States Assembly | Bear Stearns report on the up-side of telco retail-wholesale separation

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Sector Stance: Market Underweight

European Telecommunication Services

Wholesale Salvation'

Retail-wholesale separation offers upside

December 2006

Research Analysts:

Jonathan Dann William Main Fanos Hira Maurice Patrick

U.S. investors contact your Bear, Stearns & Co. Inc. registered representative at 1-800-999-2000

Bear, Stearns International Limited, London Authorised and regulated by the United Kingdom Financial Services Authority

Bear Stearns does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Customers of Bear Stearns in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.bearstearns.com/independentresearch or can call (800) 517-2327 to request a copy of this research. Investors should consider this report as only a single factor in making their investment decision. PLEASE READ THE IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION INFORMATION IN THE ADDENDUM SECTION OF 1THIS REPORT

Agenda

Wireline continues to depress group earnings
Structural separation – upside to valuations?
Utility comparisons: gaswatertelecoms?
Applying Openreach across Europe
Selling Openreach
Identifying the intrinsic value within retail'

Wireline continues to depress group earnings

15.00 EU Telecoms: 6 month Absolute Performance (%)

European incumbents under increasing pressure

10.00

5.00 – Competition continues unabated, while regulatory relief is slow

- – Broadband penetration starting to mature – less scope to offset

-5.00 traditional declines

-10.00 – IPTV will help slow line losses, but unlikely to be panacea

-15.00

-20.00

Mobile growth stunted as termination rate cuts continue

– Ongoing rate cuts expected – Dutch regulator has set the EU floor

Absolute Performance - 6 Months

– International roaming regulation set to negatively impact profitability

EU Telecoms: Revenue Breakdown by Division, 2006E (%)

100% 80% 60% 40% 20% 0%

– Market penetration >100% limits absolute upside

Maintaining Underweight sector stance

– DT/FT/Swisscom 2Q profit warnings appear to validate position

– Recovery in margins is likely to be cost driven, growth via M&A

– No sign of positive earnings momentum in the medium term

Domestic fixed International fixed Domestic mobile International mobile Other

Structural separation - upside to valuations?

PSTN Network and Openreach

Core network Central office Street cabinet Customer premises

¦---------------------Openreach-------------------¦

BT Group: Re-rating Openreach as a Utility, 2006E (p)

350

286 177

300 2

234 127

250

200

150

100

BT Current Share Back out Implied Add Openreach Additional Wholesale New BT Valuation

Price Openreach RAV-based Valuation

Valuation Valuation

Source: Company data; Bear, Stearns International Limited Estimates

Structural separation – what is it?

– Distance between local exchange and customer premises

– Equal access for all players to last-mile copper network

– Separating last-mile from remaining businesses – accounting or operationally

BT Group and Ofcom precedent – EU likely to follow

– Establishment of Openreach a key outcome of The Strategic Review

– EU Commissioner Vivian Reding has highlighted the need for further investigation

– Other examples adopting/likely to adopt include TI, eircom, Telstra, Telecom NZ and potentially Portugal Telecom

Utility re-rating opportunity

– Via leverage, regulated assets should be valued in excess of assets

– Regulated assets value (RAV) – definition critical to returns

– BT's Openreach offers ca. 20% upside from utility-like valuation

Utility comparisons: water, electricity, gastelecoms?

UK Utilities: Regulated Post Tax Nominal Returns (%)

9.0 8.0

8.0 7.0 7.1 7.3

7.0 6.4 6.4 6.4 6.0

5.0

4.0

3.0

2.0 1.0 -

EU Telecoms: Utility Comparisons, 2006-07E

Net Debt /

Enterprise EBITDA ----- EV/EBITDA ----- --- Price /Earnings -- Market Cap Net Debt Value 2006E 2006E 2007E 2006E 2007E

AWG 1,808 3,318 5,126 6.3 9.8 10.0 19.3 20.4 Kelda 3,174 1,841 5,015 4.1 11.1 10.2 18.3 17.5 Northumbrian 1,381 1,919 3,300 6.4 10.9 10.2 16.1 14.4 Pennon 1,687 1,156 2,843 4.7 11.5 10.7 17.9 18.7 Severn Trent 4,566 2,996 7,562 3.5 8.9 8.5 25.9 22.3 United Utilities 5,902 3,854 9,756 3.7 9.3 8.6 18.8 13.3 National Grid 22,793 16,333 39,126 3.6 8.6 8.2 11.5 11.4

Source: Company data; Thomson First Call Consensus Estimates.

Monopoly industries

– Parallels in water, gas, electricity and broadcast transmission networks

– Returns consider gearing, inflation and tax assumptions

Regulated asset values, regulated returns

– Price cap mechanism is determined by regulated returns and assets

– Monopoly assets independently valued, outside IFRS/GAAP

– Allowable returns set at 5 year intervals, embedded cost saving incentives add further upside

Utilities trade at a premium to telecoms

– Stable, predictable returns

– Pension contributions/deficit funding and capital investment are recoverable

– Gearing potential increases upside

Applying Openreach across Europe

EU Telecoms: Full ULL Rates, 2006 () 16.00

14.00 12.00 10.00

8.00 6.00 4.00 2.00

0.00

NOR BELG SWE SP AUS Germ UK NL FR PT GR IT

FULL rate Median

EU Telecoms: Creating European Openreach

Openreach Openreach BSIL

Implied Value Regulated Incumbent

Per Access Line Returns Forecasts

What if Retail Margins

Number of RAV of Incumbent Implied Normalise? Incumbent Incumbent "Openreach" Incumbent

Access Lines "Openreach" EBIT/EBITDA Retail EBITDA

Implied Valuation Uplift

Openreach From RAV Depreciation

Per Line

ULL access and rates underpin methodology

– Monopoly on last mile network exists across European incumbents

– Obligation to provide ULL access backs up conclusion

– European incumbents face the same operating risks – similar FULL rates across operators supports assertion

Methodology

– Regulated assets per lines deployed, not those just in service

– 10% regulated return on each incumbents' regulated assets value

– Using Openreach data points to imply European Openreach'

Significance to group

– Accounts for greater % of valuation than EBITDA across all incumbents due to monopolistic characteristics

– Greatest exposure at less diversified operators – BT, OTE and BCOM

Selling Openreach

EU Telecoms: Selling Openreach – Impact on Net Debt/EBITDA , 2006 (x)

1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0

Existing net debt/EBITDA New net debt/EBITDA

EU Telecoms: Selling Openreach – Impact on Market Capitalisation, 2006 (%) 35.0

30.0 25.0 20.0 15.0 10.0

5.0 0.0

BT DT FT OTE TI BCOM KPN PT TA SCOM TEF Telia Openreach equity as % of group market capitalisation

Sale/spin-off or securitisation

– Could unlock considerable value

– Operational separation is the first step to full deconsolidation

– Infrastructure investors/private equity interest likely, given stable cashflow, regulated returns and gearing capacity

Assumptions

– Sold at 1.25x regulated asset value (RAV)

– Openreach geared to 70% of RAV, in line with other utilities

Benefits offered

– Releases 123bn of capital across the sector (54bn equity, 69bn debt) to fund growth or boost shareholder returns

– Lighter touch regulation for remaining retail business

– Valuation and gearing multiples improve

Identifying the intrinsic value within retail'

EU Telecoms: Retail' EBITDA and OFCF Margins, 2006E (%) 35.0

30.0 25.0 20.0 15.0

10.0 5.0 0.0

EBITDA margin (%) OFCF margin (%)

EU Telecoms: Implied Valuation of Retail' Wireline vs EBITDA Margin, 2006E 1.8

1.6 TEF

KPN

1.4

SCOM

1.2 TA PT TI

1.0 TNOR

BCOM

0.8 BT

0.6 DT R2 = 0.7622

0.4 OTE FT

Telia

0.2

0.0

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 EBITDA margin (%)

Methodology

– With Openreach established, we imply the remaining wireline operations

– Monopoly assets relatively alike, implied retail' units differ considerably

– Exposure to group also varies, dependent on level of diversification

Implied retail margins – who's at risk

– We consider a scenario where retail EBITDA margins normalise at 25%

– Impact on EBITDA varies considerably across Europe

– Southern EU operators (TEF, TI, PT) most exposed, KPN also at risk

Implied retail units – what are they worth?

– Diverse set of implied valuations across Europe

– Data set suggests 25% EBITDA margins, EV/sales should be 1.0x

– In addition to Openreach re-rating as a utility, upside exists at OTE, BT, DT, FT and Telia from retail operations trading towards 1.0x EV/sales

6b. Identifying the intrinsic value within retail' (cont'd)

EU Telecoms: OFCF Impact on Retail' Margins Normalising at 15%

Margins at risk

80.0 60.0 40.0 20.0 0.0 -20.0 -40.0

– We flex scenario where EBITDA and OFCF margins normalise to 25% and 15% respectively

– OTE, BT and DT margins already depressed and hence benefit from normalising margins

– Most incumbents indicate modest downside, but at group level <20%

Impact on domestic fixed OFCF (%) Impact on group OFCF (%)

EU Telecoms: Valuation Impact on EV/Sales Normalising at 1.0x, 2006E (%)

Valuation at risk

35.0 25.0 15.0 5.0 -5.0 -15.0 -25.0

– We consider a scenario where valuation of retail division ex-Openreach normalises to 1.0x EV/sales

– FT, Telia and OTE standout performers, given already low valuations

– TEF, KPN and TA at risk, given higher margins and higher valuations

Impact on Fixed EV (%) Impact on Group EV (%)

Reiterate Outperform on KPN

– Retail margins and valuation high vs peers – indicates efficiency of retail operations despite cable threat

– Q3 results: Another strong quarter led by E-Plus and KPN mobile NL, wireline losses continue

– Investment thesis: Strong capital discipline: in-market consolidator (domestic mobile, domestic broadband), 1bn buyback in 2006

Reiterate Outperform on Telenor

– Openreach is 5.2% of group valuation, Retail margins have mid-range exposure

– Q3 results: Rebound in Nordic mobile continues, guidance upgraded, Norwegian fixed weak

– Investment thesis: Strong emerging growth, Nordic mobile rebound strong, offsetting ongoing domestic fixed declines

Reiterate Outperform on Belgacom

– Heavy investment in fibre is likely to increase regulated returns

– Q3 results: Results ahead of expectation, mobile guidance increased

– Investment thesis: Valuation remains attractive, early adopter of VDSL

Reiterate Outperform recommendation on TI

– September 11 2006: TI announces it is adopting structural separation

– Q3 results: Worst of termination rate cuts now over for TIM Italy, growth coming from outside Italy, deregulation of directories hurting fixed

– Increasing clarity on strategy, dividend yield remains attractive (06E Ords: 6.1%, Savers: 7.8%)

Reiterate Outperform on TA

– Broadly in line with sector – risks neutral

– Q3 results: Strong results reported, led by domestic operations, net income and dividend guidance raised

– Investment thesis: Low gearing, EMEA exposure, shares driven by capital redistribution, potential take-over candidate

Reiterate Outperform on PT

– Defence document and acquirer looking at Openreach separation and spin-off

– Q3 results: Better than expected results, led by Vivo margin rebound, raising pressure on Sonaecom to raise bid

– Investment thesis: Sonaecom bid too low, will have to raise it or shareholders are likely to back PT management's own plan

Reiterate Peer Perform on Telefonica

– Retail margins at risk but in longer term, concerns offset by diverse asset base and benign regulatory risk

– Q3 results: Diversification demonstrated in strong group results

– Investment thesis: Highly geared to operational underperformance in Spanish mobile should competitive intensity increase, M&A risk limited

Reiterate Peer Perform on BT Group

– Most exposed to upside given no mobile assets, Ofcom also leading regulatory body on structural separation

– Q2 results: Continuing momentum with underlying EBITDA increasing for the third quarter running

– Investment thesis: Downgraded to Peer Perform as structural separation benefits now broadly reflected in price, ULL threat remains

Maintain Peer Perform recommendation on FT

– Positively exposed due to low valuation of group, could provide catalyst to re-rate in line with sector

– Q3 results: Revenues slightly ahead, underlying EBITDA fell by 3.5% however cashflow guidance reiterated 6.8bn, FULL threat looms

– Investment thesis: Valuation remains attractive however as earnings downgrades continue

Maintain Peer Perform recommendation on TeliaSonera

– Low margins on retail indicates upside, although impact at group level limited

– Q3 results: Dividends increase materially, cost cutting initiatives led to robust margins in Sweden/Finland

– Investment thesis: Emerging market exposure, but lacks growth profile to compensate for the additional risk, Spanish mobile concerns

Maintain Peer Perform recommendation on OTE

– Beneficiary under structural separation, largely on account of low retail margins

– Q3 results: Reported November 29

– Investment thesis: Domestic wireline relatively benign with broadband growth continuing to support earnings, mobile risk at Cosmote

Retain Underperform stance on DT

– Large capital expenditure in fibre offers investment upside

– Q3 results: Domestic operations continuing to suffer from termination and competition, UK margins rebound

– Numbers still at risk, running the business on cashflow generation and likely to under-invest going forward in order to meet targets

Retain Underperform stance on Swisscom

– No ULL in Switzerland, making Openreach more valuable

– Q3 results: Moderately ahead of expectations with fixed still benign and mobile still taking share

– Stock remains expensive vs sector peers, regulatory threat accelerating (ULL, interconnect rates) and competition increasing

European Telecoms: Capitalisation

(a) (b) (c) (a)+(b)-(c)

Fully Mkt Cap. Free- EOY Net EOY Enterprise Net Dividend Price Diluted Free Float Debt Other Valuation Debt/EBITDA Yield

Price Target Shares (Local Float (Local (Local (Local ( Local 05 06 Rating Currency (Local) (Local) (mn) mn) (%) mn) mn) mn) mn) 05 06 (%) (%)

Integrated

Belgacom O Euro 32.71 34.96 340 11,135 44.7 4,978 (268) (2,427) 13,295 -0.2 -0.1 4.6 4.8 BT Group1 P Sterling 2.92 NA 8,328 24,319 100.0 24,319 7,416 (764) 32,500 1.4 1.3 4.1 4.7 Deutsche Telekom U Euro 13.37 NA 4,260 56,956 67.5 38,445 38,479 (3,659) 99,094 1.9 2.0 5.4 5.7 France Telecom P Euro 19.6 NA 2,603 51,020 65.1 33,214 37,562 (15,677) 104,259 2.7 2.2 5.1 6.1 KPN O Euro 10.49 12.50 2,036 21,359 100.0 21,359 9,707 (63) 31,130 1.9 1.9 4.3 5.0 Telecom Italia (Blended)[1] O Euro 2.71 41,680 100.0 41,680 33,931 (3,640) 79,251 3.2 2.8 6.7 7.0 Telefonica P Euro 15.87 NA 4,784 75,924 100.0 75,924 51,882 (8,977) 136,783 2.0 2.6 3.2 3.8 Portugal Telecom O Euro 9.76 10.5 1,129 11,018 100.0 11,018 4,090 (2,888) 17,996 1.5 1.8 4.9 5.0 OTE P Euro 21.9 NA 491 10,746 61.5 6,609 2,112 (3,669) 16,528 1.8 1.3 0.0 2.1 Telekom Austria O Euro 20.42 25.5 466 9,516 69.7 6,633 3,240 0 12,756 1.8 1.6 2.7 3.8 Telenor O NOK 117.25 126 1,712 200,713 47.0 94,335 34,963 (15,794) 251,470 1.3 1.3 1.7 2.6 TeliaSonera P SEK 52.75 NA 4,490 236,872 39.3 93,091 20,577 23,763 233,686 0.3 0.6 2.4 3.2 Swisscom U CHF 442.5 NA 52 22,922 37.3 8,550 334 (4,359) 27,614 -0.4 0.1 3.6 3.8 Integrated Average 1.8 1.6 4.1 4.7 Wireless

Vodafone U Sterling 1.3825 NA 52,658 72,800 100.0 72,800 24,234 987 96,047 1.5 1.8 4.4 4.6 Mobistar U Euro 63.35 NA 63 3,980 49.4 1,966 (183) 81 3,716 -0.1 -0.2 6.3 5.5 Cosmote O Euro 21.70 23.8 334 7,241 41.2 2,983 2,232 0 9,474 1.3 2.6 3.0 3.5 Wireless Average 1.3 1.8 4.4 4.6

Other

Carphone Warehouse O Sterling 2.93 4.44 883 2,588 37.2 963 581 0 3,170 1.2 2.1 0.9 0.9 Bouygues O Euro 46.79 50.60 337 15,757 74.2 11,692 3,312 (3,671) 22,741 0.7 0.9 1.9 2.6 Cable & Wireless O Sterling 1.60 1.77 2,307 3,680 100.0 3,680 72 (119) 3,871 -0.8 -0.1 2.8 3.4 Other Average 0.4 1.0 1.9 2.3

Telecom Average 1.4 1.6 3.6 3.8

European Telecom: Valuation

P/E Multiple Equity/FCF Multiple EV/Operating FCF Multiple EV/EBITDA Multiple Currency 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008

Integrated

Belgacom Euro 13.6 14.1 14.1 13.0 16.2 16.8 9.0 9.5 9.3 6.3 6.5 6.5 BT Group Sterling 13.0 12.8 12.1 18.5 17.6 14.7 13.1 12.3 11.8 5.8 5.7 5.7 Deutsche Telekom Euro 14.5 16.0 15.1 27.7 11.0 11.7 11.9 9.0 9.2 5.2 5.3 5.2 France Telecom Euro 11.2 12.2 12.1 7.4 7.6 7.2 8.9 9.1 9.0 5.6 5.6 5.6 KPN Euro 13.8 13.8 13.0 8.6 10.4 14.1 9.9 10.9 11.0 6.4 6.4 6.4 Telecom Italia (Blended) Euro 13.9 13.3 12.0 8.0 7.2 8.3 9.8 8.9 8.6 6.1 5.9 5.9 Telefonica Euro 16.0 13.9 11.0 12.0 10.8 8.9 10.9 9.9 8.8 7.0 6.6 6.2 Portugal Telecom Euro 17.1 19.1 19.6 38.7 34.6 20.8 13.5 12.4 11.7 7.9 7.6 7.5 OTE Euro 23.8 18.1 15.9 25.1 15.6 11.6 14.4 11.6 9.7 7.5 6.9 6.4 Telecom Austria Euro 17.2 17.9 14.8 9.1 12.3 10.9 10.1 11.9 10.9 6.6 6.9 6.6 Telenor NOK 18.7 15.2 12.8 20.4 16.6 12.2 16.7 11.9 9.7 7.4 6.7 6.1 TeliaSonera SEK 14.3 14.1 13.7 15.7 15.2 12.8 12.9 12.5 11.5 7.5 7.1 6.9 Swisscom CHF 15.2 13.9 14.0 15.7 16.4 15.4 11.4 10.9 11.3 7.4 7.0 7.1 Integrated Average 14.5 14.1 13.7 15.7 15.2 12.2 11.4 10.9 9.7 6.6 6.6 6.4 Wireless

Vodafone (Consol) Sterling 14.0 13.8 13.1 19.1 30.3 14.2 12.7 12.2 11.6 8.1 8.2 8.0 Vodafone (Prop) Sterling 14.0 13.8 13.1 19.1 30.3 14.2 8.9 8.5 8.1 5.7 5.7 5.6 Mobistar Euro 13.6 14.2 14.3 13.4 13.8 14.1 8.3 9.1 9.3 6.1 6.4 6.5 Cosmote (Consol) Euro 21.2 16.2 13.2 NM 19.9 13.2 24.6 15.5 12.1 10.8 9.0 8.0 Cosmote (Prop) Euro 21.2 16.2 13.2 NM 19.9 13.2 26.4 17.3 13.6 11.3 10.0 9.0 Wireless Average Proportionate 14.0 14.2 13.2 16.3 19.9 14.1 8.9 9.1 9.3 6.1 6.4 6.5 Wireless Average Consolidated 14.0 14.2 13.2 16.3 19.9 14.1 8.9 9.1 9.3 6.1 6.4 6.5 Other

Carphone Warehouse Sterling 27.4 11.8 9.4 NM 20.9 12.2 28.1 9.0 7.8 11.3 6.4 5.7 Bouygues Euro 13.7 12.6 11.8 NM 12.9 12.2 10.1 8.6 8.4 6.5 5.7 5.6 Cable & Wireless Sterling 37.0 18.8 13.8 NM 126.3 26.5 NM 16.3 11.3 8.4 6.2 5.3 Other Average 26.0 14.4 11.7 NM 53.4 17.0 19.1 11.3 9.2 8.7 6.1 5.5

Telecom Average 14.5 14.1 13.2 15.7 15.6 12.8 11.1 10.9 9.7 6.6 6.4 6.2 Source: Bear, Stearns International Limited estimates.

Fiscal Benefits – Impact on Multiples

Adjusted FCF Multiple Comparison, 2005-09E

2005 2006 2007 2008 2009 Belgacom 13.2 15.0 16.0 15.1 14.9 BT Group 16.8 20.0 18.9 15.2 15.8 Deutsche Telekom 12.6 25.5 13.0 13.1 10.1 France Telecom 8.1 8.6 8.7 8.2 8.1 KPN 18.0 13.6 14.4 12.5 11.6 Telecom Italia (Blended) 11.3 9.6 9.0 8.5 8.6 Telefonica 14.5 22.7 12.2 10.2 9.6 Portugal Telecom 34.2 48.3 30.7 20.4 18.9 OTE 29.5 21.1 15.0 11.6 10.0 Telekom Austria 10.7 10.8 13.2 11.9 9.9 Telenor 29.8 23.0 15.7 12.1 10.8 TeliaSonera 19.0 18.6 17.5 15.0 13.5 Swisscom 11.8 15.1 15.3 14.8 14.0 Mean 17.6 19.4 15.3 12.9 12.0 Median 14.5 18.6 15.0 12.5 10.8

Vodafone 9.8 12.4 11.3 10.5 10.1 Mobistar 13.5 13.8 14.2 14.4 13.9 Cosmote NM NM 19.4 14.5 12.1 Mean 11.6 13.1 14.9 13.2 12.0 Median 11.6 13.1 14.2 14.4 12.1

Carphone Warehouse NM NM 22.2 13.6 10.1 Bouygues 19.9 NM 13.5 12.7 11.8 Cable & Wireless NM NM 49.2 23.6 15.4 Mean 19.9 NM 28.3 16.6 12.4 Median 19.9 NM 22.2 13.6 11.8

Sector Mean 17.0 18.5 17.3 13.6 12.1 Sector Median 14.0 15.1 15.0 13.1 11.6

Source: Bear, Stearns International Limited estimates.

Reported FCF Multiple Comparison, 2005-09E

2005 2006 2007 2008 2009 Belgacom 11.2 13.0 16.2 16.8 16.5 BT Group 14.7 18.5 17.6 14.7 15.8 Deutsche Telekom 9.9 27.7 11.0 11.7 9.2 France Telecom 6.9 7.4 7.6 7.2 7.2 KPN 8.8 8.6 10.4 14.1 13.7 Telecom Italia (Blended) 8.8 8.0 7.2 8.3 9.0 Telefonica 12.2 17.6 10.8 8.9 8.9 Portugal Telecom 27.2 38.7 34.6 20.8 21.2 OTE 21.7 25.1 15.6 11.6 9.8 Telekom Austria 9.1 9.1 12.3 10.9 9.0 Telenor 25.1 20.4 16.6 12.2 10.8 TeliaSonera 15.8 15.7 15.2 12.8 11.6 Swisscom 16.4 16.4 16.4 16.4 - Mean 14.5 17.4 14.7 12.8 11.0 Median 12.2 16.4 15.2 12.2 9.8

Vodafone 8.0 14.8 23.4 10.9 9.7 Mobistar 12.5 13.4 13.8 14.1 13.6 Cosmote NM NM 19.9 13.2 10.7 Mean 10.2 14.1 19.0 12.7 11.3 Median 8.0 13.4 16.9 12.1 10.2

Carphone Warehouse NM NM 20.9 12.2 8.8 Bouygues 20.4 NM 12.9 12.2 11.3 Cable & Wireless NM NM 126.3 26.5 14.8 Mean 20.4 NM 53.4 17.0 11.6 Median 20.4 NM 20.9 12.2 11.3

Sector Mean 14.3 17.0 21.5 13.4 11.1 Sector Median 12.3 15.7 15.6 12.2 10.7

Source: Bear, Stearns International Limited estimates.

Companies Mentioned

European Telecom Coverage

Latest Target Methodology

Company Name Ticker Price Rating Price (If target is included) Investment Risks Belgacom BELG.BR 32.71 O 34.96 DCF based SOP Increasing competitive pressures in domestic fixed line, mobile

competition continuing. M&A risk

BT Group BT.L £2.92 P NA NA

Deutsche Telekom DTEGn.DE 13.37 U NA NA

France Telecom FTE.PA 19.60 P NA NA

KPN KPN.AS 10.49 O 12.50 DCF based SOP German wireless competition intensifies, domestic wireline declines

accelerate, M&A risk

Telecom Italia (Ords) TLIT.MI 2.25 O 2.71 DCF Based SOP / RAB Acceleration in wireline and wireless competition, political and economic

multiples risk

Telefonica TEF.MC 15.87 P NA NA

Portugal Telecom PTCO.IN 9.76 O 10.50 Achievable bid offer Political and M&A risk

OTE OTEr.AT 21.90 P NA NA

Telekom Austria TELA.VI 20.42 O 25.5 DCF based SOP Margin erosion in Bulgaria due to new entrants, increased unbundling

and cable threat to domestic fixed, and Hutchison could destabilise the Austrian wireless market

Telenor TEL.OL Nkr 117.25 O NKr 126 DCF based SOP Conflict with Alfa group regarding Kyivstar and Vimpelcom, emerging

market and forex risk, deterioration in domestic fixed line market continues

TeliaSonera TLSN.ST SEK 52.75 P NA NA

Swisscom SCMN.VX SFr. 443 U NA NA

Vodafone VOD.L £1.38 U NA NA

Mobistar MSTAR.BR 63.35 U NA NA

Cosmote COSr.AT 21.70 O 23.8 DCF based SOP Execution risk of Germanos integration and termination exposure in

Greece and Bulgaria

Carphone Warehouse CPW.L £2.93 O £4.44 DCF based SOP Threat of disintermediation by operators, stock overhang, stability of

TalkTalk margins

Bouygues BOUY.PA 46.79 O 50.60 DCF based SOP High exposure to wireless termination rate cuts, increasing MVNO

threat, slowing group growth and rising capex

Cable & Wireless CW.L £1.60 O £1.77 DCF based SOP UK business turnaround fails, re-acceleration of competition in

Caribbean

Price d at Market close December 08 2006

Source: Company data; Bear, Stearns International Ltd. estimates.

Addendum – Important Disclosures

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Outperform (O) - Stock is projected to outperform analyst's industry coverage universe over the next 12 months.

Peer Perform (P) - Stock is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. Underperform (U) - Stock is projected to underperform analyst's industry coverage universe over the next 12 months.

Ratings for Sectors (vs. regional broader market index):

Market Overweight (MO) - Expect the industry to perform better than the primary market index for the region (S&P 500 in the US) over the next 12 months.

Market Weight (MW) - Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the US) over the next 12 months.

Market Underweight (MU) - Expect the industry to underperform the primary market index for the region (S&P 500 in the US) over the next 12 months.

Jonathan Dann, European Telecom - Wireline: BT Group, BT Group ADR, Deutsch Telekom, Deutsche Telekom ADR, France Telecom, France Telecom ADR, Hellenic Telecommunications, Hellenic Telecommunications ADR, KPN, KPN ADR, Portugal Telecom, Portugal Telecom ADR, Swisscom AG, Swisscom AG ADR, Telenor, Telecom Italia,Telecom Italia ADR,Telecom Italia S.p.A.RNC, Telefonica de Espana ADS, Telefonica de Espana S.A.,Telenor ADR, TeliaSonera

Bear, Stearns & Co. Inc. Ratings Distribution as of September 30, 2006: Outperform (Buy): 43.3 / 4.6

Peer Perform (Neutral): 47.7 / 3.3

Underperform (Sell): 9.1 / 0.0

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