SPINNING OFF PT MULTIMEDIA · João Henrique do Carmo Mateus Spinning Off PT Multimedia | 1 It was only after 7 PM, on the warm spring Friday of March 02, 2007 - 389 days after Sonae

A Work Project, presented as part of the requirements for the Award of a Masters Degree in

Management from NOVA – School of Business and Economics.

SPINNING OFF PT MULTIMEDIA

João Henrique do Carmo Mateus

2044

A Project carried out on the Masters in Management Program, under the supervision of:

Professor Paulo Soares de Pinho

January 8th

, 2016


ACKNOWLEDGMENTS

The final outcome of this work was achieved with the guidance of Professor Paulo Soares

de Pinho – the constant seek for perfection, as well as his patience and perseverance

throughout the semester helped me improve and succeed in the final results.

- - -

It is also important to mention my family for all the support, specially my parents that

provided me with the tools to succeed in another important chapter of my life, as well as

Catarina, for the help with all the revisions.


ABSTRACT

The purpose of the present case – and accompanying Teaching Notes – is to better understand the

spin-off of PT Multimédia, by Portugal Telecom, after receiving a Public Takeover Offer from

Sonaecom, in 2006. The Government and the Competition Authority had never looked in a serious

way at PT’s dominant position and the lack of room for competition in the TMT sector – PT was

the owner of both the cable and copper networks, having access to privileged information from its

competitors with control over the wholesale and retail businesses. In 2006, the company received a

takeover offer from Sonaecom, the TMT subsidiary from the Portuguese conglomerate Sonae. The

offer was voted and rejected by a majority of PT shareholders, but the whole process triggered

several recommendations from the regulatory bodies. As a result, PT divested its cable business

with the spin-off of PT Multimédia, giving birth to a new competitor and a totally different

landscape in the telecommunications sector in Portugal.

KEYWORDS: Portugal Telecom, Spin-off, Takeover Offer, Corporate Governance


TABLE OF CONTENTS

ABSTRACT

PORTUGAL TELECOM HISTORY………………………………………………..……………1

Early days: TLP and CTT

Portugal Telecom, SGPS, SA

TMN

PT Multimédia and TV Cabo

Telesp Celular and Vivo

SONAE TAKEOVER OFFER FOR PT……………………………………….………………….3

PT’s Dominant Position

The Competition Authority Role

Alternatives for the disposal of PTM

SONAE................................................................................................................................................6

Sonaecom

Optimus

Telefónica

WORLD ECONOMIC OUTLOOK……………………………………………………….………7

TELECOM INDUSTRY IN 2006………………………………………………………….………8

Portugal TMT in 2006

MERGERS & ACQUISITIONS IN 2006………………………………………………….……..10

Type of Divestment

The Spin-off Process

THE SPIN-OFF OF PT MULTIMÉDIA……………………………….…………………………12

APPENDIX

TEACHING NOTES

REFERENCES


ACRONYMS AND ABBREVIATIONS

AT&T – American Telephone and Telegraph (American telecom company)

BCG – Boston Consulting Group (American consulting firm)

BPI – Banco Português de Investimento (Portuguese private bank)

BRIC – Brazil, Russia, India and China (referring to emerging economies)

CAGR – Compound Annual Growth Rate

CAPM – Capital Asset Pricing Model

CAR – Compound Annual Return

CEO – Chief Executive Officer

CGD – Caixa Geral de Depósitos (Portuguese State owned bank)

D/E – Debt-to-Equity ratio (capital structure of a company)

DBK – DBK Informa – Observatorio Sectorial (Iberian consulting and market studies firm)

DCF – Discounted Cash Flow (Valuation Model)

EBIT – Earnings Before Interest and Taxes

EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization

EUR – Euro (currency)

EV – Enterprise Value

FCF – Free Cash Flow

FCFE – Free Cash Flow to Equity

FCFF – Free Cash Flow to the Firm

FED – United States Federal Reserve Bank

GDP – Gross Domestic Product

GSM – Global System for Mobile (digital technology for mobile operations)

IPO – Initial Public Offering

IT – Information Technology

ITU – International Telecommunication Union

M&A – Mergers and Acquisitions

MVNO – Mobile Virtual Network Operator

NOPLAT – Net Operating Profit Less Adjusted Taxes

NOS – Portuguese technology, media and telecommunications company (former “ZON”)

OECD – Organization for Economic Co-operation and Development

P/E – Price Earnings ratio

PT – Portugal Telecom (Portuguese telecom company)

PTM – PT Multimédia (Portugal Telecom’s subsidiary that was spun-off and originated “ZON”)

SBC – Southwestern Bell Telephone Company (American telecom company)

SOTP – Sum of the parts

TMT – Technology, Media and Telecommunications

USD – United States Dollar (currency)

WACC – Weighted Average Cost of Capital

ZON – Portuguese technology, media and telecommunication company (1993-2014)


S p i n n i n g O f f P T M u l t i m e d i a | 1

It was only after 7 PM, on the warm spring Friday of March 02, 2007 - 389 days after

Sonae Group public takeover offer for Portugal Telecom - that Henrique Granadeiro and Zeinal

Bava, respectively Chairman and CEO of Portugal Telecom (PT) could finally smile and celebrate

with the other board members of Portugal's leading telecommunications company. PT’s

shareholders had just voted against the hostile takeover attempt made by Sonae, a Portuguese

conglomerate, but the concerns with that long-lasting process were far from being over. In reality,

the sweet taste of victory was mixed with the sour taste of regulatory interventionism.

The takeover had attracted significant attention by regulatory bodies who saw it as an opportunity

to increase the competitiveness of the country's telecommunications sector. Due to regulators’

pressure, PT was about to divest its much prized Multimedia unit, in a operation that would result

not only in the beginning of the downfall of one of Portugal’s biggest companies, but also in a total

reconfiguration of the Portuguese Telecom Sector.

- - -

PORTUGAL TELECOM HISTORY

Early days: TLP and CTT

Only one year after Alexander Graham Bell announced the invention of the telephone in 1876, the

first telephone experiments were portrayed in Portugal. In 1887, a concession set in Lisbon and

Oporto by The Edison Gower Bell Company was transferred to APT – Anglo Portuguese Telephone

Company. Almost one century later, in 1968, TLP – Telefones de Lisboa e Porto (“Lisbon and

Oporto Telephones”) became the first Government owned company to explore telephone services in

Portugal’s two major cities – CTT, the Portuguese Telephone, Telegraph and Post Office company

(Correios, Telégrafos e Telefones) covered the rest of the country. Radio-telegraphy and wireless

telephone were explored by CPRM – Companhia Portuguesa Rádio Marconi, through an

agreement with Marconi’s Wireless Telegraphy concession.

Between 1970 and 1992, CTT became a public company, TLP was transformed under the State

control and TDP – Teledifusora de Portugal, was created with the mission to explore over-the-air

radio and television broadcasting. 1992 was the year that witnessed the inception of Portugal’s

biggest telecommunications company and one of the key economic players on the following years.



With the purpose to manage all the State participations in the sector (CTT, TLP, CPRM and TDP)

Portugal Telecom SA was created (firstly named “Comunicações Nacionais SGPS, SA).

Portugal Telecom, SGPS, SA

Eight years after its inception, in 2000, the fifth phase of privatization was concluded leaving the

State with a minor participation on the company (around 11 percent), although having privileged

voting rights through a golden share. The expansion into new technological fields, business areas

and products (see Exhibit 1), as well as the creation of a new holding company to manage PT’s

participations (Portugal Telecom, SGPS, SA) were the first steps of the soon-to-become Portugal’s

TMT behemoth1. The company comprised several brands along the technological and

telecommunications sector, such as TMN (Mobile), PT Multimédia and TV Cabo (television) as

well as Netcabo (internet).

TMN

TMN was a Portuguese telecommunications company that operated in the mobile segment – the

brand was launched in March 1991 by PT Comunicações as Portugal Telecom’s mobile operator2.

The company that began to operate on a analogic network and later moved to digital (GSM),

launched a third generation mobile technology UMTS in 2004, soon establishing itself as

Portuguese market leader in mobile communications – in 1997 it had already 7 million customers.

TMN was the first company in the world to introduce pre-paid SIM cards that allowed customers to

pay for the service before using it – this innovative process allowed for a reduction in the number of

invoices and burocracy in contracts.

PT Multimédia and TV Cabo

TV Cabo was the first Pay TV Company to operate in Portugal, as well as the first cable TV

operator. The inception was in 1993 and it started broadcasting in 1994, operating 30 channels. In

1996, after the restructuring of the Portugal Telecom group in the areas of fixed-line telephone

network, mobile, cable television and media, corporate, international, innovation and information

systems, it was created PT Multimédia, SGPS, SA (“PT Multimédia”) – a holding with the main

purpose of centralizing Internet and Media activities. In 1998, the company launched its first

satellite service, allowing the expansion of its products across the whole country. In the same year,



the company created the first national cable internet company – Netcabo. In 1999, TV Cabo settles

itself as the leading domestic television distributor (see Exhibit 2) and the first broad band internet

operator, taking advantage of the TMT bubble – later, in the same year, PT Multimédia would

complete its IPO, having Portugal Telecom as its major shareholder (58 percent). In 2004, 3 years

after the first experiments with Interactive Digital TV, the company launches Portugal’s first pre-

paid broadband access – Zzt!. In 2006 the company receives a public takeover offer by Sonaecom –

a Portuguese subsidiary of the Sonae group, responsible for the areas of technology, media,

telecommunications, internet and information systems.

Telesp Celular and Vivo

A few years before the takeover offer, PT had already expanded overseas, namely to Brazil. Telesp

Celular was the first mobile operator in the São Paulo State (Brazil) - starting as a division within

Telecomunicações do Estado de São Paulo (Telesp), Telesp Celular began its operations in 1993,

firstly in the analogic system, later, with the Telebrás system privatization, in 1998, Telesp and

Telesp Celular were split. The first one became Telefónica’s property, while Telesp Celular was

acquired by Portugal Telecom. Later, in 2000, in a joint venture between PT and Telefónica Mobile,

both telecoms combined their Brazilian assets and gave birth to Vivo. Telesp Celular operated under

its original name until 2003, when it became operating as Vivo, with almost 66 percent market share

in Brazil3.

PT was one of Portugal’s biggest companies, not only in revenues and assets but also in terms of

market cap - together with PT Multimédia the technological giant had a market capitalization of

EUR 12.2 bn4.

SONAE TAKEOVER OFFER FOR PT

On February 06, 2006, Sonaecom, launched a cash tender offer for Portugal Telecom, as well as a

co-offer (demanded by the regulator) for PT Multimédia, for EUR 9.50 cash per share (see Exhibit 3

for comparable offers). This offer valued PT Multimédia at EUR 2.79 bn and represented a

premium of 16.1 percent relative to PT’s closing price of EUR 8.18 (the offer to PTM shares was of

EUR 9.03, which represented a 6.1 percent discount to PT Multimédia's closing stock price of EUR

9.62) on February 06, 2006 (the last trading day prior to the firm announcement of the offer). PT

owned, by the announcement date, a 57.55 percent stake in PT Multimédia and Sonaecom would



indirectly acquire that stake by successfully taking over PT, and would then have to launch a

mandatory offer for the remaining shares in PT Multimédia5.

How could such a smaller company dare to threaten one of Portugal’s leading corporations?

PT’s Dominant Position

Sonae defended like no one the need of the incumbent to sell one of the networks and separate the

wholesale business (providing network to other operators) and retail (selling communications to

final customers). By not controlling both segments, PT would not have access to other operators’

information – PT’s clients in the wholesale business – and would give room to more competition on

the final consumer services. The first case related with the abuse of dominant position by Portugal

Telecom, resulted in a fine of EUR 38 million - the Competition Authority concluded that PT

unjustifiably refused access by competitors TV TEL and Cabovisão to its underground conducts

network (2007). The Competition Authority stated that “the ductwork was an essential facility for

the purpose of passing cables and electronic communications networks and that, by refusing access

to this facility, Portugal Telecom restricted competition in downstream markets, in particular in the

markets for pay-TV, broadband internet access and fixed telephony”6. One year after, in September

2008, the Competition Authority imposed an EUR 2.1 million fine on Portugal Telecom related

with an abusive behavior portrayed in 2003 and 2004, in the wholesale markets for leased lines, in

particular to the system of discounts applied by the company in the provision of these services. The

Competition Authority concluded that PT was the sole supplier of wholesale services of terminating

segments and analogue trunk segments of leased lines, and that in the wholesale provision of digital

trunk segments its market share was always above 86 percent. As a consequence, PT’s offer in the

leased lines markets was indispensable for the provision of electronic communications services at

the retail level7.

The Competition Authority Role

With the takeover announcement, Sonae committed itself with the Competition Authority to operate

some structural changes in the telecommunications market in Portugal, namely the horizontal and

vertical separation of the fixed line networks, agreeing to sell either the copper (voice and internet)

or cable (TV and internet) network, as well as providing access and alienate some features of the

content services and mobile services. For the takeover to be approved, Sonae would have to assure



better competition conditions on the content broadcasting business as well as provide access to

MVNO’s, allow the entrance of a new mobile operator and respect price cap mechanisms among

other mobile services rules imposed by the Competition Authority8. Despite the recommendations

from the Competition Authority, Sonae was not willing to sell Optimus, stating in a press note from

May 2006 that in the event of not being able to merge Optimus and TMN, the bidder would

withdraw its offer from the market – “we always said that the offer was based on the synergies

between both mobile operators”9.

Telefónica and Vivo

By 2006, Portugal Telecom and the Spanish Telefónica were co-owners of the Brazilian operator

Vivo. There was some speculation in the market regarding the position of Telefónica towards the

approval of the takeover (as PT shareholder) in order to acquire the remaining of PT’s stake on

Vivo, becoming the only shareholder (see Exhibits 4 and 5 for shareholder structure). However,

Belmiro de Azevedo, Sonae Group chairman, said that although the ownership structure was likely

to change if the takeover was approved, Sonae could eventually acquire the remaining of Vivo’s

stake from Telefónica or even sell its stake to other interested parties10

.

1 percent Stake to have Access to Information

In May 2006, Sonaecom announced the purchase of 11.3 million PT shares, which is approximately

the 1 percent stake that allows the access to information – the price paid was EUR 9.38 per share.

Sonae was willing to pay EUR 9.50 per share by the date of the takeover announcement (February

2006), but after several restrictions imposed by the Competition Authority (September 2006) the

bidder was considering to review the price proposed. In December 2006, Sonae submitted a new

proposal with more commitments that were approved by ANACOM – previously, the telecom

sector regulator had opposed the deal. Finally, in January 2007, after ANACOM’s approval, as well

as the Competition Authority positive signal (approval for the second time in 3 months), Sonae

submitted the official prospectus for the public takeover offer for PT.

Alternatives for the Disposal of PTM

After the recommendations of structural changes in the telecommunications industry in Portugal,

given by the Competition Authority, even if the takeover offer was not approved by PT’s



shareholders, PT would have to divest - not only at the mobile operations level, but especially in the

fixed-line infrastructure. The future owner of PTM (either PT or Sonae) would have to dispose of

one of the networks (copper or cable) in order to dilute the dominant position on the market. The

Competition Authority did not specified the type of divestment required after the outcome of the

takeover offer process – it could be either a trade sale or a carve-out, to a direct competitor, being

national or foreigner investor, or even a spin-off.

SONAE

Sonae, SGPS, SA (“Sonae”) is a Portuguese conglomerate that operates in the sector of Shopping

Malls, Hotels and Travel Agencies through its subsidiary Sonae Sierra as well as in the Information

Systems Software, Media and Telecommunications through its subsidiary Soanecom. The company

is Portugal’s top employer with almost 40,000 employees (as of 2006) and is listed on the Lisbon

Stock Exchange (Euronext PSI-20:SON).

Sonaecom

Sonaecom is a company from Sonae Group that participates in the Media, Telecommunications,

Internet and Information Technology sectors11

. In 2006, Sonaecom was the owner of Optimus,

Portugal’s third mobile operator in terms of market share (after TMN and Vodafone). Sonaecom

was also the owner of one of Portugal’s reference newspapers, Público and the digital certification

company Saphety as well as technological consulting firms like WeDo Technologies and BizDirect.

In 2006, Sonaecom’s consolidated turnover decreased by 1 percent to EUR 836 m (USD 1.1 bn12

),

reflecting the divestment of Enabler, a tech subsidiary, sold to an Indian company13

. Although 2006

EBITDA reached EUR 184 m (USD 243 m), resulting in a 22 percent margin and a 17 percent

increase relative to the previous year, the consolidated net income was negative in EUR 5 m (USD

6.6 m) mostly due to the costs incurred with the public tender offer on PT Multimédia.

Optimus

Optimus was a Portuguese mobile telecommunications operator14

, founded in 1997 as Optimus

Telecomunicações, S.A., by the Sonae Group, that began its operations on the GSM and UMTS

systems in 1998. In 2006, Optimus customer base increased by 10.6 percent to 2.6 million



subscribers, allowing the brand to consolidate as the third Portuguese mobile operator, after TMN15

and Vodafone, with a market share of 20 percent16

.

Telefónica

Telefónica S. A. is a Spanish telecommunications company, created in 1924 in Madrid. Telefónica

had the market monopoly until the State decided to sell its participation, in 1997. By 2004, the

company still had 20 percent of the Spanish telecommunications market and the monopoly in some

regions – it operates globally and has become one of the largest fixed-line and mobile companies in

the world. In 2003, Telefónica merged its mobile operations in Brazil with PT, Telesp Celular and

Global Telecom in order to control all its mobile operations in Brazil under a single brand (Vivo)17

.

WORLD ECONOMIC OUTLOOK

2006 represented the third consecutive year of accelerated growth in the global economy – the GDP

at current prices grew by 3.8 percent, with the major contributions coming from the BRICs – China

had the largest growth rate, with 10 percent, India’s GDP grew by 8.3 percent, followed by Russia

with a 6.5 percent growth18

. The United States GDP grew by 3.3 percent, after a slowdown of the

increase in oil prices and 17 consecutive increases in interest rates by the FED – which boosted

from an historic low of 1 percent to 5.25 percent19

. Despite the fact that the American economy was

inflated with overvalued real estate, analysts were optimistic and expectations for 2007 remained

very high, since the inflation rates (with the exception of Japan) were stable and close to the target

set by the FED.

European Economic Outlook

The Eurozone economy grew by 2.6 percent, with positive contributions from the southern

countries – Spain grew by 3.7 percent, being one of the highest rates despite having its inflation

over 3.5 percent, Greece was growing by 4 percent, although it had the highest deficit among its

peers (4.8 percent of GDP). The German and British economies grew both by 2.6 percent, leaving

Italy and Portugal with the bottom spots – 1.8 and 1.3 percent, respectively. Despite the inflationary

pressures led by Central Banks and Governments, with increasing interest rates and overvalued

housing market, forecasts were optimistic all over Europe for the following years, with companies

betting on high levels of leverage to finance their growth policy, relying on favorable credit

conditions.



Portugal Economic Outlook

Portugal had one of the lowest growth rates in the world economy in 2006 – the 1.3 percent increase

in GDP was mostly conditioned by the need to reduce public deficit. Public consumption and

investment fell by 0.3 and 2.1 percent respectively and private consumption grew modestly by 1

percent20

. On the other hand, exports were driving the economy up and bringing GDP growth to

positive figures, achieving an 8.3 percent increase with optimistic forecasts for the following years.

Investment in the private sector was also expected to increase. Despite the poor state of public

finances and the large negative output gap, inflation (3 percent in 2006) was expected to converge

towards the European average. Unemployment, although declining, was still high (8.7 percent), so it

was expected to be translated into slightly lower wages.

TELECOM INDUSTRY IN 2006

The 2007 edition of the ITU report Trends in Telecommunication Reform21

stated that, by the end of

the previous year there were already 4 billion mobile and fixed-line phone subscribers and 1 billion

internet users connected worldwide.

Mobile surge

The TMT sector was witnessing a mobile surge, with 61 percent of the mobile phone subscribers

coming from developing countries – China and India alone reported almost 200 million additional

subscribers in the first quarter of 2007, with India aiming to attain 500 million in 2010. Not only the

BRICs registered continuous growth between 2006 and 2007 – Iran doubled the number of

subscribers reaching 17 million in 2007 and Ukrain registered the strongest mobile annual growth

rate in Eastern Europe at 60 percent between 2005 and 2007.

Internet and broadband

Although the internet penetration rate was only 10 percent among the developing countries, in 2006

the number of users in these economies grew by 150 percent – in the OECD countries there was

already some saturation with 70 percent of the population having access to broadband. This growth

in the number of users fostered further investment in better infrastructures to ensure higher quality



internet access and improve broadband penetration – wealthy economies still represent over 92

percent of the number of subscribers in the 25 top broadband countries.

Tech and Telecoms M&A

2006 was a record year for the M&A market, especially regarding technology and

telecommunications deals – excluding debt, the number of mergers and acquisitions in the TMT

sector increased 4.9 percent to a record EUR 463.9 bn (USD 611.9 bn22

), where telecommunication

deals alone reached EUR 175.9 bn (USD 232 bn), despite a decline in the number of transactions

versus the previous year (2005) – less 2.9 percent to 5,526 deals in 200623

. Excess cash reserves

and favorable credit conditions drove the increase in the size of the deals – Brenon Daly, an analyst

at 451 Research said that this surge in telecom deals allowed “many potential buyers to stay

competitive in auctions that they perhaps wouldn't have contested in years past, driving up prices”24

.

After paying USD 16 bn (EUR 13.5 bn25

) for the integration of SBC in 200526

, AT&T was involved

in the biggest telecom deal in 2006, offering USD 66.7 bn (EUR 50.5 bn27

) for BellSouth. Not only

in the US, but also in Europe and Asia, the buyout spree continued through 2006 - the French

operator Alcatel bought Lucent, an American tech company for EUR 10.2 bn (USD 13.44 bn), a

consortium led by the Blackstone Group bought Freescale Semiconductor, a Motorola spun-off

company, for USD 17.6 bn (EUR 13.3 bn) or even Motorola acquisition of Symbol Technologies

for USD 3.9 bn (EUR 3 bn).

Portugal TMT in 2006

“We consider that PT is actually a national champion because of its spectacular dimension (…) it is

Portugal’s only non-financial multinational (Ricardo Salgado - BES CEO, 2006)”

The market value of the telecommunication services in Portugal reached EUR 7.7 bn (USD 10.2

bn28

), in 2006, registering a slight decrease relative to 2005, with the internet segment maintaining

its growth trend over the last years. According to a study from the consulting firm DBK29

, 2006

figures were penalized by a downfall on the fixed-line telephone segment (see Exhibit 6), as well as

the level of maturity achieved by the mobile services segment – broadband internet connections

were also ramping up. 76 percent of the TMT sector revenues in Portugal came from services

rendered to the customers, whereas the mobile segment alone captured 53 percent of the total

revenues (see Exhibit 7), growing by 4.4 percent relative to 200530

, with almost EUR 2.3 bn (USD 3

bn). Contrary to the fixed-line telephone services, which fell 12 percent to EUR 1.2 bn (USD 1.6



bn), the Internet and Data market showed strong dynamics, supported by the continuous investment

on broadband infrastructures (see Exhibit 8). In 2006, the number of registered customers grew by

23 percent, reaching 1.5 m broadband users that accounted for EUR 815 m (USD 1.1 bn) of

revenues – an increase of 7.7 percent when compared to 2005. The market was characterized by

high levels of concentration, with the main players accounting for more than 90 percent of the

market share – Portugal Telecom Group (PT) with 44.5 percent, followed by the Vodafone Group

with 36.1 percent and Sonae Group (Optimus) with 19.3 percent31

(see Exhibit 9). Television

distribution services revenues were also increasing, especially in the Cable TV segment (see Exhibit

10) where PT had a dominant position in the market.

MERGERS & ACQUISITIONS IN 2006

A Record Year for M&A

2006 was a great year for mergers and acquisitions with the global deals reaching EUR 3,032 bn

(USD 3,999 bn32

) – 16 percent higher than the height of the dotcom bubble in 2000. Fueled by good

financing conditions, ambitious CEOs and a growing market hungry for bigger deals, companies

were launching hostile bids like never before - 355 deals that represented a 378 percent increase

over the previous year (94 deals in 2005) and above the previous record of 272 deals in 1999. This

surge of deals was reinforced with an increase by more than the double of the previous year number

of buyouts and private equity cash reaching EUR 538.1 bn (USD 709.8 bn), accounting for almost

18 percent of the M&A activity in 2006. Europe led the rankings with EUR 1,160 bn (USD 1,530

bn), followed by the US with deals totaling EUR 1,092 bn (USD 1,440 bn) – this allowed

investment banks to take EUR 14.3 bn in fees and distribute million-dollar bonuses for their M&A

bankers. By the end of 2006, banks were still optimistic about the increase in the level of M&A

activity as markets remained opened to finance aggressive takeovers – global high-yield borrowing

reached an historical maximum, with EUR 198.2 bn (USD 261.4 bn) and IPOs, as well as overall

equity capital markets, totaled EUR 180.3 bn (USD 237.8 bn).

Number of Divestments

According to a study from the Boston Consulting Group33

, 41 percent of the M&A deals between

2006 and 2010 were divestitures (public to subsidiaries), while 43 percent of the portfolio

restructurings were from public to private and only 16 percent changed hands and remained public



(public to public). The number of divestitures had also increased and its share had grown over the

years and it is estimated to have accounted for almost 50 percent of the M&A activity in 2014.

Divestment Reasons

Although the starting point of a divestment should always be a strategic question on the company’s

assets’ potential value in the event of a transfer of ownership, sometimes, competition authorities

demand divestitures, especially in customer-focused industries, such as media, telecommunications

or technology. Capital markets reward highly leveraged companies that divest some of their assets,

not only because they tend to improve their remaining operations by focusing on core activities

after the spin-off, but also because they reduce their exposure to diversification, lowering the

conglomerate discount.

Type of Divestment

In an article published by BCG34

, there are three basic divestment strategies that can be followed by

companies when restructuring their business portfolios or assets: a straight trade sale to another

buyer, a spin-off to the company’s shareholders and a carve-out, where the company retains the

ownership despite selling a partial interest to the public. Although the companies that actively

reshape their portfolios are often rewarded positively, the research concludes that investors prefer

spin-offs, even with no cash inflows for the seller and an average longer execution – since 1990, 60

percent of the spin-offs generated positive CARs for the parent company. Furthermore, the average

CAR for spin-offs was twice the value of the other two exit alternatives - 2.6 percent versus 1.3 and

1.2 for trade sales and carve-outs, respectively.

The Spin-off Process

The spin-off results in the creation of a new company, after the distribution or sale of new shares

from an existing business unit of the parent company. The operation does not generate cash, but is

considered to produce value for shareholders that become owners of the spun-off company, which

is expected to grow and be worth more as an independent entity35

. Unlike IPOs, which depend on

favorable market conditions, spin-offs have a higher completion security, as well a tax advantage,

since the parent company does not incur in capital gains. It is a purely strategic decision that does

not require financing or capital constraints. Another reason why spin-offs are pursued more often,



especially by bigger businesses, is because the spun off entity becomes a publicly traded company

with its own ticker symbol and a board of directors and management team that is usually

independent from the parent company – this reduces the conflict of interests between both parties

(the spun-off company and the former parent), allowing also for a higher freedom when pursuing

new strategies and potential future mergers and acquisitions.

THE SPIN-OFF OF PT MULTIMÉDIA

Six months after the rejection of the takeover offer made by Sonae, on September 21, 2007,

Portugal Telecom, agreed to spin off its 58.43 percent stake in PT Multimédia, to its shareholders.

The stake was valued, by the time of the announcement, at EUR 2,149 m (closing price on

September 20, 2007). Under the terms of the agreement, each shareholder would receive 0.16 PTM

shares for every PT share held (the previous stake announced was 0.14 PTM shares per PT share).

The spin-off was part of the shareholders’ remuneration package announced on February 20, 2007

(see Exhibit 11 for dividend policy details). PT shareholders were to receive PTM shares two weeks

after the shares start trading. The transaction was approved by the SEC and in November 07, 2007 it

was completed: a total of 154.9m shares were transferred to PT shareholders, representing 50.1

percent of the share capital and voting rights in PT Multimédia. As a result of the application of the

withholding tax and the fractional shares mechanisms, PT retained an interest of 8.3 percent of PT

Multimédia’s share capital, corresponding to a total of 25.7m shares36

.

In 2006, Obercom37

had already commented on a possible reconfiguration of the market, following

the rejection of the tender offer made by Sonae to PT and the spin-off of PT Multimédia from its

parent company, the data agency anticipated a consolidation of the market and a reorganization of

its several players. Several news in the Portuguese press, released after the announcement of the

spin-off, stated that the divestment was a defensive mechanism that PT found against Sonae’s

takeover, forcing the government to pronounce itself about the possible merger. Portugal Telecom

estimated that the costs with PTM’s spin-off, in a worst case scenario, would be approximately

EUR 18.2 m (USD 24.8 m)38

, including employee compensation and restructuring of the IT39

.

According to Henrique Granadeiro, the Chairman, this amount would only be reached if PTM

canceled all the contracts that it had with PT – something unlikely to happen, since PT assured the

best market prices to PTM.



After paying almost EUR 5 bn (USD 6.6 bn40

) to shareholders as a compensation package resulting

from a defensive measure from Sonae’s takeover bid, PT was preparing to raise more capital from

investors to finance their growth plans (see Exhibits 12 to 22 for more Financial Data).

- - -

The PT Multimédia spin-off triggered the separation of PT’s Cable and Copper networks – an

operation long time ago demanded by the competition. Why had PT kept both competing networks?

Was this a possible reason for lack of development in the sector? Who benefited the most with the

spin-off? Was this the best option for all the shareholders? Where there any possible conflicts of

interest?


S p i n n i n g O f f P T M u l t i m e d i a ( T e a c h i n g N o t e s ) | 1

TEACHING NOTES

1. Summary of the case

The present case is focused on the spin-off of PT Multimédia, by Portugal Telecom, after receiving

a public takeover offer from Sonaecom, in 2006. Since its inception in 1992, Portugal Telecom had

a dominant position in the telecommunications market in Portugal. It was the owner of both the

cable and copper networks, having access to privileged information from its competitors with

control over the wholesale and retail businesses. In 2006 the company received a takeover offer

from Sonaecom, the TMT subsidiary from the Portuguese conglomerate Sonae. The bidder intended

to merge its mobile operator – Optimus with PT’s TMN, as well as cause some structural changes in

the bundled services market (TV, Telephone, Mobile and Internet) – the Government and the

Competition Authorities had never looked in a serious way at PT’s dominant position and the lack

of room for competition in the TMT sector. The takeover offer was voted and rejected by a

majority of PT shareholders, but the whole process triggered several recommendations from the

regulatory bodies. PT divested its cable business with the spin-off of PT Multimédia, giving birth to

new competitor and a totally different landscape in the telecommunications sector in Portugal.

2. Teaching objectives and target audience

Target Audience:

- Masters students – Management and Finance

Teaching objectives:

The present case is a typical Applied Corporate Finance case-study that can be discussed to address

the following subjects:

- Corporate Restructuring

- Divestments (Spin-offs and alternatives)

- Valuation (holdings and subsidiaries – conglomerate discounts)

- Mergers and Acquisitions

- Public Tender Offers

- Corporate Governance / Shareholder Activism



3. Teaching approach and strategy

Some of the questions that might be proposed for students to address and answer, helping in a better

understanding of the case and the subjects learned in class:

a. Why did PT kept both competing networks (copper and cable)? Is this the reason for

lack of development?

b. What are the alternatives for the disposal of PTM? Sale to a competitor / spin-off /

carve-out / other?

c. Who benefits the most with the spin-off? Is it the best option for all the shareholders?

(minority / major / control premium)

d. Valuation – How much was PT worth as a conglomerate and PTM as a standalone

subsidiary? Before and after the spin-off?

e. How did the markets react? What was the share performance before and after the spin-

off announcement? (1 day before and 1 day after the spin-off)

f. What are the possible governance issues? Are there any possible conflicts of interest in

sharing shareholders between PT and the spun-off PTM?

g. Is the spin-off a source of ‘Cannibalization’? Why would PT put itself in a situation of

potential competition (by creating a competitor)?

h. Does it increase shareholders ‘exposure’ to a bigger market share by creating two major

players in the triple play segment?

i. Does it add value to the market / consumer?

j. How did the shareholder structure change over time?



4. Analysis of the proposed questions

1. Why did PT kept both competing networks (copper and cable)?

PT’s Dominant Position – The Separation of Copper and Cable Networks

Almost all the shareholders with seats on the board feared that the takeover would lead to the

dismantlement of PT, since this was the only form of investment that was viable to Sonae which

protested in the previous years about the need of separation of PT‘s two owned networks – copper

and cable. Before the takeover, in July 2005, Sonae had press charges on the European Commission

against what it considered to be an abusive dominant position by Portugal Telecom, reinforced by

the ownership of the two networks. Sonae defended like no one the need of the incumbent to sell

one of the networks and separate the wholesale business (providing network to other operators) and

retail (selling communications to final customers). By not controlling both segments, PT would not

have access to other operators’ information – PT’s clients in the wholesale business – and would

give room to more competition on the final consumer services. PT controlled approximately 90

percent of the fixed-line business, 85 percent of broadband internet access and 69 percent in cable

internet access - 35 percent of the customers had internet access, of which 75 percent were

broadband (ANACOM).

The Regulatory Body’s’ Role – ANACOM, the Competition Authority and the Government

Although the tender offer was not accepted, by the time of the announcement Sonaecom had already

assured total acceptance by the Competition Authority in merging its mobile operator, Optimus with

PT’s TMN – few conditions were imposed by the regulator, like keeping annual price floating rates

around European averages, since it believed that more players could enter the mobile

telecommunications market soon and there would be less need for regulation41

.

ANACOM – Autoridade Nacional de Comunicações (“National Communications Authority”),

which is the regulatory body for postal and electronic communications in Portugal, never opposed

the deal and always acted as a prudent observer with its recommendations – in March 2008

ANACOM stated that: “[…] it appears to begin to observe a competition behavior between the

spun-off PT Multimédia and PT” – concluding that the spin-off originated a true competitor for PT:

“Therefore, ICP-ANACOM believes that, with the spin-off, PTM is no longer a part of the PT

Group, thus it also stops being subject of regulatory obligations recurring from market analysis.”



The Government always had a neutral position during the whole process – “We took due note”

(Mário Lino – former Minister of Telecommunications); not being clear on its position regarding

the operation (Sonaecom’s takeover offer) a posture that the Government held throughout the

upcoming months and that reinforced the northern company (Sonae) to move forward with the

takeover. There was, however, a setback that concerned the parliament: eliminating competition

from mobile, since the takeover would result in the merger of TMN and Optimus - the State was

represented through the attorney Sérvulo Correia, which was directed by Mário Lino of abstaining

to vote.

2. What are the alternatives for the disposal of PTM?

Alternatives for the Disposal of PTM

According to estimates from Goldman Sachs (April 2007) PTM was believed to be overvalued,

trading at 16x EBITDA, making it hard to result in a carve-out and attract investors, since they

prefer to acquire companies perceived to be undervalued, which does not seem to be the case of

PTM. The LBO analysis from the research house also yields an IRR of 12.4 percent (exit in 5 years)

and 15 percent (in 3 years) – this is also a sign of hard completion on a deal with a Private Equity

player (trade sale).

5 Year Exit

Exit EV/EBITDA multiple 6.0

Equity Value in 5 Years (2012) 2 752

Implied exit unlevered FCF Yield 7.0%

IRR 12.4%

3 Year Exit

Exit EV/EBITDA multiple 6.5

Equity Value in 3 Years (2010) 2 337

Implied exit unlevered FCF Yield 6.8%

IRR 15.0%

Source: Goldman Sachs Research estimates

PT Multimédia 3.4 5.1x 16.0x 49.1x 2.6% 2.9%

Cable Comparables Average 2.1x 10.3x 31.6x 4.2% 1.6%

Weighted Average 2.1x 9.0x 29.9x 5.8% 1.8%

Source: Goldman Sachs Research estimates

P/EFCF

Yield

Div

YieldAlternative Carriers

Mkt Cap

(€ bn)

EV /

Sales

EV /

EBITDA



3. Who benefits the most with the spin-off? Is it the best option for all the shareholders? (minority

/ major / control premium) Does it create value for shareholders?

PT relinquished its 58 percent stake in PTM, with PT shareholders receiving 16 PTM shares for

every 100 shares in PT. By 2006, PTM had a market value of EUR 3.1 bn (USD 4.1 bn42

) - the

value of PT's stake was approximately EUR 1.8 bn (USD 2.4 bn) but the value paid to shareholders

was around EUR 2.1 bn (a premium of 16.7 percent). The proposed deal would result in having the

same shareholder structure for two different companies: on one hand, PT’s Multimedia division

would maintain its operations on the triple play market (TV, voice and internet), as well as its

mobile operator “TMN”, under PT’s umbrella and relying specially on the copper (fixed-line)

network. On the other hand, the spun-off PTM would begin operating on the triple play market as a

new and distinct player and PT’s direct competitor, mainly on the cable network. From a financial

point of view, not only these types of deals are better for shareholders, since they do not depend on

favorable market conditions (unlike IPOs) and are also tax-free, but also, on this particular case, in

order to defend itself from Sonae’s takeover bid, PT had already given its shareholders a

compensation package that amounted to EUR 5 bn, (from which EUR 3.5 bn comprises an

extraordinary cash return of EUR 1.9 bn within the upcoming 12 months and a commitment to

continue to implement a progressive dividend policy).

Fernando Ulrich, CEO of the Portuguese bank BPI – one of PT Multimédia’s major shareholders

with a 5 percent stake – considered the spin-off highly favorable for both PTM and Portugal

Telecom itself, since it would allow the company to become more competitive and aggressive due

to an increase in direct competition. Mr. Ulrich also believed that the shareholder structure would

change after the spin-off closing, as well as the management team that, by being independent from

Portugal Telecom, would have as major goal to maximize the value of PTM43

. Sonaecom’s offer for

PTM shares was also seen as undervaluing the company, not only by analysts and comparable

transactions, but also by most of PT’s shareholders with interests on keeping their stake in a

company with a dominant position on the market.

Although there was a slight decrease in both PT and PTM shares after the spin-off announcement

(September 21st) and its completion (November 7

th), value was created for shareholders since PT

relinquished its stake on PTM by giving 0.16 PTM shares per PT share to each shareholder. On

November 6th, PT shares were trading at EUR 5.36 (adjusted closing price) and after the spin-off

completion PT shareholders had a portfolio of PT shares trading at EUR 5.23 (adjusted closing



price on November 8th) plus 0.16 PTM shares per PT share held, trading at EUR 9.45 (portfolio

value increase of 0.16x9.45=1.50 per share).

4. Valuation – How much was PT worth as a conglomerate and PTM as a standalone subsidiary?

PT Valuation – as a conglomerate (before spin-off) – DCF method

For the valuation of Portugal Telecom (as of 2005) as a conglomerate, one of the possible methods

is the Discounted Cash Flow method. The Free Cash Flows from 2005 until 2010 (estimated) were

obtained based on average analysts estimates for that period – Credit Suisse and JP Morgan

researches on Portugal Telecom dating 200544

(see the DCF spreadsheet for more details). The

continuing value was calculated based on the EV with EBITDA, with Revenues for the last period

of analysis (2011) and EV/EBITDA Multiple based on comparables (see comparables table below

and spreadsheet for more details). The WACC to discount the Free Cash Flows was also computed

based on the firm’s Cost of Equity (with betas from comparables) and Cost of Debt, among several

other assumptions (see spreadsheet for more details) and the value obtained was 6.14 percent.

EBIT 1 397 1 350 1 261 1 343 1 255 1 117 1 022

Income Tax 197 310 211 312 317 310 272

NOPLAT 1 200 1 040 1 051 1 031 938 807 750

D&A 940 1 031 1 034 1 026 946 931 919

CFO 2 141 2 071 2 085 2 057 1 884 1 738 1 669

CAPEX (706) (883) (873) (810) (966) (908) (1 043)

NWC - (713) 406 68 (179) 461 (820)

CFI (706) (1 596) (468) (742) (1 145) (447) (1 863)

FCF (model) 1 435 475 1 617 1 315 739 1 291 (194)

2009E 2010E2005E 2006E 2007E 2008E[EUR million] 2004A

BCOM US Equity B COMMUNICATIONS LTD 759 4280 2,82%

BT/A LN Equity BT GROUP PLC 58552 67442 7,4 16,2 2,53%

CWC LN Equity CABLE & WIRELESS COMMUNICATI 4763 7549 11,7 36,6 3,39%

DTE GR Equity DEUTSCHE TELEKOM AG-REG 79280 137791 7,2 26,1 2,91%

HTO GA Equity HELLENIC TELECOMMUN ORGANIZA 4534 5990 4,6 17,7 0,82%

KPN NA Equity KONINKLIJKE KPN NV 15232 20536 8,4 62,0 3,20%

PHR PL Equity PHAROL SGPS SA 339 254 0,1 2,8 0,00%

SCMN VX Equity SWISSCOM AG-REG 24932 32688 8,4 17,9 4,20%

TDC DC Equity TDC A/S 3922 7678 6,2 12,1 5,55%

TIT IM Equity TELECOM ITALIA SPA 21856 56443 7,1 68,1 0,00%

TEF SM Equity TELEFONICA SA 57424 125993 8,6 18,2 6,31%

TKA AV Equity TELEKOM AUSTRIA AG 3553 6127 4,8 13,7 0,94%

TEL NO Equity TELENOR ASA 25157 31283 6,6 20,5 4,71%

TLSN SS Equity TELIASONERA AB 20181 28926 7,9 12,1 6,92%

Average 22892 38070 6,8 24,9 3,16%

Median 17706 24731 7,2 17,9 3,05%

Dividend YieldTicker Name Mkt Cap (EUR m) EV EV/EBITDA P/E



For the Weighted Average Cost of Capital (WACC) estimates, the values obtained for both the cost

of equity and cost of debt were based on several assumptions: For the Cost of Equity (CAPM45

model) the value used as risk-free rate was the German Government 10y Bonds (average 2005), for

the country risk premium the value used was the daily average spread between Portuguese 10y

Government Bonds and German 10y Government Bonds (2005), for the market risk premium the

difference between the return of the Portuguese stock market (based on the PSI20 index) and the

German Gov 10y Bonds (2005) and for the betas the value obtained was an average of the

deleveraged betas from comparable companies, re-levered with the target D/E for PT (Telecom

Industry). For the Cost of Debt, the debt risk premium was obtained with the difference between the

average LT Bond interest rate (7y, 12y and 25y) and the German Government 10y Bonds (2005).

WACC Estimate Portugal

Discount Rate (WACC)

Cost of Equity

Risk-free Rate (Rf) 3,49%

Country Risk Premium 0,14%

Market Risk Premium 5,43%

Assets' Beta 0,58

Equity Beta 1,07

Cost of Equity (Re) 9,43%

Cost of Debt

Debt Risk Premium 1,10%

Cost of Debt Before Tax (Rd) 4,59%

Cost of Debt After Tax (Rd) (1-t) 3,33%

Capital Structure

D / (D + E) 53,90%

D / E 116,90%

Tax Rate (t) 27,50%

WACC 6,14%

Source: WACC file ('WACC PT Draft 3')

WACC 6,14%

PV FCF 448 1 435 1 100 583 958 (136)

PV EV 2011 9 732

EV 14 120

PT Valuation – as a conglomerate (before spin-off) – Comparable Multiples

Another possible method to value PT as a conglomerate is trough the analysis of multiples, such as

EV / EBITDA, EV / EBIT, EV / Sales, P / E, among others. Using an EV / EBITDA multiple

average from comparable companies in Europe and in the US of 6.8 and PT’s 2005 EBITDA of

EUR 2,294 m, the value of the company before the spin-off was approximately EUR 15.7 bn.

EV/EBITDA 6,8

CAGR Rev 04-10 1,65%

Revenue 2011 5 332

EBITDA Margin 40,5%

EBITDA 2011 2 157

EV w EBITDA 14 771

Continuing value



2 294

EV / EBITDA Average 6,8

EV / EBITDA Median 7,2

EV w/ EBITDA (Average) 15 705

EV w/ EBITDA (Median) 16 525

2005 EBITDA

Valuation with EV / EBITDA Multiple (from Comparables in Europe and

US - 2005)

PT Multimédia Valuation – standalone (before spin-off) – 2006

Combining different approaches, based on CSFB estimates, the SOTP valuation obtained is EUR

8.2 bn (for Portugal Telecom as a whole), with the PT Multimédia‘s stake being worth EUR 1.8 bn

(market value) as a standalone entity.

Asset Methodology Value (€ bn) Per share (€) Of total (%)

Wireline 5.5x 2006E Ev/EBITDA 4,9 4,43 35,80%

Domestic mobile 7x 2006E Ev/EBITDA 4,6 4,17 33,70%

Brazil mobile Market Value 1,5 1,4 11,30%

Other mobile assest Various 0,7 0,68 5,50%

PT Multimédia Market Value 1,8 1,66 13,40%

Other assets Various 0 0,04 0,30%

Current SOTP Group EV 13,5 12,38 100%

Net Debt 2006E -3,8 -3,43 -27,70%

Pension Liability 2005E -1,5 -1,39 -11,20%

Current SOTP Group MV 8,2 7,56 61%

SOTP Value 8,2 7,56 61%

Current Share Price 7,45

Discount / (Premium) - SOTP vs. Current share price (%) 1,5%

Source:Company Data, CSFB estimates

The values obtained in the three methods – DCF, EV / EBITDA Multiple and CSFB SOTP

Valuation – differ largely from one another mainly due to the estimates of future revenues and

revenue growth and the discount rates applied. Whereas in the DCF and Multiple valuations the

EBITDA and FCF obtained are based in two different research houses estimates (JP Morgan and

Credit Suisse), the SOTP valuation uses different approaches and combines methods with lower

forecasts and multiples. JPM and CSFB estimates for the DCF were made in 2005, whereas the

SOTP estimates are in 2006. The average EV/EBITDA from comparables in 2005 was 6.8, whereas

the SOTP in 2006 uses a 5.5 multiple and combines various methodologies. All valuation methods

and results are subject of discussion and none of the research houses that publish the reports claims

to have the correct valuation method and final result. Despite all the alternatives and margin of

error, one thing was clear: PT was overvalued, mainly due to an over-confident market, with excess

M&A transactions and high multiples that contributed in part to the global economic crisis that

followed.



PTM Valuation alternatives – PTM trading on 16 times 2007 EBITDA

According to a Credit Suisse research46

, PT's latest estimate on timing for a PTM spin-off would the

end of Q3 2007. As the research house stated previously, an eventual acquisition of PT Multimédia

would give Sonaecom a strong broadband competitor to PT and could potentially create synergies

with Sonaecom fixed. However, with a market cap of EUR 3.6 bn (trading on an estimated 2007

15.7x EV/EBITDA on Reuters consensus estimates), PTM was highly valued. The analysts

believed Sonaecom was unwilling to pay such a high multiple for an asset that it had previously

indicated should trade on around 12x EV/EBITDA. In addition, Credit Suisse believed that after a

PTM spin-off, the shareholder structure of PTM would be similar to PT with large stakes held in

both companies by Caixa and BES, among others. With such a shareholder structure, a future sale

of PTM post a spin-off would also be blocked. In other words PTM shareholders would need to be

willing sellers to facilitate a sale of PTM.

5. How did the markets react? What was the share performance before and after the spin-off?

Rodrigo Costa, which became CEO of the new spun-off company, claimed that PTM’s focus would

be the triple play (voice, TV and internet), where the company had its strengths and was more

mature, despite the new competition that emerged between PT, Portugal’s monopoly on fixed-line

(copper) and PTM, the dominant cable operator. Some analysts expressed concerns on whether

PTM would remain truly independent from its former parent (PT) and what would be the impact on

competition between both players, since most of the shareholder structure was common. There was

also some speculation regarding a possible consolidation on the market with Vodafone and

Sonaecom emerging as potential bidders for the control of the new spun-off company47

.

Despite all the uncertainty, by the time of the announcement (2007), PT shares closed at EUR 5.55

(3.6 percent increase) and PTM shares closed at EUR 10.50 (0.5 percent increase) – PT also posted

a 3.9 percent increase in net income, for the first 9 months of 2007, to EUR 55.6 m (USD 79.3

bn48

). During 2007, PT shares registered a favorable evolution, in line with the positive performance

of the Euro telecom industry - PT shares closed the year at EUR 8.93 (adjusted close of 5.35 on

December 2007), representing an increase of 8.6 percent when compared with 2006 (considering

the PT share price adjustment by the spin-off of PT Multimédia of Euro 8.22 for the 2006 year-end).

Taking into account shareholder remuneration, PT provided a total shareholder return of 11.7

percent in 200749

.



Portugal Telecom share prices (Euronext Lisbon: PTC PL / NYSE: PT)

Before Sonaecom’s takeover offer for PTM, on February 2006 (the announcement date according to

Merger Market is February 02, 2006), Portugal Telecom shares were trading at EUR 4.66 (adjusted

closing price on January 31, 2006). After the takeover offer announcement, by the end of February,

PT shares went up to EUR 5.4750

, reacting positively to the acquisition intention by Sonaecom.

Before the announcement of PTM’s spin-off, in response to the takeover offer, in September 2007

(the announcement date according to Merger Market is September 21, 2007) Portugal Telecom

share price was still increasing, trading at EUR 5.69. After the spin-off announcement the shares

fell slightly to EUR 5.55 (adjusted close on October 01, 2007) and remained relatively stable

around EUR 5.36 (1 day before the spin-off completion, November 06, 2007) and fell slightly to

EUR 5.23, 1 day after the spin-off of PT Multimédia was completed (November 08, 2007).

PT Multimédia share prices (Euronext Lisbon: PTM PL)

PT Multimédia share prices followed the trend of its parent company – Portugal Telecom – during

the whole process (from the announcement of Sonaecom’s takeover offer until the completion of its

spin-off). Reacting positively to both announcements and, unlike PT shares, PTM share price

increased from EUR 9.32 to EUR 9.43 1 day after the completion of the spin-off.

6. What are the possible governance issues? Are there any possible conflicts of interest in

sharing shareholders between PT and the spun-off PTM?

BES, the Government and the “Iron Curtain” Against the Takeover

Although PT had an important footprint, not only in Portugal but also worldwide, it was considered

to be the “goose of golden eggs” to some shareholders. Management decisions were often

influenced by the power of shareholders that ruled the company with only 10 percent stake – such

as BES or the Government that even in a private company didn’t forego their golden share.

Telefónica VS Espírito Santo Group

Although Miguel Horta e Costa had characterized the offer as hostile, António Viana-Baptista, the

Portuguese representative of Telefónica was the person that most opposed the use of the term. The



Spanish shareholder was clearly in a conflict of interests, because it was convenient that Sonae won

the bid to get hands on Vivo. Telefónica voted in all the board meetings without blinking. António

Viana-Baptista even asked Henrique Granadeiro (PT’s CEO) for a fairness opinion – a document

that analyzed the kindness of the offer on the table. Telefónica end up supporting Sonae, although

always remaining a part of the PT’s board - an asset sale like Vivo would help finance the takeover.

BES

Ricardo Salgado will always be seen as the “silent mobilizer” of the “iron curtain” that prevented

the takeover success. In Portugal, day after day, new relevant shareholders were showing up, such

as the Ongoing Group and institutional investor Joe Berardo. Curiously, or not, all against the offer

made by Sonaecom and decisive when the time to defeat the takeover came. Together with CGD

(5.11 percent), the “no” was assumed by BES (8.08 percent), Ongoing (2 percent), Joe Berardo

Foundation (2.07 percent) and minority shareholders (1 percent). Ongoing had also convinced some

private equity companies, with an approximately 7 percent stake, to vote alongside the

administration. 46.5 percent of the shareholders had previously voted against the statutory release

and 43.9 in favor, insufficient for the 66 percent necessary to apply the changes.

Takeover Financing and Possible Vivo Sale

With António Horta Osório as Santander Totta’s CEO in Portugal and even with the support of

Emílio Botín in Spain, it was clear for Sonaecom that the takeover would be easily funded, because

the company was expected to sell some of PT’s assets afterwards. The option was to hand-in Vivo to

the Spanish Telefónica and keep the Moroccan Méditel. Sonaecom didn’t like to be in operations

where it didn’t have control or in joint control with another shareholder. Sonaecom would then

begin to analyze the possibilities of controlling all the operations where the PT group was by that

time a shareholder, especially in the Brazilian and Moroccan cases. If the control was not possible,

Sonae would look at other options, namely the sale of those assets or business segments.

Competition Authority Role

PT’s shareholders were not the only obstacle that Sonae had to face - the operation had to go

through the approval of the regulators, namely the Competition Authority. The Competition

Authority conclusions were only released in December, exactly 99 days after the beginning of the



analysis. Did this delay kill the offer? It is hard to say, but it was clearly taken advantage by the

takeover opponents to organize and on March 02, in PT’s General Assembly, defeat the operation.

Granadeiro, Bava and Costa

In April 2006, during the takeover offer period, Henrique Granadeiro took over as PT Chairman.

Zeinal Bava became his right arm and number two and Rodrigo Costa appeared as number three.

Zeinal Bava was, until then, PTM and TMN CEO. During some roadshows, both in Portugal and

abroad, Bava was considered by its peers to be a Capital Markets “animal” - he annihilated

Sonaecom’s plan when it came to talk to investors. Brandes Capital got even further, stating in

meetings with Sonae’s teams that it supported Bava and PT, refusing to hear any arguments from

the bidder. Carlos Slim, the Mexican Telecom mogul, even bought a relevant position in PT just to

vote for the administration side (against the offer).

Caixa Geral de Depósitos and the Government

CGD also voted against the removal of the voting limitations to any shareholders, stated in the

company’s statutory registers – for the state-owned bank not only the dividends coming from PT

were important but also the source of power and influence. Sérvulo Correia was the lawyer that

represented the State and its 500 golden shares, and that had instructions from Mario Lino (Minister

of Telecommunications) to abstain from voting. CGD voted against the offer - a Sonae-owned PT

would never give jobs to boys and would hardly walk hand-in-hand with the Government.

Yes to the Takeover - Other shareholders

With Sonae, that acquired 1 percent stake in PT during the process to get access to privileged

information, were: Telefónica (9.96 percent stake), ABN Amro (1.28 percent) and Santander (0.5

percent). The remaining favorable votes were from minority shareholders.

Takeover Costs

The “no to the takeover” bill arrived and with many zeros on it – a heavy invoice for the company.

The takeover cause the separation of PT and PTM - the spin-off of TV Cabo’s owner, concluded in

the stock exchange on November 2007 was one of the promises made by the administration for the



rejection of the offer that integrated an overall compensation package of EUR 5 bn to be distributed

by the shareholders.

Another offer?

Nowadays it is hard to tell why didn’t Sonae made the ultimate effort – maybe because the group

knew that other scenarios were being cooked in the backstage, like the possibility of another offer at

EUR 12 per share, made by some shareholders like the Ongoing group, together with financing

from an American bank. It was PT’s shareholders plan B – a card that they never needed need to

play.

7. Is it a source of ‘Cannibalization’? Why would PT put itself in a situation of potential

competition (by creating a competitor)?

Market ‘Cannibalization’ is often referred to a situation when a new product, service or business

unit created by a company "eats" up the sales and demand of an existing product, service or

business unit from that same company51

. From the strategic point of view, creating a competitor that

will, eventually, steal market share is never good for shareholders, since revenues and results will

decrease and not only the company value is expected to be driven down, also dividends are less

likely to be distributed. In the PTM spin-off case, the shareholder structure would remain the same

for both companies; hence the benefits from adding another player to the market will all be

collected by the same investors.

8. Does it increase shareholders ‘exposure’ to a bigger market share by creating two major

players in the triple play segment?

Since PT had a monopoly on the cable and copper network the divestment of its cable unit (PTM)

would create a strong competitor on the triple play market. With the innovation and technology

announcements made in 2006 and 2007 it was expected that the combined market share of both

companies – PT and the spun-off PTM – would increase, when compared to PT’s market share

alone, prior to the deal. By the end of June 2006 there were 1.5 m cable TV subscribers. Within the

range of homes equipped with access to cable TV, these subscribers represented a penetration rate

of almost 30 percent52

. Two years later (by July 2008), with ZON Multimédia (former PTM) already

operating on the market, the number of subscribers increased to almost 1.9 m of households – a



market penetration of cable TV of approximately 35 percent53

. ZON Multimédia had a 79.7 percent

share of the cable TV market, together with PT’s 7 percent accounting for more almost 90 percent

of the TV subscriptions market (Cabovisão was the second player on the Cable TV market with

13.6 percent market share). The figures stated previously, regarding Cable TV market shares,

highlight the growing trend that the industry was witnessing – in 10 years, since its inception (from

1997 until 2007) the number of Cable TV subscribers was almost 4 times higher. Although the

number of households with access to Cable TV was increasing, by the end of 2008 ZON Multimédia

saw its overall TV subscriber base being reduced from 74.3 percent to 71.1 percent (4th trimester of

2008), whereas PTC (Portugal Telecom Comunicações) was the only operator to register a positive

growth, with an increase from 5.4 percent to 9.5 percent in the total number of TV subscribers)54

.

This slight change in positions regarding TV subscribers was mostly explained by the growing

number of DTH (Direct to Home) customers. PT’s strategic investment in this segment, announced

prior to the spin-off, was driving TV subscriber revenues and market share up. Therefore, it is

possible to observe that the combined market share of TV subscribers between ZON Multimédia

(the spun-off company) and PTC (the new Multimedia division of PT) did not increase substantially

after the divestment. Most of the value created for both companies resulted from technological

evolution, strategic investments and market trends, rather than just the creation of a new competitor.

9. Does it add value to the market / consumer?

On September 12, 2006, Portugal Telecom announced a new technology (VDSL2) that would allow

the broadcasting of TV through the copper network, extending the concept from triple play to

multiplay by adding features such as tele-work and video surveillance, among others, to the already

provided services – data, voice and video55

. This innovation, along with PT’s will to pursue the

mobile business, was already an anticipation of the spin-off process that would be concluded in the

following months – PT would separate its cable and copper operations – “An independent PT

Multimedia would compete with Portugal Telecom. PT Multimedia is starting a telephone service

over its cable network, and Portugal Telecom is planning TV services over its phone lines.”

(Bloomberg News, 2007)56

.

10. How did the shareholder structure change over time?

Portugal Telecom announced that it would keep an 8 percent stake in PT Multimédia after the spin-

off, although not having any influence in PTM’s management. It also stated its intention to sell its



participation as soon as possible57

. In 2006, PT had a diversified shareholder structure, with almost

70 percent of its capital being held abroad – 26 percent in Continental Europe (excluding Portugal),

25 percent in the US, 12 percent in the UK and Ireland and 8 percent in other locations.

The Portuguese market had just increased its share to 29 percent, with Banco Espírito Santo as the

main shareholder with a 7.77 percent stake in the company. Among other Portuguese shareholders,

there was Caixa Geral de Depósitos (Portuguese state owned bank) with 5.11 percent, Ongoing

Strategy Investments with 3.01 percent or even Joe Berardo’s Foundation with 2.07 percent58

.

Portugal Telecom shareholder structure did not change significantly overtime – the Portuguese

market increased its stake in the company in 2007, up to 32 percent.

5. Additional readings or references

Book – “A Implosão da PT”, by Alda Martins and Alexandra Machado

Portuguese journalists Alda Martins and Alexandra Machado wrote a book (released in October

2015) telling Portugal Telecom’s History and how it went from Portugal’s biggest and most

successful company to almost disappear in 2014. The book, named “A Implosão da PT – como

Políticos e Empresários se serviram da PT ao longo de 20 anos” (“PT’s Implosion – how

Politicians and Business man used PT for their own benefits, over 20 years”) starts the description

of the downfall, in the 1st chapter, with the takeover offer from Sonaecom and the spin-off of PTM

that resulted from that bid.

Letter to the Owners of PT Multimédia

“PTM is a Strategic Asset with a Clearly Defined Growth Strategy”

PT wrote a 15-page letter to its shareholders where, among other items, it claimed the true value of

PTM and why it should not be taken by Sonaecom and several reasons to explain why was the

bidder’s offer undervaluing the company. This letter was clearly appealing to shareholders to vote

against the takeover, even promising future dividend payments increases and more benefits.

Below is a transcript of some of the reasons why PTM should not be sold and why Sonaecom’s

offer was too low and should be voted against.



REFERENCES

1 Source: Company Website -

http://www.telecom.pt/InternetResource/PTSite/UK/Canais/SobreaPT/Quem+Somos/A+nossa+hist

oria/historia.html (2015)

2 Source: Company website -

http://www.telecom.pt/InternetResource/PTSite/PT/Canais/Media/DestaquesHP/Destaques_2012/c

onferenciatmnvamosla.html (2015)

3 Source: “Telesp Celular reduz prejuízo e aumenta receita” - Computer World (2015)

4 Source: Bloomberg (2015)

5 Source: Merger Market – Deal ID 74934

6 Source: MGS - “Regulator Fines Portugal Telecom for Refusing Access to Infrastructure”,

September 13 2007 -

Morais Leitão Galvão Teles Soares da Silva & Associados (2015)

7 Source: “The Dominance and Monopolies Review”, Maurits Dolmans, 2013, Law Business

Research Ltd (2015)

8 Source: Competition Authority Notes, December 2006 – “Parecer AdC – Decisão Processo AC –

I – 08/2006 – Sonaecom/PT” (2015)

9 In “O Público”, May 25, 2006 - http://www.publico.pt/economia/noticia/sonaecom-disponivel-

para-aplicar-remedios-que-facilitem-opa-1258338 (2015)

10 In TVI 24, April 26, 2006 - http://www.tvi24.iol.pt/portugal/europa/belmiro-afasta-convivencia-

com-telefonica-na-vivo (2015)

11 Sonaecom SGPS (holding company) as of 2015 owned 35 percent of the telecom market

11,

through NOS, which resulted from the merger between ZON and Optimus.

12 USD/EUR = 1.319147 as of Dec, 2006 (Bloomberg, 2015)

13 Source: Company Annual Report (2006)

14 As of 2015, the telecom operator resulting from the merger of ZON with Optimus was renamed

“NOS”.

15 As of 2015, Portugal Telecom mobile operator was renamed “MEO”.

16 Source: Autoridade Nacional para Comunicações – ANACOM (Portuguese National

Communications Authority) (February 1, 2007)

17 Source: Company website - http://www.telefonica.com/en/about_telefonica/ (2015)

18 Source: The World Bank Group - http://www.worldbank.org/ (2015)

http://www.telecom.pt/InternetResource/PTSite/UK/Canais/SobreaPT/Quem+Somos/A+nossa+historia/historia.html

http://www.telecom.pt/InternetResource/PTSite/UK/Canais/SobreaPT/Quem+Somos/A+nossa+historia/historia.html

http://www.telecom.pt/InternetResource/PTSite/PT/Canais/Media/DestaquesHP/Destaques_2012/conferenciatmnvamosla.html

http://www.telecom.pt/InternetResource/PTSite/PT/Canais/Media/DestaquesHP/Destaques_2012/conferenciatmnvamosla.html

http://www.publico.pt/economia/noticia/sonaecom-disponivel-para-aplicar-remedios-que-facilitem-opa-1258338

http://www.publico.pt/economia/noticia/sonaecom-disponivel-para-aplicar-remedios-que-facilitem-opa-1258338

http://www.tvi24.iol.pt/portugal/europa/belmiro-afasta-convivencia-com-telefonica-na-vivo

http://www.tvi24.iol.pt/portugal/europa/belmiro-afasta-convivencia-com-telefonica-na-vivo

http://www.telefonica.com/en/about_telefonica/

http://www.worldbank.org/



19

Source: Historical Changes of the Target Federal Funds and Discount Rates -

http://www.newyorkfed.org/ (2015)

20 Source: OECD (2007) Economic Outlook, Volume 2007, Issue 1 – Portugal (2015)

21 Source: “Trends in Telecom Reform: The road to Next-Generation Networks” (ITU, 2007)


23 Source: Dealogic (2015)

24 Source: Brenon Daly, 451 Research - https://451research.com/report-short?entityId=28315

(2015)


26 Source: SBC Communications to Adopt AT&T Name - http://www.att.com/gen/press-

room?pid=4800&cdvn=news&newsarticleid=21850



29 Source: DBK - “Estudo Sectores Portugal basic da DBK – Serviçoes de Telecomunicações

2006“, Informa D&B (2015)

30 Source: INE – Instituto Nacional de Estatitica (National Statistics Institute), “Estatísticas das

Comunicações 2006”, ISBN-978-972-673-946-3 (2015)

31 Source: OberCom (Portuguese Communications Observatory), “O Mercado Nacional das

Comunicações Moveis – Das Cadeias de Valor às Redes de Valor - Working Report, June 2007”

(2015)

32 USD/EUR = 1.319147 as of Dec, 2006 (Bloomberg)

33 Source: Creating Shareholder Value with Divestitures -

https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_creating_shar

eholder_value_divestitures/) - 22 September 2014, Boston Consulting Group

34 Source: Maximizing Value: Choose the Right Exit Route -

(https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_maximizing_

value_choose_right_exit_route/) - 22 September, 2014, Boston Consulting Group

35 Wachtell, Lipton, Rosen & Katz – “The Spin-off Guide”, March 2014 -

http://www.wlrk.com/files/2014/SpinOffGuide.pdf (2015)

36 Source: Merger Market

37 Portuguese Observatory for the Media

38 USD/EUR = 1.3630 as of Aug, 2007 (Bloomberg, 2015)

http://www.newyorkfed.org/

https://451research.com/report-short?entityId=28315

http://www.att.com/gen/press-room?pid=4800&cdvn=news&newsarticleid=21850

http://www.att.com/gen/press-room?pid=4800&cdvn=news&newsarticleid=21850

https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_creating_shareholder_value_divestitures/

https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_creating_shareholder_value_divestitures/

https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_maximizing_value_choose_right_exit_route/

https://www.bcgperspectives.com/content/articles/mergers_acquisitions_divestitures_maximizing_value_choose_right_exit_route/

http://www.wlrk.com/files/2014/SpinOffGuide.pdf



39

In “Sapo Notícias”, August 8, 2007 -

http://tek.sapo.pt/noticias/negocios/artigo/i_spin_off_i_da_pt_multimedia_vai_custar_18_2_milhoe

s_de_euros_a_pt-876743tek.html (2015)


41 Source: OberCom (Portuguese Communications Observatory), “O Mercado Nacional das

Comunicações Moveis – Das Cadeias de Valor às Redes de Valor - Working Report, June 2007”

(2015)


43 In “Jornal de Negócios”, April 24, 2007 -

http://www.jornaldenegocios.pt/empresas/detalhe/spin_off_e_altamente_favoravel_para_a_pt_mult

imedia.html (2015)

44 Source: Credit Suisse First Boston Equity Research Europe – “Vivo Results and Third-quarter

results preview” – October 28, 2005 (2015); JP Morgan European Equity Research – “Portugal

Telecom Q3 Preview / earnings update” – October 27, 2005 (2015)

45 CAPM – Capital Asset Pricing Model

46 Source: Credit Suisse Equity Research – Wireless Telecom Services, June 13, 2007 (2015)

47 In “Financial Times”, October 17, 2007 - http://www.ft.com/intl/cms/s/0/64a83788-7c4c-11dc-

be7e-0000779fd2ac.html#axzz3oRXAv8E8 (2015)

48 USD/EUR = 1.4267 as of Sep, 2007 (Bloomberg, 2015)

49 Source: Company Annual Report (2006)

50 Source: Bloomberg, as of February 28, 2006

51 Source: “Investopedia” - http://www.investopedia.com/terms/c/corporatecannibalism.asp (2015)

52 Source: ANACOM - http://www.anacom.pt/render.jsp?contentId=298388#.Vh-wc6NdbxM

53 Source: ANACOM - http://www.anacom.pt/render.jsp?contentId=509388#.Vh-x86NdbxM

54 Source: ANACOM - http://www.anacom.pt/render.jsp?contentId=742018#.Vh-y7aNdbxM

55 In “Correio da Manhã”, September 12, 2006 -

http://www.cmjornal.xl.pt/nacional/economia/detalhe/pt-oferece-tv-cabo-na-rede-de-cobre.html

(2015)

56 In “Bloomberg News”, April 27, 2007 - http://www.bloomberg.com/news/articles/2007-04-

27/portugal-telecom-shareholders-approve-pt-multimedia-spinoff (2015)

57 In “tvi 24”, October 12, 2007 - http://www.tvi24.iol.pt/telecomunicacoes/ptm/pt-mantem-

participacao-de-7-na-pt-multimedia-com-spin-off (2015)

58 Source: ANACOM - http://www.anacom.pt/render.jsp?contentId=298388#.Vh-wc6NdbxM

http://tek.sapo.pt/noticias/negocios/artigo/i_spin_off_i_da_pt_multimedia_vai_custar_18_2_milhoes_de_euros_a_pt-876743tek.html

http://tek.sapo.pt/noticias/negocios/artigo/i_spin_off_i_da_pt_multimedia_vai_custar_18_2_milhoes_de_euros_a_pt-876743tek.html

http://www.jornaldenegocios.pt/empresas/detalhe/spin_off_e_altamente_favoravel_para_a_pt_multimedia.html

http://www.jornaldenegocios.pt/empresas/detalhe/spin_off_e_altamente_favoravel_para_a_pt_multimedia.html

http://www.ft.com/intl/cms/s/0/64a83788-7c4c-11dc-be7e-0000779fd2ac.html#axzz3oRXAv8E8

http://www.ft.com/intl/cms/s/0/64a83788-7c4c-11dc-be7e-0000779fd2ac.html#axzz3oRXAv8E8

http://www.investopedia.com/terms/c/corporatecannibalism.asp

http://www.anacom.pt/render.jsp?contentId=298388#.Vh-wc6NdbxM

http://www.anacom.pt/render.jsp?contentId=509388#.Vh-x86NdbxM

http://www.anacom.pt/render.jsp?contentId=742018#.Vh-y7aNdbxM

http://www.cmjornal.xl.pt/nacional/economia/detalhe/pt-oferece-tv-cabo-na-rede-de-cobre.html

http://www.bloomberg.com/news/articles/2007-04-27/portugal-telecom-shareholders-approve-pt-multimedia-spinoff

http://www.bloomberg.com/news/articles/2007-04-27/portugal-telecom-shareholders-approve-pt-multimedia-spinoff

http://www.tvi24.iol.pt/telecomunicacoes/ptm/pt-mantem-participacao-de-7-na-pt-multimedia-com-spin-off

http://www.tvi24.iol.pt/telecomunicacoes/ptm/pt-mantem-participacao-de-7-na-pt-multimedia-com-spin-off

http://www.anacom.pt/render.jsp?contentId=298388#.Vh-wc6NdbxM

Documents

SPINNING OFF PT MULTIMEDIA · João Henrique do Carmo Mateus Spinning Off PT Multimedia | 1 It was only after 7 PM, on the warm spring Friday of March 02, 2007 - 389 days after Sonae