C34. Discontinued operations and assets classified as held for sale

Classification

Eurasia

Former segment region Eurasia (including holding com-panies) is classified as held for sale and discontinued operations since December 31, 2015. The holding com-panies will be divested or liquidated in connection with the transactions. Telia Company is still committed to the plan to divest the remaining parts of Eurasia and the delay during 2016 in the sales process was caused by events and circumstances beyond Telia Company’s control. A sales agreement was signed in September 2016 for Tcell, but regulatory approval has not yet been received for the transaction. For the other remaining parts of Eurasia different circumstances arose during 2016 which led to that these units were not sold by the end of the year. Telia Company has taken actions necessary to respond the change in circumstances and the units are being actively marketed at reasonable prices given the change in circumstances. The remaining Eurasian parts are available for immediate sale and divestments of these units are deemed highly probable within one year.

Yoigo

Yoigo in Spain was classified as held for sale since June 2016 when Telia Company signed an agreement to sell its 76.6 percent holding in the Spanish operator Yoigo. The deal was closed on October 5, 2016, see Disposals. Yoigo in Spain was a part of the reportable segment region Europe. It was not considered to represent a separate major line of business or geographical area of operations and is therefore not presented as discontinued operations.

Sergel

In June 2016, Telia Company signed an agreement to divest its 100 percent holding in Sergel (credit management services and debt purchase business) to Marginalen at an enterprise value of SEK 2.1 billion. In 2015, Sergel’s EBITDA contribution, excluding non-recurring items, was SEK 206 million. The transaction is conditional on relevant regulatory approvals including the Swedish Financial Supervisory Authority as well as Competition Authorities. The approvals are deemed highly probable and Sergel is therefore classified as held for sale since June 30, 2016. In the segment reporting Sergel is part of Other operations. It is not considered to represent a separate major line of business or geographical area of operations and is therefore not presented as discontinued operations.

Presentation

Former segment region Eurasia (including holding com-panies), which is classified as discontinued operations, is presented as a single amount in the consolidated statements of comprehensive income. Comparative periods in the consolidated statements of comprehensive income are restated to reflect the classification of region Eurasia as discontinued operations. The consolidated cash flow statement is presented including region Eurasia, but with additional information on cash flows from operating, investing and financing activities and free cash flow for region Eurasia. Eurasia and Sergel are classified as held for sale and the related assets and liabilities are therefore presented separately in two line items in the consolidated statement of financial position. The amounts for discontinued operations and assets and liabilities held for sale (Eurasia and Sergel) in the consolidated financial statements are presented after elimination of intragroup transactions and intragroup balances.

Net income from discontinued operations (region Eurasia)

SEK in millions, except per share data

Jan-Dec 2016

Jan-Dec 2015

Net sales

13,653

20,742

Expenses and other operating income, net1

-20,701

-13,775

Operating income

-7,048

6,967

Financial items, net

-315

1,552

Income after financial items

-7,364

8,519

Income taxes

-1,208

-2,546

Net income before remeasurement and gain on disposal

-8,572

5,973

Impairment loss on remeasurement to fair value less costs to sell2

-2,400

-5,300

Gain on disposal of Ncell in Nepal (including cumulative Ncell exchange loss in
equity reclassified to net income of SEK –1,065 million)3

1,035

whereof loss attributable to parent shareholders

-927

whereof gain attributable to non-controlling interests

1,962

Net income from discontinued operations3

-9,937

673

     

EPS from discontinued operations (SEK)3

-2.90

-0.19

EBITDA excl. non-recurring items

5,880

11,035

 1) Operating expenses for 2016 include expenses relating to the provision for settlement amount proposed by the US and Dutch authorities. The provision is recognized as a short-term provision relating to continuing operations in the consolidated statements of financial position, see Note C22.
2) Non-tax deductible.
3) Non-taxable gain.

Assets and liabilities classified as held for sale (region Eurasia and Sergel)

SEK in millions

Eurasia

Dec 31, 20164

Sergel,

Dec 31, 2016

Total
Dec 31, 2016

Eurasia
Dec 31, 2015

Goodwill and other intangible assets

7,562

38

7,601

10,821

Property, plant and equipment

7,551

6

7,557

10,379

Other non-current assets

448

251

699

586

Short-term interest-bearing receivables

1,889

1

1,890

1,382

Other current assets4

2,329

568

2,898

1,957

Cash and cash equivalents4

8,302

95

8,397

10,687

Assets classified as held for sale

28,082

960

29,042

35,812

Long-term borrowings

355

0

355

238

Long-term provisions

2,652

149

2,801

4,431

Other long-term liabilities

3,711

5

3,716

2,176

Short-term borrowings

1,612

1,612

1,230

Other current liabilities

4,932

211

5,144

3,524

Liabilities classified as held for sale

13,262

365

13,627

11,598

Net assets classified as held for sale5

14,819

596

15,415

24,214

4) The major part of the minority owner Visor’s share of the sales price for Ncell and Visor’s share of the holding company Reynolds Holding has been distributed to Visor during the third quarter of 2016 and SEK 0.3 billion remains within cash and cash equivalents of discontinued operations as of December 31, 2016. The provisions for transaction warranties and the sales price for Telia Company’s 60.4 percent ownership in Ncell and Telia Company’s share in the holding company Reynolds Holding, as well as sales price for Telia Company’s economic interest in the 20 percent local shares in Ncell are included in continuing operations. 
5) Represents 100 percent of external assets and liabilities, i.e. non-controlling interests’ share of net assets are included.

Measurement

In accordance with IFRS 5, discontinued operations (Eurasia) and assets held for sale (Sergel) are measured at the lower of carrying value and estimated fair value less costs to sell. The valuation is based on an assessment of the input from the sales process and the risks in the different countries. Fair value is the price that would be received to sell the discontinued operations in an orderly transaction between market participants at the measurement date under current market conditions. There are no directly observable (quoted) prices for Telia Company’s discontinued operations and fair values have therefore been estimated using other valuation techniques which require the use of judgment.

Non-current assets included in discontinued operations or disposal groups held for sale are not depreciated or amortized. Depreciation and amortization in discontinued operations (Eurasia) would have been SEK 2.0 billion in 2016. Depreciation and amortization in discontinued operations (Eurasia) for 2015 were SEK 3.6 billion.

Uzbekistan

Since December 31, 2015, the operations in Uzbekistan (Ucell) is measured at estimated fair value less costs to sell and is classified within Level 3 of the fair value hierarchy of IFRS 13. For Ucell, valuations have been prepared based on the current business plan. Input from both internal and external advisors have been considered in the valuations. The following different valuation models have been used:

  • Valuation multiples from comparable companies (peers) on relevant financial metrics such as EBITDA and Operating free cash flow (OpFCF)
  • Discounted cash flow (DCF) calculations, and
  • Brokers’ EBITDA multiple valuations of Ucell

The key assumptions used in the valuation models per December 31, 2016, and December 31, 2015, are presented in the table below.

 

Multiple range

WACC %

Terminal
growth rate %

Enterprise value/EBITDA

3.00-3.50 (2.75-3.75)

Enterprise value/OpFCF

5.00-6.00 (4.75-5.75)

DCF

22.31-23.31 (20.78-21.78)

2.00-3.00 (2.00-3.00 )

Brokers’ EBITDA multiples

1.0-4.3 (2.5-4.0)

The combined results of the different valuation models provided an estimated range reflecting a normalized Enterprise value based on normal business risks. Apart from the normal business risks, there are a number of specific risks related to the valuation of Ucell such as cash repatriation issues, the foreign exchange risks, the unstable regulatory environment, the historical compliance issues associated with Ucell’s previous minority shareholder and finding the right buyer from a sustainability point of view. Given the lack of precedents and factual evidence, it is difficult to quantify the valuation impact of all such risks. Moreover, any potential discount, will be highly subject to the specific views of an interested buyer. The normalized range for the estimated enterprise value was adjusted to reflect management’s best estimate of these specific risks.

The remeasurement of the net assets in Ucell per December 31, 2015, resulted in an impairment charge in the fourth quarter of 2015 of SEK 5.3 billion related to goodwill and other fixed assets. Management’s best estimate is that the risk adjusted debt free value of Ucell of SEK 3.3 billion as of December 31, 2015, remains unchanged as of December 31, 2016. Due to increased carrying values for Ucell, impairment charges of SEK 200 million, SEK 550 million, SEK 600 million and SEK 600 million were recognized in the first, second, third and fourth quarters of 2016, respectively. In total Ucell was impaired by SEK 1,950 million in 2016.

Changes in any of the estimated risk adjustments would have a material impact on the estimated fair value. The most significant impact on fair value will be the buyer’s ability to operate in the country and convert local currency. See also Risks and uncertainties, sections “Emerging markets,” and “Review of Eurasian transactions.”

Tajikistan

In September 2016, Telia Company signed an agreement to sell its 60 percent holding in Central Asian Telecommunications Development B.V., which controls CJSC “Indigo Tajikistan” (Tcell), to the Aga Khan Fund for Economic Development (AKFED). AKFED is currently the minority owner in Central Asian Telecommunications Development B.V. with a 40 percent holding. The transaction is subject to regulatory approvals in Tajikistan. The transaction price for Tcell is based on an enterprise value of USD 66 million, of which Telia Company’s 60 percent share corresponds to USD 39 million. Based on current FX-rates, the agreed price implies an EV/EBITDA multiple of approximately 4.0x based on Tcell’s 2015 results. The transaction will have limited result and net debt impact. Based on the signed agreement for Tcell and current information in the sales process of Roshan (financial asset relating to shares in an operator in Afghanistan), management’s best estimate is that the enterprise value for Tcell (100 percent) and the value of the shares in Roshan (12.25 percent) combined as of June 30, 2016, of SEK 600 million remains unchanged as of December 31, 2016. An impairment loss of SEK 450 million was recognized in the second quarter of 2016 for Tcell and Roshan.

Other parts of discontinued operations

For the other remaining parts of discontinued operations (excluding Ucell and Tcell), the estimated fair values exceeds the carrying value and these parts have therefore not been remeasured at December 31, 2015 or December 31, 2016. The estimated fair values were based on a combination of indicative bids received, valuation discussions with potential buyers and valuation models in the form of multiples from comparable companies (peers) on relevant financial metrics such as EBITDA and discounted cash flow calculations. The specific risks of each country have also been factored in to the fair value estimates. See Risks and uncertainties for more information on the risks.

Disposals

Ncell in Nepal

On April 11, 2016, Telia Company completed the divestment of its holdings in Ncell in Nepal to Axiata, one of Asia’s largest telecommunication groups. The deal has been approved by all relevant authorities. Telia Company has completed the sale at an enterprise value of USD 1,030 million for its 60.4 percent ownership of Ncell and Telia Company’s share of the holding company Reynolds Holding. The transaction was subject to customary closing adjustments based on net debt and net working capital. Telia Company has been paid for Ncell’s cash position in proportion to its economic interest of 80.4 percent. Furthermore, Telia Company has dissolved its economic interests in the 20 percent local ownership in Ncell and received approximately USD 48 million from Sunivera Capital Ventures, Singapore.

The divestment, all transactions included, resulted in a total capital gain of SEK 1,258 million for the group in the second quarter of 2016, whereof a loss of SEK -888 million was attributable to owners of the parent and a gain of SEK 2,146 million was attributable to non-controlling interests. The sale resulted in a loss for the parent shareholders mainly due to the carrying value of goodwill in Ncell (not attributable to minority) and provisions for parent shareholder’s transaction warranties. On signing in December 2015, no material effect on net income (attributable to parent shareholders) was expected, but final amounts were subject to deviations in foreign exchange rates and closing adjustments. Compared to the estimated net income effect expected in December 2015, the capital loss relating to parent shareholders of SEK -888 million recognized in the second quarter of 2016 was effected by negative foreign currency effects on the sales price, estimated closing adjustments and estimated additional provisions for transaction warranties. In the fourth quarter of 2016 the total capital gain for the group was reduced to SEK 1,035 million, whereof a loss of SEK -927 million was attributable to owners of the parent and a gain of SEK 1,962 million was attributable to non-controlling interests. The change in the fourth quarter was mainly related to transaction warranties of the minority owners.

The total price for all transactions was SEK 14.0 billion, whereof SEK 12.6 billion has been received in cash as of December 31, 2016. The price received in cash less divested cash and cash equivalents in Ncell of SEK 3.3 billion resulted in a net cash flow effect for the group of SEK 9.3 billion for 2016. The net cash flow effect for the group was SEK 9.8 billion (relating to both parent shareholders and non-controlling-interests) in the second quarter of 2016 and changed to SEK 9.3 billion at the end of the third quarter 2016. The net cash flow change of SEK -0.5 billion related to cash proceeds received in the third quarter of SEK 0.9 billion and SEK -1.4 billion which was part of the proceeds that were recognized as cash in the second quarter that was reported as receivables in the third quarter of 2016. There were no cash flow changes during the fourth quarter of 2016.

Provisions for transaction warranties are included in the statement of financial position for continuing operations. The sales price of SEK 12.9 billion for Telia Company’s 60.4 percent direct ownership and the minority owner Visor’s 19.6 percent ownership in Ncell and their 100 percent ownership in the holding company Reynolds Holding, have been recognized in the legal entity TeliaSonera Norway Nepal Holding. A liquidation process has been initiated for TeliaSonera Norway Nepal Holding, which is included within discontinued operations. Telia Company’s share of the sales price of SEK 9.6 billion has been classified within continuing operations (whereof SEK 8.9 billion has been included in cash and cash equivalents as of December 31, 2016). The minority owner Visor’s share of the sales price of SEK 3.3 billion was included within discontinued operations and was classified as held for sale. The major part of Visor’s sales price was distributed to Visor during the third quarter and SEK 0.3 billion remains within cash and cash equivalents of discontinued operations as of December 31, 2016. The sales price of SEK 1.0 billion for Telia Company’s economic interest in the 20 percent local shares has been transferred to Telia Company AB and has been included within cash and cash equivalents in continuing operations. The final amounts relating to the Ncell divestment are still subject to deviations in foreign exchange rates and transaction warranties. Ncell in Nepal was part of the former segment region Eurasia which is classified as discontinued operations.

Yoigo in Spain

In June 2016, Telia Company signed an agreement to sell its 76.6 percent holding in the Spanish operator Yoigo to Masmovil, a Spanish telecommunications operator. The deal has been approved by all relevant authorities and was completed On October 5, 2016, at a price of SEK 3.8 billion for Telia Company’s share. The divestment resulted in a capital gain of SEK 4.5 billion, which is recognized as part of “Other operating income” within continuing operations. The transaction had a cash flow effect of SEK 2.6 billion (price received in cash SEK 3.8 billion less divested cash and cash equivalents in Yoigo SEK 1.2 billion) and has reduced net debt for Telia Company by SEK 6.1 billion.

Subsidiaries in discontinued operations with ­material non-controlling interests

AO Kcell and Azercell Telekom B.M. are held partly by intermediate holding companies where one is partly held by the associated company Turkcell. The NCI in Kcell is 38.1 percent. Based on a put option granted, the NCI in Azercell is accounting-wise reduced to 30.5 percent.

Based on put options granted on 6 percent of the share capital in TeliaSonera Uzbek Telecom Holding B.V. (Uzbek Holding), the subsidiary has previously accountingwise been treated as a wholly-owned subsidiary of Telia Company. During the fourth quarter of 2016 the 6 percent shares owned by the non-controlling owner Takilant were transferred to the Dutch Authorities. As a result the put option can no longer be exercised. The put option provision of SEK 686 million has therefore been derecognized with a corresponding charge to other operating income within discontinued operations. In addition a 6 percent non-controlling interest has been recognized in equity.

Before the divestment, Ncell Pvt. Ltd. was held by intermediate holding companies with an NCI of 39.6 percent, but based on a put option granted the NCI was reduced to 19.6 percent.

Put options

Azertel Telekomünikasyon A.S. (Azertel), the parent company of the mobile operator Azercell Telekom B.M. (Azercell) in Azerbaijan, has a put option granted in 2008 in conjunction with the privatization of Azercell, now wholly-owned by Azertel. Should a deadlock regarding material decisions at the general assembly arise, the resolution supported by Fintur Holdings B.V. will apply. In such circumstances, the put option gives the largest holder of non-controlling interests the right to sell its 42 percent holding in Azertel to Fintur Holdings B.V. Telia Company consolidates 74.3 percent of Fintur. The exercise price is equal to the fair value at the time of exercise and is to be determined by independent appraisal. The provision represents the present value of management’s best estimate of the amount required to settle the liability. The provision may vary as a result of changes in Azertel’s estimated fair value and the timing of the option exercise.

Uzbek Holding, the parent company of the mobile operator OOO Coscom (Ucell) in Uzbekistan, had a put option granted that gave the non-controlling owner Takilant the right to sell its 6 percent interest in Uzbek Holding to Telia Company. After the transfer during the fourth quarter 2016 of the 6 percent non-controlling shares to the Dutch authorities, the put option can no longer be exercised and the provision for the put option has been derecognized. See “Subsidiaries in discontinued operations with material non-controlling interests”.

Put options and financial receivables are offset in the statement of financial position when there is an enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to settle the put option and financial receivable simultaneously (Ncell before the divestment and Rodnik).

Financial risk management

Telia Company’s net investments in the Eurasia region is although classified as discontinued operations, still exposed to fluctuations in foreign exchange rates and managed accordingly.

Transaction risk on proceeds of the divestments is dealt with as a part of the group’s established foreign exchange risk management procedures following the group policy on financial management. The currency of the future sales proceeds will probably not be the same as the local currency of the disposed operations.

Conversion risk in discontinued operations relates to the net investments in foreign operations. The major currencies contributing to the conversion risk are AZN, USD, UZS and KZT.

The surplus liquidity and liquidity position for the discontinued operations as of December 31, 2016, were SEK 8,397 million (SEK 10,687 million), which relate to cash and cash equivalents. Based on the current liquidity position and the expected disposal of the Eurasian operations within one year, Telia Company’s liquidity risk relating to discontinued operations are considered limited.

Credit risk is dealt with as part of the group’s established credit risk management procedures following the group policy, or where applicable, the subsidiary´s policy on financial management.

Interest rate risk is the risk that a change in interest rates will negatively affect the group net income or cash flows. The interest-bearing borrowings in the discontinued operations refers mainly to fixed rate loans with short maturity and considering the expected divestment of the operations within one year the interest rate risk exposure for Telia Company is therefore deemed limited. The interest rate risk relating to cash and cash equivalents and receivables is deemed limited.

Provision for settlement amount proposed by the US and Dutch authorities

The US and Dutch authorities have investigated historical transactions related to Telia Company’s entry into Uzbekistan in 2007. As announced on September 15, 2016, Telia Company received a proposal from the authorities for resolution of the pending investigations. The authorities have proposed a global resolution that includes a total financial sanction of USD 1.45 billion.

Resolution of the various investigations is complex and will require further discussion and negotiation with the various government agencies involved in the investigations. Without certainty as to the timing and amount that may be paid at the time of a final resolution, Telia Company recorded a USD 1.45 billion (SEK 12.5 billion per September 30, 2016, which due to foreign currency changes has increased to SEK 13.2 billion per December 31, 2016) provision at the balance sheet date. This is in line with IFRS requirements, which states that the best estimate must be recorded as a provision. As it is not possible for management to make another reliable estimate at this point in time, this amount is the estimate of the expenditure required to settle this matter at the balance sheet date. Disclosure of further details regarding the assumptions and uncertainties of the provision is expected to prejudice seriously the position of Telia Company. Telia Company has therefore, in accordance with IAS 37.92, not presented any further information on the provision in this Annual report. From end of December 2016, the provision is partly hedged for changes in foreign currencies. The total net income effect of the provision including foreign exchange effects and the hedge effect was SEK 13.5 billion for 2016.

The provision is recognized as a short-term provision in the consolidated statements of financial position. The provision is classified as part of liabilities relating to continuing operations as the provision will not be part of the sale of the Eurasian net assets. The effect on net income is included in the line item “Net income from discontinued operations” in the consolidated statements of comprehensive income and disclosed as operating expenses in the table “Net income from discontinued operations (Eurasia)” above. The net income effect is classified as part of discontinued operations based on that the expenses are related to the operations in Uzbekistan. The settlement amount is assumed to be non-tax deductible.