TEMDirectors'report on merger
Telefonica SA
16 May 2006
Telefonica, S.A., as provided in article 82 of the Spanish Stock Market Act (Ley
del Mercado de Valores), hereby encloses to this document the Report of the
Directors of Telefonica Moviles, S.A. in relation to the proposed resolution on
the merger of Telefonica S.A. and Telefonica Moviles, S.A. to be adopted by the
shareholders meetings of each company, to be held on June 20 and June 21st ,
2005 at first and second call respectively.
REPORT OF THE DIRECTORS OF TELEFONICA MOVILES, S.A. ON THE PLAN FOR THE
MERGER BY ABSORPTION OF TELEFONICA MOVILES, S.A. BY TELEFONICA, S.A.
Madrid, May 12, 2006
CONTENTS
1. LEGAL ASPECTS OF THE MERGER
1.1 General characteristics
1.2 Applicable legislation
1.3 Choice of TELEFONICA as absorbing company
1.4 Legal procedure for the merger
1.4.1 Merger Plan and exchange ratio
1.4.2 Deposit of the Merger Plan
1.4.3 Independent expert's report
1.4.4 Directors' report
1.4.5 Call of the Shareholders' Meetings to deliberate
on and, if appropriate, approve the merger
1.4.6 Publication of the merger resolutions and period
for opposition by creditors
1.4.7 Merger deed
1.4.8 Performance of the exchange
1.5 Share exchange procedure
1.6 Option plan on shares of TELEFONICA MOVILES
1.7 Bylaw amendments at the Absorbing Company
1.8 Administrative aspects
1.9 Tax regime applicable
2. ECONOMIC ASPECTS
2.1 Strategic justification for the merger
2.2 Merger balance sheet
2.3 Exchange ratio
2.4 Real value of the assets of TELEFONICA MOVILES and
TELEFONICA
2.4.1 Real value of the assets of TELEFONICA
MOVILES
2.4.2 Real value of the assets of TELEFONICA
2.5 Valuation criteria
2.5.1 Morgan Stanley
2.5.2 Lehman Brothers
2.6 Comparison with the criteria envisaged for de-listing offers
2.6.1 Morgan Stanley
2.6.2 Lehman Brothers
2.7 Conclusions
This Report has been drawn up by the Directors of TELEFONICA MOVILES,
S.A. in accordance with the provisions of Article 237 of the Revised
Corporations Law, approved by Legislative Royal Decree 1564/1989, of
December 22 (hereinafter the 'Corporations Law'), in order to examine and
justify in detail, for the purposes required by the legislation in force,
the Plan for the merger (hereinafter the 'Plan' or the 'Merger Plan') of the
companies TELEFONICA MOVILES, S.A. (absorbed company, hereinafter,
'TELEFONICA MOVILES') and TELEFONICA, S.A. (absorbing company,
hereinafter, 'TELEFONICA'), which has been deposited in Madrid Mercantile
Registry on April 3, 2006.
It is noted for the record that all the nominee Directors appointed at the
request of TELEFONICA, that is, Mr. Corominas Vila, Mr. Lada Diaz, Mr.
Alvarez-Pallete Lopez, Mr. Carpio Garcia, Mr, Goyenechea Fuentes, Mr.
Massanell Lavilla, Mr. Burillo Azcarraga and Mr. Almansa Moreno-Barreda have
abstained themselves from participating in the deliberations concerning the
approval of this Report and, therefore, have abstained from subscribing it,
because they understand they are subject to a conflict of interest.
1 LEGAL ASPECTS OF THE MERGER
1.1 General characteristics
In accordance with the provisions of the Merger Plan, the terms of
which are deemed to be reproduced herein insofar as necessary, the
planned merger will consist of the absorption of TELEFONICA
MOVILES by TELEFONICA with the termination, through the
dissolution without liquidation, of TELEFONICA MOVILES and the
transfer of all its net worth to TELEFONICA, which will acquire,
by universal succession, the rights and obligations of the absorbed
company.
Said universal transfer involves the acquisition in a single act of
all the assets and liabilities which sum up the net worth of
TELEFONICA MOVILES: therefore, all property, rights and
obligations are transferred and, in general, all legal relations of
the absorbed company which are maintained in force although the
party to them is changed, except for cases in which, due to the will
of the parties or under a statutory provision, the change of a party
to the specific legal relation involves the termination of such
relation.
Simultaneously, the merger means that the shareholders of
TELEFONICA MOVILES are incorporated into the shareholders of
TELEFONICA, by means of the allotment to them of shares
representing part of the latter's capital, in proportion to their
respective stake in the capital of TELEFONICA MOVILES, under
the terms established in the Plan.
1.2 Applicable legislation
The basic corporate legislation on mergers is contained in Articles
233 to 251 of the Corporations Law and in Articles 226 to 234 of the
Mercantile Registry Regulations.
1.3 Choice of TELEFONICA as absorbing company
The choice of TELEFONICA as absorbing company is due to the fact
that TELEFONICA holds in TELEFONICA MOVILES a stake of
92.50% in its capital stock.
As of the date of the Merger Plan, TELEFONICA was direct or
indirect holder of 4,003,900,749 shares of TELEFONICA MOVILES,
representing 92.457% of its capital stock. Following the signature
of the Plan, TELEFONICA has acquired 2,000,000 shares of
TELEFONICA MOVILES and, in accordance with the provisions of
section 1.2 of the Merger Plan, it has also acquired the package of
927,917,620 shares of TELEFONICA MOVILES, representing 21.427%
of its capital stock, held up to that time by TELEFONICA
INTERNACIONAL, S.A.U., a company which is in turn wholly owned by
TELEFONICA, allowing the stake of TELEFONICA in TELEFONICA
MOVILES to be direct in its entirety, the generation of indirect
treasury stock as a result of the performance of the merger being
thus avoided. The acquisition of the above-mentioned 927,917,620
shares of TELEFONICA MOVILES has been performed at the average
listed price of the share of TELEFONICA MOVILES from its
flotation until the date of signature of the Merger Plan (calculated
as the weighted average per volume of the closing prices of each day
from the flotation until March 28, 2006), which amounts to the sum
of 8.653 euros per share. As a result of such transactions,
TELEFONICA is now direct holder of 4,005,900,749 shares of
TELEFONICA MOVILES, representing 92.50% of its capital stock.
1.4 Legal procedure for the merger
1.4.1 Merger Plan and Exchange Ratio
For the performance of the merger, the Corporations Law
requires the directors of the companies participating in the
transaction to draw up a merger plan.
For these purposes, on March 29, 2006, all the directors of
TELEFONICA MOVILES and TELEFONICA (with the
exceptions indicated in the document itself) approved and
signed the Merger Plan.
The Merger Plan provides for an exchange ratio, without any
additional cash compensation, of four (4) shares of
TELEFONICA, each with a par value of euro (€1), for
every five (5) shares of TELEFONICA MOVILES, each with
a par value of fifty cents of a euro (€0.5).
1.4.2 Deposit of the Merger Plan
In accordance with the provisions of Article 226 of the
Mercantile Registry Regulations, a copy of such Plan was
deposited in Madrid Mercantile Registry on April 3, 2006.
The deposit of the Merger Plan in Madrid Mercantile Registry
was published in the Official Gazette of the Mercantile
Registry on April 17, 2006.
1.4.3 Independent expert's reportn
Furthermore, pursuant to the provisions of Article 236 of
the Corporations Law, the directors of TELEFONICA
MOVILES and TELEFONICA requested, on March 30, 2006,
from the Madrid Mercantile Registrar, as Registrar for the
place where the absorbing company is located, the
appointment of a single common independent expert to report
on the Merger Plan.
On April 4, 2006, the Madrid Mercantile Registrar appointed
KPMG Auditores, S.L. as an independent expert to issue a
single report on the Merger Plan and the net worth
contributed by the company which is dissolved.
Within the period established by law, and after having
requested and obtained a deferral of it, the above-mentioned
independent expert has issued his report, with the following
conclusion:
'a) The valuation methodologies used in the determination of
the real value of the Companies are adequate in the context
and the circumstances of the operation proposed, the
exchange rate envisaged in the Merger Plan being justified.
b) The net worth contributed by the absorbed company are
equal at least to the maximum amount of the increase of
capital of the absorbing company envisaged in the Merger
Plan.'
1.4.4 Directors' report
The directors of TELEFONICA MOVILES, with the
exceptions which are stated at the end of the document, have
approved and signed on the date hereof this Report
explaining and justifying in detail the legal and economic
aspects of the Merger Plan, with specific reference to the
exchange ratio, all in compliance with the provisions of
Article 237 of the Corporations Law.
1.4.5 Call of the Shareholders' Meetings to deliberate on and,
if appropriate, approve the merger
The above-mentioned requirements having been met, the Boards of
Directors of TELEFONICA MOVILES and TELEFONICA will
pass resolutions to call their respective Shareholders' Meetings
for the purpose of deliberating on and, if appropriate,
approving the planned merger. It is envisaged that the
Shareholders' Meeting of TELEFONICA MOVILES will be called
to be held on June 20, 2006, at first call, and on June 21,
2006, at second call; and that the Shareholders' Meeting of
TELEFONICA will be called to be held on June 20, 2006, at
first call, and on June 21, 2006, at second call.
In accordance with the provisions of Article 238 of the
Corporations Law, when the notice of call of the Shareholders'
Meeting is published, the following documents will be made
available to the shareholders, bondholders and holders of
special rights other than shares, as well as the workers'
representatives, for examination at the registered office:
a. Merger Plan.
b. Report of the independent expert on the Merger Plan.
c. Report of the directors of TELEFONICA MOVILES and of
TELEFONICA on the Merger Plan.
d. Financial statements and management report of the last three
financial years of TELEFONICA MOVILES and of
TELEFONICA, with the relevant auditors' report.
e. The merger balance sheet of TELEFONICA MOVILES and of
TELEFONICA, which coincide with the last annual balance sheet
of each company, with the relevant auditors' report.
f. Current bylaws of TELEFONICA MOVILES and of TELEFONICA.
g. List of first names, surnames and age, in the case of
individuals, or the corporate name, in the case of legal
entities, and in both cases, the nationality and address of the
directors of TELEFONICA MOVILES and of TELEFONICA, as
well as the date from which they hold office and, where
relevant, the same data of those who are going to be proposed as
directors as a result of the merger.
In addition, in accordance with the provisions of Article 240.2
of the Corporations Law, the shareholders, bondholders and
holders of special rights other than shares may request, from
the date of publication of the notice of call of the respective
Shareholders' Meetings, the delivery or the dispatch free of
charge of the documents listed above.
All documents mentioned above will be accessible, from the date
of the notice of call, by telematic means, on the web page of
TELEFONICA MOVILES (www.telefonicamoviles.com).
1.4.6 Publication of the merger resolutions and period for
opposition by creditors
In accordance with the provisions of Article 242 of the
Corporations Law, the merger resolution will be published at
least three times in the Official Gazette of the Mercantile
Registry and once in two large-circulation newspapers in
Madrid.
Once these notices have been published, which will indicate
the right of the shareholders and creditors of TELEFONICA
MOVILES and TELEFONICA to obtain the full text of the
merger resolutions and of the merger balance sheets, the
one-month period will commence for the creditors of the
companies which are merged to oppose the merger until the
undue claims at the time of publication are guaranteed, in
accordance with Article 243 of the Corporations Law.
1.4.7 Merger deed
Once the appropriate merger resolutions have been adopted,
the notices have been published and the statutory period has
elapsed without any creditor having exercised his right of
opposition or, where relevant, the claims of creditors who
have exercised such right have been paid or duly guaranteed,
the appropriate merger deed will be executed.
The aforementioned deed will be presented for registration
in Madrid Mercantile Registry, the Mercantile Registrar
being requested to cancel the registered entries of
TELEFONICA MOVILES.
1.4.8 Performance of the exchange
Once the equivalent documentation referred to in Articles
26.1.d), 41.1.c) and like provisions of Royal Decree 1310/2005,
of November 4, if necessary, has been submitted to the National
Securities Market Commission, and the merger deed has been
registered in Madrid Mercantile Registry, the shares of
TELEFONICA MOVILES will be exchanged for shares of
TELEFONICA under the terms established in the Merger Plan,
which are described in the next section.
1.5 Share exchange procedure
The procedure for the exchange of the shares of TELEFONICA
MOVILES for shares of TELEFONICA is described in section 5 of
the Merger Plan.
For these purposes it is placed on record that TELEFONICA, as of
the date of the Merger Plan, directly or indirectly held
4,003,900,749 shares of TELEFONICA MOVILES, representing
92,457% of its capital stock. As described in section 1.3 above,
following the signature of the Plan, TELEFONICA has acquired
2,000,000 shares of TELEFONICA MOVILES and, in accordance with
the provisions of section 1.2 of the Merger Plan, has also acquired
the package of 927,917,620 shares of TELEFONICA MOVILES,
representing 21.427% of its capital stock, held up to that time by
TELEFONICA INTERNACIONAL, S.A.U. As a result of such
transactions, TELEFONICA is now direct holder of 4,005,900,749
shares of TELEFONICA MOVILES, representing 92.50% of its
capital stock.
Due to the requirements of Article 249 of the Corporations Law and
the legislation on own shares, the shares of TELEFONICA
MOVILES in the possession of TELEFONICA will not be exchanged
for shares of TELEFONICA.
It is also placed on record that, as of the date of the Merger Plan,
TELEFONICA MOVILES was holder of 1,599 of its own shares as
treasury stock and had a call option on 20,957,784 own shares
assigned to the hedging of the stock option plan of TELEFONICA
MOVILES (the MOS Plan), belonging to Caja de Ahorros y Pensiones
de Barcelona and Banco Bilbao Vizcaya Argentaria, S.A., that were
subscribed by these entities under the terms of the reduced
informative prospectus verified by the National Securities Market
Commission on February 28th, 2001. TELEFONICA MOVILES will
acquire the aforementioned 20,957,784 own shares and will use the
relevant portion for the liquidation of the MOS Plan.
The shares which TELEFONICA MOVILES ultimately holds as
treasury stock as a result of the provisions of the previous
paragraph (at most 20,959,383 own shares), may not be exchanged
either, in accordance with the provisions of Article 249 of the
Corporations Law and like provisions.
In addition, TELEFONICA or TELEFONICA MOVILES will acquire
or sell on the market, before the execution of the merger, the
necessary portion of shares of TELEFONICA MOVILES so that the
number of shares of TELEFONICA MOVILES which are to be
exchanged is an exact multiple of the exchange ratio.
Having regard to the foregoing, if it is assumed that (i)
TELEFONICA does not modify its current stake in TELEFONICA
MOVILES (4,005,900,749 shares representing 92.50% of its capital
stock); and (ii) on the date of performance of the exchange
TELEFONICA MOVILES does not have more treasury stock other
than the 1,599 own shares mentioned in section 5 of the Merger Plan,
the maximum number of shares of TELEFONICA MOVILES which would
be exchanged would be 324,648,548 shares. If all of the shares of
TELEFONICA MOVILES allocated to the hedging of the MOS Plan
were acquired and held as treasury stock by TELEFONICA
MOVILES, the number of shares of the latter which would be
exchanged would be 303,690,764 shares. Consequently, the number of
shares of TELEFONICA which must be transferred in order to meet
the merger exchange will range from 242,959,611 to 259,718,838
shares, i.e. between 4.94% and 5.28% of the capital stock of
TELEFONICA.
Nevertheless, taking into consideration the terms and conditions of
the MOS Plan and the liquidation transactions performed to this
date, TELEFONICA and TELEFONICA MOVILES have concluded that
the number of shares of TELEFONICA MOVILES that will be held
in treasury stock at the moment of the registration of the merger
will be, of a minimum, of 19,009,513 and, therefore, that the number
of shares of TELEFONICA MOVILES that will be exchanged will
not exceed 305,640,634. Consequently, the number of shares of
TELEFONICA needed to meet the exchange will be, of a maximum, of
244,512,507.
Considering the above and taking into account that TELEFONICA is
the current owner of a total of 244.527.541 own shares in treasury
stock, it is foreseen that to meet the exchange derived from the
merger, TELEFONICA uses only treasury stock, reason why it would
not be necessary that TELEFONICA issues new shares for this purpose.
For this and since the date of the merger resolution, TELEFONICA
will immobilize 244,512,507 own shares, without detriment of, once
determined, within the established maximum, the definite number of
shares of TELEFONICA needed to meet the exchange, the number of
shares immobilized will be adjusted accordingly to match the latter
amount mentioned.
The exchange will occur, as has been referred to, once the
equivalent documentation referred to in Articles 26.1.d), 41.1.c)
and like provisions of Royal Decree 1310/2005, of November 4 has
been submitted to the National Securities Market Commission, if
necessary, and the merger deed has been registered in the Madrid
Mercantile Registry, and will be carried out, with the collaboration
of a financial institution, from the date indicated in the notices
to be published in one of the high circulation newspapers in Madrid
and in the Official Gazettes of the Spanish Stock Exchanges and,
where relevant, in the Official Gazette of the Mercantile Registry.
The exchange of the shares of TELEFONICA MOVILES for the
shares of TELEFONICA will be carried out through the
participating entities in Sociedad de Gestion de los Sistemas de
Registro, Compensacion y Liquidacion de Valores, S.A. (IBERCLEAR)
which are depositories of the shares, in accordance with the
procedures established for the book entries system, in accordance
with the provisions of Royal Decree 116/1992, of February 14,
applying the provisions of Article 59 of the Corporations Law,
insofar as applicable.
In accordance with the provisions of paragraph (d) of section 5 of
the Merger Plan, the shareholders of TELEFONICA MOVILES who
are holders of shares which represent a fraction of the number of
shares of TELEFONICA established as the exchange ratio may
acquire or transfer shares in order to exchange them according to
such exchange ratio. The appropriate decisions for these purposes,
either to purchase or sell on the market shares of TELEFONICA
MOVILES, in order to reach a number of shares of TELEFONICA
MOVILES which is a multiple of five must be taken by each
shareholder individually.
Without prejudice to the foregoing and pursuant to the provisions of
the above-mentioned section 5 of the Plan, the Boards of Directors
of TELEFONICA MOVILES and TELEFONICA, after the appropriate
conversations, have considered it appropriate to submit to their
respective Shareholders' Meetings the approval of a mechanism aimed
at facilitating the performance of the exchange for shareholders of
TELEFONICA MOVILES who are holders of a number of shares which
is not a multiple of five (5). The fundamental terms and conditions
of that mechanism are as follows:
i. Since the exchange ratio of the merger is equivalent, in unitary
terms, to the transfer of one share of TELEFONICA for every 1.25
shares of TELEFONICA MOVILES, at the end of the last stock
market session of TELEFONICA MOVILES on the Spanish Stock
Exchanges, each shareholder of TELEFONICA MOVILES who, by
applying the above-mentioned unitary ratio, is entitled to receive a
whole number of shares of TELEFONICA and has left over fractions
of shares of TELEFONICA MOVILES of less than 1.25, may
transfer such fractions to the purchaser of fractions which is
appointed for such purpose by TELEFONICA MOVILES and
TELEFONICA (hereinafter the 'Fractions Agent'), on the
understanding that for the calculation of the fraction of each
shareholder position the total amount of the shares of TELEFONICA
MOVILES which form that position will be taken into account.
Likewise, any shareholder of TELEFONICA MOVILES who is holder
of a number of shares of TELEFONICA MOVILES below 1.25 may
transfer such shares to the Fractions Agent.
It will be understood that each shareholder of TELEFONICA
MOVILES avails of the system of acquisition of fractions provided
herein, without having to send instructions to the relevant
participating entity in IBERCLEAR, which will report him the result
of the transaction once it is concluded.
ii. Having regard to the exchange ratio agreed, it is placed on record
that, irrespective of the number of shares which form each
shareholder position, the only cases of acquisition of fractions
which may occur are as follows:
Number of shares Corresponding shares of Fraction of shares of TELEFONICA
of TELEFONICA TELEFONICA under the MOVILES subject to the system of
MOVILES exchange acquisition of fractions
1 0 1
2 1 0.75
3 2 0.5
4 3 0.25
5 4 0
Consequently, in any shareholder position, if a fraction exists,
this will range from a minimum of 0.25 to a maximum of 1 share of
TELEFONICA MOVILES.
iii. The purchase price of the fractions will be determined according to
the arithmetical average of the weighted average changes of the
shares of TELEFONICA MOVILES on the Stock Market
Interconnection System (Continuous Market) during the last three
stock market sessions of TELEFONICA MOVILES on the Spanish
Stock Exchanges.
If the fraction in question consists of one share of TELEFONICA
MOVILES, its purchase price will be the arithmetical average of
the weighted average changes of the shares of TELEFONICA
MOVILES on the Stock Market Interconnection System (Continuous
Market) during the last three stock market sessions of TELEFONICA
MOVILES; similarly, if the fraction in question is not one share,
the purchase price thereof will be calculated on the basis of the
same criterion as is agreed herein but in the appropriate proportion
of the specific amount of the fraction.
iv. The entity which is appointed as Fractions Agent, acting in its own
name and on its own behalf, will acquire the fractions of shares
which are left over in the positions which exist at the end of the
last stock market session of TELEFONICA MOVILES on the Spanish
Stock Exchanges. The shares or portions of shares of TELEFONICA
MOVILES acquired by the Fractions Agent will be exchanged for the
appropriate shares of TELEFONICA according to the proposed
exchange ratio.
1.6 Option plan on shares of TELEFONICA MOVILES
In accordance with the provisions of the Merger Plan, the option
plan on shares of TELEFONICA MOVILES (the MOS Plan) ended on
January 3, 2006 and is currently at the liquidation stage.
In this respect, TELEFONICA MOVILES was holder of a put option
on 20,957,784 shares of its own assigned to the hedging of the MOS
Plan, it being envisaged that the liquidation thereof will have
concluded prior to the execution of the planned merger, although
TELEFONICA will succeed TELEFONICA MOVILES as the entity
bound in relation to any pending obligation arising from the
aforementioned liquidation.
TELEFONICA MOVILES will acquire the aforementioned 20,957,784
own shares by exercising its call option and will use the relevant
part for the liquidation of the MOS Plan.
1.7 Bylaw amendments at the Absorbing Company
No bylaw amendments will be carried out at TELEFONICA as a result
of the merger.
1.8 Administrative aspects
Finally, section 15 of the Merger Plan provides that the validity of
the merger is subject to the issue of the notices and to the
obtainment of the appropriate authorizations and registrations in
Spain and in other jurisdictions in which both companies are
present.
It is not envisaged that it will be necessary to make or obtain
authorizations or registrations in Spain or in other jurisdictions
in which both companies are present in order for the merger to be
valid. However, it may be necessary, when the merger has been
completed, to obtain certain administrative authorizations in
Ecuador and Panama in order to implement the operation in these
countries. Furthermore, once the merger has been completed, it will
be necessary to inform the relevant authorities regarding the change
of ownership of certain subsidiaries of TELEFONICA MOVILES.
Finally, in accordance with the provisions of the Merger Plan,
before the registration of the merger, the equivalent documentation
referred to in Articles 26.1.d), 41.1.c) and like provisions of
Royal Decree 1310/2005, of November 4 will be submitted, if
necessary, to the National Securities Market Commission.
1.9 Tax regime applicable
In this case the conditions required in the Revised Corporate Income
Tax Law, approved by Legislative Royal Decree 4/2004, are fulfilled
so that the planned merger may benefit from the special tax regime
established in Chapter VIII of Title VII and the second additional
provision of the above-mentioned Revised Law.
In this respect, in accordance with the provisions of the Merger
Plan, a proposal will be made to the Shareholders' Meetings of
TELEFONICA MOVILES and TELEFONICA to adopt the resolution
to apply the above-mentioned special tax regime to the merger.
2 ECONOMIC ASPECTS
2.1 Strategic justification for the merger
As mentioned in the Merger Plan, the situation in the
telecommunications marketing in general and in the mobile
telecommunications markets in particular, has varies significantly
in the last years. These changes in the competition environment,
technology, and clients' needs have brought about the convenience to
amend the strategic model on which to base the growth of the
business that TELEFONICA and TELEFONICA MOVILES have been developing
independently until now.
Synthetically, these changes have been particularly apparent in the
following areas:
a. There have been major changes in the market and in the competition,
aimed at allowing the commercial distribution of combined offers
including fixed and mobile telephony, broadband and audiovisual
services that include (i) the appearance of great mobile operators
that enjoy the benefits of scale and scope economies, (ii) the
competition of operators that combine scale benefits with an
integrated offer of fixed and mobile services, (iii) the appearance
of several services providers without differentiating the network or
device through they are connecting, or (iv) regulatory changes,
which are aimed at allowing the entry of new commercial competitors,
thus encouraging the establishment of virtual mobile operators or
increasing the broadband offer by making it compulsory to allow
clients to use the access loop.
b. Significant technological changes that can be summarizes as follows:
(i) a tendency to develop - fixed and mobile - telecommunication
networks based on the so called 'IP Protocol', in such a way that
both the establishment of communication networks and the development
of related services will develop in this IP environment, thus
removing most of the barriers existing between mobile and fixed
networks services enabling significant scale economies in the future
investment of these networks and platforms, (ii) the development of
new hybrid terminals that can connect fixed and mobile networks and
access all types of multimedia contents; and (iii) the development
of third generation mobile networks with voice, data, internet and
multimedia contents.
c. Finally, from the demand side, clients are starting to see mobile
phones as indispensable item in their voice communications, not only
in terms of mobility. Likewise, the fast penetration of the use of
the Internet is producing a considerable growth of broadband
technology and an increasing demand for these means of access to be
available from fixed or mobile terminals indistinctly. In
conclusion, increasingly more and more clients demand services and
solutions for communications, information and entertainment in their
fixed broadband access and at the same time they require equivalent
services and solutions through mobile telecommunications.
The changes mentioned above have had a fundamental impact in fixed
and mobile operators in the last few years, forcing them to make
their business plans and their strategies progress in order to
acquire a higher flexibility which allows a faster adaptation to the
market and, consequently, higher competitivity and future growth.
In this context, the Boards of Directors of TELEFONICA MOVILES
believe that the focus in a strategy of higher orientation to
clients' needs relating to communication, entertainment and
information services as a whole and, more specifically, for each
specific client segment, combining the communication platforms
available in each market in the most optimum manner will produce a
very positive effect, ensuring the growth in the penetration of
mobile and fixed broadband services, and a higher clients' fidelity
by means of a wider offer of new services and solutions, reinforcing
the competitive position and allowing a greater acceleration of the
growth pace, specifically fundamental in markets with higher
penetration. Likewise, it will increase the efficiency in the use of
infrastructures, specifically concerning the development of the
fixed and mobile broadband, this providing our clients with more
possibilities of use and, therefore, more value to the shareholders
of TELEFONICA MOVILES and TELEFONICA and facilitating the
achievement of a profitable and sustainable growth.
The merger proposal between TELEFONICA and TELEFONICA
MOVILES responds to these needs of adapting their current
business strategy to the new competitive environment described
above. The Board of Directors of TELEFONICA MOVILES consider
that the planned merger is the most efficient mechanism to face the
new demands from clients, the technological change and the new
competitive environment in the market, resulting into a higher value
growth for the shareholders of TELEFONICA and TELEFONICA
MOVILES, and allowing the shareholders of TELEFONICA
MOVILES to become shareholders of TELEFONICA, for sure one of
the most liquid companies in the Spanish market, thus consolidating
the shareholding basis of both companies.
2.2 Merger balance sheet
In accordance with the provisions of section 1 of Article 239 of the
Corporations Law, the annual balance sheets of TELEFONICA
MOVILES and TELEFONICA as of December 31, 2005 will be deemed
to be the merger balance sheets. Such balance sheets have been
verified by the auditors of the companies participating in the
merger.
It is placed on record that no significant changes have occurred in
the net worth of either TELEFONICA MOVILES or TELEFONICA
between the date of the Merger Plan and the date of this Report.
2.3 Exchange ratio
The exchange ratio proposed in the Merger Plan, which has been
determined on the basis of the real value of the corporate net worth
of TELEFONICA MOVILES and TELEFONICA, is, without any
additional cash compensation, four (4) shares of TELEFONICA, each
with a par value of one euro (€1), for every five (5) shares of
TELEFONICA MOVILES, each with a par value of fifty cents of a
euro (€0.5).
In establishing the above-mentioned exchange ratio, the following
dividends which TELEFONICA MOVILES and TELEFONICA plan to
distribute, as described in section 8 of the Merger Plan, have been
taken into account:
i. By TELEFONICA MOVILES:
a. Dividend previously notified: Payment of a gross dividend of 0.205
euros per share of TELEFONICA MOVILES from the distributable
profit for the year 2005 and from unrestricted reserves. The
proposal of such distribution was approved by the Board of Directors
at its meeting of February 27, 2006 and notified to the market the
following day and the validity of which is subject to the approval
thereof by the Ordinary Shareholders' Meeting of TELEFONICA
MOVILES. Since it is envisaged that this dividend will be paid on
July 21, 2006, before the registration of the merger, only the
shareholders of TELEFONICA MOVILES will benefit and,
consequently, it has been taken into account for the calculation of
the exchange ratio.
b. Dividends proposed by the Board of Directors of TELEFONICA
MOVILES for the approval thereof by the Shareholders' Meeting, in
the framework of the negotiation between TELEFONICA and
TELEFONICA MOVILES and the validity of which is subject to the
approval of the planned merger by the Shareholders' Meetings of both
companies:
• The payment of a gross dividend of 0.085 euros per share of
TELEFONICA MOVILES from the share premium reserve and
other unrestricted reserves.
• The payment of a gross interim dividend of 0.35 euros per
share of TELEFONICA MOVILES from the results obtained from
January 1 to March 28, 2006.
The above-mentioned two proposals are also subject to the condition that
the planned merger is approved by the Shareholders' Meetings of both
companies.
If these two proposals are approved by the Ordinary Shareholders'
Meeting of TELEFONICA MOVILES and if the above-mentioned condition
is fulfilled, the dividends to which such proposals refer (of a total
gross amount of 0.435 euros per share of TELEFONICA MOVILES) will
be paid on July 21, 2006. Consequently, only the shareholders of
TELEFONICA MOVILES will benefit from this distribution and,
consequently, it has been taken into account for the formulation of the
exchange ratio.
ii. By TELEFONICA:
a. The payment of a gross interim dividend of 0.25 euros per share,
from the results of the year ended December 31, 2005, paid on
May 12, 2006. This dividend was approved by the Board of
Directors at its meeting of February 28, 2006 and notified to
the market on the same day. The shareholders of TELEFONICA
MOVILES who become shareholders of TELEFONICA as a result
of the merger do not benefit from that dividend. Consequently,
it has been taken into account for the formulation of the
exchange ratio.
b. As notified to the market on February 28, 2006, the Board of
Directors of TELEFONICA intends to distribute in 2006 an
additional gross dividend of 0.25 euros per share. This dividend
will be paid in any event after the registration of the merger
in Madrid Mercantile Registry. Unlike the terms of the dividend
mentioned above in section (i), both the shareholders of
TELEFONICA and the shareholders of TELEFONICA MOVILES
who become shareholders of TELEFONICA as a result of the
merger will benefit from this dividend. Consequently, it has not
been taken into account for the calculation of the exchange
ratio.
2.4 Valuation of TELEFONICA MOVILES and TELEFONICA
2.4.1 Valuation of TELEFONICA MOVILES
According to the financial advice received, the real value of
the net worth of TELEFONICA MOVILES used to calculate the
exchange ratio was €44,172 million. This value represents a
value per share of €10.20 and includes the adjustments for
(a) the interim dividend declared by TELEFONICA MOVILES of
€0.205 per share from the results of the year ended
December 31, 2005, which will be paid on July 21, 2006 to the
current shareholders of TELEFONICA MOVILES; and (b) the
extraordinary dividend of €0.435 per share approved by the
Board of Directors of TELEFONICA MOVILES on March 29,
2006. The real value of the net worth of TELEFONICA
MOVILES is obtained by multiplying the value per share of &
euro;10.20 by the total number of shares of TELEFONICA
MOVILES of 4,330.55 million.
The exchange ratio resulting from this value and of the value of
the shares of TELEFONICA as mentioned below is among the ranges
that derive from the application of the different methodologies
of valuation as described in the reports of Morgan Stanley & Co.
Limited and Lehman Brothers Europe Limited.
2.4.2 Valuation of TELEFONICA
According to the financial advice received, the real value of
the net worth of TELEFONICA used to calculate the exchange
ratio was €60,297 million. This amount was calculated on
the basis of the closing price of TELEFONICA on March 28,
2006 (€13.00 per share) adjusted by a total of €0.25
per share in relation to the dividend declared by TELEFONICA
(not payable to the shareholders of TELEFONICA MOVILES in
relation to the shares of TELEFONICA which they would receive
in accordance with the merger resolution) which is distributed
on account of the results of the year ended December 31, 2005,
and which will be paid on May 12, 2006 to the current
shareholders of TELEFONICA. The real value of the net worth
of TELEFONICA is obtained by multiplying such adjusted
closing price of €12.75 per share, by a total of shares of
TELEFONICA of 4,729.21 million, excluding the shares held as
treasury stock.
2.5 Valuation criteria
TELEFONICA MOVILES hired the services of Morgan Stanley &
Co. Limited ('Morgan Stanley') as financial adviser in relation
to the merger and to advise TELEFONICA MOVILES in the
process of valuation of TELEFONICA MOVILES and
TELEFONICA (jointly referred to as the 'Companies') and in
the determination and justification by TELEFONICA MOVILES
of the exchange ratio proposed for the merger, and for the issue
of a fairness opinion on the planned transaction.
TELEFONICA MOVILES also hired the services of Lehman
Brothers Europe Limited ('Lehman Brothers') as appraiser for
this transaction and for the issue of another fairness opinion
on the planned transaction.
On March 29, 2006 both entities each issued a fairness opinion
in relation to the merger addressed to the Board of Directors of
TELEFONICA MOVILES, in which it was concluded that, on the
basis of and subject to the terms of the documents mentioned,
the exchange ratio of the merger, taking into account the
dividends to be distributed prior to the execution of the
transaction, is fair from a financial perspective for the
shareholders of TELEFONICA MOVILES other than
TELEFONICA.
It is also placed on record that Credit Suisse Securities
(Europe) Limited, as financial adviser of TELEFONICA for this
transaction, has expressed to the Board of Directors of that
company its opinion that the exchange ratio is fair for the
shareholders of TELEFONICA.
With the advice of both entities, TELEFONICA MOVILES
performed the appropriate evaluations of the Companies and on
the basis of same and following negotiation with TELEFONICA
under market conditions, it decided the financial terms of the
merger which are shown in the Merger Plan. In this respect it is
placed on record that the extraordinary dividends of a total
gross amount of 0.435 euros per share which it is envisaged that
TELEFONICA MOVILES will distribute to its shareholders
prior to the merger were not initially envisaged in the proposal
for the merger of TELEFONICA and are the result of such
negotiation.
Morgan Stanley and Lehman Brothers carried out various valuation
analyses of the Companies in relation to the preparation of
their respective fairness opinions. A summary is provided in
sections 2.5.1 and 2.5.2 below, separately, of each of the
relevant analyses conducted by each of the above-mentioned
entities.
2.5.1 Morgan Stanley
A summary is included below of the principal financial valuation
analyses carried out by Morgan Stanley in relation to the
preparation of its fairness opinion.
Trading Range Analysis
Morgan Stanley reviewed the range of closing prices of
TELEFONICA and TELEFONICA MOVILES shares for various
periods ending on March 28, 2006. Morgan Stanley observed the
following price ranges:
Period ending March 28, 2006 TELEFONICA TELEFONICA MOVILES
Current € 13.00 € 10.74
Last Seven Days € 13.00 - € 13.27 € 10.74 - € 10.95
Last Thirty Days € 13.00 - € 13.47 € 9.75 - € 10.95
Last Three Months € 12.22 - € 13.47 € 8.80 - € 10.95
Last Six Months € 12.22 - € 14.11 € 8.53 - € 10.95
Last Twelve Months € 12.22 - € 14.11 € 8.35 - € 10.95
Since TELEFONICA MOVILES' IPO (Nov 22,
2000) € 6.79 - € 18.11 € 4.90 - € 11.09
Sum-of-the-parts Comparable Companies Analysis
Morgan Stanley compared certain financial information of
TELEFONICA and TELEFONICA MOVILES with publicly
available consensus financial estimates for other companies that
shared similar business characteristics to TELEFONICA and
TELEFONICA MOVILES, respectively.
Morgan Stanley used a sum-of-the-parts comparable valuation for
both TELEFONICA and TELEFONICA MOVILES, valuing the
major assets of each of TELEFONICA and TELEFONICA
MOVILES. Morgan Stanley estimated the value of TELEFONICA
MOVILES as the sum of the values of its Spanish and Latin
American businesses. Morgan Stanley estimated the value of
TELEFONICA as the sum of the values of TELEFONICA
MOVILES and TELEFONICA'S domestic and Latin American
fixed-line businesses, plus the value of its other minority
holdings.
The companies used in this comparison included the following
companies:
i. With respect to TELEFONICA MOVILES Spain: Cosmote.
ii. With respect to TELEFONICA MOVILES Latin America:
America Movil, Millicom.
iii. With respect to TELEFONICA: Deutsche Telekom, France
Telecom, Telecom Italia.
For the purposes of this analysis, Morgan Stanley
analyzed the ratio of aggregate value (defined as market
capitalization plus total debt less cash and cash
equivalents, plus other adjustments) to estimated
calendar year 2006 earnings before interest, taxes,
depreciation and amortization of the various companies
within the TELEFONICA and TELEFONICA MOVILES
groups. Morgan Stanley applied this multiple to the 2006
expected earnings before interest, taxes, depreciation
and amortization of TELEFONICA and TELEFONICA
MOVILES group companies, utilizing as information
sources for TELEFONICA, publicly available consensus
financial forecasts, and for TELEFONICA MOVILES,
financial forecasts prepared by the management of
TELEFONICA MOVILES.
Based on TELEFONICA'S and TELEFONICA MOVILES
current outstanding shares and options, Morgan Stanley
estimated the implied value per TELEFONICA and
TELEFONICA MOVILES share, respectively, as of
March 28, 2006, as follows:
Calendar Year Financials Aggregate Implied Implied
Value Range 2006E AV/ Share Price
(€Bn) EBITDA (x) Range (€)
TELEFONICA MOVILES group Aggregate Value to 50.2 - 58.7 7.7 - 9.1 10.19 - 12.16
Estimated 2006 Earnings Before Interests,
Taxes, Depreciation and Amortization
TELEFONICA group Aggregate Value to 121.4 - 134.3 6.1 - 6.8 14.34 - 17.07
Estimated 2006 Earnings Before Interests,
Taxes, Depreciation and Amortization
No company utilized in the comparable companies analysis
is identical to TELEFONICA or TELEFONICA
MOVILES. In evaluating comparable companies, Morgan
Stanley made judgments and assumptions with regard to
industry performance, general business, economic, market
and financial conditions and other matters, many of
which are beyond the control of TELEFONICA or
TELEFONICA MOVILES, such as the impact of
competition on the businesses of TELEFONICA or
TELEFONICA MOVILES and the industry generally,
industry growth and the absence of any adverse material
change in the financial condition and prospects of
TELEFONICA or TELEFONICA MOVILES or the
industry or in the financial markets in general.
Mathematical analysis (such as determining the average
or median) is not in itself a meaningful method of using
comparable company data.
Discounted Cash Flow Analysis
Morgan Stanley calculated the range of equity values per
share for each of TELEFONICA and TELEFONICA
MOVILES based on a sum-of-the-parts discounted cash
flow analysis.
With respect to TELEFONICA MOVILES, Morgan Stanley
relied on TELEFONICA MOVILES' financial
projections provided by the management of TELEFONICA
MOVILES for calendar years 2006 through 2009. Morgan
Stanley also assumed that the existing relationship
between TELEFONICA and TELEFONICA MOVILES
already captured synergies identified by TELEFONICA
MOVILES and that a merger did not improve the
capacity to capture any material synergies. In arriving
at a range of equity values per share of TELEFONICA
MOVILES shares, Morgan Stanley calculated the
individual values of TELEFONICA MOVILES' assets in
each country (Spain, Chile, Colombia, Ecuador, Morocco,
Mexico, Nicaragua, Panama, Peru, Guatemala, El Salvador,
Argentina, Uruguay, Venezuela and Brazil.)
Country-by-country terminal values were calculated by
applying a range of perpetual growth rates, including a
mid-point rate of 2.0% for Spain and a mid-point average
rate of 4.0% for the various Latin American countries.
The unlevered free cash flows (earnings before
interests, tax, depreciation and amortization, increased
by investments in net working capital and decreased by
capital and tax expenses) from calendar year 2006
through 2009 and the terminal value were then discounted
to present values using different discount rates on a
country-by-country basis, including a mid-point rate of
8.4% for Spain and a mid-point average rate of 13.9% for
the various Latin American countries.
With respect to TELEFONICA, Morgan Stanley relied on
publicly available consensus financial forecasts for
calendar years 2006 through 2010 from publicly available
equity research analyst reports for the valuation of
TELEFONICA'S fixed-line business, which was then
added to the value of TELEFONICA MOVILES and the
value of TELEFONICA'S other minority holdings to
obtain the aggregate value of the TELEFONICA group.
In arriving at a range of equity values per share of
TELEFONICA shares, Morgan Stanley calculated the
terminal value by applying a mid-point perpetual growth
rate of negative (1.5%) for the domestic fixed-line
business and of 1.0% for the fixed-line Latin American
business. The unlevered free cash flows from calendar
year 2006 through 2010 and the terminal value were then
discounted to present values using mid-point discount
rates of 8.5% for the domestic fixed-line business and
of 13.0% for the Latin American fixed-line business.
The following table summarizes the results of Morgan
Stanley's analysis:
Key Assumptions Implied Implied Implied
Aggregate Equity Share
Value Value Price
(€Bn) (€Bn) (€)
TELEFONICA MOVILES: mid-point perpetual growth rates 64.6 - 70.1 58.5 - 64.0 13.51 - 14.79
of 2.0% for Spain and 4.0% average for Latin America
and mid-point discount rates of 8.4% for Spain and
13.9% average for Latin America
TELEFONICA: mid-point perpetual growth rates of 130.1 - 139.2 76.5 - 85.6 16.16 - 18.11
-1.5% for Spanish Fixed Line and of 1.0% average for
Latin America Fixed Line and mid-point discount
rates of 8.5% for Spanish Fixed Line and of 13.0%
average for Latin America Fixed Line
Equity Research Analysts' Price Targets
Morgan Stanley reviewed and analyzed future public
market trading price targets for TELEFONICA and
TELEFONICA MOVILES shares prepared and published
by equity research analysts. These targets reflect each
analyst's estimate of the future public market trading
price of TELEFONICA and TELEFONICA MOVILES
shares. The range of equity analyst price targets
reviewed for TELEFONICA and TELEFONICA MOVILES
were €12.70 - € 15.20 and €9.30 - €
10.82, respectively.
The public market trading price targets published by
equity research analysts do not necessarily reflect
current market trading prices for TELEFONICA or
TELEFONICA MOVILES shares and these estimates are
subject to uncertainties, including the future financial
performance of TELEFONICA and TELEFONICA
MOVILES and future financial market conditions.
Exchange Ratio Analysis
Morgan Stanley reviewed the ratios of the volume
weighted average prices of TELEFONICA shares divided
by the corresponding volume weighted average prices of
TELEFONICA MOVILES shares over various periods
ending March 28, 2006. Morgan Stanley compared the 1.25
exchange ratio, as set forth in TELEFONICA'S original
proposal on Friday March 17, 2006 to the various implied
exchange ratios. Morgan Stanley also compared the ratios
of the prices of TELEFONICA and TELEFONICA
MOVILES shares implied by the sum-of-the-parts
comparable companies analysis, the sum-of-the-parts
discounted cash flow analysis' and by future public
market trading price targets for TELEFONICA and
TELEFONICA MOVILES prepared and published by
equity research analysts.
The following table presents the results of this
analysis:
Implied Price for
TELEFONICA MOVILES(1) (3)
Period TELEFONICA TELEFONICA Exchange Including Excluding
Price (€) MOVILES Pr. (€) Ratio Dividends Dividends(2)
Share Price Development
Since TELEFONICA
MOVILES' IPO
(22-Nov-2000) 11.70 8.58 1.364 9.53 9.56
Last Twelve
Months Average 13.13 9.35 1.404 9.26 9.28
Last Six
Months Average 12.98 9.64 1.346 9.65 9.67
Last Thirty
Days Average 13.24 10.59 1.250 10.40 10.40
Current as on
28-Mar-2006 13.00 10.74 1.210 10.74 10.74
TELEFONICA Offer
4 TELEFONICA'S shares
for every TELEFONICA
MOVILES' share 13.00 1.250 10.40 10.41
Sum-of-the-parts Trading Multiples (Midpoint)
2006E 15.71 11.17 1.406 9.24 9.27
2007E 15.73 11.28 1.394 9.32 9.35
Discounted Cash Flow (Midpoint)
Sum-of-the-parts
Discounted
Cash Flow 17.14 14.15 1.211 10.73 10.73
Broker Valuation (Midpoint)
Broker target
prices 13.95 10.06 1.387 9.37 9.40
1. Based on TELEFONICA'S share price of &
euro; 13.00 as of March 28, 2006.
2. Dividends per share of €0.205 for
TELEFONICA MOVILES shareholders
and €0.25 for TELEFONICA
shareholders, payable on July 21, 2006
and May 12, 2006 respectively.
3. For the purpose of the determination of
the implied price of TELEFONICA MOVILES
the extraordinary dividends of 0.435
euros per share for the shareholders of
TELEFONICA MOVILES to be paid July 21st,
2006 have not been taken into account.
2.5.2 Lehman Brothers
A summary of the principal financial valuation analyses
carried out by Lehman Brothers in relation to the
preparation of its fairness opinion is included below.
In order to assess the fairness of the exchange ratio
offered by TELEFONICA, Lehman Brothers has compared:
• The trading value of TELEFONICA MOVILES and the
key transaction comparables to the price being offered
based to the market value of TELEFONICA share; and
• The fundamental value of TELEFONICA MOVILES
based on DCF with an estimate of the equivalent
fundamental value of TELEFONICA calculated using
similar methodology
Lehman Brothers has also reviewed the value of the
TELEFONICA share against trading comparables and brokers
views on value to confirm that the market value of the
TELEFONICA share is a reasonable basis for valuing the offer
under the market valuation.
Finally, Lehman Brothers has carried out an analysis of the
relative value of the TELEFONICA MOVILES and
TELEFONICA share price over time.
Lehman Brothers analysis is based upon TELEFONICA
MOVILES's management projections for the business. These
projections reflect the management team's best estimations
of the future development of the various units. In this
assessment Lehman Brothers has performed:
• A DCF valuation of TELEFONICA MOVILES based on
its business plan for the years 2006 to 2009, and an
extrapolation for 2010.
• A DCF valuation of TELEFONICA largely based on
market forecasts for its businesses other than
TELEFONICA MOVILES.
Based on its conversations with Management, Lehman Brothers
Europe Limited understands that no significant synergies
will be derived from the merger.
Analysis of the valuation of TELEFONICA MOVILES by the
'Sum-of-the-Parts' methodology
Lehman Brothers has valued TELEFONICA MOVILES by means
of the 'Sum-of-the-Parts' methodology, applying in each case
the most appropriate valuation method according to the
characteristics of the asset in question. For the cash
position of TELEFONICA MOVILES, Lehman Brothers has
used the book values published by the company itself as of
December 31, 2005. For the operating assets of TELEFONICA
MOVILES, as well as for stakes in subsidiaries, Lehman
Brothers has used the cash flow discount methodology in
order to determine the present net value of the cash flows
generated by such assets discounted to their respective
weighted average costs of capital. Lehman Brothers has
envisaged other possible sources of creation of value such
as tax credits generated in previous years as well as the
deductibility of the amortization of goodwill and the tax
credits for export activities.
The result of the 'Sum-of-the-Parts' valuation of Lehman
Brothers shows a price of €13.84 for each share of
TELEFONICA MOVILES. The implied value of the share of
TELEFONICA MOVILES would become €13.40 after
taking into account the extraordinary dividend.
In addition to the cash flow discount valuation, as an
additional reference, Lehman Brothers has valued the Spanish
and Latin American assets of TELEFONICA MOVILES using
comparable transactions and listed companies, through the
application of the implied multiples of those transactions
and of those comparable listed companies to the projections
of Earnings Before Interest, Taxes, Depreciation and
Amortization given by the management team for the activities
in Spain and Latin America.
TELEFONICA MOVILES Comparables Valuation Analysis
In order to value TELEFONICA MOVILES, Lehman Brothers
Europe Limited has selected the following comparable
companies and transactions:
• Comparable Trading Companies:
• Spain: based on major European wireless companies
(Vodafone, Cosmote and Mobistar).
• Latam Assets: based on Latin America wireless
trading multiples (America Movil, Telesp Celular,
Telemig Celular, Tim Participacoes).
Lehman Brothers applied the average multiple of the
listed companies' enterprise values to forecasted
EBITDA for each 2006 and 2007 to TELEFONICA
MOVILES forecasted EBITDA for such years to
calculate implied firm values for TELEFONICA
MOVILES, and then made adjustments to such firm
values for other assets and liabilities. The results
of this analysis were implied equity values of &
euro;9.8 to €10.0 per TELEFONICA MOVILES
share based on TELEFONICA MOVILES forecasted
2006 and 2007, respectively.
• Comparable Transactions
• Spain: Lehman Brothers has selected the major European
western transactions from the last 18 months (Telefonica/
O2, FT/ Amena, TI/ TIM). Lehman Brothers range has been
selected by excluding the high and the low multiples. In the
low end of the range, Lehman Brothers has also excluded the
value of TELEFONICA MOVILES' tax credits on the basis
that each of the comparable transactions ascribed
significant value to tax assets or synergies which are
therefore represented in the overall comparable multiple.
• Latam Assets: Lehman Brothers has selected the major Latam
mobile transactions since the end of 2004. By excluding the
high/ low end of the range, Lehman Brothers valuation is
based on the TIM Peru transaction with America Movil and the
TELEFONICA MOVILES transaction with Bellsouth.
Lehman Brothers applied the average multiple of the
enterprise values to prior last twelve months EBITDA to
TELEFONICA MOVILES forecasted EBITDA for 2006 to
calculate implied firm value for TELEFONICA
MOVILES, and then made adjustments to such firm
values for other assets and liabilities. The results of
this analysis were implied equity values of €9.1 to
€12.2 per TELEFONICA MOVILES share based on
TELEFONICA MOVILES forecasted 2006.
Broker Views
Lehman Brothers reviewed brokers' target prices for
TELEFONICA MOVILES shares in reports published between
February 1, 2006 and March 9, 2006. The average of these target
prices was €9.9 per share and the median was €10.2.
Historical Share Price Performance
Lehman Brothers reviewed the historical share price performance
and trading volumes of TELEFONICA MOVILES shares since its
Initial Public Offering on November 22, 2000. Lehman Brothers
also calculated the average market price of TELEFONICA
MOVILES shares for the one-month, three-months, six months
and one-year periods prior to March 16, 2006. The following
table sets forth the results of this analysis:
Period Average Share Price (€)
Since IPO 8.1
Last 12 Months 9.1
Last 6 Months 9.1
Last 3 Months 9.5
Last Month 10.2
TELEFONICA Market Valuation Analysis
Historical Share Price Performance
Lehman Brothers reviewed the historical share price performance and trading
volumes of TELEFONICA shares since TELEFONICA MOVILES Initial Public
Offering on November 22, 2000. Lehman Brothers also calculated the average
market price of TELEFONICA shares for the one-month, three-months, six months
and one-year periods prior to March 16, 2006. The following table sets forth the
results of this analysis:
Period Average Share Price (€)
Since IPO 11.8
Last 12 Months 13.2
Last 6 Months 13.2
Last 3 Months 12.9
Last Month 13.2
Broker Views
Lehman Brothers reviewed brokers' target prices for TELEFONICA shares in
reports published between February 22, 2006 and March 9, 2006. The average of
these target prices was €14.8 per share and the median was €15.0.
Analysis of the Valuation of TELEFONICA by the 'Sum-of-the-Parts' methodology
Lehman Brothers has valued TELEFONICA MOVILES by means of the
'Sum-of-the-Parts' methodology, applying in each case the most appropriate
valuation method according to the characteristics of the asset in question. For
the cash position of TELEFONICA MOVILES, Lehman Brothers has used the book
values published by the company itself as of December 31, 2005. For the
operating assets of TELEFONICA MOVILES, Lehman Brothers has used the cash
flow discount methodology in order to determine the present net value of the
cash flows generated by such assets discounted to their respective weighted
average costs of capital, with the exception of O2, which has been valued at the
purchase price, as well as the stakes in TPI, Portugal Telecom and China Netcom,
which have been valued at market prices. Lehman Brothers has envisaged other
possible sources of creation of value such as tax credits generated in previous
years as well as the deductibility of the amortization of goodwill.
The result of the 'Sum-of-the-Parts' valuation of Lehman Brothers shows a price
of €17.81 for each share of TELEFONICA.
Adjusted opinion of Equity Research Analysts
Lehman Brothers has recalculated the price targets set by the equity research
analysts by replacing the valuation which they gave to TELEFONICA MOVILES
(in cases in which it was available) with that obtained by cash flow discounting
on the basis of the estimates provided by the management team.
The average of these 'adjusted' price targets became €18.01 per share,
whereas the median became €17.82.
Relative Valuation: Exchange Ratio Analysis
Lehman Brothers performed a relative analysis of the historical share price
performance for both TELEFONICA MOVILES and TELEFONICA by comparing
market prices of TELEFONICA MOVILES shares to market prices of
TELEFONICA shares during the period from March 16, 2006 to March 24, 2006.
Lehman Brothers also calculated the average ratio of the market price of a
TELEFONICA share to the adjusted price of a TELEFONICA MOVILES share
for the month prior to the offer, the six-month period of September 2005 through
March 2006, and the one-year period of March 2005 through March 2006. The
following table sets forth the results of this analysis:
Period Average Ratio
Last 12 Months 1.46
Last 6 Months 1.43
Last Month 1.33
Since TELEFONICA Offer (16/03/2006) 1.21
The average ratio showed does not take into account the dividends made known by
both companies and that will be paid before the merger is registered.
Lehman Brothers Europe Limited also calculated the average ratio using relative
fundamental valuations, implying average exchange ratios of 1.24 to 1.34,
without taking into consideration the extraordinary dividend of €0.435 per
share, and of 1.28 to 1.38 taking into account such dividend.
2.6 Comparison with the criteria envisaged for de–listing offers
Merely by way of indication, the directors or TELEFONICA MOVILES
requested Morgan Stanley and Lehman Brothers to calculate the values of
TELEFONICA MOVILES which would result from the application of the
criteria established in section 3 of Article 7 of Royal Decree 1197/1991, of
July 26, taking into consideration the dividends which TELEFONICA
MOVILES intends to pay to its shareholders before the registration of the
merger.
Such analysis leads to the following values:
2.6.1 Morgan Stanley
A summary is included below of the analysis performed by Morgan
Stanley in relation to the valuation of TELEFONICA MOVILES in
accordance with the criteria established in section 3 of Article 7
of Royal Decree 1197/1991, of July 26.
i. Underlying book value: 1.33 euros per share of
TELEFONICA MOVILES, resulting from dividing the
'net worth attributable to the shareholders of the
parent company' by the number of shares of TELEFONICA
MOVILES.
ii. Liquidation value:
In the opinion of Morgan Stanley, the liquidation value
of TELEFONICA MOVILES would never exceed the
market valuation of TELEFONICA MOVILES determined
by methodology based on the continuity of the business
and the future results. The range of the liquidation
value would at all times and in any event be below the
market value and could be determined as a range between:
a. Book value of TELEFONICA MOVILES.
b. Value of the sum of the parts of TELEFONICA
MOVILES deducting the debt, contingent
liabilities, other expenses, taxes and the adverse
effect on the sale price of assets of the lower
competitive tension in an auction process.
iii. Average listed price of TELEFONICA MOVILES in the
last 6 months: 9.64 euros per share.
iv. Price of the consideration previously offered, if some
tender offer had been made in the last year:
No tender over has been made for TELEFONICA
MOVILES in the past year or previously.
2.6.2 Lehman Brothers
A summary is included below of the analysis performed by
Lehman Brothers in relation to the valuation of
TELEFONICA MOVILES in accordance with the criteria
established in section 3 of Article 7 of Royal Decree
1197/1991, of July 26.
i. Underlying book value:
The underlying book value of TELEFONICA MOVILES
amounts to 1.43 euros per TELEFONICA MOVILES
share, resulting from dividing the 'net worth' by the
number of shares of TELEFONICA MOVILES.
ii. Liquidation value:
The liquidation value of an enterprise is intended to
reflect its value in a possible situation of dissolution
and final conclusion of business. Therefore, it is a
static approach, since it only takes into consideration
the situation of its assets and liabilities at the time
of the valuation and not the income which they may
generate in the future. Therefore, the principle of the
company's on going concern is not taken into account.
The process is based essentially on obtaining the net
worth resulting from realizing all the assets and
liquidating all the liabilities of the company taking
into consideration the latent capital gains/losses, as
well as the contingencies which may exist. It must be
borne in mind that, in practice, the price obtained upon
the transfer of some of the assets may be lower than
their book value. This will essentially depend on the
speed with which it is necessary to sell them.
Lehman Brothers considers that the liquidation value of
the company is lower than the value of the going
concern.
If a sale in parts of the different subsidiaries in each
country is considered, the valuation methodology would
be quite similar to that used in the scenario of the
Discount of Cash Flows reducing their valuation by the
investment necessary for them to operate independently.
It is necessary to consider the fact that the combined
management of the assets within TELEFONICA MOVILES
benefits from substantial synergies, of benefits (fame
of the trademark, technological development) as well as
of costs (economies of scale, cost of equipment, central
functions).
Therefore, in the opinion of Lehman Brothers, under no
circumstance would the valuation resulting from an
analysis of the sum of the parts exceed that obtained on
the basis of the Discount of Cash Flows.
iii. Average listed price of TELEFONICA MOVILES:
The average listed price of TELEFONICA MOVILES in
the 6 months of effective trading prior to the date of
announcement of the transaction (i.e., the 180 days on
which the shares were traded) was 9.13 euros.
iv. Price of the consideration previously offered, if some
tender offer had been made in the past year:
No tender offer has been made for TELEFONICA MOVILES in the past
year or previously.
Consequently, the valuation of the share of TELEFONICA MOVILES used in
the merger (10.20 euros per share) is greater than the highest of the prices
which would result from the application of the criteria provided in Article
7.3 of Royal Decree 1197/1991, of July 26, all of this taking into account
the dividends which TELEFONICA MOVILES intends to pay to its
shareholders before the registration of the merger.
2.7 Conclusions
On the basis of the foregoing, the directors of TELEFONICA MOVILES
conclude:
• That the merger the subject-matter of this Report is highly advisable
for both participating entities and their shareholders, since it
constitutes the most efficient mechanism to face the new demands from
clients, the technological change and the new competitive environment in
the market, resulting into a higher value growth for the shareholders;
and
• That the exchange ratio has been determined according to the real
values of the companies involved in the merger and is considered fair
for the shareholders of TELEFONICA MOVILES other than its majority
shareholder TELEFONICA, as conformed by the fairness opinions issued
for the Board of Directors of TELEFONICA MOVILES by Morgan Stanley
and Lehman Brothers.
* * *
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