Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No ___X____
Free Translation
Valuation Report
TIM Participações
S.A.
TIM Sul S.A.
TIM
Nordeste Telecomunicações S.A.
The securities of TIM Participações to be issued in the merger between TIM Participa çõe s, TIM Sul and TIM Nordeste are being offered solely outside the United States. The securities will not be registered under the U.S. Securities Act of 1933 and upon issuance may not be offered or sold in the United States absent registration or an exemption. This valuation report does not constitute an offer of the securities to be issued in the merger.
Corporate Finance, April 17th, 2005.
Important notice
Banco ABN AMRO Real S.A.
("BAAR") has been retained by TIM Participações
S.A. (TIM Participações), TIM Sul S.A. (TIM Sul) and TIM
Nordeste Telecomunicações S.A. (TIM Nordeste and, together
with TIM Participações and TIM Sul, the Companies) to render
an independent financial-economic valuation report (the Valuation or the Valuations)
of the Companies, in connection with the incorporation of shares of TIM Sul
and TIM Nordeste by TIM Participações, pursuant to article 252
and following of the Brazilian Corporate Law ( Law nº 6.404/76, as amended)
(the Transactions").
The purpose of the Valuations is to calculate
the financial-economic equity value of the Companies. The Valuations were prepared
by BAAR for the exclusive use of the Companies in assessing the Transactions
and shall not be used by any third parties or for purposes other than the Transactions.
BAAR
has not made and will not make any recommendation, and does not express any
opinion, explicitly or implicitly, on the definition of the exchange ratio
of the shares issued by TIM Sul and by TIM Nordeste for new shares issued by
TIM Participações within the Transactions, which will be determined
at the Board of Directors Meetings of TIM Sul, TIM Nordeste and TIM Participações
Reference date, valuation methodology and liability
The reference date for
the Valuations is March 31 st , 2005.
Given the
availability of 10-year management business plans for the Companies and their
respective subsidiaries, which were prepared by and approved by their respective
managements, and our opportunity to review such plans with the management of
the Companies, and given the limitations of other comparable transactions and
precedents, BAAR selected the discounted cash flow methodology for rendering
the Valuations.
The Companies were valued on a stand-alone basis and,
therefore, the results do not include operational, tax or any other losses
or gains, nor any synergies, which may result from the Transactions, nor costs
arising out of or relating to the Transactions.
The rendering of financial-economic
valuations is a complex process that involves subjective judgements and is
not suitable for partial analyses or summarised descriptions. BAAR did not
place special emphasis on any specific factors considered in the Valuations,
but rather performed a qualitative assessment of the importance and relevance
of all factors considered therein. In this context, the Valuations should be
considered as a whole and the review of selected portions, summaries or specific
aspects of the Valuations, without acknowledging and analysing the Valuations
as a whole, may result in a misleading and incomplete understanding of the
analyses and their conclusions.
Reference date, valuation methodology and liability (continued)
In
order to render the Valuations, BAAR relied on information provided by the
Companies. In the Valuations, BAAR relied on (i) the premises, estimates
and projections prepared and approved by the Companies' managements; (ii)
public information, including the Companies' financial statements for the
fiscal years ending December 31 st , 2002, 2003 and 2004, all of which were
audited by Ernst & Young Auditores Independentes
S.S. (Ernst & Young); and (iii) in order to calculate the equity value,
cash balance and cash equivalents, financial applications, loans and financing,
hedges and contingency provisions for the Companies as of March 31st of 2005,
all of which reflect the best understanding of Ernst & Young, given the
execution of auditing procedures in accordance with the applicable auditing
norms of Brazil over such financial statements, as stated in the April 13th
2005 letter addressed to the Companies and provided to us by the latter (referred
to jointly as the Information).
BAAR has not performed any independent
investigation of the Information and, therefore, does not assume any responsibility
associated with the content, accuracy, veracity, integrity, consistency, sufficiency
and truthfulness of the Information.
As instructed by the managements of
the Companies, we adopted the assumption that the financial projections furnished
to us reflect the best estimates available at the time they were made available
to us, as well as the best judgment of the Companies' managements in regards
to the expected future financial performances of the Companies.
Reference date, valuation methodology and liability (continued)
BAAR
assumed all Information provided by the Companies to be accurate and complete,
and performed no independent investigation and, therefore, assumes no responsibility
for the accuracy or completeness of such information, including, without
limitation, the projections of the Companies or the assumptions and estimates
on which such projections were based. BAAR did not undertake (i) any appraisal
of the assets and liabilities (contingent or not) of the Companies; (ii)
any review or audit of the historical financial statements or of the Financial
Statements of the Companies, and of the cash balances and cash equivalents,
financial applications, loans and financings, hedge and the contingency provisions
for the Companies on March 31st of 2005, all of which is mentioned in Ernst & Young's letter dated April 13th ,
2005; (iii) any technical audit of the operations of the Companies; or (iv)
any physical inspection of the property or assets of the Companies.
BAAR
does not and will not, expressly or implicitly, make any representation or
statement regarding the Information (including projections or forecasts of
the Companies or assumptions and estimates on which such projections and forecasts
were based) used in preparing the Valuations, nor assumes any responsibility
or obligation to indemnify any party for the content, accuracy, veracity, completeness,
consistency, sufficiency and precision of such Information, each of which is
the sole and exclusive responsibility of the Companies.
BAAR considered,
for the purposes of the Valuation, a stable macroeconomic scenario in Brazil.
Reference date, valuation methodology and liability (continued)
There is no way to ensure
that the estimates and projections used for purpose of the Valuations, especially
those which depend on the occurrence of future and uncertain events beyond
the control of the Companies, will actually be achieved. The actual future
results of the Companies may differ significantly from the forecast results
utilised in connection with the Valuations. Therefore, BAAR does not assume
any responsibility should the future results be substantially different from
those used in connection with the Valuations.
BAAR does
not express any view as to the distribution of economic value among the various
types and/or classes of shares of the Companies.
The Valuations do not
constitute a judgement, opinion or recommendation to the management of the
Companies, the Companies or their shareholders as to the convenience and opportunity,
or to the strategic decision of the Companies, to implement the Transactions.
The Valuations do not constitute any recommendation to the shareholders of
the Companies as to how they should vote their shares in connection with the
Transactions, and are not intended to support any investment decision.
BAAR
has rendered, directly or through its related companies, certain financial
and investment banking services to the Companies and their controlling shareholders,
subsidiaries and affiliates, for which it received compensation, and it shall
continue to render such services and may, at any time, render additional services.
BAAR is and may become at any time, directly or through its related companies,
a creditor of the Companies and their controlling shareholders, subsidiaries
and affiliates in certain financial transactions. BAAR also acts as the transfer
agent and registrar of the shares of TIM Sul, TIM Nordeste, and TIM Participações
and therefore, shall perform certain administrative functions in connection
with the Transactions.
Reference date, valuation methodology and liability (continued)
During
its regular course of business, BAAR may trade or hold, directly or through
its related companies, on its behalf or on behalf of third parties, securities
of the Companies and their controlling shareholders, subsidiaries and affiliates,
and, as a consequence thereof, may hold, at any time, long or short positions
in these securities. In addition, the research departments as well as other
divisions within BAAR including its related companies, may use in their analyses,
reports and publications, estimates, projections and methodologies other
than those used in the Valuations, and therefore, such analyses, reports
and publications may contain results that differ from those described in
the Valuations.
BAAR shall receive compensation
for rendering services in connection with the Valuations, regardless of the
completion of the proposed Transactions. The Companies have agreed to indemnify
BAAR and its associated companies for certain liabilities which may arise from
the services related to the Valuations, and agreed to reimburse BAAR for fees
of our legal advisors retained in connection with the preparation of the Valuations.
The
Valuations constitute proprietary information of BAAR and shall not be disclosed
or referenced to third parties, nor distributed, reproduced or used for any
other purpose without the prior written consent of BAAR.
BAAR shall not
be bound, at any time, to update, review or correct any information contained
in the Valuations, nor to provide any additional information on the Valuations.
Executive summary
Executive summary (continued)
Table of contents |
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Financial advisor information | 11 | |
Valuation methodology | 14 | |
TIM Sul S.A. (TIM Sul) | 26 | |
a The company - overview | 27 | |
b Market assumptions | 30 | |
c Operating and financial assumptions | 32 | |
d Valuation results | 38 | |
TIM Nordeste Telecomunicações S.A. (TIM Nordeste) | 40 | |
a The company - overview | 41 | |
b Market assumptions | 44 | |
c Operating and financial assumptions | 46 | |
d Valuation results | 52 | |
TIM Participações S.A. (TIM Participações) | 54 | |
Implied exchange ratio | 57 | |
Glossary | 59 |
1 Financial advisor information
The Corporate Finance Area
of Banco ABN AMRO Real S.A.
Representations by the advisor
2 Valuation methodology
Macro-economic assumptions
The Valuations were based on macro-economic
assumptions prepared by BAAR's economic department
Main macro-economic assumptions | ||||||||||||||||||||
Macro-economic assumptions | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||
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Consumer price inflation (IPCA) | 5.9% | 4.8% | 4.4% | 4.4% | 4.5% | 4.7% | 4.8% | 4.9% | 4.9% | 4.9% | ||||||||||
Exchange rate end-of-period (R$/US$) | 2.70 | 3.00 | 3.12 | 3.24 | 3.37 | 3.64 | 3.79 | 3.94 | 4.10 | 4.20 | ||||||||||
Average exchange rate (R$/US$) | 2.68 | 2.87 | 3.06 | 3.18 | 3.31 | 3.51 | 3.72 | 3.87 | 4.02 | 4.15 | ||||||||||
Selic (year average) | 18.7% | 15.7% | 14.3% | 12.8% | 11.8% | 10.0% | 9.0% | 9.0% | 9.0% | 9.0% | ||||||||||
GDP real growth | 3.5% | 4.0% | 3.9% | 4.4% | 4.5% | 4.3% | 4.3% | 4.1% | 3.9% | 3.8% | ||||||||||
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Discounted Cash Flow Methodology (DCF)
Composition of cash flow
(+)Earnings before interest and taxes ( EBIT ) |
Discounted Cash Flow Methodology (DCF)
Discounted cash flow methodology (DCF)
| |
Weighted average cost of capital ( WACC )
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Cost of equity
Risk-free rate of return
Country risk
Country risk premium
Beta
Beta is a measurement of market risk / systematic risk / non-diversifiable risk. The coefficient Beta attempts to indicate what proportion of a companys share price variation may be explained by the variation in the market portfolio, i.e., a share with Beta=2 would increase by 2% if the market increases by 1%
Beta is calculated through a linear regression between the series of variations in the share price and the series of variations in the market portfolio
To estimate the beta, we considered a group of 6 mobile telephone companies operating in the international market. Thus, we considered the weighted average of the companies unlevered betas as a proxy for the Companies betas
In order to make the set of companies betas comparable, we unlevered the Equity betas of each company based on their respective debt/equity structures and income tax, thus resulting in the unlevered or asset betas
The average unlevered beta of the set of comparable companies was then re-levered to the Companies debt/equity structures and income tax:
Beta = Unlevered Beta * [1 + (1 - IT and SC rate(1)) * Debt/Equity]
The Valuations of TIM Sul and TIM Nordeste were based on a levered Beta of 1.12
(1) | Long-term income tax and social contribution rate |
Market risk premium
Market risk premium is the additional return required by an investor to compensate for assuming the higher degree of uncertainty (risk) involved in equity investments vis-à-vis risk-free investments
We believe that the best estimate for global market risk premium is the historic long-term average spread (1900 through 2004) between the return on a global stock market index denominated in US dollars and the return on a long term global bond index composed of 17 credit risk-free countries
ABN AMRO prefers the long timeframe (since 1900) over other timeframe estimates, as the former reflects a broader set of economic circumstances. These circumstances include wars, economic depression and expansion periods, which are not captured by short-term estimates. Since we believe market risk is essentially random, the longest timeframe possible would provide the best estimate for the future
ABN AMRO prefers the historical approach over the forward-looking approach since it does not believe that the market risk premium is predictable beyond a 3-4 year period. Given that the market premium is random, historical data is the best estimate of the future. TIM Sul, TIM Nordeste and TIM Participações Valuations were based on a market risk premium of 5.1% (a result of the Global Investment Return Yearbook 2005 report, prepared by ABN AMRO jointly with the London Business School)
Cost of debt and capital structure
Cost of debt (cost of third-party capital)
The cost of debt is estimated based on the average cost observed in long-term fund raising operations by companies with credit profiles similar to the Companies. The cost of future debt should be determined by the cost of debt that the Companies would pay in case they issue long-term debt instruments. Such cost is directly related to companies risk profiles. Based on our estimates of the Companies long-term cost of debt, we reached an annual rate of 12.0% in US$ terms
Since interest payments are income tax and social contribution-deductible, we deduct from the cost of debt before taxes the long-term income tax and social contribution rate (IR and CSLL), thereby obtaining the after-tax cost of debt
Capital structure
The weight attributed to equity and third-party capital in the weighted average cost of capital calculation is based upon estimated market value, as opposed to book value, since a companys cost of capital should reflect the return required by investors according to the companys business risk
For the Companies, we assumed a target capital structure of 35% (total debt/ total capital)
Terminal value and perpetuity growth rate
A companys lifetime is theoretically infinite. However, we cannot precisely estimate the future cash flows beyond a certain period. Therefore, a portion of the companys value, known as Terminal Value, will arise from cash flows generated after the last year of the projection period
The Terminal Value is calculated by applying a fixed annual growth rate to the free cash flow of the year following the last year in the forecast period. Every forthcoming year, until perpetuity, the free cash flow of the company will grow according to this rate, which is known as Perpetuity Growth Rate
The financial projections were prepared in nominal R$, i.e., considering Brazilian inflation. To be consistent, the perpetuity growth rate of the free cash flows must be also expressed in R$ in nominal terms. The Valuations were based on a range of nominal perpetuity growth rates between 6.32% and 7.32%
Weighted average cost of capital (WACC)
WACC
Weighted average cost of capital
Cost of equity (US$) | Cost of debt (US$) | |||||
U.S. 10-year T-Bond yield | 4.33% | Cost of debt before taxes | 12.0% | |||
Market risk premium | 5.10% | After-tax cost of debt | 7.9% | |||
Beta | Estrutura de Capital | |||||
Unlevered sector beta | 0.83 | % Equity | 65.0% | |||
Tax rate | 34.0% | % Debt | 35.0% | |||
Levered beta | 1.12 | |||||
Cost of equity | 10.1% | |||||
Country risk premium | 5.64% | |||||
Adjusted cost of equity | 15.7% | |||||
Weighted average cost of capital (R$) | ||||||
Weighted average cost of capital (nominal US$) | 13.0% |
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Differential long-term inflation (Brazil vs. U.S.) | 2.3% |
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Weighted average cost of capital (nominal R$) | 15.6% |
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3. TIM Sul S.A.
a The company - overview
Corporate structure
TIM Sul S.A. is a publicly held company controlled by TIM Participações S.A., which holds 90.65% of its voting capital and 81.73% of its total capital
The corporate structure of TIM Sul S.A. on March 31st, 2005, in accordance with the information provided by the Companies, is indicated as follows:
Competitive scenario
Global Telecom S.A. ("Global Telecom") provides mobile telephone services in the States of Paraná and Santa Catarina under the Band B license. In December 1998, Global Telecom began to offer mobile telephone services based on the CDMA technology. Global Telecom is controlled by Telesp Celular, a Band A operator in the State of São Paulo, one of the companies under the joint venture known as "Vivo"
In December 2002, Telecom Américas (Claro) was granted a license to provide mobile telephone services under the SMP system in Region II, using the Band D sub-frequency range, beginning its operations in 2003 using the GSM technology
In December 2002, Brasil Telecom secured a license to provide mobile telephone services under the SMP system in Region II, using the Band E sub-frequency range, with the GSM technology. Brasil Telecom began to provide mobile telephone services in the 4th quarter of 2004, in the States of Paraná and Santa Catarina, becoming the fourth operator in the region
In the municipalities of Pelotas, Capão do Leão, Morro Redondo and Turuçu (RS), Vivo, Claro and Brasil Telecom are also authorized to provide mobile telephone services
Generally, the cellular phone market in TIM Suls area has been growing significantly in the last two years, specially in relation to the penetration rate. Competition within the region has been intense and is expected to continue due to several factors affecting the four operators
b Market assumptions
Demographic and market data -TIM Sul
Population and penetration (year-end)
The assumptions reflect an expectation of continuous growth of the penetration rate in the region, reaching 63% at the end of the projection period
Total mobile market (year-end)
That growth should be driven by a period of sustainable economic development in the region, combined with a rise in the competitive pressure attributed to competitors
c Operating and financial assumptions
Revenues
Subscriber base (year-end)
The projected growth in the subscriber base reflects continued expansion in the pre-paid customer base
Average revenue per user- ARPU
The expansion of the pre-paid customer base should limit ARPU growth
Revenues
Revenues breakdown
The participation of handset revenues in total revenues decreases during the forecast period
Operating costs
EBITDA
Economies of scale should facilitate an increase in EBITDA margins, from 34% in 2005 to 46% in 2014
Note: R$ million, in nominal terms
Capex
Capex forecast
The peaks observed in the first years of projection reflect the need for investments in fixed assets, including the migrations from TDMA to GSM
Capex forecast
Note: R$ million, in nominal terms
Income statement and cash flow
Income statement - TIM Sul S.A. | ||||||||||||||||||||
Years ended on December 31st |
2005
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2006
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2007
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2008
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2009
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2010
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2011
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2014
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Net revenues | 1,737 | 1,819 | 1,883 | 1,932 | 1,991 | 2,056 | 2,149 | 2,242 | 2,344 | 2,455 | ||||||||||
Operating expenses | (1,145) | (1,136) | (1,119) | (1,089) | (1,094) | (1,119) | (1,168) | (1,213) | (1,269) | (1,329) | ||||||||||
EBITDA | 592 | 683 | 764 | 843 | 897 | 937 | 981 | 1,029 | 1,075 | 1,126 | ||||||||||
Margin (%) | 34% | 38% | 41% | 44% | 45% | 46% | 46% | 46% | 46% | 46% | ||||||||||
Profit before IT ans SC | 347 | 485 | 772 | 971 | 1,048 | 1,081 | 1,132 | 1,250 | 1,389 | 1,526 | ||||||||||
Net profit | 246 | 339 | 518 | 646 | 692 | 714 | 747 | 825 | 917 | 1,007 | ||||||||||
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Unlevered free cash flow - TIM Sul S.A. | ||||||||||||||||||||
Years ended on December 31st |
2005
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2006
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2007
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2008
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2009
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2010
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2011
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EBIT | 252 | 342 | 568 | 717 | 741 | 752 | 767 | 805 | 857 | 909 | ||||||||||
IT ans SC tax | (68) | (97) | (185) | (239) | (252) | (256) | (261) | (274) | (291) | (309) | ||||||||||
Depreciation and amortization | 341 | 341 | 196 | 127 | 155 | 185 | 214 | 224 | 218 | 217 | ||||||||||
CAPEX | (284) | (242) | (232) | (218) | (216) | (202) | (208) | (216) | (226) | (235) | ||||||||||
Changes in working capital | (4) | 10 | 33 | 14 | 5 | 5 | 12 | 22 | 28 | 28 | ||||||||||
Free cash flow | 236 | 354 | 381 | 401 | 434 | 485 | 524 | 561 | 586 | 609 | ||||||||||
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Notes: R$ million, in nominal terms; Net earnings consider deferred taxes, and tax loss carry- | ||||||||||||||||||||
forward as applicable |
d Valuation results
Discounted cash flow - TIM Suls valuation range
Discounted cash flow valuation - TIM Sul S.A.
The diagram to the right illustrates the composition of the equity value of TIM Sul and its sensitivity due to variances in the WACC and nominal perpetuity growth rate
A | + | B | = | C | ||||||||||||||||||||||||||||||
WACC | NPV(2) of free cash flows (R$ thousands) 2005 - 2014 | NPV(2) of perpetuity (R$ thousands) @ nominal perpetuity growth rate | Enterprise value (R$ thousands) @ nominal perpetuity growth rate | |||||||||||||||||||||||||||||||
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6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | |||||||||||||||||||||||||||||
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14.6% | 2,279,084.37 | 2,220,501.59 | 2,374,683.97 | 2,550,102.57 | 4,499,585.95 | 4,653,768.34 | 4,829,186.94 | |||||||||||||||||||||||||||
15.1% | 2,234,811.22 | 2,010,808.90 | 2,142,552.15 | 2,291,271.85 | 4,245,620.12 | 4,377,363.37 | 4,526,083.07 | |||||||||||||||||||||||||||
15.6% | 2,191,881.96 | 1,827,181.35 | 1,940,551.59 | 2,067,646.45 | 4,019,063.31 | 4,132,433.55 | 4,259,528.42 | |||||||||||||||||||||||||||
16.1% | 2,150,245.99 | 1,665,458.88 | 1,763,638.22 | 1,873,024.79 | 3,815,704.87 | 3,913,884.21 | 4,023,270.78 | |||||||||||||||||||||||||||
16.6% | 2,109,854.89 | 1,522,299.87 | 1,607,809.51 | 1,702,553.09 | 3,632,154.76 | 3,717,664.39 | 3,812,407.98 |
- | D | = | E | / | F | = | G | ||||||||||
WACC | Net debt (1) | Equity value (R$ thousands) | # shares (million)(3) | Equity value per share (R$/1000 shares) | |||||||||||||
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6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | ||||||||||||
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14.6% | (265,422.00) | 4,765,007.95 | 4,919,190.34 | 5,094,608.94 | 15,331 | 310.8142 | 320.8713 | 332.3136 | |||||||||
15.1% | (265,422.00) | 4,511,042.12 | 4,642,785.37 | 4,791,505.07 | 15,331 | 294.2484 | 302.8419 | 312.5426 | |||||||||
15.6% | (265,422.00) | 4,284,485.31 | 4,397,855.55 | 4,524,950.42 | 15,331 | 279.4705 | 286.8655 | 295.1557 | |||||||||
16.1% | (265,422.00) | 4,081,126.87 | 4,179,306.21 | 4,288,692.78 | 15,331 | 266.2057 | 272.6098 | 279.7449 | |||||||||
16.6% | (265,422.00) | 3,897,576.76 | 3,983,086.39 | 4,077,829.98 | 15,331 | 254.2330 | 259.8107 | 265.9907 | |||||||||
Notes: (1) Net debt includes cash, marketable securities, debt, hedge and provisions for contingencies, according to Ernst & Youngs letter; | |||||||||||||||||
(2) net present value on March 31st, 2005; (3) as of March 31st, 2005 |
4 TIM Nordeste Telecomunicações S.A.
a The company- overview
Corporate structure
TIM Nordeste Telecomunicações S.A. is a publicly held company controlled by TIM Participações S.A., which holds 94.09% of the voting capital and 81.75% of the total capital
The corporate structure of TIM Nordeste S.A on March 31st, 2005, in accordance with the information provided by the companies, is indicated as follows:
Competitive scenario
The operating company of the so-called Band B in the Region, Claro (former BCP and BSE S.A.), started its operations in mid-1998 with a fully digital network (TDMA). At the time of the privatization, BCP was controlled by a consortium formed by Bell South and Banco Safra. In the first quarter of 2003, the shareholding control of BSE was acquired by América Móvil S.A., which recently adopted a single brand to operate its cellular telephone operations in Brazil, Claro
In 2001, Tele Norte Leste Participações S.A. (Telemar) purchased a Band D license to operate in the Region. Since June 2002, the cellular telephone market in the Region has included another competitor Oi operator, a subsidiary of Telemar, which operates in the fixed network, with GSM technology
In December 2002, Vésper S.A. was authorized to provide SMP in the Region, on the sub-frequency spectrum of 1,800 MHz. Since Vésper was not authorized to use the sub-frequency spectrum of 1,900 MHz for SMP, the license was returned to ANATEL, who held a new auction to grant that license later, but unsuccessfully. In this regard, there are currently three operating companies in the region
The cellular phone market in TIM Nordestes area continues to grow significantly, with the competition between the three operating companies increasing steadily
b Market assumptions
Demographic and market data TIM Nordeste
Population and penetration (year-end)
The assumptions reflect an expectation of continuous growth of the penetration rate in the region, reaching 39% at the end of the projection period
Note: population in thousands of inhabitants, based on IBGE projections
Total mobile market (year-end)
That growth should be driven by a period of sustainable economic development in the region, combined with a rise in the competitive pressure attributed to competitors
Note: thousands of subscribers
c Operating and financial assumptions
Revenues
Subscriber base (year-end)
The projected growth in the subscriber base reflects continued expansion in the pre-paid customer base
Note: thousands of subscribers
Average revenue per user- ARPU
The expansion of the pre-paid customer base should limit ARPU growth
Notes: In nominal R$; ARPU defined as the total net service revenue (excluding roaming) divided by the average number of users during the reference year, expressed in monthly nominal R$
Revenues and operating costs
Revenues breakdown
The participation of handset revenues in total revenues decreases during the forecast period
Operating costs
Note: R$ million, in nominal terms
EBITDA
Economies of scale should facilitate an increase in EBITDA margins, from 40% in 2005 to 47 % in 2014
Note: R$ million, in nominal terms
Capex
Capex forecast
The peaks observed in the first years of projection reflect the need for investments in fixed assets, including the migration from TDMA to GSM.
Note: R$ million, in nominal terms
Income statement and cash flow
Income statement - TIM Nordeste Telecomunicações S.A. | ||||||||||
Years ended on December 31st | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
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Net revenues | 1,242 | 1,321 | 1,407 | 1,496 | 1,587 | 1,672 | 1,769 | 1,869 | 1,973 | 2,110 |
Operating expenses | (751) | (771) | (806) | (855) | (893) | (923) | (960) | (1,005) | (1,055) | (1,122) |
EBITDA | 491 | 550 | 601 | 642 | 694 | 750 | 809 | 864 | 918 | 987 |
Margin (%) | 40% | 42% | 43% | 43% | 44% | 45% | 46% | 46% | 47% | 47% |
Profit before IT ans SC | 264 | 384 | 626 | 799 | 886 | 943 | 1,023 | 1,155 | 1,301 | 1,466 |
Net profit | 193 | 262 | 422 | 532 | 585 | 622 | 675 | 762 | 859 | 967 |
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Unlevered Free Cash Flow - TIM Nordeste Telecomunicações S.A. | ||||||||||
Years ended on December 31st | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
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EBIT | 172 | 243 | 419 | 535 | 564 | 594 | 630 | 678 | 737 | 804 |
IT and SC tax | (39) | (74) | (134) | (177) | (192) | (202) | (214) | (230) | (250) | (274) |
Depreciation and amortization | 320 | 308 | 182 | 107 | 130 | 156 | 179 | 186 | 181 | 183 |
Investments | (255) | (185) | (180) | (184) | (186) | (179) | (170) | (180) | (190) | (201) |
Changes in working capital | (16) | 2 | 34 | 27 | 7 | 0 | 6 | 17 | 21 | 26 |
Free cash flow | 181 | 293 | 322 | 308 | 323 | 368 | 431 | 471 | 498 | 539 |
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Note: R$ million, in nominal terms; Net earnings consider deferred taxes and tax loss carry-forwards as applicable; Free cash flow of the Company dos not consider tax incentives related to the Constitutive Reports numbers. 0144/2003 and 0232/2003, issued on 12/31/2003 by Adene - Development Agency of the Northeast Region
d Valuation results
Discounted cash flow valuation - TIM Nordestes value range
The diagram to the right illustrates the composition of the equity value of TIM Nordeste and its sensitivity due to variances in the WACC and nominal perpetuity growth rate
A | + | B | + | C | = | D | |||||
WACC | NPV(2) of free cash flows (R$ thousands) 2005 - | NPV(2) of Adene (tax benefit) (R$ thousands) | NPV(2) of perpetuity (R$ thousands) @ nominal perpetuity growth rate |
Enterprise value (R$ thousands) @ nominal perpetuity growth rate |
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2014 | |||||||||||
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|
|
|
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6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | ||||||
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14.6% | 1,845,147.72 | 409,474.50 | 1,965,194.73 | 2,101,649.68 | 2,256,899.15 | 4,219,816.95 | 4,356,271.90 | 4,511,521.37 | |||
15.1% | 1,808,835.67 | 403,230.03 | 1,779,611.90 | 1,896,207.69 | 2,027,828.03 | 3,991,677.60 | 4,108,273.39 | 4,239,893.73 | |||
15.6% | 1,773,639.13 | 397,130.96 | 1,617,097.32 | 1,717,432.58 | 1,829,914.44 | 3,787,867.41 | 3,888,202.67 | 4,000,684.53 | |||
16.1% | 1,739,515.66 | 391,173.07 | 1,473,969.23 | 1,560,860.19 | 1,657,669.81 | 3,604,657.96 | 3,691,548.92 | 3,788,358.54 | |||
16.6% | 1,706,424.70 | 385,352.27 | 1,347,270.23 | 1,422,948.22 | 1,506,798.46 | 3,439,047.20 | 3,514,725.18 | 3,598,575.43 |
- | E | = | F | / | G | = | H | ||||
WACC | Net debt (1) | Equity value (R$ thousands) | # shares (million)(3) | Equity value per share (R$/1000 shares) | |||||||
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6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | ||||||
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14.6% | (307,930.00) | 4,527,746.95 | 4,664,201.90 | 4,819,451.37 | 29,064 | 155.7869 | 160.4819 | 165.8236 | |||
15.1% | (307,930.00) | 4,299,607.60 | 4,416,203.39 | 4,547,823.73 | 29,064 | 147.9373 | 151.9490 | 156.4777 | |||
15.6% | (307,930.00) | 4,095,797.41 | 4,196,132.67 | 4,308,614.53 | 29,064 | 140.9248 | 144.3770 | 148.2472 | |||
16.1% | (307,930.00) | 3,912,587.96 | 3,999,478.92 | 4,096,288.54 | 29,064 | 134.6210 | 137.6107 | 140.9417 | |||
16.6% | (307,930.00) | 3,746,977.20 | 3,822,655.18 | 3,906,505.43 | 29,064 | 128.9228 | 131.5267 | 134.4118 |
5 TIM Participações S.A.
Corporate structure
TIM Participações S.A. is a publicly held company controlled by TIM Brasil Serviços and Participações S.A., which holds 53.23% of its voting capital and 23.73% of its total capital
The corporate structure of TIM Participações S.A. on March 31st, 2005, according to the information provided by the Companies, is illustrated in the diagram bellow:
TIM Participações S.A. valuation (value range)
Economic-financial valuation of TIM Participações S.A.
The calculation includes assets and liabilities reflected in the balance sheet of TIM Participações as of March 31st, 2005 (4), as well as the net present value (NPV) of the costs and expenses of TIM Participações
Assets | March 31st, 2005 | Liabilities and equity | March 31st, 2005 | |
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Short-term assets | 84,656 | Short-term liabilities | 80,878 | |
Long-term assets | 9,024 | Long-term liabilities | 7,032 | |
Fixed assets(1) | 7,024,796 | NPV of holding's expenses(2) | 43,402 | |
Shareholders' equity | 6,987,164 | |||
Total assets | 7,118,476 | Total liabilities and equity | 7,118,476 | |
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A | / | B | = | C | |||||
WACC | Equity value (R$ thousands) | Shares (milllion)(3) | Equity value per share (R$/1000 shares) | ||||||
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6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | ||||
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14.6% | 7,558,339.73 | 7,795,907.89 | 8,066,197.34 | 702,505.09 | 10.7591 | 11.0973 | 11.4820 | ||
15.1% | 7,164,264.56 | 7,367,257.93 | 7,596,409.04 | 702,505.09 | 10.1982 | 10.4871 | 10.8133 | ||
15.6% | 6,812,480.42 | 6,987,164.18 | 7,182,995.20 | 702,505.09 | 9.6974 | 9.9461 | 10.2248 | ||
16.1% | 6,496,497.86 | 6,647,775.09 | 6,816,320.71 | 702,505.09 | 9.2476 | 9.4630 | 9.7029 | ||
16.6% | 6,211,091.95 | 6,342,847.39 | 6,488,830.72 | 702,505.09 | 8.8413 | 9.0289 | 9.2367 |
Notes: (1) Fixed asset value considers TIM Suls and TIM Nordestes discounted cash flow valuations; (2) Net present value of TIM Participações after tax costs and expenses, according to the Information furnished by the Companies; (3) Number of shares (millions) on March 31st, 2005; (4) Net debt constituent accounts, including cash balances, marketable securities, debt, hedge and provisions for contingencies were adjusted, in accordance with Ernst & Youngs letter dated April 13th, 2005
6 Implied exchange ratio
Implied exchange ratio
Based on the value ranges per 1,000 shares, the exchange ratio between TIM Participações and TIM Sul would range from 28.7550 shares of TIM Participações for one share of TIM Sul to 28.9420 shares of TIM Participações for one share of TIM Sul
Based on the value ranges per 1,000 shares, the exchange ratio between TIM Participações and TIM Nordeste would range from 14.4420 shares of TIM Participações for one share of TIM Nordeste to 14.5818 shares of TIM Participações for one share of TIM Nordeste
Exchange ratio of TIM Sul | Exchange ratio of TIM Nordeste | |||||||||||||||||
Shares of TIM Participações per share of TIM Sul | Shares of TIM Participações per share of TIM Nordeste | |||||||||||||||||
Perpetuity growth rate | Perpetuity growth rate | |||||||||||||||||
6.32% | 6.82% | 7.32% | 6.32% | 6.82% | 7.32% | |||||||||||||
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14.6% | 28.8884 | 28.9144 | 28.9420 | 14.6% | 14.4795 | 14.4614 | 14.4420 | |||||||||||
15.1% | 28.8531 | 28.8775 | 28.9035 | 15.1% | 14.5063 | 14.4891 | 14.4708 | |||||||||||
WACC | 15.6% | 28.8191 | 28.8421 | 28.8666 | WACC | 15.6% | 14.5322 | 14.5160 | 14.4987 | |||||||||
16.1% | 28.7864 | 28.8081 | 28.8311 | 16.1% | 14.5574 | 14.5420 | 14.5258 | |||||||||||
16.6% | 28.7550 | 28.7755 | 28.7971 | 16.6% | 14.5818 | 14.5673 | 14.5519 |
7 Glossary
Glossary
We have included a glossary to help those less familiar with the discounted cash flow valuation methodology to better understand this document. The explanation of each term, therefore, is written in didactical terms, so that they may be easily understood
Average Revenue per User (ARPU): total net revenues from services (excluding roaming), divided by the average number of lines in service during the reference year, expressed in monthly nominal Reais (R$)
Beta: a measure of the market risk / systemic risk / non-diversifiable risk. The Beta factor indicates the sensitivity of the stock price to market portfolio price variations. The Beta factor is calculated trough a linear regression between a series composed of variations on a companys share price and a series composed of variations on the market portfolio price
Capital Asset Pricing Model CAPM: the CAPM model is used to determine the Cost of Equity. The model is based on the financial premise of risk and return, so the greater the risk, the greater the return required by the shareholder. In the calculation of the CAPM, the beta, the risk-free rate and the market risk premium factors are taken into account
Capital Expenditures (Capex): investments in fixed assets
Glossary (continued)
Cost of Equity: the cost of equity is the return required by the shareholder on the invested capital. The calculation considers that a certain asset must pay the investor the opportunity cost plus a risk premium
Cost of Debt: a measure of the cost associated with capital provided by third parties, in the form of loans, financings, market funding, among others
Weighted Average Cost of Capital (WACC): a measure of a companys cost of capital. The WACC is determined by the weighted average costs of equity and cost of debt in the companys intended capital structure and is directly related to the risk associated to future cash flows
Equity Value: value of the shareholders equity
Optimal Capital Structure: in theory there is an optimal proportion of own capital and third-party capital, known as optimal capital structure. Considering the risk and the return of each source of capital, each company has an optimal structure that maximizes the its value
Operating Cash Flow: the operating cash flow considers only revenues and expenses effectively received and disbursed as a result of the companys operations. As such, the interest income and interest expenses are not considered in this calculation
Glossary (continued)
Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA): the operating profit generated by the company, which will effectively generate cash. As a result, only the expenses that produce cash outflows are considered in its calculation
Earnings Before Interests and Taxes (EBIT): the operating profit generated by the company, less depreciation and amortization expenses
Market Risk Premium: the additional return required by investors as a compensation for a greater element of uncertainty (risk) in investments in shares versus risk-free investments
Country Risk Premium (Sovereign Risk): the premium paid due to political instability and uncertainty in a given country. A method frequently used to estimate this premium is the spread between the return of the sovereign bonds of the country and the U.S. sovereign bonds
Risk-Free Interest Rate: the interest rate paid for a risk-free asset. In practice, the U.S. Treasury bonds are used as parameters for the risk-free interest rate
Glossary (continued)
NPV: net present value
Terminal Value: considering that, in theory, a companys lifetime is infinite and that it is impossible to accurately estimate/forecast the future cash flows beyond a certain period, a portion of the companys value will be composed of cash flows generated in the years following the last year of the projection period. This estimated portion of the value is known as terminal value. To determine the Terminal Value, the assumptions that the company will reach a state of maturity and will grow at a constant pace are adopted
FREE TRANSLATION
Rio de Janeiro, April 26th, 2005.
To
The Board of
Directors of
TIM Participações S.A.
Rua Comendador Araújo, 299 - 3º andar
Curitiba, Paraná
Dear Sirs:
Banco ABN AMRO Real S.A. ("BAAR") has been retained by TIM Participações S.A. (TIM Participações), TIM Sul S.A. (TIM Sul) and TIM Nordeste Telecomunicações S.A. (TIM Nordeste and, together with TIM Participações and TIM Sul, the Companies) (i) to render an independent financial-economic valuation report (the Valuation or the Valuations) of the Companies, in connection with the incorporation of shares of TIM Sul and TIM Nordeste by TIM Participações, pursuant to article 252 and following of the Brazilian Corporate Law ( Law nº 6.404/76, as amended) (the Transactions") and (ii) to express its views as to whether the proposed exchange ratios shall provide equitable treatment (tratamento equitativo) to the Companies for purposes of the Transactions subject to the terms set hereof.
This letter is based upon the Valuations of the Companies, dated April 17th, 2005. The purpose of the Valuations is to calculate the financial-economic equity value of the Companies. The Valuations were prepared by BAAR for the exclusive use of the Companies in assessing the Transactions and shall not be used by any third parties or for purposes other than the Transactions. BAAR has not made and will not make any recommendation, and does not express any opinion, explicitly or implicitly, on the definition of the exchange ratios of the shares issued by TIM Sul and by TIM Nordeste for new shares issued by TIM Participações within the Transactions, which will be determined at the Board of Directors Meetings of TIM Sul, TIM Nordeste and TIM Participações.
The reference date for the Valuations is March 31st, 2005. Given the availability of 10-year management business plans for the Companies and their respective subsidiaries, which were prepared by and approved by their respective managements, and our opportunity to review such plans with the management of the Companies, and given the limitations of other comparable transactions and precedents, BAAR selected the discounted cash flow methodology for rendering the Valuations.
The Companies were valued on a stand-alone basis and, therefore, the results do not include operational, tax or any other losses or gains, nor any synergies, which may result from the Transactions, nor costs arising out of or relating to the Transactions. As such, the Valuations do not consider the results that could be potentially generated for the Companies by the consummation of the Transactions, nor any costs arising from the Transactions.
The rendering of financial-economic valuations is a complex process that involves subjective judgements and is not suitable for partial analyses or summarised descriptions. BAAR did not place special emphasis on any specific factors considered in the Valuations, but rather performed a qualitative assessment of the importance and relevance of all factors considered therein. In this context, the Valuations should be considered as a whole and the review of selected portions, summaries or specific aspects of the Valuations, without acknowledging and analysing the Valuations as a whole, may result in a misleading and incomplete understanding of the analyses and their conclusions.
In order to render the Valuations, BAAR relied on information provided by the Companies. In the Valuations, BAAR relied on (i) the premises, estimates and projections prepared and approved by the Companies managements; (ii) public information, including the Companies financial statements for the fiscal years ending December 31st, 2002, 2003 and 2004, all of which were audited by Ernst &Young Auditores Independentes S.S. (Ernst & Young); and also (iii) in order to calculate the equity value, cash balance and cash equivalents, financial applications, loans and financing, hedges and contingency provisions for the Companies as of March 31st of 2005, all of which reflect the best understanding of Ernst & Young, given the execution of auditing procedures in accordance with the applicable auditing norms of Brazil over such financial statements, as stated in the April 13th 2005 letter addressed to the Companies and provided to us by the latter (referred to jointly as the Information).
As instructed by the managements of the Companies, we adopted the assumption that the financial projections furnished to us reflect the best estimates available at the time they were made available to us, as well as the best judgment of the Companies' managements in regards to the expected future financial performances of the Companies.
BAAR assumed all Information provided by the Companies to be accurate and complete, and BAAR has not performed any independent investigation of the Information and, therefore, does not assume any responsibility associated with the content, accuracy, veracity, integrity, consistency, sufficiency and truthfulness of the Information, including, without limitation, the projections of the Companies or the assumptions and estimates on which such projections were based. BAAR did not undertake (i) any appraisal of the assets and liabilities (contingent or not) of the Companies; (ii) any review or audit of the historical financial statements or of the Financial Statements of the Companies, and of the cash balances and cash equivalents, financial applications, loans and financings, hedge and the contingency provisions for the Companies on March 31st of 2005, all of which is mentioned in Ernst &Youngs letter dated April 13th, 2005; (iii) any technical audit of the operations of the Companies; or (iv) any physical inspection of the property or assets of the Companies.
BAAR does not and will not, expressly or implicitly, make any representation or statement regarding the Information (including projections or forecasts of the Companies or assumptions and estimates on which such projections and forecasts were based) used in preparing the Valuations, nor assumes any responsibility or obligation to indemnify any party for the content, accuracy, veracity, completeness, consistency, sufficiency and precision of such Information, each of which is the sole and exclusive responsibility of the Companies.
BAAR considered, for the purposes of the Valuation, a stable macroeconomic scenario in Brazil.
There is no way to ensure that the estimates and projections used for purpose of the Valuations, especially those which depend on the occurrence of future and uncertain events beyond the control of the Companies, will actually be achieved. The actual future results of the Companies may differ significantly from the forecast results utilised in connection with the Valuations. Therefore, BAAR does not assume any responsibility should the future results be substantially different from those used in connection with the Valuations.
BAAR does not express, through the Valuations and this letter, any view as to the distribution of economic value among the various types and/or classes of shares of the Companies. The Valuations and this letter do not constitute a judgement, opinion or recommendation to the management of the Companies, the Companies or their shareholders as to the convenience and opportunity, or to the strategic decision of the Companies, to implement the Transactions. The Valuations and this letter do not constitute any recommendation to the shareholders of the Companies as to how they should vote their shares in connection with the Transactions, and are not intended to support any investment decision.
Furthermore, for the purposes of this letter, BAAR was retained based on the assumption that the proposed exchange ratios shall constitute equitable treatment to the Companies if they were contained within the value ranges resulting from the Valuations, executed as described hereof.
BAAR has rendered, directly or through its related companies, certain financial and investment banking services to the Companies and their controlling shareholders, subsidiaries and affiliates, for which it received compensation, and it shall continue to render such services and may, at any time, render additional services. BAAR is and may become at any time, directly or through its related companies, a creditor of the Companies and their controlling shareholders, subsidiaries and affiliates in certain financial transactions. BAAR also acts as the transfer agent and registrar of the shares of TIM Sul, TIM Nordeste, and TIM Participações and therefore, shall perform certain administrative functions in connection with the Transactions.
During its regular course of business, BAAR may trade or hold, directly or through its related companies, on its behalf or on behalf of third parties, securities of the Companies and their controlling shareholders, subsidiaries and affiliates, and, as a consequence thereof, may hold, at any time, long or short positions in these securities. In addition, the research departments as well as other divisions within BAAR including its related companies, may use in their analyses, reports and publications, estimates, projections and methodologies other than those used in the Valuations, and therefore, such analyses, reports and publications may contain results that differ from those described in the Valuations.
BAAR shall receive compensation for rendering services in connection with the Valuations and this letter, regardless of the completion of the proposed Transactions. The Companies have agreed to indemnify BAAR and its associated companies for certain liabilities which may arise from the services related to the Valuations and this letter, and agreed to reimburse BAAR for fees of our legal advisors retained in connection with the preparation of the Valuations and this letter. The Valuations and the content of this letter constitute proprietary information of BAAR and shall not be disclosed or referenced to third parties, nor distributed, reproduced or used for any other purpose without the prior written consent of BAAR.
BAAR shall not be bound, at any time, to update, review or correct any information contained in the Valuations and in this letter, nor to provide any additional information on the Valuations and this letter.
In accordance with the discounted cash flow methodology (DCF) selected for rendering the valuations of the Companies as described in the Valuations, the value per lot of 1,000 shares range of the Companies may be summarized as follows:
in Reais (R$) | Values per Lot of 1,000 Ações | |
Minimum | Maximum | |
TIM Sul | 254.2330 | 332.3136 |
TIM Nordeste | 128.9228 | 165.8236 |
TIM Participações | 8.8413 | 11.4820 |
Based on such value ranges per lot of 1,000 shares, the Exchange ratios between one TIM Sul share for shares of TIM Participações and between one TIM Nordeste share for shares of TIM Participações can be summarized as follows:
Exchange Ratios | ||
Minimum | Maximum | |
Shares of TIM Participações for each share of TIM Sul | 28.7550 | 28.9420 |
Shares of TIM Participações for each share of TIM Nordeste | 14.5818 | 14.4420 |
The Boards of Directors of TIM Sul, TIM Nordeste and TIM Participações, following the meeting held on the date hereof in the city of Rio de Janeiro, State of Rio de Janeiro, have proposed the exchange ratios of 28.8421 shares of TIM Participações for each share of TIM Sul and of 14.5160 shares of TIM Participações for each share of TIM Nordeste.
Subject to the qualifications above, as the exchange ratios proposed by the Boards of Directors of TIM Sul, TIM Nordeste and TIM Participações for purposes of implementation of the Transactions is within the value ranges indicated above, we are of the view that such exchange ratios provide equitable treatment to the Companies.
Sincerely,
_________________________
Banco ABN AMRO Real S.A.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TIM PARTICIPAÇÕES S.A. | ||
Date: April 28, 2005 | By: | /s/ Paulo Roberto Cruz Cozza |
Name: Paulo Roberto Cruz Cozza | ||
Title: Chief Financial Officer |