BT 2015 Annual Report Download - page 224

222 BT Group plc
Annual Report 2015
3URƬWHVWLPDWHDQGSURƬWIRUHFDVWFRQVLGHUHGLQWKH
VKDUHKROGHUFLUFXODU
Introduction
On 1 April 2015 we published a shareholder circular in relation to our
proposed acquisition of EE. In this, we provided information relating
to our 011 profit estiate and our 011 profit forecast. his
inforation confired our outloo as stated on 0 anuar 01
when we published our unaudited results for the third quarter and nine
months to 31 December 2014.
In this we included the following statement:
We epect adusted  of . billion  . billion in 011
with further rowth in 011.
he 011 profit estiate and the 011 profit forecast do not
take into account any impact of the proposed acquisition of EE. We have
reproduced below the basis of preparation of the profit estiate and
profit forecast as it was set out in the shareholder circular.
Basis of preparation
oth the 011 profit estiate and the 011 profit forecast
were prepared on a basis consistent with the current accounting
policies of BT which are in accordance with IFRS as adopted by the
European Union and in accordance with IFRS issued by the International
Accounting Standards Board, and are expected to be applicable for the
years to 31 March 2015 and 2016.
he directors prepared the 011 profit estiate based upon the
unaudited published results for the nine months ended 31 December
2014, the unaudited management accounts for the two months
ended 28 February 2015 and a forecast of the results for the month to
31March 2015.
he directors prepared the 011 profit forecast based on a forecast
of the results for the period to 31 March 2016.
Assumptions
he 011 profit forecast has been prepared on the basis of the
following assumptions during the forecast period.
)DFWRUVRXWVLGHWKHLQƮXHQFHRUFRQWURORIWKHGLUHFWRUV
a) there will be no aterial chane in the political andor econoic
environent that would ateriall aect the roup
b) there will be no material change in market conditions in relation to
customer demand or the competitive environment;
c) there will be no material change in legislation or regulatory
requirements impacting on the group’s operations or its accounting
policies;
d) there will be no business disruptions that ateriall aect the
group, its customers or operations, including natural disasters, acts
of terrorism, cyber attac andor technoloical issues or suppl
chain disruptions;
e) foreign exchange rates will be an average US$: Pounds Sterling
exchange rate of US$1.50: £1 and an average Euro: Pounds
Sterling exchange rate of €1.35: £1;
f) there will be no material technological developments in the
telecommunications market that disrupt the group’s core services;
g) there will be no industrial action;
h) there will be no aterial uctuation in the level of the  19
accountin pension deficit and associated incoe stateent
charge; and
i) there will be no material change in the management or control of
the group.
)DFWRUVZLWKLQWKHLQƮXHQFHRUFRQWURORIWKHGLUHFWRUV
a) there will be no material acquisitions or disposals;
b) there will be no material change in the existing operational strategy
of the Group; and
c) there are no material strategic investments over and above those
currently planned.
ur actual adusted  for 011 was 1.
)LQDQFLDOHƪHFWVRIWKHDFTXLVLWLRQFRQVLGHUHGLQWKH
VKDUHKROGHUFircular
Introduction
The Board believes that the proposed acquisition of  the cuisition
will enerate considerable value for shareholders with sinificant cost
savings as well as revenue synergies. We have reproduced below the
information relating to cost savings and revenue synergies that was set
out in the shareholder circular.
Adjusting for the net present value of operating cost and capex
synergies, the Acquisition values EE at a multiple of 6.0x 2014 EBITDA
and 9.6x 2014 OpFCF.a The Acquisition is expected to be accretive to
 per rdinar hare fro the first full ear post-opletion.b As a
result of EE’s high amortisation and depreciation charge, the Acquisition
is expected to be accretive to Adjusted EPS one year later.c
The cash return on investment is expected to comfortably exceed
BT’s cost of capital in the third year post-Completion on the basis of
estimated synergies and integration costs.
Cost savings
he cuisition is epected to enerate sinificant operatin cost
savings and additional capex savings. Together these are expected
to reach approximately £360 million per annum in the fourth full
year post-Completion. Integration costs to achieve these savings are
expected to be around £600 million. The savings are equivalent to a net
present value of around £3.5 billion before integration costs or around
£3.0 billion after integration costs.
Both BT and EE have a proven track record in delivering transformation
with stron financial results.  brins its tried and tested approach to
cost transformation, which uses forensic analysis to redesign processes
to reove inecienc reduce the cost of failure and iprove custoer
experience. EE has demonstrated its ability to deliver post-transaction
synergies ahead of initial expectations following its creation by the
merger of the Orange Group’s UK business and the Deutsche Telekom
roups UK business.  is confident it can use the cobined eperience
to unloc sinificant sneries across the nlared roup.
The operating cost and capex savings are expected to be achieved as
follows:
 commercial savings with an annual run-rate of approximately £70
million from consolidating sales and marketing operations, procurement
eciencies and siplifin diital platfors and the brand portfolio
 IT savings with an annual run-rate of approximately £90 million
through consolidating IT systems and insourcing activities;
 network savings with an annual run-rate of approximately £80 million
through integrating some network elements and insourcing certain
activities; and
 operational savings with an annual run-rate of approximately £120
illion fro consolidatin head oce functions rationalisin
property and realising scale economies in customer service operations.
Revenue synergies
BT expects to generate revenue synergies by providing a full range of
communications services to the combined customer base. This includes
sellin s broadband fied telephon and pa- services to those 
customers who do not currently take a service from BT. BT also expects
to accelerate the sale of convered fied-obile services to its eistin
consuer and business custoers and oer new services usin both
companies’ product portfolios, skills and networks. BT expects revenue
synergies, over and above the revenue it had expected to be generated
from its standalone mobile strategy, to have a net present value of
around £1.6 billion. The revenue synergies are expected on a recurring
basis, reaching a run-rate level in the fourth year post-Completion.
a 7KHPXOWLSOHVDUHFDOFXODWHGEDVHGRQDQ$FTXLVLWLRQSULFHRI~ELOOLRQOHVVWKH139RI
WKHRSHUDWLQJFRVWDQGFDSH[V\QHUJLHVDIWHULQWHJUDWLRQFRVWVRIDSSUR[LPDWHO\~ELOOLRQ
DQG(($GMXVWHG(%,7'$IRUWKHWZHOYHPRQWKVWR'HFHPEHURI~PLOOLRQDQG
2S)&)IRUWKHWZHOYHPRQWKVWR'HFHPEHURI~PLOOLRQERWKDGMXVWHGWRUHPRYH
PDQDJHPHQWDQGEUDQGIHHVRI~PLOOLRQUHVWUXFWXULQJFRVWVRI~PLOOLRQDQGH[FHSWLRQDO
H[SHQVHVRI~PLOOLRQDVUHSRUWHGLQ((oVUHVXOWVIRUWKH\HDUHQGHG'HFHPEHU
b $IWHURSHUDWLQJFRVWDQGFDSH[V\QHUJLHVDQGEHIRUHLQWHJUDWLRQFRVWV
c $IWHURSHUDWLQJFRVWDQGFDSH[V\QHUJLHVDQGEHIRUHLQWHJUDWLRQFRVWVDQGH[FOXGLQJSXUFKDVH
DFFRXQWLQJDGMXVWPHQWVUHODWLQJWRWKH$FTXLVLWLRQ7KLVVWDWHPHQWUHJDUGLQJHDUQLQJV
HQKDQFHPHQWLVQRWLQWHQGHGWREHDSURƬWIRUHFDVWDQGVKRXOGQRWEHLQWHUSUHWHGWRPHDQWKDW
WKHHDUQLQJVSHU2UGLQDU\6KDUHIRUWKHFXUUHQWRUIXWXUHƬQDQFLDOSHULRGVZLOOQHFHVVDULO\EHJUHDWHU
WKDQWKRVHIRUWKHUHOHYDQWSUHFHGLQJƬQDQFLDOSHULRG