CONTRACT REPORT - Vodafone Kabel Deutschland · Vodafone Vierte Verwaltungs AG announced its...
Transcript of CONTRACT REPORT - Vodafone Kabel Deutschland · Vodafone Vierte Verwaltungs AG announced its...
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CONTRACT REPORT
Joint Report
of the management board of
Vodafone Vierte Verwaltungs AG, Düsseldorf,
and
the management board of
Kabel Deutschland Holding AG, Unterföhring,
pursuant to Section 293a German Stock Corporation Act
concerning the Domination and Profit and Loss Transfer Agreement
between Vodafone Vierte Verwaltungs AG
and Kabel Deutschland Holding AG
20 December 2013
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Table of Contents
Section Page
(A) INTRODUCTION ................................................................................................................... 6
(B) THE PARTIES ....................................................................................................................... 7
1 KDH AG ................................................................................................................................. 7
1.1 Structure of KDH Group ........................................................................................................ 7
1.1.1 Overview of KDH Group............................................................................................ 7
1.1.2 Operative foundations ............................................................................................... 8
1.1.3 TV business segment ................................................................................................ 8
1.1.4 Internet and phone business segment ...................................................................... 8
1.1.5 Consolidated financial statements of KDH AG ......................................................... 9
1.1.6 Material participations of KDH AG ............................................................................ 9
1.1.7 Financing ................................................................................................................... 9
1.1.8 Tax situation of KDH AG............................................................................................ 9
1.2 Corporate history and development .................................................................................... 10
1.3 The cable network ............................................................................................................... 10
1.4 Legal foundations of KDH AG ..............................................................................................11
1.5 Capital, trading on the stock exchange, KDH Shareholders ................................................11
1.5.1 Share capital ............................................................................................................11
1.5.2 Authorized capital .....................................................................................................11
1.5.3 Conditional capital and authorization to issue convertible bonds and bonds with
warrants .................................................................................................................. 12
1.5.4 KDH Shares held as treasury shares ...................................................................... 12
1.5.5 Trading on the stock exchange ............................................................................... 13
1.5.6 KDH Shareholders .................................................................................................. 13
1.6 Corporate bodies of KDH AG .............................................................................................. 15
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1.6.1 Management board ................................................................................................. 15
1.6.2 Supervisory board ................................................................................................... 16
1.7 Employees of KDH Group ................................................................................................... 17
1.8 Development of the business, earnings situation and financial position of KDH Group ..... 17
1.8.1 Key numbers for the fiscal years 2010/2011 to 2012/2013 ..................................... 17
1.8.2 Other key numbers of KDH Group .......................................................................... 18
1.8.3 Financial position .................................................................................................... 18
1.8.4 First half of the fiscal year 2013/2014 ..................................................................... 18
1.8.5 Outlook .................................................................................................................... 19
2 Vodafone Group .................................................................................................................. 20
2.1 Overview ............................................................................................................................. 20
2.2 Corporate history and development of Vodafone Group Plc .............................................. 20
2.3 Legal foundations of Vodafone Group Plc .......................................................................... 21
2.4 Capital, trading on the stock exchange, shareholders of Vodafone Group Plc .................. 21
2.4.1 Share capital ........................................................................................................... 21
2.4.2 Trading on the stock exchange ............................................................................... 21
2.4.3 Shareholders and treasury shares .......................................................................... 22
2.5 Structure of the Vodafone Group ........................................................................................ 22
2.5.1 Operative and legal structure .................................................................................. 22
2.5.2 Participations ........................................................................................................... 22
2.5.3 Tax situation of Vodafone Group Plc ....................................................................... 22
2.6 Overview of the business strategy “Vodafone 2015” .......................................................... 22
2.7 Corporate bodies of Vodafone Group Plc ........................................................................... 23
2.7.1 Board ....................................................................................................................... 23
2.7.2 Executive Committee .............................................................................................. 23
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2.8 Employees........................................................................................................................... 24
2.9 Development of the business and earnings situation ......................................................... 24
2.9.1 Key numbers for the fiscal years 2010/2011 to 2012/2013 ..................................... 25
2.9.2 Development of the business in the fiscal year 2012/2013 .................................... 25
2.9.3 Key numbers by segments ..................................................................................... 26
2.9.4 First half year in business year 2013/2014 ............................................................. 27
2.10 Vodafone Germany ............................................................................................................. 28
2.10.1 Overview ............................................................................................................... 28
2.10.2 Corporate history of Vodafone Germany .............................................................. 28
2.10.3 Structure of Vodafone Germany ........................................................................... 29
2.10.4 Overview of the business activities of Vodafone Germany ................................... 30
3 Vodafone Vierte Verwaltungs AG ........................................................................................ 31
3.1 Overview ............................................................................................................................. 31
3.2 Legal form, registered office, fiscal year and corporate purpose ........................................ 31
3.3 Corporate history and development .................................................................................... 32
3.3.1 Foundation .............................................................................................................. 32
3.3.2 Capital increase, economic re-establishment, change of legal form and change of
the corporate purpose ............................................................................................. 32
3.3.3 Transfer of shares to Vodafone GmbH ................................................................... 32
3.3.4 Post-formation ......................................................................................................... 33
3.3.5 Domination and profit and loss transfer agreement with Vodafone GmbH ............. 33
3.4 Capital and shareholder ...................................................................................................... 33
3.5 Corporate bodies of Vodafone Vierte Verwaltungs AG ....................................................... 34
3.5.1 Management board ................................................................................................. 34
3.5.2 Supervisory board ................................................................................................... 34
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3.6 Business activities and participations ................................................................................. 34
3.7 Earnings situation and financial position of Vodafone Vierte Verwaltungs AG ................... 35
3.7.1 Assets...................................................................................................................... 35
3.7.2 Equity and liabilities ................................................................................................. 35
3.8 Employees and employee representation ........................................................................... 35
3.9 Financial funding of Vodafone Vierte Verwaltungs AG........................................................ 35
4 Takeover Offer by Vodafone Vierte Verwaltungs AG, further purchases of shares ............ 37
4.1 Takeover Offer and additional purchases of shares ............................................................ 37
4.2 Possible purchases outside of the cash buyout offer ......................................................... 38
(C) DOMINATION AND PROFIT AND LOSS TRANSFER AGREEMENT .............................. 38
1 Reasons for the conclusion of the Domination and Profit and Loss Transfer Agreement .. 38
1.1 Economic, legal and tax reasons ........................................................................................ 38
1.1.1 Economic and legal reasons ................................................................................... 38
1.1.2 Tax reasons ............................................................................................................. 44
1.2 Alternatives to concluding the Domination and Profit and Loss Transfer Agreement ......... 45
1.2.1 Conclusion of an isolated domination agreement or an isolated profit and loss
transfer agreement ................................................................................................. 45
1.2.2 Exclusion of the minority shareholders (squeeze-out) ............................................ 45
1.2.3 Absorption or merger .............................................................................................. 46
1.2.4 Change of legal form ............................................................................................... 46
1.2.5 Conclusion .............................................................................................................. 47
1.3 Costs of the Domination and Profit and Loss Transfer Agreement ..................................... 47
2 Content and effects of the Domination and Profit and Loss Transfer Agreement ............... 47
2.1 Explanation of the content of the contract ........................................................................... 47
2.1.1 Management control and instructions (clause 1 of the Domination and Profit and
Loss Transfer Agreement) ...................................................................................... 47
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2.1.2 Transfer of profit (clause 2 of the Domination and Profit and Loss Transfer
Agreement) ............................................................................................................. 49
2.1.3 Assumption of losses (clause 3 of the Domination and Profit and Loss Transfer
Agreement) ............................................................................................................. 51
2.1.4 Recurring Compensation Payment (clause 4 of the Domination and Profit and Loss
Transfer Agreement) ............................................................................................... 52
2.1.5 Compensation (clause 5 of the Domination and Profit and Loss Transfer
Agreement) ............................................................................................................. 58
2.1.6 Coming into effect, term and termination of the contract (clause 6 of the Domination
and Profit and Loss Transfer Agreement) ............................................................... 61
2.1.7 Final provisions of the contract (clause 8 of the Domination and Profit and Loss
Transfer Agreement) ............................................................................................... 64
2.1.8 Comfort letter by Vodafone Group Plc .................................................................... 65
2.2 Technical processing of the Domination and Profit and Loss Transfer Agreement by the
banks ................................................................................................................................... 65
2.3 Explanation of the effects of the Domination and Profit and Loss Transfer Agreement ..... 66
2.3.1 Effects under corporate law .................................................................................... 66
2.3.2 Protection of the outside KDH Shareholders .......................................................... 67
2.3.3 Tax effects for KDH Shareholders in Germany ....................................................... 71
2.3.4 Tax effects on KDH AG ........................................................................................... 79
3 Type and amount of the Recurring Compensation Payment and the compensation
under Sections 304, 305 AktG ........................................................................................... 80
3.1 Overview ............................................................................................................................. 80
3.2 Determination and setting of the amount of the reasonable Recurring Compensation
Payment under Section 304 AktG ....................................................................................... 82
3.3 Determination and setting of the amount of the reasonable compensation under Section
305 AktG.............................................................................................................................. 83
3.4 Contract audit ...................................................................................................................... 84
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The management board of Kabel Deutschland Holding AG (“KDH AG”) and the management
board of Vodafone Vierte Verwaltungs AG (“Vodafone Vierte Verwaltungs AG”) are jointly issuing
the following report (the “Contract Report”) pursuant to Section 293a German Stock Corporation
Act (Aktiengesetz – “AktG”) concerning the Domination and Profit and Loss Transfer Agreement
dated 20 December 2013 (the “Domination and Profit and Loss Transfer Agreement”) between
KDH AG as the controlled company and Vodafone Vierte Verwaltungs AG as the controlling
company (together also the “Parties”).
(A) INTRODUCTION
On 30 July 2013, Vodafone Vierte Verwaltungsgesellschaft mbH (now following the change
of legal form into a German stock corporation: “Vodafone Vierte Verwaltungs AG”) has
made a voluntary public takeover offer (“Takeover Offer”) to all shareholders of KDH AG
(“KDH Shareholders”) for the acquisition of all no-par value bearer shares (“KDH
Shares”). The Takeover Offer was accepted for approximately 72.21% of the KDH Shares
by the expiration of the acceptance period on 11 September 2013 at 24:00 hours. The
overall participation in KDH Shares which was held by Vodafone Vierte Verwaltungs AG
and persons acting in concert with Vodafone Vierte Verwaltungs AG within the meaning of
Section 2 para. 5 of the German Securities Acquisition and Takeover Act
(Wertpapiererwerbs- und Übernahmegesetz – “WpÜG”) on 11 September 2013 at 24:00
hours as well as those KDH Shares for which the Takeover Offer had been accepted was
approximately 76.48% at the end of the acceptance period. Included therein were
3,782,719 KDH Shares that were held by Vodafone Group Plc (“Vodafone Group Plc” and
together with its subsidiaries “Vodafone Group”) and for which Vodafone Group Plc has
accepted the Takeover Offer during the additional acceptance period. At the end of the
additional acceptance period within the meaning of Section 16 para. 2 WpÜG on
30 September 2013 at 24:00 hours, the Takeover Offer had been accepted for
approximately 76.57% of KDH Shares (see Section B.4.1).
Following settlement of the Takeover Offer, Vodafone Vierte Verwaltungs AG holds
67,780,374 KDH Shares at the time of signing of this Contract Report. This corresponds to
a shareholding of 76.57% in the share capital and the voting rights in KDH AG.
Vodafone Vierte Verwaltungs AG announced its intention to enter into a Domination and
Profit and Loss Transfer Agreement with KDH AG after settlement of the Takeover Offer in
a press release dated 12 September 2013. On 20 September 2013 Vodafone Vierte
Verwaltungs AG published the fulfilment of all completion conditions of the Takeover Offer.
The Takeover Offer has been settled on 14 October 2013.
In response to identical requests of KDH AG and Vodafone Vierte Verwaltungs AG, the
District Court (Landgericht) Munich I by order dated 25 October 2013 selected and
appointed Wedding & Cie. GmbH Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, with
the participation of the publicly appointed and sworn in business-evaluation expert
Dr. Anke Nestler, as joint contract auditor (the “Contract Auditor”) for the examination of
the Domination and Profit and Loss Transfer Agreement.
The Parties concluded the Domination and Profit and Loss Transfer Agreement on
20 December 2013. The supervisory board of KDH AG had previously approved the
conclusion of the Domination and Profit and Loss Transfer Agreement in its meeting on
20 December 2013. At the time of adopting the resolution, the final draft of the Domination
and Profit and Loss Transfer Agreement, a final draft of this Contract Report and the
signed version of the expert opinion (the “Valuation Report”) of Warth & Klein Grant
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Thornton AG, Wirtschaftsprüfungsgesellschaft, Düsseldorf, (the “Valuation Expert”) dated
19 December 2013 as well as a final draft of the report by the Contract Auditor concerning
the examination of the Domination and Profit and Loss Transfer Agreement dated
18 December 2013 (the “Audit Report”) were available to the supervisory board.
Vodafone Group Plc has issued a comfort letter regarding the Domination and Profit and
Loss Transfer Agreement to Kabel Deutschland Holding AG on 18 December 2013.
The Domination and Profit and Loss Transfer Agreement requires the approval of the
general shareholders’ meeting of KDH AG in accordance with Section 293 para. 1 AktG as
well as the approval of the general shareholders’ meeting of Vodafone Vierte Verwaltungs
AG in accordance with Section 293 para. 2 AktG. The general shareholders’ meeting of
Vodafone Vierte Verwaltungs AG resolved on its approval of the Domination and Profit and
Loss Transfer Agreement on 19 December 2013. The approving resolution of the general
shareholders’ meeting of KDH AG shall be adopted at the extraordinary general
shareholders’ meeting of KDH AG on 13 February 2014. The Domination and Profit and
Loss Transfer Agreement will become effective upon registration in the commercial register
(Handelsregister) at the seat of KDH AG.
(B) THE PARTIES
1 KDH AG
1.1 Structure of KDH Group
1.1.1 Overview of KDH Group
The structure chart below shows operational participations of KDH Group as well
as the participations in the respective personally liable shareholders if applicable.
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A list of the participations of KDH AG as of 20 December 2013 is attached as
Annex 1 to this Contract Report.
1.1.2 Operative foundations
KDH AG is the management and holding company of Kabel Deutschland group
(“KDH Group”) and is, in particular, responsible for the strategic development of
KDH Group and the provision of services and financing to the members of KDH
Group. The business activities of KDH Group are primarily conducted by KDH AG’s
operating subsidiaries, in particular by Kabel Deutschland Vertrieb und Service
GmbH, a wholly-owned subsidiary of KDH AG, and Kabel Deutschland
Kundenbetreuung GmbH, a wholly-owned subsidiary of Kabel Deutschland
Vertrieb und Service GmbH. KDH Group has bundled its customer service centres
and its technical service centres in Kabel Deutschland Kundenbetreuung GmbH.
KDH Group offers a variety of television and telecommunication services, including
analogue TV, digital and high definition TV, video on demand (VoD), digital video
recording (DVR), pay TV, broadband internet and phone services via TV-cable as
well as mobile services by a partner. According to its own estimate, KDH Group is
the largest cable network provider in the Federal Republic of Germany in terms of
housing units that can be connected to a cable network. With more than 15 million
housing units that can be connected to the cable network, the cable network of
KDH AG could be considered to be the largest within a country in Europe. KDH
Group has two operative segments, TV business and internet and phone business,
both of which report separately and are managed separately.
1.1.3 TV business segment
KDH Group’s TV business segment provides to its customers basic cable and
premium TV products and services. The basic cable products comprise analogue
and digital TV and radio services, which are provided primarily via individual
customer contracts or collective contracts with landlords or housing associations as
well as contracts with level 4 network operators. Revenue is primarily generated
from subscription fees. The premium TV products and services generate revenues
primarily from monthly subscription fees for pay TV, digital video recorders as well
as from technical access fees for encrypted high definition channels which are sold
as additional services to basic cable customers. In addition, KDH Group’s TV
business segment generates revenue from the feed-in and signal transportation
services with free TV and pay TV providers.
In the financial year ended on 31 March 2013, KDH Group’s TV business segment
generated revenues of approximately EUR 1,191.6 million representing
approximately 65.1% of KDH Group’s total revenues.
1.1.4 Internet and phone business segment
KDH Group’s internet and phone business segment comprises broadband internet
access, fixed-line phone services, mobile voice and data services as well as
supplementary options. Broadband internet access and fixed-line phone services
are offered to customers who can be connected to KDH Group’s network upgraded
for bidirectional services. A large part of the new customers in the internet and
phone business segment subscribe combination products that include both
services. The mobile voice and data services are offered by KDH Group on the
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basis of a contractual relationship with a mobile network operator in the Federal
Republic of Germany. Revenues are generated in the internet and phone business
segment mainly by reoccurring fees, such as in particular the monthly fee for
telephone and internet flat rates.
In the financial year ending 31 March 2013, KDH Group’s internet and phone
business segment generated revenues of approximately EUR 638.3 million,
representing approximately 34.9% of KDH Group’s total sales revenues.
1.1.5 Consolidated financial statements of KDH AG
Pursuant to Section 315a para. 1 German Commercial Code (Handelsgesetzbuch
– "HGB"), the consolidated financial statements of KDH AG for the fiscal year
2012/2013 that ended on 31 March 2013 were prepared as in the previous year in
accordance with the International Financial Reporting Standards of the
International Accounting Standards Board (IASB) as they must be applied pursuant
to the regulation no. 1606/2002 of the European Parliament and the Council on the
application of International Accounting Standards in the European Union (“IFRS”)
and show revenue in the amount of EUR 1,829.9 million, earnings before interest,
taxes, depreciation and amortisation (adjusted EBITDA) in the amount of
EUR 862.3 million and a consolidated profit of EUR 246.8 million.
1.1.6 Material participations of KDH AG
KDH AG held 18 direct and indirect corporate participations in Germany as of
31 March 2013. 16 companies (including KDH AG) were fully consolidated in the
consolidated financial statements 2012/2013.
A list of the direct and indirect participations of KDH AG as of 20 December 2013 is
attached as Annex 1 to this Contract Report.
1.1.7 Financing
KDH has issued an unsecured, fixed interest bearer bond of EUR 400 million. The
bond has a interest rate of 6.5% and is due on 31 July 2017. Its subsidiary, Kabel
Deutschland Vertrieb und Service GmbH, has issued a senior, fixed interest bearer
bond of EUR 700 million with an interest rate of 6.5%, due on 29 June 2018. Both
bonds can be repaid with advanced repayment. In October 2013 investment grade
ratings have been published. The conditions of the bonds allow the conclusion of a
Domination and Profit and Loss Transfer Agreement.
Kabel Deutschland Vertrieb und Service GmbH has a line of credit of EUR 2.15
billion with a duration until June 2020 and a revolving line of credit of EUR 300
million with a duration until March 2019 each granted by Vodafone Investments
Luxembourg S.a.r.l. Both of these granted lines of credit have replaced bank
financing as of 15 October 2013, which have become due for repayment with
completion of the Takeover Offer.
1.1.8 Tax situation of KDH AG
KDH AG generally has the policy of establishing a consolidated tax group
(Organschaft) for income tax purposes with all of its domestic corporations in which
it directly holds a participation of 100% with KDH AG as the parent company
(Organträgerin). As parent company, all profits are generally attributable to KDH
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AG for purposes of income tax in Germany and are subject to corporate income tax
and trade tax at the level of KDH AG.
1.2 Corporate history and development
KDH AG was established on 29 November 2004 under the name Kabel Deutschland
Holding GmbH & Co. KG. On 19 January 2005, the legal form of the company was
changed into a German limited liability company (Gesellschaft mit beschränkter Haftung).
On 19 February 2010, the shareholders’ meeting resolved upon the change of legal form
into a German stock corporation (Aktiengesellschaft) with the name Kabel Deutschland
Holding AG. Upon registration in the commercial register (Handelsregister) on 4 March
2010, such change of legal form became effective. On 22 March 2010, KDH AG launched
an initial public offering. Since then, KDH Shares have been listed on the regulated market
(Prime Standard) of the Frankfurt Stock Exchange under ISIN DE000KD88880 /
WKN KD8888. In June 2010, the shares were admitted to the MDAX. Following settlement
of the Takeover Offer, Vodafone Vierte Verwaltungs AG holds 67,780,374 KDH Shares at
the time of signing of this Contract Report. This corresponds to a shareholding of 76.57%
in the share capital and the voting rights in KDH AG. The website of KDH AG can be
accessed at http://www.kabeldeutschland.com.
The broadband cable business, in particular the TV cable network, of KDH Group was
originally operated by Deutsche Telekom, which had emerged out of the German Federal
Mail (Bundespost). In the late 1990s, the EU Commission requested the separation of
telecommunication and cable TV networks in order to create a greater level of competition.
Hence, Deutsche Telekom had to sell its TV cable networks. For this purpose, the
networks were transferred to a Telekom subsidiary and thereafter regionalised. The
regional companies were then offered for sale to financial investors and strategic investors
individually or in packages. In 2003, Deutsche Telekom sold a large package of regional
companies which encompassed all federal states (Bundesländer) in Germany except for
the states of North Rhine-Westfalia (Nordrhein-Westfalen), Baden-Württemberg and Hesse
to an international group of financial investors. KDH Group derived from this transaction.
Following this transaction, KDH Group acquired additional networks, in particular level 4
networks (Netzebene 4) (cable networks within residential complexes).
1.3 The cable network
The cable network of KDH Group was established by Deutsche Telekom and its legal
predecessor, the German Federal Mail (Deutsche Bundespost), according to high
standards characterized by a homogenous design, a high degree of reliability and low
maintenance requirements. The network reaches more than 15 million housing units as of
30 September 2013 and positions KDH Group, in the regions it serves, as the sole
competitor of Deutsche Telekom with end-to-end infrastructure. Since April 2006, KDH
Group has been investing in an upgrade of its broadband network for interactive services.
As of 30 September 2013, 91.4% of the network had been upgraded to a backchannel-
ready HFC structure (hybrid fibre coaxial cabling using both coaxial as well as optical fibre
cables). This corresponds to approximately 13.86 million housing units that can be
connected to the network, of which as of 30 September 2013 approximately 11.57 million
housing units are marketed housing units. At the same time, KDH Group has invested in
the further technological development of the customer end products (customer premise
equipment – “CPE”). That way, KDH Group can offer its customers broadband internet
access, phone services and modern TV services that are market-leading in KDH Group’s
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view. Over the coming years, KDH Group will upgrade further networks for interactive
services that can then also be used for offering high internet bandwidths through a use of
DOCSIS 3.0. As of 30 September 2013 DOCSIS 3.0 products were offered in 89.9% of the
upgraded network. In April 2013, KDH Group kicked off an additional investment program
of EUR 300 million, that shall be implemented in the fiscal years 2013/2014 and
2014/2015. Such program aims at an enhancement of growth and efficiency improvements
of the network infrastructure. In order to strengthen and promote growth, further broadband
networks, not insignificantly also in rural areas, are upgraded for interactive services. The
consistent proseqution of the almost nationwide conversion of the KDH Group networks
into the transmission standart DOCSIS 3.0 allows to offer internet broadbands to up to
400 Mbit/s. The major focus of these efficiency improvement activities is the redemption of
leased lines and the replacement by owned optical fibre infrastructure. This enables KDH
Group to respond effectively to the continuous increase of rental costs and to significantly
reduce reaction times for network capacity requirements. Such investment also forms the
basis for the realisation of future broadband-intensive services and products.
1.4 Legal foundations of KDH AG
The KDH AG is a German stock corporation (Aktiengesellschaft) having its seat in
Unterföhring and being registered in the commercial register (Handelsregister) of the local
court (Amtsgericht) of Munich under number HRB 184452. The corporate purpose of KDH
AG comprises the provision of television, telecommunication, multimedia and other related
services. KDH AG is entitled to perform all acts and take all steps and conduct all kinds of
transactions which are appropriate to directly or indirectly facilitate the attainment of its
corporate purpose. KDH AG may also establish, acquire or hold participations in other
companies of the same or a similar kind in Germany or abroad and may manage such
companies or limit itself to the management of its investment. It is entitled to outsource its
business activities in whole or in part to affiliated companies. KDH AG may also set up
branches and permanent establishments in Germany and abroad (see Section 2 of the
articles of association of KDH AG (“KDH Articles of Association”)). The fiscal year of
KDH AG begins on 1 April of each calendar year and ends on 31 March of the following
calendar year.
1.5 Capital, trading on the stock exchange, KDH Shareholders
1.5.1 Share capital
At the time of signing of this Contract Report, the share capital of KDH AG is
EUR 88,522,939.00 and is divided into 88,522,939 no-par value ordinary bearer
shares, each representing a pro rata amount of the share capital of EUR 1.00 per
share.
1.5.2 Authorized capital
The management board is authorized according to the shareholders resolution as
of 19 February 2010 to increase the share capital of the company, subject to the
approval of the supervisory board, in the time period until 18 February 2015 by
issuing up to 45,000,000 ordinary bearer shares in exchange for cash contributions
and/or contributions in kind once or several times up to a total of EUR 45 million
(“Authorized Capital 2010/I”). As a general rule, the shareholders shall be granted
subscription rights to the new shares. The new shares may also be subscribed by
banks or institutions within the meaning of Section 186 para. 5 sentence 1 AktG
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under the obligation to offer such shares for subscription to the shareholders. The
subscription right of the shareholders, may, however, be excluded in total or in part.
The management board is authorised, subject to the approval of the supervisory
board, to determine the further details of capital increases from Authorised Capital
2010/I and their implementation.
1.5.3 Conditional capital and authorization to issue convertible bonds and bonds with
warrants
The registered share capital of KDH AG has been increased conditionally by
resolution of the annual meeting as of 15 March 2010 by issuing 45,000,000 new
non-par value bearer shares by EUR 45 million (“Authorized Capital 2010/I”). The
Authorized Capital 2010/I serves the purpose of granting bearer shares to the
holders or creditors of convertible bonds and bonds with warrants according to the
authorisation as of 15 March 2010.
1.5.4 KDH Shares held as treasury shares
By a resolution of the Shareholders’ Meeting dated 15 March 2010, the
management board is authorized to purchase treasury shares on or before
14 March 2015, subject to supervisory board consent, in a volume of up to 10% of
the share capital existing at the time the resolution was adopted (corresponding to
9,000,000 KDH Shares). Acquisition for purposes of trading in treasury shares is
not permitted. The shares acquired on the basis of this authorization, together with
other shares of the company acquired by the company and still in its possession at
the time of acquisition, may not represent more than 10% of the share capital.
The authorization may be used by the company in its entirety or in several
instalments, on one or more occasions, and may also be used by the company’s
subsidiaries or companies under majority ownership of the company or by third
parties acting on behalf of the company or its subsidiaries or companies under
majority ownership of the company.
Purchases may be made over the stock exchange or through a public offer to all
shareholders. For acquisition via the stock exchange, the purchase price
(excluding incidental acquisition costs) may not be more than 20% above or below
the share price as determined by the opening auction in XETRA trading (or a
corresponding successor system) on the trading date.
In the fiscal year ended 31 March 2012, the management board, with consent of
the supervisory board, repurchased on the stock exchange a total of 1,477,061
no par value shares, with a pro rata amount of share capital equal to EUR
1,477,061 at a total purchase price of approximately EUR 60,000 (excluding
transaction costs) and retired these treasury shares with a corresponding reduction
in the share capital. As of 20 December 2013 KDH AG does not hold treasury
shares.
At this time, the authorization of the shareholders’ meeting of 15 March 2010 still
encompasses the repurchase of up to 8.36% of the share capital existing at the
time the resolution was adopted (corresponding to 7,522,939 KDH Shares).
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1.5.5 Trading on the stock exchange
The KDH Shares are admitted to trading on the regulated market of the Frankfurt
Stock Exchange (Prime Standard) and are traded on the regulated unofficial
market (Freiverkehr) of the stock exchanges in Berlin, Düsseldorf, Hamburg,
Hanover, Munich and Stuttgart. The KDH Shares are, inter alia, included in the
MDAX share index, and as per 23 September 2013 they were weighted at
1.9264% of the MDAX.
1.5.6 KDH Shareholders
As of the time of signing of this Contract Report, Vodafone Vierte Verwaltungs AG
directly holds a total of 67,780,374 KDH Shares, corresponding to 76.57% of the
voting rights and of the share capital of KDH AG.
Apart from Vodafone Vierte Verwaltungs AG and its controlling direct and indirect
shareholders at the time of signing of this Contract Report the following
participiations in KDH AG had been known by KDH AG according to the voting
rights notifications in accordance with Sections 21 et seq. of the German Securities
Trading Act (Wertpapierhandelsgesetz – “WpHG”) received until signing of this
Contract Report:
Shareholder
Voting rights
participation
(total) in %
Attribution Date (reaching,
crossing or
falling below
threshold)
Elliott total 11.09
Braxton Associates,
Inc., Wilmington,
Delaware, USA
10.91 9.61 % (Section 22
para. 1 sentence 1
no. 1 WpHG);
1.30% (Section 22
para. 1 sentence 1
no. 2, sentence 2
WpHG);
06.09.2013
Paul E. Singer, USA 10.91 9.61 % (Section 22
para. 1 sentence 1
no. 1 WpHG);
1.30% (Section 22
para. 1 sentence 1
no. 2, sentence 2
WpHG);
10.46% (Section 22
para. 1 sentence 1
no. 6)
06.09.2013
Elliott Asset
Management LLC,
Wilmington,
10.91 9.61 % (Section 22
para. 1 sentence 1
no. 1 WpHG);
06.09.2013
NON-BINDING ENGLISH TRANSLATION
14
Delaware, USA 1.30% (Section 22
para. 1 sentence 1
no. 2, sentence 2
WpHG);
Elliott Capital
Advisors, L.P.,
Wilmington,
Delaware, USA
10.91 9.61 % (Section 22
para. 1 sentence 1
no. 1 WpHG);
1.30% (Section 22
para. 1 sentence 1
no. 2, sentence 2
WpHG);
06.09.2013
Elliott International
Capital Advisors
Inc.,
Wilmington,
Delaware, USA
10.46 10.46% (Section 22
para. 1 sentence 1
no. 6 WpHG)
06.09.2013
Hambledon Inc.,
Grand Cayman,
Cayman Islands
10.46 9.61% (Section 22
para. 1 sentence 1
no. 1 WpHG);
0.84% (Section 22
para. 1 sentence 1
no. 2 WpHG)
06.09.2013
Elliott International,
L.P. Grand Cayman,
Cayman Islands
10.46 9.61% (Section 22
para. 1 sentence 1
no. 1 WpHG);
0.84% (Section 22
para. 1 sentence 1
no. 2 WpHG)
06.09.2013
Elliott International
Limited, Grand
Cayman,
Cayman Islands
11.09 11.09% (Section 22
para. 1 sentence 1
no. 1 WpHG)
11.09.2013
Maidenhead LLC,
Wilmington,
Delaware, USA
11.09 11.09% (Section 22
para. 1 sentence 1
no. 1 WpHG)
11.09.2013
Wolverton
(Luxembourg)
S.à r.l.,
Luxembourg,
Luxembourg
11.09 11.09% (Section 22
para. 1 sentence 1
no. 1 WpHG)
11.09.2013
Cornwall
(Luxembourg)
S.à r.l.,
11.09 11.09.2013
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15
Luxembourg,
Luxembourg
Blackrock total 4.30
Blackrock Holdco 2,
Inc., Wilmington,
Delaware, USA
4.21 4.21% (Section 22
para. 1 sentence 1
no. 6, sentence 2
WpHG)
20.09.2013
Blackrock, Inc., New
York, New York,
USA
4.30 4.30% (Section 22
para. 1 sentence 1
no. 6, sentence 2
WpHG)
20.09.2013
Blackrock Financial
Management, Inc.,
New York, New
York, USA
4.21 4.21% (Section 22
para. 1 sentence 1
no. 6, sentence 2
WpHG)
20.09.2013
Barclays total 5.04
Barclays Plc,
London, United
Kingdom
5.04 5.04% (Section 22
para. 1 sentence 1
no. 1 WpHG)
30.08.2013
Barclays Bank Plc,
London, United
Kingdom
5.04 4.43% (Section 22
para. 1 sentence 1
no. 1 WpHG)
30.08.2013
Barclays Capital
Securities Ltd,
London, United
Kingdom
4.43 30.08.2013
To the extent no further voting rights obligations have been triggered, these actual
participation quotas could have changed.
1.6 Corporate bodies of KDH AG
1.6.1 Management board
Pursuant to Section 5 para. 1 sentence 1 of the KDH Articles of Association, the
management board (Vorstand) of KDH AG is composed of one or several persons.
The supervisory board (Aufsichtsrat) determines the number of members of the
management board according to Section 5 para. 1 sentence 2 of the KDH Articles
of Association. At the time of signing of this Contract Report, the management
board of KDH AG is composed of the following individuals:
• Dr. Adrian v. Hammerstein
Chief Executive Officer
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16
• Dr. Manuel Cubero del Castillo-Olivares
Chief Operating Officer
• Erik Adams
Chief Marketing Officer
• Dr. Andreas Siemen
Chief Financial Officer
Pursuant to Section 6 para. 2 of the KDH Articles of Association, KDH AG is
represented by one member of the management board alone, as long as only one
person has been appointed as member of the management board. If the
management board consists of several persons, the company is represented by
two members of the management board or one member of the management board
acting jointly with a holder of registered signing authority (Prokurist).
1.6.2 Supervisory board
Pursuant to Section 96 para. 1 AktG, Section 7 para. 1 sentence 1 no. 1 of the
German Co-Determination Act (Mitbestimmungsgesetz – “MitbestG”) as well as
Section 7 para. 1 of the KDH Articles of Association, the supervisory board of KDH
AG is composed of twelve members. Half of the members is elected by the general
shareholders’ meeting of KDH AG and the other half of the members is elected in
accordance with the provisions of the MitbestG. At the time of signing this Contract
Report, the supervisory board of KDH AG is composed of the following individuals:
• Philipp Humm
Chairman
• Joachim Pütz, representative of the employees
Vice-Chairman
• Susanne Aichinger, representative of the employees
• Annet Aris
• Dirk Barnard
• Petra Ganser, representative of the employees
• Irena Gruhne, representative of the employees
• Ronald Hofschläger, representative of the employees
• Florian Landgraf, representative of the employees
• Dr. Thomas Nowak
• Karsten Pradel
• Jens Schulte-Bockum
Upon request of the management board in accordance with Section 104 AktG, the
supervisory board members Philipp Humm, Dirk Barnard, Dr. Thomas Nowak,
Karsten Pradel and Jens Schulte-Bockum were appointed by order of the local
court (Amtsgericht) of Munich dated 31 October 2013 with effect as of 1 November
2013 after the former members Tony Ball, Catherine Mühlemann, Martin David
Stewart, Paul Stodden and Torsten Winkler, which had been elected by the general
NON-BINDING ENGLISH TRANSLATION
17
shareholders’ meeting of KDH AG, had resigned from their offices with effect as of
the expiration of 31 October 2013.
1.7 Employees of KDH Group
As of 31 March 2013, KDH Group had 3,567 employees. 1,054 of these employees were
working in the “technics and IT” division, 1,297 in the “customer and technical service
centre” division, 727 in the “sales and marketing” division and 489 in the “administration”
division. In comparison with the numbers as of 31 March 2012, this reflects an increase in
personnel by a total of 741 employees. Such increase results primarily from the permanent
employment of approximately 600 former temporary staff members in the customer and
technical service division of Kabel Deutschland Kundenbetreuung GmbH and from the
building up of own personnel in the technics division for the coverage of underground
construction and other services by Kabel Deutschland Field Services GmbH in Western
and Southern Bavaria, but also from organizational employee growth.
1.8 Development of the business, earnings situation and financial position of KDH Group
The revenues of KDH Group amounted to EUR 1,829.9 million in the fiscal year 2012/2013
and the consolidated profit was EUR 246.8 million.
The following table provides an overview of the main financial numbers for the fiscal years
2010/2011, 2011/2012 and 2012/2013 in KDH Group. The financial information for the
fiscal years 2010/2011, 2011/2012 and 2012/2013 has been taken from the audited
consolidated financial statements of KDH AG for the respective fiscal years ending
31 March 2011, 31 March 2012 and 31 March 2013. These consolidated financial
statements were prepared in accordance with IFRS pursuant to Section 315a para. 1 HGB.
Aside from this, reference is made to the information on the development of the business
and the earnings situation described in the published annual financial reports of KDH AG
for the fiscal years 2010/2011, 2011/2012 and 2012/2013.
Unless stated otherwise, the values have been rounded in accordance with commercial
principles. The figures included in this Contract Report are rounded for better clarity, even
if they have been calculated with several decimal places. For this reason, adding up the
figures in the table can result in deviations from the listed subtotals or total amounts.
1.8.1 Key numbers for the fiscal years 2010/2011 to 2012/2013
KDH Group (in EUR million) 2010/2011 2011/2012 2012/2013
Revenue TV business 1,132.9 1,158.4 1,191.6
Revenue internet and phone business 466.0 541.4 638.3
Revenue 1,598.9 1,699.7 1,829.9
Costs for achieving revenue -801.5 -784.3 -835.6
Other operating income 12.3 12.1 12.6
Distribution costs -467.4 -424.7 -414.2
General administrative expenses -135.4 -130.0 -166.8
Operating profit 207.0 372.9 426
Interest earnings 4.3 2.9 3.3
Interest expenditures -272.7 -201.6 -206.0
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KDH Group (in EUR million) 2010/2011 2011/2012 2012/2013
Revenue from affiliated companies 4.1 1.6 2.3
Earnings before taxes -57.3 175.8 225.6
Revenue (+) / expenditures (-) from income
tax
12.0 -16.4 21.2
Consolidated profits (+) / losses (-) -45.3 159.4 246.8
1.8.2 Other key numbers of KDH Group
Key numbers 2010/2011 2011/2012 2012/2013
EBITDA (adjusted), (in EUR million) 729.1 795.5 862.3
EBITDA margin (adjusted), (in %) 45.6 46.8 47.1
CAPEX (in EUR million) 337.0 391.2 472.3
ARPU (in EUR / customer) 13.40 14.44 15.87
Total of customers (connected housing
units) (in thousands)
8,745 8,545 8,473
RGUs1 in total (in thousands) 12,698 13,449 14,348
* RGU refers to the so-called Revenue Generating Unit. It is a common figure used in the cable industry, which in addition to customer numbers provides information on the quantity of services sold and hence, on the economical development of the company. Each service that goes beyond an analogue TV connection (e.g. digital TV or internet access) is accounted for as a RGU.
1.8.3 Financial position
(i) Assets (main line items)
KDH Group in EUR million 31/3/2012 31/3/2013
Noncurrent assets 1,877.5 2,035.5
Current assets 282,3 823,0
- of which cash and cash equivalents 133.8 609.5
Total assets 2,159.8 2,858.5
(ii) Equity and liabilities (main line items)
KDH Group in EUR million 31/3/2012 31/3/2013
Total equity (deficit) -1,576.8 -1,470.9
Current liabilities 282.3 822.9
Non-current liabilities 3,000.3 3,588.5
Total equity and liabilities 2,159.8 2,858.5
1.8.4 First half of the fiscal year 2013/2014
Total revenue for the six months period ended on 30 September 2013 was
increased by EUR 38.75 million or 4.3%, respectively, to EUR 935.53 million,
compared to EUR 896.78 million for the six-months-period ended on 30 September
2012. This results from continuous strong growth in the internet and phone
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19
segment, to which in particular products based on the technological standard
DOCSIS 3.0 with a transmission speed of up to 100 Mbit/s contributed significantly.
The TV business segment of KDH Group generated revenue amounting to EUR
580.23 million in the six months period ended on 30 September 2013. This
corresponds to 62% of the total revenues of KDH Group. In comparison to that,
during the six months period that ended on 30 September 2012, revenue
amounting to EUR 590.75 million was generated, corresponding to 65.9% of the
total revenues. The decline of revenue in the TV business segment primarily
results from the decrease of feed-in tariffs by public service channel providers,
which were decreased by EUR 13.80 million. An increase of revenue resulting from
Premium-TV-services, in particular in connection with DVR and extended HD
subscription packages as for example “Kabel Premium HD”, could only partially
compensate such decline in feed-in tariffs. In the internet and phone business
segment, total revenue in the six months period ending on 30 September 2013 was
increased by EUR 49.28 million or 16.1%, respectively, to EUR 355.30 million
(previous year: EUR 306.03 million). This results substantially from an increase of
recurring fees. The continuous strong growth is primarily due to an increase of
internet and phone customers of KDH Group. In proportion to total revenue
numbers, the internet and phone business generated 38.0% of revenue in the six
months period ended on 30 September 2013 compared to 34.1% of total revenue
for the six months period ended on 30 September 2012.
For the six months period ended on 30 September 2013, a consolidated loss
amounting to EUR 100 million was incurred, compared to a consolidated profit of
EUR 126.82 million for the six months period ended on 30 September 2012. The
consolidated group results in particular decreased due to non-recurring
expenditures (depreciation and amortisation of capitalised deferred tax assets for
losses carried forward on level of KDH AG, advisor fees and non-liquidity-related
amortization of capitalised financing and transaction costs) amounting to
EUR 205.64 million in connection with the takeover by Vodafone Vierte
Verwaltungs AG.
1.8.5 Outlook
KDH Group anticipates that the business will continue to develop robustly in the
current fiscal year and beyond. In the previous years, KDH Group has
implemented a comprehensive investment program to upgrade its network, has
launched new services and strengthened marketing and sales capabilities. This
allowed for the sale of new products such as broadband internet access, fixed-line
phone services and premium TV services like DVR or pay TV. In the context of the
investments made, KDH Group benefited from its existing network, economies of
scale due to a partially fixed cost structure and from performance-related customer-
oriented investments. This strategy has lead to substantial organic growth of
revenues and EBITDA over the past years.
(i) TV business
KDH Group anticipates that the basic cable business will continue to
generate reliable revenues and cash flows in the future, despite the on-
going decline in basic cable customers. As in past years, this decline in
customers will presumably occur primarily in the segment of indirect
customers with low monthly turnover, which is caused by further
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cancellations of cable subscriptions by operators of level 4 cable networks.
Possible further acquisitions of small level 4 network operators in the KDH
network area could increase again the share of direct customer relations.
The increasing popularity of and demand for digital TV services should
furthermore enhance more innovation opportunities of KDH Group to
supply basic cable customers with additional premium TV services. KDH
Group intends to further increase the distribution of digital video recorders
and digital receivers among existing customers and to expand HDTV offers
within the next two years. In addition, KDH Group plans to distribute the
interactive VoD service that was introduced in March 2011 in further
upgraded networks over the coming years. KDH Group expects that the
marketing of these new services – either as individual products or as a
product package together with the existing pay TV offers – will generate
further growth in the TV business.
(ii) Internet and phone business
According to the plans of KDH Group, the internet and phone business will
continue to be the main driver of revenue and EBITDA growth of KDH
Group which it has been over the past years. While in Germany, there has
been a slow-down in the growth of the overall market, with view to an
increasing internet penetration, KDH Group nevertheless expects growth of
internet customers and internet revenues for KDH Group. Cable network
operators have gained market shares from DSL operators and KDH
Group’s growth has gained increasing support through DSL customers
which are willing to change, which KDH Group can attrac by product
differentiation and the best price-performance ratio in cable technologies.
KDH Group will be able to further expand this leadership in technology with
increasing availability of DOCSIS 3.0 services with speeds of up to 100
Mbit/s or even more.
2 Vodafone Group
2.1 Overview
Vodafone Group Plc is one of the world's largest mobile communications companies by
revenue with approximately 411 million customers in its controlled and jointly controlled
markets as of 30 September 2013. It generates turnover from mobile voice, messaging
and data communications services, fixed-line services, so-called business managed
services and the wholesale of access to mobile virtual network operators.
For the fiscal year that ended on 31 March 2013, Vodafone Group generated revenue of
approximately GBP 44.4 billion and an operating profit of approximately GBP 4.7 billion,
with profit before taxes of approximately GBP 3.3 billion.
The website of Vodafone Group Plc can be accessed at http://www.vodafone.com.
2.2 Corporate history and development of Vodafone Group Plc
Vodafone Group Plc was incorporated under the laws of England and Wales under the
name Racal Strategic Radio Limited (register number 1833679). Following several
changes of the company name, 20% of the share capital of the company meanwhile
named Racal Telecom Plc were offered for sale to the public in October 1988. In
NON-BINDING ENGLISH TRANSLATION
21
September 1991, the spin-off from Racal Electronics Plc was completed and the name was
changed to Vodafone Group Plc. Since then, the Vodafone Group Plc has increased its
international presence due to a large number of transactions. The following table sets out
major milestones in corporate history:
Year Milestone
1999 Merger with AirTouch Communications, Inc. and change of name into
Vodafone AirTouch Plc with subsequent (re-)change of name into
Vodafone Group Plc
2000 Acquisition of Mannesmann AG: Entry into the German and Italian
telecommunications market as well as increase of the indirect
participation in SFR (French telecommunication provider)
1999 – 2004 Successive acquisition of shares in Vodafone Japan with subsequent
sale of all shares in 2006
2007 Acquisition of companies with controlling majority interests in
Vodafone India Limited (formerly Vodafone Essar Limited)
2009 Additional acquisition of 15.0% interest in Vodacom
2010 Disposal of interest in China Mobile Limited amounting to 3.2%
2011 Disposal of shares in SFR amounting to 44%
2011 Disposal of shares in Polkomtel amounting to 24.4%
2012 Acquisition of Cable & Wireless Worldwide Plc
2.3 Legal foundations of Vodafone Group Plc
Vodafone Group Plc is a public limited company, incorporated under the laws of England
and Wales, with its registered office in Newbury, Great Britain (Vodafone House, The
Connection, RG14 2FN Newbury, Berkshire). It is registered in England and Wales under
the name Vodafone Group Public Limited Company with register no. 1833679.
2.4 Capital, trading on the stock exchange, shareholders of Vodafone Group Plc
2.4.1 Share capital
On 29 November 2013 Vodafone’s registered share capital amounted to
GBP 3,685,335,743 and was divided into 52,821,686,866 shares (“Vodafone
Shares”).
2.4.2 Trading on the stock exchange
The Vodafone Shares are listed on the London Stock Exchange under
ISIN GB00B16GWD56. As of 30 November 2013, the market capitalization of
Vodafone Group Plc was approximately GBP 109.9 billion. Apart from the London
Stock Exchange, Vodafone Shares are traded in NASDAQ in the form of American
Depositary Receipts (ADR).
NON-BINDING ENGLISH TRANSLATION
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2.4.3 Shareholders and treasury shares
As of 6 December 2013, BNY Mellon as ADR custodian of Vodafone Group Plc
held approximately 20.36% of the Vodafone Shares, Black Rock Inc held at that
point in time approximately 7.49% of Vodafone Shares and The Capital Group
Companies Inc held at that point in time approximately 4.03% of Vodafone Shares.
On 29 November 2013, Vodafone Group Plc held 4,357,681,799 treasury shares.
The rest of the Vodafone Shares were held in free float.
2.5 Structure of the Vodafone Group
2.5.1 Operative and legal structure
Vodafone Group Plc has equity interests in telecommunication operations in nearly
30 countries across five continents, has more than 91,000 employees and has
around 50 partner networks worldwide. In fiscal year ended on 31 March 2013, the
operative business of the Vodafone Group was divided into three regions: Northern
and Central Europe, Southern Europe as well as Africa, Middle East and Asia-
Pacific (AMAP). As of 1 October 2013 the Vodafone Group Plc has merged
Northern and Central Europe and Southern Europe regions to form the Europe
region and has assigned the entity operating in Turkey to the Africa, Middle East,
Asia-Pacific (AMAP) region. On 2 September 2013 Vodafone Group Plc
announced, that it has agreed to dispose of its US Group whose principal asset is
its 45% interest in Verizon Wireless.
For the fiscal year that ended on 31 March 2013, GBP 18.8 billion (45.8%) of the
service revenues of Vodafone Group are assigned to the Northern and Central
Europe region, GBP 12.3 billion (30.2%) to the Africa, Middle East, Asia-Pacific
(AMAP) region and GBP 9.6 billion (23.5%) to the Southern Europe region.
2.5.2 Participations
As of 29 November 2013, Vodafone Group Plc held approximately 640 direct and
indirect participations in other companies in Germany and abroad.
A list of the material direct and indirect participations of Vodafone Group Plc as of
31 March 2013 is attached to this Contract Report as Annex 2.
2.5.3 Tax situation of Vodafone Group Plc
Vodafone Group Plc is a UK tax resident company. In the UK there is no system of
tax consolidation and as such, Vodafone Group Plc is subject to tax in the UK on a
standalone basis. However, UK companies can surrender current year losses to
other profitable UK tax resident companies which are members of the same 75%
group. Furthermore, the Vodafone Group operates through separate legal entities
in the countries where it provides telecommunication services and those entities
are subject to tax in their own territory. In case there is more than one legal entity in
one country, it is the Vodafone Group’s policy to form a tax group if local law allows
it and any conditions are met.
2.6 Overview of the business strategy “Vodafone 2015”
In 2012, Vodafone Group Plc presented a new strategy entitled “Vodafone 2015”, which
comprises four core areas: (i) Consumer 2015 – a new approach for pricing for and
NON-BINDING ENGLISH TRANSLATION
23
bundling of private customers in Europe with the aim of offering customers more utilisation
flexibility while at the same time stabilizing average revenue per customer; (ii) Enterprise
2015 – a plan to strengthen the leading position regarding offers for business customers;
(iii) Network 2015 – continuous focus on the provision of high speed data services and the
procurement of a permanently excellent data experience based on a widespread
availability of 3G, 4G and a high backhaul-capacity as well as (iv) Operations 2015 –
usage of advantages arising out of the global coverage and size of Vodafone Group in
order to standardize and simplify business processes within Vodafone Group aiming at
improving cost efficiency and the period of time that lapses prior to the introduction of new
products.
2.7 Corporate bodies of Vodafone Group Plc
2.7.1 Board
The board of Vodafone Group Plc is composed of the following members:
• Gerard Kleisterlee, Chairman
• Vittorio Colao, Chief Executive – Executive Director
• Andy Halford, Chief Financial Officer – Executive Director
• Stephen Pusey, Chief Technology Officer – Executive Director
• Renee James, Non-executive Director
• Alan Jebson, Non-executive Director
• Samuel Jonah, Non-executive Director
• Omid Kordestani, Non-executive Director
• Nick Land, Non-executive Director
• Anne Lauvergeon, Non-executive Director
• Luc Vandevelde, Senior Independent Director
• Anthony Watson, Non-executive Director
• Philip Yea, Non-executive Director
Vodafone Group Plc has announced on 3 October 2013, that Nick Read has been
appointed as Executive Director and Chief Financial Officer as of 1 April 2014
replacing Andy Halford. Vodafone Group Plc has announced on 3 December 2013,
that Val Gooding has been appointed as further Non-executive Director as of 1
February 2014.
2.7.2 Executive Committee
The Executive Committee of Vodafone Group Plc is composed of the following
members:
• Vittorio Colao, Chief Executive
• Andy Halford, Chief Financial Officer
• Stephen Pusey, Chief Technology Officer
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• Paolo Bertoluzzo, Chief Executive Officer, Southern Europe
• Warren Finegold, Group Strategy and Business Development Director
• Philipp Humm, Chief Executive Officer, Northern and Central Europe
• Nick Jeffery, Group Enterprise Director
• Matthew Kirk, Group External Affairs Director
• Rosemary Martin, Group General Counsel and Company Secretary
• Nick Read, Chief Executive Officer, Africa, Middle East and Asia Pacific
region
• Ronald Schellekens, Group Human Resources Director
With effect from 1 January 2014 Serpil Timuray will join the Executive Committee.
Andy Halford will resign from the Executive Committee as of 1 April 2014.
2.8 Employees
Vodafone Group has more than 91,000 employees worldwide in over 30 countries, 13%
thereof in India, 12% in Germany, 9% in Great Britain, 6% in Italy, 5% in Spain and 8% in
Vodafone Group’s Vodacom subsidiaries in Africa. Whilst the average number of
employees worldwide was still at 83,862 in fiscal year 2010/2011, it increased to 91,272
employees in fiscal year 2012/2013.
2.9 Development of the business and earnings situation
Vodafone Group generated revenues amounting to GBP 44.445 billion, an operating profit
of GBP 4.728 billion and an annual profit before tax of GBP 3.255 billion during the fiscal
year 2012/2013.
The following table provides an overview of the main financial numbers for the fiscal years
2010/2011, 2011/2012 and 2012/2013 of Vodafone Group Plc. The financial information for
the fiscal years 2010/2011, 2011/2012 and 2012/2013 has been taken from the audited
consolidated financial statements of Vodafone Group Plc for the respective fiscal years
ended 31 March 2011, 31 March 2012 and 31 March 2013. These consolidated financial
statements were prepared in accordance with the International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board (IASB). In
addition, the consolidated financial statements were prepared in accordance with the IFRS
as declared applicable by the European Union, the Companies Act 2006 and Article 4 of
the European IAS Regulation.
Aside from this, reference is made to the information on the development of the business
and the earnings situation described in the published annual reports of Vodafone Group
Plc for the fiscal years 2010/2011, 2011/2012 und 2012/2013 as well as to the discharging
group reports according to Section 291 HGB.
Unless stated otherwise, the values have been rounded in accordance with commercial
principles.
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2.9.1 Key numbers for the fiscal years 2010/2011 to 2012/2013
Vodafone Group Plc in GBP million 2010/2011 2011/2012 2012/2013
Revenue 45,884 46,417 44,445
Gross profit 15,070 14,871 13,940
Operating profit 5,596 11,187 4,728
Working Capital 566 206 318
Profit before tax 9,498 9,549 3,255
Operating free cash flow 9,785 8,518 7,685
Profit for the financial year 7,870 7,003 673
Free cash flow 7,049 6,105 5,608
EBITDA1 14,670 14,475 13,275
Dividends 4,468 6,654 4,801
Total dividend per share in Pence 8.90 9.52
(+4.00 special
dividend)
10.19
Total assets 151,220 139,576 142,698
Total equity 87,561 78,202 72,488
Equity ratio 57.9% 56% 50.8%
Net debt -29,858 -24,425 -26,958
Research and development
expenditure
287 304 307
Employees
(average number)
83,862 86,373 91,272
1 Operating profit excluding share in results of associates, depreciation and amortisation, gains/losses on
the disposal of fixed assets, impairment losses and other operating income and expense.
2.9.2 Development of the business in the fiscal year 2012/2013
(i) Earnings
Vodafone Group Plc in GBP million 2011/2012 2012/2013 Changes
Revenue 46,417 44,445 -4.2%
EBITDA1 14,475 13,275 -8.3%
Profit before tax 9,549 3,255 -65.9%
Profit for the financial year 7,003 673 -90.4%
1 Operating profit excluding share in results of associates, depreciation and amortisation,
gains/losses on the disposal of fixed assets, impairment losses and other operating income
and expense.
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(ii) Financial position
(a) Assets (main line items)
Vodafone Group Plc in GBP million 31/03/2012 31/03/2013
Goodwill 38,350 30,372
Other intangible assets 21,164 22,025
Property, plant and equipment 18,655 20,331
Shareholding in associates 35,108 38,635
Total assets 139,576 142,698
(b) Equity and liabilities (main line items)
Vodafone Group Plc in GBP million 31/03/2012 31/03/2013
Total equity 78,202 72,488
Current liabilities 24,025 31,224
Non-current liabilities 37,349 38,986
Total equity and liabilities 139,576 142,698
The consolidated total assets have been increased as of 31 March 2013 in
comparison with 31 March 2013 by approximately 2.2%.
2.9.3 Key numbers by segments
The business segments of Vodafone Group are primarily conducted on a
geographical basis. On this basis, selected financial numbers are presented below.
Vodafone Group has one single group of communications services and products.
Revenues are allocated to a country or a region based on the location of the group
company that has reported the revenue. Revenues between the segments are
shown at prices corresponding to the arms length amounts.
(i) Northern and Central Europe
In GBP million 2011/2012 2012/2013 Changes
Revenue 19,536 20,062 2.7%
EBITDA1 5,934 5,713 -3.7%
(a) Thereof allocated to Germany
In GBP million 2011/2012 2012/2013 Changes
Revenue 8,188 7,824 -4.4%
EBITDA 2,965 2,735 -7.8%
(b) Thereof allocated to Great Britain
In GBP million 2011/2012 2012/2013 Changes
Revenue 5,354 5,116 -4.4%
EBITDA 1,294 1,209 -6.6%
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(ii) Southern Europe
In GBP million 2011/2012 2012/2013 Changes
Revenue 12,438 10,459 -15.9%
EBITDA1 4,438 3,483 -21.5%
(iii) Africa, Middle East and Asia-Pacific
In GBP million 2011/2012 2012/2013 Changes
Revenue 13,831 13,443 -2.8%
EBITDA1 4,115 4,178 1.5%
1 Vodafone Group’s meassure of segment profit, EBITDA, excludes Vodafone Group’s share
of results in associates.
2.9.4 First half year in business year 2013/2014
On 12 November 2013, Vodafone Group Plc announced its half year results for the
six month period ended 30 September 2013. According to that Vodafone Group
Plc’s emerging markets continue to deliver strong results, with growing revenue
and increasing margins. The environment in Europe remains challenging, resulting
in intense macroeconomic, regulatory and competitive pressures during the six
months ended 30 September 2013. Overall, Vodafone Group continued to make
progress in that period. Group revenue for the six months ended 30 September
2013 was GBP 22.0 billion and group service revenue was GBP 20.0 billion. Group
service revenue decreased by 4.2%∗, or 1.5%∗ excluding the impact of mobile
termination rate cuts. Enterprise service revenue decreased 4.5%∗ following
intense price competition across a number of Vodafone’s markets. Group EBITDA∗∗
fell 4.1%∗ to GBP 6.6 billion. The Group EBITDA margin fell 0.8 percentage points,
or 0.31 percentage points on an organic basis. Adjusted operating profit∗∗ fell 8.3%
due to lower EBITDA and higher depreciation and amortisation. Additionally, only
five months of profit contribution from Verizon Wireless is included in the six
months ended 30 September 2013. On an organic basis, adjusted operating profit
increased by 0.5%∗. Free cash flow was with GBP 2.0 billion by GBP 0.2 billion
lower than the prior year due to principally lower EBITDA as well as increased
taxation and investment expenditures, contravened partially by reverse effects of
lower working capital as well as higher dividends received. Net debt at 30
September 2013 was GBP 25.7 billion which includes the GBP 2.1 billion dividend
received from Verizon Wirelessin the period reported on.
∗ Amounts represent organic growth which presents performance on a comparable basis, both in terms of merger and acquisition activity and movements in foreign exchange rates. There have been two one-off items impacting organic growth rates in the six month period.
∗∗ Now reported excluding restructuring costs and significant one-off items of GBP 121 million (2012: GBP 63 million) and GBP 107 million respectively in the six months ended 30 September 2013.
The following table provides an overview over the profit situation of Vodafone
Group in first half of the business year 2013/2014. The figures have been taken
from the unaudited, shortened group interim annual report of Vodafone Group Plc
from their half year financial statement for the first half of the business year
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2013/2014. The unaudited, shortened group interim annual report has been
prepared in accordance with the IAS 34 issued by International Accounting
Standards Board (IASB) and declared applicable by the European Union.
Unless stated otherwise, the values have been rounded in accordance with
commercial principles.
Vodafone Group in GBP billion H1
2012/2013 H1
2013/2014 Changes
Revenue 18,598 19,061 2.5%
Service-revenue 17,197 17,532 2.0%
- from that fixed-line revenue 1,710 2,395 40.1%
- from that mobile in-bundle revenue 6,332 6,978 10.2%
- from that mobile out-of-bundle
revenue
6,443 5,874 -8.8%
Gross profit 5,698 5,444 -4.5%
Operating profit -3,215 2,196
Profit before tax -3,881 1,514
Income tax credit /expense -371 14,197
Profit for the financial period -1,892 18,064
EBITDA 5,596 5,576 -0.4%
2.10 Vodafone Germany
2.10.1 Overview
Vodafone GmbH (until 27 November 2013 Vodafone Holding GmbH) is an affiliated
company of Vodafone Group Plc. Until 27 November 2013, Vodafone GmbH
performed the tasks of an intermediate holding company (Vodafone GmbH and its
direct and indirect subsidiaries “Vodafone Germany”). Until that day, the operative
business of Vodafone Germany was primarily conducted by Vodafone GmbH, a
wholly owned subsidiary of former Vodafone GmbH, with its registered seat in
Düsseldorf. Upon registration in the commercial register on 27 November 2013, the
merger of former Vodafone GmbH into Vodafone Holding GmbH has become
effective. In the course of this merger, Vodafone Holding GmbH has been renamed
into Vodafone GmbH, registered in the commercial register (Handelsregister) of the
local court (Amtsgericht) of Düsseldorf under commercial register no. HRB 38062
(“Vodafone GmbH”). Since the merger has become effective on 27 November
2013, Vodafone GmbH has primarily conducted the operative business of
Vodafone Germany in the “private customer (consumer)”, the “business customer
(enterprise)” and the “wholesale” segments. Apart from that, Vodafone Germany’s
business operations are conducted by Vodafone Group Services GmbH,
Düsseldorf, a wholly-owned subsidiary of Vodafone GmbH.
The website of Vodafone GmbH can be accessed at http://www.vodafone.de.
2.10.2 Corporate history of Vodafone Germany
Vodafone Germany’s current business activities have their origin in Mannesmann
Mobilfunk GmbH, which was established in 1989. The licenses for the
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implementation and the operation of a GSM mobile radio network was granted in
1989. In August 2000, a UMTS license was acquired in the course of an auction
procedure. This UMTS license allows for the operation of transmission paths for
the provision of mobile phone services of the third generation within the Federal
Republic of Germany until the end of 2020 and thereby facilitates broadband
mobile multimedia applications. In May 2010, Vodafone Germany, again in the
course of an auction, acquired a license that is valid until 31 December 2025
allowing for the implementation and the operation of a LTE network, a mobile radio
standard of the fourth generation, which can achieve very high download rates of
up to 150 Mbit per second. In the fixed-line segment, Vodafone Germany is one of
the major competitors of Deutsche Telekom. Following the foundation of Arcor by a
merger of the former Deutsche Bahn subsidiary DBKom and Mannesmann-
Gesellschaft Communications Network International (CNI) in 1996, over the
subsequent years and under Arcor’s management, one of the largest nationwide
networks competing with Deutsche Telekom was formed. Today, 70% of all
German homes can be reached by own infrastructure with the support of the
customer subscriber line owned by Deutsche Telekom. Together with the density of
the network, the spectrum of products offered grew, including voice services,
broadband internet and digital TV services. In 2009, Arcor was integrated into
Vodafone Germany and the products have been continued as part of the Vodafone
product spectrum.
2.10.3 Structure of Vodafone Germany
(i) Operative und legal structure
Vodafone GmbH conducts the operative business of Vodafone Germany in
the segments “private customers (consumer)”, “business customers
(enterprise)” and “wholesale”. One of the tasks of Vodafone GmbH as the
parent company of Vodafone Germany is in particular the consolidation of
operating results for tax purposes. Further group-wide functions such as
cash pooling and Euro cash management were transferred to the Vodafone
owned shared services centre in Hungary in 2012.
(ii) Participations
Vodafone GmbH holds direct and indirect participations in companies with
their registered office in Germany and abroad, which are primarily active in
the telecommunications sector (mobile services, fixed line services,
internet) as well as in information technologies. At the time of signing this
Contract Report, Vodafone GmbH holds the following direct capital
participations:
Vodafone Group Services GmbH, Düsseldorf, Germany (100%), Vodafone
Vierte Verwaltungs AG, Düsseldorf, Germany (100%), Vodafone Fünfte
Verwaltungsgesellschaft mbH, Düsseldorf, Germany (100%), Vodafone 1
Beteiligungs-AG, Frankfurt a.M., Germany (100%), Vodafone Stiftung
Deutschland gGmbH, Düsseldorf, Deutschland (100%), Vodafone Institut
für Gesellschaft und Kommunikation GmbH, Düsseldorf, Deutschland
(100%), MNP Deutschland GbR, Köln, Deutschland (17%), Arcor-
Beteiligungs-GmbH, Eschborn, Deutschland (100%), Vodafone Finance
Luxembourg Ltd., Newbury, Great Britain (100%).
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At the time of signing of this Contract Report, Vodafone GmbH holds no
further indirect participations apart from the indirect participation in
KDH AG.
(iii) Tax situation of Vodafone GmbH
Vodafone GmbH generally has the policy of establishing a consolidated tax
group (Organschaft) for income tax purposes with all of its domestic
corporations in which it directly holds a participation of 100% and with
Vodafone GmbH as the parent company (Organträgerin). As the parent
company of the consolidated tax group, generally all profits are attributed to
Vodafone GmbH for purposes of income tax in Germany and are subject to
corporate income tax and trade tax at the level of Vodafone Holding GmbH.
2.10.4 Overview of the business activities of Vodafone Germany
The business activities of Vodafone Germany are divided into the segments
“private customers (consumer)”, “business customers (enterprise)” and
“wholesale”.
(i) Segment private customers (consumer)
The segment „Private Customers (Consumer)“ is divided into two large
parts, Pre-paid and Post-paid. Pre-Paid customers are mainly young users
which send many SMS each day as well as older users which use mobile
communication less frequently. Post-paid customers are private as well as
business customers which enter into a long-term agreement, buy services
on credit and pay them monthly. Business customers use their telephone
often and regularly and use mobile data services on the way. In contrast,
large enterprises buy mobile communication services via individual tenders.
The product range for private customers encompasses Vodafone
Superflats, the carefree Vodafone Red Tariffs, Vodafone at home, Vodafone
live!, LTE-mobile phones, free roaming in all Vodafone networks worldwide,
free customer hotline, flat rate in the whole German fixed line network,
broadband services such as DSL, Vodafone TV, Vodafone Surf-Sofort-
Packet and data services such as Turbo Internet LTE, Vodafone USB-Stick,
LTE Sticks, Netbooks, Apps and Connected Home.
(ii) Segment business customers (enterprise)
The segment “Enterprise (Geschäftskunden)” covers all customers with a
trade licence and at least five connections. Business customers have
framework agreements. These agreements have individually defined,
customer specific and tailor-made tariffs with individual terms, individual
discounts, methods of payments, pricing details, tariff structures, prices for
hardware and repair conditions, delivery conditions, as well as individual
service level arrangements. The business customer sales and distribution
is nationwide establishes in eight decentralised regions and divided
according to the following:
− VGE (Vodafone Global Enterprise): enterprises with more than 500
employees, among others large DAX-corporations and customers
with a large part of their revenue abroad, such as VW, BMW, Metro;
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− Public & Health with non-profit and public accounts: more than 500
employees as well, however with a focus on public clients, media
and health, such as State of Bavaria with Bay-KOM, ARD Hypnet;
− Regional Sales covers customers with small and mid-size
enterprises, e.g. small customers with up to 50 employees as well as
mid-size customers with up to 499 employees;
Vodafone Germany offers business customers in its core activities
integrated communication solutions, e.g. mobile broadband (LTE), ISDN,
SIP Trunk, Service numbers, pre-select, internet connect, ADSL, SDSL,
VDSL and convergent tariffs.
(iii) Segment wholesale
The segment wholesale covers the business activities with service
providers such as Mobilcom Debitel, Phone House and the core partners
1&1 and Drillisch as well as the mobile communications discount stores
and reseller. Vodafone Germany offers its partners, depending on existing
telecommunication know-how, different types of partnership. These types
are divided into Full-MVNO, Light-MVNO, service provider and branded
reseller. At the Full-MVNO-model, the technical infrastructure, except the
Radio-Access-Networks (RAN), is set up and provided almost completely
by the partner. Accordingly the proportion of technical infrastructure
provided moves across these different types of models up to the Branded
Reseller model, where almost the whole technical infrastructure is provided
by Vodafone Germany. Furthermore the second brand Otelo is
merchandised. This second brand aims at price sensitive pre- and post-
paid customers and is promoted outside the own Vodafone shops.
3 Vodafone Vierte Verwaltungs AG
3.1 Overview
Vodafone Vierte Verwaltungs AG is an indirect subsidiary of Vodafone Group Plc. The
registered share capital of Vodafone Vierte Verwaltungs AG is EUR 50,000.00 and is
completely held by Vodafone GmbH.
3.2 Legal form, registered office, fiscal year and corporate purpose
Vodafone Vierte Verwaltungs AG is a German stock corporation (Aktiengesellschaft) with
its registered office in Düsseldorf, Germany, registered in the commercial register
(Handelsregister) of the local court (Amtsgericht) of Düsseldorf under commercial register
no. HRB 70886.
The fiscal year of Vodafone Vierte Verwaltungs AG begins on 1 September of each
calendar year and ends on 31 August of the subsequent calendar year. The time period
starting on 1 April 2013 and ending on 31 August 2013 constitutes a short fiscal year
(Rumpfgeschäftsjahr).
The corporate purpose of Vodafone Vierte Verwaltungs AG, according to the articles of
association is the activity in all areas of the TV, telecommunications and multimedia
sectors and the provision of services relating to these sectors. The company is entitled to
conduct all actions and to carry out all measures and business transactions which are
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directly or indirectly suitable to serve the corporate purpose of the company. For this
purpose, the company may establish, acquire or hold participations in other companies of
the same or a similar kind in Germany or abroad and may manage such companies or limit
itself to the management of its investment. It is entitled to outsource its business activities
in whole or in part to affiliated companies. The company may also set up branches and
permanent establishments in Germany and abroad.
3.3 Corporate history and development
3.3.1 Foundation
Vodafone Vierte Verwaltungs AG was established on 18 March 2003 under the
name Vodafone Vierte Verwaltungsgesellschaft mbH with its registered office in
Düsseldorf, with a share capital of EUR 25,000 and was registered in the
commercial register (Handelsregister) of the local court (Amtsgericht) of Düsseldorf
under commercial register no. HRB 47879 on 23 April 2003.
3.3.2 Capital increase, economic re-establishment, change of legal form and change of
the corporate purpose
On 2 July 2013, Vodafone Group Plc and Vodafone GmbH as the sole
shareholders of Vodafone Vierte Verwaltungsgesellschaft mbH at that time passed
a resolution on the change of the legal form of Vodafone Vierte
Verwaltungsgesellschaft mbH into a stock corporation (Aktiengesellschaft) under
German law with the name Vodafone Vierte Verwaltungs AG. In connection
therewith, an increase of Vodafone Vierte Verwaltungs AG’s share capital from
EUR 25,000.00 by EUR 25,000.00 to EUR 50,000.00 was resolved and the
economic re-establishment (wirtschaftliche Neugründung) of Vodafone Vierte
Verwaltungsgesellschaft mbH was filed with the commercial register
(Handelsregister) of the local court (Amtsgericht) of Düsseldorf. The capital
increase and the change of the legal form have been registered in the commercial
register (Handelsregister) of the local court (Amtsgericht) of Düsseldorf on
20 August 2013 and have thereby become effective. In the context of the change of
the legal form, the corporate purpose of Vodafone Vierte
Verwaltungsgesellschaft mbH stated in the articles of association has been
amended as well. The former corporate purpose which was the holding of
participations and the management of the company’s own assets has been
replaced by the corporate purpose described in section 3.2 above with effect as of
the time the change of the legal form became effective. At the time the change of
the legal form became effective, the statutory share capital of Vodafone Vierte
Verwaltungs AG was EUR 50,000.00 and was divided into 50,000 no-par value
registered shares (nennwertlose auf den Namen lautende Stückaktien) of which
Vodafone Group Plc held 42,500 shares and Vodafone GmbH held 7,500 shares.
3.3.3 Transfer of shares to Vodafone GmbH
By share purchase agreement dated 21 August 2013, Vodafone Group Plc sold
and transferred all 42,500 shares held by it in Vodafone Vierte Verwaltungs AG to
Vodafone GmbH. Since 21 August 2013, all 50,000 shares in Vodafone Vierte
Verwaltungs AG have therefore been held by Vodafone GmbH alone.
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3.3.4 Post-formation
On 26 September 2013, Vodafone Vierte Verwaltungs AG and Vodafone
Group Plc, which was one of the shareholders of Vodafone Vierte
Verwaltungsgesellschaft mbH prior to the change of the legal form and which is
thus a founder of Vodafone Vierte Verwaltungs AG, entered into an agreement on
the post-formation (Nachgründungsvertrag) in the form of an agreement pursuant
to which Vodafone Group Plc and Vodafone Vierte Verwaltungs AG agreed that
Vodafone Group Plc would accept the Takeover Offer within the additional
acceptance period pursuant to Section 16 para. 2 sentence 1 WpÜG for the
3,782,179 KDH Shares held in total by Vodafone Group Plc and that it would sell
the KDH Shares to Vodafone Vierte Verwaltungs AG in accordance with the
provisions of the offer document dated 29 July 2013. The general shareholders’
meeting of Vodafone Vierte Verwaltungs AG has approved this agreement on the
post-formation (Nachgründungsvertrag) by resolution dated 8 November 2013. The
agreement on the post-formation (Nachgründungsvertrag) has been registered in
the commercial register (Handelsregister) of the local court (Amtsgericht) of
Düsseldorf on 15 November 2013 and the sale and transfer of the 3,782,179 KDH
Shares has thereby finally become effective.
3.3.5 Domination and profit and loss transfer agreement with Vodafone GmbH
A domination and profit and loss transfer agreement was concluded on 22 August
2013 between Vodafone Vierte Verwaltungs AG as the controlled company and
Vodafone GmbH as the controlling company (“VF Domination and Profit and
Loss Transfer Agreement”). The VF Domination and Profit and Loss Transfer
Agreement has become effective upon registration in the commercial register on
24 September 2013. As a result of the VF Domination and Profit and Loss Transfer
Agreement, Vodafone Vierte Verwaltungs AG is subject to the management control
of Vodafone GmbH and is required to comply with the instructions of Vodafone
GmbH and to transfer its entire profit to Vodafone GmbH. In exchange, during the
term of the contract Vodafone GmbH is required to compensate for any annual
losses of Vodafone Vierte Verwaltungs AG which would have occurred without the
loss compensation under the VF Domination and Profit and Loss Transfer
Agreement being in place. The VF Domination and Profit and Loss Transfer
Agreement has been concluded for an indefinite period of time. Upon termination
of the VF Domination and Profit and Loss Transfer Agreement, Vodafone GmbH
would have to provide security to the creditors of Vodafone Vierte Verwaltungs AG
pursuant to Section 303 AktG.
3.4 Capital and shareholder
At the time of signing of this Contract Report, the share capital of Vodafone Vierte
Verwaltungs AG amounts to EUR 50,000.00 and is divided into a total of 50,000 no-par
value registered shares (nennwertlose auf den Namen lautende Stückaktien) each
representing a pro rata amount of the share capital of EUR 1.00 per share.
Sole shareholder of Vodafone Vierte Verwaltungs AG is Vodafone GmbH with its seat in
Düsseldorf, registered in the commercial register (Handelsregister) of the local court
(Amtsgericht) of Düsseldorf under commercial register no. HRB 38062.
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3.5 Corporate bodies of Vodafone Vierte Verwaltungs AG
3.5.1 Management board
Pursuant to Section 6 para. 1 of the articles of association of Vodafone Vierte
Verwaltungs AG (“Vodafone Vierte Articles of Association”), the management
board of Vodafone Vierte Verwaltungs AG is composed of one or more members.
According to Section 6 para. 2 sentence 1 of the Vodafone Vierte Articles of
Association, the supervisory board determines the number of members of the
management board. At the time of signing of this Contract Report, the
management board is composed of the following individuals:
• Dr. Joachim Peters
• Dr. Thomas Wandres
Pursuant to Section 7 para. 2 sentence 2 of the Vodafone Vierte Articles of
Association, Vodafone Vierte Verwaltungs AG is represented by two members of
the management board or one member of the management board acting jointly
with a holder of registered signing authority (Prokurist). According to Section 7
para. 2 sentence 3, the supervisory board may determine that certain members of
the management board are authorised to represent the company alone. The
supervisory board of Vodafone Vierte Verwaltungs AG has made use of this
authority with regard to the members of the management board Dr. Joachim Peters
and Dr. Thomas Wandres.
3.5.2 Supervisory board
Pursuant to Section 96 para. 1 AktG, Section 8 para. 1 of the Vodafone Vierte
Articles of Association, the supervisory board of Vodafone Vierte Verwaltungs AG is
composed of three members, all of which are elected by the shareholders of
Vodafone Vierte Verwaltungs AG. At the time of signing of this Contract Report, the
supervisory board of Vodafone Vierte Verwaltungs AG is composed of the following
members:
• Philipp Humm
Chairman
• Jens Schulte-Bockum
Vice-Chairman
• Dr. Thomas Nowak
3.6 Business activities and participations
Prior to 24 June 2013, Vodafone Vierte Verwaltungsgesellschaft mbH (since 20 August
2013 Vodafone Vierte Verwaltungs AG) had not taken up any business activity which went
beyond the management of the company’s own assets. On 24 June 2013, Vodafone Vierte
Verwaltungsgesellschaft mbH (since 20 August 2013 Vodafone Vierte Verwaltungs AG)
announced its decision to make the Takeover Offer and has taken all necessary and useful
measures in relation thereto. With the offer document dated 29 July 2013, Vodafone Vierte
Verwaltungsgesellschaft mbH (since 20 August 2013 Vodafone Vierte Verwaltungs AG)
has published the Takeover Offer. Since the closing of the Takeover Offer on 14 October
2013, Vodafone Vierte Verwaltungs AG carries out the tasks of an intermediate holding
company in the Vodafone Group. At the time of signing of this Contract Report, Vodafone
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Vierte Verwaltungs AG holds 67,780,374 KDH Shares, corresponding to a shareholding of
76.57% of the share capital and the voting rights of KDH AG. Furthermore Vodafone Vierte
Verwaltung AG has entered into a purchase agreement with Cable & Wireless Europe
Holdings Limited for the purchase of all shares in Cable & Wireless Telecommunication
Services GmbH.
3.7 Earnings situation and financial position of Vodafone Vierte Verwaltungs AG
The following tables provide an overview of the financial situation of Vodafone Vierte
Verwaltungsgesellschaft mbH (since 20 August 2013 Vodafone Vierte Verwaltungs AG) as
of 31 March 2012 and 31 March 2013. The information has been taken from the audited
annual financial statements of Vodafone Vierte Verwaltungsgesellschaft mbH (since 20 Au-
gust 2013 Vodafone Vierte Verwaltungs AG). These annual financial statements were pre-
pared in accordance with HGB for small corporations and the special provisions contained
in the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit
beschränkter Haftung – “GmbHG”) using the simplifications stipulated in Section 288
para. 2 sentence 2 HGB.
3.7.1 Assets
Vodafone Vierte Verwaltungsgesellschaft mbH (since 20.8.2013 Vodafone Vierte Verwaltungs AG) in EUR 31.3.2012 31.3.2013
Receivables from affiliated companies 29,790.83 29,632.66
Total assets 29,790.83 29,632.66
3.7.2 Equity and liabilities
Vodafone Vierte Verwaltungsgesellschaft mbH (since 20.8.2013 Vodafone Vierte Verwaltungs AG) in EUR 31.3.2012 31.3.2013
Subscribed capital 25,000.00 25,000.00
Capital reserves 55,915.95 55,915.95
Loss carry forward 50,915.95 51,125.12
Net loss for the year 209.17 217.61
Trade liabilities 0.00 59.44
Total equity and liabilities 29,790.83 29,632.66
After the Domination and Profit and Loss Transfer Agreement becomes effective,
Vodafone Vierte Verwaltungs AG will primarily generate revenues and earnings
from the transfer of profits of KDH AG.
3.8 Employees and employee representation
Vodafone Vierte Verwaltungs AG does not have any employees. No employee
representation exists.
3.9 Financial funding of Vodafone Vierte Verwaltungs AG
Prior to the conclusion of the Domination and Profit and Loss Transfer Agreement, the
management board of KDH AG and the management board of Vodafone Vierte
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Verwaltungs AG examined whether Vodafone Vierte Verwaltungs AG would be able to fulfil
its payment obligations under the Domination and Profit and Loss Transfer Agreement.
Based on the current economic, financial and contractual situation at Vodafone Vierte
Verwaltungs AG, the management board of KDH AG and the management board of
Vodafone Vierte Verwaltungs AG have concluded that Vodafone Vierte Verwaltungs AG will
be able to fulfil its obligations resulting under the Domination and Profit and Loss Transfer
Agreement.
The management board of KDH AG and the management board of Vodafone Vierte
Verwaltungs AG have based this conclusion on the following aspects:
For the future payment obligations of Vodafone Vierte Verwaltungs AG after the obligation
to transfer profits under the Domination and Profit and Loss Transfer Agreement takes
effect (see on this point, section C.2.1.2), the profit of KDH AG will be available, whereas
Vodafone Vierte Verwaltungs AG will be required under § 302 AktG to compensate for any
annual loss of KDH AG arising during the term of the contract. There are no indications for
any threatening loss situation at KDH AG in its current fiscal year. KDH AG generated an
annual profit of EUR 246.8 million in fiscal year ended on 31 March 2013. Though in the
first six month of the current fiscal year a consolidated loss of EUR 100 million was
recorded, compared to a consolidated profit of EUR 126.82 million in the first six month as
to 30 September 2012. However this performance was caused by non-reoccurring
expenses and one-time issues of EUR 205.64 million in connection with the takeover by
Vodafone Vierte Verwaltungs AG (see section B.4).
Finally, Vodafone Vierte Verwaltungs AG as controlled company concluded the
VF Domination and Profit and Loss Transfer Agreement with Vodafone GmbH as the
controlling company on 22 August 2013, as a result of which Vodafone GmbH is required
under § 302 AktG to compensate for any annual loss of Vodafone Vierte Verwaltungs AG
occurring during the term of the contract. The VF Domination and Profit and Loss Transfer
Agreement could be terminated by either of the parties by regular notice of termination as
of the end of the fiscal year of Vodafone Vierte Verwaltungs AG with three month notice
period, at first however to the end of the fiscal year of Vodafone Vierte Verwaltungs AG
ending at least five years after the beginning of the business year or short fiscal year of
Vodafone Vierte Verwaltungs AG in which the agreement has become effective.
Furthermore, the VF Domination and Profit and Loss Transfer Agreement could be
terminated by extraordinary notice of termination by one party if the required reasons
justifying such termination exist, or the parties could agree to cancel the VF Domination
and Profit and Loss Transfer Agreement. However, according to statements by Vodafone
Vierte Verwaltungs AG and Vodafone, this is currently not intended. Furthermore, both the
outside KDH Shareholders as well as KDH AG would be protected by the provisions on the
termination of corporate group contracts in the case of any termination of the
VF Domination and Profit and Loss Transfer Agreement during the term of the Domination
and Profit and Loss Transfer Agreement. Vodafone GmbH would have to provide security
to them for their claims for the Recurring Compensation and the Cash Compensation and
the claim for compensation for losses in case of termination of the VF Domination and
Profit and Loss Transfer Agreement in accordance with the detailed provisions in § 303
AktG.
Furthermore, without joining the Domination and Profit and Loss Transfer Agreement as a
contracting party, Vodafone Group Plc has issued a comfort letter to KDH AG which is
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37
attached together with the Domination and Profit and Loss Transfer Agreement to this
Contract Report as Annex 3.
Vodafone Group Plc undertakes in the comfort letter to ensure that Vodafone Vierte
Verwaltungs AG is managed and financed in such a manner that Vodafone Vierte
Verwaltungs AG will always be able to fulfil all its liabilities under or in connection with the
Domination and Profit and Loss Transfer Agreement completely and in a timely manner.
This in particular applies to the obligation to compensate for any annual loss according to
§ 302 AktG. In addition, Vodafone Group Plc undertakes without limitation and irrevocably
vis-à-vis the outside shareholders of KDH AG, in in case Vodafone Vierte Verwaltungs AG
is not able to fulfil all its liabilities under or in connection with the Domination and Profit and
Loss Transfer Agreement completely and in a timely manner and Vodafone Group Plc does
not comply with its aforesaid obligation to equip Vodafone Vierte Verwaltungs AG, that
Vodafone Vierte Verwaltungs AG fulfils all its obligations towards them arising from or in
connection with the Domination and Profit and Loss Transfer Agreement, in particular
regarding the Recurring Compensation and the Cash Compensation completely and in
time. To that extent the outside shareholders of KDH AG have an own claim according to
section 328 para. 1 German Civil Code (Bürgerliches Gesetzbuch – BGB) directed at
payment to Vodafone Vierte Verwaltungs AG (see Section C.2.1.8).
4 Takeover Offer by Vodafone Vierte Verwaltungs AG, further purchases of
shares
4.1 Takeover Offer and additional purchases of shares
On 30 July 2013, Vodafone Vierte Verwaltungsgesellschaft mbH (today: Vodafone Vierte
Verwaltungs AG) published its Takeover Offer to the KDH Shareholders for the acquisition
of their KDH Shares for an offer price of EUR 84.50 per share of KDH AG. The Takeover
Offer stipulated that in addition to the offer price, the KDH Shareholders were supposed to
benefit from the dividend for the financial year ended on 31 March 2013 in the amount of
EUR 2.50 per KDH Share as proposed by KDH AG. If the settlement of the Takeover Offer
had occurred prior to the day on which KDH AG’s general shareholders’ meeting resolved
on the distribution of profits for the financial year ended on 31 March 2013, the offer
consideration would have been increased accordingly by EUR 2.50 per KDH Share to
EUR 87.00 per KDH Share. However, the Takeover Offer was closed on 14 October 2013
and thus after the general shareholders’ meeting of KDH AG on 10 October 2013. The
KDH Shareholders received a dividend in the amount of EUR 2.50 per KDH Share already
prior to the closing of the Takeover Offer and the offer price remained at EUR 84.50 per
KDH Share. In addition to regulatory closing conditions, the Takeover Offer also provided
for a minimum acceptance threshold of 75% of the KDH Shares as a closing condition.
After the announcement of the Takeover Offer, Vodafone Group Plc, the indirect sole
shareholder of Vodafone Vierte Verwaltungs AG, acquired a total of 3,782,179 KDH
Shares, which corresponds to a shareholding of 4.27%, and has accepted the Takeover
Offer for these KDH Shares during the additional acceptance period.
In their reasoned statement as of 1 August 2013 management board and supervisory
board of KDH AG have recommended shareholders to accept the Takeover Offer. The
acceptance period (Section 16 para. 1 sentence 1 WpÜG) for the Takeover Offer ended on
11 September 2013 at 24:00 hours. Prior to the expiration of the acceptance period the
Takeover Offer had been accepted for a total of 63,919,924 KDH Shares, which
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38
corresponds to 72.21% of the voting rights and the share capital of KDH AG. The total
number of KDH Shares which were held by Vodafone Vierte Verwaltungs AG and persons
acting in concert with it on 11 September 2013, plus the KDH Shares for which the
Takeover Offer had been accepted during the acceptance period, amounted to 67,702,103
KDH Shares, which corresponds to 76.48% of the voting rights and the share capital of
KDH AG. Thus, the minimum acceptance threshold of 75% was exceeded during the
acceptance period and the corresponding offer condition has been fulfilled.
The additional acceptance period (Section 16 para. 2 sentence 1 WpÜG) for the Takeover
Offer ended on 30 September 2013 at 24:00 hours. Prior to the expiration of the additional
acceptance period, the Takeover Offer had been accepted for a total of 67,780,374 KDH
Shares, which corresponds to 76.57% of the voting rights and the share capital of
KDH AG.
4.2 Possible purchases outside of the cash buyout offer
Vodafone Vierte Verwaltungs AG reserves the right to purchase at any time additional KDH
Shares directly or indirectly on or off the stock exchange outside of the offer for
Compensation provided for in Section 5 of the Domination and Profit and Loss Transfer
Agreement to the extent legally permitted.
(C) DOMINATION AND PROFIT AND LOSS TRANSFER AGREEMENT
1 Reasons for the conclusion of the Domination and Profit and Loss Transfer
Agreement
1.1 Economic, legal and tax reasons
1.1.1 Economic and legal reasons
(i) Goal of creating an integrated telecommunications group
By concluding the Domination and Profit and Loss Transfer Agreement,
KDH AG and Vodafone Vierte Verwaltungs AG, together with Vodafone
Group, are taking a further step on the path towards creating an integrated
telecommunications group consisting of KDH AG as well as other
companies of the Vodafone Group and KDH Group. The aim of this step is
to facilitate closer cooperation between all companies involved. The
successful closing of the Takeover Offer of Vodafone Vierte Verwaltungs
AG has been an important milestone on the way towards achieving such
strategic cooperation.
KDH Group possesses a highly attractive business offering a broadband-
based high-speed network which allows for access to 15.293 million
households in 13 out of the 16 German federal states (Bundesländer). As
of 31 March 2013, KDH Group had 7.6 million direct customers,
approximately 60% of which are bound mostly under long-term contracts
with institutional housing clients. As a result of its continuous cross-selling
and up-selling, KDH Group has been able to significantly increase revenue
as well as adjusted EBITDA (earnings before interest, taxes, depreciation
and amortisation) by approximately 8% between fiscal years 2011/12 and
2012/13. With regard to broadband and pay-tv, KDH Group’s customer
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39
base has a penetration rate of only 16% and 12%, respectively, and thus
offers further growth opportunities in the future.
The network infrastructures of Vodafone Group and KDH Group are
complimentary to a large degree. To the extent possible, Vodafone Group
intends to migrate its DSL fixed-line customers to the cable network of KDH
Group, which would lead to cost reductions from shutting down DSL central
offices, lower maintenance costs and an elimination of ULL and bitstream
fees.
The creation of an integrated communications provider can effectively only
be achieved by concluding a Domination and Profit and Loss Transfer
Agreement between Vodafone Vierte Verwaltungs AG and KDH AG.
KDH AG has explored providing wholesale access to its cable network on
several occasions and always concluded that it would not be economically
attractive. In addition, Vodafone Group is unwilling to take the risk of
migrating its customer base to KDH AG’s network without absolute certainty
of pricing and supply. For these reason, the migration of Vodafone Group
fixed-line customers would only be possible when a Domination and Profit
and Loss Transfer Agreement is in place. Outside the scope of coverage of
KDH Group, Vodafone Group will continue to offer to its consumer and
business customers broadband access via DSL or on the basis of the
VDSL bitstream agreement recently concluded with Deutsche Telekom.
Vodafone’s mobile business will benefit from KDH AG’s network, which can
provide transmission capacity for Vodafone’s base stations at prices that
are lower than current market prices for leased capacities. Furthermore,
there is an additional cost saving potential based on the consolidation of
national and regional networks (so-called backbones) of both companies.
Vodafone Group’s transmission network comprises a combination of own
infrastructure and leased capacity based on optimised arms’ length
agreements with external transmission providers. Transmission cost
efficiencies can only be generated through deeper and longterm
infrastructure integration with KDH Group requiring significant investment,
long-term planning and mutual dependency, only achievable with the
Domination and Profit and Loss Transfer Agreement.
Other cost synergies will accrue in the area of purchasing, through
simplifications of the IT and billing systems and by removing overlaps in
customer care and administrative functions. Vodafone Group and KDH
Group consider IT and billing systems as being an integral part of their
businesses (as genuinely interlinked with their respective products) As such
they cannot be outsourced. Central functions are also considered as critical
organisational elements and cannot be externalised. Synergies in customer
care would require consolidating customer bases of both companies, which
would legally require a Domination and Profit and Loss Transfer
Agreement.
As long as no Domination and Profit and Loss Transfer Agreement is in
place, Vodafone Group would continue to market its own IPTV and
broadband propositions, including in KDH Group’s footprint. Vodafone
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Group also has no intention to provide wholesale mobile services to KDH
Group other than potentially for the replacement of the existing contract
with a mobile telecommunication partner on identical terms, nor to provide
access to its distribution network to KDH Group with a competing mobile
proposition.
Other potential synergies also cannot be realised in a legally reliable
manner without the Domination and Profit and Loss Transfer Agreement.
The system of the de facto corporate group with its inherent limitations and
disadvantages would preclude the exploitation of synergies. For example,
an integration of IT or billing systems or customer centres would, from a
stand-alone perspective, be risky, irreversible and disadvantageous for
KDH Group in each individual case and could not be implemented without
compensation. In the Offer Document for the Takeover Offer, Vodafone
Group had therefore already announced its intention to conclude a
Domination and Profit and Loss Transfer Agreement in order to be able to
realise synergies.
(ii) Limits and restrictions on cooperation in the current de facto corporate
group
Due to the majority participation of Vodafone Vierte Verwaltungs AG, a so-
called de facto corporate group exists between KDH AG and Vodafone
Vierte Verwaltungs AG at the present time. This also applies indirectly with
regard to the relationship of KDH AG to Vodafone GmbH as Vodafone
GmbH holds a participation of 100% of the shares in Vodafone Vierte
Verwaltungs AG and a domination and profit and loss transfer agreement
also exists between Vodafone GmbH and Vodafone Vierte Verwaltungs AG
under which Vodafone GmbH has management control rights and rights to
issue instructions to Vodafone Vierte Verwaltungs AG. In this de facto
corporate group, Vodafone Vierte Verwaltungs AG and Vodafone GmbH
can exercise factual controlling influence over KDH AG. However, the
management board of KDH AG continues to be under an obligation to
manage the company on its own responsibility in accordance with Section
76 para. 1 AktG. The management board must examine in each individual
case all measures or transactions taken or omitted on the initiative or in the
interest of Vodafone Vierte Verwaltungs AG or one of its affiliated
companies in the Vodafone Group with regard to whether it has adverse
effects for KDH AG. If such transactions or measures are adverse, they
may only be implemented if the adverse effect linked to the relevant
transaction or measure is compensated. The compensation for the adverse
effect must either actually occur by the end of the fiscal year in which the
adverse effect is incurred, i.e. in a short period of time, or the compensation
must occur by granting a corresponding legal claim (Section 311 para. 2
AktG). Due to this legal situation all measures and transactions of KDH AG
taken or omitted on the initiative or in the interest of Vodafone Vierte
Verwaltungs AG or one of its affiliated companies in the Vodafone Group
must be examined in the individual case with regard to their exact effects
on KDH AG and potential harm to be incurred and with regard to a duty to
compensate.
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Furthermore, in a de facto corporate group, all measures and transactions
which are taken with the controlling company or one of its affiliates or on
initiative or in the interest of the controlling company or one of its affiliates
must be documented in detail individually. Such measures and transactions
must especially be reported on annually in a so-called control report
(Abhängigkeitsbericht) by the management board of the controlled
company and the adverse effects must be quantified (Section 312 AktG).
The control report must be examined both by the supervisory board as well
as by the auditor of the controlled company (Sections 313, 314 AktG).
These principles applicable to the de facto corporate group lead to a
substantial expenditure of time and resources, especially on the side of the
factually controlled company. Both the management board as well as other
departments in KDH AG (e.g. the legal department and the finance and
accounting department) must be involved in every measure and every
transaction of KDH AG taken or omitted on the initiative or in the interest of
Vodafone Vierte Verwaltungs AG or one of its affiliated companies in the
Vodafone Group, regardless of whether the respective transaction is with
Vodafone Vierte Verwaltungs AG or with a third party, in order to assure
compliance with the rules applicable to a de facto corporate group. This not
only ties up resources on the side of KDH AG as the controlled company,
but also leads to substantial delays in the intended cooperation between
KDH Group and the rest of the Vodafone Group. As a result, the fast and
efficient implementation of management decisions that are in the common
interest is impeded.
In addition, the quantification and compensation of any adverse effect on
the controlled company results in great difficulties in de facto corporate
groups. Such difficulties arise regularly in the context of transactions and
measures which go beyond the mere exchange of performance and
consideration (e.g. purchasing goods or rendering services) or for which a
market price cannot be determined. Such measures can, for example,
involve the exchange of know-how and business information in the context
of jointly developing products and integrated systems solutions. In practice
it is difficult in these situations, if not often impossible, to quantify and
compensate any adverse effects or corresponding benefits of the controlled
company. The consequence is that such measures are not possible with
sufficient legal certainty in a de facto corporate group and can only be
carried out with substantial effort for the examination and documentation or
may have to be avoided completely.
The implementation of extensive cooperation and an intensive exchange of
information, however, is necessary in order to realize the intended benefits
from further cooperation in the activities of KDH AG and the rest of the
Vodafone Group described in section C. 1.1.1(i). Without the conclusion of
a domination and profit and loss transfer agreement, these benefits can not
or only inadequately be realized.
(iii) Creation of a contractual corporate group by concluding the Domination
and Profit and Loss Transfer Agreement
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These difficulties existing in a de facto corporate group are avoided if there
is a domination and profit and loss transfer agreement because this creates
a contractual basis for the intended close cooperation. In a contractual
corporate group, the provisions regarding specific compensation for
adverse transactions and measures initiated by the controlling company or
one of its affiliates or taken or omitted in their interest do not apply. In
particular, the controlling party to the agreement has the right under the
domination agreement to directly issue instructions to the management
board of the controlled company to take measures or engage in
transactions in the interest of the controlling party to the contract or one of
its affiliated companies even if they might be adverse for the controlled
company when viewed on a stand-alone basis (Section 308 AktG) and if
the adverse effect cannot be compensated within the same fiscal year or if
an exact quantification of the adverse effect is not possible. This allows for
a more efficient use of resources and for the implementation of those
cooperation measures for which the quantification of potential adverse
effects and possible corresponding benefits is not possible with legal
certainty. Measures by the management can accordingly be focused
towards the common interest of the affiliated enterprises without great effort
being required to control every measure and its effects on the controlled
company. In addition, the expenses for preparing and examining the control
report are avoided because such a report does not have to be prepared in
a contractual corporate group.
The Domination and Profit and Loss Transfer Agreement enables Vodafone
Vierte Verwaltungs AG and Vodafone GmbH to better control the intended
cooperation with KDH Group in the common interest of the entire corporate
group. A domination agreement will also facilitate the unhindered exchange
of information with regard to best practice policies between KDH AG and
the rest of the Vodafone Group.
The conclusion of a domination agreement accordingly is the appropriate
legal means to implement the intended comprehensive cooperation of the
involved companies and is also used by other companies in comparable
cases and is specifically intended by law to be used for this purpose.
As a result of the combination of the domination agreement with a profit
and loss transfer agreement, Vodafone Vierte Verwaltungs AG also obtains
a claim for transfer of profit against KDH AG starting on 1 April 2014. In
exchange, KDH AG receives a claim for the assumption of losses under the
Domination and Profit and Loss Transfer Agreement in the event that an
annual loss of KDH AG arises during the term of the contract. Contrary to
the situation in a merely de facto corporate group, after the conclusion of
the Domination and Profit and Loss Transfer Agreement, KDH AG is no
longer forced to rely on individual compensation for potentially adverse
impact suffered as a result of the exercise of influence and but rather
receives by force of law a claim for full compensation of losses from
Vodafone Vierte Verwaltungs AG regardless of questions on the exercise of
influence or other factors (see Section 302 AktG).
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After the conclusion of the Domination and Profit and Loss Transfer
Agreement, the interests of KDH AG are furthermore protected by the fact
that the right to issue instructions does not exist without any limitation (see
section C.2.1.1). KDH AG especially may not be deprived of the ability to
continue to exist as a result of adverse instructions because the statutory
provisions are based on the assumption of a continuing existence of the
controlled company, also for the time after termination of a domination
agreement. Adverse instructions are also impermissible and do not trigger
any duty to comply with them if they obviously do not serve the interests of
the controlling company or any companies affiliated with the controlling
company or the controlled company.
The Domination and Profit and Loss Transfer Agreement establishes
special protective mechanisms for outside KDH Shareholders which are not
available in a de facto corporate group: They receive a claim against
Vodafone Vierte Verwaltungs AG for a reasonable annual Recurring
Compensation Payment (see section C.2.1.4) or they can transfer their
KDH Shares to Vodafone Vierte Verwaltungs AG and cease to be
shareholders in KDH AG in exchange for payment of a reasonable
Compensation if they want to dispose of their KDH Shares in light of the
Domination and Profit and Loss Transfer Agreement (see section C.2.1.5).
These claims of the outside KDH Shareholders are secured indirectly by
the duties of Vodafone GmbH resulting from the VF Domination and Profit
and Loss Transfer Agreement, especially the duty to compensate for any
annual losses of Vodafone Vierte Verwaltungs AG (Section 302 AktG) and
the posting of security for the benefit of the creditors of Vodafone Vierte
Verwaltungs AG in case of a termination of the domination and profit and
loss transfer agreement between Vodafone GmbH and Vodafone Vierte
Verwaltungs AG (Section 303 AktG) (see section B.3.3.5). Additional
security results from the comfort letter which Vodafone Group Plc has
issued to KDH AG.
(iv) Conclusion
KDH AG and Vodafone Vierte Verwaltungs AG are of the opinion that only
after the Domination and Profit and Loss Transfer Agreement has become
effective, meaningful synergies can be generated through a close
cooperation of the involved companies.
Overall, it is apparent that the creation of a contractual corporate group by
means of the Domination and Profit and Loss Transfer Agreement expands
and reinforces the possibilities for cooperation. In particular, the usage of
KDH Group’s high-speed network at conditions that are economical for
Vodafone Group is only possible on the basis of a domination and profit
and loss transfer agreement. Cost savings by combining functions in
central units are further consequences. This is complemented by greater
flexibility and more rapid and efficient decision making processes arising
from an elimination of the duties for examination and documentation
existing in the context of the current de facto corporate group.
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1.1.2 Tax reasons
The conclusion of a profit and loss transfer agreement within the meaning of
Section 291 AktG is a prerequisite for establishing a consolidated tax group for
purposes of corporate income tax and trade tax (ertragsteuerliche Organschaft)
between Vodafone Vierte Verwaltungs AG (as the parent company) and KDH AG
(as the subordinate company). The consolidated tax group for purposes of income
tax also requires that the parent company holds a participation in the subordinate
company from the beginning of the subordinate company’s fiscal year without
interruption to such an extent that it has the majority of the voting rights arising out
of the shares in the subordinate company (Section 14 para. 1 sentence 1 no. 1
sentence 1 German Corporate Income Tax Act (Körperschaftsteuergesetz –
"KStG")) and that the participation is attributable to a domestic permanent
establishment of the parent company in the group without interruption for the entire
duration of the consolidated tax group (Section 14 para. 1 sentence 1 no. 2
sentence 2 KStG). The validity of the consolidated tax group for purposes of
income tax also requires that the profit and loss transfer agreement is concluded
for a period of at least five years (60 months) (Section 14 para. 1 sentence 1 no. 3
sentence 1 KStG) and is actually implemented during the entire term of its validity.
Subject to the other conditions being fulfilled, the consolidated tax group for
purposes of income tax will exist starting on 1 April 2014 if the Domination and
Profit and Loss Transfer Agreement is registered in the commercial register of
KDH AG prior to the end of the fiscal year 2014/2015. If the Domination and Profit
and Loss Transfer Agreement is only registered at a subsequent point in time, the
consolidated tax group for purposes of income tax will only be established –
provided that all other conditions are satisfied – as of the beginning of that fiscal
year in which the registration takes place.
The consolidation does not have the effect that the general tax obligations of
KDH AG are eliminated. KDH AG must in principle determine its taxable profit
under the general provisions separately from Vodafone Vierte Verwaltungs AG as
in the past. For purposes of corporate income tax, the income of KDH AG will be
separately and uniformly determined with binding effect for Vodafone Vierte
Verwaltungs AG and KDH AG. As a consequence of the creation of the
consolidated tax group for purposes of income tax, however, the entire taxable
income of KDH AG – taking into account certain statutory restrictions – will be
attributed to Vodafone Vierte Verwaltungs AG and will be taxed at the level of
Vodafone GmbH due to the consolidated tax group for income tax purposes
existing between Vodafone Vierte Verwaltungs AG and Vodafone GmbH.
Nevertheless, KDH AG is obliged to pay taxes starting in that fiscal year in which
the tax consolidation first exists according to current tax laws 20/17 of the
payments rendered to the outside KDH Shareholders as its own income for
corporate income tax purposes (Section 16 KStG).
The establishment of the consolidated tax group for purposes of income tax has a
positive liquidity effect for Vodafone Vierte Verwaltungs AG as contrary to
distributions of profit, transfers of profit of KDH AG to Vodafone Vierte Verwaltungs
AG under commercial law are not subject to withholding tax on investment income
plus the solidarity surcharge. If no profit and loss transfer agreement were
concluded and the profits were distributed in the form of dividends, a crediting or
reimbursement of the withholding tax on investment income plus the solidarity
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surcharge would generally only occur in the context of the assessment of corporate
income tax after filing the tax declaration for the tax period in which the dividend
was received. Furthermore, a transfer of profit under commercial law, contrary to
the distribution of a dividend, does not result in a prohibition on deducting operating
expenses under Section 8b para. 5 KStG in the amount of notional 5% of the
dividend distribution.
The above mentioned tax effects do not apply for excess transfers which have their
basis in the time prior to the consolidated tax group (Section 14 para. 3 KStG).
1.2 Alternatives to concluding the Domination and Profit and Loss Transfer Agreement
The management board of Vodafone Vierte Verwaltungs AG and the management board of
KDH AG have examined alternatives to concluding the Domination and Profit and Loss
Transfer Agreement. They have concluded that none of the examined alternatives has the
same capacity for achieving the above described goals. In particular, the following other
options have been examined:
1.2.1 Conclusion of an isolated domination agreement or an isolated profit and loss
transfer agreement
The conclusion of an isolated domination agreement only is legally permissible, but
no consolidated tax group for corporate income tax and trade tax purposes
(steuerliche Organschaft) can be established on the basis of only a domination
agreement.
The intended tax benefits would accordingly not be achievable with just a
domination agreement.
The conclusion of an isolated profit and loss transfer agreement only would also be
legally permissible. However, this would not be a sufficient legal basis for the
intended comprehensive cooperation between KDH AG and the Vodafone Group.
As has been described, close cooperation in a legally safe manner is only possible
if the existing de facto corporate group is placed on a contractual basis by means
of a domination agreement in addition to a profit and loss transfer agreement (see
section C.1.1.1). An optimized structure of the corporate group in terms of the tax
situation and the control structures can only be achieved when both elements are
combined.
1.2.2 Exclusion of the minority shareholders (squeeze-out)
Excluding the minority shareholders of KDH AG pursuant to Sections 327a et seq.
AktG (so-called squeeze-out under Stock Corporation Act, aktienrechtlicher
Squeeze-out) would not be possible at the present time because the participation
of Vodafone Vierte Verwaltungs AG in KDH AG does not reach the required
statutory level of at least 95% of the share capital.
This applies correspondingly to an exclusion of minority shareholders pursuant to
Section 62 para. 5 German Transformation Act (Umwandlungsgesetz – “UmwG”) in
connection with Sections 327a et seq. AktG after a merger (so-called squeeze-out
under the Transformation Act, umwandlungsrechtlicher Squeeze-out) which would
require a participation of 90% of the share capital.
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A so-called squeeze-out under the Takeover Act (übernahmerechtlicher Squeeze-
out) pursuant to Sections 39a et seq. WpÜG would also require a participation of
Vodafone Vierte Verwaltungs AG in the amount of 95% of the share capital in KDH
AG.
Furthermore, the legal restrictions described in section C.0 resulting from a de
facto corporate group would also exist in the case of a 100% shareholding of
Vodafone Vierte Verwaltungs AG in KDH AG without the Domination and Profit and
Loss Transfer Agreement as long as KDH AG has the legal form of a stock
corporation (or a European Company (Societas Europaea)). A consolidated tax
group for purposes of corporate income tax and trade tax purposes could also not
be established without concluding a profit and loss transfer agreement.
1.2.3 Absorption or merger
Integration into a corporate group by way of absorption (Sections 319 et seq. AktG)
(Eingliederung) is precluded in the present case. Vodafone Vierte Verwaltungs AG
does not have the level of shareholding required for an absorption of at least 95%
of the share capital in KDH AG (Section 320 para. 1 sentence 1 AktG).
A merger of Vodafone Vierte Verwaltungs AG into KDH AG (so-called
"downstream merger") is also precluded as an alternative structure, just as a
merger of KDH AG into Vodafone Vierte Verwaltungs AG ("upstream merger") is
precluded.
The downstream merger of Vodafone Vierte Verwaltungs AG into KDH AG is an
inappropriate alternative because Vodafone Vierte Verwaltungs AG would cease to
exist as a separate legal entity. Such a measure would also not change the
requirement for a domination and profit and loss transfer agreement in order to
implement the desired integration of KDH AG into the Vodafone Group. KDH AG
would then have to conclude a domination and profit and loss transfer agreement
with Vodafone GmbH. The domination and profit and loss transfer agreement
existing between Vodafone GmbH and Vodafone Vierte Verwaltungs AG would
cease to exist as a result of the downstream merger and would not be continued as
a domination and profit and loss transfer agreement between Vodafone GmbH and
KDH AG.
An upstream merger is also not an appropriate alternative. In this situation, the
outside KDH Shareholders would obtain a participation in Vodafone Vierte
Verwaltungs AG. Since a listing on the stock exchange is not intended for the
shares in Vodafone Vierte Verwaltungs AG, this would result in the loss of the
listing of the KDH Shares on the stock exchange, which would substantially
adversely affect the ability to trade the KDH Shares and, thus, would harm the
interests of the KDH Shareholders.
1.2.4 Change of legal form
A transformation of KDH AG into a different corporate form or a partnership is also
not an appropriate alternative because the corporate constitution of KDH as a
stock corporation shall be maintained.
A change in corporate form would not help to establish the desired consolidated tax
group (see section C.1.1.2). Furthermore, even a transformation into a limited
partnership based on shares (Kommanditgesellschaft auf Aktien) would not affect
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47
the applicability of the rules on the de facto corporate group and accordingly, would
not change the disadvantages existing compared to a situation with a domination
and profit and loss transfer agreement (see sections C.1.1.1(ii) and C.1.1.1(iii)).
After a transformation into a limited liability company (Gesellschaft mit
beschränkter Haftung) or a partnership (Personengesellschaft), instructions in the
interest of the corporate group would still have to be examined in the individual
case with regard to whether they have an adverse impact on KDH AG as described
in section C.1.1.1(ii). The fiduciary duty of the controlling company existing as a
result of membership would also have to be observed in the relationship to a
limited liability company or a partnership so that the implementation of adverse
measures would be problematic.
Furthermore, a change of the legal form would involve additional expenses and
delay. A legal obligation to change the legal form in connection with the conclusion
of a domination and profit and loss transfer agreement does not exist.
1.2.5 Conclusion
In light of the above, only the conclusion of a domination and profit and loss
transfer agreement will provide a sufficient legal basis for the intended integration
of KDH AG into the Vodafone Group. The restrictions of a de facto corporate group
can only be overcome (see section C.1.1.1) and the status of a consolidated tax
group for purposes of corporate income tax and trade tax can only be established
(see section C.1.1.2) by concluding a domination and profit and loss transfer
agreement.
1.3 Costs of the Domination and Profit and Loss Transfer Agreement
The conclusion of the Domination and Profit and Loss Transfer Agreement caused one-
time costs. These costs were in particular caused by mandating the Valuation Expert (see
section C.3.1), the issuance of the Audit Report by the court appointed Contract Auditor
(see section C.2.3.2(ii) and section C.3.4), as well as by obtaining legal advice. Vodafone
Vierte Verwaltungs AG and KDH AG each bear one half of the costs for the preparation of
the expert opinion on the enterprise value prepared by the Valuation Expert as well as the
costs for the preparation of the report by the Contract Auditor. All other costs incurred by
the parties, including costs of external advisers, are borne by the respective party alone.
External costs to be borne by KDH AG in a range of approximately EUR 1.5 million are
expected overall. The external costs to be born by Vodafone Vierte Verwaltungs AG are
expected to amount to approximately EUR 1 million.
2 Content and effects of the Domination and Profit and Loss Transfer
Agreement
2.1 Explanation of the content of the contract
Individual provisions of the Domination and Profit and Loss Transfer Agreement are
explained below.
2.1.1 Management control and instructions (clause 1 of the Domination and Profit and
Loss Transfer Agreement)
Clause 1 of the Domination and Profit and Loss Transfer Agreement contains the
constitutive provision for a domination agreement under which KDH AG, as the
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48
controlled company, submits the management of its company to Vodafone Vierte
Verwaltungs AG as the controlling company. Vodafone Vierte Verwaltungs AG is
accordingly entitled to issue instructions to the management board of KDH AG with
regard to the management of the company (clause 1.1 sentence 2 of the
Domination and Profit and Loss Transfer Agreement). Notwithstanding this right of
management control and right to issue instructions, KDH AG will continue to be a
legally independent company with its own corporate bodies. The management
board of KDH AG accordingly continues to be responsible for the management and
the representation of the company. To the extent no instructions have been issued,
the management board of KDH AG is entitled to and must manage the company on
its own responsibility.
The scope of the right of management control and the right to issue instructions is
governed primarily by Section 308 AktG. The management board of KDH AG is
required to comply with the permissible instructions of Vodafone Vierte
Verwaltungs AG (clause 1.1 sentence 3 of the Domination and Profit and Loss
Transfer Agreement). Pursuant to Section 308 para. 1 sentence 2 AktG,
instructions which are disadvantageous for KDH AG can also be issued if they
serve the interests of Vodafone Vierte Verwaltungs AG or the companies affiliated
with Vodafone Vierte Verwaltungs AG and KDH AG in the corporate group. The
management board of KDH AG is not entitled to refuse to comply with an
instruction unless the instruction obviously does not serve these interests. The
management board does not have to follow any impermissible instructions, e.g.
instructions which would violate statutory provisions or provisions in the articles of
association of KDH AG. Instructions which endanger the existence of KDH AG are
impermissible, in any event. A controlled company is also not required to comply
with instructions if and as long as the controlling company does not fulfil its
obligations under the domination and profit and loss transfer agreement, in
particular the obligations to assume losses and to pay the Recurring Compensation
Payment as well as the cash compensation to the outside shareholders (Sections
304, 305 AktG) or to the extent that the controlling company will most likely not be
able to comply with these obligations (with regard to the right of the controlled
company to terminate see section C.2.1.6(iii)). Furthermore, instructions to amend,
maintain or terminate the Domination and Profit and Loss Transfer Agreement can
also not be issued pursuant to Section 299 AktG (clause 1.2 of the Domination and
Profit and Loss Transfer Agreement).
The right of management control and the right to issue instructions exist only
towards the management board but not towards the supervisory board, the general
shareholders’ meeting or employees of KDH AG and also not towards corporate
bodies and employees of any subsidiary of KDH AG. If the management board of
KDH AG is instructed to engage in a transaction which requires the consent of the
supervisory board of KDH AG and if the supervisory board does not consent or if
the consent is not issued within a reasonable period of time, the consent of the
supervisory board can be substituted in accordance with Section 308 para. 3 AktG
by repeating the instruction. The participation rights of the general shareholders’
meeting of KDH AG are not affected by the Domination and Profit and Loss
Transfer Agreement.
Any instruction to the management board of KDH AG must be issued in text form
(Section 126b German Civil Code (Bürgerliches Gesetzbuch – “BGB”), e.g. by
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telefax or email; an oral instruction must be confirmed in text form without undue
delay (clause 1.3 of the Domination and Profit and Loss Transfer Agreement).
Pursuant to Section 294 para. 2 AktG, clause 6.1 sentence 2 of the Domination
and Profit and Loss Transfer Agreement, the right of Vodafone Vierte Verwaltungs
AG to issue instructions and the corresponding duty of KDH AG to comply under
clause 1 of the Domination and Profit and Loss Transfer Agreement exist only after
the point in time when the Domination and Profit and Loss Transfer Agreement has
become effective as a result of registration in the commercial register of KDH AG
(see section C.2.1.6(i)(a)).
2.1.2 Transfer of profit (clause 2 of the Domination and Profit and Loss Transfer
Agreement)
Clause 2 of the Domination and Profit and Loss Transfer Agreement contains the
constitutive provision for a profit and loss transfer agreement under which KDH AG
is required to transfer its entire profit to Vodafone Vierte Verwaltungs AG during the
term of the contract (clause 2.1 of the Domination and Profit and Loss Transfer
Agreement). With regard to the scope of the profit to be transferred under clause
2.1 of the Domination and Profit and Loss Transfer Agreement and subject to an
establishment or a dissolution of reserves under clause 2.2 and clause 2.3 of the
Domination and Profit and Loss Transfer Agreement, reference is made to the
statutory provision in Section 301 AktG in its respectively valid version. Based on
the current version of Section 301 AktG, that profit must be transferred which would
arise as annual profit if no profit transfer arrangements were in place, as reduced
by any loss carry forward from the previous year and by the amount which must be
allocated to the statutory reserve pursuant to Section 300 AktG and the amount
which is blocked from distribution under Section 268 para. 8 HGB.
The amount which must be allocated to the statutory reserve is assessed in
accordance with Section 300 no. 1 AktG and depends on the amount of the share
capital, the annual profit and the amount already allocated to the statutory reserve.
At the present time, the statutory reserve of KDH AG has been established in the
full amount. The allocation of additional amounts under Section 300 no. 1 AktG is
not required when the statutory reserve has been fully established.
The block on distribution pursuant to Section 268 para. 8 sentence 1 HGB applies
if intangible assets created by the company itself are capitalized as fixed assets in
the balance sheet (Section 248 para. 2 sentence 1 HGB). In this event, profits can
only be distributed to the extent that freely available reserves plus a profit carry
forward and minus any loss carry forward remain after the distribution in an amount
which corresponds at least to the total capitalized amounts minus the deferred tax
liabilities established for this purpose. If deferred tax assets are capitalized in the
balance sheet (Section 274 para. 1 sentence 2 HGB), the block on distribution
exists to the extent that these deferred tax assets exceed the deferred tax liabilities
(Section 268 para. 8 sentence 2 HGB). Furthermore, the block on distribution
applies in the case of assets which cannot be accessed by any creditor and which
serve exclusively to fulfil pension obligations or comparable long-term due
obligations (Section 246 para. 2 sentence 2 HGB). In this event, the block on
distribution exists pursuant to Section 268 para. 8 sentence 3 HGB in the amount
of the difference between the total of the present value (Zeitwerte) for these assets
shown in the balance sheet minus the deferred tax liabilities established therefor
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and the procurement costs of these assets. The term "freely available reserves"
includes both profit reserves as well as specific capital reserves. Profit reserves
which can be distributed without any statutory provisions or provisions in the
articles of association limiting such distribution as well as the freely available
capital reserve under Section 272 para. 2 no. 4 HGB must be taken into account
accordingly when determining the maximum amount that can be distributed. The
block on distribution above all serves to protect creditors. Its purpose is to ensure
that no higher distributions of profits are permissible beyond those which would be
possible without capitalizing the line items designated in Section 268 para. 8 HGB.
The amount to be transferred as profit under clause 2.1 of the Domination and
Profit and Loss Transfer Agreement is reduced under clause 2.2 of the Domination
and Profit and Loss Transfer Agreement if and to the extent KDH AG, with the
approval of Vodafone Vierte Verwaltungs AG, allocates amounts from the annual
profit without the transfer of profit to other profit reserves (Section 272 para. 3
sentence 2 HGB). In the context of the recognition as a consolidated tax group for
income tax purposes (see section C.1.1.2), however, an allocation to these other
profit reserves is only permissible to the extent that there is economic justification
for this under a reasonable commercial assessment (Section 14 para. 1 sentence 1
no. 4 KStG). Clause 2.2 of the Domination and Profit and Loss Transfer Agreement
takes this standard into account.
Vodafone Vierte Verwaltungs AG can demand (in writing) under clause 2.3
sentence 1 of the Domination and Profit and Loss Transfer Agreement that other
profit reserves established during the term of the Domination and Profit and Loss
Transfer Agreement (Section 272 para. 3 sentence 2 HGB) are dissolved again
and transferred as profit (Section 301 sentence 2 AktG) or are used to offset any
annual loss (Section 302 para. 1 AktG).
Clause 2.3 sentence 2 of the Domination and Profit and Loss Transfer Agreement
provides that other reserves or a profit carry forward resulting from the time prior to
the beginning of the Domination and Profit and Loss Transfer Agreement cannot be
transferred or used to offset any annual loss. This provision corresponds with the
requirements of Section 301 AktG and the decisions of the highest courts on the
use of reserves in the context of a domination and profit and loss transfer
agreement. The term "other reserves" includes all reserves under Section 272
HGB except for the other profit reserves established during the term of the
contract. Therefore, the statutory reserve, reserves in accordance with the articles
of association as well as the capital reserves are excluded from contractual
transfer regardless of when they were established. Furthermore, the other profit
reserves within the meaning of Section 272 para. 3 sentence 2 HGB that have
been established in the time prior to the beginning of the Domination and Profit and
Loss Transfer Agreement are excluded from transfer.
The obligation to transfer profit applies for the first time for the entire profit
generated in the fiscal year beginning on 1 April 2014 or in such subsequent fiscal
year in which the Domination and Profit and Loss Transfer Agreement becomes
effective pursuant to clause 6.1 sentence 2 (clause 2.4 sentence 1 of the
Domination and Profit and Loss Transfer Agreement).
The Domination and Profit and Loss Transfer Agreement will take effect upon
registration in the commercial register of KDH AG after approval by the general
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shareholders’ meeting of KDH AG and the general shareholders’ meeting of
Vodafone Vierte Verwaltungs AG (Section 294 para. 2 AktG, clause 6.1 sentence 2
of the Domination and Profit and Loss Transfer Agreement). The management
control as well as the obligation to transfer profit and the obligation to compensate
losses will, however, apply for the first time for the fiscal year of KDH AG which
begins on 1 April 2014 or for such subsequent fiscal year of KDH AG in which the
agreement becomes effective.
The claim of Vodafone Vierte Verwaltungs AG for a transfer of profit is due upon
expiration of the last day of a fiscal year of KDH AG for which the respective claim
exists. The claim must be fulfilled within four weeks after the assessment of the
annual financial statements of KDH AG for the relevant fiscal year. Interest in the
respective statutory amount is owed for the period of time between the due date
and actually fulfilling the claim for transfer of profit, i.e. in the amount of the
statutory rate of interest that applies between commercial parties (currently 5%
annually, Section 352 para. 1 sentence 1 HGB). This provision corresponds with
the statutory requirements and the requirements under the case law of the highest
courts.
Claims resulting from any default in payment are not affected under clause 2.4 of
the Domination and Profit and Loss Transfer Agreement. The relevant claims
accordingly exist in accordance with the statutory provisions; especially the legally
established default interest rate applies.
2.1.3 Assumption of losses (clause 3 of the Domination and Profit and Loss Transfer
Agreement)
Clause 3.1 of the Domination and Profit and Loss Transfer Agreement regulates
the obligation of Vodafone Vierte Verwaltungs AG to assume the losses of KDH AG
pursuant to Section 302 AktG in its respectively valid version. This means that
Vodafone Vierte Verwaltungs AG must compensate for every annual loss that
"otherwise" arises during the term of the contract i.e. that would arise if no
obligation to cover the loss was in existence. The obligation to compensate for loss
does not exist to the extent that the annual loss is offset by amounts being
withdrawn from the other profit reserves (Section 272 para. 3 sentence 2 HGB)
which have been allocated to the profit reserves during the term of the Domination
and Profit and Loss Transfer Agreement.
The obligation to compensate for losses assures that the accounted equity capital
of KDH AG existing at the time the contract becomes effective is not reduced
during the term of the contract. The duty to assume losses serves to secure the
financial interests of KDH AG and of the KDH Shareholders and the creditors of
KDH AG during the existence of the Domination and Profit and Loss Transfer
Agreement.
Pursuant to clause 3.2 of the Domination and Profit and Loss Transfer Agreement,
the obligation to assume losses applies for the first time for the entire fiscal year in
which the Domination and Profit and Loss Transfer Agreement has become
effective upon registration in the commercial register of KDH AG (see on this point,
clause 6.1 sentence 2 of the Domination and Profit and Loss Transfer Agreement),
however, at the earliest for the fiscal year of KDH AG beginning on 1 April 2014. If
the Domination and Profit and Loss Transfer Agreement is registered prior to
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31 March 2014, the obligation does therefore not exist for any potential loss in the
fiscal year 2013/2014. The obligation to assume losses is due in each case upon
expiration of the last day of a fiscal year of KDH AG. The obligation must be fulfilled
within four weeks after the assessment of the annual financial statements of
KDH AG for the relevant fiscal year. Interest in the respective statutory amount is
owed for the period between the due date and actually fulfilling the claim to
compensate for losses, i.e. in the amount of the statutory interest rate applicable
between commercial parties (currently 5% annually, Section 352 para. 1 sentence
1 HGB). This provision corresponds with the statutory requirements and the
requirements under the case law of the highest courts.
Pursuant to clause 3.2 of the Domination and Profit and Loss Transfer Agreement,
claims resulting from any default in payment are not affected. The relevant claims
accordingly exist in accordance with the statutory provisions; especially the legally
established default interest rate applies.
2.1.4 Recurring Compensation Payment (clause 4 of the Domination and Profit and Loss
Transfer Agreement)
A duty to compensate the outside KDH Shareholders comes into existence under
Section 304 para. 1 AktG when the Domination and Profit and Loss Transfer
Agreement becomes effective. In order to fulfil this duty of compensation, Vodafone
Vierte Verwaltungs AG undertakes towards the outside KDH Shareholders to pay a
recurring compensation (the "Recurring Compensation Payment").
(i) Recurring Compensation Payment (clause 4.2 of the Domination and Profit
and Loss Transfer Agreement)
After the obligation to transfer profit under clause 2 of the Domination and
Profit and Loss Transfer Agreement becomes effective, i.e. for the first time
for the fiscal year of KDH AG beginning on 1 April 2014 or any subsequent
fiscal year in which the Domination and Profit and Loss Transfer Agreement
is registered in the commercial register of KDH AG, KDH AG will generally
no longer show any balance sheet profit for the corresponding fiscal year
and subsequent fiscal years. The right of the KDH Shareholders to decide
about the use of any balance sheet profit generally ceases to exist as of
that point in time. As compensation for the loss of the claim for a dividend,
the obligation of Vodafone Vierte Verwaltungs AG to pay a reasonable
Recurring Compensation Payment is granted to the outside KDH
Shareholders according to clause 4.2 of the Domination and Profit and
Loss Transfer Agreement. This Recurring Compensation Payment exists as
of the fiscal year of KDH AG for which the claim of Vodafone Vierte
Verwaltungs AG under clause 2 of the Domination and Profit and Loss
Transfer Agreement for the transfer of profit takes effect and is in place for
the duration of the Domination and Profit and Loss Transfer Agreement.
The Recurring Compensation Payment is due on the first banking day after
the ordinary general shareholders’ meeting of KDH AG for the previous
fiscal year, but at the latest eight months after expiration of that fiscal year
of KDH AG.
(ii) Type and amount of the Recurring Compensation Payment
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The following applies to the reasonable, respective Recurring
Compensation Payment:
(a) Legal basis
A domination and profit and loss transfer agreement must provide for
a reasonable recurring compensation for the outside shareholders of
the controlled company, in this case KDH AG (Section 304 para. 1
sentence 1 and sentence 2 AktG). The recurring compensation must
consist of a recurring payment of money to the outside shareholders
for each share (Section 304 para. 1 sentence 1 and sentence 2
AktG). The AktG differentiates between two types of recurring
compensation (see sections C.2.1.4(ii)(b) and C.2.1.4(ii)(c)).
(b) Fixed recurring compensation
Annually recurring payments of a fixed amount of money can be
warranted as recurring compensation in any event. If the domination
and profit and loss transfer agreement provides for a fixed recurring
compensation, the recurring compensation payment must
correspond to the amount which could most likely be allocated to the
individual share as an average share in the profits, i.e. as profit able
to be distributed under commercial law (Section 304 para. 2
sentence 1 AktG).
(c) Variable recurring compensation
If the other contracting party, i.e. the controlling company, is a
European Company (Societas Europaea), a stock corporation or a
limited partnership based on shares, variable recurring
compensation which is based on the profit of the other contracting
party can alternatively be promised. In that case, the variable
recurring compensation must correspond to the amount which
accrues to shares of the controlling company as a share in the profit
based on the establishment of a reasonable conversion ratio
(Section 304 para. 2 sentences 2 and 3 AktG).
Even if a variable recurring compensation was legally possible in
general in the specific case, the domination and profit and loss
transfer agreement does not have to provide for a fixed recurring
compensation and in the alternative an additional variable recurring
compensation. The contracting parties can rather decide in favour of
one or the other type of recurring compensation in this situation.
(d) Reasons for determining a fixed Recurring Compensation Payment
The Domination and Profit and Loss Transfer Agreement between
Vodafone Vierte Verwaltungs AG and KDH AG provides for a fixed
annual Recurring Compensation Payment. The reasons for this are
primarily as follows:
Since Vodafone Vierte Verwaltungs AG as the controlling company
has the legal form of a stock corporation, in principle, a variable
recurring compensation based on the profit of Vodafone Vierte
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Verwaltungs AG could have been provided for. However, such a
compensation based on the profit of Vodafone Vierte Verwaltungs
AG would not be suitable to ensure the outside KDH Shareholders’
right to receive reasonable compensation, as the participation in
KDH is Vodafone Vierte Verwaltungs AG’s by far the most valuable
current asset and thus, the KDH Shareholders would economically
receive a compensation that is based on KDH AG’s profit only.
Vodafone Vierte Verwaltungs AG could in fact exercise its
management control over KDH AG on the basis of the Domination
and Profit and Loss Transfer Agreement in a way that reduces profits
of KDH AG. This would in consequence also lead to a lower
compensation for the outside KDH Shareholders.
(e) Determination of the Recurring Compensation Payment as gross
payment, amount of the Recurring Compensation Payment
Pursuant to clause 4 of the Domination and Profit and Loss Transfer
Agreement, Vodafone Vierte Verwaltungs AG grants to the outside
KDH Shareholders an annual Recurring Compensation Payment for
the term of the Domination and Profit and Loss Transfer Agreement.
The amount as well as the determination of the Recurring
Compensation Payment is explained and reasoned in more detail
below as well as in section C.3.2.
(I) Amount of the Recurring Compensation Payment
Clause 4.3 of the Domination and Profit and Loss Transfer
Agreement provides for the payment of an annual Recurring
Compensation Payment in the amount of EUR 3.17
(corresponding to an amount of EUR 3.77 before current
corporate income tax and the solidarity surcharge) per KDH
Share to the outside KDH Shareholders for the first time for
the fiscal year of KDH AG beginning on 1 April 2014 or
starting with the subsequent fiscal year in which the
Domination and Profit and Loss Transfer Agreement
becomes effective. This amount will be due in full annually
because no balance sheet profit will be shown any longer
after the obligation to transfer profit has become effective,
and the right of the KDH Shareholders to decide about the
use of the balance sheet profit will no longer exist.
(II) Adjustment mechanism for the Recurring Compensation
Payment
When determining the Recurring Compensation Payment,
the contracting parties took into account the case law of the
Federal Supreme Court of Justice (Bundesgerichtshof –
"BGH") (order of 21 July 2003, case no. II ZB 17/01 –
"Ytong"). The BGH decided in this order that the outside
shareholders must be granted a recurring compensation for
purposes of Section 304 para. 1 sentence 1 and sentence 2,
para. 2 sentence 1 AktG which corresponds to the gross
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share in the profit per share which will most likely be able to
be distributed when viewed at the starting point and from
which the burden of corporate income tax in the respective
statutory amount must be deducted. This shall ensure that a
decrease in the corporate income tax rate compared to the
rate at the time of the effective date of the valuation will not
lead to an unjustified benefit of the other contracting party at
the expense of the outside shareholders. On the other hand,
the situation under which the provision on the recurring
compensation leads to an unjustified benefit for the outside
shareholders at the expense of the other contracting party in
the case of an increase in tax is also supposed to be
avoided. These principles are also applicable accordingly to
the solidarity surcharge levied as a surtax on the corporate
income tax.
Based on the case law of the BGH described above, the
fixed Recurring Compensation Payment must be determined
by the average share in the gross profit per KDH Share that
will most likely arise, of which the corporate income tax and
the solidarity surcharge must be deducted at the respective
rates that are applicable for the fiscal year for which a
Recurring Compensation Payment is paid. This ensures that
any change in the corporate income tax rate or the solidarity
surcharge will result in a corresponding adjustment of the net
Recurring Compensation Payment. The provision made in
clause 4.2 of the Domination and Profit and Loss Transfer
Agreement accordingly contains a variable provision with
regard to corporate income tax and the solidarity surcharge.
Based on the circumstances at the time of signing the
Domination and Profit and Loss Transfer Agreement and this
Contract Report, a total of EUR 3.77 per KDH Share
corresponding to the 15.0% corporate income tax plus 5.5%
solidarity surcharge must be deducted from the Recurring
Compensation Payment with the amount of EUR 0.60 per
KDH Share. This results to a Recurring Compensation
Payment in the net amount of EUR 3.17 per KDH Share for
each full fiscal year results based on the circumstances
existing at the time of signing the Domination and Profit and
Loss Transfer Agreement.
The mechanism for the potential adjustment of the Recurring
Compensation Payment in the case of future changes of the
tax rate will be explained using the following example: If the
corporate income tax, for example, decreases by one
percentage point (from 15.0% to 14.0%), the provision in
clause 4.2 of the Domination and Profit and Loss Transfer
Agreement has the effect that the deduction of currently
EUR 0.60 for corporate income tax and the solidarity
surcharge will be reduced by an amount of around EUR 0.04
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(1.0% plus 5.5% solidarity surcharge thereon and together
1.055% of the amount of the Recurring Compensation
Payment of EUR 3.77 resulting from income subject to
corporate income tax). This increases the net Recurring
Compensation Payment in the amount of EUR 3.17 by an
amount of EUR 0.04 to EUR 3.21. On the other hand, an
increase in the corporate income tax by one percentage point
would lead to a reduction of the net Recurring Compensation
Payment from EUR 3.17 to EUR 3.13.
(iii) Additional explanations on clause 4 of the Domination and Profit and Loss
Transfer Agreement
The Recurring Compensation Payment is granted for the first time for the
entire fiscal year of KDH AG for which the obligation to transfer profit to
Vodafone Vierte Verwaltungs AG becomes effective pursuant to clause 2 of
the Domination and Profit and Loss Transfer Agreement (clause 4.3
sentence 2 of the Domination and Profit and Loss Transfer Agreement).
This is the case for the first time under clause 2.4 of the Domination and
Profit and Loss Transfer Agreement for the entire profit for the fiscal year of
KDH AG beginning on 1 April 2014 or a subsequent fiscal year of KDH AG
in which the Domination and Profit and Loss Transfer Agreement becomes
effective. If the Domination and Profit and Loss Transfer Agreement takes
effect prior to 31 March 2014, the obligation to transfer profit exists as of
1 April 2014 for the fiscal year 2014/2015. If the Domination and Profit and
Loss Transfer Agreement becomes effective during the fiscal year
2014/2015, the obligation to transfer profit also applies starting with the
fiscal year 2014/2015. If the Domination and Profit and Loss Transfer
Agreement takes effect only in a subsequent fiscal year, the obligation to
transfer profit applies only as of the start of the relevant, subsequent fiscal
year.
Once the obligation regarding the transfer of profit contained in the
Domination and Profit and Loss Transfer Agreement becomes effective, the
outside KDH Shareholders have no claim for a dividend unless a balance
sheet profit exists resulting from reserves or a profit carry forward from the
time prior to the beginning of the Domination and Profit and Loss Transfer
Agreement and the general shareholders’ meeting resolves a distribution of
such balance sheet profit.
If the Domination and Profit and Loss Transfer Agreement ends during the
course of a fiscal year of KDH AG or if a Recurring Compensation Payment
must be paid for a partial fiscal year that lasts for less than twelve months,
the Recurring Compensation Payment for this fiscal year is reduced
proportionately according to time (clause 4.4 of the Domination and Profit
and Loss Transfer Agreement). This takes into account the circumstance
that the fixed amount of the Recurring Compensation Payment is assessed
on the basis of a period of twelve months, i.e. a full fiscal year.
Clause 4.1 sentence 2 of the Domination and Profit and Loss Transfer
Agreement stipulates the due date for the Recurring Compensation
Payment. The Recurring Compensation Payment to be paid by Vodafone
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Vierte Verwaltungs AG is due in each case on the first banking day after the
ordinary general shareholders’ meeting of KDH AG for the respective
previous fiscal year, but at the latest eight months after the end of the fiscal
year.
Clause 4.5 of the Domination and Profit and Loss Transfer Agreement
governs the adjustment of the Recurring Compensation Payment in the
case of a capital increase using corporate funds. If new KDH Shares are
issued on the occasion of a capital increase using corporate funds, the
Recurring Compensation Payment per KDH Share is reduced to such an
extent that the total amount of the Recurring Compensation Payment
remains the same. The change in the number of KDH Shares held by an
outside KDH Shareholder resulting from a capital increase using corporate
funds, therefore, does not affect the total amount of the Recurring
Compensation Payment to which this KDH shareholder is entitled. This is
appropriate because a capital increase using corporate funds, i.e. the
conversion of profit or certain capital reserves into share capital, does not
influence the value and the earning power of the company, and because
the new KDH Shares resulting from the capital increase using corporate
funds are issued to the KDH Shareholders without consideration. This also
corresponds to the statutory provision in Section 216 para. 3 AktG under
which the economic content of contractual relationships of the company to
third parties is not affected by a capital increase using corporate funds. If
no new KDH Shares are issued in the context of the capital increase using
corporate funds, an adjustment of the Recurring Compensation Payment is
not required.
If the share capital of KDH AG is increased by issuing new KDH Shares in
exchange for cash contributions or contributions in kind with a subscription
right being granted to the outside KDH Shareholders, the claim of the
outside KDH Shareholders to the Recurring Compensation Payment also
extends to the newly created KDH Shares resulting from the capital
increase. Clause 4.5 of the Domination and Profit and Loss Transfer
Agreement ensures that not only the claims to Recurring Compensation
Payments of the previous outside KDH Shareholders remain the same but
that also new outside KDH Shareholders are treated equally in the case of
such increases in the share capital of KDH AG.
Clause 4.6 of the Domination and Profit and Loss Transfer Agreement
serves to protect the non-discriminatory treatment of all outside KDH
Shareholders. If a KDH Shareholder claims that the offered Recurring
Compensation Payment is set too low, the shareholder can request from
the court in appraisal proceedings (Spruchverfahren) pursuant to Sections
1 et seq. German Act on Appraisal Proceedings (Spruchverfahrensgesetz –
"SpruchG") that the court determines the reasonable Recurring
Compensation Payment. The provision in clause 4.6 of the Domination and
Profit and Loss Transfer Agreement grants to all outside KDH Shareholders
a claim for an increase of the Recurring Compensation Payment if
appraisal proceedings take place and if the court sets a higher Recurring
Compensation Payment in an order which can no longer be appealed
(rechtskräftig). The same applies, if the Vodafone Vierte Verwaltungs AG
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commits itself against an outside KDH Shareholder in a court settlement
(gerichtlicher Vergleich) to pay a higher compensation payment in order to
avoid or to end a proceeding according to the German Act on Appraisal
Proceedings. These claims also exists for those KDH Shareholders who
have accepted the compensation offer under clause 5 of the Domination
and Profit and Loss Transfer Agreement in the meantime (see below on
clause 5.5 of the Domination and Profit and Loss Transfer Agreement).
Furthermore, these claims also exists without regard to whether the KDH
Shareholder was involved in any appraisal proceedings (see Section 13
sentence 2 SpruchG).
2.1.5 Compensation (clause 5 of the Domination and Profit and Loss Transfer
Agreement)
(i) Type of compensation
In addition to the obligation to pay the Recurring Compensation Payment
under Section 304 AktG, the Domination and Profit and Loss Transfer
Agreement must contain an obligation of Vodafone Vierte Verwaltungs AG
to purchase the KDH Shares upon request of an outside KDH Shareholder
in exchange for the reasonable compensation determined in the
Domination and Profit and Loss Transfer Agreement (Section 305 para. 1
AktG). Vodafone Vierte Verwaltungs AG offers to the outside KDH
Shareholders who would like to leave the company due to the Domination
and Profit and Loss Transfer Agreement a cash compensation within the
meaning of Section 305 para. 2 no. 3 AktG in the amount of EUR 84.53 per
KDH Share in accordance with Section 305 para. 1 AktG (clause 5.1 of the
Domination and Profit and Loss Transfer Agreement).
(ii) Alternative types of compensation compared to cash compensation
Section 305 para. 2 no. 2 AktG entitles the contracting parties to freely
choose between a compensation in shares and a cash compensation. The
parties have exercised this right of election in favour of a cash
compensation. The decision for granting a cash compensation was
primarily based on the following reasons: A compensation in shares of a
controlling company or a company which has a majority participation in the
other contracting party would have required a valuation of this company.
This would have led to a substantial additional effort in the preparation and
to a further delay in concluding the Domination and Profit and Loss
Transfer Agreement.
As a result of the aforementioned reasons, the Domination and Profit and
Loss Transfer Agreement provides for an offer of a cash compensation.
(iii) Amount of the compensation
In accordance with Section 305 para. 1 AktG, Vodafone Vierte Verwaltungs
AG is offering a cash compensation within the meaning of Section 305
para. 2 no. 3 AktG in an amount of EUR 84.53 per KDH Share to the
outside KDH Shareholders who would like to leave the company due to the
Domination and Profit and Loss Transfer Agreement (clause 5.1 of the
Domination and Profit and Loss Transfer Agreement). The details about the
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amount and determination of the reasonable cash compensation are
explained in section C.3.3.
(iv) Other explanations on clause 5 of the Domination and Profit and Loss
Transfer Agreement
The obligation of Vodafone Vierte Verwaltungs AG to purchase the KDH
Shares of the outside KDH Shareholders in exchange for the compensation
is limited by time according to clause 5.2 of the Domination and Profit and
Loss Transfer Agreement. The deadline ends two months after the date on
which the registration of the existence of the Domination and Profit and
Loss Transfer Agreement in the commercial register of KDH AG is publicly
announced pursuant to Section 10 HGB. The time limit on the offer for the
compensation is common and is permitted under Section 305 para. 4 AktG.
The provision of a two month deadline (clause 5.2 of the Domination and
Profit and Loss Transfer Agreement) corresponds to the statutory provision
in Section 305 para. 4 sentence 2 AktG.
Under Section 4 para. 1 no. 1 SpruchG, outside KDH Shareholders can file
a request for a court decision about the compensation to be granted within
three months after the date on which the registration of the existence of the
Domination and Profit and Loss Transfer Agreement in the commercial
register of KDH AG has been publicly announced pursuant to Section 10
HGB. Section 305 para. 4 sentence 3 AktG stipulates that in case of an
application to the court to determine the recurring compensation or the
compensation, the deadline for accepting the offer for transfer of the shares
to the controlling company in exchange for payment of a reasonable
compensation ends at the earliest two months after the date on which the
decision about the most recently decided request of a shareholder has
been published in the Federal Gazette (Bundesanzeiger). Clause 5.2 of the
Domination and Profit and Loss Transfer Agreement clarifies that this
statutory provision applies without any restriction. If appraisal proceedings
are initiated, the deadline for accepting the offer accordingly ends two
months after the date on which the decision about the most recently
decided request of a KDH Shareholder has been published in the Federal
Gazette.
The declaration of the outside KDH Shareholders that they want to accept
the offer for the compensation from Vodafone Vierte Verwaltungs AG must
be received within the deadline that is determined as explained above.
After expiration of the deadline, an acceptance of the offer for the
compensation is no longer possible.
The outside KDH Shareholders can decide to leave the company after
registration of the existence of the Domination and Profit and Loss Transfer
Agreement in the commercial register and receive the offered
compensation or they can instead decide to remain KDH Shareholders and
receive the Recurring Compensation Payment offered in clause 4 of the
Domination and Profit and Loss Transfer Agreement.
Accepting the offer for the Compensation is free of costs for the outside
KDH Shareholders under clause 5.3 of the Domination and Profit and Loss
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Transfer Agreement. This assures that the outside KDH Shareholders are
not burdened with fees, commissions or other processing fees of the banks
and that they receive the compensation without any reduction. Taxes which
accrue on any capital gain for an outside KDH Shareholder are not affected
by this. The respective KDH Shareholder must bear these taxes himself.
Reference is made to section C.2.3.3 with regard to the tax effects for the
outside KDH Shareholders.
Clause 5.4 of the Domination and Profit and Loss Transfer Agreement
takes into account the principles already explained above with regard to
clause 4.5 of the Domination and Profit and Loss Transfer Agreement in the
event of an increase of the share capital using corporate funds or for
contributions. Reference is made to the corresponding explanations in
section C.2.1.4(iii).
Clause 5.5 of the Domination and Profit and Loss Transfer Agreement, in
turn, serves the purpose of protecting and treating all outside KDH
Shareholders equally. The provision grants to all outside KDH Shareholders
a claim for an additional payment to the compensation in the event of any
appraisal proceedings pursuant to Sections 1 et seq. SpruchG if the court
sets forth a higher compensation in an order which can no longer be
appealed (rechtskräftig) or in the event of Vodafone Vierte Verwaltungs AG
committing itself in a court settlement (gerichtlicher Vergleich) against an
outstanding KDH shareholder to pay a higher compensation payment to
avoid or end a proceeding according to the German Act on Appraisal
Proceedings. This claim also exists if the outside KDH Shareholder has
already received the compensation without regard to whether the outside
KDH Shareholder participated in any appraisal proceedings.
The Domination and Profit and Loss Transfer Agreement can be terminated
by either party in accordance with clauses 6.2 and 6.3. If the termination
occurs at a time when the deadline for accepting the offer for the
compensation under clause 5.2 of the Domination and Profit and Loss
Transfer Agreement has already expired, every outside KDH Shareholder
at that time is granted the right under clause 5.6 of the Domination and
Profit and Loss Transfer Agreement to sell the KDH Shares held by that
shareholder at the time of termination to Vodafone Vierte Verwaltungs AG
for an amount of EUR 84.53. This amount corresponds to the amount of
the cash compensation set out in clause 5.1 of the Domination and Profit
and Loss Transfer Agreement. If this amount of the compensation is
increased by a decision in appraisal proceedings which can no longer be
appealed (rechtskräftig) or in a court settlement (gerichtlicher Vergleich) to
avoid or end an appraisal proceeding the outside KDH Shareholders are
entitled to exercise the right to sell for the corresponding increased amount.
The outside KDH Shareholders who have initially decided not to accept the
offer for the cash compensation from Vodafone Vierte Verwaltungs AG but
to remain KDH Shareholders and receive the Recurring Compensation
Payment are granted additional protection with this right to sell. In case of
the termination of a domination and profit and loss transfer agreement, no
statutory obligation for such a renewed offer to sell exists.
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This renewed right to sell is also limited by time. It can be exercised within
two months after the date on which the registration of the termination of the
Domination and Profit and Loss Transfer Agreement in the commercial
register of KDH AG has been publicly announced pursuant to Section 10
HGB. The sale of KDH Shares under clause 5.6 in connection with
clause 5.3 of the Domination and Profit and Loss Transfer Agreement is
also free of costs for the outside KDH Shareholders. The corresponding
application of clause 5.4 of the Domination and Profit and Loss Transfer
Agreement takes into account potential increases in the share capital of
KDH AG using corporate funds or in exchange for contributions (see on this
point above, section C.2.1.4(iii)).
The aforementioned right to sell applies both in the case of a termination by
Vodafone Vierte Verwaltungs AG as well as in the case of termination by
KDH AG. It should be noted that a regular notice of termination of the
Domination and Profit and Loss Transfer Agreement during the fixed term
of the contract is precluded under clause 6.2 of the Domination and Profit
and Loss Transfer Agreement (see section C.2.1.6(iii)).
A payment of interest on the amount to be paid under clause 5.6 of the
Domination and Profit and Loss Transfer Agreement is not provided for by a
corresponding application of Section 305 para. 3 sentence 3 AktG.
2.1.6 Coming into effect, term and termination of the contract (clause 6 of the Domination
and Profit and Loss Transfer Agreement)
(i) Coming into effect
In accordance with the statutory requirements for approval under Section
293 AktG, clause 6.1 sentence 1 of the Domination and Profit and Loss
Transfer Agreement stipulates that the Domination and Profit and Loss
Transfer Agreement requires the consent of the general shareholders’
meeting of Vodafone Vierte Verwaltungs AG as well as of the general
shareholders’ meeting of KDH AG in order to be valid. The general
shareholders’ meeting of Vodafone Vierte Verwaltungs AG has approved
the Domination and Profit and Loss Transfer Agreement as on
19 December 2013. The general shareholders’ meeting of KDH AG is
supposed to vote on the consent to the Domination and Profit and Loss
Transfer Agreement on 13 February 2014.
According to Section 294 para. 2 AktG the Domination and Profit and Loss
Transfer Agreement only becomes effective upon its registration in the
commercial register at the registered office of KDH AG. Clause 6.1
sentence 2 of the Domination and Profit and Loss Transfer Agreement only
reflects this provision.
(a) Coming into effect of the right of management control and the right to
issue instructions under clause 1 of the Domination and Profit and
Loss Transfer Agreement
The right of management control and the right to issue instructions
under clause 1 of the Domination and Profit and Loss Transfer
Agreement applies as of 1 April 2014, provided that the Domination
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and Profit and Loss Transfer Agreement has become effective until
then. Alternatively, the right of management control and the right to
issue instructions will apply as of that point in time when the
Domination and Profit and Loss Transfer Agreement becomes
effective by registration in the commercial register.
(b) Coming into effect of the obligation to transfer profit under clause 2 of
the Domination and Profit and Loss Transfer Agreement
The obligation to transfer profit under clause 2 of the Domination and
Profit and Loss Transfer Agreement applies for the first time for the
entire profit of the fiscal year of KDH AG beginning on 1 April 2014 or
the subsequent fiscal year of KDH AG in which the Domination and
Profit and Loss Transfer Agreement becomes effective. If the
Domination and Profit and Loss Transfer Agreement takes effect only
during a subsequent year, e.g. if the registration is delayed due to
appeal proceedings, the obligation to transfer profit applies
accordingly only as of the beginning of this subsequent fiscal year in
which the Domination and Profit and Loss Transfer Agreement takes
effect.
(c) Coming into effect of the obligation to assume losses under clause 3
of the Domination and Profit and Loss Transfer Agreement
Pursuant to clause 3.2 of the Domination and Profit and Loss
Transfer Agreement, the obligation to assume losses applies for the
first time for the entire fiscal year of KDH AG in which the Domination
and Profit and Loss Transfer Agreement becomes effective, but not
before the fiscal year 2014/2015, even if the registration takes place
before 1. April 2014.
(ii) Duration of the Domination and Profit and Loss Transfer Agreement,
minimum term
The Domination and Profit and Loss Transfer Agreement is concluded for
an indefinite period of time (clause 6.2 sentence 1 of the Domination and
Profit and Loss Transfer Agreement). According to clause 6.2 sentence 2,
the Domination and Profit and Loss Transfer Agreement has a fixed
minimum term of five successive years as of the beginning of the fiscal
year in which the obligation to transfer profit under clause 2 of the
Domination and Profit and Loss Transfer Agreement becomes effective. In
the event that the Domination and Profit and Loss Transfer Agreement has
been registered in the commercial register prior to 31 March 2015, the
obligation to transfer profit under clause 2 of the Domination and Profit and
Loss Transfer Agreement begins (if applicable, retroactively) on 1 April
2014. The contractual minimum term accordingly lasts until 31 March 2019.
This fixed minimum term is required under Section 14 para. 1 sentence 1
no. 3 KStG in order to be able to establish the consolidation group for
purposes of corporate income tax and trade tax between Vodafone Vierte
Verwaltungs AG and KDH AG intended with the conclusion of the
Domination and Profit and Loss Transfer Agreement.
(iii) Termination of the Domination and Profit and Loss Transfer Agreement
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During the fixed minimum term of five consecutive years as of the
beginning of the fiscal year in which the obligation to transfer profit under
clause 2 of the Domination and Profit and Loss Transfer Agreement takes
effect as established in clause 6.2 sentence 2 of the Domination and Profit
and Loss Transfer Agreement, the right to give regular notice of termination
is excluded. The Domination and Profit and Loss Transfer Agreement can
accordingly be terminated for the first time by giving three months' notice as
of the end of the last fiscal year of the minimum term and it can
subsequently be terminated by regular notice of termination in accordance
with this notice period in each case as of the end of a fiscal year (clause
6.2 sentence 3 of the Domination and Profit and Loss Transfer Agreement).
The notice of termination must be given in writing (clause 6.4 of the
Domination and Profit and Loss Transfer Agreement).
In accordance with clause 6.3 of the Domination and Profit and Loss
Transfer Agreement, this provision does not affect the right of the
contracting parties to terminate the Domination and Profit and Loss
Transfer Agreement for just cause (aus wichtigem Grund) without
compliance with a notice period. The right of termination for just cause
exists by force of law and cannot be excluded by contract. Just cause for
termination generally exists if a continuation of the contractual relationship
can no longer be expected of the party giving notice of termination after
weighing all circumstances. For example, a deterioration in the financial or
earning position of the controlled company can entitle the controlling
company to give notice of termination if the risks for the controlling
company are no longer acceptable and the controlling company is not
responsible for this situation. The controlled company can, in turn, give
notice of termination, for example, if the controlling company will most likely
not be able to fulfil its obligations existing under the Domination and Profit
and Loss Transfer Agreement (assumption of losses, recurring
compensation and compensation).
Pursuant to clause 6.3 sentence 1 of the Domination and Profit and Loss
Transfer Agreement, both parties are entitled to give notice of termination
for just cause (aus wichtigem Grund). Just cause within the meaning of
clause 6.3 sentence 2 in particular exists, if just cause for termination within
the meaning of tax law (wichtiger Grund im steuerlichen Sinn) exists. The
provision contained in clause 6.3 sentence 2 of the Domination and Profit
and Loss Transfer Agreement must be seen in light of applicable tax law.
The conclusion of a profit transfer agreement is necessary in order to be
able to establish the indented status of a consolidated tax group between
Vodafone Vierte Verwaltungs AG and KDH AG for purposes of corporate
income tax and trade tax. The prerequisite for this status of a consolidated
tax group for purposes of corporate income tax and trade tax, in addition to
the minimum term of the contract under Section 14 para. 1 sentence 1
no. 3 KStG is, among others, that KDH AG, as the controlled company, is
financially integrated into Vodafone Vierte Verwaltungs AG as the
controlling company in such a manner that the controlling company has the
majority of the voting rights in the controlled company. Furthermore, the
profit and loss transfer agreement must be entered into for a minimum term
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of five years and must actually be performed during its term. A termination
of the profit and loss transfer agreement prior to the expiration of the
minimum term pursuant to Section 14 para. 1 sentence 1 no. 3 KStG
generally leads to the non-recognition of the status of a consolidated tax
group for tax purposes from the very beginning. Only a termination for just
cause does not affect the status of a consolidated tax group for fiscal years
that have already been completed, even if the termination occurs within the
minimum term of the profit and loss transfer agreement established under
tax law, to the extent that the just cause is recognized for tax purposes.
The disposal or the contribution of the participation can generally constitute
just cause within the meaning of Section 14 para. 1 no. 3 KStG for early
termination of a domination and profit and loss transfer agreement by the
controlling company which does not affect the recognition of the status of a
consolidated tax group for the past. This applies accordingly in case of a
merger, spin-off or liquidation of one of the two contracting parties.
Accordingly, Clause 6.3 sentence 2 of the Domination and Profit and Loss
Transfer Agreement is supposed to allow for a termination for just cause
under corporate law in case one of the instances of termination for just
cause recognized under tax law is given.
In case of a termination of the Domination and Profit and Loss Transfer
Agreement, the statutory provision in Section 303 AktG also applies: If a
domination agreement or a profit and loss transfer agreement ends, the
controlling company must provide security to the creditors of the controlled
company if they make a corresponding request for this purpose to the
controlling company within six months after the publication of the
registration. However, this obligation under Section 303 para. 1 and 2 AktG
exists only with regard to those creditors whose claims were established
before the registration of the termination of a domination or a profit and loss
transfer agreement in the commercial register has been publicly announced
pursuant to Section 10 HGB, and only to the benefit of those creditors
which, in case of insolvency proceedings, would not have a right for
preferred satisfaction from an insolvency estate which is established and
publicly monitored for the protection of such preferred creditors under
statutory law. The controlling company can issue a surety for the claim
instead of posting security, whereby Section 349 HGB concerning the
exclusion of the defence of requiring that a complaint first be filed against
the primary obligor does not apply in this situation (Section 303 para. 3
AktG).
If the Domination and Profit and Loss Transfer Agreement is terminated by
one of the contracting parties after expiration of the deadline for the
compensation offer under clause 5.2 of the Domination and Profit and Loss
Transfer Agreement, the outside KDH Shareholders again have the right
under clause 5.6 of the Domination and Profit and Loss Transfer
Agreement to sell their KDH Shares to Vodafone Vierte Verwaltungs AG
(see section C.2.1.5(iv)).
2.1.7 Final provisions of the contract (clause 8 of the Domination and Profit and Loss
Transfer Agreement)
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Clause 8.1 of the Domination and Profit and Loss Transfer Agreement determines,
that the applicable law is German law.
Clause 8.2 of the Domination and Profit and Loss Transfer Agreement (severability
clause) shall secure the survival of the main content of the Domination and Profit
and Loss Transfer Agreement if individual contractual provisions turn out to be
completely or partially invalid, unenforceable or if there are gaps, contrary to
expectations. This is a typical provision contained in domination and profit and loss
transfer agreements.
2.1.8 Comfort letter by Vodafone Group Plc
Clause 7 of the Domination and Profit and Loss Transfer Agreement indicates that
Vodafone Group Plc has without joining this Agreement as a party provided a
comfort letter in a separate declaration. The comfort Letter is attached to this
Report together with the Domination and Profit and Loss Transfer Agreement as
Annex 3.
In this comfort letter Vodafone Group Plc undertakes without limitation and irrevo-
cably to ensure, that Vodafone Vierte Verwaltungs AG will be managed and finan-
cially equipped in a way that Vodafone Vierte Verwaltungs AG is at all times able to
fulfil all its obligations arising from or in connection with the Domination and Profit
and Loss Transfer Agreement completely and in time. This applies in particular to
the obligation to compensate losses pursuant to Section 302 AktG.
In addition, Vodafone Group Plc undertakes without limitation and irrevocably vis-à-
vis the outside shareholders of KDH that Vodafone Vierte Verwaltungs AG fulfils all
its obligations towards them arising from or in connection with the Domination and
Profit and Loss Transfer Agreement, in particular regarding the Recurring
Compensation and the Cash Compensation completely and in time. To that extent
the outside shareholders of KDH have an own claim according to Section 328
para. 1 German Civil Code (Bürgerliches Gesetzbuch – BGB) directed at payment
to Vodafone Vierte Verwaltungs AG. Vodafone Group Plc’s liability pursuant to the
two preceding sentences does, however, only apply if Vodafone Vierte Verwaltungs
AG does not fulfil its obligations towards the outside shareholders of KDH arising
from or in connection with the Domination and Profit and Loss Transfer Agreement
completely and in time and Vodafone Group Plc does not comply with its obligation
to equip Vodafone Vierte Verwaltungs AG as described above.
By way of this obligation Vodafone Vierte Verwaltungs AG’s ability to fulfil all
potential claims for Compensation and Recurring Compensation Payment of the
outside KDH Shareholders pursuant to the Domination and Profit and Loss
Transfer Agreement shall be strengthened in addition to the claims based on the
VF Domination and Profit and Loss Transfer Agreement between Vodafone Vierte
Verwaltungs AG and Vodafone GmbH.
2.2 Technical processing of the Domination and Profit and Loss Transfer Agreement by the
banks
Vodafone Vierte Verwaltungs AG will mandate Commerzbank Aktiengesellschaft, Frankfurt
am Main, Germany, as the central processor for the technical handling of the payment of
the compensation under clause 5 of the Domination and Profit and Loss Transfer
Agreement. The KDH Shareholders who want to make use of the offer for the
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compensation must instruct their securities account bank to make available their KDH
Shares to the central processor via the collective custody system for the purpose of
receiving the compensation. Simultaneously with (Zug um Zug) proper transfer of the KDH
Shares, the cash compensation will then be paid out. The processing of the cash
compensation is free of any commissions and fees for the KDH Shareholders (see section
C.2.1.5(iv)). The compensation will be offered to all outside KDH Shareholders. Details
about the processing will be announced without undue delay after registration of the
Domination and Profit and Loss Transfer Agreement in the commercial register.
The Recurring Compensation Payment under clause 4 of the Domination and Profit and
Loss Transfer Agreement will be processed in the same manner as dividend payments.
2.3 Explanation of the effects of the Domination and Profit and Loss Transfer Agreement
2.3.1 Effects under corporate law
Once the right of management control for Vodafone Vierte Verwaltungs AG and the
right to issue instructions to KDH AG under clause 1 of the Domination and Profit
and Loss Transfer Agreement takes effect, i.e. upon registration of the Domination
and Profit and Loss Transfer Agreement in the commercial register of KDH AG
after the approval of the general shareholders’ meeting of KDH AG and the general
shareholders’ meeting of Vodafone Vierte Verwaltungs AG, not before 1 April 2014
at the earliest, KDH AG will submit the management control of its company to
Vodafone Vierte Verwaltungs AG and Vodafone Vierte Verwaltungs AG will obtain
the right to issue instructions to the management board of KDH AG with regard to
the management of KDH AG. The management board of KDH AG is required to
comply with the instructions of Vodafone Vierte Verwaltungs AG. Vodafone Vierte
Verwaltungs AG can also issue disadvantageous instructions to the management
board of KDH AG if these instructions serve the interest of Vodafone Vierte
Verwaltungs AG or Vodafone GmbH including the affiliated companies of Vodafone
GmbH. Such disadvantageous instructions can have substantial negative effects
on the financial situation and earnings position of KDH AG despite the Vodafone
Vierte Verwaltungs AG’s obligation to assume the losses and these effects can also
continue to exist after the Domination and Profit and Loss Transfer Agreement has
been terminated. Upon the termination of the Domination and Profit and Loss
Transfer Agreement based on a notice of termination by Vodafone Vierte
Verwaltungs AG or KDH AG, the outside KDH Shareholders obtain the right under
clause 5.6 of the Domination and Profit and Loss Transfer Agreement, explained in
more detail in section C.2.1.5(iv), to sell the KDH Shares they hold at the time of
the termination of the Domination and Profit and Loss Transfer Agreement to
Vodafone Vierte Verwaltungs AG.
The outside KDH Shareholders will be adversely affected in their control rights and
possibly in their financial rights as a result of the right of management control of
Vodafone Vierte Verwaltungs AG and the right to issue instructions to KDH AG
agreed upon in the Domination and Profit and Loss Transfer Agreement. In
exchange for these adverse effects, the outside KDH Shareholders are
compensated by the obligation of Vodafone Vierte Verwaltungs AG to pay an
annual Recurring Compensation Payment (see section C.2.1.4).
Aside from this, the conclusion of the Domination and Profit and Loss Transfer
Agreement has no legal effects on the shareholdings of the outside KDH
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Shareholders. In particular the voting rights and other participation rights linked to
their KDH Shares continue to be governed by the articles of association of KDH AG
and the statutory provisions after the registration of the Domination and Profit and
Loss Transfer Agreement in the commercial register.
The stock exchange listing of the KDH Shares will not be affected by the
registration of the Domination and Profit and Loss Transfer Agreement in the
commercial register. However, the possibility cannot be excluded that a large
portion of the outside KDH Shareholders will accept the offer for the compensation
and that the number of the KDH Shares held in free float will decrease further. This
can have the consequence that a normal trading of KDH Shares on the stock
exchange is no longer assured. The resulting further reduction of the liquidity of the
KDH stock could lead to greater fluctuations in the price of the KDH stock than in
the past under certain circumstances.
The number of the KDH Shares held in free float will decrease to the extent the
offer for the compensation under the Domination and Profit and Loss Transfer
Agreement is accepted. As a result, KDH AG might no longer fulfil the respective
criteria for remaining in stock exchange indices currently containing the KDH
Shares. This applies especially for the KDH stock remaining in the MDAX, an index
calculated by Deutsche Börse AG which consists of 50 of the companies traded on
the Frankfurt Stock Exchange. A removal from a stock exchange index can have
the consequence, among others, that institutional investors which reflect the
relevant index in their portfolio will dispose of KDH Shares and refrain from any
future purchases of KDH Shares. An increased offer of KDH Shares combined with
a lower demand for KDH Shares can adversely influence the stock exchange price
for the KDH Shares.
2.3.2 Protection of the outside KDH Shareholders
Protection of the interests of the outside KDH Shareholders in connection with the
conclusion of the Domination and Profit and Loss Transfer Agreement, as is
described below, is secured by granting a compensation and a Recurring
Compensation Payment, the reasonableness of which is examined by the Contract
Auditor (see sections C.2.3.2(ii) and C.3.4). If outside KDH Shareholders are of the
opinion that the compensation and/or the Recurring Compensation Payment
established in the Domination and Profit and Loss Transfer Agreement are not
reasonable, they can have the reasonableness examined in appraisal proceedings.
(i) Recurring Compensation Payment and compensation
After the contractually stipulated obligation to transfer profit under clause 2
of the Domination and Profit and Loss Transfer Agreement has become
effective, i.e. at the earliest as of the fiscal year 2014/2015 if the
Domination and Profit and Loss Transfer Agreement is registered in the
commercial register of KDH AG by the end of the fiscal year 2014/2015 or
in a relevant subsequent fiscal year if the registration occurs only in a
subsequent fiscal year (see section C.2.1.6), KDH AG will not show any
annual profit and also no balance sheet profit, aside from any earnings
resulting from the dissolution of reserves which are not subject to transfer
of profit under the contract or a balance sheet profit resulting from any profit
carry forward from the time before the contract. This means that the outside
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KDH Shareholders will generally not receive any dividends after the
obligation to transfer profit takes effect. Their right to decide about the use
of any balance sheet profit arising after that point in time will generally
cease to exist.
Instead, there is a claim of the outside KDH Shareholders against
Vodafone Vierte Verwaltungs AG for a full economic compensation in terms
of an annual Recurring Compensation Payment under Section 304 AktG.
The annual Recurring Compensation Payment to be paid in accordance
with clause 4 of the Domination and Profit and Loss Transfer Agreement
will be paid to the outside KDH Shareholders without undue delay after the
due date established in clause 4.1 sentence 2 of the Domination and Profit
and Loss Transfer Agreement. The technical processing of the payment will
be through the respective securities account banks just as in the case of a
dividend payment (see section C.2.2).
The contracting parties have set a fixed annual Recurring Compensation
Payment in a gross amount of EUR 3.77 on the basis of the Valuation
Report. Corporate income taxes as well as the solidarity surcharge must be
deducted from this amount. According to the situation at the time of
conclusion of the contract, 15% corporate income tax plus 5.5% solidarity
surcharge for a total of EUR 0.60 will be deducted from the Recurring
Compensation Payment in the amount of EUR 3.77 per KDH Share. This
results, based on the circumstances existing at the time of signing, in a
Recurring Compensation Payment in the amount of EUR 3.17 per KDH
Share for each full fiscal year (see with regard to the legal basis of the
Recurring Compensation Payment section C.2.3.2(i), and on the calculation
of the Recurring Compensation Payment sections C.3.1 and C.3.2).
As an alternative to receiving the annual Recurring Compensation
Payment, the outside KDH Shareholders can make use of the offer for the
compensation by Vodafone Vierte Verwaltungs AG under Section 305 AktG
and leave KDH AG as shareholders in exchange for the compensation set
out in clause 5.1 of the Domination and Profit and Loss Transfer
Agreement. The situation of KDH AG existing at the time of adopting the
resolution in the planned general shareholders’ meeting of KDH AG on
13 February 2014 constitutes the basis for assessing the compensation in
the amount of EUR 84.53 per KDH Share set out in clause 5.1 of the
Domination and Profit and Loss Transfer Agreement (see the
comprehensive discussion and the reasons for the reasonableness of the
cash compensation in section C.3.3).
The outside KDH Shareholders do not lose the right to the compensation
as a result of the fact that they have already received the Recurring
Compensation Payment. If the offer for the compensation is only accepted
after the Recurring Compensation Payment has been paid, which can be
the case especially if the offer for the compensation is accepted during or
after conclusion of appraisal proceedings (see Section 305 para. 4
sentence 3 AktG and clause 5.2 of the Domination and Profit and Loss
Transfer Agreement), Recurring Compensation Payments that have already
been received will be credited against the claim for interest on the
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compensation under Section 305 para. 3 sentence 3 AktG. This crediting
will be in accordance with reference periods, normally fiscal years, whereby
the KDH Shareholder entitled to the compensation is entitled to the
corresponding difference between the Recurring Compensation Payment
and the interest on the compensation for the respective reference period if
Recurring Compensation Payments that have been received are lower than
the interest on the compensation and also if the interest for the
compensation in the reference period falls short of the higher Recurring
Compensation Payments. The crediting of the Recurring Compensation
Payment with the interest on the compensation to be paid only occurs with
regard to the Recurring Compensation Payment which relates to the period
of time after registration of the Domination and Profit and Loss Transfer
Agreement in the commercial register. Recurring Compensation Payment
that has already been received will not be credited against the payment of
the compensation itself. This corresponds to the statutory provisions, taking
into account the case law of the BGH (judgment dated 16 September 2002,
case no. II ZR 284/01 – "Rütgers"; judgment dated 2 June 2003 case no. II
ZR 85/02; judgment dated 10 December 2007, case no. II ZR 199/06).
The obligation of Vodafone Vierte Verwaltungs AG to purchase the KDH
Shares of the outside KDH Shareholders in exchange for payment of the
compensation set out in clause 5.1 of the Domination and Profit and Loss
Transfer Agreement comes into existence with effectiveness of the
Domination and Profit and Loss Transfer Agreement. As of that point in
time, the outside KDH Shareholders can make use of their right to transfer
their KDH Shares to Vodafone Vierte Verwaltungs AG in exchange for
payment of the compensation set out in the Domination and Profit and Loss
Transfer Agreement by declaration to Vodafone Vierte Verwaltungs AG or
to their respective securities account bank. Those KDH Shareholders that
do not make use of their right to transfer their KDH Shares to Vodafone
Vierte Verwaltungs AG continue to be KDH Shareholders and receive the
annual Recurring Compensation Payment.
Immediately after registration of the Domination and Profit and Loss
Transfer Agreement in the commercial register of KDH AG, further details
about the procedure will be published in the Federal Gazette and will be
communicated to the outside KDH Shareholders via the respective
securities account banks. The processing of the transfer of the KDH Shares
to Vodafone Vierte Verwaltungs AG as a result of accepting the offer for
compensation will be free of charge for the KDH Shareholders (clause 5.3
of the Domination and Profit and Loss Transfer Agreement).
The obligation of Vodafone Vierte Verwaltungs AG to acquire KDH Shares
of the outside KDH Shareholders in exchange for payment of the
compensation is subject to a time limit pursuant to clause 5.2 of the
Domination and Profit and Loss Transfer Agreement. The declaration of the
outside KDH Shareholders who want to accept the offer of Vodafone Vierte
Verwaltungs AG for the compensation must be received within this deadline
(see section C.2.1.5(iv) concerning the details of the time limit on the
obligation of Vodafone Vierte Verwaltungs AG). After expiration of the
deadline established in clause 5.2 of the Domination and Profit and Loss
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Transfer Agreement, it is no longer possible to accept the original offer for
the compensation.
However, if the Domination and Profit and Loss Transfer Agreement is
terminated by one of the contracting parties, the outside KDH Shareholders
existing at the time of the termination are entitled to sell their KDH Shares
to Vodafone Vierte Verwaltungs AG within a period of two months after the
date on which the registration of the termination of the Domination and
Profit and Loss Transfer Agreement in the commercial register of KDH AG
has been publicly announced pursuant to Section 10 HGB (see section
C.2.1.5(iv)).
(ii) Contract audit by the Contract Auditor
In response to identical requests of the management board of KDH AG and
the management board of Vodafone Vierte Verwaltungs AG, the District
Court (Landgericht) Munich I in accordance with Section 293c para. 1 AktG
selected and appointed Wedding & Cie. GmbH
Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, with the participation
of the publicly appointed and sworn in business-evaluation expert Dr. Anke
Nestler, Frankfurt am Main, as joint contract auditor within the meaning of
Section 293b para. 1 AktG by order dated 25 October 2013. The Contract
Auditor examines the Domination and Profit and Loss Transfer Agreement
and especially the reasonableness of the annual Recurring Compensation
Payment as well as the compensation and prepares the separate audit
report pursuant to Section 293e AktG. The Contract Auditor’s Audit Report
will be available together with the documents set forth in Section 293f para.
1 AktG as of the date on which the ordinary general shareholders’ meeting
of KDH AG that shall take place on 13 February 2014 is called on the
internet page of KDH AG at
http://www.kabeldeutschland.com/hauptversammlung. The report will also
be available during the general shareholders’ meeting of KDH AG on
13 February 2014.
(iii) Appraisal proceedings
If KDH Shareholders are of the opinion that the amount of the Recurring
Compensation Payment set out pursuant to clause 4.2 of the Domination
and Profit and Loss Transfer Agreement in accordance with Section 304
AktG is too low, they can have the reasonableness of the Recurring
Compensation Payment examined by a court in appraisal proceedings
pursuant to Section 304 para. 3 sentence 3 AktG in conjunction with
Section 1 no. 1 SpruchG after the Domination and Profit and Loss Transfer
Agreement takes effect. The right to make a motion for the initiation of
appraisal proceedings does not depend on having declared an objection to
the minutes recorded by the officiating notary against the resolution of the
general shareholders’ meeting about the Domination and Profit and Loss
Transfer Agreement in the general shareholders’ meeting. The court
examination of the Recurring Compensation Payment in special
proceedings under Section 304 para. 3 sentence 3 AktG in conjunction with
Section 1 no. 1 SpruchG can be requested within three months after the
date on which the registration of the existence of the Domination and Profit
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and Loss Transfer Agreement in the commercial register of KDH AG has
been publicly announced pursuant to Section 10 HGB. The request must
be supported with reasons in accordance with Section 4 para. 2 SpruchG
within the above stated deadline of three months. If a higher annual
Recurring Compensation Payment is set forth by the court having
jurisdiction in the appraisal proceedings in an order which can no longer be
appealed (rechtskräftig), all outside KDH Shareholders can assert a claim
against Vodafone Vierte Verwaltungs AG for the Recurring Compensation
Payment as increased by the court (Section 13 SpruchG). The controlling
company can terminate the Domination and Profit and Loss Transfer
Agreement in this event within two months after the court decision has
become non-appealable without complying with any notice period (Section
304 para. 4 AktG). If appraisal proceedings are ended by a court
settlement, the rights of all outside KDH Shareholders are protected by the
fact that such an end of proceedings under Section 11 para. 2 SpruchG is
only possible with the consent of the joined representative of the outside
KDH Shareholders and any agreement about an increased Recurring
Compensation Payment or any increased compensation agreed in order to
end the proceedings applies for the benefit of all outside KDH Shareholders
regardless of whether they were involved in the appraisal proceedings
themselves.
If outside KDH Shareholders are of the view that the compensation set out
in clause 5.1 of the Domination and Profit and Loss Transfer Agreement is
too low, they can also have the reasonableness of the compensation
examined by a court in appraisal proceedings pursuant to Section 305
para. 5 sentence 2 AktG in conjunction with Section 1 no. 1 SpruchG. The
discussion in the above paragraph concerning the Recurring Compensation
Payment applies accordingly with regard to the deadline for submitting the
request, the submission of reasons for the request, the effect of the court
decision in such appraisal proceedings, the right of termination for the
controlling company after a determination of the compensation by the court
and the conclusion of such proceeding by way of court settlement
(gerichtlicher Vergleich) also to the benefit of outstanding KDH
shareholders not involved in the appraisal proceeding.
2.3.3 Tax effects for KDH Shareholders in Germany
(i) Introduction
The following paragraphs contain a brief summary of some important
German tax principles which can be relevant in connection with the
conclusion of the Domination and Profit and Loss Transfer Agreement for
the outside KDH Shareholders who are subject to full taxation in Germany.
Tax effects for KDH Shareholders who are not fully subject to taxation in
Germany are not explained below. These tax effects depend, among other
aspects, on special provisions in German tax law, the tax law in the country
in which the respective KDH Shareholder is domiciled as well as on
provisions in any existing treaty for the avoidance of double taxation
(double taxation treaty).
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The description generally only relates to corporate income tax, income tax,
withholding tax on investment income and trade tax as well as the solidarity
surcharge which accrue in Germany and deals only with some of the
aspects of these types of taxes. For example, the situation in which
amounts used for payments of the Recurring Compensation Payment are
deemed to have been used from the tax-specific contribution account of
KDH AG is not explained. The description also does not address the
specific aspects with regard to KDH Shares which were acquired as
consideration for a tax benefited contribution under the UmwG (so-called
lock-up shares, (sperrfristbehaftete Anteile) as well as special provisions for
certain companies in the financial and insurance industry. Only the currently
applicable legal situation is used as a basis. This situation can change,
potentially also with retroactive effect. No liability is assumed for the
completeness and accuracy of this description. The recommendation is
made to KDH Shareholders to consult with their tax advisors. Only the tax
advisors are able to reasonably take into account the specific tax
circumstances of the individual KDH Shareholder.
The following description reflects that KDH AG only exists as stock
corporation since 4 March 2010. Therefore no descriptions on share
purchases before that time are necessary.
(ii) Taxation of the Recurring Compensation Payment at the level of the KDH
Shareholders
The Recurring Compensation Payment to be paid pursuant to clause 4.1 of
the Domination and Profit and Loss Transfer Agreement is subject to the
general rules on taxation of dividends at the level of the affected KDH
Shareholders.
(a) Withholding tax on investment income
Withholding tax on investment income (Kapitalertragsteuer) in the
amount of 25% (plus the solidarity surcharge in the amount of 5.5%,
in aggregate 26.375%, and, if applicable, church tax on this amount
for natural persons) will generally be withheld from the Recurring
Compensation Payment for the account of the KDH Shareholder and
passed on to the tax office. The withholding tax on investment
income will be withheld and passed on by the domestic payment
office (credit institution, financial services institution, securities
trading company or securities trading bank) which holds in custody
or administers the KDH Shares or by the collective custody bank for
securities which has been entrusted with collective custody of the
shares if this bank pays out the investment income to a foreign party.
The withholding tax on investment income is generally withheld and
passed on without regard to which amount the payment is actually
subject to taxation at the level of the KDH Shareholders.
The treatment of the withheld and passed on withholding tax on
investment income at the level of the KDH Shareholder depends on
whether the KDH Shares are allocated to private assets or business
assets of the relevant KDH Shareholder.
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(b) KDH Shares in private assets
The Recurring Compensation Payments for KDH Shares held as
private assets of natural persons are subject to income tax as
income from capital assets. The income tax on the Recurring
Compensation Payments is generally settled by the deduction of the
withholding tax on investment income (the so-called flat tax on
investment income (Abgeltungsteuer)). The Recurring Compensation
Payment must, therefore, generally no longer be declared in the
annual tax declaration of the KDH Shareholder. Income-related
expenses actually incurred which have an economic connection to
the Recurring Compensation Payments are not deductible. Only the
deduction of the saver's (tax-free) allowance of currently EUR 801
(EUR 1,602 in the case of jointly taxed spouses) is granted on all
private investment income. In certain situations (for example, in the
case of the existence of a non-assessment certificate of the tax
authorities or in the case of an exemption order in a sufficient
volume), the Recurring Compensation Payment can be paid out to
the KDH Shareholder without deducting withholding tax on
investment income, the solidarity surcharge or any applicable church
tax.
Upon the request of the KDH Shareholder, the respective Recurring
Compensation Payments can be made subject to the standard
income tax instead of taxation with the rate of the flat tax on
investment income of 25% if this leads to a lower tax burden for the
KDH Shareholder (most-favourable-tax-treatment test
(Günstigerprüfung)). Also in this event according to the current view
of the fiscal authorities (against the jurisdiction of fiscal courts) only
the saver's (tax-free) allowance of EUR 801 (EUR 1,602 in the case
of jointly assessed spouses) is granted, i.e. a deduction of the actual
income-related expenses is excluded; the decision of the highest
fiscal court is outstanding. The withholding tax on investment income
which is withheld and passed on is credited against the levied
income tax and any excess amount will be reimbursed.
(c) KDH Shares held as business assets
In the case of KDH Shares held as business assets, the withholding
tax on investment income which is withheld and passed on does not
have any conclusive effect. The KDH Shareholder must state the
Recurring Compensation Payments in the tax declaration. The
withholding tax on investment income which is withheld and passed
on is credited against the levied income tax or corporate income tax
and any excess amount will be reimbursed. Aside from this, the
taxation of the Recurring Compensation Payment depends on
whether the KDH Shareholder is a corporation, an individual
business person or a partnership (co-entrepreneur):
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(I) Corporations
After a reform of the rules on the taxation of dividends paid
on shares that are held in free float, Recurring Compensation
Payments to a corporation are subject to corporate income
tax in the full amount (plus the solidarity surcharge) if the
corporation has a direct participation of less than 10% in the
share capital of KDH AG (free-float participation
(Streubesitzbeteiligung)) at the beginning of the calendar
year.
If a corporation holds at least 10% of the share capital of
KDH AG at the beginning of the calendar year or if the
corporation initially acquires a participation of at least 10% or
does so by additional purchases during the course of the
calendar year, the Recurring Compensation Payment is
generally exempt from corporate income tax. However, 5% of
these revenues are deemed to be expenses which may not
be deducted as operating expenses and, thus, are subject to
taxation with corporate income tax (plus the solidarity
surcharge in the amount of 5.5% hereon). In exchange,
operating expenses which have actually been incurred that
have an economic connection to the Recurring
Compensation Payments can generally be fully deducted
(subject to other limits on deduction).
In both cases, the Recurring Compensation Payments are
also subject in full to trade tax unless the KDH Shareholder
has a participation of at least 15% in the share capital of KDH
AG (intercompany participation (Schachtelbeteiligung)) at the
beginning of the relevant tax period. In the latter case, the
exemption of 95% of the Recurring Compensation Payments
from corporate income tax applies accordingly for purposes
of trade tax.
(II) Individual business person
In the case of individual business persons (natural persons
(natürliche Personen)), 60% of Recurring Compensation
Payment is subject to the individual income tax rate (plus the
solidarity surcharge as well as any church tax). Expenses
related economically to the Recurring Compensation
Payment are accordingly only deductible in an amount of
60% (subject to other limits on deduction).
If the KDH Shares belong to the assets of a permanent
establishment of a commercial business of the KDH
Shareholder located in Germany, the Recurring
Compensation Payments are fully subject to trade tax if the
KDH Shareholder does not have a participation of at least
15% of the share capital of the company at the beginning of
the relevant tax period. The trade tax incurred on the
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Recurring Compensation Payments, however, can be fully or
partially credited against the income tax of the KDH
Shareholder by means of a flat sum procedure. If the KDH
Shareholder holds at least 15% of the share capital of KDH
AG at the beginning of the tax period, the Recurring
Compensation Payments are fully exempt from trade tax.
(III) Partnerships
If the KDH Shares are held by a partnership that is
commercially active or has commercial qualifications (co-
entrepreneur), the income tax or corporate income tax (in
each case plus the solidarity surcharge as well as any church
tax in the case of natural persons) is only assessed at the
level of the respective partner. Accordingly, the taxation is
generally determined pursuant to the rules which would apply
if the partner were a direct KDH Shareholder (see sections
C.2.3.3(iii)(c)(I) and C.2.3.3(ii)(c)(II)). The participation in the
share capital of KDH AG will be proportionately attributed as
a direct participation to any corporation which is a partner in
a partnership with regard to the 10% participation threshold
for free float participations (see section C.2.3.3(ii)(c)(I)).
The Recurring Compensation Payment is subject to trade tax
at the level of the partnership if the partnership does not have
a participation of at least 15% in the share capital of KDH AG
at the beginning of the relevant tax period. If the partnership
holds at least 15% of the share capital of KDH AG at the
beginning of the tax period, the Recurring Compensation
Payment is generally not subject to trade tax. The situation
should be different to the extent that one or more
corporations have participations in the partnership. In this
event, 5% of the Recurring Compensation Payments are
subject to trade tax to the extent that they are attributable to
the corporation according to the share of the corporation(s) in
the profit of the partnership. Whether and to which extent the
new law on taxation of free float dividends (see section
C.2.3.3(ii)(c)(I)) will result in changes has not yet been finally
clarified. In the case of an interpretation according to the
specific wording of the provisions, there is certain support for
the view that the above described taxation of 5% of the
Recurring Compensation Payments will not apply to the
extent that the corporation indirectly has a participation of
less than 10% in the share capital of KDH AG through its
participation in the partnership. To the extent that the
Recurring Compensation Payment is subject to trade tax at
the level of the partnership, this will completely or partially be
credited against the income tax by means of the flat sum
procedure in the case of natural persons who have a
participation in the partnership.
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(iii) Taxation of the compensation at the level of KDH Shareholders
Pursuant to clause 5.1 of the Domination and Profit and Loss Transfer
Agreement, Vodafone Vierte Verwaltungs AG undertakes towards KDH
Shareholders who want to leave KDH AG due to the conclusion of the
Domination and Profit and Loss Transfer Agreement to purchase their KDH
Shares in exchange for a reasonable compensation in the amount of
EUR 84.53 for each KDH Share. The transfer of the KDH Shares to
Vodafone Vierte Verwaltungs AG in exchange for the compensation
constitutes a sale of the KDH Shares for the KDH Shareholders. A capital
gain is realized if the compensation minus any related costs of sale
exceeds the procurement costs for tax purposes or the book value for tax
purposes for the relevant KDH Shares at the respective KDH Shareholder.
If the compensation minus any costs of sale is less than the acquisition
costs or the book value of the KDH Shares at the KDH Shareholder, a
capital loss is incurred.
(a) Withholding tax on investment income
If a domestic paying office (credit institution, financial services
institution, securities trading company or securities trading bank)
holds the KDH Shares in custody or administers them or carries out
the sale and pays out or issues a credit for the investment income
("Domestic Paying Office"), it must generally withhold and pass on
from the capital gain the withholding tax on investment income in the
amount of 25% (plus the solidarity surcharge in the amount of 5.5%,
in aggregate 26.375%, and any church tax in the case of natural
persons) for the account of the KDH Shareholder.
The compensation for KDH Shares which are held by fully taxable
corporations is generally not subject to deduction of the withholding
tax on investment income. The withholding of tax on investment
income also does not occur in the case of capital gains which belong
to business revenues of a domestic business if this is declared to the
Domestic Paying Office using the officially required form.
Aside from this, the tax treatment of any capital gain or loss and the
issue of whether the withheld tax on investment income has
conclusive effect or whether it will be credited to the income tax or
corporate income tax obligation of the KDH Shareholder in the tax
assessment and, if applicable, reimbursed in the amount of any
excess, depends on whether the KDH Shares are attributable to the
private assets or business assets of the relevant KDH Shareholder:
(b) KDH Shares held as private assets
Profits from the sale of the KDH Shares are generally subject
to income tax without regard to the amount of the
participation. However, profits (and losses) are treated
differently depending on whether or not the KDH Shareholder
had a direct or indirect participation of at least 1% in the
share capital of KDH AG at any time in the last five years
prior to the transfer (a "Material Participation").
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The income tax on the capital gain for KDH Shareholders
who do not have a Material Participation is settled with the
deduction of the withholding tax on investment income by the
Domestic Paying Office, and the capital gain no longer has to
be declared in the income tax statement of the KDH
Shareholder. Capital losses can only be offset against profits
from the sale of shares in the current year or in a later year
(but not with other income from investments or other types of
income).
In certain cases (for example, if a non-assessment certificate
from the tax authorities or up to the amount of any issued
exemption order), KDH Shareholders can be paid the
compensation without deduction of withholding tax on
investment income and the solidarity surcharge (as well as
any church tax).
If the deduction of withholding tax on investment income
does not occur other than in these situations (e.g. due to lack
of a Domestic Paying Office), the KDH Shareholder must
state the capital gain in the shareholder’s income tax
declaration. However, the capital gain in these situations will
not be subject to the individual income tax rate of the KDH
Shareholder; instead, the assessment of the capital gain will
be at the rate for the flat tax on investment income of 25%
(plus the solidarity surcharge in the amount of 5.5%, in
aggregate 26.375%, and any church tax thereon). Also in this
case, the investment income minus the saver's (tax-free)
allowance of EUR 801 (EUR 1,602 in the case of jointly
assessed spouses) is determinative for the taxation, and a
deduction of any actually incurred income-relate expenses is
excluded.
Upon the request of the KDH Shareholder, the capital gain
can be subject to the income tax rate instead of taxation at
the rate of 25% for final tax on investment income if this
leads to a lower tax burden for the shareholder (most-
favourable-tax-treatment test (Günstigerprüfung)). In this
case, tax on investment income that has been withheld and
passed on will be credited against the levied income tax and
will be reimbursed in the amount of any excess. When
determining the income from investments, only a saver's (tax-
free) allowance of EUR 801 (or EUR 1,602 in the case of
jointly assessed spouses) can be deducted as income-relate
expenses. A deduction of the actual income-relate expenses
is according to the current view of the fiscal authorities
(against the jurisdiction of fiscal courts) excluded in this case;
the decision of the highest fiscal court is outstanding.
The deduction of withholding tax on investment income has
no conclusive effect if the KDH Shareholder has a Material
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Participation. The gain from the sale of a Material
Participation is also not subject to the rate of 25% for the flat
tax on investment income. The partial income procedure
(Teileinkünfteverfahren) applies instead. According to this
procedure, only 60% of the capital gain is subject to income
tax at the individual income tax rate (plus the solidarity
surcharge and any church tax thereon). The withheld tax on
investment income that has been passed on will be credited
against the levied income tax and any excess will be
reimbursed. Only 60% of any capital losses and expenses in
connection with the sale can be claimed for tax purposes.
(c) KDH Shares held as business assets
If KDH Shares are held as business assets, the withholding tax on
capital income that has been passed on does not have any
conclusive effect. The KDH Shareholder must state the capital gain
from the sale of the KDH Shares in the shareholder’s tax declaration;
any initial withholding of tax on investment income will be credited
against the shareholder’s levied income tax or corporate income tax
obligation and any excess will be reimbursed. Aside from this, the
taxation of the capital gain depends on whether the KDH
Shareholder is a corporation, an individual business person or a
partnership (co-entrepreneur):
(I) Corporations
Profits from the sale of KDH Shares are generally exempt
from corporate income tax and trade tax for corporations.
However, 5% of the capital gain is deemed to be expenses
which cannot be deducted as business expenses for tax
purposes so that they are subject to corporate income tax
(plus the solidarity surcharge thereon) and trade tax. As a
result, a capital gain is generally 95% tax exempt. Capital
losses and other reductions in the profit economically related
to the sold KDH Shares cannot be taken into account for tax
purposes.
(II) Individual business person
To the extent that KDH Shares are part of the business
assets of an individual business person, 60% of the profit is
subject to taxation at the individual income tax rate (plus the
solidarity surcharge in the amount of 5.5% as well as any
church tax thereon). Accordingly, only 60% of the business
expenses economically related to the capital gains as well as
only 60% of any capital losses can be taken into account for
tax purposes.
If the KDH Shares belong to the domestic business assets of
a business of the KDH Shareholder, the capital gain is
generally also subject to trade tax, but only in an amount of
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60%. The trade tax is completely or partially credited against
the income tax of the investor by way of a flat rate procedure.
(III) Partnerships
If the KDH Shares are held by a partnership that is
commercially active or has commercial qualifications (co-
entrepreneur), the income tax or corporate income tax (in
each case plus the solidarity surcharge as well as, in the
case of natural persons, any church tax thereon) is only
assessed at the level of the respective partner. Accordingly,
the taxation is generally in accordance with the rules which
would apply if the partner were a direct KDH Shareholder
(see sections C.2.3.3(iii)(c)(I) and C.2.3.3(iii)(c)(II)).
If the KDH Shares are attributed to a permanent
establishment located in Germany of a commercial business
of the partnership, the capital gain is generally also subject to
trade tax at the level of the partnership, generally in an
amount of 60%, to the extent that the capital gain is included
in the share of a natural person in the profit as a partner in
the partnership. To the extent that the capital gain are
contained in the share of the profit for a corporation as a
partner in the partnership, 5% of the capital gain is subject to
trade tax. Capital losses and other reductions in profit related
to the sold KDH Shares are not taken into account for
purposes of trade tax if they are attributable to the share of a
corporation in the profit, or 60% of these losses and
reductions are taken into account if they are attributable to
the profit share of a natural person. To the extent that natural
persons have a participation in the partnership, however, the
trade tax is completely or partially credited against their
income tax by way of a flat rate procedure.
2.3.4 Tax effects on KDH AG
The Domination and Profit and Loss Transfer Agreement between Vodafone Vierte
Verwaltungs AG and KDH AG has the consequence that the income of KDH AG
(prior to the transfer of profit) is generally no longer subject to corporate income tax
and trade tax at KDH AG, but, provided that the other legal requirements for a
consolidated tax group for purposes of corporate income tax and trade tax are
fulfilled and at the earliest starting on 1 April 2014, is instead attributed to Vodafone
Vierte Verwaltungs AG and ultimately taxed at the level of Vodafone GmbH
because a consolidated tax group for purposes of tax on income also exists in the
relationship of Vodafone Vierte Verwaltungs AG to Vodafone GmbH (. When
determining the income attributable for tax purposes under Section 14 KStG, the
profit prior to the transfer of profit is used as the basis. KDH AG owes corporate
income tax pursuant to Section 16 KStG on the payments of the Recurring
Compensation Payment to be made to the outside shareholders (plus the solidarity
surcharge thereon), despite the fact that Vodafone Vierte Verwaltungs AG and not
KDH AG owes the Recurring Compensation Payment and without regard to
whether the income of KDH AG attributable to Vodafone Vierte Verwaltungs AG is
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80
positive or negative. The basis for assessing corporate income tax (plus the
solidarity surcharge) is currently 20/17 of the Recurring Compensation Payments in
accordance with Section 16 KStG. For purposes of trade tax, and contrary to the
situation with respect to corporate income tax, the Recurring Compensation
Payment is in any event assessed at the level of Vodafone Vierte Verwaltungs AG
as the parent company of the consolidation tax group.
As a result of the consolidation for tax purposes, KDH AG is also liable pursuant to
Section 73 German General Tax Code (Abgabenordnung) for those taxes of
Vodafone Vierte Verwaltungs AG as the parent company of the consolidated tax
group, for which the consolidated tax group between Vodafone Vierte Verwaltungs
AG and KDH AG for purposes of corporate income tax and trade tax is relevant.
Claims for reimbursement of tax credits are treated equally with the taxes in this
regard.
During the term of the consolidated tax group, loss carry forwards of KDH AG for
purposes of corporate income tax and trade tax from the time prior to the
consolidated tax group cannot be credited against any potential positive income of
KDH AG which has to be attributed to the parent company in the consolidated tax
group. Furthermore, a loss carry forward of KDH AG for purposes of corporate
income tax from the time prior to the consolidated tax group cannot be credited
against any taxable income under Section 16 KStG. Any loss carry forwards from
the time prior to the consolidated tax group remain in place, but cannot be
deducted for the duration of the consolidated tax group.
3 Type and amount of the Recurring Compensation Payment and the
compensation under Sections 304, 305 AktG
3.1 Overview
Pursuant to Section 304 AktG, a domination and profit and loss transfer agreement must
contain a reasonable compensation for the outside KDH Shareholders by means of a
recurring payment of money related to the shares in the share capital. At least the annual
payment of that amount must be guaranteed or promised as compensation under Section
304 para. 1 sentence 1 AktG and Section 304 para. 2 sentence 1 AktG which could most
likely be distributed to the individual share as an average share in the profit according to
the earnings position of the company to date and its future prospects for earnings, taking
into account reasonable depreciation and adjustments in value but without establishing
other profit reserves.
According to Section 305 para. 1 AktG, a domination agreement or a domination and profit
and loss transfer agreement must also contain the obligation of the controlling company to
purchase the KDH Shares of an outside KDH Shareholder upon request in exchange for
reasonable compensation determined in the corporate group agreement. The reasonable
compensation must take into account the circumstances of the company at the time of
adopting the resolution by the general shareholders’ meeting of the controlled company
about the corporate group agreement in accordance with Section 305 para. 3 sentence 2
AktG. This applies accordingly for the Recurring Compensation Payment within the
meaning of Section 304 AktG. According to the order of the German Constitutional Court
(Bundesverfassungsgericht) dated 27 April 1999 (case no. 1 BvR 1613/94), an existing
stock exchange price cannot be ignored when setting the amount of the compensation
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81
under Section 305 AktG. The stock exchange price generally represents the lowest amount
of the compensation to be paid to the shareholder.
The determinative date for the valuation of the enterprise and the determination of the
Recurring Compensation Payment and the compensation is the date of the general
shareholders’ meeting of KDH AG which will adopt the resolution about the Domination
and Profit and Loss Transfer Agreement, i.e. 13 February 2014.
The management boards of Vodafone Vierte Verwaltungs AG and KDH AG have issued a
mandate to Warth & Klein Grant Thornton AG, Wirtschaftsprüfungsgesellschaft,
Düsseldorf, in order to obtain support when setting the Recurring Compensation Payment
and the compensation, to issue an expert opinion on the enterprise value of KDH AG as of
the date of the general shareholders’ meeting on 13 February 2014 and the amount of the
reasonable Recurring Compensation Payment pursuant to Section 304 AktG and the
reasonable compensation pursuant to Section 305 AktG. The Valuation Expert conducted
the work required for the Valuation Report from 23 October 2013 to 19 December 2013.
The Valuation Expert submitted the Valuation Report on the determination of the enterprise
value of KDH AG as of 13 February 2014 and the reasonable Recurring Compensation
Payment (Section 304 AktG) and the compensation (Section 305 AktG) on 19 December
2013.
The Valuation Expert, in his function as a neutral expert within the meaning of IDW S 1,
concludes in his Valuation Report that the objectified enterprise value within the meaning
of IDW S 1 for KDH AG as of 13 February 2014 determined using the discounted earnings
method is EUR 6,706.2 million and that the value per share is EUR 75.76 for each KDH
Share based on 88,522,939 KDH Shares.
The Valuation Expert also concludes that the relevant average stock exchange price is
EUR 84.53 for each KDH Share. This is determined on the basis of a volume weighted
average stock exchange price for KDH Shares determined by BaFin for the three months
period prior to the announcement on 12 September 2013 of the intent of Vodafone Vierte
Verwaltungs AG to enter into a Domination and Profit and Loss Transfer Agreement with
KDH AG. Since the announcement was released after close of trading, the average stock
exchange price for KDH Shares determined by BaFin for the three months period including
the 12 September 2013 has been used as a basis. The Compensation thus amounts to
EUR 84.53 for each KDH Share.
Unlike regarding the Compensation, the principles developed by the German Constitutional
Court in relation to the stock exchange price forming the minimum level do not have to be
taken into account in relation to the determination of a fixed recurring compensation
payment as envisaged here (cf. Higher Regional Court of Stuttgart, decision dated 14
February 2008 – 20 W 10/06), therefore, the determination of the recurring compensation
payment generally has to be based on the capitalized earnings value. The Parties have,
however, agreed, for the benefit of the outstanding shareholders, to take as a basis for the
valuation not the value per share in the amount of EUR 75.76 as determined by the
Valuation Expert, but the offer price in the amount of EUR 84.50. The reasonable
Recurring Compensation Payment within the meaning of Section 304 AktG derived
therefrom amounts according to the determinations of the Valuation Expert on the basis of
the corporate income tax rate applicable at the time of conclusion of the contract, including
the solidarity surcharge, to a net amount of EUR 3.17 (EUR 3.77 before current corporate
income tax and the solidarity surcharge) for each KDH Share.
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82
The complete version of the Valuation Report by the Valuation Expert on the determination
of the reasonable compensation (Section 305 AktG) and the reasonable Recurring
Compensation Payment (Section 304 AktG) dated 19 December 2013 is attached as
Annex 4 to this Contract Report and, thus, constitutes an integral part of this Contract
Report. The management board of KDH AG and the management board of Vodafone
Vierte Verwaltungs AG have completely incorporated the statements by the Valuation
Expert in the referenced Valuation Report as their own and include it in the substance of
this joint Contract Report.
In their own view, the management board of KDH AG and the management board of
Vodafone Vierte Verwaltungs AG consider the compensation for purposes of Section 305
AktG in the amount of EUR 84.53 for each KDH Share as well as a Recurring
Compensation Payment for purposes of Section 304 AktG in the present amount of
EUR 3.17 (EUR 3.77 before current income tax and solidarity surcharge) for each KDH
Share to be reasonable.
The Contract Report as well as the Valuation Report by the Valuation Expert will be
available at the website of KDH AG at
http://www.kabeldeutschland.com/hauptversammlung, together with the other documents
required by law starting on the date on which the general shareholders’ meeting of KDH
AG which will resolve on the approval of the Domination and Profit and Loss Transfer
Agreement is convened. The documents will also be available during the general
shareholders’ meeting. Reference is made to the invitation for the general shareholders’
meeting of KDH AG that will resolve about the approval of the Domination and Profit and
Loss Transfer Agreement with regard to the details.
The management board of KDH AG and the management board of Vodafone Vierte
Verwaltungs AG expressly point out for purposes of avoiding the risk of liabilities under
foreign legal systems that the planning of KDH AG constituting the basis of the enterprise
valuation by the Valuation Expert was prepared to the best of their knowledge but that
neither KDH AG, nor any other company of the Vodafone Group, can assume any liability
that the planning will actually be met.
3.2 Determination and setting of the amount of the reasonable Recurring Compensation
Payment under Section 304 AktG
Pursuant to clause 4.1 of the Domination and Profit and Loss Transfer Agreement,
Vodafone Vierte Verwaltungs AG grants a fixed annual Recurring Compensation Payment
to the outside KDH Shareholders starting in the fiscal year of KDH AG for which the
obligation to transfer profit under clause 2 of the Domination and Profit and Loss Transfer
Agreement takes effect, starting at the earliest as of the fiscal year 2014/2015 and lasting
for the duration of the Domination and Profit and Loss Transfer Agreement.
The annual Recurring Compensation Payment for holders of KDH Shares is EUR 3.17
(EUR 3.77 before current corporate income tax and solidarity surcharge) for each KDH
Share.
The reasons why the contracting parties have agreed on a fixed annual Recurring
Compensation Payment were described in section C.2.1.4(ii)(d). The contracting parties
have agreed on a gross amount in accordance with the case law of the BGH (order dated
21 July 2003, case no. II ZB 17/01 – "Ytong"). Reference is made on this point to the
explanation in section C.2.1.4.
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83
The management board of KDH AG and the management board of Vodafone Vierte
Verwaltungs AG have agreed to determine the amount of the Recurring Compensation
Payment not on basis of the value per share in the amount of EUR 75.76 as determined by
the Valuation Expert, but on basis of the offer price in the amount of EUR 84.50. On this
basis the Valuation Expert concluded that the fixed annual Recurring Compensation
Payment under Section 304 AktG is currently EUR 3.17 (EUR 3.77 before current
corporate income tax and solidarity surcharge) for each KDH Share.
3.3 Determination and setting of the amount of the reasonable compensation under Section
305 AktG
Pursuant to clause 5 of the Domination and Profit and Loss Transfer Agreement, Vodafone
Vierte Verwaltungs AG is required to purchase the KDH Shares of any outside KDH
Shareholder upon request in exchange for the compensation (Section 305 para. 2 no. 3
AktG).
Each outside KDH Shareholder wanting to make use of the offer for the compensation
receives for each KDH Share a compensation in the amount of EUR 84.53 in cash in
accordance with clause 5.1 of the Domination and Profit and Loss Transfer Agreement.
The determinative reasons for the agreement on the compensation in the form of a cash
compensation are described in section C.2.1.5(ii).
The enterprise value of KDH AG determined by the Valuation Expert in his Valuation
Report in accordance with the discounted earnings method pursuant to IDW S 1 as
amended in 2008 as of 13 February 2014 is EUR 6,706.2 million. This results in a
proportionate value of EUR 75.76 for each KDH Share. This value is below the above-
mentioned volume weighted three months stock exchange price determined by the
Valuation Expert in the amount of EUR 84.53 for the KDH Share.
When determining the amount of the compensation, the Valuation Expert and the
contracting parties took into account the stock exchange price for the KDH Shares.
According to the case law of the German Constitutional Court of 27 April 1999 (case no. 1
BvR 1613/94), the stock exchange price represents the lowest limit for determining the
amount of the compensation to be offered to the outside KDH Shareholders.
The BGH (judgment dated 12 March 2001 – II ZB 15/00) specified the requirements of the
German Constitutional Court with regard to the relevance of the stock exchange price for
determining the reasonable compensation. In its judgment of 19 July 2010 (case no. ZB II
18/09 – "Stollwerck"), the BGH established additional requirements in this respect and
stated in further detail that the relevant stock exchange price must be determined on the
basis of a volume weighted average stock exchange price during a three month reference
period prior to the announcement of a structural measure.
Vodafone Group Plc issued a press release on 12 September 2013 about its intent to enter
into a Domination and Profit and Loss Transfer Agreement with KDH AG. Due to preceding
remarks of the Federal Cartel Office (Bundeskartellamt) and corresponding press coverage
it was to be expected at that point in time, that the EU Commission would approve the
merger of the Parties on 20 September 2013 and it had informed the Vodafone Vierte
Verwaltung AG thereof before the publication of the press release. Therefore, at this point
in time it was predominantly probable that the merger can be settled. The volume weighted
stock exchange price of the KDH Shares determined by BaFin pursuant to Section 5 para.
3 WpÜG Offering Regulation for the three months period prior to the publication of the
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84
press release by Vodafone Vierte Verwaltungs AG after close of trading on 12 September
2013 is EUR 84.53 per KDH Share, whereby the three months period was calculated
including 12 September 2013.
The volume weighted stock exchange price does not have to be adjusted and extrapolated
to the date of the general shareholders’ meeting. According to the Stollwerck decision of
the BGH, such adjustment only has to occur if a longer period of time has passed between
the public announcement of the structural measure and the date of the general
shareholders’ meeting and if the development of the stock exchange prices shows that an
adjustment is appropriate. An adjustment of the volume weighted three months stock
exchange price in the present case, however, is not necessary because a period of
approximately five months lies between the announcement of the intent to enter into a
Domination and Profit and Loss Transfer Agreement (12 September 2013) and the date on
which the general shareholders’ meeting takes place (13 February 2014) which will resolve
about the approval for the Domination and Profit and Loss Transfer Agreement. This does
not constitute a longer period of time under the Stollwerck decision.
3.4 Contract audit
Please see section C.2.3.2(ii) for explanations on the contract audit.
Vodafone Vierte Verwaltungs AG
The management board
Düsseldorf, 20 December 2013
Dr. Joachim Peters Dr. Thomas Wandres
KDH AG
The management board
Unterföhring, 20 December 2013
Dr. Adrian von Hammerstein Dr. Manuel Cubero
Erik Adams Dr. Andreas Siemen
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85
Annexes
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Annex 1: List of the direct and indirect participations of KDH AG as of
20 December 2013
Name and registered office of the company Interest in
the share
capital
Kabel Deutschland Vertrieb und Service GmbH, Unterföhring 100.00%
Kabel Deutschland Kundenbetreuung GmbH, Unterföhring 100.00%
TKS Telepost Kabel-Service Kaiserslautern Beteiligungs-GmbH, Kaiserslautern 100.00%
TKS Telepost Kabel-Service Kaiserslautern GmbH & Co. KG, Kaiserslautern 100.00%
Kabel Deutschland Field Services GmbH, Nürnberg 100.00%
„Urbana Teleunion“ Rostock GmbH & Co. KG, Rostock 70.00%
Verwaltung „Urbana Teleunion“ Rostock GmbH, Rostock 50.00%
KABELCOM Braunschweig Gesellschaft für Breitbandkabel- Kommunikation mit
beschränkter Haftung, Braunschweig
100.00%
KABELCOM Wolfsburg Gesellschaft für Breitbandkabel- Kommunikation mit
beschränkter Haftung, Wolfsburg
100.00%
Kabel Deutschland Holding Erste Beteiligungs GmbH, Unterföhring 100.00%
Kabel Deutschland Holding Zweite Beteiligungs GmbH, Unterföhring 100.00%
Kabel Deutschland Dritte Beteiligungsgesellschaft mbH, Unterföhring 100.00%
Kabel Deutschland Fünfte Beteiligungsgesellschaft mbH, Unterföhring 100.00%
Kabel Deutschland Sechste Beteiligungs GmbH, Unterföhring 100.00%
Kabel Deutschland Siebte Beteiligungs GmbH, Unterföhring 100.00%
Kabel Deutschland Achte Beteiligungs GmbH, Unterföhring 100.00%
Kabel Deutschland Neunte Beteiligungs GmbH, Unterföhring 100.00%
Kabelfernsehen München Servicenter Gesellschaft mit beschränkter Haftung –
Beteiligungsgesellschaft, München 24.00%
Kabelfernsehen München Servicenter GmbH & Co. KG, München 30.22%
AFK Aus- und Fortbildungs GmbH für elektronische Medien 2.00%
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Annex 2: Material subsidiaries of Vodafone Group Plc as of 31 March 2013
Name of the company
Country of seat /
incorporation Capital share1
Vodafone GmbH2 Germany 100%
Vodafone Limited England 100%
Cable & Wireless Worldwide plc. England 100%
Vodafone Czech Republic a.s. Czech Republic 100%
Vodafone Magyarorszag Mobile Tavkozlesi Zartkoruen Mukodo
Reszvenytarsasag3 Hungary 100%
Vodafone Ireland Limited Ireland 100%
Vodafone Libertel B.V. Netherlands 100%
Vodafone Romania S.A. Romania 100%
Vodafone Telekomunikasyon A.S. Turkey 100%
Vodafone España S.A.U. Spain 100%
Vodafone Albania Sh.A. Albania 99.9%
Vodafone-Panafon Hellenic Telecommunications Company S.A. Greece 99.9%
Vodafone Malta Limited Malta 100%
Vodafone Portugal-Comunicações Pessoais, S.A.4 Portugal 100%
Vodafone India Limited5 India 84.5%
Vodacom Group Limited South Africa 65%
Vodacom Congo (RDC) s.p.r.l.6, 7, 8
Democratic Republic of
Congo 33.2%
Vodacom Tanzania Limited6, 8 Tansania 42.3%
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VM, S.A.6, 9 Mozambique 55.3%
Vodacom Lesotho (Pty) Limited6 Lesotho 52%
Vodacom Business Africa Group (PTY) Limited6 South Africa 65%
Vodafone Egypt Telecommunications S.A.E. Egypt 54.9%
Ghana Telecommunications Company Limited Ghana 70%
Vodafone New Zealand Limited New Zealand 100%
Vodafone Qatar Q.S.C.8 Qatar 23%
Vodafone Group Services Limited10 England 100%
Vodafone Sales & Services Limited11 England 100%
Vodafone GmbH Germany 100%
Vodafone Holdings Europe S.L.U. Spain 100%
Vodafone Europe B.V. Netherlands 100%
Vodafone International Holdings B.V. Netherlands 100%
Vodafone Investments Luxembourg S.a.r.l. Luxembourg 100%
Vodafone Procurement Company S.a.r.l. Luxembourg 100%
Vodafone Roaming Services S.a.r.l. Luxembourg 100%
Vodafone Americas Inc.12 USA 100%
Comments:
1 The percentage of shares held by Vodafone Group Plc as of 31 March 2013 have been rounded to the nearest tenths
position.
2 The name of Vodafone D2 GmbH was changed to Vodafone GmbH on 1 February 2013.
3 Operates under Vodafone Hungary Mobile Telecommunications Company Limited.
4 38.6% of the issued share capital of Vodafone Portugal-Comunicações Pessoais, S.A. are held by Vodafone Group Plc
directly.
5 As of 31 March 2013, the group, via wholly-owned subsidiaries, directly held a 64.4% interest in Vodafone India Limited
(VIL) and indirectly held a 20.1% interest via companies in which the group holds less than 50%. In total, the shares
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amounted therefore to 84.5%. The group has call-options for the acquisition of participations in companies, that indirectly
hold further participations of 4.5% in VIL. The shareholders of these companies furthermore have put options; in case of an
exercise of such put options, Vodafone would be obliged to acquire further shares in the company. In case these options
are exercised, which can only occur in accordance with the provisions of Indian law applicable at the time of exercising the
options, the group would directly and indirectly hold a participation of 89.0% in VIL.
6 The participation indirectly exists via Vodacom Group Limited. The indirect participation is calculated based on the
participation of 65.0% in Vodacom.
7 The share capital of Vodacom Congo (RDC) s.p.r.l. exists of 1,000,000 ordinary shares and 75,470,588 preference
shares.
8 The group owns rights through which it can dominate the strategic and operative decisions of Vodafone Qatar Q.S.C.,
Vodacom Congo (RDC) s.p.r.l. and Vodacom Tanzania Limited.
9 The share capital of VM, S.A. is divided into 60,000,000 ordinary shares and 548,350,646 preference shares.
10 The share capital is divided into 790 ordinary shares and one deferred share; 100% of the shares are indirectly held by
Vodafone Group Plc.
11 Vodafone Sales & Services Limited is directly held by Vodafone Group Plc.
12 The share capital is divided into 395,834,251 ordinary shares and 1.65 million repayable preference shares of category D und E, whereby 100% of the ordinary shares are indirectly held by Vodafone Group Plc.
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Annex 3: Domination and Profit and Loss Transfer Agreement dated 20 December 2013 together with the comfort letter from Vodafone Group Plc dated 18 December 2013
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1
Domination and Profit and Loss Transfer Agreement
(Beherrschungs- und Gewinnabführungsvertrag)
between
(1) Vodafone Vierte Verwaltungs AG
having its registered office in Düsseldorf, registered in the commercial register
(Handelsregister) at the Local Court (Amtsgericht) Düsseldorf under company number
HRB 70886,
- herein referred to as "Vodafone Vierte Verwaltungs AG" -
and
(2) Kabel Deutschland Holding AG
having its registered office in Unterföhring, registered in the commercial register
(Handelsregister) at the Local Court (Amtsgericht) Munich under company number HRB
184452,
- herein referred to as "Kabel Deutschland Holding AG" -
1 Management Control and Instructions
1.1 With effect as of the date of this agreement entering into force and in any event not earlier
than 1 April 2014, Kabel Deutschland Holding AG submits the management control
(Leitung) of its company to Vodafone Vierte Verwaltungs AG. Vodafone Vierte Verwaltungs
AG is accordingly entitled to issue instructions (Weisungen) to the management board of
Kabel Deutschland Holding AG with regard to the management control of the company.
The management board of Kabel Deutschland Holding AG is required to comply with the
instructions of Vodafone Vierte Verwaltungs AG. Without prejudice to this right to issue
instructions (Weisungsrecht), the management board of Kabel Deutschland Holding AG is
responsible for the management and representation of Kabel Deutschland Holding AG.
1.2 Vodafone Vierte Verwaltungs AG is not entitled to issue an instruction to the management
board of Kabel Deutschland Holding AG to amend, maintain or terminate this Agreement.
1.3 Any instructions require text form (Textform) or, if the instructions are issued orally, they
shall be confirmed in text form without undue delay.
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2
2 Transfer of Profit
2.1 Kabel Deutschland Holding AG undertakes to transfer its entire annual profit
(Gewinnabführung), as determined in accordance with commercial law, to Vodafone Vierte
Verwaltungs AG. Subject to establishing or dissolving reserves in accordance with Clauses
2.2 and 2.3 of this Agreement below, the maximum amount permissible under section 301
German Stock Corporations Act (Aktiengesetz – "AktG"), as amended from time to time,
shall be transferred.
2.2 If and only to the extent permissible under commercial law and as economically justified by
reasonable commercial judgement and with the consent of Vodafone Vierte Verwaltungs
AG, Kabel Deutschland Holding AG may allocate parts of its annual profit to other profit
reserves (section 272 para. 3 German Commercial Code (Handelsgesetzbuch – "HGB")).
2.3 Upon the written request of Vodafone Vierte Verwaltungs AG, Kabel Deutschland Holding
AG shall dissolve other profit reserves within the meaning of section 272 para. 3 HGB
established during the course of this Agreement and use the proceeds to compensate for
any annual loss or transfer the proceeds as profit. Other reserves or profits carried forward
from the period prior to the term of this Agreement may neither be transferred as profit to
Vodafone Vierte Verwaltungs AG nor be used by Kabel Deutschland Holding AG to
compensate for any annual loss.
2.4 The obligation to transfer the annual profit applies for the first time to the entire profit for
the fiscal year of Kabel Deutschland Holding AG beginning on 1 April 2014 or for whichever
subsequent fiscal year of Kabel Deutschland Holding AG in which this Agreement becomes
effective. The claim of Vodafone Vierte Verwaltungs AG for a transfer of profit under this
Clause 2 becomes due upon expiration of the last day of the fiscal year of Kabel
Deutschland Holding AG for which the respective claim exists. The claim must be fulfilled
within four weeks after determination of the annual financial statements of Kabel
Deutschland Holding AG. Interest shall accrue in accordance with statutory law for the time
between the due date of the claim for the transfer of the profit and its fulfilment.
Claims based on any default in payment remain unaffected.
3 Assumption of Losses
3.1 An assumption of any annual losses (Verlustübernahme) of Kabel Deutschland Holding AG
by Vodafone Vierte Verwaltungs AG is agreed pursuant to and in accordance with the
provisions in section 302 AktG, as amended from time to time.
3.2 The obligation to assume losses applies for the first time for the entire fiscal year of Kabel
Deutschland Holding AG beginning on 1 April 2014 or for whichever subsequent fiscal year
of Kabel Deutschland Holding AG in which this Agreement becomes effective. The claim of
Kabel Deutschland Holding AG with regard to the assumption of any annual losses under
this Clause 3 becomes due upon expiration of the last day of a fiscal year of Kabel
Deutschland Holding AG for which the respective claim exists. The claim must be fulfilled
within four weeks after determination of the annual financial statements of Kabel
Deutschland Holding AG. Interest shall accrue in accordance with statutory law for the time
between the due date of the claim for the assumption of the annual losses and its
fulfilment.
Claims based on any default in payment remain unaffected.
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3
4 Recurring Compensation Payment
4.1 Vodafone Vierte Verwaltungs AG undertakes to pay to the outside shareholders of Kabel
Deutschland Holding AG as adequate recurring compensation an annual cash
compensation ("Recurring Compensation Payment") (Ausgleich) during the term of this
Agreement. The Recurring Compensation Payment is due on the first banking day
following the ordinary general shareholders’ meeting of Kabel Deutschland Holding AG for
any respective preceding fiscal year falling during the term of this Agreement, but in any
event within eight months following expiration of the relevant fiscal year.
4.2 For each full fiscal year of Kabel Deutschland Holding AG the Recurring Compensation
Payment for each bearer share of Kabel Deutschland Holding AG, representing a
mathematical portion of EUR 1.00 in the share capital ("Kabel Deutschland Holding AG
Share”) in each case amounts to a gross sum of EUR 3.77 ("Gross Recurring
Compensation Payment") (Bruttoausgleichsbetrag) minus the amount of any corporate
income tax and the solidarity surcharge in accordance with the respective tax rate
applicable for these taxes for the relevant fiscal year. Based on the situation at the time of
conclusion of this Agreement, the Gross Recurring Compensation Payment is subject to a
deduction of 15% corporate income tax plus 5.5% solidarity surcharge, i.e. EUR 0.60.
Based on this the Recurring Compensation Payment amounts to EUR 3.17 for each Kabel
Deutschland Holding AG Share for a full fiscal year based on the situation at the time of
conclusion of this Agreement.
4.3 The Recurring Compensation Payment is granted for the first time for the fiscal year of
Kabel Deutschland Holding AG for which the claim of Vodafone Vierte Verwaltungs AG for
the transfer of profit under Clause 2 of this Agreement becomes effective.
4.4 If this Agreement ends during a fiscal year of Kabel Deutschland Holding AG or if Kabel
Deutschland Holding AG establishes an abbreviated fiscal year (Rumpfgeschäftsjahr)
during the term of this Agreement, the Gross Recurring Compensation Payment is reduced
proportionately pro rata temporis for the relevant fiscal year.
4.5 If the share capital of Kabel Deutschland Holding AG is increased from the reserves in
exchange for the issuance of new shares, the Gross Recurring Compensation Payment for
each Kabel Deutschland Holding AG Share is reduced to such an extent that the total
amount of the Gross Recurring Compensation Payment remains unchanged. If the share
capital of Kabel Deutschland Holding AG is increased by cash contributions and/or
contributions in kind, the rights under this Clause 4 also apply for the shares subscribed to
by outside shareholders in such capital increase. The beginning of such entitlement
pursuant to this Clause 4 of the new shares corresponds to the dividend entitlement set by
Kabel Deutschland Holding AG when issuing the new shares.
4.6 If judicial appraisal proceedings (Spruchverfahren) regarding a judicial determination of the
adequate Recurring Compensation Payment are initiated and the court adjudicates a
legally binding higher Recurring Compensation Payment for each Kabel Deutschland
Holding AG Share, the outside shareholders are entitled to demand a corresponding
payment in addition to the Recurring Compensation Payment for each Kabel Deutschland
Holding AG Share which they have already received, even if they have already received
the Compensation pursuant to Clause 5 of this Agreement. All other outside shareholders
will be treated in the same way if Vodafone Vierte Verwaltungs AG undertakes to pay a
higher Recurring Compensation Payment to an outside shareholder of Kabel Deutschland
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4
Holding AG in a court settlement (gerichtlicher Vergleich) for the purpose of avoiding or
settling judicial appraisal proceedings.
5 Compensation
5.1 Vodafone Vierte Verwaltungs AG undertakes upon demand of each outside shareholder of
Kabel Deutschland Holding AG to purchase such shareholder's Kabel Deutschland Holding
AG Shares in exchange for a cash compensation in the amount of EUR 84.53 for each
Kabel Deutschland Holding AG Share (“Compensation”) (Abfindung).
5.2 The obligation of Vodafone Vierte Verwaltungs AG under Clause 5.1 of this Agreement is
for a limited period of time. The time limitation period ends two months after the date on
which the registration of this Agreement in the commercial register of Kabel Deutschland
Holding AG has been announced pursuant to section 10 HGB. An extension of the time
limitation period pursuant to section 305 para. 4 sentence 3 AktG as a result of a motion for
determination of the adequate Recurring Compensation Payment or Compensation by a
court pursuant to section 2 of the German Act on Special Court Proceedings
(Spruchverfahrensgesetz) remains unaffected; in this event, the time limitation period ends
two months after the date on which the decision on the last motion ruled on has been
announced in the Federal Gazette (Bundesanzeiger).
5.3 The transfer of the Kabel Deutschland Holding AG Shares for payment of the
Compensation is free of costs for the outside shareholders of Kabel Deutschland Holding
AG.
5.4 If the share capital of Kabel Deutschland Holding AG is increased using corporate funds in
exchange for the issuance of new shares prior to the expiration of the time limitation period
set forth in Clause 5.2 of this Agreement, the Compensation for each Kabel Deutschland
Holding AG Share is reduced accordingly to such an extent that the total amount of the
Compensation remains unchanged. If the share capital of Kabel Deutschland Holding AG
is increased prior to the expiration of the time limitation period set forth in Clause 5.2 of this
Agreement by means of cash contributions and/or contributions in kind, the rights under
this Clause 5 also apply for the shares subscribed to by the outside shareholders in such
capital increase.
5.5 If judicial appraisal proceedings regarding a judicial determination of the adequate
Compensation are initiated and the court adjudicates a legally binding higher
Compensation for each Kabel Deutschland Holding AG Share, the outside shareholders
are entitled to demand a corresponding additional payment to the Compensation for each
Kabel Deutschland Holding AG Share, even if they have already received the
Compensation stipulated in this Agreement. All other outside shareholders will be treated in
the same way if Vodafone Vierte Verwaltungs AG undertakes to pay a higher
Compensation to an outside shareholder of Kabel Deutschland Holding AG in a court
settlement for the purpose of avoiding or settling judicial appraisal proceedings.
5.6 If this Agreement is terminated by notice of termination by Vodafone Vierte Verwaltungs AG
or Kabel Deutschland Holding AG at a point in time when the time limitation period set forth
in Clause 5.2 of this Agreement for accepting the Compensation pursuant to Clause 5.1 of
this Agreement has already expired, each outside shareholder of Kabel Deutschland
Holding AG at that time is entitled to sell his Kabel Deutschland Holding AG Shares held at
the time of the termination of this Agreement to Vodafone Vierte Verwaltungs AG in
exchange for payment of the Compensation set forth in Clause 5.1 of this Agreement for
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5
each Kabel Deutschland Holding AG Share and Vodafone Vierte Verwaltungs AG is
required to purchase the shares of each outside shareholder upon request of such outside
shareholder. If the Compensation set forth in Clause 5.1 of this Agreement for each Kabel
Deutschland Holding AG Share is increased by a legally binding decision in judicial
appraisal proceedings or in a court settlement for the purpose of avoiding or settling
judicial appraisal proceedings, Vodafone Vierte Verwaltungs AG will purchase the shares
of the outside shareholders under the preconditions set forth in sentence 1 in exchange for
payment of the amount established for each Kabel Deutschland Holding AG Share in the
judicial appraisal proceedings or the court settlement. The right to sell pursuant to this
Clause 5.6 is for a limited period of time. The time limitation period ends two months after
the date on which the registration of the termination of this Agreement in the commercial
register of Kabel Deutschland Holding AG is announced pursuant to section 10 HGB.
Clause 5.3 and Clause 5.4 of this Agreement apply accordingly.
6 Effectiveness, Term and Termination of this Agreement
6.1 This Agreement requires the consent of the general shareholders’ meeting of Kabel
Deutschland Holding AG as well as the consent of the general shareholders’ meeting of
Vodafone Vierte Verwaltungs AG. This Agreement becomes effective upon registration in
the commercial register of Kabel Deutschland Holding AG.
6.2 This Agreement is concluded for an indefinite period of time. This Agreement can be
terminated for the first time as of the end of the fiscal year of Kabel Deutschland Holding
AG which ends at least five years (Zeitjahre) after the beginning of the fiscal year of Kabel
Deutschland Holding AG for which the claim of Vodafone Vierte Verwaltungs AG under
Clause 2 of this Agreement becomes effective. The term of this Agreement is extended
subsequently in each case by one year unless this Agreement is terminated by one of the
Parties by giving three months' notice prior to the expiration.
6.3 Notwithstanding the preceding Clause 6.2 of this Agreement, this Agreement can be
terminated for just cause (wichtiger Grund) without compliance with any notice period. Just
cause exists in particular if just cause for purposes of tax law for the termination of this
Agreement exists.
6.4 Any notice of termination must be in writing.
7 Comfort Letter
7.1 Vodafone Group Plc with seat in Newbury, Great Britain, indirectly holds 100% of the
shares in Vodafone Vierte Verwaltungs AG and in this capacity as indirect shareholder, has
without joining this Agreement as a party provided the comfort letter attached for
information purposes to this Agreement as an Annex. In this comfort letter Vodafone Group
Plc undertakes without limitation and irrevocably to ensure, that Vodafone Vierte
Verwaltungs AG will be managed and financially equipped in a way that Vodafone Vierte
Verwaltungs AG is at all times able to fulfil all its obligations arising from or in connection
with this Agreement completely and in time. This applies in particular to the obligation to
compensate losses pursuant to section 302 AktG.
7.2 In addition, Vodafone Group Plc undertakes without limitation and irrevocably vis-à-vis the
outside shareholders of Kabel Deutschland Holding AG that Vodafone Vierte Verwaltungs
AG fulfils all its obligations towards them arising from or in connection with this Agreement
completely and in time, in particular with respect to the Recurring Compensation Payment
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6
and the Compensation. To that extent the outside shareholders of Kabel Deutschland
Holding AG have an own claim according to section 328 para. 1 German Civil Code
(Bürgerliches Gesetzbuch – BGB) directed at payment to Vodafone Vierte Verwaltungs
AG. Vodafone Group Plc’s liability pursuant to the two preceding sentences does, however,
only apply if Vodafone Vierte Verwaltungs AG does not fulfil its obligations towards the
outside shareholders of Kabel Deutschland Holding AG arising from or in connection with
this Agreement completely and in time and Vodafone Group Plc does not comply with its
obligation to equip Vodafone Vierte Verwaltungs AG as described in the preceding Clause
7.1 of this Agreement.
8 Further Provisions
8.1 The applicable law is German law.
8.2 If any provision of this Agreement is or becomes invalid, or if this Agreement does not
contain a necessary provision, the validity of the remaining provisions of this Agreement
shall not be affected. In place of the invalid provision, or in order to remedy an omission in
this Agreement, a legally permissible provision will be deemed to have been agreed which
corresponds as far as possible to what the Parties intended or would have intended in
accordance with the intent and purpose of this Agreement if they had been aware of the
invalidity of the relevant provision or the omission. Furthermore, when interpreting this
Agreement, the provisions contained in sections 14 to 19 of the German Corporate Income
Tax Act (Körperschaftsteuergesetz – KStG) as amended from time to time shall be taken
into account.
Vodafone Vierte Verwaltungs AG
Düsseldorf, this 20 December 2013
Dr Joachim Peters Dr Thomas Wandres
Member of the management board Member of the management board
Kabel Deutschland Holding AG
Unterföhring, this 20 December 2013
Dr. Adrian v. Hammerstein Dr. Andreas Siemen
Chairman of the management board Member of the management board
Annex: Comfort Letter of Vodafone Group Plc
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1
[Letterhead of Vodafone Group Plc]
London, 18 December 2013
Kabel Deutschland Holding AG
Betastraße 6-8
80774 Unterföhring
Comfort Letter (Patronatserklärung)
Vodafone Vierte Verwaltungs AG, Düsseldorf, registered in the commercial register
(Handelsregister) at the Local Court (Amtsgericht) Düsseldorf under company number
HRB 70886, intends to enter into a domination and profit and loss transfer agreement
(Beherrschungs- und Gewinnabführungsvertrag) with Kabel Deutschland Holding AG,
Unterföhring, registered in the commercial register at the Local Court Munich under company
number HRB 184452, with Kabel Deutschland Holding AG as the controlled and profit transferring
company ("Domination and Profit and Loss Transfer Agreement"). Vodafone Group Plc, a
company incorporated and operating under the laws of England and Wales, registered under
register no. 1833679, with its registered office at Vodafone House, The Connection, Newbury,
Berkshire, RG14 2FN, Great Britain, indirectly holds 100% of the shares in Vodafone Vierte
Verwaltungs AG. Vodafone Group Plc hereby makes the following declarations without joining the
Domination and Profit and Loss Transfer Agreement as a party:
1. Vodafone Group Plc undertakes without limitation and irrevocably to ensure, that Vodafone
Vierte Verwaltungs AG will be managed and financially equipped in a way that Vodafone
Vierte Verwaltungs AG is at all times able to fulfill all its obligations arising from or in
connection with the Domination and Profit and Loss Transfer Agreement completely and in
time. This applies in particular to the obligation to compensate losses pursuant to
section 302 German Stock Corporations Act (Aktiengesetz – AktG).
2. Vodafone Group Plc undertakes without limitation and irrevocably vis-à-vis the outside
shareholders of Kabel Deutschland Holding AG that Vodafone Vierte Verwaltungs AG
fulfills all its obligations towards them arising from or in connection with the Domination and
Profit and Loss Transfer Agreement completely and in time, in particular with respect to the
recurring compensation payment (Ausgleich) and the cash compensation (Abfindung). To
that extent the outside shareholders of Kabel Deutschland Holding AG have an own claim
according to section 328 para. 1 German Civil Code (Bürgerliches Gesetzbuch – BGB)
directed at payment to Vodafone Vierte Verwaltungs AG. Vodafone Group Plc’s liability
pursuant to the two preceding sentences does, however, only apply if Vodafone Vierte
Verwaltungs AG does not fulfill its obligations towards the outside shareholders of Kabel
Deutschland Holding AG arising from or in connection with the Domination and Profit and
Loss Transfer Agreement completely and in time and Vodafone Group Plc does not comply
with its obligation to equip Vodafone Vierte Verwaltungs AG pursuant to Section 1 of this
Comfort Letter.
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2
This Comfort Letter is subject to the law of the Federal Republic of Germany.
Vodafone Group Plc
A. Halford
Title: Chief Financial Officer
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Annex 4: Expert Opinion on the Equity Value of KDH AG by Warth & Klein Grant
Thornton AG dated 19 December 2013
NON-BINDING ENGLISH TRANSLATION
EXPERT REPORT
on the equity value of
Kabel Deutschland Holding AG,
Unterföhring,
and on the determination of the reasonable compensation pursuant to
§ 305 German Stock Corporations Act [Aktiengesetz, "AktG"] as well as
the reasonable guaranteed dividend pursuant to § 304 AktG
as of 13 February 2014
This English version of our Expert Report is only the translation of the German
Expert Report „Gutachtliche Stellungnahme über den Unternehmenswert der
Kabel Deutschland Holding AG, Unterföhring, und zur Ermittlung der
angemessenen Abfindung gemäß § 305 AktG sowie zum angemessenen
Ausgleich gemäß § 304 AktG zum 13 Februar 2014“. In a matter of doubt only
the German version is valid.
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T a b l e o f C o n t e n t s
-------------------------------------------
Page
A. MANDATE AND CONDUCT OF THE MANDATE 1
B. SUBJECT OF THE VALUATION 4
I. Legal situation 4
II. Economic situation 7
1. Subject of the business activity 7
2. Earnings and financial situation 11
3. Market and competition 15
III. Tax situation 22
C. VALUATION METHODOLOGY 23
I. Discounted Earnings Value and Discounted Cash Flow 23
II. Liquidation value and substance value 24
III. Comparison oriented value 25
IV. Stock exchange price 25
V. Price for the takeover bid and synergies 26
D. VALUATION OF KDH AG 27
I. Discounted earnings value 27
1. Valuation date 27
2. Determination of the expected net distributions 28
a) Analysis of the results in the past 28
b) Analysis of the operating planning of KDH AG 29
c) Earnings after interest and taxes 49
d) Sustained profit 51
e) Expected net distributions 53
3. Determination of the Capitalization Interest Rate 54
a) Risk free rate 54
b) Risk premium 55
c) Deduction for growth 67
4. Discounted earnings value of the operational business 69
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T a b l e o f C o n t e n t s
-------------------------------------------
Page
5. Special values 70
6. Equity value and value per share 71
II. Reasonableness of the equity value 71
1. Trading Multipliers 71
2. Transaction Multipliers 72
III. Takeover bid price and synergies 73
1. Takeover bid price 73
2. Synergies reflected in the takeover bid price 74
3. Non-reflection of these synergies within the discounted earnings value 74
4. Classification of genuine synergies within takeover bid 75
IV. Stock exchange price 76
V. Compensation 81
VI. Guaranteed dividend 82
1. Determination of the average share in the profit 82
2. Consideration of corporate income tax according to the case law of the BGH 84
E. FINAL COMMENT 85
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L i s t o f A n n e x e s ---------------------------------------------
Annex 1 Final draft of the Domination and Profit and Loss Transfer Agreement between Vodafone Vierte Verwaltungs AG and KDH AG dated 18.12.2013
Annex 2 General Terms and Conditions of Engagement for Accountants and Accounting Firms in the version dated 1 January 2002
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L i s t o f A b b r e v i a t i o n s
------------------------------------------------------
adj. adjusted AFK AFK Aus- und Fortbildungs GmbH für elektronische Medien AG German Stock Corporation [Aktiengesellschaft] AktG German Stock Corporations Act [Aktiengesetz] ARD Consortium of public broadcasters in Germany
[Arbeitsgemeinschaft der öffentlich-rechtlichen Rundfunkanstalten der Bundesrepublik Deutschland]
ARPU Average Revenue per User Art. Article ARTE Association Relative à la Télévision Européenne BaFin German Financial Supervisory Authority [Bundesanstalt für
Finanzdienstleistungsaufsicht] BB German professional journal in the field of law, economics and
taxes [Betriebs Berater] BCA Business Combination Agreement BGH German Federal Court of Justice [Bundesgerichtshof] BVerfG Federal Constitutional Court [Bundesverfassungsgericht] BvR Register reference of the Federal Constitutional Court
[Registerzeichen des Bundesverfassungsgerichts] BWA Broadband Wireless Access ca. circa CAGR Compound Annual Growth Rate CAPM Capital Asset Pricing Model CDAX Composite DAX DAX German Stock Market Index [Deutscher Aktienindex] DCF Discounted Cash Flow DPLTA Domination and Profit and Loss Transfer Agreement DSL Digital Subscriber Line DTAG Deutsche Telekom AG DTK DTK Deutsche Telekabel GmbH DVR Digital Video Recorder e.V. registered association [eingetragener Verein] e.g. exempli gratia (for example) EBIT Earnings before Interest and Taxes EBITDA Earnings before Interest and Taxes, Depreciation and
Amortization EBT Earnings before Taxes EStG Income Tax Act [Einkommensteuergesetz] et seq. et sequens (and the following pages) EU European Union EUR Euro
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L i s t o f A b b r e v i a t i o n s
------------------------------------------------------
FAUB Technical Committee for Business Valuation and Economics [Fachausschuss für Unternehmensbewertung und Betriebswirtschaft des IDW]
FTE Full-time equivalent GB Great Britain GewStG Trade Tax Act [Gewerbesteuergesetz] GG German Constitution [Grundgesetz] GmbH German company with limited liability [Gesellschaft mit
beschränkter Haftung] GSM Global System for Mobile Communications HD High Definition HFC Hybrid Fiber Coax Network [Hybrid-Glasfaser-Koaxial-Netz] HGB Commercial Code [Handelsgesetzbuch] HRB Commercial Register [Handelsregister – Abteilung B] i.e. id est IAS International Accounting Standard IDW Institute of Accountants in Germany – Institute of Public Auditors
in Germany, Incorporated Association [Institut der Wirtschaftsprüfer in Deutschland e.V.]
IDW S 1 IDW Standards: Principles on the Conduct of Enterprise Valuations dated 02 April 2008
IFRS International Financial Reporting Standards Inc. Incorporation incl. including IP Internet Protocol IPO Initial Public Offering IPTV Internet Protocol Television KCB KABELCOM Braunschweig Gesellschaft für Breitbandkabel-
Kommunikation mbH KCW KABELCOM Wolfsburg Gesellschaft für Breitbandkabel-
Kommunikation mbH KDFS Kabel Deutschland Field Services GmbH KDK Kabel Deutschland Kundenbetreuung GmbH KDVS Kabel Deutschland Vertrieb und Service GmbH KDH Kabel Deutschland Holding KG Limited Partnership [Kommanditgesellschaft] KMS GmbH Kabelfernsehen München Servicenter GmbH –
Beteiligungsgesellschaft – KMS KG Kabelfernsehen München Servicenter GmbH & Co. KG KStG Corporation Tax Act [Körperschaftsteuergesetz] LTIP Long Term Incentive Plan mbH with limited liability [mit beschränkter Haftung] Mbit/ s Megabit per second MDAX Mid-Cap-DAX
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L i s t o f A b b r e v i a t i o n s
------------------------------------------------------
mEUR million Euro Mio. million MSCI Morgan Stanley Capital International no. number NV/N.V. Naamloze Vennootschap (stock corporation according to Dutch
and Belgian law) NZG Professional journal in the field of law [Neue Zeitschrift für
Gesellschaftsrecht] n/a not available OLG Court of appeals [Oberlandesgericht] p. page p. a. per annum para. paragraph Plc Public limited company PLN Polish Złoty RGU Revenue-Generating Unit RTL Radio Télévision Luxembourg / RTL Television Rz. point [Randziffer] SA/S. A. Société anonyme SD Standard Definition SEPA Single Euro Payments Area SLA Service Level Agreement sp. special TC Tele Columbus GmbH TKS TKS Telepost Kabel-Service Kaiserslautern GmbH & Co. KG TV Television Tz. note [Textziffer] UMTS Universal Mobile Telecommunications System Unitymedia Unitymedia Kabel BW GmbH US United States (of America) USA United States of America USD US-Dollar Urbana GmbH Urbana Teleunion Rostock GmbH Urbana KG Urbana Teleunion Rostock GmbH & Co. KG VDSL Very High Speed Digital Subscriber Line VoD Video-on-Demand vs. versus w/o without WACC Weighted Average Cost of Capital WLAN Wireless Local Area Network WpÜG German Takeover Act [Wertpapiererwerbs- und
Übernahmegesetz] XETRA Exchange Electronic Trading (electronic trading system of
Deutsche Börse AG)
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L i s t o f A b b r e v i a t i o n s
------------------------------------------------------
ZDF Second German Television [Zweites Deutsches Fernsehen] ZIP Professional journal in the field of law [Zeitschrift für
Wirtschaftsrecht und Insolvenzpraxis]
The calculations shown in this report were calculated to several places behind the decimal point, although they are shown only with one place after the decimal point for the sake of
convenience. For this reason, the addition of the values in the tables can lead to differences with the shown subtotals and totals.
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A. MANDATE AND CONDUCT OF THE MANDATE
Kabel Deutschland Holding AG, Unterföhring, and Vodafone Vierte Verwaltungs AG, Düsseldorf, mandated us in a letter dated 23 October 2013 to conduct an enterprise valuation of
Kabel Deutschland Holding AG,
Unterföhring,
(hereinafter also referred to as "KDH AG" or the "Company")
and to determine the amount of the reasonable compensation pursuant to § 305 AktG as
well as the reasonable guaranteed dividend pursuant to § 304 AktG.
The reason for the valuation is the planned conclusion of a Domination and Profit and Loss Transfer Agreement pursuant to § 291 AktG (hereinafter, also the "DPLTA") between Vodafone Vierte Verwaltungs AG as the controlling company and KDH AG as
the controlled company. The extraordinary general shareholders meeting of KDH AG is supposed to resolve about the conclusion of the DPLTA on 13 February 2014.
On 24 June 2013 Vodafone Vierte Verwaltungs AG (formerly Vodafone Vierte Verwaltungsgesellschaft mbH) announced to submit a voluntary public takeover bid to
acquire the shares of KDH AG for a price of EUR 84.50. Vodafone Vierte Verwaltungs AG declared in the offer document for the voluntary public takeover bid published on 30 July 2013 that it has the intent, subject to fulfilling the relevant legal
prerequisites, to conclude a DPLTA with KDH AG. The announcement was made on 12 September 2013 that the minimum threshold for acceptance of 75 % contemplated in the takeover bid was achieved. The transaction was subject to merger control
proceedings. On 20 September 2013 the relevant EU competition authority officially announced that there are no antitrust concerns against the takeover of KDH AG by
Vodafone Vierte Verwaltungs AG. Correspondingly, the executive board of Vodafone Vierte Verwalungs AG announced on the 20 September 2013 that all necessary closing conditions were satisfied. Simultaneously, the intent to conclude a DPLTA was again
affirmed by the bidder by approaching the executive board of KDH AG for the purpose of commencing contract negotiations about the conclusion of a DPLTA. The closing of the takeover bid was announced on 14 October 2013.
We conducted our work after being mandated in the months of October 2013 until the date of signature of this Expert Report in the offices of KDH AG in Unterföhring and in
our offices in Düsseldorf.
The basis for our work consisted especially of the following documents.
� Final draft of the DPLTA between Vodafone Vierte Verwaltungs AG and KDH AG dated 18.12.2013;
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� Final draft of the joint report of the executive board of Vodafone Vierte Verwaltungs AG and the executive board of KDH AG pursuant to § 293a AktG on the DPLTA (the "Contract Report") dated 18.12.2013;
� Letter of comfort issued by Vodafone Group Plc;
� Business plan of KDH AG for the fiscal years 2013/14 until 2018/19; adopted by the executive board of KDH AG on 25 November 2013;
� Annual financial reports of KDH AG for the fiscal years 2010/11 to 2012/13 as well as the interim notification of KDH AG on the second quarter of the fiscal year 2013/14;
� Audit reports for the annual financial statements and the management report of KDH AG for the fiscal years 2010/11 to 2012/13 from Ernst & Young GmbH
Wirtschaftsprüfungsgesellschaft;
� Audit reports about the consolidated financial statements and the consolidated management report of KDH AG for the fiscal years 2010/11 to 2012/13 by Ernst &
Young GmbH Wirtschaftsprüfungsgesellschaft;
� Excerpt from the commercial register for KDH AG dated 16 December 2013;
� Articles of association of KDH AG in the version registered in the commercial register on 23 July 2013;
� Determination of the weighted average German stock exchange price for the stock of KDH AG in accordance with the WpÜG from the Federal Financial Supervisory Agency [Bundesanstalt für Finanzdienstleistungsaufsicht, "BaFin"] dated 17 December2013
for the relevant three-month-period ending on 12.09.2013.
In addition, we refer to publicly available information as well as capital market data.
We were openly and willingly provided information about the economic and tax circumstances of KDH AG as well as the planned accounts.
We received a declaration of completeness from the executive board of Vodafone Vierte Verwaltungs AG and KDH AG stating that all information which is relevant for the
valuation was correctly and completely provided.
We expressly point out that we have not conducted any audit of the accounts, the annual
and consolidated financial statements as well as the management reports or the management of KDH AG and the companies in the KDH Group. Such audits are not
the subject of our valuation work. The consistency of the submitted individual consolidated financial statements as well as the management reports of KDH AG as well
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as the companies in the KDH Group for the fiscal years that have been completed and are shown in this Report with the respective legal provisions has been fully certified by the respective auditors of the financial statements. We accordingly assume the accuracy
of the documents presented to us with regard to the completeness of the annual financial statements and compliance with accounting provisions.
Our work is based on the statement of the Institute of Accountants in Germany – Institute of Public Auditors in Germany, Incorporated Association [Institut der
Wirtschaftsprüfer in Deutschland e.V.], Düsseldorf, IDW Standard: Principles on the Conduct of Enterprise Valuations [Grundsätze zur Durchführung von Unternehmensbewertungen] dated 02 April 2008 ("IDW S 1 2008"). We also took into account the guidelines developed in
the case law.
We are issuing this Expert Report as neutral experts.
If there are material changes in the period between the completion of our work on the date of signing this Expert Report and the date on which the resolution of the
extraordinary shareholders meeting of KDH AG is adopted on 13 February 2014 which affect the assessment of the compensation and guaranteed dividend, these changes would
have to be subsequently taken into account.
Our mandate is based on the attached "General Terms and Conditions of Engagement
for Accountants and Accounting Firms in the version dated 1 January 2002". Our liability is limited under clause 9 para. 2 of these General Terms and Conditions of Engagement to EUR 4 million for individual damages caused by negligence, except for damages
resulting from injury to life, physical integrity and health. With regard to the relevance of our mandate for the determination of the compensation and the guaranteed dividend, the
amount of EUR 10 million takes the place of the maximum amount of EUR 4 million set forth in Clause 9 para. 2 of the General Terms and Conditions of Engagement due to the importance of our mandate for the setting of the compensation and the guaranteed
dividend. The above maximum amount of liability is only available in total once for all beneficiaries of any claims. No. 1 para. 2 and no. 9 of the General Terms and Conditions of Engagement are determinative in the relationship to third parties.
The Expert Report has been prepared in connection with the intended conclusion of a DPLTA pursuant to § 291 AktG and will be published as an attachment to the
contractual agreement. Any additional disclosure of our Expert Report to third parties can only occur subject to the express consent from our side. The consent to distribute the Expert Report to third parties will only be granted under the restriction that the particular
third party and Warth & Klein Grant Thornton have concluded a liability agreement in written form.
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B. SUBJECT OF THE VALUATION
I. Legal situation
Commercial register, articles of association and participations
KDH AG has its registered office in Unterföhring and is registered under HRB 184452 in the commercial register at the Local Court [Amtsgericht] Munich. The fiscal year of KDH AG begins on 1 April of a calendar year and ends on 31 March of the following
calendar year. The articles of association of KDH AG are valid in the version registered in the commercial register on 23 July 2013.
The direct and indirect shareholdings of KDH AG as of 31 March 2013 are shown below:
According to information from the Company, two companies have been established since
31 March 2013 in which KDH AG holds 100 % of the shares: Kabel Deutschland Holding Erste Beteiligungs GmbH and Kabel Deutschland Holding Zweite Beteiligungs GmbH. Both companies are shelf companies and are not operational.
KDH AG is the top management and holding company in the KDH Group. As the parent company, it performs the typical responsibilities of a holding company, for
example, the strategic development of the Group as well as providing services and financing for its affiliated enterprises.
The business activity of the KDH Group is primarily conducted by the operational Kabel Deutschland Vertrieb und Service GmbH ("KDVS GmbH"), TKS Telepost Kabel-
Service Kaiserslautern GmbH & Co. KG ("TKS KG"), KABELCOM Wolfsburg Gesellschaft für Breitbandkabel-Kommunikation mit beschränkter Haftung
Group Companies as of 31.03.2013 Share
KDH AG in %
Kabel Deutschland Vertrieb und Service GmbH 100.00%
Kabel Deutschland Kundenbetreuung GmbH 100.00%
TKS Telepost Kabel-Service Kaiserslautern Beteiligungs-GmbH 100.00%
TKS Telepost Kabel-Service Kaiserslautern GmbH & Co. KG 100.00%
Kabel Deutschland Field Services GmbH 100.00%
"Urbana Teleunion" Rostock GmbH & Co. KG 70.00%
Verwaltung "Urbana Teleunion" Rostock GmbH 50.00%
KABELCOM Braunschweig Gesellschaft für Breitbandkabel-Kommunikation mit beschränkter Haftung 100.00%
KABELCOM Wolfsburg Gesellschaft für Breitbandkabel-Kommunikation mit beschränkter Haftung 100.00%
Kabel Deutschland Dritte Beteiligungsgesellschaft mbH 100.00%
Kabel Deutschland Fünfte Beteiligungsgesellschaft mbH 100.00%
Kabel Deutschland Sechste Beteiligungs GmbH 100.00%
Kabel Deutschland Siebte Beteiligungs GmbH 100.00%
Kabel Deutschland Achte Beteiligungs GmbH 100.00%
Kabel Deutschland Neunte Beteiligungs GmbH 100.00%
Kabelfernsehen München Servicenter Gesellschaft mit beschränkter Haftung - Beteiligungsgesellschaft - 24.00%
Kabelfernsehen München Servicenter GmbH & Co. KG 30.22%
AFK Aus- und Fortbildungs GmbH für elektronische Medien 2.00%
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("KCW GmbH") as well as KABELCOM Braunschweig Gesellschaft für Breitbandkabel-Kommunikation mit beschränkter Haftung ("KCB GmbH").
KDVS GmbH is the owner and operator of the operational cable television business and represents the main part of the business operations of KDH Group. The subject of the business activity of KDVS GmbH is activity in all areas of television, telecommunications
and multi-media and services related to these areas.
TKS KG is a service provider which provides especially telecommunications products
such as TV, internet and telephone and telecommunications services for English language customers in Germany. It is especially active on the American military bases in Germany.
TKS Telepost Kabel-Service Kaiserslautern Beteiligungs-GmbH (“TKS GmbH“) is the general partner of TKS KG.
KCW GmbH and KCB GmbH construct and operate cable connections, especially for the transmission of television and radio signals at the network level 4 (building connections) for end customers. In addition, the companies provide back channel
services in cooperation with KDVS GmbH such as internet and telephone products as well as other digital services. The companies Kabel Deutschland Kundenbetreuung
GmbH ("KDK GmbH") and Kabel Deutschland Field Services GmbH ("KDFS GmbH") are internal service provider companies in the KDH Group.
The internal services of KDK GmbH include rendering services especially for customer service, call centers and sales support. KDFS GmbH is active as a regional complex service provider and performs services and carries out works of all kinds in the field of
cable networks in this regard, especially services for maintenance and correction of problems as well as services for setting up interactive services. KDFS GmbH also
handles the procurement and sale of the material components required for performing the services.
In addition, KDH AG has participations in "Urbana Teleunion" Rostock GmbH & Co. KG ("Urbana KG") and its general partner "Urbana Teleunion" Rostock GmbH ("Urbana GmbH").
The business activity of Urbana KG covers the development, production, administration, maintenance and servicing of telecommunications systems as well as all related business.
The management "Urbana Teleunion" Rostock GmbH ("Urbana GmbH") has a participation in Urbana KG as the general partner without a capital contribution. The
activity of Urbana GmbH is limited to management activities within the KG.
A minority stake is held in Kabelfernsehen München Servicenter GmbH & Co. KG
("KMS KG") and its general partner, Kabelfernsehen München Servicenter Gesellschaft mit beschränkter Haftung - Beteiligungsgesellschaft - ("KMS GmbH").
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The activity of KMS KG includes especially the construction and operation of broadband distribution equipment in Munich and in parts of Southern Bavaria as well as the acquisition, servicing and administration of the corresponding customers. KMS GmbH
conducts the business and represents KMS KG in accordance with the partnership agreement of KMS KG. KMS GmbH does not carry out any own business activity other than the management for KMS KG.
The companies Kabel Deutschland Dritte Beteiligungsgesellschaft mbH, Kabel
Deutschland Fünfte Beteiligungsgesellschaft mbH, Kabel Deutschland Sechste Beteiligungs GmbH, Kabel Deutschland Siebte Beteiligungs GmbH, Kabel Deutschland Achte Beteiligungs GmbH and Kabel Deutschland Neunte Beteiligungs GmbH are non-
operational shelf companies. AFK - Aus- und Fortbildungs GmbH für elektronische Medien is a charitable company which was established on the initiative of the Bavarian State Central Office for New Media [Bayerische Landeszentrale für neue Medien]. The subject
of the company is developing concepts for training and continuing education measures in the field of electronic media, especially for television and radio.
Share capital, number of shares, shareholders
The share capital of KDH AG in the amount of EUR 88,522,939 is divided into 88,522,939 no par value bearer shares. KDH AG does not hold any treasury stock.
At the completion of our work Vodafone Vierte Verwaltungs AG holds 67,780,374 shares in KDH AG; this corresponds to a shareholding of 76.57 % in the share capital of
KDH AG.
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II. Economic situation
1. Subject of the business activity
According to the currently valid articles of association, the subject of the enterprise is
working in all areas involving television, telecommunications and multi-media and services related to these areas.
The Company is authorized to take all actions and measures and can conduct all transactions which directly or indirectly are appropriate for serving the corporate purpose. The Company can also establish, acquire and participate in other enterprises of the same
or related kind in Germany and foreign countries as well as manage such companies or limit itself to the management of the participation. The Company can completely or
partially spin off its operations to affiliated enterprises. The Company can also establish branches and permanent establishments in Germany and foreign countries.
The cable network is the foundation of the business for the KDH Group and forms the foundation for all other products and services. When measured in terms of residential units that can be connected to a cable network and overall clients, according to its own
assessment KDH Group can be considered as the largest cable network operator in Germany. With more than 15 million residential units which can be connected to a cable
network, the cable network of KDH Group is most likely also the largest within one single country throughout Europe. As of 30 September 2013, 13.9 million of the 15 million residential units that can be connected, are equipped with back-channel-ready
connections. Of these, 11.6 million can currently be provided with internet- and/or phone services from KDH AG. That’s about 30 % of all German households.
The network coverage of the KDH Group in Germany is shown in the following illustration. The territory for the activity of KDH Group in Germany is marked with dark color. The German states of Hesse, North Rhine-Westphalia and Baden-Wuerttemberg
are displayed with a light color because KDH Group is not active in these regions.
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With its current cable network in place, Germany has an infrastructure which is ideally
suited for transporting broadcast signals and other large volumes of data. The development of the network goes back to the year 1982 when the former German Federal
Post Office [Deutsche Bundespost] began to supply the Federal Republic with comprehensive coverage with so-called broadband cable. The proportion of German households which are connected to this network equals around 70 %.
The cable network in Germany is organized into four so-called network levels. The network levels 1 and 2 provide the signal transport from the broadcaster to the regional
distribution networks. The network level 3 extends from the regional distribution points or head-end stations to the households’ cellar or their connection points in front of the
house door. Network level 4 is the portion of the network from the transfer point to the cable socket in the apartment.
KDH Group operates the network level 3 in its regional area of activity and also supplies customers directly in these territories, i.e. at the network level 4.
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KDH Group uses the cable network to offer its customers services of various kinds in the areas of television and telecommunications, including analog, digital and high definition
television as well as video-on-demand ("VoD”), digital video recording (“DVR”), pay-TV, broadband internet and telephone service using the TV cable network and with one cellular telephone services partner.
The activities of KDH AG are organized into two business segments: TV as well as Internet and Telephone.
The TV business covers basic cable and premium TV-products and -services. The basic cable business consists of analog and digital TV and radio services which are offered
especially using individual contracts with end customers or group contracts with building owners and residential companies as well as contracts with network level 4 operators.
Premium TV products such as pay-TV, digital video recording and access to high definition television are distributed to basic cable customers as supplemental services.
The Internet and Telephone business segment includes broadband internet access, fixed line telephone service and cellular telephone service, mobile data services as well as additional options. Broadband internet access and fixed line telephone service is provided
to households which can be connected to the upgraded KDH network. A large portion of the new customers in the Internet and Telephone segment subscribed to combination
products which cover both services. The mobile telephone and data services are offered by KDH Group using a contractual relationship with a cellular telephone operator.
The allocation of the sales revenues to the two business segments TV as well as Internet and Telephone for the fiscal years 2005/06 to 2012/13 is shown in the following graph:
Ne
two
rkle
ve
l
Content production and network supply
Anlalog and digital signal processing
and encryption
Regional signal distribution
In-house signal distribution
Ne
two
rkle
ve
l 2
Ne
two
rk le
ve
l 3
Ne
two
rkle
ve
l 4
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Source: annual financial reports of KDH
From the allocation of sales between the business segments, it becomes clear that the Internet and Telephone division has gained importance compared to the TV division in the shown period. The portion of total sales of the Internet and Telephone division in
the fiscal year 2005/06 was 1.0 % and increased to 34.9 % over the course of time until the fiscal year 2012/13.
0
200
400
600
800
1.000
1.200
1.400
1.600
1.800
2.000
mE
UR
Revenue shares of TV- and Internet and Phone business
TV business Internet and Phone business
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2. Earnings and financial situation
The earnings situation of KDH AG under IFRS (consolidate ed financial statements)
according to the information for the fiscal years 2010/11 to 2012/13 published and certified in the annual financial reports is shown in the following table:
KDH AG generated in the last fiscal years corporate group profit of EUR -45.3 million
(2010/11), EUR 159.4 million (2011/12) as well as 246.8 million (2012/13).
The main reasons for the positive development of the group profit in the fiscal year
2011/12 compared to the previous year were the dynamic development of sales in the Internet and Telephone division which generated growth in sales of 16.2 % compared to
the previous year. Costs and expenses were also able to be reduced which is mainly attributable to lower expenses for depreciation by extending the useful life of certain assets as well as the expiration of the useful life of the customer base which was originally
acquired by KDH AG in 2003. In addition, the interest expense was able to be lowered compared to the fiscal year 2010/11. This decrease resulted from a reorganization of debt that was carried out in the fiscal years 2010/11 and 2011/12.
In the fiscal year 2012/13, KDH AG was again able to show a major increase in the
group profit. As in the previous year, the Internet and Telephone division was one of the main components for this success with an increase in sales of 17.9°%. The costs and expenses of KDH AG increased mainly as a result of an increase in the personnel costs
which resulted essentially from the permanent employment of temporary workers at the call centers of the KDH-Group. However, the general increase in costs was able to be compensated in part by lower expenses for depreciation. The interest expense compared
Profit and loss statement 2010/11 2011/12 2012/13
KDH AG mEUR mEUR mEUR
Revenues 1,598.9 1,699.7 1,829.9
Cost of services rendered -801.5 -784.3 -835.6
Other operating income 12.3 12.1 12.6
Selling expenses -467.4 -424.7 -414.2
General and adminstrative expenses -135.4 -130.0 -166.8
EBIT 207.0 372.9 426.0
Interest income 4.3 2.9 3.3
Interest income -272.7 -201.6 -206.0
Income from associates 4.1 1.6 2.3
EBT -57.3 175.8 225.6
Income tax 12.0 -16.4 21.2
Net profit/loss -45.3 159.4 246.8
Non-controlling interest 0.0 0.0 0.0
for information only: depreciation and amortization -490.2 -395.9 -360.9
for information only: EBITDA 697.1 768.8 786.9
for information only: EBITDA margin 43.6% 45.2% 43.0%
* The non-controlling interest for the fiscal years 2011/12 - 2012/13 are 781.10 EUR, 1,225.70 EUR
* and 1,254.70 EUR, respectively. As the figures are presented in mEUR * the table shows 0,0.
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to the previous year was virtually constant. Overall, the increase in costs and expenses compared to the growth in sales in the fiscal year 2012/13 was disproportionately low.
KDH AG published the profit and loss statement under IFRS based on the cost of sales method. The profit and loss statement in the internal reporting, especially the business planning, however, is prepared according to the total costs method. In order to have
better comparability of the planning for the profit and loss statement with the observed developments in the past, the following illustration shows the earnings position of
KDH AG (corporate group) according to the internal organizational structure based on the total costs method. Expenses for the Long Term Incentive Plan (“LTIP”) are shown separately from personnel expenses. Furthermore, the adjusted EBITDA displayed by
the Company within its annual financial report is shown for information purposes only:
The financial situation of KDH AG under IFRS (consolidated financial statements) according to information for the fiscal years 2010/11 to 2012/13 published and certified
in the annual financial reports is as follows:
Profit and loss statement 2010/11 2011/12 2012/13
KDH AG mEUR mEUR mEUR
actual actual actual
Revenues 1,598.9 1,699.7 1,829.9
Cost of material and services -421.6 -450.9 -491.1
Personnel expenses -182.0 -179.4 -199.6
LTIP -17.4 -20.5 -64.1
Other expenses -293.1 -292.2 -300.9
Other operating income 12.3 12.1 12.6
EBITDA 697.1 768.8 786.9
Depreciation and amortization -490.2 -395.9 -360.9
EBIT 207.0 372.9 426.0
Financial result -264.3 -197.1 -200.3
EBT -57.3 175.8 225.6
Income tax 12.0 -16.4 21.2
Net profit/loss -45.3 159.4 246.8
for information only: adapted EBITDA 729.1 795.5 862.3
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The balance sheet total of KDH AG increased in the fiscal year 2011/12 compared to the previous year from EUR 2,014.3 million to EUR 2,159.8 million. Compared to the
previous year, the main differences resulted from increases in cash- and cash equivalents. The related balances at credit institutions were pledged under the Senior Credit Facility and its amendments as security for the benefit of the corresponding lending banks as of
31 March 2012. There was a decrease in the capital reserve on the equity liabilities side in the fiscal year. This results primarily from the cancelation of redeemed treasury stock. At
the end of the fiscal year 2011/12 KDH AG reported a net accumulated loss on the balance sheet of EUR 1,691.2 million which resulted in negative equity capital. The main reason for the net accumulated loss can be seen in the accounting treatment of the
foundation of KDH AG in the year 2004 under IFRS and the application of a “reverse acquisition” according to IFRS 3 and IAS 18.
Balance sheet 31.03.2011 31.03.2012 31.03.2013
KDH AG mEUR mEUR mEUR
Cash and cash equivalents 28.3 133.8 609.5
Trade receivables 83.0 88.8 131.2
Inventories 16.2 31.5 51.9
Receivables from tax authorities 0.4 0.3 1.9
Other current financial assets 9.8 15.6 16.4
Prepaid expenses 12.0 12.3 12.0
Current assets 149.8 282.3 823.0
Intangible assets 673.2 630.4 641.4
Property and equipment 1,158.5 1,198.0 1,308.9
Equity investment in associates 13.2 8.1 7.7
Deferred tax assets 1.4 0.6 38.5
Other non-current financial assets 0.0 7.8 7.0
Prepaid expenses 18.3 32.6 32.0
Non-current assets 1,864.5 1,877.5 2,035.5
Total assets 2,014.3 2,159.8 2,858.5
Subscribed capital 90.0 88.5 88.5
Capital reserve 126.5 68.1 68.1
Legal reserve 0.0 0.0 8.9
Cash flow hedge reserves 0.0 -43.0 -51.1
Asset revaluation surplus 1.0 0.8 0.6
Accumulated deficit -1,850.8 -1,691.2 -1,585.8
Non-controlling interest 0.3 0.0 0.0
Equity -1,633.0 -1,576.8 -1,470.9
Current financial liabilities 208.5 27.9 40.1
Trade payables 266.2 287.9 312.6
Liabilites to associates 0.0 0.0 0.0
Other current provisions 34.5 21.7 8.5
Liabilities due to income taxes 85.2 72.8 58.1
Other current liabilities 106.1 88.9 93.7
Deferred income 238.6 237.1 227.8
Current liabilities 939.1 736.3 740.9
Non-current financial liabilities 2,546.2 2,831.9 3,383.1
Deferred tax liabilites 64.6 41.3 1.1
Provisions for pensions 44.6 49.0 54.8
Other non-current provisions 23.2 24.8 33.1
Other non-current liabilities 28.9 51.4 115.1
Deferred income 0.7 1.9 1.2
Non-current liabilites 2,708.2 3,000.3 3,588.5
Total equity and liabilities 2,014.3 2,159.8 2,858.5
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The total balance sheet for the fiscal year 2012/13 compared to the previous year increased substantially from EUR 2,159.8 million to EUR 2,858.5 million. This increase resulted especially from increased cash- and cash equivalents resulting from the issuance
of senior notes in June 2012 as well as increases of senior secured notes in July 2012. The long-term debt increased in a corresponding manner on the liabilities side of the balance sheet. An additional increase on the assets side results from the increase in receivables for
delivery of goods and services compared to the previous year. This results mainly from the increase of revenue generating units (“RGU”) and the corresponding revenue
recognition of accrued receivables as well as from receivables towards broadcasters established under public law for signal feeds which were outstanding as of 31 March 2013 due to ongoing proceedings. Due to the positive annual result, the net accumulated loss
on the balance sheet has been reduced to EUR 1,585.8 million at the end of the fiscal year 2012/13.
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3. Market and competition
KDH Group offers television as well as internet and telephone services through its cable
network. In light of this business model the German cable market and the competitors active in that market are discussed in the analysis of the market and competition. Furthermore, the market and competition for the two business segments, TV- as well as
internet and telephone services are then analyzed.
The cable network is the main foundation of the business of KDH Group and constitutes
the basis for all additional products and services. Until the end of the 1990s, the entire German cable network was owned by Deutsche Telekom, which was required by the EU
Commission to completely separate its telecommunications- and cable television networks. In order to create more competition, Deutsche Telekom accordingly had to sell its TV-cable networks. In preparation of this sale, Deutsche Telekom outsourced its
broadband cable operations to affiliated companies.
The cable networks in North Rhine Westphalia and Baden-Wuerttemberg were sold to
the American investor Callahan, whereas the British investor Gary Klesch acquired the Hessian cable network. Through these transactions the companies ish for the cable
network in North Rhine Westphalia and iesy for the cable network in Hesse originated, which were later merged to Unitymedia and KabelBW.
Nowadays, cable network operators in addition to KDH Group are Unitymedia Kabel BW ("Unitymedia”), Tele Columbus ("TC”), DTK Deutsche Telekabel ("DTK”), PrimaCom, pepcom Unternehmensgruppe (“pepcom”) as well as several local suppliers.
Unitymedia, which is part of Liberty Global, provides broadband services in the States of North Rhine-Westphalia, Hesse and Baden-Wuerttemberg. TC consists of several regional cable network operators and supplies customers in the core regions of Berlin,
Brandenburg, Saxony, Saxony-Anhalt and Thuringia as well as in certain key regions in Western Germany. DTK is active throughout the country. PrimaCom operates its cable
network with a regional emphasis in Berlin, Brandenburg, Mecklenburg-Vorpommern, Saxony, Saxony-Anhalt and Thuringia as well as some major regions in Western Germany. pepcom comprises of twelve regional cable operators running more than 100 local and
regional networks.
Beside other cable network operators that offer their products and services in the same
footprint, the competitors for the cable network operators are Deutsche Telekom, other DSL-providers (in particular United Internet, Telefónica O2 and Vodafone) and regional
city network operators whose services directly compete with the offers from the cable network operators.
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TV Market
The households owning a television set constitute the relevant sales market for TV
products in Germany. The supply of these households with TV products occurs through various means of transmission that compete with each other. These are: satellite, cable, terrestrial broadcasting and IPTV (Internet). TV reception by means of satellite or by
means of a terrestrial broadcast signal is generally free of charge in Germany, if the corresponding reception equipment exists. Compared to this, reception by cable or IPTV
is subject to charges.
The actual and expected allocation of the television households to the various
transmission methods for the year 2006 to 2017 is shown in the following table:
Source: German Entertainment and Media Outlook 2013, p. 77.
The number of households that receive their television signal by satellite has increased substantially in recent years. Their portion in the number of television households in the
year 2012 was 45.9 %, whereby a further increase to 48.0 % is expected by the year 2017. The reasons for the increased portion of satellite households can be seen in the largely free of charge services and the wide variety of the offered programs.
The increase in the satellite households especially coincides with the decrease in cable households. The number of cable households in the year 2012 was 44.6 % of the
television households and for the first time less than the number of satellite households. A further decreasing number of cable households is expected in the future. The reason
for this is the competition with other transmission channels combined with a stagnating overall market (number of television households) which has the result of decreasing the number of cable customers. The cable suppliers are trying to counter this trend by
bundling products such as TV, internet and telephone and by selling additional products to existing customers.
The share of terrestrial households as well as IPTV households currently has a subordinate relevance in the overall market. The share of households receiving terrestrial
Transmission pathes 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
TV homes actual actual actual actual actual expected expected expected expected expected
m m m m m m m m m m
Satellite homes 16.2 16.2 16.7 17.1 17.6 17.8 18.0 18.1 18.3 18.4
Change n/a 0.0% 3.1% 2.4% 2.9% 1.1% 1.0% 0.9% 0.8% 0.6%
Share of TV homes 43.0% 42.9% 43.7% 44.8% 45.9% 46.4% 46.9% 47.3% 47.7% 48.0%
Cable homes 18.4 18.6 18.2 17.9 17.1 16.7 16.4 16.2 16.0 15.8
Change n/a 1.1% -2.4% -1.7% -4.2% -2.2% -1.7% -1.5% -1.2% -1.0%
Share of TV homes 48.8% 49.2% 47.5% 46.8% 44.6% 43.6% 42.9% 42.3% 41.7% 41.3%
Terrestrial homes 2.6 2.0 2.0 1.7 2.0 1.9 1.8 1.7 1.6 1.5
Change n/a -23.1% 0.0% -15.0% 17.6% -3.5% -6.7% -7.2% -7.2% -6.5%
Share of TV homes 6.9% 5.3% 5.2% 4.5% 5.2% 5.0% 4.7% 4.4% 4.0% 3.8%
IPTV homes 0.5 1.0 1.4 1.5 1.6 1.9 2.1 2.3 2.5 2.6
Change n/a 85.2% 35.0% 11.1% 9.3% 14.6% 12.8% 9.9% 7.3% 4.0%
Share of TV homes 1.4% 2.6% 3.5% 3.9% 4.3% 4.9% 5.5% 6.1% 6.5% 6.8%
TV homes 37.7 37.8 38.2 38.1 38.3 38.3 38.4 38.3 38.3 38.3
Change n/a 0.3% 1.1% -0.2% 0.5% 0.00 0.00 0.00 0.00 0.00
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broadcast signals in the year 2012 was around 5.2 % and is expected to decrease to 3.8 % by the year 2017. One reason for the expected downward trend includes the decision of RTL to stop terrestrial broadcasting towards the end of 2014. 1 However, there is a
positive trend with the number of IPTV households. The share of households using IP based television transmission was 4.3 % in 2012; a share of 6.8 % is expected by the year 2017.
A major development in the field of TV is the increasing digitalization of German
television households which is shown in the following graph:
Source: die medienanstalt (2013): Digitalization Report 2013, p. 35.
While 32.3 % and 10.3 % of the television households were not digitalized or not completely digitalized in the year 2011, their portion decreased to only 19.2 % and 7.4 % of the television households in the middle of 2013.
The analysis of the digitalization of the transmission channels shows a differentiated picture. As a result of shutting down distribution with analog terrestrial television
broadcasting at the end of 2008 and analog satellite transmission in April 2012, these two transmission channels have become fully digitalized in the meantime. Contrary to this, cable households currently can still receive analog television signals, whereby the portion
of digital television households increased from 16.2% in 2007 to 55.9% in the middle of 2013.
In order to further advance the digitalization of the television households, the media companies have increasingly supported requests to cancel the existing basic encryption in
cable in recent years. As a result of basic encryption, the transmission channel is encoded so that programs cannot be received without an additional decoder. The basic encryption of digital programs in SD quality was generally eliminated as of May 2013 in the two large
German cable networks of KDH Group and Unitymedia respectively due to an order of the Federal Cartel Office [Bundeskartellamt]. In the case of KDH Group, the conditions
1 See, die medienanstalt (2013): Digitalization Report 2013, p. 39.
32%
10%
59%2011
analog TV reception only
22%
7%
71%
2012
digital and analog TV reception
19%
7%
74%
2013
digital TV reception only
Progress of digitalization of TV homes 2011 to 2013
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imposed by the Cartel Office are directed towards the two large broadcasting groups ProSiebenSat.1 and RTL. For most private broadcasters the basic encryption of HD-signals will continue to exist.
Internet and telephone market
The percentage of the German population with internet access increased from 75.9 % in the year 2012 to 77.2 % in the year 2013; this corresponds to a total of 54.2 million users.2
The major portion of broadband connections in fixed line networks is based on copper lines (DSL) and HFC cable networks. Furthermore, glass fiber, satellite, radio based
infrastructure (BWA) as well as electric power lines do exist as additional connection technologies. The number of broadband connections as well as their allocation for the years 2002 to 2012 is shown in the following table.
Source: Federal Network Agency (2013): Annual Report 2012, p. 75-76.
In 2012 DSL is the dominant connection technology with 23.3 million connections and a
share of 83.2 %. The high level of market penetration in the broadband market in general is also reflected in the corresponding rates of growth in the connection technologies.
While growth in the number of DSL connections of 54.5 % was able to be generated in the year 2004 when the market penetration for the broadband market was still very low, the growth has since then continuously decreased with increasing saturation of the
market. In the year 2012, fewer DSL connections were placed in operation compared to the previous year for the first time; they decreased by 0.9 %.
In 2012 the total number of broadband connections of the cable network operators is well below the total number of DSL connections with a number of 4.4 million and a corresponding share of 15.7 %. Due to the lower starting level, the cable providers were
able to achieve relatively high rates of growth compared to the previous years; at times more than 100 % as in the years 2006 und 2007. Accordingly, they were able to decrease
the distance to the DSL connections. As a result of the increasing market penetration for
2 See, results of ARD/ZDF-Online Study 2013.
Broadband connections 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Germany millions millions millions millions millions millions millions millions millions millions millions
DSL connections 3.20 4.40 6.80 10.50 14.40 18.50 20.90 22.40 23.00 23.50 23.30
Growth n/a 37.5% 54.5% 54.4% 37.1% 28.5% 13.0% 7.2% 2.7% 2.2% -0.9%
Share 100.0% 97.8% 97.1% 97.2% 96.0% 93.9% 92.1% 89.6% 87.8% 86.1% 83.2%
Cable connections 0.05 0.07 0.15 0.24 0.49 1.00 1.60 2.30 2.90 3.60 4.40
Growth n/a 40.0% 114.3% 60.0% 104.2% 104.1% 60.0% 43.8% 26.1% 24.1% 22.2%
Share 1.6% 1.6% 2.1% 2.2% 3.3% 5.1% 7.0% 9.2% 11.1% 13.2% 15.7%
Other connections 0.00 0.03 0.05 0.06 0.11 0.20 0.20 0.30 0.30 0.20 0.30
Growth n/a n/a 66.7% 20.0% 83.3% 81.8% 0.0% 50.0% 0.0% -33.3% 50.0%
Share 0.0% 0.7% 0.7% 0.6% 0.7% 1.0% 0.9% 1.2% 1.1% 0.7% 1.1%
Broadband connections 3.20 4.50 7.00 10.80 15.00 19.70 22.70 25.00 26.20 27.30 28.00
Growth n/a 40.6% 55.6% 54.3% 38.9% 31.3% 15.2% 10.1% 4.8% 4.2% 2.6%
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the entire broadband market and the accordingly decreasing rates of growth, the percentage growth in broadband connections for the cable providers has continuously decreased; it was 22.2 % in the year 2012. This general development in the overall market
of cable providers is also reflected in the development of KDH Group’s number of customers:
Sources: Federal Network Agency (2013): Annual Report 2012, p. 76; Data from KDH AG.
As becomes evident by comparing the development of total broadband connections with
the number of customers of KDH Group with broadband connections in the internet and telephone segment, the growth in customers of KDH Group outweighed the combined business growth of all cable operators in the years 2006 until 2010. The major
reasons for this development can be seen in the relatively late commercialization of internet- and telephone services by KDH Group compared to its competitors and the small customer base at the beginning of operations. In the following years between 2010
and 2012 the rate of customer growth of KDH Group has adjusted towards the growth rates of the other cable operators.
In 2012, around 0.3 million connections or a share of 1.1 % are attributable to all other connection technologies, whereby purely glass fiber connections have not been very
widespread so far.3
At the end of 2012, a total of around 28 million broadband connections were in operation
which corresponds to market penetration of 70.1 % based on the total number of households.4 Accordingly, broadband connections are increasingly becoming the standard equipment for households, which is why the quality of the connections, in terms
of features such as speed and the actually available bandwidth, will gain further importance in the future. The growth in the broadband market is slowing as the market
penetration progresses. While the growth in broadband connections in the year 2004 was still 55.6 %, a continuous decrease in the rates of growth to 2.6 % in the year 2012 was observed.
For the overall market of broadband connections a transition from a growth path towards a stage of stagnation is anticipated due to the consisting penetration of the market. With
respect to the different types of connection it is envisioned that a shift from DSL-
3 See, Federal Network Agency (2013): Annual Report 2012, p. 74.
4 See, Federal Network Agency (2013): Annual Report 2012, p. 81.
Broadband connections 2006 2007 2008 2009 2010 2011 2012
Market vs. KDH AG actual actual actual actual actual actual actual
Broadband connections via cable in millions 0.49 1.00 1.60 2.30 2.90 3.60 4.40
Growth 104.2% 104.1% 60.0% 43.8% 26.1% 24.1% 22.2%
Internet & Phone subscribers KDH AG in millions 0.07 0.19 0.42 0.81 1.10 1.35 1.60
Growth n/a 192.0% 121.2% 91.5% 36.1% 23.0% 18.6%
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connections towards connections with higher transmission rates will take place. Furthermore, it is anticipated that cable operators will increase their share of total connections to 26% in the year 2017, which equals an average annual growth of 11.5 %.5
Source: German Entertainment and Media Outlook 2013, p. 42-43.
As is apparent from the table, an increase in the number of broadband connections to 29.7 million is forecasted for the year 2017. At the same time, there continues to be a trend that product bundles consisting of TV, internet and telephone are offered which
tends to make the broadband connection cheaper for the households; this is documented in the expected ARPUs which are forecasted to decrease from EUR 22.54 in the year 2012 to EUR 22.08 in the year 2017. The slowly increasing number of broadband
connections as well as the decreasing ARPUs will consequentially lead to a decrease in growth in terms of sales revenues for the broadband market.
Various competitors are active in the broadband market. In addition to Deutsche Telekom, which is the largest provider of broadband connections, these are above all the
cable providers KDH Group and Unitymedia and other providers such as 1&1, Vodafone and Telefónica O2 as well as regional city network operators. The market shares of the competitors in the broadband market in the years 2011 to 2013 are shown in the
following graph.
Source: dslweb.de: Broadband Reports 2010-2013
5 See, German Entertainment and Media Outlook 2013, p. 44.
Market for broadband connections 2012 2013 2014 2015 2016 2017
Germany actual expected expected expected expected expected
Broadband connections (in millions) 28.00 28.40 28.80 29.10 29.40 29.70
Growth 2.6% 1.4% 1.4% 1.0% 1.0% 1.0%
ARPU (in EUR) 22.54 22.40 22.30 22.22 22.16 22.08
Growth -2.0% -0.6% -0.4% -0.4% -0.3% -0.4%
Revenues (in mEUR) 7,482 7,578 7,650 7,717 7,781 7,830
Growth 1.4% 1.3% 1.0% 0.9% 0.8% 0.6%
46%
11%
44%06/11
Telekom
46%
13%
41%06/12
Cable operators
44%
15%
41%
06/13
Others
Market shares in the German Broadband Market
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As becomes evident from the development of the market shares, Deutsche Telekom dominates the market for broadband connections as a DSL provider. The other DSL providers 1&1, Vodafone and Telefónica O2 have similarly high combined market shares.
However, cable providers have succeeded in recent years in gaining market shares in the broadband market; which is reflected by an increase from 11.0 % in the middle of 2011 to 15.4 % in the middle of 2013. The cable providers have profited from their technical
advantages because they can already offer high speed connections with up to 150 Mbit/s and more in large areas of their territory. Comparable offers from competitors are limited
to only a few regions in Germany. In order to counter this competitive advantage of the cable providers, the DSL providers are using the newly developed vectoring technology which is supposed to double the maximum speed of 50 Mbit/s in the VDSL network to
100 Mbit/s6 or potentially increase VDSL even further to 200 Mbit/s through additional technical solutions..
6 See, dslweb.de: Broadband Report Q2/2013.
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III. Tax situation
The tax office München maintains the records for KDH AG under the tax number 143/101/00707. A tax consolidation [Organschaft] for purposes of corporate income tax or trade tax exists between KDH AG (as the superior entity in a tax group) and the
operating companies KDVS, KDK and KDFS as well as non-operational shelf companies.
KDH AG has loss carry forwards for purposes of corporate income tax and trade tax as of 31 March 2013. The loss carry forwards for corporate income tax, according to our
information, are around EUR 241.9 million, and the loss carry forwards for trade tax are around EUR 159.9 million. The interest carry forward of KDH AG as of 31 March 2013 -is additionally around EUR 310.9 million. There are also negligible loss carry forwards for
purposes of corporate income tax and trade tax for companies in the KDH group which are not included in the consolidation group.
Upon the acquisition of 76.57 % of the shares of KDH AG by Vodafone Vierte Verwaltungs AG, the Company currently believes that the existing loss carry forwards and interest carry forwards at the level of KDH AG will be eliminated. Elimination of these
loss carry forwards and interest carry forwards is not necessarily mandated in light of the unclear legal situation concerning the applicability of the exceptions set forth in § 8c para.
1 sentence 6-9 KStG (“silent reserve clause“). Therefore, we have assumed the existing loss carry forwards and interest carry forwards of KDH AG forehanded and value enhancing at an anticipated value of 50 % when determining the corporate taxes.
With regards to the tax loss carry forwards existing at companies outside of the two consolidation groups it is believed that these loss carry forwards cannot be used in the
future because the companies are inactive and, therefore, no profits for tax purposes arise. Since no results are planned in the future for these companies the loss carry forwards
existing at the inactive companies were not taken into account in the valuation.
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C. VALUATION METHODOLOGY
I. Discounted Earnings Value and Discounted Cash Flow
The value of the equity capital in a commercial enterprise is derived from the future, uncertain cash flows which the provider of equity capital must expect. Therefore, such an equity value can be calculated as the present value of all future surpluses of revenues over
expenses of the enterprise.
This requires a forecast of the expected surpluses of the enterprise. The basis for valuing
the earnings, therefore, is normally the corporate planning which covers at least a period of three to five planned years as well as the estimate of sustained earnings which can be
considered to be able to be generated on a permanent basis during the period of time after the planned years. The main focus of such corporate planning is normally on the planning of earnings. To the extent that timing differences exist between the planned
earnings and expenses as well as the planned revenues and expenditures, these differences must be reflected in the calculation of the need for financing and must be reflected in the valuation on the basis of the financing effects.
The basis for such a forecast of future earnings and expenses consists of the adjusted earnings generated in the past. The forecasts prepared by the enterprise being valued can
be checked with regard to plausibility by comparisons with the past, developments of other enterprises as well as developments in the industry, the market and the general
economy.
However, every forecast involves a degree of uncertainty. When determining a present
value of forecast cash flows, it is accordingly necessary to consider that providers of equity capital normally prefer a secure positive cash flow compared to an equally high, uncertain cash flow. This risk aversion can be taken into account by increasing the risk
free interest rate used for calculating the present value by a risk premium.
The principles about how such enterprise valuations relating to the future are to be conducted are set forth in the valuation standard IDW S 1 2008 (Principles on the Conduct of Enterprise Valuations).
In order to determine the reasonable cash compensation (Abfindung) and guaranteed dividend (Ausgleich), a discounted earnings valuation pursuant to IDW S 2008 was
conducted. The discounted earnings method is recognized by the case law in Germany. According to this method, the equity value results from the discounting of future, expected distributions from the enterprise to its shareholders appropriately reflecting the
risk. The principles established in the IDW S 1 standard, especially the explanation of the discounted earnings method, corresponds to the predominant view in academic writings
on business management, the case law and the practice of enterprise valuation.
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As an alternative to applying the discounted earnings method, it is also generally possible to apply the discounted cash flow ("DCF") method for valuations under the IDW S 1 2008. According to the DCF method in its common form used in practice (the so-called
gross, entity, enterprise or WACC approach), initially a total value of the capital for the operational business is determined. The value of the equity capital is then derived from the total value of the capital by deducting the net debt.
The discounted earnings method and the DCF method are based on the calculation of the
value of capital and, thus, on the same conceptual foundations. In the case of the same premises, especially consistent planning including the planned income statements, the planned balance sheets and the planned cash flow statements, both methods arrive at the
same result. Therefore, we have not included a discussion of the discounted cash flow in this Expert Report.
The present value of the forecast cash flows calculated when applying the discounted earnings method only completely includes those values contributing to value which can be correctly reflected in terms of value by ongoing cash flows. Factors contributing to value
which cannot be shown at all in this manner or can only be reflected incompletely must be separately valued. This can especially involve assets which are not required for
operations.
II. Liquidation value and substance value
The value of an enterprise is derived under the discounted earnings method by discounting expected surplus cash flows of the enterprise as a going concern. Compared
to this, the liquidation value represents the cash surplus resulting from liquidation. The substance value is the total of expenditures which would be needed if the enterprise were supposed to be reproduced.
We have conducted a rough estimate of the liquidation value and concluded that the
equity value of KDH AG is greater than the liquidation value. Liquidation in the sense of a regular unwinding of the operational business would clearly result in much lower values than continuing the business.
The valuation of the substance under procurement aspects leads to a so-called reconstruction value of the enterprise which is actually just a partial reconstruction value
due to the general lack of replacement costs of intangible assets. This substance value by itself has no informative value for determining the overall value of a going concern.
Therefore, no substance value was determined.
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III. Comparison oriented value
It is common in the practice of mergers & acquisitions to determine indicative enterprise values or ranges for values by means of multipliers which are considered to be common for the industry. When carefully conducting such valuations, an analysis of the past and
also the expected earnings situation of the subject of the valuation is needed in the first place. Secondly, the multipliers must be derived from an analysis of the valuations of comparable enterprises. Such multiplier valuations are only simplified, generalized
discounted earnings valuations. Therefore in collaboration with IDW S 1 i. d. F. 2008 Tz. 164 - 167, a comprehensive, analytical valuation according to the discounted earnings
method, as conducted in the present case, is preferable to multiplier valuations.
A multiplier valuation was conducted only in order to check the reasonableness, see
below in Section D.II.
IV. Stock exchange price
The shares of KDH AG are listed on the stock exchange and traded in the regulated market on the Frankfurt Stock Exchange (Prime Standard) and over the counter at the
exchanges in Berlin, Düsseldorf, Hamburg, Hanover, Munich as well as Stuttgart. Therefore, it is possible to fix the compensation on the basis of stock exchange prices.
According to the case law of the Federal Constitutional Court [Bundesverfassungsgerichts, "BVerfG” (order dated 27 April 1999 - 1 BvR 1613/94), Art. 14 German Constitution
[Grundgesetz, "GG”] requires that the departing shareholder receive full compensation for the corporate participation which cannot be less than the fair market value. In the case of listed companies, this value cannot be determined without taking the stock exchange price
into account. Exemptions can be made if the stock exchange price does not represent the fair market value of the stock in an exceptional situation. Thus, the stock exchange price is in general the lower limit regarding the compensation of minority shareholders in the
case of corporate group contracts and mergers.
According to the most recently issued case law of the Federal Supreme Court of Justice [Bundesgerichtshof, "BGH”] (order dated 19 July 2010 – II ZB 18/09 - "Stollwerck”), the stock exchange value forming the basis of a reasonable cash compensation must generally
be determined on the basis of sales weighted domestic average stock prices within a three month reference period prior to the announcement of the measure.
If an extended period of time has passed between the announcement of the structural measure and the date of the general shareholders meeting and the development of the
stock exchange price appears to require an adjustment, the stock exchange value must be extrapolated in accordance with the typical development in values in general or for the industry, taking into account the previous development of the stock price (BGH, II ZB
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18/09 - "Stollwerck”). This extrapolation is not required in situations in which the measure is carried out within a normal or common period of time. In any event, a period of six to seven months can be considered to be normal or common (Court of Appeals
[Oberlandesgericht, "OLG”] Stuttgart, order dated 19 January 2011, 20 W 2/07, with reference to Bungert, BB 2010, 2227, 2229; Bücker, NZG 2010, 967, 970; OLG Frankfurt, order dated 29 April 2011, 21 W 13/11 with reference to Bungert/Wettich,
BB 2010, 2227, 2229; Decher, ZIP 2010, 1673, 1676; Bücker, NZG 2010, 967, 970).
In the present situation in which the general shareholders meeting, which is supposed to resolve about the conclusion of the DPLTA, is supposed to take place five months after the relevant calculation date for determining the average stock exchange price we have
therefore refrained from extrapolating the stock exchange price.
We address in Sections D.IV and D.V the question about which average price results for
KDH AG on the basis of this case law and which relationship the equity value and the average stock exchange price have to each other.
V. Price for the takeover bid and synergies
The purpose of our valuation is grounded on Vodafone Vierte Verwaltungs AG’s and
KDH AG’s intention to conclude a DPLTA. In the present case, this intention was already announced in the context of the public takeover bid. In the documents and
disclosures related to this takeover bid, Vodafone Vierte Verwaltungs AG offered a takeover price of EUR 84.50. Shareholders accepting the offer received the dividend of EUR 2.50 which was paid out before closing. If the closing would have taken place
before the dividend payout, Vodafone would have paid the accepting shareholders a price increased by EUR 2.50.
The takeover price includes a premium compared to the stock exchange price which was justified by Vodafone with synergies which can be achieved upon full integration of
KDH Group into the Vodafone Group. We will take a further stand with regards to this topic in Section D.III.
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D. VALUATION OF KDH AG
I. Discounted earnings value
The equity value of KDH AG was derived by us on the basis of the planned profit of KDH Group using the discounted earnings method in accordance with IDW S 1 2008 and based on the perspective of a domestic, fully taxable natural person as a shareholder.
The tax circumstances of the shareholders were typified and taken into account (direct typification pursuant to IDW S 1 2008, no. 44). While the planned profits of KDH Group were generally accepted by us up to the level of the EBIT ("Earnings before
Interest and Taxes"), we recalculated the financial result and the tax expense and took into account earnings that could be realized over a sustained period. Consistent with the
purpose of the valuation non-genuine synergies that can possibly be realized before DPLTA have been considered.
The subject of the valuation is KDH AG. KDH AG was valued as a corporate group on the basis of consolidated planned accounts which cover both KDH AG as well as its participations. Assets which are not required for the business were taken into account as
special values. These are companies in which participations are held which are inactive or were not included in the planning because they have no material importance.
The equity value of KDH AG results accordingly from the discounted earnings value of the operational business plus the special values.
We describe below our results relating to adjustments in the past, the analysis of the planning as well as the adjustments we have made to the planned accounts.
1. Valuation date
The valuation date for determining the equity value as the basis for calculating the compensation and the guaranteed dividend is 13 February 2014. This is the date on which the DPLTA is supposed to be submitted to the extraordinary general shareholders
meeting of KDH AG for approval.
The expected net distributions were discounted directly to the valuation date 13 February 2014. The special values were also determined as of the valuation date 13 February 2014.
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2. Determination of the expected net distributions
a) Analysis of the results in the past
The starting point for our analysis of the planning was an analysis of the results of KDH AG in the past because they serve as an initial orientation for analyzing the planned numbers. Since the planned profit and loss statement of KDH AG was prepared
according to the total costs method, a description using the total costs method was also used as a basis for the actual years in order to have better comparability with the observed developments in the past, see, Section B.II.2.
The group profit and loss statements of KDH AG for the fiscal years 2010/11 to
2012/13 down to the level of the EBIT were reviewed by us with regard to one-time or extraordinary positions and adjusted accordingly. The adjustments and the resulting profit of KDH AG in the past after the adjustment are shown in the following table:
For purposes of better comparability with operational planning, revenues generated
through the feed-in of signals of the public service broadcasters ARD, ZDF, ARTE and Deutschlandradio were adjusted for the three disclosed fiscal years; in the fiscal years 2010/11 until 2012/13 these revenues amounted to EUR 27.3 million, EUR 27.6 million
and EUR 24.8 million. These feed charges are no longer planned by the Company since the relating contracts were terminated by the public service broadcasters as of
31. December 2012.
The profit statement of KDH AG was adjusted by a total of EUR 12.7 million for the
fiscal year 2010/11. Beside the revenues of feed charges this amount is allocated to the positions for cost of materials and procured services, personnel costs and other costs. The adjustment for costs of materials and procured services of EUR 11.5 million involves
in substance one-time expenses resulting from adding provisions for restructuring which were established on the basis of a change in the network infrastructure in connection with the transfer of television signals to glass fiber. The personnel costs were adjusted for
2010/11 by a total of EUR 2.2 million for expenditures. The amount results from adjusting expenditures in connection with the restructuring measures and the legal
reorganization within KDH Group, especially restructuring certain functions in the finance department such as changes resulting from outsourcing solutions. The
Profit and loss statement 2010/11 2011/12 2012/13 2010/11 2011/12 2012/13 2010/11 2011/12 2012/13
KDH AG actual actual actual adjustment adjustment adjustment actual adj. actual adj. actual adj.
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Revenues 1,598.9 1,699.7 1,829.9 -27.3 -27.6 -24.8 1,571.6 1,672.2 1,805.1
Cost of material and services -421.6 -450.9 -491.1 11.5 -410.1 -450.9 -491.1
Personnel expenses -182.0 -179.4 -199.6 2.2 0.9 2.9 -179.8 -178.5 -196.8
LTIP -17.4 -20.5 -64.1 -17.4 -20.5 -64.1
Other costs -293.1 -292.2 -300.9 0.9 4.0 8.5 -292.3 -288.2 -292.4
Other operating income 12.3 12.1 12.6 12.3 12.1 12.6
EBITDA 697.1 768.8 786.9 -12.7 -22.7 -13.5 684.4 746.2 773.4
Depreciation and amortization -490.2 -395.9 -360.9 -490.2 -395.9 -360.9
EBIT 207.0 372.9 426.0 -12.7 -22.7 -13.5 194.3 350.2 412.5
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adjustment of EUR 0.9 million within other costs is attributable primarily to expenses incurred in the fiscal year 2010/11 in connection with the IPO of KDH AG of around EUR 0.7 million.
In the fiscal year 2011/12, the profit and loss statement of the Company was adjusted by EUR 22.7 million. Beside the revenues of feed charges this amount can be allocated to
adjustments within personnel costs as well as other costs. The adjusted personnel costs in the total amount of EUR 0.9 million include on the one hand expenses of EUR 2.1
million related to restructuring measures and the legal reorganization in the fiscal year 2011/12. These measures involved in substance primarily combining the sales channel management and the regional sales offices as well as reorganizing interfaces between sales
and certain central functions. On the other hand, one-time earnings of around EUR 1.3 million connected to changes in pension commitments of KDH Group have been eliminated from the personnel expenses. Other costs were adjusted with an amount of
EUR 4.0 million. These costs include for the most part IT related expenditures and consulting expenses as well as costs for legal advice incurred as a result of the merger of
various companies to form KDVS.
The EBIT of KDH AG was adjusted by a total of EUR 13.5 million in the fiscal year
2012/13. Beside the adjustment of revenues of feed charges this amount spreads to adjustments relating to personnel costs and other costs. The adjustments in personnel costs amount to around EUR 2.9 million and arose in connection with bundling the
customer service center and the technical service center into the one hundred percent subsidiary KDK. The adjustment of the other costs in the amount of EUR 8.5 million involves primarily costs in connection with the intended acquisition of TC as well as one-
time expenses in connection with the EU Regulation on the introduction of a Single European Payment Area for transactions in Euro (SEPA).
b) Analysis of the operating planning of KDH AG
The enterprise valuation is based on the mid-term planning prepared by KDH AG for the fiscal years 2013/14 to 2018/19. We examined the reasonableness of the documents that were provided concerning the planning. We initially systematically checked the structure
of the planning. We discussed in detail the planning assumptions and the resulting planned accounts with the executive board of KDH AG and the relevant employees. We verified the general suitability of the planned accounts as a basis for the valuation as
follows:
Planning process and responsibility for the planning
The mid-term planning of KDH AG always covers 5 years – the fiscal year beginning in each case on the next 1 April (budget year) as well as four additional fiscal years.
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The process for preparing the mid-term planning normally begins in November and is completed in March of the subsequent year when the planning is adopted by the executive board. In addition, the planning for the budget year is updated twice during the course of
the year after publication of the business figures for the first (“Q1”) and second (“Q2”) quarter of the fiscal year (“Forecast”).
Based on the planning of sales volume and subscribers which in done in close cooperation with the individual product areas the business planning for the budget year
regarding sales revenues is carried out especially by the controlling department of KDH AG The product areas themselves coordinate with the sales channels in the planning process. The planning of the remaining operational business down to the level
of the EBITDA as well as the planning for investments is made according to so-called reverse planning with all business units. At this stage, top-down targets are formulated, which are validated by means of a bottom-up planning.
Based on the knowledge from the ongoing budget planning, the preparation of the mid-term plan takes place in a multi-step process. In a first step, general targets are drafted
top-down by the executive board. In a second step, these targets are supported with detailed planning in the product areas by planning the material variables for the planning
such as the expected number of subscribers, the expected number of RGUs and the expected average revenue per unit ("ARPU”). In a third step, the corresponding sales numbers are broken down to the individual sales channels. In a fourth step costs and
capital expenditures are planned according to reverse planning through the inclusion of the business units. In this process top-down targets are set by the executive board, which are subsequently validated in a bottom-up planning by the business units. The corporate
development department in connection with the business units and cost units is responsible for strategically combining and modelling the planning assumptions into
integrated planned accounts down to the level of the EBITDA. The planning for depreciation, interest, taxes and working capital is the responsibility of the finance department.
The planning for the budget years forms the basis for the short-term outlook for the enterprise, also for purposes of external communication. However, KDH AG does not
publish any sales or profit forecasts that go beyond the budget year. The mid-term planning is exclusively intended for internal management purposes.
Timeliness of the planning
In order for corporate planning to be taken into account for purposes of determining the value as of 13 February 2014 which reflects the current developments in KDH AG, the
normal process for preparing the new mid-term planning was delayed so that an updated mid-term plan was also submitted by the company in parallel to the second update of the budget planning (“Forecast”). Compared to the mid-term plan prepared in March 2013,
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the planning was extended by an additional planned year because the current budget year 2013/14 will already represent an additional nearly concluded actual year at the time of the relevant general shareholders meeting. This approach guarantees that the planning is
based on the most recent information. Furthermore, it is assured that the valuation of KDH AG is based on the most accurate management estimates regarding expected future business development with proximity to the relevant valuation day.
As is common in the annual planning process of KDH AG, developments that occurred
since the mid-term planning adopted in March 2013 were taken into account in the updated mid-term planning. Especially effects from current business developments up to and including Q2 2013/14 as well as new estimates in the course of the budgeting process
for the fiscal year 2014/15 were reflected.
A material change compared to the mid-term planning in March 2013 involves, for
example, the compensation for feed signals which the broadcasters established under public law ARD, ZDF, ARTE and Deutschlandradio pay for feeding their signal to KDH Group. The public law broadcasters had terminated the corresponding contracts about
the feed charges effective as of 31 December 2012. In the initial first instance judgment, the complaints of KDH AG against these terminations were dismissed7. Due to this
reason, the feed charges under public law were no longer taken into account in the updated mid-term planning. In addition, corrections were made in the area of the planned number of customers, RGUs and ARPUs based on the current business
developments. Main reasons for these corrections can be found in the discontinuation of the basic encryption which has direct- and indirect consequences for KDH AG’s business performance and its current planning. Direct effects can be seen in decreases in revenues
which were formerly achieved by decoding SD-signals. However, more serious are the indirect effects occurring through decreases in overall customer contacts which were
necessary when basic encryption was still in place. This makes it more difficult for KDH Group to offer additional services to its customers which ultimately leads to lesser sales. Therefore, the estimated sales quantity in the Premium-TV segment was altered.
Adjustments were also made with regards to the considerations about the development of new fields of business:
In connection with the expansion of its hotspots, KDH Group originally intended to
offer mobile data services to individual users throughout Germany by the help of its network. These services were planned to include price-aggressive charges compared to KDH AGs competitors. A cooperation relationship was supposed to be concluded with
7 See on this point, the semi-annual financial report of KDH AG as of 30 September 2013. On 21 November 2013, the OLG Stuttgart and on 28 November 2013 the OLG München have both decided in second instance that Südwestrundfunk and Bayerischer Rundfunk do not have to pay feeding fees for its
programs to be submitted over KDH AG’s cable network.
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a cellular telephone provider in order to assure complete network coverage also outside of the KDH WLAN network. Thought was also given to enabling cellular telephone operators to offload mobile data ("mobile offloading”) using the KDH network.
Both the offer of mobile data services to new end customers as well as "mobile offloading” cannot be realized in the form that was intended in the previous mid-term
planning. Reasons for this are rooted in difficulties regarding the technical feasibility of the business idea as well as existing regulatory hurdles. Concerning the technical
feasibility, limited stability of WLAN-networks as well as comprehensive network coverage can be regarded as the major challenges. Regulatory hurdles do exist because the Federal Network Agency will not approve the cooperation with a third party cellular
telephone operator after Vodafone became the majority shareholder of KDH AG because Vodafone is prohibited from becoming a service provider for operators that operate in the same substantive and geographic market as Vodafone in connection with
the award of the GSM and UMTS licenses. Even without the entry of Vodafone, it would have been perhaps difficult for KDH AG to find a cellular telephone operator for its
aggressive price strategy, due to the consolidation of the German mobile market. The monetization of KDH’s own WLAN network for mobile services is only possible to a much lesser extent than previously planned without the cooperation with a cellular
telephone operator, which is accounted for in the planning.
Other business ideas involved the development of VoD offers, feeding regional TV
advertising (“Targeted Advertising”), personalized online advertising as well as distributing internet and telephone services to small companies. Due to legal hurdles (necessity of the "double-opt-in"), the plan to offer personalized online advertising was
given up in the meantime and, therefore, is no longer contained in the updated mid-term planning. Due to legal restrictions the double-opt-in requires a dual approval from clients
for personalized online advertisement, which is hard to obtain according to current assessments from KDH AG. The business idea to offer internet and telephone services to small companies in the future is also no longer pursued. The Company has decided
against an entry into the market for business clients as it concluded after further detailed reviews that the business case is not economically viable. Furthermore, the provisions in the Business Combination Agreements with Vodafone provide that KDH Group will
limit itself to business with private customers. The business idea of targeted advertising and the development of the VoD business continue to be reflected in the updated mid-
term planning.
Synergies resulting at KDH Group due to the entry of Vodafone as the majority
shareholder that are independent of conclusion of the DPLTA (so-called non-genuine synergies) were also taken into account in the updated mid-term planning. Cost synergies are expected in the area of IP-Peering and procurement. Furthermore, there are
advantages in financing the company due to the take-over by Vodafone which have a
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positive effect on the financial result of KDH Group. Potential synergies which can only be achieved after the conclusion of the DPLTA and which are not yet implemented or transformed into concrete terms were not taken into account in the planning as they
symbolize genuine synergies (see further details in Section D.III).
The current mid-term planning was adopted by the executive board on 25 November
2013.
Structure of the planning
The operational planning down to the level of the EBITDA was prepared on the basis of the total costs method and consists primarily of two components:
The first part consists of the existing core business of KDH Group which is basically broken down into the business segments TV as well as Internet and Telephone. A
detailed further breakdown according to individual product groups is implemented within these business segments. KDH Group has planned the development of RGUs and estimated the future ARPUs for each of these product groups on the basis of new
contracts and termination rates. The planning of the expenses also has a high degree of detail and takes place in an integrated planning model that depends on the planned development of customers and RGUs.
The second part involves the future expected earnings from new fields of business such as offering mobile services using the KDH WLAN network, VoD and targeted advertising.
Based on the operational planning of the EBITDA and the capex planning the
depreciation, financial result and corporate taxes were determined by the Company. The planned financial result prepared by the Company contains interest income which is based on a planning of the need for financing build on the mid-term planning, but not on an
integrated planning of the need for financing. During the course of the valuation of KDH AG, we accordingly replaced this planning by an integrated planning of the need for financing and again determined the corporate taxes.
Planning accuracy
In order to evaluate the planning accuracy of KDH AG, we compared the actual numbers
in the fiscal years 2010/11 to 2012/13 as well as the current forecast for the fiscal year 2013/14 based on the Q2 2013/14 results with the business plans adopted by the Company for these fiscal years.
Our analysis covered the mid-term plan which was prepared in February/March 2010 for the initial public offering of KDH AG as well as the mid-term plans prepared in March
2012 and March 2013. The Company did not prepare any business plan in the year 2011.
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The deviations between the sales revenues and adapted EBITDA actually achieved in the fiscal years 2010/11 to 2012/13 and the sales revenues and adapted EBITDA forecasted for the year 2013/14 based on the Q2 2013/14-results are shown in the following table.
The adapted EBITDA for the fiscal years 2010/11 to 2013/14 was disclosed by the Company in the respective annual financial reports (see, Section B.II.2). The adapted EBITDA for 2013/14 is based on the forecast for the current fiscal year:
Only the mid-term planning prepared in 2010 can be used as a basis for comparison with
the fiscal years 2010/11 and 2011/12. The Company planned sales revenues of EUR 1,595.7 million and an adapted EBITDA of EUR 722.3 million for 2010/11. In fact, KDH AG achieved sales revenues of EUR 1,598.9 million and an adapted EBITDA
of EUR 729.1 million in the fiscal year 2010/11 and, thus, values which only deviate from the planning to a minimal degree.
KDH AG planned an increase in sales revenues to EUR 1,745.0 million and an increase in the adjusted EBITDA to EUR 817.6 million for the next fiscal year 2011/12. The
actual numbers fell slightly short of the planned numbers: KDH AG generated in this fiscal year sales revenues of EUR 1,699.7 million (deviation –2.6 %) and an adapted EBITDA of EUR 795.5 million (deviation –2.8 %).
An additional basis for comparison is available in the form of the mid-term planning adopted in March 2012 in order to compare the planning accuracy for the fiscal year
2012/13. Compared to the planning prepared two years earlier, KDH AG decreased its
Plan vs. Actuals 2010/11 2011/12 2012/13 2013/14
KDH AG actual actual actual Forecast
mEUR mEUR mEUR mEUR
Revenue - Actuals 1,598.9 1,699.7 1,829.9 1,909.1
Revenue - Plan Feb/Mar 2010 1,595.7 1,745.0 1,942.7 2,150.8
Delta Actuals vs. Plan 2010 3.2 -45.2 -112.8 -241.7
Delta in % 0.2% -2.6% -5.8% -11.2%
Revenue - Plan Mar 2012 1,841.5 2,002.0
Delta Actuals vs. Plan 2012 -11.6 -92.9
Delta in % -0.6% -4.6%
Revenue - Plan Mar 2013 1,969.7
Delta Actuals vs. Plan 2013 -60.6
Delta in % -3.1%
adapted EBITDA - Actuals 729.1 795.5 862.3 910.0
EBITDA - Plan Feb/Mar 2010 722.3 817.6 955.8 1,107.1
Delta Actuals vs. Plan 2010 6.7 -22.2 -93.5 -197.1
Delta in % 0.9% -2.7% -9.8% -17.8%
EBITDA - Plan Mar 2012 860.0 961.4
Delta Actuals vs. Plan 2012 2.3 -51.3
Delta in % 0.3% -5.3%
EBITDA - Plan Mar 2013 945.0
Delta Actuals vs. Plan 2013 -35.0
Delta in % -3.7%
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assumptions for revenues and adjusted EBITDA in the fiscal year 2012/13. The actual results in the fiscal year were very close to these updated planned numbers with deviations (absolute numbers) of less than 1 % at the level of revenue and EBITDA. The planning
from March 2010 had still assumed a better development of the business for this fiscal year; the actual sales revenues were 5.8 % and the actual adapted EBITDA was 9.8 % lower than the corresponding planned numbers. The cause for this deviation can be
found in too optimistic expectations for ARPU. Furthermore, the subscriber base in the core TV business decreased more than expected in the year 2010.
The comparison of the different mid-term plans with the current forecast for the fiscal year 2013/14 illustrates that plan-vs.-actual deviations increase correspondingly to the
number of years between the year of the preparation of the plan and the respective plan year. Based on the Q2 results, actual sales revenues of the year 2013/14 are expected to fall short of the sales revenue figure planned in 2010 by 11.2 %. The respective EBITDA
deviation amounts to 17.8 %. Compared to the planning figures of the mid-term planning prepared in 2012, actual sales revenues and actual adapted EBITDA of the current fiscal
year are expected to turn out lower by 4.6 % and 5.3 %, respectively. Furthermore, KDH AG expects in the current fiscal year for the first time a considerable deviation between actuals and budget: Based on the Q2 results, the Company predicts that revenues and
EBITDA will fall below the figures budgeted in March 2013 by 3.1 % and 3.7 %, respectively. According to KDH AG, this is due to the adverse effects that the discontinuation of the basic encryption had on the growth in the Premium-TV segment as
well as to the termination of the feed-in-fee contracts by public broadcasters.
The analysis of the deviations in the plan show that the respective first planned year
(budget) is very close to the actual achieved results so that there is good planning accuracy for the budget year. The relatively higher deviation between budget and actuals in the
current year compared to the previous years could be explained by the just-mentioned special effects in the current fiscal year.
However, the growth planned in the mid-term plan in 2010 for the future years was not able to be realized in the expected volume. This image results in the same manner for the comparison of the historic plans from 2010 and 2012 to the current forecast for the fiscal
year 2013/14 on the basis of the Q2 2013/14 numbers. This mainly results because the mid-term planning has been primarily used to incentivize the organization to outperform
and thus has been based on ambitious assumptions.
Completeness of the planning
The planned accounts of KDH Group consist of an income statement for the fiscal years
2013/14 to 2018/19 as well as investment planning. Consolidated balance sheet planning as well as an integrated planning for needed financing was not prepared by the Company. The audited consolidated balance sheet of 31 March 2013 was accordingly carried forward
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by us for the planned years and the need for financing was determined on this basis, taking into account the planned profits and investments, the financing structure as well as the assumptions relating to distributions.
All material subsidiaries were included in the planned accounts. Inactive participations and participations which the Company does not consider to be material were not included
in the planning. The inactive companies involve the shelf companies Kabel Deutschland Holding Erste Beteiligungs GmbH, Kabel Deutschland Holding Zweite Beteiligungs
GmbH, Kabel Deutschland Dritte Beteiligungsgesellschaft mbH, Kabel Deutschland Fünfte Beteiligungsgesellschaft mbH, Kabel Deutschland Sechste Beteiligungs GmbH, Kabel Deutschland Siebte Beteiligungs GmbH, Kabel Deutschland Achte Beteiligungs
GmbH and Kabel Deutschland Neunte Beteiligungs GmbH. AFK Aus- und Fortbildungs GmbH für elektronische Medien, in which KDH AG has only a 2 % participation, was not included in the planned accounts due to reasons of materiality.
These companies were taken into account in the valuation as special values (see, Section D.I.5).
Planned results of KDH Group
The planned results of KDH AG down to the level of the EBIT for the fiscal years 2013/2014 to 2018/2019 compared to the adjusted results in the past are shown below:
Verification of the reasonableness of the planning
We have mathematically checked the structure of the planning and critically reviewed the underlying assumptions. The goal was especially to test the developments assumed in the planning against the observed developments in the past and to check the consistency of
the assumptions. During this process we especially reverted to prominent market-specific performance indicators like ARPU and RGUs. We based our analysis of the planned
earnings on their structure and the total costs method:
Profit and loss statement 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Revenues 1,571.6 1,672.2 1,805.1 1,909.1 2,043.4 2,199.9 2,322.7 2,429.5 2,541.3
Cost of material and services -410.1 -450.9 -491.1 -494.8 -546.1 -578.7 -610.3 -645.0 -666.3
Personnel expenses -179.8 -178.5 -196.8 -213.1 -223.1 -231.9 -241.4 -251.4 -261.4
LTIP -17.4 -20.5 -64.1 -63.6 -15.8 -10.1 -5.5 -4.8 -4.8
Other expenses -292.3 -288.2 -292.4 -336.9 -306.6 -325.2 -331.2 -338.6 -346.5
Other operating income 12.3 12.1 12.6 9.8 9.9 10.1 10.2 10.3 10.5
EBITDA 684.4 746.2 773.4 810.6 961.9 1,064.0 1,144.5 1,200.2 1,272.8
Depreciation and amortization -490.2 -395.9 -360.9 -404.3 -458.3 -478.7 -484.9 -484.4 -493.2
EBIT 194.3 350.2 412.5 406.3 503.6 585.3 659.7 715.7 779.6
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Sales revenues
KDH Group generated its sales revenues in the two business segments TV and Internet & Telephone. The development of the sales revenues in these two business segments is shown in the following table:
Sales revenues TV
In the TV segment, the sales revenues are generated primarily by basic cable connection fees which are paid by customers for access to the cable network and the reception of
analog and digital TV signals. In addition to private households, residential companies (including the owners of buildings) and network level 4 operators are among the customers. The private households and residential companies are referred to as direct
customers, whereas the clients of other network level 4 operators are referred to as indirect customers. KDH Group also generated sales revenues with premium TV
services and international pay TV offers, leasing of DVR and technical access fees for basic encoded HD broadcasters.
The Company plans slightly increasing annual sales revenues of around 1.7 % for the connection fees in the TV division from EUR 1,018.2 million in the fiscal year 2012/13 to EUR 1,124.1 million in the last planned year 2018/19.
The expected increase in revenues for TV connection fees is the result of an increase in the TV RGUs and an increase in the TV ARPUs:
The main foundation for revenues of KDH Group are its direct basic cable customers. The number of direct basic cable customers has slightly decreased in the last three years
Revenues 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 CAGR CAGR
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan 13/14-18/19 10/11-12/13
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR0
TV subscription revenues 987.8 994.9 1,018.2 1,031.9 1,048.8 1,071.6 1,088.0 1,104.7 1,124.1 1.7% 0.8%
Carriage fees and other revenues 117.8 136.0 148.6 135.6 140.9 149.2 148.2 138.5 147.4 -0.1% 5.2%
Revenues TV 1,105.6 1,130.8 1,166.8 1,167.5 1,189.7 1,220.8 1,236.2 1,243.2 1,271.5 1.4% 1.3%
Growth in % 2.3% 3.2% 0.1% 1.9% 2.6% 1.3% 0.6% 2.3%
Internet & Phone recurring revenues 436.0 508.3 604.7 699.8 811.8 937.1 1,044.6 1,144.4 1,227.9 12.5% 23.1%
Internet & Phone non-recurring revenues 30.0 33.0 33.6 41.8 41.9 41.9 41.9 41.9 41.9 3.8% -15.3%
Revenues Internet & Phone 466.0 541.4 638.3 741.6 853.8 979.1 1,086.5 1,186.3 1,269.8 12.1% 18.9%
Growth in % 16.2% 17.9% 16.2% 15.1% 14.7% 11.0% 9.2% 7.0%
Total Revenues 1,571.6 1,672.2 1,805.1 1,909.1 2,043.4 2,199.9 2,322.7 2,429.5 2,541.3 5.9% 6.3%
Growth in % 4.7% 6.4% 7.9% 5.8% 7.0% 7.7% 5.6% 4.6% 4.6%
Blended ARPU in EUR / month 13.40 14.44 15.89 17.13 18.51 20.05 21.35 22.55 23.54 6.8% 8.8%
Subscribers/RGUs TV 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 CAGR CAGR
KDH AG Actuals Actuals Actuals Forecast Plan Plan Plan Plan Plan 13/14-18/19 10/11-12/13
'000 '000 '000 '000 '000 '000 '000 '000 '0000
Direct basic cable subscribers 7,299 7,232 7,193 7,170 7,140 7,122 7,107 7,096 7,089 -0.2% -0.5%
Indirect basic cable subscribers 1,205 1,009 897 736 629 562 472 436 399 -12.6% -14.3%
Total basic cable subscribers 8,504 8,241 8,090 7,907 7,769 7,684 7,579 7,533 7,488 -1.3% -2.5%
Basic cable RGUs 8,878 8,702 8,619 8,325 8,102 7,927 7,583 7,537 7,492 -2.3% -1.5%
Premium TV RGUs 1,264 1,680 2,067 2,342 2,645 2,909 3,137 3,335 3,507 9.2% 24.4%
Total RGUs TV 10,142 10,381 10,687 10,667 10,748 10,835 10,721 10,872 10,998 0.5% 2.0%
TV-ARPU in EUR / month 9.52 9.86 10.37 10.72 11.12 11.53 11.86 12.17 12.47 3.1% 3.7%
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(CAGR - 0.5 %). KDH Group anticipates a further slightly decreasing number of basic cable customers until the end of the planning period, however the decline is assumed to occur at a lower rate (CAGR -0.2 %) than in the years before.
As described in Section B.II.3, the number of German cable homes is expected to decrease from 2013 to 2017 by on average 1.7 % per year, according to German
Entertainment and Media Outlook 2013. Thus, KDH Group assumes a significantly lower relative decrease in its basic cable subscriber base compared to the market.
The wholesale business with indirect basic cable customers (network level 4 operators) was already showing a clear downturn in recent years. The expectation is that this trend
will continue in the planned period. The reason is that network 4 operators are increasingly building on the existing KDH network and no longer need to pay the fees previously paid to KDH Group for using the KDH lines.
The drivers behind the increase in sales revenues in the business segment TV are the premium TV services which KDH Group offers as an upgrade to the current cable
connection to its existing customer base. This includes especially a substantial increase in the leased DVRs. It is also expected that more customers will continuously book the
German pay TV product "Kabel Premium HD”. The premium TV products are normally sold in a bundled form so that normally one or two additional RGUs accrue for each customer that has been upgraded to premium TV. In total KDH Group plans to
increase the RGUs in the area of premium TV from 2.067 million at the end of the fiscal year 2012/13 to 3.507 million by the end of the detailed planning period 2018/19.
Although KDH Group expects to almost double its Premium-TV RGUs over the planning period, the CAGR for the years of the mid-term plan lies below the CAGR
achieved in the years 2010/11 to 2012/13. According to KDH AG, this is due to various reasons:
- Since the discontinuation of the basic encryption (see, Section B.II.3), KDH Group faces a substantial decline of subscriber contact rates at its call centers, one of the most important sales channels for the Premium-TV product. In consequence, the
number of gross adds in Premium-TV fell considerably short of the figures budgeted. The Company anticipates that this effect can only partially be mitigated by other sales channels in the coming years.
- Given the declining number of basic cable subscribers and the increasing number of Premium-TV RGUs, the remaining subscriber base that could potentially upgrade to
Premium-TV services will steadily decrease. By assuming gross adds to remain constant over the mid-term-plan period, KDH Group expects to even acquire an annually increasing share of Premium-TV users out of the remaining subscriber base.
Furthermore, as a consequence of the growing RGU figures and despite the fact that churn rates are assumed to stay constant or even go back over the planning horizon,
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the absolute number of churns is expected to increase. This contributes to the decline in the growth of net adds.
- Not only the quantity but also the willingness to buy – i. e. the probability that the
average subscriber will upgrade to Premium-TV – of the remaining client base is supposed to change. This is due to the fact that the first subscribers that upgraded to Premium-TV were normally young, with a high affinity to technology and/or
financially strong. With rising RGUs, these “easy-to-acquire” subscribers make up a declining share of the remaining subscriber base.
- The average annual RGU-growth rate of 9.2 % which is expected by KDH Group for Premium-TV-Products is higher than the growth rates projected for the German Pay-TV market. For example, the German Entertainment and Media Outlook 2013
expects for the time period 2013 – 2017 an average annual growth rate of German Pay-TV households of 6.6 % but with declining growth rates over the passage of time. 8
For the stated reasons, we consider it to be understandable that the planned growth rates
of the RGUs in the Premium-TV segment are lower than in past years and slightly decline throughout the planning horizon.
As a result of the continuously increasing penetration in the premium TV segment an
increasing revenue per customer is expected by KDH Group in the business segment TV. The TV ARPU is supposed to increase from EUR 10.38/month in 2012/13 to EUR 12.47/month in 2018/19.
KDH Group generates other sales revenues in the TV segment especially with feed
charges by television broadcasters for distributing program offers, installation fees from
individual users, sale of end devices and the newly introduced VoD offer to existing TV customers. KDH Group also expects minor sales revenues from targeted advertising
starting in the year 2014/15.
Feed charges and other sales revenues are supposed to decrease in the year 2013/14 by
around EUR 13 million compared to the previous year. A slight decrease is expected for installation fees as well as from the sale of hardware equipment.
The increase in other sales revenues in the three subsequent years can especially be traced back to growing sales revenues in the areas of VoD and Targeted Advertising. Marginally
decreasing sales revenues are expected for the years 2016/17 and 2017/18. As described above, feed charges from public broadcasters were not taken into account in the planning. The corresponding actual figures were therefore adjusted for these feed charges from
8 see, German Entertainment and Media Outlook 2013, p. 82.
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public broadcasters to achieve a better comparability (see, adjustment of past results in Section D.I.2.a)
Sales revenues for Internet and Telephone
KDH Group has offered its customers internet and telephone services using the KDH
cable network since the year 2005. The business segment of Internet and Telephone has continuously developed since then to be the main driver of growth in the business. KDH Group was always able to realize at least two digit rates of growth in internet and
telephone sales revenues, also as a consequence of the advancement in the technical equipment in the cable network for interactive services. KDH Group generated sales
revenues of EUR 638.3 million in the year 2012/13 in the Internet and Telephone business segment which is a share already of 34.9 % in the total sales revenues of the Company.
The growth in sales in the area of Internet and Telephone is supposed to continue in the coming fiscal years according to the current planning of KDH Group. The Company
expects an increase of sales revenues in the business segment to EUR 1,269.8 million by the last planned year 2018/19. This would represent a share of around 50.0 % in the total
revenues of KDH Group.
The by far largest portion of the sales revenues in the Internet and Telephone business
segment involves the recurring charges. This includes especially fixed monthly fees for telephone and internet flat rates. KDH Group obtains revenues with use-based fees and termination fees, the importance of which has decreased substantially, however, in recent
years, also as a consequence of EU-wide regulations. Furthermore, KDH Group offers a small amount of mobile telephone and data services on the basis of a contractual
relationship with a German cellular telephone operator. KDH Group plans for an increase in the recurring fees during the planning period of EUR 604.7 million in the year 2012/13 to EUR 1,227.9 million in the planned year 2018/19.
The following table shows that the growth in the Internet and Telephone business segment is especially volume-based growth. The number of RGUs is supposed to almost
double from 3.660 million in the fiscal year 2012/13 to 6.617 million in the planned year 2017/18:
Since internet and telephone services are generally sold in bundled form, the rates of growth for internet RGUs and telephone RGUs are only marginally different. The fact
RGUs Internet & Phone 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 CAGR CAGR
KDH AG Actuals Actuals Actuals Forecast Plan Plan Plan Plan Plan 13/14-18/19 10/11-12/13
'000 '000 '000 '000 '000 '000 '000 '000 '0000
Internet RGUs 1,260 1,518 1,829 2,177 2,476 2,728 2,968 3,182 3,374 10.7% 22.3%
Phone RGUs 1,296 1,549 1,831 2,153 2,428 2,656 2,874 3,069 3,243 10.0% 20.8%
Total RGUs Internet & Phone 2,556 3,067 3,660 4,330 4,904 5,385 5,842 6,251 6,617 10.4% 21.6%
ARPU in EUR / month 29.15 28.24 28.17 27.49 27.33 28.26 28.84 29.32 29.54 0.8% -0.9%
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that KDH Group continues to have significant increases in the planned numbers of users while anticipating at the same time a slowdown in the growth dynamics during the planning period applies for both services. The Company believes that there are various
reasons for the expected downturn in the growth rates for revenues in the Internet and Telephone business segment:
− Especially the increase in the number of households with equipped back-channel
capable cable connections was responsible for the strong rates of growth in previous years. Only this type of connection permits the use of interactive services so that as a consequence of this improvement in equipment, the number of accessible marketed
households for internet and telephone services increased substantially. At 30 September 2013 already 91.4 % of the KDH network was equipped for a back-channel capable structure. During the course of a further investment program, this
share is supposed to be increased to almost 94 % of the residential units that can be connected by the end of the fiscal year 2014/15. Additional increases in this portion,
however, are not expected economically according to information from the Company. In light of a constant number of households that can be connected, KDH Group expects also only very small rates of increase for the marketed
residential units so that no material growth can be generated any longer from an increase in the potential user base.
− A further aspect is that the number of marketed residential units remains approximately the same with continuously increasing RGUs in the Internet and
Telephone business segment. Therefore, the remaining basis of households which could potentially still conclude a telephone/internet agreement with KDH Group is
reduced. At the same time, and with planned churn rates, which are already low compared to competitors, the absolute churn increases just mathematically due to the increasing RGUs.
− According to information from the Company and similar to the situation in the
Premium-TV segment, the willingness to buy of the remaining base deteriorates. That means, the share of the potential users that even considers obtaining these services
from KDH Group becomes smaller. This is explained, on the one hand, by the increasing share of former customers which are again calculated as potential customers in the pool after notice of termination. Furthermore, marketing and sales
activities had first been directed towards those potential subscribers to which the highest probability of success in terms of achieving an internet and/or phone contract was assigned, i.e. solvent or young customers who appreciate the high
bandwidths of the cable network.
− Furthermore, KDH Group expects incisive changes in the competitive environment
over the next years. First, the Company assumes that the competitive pressure from
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Deutsche Telekom AG will increase significantly as a result of the VDSL-expansion and the introduction of the vectoring technology. Second, additional competition will arise from the city network providers who consistently push forward the
technical upgrade and expansion of their network through municipal support.
Further support for the expected slowdown in the Internet and Telephone business
segment is given by the German Entertainment and Media Outlook 2013 (see Section B.II.3). According to this study, the number of broadband connections is assumed to
grow by only 1.0 % annually from 2015 to 2017, compared to an average growth of 3.9 % observed for 2010 through 2012. The expectation that there will be shifts of market shares from DSL to cable is reflected in the growth rate of the Internet and Telephone
business during the planning period.
We consider it to be understandable for these stated reasons that the rates of growth in
sales revenues in the Internet and Telephone business segment are planned to be lower during the planning period.
The basis for calculating the ARPUs shown in the above table is the number of those KDH customers who have booked at least one of the two services telephone or internet.
The planned ARPU development shows that the price component has only a minor share in the high rates of growth of sales revenues in the Internet and Telephone business segment. Overall, the price level is expected to remain stable. However, due to the
expected trend towards more expensive “high bundles”, ARPU is expected to slightly increase over the planning horizon. Both, the decline in ARPUs reported for the last business years as well as the ARPU decline that the German Entertainment and Media
Outlook 2013 (see Section B.II.3) depicts for the years 2013 to 2017 suggest that this might even be an ambitious assumption. The somewhat stronger increase of the ARPUs
in the planned year 2015/16 compared to the other years is the result of an improvement in the packet structure planned for the corresponding year.
In addition to the monthly recurring sales revenues, KDH Group realizes non-recurring
sales revenues which include especially initial installation fees and other one-time revenues. The non-recurring sales revenues are planned in part on the basis of the
number of (new) users and accordingly increase substantially over the planning period in a manner which is analogous to the development of the growth in customers in this
business segment.
KDH Group plans overall an increase in its total sales revenues from
EUR 1,805.1 million (adjusted) in the last actual fiscal year 2012/2013 to EUR 2,541.3 million in the last year of the mid-term plan 2018/19. This corresponds to a rate of growth in the mid-term plan in an average of 5.9 % p. a. This is slightly below the rate of
6.8 % which was achieved on average annually in the fiscal years 2010/11 to 2012/13. The absolute growth in sales, however, is supposed to be higher with an annual average of
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EUR 122.7 million in the planned years 2013/14 to 2018/19 than the growth sales on average of EUR 109.5 million annually achieved from 2010/11 to 2012/13. Based on the current Q2 2013/14 numbers, growth of only 5.8 % (adjusted) is expected for the current
fiscal year 2013/14. Substantially higher rates of growth in sales revenues of 7.0 % and 7.7 % respectively are expected for the following planned years 2014/15 and 2015/16, and this is accordingly supposed to be higher than the rates of increase achieved on
average in the last three years in the past. KDH Group expects for the planned years 2016/17 to 2018/19 that the growth in sales will slightly weaken especially due to a
somewhat easing dynamics in the Internet and Telephone business segment.
Based on historical results, market expectations and explanations regarding the predicted
growth in RGUs given to us by the management of the Company , we deem reasonable the planning of the Company’s revenues.
Cost of materials and for procured services
The cost of materials and expenses for procured services include expenses in connection with service level agreements (SLA) with Deutsche Telekom ("DTAG”) which relate above all to leased cable channel facilities, technical rooms, glass fiber systems and energy
supply. This also includes expenses for procurement of program content, connectivity and other network costs, interconnection expenses, maintenance and repair costs as well
as other expenses.
KDH Group forecasts overall in the planned period an increase in the cost of materials
and the procured services from EUR 490.8 million in the last actual fiscal year 2012/13 to EUR 666.3 million in the last planned year 2018/19.
The following table shows the development of the individual expense positions from 2010/11 to 2018/19:
The largest expense position consists of the costs for renting and leasing in
connection with SLAs especially with DTAG. A large portion of these expenses
consists of fixed costs for the cable channel facilities. These remain relatively constant during the planning period. The planned increase in costs for rent and leasing on average
of around 2.8 % annually planned by KDH Group through the year 2018/19 are above all
Cost of Materials and Serv. Rendered 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
DTAG service level agreements -188.3 -199.0 -209.6 -200.4 -226.9 -230.3 -235.9 -247.8 -248.0
Content cost -52.3 -59.4 -76.6 -93.8 -116.9 -137.5 -153.5 -164.6 -173.4
Phone interconnection -42.5 -42.5 -42.9 -38.7 -37.8 -37.8 -39.0 -42.0 -44.5
Maintenance -27.7 -35.8 -41.1 -39.5 -39.4 -41.6 -43.6 -45.2 -46.8
Connectivity -22.0 -29.4 -34.1 -38.6 -44.5 -49.0 -51.2 -53.6 -55.8
Other expenditures -77.3 -84.9 -86.8 -83.9 -80.6 -82.5 -87.0 -91.8 -97.8
Cost of materials and serv. rendered -410.1 -450.9 -491.1 -494.8 -546.1 -578.7 -610.3 -645.0 -666.3
Growth in % 9.9% 8.9% 0.8% 10.4% 6.0% 5.5% 5.7% 3.3%
in % of revenues 26.1% 27.0% 27.2% 25.9% 26.7% 26.3% 26.3% 26.5% 26.2%
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the result of higher expected payments of rent for glass fiber lines because the growing user numbers in the Internet and Telephone business segment also mean that the need for additional line capacity increases. The increase is still relatively small compared to the
planned growth in the user numbers in the Internet and Telephone business segment. The reason is that KDH Group is constructing its own glass fiber lines in the course of a planned investment program and, thus, must lease a lower amount of (additional) lines
from DTAG.
Those costs are compiled in expenses for program content which must be paid to the corresponding broadcasters for providing pay TV and private HD programs (Kabel Digital, Kabel Komfort HD, Kabel Premium, Kabel International). The rates of growth
in these expenses are closely linked to the increase in RGUs in the area of premium TV because the services in general are charged on the basis of costs per customer. The expenses for program content overall increased during the planning period by 14.6 % on
average over the years and thus slightly greater than the RGUs in the premium TV segment (+9.2 %) which, among other reasons, is the result of additional costs for HD
content which are incurred in the first planned years for the new HD packages of KDH Group.
The expenses for phone interconnection consist of fees for transmission and scheduling which are charged to KDH Group by other carriers. These involve the offsetting positions to the use-based feeds which KDH Group, in turn, demands from third party
carriers for the scheduling of telephone traffic and which are shown in the recurring sales revenues for Internet & Telephone. Despite substantially higher RGUs in the Internet and Telephone business segment, this position in the expenses remains relatively constant
because substantially decreasing traffic minutes and corresponding costs per user are expected in a manner which is analogous to the corresponding expectations for sales.
Synergies in the area of IP peering which KDH Group expects as the result of Vodafone becoming the majority shareholder contribute to a slight degree to reducing the annual expense.
In the area of maintenance and repair, KDH Group plans slightly increasing expenses on average of around 2.2 % annually based on the growth of the RGUs and a slightly
decreasing planned maintenance ratio per RGU.
A further main position in the costs involves the connectivity expenses which include especially rental payments for national and regional backbones. During the course of the planned expansion of the network, these expenses are also planned to increase
substantially.
Other expenses, for example, are costs for external call center agencies, costs for sold
end devices, installation fees as license fees which have not been capitalized. In a manner analogous to the growth in the RGUs and the sales revenues, an increase is expected in
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the planning period also for these positions in the costs. The planning considers, that KDH Group expects synergies in the area of procurement through the entry of Vodafone of around EUR 7.7 million in the planned year 2014/15 and around EUR 14.4 million
p.a. for the following years.
Since the cost of materials and procured services depends directly on the number of
customers and connection fees of KDH Group, we consider it reasonable that the corresponding rates of growth are virtually identical during the planned period. The
percentage portion of cost and materials and procured services in the sales revenues during the planning period is accordingly virtually constant. The ratio decreases only slightly from 27.2 % in the year 2012/13 to 26.2 % in the last planned year 2018/19.
Personnel costs
The personnel costs include salaries as well as social insurance levies especially for technical personnel who are responsible for planning and operating the network
infrastructure.
KDH Group intends to further expand its staff of employees in the planning period and plans and average annual growth of 3.3 % for full time equivalents (FTEs). The costs for personnel are accordingly supposed to increase from EUR 196.8 million in 2012/13 to
EUR 261.4 million in 2018/19. This corresponds to an average annual growth rate of 4.8 % that is higher than the growth in FTEs due to assumed wage increases. As is the
case with the position for costs of materials and procured services, KDH Group also expects slight economies of scale effect in coming years for the personnel costs. Compared to sales revenues, the personnel costs are supposed to decrease from 10.8 % in
the year 2012/13 to 10.3 % in the last planned year 2018/19.
Long-term incentive plan
A new compensation structure for certain employees in the Group was introduced
effective as of 1 April 2010 in accordance with the requirements of the German Stock Corporations Act and the German Corporate Governance Code.
A new long-term, success-based variable compensation structure based on a long-term incentive plan was also introduced by KDH AG and its subsidiaries together with this
new compensation structure effective as of 1 April 2010. This LTIP consists of two
Personnel Expenses 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Personnel Expenses (w/o LTIP) -179.8 -178.5 -196.8 -213.1 -223.1 -231.9 -241.4 -251.4 -261.4
Growth in % -0.7% 10.2% 8.3% 4.7% 4.0% 4.1% 4.1% 4.0%
in % of revenues 11.4% 10.7% 10.9% 11.2% 10.9% 10.5% 10.4% 10.3% 10.3%
Ø FTEs 2,795 2,857 3,220 3,617 3,745 3,788 3,829 3,869 3,911
Growth in % 2.2% 12.7% 12.3% 3.5% 1.2% 1.1% 1.0% 1.1%
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stock-based components: a virtual performance share program ("LTIP I”) to be awarded annually and a one-time grant of virtual stock options ("LTIP II”) both for members of the executive board as well as for selected members of the senior management.
The performance shares granted under the LTIP I become mature for payment four years after they have been allocated, depending on certain success targets. The success targets
are measured according to the development of the returns on shares for the KDH stock compared to the MDAX in the four year vesting period. The payout is made in cash and
results from the number of payable performance shares multiplied by the volume weighted average closing price for the KDH stock in XETRA trading during the last 30 trading days prior to the date of full vesting.
The virtual stock options granted under the LTIP II are mature for exercise depending on achieving certain success targets in a staggered basis on 31 March 2012 (40 % of the
options), 31 March 2013 (additional 30 % of the options) and on 31 March 2014 (remaining 30 % of the options). EBITDA goals which must be achieved during a certain period of time as well as goals relating to the price of the KDH stock which must be
achieved within a defined performance window are set as the success targets. The virtual stock options can be exercised for the first time four years after they have been allocated
during a two year exercise period. Upon exercising the virtual options, the difference between the issuing price of the KDH stock in the initial public offering and the volume weighted average closing price of the KDH stock in XETRA trading during the last 30
days prior to the exercise date is paid in cash.
The expenses for the LTIPs to be taken into account in the planning result from two
components. The first component is the change in value in the already granted performance shares and the virtual stock options. The planned changes in value are
determined on the basis of an option price model. Due to the dynamic development of the stock price of KDH AG since the last accounting date on 31 March 2013, an increase in the obligations under the LTIPs in the amount of EUR 63.6 million is expected in the
forecasts for the present fiscal year 2013/14. Lower changes in value are planned in subsequent years because a constant price for the KDH stock is used as a basis in the option price model. The Company expects that success-based compensation will also be
used in the future to assure appropriate compensation. With regards to the value it needs to be proceeded from the respective compensation in previous years. In this light, the
Company took the overall value of the performance shares granted on 01 December 2012 of EUR 4.8 million p.a. into account for the planned years 2014/15 et seq. as a second component of the expenses for LTIP.
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Other expenses
The other expenses include, among other items, marketing expenses, copyright royalties, expenses for IT support, sales commissions, expenses for temporary personnel, rental
expenses, consulting costs and travel costs.
In the budget year 2013/14 which already incorporates actual figures due to the forecasts one-time expenses are included in the other expenses which explains the comparably high
share of other expenses of sales revenues of 17.6 %. One-time expenses of EUR 35.9 millions relate to the take-over by Vodafone Vierte Verwaltungs AG and the EU regulation relating to SEPA. Without these one-time items the share of other expenses of
sales revenues would be 15.8 % and thus be lower than observed in the past. Apart from this KDH Group expects an increase in other expenses from EUR 292.4 million in the
year 2012/13 to EUR 346.5 million in the last planned year 2018/19 at an annual average of around 2.9 %. As is the case with the other positions in costs, KDH Group also plans increases in efficiency in the area of other expenses which decrease the ratio to sales
revenues from 16.2 % in 2012/13 to 13.6 % in 2018/19. This is based, among other aspects, on decreasing planned expenses in the area of consulting costs, license fees and temporary personnel (in part hired as firm employees). Economies of scale, for example,
are also planned in sales commissions and travel costs.
Other operating income
The other operating income includes primarily income from other services, commissions for advertising costs premiums, payments of damages as well as various other positions. KDH Group anticipates a decrease in the other operating income from EUR 12.6 million
in the year 2012/13 to a forecast of EUR 9.8 million in the current fiscal year 2013/14 which stems from the elimination of one-offs of the previous year resulting from the
switch off of analog satellite TV. Apart from this, only minor changes are expected in subsequent years. A slight increase to EUR 10.5 million is planned by the year 2018/19.
EBITDA
The following table shows the planned development of the EBITDA as well as the EBITDA margin of KDH Group until the year 2018/19.
Other Costs 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Other costs -292.3 -288.2 -292.4 -336.9 -306.6 -325.2 -331.2 -338.6 -346.5
Growth in % -1.4% 1.5% 15.2% -9.0% 6.1% 1.8% 2.2% 2.3%
in % of revenues 18.6% 17.2% 16.2% 17.6% 15.0% 14.8% 14.3% 13.9% 13.6%
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EBITDA is planned to increase from EUR 773.4 million in the fiscal year 2012/13 to
EUR 1,272.8 million in the planned year 2018/19, which corresponds to an annual average growth rate of 8.8 %. The associated expected EBITDA margins increase from 42.8 % in the fiscal year 2012/13 to 50.1 % in the planned year 2018/19.
If the expenses for LTIP and the one-time items already reflected in the forecast 2013/14 are neglected when calculating EBITDA, EBITDA increases from EUR 837.5 million in
the fiscal year 2012/13 to EUR 1,277.6 million by the last planned year 2018/19. This corresponds to an average annual rate of growth of 7.3 %. At the same time, KDH Group expects a further increase of its EBITDA margin from 46.4 % in the fiscal
year 2012/13 to 50.3 % in the planned year 2018/19.
Based on the explanations of the Company provided to us with regard to the planning assumptions, our analysis of the results in the past and a comparison with market studies,
we consider the assumptions forming the basis of the business planning of KDH Group down to the level of the EBITDA to be justified and verifiable.
Depreciation
The planned depreciation relates to the tangible and intangible assets of KDH Group which are subject to wear and tear. Depreciation of good will is not planned, as these are determined on the grounds of a annual impairment test
The planning of the investments (capex) and the depreciation is shown as follows when compared to the fiscal years 2010/11 through 2012/13:
Depreciation of tangible and intangible assets was planned by KDH Group in two steps.
Firstly, depreciation of the currently existing assets was calculated based on a simulation approach. Then the depreciation of the planned capex of KDH Group was considered.
EBITDA 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
EBITDA 684.4 746.2 773.4 810.6 961.9 1,064.0 1,144.5 1,200.2 1,272.8
Growth in % 9.0% 3.7% 4.8% 18.7% 10.6% 7.6% 4.9% 6.0%
in % of revenues 0.4 44.6% 42.8% 42.5% 47.1% 48.4% 49.3% 49.4% 50.1%
+ LTIP 17.4 20.5 64.1 63.6 15.8 10.1 5.5 4.8 4.8
+ One-time effects 0.0 0.0 0.0 35.9 0.0 0.0 0.0 0.0 0.0
EBITDA (before LTIP/sp. effects) 701.8 766.6 837.5 910.0 977.6 1,074.1 1,150.0 1,205.0 1,277.6
Growth in % 9.2% 9.2% 8.7% 7.4% 9.9% 7.1% 4.8% 6.0%
in % of revenues 44.7% 45.8% 46.4% 47.7% 47.8% 48.8% 49.5% 49.6% 50.3%
3u
Capex and Depreciation 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
KDH AG Adj. Actuals Adj. Actuals Adj. Actuals Forecast Plan Plan Plan Plan Plan
mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Capex 384.3 395.5 486.7 590.1 666.9 484.5 481.6 486.4 487.5
in % of revenues 24.5% 23.7% 27.0% 30.9% 32.6% 22.0% 20.7% 20.0% 19.2%
Depreciation -490.2 -395.9 -360.9 -404.3 -458.3 -478.7 -484.9 -484.4 -493.2
in % of revenues -31.2% -23.7% -20.0% -21.2% -22.4% -21.8% -20.9% -19.9% -19.4%
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The planned investments are composed of success based investments directly attributable of the acquisition of new subscribers and non-success based investments, attributable to the upgrade and expansion of the network of KDH Group. In April 2013 the Company
has started an investment program with a volume of around EUR 300 million that will be implemented within the current and next financial year. The objective of the program is an additional growth and efficiency improvements in network infrastructure. Accordingly
the planned investments are initially planned to increase from EUR 384.3 million in 2010/11 to EUR 666.9 million in 2014/15. After 2015/16 the Company expects an
overall decrease in investments. The expected investments to revenues ratio is planned within a range between 19.2 % and 22.0 % after 2015/16 which is overall at a lower level than was observed in the past.
The decrease in planned investments due to the phase out of the investment program for network upgrades towards the end of the fiscal year 2014/15 becomes visible through a decreased portion of depreciation compared to revenues from 22.4 % in the plan year
2014/15 to 19.4 % in the plan year 2018/19. This level of depreciation is situated below or at the lower end of a range of 20.0 % to 31.2 % of revenues which was observed in the
past.
c) Earnings after interest and taxes
Determination of the financial result
The financial result of KDH Group includes several components: the interest income,
allocations of profit to minority shareholder and silent partners as well as the results from participations.
The planned accounts prepared by the Company contain interest income which is based on a planning of the need for financing build on the mid-term planning,but not based on an integrated planning of the need for financing. During the course of the valuation of
KDH Group, we accordingly replaced this planning by an integrated planning of the need for financing which is based on the audited consolidated accounts as of 31 March 2013 and takes into account the planned earnings and investments, the financing structure
as well as payout assumptions.
We took into account the assumptions of the Company concerning financing when deriving the interest results. In light of the improved credit rating of KDH Group in the investment grade range resulting from the takeover by Vodafone, a successive increase in
the investment grade debt capacity of the Company at clearly improved conditions for the financing is expected. The interest expense is initially expected to decrease strongly until the planned year 2015/16 as a result of this non-genuine synergy, and it is then planned to
slightly increase with increasing interest levels.
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Minority participations of third parties exist in the fully consolidated companies Urbana KG and its general partner Urbana GmbH. The treatment of the profit shares belonging to the minorities is different for the two companies in the planned accounts.
The profit share in Urbana KG belonging to the minorities is covered in the financial result, while the minority share in Urbana GmbH is shown separately as a minority share below the annual profit (see on this point the section "Determination of minority shares”
below).
KDH AG has an indirect participation of 100 % in KCW GmbH and KCB GmbH. However, the two companies have concluded a contract about establishing an atypical silent partnership for an indefinite term. Under this contract the silent partners have a
share in the profits, the assets and the silent reserves of the companies. The profit share of the silent partners is 60 %. The two companies are included with their full contribution to profit in the consolidated planned accounts of KDH Group which is why
the profit allocations to the silent partners were taken into account in the financial result. As the planning of the Company is performed on a consolidated level and in the absence
of individual planning accounts for the affiliates, the profit allocations to the silent partners in the planning were calculated on the basis of the forecast for the fiscal year 2013/14. They were developed further by indexing them to the overall development of
KDH Group.
The indirect participations of KDH AG in KMS KG and KMS GmbH are included in
the accounts at equity which is why the shares in the profit of the companies are shown in the results from participations. In the absence of individual planning accounts for these affiliates the corresponding income from subsidiaries was perpetuated on the basis of the
last available annual financial statement of these companies. According to our assessment the business development of the affiliates is however expected to follow the general
business development of KDH Group. Therefore, the level of the income from subsidiaries was again linked to the business development of KDH Group.
Determination of corporate taxes
KDH AG has carried out planning of the corporate taxes. Starting with the consolidated IFRS income before taxes, the tax result of the fiscal unit of KDH AG (as parent
company), KDVS, KDK and KDFS and the remaining affiliates was derived. Due to the modified calculation of the results for interest, the corporate taxes were recalculated by us. This determination of corporate taxes was based on the Company’s calculation of the tax
result.
When calculating the corporate taxes, a corporate income tax rate including the solidarity
surcharge in the amount of 15.83 % was applied. The trade tax for the fiscal unit of KDH AG (as parent company) and its operating affiliates was calculated with a trade tax
rate of about 13.65 %. This is based on the expected average trade tax charging rate at the
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fiscal unity of 390.02 %. For the other companies individual trade tax charging rates were considered.
When calculating the basis for assessing trade tax, additions and reductions were made in accordance with §§ 8 and 9 GewStG. Taking into account the free amount, under § 8 no. 1a, consideration for debt after taking into account the interest barrier (§ 4h EStG
in conjunction with. § 8a KStG), 20 % of the rents, lease payments and leasing installments for movable assets under § 8 no. 1d, 50% of the rents and lease payments for
immovable assets under § 8 no. 1e as well as 25 % of the expenses for the grant of rights limited by time under § 8 Nr. 1f were added.
There are loss carry forwards as of 31 March 2013 at KDH AG for purposes of corporate income tax and trade tax. The loss carry forwards for purposes of corporate income tax according to our information are around EUR 241.9 million, and the loss carry forwards
for trade tax purposes are around EUR 159.9 million. The interest carry forward of KDH AG as of 31 March 2013 is additionally around EUR 310.9 million. Upon the acquisition of 76.57 % of the shares of KDH AG by Vodafone Vierte Verwaltungs AG,
the Company currently believes that the existing loss carry forwards and interest carry forwards at the level of KDH AG will be eliminated. Elimination of these loss carry
forwards and interest carry forwards is not necessarily mandated in light of the unclear legal situation concerning the applicability of the exceptions set forth in § 8c para. 1 sentence 6-9 KStG (“silent reserve clause”). Therefore, we have assumed the existing loss
carry forwards and interest carry forwards of KDH AG in a precautionary value enhancing way at an anticipated value of 50 % when determining the corporate taxes.
Determination of minority shares
The minority shares relate to the part of the profit of KDH Group which is attributable to minority shareholders in the fully consolidated subsidiaries. As already explained in the
section "Determination of the financial result”, the minority shares shown separately below the annual profit relate only to Urbana GmbH. Due to the lack of material
importance of the minority shares in Urbana GmbH, they are not included by KDH Group in the planning and have accordingly been determined from our side. The net profit (HGB) of Urbana GmbH amounted to 2.1 TEUR in the fiscal year 2012/13
which leads us to not consider minority shares throughout our valuation.
d) Sustained profit
The planned accounts of KDH AG for the years 2013/14 to 2019/20 et seq. which are forming the basis of evaluation are shown below:
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For the derivation of the sustained profit 2019/20 et seq. we extended the planning of KDH Group by one additional year to account for the stronger growth of the business
segment Internet and Telephone compared to the sustainable growth rate after the last plan year 2018/19. The derivation of the sustained profit is based on the following considerations:
Our derivation of revenues differentiates between the business segments TV as well as Internet and Telephone. The revenues 2019/20 in the business segment TV were derived
applying the sustainable growth rate of 1.0 % to the TV revenues planned for the last year of the planning period. With regard to the Internet and Telephone revenues we assume a higher growth rate of 5.0 % to derive the revenues for the year 2019/20 for this business
segment. This growth rate results from a linear interpolation of the growth trend of the last three years of the business plan. In total, these growth assumptions result in an
increase in revenues to EUR 2,617.5 million in 2019/20, which corresponds to an increase of EUR 76.2 million or 3.0 % respectively.
The EBITDA of fiscal year 2019/2020 is calculated based on the incremental average EBITDA-Margin of the planning years of 60 %. The incremental EBITDA-Margin is the margin that can be earned on one additional unit of revenue, thus, it is higher than the
margin on the total revenues. Applied to the change in revenue of EUR 76.2 million an EBITDA growth of EUR 45.7 million to EUR 1,318.5 million results equaling a growth
rate of 3.6 %. This growth rate is right in the middle of the expected EBITDA growth rate in the year 2018/19 of 6.0 % and the sustainable growth rate of 1.0 %.
The sustainable depreciations correspond to the necessary sustainable investments. They are derived based on the expectation of the Company that 19.5 % of revenues need to be reinvested. This percentage is lower than the average annual investment rate of 24.4 %
which has been observed in the past.
Profit and loss statement 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
KDH AG Forecast Plan Plan Plan Plan Plan TV
mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Revenues 1,909.1 2,043.4 2,199.9 2,322.7 2,429.5 2,541.3 2,617.5
Cost of material and services -494.8 -546.1 -578.7 -610.3 -645.0 -666.3
Personnel expenses -213.1 -223.1 -231.9 -241.4 -251.4 -261.4
LTIP -63.6 -15.8 -10.1 -5.5 -4.8 -4.8
Other expenses -336.9 -306.6 -325.2 -331.2 -338.6 -346.5
Other operating income 9.8 9.9 10.1 10.2 10.3 10.5
EBITDA 810.6 961.9 1,064.0 1,144.5 1,200.2 1,272.8 1,318.5
in % of revenues 42.5% 47.1% 48.4% 49.3% 49.4% 50.1% 50.4%
Depreciation and amortization -404.3 -458.3 -478.7 -484.9 -484.4 -493.2 -510.4
EBIT 406.3 503.6 585.3 659.7 715.7 779.6 808.1
Financial result -212.7 -167.5 -124.5 -127.8 -130.7 -137.5 -145.0
EBT 193.6 336.0 460.8 531.8 585.0 642.1 663.1
Income tax -33.3 -80.5 -143.0 -164.6 -178.7 -196.4 -204.1
Net profit/loss 160.3 255.5 317.8 367.2 406.3 445.7 459.0
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e) Expected net distributions
The expected net distributions were derived as follows:
Distribution of dividends and retained earnings (internal financing)
A resolution was adopted at the general shareholders meeting on 10 October 2013 about the dividend for the year 2012/13 which is EUR 2.50 per share. This dividend has been paid to the shareholders so that this outflow of funds was taken into account when
planning the need for financing.
KDH Group has not made any assumptions in its planned accounts concerning the application of the annual surplus. In this context, a distribution ratio of 45 % of the annual surplus available for purposes of distribution, after taking minorities into account
(gross distribution), is applied for the planning years as well as for the sustainable planning year 2019/20. This ratio is derived from the historic distribution policy of publicly listed companies which are comparable to KDH Group.
Tax exempt return of contributions
Pursuant to § 27 para. 1 sentence 3 KStG, a company which is fully subject to taxation
can return payments free of taxes to the extent that these payments exceed the profits capable of being distributed which have been identified as of the closing of the previous fiscal year. The profit of KDH AG available for distribution as defined there will be
positive for the first time in the year 2015/16 so that all distributions of KDH AG to its shareholders will be made as tax exempt returns of contributions up to that point in time.
Deemed retention of earnings
The contribution to value from retained earnings is that part of the gross distribution which is not distributed as a dividend to the shareholders. The assumption is made with
regard to the deemed retained earnings that they flow directly to the shareholders after deduction of capital gains tax.
The method of directly attributing the retained funds to the shareholder was chosen for reasons of simplification. In the alternative, there could be an assumption of internal
reinvestment within the enterprise in the amount of the deemed retained earnings at the capitalization interest rate before the taxes accruing at the level of the enterprise, which would have the same effect.
Net distribution 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
KDH AG Forecast Plan Plan Plan Plan Plan TV
mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Net income 160.3 255.5 317.8 367.2 406.3 445.7 459.0
Dividends 72.1 115.0 143.0 165.2 182.8 200.6 206.5
Capital gains (fictious retention of net income) 88.2 140.5 174.8 202.0 223.5 245.2 252.4
Income tax on dividends 0.0 -12.9 -37.7 -43.6 -48.2 -52.9 -54.5
Income tax on capital gains (fictious retention of net income) -11.6 -18.5 -23.1 -26.6 -29.5 -32.3 -33.3
Net distribution 148.7 224.1 257.1 297.0 328.6 360.5 371.2
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All profits from the sale of securities and corporate shares acquired after 1 January 2009 are subject to the final tax on investment income [Abgeltungsteuer] including the solidarity surcharge at a rate of 26.38 %. The assumption can be made for purposes of typification
that capital gains are only realized and taxed in the far future. The effective tax burden on capital gains tends to be below that on dividends due to this tax deferral effect. Taken into account a very long holding period, an effective tax on the capital gains on the
deemed retained earnings is deducted in one-half of the nominal final tax on investment income resulting in 13.19 %.
The net distributions to the shareholders to be capitalized result from the total of the dividend distributions (minus final tax on investment income) and the deemed retained
earnings (minus tax on capital gains).
3. Determination of the Capitalization Interest Rate
The discounted earnings value is determined by discounting the future financial surpluses to the valuation date. The capitalization interest rate reflects the return on investment for
an alternative investment in which the cash flow is considered to be comparable to the cash flow which the shares in the enterprise being valued provide in terms of timing, risk
and taxation.
The starting point for the determination of the capitalization interest rate is the return on
investment of a risk-free investment in the capital market (risk free rate). This risk free rate must be increased by a risk premium which is supposed to cover the greater uncertainty about the amount of the financial surpluses involved in an investment in
shares of the enterprise being valued compared to an investment in a risk-free interest bearing security. When determining the risk free rate in the risk premium, provisions on taxes must be considered. In order to determine effects of growth in the form of
continuously increasing financial surpluses after the end of the detailed planning phase, the capitalization interest rate is reduced by a factor for growth (deduction for growth).
Our approach for determining the capitalization interest rate is as follows:
a) Risk free rate
The risk free rate represents a risk-free alternative investment equivalent to an investment
in the enterprise being valued in terms of timing. In light of their virtually safe nature, government bonds in Germany fulfill to a greatest extent the requirement of freedom from risk due to the inability of the issuers to become insolvent.
When valuing an enterprise with a perpetual life, as a general rule the returns on
investment which can be realized on the valuation date from government bonds which
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are also perpetual would have to be used as the risk free rate (equivalent term). However, since such perpetual bonds do not exist or are not traded, the theoretical return on investment for bonds with a perpetual term can be approximated using the observed
interest yield curve.
The German Federal Bank [Deutsche Bundesbank] regularly publishes estimates of the yield
curves on the basis of the prices of listed German Federal Government securities having a remaining term of up to around 30 years by using the Svensson method. These yield
curves reflect risk free rates for specific terms (so-called zero bond interest rates).
In the case of remaining terms greater than 30 years, the average determined zero bond
interest rate for a remaining term of 30 years can normally be applied as a long-term approximate value in light of the general uncertainty of forecasts and the limited applicability of the parameters of the estimation function of the German Federal Bank in
the context of an extrapolation for forecasts of interest for periods further in the future. This approach was followed in accordance with the recommendation of the FAUB (Technical Committee for Business Valuation and Economics [Fachausschuss für
Unternehmensbewertung und Betriebswirtschaft].
In order to determine the base interest rate, an average interest yield curve for the years 2013 et seq. over a time period of up to 30 years was derived from the estimates of the German Federal Bank [Deutsche Bundesbank] for the months of September to November
and an extrapolation of the average 30 year zero bond interest rate. The specific interest rates for the terms in the interest yield curve derived in this manner were converted to a uniform base interest rate before income taxes of 2.7574 % for all planned years and
rounded by us to 2.75 %.
b) Risk premium
The risk premium serves to compensate the risk that is accepted when investing in shares
of the enterprise being valued. It must be assumed that market participants are risk averse. This means that safe earnings are always preferred compared to expected values from unsafe earnings in the same amount. This risk aversion can be taken into account
by a deduction from the expected surpluses (so-called certainty equivalent method; Sicherheitsäquivalenzmethode) or by a risk premium on the capitalization interest rate (so-called risk premium method; Risikozuschlagsmethode). Both methods can be converted to
each other, but in practice risk aversion is almost exclusively reflected by a premium on the interest rate.
This decision for the risk premium method is embedded in the general purpose of an objectified valuation. An objectified valuation needs to meet the requirement to be based
on transparent parameters which are comprehensible for third parties. As the
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theoretically equal certainty equivalent method derives its risk discounts from the planned figures in individual, not observable and therefore not comprehensible utility functions and preferences, it basically needs to be disregarded for objectified valuations. In contrast
to this, risk premiums which are demanded by investors for risky investments are visible in the capital market and can therefore be verified.
Due to this reason capital market models such as the Capital Asset Pricing Model (CAPM) and the Tax CAPM, which is based on the CAPM, are particularly good for
determining the risk premium in the course of objectified valuations. These capital market models derive risk premiums indirectly using prices that can be observed in the capital market. The prices that develop in the capital market are the results of actions of
the investors. Prices for securities reflect in this regard also the risk preferences of the investors because the investors knowingly and freely make a decision to purchase or sell certain securities. This market assessment of the risks in shares by rational and risk averse
investors is reflected in the CAPM and the Tax CAPM in the form of a theoretical model. The CAPM and the Tax CAPM accordingly provide a verifiable, objectified explanatory
context for the quantification of a reasonable risk premium.
It can be argued that the theoretical considerations of the CAPM and especially the Tax-
CAPM are grounded on assumptions (e.g. the presence of a complete market) which are not observable in reality. This critique is justified and leads to the conclusion that the results of empirical analyses of the capital market need to be assessed in terms of
plausibility. For individual parameters like market risk premium or beta factor (see section D.I.3.bb) it is generally observed that results can differ significantly depending on the selection of the underlying data and the analyzed respective time periods. Despite the
justified critique, the derivation of a risk premium on the basis of a capital market model is preferable compared to rough estimations and guesses which were customary in the
past (e.g. premiums on the basis of credit risk, industry risk or size risk), because
- the CAPM displays the behavior of capital market participants in a rational and
comprehensible way. Despite market imperfections and existing mispricing it cannot be concluded that the capital market is systematically wrong or sustainably valued in an incorrect way.
- no other pricing model has shown its superiority over the long run so far.
- an objective discussion about the adequate approach and the plausibility of the results is just possible due to the comprehensible valuation parameters.
The debate about the valuation parameters “market risk premium” and “beta factor” will progress in the following sections. As the influence of taxes is generally significant for
investment decisions and valuations and in light of KDH AGs tax-free potential distributions and endangered tax losses carried forward it is advisable to utilize the CAPM
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in its after-tax version (Tax-CAPM).Against this background, the two model parameters of market risk premium and beta factor, which are needed in the CAPM and Tax-CAPM to calculated the adequate risk premium are derived as follows:
aa) Market risk premium
The market risk premium is the market average excess return on investment for investments in stock compared to returns on investment for risk-free securities demanded
by investors. The stock market can be reflected by a broad stock index such as, for example, the CDAX or the MSCI All Country World Index.
The CAPM represents in its standard form a capital market model in which the costs of capital and risk premiums are explained without taking into account the effects of personal income taxes. Since returns on investment for stock and risk premiums,
however, are generally influenced by taxes on income, an explanation of the empirically observable returns on investment that is closer to reality is provided by the Tax CAPM which expands the CAPM in order to expressly take into account the effects of personal
income taxes. The different tax treatment of interest income, dividends and capital gains is directly covered in the equation for the Tax CAPM by considering the respective
relevant tax rates for the components of the costs of capital.
According to the Tax CAPM, the capitalization interest rate consists of the risk free rate as reduced by typified personal income taxes and the risk premium after personal income
taxes determined on the basis of the tax CAPM, weighted with the beta factor.
In light of the current situation in the capital markets, the Technical Committee for Business Valuation and Economics at the IDW (FAUB)9 considers it appropriate to use
as an orientation a range of 5 % to 6 % (after personal taxes) when assessing the market risk premium in light of the current distortions in the financial market and the Euro debt
crisis.
In times of stable economic development, it must be assumed that the relationship
between risk premium and risk-free interest rate measured in the past and taking into account long-term developments of trends is a good basis for estimating the expected relationship. In light of this background, the capitalization interest rate is determined in
the context of the capital market oriented approach as the sum of a return of risk-free return on investment currently expected for the future and a forecast risk premium which is based on returns on investment measured in the past. While the risk-free interest rate
can be derived from current expectations in the capital market, the forecast of the risk
9 See, "Instructions of the FAUB on taking into account the crisis in the financial markets when determining the capitalization interest rate in enterprise valuations “ dated 19 September 2012.
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premium is made on the basis of historic average values due to the lack of ability to measure the expected returns on investment for stocks.
In the current crisis in the financial markets and the Euro debt crisis, however, various
indicators show that long-term developments in trends assumed in the past when forecasting the risk premium are currently being overshadowed by other influences or no longer exist in the extent previously anticipated. Long-term German government bonds
currently have a very low return on investment compared to their past history and compared to other EU government bonds. Even negative returns on investment can be
seen for short-term German government bonds and inflation protected German government bonds. Furthermore, there are spreads between interbank interest rates and government bonds that are significantly above the spreads that were measured prior to
the beginning of the crisis in the financial market. In light of this background, it must be determined that the current situation in the capital market no longer corresponds to the situation that was observed on average in the past.
Despite these distortions, it must be noted that the observable returns on investment for German government bonds continue to be the best possible estimator for determining
the risk-free interest rate because no failure of the market can be observed for them.
Compared to this, both the increased spread between German government bonds and other European government bonds as well as the increased spread between interbank
interest rates and government bonds support the assumption that the risk premium as the price for assuming the risk has increased. An extension of the analysis of historical data for considerations about the development of real returns on investment for shares as well
as findings in a so-called ex ante analysis confirms this view.
In light of this background, we have applied a market risk premium in the amount of
5.5 % for the valuation of KDH Group.
bb) Beta factor
The amount of the beta factor according to the valuation formula in the CAPM reflects the degree of systematic risk in a stock which cannot be diversified by capital market
transactions. The higher the beta factor, the higher is the risk premium demanded by investors in the capital market.
The CAPM and the Tax-CAPM are so-called ex ante models in order to explain shareholders’ expected return on investment from risky cash flows in capital market
equilibrium. They are based on expected values of future cash flows and returns. Therefore, in the context of a forward looking valuation, reference must be made to future beta factors that reflect the risk of the business model being valued. This future
risk, however, cannot be directly observed and measured.
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Due to un-availability of observable future beta factors, reference can be made only to auxiliary solutions. As one of these solutions the usage of so-called fundamental beta factors is thinkable. Financial analysts estimate fundamental betas on the basis of
fundamental company information using econometric models. As these econometric models are usually not disclosed and are hence not traceable, the usage of fundamental betas should usually be ruled out in the determination of objectified business values. The
standard practice solution is therefore the estimation of the unknown future beta factor on the basis of historical data.
In general, historic beta factors can be derived both on the basis of the historic stock prices of the subject of the valuation, if the subject is a listed company, as well as on the
basis of stock prices of comparable enterprises.
We have analyzed and evaluated both possible approaches:
(1) Beta factor of peer group
“Valuing is comparing”: the discount rate represents the return on an alternative investment adequately comparable to the entity to be valued (see, IDW S 1 2008, no. 4).
In a first step, we therefore analyzed which conclusions with regard to the beta can be made from the average beta factor of a group of comparable companies (Peer Group)
For this purpose we considered those listed cable network operators that have comparable business models to KDH Group.
Especially the revenue structure of the enterprises with regard to the business fields of TV as well as internet and telephone were taken into account. The peer group that was used consists of cable network operators which are primarily active in the United States of
America as well as in the European area. The activities of the companies included in the peer group, whose beta factors have been included in determining the average unlevered
beta factor, are described below (in alphabetical order):
Cablevision Systems Corp.
Cablevision Systems with sales of around USD 6,705 million (2012) is one of the leading US American media and telecommunications companies. The company owns and
operates hybrid fiber coaxial cable networks in four western states of the USA and offers also cable, internet and voice solutions in the New York area. In 2012, the company generated a share of 51 % of its total sales within their TV division. Revenues resulting
from their internet- and telephone operations amounted to 33% of the company’s total sales revenues.
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Charter Communications Inc.
With sales of USD 7,504 million (2012) Charter Communications symbolizes a large cable
network operator in the USA. The core business of the company consists primarily of operating broadband networks with coaxial and fiber optic cables. In total, around 12 million households are connected to the cable network of the company. The customers
are provided with video, data, interactive and private network services through this infrastructure. In addition, the company provides telephone services using their
broadband network. In 2012, the company generated 49 % of its sales in the area of TV/Video- and 36 % in the area of internet and telephone service.
Comcast Corp.
Comcast is a US American cable network operator which offers its customers TV,
internet and telephone services. The business of the company is organized and segmented into the two divisions of Comcast Cable and NBCUniversal. Comcast Cable is present in 39 US states, and forms the largest cable provider for private households and
companies in the areas of video, high speed internet and telephone services in the USA. The subsidiary NBCUniversal acquired in March 2013 develops, produces and markets
entertainment, news, sports and other content for a worldwide audience. In addition, NBCUniversal operates an own cable network.
Liberty Global Plc
Liberty Global is an operator of broadband cable networks and generates its sales
primarily with video, telephone and internet services. The corporate group operates networks within 14 countries. Liberty Global is primarily active in Europe and is represented, among other, by the brands UPC (Austria), Unitymedia (German), UPC
Cablecom (Switzerland) and Telenet (Belgium). In June 2013, the company acquired Virgin Media which operates in the United Kingdom. The company is accordingly one of
the largest cable network operators outside of the USA. In March 2013, Liberty Global acquired a block of shares of around 25 % from a private equity investor. In 2012, Liberty Global employed 22,000 employees and achieved revenues of USD 10,311 million. 45 %
of these sales are attributable to the company’s TV-operations, whereas 39 % can be linked to their various internet and telephone services.
Multimedia Polska SA
Multimedia Polska is a leading cable network operator, provider of digital TV as well as broadband, mobile and fixed line network solutions in Poland. In November 2011, the company was delisted. The company generated around 48 % of its sales by providing
cable television in this year. Another 28 % and 21 % were generated with internet and telephone services, respectively. In 2011, the company achieved total revenues of in 2011 PLN 622.3 million.
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Telenet Group Holding NV
Telenet Group is a Belgian telecommunications company and the largest cable network
operator in the country; a majority of the shares in the company are owned by Liberty Global. The company offers services such as fixed line telephone service, cellular telephone, broadband internet, pay TV and cable television for private persons through
hybrid glass fiber coaxial networks. Commercial customers are reached through specialized voice and data transmission using glass fiber cable and coaxial cable in
Belgium and parts of Luxembourg. The company had sales of EUR 1,489 million in 2012, whereby 37 % of the sales were generated by providing cable television and 53 % by providing internet and telephone services.
Time Warner Cable Inc.
Time Warner Cable is a large US American cable network operator with sales revenues of USD 21,386 million (2012). The company provides multimedia services to more than 15 million households and around 300,000 corporate clients. The main fields of business of
the company are HD-TV, services for video and high speed data transmission as well as voice and digital telephone services. The company achieved around 58 % of its sales
revenues in the TV field and around 40 % with its internet and telephone services.
Virgin Media Inc.
Virgin Media is an Anglo-American company which provides services in the field of telecommunications. The core business is providing fixed line- and cell telephone
networks, television- as well as broadband internet solutions for private and commercial customers in Great Britain. With its extensive cable network, the company services around 4.8 million customers. The TV, internet and telecommunication services are
combined in the division of cable with which around 82 % of the sales revenues are generated. Around 31 % of the cable sales revenues in the fiscal year 2012 were
attributable to the field of TV and the remaining 69 % were attributable to the field of internet and telephone. Within telephone services, revenues generated with mobile phone services represent only a small portion of total revenues. In June 2013, the company was
acquired by Liberty Global.
ZON Optimismus SGPS SA
ZON Optimus is a media company which has its origins in Portugal Telecom. The
company supplies its customers with satellite and cable television as well as internet services as a service provider. The company generated total sales of EUR 858.6 million in 2012. A portion of 86 % and, thus, a majority of the sales of the company are generated
by providing television as well as internet and telephone services. To a lesser extent the company offers mobile services.
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The Dutch Ziggo NV could also have been included in the peer group in light of the comparable operational business. The company is, however, only listed since March 2012. Due to the lack of sufficient data this was precluded for the beta inquiry.
Since the beta factor in an enterprise valuation is a forward looking variable, major influences of one-time effects in the past must be avoided if possible and possible trends
must be analysed. For this purpose, we conducted five determinations of beta against the MSCI World All Country Index for the period December 2007 to December 2013.
Each of these determinations cover a period of two years and are based on weekly returns on investment. The use of the worldwide MSCI World All Country Index reflects the existing worldwide possibilities for investment and diversification of a representative
investor and corresponds to the approach of using an international peer group. The oldest period in these inquiries ends on 09 December 2009 and the most recent on 09 December 2013.
In order to assess the statistical significance and the goodness of the regressions made to derive the beta factors we applied the coefficient of determination (R²) and the t-test. 10
The usage of statistical filter criteria based on these statistical tests can ensure that, on the one hand, a statistical relationship between the stock returns and market returns even
exist (as measured with the beta factor and tested with the t-test) and, on the other hand, that the this relationship has a minimum of statistical reliability and quality (tested with R²). If measured beta factors could not fulfil both statistical tests11, they were eliminated
from our analysis. In addition, beta factors of companies whose stock quotes were influenced by acquisitions were not considered in the respective time periods.
The so-called adjusted, and corrected for their financial risk (unlevered) beta factors that have been adjusted for this purpose, are derived as follows from the analysis:
10 These tests are often used for valuation purposes and are accepted by courts (see, decision of the OLG
Stuttgart from 18 December 2009, Az 20 W 2/08, p. 77; decision of OLG Stuttgart from 19 January 2011, Az 20 W 3/09, Tz. 212).
11 As the lower limit of the coefficient of determination we applied a common minimum value of 10 %; for the t-test we used a significance level of 5.0 %, which is also common for statistical tests.
Unlevered adjusted beta factors
Company10.12.2007 -
09.12.2009
10.12.2008 -
09.12.2010
10.12.2009 -
09.12.2011
10.12.2010 -
09.12.2012
10.12.2011 -
09.12.2013Mean
Cablevision Systems Corp 0.75 0.68 0.60 0.61 0.66 0.66
Charter Communications Inc 0.47 0.59 0.53
Comcast Corp 0.79 0.71 0.70 0.77 0.78 0.75
Liberty Global PLC 0.67 0.59 0.54 0.58 0.63 0.60
Multimedia Polska SA 0.78 0.77 0.78
Telenet Group Holding NV 0.65 0.65 0.64 0.65
Time Warner Cable Inc 0.57 0.55 0.60 0.57
Virgin Media Inc 0.67 0.56 0.62 0.57 0.61
ZON OPTIMUS SGPS SA 0.68 0.52 0.65 0.63 0.62
Mean 0.71 0.63 0.62 0.60 0.65 0.64
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The unlevered beta factors of the peer group companies show a range of 0.53 to 0.78. The average value of the unlevered beta factors is 0.64 and was rounded down to 0.60 from our side throughout the determination of the capitalization interest rate.
The capital structure risk was taken into effect by a period specific adjustment of this unlevered beta factor for the risk effect resulting from the varying degrees of debt of
KDH Group, whereby the fact that third party capital generally involves risk was taken into account. The level of debt is integrated and derived from the calculation of the need
for financing. This results in a range of the levered beta factor of 0.74 to 0.75.
(2) The own historic beta factor of KDH AG
Since the stocks of KDH AG are listed since 22 March 2010, own historic beta factors for KDH AG can be calculated.
To start with, we have determined different historic beta factors for KDH AG over different time periods since the initial listing of the stock using the MSCI World All
Country Index. Analog to the analysis of the peer group, time periods of two years were chosen. The analyses were based on weekly (calculated per last weekday) returns on
investment. The so derived historic unadjusted beta factors of KDH AG are as follows:
The historic beta factors of KDH AG (unadjusted and levered) determined over these
time periods are within a range of 0.25 and 0.60. It should firstly be noted that the beta factors of KDH AG are generally lower for younger time periods since Vodafone’s
intention to acquire KDH AG was released on 13 February 2013.
In order to differentiate between purely random and systematic beta observations,
statistical tests are usually applied. In order to assess the statistical significance and the goodness of the regressions made to derive the historic beta factors of KDH AG we applied the coefficient of determination (R²) and the t-test.
In the present case, the beta factors derived for KDH AG mainly have an unsatisfying R² that decreases when later estimation periods are considered. This might be an argument
that the future beta of KDH AG to be estimated should really be close to zero, or alternatively, that the estimated beta factor has been measured purely randomly from a
statistical point of view. Since one should assume that the business and the planning of KDH AG is generally not riskless, we consider the estimations of KDH’s own beta factor as not very reliable and as not very suitable to forecast the company’s risk. That the
KDH AG's levered raw beta
KDH's levered raw beta - 0.60 0.47 0.44 0.25
Coefficient of determination - 15% 9% 7% 2%
Passed t-test - yes yes yes no
Data points 0 37 90 104 103
10.12.2007 -
09.12.2009
10.12.2008 -
09.12.2010
10.12.2009 -
09.12.2011
10.12.2010 -
09.12.2012
10.12.2011 -
09.12.2013
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quality of the beta estimations decreases when later periods are considered indicates that the own historic beta of KDH AG has been decoupled from the intrinsic risk of its business model at the latest since the publication of Vodafone’s takeover intention on
13 February 2013. Then, this beta factor would not suitable to forecast the future beta factor of KDH AG. In the following we therefore analysed the suitability of the historic beta factors of KDH AG to forecast the company’s future risk in more detail.
We first analysed the development of the historic own beta factor of KDH AG over time.
Beginning with the initial listing of the stock of KDH AG on 22 March 2010, we have determined beta factors using the MSCI World All Country Index for each week up to 09 December 2013], each of which covers a period of one year and is based on weekly
(calculated per last weekday) returns on investment. These rolling unadjusted historic beta factors are shown together with the stock price development of KDH AG and of the MDAX are as follows:
After initial fluctuations, the annual beta factor of KDH AG determined on a rolling basis
shows a general upward trend up to spring 2013.
The development of the stock price of KDH AG indicates that the own beta factors are
distorted since the first rumors about the potential takeover through Vodafone arose in press on 13 February 2013. On this day the stock price of KDH AG increased sharply with relatively high trading volumes and, in the following weeks, the stock was primarily
determined by increased interest on the part of analysts (see section D.IV). Beta factors that are estimated this period therefore do not reflect market expectations with regard to
the risk of future earnings of KDH AG but instead expectations with regard to a potential takeover bid and the bid price.
Starting with these speculations the stock price of KDH AG has been decoupled from the general market movements (as represented by the MDAX index). That this decoupling from the market does not affect beta factors immediately is explained by the methodology
to determine beta factors on past returns (1 year in this case). Distortions in the stock
-0,20
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0
20
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25.03.2011 25.09.2011 25.03.2012 25.09.2012 25.03.2013 25.09.2013
beta
fa
cto
r
sto
ck
pri
ce o
f K
DH
in
Eu
ro,
Ind
ex n
orm
alise
d
Rolling annual (unadjusted) beta fakcor and stock pricedevelopment of KDH AG
KDH AG MDAX Betafaktor der KDH AG
13.02.2013: first rumors about Vodafone's takeover intentions
12.06.2013: Confirmation of Vodafone's takeover intention by KDH
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price can therefore be detected only with a time lag in the beta factors, though they impact beta factors immediately.
Since the date of the announcement of receipt of a preliminary proposal for a takeover by Vodafone on 12 June 2013, KDH AG’s stock price was virtually fixed until the announcement that the 75 % minimum acceptance threshold has been reached on
12 September 2013 (see section D.IV). With lacking volatility of stock returns the historic beta factor of KDH AG approaches zero and is now even negative.
As a result, historic beta factors of KDH AG that consider estimation periods after 13 February 2013 are not suitable to forecast the inherent systematic risk of the planning
of KDH AG.
Within the relevant estimation period for KDH AG starting with the listing and ending
before 13 February 2013, the own beta factor (unadjusted and levered) determined on a rolling basis follows a slightly increasing trend after initial fluctuations from around 0.3 to around 0.6. In contrast, the average beta factor of comparable companies is relatively
stable at a level of just over 0.6 (adjusted and unlevered). This raises the question of which observation is more suitable to value the future risk of KDH AG.
It is worth pointing out, that the planning of KDH AG includes an increasing importance of the Internet and Telephone segment compared to the TV segment. The expected
revenue share of the TV segment decreases from around 61 % in 2013/14 to around 50 % in plan year 2018/19 (see section D.I.2.b). Compared with this, the revenue share of KDH in the past has been substantially higher (see graph in section D.I). The extent to
which the own beta factors determined for the period prior to 13 February 2013 are appropriate in light of the continuously changing revenue structure of KDH AG is at least
questionable. In contrast, the peer group we derived shows already in the past an average revenue share for the TV segment at levels seen at the end of KDH AG’s planning horizon. Hence, there are good arguments that the historic own beta factor of KDH AG
cannot easily be applied to the future.
(3) Estimation of the future beta factor
In general, both, the historic beta of comparable companies as well as the historic own beta of KDH AG indicate that the risk inherent in the business model is below-average.
Due to the difference between the beta factor of the peer group of 0,6 (adjusted and unlevered) and the range of the historic own beta factor of KDH AG of 0.3 to 0.6
(unadjusted and levered) determined on a rolling basis, a decision between both approaches is required.
This decision can be made on the basis of concrete empirical results or on the basis on fundamental theoretical considerations.
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If the empirical data basis is considered in more detail, one can observe that the beta factors provided by Bloomberg or other financial service companies that are based on weekly stock returns are usually derived from weekly returns that are calculated as of end
of the week (Friday). However, there is no economic justification to calculate weekly stock returns based on last prices of the week. Rather, every week day should have the same relevancy.
Therefore, analogous to the preceding beta estimations, beginning with the initial listing
of the stock of KDH AG on 22 March 2010, we have determined beta factors using the MSCI World All Country Index for each week up to 09 December 2013, each of which covers a period of one year and is based on weekly returns on investment. We calculated
the weekly returns on investment, however, for various week days, i.e. the weekly returns on investment from one Friday to the next Friday as well as the returns on investment determined for other week days respectively were analyzed. Depending on the week day
used as a basis for calculating the weekly returns on investment, the observed beta factors (unadjusted and levered) are as follows:
The amount of the own historic beta factor of KDH AG depends decisively on the week
day which is used as a basis for determining the weekly returns on investment. For example, beta factors between slightly over zero up to 1.48 can be observed depending on the underlying week day. The average beta factor established over all weekday for time
periods until 13.02.2013 is on average about 0.75. Thus, there would be a certain degree of arbitrariness if, for example, weekly returns on investment determined as of a specific
week day were used for determining the beta factor or to apply a however calculated
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1,00
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1,40
1,60
25.03.2011 25.09.2011 25.03.2012 25.09.2012 25.03.2013 25.09.2013
Rolling annual (unadjusted) beta factor of KDH AG based on weekly stock returns measured over different week days
Monday Tuesday Wednesday
Thursday Friday Mean over week days
13 February 2013: rumors about Vodafone's intention to take over KDH arise
12 June 2013: KDH confirms Vodafone's takeover intentions
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average above week days. The arbitrariness of the own beta factor is not by chance. Rather, this empirical result is in accordance with fundamental theoretical considerations.
The estimation of future beta factors on the basis of historic measurement requires a resilient and a large data base as possible. If however the historic beta factor of only a single company is applied to the valuation, then the data basis is so small that even
changes in the week day used to calculate returns can result in almost arbitrary changes in the outcome. In contrast, such distortions can offset each other in the total data set of a
large peer group and can so be avoided.
“Valuing is comparing” is therefore not an empty phrase. Valuing a company always
means to conclude form the known value of other companies to the value of the company to be valued. With regard to multiple valuation techniques, the earnings multiples observed from other comparable companies are applied to the valuation object.
With regard to Discounted Earnings valuations, the required returns on investments observed from comparable companies and hence the beta factors are applied to the valuation object. Comparing a company with itself however generates no further
knowledge.
It is for this reason that the valuation standard IDW S 1 assumes that as part of the comparison required for the valuation the discount rate represents the return on an alternative investment adequately comparable to the entity to be valued (see, IDW S 1
2008, no. 4 and no. 114).
Based on the concrete empirical data basis as well as on fundamental theoretical
considerations, we therefore consider it as preferable to use the beta factor derived from comparable companies instead of the own historic beta in order to estimate the future
beta factor of KDH AG. Although the above analysis shows the arbitrariness of applying the own historic beta factor of KDH AG, nonetheless, when considering the average value of about 0.75 established for the week days, it does not contradict the range of the
levered beta factor of KDH AG from 0.74 to 0.75 determined using the peer group.
c) Deduction for growth
The growth of expected future enterprise profits must be taken into account throughout the valuation of the enterprise. Any growth in the corporate profits for the individual
periods in the detailed planning phase 2013/14 to 2018/19 is included in the planned accounts. The contribution to value from the surplus payments in the company which
accrue over time after the detailed planning phase starting in the year 2019/20 et seq. is reflected in the valuation for purposes of simplification by the present value of a terminal annuity [terminal value]. Within the discounted cash flow formula, the terminal value
needs to be reflected by the means of the sustainable expected profit. If the enterprise
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being valued is able to increase its profits in a sustained manner in the period after the detailed planning phase, the corresponding growth in profit can be taken into account mathematically by a deduction from the capitalization interest rate.
We have set the sustainable growth rate at 1.0 % p.a. We have derived this value from the following considerations:
The starting point for the development of sustained profits is the determination that nominal planning variables can be subject to inflation-linked- and real changes over the
long term.
The expected changes for inflation for German can be determined using differences in returns on investment between nominal fixed interest and inflation protected government bonds. Based on this as well as fundamental forecasts, the long-term inflation expectation
ranges between 1.5 % to 1.9 % which has effects on both the sales revenues as well as the costs. Inflation effects are considered by KDH Group to be a material key factor for the success of the business. If the increases in costs cannot be held below the increase in
sales revenues by increasing productivity and operating efficiency, the margins come under pressure.
In addition to this nominal development, real developments can also influence the growth of profits. These real developments were considered for the two business segments TV
and Internet and Telephone separately.
As displayed in Section B.II.3 the number of TV households is expected to be constant at
around 38.3 Mio. in the mid-term. For the long-term, a shrinking population is anticipated for Germany as a result of the demographic development. In contrast to this, households consisting of one or two persons are increasing, which leads to an overall
increase of total households despite the demographic development. However, the share of cable households on total TV households is decreasing and a continuation of this
process is expected because the transportation of TV signals via cable stays in direct competition with other ways of transportation like satellite or IPTV. Apart from this volume-based perspective the development in general pricing policies also needs to be
considered when analyzing ways to compensate the decrease of customers for cable network operators.12 One reference point for the sustainable volume-based and price-related developments can be seen in the growth rates of revenues from subscriber and
Pay-TV services in the overall TV market. These are expected to decrease as a result of the increasing market penetration. For the business segment TV no real growth is
anticipated in the long run.
12 See, German Entertainment and Media Outlook 2013-2017, p. 81.
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Within the sustainable development of the business segment Internet and Telephone it needs to be considered next to the general demographic development and the number of households, that the relevant market for KDH Group is limited. The market currently
comprises of 15 million households of which 13.9Mio are upgraded with a back-channel ready connection. Of these, 11.6 million households are potential users of KDH Groups Internet and Telephone products. This high penetration rate can be seen in the total
broadband market as well. At the end of 2012 a total of 28 million broadband connections were in use which equals a penetration rate of 70.1 %.13 Broadband
connections are becoming the standard for households and with the continuous development in terms of market penetration the volume-based growth of the broadband market slows down. It is expected to be only 1 % by the year 2017.14 Simultaneously, the
development towards increased bundling of TV, Internet and Telephone products becomes visible, which makes the broadband connection generally cheaper for households. For the business segment Internet and Telephone, growth is anticipated
which is expected to be higher than in the TV business segment.
In light of this, we consider a rate of growth of 1 % for the entire corporate group to be reasonable.
Based on the above considerations, we derive the capitalization interest rate for the expected net distributions of KDH AG as follows:
4. Discounted earnings value of the operational business
The forecasted net distributions were discounted directly to the valuation date 13 February 2014. This results in a discounted earnings value of around EUR 6,705.7 million for KDH AG as of 13 February 2014.
13 See, Bundesnetzagentur (2013): Jahresbericht 2012, p. 81.
14 See, German Entertainment and Media Outlook 2013-2017, p. 42-43.
Discount rate 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
KDH AG Forecast Plan Plan Plan Plan Plan TV
Risk-free rate before personal income tax 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75%
Personal income tax -0.73% -0.73% -0.73% -0.73% -0.73% -0.73% -0.73%
Risk-free rate after personal income tax 2.02% 2.02% 2.02% 2.02% 2.02% 2.02% 2.02%
Market risk premium after personal income tax 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Beta unlevered 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Leverage 48.05% 50.30% 51.28% 49.82% 49.39% 48.52% 47.66%
Beta levered 0.74 0.75 0.75 0.75 0.75 0.74 0.74
Risk premium after personal income tax 4.09% 4.13% 4.14% 4.12% 4.11% 4.10% 4.08%
Sustainable growth rate -1.00%
Discount rate 6.11% 6.15% 6.17% 6.14% 6.14% 6.12% 5.11%
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5. Special values
KDH AG owns affiliated companies which are inactive or have not been taken into account in the planned accounts due to their lack of materiality. Therefore, these
companies are regarded as special values.
The inactive companies are symbolized by the shell companies Kabel Deutschland
Holding Erste Beteiligungs GmbH, Kabel Deutschland Holding Zweite Beteiligungs GmbH, Kabel Deutschland Dritte Beteiligungsgesellschaft mbH, Kabel Deutschland
Fünfte Beteiligungsgesellschaft mbH, Kabel Deutschland Sechste Beteiligungs GmbH, Kabel Deutschland Siebte Beteiligungs GmbH, Kabel Deutschland Achte Beteiligungs GmbH und Kabel Deutschland Neunte Beteiligungs GmbH. AFK Aus- und
Fortbildungs GmbH für elektronische Medien, in which KDH AG has a participation of only 2 %, was not included in the planned accounts due to reasons of materiality.
The respective special value of the designated companies was set at the book value of the participation or the proportionate equity capital if that was higher than the proportionate book value. The special values determining this manner are compiled in the following
table:
According to the Company, the Company does not have further non-operating assets, which need to be recognized as special values.
Discounted earnings value 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
KDH AG Forecast Plan Plan Plan Plan Plan Terminal value
mEUR mEUR mEUR mEUR mEUR mEUR mEUR
Net distribution 148.7 224.1 257.1 297.0 328.6 360.5 371.2
Discount rate 6.11% 6.15% 6.17% 6.14% 6.14% 6.12% 5.11%
Discount factor as of 13.02.2014 0.9925 0.9350 0.8807 0.8297 0.7818 0.7367 14.4221
Present values 147.6 209.5 226.4 246.4 256.9 265.6 5,353.3
Equity value as of 13.02.2014 6,705.7
Special Values
KDH AG mEUR
Kabel Deutschland Holding Erste Beteiligungs GmbH 0.03
Kabel Deutschland Holding Zweite Beteiligungs GmbH 0.03
Kabel Deutschland Dritte Beteiligungsgesellschaft mbH 0.31
Kabel Deutschland Fünfte Beteiligungsgesellschaft mbH 0.03
Kabel Deutschland Sechste Beteiligungs GmbH 0.03
Kabel Deutschland Siebte Beteiligungs GmbH 0.03
Kabel Deutschland Achte Beteiligungs GmbH 0.03
Kabel Deutschland Neunte Beteiligungs GmbH 0.03
AFK Aus- und Fortbildungs GmbH für elektronische Medien* 0.00
Total Special Values 0.48
* The Special value of the company is 511.29 EUR. As all amounts in the table are
shown in mEUR it is displayed as 0.00.
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6. Equity value and value per share
We have determined an equity value as of the valuation date of 13 February 2014 of around EUR 6,706.2 million and a value per share in KDH AG in the amount of EUR 75.76.
II. Reasonableness of the equity value
In order to check the reasonableness of our enterprise valuation based on the internal
data from the enterprise, we conducted a comparative analysis on the basis of public capital market data. Such multiplier valuations represent only simplified, generalized
discounted earnings valuations and, therefore only serve the purpose of checking reasonableness.
Earnings and market capitalization data of listed comparable companies (“Trading Multiples”) and comparable transactions (“Transaction Multiples”) serve as the basis for the multiplier valuation.
1. Trading Multipliers
Within the analysis of trading multipliers we have related the classic earnings number EBITDA of comparable companies (see Peer Group in Section D.I.3.b)) to their respective total enterprise values (“Entity Value”). We have excluded Virgin Media Inc.
from this analysis, as the company was acquired by Liberty Global Plc in June 2013. Within our analysis we have referred to the consensus estimates of analysts for the years
2013 to 2016 provided by the financial information service provider Bloomberg.
We have applied the earnings multipliers obtained for the year 2013 to the corresponding
planned earnings of KDH AG for the fiscal year 2013/14 because the main part of these earnings accrue in the year 2013 due to the reason that the fiscal year of KDH AG ends on 31 March. In accordance with this logic, we have applied the earnings multiples
measured for the years 2014 until 2016 to the planned earnings of KDH AG for the respective fiscal years.
This approach is based on the assumption that the relationship of the overall enterprise value and the earnings in the enterprise being valued is similar to the enterprises in the
peer group. This results in the following values:
Company ValueKDH AG mEUR
Discounted earnings value 13.02.2014 6,705.7
Special value for inactive or non-operating entities 13.02.2014 0.5
Enterprise value 13.02.2014 6,706.2
Number of shares (in 1,000) 88,523
Value per share in EUR 13.02.2014 75.76
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After deducting the net debt position, a maximum value of the equity capital related to the
average value of the multipliers results in an amount of around EUR 5.6 billion. With regards to the lowest and the highest multiplier, the equity capital value ranges between
EUR 3.2 billion and EUR 8.1 billion. The value of the equity capital of KDH AG including special values derived on the basis of the discounted earnings method of EUR 6.7 billion is situated in the upper range of this equity capital value derived in a simplified
manner. This is shown in the following graph, whereby the broken line represents the discounted earnings value of KDH AG.
2. Transaction Multipliers
For the analysis of transaction multipliers we analyzed completed transactions
(acquisitions & IPOs) which were executed within the respective industry of KDH AG in the years 2012 – 2013. The foundation of our analysis was formed by the data base of the
Value of the Equity Capital on the
Basis of Multipliers (in mEUR) 2013/14 2014/15 2015/16 2016/17
Minimum 7.7x 6.9x 6.6x 6.5x
Mean 8.9x 8.3x 7.9x 7.6x
Maximum 10.4x 10.1x 9.8x 9.8x
EBITDA 811 962 1,064 1,145
Net debt position -3,060 -3,060 -3,060 -3,060
Special Values 0.5 0.5 0.5 0.5
Minimum 3,190 3,590 3,941 4,342
Mean 4,164 4,923 5,322 5,629
Maximum 5,369 6,684 7,331 8,134
EBITDA
Mu
ltip
lier
Eq
uity V
alu
e
0 2.000 4.000 6.000 8.000 10.000
2013/14
2014/15
2015/16
2016/17
Value of the Equity Capital (in mEUR)
Fis
ca
l Y
ea
r
Value of the Equity Capital on the basis of EBITDA Multipliers
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financial information service provider Zephyr. The results of our analysis are presented in the table below:
When applying the mean of the multipliers, an equity capital value of EUR 1.8 billion is
derived from the analysis. With regards to the lowest and highest multipliers the result for the equity capital value ranges between EUR -0.2 billion and EUR 3.4 billion. Within this determination it needs to be recognized that these values are based on the (adjusted)
earnings figures of KDH AG from 31.03.2013 and thus do not reflect the expected earnings growth of KDH AG.
Based on the results of the comparison based valuation by means of multipliers, we consider the discounted earnings value of KDH AG of EU 6.7 billion to be rather
optimistic, but not implausible.
III. Takeover bid price and synergies
1. Takeover bid price
The discounted earnings value derived in Section D.I reflects the expectations for the business of KDH Group according to its economic and legal circumstances at the present
point in time. This situation is characterized by the fact that Vodafone is the majority shareholder after completion of the takeover bid, but before concluding a DPLTA. In
such a situation, before the completion of a DPLTA, influences from Vodafone into KDH Groups business decisions are problematic with regards to the governing law on stock companies and are not desired by both sides from an economic viewpoint. Specific
actions to exploit potential synergies have not been undertaken so far, with the exclusion
Value of Equity Capital on the Basis of Transaction Multipliers (in mEUR)
Date Acquirer Target Country Transaction Type EBITDA-
Mulltiple
30.07.2013 Consortium/Sumitomo Corp. Jupiter Telecommunications Co Ltd Japan Acquisition of 29.31% 5.6x
10.06.2013 Liberty Global PLC Virgin Media Inc. GB Acquisition of 100% 8.4x
01.05.2013 Liberty Global PLC Charter Communications Inc. USA Acquisition of 27.3% 3.7x
28.03.2013 Liberty Global PLC Ziggo NV Netherlands Acquisition of 12.65% 6.0x
11.01.2013 Liberty Global PLC Telenet Group Holding NV Belgium Acquisition of 8% 5.6x
18.07.2012 WideOpenWest Holding Cos Knology Inc. USA Acquisition of 100% 8.1x
Minimum 3.7x
Mean 6.2x
Maximum 8.4x
EBITDA KDH AG 31.03.2013 773
Entity Value (Minimum) 2,846
Entity Value (Mean) 4,815
Entity Value (Maximum) 6,466
Net debt position -3,060
Special values 0.5
Equity Value (Minimum) -213
Equity Value (Mean) 1,756
Equity Value (Maximum) 3,407
Sources: Bloomberg, Zephyr
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of amendments to KDH AGs financing situation and certain specific cost reductions (e.g. IP Peering or procurement).
In contrast to this, Vodafone has offered a price of EUR 84.50 plus the dividend of EUR 2.50 in its public takeover bid, which symbolizes a significant premium to the unaffected stock exchange price of KDH AG. The offered price was justified by
Vodafone with reference to the potential synergies which can be achieved upon full integration of KDH AG into the Vodafone Group and under the assumption of a
subsequent completion of a DPLTA.
This differing consideration of synergies follows the legal understanding, that minority
shareholders do not have a claim to be compensated for synergies which can only be achieved through the specific transaction and through the collaboration between takeover target and majority shareholder. A split of all synergies into so-called genuine (only
realizable with the DPLTA) and non-genuine synergies (possible to realize after the takeover of KDH AG by Vodafone but before DPLTA) is therefore necessary with regards to the present valuation purpose. In comparison, the public announcements
made by Vodafone and KDH AG only focus on an estimate of synergies resulting from full integration, especially after concluding a DPLTA.
2. Synergies reflected in the takeover bid price
The intent to conclude a DPLTA between Vodafone Vierte Verwaltungs AG and KDH AG after the successful completion of the takeover bid was already expressed in the takeover bid. In section 8.1 of the takeover bid, the economic and strategic reasons
for the intended integration of the two corporate groups are also mentioned. From the implementation of the present measures, synergies for the integrated group are expected which were estimated by Vodafone as follows:
• Cost and Capex synergies with a total volume of EUR 300 million p.a., beginning
with year four after full integration (before integration costs), which relate to a present value of EUR 3 billion.
• Revenue-related synergies with a present value of more than EUR 1.5 billion.
The equivalent estimations of KDH Group concerning expected synergies which can be achieved after full integration into Vodafone show similar levels.
3. Non-reflection of these synergies within the discounted earnings value
Within the determined entity value of KDH AG non-genuine-synergies are taken into
account, which leads to value-enhancements. These synergies relate to estimated cost-advantages within expenses for IP Peering and improved buying conditions in the area of
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procurement, see section D.I.2.b). Furthermore, KDH Group will benefit from significant funding advantages resulting from Vodafone’s entry, which will be reflected in the Company’s interest results, see section D.I.2.c). However, the main advantages from
the takeover are estimated to be achieved in other areas. By way of summary, the joint use of the cable infrastructure can achieve lower costs, and accelerated growth in sales can be achieved by offering bundled products to the customers of both companies. This
involves for both companies the main foundations of their businesses (network infrastructure and customers). In light of this and reflecting legal and economic aspects,
both sides do not see essential possibilities to implement the stated measures without concluding a DPLTA.
A further aspect is that the implementation of the intended integration requires extensive technical analyses and consents from customers, so that even after concluding the DPLTA, the opinion is that there is no potential to realize synergies in the short term.
4. Classification of genuine synergies within takeover bid
The conclusion that the main synergies explained in the course of the takeover bid cannot be initiated before the completion of a DPLTA and are therefore not initiated at the
current stage is clear in our view. In consequence, we do not consider it possible to now take into account those synergies in the discounted earnings value of KDH AG under the valuation standards IDW S 1 and the case law. According to this only non-genuine
synergies are reflected in the discounted earnings value of KDH AG (see section D.I.2b)).
In light of the importance of the synergies in the present case and the specific mention by
Vodafone, however, we have considered which consequences another analysis of these synergies would have for the compensation and the guaranteed dividend.
If, contrary to our assessment, the synergies mentioned by Vodafone were included as effects to be considered in the calculation of the discounted earnings value, the question
would arise about the share with which KDH AG participates in these synergies. The amounts stated by Vodafone represent in the final analysis the overall effect from the point of view of Vodafone. However, only the synergies attributable to KDH AG would
be relevant for the shareholders in KDH AG.
It must be noted that the criteria of "initiated and documented measures" and "genuine
synergies" compared to "non-genuine synergies" have been developed in valuation practice specifically because a clear allocation of the potential for synergies to two
business partners is hardly possible.
If the attempt were made in an alternative analysis to divide the overall potential for
synergy between KDH and Vodafone, anyway, the question arises about what the basis for a fair standard for the allocation could be. An initial consideration about this, on the
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one hand, is the idea that also a company which has been taken over can have potential to provide additional value in an overall constellation with other enterprises. On the other hand, it is undisputed that the specific synergies which only can be implemented by the
specific cooperation between the company doing the takeover and the company being taken over, which cooperation is made possible by the corporate group measure representing the reason for the valuation, are attributable as so-called genuine synergies
solely to the company doing the takeover. These conclusions show that the maximum potential synergy that can be attributed to the shareholders of a company that has been
taken over is limited to the synergies which can be realized also with other business partners or other measures.
In the present case, this potential synergy which can at most be attributed is well documented and understandable. The implementation of the takeover with a price of EUR 84.50 per share of KDH AG shows that no other potential acquiring company
existed which would have been willing to pay more. This also leads to KDH AG's board recommendation towards their shareholders to make use of the takeover bid.
Due to this reason, we regard the takeover price of EUR 84.50 per share to contain all synergies, also the genuine synergies, and to allocate them adequately between KDH AG
and Vodafone. According to the undisputed legal opinion, the minority shareholders of KDH AG do not have a claim for the recognition of all synergies within the course of the DPLTA. Through a determination of a cash compensation above EUR 84.50 the
minority shareholders would receive a share of the entire synergies, which goes beyond the share attributable to them and which would therefore be inadequate – from the viewpoint of the shareholders of Vodafone as well as from the viewpoint of the majority
of shareholders from KDH AG, which have sold their shares for the takeover bid price.
IV. Stock exchange price
In accordance with the case law of the BGH, see section C.IV, the average stock
exchange price for a three month reference period is the lowest limit for value when determining the reasonable cash compensation. The end of the reference period is determined by the announcement of the measure.
Starting with an analysis of the development of the stock exchange price for the KDH AG stock, we show below how the three month period used as a basis for
determining the average stock exchange price was derived.
Analysis of the development of the stock price
The stock of KDH AG was listed on the stock exchange for the first time on 22 March
2010, whereby the issue price was EUR 22.00 per share. The stock reached a price of EUR 22.24 at the end of the first trading day (closing price according to Deutsche Börse
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AG). The price for the stock continuously increased in the subsequent months until 31 May 2011 to a highest level of EUR 47.42; the price then fell steadily to one point of EUR 33.16 on 08 August 2011. Prior to 15 September 2011, the last trading day prior to
the notification by KDH AG that it intends to buy back its own stock for a total consideration of EUR 60 million, the stock price reached a level of EUR 37.91.
In the following months until 18 May 2012, the price for the KDH stock moved in a range between EUR 36.85 and EUR 47.75. On 18 May 2012, the last trading day prior to
the announcement of the planned acquisition of the Tele Columbus Group for EUR 603 million, the stock was listed at EUR 46.18. Despite initial decreases to values below EUR 45.00, a stock price of more than EUR 50.00 was continuously achieved
starting on 03 August 2012. The stock increased until 12 February 2013, the date before the first rumors about a potential interest of Vodafone in KDH AG arose at Reuters and
others, to EUR 63.60. As a result of the rumors, relatively high volumes of KDH shares were traded, and the price increased to EUR 69.17. The price stabilized at this level in the following trading days before the first information became official on 18 February 2013,
according to which the Federal Cartel Office was opposed to the planned acquisition of Tele Columbus. The KDH stock then lost more than 5 % of its value on the next trading day and closed at a price of 67.37 EUR. In the subsequent weeks, the price for the stock
was primarily determined by increased interest on the part of analysts. Continuing speculation about potential purchasers led to a positive development for the stock.
During the period 20 February 2013 to 11 June 2013, the stock listed in a range of EUR 66.24 to EUR 75.84.
11 June 2013 also represents the last trading day prior to KDH AGs announcement stating that it had received a preliminary approach from Vodafone.
0
1
2
3
4
0
10
20
30
40
50
60
70
80
90
100
03/2010 09/2010 03/2011 09/2011 03/2012 09/2012 03/2013 09/2013
Tra
din
g V
olu
me in
Mio
.
Sha
re P
rice in E
UR
Share price development of KDH AG from 22.03.2010 until 22.11.2013 and corresponding trading volume
Trading Volume Share Price BaFin Price
12.09.13: Achievement of
75% Acceptance Rate
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On the date of the announcement, the 12 June 2013, the stock gained more than 8 % in price and listed at the end of the trading day at EUR 80.84. In the following three trading days, the KDH stock continued to gain value and closed on 14 June 2013 at a price of
EUR 82.69. KDH AG confirmed the receipt of a further preliminary proposal for a takeover by Liberty Global on Monday, 17 June 2013. After brief increases of the stock respectively to more than EUR 85.00 in the middle of June, the stock consolidated at a
price level of around EUR 84.00.
On 24 June 2013, the receipt of the announcement of a takeover bid from Vodafone Vierte Verwaltungs AG became public through an ad hoc announcement by KDH AG. The stock closed on that day at a price of EUR 85.50. The Federal Cartel Office
addressed the takeover bid on 26 June 2013 and declared that a potential takeover of KDH AG by Vodafone Vierte Verwaltungs AG would be subjected to a detailed antitrust examination.15
Liberty Global declared on 16 July 2013 that it was withdrawing from negotiations about an acquisition of KDH AG which, however, did not materially influence the stock price.
The stock listed at a price of EUR 84.19 on 15 July 2013 and at a price of EUR 84.39 on 16 July 2013.
The course of the stock price was subsequently stable. In the period from 17 July 2013 till 29 July 2013, the stock moved in a range EUR 84.31 to EUR 84.55. 29 July 2013 was
also the last trading day prior to the disclosure of receipt of the offer document for the voluntary takeover bid of Vodafone Vierte Verwaltungs AG. The takeover bid was officially disclosed on 30 July 2013, but this did not lead to material movements in the
price for the KDH stock.
A joint statement was published on 02 August 2013 by the executive board and the supervisory board of KDH AG in which the previously received takeover bid was welcomed. This publication also did not lead to any material movements in the price for
the KDH stock; it closed at the level of the previous day at EUR 84.57.
The stock price for KDH AG was stable in a tight range of EUR 84.50 to EUR 86.00
until the end of the acceptance period for the takeover bid on 11 September 2013. The stock closed on the last day of the acceptance period at a price of EUR 85.55.
On the next day, 12 September 2013, it became public after the close of the exchange that the takeover bid had reached the minimum acceptance threshold of 75 %; that same day,
Vodafone affirmed to conclude a DPLTA with KDH AG. The KDH stock experienced
15 On 21 August 2013 the Federal Cartel Office declared that they do not have antitrust concerns regarding the transaction, see FAZ from 21 August 2013
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an extraordinary jump from 86.39 to EUR 91.82 on 13 September 2013 and a resulting daily gain of 6.3 %. The stock continued to increase in the subsequent trading days.
The EU competition authorities published a statement on 20 September 2013 that they did not have any antitrust concerns against the takeover of KDH AG by Vodafone and already granted the approval for the takeover in phase 1 of the antitrust proceedings.
Vodafone Vierte Verwaltungs AG announced on 20 September 2013 that all closing conditions had been satisfied and that the bidder had approached KDH AG on the same
day for the purpose of commencing contract negotiations about the conclusion of a DPLTA. In the proceeding days, a further increase of the KDH stock became visible; until 09 October 2013, the stock increased up to a level of EUR 94.15. On the following
Monday, 14 October 2013, Vodafone publicly announced that the takeover bid had been completed with an acquired share in KDH AG of 76.57 % and reinforced its previously expressed intent to conclude a DPLTA.
Determination of the relevant three-month period
In the present case and under consideration of the governing law on stock companies it needs to be clarified which day marks the announcement of the measure. As one end of
the potential interpretation the 30 July 2013 can be considered, as the takeover bid was disclosed on this day, followed by the intent to conclude a DPLTA (see, Section 9.7 of the offer). In contrast to this, it could be argued that at this point in time it was unclear
whether the terms and conditions included in the offer, which form the basis of the subsequent move towards a DPLTA, can be fulfilled. The development of the stock price implies that this uncertainty was present, as a significant reaction did not occur in
the market subsequently to the announcement of the takeover bid.
The achievement of the most important closing condition, which was reached when the acceptance rate exceeded the minimum threshold of 75 %, was announced on 12 September 2013. After this announcement, combined with a disclosure from
Vodafone Vierte Verwaltungs AG which affirmed that the set-up of a DPLTA is intended after successful closing of the takeover, a significant reaction in the market became visible. This lead to the development, that the stock price of KDH AG surpassed the actual
takeover bid price (EUR 87.00 incl. dividend) on 13 September 2013. From an economic viewpoint it can therefore be argued that from this date onwards speculation about
possible and already disclosed subsequent corporate law measures started to unfold. The stock corporations act indicates that an average stock exchange price which is unbiased by speculations needs to be utilized as a minimum price. Therefore, the stock price
development after 12 September 2013 needs to be regarded as not relevant for the estimation of the average stock exchange price and for the minimum of the cash compensation
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According to the case-law regarding stock corporations, a measure can also be announced at a date at which not all closing conditions were already achieved (OLG Frankfurt, decision from 21 December 2010, Az. 5W 15/10). The prerequisite is that the
achievement is already likely at this date. At 12 September 2013, the only remaining condition for the closing of the takeover bid and the possible completion of a DPLTA which had not yet materialized was the antitrust approval. This antitrust approval was
already likely at this point. Responsible for this approval was the EU commission. The president of the German Federal Cartel Office had already announced in an interview
published on 21 August 2013 in the FAZ that the Federal Cartel Office would not ask for the transaction to be referred back to Germany because after initial, preliminary estimation it determined that a complementary merger was present. After Vodafone
received confirmation from the German Federal Cartel Office that it would not request the EU Commission to refer the offer to the German Federal Cartel Office for its approval and after the deadline for the application of re-transfer expired Vodafone issued
a press release on 09.09.2013. Due to the dialogues between the EU commission and the respective parties involved, no indicators were given that the EU commission would
come to a different conclusion.
In the light of these considerations we regard the three-month period before
13 September 2013 to be the relevant period for the derivation of KDH AGs average stock exchange price.
Relevant average stock exchange price as the lowest limit on the value
In order to determine the average stock exchange price in the relevant three-month
period ending on 12. September 2013, reference will be made to the calculation by the Federal Financial Supervisory Authority [Bundesanstalt für Finanzdienstleistungsaufsicht,
"BaFin”]. The valid minimum price for the stock of Kabel Deutschland calculated by the BaFin pursuant to § 31 para. 1, 7 WpÜG in conjunction with § 5 WpÜG Offer Regulation for the corresponding period is EUR 84.53.
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Shares of KDH AG were traded on each of the 66 trading days during the three-month reference period from 13 June 2013 to 12 September 2013. The volume of the daily
traded number of KDH AG shares fluctuated during this reviewed period between 113,025 and 2,017,354 shares.
As a normal period of less than six to seven months lies between the announcement of the intended structural measure on 12 September 2013 and the date of the general shareholders meeting adopting the resolution on 13 February 2014, we do not see any
need for an adjustment of the stock exchange price on the basis of the development of the stock price in the meantime.
V. Compensation
The equity value of KDH AG as of 13 February 2014 is around EUR 6,706.2 million.
Based on the share capital of KDH AG which is divided into 88,522,939 no par bearer shares, a value per share of KDH AG of EUR 75.76 results.
The average stock exchange price calculated by the BaFin for the relevant three-month period is EUR 84.53 which is higher than the estimated company value of EUR 75.76
resulting from our valuation. Therefore, the cash compensation needs to be calculated on the basis of the average stock exchange price which forms the lower limit.
Accordingly, the adequate cash compensation per share of KDH AG equals EUR 84.53.
Pursuant to § 305 AktG, the fixed compensation must take into account the
circumstances of the company at the time the general shareholders meeting adopts the
0
1
2
3
4
70
75
80
85
90
95
100
13/06/2013 13/07/2013 13/08/2013 13/09/2013 13/10/2013
Tra
din
g V
olu
me
in M
io.S
ha
re P
rice
in
EU
R
Share Price Development of KDH AG and corresponding number of traded shares within relevant period from 13.06.2013 until 12.09.2013 (incl. period until 14.10.2013)
Trading Volume Share Price BaFin Price
Liberty Global
officially steps back
from bidding
processAd-hoc: Vodafone
takeover offer arrives at
KDH
Announcement Vodafone: Take-over offer has reached acceptance rate of 75%
EU approves transaction
Ad-hoc KDH: Intention for takeover offer of Vodafone is made public
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resolution. If material changes have occurred in the time between the completion of our work on 19 December 2013 and the date of adopting the resolution in the extraordinary general shareholders meeting of KDH AG on 13 February 2014 which have an effect on
the assessment of the cash compensation, these changes would have to be subsequently taken into account.
VI. Guaranteed dividend
The annual payment of at least that amount which could likely be distributed as an
average profit share to the individual share based on the current earnings position of the company and its future earnings prospects and taking into account reasonable
depreciation and value adjustments but without establishing other profit reserves must be provided as the guaranteed dividend pursuant to § 304 para. 2 sentence 1 AktG. This statutory provision assures that the outside shareholder receives a guaranteed dividend
which corresponds in value to the average dividend which the shareholder would receive without the corporate group agreement.
The following table shows the earnings per of KDH AG for fiscal years 2010/11 to 2012/13:
1. Determination of the average share in the profit
The derivation of an average fixed future profit for fluctuating earnings expectations is
done mathematically correct by discounting the present value of the fluctuating earnings. The present value of the fluctuating earnings is incorporated in the discounted earnings value calculated in accordance with the principles pursuant to IDW S 1 2008.
The fixed guaranteed dividend payment per share results by applying an interest rate to the equity value of KDH AG determined in section D.I. In the present case the parties
involved have decided in favor of the minority shareholders to apply a higher calculation base for the guaranteed dividend which amounts to the takeover bid price of EUR 84.50,
which equals a total company value of EUR 7,480.2 million.
When identifying the reasonable interest rate for the determination of the fixed
guaranteed dividend payment, the risk for the recipient of the guaranteed dividend associated with the guaranteed dividend payment must be examined. During the term of the DPLTA, the recipient of the guaranteed dividend receives the dividend payment
Earnings per Share 2010/11 2011/12 2012/13
KDH AG EUR EUR EUR
Total Earnings after Minorities (in mEUR) -45.3 159.4 246.8
Number of Outstanding Shares 90,000,000 89,408,169 88,522,939
Earnings per Share -0.50 1.78 2.79
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firmly guaranteed by Vodafone Vierte Verwaltungs AG which must be considered to be unsecure compared to a secure government bond but, on the other hand, must be considered to be secure when compared to a share in the enterprise of KDH AG.
Uncertainty exists for the recipient of the guaranteed dividend generally with the regard to the term of DPLTA and the recipient’s financial position after the end of the DPLTA.
The draft DPLTA provides in clause 5.6 that in the event of notice of termination of the DPLTA by Vodafone Vierte Verwaltungs AG or KDH AG, each outstanding
shareholder of KDH AG is entitled to sell the shareholder’s shares in KDH AG held at that time of the end of the contract to Vodafone Vierte Verwaltungs AG, and this company is required to purchase the shares. As consideration, the shareholder receives
the compensation set in the context of the DPLTA or the higher compensation resulting in the course of a final decision in the special court proceedings or resulting from a legal settlement to avoid or conclude special court proceedings.
Accordingly, the recipient of the guaranteed dividend only carries the risk of failure of the debtor of the guaranteed dividend payment. The recipient of the guaranteed dividend is
therefore the equivalent of a creditor of Vodafone Vierte Verwaltungs AG. The risk of failure of Vodafone Vierte Verwaltungs AG is however related to that of Vodafone
Group Plc because Vodafone Group Plc issued a letter of comfort. On the basis of this letter of comfort, Vodafone Group Plc ensures unrestricted and irrevocable commitment towards the obligations of Vodafone Vierte Verwaltungs AG. This commitment also
holds with regards to obligations towards the outstanding shareholders of KDH AG which are related to the DPLTA, especially that the payment of the guaranteed dividend and the cash compensation is made entirely and at due date.
The interest rate applied as the annuitisation factor for determining the amount of the
guaranteed dividend results from the sum of the risk-free base interest rate and a risk premium which takes into account the risk of failure of Vodafone Group Plc.
The risk of failure of Vodafone Group Plc was determined by the differences in returns for long-term bonds of Vodafone Group Plc and returns of bonds issued by the Federal Republic of Germany with similar maturities. As a result of this analysis, we derived a risk
spread of around 1.0 %. The discount rate before taxes therefore equals the combination of the risk free rate of 2.75 % and the risk premium of 1.0 % and is 3.75 %.
The guaranteed dividend is finally calculated under consideration of the dividend basis which was voluntarily increased by Vodafone Vierte Verwaltungs AG for the benefit of
the minority shareholders from the proportional discounted earnings value of EUR 75.76 to EUR 84.50 and the annuitisation factor of 3.75 %. As of 13 February 2014 the guaranteed dividend for each KDH share results in the amount of EUR 3.17.
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2. Consideration of corporate income tax according to the case law of the BGH
The BGH decided in an order dated 21 July 2003, II ZB 17/01, with regard to the guaranteed dividend that the outside shareholders must be promised the likely average
gross profit per share that is capable of being distributed, minus the corporate income tax in the amount of the respectively valid tax rate which is to be paid by the company (on
distributions) as a fixed guaranteed dividend within the meaning of § 304 para. 1 sentence 1, para. 2 sentence 1 AktG. The BGH refers only to the burden with German corporate income tax; other domestic as well as foreign tax burdens are not taken into
account. The interaction between possible changes in the corporate income tax at the level of the company and changes in the income taxation at the level of the shareholders also is not taken into account.
According to the above referenced order, the generated profit is deemed to be the profit before corporate income tax because the amount of the corporate income tax cannot be
influenced by the company alone and instead is only a result of the profit generated by the company. Especially in the case of a future lowering of the corporate income tax rate in
the law, the BGH finds that there is an unjustified benefit for the company or the parent company at the expense of the outside shareholder because then a correspondingly higher amount would be available for distribution as profit than the net amount set out at one
time permanently as the guaranteed dividend. In the case of such a decrease in the tax rate, a full distribution of the previously determined average available gross profit would in fact no longer take place.
According to the opinion of the BGH, this approach does not call into question the
principle of having a fixed calculation date because when setting the guaranteed dividend, the average gross profit available for distribution must be derived as a fixed amount from the objective value of the enterprise so that only the organizational circumstances and the
economic and legal structures of the company are determinative as they exist on the valuation date.
Taking into account the corporate income tax rate of 15 % and the solidarity surcharge of 5.5 %, thus 15.83 %, the net guaranteed dividend of EUR 3.17 corresponds to a gross
guaranteed dividend before corporate income tax of EUR 3.77 per share. From this guaranteed dividend the future corporate income tax needs to be deducted. Under the current tax code this is 15.83 % on EUR 3.77, thus EUR 0.60 per share resulting in a net
guaranteed dividend of EUR 3.17 per share under the current tax code.
Derivation of guaranteed dividend EUR
Basis for Derivation 84.50
Annuitising Factor 3.75%
Net guaranteed dividend per share 3.17
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E. FINAL COMMENT
We had the mandate to conduct an enterprise valuation of KDH AG and determined the amount of the reasonable compensation under § 305 AktG as well as the reasonable guaranteed dividend under § 304 AktG.
The occasion for this valuation is the planned conclusion of a Domination and Profit and Loss Transfer Agreement pursuant § 291 AktG Vodafone Vierte Verwaltungs AG as the
controlling company and KDH AG as the controlled company. The extraordinary general shareholders meeting of KDH AG is supposed to resolve about the conclusion of
the Domination and Profit and Loss Transfer Agreement on 13 February 2014.
We have issued this Expert Report and especially conducted the discounted earnings
valuation of KDH AG on the basis of the documents and information provided to us. We also took into account the results of our own examinations.
Our valuation was in accordance with the standard IDW S 1 2008. This results for KDH AG in an equity value on the valuation date of 13 February 2014 in the amount of around EUR 6,706.2 million. Based on the share capital of KDH AG divided into
88,522,939 no-par bearer shares, this results in a value per share of KDH AG of EUR 75.76.
The average stock price calculated by BaFin for the relevant reference period before the announcement to conclude a DPLTA is EUR 84.53 and is above our calculated
discounted earnings value. In this respect, the average stock price has to be used as the minimum value for the cash compensation.
Based on the agreements between the parties the basis of assessment for the estimation of the guaranteed dividend was raised to EUR 84.50 on a voluntary basis. On this basis the gross amount of the guaranteed dividend is EUR 3.77 per KDH share annually. The
respective corporate income tax burden including the solidarity surcharge must be deducted in accordance with the respectively applicable tax rate. At the currently
applicable corporate income tax rate including the solidarity surcharge of 15.83 %, this results in a deduction for taxes per share in the amount of EUR 0.60 and a net amount of the guaranteed dividend of EUR 3.17.
If there are material changes in the time between the completion of our work on 19 December 2013 and the date on which the resolution is adopted in the extraordinary
general shareholders meeting of KDH AG on 13 February 2014 which have an effect on the assessment of the compensation in the guaranteed dividend, these changes would
have to be subsequently taken into account.
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We are issuing this Expert Report as neutral and independent experts to the best of our knowledge and in accordance with the professional principles as they are set forth in §§ 2 and 43 of the German Accountants Code.
Düsseldorf, 19 December 2013
Warth & Klein Grant Thornton AG Wirtschaftsprüfungsgesellschaft
Prof. Dr. Martin Jonas Dr. Heike Wieland-Blöse
Wirtschaftsprüfer Wirtschaftsprüferin
Annex
Annex 1
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1
Domination and Profit and Loss Transfer Agreement
(Beherrschungs- und Gewinnabführungsvertrag)
between
(1) Vodafone Vierte Verwaltungs AG
having its registered office in Düsseldorf, registered in the commercial register
(Handelsregister) at the Local Court (Amtsgericht) Düsseldorf under company number
HRB 70886,
- herein referred to as "Vodafone Vierte Verwaltungs AG" -
and
(2) Kabel Deutschland Holding AG
having its registered office in Unterföhring, registered in the commercial register
(Handelsregister) at the Local Court (Amtsgericht) Munich under company number HRB
184452,
- herein referred to as "Kabel Deutschland Holding AG" -
1 Management Control and Instructions
1.1 With effect as of the date of this agreement entering into force and in any event not earlier
than 1 April 2014, Kabel Deutschland Holding AG submits the management control
(Leitung) of its company to Vodafone Vierte Verwaltungs AG. Vodafone Vierte Verwaltungs
AG is accordingly entitled to issue instructions (Weisungen) to the management board of
Kabel Deutschland Holding AG with regard to the management control of the company.
The management board of Kabel Deutschland Holding AG is required to comply with the
instructions of Vodafone Vierte Verwaltungs AG. Without prejudice to this right to issue
instructions (Weisungsrecht), the management board of Kabel Deutschland Holding AG is
responsible for the management and representation of Kabel Deutschland Holding AG.
1.2 Vodafone Vierte Verwaltungs AG is not entitled to issue an instruction to the management
board of Kabel Deutschland Holding AG to amend, maintain or terminate this Agreement.
1.3 Any instructions require text form (Textform) or, if the instructions are issued orally, they
shall be confirmed in text form without undue delay.
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2 Transfer of Profit
2.1 Kabel Deutschland Holding AG undertakes to transfer its entire annual profit
(Gewinnabführung), as determined in accordance with commercial law, to Vodafone Vierte
Verwaltungs AG. Subject to establishing or dissolving reserves in accordance with Clauses
2.2 and 2.3 of this Agreement below, the maximum amount permissible under section 301
German Stock Corporations Act (Aktiengesetz – "AktG"), as amended from time to time,
shall be transferred.
2.2 If and only to the extent permissible under commercial law and as economically justified by
reasonable commercial judgement and with the consent of Vodafone Vierte Verwaltungs
AG, Kabel Deutschland Holding AG may allocate parts of its annual profit to other profit
reserves (section 272 para. 3 German Commercial Code (Handelsgesetzbuch – "HGB")).
2.3 Upon the written request of Vodafone Vierte Verwaltungs AG, Kabel Deutschland Holding
AG shall dissolve other profit reserves within the meaning of section 272 para. 3 HGB
established during the course of this Agreement and use the proceeds to compensate for
any annual loss or transfer the proceeds as profit. Other reserves or profits carried forward
from the period prior to the term of this Agreement may neither be transferred as profit to
Vodafone Vierte Verwaltungs AG nor be used by Kabel Deutschland Holding AG to
compensate for any annual loss.
2.4 The obligation to transfer the annual profit applies for the first time to the entire profit for
the fiscal year of Kabel Deutschland Holding AG beginning on 1 April 2014 or for whichever
subsequent fiscal year of Kabel Deutschland Holding AG in which this Agreement becomes
effective. The claim of Vodafone Vierte Verwaltungs AG for a transfer of profit under this
Clause 2 becomes due upon expiration of the last day of the fiscal year of Kabel
Deutschland Holding AG for which the respective claim exists. The claim must be fulfilled
within four weeks after determination of the annual financial statements of Kabel
Deutschland Holding AG. Interest shall accrue in accordance with statutory law for the time
between the due date of the claim for the transfer of the profit and its fulfilment.
Claims based on any default in payment remain unaffected.
3 Assumption of Losses
3.1 An assumption of any annual losses (Verlustübernahme) of Kabel Deutschland Holding AG
by Vodafone Vierte Verwaltungs AG is agreed pursuant to and in accordance with the
provisions in section 302 AktG, as amended from time to time.
3.2 The obligation to assume losses applies for the first time for the entire fiscal year of Kabel
Deutschland Holding AG beginning on 1 April 2014 or for whichever subsequent fiscal year
of Kabel Deutschland Holding AG in which this Agreement becomes effective. The claim of
Kabel Deutschland Holding AG with regard to the assumption of any annual losses under
this Clause 3 becomes due upon expiration of the last day of a fiscal year of Kabel
Deutschland Holding AG for which the respective claim exists. The claim must be fulfilled
within four weeks after determination of the annual financial statements of Kabel
Deutschland Holding AG. Interest shall accrue in accordance with statutory law for the time
between the due date of the claim for the assumption of the annual losses and its
fulfilment.
Claims based on any default in payment remain unaffected.
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4 Recurring Compensation Payment
4.1 Vodafone Vierte Verwaltungs AG undertakes to pay to the outside shareholders of Kabel
Deutschland Holding AG as adequate recurring compensation an annual cash
compensation ("Recurring Compensation Payment") (Ausgleich) during the term of this
Agreement. The Recurring Compensation Payment is due on the first banking day
following the ordinary general shareholders’ meeting of Kabel Deutschland Holding AG for
any respective preceding fiscal year falling during the term of this Agreement, but in any
event within eight months following expiration of the relevant fiscal year.
4.2 For each full fiscal year of Kabel Deutschland Holding AG the Recurring Compensation
Payment for each bearer share of Kabel Deutschland Holding AG, representing a
mathematical portion of EUR 1.00 in the share capital ("Kabel Deutschland Holding AG
Share”) in each case amounts to a gross sum of EUR 3.77 ("Gross Recurring
Compensation Payment") (Bruttoausgleichsbetrag) minus the amount of any corporate
income tax and the solidarity surcharge in accordance with the respective tax rate
applicable for these taxes for the relevant fiscal year. Based on the situation at the time of
conclusion of this Agreement, the Gross Recurring Compensation Payment is subject to a
deduction of 15% corporate income tax plus 5.5% solidarity surcharge, i.e. EUR 0.60.
Based on this the Recurring Compensation Payment amounts to EUR 3.17 for each Kabel
Deutschland Holding AG Share for a full fiscal year based on the situation at the time of
conclusion of this Agreement.
4.3 The Recurring Compensation Payment is granted for the first time for the fiscal year of
Kabel Deutschland Holding AG for which the claim of Vodafone Vierte Verwaltungs AG for
the transfer of profit under Clause 2 of this Agreement becomes effective.
4.4 If this Agreement ends during a fiscal year of Kabel Deutschland Holding AG or if Kabel
Deutschland Holding AG establishes an abbreviated fiscal year (Rumpfgeschäftsjahr)
during the term of this Agreement, the Gross Recurring Compensation Payment is reduced
proportionately pro rata temporis for the relevant fiscal year.
4.5 If the share capital of Kabel Deutschland Holding AG is increased from the reserves in
exchange for the issuance of new shares, the Gross Recurring Compensation Payment for
each Kabel Deutschland Holding AG Share is reduced to such an extent that the total
amount of the Gross Recurring Compensation Payment remains unchanged. If the share
capital of Kabel Deutschland Holding AG is increased by cash contributions and/or
contributions in kind, the rights under this Clause 4 also apply for the shares subscribed to
by outside shareholders in such capital increase. The beginning of such entitlement
pursuant to this Clause 4 of the new shares corresponds to the dividend entitlement set by
Kabel Deutschland Holding AG when issuing the new shares.
4.6 If judicial appraisal proceedings (Spruchverfahren) regarding a judicial determination of the
adequate Recurring Compensation Payment are initiated and the court adjudicates a
legally binding higher Recurring Compensation Payment for each Kabel Deutschland
Holding AG Share, the outside shareholders are entitled to demand a corresponding
payment in addition to the Recurring Compensation Payment for each Kabel Deutschland
Holding AG Share which they have already received, even if they have already received
the Compensation pursuant to Clause 5 of this Agreement. All other outside shareholders
will be treated in the same way if Vodafone Vierte Verwaltungs AG undertakes to pay a
higher Recurring Compensation Payment to an outside shareholder of Kabel Deutschland
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4
Holding AG in a court settlement (gerichtlicher Vergleich) for the purpose of avoiding or
settling judicial appraisal proceedings.
5 Compensation
5.1 Vodafone Vierte Verwaltungs AG undertakes upon demand of each outside shareholder of
Kabel Deutschland Holding AG to purchase such shareholder's Kabel Deutschland Holding
AG Shares in exchange for a cash compensation in the amount of EUR 84.53 for each
Kabel Deutschland Holding AG Share (“Compensation”) (Abfindung).
5.2 The obligation of Vodafone Vierte Verwaltungs AG under Clause 5.1 of this Agreement is
for a limited period of time. The time limitation period ends two months after the date on
which the registration of this Agreement in the commercial register of Kabel Deutschland
Holding AG has been announced pursuant to section 10 HGB. An extension of the time
limitation period pursuant to section 305 para. 4 sentence 3 AktG as a result of a motion for
determination of the adequate Recurring Compensation Payment or Compensation by a
court pursuant to section 2 of the German Act on Special Court Proceedings
(Spruchverfahrensgesetz) remains unaffected; in this event, the time limitation period ends
two months after the date on which the decision on the last motion ruled on has been
announced in the Federal Gazette (Bundesanzeiger).
5.3 The transfer of the Kabel Deutschland Holding AG Shares for payment of the
Compensation is free of costs for the outside shareholders of Kabel Deutschland Holding
AG.
5.4 If the share capital of Kabel Deutschland Holding AG is increased using corporate funds in
exchange for the issuance of new shares prior to the expiration of the time limitation period
set forth in Clause 5.2 of this Agreement, the Compensation for each Kabel Deutschland
Holding AG Share is reduced accordingly to such an extent that the total amount of the
Compensation remains unchanged. If the share capital of Kabel Deutschland Holding AG
is increased prior to the expiration of the time limitation period set forth in Clause 5.2 of this
Agreement by means of cash contributions and/or contributions in kind, the rights under
this Clause 5 also apply for the shares subscribed to by the outside shareholders in such
capital increase.
5.5 If judicial appraisal proceedings regarding a judicial determination of the adequate
Compensation are initiated and the court adjudicates a legally binding higher
Compensation for each Kabel Deutschland Holding AG Share, the outside shareholders
are entitled to demand a corresponding additional payment to the Compensation for each
Kabel Deutschland Holding AG Share, even if they have already received the
Compensation stipulated in this Agreement. All other outside shareholders will be treated in
the same way if Vodafone Vierte Verwaltungs AG undertakes to pay a higher
Compensation to an outside shareholder of Kabel Deutschland Holding AG in a court
settlement for the purpose of avoiding or settling judicial appraisal proceedings.
5.6 If this Agreement is terminated by notice of termination by Vodafone Vierte Verwaltungs AG
or Kabel Deutschland Holding AG at a point in time when the time limitation period set forth
in Clause 5.2 of this Agreement for accepting the Compensation pursuant to Clause 5.1 of
this Agreement has already expired, each outside shareholder of Kabel Deutschland
Holding AG at that time is entitled to sell his Kabel Deutschland Holding AG Shares held at
the time of the termination of this Agreement to Vodafone Vierte Verwaltungs AG in
exchange for payment of the Compensation set forth in Clause 5.1 of this Agreement for
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5
each Kabel Deutschland Holding AG Share and Vodafone Vierte Verwaltungs AG is
required to purchase the shares of each outside shareholder upon request of such outside
shareholder. If the Compensation set forth in Clause 5.1 of this Agreement for each Kabel
Deutschland Holding AG Share is increased by a legally binding decision in judicial
appraisal proceedings or in a court settlement for the purpose of avoiding or settling
judicial appraisal proceedings, Vodafone Vierte Verwaltungs AG will purchase the shares
of the outside shareholders under the preconditions set forth in sentence 1 in exchange for
payment of the amount established for each Kabel Deutschland Holding AG Share in the
judicial appraisal proceedings or the court settlement. The right to sell pursuant to this
Clause 5.6 is for a limited period of time. The time limitation period ends two months after
the date on which the registration of the termination of this Agreement in the commercial
register of Kabel Deutschland Holding AG is announced pursuant to section 10 HGB.
Clause 5.3 and Clause 5.4 of this Agreement apply accordingly.
6 Effectiveness, Term and Termination of this Agreement
6.1 This Agreement requires the consent of the general shareholders’ meeting of Kabel
Deutschland Holding AG as well as the consent of the general shareholders’ meeting of
Vodafone Vierte Verwaltungs AG. This Agreement becomes effective upon registration in
the commercial register of Kabel Deutschland Holding AG.
6.2 This Agreement is concluded for an indefinite period of time. This Agreement can be
terminated for the first time as of the end of the fiscal year of Kabel Deutschland Holding
AG which ends at least five years (Zeitjahre) after the beginning of the fiscal year of Kabel
Deutschland Holding AG for which the claim of Vodafone Vierte Verwaltungs AG under
Clause 2 of this Agreement becomes effective. The term of this Agreement is extended
subsequently in each case by one year unless this Agreement is terminated by one of the
Parties by giving three months' notice prior to the expiration.
6.3 Notwithstanding the preceding Clause 6.2 of this Agreement, this Agreement can be
terminated for just cause (wichtiger Grund) without compliance with any notice period. Just
cause exists in particular if just cause for purposes of tax law for the termination of this
Agreement exists.
6.4 Any notice of termination must be in writing.
7 Comfort Letter
7.1 Vodafone Group Plc with seat in Newbury, Great Britain, indirectly holds 100% of the
shares in Vodafone Vierte Verwaltungs AG and in this capacity as indirect shareholder, has
without joining this Agreement as a party provided the comfort letter attached for
information purposes to this Agreement as an Annex. In this comfort letter Vodafone Group
Plc undertakes without limitation and irrevocably to ensure, that Vodafone Vierte
Verwaltungs AG will be managed and financially equipped in a way that Vodafone Vierte
Verwaltungs AG is at all times able to fulfil all its obligations arising from or in connection
with this Agreement completely and in time. This applies in particular to the obligation to
compensate losses pursuant to section 302 AktG.
7.2 In addition, Vodafone Group Plc undertakes without limitation and irrevocably vis-à-vis the
outside shareholders of Kabel Deutschland Holding AG that Vodafone Vierte Verwaltungs
AG fulfils all its obligations towards them arising from or in connection with this Agreement
completely and in time, in particular with respect to the Recurring Compensation Payment
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6
and the Compensation. To that extent the outside shareholders of Kabel Deutschland
Holding AG have an own claim according to section 328 para. 1 German Civil Code
(Bürgerliches Gesetzbuch – BGB) directed at payment to Vodafone Vierte Verwaltungs
AG. Vodafone Group Plc’s liability pursuant to the two preceding sentences does, however,
only apply if Vodafone Vierte Verwaltungs AG does not fulfil its obligations towards the
outside shareholders of Kabel Deutschland Holding AG arising from or in connection with
this Agreement completely and in time and Vodafone Group Plc does not comply with its
obligation to equip Vodafone Vierte Verwaltungs AG as described in the preceding Clause
7.1 of this Agreement.
8 Further Provisions
8.1 The applicable law is German law.
8.2 If any provision of this Agreement is or becomes invalid, or if this Agreement does not
contain a necessary provision, the validity of the remaining provisions of this Agreement
shall not be affected. In place of the invalid provision, or in order to remedy an omission in
this Agreement, a legally permissible provision will be deemed to have been agreed which
corresponds as far as possible to what the Parties intended or would have intended in
accordance with the intent and purpose of this Agreement if they had been aware of the
invalidity of the relevant provision or the omission. Furthermore, when interpreting this
Agreement, the provisions contained in sections 14 to 19 of the German Corporate Income
Tax Act (Körperschaftsteuergesetz – KStG) as amended from time to time shall be taken
into account.
Vodafone Vierte Verwaltungs AG
Düsseldorf, this 20 December 2013
Dr Joachim Peters Dr Thomas Wandres
Member of the management board Member of the management board
Kabel Deutschland Holding AG
Unterföhring, this 20 December 2013
Dr. Adrian v. Hammerstein Dr. Andreas Siemen
Chairman of the management board Member of the management board
Annex: Comfort Letter of Vodafone Group Plc
Annex 2
[Translator's notes are in square brackets]
General Engagement Termsfor
Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften[German Public Auditors and Public Audit Firms]
as of January 1, 2002
This is an English translation of the German text, which is the sole authoritative version
1. Scope
(1) These engagement terms are applicable to contracts between Wirt-schaftsprüfer [German Public Auditors] or Wirtschaftsprüfungsgesellschaften[German Public Audit Firms] (hereinafter collectively referred to as the"Wirtschaftsprüfer") and their clients for audits, consulting and other engagementsto the extent that something else has not been expressly agreed to in writing or isnot compulsory due to legal requirements.
(2) lf, in an individual case, as an exception contractual relations have alsobeen established between the Wirtschaftsprüfer and persons other than theclient, the provisions of No. 9 below also apply to such third parties.
2. Scope and performance of the engagement
(1) Subject of the Wirtschaftsprüfer's engagement is the performance of agreedservices - not a particular economic result. The engagement is performed inaccordance with the Grundsätze ordnungsmäßiger Berufsausübung [Standardsof Proper Professional Conduct]. The Wirtschaftsprüfer is entitled to use qualifiedpersons to conduct the engagement.
(2) The application of foreign law requires - except for financial attestationengagements - an express written agreement.
(3) The engagement does not extend - to the extent it is not directed thereto - toan examination of the issue of whether the requirements of tax law or specialregulations, such as, for example, laws on price controls, laws limiting competitionand Bewirtschaftungsrecht [laws controlling certain aspects of specific businessoperations] were observed; the same applies to the determination as to whethersubsidies, allowances or other benefits may be claimed. The performance of anengagement encompasses auditing procedures aimed at the detection of thedefalcation of books and records and other irregularities only if during the conductof audits grounds therefor arise or if this has been expressly agreed to in writing.
(4) If the legal position changes subsequent to the issuance of the finalprofessional statement, the Wirtschaftsprüfer is not obliged to inform the client ofchanges or any consequences resulting therefrom.
3. The client's duty to inform
(1) The client must ensure that the Wirtschaftsprüfer - even without his specialrequest - is provided, on a timely basis, with all supporting documents andrecords required for and is informed of all events and circumstances which maybe significant to the performance of the engagement. This also applies to thosesupporting documents and records, events and circumstances which first becomeknown during the Wirtschaftsprüfer's work.
(2) Upon the Wirtschaftsprüfer's request, the client must confirm in a writtenstatement drafted by the Wirtschaftsprüfer that the supporting documents andrecords and the information and explanations provided are complete.
4. Ensuring independence
The client guarantees to refrain from everything which may endanger theindependence of the Wirtschaftsprüfer's staff. This particularly applies to offers ofemployment and offers to undertake engagements on one's own account.
5. Reporting and verbal information
lf the Wirtschaftsprüfer is required to present the results of his work in writing,only that written presentation is authoritative. For audit engagements the long-form report should be submitted in writing to the extent that nothing else has beenagreed to. Verbal statements and information provided by the Wirtschaftsprüfer'sstaff beyond the engagement agreed to are never binding.
6. Protection of the Wirtschaftsprüfer's intellectual property
The client guarantees that expert opinions, organizational charts, drafts,sketches, schedules and caIculations - expecially quantity and cost computations- prepared by the Wirtschaftsprüfer within the scope of the engagement will beused only for his own purposes.
7. Transmission of the Wirtschaftsprüfer's professional statement
(1) The transmission of a Wirtschaftsprüfer's professional statements (long-form reports, expert opinions and the like) to a third party requires theWirtschaftsprüfer's written consent to the extent that the permission to transmit toa certain third party does not result from the engagement terms.
The Wirtschaftsprüfer is liable (within the limits of No. 9) towards third parties onlyif the prerequisites of the first sentence are given.
(2) The use of the Wirtschaftsprüfer's professional statements for promotionalpurposes is not permitted; an infringement entitles the Wirtschaftsprüfer toimmediately cancel all engagements not yet conducted for the client.
8. Correction of deficiencies
(1) Where there are deficiencies, the client is entitled to subsequent fulfillment[of the contract]. The client may demand a reduction in fees or the cancellation ofthe contract only for the failure to subsequently fulfill [the contract]; if theengagement was awarded by a person carrying on a commercial business aspart of that commercial business, a government-owned legal person under publiclaw or a special government-owned fund under public law, the client may demandthe cancellation of the contract only if the services rendered are of no interest tohim due to the failure to subsequently fulfill [the contract]. No. 9 applies to theextent that claims for damages exist beyond this.
(2) The client must assert his claim for the correction of deficiencies in writingwithout delay. Claims pursuant to the first paragraph not arising from anintentional tort cease to be enforceable one year after the commencement of thestatutory time limit for enforcement.
(3) Obvious deficiencies, such as typing and arithmetical errors and formelleMängel [deficiencies associated with technicalities] contained in aWirtschaftsprüfer's professional statements (long-form reports, expert opinionsand the like) may be corrected - and also be applicable versus third parties - bythe Wirtschaftsprüfer at any time. Errors which may call into question theconclusions contained in the Wirtschaftsprüfer's professional statements entitlethe Wirtschaftsprüfer to withdraw - also versus third parties - such statements. Inthe cases noted the Wirtschaftsprüfer should first hear the client, if possible.
9. Liability
(1) The liability limitation of § ["Article"] 323 (2)["paragraph 2"] HGB["Handelsgesetzbuch": German Commercial Code] applies to statutory auditsrequired by law.
(2) Liability for negligence; An individual case of damagesIf neither No. 1 is applicable nor a regulation exists in an individual case, pursuantto § 54a (1) no. 2 WPO ["Wirtschaftsprüferordnung": Law regulating theProfession of Wirtschaftsprüfer] the liability of the Wirtschaftsprüfer for claims ofcompensatory damages of any kind - except for damages resulting from injury tolife, body or health - for an individual case of damages resulting from negligenceis limited to € 4 million; this also applies if liability to a person other than the clientshould be established. An individual case of damages also exists in relation to auniform damage arising from a number of breaches of duty. The individual caseof damages encompasses all consequences from a breach of duty without takinginto account whether the damages occurred in one year or in a number ofsuccessive years. In this case multiple acts or omissions of acts based on asimilar source of error or on a source of error of an equivalent nature are deemedto be a uniform breach of duty if the matters in question are legally oreconomically connected to one another. In this event the claim against theWirtschaftsprüfer is limited to € 5 million. The limitation to the fivefold of theminimum amount insured does not apply to compulsory audits required by law.
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(3) Preclusive deadlinesA compensatory damages claim may only be lodged within a preclusive deadlineof one year of the rightful claimant having become aware of the damage and ofthe event giving rise to the claim - at the very latest, however, within 5 yearssubsequent to the event giving rise to the claim. The claim expires if legal actionis not taken within a six month deadline subsequent to the written refusal ofacceptance of the indemnity and the client was informed of this consequence.
The right to assert the bar of the preclusive deadline remains unaffected.Sentences 1 to 3 also apply to legally required audits with statutory liability limits.
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Warth & Klein Grant Thornton AG Wirtschaftsprüfungsgesellschaft
10. Supplementary provisions for audit engagements
(1) A subsequent amendment or abridgernent of the financial statements ormanagement report audited by a Wirtschaftsprüfer and accompanied by anauditor's report requires the written consent of the Wirtschaftsprüfer even if thesedocuments are not published. If the Wirtschaftsprüfer has not issued an auditor'sreport, a reference to the audit conducted by the Wirtschaftsprüfer in themanagement report or elsewhere specified for the general public is permitted onlywith the Wirtschaftsprüfer's written consent and using the wording authorized byhim.
(2) lf the Wirtschaftsprüfer revokes the auditor's report, it may no longer beused. lf the client has already made use of the auditor's report, he must announceits revocation upon the Wirtschaftsprüfer's request.
(3) The client has a right to 5 copies of the long-form report. Additional copieswill be charged for separately.
11. Supplementary provisions for assistance with tax matters
(1) When advising on an individual tax issue as well as when furnishingcontinuous tax advice, the Wirtschaftsprüfer is entitled to assume that the factsprovided by the client - especially numerical disclosures - are correct andcomplete; this also applies to bookkeeping engagements. Nevertheless, he isobliged to inform the client of any errors he has discovered.
(2) The tax consulting engagement does not encompass procedures required tomeet deadlines, unless the Wirtschaftsprüfer has explicitly accepted theengagement for this. In this event the client must provide the Wirtschaftsprüfer,on a timely basis, all supporting documents and records - especially taxassessments - material to meeting the deadlines, so that the Wirtschaftsprüferhas an appropriate time period available to work therewith.
(3) In the absence of other written agreements, continuous tax adviceencompasses the following work during the contract period:
a) preparation of annual tax returns for income tax, corporation tax andbusiness tax, as well as net worth tax returns on the basis of the annualfinancial statements and other schedules and evidence required for taxpurposes to be submitted by the client
b) examination of tax assessments in relation to the taxes mentioned in (a)c) negotiations with tax authorities in connection with the returns and
assessments mentioned in (a) and (b)
d) participation in tax audits and evaluation of the results of tax audits withrespect to the taxes mentioned in (a)
e) participation in Einspruchs- und Beschwerdeverfahren [appeals andcomplaint procedures] with respect to the taxes mentioned in (a).
In the afore-mentioned work the Wirtschaftsprüfer takes material published legaldecisions and administrative interpretations into account.
(4) If the Wirtschaftsprüfer receives a fixed fee for continuous tax advice, in theabsence of other written agreements the work mentioned under paragraph 3 (d)and (e) will be charged separately.
(5) Services with respect to special individual issues for income tax, corporatetax, business tax, valuation procedures for property and net worth taxation, andnet worth tax as well as all issues in relation to sales tax, wages tax, other taxesand dues require a special engagement. This also applies to:
a) the treatment of nonrecurring tax matters, e. g. in the field of estate tax,capital transactions tax, real estate acquisition tax
b) participation and representation in proceedings before tax andadministrative courts and in criminal proceedings with respect to taxes,and
c) the granting of advice and work with respect to expert opinions inconnection with conversions of legal form, mergers, capital increases andreductions, financial reorganizations, admission and retirement ofpartners or sharehoIders, sale of a business, liquidations and the like.
(6) To the extent that the annual sales tax return is accepted as additional work,this does not include the review of any special accounting prerequisities nor of theissue as to whether all potential legal sales tax reductions have been claimed. Noguarantee is assumed for the completeness of the supporting documents andrecords to validate the deduction of the input tax credit.
12. Confidentiality towards third parties and data security
(1) Pursuant to the law the Wirtschaftsprüfer is obliged to treat all facts that hecomes to know in connection with his work as confidential, irrespective of whetherthese concern the client himself or his business associations, unless the clientreleases him from this obligation.
(2) The Wirtschaftsprüfer may only release long-form reports, expert opinionsand other written statements on the results of his work to third parties with theconsent of his client.
(3) The Wirtschaftsprüfer is entitled - within the purposes stipulated by the client- to process personal data entrusted to him or allow them to be processed by thirdparties.
13. Default of acceptance and lack of cooperation on the part of the client
lf the client defaults in accepting the services offered by the Wirtschaftsprüfer or ifthe client does not provide the assistance incumbent on him pursuant to No. 3 orotherwise, the Wirtschaftsprüfer is entitled to cancel the contract immediately.The Wirtschaftsprüfer's right to compensation for additional expenses as well asfor damages caused by the default or the lack of assistance is not affected, evenif the Wirtschaftsprüfer does not exercise his right to cancel.
14. Remuneration(1) In addition to his claims for fees or remuneration, the Wirtschaftsprüfer isentitled to reimbursement of his outlays: sales tax will be billed separately. Hemay claim appropriate advances for remuneration and reimbursement of outlaysand make the rendering of his services dependent upon the complete satisfactionof his claims. Multiple clients awarding engagements are jointly and severallyliable.
(2) Any set off against the Wirtschaftsprüfer's claims for remuneration andreimbursement of outlays is permitted only for undisputed claims or claimsdetermined to be legally valid.
15. Retention and return of supporting documentation and records
(1) The Wirtschaftsprüfer retains, for ten years, the supporting documents andrecords in connection with the completion of the engagement - that had beenprovided to him and that he has prepared himself - as well as the correspondencewith respect to the engagement.
(2) After the settlement of his claims arising from the engagement, theWirtschaftsprüfer, upon the request of the client, must return all supportingdocuments and records obtained from him or for him by reason of his work on theengagement. This does not, however, apply to correspondence exchangedbetween the Wirtschaftsprüfer and his client and to any documents of which theclient already has the original or a copy. The Wirtschaftsprüfer may prepare andretain copies or photocopies of supporting documents and records which hereturns to the client.
16. Applicable law
Only German law applies to the engagement, its conduct and any claims arisingtherefrom.
Warth & Klein Grant Thornton AG Wirtschaftsprüfungsgesellschaft
DokID
:5245
DG
2P
U20