Significant synergies expected from the integration of Club Internet
The price paid for T-Online France is based on an enterprise value of €465 million. Of this price, €340 million relates to the value of Club Internet's customer base (around 600,000 ADSL subscribers and a few tens of thousands dial-up subscribers) and €125 million to the discounted value of tax deficits accumulated by T-Online France, which can be used indefinitely by Neuf Cegetel. Neuf Cegetel financed the acquisition using available cash and existing credit lines.
In the short term, Club Internet's customers will continue to benefit from their existing packages and Club Internet's customer service. From the end of this year, they will be able to opt to migrate to the Neuf brand - in particular by choosing the 100% Neuf Box package - in order to benefit from all of the group's services.
From the second half of 2007, synergies will be generated in the fields of marketing expenses, revenue per customer, network and IT costs and overhead costs:
- From this summer, Club Internet's marketing expenses will be reduced sharply and advertising will be focused on the Neuf brand.
- Migrations towards the 100% Neuf Box package, possible from the end of the year, will increase the average monthly revenue per Club Internet customer, which currently stands at around €32 excluding value added tax.
- Beginning of 2008, streamlining of Club Internet's unbundling network, which comprises over 500 unbundling points, most of which redundant with those of Neuf Cegetel, will start.
- Half of the ca. 500 Club Internet’s employees work in the internalised call center; they will continue to serve Club Internet’s customers and progressively other customers of the group. The other employees of Club Internet will be offered to fill open positions available within the Neuf Cegetel group.
Although Club Internet is currently heavily unprofitable, these measures should help it to breakeven in terms of EBITDA from the second half of 2007, excluding potential non-recurring restructuring expenses. From the end of 2008, once the integration of Club Internet is completed and customers have migrated to the Neuf brand, the EBITDA gain for the group should amount to around €60 million per year, including the impact of the loss of the related wholesale business.
Strength of the ‘Neuf’ brand confirmed in the second quarter
The Neuf brand is continuing to develop soundly. Broadband customers on the Neuf brand increased by 130,000 in the second quarter of 2007. This figure excludes subscribers migrated to the Neuf brand from the Cegetel and AOL brands, which are continuing to see a decline in their customer base. 1.7 million customers are now positioned on the Neuf brand, representing 56% of the group's total customer base after the integration of Club Internet.
For the coming quarters, Neuf Cegetel’s target for the Neuf brand is to capture a 20% to 25% share of the Mass Market broadband market growth. Added to customers migrating from the Cegetel, AOL and Club Internet brands, this growth should allow the group to have 90% of its clients on the Neuf brand by the end of 2008.
The proactive strategy of migrating customers to the Neuf brand, even though it entails non-recurring costs in the short term, enables the group to build up a homogenous customer base, increase the revenue per customer and reduce customer management costs, thereby fuelling an increase in the profitability of the Mass Market activity.
Growth accelerating and profitability targets reinforced
On the back of the organic growth in the number of broadband subscribers recorded during the first half of the year and of the significant improvement in the average revenue per subscriber (expected to reach €35 per month excluding value added tax at the end of 2007 for Neuf, Cegetel and AOL customers), and in view of the consolidation of Club Internet as of July, the group has upgraded its 2007 sales growth guidance for the Mass Market activity to close to 60% (growth of close to 50% in the first half of the year and close to 70% in the second half of the year, compared with the group's initial guidance of over 40% in 2007).
In the light of this faster growth and of the strong momentum of the Enterprises activity, the group maintains its guidance of doubling the rate of operating cash flow at end 2007 compared with the start of 2006, despite the short-term negative impact of the integration of Club Internet.
Neuf Cegetel also reiterates its target of achieving an EBITDA margin of 25% of sales before the end of 2008, which will apply on a higher level of sales following the acquisition of Club Internet. Finally, the group intends to generate an Operating Cash Flow of around €450 million in 2008, despite significant expenditures relating to customer migrations to the Neuf brand.
Acceleration in growth and continuing improvement in margins in the Mass Market and Enterprises activities confirm the relevance of the group's growth model, based on profitable organic growth, amplified by well controlled acquisitions.
Neuf Cegetel Group (Euronext: NEUF)