Regulatory Filings • Jul 17, 2017
Regulatory Filings
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Deloitte & Touche S.p.A. Via della Camilluccia, 589/A 00135 Roma Italia
DIGITAL
Tel: +39 06 367491 Fax: +39.06.36749282 www.deloitte.it
To the Shareholders of Atlantia S.p.A.
In connection with the proposed capital increase to be paid for via contributions in kind and subject to the exclusion of pre-emption rights pursuant to articles 2441, paragraph 4.1 of the Italian Civil Code and 158, paragraph 1 of Legislative Decree 58/98 (the "CFA"), we have received from Atlantia S.p.A. (hereinafter "Atlantia" or the "Company" or the "Offeror") the related Report of the Board of Directors dated 3 July 2017, prepared pursuant to art. 2441, paragraph 6 of the Italian Civil Code (the "Directors' Report"). The Report describes and explains the reasons for the proposed capital increase, indicating the criteria used by the Board of Directors in determining the price of the newly issued shares.
The Board of Directors' proposal, as described in the Directors' Report, regards an effective increase in Atlantia's issued capital, in whole or in part (the "Capital Increase") for consideration and in whole or in part, by up to €3,794,537,700 (inclusive of the share premium), to be carried out in one or more instances and in several tranches, through the issue of up to 160,310,000 special shares ("Special Shares") in Atlantia with a nominal value of €1 each, to be paid for, pursuant to art. 2441, paragraph 4.1 of the Italian Civil Code, via the contribution in kind of ordinary shares issued by Abertis Infraestructuras SA ("Abertis") tendered in acceptance of the public tender offer, in cash and shares, (the "Offer" or the "Public Tender Offer in Cash and Shares" and, together with the Capital Increase, the "Transaction") approved by Atlantia's Board of Directors on 12-14 May 20171.
As explained in the Directors' Report, and more fully described in the following paragraph 2, "Overview of the Transaction", on 12-14 May 2017 Atlantia's Board of Directors resolved to launch the Offer for 990,381,308 ordinary Abertis shares, representing the entire fully subscribed and paid-in capital of Abertis.
For each Abertis share tendered in response to the Offer, the Offeror will pay shareholders a consideration in cash, with the possibility for Abertis's shareholders to opt, in whole or in part, for a consideration in shares (the "Partial Alternative in Shares" or the "Stock Consideration"), consisting of up to 160,310,000 Special Shares to be issued by Atlantia (taken together, the "Consideration").
The above proposed Capital Increase will be submitted for approval at the Company's Extraordinary General Meeting to be held in single call on 2 August 2017.
The Company's Board of Directors has requested us to issue, in accordance with the combined provisions of art. 2441, paragraphs 4.1 and 6 of the Italian Civil Code and art. 158, paragraph 1 of the CFA, our fairness opinion on the proposed criteria to be used by the Directors in determining the issue price of Atlantia's Special Shares (the "Issue Price").
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<sup>1 The Board's meeting was called for, and started, on 12 May 2017 and, at the end of the day, the Board of Directors adjourned the meeting until 14 May 2017.
Ancona Bari Bergamo Bologna Brescia Cagliari Firenze Genova Milano Napoli Padova Parma Roma Torino Treviso Verona Sede Legale: Via Tortona, 25 - 20144 Milano | Capitale Sociale: Euro 10.328.220,00 i.v.
Codice Fiscale/Registro delle Imprese Milano n. 03049560166 - R.E.A. Milano n. 1720239 | Partita IVA: IT 03049560166
In order to provide a useful framework for assessing the context of the proposed Capital Increase, this section provides a summary of the information included in the Directors' Report on the transaction.
The Directors state that the proposed Capital Increase is designed to service the Public Tender Offer in Cash and Shares for the entire ordinary shares issued by Abertis, as approved by the Board of Directors on 12-14 May 2017.
Abertis is a company organised under, and governed by, the laws of Spain. Its shares are listed on the Madrid, Barcelona, Bilbao and Valencia stock exchanges and it is the parent company of one of the world's main infrastructure groups (the "Abertis Group"). Abertis has issued capital of €2,971,143,924 allocated over 990,381,308 shares with a nominal value of €3.00 each. These shares are dematerialised and centrally managed, with each carrying one vote.
The Directors state that, as briefly described in the previous section, the Offer calls for a cash payment of €16.50 (the "Cash Consideration") for each Abertis share tendered, with the possibility for Abertis's shareholders to opt, in whole or in part, for a Partial Alternative in Shares involving a payment in Special Shares to be issued by Atlantia, on the basis of a share exchange ratio of 0.697, determined on the basis of an assumed price per Atlantia share of €23.67.
In the event of any dividend distribution by Abertis before the Offer's payment date, the Cash Consideration and the Stock Consideration will be adjusted accordingly. In addition, the Stock Consideration is subject to a maximum acceptance threshold of 230 million Abertis shares, equal to 23.2% of the total Abertis shares covered by the Offer (the "Maximum Special Share Threshold"); once this threshold is crossed, the number of Special Shares corresponding to the Special Share Threshold will be allotted on a prorated basis, with the balance payable in cash.
The Directors state, in section 1.1 of their Report, that the Offer is subject to the occurrence of the following events:
In this regard, the Directors also state that the Offeror may waive one or more of the above conditions precedent of the Offer or amend them, in whole or in part, as permitted by the applicable legislation.
Based on the Stock Consideration and taking into account the Maximum Special Share Threshold, the Board of Directors has determined that the maximum number of shares to be issued as a result of the proposed Capital Increase to service the Offer is 160,310,000.
With reference to the characteristics of the Special Shares issued in connection with the Capital Increase, such Special Shares will rank pari passu with the other ordinary shares, save for the following:
In determining the price of the Abertis shares and the exchange ratio between Atlantia's Special Shares and the Abertis shares, the Company also relied on the financial consulting services provided by Mediobanca Banca di Credito Finanziario S.p.A. and Credit Suisse International. Furthermore, in the meeting held on 12-14 May 2017, Atlantia's Board of Directors: (i) received a presentation from Credit Suisse with an analysis of the equity value for both Atlantia and Abertis; and (ii) obtained a fairness opinion from Goldman Sachs on the Offer price and the implicit share exchange ratio.
As described by the Directors in their Report, the objective of the Offer, which can be achieved thanks to the Capital Increase, is for Atlantia to acquire control of Abertis.
In fact, the Transaction would result in the creation of a world leader in the infrastructure sector, with stable and independent leadership and sounder financial position and cash flows as a result of the Offer. More specifically, Atlantia and Abertis operate in substantially complementary areas and the combination between the two companies would make it possible to create a diversified group that, by leveraging the strengths of each and the benefits of integration, can become a key player in the global market, with a significant international presence, so as to take advantage of any opportunity for further consolidation.
The purpose of this fairness opinion, issued pursuant to articles 2441, paragraph 6 of the Italian Civil Code and 158, paragraph 1 of Legislative Decree 58/98, is to expand on the information available to Atlantia's shareholders, whose right of pre-emption has been excluded pursuant to art. 2441, paragraph 4.1 of the Italian Civil Code, regarding the methods used by the Directors in determining the issue price of the shares to service the proposed Capital Increase.
More specifically, this fairness opinion indicates the approaches used by the Directors in determining the Issue Price of the Special Shares and any difficulties encountered in determining this price. The opinion includes our considerations on the suitability of such approaches, in terms of their being reasonable and non-arbitrary, given the circumstances, and on their correct application.
In examining the suitability of the valuation methods used by the Directors, we did not perform a valuation of the Company, which was the sole responsibility of the Directors, or of Abertis's ordinary shares to be contributed, which were the subject of the valuations carried out by the Directors and the Independent Expert referred to in art. 2343-ter, paragraph 2, sub-paragraph b) and art. 2440, paragraph 2 of the Italian Civil Code. Such a valuation is beyond the scope of the responsibilities assigned to the independent auditor or audit firm by art. 158 of the CFA.
In performing our engagement, we obtained documents and information we considered useful to our work directly from the Company. We obtained and examined the following documentation:
Solely to ensure full information, we also obtained the presentation given by Credit Suisse, containing an analysis of the equity value for both Atlantia and Abertis, and the fairness opinion from Goldman Sachs on the Offer price and the implicit share exchange ratio.
Finally, we also obtained specific and express assurance, in a letter issued by the Company on 12 July 2017, that, to the best knowledge of the Directors and Atlantia's management, there have been no changes in events or circumstances that would require significant alterations to the assumptions underlying the above business plans, or in the data and information taken into account in performing our analysis and/or that could have a significant impact on the valuations.
In the event of the exclusion of pre-emption rights pursuant to article 2441, paragraph 4.1 of the Italian Civil Code, the sixth paragraph of the same article provides that the issue price is to be set by the Directors "based on the equity value, also taking into account, in the case of listed shares, of market prices over the last six months". In accordance with usual practice and convention, with regard
to listed companies, this provision is understood to mean that, where pre-emption rights do not exist or have been excluded, the newly issued shares must be shared at a price that corresponds to their objective valuation, which should be fair according to the circumstances and, above all, in consideration of the market price of the shares in issue.
As stated in their Report, in determining the issue price, the Directors initially made reference to the following valuation methods:
An explanation of the valuation methods used by the Directors and illustrated in paragraph 4 of their Report is provided below, in order to describe the process followed in determining the Issue Price of the Special Shares.
The Market Approach involves the assignment to the subject company of a value equal to the average value attributed to it by the market in which its shares are traded. This approach assumes the efficiency of the market in which the company is listed and translates into the possibility to identify its value with its market capitalisation in given time periods.
In terms of the method used, application of the approach requires prior assessment of the following conditions:
The result of the Directors' assessment was positive, considering the highly liquid nature of Atlantia's shares in the market (reflecting the size of the free float) and the levels reached by the share price.
In applying the Market Approach, the Directors considered the market highs and lows for Atlantia's shares over the last 1, 6 and 12 months through to 13 April 2017 (the last trading day before news began to be published by Bloomberg and the date on which Atlantia issued its first press releases on the Transaction) and in the last 6 months, including the period following the issue of the initial press releases through to 12 May 2017.
Application of the Market Approach resulted in a value within the range of $C19.6$ to $C24.5$ .
The Target Prices approach determines the value of the company based on the target prices used by financial analysts published by the company itself. As stressed by the Directors, these prices generally reflect the expected price for the company's share 12 months from now and are derived from the different valuation methods used by each research analyst. In this case, in conducting their analysis of target prices, the Directors took into account a sample of over 30 reports published by the analysts after the announcement of Atlantia's results for 2016.
Application of the Target Prices approach resulted in a value within the range of €22.3 to €32.0.
The value of Atlantia was estimated by using the discounted cash flow ("DCF") method. In particular, use was made of the unlevered discounted cash flow, where the value of the company is given by the present value of its future operating cash flows, less net interest payments.
According to the DCF method, the equity value of a firm or a business is equal to the sum of:
(i) expected future operating cash flows;
(iv) less financial debt and interest expense, as expressed by the following formula:
$W = FC 1 / (1 + WACC)^{1} + FC 2 / (1 + WACC)^{2} + ... + VT / (1 + WACC)n - DF$
where:
$W =$ Equity value; $FC t = Annual cash flow expected in period t;$ $VT = Terminal value;$ $DF = Financial debt$ and interest expense at $t=0$ ; $n =$ Number of projection periods; $WACC = Weighted average cost of capital.$
The Directors included the following in operating cash flows for the explicit projection period:
$+$ EBIT;
Taxes;
Amortisation/Depreciation/Non-monetary provisions;
Capex;
+/- Changes in working capital.
The terminal value is the value of the company or the business under valuation at the end of the explicit projection period, or the present value of the operating cash flow that the company will continue to generate after the explicit projection period. The explicit cash flow projections and the terminal value are discounted to present value at a rate equal to the weighted average cost of capital, which reflects the weighted average cost of the mix of debt and equity used or which can be used by the companies under valuation. In the case under review, terminal value is irrelevant as the analysis has been performed until expiration of the concessions held by Atlantia.
In applying this method, the Board referred to the projections made until expiration of the concessions of Atlantia.
Given the geographical diversification of Atlantia's activities, the cost of capital adopted in determining the discount rate ranged from 5% to 10%.
Based on the above, the Directors' application of the DCF method resulted in a value within the range of $C27.8$ to $C32.7$ .
Application of the above approaches led the Directors to establish a wide range, as shown below:
| Approach | Min | Max |
|---|---|---|
| Market | 19.6 | 24.5 |
| Target Prices | 22.3 | 32.0 |
| DCF | 27.8 | 32.7 |
| Range | 19.6 | 32.7 |
Considering the above limitations and difficulties encountered by the Directors during application of the various approaches and described in section 6 below, and the significance of Atlantia's shares in the market, and in accordance with the criteria set out by article 2441, paragraph 6 of the Italian Civil Code (equity value, it being understood to reflect the Company's economic value, and market price for the shares for the last 6 months), in the meeting of 12-24 May 2017 the Board of Directors set the Issue Price within the range of values resulting from application of the different approaches selected, focusing primarily on the results of an analysis of the market prices for Atlantia's shares, in keeping with common practice for such transactions.
Considering the highly liquid nature of Atlantia's shares in the market (reflecting the size of the free float) and the levels reached by the share price, which has in fact hit a high for the last 10 years, it was felt that the market approach would be, at this time, the most indicative of the Company's ability to generate future earnings, on a stand-alone basis, compared with the other valuation methods applied.
The Issue Price was thus set, on the basis of the above range, at $\epsilon$ 23.67 per share, based on a market price at close of 12 May 2017 of €24.20, as adjusted to take into account the dividend of €0.53 approved on 21 April 2017 and with an ex-dividend date of 22 May 2017.
The Directors have also noted that the Issue Price so determined is consistent with the market price for Atlantia's share in the last six months (without taking into account the impact of the ordinary dividend approved by the Annual General Meeting that approved the financial statements for 2016, amounting to €0.53 per Atlantia share), and that:
In view of the above, taking as reference also the market price of $\epsilon$ 24.20 at close of 12 May 2017 (which does not reflect the impact of the ex-dividend date of 22 May 2017) and considering the specific purposes of the estimate, Atlantia's Board of Directors regarded €23.67 as a fair issue price for Atlantia's Special Shares. This value also incorporates strategic and negotiation-related aspects considered by the Directors when evaluating the Offer.
The Directors note that the issue price with the exclusion of pre-emption rights must, in cases of this nature, be such as, on the one hand, to protect the Company's shareholders who have been deprived of their pre-emption rights and, on the other, to enable the Company and its shareholders to take the best possible advantage of any opportunities resulting from the proposed combination with the Abertis group. In this context, determination of the issue price has, therefore, also involved a judgement on how to ensure a fair balance between the interests of the Company and its shareholders. Moreover, it is not possible to ignore the fact that a reserved capital increase will, in any event, involve an assessment of the benefits linked to the advantages resulting from the value created by the capital increase itself and the purpose for which it is being carried out.
With regard to their valuation of the Special Shares, the Directors have specified that no liquidity discounts were applied to Atlantia's shares, considering the governance rights attributed to the Special Shares (i.e. the right to nominate up to three Directors) and the lock-up period (until 15 February 2019), whose expiration will trigger the conversion of the Special Shares into ordinary shares as rapidly as possible and without the need for Atlantia's Board of Directors to pass further resolutions.
Finally, the Directors note that following announcement of the Transaction, Atlantia's share price rose further with respect to previous levels. In determining the Issue Price for Atlantia's Special Shares, however, the Directors opted to only take account of the share price before announcement of the Transaction, as this was not influenced by the Board of Directors' resolutions regarding the Transaction announced on 15 May 2017.
The Directors' Report described the difficulties encountered by the Directors in determining the Issue Price referred to above. In particular:
Based on the analysis conducted by the Board of Directors, the Directors have set the Issue Price for the new shares to be issued by Atlantia to service the Capital Increase at:
with €22.67 to be allocated to the share premium reserve. This was determined on the basis of a closing market price of €24.20 on 12 May 2017, adjusted to take into account the ordinary dividend of €0.53.
For the purpose of our engagement, we carried out the following main activities:
we discussed with Atlantia's management, subject to the limits and uncertainties related to any type of forecast, the budget and the business plans, so as to check the reasonableness of the underlying assumptions;
we collected, through interviews with the Company's management, information on events occurring after preparation of the business plans, with reference to facts and circumstances that might have a substantial impact on the assumptions underlying the plans, on the data and information considered in our analysis and on the valuation results;
In the first place, it is appropriate to specify that this fairness opinion refers to the Capital Increase, subject to the exclusion of pre-emption rights, to service the Offer.
The Directors' Report explaining the Capital Increase under review describes the reasons underlying their methodological choices and the logical process followed in determining the Issue Price of the Special Shares to service the Capital Increase.
To this end, considering the characteristics of the Transaction, we express in the following notes our considerations on the suitability, in terms of reasonableness and non-arbitrariness, of the valuation methods used by the Directors.
Actually, there is no question that market price is a key indicator of the value of a listed company, as confirmed logically and indirectly also by article 2343-ter, paragraph 1 of the Italian Civil Code, as well as by paragraph 6 of article 2441 of the Italian Civil Code. In fact, as a rule, market prices reflect the value attributed by the market to the shares traded and, consequently, provide meaningful guidance on the value of the company that issued them, as they reflect the information available to analysts and investors, as well as their expectations on the company's future performance and financial condition.
As commonly acknowledged by experts in valuation and as is common practice, market prices are a more or less meaningful reference also in light of the special nature of the shares. In efficient financial markets, share prices that prevail for companies with characteristics - in terms of volumes traded, volatility and free float - similar to Atlantia's tend to reflect their equity value.
On the other hand, even though the DCF method is used extensively in professional practice at the international level, and its importance is acknowledged by highly qualified experts, it does have limits in relation to the forecasts, estimates and financial projections used for valuation purposes, as all such factors are characterised, by their nature, by the uncertainty surrounding the predictability of a company's future financial condition, operating results and cash flows, also in relation to possible changes in the related macroeconomic context.
Thus, market methods are common in professional practice especially in cases where there is a need for a yardstick against which the value of similar assets can be measured - given the significance of the value attributed by the market to the company undergoing valuation. The reliability of the results obtained with these methods depends essentially on the price observation period, as sufficiently long time horizons make it possible to smooth out the impacts of speculative factors or periods of high volatility affecting the share being valued. In particular, the Directors utilised the market method on the basis of the commonly held belief that in the specific circumstances the market price is indicative of the value of the Company.
Due account has been taken of the aspects commented on above for the purposes of this fairness opinion.
Also, it should be considered that market-based valuations are subject to market trends and, as such, may fluctuate widely, especially in the short term, in relation to the domestic and international economic context. Moreover, share price performance can be affected also by extraordinary and unpredictable factors, independent of the financial and operating prospects of the individual companies. To this end, it should be noted that in the days following 12 May 2017, the share price rose and that, on the day before this report, the share price was €24.58.
(ii) For the sake of completeness, the addressees of this report should take into account the following aspects:
Based on the documentation examined and the procedures indicated above, and considering the nature and scope of our work and, in particular, the content of section 10 above, in our opinion the valuation methods adopted by the Directors are suitable, as they are reasonable and non-arbitrary under the circumstances for the purposes of setting the issue price of the 160,310,000 Special Atlantia S.p.A. Shares at €23.67, in relation to which Atlantia's existing shareholders will have no pre-emption rights under the Capital Increase reserved for such Abertis shareholders as will tender their shares for the Voluntary Public Tender Offer launched by the Company.
DELOITTE & TOUCHE S.p.A.
Signed by Fabio Pompei Partner
Rome, July 12, 2017
This report has been translated into the English language solely for the convenience of international readers
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