31st Oct 2005 07:01
Telefonica SA31 October 2005 FOR IMMEDIATE RELEASE 31 October 2005 Not for release, publication or distribution in whole or in part in or into the United States, Canada, Australia or Japan RECOMMENDED CASH OFFER BY GOLDMAN SACHS INTERNATIONAL AND CITIGROUP ON BEHALF OF TELEFONICA (OR A WHOLLY-OWNED SUBSIDIARY OF TELEFONICA) FOR O2 The Boards of Directors of Telefonica and O2 are pleased to announce today thatagreement has been reached on the terms of a recommended cash offer to be madeby Goldman Sachs International and Citigroup, on behalf of Telefonica, or awholly-owned subsidiary of Telefonica, to acquire the entire issued and to beissued share capital of O2. The Offer will be at 200 pence in cash for each O2Share which values O2 at approximately £17.7 billion. Highlights: • The combination with O2 is a logical step for Telefonica in pursuing itsstrategic goal of providing its shareholders with both growth and cash returns.Telefonica believes that the combination with O2 will: - accelerate Telefonica's superior growth profile relative to its peers - provide enhanced scale by entering two of Europe's largest markets, Germany and the UK, with critical mass - balance Telefonica's portfolio across businesses and regions - generate an estimated run-rate of EUR 293 million (£199 million) of quantified annual operating cost and capital expenditure synergies by 2008 - be immediately accretive to earnings per share, cash earnings per share and free cash flow per share(1) - enable Telefonica to preserve its stated shareholder remuneration policy based on dividends and share buy backs • The Offer of 200 pence per O2 Share represents a premium ofapproximately 22 per cent. over the middle market price of an O2 Share of 164.25pence at the close of business on 28 October 2005, being the last dealing daybefore this announcement. • O2 Shareholders will be entitled to receive an interim dividend for thesix months ended 30 September 2005 of 1.54 pence per O2 Share, which is expectedto be paid on 2 December 2005 to the registered holders of O2 Shares at theclose of business on 11 November 2005. • O2 will retain its existing brand and will continue to be based in theUK. O2's operating business will be led by the current management and Sir DavidArculus and Peter Erskine will join the Board of Directors of Telefonica. • The Directors of O2, who have been so advised by JPMorgan Cazenove andMerrill Lynch, consider the terms of the Offer to be fair and reasonable. Inproviding advice to the Directors of O2, JPMorgan Cazenove and Merrill Lynchhave taken into account the commercial assessments of the Directors of O2.Accordingly, the Directors of O2 unanimously intend to recommend holders of O2Shares to accept the Offer as they have irrevocably undertaken so to do inrespect of their own aggregate beneficial shareholdings. Merrill Lynch isdeemed to be a connected party to Telefonica. As a result, only JPMorganCazenove is acting as the independent financial adviser to O2 for the purposesof providing independent advice to the Board of O2 on the Offer under Rule 3 ofthe City Code. • Telefonica has received irrevocable undertakings to accept the Offerfrom the Directors of O2 in respect of 2,820,573 O2 Shares in aggregate,representing approximately 0.032 per cent. of O2's issued share capital. Theseundertakings will remain binding in the event of a higher competing offer. • A Loan Note Alternative of up to £1 billion will, subject to certainconditions, be made available. • The acquisition will be implemented by way of the Offer unlessTelefonica elects to implement it by way of a Scheme of Arrangement. The Offer is conditional, amongst other things, upon receiving the requiredregulatory clearances. Telefonica expects the Offer to complete in January2006. Further information on the terms and conditions to which the Offer willbe subject are set out in Appendix I and will be set out in the OfferDocumentation, which Telefonica expects to despatch to O2 Shareholders inNovember. The Chairman of Telefonica, Mr. Cesar Alierta said: "O2 is an excellent company that, driven by a top class management team, hasbeen able to become one of the highest growth mobile operators in Europe. Itsintegration in the Telefonica group will enhance our growth profile, it willallow us to gain economies of scale, it will open the group to the two largestEuropean markets with sizeable critical mass and it will balance our exposureacross business and regions. This transaction will be accretive from year one,it will allow us to preserve our shareholder remuneration policy and, in short,it will reinforce Telefonica's strategic goal of offering the best combinationof growth and cash returns to our shareholders." Commenting on the Offer, Sir David Arculus, Chairman of O2, said: "This Offer from Telefonica, which reflects the value created since demerger andthe potential of the O2 Group going forward, is an excellent opportunity for O2Shareholders to realise significant value in cash now. The combination of O2 andTelefonica will be a powerful force in international communications. Oursuccessful brand will be retained and extended bringing benefits to bothcustomers and employees as part of an enlarged, strengthened group." Commenting on the Offer, Peter Erskine, the Chief Executive of O2, said: "Since the emergence of O2 as a listed company in 2001, it has enjoyedconsiderable operational success and, in the process, delivered real value toshareholders. This transaction brings together two companies which are growingstrongly with highly complementary geographical activities." Goldman Sachs International and Citigroup are acting as financial advisers andcorporate brokers to Telefonica. JPMorgan Cazenove and Merrill Lynch are actingas financial advisers and corporate brokers to O2. This summary should be read in conjunction with, and is subject to, the fulltext of the following announcement. Appendix 2 of this announcement containsdefinitions of certain terms used in this summary and the followingannouncement. Appendix 3 of this announcement contains the sources and bases ofcertain information used in this summary and in the following announcement. There will be a call with analysts at 10a.m. London time (11a.m. Madrid time)today (Monday 31 October 2005). Dial in +34 9 178 896 39 +44 (0)20 7154 2688 Replay Number UK: +44 (0)20 8515 2499 PIN: 685099#Webcast http://www.Telefonica.es/investors Enquiries: Telefonica Tel: +34 91 584 4700 Investor Relations Office Fax: +34 91 531 9975 Citigroup Global Markets Limited Tel: +44 (0)20 7986 4000 Mark Simonian William Kennish Matthew Smith Goldman Sachs International - Madrid Tel: +34 91 700 6000 David Jimenez-Blanco Juande Gomez-Villalba Goldman Sachs International - London Tel: +44 (0) 20 7774 1000 Luca Ferrari Nick Reid Phil Raper (Corporate Broking) Hudson Sandler Tel: +44 (0)20 7796 4133 Andrew Hayes Fax: +44 (0)20 7796 3480 Sandrine Gallien O2 Richard Poston, Director Corporate Affairs Tel: +44 (0) 1752 628 039 David Nicholas Tel: +44 (0)7715 759176 David Boyd Tel: +44 (0)1753 628 230 John Crosse Tel: +44 (0)1753 628 198 JPMorgan Cazenove Tel: +44 (0)20 7588 2828 Charles Harman Edward Banks David Harvey-Evers Merrill Lynch Tel: +44 (0)20 7628 1000 Philip Yates Richard Taylor Mark Astaire (Corporate Broking) Goldman Sachs International, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively forTelefonica and no one else in connection with the matters described in thisannouncement and is not advising any other person and accordingly will not beresponsible to any person other than Telefonica for providing the protectionsafforded to clients of Goldman Sachs International or for providing advice inrelation to the matters described in this announcement. Citigroup Global Markets Limited, which is authorised and regulated in theUnited Kingdom by the Financial Services Authority, is acting exclusively forTelefonica and no one else in connection with the matters described in thisannouncement and is not advising any other person and accordingly will not beresponsible to any person other than Telefonica for providing the protectionsafforded to clients of Citigroup Global Markets Limited or for providing advicein relation to the matters described in this announcement. JPMorgan Cazenove, which is authorised and regulated in the United Kingdom bythe Financial Services Authority, is acting exclusively for O2 and no one elsein connection with the matters described in this announcement and is notadvising any other person and will not be responsible to any person other thanO2 for providing the protections afforded to clients of JPMorgan Cazenove or forproviding advice in relation to the matters described in this announcement. Merrill Lynch is acting exclusively for O2 and no one else in connection withthe matters described in this announcement and is not advising any other personand will not be responsible to any person other than O2 for providing theprotections afforded to clients of Merrill Lynch or for providing advice inrelation to the matters described in this announcement. The Offer will not be made, directly or indirectly, in or into, or by use of themails of, or by any means or instrumentality (including, without limitation,telephonically or electronically) of interstate or foreign commerce of, or anyfacility of any securities exchange of, the United States, Canada, Australia orJapan and will not be capable of acceptance by any such use, means,instrumentality or facility or from within the United States, Canada, Australiaor Japan. Accordingly, neither this announcement nor the Offer Documentation isbeing, and must not be, mailed or otherwise forwarded, transmitted, distributedor sent in, into or from the United States, Canada, Australia or Japan. Doingso may render invalid any purported acceptance of the Offer. All O2 Shareholdersor other persons (including nominees, trustees or custodians) who would orotherwise intend to, or may have a contractual or legal obligation to, forwardthis announcement or the Offer Documentation to any jurisdiction outside theUnited Kingdom should refrain from doing so and seek appropriate professionaladvice before taking any action. The Offer will be capable of acceptance only by persons outside the UnitedStates. Offering materials with respect to this Offer will not be, and may notbe, distributed in or sent to the United States and may not be used for thepurpose of solicitation of an offer to purchase or sell any securities in theUnited States. Any tenders received from persons resident in the United Statesor with United States mailing addresses will be rejected. The Loan Notes have not been and will not be registered under the United StatesSecurities Act of 1933, as amended, or under the securities laws of any state ofthe United States and are not and will not be registered under the securitieslaws of any other country. Therefore, the Loan Notes may not be offered, soldor delivered, directly or indirectly, in the United States. O2 Shareholders inthe United States, Canada, Australia or Japan or any other overseas jurisdictionin respect of which the issue of Loan Notes to them would be unlawful will notbe entitled to elect to receive Loan Notes. Any person who, acting alone or acting together with any person(s) pursuant toan agreement or understanding (whether formal or informal) to acquire or controlsecurities of O2, owns or controls or becomes the owner or controller, directlyor indirectly, of one per cent. or more of any class of securities of O2 isgenerally required under the provisions of Rule 8 of the City Code to notify aRegulatory Information Service as specified in the Listing Rules and the Panelby not later than 12:00 noon (London time) on the London business day followingthe date of the transaction of every dealing in such securities during the offerperiod to the date on which the Offer becomes or is declared unconditional inall respects or lapses or is otherwise withdrawn (or, if implemented by way ofthe Scheme of Arrangement, to the date of the relevant Court Meeting or the dateon which the Scheme of Arrangement is withdrawn). Dealings by Telefonica or O2or by their respective 'associates' (as defined in the City Code) in any classof securities of O2 until the end of such offer period must also be disclosed.If you are in doubt as to the application of Rule 8 to you, please contact anindependent financial adviser authorised under the Financial Services andMarkets Act 2000, consult the Panel's website at www.thetakeoverpanel.org.uk orcontact the Panel on telephone number +44 20 7638 0129; fax +44 20 7236 7013.The above provisions reflect the disclosure requirements as at the date of thisannouncement. Revised disclosure requirements will apply with effect from 7November 2005 which will require the public disclosure of dealing by personsinterested in one per cent. or more of any class of relevant securities in O2.If in any doubt about the effect of the changes, you should visit the Panel'swebsite for further details of the revised disclosure requirements. This document contains statements that constitute forward looking statements inits general meaning and within the meaning of the Private Securities LitigationReform Act of 1995. These statements appear in a number of places in thisdocument and include statements regarding the intent, belief or currentexpectations of the customer base, estimates regarding future growth in thedifferent business lines and the global business, market share, financialresults and other aspects of the activity and situation relating to Telefonica.The forward-looking statements in this document can be identified, in someinstances, by the use of words such as "expects", "anticipates", "intends", "believes", and similar language or the negative thereof or by forward-lookingnature of discussions of strategy, plans or intentions. Such forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties and actual results may differ materially fromthose in the forward looking statements as a result of various factors. FOR IMMEDIATE RELEASE 31 October 2005 Not for release, publication or distribution in whole or in part in or into the United States, Canada, Australia or Japan RECOMMENDED CASH OFFER BY GOLDMAN SACHS INTERNATIONAL AND CITIGROUP ON BEHALF OF TELEFONICA (OR A WHOLLY-OWNED SUBSIDIARY OF TELEFONICA) FOR O2 1. Introduction The Boards of Directors of Telefonica and O2 are pleased to announce today thatagreement has been reached on the terms of a recommended cash offer to be madeby Goldman Sachs International and Citigroup, on behalf of Telefonica, or awholly-owned subsidiary of Telefonica, to acquire the entire issued and to beissued share capital of O2. The Offer values each O2 Share at 200 pence and theentire issued and to be issued share capital of O2 at approximately £17.7billion. The Offer, which is subject to the conditions and further terms set out below(and in Appendix 1) and to be set out in the formal Offer Documentation whenissued, will be made on the following basis: for each O2 Share 200 pence in cash The Offer represents a premium of approximately 22 per cent. over the middlemarket price of an O2 Share of 164.25 pence at the close of business on 28October 2005, being the last dealing day before this announcement. O2 Shareholders will be entitled to receive an interim dividend for the sixmonths ended 30 September 2005, which will be 1.54 pence per O2 Share. 2. The Loan Note Alternative As an alternative to all or some of the cash consideration of 200 pence per O2Share, holders of O2 Shares (other than certain Overseas Shareholders) whovalidly accept the Offer may elect to receive Loan Notes on the following basis: for every £1 of cash consideration £1 nominal of Loan Notes The Loan Notes will be issued credited as fully paid in amounts and integralmultiples of £1 nominal and any fractional entitlements will be disregarded.The Loan Notes will be issued by or guaranteed by Telefonica and will bearinterest, payable in arrears in half-yearly instalments on 30 June and 31December each year, at a rate of 0.5 per cent. below six month sterling LIBOR asdetermined on the first business day of each interest period. The first paymentof interest will be on 30 June 2006. The Loan Notes will not be transferable. No application will be made for the Loan Notes to be listed or dealt in on anystock exchange. The Loan Notes will not be available to O2 Shareholders in theUnited States, Canada, Australia or Japan or in certain other jurisdictionsincluding those in respect of which the issue of Loan Notes would be unlawful. The Loan Notes will be redeemable, at the option of their holders, on anyinterest payment date between 31 December 2006 and 31 December 2010. On 31December 2010, all outstanding Loan Notes will be redeemed. The offeror willhave the right to redeem all (but not some only) of the Loan Notes if, at anytime on or after 30 June 2008, the total nominal amount of Loan Notesoutstanding is less than either £50 million or 10 per cent. of the originallyissued nominal value. The issue of Loan Notes will be subject to a maximum nominal amount of £1billion. In the event that elections by O2 Shareholders for the Loan Notesexceed this nominal value, O2 Shareholders will receive their election reducedpro rata so that the total issued Loan Notes do not exceed a nominal value of £1billion. If valid elections for the Loan Note Alternative will not result in the issue ofat least £75 million nominal of Loan Notes, no Loan Notes will be issued, unlessthe issuer otherwise determines, in which event O2 Shareholders who have validlyaccepted the Offer and elected for the Loan Note Alternative will receive cashin accordance with the basic terms of the Offer. Elections for the Loan Note Alternative will be conditional, amongst otherthings, on the Offer becoming or being declared unconditional in all respects. Full details of the Loan Notes will be set out in the formal OfferDocumentation. 3. Terms and Conditions of the Offer The O2 Shares will be acquired by the offeror fully paid and free from allliens, equities, charges, encumbrances and other interests and together with allrights now or hereafter attaching thereto, including the right to receive andretain all dividends and other distributions declared, made or paid hereafter,except for the interim dividend of 1.54 pence which is expected to be paid on 2December 2005 to the registered holders of O2 Shares at the close of business on11 November 2005. The conditions and certain further terms of the Offer are setout or referred to in Appendix 1. 4. Irrevocable Undertakings Telefonica has received irrevocable undertakings to accept the Offer from theDirectors of O2 in respect of 2,820,573 O2 Shares representing in aggregateapproximately 0.032 per cent. of the issued share capital of O2. The irrevocable undertakings given by the Directors of O2 will remain binding ifa higher competing offer is made for O2. 5. Background to and reasons for the Offer Telefonica believes that the Offer will create significant value for itsshareholders by delivering a combination with an attractive growth profilerelative to its peers in the telecommunications sector, enhanced scale and aportfolio balanced across businesses and regions. Telefonica has developed a leading position in Spain in both mobile telephonyand fixed line, has exposure to the higher growth markets with a leadingposition in Latin America and has demonstrated a consistent focus on cashreturns to shareholders through dividend payments and share buybacks.Telefonica believes that the Offer is a logical step in pursuing this strategyof delivering value to Telefonica shareholders through a combination of growthand cash returns. Accelerates Telefonica's growth profile Telefonica believes that, following the Offer, its superior growth profilerelative to its peers will be further enhanced. O2 has historically achievedhigher growth rates relative to other mobile operators in the markets in whichit is present and is expected to continue to do so. Additionally, with a mobilesubscriber base of 116 million subscribers on a pro forma basis following theOffer (including O2 as at June 2005), Telefonica's exposure to the fastergrowing mobile sector is expected to be greater than its peers. Realises benefits of scale Telefonica believes that scale is increasingly important in thetelecommunications sector to enable operators to improve the service provided toits customers. In addition, benefits in areas such as purchasing, networkoptimisation and access to content services provide further scope foroperational efficiencies. O2, which as at 30 June 2005 had 24.6 millioncustomers, will significantly expand Telefonica's mobile footprint by providingentry into Europe's two largest mobile markets, the UK and Germany, withwell-established operations that have achieved critical mass within thosemarkets. This enhanced scale will provide benefits to both O2's andTelefonica's existing European operations. Telefonica's recent acquisitions of the BellSouth Latin America assets and CeskyTelecom demonstrate Telefonica's success in achieving meaningful scale-drivenbenefits in areas such as handset purchasing, unified logistic processes,roll-out of products and services into new geographies. Telefonica expects toexceed the synergies announced for the BellSouth Latin America acquisition byapproximately 50 per cent. Balances portfolio across businesses and regions The combination with O2 enhances Telefonica's growth prospects through increasedexposure to the mobile sector and through greater geographical diversity. On astandalone basis, analysts' expect Telefonica, during the period 2005 to 2008,to generate over half its EBITDA from its fixed line operations andapproximately two thirds of its EBITDA from Spain. Based on analysts' forecastsfor Telefonica and O2, on a pro forma basis following the Offer, over half ofTelefonica's EBITDA is expected to be generated from the faster growing mobilebusiness and the majority of its EBITDA from outside Spain. Building on a successful platform O2 has been successful in commercial and product development as well as brandinnovation. In addition, O2 has demonstrated an excellent track record ofdelivery with strong service revenue and EBITDA growth in the UK, critical massand market leading ARPU in Germany with significant potential for furtherrevenue growth and a highly cash generative business in Ireland. In addition,its digital emergency services communications network, Airwave, has grownsignificantly over the last two years and is expected to benefit from additionalrevenue generating contracts. Telefonica is looking forward to the ongoinginvolvement of O2's management team, which will continue to lead O2 and iscommitted to developing O2. O2 will remain a UK-based entity. Significant synergies The combination of O2 and Telefonica is expected to generate substantialsynergies. Telefonica expects to achieve these benefits in areas such asnetwork cost efficiencies, handset and equipment purchasing and other costsavings. Telefonica has calculated that the combination is expected to generateannual savings of EUR 293 million (£199 million) by 2008, comprising EUR 186million (£127 million) of pre-tax operating cost savings and EUR 107 million(£73 million) of capital expenditure savings. Telefonica estimates that the netpresent value of these quantified synergies will be EUR 3.3 billion (£2.2billion). Additionally, Telefonica expects to benefit from O2's existing netoperating losses, which Telefonica estimates as having net present value of EUR1.4 billion (£950 million). Telefonica expects that the one-off pre-tax cost ofachieving these synergies is EUR 39 million (£27 million) (2). Telefonica has also identified but not quantified a number of areas wherefurther synergies could also be achieved including incremental benefits from IT,product and software development, content purchasing, advertising, corporatesolutions development, content services development, new services and roaming.Additionally, Telefonica has not taken into account any potential benefits fromtax deductible goodwill amortisation. Financial impact on Telefonica The Offer is expected to be immediately accretive to earnings per share, cashearnings per share and free cash flow per share for Telefonica.(3) Telefonica'sratio of net debt to EBITDA is expected to increase as a result of thistransaction and Telefonica is currently in discussions with the rating agenciesin relation to the Offer. Telefonica has structured the financing for the Offerto achieve a single A- rating or no more than one notch below. Telefonicaconfirms that it will continue its ongoing share buyback programme and itreaffirms its current dividend policy. Telefonica is not contemplating an issueof equity as a consequence of the Offer. 6. O2 Management and Brand The O2 Group will continue to be based and to operate from within the UK.Further, the powerful and successful O2 brand will be maintained. 7. Information on O2 O2 has one hundred per cent. ownership of mobile network operators in threecountries: the UK, Germany and Ireland - as well as a leading mobile internetportal business. All of these businesses are branded as 'O2'. O2 also hasoperations on the Isle of Man (Manx Telecom) and owns O2 Airwave, an advanced,digital emergency communication service. In addition, O2 has established theTesco Mobile and Tchibo Mobilfunk joint venture businesses in the UK and Germanyrespectively. O2 recently launched the i-mode mobile internet service in the UKand Ireland, and will introduce a similar service in Germany in 2006. O2 has around 25 million customers and some 15,000 employees. For the yearended 31 March 2005 it reported revenues of £6.683 billion, EBITDA of £1.768billion and net assets of £10.281 billion. 8. Information on Telefonica Telefonica is one of the leading companies in the telecommunications sectorglobally, with a presence in Europe, Africa and Latin America. As at June 2005,Telefonica had 145 million customers of which approximately 72 per cent. wereoutside Spain. Telefonica is listed on a number of stock exchanges, includingthe Madrid, New York, London, Frankfurt, Paris, Tokyo and Buenos Aires stockexchanges and, as at 28 October 2005, the last dealing day before thisannouncement, Telefonica had a market capitalisation of EUR 67.0 billion (£45.6billion). In Spain, Telefonica has over 80 years' experience of telecommunications, withover 16 million fixed lines and close to 5 million data and internet accesslines and, as at June 2005, more than 19 million mobile customers. Telefonica has had a presence in Latin America for over 15 years, withcumulative investments in infrastructure and acquisitions of over EUR 70 billionfor the period from 1990 to 2004. Telefonica is a leading operator in Brazil,Argentina, Chile and Peru and it has substantial operations in Colombia,Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Puerto Rico, Uruguayand Venezuela as at June 2005. It is a leading operator in the region, and as atDecember 2004 it had 22.8 million fixed lines, and over 56.5 million cellularcustomers, in addition to offering data and internet access as well as integralcommunications solutions for businesses. As at 31 December 2004, Telefonica had over 173,000 employees, of which 34 percent. were located in Spain and 62 per cent. in Latin America. The largestnumber of employees by country are in Spain (nearly 60,000) and Brazil (over51,000), followed by Argentina (over 15,000), and Peru and Chile (with over10,000 each). For the year ended 31 December 2004, Telefonica reported revenues of EUR 30.3billion, EBITDA of EUR 13.2 billion and earnings per share of EUR 0.581 perTelefonica share. As at 31 December 2004, Telefonica reported shareholdersequity of EUR 16.2 billion. 9. Financing the Offer Telefonica has obtained committed financing, arranged by Citigroup, GoldmanSachs International and the Royal Bank of Scotland, sufficient to enableTelefonica to satisfy in full the cash consideration payable to O2 Shareholdersand otherwise to fulfil its commitments under the terms of the Offer. Furtherinformation on the financing of the Offer will be set out in the Offer Document. 10. Management and Employees The board of Directors of Telefonica has confirmed that the existing employmentrights, including pension rights, of the management and employees of the membersof the O2 Group will be fully safeguarded. The board of Directors of Telefonica will procure, as soon as practicablefollowing the date the Offer becomes or is declared wholly unconditional theappointment of (a) two persons nominated by O2, as members of the board ofDirectors of Telefonica, one of whom will also be appointed to the executivecommittee of the Board of Directors of Telefonica and will be part ofTelefonica's management committee, and (b) one person, nominated by O2, as amember of the Board of Directors of Telefonica Moviles SA. O2 has decided to nominate Sir David Arculus and Peter Erskine to the board ofTelefonica, with Peter Erskine also to be nominated to the Telefonica executivecommittee and management committee. Rudolf Groeger will be nominated to theboard of Telefonica Moviles S.A. 11. O2 Share Option Schemes The Offer (but not necessarily the Loan Note Alternative) will extend to any O2Shares unconditionally allotted or issued whilst the Offer remains open foracceptance pursuant to the exercise of options under the O2 Share Option Schemesor any O2 Shares which vest pursuant to the O2 Share Option Schemes. To the extent that options under the O2 Share Option Schemes are not soexercised, and if the Offer becomes or is declared unconditional in allrespects, Telefonica will make appropriate proposals to option holders in duecourse. 12. Framework Agreement Telefonica has entered into a framework agreement with O2 under which O2 hasundertaken amongst other things to pay Telefonica one per cent. of the value ofthe Offer calculated on a fully diluted basis in accordance with the City Codeif following this announcement but before the Offer lapses or is withdrawn anycompeting offer is announced and the Offer subsequently lapses or is withdrawnand such competing offer becomes or is declared wholly unconditional (or, if itis implemented as a Scheme of Arrangement, becomes effective). The frameworkagreement also contains provisions governing the conduct of the transaction andof the parties. 13. Recommendation The Directors of O2, who have been so advised by JPMorgan Cazenove and MerrillLynch, consider the terms of the Offer to be fair and reasonable. In providingadvice to the Directors of O2, JPMorgan Cazenove and Merrill Lynch have takeninto account the commercial assessments of the Directors of O2. Accordingly,the Directors of O2 unanimously intend to recommend holders of O2 Shares toaccept the Offer as they have irrevocably undertaken so to do in respect oftheir own aggregate beneficial shareholdings. Merrill Lynch is deemed to be aconnected party to Telefonica. As a result, only JPMorgan Cazenove is acting asthe independent financial advisor to O2 for the purposes of providingindependent advice to the Board of O2 on the Offer under Rule 3 of the CityCode. 14. De-listing and compulsory acquisition If the Offer becomes or is declared unconditional in all respects, andsufficient acceptances are received, Telefonica intends to procure that O2 willmake an application to de-list the O2 Shares from the Official List and tocancel trading of O2 Shares on the London Stock Exchange's market for listedsecurities. It is anticipated that cancellation of listing on the Official List andadmission to trading on the London Stock Exchange will take effect no earlierthan 20 business days after Telefonica has acquired or agreed to acquire 75 percent. of the voting rights attaching to the O2 Shares. De-listing wouldsignificantly reduce the liquidity and marketability of any O2 Shares notassented to the Offer at that time. If the offeror receives acceptances under the Offer in respect of, or otherwiseacquires, 90 per cent. or more of the O2 Shares to which the Offer relates, theofferor will exercise its rights pursuant to the provisions of sections 428 to430F (inclusive) of the Companies Act to acquire compulsorily the remaining O2Shares in respect of which the Offer has not been accepted. It is also intended that, following the Offer becoming or being declaredunconditional, O2 will be re-registered as a private company under the relevantprovisions of the Companies Act. In accordance with Rule 2.10 of the City Code, as at the close of business on 30October 2005, the issued share capital of O2 comprised 8,766,496,589 ordinaryshares of 0.1 pence each. In addition, as at 30 September 2005, the most recentdate for which information is available, options to subscribe for and awards toacquire a total of 142,289,639 ordinary shares of 0.1 pence each remainedoutstanding. No further share awards have been made or options granted sincethis date. The International Securities Identification Number for O2 Shares isGB00B05KYV34. 15. General It is expected that the Offer Documentation, which will include a letter ofrecommendation from the Chairman of O2, will be despatched to O2 Shareholders byTelefonica in November 2005. The Offer is expected to close in January 2006. The Offer will be on the terms and subject to the conditions set out herein andin Appendix I and to be set out in the Offer Documentation. The Offer will be governed by English law and will be subject to thejurisdiction of the English courts. The acquisition will be implemented by way of the Offer unless Telefonica electsto have it implemented by way of a Scheme of Arrangement. Save as set out above neither Telefonica, nor any of its directors, nor, so faras Telefonica is aware, any person deemed to be acting in concert with it, ownsor controls any O2 Shares or has any option to acquire any O2 Shares or anyrights to subscribe for or purchase the same, or has entered into any derivativereferenced to securities of O2 which remains outstanding. In view of therequirement for confidentiality, Telefonica has not made any enquiries inrespect of certain parties who may be deemed by the Panel to be acting inconcert with it for the purposes of the Offer. Appendix 2 contains definitions of certain terms used in this announcement.Details of the sources and bases of certain information set out in thisannouncement are included in Appendix 3. This announcement does not constitute an offer or an invitation to purchase anyO2 Shares. Any response to the Offer should be made only on the basis of theinformation contained in the Offer Documentation. Enquiries: Telefonica Tel: +34 91 584 4700 Investor Relations Office Fax: +34 91 531 9975 Citigroup Global Markets Limited Tel: +44 (0)20 7986 4000 Mark Simonian William Kennish Matthew Smith Goldman Sachs International - Madrid Tel: +34 91 700 6000 David Jimenez-Blanco Juande Gomez-Villalba Goldman Sachs International - London Tel: +44 (0) 20 7774 1000 Luca Ferrari Nick Reid Phil Raper (Corporate Broking) Hudson Sandler Tel: +44 (0)20 7796 4133 Andrew Hayes Fax: +44 (0)20 7796 3480 Sandrine Gallien O2 Richard Poston, Director Corporate Affairs Tel: +44 (0) 1752 628039 David Nicholas Tel: +44 (0)7715 759176 David Boyd Tel: +44 (0)1753 628230 John Crosse Tel: +44 (0)1753 628198 JPMorgan Cazenove Tel: +44 (0)20 7588 2828 Charles Harman Edward Banks David Harvey-Evers Merrill Lynch Tel: +44 (0)20 7628 1000 Philip Yates Richard Taylor Mark Astaire (Corporate Broking) Goldman Sachs International, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively forTelefonica and no one else in connection with the matters described in thisannouncement and is not advising any other person and accordingly will not beresponsible to any person other than Telefonica for providing the protectionsafforded to clients of Goldman Sachs International or for providing advice inrelation to the matters described in this announcement. Citigroup Global Markets Limited, which is authorised and regulated in theUnited Kingdom by the Financial Services Authority, is acting exclusively forTelefonica and no one else in connection with the matters described in thisannouncement and is not advising any other person and accordingly will not beresponsible to any person other than Telefonica for providing the protectionsafforded to clients of Citigroup Global Markets Limited or for providing advicein relation to the matters described in this announcement. JPMorgan Cazenove, which is authorised and regulated in the United Kingdom bythe Financial Services Authority, is acting exclusively for O2 and no one elsein connection with the matters described in this announcement and is notadvising any other person and will not be responsible to any person other thanO2 for providing the protections afforded to clients of JPMorgan Cazenove or forproviding advice in relation to the matters described in this announcement. Merrill Lynch is acting exclusively for O2 and no one else in connection withthe matters described in this announcement and is not advising any other personand will not be responsible to any person other than O2 for providing theprotections afforded to clients of Merrill Lynch or for providing advice inrelation to the matters described in this announcement The Offer will not be made, directly or indirectly, in or into, or by use of themails of, or by any means or instrumentality (including, without limitation,telephonically or electronically) of interstate or foreign commerce of, or anyfacility of any securities exchange of, the United States, Canada, Australia orJapan and will not be capable of acceptance by any such use, means,instrumentality or facility or from within the United States, Canada, Australiaor Japan. Accordingly, neither this announcement nor the Offer Documentation isbeing, and must not be, mailed or otherwise forwarded, transmitted, distributedor sent in, into or from the United States, Canada, Australia or Japan. Doingso may render invalid any purported acceptance of the Offer. All O2 Shareholdersor other persons (including nominees, trustees or custodians) who would orotherwise intend to, or may have a contractual or legal obligation to, forwardthis announcement or the Offer Documentation to any jurisdiction outside theUnited Kingdom, should refrain from doing so and seek appropriate professionaladvice before taking any action. The Offer will only be capable of acceptance by persons outside the UnitedStates. Offering materials with respect to this Offer will not be, and may notbe, distributed in or sent to the United States and may not be used for thepurpose of solicitation of an offer to purchase or sell any securities in theUnited States. Any tenders received from persons resident in the United Statesor with United States mailing addresses will be rejected. The Loan Notes have not been and will not be registered under the United StatesSecurities Act of 1933, as amended or under the securities laws of any state ofthe United States and are not and will not be registered under the securitieslaws of any other country. Therefore, the Loan Notes may not be offered, soldor delivered, directly or indirectly, in the United States. Holders of O2Shares in the United States, Canada, Australia or Japan or any other overseasjurisdiction in respect of which the issue of Loan Notes to them would beunlawful will not be entitled to elect to receive Loan Notes. Any person who, acting alone or acting together with any person(s) pursuant toan agreement or understanding (whether formal or informal) to acquire or controlsecurities of O2, owns or controls or becomes the owner or controller, directlyor indirectly, of one per cent. or more of any class of securities of O2 isgenerally required under the provisions of Rule 8 of the City Code to notify aRegulatory Information Service as specified in the Listing Rules and the Panelby not later than 12:00 noon (London time) on the London business day followingthe date of the transaction of every dealing in such securities during the offerperiod to the date on which the Offer becomes or is declared unconditional inall respects or lapses or is otherwise withdrawn (or if implemented by way of ascheme of arrangement to the date of the relevant Court Meeting or the date onwhich the scheme is withdrawn). Dealings by Telefonica or O2 or by theirrespective 'associates' (as defined in the City Code) in any class of securitiesof O2 until the end of such offer period must also be disclosed. If you are indoubt as to the application of Rule 8 to you, please contact an independentfinancial adviser authorised under the Financial Services and Markets Act 2000,consult the Panel's website at www.thetakeoverpanel.org.uk or contact the Panelon telephone number +4420 7638 0129; fax +4420 7236 7013. The above provisionsreflect the disclosure requirements as at the date of this announcement.Revised disclosure requirements will apply with effect from 7 November 2005which will require the public disclosure of dealing by persons interested in oneper cent. or more of any class of relevant securities in O2. If in any doubtabout the effect of the changes you should visit the Panel's website for furtherdetails of the revised disclosure requirements. This announcement contains statements that constitute forward looking statementsin its general meaning and within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These statements appear in a number of places inthis document and include statements regarding the intent, belief or currentexpectations of the customer base, estimates regarding future growth in thedifferent business lines and the global business, market share, financialresults and other aspects of the activity and situation relating to Telefonica.The forward-looking statements in this announcement can be identified, in someinstances, by the use of words such as "expects", "anticipates", "intends", "believes", and similar language or the negative thereof or by forward-lookingnature of discussions of strategy, plans or intentions. Such forward-looking statements are not guarantees of future performance andinvolve risks and uncertainties and actual results may differ materially fromthose in the forward looking statements as a result of various factors. APPENDIX 1 Conditions and certain further terms of the Offer 1. Conditions The Offer, which will be made by Goldman Sachs International and Citigroup onbehalf of Telefonica (or a wholly-owned subsidiary of Telefonica), will besubject to the following conditions: (A) valid acceptances being received (and not, where permitted,withdrawn) by not later than 3.00 pm on the first closing date of the Offer (orsuch later time(s) and/or date(s) as the offeror may, subject to the rules ofthe City Code, decide) in respect of not less than 90 per cent. (or such lesserpercentage as the offeror may decide) in nominal value of O2 Shares to which theOffer relates, provided that this condition will not be satisfied unless theofferor (and/or any of its wholly-owned subsidiaries) shall have acquired, oragreed to acquire, whether pursuant to the Offer or otherwise, and whetherdirectly or indirectly, O2 Shares carrying, in aggregate, more than 50 per cent.of the voting rights then normally exercisable at general meetings of O2. For the purposes of this condition: (i) O2 Shares which have been unconditionally allotted shallbe deemed to carry the voting rights they will carry upon being entered in theregister of members of O2; and (ii) the expression "O2 Shares to which the Offer relates"means (i) O2 Shares unconditionally allotted or issued on or before the date theOffer is made and (ii) O2 Shares unconditionally allotted or issued after thatdate but before the time at which the Offer ceases to be open for acceptance (orsuch earlier date, not being earlier than the date on which the Offer becomesunconditional as to acceptances or, if later, the first closing date of theOffer, as Telefonica may, subject to the City Code, decide) but excluding anyissued O2 Shares which are held in treasury, except to the extent that they aretransferred out of treasury whilst the Offer remains open for acceptance and anyO2 Shares which, on the date the Offer is made, are held or (otherwise thanunder such a contract as is described in s.428(5) Companies Act 1985) contractedto be acquired by Telefonica and/or its associates (within the meaning of s.430ECompanies Act 1985); (B) to the extent that the acquisition of all the O2 Shares byTelefonica constitutes a concentration with a Community dimension within thescope of Council Regulation (EC) 139/2004 (the "ECMR"): (i) the Commission of the European Communities (the "EuropeanCommission") adopting a decision under Article 6(1)(b) of the ECMR in termssatisfactory to Telefonica declaring such acquisition to be compatible with thecommon market; or (ii) such acquisition being deemed to have been declaredcompatible with the common market pursuant to Article 10(6) of the ECMR; or (iii) in the event that a request is made under Article 9(2) ofthe ECMR by a European Union state, the European Commission indicating, in termssatisfactory to Telefonica, that it does not intend to refer such acquisition orany aspect of it to the competent authorities of such state in accordance withArticle 9 of the ECMR and no such referral being deemed to have been madepursuant to Article 9(5) of the ECMR; (C) the receipt of evidence in a form and substance satisfactory toTelefonica that, if required, all filings have been made and all the waitingperiods relating to the Offer have expired or been terminated pursuant to theHart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended); (D) the waiting period under any other applicable anti-trust orcompetition laws of any other affected jurisdictions expiring, and all relatedconsents, licences, registrations, or declarations of, or filings with, anycompetent authority in any such jurisdictions required to be obtained or madeprior to the implementation of such acquisition having been obtained or made ona basis satisfactory to Telefonica; (E) no government or governmental or quasi-governmental authority(whether supranational, national, regional, local or otherwise) or statutory orregulatory or investigative body or other authority (including any anti-trust ormerger control authority), court, tribunal, arbitrary body, trade agency,association, institution or professional or environmental body or (withoutprejudice to the generality of all the foregoing) any other person or body inany jurisdiction (each a "Relevant Authority") having decided to take,institute, implement or threaten any action, proceedings, suit, investigation,enquiry or reference, or made, proposed or enacted any statute, regulation,order, decision or judgment, or taken any other steps which would or mightreasonably be expected to: (i) make the Offer, or its implementation, or the proposedacquisition of any O2 Shares by Telefonica or any of its subsidiaries,subsidiary undertakings, associated undertakings or any joint venture,partnership, firm or company in which any of them has a substantial interest(together, the "Wider Telefonica Group") or the subscription by, or allotmentto, any member of the Wider Telefonica Group of O2 Shares or any matter arisingtherefrom or relating thereto, void, illegal or unenforceable under the laws ofany relevant jurisdiction or otherwise, directly or indirectly, restrain,prohibit, restrict or delay the Offer, its implementation or such proposedacquisition by any member of the Wider Telefonica Group or any matter arisingtherefrom or relating thereto or impose additional conditions or obligationswith respect thereto, or otherwise challenge or interfere therewith; (ii) result in a delay in the ability of any member of theWider Telefonica Group, or render any member of the Wider Telefonica Groupunable, to acquire all or some of the O2 Shares or other securities in O2 orrequire, prevent or delay a divestiture by any member of the Wider TelefonicaGroup of any such shares or securities; (iii) require, prevent or delay the divestiture or surrender byTelefonica or any member of the Wider Telefonica Group or by O2 or any of itsrespective subsidiaries, subsidiary undertakings, associated undertakings or anyjoint venture, partnership, firm or company in which any of them has asubstantial interest (together, the "Wider O2 Group") of all or any materialportion of their respective businesses, assets or properties; or of any consent,licence, permission or approval necessary to carry on their respectivebusinesses or which would or might impose any material limitation on the abilityof any of them to conduct all or any material portion of their respectivebusinesses or own all or any material portion of their respective assets orproperties; (iv) impose any material limitation on the ability of Telefonicaor any other member of the Wider Telefonica Group or of the Wider O2 Group toacquire, or to hold or exercise effectively, directly or indirectly, any rightsof ownership in respect of shares or other securities (or the equivalent) in anymember of the Wider O2 Group or to exercise management control over O2 or anyother member of the O2 Group; (v) otherwise materially adversely affect the business orprofits of any member of the Wider Telefonica Group or of the Wider O2 Group,the effect of which is material in the context of the Offer; (vi) except pursuant to Part XIII A of the Companies Act, requireany member of the Wider Telefonica Group or any member of the Wider O2 Group toacquire, or offer to acquire, any O2 Shares or other securities (or theequivalent) in any member of the Wider O2 Group owned by any third party; (vii) result in any member of the Wider O2 Group ceasing to be ableto carry on business under the name which it presently does so; or (viii) result in any member of the Wider Telefonica Group having todispose of any shares or other securities (or the equivalent) in any member ofthe Wider O2 Group or the Wider Telefonica Group, the effect of which ismaterial in the context of the Offer. and all applicable waiting and other time periods during which any RelevantAuthority could decide to take, institute, implement or threaten any suchaction, proceeding, suit, investigation, enquiry or reference or otherwiseintervene having expired, lapsed or been terminated; (F) all necessary filings and applications in connection with theOffer or its implementation having been made, all appropriate waiting periods(including extensions thereof) in respect of the Offer or its implementationunder any applicable legislation or regulations of any jurisdiction havingexpired, lapsed or been terminated and all authorisations, orders, recognitions,grants, consents, licences, confirmations, clearances, permissions and approvals("Authorisations") necessary or reasonably considered necessary or appropriatefor or in respect of the Offer and the proposed acquisition of any O2 Shares orother securities in, or control of, O2 by the Wider Telefonica Group, or whichare necessary for any member of the Wider O2 Group to carry on its business,having been obtained in terms and in a form satisfactory to Telefonica from allappropriate Relevant Authorities or other bodies with whom any member of theWider Telefonica Group or the Wider O2 Group has entered into contractualarrangements in each case where the absence of such authorisation is material inthe context of the Offer and all such Authorisations remaining in full force andeffect at the time at which the Offer becomes otherwise unconditional and allappropriate waiting periods (including extensions thereof) under any applicablelegislation and regulations of any jurisdiction having expired, lapsed or beenterminated and no intimation or notice of an intention to revoke or not to renewany of the same having been received, and all necessary statutory or regulatoryobligations in connection with the Offer and its implementation in any relevantjurisdiction having been complied with; (G) since 31 March 2005 and except as disclosed in O2's annual reportand accounts for the year then ended or as publicly announced by O2 prior to 31October 2005 (by the delivery of an announcement to a Regulatory InformationService) (such information being "publicly announced") or as can reasonably bedemonstrated to have been fairly disclosed to Telefonica prior to 31 October2005 by or on behalf of O2 in the course of negotiations, there being noprovision of any material arrangement, agreement, licence, permit, franchise orother instrument to which any member of the Wider O2 Group is a party or by orto which any such member or any of their assets is or are or may be bound,entitled or subject or any circumstance which, as a consequence of the making ofthe Offer or the acquisition or proposed acquisition by any member of the WiderTelefonica Group of some or all of the share capital or other securities in O2or because of change in control or management of O2 or otherwise, could or mightreasonably be expected to result in, in any case to an extent which is or wouldbe material in the context of the O2 Group taken as a whole: (i) any monies borrowed by or other indebtedness (actual orcontingent) of any member of the Wider O2 Group which is not already repayableon demand being or becoming repayable or being capable of being declaredrepayable immediately or prior to the stated maturity date or repayment date orthe ability of any such member to borrow monies or incur any indebtedness beingwithdrawn or inhibited; (ii) the creation of any mortgage, charge or other securityinterest over the whole or any part of the business, property or assets of anymember of the Wider O2 Group or any such security (whenever arising or havingarisen) becoming enforceable; (iii) any such arrangement, agreement, licence, permit, franchiseor other instrument, or the rights, liabilities, obligations or interests orbusiness of any member of the Wider O2 Group under any such arrangement,agreement, licence, permit franchise or other instrument, being terminated oradversely modified or adversely affected or any material action being taken orany material obligation arising thereunder; (iv) otherwise than in the ordinary course of business, anyassets or interest of any member of the Wider O2 Group being or falling to bedisposed of or charged or any right arising under which any such asset orinterest could be required to be disposed of or charged; (v) the interest or business of any member of the WiderTelefonica Group or the Wider O2 Group in or with any person, firm, company orbody (or any arrangements relating to such interest or business) beingterminated or adversely modified or affected; (vi) any member of the Wider O2 Group ceasing to be able to carryon business under any name under which it presently does so; or (vii) the value of, or the financial or trading position orprospects of, any member of the Wider O2 Group being prejudiced or adverselyaffected; (H) no member of the Wider O2 Group having since 31 March 2005(except as disclosed in the annual report and accounts of O2 for the year thenended) and unless publicly announced or as can otherwise reasonably bedemonstrated to have been fairly disclosed to Telefonica prior to 31 October2005 by or on behalf of O2 in the course of negotiations: (i) issued, agreed or authorised or proposed the issue ofadditional shares of any class, or securities convertible into, or rights,warrants or options to subscribe for or acquire, any such shares or convertiblesecurities (save as between O2 and its wholly owned subsidiaries and save forshares issued or options or other subscription rights granted under the O2 ShareOption Schemes); (ii) recommended, declared, paid or made or proposed torecommend, declare, pay or make any bonus, dividend or other distribution otherthan the interim dividend 1.54 pence per O2 Share or to O2 or a wholly-ownedsubsidiary of O2; (iii) other than a transaction between O2 and a wholly-ownedsubsidiary of O2 or between such wholly-owned subsidiaries merged with any bodycorporate or acquired or disposed of, or transferred, mortgaged or charged orcreated any security interest over, any assets or any right, title or interestin any asset (including shares and trade investments), or authorised, proposedor announced any intention to propose any merger, demerger, acquisition,disposal, transfer, mortgage, charge or security interest (other than in theordinary course of business); (iv) except as between O2 and its wholly-owned subsidiaries orbetween such wholly-owned subsidiaries issued, authorised or proposed the issueof any debentures or incurred or increased any indebtedness or contingentliability which in any case is material in the context of the O2 Group taken asa whole; (v) purchased, redeemed or repaid or announced any proposal topurchase, redeem or repay any of its own shares or other securities or redeemedor reduced or made any other change to any part of its share capital to anextent which (other than in the case of O2) is material in the context of the O2Group taken as a whole; (vi) entered into, or varied, or authorised, proposed orannounced its intention to enter into or vary any contract, transaction,arrangement or commitment (whether in respect of capital expenditure orotherwise) which is of a long-term, onerous or unusual nature or magnitude, orwhich involves or is reasonably likely to involve an obligation of such natureor magnitude and which in any case is material in the context of the O2 Grouptaken as a whole; (vii) except as between O2 and its wholly-owned subsidiaries orbetween such wholly-owned subsidiaries implemented, authorised, proposed orannounced its intention to implement or enter into any reconstruction,amalgamation, commitment, scheme or other transaction or arrangement otherwisethan in the ordinary course of business; (viii) entered into or made an offer (which remains open foracceptance) to enter into or vary the terms of any service agreement or anyother agreement or arrangement with any directors or senior executives or anyconnected person of any such person (within the meaning of s.346 Companies Act1985); (ix) waived or compromised any claim other than in the ordinarycourse of business which is material in the context of the O2 Group taken as awhole; (x) been unable, or admitted in writing that it is unable, topay its debts or having stopped or suspended (or threatened to stop or suspend)payment of its debts generally; (xi) except as between O2 and its wholly-owned subsidiaries orbetween such wholly-owned subsidiaries made or authorised or proposed orannounced an intention to propose any change in its share or loan capital; (xii) entered into any contract, transaction or arrangement whichis or is reasonably likely to be restrictive on the business of any member ofthe Wider Telefonica Group or the Wider O2 Group and which is material in thecontext of the O2 Group taken as a whole; (xiii) (save for O2) made any alteration to its Memorandum orArticles of Association or other incorporation documents which is material inthe context of the Offer; or (xiv) entered into or made an offer (which remains open foracceptance) to enter into an agreement or commitment or passed any resolution orannounced or made any proposal with respect to any of the transactions or eventsreferred to in this sub-paragraph (H); (I) save as publicly announced prior to 31 October 2005 or as canotherwise reasonably be demonstrated to have been fairly disclosed to Telefonicaprior to such date by or on behalf of O2 in the course of negotiations, since 31March 2005: (i) there having been no adverse change, and no othercircumstance having arisen which would or might be likely to result in anyadverse change, in the business, assets, financial or trading position orprofits or prospects of any member of the Wider O2 Group which in any case ismaterial in the context of the O2 Group taken as a whole; (ii) there not having been instituted or remaining outstandingany litigation, arbitration proceedings, prosecution or other legal proceedingsto which any member of the Wider O2 Group is a party (whether as claimant ordefendant or otherwise) and no such proceedings having been announced orthreatened against any such member and no investigation by any government orgovernmental, quasi-governmental, supranational, statutory, regulatory orinvestigative body, authority or court (including, other than as a result of theOffer, any anti-trust or merger control authority) against or in respect of anysuch member or the business carried on by any such member having been threatenedin writing, announced, instituted or remaining outstanding by, against or inrespect of any such member which, in any case is material in the context of theO2 Group taken as a whole; (iii) there having been no receiver, administrative receiver orother encumbrancer appointed over any of the assets of any member of the WiderO2 Group or any analogous proceedings or steps having taken place under the lawsof any jurisdiction and there having been no petition presented or resolutionpassed for the administration of any member of the Wider O2 Group or anyanalogous proceedings or steps taken place under the laws of any jurisdiction;and (iv) no contingent or other liability having arisen, becomeapparent or having been incurred which would or might reasonably be expectedadversely to affect any member of the Wider O2 Group and which, in any case, ismaterial in the context of the O2 Group taken as a whole; (J) Telefonica not having discovered prior to the date when theOffer would otherwise become unconditional that: (i) any financial, business or other information concerning O2or the Wider O2 Group publicly disclosed at any time is misleading, contains amisrepresentation of fact or omits to state a fact necessary to make theinformation contained therein not misleading and which was not corrected priorto 31 October 2005 by being publicly disclosed or fully and fairly disclosed inwriting to Telefonica by or on behalf of O2 prior to such date; or (ii) any member of the Wider O2 Group is subject to anyliability, contingent or otherwise, existing at 31 March 2005, which is notdisclosed or reflected in the audited accounts of O2 for the financial yearended on that date and which in any case, is material in the context of the O2Group taken as a whole; and (K) Telefonica not having discovered other than as publicly disclosedprior to 31 October 2005 or otherwise fully and fairly disclosed in writing toTelefonica by or on behalf of O2 prior to such date, by or on behalf of O2 inthe course of negotiations prior to the date when the Offer would otherwisebecome unconditional that: (i) any member of the Wider O2 Group has not complied with allapplicable legislation and regulations of any jurisdiction, with regard to thedisposal, discharge, spillage, leak or emission of any waste or hazardoussubstance or any substance likely to impair the environment or harm human healthor otherwise relating to environmental matters, or that there has otherwise beenany such disposal, discharge, spillage, leak, or emission (whether or not thesame constituted a non-compliance by any person with any such legislation orregulations and wherever the same may have taken place) from any land or otherasset now or previously owned, occupied or made use of by any past or presentmember of the Wider O2 Group which would be likely to give rise to any liability(whether actual or contingent) on the part of any member of the Wider O2 Groupand which, in any case is material in the context of the O2 Group taken as awhole; (ii) there is, or is reasonably expected to be, any liability(whether actual or contingent) to make good, repair, reinstate or clean up anyproperty now or previously owned, occupied or made use of by any past or presentmember of the Wider O2 Group or in which any such member may now or previouslyhad an interest under any environmental legislation, regulation, notice,circular or order of any Relevant Authority or third party or otherwise which ismaterial in the context of the O2 Group taken as a whole; or (iii) circumstances exist whereby a person or class of personswould be likely to have any claim or claims in respect of any product or processof manufacture or materials used therein now or previously manufactured, sold orcarried out by any member of the Wider O2 Group which claim or claims would belikely materially and adversely to affect any member of the Wider O2 Group whichis or would be material in the context of the O2 Group taken as a whole. Subject to the requirements of the Panel, Telefonica reserves the right towaive, in whole or in part, all or any of conditions (B) to (K) inclusive. IfTelefonica is required by the Panel to make an offer for O2 Shares under theprovisions of Rule 9 of the City Code, Telefonica may make such alterations tothe above conditions, including condition (A), as are necessary to comply withthe provisions of that Rule. The Offer will lapse if the European Commission initiates proceedings underArticle 6(1)(c) of Council Regulation (EC) 139/2004 or, following a referral bythe European Commission under Article 9 of such Regulation, the proposedacquisition of O2 by Telefonica, or any matter arising therefrom, is referred tothe UK Competition Commission in either case before 3.00 pm on the first closingdate of the Offer or the time and date when the Offer becomes declaredunconditional as to acceptances, whichever is the later. Conditions (B) to (K) inclusive must be fulfilled, determined by Telefonica tobe or remain satisfied or (if capable of waiver) be waived by midnight on thetwenty-first day after the later of the first closing date of the Offer and thedate on which condition (A) is fulfilled (or in each case such later date asTelefonica may, with the consent of the Panel, decide) failing which the Offerwill lapse. Telefonica shall be under no obligation to waive (if capable ofwaiver), to determine to be or remain satisfied or to treat as fulfilled any ofconditions (B) to (K) (inclusive) by a date earlier than the latest datespecified above for the fulfilment of that condition, notwithstanding that theother conditions of the Offer may at such earlier date have been waived orfulfilled and that there are, at such earlier date, not circumstances indicatingthat any condition may not be capable of fulfilment. If the Offer lapses it will cease to be capable of further acceptance. O2Shareholders who have accepted the Offer and Telefonica shall then cease to bebound by acceptances delivered on or before the date on which the Offer lapses. 2. Certain further terms of the Offer The Offer will not be made, directly or indirectly, in or into, or by use of themails, or by any means or instrumentality (including, without limitation,facsimile transmission, telephonically or electronically) or interstate orforeign commerce of, or any facilities of any securities exchange of, the UnitedStates, Canada, Australia or Japan and will not be acceptable by any such use,means, instrumentality or facility or from within the United States, Canada,Australia or Japan. The Offer will be capable of acceptance only by persons outside the UnitedStates. Offering materials with respect to this Offer will not be, and may notbe, distributed in or sent to the United States and may not be used for thepurpose of solicitation of an offer to purchase or sell any securities in theUnited States. Any tenders received from persons resident in the United Statesor with United States mailing addresses will be rejected. The Loan Notes have not been and will not be registered under the United StatesSecurities Act of 1933, as amended or under the securities laws of any state ofthe United States and are not and will not be registered under the securitieslaws of any other country. Therefore, the Loan Notes may not be offered, soldor delivered, directly or indirectly, in the United States. O2 Shareholders inthe United States, Canada, Australia or Japan or certain other overseasjurisdictions, including those, in respect of which the issue of Loan Notes tothem would be unlawful. The availability of the Offer to persons not resident in the United Kingdom maybe affected by the laws of the relevant jurisdictions. Persons who are notresident in the United Kingdom should inform themselves about and observe anyapplicable requirements. The acquisition contemplated by this announcement will be governed by Englishlaw and be subject to the jurisdiction of the English Courts and to the termsand conditions set out in this announcement and in the Offer Documentation. Telefonica reserves the right to implement the acquisition of O2 Sharescontemplated by the Offer by way of a Scheme of Arrangement under section 425 ofthe Companies Act. In such event, the Scheme of Arrangement will be implementedon the same terms (subject to appropriate amendments), so far as applicable, asthose which would apply to the Offer. In particular, condition (A) will notapply and the Scheme of Arrangement will become subject to the following furtherconditions which are not intended to be capable of waiver: (i) approval of the Scheme of Arrangement at the Court Meeting by amajority in number, representing 75 per cent. or more in value present andvoting, either in person or by proxy, of the holders of the O2 Shares (or therelevant class or classes thereof); (ii) the resolution(s) required to approve and implement the Scheme orArrangement and to be set out in the notice of Scheme Extraordinary GeneralMeeting to the holders of O2 Shares being passed by the requisite majority atsuch Scheme Extraordinary General Meeting; and (iii) sanction of the Scheme of Arrangement and confirmation of thereduction of capital involved therein by the Court (in both cases with orwithout modifications on terms reasonably acceptable to Telefonica) and anoffice copy of the orders of the Court sanctioning the Scheme of Arrangement andconfirming the cancellation of share capital which forms part of it beingdelivered for registration to the Registrar of Companies in England and Walesand being registered by him. APPENDIX 2 Definitions The following definitions apply throughout this announcement, unless the contextrequires otherwise: "Act" or "Companies Act" the Companies Act 1985, as amended "ARPU" means average revenue per user "Citigroup" Citigroup Global Markets Limited "City Code" the City Code on Takeovers and Mergers "Court" the High Court of Justice in England and Wales "Court Meeting" any meeting or meetings of the holders of O2 Shares (or different classes thereof) as may be convened pursuant to an order of the Court under section 425 of the Companies Act for the purpose of considering and, if thought fit, approving a Scheme of Arrangement (with or without amendment) in the event the acquisition of O2 Shares is elected by Telefonica to be implemented by a Scheme of Arrangement "Director" an executive or non-executive director of O2 or Telefonica as the case may be "EBITDA" earnings before interest, tax, depreciation and amortisation "Form of Acceptance" the form of acceptance, election and authority to be distributed with the Offer Document "FSMA" the Financial Services and Markets Act 2000, as amended "JPMorgan Cazenove" JPMorgan Cazenove Limited "LIBOR" London Interbank Offered Rate "Listing Rules" the Listing Rules of the UK Listing Authority as amended from time to time "Loan Note Alternative" the alternative under which holders of O2 Shares (other than certain Overseas Shareholders) who validly accept the Offer may, while the loan note alternative remains open for acceptance, elect to receive Loan Notes in lieu of cash consideration to which they would otherwise have been entitled under the Offer "Loan Notes" the loan notes to be issued pursuant to the Loan Note Alternative by Telefonica or a wholly-owned subsidiary of Telefonica "London Stock Exchange" London Stock Exchange plc "Merrill Lynch" Merrill Lynch International "Offer" the proposed recommended offer to be made by Goldman Sachs International and Citigroup, on behalf of Telefonica (or a wholly owned subsidiary of Telefonica) on the terms and subject to the conditions to be set out in the Offer Document, to acquire the entire issued and to be issued share capital of O2 and, where the context admits, any subsequent revision, variation, extension or renewal thereof "Offer Document" the document containing the terms and conditions of the Offer and where appropriate, any other document(s) containing terms and conditions of the Offer proposed to be sent to O2 Shareholders containing, inter alia, details of the Offer "Offer Documentation" the Offer Document and the Form of Acceptance "Official List" the Official List of the UK Listing Authority "O2" O2 plc "O2 Group" O2 and its subsidiary undertakings "O2 Share Option Schemes" the O2 Share Ownership Plan, the O2 Success Sharing Share Scheme (also known as "S4"), the O2 Sharesave Plan, the O2 Sharesave Sub Plan for Irish Employees, the O2 International Sharesave Plan, the O2 Legacy Option Plan, the O2 Deferred Equity Incentive Plan, the O2 Performance Share Plan, the O2 Restricted Share Plan, the O2 Share Option Plan and the O2 deferred bonus arrangements "O2 Shares" or "Shares" ordinary shares of 0.1 pence each in O2 in issue on the date hereof and any such further shares which are unconditionally allotted or issued after the date hereof and before the date on which the Offer closes pursuant to the exercise of options under the O2 Share Option Schemes or otherwise "O2 Shareholders" holders of O2 Shares "Overseas Shareholders" holders of O2 Shares resident in, or nationals or citizens of, jurisdictions outside the UK or who are nominees of, or custodians, trustees or guardians for, citizens or nationals of other countries "Panel" The Panel on Takeovers and Mergers "Regulatory Information Service" any of services set out in Schedule 12 to the Listing Rules published by the Financial Services Authority"Scheme of Arrangement" the potential acquisition of O2 Shares by the offeror by way of a scheme of arrangement under section 425 of the Companies Act in accordance with this announcement in the event that Telefonica elects to implement the acquisition of O2 Shares by way of a scheme of arrangement "Scheme Extraordinary General Meeting" any extraordinary general meeting of O2 convened in connection with the Scheme of Arrangement, including any adjournment thereof "substantial interest" a direct or indirect interest in 20 per cent. or more of the equity or voting share capital or the equivalent "Telefonica" Telefonica S.A. "UK Listing Authority" or "UKLA" the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of FSMA "United States" or "US" the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia. For the purposes of this announcement, "subsidiary", "subsidiary undertaking", "undertaking" and "associated undertaking" have the meanings given by the Act(but for this purpose ignoring paragraph 20(1)(b) of Schedule 4A of the Act). APPENDIX 3 Sources and bases of information n The value placed by the Offer on the existing issued share capital of O2is based on 8,766 million O2 Shares in issue on 28 October 2005, being the lastdealing day prior to the date of this announcement. In addition, 142 million O2shares were under option at 30 September 2005 (of which approximately 2.5million were covered by existing issued O2 Shares), and have been taken intoaccount (net of proceeds of notional option exercise at the Offer price) indetermining the to be issued share capital of O2 n The closing middle market price for an O2 Share on 28 October 2005,being the last dealing day prior to the date of this announcement, is taken fromthe Official List n The market capitalisation for Telefonica is based on 4,921.1 millionTelefonica shares in issue and the closing price of EUR 13.62 on 28 October2005, being the last dealing day prior to the date of this announcement n Unless otherwise stated, the financial information relating toTelefonica is extracted from the audited consolidated financial statements ofTelefonica for the relevant year n Unless otherwise stated, the financial information relating to O2 isextracted from the audited consolidated financial statements of O2 for therelevant year in UK GAAP n An exchange rate of EUR/GBP 1.47 has been used throughout thisannouncement n Unless otherwise stated, the comparative statements regardingTelefonica's current and prospective financial performance relative to its peersand its market position have been arrived at from information contained inrecent brokers' research reports n Comparative statements regarding O2's current and prospective financialperformance relative to its competitors and its market position have beenarrived at from the information contained in recent brokers' research reports: • the above referenced research reports contain information from whicha 2005-2008 compound average growth rate for the combined group for EBITDA ofapproximately 8 per cent. can be calculated • the above referenced research reports contain information from whicha market share of 16 per cent. for the combined group can be calculated • the above referenced research reports contain information from whichan estimated EBITDA for the combined group of approximately EUR 17.5 billion in2005 and approximately EUR 22 billion in 2008 can be calculated • statements regarding subscribers have been either extracted fromannual reports or derived from market research reports -------------------------- (1) This statement regarding earnings enhancement is not a profit forecast andshould not be interpreted to mean that Telefonica's future earnings per sharewill necessarily match or exceed the historical published earnings per share ofTelefonica or O2. (2) These estimated benefits, cost savings and one-off costs for achieving themrelate to future actions and circumstances which, by their nature, involverisks, uncertainties and other factors. Because of this, the benefits andsavings may not be achieved, or those achieved could be materially differentfrom those estimated. (3) This statement regarding earnings enhancement is not a profit forecast andshould not be interpreted to mean that Telefonica's future earnings per sharewill necessarily match or exceed the historical published earnings per share ofTelefonica or O2. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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