Telefonica O2 Czech Republic

Buy Out Proposal

Tomas Likar, Peter Gajdos, Jaideep Dhanoa

Opportunity Evaluation

Executive summary Telecommunication sector in the Czech Republic – Overview Investment thesis Transaction overview Industry overview Financials Exit strategy

Executive summary

We believe Telefonica O2 Czech Republic (TO2 CR) is an ideal target for private equity buyout. TO2 CR operates in a stable market oligopoly with low subscriber churn (~1% p.a.) and one of

the highest mobile ARPUs (~20 EUR/month) and gross margins (45%) in Europe. Czech Republic is a politically stable economy with forecasted GDP growth of 1% in 2013.

Majority owner of TO2 CR, Spanish telecommunications group Telefonica has been selling most of its international assets to cover upcoming debt payments, so we are convinced TO2 CR would be available for sale at favorable terms.

Even though the Czech telecommunications market is saturated (130% penetration), we still identified some growth opportunities (mainly mobile data) as well as operational improvements that could offset the expected decline in ARPU going forward.

We expect to entry at $101.566bn CZK (€3.92bn) EV at 5.5x 2013E EBITDA. This implies an 8% premium over current market price.

With the assumed exit in 2018 for the same multiple (5.5x), we forecast IRR of 25.9% and MoM of 3.1x.

These forecasts are very sensitive to the entry multiple (given the high leverage) and assumptions about future EBITDA margins. If the market was to become more competitive (e.g., because of a new market entrant), the situation could resemble the market situation in Austria, where margins declined from 40% to 10% within a time frame of 2 years. However, we see this scenario as less likely.

Since this is an attractive asset, we identified multiple exit strategies. Most viable is exit through stock market offering, but we also see a number of potential strategic (European and Asian telecoms) as well as non-strategic (e.g., local private equity groups) buyers.

Telecommunication sector in the Czech Republic - Overview

2010 2012 (e)

Broadband

Fixed broadband subscribers (million)

2.30 2.79

Fixed broadband penetration rate

22% 26%

Mobile broadband subscribers (thousand)

505 760

Subscribers to telecoms services

Fixed-line telephony (million)

2.05 1.85

Mobile phone (million) 14.33 14.60

Mobile SIM penetration (population)

139% 144%

Source: BuddeComm

Key figures:Key facts - broadband:

Telefonica O2 (VDSL broadband) and UPC (cable TV provider) are the two largest broadband providers

Independent local Wi-Fi operators (~30% market share) provide a cheaper alternative, but at lower speeds and service quality (customers increasingly switching to VDSL or cable)

FttX deployments remain low key, focusing only on few residential areas

Key facts - mobile:

Market dominated by oligopoly of three international telecom groups – Telefonica O2, T-Mobile and Vodafone

Significant pressure on ARPU (average revenue per customer) in the last few years – ARPU declined by ~40% since 2009 to $20 in 2013(E)

Despite revenue decline, EBITDA margins stayed at high levels (45% in 2012)

Czech Republic’s high mobile penetration of 130% is the main reason for low subscriber growth (<1% p.a.)

3G has witnessed a very slow uptake, forcing operators to stay conservative about future investments in LTE 4G networks (license auction is currently in progress)

First two virtual MNOs have entered the market in 2012 partnering with Telefonica O2

Czech Republic mobile market is characterized by very low subscriber churn and low market growth

Source: The Worldwide Directory of Mobile Network Operators 2011

Market is divided between three mobile operators with stable market shares

Number of subscribers has been growing at less than 1% p.a.

Selected customer data for Telefonica O2 Czech Republic

Source: Telefonica O2 Czech Republic Investor Relationships

Fixed

voice

Fixed

inte

rnet

Mob

ile p

ostp

aid

Mob

ile p

repa

id0

500

1000

1500

2000

2500

3000

3500

Active subscribers (‘000)

2011 2012

Fixed voice Mobile voice0

2000

4000

6000

8000

10000

12000

Minutes of use (MOUs in mil.)

Postpaid Prepaid Mobile data0

100

200

300

400

500

600

700

Average revenue/ cust. (ARPU)1

+4.7%-5.2% -0.1% +4.7%

-13% +7.1%

-10% -6.6% -4.8%

1 ARPU reported in CZK (1 USD = 20 CZK)

Telefonica O2 Czech Republic has been unable to cope with declining revenue and profitability

Source: FT.com/marketsdata; Annual Reports

2008 2009 2010 2011 20120

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Income statement summary (mil. CZK)

Total revenue Operating income Net income

Revenues fell 3.54% from 52.39bn to 50.53bn CZK.

In addition, the company has been unable to reduce the cost of goods sold, selling, general and administrative expenses and interest paid (as a percentage of sales).

This has contributed to a 21.97% reduction in net income from 8.68bn to 6.78bn CZK.

Telefonica O2 Czech Republic has been unable to cope with declining revenue and profitability

Source: FT.com/marketsdata; Annual Reports

2008 2009 2010 2011 20120

5,000

10,000

15,000

20,000

25,000

Cash-flow summary (mil. CZK)

CF from Ops Dividends paid Capex

In 2012, cash reserves at Telefonica O2 Czech Republic as fell by 3.91bn

The company has been consistently paying very high dividends (mostly to generate cash for Spanish parent company)

The company earned in 2012 17.24bn from its operations for a Cash Flow Margin of 34.11%.

Growth opportunities

Source: Team analysis

Mobile data and smartphones

Only 30% of all mobile phones are smartphones (vs. 50-80% in Western Europe)

LTE (4G) can attract customers in rural areas who have been using WiFi connection so far (~30% of the broadband market)

IPTV

Telefonica O2 operates the only IPTV network in the Czech Republic (competing with satellite and cable platforms)

After network upgrades in 2012/13, it will be able to offer video on demand (only comprehensive VOD offering on the market), time-shift and other advanced features

Fixed broadband

Limited competition in the fixed broadband market makes Telefonica O2 the only provider of choice outside of major cities

Due to this position, we can expect slight increase in ARPU from fixed broadband customers

Virtual mobile operators

The only two virtual mobile operators (both owned by major national newspaper groups) have long-term contracts with Telefonica O2

Both MVNOs have been aggressively attracting customers of all three operators and are expected to reach 10% market share in 2014; Telefonica O2 shares its profit margin with both MVNOs

Potential risks

Source: Team analysis

New mobile operator

The ongoing auction of additional spectrum can have two results – distribution of spectrum to existing operators or entry of a new 4 th player (Czech financial group PPF is showing a strong interest)

New mobile operator (option preferred by Czech authorities) would probably set up very aggressive pricing and put current profit margins under pressure

In Austria, hyper-competitive environment led to reduction of profit margins from 40% to less than 10%, such scenario is not unlikely to repeat in the Czech Republic

LTE auction

Telefonica is competing in LTE spectrum auction with 3-4 other entities (existing mobile operators as well as potential new entrants)

First LTE auction was cancelled by the government as prices increased to levels that could damage the market

Second LTE auction is supposed to be launched within the next 1-2 months

Decreasing ARPU

Even without new market entrants, ARPUs are expected to be under pressure from MVNOs

Czech ARPUs are still one of the highest in Europe and Czech telecommunication authorities have been actively pushing operators to reduce prices

Investment Thesis

High margins (45% in 2012) likely to continue– Market dominated by oligopoly of three international telecom groups – Telefonica O2, T-Mobile

and Vodafone– Limited spectrum preventing entry of additional network operators– Company well positioned to capture share of business lost to MVNOs

Stable cash flows will enable servicing of highly leveraged buy out

Parent company Telefonica likely a willing seller in need of cash given struggles in Spanish economy

Stable EBITDA with potential upside– Current 30% smartphone penetration vs 50-80% in Western Europe presents strong upside– Opportunity to increase ARPU through complementary products and services as customers

transition to smartphone devices– Expansion of business in Slovakia and other neighboring countries also a possibility

Expected deal structure

100% buyout from Prague Stock Exchange – take private; largest take private LBO in Czech Republic to date

Entry at $101.566bn CZK (€3.92bn) EV at 5.5x 2013E EBITDA. This implies an 8% premium over current market price. Structure to use good financing conditions in the credit markets:

– 3.5x senior debt (LIBOR +400 bps)– 1.0x mezzanine debt (8% fixed coupon)– Total leverage of 4.5x implies sufficient interest coverage: 3.8x FCF/Interest in 2014– 22.47bn CZK in equity– 5% transaction fees– 7.5% management options pool (lower than in the US due to lower equity requirements by

mgmt)

Uses Amount EBITDAx Sources Amount EBITDAx Rate AmortizationSenior debt 3,000 0.2x Cash 1,075 0.1x 1.0%Sub-debt 31 0.0x Senior debt 64,633 3.5x L+400 7Equity 98,566 5.3x Mezzanine 18,467 1.0x 8% BulletEV 101,566 5.5x Total debt 83,099 4.5xFees 5,078 0.3x Equity 22,470 1.2x

Total uses 106,644 5.8x Total sources 106,644 5.8x

Implied premium over equity market price 8.1%

Financial projections – base case scenarioINCOME STATEMENT CAGRin CZK bn 2008A 2009A 2010A 2011A 2012A 2013E 2014F 2015F 2016F 2017F 2018F 2019F'06-'11 '13-'18

SalesFixed 30.5 27.4 24.8 22.8 21.6 20.5 19.6 18.7 17.9 17.1 16.5 15.7 -4.3%

% growth -10.2% -9.6% -7.8% -5.4% -5.0% -4.7% -4.5% -4.3% -4.1% -3.9% -4.9%Mobile 35.4 33.5 31.7 30.3 29.5 29.2 29.1 29.2 29.4 29.5 29.4 29.5 0.1%

% growth -5.4% -5.2% -4.7% -2.4% -1.0% -0.5% 0.3% 0.7% 0.4% -0.2% 0.2%Total net sales 65.9 60.9 56.5 53.1 51.1 49.7 48.6 47.8 47.2 46.6 45.9 45.1 -1.6%

% growth -7.6% -7.2% -6.1% -3.7% -2.7% -2.2% -1.6% -1.3% -1.3% -1.6% -1.6%

Gross ProfitInterconn. and roaming (12.0) (11.4) (10.2) (9.2) (8.8) (8.9) (8.7) (8.5) (8.4) (8.3) (8.2) (8.1) -1.5%

margin 18.2% 18.7% 18.1% 17.3% 17.3% 17.8% 17.8% 17.8% 17.9% 17.9% 17.9% 17.9%Costs of good sold (3.3) (2.3) (1.9) (2.2) (2.1) (2.2) (2.4) (2.6) (2.6) (2.5) (2.5) (2.5) 2.5%

margin 4.9% 3.8% 3.4% 4.1% 4.2% 4.5% 5.0% 5.5% 5.5% 5.5% 5.5% 5.5%Other costs of sales (4.2) (3.8) (3.2) (3.4) (3.8) (3.9) (4.1) (4.3) (4.2) (4.2) (4.1) (4.0) 0.8%

margin 6.3% 6.2% 5.6% 6.5% 7.4% 7.9% 8.4% 8.9% 8.9% 8.9% 8.9% 8.9%Other expenses (11.1) (9.4) (11.6) (10.1) (10.6) (10.3) (10.2) (10.2) (10.2) (10.2) (10.1) (10.1) -0.4%

margin 16.9% 15.5% 20.6% 19.1% 20.8% 20.8% 21.0% 21.3% 21.6% 21.8% 22.1% 22.4%Staff costs (7.1) (7.1) (7.1) (6.2) (5.8) (5.9) (5.9) (5.9) (6.0) (6.0) (6.0) (6.2) 0.4%

margin 10.8% 11.7% 12.5% 11.6% 11.4% 11.9% 12.1% 12.4% 12.6% 12.9% 13.2% 13.7%Impairment reversal/(loss) (0.1) (0.0) 4.3 (0.0) (0.0) - - - - - - - NM

margin 0.1% 0.0% -7.7% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Other income 1.3 1.2 0.7 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.0%

margin -2.0% -2.0% -1.3% -0.9% -1.0% -1.0% -1.0% -1.0% -1.1% -1.1% -1.1% -1.1%Total EBITDA 29.5 28.1 27.6 22.5 20.4 19.0 17.8 16.8 16.3 15.9 15.4 14.8 -4.1%

margin 44.8% 46.1% 48.8% 42.3% 39.8% 38.2% 36.7% 35.1% 34.6% 34.1% 33.5% 32.8%

D&A (12.9) (12.0) (11.9) (11.7) (11.4) (10.0) (10.1) (11.0) (11.3) (11.6) (10.8) (7.6) 1.6%EBIT 16.6 16.1 15.7 10.8 8.9 9.0 7.8 5.8 5.0 4.3 4.6 7.2 -12.5%

margin 25.1% 26.4% 27.8% 20.4% 17.5% 18.1% 16.0% 12.1% 10.6% 9.2% 10.1% 15.9%

CapEx (2.2) (7.6) (5.3) (5.5) (5.8) (7.0) (8.0) (5.5) (5.5) (5.0) (5.0) (5.0) -6.5%% of sales -3.4% -12.5% -9.4% -10.4% -11.3% -14.1% -16.5% -11.5% -11.6% -10.7% -10.9%

EBITDA - Capex 26.1 19.5 21.5 16.3 14.0 11.5 9.4 10.9 10.5 10.5 10.1 -2.5%% of sales 39.6% 32.0% 38.0% 30.7% 27.4% 23.1% 19.2% 22.8% 22.1% 22.6% 22.0% Entry (EBITDAx)

Assumptions – base case

REVENUE ASSUMPTIONS: Fixed continues steady decline in revenue,

mostly due to reductions in prices:– Voice: (5%) p.a.; monthly: (15%); data:

(2.5%); other: 0% Mobile continues shifts from voice (per minute)

to monthly (plan); slow growth in customer base, decline in ARPU. growth in data as more consumers switch to smartphones:

– Voice: (6%), monthly: (2%), data: 5-15%, other: 0%

COST ASSUMPTIONS: Roaming: 18% of revenue steady Increase in COGS are oligooply weakens:

increase from 4.2% in 2012 to 5.5% of sales by 2018

Also marginal increases in other costs of sales, staff costs as % revenue due to smaller revenue base and operational de-leveraging

No major non-recurring items. Gains on asset sales occurs every year, no major impairment expected going forward

CAPEX AND WC ASSUMPTIONS: Telefonica underinvested in capex in the past

few years Increase in capex from 5.7bn CZK in 2012 to

8bn CZK by 2014 to build out 4G LTE network. Decline back to c. 5bn post 2014

No major changes expected to inventory, A/R, A/P positions

ENTRY AND EXIT ASSUMPTIONS: Entry in Dec 2013 at 5.5x EBITDA multiple

(comps trade at around 5x) Exit in Dec 2018 at 5.5x EBITDA

European telecom operators public market comparison

Sources: Deutsche Bank estimates, Reuters pricing

Definitions:

Adjusted P/E and EV/EBITDA multiples strip out identified non-recurring/specific items. Equity FCF Yield is the ratio of consolidated Equity FCF to consolidated Equity Value. Consolidated Equity FCF = EBITDA - cash tax - cash interest - working capital - provisions – capexConsolitated Equity Value = Market Cap + minorities - associates - investments Adjusted Equity FCF Yield normalises for P&L tax Unlevered FCF Yield is the ratio of consolidated Unlevered FCF to consolidated Enterprise Value Consolidated UFCF = Equity FCF + cash interest * (1 - tax rate) Consolidated Enterpirse Value = Consolidated Equity Value + Net Debt + Other Adjustments (e.g. pension liabilities)

Company Quote

Currency Current

PriceM. Cap

(EUR bn)EV (EUR

bn)

Adj. P/E (x) Adj. EV/EBITDA (x) Adj. FCF Yield (%) Dividend Yield (%) Adj. Unlevered FCF Yield (%)

2011 2012E 2013E 2014E 2011 2012E 2013E 2014E 2011 2012E 2013E 2014E 2011 2012E 2013E 2014E 2011 2012E 2013E 2014EBelgacom EUR 19.18 7.3 8.9 10.2x 10.1x 9.9x 11.3x 4.9x 5.0x 4.6x 4.9x 9.9% 10.1% 8.5% 7.8% 8.9% 10.8% 9.4% 8.9% 9.1% 9.1% 7.3% 6.7%BT Group PLC GBP 266 24.6 35.0 8.2x 10.5x 10.0x 9.3x 4.2x 4.9x 4.7x 4.5x 1.6% 9.1% 8.7% 9.4% 4.3% 3.6% 4.1% 4.8% 3.0% 8.1% 7.9% 8.5%Deutsche Telekom EUR 8.44 38.3 82.3 15.0x 15.2x 10.7x 11.3x 4.8x 4.6x 4.7x 4.7x 11.9% 10.6% 7.9% 7.3% 7.1% 7.9% 5.9% 5.9% 8.3% 7.5% 5.9% 5.8%France Telecom EUR 7.72 20.4 57.0 9.4x 6.5x 7.1x 7.4x 4.9x 4.1x 4.3x 4.4x 16.0% 14.1% 15.7% 15.0% 9.9% 10.4% 10.4% 10.4% 9.9% 7.7% 8.4% 8.1%KPN EUR 2.6 3.7 19.6 9.5x 2.6x 3.4x 3.5x 5.9x 4.1x 4.6x 4.6x 13.1% 23.4% 30.2% 22.9% 8.2% 4.6% 1.2% 1.2% 8.0% 6.5% 7.8% 6.7%OTE EUR 4.7 2.3 5.6 6.8x 5.5x 5.7x 5.6x 4.2x 3.4x 3.2x 2.8x 21.4% 24.0% 22.0% 25.1% 0.0% 0.0% 0.0% 5.3% 11.8% 15.4% 14.7% 18.2%Portugal Telecom EUR 3.84 3.3 9.4 nm 11.4x 9.5x 8.4x 5.2x 4.1x 4.0x 3.7x 12.8% 17.9% 24.0% 30.6% 9.6% 8.5% 8.5% 8.5% nm 4.5% 5.9% 7.7%Swisscom CHF 433 18.5 25.3 28.9x 13.1x 13.9x 14.6x 6.1x 7.0x 7.1x 7.2x 8.1% 5.2% 6.2% 5.6% 5.8% 5.1% 5.1% 5.3% 6.5% 4.5% 5.2% 4.8%TDC DKK 44.4 4.8 7.7 12.7x 10.4x 12.7x 12.5x 5.2x 5.5x 5.6x 5.7x 10.2% 8.8% 9.0% 9.4% 9.8% 10.4% 8.3% 8.3% 7.2% 6.8% 6.7% 6.9%Tele2 SEK 106 5.6 7.5 12.6x 14.5x 10.3x 9.1x 6.5x 5.7x 5.5x 5.0x 6.4% 7.6% 7.0% 10.5% 9.7% 6.6% 8.5% 9.4% 5.7% 6.8% 6.4% 9.1%Telefonica EUR 10.37 46.3 105.3 9.9x 11.8x 9.0x 8.8x 6.6x 5.0x 4.9x 4.8x 13.3% 16.0% 14.4% 16.5% 8.2% 0.0% 7.2% 7.2% 9.3% 10.1% 9.8% 11.3%Telenor ASA NOK 125 26.6 29.2 12.0x 12.5x 12.3x 10.4x 5.0x 6.6x 6.0x 5.5x 9.8% 3.6% 9.1% 10.5% 5.5% 4.8% 5.2% 6.0% 9.3% 4.0% 8.1% 9.4%Telekom Austria EUR 5.11 2.3 6.0 17.4x 16.3x 23.5x 22.0x 4.8x 4.1x 4.7x 4.5x 15.1% 21.8% 15.9% 18.1% 4.2% 1.0% 1.0% 3.3% 10.1% 11.7% 8.5% 9.9%Telecom Italia EUR 0.58 14.2 45.2 6.9x 5.7x 4.8x 4.4x 4.1x 3.8x 3.5x 3.3x 13.1% nm 22.0% 23.9% 4.6% 2.6% 3.4% 3.4% 7.8% 0.5% 10.5% 11.3%TeliaSonera SEK 42.8 22.1 21.1 10.1x 8.8x 9.9x 9.5x 5.1x 4.9x 4.7x 4.4x 6.9% 27.1% 16.9% 17.5% 6.7% 6.7% 7.0% 7.2% 5.0% 18.0% 12.0% 12.8%Integrated weighted average 12.0x 11.1x 9.9x 9.7x 5.3x 4.8x 4.8x 4.7x 10.5% 11.9% 12.4% 13.1% 6.9% 5.1% 6.3% 6.5% 8.0% 7.6% 8.3% 8.9%                                                 Elisa Corporation EUR 14.31 2.2 3.3 12.0x 10.7x 10.9x 10.6x 6.3x 6.5x 6.5x 6.4x 8.4% 6.9% 9.0% 9.2% 8.4% 9.1% 9.1% 9.1% 6.3% 4.7% 6.2% 6.3%Mobistar EUR 17.3 1.0 1.4 12.5x 5.6x 8.0x 8.3x 5.8x 2.9x 3.6x 3.7x 4.5% 4.1% 4.4% 5.3% 8.0% 10.4% 10.4% 10.4% 4.3% 3.5% 3.7% 4.4%Vivendi SA EUR 16.1 19.4 41.9 7.4x 7.6x 9.1x 9.0x 5.0x 5.0x 5.4x 5.3x 9.9% 7.2% 8.2% 7.9% 5.7% 6.7% 6.2% 6.2% 7.9% 5.8% 6.8% 6.7%Vodafone Group Plc GBP 182.6 106.0 91.2 11.2x 12.4x 12.0x 11.2x 4.8x 5.8x 5.7x 5.5x 12.6% 10.9% 10.6% 11.2% 5.7% 5.6% 5.6% 5.6% 9.5% 8.5% 8.5% 8.9%Mobile weighted average 11.2x 12.3x 12.0x 11.2x 4.8x 5.8x 5.7x 5.5x 12.4% 10.8% 10.5% 11.1% 5.8% 5.7% 5.7% 5.7% 9.4% 8.3% 8.3% 8.7%                                                 Kabel Deutschland EUR 70.2 6.2 9.0 23.0x 22.9x 26.7x 22.8x 8.0x 10.5x 9.5x 8.7x 4.6% 1.0% 2.7% 4.1% 3.7% 2.1% 4.3% 5.0% 4.7% 2.0% 3.3% 4.3%Telenet Group EUR 39.2 4.4 7.4 nm nm 36.9x 27.3x 8.3x 9.5x 9.6x 9.2x 6.3% 4.9% 3.5% 4.7% 15.1% 10.8% 20.2% 10.2% 5.8% 5.2% 4.1% 4.7%Virgin Media GBp 3203 10.4 17.1 66.5x 3.1x 19.6x 14.7x 6.7x 8.8x 7.9x 7.1x 9.4% 2.9% 8.1% 9.7% 1.0% 0.5% 0.5% 0.5% 2.2% nm 3.0% 3.8%Ziggo N.V. EUR 27.4 4.9 7.8   21.1x 17.3x 15.1x   8.9x 9.2x 9.0x   8.7% 7.9% 8.3%   5.9% 7.5% 8.3%   8.1% 7.0% 7.0%Zon Multimedia EUR 3.1 1.0 1.8 27.3x 26.6x 20.7x 16.6x 5.7x 5.6x 5.3x 5.0x 4.8% 9.6% 10.7% 9.5% 5.3% 5.1% 5.4% 5.8% 4.3% 7.0% 7.9% 7.3%Cable weighted average 32.7x 11.3x 23.7x 18.8x 7.3x 9.2x 8.7x 8.1x 7.3% 4.1% 6.2% 7.3% 5.1% 3.7% 6.1% 4.8% 3.7% 3.1% 4.2% 4.8%                                                 Colt Group S.A. GBP 125 1.3 1.0 20.7x 22.0x 24.5x 23.2x 3.0x 3.1x 3.2x 3.0x 2.3% nm nm 0.1% 0.0% 0.0% 0.0% 0.0% 3.3% nm nm 0.2%C&W Communications GBP 40 1.2 2.5 9.1x nm 25.8x 19.5x 4.1x 5.6x 3.8x 4.3x 13.2% 1.8% 5.3% 5.6% 9.0% 6.5% 6.5% 6.5% 10.7% 4.5% 9.4% 8.3%QSC AG EUR 2.43 0.3 0.4 13.0x 17.8x 13.8x 14.7x 5.1x 5.2x 4.8x 4.7x 13.2% 7.6% 8.4% 10.2% 3.0% 3.7% 4.1% 4.5% NA NA NA NAIliad Group EUR 156.9 9.0 10.2 NA 68.4x 52.1x 29.3x 6.8x 12.6x 10.7x 8.1x nm nm 0.3% 2.9% 0.4% 0.3% 0.3% 0.3% nm nm 0.7% 3.1%Freenet AG EUR 18.28 2.3 2.8 4.8x 9.6x 10.0x 9.9x 4.7x 7.9x 7.5x 7.2x 20.1% 9.2% 9.9% 10.3% 13.7% 6.6% 6.6% 6.8% 13.2% 7.6% 8.4% 8.9%TelecityGroup Plc GBP 884 2.1 2.4 23.2x 28.2x 23.7x 18.8x 11.5x 15.6x 12.6x 10.1x nm nm 0.7% 4.2% 0.0% 0.8% 1.1% 1.4% nm nm 1.0% 4.2%United Internet EUR 18.55 2.9 3.1 16.8x 18.7x 17.2x 13.4x 8.7x 9.1x 9.1x 7.0x 5.2% 6.9% 6.0% 7.1% 2.3% 2.0% 1.9% 2.0% 4.4% 6.3% 5.8% 7.3%Alt. nets weighted average 7.8x 41.0x 34.4x 22.1x 6.8x 10.5x 9.0x 7.3x 4.4% 2.4% 2.8% 4.7% 2.8% 1.8% 1.8% 1.9% 3.6% 2.3% 3.3% 4.9%

Valuation and rate of return

Exit 2013F 2014F 2015F 2016F 2017F 2018F 2019FEBITDA 18,282 17,181 16,219 15,802 15,380 14,931 14,375 Multiple 5.5x 5.5x 5.5x 5.5x 5.5x 5.5x 5.5xEV 100,550 94,498 89,205 86,910 84,591 82,122 79,063 - Debt (83,099) (66,440) (52,420) (38,394) (27,700) (18,467) (9,233) Equity value 17,451 28,058 36,785 48,516 56,891 63,656 69,829 Equity net value (5,019) 5,588 14,315 26,046 34,422 41,186 47,360 Mgmt options - 419 1,074 1,953 2,582 3,089 3,552 Equity to Sponsor 17,451 27,639 35,711 46,563 54,310 60,567 66,277

Sponsor Flows 2013E 2014E 2015E 2016E 2017E 2018E 2019EDividends - - - - 3,082 4,764 Management Fees 185 174 164 160 155 151 Investments and Exits (22,470) - - - - 60,567 - Total Flows to Sponsor (22,285) 174 164 160 3,237 65,481 -

Closing date 12/31/2013 LIBOR 0.5%Entry EBITDA 18,467 Tax rate 19%Entry multiple 5.5x Exit multiple 5.5xTransaction fees 5.0% Exit year 2018Mgmt fees 1.0% Dividends 100%Mgmt options 7.5%

IRR 25.9%MoM 3.1x

Returns Sensitivity - IRR

Returns Very sensitive to entry multiple given high leverage

Entry multiple25.9% 4.5x 5.0x 5.5x 6.0x 6.5x

4.0x 78.4% 31.5% 17.2% 9.2% 3.7%4.5x 83.1% 35.1% 20.4% 12.1% 6.5%5.0x 87.4% 38.3% 23.3% 14.8% 9.0%5.5x 91.4% 41.3% 25.9% 17.2% 11.3%6.0x 95.0% 44.0% 28.3% 19.5% 13.4%6.5x 98.3% 46.5% 30.6% 21.6% 15.4%

Sales growth25.9% -5.0% -3.0% -1.5% 0.0% 1.5%-8.0% -10.9% -0.5% 4.7% 9.2% 13.2%-6.0% -1.4% 5.8% 10.2% 14.2% 17.9%-4.0% 4.8% 10.8% 14.8% 18.4% 21.9%-2.0% 9.6% 15.0% 18.7% 22.3% 25.7%0.0% 13.7% 18.8% 22.4% 25.9% 29.3%2.0% 17.4% 22.3% 25.9% 29.4% 32.8%

Exit

mul

tiple

EBIT

DA m

argi

n Any EBITDA margin reduction similar to experience in Austria would lead to severe reduction in returns

Exit strategy

Telefonica O2 is currently listed on the Prague Stock Exchange (BAATELEC:PRA; 30% of stock is free float). Given the existing liquidity, this is the first option to exit. However, Prague Stock Exchange is fairly small, so the emission would have to take place at one of the bigger markets (e.g., London)

Strategic sale to another international telecommunications group is a viable exit option. From the regional players, these companies could be interested:

– Orange (France Telecom)– Telecom Italia– KPN Telecom– TDC Denmark

Moreover, Asian operators have been increasingly looking for expansion opportunities in Europe. In 5 year horizon, companies such as China Mobile, China Telecom, NTT DoCoMo and Softbank could be interested in this investment.

Non-strategic sale is a possibility too. Strong Central European private equity groups (e.g., Penta Investments, PPF) have expressed their interest to invest in telecommunications.

Due to the limited availability of spectrum, there is also scope for a trade sale either to an existing competitor within Czech Republic, but this would most likely be blocked by the regulator.

APPENDIX

Mobile operators in the Czech Republic

Source: Oligopoly Theory: Mobile Phone Providers in the Czech Republic

Eurotel Praha, spol. s.r.o.(later re-branded Telefonica O2) has been the first and the largest mobile phone provider in the Czech Republic. It entered the market offering analog NMT 450 system. Later, Eurotel received concession for new frequencies GSM 900 and in 2000 GSM 1800. In 2006 Eurotel Praha and Cesky Telecom merged to one company called Telefonica O2. Nowadays, Telefonica O2 Czech Republic is a major integrated operator in the Czech Republic, operating more than seven million lines, both fixed and mobile, which makes it one of the world's leading providers of fully converged services. The company offers the most comprehensive portfolio of voice and data services. As stated already above, the international acquisition was made in 2006 by Telefonica O2 Europe. Telefonica O2 Europe is a business division of Telefonica O2 S.A. which belongs to one of the world leaders integrated operator in the telecommunication sector with presence in Europe, Africa and Latin America. In Europe, it operates markets in Great Britain, Ireland, Germany, the Czech and Slovak Republic, Spain and Isle of Man. In all, the international companyhas more than 49 million customers.

The monopoly era of Eurotel Praha on the mobile phone market ended in 1996, when new mobile phone operator RadioMobil a.s. entered the market. During its first year began offering mobile telecommunication services via the GSM network under the name Peagas. Company's name was changed in 2002 to T-mobile Czech Republic a.s. According to the to the T-mobile, T-mobile portfolio includes a wide range of services for homes and professional solutions for the business segment and public sector. Not only voice services and SMS,but they offer to customers non-voice services such as data transmission via GPRS, WiFi, EDGE and UMTS as well. T-mobile is fully owned by Deutsche Telekom AG and again this group is one of the world's leading telecommunications and information technology service companies. It serves over 200 million customers in more than 50 countries, Great Britain, Germany, Netherlands, Poland, Hungary, Austria and the Czechand Slovak Republic in Europe.

Cesky Mobil is the third and the youngest player who entered the Czech market in 2000. It provided the services under the name Oskar and from the beginning became one of the fastest developing mobile phone providers in Europe. In 2005 Oskar became a member of Vodafone group and from 2006 the Oskar changed to Vodafone Czech Republic a.s. Since all three groups are large competitors, once more it is the world's leading mobile telecommunications company and it has significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States with more than 330 million customers.

Stock information (BAATELEC:PRA)

Source: FT Markets

5-year return

Average volume 272k Annual div (TTM) 20 CZK

Shares outstanding 322.09m Annual div yield (TTM) 7.06%

Free float 98.52m 52-week high 443.5 CZK

P/E (TTM) 13.46 52-week low 264 CZK

Market cap 91.22bn CZK

EPS (TTM) 21.04 CZK