Statement of the Management Board of Cyfrowy Polsat concerning acquisition of Metelem Holding Company Limited shares

Cyfrowy Polsat and Polkomtel will create the largest media-telecommunications group in Poland

• Cyfrowy Polsat has entered into an agreement to acquire a majority (83.8%) stake in Metelem Holding Company Limited, the company holding full control over Polkomtel, operator of Plus mobile network, in exchange for shares of Cyfrowy Polsat. As a result of the transaction, Argumenol, Karswell and Sensor will acquire Cyfrowy Polsat shares. The European Bank for Reconstruction and Development is analyzing the possibility of its participation in the transaction, based on an offer from Cyfrowy Polsat to acquire the EBRD’s 16.2% stake in Metelem.  
• Metelem has been valued for the purposes of the transaction at PLN 6.15bn. The attractiveness of valuation was confirmed by the DCF method. 
• The acquisition price implies an EV/EBITDA ratio (end of 3Q’13, for the last 12 months) of 5.7x (not including revenue, cost and financial synergies), i.e. below trading multiples for peers and recently completed transactions. An independent opinion issued by EY, an advisory firm, confirms that the proposed purchase price for the contemplated transaction is fair from the financial point of view to the shareholders of Cyfrowy Polsat as a whole.  
• The Management Board estimates operational synergies at approximately PLN 3.5bn and financial synergies at approximately PLN 0.5bn through 2019, which should provide additional value for Cyfrowy Polsat’s shareholders which is not accounted for in the purchase price.  
• On completion of the transaction, Cyfrowy Polsat Group and Polkomtel will become one of the largest Polish companies and the leading media-telecommunications group in the region. 
• Proforma for the third quarter of 2013, the new Cyfrowy Polsat Group (including Metelem group) would have reported revenues of PLN 9.7bn, EBITDA of PLN 3.9bn, EBITDA margin of 40.1% and operating cash flow of PLN 3.6bn. 
• In exchange for shares in Metelem, Cyfrowy Polsat will issue 243.93 million subscription warrants authorizing the take up new shares of Cyfrowy Polsat with an issue price of PLN 21.12 per share (plus 47.26 million additional subscription warrants, if EBRD participates in the transaction). 
• Consolidated net debt proforma for the acquisition would amount to 3.1x EBITDA, and the Management Board’s target will be to reduce the ratio to below 2.5x net debt/EBITDA through the end of 2016. 
• Completion of the transaction is expected in mid-2014 and is contingent on Cyfrowy Polsat shareholders’ approval of the issue of shares to Metelem shareholders as well as a successful refinancing of Cyfrowy Polsat’s current debt.

 Following the takeover of Metelem, Cyfrowy Polsat and Polkomtel will become undisputed leader of media-telecommunications market in Poland in terms of financial performance, with an estimated revenue close to PLN 10bn per annum, EBITDA at nearly PLN 4bn and EBITDA margin above 40.0%. At the same time, Cyfrowy Polsat will significantly strenghten its business structure, which is already strong and resilient to macroeconomic cycles. On the completion of the transaction, 65% of the Group’s revenue will be generated by contract clients, forming the base of stability and predictability of future cash flows, that are already high – above PLN 3.6bn proforma.

“I am confident that thanks to this transaction both Cyfrowy Polsat and Polkomtel will gain new possibilities for development in the dynamically changing and highly competitive market environment. The strategy of Cyfrowy Polsat Group, based on providing the best entertainment and telecommunication services using the latest technologies on all consumer devices, remains unchanged. Polkomtel fits it perfectly and provides a fantastic opportunity for significant acceleration of its execution,” Dominik Libicki, President of the Management Board of Cyfrowy Polsat S.A., explains. 

 Why Plus?

 “The consummation of the transaction will enable the integration of two highly profitable businesses, and that will make it possible to create a Group providing customers with a portfolio of attractive products and services, that would be very difficult to replicate by the competitors.” Dominik Libicki claims.

Polkomtel is the most profitable mobile telephony operator in Poland serving 14 million clients. It holds the largest – 29% – share in the contract clients segment (7.4 million clients). Moreover, it has access to an attractive spectrum of frequencies enabling it to provide state-of-the-art telecommunication services (LTE in particular) to clients, among which 30% use smartphones and tablets.

Cyfrowy Polsat is the largest media group in Poland with a strong position both on pay-TV and TV production and broadcasting markets. Cyfrowy Polsat serves over 3.5 million households, at the same time, through its IPLA online service, it provides online video services to almost 4 million users, of which 30% use smartphones and tablets. It also provides broadband access services in LTE technology. Telewizja Polsat, being a large producer of recognized local content, has approximately 24% in audience share and above 25% share in advertising market.

Incorporation of Polkomtel to Cyfrowy Polsat Group provides new opportunities for distribution of TV content, as well as for further development of telecommunications services, launched in 2008. Thanks to this combination, the attractive content and the wide range of Cyfrowy Polsat’s services will be delivered through a variety of reliable distribution channels – via sattelite (DTH), within digital terrestrial television (DVB-T), through mobile technologies: 3G, 4G and LTE – to all consumer devices, from TV sets to PCs to tablets and smatphones.

The unique portfolio of services will be simultanously targeted to clients of both operators. That is, according to conservative assumptions of Cyfrowy Polsat, nearly 17 million individuals in 6 million Polish households. According to Cyfrowy Polsat’s estimates, in each household to which Cyfrowy Polsat and Polkomtel address their offer, there are on average 4 devices using video, data or voice transmission – including TVsets, mobile phones, PCs, and tablets. As a result of the above the market for the Cyfrowy Polsat Group and Polkomtel products will be around 25 million devices, and thanks to the dynamicly growing sales of smartphones, this growth trend will certainly continue. Consumers increasingly watch video on a range of devices both at home and outside, and regularly use more than one device at the same time. Proper addressing of this potential may significantly boost sales of services to an individal user, thus increasing the average revenue per subscriber (ARPU).

Valuation

-The valuation of Polkomtel was prepared using DCF method, and the attractiveness of the valuation was confirmed by analysis of market multiples both for peers and recently concluded market transactions. Moreover, we expect that the acquisition of Polkomtel will enable us to achieve tangible revenue and cost synergies, which additionally enhance the attractiveness of financial parameters of the transaction and provides significant potential for value creation for Cyfrowy Polsat’s shareholders – Tomasz Szeląg, CFO at Cyfrowy Polsat S.A., explains.

The Management Board of Cyfrowy Polsat believes the valuation of Metelem group is attractive and beneficial to Cyfrowy Polsat’s shareholders. It was realized using three methods: discounted cash flows method (DCF), multiples for listed European peer mobile operators (realizing most of their business based on mobile technology, including LTE) as well as analysis of comparable transactions. All methods confirm the attractive rate of Metelem valuation (5.7x EBITDA as at the end of 3Q’13, for the last 12 months), which, it is worth emphasizing, does not include the identified and planned synergies. An independent opinion issued by EY, an advisory firm, confirms that the proposed purchase price for the contemplated transaction is fair from the financial point of view to the shareholders of Cyfrowy Polsat as a whole.

In order to acquire the block of 83.8% of Metelem shares, Cyfrowy Polsat will issue 243.93 million shares (47.26 million additional shares will be issued if EBRD joins in the transaction). The total net debt of Cyfrowy Polsat Group, including Cyfrowy Polsat’s net debt of PLN 1.8bn and Metalem’s assumed net debt of PLN 10.2bn, will amount to PLN 12bn, which translates into net debt/EBITDA ratio of 3.1x for proforma EBITDA of the new Cyfrowy Polsat Group for twelve-month period ended September 30, 2013. The rate is lower by 0.4x than after the acquisition of Telewizja Polsat by Cyfrowy Polsat in 2011. Since the acquisition of Telewizja Polsat, the net debt/EBITDA ratio of Cyfrowy Polsat decreased to 1.78x, which shows that the deleveraging was faster than originally expected in 2011.

The goal of the Management Board is to deleverage to below 2.5x through the end of 2016 (excluding F/X differences). It will be possible thanks to the expected  ability of both entities to generate significant, stable free cash flows. When the reduction of net debt/EBITDA ratio reaches below 2.5x, the Cyfrowy Polsat dividend policy will be reviewed.

Transaction’s financials

The acquisition of the Metelem shares will take effect in exchange for 243.93 million subscription warrants issued by Cyfrowy Polsat, authorizing Argumenol, Karswell and Sensor to take up 243.93 million new shares of Cyfrowy Polsat (291.19 million subscription warrants and new shares if EBRD participates in the transaction). The subscription warrants will be issued free of charge and the assumed issue price is PLN 21.12 per share. It has been agreed with Argumenol, Karswell and Sensor and represents the average price of Cyfrowy Polsat’s shares in the last 3 and 6 months. The new shares acquired by Argumenol, Karswell and Sensor will constitute 41.18% of the share capital and 31.60% of the total votes in the company (45.53% of the share capital and 35.55% of votes if EBRD participates in the transaction). The shares issue and introduction to the public trade will cause a dilution of the share capital and a temporary decrease in EPS. The Management Board, however, expects to be EPS neutral within approximately 3 years from closing (excluding F/X differences).

Expected synergies and benefits

The transaction aims at maximizing revenues through offering the clients a complex and regularly enriched portfolio of integrated services, that, in the opinion of Cyfrowy Polsat group, will have a significant impact on improving consumer satisfaction and building loyalty towards services offered by Cyfrowy Polsat Group together with Polkomtel.

Following the transaction, the Management Board of Cyfrowy Polsat expects significant operational synergies of approximately PLN 3.5bn through the end of 2019. The Management Board expects that cost and revenue synergies should increase proforma EBITDA margin by approximately 2pp until the end of 2016 and by a further approximately 1.5pp in 2017-2019. Assuming a new structure of the balance sheet and the scale of activity of both entities, the Management Board of Cyfrowy Polsat sees also a real possibility of significant improvement of terms of debt financing, through lower interest rates and better terms of the loan, which could bring an additional approximately PLN 0.5bn in savings through the end of 2019.

The Management Board of Cyfrowy Polsat expects that another effect of the strategy being realized by the Group will include an increase in satisfaction of customers of Cyfrowy Polsat and Polkomtel. In the long term, the unique set of integrated services is expected to impact positively customers loyalty, and thus the churn rate. Cyfrowy Polsat’s experience shows that each additional service elected by the client results in the decrease of the churn rate by around 20%.

“The integration of Polkomtel in Cyfrowy Polsat Group and the following possibility of creating a portfolio of unique services and realizing significant revenue and cost synergies provide both companies with an opportunity to improve operational and financial results. That should translate into the growth of the Group’s value for shareholders in the mid and long term. Thanks to the transaction one of the largest Polish companies and the leading media-telecommunication group in the region will be born,” Dominik Libicki added.

Cyfrowy Polsat shareholding structure after the transaction

 On completion of the transaction, the number of Cyfrowy Polsat’s shares will increase to 592.28 million (or 639.54 million, if EBRD decides to join in the transaction). The shareholding structure (in terms of votes) will be as follows: Pola Investment 39.74%, Karswell 20.47%, Sensor Overseas 10.14%, Argumenol 7.52%, free float 22.13% (or Pola Investment 37.45%, Karswell 19.29%, Sensor Overseas 9.55%, Argumenol 7.09%, EBRD 5.77%, free float 20.85%, if EBRD decides to join in the transaction).

 Transaction Schedule

 An investment agreement setting forth the principles and timeline of the acquisition of Metelem shares accounting for approximately 83.8% of total shares from Argumenol Investment Company Limited, Karswell Limited and Sensor Overseas Limited by Cyfrowy Polsat was signed today. EBRD is considering the transaction. The agreement signed by Cyfrowy Polsat contains mechanisms that enable EBRD to join in the transaction, should EBRD decide to participate in the transaction. The completion of the acquisition process is scheduled for 2014Q2. The transaction is subject to approval by EGM of an issue of shares addressed to Metelem shareholders and the refinancing of Cyfrowy Polsat debt. The Management Board of Cyfrowy Polsat will convene an EGM with the voting on the resolutions required for the consummation of the transaction on the agenda. The Management Board of Cyfrowy Polsat expects that it will complete the refinancing process at the beginning of 2014Q2, which, combined with the drafting of a prospectus for the purposes of admitting the shares issued to Metelem shareholders to trading on WSE would make it possible to finalize the transaction on schedule.

Disclaimer

This press release was prepared by Cyfrowy Polsat S.A. (the “Company”) solely for information purposes and can in no event be treated as solicitation of the purchase of securities, an offer, invitation or encouragement to submit an offer to purchase, invest in or carry out transactions concerning such securities, or as a recommendation to enter into any transaction, in particular ones concerning the Company’s securities.

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