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Millennium investment banking Zon Optimus

Zon Optimus Valuation update

Avoiding euphoria… but downside is limited

Alexandra Delgado, CFA Equity Analyst

+351 21 003 7827 [email protected]

Neutral (Medium Risk) Target (€)YE14: 5.30 Price (€): 5.17

Upside: 3%

No. Shares (mn): 515

Financials Market Cap (€ mn): 2,663

Revenue (€ mn) 1,621 1,591 1,465 1,481 Avg Daily Vol 3m (k): 800

EBITDA (€ mn) 543 556 497 516 Reuters: ZONOP.LS

Net Income (€ mn) 106 124 95 120 Bloomberg: ZONOP PL

EPS (€) 0.21 0.24 0.19 0.23 Prices as at 06-11-2013

CEPS (€) 0.91 0.93 0.81 0.84

DPS (€) 0.00 0.12 0.19 0.23

Ratios

RoIC (%) 7.5 8.8

RoE (%) 7.5 9.2

Net Debt/EBITDA (x) 2.1 1.8

Net Debt/EV (%) 27.6 26.2

Valuation

P / E (x) 27.9 22.1

EV / Revenues (x) 2.5 2.5

EV / EBITDA (x) 7.5 7.0

Dividend Yield (%) 3.7 4.4

Source: Millennium investment banking

2011 2012 2013E 2014E

50

70

90

110

130

150

170

190

210

Nov-12 Feb-13May-13Aug-13

ZON Optimus

PSI20

� We have fine-tuned our estimates for Zon Optimus and moved our valuation to the end of

2014. We value Zon Optimus at €5.30 per share (YE14), revised from our previous

calculation of €4.30 (YE13), meaning a 23% upward revision. Given the 3% upside on the

stock we rate it as Neutral (Medium Risk).

� The upward revision of domestic EBITDA forecasts (better Optimus margin plus higher

operational synergies) increased our price target by €0.20/ share. Better estimates for Zap

added €0.05/ share (our Zap valuation stands for an 8.1x EV/EBITDA 2014E). The change in

valuation of the Sport TV stake (previously included in the domestic business DCF, now

valued at €30 mn, 1.8x EV/EBITDA 2014E) increased our price target €0.25. Finally, moving

our valuation to the end of 2014 has revised upwards our valuation by €0.50.

� After 9 months since the announcement of merger agreement, Zon Optimus has finally

emerged in late August. The next immediate challenge is to execute the integration and

start delivering synergies. The rapid launch of the quadruple-play indicates integration

should be carried out quickly.

� On the synergies front, we remain relatively conservative. In terms of operational (opex +

capex) synergies, we have raised our forecast from €375 mn to €400 mn, top of the interval

provided by the companies. We remain however cautious in terms of revenue synergies,

and for now our valuation does not include any. The business segment presents an

interesting opportunity, given the low share of Zon Optimus in this market, but the

downward adjustment of prices should be great and shrink additional revenue.

� The future seems bright for Zon Optimus. The new company has interesting operational

synergies to capture and some potential to increase market shares. Market will remain

tough, but competition should not dramatically worsen. Finally, the possibility to further

diversify geographically remains a wildcard. Bottom line, our valuation doesn’t give much

upside to Zon Optimus. But it doesn’t give much space for downside either: valuation of the

domestic business does not include revenue synergies; Zap valuation is conservative.

7 Nov 2013

COMPANY U

PDATE

PORTUGAL

TELECOM

Page 2 of 33

Millennium investment banking Zon Optimus 7 November 2013

Index

Investment case 3

Valuation changes breakdown

Zon Optimus Headlines

Impact of deconsolidation & accounting changes

Zon Optimus EBITDA

Zon Optimus EBITDA margin

Main valuation drivers

Capex revision

Valuation drivers – Zap (Africa)

Mib Merger synergies vs. Merger project

Synergies included in Zon Optimus model

Free Cash Flow

DPS estimates

Net Debt 2012-2022E

3Q13 Income Statement

Valuation 18

Sum-of-The-Parts

Sum-of-The-Parts’ revision

DCF – Portugal

DCF – Zap (Africa)

DCF assumptions - Portugal

DCF assumptions - Africa

Estimates Revisions 22

Domestic business KPIs revision

Income statement revisions

Main Headlines revisions

Consolidated Balance Sheet revisions

African business revisions

Operating Performance 26

Main Headlines

Consolidated income statement

Operating & Financial margins

Financial Balance Sheet

3Q13 Earnings Preview 28

Income Statement

KPIs - Portugal

Cash Flow Items

Quarter Schedule

Quarter Seasonality

Sector Multiples 30

Consolidated Figures 31

Income Statement


Cash Flow Statement

Leverage Indicators

Disclosures and Disclaimer 32

Page 3 of 33


Investment Case

Summary:

After 9 months since the announcement of merger agreement between Isabel dos Santos and Sonaecom, Zon

Optimus has finally emerged in late August. Zon Optimus will be able to generate synergies in a saturated

Portuguese market and the improved competitive position as an integrated player should bring some market share

gains (mainly on the business segment). Zon Optimus has a larger scale that will bring a stronger cash generation

and therefore additional capacity to invest in infrastructure and R&D and compete with incumbent Portugal

Telecom. The company enjoys a stronger BS (2.1x Net debt-on-EBITDA 2013E) and potentially a better access to

debt markets and funding. It also enjoys a very strong momentum: cable assets value is on the rise and

consolidation buzz makes the telecom sector attractive.

The launch of the much anticipated quad-play1, based on Zon’s fixed network and Optimus’ mobile network, was

two weeks ago. The next immediate challenge is to execute the integration and start delivering synergies.

The rapid launch of the quad-play (3 weeks after new governing bodies were elected) is a sign that companies did

their homework and are well prepared for the merger; integration should therefore be carried out quickly.

It is not all roses though. While PT has decreased pricing competition in the last year (after getting a big chunk of

Pay TV market), Vodafone is more aggressive than ever on the triple play front as a way to defend its mobile

base. We doubt the announced FTTH investment in 500k houses, but the deep-pockets operator won’t go down

without a fight. On this topic, we believe PT opening its FTTH network to Vodafone would possibly result in a more

rational triple play pricing from Vodafone. Anyway, the fact is the market already enjoys a very strong competition in

every consumer segment; we’re not expecting that pressure to ease in anyway but we’re not expecting much worse

either.

On the synergies front, we remain relatively conservative. In terms of operational (opex + capex) synergies,

we have raised our forecast from €375 mn to €400 mn, top of the interval provided by the companies in the

merger project. The fact is both companies stated figures were conservative, so we expect the maximum estimate

to be achieved “easily”. We remain however cautious in terms of revenue synergies, and for now our valuation

does not include any. In the consumer segment, we believe Zon Optimus has potential to gain market share in

mobile, but prices will remain quite pressured (now with Vodafone as the triple play challenger), so with limited

impact on revenue. The business segment presents a much more interesting opportunity, given the low share of

Zon Optimus in this market2. However, the downward adjustment of prices should be much greater here, shrinking

the amount of additional revenue. New executive team is preparing a strategic plan that should be disclosed early

next year; additional information on revenue synergies and market share gains should be presented then.

We’re assuming Zon Optimus will have a 100% payout throughout the explicit period, which means paying €0.19

DPS next year, and a 3.7% yield at current prices. Given the low leverage of the company, the Board has the

room to be more generous. The company may however choose to be more aggressive on the

internationalization front instead of raising shareholder remuneration. The internationalization strategy is another

topic that should be addressed in the company’s strategic plan.

We value Zon Optimus at €5.30 per share (YE14). With run rate savings reaching c. €50 mn (top of interval

provided by companies) from FY16, we calculate Zon Optimus free cash flow may reach c. €248 mn in FY16,

1 ZON4i was launched on October 22nd. For more information on this product, please refer to the section “Other topics” of this report. 2 Zon Optimus has c. 26% of domestic market share, but only c. 15% share in the business segment. The business segment is estimated to represent €2.2 bn (out of €5.5 bn total telecom market): a 1p.p. increase in market share can represent approx. €22 mn in revenues.

Page 4 of 33


which compares to €180 mn in FY12 (pro forma, exc. spectrum payment and securitization). Our valuation entails:

revenue CAGR 12-16E of 0.6%, EBITDA (inc. synergies) CAGR 12-16E of 3.6% and FCF CAGR 12-16E of 8.3%.

Our figures for Zon Optimus changed significantly due to reporting changes. We highlight that joint ventures (Zap-

Finstar, Dreamia, SportTV) will be deconsolidated in 3Q13 ahead of IAS 28 that is effective after January 1st

20143. In addition, Zon will capitalize subscribers’ acquisition costs, as Optimus already does. An estimate of the

impact of these changes is summarized on a table in page 7. With the deconsolidation, we now value stake in Sport

TV at €30 mn (stands for 1.8 EV/ EBITDA 2014E), while before it was included in the domestic business DCF.

Despite deconsolidation, we will continue to value Zap through a DCF in Euro, for now.

The upward revision of domestic EBITDA forecasts (better Optimus margin plus higher operational synergies)

increased our price target by €0.20/ share. The upward revision of estimates for the African business Zap added

€0.05/ share (our Zap valuation stands for an 8.1x EV/EBITDA 2014E). The change in valuation of the Sport TV

stake (previously included in the domestic business DCF, now valued at €30 mn, 1.8x EV/EBITDA 2014E)

increased our price target by €0.25/ share. Finally, moving our valuation to the end of 2014 has revised upwards

our valuation by €0.50.

The future seems bright for Zon Optimus. The new company has interesting operational synergies to capture

and some potential to increase consumer (mobile) market share and more significantly business segment market

share. Market will remain tough, but competition should not dramatically worsen. Management has a deep

knowledge of the companies and the sector. Shareholder structure is stable, so management has time to deliver

goals. Finally, the possibility to further diversify geographically remains a wildcard. Bottom line, our valuation

doesn’t give much upside to Zon Optimus stock. But it doesn’t give much space for downside either:

valuation of the domestic business does not include revenue synergies; Zap valuation is conservative.

Our valuation:

We have fine-tuned our estimates for Zon Optimus and moved our valuation to the end of 2014.

We value Zon Optimus at €5.30 per share (YE14), revised from our previous calculation of €4.30 (YE13), meaning

a 23% upward revision. Given the 3% upside on the stock we rate it as Neutral (Medium Risk). Our price target

implies a 7.4x EV/ EBITDA 2014E / 6.8x adjusted EV/EBITDA 2014E4.

3 IAS 28 (2011 revision), “Investments in associates and joint ventures”, is effective in the EU for annual periods beginning on or after January 1st 2014. IAS 28 prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. 4 Assuming €40 mn run rate opex synergies flowing into 2014 EBITDA.

Page 5 of 33


Main changes in our estimates:

+€0.50

+€0.25

+€0.05

€5.30

€4.80

+€0.20

€4.30

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Target YE14

Move to YE14

Target YE13

Other revisions

Estimates fine-tuning (Africa)

Estimates fine-tuning (Portugal)

Original Target YE13


We have fine-tuned our operating estimates for Portugal. On the revenue side, we have revised upwards our

estimates both for the Audiovisual and the Telecom businesses. These were triggered by better performances in

1H13. We are now forecasting for Audiovisual revenue: -3.0% YoY in FY13 and +1.2% in FY14. As for Telecom,

our new estimates are: -3.3% in FY13 and +1.0% in FY14. EBITDA estimates before synergies were revised

upwards by an average of 2.0%, in line with topline revision. This stems for a better than expected margin in

Optimus: EBITDA in 1H13 dropped only 0.4% YoY (inc. €1.3 mn merger costs). In addition, we increased our opex

& capex synergies coming from merger to €400 mn (previous valuation included €375 mn). We are now

considering the domestic business will deliver an EBITDA margin of 33.9% in FY13, growing to 39.0% in FY22

(broadly in line with previous estimates). Capex estimates suffered little change (apart from the deconsolidation of

joint ventures). We estimate Zon Optimus should spend c. €265 mn in capex this year (exc. joint ventures), 18.1%

of revenues; the weight of capex on revenues should slowly decline to c. €16% of revenues in perpetuity. In

summary, increase in domestic EBITDA forecasts increased our price target by €0.20/ share.

Zon will deconsolidate joint ventures (Zap-Finstar, Dreamia, SportTV) already in 3Q13 ahead of IAS 28 that is

effective after January 1st 2014.

We now value the 50% stake in Sport TV individually, at €30 mn equity value, which stands for a 1.8x

EV/EBITDA 2014E multiple. The change in valuation of the Sport TV stake had a positive impact on our price

target: €0.25/ share. This is due to the fact that Sport TV’s contribution to the Domestic Business DCF was negative

(negative EBITDA – capex) and now we attribute a positive value to this financial stake.

In what concerns the African business (Zap) our revision of estimates added €0.05/ share to Zon Optimus

price target. Zap’s performance continued to be a good surprise in 1H13, combining strong growth (+52%) with

impressive profitability (30% EBITDA mg). We have accordingly raised our 2013 estimates (to €154 mn revenue,

with a 27.5% EBITDA margin), but broadly kept our estimates in the subsequent years. We highlight that despite

deconsolidation, we will continue for now to value Zap through a DCF in Euro. We attribute a value of €106 mn to

Zon’s equity stake in Zap. Zap’s enterprise value stands for an 8.1x EV/EBITDA 2014E.

Finally, moving our valuation to the end of 2014 has revised upwards our valuation by €0.50, to €5.30/ share.

Please refer to tables in pages 22 to 25 for a detailed analysis of our estimate revisions.

Valuation changes breakdown

Page 6 of 33


Valuation drivers:

- Revenue: we forecast the new company will generate €1,465 mn pro-forma5 revenue in 2013, minus 4% than

the previous year, as a consequence of topline pressure in the domestic market, both in Telecom (-3.3% YoY)

and in the Audiovisual segment (-3.0% YoY). For FY14 we estimate a positive 1% revenue growth on the back

of the stabilization of the domestic market. Revenue CAGR 2012-22E entailed by our model is 1.7%.

- EBITDA margin: we estimate synergies impact from 2015 (in 2013 & 2014 integration costs eat up synergies)

together with topline growth, will allow margin to advance to 36.9% in FY15 and 38.1% in FY16 from last

year’s 34.0%; in the subsequent years we do not forecast a significant change in margin (39% EBITDA margin

in perpetuity). We highlight that we estimate a margin of c. 40% for the telecom business in perpetuity, which

compares to 43.5% for PT’s domestic business.

- Capex: we estimate capex as % of revenues dropping to 16% in FY22 from 18% in FY13.

Revenue 1,521 1,465 1,481 1,520 1,561 1,600 1,791

YoY -4% 1% 3% 3% 3% 2%

Cash costs exc. int. costs 1,035 956 944 951 966 987 1,092

Integration costs 12 20 8

EBITDA 517 497 516 561 595 613 699

EBITDA mg 34.0% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0%

Net Income 124 95 120 163 192 205 289

EPS 0.24 0.19 0.23 0.32 0.37 0.40 0.56

Capex 252 266 266 265 265 266 285

Capex as % of revenues 16.6% 18.1% 17.9% 17.4% 17.0% 16.6% 15.9%

EBITDA - Capex 265 232 251 296 330 347 414

WC -35 -8 -10 -5 -4 -3 -5

Interest & Taxes -59 -86 -75 -72 -81 -81 -131

Other 9 6 7 8 8 8 11FCF (1) 180 144 173 227 254 272 289

Dividends -49 -62 -98 -118 -165 -191 -278

Net debt 1,138 1,021 953 850 767 692 555

EV/EBITDA 5.2x 7.5x 7.2x 6.6x 6.2x 6.0x 5.3x

adj EV/EBITDA (2) 5.2x 7.0x 6.9x 6.5x 6.2x 6.0x 5.3x

PER 21.5 27.9 22.1 16.4 13.9 13.0 9.2

Net debt/ EBITDA 2.0 x 2.1 x 1.8 x 1.5 x 1.3 x 1.1 x 0.8 x

FCF p/ share 0.35 0.28 0.33 0.44 0.49 0.53 0.56

FCF yield 7% 5% 6% 9% 10% 10% 11%

2022E€ million 2012PF 2013E 2014E 2015E 2016E 2017E

(1) FCF excludes securitization and spectrum payment

(2) Assuming €40 mn run rate opex synergies from 2013


Our figures for Zon Optimus changed significantly due to reporting changes. We highlight that joint ventures (Zap-

Finstar, Dreamia, SportTV) will be deconsolidated in 3Q13 ahead of IAS 28 that is effective after January 1st

20146. In addition, Optimus capitalizes subscribers’ acquisition costs (SACs)7 and with the merger Zon will adopt

this accounting practice, which translates into an additional €15 mn in EBITDA for the full-year8. Please find in the

next table the estimated impact from these accounting changes:

5 Figures after accounting changes (deconsolidation of joint ventures and capitalization of loyalty contracts). 6 IAS 28 (2011 revision), “Investments in associates and joint ventures”, is effective in the EU for annual periods beginning on or after January 1st 2014. IAS 28 prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. 7 Sonaecom capitalizes costs related to customers’ loyalty contracts. These are then amortized over the period of the contracts (typically 2 years). 8 EBITDA increases by the same amount than Capex and D&A, so impact on P&L and FCF is null.

Zon Optimus Headlines

Page 7 of 33


Operating Revenues -70.0 -78.0 -90.1 -96.8 -98.5 -99.6 -103.7

Portugal -38.4 -33.8 -34.5 -35.5 -36.4 -37.3 -42.5

Telecom -38.4 -33.8 -34.5 -35.5 -36.4 -37.3 -42.5

Audiovisuals 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Angola -31.6 -44.3 -55.6 -61.3 -62.0 -62.3 -61.3

EBITDA -39.0 -37.0 -42.1 -46.2 -46.0 -45.7 -43.6

Portugal -34.7 -28.1 -28.2 -27.8 -27.4 -27.0 -25.3

Africa -4.2 -8.9 -13.9 -18.4 -18.6 -18.7 -18.4

EBIT -7.8 -9.0 -12.4 -16.5 -16.6 -16.6 -15.6

Net Income -0.1 -0.5 -0.6 -1.9 -2.0 -1.7 0.9

Capex -32.6 -15.0 -36.6 -36.1 -35.6 -35.2 -33.0

Portugal -30.8 -11.9 -32.7 -31.8 -31.3 -30.8 -28.7

Africa -1.8 -3.1 -3.9 -4.3 -4.3 -4.4 -4.3

2022E€ million 2012PF 2013PF 2014E 2015E 2016E 2017E


450

470

490

510

530

550

570

590

610

630

2012R 2012PF 2013PF 2014E 2015E 2016E 2017E

Synergies minus integration costs impact (pos.)

Synergies minus integration costs impact (neg.)

Deconsolidation of joint ventures & accounting changes

Africa

Portugal exc. synergies & int. costs


34.0% 33.9% 34.9%36.9% 38.1% 39.0%34.6% 34.4% 35.4% 37.5% 38.8%

39.8%

12.9% 12.4% 12.9% 13.4% 13.7% 14.5%

0%

10%

20%

30%

40%

50%

2012PF

2013PF

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

Consolidated EBITDA margin Telecom EBITDA margin Audiovisual EBITDA margin


Zon Optimus EBITDA

Zon Optimus EBITDA mg

Impact of deconsolidation & accounting changes

Page 8 of 33


Domestic business

Consolidated revenue was revised slightly upwards (+2%), thanks to a better trend in the Audiovisual segment

and in the Telecom business. In telecom, Optimus wireline performance (growing operator revenues) in 1H13 has

been very positive. The improved forecast in this line has more than offset the slightly higher pressure in Zon’s

domestic revenues observed in 1H13. In the audiovisual segment, the surprising positive performance in 1H13 (-

0.8% YoY) led us to improve our forecast for the full-year to -3% (from -7%).

EBITDA was also revised upwards (+2%). This stems for a better than expected margin in Optimus: EBITDA in

1H13 dropped only 0.4% YoY; excluding €1.3 mn merger costs, it would have grown 0.7%. Zon has continued to

manage mounting pressure on revenues with cost control, minimizing impact on EBITDA, as we were already

forecasting.

New Estimates

Consolidated revenue 1520.7 1465.2 1480.6 1520.2 1560.6 1599.9 1791.3

Telecom 1448.7 1401.1 1415.7 1452.4 1489.7 1526.0 1700.6

Audiovisuals 122.8 119.1 120.5 124.0 127.7 131.2 150.9

EBITDA 516.6 497.3 516.2 561.1 595.0 613.3 699.0

EBITDA mg 34.0% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0%

Consolidated revenue growth -3.7% 1.1% 2.7% 2.7% 2.5% 2.3%

Telecom revenue growth -3.3% 1.0% 2.6% 2.6% 2.4% 2.2%

Audiovisuals revenue growth -3.0% 1.2% 2.9% 2.9% 2.8% 2.9%

EBITDA growth -3.7% 3.8% 8.7% 6.0% 3.1% 2.5%

EBITDA mg increase (pp) 0.0pp 0.9pp 2.0pp 1.2pp 0.2pp 0.1pp

Revisions

Consolidated revenue 0% 2% 2% 2% 2% 2% 2%

Telecom 0% 2% 2% 2% 2% 2% 2%

Audiovisuals 0% 4% 4% 4% 4% 4% 4%

EBITDA 0% 1% 4% 2% 2% 2% 2%

EBITDA mg 0.0pp -0.1pp 0.6pp 0.2pp 0.1pp 0.1pp 0.2pp

Consolidated revenue growth 1.6% 0.3% 0.0% -0.1% -0.1% 0.0%

Telecom revenue growth 1.6% 0.3% 0.0% -0.1% -0.1% 0.0%

Audiovisuals revenue growth 4.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EBITDA growth 1.1% 2.5% -1.4% -0.1% -0.1% -0.1%

EBITDA mg increase (pp) -0.1pp 0.7pp -0.4pp 0.0pp 0.0pp 0.0pp

€ million 2012PF 2013PF 2014E 2015E 2022E2016E 2017E

Note: FY12 figures were restated to account for accounting changes (deconsolidation of joint ventures and capitalization of

loyalty contracts) Source: Company data and Millennium investment banking

In what capex is concerned, we haven’t changed significantly our estimates apart from the deconsolidation of joint

ventures. In this respect, the deconsolidation of Sport TV was particularly significant: we remind that Sport TV had

a significant amount of content rights (football rights) that were capitalized. We now have “cleaner” capex figures:

we estimate Zon Optimus should spend c. €265 mn in capex this year (exc. joint ventures), 18.1% of revenues; the

weight of capex on revenues should slowly decline to c. €16% of revenues in perpetuity. The detail on our Capex

estimates is shown in the table in the next page.

Main valuation drivers

Page 9 of 33


CAGR CAGR

12-17 12-22

New Estimates

Capex 252 266 266 265 265 266 285 1% 1%

Portugal 252 266 266 265 265 266 285 1% 1%

Operating capex 241 251 251 250 250 251 267 1% 1%

LT contracts 12 15 15 15 15 15 18 6% 4%

Capex % on revenues 16.6% 18.1% 17.9% 17.4% 17.0% 16.6% 15.9% 0.0pp -0.1pp

Africa 0 0 0 0 0 0 0

Capex % on revenues

Revisions

Capex 0% -7% -13% -12% -12% -12% -11%

Portugal 0% -6% -12% -11% -11% -11% -9%

Operating capex -5% 6% 7% 8% 9% 9% 9%

LT contracts 37% -67% -77% -77% -77% -77% -75%

Capex % on revenues 0.0pp -1.0pp -2.3pp -2.0pp -2.0pp -1.9pp -1.5pp

Africa 0% -100%

Capex % on revenues 0.0pp

LfL Revisions

Capex 0% -1% -1% 0% 0% 0% 0%

Portugal 0% -1% -1% 0% 0% 0% 0%

Operating capex 0% -1% 1% 2% 2% 2% 3%

LT contracts 0% 0% -23% -24% -26% -28% -31%

Capex % on revenues 0.0pp -0.1pp -0.2pp 0.0pp 0.0pp 0.0pp 0.0pp

Africa

Capex % on revenues

2013PF 2014E 2015E 2016E 2017E 2022E€ million 2012PF

Source: Company data and Millennium investment banking

Sport TV

As mentioned previously, Zon will deconsolidate its 50% stake in Sport TV, main premium sports channel in

Portugal, already in 3Q13, in anticipation of the IAS 28 effective on January 1st 2014.

An agreement was announced in the end of December 2012 to consolidate Sportinveste Multimedia and PPTV

into Sport TV9. Currently, Zon Optimus holds 50% of Sport TV. With the merger, Zon Multimédia and Portugal

Telecom will hold each 25% of the new Sport TV and Sportinveste (Joaquim Oliveira) will hold 50%. The

Competition Authority has decided last August to launch a thorough investigation into this merger.

Zon will receive a cash inflow of around €46 mn (mainly shareholder loans). PT said it will contribute with its 50%

stake in Sportinveste Multimedia and with a net amount of up to €21 mn (through a rights issue) in order to hold

25% of the new Sport TV. This sets a minimum value for the 25% stake Zon Optimus will have in new Sport

TV or the 50% stake it has now.

We have deconsolidated Sport TV from Zon Optimus reported figures. We now value the 50% stake in Sport TV

individually, at €30 mn equity value, which stands for a 1.8x EV/EBITDA 2014E multiple10. The change in

valuation of the Sport TV stake had a positive impact on our price target: €0.25/ share. This is due to the fact that

Sport TV’s contribution to the Domestic Business DCF was negative (negative EBITDA – capex) and now we

attribute a positive value to this financial stake.

9 For further information on this deal please refer to the section “Other topics”. 10 Estimated EBITDA in 2014: €80 mn, Net debt 2013E of €81 mn.

Capex revision

Page 10 of 33


Africa (Zap)

Finstar, a joint venture by Angolan businesswoman Isabel dos Santos11 (70%) and Zon Multimédia (30%),

launched on February 2010 a satellite (DTH: direct-to-home) Pay TV service in Angola, with the brand Zap. Zap

has in the meantime extended its offering to Mozambique, using the same satellite as in Angola. Zap has c. 1,000

agent stores and a door-to-door sales force of 200 people in Angola12.

We estimate Zap ended FY12 with circa 525k subscribers and we forecast c. 735k subs by the end of this year;

this means c. 17.5k per month (below the 20-25k per month registered last year). In Angola, Zap is already leader

in the market, having surpassed former leader Multichoice13. Zap’s ARPU is c. $25. Zap achieved EBITDA

breakeven in 1Q12 (EBITDA of €14 mn in FY12) and net income breakeven in 3Q12 (contribution to EBT in FY12

was minus €1.3 mn).

Pay TV penetration in Angola is circa 15% of households (750k subs in 5mn households) and Zon believes

penetration may reach 20-25% in the medium/ long term. In what margin is concerned, Zon expects margin to

continue to expand to circa 35% which matches the margin that Zon drives in the DTH business in Portugal.

Moreover, Zon management has stated that they believe Zap may be paying dividends in 2014/201514.

Zap’s performance in 1H13 continued to be a good surprise, combining strong growth (+52%) with impressive

profitability (30% EBITDA mg, stable vs. 1Q). We have accordingly raised our 2013 estimates (to €154 mn revenue,

with a 27.5% EBITDA margin), but broadly kept our estimates in the subsequent years. Since Zap’s performance

has been above expectations (e.g. net income breakeven was expected to be achieved in early 2013) we believe

the company may start paying dividends already next year.

Valuation. Zon has started to proportionally consolidate its 30% stake in Zap in the beginning of 2012. With IAS 28

(2011 revision) effective as of January 1st 2014, Zon will start accounting for this stake using the equity method.

Despite deconsolidation, we will continue for now to value Zap through a DCF in Euro (refer to page 20) as long as

we have the necessary data to feed the model. We value Zap’s equity at €354 mn, derived from a €434 mn

enterprise value deducted from a net debt YE13E of €80 mn. We then attribute a value of €106 mn to Zon’s

equity stake in Zap. Zap’s enterprise value stands for an 8.1x EV/EBITDA 2014E.

Our DCF-based valuation is based on the following assumptions:

- Subscribers grow to circa 919k by YE14 and ARPU declines throughout the explicit period (CAGR 12-22E of minus 3%);

- Revenue CAGR 2012-2022E is 7%;

- EBITDA margin reaches 27.5% in 2013 (1H13 = 30%), growing to 30% in 2015, and peaking at 32.5% in 2018;

- Capex is set at 7% of revenues.

11 Isabel dos Santos shares control of Zon Optimus with Sonaecom through vehicle ZOPT (each holds a 50% stake); ZOPT holds 50.1% of Zon Optimus’ share capital. 12 Data disclosed by Zon on its 1Q13 Earnings presentation. 13 South-African Multichoice is the leading Pay TV provider in Sub-Saharan Africa, operating in South Africa, Nigeria, Angola, Mozambique and other countries, under brand DSTV. It provides Pay TV services through satellite. The company had by YE09 180k subscribers in Angola, 80% of each in Luanda. 14 Statement by Zon’s CFO in the 2Q12 Earnings conference call.

Page 11 of 33


CAGR CAGR

12-17 12-22

Pay TV Subscribers (th, EoP) 525 735 919 988 1,007 1,028 1,112 1,135 14% 8%

Blended ARPU (€) 21.6 19.7 18.3 17.8 17.2 17.0 15.4 15.1 -5% -3%

Revenues 105 154 185 204 207 208 204 204 15% 7%

EBITDA 14 42 54 61 64 66 66 66 36% 17%

Margin 13.5% 27.5% 29.0% 30.0% 31.0% 32.0% 32.5% 32.5% 3.7pp 1.9pp

Capex 6 11 13 14 14 15 14 14 19% 9%

As % of Revenues 5.7% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 0.3pp 0.1pp

EBITDA - Capex 8 32 41 47 50 52 52 52 45% 20%

As % of Revenues 7.8% 20.5% 22.0% 23.0% 24.0% 25.0% 25.5% 25.5% 3.4pp 1.8pp

2022E2021E2016E€ million 2017E2012 2013E 2014E 2015E


Merger synergies included in valuation

Our previous valuation of Zon Optimus included €375 mn in merger synergies (NPV 2013), which stood for

the midpoint of the interval provided by both companies in the merger project. Synergies resulted from run rate

savings of €47.5 mn from FY16 and integration costs of €40 mn.

We have chosen to increase cost & opex synergies to the maximum of the interval provided- €400 mn-,

given that management has repeatedly said this figure was conservative. These synergies result from run rate

savings of €50 mn from FY16 and integration costs of €40 mn (between 2013 and 2015).

New management is preparing a strategic plan that should be disclosed early next year that should deliver further

information on the synergies’ topic.

€ mnSynergies NPV

Run rate savings

% on combined opex & capex

Criteria

Integration costs

3.5%-4.5%

Only cost & capex savings

35-45

400

Mib valuation Merger Project

350- 400

45-50

40

Only cost & capex savings

3.8%

50


Other assumptions related to merger impact:

• We assume (as in previous report) that the merger of the two companies will have no material impact

in terms of revenues. We continue to adopt a high degree of conservatism in modelling revenue

synergies since these depend greatly on the behaviour of competitors. We believe Zon Optimus has a

potential market share gain in consumer business (mobile), but the market remains highly competitive

(now with Vodafone as the triple play challenger), so prices will remain highly pressured. The potential

to grow in the business segment is much greater, given the low share of Zon Optimus in this market15.

As the incumbent, PT has maintained a strong grab over this segment, even greater if we look to the

15 Zon Optimus has c. 26% of domestic market share, but only c. 15% share in the business segment. The business segment is estimated to represent €2.2 bn (out of €5.5 bn total telecom market): a 1p.p. increase in market share can represent approx. €22 mn in revenues.

Valuation drivers – Zap (Africa)

Mib Merger synergies vs. Merger project

Page 12 of 33


public sector. However, the downward adjustment of prices should be much greater here, shrinking the

amount of additional revenue.

• We assume 80% of savings would be opex and 20% would be capex;

• We consider 100% of run rate synergies would be achieved in year 4, as guided in the merger

project (therefore, in 2016). In the road until year 4, we assumed 15% of run rate synergies would be

achieved in year 1 (2013), 55% in year 2 (2014), 85% in year 3 (2015);

• We assume integration costs would be split between 3 years: 30% in 2013, 50% in 2014 and 20% in

2015.

Please refer to the next table for a detailed analysis of synergies & integration costs included in our Zon Optimus model:

Synergies -7.5 -27.5 -42.5 -50.0 -50.0 -50.0

Opex -6.0 -22.0 -34.0 -40.0 -40.0 -40.0

Capex -1.5 -5.5 -8.5 -10.0 -10.0 -10.0

Integration costs (opex) 12.0 20.0 8.0 0.0 0.0 0.0

Impact on:

Opex/ EBITDA -6.0 2.0 26.0 40.0 40.0 40.0

Capex -1.5 -5.5 -8.5 -10.0 -10.0 -10.0

Net income -6.2 0.2 20.6 31.7 32.3 36.6

Free cash flow 2.2 7.0 27.7 39.1 38.8 39.0

€ million 2013E 2014E 2015E 2022E2016E 2017E


FCF, Dividend and Net Debt:

Proforma16 Free Cash Flow should be circa €118 mn in FY13 according to our estimates, which turns into €167

mn next year as securitization payments cease. Beyond 2015, as synergies start boosting EBITDA and Capex is

stable around €265 mn, free cash flow should grow considerably.

16 Assuming 12 months consolidation of Optimus and stakes in Zap, SportTV and Dreamia consolidated through equity.

Synergies included in Zon Optimus model

Page 13 of 33


EBITDA minus Capex 272.7 231.7 250.6 296.2 330.0 347.2

Change in Working Capital + non-cash items -35.1 -8.2 -9.6 -4.6 -3.5 -2.9

Operating Cash Flow 237.7 223.4 241.0 291.6 326.5 344.2

Net Interest Paid & other fin. Charges -44.4 -64.7 -55.3 -42.9 -31.3 -27.6

Income taxes paid -14.2 -21.2 -19.9 -29.6 -49.4 -53.2

Spectrum auction -83.0 -6.0 -6.0 -6.0 -6.0 -6.0

Securitisation transaction -20.0 -20.0

Dividends received from Zap & Others 7.5 8.6 8.9 9.2

Other Cash movements 1.3 6.4 -0.7 -0.8 -0.8 -0.8

Free Cash Flow 77.4 117.9 166.5 221.0 247.9 265.8

Dividends paid -49.5 -61.8 -97.9 -118.5 -164.9 -190.6

Free Cash Flow minus Dividends 27.9 56.1 68.7 102.5 83.0 75.2

Cons. Zap's Net Debt (YE11) -23.4

Decons. Zap, Sport TV & Dreamia net debt 41.1

Securitisation transaction 20.0 20.0

Net Fin. Debt decrease (increase) 24.5 117.2 68.7 102.5 83.0 75.2

FY12PF FY16E FY17EFY13PF FY15EFY14E


Zon Multimédia paid a €0.12/ share dividend on 2012 Earnings (payment on May 24th, 2013), which stood for a

103% payout. We’re assuming the company will keep a 100% payout throughout the explicit period. We’re

therefore estimating Zon Optimus will pay €0.19/ share on 2013 Earnings.

We highlight that the Board has the room to be more generous though: from a FCF standpoint, dividend 2014-

2016 is only an average of 60% of FCF17 and the company already has a low leverage relatively to peers. However,

as the company has plans to pursue internationalization into other geographies, this effort can prevent the

increase of shareholder remuneration.

CAGR CAGR

12-17 12-22

DPS 0.12 0.19 0.23 0.32 0.37 0.40 0.56 27.2% 16.7%YoY growth 58.3% 21.1% 39.1% 15.6% 8.1% 3.7%Payout ratio 50% 102% 98% 101% 99% 100% 100%Dividend as % of FCF (1) 64% 52% 59% 54% 67% 72% 96%

2017E2016E2015E2014E2013E€ million 2012 2022E

(1) DPS paid in a given year over FCF of that year Source: Millennium investment banking

Following FCF estimates, and considering a 100% payout, we estimate Net Debt will be reduced by circa €69 mn in

2014 and €103 mn in 2015. Without M&A and/or expansion into other geographies, Net debt / EBITDA 2015E ratio

should be quite low, at 1.5x.

Net Debt 1,138 1,021 953 850 767 692 555

NetDebt/ EBITDA 2.0 x 2.1 x 1.8 x 1.5 x 1.3 x 1.1 x 0.8 x

2017E€ million 2012PF 2013E 2014E 2015E 2016E 2022E


17 Difference between payout and % on FCF is justified by net income being impacted by significant D&A resulting from heavy investment in the last years.

DPS estimates

Free Cash Flow

Net Debt 2012-2022E

Page 14 of 33


3Q13 Preview:

Zon Optimus will disclose its 3Q13 Earnings on November 14th 2013, before the market opening.

€ million 9M12 9M13E YoY 3Q12 4Q12 1Q13 2Q13 3Q13E YoY QoQ

Revenues 1,139.2 1,098.5 -4% 382.2 381.5 364.6 369.6 364.2 -5% -1%

Telecom 1,086.3 1,051.0 -3% 361.4 362.4 348.7 353.5 348.7 -3% -1%

Audiovisuals 90.3 88.0 -3% 31.9 32.6 28.9 29.1 30.0 -6% 3%

Other -37.4 -40.4 nm -11.1 -13.4 -13.0 -13.0 -14.5 nm nm

Cash Costs 742.3 713.4 -4% 247.2 261.9 236.2 241.2 236.0 -5% -2%

EBITDA 397.0 385.1 -3% 135.0 119.7 128.4 128.3 128.3 -5% 0%

Margin 34.8% 35.1% 0.2pp 35.3% 31.4% 35.2% 34.7% 35.2% -0.1pp 0.5pp

D&A 241.2 235.0 -3% 79.9 81.7 77.3 73.8 84.0 5% 14%

Income from Operations 155.7 150.1 -4% 55.1 38.0 51.1 54.6 44.3 -20% -19%

Margin 13.7% 13.7% 0.0pp 14.4% 10.0% 14.0% 14.8% 12.2%

EBIT 155.2 150.7 -3% 55.5 37.6 51.0 55.2 44.3 -20% -20%

Income before Taxes 122.2 107.2 -12% 43.4 24.3 37.2 40.0 29.8 -31% -26%

Net Profit 97.3 81.8 -16% 37.2 26.9 29.2 30.8 21.5 -42% -30%

Margin 8.5% 7.4% -1.1pp 9.7% 7.1% 8.0% 8.3% 5.9% Note: quarterly figures account for deconsolidation of joint ventures and loyalty contracts’ accounting changes


For 3Q13 we estimate revenues to drop 4.7% YoY to €364.2 mn. Telecom should show a slightly worse YoY trend

(-3.5% YoY in 3Q13 vs. -2.7% YoY in 2Q13), on the back of additional pressure on triple play prices, since mobile

revenue trend should be a bit better. We’re also estimating the trend in Audiovisuals to deteriorate: we forecast a

6.0% YoY decline in 3Q13, which compares to -1.4% in 2Q13. We estimate EBITDA should decline 5.0% YoY, to

€128.3 mn. EBITDA margin should decrease 0.1pp YoY to 35.2%. Finally, net profit should decrease 42%YoY, due

to lower EBITDA, higher D&A and higher financial expenses.

Please refer to Section 3Q13 Earnings Preview of this report for a more detailed view of our quarterly estimates.

3Q13 Income Statement

Page 15 of 33


Other topics:

We’ll make a quick update on the main topics that came up since last company updates on Zon Multimédia/

Sonaecom (Optimus), issued last April:

� Zon Optimus launched on October 22nd its quadruple play offer, ZON4i, based on Zon’s fixed network and

Optimus’ mobile network. We remind that Zon Multimédia had already launched a quadruple play offer by

mid-May. Mobile services were provided through the MVNO contract signed with Vodafone. New mobile

customers had a negative effect on margin, so the goal was not to massively upgrade clients, rather to protect

Zon triple play clients until merger with Optimus was approved. The new quadruple play offer includes TV,

Broadband, fixed voice and mobile voice. Bundles start at €79.99 per month vs. PT’s €79.99 and Vodafone’s

€79.90. Since ZON4i price includes the box monthly fee (as Vodafone), Zon Optimus price is €1 lower than

PT. ZON4i offers 116 channels, which compares to 90 channels offered by PT and 130 channels offered by

Vodafone. ZON4i offers unlimited fixed voice to Portugal and 50 countries, while PT and Vodafone include

communications for Portugal and 30 countries. ZON4i matches PT and Vodafone offers in the following

aspects: fixed broadband has a 100 Mb speed; bundle includes two mobile cards with 2,000 minutes in voice,

2,000 SMS, and 200Mb/ month of mobile data; two additional mobile cards can be added for €7.50/ month

each; ZON4i requires a 24-month contract. Zon Optimus quadruple play is very similar to PT and Vodafone’s

offers, as is the price. The company expects to lure customers with additional “sweets”, such as access to

ZON@FON (500k hotspots) and MyZonCard (2 movie tickets for the price of 1). The big change is of course

the attitude: while Zon was focused on protecting its client base from competitors, Zon Optimus will be

aggressive in the attempt to upgrade triple play customers to quadruple play. This should bring an interesting

boost to mobile subscribers. This is the first convergent product launched by Zon Optimus after merger, and

eliminates a disadvantage in the consumer segment vs. competitors. The fact that Zon Optimus has launched

a convergent offer only 3 weeks after new management bodies were elected is quite positive and shows

companies were well prepared for the merger and that integration should develop fast.

� Zon Optimus shareholders approved on October 1st its new governing bodies, with Miguel Almeida,

former Optimus CEO, as the new CEO of Zon Optimus. Zon Optimus Executive Committee include in

addition to Miguel Almeida: Manuel Ramalho Eanes and Ana Paula Marques from Sonaecom; Luís Lopes

(Vice-Chief Executive Officer), José Pedro Pereira da Costa (Chief Financial Officer) and André Santos

Almeida from Zon Multimédia; and Miguel Veiga Martins, former CEO of Angolan mobile operator Unitel.

Jorge Brito Pereira, partner of law firm PLMJ and layer of Zon and Isabel dos Santos, was elected Chairman,

replacing Daniel Proença de Carvalho. Zon Optimus shareholders also approved the new articles of

association of the operator. Zon Optimus will have, as Zon Multimédia, a by-law that prohibits competitors to

have a stake over 10% of Zon’s capital.

� Zon Optimus new shares (206,064,552) issued as a result of the merger by incorporation of Optimus were

listed on Euronext Lisbon, as from 9 September 2013. Zon Optimus has 515.170.202 shares, 50.01% are

held by ZOPT, holding jointly controlled by Sonaecom and Isabel dos Santos. Sonaecom holds directly

37.489.324 Zon Optimus shares, which corresponds to 7.28% of capital.

� Portugal's Cinema and Audiovisual Institute (ICA) has started an official settlement procedure under the new

Cinema and Audiovisual Law against pay-TV operators. The five major Portuguese Pay-TV operators

refused to pay about €12.5 million due as the new annual fee created by the Law on Cinema and the

Audiovisual Sector. The fee is intended to support the film sector. The deadline for payment expired on July

31st; Zon has not paid €6.3 million, Portugal Telecom (Meo) also failed to pay €4.7 million, Cabovisão owes €1

million, while Vodafone and Optimus owe €166,000 and €148,000, respectively. The new Cinema Law was

published in the Diário da República (Official State Gazette) on September 6th 2012. This law establishes an

Page 16 of 33


annual tax applied to Pay TV operators: €3.5 per Pay TV client, growing yearly by 10% until it reaches

€5.0 per client.

� ZOPT, holding that controls Zon Optimus with 50.1% of capital, released on August 30th the proposed

list of members of the governing bodies of the telecom operator that resulted from the merger between

Zon Multimédia and Optimus. An extraordinary shareholders’ meeting was called for October 1st. ZOPT

chose Miguel Almeida, currently Optimus CEO, as the new CEO of Zon Optimus. Rodrigo Costa, CEO of Zon

Multimédia, will remain in the company, but as a non-executive board member. The proposed Board and

executive committee reflect a tight balance between controlling shareholders Sonaecom and Isabel dos

Santos. In this balancing process Rodrigo Costa was left out, with Sonaecom choosing the CEO and Isabel

dos Santos appointing Miguel Veiga Martins for the executive committee, choosing the Chairman and

appointing more non-executive Board members. Rodrigo Costa becoming non-executive is the most negative

outcome, but continuity on Zon side is assured by the maintenance of Luís Lopes and José Pedro Pereira da

Costa in the executive committee.

� Zon Optimus informed that the commercial registry of the merger between Zon Multimédia and Optimus

was completed on August 27th. Merger assumed the form of a merger by incorporation and implied: the

issuance of 206.1mn new shares which were delivered to Optimus shareholders; the change in name to Zon

Optimus. Sonaecom transferred 81.807% of Optimus capital to ZOPT and Mrs. Isabel dos Santos transferred

28.81% of Zon’s capital to ZOPT. Isabel dos Santos should have paid c. €112 mn to Sonaecom in order to

ensure joint control of ZOPT: now each one holds 50% of ZOPT’s capital. ZOPT became the holder of more

than 50% of Zon Optimus. Isabel dos Santos will be able to buy from Sonaecom, in two years, up to half of

the shares Sonaecom holds in Zon Optimus at that time (excludes indirect stake through ZOPT). We remind

that Sonaecom will be holding (directly) 7.2% of Zon Optimus’ capital.

� Sonaecom and Zon disclosed on August 26th that the Competition Authority issued the final deliberation

stating non-opposition to the merger between Optimus and Zon Multimédia. The final decision

maintains the remedies that were already included in the draft decision. These are directed at the fibre

network Optimus shares with Vodafone (500k houses) which was already expected given the overlapping of

this infrastructure with Zon’s network. Commitments are: the extension of the fibre network sharing agreement

between Optimus and Vodafone; the amendment of the latter agreement in order for the limitation of liability

not to apply in the event of unjustified contract termination by Optimus or contract termination by Vodafone

Portugal for reasons attributable to Optimus; Optimus will not charge its triple play fibre customers the

payment of amounts due by virtue of loyalty clauses in the event of a request for termination of services

during a period of 6 months; Optimus will have to be open to negotiate with third parties the wholesale access

to its fibre network; and Optimus will negotiate and enter into a call option agreement with Vodafone for the

purchase of Optimus’ fibre network.

� The Competition Authority has decided to launch a thorough investigation into the consolidation of Sport

TV, Sportinveste Multimedia and PPTV into a single entity. The Competition Authority has doubts about the

operation's effects on the market for broadcasting rights for premium sports content, the market for conditional

access channels with premium sports content and the markets for premium sports content for internet and

mobile markets. An agreement was announced in the end of December 2012 to consolidate Sport TV,

Sportinveste Multimedia and PPTV into a single entity that will manage TV and Multimedia (internet and

mobile) sports rights for the Portuguese market. The agreement sets that Sport TV will incorporate PPTV and

Sportinveste Multimedia; Zon Optimus and Portugal Telecom will hold each 25% of the new entity and

Sportinveste (Joaquim Oliveira) will hold 50%. Currently, Portugal Telecom holds 50% of Sportinveste

Multimédia, Zon holds 50% of Sport TV, Sportinveste (Joaquim Oliveira) holds 50% of Sport TV, 100% of

PPTV and 50% of Sportinveste Multimédia.

� The Portuguese government has announced on July 18th that Optimus and Zon have won the contract to

provide universal telecommunications’ service in Portugal. It had already been reported in the media that

Zon & Optimus had submitted the lowest bids, so the tender’s outcome was no surprise. Optimus secured the

concession for the Northern and Central regions with a €7.05 mn offer. Zon secured the concession for the

Southern region and Islands with a €4.921 mn offer. We remind that Zon and Optimus were at the time

Page 17 of 33


waiting for regulatory clearance in order to conclude their merger. The total cost of the universal service

(€11.971 mn) will be supported by all telecom operators through a compensation fund. Since Portugal

Telecom did not win the tender, it will receive a €33.5 mn compensation (to be paid in 2014) for the early

termination of the concession that was valid until 2025.

� Portuguese club Benfica announced in the end of June it has reached an agreement with Pay TV

providers Portugal Telecom, Zon and Zap (Zon’s African unit) to broadcast Benfica TV as a premium

channel. Benfica TV will broadcast the 15 Portuguese League matches that Benfica plays at home, and the

exclusive of the English Premier League matches. Benfica TV will be distributed in Portugal in a non-exclusive

basis, but it will be exclusive of Zap’s channel line up for Angola and Mozambique. The monthly subscription

is €9.90. A club spokesman said Benfica was the first big European club to broadcast league games on their

own pay TV channel. Football TV rights in Portugal are negotiated on a club-by-club basis, as in Spain, and

unlike the English Premier League and Italy's Serie A where collective bargaining deals are struck. This move

by Benfica put pressure on Sport TV, main premium Sport channels broadcaster in Portugal, that has since

launched a low-cost channel (Sport TV live) with the same price (€9.90). Basic Sport TV service (4 channels)

costs €22.79/ month, €26.79/ month if it’s the HD package. Sportinveste (Joaquim Oliveira) and Zon

Multimédia hold Sport TV, each with 50% of capital. PT reached an agreement last December with Joaquim

Oliveira and Zon to become a Sport TV shareholder; this deal is being scrutinized by the Competition

Authority.

� Sonaecom and Zon disclosed in the beginning of July that in the context of the merger operation between

Optimus and Zon, the two companies have agreed to undertake a set of commitments aimed at

eliminating all the concerns identified by the Competition Authority. These commitments were then

submitted for comment by the counterparties for a 7-working day period. The acceptance of the regulator’s

remedies allowed a faster merger approval than the alternative of letting the process go through an in-depth

investigation.

� Avistar SGPS sold on June 25th all shares it held of Zon Multimédia (7,260,000 shares) at an average

price of €3,449. Following this transaction, Banco Espirito Santo held the voting rights corresponding to 0.97%

of the share capital of Zon Multimédia. Another entity of the BES group, Espírito Santo Irmãos SGPS,

continues to hold 5% of Zon’s capital.

� The Competition Authority fined Sport TV €3.7 million by mid-June, due to the remuneration regime

applied by the latter between January 2005 and March 2011. This regime implied that Pay TV operators had

to pay for a minimum number of subscribers, even if they didn’t hold them. The Watchdog’s analysis and

decision was triggered by Cabovisão complaint in July 2009. Sport TV has appealed the Competition Court;

this appeal suspended the Competition Authority decision.

� Zon Multimédia announced on May 14th the launch of a quadruple play offer, which included TV,

Broadband, fixed voice and mobile voice. Mobile services were delivered through the MVNO contract it held

with Vodafone. Bundles started at €69.99 per month, with a quadruple play offer that included only one mobile

card with unlimited voice and SMS (PT does not offer a bundle with just one mobile card). Adding one more

mobile card (there’s the possibility to add two) cost €10 per month, so triple play plus 2 mobile cards cost

€79.99, which matches PT and Vodafone prices. Zon’s quadruple play had the best television offer: 149

channels compared to 90 channels offered by PT and 100 channels offered by Vodafone. Broadband had a

100 Mb speed, just like PT and Vodafone. Zon’s offer did not include mobile data, while PT and Vodafone

include 200 Mb/ month. Zon chose to launch quadruple play before merger with Optimus was approved in

order to reinforce the retention of its triple play customer base. New mobile customers had a negative effect

on margin, but impact was limited to a maximum of 2 quarters.

Page 18 of 33


Valuation

Economic Enterprise Value Per Contribution Valuation Implied Sector Previous Value Contribution

Interest Value for ZON share to Target Method Multiple Multiple for zon to Target

Domestic business 100.00% 3,814 3,814 7.40 139.6% DCF 7.4x EV/EBITDA 14 9.6x EV/EBITDA 14 3,368 151.7% 13%

African business (Zap) 114 5.1% -100%

Enterprise Value 3,814 7.40 139.6% 7.4x EV/EBITDA 14 9.6x EV/EBITDA 14 3,481 156.8% 10%

Other Investments 137 0.27 279.3% 0 313.6% nm

African business (Zap) 30.0% 434 106 0.21 3.9% DCF 8.1x EV/EBITDA 14 0 0.0%

Sport TV 50.0% 30 0.06 1.1% Transaction value 1.8x EV/EBITDA 14 0 0.0%

Other 0 0.00 0.0% Mkt Multiple 3.4.x P/BV 14 0 -51.3% nm

Net Debt -1,185 -2.30 -42.6% -1,227 -54.1% -3%

Consolidated Net Debt YE13 -1,066 -2.07 -39.0% -1,138 -51.3% -6%

Dividends to be paid in 2014 -98 -0.19 -3.6% -62 -2.8% 58%

Cash outlay with spectrum acquisition -21 -0.04 -0.8% -27 -1.2% -22%

Minority Interests -35 -0.07 -1.3% 3.4.x P/BV 14 4.2x P/BV 14 -34 -1.5% 2%

Equity Value 2,731 5.30 100.0% 22.7x PER 14 21.7x PER 14 2,220 100.0% 23%

Outstanding Shares (mn) 515 7.4x EV/EBITDA 14 9.6x EV/EBITDA 14 515 0%

Price Target (€) 5.30 4.30 0%

Sum of the Parts Revision


Sum-of-The-Parts

Page 19 of 33


Domestic business 3,368 3,473 3,473 3,558 3,814

African business 114 114 0 0 0

Enterprise Value 3,481 3,586 3,473 3,558 3,814

Other Investments 0 0 103 133 137

Net Debt/ Minorities -1,261 -1,261 -1,238 -1,220 -1,220

Equity Value 2,220 2,325 2,337 2,470 2,731

Domestic business 3.1% 0.0% 2.4% 7.2% 13.3%

African business 0.0% nm nm nm -100.0%

Enterprise Value 3.0% -3.2% 2.4% 7.2% 9.6%

Other Investments 0.0% nm nm 2.8% nm

Net Debt/ Minorities 0.0% 1.8% 1.5% 0.0% 3.3%

Equity Value 4.7% 0.5% 5.7% 10.6% 23.0%

African business

revisionOther revisions Move to YE14 Total change€ million

Domestic business

revision

Move to YE14€ million Previous EstimatesDomestic business

revision

African business

revisionOther revisions


Sum-of-The-Parts’

revision

Page 20 of 33


CAGR CAGR

12-17 12-22

Operating Income 198 176 203 253 288 302 408 9% 8%

(+) Non-Cash Items 354 321 313 308 307 311 291 -3% -2%

(-) Taxes -16 -21 -20 -30 -49 -53 -110 28% 21%

(-) Tax Shield on Interest -9 -16 -14 -10 -7 -6 -4 -8% -7%

(-) Capital Expenditure -283 -266 -266 -265 -265 -266 -285 -1% 0%

(-) Working Capital Changes -89 -14 -10 -5 -4 -3 -5 -49% -26%

FCFF 154 180 207 252 270 285 295 13% 7%

Discount Factor 1.000 1.000 0.885 0.800 0.723 0.437

Discounted Cash Flow 180 207 223 216 206 129

PV FCFF 1,785 1,605

Terminal Value 2,210 2,210

Enterprise Value 3,994 3,814

2022E€ million 2012 2014E 2016E2013E 2017E2015E


CAGR CAGR

12-17 12-22

Operating Income 11.8 40.1 48.0 53.0 54.1 54.7 51.9 36% 16%

(+) Non-Cash Items 2.4 2.3 5.8 8.3 10.0 11.7 14.5 37% 20%

(-) Taxes 0.0 0.0 0.0 0.0 0.0 0.0 -15.3 nm nm

(-) Tax Shield on Interest -3.7 -2.4 -3.6 -3.6 -3.5 -3.3 -0.3 -2% -23%

(-) Capital Expenditure -6.0 -10.8 -13.0 -14.3 -14.5 -14.5 -14.3 19% 9%

(-) Working Capital Changes -0.5 -0.8 -0.9 -1.0 -1.0 -1.0 -1.0 15% 7%

FCFF 4.0 28.4 36.3 42.4 45.1 47.6 35.5 64% 24%

Discount Factor 1.000 1.000 0.903 0.816 0.737 0.443

Discounted Cash Flow 28 36 38 37 35 16

PV FCFF 273 244

Terminal Value 190 190

Enterprise Value 463 434

2022E2012€ million 2013E 2014E 2015E 2016E 2017E


2013-15 2016-21Risk-Free Rate 2.00% 2.00% 2.00%

Country risk premium 7.00% 4.50% 2.00%

Market Premium 5.00% 5.00% 5.00%

Levered Beta 1.17 1.17 1.17

Cost of Equity* 16.09% 13.15% 10.22%

Cost of Debt** 8.25% 6.62% 5.00%

Corporate Tax Rate 29.0% 29.0% 29.0%

After-tax Cost of Debt 5.86% 4.70% 3.55%

Leverage 30% 30% 30%WACC 13.02% 10.62% 8.22%

Perpetuity Growth Rate 2.26%

Real perpetuity growth rate 0.75%

LT Inflation 1.50%

WACC - G 5.96%

Terminal

Value

Explicit Period


*Cost of equity is calculated as the sum of the risk free rate plus country risk premium and market risk premium, the latter two

multiplied by the levered beta. Risk free rate is the German 10-year Government bond yield. Country risk premium results from

the difference between the local Sovereign yield and the German 10-year Government bond yield multiplied by a volatility factor

(ratio that relates equity with bonds volatility). For country risk premium in perpetuity, we assume that the German and local 10-

year sovereign yields will converge to respective last 10-year averages. Market risk premium is set at 5%.

**Cost of debt before tax is the debt spread (long-term issuances) over the German 10-year sovereign rate.

DCF – Portugal

DCF – Zap (Africa)

DCF Assumptions - Portugal

Page 21 of 33


Risk-Free Rate 2.00% 2.00%

Country risk premium 5.00% 5.00%

Market Premium 5.00% 5.00%

Levered Beta 1.15 1.15

Cost of Equity* 13.51% 13.51%

Cost of Debt** 6.50% 6.50%

Corporate Tax Rate 35.0% 35.0%

After-tax Cost of Debt 4.23% 4.23%

Leverage 30% 30%

WACC 10.72% 10.72%

Perpetuity Growth Rate 2.26%

Real perpetuity growth rate 0.75%

LT Inflation 1.50%

WACC - G 8.46%

Explicit

Period

Terminal

Value


*Cost of equity is calculated as the sum of the risk free rate plus country risk premium and market risk premium, the latter two

multiplied by the levered beta. Risk free rate is the German 10-year Government bond yield. Country risk premium results from

the difference between the local Sovereign yield and the German 10-year Government bond yield multiplied by a volatility factor

(ratio that relates equity with bonds volatility). For country risk premium in perpetuity, we assume that the German and local 10-

year sovereign yields will converge to respective last 10-year averages. Market risk premium is set at 5%.

**Cost of debt before tax is the debt spread (long-term issuances) over the German 10-year sovereign rate.

DCF Assumptions - Africa

Page 22 of 33


Estimates Revisions

CAGR CAGR

12-17 12-22

New Estimates

Pay TV Subscribers (th, EoP) 1,603 1,607 1,570 1,578 1,586 1,594 1,634 0% 0%

Internet Subscribers (th, EoP) 866 901 935 950 967 985 1,000 3% 1%

Voice subscribers (th, EoP) 1,098 1,164 1,190 1,184 1,184 1,187 1,205 2% 1%

Wireline ARPU (€) 39 38 37 37 38 39 42 0% 1%

Mobile Subscribers 3,764 3,699 3,651 3,760 3,854 3,931 4,340 1% 1%

Mobile ARPU (€) 12.4 11.5 11.0 10.9 11.0 11.1 11.3 -2% -1%

Revenues 1,521 1,465 1,481 1,520 1,561 1,600 1,791 1% 2%

Telecom 1,449 1,401 1,416 1,452 1,490 1,526 1,701 1% 2%

Audiovisuals 123 119 121 124 128 131 151 1% 2%Other -51 -55 -56 -56 -57 -57 -60 2% 2%

Revisions

Pay TV Subscribers (th, EoP) 0% 0% -2% -2% -2% -2% -2%

Internet Subscribers (th, EoP) 0% 0% 3% 3% 3% 3% 0%

Voice subscribers (th, EoP) 0% 0% 2% 2% 1% 1% 0%

Wireline ARPU (€) 0% 0% 1% 2% 2% 2% 2%

Mobile Subscribers 0% 0% -1% -1% -1% -1% -1%

Mobile ARPU (€) 0% 0% 1% 2% 2% 2% 2%

Revenues 2% 5% 6% 6% 6% 6% 5%

Telecom 0% 2% 2% 2% 2% 2% 2%

Audiovisuals 0% 4% 4% 4% 4% 4% 4%

Other 0% 7% 7% 7% 7% 7% 7%

2022E2016E 2017E€ million 2012PF 2013PF 2014E 2015E

Note: Revisions are LfL, i.e. after accounting changes (deconsolidation of joint ventures and capitalization of loyalty contracts)


Domestic business KPIs revision

Page 23 of 33


CAGR CAGR

12-17 12-22

New Estimates

Revenues 1,521 1,465 1,481 1,520 1,561 1,600 1,791 1% 2%

EBITDA 517 497 516 561 595 613 699 3% 3%

Margin 34.0% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.9pp 0.5pp

EBIT 192 176 203 253 288 302 408 9% 8%

Margin 12.7% 12.0% 13.7% 16.7% 18.4% 18.9% 22.8% 1.2pp 1.0pp

Net Income 124 95 120 163 192 205 289 11% 9%

Margin 8.2% 6.5% 8.1% 10.7% 12.3% 12.8% 16.1% 0.9pp 0.8pp

Capex 252 266 266 265 265 266 285 1% 1%

As % of Revenues 16.6% 18.1% 17.9% 17.4% 17.0% 16.6% 15.9% 0.0pp -0.1pp

EBITDA - Capex 265 232 251 296 330 347 414 6% 5%

As % of Revenues 17.4% 15.8% 16.9% 19.5% 21.1% 21.7% 23.1% 0.9pp 0.6pp

Revisions

Revenues 0% 2% 2% 2% 2% 2% 2%

EBITDA 0% 1% 4% 2% 2% 2% 2%

Margin 0.0pp -0.1pp 0.6pp 0.2pp 0.1pp 0.1pp 0.2pp

EBIT 0% 22% 27% 16% 12% 11% 5%

Margin 0.0pp 2.0pp 2.7pp 2.0pp 1.7pp 1.5pp 0.8pp

Net Income 0% 21% 29% 16% 14% 12% 5%


Capex 0% -2% -1% 0% 0% 0% 0%

As % of Revenues 0.0pp -0.6pp -0.5pp -0.4pp -0.4pp -0.3pp -0.3pp

EBITDA - Capex 0% 5% 9% 5% 4% 4% 4%

As % of Revenues 0.0pp 0.5pp 1.1pp 0.5pp 0.5pp 0.5pp 0.5pp

2022E€ million 2012PF 2013PF 2014E 2015E 2016E 2017E



Income Statement

revisions

Page 24 of 33


CAGR CAGR

12-17 12-22

New Estimates

Revenues 1,521 1,465 1,481 1,520 1,561 1,600 1,791 1% 2%

Portugal 1,521 1,465 1,481 1,520 1,561 1,600 1,791 1% 2%

Telecom 1,449 1,401 1,416 1,452 1,490 1,526 1,701 1% 2%

Audiovisuals 123 119 121 124 128 131 151 1% 2%

Holding & Adjustments -51 -55 -56 -56 -57 -57 -60 2% 2%

Africa 0 0 0 0 0 0 0 nm nm

EBITDA 517 497 516 561 595 613 699 3% 3%

Portugal 517 497 516 561 595 613 699 3% 3%

Telecom 501 483 501 544 578 595 677 4% 3%

Audiovisuals 16 15 16 17 17 18 22 3% 3%

Africa 0 0 0 0 0 0 0 nm nm

Margins 34.0% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.9pp 0.5pp

Portugal 34.0% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.9pp 0.5pp

Telecom 34.6% 34.4% 35.4% 37.5% 38.8% 39.0% 39.8% 0.9pp 0.5pp

Audiovisuals 12.9% 12.4% 12.9% 13.4% 13.7% 14.0% 14.5% 0.2pp 0.2pp

Africa

Capex 252 266 266 265 265 266 285 1% 1%

Portugal 252 266 266 265 265 266 285 1% 1%

Africa 0 0 0 0 0 0 0 nm nm


Portugal 16.6% 18.1% 17.9% 17.4% 17.0% 16.6% 15.9% 0.0pp 0.0pp

Africa

EBITDA - Capex 265 232 251 296 330 347 414 6% 5%

Portugal 265 232 251 296 330 347 414 6% 5%

Africa 0 0 0 0 0 0 0 nm nm


Portugal 17.4% 15.8% 16.9% 19.5% 21.1% 21.7% 23.1% 0.9pp 0.6pp

Africa

Revisions

Revenues 0.0% 1.6% 1.9% 1.9% 1.9% 1.8% 1.7%

Portugal 0.0% 1.6% 1.9% 1.9% 1.9% 1.8% 1.7%

Telecom 0.0% 1.6% 2.0% 1.9% 1.9% 1.8% 1.6%

Audiovisuals 0.0% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%

Holding & Adjustments 0.0% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4%

Africa

EBITDA 0.0% 1.2% 3.7% 2.4% 2.3% 2.2% 2.1%

Portugal 0.0% 1.2% 3.7% 2.4% 2.3% 2.2% 2.1%

Telecom 0.0% 1.1% 3.6% 2.3% 2.2% 2.1% 2.0%

Audiovisuals 0.0% -12.3% -12.9% -11.8% -11.9% -11.9% -15.3%

Africa

Margins 0.0pp -0.1pp 0.6pp 0.2pp 0.1pp 0.1pp 0.2pp

Portugal 0.0pp -0.1pp 0.6pp 0.2pp 0.1pp 0.1pp 0.2pp

Telecom 0.0pp -0.2pp 0.6pp 0.1pp 0.1pp 0.1pp 0.2pp

Audiovisuals 0.0pp -2.3pp -2.5pp -2.4pp -2.5pp -2.6pp -3.4pp

Africa

Capex 0.0% -1.8% -0.9% -0.2% -0.3% -0.3% -0.2%

Portugal 0.0% -1.8% -0.9% -0.2% -0.3% -0.3% -0.2%

Africa

As % of Revenues 0.0pp -0.6pp -0.5pp -0.4pp -0.4pp -0.3pp -0.3pp

Portugal 0.0pp -0.6pp -0.5pp -0.4pp -0.4pp -0.3pp -0.3pp

Africa

EBITDA - Capex 0.0% 4.9% 8.9% 4.8% 4.4% 4.2% 3.7%

Portugal 0.0% 4.9% 8.9% 4.8% 4.4% 4.2% 3.7%

Africa


Portugal 0.0pp 0.5pp 1.1pp 0.5pp 0.5pp 0.5pp 0.5pp

Africa

2017E€ million 2012PF 2013PF 2014E 2015E 2022E2016E



Main headlines revisions

Page 25 of 33


CAGR CAGR

12-17 12-22

New Estimates

Fixed Assets 2,539 2,437 2,390 2,347 2,305 2,259 2,180 -2% -2%

Working Capital -134 -115 -114 -129 -142 -157 -129 3% 0%

Invested Capital 2,405 2,322 2,276 2,218 2,163 2,102 2,051 -3% -2%

Net Debt 1,138 1,021 953 850 767 692 555 -9% -7%

Minorities 10 10 10 10 11 11 11 2% 2%

Equity 1,257 1,291 1,313 1,358 1,385 1,400 1,485 2% 2%

Capital Employed 2,405 2,322 2,276 2,218 2,163 2,102 2,051 -3% -2%

Revisions

Fixed Assets 0% 1% 2% 3% 4% 5% 9%

Working Capital 0% -1% 3% 20% 34% 50% 73%

Invested Capital 0% 1% 2% 2% 3% 3% 7%

Net Debt 0% 1% 4% 7% 10% 12% -18%

Minorities 0% 0% 0% 0% 0% 0% 0%

Equity 0% 1% 1% 0% -1% -1% 21%

Capital Employed 0% 1% 2% 3% 3% 4% 8%

2022E€ million 2012 2013PF 2014E 2015E 2016E 2017E



CAGR CAGR

12-17 12-22

New Estimates

Pay TV Subscribers (th, EoP) 525 735 919 988 1,007 1,028 1,135 14% 8%

Blended ARPU (€) 21.6 19.7 18.3 17.8 17.2 17.0 15.1 -5% -3%

Revenues 105 154 185 204 207 208 204 15% 7%

EBITDA 14 42 54 61 64 66 66 36% 17%

Margin 13.5% 27.5% 29.0% 30.0% 31.0% 32.0% 32.5% 3.7pp 1.9pp

Capex 6 11 13 14 14 15 14 19% 9%


EBITDA - Capex 8 32 41 47 50 52 52 45% 20%


Exc rate AOA/€ (AoP) 130.5 122.6 135.8 155.9 178.9 205.4 409.1

Exc rate AOA/€ (EoP) 122.8 126.5 145.2 166.6 191.3 219.5 437.3

Revisions

Pay TV Subscribers (th, EoP) 0% 0% 0% 0% 0% 0% 0%

Blended ARPU (€) 0% 4% 0% 0% 0% 0% 0%

Revenues 0% 4% 0% 0% 0% 0% 0%

EBITDA 0% 43% 16% 0% 3% 7% 8%


Capex 0% 4% 0% 0% 0% 0% 0%


EBITDA - Capex 0% 65% 22% 0% 4% 9% 11%


Exc rate AOA/€ (AoP) 5.0% 0.3% 0.0% 0.0% 0.0% 0.0% 0.0%

Exc rate AOA/€ (EoP) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

€ million 2012PF 2013PF 2014E 2015E 2022E2016E 2017E


Consolidated Balance Sheet revisions

African business revisions

Page 26 of 33


Operating Performance

CAGR CAGR

12-17 12-22

Revenues 1,591 1,465 1,481 1,520 1,561 1,600 1,791 0% 1%

Portugal 1,559 1,465 1,481 1,520 1,561 1,600 1,791 1% 1%

Telecom 1,487 1,401 1,416 1,452 1,490 1,526 1,701 1% 1%

Audiovisuals 123 119 121 124 128 131 151 1% 2%

Holding & Adjustments -51 -55 -56 -56 -57 -57 -60 2% 2%

Africa 32 0 0 0 0 0 0 nm nm

Weights 100% 100% 100% 100% 100% 100% 100% 0.0pp 0.0pp

Portugal 98% 100% 100% 100% 100% 100% 100% 0.4pp 0.2pp

Telecom 93% 96% 96% 96% 95% 95% 95% 0.4pp 0.1pp

Audiovisuals 8% 8% 8% 8% 8% 8% 8% 0.1pp 0.1pp

Other -3% -4% -4% -4% -4% -4% -3% -0.1pp 0.0pp

Africa 2% 0% 0% 0% 0% 0% 0% -0.4pp -0.2pp

EBITDA 556 497 516 561 595 613 699 2% 2%

Portugal 551 497 516 561 595 613 699 2% 2%

Telecom 535 483 501 544 578 595 677 2% 2%

Audiovisuals 16 15 16 17 17 18 22 3% 3%

Africa 4 0 0 0 0 0 0 nm nm

Margins 34.9% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.7pp 0.4pp

Portugal 35.4% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.6pp 0.4pp

Telecom 36.0% 34.4% 35.4% 37.5% 38.8% 39.0% 39.8% 0.6pp 0.4pp

Audiovisuals 12.9% 12.4% 12.9% 13.4% 13.7% 14.0% 14.5% 0.2pp 0.2pp

Africa 13.4%

Capex 285 266 266 265 265 266 285 -1% 0%

Portugal 283 266 266 265 265 266 285 -1% 0%

Africa 2 0 0 0 0 0 0 nm nm


Portugal 18.1% 18.1% 17.9% 17.4% 17.0% 16.6% 15.9% 0.0pp 0.0pp

Africa 5.7%

EBITDA - Capex 271 232 251 296 330 347 414 5% 4%

Portugal 268 232 251 296 330 347 414 5% 4%

Africa 2 0 0 0 0 0 0 nm nm


Portugal 17.2% 15.8% 16.9% 19.5% 21.1% 21.7% 23.1% 0.9pp 0.6pp

Africa 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0pp 0.0pp

2017E2016E2013E€ million 2012 2022E2014E 2015E


Main Headlines

Page 27 of 33


CAGR CAGR

12-17 12-22

Operating Revenues 1,591 1,465 1,481 1,520 1,561 1,600 1,791 0% 1%

Portugal 1,559 1,465 1,481 1,520 1,561 1,600 1,791 1% 1%

Telecom 1,487 1,401 1,416 1,452 1,490 1,526 1,701 1% 1%

Audiovisuals 123 119 121 124 128 131 151 1% 2%

Other -51 -55 -56 -56 -57 -57 -60 2% 2%

Africa 32 0 0 0 0 0 0 nm nm

Operating Costs 1,389 1,289 1,278 1,267 1,273 1,298 1,383 -1% 0%

Wages and Salaries 108 102 101 103 105 108 125 0% 2%

Direct Costs 480 480 470 472 477 482 526 0% 1%

Commercial Costs 150 103 103 104 105 109 125 -6% -2%

Other Opex 298 282 290 281 279 287 316 -1% 1%

D&A 354 321 313 308 307 311 291 -3% -2%

EBITDA 556 497 516 561 595 613 699 2% 2%

Margin 34.9% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.7pp 0.4pp

Income from Operations 201 176 203 253 288 302 408 8% 7%

Margin 12.7% 12.0% 13.7% 16.7% 18.4% 18.9% 22.8% 1.2pp 1.0pp

Other Non-Operating 1 0 0 0 0 0 0 nm nm

EBIT 200 176 203 253 288 302 408 9% 7%

Margin 12.6% 12.0% 13.7% 16.7% 18.4% 18.9% 22.8% 1.3pp 1.0pp

Net Interest Income 39 61 51 39 27 23 16 -10% -8%

Other Financing Expenses 15 4 4 4 4 4 5 -22% -11%

Equity in Earnings of Affiliates 0 -7 -7 -9 -9 -9 -11 nm nm

Income before Taxes 146 118 155 219 265 284 398 14% 11%

Margin 9.2% 8.1% 10.5% 14.4% 17.0% 17.7% 22.2% 1.7pp 1.3pp

Taxes -21 -22 -34 -55 -72 -77 -108 29% 18%

Effective Tax Rate 14.6% 18.3% 21.8% 25.3% 27.2% 27.2% 27.2% 2.5pp 1.3pp

Minorities -1 -1 -1 -1 -1 -1 -1 2% 2%

Net Income 124 95 120 163 192 205 289 11% 9%

Margin 7.8% 6.5% 8.1% 10.7% 12.3% 12.8% 16.1% 1.0pp 0.8pp

2015E 2017E2016E€ million 2012 2022E2014E2013E


CAGR CAGR

12-17 12-22

EBITDA 34.9% 33.9% 34.9% 36.9% 38.1% 38.3% 39.0% 0.7pp 0.4pp

EBIT 12.7% 12.0% 13.7% 16.7% 18.4% 18.9% 22.8% 1.2pp 1.0pp

Net Income 7.8% 6.5% 8.1% 10.7% 12.3% 12.8% 16.1% 1.0pp 0.8pp

Effective Tax Rate 14.6% 18.3% 21.8% 25.3% 27.2% 27.2% 27.2% 2.5pp 1.3pp

2015E 2016E 2012E€ million 2022E2013E 2014E2012


CAGR CAGR

12-17 12-22

Fixed Assets 2,539 2,437 2,390 2,347 2,305 2,259 2,180 -2% -2%

Working Capital -134 -115 -114 -129 -142 -157 -129 3% 0%

Invested Capital 2,405 2,322 2,276 2,218 2,163 2,102 2,051 -3% -2%

Net Debt 1,138 1,021 953 850 767 692 555 -9% -7%

Minorities 10 10 10 10 11 11 11 2% 2%

Equity 1,257 1,291 1,313 1,358 1,385 1,400 1,485 2% 2%

Capital Employed 2,405 2,322 2,276 2,218 2,163 2,102 2,051 -3% -2%

2016E2015E2014E 2017E€ million 2012 2013E 2022E


Consolidated income

statement

Operating & Financial Margins


Page 28 of 33


3Q13 Earnings Preview


Revenues 1,139.2 1,098.5 -4% 382.2 381.5 364.6 369.6 364.2 -5% -1%

Telecom 1,086.3 1,051.0 -3% 361.4 362.4 348.7 353.5 348.7 -3% -1%

Audiovisuals 90.3 88.0 -3% 31.9 32.6 28.9 29.1 30.0 -6% 3%

Other -37.4 -40.4 nm -11.1 -13.4 -13.0 -13.0 -14.5 nm nm

Cash Costs 742.3 713.4 -4% 247.2 261.9 236.2 241.2 236.0 -5% -2%

EBITDA 397.0 385.1 -3% 135.0 119.7 128.4 128.3 128.3 -5% 0%

Margin 34.8% 35.1% 0.2pp 35.3% 31.4% 35.2% 34.7% 35.2% -0.1pp 0.5pp

D&A 241.2 235.0 -3% 79.9 81.7 77.3 73.8 84.0 5% 14%

Income from Operations 155.7 150.1 -4% 55.1 38.0 51.1 54.6 44.3 -20% -19%

Margin 13.7% 13.7% 0.0pp 14.4% 10.0% 14.0% 14.8% 12.2%

EBIT 155.2 150.7 -3% 55.5 37.6 51.0 55.2 44.3 -20% -20%

Income before Taxes 122.2 107.2 -12% 43.4 24.3 37.2 40.0 29.8 -31% -26%

Net Profit 97.3 81.8 -16% 37.2 26.9 29.2 30.8 21.5 -42% -30%

Margin 8.5% 7.4% -1.1pp 9.7% 7.1% 8.0% 8.3% 5.9% Note: Quarterly figures account for deconsolidation of joint ventures and loyalty contracts’ accounting changes

Source: Company and Millennium investment banking

k subs 9M12 9M13E YoY 3Q12 4Q12 1Q13 2Q13 3Q13E YoY QoQ

Portugal

Pay TV 1,611 1,570 -3% 1,611 1,607 1,596 1,582 1,570 -3% -1%

Internet 881 925 5% 881 901 910 920 925 5% 1%

Voice 1,153 1,185 3% 1,153 1,164 1,169 1,176 1,185 3% 1%

Mobile voice 3,704 3,550 -4% 3,704 3,699 3,634 3,575 3,550 -4% -1%

Internet-to-basic (cable) 54.7% 58.9% 54.7% 56.1% 57.0% 58.1% 58.9%

Voice-to-basic (cable) 71.5% 75.5% 71.5% 72.4% 73.3% 74.3% 75.5% Note: Quarterly figures account for deconsolidation of joint ventures and loyalty contracts’ accounting changes



Revenues 1,139.2 1,098.5 -4% 382.2 381.5 364.6 369.6 364.2 -5% -1%

EBITDA 397.0 385.1 -3% 135.0 119.7 128.4 128.3 128.3 -5% 0%

Margin 34.8% 35.1% 0.2pp 35.3% 31.4% 35.2% 34.7% 35.2% 0.0pp 0.0pp

Capex 182.5 165.4 -9% 65.9 69.5 49.1 56.1 60.2 -9% 7%

As % of Revenues 16.0% 15.1% -1.0pp 17.2% 18.2% 13.5% 15.2% 16.5% 0.0pp 0.1pp

EBITDA - Capex 214.4 0.0 nm 69.1 50.2 79.3 72.2 68.0 -2% -6%

As % of Revenues 18.8% 0.0% -18.8pp 18.1% 13.2% 21.8% 19.5% 18.7% 0.0pp 0.0pp Note: Quarterly figures account for deconsolidation of joint ventures and loyalty contracts’ accounting changes


Income Statement

KPIs - Portugal

Cash Flow Items

Page 29 of 33


1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E FY13E

Weight in FY

Revenues 25% 25% 25% 25% 25% 25% 25% 25%Opex 25% 25% 25% 26% 24% 24% 25% 26%EBITDA 25% 26% 26% 23% 26% 26% 26% 23%EBIT 24% 28% 28% 20% 29% 31% 25% 15%Growth Rates YoY

Revenues -3.4% -2.7% -4.7% -3.9% -3.6%Opex -5.3% -3.2% -2.2% -0.9% -2.9%EBITDA -0.4% -3.4% -5.0% -6.2% -3.7%EBIT 10.9% 0.5% -19.7% -31.1% -8.9%Growth Rates QoQ

Revenues 0.6% 0.7% -0.2% -4.4% 1.4% -1.4% 0.7%Opex -1.8% 0.5% 5.0% -8.7% 0.5% 1.6% 6.4%EBITDA 3.0% 1.6% -11.3% 7.3% -0.1% -0.1% -12.5%EBIT 17.9% 1.5% -31.1% 34.5% 6.8% -18.9% -40.9% Source: Company data and Millennium investment banking

€ million 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13E 4Q13E FY12PF FY13E

Revenues 377 380 382 382 365 370 364 367 1,521 1,465

Telecom 361 363 361 362 349 354 349 350 1,449 1,401

Audiovisuals 29 30 32 33 29 29 30 31 123 119

Other -13 -13 -11 -13 -13 -13 -15 -15 -51 -55

EBITDA 129 133 135 120 128 128 128 112 517 497

Margin 34.2% 35.0% 35.3% 31.4% 35.2% 34.7% 35.2% 30.6% 34.0% 33.9%

Income from Operations 46 54 55 38 51 55 44 26 194 176

Margin 12.2% 14.3% 14.4% 10.0% 14.0% 14.8% 12.2% 7.1% 12.7% 12.0%

Goodwill Impairment / Amortisation 0 0 0 0 0 0 0 0 0 0

Other Non-Operating 0 1 0 0 0 -1 0 1 1 0

Fixed Asset Disposals 0 0 0 0 0 0 0 0 0 0

EBIT 46 53 56 38 51 55 44 26 193 176

Net Financial Expenses 9 13 14 14 15 17 16 16 50 65

Equity accounted profits 0 -1 -2 -1 -1 -2 -2 -2 -4 -7

Income before Taxes 37 42 43 24 37 40 30 11 146 118

Taxes -10 -9 -6 3 -8 -9 -8 3 -21 -22

Income from Discont. Operations 0 0 0 0 0 0 0 0 0 0

Minority Interests 0 0 0 0 0 0 0 0 -1 -1

Net Profit 27 33 37 27 29 31 22 14 124 95

Margin 7.2% 8.6% 9.7% 7.1% 8.0% 8.3% 5.9% 3.8% 8.2% 6.5% Note: Quarterly figures account for deconsolidation of joint ventures and loyalty contracts’ accounting changes


Quarter Schedule

Quarter Seasonality

Page 30 of 33


Sector Multiples

Market EV/EBITDA Dividend Yield EBITDA Margin Net Debt/EBITDA

Cap (€ mn) 2013 2014 2013 2014 2013 2014 2013 2014

European Pay TV

BSkyB 17,619 9.5 x 9.6 x 3.2% 3.3% 23.4% 22.0% 0.7 x 0.8 x Satellite

Telenet 4,653 9.9 x 9.3 x 8.8% 1.2% 50.6% 50.2% 4.3 x 4.3 x Cable

Iliad 9,730 9.3 x 8.2 x 0.2% 0.3% 31.1% 31.2% 0.9 x 0.7 x ADSL

Kabel Deutschland 8,185 11.9 x 10.8 x 3.2% 3.5% 47.8% 49.1% 3.1 x 3.0 x Cable

Ziggo 6,321 10.5 x 10.2 x 6.0% 6.8% 56.2% 56.1% 3.4 x 3.3 x Cable

EU Pay TV (median) 9.9 x 9.6 x 3.2% 3.3% 47.8% 49.1% 3.1 x 3.0 x

EU Pay TV (average) 46,508 11.7 x 9.6 x 4.1% 3.0% 37.8% 37.6% 2.2 x 2.1 x

US Pay-TV

DirectTV 25,412 6.4 x 5.9 x 0.0% 0.0% 24.9% 25.3% 2.2 x 2.2 x Satellite

Comcast 92,174 10.0 x 9.4 x 1.6% 1.9% 32.9% 32.9% 2.1 x 1.8 x Cable

Cablevision 3,101 8.1 x 7.8 x 3.8% 3.8% 26.3% 27.0% 5.6 x 5.4 x Cable

Dish Network 16,324 9.4 x 8.9 x 0.0% 0.0% 20.1% 20.7% 1.4 x 1.1 x Satellite

US Pay TV (median) 8.8 x 8.3 x 0.8% 0.9% 25.6% 26.1% 2.1 x 2.0 x

US Pay TV (average) 137,011 9.2 x 8.7 x 1.2% 1.3% 29.8% 29.9% 2.1 x 1.9 x

ZON Optimus 2,610 11.2 x 6.3 x 2.4% 3.0% 37.9% 37.0% 2.9 x 1.5 x

ZON Optimus (Mbcpi) 2,718 7.5 x 7.2 x 3.8% 4.4% 34.3% 34.4% 2.0 x 1.9 x

Tech

Sources: JCF Consensus and Millennium investment banking

Sector Multiples

Page 31 of 33


Consolidated Figures

Operating Revenues 1,620.9 1,590.7 1,465.2 1,480.6

EBITDA 542.9 555.5 497.3 516.2

D&A 360.4 354.3 321.2 313.3

Net Financials 34.4 38.8 60.9 51.5

Taxes -22.5 -21.4 -21.6 -33.8

Minority Interests -0.6 -0.9 -0.9 -0.9

Net Income 106.3 124.1 95.5 120.4

Margins (%)

EBITDA 33.5 34.9 33.9 34.9

EBIT 11.3 12.7 12.0 13.7

EBT 8.0 9.2 8.1 10.5

Effective Tax Rate 17.4 14.6 18.3 21.8

Net Income 6.6 7.8 6.5 8.1

2012 2013E2011€ million 2014E


Fixed Assets 2,554.3 2,539.0 2,437.2 2,389.6

Working Capital -162.4 -133.7 -115.3 -113.6

Invested Capital 2,391.8 2,405.2 2,322.0 2,276.0

Net Debt 1,101.9 1,138.5 1,021.3 952.6

Minority Interests 10.5 9.8 10.1 10.3

Equity 1,279.4 1,257.0 1,290.6 1,313.1

Capital Employed 2,391.8 2,405.3 2,322.0 2,276.0

2012 2013E2011€ million 2014E


Cash Flow from Operations 576.5 399.0 335.3 327.5

Cash Flow from Investing -210.1 -282.3 -265.7 -258.2

Cash Flow from Financing 1,776.7 -282.0 -177.4 -150.7

EBITDA - Capex 203.6 270.9 231.7 250.6

2012 2013E2011€ million 2014E


EBITDA 543 556 497 516

Capex 274 242 266 266

EBITDA - Capex 269 313 232 251

EBITDA - Capex - Dividends 269 313 170 153

Financial costs, Net 34 39 61 51

Net Debt 1,102 1,138 1,021 953Net Debt / EBITDA 2.0 x 2.0 x 2.1 x 1.8 x

Net Debt / Equity 0.9 x 0.9 x 0.8 x 0.7 x

Net Debt / Capital Employed 0.5 x 0.5 x 0.4 x 0.4 x

EBITDA / Financial costs 15.8 x 14.3 x 8.2 x 10.0 x

2012€ million 2011 2014E2013E


Income Statement


Cash Flow Statement

Leverage indicators

Page 32 of 33


DISCLOSURES

� This report has been prepared by Millennium investment banking (Mib) a department of Banco Comercial Português, S.A. (Millennium bcp).

� Millennium bcp is regulated by Comissão de Mercado de Valores Mobiliários.

� A draft of the report was shown to the company. Neither the company was aware of the recommendation nor was it changed.

� Recommendations:

Buy means more than 10% absolute return;

Neutral means between 0% and +10% absolute return;

Reduce means between -10% and 0% absolute return;

Sell means less than -10% absolute return.

� Unless otherwise specified, the time frame for price targets included in this report is current year-end or next year-end.

� Risk is defined by the analyst’s view in a qualitative way (High, Medium, Low).

� Usually we update our models and price targets in between 3 and 9 months.

� Millennium bcp prohibits its analysts and members of their households to own any shares of the companies covered by them.

� BCP group may have business relationships with the companies mentioned in this report.

� Millennium bcp expects to receive or intends to seek compensation for investment banking services from the companies mentioned in this

report.

� The views expressed above, accurately reflect personal views of the authors. They have not and will not receive any compensation for

providing a specific recommendation or view in this report. There were not any agreements between the companies covered and the

analysts regarding the recommendation.

� Analysts are paid in part based on the profitability of BCP group, which includes investment bank revenues.

(Unrated)Sell

ReduceNeutral

Buy

3.13

3.42

3.71

4.00

4.29

4.58

4.87

5.16

5.44

Nov/12

Dec/12

Jan/13

Feb/13

Mar/13

Apr/13

May/13

Jun/13

Jul/13

Aug/13

Sep/13

Oct/13

Nov/13

Dec/13

ZON Optimus

Recommendation Stock Price Price Target

DISCLAIMER

This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or

of opinions or estimates from Banco Comercial Português, S.A. and no representation or warranty is made as to its accuracy or

completeness. This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible

for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed

without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions

prevailing on the date they have been collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any

alteration in the market conditions shall imply the introduction of changes in this report. This information/ these opinions may be

altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result

of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different

assumptions could result in materially different results.

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