BOARD OF DIRECTORS STATEMENT REGARDING THE OPPORTUNITY AND CONDITIONS OF JOSÉ DE MELLO SAÚDE, S.A. OFFER

Transcription

1 BOARD OF DIRECTORS STATEMENT REGARDING THE OPPORTUNITY AND CONDITIONS OF JOSÉ DE MELLO SAÚDE, S.A. OFFER 24 September 2014

2 INDEX 1. INTRODUCTION TERMS AND CONDITIONS OF THE COMPETING OFFER OFFEROR S STRATEGIC PLANS FOR ESS IMPACT OF THE COMPETING OFFER ON THE INTERESTS OF EMPLOYEES AND THEIR WORKING CONDITIONS AND ON THE LOCATIONS WHERE ESS OPERATES TYPE AND AMOUNT OF THE CONSIDERATION OFFERED INTENTIONS OF THE MEMBERS OF THE BOARD OF DIRECTORS THAT ARE ALSO ESS SHAREHOLDERS ON THE ACCEPTANCE OF THE COMPETING OFFER OTHER INFORMATION APPROVAL OF THE REPORT BY THE BOARD OF DIRECTORS SCHEDULE SCHEDULE

3 1. INTRODUCTION The Board of Directors of Espírito Santo Saúde SGPS, S.A. ( ESS ), having received, on 17 September 2014, and analysed, the draft prospectus and draft offer announcement ( Draft Prospectus and Draft Offer Announcement, respectively) for the general and voluntary competing takeover offer for the acquisition of the shares representing the share capital of ESS ( Competing Offer ), which was disclosed in a preliminary announcement on 11 September 2014, ( Preliminary Announcement ), presented by José de Mello Saúde, S.A. ( Competing Offeror or JMS ), hereby issues a statement regarding the opportunity and conditions of the Competing Offer, as provided for and for the purposes set out in number 1 of Article 181 of the Portuguese Securities Code ( PSC ). Considering that the preliminary announcement of the general and voluntary takeover offer for the acquisitions of the shares representing the share capital of ESS announced by JMS occurred after the disclosure of other preliminary announcement of general and voluntary takeover of the shares of ESS on 19 August 2014 ( Initial Offer ) by the Ángeles Servicios de Salud, S.A. de C.V. Group, ( GASS ), the preliminary offer announced by the JMS on 11 September 2014 constitutes a competing offer, in accordance with the Article 185 of the PSC, which states that, from the publication of a preliminary announcement of a general takeover, any other general takeover offer over the same class shares can only be carried out through a competing offer. On 19 September 2014, following the reception of the Draft Prospectus and the Preliminary Announcement of the Competing Offer by ESS, the Initial Offer by GASS was registered and the respective prospectus and preliminary announcement were published. It should be noted that, according to the preliminary announcement and prospectus of the Initial Offer: a) the consideration offered in the Initial Offer is now in the amount of 4.50 (four Euros and fifty cents) per share; and b) the term set out for the Initial Offer period expires at 3:30 p.m. on 3 October Therefore, the pursuit of the Competing Offer implies, at the moment, that JMS: a) reviews the consideration proposed, so it is at least 2% higher than the consideration of the Initial Offer; and b) proceeds with the launch of the Offer until the fifth day prior to the end of the Initial Offer period. Following this, it was also disclosed, on 22 September 2014, another preliminary announcement of a general and voluntary competing takeover offer for the acquisition of the shares representing the share capital of ESS, by the company Fidelidade 1

4 Companhia de Seguros, S.A., in which the consideration offered, to be paid in cash, is in the amount of 4.72 (four Euros and seventy two cents). The Competing Offer is general and voluntary and the Offeror undertakes to purchase the whole of the shares whose holders validly accept. In summary, from the analysis of the Draft Prospectus and Draft Competing Offer Announcement, the Board of Directors of ESS considers that: (i) (ii) (iii) (iv) Such as in the case of the Initial Offer, the success of the Competing Offer is deemed to be a way of obtaining the necessary shareholder stability in ESS, allowing the latter to resume its medium and long term strategic management, as well as to normalise its relationship with the various stakeholders. However, the increase leverage resulting from the Offeror s implementation of the Competing Offer and the current financial situation of the Offeror s main shareholder are two factors that could condition the above-mentioned objectives; There is a deemed strategic alignment between the Offeror and ESS, given that the Offeror considers ESS strategic pillars to be appropriate; The consideration currently offered by the Offeror does not allow the pursuit of this Competing Offer, seeing as the consideration of the Initial Offer was revised to 4.50 (four Euros and fifty cents) per share. Nonetheless, even though the value of 4.40 (four Euros and forty cents) per share, proposed by the Offeror, fits within the analysed market valuation criteria (price of IPO, share performance since the IPO, multiples of listed peer companies and comparable transactions, evolution of analyst outlooks from equity research and the comparison with the consideration offered by GASS), may not fully reflect the potential control premium and the benefit of the possible synergies resulting from the success of the Competing Offer mentioned by the Offeror; The possible success of the Competing Offer shall entail a concentration of companies, which will determine a change in the private healthcare services provision market structure in Portugal, subject to the analysis of the Competition Authority. The mentioned concentration appears to be capable of affecting the various ESS stakeholders: on one hand, at the level of the current existing scenario in relation to freedom of choice between the available alternatives, either in respect of employers in the case of the employees, or providers of healthcare services in the case of the clients/patients; and on the other, in what concerns the current equilibrium in the insurance companies, healthcare systems and other payers market. 2

5 This report was drafted based on the best information made available to ESS Board of Directors, notwithstanding it can, in no way, replace the individual assessment required from each shareholder in his/her decision-making process. In the drafting of the present report, the Board of Directors was advised by Banco Espírito Santo de Investimento, S.A. as its financial consultants and Linklaters LLP, Sucursal em Portugal as its legal advisors. The following documents are available for consultation by any interested party on the website of the Portuguese Securities Commission ( CMVM ), whose address is as well as on the website of ESS, whose address is Preliminary Announcement of the Initial Offer; Preliminary Announcement of the Competing Offer; Preliminary Announcement of the general and voluntary takeover offer for the acquisition of the shares representing the share capital of ESS announced by the company Fidelidade Companhia de Seguros, S.A.; Statement of the Board of Directors of ESS regarding the opportunity and conditions of the Initial Offer; Initial Offer Prospectus; and Initial Offer Announcement. 3

6 2. TERMS AND CONDITIONS OF THE COMPETING OFFER ESS share capital is represented by ordinary nominative book-entry shares whose nominal value is 1.00 (one euro) each and which are admitted to trading on the Euronext Lisbon regulated market managed by Euronext Lisbon Sociedade Gestora de Mercados Regulamentados, S.A. ( Euronext Lisbon ), with the ISIN code PTEPT0AM0005 ( Shares ). Offeror and Purchasing Company According to the information contained in the Draft Prospectus and Draft Competing Offer Announcement, the Offeror is José de Mello Saúde, S.A., incorporated under the Portuguese laws, with registered office at Avenida do Forte n.º 3, Edifício Suécia III, piso 2, Oeiras and registered at the Commercial Registry Office of Cascais, under the single registration and collective person and features a fully paid-up share capital of 53,000, Also according to the Draft Prospectus of the Competing Offer, 65.85% of the Offeror s share capital is held by José de Mello SGPS, S.A., 4.15% is held by the Fundação Amélia de Mello and the remaining 30% are indirectly held by the Associação Nacional de Farmácias (National Pharmacy Association) (through Farminveste, S.A.). The Offeror is integrated in the José de Mello s Group ( JMG ) and operates in the healthcare sector trough various healthcare facilities in the North of Portugal and Great Lisbon regions, of which seven hospital units aimed at the provision of healthcare services under medical or surgical hospitalisation and/or on an outpatient basis, five outpatients clinics and one institute providing primary non-acute care and a imaging and nuclear medicine unit, among other complementary activities to healthcare. Type of Competing Offer Since the preliminary announcement of the general voluntary takeover offer for the acquisition of the shares representing the share capital of ESS published by JMS occurred after the disclosure of the Initial Offer by GASS, the offer preliminary announced by JMS on 11 September 2014 constitutes a competing offer, in accordance with the Article 185 of the PSC, which states that, from the publication of a preliminary announcement of a general takeover offer, any other offers over the same class shares can only be carried out through a competing offer. Furthermore, on 19 September 2014, following the reception by ESS of the Draft Prospectus and the Preliminary Announcement of the Competing Offer by JMS, the Initial 4

7 Offer was registered and the respective prospectus and preliminary announcement were published. Subsequently, on 22 September 2014, another preliminary announcement of a general and voluntary competing offer over the shares representing the share capital of ESS unit was disclosed by company Fidelidade Companhia de Seguros, S.A., in which it is stated that the consideration offered, to be paid in cash, is in the amount of 4.72 (four Euros and seventy two cents). Additionally, the Competing Offer is general and voluntary, covering the whole of ESS issued and circulating Shares. The Offeror undertakes to purchase the whole of the Shares whose holders validly accept the Competing Offer. Financial Intermediaries The financial intermediaries appointed by the Offeror to advise on the Competing Offer, namely by rendering the services necessary for the preparation, launch and execution of the Competing Offer, are Banco Santander Totta, S.A and Caixa Banco de Investimento, S.A.. Shares targeted by the Offer The shares targeted by the Competing Offer are the whole of the Shares representing the share capital of ESS. Conditions for the launch of the Offer The launch of the Competing Offer is subject to the approvals, statements of nonopposition and administrative authorisations required under Portuguese law, namely: a) obtaining prior registration of the Competing Offer with the CMVM; b) statement of non-opposition by the Portuguese Competition Authority; c) obtaining the unconditional consent, or statement of non-opposition, by the Portuguese State, represented by Ministry of Health and Regional Administration of Health of Lisbon and Tagus Valley, I.P., for the change of control of the company SGHL Sociedade Gestora do Hospital de Loures, S.A and the company HL Sociedade Gestora do Edifício, S.A., through the indirect transfer of the shares representing the share capital; and d) obtaining a statement from CMVM of the exemption of the duty to launch a subsequent mandatory offer as result of the acquisition of Shares under the 5

8 Competing Offer, pursuant to subparagraph a) of paragraph 1 of Article 189 of PSC, in favour of Offeror and the persons to whom the voting rights attaching thereto are attributed, even if subordinated to the survival of the respective legal requirements. Regarding condition of launch c), this Board of Directors recalls that under Clause 12 of the Loures Hospital Management Agreement, entered into by the Portuguese State, as the Contracting Public Entity, SGHL Sociedade Gestora do Hospital de Loures, S.A. and HL Sociedade Gestora do Edifício, S.A., the shares of the referenced Managing Entities are necessarily nominative and their transfer, whether between shareholders or to third parties, is subject to the prior consent of the Contracting Public Entity, under penalty of becoming null and void. Said clause further clarifies that any acts that result in or that may possibly result in a change of control or of management of the Managing Entities, such as a direct or indirect change in ownership of its share capital, are encompassed by the said regime. Under the terms of Clause 19 of the Agreement, the referenced prior consent shall be express and written and given within thirty days of the presentation of the request, by joint ministerial order of the Ministries of Finance and of Health. On the 19 September 2014, GASS Initial Offer was registered and, in accordance with Initial Offer s offer announcement and prospectus, the consideration offered is now in the amount of 4.50 (four Euros and fifty cents) per share and the offer period expires at 3:30 p.m. on 3 October Therefore, the launch of the Competing Offer implies that JMS: a) reviews the consideration proposed, so it is at least 2% higher than the consideration of the Initial Offer; and b) proceeds with the launch of the Offer until the fifth day prior to the end of the Initial Offer period. The effectiveness of the Competing Offer is, in turn, dependent on the verification, until the end of the Competing Offer period, on the following conditions: 1. acquisition by the Offeror, until the end of the Competing Offer, of a total amount of Shares that, when added to the Shares detain by other entities that are, or will be with the Offeror, on that date, in any of the circumstances mentioned on number 1 of Article 20 of the PSC, provide him 50.01% of voting rights correspondent to the share capital of ESS; 2. obtaining the unconditional consent, or statement of non-opposition, to the transfer of the Shares and to the indirect transfer of the shares representing the share capital of ESS subsidiaries by certain private financing banks in the context of financial contracts with change of control clauses, as stated on the Shares IPO prospectus, of 24 January

9 On the date of this report, the Board of ESS is not aware if the satisfaction of the condition 2, herein identified, is satisfied. It should be noted that, according to Article 185(5) of the PSC, not only does the consideration proposed by JMS needs to be reviewed, in order to satisfy the minimum limit set out in that Article, but also the Competing Offer cannot include conditions which make it any less favourable than the Initial Offer. In this context, is should be noted that GASS Initial Offer, as registered on 19 September, subjects the effectiveness of the Initial Offer to only one condition: the acquisition by the acquiring company, in the Initial Offer, of a number of Shares representative of, at least, 50.01% of the share capital of ESS. Therefore, between the preliminary announcement of the Initial Offer and the offer announcement disclosed on 19 September, GASS stopped conditioning the effectiveness of the Initial Offer to, among others, the obtainment of the unconditional consent or statement of non-opposition to the transfer of the Shares or to the indirect transfer of the shares representing the share capital of ESS subsidiaries by certain private financing banks, in the context of financial contracts with change of control clauses. As the Initial Offer was registered on the above-mentioned terms, it is up to JMS to ensure that the conditions which it will impose to the Competing Offer will not make it less favourable than the Initial Offer, trough, inter alia, the satisfaction before registration of the Competing Offer or the elimination of the above mentioned condition 2. The Offeror further listed in the Preliminary Announcement, in the Draft Offer Announcement and in the Draft Prospectus of the Competing Offer, a set of assumptions concerning the decision to launch the Competing Offer (see paragraph 16 and 20 of the Preliminary Announcement of the Competing Offer). Under these assumptions, it is also assumed in the Competing Offer, as determined in the Preliminary Announcement, in the Draft Offer Announcement and in Draft Prospectus of the Competing Offer, "the absence of any (i) material change to the national and international financial markets and to their respective financial institutions, not reflected in the official scenarios disclosed by the Eurozone authorities, or (ii) in the markets in which the Offeror and the Target Company operate, and that has a material adverse effect on the Competing Offer or in Target Company s activity, by exceeding its inherent risks (ESS highlight). For the purposes of Article 185(5) of the PSC mentioned above, it should be noted that the corresponding assumption to the one above cited in GASS Initial Offer reads as follows: "the absence of any material change in the national and international financial markets and to their respective financial institutions, not reflected in the official scenarios disclosed by the Eurozone authorities and that has a material adverse effect on the Offer by exceeding its inherent risks." Comparing the wording of both assumptions it should be noted that JMS assumption in relation to a material change in the markets includes the 7

10 markets in which either JMS or ESS operate (a somewhat indeterminate concept, moreover), which does not occur in GASS Initial Offer. Consideration The consideration offered by the Offeror is 4.40 (four Euros and forty cents) per Share, an amount which is "deducted from any (gross) amount that may be attributed to each Share, whether as dividend, advance payment of year-end profits, distribution of reserves or other, such deduction being made at the time the right to the amount in question has been detached from the Shares and if such occurs prior to the financial settlement of the Competing Offer" (the "Consideration "). However, as the value of the consideration of the Initial Offer is now set at 4.50 (four Euros and fifty cents) per share, if JMS intends to proceed with the Competing Offer it should review the consideration proposed in order to make it at least 2% higher than the value of the Initial Offer s consideration. The Consideration as proposed would be paid in cash. According to the Draft Prospectus, "The total amount of the consideration is guaranteed as provided for under number 2 of Article 177 of the Portuguese Securities Code." As stated in the Competing Offer s Draft Prospectus, the Offeror shall deposit with Banco Santander Totta a global amount to be determined, which corresponds to the portion of the Competing Offer financed with the Offeror s funds, and the remaining amount will be covered by an undertaking to pay assumed by a bank syndicate composed by Banco Santander Totta, Caixa Económica Montepio General, Caixa Central de Crédito Agrícola Mútuo, C.R.L. and Banco BIC Português, S.A. and issued on the basis of a credit facility agreement agreed between the bank syndicate and the Offeror, governed by Portuguese Law and subject to the Portuguese Jurisdiction. Offer period and minimum number of Shares to be purchased The Competing Offer s Draft Prospectus does not contain yet a definition of the offer period. The Offeror made the Competing Offer conditional on the purchase, in the Competing Offer, of a number of Shares representing at least 50.01% of ESS share capital. The result of the Competing Offer will be determined at a special session of the regulated market of Euronext Lisbon, planned for a date yet to ascertain. The respective physical and financial settlement will take place on the third business day following the special session. 8

11 Public company status The Offeror has stated that in case it reaches or exceeds, either directly or as provided for under Article 20 of the PSC, (i) 90% of the voting rights attached to ESS share capital and (ii) 90% of the voting rights encompassed by the Competing Offer, as a result of the Competing Offer or other lawfully transactions which are relevant to the calculation of the said percentage, it will make use of the squeeze-out mechanism set out in Article 194 of the PSC which allows the acquisition of the remaining Shares within the three following months. The Offeror also stated that, even if the assumptions referred above are not verified, but the Offeror holds at least 90% of the voting rights attached to ESS share capital calculated in accordance with Article 20 of PSC, as a result of Competing Offer, it will request to the CMVM, within six months from the closing of the Competing Offer, the loss of public company status by ESS, as provided under Article 27(1)(a) of the PSC and will use the mechanism of squeeze-out of the remaining Shares under Article 490 of the Commercial Companies Code. Finally, the Offeror further reserved itself the right, in case of not holding, as a result of the Competing Offer, at least 90% of the voting rights attached to ESS share capital, but 90% of its share capital, to make use of Article 27(1)(b) of the PSC, i.e., by passing a resolution in the General Meeting taken by a majority of not less than 90% of ESS s share capital, resolving the loss of public company status by ESS, and subsequently make use of the mechanism of squeeze out of the remaining Shares under the mentioned Article 490 of the Commercial Companies. The Offeror s exercise of the rights referenced in the preceding paragraphs entails the immediate delisting of the Shares from the regulated market of Euronext Lisbon, being its readmission barred for a one-year period, although there may be instances where the remaining shareholders are hindered from making use of the squeeze-out mechanism set out in Article 194 of the PSC. Statement of interest on the part of ESS shareholders ESS shareholders that intend to accept the Competing Offer should state such interest during the Competing Offer period through sell orders issued through their broker companies, broker-dealer companies and at the branches of the financial intermediaries eligible to render securities registration and deposit services. 9

12 3. OFFEROR S STRATEGIC PLANS FOR ESS Opportunity of the Competing Offer Because ESS is a company mainly owned by companies of the Espírito Santo Group, it is presently in an uncertain situation concerning the future of its controlling shareholders. ESS Board of Directors considers that, such as in the case of the Initial Offer, due to this context, the Competing Offer through which the Offeror proposes to purchase the whole of ESS share capital, is deemed to be a way of increase the shareholder stability. However, in this context, it is necessary to carry out two important analyses on the Competing Offer: (i) an analysis of the financing structure proposed by the Offeror, and (ii) an analysis of potential consequences on the configuration of the ESS units and services before the possible competitive environment resulting from the completion of the Competing Offer. I. Analysis of the financing structure proposed by the Offeror According to Draft Prospectus submitted by the Offeror, the acquisition of ESS, if implemented at 100% will be financed in 1/3 (one third) by funds of the Offeror" and in 2/3 (two thirds) through "financing". ESS Board of Directors considers that: i) it is not clear whether the "funds of the Offeror" contributing to the financing of the acquisition, result from a capital increase of the Offeror or from allocation of the cash balance of the Offeror for this purpose; ii) iii) based on the latest financial indicators (June 2014) on the Offeror and the Target Company, the ratio commonly used by the market to gauge the level of leverage of a company, i.e., the Net Debt / EBITDA ratio results in 4.4x, in the case of a capital increase of the Offeror, or in 5.5x, in case of allocation of resources of the Offeror, as set out above. Still, if the most conservative scenario is considered, an indebtedness of 4.4x EBITDA is about 33% above the sector median (3.3x EBITDA), considering the Net Financial Debt / EBITDA ratios of comparative listed companies (see table in Annex 1); the financing of the acquisition has a significant impact on the ability of the company resulting from the merger between the Offeror and the Target Company, to release sufficient cash flows, to enable the development of the strategic plan set by the Target Company. It is noted that the expansion plans 10

13 announced by ESS for the next three years planned to absorb all of the cash flows generated by the Target Company; iv) the above-mentioned limitations could have only a relative importance in the achievement of the objectives of the Target Company, if the main shareholder of the Offeror presented a low level of leverage. However, as far as is publicly known, the José de Mello Group had, on 31 December 2013, 5.5 billion of net debt, which corresponds to a ratio of financial autonomy of only 6.5%. For the reasons explained above, it appears to the ESS Board of Directors that the increase of indebtedness of the Offeror resulting from the implementation of the Competing Offer and the current financial situation of the main shareholder of the Offeror are two factors that could adversely impact on the recovery by the ESS of its strategic management in its medium and long term, going beyond the current management, for the purpose of pursuing the development of its expansion plans already announced, as well as the normalization of relations with the various stakeholders, in particular for the returning to the financial market without restrictions. II. Analysis of the potential consequences to the competitive environment of the completion level of the Competitor Offer The Offeror controls a group operating in the health sector, including hospitals and other units which provide services in this area. Thus, the potential acquisition of ESS by the Offeror will configure a merger, subject to approval by the competition authorities responsible under applicable law. Given the size and geographical location of some of JMS hospitals, when analysed in conjunction with the ESS, the Competition Authority is likely to trigger a process of further investigation. In view of the Competing Offer submitted by JMS, the Competition Authority, following the merger control process mentioned above, may require some additional conditions for the approval of the transaction that may turn out to be adverse to ESS interests and of its stakeholders. Given the practice of the Competition Authority, the determination of the conditions that may eventually come to be applied is made taking into account the market share that the Offeror and ESS have through the establishments and services offered by both groups, in the geographic area where such establishments are located. In this scenario, one of the conditions which may be imposed could be the disposal of the establishments held in the respective geographical areas where there is a 11

14 concentration or, eventually, the provision of some services in those units in conditional terms. In principle, in case some of these conditions are imposed, if the disposition determined by the Offeror were to focus on the ESS units or any conditions are imposed for the approval of the acquisition of control in ESS by JMS that affect or restrict the provision of services in health units belonging to the ESS universe, such conditions will impact on ESS activity Purpose of Acquisition The Board of Directors notes that the Offeror presents as acquisition purposes: i) creation of an internationally reference operator with a national basis; ii) enhancement of the quality of the healthcare services provided to the citizens; iii) oppose the structural trend of increasing costs in the healthcare sector; iv) increasing the attractiveness for healthcare professionals and the investment in medical training; v) provide ESS with a stable and transparent shareholder structure, with a national base; and, vi) strict compliance with the commitments undertaken under the Public-Private Partnerships ( PPPs ) entered into with the Portuguese State. I. Creation of an internationally referred operator with a national basis The Offeror stated in the Draft Prospectus that "the combined revenues of the Target Company and the Offeror shall compare with some of the major European operators in the health services sector (...) Still, the size of the new entity will not exceed about 8% of the market of provision health care services in the national market." The Board notes that, although the market share in terms of operating revenues from the resulting business between the Target Company and the Offeror (the "Resulting Business") reaches about 8%, when analysing the healthcare services provision national market (public and private sector), there are changes at the public and private sector levels. Regarding the public sector, despite the small market share, it seems relevant to note that the Resulting Business would result in one sole operator holding three of the four PPPs in operation. In what concerns the private sector level, the Resulting Business would result (based on the financial information of end the of 2013) in operating revenues 4.5 times higher than the second largest private operator in the market (HPP Group) and 12.2 times higher than the third largest private operator in the market (Trofa Group). This is likely to impact the current market equilibrium moreover at the insurance companies level and other payers, but also to the suppliers. The Resulting Business would result, in particular, in an increase of the market share 12

15 in the segment of private hospitals in the Greater Lisbon Area (Grande Lisboa) and Greater Porto Area (Grande Porto). II. Enhance the quality of the healthcare services provided to the citizens The Board of Directors has noted that the Offeror states in the Draft Prospectus that the acquisition of the Target Company and the business integration will result in a significant increase of the quality of the services provided to the citizens. There is a set of aspects that will have a positive impact in the level of the services provided, in particular those referred to thereinafter. Firstly, there will be a greater ability to develop services in geographical areas where neither ESS nor JMS have the ability to invest, given the lack of critical mass to justify the investment. Furthermore, the congregation of know-how and capacity to deliver will allow to test and to develop the provision of new healthcare services, notably in the segment of those chronically ill. The Board of Directors understands that there may be a potential to enhance the quality of the services provided through the sharing of best practices between the Offeror and ESS. The Offeror also states that the business integration will increase the ability to invest in cutting edge technology and equipment, which will result in both a greater and better diagnostic and treatment capacity and the decrease of the citizens demand for differentiated treatments abroad and such combination will stimulate the share and crosscutting introduction of the best clinical and services management practices. The Board of Directors understands that the effects referred to by the Offeror as a result of the integration of both groups are valid, adding that the Resulting Business will entail greater levels of utilization of existing assets of each one of the groups, through the increase of the volume of cases that require such treatments. III. Oppose the structural trend of increasing costs in the healthcare sector It is mentioned in the Draft Prospectus that the Offeror presents levels of efficiency which have obtained public recognition, for instance in the costs rankings for hospitals in the NHS. According to the research made by ACSS in 2013 (September), the treatment of the standardised patient costs Euros in Braga Hospital, the lowest value amongst 31 hospitals and hospital centres which perform services as Entidades Públicas Empresariais or Public-Private Partnerships. The same research also refers that Braga Hospital has the medical staff with the greater productivity index amongst the national hospitals and the nursing staff with the greater efficiency index amongst the hospitals with its size and complexity, from a national perspective. The integration will consolidate such levels of efficiency, either in the productivity segment or in the costs optimisation. 13

16 The Board of Directors agrees that the Resulting Business of the two healthcare groups with such a size may result in potential increases of efficiency. Nevertheless, based on the benchmarking research performed by the Central Administration of the Health System (Administração Central do Sistema de Saúde, I.P.), on September 2013 on the National Healthcare Service s hospitals, mentioned by the Offeror, the Board of Directors wishes to emphasise that the hospitals under a PPP regime should be compared with the hospitals of the group in which they are a part. Thus, when analyzing Hospital Beatriz Ângelo (ESS), the latter presents the lowest operational costs per standardised patient of its comparable group ( 2,312 per standardised patient), a value 20.0% lower than the median of its comparable group (Group C). IV. Increasing the attractiveness for healthcare staff and the investment in medical training The Offeror states that the acquisition of the Target Company will allow the dilution of costs associated to this type of training and integrate the training programs in a more efficient way, which means it will be possible to support an increasing number of Portuguese doctors in terms of research and professional development. The Board of Directors has the investment in training and professional development as one of the pillars of its activity. Furthermore, it agrees that the Resulting Business will allow the achievement of economies of scale and knowledge in this specific area, though the emphasis should be in the development of a comprehensive, distinctive and differentiated offer, founded in the existing experience in both groups and with potential to create value beyond the limits of the combined group. V. Provide ESS with a stable and transparent shareholder structure, with a national base The Offeror states in the Draft Prospectus that the difficult financial situation of the Luxembourgish company which indirectly holds 51% of the Target Company is, as it is known, source of uncertainty and instability for the development of a coherent and value added strategy. The success of the Competing Offer will allow the Target Company to obtain shareholder stability, providing it with a transparent and national control structure. Thus the Target Company will be provided with all the conditions for following the course and strategy to be implemented after the Offer, benefiting from a stable shareholder s support for that purpose. As mentioned above, as ESS is a company mainly owned by companies of the Espírito Santo Group, it is presently in an uncertain situation concerning the future of its controlling shareholders. 14

17 ESS Board of Directors considers that, due to this context, the Competing Offer through which the Offeror proposes to purchase the whole of ESS share capital, is deemed to be a way of obtaining the necessary shareholder stability. Nevertheless, and as already mentioned above, the increase in debt by the Offeror as a result of the conclusion of the Competing Offer and the current financial situation of the main shareholder of the Offeror are two factors which might have a negative impact in the return by ESS to its medium and long term strategic management in addition to its current course of business through the continued development of its previously announced expansion plans and in the normalisation of its relationship with the various stakeholders, in particular the unrestricted return to the financial market. VI. Strict compliance with the commitments undertaken under the Public-Private Partnerships entered into with the Portuguese State The Offeror states it intends to comply with all commitments undertaken before the Portuguese State under the Loures Hospital Management Agreement whereby one of the companies held by ESS (SGHL Sociedade Gestora do Hospital de Loures, S.A.) is in charge, under a PPP regime, of the management of the Beatriz Ângelo Hospital in Loures, a hospital integrated in the National Health System. ESS strategic aspects to be implemented within the Resulting Business The Board of Directors notes that there it seems to be an alignment between the Offeror and ESS in relation to a central core of operational principles, namely concerning clinical high standards and excellence of the services provided to the customers. In the Draft Prospectus, the Offeror highlights that this operation is not a consolidation in a mature market and, as a consequence, based on an operational restructuring, but rather the integration of two operators with the ability to provide an answer to a market with a significant growing potential and that it considers that a jointly defined strategy will allow ESS to pursue the strategic pillars inherent to its strategic vision with a strengthened capacity to achieve them, as well as the financing plans which have been in the origin of this acquisition have taken into account the implementation of the projects mentioned by ESS in its Prospectus for the public offer of distribution and admission to trading of the Shares. The Board of Directors considers that the market of which both the Offeror and ESS are part has growing potential, but understands that, as previously stated, the Offeror may not have the financial capacity required to allow the entity resulting from the successful conclusion of the Competing Offer to invest in order to benefit from such growing potential, notably through ESS expansion projects, which have already been announced 15

18 to the market (which are briefly described in the prospectus for the public offer of distribution and admission to trading of the Shares, dated 24 January 2014, available on the CMVM website ( and in ESS website ( Nonetheless, from the Draft of Prospectus of the Offer it seems to exist a strategic alignment between the Offeror and ESS, given that the former considers ESS strategic pillars as appropriate: Continuous improvement of ESS main business and commitment to the provision of high standard healthcare services; Enhance the efficiency and productivity between ESS business segments and healthcare units; Increase the coverage and penetration in Portugal; International expansion of ESS services. Lastly, the Offeror describes itself as having size, experience and capacity in the healthcare services sector, in addition to the necessary know-how in ESS business areas, indicating alignment in relation to the main strategic features to be implemented, notably: Enhance the clinical quality ( ); Develop excellence centres ( ); Service of excellence ( ); Expand the national geographical coverage ( ); Enhance the internationalization potential ( ); Efficiency in benefit of the system ( ). 16

19 4. IMPACT OF THE COMPETING OFFER ON THE INTERESTS OF EMPLOYEES AND THEIR WORKING CONDITIONS AND ON THE LOCATIONS WHERE ESS OPERATES Employees ESS Board of Directors considers the repercussions of an offer on the interests of its employees, in particular on their stability and working conditions, as well as their professional development to be a crucial factor in any offer. The Offeror mentions it does not foresee the need to change working conditions nor to significantly reallocate employees, since it intends to continue to operate and conduct ESS business from its existing premises, which are properly dimensioned. Such intention of the Offeror is stated in the following excerpts of the Draft Prospectus: It is important to remember that JMS has been marked by the creation of qualified jobs and business growth, without jeopardizing the existing jobs. The proposition for the integration of businesses between the Target Company and the Offeror is, therefore, an attractive proposition of value and does not intend to threaten the existing jobs. The existing units comprised within the groups headed by the Target Company and the Offeror are properly dimensioned and equipped for the provision of services, thus it is not foreseen that any relevant changes in the working conditions may occur nor that there is a need to perform a significant reallocation of employees. A more efficient management of corporate centres may lead, in particular, to the avoidance of the execution of contracts with new employees for those activities, including in case of new investments. The Board of Directors understands that, notwithstanding the appropriate dimension of the healthcare units human resources of both groups, the Resulting Business may lead, in the short term, to duplication of jobs especially in the corporate centre of the groups, as well as in the healthcare units administrative and/or support roles and directive roles in the units. In the short term, the growth of the group derived from the Resulting Business may be not sufficient to tackle such duplications which may result, from the Board of Directors perspective, in job losses. Additionally (or alternatively to said job losses), the duplication of jobs may cause significant changes in the involved employees role, with the consequent professional downgrading (even if not formal). Specially, regarding healthcare professionals, the Offeror mentions that the integration of both operators will allow to strengthen the value proposition to the clinical staff by means of medical training, differentiation opportunities through sub-specialisation and access to cutting edge clinical equipment. It should be noted JMS was pioneer in the training 17

20 segment and has been playing a role in the improvement of the State s actions on this regard, by extending the training of doctors on internship to private operators and, this year, by awarding doctoral grants to Portuguese doctors. Implementing this operation, through a dilution of costs, will allow the support of an increasing number of Portuguese doctors in their relevant pre or post graduation training. The Board of Directors understands that, should the Competing Offer be successful, this positioning of the Offeror concerning professional and academic training could leverage what already occurs in the ESS group units to the scale increase effect. Nevertheless, the Board of Directors understands that the successful conclusion of the Competing Offer may hinder the current scenario in which the doctors, nurses and health technicians exercise their freedom of choice in relation to their employers, as the negotiation power of the entity resulting from the Resulting Business will be boosted. Clients / Patients Given the aligned strategy, as well as both ESS and the Offeror s market positioning, the Board of Directors expects that the quality of the services rendered, as well as the level of client service of the various ESS units will be maintained, should the Competing Offer be successful. The following excerpt from the Draft Prospectus supports this: With this operation clients/patients will benefit from an increase of access to better healthcare services, with functionalities which provide them an answer to their needs and demands and in geographical areas where until now neither the Offeror nor the Target Company had the capacity to invest given the lack of critical mass. However, the board of Directors considers that a possible successful conclusion of the Competing Offer may hinder the current scenario in which the clients / patients may exercise their freedom of choice in relation to the providers of healthcare services. Insurance Companies / Healthcare / Payers and Suppliers In light of the stated shared strategic vision of the Offeror and ESS, as well as the agreement stated by the Offeror in the Draft Prospectus of the Competing Offer with ESS management model, no impact on the current relationship with healthcare / payers and suppliers (actual and potential) is expected. Nevertheless, the Board of Directors further considers that the success of the Competing Offer may have an impact in the current balance of the insurance market and other paying entities, insofar as it will involve a concentration of companies that would increase ESS and the Offeror s market power (by means of the entity resulting from the Resulting Business) towards such insurance companies and other payers. 18

21 Regarding the suppliers, the Offeror states that considering that the top ten list of suppliers comprises medicines and consumable health products international operators, which negotiate with several services providers, a great number of which are international services providers with a turnover exceeding a billion Euros (from a national perspective, a situation similar to the State as a services provider), the integration of the two operators will have no impact in the existing agreements. The Board of Directors considers that, notwithstanding the dimension of the entity resulting from the Resulting Business when compared with European operators as well as with the State, the conclusion of the Competing Offer may have an impact especially in relation to smaller national suppliers. State The Offeror states it intends to comply with all commitments undertaken before the Portuguese State under the Loures Hospital Management Agreement whereby one of the companies held by ESS (SGHL Sociedade Gestora do Hospital de Loures, S.A.) is in charge, pursuant to a public-private partnership, of the management of Hospital Beatriz Ângelo in Loures, a hospital integrated in the National Health System. It follows as regards this particular aspect that the Competing Offer is deemed neutral for the public segment of ESS. However, the success of the Competing Offer would reduce the exposure of the State to different management models and its capacity to ascertain the best practises e to promote innovation, seeing as the four hospitals management under the public-private partnership would be managed by only two private operators. Financing entities The Offeror has stated its intention to maintain the financing policies and strategies of ESS and, therefore, no significant changes are expected to the existing relationships between ESS and the financing banks. In this context, the following excerpt from the Draft Prospectus is pertinent: The JMS has a long-term relationship with most of the current ESS financing entities, therefore it will have the ability to maintain the approach followed by the Target Company, namely as to the financing costs reduction component, appropriate level of working capital and continuity of existing agreements strategies. The financing plans supporting this purchasing transaction took this into account the implementation of the projects announced by ESS in its Prospectus for the public distribution offer of Shares. However, the Offeror states that The funding made available under the credit facility agreement entered into for the payment of the consideration due to the acceptance of the 19

22 Competing Offer shall be repaid within no more than 60 months, and it establishes terms and conditions common to this type financing, such as ( ) restrictions to indebtedness, negative pledge, restrictions at the level of the disposal of assets and Shares, and of the acquisitions transactions not related to current course of business and corporate restructuring or transforming transactions (except for any merger transaction between the Offeror and the Company) ( ). The Board of Directors highlights that, considering what was stated above about the Offeror and its corporate group, in Analysis of the financing structure proposed by the Offeror (Chapter 3), that may impinge upon the debt capacity of the corporate group resulting from the Resulting Business to face the expansion plans already announced by ESS to the market. These are plans known by the Offeror and which the latter intends to ensure in case the Competing Offer succeeds, as mentioned in the Draft Prospectus. 20

23 5. TYPE AND AMOUNT OF THE CONSIDERATION OFFERED ESS Board of Directors considers the offered amount of 4.40 (four Euros and forty cents) does not enable the Competing Offer to subsist, as the consideration of the Initial Offer was revised to 4.50 (four Euros and fifty cents) per share. Nevertheless, it should be noted that the offered amount of 4.40 (four Euros and forty cents) per share might not reflect ESS potential long term intrinsic value. Concerning the opinion on the price of the Competing Offer, the Board of Directors took various factors into consideration: Price of the Initial Public Offering (IPO); Share performance since the IPO; Listed peer companies and transactions; Evolution of the outlooks of the Equity Research analysts; Potential creation of value accruing from the Resulting Business of ESS and JMS. Price of the IPO The price offered is higher than the sale price in the IPO ( 3.20) by nearly 38%. ESS ITF (intention to float) was disclosed on 14 January 2014, the price range determined on 24 January ( ) and the roadshow and offer period took place between 27 January and 6 February The determination of a price range in an IPO serves the purpose of attracting the interest of the widest array possible of investors (due to the amplitude of the price range), thereby maintaining a sufficient level of demand even during periods of high volatility with sharp falls in the market, a scenario in which it is possible to set the price at the lower end of the range and, on the other hand, to obtain a price closer to the intrinsic value of the company, if the market were to become more positive. The offer period of the IPO and subsequent determination of the price at the end of this period took place during the last two weeks of January and the first week of February 2014, during which time there was an increase in volatility in the financial markets and an aversion to risk on the part of investors, specially due to fears related to instability in some emerging economies and which are considered to have had a negative impact on the price of the IPO. In fact, this environment translated into a penalization of risk assets (sharp falls in equity markets, depreciation of the currencies of emerging nations) and a 21