Telefonica SA

MAD:TEF

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to March 2020 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Global Director of Investor Relations. Please go ahead, sir.

[Pablo Eguiron Vidarte, Head of Investor Relations]

Good morning, and welcome to Telefonica's conference call to discuss January-March 2020 results. I'm Pablo Eguirón, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first quarter 2020 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties, including those related -- relating to the effect of the COVID-19 pandemic, that would cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and Chief Executive Officer, Mr. José María Álvarez-Pallete.

[José María Álvarez-Pallete López]

Thank you, Pablo. Good morning, and welcome to Telefonica's first quarter conference call results. Today, with me, are: Ángel Vilá, Chief Operating Officer; and Laura Abasolo, Chief Finance and Control Officer. During the Q&A session, we will take any questions you may have. I would like to start today's presentation highlighting the exciting announcement we are making today that we've transformed the telecom landscape in the U.K. Aligned with our strategy to focus on our core operations, we have agreed with Liberty Global to combine Telefónica U.K. and Virgin Media U.K. in a 50-50 joint venture that creates the leading integrated operator in the U.K. with complementary strength in mobile, broadband, video and B2B. Enterprise value of the JV is estimated at GBP 58 billion (sic) [ GBP 38 billion ]. The combined entity is larger, stronger and more diversified with GBP 11 billion of revenues, GBP 3.6 billion of OIBDA, and GBP 1.5 billion of OIBDA minus CapEx, pre-synergies. On a pro forma basis, it will have more than 46 million accesses, including 33 mobile, more than 5 million broadband and 4 million pay TV. Liberty Global will make a cash payment to Telefónica of GBP 2.5 billion to equalize ownership in the JV. And in total, we expect to receive between GBP 5.5 billion and GBP 5.8 billion of proceeds from the transaction, post-dividend recap. We are again, fostering e-market consolidation, convergence, combining best-in-class infrastructure assets whilst unlocking significant value. We expect to deliver GBP 6.25 billion of synergies on a net present value basis after integration costs of GBP 540 million run rate. We are therefore creating significant value for Telefónica shareholders. The transaction is free cash flow accretive from year 1, and expected to reduce Telefónica's net debt by between GBP 5.5 billion and GBP 5.8 billion. Accordingly, a credit positive move that improves our competitive positioning and business sustainability, whilst reducing net debt at Telefónica. Slide 3 shows the transaction structure and key terms. Telefónica U.K. enterprise value has been set at GBP 12.7 billion or 7.8x OIBDA, and is contributed to the JV on a debt and cash-free basis. Considering Virgin Media U.K.'s enterprise value and after deducting its GBP 11.3 billion net debt, Liberty Global will make a cash payment to Telefónica of GBP 2.5 billion to equalize JV ownership. The JV will target a leverage ratio of 4 -- between 4 and 5x -- 4 to 5x OIBDA. We expect to raise new debt to reach this target leverage ratio and proceeds to be distributed equally between Telefónica and Liberty Global. Following completion of the transaction, neither Telefónica nor Liberty Global will consolidate the JV. Both companies will have equal governance rights in line with the 50-50 shareholding and have agreed to provide a suite of services to the JV, post completion. On Slide 4, we can see that we'll be turning into a stronger, larger and more sustainable player. The combined entity will become the largest player in the market in terms of accesses with the slightly lower revenues than the market's incumbent, though at a significantly higher operating margin benchmark for the sector in the U.K. Same for OIBDA minus CapEx over revenues and cash conversion rates. So we are creating a stronger competitor with significant scale and financial strength to invest in the U.K. digital infrastructure and give millions of consumers, businesses and public sector customers more choice and value. Among premium brands of O2 and Virgin Media and fully converged provide, the JV will provide more competition in the marketplace and choice for consumers, as shown on Slide 5. The value proposition will be different as we have the following foundations: Customer-centric proposition, industry leader in net promoting score and sector-leading loyalty; fastest broadband with broadband speed up to 1 gigabit per second by 2021; rich content offering, only U.K. operator offering Netflix, Amazon and all sports; leading technology, state-of-the-art platforms and product offering; and an attractive value proposition for wholesale: wide MVNO offering ready to be a relevant wholesale player; and a complete portfolio of digital solution: Internet of Things with Big Data, cybersecurity, cloud and advertising. On Slide 6, with 5G rolling out across O2's footprint and gigabit broadband soon available to all 15 million Virgin Media homes, there is no question that our coming together will accelerate the U.K.'s digital future, being the national connectivity champion. We are going to be the unique infrastructure in Europe to seize new opportunities arising from fixed mobile convergence, and there is no network monetization to date. We are retaining our ownership of both mobile and fixed infrastructure, whilst being clear market leaders in ultra-broadband, including both fiber to the premises and HFC. On Slide 7, we go into detail about identified synergies. As previously stated, as much as 80% of total identified synergies relates to OpEx and CapEx, with lower execution risk. As regards to revenue synergies, we are being rather conservative. Same for other financial and fiscal potential synergies which we are not even considering. We have a proven track record in delivering when promising. Both parties have completed several acquisitions over the last few years, systematically overachieving initial targets, both in terms of total sizes and timings. We expect synergies run rate to be reached by 2026, though turning cash positive, including integration cost, as early as from 2023, with more than 75% of synergies materializing in the first 42 months. Moving to Slide 8. I would like to again highlight the strategic fit of this transaction within the new Telefónica strategy we announced last November. With the purpose of generating shareholder value and creating the relationship of trust, growth and efficiency, we needed to focus in our most important markets, and the U.K. is and remains a core market to us. This transaction creates a leading and fully integrated champion in 1 of our 4 core markets, a significant value creation through synergies, secures superior next-generation fixed infrastructure to drive customer experience, complementing Telefónica U.K.'s mobile network, and we will be a stronger, more valuable and sustainable platform with high dividends to continue reducing Telefónica's net debt. All in all, partnering with Virgin Media U.K. is the most compelling alternative for Telefónica U.K. and the best strategic path forward. Slide 9 explains governance, exit and timetable of the transaction. On governance and shareholders' agreement, the JV Board of Directors will consist of 8 members, 4 from each of Liberty Global and Telefónica and the post of Chairman of the JV will be held for alternating 24-month periods by a Telefónica or Liberty Global appointed director. On exit, there are some windows as to the third anniversary and after fifth. And finally, on timetable, closing will be expected for the fourth quarter of 2020 -- 2021 or first quarter of 2022, the latest after approval of the second phases, European Commission and Competition Markets Authority, CMA. To conclude on today's announcement and before moving on to rapidly review the first quarter results and current environment, I would like to stress that we remain committed to our strategy. No matter current uncertain times, it is the long-term sustainability that drives our decisions. We believe this is the best and the only way to unlock value. We are creating a leading integrated player with significant cross-selling opportunities in the second largest European market, improving our market positioning, the group's profile and business sustainability. We are combining Telefónica U.K.'s leading mobile operation and Virgin Media U.K.'s extensive super fast broadband network to benefit consumers, businesses and the public sector through investment to accelerate digital infrastructure deployment and improving customer experience. Whilst doing so, we create significant value. Total OpEx, CapEx and revenue synergies with an estimated net present value of GBP 6.25 billion after integration costs, with potential additional financial and fiscal synergies not being considered, creating substantial value creation for Telefónica shareholders. Today, we are changing the U.K. telecoms market landscape. We are fostering in-market consolidation in one of our core markets. We are, as well, fostering in-market consolidation in Brazil, all aimed at granting a more predictable future to our shareholders. Moving now to Slide 11. It is worth highlighting our mission: To make the world more human by connecting lives. It has turned even more evident than ever during this crisis. Connectivity has proven even more critical, and thanks to the focus and investment in our infrastructure over the last year, over EUR 90 billion since 2012, we have been able to guarantee continuity of service. And this service has been key to society being able to stay connected and mitigate the impact of the crisis. Our networks have proven resilient, reliable and stable. Managing traffic peaks, which as an example, in Spain, the company has been able to cope with an increasing bandwidth demand of almost 40%, a growth of mobile data traffic of 50%, and mobile boost of 25% in the first week of the confinement by COVID-19. It has enabled us to be in a position to use our capabilities to support public administrations and health institutions. We have, at the same time, secured the integrity of our operations, helping to maintain the supply chain. The COVID-19 outbreak has also demonstrated that our business model is sustainable, and we are now more confident on its resilience. Our resilient model, built on digital transformation over recent year, enable us to cope with increased demand for connectivity and remote working solution, whilst also working with public bodies to keep society connected. We have responded to our stakeholders' needs in a responsible manner. We needed to care about our employees, and we promoted working from home as for as much as 95% of our workforce. For our vendors, we have shortened payment terms whilst trying to help them with some of their liquidity issues. We care, as well, about our customers, showing flexibility with payments, while increasing data allowances and offering faster speed and richer content offering. And above all, we needed to respond to our society needs, making all our service and capabilities available to institution. We feel that through these responses, we have, as well, taken care of our shareholders, showing responsibility. On Slide 12, we go through a revision of potential COVID-19 impacts. Let me start by saying that this is uncharted territory. Extension of lockdowns based on lifting of restrictions and economic impacts in each of the countries in which we operate are still to be seen. In any case, the resilient business model I referred to in my previous slides make us not immune, but much better protected than others. Of course we will face negative revenue impacts. Overall, commercial activity has been stopped, and both consumer and corporate customers are to suffer in one form or another. But whilst in the short term, we may see lower roaming, reduced prepaid recharges, or SME customers navigating through difficult times, long-term prospects remain, if any, intact. Demand for connectivity is on the rise. Need for speeding up digitalization in the corporate world has proven real, and changes within consumer habits are here to stay. Again in the short term, we have levers to weather this storm. Yes, our top line will be negatively affected, as mentioned, though to a lesser extent than for many other industries. This will nevertheless be more mute at the year-to-year level as lockdowns as well bring down churn and overall commercial expenses. Not to mention, prepaid B2B revenues or handset sales have lower than average margin. We count with additional levers in the form of discretionary investment, despite we remain focused on our growth opportunities. All in, we have enough tools to preserve free cash flow, which allow us to be better prepared for future opportunities. Moreover, delays in the spectrum auction will occur like Spain, the U.K. and Brazil. Moving to the next slide. We reiterate our 2022 guidance and 2020 dividend of EUR 0.4 per share. Due to the significant changes in the guidance scenario, and context and the current level of uncertainty, 2020 financial guidance is withdrawn. Nevertheless, we will closely monitor the evolution of our businesses, and we'll manage CapEx and OpEx accordingly to focus on OIBDA minus CapEx stability. In the current context, the outlook for 2020 OIBDA minus CapEx is to be slightly negative to flat year-on-year. As for the midterm, 2022 guidance of revenue growth and 2 percentage points improvement in OIBDA managed CapEx over revenues is reiterated. To note that this crisis has accelerated the digitalization processes -- in all processes, increasing our relevance significantly. Confidence in our business model flexibility to weather current environment, coupled with a solid liquidity position and business resiliency, allow us to confirm the announced EUR 0.4 dividend for 2020. The payment of the second tranche of 2019 dividend, EUR 0.2 per share, to be paid in June and the first tranche of 2020 dividend, EUR 0.2 per share to be paid in December will be voluntary scrip, giving more flexibility to both our financial position and our shareholders in this unprecedented situation. I now hand over to Ángel to go through a detailed review of the business unit's performance.

[Ángel Vilá Boix, COO & Executive Director]

Thank you, José María. Turning to Slide #14, let me summarize our main financials. Reported figures for the first quarter reflected the negative evolution of ForEx. Revenues topped almost EUR 11.4 billion, declining 5.1% year-on-year on a reported basis and just 1.3% in organic terms, and grew 0.1% in the core 4 markets: Spain, U.K., Germany and Brazil. It is worth highlighting the continued transformation of our top line, especially in the context of this COVID-19 crisis, with 65% of our services revenues already coming from broadband and services over connectivity, 2 percentage points more than a year ago. OIBDA reached EUR 3.8 billion and though reported annual evolution is impacted by ForEx and capital gains registered in Q1 '19, in organic terms, it shows a drop of 1.7%, which turns into as much as a 1% annual growth, if we look at our 4 core markets. Leading profitability is maintained in organic basis, with OIBDA margin flat versus January-March 2019 to stand at 33.1% and OIBDA minus CapEx over revenues reaching 20%, just 0.5 percentage points lower organically, but increasing 0.7 percentage points in the 4 core markets. Net income reached EUR 406 million, and earnings per share stood at EUR 0.06 per share or EUR 0.11 in underlying terms. Free cash flow is impacted by the usual first quarter seasonality, whilst the comparison base for same period last year is distorted by the tax refund received in Spain. Finally, net financial debt stood at EUR 38.2 billion, declining 5% year-on-year, and reflected the punctual increase in Q1 due to the exercise of the outstanding hybrid first call date in March 2020 and the hybrid issued out of Colombia. Regarding COVID-19 impacts, those were minus EUR 77 million in revenues, minus EUR 33 million in OIBDA, minus EUR 17 million in CapEx in Q1, approximately, the last 15 days of March, and we see risks but also opportunities going forward. On Slide 15, we review our Spanish operation. After a strong -- after -- sorry, after strong investment efforts in past years, owning the largest and most powerful fiber to the home network in Europe has proven critical during the quarter to support stable and reliable connectivity to our customers and to the overall society. Our network delivered at a time when both our retail and wholesale customers required an additional effort from us. Despite lockdown having an impact on our commercial activity, we stood by our clients through our online channels, and we responded to our customer and corporate customers' needs, providing free extra data and enriching our content and digital services offering. Being the most reliable and advanced platforms allows us to have the most valuable customer base, mostly in high-end services, video and ultra-broadband fiber and [city] mostly in convergent bundles.Despite not having lock-in clauses, churn improved in Q1, showing how resilient our business stands within this environment. So far, impacts from COVID-19 have been limited, but note, visible already in the month of March. Revenues showed a slight decline, mainly concentrated on the retail segment, but efficiency gains led the OIBDA minus CapEx to increase by 1.4% year-on-year. Cash generation is our focus, and we will prioritize OpEx and CapEx to continue delivering benchmark cash conversion in the coming months. Moving to Slide 16. After COVID-19 environment started, Telefónica Deutschland has supported employees, customers and the wider society through a variety of initiatives, such as offering complimentary app access for a limited time period and launching a series of livestreamed O2 concerts. The network is coping well with the new traffic patterns, and the company maintained a clear focus on improving customer experience, also underpinned by strong network resilience. Despite this tough environment, Telefónica Deutschland delivered a robust start to the year, maintaining its profitable momentum across all revenue lines despite softer trading trends following the government-imposed lockdown. The company posted a strong 3.8% year-on-year revenue growth. OIBDA turned positive and improved by 1.5% year-on-year. As such, OIBDA minus CapEx increased by 12.9% year-on-year in January to March. Moving to Slide 17, where we review the performance of our U.K. business. In the COVID-19 environment, Telefónica U.K. has played a key role in keeping the U.K.'s customers, businesses and public services connected. Our response has included doubling our network capacity, helping our customers and strongly supporting the national health service. In Q1, we have seen limited COVID-19 related impacts due to the later timing of lockdown. Within this environment, Telefónica U.K. posted the 15th consecutive quarter revenue growth year-on-year, with a sector-leading contract churn at 1%, confirming its market-leading position in a highly competitive market, while growing mobile customer base by 6% year-on-year. Worth highlighting in the quarter is the exclusive launch of Disney+. The company continues to outperform the market and posted plus 1.5% year-on-year revenue growth, OIBDA improved by 1.1% year-on-year, and OIBDA margin stood at 29.7%, stable year-on-year. Thus, OIBDA minus CapEx over revenues ratio improved by 3.7 percentage points quarter-on-quarter in January into March. We now move to Slide 18, where we review the performance of our Brazilian operations. In this economic and social context, Telefónica Brazil plays a relevant role as an enabler of connectivity to its customers. In this respect, and along with other measures, we have decided to offer higher data allowances across our plans for no additional cost and to open more than 100 TV channels for all customers. During Q1, Vivo maintained its leadership in the mobile business with a 33% market share, and a remarkable 39% market share in the contract segment. In the fixed business, it's worth mentioning the new alternative fiber expansion models, such as the agreement with ATC or the franchise model, that allow the company to boost connections and reach almost 2.7 million accesses connected with fiber to the home at the end of March. Operating-wise, and for another quarter, the company posted very solid OIBDA and OIBDA minus CapEx growth. Despite initial impacts from COVID-19, mainly in prepaid in and handset sales, the ongoing transformation of the company towards fiber, the continued migration to contract and the steady digitalization process we have been undertaking for the last few years allow the company to be confident on the continued free cash flow generation going forward. On Slide 19, we can see how Telxius growth and margin increased, along with its continued tower expansion. In the first quarter of the year, Telxius acquired 1,900 towers in Brazil and Peru that, combined with new towers built, grew the portfolio by 21% -- the tower portfolio by 21% year-on-year. Moreover, Telxius has doubled its size in our relevant markets such as Brazil, consolidating itself as an industry leader with a total portfolio of over 20,000 towers in March, with a tenancy ratio of 1.34x or 1.36x, ex acquisitions. Revenues and OIBDA grew by 6% and 12% year-on-year, organically, respectively, excluding the exceptional subsea cable capacity sale of the first quarter 2019. This acceleration in the quarter drove OIBDA minus CapEx growth up to 11% year-on-year, excluding the new Pacific cable construction. Now I hand over to Laura.

[Laura Abasolo García de Baquedano, Chief Financial & Control Officer]

Thank you, Ángel. Moving to Slide 20. Telefónica Hispam, like for the rest of our units, has taken initiatives to offer special benefits to clients in order to improve and expand connectivity, such as free browsing through certain applications or higher data allowances across mobile plans. In the region, the telecom sector appears initially more exposed to COVID-19 potential impacts due to mobile prepaid exposure. However, the ongoing digital transformation, the continuous migration to high-value accesses, and achieved CapEx efficiencies make us feel confident about the resiliency and strength of our business. Revenue and OIBDA year-on-year trends continue to be highly affected by tough competitive situation in Peru and Chile. On the other side, it's worth highlighting that a more suitable model just implemented in Mexico is already showing positive results, with OIBDA year-on-year growth in Q1 for the first time in 9 quarters. Moving to Slide 21. We look in detail on how FX impacts our first quarter results, again proving currency headwinds are structurally neutralized. Even more, we actively hedged cash flows of Brazil and U.K. FX dropped 3.2 percentage points in revenue and 3.5 percentage points in OIBDA's year-on-year variation, with the Brazilian real, the currency that most depreciated against the euro. Nevertheless, the negative effect of EUR 151 million drop in OIBDA levels translated to just EUR 20 million in free cash flow terms. And as regards to net debt, in the 12-month rolling period to March 2020, FX had a positive impact of EUR 824 million. As anticipated in 2019 full year results, net debt in March has slightly increased by nearly EUR 500 million, mainly explained by the amortization of a couple of hybrid references with noncall dates in March 2020. Other than these temporary effects of EUR 700 million, net debt would have continued downward trends shown in previous quarters. Free cash flow generation in the quarter amounts to EUR 233 million and is expected to improve for the remaining of the year. Slide 23 shows Telefónica's strong liquidity cushion amounting to EUR 22.5 billion, covering well in excess of next 2 years' debt maturities, without considering cash generation, additional financing nor credit lines extension. It is to note the high-quality of Telefónica undrawn credit lines, mainly with maturities of 2 years or beyond and no MAC clauses. Additionally, it is to highlight our proactive and extensive financing activity undertaken in the last years, nearly EUR 39 billion funds raised in total since June 2016 to date. During this quarter, we have continued with this activity, issuing EUR 2.3 billion of new debt benefiting from minimum costs, including a EUR 1 billion 10-year bond and the first green hybrid issue in the telecom sector of EUR 500 million with respective coupons of 0.66% and 2.5%. We have approached different pockets of liquidity, extended our average debt life from 5.6 years to 10.7 years, while achieving the lowest coupons ever in recent [ years. ] As a result, our effective interest payment cost has reduced to 3.49% in March 2020, 109 basis points lower than in June 2016. In summary, we have been successfully strengthening our balance sheet in the last years. I will now hand back to José María to recap.

[José María Álvarez-Pallete López]

Thank you, Laura. To conclude, in this environment of a coronavirus pandemic, the telecom sector is proving essential, and our mission, which is to make the world more human by connecting lives, has turned more critical than ever. We are one of the most protected and resilient sectors, and inside the sector, Telefónica continues showing its strength remaining ahead of the curve in crucial aspects, such as the state-of-the-art infrastructure and network modernization. We have, as well, a solid liquidity position, result of the prudent and strict financial discipline we have followed over the last few years. We are obviously not immune to the current crisis, but our sustainable model via being committed to our strategy and our values has allowed us to respond to our stakeholders' needs, both employees, customers, suppliers and the society, in general. We will continue to progress in this sustainable model on its 3 fronts: Growth, efficiency and trust. By doing so, we believe we will continue to deliver long-term value creation for all of our stakeholders. Thank you very much for listening, and we are now ready to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Jakob Bluestone from Crédit Suisse.

[Jakob Bluestone, Research Analyst]

A couple of questions from me. Firstly, can you maybe elaborate a little bit on the thinking behind the dividend, keeping it at EUR 0.40, obviously it's going to voluntary scrip. But just sort of in terms of thinking, why didn't you go for full scrip or sort of create a little bit more flexibility? Is that sort of a reflection of your confidence that you can sustain your equity free cash flow generation? Is that sort of how we should read that? So if you can just help us on the process a little bit in that? Secondly, on Spain, you reported, I think it was a 3% decline in your retail revenues. Can you maybe give us a little bit more sort of color on what's going on in that? It looks like, particularly the sort of decline came through in the nonconvergent revenues and is there any sort of clarity or additional detail you could give on what's going on with that part of your revenues would be helpful. And then finally, on the U.K. transaction. I guess one of the big parts of the synergies is getting the Virgin MVNO back to your network. Are there any sort of costs associated with that?

[José María Álvarez-Pallete López]

Taking your first question on the dividend. As you might imagine, we have analyzed all the scenarios, considering also the low level of visibility that anybody has on what might happen in the macroeconomic scenario. What we know for sure, as we were detailing on the presentation, is that we are not immune but we are more resilient than others. And the impact that we are having in revenues, we have levers to neutralize part of that on the level of OIBDA through the manageable OpEx that we have. And additionally, further down the road, in terms of CapEx, trying not to compromise the strength that the networks -- or the network that we have built. And therefore, considering all circumstances, we think that in terms of free cash flow and also considering that some of the spectrum auctions are likely to be delayed, free cash flow generation enable us to have a very good coverage of the dividend. But in order to preserve more financial flexibility, we have decided to include the optionality of our scrip dividend, a voluntary scrip dividend. And therefore, depending on how -- what's the percentage of shareholders that might come, we could -- might build up additional financial flexibility. So we think this is the more prudent approach and, at the same time, preserving an attractive dividend policy and showing the confidence that we have on the free cash flow generation of the company, in spite of current circumstances.

[Ángel Vilá Boix, COO & Executive Director]

Regarding the question on the evolution of Spanish revenues. In the first quarter, total revenues declined 1.6% year-on-year, reflecting certain COVID-19 related impacts, in particular handset sales. Service revenues declined 1.2% year-on-year, less than total revenues, mostly due to nonconvergent revenues, not offset by the growth in IT and wholesale. So if we look at retail, to your question, minus 3.4% year-on-year. This is due to this lower nonconvergent communication services -- nonconvergent communication revenues, despite the IT growth. The convergent and new services show a minor decrease, mostly in line with the convergent ARPU decline. So the evolution of this line is linked to the nonconvergent communication revenues. At the same time, wholesale revenues have increased 10.8%, very positively impacted by NEBA and TV, and despite the unbundled local loop decline. Sorry, the third question. I thought it was a maximum of 2 questions. The third question on U.K. transaction synergies, we have identified synergies with a net present value of GBP 6.25 billion. You can see them on Slide 7. Of these level of synergies, 65% are to be coming from OpEx; 15% from CapEx; so 80% of the total synergies are OpEx- and CapEx-related, and only 20% are related to revenue. If one does the ratio of these synergies over the combined cost and CapEx base of the entities combined, you will see that it stands slightly above 4% of those, which compares very favorably to previous transactions being presented to the market, in which the median of that ratio is between 5.5% and 6%. So these are synergies, which we believe are achievable and which compare well with the benchmarks of other transactions. Among the OpEx synergies, we include the migration of the Virgin Media mobile traffic to Telefonica's U.K. network. It's the largest component in this OpEx bar of synergies, but I cannot disclose further details.

[Pablo Eguiron Vidarte, Head of Investor Relations]

Next question please, and please ask no more than 2 because we have a long list of analysts waiting to ask, please.

[Operator]

Our next question comes from Michael Bishop from Goldman Sachs.

[Michael Bishop, Equity Analyst]

It's Michael Bishop from Goldman Sachs. Just 2 questions, please. Firstly, on the relative valuation of O2 and Virgin Media, could you just give us a little bit more color on the discussions there? Because clearly, it's a very complex job valuing the 2 companies. And especially, I was thinking about things like your stake in CTIL, potential tax losses at Virgin Media and really, what did the discussions center around to end up at the 2 relative valuations? And my second question is, you've highlighted the impact of hedging, mitigating a lot of the negative FX headwinds at free cash flow level. And if I'm right, it looks like the offset, at least, in the first quarter from hedging, was quite a lot more than the impact that you disclosed through 2019. So could you just perhaps give us a little bit more information on how your hedging strategy has changed or evolved to drive that better offset as you face the FX headwinds?

[Ángel Vilá Boix, COO & Executive Director]

I'll take the first question on the relative valuation. We have brought to this merger the perimeter of Telefónica U.K., including the 50% stake in CTIL. At the same time, Virgin Media is contributing the asset in the U.K., including the projects that they have on fixed ultra-broadband, Project Lightning, but excluding the Irish business. When approaching the relative valuations that led to the equalization payment, given the leverage that each one of the assets is bringing, we have been focusing on the 2 fundamental valuation, first, on discounted cash flows of each one of the businesses. And we have also been taking into account the valuation of present transactions. Clearly, a third traditional metric that you have in this situation, which is market multiples comparable, is not a proper reference given the situations that we are navigating through in the markets. So if one looks at DCF valuations for each one of the assets, the values agreed for the transaction and the multiples agreed for the transaction sit squarely in the middle or close to the middle of the DCF range for each one of the 2 assets. But also, if one looks at the transaction precedents, and there have been quite a few precedent transactions of fixed mobile convergence in -- across Europe, you will see that those multiples are also consistent with those ranges.

[Laura Abasolo García de Baquedano, Chief Financial & Control Officer]

Yes. If I may continue on the free cash flow on hedging, I think the numbers this quarter show the hedge we have throughout the free cash flow and net income that we have been discussing for many quarters. This quarter, the Brazilian real and other LATAM have been a lot affected. And in the case of Brazil, as you know, we have minorities, we have the higher CapEx over revenue than the remaining of the portfolio, and all of that makes that we don't only have revenue affected but also other cash outflows. And the resulting is that, that free cash flow final impact has got minimized. The pound, on the other way, this quarter, on average, has appreciated. So I think it has to do with the mix, and this particularly quarter shows how the FX coming from LATAM currencies final impact can get minimized as we go down the free cash flow line. It is true that this year, on top of that, that is not affecting the figure, [ this whole ] Q1, given the volatility, we were forecasting both for the real and the pound, and the difficulty to preview or forecast the FX, we did some hedging on the free cash flow that will come throughout the year. But that's a different hedging that we have done in order to have more predictable free cash flow coming from those geographies, but it's not the explanation for the Q1 that was your specific question, it has to do with the mix of the currencies.

[Operator]

Our next question comes from David Wright from Bank of America.

[David Antony Wright]

And congratulations on the deal. My question is around Project Lightning that Virgin Media has injected. There has been a lot of commentary from management at Liberty that they could look to even spin that asset out with an infrastructure investor or that they could look to accelerate build and even provide wholesale services. What is the strategy for Project Lightning in the JV, please?

[Ángel Vilá Boix, COO & Executive Director]

Well, we, as you know, have been proponents and believers of ultra-broadband, in particular, fixed, the Spanish market is the most developed in terms of fiber across Europe. So we look at this deal, looking at Project Lightning as one of the attractions of the project. At the same time, Liberty Global valued significantly the experience that Telefónica has in the industrialization of the fiber process, which has led us to achieve one of the most efficient ratios of speed and cost in deployment of fiber, also, combined with the standardization of all the equipment around the fiber system. The Project Lightning, as it's progressing, at this point, at the end of 2019, was 1.9 million homes passed. There is a plan, which was already in the market by Virgin Media, to more than double that by 2024. The ultra-broadband infrastructure of Virgin Media, at this stage, is covering 15 million of homes passed in the U.K., with speeds at around 500 megabit per second, but ready to upgrade to DOCSIS 3.1 to get to 1 gigabit per second, but also in new areas is through deployment of fiber. For us, this is the way going forward, and we are supportive, obviously, of this project. And if conditions allow, we would support the JV to progress more decisively across this. This deployment also is being done through owned ducts, which provides sustainability to the whole deployment. So Project Lightning is part of the project. Strategic alternative regarding Project Lightning, how to structure or restructure it to make it even more ambitious, will be, in due course, discussed by the partners. We are open-minded on this. So we are open to explore alternatives to use in the most smart way the infrastructure that both partners are bringing to the table, be it being Lightning or being CTIL.

[David Antony Wright]

I see. And just to follow-up, please, Ángel, are there any, within the synergies, within the current business plan, are there any plans to wholesale at all the fixed line network, whether that be existing cable infrastructure or Lightning further?

[Ángel Vilá Boix, COO & Executive Director]

That will be something to agree between the partners when the JV is in place, post completion.

[David Antony Wright]

I see. Okay. But it's not in any synergies or business plan right now, no wholesale? This is -- it's a huge variable, I think, on this particular deal that Liberty's talked about a lot, but really isn't commented at all in the releases.

[Ángel Vilá Boix, COO & Executive Director]

It's not included in the synergies -- sorry, it's not included in the synergies.

[Operator]

Our next question comes from Joshua Mills from Exane.

[Joshua Andrew Mills, Research Analyst]

Just 2 for me. Just the first with regards to the cash inflow on year 1 of this transaction. So you're guiding for about GBP 3 billion worth of dividend upstream. I'd just like to know where that leaves the joint venture in terms of leverage. My assumption would be that's probably towards the higher end of the 4x to 5x range. So just to confirm that, would be great. And then secondly, would be great if you could give us a bit of insight into the Spanish operating trends. You mentioned COVID-19 is clearly having an impact, but perhaps if you could give us an update on how your customer mix has shifted between Fusion, O2, high, mid, low-end bands that you -- as you often do, would be very helpful.

[Laura Abasolo García de Baquedano, Chief Financial & Control Officer]

Joshua, I may answer the first question, if you want. The O2 U.K. is going to be contributed to the JV, debt-free. Liberty will be contributing to the JV with about GBP 11.3 billion of leverage. And on top of that, we are estimating a recap of approximately GBP 6 billion that will lead to the high end of the range, although it will obviously depend on the finance figures by year-end and at the time of closing.

[Ángel Vilá Boix, COO & Executive Director]

Regarding your question in on the operating trends in Spain. First, on the quarterly trading, net adds have shown a slight decrease on lower gross adds, impacted by tough commercial dynamics that took place in January, February, and the lockdown in March not allowing for recovery for a weak first half of the quarter. At the same time, fiber -- fixed broadband net adds improved, both quarter-on-quarter and year-on-year. The fiber base is reaching 6.7 million subscribers, both 4.4 million retail, 2.3 million wholesale, which is 16% up. And we have been recovering in churn, even before the lockdown in mid-March. So even before that, we were back to usual figures, around 1.5% and despite the end of promos and More for More. The ARPU shows -- reaches EUR 95.1. This is the ARPU of convergent products, plus SME convergent products and digital services related to convergent customers, is 1.1% down. And this was due to consumer upselling, a positive, higher ratio of additional mobile lines, minus dilutive effect from multi-brand options, mainly driven from the higher weight in the mix of O2 and lower extra consumption outside the bundle. We are no longer disclosing the guide of the value mix in the ARPU because we think that that's commercially sensitive and could also, given the different price points of the different segments of what we used to define as high, medium and low, that was becoming misleading in interpretation of the information. We continue to have average ARPUs which are significantly higher than our next competitor and the average of the industry, but also because of our customers have more services in their bundle.

[Operator]

Our next question comes from Mathieu Robilliard from Barclays.

[Mathieu Robilliard, Research Analyst]

I have 2 questions, please. First, coming back at the dividend question maybe from a different angle. I see that one of the rating agencies has put your rating to a negative outlook, and I was wondering how you prioritize your current debt rating versus the cash remuneration to shareholders. Is one more important than the other? Or you can manage both at this stage? And then with regards to Latin America and M&A activity there, it seems that in Brazil things are progressing well despite the current crisis. On the other hand, we saw the Costa Rica deal not being finalized. I don't know how much color you can give in terms of other initiatives and maybe the impact of current crisis on your planned spin-off there?

[Laura Abasolo García de Baquedano, Chief Financial & Control Officer]

Let me take the dividend and the link to the credit rating. I think what we have done with this decision is a balanced approach. It's showing prudence, it's showing that liquidity and credit rating quality is important and fortunately, we are strong in both terms, but also showing commitment to shareholder remuneration. We have done the homework to sustain an attractive dividend policy, but we are also looking for flexibility. And we are giving flexibility to our shareholders because we are giving the option to have dividend in cash, which is important to some of our shareholders, and it also shows consistency, and it's also preserving free cash flow for the other shareholders that are fine also with that decision and taking more shares out of Telefónica. It's not one goal versus the other. We want to create value to our shareholders, and we want to be within our solid investment rate credit. And I think with this proposal, it's a hybrid solution, it's a balanced approach, it shows our resilience, both from a shareholder perspective, but also is in the right direction for keeping, protecting our solid investment grade. So it's not -- it's a balanced equation. If I may on the Hispam, we continue working at full speed in the operational carve-out, and we have done lots of things, and you have seen some of the movements from some of the shareholders [ to a vehicle ] throughout the first quarter of the year, end of March, for instance, in Peru and in Colombia and other OBs, and we are also working in preparing ourselves for a potential financial spin-off, but there are also alternatives open from an M&A perspective. So we are doing all the homework at full speed, remotely, as everything else in the new Telefónica at the moment, and we are getting prepared. On the financing market, it's true that the situation today is not ideal. We will never be ready for a financial spin-off in any case today. So there's still a month to come and month of work pending. Hopefully, the situation will be calmer, and we will be able to approach the market in due term.

[Operator]

Our next question comes from Georgios Ierodiaconou from Citi.

[Georgios Ierodiaconou, Director]

I have 2. One is around Cornerstone, and I believe Ángel, you alluded to this when you were discussing options around the fixed line. I'm curious about the process for the tower sale at Cornerstone, whether that is impacted at all, whether you will wait until the transaction is completed, or whether there could be a parallel disposal of the towers of Cornerstone? And my second question is around other initiatives to monetize your infrastructure. Is it possible to update us where we are with some of these initiatives, and there were some articles around the German situation a couple of weeks ago. Any delays or any fiscal or other hurdles that may either delay or cancel some of these initiatives?

[Ángel Vilá Boix, COO & Executive Director]

Thank you, Georgios. Regarding Cornerstone CTIL, we have been preparing the asset in terms of all the model, operational model, financial model for what would be a market-oriented tower company. This phase of preparation is basically complete. Now the transaction to create the U.K. JV has meant 2 things. First, that CTIL is part of the asset -- 50% of CTIL is part of the assets contribute into the perimeter of the transaction -- of the JV transaction. So the asset will be helped by the JV. And second, the 2 options that you were talking about are possible. Monetization could take place once the JV deal completion has finished, or it could be approached in between signing and closing. Of course, if the different parties that have interest in this situation wanted or agreed in going ahead with such a potential monetization. So it's possible. It's not that it cannot take place before completing the JV deal, but we would need to talk with the different parties involved now in the situation. The asset is ready for such a possibility. Other initiatives to monetize infrastructure. We have been very active with tower deals, so far, in the year. Some tower deals have been incorporated to Telxius, as I was saying in my presentation. So 2,000 towers in rough numbers from Brazil and Peru have been contributed into Telxius. We have also sold outside of the group and monetized towers in other Latin American geographies, Colombia and Ecuador, in particular, which were of less interest to Telxius, and we sold them out of the group. We are very advanced in a potential tower deal in Germany, as was expressed by my colleagues of Telefónica Deutschland yesterday in the conference call. This would be a substantial number of towers. Our preferred route is to contribute those to Telxius, with our partners in Telxius contributing cash to maintain the percentage in the company. And therefore, we are achieving effective monetization as we transfer those towers to Telxius. The deal is advanced. It's still pending some elements of the negotiation. As soon as there would be a deal achieved, of course, we would communicate it accordingly to the market.

[Operator]

At this time, no further questions will be taken.

[Pablo Eguiron Vidarte, Head of Investor Relations]

Sorry, I think that there are more people waiting. I think we have time for one final question, at least. I know that there are more people waiting, but there are a lot of commitments and a full agenda today. So one, operator, please, one more, and then we can finish because there are some analysts still waiting there.

[Operator]

Our next question comes from Charlotte Perfect from Arete Research.

[Charlotte Perfect, Senior Analyst]

Really my question around the Spanish trends was asked earlier. But if I may just follow-up on that, and I understand you don't want to give the split into premium, mid- and low-tier amidst your convergent base. But I'm just wondering, what's your outlook? As we go into a recession, and over the next 6 months, and as consumers become a bit more price-sensitive, are you expecting further downspin in the market? I guess, also as the Virgin plans rolls out and MásMóvil continues its advance as well. And so just really sort of would like to understand your outlook on downspin in Spain?

[Ángel Vilá Boix, COO & Executive Director]

Regarding the outlook for Spain, no? Pre-COVID-19, we were targeting operating cash flow growth on a trend of growing key accesses, launching new services and with a positive outlook, which is still there for wholesale revenues. Also, at the OIBDA level, corporate recommissioning and digitalization were to keep providing benefits, on top of improved trends in costs, in content and personnel and, of course, having stable CapEx. Now what we see is that uncertainty is maybe main attribute for the year. So we foresee pressure on the top line. In any case, and given this pressure on the top line, we can no longer aim to -- for stable top line and OIBDA, but we have room. We have room for acting on OpEx and CapEx and aim to preserve operating cash flow. At the OIBDA level, part of the loss in revenues will be compensated by OpEx savings in supplies and in commercial costs, and efficiencies that were already up and running. So this should allow us to maintain OIBDA margins at around 40% approximately. And then when we translate this into operating cash flow, given our flexible CapEx model, we are aiming for the Spanish operation for slightly negative to flat operating cash flow.

[Pablo Eguiron Vidarte, Head of Investor Relations]

Thank you. With this, we will finish. Help us -- I'll hand over to José María to close the call.

[José María Álvarez-Pallete López]

Thank you very much for your participation. We certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relationship department. Good morning, and thank you very much.

[Operator]

Telefónica's January to March 2020 Results Conference Call is over. You may now disconnect your line. Thank you.