4. Calculation of the cost-of-capital rate for 2015

“The risk-free interest rate must be computed based on the GDP weighted average, (source: Eurostat) of the respective country, of implicit rates (yields) of10-year T-bonds, of all Euro zone countries (historical series, based on monthly observations during the two years preceding the year of decision - source: European Central Bank).”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a risk-free interest rate of 2.42% (vide table 3) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

Source: Mazars Report

It is particularly important to refer some situations that were identified by consultants when data were collected for the calculation of the cost-of-capital rate, making it impossible to use some data in the scope of the respective calculation, namely: (i) lack of information on bond issues a far as Estonia is concerned; (ii)  absence of information on Luxembourg’s annual GDP, having been used the published value for the first 9 months of 2014 and (iii) insufficiency of historic data for Latvia and Lithuania, that joined the Euro-area in 2014 and 2015, respectively.

Notwithstanding the identified limitations, it is deemed that, on the basis of data presented by Mazars, as well as of the calculation carried out, the determined rate reflects the best possible estimate for the establishment of the risk-free interest rate for the 2015 financial year.

“The risk premium shall be calculated based on a simple average of ex-ante data - Pablo Fernandez and Damodaran (calculated in the year preceding that of the decision, taking future expectations into consideration), for Portugal.”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a risk premium of 9% (vide table 4) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

“The beta must be calculated using the benchmark of comparable companies. Data correspond to adjusted betas of comparable companies, provided by Bloomberg - historical series for the five years preceding the decision year, with monthly observations. Moreover, data from Bloomberg must be unleveraged from the financial structure and later leveraged, using the Harris and Pringle model (equity β = asset β * (1+ D/E)), using the gearing defined for MEO for the decision year.”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a beta of 0.74% (vide table 5) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

Source: Mazars Report

It is particularly important to refer some situations that were identified by consultants when data were collected for the calculation of beta, specifically as regards PT SGPS, having been considered the series with observations corresponding to 4 years and 3 months, removing observations for the last 9 months of 2014, instead of considering a 5-year series, as defined in the methodology.

According to consultants, “PT SGPS, as far as its performance is concerned for the period after the first quarter of 2014, does not reflect the structure of an operator of the telecommunications sector. The reduction in the total of assets and liabilities of PT SGPS is a sign of the contribution in kind in OI's capital increase that occurred on 5 May 2014, which explains the decrease of most items of the company's consolidated financial position. As a result of that operation, the most expressive asset held by PT SGPS corresponds to the fair value of the investment in OI.”

In this framework, consultants considered that the last 9 months should not be considered in the data sample provided by PT SGPS, concluding that such exclusion “does not bring any robustness problems to the analysis, given that a considerable time horizon remains - as far as the comparable sample is concerned.”

Notwithstanding the identified limitations, it is deemed that, on the basis of data presented by Mazars, as well as of the calculation carried out, the determined value of beta reflects the best possible estimate for the establishment of the beta for the 2015 financial year.

“The gearing must be calculated using the benchmark of comparable companies. Data correspond to gearings of comparable companies in reports and accounts, as provided for by Bloomberg - historic series for the five years that precede the decision year.”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a gearing of 42.97% (vide table 6) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

Source: Mazars Report

It is particularly important to refer some situations that were identified by consultants when data were collected for the calculation of gearing, specifically as regards PT SGPS, having been considered the series with observations corresponding to 4 years and 3 months, removing observations for the last 9 months of 2014, instead of considering a 5-year series, as defined in the methodology.

According to consultants, “PT SGPS, as far as its performance is concerned for the period after the first quarter of 2014, does not reflect the structure of an operator of the telecommunications sector. The reduction in the total of assets and liabilities of PT SGPS is a sign of the contribution in kind in OI's capital increase that occurred on 5 May 2014, which explains the decrease of most items of the company's consolidated financial position. As a result of that operation, the most expressive asset held by PT SGPS corresponds to the fair value of the investment in OI.”

In this framework, consultants considered that the last 9 months should not be considered in the data sample provided by PT SGPS, concluding that such exclusion “does not bring any robustness problems to the analysis, given that a considerable time horizon remains - as far as the comparable sample is concerned.”

Notwithstanding the identified limitations, it is deemed that, on the basis of data presented by Mazars, as well as of the calculation carried out, the determined value of gearing reflects the best possible estimate for the establishment of the gearing for the 2015 financial year.

“The debt premium must be calculated using the benchmark of comparable companies. Data correspond to Credit Default Swaps spreads (10-year maturity) of bond-issuing comparable companies, provided by Bloomberg - historic series for the two years preceding the decision year, monthly observations.”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a debt premium of 2.12% (vide table 7) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

Source: Mazars Report

It is particularly important to refer some situations that were identified by consultants when data were collected for the calculation of beta, specifically as regards PT SGPS, having been considered the series with observations corresponding to 4 years and 3 months, removing observations for the last 9 months of 2014, instead of considering a 5-year series, as defined in the methodology.

According to consultants, “PT SGPS, as far as its performance is concerned for the period after the first quarter of 2014, does not reflect the structure of an operator of the telecommunications sector. The reduction in the total of assets and liabilities of PT SGPS is a sign of the contribution in kind in OI's capital increase that occurred on 5 May 2014, which explains the decrease of most items of the company's consolidated financial position. As a result of that operation, the most expressive asset held by PT SGPS corresponds to the fair value of the investment in OI.”

In this framework, consultants considered that the last 9 months should not be considered in the data sample provided by PT SGPS, concluding that such exclusion “does not bring any robustness problems to the analysis, given that a considerable time horizon remains - as far as the comparable sample is concerned.”

Notwithstanding the identified limitations, it is deemed that, on the basis of data presented by Mazars, as well as of the calculation carried out, the determined value of beta reflects the best possible estimate for the establishment of the beta for the 2015 financial year.

“The tax rate to be considered, for the purpose of the calculation of the cost of capital rate, corresponds to the nominal tax rate.”

Taking into consideration the calculation carried out by Mazars, applicable to the 2015 financial year, a tax rate of 29.50% (vide table 8) was obtained, the detailed calculation of which may be consulted at Mazars' report (vide annex).

Source: Mazars Report