background information has been obtained by the management and
by external parties of which the Committee has decided to avail
itself to express this opinion pursuant to the Regulation and the
Procedure. The Committee Board met on 4 December 2013. On that
occasion, the members of the Committee Board not being part of the
Control and Risk Committee were informed of the conclusions of the
activity of the Control and Risk Committee. This opinion, issued
pursuant to art. 8, subsection 1, letter c) of Consob Regulation
no. 17221/2010, and of paragraphs 33 and 34 of the Procedure, can
in no way be treated as an act of the management body. The
assessment and final decision on the completion and on the contents
of the operation remain the exclusive competence of the Board of
Directors in its entirety.
Interest of the Company
5
The interest of the Company in the operation has been illustrated
in the Directors' report on the proposed increase in capital to
service the bond issue (published on 26 November 2013 and available
on the website www.telecomitalia.com/assemblea), to which the Board
Committee refers.
In brief, the interest should be identified in the need to
strengthen the Group's financial position, which the management has
also sought to attain by means of the sale of the investment in
Telecom Argentina, as well as by means of further measures
presented to the Board of Directors together with the 2014-2016
Industrial Plan.
The bond issue is therefore functional to: - increase the financial
flexibility of the Group, and at the same time reduce the need for
and risks of refinancing; - allow the company to face the changed
rating situation and passage to subinvestment grade with the
necessary prudence, limiting the downgrade to a single rating
level; - guarantee that the options to further reduce indebtedness
can be considered more calmly, also in relation to the progress of
the company.
In view of the identification of necessary resources in financial
instruments with equity content in a range between 1 to 1.5 billion
euro, the bond issue seemed to be the most effective solution as
especially where compared with alternative instruments offered as
an option it allows (i) to minimize the Company's exposure to
market risks, thanks to the peculiar rapidity of the so called
overnight placement, and (ii) to maximize the issue price (at a
premium rather than at a discount, compared to the market price at
the time of placement of the bond issue).
According to the Board Committee, the opinion on the compliance of
the bond issue with the company interest, already expressed by the
Board of Directors pursuant to art. 2441, subsections 5 and 6 of
the Italian Civil Code, to justify disapplication of the
preferential subscription right of pre-existing shareholders, does
not change upon integration of the conditions for the existence of
a related party operation during execution, of placement with the
undifferentiated target audience.
6
The Board Committee also noted that, within the context of the bond
issue placement, the subscription of the notes by outright
investors (including stable, direct or indirect shareholders) was
in the Company's interest as such investors unlike hedge investors
- would not cover their purchase of the notes by re-selling
ordinary shares of the company against cash.
Expediency of the operation The Committee Board deems that the
expediency of the operation (i.e. the values at which it has been
carried out so far and will be carried out) should be assessed
primarily in terms of the fairness of the conversion price of the
bonds issued within the scope of the Bond Issue, the subscription
price of the related conversion shares, besides the price of the
Bond Issue itself. The fairness of the capital increase issue price
to service the Bonds had been specifically illustrated in the
Director's report to the Shareholders' meeting, which, as required
by law (art. 2441, subsection 6 of the Italian Civil Code)
described the criteria adopted for its fixing and the reasons
behind their choice, intrinsically linked to the nature of the
market operation. Reference is hereby made to those considerations.
The procedure applied for the determination of the issue price was
therefore based, as usual for this type of financial instrument, on
a purely market-based criteria (therefore "objective"), where the
presence of related parties between the subscribers of the Bond
issue is not (and was not) able to determine any effect. The
independent auditors PriwaterhouseCoopers S.p.A. was then asked to
issue an opinion on the subscription price of the conversion shares
to be issued to service the bond issue as required by law: art.
2441, subsection 6, of the Italian Civil Code and art. 158,
subsection 1, TUF (Consolidated Law on Finance) and on 29
November 2013 it has issued a report (the fairness opinion). In its
conclusions, it expresses the opinion, among other things that "the
valuation approach adopted by the Directors for the purposes of
determining the issue price of the Conversion shares of Telecom
Italia within the scope of the capital increase with
disapplication
7
www.telecomitalia.com/assemblea). Therefore, in order to have a
report for the Shareholders' Meeting from an independent third
party on the fairness of the issue price of the notes as well as
the effects of the disapplication of the preferential subscription
right in the increase of the conversion capital, the Company's
management assigned the task of preparing the specific fairness
opinion to StudioTasca S.r.l. (which used the services of Professor
Roberto Tasca, Full Professor of Economics of Financial
Intermediaries at the Department of Business Sciences of the
University of Bologna, and Professor Francesco Corielli, Associate
Professor of Mathematical Methods for Economics and Actuarial and
Financial Sciences at the Department of Finance of the Luigi
Bocconi University of Milan). The Board Committee in the meeting of
4 December 2013 had access to a preliminary version of the analysis
by Studio Tasca and the relative conclusions, which were explained
by the two consultants. Specifically, this analysis shows that even
the bond issuance occurred at a fair value from a financial point
of view, in terms of the valuation of the instrument's key
components (implicit options on Telecom Italia ordinary shares and
flow of coupons). The Board Committee, - on the basis of the
considerations already made in the illustrative report with regard
to the proposal to the Shareholders' Meeting to increase the
conversion capital; - having regard to the opinion on the fairness
of the issue price of the shares to be issued at the service of the
Bonds, given by the Company's external auditor pursuant to the
Italian Civil Code and the CFL; - having noted the conclusions
reached by the consultants Professor Tasca and Professor Corielli
as part of the assignment independently conferred by the
8
- having ascertained that the consultants referred to in the
previous point are qualified as independent professionals in
accordance with the criteria set out in Annex 4 of Consob
Regulation no. 17221/2010, in consideration of all the above and in
light of their expertise and knowledge, it considers the economic
conditions of the operation to be correct, confirming that also
on the basis of the considerations made before with respect to the
Company's interests it will be carried out with values deemed
favourable for the Company.
Substantial correctness of the conditions of the operation In the
meeting of 7 November 2013 the conditions of the operation were
illustrated to the Board of Directors by the management and by the
Joint Global Co-ordinators and Joint Bookrunners as standard and
aligned with market practices. Moreover, the Committee obtained an
analysis made by a primary international commercial bank not
involved in the definition or placing of the Bonds, which compares
the Bond issue with comparable issue operations of Mandatory
Convertible Bonds. The analysis, which covers the terms of issue,
execution methods and pricing methods, confirmed that the operation
under review is in line with the benchmark operations. The
Committee also established that the conditions applied to Telecom
Italia's related parties who subscribed to the Bonds (namely those
who over time may purchase the relative bonds, inter alia destined
to be listed on a regulated market or multilateral trading system
recognized internationally by March 2014) were and will be the same
conditions applicable to bondholders that do not qualify as related
parties. Specifically, the "priority treatment" granted to
shareholders in the bond allocation process, and towhich Telefónica
S.A. asked to benefit, exclusively consisted of receiving priority
in the allocation of the order with respect to the orders of
eligible institutional investors that are not shareholders: the
appointed banks assigned
9
The opinion requested pursuant to Article 8 of the Consob
Regulation on operations with related parties concerns the
substantial correctness of the operation conditions. The Board,
supported by its consultant, therefore considers that any
conditions of non-compliance with the procedures may be relevant
for the purposes of this opinion to the extent they are capable of
adversely affecting the determination of the substantive conditions
of the operation.
The Board, in the meeting of 4 December 2013, with the support of
its consultant, examined the considerations made by Director
Zingales, detailed below, assessing whether they could adversely
affect the determination of the substantial conditions of the
operation. In a careful examination, the Board, after extensive
discussion, even on the basis of the opinion illustrated by Prof.
Tasca, the opinion on fairness provided by PwC and the opinion
given to the Company by Prof. Piergaetano Marchetti, decided to
exclude this risk given the characteristics of the process of
determining the substantial conditions in this case.
Specifically, given the operating methods of the bookbuilding
process, it can be excluded that they were able to adversely affect
the orders placed in the context of the bookbuilding process and,
therefore, the economic conditions of the operation: 1. the
application of the procedure for carrying out operations with
related parties only after subscription to the bonds by Telefonica
and IMI; 2. the communications that occurred between the Company's
management and Telco shareholders; 3. the granting of priority
treatment to shareholders during allocation.
In light of the above as well as their expertise and knowledge,
considering that the critical issues of the ordering process
highlighted above did not in any case influence the substantial
conditions of the operation, given the characteristics of the
process of determining the prices outlined, the Committee deems the
conditions of the operation to be correct from the substantial view
point.
10
For greater transparency it is stated that the following
disassociate themselves from the evaluations carried out before: o
Director Calvosa, who, as already announced in the Board meeting of
7 November 2013, is "against the operation to increase the capital
to service the conversion of the Telecom Italia Finance bond, not
acknowledging its expediency for the Company compared to other
possible alternative operations and not agreeing with the dilution
of the shareholders' holdings without ensuing compensatory
measures"; o Director Zingales who, while believing the operation
to be in the Company's interests and carried out at fair values and
as such classifiable as favourable, is of the opinion that the
necessary substantial correctness requirements have not been met
because in his opinion: 1. The evaluation of substantial
correctness includes an opinion on both the economic conditions of
the operation and procedural correctness; 2. In light of the
information that was disclosed to the Control and Risks Committee
during the meetings of 27 November and 4 December 2013, the
procedure for operations with related parties should have applied
from the outset. 3. Even taking into account the nature of the
operation, the access to information on the issuing decision and on
its characteristics was discriminatory among shareholders. 4. In a
situation where demand for the bond was three times higher than the
supply, Telefonica was favoured in the allocation at the time of
distribution.
Conclusions The Board Committee expresses the opinion that the
operation: - is in the Company's interests, - is carried out with
fair values and as such it qualifies as favourable; 11
- meets the necessary substantial correctness requirements. The
opinion in favour of continuing the operation completion process
does not change in light of the Bonds having been subscribed to (or
the possible future purchase of bonds issued in this context) by
parties that qualify as related parties of Telecom Italia. This
opinion was given by the Board Committee in the meeting on 4
December 2013, which was attended by Directors Lucia Calvosa,
Massimo Egidi, Angelo Provasoli, Mauro Sentinelli, and Luigi
Zingales, with the participation of Auditors Enrico Maria Bignami
(Chairman of the Board of Statutory Auditors), Roberto Capone,
Gianluca Ponzellini, and Ferdinando Superti Furga. The opinion was
approved by the majority of the Board Committee, with dissenting
votes from Directors Calvosa and Zingales.
12
Milan, 5 December 2013 Statement of the Board of Statutory Auditors
of Telecom Italia S.p.A. regarding Consob's request for information
pursuant to article 114, paragraph 5, Legislative Decree 58/98
Further to the considerations made regarding the sale of the
Telecom Italia Group holdings in Argentina contained in the press
release disseminated by the Company on 2 December 2013, the further
assessments that Consob, in a communication dated 28 November 2013
(proceedings: 6349/2013), asked the Board of Statutory Auditors of
Telecom Italia S.p.A. to provide to the public, are set out below.
In particular, "in relation to the operation to issue a guaranteed
subordinated fixed rate mandatory convertible bonds for a maximum
of 1,300 million euros due November 2016" (the "convertible bonds"
and "the operation"), the Commission asked the Board of Statutory
Auditors to: 1. "provide its opinions on the timing and
arrangements for involving the Telecom Italia Shareholders' Meeting
for the mandatory convertible bond issue, for deciding on the
exchange ratio and the period and arrangements for bond conversion,
for the increase in share capital to service the bond issue and for
the disapplication of the preferential subscription right, in light
of the provisions of art. 2420bis, paragraphs 1 and 2, and art.
2441, paragraph 5, of the Italian Civil Code", and to 2. "indicate
its considerations on the relevance of the operation with reference
to the provisions set out in Consob Regulation no. 17221/2010
regarding operations with related parties". Firstly, it is stated
that the Board of Statutory Auditors supervised the operation the
operation during the meetings (i) of the Control and Risks
Committee on 30 October, 6
November and 27 November, all held jointly with the Board of
Statutory Auditors, (ii) of the Board Committee (meaning the
Committee composed of all the independent and nonrelated Directors
pursuant to art. 8, paragraph 1, letter c) of Consob Regulation no.
17221/2010 and the Procedure for the execution of related party
operations adopted by the Company) of 4 December 2013, (iii) of the
Board of Directors of 7 November and 5 December 2013, as well as
(iv) its own meetings on 11, 12, 20, 28 and 29 November and on 5
December last. The Control Body, which availed itself of the
support of its own legal advisor, Paolo Montalenti, Professor of
Commercial Law at the University of Turin, examined, among other
things i) the documentation submitted to the Board of Directors on
7 November and 5 December 2013, ii) the call notice for the
Shareholders' Meeting to be held on 20 December 2013 and the
related documentation made available to the public by the Company,
iii) the considerations of the Control and Risks Committee, iv) the
opinion drafted by the Board Committee, v) legal and
economicfinancial opinions acquired. Taking account of the above
preamble, regarding request 1, we would make the following
statement: the Board of Statutory Auditors firstly ascertained that
the provisions set out in art. 2420bis, paragraphs 1 and 2 of the
Italian Civil Code, which apply by hypothesis when the bond issue
is carried out by the same company called on to issue the shares
into which the bonds will be converted and which asks an
extraordinary meeting of the shareholders of the issuing company to
determine the exchange ratio, period and arrangements for the
conversion, as well as the increase in capital to service the
issue, do not apply. In the operation considered here, however, the
bond issue was carried out by Telecom Italia Finance S.A., while
the shares into which the bonds will be converted are those of its
parent company, Telecom Italia S.p.A.. Therefore approval will be
sought from the Meeting of the Shareholders of the latter only for
an increase in share capital with disapplication of the
preferential subscription right by the issue of ordinary shares to
service the conversion of the bonds issued by Telecom Italia
Finance S.A. and guaranteed by Telecom Italia S.p.A.. 2
The Control Body has also checked that the Telecom Italia
Shareholders' Meeting called for 20 December 2013 was regularly
called, and that the terms and arrangements set out in the current
law regarding the making available of the reports on the topics on
the agenda have been respected. In particular, with specific
reference to the proposed increase in capital, the Board of
Statutory Auditors has checked the completeness of the information
contained in the explanatory report that, in compliance with art.
2441 of the Italian Civil Code and art. 72 of Consob Regulation no.
11971/1999 as amended, suitably represents among other things the
interest of the Company in the operation, and the purposes thereof,
the reasons for the disapplication of the preferential subscription
right and the criteria for the determination of the share issue
price, the adequacy of which was confirmed by independent auditors
PricewaterhouseCoopers S.p.A. pursuant to art. 2441, paragraphs 5
and 6 of the Italian Civil Code and art. 158, paragraph 1, of
legislative decree 59/1998. The characteristics of the bond issue,
and the conditions and terms of conversion are also explained in
the report. Taking account of the above preamble, regarding request
2 we would make the following statement. The Board of Statutory
Auditors has checked the procedure for the issue by Luxembourg
subsidiary Telecom Italia Finance S.A. of mandatory convertible
bonds into Telecom Italia shares to be placed in overnight mode
with qualified investors. The operation was explained at the Board
of Directors meeting on 7 November 2013 and was structured and
approved as a market operation, since it was addressed to an
undifferentiated public of qualified investors. The Board of
Statutory Auditors has noted that during the meeting, Mr. Alierta
declared the intention of Telefónica S.A. to subscribe to the bond
issue, and has also noted that the management reported the contact
with the principal qualified investors through the "wallcrossing"
procedure, managed by the banks appointed to place the issue, and
with the shareholders of TELCO S.p.A..
3
The operation was therefore susceptible to potentially be
transformed into an operation with related parties in the
subsequent execution phase. The Board of Statutory Auditors agrees
with the Control and Risks Committee in deciding to consider the
operation to have assumed the features of an operation with related
parties in the implementation phase, due to the subscription by
Telefónica S.A. and Banca IMI S.p.A.. The Board of Statutory
Auditors has noted that the Control and Risks Committee asked that
the Procedure for the execution of related party operations"
adopted by the Company (the "Procedure") be adopted, qualifying the
operation as one "of greater importance" on a voluntary basis, as
permitted by said Procedure (Section 1, point 19). The Board of
Statutory Auditors has also noted that the priority treatment
accorded to Telefónica, among others, consisted of a priority over
other investors in the allocation of the order by the appointed
banks. The Board of Statutory Auditors has also noted the
favourable opinion expressed by the Board Committee composed of the
unrelated independent Directors (Lucia Calvosa, Massimo Egidi,
Angelo Provasoli, Mauro Sentinelli, Luigi Zingales). This opinion
was approved by a majority, with Directors Calvosa and Zingales
dissenting. The opinion of the Board Committee considered that "the
operation meets the interests of the Company, is being carried out
at fair values, which as such may be qualified as advantageous, and
satisfies the requisites of substantial correctness required". The
Board of Statutory Auditors also noted the comments made by Mrs.
Calvosa; finally, it noted the critical observations made by Mr.
Zingales regarding the requisites of substantial correctness of the
operation, regarding which the Board of Directors is investigating
further.
4
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