Capital Markets Case Study o 20 March 2008

Capital Markets Case Study o 20 March 2008 o Eugene Belin o Managing Director, Head of FICC, Citi Russia, CIS and Israel

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KPN: Interactive Case Study

Introduction to KPN o Koninklijke (Royal) KPN NV (“KPN”) is a Dutch telecoms company, formerly the Dutch state-owned monopoly o Core activities include: – Fixed-line services in the Netherlands – Mobile services in the Netherlands, Germany and Belgium o KPN is listed on the Amsterdam, New York, London and Frankfurt stock exchanges o KPN has had an eventful history – Privatisation – Deregulation – Purchase of 3 G licences – Rating downgrade 7

May 2000 o KPN’s objectives: – Refinance “bridge facility” arranged for the acquisition of German mobile operator E-plus – Secure medium-term financing for upcoming 3 G auctions u u Positive credit sentiment due to boom time Increased “liquidity” levels in the market High M&A activity (and hence acquisition financings) meant increased loan volumes u Share Price: € 47 -60 u Bond Price: € 89 -91 u Credit Ratings: Aa 2/AA u Loan Price: Libor+3537. 5 bps Bonds Loans u KPN Market data: Equity u Markets hard hit after “bubble” bursts investors nervous u Investor uncertainty following market decline from March 2000 highs. u Deluge of telecom supply expected after licence auctions u Strong telecom equity pipeline

KPN Trading History Share Price and Bond Price Performance – Jan 99 to May 00

BONDS

Result? o The Company announced a jumbo multi-tranche short-dated Eurobond financing through Citi: € 1 bn FRN due Jun 01 $1 bn FRN due Jun 01 € 2. 5 bn FRN due Jun 02 Press Comments Key Features / Terms Issuer Offer Size Market KPN NV Maturities 1, 2 and 3 years Marketing 3 day European roadshow Bookbuild All “pot” No. investors Citi Role u € 6. 0 bn equivalent Multi-tranche Eurobond 140 Joint Bookrunner € 1. 5 bn 5. 575% due Jun 03 “KPN eases telecom fears in short-dated € 6 bn raid” Euroweek u “That’s the way to do it……KPN last week answered the big question – whether telecoms borrowers can access the fixed-income sector – with a resounding YES. ” IFR

July 2000 o KPN’s objectives: – Reduction of debt level having secured financing ahead of 3 G auctions 11 Continued high liquidity in the market and positive credit sentiment due to boom time u Share Price: € 38 -44 u Bond Price: € 89 -90 u Credit Ratings: A 3/A- u Loan Price: Libor+3537. 5 bps Bonds Loans u KPN Market data: u Corporate bond supply increases, requiring issuers to pay higher and higher yield u Govt. spreads widen as USTs outperform Equity u Continued decline from March 2000 highs, however appetite for telecom equity still exists as investors hope for recovery

KPN Trading History Share Price and Bond Price Performance – Jan 99 to Jul 00

EQUITY

Result? o Announcement on 17 th July 2000 that the Company would launch a “substantial” equity offering in Q 4 2000 o € 5. 5 bn combined equity and equity-linked offering launched via Citi on 16 th October 2000 Equity-Linked Offer Size € 4. 0 bn € 1. 5 bn Offer Type Fully marketed Equity Offering “Subordinated” “Convertible” Bond € 17 following bookbuild (2. 4% discount to market) 5 year maturity, 3. 5% coupon, 26% conversion premium 1. 8 x 11. 3 x Joint Global Co-ordinator and Bookrunner Pricing Oversubscription Citi Role

September 2001 o KPN’s objectives: – Obtain short term financing Slowdown in economy raises credit concerns u Lower loan volumes compared to 2000 u Low appetite for telecom names u Share Price: € 3 u Bond Price: € 71 -72 u Credit Ratings: Baa 2/BBB+ u Loan Price: Libor+200 bps Bonds Loans u KPN Market data: u u In secondary market investors rebalance portfolios away from volatile equities and towards cheap bonds But in primary market the high yields are unattractive to issuers Equity u Share price at historic lows. Sentiment weak towards telecom stocks. u Uncertainty over timing of economic recovery

KPN Trading History Share Price and Bond Price Performance – Jan 99 to Sep 01

LOAN

Result? o September 2001: € 2. 5 bn underwritten liquidity facility provided by Citi together with 7 banks o Facility had higher pricing and tighter credit protections Key Results Bond Spreads Stock Price Tightened from over 1000 bps to approximately 400 bps. Current spreads are 50 bps Up by 20% in one day and 65% since its lowest value in 2002 Ratings Upgrade with stable outlook to BBB+/Baa 1 Terms & Conditions Tighter credit protection and higher pricing

November 2001 o KPN’s objectives: – Debt reduction – Avoidance of “fire-sale” of assets – Funding growth Slowdown in economy raised credit concerns u Lower loan volumes compared to 2000 u Low appetite for telecom names u Share Price: € 4 -6 u Bond Price: € 72 -85 u Credit Ratings: Baa 2/BBB- u Loan Price: Libor+200 bps Bonds Loans u KPN Market data: u Corporate market rebounded after Sep 11 activity. u Volatile equity market drives investors towards fixed income. Equity u Volatile markets due to uncertainty on economic recovery u Interest rate driven market u Defensive nature of fixed line telecom stocks attractive

KPN Trading History Share Price and Bond Price Performance – Jan 99 to Nov 01

EQUITY

Result? o KPN announced a € 5. 0 bn equity offering on 21 st November 2001 via Citi. Offering Summary Offer Size € 5. 0 bn Fully marketed Equity Offering Offer Type Existing shareholders given preferential allocation Fully underwritten Pricing % of Enlarged Co € 4. 90 – 18. 6% discount to pre-announcement price 44% Bookbuilding Period 22 nd November to 6 th December Take up by Existing Shareholders 75% Citi Role Joint Lead Manager

18 September 2003 , Y A 21% Performance Since 12 -Mar Stock Price Performance D 30% S R Market: 36% U H. . . T L on 18 -Sep: € 6. 75 T L KPN price A A H C T E N H Government Objectives KPN Objectives O T M ET Remove overhang Raise finance from non-core stakes P 0 Achieve maximum price for them Minimum impact on share price G 3 : Quick, efficient process U 5 O S Y IT KPN: Sector: Competitive auction of a block of shares (“Block trade”)

Block-Trade Exercise Student Hand-out

Parameters of the Auction Number of shares being sold Reference price per share Indicative auction value 300 million € 6. 75 € 2, 025 million Teams Process Considerations Deliberation Winner! (or are they? ) Split into teams of 5/6 Teams will bid against each other to win the auction Explanation of factors to consider Views from key decision-makers in the process 15 minutes for your team to decide what price to bid Submit price in € per share in sealed envelope Whichever team bids the highest price per share will win But, what price were the shares sold to investors at on Friday? Cash prize if a team can win the auction at a price that the shares can be sold at Goal is to win the auction, but not lose money!!!

Risk – Reward Considerations o Key measure to consider in deciding what price to bid at is the percentage discount to the reference price (left hand column of table) o The amount of money the firm makes will depend on what price the shares are sold at the next day (matrix table) Profit & Loss Bid Prices

Share Price Performance o KPN’s share price has increased c. 20% since March o But, it has underperformed the sector by c. 15% for most of the year. One concern of investors has been the overhang, i. e. the potential impact on the share price of the Dutch State selling their 31% shareholding in KPN o This auction of 40% of the Dutch State’s shareholding, will reduce these concerns and is likely to have a positive impact on the share price 10% underperformance KPN Share Price € 7. 50 € 7. 00 € 6. 50 € 6. 00 € 5. 50 € 5. 00 12 Mar KPN 26 Mar 09 Apr 23 Apr 07 May 21 May 04 Jun European Telecoms Sector (rebased) 18 Jun 02 Jul 16 Jul 30 Jul 13 Aug 27 Aug 10 Sep

General Block Trade Information Q 1 01 Q 2 01 Q 3 01 Q 4 01 Q 1 02 Q 2 02 Q 3 02 Q 4 02 Q 1 03 Q 2 03 Q 3 03 0% Discount to Pre-Announcement -1% -2% -1. 6% -3% -2. 8% -2. 9% -4% -3. 6% -4. 1% -4. 2% -5% -4. 4% -5. 0% o Block trades are typically executed at a discount of between 0% and 10%, but this is not a rule o Recently, as block issuance has increased, banks have become more competitive – Tighter discount needed to win a bid -6% -6. 1% Average: -4. 3% -7. 0% -8% o An important consideration for pricing is the average daily trading volume (ADTV) multiple – the number of normal days’ trading volume represented – If a stock has an average of 1 m shares traded per day, a 5 m share block would have a multiple of 5 x o Large block relative to ADTV implies big market impact – larger discount o At 26 x ADTV multiple, KPN block is larger than average

Precedent Auctions Approx. Size Percentage of KPN Multiple of Average Daily Traded Volume € 2. 0 bn / $2. 3 bn 12. 0% 26 x Size % of Company Multiple of Daily Volume Discount Vodafone $5. 1 bn 1. 6% 2. 5 x 5. 6% Yes Vivendi Universal $2. 9 bn 6. 5% 12. 5 x 5. 3% No Vodafone $1. 2 bn 0. 6% 1. 1 x 1. 5% Yes Diageo $1. 1 bn 3. 9% 8. 3 x 7. 8% Yes Telenor $1. 0 bn 13. 9% 88. 1 x 6. 1% Neutral Company Did the Bank Make Money?

View of Independent Equity Research Analysts Recommendation 12 month Target Price Buy € 7. 40 “KPN offers investors a well-run company that is undervalued. In our view, there are few barriers to [share price] outperformance in the short term” Bank “M” Buy € 8. 00 “We see KPN as having a strong management team, good earnings momentum, a sound financial position and a very attractive valuation” Bank “C” Neutral € 7. 10 “Results once again ahead of expectations. However, concerns about domestic competition and issues with German operations. Following recent recovery in share price, we downgrade our rating to neutral” Bank “D” Sell € 5. 00 “We have fundamental concerns about KPN for three reasons; we believe the quality of the assets is below that of the peer group, KPN faces above average broadband competition, cash flow is worse than the sector” Research House Views 75% of research analysts have a “Buy” rating on the shares

Advice From the Citi Team Equity Capital Markets Sales / Research “We want to win this deal. It is a very prestigious transaction” “This is a great stock which we have been recommending our clients to buy” “Winning is very important to our franchise, league table position and budget” “The share price has underperformed its peers in part due to the worry about this placing. We think the shares will rise after this transaction” “It is going to be a very competitive process and we need to bid aggressively” Senior Management Trading “We are the #1 trader of the shares, we know it very well. There a number of fund managers that want to buy a lot more stock” “Demand at the right price will not be a problem” “OK, this is a big deal and we want to win” “However, it is only one deal and should not bet the firm on it” “We should bid to win, but also not to lose money”

What to Do Next o The clock is ticking. . . 15 minutes to decide on a price in € per share to bid o Write team name and the price per share on a piece of paper and then hand in o Only a team which wins the auction and does not lose the firm money will get the cash prize! Good luck. . .

The Next Day. . .

What Happened Next. . . 07: 00 07: 30 08: 15 09: 30 09: 45 Citi briefs salesforce Order book opens Demand received for half the deal Demand equals deal size Shares at € 6. 83 Transaction closed, demand for € 2. 6 bn Transaction priced at € 6. 78

Independent Views on the Transaction “If European ECM bankers needed any further indication that sizeable deals are possible in today’s markets, given good knowledge of the stock and confidence in one’s own distribution ability, they needed to look no further than the ground-breaking display from Citi on Friday morning” “The deal provides a shot of confidence for European telecoms investors who have sat beneath government share overhangs for years. It demonstrates that a strong appetite remains for telecoms shares” Lex, Financial Times, 19 September 2003 International Financing Review, 20 September 2003 “Rivals described it as the most aggressive deal they had ever seen” Financial News, 29 September 2003 “The offering was extremely well executed by Citi” Financial News, 29 September 2003 “The deal has finally come after months of rumours, but the manner in which it arrived still took the market by surprise” International Financing Review, 20 September 2003 “The block trade, arranged by Citi, will reduce threat of an overhang that has depressed KPN's share price in recent weeks” Financial Times, 20 September 2003 Independent press reports acknowledged the resounding success of the transaction

QUESTIONS