ON THE CASE STUDY: THE RISE OF A MAJOR PLAYER IN THE PORTUGUESE TELECOMMEDIA MARKET

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ZON-OPTIMUS MERGER TEACHING NOTE

ON THE CASE STUDY: THE RISE OF A MAJOR PLAYER IN THE PORTUGUESE TELECOM/MEDIA MARKET

PEDRO BARRETO SOARES DAVID - # 824

A Project carried out on the Master in Finance course, under the supervision of: Professor Paulo Soares de Pinho

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1 TEACHING NOTE

The Zon Optimus Merger

Synopsis

In 2013, Zon and Optimus announced a merger agreement which led to the rise of a major player in the Portuguese telecom/media industry. The Zon-Optimus company would be in a better condition to face competition namely from Vodafone’s subsidiary, in Portugal, and the historic incumbent Portugal Telecom.

Teaching Purpose

The current Teaching Note should be analysed together with the respective Case Study and should be focused on: (i) merger synergies, (ii) implied valuation based on RJ Group payment to Sonaecom, (iii) adequacy of the agreed exchange ratio, (iv) rationale for the use of EV/[EBITDA-Capex] multiple, (v) shareholder agreement among Zopt, (vi) Zon and Sonaecom individual incorporation of the merger synergies and (vii) Zon-Optimus swot analysis and (viii) rationale for the Competition Authority decision.

Teaching Suggestions

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Discussion Questions

1. Were the initially projected cost and capex synergies reasonable? What would be

the impact of the cost synergies in the EBITDA Margin? Considering the projected

cost and capex synergies what was the implied discount rate?

According to the Case Study, the merger project approved by both parties, on January 21st, 2013, considered a Net Present Value (“NPV”) of €350-€400 million for the estimated cost and capex synergies. That meant €45-€50 million of yearly cost and capex savings, which were expected to be fully achieved from 2016 onwards. Nevertheless, those synergies were subject to €35-€45 million of integration costs, distributed by the following 3 years after the merger.

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The reasonability of the cost and capex synergies should be analysed by comparison with similar transactions. For that purpose, a couple of financial analysts, presented on their researches a benchmark of the synergies verified on past telecom mergers. By the analysis of the Case Study’s Exhibit 9B, it seemed that Zon-Optimus initial projections could be under-valued.

Accordingly, the company later revised those cost and capex synergy forecasts to 2 times more than initially projected.

The referred analysts also estimated that 80% of the synergies would be related to cost savings, that is, €38 million ([[45+50]/2]x80%) on a run-rate basis, from 2016 onwards. This would mean an increase of the 2016 EBITDA margin by 2.4% ([38m/Zon-Optimus’ Consolidated Pro-forma revenues, of 2016, in Portugal]). See Exhibit 9A and Exhibit 15 of the Case Study.

Considering a midpoint NPV of €375m, for the estimated cost and capex synergies, and the yearly contribution to the Free Cash Flow, the implied discount rate would be 8.3%. See in Exhibit TN1 the respective calculations.

The merger project did not consider though any revenue synergies, namely from cross-selling among both companies’ customers, which are also common in these type of mergers. Analysts estimated a NPV gap of €500-€750 million for those revenue synergies.

2. What were the implied valuations of Zon and Optimus considering the price paid,

by RJ Group to Sonaecom, for 7.7% of Zon-Optimus in order to settle a 50/50%

shareholding at Zopt?

As mentioned in the Case Study, RJ Group paid €119.6 million to Sonaecom for 7.7% of Zon-Optimus which results on a 100% equity valuation of € 1,553 million.

Considering the agreed exchange ratio of 1.5, 60% of the valuation is related to Zon (€932 million) and the remaining to Optimus (€621 million). Comparing the Zon implied valuation with its market cap evolution, it is understood that Zon was valued based on its market cap at the beginning of 2013 (see Exhibit TN2A).

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Merging Company as from 1 January 2013, being subsequently granted retroactive effects to the merger.”

Considering the Net Debt’s of 2012, the implied equity valuations result into an Enterprise Value (“EV”) of €1,537 million for Zon and €970 million for Optimus (Optimus’ Net Debt was deducted by €58 million related to tax credits).

Thus, Zon implied EV multiples mean 4.9x EBITDA (2012) and 8.1x [EBITDA-Capex] (2012). By its part, Optimus implied EV result into 4.0x EBITDA (2012) and 8.5x [EBITDA-Capex] (2012). The adequacy of the implied multiples should be analysed along with the comparable multiples and transaction multiples (see the information present in Question 3).

As a result, considering the payment from Sonaecom by RJ Group, the valuations were based on Zon’s Market Cap, at the time of the merger agreement, not considering for that purpose any premium that could result from the application of alternative valuations such as the Discounted Cash Flows or Market/ Transaction Multiples. See in

Exhibit TN2B the respective calculations.

3. Was the deal exchange ratio adequate? Was the deal fair for both parties?

As referred in the Case Study, the valuations of both Zon and Optimus were performed according to the Discounted Cash Flows (“DCF”) method as well as to Market Multiples, namely, EV/EBITDA and EV/[EBITDA-Capex]. The Market Multiples are based on the stock price and capital structure of each comparable company. However, according to the merger’s Informative Document for the Admission to Trading of the New Shares, available at the regulator CMVM, it was not understood if the Transaction Multiples were considered for valuation purposes.

In order to understand if the agreed exchange ratio of 1.5 was adequate, or not, were applied the referred valuation methods (DCF and Multiples), to Zon and Optimus on a Stand-Alone basis.

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On the other hand, it is understood that cable comparables were trading at considerably higher multiples than mobile. Zon’s EV/EBITDA multiple reflects that premium when compared with Sonaecom/Optimus although the gap is smaller. The EV/[EBITDA-Capex] multiple does not reflect though the referred premium which might be explained by the fact that capex is more volatile than EBITDA, ranging according to each years’ investment needs, with the respective impact on multiples.

One final note concerning the Net Debt/EBITDA multiple as Zon and Optimus present a lower indebtedness than its comparables, although the gap between Zon and the cable comparables is fairly larger.

Also, by the Exhibit10Bof the Case Study, the same conclusions can be taken from the Transaction Multiples, that is, cable comparables were trading at a premium compared with mobile.

Concerning the Zon valuation itself, in Exhibit TN3A,isconsidered the application of the Market and Transaction multiples to Zon’s financial indicators. Accordingly, the cable Market Multiples lead to a 100% Equity Valuation range of €2,181-€2,460 million while the Transaction Multiples result on a range of €2,080-€2,307 million. Regarding the DCF Valuation, present in Exhibit TN3B, it divides Zon’s Free Cash Flow to Firm (“FCFF”) projections, in Portugal, from the African ones, as the growth stage in each country is different as well as the respective discount rates (Wacc – weighted average cost of capital). The projections and Wacc calculations were based on the information considered in the Exhibit 15 of the Case Study.

Also, both DCF’s consider a normalized FCFF for the calculation of the Terminal Value, which usually has a significant impact in the overall valuation. The DCF valuation, which is believed to have been the main valuation method, considered by RJ Group and Sonaecom’s advisors, results on a 100% Equity Value of €1,153 million, as per the DCF valuation chart in Exhibit TN3C. Considering a Wacc sensitivity of ± 0.5% it results on a DCF valuation range of €1,067-€1,249 million.

Finally in Exhibit TN3D, are compared the results from the different valuation methods where it is perceived that Zon’s European comparables are trading at very large premium when compared with Zon’s DCF and implied multiples.

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Transaction Multiples result on a range of €1,162-€1,226 million. On its part, the DCF valuation results on a 100% Equity Value range of €668-€782 million.

The Exhibit TN4D, also compares the results from the different valuations. In this case, the Market Multiples are closer to the DCF valuation.

According to the valuations performed, the implied exchange ratios are the following:

Valuation Method

Implied

Exchange Ratio Zon/(Zon+Optimus) Optimus/(Zon+Optimus)

DCF 1.6x

(€1,153M / €722M)

61% 39%

Transaction Multiples

1.8x (€2,193M / €1,194M)

65% 35%

Market Multiples

2.6x (€2,321M / €890M)

72% 28%

By DCF method, which, as referred before, is believed to have been the main valuation method, results on an implied exchange ratio very close to the agreed one.

On its part, the Transaction Multiples, firstly, and then the Market Multiples present a higher exchange ratio where Zon as a higher relative valuation. In fact, in this case, the European cable comparables were trading at a significant premium when compared with mobile, maybe because of the importance of Pay TV on the multiple play bundles but also due to the multiples paid in the last transactions.

Nevertheless, in Portugal, Zon and Sonaecom were trading at a closer multiple and Portugal Telecom was presenting market multiples closer to the ones of Zon and Sonaecom.

Thus, concerning mergers, it is very common to see the application of the same, or a close, multiple to both parties, as otherwise it could be difficult to reach into an agreement. In cases where the multiple gap is large, the party with the lower multiple might feel that the merger is not being negotiated on balanced way, moving away from the deal.

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Considering the previous arguments it is believed that the parties agreed the exchange ratio mainly based on the DCF Valuation and Market Multiples in Portugal, not focusing on immediate capital gains but on a medium/long term perspective.

4. Why does [EBITDA-Capex] is one of the most preferable financial indicators

concerning multiples calculation of telecom/media companies?

Usually analysts prefer to compare companies based on Enterprise Value multiples as they are not influenced by each company capital structure, namely, by the balance between debt and equity.

Among the financial indicators, which are not affected by inflows/outflows from, and to, debt holders and shareholders, the EBITDA is most common one, as it is the closest to the Free Cash Flow to the Firm (“FCFF”), based on the Profit and Loss financial statement. Nevertheless, in companies where capex is significant, the [EBITDA-Capex] is most appropriate financial indicator towards the FCFF.

In Exhibit TN5, the cash flow waterfall charts by both Zon and Optimus may help to understand the relevance of [EBITDA-Capex] in this case.

Beyond EBITDA and Capex, the Net Working Capital (“NWC”) is also an important item for the Free Cash Flow calculation. In case of Zon, the Net Working Capital is the least relevant of the three, where the NWC investment, of 2011 (€66 million), was almost balanced by the NWC divestment of 2012 (€55 million). As a result, it is clear that the EBITDA-Capex is the closest indicator to the FCFF.

In case of Optimus the cash flow waterfall exercise was only applied to the year of 2012 as the 2010 accounts were not consolidated. Again, the NWC divestment, of 2011 (€71.3 million), was almost balanced by the NWC investment of 2012 (€105 million).

5. What were the main clauses defined in the shareholder agreement at the SPV -

Zopt? Comment the possible rationale.

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The shareholder agreements should be analysed together with the bylaws of the company, which settle the structural rules on how the company should operate and be managed.

Regarding the Zon-Optimus merger, Sonaecom and Kento/Unitel International (“RJ Group”) established a shareholder agreement in order to regulate its 50/50% joint venture in Zopt, the Special Purpose Vehicle (“SPV”) established to hold the majority of Zon-Optimus share capital.

Concerning the Board of Directors’ composition, it was agreed that Sonaecom and RJ Group would have the right to appoint half of the members, from whom the Chairman would be designated by mutual agreement. Also, it was defined that the Chairman, the Secretary of the Shareholders’ Meetings and the Audit Committee should be appointed by both parties.

As what concerns to corporate bodies, it seems a merger of equals.

It was also agreed that the board meetings may occur whenever is present at least half of the board members. Thus, although it was defined that the board resolutions have to be approved by the majority of the members, at least one board member appointed by each party has to vote favourably.

In case Zopt has a small number of board members, it will imply a regular consensus,

regarding board resolutions, which might not be simple in some occasions.

Nevertheless, it is understandable given the purpose of this SPV.

Nothing was disclosed regarding the powers given to the board although it could be defined in the bylaws of Zopt. The remaining resolutions are voted at the Shareholders Meetings which can validly meet when at least 50% of the share capital is present.

Once Zopt is a SPV, without operational activity and with the sole goal to obtain

control in Zon-Optimus, it is understandable that the Zopt Board of Directors is an

extension of its shareholders, as the main role of the board is to monitor the investment

made in Zon-Optimus and to define voting strategies at the Shareholder Meetings of

Zon-Optimus.

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The parties also agreed not to acquire additional Zon-Optimus shares unless it is through Zopt. Regarding the direct stake of 7.3% from Sonaecom in Zon-Optimus, was granted to RJ Group a call option up to half of Sonaecom direct stake.

As what concerns to shareholding exposure to Zon-Optimus, both parties seem to

progress towards equal stakes.

Still regarding the transfer of shares, apparently were not defined any liquidity measures as the drag along or tag along. If the drag along was agreed by both parties, either could promote the sale of 100% of the company and drag the other party towards a transaction. In case of a tag along, any party would have the option to sell its shares, at the same conditions, if the other party receives a proposal as is willing to sell to the proposed acquirer.

There was no disclosure on the existence of any pre-emptive rights which would grant each party the right to acquire the other party shares, at the same conditions, in case there would be an acquisition proposal by a third party. The pre-emptive rights may tough reduce the liquidity of the shares as a potential buyer could be losing time on analysing and structuring a transaction where, in the end, one of the shareholders exercises the pre-emptive right.

Alternatively, both parties decided that, after a period of 12 months, and as well as in case of deadlock situations without a friendly solution, any party could require the dissolution of the company.

It means that either there are conditions to maintain a 50/50% joint venture to control

the Zon-Optimus share capital or both parties would convert their indirect stakes,

through Zopt, into direct ones. It is also common to solve these deadlock situations

through call and put option mechanisms or independent valuations. In this case, for the

reasons previously mentioned it is understandable the option made by the parties to

deal with deadlock situations. In case both parties decide to have direct stakes in

Optimus, each party would have the freedom to define its own strategy concerning

Zon-Optimus, although the control would be lost.

The absence of liquidity measures may anticipate that, at that stage, either party would

not consider a joint venture with a third party. On the other hand, the liquidity is

ensured by the possibility of converting the indirect stakes in Zon-Optimus into direct

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On a potential buyer perspective, and in case only one party would be willing to sell its

shares at Zopt, it might also not be interesting for the potential buyer, versus a direct

stake in Zon-Optimus, as it would be mostly dependent on the fit with the remaining

party. On the other hand, if both parties would consider a joint sale, Zopt could be then

an interesting vehicle for a consortium of investors to achieve control over

Zon-Optimus.

Also, no disclosure was made concerning other typical clauses that usually are present on shareholder agreements as:

(i) dividend policy, with an eventual minimum payout ratio in case of no agreement; (ii) agreement on additional equity financing, to the company, and eventual interests in case of shareholder loans. This could be relevant in case Zopt will have to subscribe any capital increase at Zon-Optimus in order to maintain the control;

(iii) dealing with the breach of the shareholder agreement, namely by applying indemnities.

On the other hand, as the financial investment of 50.01% in Zon-Optimus is Zopt major asset, it is important to analyse the Zon-Optimus bylaws in order to understand, among others, the dividend policy and the requirements for the resolutions at the Shareholder Meetings.

The bylaws, proposed in the merger project for Zon-Optimus, which were approved by large majority, by both Zon and Optimus shareholders, introduced a minimum payout ratio of 40%, which can only be changed at the Shareholders Meeting by 2/3 of the votes cast.

It is important that the dividend policy for Zon-Optimus is defined considering the

maintenance of the investment capacity in order to sustain the past innovation path and

to anticipate the next technology generations.

The bylaws, proposed for Zon-Optimus, considered in article 14 that “without prejudice to qualified majority in the cases foreseen in the law, the general meeting of shareholders shall resolve by a single majority of the votes cast”. Thus, the simple majority also stands for the election of the Board of Directors, which responsibilities are also present in the bylaws.

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10 6. Did the individual market cap’s, of Zon and Sonaecom, captured part of the merger

synergies as the timeline of the merger evolved?

As mentioned in the Case Study, Zon-Optimus started trading on September 9th, 2013 with an initial market cap of € 2.19 billion. Also, the Exhibit 11 of the Case Study, namely the chart that compares the Zon, Sonaecom and PT’s stocks performance against the main Portuguese Stock Index (PSI 20), highlights the growth of Zon and Sonaecom stocks, since the beginning of 2013, compared with a stable PSI 20.

By analysing the Exhibit TN6, it is understood that since the merger announcement in December, 2012, Zon and Sonaecom have valued €442 million and €139 million, respectively, which might indicate that part of the synergies was incorporated in Zon and Sonaecom’s stock prices.

By deducting an estimation of €50-€100 million, to the market cap of Sonaecom, related to Sonaecom’s non-Optimus activities, and adding as well Zon’s market cap, it would lead to a joint market cap of €1.91-€1.96 billion, by September 8th, a €226-€276 million gap to Zon-Optimus’ initial market cap.

Considering the estimated synergies’ NPV of €350-€400 million, and assuming a breakdown of those synergies between Zon and Optimus, according to the agreed exchange ratio of 1.5, Zon would account for €210-€240 million, of those synergies, while Optimus for €140-€160 million.

In case of Zon, given the appreciation of its stocks until September 8th, by €442 million, an important part of the respective synergies seems to be incorporated, even considering the €37.2 million paid related to the 2012’s dividends. The difference between the €442 million appreciation and the €210-240 million interval, related to Zon’s synergies, should be explained by the company’s prospects of future growth.

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11 7. What would the merger’s swot analysis reveal?

By the Swot analysis described below, Zon-Optimus was in a clear position to challenge the leadership of the Portuguese Telecom/Media Market, leaded until then by the incumbent Portugal Telecom. Nevertheless, the company should be alert to its competitors’ response namely to the establishment of new MVNO’s or complementary acquisitions. In the medium term, the company’s success will be mostly dependent from the maintenance of innovation and anticipation of technology trends, in an industry that changes very quickly.

STRENGHTS WEAKNESSES

Strong shareholder structure;

Next generation network coverage 2 times higher than the closest competitor (Portugal Telecom), which is particularly relevant in markets with strong cable competition;

Past innovation expertise of both companies (Zon and Optimus);

Pay TV leadership, which is the entry door to new residential customers and for the marketing of the remaining services (fixed voice, internet or mobile);

Strong market share in multiple play offers;

International presence namely in emerging countries as Angola or Mozambique;

Strong Balance Sheet – lowest levels of Net/EBITDA and Net/(EBITDA-Capex) compared with the main competitor Portugal Telecom;

Most efficient telecom/media player with the highest pre-merger EBITDA margin compared with its main peers (Portugal Telecom and Vodafone);

Significant EBITDA to Free Cash Flow conversion, meaning a high level of expected dividends;

No need for major investments in the next couple of years;

Consolidated Balance Sheet weaker than Vodafone Group;

Ranked as the third mobile operator in Portugal which is the weakest position;

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OPPORTUNITIES THREATS

Re-leveraging opportunity to finance additional investments or for an eventual leverage buyout;

Opportunity to market multiple play bundles along with Sonaecom expertise in IT and data storage;

Room to grow in the corporate segment namely offering multiple play bundles to SOHO’s (Single Office/Home Office) and to SME’s (Small and Medium Enterprises);

Room to grow in the customer segment namely in personal mobile;

Opportunity to enter in other international markets;

Additional cost and capex synergies;

Revenues synergies namely cross-selling among Zon and Optimus customers;

Opportunity to increase the merged company market cap as it is trading at a discount versus the sector comparables;

Defocus from the Portuguese market, from the PT/Oi’s

merged company;

Portuguese economy recovery;

Targeting the tribal bundles, that is, free mobile calls within a closed community (mostly from Vodafone);

The announced investment by Zon-Optimus to increase its network coverage by more 400 additional houses will increase the overlap with Cabovisão network. With this investment Zon-Optimus will be in a clear position to tackle the respective Cabovisão customers. On the other hand, Zon-Optimus would stop the customers churn rate to Portugal Telecom’s DTH network;

Eventual acquisition of PT, out of Oi Group, bringing back the focus to the Portuguese market;

Eventual acquisition of Altice’s operations, in Portugal, by Vodafone or other player;

Eventual MVNO between Vodafone and other telecom/media player operating in Portugal;

Vodafone aggressive multiple play pricing which can pressure margins and revenues downward;

Increasing competition with negative impact on pricing and revenues;

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OPPORTUNITIES (cont.) THREATS (cont.)

Increase its market share in large corporate;

Opportunity of a refinancing at a lower cost of debt;

Better consumer/corporate revenue mix as corporate usually provides higher margins;

With convergence a significant number of pre-paid customers will convert to a post-paid structure.

The minimum level of approved dividends could compromise the continuous investment in order maintain

innovation and anticipate technology trends.

8. Why did the Competition Authority impose those remedies to the merger?

As mentioned in the Case Study the Competition Authority (“CA”) did not impose major remedies to the merger. It was understandable considering that the merger did not lead to excessive concentration, as Zon and Optimus were complementary companies. On the contrary, it the merger would increase competition in multiple play bundles pressuring prices downwards to the final customers.

Nevertheless, Optimus and Vodafone agreed, in 2009, to co-invest, on a joint venture (“JV”) basis, in a fiber network that would cover 500 thousand houses. Considering that no major concentration problems were identified, the CA was then mostly concerned with the effects of the merger on the referred Optimus-Vodafone joint venture. Given the overlap between Zon’s network and Optimus’ fiber network, it was expected that Optimus’ fixed customers would change to Zon and Vodafone would lose competitiveness in the areas where it was dependent from Optimus’ fiber network. As a result, from the remedies described in the Case Study the following are applicable to this concern: (i) extension of the JV maturity, in order to secure that Vodafone will maintain the access to the Optimus’ fiber network; (ii) no charge of indemnities, during a period of 6 months, to customers that pretend to terminate their Optimus’ loyalty contracts; and (iii) Vodafone’s call option over Optimus’ fiber network.

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Epilogue

The Zon and Optimus merger was a clear example of a transaction between two complementary companies with the respective synergies and impact in the future strategy. It followed a consolidation trend among complementary European companies towards the offer of multiple play bundles.

For that purpose, Sonaecom (Optimus’ sole shareholder) and RJ Group (Zon’s major shareholder) established a 50/50% joint-venture, on a Special Purpose Vehicle (“SPV”), in order the achieve control (50.01%) over the Zon-Optimus merged company.

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15 Exhibit TN1:Synergies’ Contribution to Free Cash Flow– Implied Wacc

Synergies' Contribution to Free Cash Flow

Unit: EUR M illion

(except when specified) 2013 E 2014 E 2015 E 2016 E

+ Opex Synergies 5.7 20.9 32.3 38.0

(-) Integration Costs 6 26 8 0

(-) Income Tax 0.0 0.0 6.4 10.1

+ Capex Synergies 1.4 5.2 8.1 9.5

Contribution to Free Cash Flow 1.1 0.1 26.0 37.4

Source: BPI Equity Research; Millennium Equity Research

NPV (2013E-2106E) 49

Present Value Terminal Value (g=0%) 326

Total NPV 375

Implied Wacc 8.3%

Exhibit TN2: Zon’s Market Cap on 31st December 2012 // Zon-Optimus Implied Valuation

TN2A: Zon’s Market Cap on 31st December 2012

850 950 1,050 1,150 1,250 1,350 1,450 D e c 3 1 , 2 0 1 2 Ja n 7 , 2 0 1 3 Ja n 1 1 , 2 0 1 3 Ja n 1 7 , 2 0 1 3 Ja n 2 3 , 2 0 1 3 Ja n 2 9 , 2 0 1 3 F e b 4 , 2 0 1 3 F e b 8 , 2 0 1 3 F e b 1 4 , 2 0 1 3 F e b 2 0 , 2 0 1 3 F e b 2 6 , 2 0 1 3 M a r 4 , 2 0 1 3 M a r 8 , 2 0 1 3 M a r 1 4 , 2 0 1 3 M a r 2 0 , 2 0 1 3 M a r 2 6 , 2 0 1 3 A p r 3 , 2 0 1 3 A p r 9 , 2 0 1 3 A p r 1 5 , 2 0 1 3 A p r 1 9 , 2 0 1 3 A p r 2 5 , 2 0 1 3 M a y 2 , 2 0 1 3 M a y 8 , 2 0 1 3 M a y 1 4 , 2 0 1 3 M a y 2 0 , 2 0 1 3 M a y 2 4 , 2 0 1 3 M a y 3 0 , 2 0 1 3 Ju n 5 , 2 0 1 3 Ju n 1 1 , 2 0 1 3 Ju n 1 7 , 2 0 1 3 Ju n 2 1 , 2 0 1 3 Ju n 2 7 , 2 0 1 3 Ju l 3 , 2 0 1 3 Ju l 9 , 2 0 1 3 Ju l 1 5 , 2 0 1 3 Ju l 1 9 , 2 0 1 3 Ju l 2 5 , 2 0 1 3 Ju l 3 1 , 2 0 1 3 A u g 6 , 2 0 1 3 A u g 1 2 , 2 0 1 3 A u g 1 6 , 2 0 1 3 A u g 2 2 , 2 0 1 3 A u g 2 8 , 2 0 1 3 E u r M il li o n s

Zon Market Cap, 1st_{January 2013}–₃₁st_{August 2013}

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16 TN2B: Zon and Optimus Implied Valuations Based on RJ Group Payment to Sonaecom

Implied valuations of Zon and Optimus

Amount paid by RJ Group to Sonaecom 119.6 % acquired of the NewCo (Zon-Optimus) 7.7%

Implied Equity Value 1,553.2

Zon@60% 931.9

Optimus@40% 621.3

Exchange ratio 1.5 x

ZON - IMPLIED MULTIPLES

Enterprise Value ("EV") 1,536.9

EV/EBITDA (2012) 4.9 x

EV/(EBITDA-Capex) (2012) 8.1 x

OPTIMUS - IMPLIED MULTIPLES

Enterprise Value ("EV") 970.3

EV/EBITDA (2012) 4.0 x

EV/(EBITDA-Capex) (2012) 8.5 x

Unit: EUR Millions

Exhibit TN3: Zon Stand-Alone Valuation

TN3A: Zon’s Multiples Valuation

Zon Turnover Zon EBITDA Zon EBITDA-Capex

-Net Debt= EBITDA

2012 9.6 x - 9.8 x 3,005 - 3,065 605 2,400 - 2,460 7.8 - 8.0

2013E 8.9 x - 9.0 x 2,803 - 2,860 2,198 - 2,255 7.1 - 7.3

EBITDA-Capex

2012 14.7 x - 15.0 x 2,786 - 2,842 605 2,181 - 2,237 7.1 - 7.2

2013E 14.2 x - 14.4 x 2,847 - 2,904 2,242 - 2,299 7.3 - 7.4

EBITDA

2012 8.6 x - 8.8 x 2,685 - 2,739 605 2,080 - 2,134 6.7 - 6.9

EBITDA-Capex

2012 15.0 x - 15.3 x 2,854 - 2,912 605 2,249 - 2,307 7.3 - 7.5

Unit: EUR Millions

2013E

817.6 316.0 201.1

2012

858.6 312.9 189.8

Value/share

Market Multiples

Equity Value

Transaction Multiples

Entreprise Value Multiple Interval

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17 TN3B: Zon’s DCF Valuation – Free Cash Flow Calculation

Zon Portugal (Stand-Alone DCF Valuation) Unit: EUR M illions

(except when specified) 2013E 2014E 2015E 2016E Terminal Value CF

Turnover 817.6 819.5 839.8 863.9 881.2

% growth 0.2% 2.5% 2.9% 2.0%

EBIT 98.8 94.8 112.1 125.4 209.1

Taxable EBIT margin % 12.1% 11.6% 13.3% 14.5% 23.7%

Income Tax over EBIT 26.2 23.2 27.5 30.7 51.2

EBIT tax rate % 26.5% 24.5% 24.5% 24.5% 24.5%

EBIAT 72.6 71.6 84.6 94.7 157.9

Memo: EBITDA 316.0 322.2 330.7 341.4 348.2

Memo: EBITDA margin 38.6% 39.3% 39.4% 39.5% 39.5%

+ Depreciation & Amortization 217.2 227.4 218.6 216.0 139.1

as a % of capex 189% 162% 154% 165% 100%

(-) Net Working Capital -4.2 -0.3 -1.3 -1.3 -1.0

% Turnover -0.5% 0.0% -0.2% -0.2% -0.1%

(-) Capex 114.9 140.1 141.7 130.7 139.1

% Turnover 14.1% 17.1% 16.9% 15.1% 15.8%

Free cash flow to Firm 179.1 159.1 162.8 181.3 158.9

Source: BPI Equity Research; Millennium BCP Equity Research

Wacc: 10.38% [Cost of Debt after taxes: 5.01%; Cost of Equity: 12.68% (Risk Free + Country Risk Premium: 5.6%; Beta Levered: 1.18; Market Risk Premium: 6%); Taxes: 24.5%; Target Debt to Capital Ratio: 30%]

Zon Africa (Stand-Alone DCF Valuation) Unit: EUR M illions

Turnover 148.0 185.0 204.0 207.0 211.1

% growth 25.0% 10.3% 1.5% 2.0%

EBIT 27.3 40.7 53.0 52.1 48.5

EBIT tax rate % na na na na 30.0%

EBIAT 27.3 40.7 53.0 52.1 33.9

Memo: EBITDA 30.0 46.0 61.0 62.0 63.2

as a % of capex 26% 41% 56% 68% 100%

(-) Net Working Capital 0.7 0.9 1.0 1.0 1.0

% Turnover 0.5% 0.5% 0.5% 0.5% 0.5%

(-) Capex 10.3 13.0 14.3 14.5 14.8

% Turnover 7.0% 7.0% 7.0% 7.0% 7.0%

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18 TN3C: Zon’s DCF Valuation – Valuation Chart

Zon Stand Alone DCF Valuation

(605)

536

1,141

81 1,758

1,153

0 250 500 750 1,000 1,250 1,500 1,750

NPV 13E-16E Present Value Terminal Value

Zon Africa (Zap): 30% Equity Value

Enterprise Value Net Debt Equity Value

Eur

Mi

ll

ion

Source: DCF Valuation; Zon’s Financial Report

TN3D: Zon’s Combined Stand-alone Valuations

800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600

Market Multiples Transaction Multiples DCF

Zon Stand Alone Combined Valuation (Eur Million)

€1,067 M €1,249 M

€2,080 M €2,307 M

€2,181 M €2,460 M

EV / EBITDA

2012

5.3x –5.9x

8.6x –9.3x

8.9x –9.8x

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19 Exhibit TN4: Optimus Stand-alone Valuation

TN4A: Optimus’ Multiples Valuation

Optimus Turnover Optimus EBITDA Optimus EBITDA-Capex

-Net Debt= EBITDA

2012 5.7 x - 5.9 x 1,393 - 1,421 465 928 - 956 8.1 - 8.3

2013E 5.7 x - 5.8 x 1,328 - 1,355 863 - 890 7.5 - 7.7

EBITDA-Capex

2012 10.4 x - 10.6 x 1,187 - 1,211 465 722 - 746 6.3 - 6.5

2013E 12.1 x - 12.4 x 1,492 - 1,523 1,027 - 1,058 8.9 - 9.2

EBITDA

2012 6.8 x - 7.0 x 1,657 - 1,691 465 1,192 - 1,226 10.4 - 10.7

EBITDA-Capex

2012 14.3 x - 14.6 x 1,627 - 1,660 465 1,162 - 1,195 10.1 - 10.4

Unit: EUR Millions

Market Multiples

Transaction Multiples

113.7 123.0

Multiple Interval Entreprise Value 2012 2013E

732.1 677.0

242.6 234.0

Equity Value Value/share

Source: Optimus; BPI Equity Research; Millennium BCP Equity Research; Market and Transaction Multiples Note: Range of multiples defined as ± 1% than the average Market and Transaction Multiples

TN4B: Optimus’ DCF Valuation – Free Cash Flow Calculation Optimus (Stand-Alone DCF Valuation)

Unit: EUR M illions

Turnover 677.0 684.0 697.0 706.0 720.1

% growth 1.0% 1.9% 1.3% 2.0%

EBIT 90.0 92.0 103.0 105.0 130.7

EBIT tax rate % 26.5% 24.5% 24.5% 24.5% 24.5%

EBIAT 66.2 69.5 77.8 79.3 98.7

Memo: EBITDA 234.0 238.0 245.0 252.0 257.0

as a % of capex 130% 120% 114% 116% 100%

(-) Net Working Capital -14.0 -5.0 -5.0 -4.0 -4.8

% Turnover -2.1% -0.7% -0.7% -0.6% -0.7%

(-) Capex 111.0 122.0 125.0 127.0 126.3

% Turnover 16.4% 17.8% 17.9% 18.0% 17.5%

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20 TN4C: Optimus’ DCF Valuation – Valuation Chart

Optimus Stand Alone DCF Valuation

744

(407)

327

1,071

58 722

0 250 500 750 1,000 1,250 1,500

NPV 13E-16E Present Value Terminal Value

Enterprise Value Net Debt Tax Credits Equity Value

Eur

Mi

ll

ion

Source: DCF Valuation; Optimus’ Financial Report

TN4D: Optimus’ Combined Stand-alone Valuations

600 700 800 900 1,000 1,100 1,200 1,300

Market Multiples Transaction Multiples DCF

Optimus Stand Alone Combined Valuation (Eur Million)

€668 M €782 M

€1,162 M €1,226 M

€722 M €1,058 M

4.4x –4.9x

6.5x –6.7x

4.7x –6.0x

EV / EBITDA

2012

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21 Exhibit TN5: Zon and Optimus Past Cash Flow Waterfall

265 407 308 311 (66) (150) 195 (43) (49) (55) 313 55 (123) (150) (43) (52) (100) 200 400 600 800 1,000 C ash 2010 EBITD A W or ki ng Ca pi ta l C ape x F ina nc ial De bt F ina nc ial Result s C ha nge in Equi ty Ta xe s, Extra or dinar y Re sults & O the rs C ash 2011 EBITD A W or ki ng Ca pi ta l C ape x F ina nc ial De bt F ina nc ial Result s C ha nge in Equi ty Ta xe s, Extra or dinar y Re sults & O the rs C ash 2012 Eur Mi ll ion

Zon Cash Flow Waterfall

Source: Zon 100 33 243 (105) (129) 61 (11) (98) (26) 200 400 C ash 2011 EBITD A W or ki ng Ca pi ta l C ape x F ina nc ial De bt F ina nc ial Result s Cha nge in Eq uity Ta xe s, Extra or dinar y R esult s & O the rs C ash 2012 Eur Mi ll ion

Optimus Cash Flow Waterfall

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22 Exhibit TN6: Zon and Sonaecom Market Cap Evolution

400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 D ec 1 4 , 2 0 1 2 D ec 2 1 , 2 0 1 2 Jan 2 , 2 0 1 3 Jan 9 , 2 0 1 3 Jan 1 6 , 2 0 1 3 Jan 2 3 , 2 0 1 3 Jan 3 0 , 2 0 1 3 Feb 6 , 2 0 1 3 Feb 1 3 , 2 0 1 3 Feb 2 0 , 2 0 1 3 Feb 2 7 , 2 0 1 3 M ar 6 , 2 0 1 3 Ma r 1 3 , 2 0 1 3 Ma r 2 0 , 2 0 1 3 Ma r 2 7 , 2 0 1 3 Ap r 5 , 2 0 1 3 Ap r 1 2 , 2 0 1 3 Ap r 1 9 , 2 0 1 3 Ap r 2 6 , 2 0 1 3 Ma y 6 , 2 0 1 3 M ay 1 3 , 2 0 1 3 Ma y 2 0 , 2 0 1 3 Ma y 2 7 , 2 0 1 3 Ju n 3 , 2 0 1 3 Ju n 1 0 , 2 0 1 3 Ju n 1 7 , 2 0 1 3 Ju n 2 4 , 2 0 1 3 Ju l 1 , 2 0 1 3 Ju l 8 , 2 0 1 3 Ju l 1 5 , 2 0 1 3 Ju l 2 2 , 2 0 1 3 Ju l 2 9 , 2 0 1 3 Au g 5 , 2 0 1 3 Au g 1 2 , 2 0 1 3 Au g 1 9 , 2 0 1 3 Au g 2 6 , 2 0 1 3 Sep 2 , 2 0 1 3 Ma rk et C ap ( E u r Millio n ) Zon Sonaecom

Zon and Sonaecom Market Cap, 14th_{December 2012- 8}th_{September 2013}

Merger announcement

Boards approve the merger

ERC provides a favorable opinion towards the merger

Zon’s and Optimus’

General Meetings approved the merger

Anacom provides a favorable opinion towards the merger

CMVM does not oblige Zon-Optimus to

launch a tender offer for 100%

CA does not oppose to the merger

+ €139M

Merger Register

+ €442M €1,311M

€703M

Source: Google Finance

Legend:

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23

References

Comissão do Mercado de Valores Mobiliários (CMVM). 2013. Zon-Optimus, SGPS, S.A. - Documento Informativo para efeitos da admissão à negociação na

Euronext Lisbon de 206.064.552 Novas Acções com o Valor Nominal Unitário de

EUR 0,01 emitidas no âmbito do Aumento de Capital Social realizado por efeito da

fusão

Damodaran, Aswath. 2002. Investment Valuation – Tools and Techniques for Determining the Value of Any Asset, Second Edition, New York: John Wiley & Sons, Inc.

Damodaran Online.www.stern.nyu.edu/~adamodar/

Google Finance website. 2012-2013. www.google.com/finance

Palepu, Krishna G., Healy, Paul M., Bernard, Victor L. 1997. Introduction to Business Analysis and Valuation,Cincinnati, Ohio: South-Western Publishing Co.

Ross, Stephen A., Westerfield, Randolph W., Jordan, Bradford D. 1995.

Fundamentals of Corporate Finance, Chicago: Irwin

Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffrey. 1999. Corporate