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Item 1.01
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Entry into a Material Definitive Agreement
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On May 7, 2020, Liberty Global plc (“Liberty
Global”), Liberty Global Europe 2 Limited, a private limited company incorporated in England and Wales and a wholly-owned
subsidiary of Liberty Global (“LG Europe”), Liberty Global Holdco Limited, a private limited company incorporated
in England and Wales and a wholly-owned subsidiary of Liberty Global (the “Joint Venture”), Telefónica,
S.A., a public limited liability company (sociedad anónima) formed in the Kingdom of Spain (“Telefónica”),
and Telefonica O2 Holdings Limited, a private limited company incorporated in England and Wales and a wholly-owned subsidiary of
Telefónica (“O2 Holdings”) entered into a Contribution Agreement (the “Contribution Agreement”).
Pursuant to the Contribution Agreement, Telefónica will contribute its subsidiaries comprising its O2 mobile business in
the United Kingdom to the Joint Venture, which will hold Liberty Global’s subsidiaries comprising its Virgin Media business
in the United Kingdom. After the closing of the transaction, the Joint Venture will be owned 50:50 by Liberty Global and Telefónica.
Liberty Global’s Irish operations are not part of the transaction.
The closing of the transaction is subject
to the satisfaction of certain conditions, including regulatory clearance by the European Commission and, if applicable, the merger
control authorities of the United Kingdom, approval of the U.K. Financial Conduct Authority, and the completion of a recapitalization
of the Joint Venture, including receipt of financing, in each case, on terms set forth in the Contribution Agreement.
Subject to satisfaction of the closing
conditions, the closing of the transaction is currently expected to take place in the middle of 2021. Until the closing of the
transaction, Liberty Global and Telefónica will continue to operate their respective businesses in the United Kingdom as
independent businesses.
The Contribution Agreement contains customary
termination rights for both LG Europe and O2 Holdings, including if the closing has not occurred within twenty-four (24) months
following the date of the Contribution Agreement, which may be extended by six (6) months by either LG Europe or O2 Holdings if
such party reasonably believes the closing conditions can be satisfied in the extended time period.
At the closing of the transaction, each
of Liberty Global and Telefónica is expected to receive the proceeds of the recapitalization of the Joint Venture, subject
to adjustments for the aggregate net debt (including capital expenditure accruals), working capital, and intercompany payables
and receivables of the entities contributed by each party to the Joint Venture, in each case, calculated as set forth in the Contribution
Agreement. Telefónica is currently expected to receive aggregate proceeds of approximately £5.7 billion, and Liberty
Global is currently expected to receive aggregate proceeds of approximately £1.4 billion, including approximately £800
million from the recapitalization of its retained and 100% owned Virgin Media Ireland business (after a cash payment by Liberty
Global to Telefónica of approximately £2.5 billion).
The Contribution Agreement contains
customary representations and warranties, covenants and indemnities by the parties to the Contribution Agreement relating to
each of their contributed businesses, and each of Liberty Global and Telefónica has agreed to guarantee the
obligations of LG Europe and O2 Holdings, respectively, under the Contribution Agreement and certain other agreements to be
entered into in connection with the Joint Venture. The Contribution Agreement also provides that each party will provide
indemnification, reimbursement or other payments for, among other things, breaches of its representations, warranties,
covenants and specified matters, including certain employee-related liabilities, litigation and claims, cybersecurity
matters, costs and liabilities from internal reorganizations and separation of assets prior to closing, subject to mutual
minimum thresholds and caps and other limitations set forth therein. In addition, with respect to the acquisition of mobile
spectrum in the upcoming U.K. spectrum auction, the parties will operate as standalone entities and make independent
decisions regarding strategy and participation and be responsible for their own individual costs for the auction. Each party will also fund the deficit in the defined benefit pension
schemes of their respective entities contributed to the Joint Venture based on the valuation determined as a result of the
next triennial actuarial valuation pursuant to applicable law. Telefónica will be responsible for
satisfying the incentive awards granted to certain employees in the O2 group before or on the closing of the
transaction (which awards will vest at the closing of the transaction), and Liberty Global will be responsible for satisfying
any incentive awards in Liberty Global securities granted to certain employees in the Virgin Media group before or on the
closing of the transaction (which may be subject to vesting on or after the closing of the transaction). Each party
will be responsible for certain other employee-related liabilities associated with such incentive awards, including
administrative costs.
Pursuant to the Contribution Agreement,
at the closing of the transaction, the parties and certain of their respective affiliates will enter into various agreements in
connection with the transaction. These include: a shareholders agreement to be entered into at the closing of the transaction (the
form of which is described below) (the “Shareholders Agreement”); services agreements principally relating to
certain IT, technology, procurement and other support services to be provided by Liberty Global, Telefónica and their respective
subsidiaries to the Joint Venture following the closing of the transaction; transition services agreements pursuant to which the
Joint Venture will provide certain services to each of Liberty Global, Telefónica and their respective subsidiaries; brand
license agreements in respect of the use by the Joint Venture of the O2 and Telefónica brands; and tax deeds.
Upon the closing of the transaction,
Liberty Global, LG Europe, Telefónica, O2 Holdings and the Joint Venture will enter into the Shareholders Agreement pursuant
to which the parties thereto will agree to certain rights, covenants and obligations, including those summarized below.
The Shareholders Agreement will provide
that the initial board of directors of the Joint Venture will be comprised of eight (8) directors, with four (4) directors designated
by each of Liberty Global and Telefónica. In general, most decisions of the board of directors will require the approval
of at least one individual designated by both Liberty Global and Telefónica. Certain decisions, referred to as “Reserved
Matters,” will require the approval of both Liberty Global and Telefónica, either directly or through their designees
to the board of directors, including changes in the constituent documents, capital stock, certain executive management matters,
or branding of the Joint Venture; certain material transactions, including transfers of all shares in the Joint Venture and acquisitions
and dispositions over a certain threshold; the adoption of any new business plan or amendment to any current business plan (including
with respect to the budget) of the Joint Venture; and certain other material business, investing and financing decisions of the
Joint Venture. The Chairman of the board of directors will alternate every two (2) years as between a director designated by Liberty
Global and a director designated by Telefónica, and the initial Chairman of the board of directors of the Joint Venture
will be a director designated by Liberty Global.
Pursuant to the Shareholders Agreement,
the Joint Venture will be required to make regular cash distributions to the shareholders on a pro rata basis equal to the
unrestricted cash held by the Joint Venture (subject to the Joint Venture maintaining a minimum amount of cash and complying with
the targeted net debt to EBITDA leverage ratio and the terms of its financing arrangements). As an ongoing operation, it is intended
that the Joint Venture will be self-funded from its net cash flow from operations and third-party financing. In addition, the Joint
Venture is expected to undertake periodic further recapitalizations, subject to market and operating conditions, to maintain a
4.0x-5.0x target net leverage ratio.
The Shareholders Agreement further
provides that each of Liberty Global or Telefónica will have the right to initiate an initial public
offering of the Joint Venture after the third (3rd) anniversary of the closing of the transaction, with the
opportunity for the other shareholder to sell shares in the initial public offering on a pro rata basis. The parties
have agreed to general restrictions on transfers of interests in the Joint Venture until the third (3rd)
anniversary of the closing of the transaction, subject to certain limited exceptions. After the fifth (5th)
anniversary of the closing of the transaction, each shareholder will be able to initiate a sale of the Joint Venture to a
third party in accordance with certain drag procedures, subject to a right of first offer in favor of the other shareholder.
In certain enumerated events of default of a shareholder, including the insolvency of Liberty Global or Telefónica or
transfers of shares of the Joint Venture in breach of the Shareholders Agreement, the other party will have a call right to
purchase the shares of the other party in the Joint Venture on the terms set forth in the Shareholders Agreement. The
Shareholders Agreement will contain customary covenants regarding cooperation, information sharing, restrictions on the
partners from competing with the Joint Venture and restrictions on soliciting employees of the Joint Venture.
The foregoing description of the Contribution
Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference
to the Contribution Agreement, a copy of which is filed as Exhibit 2.1 hereto and is incorporated herein by reference.
The Contribution Agreement contains representations
and warranties by each of the parties to the Contribution Agreement, which were made only for purposes of that agreement and as
of specified dates. The representations and warranties and covenants in the Contribution Agreement were made solely for the benefit
of the parties to the Contribution Agreement.