The Board of Directors of Telecom Italia, chaired yesterday by Aldo Minucci to examine the Company's results update as of October 2013, also examined the issuing of the Guaranteed Subordinated Mandatory Convertible Bonds issued by TI Finance and convertible into Telecom Italia shares for an amount equal to 1.3 billion euros.
On the basis of the Control and Risks Committee's request, the Company considered the mandatory convertible bonds operation as an ‘operation with related parties of greater importance’; the preparatory and decision-making processes provided for as a guarantee in the internal procedures for operations with related parties was therefore carried out.
The Board of Directors therefore returned to discuss the mandatory convertible bonds on the basis of the specific opinion formulated by the independent directors, approving the operation after the verifications aimed at guaranteeing the Company's interests, as well as the substantial expediency and correctness of the initiative.
After the preparatory and approval process by the corporate boards, the Company defined the information document requested by Consob.
In this regard, it is hereby stated that the subscribers to the convertible bond who were given – on request – priority treatment in the bond allocation process are:
- BlackRock, with an investment of 200 million euros for a share of the bond equal to 15.38%
- Telefonica, with an investment of 103 million euros for a share equal to 7.92%
- Och Ziff Capital Management, with an investment of 40 million euros equal to 3.08%.
As regards the Shareholders' Meeting called for 20 December 2013, to proceed – if the revocation proposal formulated by Findim Group S.A. is approved – with the renewal of the Board of Directors, the presence in the slates of candidates filed pursuant to the law and the Bylaws of people who perform activities in competition with Telecom Italia has been noted. In the event of their appointment it is hereby specified that the Shareholders' Meeting shall be offered a special vote of authorization, pursuant to article 2390, subsection 1, of the Italian Civil Code.
A corresponding addendum to the Directors' report at the ordinary Shareholders' Meeting will be published on the website www.telecomitalia.com/assemblea.
Finally, the Board of Directors approved the integration of the composition of the Nomination and Remuneration Committee through the appointment of Director Angelo Provasoli (independent).
The full document prepared by the Company in response to the request for information from Consob (also valid as an information document pursuant to Consob Regulation no. 17221/2010), enclosing the report of the Independent Directors, is shown below.
The document containing the considerations of the Board of Statutory Auditors, as requested by Consob, is also attached.
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Release at the request of the National Commission for Companies and the Stock Exchange pursuant to art. 114 Legislative Decree n. 58/1998, which also apply as information document pursuant to art. 5 of Consob Regulation on operations with related parties, n. 17221/2010. 17221/2010
As reported on 2 December 2013 and pursuant to art. 114, paragraph 5 of Legislative Decree n. 58/1998, Consob requested disclosure of the following information in a press release:
− chronological reconstruction of the decision-making process that led to the approval of the issue of subordinated mandatory bonds with guarantee by Telecom Italy called Guaranteed Subordinated Mandatory Convertible Bonds due 2016 convertible into ordinary shares of Telecom Italia S.p.A. amounting to Euro 1.3 billion (the Bond Issue), with capital increase to service it;
− 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 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;
− the considerations of the Company and the Board of Statutory Auditors on the relevance of the operation to subscribe the Bonds by Telefonica S.A., with reference to the provisions regarding operations with related parties.
It was specifically announced that 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 subjects qualifying as related parties of Telecom Italia. In particular, the Committee, considered that in its downstream execution phase of the Board resolution (Bond subscription) the operation has assumed the characteristics of a relevant operation along the lines of Consob Regulation on operations with related parties, n. 17221/2010 (Consob Regulation), has requested the execution of the preparatory and decision-making process set out in the Company Procedure for carrying out operations with related parties (the Procedure), in view of the resolution of the Extraordinary Meeting of Telecom Italy to be held on 20 December 2013. At the same time, in exercising the powers granted to it pursuant to the Procedure based on considerations of advisability, the Committee has qualified the operation as "of greater importance", vesting once more the Board of Directors that on 5 December 2013 therefore returned to vote on the basis of the opinion issued jointly by a Committee consisting of the Independent Directors not related to the operation (the Board Committee).
Therefore, this press release is also intended as information document pursuant to art. 5, Consob Regulation.
Chronological reconstruction of the decision-making process
Please refer to the annexed opinion of the Board Committee, for the chronological reconstruction of the decision-making process.
Following the request by Consob, it should be noted that the Bonds subscribers which have been given, on request, priority treatment in the bonds allocation process were:
- BlackRock, with an investment of 200 million euros, with a 15.38% share of the total;
- Telefónica, with an investment of 103 million euros, with a 7.92% share of the total;
- Och Ziff Capital Management, with an investment of 40 million euros, with a 3.08% share of the total.
Since in the press release related to the launch of the operation (7 November 2013) priority treatment was related to their status of shareholder, but (as reported in the press release issued by the Company on 2 December 2013, upon Consob's request) Telefónica S.A. is not registered directly in the Shareholders' Register of Telecom Italia, that indication is amended and clarified, indicating that priority was given to Telefónica S.A. in view of its nature of mere vehicle, as regards shareholders' agreements with significance for Telecom Italia pursuant to art. 122 of Legislative Decree n. 58/1998, attributable to Telco S.p.A., and therefore in its status of indirect shareholder and "in transparency".
Assessments relating to the timing and ways of involvement of the Shareholders' Meeting
The overall operation consists in the indirect issuing of a mandatory convertible bonds, in which the company issuing the bonds is different from the issuer of the conversion shares. It is therefore an operation in several stages, the first of which was the issue of mandatory convertible bonds by the subsidiary Telecom Italia Finance S.A., the second (and final) is the increase in capital for the Bonds.
Each phase has its own specific decision-making process and, in the architecture of the operation underway, the phase of the resolution of the increase in capital to service the Bonds occurs after issuance and placement of the bonds, it being understood that - in the event of failure to obtain approval for the increase in capital by the Shareholders' Meeting of Telecom Italia by 28 February 2014 - the Regulation of the Bonds provides the option of early redemption for the issuer, as also indicated in the Directors' report at the extraordinary Shareholders' Meeting of Telecom Italia.
This is not technically involved in the issuance of the Bonds, nor in the definition of the exchange ratio, the period and the procedures for conversion of the bonds, but only in the approval of the increase in capital through the issuance of ordinary shares with dividend entitlement exclusive to service the Bonds, according to the criteria determined by the relevant regulation. In particular, the issue price of the conversion shares of the increase in capital will be determined on the basis of the provisions contained in the Regulation of the Bonds and will thus range from a minimum of 0.6801 euros (corresponding to the Maximum Conversion Ratio, initially equal to 147,037.2004 ordinary shares per bond) and a maximum of 0.8331 euros (corresponding to the Minimum Conversion Ratio, initially equal to 120,033.6094 ordinary shares per bond), subject to adjustment, and provided that further criteria for the types of voluntary conversion as a result of specific events and regulation in shares of the interests of the Bonds, where permitted.
For completeness, it should be noted that the Bond Issue is governed by English law, apart from the provisions on subordination, which, for those regarding the Telecom Italia Finance S.A., are governed by Luxembourg law and, for those regarding the Telecom Italia, by Italian law.
With regard to the timing of the Shareholders' Meeting, on 7 November the methods and the successful placement of the Bonds represented an uncertain and future element for the Board of Directors of Telecom Italia: hence the mandate to complete the proposed resolution and explanatory report and to establish the date of the convening of the Shareholders' Meeting, both in an ordinary session (upon the request for convening of the shareholder Findim Group S.A., pursuant to art. 2367 Civil Code) and extraordinary session (so as to decide on the increase in capital, but also the ancillary proposal to eliminate the par value of the shares). Once certain of the Bond placement, the date of the meeting was reported by the CEO of the Company during the press conference held Friday 8 November 2013, with publication of the single notice 9 November 2013.
For details on the characteristics of the Bonds, please refer to the Directors' report , outlining the proposal to the Shareholders' Meeting, available at the website www.telecomitalia.com/assemblea, which also includes (also in Italian, for information purposes only, with the original text in English prevailing in case of inconsistency) the aforementioned Regulation.
Considerations on the relevance of the operation with reference to the provisions relating to operations with related parties
As noted in the introduction, the Board of Directors, after having considered the assessments of the Control and Risks Committee, on 5 December 2013 reapproved the initiative, as it has been redefined in its implementation phase, after the Board resolution, as operation with a related party of greater importance.
The risks related to the potential conflicts of interest arising from the operation concern the theoretical possibility that the same does not occur in the interest of Telecom Italia, or involve the application of different and/or disadvantageous conditions comparing to those which might be applied to similar operations with unrelated subjects.
However, it is excluded that in carrying out the operation, Telecom Italia is exposed to such risks in consideration: (i) of the interest of the Company to benefit from a financial and asset structure strengthening from the Bond, (ii) of the fact that the Bond subscription was carried out and the conversion of bonds into conversion shares will be on equal terms for all investors and (iii) of the application of the Procedure, which confirmed the Company's interest, the substantial expediency and correctness of the operation.
Description of the operation
For a description of the operation please refer to the Directors' Report to the Extraordinary Shareholders' Meeting, paragraphs "Reason, purpose and method of execution of the increase in capital" and "Main features of the bonds issue" published at the website www.telecomitalia.com/assemblea.
Indication of related parties with which the operation is entered into
The main shareholder of Telecom Italia is Telco S.p.A., which holds 22.387% of the ordinary share capital of Telecom Italia and whose capital with voting rights is currently divided among the following shareholders: Intesa Sanpaolo S.p.A. (11.62%), Mediobanca S.p.A. (11.62%), companies belonging to the Assicurazioni Generali Group (30.58%) and Telefónica S.A. (46.18%). Among the shareholders of Telco S.p.A. there is a shareholders' agreement, which regulates - among other things - the presentation of a slate for the appointment of directors of Telecom Italia (the extract of the agreement is available at the Consob website www.consob.it, in the section relating to information on listed issuers).
Pursuant to item 3 of the Company procedure for for carrying out operations with related parties, the related discipline is also applicable to the parties of shareholders' agreements governing the appointment to the office of Company Director, where the slate thus presented is the Majority Slate pursuant to art. 9 of the Company Bylaws, as was the case for the slate presented by Telco S.p.A. at the Telecom Italia Shareholders' Meeting held on 12 April 2011.
The Bonds were subscribed by the following related parties:
- Banca IMI S.p.A., a subsidiary of Intesa Sanpaolo S.p.A. for an amount of 2 million euros;
- Telefónica S.A., for an amount of 103 million euros;
For completeness, it should also be noted that the directors of Telecom Italia Jean Paul Fitoussi and Gaetano Miccichè are respectively member of the Supervisory Board and member of the Management Board and General Manager of Intesa Sanpaolo S.p.A.; Cesar Alierta Izuel and Julio Linares Lopez are respectively Chairman and Vice Chairman of the Board of Directors of Telefónica S.A..
Economic reasons and the reasons for the expediency of the operation
The reasons for the operation are set out in the Directors' Report to the Extraordinary Shareholders' Meeting, paragraph "Reason, purpose and method of execution of the increase in capital" published on the website www.telecomitalia.com/assemblea, as well as analysed in the opinion of the Board Committee annexed.
Methods for determining the consideration of the operation
With respect to the method for determining the consideration and the criteria adopted for the definition of the issue price of the conversion shares, reference is made to the Directors' Report to the Extraordinary Shareholders' Meeting, paragraph "Criteria for the determination of the issue price of the increase in capital". The issue price of the increase in capital to service the Bonds was also the subject of the opinion of the independent auditors PricewaterhouseCoopers S.p.A., issued pursuant to the law. Both documents are available on the website www.telecomitalia.com/assemblea.
As then represented in the opinion of the Board Committee annexed, after the Board meeting of 7 November 2013 and in view of the Shareholders' Meeting, the management of the Company has appointed Studio Tasca S.r.l. to prepare a fairness opinion on the issue price of the notes and the effects of the disapplication of the preferential subscription rights in the increase in conversion share capital. The opinion is being developed by Mr. Roberto Tasca, Full Professor of Economics of Financial Intermediaries at the Department of Business Sciences of the University of Bologna, and Mr. Francesco Corielli, Associate Professor of Mathematical Methods for Economics and Actuarial and Financial Sciences at the Department of Finance of the Luici Bocconi University of Milan. The two consultants do not have economic, equity and financial relations neither with the issuer nor its subsidiaries.
According to the subject and purpose of the assignment, the term of office is set at 20 December 2013 (the date of convening the Extraordinary Shareholders' Meeting called to approve the increase in capital), for an amount of 220,000 euros.
Effects of the operation
For the economic, equity and financial effects of the operation reference is made to the Directors' Report to the Extraordinary Shareholders' Meeting paragraph "Pro-forma effects on capital and financial position", published at www.telecomitalia.com/assemblea.
The amount of the remuneration of the directors of the Company and/or its subsidiaries will not change as a result of the operation.
An accurate summary of the assessment and approval process is contained in the opinion of the Board Committee annexed.
On 5 December 2013 the Board of Directors,
− noted (i) the requalification as an operation with a relevant related party of the overall operation of the bond issue by TI Finance, with mandatory conversion into Company shares and (ii) the choice of the Control and Risk Committee to treat it as an operation of major importance;
− acquired the reasoned opinion of the Committee Board in favour of the Company's interest as regards fulfilment of the operation as well as advantages and substantial fairness of the relevant conditions.
confirmed the decisions already taken in regard on 7 November 2013, and, as required, also approved the operation as an operationwith a related party of greater importance, giving the Chief Executive Officer the necessary mandate to implement the resolution as adopted, with the favourable vote of the Directors Aldo Minucci - Vice Chairman, Marco Patuano - CEO, Cesar Alierta, Tarak Ben Ammar, Massimo Egidi, Jean Paul Fitoussi, Gabriele Galateri, Julio Linares, Gaetano Micciché, Angelo Provasoli, Renato Pagliaro, Mauro Sentinelli, contrary Directors Lucia Calvosa and Luigi Zingales.
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The Board of Directors, given the presence in the lists of candidates filed pursuant to the law and the by-laws, in view of the meeting of 20 December 2013, of people who actually engage in activities in competition with Telecom Italia, as of now indicates that - in the event of their appointment - at the Shareholders' Meeting a special vote of authorization will be proposed, pursuant to art. 2390, paragraph 1, of the Civil Code.
Corresponding addendum to the Directors' Report to the Ordinary Shareholder's Meeting will be published at www.telecomitalia.com/assemblea.
Nomination and Remuneration Committee
The Board of Directors has approved the integration of the composition of the Nomination and Remuneration Committee through the appointment of the Director Angelo Provasoli.
As required, with reference to the press release issued by the Company on 2 December 2013 upon Consob's request, pursuant to art. 114, paragraph 5, of Legislative Decree n. 58/1998, it should be noted that, with regard to the disposal of the Group's interest in Telecom Argentina, the opinion issued by Barclays Group to the Control and Risks Committee referred to therein was an opinion on the fairness for Telecom Italia, from a financial point of view, of the total consideration agreed.
Milan, 6 December 2013