Report on ONO Midco, SAU and its subsidiaries as of December 31 ...

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OUR BUSINESS Overview We are the second largest provider of broadband internet, pay television and fixed telephony services in Spain. Through our proprietary state-of-the-art network, we offer our services to over 7 million homes across Spain, including the nine largest cities. We are the only fiber operator in Spain with national coverage. As of December 31, 2011, we provide over 4.4 million services under the ONO brand to 1.9 million residential (fiber and ADSL) customers and more than 89 thousand small and medium-sized enterprises (“SMEs”) in Spain. We also offer products and services to large corporations and public sector entities as well as to the wholesale market. We are the principal competitor to the incumbent telecommunications and pay television operators in Spain and, through our recently upgraded network, we believe we are able to offer the most advanced broadband internet and pay television services in the Spanish market. For the year ended December 31, 2011, we generated revenues of €1,485 million, EBITDA of €748 million and an EBITDA margin of 50.4%. In the same period, our residential services generated revenues of €1,168 million (accounting for 78.6% of our total revenues), and our business and other services generated revenues of €318 million (accounting for 21.4% of our total revenues). Residential Services As of December 31, 2011, our residential fiber customers totaled over 1.8 million, representing approximately 95.1% of our total residential customer base. We offer customers the opportunity to subscribe to a variety of “bundled” packages, which provide them with multiple services (broadband internet, pay television and telephony) charged in a single bill. “Double-play” packages bundle two of our services together, whereas “triple-play” packages allow customers to utilize each of our broadband internet, pay television and telephony services. As of December 31, 2011, 84.7% of our residential fiber customers subscribed to a bundled package. The following is a summary of our services for residential fiber customers: Broadband Internet: We are a leading provider of residential broadband internet services in our areas of operation. Our internet customer base grew by 4.7% in 2010 and 3.6% in 2011. As of December 31, 2011, we had over 1.4 million internet customers, representing 79.1% of our total residential fiber customer base. We were the first Spanish operator to launch broadband speeds of 50 Mbps and 100 Mbps on a nation-wide basis and, with the implementation of Docsis 3.0 technology, we have made these broadband speeds available widely throughout our network. As of December 31, 2011, over 424 thousand customers subscribed to our high-speed internet packages (30, 50 or 100Mbps), which we believe makes us the leading provider of ultra-high speed internet in Spain. We intend to continue focusing on marketing and deriving the commercial benefits from this service. Television: We are a leading provider of pay television services in Spain with 923 thousand customers as of December 31, 2011, representing 51.1% of our total residential fiber customers. We offer a wide selection of digital television programming from basic to premium packages. Each of our TV packages also provides easy access to our pay-per-view and video-on-demand (“VoD”) services, where available. In June 2010, we signed a strategic agreement with TIVO (a U.S. digital video company) to deploy an innovative set of next generation TV services on an exclusive basis, which we believe provides a seamless convergence between internet and traditional television content. In October 2011, we officially launched our next generation TV service (TIVO) to customers within the Madrid and Barcelona regions and in Valencia, Murcia and Santander in February 2012, and we expect to start offering this innovative service on a broader scale in the coming quarters. Although to date this product has only been launched on a limited basis, we believe there are positive signs of market acceptance of the TIVO product at this early stage, with approximately 8 thousand customers as of December 31, 2011. Telephony: We provide local, national and international telephony services to 1.7 million customers, representing 94.6% of our total residential fiber customer base as of December 31, 2011. In June 2010 we signed a strategic agreement with Huawei to upgrade and outsource our voice network. We believe this agreement will reduce operating costs while maintaining the quality of our telephony service. We also offer services through ADSL and other technologies, such as indirect access. As of December 31, 2011, we had approximately 94 thousand ADSL customers taking 176 thousand services from us. In addition, we offer all our fiber customers mobile telephony and internet services Business Services Spain. We also provide telecommunication services to SMEs, large accounts and corporations and the wholesale market in SME: We provide voice and data telecommunication services to small and medium sized enterprises. As of December 31, 2011, we had approximately 89 thousand SME customers taking 174 thousand services from us. Large Accounts & Corporations: We provide a range of customized solutions (voice, internet, data and equipment) to corporations, institutions and public sector entities. 26
Wholesale & Other: We provide carrier services, voice traffic services, leased and dedicated lines and circuits and ISP solutions to other telecommunications operators. In addition, we provide intelligent network services. Our History Formation Before commencing operations in 1998, we participated in a number of competitive public bids further to the adoption of Spain’s Law 42/1995 on Cable Telecommunications. Between 1996 and 1998, we were awarded licenses to provide fiber television and telecommunications services in the following nine regions: Valencia, Alicante, Castellón, Murcia, Cádiz, Huelva, Cantabria, Mallorca and Albacete. In 2003, we were awarded a license to operate in Castilla la Mancha. In 2004, we acquired the telecommunications operator Retecal, covering the Castilla y Leon region. In November 2005, we acquired Auna Telecomunicaciones, S.A.U. (“Auna”), a wireline and fiber operator. The acquisition consolidated our presence in Spain and extended our coverage to seven additional regions, which included Spain’s largest cities, Madrid and Barcelona. Following the Auna acquisition, we continued to pursue an expansion strategy of extending our network and acquiring new customers. Between 2006 and 2008 we invested substantially in expanding the footprint of our network infrastructure, with the number of homes released to market increasing by 1.2 million to over 7 million. Transformation Process Towards the end of 2008, faced with weakening international economic conditions, we commenced a transformation process. The transformation focused on adjusting our business model to the changed economic environment and stabilizing our operations following a period of rapid expansion, with the aim of creating a more efficient platform for future growth. This process also coincided with significant changes in our senior management. Largely completed by the end of 2009, the transformation process included a wide range of initiatives focused on maximizing cash flow, implementing cost efficiencies, reshaping our organization and attracting and retaining high-quality customers. As a result of the transformation, we believe we have become a more resilient and efficient company. As a result of the transformation, we believe we have become a more resilient and efficient company. Our EBITDA increased from €645 million in 2007 to €748 million in 2011, our EBITDA margin increased from 39.9% in 2007 to 50.3% in 2011 and operating free cash flow increased from €91 million in 2007 to €456 million in 2011. During the transformation process, we focused primarily on: Optimizing returns from assets: Having already invested to establish a network reach of over 7 million homes, we ceased our network expansion activities and focused on maintaining and enhancing our existing network. We have undertaken several platform upgrades, such as our implementation of DOCSIS 3.0 (deployment completed in February 2012), our ongoing voice platform migration to 12 switches from out old 130 switches and improvement of our next generation television service (TIVO). Other initiatives included improving our receivables collection cycle. Reshaping our organization: We centralized our business operations, eliminating duplicated regional functions and reducing headcount. A shift towards internet sales and other more cost-efficient sales channels led to a reduction of our direct sales force. In the fourth quarter of 2011, 31.9% of our sales were through the internet, compared to 16.6% in the same period in 2009. The average number of our employees has declined from 3,549 for 2009 to 3,025 for 2011. In addition, in April 2010 we sold our loss-making content aggregator, Teuve. Cost efficiencies: We implemented a wide range of cost efficie0ncy initiatives, resulting in our cost of sales, staff costs and other operating expenses (less capitalized costs) declining from €782 million in 2009 to €738 million in 2011, or 5.6%. In addition to the organizational changes described above, other key initiatives included selective outsourcing, renegotiating various contracts and migrating our customers to an e-billing system. Focusing on high-quality customers: We placed a strong emphasis on attracting and retaining high-quality customers. We introduced a credit scoring initiative and increased activation and installation fees in order to reduce the number of new earlychurn customers. In addition, we improved our customer care processes and offered our existing customers add-on services, such as next generation TV (TIVO), mobile broadband and the Gol TV channel, in order to increase their loyalty. Despite these successful initiatives, the unfavourable economic environment took a toll in our churn levels that increasedt in 2009-2011. We also shifted our marketing focus to promote double- and triple-play packages, which we believe can help us achieve higher ARPUs and greater loyalty. As part of this initiative, we offered to double the broadband internet speeds to the majority of our residential fiber customers for an additional small monthly fee, with wide acceptance. We also launched a new marketing campaign emphasizing the superiority of fiber versus ADSL in terms of speed and quality of service. As a result of these and other measures, the percentage of our customers subscribing to triple-play services increased from 36% as of December 31, 2009 to 40% as of December 31, 2011 and our RGUs per customer increased from 2.17x in the fourth quarter 2009 to 2.25x in the same period in 2011. 27
Page 1 and 2: Report on ONO Midc
Page 3 and 4: • Operating free cash flow do not
Page 5 and 6: • the effect of changes in the re
Page 7 and 8: CONTENTS INFORMATION ON THE COMPANY
Page 9 and 10: RECENT DEVELOPMENTS Key operating e
Page 11 and 12: SUMMARY FINANCIAL INFORMATION AND O
Page 13 and 14: Reconciliation of EBITDA, operating
Page 15 and 16: RISK FACTORS In addition to other i
Page 17 and 18: We do not expect to generate suffic
Page 19 and 20: RISKS RELATING TO OUR BUSINESS We m
Page 21 and 22: altogether. In addition, the broadb
Page 23 and 24: evenues could be adversely affected
Page 25: • Regulations relating to accessi
Page 29 and 30: espectively), which stands in contr
Page 31 and 32: Our Products and Services We curren
Page 33 and 34: We offer all our broadband customer
Page 35 and 36: services, ranging from simple fixed
Page 37 and 38: coming years. For example, in June
Page 39 and 40: technology, although depending on O
Page 41 and 42: Supplier Network Equipment Next Gen
Page 43 and 44: not belonging to a group (following
Page 45 and 46: Telecommunications Law, the MIET ha
Page 47 and 48: The right to provide electronic com
Page 49 and 50: As holders of spectrum concessions
Page 51 and 52: A general provision against anticom
Page 53 and 54: programs and content in order to in
Page 55 and 56: SELECTED HISTORICAL CONSOLIDATED FI
Page 57 and 58: MANAGEMENT’S DISCUSSION AND ANALY
Page 59 and 60: aggregate price of these services p
Page 61 and 62: Residential Services Residential re
Page 63 and 64: Operating data in units % change Fi
Page 65 and 66: Operating Expenses Our operating ex
Page 67 and 68: Net Financial Expense Our net finan
Page 69 and 70: Cash flows from investing activitie
Page 71 and 72: Currency Risk While the vast majori
Page 73 and 74: MANAGEMENT DIRECTORS AND SENIOR MAN
Page 75 and 76: Starman AS, Elipso Finance and Vest
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Víctor Guerrero is our Director of
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The amounts and percentages of shar
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filing and the court has to evaluat
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DESCRIPTION OF OTHER INDEBTEDNESS T
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Maturity: Tranche A and Tranche B m
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the event that at the end of each C
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Senior Secured Notes On October 22,
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• Second, in payment of the follo
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