Letter regarding Masmóvil Ibercom S.A. bid

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• España - español

LONDON, June 24, 2020 /PRNewswire/ --

Comisión Nacional del Mercado de Valores
C/ Edison, 4, 28006, Madrid
Att: Mr. Sebastián Albella, Chairman, and Mr. Rodrigo Buenaventura, General Director of Markets

In London, on 23 June 2020

Dear Sirs,

We refer to the request for authorisation of a public takeover bid launched by Lorca Telecom Bidco, S.A.U. (the "Bidder") on all of the shares of Masmóvil Ibercom, S.A. ("Masmóvil"), which was announced on 1 June 2020 (the "Bid").

In relation to the Bid, in our condition as shareholders of Masmóvil, we would like to declare our great concern about the terms on which the Bid has been made, particularly in connection with the items further developed below.

1.- Equitable price

The Bid's announcement, published on 1 June 2020, states, in relation to the price offered in the Bid (amounting to 22.50 euros per share), that:

• even though the Bid is a voluntary one, the Bidder considers that the price offered is an "equitable price" in accordance with sections 9 and 10 of Royal Decree 1066/2007, given that it is the highest price paid or agreed by the Bidder for the acquisition of shares of Masmóvil in the 12 months preceding the announcement of the Bid, as it equals the price agreed with the significant shareholders of Masmóvil that have entered into irrevocable undertakings with the Bidder;

• the Bidder considers that none of the circumstances which, under section 9 of Royal Decree 1066/2007, may give rise to a review of the equitable price determined in such manner applies; and

• the Bidder is providing an independent expert valuation report "with the purpose to support the Price of the Bid in accordance with the provisions of sections 9 and 10 of Royal Decree 1066/2007".

The request for authorisation states subsequently that, in the opinion of the Bidder: "If the CNMV considers that the Bid Price is not an "equitable price", the Bidder will not have the obligation to launch a mandatory takeover bid on the target's shares, provided that the Bid is accepted by holders of shares representing at least 50% of the voting rights to which it was addressed, excluding those held by the Bidder and those held by shareholders that have reached any agreement with the Bidder in relation to the Bid". The Bidder is making reference here to the exception, set out in section 8.f) of Royal Decree 1066/2007, to the obligation to launch a subsequent mandatory takeover bid when control is acquired through a voluntary takeover bid that meets any of the two mentioned requirements.

We understand that the statement reproduced above ignores the protection established in section 137, subsections 2 and 3, of the Securities Market Law, which undoubtedly is applicable to the current situation, considering the extremely serious public safety, economic and social crisis generated by the COVID 19 pandemic, the measures taken to stop the economic activity, both globally and locally, the state of alarm declared by a decision of the Spanish Council of Ministers on 14 March 2020 and Royal Decree 463/2020, still in force, and the severe impact that such COVID-19 crisis has had on the global economy and the Spanish economy, including an impact on quotation prices, both generally in the Spanish market and, particularly, in Masmóvil. In particular, said subsections 2 and 3 of section 137 of the Securities Market Law set out that:

"2. When in the two years preceding the announcement of a takeover bid the circumstances listed in subsection 3 below have occurred, the bidder shall be obliged to provide an independent expert report on the methods and criteria applied to determine the offered price, which shall include the average quotation price for a given period, the target company's liquidation value, the value of the consideration paid by the bidder for the same securities in the 12 months preceding the announcement of the bid, the target company's theoretical accounting value and other generally accepted valuation criteria which shall, in any event, procure to safeguard the rights of shareholders.

The report will justify the relevance given to each of the valuation methods employed. The offered price shall not be lower than the higher of the equitable price mentioned in section 130 or the price resulting from taking into account, justifying their relevance, the methods considered in the report.

[….]

3. The circumstances referred to in subsection 2 above are the following:

[….]

b) That quotation prices, generally, or those of the target in particular, have been affected by exceptional circumstances such as natural catastrophes, war or calamity or any others arising from force majeure.

c) That the target company has been subject to expropriations, confiscations or any other circumstances of a similar nature that may entail a significant variation of its assets' real value."

It is a fact that quotation prices in the market generally, and those of the target company particularly, have been and are still affected by the exceptional circumstances emerging from the COVID 19 pandemic, which constitutes undoubtedly a situation of calamity or arising from force majeure. There is, as it is widely known, a unanimous opinion by experts, governments, supervisory bodies, central banks and all other national and supranational organisations in relation to the seriousness and magnitude of the crisis that the COVID 19 pandemic has generated. As an example, the General Director of the IMF declared last 9 April that the pandemic will lead the World to the worst global recession since 1929. If, on 5 March 2020, the shares of Masmóvil were traded at 20.16 euros per share, 15 days later (20 March), it was at 12.20 euros per share, having suffered a fall of 39.48% in such a short period of time.

By applying the legal provision reproduced above, the price of the Bid can never be lower than the highest between the "equitable price" referred to in section 130 of the Securities Market Law, and the price resulting from the independent expert report. In our view, it cannot be accepted, as the Bidder suggests (as it would be contrary to mandatory law), that the Bid can be launched at a price lower than the "equitable price", trying to apply the exception to the subsequent mandatory takeover bid set out in section 8.f) of Royal Decree 1066/2007 to which the request for authorisation refers (deriving from acceptance of over 50% of the voting rights to which the bid was initially addressed, even if the price is not "equitable").

We think it is of the utmost relevance that, not only for the Bid launched by Lorca Telecom Bidco S.A.U., but also with a view on potential future deals that may be launched within the exceptional situation created by the COVID 19 crisis, and considering the impact that it is having in the quotation prices of Spanish listed companies that may be targets, that the CNMV clarifies the need to respect the provisions of section 137 of the Securities Market Law in relation to any voluntary takeover bid, in the sense that it may never be made at a price lower than the "equitable price".

We consider it is also of the utmost relevance that, in the present serious circumstances, the CNMV, as supervisory body, carefully scrutinizes the determination of the "equitable price" to ensure that all interests are duly protected. This implies assessing whether the "equitable price" determined by a given bidder must be amended, among others, when quotation prices, generally, or those of the target company, in particular, have been affected by "exceptional circumstances", as in the case at hand (section 130 of the Securities Market Law). We would expect the CNMV in this scenario, to exercise such legal authority to ensure that bidders are not allowed to take advantage of this severe crisis to the detriment of other shareholders and of the Spanish market generally.

The CNMV should also be mindful of the relevant information disclosed by Masmóvil on 12 June 2020 (regarding the binding bid by an infrastructure fund for part of the company's network that will generate a very substantial net cash flow of EUR 215-245 million) and last evening, 22 June 2020 (regarding the new agreements reached with Telefónica for mobile and fixed access). This last announcement in particular will, according to Masmóvil, create savings for the company of EUR 28 million. That figure would represent an increase of 6% vs. the EBITDA reported by the company in year 2019. Both of these developments, we believe, significantly improve the financial position of Masmóvil and should be fully reflected in any fairness opinion in connection with this bid.

2.- Competing bids

The Bid's preliminary announcement reflects the following in relation to the irrevocable undertakings entered into with several significant shareholders of Masmóvil, in relation to a potential competing bids scenario:

"The Selling Shareholders¹ have assumed the undertaking to accept the Bid in relation to the shares indicated in the foregoing table within the first five (5) Stock Exchanges trading days of the acceptance period.

Notwithstanding the foregoing, in case a competing bid is launched by a third party and approved by the CNMV in accordance with Royal Decree 1066/2007, the Selling Shareholders will have the right to accept the competing bid provided that it is a higher bid and complies with each and all of the following conditions: (i) having been approved by CNMV and not having been withdrawn; (ii) having a price higher than 26 euros per share, payable in cash; (iii) having a minimum acceptance condition not higher than 50% plus one share among those shares to which the higher bid is addressed; and (iv) not including any other additional conditions other than those included in the Bid and, in relation to the antitrust condition, including a firm commitment from the bidder to accept any antitrust remedy which may be requested by any authority in order to approve the higher bid.

If the Bidder modifies the price of the Bid so that it is, at least, equal to the price of the higher bid, the undertaking to accept the bid by the Selling Shareholders will continue in force and will still be binding for the Selling Shareholders, who shall be obliged to sell their shares to the Bidder within the first five (5) Stock Exchanges trading days of the acceptance period."

It is important to note also that the Selling Shareholders (except for Estiriac XXI, S.L.) have assumed the undertaking to reinvest in the Bidder if the Bid has a positive outcome.

The request for authorisation goes on to disclose that the shareholders that have entered into irrevocable undertakings "have assumed the undertaking (on their own behalf and on behalf of any entity within their groups or any company, fund or person directly or indirectly controlled or managed by the relevant Selling Shareholder) not to invest or participate in any manner (including by providing funds or financing and/or giving operative or financial advice) in a competing bid without the prior consent of the Bidder. Said consent will not be required provided that the price offered in the competing bid exceeds 26 euros."

In addition, according to the request for authorisation, one of the significant shareholders has assumed similar commitments (but differing in some relevant points) to those reproduced above. In particular, according to the request for authorisation, PLT VII MAS S.à r.l. (Providence Holdings VII) ("Providence") has assumed the undertaking not to accept any competing bid authorised by the CNMV, except if the Bidder has withdrawn the Bid or if any of the conditions of the Bid has been unfulfilled (and not waived).

In our view, the terms agreed upon in the irrevocable undertaking, reproduced above, make impossible in practice the filing of any competing bids and, additionally, prejudice the system of price determination in a competing bids scenario which, to safeguard shareholders' interests, is set out in both the Securities Market Law and Royal Decree 1066/2007.

Firstly, it is not possible, as the Bidder pretends, for the selling shareholders to assume the undertaking to "sell their shares to the Bidder within the first five (5) Stock Exchanges trading days of the acceptance period" in case a higher competing bid has been filed and provided that the Bidder amends the Bid for it to be "at least, equal to the price of the higher bid". We must remember that, in accordance with section 45.3 of Royal Decree 1066/2007, in a scenario of competing bids, the initial Bidder and the remaining competing bidders that have not withdrawn their bids must file in a closed envelope a communication which may include, either their last improvement of the price or their decision not to improve. Given this, and once the envelopes are open and the requirements set out in subsections 4 and 5 of said section 45, if the improvement offered by any of the competing bidders is higher than the improvement offered by the initial Bidder, the envisaged scenario is not possible, given that, in accordance with the competing bids regime set out in Chapter IX of Royal Decree 1066/2007, the initial Bidder will not be authorised to match the improvement made in the closed envelope by the competitor as the Bidder pretends. The initial bidder would only be entitled, if the requirements of subsection 6(a) of section 45 are met (i.e. the improved price offered by the initial Bidder in the closed envelope having not been lower in 2% or more than the highest price offered in the closed envelopes), to improve the price of its bid in at least 1% in relation to the best price offered in a closed envelope by any of the competitors.

Additionally, in accordance with the request for authorisation, the Bidder has agreed with the Selling Shareholders and Providence an additional economic compensation in case that, even when a higher competing bid is filed, they accept the Bid, under certain conditions. In particular, as the request for authorisation states:

"(c) In case (i) a competing bid is filed by a third party, (ii) both the Bid and the competing bid are settled, and (iii) the stake held by the Bidder in Masmóvil in the first of the following dates (A) the date of de-listing of Masmóvil shares or (B) three (3) months from the date of settlement of the Bid is lower than 65,857,283 shares of Masmóvil, the Selling Shareholders will have the right to receive the following compensation:

a. An amount equal to the result of multiplying (x) the difference between the price per share of the competing bid and the price per share of the Bid less 25 Euro cents (the Buffer) times (y) the number of shares indicated in the table above (the Economic Compensation).

b. In addition, if the requirements for payment by the Bidder of the Economic Compensation are met and in the term of 6 months since the date of settlement of the Bid, the Bidder transfers the shares subject to the irrevocable undertaking to the competing bidder, the Selling Shareholders will have the right to receive, on top of the Economic Compensation, an amount equivalent to the result of multiplying (x) the Buffer times (y) the number of shares indicated in the table above.

The Bidder shall pay the Economic Compensation in cash in the date falling 12 months after the date of settlement of the Bid."

In a similar sense, in the case of Providence:

"In case (i) a competing bid is filed by a third party, (ii) Providence Holdings VII accepts the Bid with its shares, (iii) both the Bid and the competing bid are settled, (iv) the stake held by the Bidder in Masmóvil in the first of the following dates (A) the date of de-listing of Masmóvil shares or (B) three (3) months from the date of settlement of the Bid is lower than 65,857,283 shares of Masmóvil, and (v) the price per share of the Bid is lower than the price per share of the competing bid, Providence Holdings VII will have the right to receive an economic compensation equivalent to multiplying (x) 50% times (y) the difference between the price per share of the competing bid and the price per share of the Bid, plus the documented costs associated to the Offer per share, times (z) the number of shares held by Providence Holdings VII."

All of the foregoing would imply, de facto, that in the scenario described above the shareholders that are parties to the irrevocable undertakings would be receiving, as a consequence of accepting the same takeover bid, a compensation which is higher than the one received by other accepting shareholders. In our view, this is clearly contrary to the principle of "equal treatment" which is paramount to takeover bid legislation, and clearly acts as a mechanism to discourage competing bids, again in detriment of the best interests of minority shareholders of Masmóvil.

On another note, it should be considered whether this "improved" price agreed upon with the significant shareholders of Masmóvil should be taken into account as the highest agreed upon by the Bidder for Masmóvil shares in the 12 months preceding the announcement of the Bid, in relation with the determination of the "equitable price" that must be offered to all shareholders.

3.- Board of Directors report and "passivity duties"

The request for authorisation of the Bid states that: "The Selling Shareholders have assumed the undertaking to procure that, insofar as legally possible and provided that legal fiduciary duties of directors are complied with, the directors of Masmóvil appointed to represent them vote in favour of the issuance of a report of the Board of Directors, in accordance with section 24 of Royal Decree 1066/2007, which is favourable to the Bid." The same undertaking has been assumed by Providence.

Furthermore, as already noted, in accordance with the request for authorisation the selling shareholders (except for Estiriac XXI, S.L.) have assumed the undertaking to re-invest in the Bidder if the Bid has a positive outcome, i.e. they will be able to benefit from the performance of Masmóvil after a successful Bid, possibility which is not offered to all other shareholders.

In addition, the request for authorisation states that "once the Bid is settled, the Bidder undertakes to amend the 2020 Plan of rights over the revalorization of shares to foresee the consolidation of 25% of the rights granted, or their expected value, to the CEO (which is also susceptible of being extended to the first-rank senior managers of the Target) in case he takes the decision to terminate his contract with Masmóvil and resigns as CEO in the 18 months following the settlement of the Bid as a result of a material change in the implementation of the M&A strategy compared to past practice or the intentions expressed by the Investors based on the risk / profitability profile applicable to the Investors jointly." In a similar manner, the request for authorisation includes commitments by the Bidder to maintain or improve the variable remuneration plans of all the senior management team after the settlement of the Bid.

We believe that the foregoing undertakings result in a conflict of interest, in relation to the Bid, affecting the proprietary directors appointed by the shareholders that have entered into the irrevocable undertakings, but also the CEO. Said conflict of interest shall not only be placed on record in the report of the Board of Directors (as required by subsection 24.1 of Royal Decree 1066/2007), but shall also imply the obligation for such directors to abstain from taking part in deliberation and voting in relation to any agreements of the Board of Directors of Masmóvil which may be taken in relation to the Bid (in accordance with the provisions of the Capital Companies Act).

Notwithstanding the foregoing, and without respecting these transparency and abstention rules, in our view improperly, the Board of Directors of Masmóvil has already publicly announced a favourable opinion in relation to the Bid, stating in the privileged information communication published on 1 June 2020 that:

"Regarding the Request, the Company informs that it has had negotiations and conversations with the Consortium on the Offer, which included a confirmatory due diligence process by the Consortium, as well as the signing of an agreement between the Bidder and the Company regarding the Offer, whose main terms are reflected in the Request made by the Bidder, and that has been authorized by MASMÓVIL's Board of Directors and subscribed by the parties today.

The Bidder has manifested to the Company's Board of Directors its commitment, in case the Offer is successfully completed, of keeping the continuity of MASMÓVIL's strategy and strategic and business plan, as well as its employees and management team.

Notwithstanding the report on the Offer that the Board of Directors should issue within the terms and timing stated in the applicable law, once the Offer is authorized by the CNMV, if that is the case, the Board of Directors believes that this is a transaction beneficial for MASMÓVIL's shareholders and other stakeholders, and that the transaction confirms the Bidder full trust in the strategy, business project and success history of MASMÓVIL."

There is no clear statement, in addition, on whether the directors affected by the aforementioned conflict of interest have abstained in the Board's decision to enter into the so-called "Agreement in relation to the Bid" with the Bidder, under which Masmóvil has undertaken to pay relevant economic compensations to the Bidder in case the Bid is unsuccessful.

Finally, the request for authorisation indicates that the Bidder "waiving the board of directors' passivity duties, authorises the Masmóvil Group to continue, during the Bid process, implementing its strategy of growth and expansion, including, without limitation, potential new corporate projects of mergers and acquisitions and/or development of infrastructures, and to continue projects of such nature actually ongoing, including those transactions that, due to their materiality, require the additional approval of Masmóvil's shareholders for the execution under section 160.f) of the Capital Companies Act, all of the foregoing without prejudice to the express reserve of rights of the Bidder to, when applicable, withdraw the Bid on the terms of Royal Decree 1066/2007".

The Bidder has not legal capacity whatsoever to "waive" the "passivity duties" of Masmóvil's board of directors, or to "authorise" any transaction (or, more importantly, the continuance of ongoing transactions). It is important to note that the so-called "passivity duties" are not legally established only for the protection of the bidder, but also for the protection of potential competing bidders and, more importantly, for the protection of the company's shareholders (particularly those that have not entered into arrangements with the Bidder like those described in the request for authorisation and which are therefore not affected by a conflict of interest). The protection of such interests is, in our view, extremely relevant and serious in this case, where the Bid seems to have been agreed upon in all detail between the Board of Directors and the Bidder, which makes it improbable to expect that the Board members, pursuing their loyalty duties, search for competing bids, or at least procure not to hinder them and to guarantee equal treatment to all potential bidders.

All of the foregoing, in our opinion, demonstrates clearly that the Bid has been designed in concert by the Bidder, not only with the significant shareholders, but also with the CEO and the senior management of Masmóvil (including the negotiation of variable compensation and exit remuneration for the management team after the settlement of the Bid on terms that differ from those approved by the general shareholders meeting – noting that the Bid is not a de-listing one and that Masmóvil may as well keep its condition as listed company even after settlement of the Bid). The foregoing, along with the "shielded" nature of the undertakings assumed by the shareholders, which in practice make it impossible for competing bids to be filed, clearly prejudices, in our view, the interests of the minority shareholders of Masmóvil that applicable law intends to protect.

4.- Break-up fees payable to the Bidder by Masmóvil

The request for authorisation states that the Board of Directors of Masmóvil, in the so-called "Agreement in relation to the Bid" has agreed to pay the Bidder a compensation of 22.6 million Euros in case that, due to the authorisation and effective settlement of a competing bid, the Bid is not settled. In addition, however, the request states that an additional compensation, for a different concept, has been agreed, as set out below:

"In addition, the Target has undertaken to pay to the Bidder 22.6 million Euros to compensate the Bidder for damages and costs incurred in preparing the Bid in case each and all of the following conditions are met:

a. in respect of corporate transactions which require authorisation by the general meeting of shareholders of the Target in accordance with section 160.f) of the Capital Companies Act (a Significant Transaction), when the general shareholders meeting approves a Significant Transaction; or, if the Target announces the execution of an agreement for a Significant Transaction but the relevant shareholders meeting to assess the Significant Transaction has not been held prior to the end of the Bid's acceptance period; and

b. either (y) the VWAP of the shares of the Target for the last five days of the acceptance period exceeds in, at least, 3% the price per share offered by the Bidder in the Bid (including any increase of price that may have occurred during the Bid processing); or, whether (y) is fulfilled or not, (z) the CNMV has notified the Bidder, in accordance with subsection 36.2 of Royal Decree 1066/2007 that the acceptance of the Bid is lower than 50% of the share capital of the Target plus one share; and

c. the Bid is not settled because any of the Conditions for its effectiveness is not fulfilled (and the Bidder does not waive the condition) and, thus, the Bidder does not acquire shares in the Target as a consequence of the Bid."

Even though subsection 42.4 of Royal Decree 1066/2007 expressly permits an agreement between a target company and a bidder, consisting in payment to the bidder of a commission to compensate for the bid's preparation expenses, it does so only for the scenario where "due to the filing of other competing bids, the initial bid does not succeed". The provision does not permit, in our view, an agreement for compensation in case the bid is not successful due to lack of fulfilment of the conditions to which the bidder has made it subject (or any of the other circumstances reproduced above and agreed, which do not include filing of competing bids). We believe therefore that this provision of the "Agreement in relation to the Bid" is contrary to law and clearly prejudices the interests of all other shareholders of Masmóvil, evidencing again the clear conflict of interest affecting its Board of Directors.

* * * * *

For all the reasons above, we request the protection of this Securities Market National Commission for it to make a deep and compete analysis of the issues raised and to procure all necessary amendments and clarifications to guarantee that the Bid and the agreements reached by the Bidder with certain significant shareholders of the target company are compliant with applicable law, promptly informing the market on whether the Bid, on the terms that have been published, are compliant with the provisions of the Securities Market Act and Royal Decree 1006/2007.

Thanking you in advance for your attention, we will expect your reply, and will be available for any additional information you may require.

Yours faithfully,

Nicolas Dautigny

Polygon Global Partners LLP

_____________________________________
¹ Includes Onchena, S.L., Key Wolf, S.L., Inveready Capital Company, S.L., Inveready Seed Capital S.C.R., S.A., Inveready Evergreen, S.C.R., S.A., The Nimo's Holding, S.L., Josep María Echarri Torres and Estiriac XXI, S.L., jointly holding 20.41% of the share capital of Masmovil.

Contact: Polygon Investor Relations ([email protected]).

SOURCE Polygon Global Partners LLP