SKY Network Television : June 2016 Independent Adviser's Summary Letter

Report

10 June 2016

The Directors

Sky Network Television Limited 10 Panorama Road

Mt Wellington Auckland 1060

Dear Directors

Proposed Acquisition of Vodafone New Zealand Limited Summary of our Independent Adviser's Report and Appraisal Report

1. Introduction

   Sky Network Television Limited ("Sky TV" or "the Company") is New Zealand's leading pay television operator. It has annual revenues of over $900 million1and a market capitalisation of approximately $1.6 billion.

   Vodafone New Zealand Limited ("Vodafone NZ") is a full service telecommunications provider, providing fixed line voice, broadband and mobile telephony services to the retail and corporate sectors across New Zealand. Its revenue for FY162was approximately $2.0 billion. Vodafone NZ is wholly owned by Vodafone Europe B.V., a member of the Vodafone group of companies ("Vodafone Group")3of which Vodafone Group Plc is the ultimate parent. The Vodafone Group has operations in 26 countries and more than 450 million customers globally. It is listed on the London Stock Exchange with a market capitalisation of approximately £58 billion.

   On 9 June 2016, Sky TV announced that it had entered into an agreement with Vodafone Group to acquire all the shares in Vodafone NZ ("the Proposed Transaction"). The headline consideration payable by Sky TV ("the Consideration") is $3.44 billion, consisting of cash of $1.25 billion and the issue of

   405.0 million shares in Sky TV ("Share Issue4"). As a result of the Share Issue, Vodafone Group will hold 51% of Sky TV's shares on issue. The remaining shares in Sky TV will continue to be traded on the New Zealand Stock Exchange ("NZX") and the Australian Securities Exchange ("ASX").

   The Proposed Transaction is subject to a number of conditions that are set out in full in the Explanatory Memorandum. In particular, the Proposed Transaction is subject to the approval of Sky TV shareholders by special resolution (at least 75% of votes cast) and by ordinary resolution (a simple majority of votes cast). The directors of Sky TV have unanimously recommended that Sky TV shareholders vote in favour of the Proposed Transaction.

   The directors of Sky TV have engaged Grant Samuel & Associates Limited ("Grant Samuel") to prepare an independent adviser's report on the merits of the Proposed Transaction, as required under the New Zealand Takeovers Code. In addition, the directors of Sky TV have requested that Grant Samuel provide an opinion as to whether the terms of the Share Issue are fair to the existing shareholders of Sky TV, for the purposes of the appraisal report requirements of the Listing Rules of NZX. This letter contains a summary of Grant Samuel's main conclusions in relation to the merits of the Proposed Transaction and its opinion as to whether the price and terms of the Share Issue are fair.

   1 All references to $ in this report represent New Zealand dollars (unless otherwise specified).

   2 FYXX = Financial Year ending 30 June 20XX for Sky TV and the Combined Group and 31 March 20XX for Vodafone NZ (except in relation to forecast financial information for Vodafone NZ which has been restated to a 30 June 20XX year end).

   3 For the purposes of this report, the term "Vodafone Group" includes all subsidiaries of Vodafone Group as the context requires.

   4 Sky TV will issue sufficient shares such that following the Share Issue Vodafone Group will own 51% of the Combined Group. Accordingly, the number of shares to be issued to Vodafone Group will vary from 405.0 million to the extent that there is any change in the number of Sky TV shares on issue prior to completion of the Proposed Transaction. For the purposes of this report, Grant Samuel has assumed that 405.0 million Sky TV shares will be issued to Vodafone Group.

   A copy of the full report:

   • is available for inspection at Sky TV's registered office (10 Panorama Road, Mt Wellington, Auckland) on and after the date of the notice of Sky TV's special meeting of shareholders;

   • is available to download from the investor relations page on Sky TV's website www.sky.co.nz/investor-relations; and

   • willbe sent on request to any person entitled to attend Sky TV's special meeting of shareholders. The full report may be requested by calling 0800 378 300 (freephone within New Zealand), 1800 501 366 (freephone within Australia) or [phone].

2. Summary

   The growing popularity of Over-the-Top ("OTT") services delivering video on demand via high speed broadband internet has fundamentally changed the competitive position of pay television operators around the world. The effect for Sky TV has been increasing rates of subscriber churn and a flattening of revenue growth. At the same time, heightened global competition for content has driven up programming costs, resulting in a projected fall in Sky TV's earnings across the FY16 and FY17 financial years. The Proposed Transaction is expressly designed to address the deterioration in Sky TV's strategic position. It will be transformational for Sky TV, creating a business unique in the New Zealand market place. The merged Sky TV and Vodafone NZ businesses ("the Combined Group5") will have market leading positions in mobile telephony and pay television, a strong fixed line telephony and broadband internet business, extensive infrastructure and the leading content offering in the New Zealand market.

   The combination of the Sky TV and Vodafone NZ businesses is expected to generate meaningful cost synergies over time, although in the short term the cost synergies will be modest. More importantly, it will materially improve the Combined Group's competitive position and, over time, should allow the capture of significant revenue synergies. The Combined Group will be able to cross-sell a much broader range of services across the Sky TV and Vodafone NZ subscriber bases, reduce subscriber churn through bundled service offerings, and deliver incremental revenue through new offerings. Sky TV has estimated that the net present value ("NPV") of the cost and revenue synergies is approximately $850 million, although the bulk of these synergies will only be captured in the medium to longer term.

   The Proposed Transaction will result in other, less easily quantifiable benefits. In particular, as part of the Vodafone Group, the Combined Group will have the benefit of management support and expertise based on the Vodafone Group's international operations, and access to the Vodafone Group's global technology base. Given its size and diversification, the business should have the capacity to respond effectively to changes in technology and consumer preferences over the medium to longer term. It should be able to access capital (at least debt capital) on attractive terms.

   The Combined Group will have much higher debt levels than Sky TV on a standalone basis, with aggregate debt of around $1.6 billion immediately following the Proposed Transaction. However, the level of gearing will be within acceptable limits and will arguably represent a more efficient capital structure than Sky TV's current capital structure.

   Overall, the Proposed Transaction will result in the creation of a robust, strongly capitalised business with a far stronger strategic position than that enjoyed by Sky TV in its current form. The improvement in Sky TV's strategic positioning will have some direct short term benefits. More importantly, however, it will materially address the longer term risks associated with Sky TV's standalone business model as a "pure play" provider of video entertainment.

   5 References in this letter to the Combined Group are references to Sky TV after completion of the Proposed Transaction.

   A threshold issue for Sky TV shareholders is whether shares in the Combined Group can be expected to trade at prices higher than shares in a standalone Sky TV. Grant Samuel has considered factors including:

   • the potential for a market re-rating to reflect the stronger strategic position and business characteristics of the Combined Group;

   • the nature, quantum and timing of the synergies expected to be generated by the combination of the Sky TV and Vodafone NZ businesses;

   • the expected increase in underlying free cash flow and dividends per share following the Proposed Transaction;

   • the expected substantial fall in earnings per share (reflecting the significant non-cash depreciation and amortisation charges associated with Vodafone NZ's asset base and the effect of merger accounting);

   • the earnings multiples on which broadly comparable businesses are trading in New Zealand and in other markets; and

   • the impact on investor sentiment of Vodafone Group's controlling stake (given that it is likely to reduce the prospect of a takeover offer from any party other than Vodafone Group).

     Having regard to these factors, Grant Samuel believes that it is reasonable to expect that, over time, shares in the Combined Group will trade at meaningfully higher prices than shares in a standalone Sky TV. In the shorter term, the positive effect may be more modest, reflecting the longer dated timing of many of the synergies and likely investor caution regarding the recognition of revenue synergies before they have been delivered.

     As a result of the Share Issue, Vodafone Group will hold 51% of the shares in the Combined Group. While the Proposed Transaction is structured as an acquisition of Vodafone NZ, it is effectively an acquisition of Sky TV by Vodafone Group. In this context, Sky TV shareholders are potentially giving up the opportunity to receive a takeover premium (through an actual takeover offer for Sky TV by the Vodafone Group or by some third party). By way of compensation, Sky TV shareholders will benefit to the extent that shares in the Combined Group trade at higher prices than shares in a standalone Sky TV. Comparison of the opportunity cost of approving the Proposed Transaction (i.e. foregoing the possibility of receiving a fully priced takeover offer) with the potential benefit in terms of improved share prices is essentially judgemental:

   • there are likely to be very few parties interested in an outright acquisition of Sky TV, at least in the short term. In this context any estimate of the value potentially realisable through a takeover offer may be little more than theoretical; and

   • there is nothing to prevent any third party that is interested in an acquisition of Sky TV from submitting an alternative proposal following announcement of the Proposed Transaction.

     There is at least a risk that Sky TV shareholders are receiving only partial compensation for the passing of control of the Company to Vodafone Group. On the other hand, in Grant Samuel's view, Sky TV shareholders will clearly be better off if the Proposed Transaction proceeds than if Sky TV continues as a standalone entity.

     Grant Samuel has valued Vodafone NZ in the range $3,400-3,700 million. The Consideration for the acquisition is $1,250 million in cash and 405.0 million shares in Sky TV. Given that the shares to be issued to Vodafone Group will confer control over Sky TV, it is appropriate to value the share component of the Consideration on the basis of Sky TV's estimated full underlying value ($4.95-

     5.46 per share). On this basis, the Consideration has an aggregate value of $3,255-3,463 million, slightly less than the estimated value of Vodafone NZ. This acquisition analysis suggests that the Proposed Transaction is on attractive terms for Sky TV.

     The merits of the Proposed Transaction may also be assessed by merger analysis, by comparing Sky TV's proportionate contribution of value to the Combined Group with the post transaction shareholdings in the Combined Group. Sky TV shareholders will hold in aggregate 49% of the shares in the Combined Group. On the basis of Grant Samuel's estimates of value, Sky TV will be

     contributing approximately 46-47% of the value of the Combined Group. Sky TV shareholders' aggregate shareholding will be marginally greater than their proportionate contribution of value, suggesting that the Proposed Transaction terms are favourable to Sky TV shareholders.

     There are various risks and disadvantages associated with the Proposed Transaction, including ongoing risks associated with the Vodafone NZ business and the achievement of its projected earnings growth, business integration risks, the Combined Group's future reliance on the Vodafone Group, transaction costs and other matters. However, in Grant Samuel's view, these risks and disadvantages are outweighed by the benefits of the Proposed Transaction.

     The effective price at which shares are to be issued to Vodafone Group under the Share Issue is equal to or greater than the estimated underlying value of Sky TV on a per share basis. Accordingly, Grant Samuel has concluded for the purpose of the NZX Listing Rules that the price and terms of the Share Issue are fair.

3. Key Conclusions

   • TheProposed Transaction is a response to a fundamental deterioration in Sky TV's strategic position.

     As the leader in the provision of video entertainment in New Zealand, Sky TV has been able to generate continuing growth in revenue and earnings over many years. However, the increasing availability of high speed broadband internet, changing consumer preferences and the entry into the New Zealand market of Netflix and other providers of OTT video has resulted in a fundamental deterioration in Sky TV's strategic position. The competition from OTT video providers has seen an increase in Sky TV's subscriber churn rates, an absolute decline in subscriber numbers and pressure on subscriber pricing. At the same time, growing competition for content continues to drive up content costs. The result has been a flatlining of Sky TV's revenues and a forecast fall in earnings in FY16 and FY17.

     Sky TV - Summary Performance

     1,000

     900

     860

     800	840
     700	820
     600	800

     $ millions

     500

     400

     300

     200

     100

     0

     FY10 FY11 FY12 FY13 FY14 FY15 FY16F FY17F

     Total Subscribers (000s)

     780

     760

     740

     720

     700

     ARPU

     $67.61

     $70.45 $71.93 $75.83 $77.52 $79.52 $78.67 $78.59

     Revenue (LHS) EBIT (LHS) Total Subscribers (Year end) (RHS)

     Source: Sky TV

   • The Proposed Transaction will be transformational for SkyTV.

Globally, technological developments have driven a growing convergence of the telecommunications and video entertainment sectors. In response to both the competitive threats