(This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
TERNA S.p.A.
PROSPECTUS
RELATIVE TO SIGNIFICANT TRANSACTIONS WITH RELATED PARTIES
prepared pursuant to article 5 of the Regulations on related-party transactions (adopted by Consob with Resolution no. 17221 of 12 March 2010, as amended)
Acquisition by TERNA- Rete Elettrica Nazionale Società per Azioni (abbreviated as “TERNA S.p.A.”) of the equity investment equal to 100% of the share capital of S.EL.F. - Società Elettrica Ferroviaria S.r.l. (abbreviated as “S.EL.F. S.r.l.”), entirely held by Ferrovie dello Stato Italiane S.p.A.
December 16 th 2015
TERNA S.p.A. Registered office in Rome, viale Egidio Galbani, 70 Share capital: Euro 442,198,240.00 fully paid-in Rome Companies Register, Tax ID code and VAT No.: 05779661007 - R.E.A. of Rome: 922416
Prospectus made available to the public at TERNA S.p.A.'s registered office (Rome, viale Egidio Galbani, 70), on the TERNA S.p.A. website ( www.terna.it ) and on the website of the authorised storage service “1Info” ( www.1info.it ), as well as being filed with the stock exchange management company Borsa Italiana S.p.A. ( www.borsaitaliana.it )
1 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
CONTENTS DEFINITIONS ...... 4 1 Indicates the fairness opinion issued by Rothschild pursuant to the Regulations on Related- Party Transactions...... 5 FOREWORD ...... 8 1. CAUTIONS ...... 11 1.1. Risks connected to potential conflicts of interest deriving from the Transaction. . 11
2. INFORMATION ABOUT THE TRANSACTION ...... 11 2.1. Characteristics, methods, terms and conditions of the Transaction ...... 11
2.1.1 Demerger ...... 12
2.1.2 Acquisition from FS of an equity investment equal to the entire share capital of S.EL.F...... 13
2.1.3 Price adjustment ...... 14
2.1.4 Interim Management ...... 14
2.2. Related parties involved in the Transaction, nature of the correlation, nature and significance of the interests of said parties in the Transaction ...... 14
2.3. Economic rationale and suitability of the Transaction for the Company ...... 15
2.4. Method used to determine the financial consideration for the Transaction and evaluations of its fairness with respect to the market values of similar transactions ...... 16
2.5. Illustration of the economic, equity and financial effects of the Transaction ...... 20
2.6. Impact of the Transaction on the fees of members of the Company Board of Directors and/or subsidiaries of the company ...... 20
2.7. Any members of the management and control bodies, general directors and senior executives of the Company, involved in the Transaction ...... 20
2.8. Transaction approval process ...... 21
2.8.1 Approval of the Transaction by the TERNA Board of Directors ...... 22
2.9. Possible collection of transactions pursuant to article 5, paragraph 2 of the Consob Regulations...... 22
2 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
3 DECLARATIONS OF THE EXECUTIVE IN CHARGE OF PREPARING THE COMPANY'S FINANCIAL REPORTS ...... 22 4 ANNEXES ...... 23
3 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
DEFINITIONS
Below is a list of the main terms used within this Information Document.
Authority or AEEGSI The Italian Regulatory Authority for Electricity, Gas and Water.
Banca IMI Banca IMI S.p.A., with registered office in Milan, Largo Mattioli, no. 3, Milan Companies Register, Tax ID code and VAT no. 04377700150, appointed as the independent financial expert to support the TERNA Board of Directors.
CDP Cassa Depositi e Prestiti S.p.A., with registered office in Rome, Via Goito no. 4, Rome Companies Register, Tax ID code no. 80199230584, VAT no. 07756511007, R.E.A. of Rome no. 1053767.
CDP RETI CDP RETI S.p.A., with registered office in Rome, Via Goito no. 4, Rome Companies Register, Tax ID code and VAT no. 12084871008, R.E.A. of Rome no. 1349016, the share capital of which is 59.1% held by CDP.
Related -Party Transactions Committee Collegial body within TERNA, consisting of at least 3 or Committee directors, appointed by the Board, all of whom independent, one of whom serves as the coordinator.
Consob The National Commission for Companies and the Stock Exchange.
Sales Contract The contract for the sale of the share capital of S.EL.F. between TERNA (buyer), FS (seller) and RFI signed on December 9th 2015.
Date of Execution The date on which the transfer of the Equity Investment will occur, through transfer of ownership.
AEEGSI Resolution Indicates the AEEGSI Resolution of October 29 th 2015, no. 517/2015/R/EEL which defined the remuneration of
4 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
high-voltage and very-high-voltage electricity grids owned by FS, to be included in the NTG.
Prospectus This prospectus, prepared pursuant to article 5 of the Regulations on Related-Party Transactions and in compliance with Annex 4 to the Regulations on Related-Party Transactions.
FS “Ferrovie dello Stato Italiane S.p.A.” (abbreviated "FS S.p.A.”), with registered office in Rome, Piazza della Croce Rossa no. 1, Rome Companies Register, Tax ID code and VAT no. 06359501001, R.E.A. of Rome no. 962805.
FS Group FS, RFI and all their respective affiliates.
Stability Law Italian Law no. 190 of 23 December 2014, Official Journal December 29 th 2014.
MEF The Ministry of Economy and Finance of the Italian Republic.
Transaction Indicates the transaction to acquire the entirety of S.EL.F.'s share capital by TERNA (or a subsidiary), once S.EL.F. has acquired the Business Unit.
Fairness Opinion 1 Indicates the fairness opinion issued by Rothschild pursuant to the Regulations on Related-Party Transactions.
Equity Investment The equity investment held in S.EL.F. by FS, equal to 100% of the share capital.
Purchase Price The amount of Euro 757,000,000.00 ( seven hundred fifty seven million and 00 cents) which must be paid in a single payment as the financial consideration due from TERNA to FS for the acquisition of the Equity Investment.
5 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Related -Party Transactions Procedure The Related-Party Transactions Procedure approved or Procedure by the TERNA Board of Directors on November 12 th 2010, pursuant to article 2391-bis of the Civil Code and article 4, paragraph 1 and 3, of the Regulations on Related-Party Transactions.
Business Unit The combination of assets, liabilities and contractual obligations constituting the RFI business unit instrumental to the activities of transmission of electricity through the high-voltage and very-high- voltage grid owned by FS (including the power lines, relative portions of substations, related properties and a contract for the hosting of fibre optic cables owned by BasicTel S.p.A.), transferred to S.EL.F. following the demerger of RFI, which a portion is subject to inclusion in the NTG following TERNA's acquisition of S.EL.F.
Issuers Regulations The "Regulation implementing Legislative Decree no. 58 of February 24 th 1998, concerning regulation of issuers" (adopted by Consob with resolution no. 11971 of May 14 th 1999), as amended.
Regulations on Related -Party The "Regulations on Related-Party Transactions" Transactions (adopted by Consob with resolution no. 17221 of March 12 th 2010), as amended from time to time.
RFI “Rete Ferroviaria Italiana - Società per Azioni (abbreviated as “R.F.I. S.p.A.”), with registered office in Rome, Piazza della Croce Rossa no. 1, Rome Companies Register, Tax ID code 01585570581, R.E.A. of Rome no. 758300, sole shareholder.
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Rothschild Rothschild S.p.A., with registered office in Milan, via Santa Radegonda, no. 8, Milan Companies Register, Tax ID code and VAT no. 09682650156, R.E.A. of Milan, no. 1307793, appointed as the Independent Expert pursuant to article 5.3.1. of the Procedure, supporting the Related- Party Transactions Committee.
NTG The National Electricity Transmission Grid, as defined by the Ministry of Economic Development Decree (the Ministry of Industry at the time) of June 25 th 1999, as amended from time to time.
Demerger The partial demerger of RFI and S.EL.F., upon completion of which S.EL.F. will become the owner of the Business Unit.
S.EL.F. S.EL.F. - Società Elettrica Ferroviaria S.r.l. (abbreviated as “S.EL.F. S.r.l.”), with registered office in Rome, Piazza della Croce Rossa no. 1, Rome Companies Register, Tax ID code and VAT no. 06132641009, R.E.A. of Rome no. 948185, sole shareholder.
TERNA or Issuer or Company TERNA- Rete Elettrica Nazionale Società per Azioni (abbreviated as “TERNA S.p.A.”), with registered office in viale Egidio Galbani, no. 70, Rome Companies Register, Tax ID code and VAT no. 05779661007, R.E.A. of Rome no. 922416.
Consolidated Law on Finance Legislative Decree no. 58 of February 24 th 1998, as amended from time to time.
UniCredit UniCredit S.p.A., with registered office in Rome, Via A. Specchi, no. 16, Rome Companies Register, Tax ID code and VAT no. 00348170101, appointed as the independent financial expert to support the TERNA Board of Directors.
7 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
FOREWORD
This Information Document was prepared by TERNA, pursuant to article 5 of the Regulations on Related-Party Transactions and in compliance with Annex 4 to the same Regulations, as well as pursuant to the Related-Party Transaction Procedure.
The Transaction described in this Information Document is part of a broad legal and regulatory framework. Specifically, article 1, paragraph 193 of the Stability Law, in order to improve the efficiency of the NTG and ensure the development of the national railway network, in consideration of the functions of the same NTG, envisages, among other things, that: a) “the high-voltage and very-high-voltage electrical grids pursuant to the regulations adopted by the Italian Electricity Committee and the relative portions of the substations owned by Ferrovie dello Stato Italiane S.p.A. or subsidiaries of the same are included within the national transmission grid " and that " the completion of said inclusion is conditional on the completion of the acquisition of said assets by the operator of the national transmission system (..... )"; b) FS provides the Authority " the data and information necessary for the Authority's determinations "; c) “the Authority defines the remuneration of the net invested capital, the depreciation and current and upcoming operating costs relative to the portion of the national transmission grid, also taking into account the potential benefits for the national electricity system, providing information to the Ministry of Economic Development "; (…) “ for the purposes of proper allocation of the cost of the infrastructure to the respective sectors, (....) defines the net recognised invested capital without deducting the value of government contributions to set-up grants used for investments relative to the portion of the national transmission grid " owned by FS; d) “the value of the net invested capital determined by the Authority also represents the accounting and tax value of the high-voltage and very-high-voltage electricity grids and the relative portions of the substations relative to third-party purchasers, without any cost of revaluation.”
With resolution 11/2015/R/EEL of January 22 nd 2015, the AEEGSI began the procedure to determine remuneration of the high-voltage and very-high-voltage electricity grids owned by FS, subject to inclusion in the NTG, in order to determine the net invested capital, depreciation and current and upcoming operating costs, taking into account the constraints introduced through the law, including the potential benefits for the electricity system, and in compliance
8 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail) with the tariff regulation criteria: to that end, the Authority: a) instituted (article 2) an independent commission (for seller and purchaser) of experts (the " Commission ”) for the analysis and verifications necessary to assess the electricity transmission assets owned by the FS Group and to analyse the relative current and upcoming operating costs.
Following this procedure, another AEEGSI Resolution was issued, regarding the " definition of the remuneration of the High-Voltage and Very-High-Voltage electricity grids owned by the company Ferrovie dello Stato Italiane S.p.A. to be included in the national transmission grid ".
The Transaction was therefore carried out with the aim of including into the NTG operated by TERNA the high-voltage and very-high-voltage grids owned by FS, including the power lines, relative portions of substations and related properties.
The transaction foresees the acquisition of the Equity Investment by TERNA, or by a subsidiary of the same, corresponding to all of the share capital of S.EL.F., conditional on the Business Unit becoming part of S.EL.F.'s assets.
For a complete description of the Transaction and the Related Parties involved, please see sections 2.1 and 2.2 below.
The Transaction was approved by the Company's Board of Directors on November 11 th 2015, after a favourable opinion was issued on the same date by the Related-Party Transactions Committee, pursuant to the already referenced Procedure.
In the context of related-party transactions, the Transaction was classified as a significant transaction, pursuant to the Regulations on Related-Party Transactions, as well as the Related- Party Transactions Procedure, as illustrated in 2.5 below, given that, with reference to the most recent accounting document published by the Company (on November 12 th 2015) 1, the “Value Relevance Index" (as defined in Annex 3 to the Regulations on Related-Party Transactions) exceeds 5%.
The Transaction is classified as significant pursuant to article 71 and Annex 3B to the Issuers Regulations. To that end, on January 18 th 2013 the Company stated that it had chosen to opt-out, as provided for by articles 70, paragraph 8 and 71, paragraph 1-bis of the Issuer Regulation, thereby exercising of the option to opt-out of the obligations to publish information documents
1 Consolidated Interim Financial Report at September 30 th 2015, envisaged under article 154-ter, paragraph 5 of the Consolidated Law on Finance effective at the time. 9 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail) required in relation to significant merger, de-merger or capital increase operations by means of contributions in kind, acquisitions and disposals.
Consequently, it was exonerated from the requirement to publish pro-forma figures, which are therefore not provided in this Information Document.
This Prospectus, and related annexes, published on December 16 th 2015, is available to the public at the registered offices of TERNA, on the Company's website at www.terna.it , and on the website of the authorised storage service “1Info” ( www.1info.it ), as well as being filed with the stock exchange management company Borsa Italiana S.p.A. ( www.borsaitaliana.it).
The following documents are annexed to this Information Document: (i) the favourable opinion regarding the Company's interest in carrying out the Transaction and on the expediency and substantial correctness of the relative conditions, issued unanimously by the Related-Party Transactions Committee; (ii) Fairness Opinion issued by Rothschild from a financial point of view relative to the Transaction, supporting the Related-Party Transactions Committee; (iii) fairness Opinion issued by Banca IMI from a financial point of view relative to the Transaction, supporting the Company's Board of Directors; (iv) fairness Opinion issued by UniCredit from a financial point of view relative to the Transaction, supporting the Company's Board of Directors.
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1. CAUTIONS
1.1. Risks connected to potential conflicts of interest deriving from the Transaction.
The Transaction described in this Prospectus - as better identified in section 2.2 below - has been classified as a related-party transaction.
With reference to the risks connected with potential conflicts of interest deriving from the execution of the Transaction described in this Information Document, the Company - taking into account that foreseen in the Stability Law, the AEEGSI Resolution and the procedure followed by AEEGSI to determine the net invested capital, amortisation/depreciation and operating costs relative to the non-NTG assets to be acquired and referred to in the Committee's opinion - holds the conditions of the Transaction to be sufficiently objective and, consequently, in the company's interest. It is also held that the Transaction, regarding the perimeter already included in the NTG, is an object of interest for TERNA in the context of the process to unify ownership of the NTG within TERNA, most recently referred to in the context of Legislative Decree 93/2011 and that “ the total value identified by TERNA is in any case congruent from a financial point of view for TERNA and in line with market parameters for comparable transactions, regardless of any existing correlation between the parties interested in the Transaction ”, as indicated in the fairness opinion issued by Rothschild, even if it is not possible to ensure that, if carried out by third-party subjects, it would have been carried out under the same conditions and for the same fee.
Therefore, taking into account the characteristics of the Transaction, in TERNA's judgement there are no particular risks connected with potential conflicts of interest other than those typically associated with related-party transactions, nor risks other than those typically associated with transactions of a similar nature.
2. INFORMATION ABOUT THE TRANSACTION
2.1. Characteristics, methods, terms and conditions of the Transaction
The Transaction falls within a broad legal and regulatory framework, described in the Foreword.
Subsequent to the issuing of the Stability Law, on December 30 th 2014, TERNA, RS, RFI and 11 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
S.EL.F. subscribed a non-binding Memorandum of Understanding which started the process to evaluate the potential purchase by TERNA of the high-voltage and very-high-voltage electricity transmission grids currently owned by the FS Group. The market was informed of the signing of the Memorandum of Understanding on December 30 th 2014.
After the issuing of the AEEGSI Resolution which defined the remuneration for the high- voltage and very-high-voltage electricity transmission grids owned by FS and subject to inclusion in the NTG, the Sales Contract was signed on December 9th 2015 by TERNA, FS and RFI, which governs the conditions and terms for execution of the Transaction.
Briefly, the Transaction involves the purchase of the Equity Investment held by FS in S.EL.F., an entirely controlled subsidiary of FS that transmits electricity and which, following the Demerger of the Business Unit, will be the owner of around (1) 7,510 km of high-voltage and very-high- voltage power lines and 350 electrical substations and instrumental properties that will be included in the NTG following the completion of the Transaction, in virtue of that foreseen in article 1, paragraph 193 of Law no. 190 of December 23 rd 2014 - Stability Law 2015 ("New NTG Portion"), (2) 869 km of high-voltage and very-high-voltage power lines that are already part of the NTG ("NTG Portion").
In addition, the perimeter of the Transaction also includes a contract for the hosting of optical fiber cables owned by BasicTel S.p.A. (“BasicTel”) on the high-voltage and very-high-voltage power lines of S.EL.F. ("Non-Regulated Activities").
The Transaction does not foresee the transfer of employees and financial liabilities and includes a number of service contracts between TERNA and RFI for the interim management of the infrastructures purchased.
The structure of the Transaction foresees that (i) preliminarily RFI completes the Demerger of the Business Unit in favour of S.EL.F.; and that (ii) TERNA then acquires 100% of the shares of S.EL.F. The acquisition of the Equity Investment may be carried out directly by TERNA or by another company, fully controlled by the same, which will take over all the rights and obligations foreseen in the Sales Contract.
Below the elements of the Transaction are illustrated indetail.
2.1.1 Demerger
On the basis of that foreseen in the Sales Contract, RFI must complete the Demerger of the
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Business Unit in favour of S.EL.F. by December 31 st 2015 (“ Effective Demerger Date ”).
On the Effective Demerger Date:
(i) FS will ensure that S.EL.F. is the sole, legitimate and exclusive owner and has free availability of the Business Unit and the relative goods, rights, relations, assets and liabilities;
(ii) RFI and FS and RFI for S.EL.F. will ensure that the following (ancillary) contracts are signed: (i) the new maintenance contract for the grid carried out by RFI in favour of S.EL.F.; (ii) the remote operation contract for the systems; (iii) other contracts relative to operation management and maintenance of Non-Regulated Activities; (iv) the operating regulations and (v) the contract for completion of the so-called Works in Progress (WiP).
2.1.2 Acquisition from FS of an equity investment equal to the entire share capital of S.EL.F.
With the signing of the Sales Contract, FS undertakes to sell and TERNA undertakes to acquire the Equity Investment for a total fee due on the Execution Date of Euro 757,000,000.00 ( seven hundred fifty seven million and 00 cents) (" Purchase Price " as defined). To pay the price, TERNA will make use of already available credit lines and liquidity.
The completion of the transfer of the Equity Investment is subject to specific conditions precedent, among which:
(i) the completion and execution of all the activities and procedures inherent to the Demerger between RFI (demerging company) and S.EL.F. (beneficiary);
(ii) the special powers pursuant to article 2 of Decree Law no. 21 of March 15 th 2012, converted with Law no. 56 of May 11 th 2012 ( Golden Power ) not being exercised within the terms foreseen herein;
(iii) authorisation is released by the Italian Antitrust Authority; and
(iv) the absence of any relevant and unfavourable change to the legal and regulatory framework such as to significantly and detrimentally modify that foreseen in the Stability Law and/or the AEEGSI Resolution.
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With regards to the conditions precedent pursuant to point 2.1.2 letter (ii) above, it is noted that December 11 th 2015, the Prime Minister's Office, to which the Transaction was submitted pursuant to the law, issued a press release which stated that the aforementioned special powers (Golden Power) would not be exercised.
2.1.3 Price adjustment
The Sales Contract contains a price adjustment clause that becomes active in case that the amount of shareholders' equity recognised in the statement of financial position as of the Execution Date suffers a negative or positive change with respect to the amount of shareholders' equity recognised in the pro forma statement of financial position at September 30 th 2015 2.
2.1.4 Interim Management
In addition, the Sales Contract contains a interim management clause regarding S.EL.F., effective as of the date the Sales Contract is signed and until the Execution Date, pursuant to which FS undertakes to ensure that S.EL.F. is managed with criteria complying with sane and prudent management, and that the same does not establish additional management actions without written consent from TERNA. The same limitations apply to RFI prior to the Demerger, with reference to the Business Unit.
2.2. Related parties involved in the Transaction, nature of the correlation, nature and significance of the interests of said parties in the Transaction
With regards to the parties involved in the Transaction, it should be noted that, on one hand, as of the date of this Prospectus and with reference to the share capital of TERNA, of Euro 442,198,240.00, for a total of 2,009,992,000 ordinary shares, CDP RETI (joint-stock company controlled by CDP, in turn held at 80.1% by MEF) is in possession of 29.851% of TERNA's share capital. With reference to the control of the Company, recall that CDP has confirmed the relation of de facto control existing between CDP and TERNA, declared officially on April 19 th 2007.
The other party, FS, is a company fully controlled by MEF and, additionally, the same is listed in the list of companies that CDP sent to TERNA, also pursuant to article 4, paragraph 8 of the Regulations on Related-Party Transactions.
2 The pro forma statement of financial position at September 30 th 2015 consists of the consolidation of the financial position of the Business Unit and that of S.EL.F., as if the Demerger were to take effect on said date. 14 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
The Transaction described in this Prospectus was therefore classified as a related-party transaction and represented as such to the Board of Directors and the Committee.
2.3. Economic rationale and suitability of the Transaction for the Company
The Transaction is part of a situation governed under both the law and regulatory provisions issued by the AEEGSI.
In particular, and as already illustrated in the Foreword, the Stability Law established:
- the insertion into the NTG of the high-voltage and very-high-voltage grid owned by the FS Group, conditional on its acquisition by TERNA;
- the transfer of the authorisations and other titles relative to the perimeter acquired in favour of TERNA;
- that AEEGSI be entrusted with the task of determining the value of the remuneration, the amortisation/depreciation and the current and upcoming operating costs;
- the recognition of the value of net invested capital without deducting the value of the contributions received by FS in the past;
- that the value of the electricity assets be aligned for accounting and tax purposes with the value of the remuneration of the invested capital as determined by the Authority.
Following that provided in the legislation, in compliance to article 1, paragraph 193, letter b) of the Stability Law, the AEEGSI Resolution determined, with the procedure described herein, the net invested capital, the amortisation/depreciation and current and upcoming operating costs relative to the high-voltage and very-high-voltage grid owned by FS Group and subject to insertion in the NTG.
In addition, the procedure followed by AEEGSI to determine the net invested capital, amortisation/depreciation and the operating costs relative to the New NTG Portion to be acquired make it possible to judge the conditions of the Transaction sufficiently objective and, consequently, in the company's interest. An additional relevant factor is that the AEEGSI Resolution was adopted by the Authority on the basis of the contributions of an assessment commission composed by independent members.
15 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Regarding the perimeter already within the NTG, this is an object of interest for TERNA in the context of the process to unify ownership of the NTG within TERNA, most recently referred to in Legislative Decree 93/2011.
In this context, the total value identified was, in any case, held “fair from a financial point of view for TERNA and in line with market parameters for comparable transactions, regardless of any existing correlation between the parties interested in the Transaction ”, as indicated in the Fairness Opinion issued by Rothschild.
Beyond the legal and regulatory context outlined above, also note the existence of the strategic and industrial interest covered by the Transaction.
Therefore, taking into account and considering:
- the legal and regulatory situation in question, as effective at present;
- the results of the procedure followed by the Authority in which the Company also indicated the benefits for the electricity system, deriving from the insertion of the grids involved in the Transaction into the NTG;
- the advantages that could be obtained, from both a strategic and industrial point of view and in terms of the investment plan, as well as operating costs and the quality of the service, taking advantage of the synergies made possible through the integration of the FS Group electricity grid and the Terna Group transmission grid; it can be stated that TERNA has an interest in the completion of the Transaction, in that it is able to create synergic development of the NTG, also in relation to connection requests by renewable energy production plants, in particular in southern Italy, thereby producing notable benefits for the electricity system and its users.
2.4. Method used to determine the financial consideration for the Transaction and evaluations of its fairness with respect to the market values of similar transactions
The Purchase Price for the Equity Investment in S.EL.F. was agreed as Euro 757,000,000.00 (seven hundred fifty seven million and 00 cents).
The Purchase Price for the Equity Investment was determined by also taking into account that provided in the AEEGSI Resolution and the procedure followed by AEEGSI in determining the net invested capital, amortisation/depreciation and operating costs relative to the non-NTG
16 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail) assets to be acquired, as referred to in the Committee's opinion. In particular, the New NTG Portion will receive a tariff-based remuneration, according to that foreseen in the AEEGSI Resolution which determined, among other things, the value of the net invested capital recognised for tariff purposes ( Regulated Asset Base ) of this portion as Euro 674.0 million, as well as the evolution of the operating costs and amortisation/depreciation recognised.
With reference to the NTG Portion managed by S.EL.F., in 2014 this generated tariff revenues of Euro 7.4 million while the Non-Regulated Activities reported revenues of Euro 5.6 million.
Therefore, TERNA has identified the total value held fair for the Transaction, equal to the Purchase Price and costs and taxes deriving from the completion of the same estimated at around Euro 13,000,000.00 ( thirteen million and 00 cents), as indicated in the Fairness Opinion issued by Rothschild referred to above and in the opinions of Banca IMI and UniCredit.
Regarding its responsibilities, the TERNA Board of Directors unanimously gave a favourable opinion to implementing the Transaction, as well as the suitability and substantial correctness of the conditions of the same, after receiving a favourable opinion issued unanimously by the Related-Party Transactions Committee which made use of Rothschild as its primary independent financial advisor, having a proven professional approach, as well as the evaluations made in the AEEGSI Resolution prepared on the basis of the contributions of an Evaluation Committee also composed of independent parties.
Independent experts
Rothschild
The Committee, in compliance with the Procedure and that foreseen in the Regulations on Related-Party Transactions, following the competitive tender that involved various candidate companies, unanimously selectedof Rothschild as the Independent Expert on May 6th 2015, assigned to issue an opinion regarding the fairness of the total value identified by TERNA for the acquisition, gross of any costs and taxes deriving from the completion of the Transaction ("Total Transaction Value") and additional financial aspects of the Transaction.
The Committee verified the independence of Rothschild, which stated its independence as the financial advisor for the Transaction, taking into account the absence of any relevant economic relations that could influence its independence with reference to Consob regulations and the independence of the specific dedicated team, as well as the lack of any economic or financial
17 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail) relationships with TERNA, TERNA's subsidiaries and their Directors. Consequently, on September 2nd 2015, the Committee assigned the task to the Independent Expert, through a “Mandate Agreement” and via the Company.
The members of Rothschild team appointed to determine the fairness of the Transaction for the Committee are the following:
- Alessandro Daffina;
- Alessandro Bertolini;
- Tommaso Bricola.
On November 11 th 2015, the Committee received a Fairness Opinion from Rothschild regarding the fairness of the Total Transaction Value. In compliance with that foreseen in article 5 of the Regulations on Related-Party Transactions, the Fairness Opinion issued by Rothschild from a financial point of view, for the benefit of the Related-Party Transactions Committee is available to the public as an annex to this Prospectus at the registered office of TERNA and is published on the Company's website at www.terna.it, and on the website of the authorised storage service “1Info” ( www.1info.it ), as well as being filed with the stock exchange management company Borsa Italiana S.p.A. ( www.borsaitaliana.it).
Valuation methodology adopted by Rothschild
In carrying out the valuation analysis in order to prepare the Fairness Opinion, Rothschild made its considerations on the basis of the Information received and carried out a sum of the parts (SOTP) analysis, on a "debt free/cash free" basis, applying the most commonly used methodology in international measurement practices, while also taking into account the specifics of the various activities within the scope of the Transaction.
Rothschild used the Unlevered Discounted Cash Flow (DCF) valuation method and, as control methods, used current market multiples relative to comparable listed companies and implied multiples from recent comparable transactions.
18 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Banca IMI and UniCredit
The TERNA Board of Directors made use of the assistance of Banca IMI and UniCredit as Independent Experts, each of which respectively issued, on November 11 th 2015, their opinions regarding the fairness of the payment from a financial point of view gross of costs and taxes deriving from completion of the Transaction.
The opinions issued to the Board of Directors by Banca IMI and UniCredit, which carried out their evaluations in full autonomy, are annexed to this Prospectus in their entirety. The reader is referred to these evaluations for any additional information required about their relative valuation.
Valuation methodology adopted by Banca IMI
Banca IMI, in carrying out the valuation analysis necessary to prepare its opinion, applied generally accepted methodological criteria regarding corporate evaluation widely used in national and international practice, while also taking into account the special features of the Transaction. Therefore, Banca IMI used the discounted cash flow method as its valuation method, in consideration of the specific nature of the assets, the availability of economic/financial forecasts in the business plan and the underlying investment plan.
Banca IMI also used (i) the multiples method, based on comparable M&A transactions occurring in recent years in the sector in which the Business Unit falls, and (ii) the stock multiples method relative to comparable companies listed on regulated markets. Banca IMI holds that these methods were found to be of limited significance, in that both the multiples method for comparable transactions and that of stock multiples refer to assets and/or companies that are not entirely comparable to the Business Unit and refer to different regulatory regimes as well as different levels of industrial development.
Measurement methodology adopted by UniCredit
In order to prepare the opinion regarding the fairness of the payment from a financial point of view, UniCredit used the following methods:
° the discounted cash flow method ° the multiples method using comparable transactions.
19 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
These methods were those most commonly used for transactions of this nature in the context of the regulated sector in which S.EL.F. operates. The discounted cash flow is considered to be the reference method, in line with market practices. In addition, the multiples method using comparable transactions was also used as a control method.
2.5. Illustration of the economic, equity and financial effects of the Transaction
The Transaction is classified as a significant transaction pursuant to the Related-Party Transactions Procedure given that, with reference to the most recent accounting document published by the Company (on November 12 th 2015), 3, the “Value Relevance Index" (as defined in Annex 3 to the Regulations on Related-Party Transactions) exceeds 5%. Specifically, it amounts to approximately 9%.
As regards the provisions of art. 71 of the Issuers Regulations, it is noted that the Company, with a resolution made by the Board of Directors on December 19 th 2012, chose to adhere to the simplification regime foreseen in articles 70, paragraph 8 and 71, paragraph 1-bis of the Issuers Regulations, thereby availing itself of the possibility to opt-out of the obligations to publish information documents required in relation to significant merger, de-merger or capital increase operations by means of contributions in kind, acquisitions and disposals.
Consequently, the Company was exonerated from the requirement to publish pro-forma figures, which are therefore not provided in this Prospectus.
2.6. Impact of the Transaction on the fees of members of the Company Board of Directors and/or subsidiaries of the company
The Transaction does not involve changes in the fees due to the members of the TERNA Board of Directors, nor the subsidiaries of the company.
2.7. Any members of the management and control bodies, general directors and senior executives of the Company, involved in the Transaction
Without prejudice to that specified in section 2.2 above, no members of the management and control bodies, general directors or senior executives of the Company are involved in the Transaction as related parties.
3 Consolidated Interim Financial Report at September 30 th 2015, envisaged under article 154-ter, paragraph 5 of the Consolidated Law on Finance effective at the time. 20 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
2.8. Transaction approval process
Under the terms of Art. 8 of the Regulations on Related-Party Transactions and article 5.3 of the Related-Party Transactions Procedure, significant transactions with related parties are approved by the Board of Directors after receiving a reasoned favourable opinion from the Related-Party Transactions Committee, asked to express its opinion regarding the interest of the Company in carrying out the Transaction and regarding its suitability and the substantial correctness of the relative economic conditions.
The CEO decides when the transaction is sufficiently well-developed to be submitted to the Committee for formal evaluation, when the investigation stage can be considered complete and asks the Committee to express their opinion.
To that end, the Related-Party Transactions Committee was involved with the Transaction investigation stage from the start, both regarding meetings of the Board of Directors and through the receipt of information, that was complete and timely, provided by the relevant functions during meetings of the Committee, in which the Company's management also played a role. More specifically, in the context of the Board of Directors, information was provided at the meetings on October 15 th 2014, November 12 th 2014, December 18 th 2014, March 4th 015, March 26 th 2015, May 6th 2015, July 28 th 2015 and October 14 th 2015. The Committee's meetings were held on December 18 th 2014, May 6th 2015, November 6th 2015 and November 11 th 2015.
In compliance with the Procedure and that foreseen in the Regulations on Related-Party Transactions and for that already indicated in section 2.4 above, the Related-Party Transactions Committee selected Rothschild as the Independent Expert to issue the fairness opinion regarding the fairness of the payment for the Transaction.
Identification of the Independent Expert by the Related-Party Transactions Committee was carried out by comparing the bids received and the knowledge of the reference sector, as well as the quality and experience of the teams indicated in the aforementioned bids.
In addition, the Related-Party Transactions Committee verified the independence of Rothschild, ascertaining, on the basis of a declaration issued by the same, pursuant to article 2.4 of Annex 4 to the Regulations on Related-Party Transactions and as already noted in section 2.4 above.
The assignment granted consisted in the issuing of a fairness opinion on the Transaction from a financial point of view .
21 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
The Related-Party Transactions Committee discussed aspects relative to the Transaction during the meetings indicated above and, most recently, on November 11 th 2015.
Then, on November 11 th 2015, the Related-Party Transactions Committee unanimously issued its reasoned favourable opinion regarding TERNA's interest in proceeding with the Transaction, as well as the suitability and substantial correctness of the relative conditions.
2.8.1 Approval of the Transaction by the TERNA Board of Directors
On November 11 th 2015, the Company's Board of Directors, on the basis of the research documentation received, the reasoned favourable opinion issued by the Related-Party Transactions Committee, supported by the Fairness Opinion issued by Rothschild regarding the Total Transaction Value, and making use of the opinions issued to support the Board of Directors by Banca IMI and UniCredit, as illustrated in section 2.4, identifying the Company's interest in carrying out the Transaction, as well as the suitability and substantial correctness of the relative conditions, unanimously approved implementation of the Transaction.
In relation to the above, the Board of Directors also resolved to severally grant the Chairman and CEO of TERNA the powers for the consequent activities.
2.9. Possible collection of transactions pursuant to article 5, paragraph 2 of the Consob Regulations.
The case described does not apply to the Transaction.
3 DECLARATIONS OF THE EXECUTIVE IN CHARGE OF PREPARING THE COMPANY'S FINANCIAL REPORTS
The Executive in Charge of preparing TERNA's financial reports, Pierpaolo Cristofori, pursuant to article 154-bis, paragraph 2 of the Consolidated Law on Finance (TUF), certifies that the accounting information included in this Prospectus corresponds to the information found in the documents, books and accounting records.
22 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
4 ANNEXES
Annex "A" - Opinion of the TERNA S.p.A. Related-Party Transactions Committee
Annex "B" – Fairness opinion issued by Rothschild S.p.A.: Independent Expert, pursuant to article 5.3.1. of the Procedure supporting the Related-Party Transactions Committee
Annex "C" – Opinion issued by Banca IMI: Independent Financial Expert supporting the TERNA Board of Directors
Annex "D" – Opinion issued by UniCredit: Independent Financial Expert supporting the TERNA Board of Directors
23 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Annex "A" - Opinion of the TERNA S.p.A. Related-Party Transactions Committee
24 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) Opinion of the Related-Party Transactions Committee provided to the TERNA S.p.A. Board of Directors, relative to a significant related-party transaction, prepared pursuant to article 5 of the Regulations approved by Consob with Resolution no. 17221 of March 12 th 2010, as amended
Contents
1. Role of the Related-Party Transactions Committee in relation to the nature of the Transaction and risks connected to potential conflicts of interest deriving from the related- party transaction 2. Description of the Transaction 3. Indication of the Related Parties with which the Transaction is established 4. Transaction approval process - as in the applicable Related-Party Transactions Procedure of TERNA S.p.A. 5. Interests in the completion of the Transaction 6. Formal and substantial correctness and transparency of the process 7. Fairness of the Transaction 8. Conclusions (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) 1. Role of the Related-Party Transactions Committee in relation to the nature of the Transaction and risks connected to potential conflicts of interest deriving from the related-party transaction The Related-Party Transactions Committee (the “ Committee ”) of TERNA S.p.A. (“ TERNA ” or the “Company ”) has examined the related-party transaction – described below – for the purposes of issuing a reasoned opinion on a significant transaction, pursuant to article 8 of the Regulations adopted through Consob resolution no. 17221 of March 12 th 2010, as amended (the "Regulations ”) and article 5.3 of the Related-Party Transactions Procedure approved by the Company's Board of Directors at its meeting on 12 November 2010 (the " Procedure ”). In compliance with the provisions of article 8 of the Regulations and article 5.3 of the Procedure, the Committee examined the interests of the Company in completing the transaction, the economic expedience of the same, as well as the substantial correctness of the relative conditions, obtaining assistance from an independent expert, Rothschild, appointed pursuant to article 5.3.1 of the Procedure, having verified the requirements of independence and professionalism (the “Expert ” or “ Rothschild ”).
2. Description of the Transaction The Transaction falls within a wide legal and regulatory framework. Recall that article 1, paragraph 193 of Law no. 190 of December 23 rd 2014 (" Stability Law "), in order to improve the efficiency of the national transmission grid (" NTG ") and ensure the development of the national railway network, in consideration of the functions of the NTG, envisages, among other things, that: <
Subsequent to issue of the Stability Law, following previous contacts, TERNA, Ferrovie dello Stato Italiane S.p.A. (FS), RFI – Rete Ferroviaria Italiana S.p.A. (RFI) and S.EL.F. – Società Elettrica Ferroviaria S.r.l. (S.EL.F.), (all companies within the FS Group), signed a non-binding Memorandum of Understanding on December 30 th 2014, which began the process to evaluate the potential purchase by TERNA of the high-voltage and very-high-voltage electricity transmission grids currently owned by the FS Group. The market was informed of the signing of the Memorandum on December 30 th 2014. (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) With resolution 11/2015/R/EEL of January 22th 2015, the Italian Regulatory Authority for Electricity, Water and Gas (" AEEGSI " or the " Authority ") began the procedure to determine remuneration of the high-voltage and very-high-voltage electricity grids owned by FS, subject to insertion in the NTG, in order to determine the net invested capital, amortisation/depreciation and current and upcoming operating costs, taking into account the constraints introduced by law, including the potential benefits for the electricity system, and in compliance with the tariff regulation criteria: to that end, the Authority: a) instituted (article 2) an independent commission (for seller and purchaser) of experts (the " Commission ”) for the analysis and verifications necessary to measure the electricity transmission assets owned by the FS Group and to analyse the relative current and upcoming operating costs. Following this procedure, the Authority issued resolution no. 517/2015/R/EEL on October 29 th 2015, (the " Resolution "), regarding the " definition of the remuneration of the High-Voltage and Very-High-Voltage electricity grids owned by the company Ferrovie dello Stato Italiane S.p.A. to be included in the national transmission grid ". The Authority's decision therefore was made at the end of the investigation carried out with the assistance of the independent Commission of experts, which requested the acquisition and analysis of technical, economic and accounting information relative to the grid assets and the relative portions of HV substations currently owned by the FS Group and not yet included within the NTG (around 7,510 km of power lines and 350 HV substations’ portions, for possible transfer to TERNA).
The Transaction brought to the Committee's attention involved an offer for around 8,380 km of power lines and 350 portions of HV substations (including both the grid assets indicated, which were the subject of measurement by the Authority and at present not part of the NTG but destined to become so once acquired by the Company, as well as an additional 869 km of power lines that are already part of the NTG 1) and also including (i) the land underlying the substations’ portions (ii) the work in progress and variations and third-party connections, as well as (iii) the optic fibre hosting contract with BasicTel S.p.A. (“ BasicTel ”) – (as a whole, the “ Business Unit ”). In relation to the contract with BasicTel, recall that RFI holds a contract with BasicTel (BT S.p.A. Group) for fibre-optic "housing" within the Guard Wires ( "f.d.g." ) on around 3,300 km of power lines subject to acquisition.
Transaction’s structure foresees that RFI carries out a partial demerger of the Business Unit in favour of S.EL.F., entirely controlled by FS, and that TERNA then acquires 100% of S.EL.F.’s shares. In the context of the Transaction to transfer the shares, it is also foreseen that certain contracts be signed aimed at regulating connected and complementary aspects, in order to safely manage the electricity system in the initial period following the acquisition. In relation to the same, it should be noted that at present TERNA, FS and RFI are negotiating the main terms and conditions of the ancillary contracts, including: (i) the O&M contract, (ii) the remote management contract, (iii) the contract relative to management of work in progress (iv) the "Operating Regulations" and (v) the "Interference Management Regulations". The terms of the acquisition contract are currently being defined. Considering the reference framework as defined and taking that foreseen by the AEEGSI into account, the Company intends to prepare an Offer in order to complete the Transaction by 31/12/2015. This Offer will have the objective of indicating TERNA's interest in the Transaction, summarising the main terms, in particular with regards to the relevant economic values, and indicating the implementation schedule (the “ Offer ”).
1 Not subject to evaluation by the Authority. (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) The Offer will foresee a total payment to transfer ownership of the share capital of S.EL.F.
3. Indication of the Related Parties with which the Transaction is established Note that with reference to the share capital of TERNA, of Euro 442,198,240.00, with a total of 2,009,992,000 ordinary shares, CDP Reti S.p.A. (“ CDP Reti ”, a joint-stock company controlled by Cassa Depositi e Prestiti S.p.A. in turn held 80.1% by the Ministry of Economy and Finance of the Italian Republic, “ MEF ”) holds 29.851% of the share capital. With reference to the control situation for the Company, recall that Cassa Depositi e Prestiti S.p.A. (“ CDP ”) has confirmed the de facto control relationship existing between CDP and TERNA, declared with a communication on April 19 th 2007. FS, is a company fully controlled by MEF and, additionally, the same is listed in the list of companies that CDP sent to TERNA, also pursuant to article 4, paragraph 8 of the Regulations. The Transaction is therefore classified as a related-party transaction and represented as such to the Board of Directors and the Committee. The Committee also notes that the same is classified as a significant transaction, in that its value exceeds the thresholds identified pursuant to article 4, paragraph 1, letter a) of the Regulations, and in the combined provisions of article 2 and article 8.1 of the Procedure.
4. Transaction approval process - as in the applicable Related-Party Transactions Procedure of TERNA S.p.A. The Related-Party Transactions Committee was involved with the Transaction investigation stage from the start, both regarding meetings of the Board of Directors and through the receipt of information provided swiftly and thoroughly by the relevant units during meetings of the Committee, in which the Company's management also played a role. More specifically, in the context of the Board of Directors, information was provided at the meetings on October 15 th 2014, November 12 th 2014, December 18 th 2014, March 4th 2015, March 26 th 2015, May 6th 2015, July 28 th 2015 and October 14 th 2015. The Committee's meetings were held on December 18 th 2014, May 6th 2015, November 6th 2015 and November 11 th 2015. With a wealth of information and excellent cooperation from the relevant company units, the Committee was able to receive the information necessary to evaluate the aspects under its responsibility initially and going forward, despite the scarce number of similar transactions to be used for comparative purposes. The Committee met to carry out the tasks and make the assessments under its responsibility on the dates indicated above and also made use of the right to request information and make observations to the company units/bodies assigned to carry out the activities, also in order to be sure, on the basis of careful and in-depth analysis, of having all the necessary information to prepare the opinion regarding (i) the Company's interest in executing the Transaction, (ii) the expediency of the relative conditions and (iii) the substantial correctness of the relative conditions, all guaranteeing the utmost exchange of information both within the Committee and between the Committee and the Company's relevant units regarding the completion of the tasks assigned to them.
In compliance with the Procedure and that foreseen in the Regulations, the Committee identified Rothschild as the Independent Expert for issuing of the fairness opinion regarding the fairness of the payment. (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) Specifically, with a resolution made on May 6th 2015, the Committee unanimously identified the Expert, following the completion of the tender procedure, carried out through the relevant Company structures, a competitive procedure that involved various candidate companies (12). Identification of the Expert by the Committee was carried out by comparing the bids received and the knowledge of the reference sector, as well as the quality and experience of the teams indicated in the aforementioned bids. An additional aspect evaluated involved the nature of the candidates and their specific expertise with reference to the role carried out in assessing comparable transactions. In addition, the Committee verified the independence of Rothschild ascertaining the same on the basis of the declarations issued by the company in question and contained in the tender that the Committee evaluated at its meeting on May 6th 2015. On September 2nd 2015, through the Company, the Committee granted the assignment to the Expert through a "Mandate Agreement", consisting in the issuing of a fairness opinion regarding the Transaction from a financial point of view. The members of the Rothschild team appointed to determine the fairness of the Transaction for the Committee are the following: - Alessandro Daffina; - Alessandro Bertolini; - Tommaso Bricola.
The Fairness Opinion issued by the Expert, or the essential elements of the same, pursuant to article 5 of the Regulations, will be annexed to the information document that TERNA will prepare within the terms of said Regulations, and that will be published on the Company's website.
5. Interests in the completion of the Transaction The Transaction as represented is part of a situation governed under both the cited law and the regulatory provisions issued by the AEEGSI. In particular and as illustrated, the Stability Law established: - the insertion of the HV grid into the NTG, conditional on its acquisition by TERNA; - the transfer of the authorisations and other titles relative to the perimeter acquired in favour of the purchaser (or its subsidiary); - that AEEGSI be entrusted with the task of determining the value of the remuneration, the amortisation/depreciation and the current and upcoming operating costs; - the recognition of the value of net invested capital without deducting the value of the contributions received by FS in the past; - that the value of the electricity assets be aligned for accounting and tax purposes with the value of the remuneration of the invested capital as determined by the Authority. Following the provisions of the law, in obeisance to article 1, paragraph 193, letter b) of the Stability Law, the AEEGSI Resolution determined, with the procedure described herein, the net invested capital, the amortisation/depreciation and current and upcoming operating costs relative to the high-voltage and very-high-voltage grids owned by FS Group and subject to insertion in the NTG.
With particular reference to the Resolution, the Committee holds that the procedure followed by the AEEGSI to determine the net invested capital, amortisation/depreciation and operating costs relative to the non-NTG assets to be acquired, makes it possible to considerer the economic (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail) conditions of the transaction sufficiently objective and, consequently, in line with the company's interest, as proposed by the delegated bodies of the Company [given that the same are fully in line with the assessment given by the Authority in the Resolution regarding the payment for transfer of the assets]. An additional relevant factor, in assessing the correctness and fairness expressed here - is that the Resolution was adopted by the Authority on the basis of the contributions of an Evaluation Commission made up of independent parties. The Committee also holds, regarding the perimeter already within the NTG, this is an object of interest for TERNA in the context of the process to unify ownership of the NTG within TERNA, most recently referred to in Legislative Decree 93/2011. Therefore, the Committee: - taking into account that represented by management as well as that illustrated by the CEO at the various meetings of the Board of Directors; - considering the legal and regulatory situation in question, as effective at present; - noting the results of the procedure followed by the Authority in which the Company also indicated the benefits for the electricity system, deriving from the insertion of the grids involved in the Transaction into the NTG; - acknowledging the advantages that could be obtained, also from an industrial point of view and in terms of the investment plan, as well as operating costs and the quality of the service, taking advantage of the synergies made possible through the integration of the FS Group electricity grid and the Terna Group transmission grid, holds that TERNA has an interest in completing the Transaction, independent of the fact that the seller can be classified as a Related Party of the Company and that it agrees with that indicated during the investigation by the Company bodies, due to the fact that the Transaction will create synergistic development of the NTG, also in relation to connection requests for renewal energy power plants, in particular relative to southern Italy.
6. Formal and substantial correctness and transparency of the process The Committee acknowledges that TERNA has established the necessary checks to ensure proper classification of the Transaction, readily submitting it to the specific TERNA Procedure foreseen in the Regulations, guaranteeing the assigned company bodies (the present Committee in primis ) the possibility to act in an informed and transparent manner through a complete and timely flow of information, noting the relative observations and elements held useful to the process through to the negotiation.
7. Fairness of the Transaction All that above being established, acknowledging the documentation and information received, the assessment process and conclusions reached by the Expert supporting the Committee, pursuant to the Support Document prepared by Rothschild and received on November 6th 2015, prepared in definitive form on today's date (the “ Fairness Opinion ”), the price of € 770M including all the components of the Transaction appears to be congruent.
8. Conclusions Pursuant to and in accordance with article 8 of the Regulations and article 5.3 of the Procedure, (i) acknowledging the reasoning behind the Transaction; (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail)
(ii) taking into account the Fairness Opinion issued by Rothschild; (iii) in the light of the information acquired from management; (iv) due to the additional work carried out by the Committee to support the Company's Board of Directors, the Committee, after in-depth discussion by its members, with a vote in favour by the Chairman of the Committee Stefano Saglia and its members Fabio Corsico and Gabriella Porcelli, expresses a favourable opinion of the Company's interest in the Transaction as described and presented to its attention, as well as on the expedience and substantial correctness of the relative conditions as represented up to this point.
Rome, November 11 th 2015 ______Stefano Saglia - Chairman of the Committee ______Fabio Corsico – Committee member ______Gabriella Porcelli – Committee member (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Annex "B" – Fairness opinion issued by Rothschild S.p.A.: Independent Expert, pursuant to article 5.3.1. of the Procedure supporting the Related-Party Transactions Committee
25
(This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Annex "C" – Opinion issued by Banca IMI: Independent Financial Expert supporting the TERNA Board of Directors
26 BOZZA qqq
STRICTLY PRIVATE AND CONFIENTIAL
IMPORTANT NOTICE: PLEASE NOTE THAT THE PRESENT DOCUMENT IS A COURTESY TRANSLATION ONLY, NOT TO BE RELIED UPON. IN CASE OF ANY DISCREPANCIES BETWEEN THE ITALIAN VERSION AND THE ENGLISH VERSION OF THE OPINION, THE ITALIAN VERSION SHALL PREVAIL.
Terna – Rete Elettrica Nazionale S.p.A. Viale Egidio Galbani, 70 00156, Rome
To the kind attention of the Board of Directors
Milan, November 11 th , 2015
Dear Sirs,
We refer to the letter of engagement dated as of September 2nd , 2015 (the “ LoE ” ) in force of which Terna – Rete Elettrica Nazionale S.p.A. (“ Terna ” or the “Client ”) mandated Banca IMI S.p.A. (“ Banca IMI ”), belonging to Intesa Sanpaolo Group (“ ISP Group ”), to act as its financial advisor in connection with the potential acquisition by Terna of the high voltage assets owned by Ferrovie dello Stato Italiane S.p.A. (“ FS ”) or other companies belonging to its group (the “ Transaction ”). In the context of Banca IMI’s financial advisory engagement, the Client requested Banca IMI to render an opinion (the “ Opinion ”) to the board of directors of Terna (the “ BoD ”) as to the fairness, from a financial point of view, of the Consideration (as defined below) for the Transaction.
1. Description of the Transaction
The Transaction finds its reason in the provision of Law no. 190 of December 23 rd , 2014, published in the Official Gazette on December 29 th , 2014 (the “Legge di Stabilità 2015 ”) which states, inter alia , that, in order to improve the efficiency of national high voltage electricity transmission grid (“ RTN ”) and to develop the Italian rail network the high voltage assets (power lines and related substations) owned by FS or controlled company (the “ AT Business ”) will be included in the national high voltage electricity transmission grid and the effectiveness of this inclusion will be subject to the acquisition of the abovementioned assets from Terna, in its capacity as administrator of the national high voltage electricity transmission grid. In such context, on October 29 th , 2015, the Italian Regulatory Authority for Electricity Gas
Banca IMI S.p.A. Sede Legale Largo Mattioli, 3 20121 Milano Capitale Sociale Euro 962.464.000,00 Registro Imprese di Milano, Codice Fiscale e Partita IVA 04377700150 N° Iscr. Albo delle Banche al n. 5570 Codice ABI 3249.0 Aderente al Fondo Interbancario di Tutela dei Depositi Società soggetta all’attività di Direzione e Coordinamento del socio unico Intesa Sanpaolo S.p.A. e appartenente al gruppo bancario “Intesa Sanpaolo”.
and Water (“ AEEGSI ”) defined, in accordance with resolution no. 517/215/R/EEL, the main parameters related to the basic tariff for high voltage assets owned by FS (“ RAB Tariff Mechanism ”) and, inter alia , the related regulatory asset base (“ RAB ”) equal to € 674 million.
The Transaction, more specifically, will be carried out through the acquisition by Terna of AT Business, including 8,539 Km of power lines and 350 substations, which is composed by the following assets:
(i) assets regulated by the AEEGSI through the RAB Tariff Mechanism (“ NO RTN Business ”); (ii) assets not regulated by the RAB tariff mechanism (“RTN Business ”); and (iii) assets pertaining to the agreement which regulates the presence of the optical fiber network owned by Basictel S.p.A. on AT Business (“ Basictel Business ”).
The perimeter of AT Business, in accordance with what agreed, will not include financial debt and/or other debt like items (“cash free – debt free”).
In addition, we have been told that Terna and FS are currently defining terms and conditions of the Transaction. In particular, Terna is willing to propose to FS, in relation to the acquisition of AT Business, an offer (gross by fiscal costs and other transaction costs to be defined) equal to € 770 million (the “Consideration ”). Currently, the closing of the Transaction is expected by December 31 st , 2015.
2. Subject of the Opinion, information, limits of the analyses
As expressly agreed upon with the Client, in performing the underlying evaluative analyses expressed in the Opinion, Banca IMI relied on:
(i) the following information, documents and data provided directly and/or indirectly by the Client to Banca IMI, or acquired by Banca IMI itself in the context of its financial advisory engagement, used by Banca IMI for the sole purpose of rendering this Opinion (the “ Informative Set ”): a. AEEGSI guidelines n. 275/2015/R/COM and n. 335/2015/R/EEL released as at July 9, 2015; b. AEEGSI resolution n. 517/215/R/EEL released as at October 29, 2015, including the amount for the regulatory asset base and the basic tariff for the next regulated period c. Financial model and main operative and regulatory assumptions in relation to the business plan of AT Business (the “Business Plan ”), including, inter alia , capital expenditure plan in relation to NO RTN Business, for the stand alone and synergy scenario; d. Database including a detail of assets related to AT Business;
2
e. A preliminary draft of sale and purchase agreement of AT Business, currently under discussion between the parties, including other ancillary agreements related to the Transaction (the “Agreement ”) and (ii) certain publicly available business and financial information and documents to the extent deemed relevant.
The Information provided under (i) and (ii) above is referred herein, collectively, as the " Data ".
The Data are the sole data and documents used by Banca IMI as the basis of the Opinion.
Banca IMI has assumed that there are no other facts or circumstances of which the Client should have made Banca IMI aware which would make the Informative Set inaccurate or misleading. Banca IMI has conducted its analyses relying upon and assuming the truthfulness, accuracy and completeness of the Information Basis. Specifically, Banca IMI relied upon the plausibility of the assumptions of Terna’s management underlying the economic and financial projections of Business Plan, either in the stand-alone scenario that in the synergy scenario, and, in particular, of the assumptions related to the basic tariff, the cost structure and the amount of capital expenditures.
Banca IMI does not assume any obligation for an independent verification of the above mentioned information supplied to it and/or publicly available, nor any obligation for integration of the Data.
Banca IMI shall not in any event be liable at any time for the completeness, accuracy, reliability and representativeness of the Data, although it has used its best endeavors in connection with its careful valuation of the Data and has carried out its services with due diligence, professionalism and independence of judgment. Therefore, Banca IMI shall have no liabilities, direct or indirect thereto, and makes no warranty, express or implied, in connection with the Data used for the purpose of rendering the Opinion and contained herein.
The significance and reliability of the results of our analyses and valuation, although carried out by Banca IMI with due diligence, professionalism and independence of judgment, shall be subject to the completeness, accuracy, reliability and integration of the Data, which, as mentioned before, has not been independently verified by Banca IMI.
The Opinion refers to and is released on the date hereof and is based on AT Business’ financial, economic and market circumstances as well as the Data provided to Banca IMI as of the date hereof. Events that may occur in the future could have a significant impact on the results of the Opinion. In this regard, Banca IMI undertakes no obligation to update or correct the Opinion to reflect any new relevant event.
3
Banca IMI has not conducted any independent legal, tax, accounting, regulatory nor other analyses in connection with the assets and liabilities of AT Business. Banca IMI was not requested to, and this Opinion does not address: (i) the underlying and independent decision of Terna to consummate the Transaction; (ii) the timing and risks associated with the completion of the Transaction; (iii) the tax and legal consequences on the Transaction; and (iv) any other element or aspect of the Transaction not expressly addressed in the Opinion.
No opinion, advice or interpretation is intended to be given by Banca IMI in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. It is assumed that such opinions, advice or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Banca IMI has relied on the assumptions of the Client’s management.
3. Limits of the Opinion
The Opinion, including the values stated herein and in any other document, written or oral communication are connected to it and must be intended for the sole and exclusive use of the BoD in the context of the Transaction. The BoD agrees not to disclose the Opinion or distribute it to third parties, even partially, nor reproduce it, disseminate it, quote it, summarize it or refer to it, including the opinions, conclusions or any other information contained herein, without the prior written consent of Banca IMI.
The Client could mention the advisory services provided by Banca IMI in relation to the Transaction (including the release of the Opinion) in press releases that the Client will issue following the approval of the Transaction by the competent bodies. In case the Opinion, as well as all data, information, projections and conclusions contained herein, should be made available to third parties pursuant to any applicable law or any order from any competent authority, Terna shall promptly inform Banca IMI of such disclosure.
The Opinion shall be interpreted in accordance with the laws of Italy and can be relied on only upon the condition that it is interpreted and construed in accordance with the Italian law.
4. Synthetic description of the methodologies and evaluation analyses
Banca IMI has conducted such reviews, analyses and inquiries as deemed necessary and appropriate under the circumstance using valuation methodologies and criteria customarily adopted in similar transactions by independent evaluators, taking into account the specific characteristics of the Transaction. Banca IMI, in
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performing its analysis, has mainly made reference to the Unlevered Discounted Cash Flow method, taking into account the specific characteristics of AT Business, the availability of financial-economic forecasts of Business Plan and the underlying investment plan.
In addition, Banca IMI, applied the following valuation methods: (i) Transaction Multiples method, referred to comparable transactions occurred in recent years in the same industry of AT Business and (ii) Trading Multiples method, referred to a group of selected companies, listed on regulated markets. These methods are characterized by a limited significance, as both the Transaction Multiples and Trading Multiples relate to assets and / or companies that are not directly comparable to AT Business and reflect a different regulatory regime and a different phase of industrial development.
The valuation date is January 1, 2016 (the " Valuation Date "). Banca IMI assumed, according with the information provided by Terna, that between the Valuation Date and the date hereof, no events affected significantly the valuation considerations.
5. Conclusion
Based upon and subject to the foregoing, it is Banca IMI’s opinion that, at the date hereof, the Consideration is fair from a financial point of view to Terna.
Yours faithfully,
Banca IMI S.p.A.
Vincenzo De Falco Global Head of M&A Advisory
5 (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text shall prevail)
Annex "D" – Opinion issued by UniCredit: Independent Financial Expert supporting the TERNA Board of Directors
27 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
Fairness Opinion
11 November 2015
UniCredit S.p.A. Share capital € 20,257,667,511.62 fully paid in - Registered in the Register of Registered Office Banking Groups and Parent Company Via A. Specchi 16 of the UniCredit Banking Group, with 00186 Roma cod. 02008.1 - Cod. ABI 02008.1 - Fiscal Code, VAT number and Registration Head Office number with the Company Register of Piazza Gae Aulenti, 3 Rome: 00348170101 - Member of the Tower A NationalInterbank DepositGuarantee Fund. 20154 Milano This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
1. Introduction
Recitals
By a mandate executed in the form of an exchange of correspondence, accepted by UniCredit S.p.A. ("UniCredit") on 2 September 2015 (the "Mandate"), UniCredit was formally appointed by Terna – Rete Elettrica Nazionale S.p.A. ("Terna" or the "Client") to advise it as an independent expert, under the terms more particularly set out in the Mandate, for the preparation of a financial fairness opinion (the "Fairness Opinion") for the exclusive use and benefit of the Board of Directors of Terna, in connection with the fairness of the price, inclusive of transaction costs (the "Consideration"), for the possible acquisition of 100 per cent. of Società Elettrica Ferroviaria S.r.l. ("S.EL.F." or the "Company"), a wholly-owned subsidiary of Ferrovie dello Stato S.p.A. ("FS" and, together with Terna, the "Parties"), as described in greater detail in this Fairness Opinion (the "Transaction").
It remains understood that, in light of the complete autonomy of its decision- making, the determinations reached by the Board of Directors of Terna may vary based on additional considerations and contingent and subjective factors.
No section of the Fairness Opinion may be used in isolation from the others and each shall be read solely in conjunction with the others, as a single, indivisible document. In particular, the findings set forth in this Fairness Opinion are based on the entirety of the assessments contained herein, and accordingly none of them may be used for any other purpose, nor may they be considered without the context in which they are formulated or separately from the document in its entirety.
In view of the manner in which it is addressed and its purposes, this Fairness Opinion may not be distributed or disclosed by Terna, in whole or in part, to any third parties or used for any purpose other than those indicated herein. UniCredit does not assume any responsibility, directly or indirectly, for any losses that may result from improper use of the information contained in this Fairness Opinion, or for any incorrect use of this Fairness Opinion.
UniCredit hereby authorizes the Board of Directors of Terna to include this Fairness Opinion among the Client's records and corporate documents, in compliance with current requirements and the law and regulations applicable to the Transaction. Any other use made of this Fairness Opinion, in whole or in part, shall require prior written authorisation from UniCredit, except in circumstances in which distribution or disclosure of the same is determined by the law or is expressly required by a market authority with jurisdiction.
2 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
This Fairness Opinion incorporates by reference the potential conflicts of interest that were referred to in the Mandate. In particular, since UniCredit is the parent company of the UniCredit banking group (the "UniCredit Group"), which operates, inter alia, in the investment banking and lending sectors, there may be no assurance that situations or commitments involving a conflict of interest with respect to the subject matter of the Mandate shall not arise as part of the UniCredit Group's normal business activities.
In particular, Terna confirms it is aware that the UniCredit Group may, as at the execution date of the Mandate or of this Fairness Opinion, in its conduct of its ordinary business activities have provided, be providing, and that it may in the future provide, financial services on a variety of bases (including financing transactions) to parties involved in the Transaction (and/or in the various stages of the Transaction's negotiation and implementation), to Terna, and/or to their respective shareholders and/or associates , and/or to other companies operating in the same sector. More specifically, the Client declares that it is aware that UniCredit has economic and financial relationships with (i) Terna; (ii) Cassa Depositi e Prestiti S.p.A.; (iii) CDP Reti S.p.A.; (iv) FS Group; (v) the Ministry of Economy and Finance; and (vi) Directors of the companies referred to in (i), (ii) and (iii) in office as at the date of the Mandate, as more particularly described in Schedule 1 thereto.
UniCredit is acting as a financial advisor to Terna in relation to the Transaction, and for that it shall be receiving compensation in accordance with the terms of the Mandate.
Purpose of this Fairness Opinion
This Fairness Opinion serves to provide an assessment of the fairness from a financial standpoint of the Consideration. That assessment has been prepared for the exclusive use and benefit of the Board of Directors of Terna, in order to provide it with data, points of reference, and supporting information that may, along with other information, serve in enabling it to assess, with complete autonomy in its decision-making, the fairness from a financial standpoint of the Consideration to be paid to FS for the acquisition of S.EL.F. under the terms of the non-binding Memorandum of Understanding signed by the Parties on 30 December 2014 (the "MoU").
Without prejudice to the information set forth in the recitals, this Fairness Opinion is not intended to express any consideration of any accounting or tax nature, nor any opinion regarding the strategic or business value of the Transaction.
3 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
2. Description of the Transaction
On December 30, 2014 FS, Rete Ferroviaria Italiana S.p.A. ("RFI") and S.EL.F. (RFI and S.EL.F. both being companies of the group headed by FS, the "FS Group") executed an MoU with Terna, for the evaluation of the potential acquisition by Terna of the high and very high voltage electricity transmission networks currently owned by the FS Group.
The scope of the potential acquisition (the "HV Perimeter") principally comprises three business units: (i) a business unit related to the portion of the transmission network that is already a part of the national transmission electricity grid (the "NTG") and whose revenues are hence subject to regulated tariffs, representing 10 per cent. of the HV Perimeter's network; (ii) a business unit related to the part of the network not yet included in the NTG, corresponding to approximately 90 per cent. of the HV Perimeter's network; and (iii) an agreement that FS has in place for the laying of fibre optic cable along the shield wires of the plant it owns.
The terms of the applicable legislation provide, inter alia, for:
i) the transfer of the HV Perimeter to S.EL.F. and its simultaneous inclusion within the NTG, subject to its purchase by Terna;
ii) the transfer of the authorizations and other rights related to the HV Perimeter to Terna (or one of its subsidiaries); and
iii) the determination, by the Electricity, Gas and Water Regulator (the "Regulator"), of the value of the return on invested capital for regulatory purposes (known as the Regulated Asset Base, the "RAB"), and the depreciation and the costs of the portion of the HV Perimeter's network not yet included in the NTG, within 30 days of FS's submission of the relevant data, such determinations taking into account the potential benefits to the national electricity system.
On 29 October 2015, the Regulator published its Resolution No. 517/2015/R/EEL, which determined the tariff mechanism for the remuneration of the portion of the HV Perimeter's network that was owned by FS and not yet included in the NTG, giving, inter alia, an initial value for the RAB of euro 674 million.
The Transaction is also subject to, inter alia, the following conditions:
4 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
a) completion of the proportional spin-off of the HV Perimeter by RFI, to be transferred into the beneficiary company S.EL.F. by way of capital contribution; and b) no exercise of the special powers held by the Italian government informally referred to as its 'golden power'.
3. Information and Documentation Used
In carrying out its duties as Financial Advisor in the context of the Transaction and in the preparation of the Fairness Opinion, UniCredit has made use only of the Data (as defined below), adopting the criteria and methodologies appropriate to an independent financial advisor, and taking into account both the particular characteristics of the HV Perimeter that is the subject of the acquisition, and the purposes of the Mandate. The work done and the considerations set forth in this Fairness Opinion must be interpreted in the light of the following considerations and principal limitations:
1. the assessment has been carried out taking as its reference date 1 January 2016;
2. in accordance with the instructions from Terna's management, it has been assumed that the Enterprise Value attributable to the Company is equivalent to its Equity Value and hence to the Consideration that is the subject of this Fairness Opinion;
3. The HV Perimeter that is to be contributed to the Company principally comprises three business units:
i) a business unit related to the portion of the transmission network not yet included in the NTG, representing approximately 90 per cent. of the HV Perimeter's network, being the subject of the Regulator's Resolution 517/2015/R/EEL (the "Non-NTG Network");
ii) a business unit related to the portion of the transmission network already a part of the NTG, and whose revenues are hence subject to regulatory tariffs, representing 10 per cent. of the HV Perimeter's network (the "NTG Network"); and
iii) the agreement that FS has in place for the laying of fibre optic cable along the shield wires of the plant it owns (the "Basictel Agreement").
5 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
In light of the particular features to be taken into consideration when determining future cash flows for each of the activities within the HV Perimeter, each of (i) to (iii) has been the subject of a separate valuation.
4. The valuation was carried out in the light of forecasts that are reasonable assumptions, and no account was taken of the possibility that external events of an extraordinary or unforeseeable nature might occur. In particular, as indicated by Terna's management, in the construction of the business plan projections the assumption was made that in future regulatory periods the structure of the existing tariff system would continue, and thus so would the existing mechanisms for determining tariffs;
5. the projections for the HV Perimeter drawn up by Terna's management were considered to have been drawn up objectively and using assumptions that reflect the best forecasts available as at the date of this Fairness Opinion;
6. the Mandate awarded to UniCredit did not involve the performance of any auditing of the accounting information related to the HV Perimeter, of the Company's accounts or other financial information, or any review of a technical, fiscal, welfare, commercial, legal, regulatory or administrative nature, or in relation to any environmental issues; and
7. UniCredit has relied entirely and exclusively upon the truthfulness, fairness, accuracy, currency and completeness of the Data (as defined below), without carrying out any autonomous or independent review of any of the Data. UniCredit is therefore not in a position to express any judgment on, nor does it assume any responsibility regarding, the truthfulness, fairness, accuracy, currency or completeness of the Data contained and/or reflected in this Fairness Opinion, of the information contained in the financial documents, both historical and forward-looking, or of the other information used for the purpose of the valuation, the reliability of which may be affected should any lack of truthfulness, fairness, accuracy, currency or completeness of the Data, as a whole or in any part, emerge. The reliability of the Fairness Opinion may thus be undermined should any lack of truthfulness, fairness, accuracy, currency or completeness of the Data, as a whole or in any part, or in any other information, including market information, used in UniCredit's analysis emerge, and consequently, UniCredit assumes no responsibility and provides no warranty in that respect.
This Fairness Opinion is also based on the assumption that the Transaction is completed upon the terms and to the timetable that Terna has represented.
6 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
The analysis carried out by UniCredit has been based on: (i) data and information on the HV Perimeter and on the Company received from Terna's management; (ii) on publicly available information; and (iii) on the data and information obtained during conference calls and meetings with Terna's management. This information includes, inter alia, the following documentation (the "Data"):
• Law No. 190 of 23 December 2014 (informally known as the 2015 Stability Law);
• Terna's press release of 30 December 2014;
• the Regulator's Resolution 517/2015/R/EEL of 29 October 2015;
• the statutory financial statements of S.EL.F. as at and for the years ended 31 December 2013 and 2014;
• market information taken from leading public sources such as Mergermarket and DataStream;
• the presentation made by Terna's management on 3 September 2015, including a description of the Company's prospective acquisition of the HV Perimeter, and the timetable therefor;
• the hypothesis prepared by Terna's management, for the construction of the valuation model for the NTG Network and the Non-NTG Network;
• the Regulator's document, 509/2015/R/COM, on consultation regarding the determination of the return on invested capital for the electricity and gas infrastructure sectors, dated 29 October 2015;
• the draft sale and purchase agreement under discussion by the Parties, dated 4 November 2015;
• the draft agreements for the provision of ordinary and extraordinary maintenance, and remote management, to be made between RFI and S.EL.F., received on 5 November 2015;
• the draft agreement governing S.EL.F.'s obligation to purchase high and very high voltage electricity infrastructure currently under development and/or construction, received on 5 November 2015;
• the draft procedure regarding the management of interference between plant belonging to the Terna group and plant belonging to the RFI group, received on 5 November 2015;
7 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
• the draft operating rules regarding the procedures and the operating responsibilities of divisions of S.EL.F. and RFI, in relation to the operation and management of the HV electricity network belonging to their respective systems at connection sites, received on 5 November 2015; and
• such other data, documents and information as has been made available, orally or in writing, by Terna's management.
This Fairness Opinion is of necessity based also on economic and market conditions, as well as other conditions present and/or capable of estimation in periods up to the date hereof; and information made available to UniCredit, orally or in writing, in addition to the Data, on dates up to and including 10 November 2015. In particular, UniCredit has assumed that the main accounting, tax and legal issues have been the subject of specific investigation by Terna and shall in any event be the subject of action for their mitigation, such that the possibility that they transpire or that they may have financial effects upon the Transaction may be considered excluded or materially reduced.
Subsequent developments may affect the conclusions expressed in this Fairness Opinion, and there is no obligation upon UniCredit for it to update, revise or amend this Fairness Opinion on the basis of any circumstances or events that may occur after the date hereof. Moreover, UniCredit shall not have any responsibility for shortcomings or deficiencies in the analysis or the conclusions expressed in this Fairness Opinion that may arise between the date of this Fairness Opinion and that on which the Transaction is effective.
Changes in other factors, or the occurrence of other events, subsequent to the date of this Fairness Opinion may affect the value of the Company both before and after completion of the Transaction. These may include:
• changes in prevailing interest rates;
• adverse changes on capital markets;
• adverse changes in relation to financial circumstances, individual business units, particular extraordinary operations or future prospects;
• any action brought or restriction imposed by any local or governmental body or by any regulatory or supervisory authority, including changes to the sector's regulatory environment; and
• any failure to complete the Transaction upon the terms and to the timetable that has been represented.
8 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
4. Valuation methodologies
The methodologies to be applied in the valuation process were identified based on the characteristics of the business units included within the Transaction, the nature of the transaction itself, and the purpose of the valuation.
The methodologies should be treated as indivisible parts of a single valuation process. Any analysis of the results obtained using each methodology that treats the findings independently, without considering the complementary nature of their relationships with the other criteria that were applied, would result in the valuation process no longer being meaningful.
The results obtained by applying these methods reflect and are made subject to the variations that may occur in the prevailing conditions in financial markets (currently characterized by a situation of great volatility); in the prevailing conditions in the relevant markets, currently and in the future; and in the Company's business, results of operations, financial condition and prospects. Together, such circumstances may significantly affect the results obtained.
For the purposes of this Fairness Opinion, UniCredit has in relation to each of the business units within the HV Perimeter applied the following valuation methodologies:
• a discounted cash flow method ("DCF"); and
• a comparable transaction multiples method ("CTM").
These methods are those most commonly used for transactions of this nature within the regulated industry in which the Company operates. DCF was considered the main methodology, in line with market practice, with reference made to the comparable transaction multiples analysis as a control methodology.
The Discounted Cash Flow Method
DCF methodology determines the value of a company's economic capital by estimating the future cash flows from operations that the company itself considers it will be able to produce. Those cash flows are then discounted using a discount rate that reflects the average weighted cost of the company's capital (equity and debt), on the basis of a risk degree for the investment and a target capital structure.
9 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
Market practice is for valuation under the DCF methodology to identify a terminal value at the culmination of a business plan, that value determined on the basis of a perpetuity formula applied to an expected cash flow.
In the valuation of the Non-NTG Network, since the business unit operates in a regulated environment, it was assumed that the current regulatory framework would continue, and the terminal value was estimated as the present value of the net invested capital recognized for regulatory purposes (the RAB) that is forecast for the end of the business plan.
The Comparable Transaction Multiples Method
The Comparable Transaction Multiples methodology consists of valuing a company by applying multiples calculated on the basis of the value of comparable transactions and certain parameters related to the balance sheet, income statement, cash flows or operations of the company to which the transaction relates. In this case, the Enterprise Value/EBITDA multiple has been used, in line with market practice for companies operating in the same sector. For the business unit related to the Non-NTG Network, the Enterprise Value/RAB multiple was used, again in line with methods commonly used in market practice.
The sample used consisted of comparable transactions involving companies operating mainly in the field of electricity transmission and distribution in Europe (for the Non-NTG Network and NTG Network business units) and companies that own fibre optic infrastructure (for the business unit associated with the Basictel Agreement).
Comparability with the Company, and the applicability of this method, was in any case limited, as a result of: (i) the particular characteristics of the individual target companies, especially as a result of the tariff mechanisms in place, the period for which the tariffs apply, and the various parameters that determine the tariff; and (ii) the limited number of recent transactions in the sector, and the shortage of public information, in particular with respect to the reference value of the RAB. Additionally, it should be emphasised that the financial terms of the comparable transactions were closely connected to and much influenced by the contractual terms that were negotiated between the parties in each of the transactions.
5. Conclusions
In the light of the Data the analysis of which forms the basis of this Fairness Opinion, and the results obtained under all of the valuation methods used, and in light also of the purposes for which the Mandate was granted in accordance with
10 This is an unofficial courtesy translations only and is no way legal binding. In the event of any ambiguity about the meaning of certain translated terms or of any discrepancies between the Italian document and this courtesy translation, the Italian document shall prevail
its terms, as at the date of this Fairness Opinion, on the basis of and subject to the foregoing, UniCredit considers that a Consideration for the Transaction of Euro 770 million is fair for Terna, from a financial standpoint.
UniCredit S.p.A.
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