The information that Consob has required to be disseminated by means of a press release to be issued before the opening of the MTA on 2 December 2013, by order dated 28 November 2013, pursuant to Article 114, paragraph 5, of Legislative Decree no. 58/1998
Mandatory Convertible Bond
On 7 and 8 November last, the Company announced the launch and placement by its wholly owned subsidiary Telecom Italia Finance S.A. of a bond issue, guaranteed by Telecom Italia, with mandatory conversion into ordinary shares of the latter, with maturity in November 2016 and for an amount of 1.3 billion euros (Guaranteed Subordinated Mandatory Convertible Bonds due 2016 convertible into ordinary shares of Telecom Italia S.p.A.). The bond issue was structured in two series, convertible into ordinary and savings shares, respectively, although with declared preference for placement of the bonds convertible into ordinary shares. The demand for the issue was such that this result was achieved comfortably.
The Bond Issue terms and conditions were published after settlement (15 November 2013) and are available (also in Italian, for information purposes only, with the original text in English prevailing in case of inconsistency) at www.telecomitalia.com, where the following are available as well:
- the Directors' report to the Extraordinary Shareholders' Meeting of 20 December 2013, explaining the proposed increase of share capital to service the bond issue;
- the Fairness Opinion on the issue price of the conversion shares, issued by Independent auditors Pricewaterhouse Coopers S.p.A., pursuant to applicable law.
At Consob's request, the Company would point out that the operation was structured as a bond issue offered in an undifferentiated way to qualified investors, but with the express indication that to qualified investors who were already shareholders and had so requested, the banks appointed to place[1] the bonds could grant priority treatment in the bond allocation process when executing the placement. After the placement , the subscribers included some entities who were ascertained afterwards to be registered in the Company shareholders register (the last general updating of which was undertaken at the time of payment of the 2012 dividend), for a total of just under 846 million ordinary shares (corresponding to approximately 6.303% of the capital of this category).
The corresponding information on the holders of savings shares is not available. It should also be noted:
- that the names of the subscribing entities and the shareholder registered in the Shareholders' Register are fully identical in a more limited number of subjects, that hold approximately 768 million ordinary shares (corresponding to 5.726% of the capital of this category);
- that the intrinsic limits of the evidence in the Shareholders' Register (which is, in any event, not updated in real time), and the differentiated nature of the subscribers to the bond issue (which include some asset management companies) makes it impossible to identify the number of shares of the Company they beneficially own and/or the number of shares directly or indirectly owned by the economic groups they may be part of ;
- that the Company therefore considers the percentages indicated to be substantially underestimated.
Applications for priority treatment in the allocation process were made by three subscribers and the treatment consisted of priority, for investors who declared themselves as shareholders, in the allocation of their orders over the orders of investors who were not shareholders: the appointed banks assigned to shareholder investors a number of bonds exactly in line with their requests.
Telefónica S.A., which, according to information in the public domain, is the main shareholder of Telecom Italia’s reference shareholder Telco S.p.A which, holds 22.387% of the ordinary share capital of Telecom Italia, also requested this treatment, in relation to an order of 103 million euros. Telefónica S.A. holds 66% of the total share capital of Telco S.p.A. and 46.18% of the capital with voting rights; however it is not directly registered in the Telecom Italia shareholders' register.
Consob has also asked the Company to explain why some qualified U.S. investors were allowed to subscribe to the bond issue, although the financial notice disseminated by the Company on 7 November stated that the bond issue would be placed outside the United States of America (as prescribed in Regulation S of the U.S. Securities Act 1933, as amended), in addition to Australia, Canada and Japan. The reference is to BlackRock, which - as also reported in the press - invested 200 million euros in subscribing to the bond issue, making it the major subscriber, with a 15.38% share of the total.
Here it should be stated that during book building the asset manager informed the banks appointed to place the issue that it was interested in subscribing to the bonds issued by Telecom Italia Finance S.A. using a U.S. based entity, with what resulted in the largest of the orders received. Given
- the high quality of the investor (which, as BlackRock Inc. declared to Consob on 8 October 2013 that it held a total of 5.133% of the total ordinary shares of Telecom Italia, for non-discretionary investment management, through its controlled companies or trusts that directly hold the shareholding, as explained in the information available on the website www.consob.it) and
- the circumstance that this investor was willing to purchase the bonds despite the offer not being registered in the US, by virtue of an exemption also referred to in the disclaimer in the footnote to the notice announcing the launch of the initiative, based on obvious considerations of advisability and advantage, Blackrock was singularly permitted to access the final allocation.
As to the use of the proceeds, the Company - as illustrated in the Directors' report - focused on structuring an instrument that, with the sale of the Argentine assets (see below for details), would ensure that strengthening of its financial position was immediately certain and, together with the other measures presented with the 2014-2016 Industrial Plan, would:
- increase the financial flexibility of the Group, and at the same time reduce the need for and risks of refinancing;
- allow the Group to face the changed rating situation and passage to sub-investment grade with the necessary prudence.
- guarantee that the options to further deleverage can be considered more calmly, taking also into consideration the progress of the business.
A mandatory convertible bond issue was considered the instrument that would be most efficient in achieving these objectives. The contribution of the bond issue to strengthening the financial position of the Group will actually occur when the bonds will be converted on maturity into Company shares (November 2016). In the meantime, the cash generated by the bond placement, remaining available to issuer Telecom Italia Finance S.A., will be invested in accordance with Group policy, in investments with medium-low risk levels in money market instruments (such as deposits, euro commercial papers and monetary funds) and/or in the bond market (government and corporate bonds).
Finally, it should be noted that Consob has also requested that the following information be announced to the public:
- the chronological reconstruction of the decision-making process that led to the approval of the convertible bond issue operation, with a share capital increase in connection therewith;
- the opinions of the Company and the Board of Statutory Auditors on the timing and arrangements for involving the Telecom Italia Shareholders' Meeting for the convertible bond issue, for deciding on the exchange ratio and the period and arrangements for bond conversion, the related increase of the share capital and for the disapplication of the preferential subscription right;
- the considerations of the Company and the Board of Statutory Auditors on the relevance of the subscription of the convertible bond by Telefonica S.A., with reference to the provisions regarding transactions with related parties.
The Company will comply with the request at the conclusion of the decision-making process of the Board of which the Control and Risk Committee of the Company asked for implementation in relation to the profile of subscription of the bond issue by persons qualifying as related parties of Telecom Italia, which is scheduled to conclude at the board meeting called for 5 December 2013.
Sale of Telecom Argentina
On 7 November 2013 the Company announced that the Board of Directors had on that day considered an offer for the direct and indirect Group holding in Telecom Argentina S.A., conferring a mandate on the management to finalise the transaction at the conditions it considered to be in the best interest of the Company. The confirmation of this mandate, during the Board meeting called to consider the sale process in greater depth, was announced to the public on 11 November, with subsequent broad disclosure regarding acceptance of the offer from the Fintech group, the signing of the agreements to sell its entire holding in Telecom Argentina, whether owned directly or through Telecom Italia International N.V., Sofora Telecomunicaciones S.A., Nortel Inversora S.A. and Tierra Argentea S.A., as well as their terms and conditions, and their effects (cf. press release issued early on the morning of 14 November 2013).
As requested by Consob, it is emphasised that, pursuant to the contracts signed for the sale of this asset, Telecom Italia will receive considerations totaling 960 million dollars. Telecom Italia's indirect holding in Telecom Argentina is composed of two share packages owned through different companies, which together give Telecom Italia a 22.7% economic interest in the Argentina Business Unit.
The assessments of the fairness of the Fintech offer are based on analyses of the value of the underlying asset carried out using the normal valuation methods, i.e. the Discounted Cash Flow (on both internal projections and on projections derived from the analysts' consensus) and the market benchmarks such as multiples ("comparable companies & transactions"), stock exchange listings (particularly Telecom Argentina American Depository Receipts (ADR) on the New York Stock Exchange) and the opinions of financial analysts published in the dedicated research reports on Telecom Italia and Telecom Argentina. In taking the decision to sell the shareholding, the Company also took account of the great complexity of the context and the local macroeconomic scenario, the difficulties this creates for an international investor, as well as the strategic priorities of Telecom Italia in terms of investment and deleveraging plans.
The fairness opinions on the Fintech offer were supported by the fairness opinion issued by Citiroup as financial advisor to the Telecom Italia Group in the affirmation of the transaction. For its part, the Telecom Italia Control and Risks Committee also acquired a fairness opinion from Barclays Group, and reported to the Board of Directors its consultant's view that the total consideration agreed was reasonable and justified.
Consob also requires specific disclosure about the involvement of related parties in the affair, with specific reference to Telefónica S.A. and Assicurazioni Generali S.p.A., supplying its considerations regarding the applicability of the rules on related party transactions and on Director's interests to the operation, and regarding the way in which these rules may have been applied, in practice.
In this respect, it should be noted that on 7 November 2013 the Board of Directors of Telecom Italia examined the offer received from Fintech in a separate meeting, to which Directors Cesar Alierta and Julio Linares (Chairman and Vice Chairman of the Board of Directors of Telefónica S.A. respectively) were not called and in which they did not participate, pursuant to the "Procedure for implementing commitments assumed as of 13 October 2013 with the Argentine Comisión Nacional de Defensa de la Competencia", available on the website www.telecomitalia.com
After extensive discussion, based on the explanatory report received, and on the considerations of the Control and Risk Committee (which had been informed of the operation on 30 October, therefore deciding to commission the fairness opinion from Barclays mentioned above, and it started the case with the support of the advisor and the management on 6 November 2013), the Board of Directors conferred a mandate to finalise the operation at the conditions deemed to be in the best interest of the Company as announced in a press release disseminated on the evening of 7 November. The resolution was approved unanimously by the Directors present, Aldo Minucci – Vice Chairman, Marco Patuano – Chief Executive Officer, Lucia Calvosa, Gabriele Galateri, Renato Pagliaro, Angelo Provasoli, Mauro Sentinelli and Luigi Zingales (Directors Tarak Ben Ammar, Massimo Egidi, Jean Paul Fitoussi and Gaetano Miccichè were absent; as explained above, Cesar Alierta and Julio Linares did not participate).
During the debate, Director Galateri, also in his capacity as Chairman of the Board of Directors of Assicurazioni Generali S.p.A., raised the issue of the relations between the Generali Group and the Werthein Group (indirect shareholder of Telecom Argentina, in that it is the minority partner of Telecom Italia in the Sofora vehicle, through which Telecom Italia exercises control over Telecom Argentina), pointing out, in particular, that the former is a creditor of the latter. For transparency and caution, Mr. Galateri therefore invited the Board to make further enquiries at the offices of Assicurazioni Generali.
The enquiries were made on the morning of Friday 8 November, acquiring the details and evolution of the contractual relationship between Generali Group and Werthein Group. The Chief Executive Officer consequently invited Mr. Galateri to supplement the information thus acquired, if necessary, adding that - based on said information - the presence of elements of significant interest could be excluded, given the possible successful sale of the Group's holding in Argentina to Fintech, and hence correlations such as to suggest the need for further information could also be excluded. The communication was transmitted for information to the Chairman of the Board of Statutory Auditors, and to Mr. Fitoussi, given his interim position as chair of the Control and Risks Committee.
Having been informed of the situation by Mr. Fitoussi,
- Mrs. Calvosa (a member of the Control and Risks Committee) communicated that, having emphasised in the meeting that the total absence of any relationship between the subjects involved in the operation and the Telco shareholders would be a conditioning factor, she would, in light of the new elements that had emerged, be voting against the operation;
- Mr. Zingales (also a member of the Control and Risks Committee) asked that the Board not proceed to finalise the operation until the affair had been fully clarified.
In light of all the above, the Vice Chairman and Chief Executive Officer deemed it appropriate to recall the Board of Directors (again in a separate meeting, excluding Directors Cesar Alierta and Julio Linares, as above) on 11 November 2013, to share the details on the extent of Mr. Galateri's interest in the operation as Chairman of Assicurazioni Generali with the whole Board of Directors.
On 11 November 2013, the Board of Directors, having acknowledged the clarifications received from Mr. Galateri, agreed
- that the issue was not characterised by those elements that are characteristic of transactions with related parties;
- that, also in light of the disclosure made by Mr. Galateri regarding the interest of Assicurazioni Generali S.p.A. in the operation, the sale was advantageous for Telecom Italia, and therefore confirmed the mandate conferred on 7 November 2013.
The resolution passed with the votes in favour of Directors Aldo Minucci – Vice Chairman, Marco Patuano – Chief Executive Officer, Massimo Egidi, Jean Paul Fitoussi, Gabriele Galateri, Gaetano Miccichè, Renato Pagliaro, Mauro Sentinelli; votes against Lucia Calvosa and Luigi Zingales; absent Directors Angelo Provasoli and Tarak Ben Ammar; not participating Directors Cesar Alierta e Julio Linares.
Mrs. Calvosa explained that her vote against the proposal was due to the absence of contra party impartiality, which she had previously set as a condition for her favourable vote in the meeting of 7 November 2013, reiterating the comments she made at that time. Mr. Zingales justified his vote against the proposal, adducing that he did not consider himself sufficiently informed to support the decision.
Taking account of the above preamble, the Company considers that the sale does not qualify as a transaction with a related party, since there is no factual basis for the relation of the contractual contra parties with Telecom Italia, and more precisely, since there is no kind of direct or indirect transfer of resources between Telecom Italia and its related parties, which is the regulatory requirement for a transaction to be considered "with a related party" in the meaning referred to in the Italian Civil Code and Consob Regulation no.17221/2010 on this topic.
On the other hand, it is self-evident that director interests exist, albeit only indirect ones, namely
- for Directors Alierta and Linares, regarding Telefónica S.A, although this interest does not trigger the application of the civil law provisions on directors' interests, since it has been recognised as a one-off ex ante situation, which consequently led to the application of specific and absorptive procedural precautions adopted by the Board of Directors for self-regulatory purposes: cf. the aforementioned "Procedure for implementing the undertakings given effective from 13 October 2010 with the Comisión Nacional de Defensa de la Competencia";
- for Mr. Galateri, with reference to Assicurazioni Generali S.p.A., whose interest did trigger the application of the civil law provisions, with the disclosure made in the meeting of 7 November and completed in the especially called meeting of 11 November 2013 in which, after the reporting of the details of the extra-company interest of this Director in the initiative, the full Board confirmed its previous resolution, regarding the broad mandate to finalise the sale.
As well as asking the Company to submit its views on the applicability of the regulations on transactions with related parties and the regulations on Directors' interests, Consob also asked the Board of Statutory Auditors to do so. These considerations are reported in full below.
[1] This refers to BNP Paribas, J.P. Morgan Securities plc, Morgan Stanley & Co. International plc, as Joint Global Co-ordinators and Joint Bookrunners; Citigroup Global Markets Limited, Credit Suisse Securities (Europe) Limited, Deutsche Bank Ag (London Branch), Banca Imi S.p.A, Mediobanca - Banca di Credito Finanziario Società per Azioni, Ubs Limited, Unicredit Bank Ag (Milan Branch) as Co-Bookrunners.
