M&A AND INVESTMENT BANKING

1. M&A AND INVESTMENT BANKING Case Study: Olivetti’s Take-Over of Telecom Italia

2. Case Study: Olivetti’s Take-Over of TI Background

3. The Economic Landscape in the 90s • Birth of the Euro • Convergence of bond yields around those of German government bonds and switch of investment from government bonds into equities • Development of the Euro-denominated corporate bond-market and the ability of firms to find long-term financing • Interaction between 3 major processes changing the economic and financial landscape • Privatization • Deregulation of markets • Globalization of world economies • The new role of the State • Retreat of the direct presence of the State from the economy • Dismantle the natural monopolies • Need of greater competition and efficiency, especially in the services’ sectors • The dismantling of domestic monopolies in the TLC segment • Deregulation stimulates market competition especially in the TLC sector • Less barriers to entry: possibility for new potential competitors to interconnect to the fixed network of the former monopolist • In Italy, large number of new licenses granted to mobile phone operators (Omnitel, Wind and Blutel) and to fixed phone network (Infostrada, Albacom, Wind and Tiscali)

4. The Italian Privatization Process • A late-comer… • The government maintained control via the Istituto per la RicostruzioneIndustriale (IRI), which owned nearly 500 companies in the early 1990s • Presence of a large number of state-controlled enterprises compared to other EU countries • Government announced plan to sell-off many of the state-owned companies in 1992 • Modernization of the Italian regulatory framework in the ‘92-’95 period • At the end of 1996, the State had ultimate control of 10.34% of Italian companies • …but a fast catch-upper • Significant efforts made to speed up the process • Between 1993 and 2001, the government privatized approximately 30 companies, raising €85 billion • Greatest contribution done by IRI with its large-scale privatization program over the period 1992-1998 • Tremendous impact of privatizations on the Italian Stock Market • Over the period 1992-1999, stock market capitalization rose from $116 billion to almost $586 billion (over 5.1 times the original amount) • Contribution of privatization operations: close to 52% of 1993 market capitalization and roughly 10% of 1999 market capitalization • A number of high quality IRI’s stocks have entered the MIB30 basket (e.g. Alitalia, Finmeccanica etc…)

5. Privatization Operations in Italy (1992-1999)

6. Case Study: Olivetti’s Take-Over of TI Olivetti and TI prior to the takeover

7. Privatization of Telecom Italia • Group born in 1994 • Merger of 5 major Italian TLC companies into one company • SIP (fixed network continental operators), Italcable (fixed network intercontinental operator), Sirm (naval communications), Telespazio (satellite TLC) and Iritel • Italy’s largest telecommunication company which owns TIM (number one European mobile phone operator at that time) • Control of the TI Group before the privatization • Until 1996, TI was controlled by STET with a stake of 62.5% and the rest floated on the market • STET was a financial holding company controlled by IRI who owned 64% of share capital and the rest floated on the market • Privatization completed in October 1997 • Summer 1997: Merger of STET and TI into the new Telecom Italia listed in the stock market • On 4th October 1997: the Ministry of Treasury announced its intention to sell its 44.7% stake in TI valued at 22.9 billion Lira • It was the largest single privatization operation ever carried out in Europe and created Italy’s largest company in terms of market capitalization

8. Privatization of Telecom Italia • New Control of the Group • Initial goal was to create core holdings of 15% to ensure stability and promote global alliances • Government retained a 5% stake + a golden share with veto power over major decisions • Privatization program created a new group of companies without a dominant shareholder • Enthusiastic demand for shares from the public • 3.9 million shares demanded against 1.7 million offered: 450’000 new shareholders • Institutional Investors: 280’000 shares of which 190’000 acquired by foreign investors • At the time of Olivetti’s tender offer, 37% of TI voting shares were held by foreigners investors (mainly US Funds)

9. Performance of Telecom Italia • A strong LBO candidate • TI hadall the characteristics to be a good LBO target: • Mature player (sixthlargesttelephone company in the world) • Solid financialstructure • Favorablepast with stable production of goods and stable cash flow • Capable of providingconstant future profit

10. Telecom Italia 1997 – 1999 share price performance 20th Febraury 1999 Olivetti announces a Voluntary Tender Offer on Telecom Italia 21st May 1999 End of the VTO with Olivetti owning c.50% of Telecom Italia shares 27th October 1997 Telecom Italia is privatized through the sale of c.35% of its shares by the Treasury Share price (rebased to 100) Volumes (million) Source: Factset as of 21 November 2012.

11. Olivetti New Strategy • On the brink of collapse • The company was losing money since 1990 • Personal computer division was losing market share • Huge rights issue in December 1995, raising 2,257 billion Lire ($1.42 billion) and giving approximately 70% of Olivetti’s shares in foreign hands • After announcement of greater than expected losses for 1995, share price tumbled 14% • Pressure from investors led CEO Carlo De Benedetti to resign during H1 1996, who was replaced by Roberto Colaninno (a De Benedetti manager) • Major restructuring program • Change in strategy by concentrating on telecoms through Olivetti’s Omnitel mobile and Infostrada fixed-lines operations • Sale of the personal computing and other small businesses in early 1997 and the Olsy computer services business in March 1998 • This new focus on the telecoms business led to the decision to launch an hostile takeover bid for Telecom Italia

12. Case Study: Olivetti’s Take-Over of TI The Olivetti Offer

13. The Initialoffer • Bid for 100% of TI’s voting shares • Early 1999: Olivetti started to work with its advisors Chase Manhattan, Donaldson Lufkin Jenrette, Lehman Brothers and Mediobanca • Italy’s privatisation law of 1994 + presence of international investors in the ownership structure led Olivetti to bid for 100% of TI’s voting shares • On February 20th, 1999, Olivetti sent a letter to Consob announcing the launch of a Public Tender Offer for 100% of TI’s share capital and exactly 3 months later won the bid obtaining 52.12% of TI’s share capital and total control of the company • CEO of TI Franco Bernabèhired Credit Suisse First Boston, Banca IMI, Lazard Frères and JP Morgan as advisors • David against Goliath! • Market value of Olivetti at time of transaction was six times lower than TI • Difficult task of financing a €52.6 billion bid with a market capitalization of €9.4 billion • All indebtedness in Tecnost, a 97% owned Olivetti subsidiary, appointed as acquisition vehicle (NewCo) • Tremendous leverage: • Biggest component: Syndicated loan package of €22.5 bln(with 26 offers totaling more than €30 bln) • Other sources: €13.7 bln in new Tecnost bonds, €7.6 bln from Mannesmann sale and €7.4 bln in new Tecnost Equity • Details of the Initial offer: €10 per share for 5’255 mln ordinary shares: • €6 in cash • €2.6 in Tecnost bonds • €1.40 in Tecnost stocks • Total Value = €52.6 billion • Saving Shares (2’166 mln) excluded from the offer

14. Olivetti Strategic Plan (17/03/1999) • An ambitious plan • “A unique opportunity to guarantee the national and european development of the fixed and mobile phone activities of the Group” • “Create the necessary economic and management conditions for TI to become a big and dynamic italian industrial group in the TLC sector, with a strong client-oriented approach and innovative solutions, able to compete successfully in the national and international market” • Strategic objectives • Buy back Savings Telecom up until 10% at €10 • Increase TIM pay-out up until 90% • Decrease costs by Lire4’500 bln(lay off 13’000 employees in the fixed network activities) • Investments of Lire26’500 bln in the next 3 years (17’000 in the fixed network activities) • Fixed network: improve quality of investments, review commercial structure, annual EBITDA growth at 4% • Mobile network: keep TIM corporate autonomy, integrate commercial activities with the fixed network, act as a european leader, CAGR EBITDA 10% • Focus on Europe, dismiss activities with low profitability, simplify holding structure • Sell Finsiel, Italtel, Sirti

15. TI Strategic Plan (10/03/1999) • TI defensive plan • After days of debate with its advisors, CEO Bernabè agreed 3 defenses moves designed to make TI too expensive for Olivetti: • 1st defensive option: convert the 2.2 mln savings shares into voting shares. By doing this, TI’s voting shares total value would have exceeded €90 bln • 2nd defensive option: repurchase 10% of the voting shares using cash on hand (buy back) • 3rd defensive option: cash offer for all the floating TIM shares not already owned (40%). At the beginning, the idea was to offer a stock offer (Ord. TI 5:4 Ord. TIM and Ord. TI 20:9 Sav. TIM) but it was switched to a cash offer on 27/03/1999 after TI shareholders expressed concerns regarding the dilutive effective of a share offer: • €6.84 per one Ord. TIM share (premium +/- 17%) • €3.85 per one Sav. TIM share (premium +/- 9%) • Total value around Lire44000 bln financed by increasing financial debt • Strategic objectives • Merge TI and TIM in order to enhance synergies (marketing, customer care, investments etc…) • Reorganize international activities • Dispose of business activities (Sirti/Finsiel/Italtel/Stream/Meie) • Sell real estate assets • Goals: Sales of €60500mln in 2002, Annual EBITDA of +8% • Reduce workforce by 40’000 people by 2002

16. TI EGM (10/04/1999) • Invalid letter of intention • 22/02/1999: Consob declared that the letter of intention received 2 days before was invalid • Requested a guarantee of the completion of Olivetti’s planned sale of its existing telecoms businesses to Mannesmann • Olivetti achieved to have the guarantee only 4 days later • 26/02/1999: Consob declared Olivetti’s offer valid • Passivity rule • Surprisingly, TI did not use the 4 days to erect defenses • Passivity rule: once a bid is in place, the target can no longer adopt defensive moves without the approval of at least 30% of its shareholders • Therefore, defensive plan had to be put to a shareholder vote • Extraordinary shareholders’ meeting (10/04/1999) • Only 22% of the shareholders attended the meeting • Turnout far short of the 30% quorum required to permit voting on defensive proposals • Additional shareholders milled around the place but never entered the hall, especially because on 29/03/1999 Olivetti had increased its offer to €11.50 per share or €60.4 bln in total

17. The Last Chance (22/04/1999) • Merger TI and Deutsche Telecom • After the disaster at the EGM, CEO Bernabèsecretely decided to pursue the idea of a white knight • On 22/04/1999, announcement of merger via a share swap to create Deutsche Telecom Italia (combined value of €200 bln) • NewCo regulated by German law (NewCo 1:1 DT ; NewCo 1:3 Ord. TI ; NewCo 1:5 Sav. TI) • Issue related to the German government control • German government had a 72% stake in DT meaning a 40% stake of the merged company • Italian Government was not happy with the idea of such a large stake by a foreign government in Italy’s largest listed company • No agreement reached regarding the quick disposal of German government shares and Italian government threatened to use its golden share to block the deal • The deal failed because of pressure from Italian government and lack of enthusiasm by investors

18. The OfferingPeriod (from 21/04/99 to 21/05/99) • The shareholders’ vote and the aftermath • Shareholders began to submit their shares to Olivetti on April 30 • On 20/05/1999 only 19.9% of acceptances • The contest ended late on May 21 when 6 of 7 of TI’s remaining core shareholders tendered, pushing the acceptances over 50% • Olivetti ultimately received 52.12% (2’739’178’932 out of 5’255’131’631 shares) of TI’s voting shares at a cost of €31.5bln • 25/05/1999: TI’s board met and Bernabè and the non-executive directors resigned effective 28/06/1999

19. Change in OwnershipStructure of the Olivetti Group BEFORE THE DEAL AFTER THE DEAL • MinorityShareholders • 48% • Following the takeover deal: • Plan to transfer TI’s 60% stake in TIM directly to Tecnostfailed (unsuccessfulattempt to merge Target intoNewCo) • 2000: Approval of the merger between Olivetti and Tecnost (1.12 Olivetti voting shares per Tecnost share)

20. Case Study: Olivetti’s Take-Over of TI The Deal Structure

21. MainFeatures of Colannino’sHostileTakeover

22. The Right Price? At the moment of the takeoverbid, all TI multipleshad a discount compared to the ones of maineuropean competitors

23. EV/EBITDA EU Average

24. The FinancingStructure of the Deal

25. Sources of Funds

26. The Deal Terms • New Tecnost Bonds • One bond per one share tendered • Bonds issued by Tecnost International N.V. (owned 100% by TecnostSpA) • 5 years’ maturity from 23/06/1999 to 23/06/2004 • Variable interest rate equal to Euribor + 185 bps • Total nominal amount of €9’444mln, of which €7’944mln issued for the takeover bid and €1’500mln subscribed by the banks of the syndicated loan • Syndicated Loan • The syndicated loan of €10’057mln was organized by Chase Manhattan Plc • The syndicate (the group of lenders) was composed by Chase Manhattan Plc, DLJ Capital Funding Inc, Lehman Brothers Commercial Paper Inc and Mediobanca Spa • In July 1999, the syndicated loan and the Mediobanca loan (total of €8’660mln) have been reimbursed thanks to the following operations (in €mln):

27. Press Reaction • “By launching a Lire102,000 billion bid for a privatized group on Saturday, Roberto Colaninno, chief executive of Olivetti, has provoked what is a tantamount to an earthquake in the traditionally closed and incestuous world of Italian capitalism dominated by a few big influential players and their political sponsors” Financial Times, February 22, 1999 • “Yet that Olivetti is taking on a company more than five times its size shows that Europe’s business mores are changing quickly. The traditional reluctance to attack corporate giants, political interventionism and closing of the ranks among national business elites appear to be falling by the wayside as Anglo-Saxon notions of shareholder value and corporate governance take hold in Europe. That means Telecom Italia can’t take too much comfort in history, even if Olivetti still has many obstacles to overcome” Wall Street Journal, March 8, 1999 • “Olivetti’s victory after a 3-month battle proved that virtually anything was possible in the European mergers & acquisitions market, even US-style deals involving lots of leverage. Who broke the ice? Colaninno’s financial advisers at Chase Bank. Olivetti’s bid for Telecom Italia would probably not have been made if Chase had not given Colaninno the confidence that the bank could raise enough money on Olivetti’s behalf, $23 billion in syndicated loans” Forbes, April 4, 2000 • “Comunquevada a finire la scalata di Olivetti al colossodelletelecomunicazioniitaliane non c’èdubbiochel’operazionelasceràtracceprofondenell’economia del paese. Sui due fronti ci sipreparaalloscontrofacendotrapelarefiducia per la raccolta del consensotragliinvestitori, ma numericerti non ne fanessuno. L’Olivetti, con l’Opa da 117 miliardi, ha giàmesso in campo unalevafinanziariache non ha precedenti. Ha chiuso, in meno di due settimane, ilpiùgrandeprestitosindacatomairealizzato. Martedi la Tecnost, bracciooperativodell’Opa, delibereràunaricapitalizzazione da 12 miliardi di euro, con la piùimponenteemissione di bond chesiamaistataregistrata” La Repubblica, April 4, 1999

28. Case Study: Olivetti’s Take-Over of TI What Happened after the LBO?

29. The 2nd LBO: Pirelli’sAcquisition of Olivetti • Control of TI by Tronchetti Provera • July 2001: Olimpia Spa, a vehicle company owned by Pirelli Spa, EdizioneFinance International SA (Benetton Group), Intesa BCI and UniCreditoItaliano Spa, acquired approximately 27.7% of Olivetti’s ordinary share capital (just short of the 30% threshold requiring an offer to all shareholders • New management started a financial restructuring activity in order to focus TI’s activity on the core business • Main features of Pirelli’s acquisition

30. The PyramidOwnershipStructure BEFORE PIRELLI’S ACQUISITION (before 28/07/2001) AFTER PIRELLI’S ACQUISITION (after 28/07/2001)

31. The Shortening of the Group Structure • New ownership structure at the end of 2004 • May 2003: Olivetti Shareholders’ meeting adopted the plan to merge TI into Olivetti • Also Pirelli group chain was shortened at the top (merger between Pirelli&C. and Pirelli SpA into Pirelli&C. SpA) • 2004: Tender offer of TI on TIM was announced and a merger followed

32. Level of Indebtedness • Telecom Italia’s consolidated data (mln €) * * Numbers from 1999 to 2002 havebeenreadjusted to include Olivetti SpA (thathasmerged with TI in 2003)

33. Returns of Group’s Companies

34. Case Study: Olivetti’s Take-Over of TI Telecom Italia Today

35. TI OwnershipStructureasat 30/09/2012 • In 2007, TelcoSpAboughtOlimpia’s shares in TI • TelcoSpAis a holding company whichowns 22.39% of TI Group and iscomposed by: • Mediobanca 11.57% • Assicurazioni Generali 30.67% • Intesa San Paolo 11.57% • Telefonica SA 46.179%

36. The Burden of the Debt • Bernabè came back as CEO of TI in 2007 • The deleverageprocessisstillcontinuing • Reducing the level of debtis a fundamentalstep for TI Group • The aimis to reach the year 2015 with a “normal” level of debt (i.e. in line with competitors)

37. TI Level of Debt vs Main Competitors

38. Telecom Italia share price performance since January 1997 % Share price (rebased to 100) Volumes (million) 100 Source: Factset as of 21 November 2012.