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Telvent Investment in Xfera

October 8, 2003

I. The business transaction.

In October of 2000 Telvent received an offer to participate in Xfera Móviles, a consortium appointed to operate an UMTS license.

Previously, in March 2000, Telvent, member of the Consortium Movilweb, (lead by Deutsche Telecom and Jazztel), presented a tender offer for a UMTS license.

The Public Administration Contract Law, in its section 81, prohibited the presentation of more than one offer per company bidder, not only individually but also in a partnership. This precept is rigid and there are not exceptions.

The bid solicitation was resolved the 10th of March of 2000 and Xfera Móviles S.A. was awarded the appointment.

This appointment was impugned by some of the bidders.

The impugnation of this Administrative appointment implied that the situation was not firmly resolved. But, such impugnation, did not suspend the appointment, and its regular procedure continued to be on course (warranties constitution, adjudicatory contract signing, etc) without prejudice of a final judicial resolution.

Because the appointment was not firm, all the process was contingent upon the definitive judicial resolution by the Competent Administrative Body or by the Contentious Administrative Courts.

Such final judicial resolution could be either the confirmation of the initial appointment previously made, (in which case the March 2000 appointment would become firm and definitive, and all its effects would be established, consolidating all the intervening events occurring between the Administration and the appointment of the bidder) or it could be to overturn the initial appointment. In this latter case, there could be one of two possible results: either the appointment would be resolved with the second best bidder from the bidding process, or the entire appointment process could be voided, and a new Appointment Board would have to be started in which case all the proposals should be again analyzed, evaluated and resolved.

This process (that never suspended the initial appointment to Xfera) was not resolved until November 2002. At that moment the initial appointment to Xfera was finally confirmed.

During all this impugnation process, because the appointment was not firm, all the duties and obligations of the rest of the bidders continued to be in in full force and effect.

As a result, if the initial appointment was cancelled and afterwards awarded in favor of the Second bidder, this new winner should be obligated to sign the concession contract, to constitute the warranties required, etc. Included in such obligations that remained in force per the section 81 mentioned before, meaning that each bidder, individually or integrating a partnership, is only allowed to present a single offer.

Consequently, Telvent, member of the consortium Movilweb, was not authorized to participate, directly or indirectly, by itself or through any other person, in any other offer presented, including the Xfera presentation, until the final judicial decision of the bid solicitation was resolved.

It was in this scenario that Telvent received an offer to participate as a minority partner (3.72%) in Xfera Móviles in order to realize its interest in the UMTS technology. Telvent had expressed an interest in that participation before when it participated in the Movilweb Consortium.

The alternative that finally was achieved was based on the following arguments:

a) The entity that takes participation in Xfera cannot be a fiduciary or a related person, or figure that is similar to the indirect participation that is mentioned in the 81 section of the Administrative Law, preventing the participation of Telvent in two parallel offers of a same bid solicitation.

b) The entity that participates has to provide enough equity in order to comply with all the obligations imposed by the process appointment (including warranties of 118 million Euros) and the Shareholders Agreement (a developed business plan, equity management, etc). Such a requirement could not be provided by a joint and severally warranty of Abengoa, because this would be considered as an indirect act forbidden by the mentioned Section 81 of the Law.

c) As such entity would have invested part of its capital in the development of Xfera Móviles (equity, warranties to the Administration related to the obligations of the bid solicitation, etc) this entity would have been assuming a risk derived from the Xfera evolution, the concession, the market and by the UMTS technology itself, emerging in the 2000 year.

d) When an entity assumes a certain risk, in its own name, it destroys the concept of related party.

e) The assumption of such a risk may imply a compensation related to the risk itself, its duration, the market evolution, the UMTS technology and the cost of opportunity.

Considering the mentioned circumstances, Telvent agreed with Inversión Corporativa (IC), a referred shareholder of Abengoa, to the arrangement of a crossed option (sale and purchase) with Mercapital Telecom (MT), a shareholder of Xfera.

At the same time (October 2000), IC granted a purchase option in favor of Telvent. Therefore IC would act on behalf of Telvent, based on the executable purchase option by Telvent.

In consideration of not only the risk assumed, but also the cost of opportunity that such an investment represented for IC, both Parties agreed upon a price for such option that was equivalent to the 4 % (3 Million Euros) estimated on the participation on Xfera, valued at that date.

On the 30th of December of 2001, considering the UMTS market evolution, both parties agreed to cancel the payable obligation previously arranged, agreeing not to pay any amount for such option concession.

Meanwhile, IC granted a security interest on part of Abengoa's shares owned by IC as a warranty of the obligation assumed with the bank for the counter warranties given to the Government Administration.

On the other hand, acting exclusively and in order to protect such pledged shares of Abengoa, in case of an execution of the security interest by the bank, Abengoa in order to protect its shareholders, reserved the possibility to decide the final destiny of such pledged shares (either purchasing its own shares, or having a third party acquisition). For that reason, Abengoa gave a counter warranty, in such a way that it could intervene in a hypothetic execution process.

Considering the potential expected value of the participation interest of the companies that would be appointed an UMTS license, the participants were not interested in giving away part of their participation if a risk could affect the Xfera appointment (this risk existed with Telvent participation in another of the consortiums that were interested in the license). Considering the analysts reports, the value of the 100 % of Xfera was:

Analista Valoración Xfera Fecha
SCH 2.420 M euros March 2000
Caja Madrid 3.574 M euros June 2000
Maryl Lynch 1.200 M euros December 2000
Dresdner 990 M euros November 2000


  • Telvent received the possibility to be present in the UMTS technology development, but was limited in buying such participation in Xfera until the appointment process was firmly resolved. This happened with the resolution of the impugnation, in November 2002. At that moment, as soon as the appointment was firm and definitive, the Telvent Board of Directors took the decision to invest in Xfera.
  • At the same time, the Abengoa Board of Directors approved the participation in Xfera after the approval by the Board of Telvent, considering a presentation done by the management of Telvent where strategic criteria was explained and ratified. Such agreement was adopted subject to the previous establishment between the Ministry and the UMTS operators regarding the conditions that should be required in the future related to the warranties reduction, investment plans, and the service agreements about the commercial facts and the network deployment. Such agreement was announced by the Public Ministry the 16th of December of 2002 (with a warranty reduction of 85% and another agreements about commercial conditions related to the project launching and investment).
  • Telvent assumed the participation in reliance upon to the induced business and technology acquisition that this transaction implies, and that reliance was expressed to the CNMV in the relevant issues of the 17th of January and 27th of July of 2000, observed also in the Audited Annual Financials Report of 2000 and 2001, where the existence of such option is disclosed and its non-material character is stated, and again in the Consolidated Annual Financials Report of 2002, where the Auditor of the Corporation, PricewaterhouseCoopers ratified the criteria adopted by Telvent about the valuation of the induced business and the cash flow discounts generated in such project.
  • The economical conditions in the transaction that took place between Telvent and IC are the same as those that applied between IC and MT (nominal shares plus expenses and interests).
  • When Telvent accepted the purchase option proposed by IC in October of 2000, and approved the contractual structure to be utilized, in application of its own internal rules, it specified to Garrigues & Andersen two issues:
    • a) The potential conflict of interest and how to resolve it.
    • b) The consideration of a relevant fact at the Purchase Option according to the CNMV rules.
  • Garrigues & Andersen analyzed both issues and concluded that in such agreement there was not a conflict of interests but a coordinated and a joint action between a corporation and its principal shareholder. At the same time it was explained by Garrigues & Andersen that the contractual structure proposed and the economic value of that option did not make such operation a material event that should be notified to the CNMV.
  • In the next years it should be analyzed if the Telvent decision was appropriate considering the synergy point of view, the generated and induced business and technology acquisition, and therefore if the valuation method employed and the price paid was reasonable under a business point of view.

II.- The request of information by the CNMV.

In January 2003 the CNMV initiated an informative filing to Abengoa in order to request additional information to that previously reported to the CNMV (relevant event of the 30th of December of 2002). This concluded with the presentation of a complementary HR (7th of February of 2003).

The sanction filing was initiated in March 2003 when CNMV considered a possible unfulfilled notification by Abengoa of such purchase option subscribed with IC in October 2000.

The arguments of the CNMV are based in two arguments:

a) the first one with an objective character: the option was, by itself, and considering the circumstances (economic relevance for Abengoa, sensibility in its shares valuation, the amount of the contracts), a material event.

b) the second one with a subjective character: the option was signed between IC and Abengoa, the first one as a reference shareholder of Abengoa and considering that both companies shares determined administrators (related parties operation). It is in this case that the CNMV determined that such operation was a related parties agreement between a public corporation and its reference shareholder, that needed to be informed regardless of other criteria.

III.- Abengoa's Argumentation.

It seems clear that to enter into a purchase option is not a material event itself; nor is it in this case as we will see, even considering the peculiarities and consequences of these circumstances. Furthermore, the agreed transaction between related parties is not forbidden or illicit, although it could require additional precautions in order to reinforce the security of not damaging the interest of one of the parties due to the predominant action of the other, which situation in this case was properly solved as we will explain.

A) According to the consideration of Abengoa's purchase option as a material event requiring notice to the CNMV, we have to consider the following:

1) The option, itself, it is not a material event since the decision was not made, it was just an intention, and at that moment it could have "warmed" the value.

2) Neither the CNMV's regulation in use nor the CNMV´s Circular Letters included the purchase option as a material event. Neither the practice of other companies in the Telecommunication sector, nor the practice of other companies in general, describe a uniform procedure regarding purchase options that has been adopted by the CNMV.

3) As stated in PWC's January 2003 report, on the date Telvent assumes the participation the Company's auditor does not consider it necessary to record an accrual of its participation interest. This was ratified by the Deloitte's report presented by Abengoa to the CNMV filing in June 2003. Therefore, neither the purchase option nor the equity participation are significant to Abengoa's Balance sheet.

B) The Potential conflict of interest:

1) The contract between IC and Telvent was formalized at the same time as that between IC and MT, so no deferment or transfer of risks exists, as Telvent acquired the right from IC at the same time this one did from MT.

2) The Economic conditions between IC and MT are symmetric to the ones between IC and Telvent (par value of the Xfera shares plus expenses and interests)

3) Abengoa's Board of Directors adopted the necessary measures to solve the potential conflict of interest. Telvent's Board of Directors, with a diversity of Board Members, previously approved the acquisition of Xfera's share. Garrigues's report concluded in favour of the non existence of a conflict of interest, and considered adequate the proposed contract structure without becoming a material event.

4) IC assumed the risk until Telvent executed the purchase option (if Xfera had entered in Chapter 1 between Oct. 2000 and Dec. 2002 the losses would have been for IC) and not the other way.

5) Finally, an infraction requires objectively knowledge or negligence. Abengoa through the adopted resolutions requested legal reports that supports the absence of an obligation to notify CNMV of the Option. Therefore Abengoa acted diligently and in "good faith".

IV.- Conclusions

The opening of this filling by the CNMV really implies insecurity and concern from the CNMV in case this operation would hide a transfer of a loss from IC to Abengoa. Maybe the technical complexity of the transaction makes difficult an argument and an explanation that could avoid any prejudgment that technical people may have.


1.- The entity which acquired Xfera's shares is Telvent, whose Board of Directors (with a clear diversity and independence) is integrated, except for a member, for different persons Abengoa's Board of Directors. Therefore, the acquisition is made based on an independent decision and in coherence with Telvent's own industrial needs, as already exposed to the CNMV in the relevant events of January 17th and July 27th 2000.

2.- Telvent acquired the mentioned shares based on the possible added business and the acquisition of technology that this transaction would generate. Telvent has explained it this way to the CNMV on different occasions, for instance in the notification of the acquisition of Energyworkspace, where it was indicated that even when this or other investments may have a close to zero accounting value, the valuation of that investment reflected the business discounted cash flows and the expected technology assumed. This argument and its valuation is certainly what Xfera's investment entails. If the CNMV (or the Market or the auditors as we will see) had no concerns at that time, it is not understandable why it would have concerns now.

3.- Abengoa's Board of Directors approved the acquisition of Xfera's participation after it has been approved at Telvent's Board, and it did this in reliance on Telvent's management presentation of the strategic viability of the transaction, and where the criteria and parameters for the acquisition of the participation were notified and approved by Telvent's Board of Directors.

4.- The Economic conditions in which the transaction was made between Telvent and IC are the same as those applied between IC and MT (par value of the Xfera shares plus expenses and interests).

5.- When in October 2000, Abengoa accepted the purchase option proposed by IC, and approved the contractual structure to utilize, Abengoa, in accordance with its internal procedures, advised Garrigues & Andersen of two issues:
a) The existence of a potential conflict of interest and its resolution.
b) The consideration of whether the purchase option was a material event or not.

Garrigues & Andersen reviewed in depth both questions and concluded, first that no conflict of interest exists, but instead a coodinated and joint act of a Company and its main shareholder, and also that the contractual structure and the economical valuation of the option do not make the operation a material event suitable of requiring notification to the CNMV.

6.- Abengoa's auditor, PricewaterhouseCoopers, in Abengoa's annual report accept Telvent's criteria to value the investments based on the discounted cash flows generated from the business, and as a result an accrual was not considered necessary. In addition, Abengoa presented to the CNMV an expert report made by Deloitte & Touche dated June 13th 2003, in which it was concluded the economics of the Option granted as it was stated in the 2000 and 2001 Annual Report was not material.

In the next years it should be analysed whether the Telvent decision was appropriate considering the synergy point of view, the generation of an induced business and technology acquisition, and therefore whether the valuation method employed and the price paid was reasonable under a business point of view.

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