This section addresses both general risks associated with the economic environment and the industry in which TDC operates and the specific risks associated with its business. If any such risks were to materialise, TDC's business, financial condition and results of operations could be adversely affected and the value of TDC could decline.
The risks and uncertainties described below are not the only risks and uncertainties TDC faces. Additional risks and uncertainties not currently known to TDC, or that TDC currently deem to be immaterial may also adversely affect TDC's business, financial condition and results of operations.
The risk factors described below are not listed in any order of priority with regard to their significance or probability. It is not possible to quantify the significance to TDC of each individual risk factor as each risk described below may materialise to a greater or lesser degree and have unforeseen consequences.
TDC's business depends on the market environment, levels of economic activity, and general economic developments in Denmark and, to a lesser extent, Sweden, Norway and Finland. In particular, negative developments in, and a general weakness of, the Danish economy in recent years, including a period of increasing levels of unemployment, have negatively impacted the spending patterns of TDC's business and, to a lesser extent, residential customers in Denmark, both in terms of the products they subscribe for and usage levels. In the business markets, some of TDC's current and potential customers have reduced investment levels. Residential markets have been affected by a higher unemployment rate and a general decrease in consumer spending, while bad debts have increased. These factors have resulted, and may in the future result in, among other things, an increased focus on the basic telecommunications services and low cost services, fewer mobile broadband customers than anticipated, lower ARPU than expected for both mobile broadband and landline broadband, and increased churn rates.
Negative or very low economic growth, unemployment levels and other general economic developments in Denmark, Sweden, Norway or Finland could have an adverse effect on TDC's business, financial condition and results of operations.
The Danish telecommunications sector is highly competitive, and a number of the main product markets in which TDC is present are either approaching maturity (broadband and mobile telephony) or declining (landline telephony). TDC faces significant competition from well-established, pan-Nordic and national telecommunications companies, including utilities companies that offer fibre-based solutions in a number of product categories, and TV distributors. Some of these competitors are subject to fewer regulatory requirements in Denmark than TDC. In many of TDC's markets, future success will depend on TDC's ability to maintain or achieve economies of scale that are sufficient for its operations to be profitable.
In the Danish mobile voice and mobile data market, TDC competes with other MNOs and a number of MVNOs and service providers. Price competition in this market segment is strong and may increase in the future. This market segment has recently experienced intensified marketing of and price reductions on semi-flat rate products by SIM-only competitors. Should price competition intensify further, TDC may be forced to lower its prices for certain of its mobile voice products or offer other incentives in order to retain and/or gain customers. If such price reductions or incentives are not accompanied by cost reductions or by an increase in its customer base, usage or services sold, TDC's business, financial condition and results of operations may be adversely affected.
In the landline telephony market, TDC competes with, among others, TeliaSonera (operating under the name Telia), Telenor, utilities companies, Stofa and providers of VoIP, such as Skype. The Danish landline telephony market has been adversely affected mainly by customer migration from traditional landline telephony products to mobile voice and VoIP. The risks relating to the landline telephony market are discussed in more detail below.
In the Danish landline broadband market, increased competition for broadband customers among existing and new competitors, such as utilities companies, has resulted in increased bandwidth at unchanged, or even reduced, prices as well as significant competition for broadband add-on services. TDC's landline broadband business may also experience increased competition from mobile broadband. While the Danish mobile broadband market has experienced strong growth in recent years, TDC's market share in mobile broadband is considerably lower than in landline broadband. The risks posed by a migration of customers from landline to mobile broadband are discussed in more detail below.
In the pan-Nordic market, TDC competes primarily with TeliaSonera in Sweden and Finland and Telenor in Norway, both of which are long-established incumbent operators in their respective domestic markets with significant presences in other countries (including in Denmark). Some of TDC's business customers are increasingly demanding pan-Nordic solutions covering cross-border landline and mobile voice, broadband and data communications. Competition is intense and TDC's primary competitors for pan-Nordic solutions offer full product suites of landline and mobile voice, broadband and data communications. Some of TDC's competitors in these markets may have more comprehensive product offerings, greater economies of scale, greater brand-name recognition and longer-established relationships with certain business customers. If TDC is unable to provide competitive cross-border solutions for TDC's Nordic business customers, an important segment of TDC's customer base could be lost, which could have an adverse effect on TDC's business, financial condition and results of operations.
TDC's TV business faces competition from other cable TV operators as well as providers of alternative TV platforms, such as digital terrestrial TV (DTT), direct-to-home satellite (DTH) and TVoIP.
The customer base for traditional landline telephony (PSTN/ISDN) has been decreasing due to migration to mobile voice and VoIP as mobile prices have decreased and as broadband providers have offered VoIP at significantly reduced prices compared with traditional landline telephony. Antenna and housing associations have used their cable networks, and utilities companies have used their fibre infrastructure to provide customers with telephony services alongside Pay-TV and broadband services. As a result of such developments, TDC risks losing its traditional landline customers faster than currently anticipated. TDC has smaller shares of the mobile voice market, the VoIP market and the fibre infrastructure market in Denmark compared with its share of the traditional landline market, which means that migration has adversely affected, and may in future adversely affect, TDC's customer base, business, financial condition and results of operations.
Some customers who have migrated from TDC's traditional landline telephony products have subscribed for other TDC products, such as TDC's VoIP, mobile voice and broadband products. Even if TDC could manage to retain all the customer migration from traditional landline telephony to the substitution products, its total business may still experience decreasing profit, as margins for these substitution products are generally lower than the margins for traditional landline telephony.
As prices have decreased while bandwidth and coverage have increased, mobile broadband appears for certain customers to have become an alternative to, instead of merely complementing, landline broadband. TDC's market share in mobile broadband is significantly smaller than in landline broadband, and therefore such migration has had, and may continue to have, an adverse effect on TDC's business, financial condition and results of operation. This market segment is experiencing continued price decreases due to intense competition. Failure by TDC to increase its mobile broadband market share could have an adverse effect on TDC's business, financial condition and results of operations.
The landline telephony and broadband markets have, in recent years, experienced price discounting and, more significantly, an expansion of flat-rate products. A continuation of this trend to other markets may adversely affect TDC's business, financial condition and results of operations.
The introduction of mobile handsets with VoIP functionality may adversely affect TDC's pricing structures and market share in its landline and mobile voice business. VoIP over mobile telephony networks is an emerging technology influenced by large, global companies some of which have greater resources than TDC, such as Apple, Google, Microsoft and Skype, and there can be no assurance that TDC will be able to develop product offerings and price plans that will prevent erosion of revenue or profitability from TDC's voice business. If TDC is unable to achieve this, its business, financial condition and results of operations may be adversely affected.
Substitutions to a number of TDC's telecommunications technologies exist by means of alternative technology to satisfy customer demand. Any significant migration from TDC's technology to an alternative could have an adverse affect on its business, financial condition and results of operations.
In recent years, a number of regional Danish utilities companies have rolled out fibre networks to offer landline telephony, broadband and TV products primarily targeted at residential customers. At the date of this Annual Report, the utilities companies have not attracted a large share of the markets for such products, but if they are successful in the future, for example as a result of recent efforts by certain utilities companies to jointly market their product offerings under the Waoo! brand, or otherwise attract substantial residential or business customers, this may result in increased pressure on prices for landline telephony, broadband and Pay-TV. Such price pressure could have an adverse effect on TDC's customer base, market shares and price levels, which could adversely affect its business, financial condition and results of operations.
YouSee and TDC TV have faced competition from cable-TV operators, and from providers that offer Pay-TV services on other platforms, such as utilities companies, DTH satellite distributors, DTT providers and operators offering TVoIP. Competition has been driven by price, the range of channels offered, the ability to offer digital TV services such as personal video recording (PVR), video-on-demand and high definition TV (HDTV) and customer service. TDC believes that the number of channels in the generally accessible terrestrial network, as well as the supply of TV through the utilities companies' roll-out of a fibre-to-the-home ('FTTH') network, may increase significantly during the coming years, which could adversely affect TDC's TV business, including YouSee. Increased competition in the Danish TV-distribution market may also arise from internet-based content providers such as media and communications companies such as YouTube and Google, which could create significant price pressure. Failure by TDC to respond adequately to these challenges may have an adverse effect on TDC's customer base and its share of the Danish TV-distribution market, which could adversely affect TDC's business, financial condition and results of operations.
SKI has announced that the current framework agreement concerning telephony and data will be terminated as a result of an opinion from the Danish Competition and Consumer Authority questioning the legality of specific terms in one of the framework agreements SKI has concluded, which is also of relevance for the framework agreement concerning telephony and data. The framework agreement concerning telephony and data will be subject to a new public tender later in 2011. TDC is a party to the current framework agreement. No assurance can be given that TDC will win the tender for a new framework agreement or that the prices in the framework agreement will be at the same level as the prices in the current framework agreement.
Technologies in many of the product markets in which TDC competes change rapidly. TDC needs to anticipate and react to these changes by developing new and enhanced products and services quickly, for example. In addition, new technologies could become dominant in the future, rendering TDC's current technologies and systems obsolete. TDC's ability to adapt successfully to changes in technology in its industry and provide new or enhanced services in a timely and cost-effective manner will be important factors that will determine whether TDC can increase or maintain its customer and revenue base. If TDC is unable to do so, TDC's business, financial condition and results of operations could be adversely affected.
Costs associated with future product offerings, new technological developments and the operation of TDC's existing and future networks and technologies may also increase, due to many factors, some of which are outside TDC's control, including additional requirements for bandwidth, complexity of new solutions, potential incompatibility with TDC's current systems and the cost of content. The level and timing of future operating expenses and capital requirements may differ materially from current estimates due to various factors, many of which are beyond TDC's control. If TDC is not able to fund these costs, or if it chooses not to fund these costs, then its business, financial condition and results of operations could be adversely affected.
TDC's equipment and networks may be damaged or disrupted by events such as fire, power outages and equipment or system failures, including those caused by terrorist attacks, unauthorised access or computer viruses. In recent years, parts of TDC's fibre and landline networks have been affected by severe weather and have been damaged as a result of works undertaken by construction and installation companies. Major damage or disruptions could result in failure of TDC's networks or systems or of the third-party-owned local and long-distance networks on which TDC relies to provide its subscribers with interconnection and roaming services. This could affect the quality of TDC's services or cause service interruptions, which could result in customer dissatisfaction, regulatory penalties and reduced revenue. Network or system failures could also harm TDC's reputation or impair TDC's ability to retain and attract new customers, which could have an adverse effect on TDC's business, financial condition and results of operations. TDC's business continuity plans, network security policies and monitoring activities may not mitigate the impact of or prevent such disruptive events.
TDC relies on certain sophisticated critical systems, including exchanges, switches, other key network points and TDC's billing and customer service systems. The hardware supporting those systems is housed at relatively few locations and if damage were to occur to any of these locations or if those systems develop other problems, TDC's business, financial condition and results of operations could be adversely affected.
Based on its risk analyses, TDC's policy has been not to insure its underground, air and sea cables. If these network elements were disrupted as described above, TDC may not have sufficient resources to make necessary repairs or replacements, and such repairs and replacements may entail significant costs.
Also, if repairs or replacements of TDC's telecommunications network (or substantial parts of it) were required, TDC may not be able to complete such repairs or replacements, or may not be able to do so in a timely manner. This could adversely affect TDC's ability to provide services to its customers or the quality of its services, which could result in customer dissatisfaction and regulatory penalties, and could adversely affect TDC's business, financial condition and results of operations.
The Danish telecommunications market has been, and TDC expects that it will continue to be, influenced by providers offering residential customers converged products and bundles of services such as multi-play packages. Similarly, in recent years, business customers have favoured converged and bundled products. Since 1997, TDC has offered Duet, a converged landline and mobile product, which it has sold to a substantial portion of its customer base. Early in 2009, TDC launched the bundled multi-play products TDC HomeDuo (telephony and broadband) and TDC HomeTrio (telephony, broadband and TV). In addition, TDC plans to launch a quadruple-play product in 2011. TDC believes that its ability to offer new converged and bundled products, either by enhancing existing products or developing new products, will continue to be an important factor in its business. However, such types of bundled products can be complex due to the technological, logistical and pricing complexities of combining two or more services as a single product offering. If TDC fails to continue to offer attractive new bundled products in the future, or to successfully market such offerings to customers, TDC's customer base and market shares could decline, and its business, financial position and results of operations could be adversely affected.
TDC's success relies heavily on the skills, experience and efforts of its management. In addition, as TDC's business develops in a highly competitive market, TDC believes that its future success will depend on its continued ability to attract and retain highly skilled and qualified personnel. This may be difficult, especially as Denmark's labour market is still characterised by low unemployment and bottlenecks for highly skilled personnel.
TDC's information technology system comprises numerous intra-linked systems that are periodically updated, upgraded, enhanced and integrated with new systems. If these systems cannot be maintained adequately, or if the systems cannot provide a basis to support new or expanded products or services, TDC's ability to service its customers may be adversely affected.
As the telecommunications sector has become increasingly digitalised, automated and online-based, TDC has become exposed to increased risks of hacking and general information technology system failures. Unanticipated information technology problems, system failures, computer viruses, hacker attacks or unauthorised access to TDC's server could affect the quality of TDC's services, compromise the confidentiality of TDC's customer data or cause service interruptions, which could harm TDC's reputation and adversely impact TDC's market share, business, financial condition or results of operations.
TDC relies on third parties for the supply of equipment and certain critical systems, such as exchanges, switches, handsets, such as smartphones and other hardware. TDC also depends on MVNO and roaming agreements outside Denmark and interconnection agreements with other operators, some of which are TDC's competitors. Failure to perform by such suppliers and operators or difficulties or delays in interconnecting with other networks and services may delay or prevent TDC from providing products and services to its customers, which may adversely impact TDC's business, financial condition and results of operations. If this occurs, TDC cannot provide assurance that it will be able to, or have the right to, recover payments made to such suppliers or operators for their products or to obtain damages or other remedies.
Any price increases introduced by suppliers may adversely affect TDC's business, financial position and results of operations, to the extent that TDC is unable to pass on such price increases to its customers. TDC and its suppliers may also disagree on their contractual relationship which may lead to commercial disputes or escalate to legal proceedings, the outcome of which is uncertain. TDC and its suppliers may terminate their contractual relationship and no assurance can be given that TDC will be able to find alternative suppliers on terms acceptable to TDC or in a timely manner or at all. Switching to alternative suppliers could also cause difficulty or delays in the provision of support and maintenance, new products and upgrades and operational services. This is particularly the case in relation to agreements relating to the maintenance, development and operation of functions which have been outsourced, including several of TDC's information technology activities and its mobile network.
TDC has outsourced substantial parts of its information technology operations and development to CSC Consulting Group A/S (CSC) and the operation and build-out of its Danish mobile network to Ericsson Danmark A/S (Ericsson). This has exposed TDC to additional operational dependency and risks, as TDC relies on these and other suppliers to maintain and upgrade its hardware, software and mobile network. Any discontinuance of these supply agreements or failure by TDC's suppliers to comply with their obligations under these agreements could lead to the delay of upgrades and new products and features from suppliers. In the event that TDC's current outsourcing arrangements become unsatisfactory, or either of CSC or Ericsson is unable or fails to fulfil its obligations, TDC may not be able to find new outsourcing partners on economically attractive terms or on a timely basis or at all. Such actions could impact TDC's ability to develop new products and its supply of existing or new products and the quality of the support services associated with the outsourced function may deteriorate. Failure by CSC or Ericsson to perform their services in a timely and effective manner at acceptable costs could have an adverse effect on TDC's operations.
TDC's potential for growth in the mobile voice and data segment is highly dependent on its ability to secure the supply of handsets, including smartphones, which meet customers' demands. If TDC fails to secure the supply of smartphones or other products to meet customers' demands, its ability to retain and attract customers may be negatively impacted, which may adversely affect its business, financial condition or results of operations.
If TDC is not able to secure the supply of sufficient and attractive content, sales of TDC's products and services with a content component, such as cable TV, broadband and mobile telephony, could be adversely affected, which may have an adverse effect on TDC's business, financial condition or results of operations. In particular, YouSee and TDC's TV business are dependent on YouSee's ability to source attractive TV content at competitive prices. If one, or more, of TDC's agreements with certain content providers, such as Viasat, TV2 Networks or SBS, is not extended or renewed upon expiry or is extended on less advantageous terms or TV content is otherwise constrained, TDC's competitive position in the TV-distribution market could be adversely affected.
In addition to its own distribution network, TDC uses a number of retailers, sales agencies and other distributors to distribute or sell its products and services to retail and business customers. There is a risk that TDC's distributors may stop distributing TDC's products to end users for reasons beyond TDC's control. In addition, TDC's distributors have distribution agreements with some of TDC's competitors or they may enter into additional distribution agreements with TDC's competitors that may negatively affect customer intake and TDC's market share. If TDC fails to maintain these distribution relationships, or its distribution partners fail to provide sufficient customer intake for TDC, this could have an adverse effect on TDC's business, financial condition and results of operations.
In recent years, TDC has actively sought to reduce operating expenses and improve operating efficiency. For a summary of TDC's past and current restructuring and cost reduction programmes, see 'TDC's transformation since 2006'. TDC can give no assurances that its ongoing and future cost reduction initiatives will be successful in achieving their desired effect or that such initiatives will be executed as and within the time frame anticipated. The execution of restructuring and cost reduction initiatives may have adverse consequences, such as diversion of management time, customer complaints or industrial action, and may require TDC to record significant one-off costs as Special Items, such as provisions for redundancies. If TDC fails to successfully execute its ongoing or future initiatives to improve operating efficiency and reduce operating expenses, its business, financial position or results of operations may be adversely affected.
TDC has made and expects to continue to make significant infrastructure investments. Such investments are only recouped later, if at all, based on TDC's expectations with regard to the future developments of the markets and customer behaviour. There can be no assurance that TDC's current or future investments will generate the expected results and profits.
In particular, TDC anticipates that mobile data services and enhanced products and services, such as smartphones, higher internet speeds and add-on service offerings, will be important drivers of its future growth. In order to enable TDC to offer such services in the future, TDC has recently invested in a new licence through which it has access to 2x20 MHz of paired spectrum in the 2.5 GHz frequencies. TDC intends to use this spectrum primarily to offer LTE services to its customers in the future. In order to launch LTE services, TDC expects that it will need to make further significant investments to acquire and develop new network equipment, network software, new products and related infrastructure and services and may in addition, require further significant investments to acquire further spectrum in the future. However, a profitable market for LTE services using this spectrum may not develop in the time frame contemplated or at all, due to, for example, pricing constraints. If a profitable market fails to develop, TDC's ability to recoup its investment in such network equipment, software and products may be adversely affected. In addition to a negative impact on cash flows, this could result in significant write-downs of the value of the related investments.
As part of its cost reduction initiatives, TDC will continue to streamline its workforce in the years ahead. Many of TDC's employees (app. 25% in Denmark) have civil servant pension rights and some of these are entitled to special severance benefits. Therefore any workforce reduction entails significant redundancy costs, which would affect TDC's earnings in the short run.
Although Danish law imposes no significant restrictions on workforce reductions, and TDC's labour unions have no right under Danish law to veto any workforce reductions, reductions may lead to strikes, work stoppages or other industrial actions. In the summer of 2010, for the first time since 2005, TDC experienced a significant strike, due to workforce reductions. TDC has entered into 'truce' agreements with the telecommunications departments of the Danish Metal Workers Union (Dansk Metal), the Association of Managers and Employees in Special Positions of Trust in TDC (Lederforeningen i TDC, LTD) and the Danish Confederation of Professional Associations (Akademikernes Centralorganisation - AC). In these agreements, TDC has agreed to follow certain procedural guidelines when reducing its workforce. The 'truce' agreements will expire at the end of 2011, but may be terminated by TDC or the unions with three months' notice if the assumptions behind the truces lapse or change.
Most of TDC's products and services are marketed and sold under its brand names TDC, YouSee, Telmore, Fullrate and M1. TDC relies upon a combination of trademark laws, copyright and database protection as well as contractual arrangements to establish and protect its intellectual property rights. However, third parties may infringe TDC's trademarks and internet domain names, which could have an adverse effect on TDC's business, financial condition and results of operations. TDC cannot guarantee that any lawsuits or similar actions initiated to protect its intellectual property rights will be successful.
Third parties have claimed and may in the future claim that TDC or its suppliers are infringing third party intellectual property rights, such as patent rights. As a result of any legal action with respect to such claims, TDC may be unable to use intellectual property that is material to the operation of its business, which could prevent TDC from marketing or selling certain products or services, or require TDC to pay significant damages or higher prices for products or services due to a third party's successful intellectual property claim. In addition, legal action, regardless of outcome, could result in substantial costs to TDC and diversion of its resources.
TDC is aware of public concerns that the electromagnetic signals from mobile handsets and base stations may pose health risks or interfere with the operation of electronic equipment. Actual or perceived risks associated with mobile handsets or base stations and related publicity, regulation or litigation could reduce TDC's mobile phone customer base, cause mobile telephone customers to use their mobile phones less, make it difficult to find or maintain attractive sites for base stations or potentially result in litigation costs. Any of these events could adversely affect TDC's business, financial condition or results of operations.
Denmark's regulatory telecommunications framework is based on EU regulation. The EU regulatory telecommunications framework has been revised and must be implemented in Denmark by 25 May 2011. In connection with the implementation of this framework, obligations may be imposed on TDC which may have an adverse effect on TDC's business, financial condition and results of operations.
A bill of an amended Danish Tele Act (the 'Tele Act Bill') has been introduced. The Tele Act Bill will grant NITA increased flexibility regarding obligations to be imposed on providers with Significant Market Power, such as TDC. For example, the specific content and scope of the price control obligation will be determined by NITA in each specific case. The proposed regulation and the enhanced powers of NITA may result in regulation and decisions which may have an adverse effect on TDC's business, financial conditions and results of operations.
A revision of the political agreement on the guidelines for Danish telecommunications policy has been recommended by the Ministry of Science, Technology and Innovation's High Speed Committee and several of the Danish political parties behind the political agreement, including the governing Danish Liberal Party, have stated their intention to revise the ten-year old agreement. The recommendations in the High Speed Committee's report are likely to set the agenda for a possible revision which may entail changes to the legal and regulatory framework under which TDC operates. Any such changes may have an adverse effect on TDC's business, financial condition and results of operations.
TDC has been designated as having Significant Market Power in a number of wholesale markets where the majority of TDC's prices are regulated and the prices are set using predominantly an LRAIC model. The landline LRAIC model is based on a hypothetical 'all-internet protocol network', whereby cost is calculated assuming that all the services are produced based on packet-switched, as opposed to circuit-switched technology, using an IP protocol. This has led to significant reductions in the LRAIC regulated prices, which took effect on 1 January 2010. As a result, from 1 January 2010, TDC has only been allowed to charge the reduced LRAIC regulated prices to other providers in the market for landline interconnection and this has had, and will continue to have, an adverse effect on TDC's results of operations. The change to price regulation may benefit TDC's competitors in Denmark and may, therefore, adversely affect TDC's competitiveness, and this trend could intensify in the future.
On 7 May 2009, the Commission made a recommendation regarding change of the LRAIC-method regarding both wholesale termination rates in landline and mobile networks. According to this recommendation, incremental costs should be defined as avoidable costs. The application of such an avoidable cost method will lead to a significant reduction in the wholesale prices TDC can charge. The changes have not yet been implemented in the applied LRAIC models, but are expected to be implemented in the first half of 2011.
On 22 December 2009, NITA issued a revised market analysis and decision on the market for broadband access (market 5) followed by a supplementary decision on 3 November 2010. Currently, TDC is considering whether to appeal the supplementary decision regarding BSA via fibre to the Telecommunications Complaints Board. According to these decisions, TDC is required to offer wholesale BSA to broadband via fibre and via coax in addition to the long existing requirement to offer wholesale BSA to broadband via copper. The pricing is set using a LRAIC model. The requirement regarding fibre came into effect on 3 December 2010. However, until a new LRAIC model for wholesale BSA to broadband via fibre has been developed, the prices will be set according to the historic cost method, and on 3 January 2011, NITA decided that this entails that existing prices can be maintained until the LRAIC decision is reached. The requirement regarding coax comes into effect when (i) a LRAIC model for wholesale BSA via coax has been developed and comes into effect, and (ii) a competitor has formally asked for BSA to broadband via coax. The outcome of any revisions to the LRAIC models is uncertain.
The requirement to provide wholesale BSA to broadband via coax and via fibre could have an adverse effect on TDC's business, financial condition and results of operations, in part by adversely impacting its geographic coverage advantage and ability to offer high-speed broadband as a differentiating competitive factor, and may result in favourable conditions for TDC's competitors in Denmark and thus could adversely affect TDC's competitiveness. Furthermore, no assurance can be provided that such requirements will not be extended in the future.
TDC has appealed the 22 December 2009 decision to the ordinary courts of Denmark with respect to the obligation to offer wholesale BSA to broadband via coax not owned by TDC but where TDC supplies broadband services to the households connected to the network and controls the frequencies necessary for the broadband distribution. In the opinion of TDC, TDC is not required to offer wholesale BSA to broadband via coax not owned by TDC unless this is explicitly provided for in an agreement between the owner of the network and TDC, but the decision is unclear in relation to these obligations.
TDC is designated as the universal service provider (USP) in Denmark, in line with the EU USO Directive and Danish USO Regulation which are designed to ensure that all end users have access to certain basic affordable telecommunications services regardless of their geographical location. In the past, NITA fixed the prices that TDC could charge its Danish USO customers for using PSTN services, but these price caps were lifted at the end of 2005. However, if NITA reintroduced a price cap on TDC's USO products and services at any point in the future, this could have an adverse effect on TDC's results of operations.
The use of certain key technologies in Denmark and other countries is subject to the grant of licences from public regulators, in Denmark NITA. TDC is dependent upon such licences in order to provide many of its products and services.
TDC is licenced to provide mobile telecommunications services in Denmark. TDC has one UMTS licence to provide 3G services in Denmark, which expires on 31 October 2021. In addition, TDC has three GSM licences in Denmark: DCS 1800 (expiring on 12 June 2017), DSC6 (expiring on 12 June 2017) and GSM1 (expiring on 31 December 2019). On 10 May 2010, TDC acquired a licence through which it has access to 2x20MHz of paired spectrum in the 2.5 GHz frequencies (expiring on 31 May 2030). NITA may withdraw existing licences if TDC does not meet the licence conditions, which include obtaining the regulator's consent in the event of a change of control. After the expiration dates, TDC will have to reapply for, or reacquire, new licences which may entail significant costs for TDC. There can be no assurances that TDC will be successful in any such application or in any future applications for further licences. In the event that TDC is unable to renew a licence or obtain a new licence for any technology that is important for the provision of TDC's service offerings, TDC could be forced to stop using that technology and TDC's business, financial position and results of operations could be adversely affected.
TDC is involved and may in the future become involved in commercial disputes as well as legal and arbitration disputes, with public authorities or private parties, which involve substantial claims for damages or other sanctions, for instance arising out of acquisitions or disposals or subsidiaries or other material assets made over the past years or out of other material contracts entered into by TDC. The outcome of these and any potential future proceedings is difficult to predict with certainty. In the event of a negative outcome of any material proceeding, whether based on a judgement or a settlement agreement, TDC could be obligated to make substantial payments or accept other sanctions, which could have an adverse effect on its business, financial condition and results of operations. In addition, the costs related to litigation and arbitration proceedings may be significant. Furthermore, TDC has undertaken representations and warranties in agreements to divest certain enterprises, which is in line with common practice. Such representations and warranties may lead to payments that may or may not be provided for in the Financial Statements.
TDC is subject to Danish and European competition law regulation. Both of these prohibit agreements and practices, the purpose or result of which is to restrict competition as well as behaviour that constitute an abuse of a dominant position. Furthermore, both Danish and European laws contain merger control regulation. The Danish Competition Act was recently amended so that the threshold for notifiable mergers was lowered significantly. Pursuant to the Danish Competition Act, a merger must be notified to the Danish Competition and Consumer Authority if the businesses concerned have a total aggregate annual revenue in Denmark of at least DKK 900m and at least two of the businesses concerned have a total annual revenue in Denmark of at least DKK 100m each, or at least one of the businesses concerned has a total annual turnover in Denmark of at least DKK 3.8bn and at least one of the other businesses concerned has a total worldwide annual turnover of at least DKK 3.8bn.
Given TDC's size and market positions, competition regulation significantly restricts TDC's ability to operate. In particular, the potential for further acquisitions in the Danish market has been restricted by the recent amendment of the Danish merger control regulation. Likewise, TDC's Danish practices and agreements have been and are likely to continue to be subject to review by the Danish Competition and Consumer Authority for possible infringements of the Danish Competition Act. While TDC pays significant attention to its agreements and practices compliance with the Competition Act, it is often difficult to assess whether a practice or agreement is compliant with the Danish Competition Act and no assurance can be given that the relevant authorities will agree with TDC's interpretation of such regulation.
On 30 September 2010, the Danish Competition and Consumer Authority announced that it had undertaken an investigation of the TV-distribution market in Denmark. The Authority's assumption is that there is currently not a sufficiently effective competition in the market given the low number of distributors and the fact that certain TV-channels can only be obtained via particular distributors. The Authority expects to announce the results of the investigation before the summer of 2011. No assurance can be given as to the outcome of the investigation or its possible impact on TDC's (including YouSee's) business, financial position or results of operation.
At 31 December 2010, the Company had DKK 22,607m in net interest-bearing debt outstanding, of which DKK 17,852m was outstanding under its Senior Facilities Agreement. TDC will in the future remain subject to significant obligations with regard to servicing and repayment of the Senior Facilities Agreement and other facilities.
The Senior Facilities Agreement contains certain restrictive covenants, such as limitations on acquisitions and joint ventures, incurring financial indebtedness, providing guarantees, granting security and asset disposals. The restrictions on acquisitions and joint ventures, incurring financial indebtedness and providing guarantees are suspended as long as the Company maintains a leverage ratio of less than 3.5x (calculated in accordance with the Senior Facilities Agreement) at the end of each of the most recent two quarters or a long-term corporate credit rating of BBB- and Baa3 from S&P and Moody's (the 'Release Condition'). Failure by TDC to satisfy the Release Condition will significantly limit its flexibility in operating its business, which may adversely affect TDC's business, financial conditions and results of operations.
TDC's existing borrowing facilities require it to comply with financial ratios and satisfy specified financial tests. Events beyond TDC's control may affect its ability to do so and, as a result, TDC cannot assure stakeholders that these ratios and tests will be met. If a default occurs under such agreements, the lenders could terminate their commitments and upon acceleration declare all amounts owed to them due and payable. Acceleration of the debt under the Senior Facilities Agreement could cause a default under the terms of certain debt agreements that contain a cross-default (i.e., the EMTNs and interest-rate hedging arrangements), causing all such other debt under these agreements to be accelerated. If this were to occur, the Company may not have sufficient assets to repay its debt. Further, a breach by NTC of certain provisions under the Senior Facilities Agreement (or other finance documents relating thereto) may constitute an event of default under the Senior Facilities Agreement allowing the lenders to terminate their commitments and declare all amounts owed to them by TDC due and payable (with the same consequences as considered above).
At 31 December 2010, NTC had no outstanding debt, i.e. no debt under the Senior Facilities Agreement, no High Yield Bond debt or debt under other loan agreements.
TDC's ability to generate the significant amount of cash needed to service its debt depends on many factors beyond its control. TDC's ability to pay and refinance its debt and fund working capital and capital expenditures will depend on its future operating performance and ability to generate sufficient cash. This depends, to some extent, on general economic, financial, competitive, market, legislative, regulatory and other factors, many of which are beyond TDC's control, as well as the other factors discussed in this section. Stakeholders cannot be sure that the TDC Group's business will generate sufficient cash flows from operations or that sufficient future debt and equity financing will be available for TDC to pay its debts when due or to fund its liquidity needs. If TDC's future cash flows from operations and other capital resources (including its existing borrowing facilities) are insufficient to pay its debts as they mature or to fund its liquidity needs, TDC may be forced to reduce or delay its business activities and capital expenditures, sell assets, raise additional debt or equity capital or restructure or refinance all or a portion of TDC's debt on or before maturity.
Stakeholders cannot be certain that any of these alternatives will be accomplished on a timely basis or on satisfactory terms. In addition, the terms of TDC's debt, and that of its parent company and any future debt, may limit TDC's ability to pursue any of these alternatives.
TDC's debt and derivatives bear interest at variable rates. As a result, an increase in market interest rates could increase the Company's interest expense and its debt service obligations, which would exacerbate the risks associated with its capital structure and would have an adverse effect on TDC's business, financial conditions and results of operations. Hedging may also be expensive to maintain and may inadequately protect TDC against adverse movements in interest rates.
At 31 December 2010, the interest-rate risk relating to 76% of TDC's gross debt was hedged. The portion of the gross debt that is hedged may vary in the future.
TDC is subject to exchange-rate risk owing to revenue originating in Sweden and Norway, where TDC conducts its business operations and prepares its financial statements in currencies other than Danish kroner (DKK) or euro (EUR). Any loss in the value of these currencies against the Danish krone will reduce, from TDC's perspective, the value of TDC's investments in the relevant business activities and the income derived from them.
Further, TDC is exposed to exchange-rate risk arising from financing activities in other currencies than DKK. Adverse fluctuations in exchange rates between DKK and these currencies may adversely affect TDC's business, financial condition and results of operation.
At 31 December 2010, 97% of TDC's nominal gross debt (including derivatives) was denominated in EUR.
A downgrade of TDC's credit ratings could increase its financing costs and limit its access to financing sources.
TDC's credit ratings are subject to periodic review by the rating agencies. If TDC's results of operations deteriorate for any reason, any or all of TDC's ratings may be downgraded. A credit rating downgrade could increase TDC's financing costs, limit its access to financing sources and impede TDC's ability to refinance all or a portion of its outstanding debt.
Some of TDC's present and former employees are entitled to a pension from TDC Pensionskasse, the fund related to TDC. The pension fund invests in a variety of marketable securities and real estate, including fixed income and equities. The rate of return on these investments has implications for TDC's financial results and pension plan funding requirements. TDC also operates defined benefit plans that cover employees of TDC Norway.
If TDC Pensionskasse is not able to meet the capital adequacy requirements under the Danish Act on Company Pension Funds, TDC is immediately required to make contributions to cover the shortfall. TDC is not expected to be able to withdraw funds from the pension fund if it has a surplus of assets.
At 31 December 2010, for accounting purposes only, TDC's balance sheet shows a net positive pension asset related to its Danish defined benefit plans, but no assurance can be given that TDC will not in the future have to make contributions to cover any shortfall in meeting the capital adequacy requirements under the Danish Act on Company Pension Funds.
The Danish Financial Supervisory Authority (Finanstilsynet) has introduced a mortality benchmark for members of company pension funds, which will be implemented at 1 January 2011. The Financial Supervisory Authority now also requires that TDC Pensionskasse analyses whether the mortality of the members of the pension fund deviates from the benchmark and submits a report on this matter to the Authority on 1 July 2011 at the latest. Deviation from FSA's benchmark shall be allowed only if the pension fund can provide adequate documentation that there is a significant and justifiable reason for the difference in mortality between that of the pension fund and the benchmark. In TDC Pensionskasse's opinion, the mortality of the members of the pension fund deviates from that of the FSA benchmark in Denmark. If the FSA disagrees, and the pension fund has to apply the benchmark, it will result in higher pension provisions in TDC Pensionskasse and will possibly require the injection of funds by TDC to comply with the statutory solvency requirements.
TDC is subject to the tax legislation in effect in the countries where it conducts business. Tax laws have been amended in the past in ways that have had an adverse effect on TDC. Any future amendment of the tax rules including value added tax (VAT) in the countries where TDC conducts business may adversely affect TDC's payable corporate tax and VAT and its future results of operations.
TDC aims at ensuring correct and timely reporting and payment of direct and indirect taxes.
TDC pursues an active tax policy to optimise its tax expenses and to ensure tax risk management with a low margin of unidentified risks. This tax policy implies a risk for TDC's tax position to be challenged by local tax authorities. TDC evaluates the tax risks associated with this tax policy and makes financial provisions for these risks when required. However, due to the inherent uncertainty related to these tax risks, the provisions made may not be sufficient to cover the actual taxes and related costs payable by TDC. If the actual taxes and related costs payable by TDC exceed the provisions made, it will have an adverse effect on TDC's financial condition and results of operations, and may also adversely affect TDC's cash flow.Til top