Positive market growth, strong competition and potential for ZON

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See more information at WWW.NOVASBE.PT Page 1/36

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 Our study of the company ZON Multimedia indicates a price target of 4.30€ (BUY), an upgrade of 20.4%, relative to the price of the 3th June 2011.

 ZON has a short term competitive advantage over its main competitor, PT, due to the difference in the technologies used (HFC vs FTTH) and due to the market structure (ZON has been the PayTV market leader,57.9% in 2010) since the Spin off.

 Free Cash Flow levels will improve significantly for the next years (€0M for 2011, +€83M for 2012), because of the end of the cycle of non-recurrent investment (Capex in long term contracts, the upgrade of the cable network, and Data Centre investments), initiated in 2008. Capex to revenues has been around 35%, and we estimate a reduction to values around 20% starting next year. EBITDA margin increase of 3% expected.

 PayTV market still growing (+9.7% FY10) and high potential in Broadband (+11% FY10 and penetration rate of 51%, below Euro-average).

 Triple Play strategy has been a success (55% of the ZON cable customers have 3play plans). It allowed a Blended ARPU change of + 15.2% since 2007 for €35.4 in 2010.

 International expansion to Africa (through DTH). Joint venture in Angola, with SOCIP, a company owned by Ms. Isabel dos Santos (shareholder of ZON, 10% of the shares) will allow the exploration of a country with high potential and low competition. After Angola, we believe that ZON will expand to other sub-Saharan African countries, due to the low incremental cost, since the satellite already installed is able to broadcast to these new countries.

ZON

M

ULTIMEDIA

C

OMPANY

R

EPORT

T

ELECOMMUNICATIONS

06 JUNE 2011

S

TUDENT

:

L

UÍS

C

ORREIA

[email protected]

Positive market growth, strong

competition and potential for ZON

The fight for the best fibre network

Recommendation: BUY

Price Target FY11: 4.30 €

Price (as of 5-Jun-11) 3.57 €

Reuters: ZON.LS, Bloomberg: ZON: PL

52-week range (€) 2.77-4.12

Market Cap (€m) 1,190.023

Outstanding Shares (m) 309.067 Source:Bloomberg

Source:Bloomberg

(Values in € million) 2009 2010 2011E

Revenues 823 872 905

EBITDA 268 289 327

Net Profit 45 38 81

EPS (€) 0.14 0.12 0.25

ROIC 6.1% 4.8% 8.3%

Dividend Payout 113% 135% 72%

FCF 23 -25 0

Dividend Yield 4% 4% 4% EV/Sales (x) 2.02 1.9 1.87 EV/EBITDA (x) 6.2 5.75 5.08 Source: Company data and Nova Equity Research Team

-0.4 -0.2 0 0.2 0.4

2009 2010 2011

ZON

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ZON MULTIMEDIA COMPANY REPORT

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Leader in the PayTV market with 58% market share (1.6million customers) , ranks in the 2nd position in the Broadband market (33% market share) , as well as the Fixed Phone one (18.6% market share). Nowadays, it faces great competition by the incumbent operator, PTC (Portugal Telecom), which makes the Telecoms market1 in Portugal very active and innovative.

These services are provided by means of its vast cable network, mainly based on the Hybrid Fibre Cable (HFC) technology. ZON also counts with Fibre-to-the-home (FTTH) (and with Direct to Home - DTH), and for this contributed the acquisition of TVTel (investment of around €98 million) in 2008, which had the greatest FTTH network at that time. Besides TVTel, ZON also acquired Pluricanal Leiria,Torres Vedras and Santarém, as well as BragaTel (investment around €45 million)2_{. ZON Multimedia has strongly invested in the last 3 years}

(around €80M per year), in order to have an upgraded network (Upgrade for EuroDocsis 3.0 technology), capable of providing better services. The PayTv service has the highest offer in terms of channels (either in SD3 or HD4) and an excellent Video club service, possible through the contracts between ZON Audiovisuals and some movie studios, like Universal. The exploration of the Audiovisuals unit allows not only the access to more than 5000 movies, more than the double of the main competitors’ service, but also important synergies regarding the premium TvChannels, like Sporttv or TvCine (participations in Sporttv and Dreamia, both with 50% of the capital).

ZON has been losing market share in PayTV, however has been capable of sustaining its revenue levels because negative net adds of the last quarters are not very significant due to the very large market share of Zon, and on the other

1

Further information on the Market Analysis section

2

The investment made in acquisition is analysed on the section Impact of TvTel and Grupo Parfitel on Zon

3

Standard definition

4

High Definition 0.0%

50.0% 100.0%

2Q08 1Q09 4Q09 4Q10

Pay Tv Market share

Grupo ZON TV CABO PTC

0 1,000 2,000 3,000

2Q08 1Q09 4Q09 4Q10

Pay Tv subscribers market ('000)

89%

6% 5%

% revenuesper business unit

Pay tv,broadband and phone

Cinema

100

60

35

20

2007 2008 2009 2010

Impact of Eurodocsis 3.0 Cost per Mbps (€) Exhibit 1;Source: ICP-ANACOM

Exhibit 2;Source: ICP-ANACOM

Exhibit 3;Source: Company data, 2010

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hand ARPU is increasing, so it balances the process. We highlight this considerable increase in the ARPU, achievable with a strong commitment in providing a good Multiple Play service. This type of service which consists in double or triple play is a way of captivate more clients and achieve more fidelity of the old ones. Also, this has allowed ZON to increase the blended ARPU (nowadays in 35.4€). In the multiple play area, ZON is the leader, and 55.2% of the cable clients are 3play customers. Lately, in 2010 ZON launched the new software IRIS, a new way of watching TV, with several new functionalities, like better VOD service, new box, allows interactivity between the computer (internet) and the TV, among others. This Triple play package will continue the consolidation in the leadership of the Multiple play market.

Besides these three main services, in 2009, ZON launched its mobile operator, based on a MVNO (Mobile Virtual Network Operator). This consists on the utilization of the Vodafone network, after an agreement between these two operators.

The other business units, Cinema and Audiovisuals, despite of generating lower margins, are strategically important. ZON Lusomundo Cinemas has 217 cinema

theatres spread by Portugal and it is seen as a cheap way of entertainment by

the portuguese people. It is the market leader in this segment and also leader in terms of innovation, having introduced the digitalization of the cinema screens and also the 3D digital platforms. Regarding ZON Lusomundo Audiovisuals, this area purchases and manages the movie transmission rights, allowing some advantages in otther business units, such as Cinema or the Video Club function, available in ZON box (PayTV). Finally, ZON started in 2009, the process of internationalization in Angola, through a joint venture ZAP, (30% ZON and 70% SOCIP) due to the good relations with Ms. Isabel dos Santos, shareholder of ZON. This project consists on DTH basis, where a satellite, similar to the ones used in Portugal, broadcasts to the African market. ZON’s management is considering the expansion for other african countries in the future, since it has low incremental costs. This way, with the same satellite, ZAP can broadcast for these new countries.

Exhibit 8: Shareholder Structure Source: Company data Shareholder Structure - 2010

Caixa Geral de Depósitos S.A 10.93% Grupo Banco Espírito Santo 11.07%

Kento Holding Limited 10.00%

Banco BPI, SA 7.76%

Telefónica, SA 5.46%

Cofina SGPS, SA 4.91%

Grupo/Fundação José Berardo 5.63%

Joaquim de Oliveira 4.84%

Ongoing Strategy Investments 3.45%

Estêvão Neves SGPS, SA 2.94%

Cinveste, SA 2.82%

Grupo Visabeira SGPS, SA 2.15%

SGC, SGPS, SA 2.00%

Credit Suis e Group AG 1.83%

Free float 24.21%

total 100.00%

45% 33%

14% 8%

Triple Play Market Shares

-2009

ZON PT Cabovisão others

30.8 32 33.8 35.4

2007 2008 2009 2010

Blended ARPU (

€

) - Zon

Exhibit 5;Source: Company data

Exhibit 7;Source: Company data 44% 38%

11% 7%

Triple Play Market Shares - 2010

ZON PT Cabovisão others

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Shareholder Structure

As we explained before, the creation of Zon was due to the spin-off between PT and PTM (now Zon). This leads to the fact that the shareholders of PT at that time were similar to the ones of the new company, Zon. So, we can find that Telefónica, Grupo Espírito Santo, Caixa Geral de Depósitos and Grupo Visabeira are present in the capital structure either in Zon or PT, with important positions. Then, in December of 2009, an important change in the shareholder structure occurred. Kento Holding Limited, owned by Ms Isabel dos Santos bought 4.53% of ZON. Currently, Kento has 10% of the ZON’s shares and this entrance of Ms Isabel dos Santos had great importance. We believe that the International expansion, of ZON, namely in Angola, was triggered by this event. The remaining shareholders and respective percentages are illustrated on table 8.

Also related to this topic, are the news and rumours, in 2009, about a possible merger between Sonaecom and Zon. It was not a good solution by Zon shareholders’ perspective. One of the reasons was that this merger could worsen the situation of PT (the main competitor) and the benefits gained by the shareholders of Zon with the merger would be balanced with some more competition that would threat PT. Even though the entrance of Ms Isabel dos Santos is important and is believed that she is favourable to a possible merger, we believe, according to the news published on the last two years, that a merger for the next months is unlikely. Moreover, the president of Sonaecom Paulo Azevedo (Sonaecom was the most interested part in the merger) told to the press in March of 2011, that in his opinion the hypothesis was in stand by and would not consider the option of the merger in the upcoming period.

The technology

The intense competition between the different operators (mainly ZON and PTC) can be noted not only on the advertisings and market shares evolution but also on the type of technology used and its investment for constant upgrades. The hot topic of the moment, regarding the Telecommunications sector, is the fibre optic and the different speeds and bandwidths offered by each one of the competitors. In this section, one can see a brief definition of the different technologies and how they work. First of all, the society is becoming more and more demanding Nielsen's Law of Internet bandwidth

Exhibit 9;Source:Useit.com,2009

Optical fibre

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(figure 95) regarding quality of TV services and Internet connection speeds and the previous technologies (copper) will not be capable of providing such characteristics.

A new trend that makes this new scenario possible is achievable through the use of the NGN (New Generation Networks). These ones are based on fibre optic lines (exhibit 10 ), strands of very clean and pure glass, with the thickness of approximately a human hair and able to move digital information for many kilometers. Nowadays, there are four big groups of access networks available in the market: Wireless (UMTS, LTE, Satellite and others); xDSL; Technologies twisted metallic pair (includes FTTN/C); Hybrid fibre-coaxial (HFC) and Fibre to the end customer FTTH/B/P. We are going to focus our attention especially on the HFC and FTTH, the technologies used by ZON, PTC and Sonaecom.

To start with, Hybrid fibre coaxial, the technology mainly used by ZON, mixes fibre optic cables on the main network, with coaxial cable on the distribution and access network. As it is illustrated on the graph below, ZON installs fibre optic cables from the Head End or Distribution centre until the optical nodes, located close to the neighbourhood and then, from the optical nodes to the home of the customer, a coaxial cable provides the services requested. The use of fibre optic on the backbones allows ZON the possibility of having more data carried than with the coaxial cables. Some more advantages are presented on table 12.

The HFC network is defined by the Data Over Cable Service Interface Specification (DOCSIS) which transports the digital information to a set of clients that belong to the same cell providing speeds up to 50Mbps. This speed was attainable with DOCSIS 1.0, but ZON made a big investment to update this system and the majority of the network is now equipped with DOCSIS 3.0.This new technology permits an evolution to 400Mbps per cell (which is divided by a set of

5

A Study conducted by Jakob Nielsen states that a high-end user's connection speed grows by 50% per year. The trend line has been verified along the years, as it is shown on graphic 9.

No of carriers

in downst

ream

No of carri ers in Upstr

eam

Downst ream (Mbps)

Ups trea m (Mb

ps) Version

EuroDOCSIS 1.x

1 1 50 9

EuroDOCSIS 3.0

4 4 200 108

8 4 400 108

Less expensive Ideal for Digital signal

Thinner Less signal degradation

Higher carrying capacity

Less power required Exhibit 11; Source:Useit.com,2009

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customers). This upgrade for EuroDOCSIS 3.0 has impact on the network’s

organization. For example, with EuroDOCSIS 1.0 the transportation of the data was made through one carrier, while with the update for 3.0, it is made with help of 4 or 8 carriers (depending on the speed – table 11) originating a change in cable spectrum management. A disadvantage of this service (and we can see many complaints about that on forums of the speciality) is that the broadband is divided by a set of customers, so the speeds achieved in Internet connection depend not only on a customer usage of the network, but on the usage of all the customers that are receiving data from the same cell. The variation of real speeds verified is higher than in other competitors because it also depends if the other users that “share” the same node/cell are heavy users or not. Sometimes, in order to prevent this high traffic on the same node (because the customers of that particular node are heavy users), ZON installs more nodes, in order to decrease the number of customers served by the same node. The objective is to normalize the traffic, allowing speeds close to the ones contracted.

Now, moving to the analysis of the technology used mainly by the competitors of ZON (PTC and Sonaecom), it is important to consider that Fibre-to-the-home (FTTH) is exclusively made by fibre optic. A connection based only on fibre optic is better (in terms of speed and reliability) than HFC and, FTTH is believed to be the big trend for the future.

This consists on the deployment of fibre optic from the central to the home of the customer. Unlike the HFC, with this technology, the digital information is carried 100% by fibre optic leading to more quality for the client. As it can be seen from the figure 13, there are many variants of the use of fibre, namely the term FTTx can be divided into: the above mentioned FTTH (fibre to the home) 100% fibre until the customer; FTTC6 (fibre to the curb); FTTB7 (fibre to the building); and FTTN8 (fibre to the node).

6

FTTC-the optical cable is left from 200 to 400meters of the home of the client Exhibit 13; Types of FTTx; Source:

Howstuffworks.com

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Once again, even though the majority of the access network of ZON is based on the technology HFC, ZON has also some points of access that permit the technology FTTH. The acquisition of TvTel by ZON, in 2008, potentiated the appropriation of TvTel’s fibre optic network which was the largest in Portugal, at that time9_{.Besides that, in 2010, ZON established a contract with Alcatel-Lucent}

where with the help of this French company, it will be installed a GPON network, based on the FTTH technology, in order to provide more bandwidth. All in all, there are some advantages and disadvantages regarding the use of these different technologies and from the corporate point of view, a strategic cost vs revenues analysis has to be made. A study conducted by the International Telecommunication Union (ITU) shows that the investment necessary in the short term for HFC networks is reduced, comparing with the introduction of FTTH. Implanting FTTH is more expensive in the short-run, because it is necessary to install the fibre optic over the last links from the existing fibre optic cables to the house of the client. Moreover, the cost of the last meters of fibre optic installation grows exponentially. This results in very large investments (it is required to replace the old cables by new ones), resulting in the abandonment of the old cables, since they get useless, and also very prolonged times to deploy. On the other hand, and this is one of the biggest advantages of ZON, the HFC network allows incremental changes in order to update the network (example of the upgrade from DOCSIS 1.0 to 3.0). This way, ZON can provide speeds up to 400Mbps for downloads (108Mbps for uploads) with relative low cost. Furthermore, by the fact of this technology being demand driven, whenever the speeds offered to a set of customers are below the normal, ZON can install more nodes, to bring back the speed per user to normal levels again, only on that “heavy users’ area”, enabling a significant costs saving.

Pay TV market

The Pay TV market in the last years has been changing significantly and it is expected to continue a sharp evolution in terms of quality of the contents

7

FTTB- the fibre optic ends at the building and then the remaining meters until reaching the house of the customer are covered through copper or coaxial

8

FTTN - the fibre optic terminates usually at the entrance of the neighbourhood and the remaining distance (from the

node to the customer’s house - few kilometres) is carried by copper.

9

This topic will be developed further on Exhibit 14; Source: John A. Brouse, Jr. Director of

Network Implementation Charter Communications, Inc.

1 2 3 4 5 6 7 8 9101112131415161718192021

C

o

s

t

p

e

r

M

il

e

o

f

O

u

ts

id

e

Plant

Years in Operation

Life-Cycle Cost

Analysis

HFC vs FTTH PON

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(constant upgrade in technologies), prices offered by the operators and finally in the number of subscribers. There is definitely a market before the Spin-off of PTM and another one after the Spin-off (2007). Today’s trends are being clearly defined by intense competition between the two main operators (ZON and PTC) and we believe that in the future, the domination of these groups will be even higher. Nowadays, there are different tecnhologies available in the pay tv market: CATV (Cable TV) by means of the hybrid fibre coaxial platform; DTH10

(Direct to home Satellite Television); Internet Protocol Television (IPTV) and digital terrestrial television broadcasting system (DVB-T); FTTH (Fibre to the Home); 3rd generation mobile networks; and the new Digital Terrestrial Television (DTT) which will have a deep impact from 2012 onwards, as we will see on the DTT section, further on.

For a better understanding of the global pay tv market, we believe it is important to make a brief explanation about the market, divided by each type of technology. Starting by the CATV, with the help of figure 16 , one can observe that the number of subscribers has been decreasing during the last 3 years (1.438million in 2010). In this platform, (unlike the global pay tv market as it will be shown a few pages next) a slowdown has been noticed and the forecasts for the next quarters are in line with the recent past, so we think that this segment will stay constant with a slight negative trend. These forecasts will have special impact in our valuation, since ZON is the company that has the majority of the market share and big part of revenues come from this segment.

Regarding DTH Satellite Television, the scenario is relatively different from the previous one. Through figure 16-A, a notorious evolution is seen, having reached the number of 670,000 customers. An interesting note for the report is the fact of the more developed regions like Lisbon or Oporto have much lower rates in this segment (DTH) than the less developed ones, like the regions of the interior of Portugal. For example, the percentage of subscribers of DTH in Lisbon is only around 10%, compared to 47% in CATV, and this is due to the fact that the cable network in the interior of Portugal is not so extensive and developed as it is in the big cities.

Moving to another technology, FTTH is currently the one with the biggest potential. Big investments have been made by the operators (especially PTC) and even by the government with the plan to equip Portugal with a large

10

DTH - available since 1998, it consists in an alternative to cable where the customers have to buy a satellite dish, a

receiver and an access card. 1,250

1,300 1,350 1,400 1,450 1,500

Subscribers of the cable TV service (thousands)

0 200 400 600 800

Subscribers of the DTH service (thousands)

Exhibit 16; Source:ICP-Anacom 0

1,000 2,000 3,000

2T08 1T09 4T09 1T10 4T10 Total subscribers of the PayTv

service Exhibit 15; Source: ICP-Anacom

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fibre optic network which. FTTH is more recent than the previous technologies analysed and it is yet in an early stage, not being offered all over the country. The service is offered by PTC, Sonaecom and ZON and there are currently around 143,000 customers. Once again, Lisbon and Oporto have the vast majority of FTTH subscribers (87%). We predict that in the next 5 to 10 years, the competition in this area (and also HFC) will be very high, and a big part of the other technologies’ clients will change to this one. So, the operator which can assure the best service in this segment will have a big competitive advantage, in our opinion.

Finally, there is the public telephone network (xDSL/IP) and three main competitors can be identified. Sonaecom, PTC and Vodafone .Using the table 17, it is possible to observe the fast expansion of this service. Driven by the strong action of PTC (Meo), nowadays, this market counts with around 523,000 customers and the tendency is to keep growing. As we said, the whole market has been evolving and a good indicator is the constant increase in the number of subscribers. (table 15)

Besides these services there is another one, offered by ArTelecom, which is FWA (Fixed Wireless Access), but we are not going to focus our attention beyond this note, since it is a small segment, a small operator, and ZON does not operate through this technology.

As a result of these different segments, we can understand better the global Pay Tv market. The data provided on tables 19 and 15 indicate the total number of Pay Tv subscribers and it is a clear demonstration of the evolution of this service along the quarters and good news for this industry. The growth was mainly driven by FTTH and xDSL/IP (even though ZON is not competing on this segment) which represented 97% of the new customers in the 4Q2010.

We are cautiously optimistic about the future of ZON, since we believe the market still has potential to explore.

A more detailed analysis has to be performed, in order to justify our optimistic reasoning. A very important statistic is the penetration rate, provided by ANACOM, which is visible in graph 19. By itself we can only have an idea about the rate of Portugal, around 48.5% (48.5 households subscribe Pay Tv service per each 100 households). However, when we add to the analysis the penetration rate of other countries, we can get a good perception about the growth potential, since Portugal is currently many percentage points below its european peers. We believe that even though Portugal is facing a severe crisis 0

100 200 300 400 500 600

2Q084Q081Q094Q091Q104Q10 Subscribers of the xDSL/IP e FWA

services (thousands)

Exhibit 19:Trend in total number of paytv subsbribers in terms of households Source: ICP-ANACOM,INE; unit:subscribers per 100 inhabitants

0 50 100 150 200

1Q074Q074Q081Q094Q094Q10 Subscribers of the FTTH service

(thousands) Exhibit 17; Source:ICP-Anacom

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(Portuguese people will be punished by the austerity measures and lose disposable income), the trend will be that Portugal will follow the more developed countries in terms of penetration rates and increase the actual level of 48.5%. In fact, Portugal has one of the highest values in respect to the time spent watching TV, so we believe the PayTv service has big importance in the day to day life of the portuguese family. Hence, this will be an area that will suffer few losses in terms of subscribers. Our only remark goes only to the case of a change for more lower income plans (and less premium channels) in case of financial distress of the families, leading to a possible decrease in ARPU levels.

PayTV market share

4Q10 4Q11 E 4Q12 E 4Q13 E 4Q19 E 4Q20 E 4Q21 E

Grupo ZON TV CABO

57.9% 53.9% 51.9% 49.9% 45.4% 44.9% 44.4%

PTC 29.9% 34.3% 36.6% 39.0% 45.7% 46.5% 47.4%

Cabovisão 9.4% 9.1% 8.8% 8.5% 6.7% 6.4% 6.1%

Optimus (ex-Sonaecom)

1.1% 1.1% 1.2% 1.2% 1.5% 1.6% 1.6%

AR Telecom 0.9% 0.8% 0.8% 0.7% 0.4% 0.3% 0.2%

Vodafone 0.7% 0.6% 0.6% 0.5% 0.2% 0.2% 0.1%

Others 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Impact of TvTel, Bragatel and Pluricanal

–

Leiria

and Santarém

As we described before, in 2008, Zon acquired Bragatel and Pluricanal Leiria and Santarém, regional TV and Internet providers. According to Zon, it was an important step that would allow not only market share expansion, but also synergies regarding TV content management, marketing and decrease of other administrative and general costs. 178 thousand homes passed, around 26 thousand Tv subscribers and 11 thousand Internet clients were the key indicators at that time. Besides the acquisitions of these companies, an investment of 48Million €, Zon also invested in the acquisition of another regional pay tv/internet provider company, TvTel. This company operated mainly in the region of Oporto, had 260 thousand homes passed in Oporto and 60 thousand homes passed in Lisbon, with particular emphasis to the cable network in Lisbon which was at that time, the vastest FTTH network in Portugal ( one of the main positive aspects with this acquisition in our opinion). 74 thousand was the number of total subscribers of this company, that allowed revenues around 21Million € in 2007

0 100 200

Portugal Madeira Alentejo Centre

Penetration of PayTV services by technology compared to total

households

Cable

DTH

FTTH

Others Source: Anacom and Nova Equity Research Team (estimates)

(Thousands) 4Q08Zon Impact of the acquisitions

4Q08Total

RGUs 2834.3 147.9 2982.2

Subscribers 1525.1 88.5 1613.5

TV Digital 495.8 0 495.8

Broadband 479 40 519

Voice 327.1 19.4 346.6

Voice-Mobile

7.2 0 7.2

depreciation rate 55.0%

tax rate 26.5%

PayTV Penetration rate in Europe Exhibit 20; Source:ICP-Anacom

Exhibit 21; Source:ICP-Anacom

Exhibit 22; Source:Company data

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and EBITDA margin of 40%. Table 24-A illustrates the impact of the acquisitions in terms of the main operational key indicators.

Grupo Parfitel units

homes passed (mn) 0.178 178000 revenues (1st semester 07)

6 Acquired by

(mn €)

48

Tv clients (mn) 0.026 26000 EBITDA (1st semester 07)

2.8 Acquisition= (9.7*EBITDA) Internet clients (mn) 0.011 11000 EBITDA margin 46.7%

However, in our analysis we will try to go in more detail and assess if these investments (particular emphasis for TvTel, because it was a bigger and more important acquisition) were a good decision and brought value to the shareholders of Zon. Even though we have very few available information, we tried to estimate the FCF of the group Parfitel (Bragatel, Pluricanal Leiria and Santarém) and Tvtel starting on the EBITDA that was known through the announcements when the acquisitions were performed. The main assumptions are illustrated on the tables on the left. We assumed the Capex would be similar to the depreciation, estimated net working capital around zero and got the gross investment. Finally, we obtained the FCF and used the DCF method in order to evaluate the projects. In this process, we analysed some scenarions, since it was difficult (due to the very limited information) to get enough data to perform a very detailed and accurate valuation. So, the valuation and different scenarios proposed for TvTel are based in some assumptions, made after research, such as the cost of fibre optic deployment per home11, or the increase of +30% in TvTel’s revenues, after the acquisition. This way a peremptory conclusion is not achieved by us. The impact will depend on the different scenarios verified, that we systematize on exhibit 25.

TvTel units

homes passed (Oporto) (mn)

0.26 26000 revenues (mn

€)

21 Deployment of fibre optic homes passed

(Lisbon- FTTH) (mn)

0.06 60000 EBITDA margin 0.4 Capex/home

(mn €)

0.0008

clients 0.074 74000 Acquired by

(mn €)

98 800€/home

11_{According to Anacom, in the paper “The evolution of NGN”, written in 2009, the cost of fibre optic deployment goes}

from €651 to €1600.

Grupo Parfitel

EBITDA (mn €) 4.94

D & A (55%* EBITDA) 2.72

EBIT 2.22

EBIT* (1-t) 1.63

Gross CF 4.35

Capex (approx D&A) 2.72

Δ NWC (approx 0) 0.00

Gross Investment 2.72

FCF (mn €) 1.63

WACC 6.5%

CF generated by Parfitel 25.14

NPV (without synergies) -22.78

TvTel

EBITDA (mn€) 8.40

D & A (55%* EBITDA) 4.62

EBIT 3.78

EBIT* (1-t) 2.78

Gross CF 7.40

FCF (mn €) 2.78

WACC 6.5%

CF generated by TvTel 42.74

NPV (without synergies) -55.26 Exhibit 24; Source: Nova Equity Research estimates

Exhibit 25; Source: Nova Equity Research estimates

Exhibit 24-A; Source: Nova Equity Research estimates

Exhibit 24-B;Source: Nova Equity Research estimates

With Synergies (some scenarios)

Scenario 1

Amount saved with the FTTH network 48

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A sensitivity analysis with different values for the WACC is presented on the appendixes (see table 59). Finally, one can see that the NPV can be either positive or negative, depending on the scenarios selected.

ZON vs MEO

A complete analysis to better understand and forecast the future must contain a description of the service provided by ZON ( what the strengths and weaknesses are) and also a comparison with the competitors. In this case we will study the principal competitor, PTC.

As we have seen, HFC is behind FTTH in terms of bandwitdth, but ZON provides connections up to 400Mbps (through Eurodocsis 3.0), which in our opinion is adequate for the necessities of portuguese customers, nowadays, and for the next 3 to 5 years. In fact, according to some opinions read in specialty journals/magazines (Exame Informática, PcGuia, TvDigital), the speeds achievable with FTTH are very high and do not bring value added for the majority of the subscribers (excluding the heavy users). However, in the future, this type of technology which allows for much higher speeds (up to 1gbps) will be required (due to the superior contents offered, like HDTV, 3D TV and a more demanding use of Internet in terms of speeds either down or up stream). In this manner, we emphasize that it will be important to compete hardly against PTC and develop a vast fibre optic network (FTTH)12. Here, PTC is more advanced, having already covered around 1Million households and planning to cover 600 thousand more for this year of 2011 (it will mean around 50% of the households of Portugal). Moreover, PTC was distinguished with an award, “Deployment and Operation of FTTH Networks”,by the FTTH council Europe, simbolizing the best and most innovative company deploying fibre optic in Europe.

Although PTC has these recognized advantages, ZON still has its trumps. The High Definition offer in ZON is more extensive, including more channels, than the competitors do. In the end of 2010, 20 HD channels made part of the ZON offer, more than the double of its competitors. Besides this, ZON was the pioneer in 3D emissions in Portugal. If we exclude the competitors’ FTTH (which is in a early stage in terms of subscribers – see market analysis above), ZON’s HFC is the most recommended technology for HD and 3D emissions, since HFC permits more quality than IPTV or xDSL. Considering the analysis of the Video Club, ZON is definitely the best option. ZON Lusomundo

12

ZON is making efforts to develop its FTTH network, as explained in the Technology section. ( Acquisition of TvTel, and new investments for the construction of more kms of FTTH are some examples.)

With Synergies (some scenarios) Scenario 2

Less competition and Revenues increase

+30% revenues Tvtel 27.3

new EBITDA 10.9

D & A (55%* EBITDA) 6.0

EBIT 4.9

EBIT* (1-t) 3.6

Gross CF 9.6

FCF 3.6

WACC 0.1

NPV -42.4

With Synergies (some scenarios) Scenario 3

Increase in EBITDA margin due to cost reduction

new EBITDA margin 0.45

new EBITDA 9.5

D & A (55%* EBITDA) 5.2

EBIT 4.3

EBIT* (1-t) 3.1

Gross CF 8.3

FCF 3.1

WACC 0.1

NPV -49.9

With Synergies (some scenarios)

Scenario 1+2

NPV 5.6

Scenario 1+3

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Cinemas and ZON Lusomundo Audiovisuals ( purchasing and managing movie transmission rights) make possible a clear advantage comparing to its competitors, and ZON offers around 5,000 movies on its Video Club. PTC only offers around half of them.

During our research, we found an article on Exame Informática, comparing the services based on fibre of ZON and PTC (Meo). Table 26 intends to summarize the study and some comments were added, in order to explain some points we think relevant. This is one more figure that will help us to understand the customer’s mind and its possible option for ZON or PTC.

The meo BOX is much more developed, functional and intuitive, allowing better experiences while recording (ZON box crashes frequently). Also, the software of ZON box is very slow (takes too many time to change the channel/zapping) and besides that Meo box has a PIP (Picture in Picture) system, which allows a pre-visualization every time we make zapping. Regarding the channels, ZON offers a greater number of options, but Meo has the exclusivity of two important channels (Benfica TV and SIC K).

To conclude, ZON has more apelative packs in terms of prices, since the plan that provides 30Mbps costs 45€/month, while PTC the option with similar price (43€/month) only provides 12Mbps.

The final result is very balanced. The overall winner is PTC (meo), but the decision depends on many personal characteristics.13_{We highlight the most}

important disadvantage of ZON’s HFC: “HFC is based on hundreds of subscribers sharing the same cell. So, the speed connection depends on how many subscribers are “using” the cell, leading to very low quality in “rush hours” “.One more factor that influences the perception of the client is the advertising campaigns, and according to table 27, PTC is the leader. This is the strongest reason why PTC is conquering so many market share.

DTT (Digital Terrestrial Television)

The European Union decreed that in 2012 the analogue Television signal will be switched off. This measure will have impact in the Pay Tv market, since the majority of the families that do not subscribe Pay Tv, will have to make an investment (around 50€ to 200€), in order to watch Television via digital

13

Personal tastes due to the offer of different channels; VOD with more movies vs VOD more functional and without crashing; Depends on the zone of the subscriber (especially with ZON, there are wide variations on speed)

10 points to divide between ZON and

PTC Coluna1 ZON PTC (meo)

TV Quality of image 6 4

Quality of sound 4 6

Recording (DVR) 2 8

Video club (VOD) 4 6

BOX 2 8

Channels 6 4

Internet Bandwidth 4 6

Router/Hub 8 2

Installation 8 2

Energy

consumption 4 6

Exhibit 26; Zon vs Meo Source: Exame Informática

nº188

Scenario 2+3

new EBITDA margin 0.45

Increase in revenues 27.3

+30% revenues Tvtel

new EBITDA 12.3

D & A (55%* EBITDA) 6.8

EBIT 5.5

EBIT* (1-t) 4.1

Gross CF 10.8

FCF 4.1

WACC 0.1

NPV -35.5

Scenario 1 + 2 + 3

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signal. In Portugal, the switch off will occur on the 26th April14, and this event can open some opportunities for the entrance of more clients in the PayTv market. With Digital Tv, the user will benefit from better image and sound quality in the broadcasting, more interactivity (EPG- Electronic Program Guide) and more channels, in HD. The reason why this change provides so many improvements regards with the digital compression. The “space” (radio spectrum) occupied by one single channel in analogic signal, corresponds to four in digital TV leading to more free “space”, which will be used with the above mentioned new functionalities.The license of deployment of the digital network was attributed to PTC15

In our opinion, some of the households will analyse the Pay Tv market before making the investment16 necessary to have access to the Digital Tv, so we believe that low cost plans can have some potential for these cases. This would lead to a possible decrease in ARPU, but at the same time, RGU’s would increase (in a greater proportion), leading to more revenues.

Fixed broadband

Fixed Internet services are provided by means of three different technologies: ADSL; cable Modem; and FTTH/B. Through graphic 28, we see that this market is growing in a strong pace, having reached the number of 2,104,334 subscribers in the 4Q2010 (2.5% more than the last quarter and 10.9% relatively to the last year). Around 98% of the clients access it via broadband, while a decreasing minority uses dial up. We forecast a continuous decrease in dial up connections tending to zero, because the alternatives in the market, offer other type of conditions and dial up connections will become obsolete. Thus, the significant variation in the fixed internet services is due to the broadband connections. In the 4Q2010, 51.5% of these clients accessed via ADSL, while 41.1% via modem cable and finally others (includes FTTH/B) 7.4%. Both ADSL and cable modem acesses achieved double digit growth (emphasizing the big potential of this market), however the more expressive result was obtained by others with a growth of 179.1%, last year. This is due to the strong investment of the operators in the FTTH/B sector, and we are

14

The switch-off has already started in some zones, like Alenquer, in order to test the impact and to prepare the population for the DTT.

15

Another company (AirPlus TV, from Sweden) competed with PTC for the deployment of the digital network, but the chosen one was PTC.

16

Televisions with digital sintonizer DVB-T and able to decode signals in MPEG4/H.264 do not need the investment. (Televisions bought before 2010, probably do not possess this characteristic)

Top Advertisers - Share of Voice (%)

PTC 4.8

Modelo/Continente 4.4

Unilever 4.2

Pingo Doce 2

Zon 1.6

Danone 1.4

EDP 1

BCP 1

Exhibit 27; Source: Marktest

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convinced that this technology will achieve considerable market shares in the short run. In the long run we predict a massive implementation of the fibre, leading to a decrease in cable modem and ADSL accesses. Our believe is supported by some data drom the FTTH council that estimates a rate of 25.7% (household penetration), in 2015. (Graph 29)

In terms of market shares, according to table 32-B PTC is the leader, with 46.8%, followed by ZON which counts with 33%. The main point here is the fact that both PTC and ZON are gaining even more market share (PTC in a stronger pace), while the other operators ( Cabovisão, Optimus, Vodafone, Artelecom and Onitelecom) are losing it. This indicates a trend of even more concentration of the market in the two big operators. More data indicating the huge potential for this market comes with the comparison of penetration rates (by % of population) between Portugal and its European peers. From table 33, one can see that Portugal is below the european average, leading to a perspective of approximation for the next years. Of course we see this as an opportunity for ZON to expand its number of RGU’s and its revenues. In our opinion, also proved by a study made by ANACOM, ZON Internet service is a good option in the market, capable of collecting more clients. Next, we show our conclusions based on “Estudo de Aferição da Qualidade do Serviço de Acesso à Internet de banda larga” by ICP – ANACOM and also ESCSI Portugal “A satisfação do cliente no sector das comunicações”. Tables 30 and 31 provide information about the Index of Relative Speed Connection17_{and ZON has good}

performances. On the first table we see a slight advantage for SAPO (PTC) in what concerns to downloads for contents located in US servers. However, through the second table (measures the IVR along the day) ZON proves to be better than PTC achieving values around 80%, while PTC 70%. One note goes to the negative performance of Clix, clearly below the average. A similar study was made but for Upload speeds. On this topic, ZON clearly beats Sapo (PTC), proving to be the best option in the market.

Moving to the customers’ opinion, the global index of satisfaction ( study conducted by Obercom) indicates that in an overall analysis, PTC is the operator with best opinion in the clients’ base. PTC achieves a classification of 7.07 (out of 10), while ZON 6.9, Sonaecom 6.86 and Cabovisão 7.06. The detailed ponctuation (divided by each variable) is presented on table Q (fazer tabela com resumo das págs 383/84 do ESCSI report).

17_{IVR = )Average real speed connection/maximum speed connection announced) x 100}

35.80% 33% 29.50% 28.40% 25.70% 23.70% 20.10% 18.70% 17.50% 17.30% 17.20% Slovenia Sweden Norway Denmark Portugal Slovak Republic Finland Netherlands Bulgaria Russia France

FTTH Household penetration in 2015 (estimates) 0% 20% 40% 60% 80% 100% Cab o vi são … Cl ix 24Mb p s Sap o 4Mb p s Vod afon e … Zo n 10Mb p s Cab o vi são … Cl ix 24M b p s Sap o 4Mb p s Vod afon e … Zo n 10Mb p s USA National

IVR - downloads (%)

Exhibit 31;Source:ICP-Anacom Exhibit 29; Source: ICP-Anacom

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Turning our attention to another factor, the percentage of customers that presented a complaint during the year of 2009. This factor is illustrated on table 32, and ZON leads with the highest percentage of customers’ complaints18. However, the company from 2008 to 2011 has been improving (it was one of the big priorities for the strategic plan 2008-2011) and nowadays reduced significantly this category, having been recognized by Deco Proteste, as the company with less complaints. Besides this, ZON also won the prize “Call Centre Trophy 2010”, a clear recognition of the effort made to improve the relation with the customer.

Broadband market share

4Q10 4Q11 E 4Q12 E 4Q13 E 4Q19 E 4Q20 E 4Q21 E

Grupo PT 46.8% 46.7% 46.7% 46.8% 48.3% 48.5% 48.8%

Grupo ZON TV Cabo

33.0% 33.8% 34.5% 35.0% 37.4% 37.8% 38.2%

Cabovisão 8.0% 7.7% 7.4% 7.1% 5.3% 5.0% 4.7%

Grupo Sonae.com

6.4% 6.2% 6.0% 5.8% 4.6% 4.4% 4.2%

AR TELECOM 1.1% 1.0% 0.9% 0.8% 0.2% 0.1% 0.0%

Vodafone 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

ONITELECOM 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

Others 0.6% 0.6% 0.5% 0.5% 0.2% 0.1% 0.0%

FIXED TELEPHONE

This type of service can be provided by one of the following technologies: Copper wires, used by the incumbent operator PTC; Coaxial cable; Fixed Wireless Access (FWA); FTTH; or Hertzian links. In this segment, PTC is the main leader with 59.5% market share, while Zon is ranked in the 2nd position with around 20%, meaning 778 thousand clients.

According to ANACOM, in the end of 2010, there were around 4.4Million Fixed telephone accesses registered, meaning a penetration rate of 48%, value still below the European average and with some growth potential. The trend in the last years was negative due to the massive implementation of the cell phones ( 148% penetration rate) which made some families to cancel the fixed telephone subscription. However, with the increasing penetration of Triple Play packages (55.2% of Zon clients are 3Play) this service gained more subscribers. Together with the latter one, this inversion of trend (last year, the fixed telephone market grew) is explained by the simple and cheap tariffs

18

The report was issued in 2009, and in the last two years, Zon made a huge effort to improve this result. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000

4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 2Q10 ADSL subscribers

modem/cable subscribers 23%

31.80% _29.40%

Grupo PT Grupo Zon Grupo

Sonaecom Percentage of customers complaints

Exhibit 32 – B; Source: Anacom and Nova Equity Research team (estimates)

Population( 2010 Est. )

Intern et Users (millio n) Penetrati on(% Populati on) User Growth(20 00-2010)

Denmark 4.75 86% 144%

Finland 4.48 85% 133%

France 44.63 69% 425%

Germany 65.12 79% 171%

Greece 4.97 46% 397%

Ireland 3.04 66% 288%

Italy 30.03 52% 128%

Netherlans 14.87 89% 281%

Norway 4.43 95% 101%

Portugal 5.17 48% 107%

Russia 59.70 43% 1826%

Spain 29.09 63% 440%

Sweden 8.40 93% 108%

UK 51.44 83% 234%

…

Total Europe

475.0 58.40% 352%

Exhibit 32; Source: Obercom

Exhibit 32-A; Source: ICP-Anacom;ADSL vs Modem

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charged by the fixed telephone providers, free calls and other functionalities like costs control or privacy politics.

Mobile

There are five operators in the market, the big ones Vodafone, TMN (PTC group), Optimus (sonaecom) and two more recent, CTT and ZON. This is a market strongly influenced by the actions of the regulator ANACOM, and until 2007 it was required a huge investment in order to acquire the license and respective infrastructure in order to provide mobile voice services. However, in 2007 a big step in order to increase competition was made with the possibility of using radio frequencies of the existing operators and emerged the MNVO (Mobile Virtual Network Operators) such as CTT and in 2008, Zon, establishing a 5 year contract with Vodafone.

Portugal is a country where the mobile phone services industry is very developed and there are more cell phones than people. This results in a very high penetration rate, well above the european average, as it is shown on graph 35-A. In the 4Q2010, there were 16.47 million mobile devices (including mobile phones and USB wi-fi devices). The small position of Zon in the market, in our opinion, is due to the very intense competition, recent entrance in the market and we believe it will be very difficult to achieve high percentages. One of the main characteristics of this market is the choice of the operator that is influenced by the friends’ and family’s operator, since recently launched tariffs like

Extreme,Moche or Tag allow free calls and SMS/MMS between people that have the same tariff. This leads to a more difficult change in the market structure difficulting the business to small operators which do not possess vast network of clients.

On the other hand, good news was announced when Anacom declared lower termination rates19, aspect also mentioned in the MoU (Memorandum of Understanding), established by the Troika, (36). This measure will be applied

until the 3rd quarter of 2011. This will have impact in terms of revenues (in our opinion, Zon will be better off) since Zon will have to pay less when its users call to another operator. PT was against this change and in general terms we can affirm that this measure will improve the competition and will benefit the small operators. With this reduction, Portugal which was one of the countries with highest termination rates will return to a medium position, according to 37. This

19

Termination rate –charges that one operator has to pay to terminate a call in another operator’s network; In paper“

How mobile termination charges shape the dynamics of the telecom sector”, by Olivier Bomsel and his team 73% 75% 77% 77% 84% 86% 94%

Fixed Voice Penetration in Europe,2009 (%)

Source: Zon data

Termination rates (prices €)

Dec-09 0.065

May-10 0.06

Aug-10 0.055

Nov-10 0.05

Feb-11 0.045

May-11 0.04

Aug-11 0.035

Source: Anacom

4Q08 4Q09 4Q10

PT 65.4% 62.9% 61.6% Alternative

Providers

34.6% 37.1% 38.4%

Sonae.com 16.1% 15.0% 13.7% Grupo ZON 2.7% 6.5% 9.3% Vodafone 5.5% 7.0% 7.1% Cabovisão 3.3% 3.1% 3.3% ONITELECOM 3.2% 2.9% 2.7% AR Telecom 2.4% 2.1% 1.9% Colt Telecom 0.9% 0.3% 0.3% Others 0.5% 0.3% 0.3%

Exhibit 34; Source: Company data

Exhibit 35; Source: ICP-Anacom; Fixed phone market shares

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way, Zon, with 107 thousand mobile clients in the end of 2010 is expected to slightly increase its client base (Zon mobile 8- tariff which charges 8cents/minute was recognized by Deco Proteste) and last year was a good example with an addition of around 35 thousand clients. Regarding the mobile broadband we highlight the innovative concept of Zon@Fon which allows Zon clients to access to more than 250 thousand wi-fi hotspots and also the offer of an USB wi-fi device with 100Mb included in order to captivate clients and respond to similar actions of the competitors.

Finally, some important actions will occur in 2011 in terms of mobile market, such as the auction of the 4G network which will operate with LTE ( Long Term Evolution) allowing speeds of 100Mbps download and 50Mbps upload. This auction is expected to generate a cash flow of 462Million € to Portugal. Also present on the MoU, is the facilitation of the entrance of new competitors through the use of new radio frequencies. This measure means more MVNO’s can enter the market and therefore threat the market growth of Zon.

Exhibit 35-AService Penetration rate EU27; Units: Subscribers per 100 inhabitants; Source: Anacom

Cinemas and Audiovisuals

These business units are closely linked since ZON Lusomundo Cinemas manages the 217 cinema theatres spread by Portugal, while ZON Lusomundo Audiovisuals purchases and manages the movie transmission rights. The margins obtained with these units are not so high as the ones from the core activity (Pay Tv, Broadband and Voice), but from a strategic point of view ZON Lusomundo is important in the company’s project. The existence of a strong sector in the Audiovisuals area allows advantages to other units of ZON, such as ZON

55%

Socoram a 16% UCI 14%

New Lineo Cinemas

6%

Outros 9%

Spectators 2011

0 0.02 0.04 0.06 0.08 0.1 0.12

Average Mobile Termination rate - 2009

55% 18%

13%

7% 8%

Gross revenues 2011 - Cinemas

Zon Socorama UCI

New Limeo Others

Exhibit 37; Source: Eurostat

Exhibit 38; Source: ICA (Instituto Cinema e Audiovisual)