Telia Company AB (publ) (TELIA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Info Meeting Press and Analytics Meeting Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would like to hand the conference over to your speaker today, Andreas Joelsson. Please go ahead, sir.

Good morning, everyone, and welcome to this conference call related to our divestment of our stake in Turkcell Holding. With me in the room, I have our President and CEO, Allison Kirkby; our CFO, Douglas Lubbe; and our Group General Counsel, Jonas Bengtsson. And Allison, please take it away. Also, you have a presentation material on our website, teliacompany.com.

Good morning, everyone, and I'm delighted to announce that late last night, we reached an agreement between the shareholders of Turkcell Holding to end the disputes and the deadlock and the ownership of Turkcell. It means that we will now exit our stake in Turkcell Holding, a stake that will be acquired by the Turkish Wealth Fund, which will then take control of the company at the closing of the transaction. As a result, Telia can now simplify and fully focus on executing on our Nordic and Baltic strategy. We've been owners in Turkcell both directly and indirectly since the acquisition of Sonera back in 2002. And Sonera was actually one of the founders of the company already in 1993. Since then, Turkcell has grown into the largest telecom operator in the country, and the investment has generated a net cash flow of around SEK 15 billion to Telia Company shareholders, equal to a roughly 5% annual return. The transaction today converts the Turkcell Holding position into cash for Telia Company as we will receive USD 530 million at closing. Note that the proceeds will be in dollars, so we no longer carry exposure to Turkish lira, and there's also no cash tax on the sale of the shares. This also means that our leverage is, in effect, improved by 0.16x from the level we reported with our last results on the 31st of March to 2.55x, or if you include the dividend paid in April, 2.67. So in summary, as a result of this transaction, we simplify, we unwind a long-lasting legal deadlock, we reduce risk, we improve leverage and increase liquidity, which will generate better shareholder returns in our core Nordic and Baltic markets. And so a new chapter of Telia can begin. Let me go -- take you through the transaction highlights here on Slide 2, which are clear. The strategic rationale, already I've articulated. Moving on, clearly, we also now end all disputes and litigation between Telia and the other owners of Turkcell Holding. The Turkish Wealth Fund is the buyer of our shares, as I already said, and the Turkish Wealth Fund will finance the deal via a state mandate and a loan from LetterOne. From an accounting perspective, the transaction will, based on current FX rates, result in a noncash impairment of SEK 3 billion for Telia before reclassification of accumulated FX losses. These FX losses, which are the aggregate losses since we bought Sonera, amount to SEK 17 billion, and will be booked over the P&L at closing. But note, these have already impacted equity. This is just the IFRS way of accounting for historical FX gains and losses. This SEK 17 billion will therefore have no impact on equity nor on cash. The impact on leverage I've already mentioned. And finally, we expect the transaction to close in the second half of 2020 and is subject to regulatory approval as well as an approval at the Turkcell AGM, which is expected to be held later in the year. Moving to Slide 3. This is clearly a very natural step for us after having left the operations in Eurasia, having left the holding in MegaFon and removing the direct stake in Turkcell back in 2017. The [ cord ] company, Fintur, starts to be dismantled, in fact, as soon as we divested Turkcell, leaving even less touch points with Turkcell. Since March 2018, we've had 1 seat at the Board out of 7 in total. And despite that, we see that we're the largest owner of the company through the 47% we have in Turkcell Holding. However, there have been periods where we've had no seat at the Board. And in effect, we have had no control and minimal influence over the company and its operations for many years. Turkcell Holding is a private holding company jointly owned by us, Cukurova and LetterOne. And as the company is not traded, the holding is highly illiquid. The holding in Turkcell is the only holding in Turkcell Holding, and it has no other businesses. As many of you aware, the ownership in Turkcell has clearly been a turbulent journey for Telia. For example, the governance of the holding company has been challenging, characterized by disputes between the 3 owners which has included agreeing on how to vote at Turkcell AGMs and various lawsuits. There's been a shareholder agreement stipulating on how to decide on current investments and dividends in Turkcell Holding. And there's also been a right of first refusal, meaning that 1 poor party could not sell shares in Turkcell Holding without the approval of the other owners. Moving to Slide 4. Just to reiterate, this transaction once approved will result in an increase in our cash position by around SEK 5 billion and will, therefore, improve our leverage. And again, on this slide, you can see the accounting impact. Finally, moving to Slide 5. And with respect to human rights and compliance. Our assessment is that our exit will have limited impact on human rights, but we have included a human rights clause in the global settlement agreement. And it goes without saying that prior to signing the agreement, we have completed compliance and purchaser due diligence, including gathering external expertise. And including the screening of key individuals and counterparties, we've also investigated the flow of funds to us, including anti-money laundering control and we've found everything to be in order. It's also important to stress that we have a fairness opinion of the valuation of our stake in Turkcell Holding from UBS. I, therefore, now like to take this opportunity to thank the Telia team who have worked tirelessly and diligently for quite some time to get to this stage, especially Andreas Ekström in M&A; and Jonas Bengtsson, our General Counsel. But also Christian Luiga, who has committed almost all of his time to this transaction since my arrival at Telia so that I could focus on the Nordic and Baltic businesses. So now I'd like to open up for questions. I know it will be very tempting for many of you to ask questions that may not be related to this particular transaction, but let's please focus on the announcement of today. And wait with questions on other matters when we get together for our Q2 report.

Thank you, Allison. Then operator, we can take the first questions.

[Operator Instructions] The first question comes from the line of Lena Osterberg.

My first question, and I promise I'll stay to Turkcell then, is on the dividends for 2019 from Turkcell. Are you still entitled to get those? And could you please remind me, has there been a decision on how much would that dividend be and when will it be paid? And my second question is what will happen to Turkcell Holding after your exit?

I don't know if...

Yes, this is Jonas Bengtsson. No, we will not receive any dividend from Turkcell Holding after this. So the -- we have sold the financial interest as of now with that. Whether or not dividends will be paid out during the year is subject to several items, not least, COVID-19 restrictions in Turkey. So we cannot really comment on that. And then, sorry, I missed. You had a second part of your question also.

Taking the dividend -- yes, just the 2018 dividend and that -- I think there's 1 tranche remaining, will you get that?

No. This is sold as per the date of the agreement. So we will not get any other cash flow out of the entity sold.

Okay. And the second question was what will happen to Turkcell Holding after your exit.

Well, after we leave, it is obviously up to the new owners. But we will -- we assume that the structure will be collapsing in some way and the Turkcell Holding will be dissolved. There does not seem to be any point in keeping that structure after this transaction has closed.

Our next question comes from the line of Maurice Patrick.

Obviously, very tempting to ask a question about 2Q trading. But as you said, not to. I'll keep it to the deal. I guess the question is like, why now? And how much of the decision to sell is governance-led rather than financial? Because you could argue you could just keep the stake there and keep the dividend for the next 10 years. I mean Turkey is quite a good market, potentially the next growth and penetration, et cetera. So why now and how much of the division was governance rather than financial as such?

It's been -- Maurice, it's been Telia's intention quite publicly for many years now to exit its position in Turkcell, so that it could focus on the core markets of the Nordics and the Baltics. These negotiations have been going for quite some time to arrange that exit and the team feel that now is the right time to take advantage of the offer on the table. And we can move on and realize liquidity, reduce our leverage and really now simplify and focus on the Nordics and the Baltics. And that's being publicly an intention of my predecessors for quite some time, Maurice, and I fully support that decision.

Okay. Next question, please.

It comes from the line of Andrew Lee.

Congrats on getting the deal done, we've been waiting for years for this. I had a question really from a few investors when the valuation was first put in press speculation and then confirmed overnight. So I think some investors thought, by doing the math on the various ownerships, that maybe you'd be due more cash in from the deal. I wonder if you could just talk through the discount to the theoretical value. I know liquidity had something to do with it, but I wonder if you could talk through the valuation that you accepted.

Yes. As I'd say, we do believe it's overall a fair value. We've had a fairness opinion on that. And if you consider the last 15 years that have been characterized by disputes among the shareholders, then this is a good value. What you've got to remember is we're not actually selling shares in Turkcell. We're selling a highly illiquid position in a holding company which would -- we always believed would come at a discount, Andrew. As you know, holding companies always trade at discounts. And given this very illiquid position, it's not surprising and we've seen higher discounts in similar transactions in the sector. So we believe it is a fair value, and it's being backed up by UBS.

Next question comes from the line of [ Johanna ].

Yes. One question related to the SEK 5 billion proceeds that you get. Would you consider -- it seems like on the presentation that you aim to deleverage. But I was just wondering, would you ever consider paying those SEK 5 billion out to shareholders? And -- so that's the first question. And the second question, very much related to this, has this increased the likelihood of Telia paying the initial full dividend announced for 2019, the SEK 2.36 per share? So far, it's been the SEK 1.8, which has been distributed. So any comments on potential dividend or ex dividend?

[ Johanna ]. At this point in time, it's reducing our leverage, as I mentioned in the presentation. And clearly, it's a Board decision as to any decision on what we might want to do with dividend going forward. But for now, it's a reduction in our leverage.

Thank you, Johanna. May we have the next question, please?

It comes from the line of Peter Nielsen.

Congratulations to yourself and to Telia Company for finalizing this part of future -- of the chapter. Can I just kind of add and as you said, over the past 15, 20 years, this has been challenging and turbulent for Telia and has required much management resources. I guess I was just asking on a broader note. Are there any takeaways from this or anything you can use going forward apart from the obvious lesson, perhaps not to get involved in Eurasia? But do you feel there's anything for yourself or for Telia as a company that you could take away from this rather than just saying, okay, we are now completing our exit from Eurasia? Is -- are there any positive takeaways or lessons learned which you can use going forward?

I'd like to say, stick to your knitting. And I mean by that, just focus on your core. And I think that's the key lesson here, Peter. Focus on your core markets where you have a right to win over the long term. And that's why this transaction makes a lot of sense for Telia at this point in time as we move into a new chapter to really strengthen our positions in the markets where we do have a right to win. This has been a distraction for many years, for many in the company. And the team here have done a fabulous job in now allowing me to focus as the new CEO. And we'll -- the SEK 5 billion reduces our leverage and allows us to really focus our capital going forward on the exciting markets of the Nordics and the Baltics. But it's stick to your knitting, and you get a better chance of success.

May we have the next question, please?

It comes from the line of Steve Malcolm.

Just a quick question on use of proceeds and free cash flow accretion. I haven't looked at your maturity profile. Are there any bonds that you can pay down quite quickly with these proceeds? And in terms of the free cash flow impact, should we assume just take the Turkcell dividend off as uncertain as that is? And are there any interest savings that you can make by paying down debt in the short term?

So from our perspective, as we said, we'd look at reducing our leverage. How we use those liquidity is obviously something that we'll look into and try and structure something as best as possible. But there's nothing more than we can comment on there at this point in time.

And just to add on the free cash flow side, yes, as Mr. Bengtsson clearly has said, there will be no more dividends from the exposure we have to Turkey. So if you have any dividend in your forecast, you can take that out.

Next question comes from the line of Abhilash.

This is Abhilash Mohapatra from Berenberg. I just had a question on taxes, please. You mentioned the holding used to sit within the old sort of Sonera structure. I was just wondering post the sale, does this have any impact on the sort of cash tax rate for Telia Group?

No. As we said, this has no cash tax consequences, this transaction.

Good with a short and punchy answer, Doug. Can we have the next question, please?

It comes from the line of Nick Lyall.

Just a quick one, Allison, if possible. It's a little bit like Steve's actually. I mean your balance sheet is relatively inefficient with quite a lot of cash on it. And if you -- it sounds like even more cash now. So any change in the way you may be running the balance sheet at all and maybe tweaking it? And then secondly, the cash flow. There's still quite a bit to answer in terms of cash flows and sort of future direction. So any idea when you might be able to give us more guidance on the cash flow numbers, please?

Thanks, Nick. Listen, it's -- I think it's week 6 at the moment and delighted that we've now pooled this transaction also that I can focus, and we can derisk our business and also reduce our leverage. Regarding the rest of the balance sheet questions and strategy going forward, that's for a later day and not today, Nick. So it's great to be here, and I look forward to mapping out what I intend to do in the coming months.

There are no more questions at this time. Please continue.

Okay. If there are no more questions, then we leave it at that. But as you know, both me and Andreas will be available throughout the day for any follow-up questions. And by that, we conclude this conference call and wish you a happy day and very good mid-summer for you who celebrate mid-summer. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.