Netia

comprises a group of subsidiaries of Netia SA. As a group of companies, Netia is a leading independent fixed-line telephony operator in Poland. It operates on the basis of its own state-of-the-art fibre-optic backbone network which covers major Polish cities (5,002 km long) as well as on the basis of local access networks. Netia provides a wide range of fixed-line telecommunications services including voice, data transmission and Internet access, and wholesale network services. Netia‘s objective is to become the service provider of preference for broadband services and deliver growth by establishing the Company as the leader in the rapidly expanding Polish broadband market.

On April 18, 2007 Netia announced its new operating strategy focused on growth through dynamic expansion of the customer base and an increase in customer value. The Company plans to build on new opportunities to access the fixed-line network of the incumbent operator (via bitstream access (BSA), local loop unbundling (LLU) and wholesale line rental (WLR)), to leverage Netia’s investment in PLAY mobile project, and to capitalize on the Company’s already strong position in the business market. In particular, Netia aims to become the market leader for broadband services in Poland amongst altnet providers with the objective of acquiring one million broadband customers by the end of 2010. Netia also intends to focus on the most attractive segments of the business market, significantly increasing the number of SME & SOHO clients and increasing profitability from large corporate clients while minimizing cash burn. The above growth strategy will be supported by corporate culture changes aimed at strengthening our customer focus. Despite the sale of Netia’s stake in P4 Sp. z o.o., a mobile service provider operating under the PLAY brand, Netia expects to continue to leverage its position as a founding shareholder in P4 and continue a business partnership with P4 based on the key commercial agreements signed by both companies.

In accordance with its medium-term outlook, Netia is targeting continuous sequential quarterly revenue growth and annual growth rates in the mid to high teens for 2008-2010. It is assumed that the main strategic target to acquire 1 million broadband customers will be achieved with PLN 500.0m of capital investments allocated to broadband and Ethernet network acquisitions and PLN 200.0m of start-up losses for broadband growth. Of these amounts, PLN 66.0m of losses, PLN 81.4m of investments in broadband and PLN 39.0m of acquisitions of Ethernet networks were consumed during 2007. Netia expects EBITDA to recover strongly above PLN 220.0m by 2010 and for long run EBITDA margins to settle above 20% with a less asset intensive business model. The Company targets to achieve free cash flow break-even by 2010 and projections indicate that Netia should return to operating profit by 2010 and net profit by 2011 at the latest.

Taking advantage of new regulatory opportunities, Netia was first to market in offering broadband Internet to the incumbent’s customers via bitstream access (offered since mid-January, 2007). In August 2007 Netia introduced its ‘double play’ offering of bundled packages of Internet and voice services (offered on TP’s lines based on bitstream and wholesale line rental arrangements). The Company also secured an agreement with TP covering local loop unbundling and entered commercially LLU market in Q1 2008. This will allow Netia to differentiate its product portfolio and upsell new services to the broadband bitstream clients. In the future, Netia intends to further increase customer value by migrating its bitstream access clients to LLU and up-selling them both content and convergent products as well as voice services.

Netia’s broadband initiatives have delivered 152% growth year-on-year as the Company reached 257 thousand customers at the end of Q1 2008. Netia’s market share of net additions was a strong 17% and the Company has doubled overall broadband share, to 5.1% of the total broadband market subscribers. The financial results show that the consistent execution of Netia’s strategy is delivering accelerating revenue momentum. Q1 2008 revenues of PLN 237.5m represent a 16% year-on-year increase, up from the 6% growth reported last quarter. Excluding the non-core activities disposed of during Q1 2008, year-on-year growth from continuing parts of Netia was actually 22%. As predicted, EBITDA performance has rebounded after Q4 2007 and Netia is on-track to meet the full year guidance on EBITDA and in all other areas. The Company continues to work on adding further growth and profitability momentum to its business later in the 2008 with the roll of LLU-based services, beginning of the cross-selling of voice services to Netia’s Ethernet-based broadband customers, launch of fixed-mobile bundles and further Ethernet network acquisitions.

Sale of Netia’s minority interest in P4. After thoroughly assessing its options, Netia decided that it is best for the Company to focus its capital resources on broadband expansion. On April 30, 2008 Netia completed the sale of its share in P4 for EUR 131.8m. This represent a 66% return on invested capital and provides the funding necessary to support Netia’s broadband-driven growth strategy through to expected cash flow break-even in 2010.
Despite the sale of its stake in P4, Netia expects to continue to leverage its position as a founding shareholder to continue a close business partnership with P4. This partnership includes: (i) full implementation of the pre-existing mobile service provider agreement that enables Netia to sell convergent fixed and mobile offers under its own brand, (ii) provision of backhaul transmission services to P4’s network, and (iii) continued use of the PLAY Germanos distribution chain for Netia’s services. 

Netia acquires Tele2 Polska. On June 29, 2008, Netia concluded an agreement to buy a 100% interest in Tele2 Polska Sp. z o.o. The equity value amounts to 31.4 mln EUR (payable in cash on closing) and may increase by an additional 4.8 mln EUR, depending on performance post closing. The completion of the transaction is dependant, among others, on the satisfaction of the following conditions precedent: a positive decision from the President of the UOKiK, Netia taking over the obligations under the guarantee issued by Tele2 for the benefit of Polkomtel SA and no material adverse change.
The transaction values Tele2 Polska’s enterprise at between EUR 29.1m and EUR 33.9m, depending on the level of additional payments (not exceeding EUR 4.8m). This valuation translates to a maximum of 156 PLN (46 EUR) per voice customer, which is broadly comparable to acquisition costs for new customers acquired organically.

The acquisition of Tele2 Polska is a break-through step in realizing Netia’s mass market strategy. It will result in Netia being the indisputable leader amongst alternative telecoms operating on the Polish market (an increase in its customer base to over 300 thousand broadband services and over 1.2 million fixed voice services). Furthermore, Netia will benefit from significant synergy and economy of scale effects.  

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