France Telecom SA (FTE), Europe's third-largest telecom company, and Denmark-based TDC A/S said Wednesday that they have agreed to combine their respective Swiss subsidiaries, Orange Communication S.A. and Sunrise Communications S.A. In the deal, France Telecom will pay 1.5 billion euros to TDC at closing, and would become a 75% shareholder in the combined entity, while TDC, which is 87.9% owned by Nordic Telephone Company ApS, will hold the remaining 25%. The final transaction is expected in the second half of February 2010.
The companies also noted that both TDC and France Telecom will undertake a confirmatory due diligence before signing the final transaction documentation. The deal closure is conditional upon the approval by the relevant competition and regulatory authorities.
After closing the merger, France Telecom will fully consolidate the combined entity, while TDC will recognize its interest in the company using the equity method. The merger is projected to create substantial value for both shareholders and for France Telecom to be accretive from 2010 in terms of free cash-flow per share and from 2011 in terms of earnings per share.
In the combined entity, current Chief Executive Officer of Orange Switzerland, Thomas Sieber, will be the Chief Executive Officer, and France Telecom will hold the majority of the seats in the Board, which will also be composed of TDC representatives. Christoph Brand will continue as Sunrise's CEO up until the completion of the transaction, and following the closing, Brand will help supervise the initial integration, before moving on to pursue new executive opportunities outside of the combined entity.
According to the companies, the combination is expected to result in the creation of a leading nationwide alternative provider of telecommunications services in Switzerland. The combined entity will account for around 38% of the mobile telephony market and 13% of the fixed broadband connections, with about 3.4 million mobile and 1.1 million fixed and broadband customers. For 2008, the combined entity would have generated total pro-forma revenues of CHF 3.1 billion or 2.0 billion euros, and EBITDA of CHF 809 million or 534 million euros.
The companies noted that the combination and integration of Sunrise and Orange Switzerland is expected to generate synergies with an estimated net present value of 2.1 billion euros or CHF 3.2 billion. Estimated Opex-based synergies, mainly from Network & IT, distribution, marketing and workforce optimisation, would reach an annual run-rate of 132 million euros or CHF 200 million, with cumulative integration costs estimated at 92 million euros or CHF 140 million.
France Telecom and TDC also noted that significant Capex synergies of 376 million euros or CHF 570 million are expected between 2010 and 2015, and a run-rate Capex savings of 43 million euros or CHF 65 million per annum from 2015.
Further, the companies said that the combined entity will have a share buyback program targeted at TDC's 25% stake to be executed at the discretion of the Board using cash generated by the company. If decided, the annual share buybacks will be executed in first quarter of each of 2012, 2013 and 2014, on the basis of pre-agreed multiples applied to prior year EBITDA and determined on the basis of a target net present value of 1.2 billion euros for the full 25% TDC stake.
TDC will have the right to sell its stake to third-parties from the second anniversary of closing or to do an initial public offering of the company from the third anniversary of closing. In addition, France Telecom will have an option to buy TDC's shares from the first anniversary of closing at a minimum value of 1.2 billion euros, compounded at a rate of 7% per annum.
Commenting on the deal, Gervais Pellissier, France Telecom Deputy Chief Executive Officer and Chief Financial Officer, said, "The planned merger of Sunrise and Orange Switzerland marks a new significant step in the long-term investment by France Telecom-Orange in Switzerland. Following the UK joint venture between Orange and T-Mobile, France Telecom completes another major in-market consolidation, consistent with its M&A policy."
According to Jesper Ovesen, TDC CFO, the agreement between France Telecom and TDC is a natural last step towards TDC focusing on the Nordic markets, which is the company's strategic goal.
Sunrise CEO Christoph Brand said, "The merger with Orange is an important milestone for us. This is a logical way for us to improve our competitive position in the Swiss market and create a better product offering for our customers. The combined group will be better placed to make the necessary investments for the future and allow us to play a more active role in shaping the market."
On September 8, European telecommunication operator Deutsche Telekom AG (DT) and France Telecom said that they entered into exclusive negotiations to combine their respective UK operations T-Mobile UK and Orange UK in a new 50:50 joint venture company, which would create UK's leading mobile operator.
FTE closed Tuesday's regular trading session at $26.01, up $0.09, on a volume of 205,400 shares.
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