30th Jan 2007 10:14
Bank Pekao SA30 January 2007 Unofficial Translation of Current Report The Management Board of Bank Polska Kasa Opieki S.A. with its seat in Warsaw, ("Bank Pekao S.A."), discloses the opinion of the expert dated January 8, 2007,from the examination of the Spin-off Plan of Bank BPH Spolka Akcyjna with itsseat in Krakow dated November 15, 2006, as delivered to Bank Pekao S.A. onJanuary 29, 2007. The Spin-off Plan of Bank BPH Spolka Akcyjna was announced by Bank Pekao S.A. onNovember 16, 2006 in a form of current report no. 103/2006. Legal basis: (S) 21 Sec. 2 Item 3 in conjunction with (S) 5 Sec. 1 Item 15 ofthe Finance Minister's Ordinance on Current and Periodic Information Provided bySecurities Issuers of 19 October 2005 (Journal of Laws No. 209, Item 1744). Cracow, 8th January 2007 Janina Niedospialul. Slomiana 13/6030 -316 CracowChartered auditor 2729/2068Court-appointed auditor Regional Court For Cracow - Srodmiescie in Cracow XIth Business Department of the National Court Registry File number: KR XI Ns-Rej. KRS 26364/06/291 OPINION OF AN INDEPENDENT AUDITOR ON THE EXAMINATION OF SPIN-OFF PLAN concerning Bank BPH Spolka Akcyjna in Cracow Further to the decision issued by the Regional Court for Cracow - Srodmiescie inCracow, XIth Business Department of the National Court Registry dated 28thNovember 2006 on the appointment of Janina Niedospial, who is listed in theregister of chartered auditors of the District Court in Cracow, to examine the 'Bank BPH SA spin-off plan of 15th November 2006' for its regularity anddiligence (integrity), I examined the Spin-off plan, which covered the followingelements: Part I - General provisions 1. type, firm and location of the Companies participating in the spin-off, 2. spin-off method, 3. share allocation ratio, 4. principles governing granting of the Spin-off Share Issue to BPH SA'sshareholders 5. date, starting from which the Spin-Off Share Issue authoriseparticipation in Pekao SA's profits, 6. rights granted by Pekao SA to BPH SA's shareholders and to personsentitled to special rights in BPH SA 7. special benefits for the members of administrative boards of theCompanies participating in BPH SA spin-off and for other people participating inthe BPH SA's spin-off, 8. information on the change in Pekao SA's Articles of Association 9. consents and permits of management and supervision organs concerning BPH SA's spin off, 10. miscellaneous Part II - Description of assets elements, licenses and benefits allocated toPekao S.A The following documents were attached to the Spin-off Plan • draft resolution of the General Shareholders' Meeting of Pekao S.A. onthe integration of Pekao S.A. and BPH S.A., performed by way of BPH SA'sspin-off, with transfer of part of BPH SA's assets in the form of an organisedentity onto Pekao S.A., • draft resolution of the General Shareholders' Meeting of BPH S.A. onthe integration of BPH S.A. and Pekao SA, performed by way of BPH SA's spin-off,with transfer of part of BPH SA's assets in the form of an organised entity ontoPekao S.A., • draft amendments to Pekao SA's Articles of Association, • definition of BPH SA's assets value as at 1st October 2006, • declaration on Pekao SA's accounting status, developed for the purposeof the spin-off on 1st October 2006 , • declaration on BPH SA's accounting status, developed for the purpose ofthe spin-off on 1st October 2006. Development of the Spin-off Plan is the responsibility of the Management Boardof Pekao S.A. and BPH S.A. My task was to express an opinion on the spin-off planattached, further to the examination made. My opinion has been developed exclusively for the use of the Regional Court forCracow - Srodmiescie in Cracow, XIth Business Department of the National CourtRegistry and for the Bank's shareholders participating in the spin-off, and assuch it cannot be used for any other purpose. I do not assume responsibilitytowards third parties for the contents of this opinion. I carried out the examination further to the following legal acts: • articles 537 and 538 of the law dated 15th September 2000 Code ofCommercial Companies (Official Journal of Laws number 94, section 1037 withlater amendments), hereinafter referred to as "KSH", • standards of chartered auditors' profession, issued by the NationalCouncil of Chartered Auditors in Poland, • International Standards Licensed Services number 3000. I planned and conducted the examination in such a way so as to gain sufficientcertainty that the spin-off plan contains no significant distortions and toacquire sufficient base for expressing reliable opinion on the plan. In particular, the examination consisted in the following procedures: • Verification whether the spin-off plan agreed by the banks had beendeveloped pursuant to art. 534 (S) 1 KSH and if it contains all appendicesrequired to art. 534 (S) 2 of KSH, • Assessment whether the share valuation methods used for share swapratio are correct, • Verification whether the share valuation was calculated correctly andpursuant to the methods used by the Management Board of both Banks and whetherthe swap ratio of shares was based on these calculations . Further to the examination, I hereby express the following opinion. Further to the examination, I declare as follows: 1. Share swap ratio, mentioned in art. 534 (S) 1 point 2 KSH was defined ina diligent way. In return for the transfer of part of BPH SA's assets onto PekaoS.A., each BPH SA's shareholder will receive 3.3 newly issued Pekao SA's sharesfor one BPH SA's share. 2. The methods used for defining the share swap ratio are sensible. Threevaluation methods were used: - valuation in accordance with the Dividend Discount Model, - valuation in accordance with the Market Multipliers Analysis, - valuation in accordance with the P/NAV regression analysis (price tonet assets value) and RoNav (return on net assets). 3. Bank BPH SA's Spin-off plan dated 15th November 2006 was agreed upon byBank Pekao S.A. with seat in Warsaw at 53/57 Grzybowska Street and Bank BPHS.A. with seat in Cracow at Al. Pokoju 1, had been developed in accordance withart. 534 (S) 1 of KSH and it contains all appendices enumerated in art. 534 (S)2 of KSH. 4. Particular difficulties related to share valuation: • Impact of market speculations on Pekao SA's market price in relation topotential effects of integration with BPH S.A. • lack of market transparency for future profits in Pekao S.A. In the light of the above, I hereby declare that the Spin-off Plan for Bank BPHSpolka Akcyjna based in Cracow was developed in a regular a diligent way. Grounds for the opinion 1. Preliminary remarks 1. In its decision of 28th November 2006, signature KR XI Ns Rej KRS 26364/06/291, the Regional Court for Cracow - Srodmiescie in Cracow, XIth BusinessDepartment of the National Court Registry has appointed Janina Niedospial,listed in the register of chartered auditors of the District Court in Cracow, toexamine the 'Bank BPH SA spin-off plan of 15th November 2006' for itscorrectnewss and intergrity. 2. With the view to execute this decision, the Management Board of BPHconcluded a civil law job agreement with chartered auditor Janina Niedospial. II. General provisions 1. Parties to the spin-off Bank Polska Kasa Opieki Spolka Akcyjna based in Warsaw at 53/57 GrzybowskaStreet (hereinafter referred to as "Pekao S.A."), the taking-over company -entered under the number KRS 0000014843 to the Business Register kept by theregional Court for Warsaw, XIIth Business Division of the National CourtRegister. Representation: Krzysztof Bielecki - President of the Management Board, Luigi Lovaglio - Vice-President of the Management Board. Bank BPH Spolka Akcyjna based in Cracow at Al. Pokoju 1 (hereinafter referredto as "BPH S.A."/ - the spin-off company. Representation: Jozef Wancer - President of the Management Board, Grzegorz Piwowar - Board Member. 2. Spin-off method Spin-off will be carried out under art. 529 (S) 1 point 4 of KSH by transfer ofpart of BPH SA's assets onto Pekao S.A. in the form of an organised part of thecompany in return for Pekao SA's shares, which will be assumed by BPH SA'sshareholders Bank BPH SA's shareholders will assume Pekao SA's ordinary bearer shares seriesI of the nominal value of PLN 1 (say: one zloty) each, issued in relation to theintegration of both banks. Bank BPH SA's shareholders will receive 3.3 (say:three and 3/10) Spin-Off Issue Shares, maintaining their hitherto ownership BPHSA's shares. Equity of Bank Pekao S.A. will be increased by 94,763,559 zloty (say: ninetyfour million seven hundred and sixty three thousand five hundred and fifty ninezlotys) to the amount of 261,571, 816 zloty (say: two hundred and sixty onemillion five hundred and seventy one thousand eight hundred and sixteen zloty). The spin off of BPH SA's assets has been prepared as at 1st October 2006. In the course of the spin-off, Pekao S.A. will receive specific assets andliabilities of BPH S.A. in the form of an organised part of the companycomprising: • 284 BPH SA's branches • all new branches established after 1st October, 2006, • 23 corporate centres, • 8 macroregions, • part of BPH SA's head office, • part of BPH SA's brokerage office. Assets allocation will be performed according to the rule, under which PekaoS.A. will receive these assets, which are related to the operations oftransferred entities. This enables equipping the transferred entities with allelements of fixed assets and equipment, used for their operations. At the sametime, all rights and duties, receivables and liabilities, administrativedecisions and permits, which are related to the operations of transferred unitsare allocated to Pekao S.A. Definition of assets allocated to Pekao S.A. was performed further to accountingrecords kept in line with the regulations binding in BPH S.A. 3. Financial statements BPH SA's financial statements consist of: • Balance sheet developed as at 01.10.2006, recording assets andliabilities of: 63,285,468,000 zloty, • Profit and loss account developed for the period from 01.01.2006 to01.10.2006 r, recording net profit of 881,527,000 zloty, • Explanatory notes. Pekao SA's financial statements consist of: • Balance sheet developed as at 01.10.2006, recording assets andliabilities of: 68,029,726,000 zloty, • Profit and loss account developed for the period from 01.01.2006 to01.10.2006 r, recording net profit of 1,327,000,000 zloty, • Explanatory notes. BPH SA's financial statements developed as at 30th June 2006 were reviewed byKPMG Audyt Sp. z o.o. based in Warsaw at 51 Chlodna Street. Independent chartered auditor's report on the review of abridged mid-year solofinancial statements contain a declarations that the review detected no issueswhich may lead to a conclusion that attached abridged mid-year solo financialstatements of Bank BPH SA do not reflect Bank BPH Spolka Akcyjna's financial andproperty-related situation as at 30th June 2006, its financial results and cashflows for the period from 1st January 2006 to 30th June 2006 in a regular anddiligent way in all significant aspects, in line with the requirements of theInternational Financial Reporting Standards applicable to mid-year financialreporting, which were approved by the European Union. III. Specific provisions. 1/ Share allocation ratio Share allocation ratio was defined as the number of newly issued Pekao SA'sshares in return for each BPH's share, according to the following formula: Value of taken-over part of BPH per 1 BPH SA's share Value of Pekao SA's shares Both banks were valued by JP Morgan further to: the pro forma statements for theto be taken-over part of BPH developed as at 30.06.2006, business plan for thetaken-over part of BPH developed by BPH SA's management board for years2006-2008 and business plan for the whole Bank BPH SA for the same period, andbusiness plan for Pekao SA for years 2006-2008. Valuations of Pekao S.A. and the to be taken-over part of BPH were executed onthe basis of respective valuation methodologies applied for company valuations,including banks. Three valuation methods were used: • valuation according to the Dividend Discount Model, • valuation according to the Market Multipliers Analysis, • valuation according to P/NAV regression analysis (price to net assetsvalue) and RoNav (return on net assets). Valuation according to the Dividend Discount Model This valuation method is used for shareholders, who assume that their investmentis long-term and that they will generate revenues mainly from dividends paid outby the valued entity. Therefore, the value of the entity (including bank) willbe equal to the value of discounted (current) infinite cash stream of futuredividend. In practice, as it is impossible and not sensible to forecast dividendflows ad infinitum, future dividends are projected for e defined period of time(e.g. 3-5 years) and the current value of the final entity's value iscalculated, with due account to the assumed long-term growth rate. Key elements that are indispensable to valuation include: financial forecastcovering balance sheet, profit and loss account, dividend flows, calculation offinal value, definition of long-term growth rate necessary for calculation offinal value and definition of discount rate. Valuation according Market Multipliers Analysis This valuation model is used by the share holders, who allow that theirinvestment is a long-term one and their income will come predominantly from thedividend paid out by the entity being a subject of evaluation. Value of theentity (a bank in this case) would will be equal to the discounted (present)infinite cash flow of future dividends. In practice, this method consists in defining the company's value by multiplyingspecific market multiplier by a relevant economic parameter of the valuedentity. The key elements of this method is: to define comparable entities, to definetime bracket of the analysis, to define key multipliers and to apply thesemultipliers to the bank's financial data (i.e. to multiply the multiplier by arelevant economic parameter). The banking industry is relatively well represented on the Warsaw Stock Exchangein Warsaw. For the purpose of Pekao SA and BPH SA valuation, results and stockmultipliers of the following banks were analysed: PKO BP, BZ WBK, Bank Handlowy,ING Bank Slaski, BRE Bank S.A., Bank Millennium and Kredyt Bank (i.e. leadingPolish banks together with Pekao and BPH ). Then the most important multipliers for the banking industry were selected: • P/E - market price to earning per share, • P/NAV - market price to net assets, • RoNAV - return on net assets, Valuation according to P/NAV regression analysis Regression analysis consists in defining the relation between two variables(explanatory and dependant variables) and further on in forecasting the value ofone variable depending on the value of the second one. In case of bank valuation, this analysis consist in assessing the value of thebank's equity on the basis of relations between future equity profitability,expressed as return on net assets (RoNAV), and premium/discount expressed as theprice of shares to net assets value. Key elements of this method pertain to the selection of companies within thesample similar banks as those used for stock market multiplier analysis),definition of the time bracket for analysed RoNAV, definition of RoNAV P/NAVratios for banks within the sample, analysis of statistical regression betweenRoNAV and P/NAV and assessment of the bank's value further to regressionparameters and RoNAV. Three above-mentioned three valuation methods generated the following results: 1. Pekao SA's value falls between 26.773 - 31.510 billion zloty (thereforevalue per share is in the range of 160.5 - 188.9 zloty) 2. value of taken-over part of BPH SA falls between 14.667 - 19.059 billionzloty (therefore value per share is in the range of 510.4 - 663.7 zloty). Further to the above-quoted valuation, share swap ratio for BPH S.A. sharesexchanged for newly issued Pekao SA's shares was defined (the brackets weredefined in each valuation method as the quotient of the highest value of takenover part of BPH per BPH share and the lowest value of Pekao SA per share, andby reversed action, namely as the quotient of the lowest value of taken overpart of BPH per BPH share and the highest value of Pekao SA per share). Thisexercise was aimed at achieving the broadest possible scope of share swap ratio.The following data was generated in the course of the exercise: Valuation method Share swap ratioDividend Discount Model 2.7 3.7Market Multiplier Analysis 2.9 3.6Regression Analysis Model 3.1 3.8Average 2.9 3.7 The last phase was to define share swap rate, which was calculated asarithmetical average of average marginal swap rates, computed further to theapplied valuation method. This brought about share swap rate of 3.3 - in return for transfer of part ofBPH SA's assets onto Pekao S.A.. each BPH SA's shareholders will receive 3.3newly issued Pekao SA's shares for each BPH SA's share they hold. 2/ Division of BPH SA's property and financial results Assets and liabilities were divided further to the pre-defined allocation keys.Individual items from balance sheet and profit and loss account were dividedaccording to the following guidelines, with due account to their types: • according to accounting records of spin-off assets elements transferredto Pekao SA or New BPH SA, based on CPK of selected entitles, • according to their target operations, i.e. in new BPH SA or Pekao SA,further to binding legal agreements and business decisions, • according to the following ratio: number of branches allocated to PekaoS.A. or New BPH SA, divided by the total number of Bank BPH SA's branches, • according to the type, number or value of transactions recorded onindividual assets items, • with the use of balance sheet item proportion, with due account to thescope of operations of the New BPH Sa after spin-off, i.e. excluding assetselements which shall be transferred to Pekao SA in line with business agreementsand decisions, • with the use of controlling keys, applied in dividing commission costsand revenues, accounting for specific character of transferred 200/280 Branchesand their operational scope stemming from binding legal agreements and businessdecisions, • by allocating accounts of the house loans and savings office andleasing to 200 branches of the New BPH SA, as well as all the products whichwere sold by agents to other branches allocated to Pekao S.A., • with the use of the IT model, which identifies planned division betweenthe New BPH SA and the New Pekao SA for each IT services and each element. Thisdivision contains both allocation of direct costs and proportion of costspertaining to outsourcing. Allocation and outsourcing ratios were calculatedfurther to planned use of IT funds, • with the use of keys pertaining to full time equivalents, based on theproportion of planned employment in the New BPH SA or Pekao SA after spin-off toemployment level as at 1st October 2006 in BPH SA before spin-off. Division of BPH's assets and liabilities thousand zloty As at 01.10.2006 Assets Mini BPH BPH 280Cash and operations with Central Bank 1,177,292 518,031 Financial assets for trading 22,620 2,560,998Amounts due from banks 500,653 12,739,362including: impairment write-offs 0 -589 Amounts due from customers 5,323,977 27,305,542including: impairment write-offs -246,243 -1,073,675Other financial assets 716,373 10,105,630Tangibles assets 332,978 587,188Intangible assets 221,503 61,019Assets for sales 714 238,656Other assets 181,980 690,952 including: assets from deferred income tax 92,454 455,659Total assets 8,478,090 54,807,378 As at 01.10.2006 Liabilities Mini BPH BPH 280Amounts due to Central Bank 94,181 0Amounts due to banks 1,355,006 6,279,040Amounts due to customers 4,832,017 33,801,104Liabilities from issue of own securities 431,528 7,243,968Provisions 63,153 514,181Including: provisions for deferred income tax 40,352 437,157Financial liabilities for trading 22,620 1,131,897Other liabilities 309,108 862,083 Total equity: 1,370,477 4,975,105Total liabilities: 8,478,090 54,807,378 The following lists were attached to the Spin-Off Plan: 1. list of transferred Branches, 2. corporate centres, 3. macroregions, 4. debt securities, 5. status of debt securities issued by BPH, 6. derivatives, 7. contracts with contractors, 8. shares and participation units, 9. ownership rights, perpetual usufruct rights, co-operative right topremises, 10. property lease agreements, 11. court proceedings, civil proceedings, settlement and liquidationproceedings, 12. trademarks, 13. intellectual property rights, 14. administrative decisions, permits, licenses and benefits, 15. court proceedings covering civil proceedings related to transferredBranches, 16. location of ATMs This opinion together with grounds contains 17 pages initialled by the charteredauditor. Appendices: • The Spin-off Plan This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BPKD.L