20 March 2008 Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel

1. 20 March 2008 Eugene Belin Managing Director, Head of FICC, Citi Russia, CIS and Israel Capital Markets Case Study

2. Who are we?

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4. Capital Raising Options Capital Markets Fixed Income Equities Loans Commercial Paper Bonds Equity Linked Equity Equity Derivatives Low Risk High Risk

5. KPN: Interactive Case Study

6. Introduction to KPN • Koninklijke (Royal) KPN NV (“KPN”) is a Dutch telecoms company, formerly the Dutch state-owned monopoly • Core activities include: • Fixed-line services in the Netherlands • Mobile services in the Netherlands, Germany and Belgium • KPN is listed on the Amsterdam, New York, London and Frankfurt stock exchanges • KPN has had an eventful history • Privatisation • Deregulation • Purchase of 3G licences • Rating downgrade 7

7. May 2000 • KPN’s objectives: • Refinance “bridge facility” arranged for the acquisition of German mobile operator E-plus • Secure medium-term financing for upcoming 3G auctions KPN Market data: • Share Price: €47-60 • Bond Price: €89-91 • Credit Ratings: Aa2/AA • Loan Price: Libor+35-37.5bps Bonds Equity Loans • Positive credit sentiment due to boom time • Increased “liquidity” levels in the market • High M&A activity (and hence acquisition financings) meant increased loan volumes • Markets hard hit after “bubble” bursts - investors nervous • Deluge of telecom supply expected after licence auctions • Investor uncertainty following market decline from March 2000 highs. • Strong telecom equity pipeline

8. KPN Trading History Share Price and Bond Price Performance – Jan 99 to May 00

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10. BONDS

11. Result? • The Company announced a jumbo multi-tranche short-dated Eurobond financing through Citi: €1bn FRN due Jun 01 $1bn FRN due Jun 01 €2.5bn FRN due Jun 02 €1.5bn 5.575% due Jun 03 Key Features / Terms Press Comments • “KPN eases telecom fears in short-dated €6bn raid” Euroweek • “That’s the way to do it……KPN last week answered the big question – whether telecoms borrowers can access the fixed-income sector – with a resounding YES.”IFR Issuer Offer Size Market Maturities Marketing Bookbuild No. investors Citi Role

12. July 2000 • KPN’s objectives: • Reduction of debt level having secured financing ahead of 3G auctions KPN Market data: • Share Price: €38-44 • Bond Price: €89-90 • Credit Ratings: A3/A- • Loan Price: Libor+35-37.5bps Bonds Equity Loans • Continued high liquidity in the market and positive credit sentiment due to boom time • Corporate bond supply increases, requiring issuers to pay higher and higher yield • Govt. spreads widen as USTs outperform • Continued decline from March 2000 highs, however appetite for telecom equity still exists as investors hope for recovery 11

13. Share Price and Bond Price Performance – Jan 99 to Jul 00 KPN Trading History

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15. EQUITY

16. Result? • Announcement on 17th July 2000 that the Company would launch a “substantial” equity offering in Q4 2000 • €5.5bn combined equity and equity-linked offering launched via Citi on 16th October 2000 Equity Equity-Linked Offer Size Offer Type Pricing Oversubscription Citi Role

17. September 2001 • KPN’s objectives: • Obtain short term financing KPN Market data: • Share Price: €3 • Bond Price: €71-72 • Credit Ratings: Baa2/BBB+ • Loan Price: Libor+200bps Bonds Equity Loans • Slowdown in economy raises credit concerns • Lower loan volumes compared to 2000 • Low appetite for telecom names • In secondary market investors rebalance portfolios away from volatile equities and towards cheap bonds • But in primary market the high yields are unattractive to issuers • Share price at historic lows. Sentiment weak towards telecom stocks. • Uncertainty over timing of economic recovery

18. Share Price and Bond Price Performance – Jan 99 to Sep 01 KPN Trading History

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20. LOAN

21. Result? • September 2001: €2.5 bn underwritten liquidity facility provided by Citi together with 7 banks • Facility had higher pricing and tighter credit protections Key Results Bond Spreads Stock Price Ratings Terms & Conditions

22. November 2001 • KPN’s objectives: • Debt reduction • Avoidance of “fire-sale” of assets • Funding growth KPN Market data: • Share Price: €4-6 • Bond Price: €72-85 • Credit Ratings: Baa2/BBB- • Loan Price: Libor+200bps Bonds Equity Loans • Slowdown in economy raised credit concerns • Lower loan volumes compared to 2000 • Low appetite for telecom names • Corporate market rebounded after Sep 11 activity. • Volatile equity market drives investors towards fixed income. • Volatile markets due to uncertainty on economic recovery • Interest rate driven market • Defensive nature of fixed line telecom stocks attractive

23. Share Price and Bond Price Performance – Jan 99 to Nov 01 KPN Trading History

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25. EQUITY

26. Result? • KPN announced a €5.0bn equity offering on 21st November 2001 via Citi. Offering Summary Offer Size Offer Type Pricing % of Enlarged Co Bookbuilding Period Take up by Existing Shareholders Citi Role

27. Performance Since 12-Mar KPN: 21% Sector: 30% Market: 36% KPN price on 18-Sep: €6.75 Stock Price Performance Government Objectives KPN Objectives Raise finance from non-core stakes Achieve maximum price for them Quick, efficient process Remove overhang Minimum impact on share price Quick, efficient process Competitive auction of a block of shares (“Block trade”) 18 September 2003 ITS 5:30PM ON THAT THURSDAY, YOU GET THE CALL...

28. Block-Trade Exercise Student Hand-out

29. Number of shares being sold Reference price per share Indicative auction value 300 million €6.75 €2,025 million Parameters of the Auction Teams Split into teams of 5/6 Teams will bid against each other to win the auction Considerations Explanation of factors to consider Views from key decision-makers in the process Process Deliberation 15 minutes for your team to decide what price to bid Submit price in € per share in sealed envelope Winner! (or are they?) Whichever team bids the highest price per share will win But, what price were the shares sold to investors at on Friday? Cash prize if a team can win the auction at a price that the shares can be sold at Goal is to win the auction, but not lose money!!!

30. Risk – Reward Considerations • Key measure to consider in deciding what price to bid at is the percentage discount to the reference price (left hand column of table) • The amount of money the firm makes will depend on what price the shares are sold at the next day (matrix table) Profit & Loss Bid Prices

31. 10% €7.50 underperformance €7.00 €6.50 KPN Share Price €6.00 €5.50 €5.00 12- 26- 09- 23- 07- 21- 04- 18- 02- 16- 30- 13- 27- 10- Mar Mar Apr Apr May May Jun Jun Jul Jul Jul Aug Aug Sep KPN European Telecoms Sector (rebased) Share Price Performance • KPN’s share price has increased c.20% since March • But, it has underperformed the sector by c.15% for most of the year. One concern of investors has been the overhang, i.e. the potential impact on the share price of the Dutch State selling their 31% shareholding in KPN • This auction of 40% of the Dutch State’s shareholding, will reduce these concerns and is likely to have a positive impact on the share price

32. General Block Trade Information Q1 01 Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03 Q3 03 • Block trades are typically executed at a discount of between 0% and 10%, but this is not a rule • Recently, as block issuance has increased, banks have become more competitive • Tighter discount needed to win a bid 0% -1% -2% -1.6% -3% -2.8% -2.9% Discount to Pre-Announcement -4% -3.6% -4.1% -4.2% -4.4% -5% -5.0% -5.0% -6% -6.1% Average: -4.3% -7% -7.0% -8% • An important consideration for pricing is the average daily trading volume (ADTV) multiple – the number of normal days’ trading volume represented • If a stock has an average of 1m shares traded per day, a 5m share block would have a multiple of 5x • Large block relative to ADTV implies big market impact – larger discount • At 26x ADTV multiple, KPN block is larger than average

33. Precedent Auctions Approx. Size Percentage of KPN Multiple of Average Daily Traded Volume €2.0bn / $2.3bn 12.0% 26x Company Size % of Company Multiple of Daily Volume Discount Did the Bank Make Money? Vodafone $5.1bn 1.6% 2.5x 5.6% Yes Vivendi Universal $2.9bn 6.5% 12.5x 5.3% No Vodafone $1.2bn 0.6% 1.1x 1.5% Yes Diageo $1.1bn 3.9% 8.3x 7.8% Yes Telenor $1.0bn 13.9% 88.1x 6.1% Neutral

34. Research House Recommendation 12 month Target Price Views Bank “M” Buy €8.00 “We see KPN as having a strong management team, good earnings momentum, a sound financial position and a very attractive valuation” Bank “C” Neutral €7.10 “Results once again ahead of expectations. However, concerns about domestic competition and issues with German operations. Following recent recovery in share price, we downgrade our rating to neutral” Bank “D” Sell €5.00 “We have fundamental concerns about KPN for three reasons; we believe the quality of the assets is below that of the peer group, KPN faces above average broadband competition, cash flow is worse than the sector” View of Independent Equity Research Analysts Buy €7.40 “KPN offers investors a well-run company that is undervalued. In our view, there are few barriers to [share price] outperformance in the short term” 75% of research analysts have a “Buy” rating on the shares

35. Equity Capital Markets Sales / Research “We want to win this deal. It is a very prestigious transaction” “Winning is very important to our franchise, league table position and budget” “It is going to be a very competitive process and we need to bid aggressively” “This is a great stock which we have been recommending our clients to buy” “The share price has underperformed its peers in part due to the worry about this placing. We think the shares will rise after this transaction” Senior Management Trading “OK, this is a big deal and we want to win” “However, it is only one deal and should not bet the firm on it” “We should bid to win, but also not to lose money” “We are the #1 trader of the shares, we know it very well. There are a number of fund managers that want to buy a lot more stock” “Demand at the right price will not be a problem” Advice From the Citi Team

36. What to Do Next • The clock is ticking... 15 minutes to decide on a price in € per share to bid • Write team name and the price per share on a piece of paper and then hand in • Only a team which wins the auction and does not lose the firm money will get the cash prize! Good luck...

37. The Next Day...

38. What Happened Next... 07:00 07:30 08:15 09:30 09:45 Citi briefs salesforce Order book opens Demand received for half the deal Demand equals deal size Shares at €6.83 Transaction closed, demand for €2.6bn Transaction priced at €6.78

39. “If European ECM bankers needed any further indication that sizeable deals are possible in today’s markets, given good knowledge of the stock and confidence in one’s own distribution ability, they needed to look no further than the ground-breaking display from Citi on Friday morning” International Financing Review, 20 September 2003 “The deal provides a shot of confidence for European telecoms investors who have sat beneath government share overhangs for years. It demonstrates that a strong appetite remains for telecoms shares” Lex, Financial Times, 19 September 2003 “The deal has finally come after months of rumours, but the manner in which it arrived still took the market by surprise” International Financing Review, 20 September 2003 “Rivals described it as the most aggressive deal they had ever seen” Financial News, 29 September 2003 “The block trade, arranged by Citi, will reduce the threat of an overhang that has depressed KPN's share price in recent weeks” Financial Times, 20 September 2003 “The offering was extremely well executed by Citi” Financial News, 29 September 2003 Independent Views on the Transaction Independent press reports acknowledged the resounding success of the transaction

40. QUESTIONS