Zegona Communications PLC Return of GBP335 million of capital to shareholders (6460Z)

TIDMZEG

RNS Number : 6460Z

Zegona Communications PLC

24 May 2021

NOT FOR DISTRIBUTION, PUBLICATION OR RELEASE, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN OR INTO OR FROM THE UNITED STATES OR TO ANY US PERSON, CANADA, AUSTRALIA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY MEMBER STATE OF THE EUROPEAN ECONOMIC AREA (OTHER THAN SPAIN) OR ANY OTHER JURISDICTION IN WHICH THE DISTRIBUTION, PUBLICATION OR RELEASE WOULD BE UNLAWFUL.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

ZEGONA COMMUNICATIONS PLC ( " Zegona " )

LEI: 213800ASI1VZL2ED4S65

24 MaY 2021

ZEGONA ANNOUNCES RETURN OF GBP335 MILLION OF CAPITAL TO ITS SHAREHOLDERS, EQUIVALENT TO GBP1.53 PER SHARE, AND MANAGEMENT INCREASES ITS INVESTMENT IN ZEGONA

Zegona Communications plc ("Zegona") today announces its intention to return GBP335 million to its shareholders in cash via a capital return following receipt of the proceeds from the acquisition of Euskaltel, S.A. ("Euskaltel") by MásMóvil Ibercom, S.A.U. ("MasMovil").

MasMovil's Offer will deliver substantial cash proceeds to Zegona

-- On 28 March 2021, MasMovil launched a tender offer to acquire 100% of Euskaltel at EUR11.17 per share in cash (the "Offer"), valuing Euskaltel's equity at EUR2.0 billion, which represents an enterprise value of EUR3.5 billion

-- The Offer equates to a Zegona Underlying Asset Value of GBP1.70 per share(1) and represents a return on Zegona's Net Invested Capital of 87%(2)

-- Assuming the Offer closes as expected, Zegona will receive c.EUR428 million in cash for its 21.44% stake(3) . These proceeds will convert into c.GBP370 million under the contingent FX forward transaction that Zegona entered into on 8 April 2021

-- Together with Zegona's other net cash(4) , the outstanding tax contingent consideration(5) and anticipated ongoing operating costs, Zegona's total asset value is expected to be c.GBP372 million at the closing of MasMovil's Offer

Zegona has committed to returning GBP335 million to its shareholders

-- Zegona has undertaken to seek the necessary approvals to return GBP335 million in cash to its shareholders following the closing of MasMovil's Offer. This represents a value of GBP1.53 per Zegona share(6)

-- Zegona is committed to returning as much of the proceeds from the sale of Euskaltel as soon as reasonably possible, while leaving the business in a position to source its next investment opportunity. Following the capital return and payment of Zegona management's long term incentive programme ("LTIP"), Zegona expects to have a net cash balance of c.GBP11 million, equivalent to GBP0.05 per Zegona share. Together with the capital return of GBP1.53 per share, the total value for shareholders is expected to be GBP1.58 per Zegona share(7)

-- The capital return will be implemented using the mechanism which the directors believe offers the best combination of timeliness, cost effectiveness and tax efficiency. Zegona is committed to completing the capital return as soon as is reasonably practicable(8)

-- Zegona will hold a shareholder vote within 2 years of the closing of the Euskaltel sale on returning remaining funds to shareholders if it has not made its next investment within that timeframe(9)

Zegona management has agreed to increase its investment in Zegona by GBP4 million

-- Zegona management's LTIP will be triggered by the sale of Zegona's holding in Euskaltel and the return of the net proceeds of that sale to shareholders(10)

-- The Zegona senior team (the "Managers") has committed to re-invest a portion of the LTIP, equating to GBP4 million in aggregate, back into Zegona and has entered into binding subscription agreements(11) for new shares. The subscription price will be the adjusted net asset value per share(12) of Zegona immediately prior to completion of the subscription, which is currently expected to be c.GBP0.05

-- Zegona's two executive directors will waive any bonus payment for 2021 and will not receive any bonus for the period when Zegona does not own a material underlying asset

-- Following the re-investments, Zegona expects to have a net cash balance of c.GBP15 million(13) , with management owning in aggregate c.28% of the business(14)

Marwyn supports proposals

-- Marwyn Investment Management LLP ("Marwyn")(15) supports the Company's plans and timing for the distribution of proceeds to shareholders. These plans also have the support of other significant shareholders with whom Zegona has consulted

-- Marwyn has confirmed that its concerns have been addressed and, as a result, has withdrawn its request for a General Meeting, which was announced on 4 May 2021

-- Marwyn strongly supports management's intention to re-invest in the ongoing Zegona business and has agreed to vote in favour of all resolutions at the forthcoming AGM

Once Zegona exits Spain, it will continue to execute its Buy-Fix-Sell strategy across the European TMT sector. We will focus on businesses that require active change to realise full value, creating long-term returns through fundamental business improvements.

We see a very healthy environment for investments across the broader European TMT industry. The market is large and fragmented, with well over 100 operators, of which over half fit our target investment size of an enterprise value range of GBP2-5 billion. We have seen increased deal activity and greater availability of assets driven by significant consolidation and convergence. We believe this will continue over the coming years, creating fertile ground to both buy and sell assets and once again create shareholder value through fundamental business improvement.

Eamonn O'Hare, Zegona's Chairman and CEO commented:

"When we originally invested in Spain in 2015, we identified the opportunity for substantial value creation, with further upside potential from industry consolidation. The offer by MasMovil to acquire Euskaltel underscored the success of our strategy, delivering significant value for Zegona shareholders. Zegona has a well-established policy of raising capital when we need it and returning capital quickly and efficiently when we monetise our investments. Today's announcement represents the return of the value from Euskaltel to shareholders and reflects Zegona management's confidence in the opportunity to deliver an attractive new investment in the European TMT sector."

Enquiries

Tavistock (Public Relations adviser - UK)

Tel: [phone]

Jos Simson - [e-mail]

About Zegona

Zegona was established in 2015 with the objective of investing in businesses in the European Telecommunications, Media and Technology sector and improving their performance to deliver attractive shareholder returns. Zegona is led by former Virgin Media executives Eamonn O'Hare and Robert Samuelson.

Zegona's first transaction was the EUR640 million acquisition of Telecable in August 2015, the leading quad-play telecommunications operator in Asturias, Spain. In 2017, Zegona sold Telecable for a total consideration of up to EUR701 million(16) to the northern Spanish telecoms group Euskaltel. As part of the transaction, Zegona returned GBP140 million of capital to its shareholders and became a 15% shareholder in Euskaltel.

In 2019, Zegona became the largest shareholder in Euskaltel and, through the introduction of José Miguel García as CEO, implemented a plan to drive significant change in the business. The plan involved efficiency gains of at least EUR40 million per annum, returning Euskaltel's core business to growth and expanding nationally through launching the Virgin telco brand.

In March 2021, MasMovil launched a tender offer to acquire Euskaltel at EUR11.17 per share, valuing Euskaltel's equity at EUR2.0 billion, which equates to an enterprise value of EUR3.5 billion. The offer was supported by Zegona and Euskaltel's other major shareholders and represents a return on Zegona's Net Invested Capital of 87%. The acquisition underscores the success of our strategy, delivering significant value creation for Zegona shareholders.

About Euskaltel

Euskaltel is the leading converged telecommunications provider in northern Spain and has recently expanded to offer services nationally. It provides high speed broadband, data-rich mobile, advanced TV and fixed communications services to residential and business customers under the Euskaltel, R Cable, Telecable and Virgin telco brands. Euskaltel is a public company traded on the stock markets of Bilbao, Madrid, Barcelona and Valencia.

Notes:

1. Zegona's Underlying Asset Value per share as set out in Zegona's announcement dated 29 March 2021

2. Return on Zegona's Net Invested Capital as set out in Zegona's announcement dated 29 March 2021. As at 26 March 2021, Zegona's Net Invested Capital was GBP198.5 million, equivalent to GBP0.91 per Zegona share. Zegona's Net Invested Capital represents the net amount of all shareholder subscriptions less all returns to shareholders, including dividends, capital returns and share buy-backs since Zegona's initial quotation on the AIM Market in March 2015

3. c.EUR428 million proceeds based on tender offer price of EUR11.17 per share for the 38.3 million Euskaltel shares held by Zegona

4. On the sale of its stake in Euskaltel, Zegona will need to repay its current GBP10 million loan facility with Barclays as this is secured on 32.2 million of its Euskaltel shares

5. As part of its acquisition of Telecable in 2017, Euskaltel agreed to pay Zegona a contingent consideration equal to 35% of the value of the Telecable's tax assets once these were confirmed as being available for use by Euskaltel. Zegona expects Euskaltel to pay this contingent consideration no later than 15 days after the settlement of the Offer at the value of EUR8.654 million, which is the liability to Zegona recorded in Euskaltel's financial statements for the year ended 31 December 2020

6. The capital return is dependent on the closing of MasMovil's Offer, which is subject to regulatory clearances and to acceptance of the Offer by a number of shares representing at least 75% plus one share of the total outstanding share capital of Euskaltel, and, amongst other requirements, on the approval of Zegona shareholders of the actions required for the capital return. The Spanish tender offer process is expected to take around 6 months from announcement to settlement. However, this timeline can be impacted by any delays in regulatory reviews and approvals and if there are competing offers

7. The total value for shareholders is calculated based on a capital return of GBP335 million plus Zegona's expected net cash balance of c.GBP11 million post the return of capital and payment of the LTIP. This value is a calculation and not a forecast value for Zegona shareholders. See the heading "Calculation of total value" below

8. The capital return will be conditional upon the closing of MasMovil's Offer and subject to all applicable laws and regulations, including the receipt of the required shareholder and court approvals and such other third-party approvals as reasonably required, which the Company has undertaken to use all reasonable endeavours promptly to procure

9. If holders of a majority of Zegona's shares (excluding shares held by Zegona management) vote in favour, Zegona will promptly cease all operations and return its remaining funds to shareholders. Shareholders will be offered further votes on ceasing Zegona's operations and returning remaining funds at each subsequent AGM if Zegona has still not made its next investment by that time

10. Net proceeds of the sale are after satisfying Zegona creditors. The value of the LTIP owed to the management team is expected to be c.GBP25.7 million, as per the calculation set out in the Zegona Limited articles of association in the event of a "Takeover", which includes the scenario where all or substantially all of the business or assets of Zegona Limited have been sold and the net proceeds of the sale, after satisfying Zegona's creditors, are returned to shareholders. The value of the LTIP will be confirmed by the Company's auditors or an independent global accounting firm

11. The Managers have entered into binding subscription agreements, pursuant to which Eamonn O'Hare has conditionally subscribed GBP2,366,800, Robert Samuelson has conditionally subscribed GBP1,183,400, Howard Kalika has conditionally subscribed GBP224,900 and Menno Kremer has conditionally subscribed GBP224,900, in each case for new ordinary shares in Zegona (each a "Re-investment"). The subscription agreements are subject to the closing of the Offer, the LTIP being paid, shareholder approval for the new Zegona ordinary shares to be issued at a general meeting to be convened for immediately prior to the AGM on 30 June 2021 and to admission of them to trading on the London Stock Exchange. No prospectus is expected to be required to be issued. To the extent that the aggregate number of shares to be subscribed under the subscription agreements exceeds 28.1% of the issued share capital of the Company at the time, the subscriptions shall be scaled back pro rata. As key members of Zegona's management team (and in the case of Eamonn O'Hare and Robert Samuelson, directors of Zegona), each of the Managers is a related party, and each Re-investment is a material related party transaction, in each case for the purposes of and as defined under DTR 7.3

12. The adjusted net asset value will be calculated post the capital return of GBP335 million to shareholders, with no provisions being made for any potential value being received from the non-current tax receivable described below, no provisions for the termination costs of any contracts or other future potential liabilities, and on the basis that the terms set out in this announcement have been adhered to. The independent directors, comprising Ashley Martin, Kjersti Wiklund, Richard Williams and Suzi Williams, consider the terms of the Re-investments to be fair and reasonable and have approved each Re-investment. The adjusted net asset value per share will be confirmed by the Company's auditors or an independent global accounting firm. The non-current tax receivable of GBP4.1 million is dependent on a successful appeal by Zegona in respect of the tax paid by Zegona to HMRC on 4 March 2021 relating to the UK's Controlled Foreign Company legislation and the European Commission's decision in 2019 that the associated Group Financing Exemption was an aid scheme and amounted to illegal state aid (as disclosed in Zegona's accounts for the year ended 31 December 2020)

13. Post the repayment of Zegona's GBP10 million loan facility, the proposed return of GBP335 million of capital to shareholders and payment of the LTIP, and assuming the tax contingent consideration is received, Zegona expects to have approximately GBP11 million of net cash on its balance sheet. Including the Re-investments, the net cash balance is expected to be c.GBP15 million

14. Assuming a net asset value of c.GBP11 million, management will have a c.28% ownership stake in Zegona post the Re-investments (including management's existing 1.4% ownership). Managers are committed to hold the shares in Zegona issued to them under the Re-investment for a minimum period of 6 months from the date of payment for the shares

15. Funds managed by Marwyn currently hold a 19.2% stake in Zegona. Marwyn has undertaken to vote all shares it holds in favour of all resolutions at the Zegona AGM which is due to be held on 30 June 2021

16. Total value of up to EUR701 million comprised of an Enterprise Value of EUR686 million and a contingent deferred payment of up to EUR15 million related to tax assets acquired

IMPORTANT NOTICES

Zegona is listed on the standard listing segment of the Official List of the Financial Conduct Authority and the Main Market for listed securities of the London Stock Exchange. This announcement has been prepared in accordance with English law, the Listing Rules and the Disclosure Guidance and Transparency Rules and information disclosed may not be the same as that which would have been prepared in accordance with the laws of jurisdictions outside England. The distribution of this announcement in jurisdictions outside the United Kingdom may be restricted by law and therefore persons into whose possession this announcement comes should inform themselves about and observe such restrictions. Any failure to comply with the restrictions may constitute a violation of the securities law of any such jurisdiction.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "expects", "believes", "estimates", "envisages", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include matters that are not facts. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements contained in this announcement based on past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Subject to any requirement under the Listing Rules, Prospectus Rules, the Disclosure Guidance and Transparency Rules or other applicable legislation or regulation, Zegona does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investors should not place undue reliance on forward-looking statements, which speak only as of the date of this announcement.

Underlying Asset Value per share

The Underlying Asset Value per share of Zegona is a calculation, not a forecast value for Zegona's shareholders. There can be no assurance that such a value will be achieved and investors should place no reliance on such value when making an investment decision. Nothing in this announcement is intended, or is to be construed, as a forecast of the expected value to Zegona's shareholders.

Calculation of total value

The total value referred to in this announcement is a calculation, not a forecast value for Zegona's shareholders. There can be no assurance that such a value will be achieved and investors should place no reliance on such value when making an investment decision. Nothing in this announcement is intended, or is to be construed, as a forecast of the expected value to Zegona's shareholders.

Eamonn O'Hare

Executive Chairman

Zegona Communications plc

8 Sackville St, Mayfair

London W1S 3DG

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May 24, 2021 12:36 ET (16:36 GMT)