to particularly attractive.
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 10 Deutsche Bank AG/London
Figure 22: United Group Financial Summary
Issuer Size Maturity DB Rec Moody's S&P Next Call Call Price Ask Price YTW z-Spread
United Group B.V. 575 2022 C-S B2 B 01-Jul-19 102.188 104.500 2.7% 289
United Group B.V. 450 2023 C-H B2 B 01-Jul-18 100.000 101.900 0.2% 52
United Group B.V. 325 2024 C-S B2 B 01-Jul-20 102.438 104.375 3.8% 352
United Group is a group of companies that provide cable and satellite pay-TV, broadband and fixed-line
telephony services in Slovenia, Serbia and Bosnia and Herzegovina. The company has advanced fibre
and cable network which covers across regions in Slovenia, Serbia and Bosnia and Herzegovina and as
of June 30, 2016, provided analogue and digital cable pay-TV services, broadband, fixed-line and mobile
services to approximately 2.9 million RGU's. On 1 April 2015, United Group closed the acquisition of
Tusmobil for €110m . On March 6 2014, funds affiliated with KKR completed the group's acqusition
for a total enterprise value of €1bn.
Cable pay-
TV
38%
DTH pay-TV
24%
Broadband
17%
Fixed
telephony
17%
Other
4%
RGUs
Source: Deutsche Bank, Company data
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 12 Deutsche Bank AG/London
Figure 24: United Group Capital Structure Summary
Organizat ional Structure
€ 575m 4.375% Senior Secured Notes Due 2022
Governing Law of Indenture: New York Law
Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia
Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended
March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented
54.0% of Total Assets.
The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
(ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans.
In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain
hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full.
Optional Redemption: Prior to July 1, 2019 - MW premium prior B+50pbs; Equity Claw 40% of the Notes at 104.375%; Redeem 10% of the aggregate principal every year at 103%
Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date
and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date.
Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x
Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local
lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA
Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period
Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x
Permitted Investments: Greater of €25m and 3.1% of Total Assets
€ 450m (E+4.375%) Senior Secured FRN's due 2023
Governing Law of Indenture: New York Law
Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia
Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended
March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented
54.0% of Total Assets.
The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
(ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans.
In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain
hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full.
Optional Redemption: MW premium prior to July 1, 2018, B+50pbs;
Call Schedule: Jul-18 100.000%
Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date
and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date.
Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x
Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local
lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA
Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period
Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x
Permitted Investments: Greater of €25m and 3.1% of Total Assets
€ 325m 4.875% Senior Secured Notes Due 2024
Governing Law of Indenture: New York Law
Ranking/Security/Guarantees: The notes will be general senior obligations of the Issuer and will be guaranteed by Adria Midco B.V., Adria Serbia Holdco B.V., Bosnia Broadband S.`a r.l., Slovenia
Broadband, Adria Cable B.V., Adria Media B.V., Telemach BH, Telemach Slovenia, Telemach Rotovˇz d.d. and Telemach Tabor d.d.; For the twelve months ended
March 31, 2017, the Issuer and the Guarantors generated 46.2% of the Company’s revenue and 42.9% of the Company’s Adjusted EBITDA, and represented
54.0% of Total Assets.
The Notes are secured by (i) shares of the Issuer, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
(ii) certain bank accounts of the Issuer, the Company, Adria Serbia Holdco B.V., Adria Cable B.V., Adria Media B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l.;
and (iii) certain receivables owing to Adria Cable B.V., Slovenia Broadband and Bosnia Broadband S.`a r.l. in respect of intercompany loans.
In the event of an enforcement, the holders of the Notes will receive proceeds from such Collateral only after the lenders under the RCF, counterparties to certain
hedging obligations and other indebtedness that is permitted to be secured on a super priority basis have been repaid in full.
Optional Redemption: Prior to July 1, 2020 - MW premium B+50pbs; Equity Claw 40% of the Notes at 104.875% ; Redeem 10% of the aggregate principal every year at 103%
Change of Control Put: 101%; Specified Change of Control Event implies no Change of Control if Consolidated Net Leverage ratio is < 5.0x within 18 months of the issue date
and < 4.5x after 18 months of the original issue date. Only one Specified Change of Control event permitted after the issue date.
Debt Incurrence Test: Consolidated Leverage Ratio < 5.0x
Carve-outs Credit Facility Basket: Greater of (i) €135m + debt incurred under credit facility ≤ €125m and (ii) 100% of EBITDA; CLO: Greater of €20m and 7.5% of EBITDA, Local
lines of credit, bilateral facilities, working capital facilities: Greater of €40m and 15% of EBITDA, General Basket - Greater of €40m and 15% of EBITDA
Restricted Payments Test: 100% of Consolidated EBITDA for the period less 1.5 times the consolidated interest expense for the period
Carve-outs General Basket - greater of €20m and 7.5% of Consolidated EBITDA; No RP restriction if consolidated leverage below 3.5x
Permitted Investments: Greater of €25m and 3.1% of Total Assets
Equity Ownersh ip
KKR and EBRD - 70.3%, Management through Gerrard Enterprises LLC, Dragan ˇSolak and Cable Management Company Ltd - 26.2% and Middlesbor Associates Limited - 3.5% Source: Deutsche Bank, Offering Memorandum, Company data
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 13
Appendix 1
Important Disclosures
*Other information available upon request
Disclosure checklist
Institution Disclosure
United Group NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr For historical recommendations pertaining to a European security mentioned in this report, please visit our website at http://gm.db.com/welcome.html?about/spreadsheet.html
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vivek Khanna
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 14 Deutsche Bank AG/London
Deutsche Bank debt rating key Bond rating dispersion and banking relationships
CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating.
Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.
25 %
70 %
4 %54 %
62 %
71 %
0
50
100
150
200
250
Buy Hold Sell
European Universe
Companies Covered Cos. w/ Banking Relationship
(a)
15 January 2018
HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 15
(b) Additional Information
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HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Page 16 Deutsche Bank AG/London
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HY Corporate Credit,Media, Cable & Satellite,Telecommunications
United Group
Deutsche Bank AG/London Page 17
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