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Document Sample
English Translation of the German Merger Report
(Verschmelzungsbericht), only for convenience.
The German document shall prevail.
To avoid any inconsistencies with the German text,
this document was translated word for word into English.
CONTENTS
PART A
Merger Agreement Page 3
PART B
Merger Report Page 25
PART C
Audit Report of the
Merger Auditor Page 197
PART A
Merger Agreement
with Attachments
– Agreement in Principle
– Amendments of the Articles of Association
MERGER AGREEMENT
between
VIAG Aktiengesellschaft with registered offices in Munich
– hereinafter also ‘‘VIAG’’ –
as Transferor Company
and
VEBA Aktiengesellschaft
u
with registered offices in D¨ sseldorf and Berlin
– hereinafter also ‘‘VEBA’’ –
as Transferee Company
On September 27, 1998, VEBA Aktiengesellschaft §2
u
with registered offices in D¨ sseldorf and Berlin, Consideration
registered in the commercial register of the county
court D¨ sseldorf under HRB 22315 and in the
u (1) As consideration for the transfer of the assets and
commercial register of the county court Berlin liabilities of VIAG VEBA shall, free of costs, upon
Charlottenburg under HRB 1647, and VIAG Aktien- effectiveness of the merger issue to the shareholders
gesellschaft with registered offices in Munich, regis- of VIAG an aggregate of 249,113,480 bearer shares
tered in the commercial register of the county court without nominal value of VEBA. For five (5) bearer
Munich under HRB 105164, entered into an Agree- shares without nominal value of VIAG, each repre-
ment in Principle regarding the combination of senting an allocable portion of the registered capital
VEBA and VIAG (Notarial Deed No. 2668G/1999 of in the amount of EUR, two (2) bearer shares without
the notary Dr. Tilman G¨ tte with offices in Munich)
o nominal value of VEBA, each representing an
(‘‘Agreement in Principle’’). The Agreement in Prin- allocable portion of the registered capital in the
ciple including Annexes is attached as Exhibit 1. In amount of EUR 2.60, shall be granted. VEBA will
the Agreement in Principle, VEBA and VIAG have, not receive any shares for the 69,198,214 VIAG
inter alia, agreed to combine the companies in a shares held by VEBA (§ 20 para. 1 no. 3, 2nd half-
merger of equals and to operate the combined sentence, case 1 of the Transformation Act).
company under a new name. (2) The shares to be issued by VEBA pursuant to
The parties enter into this merger agreement for the para. (1) are entitled to profit participation as of
purpose of implementing the merger of VIAG January 1, 2000.
Aktiengesellschaft into VEBA Aktiengesellschaft in
accordance with the relevant provisions of the Agree- §3
ment in Principle. The other provisions of the Capital Increase
Agreement in Principle remain unaffected by this (1) To implement the merger, VEBA will increase its
Merger Agreement. registered capital from presently EUR 1,307,274,228
Now, therefore, the parties agree as follows: by EUR 647,695,048 to EUR 1,954,969,276 by the
issuance of 249,113,480 bearer shares without nomi-
nal value, each representing an allocable portion of
§1
the registered capital in the amount of EUR 2.60,
Transfer of Assets and Liabilities
with rights to profit participation from the beginning
(1) VIAG hereby transfers its assets and liabilities as of January 1, 2000.
a whole with all rights and obligations by dissolution
(2) It is intended to make an application for the
without liquidation pursuant to § 2 no. 1 of the
admission of the shares issued for the implementation
Transformation Act (Umwandlungsgesetz) to VEBA
of the merger to be officially traded at all German
in exchange for the issuance of shares of VEBA to
stock exchanges and at the Swiss stock exchange.
the other shareholders of VIAG (merger by
They shall also be included in the existing ADR
acquisition).
program at the New York Stock Exchange.
(2) The merger is based on the balance sheet of
VIAG as of December 31, 1999 as closing balance §4
sheet. Trustee
(3) Internally, the acquisition of the assets and (1) VIAG has retained Dresdner Bank Aktiengesell-
liabilities of VIAG by VEBA shall be effective as of schaft, Frankfurt am Main, as trustee to receive the
the end of December 31, 1999. Beginning on granted shares.
January 1, 2000 (0:00 hours), all actions and transac-
tions of VIAG shall be deemed as carried out for the (2) VEBA shall deliver the shares to be granted as
account of VEBA (‘‘Merger Closing Date’’). consideration to the trustee prior to the entry of the
merger in the commercial register responsible for
(4) In its accounting, VEBA shall continue to use the VIAG with instructions to distribute the shares to the
book values of the assets and liabilities transferred in shareholders of VIAG against the exchange of their
the merger as shown in the closing balance sheet of shares in VIAG after the entry of the merger in the
VIAG. commercial register responsible for VEBA.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement 7
§5 Dr. Wilhelm Simson as chairmen as well as
Special Advantages and Rights u
Messrs. Dr. Hans-Michael Gaul, Dr. Manfred Kr¨ per
and Dr. Erhard Schipporeit after the effectiveness of
(1) Except for the provisions set forth in the follow-
the merger. Mr. Simson shall be appointed until
ing para. (2) which have been included as a
May 31, 2002 and Mr. Schipporeit shall be appointed
precautionary measure, no rights within the meaning
for a term of five years. The new service agreements
of § 5 para. 1 no. 7 of the Transformation Act are
shall be executed for the same period as the
granted to individual shareholders or to holders of
appointment. In accordance with the position of Prof.
special rights. Further, no measures within the
Dr. Simson and Dr. Schipporeit, these agreements
meaning of the aforementioned provision are intended
shall correspond to the service agreements with the
for those persons.
members of the Board of Management of VEBA
(2) In the Agreement in Principle, the State of presently in effect also with respect to the amount of
Bavaria has been granted the right to propose to the remuneration.
Supervisory Board of VEBA an individual for
election as shareholders’ representative on the Super- (5) Messrs. Dr. Bernotat, Beuth, Bonse-Geuking and
visory Board as long as the State of Bavaria holds Dr. Harig who will leave the Board of Management
more than 4% of the shares in VEBA. Notwithstand- of VEBA will keep their present positions as board
ing the foregoing, the Supervisory Board of VEBA members in the VEBA major group companies
will decide on its proposal for the election of (Teilkonzerne) whereby they shall in the future
Supervisory Board members to be submitted to the received a remuneration which are equal to the
shareholders’ meeting at its due discretion and present aggregate amount of their remunerations at
without being bound by the proposal of the State of VEBA and the VEBA major group companies.
Bavaria. Furthermore, the State of Bavaria has been Mr. Mamsch will leave the Board of Management of
granted the right in the Agreement in Principle to VEBA as per March 31, 2000. He will receive the
propose an individual for election to the Supervisory benefits to which he is entitled pursuant to his
Board of the future energy company in which the existing service agreement.
energy activities of PreussenElektra Aktiengesell- Mr. Ardelt and Dr. Freiherr von Waldenfels will
schaft and Bayernwerk Aktiengesellschaft including leave the Board of Management of VIAG with the
their subsidiaries shall be combined as long as the effectiveness of the merger. They have been ap-
State of Bavaria holds more than 4% of the shares in pointed as members of the Board of Management of
VEBA. The Board of Management of VEBA will VIAG Telecom AG (in establishment) for a term of
support the election of the proposed individual as a five years. Subject to a resolution of the Supervisory
member of the Supervisory Board of the energy Board of VIAG Telecom AG to this effect, it is
company in accordance with the business interests of intended that same agreements for the period of this
VEBA and the energy company. appointment will be concluded with them whose
(3) Except for the provisions in para. (4) through (6) terms and conditions will correspond to the terms and
which have been included as a precautionary mea- conditions of their present service agreements with
sure, no special benefits within the meaning of § 5 VIAG. Mr. Grohe will leave the Board of Manage-
para. 1 no. 8 of the Transformation Act are granted ment of VIAG with the effectiveness of the merger.
to a member of the Board of Management, a member He will receive the benefits to which he is entitled
of the Supervisory Boards or auditor of either pursuant to his existing service agreement.
company or for the joint merger auditor.
(6) Without interfering with the powers of the
(4) The Supervisory Board of VEBA will adopt a Supervisory Board and the shareholders’ meeting of
resolution on the appointment of the new members of VEBA pursuant to the Stock Corporation Act, it has
the Board of Management of VEBA in its first been agreed between the parties to recommend a new
meeting after the shareholders’ meeting of VEBA appointment of the shareholders’ representatives on
resolving on the approval to this Agreement. The the VEBA Supervisory Board during its present term
Supervisory Board of VEBA will decide on the after the merger with a 7:3 ratio of current sharehold-
appointment of the board members at its due ers’ representatives on the Supervisory Boards of
discretion. Notwithstanding the foregoing, it is in- VEBA and VIAG or other individuals to be nomi-
tended that the Board of Management of VEBA will nated by VEBA and VIAG; a nominee of VEBA
be comprised of Mr. Ulrich Hartmann and Prof. shall become the chairman of the Supervisory Board.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
8 Merger Agreement
§6 VIAG owed to former employees (current pensions
Amendments to the Articles of Association of and vested expectancies) will transfer to VEBA.
VEBA
(2) It is intended to close the present headquarters of
(1) In the shareholders’ meeting of VEBA adopting a VIAG in Munich constituting the only operation of
resolution on the approval of this Agreement, the VIAG following the merger. The headquarters of the
Articles of Association of VEBA shall be amended merged company will be at its registered offices in
beyond the capital increase for the implementation of u
D¨ sseldorf. This constitutes a change in operations
the merger in the following points as set forth in a
(Betriebs¨ nderung) within the meaning of § 111 of
the Works Council Constitution Act (Betriebsverfass-
Exhibit 2: ungsgesetz) both for VIAG and VEBA. Therefore,
the Boards of Management of both companies intend
– § 1 para. 1
to enter into a reconciliation of interests and social
sentence 2: Amendment of dual offices
plan with their respective works councils in Munich
– § 2: Purpose of the Corporation
u
and D¨ sseldorf prior to the effectiveness of the
– § 4 para. 2: Exclusion of the right for
merger.
share certificates
– § 7: Appointment of Prokurists In the reconciliation of interests, personnel concepts
– § 8 para. 4: Notice period for retirement of shall be agreed for both locations. The parties intend
Supervisory Board members to establish a head administration with a lean holding
–§ 17, sentence 1: Place of shareholders’ meeting structure of no more than 200 to 250 employees
–§ 18 para. 1: Reduction of deposit period. comprising about two thirds VEBA employees and
about one third VIAG employees. The terms of
(2) Furthermore, VEBA will give itself in the first
employment agreed with the VEBA employees (shop
regular shareholders’ meeting in the year 2000 a new
agreements, pension schemes, etc.) shall remain
company name reflecting the new and international
unaffected.
structure and orientation of the merged company. § 1
para. 1 sentence 1 of the Articles of Association will As full or partial compensation for the economic
be adjusted accordingly. disadvantages resulting from the changes in opera-
tions, the inclusion of provisions covering, inter alia,
(3) In the regular shareholders’ meeting in the year
early retirement, severance payments, salary guaran-
2000, the existing authorized capitals in § 3 para. 2
tees, reimbursement of travelling expenses and of
through 4 of the Articles of Association of VEBA
moving costs into the social plan shall be negotiated.
and the existing authorization for the issue of
Furthermore, the principles for the harmonization of
convertible and option bonds (including the contin-
collective agreements such as shop agreements shall
gent capital in § 3 para. 5 of the Articles of
be determined in the negotiations with the works
Association of VEBA) which has been granted by the
councils. This harmonization shall be completed
regular shareholders’ meeting of VEBA on May 27,
within two years after the effectiveness of the
1999 shall be adjusted with respect to the changed
merger. Until new stipulations have been established,
circumstances which have been resulting from the
the further application of the shop agreements and
merger.
collective bargaining agreements applicable for VIAG
is governed by § 613a para. 1 of the Civil Code.
§7
Consequences of the Merger for the Employees (3) The Konzernarbeitsgemeinschaft at VIAG which
and their Representation has been established in lieu of a group works council
will be terminated. In the future, the group works
(1) Upon the effectiveness of the merger, the em-
council of VEBA will also be in charge for the
ployments of the employees of VIAG will be
businesses of VIAG and will be extended
transferred with all rights and liabilities to VEBA by
accordingly.
universal succession pursuant to § 324 of the Trans-
u
formation Act, § 613a of the Civil Code (B¨ rger- (4) Upon effectiveness of the merger, the mandates
liches Gesetzbuch). With respect to all regulations of VIAG’s Supervisory Board members will end. As
depending on the duration of the employment, the from this date, the employees of VIAG’s group
periods of employment with VIAG as recognized by subsidiaries shall – for the purposes of the Co-
VIAG will be fully credited. Pension obligations of determination Act (Mitbestimmungsgesetz 1976) – be
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement 9
deemed to be employees of VEBA (§ 5 para. 1 of the 2001 shall be the effective date for the transfer of
Co-determination Act). The Supervisory Board of assets and liabilities and for the accounting change.
VEBA is presently composed pursuant to §§ 96 In case of a further delay of the entry past March 1
para. 1, 101 para. 1 of the Stock Corporation Act, § 7 of a subsequent year, the effective dates shall be
para. 1 no. 3 of the Co-determination Act of ten postponed for one year, respectively, pursuant to the
Supervisory Board members appointed by the share- aforementioned provision.
holders and ten Supervisory Board members ap-
pointed by the employees. After the effectiveness of (2) If the merger is entered into the commercial
the merger, the employees of VIAG and its group register responsible for VEBA after the regular
subsidiaries have the right to elect, or to be elected shareholders’ meeting of VIAG in the financial year
as, members of the Supervisory Board of VEBA. 2001, the shareholders of VIAG shall, by way of
derogation from § 2 para. (2) of this Agreement, not
(5) The merger of VEBA and VIAG will be imple- be entitled to receive profits on the shares to be
mented on the parent company (i.e. holding) level. It issued by VEBA until January 1, 2001. In case of a
has no direct impact on the businesses of the further delay of the entry past the regular share-
affiliated companies. The employments of the affili- holders’ meeting in a subsequent year, the com-
ated companies of VEBA and VIAG are not directly mencement of the profit participation right shall be
affected by the merger. The merger does not result in postponed for one year, respectively, according to the
any changes for the employee representations or the aforementioned provision.
shop agreements of the affiliated companies.
(3) If the merger is not entered into the commercial
It is intended that PreussenElektra Aktiengesellschaft register responsible for VEBA until the end of
with offices in Hanover and Bayernwerk Aktien- March 1, 2001, the registration shall only be affected
gesellschaft with offices in Munich will be merged after the regular shareholders meetings of VEBA and
into a joint energy company with offices and VIAG in 2001. The Board of Management of VEBA
headquarters in Munich after the effectiveness of the will procure this by filing a supplement to the
merger. The combination shall be affected by merg- application for registration, if necessary. This provi-
ing Bayernwerk Aktiengesellschaft into PreussenElek- sion shall apply mutatis mutandis if the registration is
tra Aktiengesellschaft; the acquiring company will be delayed beyond March 1st of a subsequent year.
connected with VEBA by a control of profit and loss
transfer agreement. The intended actions and their § 10
consequences for the employees and their representa- Rescission Right
tions will be discussed and agreed with the employee
representations in charge in due time. (1) Each of the parties may rescind this Agreement if
the merger has not become effective until the end of
December 31, 2000.
§8
Expenses (2) Each party can rescind this Agreement if
Each of the parties will bear the costs and expenses – the regular shareholders’ meeting of the other party
incurred by it in connection with this Agreement and adopts a resolution on the payment of a dividend
the preparation and implementation of the combina- for the fiscal year 1999 exceeding the average
tion. Costs that have been caused by the parties amount of dividends of the last three years plus
together will be borne jointly by the parties. 25%, or
§9 – by the end of the regular shareholders’ meeting of
Change of the Effective Date VEBA in the fiscal year 2000, the members of the
Board of Management of VEBA have not been
(1) If the merger has not been entered in the appointed in accordance with the provisions of § 5
commercial register responsible for VEBA by the end para. 4 of this Agreement and the members of the
of March 1, 2001, then by way of derogation from Supervisory Board of VEBA have not been ap-
§ 1 para. (2), December 31, 2000 shall be the pointed in accordance with the provisions of § 5
effective date for the closing balance sheet, and, by para. 6 of this Agreement or a motion for their
way of derogation from § 1 para. (3), the end of appointment has not been filed with the court in
December 31, 2000 and the beginning of January 1, charge, or
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
10 Merger Agreement
– the amendments of the Articles of Association of able in view of the current status of the discussions
VEBA have not been resolved by the regular with the Commission of the European Unions and the
shareholders’ meeting of VEBA for the year 2000 Federal Cartel Office and which would result in
as laid down in § 6 para. 2 of this Agreement. material adverse effects on the future combined
company.
(3) Each of the parties can rescind this Agreement if
the necessary approval of the combination by the (4) The rescission right must be exercised by a letter
Commission of the European Unions or the Federal sent by registered mail. A rescission will become
Cartel Office has not been granted until the end of immediately effective. Each of the parties can waive
August 31, 2000, or can only be granted subject to any existing rescission rights.
commitments and conditions which were not foresee-
signed Hartmann signed Dr. Gaul signed Prof. Dr. Simson signed Dr. Schipporeit
signed Dr. Zimmermann, Notar
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement 11
12
Attachment 1 to the Merger Agreement
AGREEMENT IN PRINCIPLE
between
u
VEBA Aktiengesellschaft (‘‘VEBA’’), D¨ sseldorf and Berlin
and
VIAG Aktiengesellschaft (‘‘VIAG’’), Munich
regarding the combination of VEBA and VIAG
13
14
Preamble §3
Composition of the Board of Management
The Board of Management of VEBA Aktiengesell-
schaft with registered offices in D¨ sseldorf and Berlin
u Without interfering with the powers of the Supervi-
(‘‘VEBA’’) and the Board of Management of VIAG sory Board of VEBA-VIAG pursuant to the Stock
Aktiengesellschaft with registered office in Munich Corporation Act (Aktiengesetz), VEBA and VIAG
(‘‘VIAG’’) have agreed to combine their businesses have agreed on the following recommendations for
in a merger of equals. the composition of the Board of Management of
VEBA-VIAG:
The combination shall create an energy and chemi-
cals group which will be globally active and leading 6. The Board of Management of VEBA-VIAG will
in Europe. be comprised of five individuals.
Therefore, the parties agree upon the following: 7. The future Board of Management of
VEBA-VIAG will not have any members who are
I. simultaneously members of a Board of Management
Structure and Orientation of the New Company within the VEBA-VIAG group.
§1 §4
Combination of VEBA and VIAG / Composition of the Supervisory Board
Company Name
After the implementation of the merger, the Supervi-
1. The combination of VEBA and VIAG shall be sory Board of VEBA-VIAG will be comprised of
implemented by merging VIAG as the transferor 20 members (§ 96 of the Stock Corporation Act and
entity into VEBA as transferee entity (§ 2 para. § 7 para. 1 no. 3 of the Co-Determination Act –
1 no. 1 of the Transformation Act – Mitbestimmungsgesetz 1976). Without interfering
Umwandlungsgesetz). with the powers of the Supervisory Board and the
2. The parties will give VEBA a new company shareholders’ meeting of VEBA-VIAG according to
name (referred to as ‘‘VEBA-VIAG’’ in this Agree- the Stock Corporation Act, it is agreed to recommend
ment), which will reflect the new and international a new appointment of the shareholders’ representa-
structure and orientation of the merged company. The tives of the VEBA-VIAG Supervisory Board during
new company name shall also form part of the name its present term with a 7:3 ratio of current sharehold-
of the new energy company. ers’ representatives of VEBA and VIAG or other
individuals to be nominated by VEBA and VIAG,
respectively; a nominee of VEBA shall become the
§2
chairman of the Supervisory Board.
Object of the Company / Registered offices
Headquarters / Articles of Association The State of Bavaria shall have the right to propose
to the Supervisory Board of VEBA-VIAG an individ-
3. VEBA-VIAG Aktiengesellschaft is the manage-
ual as one of the shareholders’ representatives to be
ment holding company. The registered offices and
nominated by VIAG for election to the Supervisory
u
headquarters of VEBA-VIAG will be in D¨ sseldorf.
Board as long as it holds more than 4% of the shares
4. The parties intend to establish a head administra- in VEBA-VIAG. Notwithstanding the foregoing, the
tion with a lean holding structure of no more than Supervisory Board of VEBA-VIAG will decide on its
200 to 250 employees comprising about 2/3 VEBA proposal for the election of Supervisory Board
employees and about 1/3 VIAG employees. The members to be submitted to the shareholders’ meet-
selection will be made by the parties on the basis of ing at its due discretion and without being bound by
performance. The Board of Management of the proposal of the State of Bavaria.
VEBA-VIAG will make decisions thereon by mutual
agreement. §5
Business Areas of the New Company
5. The Articles of Association of VEBA shall
continue to apply, provided that the provisions 8. The business fields of the new company which
contained in the Annex shall be amended by mutual shall be intensively expanded through external and
agreement. organic growth include:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement Attachment 1: Agreement in Principle 15
– the Energy Division with the electricity, gas, water responsibility of the corporate bodies of the relevant
and oil operations; companies.
u
– the Chemicals Division (with Degussa-H¨ ls AG
and the new SKW Trostberg AG in which the §6
operations of the existing SKW Trostberg and of Energy Operations
Goldschmidt AG have been combined).
14. The energy operations of PreussenElektra AG
9. A material business field of the new company is: and Bayernwerk AG including their subsidiaries shall
– the Telecommunications Division (VIAG Telecom be combined under one energy company,
GmbH with the shareholdings in VIAG Intercom VEBA-VIAG Energie AG. VEBA-VIAG Energie AG
GmbH & Co. KG, Munich, Connect Austria shall in particular operate the business units Electric-
Gesellschaft f¨ r Telekommunikation GesmbH,
u ity, Gas, Water and Waste Disposal.
Vienna, and Orange Communications S.A., Lausanne,
VEBA-VIAG Energie AG will have its registered
u
as well as E-Plus Mobilfunk GmbH, D¨ sseldorf,
offices and headquarters in Munich.
and Bouygues Telecom S.A., Paris);
10. A supplementary business area is: 15. The subsidiaries of VEBA-VIAG Energie AG to
be formed within the scope of the combination of
– the Real Estate Division (with Viterra AG, Essen). PreussenElektra and Bayernwerk are to be distributed
11. The following operations of the new company between the locations of PreussenElektra and
should be continued with a view to maximizing Bayernwerk in a balanced manner. The distribution
shareholder value and divested at an appropriate time: company shall have its registered office and head-
quarters in Munich. The network company shall have
– aluminum (VAW aluminium) its registered offices and headquarters in Bayreuth.
– distribution and logistics (Kl¨ ckner & Co., Stinnes
o The companies responsible for power generation
and VEBA Electronics); capacities (conventional and nuclear) shall have their
registered offices and headquarters in Hanover. The
– silicon wafers (MEMC); company responsible for hydroelectric power genera-
tion shall have its registered offices and headquarters
– packagings (Schmalbach-Lubeca and Gerresheimer
in Landshut, the engineering company in Gelsenkir-
Glas).
chen and the data processing company in Hanover.
12. The parties have agreed on the following
principles regarding the strategy of the new company: VEBA-VIAG Energie AG will further develop the
energy business based on a reasonable energy mix
The company will predominantly expand the Energy including nuclear power. There is a consensus that it
and Chemicals Divisions. The Energy Division is reasonable from an energy-economical point of
should gain a leading position in Europe, supple- view to generate electricity as close to the consump-
mented by important positions outside of Europe. The tion as possible and to construct new and replacement
Chemicals Division should reinforce its world market generation facilities wherever a corresponding
leadership as a specialty chemicals company. The demand exists.
Telecommunications Division should be developed as
planned. The other activities should serve the purpose Electricity and gas trading is part of the activities of
of expanding the group’s financial leeway enabling it VEBA-VIAG Energie AG headquarters.
to achieve the strategic goals of its core businesses.
The long term increase of shareholder value is the 16. The State of Bavaria has the right to propose an
company’s primary goal. individual for election to the Supervisory Board of
VEBA-VIAG Energie AG as long as it holds more
The companies assume that the combination of the
than 4% of the shares in VEBA-VIAG. The Board of
energy and chemicals operation will result in syner-
Management of VEBA-VIAG will support the elec-
gies of at least DM 1.5 billion per year.
tion of the proposed individual as a member of the
13. The management and further development of Supervisory Board of VEBA-VIAG Energie AG in
the aforementioned business fields will be carried out accordance with the business interests of
within the scope of the overall entrepreneurial VEBA-VIAG and VEBA-VIAG Energie AG.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
16 Merger Agreement Attachment 1: Agreement in Principle
§7 III.
Chemicals Operations Implementation of the Combination
The chemicals operations of the new company shall
§ 10
be combined in several steps. As a first step, the
Approval of the Merger by the Shareholders’
u
combination of the Degussa and H¨ ls operations in
Meeting of VEBA and VIAG
u
the new Degussa-H¨ ls AG with registered office in
Frankfurt and the operations of SKW Trostberg AG 19. The merger of VIAG and VEBA requires the
and of Goldschmidt AG in the new SKW Trostberg approval of the shareholders’ meetings of VEBA and
AG with registered office in Trostberg shall be VIAG.
completed. The operational management of the chem-
icals operations shall remain at the existing locations. 20. The Board of Management of VEBA will take
all measures required to convene an extraordinary
§8 shareholders’ meeting of VEBA in early February
Telecommunications Operations 2000. The Board of Management of VIAG will take
17. VIAG Telecom GmbH (with its associated all measures required to convene an extraordinary
companies VIAG Interkom GmbH & Co., Munich, shareholders’ meeting of VIAG in early February
Connect Austria Gesellschaft f¨ r Telekommunikation
u 2000. In the extraordinary shareholders’ meetings,
GesmbH, Vienna, and Orange Communications S.A., resolutions shall be passed on the approval of the
Lausanne) shall be transformed into a stock corpora- merger of VIAG onto VEBA.
tion. The new VIAG Telecom AG will have its
registered office and headquarters in Munich. 21. The parties will cause the merger to be regis-
tered immediately after the regular shareholders’
It is intended to sell the participation in E-Plus meetings of VEBA and VIAG resolving on the use
Mobilfunk GmbH. of the income available for distribution
18. The merger will not result in any changes to the (Bilanzgewinn) of the financial year 1999 and pay-
existing plans for the development of the VIAG ment of the dividend to the shareholders of VEBA
Telecommunications Division (including plans regard- and VIAG, respectively.
ing the personnel and site development in Bavaria).
Furthermore, it is intended to make a public offering § 11
of shares in the telecommunications activities as early Merger Closing Date/Interim Balance Sheet
as possible, taking into consideration value increase
and financing issues. 22. The assets and liabilities of VIAG will be
acquired by VEBA with internal effect as of the end
II. of December 31, 1999. Beginning on January 1,
Accounting 2000, (00:00 hours) all actions and transactions of
§9 VIAG shall be deemed taken for the account of
Accounting VEBA (‘‘Merger Closing Date’’).
The consolidated financial statements of VEBA- 23. The merger will be based on the annual
VIAG shall continue to be prepared in accordance financial statements of VIAG as per December 31,
with the HGB (German Commercial Code) and 1999 as the closing balance sheet (Schlußbilanz). In
reconciled with U.S. GAAP (Generally Accepted its accounting, VEBA will continue to use the book
Accounting Principles). values of the assets and liabilities transferred in the
merger as shown in the closing balance sheet of
VIAG.
24. VIAG will prepare an interim balance sheet as
defined in § 63 para. 1 no. 3 of the Transformation
Act as per September 30, 1999. VEBA will prepare
an interim balance sheet as defined in § 63 para. 1
no. 3 of the Transformation Act as per September 30,
1999.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement Attachment 1: Agreement in Principle 17
§ 12 § 13
Enterprise Valuation / Determination of the Information Exchange / Due Diligence
Exchange Ratios
29. Prior to the signing of this Agreement, VEBA
25. The parties consider proportional enterprise val- and VIAG have mutually exchanged the audited
ues (Unternehmenswertrelationen) of VEBA and annual financial statements and consolidated financial
VIAG of 67% : 33% as adequate. They have agreed statements for the financial years ending on Decem-
that the exchange ratio to be established in the ber 31, 1998 and December 31, 1997 and the related
merger agreement should be in the range between audit reports of the auditors as well as the business
68% : 32% and 66% : 34%. forecasts for the years 1999 to 2001 (as of December
1998) with a current estimate of the likelihood of
In addition, a fairness opinion regarding the estab- occurrence as per end of July 1999. Furthermore,
lished exchange ratio has been obtained by the Board VEBA and VIAG hereby confirm that in the period
of Management of VEBA from the investment bank between January 1, 1999 and the execution of this
Goldman Sachs and by the Board of Management of Agreement they have conducted their businesses
VIAG from the investment bank J.P. Morgan. within the customary scope, except for publicly
announced matters, and that during this period no
26. For purposes of determining the final exchange material adverse change of their respective net worth,
ratio for the Merger Agreement, the Boards of financial position or results has occurred unless
Management of VEBA and VIAG will instruct already made public or communicated to the other
Wollert Elmendorff Deutsche Industrie Treuhand party in writing.
u
GmbH Wirtschaftspr¨ fungsgesellschaft and Warth &
Klein GmbH Wirtschaftspr¨ fungsgesellschaft (‘‘Ap-
u 30. Until November 15, 1999, the parties will
praisers’’) to prepare a joint expert opinion on the conduct a due diligence regarding those circum-
enterprise values of VEBA and VIAG. The Apprais- stances, facts and matters which are of material
ers will prepare their opinion on the basis of the importance in connection with the implementation of
generally accepted principles of the statement of the the combination. For this purpose, the parties will
Expert Committee of the German Institute of Certi- agree on the scope of the due diligence and provide
fied Public Accountants (Hauptfachausschuß des each other with the necessary information. They will
Instituts der Wirtschaftspr¨ fer in Deutschland e.V.)
u exchange the results of their findings and inform the
HFA 2/1983 ‘‘Principles for Business Valuations’’ Appraiser thereof in writing.
and the development of such principles as accepted
by the German Institute of Certified Public Account- § 14
ants, as well as the draft of the German Institute of Merger Control Approval
Certified Public Accountants ES 1 of January 27, Without undue delay, the parties will make a filing
1999, ‘‘Principles for Business Valuations’’. Based regarding the merger with the competent merger
on this valuation of the Appraisers, the Boards of control authorities for approval.
Management will determine the exchange ratio for
the merger agreement. IV.
Other Provisions
27. If the final determination in the Merger Agree-
ment based on the findings of the Appraisers and the § 15
examinations of the Boards of Management of VEBA Approval Requirements
and VIAG is not possible within a range of The Supervisory Boards of VEBA and VIAG each
proportional values between 68%: 32% and 66%: have approved this Agreement by resolutions dated
34%, each of the parties is entitled to rescind this September 26, 1999.
Agreement within one week by written statement to
the other party. § 16
Implementation of the Merger / Termination
28. The parties will file an application with the
court in charge to appoint Arthur Andersen Wirt- 31. The parties will use their best efforts to
u
schaftspr¨ fungsgesellschaft Steuerberatungsgesell- implement the combination pursuant to the provisions
schaft mbH, Eschborn and Frankfurt/Main as the joint of this Agreement in Principle and cooperate
merger auditor. trustfully with respect to all matters. They will
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
18 Merger Agreement Attachment 1: Agreement in Principle
coordinate and agree on all contacts with authorities VEBA and VIAG will lead their respective company
and the public regarding the combination and give including their subsidiaries, affiliated companies and
each other support. As far as legally possible and on major associated companies within the customary
the basis of the principles regarding the confidential- scope in accordance with past practice and with the
ity of the information provided, VEBA and VIAG care of a prudent businessman. Particularly, the
will grant each other reasonable access to their parties will inform each other about material transac-
facilities, allow inspection of their books and docu- tions or management measures which are of impor-
ments and provide information to the extent that this tance for the combination of the two companies or of
may be necessary for the most efficient preparation the Energy Divisions of both groups and for the
and practical implementation of the merger, while valuation.
observing the agreed confidentiality.
Each of the parties will carry out the following
32. Each party has a right to rescind this Agreement measures – after consultation with the other party –
in Principle to be exercised by written declaration to only if necessary in the interest of the respective
the other party in the following cases: company and its shareholders or as required for the
implementation of the combination:
1) In the due diligence, facts or circumstances are
disclosed which either make the reports and group 7) Convening a shareholders’ meeting with the
calculations submitted pursuant to § 13 para. 1, the proposal to pass a resolution regarding an increase of
auditors’ reports relating thereto, the planning docu- the registered capital or the creation of conditional or
ments or the further statements false, misleading or authorized capital;
incomplete or have not been known prior to the
execution of this Agreement and constitute a material 8) making use of an authorization by the Board of
adverse change of the net worth, financial position, or Management to increase the registered capital; issu-
results or earnings power of the respective party. ance of securities or rights which may be exchanged
2) The respective other party has failed to bring for, or converted into, shares;
about material conditions for the implementation of
9) divesting of material shareholdings and acquisi-
the combination according to this Agreement.
tion of businesses and shareholdings with material
3) The Supervisory Board of a party has not given importance for the respective group.
the approvals necessary for the combination by way
of a merger. § 18
Third Party Offers
4) The shareholders’ meetings of VEBA and/or
VIAG have not approved the merger with the The parties shall refrain from any actions which may
necessary majority in the extraordinary shareholders’ delay or endanger the realization of the merger,
meetings to be convened. particularly in respect to a material change of their
5) A required material consent, approval or permit shareholders’ structure. If a third party launches a
by any administrative body or other entity (particu- public offer to shareholders of one party, the parties
larly according to § 14 of this Agreement) is ulti- will jointly examine and consult which appropriate
mately denied or requires a material change to the measures may be taken and whether a continuation of
concept of the combination. the combination is appropriate. If the shareholder
structure of VEBA or VIAG is changed substantially
6) The merger has not become effective by the end compared to the time of the execution of this
of December 31, 2000, and therefore one of the Agreement in Principle in so far that the acquiror or
parties has rescinded the merger agreement. a group of acquirors obtains de-facto majority in the
shareholders’ meeting of VEBA or VIAG, the
§ 17 respective other party may rescind this Agreement in
Continuation of Business Operations Principle by written declaration.
During the period between the execution of this This provision does not affect the rights of the
Agreement and the registration of the merger in the shareholders of VEBA and VIAG to freely dispose of
commercial register, the Boards of Management of their shares.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement Attachment 1: Agreement in Principle 19
§ 19 German Institution for Arbitration) shall apply. The
Final Provisions court of arbitration shall consist of three judges. If
the parties cannot agree on the person of the
33. Prior to making ad-hoc statements, press
presiding arbitrator, he or she will be determined by
releases or other public statements regarding the
the president of the Upper State Court in Frankfurt/
combination, each of the parties will inform the other
Main. Place of venue for the arbitration shall be
party in order to give the other party the opportunity
Frankfurt/Main.
for examination, comment and approval and to use its
efforts to obtain the consent of the other party. 36. If any provisions of this Agreement should be
invalid in whole or in part or become invalid or
34. VEBA and VIAG will each bear their own
unenforceable, the validity of the remaining provi-
costs and expenses arising in connection with the
sions of this Agreement shall remain unaffected. The
preparation and implementation of the combination as
same applies if it becomes apparent that this Agree-
well as in connection with this Agreement. Expenses
ment contains an omission. Instead of the invalid or
caused jointly will be borne together by the parties.
unenforceable provision or in order to fill the
35. All disputes between the parties arising from omission, an appropriate provision shall apply, which,
and in connection with this Agreement and its to the extent legally possible, most closely resembles
implementation including disputes regarding its valid- what the parties intended, or, according to the intent
ity or its termination will be subject to a final and and purpose of the Agreement, would have intended,
binding decision by a court of arbitration, excluding if at the time of signing the Agreement or of a later
the ordinary courts. Unless the parties determined inclusion of a provision they had considered the
otherwise, the arbitration order of the Deutsche issue.
u
Institution f¨ r Schiedsgerichtsbarkeit e.V. (DIS –
Munich, September 27, 1999 Munich, September 27, 1999
VEBA Aktiengesellschaft VIAG Aktiengesellschaft
signed Hartmann signed Dr. Gaul signed Prof. Dr. Simson signed Dr. Schipporeit
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
20 Merger Agreement Attachment 1: Agreement in Principle
Annex to § 2 Number 3 of the Agreement
The provisions of the Articles of Association of §7
VEBA listed hereinafter are to be modified
Deletion of para. 2 (appointment of procurists only
unanimously:
with the consent of the Supervisory Board).
§1
§ 8 Para. 4:
General Provisions
Reduction of resignation period for members of the
The parties will find a new company name which
Supervisory Board to two weeks.
will reflect the new and international structure and
orientation of the merged company. § 17
u
The registered offices is in D¨ sseldorf (Berlin will be Location for the shareholders’ meeting shall be the
abandoned). company’s registered office or another appropriate
location within Germany.
§2
Object of the Company § 18 Para 1:
§3 Reduction of period for deposit from 10 to 7 days.
Registered Capital and Shares
Capital increase to implement the merger.
Continuation and adjustment of the existing autho-
rized and conditional capital to the size of the new
company.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement Attachment 1: Agreement in Principle 21
September 2, 1999
NOTE ON THE MINUTES
In addition to the Agreement in Principle between Mr. Simson and Mr. Schipporeit shall be appointed
¨
VEBA Aktiengesellschaft (‘‘VEBA’’), Dusseldorf as chairman and member of the Board of Manage-
and Berlin, and VIAG Aktiengesellschaft ment of VEBA-VIAG AG, respectively, during the
(‘‘VIAG’’), Munich, on the combination of VEBA first meeting of the Supervisory Board of VEBA
and VIAG, the following is agreed: following the shareholders’ meeting, which votes on
the approval of the Merger Agreement.
A. re § 2:
3. Mr. Hartmann shall become chairman of the
VEBA-VIAG AG as a management holding company Supervisory Board of VEBA-VIAG Energie AG and
will have the following primary functions: VEBA Oel AG.
– manage strategy of the group Mr. Simson shall become chairman of the Supervi-
sory Boards of both chemical companies (Degussa-
– manage financial resources u
H¨ ls AG and the new SKW Trostberg AG) and of
the future VIAG Telecom AG.
– fill the group’s top management positions and
coordinate executive development Mr. Gaul shall become chairman of the Supervisory
Board of Stinnes AG, Viterra AG and Schmalbach-
a
– represent the group vis-` -vis the capital markets Lubeca AG.
and the general public
Mr. Schipporeit shall become chairman of the Super-
– oversee implementation of the group’s value- o
visory Board of Kl¨ ckner & Co. AG, VAW alumin-
oriented management approach ium AG, Gerresheimer Glas AG and VEBA-VIAG
Versicherungsgesellschaft.
B. re § 3:
4. Messrs. Hartmann and Simson shall retire from
1. The future Board of Management of VEBA- the Board of Management of VEBA-VIAG AG when
VIAG AG will be composed of Messrs. Hartmann appropriate and submit to the Supervisory Board a
u
and Simson as chairmen and Messrs. Gaul, Kr¨ per joined proposal for the future chairman of the Board
and Schipporeit as members of the Board of of Management. It is intended to have both
Management. Messrs. Hartmann and Simson join the supervisory
board and Mr. Hartmann become its chairman.
2. The members of the Board of Management are to
assume the following departmental responsibilities: C. re § 6:
Mr. Hartmann Corporate communications,
Without prejudice to the competence of the Supervi-
Economic Policy, Investor
sory Board of VEBA-VIAG Energie AG according to
Relations, relations to the
the Stock Corporation Act, the members of the
Supervisory Board
Boards of Management of VEBA and VIAG have
Mr. Simson Group strategy, Post Merger agreed on the following recommendations for the
Integration, Executive members of the Board of Management of VEBA-
Development, Revision VIAG Energie AG after the effectiveness of the
Mr. Gaul Controlling/Corporate Planning, combination of PreussenElektra and Bayernwerk:
Mergers & Acquisitions, Legal Members of the Board of Management of VEBA-
Affairs VIAG Energie AG shall be Mr. Harig as chairman
Mr. Kr¨ per
u Labor Director, General and Mr. Majewski as deputy chairman.
Administration, Procurement, The Board of Management of VEBA-VIAG Energie
Organization AG will be staffed equally by VEBA and VIAG,
Mr. Schipporeit Finances, Accounting, Taxes, while appointments of outsiders should not be
Information Technology, Insurances excluded.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
22 Merger Agreement Attachment 1: Agreement in Principle
D. re § 8: E. re § 14:
During the transformation of VIAG Telecom GmbH If the required merger control approvals have not
into a stock corporation, British Telecom is to been granted by May 31, 2000, each of the parties is
become a shareholder of this stock corporation. This entitled to rescind this Agreement by written declara-
should not limit VEBA-VIAG’s flexibility in structur- tion to the other party. If a merger control approval is
ing its portfolio. denied, each of the parties is also entitled to rescind
this Agreement by written declaration.
Munich, September 27, 1999 Munich, September 27, 1999
VEBA Aktiengesellschaft VIAG Aktiengesellschaft
signed Hartmann signed Dr. Gaul signed Prof. Dr. Simson signed Dr. Schipporeit
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Agreement Attachment 1: Agreement in Principle 23
Attachment 2 to the Merger Agreement
§ 1 para. 1 sentence 2: § 7:
u
‘‘It has its offices in D¨ sseldorf’’
‘‘The Corporation shall be legally represented by two
members of the Board of Management or by one
§ 2: member and an agent with full power of attorney
‘‘(1) The Corporation controls a group of companies (Prokurist).’’
active in the following business sectors in particular:
§ 7 para. 2 will be deleted.
– energy, with main operations in electricity, gas, oil
as well as water and waste disposal,
§ 8 para. 4:
– chemicals, principally consisting of specialty chem-
icals, construction chemicals and petrochemicals, ‘‘Any member of the Supervisory Board may resign
as well as activities in from office subject to two weeks’ written notice
submitted to the Chairman of the Supervisory
– telecommunications and Board.’’
– real-estate management.
§ 17 sentence 1:
The Corporation is furthermore authorized to manage
businesses in the fields of distribution and logistics, ‘‘The Shareholders’ Meeting shall be held in the city
aluminum, silicon wafers and packaging. in which the corporation has its registered offices or
(2) Activities in these business sectors include the another major German city (deutsche Großstadt).’’
generation, processing and working as well as distri-
bution and transmission, supply and trading. Facilities § 18 para. 1:
of any kind may be erected, acquired and operated
and services and business cooperations of all kind
‘‘Only shareholders who deposit their shares or
can be undertaken.’’
certificates of deposit therefor issued by a collective
The former § 2 para. 2 of the articles of association security-deposit bank or a notary, collective security
shall become § 2 para. 3 and the former § 2 para. 3 deposit bank, or other agency stated in the notice
of the articles of association shall become § 2 calling the Shareholders’ Meeting no later than the
para. 4. end of the seventh day prior to the day of said
meeting and leave them there until the end thereof,
§ 4 para. 2 are entitled to participate in the Shareholders’ Meet-
ing and exercise their voting rights. If the seventh
‘‘Shareholders’ rights to securitize their shares and day prior the day of the Shareholders’ meeting is a
dividends is excluded as long as rules valid at stock Sunday or a general public holiday recognized by the
exchanges on which the share is listed do not require state, or if the banks are closed on said day, the
them to be securitized. Certificates for multiple shares deadline shall be the last banking day prior to said
may be issued.’’ day.’’
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
24 Merger Agreement Attachment 2: Amendments of the Articles of Association
PART B
Merger Report
25
26
JOINT
MERGER REPORT
of the Boards of Management of
VEBA Aktiengesellschaft
and of
VIAG Aktiengesellschaft
on the Merger
u
of VEBA Aktiengesellschaft, D¨ sseldorf and Berlin
and
VIAG Aktiengesellschaft, Munich
27
28
TABLE OF CONTENTS
I. Introduction................................................................................................................................................... 35
II. Companies participating in the Merger................................................................................................... 36
1. VEBA Aktiengesellschaft.................................................................................................................. 36
a) Overview / Current Group Structure .......................................................................................... 36
b) Corporate History and Development.......................................................................................... 36
c) Group Performance ..................................................................................................................... 37
d) Employees and Co-Determination.............................................................................................. 38
e) Corporate Bodies, Capital and Shareholders ............................................................................. 39
f) Divisions...................................................................................................................................... 39
(1) Electricity: PreussenElektra AG ..................................................................................... 39
(2) Oil: VEBA Oel AG ........................................................................................................... 45
(3) ¨
Chemicals: Degussa-Huls AG.......................................................................................... 48
(4) Telecommunications: VEBA Telecom GmbH ............................................................... 52
(5) Real Estate Management: Viterra AG........................................................................... 54
(6) Distribution / Logistics: Stinnes AG and VEBA Electronics....................................... 56
(a) Stinnes AG ................................................................................................................. 56
(b) VEBA Electronics...................................................................................................... 59
(7) Silicon Wafers: MEMC Electronic Materials Inc. ...................................................... 60
(8) Other Main Shareholding: RAG AG ............................................................................. 62
2. VIAG Aktiengesellschaft .................................................................................................................. 63
a) Overview / Current Group Structure .......................................................................................... 63
b) Corporate History and Development.......................................................................................... 63
c) Group Performance ..................................................................................................................... 64
d) Employees and Co-Determination.............................................................................................. 65
e) Corporate Bodies, Capital and Shareholders ............................................................................. 65
f) Divisions...................................................................................................................................... 66
(1) Energy: Bayernwerk AG ................................................................................................. 66
(2) Chemicals: SKW Trostberg AG ..................................................................................... 71
(3) Telecommunications: VIAG Telecom Beteiligungs GmbH ......................................... 74
(4) Aluminum: VAW aluminium AG................................................................................... 77
(5) Packaging: Schmalbach-Lubeca AG and Gerresheimer Glas AG............................. 79
(a) Schmalbach-Lubeca AG........................................................................................... 79
(b) Gerresheimer Glas AG............................................................................................. 81
o
(6) Other Activities: Kl¨ ckner & Co. AG ........................................................................... 82
III. Implementation of Combination.............................................................................................................. 84
1. Merger of Equals .............................................................................................................................. 84
2. Essential Steps of the Combination ................................................................................................ 84
a) Execution of the Merger Agreement.......................................................................................... 84
b) Extraordinary Shareholders’ Meetings of VEGA and VIAG ................................................... 84
c) Regular Shareholders’ Meetings of VEBA and VIAG ............................................................. 84
d) Registration of the Merger ......................................................................................................... 84
3. Acquisition of VIAG shares by VEBA AG ................................................................................... 85
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report 29
IV. Economic Explanation of the Merger..................................................................................................... 87
1. Initial Situation / Development of the Market and Competitive Environment ........................ 87
a) Competitive Environment of the Energy Industry after the Liberalization of the European
Electricity and Gas Markets ....................................................................................................... 87
b) Oil Market Environment............................................................................................................. 89
c) Chemicals Market Environment ................................................................................................. 89
d) Telecommunications Market Environment ................................................................................ 90
e) Real Estate Market Environment ............................................................................................... 90
f) Market Environment of the other Business Areas .................................................................... 90
2. Initial Situation, Strategy and Options of VEBA (on a Stand-alone Basis) ............................. 91
a) ‘‘Focus and Growth’’ Strategy................................................................................................... 91
b) Core Business Energy................................................................................................................. 91
c) Core Business Chemicals ........................................................................................................... 92
d) Other Business Activities ........................................................................................................... 92
3. Initial Situation, Strategy and Options of VIAG (on a Stand-alone Basis).............................. 93
a) Strategical Reorientation............................................................................................................. 93
b) Value Management on all operative Levels .............................................................................. 93
c) Energy and Telecommunication ................................................................................................. 94
d) Innovative Industrial Shareholdings ........................................................................................... 94
4. Entrepreneurial Orientation and Strategy of the new Company .............................................. 95
a) Creation of a new Company with leading Positions in the Core Business Areas Energy
and Chemicals ............................................................................................................................. 95
b) Strategy of the new Company.................................................................................................... 96
c) Core Businesses and Strategic Orientation ................................................................................ 97
d) Important Business Area: Telecommunications Division ......................................................... 98
e) Supplementary Business Area: Real Estate Division ................................................................ 98
f) Activities which are to be continued optimizing their value and sold at an appropriate time .... 99
5. Advantages of the Merger for the Companies involved and their Shareholders .................... 99
a) Strategic Advantages / Complementation of the Core Areas .................................................... 99
b) Synergy Potentials....................................................................................................................... 100
c) Grown Capital Market Standing and Financial Power of the new Company ......................... 102
d) Strengthening of the Innovation Potential ................................................................................. 102
6. Financial Goals of the new Company ............................................................................................ 102
7. Structure, Organization and Management of the new Company .............................................. 103
a) Group Structure........................................................................................................................... 103
b) Management and Organizational Structure of the new Company / Functions of the
Holding Company ....................................................................................................................... 103
c) Composition of the Board of Management and the Supervisory Board.................................. 103
d) Registered Office and Administration........................................................................................ 104
e) Compensation System................................................................................................................. 104
f) Management and Organizational Structure and Personal Composition of the Corporate
Bodies / Registered Office and Administration of the Material Subsidiaries of the Group .... 105
8. Cost of the Combination .................................................................................................................. 106
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
30 Merger Report
9. Alternatives to Merging ................................................................................................................... 106
a) Merger of VEBA and VIAG by Formation of a new Entity or by Acquisition by an
existing Entity ............................................................................................................................. 106
b) Merger with Voluntary Award Proceeding for VEBA Shareholders ....................................... 107
c) Capital Increase through Contribution-in-Kind with Exchange Offer...................................... 107
d) Contribution of the Assets of VEBA and VIAG into a Joint Venture .................................... 108
10. Merger Control.................................................................................................................................. 108
a) Initiated Merger Control Proceedings ........................................................................................ 108
b) Compatibility with the Common Market................................................................................... 109
V. Accounting, Financial, Corporate and Tax Effects of the Merger ...................................................... 110
1. Accounting and Financial Effects ................................................................................................... 110
a) Pro-Forma Balance Sheet Forecast of VEBA-VIAG as of January 1, 2000........................... 110
b) Pro-Forma Consolidated Balance Sheet Forecast of VEBA-VIAG as of January 1, 2000 .... 113
c) Financial Issues and Key Figures .............................................................................................. 115
d) Accounting of the new Company .............................................................................................. 115
2. Corporate Law Effects ..................................................................................................................... 115
a) Dissolution of VIAG AG and Expiration of its Shares ............................................................ 115
b) Exchange of VIAG Shares into VEBA-VIAG Shares.............................................................. 115
c) Participation Ratios at VEBA-VIAG AG after the Merger...................................................... 116
d) Dividend Rights .......................................................................................................................... 116
e) Company Name........................................................................................................................... 117
f) Explanation of the Articles of Association of the new Company............................................ 117
3. Tax Effects ......................................................................................................................................... 119
a) Taxation of the Merger............................................................................................................... 119
b) Taxation of the Company and of the Shareholders after the Merger ...................................... 120
(1) Taxation of VEBA-VIAG AG ........................................................................................... 120
(2) Taxation of the Shareholders of VEBA-VIAG AG .......................................................... 120
VI. Explanation of the Merger Agreement and of the Agreement in Principle ..................................... 121
1. Merger Agreement ............................................................................................................................ 121
2. Agreement in Principle..................................................................................................................... 125
VII. Securities and Exchange Transactions .................................................................................................. 129
1. Effects of the Merger on the Shares of VEBA AG...................................................................... 129
2. Effects of the Changes of the Company Name on the Securitization of the VEBA Shares .. 129
3. Effects of the Merger on the Shares of VIAG AG ...................................................................... 129
a) Expiration of the VIAG Shares / Acquisition of the Shares in VEBA-VIAG AG.................. 129
b) Implementation of the Share Exchange ..................................................................................... 129
c) Particularities Relating to declaring Share Certificates of VIAG AG void during
December 1999 ........................................................................................................................... 130
4. Effects of the Merger on the Exchange Trade ............................................................................. 130
a) Current Situation ......................................................................................................................... 130
b) Effects of the Merger.................................................................................................................. 130
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report 31
VIII. Exchange Ratio ....................................................................................................................................... 131
1. Structure and Delimitation of the Valuation Objects.................................................................. 131
2. Valuation Methods ............................................................................................................................ 133
a) General Valuation Principles ...................................................................................................... 133
(1) Earnings Value .................................................................................................................. 133
(2) Objective Earnings Value ................................................................................................. 133
(3) Liquidation Value and Intrinsic Value ............................................................................. 134
(4) Special Values ................................................................................................................... 135
(5) Discounted Cash Flow ...................................................................................................... 135
(6) Stock Market Prices .......................................................................................................... 135
(7) Share Value ....................................................................................................................... 136
b) Methodology................................................................................................................................ 137
(1) Valuation Date................................................................................................................... 137
(2) Deriving Future Business Success.................................................................................... 137
(a) Analysis of Historical Results .................................................................................... 137
(b) Examination of the Forecast Calculations ................................................................. 137
(3) Capitalization Interest Rates ............................................................................................. 139
(a) Base Interest Rate ....................................................................................................... 139
(b) Risk Premiums ............................................................................................................ 140
(c) Standardized Taxes on Income................................................................................... 141
(d) Growth Rate ................................................................................................................ 141
(e) Derivation of the Capitalization Interest Rates ......................................................... 142
(4) Special Values ................................................................................................................... 142
(a) Separately Valued Financial Assets ........................................................................... 142
(b) Special Tax Values ..................................................................................................... 143
(c) Real Estate Assets not Necessary for Business Operations...................................... 143
(5) Total Values of VIAG and VEBA ................................................................................... 143
3. Harmonization of Material Forecast Assumptions of Bayernwerk AG and
PreussenElektra AG.......................................................................................................................... 144
4. Valuation of VIAG............................................................................................................................ 145
a) Group Divisions with Intention of Continuation....................................................................... 145
(1) Energy: Bayernwerk AG................................................................................................... 145
(2) Chemicals: SKW Trostberg AG ....................................................................................... 147
(3) Telecommunications: VIAG Telecom Beteiligungs GmbH ............................................ 151
(4) Aluminum: VAW aluminium AG .................................................................................... 154
(5) Holding .............................................................................................................................. 156
b) Separately Valued Divisions....................................................................................................... 157
(1) Packaging: Schmalbach-Lubeca AG and Gerresheimer Glas AG .................................. 157
(a) Schmalbach-Lubeca AG ............................................................................................. 157
(b) Gerresheimer Glas AG ............................................................................................... 160
o
(2) Logistics: Kl¨ ckner & Co. AG......................................................................................... 161
c) Business Value of VIAG............................................................................................................ 163
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
32 Merger Report
5. Valuation of VEBA ........................................................................................................................... 164
a) Group Divisions with Intention of Continuation....................................................................... 164
(1) Electricity: PreussenElektra AG ....................................................................................... 164
(2) Oil: VEBA Oel AG........................................................................................................... 167
u
(3) Chemicals: Degussa-H¨ ls AG .......................................................................................... 169
(4) Real Estate Management: Viterra AG.............................................................................. 174
(5) Distribution/Logistics: VEBA Electronics........................................................................ 176
(6) Holding .............................................................................................................................. 178
b) Separately Valued Divisions....................................................................................................... 180
(1) Telecommunications: VEBA Telecom GmbH................................................................. 180
(2) Distribution/Logistics: Stinnes AG................................................................................... 182
(3) Silicon Wafers: MEMC Electronic Materials Inc. .......................................................... 185
c) Business Value of VEBA ........................................................................................................... 186
6. Determination of the Exchange Ratio ............................................................................................ 187
Attachments
Attachment 1: Articles of Association of VEBA-VIAG AG ........................................................................... 189
Attachment 2: Interim Balance Sheet of VEBA AG as of September 30, 1999 ............................................ 194
Attachment 3: Interim Balance Sheet of VIAG AG as of September 30, 1999 ............................................. 195
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report 33
FORWARD-LOOKING INFORMATION
This report contains certain forward-looking state- ) changes in availability and price of raw materials
ments and information relating to VEBA Aktien- and other commodities,
gesellschaft (‘‘VEBA’’), VIAG Aktiengesellschaft
(‘‘VIAG’’) and the merged entity of VEBA and ) increased sensitivity to environmental issues among
VIAG, VEBA-VIAG, that are based on the beliefs of consumers,
their respective managements as well as assumptions
made by and information currently available to each ) changes in regulation,
of VEBA and VIAG. When used in this document,
) lack of acceptance of new services by VEBA,
the words ‘‘anticipate’’, ‘‘believe’’, ‘‘estimate’’, ‘‘ex-
VIAG and VEBA-VIAG targeted customers,
pect’’, ‘‘plan’’ and ‘‘intend’’ and similar expressions,
as they relate to VEBA, VIAG and VEBA-VIAG or
) development of alternative power sources,
their respective managements, identify forward-look-
ing statements. These statements reflect the current ) inability to obtain optimal prices upon the sale of
views of each company with respect to future events non-core business,
and are based on certain assumptions and subject to
certain risks and uncertainties. Many factors could ) changes in business strategy,
cause the actual results, performance or achievements
of VEBA, VIAG and VEBA-VIAG to be materially ) risks that the synergies anticipated from the busi-
different from any future results, performance or ness combination may not be fully realized,
achievements that may be expressed or implied by
such forward-looking statements, including, among and various other factors, both referenced and not
others: referenced in this report. Should one or more of these
risks or uncertainties materialize, or should underly-
) changes in general economic and business ing assumptions prove incorrect, actual results may
conditions, vary materially from those described herein as
) changes in currency exchange rates, anticipated, believed, estimated, expected, planned or
intended. None of VEBA, VIAG and VEBA-VIAG
) competition by other generators and distributors of intends, or assumes any obligation, to update these
electricity both inside and outside of Germany, forward-looking statements.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
34 Merger Report II. Participating Companies: VEBA
I.
INTRODUCTION
Dear Shareholders, is a logical continuation of their existing strategies.
VEBA and VIAG both concentrate on their core
On December 21, 1999, the Boards of Management
business areas and consistently adjust their portfolios.
signed the merger agreement between VEBA
We anticipate that the merger will create synergy
Aktiengesellschaft and VIAG Aktiengesellschaft.
effects of about EUR 800 million per year – in
Both companies’ Supervisory Boards have approved
addition to the ongoing cost-management programs of
the merger.
VEBA and VIAG. On the other hand, one-off
You, the shareholders of VEBA and VIAG, now charges of about EUR 475 million will be incurred in
have the final say. We will ask for your approval at the combination.
the Extraordinary Shareholders’ Meetings of VEBA
and VIAG in February 2000. This Merger Report contains comprehensive informa-
The merger marks a new chapter in the history of tion regarding the merger of VEBA AG and VIAG
VEBA and VIAG. It creates a new powerhouse with AG for you to prepare your decision. The following
the long-term ability to secure and improve its chapters describe both companies, the reasons for the
leading international market positions in its core merger and the merger’s effects, the Merger Agree-
business areas. Both companies intend to combine ment, and the stock exchange registration of the new
under a new name which will reflect the merged company’s shares, and explain in detail how the
companies’ new and international structure and orien- exchange ratio was determined.
tation. VEBA and VIAG consider each other the
ideal partner for a merger of equals: There is simply u
D¨ sseldorf and Munich, December 22, 1999
no alternative for VEBA or for VIAG in Germany
that comes close to being as good a strategic match
in the core businesses. For both partners, the merger Ulrich Hartmann Wilhelm Simson
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report I. Preamble 35
II.
COMPANIES PARTICIPATING IN THE MERGER
1. VEBA Aktiengesellschaft
a) Overview / Current Group Structure
VEBA Aktiengesellschaft (‘‘VEBA AG’’) is the holding company of a business group operating in seven
business areas with eight major group companies.
,
.
, , , ,
. . .
,
The columns display 1998 sales figures (EUR in millions) and VEBA AG’s shareholdings. The stated sales figures represent the contribution to sales in the
group accounting of VEBA for the 1998 financial year (in million EUR). Sales numbers for the oil unit include petroleum taxes; sales numbers for the
u
Chemicals Division are pro forma figures for the financial year 1997/98 after the merger of Degussa AG and H¨ ls AG.
The Energy (electricity, oil and gas) and Chemicals u
The company has its registered offices in D¨ sseldorf
Divisions represent the group’s core businesses. u
and Berlin. Its headquarters are in D¨ sseldorf.
Further business activities include the Telecommuni-
cations, Real Estate Management, Distribution/ b) Corporate History and Development
Logistics and Silicon Wafers Divisions. The Divi-
sions are organized as legally independent entities. In 1929, the State of Prussia incorporated VEBA AG
VEBA AG’s responsibilities include the management a
as ‘‘Vereinigte Elektrizit¨ ts- und Bergwerks-
of the group by formulating the group’s strategy, Aktiengesellschaft’’ (United Electricity and Mining
strategic controlling, focusing and managing financial Corporation) with registered offices in Berlin. The
resources, coordinating executive development and company served as a holding company for Prussian
communications, particularly vis-` -vis the capital
a electricity and mining shareholdings. In particular, it
markets and the shareholders. The responsibility for a
held shareholdings in Preussische Elektrizit¨ ts-
operational decisions is vested with the individual Aktiengesellschaft (Prussian Electricity Corporation,
divisions. the later PreussenElektra AG), the mining company
Hibernia and the Preussische Bergwerks- und H¨ ttenu
The approx. 117,000 employees of the VEBA group AG (Prussian Mining and Smelters Corporation, later
(‘‘VEBA’’) generated 1998 group sales of about Preussag AG). The development of VEBA’s group
EUR 42.8 billion. With regards to sales, VEBA is companies between 1933 and 1945 was characterized
Germany’s fourth largest industrial group and with by its integration into the national socialist economy
approximately 500,000 shareholders one of Europe’s and war industry. VEBA joined the foundation
largest publicly owned companies. ‘‘Erinnerung, Verantwortung und Zukunft’’ initiated
by the German industry to compensate forced laborers.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
36 Merger Report I. Preamble
After World War II, VEBA and all its assets located – sale of the fixed-line telephone business operated
in West Germany became property of the Federal under the name of o.tel.o to the Mannesmann
Republic of Germany. As a first step, the Federal Arcor group and the disposal of a 10.2% stake in
Republic of Germany privatized the majority of its the British telecommunications company Cable &
shareholdings in an initial public offering in 1965. By Wireless, and the sale of the E-Plus cellular phone
acquiring Stinnes AG in 1965, one of Germany’s ee
shareholding to France T´ l´ com;
largest industrial and trade groups, VEBA expanded
– increase of its interest in ARAL to 99%, giving it
its lines of business to include trade and transport. In
complete management control at the end of 1999/
1969, the company contributed its mines to
beginning of 2000.
Ruhrkohle AG and restructured its oil and chemicals
activities. Due to this restructuring, the company c) Group Performance
changed its name to the short form VEBA AG in
1970. During the seventies, Gelsenberg AG was The VEBA group generated the following material
acquired and incorporated into VEBA AG. During key figures during the 1997 and 1998 financial years.
1987, the Federal Republic of Germany privatized its
remaining 25% VEBA shareholding by selling its EUR in millions 1997 1998
shares in the capital market.
Sales*) 42,294 42,787
In its development from a state-controlled industrial Operating earnings 2,240 1,946
group to a capital-market-oriented corporation with
concentration on core business areas – VEBA imple- Pretax earnings 2,543 2,392
mented, among others, the following important steps Net income 1,544 1,152
between 1993 and 1998: annual cost savings of about
EUR 1.7 billion; sale of non-strategic business areas Shareholders’ equity **) 12,946 13,468
with annual sales of about EUR 7 billion; extensive Total assets 41,208 43,069
restructuring within the Electricity, Chemicals,
Investments 8,111 4,225
Distribution/Logistics and Real Estate Management
Divisions. Employees (as of December 31) 129,960 116,774
*) including petroleum tax
In the further concentration during 1998 and 1999,
**) including minority interests
VEBA continued to streamline the group’s structure.
The goal of restructuring was to change VEBA from The VEBA group’s performance during the first three
a conglomerate with a multitude of business areas to quarters of the financial year 1999 compared with the
a corporate group with clearly defined main business first three quarters of the previous financial year is
areas and to particularly concentrate on the core shown by the following key figures:
business areas of electricity and chemicals. The
important steps during this transition were the: 1st to 3rd 1st to 3rd
quarter quarter
EUR in millions 1998 1999
– 1997 purchase of a 36.4% stake in Degussa AG
u
and its merger in 1999 with VEBA’s H¨ ls AG and Sales* 31,945 38,701
u
renaming it to Degussa-H¨ ls AG (VEBA share-
Operating earnings 1,463 1,688
holding: 64.7%);
Pretax earnings 1,893 3,664
– merger of Raab Karcher AG and VEBA
Immobilien AG to form Viterra AG, an integrated Net income 897 2,748
real estate group; Investments 2,280 3,307
– positioning of Stinnes AG as a global logistics Employees**) 116,774 132,749
service provider and the initial public offering that * including petroleum tax
placed of 34.5% of its capital stock in the capital **) as of December 31, 1998, and September 30, 1999,
markets; respectively
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 37
Group sales were up considerably in the first three Employees as of
December 31,
quarters of 1999. The increase is primarily due to the Division 1998
u
first-time full consolidation of Degussa-H¨ ls. Owing
to Degussa’s differing financial year, Chemicals’ Electricity 21,936
1999 figures also include Degussa’s fourth-quarter Oil 6,433
1998 sales of roughly EUR 81.8 billion; adjusted for
this effect, Group sales were about 16% above last u
Chemicals (H¨ ls only) 18,737
year’s level. Telecommunications 1,965
The consolidated operating profits of about EUR Real Estate Management 5,842
1.7 billion exceeded the previous year’s figures by Distribution/Logistics 55,185
15%. Telecommunications played a key role in the
Group’s markedly higher internal operating profit in Silicon Wafers 6,190
addition to the above-mentioned changes in the Other 486
Chemicals Division. The elimination of additional
startup costs in the fixed-line business beginning Total 116,774
April 1, 1999, and in the mobile business starting
July 1, 1999, distinctly reduced operating losses. In The Law regarding the Co-Determination of Employ-
an increasingly keener competitive environment, ¨
ees of May 4, 1976 (Gesetz uber die Mitbestimmung
Electricity’s earnings came in 10% below the previ- der Arbeitnehmer – MitbestG) applies to VEBA AG.
ous year’s record showing. Oil’s earnings slipped As the domestic group companies employ 77,554
well below last year’s figures owing mainly to employees, the Supervisory Board is comprised of ten
extremely low refining and fuel margins and high representatives of each of the shareholders and the
one-off expenses in the upstream business. In Silicon employees.
Wafers losses were again curtailed quarter-on-quarter. The group companies PreussenElektra AG, Degussa-
The other divisions reported significantly higher u
H¨ ls AG, Veba Oel AG, Viterra AG, as well as
earnings. Stinnes AG, also have Supervisory Boards comprised
of 20 members, of whom ten are shareholders’
Pretax income climbed 94% to EUR 83,664 million. representatives and ten are employee representatives.
This robust increase is due to considerably higher net In addition to the right to vote and to be elected in
book gains, particularly from the disposals of the elections of employee representatives to the Supervi-
Cable & Wireless stake, fixed-line telecommunica- sory Board of their respective divisions, the domestic
tions business, and German cable-TV activities. group companies’ employees also have the right to
The net income increased by 206% compared with vote and to be elected in elections of employee
the previous year to more than EUR 2.7 billion. representatives to VEBA AG’s Supervisory Board.
Supervisory Boards of domestic group companies
Significantly higher consolidated operating profits are
under the major group companies are also established
also expected for full-year 1999. The pretax income
either according to the Law regarding the Co-
and the net income including capital gains will
Determination of Employees or pursuant to §§ 76 et
significantly exceed the previous year’s figures.
seq. of the Law on the Constitution of Enterprises of
1952 (Betriebsverfassungsgesetz 1952 – BetrVG; one-
d) Employees and Co-Determination third-pro-rata co-determination).
As of December 1998, the VEBA group employed The VEBA group’s works council is comprised of 47
116,774 employees worldwide, thereof 77,554 domes- members. VEBA AG itself has a works council of 9
tically. The following table shows the number of members. In addition, VEBA has a European works
employees employed by the individual divisions. council which is comprised of 21 members.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
38 Merger Report II. Participating Companies: VEBA
e) Corporate Bodies, Capital and Shareholders of the standard constituents of the DAX and of the
EURO Stoxx 50.
VEBA AG’s Board of Management consists of the
following members: Allianz Aktiengesellschaft, Munich, informed VEBA
that it holds a shareholding of 11.46%. The remain-
– u
Ulrich Hartmann, D¨ sseldorf (chairman) ing shares are widely spread.
– u
Dr. Wulf H. Bernotat, M¨ hlheim/Ruhr
– Gunther Beuth, Essen f) Divisions
– Wilhelm Bonse-Geuking, Gelsenkirchen
– u
Dr. Hans Michael Gaul, D¨ sseldorf (1) Electricity: PreussenElektra AG
– Dr. Hans-Dieter Harig, Hanover
– Dr. Manfred Kr¨ per, D¨ sseldorf
u u PreussenElektra Aktiengesellschaft (‘‘Preussen-
– Helmut Mamsch, D¨ sseldorf
u Elektra’’) heads the VEBA group’s electricity area.
Other business areas are gas and water supply,
The group’s Supervisory Board has 20 members and wastewater disposal, waste incineration and district
pursuant to §§ 96 para. 1, 101 para. 1 of the Stock heating, as well as consulting/engineering services. A
Corporation Act (Aktiengesetz – AktG) and § 7 control and profit and loss transfer agreement exists
para. 1 sentence 1 no. 3 of the Law regarding the between VEBA AG and PreussenElektra AG.
Co-Determination of Employees is comprised of 10
members of each of the shareholders and the PreussenElektra is the second largest integrated utility
employees. Mr. Hermann Josef Strenger is Chairman among German utilities and – ranking fourth – plays
of the Supervisory Board. a leading role among the European utilities. Its main
business activities lie in northern and eastern
As of September 30, 1999, the company had a capital Germany. Through its shareholdings in regional
stock of EUR 1,307,274,228 which is divided into suppliers, PreussenElektra is also present in wide
502,797,780 bearer shares without nominal value, areas of Lower Saxony, Schleswig-Holstein and East
each representing an allocable portion of the capital Westphalia, as well as in Northern Hessia, Mecklen-
stock of EUR 2.60. VEBA AG’s shares are listed on burg Western Pommerania, Brandenburg and Saxony
all German stock exchanges, the Swiss Stock Ex- Anhalt. In addition, PreussenElektra holds sharehold-
change and the New York Stock Exchange (here in ings in regional and municipal utilities all over
the form of American Depositary Receipts). It is one Germany.
Regional utilities
with PreussenElektra
participation
Regional utilities
with PreussenElektra
electricity supply
agreement
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 39
On a national level PreussenElektra AG holds, among (a) Corporate History and Development
others, significant shareholdings in the German PreussenElektra AG was founded in 1927 under the
integrated utilities Bewag Aktiengesellschaft a
name of ‘‘Preußische Elektrizit¨ ts-Aktiengesell-
(‘‘Bewag’’; 23.0%), VEAG Vereinigte Energiewerke schaft’’ (Prussian Electricity Corporation) with regis-
Aktiengesellschaft (‘‘VEAG’’; 26.3%) and tered offices in Berlin. This enabled the Prussian
a
Hamburgische Electricit¨ ts-Werke Aktiengesellschaft State to consolidate its shareholdings in the power
(‘‘HEW’’; 15.4%). utility market between Flensburg and Frankfurt. In
PreussenElektra increasingly operates on an 1929, the company was contributed into the
international level, particularly in Scandinavia a
‘‘Vereinigte Elektrizit¨ ts- und Bergwerks-
through Sydkraft AB (with a shareholding of 20.6%, Aktiengesellschaft’’ (United Electricity and Mining
which grants 33.1% of the voting rights) and Corporation) – later VEBA. The registered offices
Graningeverkens AB (13.3%), in Switzerland through were moved to Hanover in 1947. In 1985, the
BKW FMB Energie AG (20.0%), in Russia through company merged with Nordwestdeutsche Kraftwerke
Lenenergo AO (7.6%) and in Lithuania though Aktiengesellschaft (Northwestern-German Power
Latvijas Gaze AS (11.5%). Moreover, new electricity Station Corporation).
and gas distribution companies have been established During the liberalization of the German electricity
in Italy, Poland and the Netherlands. In July 1999, market in 1998, PreussenElektra and VEBA
PreussenElektra acquired an 87.4% shareholding in Kraftwerke Ruhr AG implemented new organizational
the Dutch power utility Electriciteitsbedrijf Zuid- structures. Their business activities were dissolved
Holland (‘‘EZH’’). This acquisition will most likely and recombined along the electricity value chain.
become effective in January 2000. To optimize the Individual companies were formed for each of the
system of integrated utilities around the Baltic Sea operative business units as required by the new
and to set up a common electricity market in this ‘‘Energiewirtschaftsgesetz’’ (Energy Economy Act).
region, the Baltic Ring Electricity Corporation The aim was to be able to react more quickly and
(‘‘BALTREL’’) was founded in 1998 together with efficiently to changes of the market conditions in
17 other power utilities of countries adjacent to the order to secure and expand PreussenElektra’s good
Baltic Sea. starting position on a long term basis.
PreussenElektra
foreign participation
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
40 Merger Report II. Participating Companies: VEBA
(b) Group Structure and Operations The generation capacities of PreussenElektra
Kraftwerke comprise an installed net power capacity
PreussenElektra is an integrated power utility. To of 12,459 MW. This includes power blocks of the
reach an optimum position within the liberalized BKB subsidiary and pro-rata outputs from jointly
energy supply industry, its operational structure was operated power plants, but not the EZH power plants
thoroughly tailored to the competitive landscape with a net power output of 1,770 MW.
within the German and European energy supply
sector.
PreussenElektra AG assumes strategic and holding The conventional generation assets consist of 16 hard
responsibilities as well as global functions such as coal and four lignite power plants, five gas and oil-
purchasing, trading and distribution of electricity, as fired plants each, as well as a number of hydroelec-
well as capacity and usage planning. tric power plants. The majority of power plants are
100% owned by PreussenElektra. Among the largest
Business Unit: Power Generation power plants are Scholven, Staudinger, Heyden,
Wilhelmshaven, Farge, Buschhaus and Offleben, as
For power generation purposes, PreussenElektra has well as Robert Frank, Emden and Huntorf. The
diversified generation assets with a balanced fuel mix. power plants Schkopau, Mehrum, EV3 in Apenrade
The most important energy source – based on 1998 (Denmark), Kiel, Rostock and Kassel are jointly
figures for power generation – is hard coal taking up owned and operated with others. PreussenElektra
51.5% of total electrical generation, followed by Kraftwerke including subsidiaries and associated
nuclear energy with 34.0%, lignite with 9.8%, natural companies supplied more than 47.6 billion kWh of
gas and oil with 2.8%, as well as hydroelectric power electricity in 1998. The existing customer line output
and others with 1.9%. for process steam and district heating amounts to
more than 2,300 MW (thermal).
The total power generation capacities are provided by
two companies, one having conventional power plants Within the business area of thermal waste treatment,
and the other nuclear power plants. additional installations for residential waste with a
total capacity of 880.000 tons per year and installa-
Conventional Power Plants. During 1998 – as part tions for toxic waste for handling a total of 100.000
of PreussenElektra’s restructuring – conventional tons per year are in operation.
power generation capacities were transferred to the
newly formed PreussenElektra Kraftwerke AG & Co. Nuclear Power Plants. PreussenElektra’s nuclear
KG (‘‘PreussenElektra Kraftwerke’’) and placed power supply operations were focused in Preussen-
under uniform control in the Business Unit Preussen- Elektra Kernkraft GmbH & Co. KG (‘‘Preussen-
Elektra Kraftwerke together with the facilities of the Elektra Kernkraft’’). While conventional power gen-
former VEBA Kraftwerke Ruhr AG which was eration facilities of PreussenElektra Kraftwerke are
renamed PreussenElektra Kraftwerke AG. As a con- mainly used for mid and high-load areas, the nuclear
sequence of the new orientation along the value power plants supply an essential part of Preussen-
chain, the Braunschweigische Kohlen-Bergwerke AG Elektra’s basic electricity requirements. The nuclear
(Brunswick Coal-Mine Corporation, ‘‘BKB’’) was power plants are characterized by their high reliabil-
also transferred to PreussenElektra Kraftwerke. ity and safety at low maintenance costs.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 41
Electricity is generated in a total of seven nuclear 110 kV lines. The grid serves the interregional
power plants. The nuclear power plant Unterweser is transfer of electricity generated by PreussenElektra
wholly owned by PreussenElektra. The remaining Kraftwerke and PreussenElektra Kernkraft. Further-
nuclear power plants are jointly owned and operated more and without discrimination, PreussenElektra
together with third parties. In some instances, they Netz makes its transfer installations available to all
are managed by PreussenElektra (nuclear power users.
plants Brokdorf, Stade and Grohnde), while the other
Basis for the transmission are the conditions of the
jointly operated power plants are operated by HEW
a
Verb¨ ndevereinbarung of 1998 (Association Agree-
u u
(nuclear power plants Brunsb¨ ttel and Kr¨ mmel) and
ment). This is a private agreement in which the
VEW Energie AG (nuclear power plant Emsland).
Bundesverband der deutschen Industrie (Federal In-
The installed net power of the nuclear facilities dustry Association of Germany, BDI), the Verband
including portions from jointly owned and operated der Industriellen Energie- und Kraftwirtschaft (Energy
nuclear power plants amounts to 5,013 MW. In and Power Industry Association, VIK) as well as the
1998 – along with the procurement from the jointly a
Vereinigung Deutscher Elektrizit¨ tswerke (German
operated power plants – PreussenElektra Kernkraft Electricity Works Association, VDEW) have agreed
generated and supplied to PreussenElektra AG a total upon the fundamental criteria for determining the
of 33.0 billion kWh of electricity. transmission charges. The existing Association Agree-
ment expires at the end of 1999. The subsequent
The government coalition intends to close down
agreement is to become effective as of January 1,
Germany’s nuclear power plants. However, the opera-
2000 – after revision by the Federal Government, the
tors of nuclear power plants hold unlimited operating
Federal Cartel Office and the Commission of the
permits for their power plants. It is the goal of the
European Community (EU-Commission) – and will
coalition to find mutually acceptable solutions to
remain in force for two years. It essentially provides
several nuclear power related questions in consensus
that customers are to pay a fee to their utility for
talks. The Federal Government is aiming at stopping
their grid access, but other than that are free to
the use of nuclear power without payment of a
choose from which electricity producer or trader they
compensation. VEBA accepts the primacy of political
wish to purchase their electricity. The access fee also
decisions and expects that a contractual solution with
covers expenses for use of the connecting grid (local
the Federal Government can be reached that guaran-
rates). In order to cover expenses for long distance
tees economically adequate periods of use for the
transmissions through the high-voltage grid, a dis-
existing nuclear power plants. Several legal opinions
tance-independent ‘‘transaction component’’ is in-
come to the conclusion that, based on the existing
cluded into the transit charges, which replaces the
unlimited operating permit, a long-term property
previous distance related compensation component.
protection exists and that compensation will have to
be paid in case the running periods are limited.
Business Unit: Distribution
Business Unit: Grid Distribution is handled by PreussenElektra’s regional
providers. PreussenElektra holds majority sharehold-
By incorporating PreussenElektra Netz GmbH & Co.
ings in most of these companies. Regional providers
KG (‘‘PreussenElektra Netz’’) as the company
handle the electricity supply in many parts of Lower
responsible for handling its high-voltage grid,
Saxony, Schleswig-Holstein and East Westphalia, as
PreussenElektra also met the ‘‘unbundling require-
well as in Northern Hessia, Mecklenburg West
ment’’ for its grid pursuant to the energy law
Pommerania, Brandenburg and Saxony Anhalt. In
amendments. In the spin-off of the grid business unit
1999, to meet competitive challenges in the energy
into an independent company, a significant efficiency
sector, the number of regional providers was reduced
increase and therefore an operating cost reduction is
by merging several West and East German companies
also intended.
into e.dis Energie Nord AG (70.0%) and Avacon AG
PreussenElektra Netz operates Germany’s second (54.7%). Further regional suppliers in which Preus-
largest power distribution grid covering an area of senElektra holds shareholdings are Schleswag Aktien-
71,500 km2. 13.5 million people live in this area, gesellschaft (65.3%), PESAG Aktiengesellschaft
which equates to 17.0% of the entire population. It (54.7%), EWE Aktiengesellschaft (27.4%), Energie-
consists of more than 3,558 km of 380 kV lines, Aktiengesellschaft Mitteldeutschland EAM (46.0%)
3,011 km of 220 kV lines, as well as 19,169 km of and TEAG Aktiengesellschaft (8.7%).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
42 Merger Report II. Participating Companies: VEBA
Regional providers supply retail customers, special- The long-term distribution obligations of VEBA
rate customers and municipal utilities. Electricity for Kraftwerke Ruhr AG in the Ruhr Area are now being
supplying areas in the old states is mainly procured fulfilled by Ruhr Energie GmbH.
from PreussenElektra Kraftwerke, which itself is
This customer-oriented power distribution structure
mostly supplied by PreussenElektra Kernkraft and
pursues the goal of strengthening existing contacts
BKB. The East German regional suppliers procure
and acquiring new customers. PreussenElektra trusts
their electricity mainly from VEAG.
in the usage of a wide range of established and new
distribution channels in addition to further strengthen-
Business Unit: Trading ing of joint ventures with existing distribution
partners.
Historically, electricity trading was mainly limited to
doing business with other integrated utilities. How- PreussenElektra utilized the liberalization for the
ever, experience from the Scandinavian and British expansion of its national and international market. In
electricity markets, which were liberalized a number connection with the acquisition of Electriciteitsbedrijf
of years ago, shows that electricity trading is an Zuid-Holland (‘‘EZH’’), PreussenElektra incorporated
essential factor for market positioning. At the end of the supply company EZH Elektra BV as a wholly
1998, a separate business entity was created for owned subsidiary. Prior to this step, the distribution
physical electricity trading on a national and interna- company Electra Italia (together with the Swiss
tional level (‘‘trading floor’’). In addition, Preussen- energy supplier BKW FMB Energie AG) and the
Elektra became engaged on the Scandinavian electric- Polish distribution company PreussenElektra Polska
ity exchange Nord Pool in 1999, as well as on the were incorporated, thus increasing foreign market
Amsterdam electricity exchange APX and participates opportunities.
in physical electricity trade there, too. By expanding
its trading activities, PreussenElektra takes an inte- Business Unit: Engineering
grated approach to optimizing generation and pro-
curement, and to generate its own value contributions PreussenElektra’s restructuring in 1998 consolidated
through arbitrage trading as well as introducing risk the former VEBA Kraftwerke Ruhr AG’s technology
management instruments. sector with PreussenElektra’s engineering capacities
into PreussenElektra Engineering GmbH. Thus,
To increase market transparency, PreussenElektra PreussenElektra now has its own service company
together with Dow Jones began publishing an elec- that provides a multitude of technical consulting
tricity pricing index for trade transactions (CEPI services not only to the operative companies of the
Central European Power Index) in March 1999. Electricity Division, but also to other domestic and
foreign customers. Increasingly, new customer
groups, technologies and markets are being devel-
Business Unit: Supply
oped. Consulting services are being offered within
PreussenElektra subdivides Supply in accordance with business fields such as analysis, construction technol-
various customer groups. The particularities of indi- ogy, electrical and conductor technology, machine
vidual customer segments are thus taken into account technology and grid technology.
by offering not only matching products and services With more than 500 employees, PreussenElektra
but also specialized customer representatives. Engineering is one of the largest companies in its
field.
The area Supply Partners is responsible throughout
Germany for the establishment of supply joint ven-
Business Unit: Water
tures with regional and municipal utilities. An inde-
pendent business area along with experienced key The emphasis of the water related activities of
account managers was created for the purpose of PreussenElektra lies in the listed company GELSEN-
serving industrial customers. The same applies to WASSER AG (‘‘Gelsenwasser’’), in which
multi-site customers, since serving them requires PreussenElektra AG holds a 52.1% shareholding
special know-how, e.g., transmission and billing. through its wholly owned subsidiary Preussen Wasser
Finally, ‘‘Elektra Direkt’’ operates the mass retail GmbH. With group sales of EUR 343 million and a
business that supplies electricity to residential water output of 247 million m3 in 1998, Gelsen-
customers. wasser is the largest privately held German water
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 43
utility. Gelsenwasser does not only supply water and (c) Main Shareholdings
wastewater treatment, but is also active in supplying
natural gas. During 1998, 5.0 billion kWh of natural PreussenElektra Kraftwerke AG & Co.
gas were sold. KG, Hanover 100.0%
Further utilities in Northrhine Westphalia that are part PreussenElektra Kernkraft GmbH & Co.
of the Gelsenwasser group are Niederrheinische Gas- KG, Hanover 100.0%
und Wasserwerke GmbH, Duisburg, Vereinigte Gas- PreussenElektra Netz GmbH & Co. KG,
und Wasserversorgung GmbH, Rheda-Wiedenbr¨ ck, u Hanover 100.0%
and Gasversorgung Westfalica GmbH, Bad PreussenElektra Engineering GmbH,
Oeynhausen. The regional center of activities lies in Gelsenkirchen-Buer 100.0%
u
the Ruhr region and M¨ nster area, the Lower Rhine, Avacon AG, Helmstedt 54.7%
East Westphalia and in adjacent Lower Saxony.
Through shareholdings, Gelsenwasser has become Bewag AG, Berlin 23.0%
increasingly active in the new German states. Braunschweigische Kohlen-Bergwerke
AG, Helmstedt 99.9%
Furthermore, joint ventures operating in the areas of
water and wastewater treatment exist with Stadtwerke u
e.dis Energie Nord AG, F¨ rstenwalde/
Bremen AG (HanseWasser Ver-und Entsorgungs Spree 70.0%
GmbH and Abwasser Bremen GmbH) and as of Energie-Aktiengesellschaft
January 1, 2000, with Emschergenossenschaft/ Mitteldeutschland EAM, Kassel 46.0%
Lippeverband, Essen. EWE AG, Oldenburg 27.4%
The water business field is also based within the GASAG Berliner Gaswerke AG, Berlin 13.0%
regional suppliers of Preussen Elektra, particularly GELSENWASSER AG, Gelsenkirchen 52.1%
Schleswag and Avacon. Further shareholdings held a
Hamburgische Electricit¨ ts-Werke AG,
directly or through group companies exist in Hamburg 15.4%
Harzwasserwerke GmbH (20.8%) as well as other
LAUBAG Lausitzer Braunkohle AG,
water utility activities in different companies of the
Senftenberg 30.0%
u
Th¨ ga group.
PESAG AG, Paderborn 54.7%
Business Unit: Gas Schleswag AG, Rendsburg 65.3%
In 1998, PreussenElektra sold 38.74 billion kWh of Stadtwerke Bemen AG, Bremen 24.4%
natural gas in Germany. Sales are mainly made u
Th¨ ga AG, Munich 56.5%
through the regional supply companies Schleswag VEAG Vereinigte Energiewerke AG,
u u
and Avacon, through Th¨ ga AG (‘‘Th¨ ga’’) and Berlin 26.3%
Gelsenwasser.
BKW FMB Energie AG, Bern,
PreussenElektra holds a 56.5% shareholding in Switzerland 20.0%
u u
Th¨ ga. Throughout many German states Th¨ ga holds Electriciteitsbedrijf Zuid-Holland N.V.,
shareholdings in regional and municipal public utili- Voorburg, Netherlands* 87.4%
ties. According to the engagement known as the
Graningeverkens AB, Bollstabruk,
u
‘‘Th¨ ga-Model’’, the company cooperates on a mu-
Sweden 13.3%
nicipal level as an active minority shareholder with
municipal partners, whilst simultaneously providing Latvijas Gaze AS, Riga, Lithuania 11.5%
u
energy-related expertise. Currently, Th¨ ga holds Lenenergo AO, St. Petersburg, Russia 7.6%
shareholdings in more than 50 power suppliers all o
Sydkraft AB, Malm¨ , Sweden 20.6%
over Germany, particularly in rhenag Rheinische
Energie AG (‘‘Rhenag’’). In 1999 PreussenElektra *) probably as of January 2000
acquired a 49.0% shareholding in the gas utility
Co.GAS S.p.A., in Comacchio in northern Italy.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
44 Merger Report II. Participating Companies: VEBA
(d) Group Performance and Earnings Situation ment measures and increased sales volume could not
compensate for price cuts brought on by keener
PreussenElektra’s key figures for the financial year
competition. Internal operating profit dipped about
1998 are as follows:
10 percent below last year’s high levels.
EUR in millions 1998 PreussenElektra will continue to actively utilize the
opportunities in the liberalized electricity market –
Electricity output (in billion kWh) 106 taking into account significant price concessions.
Therefore, the expected result for electricity will be
Sales 8,141
noticeably below the record level of the previous
Operating earnings 1,875 year.
Total assets 22,700 (2) Oil: VEBA Oel Aktiengesellschaft
Investments 1,442 The VEBA Oel Aktiengesellschaft (‘‘VEBA Oel
AG’’) heads VEBA’s oil division. Between VEBA
Employees (as of December 31) 21,936 AG and VEBA Oel AG exists a control and profit
and loss transfer agreement.
Compared with the corresponding period of the Located in Gelsenkirchen, VEBA Oel AG is a
previous year, PreussenElektra has developed during vertically integrated petroleum group which is leading
the first nine months of the financial year 1999 as among the European regional oil companies. It
follows: produces oil and natural gas (upstream sector) and
processes and distributes petroleum and produces
1st to 3rd 1st to 3rd
EUR in millions quarter 1999 quarter 1998 petrochemical products (downstream). VEBA Oel AG
is the largest supplier of petroleum products and the
Electricity output 77,3 80,1 operator of the largest refinery system in Germany.
(in billion kWh) ARAL AG holds the number one position in the
a
German gasoline station business. VEBA W¨ rmeser-
Sales 5,980 5,688*)
vice GmbH is leading in the area of retail heating oil
Operating earnings 1,338 1,207 sales in Germany.
Investments 734 952 (a) Corporate History and Development
Employees 21,936 20,964 The petroleum business of VEBA Oel AG has its
(as of September 30) roots in the Hydrierwerken Scholven (Gelsenkirchen)
which was founded in 1935. Here, gasoline was made
*) including electricity tax in the amount of EUR from hard coal in 1936 for the first time. After the
94 million
Second World War, the company started processing
**) as of December 31, 1998 and September 30, 1999
crude oil to produce oil products and petrochemical
During the first three quarters of 1999, Preussen- products, initially in Scholven and in neighbouring
Elektra increased the electricity sales by about 4% Horst. In 1969 and upon an initiative of the German
compared with the same period during the previous o
government, Deminex Deutsche Erd¨ lversorgung-
year. The increase is principally the result of sgesellschaft mbH was established as a joint venture
deliveries to electricity traders and to new special-rate of eight German oil companies in the upstream
customers and was achieved in spite of a 1% sector. The goal was to secure the crude oil supply to
reduction in the consumption of electricity in German refineries.
Germany.
Also, in 1969, the VEBA group restructured its
PreussenElektra actively shaped the increasingly vig- petroleum and chemicals activities. The former
orous competition on the electricity market. This has Scholven Chemie AG was renamed first VEBA
meant accepting considerable price cuts – especially Chemie AG and then VEBA Oel AG in 1978. In
on deliveries to regional utilities and large special- 1974, VEBA acquired Gelsenkirchener Bergwerks-
rate customers – and resulted in a 5-percent decline in AG (‘‘Gelsenberg AG’’). Gelsenberg AG owned
sales despite higher total sales volume. Cost-manage- Raab Karcher AG and a shareholding of nearly 28%
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 45
in ARAL AG. Deminex commenced oil production in the exploration for, and the production of, petroleum
the British North Sea in 1978. In 1983, VEBA Oel and natural gas. VEBA Oil & Gas’s activities are
o
AG and Petr´ leos de Venezuela S.A. (‘‘PdVSA’’) exclusively international, i.e. in the Netherlands,
together incorporated Ruhr Oel GmbH which oper- Denmark, Great Britain, Libya, Syria, Canada, Vene-
ates the refinery business of VEBA Oel AG. The zuela, Columbia, Trinidad, Kazakhstan and Indonesia.
petroleum distribution activities of Raab Karcher In addition, VEBA Oil & Gas holds minority
AG – until then a subsidiary of VEBA Oel AG – shareholdings in projects in Egypt and Norway. In
were spun off into VEBA Oel Vertrieb GmbH 1998, 50.7 million barrels of petroleum and 1.4 bil-
a
(today: VEBA W¨ rmeservice GmbH) in 1992. Raab lion m# of natural gas were produced.
Karcher AG at this time a subsidiary of VEBA Oel
AG was subsequently transferred to VEBA AG. Business Unit: Refining
In 1998, the remaining three shareholders split up the The emphasis in the Business Unit Refining lies on
Deminex activities amongst themselves. To restruc- petroleum processing combined in Ruhr Oel GmbH
ture its E&P Activities1, VEBA Oel AG incorporated (‘‘Ruhr Oel’’). Since 1983, Ruhr Oel has been a joint
VEBA Oil & Gas GmbH in 1998, into which it also venture with the Venezuelan PdVSA, one of the
contributed its former Deminex activities. world’s largest oil companies. VEBA Oel AG and
PdVSA hold equal shareholdings in Ruhr Oel. The
As of January 1, 2000, VEBA Oel AG will increase
latter owns a refinery system in Gelsenkirchen and
its shareholding in ARAL AG from previously almost
o
holds shares in Mineral¨ lraffinerie Oberrhein GmbH
56% to about 99% and thus assume complete
& Co. KG, Karlsruhe (24.0%), Bayernoil Raffiner-
entrepreneurial control. With the integration of
iegesellschaft mbH, Vohburg (25.0%) and PCK
ARAL, VEBA Oel AG will considerably increase its
Raffinerie GmbH, Schwedt (37.5%). In 1998, Ruhr
sales volume and its market share in the retail
Oel was the largest refinery in Germany with
customer segment. This will open up a multitude of
22.64 million tons; a good one sixth of the annual
opportunities for VEBA Oel AG in order to improve
German petroleum products consumption of about
its cost structure. In addition, the strategic flexibility
130 million tons is produced in Ruhr Oel’s refinery
will be expanded decisively.
system.
(b) Group Structure and Business Activity The take-over of the refinery in Lingen from Winter-
shall at the beginning of 2000 will expand VEBA’s
The major group company oil comprises the follow-
oil refinery capacity by approximately 4 million tons.
ing business areas:
VEBA Oel AG
Exploration
& Refining Petrochemicals Marketing Marketing
Production (Fuels) (Heating Oil)
The refinery is one of the most competitive facilities
Business Unit: Exploration & Production
in Germany and over the past five years was
VEBA Oil & Gas GmbH (‘‘VEBA Oil & Gas’’) is a modernized with investments amounting to EUR
100% subsidiary of VEBA Oel AG and is active in 230 million.
1)
E & P = Exploration & Production
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
46 Merger Report II. Participating Companies: VEBA
Furthermore, the international crude oil trade as well offered a comprehensive heating service package to
as the distribution of petroleum products on a retail customers.
wholesale level conducted by VEBA Oil Supply and
Trading GmbH are a part of the business area (c) Substantial Shareholdings
petroleum. This company also supplies crude oil and VEBA Oil & Gas GmbH, Essen 100%
other required substances to the processing facilities VEBA Oil & Gas Ltd., London,
of Ruhr Oel. Großbritannien 100%
VEBA Oil Libya GmbH, Gelsenkirchen-
Business Unit: Petrochemicals Buer 100%
VEBA Oil Nederland B.V., Rotterdam 100%
The Business Unit Petrochemicals is comprised of the
a
VEBA W¨ rmeservice GmbH,
production and distribution of olefins (ethylene and
Gelsenkirchen-Buer 100%
propylene); these are raw materials for the production
ARAL AG, Bochum 55.9%*)
of plastics. The Veba Oel group is the largest
u
Ruhr Oel GmbH, D¨ sseldorf 50%
independent producer of olefins in Northwestern
Europe. Other major products include aromatic com- *) as of January 2000 98.9%
pounds, methanol and ammonia, which are used for
the production of e.g. synthetic fibers, pesticides and (d) Group Performance and Earnings
fertilizers. The petrochemical facilities are integrated
into the refineries of Ruhr Oel. The most important The following table shows the important key figures
installations are located in Gelsenkirchen and of VEBA Oel AG for the 1998 financial year:
u u
M¨ nchsm¨ nster.
EUR in millions 1998
Business Unit: Marketing (Fuels) Sales * 10,282
VEBA Oel AG distributes the fuel produced in its Operating earnings 235
refineries through ARAL AG. With about 2,400 gas
stations, ARAL has by far the largest service station Total assets 3,292
network in Germany. About 400 gas stations are Investments 460
operating in neighboring countries. The total gasoline
Employees (as of December 31) 6,433
sales through service stations amount to about 9 mil-
lion tons. In Germany, ARAL has a market share of *) including petroleum tax
20% and is therefore significantly ahead of the next
The following key figures show (compared with the
competitor. Also, the shop business is gaining in-
corresponding period of the previous year) the
creasing economic importance.
development of VEBA Oel AG during the first nine
ARAL supplies large industrial and commercial months of the 1999 financial year:
o
customers through its subsidiary ARAL Mineral¨ lver-
trieb GmbH, which also sells lubricants and heating 1st to 3rd 1st to 3rd
quarter quarter
oil in addition to fuels. Special lubricants are also EUR in millions 1998 1999
marketed through ARAL Lubricants GmbH. In addi-
Sales * 7,742 8,037
tion, petroleum products totalling 12 million tons are
sold in Germany and abroad. Operating earnings 174 –7
Investments 176 300
Business Unit: Marketing (Heating Oil)
Employees **) 6,433 6,017
a
VEBA W¨ rmeservice GmbH, a subsidiary of VEBA
*) including petroleum tax
Oel AG, supplies heating oil to retail customers and
**) as of December 1998 and September 30, 1999
offers services in the areas of heating technology, as
respectively
well as modernization and cleaning of heating appli-
ances and tanks. At the end of 1997, the businesses Due to higher prices for products in the business
of VEBA Oel Vertrieb GmbH and Raab Karcher areas of refining and petrochemicals and as a result
a
W¨ rmetechnik GmbH were combined to form VEBA of the increased crude oil prices, sales were above
a a
W¨ rmeservice. Since then, VEBA W¨ rmeservice has the previous year’s figures. The strong reduction of
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 47
operating profits is mainly due to the extremely low precious metals, shareholdings in companies working
refining and fuel margins as well as higher write-offs in the primary production of precious metals as well
and increased expenses for new E+P projects. as fringe activities in the chemicals area were sold
off. At the same time, the core business areas with
For the fourth quarter, a significant earnings improve-
leading positions were expanded by focusing on
ment compared with the previous quarters may be
international growth and acquisitions. At the end of
expected, among others due to higher crude oil prices
1997, VEBA acquired a block of shares of 36.4% in
and the upward trend in the business cycle of the
Degussa AG.
petrochemical industry. For full-year 1999, the oper-
ating result for the oil division will be below the u
H¨ ls AG was incorporated in 1938 as Chemische
previous year’s level, but will eventually be signifi- u
Werke H¨ ls GmbH by I.G. Farbenindustrie AG and
cantly higher. the VEBA-owned Bergwerksgesellschaft Hibernia
AG. Originally, its main business was the production
¨
(3) Chemicals: Degussa-Huls AG of synthetic rubber. As part of the restructuring of the
Degussa-H¨ ls Aktiengesellschaft (‘‘Degussa-H¨ ls’’)
u u chemical businesses within the VEBA group, VEBA
is one of the world’s largest specialty chemicals u
increased its shareholding in H¨ ls AG to 87.5%
companies with annual sales of about EUR 12 billion between the years 1978 and 1980 and subsequently to
(EUR 10 billion excluding the precious metal unit) almost 100%; furthermore, chemical activities of
and occupies numerous leading competitive positions. u
VEBA Chemie AG were transferred to H¨ ls AG.
About 75% of the sales are generated with products Subsequently, the specialty chemicals share was
with which Degussa-H¨ ls occupies positions 1 to 3 in
u expanded by focusing on acquisitions (chemical
the world markets. In addition, the company is active u
activities of Dynamit Nobel AG 1988, R¨ hm GmbH
in selected fields which show synergies to chemistry. 1989, Stockhausen GmbH & Co. KG after 1991) and
Degussa-H¨ ls has a balanced, low-cyclical portfolio.
u the internationalization of the business was pressed
It is concentrated on strong growth businesses with u
ahead. H¨ ls AG streamlined its portfolio by disposing
low cyclical dependency, has above average value of businesses with sales totalling about EUR 2.5
growth potential and leading competitive positions. billion and became focused on activities with leading
VEBA holds a shareholding of 64.7% in Degussa- market, cost, and technology-positions.
u
H¨ ls. The remaining shares are widely held. The
shares of Degussa-H¨ ls are contained in the DAX
u u
The merger of Degussa AG and H¨ ls AG resulted in
and are listed on the Frankfurt and D¨ sseldorf stock
u additional growth opportunities and significant syn-
exchanges. ergy potential as well as in a reinforcement of the
merged companies’ global presence. Degussa-H¨ ls u
(a) Corporate History and Development consistently focuses on its core chemical businesses.
At the end of 1999, the 50% shareholding in the
u
Degussa-H¨ ls came into existence on February 1, plastics manufacturer Ultraform GmbH and Ultraform
u
1999 by merging Degussa AG into H¨ ls AG with o
Company, the R¨ hm Enzyme GmbH and the PVC
economic effect as of October 1, 1998. It has its manufacturer Vestolit GmbH & Co. KG were sold.
registered office in Frankfurt.
Degussa AG was incorporated in 1873 as Deutsche (b) Group Structure and Business Activity
Gold- und Silber-Scheideanstalt (German Gold and
Silver Refinery), formerly Roessler, in Frankfurt am u
Degussa-H¨ ls’s operations are divided into 16 strate-
Main. Since 1980 the company has operated under gic business units which are allocated to four
the name Degussa Aktiengesellschaft. The Degussa divisional segments according to their respective
shares have been listed at the Frankfurt stock emphasis. The operative units are managed as legally
exchange since 1884. In addition to the precious dependent business units or as subsidiaries and have
metals business, Degussa began early with the complete responsibility for their sales and earnings.
production of inorganic chemical products. During There are also three service companies for intra-
the thirties, the business was expanded to organic group services: Degussa Bank GmbH as a financial
chemistry. From 1990 on, it was its strategy to focus service provider, Infracor GmbH as provider for
on core business areas, metal activities unrelated to technical and analytical services and CREAVIS
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
48 Merger Report II. Participating Companies: VEBA
GmbH as a venture capital company to start new livestock feed: DL-Methionin, L-Lysin and
businesses. L-Threonin. Further products are vitamin B3 and
Degussa-Hüls AG
Health Polymers
Specialty Performance Service
and Products and
Materials Area
Nutrition Intermediates
– ASTA – Creanova – Röhm – Sivento – CREAVIS
Medica – Industrial – OXENO – Advanced – Infracor
– Dental Chemicals Olefinchemie Fillers and – Degussa
– Feed – Fine – Phenol- Pigments Bank
Additives Chemicals chemistry – Precious Metals
– Stockhausen – Automotive
Catalysts
– Cerdec
Health and Nutrition Segment u
calciumformiat. Degussa-H¨ ls is the global market
The health and nutrition segment comprises the leader for its main product Methionin, an essential
pharmaceuticals business (ASTA Medica AG) as well amino acid which is particularly used in raising
as the business areas dental, feed additives and poultry.
Stockhausen. It contributed about 21% to Degussa- Stockhausen. The main product of Stockhausen
u
H¨ ls’ total sales (without precious metals). GmbH & Co. KG are superabsorbents, for which
ASTA Medica. ASTA Medica AG is one of the Stockhausen is the global market leader. These are
important research drug companies in Germany. In cross-linked polymers that bind liquids and do emit,
primary research, the company focuses on indication even under pressure. They are indispensable in the
areas oncology, diseases of the respiratory tracts and production of diapers and other hygiene products.
allergies as well as diseases of the central nervous Stockhausen’s second largest product group is flock-
system, in particular epilepsy. ASTA Medica also ing aids which are used in the treatment of waste-
develops, produces and distributes medication for the water and in paper production, as well as in the
treatment of cardiovascular system disorders and production of crude oil and the extraction of natural
pain. Its extensive product range is completed by resources.
antiseptics and drugs for self-medication.
Specialty Products Segment
Dental. In the market for prosthetic products
Degussa-H¨ ls is one of the world’s leading compa-
u The specialty products segment consists of the three
nies. Such products include e.g. alloys based on strategic business units Creanova, industrial chemicals
precious metals, ceramic and plastic materials, equip- and fine chemicals. They contributed about 20% to
ment for dental laboratories and practices and im- u
the total sales of Degussa-Hˆ ls in 1998/99.
plants. An important new development is the amal-
Creanova. Creanova with its select specialty prod-
gam replacement Definite which consists of organi-
ucts of coating raw materials, colorants and engineer-
cally modified ceramics.
ing plastics is one of the world’s leading suppliers of
u
Feed additives. Degussa-H¨ ls is one of the most high-quality surface coatings, adhesives and formed
important producers of feed additives for modern plastic parts. Core businesses in the area of coating
livestock feed. As the world’s only producer, raw materials are isophoron derivatives and polyester
u
Degussa-H¨ ls offers all three amino acids relevant for resins. Isohporon derivatives are mainly used as
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 49
crosslinking agents in coatings for the automotive anti-knocking agents in gasoline, in adhesives as well
industry and in environment-friendly powdered coat- as plastics in cable insulations, foils and hoses made
ings. The colorants area supplies leading manufactur- of PVC and polyethylene.
ers of paints and coatings for construction and
Phenol Chemistry. Phenolchemie GmbH &
industrial purposes with paint pastes and coating
Co. KG specializes in the products phenol and
mixing systems. In engineering plastics, Creanova
acetone. These are among the most important raw
focuses on the growth areas automotive, electrical
materials for pain relieving drugs, compact discs,
industry and telecommunications.
nylon and acrylic glass. With its large production
Industrial Chemicals. Industrial chemicals consti- facilities in Germany and Belgium and after 2000 in
tute a globally active business unit. Bleaching chemi- the U.S., Phenol Chemistry is world market leader
cals, raw materials for detergents and basic in- for its products.
termediates are its main product lines. The environ-
ment-friendly bleaching agent hydrogen peroxide, Performance Materials Segment
which is mainly used for the bleaching of pulp and
textiles, is of special importance. The market position The performance materials segment consists of the
as the global number 2 has been expanded in 1998 strategic business units Sivento, advanced filler sub-
through acquisitions in the U.S., Canada and New stances and pigments, precious metals, automotive
Zealand as well as through a new production facility catalysts and Cerdec. The performance materials unit
in Brazil. contributed about 32% to the total sales of Degussa-
u
H¨ ls in 1998/99.
Fine Chemicals. The main product lines in the fine
chemicals business unit are organic and inorganic Sivento. Sivento makes products such as silanes,
intermediates, particularly for the synthesis of phar- fumed silica (‘‘Aerosil’’), chemical catalysts and
maceutic substances, pesticides, cosmetics and plastic zeolites. Aerosil is a strengthening filler used inter
additives. The most important application areas are in alia in silicon-rubber, plastics or as a thickening
the agricultural and pharmaceutical markets as well agent in paint and coatings; it also improves the flow
as in the coating and paint industries. Degussa-H¨ ls
u ability of fire extinguisher powders and salt. Degussa-
is one of the globally leading suppliers in this area. u
H¨ ls is the world market leader in Aerosil. Clorosi-
lanes are used in the semiconductor and telecommu-
nication industry and in the production of Aerosil and
Polymers and Intermediates Segment
organic silanes.
After the sale of PVC-manufacturer Vestolit at the
Advanced Fillers and Pigments. Degussa-H¨ ls’s u
end of 1999, the segment polymers and intermediates
business unit advanced fillers and pigments is a
o
consists of the strategic business units R¨ hm,
manufacturer of industrial carbon black, precipitated
OXENO and Phenolchemie. In 1998/99, it contrib-
silica and rubber-silanes and as such global market
uted about 22% (including Vestolit) to the total sales
leader in the area of rubber reinforcement. These
u
of Degussa-H¨ ls.
products are mainly used in tires but also in many
o o
R¨ hm. R¨ hm GmbH holds a leading position in the other rubber products. An important application is
world market for methyl methacrylate chemistry and the ‘‘green’’ tire with its lower rolling resistance
for all product groups. The best known name is which reduces fuel consumption and environmental
Plexiglas. Products for special applications based on pollution. Industrial carbon black as well as precipi-
methyl methacrylate are becoming more important, tated silica are also used in plastics, coatings or paint
such as bonding agents in paints and coatings, dental dyes.
materials, road markings or pharma polymers, which
Precious Metals. In its precious metals unit,
are used as tablet and capsule coatings. Additives for
u
Degussa-H¨ ls is one of the leading international
engine, transmission and hydraulic lubricants increase
suppliers of technologically advanced products and
performance and longevity of these units.
services, particularly for the electronics, electrical and
OXENO. OXENO Olefinchemie GmbH is one of chemical industry. The product range includes among
the leading producers in the area of C4 products, others powders and pastes, high-purity materials and
oxo-alcohols and plasticizers. The products of galvano-technical baths for electronics, components
OXENO are contained in environment-friendly pro- and materials for electrical contacts, platinum nets
pellants for hair sprays, in PVC floor coverings, as and preparations for catalytic chemical processes,
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
50 Merger Report II. Participating Companies: VEBA
platinum components for the glass industry as well as (c) Main Shareholdings
soldering products for industrial applications.
ASTA Medica AG, Dresden 100%
u
Automotive Catalysts. Degussa-H¨ ls is one of the
Cerdec AG Keramische Farben, Frankfurt/
world’s leading manufacturers of catalytic converters Main 100%
for the treatment of gasoline and diesel engine
u
Creavis Gesellschaft f¨ r Technologie und
exhaust. Customers are international automotive man-
Innovation mbH, Marl 100%
ufacturers which are supplied from global production
sites. Degussa Bank GmbH, Frankfurt/Main 100%
Infracor GmbH, Marl 100%
Cerdec. Cerdec AG is one of the world’s most
OXENO Olefinchemie GmbH, Marl 100%
important suppliers of colors for the ceramic, glass
and plastics industry. Among the most important Allgemeine Gold- und Silber-
Scheideanstalt AG, Pforzheim 90.8%
products are decorative colors, enamels and color
particles for construction, tableware, and art ceramics, Phenolchemie GmbH & Co. KG, Gladbeck 99.5%
as well as glass colors for automotive coating, o
R¨ hm GmbH, Darmstadt 99.5%
construction and hollow glass. They also manufacture Stockhausen GmbH & Co. KG, Krefeld 99.8%
special products such as silver preparations for the u
Degussa-H¨ ls Antwerpen N.V., Anvers,
production of heated rear windows for cars. Belgium 100%
The three business units precious metals, automotive u
Degussa-H¨ ls Corporation, Ridgefield
catalytists and Cerdec AG, which are all precious Park, New Jersey, USA 100%
metals related, are to be combined on January 1, u
Degussa-H¨ ls Ltda., Guarulhos, Brazil 90.9%
2000, and spun off into an independent company in
order to concentrate competence, realize synergies (d) Group Performance and Earnings
and create additional flexibility. In this context, the u
In its current form, Degussa-H¨ ls has been in
disposal of gold and silver refining in Hanau- existence only since February 1, 1999. The following
Wolfgang to Norddeutsche Affinerie is under review. u
key figures for 1998 relate to the former H¨ ls AG
including the income portion from the Degussa
Service Area Segment shareholding. They have been included in the VEBA
The service companies Creavis Gesellschaft f¨ ru group financial statements in this form.
Technologie und Innovation mbH and Infracor GmbH
as well as the Degussa Bank GmbH contributed 5% EUR in millions 1998
u
to Degussa-H¨ ls’ total sales in the financial year Sales 4.653
1998/99.
Operating earnings 251
Total assets 4.120
Investments 761
Employees (as of December 31) 18.737
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 51
During its first financial year (1998/99) after the months. Calculated on a comparable basis operating
u
merger of Degussa and H¨ ls which ended – differing earnings in the chemicals division were significantly
from the financial year of VEBA – on September 30, below the previous year’s good showing.
u
1999, Degussa-H¨ ls showed the following key
For the whole of 1999 the operating earnings in the
figures:
chemicals division will significantly increase the
EUR in millions 1998/99 previous year’s figures due to the full consolidation
u
of Degussa-H¨ ls. Calculated on a comparable basis
Sales 12.354 the significant deficiency compared with the previous
year cannot be balanced by the positive impulses
Operating earnings 492 caused by the upturn in the chemicals economic cycle
Total assets 9.459 and additional synergy effects.
Investments 1.151 (4) Telecommunications: VEBA Telecom GmbH
The Telecommunications Division, which is led by
Employees (as of September 30) 45.335
u
VEBA Telecom GmbH, D¨ sseldorf (‘‘VEBA
Note: Due to differing reporting periods, result definitions Telecom’’) consists – after disposing of the essential
and components as well as differing accounting activities during 1999 – only of the shareholding of
methods, the key figures differ from those contained 17.5% in the French Bouygues Telecom S.A.
in VEBA’s segment reporting. (‘‘Bouygues Telecom’’).
For the first nine months of the 1999 financial year
(a) Corporate History and Development
the chemical division of VEBA showed the following
key figures compared with the first nine months of With the beginning of the liberalization of the
the previous financial year: telecommunications market at the end of the eighties,
some major group companies of VEBA started first
1st to 3rd 1st to 3rd
quarter quarter activities in their respective business related telecom-
EUR in millions 1998*) 1999**) munications sectors. In 1993, E-Plus Mobilfunk
GmbH (‘‘E-Plus’’), in which PreussenElektra held a
Sales 3,656 11,272
shareholding, received the third digital cellular tele-
Operating earnings 190 366 phone license in Germany. In 1994, Bouygues
Telecom, in which VEBA already held a sharehold-
Investments 593 871 ing at that time, received the third digital cellular
telephone license in France. In order to occupy an
Employees*** 18,737 45,335 advantageous position in the high growth telecommu-
*) H¨ ls AG including (pro-rata) result of Degussa-
u nications market, VEBA combined in 1994/95 the
shareholding telecommunications activities of the entire group of
**) including the former Degussa’s fourth quarter VEBA Telecom GmbH and the German activities of
***) as of December 31, 1998 and September 30, 1999 VEBA Telecom GmbH’s 100% subsidiary
respectively VEBACOM GmbH (‘‘VEBACOM’’). The core busi-
ness consisted of cellular phones, cable-TV as well as
The significant increase of sales and operating results corporate networks and added-value services which
u
from the first full consolidation of Degussa-H¨ ls later developed into the public telephone business.
and – due to the previously differing financial year of Initially, the telecommunications engagement was
this company – the inclusion of the fourth quarter of spread out widely with the intent of spreading the
1998 of the former Degussa (sales: about EUR risks of the still unstable market and regulation
1.8 billion; operating earnings: EUR 66 million). environment, while at the same time securing many
opportunities.
After a weak start at the beginning of the year, the
chemicals business revived noticeably during the As part of an alliance for the expansion of the
second and third quarter. This was most recognizable European and particularly the German telecommuni-
in the health and nutrition segments, as well as cations business, Cable & Wireless plc. (‘‘C&W’’)
special products. Polymers and intermediates suffered acquired a 45% shareholding in VEBACOM in early
significant earnings reductions during the first nine 1995; as a countermove, VEBA acquired a 10.5%
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
52 Merger Report II. Participating Companies: VEBA
shareholding in C&W. The alliance with C&W was nies. The sale is still subject to governmental
ended in early 1997 by the repurchase of the approvals. A possible exercise of the pre-emptive
VEBACOM shares. At the same time, VEBA and right by the co-shareholder Bell South does not result
RWE created o.tel.o communications GmbH & Co. in a change of the transfer conditions.
(‘‘o.tel.o’’) by merging RWE-telecommunications’
activities into VEBACOM. During September 1997, In December 1999, the shareholding in the Swiss
o.tel.o increased its existing shareholding in E-Plus to cable-TV company Cablecom Holding AG
60.25% through an additional purchase from Thyssen (‘‘Cablecom’’) was sold subject to the approval of
AG. the competent committees and Swiss authorities.
o.tel.o had its own far reaching network. In 1998, it
entered the public fixed-line business of the liberal- Except for the shareholdings in Bouygues Telecom
ized telecommunications market. By streamlining its and the Iridium companies (satellite based cellular
portfolio, it concentrated its telecommunications busi- service), which are of subordinated importance, the
ness on the fixed-line business, internet products as active business of VEBA Telecom has ended. The
well as the cellular phone business. sales proceeds which were received will not be
reinvested into telecommunications. They shall help
The year 1999 has led to far reaching changes in this to concentrate the group on its core business areas
division: energy and chemicals. While VEBA Telecom did not
achieve its targets in telecommunications, it neverthe-
During March 1999, VEBA sold its 10.2% sharehold- less generated a significant contribution to the
ing in C&W, which had been held as a financial group’s value. While funds of about EUR 3.6 billion
investment after ending the alliance. were invested, EUR 8.9 billion – the sales of the
During April 1999, o.tel.o sold its fixed-line business shareholdings E-Plus and Cablecom included – will
to a subsidiary of Mannesmann Arcor AG & Co. have been received back by the middle of 2000; the
VEBA left the fixed-line business, since this area had future proceeds from Bouygues Telecom will add to
fallen far behind expectations and achieving profit- this.
ability targets appeared impossible. This was due to
high expenses, in particular high marketing costs in (b) Structure and Business Activity
the isolated fixed-line business, and insufficient mar-
gins caused by a rapid price erosion in the private VEBA Telecom has a 17.5% shareholding in
telephone sector. By selling its fixed-line business, Bouygues Telecom; the majority of the equity is held
VEBA was relieved of the investments and further by Bouygues S.A. and affiliated companies.
startup losses related to building this business area. Bouygues Telecom was incorporated in 1994 and
Since mid-1999, the former o.tel.o has been named during the same year received the license to operate a
VR Telecommunications GmbH & Co. (‘‘VRT’’). cellular phone network in France according to the
In May 1999, TeleColumbus GmbH, which concen- GSM-1800 standard. Currently, about 5,500 base
trated on the German cable-TV business, was sold to stations cover most regions of France; the population
DB Investor AG, a financial holding company of coverage amounts to about 96%. Bouygues Telecom
Deutsche Bank AG. This happened against the has achieved a market share of about 20% in the still
backdrop of pending large investments and a market strong-growing business with new customers and
consolidation in larger corporate units in Germany. achieved in September 1999 a market share of 15%
of all customers with its 2.3 million subscribers. This
During October 1999, the shareholding in E-Plus was makes Bouygues Telecom the third largest cellular
ee
sold to France T´ l´ com S.A. Due to the pending phone operator in France after Itineris and SFR. The
merger of VEBA and VIAG one of the two cellular company intends to continue to both expand its
phone shareholdings in Germany had to be sold. At network and participate more than proportionally in
the same time, VEBA was able to participate in the the strong growth of the French cellular telephone
attractive increase in value of cellular phone compa- market.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 53
(c) Group Performance and Earnings quarters of 1998 enhanced earnings by about EUR
107 million.
The following table shows the most important key
Due to strong growth, Bouygues Telecom still shows
figures1 of VEBA Telecom for the 1998 financial
large losses. Due to a lack of market success, Iridium
year:
is performing significantly below plan; the sharehold-
ings in this business area were completely written
EUR in millions 1998 off.
Sales 201 Due to the sale of shareholdings with high start-up
Operating earnings –461 costs, the telecommunications division will improve
its earnings significantly compared with the previous
Total assets 2,414
year.
Investments 360
(5) Real Estate Management: Viterra AG
Employees (as of December 31) 1,965
Viterra Aktiengesellschaft, Essen (‘‘Viterra’’) was
Compared with the corresponding period of the created by the combination of Raab Karcher AG and
previous year, VEBA Telecom has developed during VEBA Immobilien AG (VEBA Real Estate Corpora-
the first nine months of the 1999 financial year as tion). It is a nearly 100% subsidiary of VEBA AG
follows: and connected to VEBA by a control and profit and
loss transfer agreement. With about 126,000 housing
1st to 3rd 1st to 3rd units, Viterra is among the leading real estate service
EUR in millions quarter 1998 quarter 1999 companies in Germany. Its shareholdings Deutschbau
Sales 128 106 Holding GmbH and Wohnbau Rhein-Main AG own
an additional approximate 50,000 housing units.
Operating earnings –335 –120 Viterra is striving to further expand its leading
Investments 276 118 position in the German real estate industry.
Employees*) 1,965 26 (a) Corporate History and Development
*) as of December 31, 1998 and September 30, 1999 During the years 1933 and 1939, the predecessors of
respectively
VEBA Immobilien were incorporated as employee
housing companies for the former iron, steel and
The sales in telecommunications contain the figures
mining industry. In 1986, the individual companies
for the fixed-line business, which was sold at the
were integrated into the VEBA Wohnen group, which
beginning of April, as well as the cable network
was renamed VEBA Immobilien in 1994. This took
operator TeleColumbus, sold at the end of May, on a
into account the expanded activity range in the
pro-rated basis. In addition, the cellular phone com-
commercial and service business areas, after the non-
panies E-Plus and Bouygues Telecom, accounted for
profit status of the company had been abandoned in
at equity, significantly contribute to the operating
1990.
result. The noticeable improvement of the operating
result is particularly due to no longer necessary Raab Karcher AG, which was incorporated in 1848,
expenses for the further expansion of the fixed-line started in coal trading and developed activities in
business and operative improvements in cellular different business areas. As part of a portfolio
telephony since April 1, 1999. In addition, the clearance during 1992 and 1993, the activities in the
operating results for E-Plus are only included in the oil business area were transferred to VEBA Oel AG
first six months of 1999, after the agreement for the and the business areas building materials and heat
sale of the E-Plus shareholding to France Telecom services were acquired from Stinnes. As of January 1,
was concluded in October 1999. Compared with the 1998 the business divisions Raab Karcher Baustoffe
previous year, it has to be taken into account that the (Raab Karcher Building Materials) and Raab Karcher
release of negative goodwill during the first three a
Sanit¨ r.Heizung.Fliesen (Raab Karcher
1)
o.tel.o was included pro-rata and E-Plus was included at
equity in the group’s financial statements.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
54 Merger Report II. Participating Companies: VEBA
Sanitary.Heating.Tiles) as part of a restructuring of Business Unit: Residential Development
the trade, logistics and services division in the VEBA
group, until then part of the Raab Karcher group, In the Residential Development Business Unit,
were transferred to Stinnes AG. The electronics Viterra, together with Viterra Baupartner GmbH,
trading activities with the business areas electronic operates a nationwide real-estate development com-
systems and electronic components were spun off to pany. The business area comprises the acquisition of
VEBA AG. Raab Karcher Tankstellentechnik (Raab building sites, development of building areas, plan-
Karcher Service Station Engineering), Raab Karcher ning and realization of real-estate projects and the
Ambiente and the security services of Raab Karcher marketing of real estate. The emphasis lies on the
Sicherheit (Raab Karcher Security) were sold in the construction and sale of terraced and duplex houses.
financial year 1998. Low-cost residential building is pursued under the
brand name VEBA Wohn-Wert (VEBA Housing
With economic effect as of January 1, 1998, Raab Value). Residences built in accordance with the
Karcher AG was merged into VEBA Immobilien AG. VEBA-Wohn-Wert program shall also be marketed in
In May 1999, the company was renamed Viterra AG. the Netherlands and in Poland. During 1998, about
The restructuring created an integrated company with 1,000 housing units were completed and sold.
a focus on real estate and real-estate services.
Business Unit: Residential Services
(b) Group Structure and Business Activity The Residential Services Business Unit contains
services related to housing for users and administra-
The business activity of Viterra is subdivided into tors, as well as private and institutional owners of
four business units: housing units and smaller commercial units. The
Viterra AG
Residential Residential Residential Commercial
Investment Development Services
main operative companies are Viterra Energy Ser-
Business Unit: Residential Investment vices AG, Viterra Wohnpartner GmbH, Viterra
Sicherheit und Service GmbH and Viterra Con-
The Residential Investment Business Unit with its tracting GmbH.
own approximately 126,000 housing units and 50,000
housing units held via the shareholdings in Deu- Viterra Energy Services AG is the worldwide market
tschbau Holding GmbH and Wohnbau Rhein-Main leader for consumption-related billing of heat and
AG is the largest business unit in terms of sales and water in private households and commercial units.
revenue. The activity in this business unit consists of Viterra Wohnpartner GmbH deals with the commer-
renting, acquisition and disposition and modernization cial, technical and infra-structural management of
of residential real estate. The center of the rental residential real estate for its own assets and over
activities is located in the Ruhr area. In the 1998 7,000 third-party housing units. The area covered by
financial year, rental income was further increased. Viterra Sicherheit und Service GmbH comprises
As part of active asset management, a total of more private security systems, emergency and service-
than 2,900 housing units were sold. centers and security technology. The area of personal
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 55
security services was disposed of to the Swedish The following key figures show (compared with the
Securitas group in 1998 in order to concentrate on corresponding period of the previous year) the
the distribution of security and alarm systems. Viterra development of Viterra during the first nine months
Contracting GmbH designs, finances, builds and of the 1999 financial year:
operates heating systems. Here, third-party business is
also increasingly developed. 1st to 3rd 1st to 3rd
EUR in millions quarter 1998*) quarter 1999
Business Unit: Commercial Sales 796 777
Larger commercial real estate assets as well as Operating earnings 91 102
development activities and facility management are Investments 77 203
concentrated in the Commercial Business Unit.
Viterra is active in project development, project Employees**) 5,842 4,856
management and investments in the construction of *) Contrary to 1998 financial statements, expiring activi-
commercial real estate. ties that were sold in 1998 are not included.
**) as of December 31, 1998 and September 30, 1999
(c) Main Shareholdings respectively
During the first nine months of 1999, Viterra
Viterra Baupartner AG, Bochum 100% achieved somewhat lower overall sales compared
Viterra Contracting GmbH, Bochum 100% with the prior year’s corresponding period. The
Viterra Energy Services AG, Essen 100% previous year’s sales figures include revenues re-
Viterra Sicherheit und Service GmbH, ceived from the sale of a larger object in the
Essen 100% commercial business area. Sales for the other busi-
Viterra Wohnen AG, Bochum 100% ness areas, Residential Investment, Residential Devel-
Viterra Wohnpartner AG, Bochum 100% opment and Residential Services, increased.
Viterra Gewerbe Immobilien GmbH,
Bochum 90.5% The operating result of Viterra was increased signifi-
VEBA Wohnen GmbH, Bochum 83.7% cantly. This is mainly due to an improvement in
VEBA Urbana GmbH, Bochum 58.2% energy services – both in the service and trading
Deutschbau Wohnungsgesellschaft business – as well as to no longer existing losses of
mbH, Frankfurt/Main 50%*) the service station engineering, sold in 1998. The
Wohnbau Rhein-Main AG, Frankfurt/ business areas residential investment and residential
Main 47.9%**) development are at their previous year’s level.
Since the business area residential investment was
*) held via a 50 percent shareholding in Deutschbau
Holding GmbH, Frankfurt am Main able to increase its planned sales volume and the
**) as of December 16, 1999; held via a 50 percent business area residential development increased the
shareholding in WBRM Holding GmbH, Frankfurt am number of current real estate projects, a significant
Main. increase of operating earnings is expected for full-
year 1999.
(d) Group Performance and Earnings
(6) Distribution / Logistics: Stinnes AG and
The most important key figures of Viterra for the VEBA Electronics
1998 financial year were:
The Business Division Distribution/Logistics consists
of the two major group companies Stinnes and
EUR in millions 1998 VEBA Electronics.
Sales 1,451
(a) Stinnes AG
Operating earnings 149
The Stinnes Aktiengesellschaft (‘‘Stinnes AG’’) is
Total assets 3,702 the managing company of a worldwide logistics
Investments 205 group active in the business sectors transportation,
chemicals, building materials, materials and full-line
Employees (as of December 31) 5,842
wholesaling. Stinnes AG concentrates on intelligent
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
56 Merger Report II. Participating Companies: VEBA
bundeling and distribution of goods and correspond- GmbH and the Stinnes Reifendienst (Stinnes Tire
ing information. Stinnes functions as intermediary Service) which represented 16% of Stinnes’ total
between suppliers, manufacturers, processors and end sales.
users. After a public offering in June 1999, VEBA
now holds a 65.5% shareholding in Stinnes. bb) Group Structure and Business Activity
aa) Corporate History and Development The activities of Stinnes are divided into the Business
Units Transportation, Chemicals, Building Materials,
The origins of the Stinnes group date back to the Raw Materials and Full-line Wholesaling.
year 1808, in which the business was formed by
Mathias Stinnes as the owner of a coal dealership in Business Unit: Transportation
u
M¨ lheim/Ruhr. His grandson, Hugo Stinnes, ex-
panded the company at the beginning of the 20th Schenker AG, a 100% subsidiary of Stinnes AG, is
century to one of the largest corporate groups in one of the world’s leading providers of integrated
Europe. After the entry of the U.S. into the war in traffic and logistics services. Three specialized lines
1941, the assets of the heirs of Hugo Stinnes were operate under the roof of the Schenker group:
confiscated by the U.S.A., but were returned to European overland transportation (‘‘Schenker-BTL’’),
Germany in 1957 with the help of a syndicate of air and sea freight (‘‘Schenker International’’) and
German banks. In 1965, VEBA acquired the majority logistics systems (‘‘Schenker Logistik’’). With about
(94.9%) of Hugo Stinnes AG. In 1976, the company 600 locations in nearly all European countries, the
was renamed Stinnes AG and was integrated into European overland transportation is one of the
VEBA in 1992. The listing of the company at stock leading transportation and logistics networks. The
exchanges, which had existed since 1962, was core business consists of organizing on-time LCL
discontinued. (‘‘less than container load’’) system traffic general
cargo transportation systems via scheduled transports
Over the past years, Stinnes has implemented a series through self-operated terminals all over Europe. The
of restructurings and completed its development from range of services also includes special transports such
a traditional trading house to an internationally as trade show and art transports, moving services,
oriented provider of logistics services. In 1997, heavy and refrigerated transports. Air and sea freight
Stinnes transferred its oil activities to VEBA Oel AG. includes the organization of the worldwide air and
By the end of 1991, Stinnes had acquired from sea transport of goods with sea transport mainly
Deutsche Bundesbahn (German Federal Railway) in involving goods in containers as well as the combina-
two steps 80% and in 1994 the remaining 20% of tion or division of several shipments or containers.
Schenker & Col. GmbH. After a major portfolio Customs services, storage or commissioning are
clearance in 1998, it consolidated its activities in the offered as additional services. The logistics systems
business area transportation in Schenker AG. To line includes the customer-specific connection of
further expand the Transportation Business Area, several logistical value-added steps with a large
Stinnes acquired a 35% shareholding in the Swedish element of stationary services. This includes the
BTL AB’s (‘‘BTL’’) in 1998 and in 1999 increased optimization of processes and systems (warehouse
its capital to nearly 100%. Schenker AG’s and BTL’s management, supply chain management) and several
business activities were integrated into uniform na- supplemental transportation services (value-added ser-
tional companies. In the nineties, selective acquisi- vices), e.g. commissioning, packaging, assembly, on-
tions in Europe and the U.S.A. brought the Chemi- time product delivery (just-in-time delivery), spare
cals Unit to its present size. At the end of 1998/ part distribution and consultation. The Business Unit
beginning of 1999, Stinnes sold its DIY supply Transportation contributes approximately 40% to the
a
markets, Raab Karcher Sanit¨ r.Heizung.Fliesen total sales of Stinnes.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 57
Stinnes AG
Transportation Chemicals Building Materials Full-time
Materials Wholesaling
through a tightly-knit large-area network of locations.
Business Unit: Chemicals The business also includes construction site logistics
In the Chemicals Business Unit, Brenntag AG & Co. and waste disposal, as well as the sale and rental of
oHG Chemievertrieb (‘‘Brenntag’’) has been active construction machinery and tools. The center of the
as a chemicals distributor for 125 years. With more Business Unit’s activity is located in Germany.
than 140 locations, 80 of which are logistics centers Building Materials generates 15% of Stinnes’ total
in Europe, Brenntag is the European market leader a
sales. Raab Karcher Sanit¨ r.Heizung.Fliesen GmbH,
and ranked 4th in the U.S. Brenntag concentrates the which was also acquired from Raab Karcher AG
production output of large chemicals producers VEBA Immobilien Management, was sold.
around the world and distributes it via its efficient
logistics centers just in time to the processing
Business Unit: Materials
industry. The offered logistics services include the
procurement, transport and storage of chemicals,
mixing and repackaging into smaller containers and Stinnes Interfer Beteiligungs-AG & Co. oHG
the re-acceptance of empty containers. The sale of (‘‘Stinnes Interfer’’) is one of the leading distributors
chemicals is supplemented by comprehensive applica- for steel in Germany and ores and minerals world-
tion-specific advice, particularly with respect to spe- wide. In early 1999, steel and raw materials were
cialty chemicals. Brenntag carries a full assortment combined in the Business Unit Materials under the
for industrial and specialty chemicals. The sales of roof of Stinnes Interfer. The activities include the
the Chemicals Business Unit contribute about 16% to customer-specific procurement, distribution and prep-
the total sales of Stinnes. aration of tubular, flat, profiled and reinforcing bars,
steel products, welded wire mats and the import and
export of steel products of every kind. Frank &
Business Unit: Building Materials
Schulte GmbH, Europe’s market leader for special
With the acquisition of Raab Karcher Baustoffe ores, runs the worldwide procurement logistics (coor-
Holding GmbH & Co. oHG from the former Raab dination of required amounts, compilation of ship-
Karcher AG VEBA Immobilien-Management on ments, transport handling, quality control), customer-
January 1, 1998, Stinnes became one of the most specific preparation from product development to
important specialized building materials dealer in processing (i.e. breaking, grinding, sifting and pack-
Europe and the market leader in Germany, the Czech aging) and the distribution of products (e.g. opening
Republic and Hungary. With a full assortment of up and developing markets for producers and applica-
building materials, materials for building construction, tion specific advice) in the segments minerals (special
civil engineering and expansion, roof and facade ores and fillers), metals and metallurgy (alloys, alloy
materials, wood and building elements and as a briquettes, carbonizing agents and special raw steel).
building services company, Raab Karcher Baustoffe Materials contributes about 12% to the sales of
supplies the building industry with system solutions Stinnes.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
58 Merger Report II. Participating Companies: VEBA
Business Unit: Full-line Wholesaling Compared with the corresponding period of the
previous year, Stinnes performed as follows during
Stinnes Intertec GmbH & Co. oHG (‘‘Stinnes the first nine months of 1999:
Intertec’’) is a system wholesaler that globally
procures technical durables and consumable goods, 1st to 3rd 1st to 3rd
combines them into assortments and supplies these EUR in millions quarter 1998 quarter 1999
along with supplemental services to dealers in se- Sales 10,191 8,722
lected European countries. More than 4,500 DIY
outlets, construction specialty stores and self-service Operating earnings 109 136
stores are supplied with a full range of products in
the areas of automotive accessories and maintenance, Investments 196 580
bicycle accessories, electrical installation material,
and tools/small iron products. Stinnes Intertec is Employees*) 49,712 43,530
market leader in Germany, Austria and Switzerland in
the area of automotive accessories and maintenance. *) as of December 31, 1998 and September 30, 1999
Branches in France as well as cooperative agreements respectively
with importers secure a presence within the remain- The sales for Stinnes were below the previous year’s
ing European countries. Full-line Wholesaling con- level due to the sale of activities (mainly DIY stores,
tributes about 1% to the total sales of Stinnes. sanitary/heating/tiles and tire service). Adjusted for
the disposed of activities, sales almost achieved the
cc) Main Shareholdings previous year’s figures.
Stinnes was able to increase the operating result
Brenntag AG & Co. oHG Chemievertrieb, significantly. The earnings relieving effects from the
u
M¨ lheim/Ruhr 100% disposal of the areas DIY stores and sanitary/heating/
Raab Karcher Baustoffe Holding GmbH & tiles as well as the positive effect of the reorganiza-
Co. oHG, Frankfurt/Main 100% tion measures in the building materials business area
were decisive. The business area chemicals also
Schenker AG, Essen 100%
showed a significant increase in earnings.
Stinnes Interfer Beteiligungs-AG & Co.
oHG, Essen 100% Significantly improved operating earnings compared
Stinnes Intertec GmbH & Co. oHG, with the previous year is expected for full-year 1999.
u
M¨ lheim/Ruhr 100%
(b) VEBA Electronics
o
BTL AG, G¨ teborg 99.0%
The range of business activities of VEBA Electronics
*) as of November 30, 1999 includes the business areas electronic components
(semiconductors, etc.) and electronic systems
dd) Group Performance and Earnings (monitors, printers, computers, networking products,
etc.). VEBA is one of the world’s three largest
During the 1998 financial year, Stinnes showed the distributors of electronic components and computer
following material key figures: systems with activities in Europe, North America and
the Asian-Pacific region. Since the beginning of 1998
EUR in millions 1998 the operative management of the electronics compa-
nies lies with VEBA Electronics, Santa Clara, Cali-
Sales 13,540 fornia, U.S.A.
Operating earnings 125 aa) Corporate History and Development
The electronics business was a business unit of Raab
Total assets 5,469
Karcher AG from 1988 until the end of 1997. Today
Investments 493 it is an independent business unit of VEBA. A
market position worth mentioning was achieved in
Employees (as of December 31) 49,712 1991 through the acquisition of the British Memec
group. In 1995/96, 80% of EBV-Elektronik GmbH
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 59
were acquired and in 1997 Wyle Electronics Inc. was compared with the first nine months of the previous
taken over. year:
1st to 3rd 1st to 3rd
bb) Structure and Business Activity EUR in millions quarter 1998 quarter 1999
VEBA Electronics consists mainly of the companies Sales 2,898 3,624
Raab Karcher Elektronik GmbH in the Business Unit
Electronics Systems, as well as Wyle Electronics, Operating earnings 25 53
Inc., EBV-Elektronik GmbH and Memec (Memory
and Electronic Components) plc. in the Business Unit Investments 72 43
Electronic Components. Both the components and the
systems businesses are characterized by the develop- Employees*) 5,473 5,933
ment of semiconductor technology. While the Sys-
*) as of December 31, 1998 and September 30, 1999
tems Unit mainly deals with final products that are respectively
distributed to retailers and system integrators, the
components unit deals with the distribution of semi- VEBA Electronics was able to increase its sales due
conductor products to the manufacturing industry. to the improved increase in volume with stable
The Electronic Components Business Unit has a margins in the business area electronic components
stable market position due to a wide range of particularly in the U.S. market.
manufacturers and products, technical customer con-
VEBA electronics’ operating earnings significantly
sultation by engineers, supply chain-management for
exceeded the previous year during the first nine
customers and manufacturers and added-value-
months of 1999, inspite of the weak business at the
services, such as component programming, special
beginning of the year. In addition to a distinct market
packaging, etc.
stimulation for electronic components in the United
States, the demand in Europe also increased
cc) Main Shareholdings noticeably.
For the full 1999 financial year operating earnings are
RK Elektronik GmbH, Nettetal 100%
expected to significantly exceed the previous year.
EBV Elektronik GmbH, Kirchheim 99.9%
Memec PLC, Thame, Großbritannien 100% (7) Silicon Wafers: MEMC Electronic Materials,
Wyle Electronics Inc., Irvine, U.S.A. 100% Inc.
MEMC Electronic Materials, Inc. (‘‘MEMC’’) is one
dd) Group Performance and Earnings of the world’s leading manufacturers of Silicon
Wafers.
The following table displays VEBA Electronics’ key
figures for the 1998 financial year: (a) Corporate History and Development
MEMC has its registered offices in St. Peters,
EUR in millions 1998 Missouri, USA, where the company was incorporated
Sales 3,837 in 1959 as a subsidiary of the former Monsanto
Chemical Company. The company’s headquarters and
Operating earnings 19 largest production facilities are still located in
St. Peters. Further production facilities were set up
Total assets 2,176 directly or through joint ventures in Italy, Japan,
Malaysia, South Korea, Taiwan and the U.S.A.
Investments 90
The company in its current form was established by
consolidating Dynamit Nobel Silicon Holdings, Inc.
Employees (as of December 31) 5,473
and the wafer business of Monsanto under the roof of
u
H¨ ls AG. In an initial public offering in July of
For the first nine months of the 1999 financial year, u
1995, the shareholding of H¨ ls AG in MEMC was
VEBA Electronics shows the following key figures reduced to 51.9%. In the merger of Degussa and
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
60 Merger Report II. Participating Companies: VEBA
u
H¨ ls, VEBA acquired the MEMC shares from H¨ ls u MEMC reacted to the tense market situation with a
in September 1998. Since then, the shareholding has comprehensive restructuring program, which included
been held directly by VEBA AG. After subscribing the following measures:
to almost the entire capital increase of US$ 200
– closing of a U.S. production facility
million in April 1999, which took place as part of a
financial restructuring of MEMC, VEBA holds a – ending a smaller joint venture in China
shareholding of 71.8% in MEMC.
– canceling the construction of a large facility in
Malaysia, and
(b) Structure and Business Activity
– additional reduction of about 1,500 jobs.
MEMC supplies silicon wafers to most of the world’s The following table shows the most important key
largest semiconductor manufacturers. Silicon wafers figures for MEMC during the 1998 financial year:
are the building blocks for almost all semiconductor
products, which are used in a multitude of electronic
products, e.g. computers, automobiles, industrial EUR in millions 1998
robots, consumer electronics and in telecommunica- Sales 683
tions. MEMC is the largest manufacturer of silicon
wafers outside of Japan. The regional diversification Operating earnings –240
of the production facilities and the shareholdings in
joint ventures takes the global presence of the Total assets 1,473
semiconductor industry into account and increases
resistance to local economic crises. Investments 218
(c) Main Shareholdings Employees (as of December 31) 6,190
MEMC Electronic Materials S.p.A., Novara, Compared with the corresponding period of the
Italy 100% previous year, MEMC has developed during the first
nine months of the 1999 financial year as follows:
MEMC Japan Ltd., Utsunomiya, Japan 100%
MEMC Electronic Materials Sdn. Bhd., 1st to 3rd 1st to 3rd
Petaling Jaya, Malaysia 100% EUR in millions quarter 1998 quarter 1999
MEMC Southwest Inc., Sherman, U.S.A. 80.0% Sales 554 475
Taisil Electronic Materials Inc., Hsin-Chu,
Taiwan 45.0% Operating earnings -159 -168
u
Posco H¨ ls Co. Ltd., Chonan, South Korea 40.0%
Investments 138 46
(d) Group Performance and Earnings Employees*) 6,190 5,611
Since 1996, MEMC has suffered significant reduc- *) as of December 31, 1998 and September 30, 1999
tions in sales and has been generating substantial respectively
losses since 1998. The reason lies in the overcapaci-
Due to lower sales prices, sales and operating results
ties in the wafer market. During the last years, all
were below the previous year’s figures. However,
wafer manufacturers had created additional produc-
during the first three consecutive quarters of the 1999
tion capabilities expecting increased demand from the
financial year, MEMC was able to increase the sales
semiconductor industry, which could no be fully
volume by at least 10% quarter-on-quarters. The
utilized due to the financial crisis in Asia, the lower
restructuring measures introduced in 1998 and an
demand for personal computers and successful ratio-
increasing demand on the wafer market made it
nalizations of the customers. The consequence was a
possible to reduce quarter-on-quarters losses during
rapid drop in prices, increased by the Yen’s weakness
the last three consecutive quarters.
compared with the US-Dollar for the most part of
1997 and 1998, which was used for further pricing The slight year-to-date increase in operating losses
concessions by the Japanese competitors. results from the severe earnings reduction during the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VEBA 61
course of 1998, which is nearly offset by a continu- reduced. Guaranteed government subsidies have been
ous earnings improvement during the course of 1999. granted up to the year 2005 to absorb losses incurred
Since May 1999, MEMC is successively decreasing by decreasing sales and to provide financial support
the deficiency for 1998 with monthly increasing for required capacity reductions.
amounts.
Therefore, improved operating earnings compared Over the past three decades, RAG has extensively
with the previous year may be expected for the expanded its activities outside of the German hard
whole of 1999. Generally, two-digit growth rates are coal mining business. Already in 1998, these activi-
predicted for the semiconductor and wafer industry ties resulted in 56% of the corporation’s total group
during the next two years. MEMC will profit from sales yet utilizing only 35% of the group’s total work
this development. During subsequent years, VEBA force. RAG Coal International AG comprises the
expects a significant improvement in earnings. foreign mining business, mining technology and the
national and international coal trading business. To-
(8) Other Main Shareholding: RAG AG day, RAG along with its foreign companies repre-
sents the world’s second largest hard coal producer.
VEBA holds (directly and indirectly) 39.2% in RAG RAG EBV Aktiengesellschaft comprises the group’s
Aktiengesellschaft (‘‘RAG’’; the former Ruhrkohle extensive real estate activities/construction-related trad-
AG). RAG is a diversified, internationally oriented ing and services. The STEAG AG (72.2%) owns and
energy and technology company with its registered operates hard coal mines in the Ruhr area and is also
offices in Essen. With 104.330 employees RAG’s increasingly active in the international power plant
sales amounted to EUR 14.1 billion and resulted in a business (IPP) as well as in the construction of
profit of EUR 209 million for 1998. Since 1999, manufacturing facilities for the production of semi-
VEBA includes its shareholding in RAG at equity conductor products, compact discs and lithography
into its Consolidated Financial Statements. u
masks. R¨ tgers AG (97.1%) is an internationally
RAG was created in 1969 by contributing several oriented group with leading positions in specialty
mining companies into one company, originally for markets in the chemicals and plastics areas. Saar-
the purpose of systematically reducing Germany’s berg AG (100%) comprises RAG’s environmental
hard coal mining activities in the Ruhr area. Today, activities but also operates in the energy, trade and
all of Germany’s hard coal mines have been consoli- rubber business areas.
dated under RAG’s wholly owned subsidiary
Deutsche Steinkohle AG. The activities in the Ger- RAG’s further main shareholdings are in Ruhrgas AG
man hard coal mining industry are continually being (indirect 18.2%) as well as in Harpen AG (23.3%).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
62 Merger Report II. Participating Companies: VEBA
2. VIAG Aktiengesellschaft
a) Overview / Current Group Structure
VIAG is a corporate group which rests on two pillars and operates in five core business areas:
VIAG AG
Services Innovative
Industries
Tele-
Alu-
Energy communi- Chemicals Packaging
minum
cations
Bayernwerk VIAG SKW Schmal- VAW
AG Telecom Trost- bach- alumini-
Beteili- berg AG Lubeca um AG
gungs 2,111
GmbH 59.8 %
5,662 201 3,384 Gerres- 2,947
94.9 % 100 % 63.7 % heimer 99.9 %
Glas
836
72.2 %
The columns show sales and the amount of the shareholdings held by VIAG AG. The sales figures show the sales portion in the consolidated accounting
of VIAG AG for the 1998 financial year (EUR in millions). In the medium term, VIAG plans an initial public offering of its telecommunications activities.
Also, a public placement of up to 49% of the capital stock of VAW aluminium AG is planned. The shareholdings in Schmalbach-Lubeca AG and
o
Gerresheimer Glas AG as well as in Kl¨ ckner & Co. AG are to be sold.
The group is led by VIAG Aktiengesellschaft The company’s registered offices and headquarters
(‘‘VIAG AG’’) a management holding company. The are in Munich.
holding company’s tasks are limited to strategic
management, managing finances, strategic controlling, b) Corporate History and Development
occupying key positions, development of management
VIAG AG was incorporated in Berlin in 1923 as
resources and communication, particularly with the
‘‘Vereinigte Industrie-Unternehmungen AG’’ (United
capital markets and shareholders. In consideration of
Industrial Companies Corporation). The sole share-
this background, the primary goal of corporate policy
holder was the Deutsche Reich. VIAG AG served as
is active portfolio optimization within the individual
a holding company for the industrial shareholdings of
divisions. The group is distinguished by its decentral-
the Deutsche Reich. At the time, the operational
ized management with flat hierarchies and short
emphasis was on power generation and the produc-
decision paths.
tion of energy-intensive basic materials such as
With group sales1 of EUR 25 billion and about aluminum (VAW aluminium AG) and fertilizers
86,000 employees (1998), the VIAG group (SKW Trostberg AG). As a state-owned company of
(‘‘VIAG’’) is one of the largest industrial groups in the Deutsche Reich, the group companies were
Germany. VIAG shares are included in the DAX and integrated into the national socialist economic system
are among the twenty most-traded stocks in Germany. and the war economy between 1933 and 1945. VIAG
1)
for the 1998 financial year including the sales of
o
Kl¨ ckner & Co. and the divested shareholdings, mainly
u
Computer 2000 AG and K¨ hne & Nagel
international AG.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 63
has joined the foundation initiative of German c) Group Performance
industry ‘‘Erinnerung, Verantwortung und Zukunft’’
(memory, responsibility and future) which has been For the financial years 1997 and 1998, the VIAG
set up to compensate forced laborers. group generated the following important key figures1:
After the Second World War, VIAG and its assets EUR in millions 1997 1998
located in Western Germany became the property of
Sales 25,332 25,130
the Federal Republic of Germany. During 1950,
VIAG AG added new registered offices in Bonn in Earnings before interest and 1,891 1,983
addition to Berlin. In 1951, its headquarters were also taxes (EBIT)
moved to Bonn. During 1994, VIAG AG relocated its Pretax earnings 1,501 1,586
registered offices and in 1995 also its headquarters to
Net Income 622 765
Munich.
Equity *) 6,399 8,286
VIAG was privatized in two steps during the years
Total assets 29,914 31,441
1986 and 1988. Its shares were initially listed on
German stock exchanges and later on stock ex- Investments 4,967 3,510
changes in Zurich and Geneva. Since 1988, the Employees (as of 95,561 86,046
Federal Republic of Germany no longer holds shares December 31)
in VIAG. The privatization was the beginning of a
*) including minority interests
very dynamic development of VIAG which led to the
core areas energy, chemicals, telecommunication, Compared with the corresponding period of the
aluminum and packaging. The most important steps previous year, VIAG has performed during the first
during the last five years were the: three months of the financial year 1999 as follows1:
– 1994: increase of the shareholding in
1st to 3rd 1st to 3rd
Bayernwerk AG to 94.9% of the capital and 100% quarter quarter
of the votes; EUR in millions 1998 1999
Sales 20,185 14,498
– 1995 and 1996: acquisition of today’s SKW
Biosystems S.A., Paris, and of the building chemi- EBIT 1,577 1,769
cals group Master Builders Technologies, Zurich, Pretax earnings 1,319 1,142
by SKW Trostberg;
Investments 1,594 2,164
– 1997: acquisition of more than 80% of the capital Employees (as of 100,523 80,985
stock of Isar-Amperwerke AG and increase of the September 30)
shareholding in Bewag to 26%;
The decrease in sales by 28% is mainly due to the
– 1998: increase of the shareholding in
u
sale of K¨ hne & Nagel International AG, Computer
Goldschmidt AG to more than 93%;
2000 AG, the business areas Thermit and environ-
– 1999: combination of SKW Trostberg AG and mental technology of Goldschmidt AG, the Canadian
Goldschmidt AG. metallurgical activities as well as the standard glass
container business of Gerresheimer Glas AG.
Since 1995, the group has been active in the Adjusted for these desinvestments, the sales decrease
telecommunications sector. Together with its partners, amounts to about 5%. The increase in earnings before
VIAG intends to become a powerful full-service interest and tax results from shifts in the provisions
provider in this future-oriented market within Ger- set aside for disposal purposes due to new estimates
many, Austria, Switzerland and in Liechtenstein. and information. This led to a considerable relief of
1) 1)
The figures for 1997 correspond to the previously id.
published numbers based on the HGB accounting
standards. The numbers for 1998 were calculated
according to the International Accounting Standards
(IAS) and are published for the first time.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
64 Merger Report II. Participating Companies: VIAG
earnings before interest and tax and to a burden on u
due to the sale of the shareholding in the K¨ hne &
interest earnings. Pre-tax income came in at the Nagel International AG. Adjusted for the changes to
previous year’s level. the group structure, the number of employees re-
mained almost constant due to the stepped-up expan-
The group performance of VIAG during the first
sion of the telecommunications division.
three quarters of 1999 was characterized by counter-
acting trends. While the industrial areas continued to VIAG AG has a co-determined Supervisory Board
recover and generated stable earnings contributions, (§§ 96 para. 1, 101 para. 1 of the Stock Corporation
the energy business suffered from price-related losses. Act and § 7 para. 1 sentence 1 no. 3 of the Co-
The rapid growth of telecommunications activities determination Act). As in the case of VEBA AG, the
resulted in increased startup expenses compared with Supervisory Board consists of ten representatives of
the previous year. Due to these effects, pre-tax each of the shareholders and the employees.
consolidated income according to IAS dropped by Bayernwerk AG, SKW Trostberg AG, VAW alumin-
13% to EUR 1.1 billion (previous year: EUR 1.3 ium AG, Gerresheimer Glas AG, Schmalbach-
billion). For full-year 1999 an increase of this o
Lubeca AG and Kl¨ ckner & Co. AG also have
reduction compared with the record income of the equally composed Supervisory Boards. Further group
previous year is expected. For full-year 1999, the companies have Supervisory Boards with employee
industry business is expected to exceed slightly the representatives according to the provisions of the Co-
high income of the previous year. Startup expenses in determination Act 1976 or the Workers Council
the telecommunications areas will be increased ac- Constitution Act (Betriebsverfassungsgesetz 1952).
cording to plan in order to continue to participate in Instead of a group works council, VIAG AG has a
strong market growth. Income in the energy business Konzernarbeitsgemeinschaft with 25 members. The
is burdened by massive price pressure and restructur- Konzernarbeitsgemeinschaft is responsible for pre-
ing costs. Further cost reductions will not be suffi- serving the interests of the (domestic) employees of
cient to compensate for these effects. Therefore, a the VIAG group in all matters. Seven companies
noticeably lower consolidated pre-tax income com- have further group works councils. Several other
pared with the previous year is to be expected for companies have general works councils.
full-year 1999.
e) Corporate Bodies, Capital and Shareholders
d) Employees and Co-Determination
As of December 31, 1998, VIAG employed 86,046 The members of the Board of Management of
employees worldwide, 51% thereof within Germany. VIAG AG are:
The number of employees by divisions is as follows:
– Prof. Dr. Wilhelm Simson, Munich (chairman)
Employees as of
– Maximilian Ardelt, Starnberg
Group Division 12/31/1998 – Rainer Grohe, Otterstadt
– Dr. Erhard Schipporeit, Pullach / Isartal
Energy 17,360
– Dr. Georg Freiherr von Waldenfels, Munich
Chemicals 18,937
Chairman of the Supervisory Board, which consists
Telecommunications 3,836 of a total of 20 members, is Mr. Dipl.-Ing. Burkhard
Aluminum 17,571 a
Wollschl¨ ger.
Packaging 16,967 The company’s capital stock of EUR 691,981,914 is
Other activities (including holding) 11,375 split into 691,981,914 shares with no nominal value.
The following shareholders have informed VIAG that
Total 86,046 they hold shareholdings of 5% or more:
As of September 1999, 80,985 employees were – State of Bavaria (15.1%)
employed by the VIAG group (previous year: – Bayerische Hypo- und Vereinsbank AG, Munich
100,523 employees). The reduction by 19% is mainly (10.5%*)
*) indirectly through a majority shareholding in VI-Indus-
trie-Beteiligungsgesellschaft mbH, Munich;
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 65
o
– HI-Verm¨ gensverwaltungs-Gesellschaft mbH, Bayernwerk holds shareholdings in several large
Munich (10.1%**) German integrated utilities 26.0% in Bewag Aktien-
u
– VEBA Aktiengesellschaft D¨ sseldorf and Berlin gesellschaft, 11.2% (directly) in VEW Aktiengesell-
(10%) schaft and 22.5% in the largest east German electric-
– Allianz AG, Munich (5.9%***) ity supplier, VEAG Vereinigte Energiewerke AG.
The other shares are widely held. Outside of Germany, Bayernwerk is active in Hun-
gary, Switzerland, Austria, the Czech Republic and in
f) Group Divisions Italy. Shortly after opening borders, the partnership
(1) Energy: Bayernwerk AG with the Hungarian energy industry was initiated.
During the privatization of the energy industry,
Bayernwerk Aktiengesellschaft, Munich
(‘‘Bayernwerk’’), is the management company of Bayernwerk acquired shareholdings in Hungarian
VIAG for the energy division. All energy activities of regional distribution and supply companies. In addi-
VIAG have been combined under the leadership of tion, it holds a 24.5% shareholding in the Swiss
Bayernwerk. Based on sales and electricity output, Watt AG. Early in 1999, Bayernwerk incorporated
Bayernwerk is one of the ten largest power utilities Bayernwerk Bohemia with registered offices in
in Europe. It is the third largest integrated utility in Prague. This company manages the activities in the
Germany. Czech Republic. Currently, Bayernwerk is the largest
The core region of Bayernwerk comprises almost all foreign investor in the Czech energy industry.
of Bavaria and Thuringia. Bayernwerk operates nu- Through Contigas Deutsche Energie-Aktiengesell-
clear power plants, conventional power plants and schaft, Bayernwerk holds shareholdings in gas supply
hydroelectric power plants as well as most parts of companies in South Tyrolia and Venetia. In 1999,
the transmission and distribution grid in Bavaria. Bayernwerk opened a sales and marketing office in
Today, it provides most of the electricity required in Milan.
Bavaria and Thuringia and, together with its
Hungarian associated companies, a major part of the Bayernwerk aims to further strengthen its core
electricity consumed in Hungary. After the liberaliza- business area of electricity in Germany and adjacent
tion of the German electricity market, Bayernwerk regions. At the same time, the business areas of gas
has also positioned itself as an energy supplier and waste disposal/environmental technology are to
operating throughout Germany. Electricity distribution be set up and consistently expanded.
takes place through the newly founded Bayernwerk
Vertriebsgesellschaft mbH as well as the regional
supply companies of Bayernwerk.
Regional Utilities (Group Subsidiaries)
Redistributors supplied by
TEAG Bayernwerk
Hessia Saxonia
Redistributors not supplied by
Bayernwerk
ÜWU Czech Republic
EVO
FÜW
EWAG
SW Fürth Slowakia Ukraine
OBAG
Baden- Miskolc
Württemberg
Austria Györ Budapest
LEW IAW EDÁSZ
TITÁSZ
and Romania
others SWM
Slovenia
DEDÁSZ Szeged
Pécs
Croatia
Serbia
o
**) main shareholders of HI-Verm¨ gensverwaltungs-Gesell- ***) in part indirectly through AI Isar-Amperwerke AG
schaft mbH are Bayerische Hypo-und Vereinsbank AG Industriebesitz und Beteiligungen oHG, Munich
and Isar-Amperwerke AG with 49% each;
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
66 Merger Report II. Participating Companies: VIAG
(a) Corporate History and Development distributors of the group by concluding control and
profit and loss transfer agreements with Contigas
Bayernwerk AG was incorporated in 1921. Initially,
Deutsche Energie-AG, OBAG AG, EVO Energiever-
the State of Bavaria was the sole shareholder. In
sorgung Oberfranken AG and Isar-Amperwerke AG,
1939, VIAG acquired a shareholding of 50.0% in
as well as the establishment of independent compa-
Bayernwerk AG from the State of Bavaria, which
nies for generation, grid and distribution.
was later reduced to 38.8%. In 1994, Bayernwerk
was almost completely privatized: VIAG acquired the
State of Bavaria’s shareholding in Bayernwerk AG. (b) Group Structure and Business Activity
Since then, VIAG has held all shares with voting
rights (94.9% of the capital stock). In addition to
Bayernwerk is active along the entire energy value
VIAG AG, several Bavarian administration districts
chain and furthermore in the areas of gas and waste
and the Bayerische Landesbank are preferred share-
disposal/environmental technology. The group struc-
holders without voting rights in Bayernwerk AG,
ture is already tailored to the competitive landscape
holding 5.1% of the capital stock.
of the German and European energy industry. As an
In 1997 and 1999, Bayernwerk gave itself in the operational holding, Bayernwerk AG essentially as-
course of the liberalization of the German and sumes strategically oriented cross-section functions.
European electricity markets a completely new In addition, it is responsible for the management of
business structure with new entities consistently energy supply activities control, the allocation of
oriented along the energy value chain: generation, burdens, the electricity trading area which is led as a
transmission as well as distribution and trading. profit center as well as the group’s gas, IPP1 and
Important steps were the integration of major regional contracting activities.
Bayernwerk AG
Waste
Other
Electricity Management/
Gas Activities
Environmental
Technology
Electricity Generation
Electricity Transmission
Electricity Distribution
Electricity Trading
1)
IPP = Independent Power Producer
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 67
Business Division: Electricity which have an installed capacity of 1,284 MW and
1,288 MW, respectively. In 1998, the nuclear power
The business division electricity is subdivided into plants of Bayernwerk generated a total of 28.2 billion
the units generation (conventional power plants, kWh of electricity. With their low expenses, the
nuclear energy and hydroelectric power plants), elec- nuclear power plants are the basis for competitive
tricity transmission, electricity supply and electricity generation of electricity. Together with other opera-
trading. The electricity sold during the financial year tors of nuclear power plants, Bayernwerk is engaged
1998 amounted to a total of 68.3 billion kWh. The in discussions with the federal government regarding
electricity business division contributed almost 90% the use of nuclear energy in Germany (‘‘consensus
to the sales of Bayernwerk. More than 60% of the talks’’). The federal government is aiming for a
electricity output are generated by own power plants. compensation-free termination. The German operators
The remainder is acquired from third parties, mainly of nuclear power plants must accept the primacy of
from members its own division. political decisions, but they expect economically
Electricity Generation. Bayernwerk has a balanced acceptable periods of use for the existing power
mix of conventional, nuclear and hydroelectric power plants (see also Section 1f(1)(b) above, page ).
plant capacities. Bayernwerk’s total power plant Bayernwerk Wasserkraft AG manages the entire
capacity amounts to 11,004 MW which represents hydroelectric power activities of Bayernwerk. It is by
10% of Germany’s total installed capacity. Manage- far the largest electricity producer based on renew-
ment responsibility for the conventional power plants able energy. During 1998, a total of 8.6 billion kWh
of the group lies with Bayernwerk Konventionelle were generated from hydroelectric power.
a
W¨ rmekraftwerke AG (Bayernwerk Conventional
Thermal Power plants Corporation). Bayernwerk Energy Transmission. Bayernwerk has a modern
Kernenergie GmbH (Bayernwerk Nuclear Energy transmission grid in the high- and highest-voltage
Corporation) is responsible for the operation of the area (380 kV, 220 kV, 110 kV) with a total length of
nuclear power plants of the group. The hydroelectric about 15,000 km. It is part of the Europe-wide
power plants are combined in Bayernwerk Wasser- UCTE-Grid1. Within the Bayernwerk group,
kraft AG (Bayernwerk Water Power Corporation). Bayernwerk Hochspannungsnetz GmbH (Bayernwerk
High-Voltage Grid Corporation) is responsible for
a
Bayernwerk Konventionelle W¨ rmekraft AG operates planning, building and maintaining the high-voltage
the group-owned conventional power plants Arzberg, grid. During its reorganization in 1997 and 1998,
Franken I and Franken II, Irsching, and Zolling. It Bayernwerk combined its grids and achieved signifi-
also owns four additional power plants: The Aschaf- cant cost savings in the grid installation area.
fenburg power plant (currently in cold reserve), Currently, the entire grid of Bayernwerk is being
Ingolstadt, Pleinting and Schwandorf. It also holds reorganized and the responsibility for all voltage
minority interests in the power plants Bexbach, levels is being transferred to the grid companies.
Rostock and Lippendorf. Installed total power output
of the conventional power plants of Bayernwerk Bayernwerk offers the use of its grid to third parties
amounts to 5,536 MW (net). The fuels used are oil according to the legal provisions of the Energy
and gas 49%, hard coal 24%, heavy oil 14%, and Supply Industry Act. Thus, it provides a significant
lignite 13%. contribution to the liberalization of the electricity
market in Germany. Transmission fees for grid usage
Bayernwerk Kernenergie GmbH is the management depend on the existing agreement among integrated
company for the nuclear power plant activities of a
companies (Verb¨ ndevereinbarung) as amended
Bayernwerk. It operates the Isar I nuclear power from time to time (see Chapter II 1, page
plant with an installed capacity of 870 MW, the Isar above). For this purpose, Bayernwerk Hochspannung-
II nuclear power plant with an installed capacity of snetz GmbH set up a group-wide information office
1,365 MW and the Grafrheinfeld nuclear power plant for all questions relating to grid usage.
with an installed capacity of 1,275 MW. In addition,
Bayernwerk holds a 25% participation in the power Electricity Supply. Bayernwerk Vertriebsgesell-
blocks B and C of the Gundremmingen power plant, schaft mbH (Bayernwerk Distribution Corporation),
1)
UCTE = Union pour la Coordination du Transport
e
d’Electricit´ (Association of European Power Suppliers)
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
68 Merger Report II. Participating Companies: VIAG
incorporated on September 7, 1999, is the manage- nies in which it holds majority or minority sharehold-
ment company for Bayernwerk’s nationwide electric- ings a pro-rata amount of about 40 billion kWh of
ity supply. In response to the new market environ- gas in 1998. On the exploration/production level,
ment in Germany, the sales activities of Bayernwerk Bayernwerk holds a 25% shareholding in EEG-Erd¨ l- o
were subdivided into the business areas industrial Erdgas-Gommern GmbH and an indirect shareholding
customers, private customers and regional business. o
of 30% in Roh¨ l-Aufsuchungs AG in Austria.
The business area industrial customers is responsible
The group’s gas supply activity covers mainly
for large customers, foreign customers and resellers
Bavaria, Thuringia and Hungary. In Bavaria,
outside Bayernwerk’s traditional supply area.
Bayernwerk is active through its minority sharehold-
Customers are served by key account managers, who
ings in Bayerngas GmbH and in Ferngas Nordbayern
are supported by sales assistants. Bayernwerk entered
at the regional long distance gas transport level and
the German private customers business with its
a
through its shareholdings in Fr¨ nkische Gas-
products POWERfamily, POWERprivate and
Lieferungs-Gesellschaft mbH, Gasversorgung
AQUApower. The business area private customers
u
Unterfranken GmbH, Erdgas S¨ dbayern GmbH and
currently provides about 2.5 million customers with
Gasversorgung Ostbayern GmbH at the retail supply
its services. The business area regional business is
level. Through its shareholding in the regional gas
responsible for the business with resellers within
u
company Gasversorgung Th¨ ringen GmbH,
Bayernwerk’s traditional supply area and for munici-
Bayernwerk is active in regional gas distribution in
palities. The group’s former regional distributors – ¨ ´
Thuringia and, through its shareholding in KOGAZ,
Isar-Amperwerke AG, OBAG AG, EVO Energiever-
¨ also in regional gas distribution in south-western
sorgung Oberfranken AG, Uberlandwerke Unter-
Hungary. Furthermore, Bayernwerk is engaged in
franken AG and TEAG AG – are currently being
regional distribution in the Czech Republic through
integrated into the new sales structure of Bayernwerk
its shareholding companies in Southern Moravia,
as regional sales units. This is to ensure a uniform
Southern Bohemia and Western Bohemia.
market appearance of all sales units of Bayernwerk in
the future. The liberalization and opening up of the gas markets
has not yet achieved the level of the electricity
Bayernwerk has recently begun to establish sales markets. Still, Bayernwerk is preparing itself today to
offices in Germany and abroad. The steps taken to be able to offer its customers electricity and gas
open up new markets are being pursued consistently. ‘‘from a single source.’’ For this purpose, a linking
Electricity Trading. The liberalization of the elec- of the gas supply to the sales activities in the
tricity market in Germany has led to new market electricity division is intended (multi-utility-capacity).
structures with new market participants (such as
independent electricity dealers). Electricity trading in Business Division: Waste Management/Environ-
particular is gaining increasing importance. mental Technology
Bayernwerk reacted to this development at an early As a service-partner, Bayernwerk offers to communi-
stage and set up an electricity trading profit center in ties solutions in the areas of utilization and disposal
June 1997. A profit center handles short and medium- of waste of all kinds. The center of activities of the
term electricity trading transactions for the purpose of business division waste management/environmental
optimizing electricity procurement, sells technology is thermal waste disposal, sewage sludge
Bayernwerk’s electricity on the European markets utilization, waste water management and toxic waste
and conducts arbitrage trading. To further strengthen disposal. The management company in this business
its position in the European electricity trading, area is ReCon Projektentwicklungs- und Beteiligungs-
Bayernwerk has set up a trading floor. gesellschaft mbH, Munich (ReCon Project Develop-
ment and Shareholding Corporation).
Business Unit Natural Gas
Other Activities
Through its associated companies, Bayernwerk is also
represented in all stages of the natural gas value In addition to its activities in the electricity, gas,
chain – exploration/production, import, transport and waste management and environmental technology
storage as well as distribution and retail supply. areas, Bayernwerk also holds shareholdings outside of
Calculated on a pro-rata basis according to its o
the energy area: the steel trading company Kl¨ ckner
shareholdings Bayernwerk sold through gas compa- & Co. is part of Bayernwerk. Through VBB VIAG-
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 69
Bayernwerk-Beteiligungsgesellschaft mbH (VBB Bewag AG, Berlin 26.0%
VIAG-Bayernwerk-Shareholding Corporation), VEW AG, Dortmund 11.2%
Bayernwerk holds a shareholding in Gerresheimer LAUBAG Lausitzer Braunkohle AG,
Glas AG. Through its silent participations in VIAG Senftenberg 15.0%
Telecom Beteiligungs GmbH in which VIAG has Gas
concentrated its telecommunications activities CONTIGAS Deutsche Energie-AG, Munich 98.5%
Bayernwerk participates in the organization and Bayerngas GmbH, Munich 22.0%
earnings of the new business divisions of the VIAG Ferngas Nordbayern GmbH, Bamberg 17.0%
group. ¨ ` a
KOGAZ, N´ gykanizsa, Hungary 29.7%
Waste Disposal/Environmental Technology
(c) Main Shareholdings ReCon Projektentwicklungs- und
The following is an overview over Bayernwerk’s Beteiligungsgesellschaft, Munich 100%
main shareholdings: Other Activities
o
Kl¨ ckner & Co. AG, Duisburg 100%
Electricity Generation VBB VIAG-Bayernwerk-
Bayernwerk Kernenergie GmbH, Munich 100% Beteiligungsgesellschaft mbH, Munich 50.0%
Bayernwerk Konventionelle
a
W¨ rmekraftwerke AG, Munich 100% (d) Group Performance and Earnings
Bayernwerk Wasserkraft AG, Landshut 100%
Großkraftwerk Franken AG, N¨ rnberg
u 98.3% The following table shows the key figures for
Bayernwerk during the 1998 financial year:
Electricity Transmission/Sales
Bayernwerk Hochspannungsnetz GmbH,
Bamberg 100% EUR in millions 1998
Bayernwerk Vertriebsgesellschaft mbH, Energy output (in billion kWh) 68
Munich 100%
OBAG, AG, Regensburg 96.4% Sales 5,662
EVO Energieversorgung Oberfranken AG, EBIT 1,527*)
Bayreuth 84.2%
¨ Pretax earnings 1,278*)
u
Uberlandwerke Unterfranken AG, W¨ rzburg 55.3%
u
TEAG Th¨ ringer Energie AG, Erfurt 74.9% Total assets 19,809
Isar-Amperwerke AG, Munich 86.8%
´ ´ Investments 2,466
e
DEDASZ, P´ cs/Hungary 87.1%
TIT ´
´ ASZ, Debrecen/Hungary 80.2% Employees (as of December 31) 17,360
´ ´ o
EDASZ, Gy¨ r/Hungary 27.4%
Watt AG, Zurich/Switzerland 24.5% *) without telecommunications losses
Integrated Companies and Primary Energy Compared with the corresponding period of the
VEAG Vereinigte Energiewerke AG, Berlin 22.5% previous year, Bayernwerk showed the following key
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
70 Merger Report II. Participating Companies: VIAG
figures for the first three quarters of the financial the stock exchanges in Munich and Frankfurt am
year: Main.
1st to 3rd 1st to 3rd (a) Corporate History and Development
EUR in millions quarter 1998 quarter 1999
Energy output (in billion 53 56 In 1908, SKW Trostberg AG was incorporated as
kWh) ‘‘Bayerische Stickstoff-Werke Aktiengesellschaft’’
(Bavarian Nitrogen-Works Corporation). The location
Sales 4,079 4,067*) Trostberg – about 100 km east of Munich – was
EBIT**) ***) 1,177 1,496 chosen to utilize the water power of the river Alz to
generate electricity for the energy-intensive produc-
Pretax earnings**) 987 922 tion of calcium cyanamid as fertilizer. Today, the
Investments 673 863 company has its registered offices, its headquarters
and essential production facilities in Trostberg, Upper
Employees (as of 17,466 15,680
Bavaria.
September 30)
In 1923, VIAG acquired all shares of Bayerische
*) including electricity tax of EUR 77 million Kraftwerke AG, which cooperated with Bayerische
**) without telecommunications losses Stickstoff-Werke AG. During the course of the
***) The increase in earnings before interest and tax is combination of material parts of both companies in
due to shifts in provisions set aside for disposal 1939, Bayerische Kraftwerke AG was renamed to
purposes due to new estimates and information. This
u
‘‘S¨ ddeutsche Kalkstickstoff-Werke AG’’ (Southern
resulted in a significant relief for earnings before
interest and tax and a burden on interest income.
German Lime-Nitrogen Works Corporation, SKW).
As a result of the combination, VIAG with about
In the last quarter, the competition in the electricity 70% and I.G. Farbenindustrie AG with about 30%
market has intensified, particularly in the private were the shareholders. After 1945, the specialty
customer business. Electricity prices dropped accord- chemicals program was created and in 1966 building
ingly, and in some cases significantly. The first nine chemicals were taken on. Since 1978, the company
months’ sales at EUR 4.1 billion nearly equaled the has been named SKW Trostberg AG.
previous year’s sales figures. Electricity sales in-
The internationalization of SKW was boosted signifi-
creased by 6% to 56 kWh (previous year: 53 billion
cantly in early 1995 through the acquisition of food
kWh). Gas sales were also increased. With 9 billion
additives producer SBI Systems Bio-Industries S.A.
kWh the figures were slightly above the previous
(today: SKW Biosystems S.A., Paris). In the same
year’s sales level. The loss in earnings resulting from
year, VIAG, as the sole shareholder at that time,
price reductions was compensated (however in the
initiated an initial public offering of SKW, but
short term not in full) by efficiency increases in
retained the majority of the shares. At the end of
electricity generation and transmission. Pre-tax in-
1996, SKW acquired the Master Builders Technolo-
come thus did not achieve the previous year’s high
gies group from Sandoz and thus became the global
level. Due to pricing conditions it is to be expected
market leader for building chemicals. In 1999, SKW
for the full year that earnings will continue to
acquired the American aroma producer Alex Fries,
decline.
the world’s largest lecithin producer Lucas Meyer,
the building chemicals activities of Harris Specialty
(2) Chemicals: SKW Trostberg AG Chemicals and the Oleochemicals and Derviates
Group (ODG) of the American Witco Corp.
SKW Trostberg Aktiengesellschaft, Trostberg (‘‘SKW
Trostberg AG’’, ‘‘SKW AG’’), is one of the world’s VIAG’s chemical division was reorganized in 1999.
leading specialty chemicals companies. The more The formerly independent chemical companies of
than 200 companies of the SKW group are active in VIAG – SKW Trostberg and Goldschmidt – were
50 countries. The group employs almost 17,500 combined into a single chemicals group. Today,
employees and – including the most recent acquisi- Goldschmidt AG is the company of the SKW group
tions – will achieve sales of about EUR 3.6 billion. responsible for performance chemicals and has been
VIAG holds 63.7% in SKW. The remaining shares integrated into the group through a control and profit
are widely held. The shares of SKW AG are listed at and loss transfer agreement.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 71
(b) Group Structure and Business Activity well as in the chemical pharmaceutical industries in
Europe, the United States, and increasingly world-
SKW has four business divisions, which are subdi- wide. The ongoing trend towards health-conscious
vided into a total of 17 business units with individual nutrition offers a good basis for future growth. In salt
responsibility for sales and earnings.
SKW Trostberg AG
Natural Chemicals Construction Performance
Substances Chemicals Chemicals
– ASTA
Medica
– Gelatine & – Fine- and – Construction- – Oligomers/
Dental
– Specialties Special and Oil-Field Silicones
Futtermittel-
– Salt Chemicals Polymers – Surfactants
additive
Products – Agro- and – Germany – Industrial
Scockhausen
– Texturants Industrial – America Chemicals
– Aromas & Chemicals – Asia/Pacific
Fruit Systems – Metallurgical – Japan
– Cultures & Chemicals
Enzymes
Natural Products Division products, the group offers a wide range of applica-
tions, from home and industrial products to road salt
This division with its business units Gelatin &
used in clearing snow and ice. The activities of this
Specialties, Texturants Systems, Cultures & Enzymes
business division are limited to Southern Germany
as well as Flavors & Fruit Preparations is one of the
and neighbouring countries.
world’s leading suppliers of natural substances and
natural substance-based specialties for the interna-
Chemicals Division
tional food, photo, and pharmaceutical industries. It is
the largest producer of gelatin worldwide and also SKW’s Chemicals Division is subdivided into three
occupies leading market positions in its other busi- business unit: Specialty and Fine Chemicals, Agro
ness areas. Biotechnology and biochemistry are be- and Industrial Chemicals and Metallurgical Chemi-
coming increasingly important for the low-cost and cals. In 1998, this business division achieved about
environmental-friendly production of food additives. 25% of SKW’s group sales.
The Natural Products Division will consistently use
the resulting opportunities in the development of Specialty and Fine Chemicals. The Specialty and
products and processes. In addition, the division is Fine Chemicals unit supplies high-quality chemicals
Germany’s largest salt supplier (brand: ‘‘Bad as starting product for pharmaceuticals, food addi-
Reichenhaller Markensalz’’). In 1998 (prior to the tives, cosmetics, paints, coatings, plastics, textile and
combination of SKW and Goldschmidt) it contributed leather tanning aids, as well as pesticides. Target
about 29% to the sales of SKW. customers are large, global life-science companies.
Regional emphasis is on Europe and the U.S.A.
The Natural Products Division supplies its products Furthermore, the specialty and fine chemicals busi-
to large companies in the food and pharmaceutical, as ness area maintains a successful niche policy through
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
72 Merger Report II. Participating Companies: VIAG
the expansion of its NCN-chemicals (cyanamid- and tion Chemicals Division was able to further
nitril-derivatives). In this business area, SKW occu- strengthen its position as market leader significantly.
pies a leading position among its international
Its core abilities include concrete technology, tunnel-
competitors.
and underground mining construction, cement-bound
Agro and Industrial Chemicals. The business unit products for expansion, repair and modernization,
Agro and Industrial Chemicals produces a wide range furthermore sealing and coating systems along with
of fertilizers; this includes calcium cyanamide as an paints and coatings.
environmental-friendly special fertilizer, solid and liq-
uid fertilizers based on urea and ammonium nitrate Performance Chemicals Division
urea-solutions to sulfur-containing and anti-nitrification The Performance Chemicals Division is managed by
special fertilizers. This business area offers processing Goldschmidt AG. It is an important supplier of
chemicals such as ammonia, technical urea (prilled), chemical specialties which are used as surface-active
nitric acid and de-nitrification substances for exhaust additives in a wide range of industrial applications.
gas from power plants to the chemicals industry. This Goldschmidt’s activities reach far beyond the German
business unit not only supplies the domestic market borders: it has a network of sales companies which
for fertilizers with its agricultural and industrial regularly represent all business areas. Outside Ger-
chemicals, but also the international chemical industry, many, Goldschmidt has production facilities in the
particularly in Europe and the U.S.A. U.S.A., Great Britain, Italy, Indonesia and Brazil.
Metallurgical Chemicals. The Metallurgical Chem- Oligomeres/Silicones. The business unit
icals business unit with its chemical special products oligomeres/silicone acts as a global supplier of
and its technical service is a partner to the interna- additives, process aids and intermediates based on
tional steel industry and iron foundries. SKW has a modified silicones and organic oligomeres. The prod-
globally leading position both in respect to the ucts of the areas polyurethane additives, silicones as
desulphurization of pig iron and in respect to cored well as paint and coating additives are used, among
wires. This business area also provides a wide others, as stabilizers in polyurethane foam, as surface
product range of powders for extrusion casting for and disperging additives in paints and coatings, as
the steel and foundry industry. In metallurgical separators and de-foamers in a variety of applications
chemicals, SKW occupies a strong market position as and in the manufacturing of separation coatings.
a system supplier directly overseeing parts of its
customers’ production process with its comprehensive Surfactants. The business unit surfactants develops,
equipment. In 2000, new production facilities in produces and sells surfactant specialties based on
Brazil and India will go into operation. regrowing raw materials and organically modified
silicone compounds. Its wide product range, which
Construction Chemicals Division was strengthened in 1999 through the acquisition of
the ODG3-activities from the American Witco group,
The Construction Chemicals Division (‘‘SKW-MBT’’) includes emulsifiers and stabilizers for different appli-
originated from the Master Builders Technologies – cations as well as mild detergent substances for
the construction chemicals activities of the former cosmetics and household products.
Sandoz group – and the PCI group of SKW. In 1998,
Industrial Chemicals. The business unit industrial
it accounted for 47% of the sales of SKW (excluding
chemicals deals with the development, production and
Goldschmidt). SKW-MBT is the world market leader
distribution of tin, zinc, and copper compounds,
for construction chemicals. No other supplier world-
sulphuric and hydrochloric acid as well as sulfides
wide has a comparably wide and deep product range
and thiosulfates. Important applications are metal
in the areas new construction, repair and moderniza-
surface coatings, catalyst technology, leather manu-
tion. SKW-MBT ships its products from more than
facturing and the photo and film technology.
100 locations to more than 50 countries. With a
system of customer-specific products and project- During the 1998 financial year, the sales of
oriented application advice, it offers a complete Goldschmidt – excluding sales from the sold environ-
service for the construction industry. By acquiring the mental technology business unit – amounted to about
business activities of Harris Specialty Chemicals Inc. EUR 380 million. This constitutes 13% of VIAG’s
in March of 1999, one of the leading construction chemicals division sales (in its form existing at that
chemicals manufacturers in the U.S.A., the Construc- time).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 73
(c) Substantial Shareholdings first nine months of the 1999 financial year as
follows (pro-forma key figures):
Goldschmidt AG, Essen 95.5%
PCI Augsburg GmbH, Augsburg 100% 1st to 3rd 1st to 3rd
EUR in millions quarter 1998 quarter 1999
SKW Stickstoffwerke Piesteritz GmbH,
Lutherstadt Wittenberg 100% Sales 2,624 2,544
Master Builders, Inc., Cleveland, USA 100%
MBT (Schweiz) AG, Zurich, Switzerland 100% EBIT 237 218
SKW Biosystems S.A., Paris, France 100% Pretax earnings 178 158
(d) Group Performance and Earnings Investments 165 642
As of December 31, 1998, the SKW group – taking
into account the combination of SKW and Employees (as of 20,031 17,332
Goldschmidt – showed the following pro-forma key September 30)
figures:
During the first nine months of 1999, sales of the
EUR in millions 1998 VIAG chemicals division dropped by 3% to
EUR 2.5 billion (previous year: EUR 2.6 billion) due
Sales 3,384 to changes to the scope of consolidation. Adjusted for
disinvestments and acquisitions, the sales were at the
EBIT 258 previous year’s level. Due to higher goodwill write-
offs and lower extraordinary income items from the
Pretax earnings 228 sale of real estate and shareholdings, pre-tax income
was below the previous year’s level. This develop-
Total assets 3,318 ment also applies to the full year.
Investments 271 (3) Telecommunications: VIAG Telecom
Beteiligungs GmbH
Employees (as of December 31) 18,937
The Telecommunications Division comprises the
Compared with the corresponding period of the shareholdings in VIAG INTERKOM GmbH & Co.,
previous year, SKW Trostberg performed during the u
Connect Austria Gesellschaft f¨ r Telekommunikation
mbH and Orange Communications S.A. All share-
holdings are held through VIAG Telecom
Beteiligungs-GmbH. In November 1999, VIAG
Telecom received a cellular telephone license for
Liechtenstein.
VIAG Telecom
Beteiligungs GmbH
Connect Austria Orange
VIAG Interkom
GmbH, Wien Communications S.A.,
GmbH & Co., München
Lausanne
45.0 % 30.0 %
42.5 %
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
74 Merger Report II. Participating Companies: VIAG
(a) VIAG INTERKOM GmbH & Co. The mobile telephone network of VIAG Interkom has
about 6,200 base stations and reaches about 75% of
VIAG INTERKOM GmbH & Co. (‘‘VIAG the population in Germany. The network is character-
Interkom’’) is a joint venture of VIAG, British ized by high reachability, even inside buildings, and a
Telecom and the Norwegian Telenor. Through VIAG voice transmission quality which is close to that of
Telecom Beteiligungs-GmbH, VIAG holds 45% of fixed lines. Outside the VIAG-Interkom network, a
the shares. roaming agreement with Deutsche Telekom AG
ensures complete service coverage. The mobile tele-
Corporate History and Development phone business generated the biggest portion of
VIAG Interkom’s sales, accounting for 45% of
VIAG Interkom was established in 1995. In May VIAG Interkom’s total sales in 1999. According to
1997, the company received the license to install and the plans, the sales portion is to increase to 65% after
operate the fourth digital mobile telephone network in 2000.
Germany (‘‘E2-Network’’). By the end of 1998,
VIAG Interkom had developed a complete program Internet services for private customers are offered
of telecommunications products for the areas fixed under the brand name ‘‘planet-interkom.’’ Business
line, mobile telephony and Internet. It is the com- customers are offered permanent and dial-up connec-
pany’s goal to achieve a market share of more than tions, as well as web-site services (such as hosting
8% of the telecommunications market in Germany by and housing).
the year 2003. This corresponds to sales of about
EUR 5 billion. According to existing plans, total Business customer services benefit from the increas-
investments until the year 2006 will amount to ing market volume in the data transmission services
EUR 6 billion, 27% of which will have been segment, which VIAG Interkom offers through sev-
completed by the end of 1999. VIAG Interkom eral products, also in connection with its partners
strives to break even in 2001. British Telecom and AT&T (Concert).
Business Activity
Shareholdings
VIAG Interkom fully meets the telecommunications
requirements of its private and business customers. Its VIAG Interkom holds 100% in Bayernwerk Netkom
product range is based on its own fixed-line and GmbH. Since the deregulation of the telecommunica-
mobile telephone infrastructure with direct access to tions market in Germany beginning mid-July 1996,
the end customer. VIAG Interkom owns a glass fiber Bayernwerk Netkom has had the permission to give
network of 11,000 km and 1,400 km of microwave third parties access to the network of Bayernwerk. In
link. addition, Bayernwerk Netkom plans, builds and
operates customer-owned networks and holds share-
In the fixed-line business, VIAG Interkom sold holdings in six city networks (among others in
between 10 and 12 million minutes of telephone time u u
Munich, N¨ rnberg and W¨ rzburg). In addition to its
per day during October 1999, which makes it one of shareholding in Bayernwerk Netkom, VIAG Interkom
Germany’s largest providers. The ratio of pre-select holds a 50% shareholding in Bertelsmann Game
customers and call-by-call customers is 40:60. In the Channel GmbH & Co. KG, which distributes online
local network, VIAG Interkom intends to connect and computer games and organizes Internet
customers directly to its network through point-to- communities.
multipoint microwave-link. After the frequency allo-
cation in August 1999, the expansion of the connec-
tion network will be further pursued in order to have ¨
(b) Connect Austria Gesellschaft fur
a network which covers almost all of Germany, Telekommunikation mbH
particularly for business customers. In the private
customer area, VIAG Interkom offers a service to its u
Connect Austria Gesellschaft f¨ r Telekommunikation
customers with its ‘‘Genion’’ product, which enables a
mit beschr¨ nkter Haftung (‘‘Connect Austria’’) is a
an integration of mobile telephone and fixed-line joint venture in which VIAG, the Austrian RHI
services. In addition, VIAG Interkom offers fixed-line group, the Norwegian Telenor group, the British
in selected areas. Orange plc. and the Danish Tele Dankmark hold
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 75
shares. VIAG holds 30%1 of the shares in Connect 200,000 subscribers. The break even is expected to
Austria. Supported by its internationally experienced occur in 2002. Important competitors are Swisscom
partners having know-how from planning, installing and Diax Mobile S.A. with registered offices in
and operating mobile telephone networks in thirteen Zurich.
countries with several million customers, the com-
pany is building the most modern mobile telephone (d) Group Performance and Earnings
network in Austria. It offers its telecommunications
services under the brand name ‘‘one’’ and reaches The following table shows the important key figures
more than 90% of the population in Austria with its of VIAG Interkom for the financial year 1998:
mobile phone services. Within one financial year,
EUR in millions 1998
Connect Austria succeeded in securing a market share
of about 12% through the introduction of innovative Sales 201
and simple rate structures, many new products and
better voice quality than the competition. In the 1999 EBIT –600
financial year, it invested about EUR 900 million
which makes it the largest private investor in Austria Pretax earnings –597
since 1945. It expects to reach the break even point
in 2001. Total assets 1,295
The Austrian mobile phone market is currently Investments 851
experiencing one of the highest growth rates in
Europe. In the medium term, Connect Austria is Employees (as of December 31)) 3,836
striving for a market share of 25% of the mobile
phone market.
Compared with the corresponding period of the
previous year, VIAG Interkom performed as follows
(c) Orange Communications S.A.
during the first nine months of the financial year
The Swiss Orange Communications S.A. (‘‘Orange 19991:
Communications’’) was jointly incorporated in 1998
1st to 3rd 1st to 3rd
by the British mobile phone operator Orange plc. and quarter quarter
VIAG. Since then, Banque Cantonale Vaudoise and EUR in millions 1998 1999
Swissphone Engineering AG have acquired shares.
Sales 119 475
VIAG and the Orange group each hold 42.5% of the
company’s shares. In May 1998, the company was
EBIT –523 –626
awarded a mobile network license for a nationwide
digital mobile telephone network based on the GSM Pretax earnings –523 –625
1800 standard in Switzerland by the Swiss Communi-
cations Commissions. Investments 479 416
The company started operating its mobile telephone
network in June 1999. With the start of its network, Employees (as of 2,982 3,921
Orange Communications achieved population cover- September 30)
age of about 90% (with the help of a roaming
agreement with Swisscom) with its own network At the end of September 1999, VIAG Interkom had
coverage of about 65%. The company plans to invest signed up about 480,000 mobile telephone subscrib-
a total of EUR 1.3 billion into the expansion of the ers. By the end of the year, the company intends to
mobile telephone network by 2008 and strives for a significantly exceed the original goal of 700,000
market share of about 30% in the strongly growing subscribers. In October 1999 alone, the company
Swiss mobile telephone market. As of December 31, solicited 101,451 new subscribers. By the end of
1998, 359 employees were engaged in building up 1999, 850,000 subscribers and EUR 303 million in
the company and the network. Early November 1999, sales (including mobile phones) shall be achieved.
Orange Communications had signed up about Compared with the previous year, VIAG Interkom’s
1) 1)
Presumably as from December 27, 1999 VIAG Interkom on a 100% basis
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
76 Merger Report II. Participating Companies: VIAG
sales tripled during the first nine months. On a the first production site, the Lauta factory in the
prorated basis (VIAG shareholding), it amounted to Lausitz, went into operation. During 1923, VIAG
EUR 214 (previous year: EUR 53 million). At the acquired the shares of the company from the
end of the third quarter, Connect Austria had about Deutsche Reich. After the Second World War, VAW
300,000 mobile telephone customers. During the first resumed its aluminum production in 1948. During
three months after market entry, Orange Communica- 1965, VAW established its first overseas subsidiary,
tions was able to sign up 140,000 mobile telephone V.A.W. of America Inc. In 1966, VAW acquired a
customers. For full-year 1999, prorated startup losses shareholding in Compagnie des Bauxites de Guin´ e e
for the VIAG group from the telecommunications and secured for itself a supply quota of about
activities in Germany, Austria and Switzerland of e
1.2 million tons Bok´ -bauxite annually from one of
approximately EUR 485 million (prior year: the world’s largest bauxite mines. In 1967, Alumin-
EUR 280 million) are expected. ium Norf GmbH began operation of a rolling mill
which is still the world’s largest today, in which
(4) Aluminum: VAW aluminium AG VAW and Alcan Deutschland GmbH, Eschborn, each
VAW aluminium Aktiengesellschaft, Bonn (‘‘VAW hold a 50% stake.
AG’’) is the management company of the Aluminum The acquisition of the aluminum activities of the
Division. VAW is active in the production and u
Eisenwerke Br¨ hl GmbH in 1992 were the basis for
processing of aluminum into innovative, high-quality the engine casting activities of VAW. Since the first
products. In each of its core business areas – acquisition of shares in Strongpack Public Company
aluminum, rolled products, flexible packaging and Ltd., Thailand, VAW has developed into one of the
engine casting – the group holds a top position in leading suppliers of flexible packaging in the South
Europe. The foundation for its high performance East Asian markets with associated companies in
production is its proprietary metal base with alumi- Thailand, Indonesia, the Philippines and the People’s
num smelters in Germany and abroad, which also Republic of China. In 1998, VAW acquired three
supply aluminum to the processing operations. VIAG European rolling mills from the American Reynolds
holds 99.9% in VAW. group.
(a) Corporate History and Development
(b) Group Structure and Business Activity
The company was incorporated in 1917 as ‘‘Vereinigte
Aluminium-Werke Aktiengesellschaft’’ (United The business activity of VAW is divided into four
Aluminum Works Corporation) in Berlin. In 1918, business units:
VAW aluminium AG
Primary Rolled Automotive Flexible
Materials Products Products Packaging
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 77
Primary Materials Business Unit heads to the automotive industry. It manufactures
engine blocks using pressure die casting, sand casting
VAW holds stakes in aluminum smelters in Germany,
and gravity die casting procedures. Cylinder heads
Australia and Canada. VAW holds 12.4% of the
are manufactured using highly modern procedures
Australian Tomago Aluminium Company Pty. Ltd.,
such as the rotacast procedure. VAW owns aluminum
and 20% of the Canadian Aluminerie Alouette Inc. In
foundries in Germany, Austria, England and Hungary.
Germany, VAW operates the ‘‘Rheinwerk’’ alumi-
In 1998, VAW entered the American automotive
num smelters near Neuss and ‘‘Elbewerk’’ in Stade
supply market through a joint venture with Seprosa/
and holds a 33.3% shareholding in Hamburger
Cifunsa in Mexico. The Automotive Products busi-
Aluminium-Werk GmbH. VAW also holds 50% of
ness unit is characterized by a variety of products,
the shares in Aluminium Oxid Stade GmbH. Further-
broad technology and modern manufacturing meth-
more, VAW is operating partner of the smelters in
ods. In addition to aluminum engine blocks and
Canada and Hamburg as well as of the oxide plant in
cylinder heads, the product range of the Automotive
Stade. Through Halco (Mining) Inc., VAW holds a
Products business unit today includes the supply of
5% shareholding in one of the world’s largest bauxite
components such as airbags, seat shells, heat shields,
mines in Guinea. The smelters produce primary
axles brackets and heat exchangers, the starting
aluminum, which mainly supplies the own processing
material for aluminum sheet wheels, and chassis
capacities. In addition, VAW supplies aluminum
components. This ensures a strong market position in
processors in Germany and abroad. In addition to the
Europe. This business unit contributed approximately
production of primary aluminum, VAW is also active
9% to the division’s total sales.
in aluminum oxide, purest aluminum and cast alloys.
The Primary Materials business unit accounted for Business Unit: Flexible Packaging
approximately 19% of the division’s total sales in
1998. The business unit Flexible Packaging produces flexi-
ble compound packaging consisting of aluminum and
Rolled Products Business Unit plastics as well as aluminum and paper in Europe
and Asia and markets worldwide. The products are
With locations in Grevenbroich, Hamburg, Irurzun used for dairy products, other food products,
(Spain) and Cisterna di Latina (Italy), VAW has a pharmaceuticals as well as technical applications. In
European network of four rolling mills. In addition, Europe, VAW manages three companies with a total
VAW has a 50% shareholding in the world’s largest of five production sites; this makes VAW one of the
hot- and cold-rolling mill, Aluminium Norf GmbH in three largest flexible packaging producers in Europe.
Neuss. Today, VAW is the second largest aluminum In Asia, VAW manages four companies with seven
rolling company in Europe. The business unit Rolled factories in Indonesia, on the Philippines, in Thailand,
Products produces aluminum foils and strips for use and in the People’s Republic of China. This makes
in packaging, automotive and transporting business, VAW one of the largest international suppliers of
as beverage cans, offset printing plates and heat flexible packaging materials in South East Asia.
exchangers as well as the construction and leisure Flexible Packaging generated approximately 16% of
industries. The foils are used in flexible packaging of the division’s total sales in 1998.
food and pharmaceuticals as well as for technical
applications. This business unit accounted for approx- Other business activities, particularly the Zarges
imately 45% of the division’s total sales in 1998. group, contributed approximately 11% to the divi-
sion’s total sales.
Business Unit: Automotive Products
VAW is among the world’s largest independent
suppliers of aluminum engine blocks and cylinder
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
78 Merger Report II. Participating Companies: VIAG
(c) Main Shareholdings The aluminum price, which until the middle of the
year remained below the previous year, resulted in a
The following list provides an overview of the main decrease in VAW’s nine-month sales of 7% to
shareholdings of the Aluminum Division: EUR 2.1 billion (previous year: EUR 2.3 billion).
Nonetheless, income at the end of the third quarter
Aluminium Norf GmbH, Neuss 50.0% exceeded the high level of the previous year due to
Aluminium Oxid Stade GmbH, Hamburg 50.0% the metal price recovery, increased sales and cost
Hamburger Aluminium-Werk GmbH, reductions. Due to positive market conditions, VAW
Hamburg 33.3% should exceed the previous year’s record income.
VAW-IMCO Guß und Recycling GmbH,
Grevenbroich 50.0% (5) Packaging: Schmalbach-Lubeca AG and
Zarges Leichtbau GmbH, Weilheim 75.0% Gerresheimer Glas AG
Aluminerie Alouette Inc., Sept-Iles, Canada 20.0%
Castech S.A. de C.V., Coahuila, Mexico 50.0% VIAG’s Packaging Division comprises VIAG’s ma-
Strongpack Public Company Ltd., Bangplec, jority shareholdings in Schmalbach-Lubeca AG and
Thailand 49.0% in Gerresheimer Glas AG. Both companies hold
Tomago Aluminium Company Pta. Ltd., market leading positions in their respective business
Australia 12.4% fields. They have one of the world’s broadest
V.A.W. of America, Inc., Ellenville, USA 100% production programs for packaging for food and
beverage as well as pharmaceuticals and cosmetics.
(d) Group Performance and Earnings
(a) Schmalbach-Lubeca AG
The following table shows the key figures of VAW Schmalbach-Lubeca Aktiengesellschaft
for the 1998 financial year: (‘‘Schmalbach-Lubeca AG’’) is active in the develop-
ment, production and distribution of PET-packaging1,
EUR in millions 1998 beverage cans and white cap closures. The company
Sales 2,947 has its registered offices in Ratingen. VIAG holds
59.8% of the company.
EBIT 270
Pretax earnings 209 aa) Corporate History and Development
Total assets 2,373 The company was incorporated in 1898 under the
name ‘‘J. A. Schmalbach Blechwarenfabriken’’
Investments 280
(J. A. Schmalbach Sheet Metal Products Factory) and
Employees (as of December 31) 17,571 initially manufactured metal cans for the preservation
of asparagus. In the following years, the product
Compared with the previous year’s period VAW range was significantly expanded. In 1935, Continental
performed as follows during the first three quarters of Can Company, USA, acquired an interest in the
the 1999 financial year: company, which was merged with Lubecawerke
GmbH in 1967 into Schmalbach-Lubeca-Werke AG.
1st to 3rd 1st to 3rd In 1991, VIAG acquired the majority of the shares in
EUR in millions quarter 1998 quarter 1999 Schmalbach-Lubeca. Thereafter, Schmalbach-Lubeca
Sales 2,296 2,140 acquired the shares in its European sister companies
and shortly afterwards the shares in Continental
EBIT 237 249 White Cap, Inc. in the U.S.A.
Pretax earnings 188 216 In the years 1996 and 1997, Schmalbach-Lubeca
Investments 220 89 completely restructured its portfolio. The plastic
packaging unit was sold; the PET activities of
Employees (as of 18,173 17,857
Johnson Controls with factories in Europe, the U.S.A.
September 30)
and Latin America were acquired. The companies of
1)
PET = Polyethyleneterephtalat
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 79
the Johnson Controls PET segment are among the Business Unit: Beverage Cans
pioneers in the PET industry. Taking into account the
The business unit beverage cans achieved 38% of the
increasing consolidation of the market for metal
group sales of Schmalbach-Lubeca in the 1998
packaging, Schmalbach-Lubeca contributed the busi-
financial year. It includes the development, produc-
ness unit metal packaging (food cans and chemical-
tion and distribution of beverage cans made from tin
technical packaging) into a joint venture with the
plate and aluminum, as well as the production of the
French Pechiney group and a British financial inves-
lids. The production sites are concentrated in Ger-
tor. Schmalbach-Lubeca holds 20% of the shares in
many, Great Britain, France, Poland, the Netherlands
this company.
and the People’s Republic of China. Since Au-
gust 1998, a production site exists in the Czech
bb) Group Structure and Business Activity
Republic. In addition, the business unit maintains a
Schmalbach-Lubeca has divided its operational activi- research and development facility in Bonn.
ties into the three business units PET packaging, Schmalbach-Lubeca is the second largest producer of
beverage cans and white cap closures. The areas PET beverage cans in Europe.
packaging and white cap closures were regionally
subdivided (Europe/Asia and America). In addition, Business Unit: White Cap
Schmalbach-Lubeca operates research and develop- With the white cap business unit (19% of group sales
ment facilities which are allocated to the three in the 1998 financial year), Schmalbach-Lubeca
business units.
Schmalbach-Lubeca AG
PET- Beverage White Cap-
Packaging Cans Closures
is the world’s leading producer of vacuum closure
Business Unit: PET Packaging
systems for glass and plastic containers. In 16
The PET packaging business unit which contributed production sites worldwide, vacuum closures are
43% of the group sales of Schmalbach-Lubeca in made of metal and plastic for various foods and
1998 is active in the development, production and beverages. In addition to closure production, closing-
distribution of packaging made of polyethyleneter- machines are distributed and supplied to customers
ephtalat, primarily for the food and beverage indus- with comprehensive service.
tries. Schmalbach-Lubeca is world market leader in
Traditional segments for white cap closure systems
this business sector. With two efficient research and
are baby food, jams, pickled preserves, juices and
development facilities in France and in the U.S.A.,
sauces.
proprietary patents and a license granted by a
Japanese manufacturer, Schmalbach-Lubeca has an
excellent position for opening up new market seg-
ments for PET packaging.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
80 Merger Report II. Participating Companies: VIAG
cc) Main Shareholdings Due to the decrease of raw material prices as well as
the weak condition of the eastern European market
The following list provides an overview of the main and the currency crisis in Brazil, sales fell by 8% to
shareholdings of Schmalbach-Lubeca AG: EUR 1.5 billion (previous year: EUR 1.7 billion).
However, income was above the previous year,
Schmalbach-Lubeca PET Containers supported by the successful restructuring of the PET
Europe GmbH, Eschborn 100% activities in the U.S.A. and performance improve-
Continental Can Company Ltd., Chester, ments in the beverage cans business. For full-year
England 90.0% 1999, an income improvement is also expected.
Continental Can France S.A., Bergues,
France 100% (b) Gerresheimer Glas AG
Schmalbach-Lubeca Plastic Containers, u
Gerresheimer Glas Aktiengesellschaft, D¨ sseldorf
Inc., Delaware, USA 100% (‘‘Gerresheimer Glas AG’’) is among the large
White Cap Inc., Delaware, USA 100% international producers of tubing, specialty, and
container glass. VIAG holds direct and indirect
shareholdings in Gerresheimer Glass totaling 72.2%.
dd) Group Performance and Earnings Situation
aa) Corporate History and Development
The important key figures of Schmalbach-Lubeca for
the 1998 financial year were as follows: Gerresheimer Glas AG was incorporated in 1864
under the name of ‘‘Ferd. Heye’’. It has been a stock
EUR in millions 1998 corporation since 1888.
Sales 2,111 From 1959 until 1985, the company was majority-
owned by Owens Illinois Inc., USA, one of the
EBIT 139 world’s leading container glass companies, which
eventually held 80% of the shares. In 1985, Owens
Pretax earnings 63 Illinois sold the majority of the shares in Ger-
resheimer Glas. The shares were placed on the stock
Total assets 2,119 exchange by WestLB. Beginning in the mid-eighties,
Gerresheimer Glas began building up the business
Investments 286
areas pharmaceuticals and cosmetics through strategic
acquisitions. In 1990, VIAG together with
Employees (as of December 31) 8,776
Bayernwerk acquired 51% of the shares in Ger-
resheimer Glas AG.
The following key figures show Schmalbach-Lubeca’s
From the middle of the 1980s, Gerresheimer Glas
performance during the first nine months of the 1999
increasingly focused on the special segments cosmet-
financial year (compared with the corresponding
ics and pharmaceuticals. Through selective acquisi-
period of the previous year):
tions, the areas cosmetics packaging and individual
1st to 3rd 1st to 3rd glass packaging were strengthened and the market
quarter quarter position in the pharmaceuticals market was expanded.
EUR in millions 1998 1999
In 1999, Gerresheimer Glas AG sold its standard
Sales 1,681 1,553 container glass business to a joint venture of the
French Groupe Danone and the financial investor
EBIT 91 137 CVC Capital Partners S.A. This laid the foundations
for its development into a specialty company for
Pretax earnings 36 77 pharmaceutical, laboratory, cosmetics, and small
container glass packaging.
Investments 188 229
bb) Group Structure and Business Activity
Employees (as of 8,907 8,666
September 30) In its business areas tubing glass, specialty glass and
container glass, Gerresheimer Glas AG is among the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 81
world’s leading suppliers, particularly in the Compared with the corresponding previous year’s
pharmaceuticals, laboratory supplies and cosmetics period, Gerresheimer Glas shows for the first nine
segments. In tubing and specialty glass, the company months of the financial year 1999 as follows:
is the worldwide leader; in container glass, it is
among the most important European producers. Pro- 1st to 3rd 1st to 3rd
duction takes place at 18 European and American EUR in millions quarter 1998 quarter 1999
locations. Almost 70% of sales are achieved abroad, Sales 631 598
particularly in Europe and North America. The
EBIT 30 38
business unit tubing glass manufactures glass tubes as
starting products for different glasses as well as glass Pretax earnings 11 34
specialties with high added value. Main products of
Investments 75 44
tubing glass are ampoules, laboratory glass and
syringe systems. Employees (as of 8,374 6,283
September 30)
After the sale of the standard container glass unit as
of August 1, 1999, the activities of Gerresheimer At EUR 0.6 billion, sales for Gerresheimer Glas after
Glas in the container glass business area have been the first nine months were slightly below the previous
concentrated on four production facilities in Ger- year’s level. The proceeds from the sale of the
many, and one facility in Belgium. In these produc- standard beverage container business led to an
tion facilities, glasses are produced for the cosmetic increase in income. For the entire year, improved
and pharmaceutical industry as well as small earnings compared with the previous year are also
container glass. With the sale of the standard expected.
container glass activities, Gerresheimer Glas became
a pure manufacturer of special glass for pharmaceuti- o
(6) Other Activities: Kl¨ ckner & Co. AG
cal, cosmetics, beverage and food packaging.
o
After the reorientation of VIAG during 1998, Kl¨ ck-
cc) Main Shareholdings ner & Co. no longer is among VIAG’s core business
activities. Currently, VIAG’s shares are held through
Main shareholding companies of Gerresheimer Glas o
Bayernwerk AG holding 100% of Kl¨ ckner & Co.
AG are: AG.
u u
B¨ nder Glas GmbH, B¨ nde 100% (a) Corporate History and Development
Spessart Glas GmbH, Lohr 100%
Tettauer Glash¨ ttenwerke AG, Tettau
u 100% o o
Kl¨ ckner & Co. Aktiengesellschaft (‘‘Kl¨ ckner &
Kimble USA Inc., Vineland, USA 100% Co. AG’’) was incorporated in 1906 by Peter
Nouvelles Verreries de Momignies S.A., o
Kl¨ ckner as an iron trading company. During the
Momignies, Belgium 60.0% following decades, it developed into an internation-
ally renowned trading house which covers almost all
areas of the trade relating to the coal, iron and steel
dd) Group Performance and Earnings
industries (steel, chemicals, coal, raw materials etc.).
As of December 31, 1998, Gerresheimer Glas showed o
Until the end of the eighties, Kl¨ ckner & Co. was
the following important key figures for the group: family owned. In 1990, the company was acquired by
o
VIAG and Bayernwerk. Today, Kl¨ ckner & Co. is
EUR in millions 1998 one of the largest factory-independent steel and metal
trading companies in Europe, with strong positions in
Sales 836 almost all western industrialized nations.
EBIT 48
(b) Business Activity
Pretax earnings 23
The group is active in the international trading of
Total assets 833 valuable materials. In the distribution unit, store-
Investments 109 keeping trading with steel and metal products organ-
ized in national companies is combined. In this unit,
Employees (as of December 31) 8,191
o
Kl¨ ckner & Co. has developed to a leading European
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
82 Merger Report II. Participating Companies: VIAG
steel trading company. With its subsidiaries, it is In comparison to the previous year’s corresponding
market leader in the Netherlands, Switzerland, France o
nine month period Kl¨ ckner & Co.’s key figures
and Spain. In addition, it has good, expandable were as follows:
positions in North America, Great Britain and
Belgium. Among its customers are both industrial 1st to 3rd 1st to 3rd
processors and craftsman’s businesses. EUR in millions quarter 1998 quarter 1999
The trading unit of Kl¨ ckner & Co. is organized
o Sales 3,894 3,363
o
globally: The subsidiary Kl¨ ckner Steel Trade GmbH EBIT 44 62
is present in all important markets around the world
Pretax earnings 119 *) 33
with its own branches and sales offices. As part of its
concentration on high value-added distribution activi- Investments 33 46
o
ties, Kl¨ ckner & Co. intends to sell the drop
Employees (as of 11,169 10,917
shipment activities (non-storekeeping steel trading
September 30)
o
business). Kl¨ ckner & Co.’s activities are concen-
trated on the trade of steel and metal products and *) including revenues from the sale of Computer 2000
processing. After selling its drop shipment business, After the first three quarters of 1999, sales of
the company’s activities will be limited to the storing EUR 3.4 billion were 14% below the previous year
business. (EUR 3.9 billion). Pre-tax income adjusted for the
sales proceeds from the sale of Computer 2000
(c) Group Performance and Earnings exceeded the previous year’s level. A continuation of
During the financial year 1998 (excluding Computer the positive earnings development is expected for the
2000), Kl¨ ckner & Co. showed the following key
o fourth quarter of 1999.
figures:
EUR in millions 1998
Sales 4,881
EBIT 6
Pretax earnings *) 39
Total assets 2,626
Investments 447
Employees (as of December 31) 10,799
*) including revenues from the sale of Computer 2000
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report II. Participating Companies: VIAG 83
III.
IMPLEMENTATION OF COMBINATION
1. Merger of Equals b) Extraordinary Shareholders’ Meetings of
VEBA and VIAG
The Boards of Management of VEBA and VIAG
have agreed to combine the companies according to
the guiding principle of a merger of equals. This The Extraordinary Shareholders’ Meeting of VEBA
combination shall create an energy and chemicals AG will take place on February 10, 2000. As a
group which is globally active and a leader in precaution in case the shareholders’ discussions
Europe. Both companies shall be fully combined by cannot be completed on that day, it has also been
the merger and operated in the future as one legal convened for the following day. The Extraordinary
and economic entity with its registered office in Shareholders’ Meeting of VIAG AG will take place
D¨ sseldorf. The new holding company that will lead
u on February 14, 2000. It has also been convened for
the group will have a name reflecting the new and the following day as a precautionary measure. In both
international structure and orientation of the merged Shareholders’ Meetings, resolutions regarding the
entity. The new company name will also be included approval of the Merger Agreement shall be adopted.
in the company name of the new energy company. In addition, the Extraordinary Shareholders’ Meeting
of VEBA AG shall resolve on the capital increase
Legally, the combination will be implemented by necessary for the implementation of the merger and
merging VIAG Aktiengesellschaft as the merging amendments to the Articles of Association of VEBA
entity into VEBA Aktiengesellschaft as the surviving AG.
entity (§ 2 para. 1 no. 1 of the Transformation Act
(Umwandlungsgesetz). The details of the merger are
set forth in the Merger Agreement dated Decem- c) Regular Shareholders’ Meetings of VEBA and
ber 21, 1999 (see part A above), which will be VIAG
explained in Chapter VI. of this report.
On May 25, 2000 (VEBA) and on May 29, 2000
2. Essential Steps of the Combination (VIAG), the regular Shareholders’ Meetings of
On September 27, 1999, the Boards of Management VEBA AG and of VIAG AG shall take place. In the
of VEBA and VIAG agreed on the principles of the regular Shareholders’ Meetings, resolutions shall,
combination as set forth in the Agreement in inter alia, be adopted on the use of the profits
Principle between VEBA Aktiengesellschaft and available for distribution for the 1999 financial year.
VIAG Aktiengesellschaft regarding the combination Therefore, the shareholders of VEBA and VIAG will
of VEBA and VIAG (Notarial Deed receive a dividend for the 1999 financial year
No. 2668 G/1999 of the notary Dr. Tilman G¨ tte,
o pursuant to the respective resolutions adopted in the
Munich). The combination will be implemented regular Shareholders’ Meeting of their respective
through the following essential steps: company. In the regular Shareholders’ Meeting of
VEBA AG another resolution on the change of the
a) Execution of the Merger Agreement company name shall be adopted.
After the Supervisory Boards of VEBA AG and of
VIAG AG agreed to the merger, the Merger Agree- d) Registration of the Merger
ment was notarized on December 21, 1999. The
merger is now only subject to approval by the After the clearance of the combination by the EU-
shareholders’ meetings of VEBA AG and of Commission and other competent cartel authorities,
VIAG AG, on the clearance of the combination by particularly in the United States, and after the
the competent cartel authorities and on the registra- distribution of the dividend for 1999, the registration
tion of the merger in the competent commercial of the merger making the merger effective will take
registers. place as soon as possible.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
84 Merger Report III. Implementation of Combination
3. Acquisition of VIAG shares by VEBA AG extraordinarily favorable merger, which will result in
anticipated synergy effects in an earnings improve-
On September 27, 1999 VEBA AG purchased from
ment of EUR 800 million per year for the participat-
the State of Bavaria a total of 10% of VIAG’s
ing companies and corresponding financial advantages
shares1. VEBA paid EUR 1.592 billion for these
for their shareholders. The purchase price paid by
shares. This represents a purchase price of EUR 23.00
VEBA is 11% above the average stock exchange
per share. Furthermore, VEBA AG and the State of
price during the last four weeks (August 30 to
Bavaria agreed upon a price adjustment clause: De-
September 24, 1999) before the signing of the sale
pending on VIAG’s stock exchange price the purchase
and purchase agreement. Based on to the total
price may increase by up to EUR 103.8 million. A
number of shares (21.5%) held by the State of
prerequisite for such an increase is that the stock
Bavaria, it received a premium [on the stake ac-
exchange price’s arithmetical average remains above
quired] of 4.4%. Based on the three months prior to
EUR 23.00 for 15 consecutive days between Septem-
signing of the sale and purchase agreement (June 25
ber 27, 1999 and February 7, 2000.
to September 24, 1999) the purchase price per share
The purchase of this block of shares benefits VEBA was 20.1% above the average stock exchange price;
and VIAG as well as their shareholders. It constitutes based on the total amount of shares held by the State
a decisive prerequisite for implementing the VEBA of Bavaria, which will hold a shareholding of only
and VIAG merger: 5.6% in the merged company, the premium [on the
stake acquired] amounts to 8%.
– For some time, the State of Bavaria had contem-
plated a sale of its 25% stake in VIAG. With its Business practice recognizes that a share block of a
acquisition, VEBA has ensured that the share block major shareholder, giving a veto right with respect to
was not sold to a third party which could have important decisions, – even from a relative point of
prevented the combination of VEBA and VIAG. view – is more valuable than the interest of an
uninfluential financial investor. Accordingly, the pay-
– The State of Bavaria supports the combination of
u
ment of ‘‘control premiums’’ (‘‘Kontrollpr¨ mien’’) or
VEBA and VIAG. Other than in case of a sale of
‘‘premiums on the stake acquired’’ (‘‘Paketzu-
VIAG shares to a third party, it is to be assumed
a
schl¨ ge’’) is standard business practice in the acquisi-
that the State of Bavaria will – subject to the
tion of businesses or shareholdings. This has been
approval of the Bavarian Parliament’s budget
confirmed by the Federal Constitutional Court
committee – vote with its remaining VIAG shares
(Bundesverfassungsgericht).
in favor of a combination of VEBA and VIAG.
The adequacy of the premium paid by VEBA can
– The acquisition of the share block will result in an
also be substantiated by empirical studies. The
increase of widely held shares after the merger
Securities Data Corporation, a leading provider of
since the share block acquired from the State of
financial information, recorded data on all industrial
Bavaria will not participate in the share exchange
shareholding purchases in Europe since 1995 with
in the merger. Therefore, the merged company’s
prices of more than US$ 100,000 in which the
earnings per share will increase.
acquirers acquired shareholdings between 5% and
– Through the sale of the 10% share block of the 25%. An analysis of this financial information
State of Bavaria to VEBA, a further important step showed that – even in cases where the number of
towards VIAG’s complete privatization has been shares purchased did not constitute a blocking minor-
taken. ity – premiums of on average 23% above the stock
exchange price four weeks prior to announcing the
The purchase price paid by VEBA to the State of
transaction were paid.
Bavaria is adequate. The premium on the VIAG’s
stock exchange price per share included in the The adequacy of the premium on the stake acquired
purchase price is justified by the fact that the paid by VEBA is also confirmed by the most recent
purchase constitutes a decisive prerequisite for VEBA shareholdings acquisitions on the German and Euro-
and VIAG as well as their shareholders for the pean energy market. For its 25.1% acquisition of
1) acquisition served the purpose of evening out the
Subsequently, VEBA AG has acquired a further
amount of the capital increase for the implementation of
22 shares of VIAG AG on the stock market for
the merger.
simplification of the exchange of the shares. The
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report III. Implementation of Combination 85
HEW, Vattenfall AB accepted a remarkably higher four weeks and 68.7% above the average stock
premium on the stake acquired which was 79.8% exchange price of the past three months before
above the average stock exchange price of the past signing the sale and purchase agreement.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
86 Merger Report III. Implementation of Combination
IV.
ECONOMIC EXPLANATION OF THE MERGER
1. Initial Situation / Development of the Market and gas supply was not appropriate considering,
and Competitive Environment among other things, the expenses. Due to special
cartel law provisions, the energy utilities were
The competitive environment in which VEBA and
permitted, based on demarcation agreements, to mark
VIAG are active is in a process of very rapid and
off their supply areas from one another. Furthermore,
dynamic changes. In the energy sector and in
energy utilities could acquire an exclusive right-of-
telecommunications, this development is characterized
way within a supply area through concession agree-
by the deregulation of the European markets, in the
ments with communities and thus use the public
chemicals and other industrial business sectors by an
roads of a community for laying supply lines while
increasing globalization of competition and a change
excluding other companies. This protected the utilities
in the value chain structure. In the energy industry, a
against most of the competition from within their
massive concentration process has begun in Germany
industry.
and Europe from which those companies which take
on a leading role in this process will benefit. The This legal framework was justified on the basis of the
development in the specialty chemicals industry will particularities of the electricity and gas industry,
be determined in the future by the companies that particularly of the fact that the supply of electricity
can act globally and are able to meet changing and gas is tied to supply lines, the high capital
customer demands. requirements of the generation facilities and grids, the
limited storage ability of electricity and gas, as well
a) Competitive Environment of the Energy In- as the dependence on a few gas production compa-
dustry after the Liberalization of the Euro- nies. The legal framework for the electricity and gas
pean Electricity and Gas Markets industry was based on the understanding that more
(1) Previous Structure of the German Energy competition would impair the security of supply and
Industry would not lead to a supply at lower cost for all
consumers.
Germany is comprised of more than 900 electricity
utilities which show considerable differences with (2) Reform Debate
respect to their size, their degree of integration and
their shareholder structure. Three groups of compa- Particularly during the last ten years, the German
nies may be distinguished: The most important group energy industry law has met with increasing criticism.
of utilities, generating 80% of the electricity, of the After both the Deregulation Commission, the Monop-
companies active in the general electricity supply in oly Commission and the Expert Council for the
Germany, consists of the eight integrated utilities that Evaluation of the Economic Development concur-
own and operate supra-regional high-voltage grids. rently come out in favor of a liberalization of the
Both PreussenElektra and Bayernwerk AG are part of electricity and gas industry, the Federal Government
this group. Approximately 80 regional distributors adopted the demand for a liberalization of the
generate about 9% of the German electricity and electricity and gas industry in its September 3, 1993
supply about 36% of the electricity output to end report regarding the securing of Germany’s ability to
customers. They acquire the largest portion of their attract and retain companies.
power supplied from the integrated utilities. Approxi-
Parallel to the discussion in Germany, the EU
mately 800 local utilities – often municipal utilities –
Commission has aimed at a competitively organized
generate about 11% of the electricity demand in
domestic market for electricity and gas by issuing
Germany and supply about 31% of the total energy
directives. After the opening of the electricity markets
output to end customers.
in England and Wales, Norway and Sweden based on
During the application of the Energy Industry Act a proposal of the Commission, the Council of
(Energiewirtschaftsgesetz), the electricity and gas Ministers of the European Community passed direc-
supply in Germany was mostly conducted within tives regarding the liberalization of the electricity
closed supply areas. With the exception of certain markets (1996) and gas markets (1998), which all
cases, the construction of parallel grids for electricity member states had to transform into national law by
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 87
February 19, 1999 (electricity) and by August 2000 transmitting company has to conclude an agreement
(gas). with the grid owner regarding access and use of the
electricity grid. Grid owners are not allowed to
(3) Reorganization of the Competitive provide their grids to third parties at conditions that
Environment are worse than those agreed upon with their own
group companies. As early as 1998, the associations
The German legislators completely overhauled the of industrial electricity users, the industry and the
legislative framework for the electricity and gas energy suppliers concluded an agreement (‘‘Associa-
industry in Germany with the Energy Industry Law tion Agreement’’), which establishes criteria for
Revision Act (Gesetz zur Neuregelung des calculating transit charges. Based on this agreement,
Energiewirtschaftsrechts) of April 24, 1998 and the thousands of transits were settled. Beginning with the
amendment to the Act regarding the Limitation of year 2000 a new agreement shall take effect, that will
Competition of August 26, 1998. The new energy further facilitate transmissions (see above chapter II,
industry law opened the market immediately and 1 page 38).
completely. The German legislators have not made
use of the possibilities provided by the EU Directive Together with the abolition of closed supply areas,
regarding the opening of the electricity markets in this provides a legal framework which grants every
partial steps. The material cornerstones of the legal supplier of electricity far reaching possibilities to
revision were (a) the abolition of the formerly closed supply customers in all supply areas directly or by
supply areas of the energy utilities by removing the using third party electricity grids. Conversely, all
cartel law privilege for demarcation and concession electricity customers today have a free choice among
agreements and (b) the creation of comprehensive many regional and supra-regional electricity suppliers.
provisions regarding the transmission fees at the
expense of electricity grid operators. (c) Liberalization of Gas Markets
The revision of the energy industry law on April 28,
(a) Abolition of Closed Supply Areas 1998, abolished the protection of supply areas
The deregulation of the energy industry law abolished awarded to gas supply companies, which was in the
the cartel law privilege of territorial demarcation past achieved by concluding exclusive right-of-way
agreements: Exclusive concession and demarcation agreements with communities and demarcation agree-
agreements are no longer legally privileged. After the ments with competitors. In the future, gas supply
revision of the energy industry law, the general cartel companies, like electricity supply companies, do not
prohibition – applicable to other industries – now also only face substitute competition – e.g. light heating
applies to the electricity and gas industry. A horizon- oil –, but also have to prepare themselves for
tal demarcation of supply areas and the related increasing competition from other gas supply compa-
exclusion of competitors is no longer possible in the nies. This adds to the requirements of the EU-Gas
new legal situation. Simple rights-of-way are taking Directive, effective as of August 10, 1998, most of
the place of exclusive concession agreements. This which has already been incorporated into national
enables competitors to construct access lines for German law.
supplying attractive electricity customers individually.
(4) Effects of the Liberalization of the Energy
(b) Transit Rights for Other Companies Market
Prior to the revision of the energy industry law, the The liberalization of the electricity industry has
transit using third party grids was enforceable only resulted in fierce price competition in Germany. The
within the framework of the anti-abuse supervision following issues characterize the new competitive
under the cartel laws. With the new energy industry environment in Germany:
law, transit has become the normal case for the – The German electricity market with its total 1998
electricity industry. The operators of electricity sup- energy output of about 493 billion kWh is the
ply grids have to make their grids available for use to largest and most attractive market in Europe.
other companies. Non-discriminative transit has be-
come an obligation for grid operators. In Germany, – Significant power plant over capacity exists in
the principle of ‘‘negotiated grid access’’ applies. The Germany and Europe.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
88 Merger Report IV. Economical Explanation
– The product ‘‘electricity’’ shows few quality- OBAG AG and Isar-Amperwerke AG into a contrac-
differentiating characteristics. This leads to a high tual corporate group with Bayernwerk.
level of price transparency.
On the integrated utility level, RWE and VEW have
– Electricity generated abroad is increasingly being announced that they are intending to combine. With
offered in the German market. the acquisition of 25% of the shares of HEW by
Vattenfall AB, a foreign competitor was successful in
– Other European countries, particularly France, have acquiring a significant shareholding in a German
not opened their electricity markets at all or not as integrated utility for the second time after the
extensively as Germany. involvement of Southern Energy in Bewag. Observers
e
expect that Electricit´ de France (‘‘EdF’’) will
– Electricity exchanges are being established all over
receive the award for a 25.01% acquisition in EnBW.
Europe, through which a part of the trades will be
settled in the future. This increases supply and
b) Oil Market Environment
demand transparency.
Since the middle of the nineties, a wave of mergers
– Electricity trading companies without grid and has occurred in the oil sector caused by the necessity
without generation capacities are increasingly ap- to reduce production costs in the upstream area in
pearing on the market as competitors. order to reduce volatile crude oil prices so that profits
– The introduction of competition for all electricity can still be made with low crude oil prices.
customers without a transition phase makes it Overcapacities in the refinery area which led to low
easier for new competitors and suppliers to become processing margins caused consolidations in the
established. New market positions for the individ- competitive environment. A further reason is the
ual customer segments are being defined. desire to expand companies to a size large enough to
take on large and attractive capital intensive projects
– Brand names are used as a new tool for binding in the upstream area and at the same time to be able
customers. to widely disperse its risks along the entire value
chain.
A wave of concentration has accompanied the inten-
sified competition in the electricity area. On a The latest mergers (e.g. BP-Amoco, BP-Amoco-Arco,
regional level, the following mergers took place: the Exxon-Mobil, TotalFina-Elf) enforce the trend to
merger of Badenwerk AG and Energie-Versorgung changing supplier structures with globally active
Schwaben AG into Energie Baden-W¨ rttemberg AG
u companies on the one hand and regional oil compa-
(EnBW), the combination of Energieversorgung nies with strong domestic market positions on the
Spree-Schwarze Elster AG (ESSAG), Energiever- other (apart from VEBA Oel AG in Germany and
sorgung S¨ dsachsen AG and Wests¨ chsische
u a Agip in Italy). It can be assumed that synergy effects
Energie AG (WESAG) into envia Energie Sachsen gained from these consolidations will be partially
Brandenburg AG, the combination of Energiever- passed on to the market so that the pressure on
sorgung M¨ ritz-Oderhaff Aktiengesellschaft (EMO),
u margins – and so ultimately on the other oil compa-
Hanseatische Energieversorgung Aktiengesellschaft nies – will increase.
a
Rostock (HEVAG), M¨ rkische Energieversorgung
Aktiengesellschaft (MEVAG) and Oder-Spree c) Chemicals Market Environment
Energieversorgung Aktiengesellschaft (OSE) into
¨ The chemicals industry is globally in a phase of rapid
e.dis Energie Nord AG, the combination of Uberland-
¨ and dynamic changes. While product life cycles
Zentrale Helmstedt AG (UZH), Landesgasversorgung
constantly become shorter, globalization increases and
Niedersachsen AG, EVM Aktiengesellschaft, HAS-
value generation structures change, the intensification
TRA Aktiengesellschaft and the operative business of
of competition leads to a consolidation process that
Ferngas Salzgitter GmbH into the new Avacon AG,
already has caused a lasting change of the environ-
a
the acquisition of the Elektrizit¨ tswerk Wesertal
ment, particularly in the European chemical industry
GmbH by the Finnish Fortum Group, which is still
and will continue to do so in the future.
subject to antitrust approval under the cartel laws, as
well as the integration of material subsidiaries of The worldwide availability of raw materials and key
Bayernwerk, such as Contigas Deutsche Enregie AG, technologies for the production of standardized chem-
EVO Energieversorgung Oberfranken AG, ical products opens opportunities to numerous new
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 89
competitors to offer low-priced and qualitatively third party networks – including the fixed-line net-
competitive products on the chemicals market. Due to work of Deutsche Telekom – at regulated prices. The
this changed competitive environment, the producers cellular telephone market has grown extraordinarily
of traditional chemical products find themselves after additional operator licences were granted and
forced to implement rationalization measures at a owing to changes in customer behavior.
higher pace, while at the same time higher invest-
ments in research and development become necessary The reorganization of the regulatory environment has
in order to be able to offer new and attractive led to significant competition accompanied by consid-
products on the markets. Therefore, producers in- erable price reductions. The competitors of Deutsche
creasingly concentrate on segments of the chemicals Telekom were able to gain substantial market share.
market in which they show proven strengths and The increasing digitalization of information technol-
occupy leading market positions. During the last few ogy leads to an increased demand for data transfer
years, joint ventures, mergers, acquisitions and disin- and Internet services.
vestments have led to fundamental structural changes
for almost all internationally active chemical compa- e) Real Estate Market Environment
nies. The combination into larger units enables a
common appearance on global markets and leads to The German real estate market is characterized by its
an improved negotiating position with suppliers and relative independence from economic cycles and
buyers. During the last four years alone, six of the distinguishes itself by its stable earnings development
world’s most important specialty chemicals compa- even during stagnating market. This applies in
nies – Ciba Specialty Chemicals, Clariant, ICI, particular to private residential real estate, the most
Rhodia, Degussa-H¨ ls and SKW-Trostberg – have
u important business area of Viterra AG.
been created. Lucrative opportunities for growth arise particularly
An ongoing consolidation process is also taking place for office space, depending on the location and the
on the customer and buyer side. An increasing objective. However, these projects are connected with
concentration is particularly noticeable among the higher specific risks.
large chemical, cosmetics, detergent and life-science In addition to the classic real estate activities, new
groups, which leads to the creation of larger compa- services are developing such as heat-contracting and
nies with a global presence and changed demand technical security services in addition to the tradi-
behavior. In the future, supply companies will be tional services, e.g. commercial real estate manage-
required to offer everything from complete systems to ment, and the registration and billing of heat, water
research, development and consulting services. and other operating expenses.
The consolidation process in the chemical industry
will continue due to the change in success drivers. f) Market Environment of the other Business
Taking into account both the expenses and the need Areas
for opening up new growth opportunities, the pres-
sure on the companies to combine into larger units is The business areas aluminum (VAW), distribution
increasing. o
and logistics (Kl¨ ckner & Co., Stinnes and VEBA
Electronics), silicon wafers (MEMC) and packaging
d) Telecommunications Market Environment (Schmalbach-Lubeca and Gerresheimer Glas) are in a
process of far-reaching changes in their respective
The European telecommunications market is charac- competitive environments. Ongoing market globaliza-
terized by the liberalization of fixed-line services and tion is characterized by a concentration on the supply
strong growth in cellular phone and Internet services. and demand side by forming larger corporate units as
The liberalization of fixed-line services in Germany well as an increasing concentration of market partici-
replaced the telecommunication monopoly of pants on certain market segments. This increases
Deutsche Telekom AG (‘‘Deutsche Telekom’’) at the competitive pressure. In the aluminum sector, this is
beginning of 1998 with an asymmetrical regulatory illustrated by the planned combination of Alcan,
concept and placed Deutsche Telekom under a Pechiney and Algroup and of Alcoa and Reynolds.
special regulatory regime. The Telecommunications Worldwide concentrations within the packaging in-
Act (Telekommunikationsgesetz) of July 25, 1996 dustry are beginning to take place. For logistics, the
established a right of competitors for connection with acquisitions of Deutsche Post AG during 1998 and
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
90 Merger Report IV. Economical Explanation
1999 (Danzas, Nedlloyd, ASG and Air Express hancement. Since 1994, VEBA has forcefully sup-
International) indicate how dynamic this process is. ported this strategy with a value-oriented controlling
system. The individual business areas are measured
2. Initial Situation, Strategy and Options of by whether or not their CFROI (Cash Flow Return
VEBA (on a Stand-alone Basis) on Investment) exceeds their capital costs on a long
term basis and whether they contribute to the
a) ‘‘Focus and Growth’’ Strategy
company’s total value. To achieve these goals of net
(1) Overview interest during a strategic first phase cost manage-
ment, restructuring and portfolio optimization were
By defining its business priorities, VEBA has stipu-
predominant. Between 1993 and 1998, annual group-
lated a clear direction for growth and added value
wide expenses were reduced by EUR 1.7 billion,
within the framework of its ‘‘focus and growth’’
businesses with sales totaling EUR 7 billion were
strategy. The key business is the energy division,
sold and the number of business areas was reduced
consisting of electricity, oil, gas and water. In
from more than 60 to about 30. Further cost savings
addition, chemicals are a growth area, particularly
of at least EUR 750 million per year are planned
specialty chemicals. These investment priorities still
through 2002. Continuous optimization and focusing
offer significant potential for profitable growth. At the
of the portfolio are and will remain integral compo-
same time, considerable funds are necessary to
nents of value management. As part of this corporate
defend and expand leading global market positions.
policy, VEBA has sold its 10.2% stake in the English
This is another reason why it is appropriate to
telecommunications company Cable & Wireless plc.
concentrate financial resources on core areas. The
and its shareholdings in o.tel.o’s fixed-line business,
remaining businesses that are being developed further
in TeleColumbus GmbH and in E-Plus Mobilfunk
are value oriented.
GmbH. With total investments in telecommunication
VEBA will therefore in the future direct the majority of EUR 3.6 billion, total proceeds from the sale of
of its investments into its energy and chemicals areas. these shareholdings amount to EUR 7.8 billion.
The electricity area has been completely restructured
and tailored to a competitive market. VEBA pursues (3) Direction for Growth
the goal of achieving and expanding a position
On this basis, VEBA has introduced a growth
among the group of leading European energy compa-
strategy which enables the group to achieve further
nies from its good cost and competitive position. By
sustained value increases. Energy and chemicals are
reorganizing the upstream-area and by obtaining
the core businesses which in the future will more
control over ARAL, VEBA has also significantly
strongly characterize the structure and value develop-
expanded its strategic maneuvering capacity in the oil
ment of the group. Therefore, VEBA will concentrate
u
division. By merging Degussa and H¨ ls, the chemi-
approximately 75% of the total investments of
cals activities were lifted into a new dimension.
approximately EUR 14 billion planned for the years
Stinnes was consistently focused as a global logistics
2000 until 2002 on these focal points. Thereby, the
services provider and was taken public. By combin-
group concentrates its strength, while at the same
ing Raab Karcher and VEBA Immobilien into Viterra
time creating larger strategic capacity to act in these
AG, VEBA has created Germany’s leading integrated
areas. VEBA sees additional growth opportunities in
real estate group. Most of the reorganization projects
an increased international orientation of the existing
have already been successfully completed. The newly
business as well as the utilization of market opportu-
structured companies are therefore able to concentrate
nities and the development of new products and
completely on their organic and external growth.
services beyond traditional business borders. There-
VEBA has a high earnings level and is among the fore, e.g. an innovation initiative was started, a
financially strongest companies in Europe. Even for group-wide program for the recruitment and promo-
major growth moves the group is excellently tion of managers was set up, and inter-group projects,
equipped financially. such as e-commerce or the fuel cell, were carried out.
(2) Sustained Increase in Value b) Core Business Energy
VEBA’s value-oriented management approach aims Energy has been and will be the backbone of the
to boost competitiveness and profitable growth. It has VEBA group. The liberalization of the electricity
been consistently designed for sustained value en- market in Germany, Europe and globally offers
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 91
growth opportunities which used to be closed off due – the internationalization of existing activities and
to tight market demarcations. Great opportunities the development of new markets; over the long
exist for electricity companies with a strong cost term, a sales allocation of 50% in Europe, 30% in
position and consistent customer orientation. VEBA North America and 20% in the remaining world is
has therefore supported liberalization from the begin- being aimed for,
ning and began to prepare itself early through
– an improved standing in the capital markets and
comprehensive cost management and a competition
the related increased capital strength, and
and market-oriented reorganization. As a consequence
of liberalization, significant concentration processes – active portfolio management, particularly through
will occur in the German electricity market with its the possibility of participating in asset swaps,
approximately 1,000 electricity companies. VEBA is which are gaining increasing importance as a part
determined to use the opportunities arising from the of portfolio management,
change of the market structure. It’s goal is to further
expand its position within the leading group of – synergies which should result in an amount of
European energy companies. approximately EUR 180 million by the end of
2001, which are documented by specific projects
In the German petroleum market – the largest and and have already been realized in part.
most competitive in Europe – VEBA Oel is consist-
ently developing from a producer to a service d) Other Business Activities
provider for mobility and heat. Through strict cost VEBA’s other business activities are also being
management, VEBA Oel is preparing for an intensi- specifically developed and their value optimized.
fied international competition in the petroleum busi-
ness and particularly for lower crude oil prices. In the The real estate management area is a stable income
course of the fundamental reorganization of the factor for VEBA, mostly independent from economic
upstream area, exploration and production activities cycles. In this respect, the group pursues an active
were combined into VEBA Oil & Gas. By obtaining portfolio policy. As Germany’s largest owner of
control over ARAL, VEBA gained full freedom for residential real estate, the area has an excellent
strategic decision-making in the downstream business. position and extensive expertise. The energy services
ARAL’s 20% market share represents the market- area is a market leader in Europe; activities in the
leading position. This strong position within the gas U.S. and the People’s Republic of China are being
station and convenience store business is to be further organized.
expanded. It is furthermore intended to increase its
In June 1999, VEBA successfully placed Stinnes
market share in the growing markets of Eastern
shares at the stock exchange. In the course of the
Europe. It is intended to consolidate the entire
preparation of the IPO, the business portfolio was
petroleum distribution business under ARAL. This
cleaned up fundamentally. Important measures con-
a
includes the business of VEBA W¨ rmeservice. Since
sisted of the sale of the DIY markets, the sale of the
ARAL enjoys a 90% name recognition it is expected
Sanitary.Heating.Tiles division and of Stinnes
to open up new markets for products outside of the
Reifendienst at the end of 1998/beginning of 1999, as
traditional oil business.
well as the almost total full acquisition of BTL in
1999. In the future, Stinnes will concentrate on five
c) Core Business Chemicals business areas: Transportation, Chemicals, Building
Materials, Materials and Full-Line Wholesaling. The
The second core business area of VEBA is specialty company is one of the leading logistics services
chemicals. Through the merger of Degussa and H¨ ls,u providers in Europe. VEBA intends to sell its
VEBA has created one of the world’s largest remaining Stinnes shares.
specialty chemicals companies with a multitude of
leading positions in high-growth markets. By means The market in which VEBA Electronics is active as
of the merger, an excellent basis is being created for the world’s third largest electronics wholesaler is
further growth in high-income specialty chemicals. characterized by its cyclical development, depending
Opportunities particularly arise from: on the semiconductor industry. Through intense cost
management and the integration of the VEBA compa-
– the strengthening of innovative capabilities through nies active in this business area, the market position
a widening of the R&D platform and capabilities, is continuously being further consolidated. A signifi-
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
92 Merger Report IV. Economical Explanation
cant strengthening of the competitive position has – SKW Trostberg sold its gardening business Euflor
been achieved by the creation of a unified platform and, during the course of the reorganization of
for the information technology and by centralizing biochemical activities, its Hungarian subsidiary
logistics. o
SKW Biotechnol´ gical. Goldschmidt separated it-
self from the thermite business area including the
MEMC is also active in the cyclical market of the segments welding technology and metallurgy.
semiconductor industry. The comprehensive restruc-
turing program which has been implemented since o
– Kl¨ ckner & Co. completed its concentration on
1998 has significantly improved the cost and compet- steel and metal trading. This involved the sale of
itive situation of MEMC. Combined with a market o
R¨ der Zeltsysteme and Computer 2000.
improvement and the emerging consolidation of the – Gerresheimer Glas sold its standard container glass
competitive environment, this offers a basis for production.
returning to profitable growth. VEBA intends to sell
its MEMC shareholding. In 1998 business areas with total sales of about
EUR 2.3 billion (excluding the container glass
activities of Gerresheimer Glas) were sold. Con-
3. Initial Situation, Strategy and Options of
versely, VIAG reinforced its core competences by
VIAG (on a Stand-alone-Basis)
targeted shareholding investments of EUR 1.6 billion.
a) Strategical Reorientation After a comprehensive strategic assessment, the
concentration of the VIAG portfolio was again
Beginning in the mid-1990s, VIAG introduced sys- forcefully pursued in fall 1998. The two pillars
tematic cost reduction measures in the entire group ‘‘services’’ with the areas energy and telecommunica-
which have shown their positive effects since 1996. tions and ‘‘innovative industries’’ with the areas
In addition, its portfolio has been consistently chemicals, aluminum and packaging were defined as
trimmed VIAG, for example, divested itself of its core businesses. According to this new strategic
basic material related activities: in 1994, the sale of orientation, the logistics division of the group no
the 51% shareholding in Didier-Werke AG to Radex- longer belongs to the core areas of VIAG. According
Heraklith Industriebeteiligungs AG was initiated. In to the concept of the strategic reorientation, the areas
1995, the sale of the 43.4% shareholding of ‘‘services’’ and ‘‘innovative industries’’ form the
Bayernwerk in PWA Papierwerke Waldhof-Aschaf- core competencies of the group. As part of the ‘‘two-
fenburg AG followed. In all business units, side pillar-philosophy’’ VIAG aims at the profitability
activities that over the long term would be unable to leadership in all relevant markets and a consistent
generate the desired margins and returns were sold. optimization of its corporate portfolio.
In a parallel move, the core areas were expanded While implementing the strategic reorientation, VIAG
consistently, particularly energy and chemicals: in the made considerable progress by further consistent
energy area, VIAG increased its stake in Bewag from optimization of its portfolio. It sold its shareholding
10% to about 26% in 1997. In the same year, u
in K¨ hne & Nagel during June 1999. The combina-
Bayernwerk obtained a majority position in Isar- tion of SKW and Goldschmidt under the industrial
Amperwerke AG. In the chemicals area, SKW management of SKW was completed and the envi-
achieved a step into a new entrepreneurial dimension ronmental technology of Goldschmidt was sold. The
with the acquisition of the natural substances division core chemicals business area was strengthened by
of Sanofi in 1995, and with the acquisition of Master selected acquisitions, particularly through the acquisi-
Builders Technologies in 1996. In 1997 VIAG also tion of specialty chemicals activities from the U.S.
acquired the majority in the specialty chemicals companies Proligo, Bunge Foods and Harris Specialty
company Goldschmidt AG. Chemicals. Gerresheimer Glas sold its standard
container glass business.
In 1998 further significant progress was made relating
to the tightening and focusing of the VIAG portfolio: b) Value Management on all operative Levels
– VAW focused on the vertical value chain for raw For years, VIAG has consistently followed a strategy
materials, smelters, rolling mills and engine cast- of sustained and continuous increase of corporate
ing. In this connection, it sold fringe activities, e.g. value. With the introduction of value management, a
carbon products, silicon and system technology. principle for measuring operative performance was
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 93
made available which constitutes a valuable instru- all four countries, in which VIAG will participate
ment for corporate management and planning, partic- consistently. Over the medium term, VIAG aims at a
ularly for conglomerates with different business areas. position among the top three telecommunications
Within the framework of value management a con- providers in all four countries. In order to finance
stant evaluation takes place, whether the ROCE further strong growth and to increase the transparency
(return on capital employed) exceeds the weighted of telecommunications’ value contribution, VIAG’s
costs for debt and equity and therefore an added medium term plans are to place up to 49% of VIAG
value is created. This value orientation is the Telecom AG’s capital stock on the stock exchange in
guideline on all operative levels of VIAG and will a public offering of the telecommunications activities.
consistently be continued in the future. Efficiency Orange plc. will have to sell its 17.4% shareholding
enhancement programs support this and a minimum in Connect Austria because Mannesmann has already
yearly cost reduction of at least EUR 570 million by received its fourth license in Austria. In Switzerland,
the year 2002 is expected. due to Mannesmann’s taking over Orange plc., VIAG
asserted its right to acquire the entire 42.5% share in
c) Energy and Telecommunication Orange Communications S.A. After exercising this
During its strategic reorientation, VIAG pursues the right, VIAG will hold an 85% majority in Orange
goal of becoming one of the five largest electricity Communications S.A.
suppliers on the European continent. Measures for a
continuous improvement of productivity – and thus of d) Innovative Industrial Shareholdings
profitability – and the use of growth opportunities in In the chemicals area, VIAG possesses a significant
Germany and in the neighboring countries are at the innovation dynamic and occupies leading competitive
center of operating decisions. To realize these growth positions in the high-return markets of specialty
opportunities it is intended to utilize the capital base chemicals. The future markets for biochemistry and
of the energy division. A market presence in other biotechnology belong to the growth divisions on
European countries is of great importance considering which VIAG intends to concentrate. It plans to
the liberalization of the energy markets also taking expand its position as a worldwide partner of the life-
place there and possible changes in the domestic sciences industry. Through the combination of SKW
energy market, particularly with respect to the efforts Trostberg and Goldschmidt in SKW Trostberg (new),
of the Federal Government to abandon nuclear a decisive step towards the integration of the
energy. The introduction of a new structural project chemicals area was taken. The group’s competency in
in 1998, which was to provide for a clear separation the specialty chemicals area can be utilized even
between the value generation steps and distribution better in the new integrated group. On the basis of
orientation towards the retail customer, laid the the latest acquisitions, which will not have their full
foundation for further sustainable efficiency increases effect until 2000, the portfolio-optimization of this
in the following years. These measures will also business area will be successfully continued through
ensure the competitiveness and efficiency of VIAG in selected acquisitions and disinvestments.
a completely liberalized market.
VAW is one of the leading producers of aluminum
In telecommunications, VIAG has put itself into a and aluminum products in Europe. The group has an
strategically promising starting position: With Ger- integrated value chain reaching from the production
many, Europe’s largest telecommunications market, of raw materials to their processing for the packag-
as well as Austria, Switzerland and Liechtenstein, ing, automotive and construction industries. VAW’s
VIAG is represented in markets that will show competitive environment underwent significant
significant growth rates. The approximately 100 mil- changes over the past few months. This requires
lion people living in these areas have an income at greater strategic flexibility. On a medium term basis,
their disposal which is above the European average VIAG therefore plans to place up to 49% of VAW
and they will increasingly demand mobile telephone AG’s capital stock on the stock exchange, in order to
and Internet services. The latest network infrastruc- provide new opportunities for growth.
ture, its own retail customer access, innovative
products and high quality of service will in the future The packaging division is represented by the
continue to be VIAG’s success factors in this area. companies Schmalbach-Lubeca AG and Gerresheimer
Particularly mobile data communication using new Glas AG. Both companies occupy leading market
transmission standards will lead to further growth in positions in their respective business areas. They have
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
94 Merger Report IV. Economical Explanation
consistently focused on high added value and future- VEBA-VIAG1 will be a clearly focused company
oriented materials such as special glass, PET and with leading market positions in its core business
vacuum closing systems. The global packaging mar- areas of energy and chemicals. By the planned
ket is undergoing worldwide consolidation of the combination of the power utilities of the two groups,
market participants. In this context, VIAG plans a PreussenElektra and Bayernwerk, the largest German
value-maximizing divestiture of its shareholdings over electricity company will be created with an electricity
the medium term. The auctioning process for Ger- output of approximately 137 billion kWh (incl. EZH)
resheimer Glas has already commenced. and electricity sales volume of about 187 billion kWh
(incl. EZH). If the announced combination of the
4. Entrepreneurial Orientation and Strategy of competitors RWE and VEW should take place, only
the new Company their combined electricity output and sales would be
higher in Germany. VEBA-VIAG will also be a
a) Creation of a new Company with leading
leading market supplier in the converging European
Positions in the Core Business Areas Energy
electricity market. In the other European countries,
and Chemicals
only the state-owned monopoly companies EdF and
Merging VEBA and VIAG will create the third ENEL will be larger. Through the merger, VEBA and
largest German industrial company. It will have VIAG will become the new ‘‘leading European
combined sales of approximately EUR 76 billion, powerhouse’’ which directly and indirectly supplies
annual pre-tax income of approximately about 15 million customers in Germany and abroad.
EUR 4.4 billion (pro-forma-figures based on the 1998
financial year) and 220,000 employees (as of Septem-
ber 30, 1999).
445
237
187 *)
168
119 *)
92 86 80
69 68
EDF ENEL VEBA- RWE VEBA Vatten- Endesa Electra- British VIAG
VIAG fall bel Energy
Energie
*) incl. EZH (NL)
1) used in the following sections of this Report will be
After the merger, VEBA AG will receive a new
VEBA-VIAG.
company name. Since the new name will not be
determined until spring 2000, the new company name
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 95
The merger of VEBA and VIAG also creates the
world’s largest specialty chemicals groups with
u
Degussa-H¨ ls and the new SKW Trostberg group,
with joint sales of approximately EUR 14 billion
(pro-forma-figures based on the financial year 1998
without precious metals trade).
u
The product portfolio of Degussa-H¨ ls and SKW
Trostberg is characterized by a high proportion of
leading positions in the global market, which should
further strengthen the profitability of the specialty
chemicals group in the future. The following table
shows a selection of leading market positions for
important products:
World
Market/ Market
Product Application Position
Degussa-Huls¨
Methionine Livestock feed 1
Superabsorbents Hygienic products and diapers 1
Coating raw materials Coatings 2
Hydrogen peroxide Paper and textile bleach 2
Organosilanes Adhesive agent for glass fibers and fillers 2
Methyl acrylate (MMA/PMMA) Plexiglas 2
Phenol/acetone Plastics/fibers 1
Precipitated silica Fillers (e.g. tires) 1
Industrial carbon black Tires and pigments 2
SKW Trostberg
Gelatine Foodstuff/pharmaceuticals 1
Texturation systems Foodstuff 2/3
Starting products and intermediates of nitril
chemicals Pharmaceuticals/agricultural 1
Selected metallic chemicals Raw iron desulphurization 1
Construction chemicals New construction/repair 1
Polyurethane stabilizers Polyurethane 1
Softener precursors Detergents 1
b) Strategy of the new Company A supplementary business area is:
It is the strategic goal of the new company to – the real-estate division with Viterra.
become a group with a transparent business structure The following activities of the new company should
which is clearly focused on its strategic positions in be continued with a view to maximizing their value
the core areas of energy and specialty chemicals. and should be sold at an appropriate time:
The core businesses of the new company which will – aluminum (VAW aluminium),
be significantly expanded through organic and exter- o
– distribution/logistics (Kl¨ ckner & Co., Stinnes and
nal growth are: VEBA Electronics);
– the energy division with activities in electricity,
– silicon wafers (MEMC); and
gas, water and oil, and
– packaging (Schmalbach-Lubeca and Gerresheimer
u
– the chemicals division with Degussa-H¨ ls and
Glas).
SKW Trostberg.
An important business area of the new company is: In their Agreement in Principle of September 27,
1999, VEBA and VIAG agreed on the following
– the telecommunications division (VIAG Telecom
principles for the strategy of the new company:
Beteiligungs-GmbH with shareholdings in VIAG
Interkom, Connect Austria and Orange Communi- ‘‘The company will predominantly expand the areas
cations as well as shareholdings in Bouygues Energy and Chemicals divisions. The Energy Divi-
Telecom). sion should gain a leading position in Europe,
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
96 Merger Report IV. Economical Explanation
supplemented by important positions outside of Eu- In detail, the strategy of the new company for the
rope. The Chemicals Division should reinforce its energy division is comprised of the following
world market leadership as a specialty chemicals elements:
company. The Telecommunications Division is to be
– In the electricity generation area, the new company
further developed as planned. The remaining activi-
will be able to further expand its position as a cost
ties should serve the purpose of expanding the
leader by realizing synergies between Preus-
group’s financial scope for maneuvers of the group in
senElektra and Bayernwerk. The generation assets
order to achieve the strategic goals of its core
of PreussenElektra and Bayernwerk complement
businesses. The long term increase of the shareholder
each other superbly. The combination opens new
value is the company’s primary goal.’’
cost savings potentials to the company which
should be used consistently. In the area of electric-
c) Core Businesses and Strategic Orientation ity trading, the excellent electricity supply pos-
sibilities from its own generation assets and the
(1) Energy advantageous geographic starting position at the
center of the European integrated electricity system
It is the strategic goal of the energy division of the will be used to expand the trading activities and
new company to further expand through a signifi- thereby a leading position in the European energy
cantly stronger presence in the European markets the trade is intended. The combination of Preus-
leading position in Europe achieved in the combina- senElektra and Bayernwerk offers a very good
tion. In addition, individual selected activities should starting point due to the extended abilities and
also be expanded outside of Europe. systems, improved risk management and the use of
the central geographic location. In addition to cost
The energy division will continue to develop the core savings potential, the combination of the network
energy business based on a reasonable energy mix activities opens the possibility to achieve a sustain-
including nuclear energy. A consensus exists that it is able earnings contribution both in the area of
economically reasonable to generate electricity as electricity transmission and through offering com-
close to consumption as possible and build new and prehensive service packages. By connecting the
replacements generation capacities where a corre- sales activities of PreussenElektra and Bayernwerk,
sponding demand exists. a powerful organization is created which covers all
relevant customer segments in Germany and fur-
The specified strategic goal of expanding the leading ther expands already existing customer relations
position in the European markets shall be achieved through representations in important European
through organic and external growth. By means of a countries. The uniform sales approach lowers the
clear marketing strategy, low production costs and the specific sales expenses and thus increases addi-
realization of significant synergies – in addition to the tional market opportunities and the profitability.
comprehensive cost reduction measures already inde- – In addition to the electricity activities, the gas
pendently implemented and initiated by VEBA and activities of the energy division shall also be
VIAG – additional market shares are to be gained expanded internationally. Based on the existing
through organic growth. It is the goal of the energy shareholdings in gas utilities and in gas deposits,
division to offer to its customers a continuously the convergence of the electricity and gas markets
improved custom-tailored, and attractively priced shall be utilized. Particularly at the interface to the
services. final customer, but also on other levels of the value
chain (e.g., electricity and gas trading) the energy
External growth is mainly to be achieved by selected markets are growing closer together. Therefore, the
acquisitions, mergers and joint ventures on important sale of both products should be increasingly
markets. In addition to Germany, an emphasis will be combined. This enables both cost savings in the
placed on the neighboring countries. The foreign sales area and additional income through cross
engagements serve the realization of synergy poten- selling and intelligent product packages. The elec-
tial and effects of scale and at the same time the tricity trading activities should be complemented
exchange of know-how. by building up gas trading activities.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 97
– In the area of water supply, the new group is Parallel to the ongoing integration of Degussa and
represented by Gelsenwasser, the largest privately u u
H¨ ls in Degussa-H¨ ls AG and the combination of the
held water utility and by the water activities of the activities of SKW Trostberg AG and Goldschmidt
regional distributors. The water business is to be AG, an overall strategic concept shall be developed
expanded during the next few years by participat- for the chemicals division. In this concept, the
ing in privatizations and through further acquisi- operative management of the chemicals activities
tions. This will complement the other energy shall remain at the existing locations. The chemicals
services, particularly in the retail business. area will continue to be listed on the stock exchange.
– Another strategic component of the energy division
d) Important Business Area: Telecommunica-
are the oil activities of VEBA Oel AG. VEBA Oel
tions Division
AG operates the largest refinery system in Ger-
many and is the market leader in sales of After the merger of VEBA and VIAG, the telecom-
petroleum products, particularly in heating oil munications division will consist of VIAG Telecom
distribution and – through ARAL – in the service Beteiligungs GmbH with its shareholdings in VIAG
station business. Through consistent cost manage- Interkom GmbH & Co., Connect Austria Gesellschaft
ment, VEBA Oel AG intends to strengthen the u
f¨ r Telekommunikation mbH and in Orange Commu-
competitiveness on all value generation levels on a nications S.A., as well as of VEBA Telecom GmbH
sustainable basis. Strategic goals are particularly with its shareholding in Bouygues Telecom S.A.
the further expansion of the market shares in VIAG Telecom Beteiligungs GmbH shall in the
heating oil distribution and in the service station future have the legal form of a stock corporation. It
business as well as the extension of the services will become the management company for the
offered. telecommunications activities of VIAG in Germany,
Austria, Switzerland and in Liechtenstein.
Based on the platform that will be created by the
merger of VEBA and VIAG, the new company will The telecommunications division of the new group is
aim to join the world’s leading group of multi- to be developed according to plan within the scope of
utilities with electricity, gas and water. To reach this the existing strategic and financial goals. This will
goal, further steps towards internationalization are change the existing plans for the development of
planned after the merger of VEBA and VIAG. VIAG’s Telecommunications Division (including the
plans regarding the personnel and site development in
(2) Chemicals Bavaria). With a view to value increase and financial
issues, it is intended to place parts of the telecommu-
The chemicals division of the new company consist-
nications activities of the stock exchange as soon as
u
ing of Degussa-H¨ ls and SKW Trostberg is to be
possible at the appropriate time.
developed into the world’s ‘‘finest’’ specialty chemi-
cals company based on its position as the world
e) Supplementary Business Area:
market leader in specialty chemicals, due to the
Real Estate Division
merger. The joint chemicals activities are to assume a
leading role in the reorganization of global specialty The real estate division with Viterra AG will
chemicals. The chemicals activities of the new group continue to be developed and increasingly contribute
will be concentrated on a rapid expansion of the to the group income. For this purpose, the new
areas fine and specialty chemicals with their products orientation as an integrated real estate group (which
which are characterized by limited cyclicality and has already begun) will be consistently implemented.
high profitability. The active portfolio management of the large real
estate assets, the development business as well as the
The profitability of chemicals activities shall be
expansion of real estate related service activities will
noticeably improved by active portfolio management
form the center of the activities.
and cost reductions as well as increased integration.
Opportunities for growth for the specialty chemicals The income of Viterra achieved in the core business
companies of the new group will particularly arise in areas, which are highly independent from economic
North America and Asia. These shall be utilized cycles, are to be increased significantly through the
consistently, as well as the significantly expanded strategic reorientation. Value maintaining and value
technology and R&D-basis resulting from the crea- increasing investments for a continuing development
tion of the new specialty chemicals group. of the company are to be financed with its own cash
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
98 Merger Report IV. Economical Explanation
flow. Accordingly, Viterra shall increasingly contrib- VEBA and VIAG are companies with a common
ute to the group’s income without requiring large historical root. Even today a number of common
financial and personnel resources of the group. issues exist which according to the firm belief of the
Boards of Management would provide VEBA and
The increasing interconnection of real estate-related
VIAG with an excellent basis for growing together
services (e.g. residential management, security tech-
rapidly in a new corporate identity and culture.
nology) and energy-related services (e.g. heat-con-
tracting, usage cost documentation and billing) may Both companies show considerable similarities re-
be strategically used in the continuing development garding their strategies and their implementation.
of the core business area energy. They both apply a strategy of focusing on their core
business areas by consistently adapting their share-
f) Activities which are to be continued optimiz- holding portfolio. VEBA and VIAG both also empha-
ing their value and sold at an appropriate size the long term increase of the corporate value as
time their prime corporate goal. Accordingly, VEBA and
The activities VIAG orient the compensation of their top manage-
ment along with the increase in corporate value. Both
– aluminum (VAW aluminium) the VEBA group and the VIAG group are managed
– distribution/logistics (Kl¨ ckner & Co., Stinnes and
o by lean management holding companies, while the
VEBA Electronics) subsidiaries manage and bear the responsibility for
the operational business.
– silicon wafers (MEMC)
The strategic advantages of merging VEBA and
– packaging (Schmalbach-Lubeca and Gerresheimer
VIAG into a new company are obvious. By merging,
Glas)
both partners immediately achieve the size in both of
are to be continued optimizing their value and sold at their core business areas that is absolutely necessary
an appropriate time, since they are not part of the to actively shape the consolidation processes in these
core business areas of the new group which is business areas, and leading market positions on an
focusing on energy and specialty chemicals with international level. Based on their market capitaliza-
leading market positions. It is intended to create tion, VEBA and VIAG will become through their
promising future perspectives for these activities – merger the worlds largest publicly listed energy
e.g., through a sale to a suitable partner or a public service company, the majority of which is privately
offering. Proceeds from the sales of these activities, held. Based on sales they will become one of the
which represent a total sales volume of more than leading European energy companies, to the largest
EUR 28 billion (1998), will be used to achieve the German electricity company, which will only be
strategic goals of expanding the core businesses. slightly surpassed by RWE and VEW after comple-
tion of their announced combination. Together,
5. Advantages of the Merger for the Companies VEBA and VIAG have a competitive portfolio of
involved and their Shareholders power plants at geographically advantageous loca-
tions, operating very economically on a balanced
a) Strategic Advantages / Complementation of primary energy mix.
the Core Areas
The joint high-voltage grid of VEBA and VIAG
The Boards of Management of VEBA and VIAG are located in central Europe reaches from Scandinavia to
both convinced that by merging the two companies the Alps. It has numerous grid connections, also to
they have found the ideal solution to the strategic Eastern Europe’s growth markets. The business
challenges caused by the massive market changes. shows a favorable risk structure. By opening the
Both companies consider each other as desired grids of all energy service providers, numerous new
partners for a merger of equals: No other partner for business opportunities arise. Both VEBA and VIAG
VEBA and VIAG exists in Germany who would even have comprehensive European distribution and sales
come close to being such a good supplement and to activities. Together they directly and indirectly supply
offering complement to core business areas. about 15 million customers in Germany.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 99
SCHLESWA
SCHLESWAG
EWE
e.dis
e.dis
Hanover
AVACON
AVACON
PESAG
EAM
Düsseldorf
TEAG
ÜWU EVO Majority Shareholdings in
Regional Utilities
FÜW
Material Minority Shareholdings
OBAG in Regional Utilities
IAW
Munich
In the Eastern European growth markets both occupy synergies and cost synergies, resulting from the
attractive starting positions. The strong sales and combination of businesses.
distribution activities offer excellent opportunities for
cross-selling in the areas electricity, gas and heating (1) Market Synergies
oil, both in Germany and in Europe.
The market leading positions which the new group
Together, VEBA and VIAG with their chemicals will achieve due to the merger in its core businesses
companies Degussa-H¨ ls and SKW Trostberg will
u energy and specialty chemicals form an optimal basis
become the world’s largest specialty chemicals group. for a further improvement of the competitive position
A product portfolio is created with a very high and the earnings potentials of the new group. The
portion of world market leading positions, which is comparable value chains (generation, transport, distri-
characterized by high profitability and a limited bution) in the electricity sector, the expert knowledge
dependency of products on economic cycles. Through of both companies regarding the gas business, and
the merger, the technological and R&D-base of the the expansion potential which is accessible together,
chemicals activities of VEBA and VIAG is also such as in water supply and sewage treatment, offer
expanded. great prospects to expand the leading market position
in the energy area. This adds to the complementing
The combination of VEBA and VIAG is thus geographical activity emphasis (particularly in Eastern
creating a basis on which VEBA and VIAG will Europe and Scandinavia) and the excellent geographi-
jointly be able to actively influence the process of cal positioning within the European electricity
consolidation and restructuring of the energy and landscape.
chemicals markets from a position of strength and
reach their goal of expanding their leading market In the specialty chemicals area, the new group has
positions on a global market scale. The financial significant potential for further increased earnings. By
potential of the joint company and additional funds in expanding market leading positions in the different
the two-digit billion range, resulting from a sale of businesses with highly profitable products and limited
the non-core businesses, form an important basis for cyclicality, by strengthening the global presence
the realization of corporate strategy. through utilization of the respective distribution
structures as well as through an active portfolio
b) Synergy Potentials management including the possibility of strengthening
the portfolio through asset swaps, the earnings
The merger of VEBA and VIAG creates extensive position of the specialty chemicals business of the
potential for increasing earnings through market new group may be significantly improved.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
100 Merger Report IV. Economical Explanation
(2) Cost Synergies – saving reserve capacities;
Due to the merger, the new group will be able to – use-oriented coordination of the revision dates of
realize annual cost synergies of at least EUR the larger generation assets;
800 million. These synergies will be realized in – optimizing the overhead in the power plant
addition to the cost reduction programs already companies.
announced by VEBA and VIAG, amounting to EUR
In addition the opportunities of the liberalized energy
1.3 billion per year until 2002 (VEBA: EUR 750 mil-
market shall be used for electricity procurement using
lion; VIAG: EUR 570 million). The total volume of
a fundamentally revised make-or-buy strategy. In
savings thus amounts to about EUR 2.1 billion per
detail, the synergy advantages will probably be
year. The cost synergies based on the combination of
distributed as follows:
about EUR 800 million per year will be realized in
steps. By 2002 their full amount will have been Synergy Potential
(total) for the
achieved. The realization of synergies will involve Years 2000 until
one-off charges of about EUR 475 million. 2002 (in million
Synergy Types EUR)
The main part of the synergies with about EUR
700 million will be related to the energy division. In Procurement Synergies:
this division, they will probably be realized by 2002 – optimizing the purchase of materials and
as follows: third party services
– optimizing the procurement of raw
Financial year Cost Synergies
materials
2000 EUR 230 million
Energy economical Optimization: 225
2001 EUR 460 million – joint reserve keeping
2002 EUR 700 million – optimizing load distribution
– optimizing electricity procurement
About 25% of these synergies will be applicable to
the combination of trading and marketing activities. Reduction of Overhead in the Management
This includes cost advantages due to the fact that in Companies and in the operative Companies
the fast growing areas of trading and marketing new
Synergies in Trading and Marketing:
functions do not need to be built up twice. This
applies to everything from the operational marketing – joint development of trading- and
settlement-systems
and trading team, back-office functions to product
development and marketing. – uniform distribution appearance and joint 175
branding
About 30% of the synergies may be achieved by
– combination of distribution organizations
optimizing the purchasing of material and third-party
services as well as the procurement of raw materials. Operative, Efficiency increasing Measures:
In addition to volume related effects, the entry into
– optimizing conventional power plants
better purchasing contracts as well as the complete
– optimizing nuclear power plants 250
renegotiation of selected fuel contracts will be at the
center of attention. Further significant synergies may – optimizing hydroelectric power plants
be utilized in the joint development of the required – optimizing grid/distribution
cost-intensive information systems and consistent
savings in overhead both of the operational compa- Synergies from the cooperation of Synergis 50
nies and the energy management company. u
and Gedos as well as Th¨ ga 50 and
Contigas
Almost half of the synergy potential results from the
opportunities for more efficient management of the Total 700
joint generation assets. The significantly larger gener-
ation assets offer the following possibilities in Synergies in an amount of about EUR 50 million per
particular: year shall be realized in specialty chemicals through
– optimizing the operation sequence of the power u
a cooperation of Degussa-H¨ ls and SKW Trostberg.
plants including reductions in the highest load; This involves general cost reductions according to the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 101
respective ‘‘best practice’’ focusing of positions in tial in the two-digit billion range. The financial
overlapping customer and supplier structures, as well potential of the new company creates an excellent
as cooperation in individual functional areas (e.g. basis for a powerful organic and external expansion
research and development, service functions, country of the core energy and specialty chemicals busi-
companies). Synergies of about EUR 50 million will nesses, and a leading role of the new group in the
result from the combination of the existing holding consolidation processes of the international energy
companies. These will result mainly from lower and chemicals industry.
personnel and materials expenses.
d) Strengthening of the Innovation Potential
The realization of cost synergies, about two thirds of
which will be allocable to personnel expenses, The merger of VEBA and VIAG results in a
involves a reduction of personnel amounting to about substantial strengthening of the know-how basis and
2,500 jobs, with about 2,300 thereof in the energy the innovative abilities of the new company. This
sector. This corresponds to about 6% of the total applies in particular to the energy and chemicals
number of employees of PreussenElektra and areas, but also to cross-section functions such as
Bayernwerk. All necessary personnel changes will information technology and e-commerce applications.
take place in the spirit of good and trusting coopera- Thus, the companies of the new group will have
tion between employee representatives and corporate significantly more innovation potential for further
managements, which exists traditionally at VEBA and expansion of their market position in their businesses
VIAG, and will take into account the personal than before at their disposal.
circumstances of the affected individuals. The sus-
tained strengthening of the competitive position of 6. Financial Goals of the new Company
the new company and the expected growth will,
however, secure existing jobs in the future and open The corporate policy of the new company will be
new opportunities for the creation of new jobs. consistently set towards a sustainable increase in
value. The main goal will be to generate a return on
c) Grown Capital Market Standing and Finan- the invested capital in all business areas, which is at
cial Power of the new Company least equal to the capital costs. Over the long term,
the company is aiming at a return on capital which is
By merging VIAG and VEBA, a new company with significantly above the capital costs.
a market capitalization of about EUR 38 billion1 is
created. Therewith, the new company occupies the Over the short term, this is a very ambitious goal for
top rank among the world’s mainly privately held the energy division, taking into account the strong
energy services company in respect to market capital- competition. This goal may be reached only through
ization. A new heavyweight in the DAX and the a rapid and complete utilization of the synergies from
EURO Stoxx 50 is created. The shares of the new the merger of PreussenElektra and Bayernwerk as
company will remain listed on at the New York well as a consistent optimization of the employed
Stock Exchange. Through the merger, the capital capital. The changed market conditions due to the
market standing of VEBA-VIAG is further improved. liberalization of the German and particularly the
European energy market, however, open new growth
The financing power of the new company grows into opportunities for the first time. These shall be utilized
a new order of magnitude with the merger. The actively while strictly observing the value-oriented
added annual pretax income amounted to about return criteria of the merged company. In the
EUR 4.4 billion in 1998, the added cash flow to chemicals division, targeted efforts are also required
more than EUR 7.8 billion. The new company will to achieve the value increase goals. The decisive
have liquid funds of about EUR 7.2 billion at its factors for increasing the return will be further
disposal. efficiency increases and active portfolio management.
Through the planned measures regarding the disposal The shareholders of the new company should not
of shareholdings in non-core business areas, the new only participate in this positive development through
company will gain access to further financing poten- the value increase of the new company, but also
1)
Calculation based on the stock quotes on September 30,
1999.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
102 Merger Report IV. Economical Explanation
through an intended distribution quota of 40 to 50% be comprised of about two-thirds VEBA-employees
of group earnings before extraordinary items. and about one-third VIAG-employees.
7. Structure, Organization and Management of
c) Composition of the Board of Management
the new Company
and the Supervisory Board
a) Group Structure
The new group will have the following structure: Without prejudice to the decision competence of the
Supervisory Board of VEBA-VIAG AG pursuant to
VEBA-VIAG AG
Tele-
com-
Energy Special- Real Other
muni-
chemicals Estate Activities
cations
– VAW
VEBA-VIAG Degussa-Hüls VIAG Viterra aluminium
– Klöckner &
Energie Tele- Co.
– ASTA – ASTA – ASTA
SKW Trost- com – Stinnes
Medica Medica Medica
VEBA Oel berg – VEBA
– Dental – Dental Dental
– Electronics
– Futtermittel- – Futtermittel- – Futtermittel-
– MEMC
additive additive additive
– Schmalbach-
– Scockhausen – Scockhausen Scockhausen
– Lubeca
– Gerresheimer
Glas
b) Management and Organizational Structure of the German Stock Corporation Act, VEBA and VIAG
the new Company / Functions of the Holding have agreed in the Agreement in Principle on the
Company following recommendations for the composition of
the Board of Management:
The new Company will be lead by VEBA-VIAG AG
as management holding company. VEBA-VIAG AG The future Board of Management of VEBA-VIAG
will be responsible for the strategic orientation of the AG will consist of five individuals. It shall not have
entire group. Its prime directive will be the value- any members, who at the same time hold positions
oriented corporate management. VEBA-VIAG AG as on a Board of Management of group companies. The
a management holding company will have the follow- future Board of Management will be composed of
ing primary functions: Mr. Ulrich Hartmann and Prof. Dr. Wilhelm Simson
– formulate group strategy as chairmen and Dr. Hans Michael Gaul,
– oversee implementation of the group’s value- u
Dr. Manfred Kr¨ per and Dr. Erhard Schipporeit as
oriented management approach manage financial members of the Board of Management. The members
resources of the Board of Management are to assume the
following departmental responsibilities:
– fill the group’s top management positions and
coordinate executive development
Ulrich Hartmann
a
– represent the group vis-` -vis the capital markets
and the general public
Corporate Communications, Corporate and Public
VEBA and VIAG aim for a lean holding structure Affairs, Investor Relations, Supervisory Board
with no more than 200 to 250 employees, which will Relations
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 103
Prof. Dr. Wilhelm Simson VEBA-VIAG AG). In respect to the combination of
VEBA and VIAG, the Boards of Management of the
Group Strategy, Post-Merger Integration, Executive
companies have agreed, without prejudice to the
Development, Audit
decision competence of the Supervisory Board and
the shareholders’ meeting of VEBA-VIAG AG pursu-
Dr. Hans Michael Gaul
ant to the German Stock Corporation Act, to propose
Controlling/Corporate Planning, M & A, Legal a new composition of the shareholder representatives
Affairs in the Supervisory Board of VEBA-VIAG AG during
the current term of office. The group of shareholder
Dr. Manfred Kruper representatives is to be comprised of a 7 : 3 ratio of
Labor Relations, General Administration, Procure- former members of the shareholders of VEBA and
ment, Organization VIAG, respectively, or other individuals to be nomi-
nated by VEBA and VIAG, respectively. A represen-
Dr. Erhard Schipporeit tative of VEBA is to preside over the Supervisory
Board.
Finance, Accounting, Taxes, IT, Insurances
In addition, in the Agreement in Principle the State
Mr. Simson and Mr. Schipporeit shall be appointed
of Bavaria has been granted the right to propose to
as members of the Board of Management of
the Supervisory Board of VEBA-VIAG an individual
VEBA-VIAG AG in the first meeting of the Supervi-
for election to the Supervisory Board the members to
sory Board of VEBA following the shareholders’
be named by the shareholders of VIAG. The proposal
meeting that votes on the approval of the Merger
right shall exist as long as the State of Bavaria holds
Agreement, with their appointment becoming effec-
more than 4% of the shares in VEBA-VIAG.
tive as of the effective date of the merger.
According to its due discretion, without commitment
Mr. Simson shall be appointed as chairman in
to the proposal of the State of Bavaria, without
addition to Mr. Hartmann.
prejudice to the foregoing, the Supervisory Board of
The members of the Board of Management shall VEBA-VIAG decides on its resolution proposal,
preside over the Supervisory Boards of the following which it presents to the shareholders’ meeting for the
group companies: election of Supervisory Board members.
Ulrich Hartmann d) Registered Office and Administration
VEBA-VIAG Energie AG, VEBA Oel AG
u
D¨ sseldorf will be the sole registered office of
Prof. Dr. Wilhelm Simson VEBA-VIAG AG. The registered office in Berlin will
be abandoned. Its headquarters will also be located in
u
Degussa-H¨ ls AG, SKW Trostberg AG, VIAG u
D¨ sseldorf.
Telecom AG
e) Compensation System
Dr. Hans Michael Gaul
Stinnes AG, Viterra AG, Schmalbach-Lubeca AG VEBA and VIAG intend to harmonize and continue
development of the value oriented compensation
Dr. Erhard Schipporeit systems which both companies have already imple-
mented and/or which exist as concepts. The aim of
o
Kl¨ ckner & Co. AG, VAW aluminium AG, the future common total compensation strategy is:
Gerresheimer Glas AG, VEBA-VIAG
Versicherungsgesellschaft – orientation of the compensation of the Board of
Management and executives according to the in-
After the completion of the merger, the Supervisory
crease in corporate value,
Board of VEBA-VIAG AG will continue to be
comprised of ten representatives each of the share- – recruiting and binding highly qualified executives
holders and of the employees, respectively (§§ 96 through a competitive compensation system,
para. 1, 101 para. 1 of the Stock Corporation Act and
§ 7 para. 1 sentence 1 no. 3 of the Co-determination – connecting the variable compensation to the indi-
Act and § 8 of the Articles of Association of vidual performance and the corporate success,
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
104 Merger Report IV. Economical Explanation
– balancing short-term and long-term compensation to have its registered offices and its headquarters in
elements. Landshut, the engineering company in Gelsenkirchen
and the data processing company in Hanover.
The total compensation is comprised of the elements,
fixed compensation and variable compensation, de- Without prejudice to the competence of the Supervi-
pending on the individual performance and the sory Board of VEBA-VIAG Energie AG, according
success of the company as well as additional to the Stock Corporation Act, the Board of Manage-
achievements. For calculating the variable compensa- ment of VEBA-VIAG Energie AG will after the
tion on a per-year basis, which is to become a larger effectiveness of the combination of PreussenElektra
portion in the total compensation, a system of targets and Bayernwerk have among its members
is agreed upon with Board of Management members Dr. Hans-Dieter Harig as chairman and Dr. Otto
and executives. Majewski as deputy chairman. The Board of Manage-
ment of VEBA-VIAG Energie AG will be staffed
In 1999 VEBA introduced a stock option program. equally by VEBA and VIAG, while appointments of
This is a program in which the entitled leading outsiders should not be excluded. Mr. Ulrich Hart-
managers are granted a right for a certain amount of mann is to become chairman of the Supervisory
money by exercising the option rights, if the VEBA Board of VEBA-VIAG Energie AG.
shares outperform a certain stock index over the
medium term. The expenses caused by the program According to § 4.2 of the Agreement between the
form part of the profit and loss statement and does State of Bavaria and VIAG Aktiengesellschaft regard-
not involve the issuance of new shares. ing the combination of VIAG Aktiengesellschaft and
Bayernwerk Aktiengesellschaft of May 11, 1994, the
VEBA-VIAG will consistently continue to develop State of Bavaria has the right to propose two
this total compensation strategy, which includes individuals for election to the Supervisory Board of
short-term and long-term incentives. Bayernwerk, as long as it holds more than 10% of
the shares in VIAG AG. According to § 6 para. 3 of
f) Management and Organizational Structure the Agreement in Principle, the State of Bavaria will,
and Personal Composition of the Corporate as long as it holds more than 4% of the shares in
Bodies / Registered Office and Administration VEBA-VIAG, have the right, appropriately adjusted
of the Material Subsidiaries of the Group to the changed circumstances after the merger, to
(1) Energy Division propose one individual for election to the Supervisory
Board of VEBA-VIAG Energie AG.
Because of the fast-changing competitive environment
of the German and European energy industry, the The Board of Management of VEBA-VIAG AG will
energy utilities of VEBA and VIAG shall be com- support the election proposal of the State of Bavaria
bined as quickly as possible under the roof of an exclusively within the framework of the corporate
energy company, VEBA-VIAG Energie AG. interest of VEBA-VIAG AG and VEBA-VIAG
VEBA-VIAG Energie AG will be created through the Energie AG. The appointment of representatives of
merger of Bayernwerk AG into PreussenElektra AG. state institutions to Supervisory Boards of energy
In particular, it will manage the electricity, gas, water utilities is also a common practice in Germany.
and waste disposal units. VEBA-VIAG Energie AG The structure and personnel composition of the Board
will have its registered offices and its headquarters in of Management of VEBA Oel AG remains unaffected
Munich. Electricity and gas trading is part of the by the combination of VEBA and VIAG. Mr.
VEBA-VIAG Energie AG’s headquarters. There will Hartmann will continue to be the chairman of the
be a balanced allocation of the subsidiaries of Supervisory Board of VEBA Oel AG.
VEBA-VIAG AG to be formed during the course of
the combination to the locations of PreussenElektra
(2) Chemicals Division
and Bayernwerk: The distribution company will have
its registered offices and its headquarters in Munich, The combination of the chemicals activities of the
the grid company its registered office in Bayreuth. new companies is to take place step by step. In
The companies for generation capacities (conven- parallel to the ongoing integrations of Degussa and
tional and nuclear) will have their registered offices u u
H¨ ls in Degussa-H¨ ls AG and the activities of SKW
and headquarters in Hanover. The company for Trostberg AG and Goldschmidt AG, a complete plan
generating electricity by using hydroelectric power is for the chemicals division is being developed; both
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 105
companies are to be combined rapidly. The opera- – cost of the appraiser
tional management of the chemicals activities is to opinions and of the merger
remain at the existing locations. audit about EUR 5 million;
– consulting fees (including
The composition of the Boards of Management of investment banks and due
u
Degussa-H¨ ls and SKW Trostberg is not affected by diligence), preparation and
the merger of VEBA and VIAG. Professor Simson realization of the
will be the chairman of the Supervisory Boards of extraordinary shareholders’
both companies. meeting about EUR 55 million.
Not included in the aforementioned costs are ex-
(3) Telecommunications Division penses for the later integration of the operative units
(including the costs for realizing the synergies).
The telecommunications division will be led by VIAG and VEBA will each bear its own expenses
VIAG Telecom AG. It will have its registered office arising in connection with the preparation and imple-
and headquarters in Munich. The current members of mentation of the combination, as well as in connec-
the Board of Management of VIAG AG, Dipl. Ing. tion with the Agreement in Principle of Septem-
Maximilian Ardelt and Dr. Georg Freiherr von ber 27, 1999. Jointly caused expenses will be borne
Waldenfels will be members of its Board of Manage- by VEBA and VIAG together.
ment. Prof. Simson will become chairman of the
Supervisory Board of the future VIAG Telecom AG. 9. Alternatives to Merging
VIAG Telecom AG will continue the existing busi-
ness policy of the telecommunications division of The Boards of Management of VEBA and VIAG
VIAG. have thoroughly reviewed the alternatives to the
merger. This review has shown that other conceivable
combination scenarios are either not able to achieve
(4) Real Estate Division
the entrepreneurial goals of the combination or show
Viterra AG is the management company of the real significant disadvantages to the chosen legal path of a
estate division. It has its registered offices and merger of VIAG into VEBA.
headquarters in Essen. The merger will not lead to
any changes in the composition of its Board of a) Merger of VEBA and VIAG by Formation of
Management. Dr. Gaul will be the chairman of the a new Entity or by Acquisition by an existing
Supervisory Board. Entity
Legally, the combination could also have been
8. Cost of the Combination realized by a merger of VEBA and VIAG by
formation of a new entity or by acquisition by an
According to the current rough estimates, the costs of existing third entity.
the merger will amount to about EUR 75 million.
They essentially consist of: (1) Merger by Formation of a new Entity
In a merger by formation of a new entity, all assets
– real estate transfer tax due
and liabilities of both companies participating in the
to merger about EUR 10 million;
merger with all rights and obligations including all
– cost of exchange trustee
liabilities are transferred to a new legal entity which
and realization of the share
is created by the merger. Both VEBA and VIAG
exchange and the cost of
would participate in the merger as transferring
registering the new VEBA-
companies.
VIAG shares with all
German stock exchanges The merger by formation of a new entity would give
as well as with the Swiss the shareholders of VEBA – as well as the sharehold-
Stock Exchange and (as ers of VIAG – the possibility of having the exchange
part of the current ADR- ratio as set forth in the merger agreement reviewed in
program) at the New York an award proceeding (Spruchverfahren). This would
Stock Exchange about EUR 5 million; preclude any challenges to the valuation in a possible
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
106 Merger Report IV. Economical Explanation
law suit contesting the merger resolution. The regis- taxes of approximately EUR 160 million would
tration of the merger could not be delayed as a result occur. The one-off charges associated with the
of lawsuits exclusively challenging the exchange ratio merger would be increased from EUR 475 million
as set forth in the Merger Agreement. to EUR 615 million.
Inspite of these advantages, the disadvantages of a (2) Merger by Acquisition by an Existing Entity
merger by formation of a new entity prevail
significantly: The merger by acquisition by an existing entity
would essentially involve the same advantages and
– The shares of VEBA have been traded on the New disadvantages as the merger by formation of a new
York Stock Exchange as part of an ADR program entity.
since October 8, 1997. In case of a merger by
formation of a new entity the current ADR b) Merger with Voluntary Award Proceeding for
program would have to be terminated and a new VEBA Shareholders
ADR program would have to be initiated for the
new company. Trading at the New York Stock In the proposed scenario of merging VIAG into
Exchange would have to be interrupted. A new VEBA, only VIAG shareholders may have the
registration procedure would have to be carried out exchange ratio reviewed in an award proceeding
in the U.S.A. In addition, VEBA would have to according to the statutory provisions. The Boards of
prepare comprehensive capital market documenta- Management of VIAG and VEBA have therefore
tion corresponding to the U.S. capital market laws reviewed the question of whether VEBA shareholders
(Form F4) together with the invitation to the may be granted the opportunity of a review of the
Shareholders’ Meeting. In addition to that, VEBA exchange ratio as set forth in the Merger Agreement
and VIAG would have had to submit their group on a voluntary basis.
financial statements for the last two fiscal years The Transformation Act neither provides for a
together with the invitation to the Shareholders’ participation of the shareholders of the surviving
Meeting, reconciled to U.S. Generally Accepted entity in an award proceeding, nor does it allow to
Accounting Principles (US-GAAP). While VEBA give the shareholders of the surviving entity the
has already reconciled its group financial state- possibility of a review comparable with an award
ments to US-GAAP in the past, VIAG changed its proceeding in the Merger Agreement. A statutory
group financial statements to International Account- basis for granting a voluntary award proceeding to
ing Standards (IAS) last year. VIAG group finan- VEBA shareholders does not yet exist. Neither the
cial statements prepared according to US-GAAP legal literature nor the courts have considered the
are not available. Preparation of the reconciliation, problem of a voluntary award proceeding. In practice,
which would also have to include the major group the possibility of conducting a voluntary award
companies, would take several months. The merger proceeding has – apparently – been used in only one
would have to be postponed accordingly. A delay case. This case was not comparable to the combina-
of the combination of VEBA and VIAG could, tion of VEBA and VIAG. One major shareholder
from a business point of view, hardly be justified held more than 95% of the share capital both of the
in view of the extraordinarily dynamic develop- merging company and of the surviving company. He
ment of German and European energy economy had agreed to a voluntary award proceeding for the
markets. Merely the disadvantages arising from a shareholders of the surviving entity. Neither VIAG
delay of realizing synergy effects would probably nor VEBA have a major shareholder holding a
amount to more than EUR 20 million per month. comparably large portion of the stock capital. Taking
this into account, a consent of the shareholders of
– The merger by formation of a new entity would
VIAG to a voluntary award proceeding could not
lead to significant additional real estate transfer tax
have been obtained.
payments, as not only the real estate owned by
VIAG, but also the real estate owned by
c) Capital Increase through Contribution-in-
VEBA AG, and some of its direct and indirect
Kind with Exchange Offer
subsidiaries would be subject to real estate transfer
tax. Compared to a real estate transfer tax burden The combination of VEBA and VIAG could also
of approximately EUR 10 million in case of a have been legally realized by way of an increase of
merger of VIAG into VEBA, real estate transfer the capital of VEBA through contribution-in-kind.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 107
For this purpose, VEBA would have had to make the The goal of combining VEBA and VIAG in a
shareholders of VIAG a public offer for the exchange company with one shareholding constituency, one
of their shares into shares of VEBA. VIAG shares business interest and one structure could, however,
would then have been contributed to VEBA as a not have been achieved with this concept. The
contribution-in-kind while new VEBA shares would shareholders of VEBA and VIAG would have re-
have been issued as consideration. However, there are mained shareholders of their company. They would
several important reasons against a combination by have participated in their company not directly, but
way of an increase of the capital of VEBA through only indirectly (through the shareholding in VEBA
contribution-in-kind: and VIAG in the joint venture company). The
incorporation of a joint venture company would
– The acquisition by way of a public exchange offer furthermore have led to a complex management and
would be a deviation from the principle of a group structure with adverse effects on the develop-
merger of equals. Unlike the concept pursued by ment of the stock exchange prices of both companies.
the Boards of Management of VEBA and VIAG,
the combination could not have been realized as a The combination of partial areas of the two groups
combination of equals. This would probably have would have led to similar disadvantages. Contrary to
significantly reduced the acceptance of the combi- the case of a merger of both companies, the
nation by the shareholders, management and em- expansion of the group to a globally active and
ployees of VIAG. leading European energy and chemicals group could
not have been achieved.
– A public exchange offer would probably not have
been accepted by all shareholders. This would 10. Merger Control
make the integration of both groups more difficult a) Initiated Merger Control Proceedings
from a legal point of view.
(1) EU-Merger Control
– A capital increase through contribution-in-kind On December 14, 1999, VEBA and VIAG filed the
would have involved higher legal risks than a notification of concentration with the EU Commis-
merger. A summary court procedure for clearing sion. The EU Commission may either clear the
the registration, as provided for in case of a merger proposed concentration within one month and – if a
in § 16 para. 3 of the Transformation Act, does not request for referral is filed – within six weeks of the
exist for a capital increase through contribution-in- filing, or enter into a so-called main examination
kind; this would increase the risk of delay of the proceeding. In this case it has to decide on the
registration considerably. A pending contestation compatibility of the concentration with the Common
suit and the related potential risk of a reversal of Market within another four months. The merger
the transaction would furthermore for the entire control proceeding of the EU Commission includes
duration of the proceeding lead to disadvantages the EGKS-proceeding, which affects parts of the steel
for the integration and management of the new trade.
company and the realization of synergies. The new
shares issued to VIAG shareholders would have to The possibility exists that the Commission refers the
be traded under a separate security number. They proposed concentration filed with it completely or in
would probably be traded at a discount. part to the German Federal Cartel Office. The
precondition is that the Federal Republic of Germany
notifies the EU Commission that the concentration
d) Contribution of the Assets of VEBA and threatens to create or increase a dominant position,
VIAG into a Joint Venture which would severely hinder effective competition on
an individual market in Germany. According to the
The combination of VEBA and VIAG could in
opinion of VEBA and VIAG, a referral may only be
principle also have been realized by contributing the
considered regarding the activities of both companies
entire shareholdings of VEBA and VIAG into a joint
in the energy area.
venture company. VEBA and VIAG could have
incorporated a joint venture company and contributed In case of a referral to the German Federal Cartel
their entire shareholdings by way of a capital increase Office, it will decide regarding the referred portion
through contribution-in-kind into the joint venture with exclusive competence according to the
company. provisions of the Gesetz gegen
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
108 Merger Report IV. Economical Explanation
a
Wettbewerbsbeschr¨ nkungen (GWB – Act against Re- ments into grid access agreements and electricity
straints of Competition). Within one month of the supply agreements. The customers may then conclude
referral, it has to decide whether to clear the a grid access agreement with the new energy
proposed concentration or enter a main examination company and a separate electricity supply agreement
proceeding itself. During a main examination pro- with another company. In the case of tariff-customers
ceeding, the office has to come to a general decision changing suppliers, so-called synthetic load profiles
within four months after the referral. A clearance (synthetische Lastprofile) will be offered, which will
may be subject to conditions and restrictions. make unnecessary an exchange of meters. The rates
for the transmission of third-party electricity through
The merger control proceedings of the German
the supply area of the new energy company should
Federal Cartel Office will probably be completed by
generally be structured independent of distance,
May 2000.
according to the new ‘‘Association Agreement’’
(2) Other Merger Control Proceedings which takes effect at the end of 1999 (see also
Chapter II 1 f (1) (b), Page 38 above).
On November 30, 1999, VEBA and VIAG have filed
a notification regarding the combination with the U.S. Divestitures in the Shareholding Area
Federal Trade Commission and the Department of
Justice according to the Hart Scott Rodino Act. The The German Federal Cartel Office aims for ‘‘divesti-
filing triggered a 30 day examination period. During tures’’ of shareholdings in energy utilities of VEBA
the examination period, the cartel authority has to and VIAG on the one hand and RWE on the other.
decide whether a more detailed examination of the In addition, new competitors should be enabled to
combination has to take place. If no further examina- enter the market through shareholdings in integrated
tion takes place, the proposed combination is deemed utilities. According to the current status of the
to be cleared at the end of the thirty day examination discussions, it has not yet been determined which
period. VEBA and VIAG assume that the U.S. shareholdings in energy utilities will be affected by
authorities will clear the proposed combination with- these commitments. VEBA and VIAG have signaled
out further examination. their willingness during the discussions to relinquish
VEW. Furthermore, a divestiture of Rhenag is being
The consent of national cartel authorities is further
discussed, in which currently both RWE and VEBA
required in the following countries, among others:
hold shareholdings. The discussions also relate to the
Brazil, Canada, Korea, Japan, Lithuania, Mexico,
shareholdings in VEAG, Bewag and HEW. The talks
Russia, Switzerland. The Boards of Management of
with the EU Commission and the German Federal
VEBA and VIAG expect that the combination will be
Cartel Office have not yet been completed. Details
cleared in these countries without limitation and/or
cannot be disclosed, since a disclosure would perma-
not prohibited.
nently deteriorate the interests of VEBA and VIAG
(§ 8 para. 2 UmwG).
b) Compatibility with the Common Market
Prior to filing the notification, VEBA and VIAG held According to the current status, no commitments have
discussions with the German Federal Cartel Office been planned in respect to other business areas, but
and the EU Commission regarding the cartel law cannot be completely ruled out either.
compatibility of the concentration with the Common Taking into account the new competitive environ-
Market in the electricity area. ment, the Boards of Management of VEBA and
VIAG are confident to receive the required clearance
Third-Party Grid Access
according to the cartel law. They will ensure that the
In connection with the discussions, PreussenElektra concept of the combination will not be materially
and Bayernwerk announced on September 28, 1999, changed due to cartel law commitments or conditions.
that they would open their grids to third parties in In any case, the Boards of Management of VEBA
case of a combination. Accordingly, the new common and VIAG assume that the established synergy
electricity company will offer all customers the potentials will not be affected by any cartel law
opportunity to split the electricity procurement agree- commitments or conditions.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report IV. Economical Explanation 109
V.
ACCOUNTING, FINANCIAL, CORPORATE
AND TAX EFFECTS OF THE MERGER
1. Accounting and Financial Effects connection with the vote by VEBA and VIAG
stockholders on the merger of VEBA and VIAG. The
The merger of VIAG AG into VEBA AG will take
forward-looking statements, including the Plan, are
place with economic effect as of January 1, 2000
based on the interim balance sheets of VEBA and
(‘‘Merger Closing Date’’). From this date on and
VIAG, audited and without restriction, as of Septem-
subject to the merger becoming effective, all actions
ber 30, 1999, and the pro-forma interim balance
of VIAG AG will, from an accounting point of view,
sheets of VEBA and VIAG, as of September 30,
be considered to be actions taken for the account of
1999. The pro-forma financial results were then
VEBA AG. The assets and liabilities of VIAG AG
further adjusted based upon management’s current
will be transferred to VEBA AG at book value as
estimates and assumptions to include the results of
shown in the closing balance sheet as of Decem-
the quarter ended December 31, 1999. The forward-
ber 31, 1999. The closing balance sheet will be based
looking statements were not prepared with a view to
on the balance sheet of VIAG AG as of Decem-
public disclosure. VEBA AG does not intend to
ber 31, 1999. VEBA AG will carry on in its own
update any of the forward-looking information in the
accounts the book values of the transferred assets and
Merger Report, including the Plan, and does not
liabilities as shown in the closing balance sheet of
intend to publish financial forecasts in the future.
VIAG AG.
The forward-looking information, including the Plan,
a) Pro-Forma Balance Sheet Forecast of is provided only for purposes of the stockholder vote
VEBA-VIAG1 as of January 1, 2000 on the VIAG merger. For all the reasons stated
above, current and prospective investors in
In connection with the merger of VIAG AG into
VEBA ADSs should not rely on such forward-
VEBA AG, VEBA AG has been advised that
looking information, including the Plan, for any other
German law governing mergers (Umwandlungsgesetz)
purpose or investment decision not related to the
requires the Boards of Management of VIAG and
stockholder vote on the VIAG merger.
VEBA to prepare and provide to their respective
shareholders a joint merger report (Gemeinsamer Hereinafter, the accounting effects of the merger will
Verschmelzungsbericht) that contains prescribed busi- be shown using a pro-forma balance sheet forecast of
ness and financial information, recommendations of VEBA-VIAG AG as of the Merger Closing Date
the two Boards and certain expert opinions (the January 1, 2000, shortened by combining positions
‘‘Merger Report’’). VEBA AG has been further and based on balance sheet forecasts of VEBA AG
advised that the Umwandlungsgesetz requires that the and VIAG AG as of December 31, 1999.
Merger Report include the VEBA’s business plan for
As of the time of completion of this Merger Report,
results of operations for the [year 1999] (the
the 1999 financial years of VEBA AG and VIAG AG
‘‘Plan’’).
have not been completed. As a consequence, audited
As a general matter, VEBA AG does not make annual financial statements with an audit certificate of
public or otherwise distribute any forecasts or projec- VEBA AG and VIAG AG (closing balance sheet
tions as to future performance. Disclosure of the according to § 17 para. 2 of the Transformation Act)
forward-looking statements in the Merger Report, as of December 31, 1999 are not yet available.
including the Plan, has been provided solely for Therefore, in order to show the effects of the merger,
purposes of complying with the provisions of the balance sheet forecasts as of December 31, 1999, for
Umwandlungsgesetz that VEBA AG has been ad- VEBA AG and VIAG AG, based on extrapolations,
vised mandate the inclusion of such information in will be used. The basis for these balance sheet
1)
VEBA AG will have a new name after the merger. As
this name will not be determined until spring 2000, the
new company will subsequently be referred to as
VEBA-VIAG.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
110 Merger Report V. Effects
Pro-forma Pro-forma
forecasts are the interim balance sheets of VEBA AG interim interim
and VIAG AG (see Attachments 2 and 3) forming balance sheet balance sheet
VEBA AG VIAG AG
part of the audited and fully certified interim financial September 30, September 30,
statements of VEBA AG and VIAG AG as of in million EUR 1999 1999
September 30, 1999, and the pro-forma interim ASSETS
balance sheets of VEBA AG and VIAG AG as of A. Fixed Assets
September 30, 1999, based thereon. I. Intangible Assets 1 –
II. Property, plant and equipment 130 6
The interim balance sheets as of September 30, 1999, III. Financial Assets 9,807 4,208
shown in Attachments 2 and 3 of this Report, have B. Receivable and other assets
I. Receivable from affiliated
been prepared according to the provisions of the
companies 1,794 1,247
Commercial Code (Handelsgesetzbuch, HGB) and II. Liquid Funds 3,530 225
generally accepted accounting principles. They have III. Other current assets including
been audited by the auditors appointed for the audit prepaid expenses 470 129
of the annual financial statements as of December 31, 15,732 5,815
1999, beyond the legal requirement and have been LIABILITIES AND
certified without restriction. According to a strict SHAREHOLDERS’ EQUITY
application of the realization and the cut-off date A. Equity
principles, the interim balance sheets do not include I. Capital stock 1,307 692
the pro-rata temporis earnings of subsidiaries due to II. Additional paid-in capital 2,198 2,599
III. Retained earnings 3,230 1,049
profit transfer agreements and pro-rata temporis IV. Annual net loss/income 656 183
earnings from profit collections during the same B. Reserve Subject to Future
period (phasengleiche Gewinnvereinnahmung) Tax 606 51
planned for the end of the year. Provisions have, C. Provisions
however, been established for the obligation to I. Provisions for pension 96 22
II. Other provisions 2,129 132
assume losses from profit transfer agreements pursu-
D. Liabilities
ant to § 302 of the Stock Corporation Act to the I. Bank loans 22 496
extent that losses had been caused by September 30, II. Liabilities affiliated companies 5,453 199
1999. III. Other liabilities including
prepaid income 35 392
Since these earnings are material for holding compa-
15,732 5,815
nies such as VEBA AG and VIAG AG, balance
sheets are not conclusive without such earnings. To The balance sheet forecasts as of December 31, 1999
improve the conclusiveness, the pro-forma interim were developed by extrapolation on the basis of the
balance sheets as of September 30, 1999 therefore pro-forma interim balance sheets as of September 30,
contain by way of derogation from commercial law 1999, which were based on estimates and assump-
provisions the pro-rata temporis earnings of subsidiar- tions. The actual figures in the balance sheets as of
ies due to profit transfer agreements and the pro-rata December 31, 1999, may differ from the figures in
temporis results from simultaneous profit collections the balance sheet forecasts as of December 31, 1999.
planned for the end of the year. By this, the The pro-forma adjustments are based upon available
comparability of the pro-forma interim balance sheets information and certain assumptions [that manage-
with the balance sheets for the end of the financial ment believes are reasonable], including the satisfying
year, which contain such income from equity interests of certain conditions set forth in the Merger Agree-
is improved. The pro-forma interim balance sheets ment, such as VEBA AG’s obtaining financing and
have been reviewed by the auditors. This resulted in other customary conditions, and the completion of the
no objections. Merger. The pro formas do not purport to represent
what VEBA AG’s results of operations or financial
condition would actually have been had the Merger
in fact occurred on such dates or to project
VEBA AG’s results of operations or financial condi-
tion for any future period or date.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report V. Effects 111
balance sheet balance sheet Pro-forma
forecast forecast balance sheet
VEBA AG VIAG AG VEBA-VIAG AG
in million EUR December 31, 1999 December 31, 1999 January 1, 2000
ASSETS
A. Fixed Assets
I. Intangible Assets 1 – 1
II. Property, plant and equipment 144 6 150
III. Financial Assets 11,388 4,208 14,004
B. Current Assets/Prepaid Expenses
I. Receivable from affiliated companies 1,522 1,296 2,818
II. Liquid Funds 2,395 214 2,609
III. Other current assets including prepaid expenses 146 150 296
15,596 5,874 19,878
LIABILITIES
A. Equity
I. Capital stock 1,307 692 1,955
II. Additional paid-in capital 2,198 2,599 5,490
III. Retained earnings 3,230 1,049 3,230
IV. Annual net loss/income *) **) 841 259 –313
B. Reserve Subject to Future Tax 605 24 629
C. Provisions
I. Provisions for pensions 98 22 120
II. Other provisions 1,991 142 2,133
D. Liabilities
I. Bank loans 22 496 518
II. Liabilities affiliated companies 5,270 199 5,469
III. Other liabilities including prepaid income 34 392 647
15,596 5,874 19,878
*) not yet divided into profit available for distribution and reserves in the balance sheet forecasts; the annual net income
of VIAG AG is allocated to the liabilities in the pro-forma balance sheet forecast assuming a distribution of an
unchanged profit in the amount of the dividend for the year 1998 of EUR 221 million
**) the annual net income in the pro-forma balance sheet contains a merger loss amounting to EUR 1,154 million.
The balance sheet forecasts and the pro-forma bal- capital of VEBA-VIAG AG shown in the pro-forma
ance sheet as of January 1, 2000, are to be explained balance sheet forecast includes the capital stock of
as follows: today’s VEBA AG and the nominal amount of the
capital increase of VEBA AG of EUR 648 million
The assets and liabilities of VIAG AG are transferred
required for the implementation of the merger. To the
to VEBA AG with the valuations stated in the
extent that VEBA AG holds shares of VIAG AG, the
closing balance sheet as of December 31, 1999. The
pro-rata portion of the assets and liabilities of
pro-forma balance sheet forecast of VEBA-VIAG AG
VIAG AG are transferred to VEBA AG in the
as of January 1, 2000, shows the merger at book
merger without an increase of the capital stock of
values.
VEBA-VIAG AG in this respect (§ 68 para. 1
The 10% interest in VIAG AG that VEBA AG sentence 1 no. 1 of the Transformation Act).
acquired from the State of Bavaria is shown in the
The capital reserve and the revenue reserve of
balance sheet forecast of VEBA AG as financial
VIAG AG will also disappear from the balance sheet
assets. As of the Merger Closing Date, the book
due to the merger. The difference between the book
value of this interest is set off against the pro-rata
value of the net assets of VIAG AG on the one hand
equity of VIAG AG. This results in a book merger
and the nominal amount of the capital increase as
loss of EUR 1,154 million. This involves no actual
well as the equity of VIAG AG attributable to the
reduction of the assets; the ability to distribute an
VIAG shares held by VEBA AG on the other hand
adequate dividend will not be affected.
in the amount of EUR 3,292 million is booked into
VIAG AG’s capital stock as shown in the pro-forma the capital reserves of VEBA-VIAG AG as agio
balance sheet as of the Merger Closing Date will pursuant to § 272 para. 2 no. 1 of the Commercial
disappear from the balance sheet. The subscribed Code. Accordingly, the capital reserve shown in the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
112 Merger Report V. Effects
pro-forma balance sheet includes in addition to the in the following have been reviewed by the auditors.
capital reserve shown in the balance sheet forecast of This resulted in no objections.
VEBA AG as of December 31, 1999 the agio from
the capital increase for the implementation of the The interim consolidated balance sheet shown for the
merger. VIAG group has been prepared according to the
Regarding the amount of the net assets of VEBA International Accounting Standards (IAS). The in-
AG, the following is to be taken into account: Since terim consolidated balance sheet for the VEBA group
no resolution has yet been passed regarding the use has been prepared according to the accounting
of the annual net income as of December 31, 1999, it principles of the Commercial Code (HGB), while
has neither been allocated to revenue reserves nor to applying applicable US Generally Accepted Account-
liabilities as a dividend, but is still shown in the pro- ing Principles (US-GAAP) to the extent permitted
forma balance sheet forecast of VEBA-VIAG AG as under German accounting law; for mergers, the book
annual net income. The annual net income of VIAG value continuation method is generally applied.
AG is, however, allocated to liabilities in the pro- Interim group Interim group
balance sheet balance sheet
forma balance sheet of VEBA-VIAG AG assuming VEBA AG VIAG AG
the distribution of a dividend per share equal to the September 30, September 30,
in million EUR 1999 1999
dividend paid during 1998.
ASSETS
b) Pro-Forma Consolidated Balance Sheet Fore- A. Fixed Assets
cast of VEBA-VIAG as of January 1, 2000 I. Intangible Assets 3,434 3,706
II. Property, plant and
In the following, the accounting effects of the merger equipment 18,143 10,726
will be shown in a pro-forma consolidated balance III. Financial Assets 11,507 6,418
sheet forecast of VEBA-VIAG AG as of the Merger B. Receivable and other assets
I. Receivable from
Closing Date January 1, 2000, based on consolidated affiliated companies 182 149
balance sheet forecasts of VEBA AG and VIAG AG II. Liquid Funds 4,725 4,036
as of December 31, 1999. III. Other current assets including
prepaid expenses 13,631 8,158
Since as of the time of completion of this Merger
51,662 33,193
Report, the 1999 fiscal year of VEBA AG and VIAG
AG have not been completed, the audited and
LIABILITIES AND SHAREHOLDERS’ EQUITY
certified consolidated balance sheets of VEBA AG
A. Equity *) 16,986 8,646
and VIAG AG as of December 31, 1999, cannot yet B. Provisions
be available. Therefore, in order to show the effects I. Provisions for pensions 5,672 3,307
of the merger on the VEBA-VIAG group, consoli- II. Other provisions 13,735 10,332
dated balance sheet forecasts as of December 31, C. Liabilities
1999, based on extrapolations, will be used. The I. Bank loans 3,787 6,090
II. Liabilities affiliated
basis for these consolidated balance sheet forecasts companies 99 104
are the interim consolidated balance sheets as of III. Other liabilities including
September 30, 1999. prepaid income 11,343 4,714
The interim consolidated balance sheets of VEBA 51,622 33,193
AG and VIAG AG as of September 30, 1999 shown *) including minority interests
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report V. Effects 113
The consolidated balance sheet forecasts as of De- able], including the satisfaction of certain conditions
cember 31, 1999, were developed by extrapolation set forth in the Merger Agreement, such as VEBA
based on estimates and assumptions of the interim AG’s obtaining financing and other customary condi-
consolidated balance sheets as of September 30, tions, and the completion of the Merger. The pro
1999. The actual figures of the consolidated balance formas do not purport to represent what VEBA AG’s
sheets as of December 31, 1999, may differ from the results of operations or financial condition would
figures in the consolidated balance sheet forecasts as actually have been had the Merger in fact occurred
of December 31, 1999. The pro-forma adjustments on such dates or to project VEBA AG’s results of
are based upon available information and certain operations or financial condition for any future period
assumptions [that management believes are reason- or date.
Consolidated Consolidated
balance sheet balance sheet Pro-forma balance
forcast VEBA AG *) forecast VIAG AG sheet VEBA-VIAG AG
in million EUR December 31, 1999 December 31, 1999 January 1, 2000
ASSETS
A. Fixed Assets
I. Intangible Assets 3,385 3,708 7,093
II. Property, plant and equipment 18,249 13,975 10,537
III. Financial Assets 6,505 28,786 18,888
B. Receivable and other assets
I. Receivable from affiliated companies 261 3,190 154
II. Liquid Funds 4,009 415 7,199
III. Other current assets including prepaid expenses 13,813 8,132 21,945
52,873 33,045 84,326
LIABILITIES AND SHAREHOLDERS’ EQUITY
A. Equity **) 17,071 9,035 24,293
B. Provision
I. Provisions for pensions 5,679 3,352 9,031
II. Other provisions 14,208 9,805 24,013
C. Liabilities
I. Bank loans 4,540 6,291 10,831
II. Liabilities affiliated companies 64 103 167
11,311
III. Other liabilities including prepaid income ***) 52,873 4,459
33,045 15,991 84,326
*) In the consolidated balance sheet forecast of VEBA it is assumed that the 15% share in ARAL held by
Wintershall is acquired by VEBA Oel AG on December 31, 1999. The acquisition is still subject to the
approval of the Federal Cartel Office.
**) including minority interests.
***) Including financial liabilities for VEBA of EUR 490 million and for VIAG of EUR 101 million; and for
VEBA-VIAG together: EUR 591 million.
The pro-forma consolidated balance sheet forecast continuation method is generally applied. The differ-
shows the anticipated balance sheet structure of the ent accounting principles were maintained for the
new VEBA VIAG group anticipated. The consoli- pro-forma consolidated balance sheet forecast of the
dated balance sheet forecasts shown have also been new VEBA-VIAG group as of January 1, 2000, for
prepared according to the International Accounting purposes of continuity with the existing accounting of
Standards (IAS) for the VIAG group and according the two groups.
to the accounting principles of the Commercial Code
(HGB) for the VEBA group. Applicable US-GAAP Due to the international focus of the accounting of
are observed for the consolidated balance sheet VEBA and VIAG, the comparability in substance of
forecast of VEBA to the extent permitted under the consolidated balance sheet forecasts of both
German accounting law; for mergers, the book value companies is not materially impaired. This applies
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
114 Merger Report V. Effects
irrespective of the differing accounting in the consoli- under German accounting law. In respect to those
dated balance sheet forecasts, particularly in respect accounting and evaluation issues for which an appli-
to the accounting for latent taxes, the partially cation of US-GAAP is prohibited due to mandatory
differing depreciation methods and usage periods as commercial law, the earnings and equity effects will
well as the treatment of goodwill created prior to be stated in case of complete accounting according to
January 1, 1995. US-GAAP in a reconciliation. The same applies to
the application of the book value continuation in
From today’s standpoint, no material mutual rela-
mergers. This does not constitute a change for the
tions, contracts or other business relationships exist
companies of the current VEBA group. The compa-
between the VEBA group and the VIAG group. For
nies of the current VIAG group will re-adjust their
simplification purposes, intra-group relationships were
accounting – beginning with the fiscal year 2000 –
not eliminated in the pro-forma plan consolidated
from IAS to an accounting according to the principles
balance sheet; this has no material effect on the
of the Commercial Code with a reconciliation to US-
balance sheet structure of the pro-forma consolidated
GAAP.
balance sheet forecast. Within the context of the
capital consolidation, only the book value of the 10%
2. Corporate Law Effects
interest of VEBA AG in VIAG AG was set off
against the equity of the VIAG group on a pro-rata a) Dissolution of VIAG AG and Expiration of its
basis. Shares
The balance sheet summaries are to be explained as The merger becomes effective upon registration in
follows: The total assets of the new group in the the commercial register. With effectiveness of the
combined pro-forma consolidated balance sheet fore- merger, VIAG AG as an entity is dissolved (ss. 20
cast as of January 1, 2000, amounts to EUR para. 1 no. 2 of the Transformation Act). The assets
84.3 billion compared with total assets of the VEBA of VIAG AG as a whole, including all liabilities, are
group of EUR 52.9 billion and of the VIAG group of transferred to VEBA AG. Simultaneously, all share-
EUR 33.0 billion. On the asset side, 65.0% thereof holders of VIAG AG except VEBA AG become
are allocable to fixed assets and 35.0% to current shareholders of VEBA-VIAG AG by operation of
assets. In the VEBA group, this relation is 67.3% : law. The shareholder rights from the VIAG shares
32.7% and in the VIAG group 62.8% : 37.2%. The expire with the dissolution of the company. As from
liabilities of the consolidated balance sheet forecast the registration, the shareholders of VIAG AG only
consist of 28.8% equity and 71.2% debt. Within the retain the claim for exchange of the VIAG shares
debt, the portion of reserves amounts to 55.0% into shares of VEBA-VIAG AG.
compared with a reserve ratio of 55.6% in the VEBA
With effectiveness of the merger, the office of the
group and 54.8% in the VIAG group.
members of the Board of Management of VIAG AG
ends. The same applies to the members of the
c) Financial Issues and Key Figures
Supervisory Board.
After completion of the merger, the VEBA-VIAG
group will probably show an equity ratio (shown b) Exchange of VIAG Shares into VEBA-VIAG
equity including outside shareholdings in% of the Shares
total assets) of 28.8%. The VEBA group has an
In order to provide the shareholders of VIAG AG
equity ratio of 32.3% and the VIAG group of 27.3%.
with VEBA-VIAG shares after effectiveness of the
The net financial position (liquid funds minus finan-
merger, VEBA AG will increase its capital stock
cial liabilities) amounts to EUR – 4.2 billion. The net
from currently EUR 1,307,274,228 by EUR
gearing (net financial position in relation to equity)
647,695,048 to EUR 1,954,969,276. The resolutions
amounts to 17.4% as of December 31, 1999 (previ-
regarding the increase of the capital stock as well as
ously VEBA group 10.8% and VIAG group 26.4%).
the approval of the Merger Agreement shall be
adopted at the Extraordinary Shareholders’ Meeting
d) Accounting of the new Company
of VEBA AG on February 10, 2000. The registration
The Consolidated Financial Statements of VEBA- of the consummation of the capital increase is a
VIAG AG will in the future be prepared according to prerequisite for the registration of the merger in the
the provisions of the Commercial Code while appli- commercial register (ss. 66 of the Transformation
cable US-GAAP are observed to the extent permitted Act).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report V. Effects 115
Pursuant to the exchange ratio set forth in the merger structure of the new company will probably be
agreement of 5 : 2, VIAG shareholders (being composed as follows:
entitled to exchange their shares) will receive for
each five (5) bearer shares without nominal value of VEBA-VIAG Shareholder Structure
VIAG AG two (2) bearer shares without nominal
3%
value of VEBA-VIAG AG. A total of 249,113,480 7%
new shares of VEBA-VIAG AG will be issued to the
VIAG shareholders (being entitled to exchange their 23 %
shares). Third party rights in the VIAG shares, which
67 %
are exchanged into VEBA-VIAG shares in the course
of the merger, will continue to exist with regard to
the VEBA-VIAG shares. Ins., Funds, Banks Private Individuals
Public Institutions Other Companies
The exchange procedure will be initiated immediately
after effectiveness of the merger (see detailed chapter Note: The shareholding of the State of Bavaria constitutes
‘‘Securities and Stock Exchange Trading’’ below the majority of the shares held by public
VII, 2 b). institutions.
Geographic Distribution of the
c) Participation Ratios at VEBA-VIAG AG after Capital Stock of VEBA-VIAG
the Merger
2%
Upon the merger, the former VIAG shareholders — 9%
except VEBA AG — will hold 33.1% and the former
26 %
VEBA shareholders will hold 66.9% of the capital
stock of VEBA-VIAG AG.3 The following share- 63 %
holders will, according to the participation ratio stated
above, hold interests of 3% or more of the capital
stock of VEBA-VIAG AG: Germany Europe America Asia/Rest
– Allianz Aktiengesellschaft with about 9.6%;*)
– State of Bavaria with about 5.6%; d) Dividend Rights
– Bayerische Hypo- und Vereinsbank AG with about
3.9%;**) The new shares which VIAG shareholders will
receive in exchange for their VIAG shares are
o
– HI-Verm¨ gensverwaltungs-Gesellschaft mbH with entitled to profit participation as from January 1,
about 3.7%.***) 2000. For the financial year 1999, VEBA AG and
The remaining shares will be widely held. VEBA VIAG AG will still have separate accounting. The
and VIAG assume based on the estimates and respective regular Shareholders’ Meetings on May 25,
investigations conducted by them that the shareholder 2000 (VEBA) and May 29, 2000 (VIAG) will adopt
resolutions on the use of the profits available for
distribution for the financial year 1999. Accordingly,
the shareholders of VEBA AG and of VIAG AG will
receive dividends for the 1999 financial year in
accordance with the resolutions of the profit distribu-
tion adopted by the respective Shareholders’ Meeting
of their company (see chapter ‘‘Implementation of
Combination’’ III 2 c above).
*) partially indirectly via Lambda-Vermogensverwaltung- o
***) main shareholder of HI-Verm¨ gensverwaltungs-Ge-
sgesellschaft mbH, Munich, and via AI Isar- sellschaft mbH are Bayerische Hypo- und Vereins-
Amperwerke AG Industriebesitz und Beteiligungen bank AG and Isar-Amperwerke AG with 49% each.
oHG, Munich.
**) indirectly via majority shareholding in VI-Industrie-
Beteiligungsgesellschaft mbH, Munich.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
116 Merger Report V. Effects
e) Company Name Association will in the future define the object of the
company as follows:
As set forth in § 6 para. 2 of the Merger Agreement, ‘‘The corporation controls a group of companies
VEBA AG will have a new company name after the active in the following business sectors in particular:
merger, which reflects the new and international
structure and orientation of the merged company. The – energy, with main operation in electricity, gas, oil,
regular Shareholders’ Meeting of VEBA on May 25, as well as water and waste disposal,
2000 shall adopt a resolution on the change of the
– chemicals, principally consisting of specialty chem-
company name. It will be ensured that the merger
icals, construction chemicals and petrochemicals
and the change of the company name will become
effective simultaneously. as well as activities in
– telecommunications and
f) Explanation of the Articles of Association of
– real estate management.
the New Company
The corporation is further authorized to manage
Pursuant to § 6 para. 1 of the Merger Agreement, the businesses in the fields of distribution and logistics,
current version of the Articles of Association of aluminum, silicon wafers and packaging.’’
VEBA AG shall be amended in the following points.
After the existing paragraph 1, a new paragraph 2
The required resolutions of the Shareholders’ Meet-
will be inserted; the subsequent paragraphs will be
ings shall be adopted in the Extraordinary Sharehold-
renumbered accordingly:
ers’ Meeting of VEBA on February 10, 2000. The
resolutions on the change of the company name and ‘‘Activities in these business sectors include genera-
the adjustment of the existing authorized capital as tion, processing and working as well as distribution
well as the existing authorization for the issuance of and transmission, supply and trading. Facilities of all
convertible bonds and bonds with warrants (including kinds can be erected, acquired and operated, and
the conditional capital) shall be adopted in the regular services and business cooperations of all kinds can be
Shareholders’ Meeting of VEBA on May 25, 2000. undertaken.’’
The provisions regarding the purpose of the company
(1) Company Name (§ 1 of the Articles of reflect the new entrepreneurial focus of the VEBA-
Association) VIAG group: the two core business areas energy and
chemicals are mentioned first. As described above in
As stated above, VEBA AG will have a new detail, they shall be forcefully expanded by organic
company name after the merger, which reflects the and external growth. A further important business
new and international structure and orientation of the unit of the new company is telecommunications, a
merged company. ss. 1 of the Articles is to be supplemental area the business unit real estate. The
changed accordingly. activities in the business units distribution and
logistics, aluminum, silicon wafers and packaging
shall be continued optimizing their value and sold at
(2) Registered Office (§ 1 of the Articles of an appropriate point in time. The definition of the
Association) new purpose of the company clarifies that the
activities in these business units are part of the
Currently, VEBA AG has its registered offices in purpose of the company until their sale and are
u
Berlin and D¨ sseldorf. It will abandon its dual managed by VEBA-VIAG AG.
registered offices. In the future, VEBA shall only
u
have its registered office in D¨ sseldorf. (4) Capital stock and Shares (§ 3 of the Articles
of Association)
(3) Purpose of the Company (§ 2 of the Articles For the implementation of the merger, the capital
of Association) stock of VEBA-VIAG AG will be increased by EUR
647,695,048 and will amount to EUR 1,954,969,276
Corresponding to the new strategic and en- after the merger. It will be split into 751,911,260
trepreneurial focus, ss. 2 para. 1 of the Articles of bearer shares without nominal value.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report V. Effects 117
The existing authorized capital in § 3 para. 2 to 4 of two weeks. The one-month notice period has proven
the Articles of Association of VEBA AG and the to be too rigid and not expedient in practice.
existing authorization for issuance of convertible
bonds and option bonds (including the conditional (8) Location of the Shareholders’ Meeting (§ 17
capital according to ss. 3 para. 5 of the Articles of of the Articles of Association)
Association) are to be amended by a resolution in the
regular shareholders’ meeting of VEBA on May 25, Currently, § 17 of the Articles of Association of
1999. It is the goal to ensure an adequate capitaliza- VEBA AG sets forth that the location of the
tion of the new company corresponding to the shareholders’ meeting is to be in Berlin, Bonn or
circumstances as changed by the merger. another appropriate location in the Federal Republic
of Germany. Corresponding to the change of the
(5) Exclusion of the Right to Securitize (§ 4 registered office of the company, the provision
para. 2 of the Articles of Association) regarding the location of the shareholders’ meeting
shall also be adjusted: location for the shareholders’
§ 4 para. 2 of the Articles of Association will set meeting of the company will be the registered office
forth that the right of shareholders to receive share of the company or another major German city
and dividend coupon certificates is excluded unless (deutsche Gro(beta)stadt).
required by the stock regulations of a stock exchange
where the shares of the company are listed. The (9) Reducing the Deposit Period (§ 18 of the
provision has the purpose of avoiding the compara- Articles of Association)
tively high costs of share certificates for individual
shareholders. Because of the practice of the giro § 18 of the Articles of Association provides that all
transaction system for securities, there is no reason shareholders are entitled to participate in the share-
for listed companies to grant every shareholder a holders’ meeting and to exercise their voting right
right to receive individual certificates. As of today, who deposit their shares or the certificates of deposit
the delivery of individual certificates is in practice no with a security-deposit bank as from a certain date
longer relevant for listed stock corporations. The new until the end of the shareholders’ meeting. The
provision takes into account the case that certificates deposit period to be observed shall be reduced from
are required by regulations of a stock exchange ten to seven days. This provides the advantage to the
where the shares of the company are listed. To this shareholders that in the future the shares will be
extent the right of the shareholders to receive share blocked for a shorter period of time.
certificates and dividend coupons will not be In all other respects, the provisions of the Articles of
excluded. Association correspond to customary practice of large
listed stock corporations. §§ 6 and 7 para. 1 of the
(6) Deletion of § 7 para. 2 of the Articles of Articles of Association stipulate the composition of
Association the Board of Management as well as the representa-
The existing provision in § 7 para. 2 of the Articles tion of the company by the Board of Management.
of Association of VEBA AG pursuant to which The provisions in §§ 8 to 15 contain customary and
agents with full power (Prokurist) may be appointed expedient provisions regarding the activity, composi-
only with the consent of the Supervisory Board shall tion and compensation of the Supervisory Board, the
be deleted. It is no longer customary in the practice position of the Supervisory Board chairman, the
of large, listed companies to require the consent of convening of Supervisory Board meetings, the resolu-
the Supervisory Board for the appointment of agents tion procedure and the early resignation of Supervi-
with full power (Prokurist) in the Articles of sory Board members. In most parts, these provisions
Association. correspond to the statutory provisions. §§ 16 to 21 of
the Articles of Association provide for the convening
and carrying out of the Shareholders’ Meeting. In
(7) Reducing the Resignation Period for Supervi-
detail, provisions regarding the notice period for
sory Board Members (§ 8 para. 4 of the
convening and possible locations for the Sharehold-
Articles of Association)
ers’ Meeting, requirements for participating in the
The notice period for resignation from the Supervi- Shareholders’ Meeting, the voting right of the share-
sory Board which is one month according to the holders and the chairmanship in the shareholders’
existing articles of association shall be reduced to meeting are excluded. § 22 reflects the provisions of
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
118 Merger Report V. Effects
the Stock Corporation Act regarding the submission date (December 31, 1999). The use of losses carried
of annual financial statements, the use of the profit as forward by individual group companies of VIAG AG
well as the exoneration of the Board of Management may be continued even after the merger of VIAG AG
and Supervisory Board. § 23 of the Articles of under the conditions of § 8 para. 4 of the Corporate
Association sets forth the form of public announce- Income Tax Act.
ments. It is existing practice of VEBA AG to publish
announcements in the Bundesanzeiger (Federal Ga- The comparison of the tax book value of the assumed
zette) and in the B¨ rsen-Zeitung. The provision in
o assets and liabilities on the one hand and the book
§ 24 of the Articles of Association makes use of the value of the canceled interest of VEBA AG in VIAG
possibility provided by § 179 para. 1 sentence 2 of AG on the other hand shows a takeover result in the
the Stock Corporation Act to authorize the Supervi- tax balance sheet of VEBA AG which, however, is
sory Board to amend the Articles of Association not taken into account for tax purposes pursuant to
relating to their form. This serves simplification § 12 para. 2 sentence 1 of the Transformation Tax
purposes and is customary in practice. Act.
3. Tax Effects (b) Transactional Taxes
a) Taxation of the Merger Since the merger constitutes a sale of an entire
(1) Consequences for the Companies participating business, the transaction is not subject to value added
in the Merger tax (§ 1 para. 1a of the V.A.T. Act).
(a) Income Taxes The merger leads to a liability for real estate transfer
tax for the real estate owned by VIAG AG as well as
According to the provisions of the Transformation some direct or indirect subsidiaries. The calculation
Act, the merger can take place without income tax basis for the real estate transfer consists of the real
liabilities for VEBA AG and VIAG AG. estate values to be established according to a specific
For VIAG AG, this results from § 11 para. 1 of the valuation procedure set forth in the Valuation Act
Transformation Tax Act. According to this provision, (required valuation, Bedarfsbewertung). The tax rate
VIAG AG may show the book values in its closing is 3.5%. The liability is estimated to amount to about
tax balance sheet as of December 31, 1999, since the EUR 10 million. This estimate does not include the
merger ensures that the hidden reserves contained in real estate transfer tax liability from later measures
the transferred assets will later be subject to corporate related to the integration of the companies of the two
income tax in the surviving company, i.e. VEBA AG, groups. The real estate transfer tax to be borne by
and that the consideration granted by VEBA AG for VEBA AG in respect to the transfer of the real estate
the transferred assets consists only of shareholder of VIAG AG is fully tax deductible as a business
rights. Therefore, the merger is in principle tax expense since it forms part of the merger costs.
neutral for VIAG AG in respect both to corporate
income tax and trade tax. (2) Taxation of Shareholders of VEBA AG and
In the merger, VEBA AG assumes all assets and VIAG AG
liabilities of VIAG AG – also for tax law purposes – The taxation of the shareholders of VEBA and VIAG
by way of universal succession. Pursuant to § 12 based on the currently applicable tax provisions is to
para. 1 of the Transformation Tax Act it continues to be described in all material aspects as follows: in
use the book values shown in the closing tax balance case of doubt, it is recommended to obtain tax advice
sheet of VIAG AG. In respect to the tax position taking into account the personal circumstances of the
(depreciation for wear and tear, increased deprecia- shareholder; this applies in particular to shareholders
tion, special write-offs, valuation options and valua- with limited tax liability in Germany, since the
tion discounts, reserves reducing the tax profit, etc.) question of taxation depends on the national tax law
VEBA AG will replace VIAG AG. As surviving of the residence state of the respective shareholder
company, VEBA AG will also enter into the legal and the provisions of any treaties for the avoidance
relations of VIAG AG with its controlled companies. of double taxation, if any.
The portions of the equity available for distribution in
the tax income calculation of VIAG AG will be The merger is tax neutral for existing VEBA
added to those of VEBA AG as of the tax transfer shareholders for income and trade tax purposes, since
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report V. Effects 119
they hold the same shares prior to and after the shareholding) become non-substantial shareholdings
merger. due to the merger, the VEBA-VIAG shares received
in the merger are also considered a substantial
To the extent that shares of existing VIAG sharehold- shareholding, even if the shareholder is subsequently
ers are held as part of their operating assets, the no longer holding a substantial shareholding in
shares are considered as disposed of at book value VEBA-VIAG AG (§ 13 para. 2 sentence 2 of the
due to the merger and the shares of VEBA-VIAG Transformation Tax Act). To the extent that shares in
AG are considered as acquired at this value (§ 13 VIAG AG are subject to a ‘‘blocked amount’’
para. 1 of the Transformation Tax Act). This also (‘‘Sperrbetrag’’) as defined in § 50c of the Income
applies for trade tax purposes. The merger is tax Tax Act, such ‘‘blocked amount’’ is transferred to
neutral for VIAG shareholders for income and trade the received shares of VEBA AG (§ 13 para. 4 of the
tax purposes. Transformation Tax Act). If in an individual case the
If VIAG shares are held as private assets and have merger would in principle lead to a tax liability of a
been acquired during the one-year speculation period, foreign shareholder, § 13 of the Transformation Tax
the shares are considered as sold at their acquisition Act also provides for tax neutrality according to
costs and the shares of VEBA-VIAG AG replacing German tax law. Other than that, the tax conse-
them are considered as acquired at value, so that no quences for such shareholders are determined by the
taxation of hidden reserves takes place. In the foreign tax law and applicable double taxation
Transformation Tax Decree of March 25, 1998, the treaties, if any.
tax authorities have ruled that the exchange of VIAG
If during the course of the merger exchanging VIAG
shares against VEBA-VIAG shares triggers a new
shareholders are not entitled to full shares due to the
speculation period pursuant to § 23 of the Income
number of their exchanged VIAG shares at the
Tax Act. In the opinion of the tax authorities, this
(calculatory) exchange ratio of 2.5 VIAG shares for 1
also applies if the speculation period for the ex-
VEBA share, the resulting fractions will be sold. Any
changed shares had already ended. According to the
capital gains resulting therefrom are subject to tax in
publication of the tax authorities, the new speculation
accordance with the tax status of the share.
period for the received VEBA shares shall begin on
the fiscal transfer date (December 31, 1999). If the
exchange of the VIAG shares against VEBA-VIAG b) Taxation of the Company and of the Share-
shares due to the merger takes place within the holders after the Merger
ongoing speculation period for the VIAG shares, any (1) Taxation of VEBA-VIAG AG
capital gains are calculated from the sale of the
received VEBA-VIAG shares, taking into account the The fiscal circumstances of VEBA-VIAG AG remain
original acquisition costs of the VIAG shares. unaffected by the merger, particularly existing control
relationships as well as control and profit and loss
If this is not the case, i.e., if the exchange of the
transfer agreements continue to apply.
VIAG into VEBA-VIAG shares due to the merger
takes place outside of any speculation period for the
exchanged VIAG shares, any capital gains from the (2) Taxation of the Shareholders of VEBA-VIAG
sale of the received VEBA-VIAG shares are calcu- AG
lated based on the stock exchange price of the VIAG
shares at the time of the share exchange as the The tax treatment of dividends to be distributed by
acquisition costs. VEBA-VIAG AG in the future is identical to the
treatment of dividend distributions prior to the
If substantial shareholdings of shareholders (as de- merger. This applies to the income, corporate income,
fined in § 17 of the Income Tax Act, at least a 10% and trade tax purposes.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
120 Merger Report V. Effects
VI.
EXPLANATION OF THE MERGER AGREEMENT
AND OF THE AGREEMENT IN PRINCIPLE
1. Merger Agreement account of VEBA AG for December 31, 2000.
However, both the Merger Closing Date and the
The Merger Agreement between VIAG AG and
effective date of the closing balance sheet may be
VEBA AG was notarized on December 21, 1999. For
postponed in case of a delay of the effectiveness of
its effectiveness it requires the approval of the
the merger according to § 9 of the Merger Agreement
shareholders’ meetings of VEBA AG and of VIAG
(see explanation under § 9 below).
AG as well as the registration of the merger in the
commercial register responsible for the respective In its accounting, VEBA AG will continue the book
company. values of the assets and liabilities for the assets and
In respect to the Merger Agreement and its provi- liabilities transferred by the merger shown in the
sions, the following is explained: closing balance sheet of VIAG AG.
a) Asset Transfer (§ 1) b) Consideration (§ 2)
During the merger, VIAG AG transfers its assets as a Upon effectiveness of the merger, VEBA AG grants
whole with all rights and obligations by means of the shareholders of VIAG AG, as consideration for
acquisition by transferring, according to § 2, no. 1 of the transfer of the assets of VIAG AG, for five
the Transformation Act (Umwandlungsgesetz) to (5) shares of VIAG AG without nominal value, each
VEBA AG. The merger becomes effective upon its representing an allocable portion of the capital stock
registration in the commercial register responsible for in the amount of EUR 1.00, two (2) bearer shares of
VEBA AG. The registration in the commercial VEBA AG without nominal value, each representing
register responsible for VEBA AG may only take an allocable portion of the capital stock in the
place after the merger has been registered in the amount of EUR 2.60. The new shares of VEBA AG
commercial register responsible for VIAG AG. Upon are granted to VIAG shareholders free of charge.
effectiveness of the merger, VIAG AG is ceases VEBA AG is not entitled to exchange its VIAG
without liquidation. VEBA AG becomes its global shares.
successor.
The new shares are entitled to participate in profits
The merger will be based on the balance sheet of
from the beginning of January 1, 2000. However, if
VIAG AG as of December 31, 1999, which is also
the merger is registered after the regular sharehold-
the closing balance sheet of VIAG AG within the
ers’ meeting of VIAG AG during the 2001 financial
meaning of § 17 para. 2 of the Transformation Act.
year, the cut-off date for the profit shareholding right
This balance sheet becomes part of the annual
is postponed according to the provision in § 9 para. 2
statement of accounts of VIAG AG as of Decem-
of the Merger Agreement (see explanation under § 9
ber 31, 1999. The assumption of the assets of VIAG
below).
AG by VEBA AG takes place internally, i.e. in
relation between VEBA AG and VIAG AG, effective The determination of the exchange ratio is based on a
as of the end of December 31, 1999. From the company valuation conducted by VEBA AG and
beginning of January 1, 2000, all actions and VIAG AG with the same methods, on the basis of
transactions of VIAG AG are deemed to be carried established principles of economic company valua-
out for the account of VEBA AG. This means that tion. The methods of company valuation and its
the internal effects of the merger, i.e., in relation to results are explained and established in detail in
VIAG AG and VEBA AG, refer back to January 1, chapter VIII. ‘‘Exchange Ratio’’ of this Report.
2000 (‘‘Merger Closing Date’’). All business transac- According to the company valuation, an exchange
tions of VIAG AG during the period between ratio of 2.499 : 1 would be the result. Based thereon,
January 1, 2000, and the day of effectiveness of the the Boards of Management of VEBA AG and of
merger (i.e., the registration in the commercial VIAG AG have agreed on the contractual exchange
register responsible for VEBA AG) are therefore ratio of 5 shares of VIAG AG for 2 shares of
taken into account in the annual statements of VEBA AG.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VI. Explanation of the Merger Agreement 121
VEBA AG holds 69,198,214 shares of the capital d) Trustee (§ 4)
stock of VIAG AG which is divided into a total of
VIAG has retained Dresdner Bank Aktiengesellschaft,
691,981,914 shares. No new shares are issued for
Frankfurt/Main, as trustee according to § 71 of the
these 69,198,214 shares of VIAG AG held by VEBA
Transformation Act for receiving the new shares to
AG (§ 20 para. 1 no. 3, 2nd half-sentence, 1st alterna-
be issued by VEBA AG to the shareholders of VIAG
tive of the Transformation Act).
AG. The new shares of VEBA AG will be certified
According to § 15 para. 1 of the Transformation Act, in one or more global certificates, which will be
the VIAG shareholders as shareholders of the trans- submitted to the trustee prior to the registration of the
feror entity are entitled to have the exchange ratio merger in the commercial register responsible for
evaluated during an award proceeding. If during an VIAG AG. After registration of the merger in the
award proceeding according to §§ 305 et seq. of the commercial register responsible for VEBA AG,
Transformation Act a more adventageous exchange VEBA AG will instruct the trustee to distribute those
ratio is established in form of an additional cash shares of VEBA AG to the shareholders of VIAG
payment with legally binding effect, this decision has AG to which the latter are entitled by way of
effect for and against all shareholders of VIAG AG crediting such shares held in collective custody to the
according to § 311 of the Transformation Act. This shareholders of VIAG AG against delivery of their
means that those shareholders who have not filed an shares in VIAG AG.
application during the award proceeding may possibly
also receive the court determined additional cash e) Special Advantages and Rights (ss. 5)
payment. The legislation has not offered the possibil-
ity of an award proceeding to the shareholders of the VIAG AG has no holders of special rights (such as
receiving entity, in this case VEBA AG. holders of preferred shares, other debentures or profit-
sharing rights) to which VEBA AG would have to
c) Capital Increase (§ 3) grant rights within the meaning of § 5 para. 1 no. 7
of the Transformation Act. Without prejudice to the
In order to be able to exchange the shares of VIAG provisions explained hereinafter, which have been
AG into shares of VEBA AG, VEBA AG will issue included in the second paragraph for reasons of legal
new shares. For this purpose, the capital stock of provisioning: no rights within the meaning of § 5
VEBA AG will be increased from the current EUR para. 1 no. 7 of the Transformation Act will be
1,307,274,228 by issuing 249,113,480 new bearer granted to individual shareholders or to holders of
shares without nominal value, each representing an special right; no measures within the meaning of the
allocable portion of the capital stock in the amount of aforementioned provision have been intended in
EUR 2.60, by EUR 647,695,048 to EUR respect to such persons.
1,954,969,276. The merger may be registered only
after the completion of this capital increase has been The State of Bavaria has been granted the right, in
registered in the commercial register responsible for the Agreement in Principle, to propose to the
VEBA AG (§ 66 of the Transformation Act). The Supervisory Board of VEBA-VIAG AG4) an individ-
new shares issued for the implementation of the ual for election as a shareholder representative for the
merger are entitled to participate in profits from the Supervisory Board, as long as it holds more than 4%
beginning of January 1, 2000. The beginning of the of the shares in VEBA-VIAG AG. This is only a
profit entitlement may be postponed in case of a proposal right and not a power to appoint Supervi-
delay of the effectiveness of the merger according to sory Board members according to § 101 para. 2
§ 9 para. 2 of the Merger Agreement. AktG (Stock Corporation Act), since the Supervisory
Board of VEBA-VIAG AG decides without prejudice
Details regarding the exchange listing of the new to the proposal with respect to its resolution proposal,
VEBA shares are found in chapter VII. 4. of this which it submits to the shareholders’ meeting for the
Merger Report ‘‘Securities and Exchange Trading’’. election of Supervisory Board members, according to
its own due discretion and without commitment to
the proposal of the State of Bavaria. Furthermore, the
State of Bavaria has been granted the right in the
4) new company will in the following be referred to as
VEBA AG will have a new name after the merger. As
VEBA-VIAG.
this name will not be determined until spring 2000, the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
122 Merger Report VI. Explanation of the Merger Agreement
Agreement in Principle to propose an individual for Dr. Bernotat, Mr. Beuth, Mr. Bonse-Geuking and
election to the Supervisory Board of the future Dr. Harig who are leaving the Board of Management
energy company, in which the energy activities of of VEBA, retain their existing memberships on the
PreussenElektra Aktiengesellschaft and Bayernwerk Boards of Management of the major group companies
Aktiengesellschaft, including their subsidiaries, are to of VEBA, from which they are to receive remunera-
be combined, as long as its holds more than 4% of tion corresponding to their current remunerations at
the shares in VEBA-VIAG AG. This is also not a VEBA and the major group companies of VEBA.
power to appoint according to § 101 para. 2 AktG. Mr. Mamsch leaves the Board of Management of
The Board of Management of VEBA-VIAG AG will VEBA on March 31, 2000. He will receive the
support the election of the proposed individual as a benefits due to him according to his service
Supervisory Board member of the energy company agreement.
within the framework of corporate interests of
Upon effectiveness of the merger, Mr. Ardelt and
VEBA-VIAG AG and the energy company. Further
Dr. Freiherr von Waldenfels will be leaving the
details in this respect may be found in chapter IV. 7.,
Board of Management of VIAG. They have been
page 103).
appointed as members of the Board of Management
Supervisory Board members, auditors of VEBA AG of VIAG Telecom AG, currently being incorporated.
and of VIAG AG and the joint merger auditor will It is intended – subject to a corresponding resolution
not receive special privileges, such as compensation of the Supervisory Board of VIAG Telecom AG – to
in the event of losing their offices due to the merger. conclude service agreements with them for the
duration of their appointments, with conditions corre-
Members of the Board of Management of VEBA AG
sponding to those of their current appointments with
and of VIAG AG will subject to the provisions in
VIAG. Mr. Grohe will leave the Board of Manage-
para. 4 through 6, which will be explained hereinafter
ment of VIAG AG upon effectiveness of the merger.
and have been included for precautionary measure
He will receive the benefits owed to him according to
not be granted any special advantages within the
his service agreement.
meaning of § 5 para. 1 no. 8 of the Transformation
Act. In § 5 para. 6 the Merger Agreement contains a
provision regarding the composition of the Supervi-
According to § 5 para. 4 of the Merger Agreement,
sory Board of VEBA-VIAG AG. Without interfering
the Supervisory Board of VEBA AG will adopt a
with the powers of the Supervisory Board and the
resolution on the appointment of the new Board of
shareholders’ meeting of VEBA according to the
Management members of VEBA AG during the first
Stock Corporation Act, an agreement exists between
Supervisory Board meeting after the shareholders’
VEBA AG and VIAG AG, that a new composition
meeting of VEBA AG, in which the resolution
will be recommended for the shareholder representa-
regarding the consent to the Merger Agreement is
tives in the Supervisory Board of VEBA-VIAG AG
passed. The Supervisory Board of VEBA AG deter-
after effectiveness of the merger and during the
mines, in its own due discretion about the appoint-
current term of office. The new composition should
ment of the Board of Management members. How-
consist of former members of the shareholders in the
ever, it is planned that the Board of Management of
Supervisory Boards of VEBA AG and VIAG AG, or
VEBA AG after effectiveness of the merger will
other individuals to be nominated by VEBA AG and
consist of Ulrich Hartmann and Professor
VIAG AG, in a ratio of 7:3, respectively. The
Dr. Wilhelm Simson as chairmen, as well as
Supervisory Board is to be chaired by a representa-
u
Dr. Hans Michael Gaul, Dr. Manfred Kr¨ per and
tive of VEBA AG.
Dr. Erhard Schipporeit. Mr. Simson is to be ap-
pointed until May 31, 2002, and Mr. Schipporeit for
f) Amendments of the Articles of VEBA AG
a duration of five years.
(§ 6)
The new service agreements are all to be concluded
The articles of VEBA AG are to be changed. The
for the term of appointment. Corresponding to the
changes to the articles are explained in chap-
positions of Mr. Simson and Mr. Schipporeit, they
ter V. 2. f) of this Report.
should correspond to the currently applicable service
agreements of the members of the Board of Manage-
ment of VEBA AG, each also in respect to the
remuneration.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VI. Explanation of the Merger Agreement 123
g) Consequences of the Merger for the Employ- The merger of VEBA AG and VIAG AG has no
ees and their Representation (§ 7) effect on the operations of the affiliated companies,
since only VEBA AG and VIAG AG immediately
§ 7 of the Agreement describes the individual- and participate in the merger. On the level of the
collective-employment law consequences of the affiliated companies, no changes will occur to their
merger. This provision contains a description of the shop constitution committees or co-determination, nor
legal consequences of the merger. to their applicable shop- or general operation agree-
ments. The legal situation of the employees of the
Since the main administration of the merged com- affiliated companies is not directly affected by the
pany is to be located at its registered office in merger.
u
D¨ sseldorf, it is planned to abandon the existing
main administration of VIAG AG in Munich. It It is intended to combine PreussenElektra Aktien-
constitutes the only operation of VIAG AG. This gesellschaft, with its registered office in Hanover, and
constitutes an operational change within the meaning Bayernwerk Aktiengesellschaft, with its registered
of § 111 BetrVG (German Shop Constitution Act). office in Munich, into a uniform energy company
Therefore, the Boards of Management of both compa- after effectiveness of this merger. It is to have its
nies intend to agree on a compromise settlement and registered office and main administration in Munich.
social plan with each of their works councils in The combination is to take place by merging
Munich and D¨ sseldorf prior to the effectiveness of
u Bayernwerk Aktiengesellschaft into PreussenElektra
the merger. As part of the compromise settlement, Aktiengesellschaft; the merged company will be
personnel concepts for both locations are to be agreed affiliated with VEBA-VIAG AG through a manage-
upon. The parties aim for a main administration with ment- and profit distribution-agreement. The intended
a lean holding structure of no more than 200 to measures and the related consequences for the
250 employees, comprised of about two thirds VEBA employees and their representations will be discussed
AG employees and about one third VIAG AG on a timely basis with the competent employee
employees. The content of the employment conditions representation and will be the subject of a separate
agreed upon with the employees of VEBA AG (shop agreement with them.
agreements, old age support, etc.) remains unaffected.
h) Expenses (§ 8)
To compensate or reduce the economic disadvantages
According to the cost clause in § 8 of the Agreement,
related to the operational change, provisions regard-
the parties each bear their own costs caused in
ing early retirement, settlements, income securing,
connection with the preparation and implementation
travel expense reimbursement and moving expense
of the combination as well as in connection with the
contributions, among others, will be negotiated for
Merger Agreement. Jointly caused expenses will be
inclusion in the social plan. During the negotiations
borne by both parties together.
with the works councils, principles regarding the
harmonization of collective provisions, e.g., works This cost provision may become relevant only if the
agreements, are also to be established. The harmoni- merger does not become effective due to the rescis-
zation is to be completed within two years after the sion of either party or for any other reason. After the
effectiveness of the merger. Until a new agreement effectiveness of the merger this cost provision be-
has been found, the continued validity of the works comes invalid, since due to the global succession all
agreements and collective wage agreements currently liabilities of VIAG AG will be transferred to VEBA
existing at VIAG will be determined by the provi- AG in any case.
sions of § 613a para. 1 BGB (German Civil Code).
Collective wage agreements exist due to the member- i) Change of the Effective Date (§ 9)
ship of VIAG AG in the employers’ association of
the chemical industry (‘‘Bayerische Chemische Indus- The rules in § 9 of the Merger Agreement contain
trie e.V.’’ – Bavarian Chemical Industry Association). provisions in the event that the registration of the
Through this membership, VIAG AG is connected to merger in the commercial register responsible for
the Bundesarbeitgeberverband Chemie e.V. (Federal VEBA AG is delayed. In this case, the date of the
Chemicals Employers’ Association). Both member- Merger Closing Date as well as the profit entitlement
ships end upon effectiveness of the merger. VEBA from the shares issued during the merger to the
AG is not bound by any collective wage agreements. shareholders entitled to an exchange are to be
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
124 Merger Report VI. Explanation of the Merger Agreement
adjusted. This provision corresponds to customary j) Rescission Rights (§ 10)
practice.
§ 10 of the Merger Agreement grants rescission
If the merger has not been registered in the commer- rights. The parties have a right to rescind in the
cial register responsible for VEBA AG by the end of following cases:
March 1, 2001, § 9 para. 1 sentence 1 of the Merger
Agreement provides for a postponement of the – The merger has not become effective by the end of
effective date of the closing balance sheet to Decem- December 31, 2000: This shall enable the merger
ber 31, 2000. Furthermore, differing from § 1 para. 3 partners to free themselves from their contractual
of the Merger Agreement, the expiration of Decem- obligations, if the effectiveness of the merger is
ber 31, 2000 and the beginning of January 1, 2001 materially delayed.
are determined as the cutoff date for the assumption – The regular shareholders’ meeting of the respective
of the assets and for the change of the accounting. other contractual party decides on a dividend
These provisions are necessary, since a retroactive payment for the 1999 financial year, that exceeds
accounting effect of the 2000 financial year is no the average amount of the dividends during the
longer possible if the accounting of the companies previous three years plus 25%: This rescission
participating in the merger has been completed for right ensures that neither party pays a dividend to
the 2000 financial year. If the merger is not its shareholders that affects the exchange ratio set
registered by March 1, 2001, a new closing balance forth in the Merger Agreement.
sheet of VIAG AG has to be prepared for Decem-
ber 31, 2000, and the merger has to relate back for – By the end of the regular shareholders’ meeting of
accounting purposes to January 1, 2001. In case of a VEBA AG during the 2000 financial year, the
further delay of the registration beyond March 1 Board of Management and Supervisory Board of
during the subsequent years, the respective cutoff VEBA-VIAG AG have not been constituted ac-
dates are postponed by one year accordingly. cording to the Merger Agreement, or the company
name has not been changed as agreed: This
In case the merger is registered in the commercial rescission right serves to secure the corresponding
register after the regular shareholders meeting of provisions of the Merger Agreement.
VIAG AG during the 2001 financial year, § 9 para. 2
of the Merger Agreement provides that the new – The required clearance by the competent cartel
shares to be granted for the implementation of the authorities has not been obtained by the end of
merger are entitled to participate in the profits only August 31, 2000, or is only possible subject to
after January 1, 2001. In this case, shareholders of conditions or restrictions which could not have
VIAG AG receive a dividend for the 2000 financial been anticipated according to the current status of
year from VIAG AG. In the event of a further delay discussions with the Commission of the European
of the registration beyond the regular shareholders’ Communities and the Federal Cartel Office, and
meeting of VIAG AG during subsequent years, the which would lead to material detrimental effects
start of the profit shareholding entitlement is post- for the future common company: The provision
poned by one year accordingly. The provisions of the provides the necessary protection since the cartel
Merger Agreement in § 9 para. 2 ensure that the law clearance has not currently been obtained. The
VIAG AG shareholders are entitled to a profit parties may rescind the Merger Agreement if the
shareholding for each financial year, either as VIAG merger control proceedings take materially longer
AG shareholders based on the resolution on the use than expected or would force material changes to
of the profits available for distribution of VIAG AG the concept of the combination.
for the previous financial year, or as shareholders of Rescissions have to be declared by registered mail.
VEBA AG. At the same time the provision provides Each rescission has immediate effect.
that for certain periods no claim arises both for
dividends from the shares of VIAG AG and from the A contractual obligation to rescind does not exist.
shares of VEBA AG received for these during the
implementation of the merger. 2. Agreement in Principle
a) Overview
– On September 27, 1999, VEBA AG and VIAG AG
have reached an Agreement in Principle regarding
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VI. Explanation of the Merger Agreement 125
the Combination of VEBA AG and VIAG AG. ordinary shareholders’ meetings and the dividend
This Agreement in Principle including its annexes distributions of VEBA and VIAG in the year 2000.
is enclosed as Attachment 1 of the Merger This is supposed to secure that the shareholders of
Agreement. It stipulates that the companies shall be VEBA and VIAG receive a dividend for the
combined in a merger of equals. It contains financial year 1999 according to the resolution
regulations regarding the distribution of profits which was
– about the structure and orientation of the new passed in the shareholders’ meeting of the respec-
company (§§ 1 through 8), tive company.
– about the accounting of the new company (§ 9), – § 11 regulates the procedure to determine the
– about the implementation of the merger (§§ 10 exchange ratio of the VIAG shareholders. The
through 14), parties have agreed that in order to determine the
final exchange ratio, two appraisers – the Wollert-
– as well as other resolutions (especially the approval
Elmendorff Deutsche Industrie-Treuhand GmbH
by the Supervisory Boards, rescission rights, con-
u
Wirtschaftspr¨ fungsgesellschaft and the Warth &
tinuation of the business, takeover bids of third
u
Klein GmbH Wirtschaftspr¨ fungsgesellschaft – will
parties, §§ 15 through 19).
be instructed to prepare a joint expert opinion on
The note in the minutes attached to the Agreement in the enterprise values of VEBA and VIAG. The
Principle contains detailed provisions. exchange ratios is according to contract, even if
not within the contractual range of variation, since
b) Provisions regarding preparation and imple- the foundation for the company valuation has been
mentation of the merger approved by the Boards of Management of VEBA
– In execution of the Agreement in Principle, and VIAG. The contractual rescission right (ac-
VEBA AG and VIAG AG have reached the cording to § 12 para. 3) for this event has not been
Merger Agreement explained above. The Agree- exercised.
ment in Principle contains several regulations that
where implemented into the merger agreement. – In § 12 para. 4 of the Agreement in Principle, the
parties agreed to apply for Arthur Andersen
– Combination of VEBA and VIAG by way of u
Wirtschaftspr¨ fungsgesellschaft Steuerberatung-
merging the VIAG AG into the VEBA AG (§ 1 sgesellschaft mbH to be appointed by the court as
para. 1 of the Agreement in Principle); the joint merger auditor. During the preparation of
– Continuation of the company under a new name the application for the court appointment of the
(§ 1 para. 2); merger auditor it became apparent that, due to
– Purpose of the corporation, registered offices, comprehensive ongoing advisory activities in a
administration and Articles of Association of the major group company of VEBA, Arthur Andersen
new company (§ 2); could not take on the merger audit. Therefore the
parties have agreed to apply at the competent court
– Composition of the Board of Management and the
for BDO Deutsche Warentreuhand AG Wirtschaft-
Supervisory Board (§§ 3 and 4);
u
spr¨ fungsgesellschaft to be appointed as the merger
– Merger Closing Date, closing balance sheet and auditor.
interim balance sheet (§ 11);
These regulations are explained individually in chap- – § 13, the parties have given an overview of the
ter VI.1. Beyond the contents of the Merger Agree- pre-contractual exchange of information and have
ment, the Agreement in Principle has further provi- agreed on the realization of a due diligence. The
sions, which were not implemented in the Merger due diligence has been conducted between Septem-
Agreement. These are mainly regulations which ber 27 and November 15, 1999. No facts have
concern the preparation of the merger and are settled become known which would entitle a party to
once the merger is in effect. The following provisions rescind. The results of the due diligence were
are meant: provided to the appraisers.
– § 10 regulates the convening of an extraordinary – In § 14 of the Agreement in Principle, the parties
shareholders’ meetings of VEBA and VIAG. In have committed themselves to immediately file a
addition, the parties have agreed to prompt that the notification regarding the merger with the
merger will be registered immediately after the responsible cartel authorities. Explanations in this
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
126 Merger Report VI. Explanation of the Merger Agreement
respect can be found in chapter IV. 10. of this c) Rescission rights according to the Agreement
report. in Principle
– In § 15 it is clarified that the Supervisory Boards In § 16 para. 2, rescission rights of the parties are
of VEBA AG and VIAG AG have approved the stated.
Agreement in Principle.
– A rescission right is given in the event that facts or
– In § 16 para. 1, VEBA AG and VIAG AG have circumstances have become known during the due
committed themselves to a confidential cooperation diligence which either make the documents submit-
as well as to the coordination of and agreement on ted pursuant to § 13 or further given statements
their contacts towards authorities and the public as appear false, misleading, or incomplete or if facts
well as to mutual support and the principles for the or circumstances have not been known prior to
mutual exchange of information. reaching this Agreement in Principle and which
– § 17 contains the obligation of the parties to constitute a material deterioration of the property-,
conduct different measures, which could change financial-, or earnings situation or earnings power
the concept of combination or make the implemen- of the respective party. This rescission right has
tation of the combination more difficult, only after not become relevant.
consultation with the respective other party and
– The parties additional have a right to rescind if the
only if this is required in the interest of the
respective other party has failed to fulfill essential
respective company and its shareholders or if it is
conditions for the implementation of the combina-
necessary for the implementation of the combina-
tion according to the Agreement in Principle. Until
tion. This includes the increase of the capital stock
now both parties have fulfilled all essential condi-
or the creation of conditional or authorized capital,
tions. Therefore, a right to rescind does not exist
the exploitation of an authorization of the Board of
according to this provision.
Management to increase the capital stock, the issue
of securities and rights that may be exchanged into – Another rescission right has been given for the
shares, as well as the disposition of major share- event that the Supervisory Board of a party has not
holdings and the acquisition of companies and given the approvals necessary for the combination
shareholdings of major importance for the respec- by way of a merger. The Supervisory Boards of
tive group. VEBA AG and VIAG AG each have by respective
– According to § 18, the parties are obliged to resolution agreed to the combination on Septem-
refrain from anything that may delay or endanger ber 26, 1999. The Supervisory Boards of
the realization of the merger. This applies in VEBA AG and VIAG AG have both agreed to the
particular to decisive changes shareholder structure Merger Agreement on December 16, 1999. There-
of both companies. If a third party makes a public fore, a right to rescind does not exist.
buyout offer to shareholders of one party, the – Furthermore, a rescission rights exists if either the
parties will engage joint assessment and consulta- shareholders’ meeting of VEBA or the sharehold-
tion concerning such appropriate measures as may ers’ meeting of VIAG do not consent to the
be taken and whether a continuation of the Merger Agreement with the required majority.
combination is practical. Furthermore, each party
– The parties have a right to rescind if it has been
has a right to rescind if due to a public buyout
definitely established that an essential required
offer the shareholder structure of the other party is
governmental or other consent, approval or permit
changed in such a way that the acquirer has a de
will not be granted or requires a major change to
facto majority in the shareholders’ meeting.
the concept of the combination. Momentarily it is
– § 19 contains several final provisions, especially not foreseeable that such a case is given. For the
regarding the coordination of ad hoc-announce- necessary anti-trust approvals the parties agreed in
ments, press releases and other public statements § 10 para. 3 of the Merger Agreement to a special
concerning the combination, the cost of the combi- provision. Details are described in chapter IV. 10
nation and an arbitration agreement. of this report.
– If the merger has not become effective by the end
of December 31, 2000, and therefore one of the
parties rescinds from the Merger Agreement, each
party may rescind the Agreement in Principle.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VI. Explanation of the Merger Agreement 127
d) Structure and Orientation of the new binding for the Supervisory Board nor for the
Company / Accounting Shareholders’ meeting of VEBA-VIAG AG. In addi-
tion, according to § 6 para 3 of the Agreement in
Beyond the contents of the merger agreement the Principles the State of Bavaria has the right to
Agreement in Principle contains further provisions propose a person for the election to the Supervisory
about the structure and orientation of the new Board of VEBA-VIAG Energy AG. The proposal
company as well as its accounting. This means the right is to remain in effect as long as the State of
following provisions which have all been described in Bavaria holds more than 4% of the shares in VEBA-
detail in the previous chapters: VIAG. This is also the adjustment of an already
existing right due to the agreement between the State
– business areas and strategy of the new company
of Bavaria and VIAG Aktiengesellschaft regarding
(§ 5 of the Agreement in principle; see chap-
the combination of VIAG Aktiengesellschaft and
ter IV. 4. of this merger report).
Bayernwerk Aktiengesellschaft of May 11, 1994 (see
– Energy activities of VEBA-VIAG (§ 6 of the above in chapter IV. 7. f) of this report).
Agreement in principle; see chapter IV. 7. f) (1) of
this merger report). e) Explanation of the Note in the Minutes
– Chemicals activities (§ 7 of the Agreement in Together with the Agreement in Principle the note in
principle; see chapter IV. 7. f) (1) of this merger the minutes (‘‘Note’’) was notarized. It is part of the
report). Agreement in Principle. This Note contains provi-
– Telecommunications activities (§ 8 of the Agree- sions regarding the management- and organisation-
ment in principle; see chapter IV. 7. f) (1) of this structure of the new Company which are shown in
merger report). detail in chapter IV. 7. b) of this report as well as
provisions regarding the management and organisa-
Furthermore, it is agreed in § 9 that in the future, the tion of the new Company which are described in
group financial statements of VEBA-VIAG are to be chapter IV. 7. c) of this report. The provisions of the
prepared according to HGB and then to be converted Note regarding the composition of the organs of the
to US-GAAP. Energy Division are shown in chapter IV. 7. f).
The State of Bavaria has in § 4 of the Agreement in Furthermore, the Note stipulates that
Principle been granted the right to propose an Messrs. Hartmann and Simson shall retire from the
individual for election to the Supervisory Board of Board of Management of VEBA-VIAG AG when
VEBA-VIAG as one of the members to be named for appropriate and submit to the Supervisory Board a
the shareholders of VIAG to the Supervisory Board. joined proposal for the future chairman of the Board
The proposal right is to apply as long as the State of of Management. It is intended to have both
Bavaria holds more than 4% of the shares in VEBA- Messrs. Hartmann and Simson join the supervisory
VIAG. Without prejudice to the foregoing, the board, at which time Mr. Hartmann shall become its
Supervisory Board of VEBA-VIAG decides on its chairman.
resolution proposal, which it makes to the sharehold-
ers’ meeting for the election of Supervisory Board After the transformation of VIAG Telecom GmbH
members, according to its due discretion and without into a stock corporation under German law, British
commitment to the proposal of the State of Bavaria Telecom is to become a shareholder of this stock
(see above in Chapter IV. 7. c) of this report). This is corporation. This should not limit VEBA-VIAG’s
the adjustment of an already existing right due to the flexibility in forming its portfolio.
agreement between the State of Bavaria and VIAG
Aktiengesellschaft regarding the combination of The note stipulates a rescission right in the event that
VIAG Aktiengesellschaft and Bayernwerk Aktien- clearances required under merger law are not granted
gesellschaft of May 11, 1994. The State of Bavaria by May 31, 2000, and in the event that antitrust
only has a proposal right. The proposal is neither approval is denied.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
128 Merger Report VI. Explanation of the Merger Agreement
VII.
SECURITIES AND EXCHANGE TRANSACTIONS
1. Effects of the Merger on the Shares of VEBA for separate securitization of the shares held by them
AG will no longer exist for the shareholders, if the
The merger has no effect on the shares of the extraordinary shareholders’ meeting excludes the right
existing VEBA shareholders. The merger only leads of shareholders for securitization of their shares, as
to VIAG shareholders becoming shareholders in proposed by the Board of Management and the
VEBA-VIAG AG1 with the same rights and obliga- Supervisory Board. In the future, the VEBA-VIAG
tions next to and together with the existing VEBA shares -assuming the exclusion of the shareholders’
shareholders. right for certification of their shares through a change
of the Articles of Association – will be transferred
and acquired exclusively by way of security clearing
2. Effects of the Changes of the Company Name
transactions. The submission involves no charges for
on the Securitization of the VEBA Shares
the VEBA shareholders.
With the change of the company name, the content of
the share certificates issued by VEBA AG becomes 3. Effects of the Merger on the Shares of
false. Therefore, VEBA shareholders will be re- VIAG AG
quested to submit their false share certificates to
VEBA-VIAG AG soon after the effectiveness of the a) Expiration of the VIAG Shares / Acquisition
merger and the change of the company name. VEBA of the Shares in VEBA-VIAG AG
shareholders holding their shares in collective custody
Upon registration of the merger, the shares in VIAG
(Girosammelverwahrung) do not have to do anything.
AG expire just as VIAG AG itself. The listing of the
VEBA shareholders keeping their shares in a special
shares of VIAG AG is discontinued. By action of
securities account (Streifbandverwahrung) are re-
law, the shareholders become shareholders of VEBA
quested to submit their shares to collective custody;
AG according to the exchange ratio determined in the
further steps will be taken by the financial institution
Merger Agreement. After the registration of the
keeping the account. VEBA shareholders who person-
merger, the (global-) share certificates of VIAG AG
ally keep their shares are requested to submit their
only certify the right of the VIAG shareholders for
share certificates to a financial institution. The request
the exchange of their shares to shares of VEBA-
for delivery will be published in the Bundesanzeiger
VIAG AG (regarding the trading of the potential
(Federal Gazette) and a supra-regional compulsory
exchange rights to be arranged for until the stock
stock exchange publication and will be repeated
exchange listing of the newly issued shares of
twice. A period of at least three months will be
VEBA-VIAG AG see 4 b below).
available for the delivery. After expiration of the
delivery period the shares not delivered will be
declared void (with permission of the responsible b) Implementation of the Share Exchange
court). Further details regarding the submission of the Dresdner Bank Aktiengesellschaft, Frankfurt/Main,
share certificates will be included in the publication has been appointed by VIAG AG as the trustee
of the submission request. according to § 71 Transformation Act. Prior to the
In the future the shares of VEBA-VIAG AG will be effectiveness of the merger, it will take possession of
certified only by global certificates. The global the new shares of VEBA-VIAG AG to be issued to
certificates bearing the new company name will be the shareholders of VIAG AG and provides these to
o
deposited for all shareholders with Deutsche B¨ rse the VIAG shareholders after registration of the
Clearing AG, Frankfurt/Main. The shareholders of merger according to the exchange ratio determined by
VEBA-VIAG AG will become co-owners of the the Merger Agreement. The share exchange will take
deposited global certificates. A right of shareholders place only via the giro transaction system
1
VEBA AG will have a new name after the merger. As
this name will not be determined until spring 2000, the
new company will in the following be referred to as
VEBA-VIAG.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VII. Securities and Exchange Transactions 129
(Girosammelwege). The VIAG shareholders do not EURO Stoxx 50. The shares of VEBA AG are
have to do anything. among the blue chip stocks comprising the DAX with
a quota of about 3.34% on September 30, 1999.
The issuance of the new shares takes place free of
charge for the VIAG shareholders entitled to ex- Like the VEBA shares, the shares of VIAG AG are
change. The trustee will make an effort to even out traded on all German stock exchanges and the Swiss
and mediate any fractional amounts of shares which Stock Exchange. They are listed for official trading at
may result from the exchange ratio. Non-allocable the German stock exchanges and may be traded
fractional share amounts will be combined in the through the electronic trading system of Deutsche
interest of shareholders and sold at the official stock Borse AG (XETRA) like the VEBA shares. On
exchange price of the shares using a broker. The September 30, 1999, the VIAG shares, with a quota
proceeds will be paid out to the respective entitled of about 1.60% constituted one of the blue chip
shareholders and/or deposited for them (§§ 72 para. 2 stocks of the DAX, like the VEBA shares.
Transformation Act, 226 para. 3 Stock Corporation
Act). b) Effects of the Merger
c) Particularities Relating to declaring Share The merger has no effect on the trading of the shares
Certificates of VIAG AG void during of the existing VEBA shareholders: Their shares can
December 1999 be traded unchanged at every stock exchange after
the merger, where they are currently listed, but under
Upon resolution of the regular shareholders’ meeting the new company name.
on May 20, 1999, VIAG AG has converted its capital
stock to Euro and at the same time redivided its The listing of the VIAG shares at the stock ex-
shares. The shares no longer have a nominal amount changes involved is discontinued at the end of the
but are now shares without a nominal value. Due to day on which the merger becomes effective. It is
this change, the former share certificates of VIAG planned that upon discontinuation of the trade in
AG have become false. Upon the issuance of three VIAG shares, the new VEBA-VIAG shares, which
notifications VIAG AG has requested its shareholders the VIAG shareholders will receive in exchange for
to submit the share certificates by November 30, their VIAG shares, will be registered for trading at
1999. Shareholders who have not submitted their every exchange where the VEBA shares have previ-
shares within the period stated in the requests may ously been listed. The registration shall be applied for
participate in the share exchange proceeding during early enough so that the trading in these shares is
the merger only if they submit their share certificates, possible upon publication of the notice regarding the
which have been declared void, to one of the exchange of VIAG shares. Due to exchange laws, up
financial institutions mentioned in the submission to three days may pass between the discontinuation
request. They will then receive a collective custody of the listing of the VIAG shares and the start of the
credit for their new VEBA-VIAG shares. These listing of the new shares of VEBA-VIAG AG. In
shareholders are asked to contact their bank regarding order to provide the shareholders of VIAG AG with
the details. an uninterrupted trading ability of their shares at a
stock exchange, applications, if possible, for a listing
4. Effects of the Merger on the Exchange Trade of the right for exchange certified by the VIAG
a) Current Situation shares will be filed with all stock exchanges on
which VIAG shares are currently traded.
The shares of VEBA AG are currently traded on all
German stock exchanges, on the Swiss Stock Ex- The responsible workgroups for the stock exchange
change and in the course of a so-called ADR- indices, particularly for the DAX and the STOXX,
Program at the New York Stock Exchange. They are will be informed regarding the exact schedule and the
listed for official trading on all German stock process of the merger. The Boards of Management of
exchanges and are trading over the electronic trading VEBA and VIAG assume that the composition and/or
system of the Deutsche Borse AG (XETRA). On quotation of the relevant indices will be adapted at
September 30, 1999, the VEBA share constituted approximately the same time as the effectiveness of
0.92% of the Dow Jones Stoxx 50 and 1.36% of the the merger.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
130 Merger Report VII. Securities and Exchange Transactions
VIII.
EXCHANGE RATIO
The determination of the adequate exchange ratios is nal value, each representing an allocable portion of
based on business valuations of VEBA and VIAG the capital stock in the amount of EUR1.00; this
performed for both companies using the same gener- results in a value of EUR37.44 per VIAG share.
ally accepted business valuation methods. For this
Based on these share values the valuation auditors
purpose the Boards of Management of VEBA and
have determined an exchange ratio of
VIAG engaged Warth & Klein GmbH, Wirtschaft-
u
spr¨ fungsgesellschaft (firm of certified public ac- 2.499 : 1
u
countants) (‘‘Warth & Klein’’), D¨ sseldorf, and
Wollert-Elmendorff Deutsche Industrie-Treuhand i.e. 2.499 VIAG shares for one VEBA share.
u
GmbH, Wirtschaftspr¨ fungsgesellschaft (‘‘WEDIT Based on these business valuations by the neutral
u
Deloitte & Touche’’), D¨ sseldorf/Hanover, as neutral valuation auditors the Boards of Management of
and independent experts, to prepare a joint expert VEBA AG and VIAG AG have fixed the exchange
opinion regarding the business value of VEBA and ratio at
VIAG to February 14, 2000 in order to determine the
exchange ratio. 5 : 2
The BDO Deutsche Warentreuhand Aktiengesell- (i.e. 5 VIAG shares for 2 VEBA shares).
u
schaft Wirtschaftspr¨ fungsgesellschaft (firm of certi- Special difficulties within the meaning of § 8 Para. 1
fied accountants), appointed as the joint merger sentence 2 UmwG (German Transformation Act)
auditor for both companies participating in the have not arisen during the valuations.
merger by the Regional Court Munich - I - with
decision of November 11, 1999, totally confirms that The determination of the exchange ratio is described
the exchange ratio determined on the basis of the and explained below in detail. Special attention is
business valuations of VEBA and VIAG is adequate. given to the business values of VEBA and VIAG.
The Auditors Report of the Merger Auditor is printed For this purpose the statements of the valuation
in full in section C. 4. auditors are set forth below in full length with regard
to the valuation principles, the execution of the
According to this expert opinion, the business value valuation as well as the mathematical determination
of VEBA amounts to EUR46,677 million and that of of the exchange ratio.
VIAG to EUR25,701 million, each referring to the
technical valuation date of January 1, 2000. Revalued 1. Structure and Delimitation of the Valuation
for accrued interest until February 14, 2000 – the Objects
date of the Extraordinary Shareholders’ Meeting of
VIAG AG – the business value of VEBA amounts to Valuation Objects are VEBA AG and VIAG AG,
EUR47,042 million and that of VIAG to including all subsidiaries and affiliated companies, i.e.
EUR25,909 million. as a result the respective corporate group of VEBA
and VIAG.
The capital stock of VEBA AG is divided into
502,797,780 bearer shares without nominal value, Both groups are, with regard to their management
each representing an allocable portion of the capital structure and their reporting, divisionally structured
stock in the amount of EUR2.60; according to the with the exception of the management, central and
calculations of the valuation the value of one VEBA service functions of the group. As per the valuation
share therefore amounts to EUR93.56 as of Febru- date, the major operational group companies are,
ary 14, 2000. The capital stock of VIAG AG is partly leading group divisions, clearly allocated to the
divided into 691,981,914 bearer shares without nomi- divisions.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 131
Calculated Division Business Unit
Group Division Main Shareholdings in%
VEBA
VEBA Electricity Uranit GmbH
Electricity PreussenElektra AG 100.00 Chemicals Vestolit GmbH & co. KG
Chemicals u
Degussa-H¨ ls AG 64.74 Neuber Ges.m.b.H.
Oil VEBA Oel AG 100.00 o
R¨ hm Enzyme
Real estate Viterra AG 99.95 Tecpart
management Distribution/Logistics Stinnes AG
Distribution/Logistics Stinnes AG 65.50 Silicon Wafers MEMC Electronic Materials Inc.
VEBA Electronics 100.00 Telecommunications Cablecom Holding AG
MEMC Electronics 71.83 Netro Corp.
Silicon Wafers Materials Inc.
Telecommunications VEBA Telecom GmbH 100.00 VIAG
Aluminum VAW aluminium AG
VIAG (stock exchange listing 49.9%)
Energy Bayernwerk AG 94.93 Packaging Schmalbach-Lubeca AG
Chemicals SKW Trostberg AG 63.70 Gerresheimer Glas AG
Aluminum VAW aluminium AG 99.99 Logistics o
Kl¨ ckner & Co AG
Packaging Schmalbach-Lubeca AG 59.78 Telecommunications VIAG Telecom Beteiligungs GmbH
Gerresheimer Glas AG 70.69 (stock exchange listing 49.5%)
Logistics o
Kl¨ ckner & Co AG 94.93 Holding CCMA Inc.
Telecommunications VIAG Telecom 94.98
Beteiligungs GmbH
VEBA and VIAG are active in different markets with
The indirect shareholding of VEBA AG in E-Plus their divisions which are characterized by distinct
Mobilfunk GmbH was disposed of prior to the differentiations with regard to the determining factors
valuation date and was therefore for the purpose of for future business successes (factors such as market
the valuation taken into account with its sales. growth, product maturity, client structure, competitive
Conversely, the valuation auditors have taken into intensity, technological dominance, cyclicality).
account the shareholding of VEBA AG in VIAG AG,
The valuation auditors have taken into account the
the additional shares in ARAL AG and the Emsland
heterogenous character of both groups – VEBA and
o
oil refinery (Erd¨ lraffinerie Emsland) of Wintershall
VIAG – by also taking into account different
AG, which VEBA AG acquired or regarding which
classifications concerning risks and opportunities
VEBA entered into binding legal obligations prior to
while (in sense of a modular valuation) treating the
the valuation date. The purchase prices paid or still to
respective divisions, each in itself constituting a
be paid have been subtracted from the value of the
viable unit, as individual valuation objects and
acquired businesses.
deriving the total value of VEBA and VIAG from the
Concerning the following shareholdings, the complete sum of the values of their respective major group
or partial disposal or disposal intent was taken into companies.
account irrespective of the planned merger:
Because of the modular process, distributions of
VEBA and VIAG made to their respective sharehold-
ers are not directly capitalized. The company values
of VEBA and VIAG are rather derived indirectly
from the earnings of the individual divisions. Even
though the earnings projections for both groups are
positive, the earnings projections for individual divi-
sions may be negative in certain years. This applies
in particular to the holding companies. Since the
shareholdings in the major group companies held by
them have been valued separately, the holding
companies are left almost entirely with their adminis-
trative expenses and interest earnings. In these cases,
negative earnings and positive tax payments (tax
refunds) are capitalized for these valuation units. The
valuation of all major group companies in their
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
132 Merger Report VIII. Exchange Ratio
entirety always results in positive earnings and in the capital market’’ (Statement HFA 2/1983,
negative tax payments. section B.4.a)). It may be understood as a value
based on conventions (subjective company value) in
2. Valuation Methods which valuation-subject specific elements are substi-
tuted by standardizations (see: MOXTER, 2nd edi-
a) General Valuation Principles
tion, 1983, p. 25 et seq.; GROSSFELD, p. 16 et seq.;
(1) Earnings Value OSSADNIK, DB 1985, p. 1954 et seq.; IDW ES 1,
Tz. 9; WP-Handbuch 1998, vol. II E 54).
The ‘‘value of a company is – taking into account
only financial goals – generally determined by its Within this meaning the valuation is aimed at an
ability to generate earning surpluses’’ (Statement imaginary shareholder as an individual, subject to an
HFA 2/1983, section B.; also draft ES 1 of the unlimited domestic tax liability (see: MAUL,
Institute of German Certified Public Accountants DB 1992, 1257; SCHMIDT, DB 1994, 1153; SIEPE,
IDW ES 1. No. 1). It has been recognized as a Wpg 1998, 332; WP-Handbuch 1998, vol. II A 137),
standard of orderly business valuation in the literature who only aims for the financial goal of realizing
a a
(see: MOXTER, Grunds¨ tze ordnungsgem¨ ßer Un- surpluses from the business to be valued (see:
ternehmensbewertung, 3rd edition, 1990), by the Statement HFA 2/1983, section B.; IDW ES 1, Tz. 1,
valuation practice (see WP-Handbuch 1998, Vol. II, 18 seq.). Thereby a full distribution of future annual
section A) and in the jurisdiction (see: PILTZ, Die (group) earnings is generally assumed (see: Statement
Unternehmensbewertung in der Rechtsprechung, HFA 2/1983, section C.1.b); IDW ES 1, No. 36; WP-
3rd edition, 1994; recently: BVerfG, decision of Handbuch 1998, vol. II A 102 et seq.; MAUL,
4/27/1999 – 1 BvR 1613/94, DB, p. 1695) that DB 1992, 1255 et seq.). To the extent that the
earnings value calculated as ‘‘cash value of the future assumption of a partial retention of profits in
revenue surpluses over the expenses’’ constitutes the connection with the use of loss carryforwards and in
‘‘proper theoretical value of a business’’ (Statement connection with the use of domestically tax free
HFA 2/1983, section B.; also: IDW ES 1 No. 1). foreign earnings lead to higher earning values, the
full distri bution hypotheses will be disregarded (see:
Thus a projection of the expected surpluses of the
IDW ES 1, No. 37; BALLWIESER, Wpg 1995,
business is necessary. The basis for an earnings ¨
p. 128; KONIG/ZEIDLER, DstR 1996, p. 1102 et
valuation is consequently the regular business fore-
seq.; DRUKARCZYK, Unternehmensbewertung,
cast as well as an estimate of sustained earnings that
2nd edition, 1998, p. 413 et seq.; SIEPE, Wpg 1997,
can be regarded as sustainably achievable for the
p. 37 et seq.; OESTERLE, BERUFUNGS-
period after the forecast years. As far as time
BEKLAGTE 1998, p. 836; IDW ES 1, No. 27;
differences exist between forecast revenues and fore-
MERTENS, AG 1992, 334; LUTZ, BfuP 1993, p. 75
cast expenses as well as between forecast earnings
et seq.; GOUTIER/KNOPF/TULLOCH, § 5 UmwG
and forecast expenditures, these differences need to
No. 32).
be taken into account in calculating the financial
needs and have to be reflected in the valuation with For the objective business value the status quo and
their financial effects. the stand alone premises apply: ‘‘The circumstances
on the valuation date are decisive. This applies to
(2) Objective Earnings Value development of business success, to financial and
capital conditions as well as to the scope of the
According to prevailing jurisdiction, followed by the
business recognizable at this time’’ (Statement
valuation practice and serving as basis of this
HFA 2/1983, section C.1.f)) ‘‘and to everything that
valuation, the exchange ratio of the shares in a
may result from this (without the contribution of new
merger is derived from objective business values
equity). . . . The valuation of future measures finds . . .
(see: PILTZ, p. 99 et seq. with further references;
its limits where the forecast protrudes from the scope
GOUTIER/KNOPF/TULLOCH, § 5 UmwG No. 31;
of the existing circumstances’’ ( see: section C.1.c),
MERTENS, AG 1992, 321 et seq.; SEETZEN,
above). Accordingly, the expected effects of forecast
WM 1994, 45; deviating opinion, e.g. BUSSE v.
new investments and disinvestments as well as of
COLBE, ZGR 1994, 595).
forecast restructuring measures independently from a
‘‘The objective company value constitutes the value merger are only taken into account as far as specific
of the going concern within the scope of the existing
business concept relating to an alternative investment
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 133
steps have been initiated for this purpose on the valuation date already have been distributed as of the
valuation date (see: IDW ES 1, No. 33). valuation date in the amount of the forecast dividends
(see: IDW ES 1, No. 16).
The effects of any intended additional future struc-
tural changes, interdependencies with other decision According to the above described distribution pre-
field components and other specific value-relevant mise, the future success of the business to be valued
circumstances in the sphere of the shareholder, i.e. not only need to be reduced by non-creditable foreign
his or her individual tax situation, are not taken into earnings and withholding taxes as well as domestic
account (see: Statement HFA 2/1983, section B.4.b), trade taxes but also – during the determination of the
C.2.d)). The same applies to changes to future objective business values – by the personal income
business success due to the transaction which gave taxes of the shareholder. Since the individual tax
rise to the business valuation, in this case possible circumstances of the shareholders are not known, and
synergy effects resulting from the merger (see: IDW since the valuation subjects are defined by standardi-
ES 1, No. 35, 47 et seq.). zation, a typical income tax rate of 35% is used (see:
¨
KONIG/ZEIDLER, DstR 1996, 1101; SIEPE, Wpg
According to the jurisdiction, such synergy effects
are to be disregarded for the business value of the 1997, 1 et seq.; IDW ES 1, no. 31, 43).
merging company in connection with the determina-
As an alternative investment during the course of
tion of the exchange ratio; since, however, the
the objective business valuation ‘‘a long-term invest-
shareholders of the transferring company – other than
ment in the capital markets is imputed as typical’’
in the case of a cash payment – will have an interest
(Statement HFA 2/1983, section B.3.), i.e. the com-
in the acquiring company after the merger of the
pany value is calculated based on the price of nearly
acquiring company, they inevitably participate in any
risk-free fixed-income securities of domestic issuers
future advantages resulting from the combination
with equivalent distribution expectancies (see:
corresponding with the business value ratio (see:
WP Handbuch 1998, vol. II A 273; IDW ES 1,
u
OLG D¨ sseldorf, decision of 2/17/1984 – 19 W 1/81,
no. 111).
WM 1984, 731 et seq.; consenting MERTENS, AG
1992, 330 et seq.; GOUTIER/KNOPF/TULLOCH,
§ 5 UmwG No. 34; SEETZEN, WM 1994, 49; (3) Liquidation Value and Intrinsic Value
critical OSSADNIK, DB 1985, 1956 et seq. and
¨
DB 1997, 886 et seq.; BOCKING, Festschrift The principles for conducting business valuations
Moxter, 1994, 1419 et seq.). At most, the synergy require the consideration of the liquidation value, if
effects ‘‘latently included in a business value’’ which the present net value of the earnings surpluses from
may be ‘‘realized relatively easy through simple the liquidation of the company would exceed the
cooperation with an arbitrary number of partners’’ earnings value, assuming a continuation of the
(LG Dortmund, decision of 10/31/1980 – 18 AktE company on the one hand, and the possibility of
2/79, AG 1980, 239) should be taken in account for dismantling the company on the other hand actually
the business value. However, these so called non- exist (see: Statement HFA 2/1983, section C.4.; IDW
genuine combination advantages are already ac- ES 1, no. 132). Since it is intended to indefinitely
counted for in the objective business value (see: IDW continue the operation of both groups to be valued
ES 1, No. 35) because they are part of the existing here, not even an approximate estimation of the
earning capability on the valuation day (see: State- liquidation values of the assets necessary for the
ment HFA 2/1983, section C. 1. c)). business was undertaken. Furthermore, there are no
indications indicating liquidation values as being
Valuations made on the occasion of a merger are higher than earnings values. An estimation of the
aimed at embodying in the share of the transferring liquidation value was merely carried out as a control
corporation – synergy effects excluded – the same measure regarding Viterra AG.
proportional business value (and thus equivalent
distribution expectancies) as the share(s) of the The intrinsic value in form of the so-called partial
acquiring corporation received according to the ex- reconstruction value has no independent function as a
change ratio. Since this equivalence postulate exclu- value pursuant to the principles of proper business
sively refers to the future business success achieved valuation (see: Statement HFA 2/1983, section B.2.b
after the valuation date, it was assumed that the 2, 3; IDW ES 1, no. 3, 164). The intrinsic value as
earnings achieved in the financial year ending on the such has thus not been determined in this case.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
134 Merger Report VIII. Exchange Ratio
(4) Special Values constant court practice, as other actual purchase
u
prices prior to the merger (see: OLG D¨ sseldorf,
Calculating the earnings value based on projected
decision of 8/2/1994 – 19 W 5/93 AktE, AG 1995,
cash flows only fully takes into account those value
p. 84; further references under PILTZ, p. 224 et seq.;
drivers that may be exactly reflected with respect to
GROSSFELD, Unternehmens-und Anteilsbewertung
their value by the current cash flows. Value drivers
im Gesellschaftsrecht, 3rd edition 1994, p. 34 et
that may not be reflected this way at all or are very
incomplete need to be valued separately and be added seq., 106 et seq.; WIDMANN/MAYER, Umwan-
to the earnings value. In addition to the assets not dlungsrecht, Kommentar, UmwG § 5 no. 100;
necessary for business operations, this applies in GOUTIER/KNOPF/TULLOCH, Kommentar zum
particular to non-consolidated shareholdings and to Umwandlungsrecht, 1996, § 5 UmwG no. 22; differ-
certain other types of financial assets. Tax effects ent opinion for settlement cases: AHA, AG 1997,
(losses carried forward, high value tax writeoffs, o
p. 27; G¨ tz, DB 1996, p. 259 et seq.; RODLOFF,
corporate income tax credits) were also accounted for DB 1999, p. 1149 et seq.; STEINHAUER, AG 1999,
as other values. p. 299 et seq.).
Not necessary for business operations are those In its decision of April 27, 1999 (– 1 BvR 1613/94 –
assets, the sale of which would not affect the actual DB 1999, p. 1695 et seq.), the Federal Constitutional
purpose of the business – functional differentiation Court decided that the stock price may not be left out
criterion – (WP-Handbuch 1998, vol. II A 133, of the considerations in determining the cash settle-
IDW ES 1, no. 55). Assets not necessary for business ment or the compensation for outside or former
operations are in particular, apart from real estate shareholders in connection with an integration or
which is for sale or for disposal, shareholdings which when concluding a control and profit and loss transfer
are also under a stand-alone scenario, i.e. indepen- agreement. The cash settlement should generally at
dently from the planned merger available for sale. least equal the stock price. With respect to a
settlement using shares in the main company, the
(5) Discounted Cash Flow Federal Constitutional Court states:
Available alternatives for the purpose of determining ‘‘In the case of a compensation with shares in the
the business value are the earnings value-method in main company (§ 320 b para. 1 sentence 2 AktG) or
the form of the earnings surplus calculation and the in the controlling company or its parent company
discounted cash flow (DCF) method. While in case (§ 305 para. 2 AktG) the same applies as in the case
of the earnings value method the earnings surpluses of a cash settlement. Also, for the purpose of the
of the shareholders relevant for the valuation are valuation of the dependent company necessary for
derived from future commercial earnings, the DCF determining the merger exchange ratio, the stock
method generates the business value by discounting market value, if the company is listed at a stock
cash flows (see: IDW ES 1, no. 98, 115). ‘‘With exchange, generally serves as the lower limit of the
identical valuation assumptions, particularly with re- valuation. On the other hand it is not a constitutional
spect to financing, both methods lead to identical requirement to take any existing stock market value
company values’’ (id., no. 97), since during the of the controlling company or of the main company
valuation of businesses, the limitation of possible into account as an upper limit for the valuation of the
distributions of earnings available for distribution company. The constitutionally protected share owner-
would also have to be observed when applying a ship of the minority shareholder who is entitled to
DCF method. (see: IDW ES 1, no. 36; WP-Handbuch compensation does not provide him with a claim for
1998, vol. II A 80; MAUL, DB 1992, p. 1256). The receiving shares in the controlling company at (no
valuation auditors have applied the earnings value more than) the stock market price. From a constitu-
method in accordance with the predominant practice tional point of view, the courts are at liberty to apply
for business valuations in merger situations. a value to the controlling company which is higher
than the stock market value, i.e. during times of bad
(6) Stock Market Prices capital market conditions.’’
For business values, on the basis of which the Whether and to what extent the decision of the
exchange ratio of shares during a merger is deter- Federal Constitutional Court also applies to mergers,
mined, stock market prices are just as irrelevant has not been fully settled according to the current
according to the existing predominant opinion and status of court practice. The legal literature points out
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 135
that a merger, other than in the case of a compensa- tion and literature – on a detailed analysis of
tion, is not a so called dominated conflict situation historical data and on business forecasts for the
during which the protected interest of the entitled individual business areas. This information, which is
shareholders dominates the valuation (see: not publicly available, was adapted by the valuation
MATSCHKE, Funktionale Unternehmungsbewertung, auditors, discussed regarding its plausibility with the
volume II: Der Arbitriumwert der Unternehmung, responsible persons in the divisions and processed in
1979, p. 32, 38 et seq.). a valuation model following capital market
calculations.
If the statement of the Federal Constitutional Court
regarding the compensation in shares of the parent The stock market values of the companies to be
company is applied to the share exchange in a merged have only been applied for purposes of
merger into a company listed at the stock exchange, judging the plausibility of the company values
it shows that the determination of the merger value determined according to the above mentioned princi-
relation according to the valuation methods applied ples (see: IDW ES 1, no. 134). The circumstance that
herein completely satisfies the requirements of the the business value of VIAG exceeds its market
Federal Constitutional Court’s jurisdiction (see: capitalization to a higher degree than in the case of
RIEGGER, DB 1999, p. 1890 et seq.). VEBA, has caused the valuation auditors to conduct
The business valuation of VIAG according to the a critical examination of the business valuations.
recognized principles for conducting business valua- Indications requiring a revision of the business
tions has led to a business value which is signifi- valuations thereby became unnecessary.
cantly above the current stock market value of VIAG.
The purchase price paid outside the stock market by
The stock market value as a lower limit was
VEBA for the 10% stake in VIAG is also – again
exceeded.
according to the decision of the Federal Constitu-
In determining the business value of VEBA, the tional Court – not decisive for the valuation of
stock market value – according to the decision of the VIAG. This shareholding is rather – just like the non-
Federal Constitutional Court of April 27, 1999 – was consolidated VIAG shares of VIAG AG held by Isar-
also not to be used. The Federal Constitutional Court Amperwerke AG (see: Section 4.a)(5)(b)) – to be
expressly stated that from a constitutional point of taken into account at the pro rata business value of
view it is not required to take into account an VIAG.
existing stock market value of the acquiring company
as an upper limit of the valuation. If for the valuation (7) Share Value
of VIAG the business value exceeding the stock
market value had been applied, while for VEBA the The value of the individual share is derived on a pro-
stock market value had been applied, an unjustified rata basis from the total value of the business for
disadvantage for VEBA shareholders would have purposes of determining the exchange ratio (see:
been the result. The business value of VEBA is also IDW ES 1, no. 10). According to this so-called
considerably above the current stock market value of indirect method of a share valuation required by law
VEBA. due to the corporate law principle of equal treatment
(§ 53a AktG), neither minority discounts from the
It is stated in the decision of the Federal Constitu-
pro-rata company value are permitted (see: PILTZ,
tional Court that, in principle, it is not unconstitu-
p. 236 et seq.; GROSSFELD, p. 18 et seq., 109 et
tional to undertake a business valuation according to
seq.), nor are premiums for the benefit of large
the earnings value method, which has become estab-
shareholders to be applied, i.e. in order to compen-
lished in the practice of business valuations and
sate for the influence which a large shareholder
which is almost exclusively applied by the courts.
derives from obtaining a majority participation (see:
Accordingly, the business valuations of VEBA and MERTENS, AG 1992, p. 333 et seq., outlining that
VIAG were correspondingly not carried out based on the German Stock Corporation Law does not recog-
the current stock market prices of VEBA and VIAG. nize a claim of the minority shareholders to partici-
The valuations undertaken here are based – in pate in the financial advantage of the large share-
accordance with the predominant view in the jurisdic- holder coinciding with the increase in influence).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
136 Merger Report VIII. Exchange Ratio
b) Methodology the comparability. Similarly, earnings and expenses
from separately valued shareholdings and goodwill
(1) Valuation Date
amortizations were eliminated from the historical
Valuation date is February 14, 2000, the day of the figures. The results are shown in the chapters 4.
Extraordinary Shareholders’ Meeting of VIAG AG, and 5. for the respective major group companies.
which as the transferring entity has to resolve upon Based on the adjustments made and special effects,
the Merger Agreement. In its expert opinion com- the established historical earnings are not comparable
pleted on December 21, 1999, the valuation auditors to the published annual financial statements and the
have chosen January 1, 2000, as the technical earnings of the divisions and/or the individual compa-
valuation date and then adjusted the business values nies as set forth in the Merger Report.
by revaluing them for accrued interest at the capitali-
zation rate to February 14, 2000, in order to (b) Examination of the Forecast Calculations
determine the exchange ratio.
The business forecasts prepared by the companies
(2) Deriving Future Business Success during the fall of 1999 include the financial years
2000 until 2002 (VEBA) and 2000 until 2004
(a) Analysis of Historical Results (VIAG), respectively. For purposes of a uniform
The basis for the projection of the future business procedure, the valuation was based on the forecasts
success is a historical analysis, since without knowl- for the financial years 2000 until 2002. For the
edge of the earnings achieved during the years prior telecommunications activities of both groups, fore-
to the valuation date, a projection of future business casts exist until 2007 and 2008, respectively, which
success may hardly be tested for plausibility (see: have been used for valuation purposes. The forecasts
Stellungnahme HFA 2/1983, section C.1.g; IDW are medium-term forecasts on a revolving annual
ES 1, no. 68 et seq.; WP-Handbuch 1998, vol. II A basis for internal management and control purposes
152 et seq.). of all companies included in the consolidated finan-
cial statements, the basic assumptions of which (sales
The goal of the analysis is to distinguish the reasons volume and pricing development, cost trends, com-
for the size and development of historical earnings petitors’ behavior, use of own action parameters
over time in order to then derive statements regarding including planned investments) are generally deter-
future results therefrom, based on assumptions on the mined decentrally by the employees responsible for
constellation of probable future conditions (see: the individual business units, the drafts of which are
MOXTER, p. 97 et seq.; PILTZ, p. 144 et seq.; then prepared by the divisional controlling and
GROSSFELD, p. 41 et seq.). planning departments, then examined and aggregated
The basis for the historical analyses of VEBA were by the group controlling and accounting division, and
the audited and certified annual financial statements then approved by the members of the Board of
for the 1997 and 1998 financial years as well as the Management according to an approval process.
forecast for 1999. In the case of VIAG the unpub- The valuation auditors have further questioned these
lished, audited and certified attached IAS balance forecast calculations thereby using the submitted
sheets and IAS profit and loss calculations of the documentation in discussions with the persons in
1997 and 1998 financial years as well as the IAS charge of the operation of the respective division
forecast for 1999 have been used as a basis. and/or the heads of the decentralized controlling units
with respect to the applied assumptions and examined
The earnings shown in the annual financial statements
them with respect to internal consistency and, to the
are often affected by extraordinary business events.
extent possible, realism (see: Stellungnahme HFA
The historical earnings also contain profits or losses
2/1983, section C.1.o); IDW ES 1, no. 78 et seq.;
form activities which have been discontinued as of
WP-Handbuch 1998, vol. II A 167 et seq.).
the valuation date as well as revenues and expenses
from assets which are not necessary for business Except for the requirement of logical correctness and
operations (see: Stellungnahme HFA 2/1983, sec- the principle of disregarding the cautionary principle
tion C.2.a); IDW ES 1, no. 99; WP-Handbuch 1998 (see: Stellungnahme HFA 2/1983, section C.1.n))
vol. II no. 229 et seq.). To the extent possible, the there are no material ‘‘rules or principles for such
valuation auditors have adjusted the historical earn- projections’’ (PILTZ, p. 149). The possibilities of a
ings for 1997 until 1999 for any such disturbances of projection examination are limited to a ‘‘plausibility
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 137
test, while the final examination is aimed at establish- projection period relates to the years 2000 until 2007
ing the ‘‘credibility’ of the documentation’’ (Stel- in only one case.
lungnahme HFA 2/1983, section C.1.o)).
In the second projection period beginning 2003
For this purpose, the valuation auditors have adjusted (2008/2009 for the telecommunication business), fu-
the forecast earnings of the business units with the (if ture business success is illustrated as a permanent
necessary adjusted) historical earnings including the annuity and implicitly assumed in accordance with
forecast for the 1999 financial year. The findings the inflation discount rate in the capitalization interest
made by VEBA and VIAG during their reciprocal rate as a geometric-progressive sequence. The esti-
due diligence examinations have been submitted to mate of the permanent annuity is based on the results
the valuation auditors for their plausibility audit. As of the first projection period, particularly the last
far as discounts or premiums appeared necessary forecast year.
based on these comparisons, on an examination of In analysing forecast amortizations, taking into ac-
the forecast assumptions and on an examination of count sustained low inflation rates and the considera-
the forecast earnings, these have already been taken ble influence of technological progress on reinvest-
into account in the future business success which are ment amounts, generally no substance preserving
set forth in chapters 4. and 5. amortizations were deducted from the replacement
These modifications include corrections that appeared values of the fixed assets existing on the valuation
to be necessary for the harmonization of differing date (see: Stellungnahme HFA 2/1983, section C.1.f;
fundamental forecast assumptions. WP-Handbuch 1998, Vol. 2 A 91 et seq., 248 et
seq.). Only in calculating the reinvestment rates for
Beside of these macro-economical forecast assump- major energy or electricity group companies were
tions affecting all business units, the forecast calcula- such calculations made due to the high investment
tions are based on numerous assumptions regarding intensity and the very long reinvestment cycles.
details which specifically apply to individual business Otherwise, the valuation auditors have made plausible
units or product groups and also determine the the amortization offset with respect to the future
development of sales earnings and the costs and/or business success of the first projection period and
the costs of functional areas. Implicit corrections of have illustrated the amortizations included in the
these detailed assumptions are equally accounted for future business success of the second projection
in the forecast results of the business units due to the period as average reinvestment rates based on histori-
modifications made by the valuation auditors. cal data (IDW ES, no. 104).
Since the divisions PreussenElektra and Bayernwerk The major energy group companies of VEBA as well
with their predominant product electricity are active as VIAG show reserves in their balance sheets for
in the same objective and regional market, VEBA nuclear waste management. For the purposes of the
and VIAG have – for the purpose of business valua- business valuation, these reserves, including their
tion – agreed on uniform assumptions concerning changes and the other expenditures related to the
supply volumes and price developments in the disposal, have been eliminated from the forecast
classical electricity business. These assumptions were calculations. Instead, payments were projected for
processed accordingly in their forecasts. Furthermore, future disposals on the basis of adjusted assumptions
the valuation auditors harmonized reinvestment rates as well as on the contractual obligations for each
and nuclear energy disposal costs. nuclear power plant, which have been included in the
earnings calculations with their terminal cash value
The forecast years 2000 to 2002 form the first
taking into account the tax effects.
projection period within the meaning of the phase
method (see: Stellungnahme HFA 2/1983, sec- Since the pension funds of the VEBA and VIAG
tion B.2.b2,1); IDW ES 1, no. 72 et seq.; WP- group are not likely to have reached a constant state
Handbuch 1998 vol. II A 157 et seq.; PILTZ, p. 20, by the end of the first projection period, in which no
141; GROSSFELD, p. 49 et seq.), whose differenti- change of the annual pension expenditures and
ated future business success is founded on a detailed payments will occur, actuarial calculations were
forecast of earnings drivers. The first projection performed for all divisions in which the value of the
period for the telecommunications divisions of both ‘‘Projected Benefit Obligation’’ (PBO) has been
groups includes the years 2000 until 2008, since determined as of January 1, 2000. It was assumed
these businesses are in a startup phase; the first that the pension obligations had been transferred to a
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
138 Merger Report VIII. Exchange Ratio
pension fund that will be sufficiently funded accord- VIAG). The remaining accounting-induced differ-
ing to actuarial calculations with a one-time premium ences are irrelevant for the business valuation.
equal to the PBO. During the following years, this
The income taxes on the corporate level (corporate
fictitious pension fund will then be endowed by
taxes) taken into account in the future business
annual payments amounting to the ‘‘service costs’’ in
success relate to domestic trade tax and non-
order to reflect still to be serviced entitlements of the
creditable foreign earnings and withholding taxes, but
active employees. With regard to the development of
not, however, to domestic corporate income tax
the service costs of the second projection period it
because of the given possibility of a credit against
was estimated on the basis of the actuarial projection
the personal income tax of the shareholder, assuming
from which point in time the service costs may be
full distribution.
considered to be constant. On this basis, the service
costs of the second projection period could be Non-consolidated shareholdings held as part of the
included in the future business success of the second assets required for business operations, since a
projection period as an annual cash value which valuation on the basis of earnings of such sharehold-
reflects the changes of the service costs up to the ings often would be incorrect (i.e., due to planned
constant state. retention of profits of the affiliated company), were
valued on the basis of stock market prices, simplified
The valuation auditors have adjusted the forecast
earnings valuations, or so-called simplified price
calculations for all elements showing pension obliga-
determinations (see: IDW WS 1, no. 135 et seq.,
tions (payments, contributions to pension reserves in-
156 et seq.), and in case of lower significance of the
cluding the pension interest). Instead, service costs
shareholding, at the commercial book value or the
were taken into account directly, while interest
(pro-rata) equity as other values. The book value
allocable to the funding of the fictitious pension fund
and/or the pro-rata equity have been developed based
resulted in a reduction of the interest earnings.
on the values as of December 31, 1998.
The valuation auditors have eliminated consolidation-
The securities (i.e. profit retaining special funds) held
related goodwill amortizations included in the fore-
by the major electricity and/or energy group compa-
cast calculations, since within the framework of the
nies as part of the assets required for business
valuation model these would have the effect of –
operations were also included as other values at their
counteracting the assumption of full distribution –
corresponding market values, since a valuation based
retained earnings.
on interest earnings would often have led to obvi-
During the first projection period, the changes relat- ously incorrect results.
ing to the financing requirements resulting from
The elimination of goodwill amortizations, as well as
earnings modifications and the full distribution as-
of earnings from shareholdings and partly of interest
sumption were determined. An additional and/or
earnings, the substitution of amortizations by rein-
lower interest result was calculated with respect to
vestment rates after 2003 (2008/2009 for the telecom-
the change of the financing requirement. For the
munication business), the recalculation of pension
sustained earnings result after 2003, the interest
expenses and the costs of the nuclear waste manage-
earnings were uniformly recalculated. For this pur-
ment as well as the recalculation of interest earnings
pose, the sustained financing requirement of the
(including the retention of foreign earnings) and
major group companies was generally calculated and
income tax expenses eliminated by the valuation
an interest rate of 6.75% (basic interest rate of 6.5%
auditors have the consequence that the calculated
plus premium for credit-worthiness of 0.25%) was
forecast net distributions may not be understood as a
applied.
projection of future commercial earnings available for
With the described recalculation of amortizations, distribution.
pension expenditures and interest earnings as well as
the cancellation of goodwill amortization, the valua- (3) Capitalization Interest Rates
tion auditors have simultaneously eliminated the
(a) Base Interest Rate
substantial differences between the forecast calcula-
tions of VEBA and VIAG, which result from the The capitalization interest rate embodies the yield of
circumstance that the forecast calculations were based the best obtainable alternative investment (see:
on different accounting methods (HGB – German MOXTER, p. 123 et seq.); for the objective business
Commercial Code – in case of VEBA, IAS in case of valuation it is assumed that the alternative investment
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 139
of funds would take place in nearly risk-free fixed- reach the average level recorded in the past, the
income securities, i.e. at the nationally typical valuation auditors have estimated a base interest rate
interest rate (base interest rate) (see: MOXTER, of 6.5% (see: WP-Handbuch 1998, vol. II A p. 277).
p. 146; GROSSFELD, p. 66 et seq.; WP-Handbuch
1998, vol. II A 273; IDW ES 1, no. 111). The (b) Risk Premiums
advantage that the price of the typical alternative The second equivalence problem to be considered is
investment is known and not itself burdened with un- that the expected future business success of the
certainty is countered by disadvantages in the form of evaluated companies is much more uncertain than the
multiple equivalence problems (see: MOXTER, future interest of the alternative investments on the
p. 155 et seq.; BALLWIESER, Unternehmensbewer- capital market and is therefore not readily comparable
a
tung und Komplexit¨ tsreduktion, 3rd edition 1990, (see: MOXTER, p. 146 et seq.). The comparability
p. 167 et seq.). can be achieved by corrections of projected future
First of all, the future business success of the business success or corresponding (inverse) modifica-
evaluated company on a going-concern-basis is pro- tions of the base interest rate (id., p. 155 et seq.).
jected as a permanent annuity, if no indications for a The former customary differentiated treatment accord-
limited lifetime exist; investment funds at the typical ing to which ‘‘special risks and opportunities are to
national interest rate are, however, offered only with be considered in the forecast of the business success’’
a limited duration. Decisive alternative yield is and only the so-called ‘‘general entrepreneurial
therefore not the typical national interest rate, de- risk ... are to be included in the capitalization interest
pending on the respective current condition of the rate’’ (Stellungnahme HFA 2/1983, section B.3.), was
financial and capital markets at the valuation date, not followed by the valuation auditors, since the risk
but the interest rate achievable over the long term dimension may not be quantitatively divided in an
taking into account the repayments of principal and economically reasonable way into special and general
reinvestment on the capital market (see: MOXTER, risks (see: MAUL, DB 1992, p. 1258; BAETGE/
p. 172; GROSSFELD, p. 69; PILTZ, p. 172 et seq.; KRAUSE, BFuP 1994, p. 435; SIEPE, Wpg 1998,
WP-Handbuch 1998 vol. II A 276 et seq.; Hetzel, BB p.327; WP-Handbuch 1998, vol. II A 186).
1988, p. 725 et seq.; SCHWETZLER, DB 1996,
p. 1963; DRUKARCZYK, p. 332). The uncertainty dimension may be adequately taken
into account using a risk premium to the base interest
The long-term average of the typical national interest rate or, beginning with an explicit illustration of the
rate until the beginning of 1990 (with slight varia- risk structure, by applying a security-equivalent future
tions depending on the reference period considered) business success (see: MOXTER, p. 116 et seq., 146
amounted to about 7.5% (see: Bavarian Upper State et seq.; Stellungnahme HFA 2/1983, section B.2.b.1;
Court decision of December 12, 1995 – 3 Z BR IDW ES 1, no. 86). Security-equivalent future
36/91, AG 1996, p. 178), whereby the fluctuations of business success represents the certain amount, which
the typical national interest rate over time – without a is considered equivalent to a risk-bearing future
strict, scientific connection being ascertainable – also business success. From the perspective of a market-
reflected the respective governing inflation expecta- typical, risk-averse valuation subject, risks are rated
tions. Since 1993, the typical national interest rate higher than opportunities during the transition from
has fallen constantly below its long-term average and projected risk-bearing future business success to their
reached the historically extremely low level of under security equivalent (see: MOXTER, p. 138 et seq.;
5.0% with a lowest point of less than 4.0% in late IDW ES 1, no. 85). That is also the reason why in
1998 and early 1999 (see: Deutsche Bundesbank, the case of an immediate capitalization of uncertain
Statistisches Beiheft zum Monatsbericht Oktober future business success the base interest rate is to be
1999, Kapitalmarktstatistik, p. 38). increased by a risk premium. This does not mean that
future business success is to be projected according
Considering the circumstances that the typical na-
to the accounting law (Sec. 252 para. 1 no. 4 HGB
tional interest rate, on the one hand, has changed
(German Commercial Code)) cautionary principle
during 1999 – faster than most market participants
(see: Stellungnahme HFA 2/1983, section C.1.n);
expected – and has already moved away by more
IDW ES 1, no. 60 et seq.).
than one percentage point from the mentioned low-
point, while on the other hand, in view of apparently In the more recent literature, it is increasingly
permanently low inflation rates, it may not again recommended that the risk premium is to be
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
140 Merger Report VIII. Exchange Ratio
determined as far as possible based on the market also active in processing in addition to mere trading.
and, in order to do so, to rely on the Capital Asset Due to their higher added value they show a lower
Pricing Model (CAPM) and the empirically deter- o
Beta. Kl¨ ckner & Co. was considered more risky by
mined risk premium for a market portfolio, as well as the experts and was valued using a Beta of 1.2.
on the individual risk-level of the valuation object
For Viterra, a schematic transfer of average values
(the so-called Beta-factor) – irrespective of the
for the industry does not appear appropriate either.
objections in detail, which especially relate to the
Viterra’s earnings are mainly derived from the
projection suitability of historical market risk data
management of housing units which are still partially
and the transferability to non-listed companies (see:
subject to rent control and show a high occupancy
BAETGE/KRAUSE, BfuP 1994, p. 433 et seq.;
rate. The property development business, with a
BALLWIESER, Wpg 1995, p. 121 et seq.;
correspondingly higher risk similar to that of other
HEURUNG, DB 1997, p. 891 et seq.: AHA, AG
companies, is comparatively irrelevant. Taking into
1997, p. 34 et seq.; WP-Handbuch 1998, vol. II A
account observable Betas for real estate stock corpo-
190 et seq.; IDW ES 1, no. 89, 126).
rations between 0.2 and 0.6 and the specific risk
The risk premium demanded by the parties contribut- situation of Viterra, a Beta of 0.3 was used.
ing the equity z is calculated according to the CAPM
The valuation of the activities of the group holding
with z = ß* (rM – i), where ß represents the
companies was based on Beta factors that were
individual risk level of the valuation object, rM
individually calculated using the weighted average of
represents the return of the market portfolio, and i
the earnings value of the operationally active major
represents the typical national interest rate. The long-
group companies. The average Beta factors weighted
term average of (rM – i) is according to the literature
across the major group companies correspond approx-
said to be at around 4 to 6 percent (see:
imately to those observed during the month prior to
DRUKARCZYK, p. 249, 263; AHA, AG 1997, p. 34
the technical valuation date for the shares of VEBA
with further references.; BALLWIESER, Wpg 1995,
and VIAG.
p. 123; again in DB 1997, p. 2394; and Wpg 1998,
p. 82). Since market risk premiums determined from
(c) Standardized Taxes on Income
historical data are subject to significant fluctuations,
depending on the reference period, there is room for Since the future business success of the valuation
discretion in choosing the historic reference basis for objects is determined according to the (standard-
the projection of future market risk premiums (see: ized) personal income taxes (see: above Sec-
BAETGE/KRAUSE, BFuP 1994, p. 452 et seq.; tion 2.a)(2)), interest earnings from the assumed
BALLWIESER, WPg, 1998, p. 83). Also with respect alternative investments and therefore the capitaliza-
to the extent of the risk premiums which have been tion interest rate also have to be reduced by a
formerly accepted by the jurisdiction for the purpose standardized income tax deduction of 35% (see:
of business valuations (see: PILTZ, annex 3), the WP-Handbuch 1998, vol. II A 201 et seq.; IDW
valuation auditors have assumed (rM – i) a rate of ES 1, no. 90).
5%.
For this purpose, the income tax discount is to be
To give credit to the obviously different risk classifi- taken from the basic interest rate increased by the
cations of the major group companies of VEBA and risk premium; the cash devaluation discount, how-
VIAG, individual Beta factors were determined for ever, is to be taken from the interest rate after taxes
the major group companies; for this purpose, the Beta (see: SIEGEL, DB 1997, p. 2391 et seq.;
factors, observed on the capital markets, of group BALLWIESER, DB 1997, p. 2394 et seq.; SIEPE,
companies listed at a stock exchange, in the other WPg 1998, p. 332, 336; KRUSCHWITZ, LOFFLER, ¨
cases the Beta factors of comparable exchange-listed DB 1998, p. 1043; IDW ES 1, no. 95; dissenting,
companies from the same industry were utilized ¨
GUNTHER, 1998, p. 384 et seq.).
(market data according to BARRA and DATAS-
TREAM, Oktober 1999; projected values based on (d) Growth Rate
historic periods between 2.5 and 5 years), as well as
investment banks’ analyses. A final equivalence problem is caused by the possibly
differing consequences of an inflationary trend: While
A Beta-factor of a comparable company was not the returns from fixed-income securities will remain
o
available for Kl¨ ckner & Co. Other steel traders are nominally constant throughout their duration irrespec-
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 141
tive of the future monetary depreciation (and there- the status quo (this assumption corresponds to the
fore are reduced in their real purchasing power), long-term forecast of the typical national inflation
companies may possibly generate nominally increas- rate of 6.5%), will increase with an annual rate of
ing (and under certain circumstances even constant 1.0% nominally and therefore inflation induced cost-
real) future business success. increases may be partially compensated (see:
DRUKARCZYK, p. 374 et seq.; WP-Handbuch 1998,
A monetary depreciation discount (more properly
vol. II a 284).
known as a growth discount) is called for only if
future business success is forecast on the price basis
as of the valuation date, i.e. as actual amounts. As far
Base Market Risk Beta-Factor Risk Adjusted Risk Adjusted Growth Capitalization
Interest Premium Interest Interest Rate Discount Interest Rate
Rate Rate after Taxes
First Second Second
Projection Projection Projection
Period Period Period
% % % % % %
VEBA
Preussen Elektra 6.50% 5.00% 0.70 10.00% 6.50% –1.00% 5.50%
VEBA Oel 6.50% 5.00% 0.80 10.50% 6.83% –1.00% 5.83%
u
Degussa-H¨ ls 6.50% 5.00% 0.90 11.00% 7.15% –1.00% 6.15%
Viterra 6.50% 5.00% 0.30 8.00% 5.20% –1.00% 4.20%
VEBA Electronics 6.50% 5.00% 1.00 11.50% 7.48% –1.00% 6.48%
VEBA Telekom 6.50% 5.00% 1.20 12.50% 8.13% –1.00% 7.13%
Stinnes 6.50% 5.00% 0.90 11.00% 7.15% –1.00% 6.15%
MEMC 6.50% 5.00% 1.30 13.00% 8.45% –1.00% 7.45%
VEBA Holding/Headquarter 6.50% 5.00% 0.72 10.11% 6.57% –1.00% 5.57%
VIAG
Bayernwerk 6.50% 5.00% 0.70 10.00% 6.50% –1.00% 5.50%
SKW Trostberg 6.50% 5.00% 0.90 11.00% 7.15% –1.00% 6.15%
VIAG Telecom 6.50% 5.00% 1.20 12.50% 8.13% –1.00% 7.13%
VAW aluminium 6.50% 5.00% 0.90 11.00% 7.15% –1.00% 6.15%
Schmalbach-Lubeca 6.50% 5.00% 0.80 10.50% 6.83% –1.00% 5.83%
Gerresheimer Glas 6.50% 5.00% 0.70 10.00% 6.50% –1.00% 5.50%
o
Kl¨ ckner & Co 6.50% 5.00% 1.20 12.50% 8.13% –1.00% 7.13%
VIAG Holding/Headquarter 6.50% 5.00% 0.79 10.46% 6.80% –1.00% 5.80%
as future business success already reflects expected (e) Derivation of the Capitalization Interest Rates
inflation-induced increases in earnings and costs and
On the basis of the above considerations the valua-
is therefore planned as nominal values, no equiva-
tion auditors reach the following derivation of the
lence problems exist compared with the standardized
capitalization interest rates:
alternative investment (see: MOXTER, p. 549 et seq.;
Statement HFA 2/1983, section B.3.; MATSCHKE,
WPg 1986 1986, p. 549 et seq.; IDW ES 1, no. 92). (4) Special Values
In the present case, this applies to future business (a) Separately Valued Financial Assets
success during the first projection period.
The non-consolidated shareholdings and other finan-
However, in future business success of the second cial assets, particularly special securities funds, have
projection period (permanent annuity) additional nom- been separately valued by the valuation auditors,
inal growth is not taken into account. The valuation since a valuation as part of the earnings value based
auditors have therefore used a capitalization interest on shareholding and/or interest earnings would have
rate for these years that is reduced by a growth led to incorrect results. For the purposes of valuing
discount equal to the amount of the current inflation shareholdings, the valuation auditors have relied on
rate, i.e. about 1.0%. The underlying expectation is stock market prices to the extent possible (generally
that the future business success of VEBA and VIAG, average prices over 260 days prior to November 1,
with monetary devaluation rates slightly higher than 1999) and in all other cases divided the shareholdings
into four different valuation categories according to
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
142 Merger Report VIII. Exchange Ratio
a uniform procedure. These categories comprise ence between the annual taxes to be paid when no
simplified earnings value methods, methods of the so losses are carried forward and the taxes to be paid
called simplified pricing (multiplication method) or annually when losses are carried forward.
a valuation according to the pro-rata equity or book
value. The allocation took place depending on the The value of the losses carried forward has been
available information as the basis for a fu- determined according to the latter method. Tax
ture-oriented valuation and on the significance of the savings from additional tax amortizations were also
companies. In individual cases it was possible to fall determined using this method.
back on concrete expectations regarding possible
sales during ongoing sales negotiations. The value of positive EK 45- and EK 40-positions
are based on their inherent corporate income tax
The valuation according to the so-called multiplier reduction potential: Through an assumed distribution
method was done by classifying the associated of these equity positions, the aggregate corporate tax
companies into five categories. Valuation expertises liability of the company and its shareholders
about companies in the energy and utility sector were would be reduced from 45% or 40%, respectively, to
analyzed for these groups. Sales multipliers were (standardized) 35%. In this case an immediate re-
derived from these analyses which – after adjust- contribution of the distributed amounts as part of
ments by the valuation auditors – were applied to the a distribute-and-reinvest procedure is assumed
sales proceeds of these companies. (see: SIEPE, WPg 197, p. 5 et seq.; HEURUNG,
DB 1999, p. 1228). EK 45-positions were considered
To the extent that separately valued financial assets value reducing, since by crediting them against future
are identified for sale, the valuation auditors have equity contributions, the shareholders will lose the
reduced the gross value of the financial assets by above-mentioned reduction potential for the corporate
income tax on capital gains (trade tax on the income tax. The tax effect amounts to 10/55 in case
corporate level and standardized shareholder income of EK 45-positions and 5/60 in case of
tax) levied in such cases. EK 40-positions.
(b) Special Tax Values (c) Real Estate Assets not Necessary for Business
Operations
Tax particularities resulting from losses carried for-
ward, high value tax amortizations and equity hold- The value of real estate not necessary for business
ings which had been subject to domestic corporate operations was determined based on expert opinions
income tax, have not been taken into account in the or other information provided by external or com-
earnings value. pany-internal experts, indicative land values or recent
The value of trade tax losses carried forward results sales. For the purpose of valuation it was assumed
directly from the tax savings related to such losses that these real-estate assets are sold during 2000 at
carried forward. The value of corporate tax losses their market value and that the sales after sales
carried forward generally results from a positive expenses and due trade and income taxes are
corporate event following a loss remaining within the distributed to the shareholders as distributable profit.
company tax free in case of retention. Retained
earnings bear interest within the company and, after (5) Total Values of VIAG and VEBA
any further reduction of the losses carried forward,
leads to higher distribution during the following The total value of VIAG and VEBA, respectively, is
years. The difference between the cash value of the derived from the values of the individual operational
distribution when losses are carried forward and the divisions as well as of the holding companies. The
distribution without existing losses carried forward divisions are divided into those that will be continued
corresponds to the value of the losses carried sustainably and those which are defined by the Board
forward. of Management as – on a stand-alone basis – to be
divested. The business values of the divisions to be
The resulting value of the losses carried forward continued as well as of the divisions to be sold are
may, however, also be derived directly by discount- again each comprised of the earnings value of the
ing the amount of the annual tax savings to the operating business and separately valued financial
valuation date. The annual tax saving is the differ- assets and earnings.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 143
3. Harmonization of Material Forecast Assump- power plants. To the extent possible, data from
tions of Bayernwerk AG and PreussenElektra external sources (contractual prices, expert opinion of
AG NIS Ingenieurgesellschaft mbH, Hanau (NIS) and of
u
Gesellschaft f¨ r Nuklear-Service mbH, Essen (GNS))
After the liberalization of the German electricity
was used. Based on this data, power-plant-specific
markets, electricity prices for special-rate customers
payments including price increases were calculated
and resellers have come under pressure during the
and converted to a uniform annuity after 2000.
course of 1998 due to existing overcapacities in
electricity generation. During the summer of 1999, No information may be disclosed relating to the
electricity prices for retail customers also fell signifi- operational lifetime of the nuclear power plants used
cantly. The further development of the electricity during the valuation as well as to the disposal costs
market and electricity prices is to be considered as due to sec. 8 para. 2 UmwG, since the disclosure
one of the material premises for the forecast earnings would inflict a significant disadvantage on the compa-
of Bayernwerk and PreussenElektra. Material funda- nies involved during the consensus negotiations.
mental data of both electricity plans were therefore
harmonized. Both groups are currently – at different levels –
Assumptions regarding sales prices including the burdened by compensations to be paid for electricity
concession payments over time for private customers, from regenerative energies fed into their grids by
commercial customers, special-rate customers and third parties. According to the corresponding an-
resellers, as well as growth assumptions regarding the nouncements of the German federal ministry for
sales were standardized. Generally, a significant price economy, a new regulation is assumed, according to
drop is expected, which is to be compensated which all producers will have to bear relatively equal
partially through increased sales in competing with amounts of the expenses for such electricity fed in.
other suppliers, or by the increase of trading Experts have assumed that about 80% of the ex-
activities. penses may be compensated for by electricity prices.
On the expense side, assumptions regarding future The conditions of the electricity market assumed for
procurement costs for fuels as well as third party the period between 2000 and 2002 may not be
electricity were coordinated. continuously assumed due to the expected further
Since a significant portion of the electricity is consolidation of the market on the supply side and
generated by both divisions based on nuclear energy, due to the requirement of reinvestment existing for
an assumption had to be made for the valuation all producers. To reflect an average pricing level that
regarding the further operation of nuclear power may be achieved in the future over a long term, the
stations (‘‘energy consensus’’). The federal govern- average price of the last forecast year 2002 of the
ment intends to limit the operational lifetime of second forecast period was increased slightly – also
nuclear power stations. This goal is primarily to be for the purpose of a harmonized procedure for both
achieved in a consensus with the operators of nuclear electricity groups – and a one-time slight sales
power plants; alternatively, a unilateral regulation increase was taken into account.
may be established by the legislator. The content of
Further differentiated considerations have been made
the final regulation is currently still open.
in the energy division regarding the size of the future
According to the present forecasts, the major group reinvestment rate. For intangible assets, real estate
companies assume an undisturbed continued operation and distribution facilities, the historical acquisition
of nuclear power plants; the aforementioned discus- costs were increased to current price levels using
sion regarding the energy consensus has been uni- indexing, and the reinvestment rates were derived
formly taken into account for both major group based on the duration of economical utilization. For
companies. The issue of nuclear waste management generation facilities, the reinvestment rates were
costs, for which Bayernwerk and PreussenElektra are determined based on the replacement cost of the
forming balance sheet provisions based on different installed power depending on the age of the facilities
assumptions, was also harmonized. This relates to and the operating periods of the different types of
reprocessing costs and disposal costs for fuel ele- power stations. For business and commercial equip-
ments, costs for final storage, lifetime assumptions, as ment, the 1998 amortizations were used as reinvest-
well as shutdown and dismantling costs for nuclear ment rates.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
144 Merger Report VIII. Exchange Ratio
4. Valuation of VIAG
a) Group Divisions with Intention of
Continuation
(1) Energy: Bayernwerk AG
(a) Earnings Value of the Operating Business
The valuation basis of the major group company
Bayernwerk is set forth in the following table. These
earnings numbers do not contain the earnings contri-
butions of the energy shareholdings which are di-
rectly part of the operating business of Bayernwerk
and of the other separately valued financial assets.
Bayernwerk
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 5,283 5,662 5,091 4,698 4,609 4,689
Production costs –4,106 –4,388 –3,806 –3,477 –3,546 –3,575
Gross margin 1,177 1,274 1,285 1,220 1,063 1,114
Other operating earnings and taxes –264 –230 –346 –501 –510 –541
EBIT 913 1,044 939 719 554 573 629
Interest earnings 67 –113 –174 –151 –180 –219 –225
Pretax operating earnings 980 931 765 568 374 354 404
Corporate taxes –93 –62 –59 –67
Operating earnings after taxes 475 311 295 337
Minority Shareholdings –21 –16 –13 –15
Retained foreign earnings –16 –24 –27
Additional interest earnings from retained
earnings 2003 et seq. 8
Gross distribution 438 271 255 330
Personal income tax 35% –153 –95 –89 –115
Net distribution 285 176 166 214
Capitalization interest rate 6.50% 6.50% 6.50% 5.50%
Cash value factor 0.93897 0.88166 0.82785 15.05180
Cash value 267 155 137 3,226
Earnings value of the operating business as of 1/1/2000 100% 3,786
In principle, historic data for the years 1997 until pected since existing overcapacities in electricity
1999 are only comparable to a limited extent with the production can only be slowly reduced. This has been
forecast results due to divergent market conditions. taken into account in the sales and price scenarios of
1997 was still characterized by the monopoly position the forecast.
of the electricity utilities. Due to changes to the
Comparing the historical with the forecast years it
energy law in 1998 and the liberalization of the
also has to be taken into account that comparability
energy market, competition initially only started in
is significantly limited due to the valuation-related
the special-rate customer reseller segments. In the
modifications of the forecast figures listed in sec-
middle of 1999 competition then expanded to all
tion 2.a)(2)(b). For the same reasons the projected net
customer groups. For the first projection period, an
increasingly keener competitive environment is ex-
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 145
distributions cannot be understood as projections of improved the earnings. On the other hand forecast
future commercial annual net income. amortizations on fixed assets of Bayernwerk were
increased for the purpose of harmonizing Bayernwerk
The historical figures for 1997 until 1999 were
and PreussenElektra.
adjusted by extraordinary business events, in particu-
lar restructuring expenses, disposal of assets and the In the Bayernwerk group, power is supplied by third
assumed losses of the telecommunications division. parties mainly from hydroelectric sources and only to
Furthermore, earnings from shareholdings and interest a limited extent. It is assumed that the implied
earnings allocable to the separately valued financial amendment of the Electricity Feed-in Law will not
assets as well as goodwill amortizations have been cause additional burdens for Bayernwerk. It is rather
eliminated. assumed that rolling over the fees for feeding in
electricity will slightly relieve Bayernwerk’s earnings.
The historical figures in 1997 and 1998 the develop-
ment of the group’s energy division was character- Even after taking into account modifications, the
ized by an increase in sales by 7.2% and by an forecast shows – particularly compared with previous
increase of power supplied by 15.7%. Thereby it has years – a significant reduction of operative earnings.
to be taken into consideration that with respect to In addition, interest earnings deteriorated compared
supply volume and sales the Isar Amperwerke were with 1997 until 1999 mainly due to the consideration
consolidated for the first time in 1997 only for the of the full distribution assumptions and the separate
first six months of its financial year and that the valuation of financial assets.
Hungarian TITASZ was included for the first time in
1998. Beginning in 1998, competition in the electric- As explained in section 3., adjustments were made to
ity market has negatively affected prices. However, the expected long-term sales price level in estimating
cost-reduction programs have contributed to increased the future business success of the Energy Division
EBIT compared with both previous financial years. after 2003. Since a meaningful differentiation after
the first projection period appears to be hardly
The increasing effects of the liberalization of the possible, the average revenue of the entire electricity
electricity market were partially compensated by business was uniformly increased and a low increase
Bayernwerk and its subsidiaries during 1999 through in supply was assumed. Other sales revenues from
cost-management programs. In case of further in- 2002 were extrapolated without changes (plus infla-
creases of supply volume, declining division sales tion-related increases).
and lower EBIT compared with the previous year are
expected. The additional results are faced with a reinvestment
rate which exceeds the amortizations of 2002 by
Corresponding to the uniform assumptions for the
approximately 60%. Also the maintenance expenses
years 2000 until 2002 further price declines, particu-
were increased for the purpose of the harmonization
larly for private and commercial customers, are
of Bayernwerk and PreussenElektra.
expected for Bayernwerk and its subsidiaries. In
addition, significantly declining prices for special-rate After subtracting interest expenses, the terminal value
customers and resellers – assuming, however, a level results in pretax earnings which, due to positive
lower than in the private customer business – are long-term price expectations, are improved compared
expected. This price development will be counter- with the earnings level during the first projection
acted by volume increases tied to sales strategies, period. It has to be taken into account, however, that
particularly in electricity trading, which significantly the future business success as of 2003 will not be
exceed the growth supported by the economic devel- necessarily achieved during 2003, but constitutes
opment and which essentially compensate the price a representative earnings level only for the long-term
reductions. Therefore, sales basically remain constant future.
during the first projection period.
Adjustments due to the valuation method (nuclear (b) Special Values
energy disposal, electricity supply, old age benefits) Separately Valued Financial Assets
effective for the years 2000 until 2002 are already
included in the production costs. Thereby the replace- The sum of the separately valued financial assets
ment of disposal expenses with a new newly calcu- amounts to EUR9,239 million which is comprised as
lated annuity of disposal payments has slightly follows:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
146 Merger Report VIII. Exchange Ratio
Bayernwerk Real Estate not Necessary for Business Operations
Separately valued financial assets – going concern EUR in
millions Bayernwerk shows the following figures:
Shares valued at stock market price: 6,103 Bayernwerk
Shareholdings valued at earnings value: 695 Real estate not necessary for business operations EUR in
Financial assets valued at book value: 2,104 millions
Financial assets valued at proportional 337
equity: Present value (after sales cost) 367
Trade tax: –34
Sum of separately valued financial 100.00% 9,239 Typical income tax: –62
assets
Net proceeds 100.00% 271
In the shareholdings valued at stock market prices
Bayerische HypoVereinsbank AG, VEW AG, The real estate not necessary for business operations
BEWAG AG, Dresdner Bank AG as well as different is comprised of numerous properties, with and
special securities funds are included as material without buildings, some of which are encumbered
individual assets; these assets represent approximately with hereditary building rights. The properties with
96% of the stock market valuation. For BEWAG AG buildings mainly include residential properties and
the average price during a 260 day period did not former business sites, the properties without buildings
represent the trend so that the average price during mainly land expected to be set aside and commercial
a 38 day period was applied. property. The value stated is based on market values
which were determined by Bayernwerk Immobilien-
A total of 56 companies – mainly regional utilities – Management GmbH or the responsible subsidiaries of
were valued at the simplified earnings value. The Bayernwerk taking into consideration expertises, in-
valuation at the earnings value includes the simplified dicative land values and proceeds from recent sales.
earnings value and the multiplier method. With respect to determining the net proceeds we refer
Among the shareholdings valued at book value, to section 2.b)(4)(c).
WATT AG, VEAG Vereinigte Energiewerke AG and
JME Strom S¨ dm¨ hren are included as material
u a (c) Business Value
individual assets; together these assets represent more
The earnings value of the operating business and the
than EUR700 million of the total amount of the
special values add up to a total value for Bayernwerk
valuation at book value. The remaining companies
of EUR13,666 million. After applying VIAG’s share-
valued at book value or their pro-rata equity
holding quota in Bayernwerk of 94.93% the business
comprise more than 100 companies from the energy
value amounts to EUR12,973 million
and utility sector.
Bayernwerk
Special Tax Values Business value as of 1/1/2000
EUR in
Bayernwerk has special tax values of EUR370 millions
million which are mainly allocable to positive EK 40 Earnings value of the operating 3,786
and EKM 45 positions. In addition, domestic losses business
carried forward of non-consolidated subsidiaries exist. Special values:
With respect to the methodological procedure of Shareholdings going concern: 9,239
determining the value reference is made to Tax values: 370
section 2.b)(4)(b). Real estate not necessary for business operations: 271
Sum of special values 9,880
Business value 100.00% 13,666
Group portion 94.93% 12,973
(2) Chemicals: SKW Trostberg AG
(a) Earnings Value of the Operating Business
The valuation basis for the Group Division SKW
Trostberg is set forth as follows:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 147
SKW Trostberg
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 3,183 3,114 3,356 3,927 4,177 4,415
Production costs –2,028 –1,967 –2,146 –2,471 –2,600 –2,738
Gross margin 1,155 1,147 1,210 1,456 1,577 1,677
Other operating expenses and earnings –894 –862 –911 –1,096 –1,145 –1,203
EBIT 261 285 299 360 432 474 443
Interest earnings –51 –63 –76 –92 –97 –102 –124
Pretax operating earnings 210 222 223 268 335 372 318
Corporate taxes –73 –97 –111 –102
Operating earnings after taxes 195 238 261 216
Minority Shareholdings 3 0 –1 –1
Retained foreign earnings –75 –107 –138
Additional interest earnings from retained 39
earnings 2003 et seq.
Gross distribution 122 130 122 254
Personal income tax 35% –43 –46 –43 –89
Net distribution 80 85 80 165
Capitalization interest rate 7.15% 7.15% 7.15% 6.15%
Cash value factor 0.93327 0.87099 0.81287 13.21747
Cash value 74 74 65 2,184
Earnings value of the operating business as of 1/1/2000 100% 2,397
The historical figures for SKW Trostberg including pensated by the positive developments in the other
Goldschmidt for 1997 until 1999 (which are based on business divisions and by acquisitions.
pro-forma statements for 1997 and 1998) were
adjusted by extraordinary business events, in particu- NATURAL PRODUCTS’ sales of EUR 791 million
lar, restructuring expenses and earnings from the represented approximately 25% of the Chemicals
disposal of assets. Furthermore, earnings from share- Division’s 1998 total sales. The profitability of the
holdings and goodwill amortizations were eliminated. division significantly increased in 1998 compared
with the previous year. Natural Products have thus
In the 1998 financial year, SKW achieved sales in the more than proportionately contributed to the divi-
amount of EUR3,114 million, which means a slight sion’s earnings. In 1999, the cost-reduction measure-
sales reduction compared with 1997, which was ments of the past years now fully effective resulted
caused by the price deterioration of urea and ammo- in an earnings improvement.
nia as well as a weaker business with deicing salts.
Improved margins of the business area natural The profitability of the Gelatine & Specialities is
products resulted in an adjusted EBIT of presently particularly affected by the more expensive
EUR285 million in 1998 and to a higher operating materials for the production. The market growth in
margin of 9.2% compared with the previous year. the business area Salt Products has to be judged as
The expected sales increase in 1999 is mainly based moderate; the profitability is strongly affected by the
on the expansion of the scope of consolidation as deicing salt business which is dependent on the
a result of the acquisition of Harris Speciality weather. The business opportunities for the
Chemicals Inc.; otherwise, due to ongoing price Texturizing-Systems can be valued as positive; the
weakness for urea and ammonia as well as the weak market for carrageenans is increasingly growing by
economy in the chemical and steel industry, sales approximately 4 to 5% per year. The business area
were reduced. The concomitant earnings reduction in Aromas & Fruit Preparation, the market position
the Business Division Chemicals is more than com- and profitability of which was below average in
relation to the total business area Natural Products,
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
148 Merger Report VIII. Exchange Ratio
intends to become one of the leading companies of The assumed sales growth for the Chemicals Division
the industry with the acquisition of Alex Fries Inc. as for the first projection period is mainly contributed by
well as of Alfrebo Inc. The products of Cultures & the business area metallurgical chemicals. Here the
Enzymes, which operates in a niche market, show startup of the new production sites in Brazil and
a high- value-added portion and correspondingly India in 2000 will lead to a one-time extremely
good profitability. disproportionate increase in sales. While a short-term
recovery of the urea prices cannot be expected, it can
Natural Products’ expected total sales growth for the be assumed with respect to Dietary Supplements that
first projection period is, adjusted by the special the supply reduction in 1999 can be overcome by the
effects from the acquisition of Lucas Meyer, slightly year 2002. Despite the improvement of the overall
below the projected average market growth. But it earnings situation, the business division will only
has to be taken into consideration that for the contribute below proportion to the total earnings of
gelatine and salt business a proportional under- the group division in the first projection period.
performing growth has to be taken into consideration
The Construction Chemicals Division’s sales in-
in comparison to the total business division. The
creased from EUR1,253 million in 1997 to EUR1,271
development of new customer relations in the busi-
million in 1998. Approximately 41% of the group
ness areas Aromas and Fruit Preparations shall result
division sales were generated by the construction
in an above-market growth rate. It is the goal of the
chemicals in 1998. A further growth push resulted
business division to achieve growth, in particular, in
from the acquisition of the U.S.-American Harris
market segments characterized by higher profitability.
Specialty Chemicals Inc. as per April 1, 1999.
SKW is today the world’s leading full-scale supplier
The Chemicals Division’s sales of EUR 634 million
of construction chemical products and systems.
represented approximately 20% of the total division
sales in 1998. Compared with the successful previous The perspectives for growth for the business area
year, this means a reduction of approximately 10%. differ regionally. A significant portion is constituted
This was caused by price deterioration for urea of fully developed markets in which the market
fertilizer and a downturn in the specialty and fine development follows the growth of the respective
chemicals as well as in the metallurgical chemistry gross domestic product. The business opportunities
caused by the economy, apart from the ongoing price here lie mainly in the areas renovation and building
deterioration for urea fertilizer for the sales of the protection. In the Emerging Markets, however,
Dietary Supplements occurred in 1999, so that the two-digit growth rates may be expected at times, also
sales will again be reduced by 10% this year. As in with respect to new constructions. The profitability of
the past, the profitability of the Chemicals Division the construction chemicals shows an above average
will also be below average in 1999 compared with level for the Chemicals Division. Locally limited
the other divisions. declines of the construction industry’s economic
cycle were compensated in the past by regional
The market for products of the business area Special diversification.
and Fine Chemicals shows relatively low cycles and
The synergy potential related to the integration of
is growing by approximately 3 to 5% per year. In the
Harris as well as stronger technology transfer lead to
units Cyanamide and food supplement Kreatin, SKW
an expected average sales growth of 7% per year
has a leading market position. Worldwide urea
during the first projection period. The success of the
overcapacities as well as the import stop of China for
division, measured using the return on sales, should
urea and cheap products from Eastern Europe have
improve only slightly during the forecast period. Due
resulted in the business area Agro and Industrial
to the expected improvement of the earnings of the
Chemicals to a reduction of world market prices
other business areas, the currently significantly dis-
in 1998 and 1999. Therefore, a substantial restructur-
proportional contribution to the earnings of the
ing is undertaken at the Piesteritz site. Opportunities
construction chemicals division will continuously
for growth for the business area Metallurgical
decrease.
Chemicals mainly exist in the Emerging Markets.
The dependency from the economy, however, results With sales of EUR400 million the PERFORM-
in comparably cyclical earnings trends which, how- ANCE CHEMICALS division generated approxi-
ever, can be partly compensated by the specialty mately 13% of the division’s sales during 1998. With
character of most products. approximately 14%, the result contributed slightly
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 149
overproportional to the total earnings of the division. (b) Special Values
Through the acquisition of the Oleochemicals and
Derivatives Group (ODG) from Witco during 1999, Separately Valued Financial Assets
the business area has significantly increased its The sum of the separately valued financial assets
business volume. amounts to EUR66 million, in which shares of the
Farben successors valued at stock market prices for
In the business area Surfactants sales were more
a total of EUR52 million as well as shares in
than doubled and SKW became one of the leading
specialty funds are included. The remaining amount
suppliers. The business area Oligomeres/Silicones
is allocable to more than 30 domestic and interna-
will be able to expand its global market position
tional shareholdings which were valued at their
through the acquisition of ODG. No noteworthy
pro-rata equity.
earnings improvements above the current level are
expected for the business area Industrial Chemicals.
Special Tax Values
Without taking into account the one-off effect result-
SKW Trostberg has special tax values of EUR32
ing from the acquisition of ODG, which will be fully
million, which are allocable to domestic losses
effective during the forecast year 2000, the division
carried forward, additional tax writeoffs for subsidiar-
assumes an average growth rate of 6 to 7% per year
ies of SKW and positive EK 45 and EK 40 positions.
This growth rate which is above the expected market
With respect to the methodological procedure of
growth of 3 to 4% per year can be explained by
value determination reference is made to
significant synergy potentials from the integration
section 2.b)(4)(b).
of ODG. In addition the forced expansion of the
strategically very attractive business area Oligomeres/
Real Estate Assets not Necessary for the Business
Silicones is intended during the first projection
Operation
period, which today already shows strong growth
combined with good earnings. The improved utiliza- The following figures appear for SKW Trostberg:
tion of production capacities related to the sales
SKW Trostberg
growth as well as the widened customer base let the Real estate not necessary for business operations EUR in
operating margins increase to 11% at the end of the millions
first forecast period.
Present value (after sales cost) 88
Trade tax: –13
In the DEVELOPMENT UNIT division which is
Typical income tax: –23
additionally included in the forecast, the personnel
and materials expenses of SKW Trostberg were Net proceeds 100.00% 51
included in addition to expenses for the development
of innovative business fields, to the extent that they The real estate assets not necessary for business
are related to the function of the holding company. operations include properties both with and without
Total earnings in this area will also be determined by buildings. The properties without buildings include
research expenses as well as the allocated costs of the such intended for residential buildings as well as for
group’s holding company at the end of the first commercial purposes the properties with buildings,
projection period. mainly residential properties. The stated value is
based on market values which were established by
The discount on an EBIT basis made by the consulting experts, indicative land values and pro-
valuation auditors for the estimate of the future ceeds from recent sales. With respect to the determi-
business success after 2003 compared with the last nation of net proceeds reference is made to
forecast year of the first projection period, on the one section 2.b)(4)(c).
hand relates to the adjustment of the amortization to
the expected long-term reinvestment rate. On the (c) Business Value
other hand, a larger discount was made in relation to
the extent of the assumed turn-around of the agricul- The earnings value of the operating business and the
tural and industrial chemistry at the Piesteritz site. In special values add up to a total value for
addition, the valuation auditors have to a smaller SKW Trostberg of EUR2,545 million. Taking into
extent made valuation discounts in all other business account VIAG’s 63.7% stake in SKW Trostberg, the
areas. business value amounts to EUR1,621 million.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
150 Merger Report VIII. Exchange Ratio
SKW Trostberg EUR in only a slight increase thereafter. Over the medium
Business value as of 1/1/2000 millions and long term and corresponding to the general
Earnings value of the operating business 2,397 expectation for the development of the mobile phone
Special values: market decreasing sales per subscriber are expected
Shareholdings going concern: 66 which, however, are faced with an increase of the
Tax values: 32 average minute volume.
Real estate not necessary for business
operations: 51 The fixed-line area intends to concentrate on the
Sum of special values 148 higher margin business customer segment and shows
Business value 100.00% 2,545 two-digit growth rates with a comparatively stable
sales quota of approximately 16% during the forecast
Group portion 63.70% 1,621
period. The sales growth is above the projected
market growth and is to be achieved by technological
(3) Telecommunications: VIAG Telecom innovations in the integration of fixed-lines and
Beteiligungs GmbH mobile phones and the marketing of the internation-
VIAG Telecom Beteiligungs GmbH bundles as the ally leading BT-AT&T services. At the end of the
management company the activities of VIAG in the first projection period a market share of almost 10%
telecommunications sector. One percent of the shares is aimed for in the business customer segment.
are held directly and 99% are held via Bayernwerk In the Internet business area more than half of the
AG of which VIAG in turn holds 94.93% of the business during the forecast period is to be realized
shares. This results in a calculated group quota for by offering Internet access provider services. The
VIAG of 94.98%. current portion of only approximately 3% of the total
As a pure holding company VIAG Telecom net revenue is mainly due to pending product
Beteiligungs GmbH holds direct and indirect share- introductions. The expansion in the private customer
holdings in the companies VIAG Interkom area will not be pushed due to current low margins.
GmbH & Co. (Germany), Orange Communications With respect to the other planned products
S.A. (Switzerland) and Connect Austria Gesellschaft (e-business, contents) the company particularly in-
f¨ r Telekommunikation mbH (Austria).
u tends to use the know-how of its partner, British
Telecom. The forecast takes into account that these
The economic situation and the forecast expectations areas have not yet been transformed into specific
relevant for the valuation may be outlined as follows products.
for the individual national companies:
Generally, after sales of approximately EUR0.7 bil-
(a) VIAG Interkom lion in 1999, sales of approximately EUR1.7 billion
are expected for the company during 2000 which is
The mobile phone business area is the largest to increase continuously to a level of more than
contributor to sales of VIAG Interkom with a share EUR8.5 billion at the end of the first projection
of approximately 45% in 1999 and planned 65% period. Break-even is to be achieved during 2001 so
after 2000. As of October 31, 1999, the company had that positive operating earnings are expected in 2002
0.6 million subscribers. In October 1999 alone for the first time. Until 2008 a continuous increase to
0.1 million new subscribers were gained. At the end more than EUR2.4 billion is expected.
of 1999 more than 0.8 million subscribers shall be
acquired which corresponds to a market share of (b) Connect Austria
approximately 4%.
The forecast for Connect Austria assumes an increas-
Compared with the rest of Europe, the development ing market share during the first projection period
of the German market still has a high potential for from currently approximately 12% to approxi-
catching up. Therefore, VIAG Interkom in its current mately 23% by 2003, which remains unchanged
general forecast – assuming a current penetration rate thereafter. During the comparable period, the ex-
of 25% – assumes an increasing penetration rate pected penetration rate of currently approximately
until 2003 with a flattening increase thereafter and 45% is to increase to a figure significantly above the
which amounts to 65% at the end of the first European average. The valuation auditors have taken
projection period. Until 2003 an increase of the this assumption into account by applying a valuation
market share to approximately 20% is assumed with discount. According to the general expectation, the
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 151
forecast assumes declining sales per user with a growth is also reflected in the assumed development
concurrent increase of the minute volume for the of the market share which is to grow from currently
development of the mobile telephone market. This approximately 10% to almost 25% in 2003 and
estimate corresponds to the projections of other should reach approximately 27% at the end of the
telecommunications companies. In addition to dis- first projection period.
counts due to the penetration rate, margin discounts
were made for valuation purposes in particular Taking into account the expected development in the
because of the sometimes ambitious forecast expecta- mobile telephone market, declining sales per sub-
tions regarding average sales per user and because of, scriber with an increase of the average minute
according to the valuation auditors’ opinion, insuffi- volume were assumed in the forecast.
cient consideration of the market entry of a fourth Based on this development it is expected that the
competitor in Austria. sales of the company will grow from almost
Based on these assumptions it is expected that the EUR0.1 billion in 1999 and approximately
sales of the company will increase from approxi- EUR0.5 billion in 2000 to more than EUR1.0 billion
mately EUR0.1 billion in 1999 to approximately at the end of the first projection period. The operating
EUR1.5 billion at the end of the first projection earnings are to be persistently positive after 2001.
period. After the break-even in 2001 the operating
earnings are to become persistently positive begin- (d) Business Value
ning in 2002. The current forecasts of the companies, reconciled
with the respective shareholders and after taking into
(c) Orange Communications
account adjustments made by the valuation auditors
The strongly increasing penetration rate of the entire on the individual company level, form the basis for
Swiss market will amount to more than 40% at the the valuation of the division. For purposes of the
end of the year. Until 2003 Orange expects an presentation of the valuation, the forecast profit and
increase of the market penetration rate to approxi- loss statements of the associated companies (after
mately 80% which is to grow to almost 85% by the valuation discounts) were combined in a pro-forma
end of the first projection period in 2008. This pro-rated consolidation.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
152 Merger Report VIII. Exchange Ratio
VIAG Telecom GmbH Projection
Forecast 2009
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 EUR in
EUR in EUR in EUR in EUR in EUR in EUR in EUR in EUR in EUR in EUR in millions
millions millions millions millions millions millions millions millions millions millions et seq.
Net sales 387 1,215 2,027 2,723 3,415 3,964 4,367 4,697 4,958 5,114
Production costs –287 –588 –818 –966 –1,166 –1,329 –1,445 –1,540 –1,618 –1,692
Gross margin 100 627 1,208 1,757 2,249 2,635 2,922 3,157 3,340 3,421
Other operating expenses and
earnings –634 –963 –1,168 –1,408 –1,557 –1,654 –1,726 –1,849 –1,934 –1,974
EBIT –534 –336 40 350 692 982 1,196 1,308 1,406 1,447 1,426
Interest earnings –15 –72 –124 –150 –143 –148 –153 –157 –167 –161 –150
Pretax operating earnings –549 –406 –83 200 549 834 1,042 1,151 1,239 1,286 1,276
Corporate taxes 56 28 –10 –64 –157 –214 –239 –260 –267 –285
Foreign earnings 137 –13 –89 –161 –162 –170 –191 –213 –211 –197
Domestic operating earnings
after taxes –213 –69 102 324 515 659 721 767 808 794
Foreign earnings to be retained –137 13 89 161 162 170 191 213 211 197
Interest earnings from retained
foreign earnings 10 23 45 69 95 107
Corporate taxes on interest
earnings –2 –5 –9 –13 –18 –21
Additional interest earnings from
retained earnings 2009 et seq. 166
Gross distribution of interest
earnings 0 0 0 0 8 19 36 55 77 252
Gross distribution total –213 –69 102 324 524 677 757 822 885 1,046
Personal income tax 35% 74 24 –36 –113 –183 –237 –265 –288 –310 –308
Net distribution –138 –45 66 211 340 440 492 534 575 738
Capitalization interest rate 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% 8.125% 7.125%
Cash value factor 0.9249 0.8554 0.7911 0.7316 0.67670 0.62580 0.57880 0.53530 0.49510 6.9483
Cash value –128 –38 52 154 230 276 285 286 285 5,125
Earnings value of the operating
business as of 1/1/2000 6,527
Minus sale of 49.5% –3,230
Net proceeds and book values to
be added 1,957
Proportional earnings value of
the operating business as of 1/1/2000 (100%) 5,253
Proportional earnings value of
the operating business as of 1/1/2000 (94.98%) 4,988
On the basis of these forecast figures an earnings According to the information provided, a future initial
value of EUR6,527 million can be derived for VIAG public offering is planned for 49.5% of the shares in
Telecom Beteiligungs GmbH before taking into VIAG Telecom Beteiligungs GmbH. Taking into
account the planned initial public offering. Thereby, a account the income taxes due on the book gain in
value optimizing tax free retention of the distributions case of an assumed partial sale, the value of the
in Germany was assumed for the foreign result entire telecommunications activities of VIAG
portions. The interest earnings generated thereby are amounts to EUR5,253 million. Thus, relating to the
included with the domestic profits in the total shareholding quota of VIAG, the pro-rata business
distributable amount which is capitalized in the value for VIAG Telecom Beteiligungs GmbH
valuation model. amounts to EUR4,988 million.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 153
(4) Aluminum: VAW aluminium AG
(a) Earnings Value of the Operating Business
The valuation basis for VAW aluminium and its
subsidiaries appears as follows:
VAW aluminium
Earnings value of the operating business as of 1/1/2000 Projection
adjusted Forecast 2003 et
1997 1998 1999 2000 2001 2002 seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 2,596 2,948 2,982 3,138 3,978 4,240
Production costs –2,105 –2,362 –2,390 –2,438 –3,064 –3,259
Gross margin 491 586 592 700 914 981
Other operating expenses and earnings –333 –303 –283 –312 –429 –445
EBIT 158 283 309 387 484 535 452
Interest earnings –26 –59 –49 –37 –51 –62 –81
Pretax operating earnings 132 224 260 350 434 473 371
Corporate taxes –81 –101 –112 –96
Operating earnings after taxes 269 333 361 276
Minority Shareholdings –2 –2 –3 –3
Retained foreign earnings –79 –107 –113
Additional interest earnings from retained
earnings 2003 et seq. 32
Gross distribution 188 223 245 306
Personal income tax 35% –66 –78 –86 –107
Net distribution 122 145 159 199
Capitalization interest rate 7.15% 7.15% 7.15% 6.15%
Cash value factor 0.93327 0.87099 0.81287 13.21747
Cash value 114 126 130 2,625
Earnings value of the operating business as of 1/1/2000 100% 2,995
The historical figures for the years 1997 until 1999 a
The acquisition of the foil activities of Gr¨ nges is to
were adjusted for extraordinary business events, in be completed shortly.
particular restructuring expenses and earnings from
the disposal of assets. Furthermore, earnings from The return on sales (EBIT divided by sales) will
shareholdings and goodwill amortizations were grow from 9.6% (1998) to 10.4% (1999) and to
eliminated. 12.6% in 2002. This improvement may be explained
as follows:
The increase of sales and earnings from 1997 to 1998 Compared with average prices during 1998 and 1999,
is mainly explained by the acquisition of the Euro- a higher aluminum price was assumed in the forecast.
pean rolling mills of Reynolds Metals Company and It is based on the long-term average prices and is –
a significant increase in rolled products sales. The with USD1,485/t beginning in 2001 – below the
sales stagnation in 1999 is mainly due to the sale of currently high forward prices for aluminum. On the
two companies. cost side of the business area Primary Materials a
further reduction in electricity prices is assumed
During the forecast period, significant sales growth of compared with 1998 and 1999. Due to the increasing
approximately EUR1.3 billion is expected. This sales use of aluminum in the automotive sector and also
growth is essentially the consequence of three larger with a view to long-term orders, an improved
planned acquisitions. All acquisitions are in a definite capacity utilization is expected in the Automotive
preparation period and are approved by resolutions. Products business area. In addition to partially
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
154 Merger Report VIII. Exchange Ratio
realized cost reductions, the Flexible Packaging The real estate not necessary for business operations
business area is aiming for volume increases in the exclusively includes three properties in Garching,
profitable health care segment and in relation to Stade and Bonn. With respect to the determination of
Asian companies. In the Rolled Products business the net proceeds, reference is made to
area, a change of the product mix towards products section 2.b)(4)(c).
with higher added value and a corresponding earnings
improvement is expected. (c) Business Value
Persistently, a lower EBIT of EUR452 million is The earnings value of the operating business and the
assumed which corresponds to a return on sales of special values add up to a total value of VAW
approximately 10.6%. It is taken into account that aluminium of EUR3,039 million. Taking into account
due to the concentration process in the aluminum the planned initial public offering of 49.9% of the
industry the competitive situation for VAW will shares the business value for the part to be continued
intensify and higher investments will be necessary to amounts to EUR1,522 million. A portion of the
maintain sales and earnings. Further risks are seen business value amounting to EUR928 million is
particularly in connection with the economic cycle of allocable to the part of the company to be sold,
the automotive industry as well as the margin taking into account income taxes on the book gains
pressure on flexible packagings. realized by the sale. This results in a total business
value of EUR2,450 million.
(b) Special Values VAW aluminium
Business value as of
Separately Valued Financial Assets 1/1/2000 EUR
in millions
The separately valued financial assets amount to
EUR6 million and relate to shareholdings in 20 do- Earnings value of the operating
business 2,995
mestic and foreign companies valued with their pro-
rata equity. Special values:
Shareholdings going concern: 6
Tax values: 29
Special Tax Values Real estate not necessary for
business operations: 9
VAW aluminium has special tax values of
Sum of special values 44
EUR29 million which are mainly allocable to foreign
losses carried forward. With respect to the method- Business value 100.00% 3,039
ological procedure of determining the value, reference Group portion 99.99% 3,039
is made to section 2.b)(4)(b).
Proportional business going
concern 50.09% 1,522
Real Estate not Necessary for the Business Net proceeds portion to be sold 49.90% 928
Operation
Sum of proportional business
The following figures appear for VAW aluminium: values/Net proceeds 2,450
VAW aluminium
Real estate not necessary for business operations
EUR
in millions
Present value (after sales cost) 12
Trade tax: –1
Typical income tax: –2
Net proceeds 100.00% 9
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 155
VIAG Holding
Earnings value as of 1/1/2000
adjusted Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 0 0 0 0 0 0
Production costs 0 0 0 0 0 0
Gross margin 0 0 0 0 0 0
Other operating expenses and earnings –34 –37 –36 –37 –39 –41
EBIT –34 –37 –36 –38 –40 –41 –42
Interest earnings 18 25 11 5 –32 –33 2
Pretax operating earnings –16 –12 –25 –32 –71 –75 –39
Corporate taxes 5 12 12 7
Operating earnings after taxes –27 –59 –62 –33
Minority Shareholdings
Retained foreign earnings
Additional interest earnings from retained
earnings 2003 et seq.
Gross distribution –27 –59 –62 –33
Personal income tax 35% 9 21 22 11
Net distribution –17 –39 –41 –21
Capitalization interest rate 6.80% 6.80% 6.80% 5.80%
Cash value factor 0.93635 0.87676 0.82096 14.16132
Cash value –16 –34 –33 –302
Earnings value of the operating business as of 1/1/2000 100% –385
(5) Holding (b) Special Values
The sum of the separately valued financial assets
(a) Earnings Value of the Operating Business
which have been valued from a going-concern point
of view amounts to EUR85 million. It contains shares
The valuation basis for the Holding appears as
valued at stock market prices amounting to
follows:
EUR62 million, of which more than 90% are
allocable to the shares of Radex-Heraklith
The historical figures for 1997 until 1999 were
Industriebeteiligungs Aktiengesellschaft and of RWE
essentially adjusted for earnings from shareholdings.
AG. With respect to the difference of EUR23 million,
shareholdings of the holding company in service
The earnings figures of the holding exclusively
companies (e.g. insurance brokers, real-estate
contain administration expenses as well as other
management) were determined applying the simplified
expenses and revenue. The administration cost
earnings valuation method.
increased slightly during the first projection period
due to inflation. The development of interest earnings In addition, financial assets with the intent to be
during the first projection period are characterized by sold had to be valued for which an amount of EUR –
modifications related to the valuation technique with 209 million was applied. The negative value mainly
effects on liquidity, particularly the elimination of the results from the planned liquidation of activities of
earnings from shareholdings and the application of o
Kl¨ ckner & Co. AG (see: Section 4.b)(2)(a)) and its
the full distribution assumption. subsidiaries which are unrelated to steel trading. The
negative liquidation balance of EUR254 million
The increase in interest earnings during the second results from the surplus of liabilities (mainly pension
projection period compared with the year 2002 is due obligations and group obligations) over assets
to a new calculation of the interest earnings, see (particularly real-estate assets as well as shares and
section 2.b)(2)(b). convertible debentures in Tech Data Corporation).
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
156 Merger Report VIII. Exchange Ratio
VIAG-Shares held by Associated Companies nies and the special values add up to a total value of
EUR 2,487 million for VIAG holding company.
During the valuation of VIAG it had to be taken into
account that Bayernwerk AG (effective participation VIAG Holding
quota VIAG 94.93%) holds shares via Isa- Business value as of 1/1/2000
Amperwerke AG (effective participation quota EUR
Bayernwerk 89.60%) in several non-consolidated in millions
companies (respective participation just below 50%), Earnings value of the operating
which in turn hold a total of 25.52% of the shares of business –385
VIAG. If the individual participation quotas are Special values:
calculated across the several participation levels, the Shareholdings going concern: 85
portion of the VIAG shares held this way effectively Shareholdings to be sold: –209
VIAG shares held by
amounts to a calculated participation of approxi- associated companies: 2,783
mately 10.83%. Tax values: 213
Real estate not necessary for business operations: 1
Therefore, the VIAG-shares held by associated com-
panies have to be valued at 10.83% of the total value Sum of special values 2,872
of VIAG of approximately EUR 25,701 million Business value 100.00% 2,487
corresponding to EUR 2,783 million.
b) Separately Valued Divisions
Special Tax Values
(1) Packaging: Schmalbach-Lubeca AG and Ger-
The holding company has special tax values of resheimer Glas AG
EUR 213 million allocable to positive positions of
EK 45 and EK 40. With respect to the methodologi- The packaging division consists of the divisions
cal procedure concerning the value determination Schmalbach-Lubeca AG and Gerresheimer Glas AG.
reference is made to section 2.b) (4) (b).
(a) Schmalbach-Lubeca AG
Real Estate not Necessary for Business Operations (aa) Earnings Value of the Operating Business
For the holding company, the net proceeds for real The valuation basis for Schmalbach-Lubeca and its
estate not necessary for business operations amount subsidiaries appears as follows:
to EUR 1 million after taxes on the disposal. With
regard to the determination of the net earnings
reference is made to section 2.b)(4)(c).
(c) Business Value
The earnings value of the operating business, the
value of the VIAG-shares held by associated compa-
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 157
Schmalbach-Lubeca
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 2,221 2,111 2,012 2,146 2,342 2,515
Production costs -1,826 -1,739 -1,626 -1,730 -1,897 -2,042
Gross margin 395 372 386 416 444 472
Other operating expenses and earnings -279 -270 -260 -247 -256 -265
EBIT 116 102 126 169 189 208 193
Interest earnings -54 -79 -78 -81 -85 -82 -77
Pretax operating earnings 62 23 48 87 104 125 116
Corporate taxes –27 –31 –37 –35
Operating earnings after taxes 61 73 89 81
Minority Shareholdings –4 –4 –4 –4
Retained foreign earnings –22 –53 –77
Additional interest earnings from retained 22
earnings 2003 et seq.
Gross distribution 35 15 8 99
Personal income tax 35% –12 –5 –3 –35
Net distribution 23 10 5 64
Capitalization interest rate 6.83% 6.83% 6.83% 5.83%
Cash value factor 0.93611 0.87630 0.82032 14.08268
Cash value 21 9 4 907
Earnings value of the operating business as of 1/1/2000 100.00% 941
The historical figures for the years 1997 until 1999 Lubeca is the world market leader in one of the
were adjusted for extraordinary business events, fastest growing packaging segments, adequate profit-
particularly earnings from the sale of business activi- ability in the standard segments can be achieved only
ties. Furthermore, the earnings from shareholdings by cost leadership due to overcapacities and limited
and goodwill amortizations were eliminated. opportunities for differentiation.
With sales of EUR2,111 million during 1999, with Market studies foresee a growth of the total world
1/3 thereof in North and South America, an adjusted market of 12.5% per year with above average growth
EBIT of EUR102 million was achieved correspond- rates in the Asian and Latin American market, and
ing to a return on sales of 4.8%. growth rates on the American and European market
which are below the very high average figure. Market
Due to a fundamental restructuring process in 1997
growth is mainly due to the substitution of other
which led to the sale of the metal and plastic
packaging materials (particularly glass). The forecast
packaging area and the acquisition of the PET unit
for the business area corresponds closely to the
from Johnson Controls Inc., the 1997 and 1998
expected development of the entire market.
financial years cannot be compared. The increased
interest expenses in 1998 are particularly due to the To achieve cost leadership, comprehensive restructur-
burden from the acquisition of the PET unit. Sales ing measures were conducted in the U.S.A., which
for 1999 are characterized by an increased sales are to counteract the pressure on margins and are
volume and declining prices. The lower sales prices beginning to pay off. Also in Europe Schmalbach-
are due to price reductions of the raw materials used Lubeca has initiated a comprehensive cost-manage-
which were passed on with delay, resulting in a ment program which is to lead to a continuous
significantly improved EBIT in 1999. earnings improvement during the first projection
period due to productivity increases.
During 1998 approximately 43% of the sales of
Schmalbach-Lubeca were allocable to the business The business area Beverage Cans contributed ap-
area PET Packaging. Even though Schmalbach- proximately 38% to the sales of Schmalbach-Lubeca
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
158 Merger Report VIII. Exchange Ratio
in 1998. With a market share of approximately 30% success projection beginning in 2003 the valuation
it is number two in the oligopolistically structured auditors have made a correction of the forecast on the
European market. EBIT level compared with the last forecast year of
the first projection period.
Market studies foresee moderate market growth in
Europe of 3.9% per year with small increases in
(bb) Special Values
Western Europe and growth rates between 5% and
8% per year in Eastern Europe. The business area Separately Valued Financial Assets
assumes an average growth of 2.2% in 2000 and of
4.2% per year until 2002, particularly due to the The separately valued financial assets valued from a
growing Eastern European business and thus remains going-concern point of view amount to
slightly above the market growth rate. EUR28 million and relate with an amount of EUR26
million to the shareholding in an interim holding for
Despite slightly declining prices, the return on sales joint venture activities in Asia.
will be maintained because of the reduction of
material costs due to new technologies (reduction of In addition, shareholdings with an intent to be sold
the thickness of the sheet metal in cans) and through amounting to EUR69 million have been valued.
moderate productivity increases. These are the shares of an associated company in the
metal packaging business area, which was valued
Approximately 19% of the sales of Schmalbach- with the expected sale proceeds.
Lubeca were allocable to the White Cap Closures
business area. Its market share amounts to approxi-
Special Tax Values
mately 48%. Market studies expect a growth of the
total global market of 3.0% per year, of which 1.7% Schmalbach-Lubeca has special tax values amounting
per year are to be allocable to the American, 3.6% to EUR46 million which are mainly allocable to
per year to the European and 10.2% on the Asian and foreign losses carried forward. With respect to the
Latin American market, whereby the total volume on methodological procedure of value determination
the Asian and Latin American market is, however, reference to section 2. b) (4) (b).
relatively low. The market for metal closures, particu-
larly in North America, has been declining for a
number of years due to the substitution of plastic for (cc) Business Value
glass containers. The opportunities for growth are The business value resulting from the application of
seen in the future oriented segment of plastic the participation quota of VIAG in Schmalbach-
closures. Lubeca of 59.78% amounts to EUR649 million.
During the first projection period the business area Taking into account the income taxes in case of a
assumes a growth in Europe and Asia corresponding presumed sale, the net proceeds amount to
to the market average, while above average growth is EUR485 million.
expected in North and South America due to the
regaining of market shares in metal closures which Schmalbach Lubeca
Business value as of 1/1/2000
were lost during 1999.
EUR in
millions
The business area is currently characterized by strong
pressure on margins on the North American market Earnings value of the operating 941
as well as technical problems with plastic closures. business
The substitution of metal with plastic closures led to Special values:
a constant need for restructuring. The implementation Shareholdings going concern: 28
Shareholdings to be sold: 69
of the restructuring is to effect a continuous increase
Tax values: 46
of the productivity.
Sum of special values 144
Since the business area PET Packaging assumes very Business value 100.00% 1,085
strong growth during the first projection period and Group portion 59.78% 649
because of the expected sustained pressure on the
Net proceeds 485
margins, in connection with the future business
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 159
(b) Gerresheimer Glas AG
(aa) Earnings Value of the Operating Business
The valuation basis for Gerresheimer Glas and its
subsidiaries appears as follows:
Gerresheimer Glas
Earnings value of the operating business as of in 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 536 532 525 533 551 561
Production costs –428 –403 –386 –382 –388 –396
Gross margin 108 129 139 151 163 165
Other operating expenses and earnings –65 –81 –100 –99 –103 –95
EBIT 43 48 39 52 60 70 71
Interest earnings –7 –22 –20 –18 –17 –16 –17
Pretax operating earnings 36 26 19 33 43 55 54
Corporate taxes –10 –14 –17 –17
Operating earnings after taxes 23 29 38 37
Minority Shareholdings –1 –2 –2 –2
Retained foreign earnings –9 –13 –15
Additional interest earnings from retained
earnings 2003 et seq. 4
Gross distribution 13 14 21 39
Personal income tax 35% –5 –5 –7 –14
Net distribution 9 9 14 26
Capitalization interest rate 6.50% 6.50% 6.50% 5.50%
Cash value factor 0.93897 0.88166 0.82785 15.05180
Cash value 8 8 11 385
Earnings value of the operating business as of 1/1/2000 100% 412
The historical figures for the years 1997 until 1999 addition a pressure on the volume exists due to the
were mainly adjusted for goodwill amortizations, increasing globalization and concentration in this
earnings from shareholdings and revenue and ex- area. Even though the market for glass packaging in
penses of the sold business area standard glass Europe and America usually grows with the gross
containers. national product, Gerresheimer assumes higher
growth rates due to new products (particularly glass
The development during the financial years 1997 syringes). Therefore an average sales growth of
until 1999 was characterized by a slight decline in approximately 4% per year is forecast while general
sales which was due to both disinvestments in the market growth for tubular glass products is believed
areas construction glass and plastic packaging and to to be 2%.
reductions in sales volume in the areas cosmetic and
small glass containers. However, the growth of profit After investments in capacity expansions with new
from sales increased due to the successful implemen- technologies particularly during 1998, increasing
tation of cost-cutting measures in the procurement earnings are expected for the first projection period.
area and rationalizations. Earnings improvements are based on the growth of
high quality products and the utilization of cost
The existing competitive pressure in the business area potential (particularly by focusing on locations during
Tubular and Special Glass was taken into account processing). Rationalization measures and personnel
during the first projection period by assuming slightly adjustments are to contribute to a further improve-
decreasing prices during the first projection period. In ment of the cost position and increased productivity.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
160 Merger Report VIII. Exchange Ratio
For the Container Glass business area constant sales account the deconstruction expenses. With respect to
volumes and a slight per-unit price decrease are the determination of net proceeds reference is made
expected in the stagnating European small glass to section 2.b)(4)(c).
container market during the first projection period.
The decline in earnings in 1999 is to be remedied (cc) Business Value
through basin and line shutdowns, significant staff
reductions, particularly during 2000 and 2002, and The business value resulting from the application of
through a new centralized organizational structure, so the participation quota of VIAG in Gerresheimer Glas
that operating earnings during the first projection in a calculated amount of 70.69% amounts to
period should improve accordingly. The small glass EUR 312 million. Taking into account the income
containers area thus remains slightly below the taxes due in case of assumed disposal net sales
industry average with respect to earnings. amount to EUR 286 million.
In the case of Gerresheimer, no adjustments had to
be made to EBIT of the last forecast year with Gerresheimer Glas
Business value as of 1/1/2000
respect to the permanent annuity.
EUR
in millions
(bb) Special Values
Earnings value of the operating 412
Separately Valued Financial Assets business
The separately valued financial assets amount to Special values:
Shareholdings going concern: 13
EUR 13 million and with EUR 12 million involve Tax values: 7
a shareholding in a company in Mexico that was Real estate not necessary for 10
valued according to the simplified earnings value business operations:
method. Sum of special values 29
Special Tax Values Business value 100.00% 441
Group portion 70.69% 312
Gerresheimer Glas has special tax values of
EUR 7 million which are mainly allocable to positive Net proceeds 286
positions of EK 45 and EK 40. With respect to the
methodological procedure of value determination
reference is made to section 2.b)(4)(b). o
(2) Logistics: Kl¨ ckner & Co. AG
(a) Earnings Value of the Operating Business
Real Estate not Necessary for the Business
Operation It is intended to separate the steel trading activities
Gerresheimer Glas shows the following values: (operating business) of the logistics division (i.e. of
o
Kl¨ ckner & Co. AG) as of January 1, 2000, from the
Gerresheimer Glas other activities and to dispose of them afterwards.
Real estate not necessary for business operations Accordingly, steel trading in its then separated state
EUR in o
under the formerly applicable name of Kl¨ ckner &
millions Co. AG was valued from a disinvestment point of
Present value (after sales cost) 16 view. The other activities remaining after the separa-
Trade tax: –2 tion are also determined for sale or liquidation, but
Typical income tax: –4 were allocated to VIAG Holding for valuation
Net proceeds 100.00% 10 purposes. Since the entire drop shipment area is to be
sold during 2000, the activities of the division
The real estate not necessary for business operations concentrate on the store keeping trade of steel and
relates to a warehouse and an area used for small metal products as well as their processing and
u
gardening in D¨ sseldorf. The stated value is based on o
preparation. The valuation basis for the Kl¨ ckner
a submitted offer for both properties taking into & Co. AG and its subsidiaries appears as follows:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 161
o
Kl¨ ckner & Co
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 5,255 4,881 4,582 3,976 4,154 4,262
Production costs –4,582 –4,333 –3,946 –3,329 –3,474 –3,575
Gross margin 673 548 636 647 680 687
Other operating expenses and earnings –613 –537 –558 –536 –557 –567
EBIT 60 11 78 111 123 120 99
Interest earnings –48 –60 –37 –28 –25 –22 –40
Pretax operating earnings 12 –49 41 83 98 98 59
Corporate taxes –21 –24 –24 –17
Operating earnings after taxes 62 74 74 42
Minority Shareholdings –8 –8 –8 –8
Retained foreign earnings –42 –49 –44
Additional interest earnings from retained
earnings 2003 et seq. 12
Gross distribution 13 17 22 46
Personal income tax 35% –4 –6 –8 –16
Net distribution 8 11 14 30
Capitalization interest rate 8.13% 8.13% 8.13% 7.13%
Cash value factor 0.92486 0.85536 0.79108 11.10291
Cash value 8 10 11 331
Earnings value of the operating as of 1/1/2000 100.00% 359
The historical figures for the years 1997 until 1999 proceedings and higher import tariffs. Although the
were adjusted for extraordinary business events, development was burdened during 1999 by the
particularly restructuring expenses and earnings form weakened economy, the margin situation appears
the sale of assets. Furthermore, earnings from partici- more positive due to the higher degree of pre-
pations and goodwill amortizations were eliminated. processing compared with other markets.
For the drop shipment business sold after 2000, no
adjustment was made. The steel trade is characterized by high market
During 1998 sales of EUR 4,881 million were transparency and customarily low margins. The eco-
achieved which were approximately 7% lower com- nomic cycle for steel trading is generally related to
pared with 1997. The adjusted EBIT for 1998 the development of the respective gross national
amounted to only EUR 11 million compared with product. Cyclical market developments are typical for
EUR 60 million in 1997. The reasons for the the business. Additional sales fluctuations during the
reduction in sales and earnings were market problems financial year are caused by seasonal effects.
due to an oversupply in steel products because of the
Asian economic crisis. A consequence of the over- The significant earnings improvement during 2000
supply was a significant price reduction with corre- compared with 1999 coinciding with decreased sales
spondingly lowered inventory valuations. The pricing is also due to the disinvestment of the loss-generating
pressure was counteracted with restructuring measures drop shipment business, the turn-around of the French
for cost reduction. An improvement is expected for business according to plan and the full effectiveness
1999, particularly due to the beginning economic of cost-management programs in the Netherlands and
recovery of the steel industry and because of the in Germany. For 2001 and 2002, an above average
cost-reduction programs’ taking effect. The steel area sales growth of approximately 3% per year in the
suffered only little from the effects of the Asian remaining store keeping business is assumed which
crisis, since the U.S.A. was able to protect its is mainly to be achieved by volume increases in all
domestic market with the threat of anti-dumping country areas.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
162 Merger Report VIII. Exchange Ratio
After the experiences during the Asian crisis and the (c) Business Value
cyclical developments typical for the steel trading
Taking into account the income tax relief related to a
over an observation period which is longer than the
fictitious disinvestment related loss results in a
reflected three years of the first projection period, a
o
business value for Kl¨ ckner & Co. and its subsidiar-
steadying of the earnings by the end of the first
ies of EUR411 million, relating to the shareholding
projection period cannot be assumed. The valuation
quota of 94.93%.
auditors have therefore made a valuation discount
within the meaning of a long-term average for the
o
Kl¨ ckner & Co
future business success projection beginning in 2003. Business value beginning as of 1/1/2000
EUR in
(b) Special Values millions
Separately Valued Financial Assets Earnings value of the operating business 359
Special values:
The separately valued financial assets amount to
Shareholdings going concern: 19
EUR19 million and relate to shareholdings in more Tax values: 38
than 90 domestic and foreign companies valued at the
Sum of special values 57
pro-rata equity.
Business value 100.00% 416
Special Tax Values Group portion 94.93% 395
o
Kl¨ ckner & Co. has special tax values amounting to Proportional net proceeds 411
EUR38 million which are allocable to the value of
domestic corporate tax and foreign losses carried
c) Business Value of VIAG
forward. With respect to the methodological proce-
dure of value determination reference is made to The business value of VIAG is summarized as
section 2.b)(4)(b). follows:
Earnings value
of the Special Values Proportional Value of 100% Proportional Participation
VIAG operating business value (in case business value quota
business after tax of purchase
proportional)
Values as of 1/1/2000
EUR in EUR in EUR in EUR in EUR in
millions millions millions millions % millions
Bayernwerk 3,786 9,880 13,666 94.93% 12,973
SKW Trostberg 2,397 148 2,545 63.70% 1,621
VAW aluminium 2,995 44 928 3,039 99.99% 2,450
VIAG Telecom 4,988 4,988 94.98% 4,988
Schmalbach-Lubeca 485 485 59.78% 485
Gerresheimer Glas 286 286 70.69% 286
o
Kl¨ ckner & Co 411 411 94.93% 411
VIAG Holding/ Sonstiges –385 2,872 2,487 100.00% 2,487
Gesamt 8,793 12,944 7,098 27,907 25,701
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 163
5. Evaluation of VEBA
a) Group Divisions with Intention of
Continuation
(1) Electricity: PreussenElektra AG
(a) Earnings Value of the Operating Business
The valuation basis for the major group Preussen-
Elektra is set forth in the following table. These
earnings figures do not contain the earnings contribu-
tions of the energy shareholdings which are directly
part of the operating business of PreussenElektra and
of the other separately valued financial assets.
PreussenElektra
Earnings value of the operating business as of 1/1/2000 (without earnings of the shareholding)
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 8,383 8,806 8,806 7,533 7,663
Production costs –6,875 –6,540 –6,491 –6,745 –6,381 –6,399
Gross margin 1,508 1,666 1,275 1,108 1,152 1,264
Other operating expenses and earnings –127 –364 –321 –444 –573 –504
EBIT 1,381 1,302 954 664 579 760 1,108
Interest earnings 29 52 19 –144 –226 –277 –464
Pretax operating earnings 1,410 1,354 973 520 353 483 645
Corporate taxes –79 –57 –81 –107
Operating earnings after taxes 441 296 402 538
Minority Shareholdings –72 –83 –88 –88
Retained foreign earnings –84 –38 –27
Additional interest earnings from retained
earnings 2003 et seq. 8
Gross distribution 285 175 287 458
Personal income tax 35% –100 –61 –101 –160
Net distribution 185 114 187 298
Capitalization interest rate 6.50% 6.50% 6.50% 5.50%
Cash value factor 0.93897 0.88166 0.82785 15.05180
Cash value 174 101 155 4,482
Earnings value of the operating business as of 1/1/2000 100% 4,911
Generally, the historical figures for the years 1997 existing overcapacities in the electricity production
until 1999 are only comparable to a limited degree can only be reduced slowly. This has been taken into
with the forecast earnings due to market conditions account in the sales and pricing scenario of the
existing from time to time. 1997 was still character- forecast.
ized by the monopoly position of energy utilities.
Due to the changes of the energy law in 1998 and Comparing the history with the forecast years it also
the beginning liberalization of the energy market, the has to be taken into account that the comparability
competition initially only started in the special-rate insofar is significantly limited because of the valua-
customer and reseller segment. In the middle of 1999, tion-related modifications of the forecast figures listed
the competition then expanded to all customer in section 2.a)(2)(b). For the same reasons the
groups. For the first projection period, an increasingly projected net distributions cannot be understood as a
keener competitive environment is expected, since the projection of the future commercial net income.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
164 Merger Report VIII. Exchange Ratio
The historical figures for the years 1997 until 1999 significant operating earnings decline is emerging
were adjusted with regard to extraordinary business which is reinforced by reduced interest earnings due
events in particular restructuring expenses, un- to valuation-related adjustments (elimination of inter-
scheduled amortizations on and disposals of assets. est earnings of separately valued financial assets, full
Furthermore, the earnings from shareholdings and distribution hypothesis, new calculation of provisions
good-will amortizations have been eliminated. for pensions and disposals).
In 1999, PreussenElektra acquired the majority of the
As explained in section 3., adjustments were made to
shares in Electriciteitsbedrijf Zuid Holland N.V.
the expected long term sales price level in estimating
(EZH) with effect as of January 1, 2000. From the
the future business success of the Energy Division
year 2000 on the company will be part of the
beginning in 2003. Since a meaningful differentiation
forecast of PreussenElektra as a consolidated
after the first projection period appears nearly impos-
company.
sible, the average revenue of the entire electricity
The development of the entire division during the business (except for revenues from electricity gener-
years 1997 and 1998 was characterized – taking into ated for third parties) was uniformly increased and a
account changes in the scope of consolidation – by low increase in supply was assumed. The price
relatively constant sales. During 1998 power supplied adjustments related to revenues from electricity gen-
was increased by 1.4% compared with the previous erated for third parties were derived in the calculation
year; however, because of price discounts particularly from the cost trends at the hard-coal power plants,
for special-rate customers and resellers due to the with a view to the related future reinvestment
beginning competition the sales of the electricity expenses. In summary, the determined reinvestment
business were lower than in the previous year. rate exceeds the depreciation for the year 2002 by
Nevertheless, EBIT of the entire division was almost about 50%. Other sales revenue from the year 2002
maintained in 1998 compared with the previous year was extrapolated without changes (plus inflation-
because of the implementation of efficiency enhance- related increases).
ment measures.
PreussenElektra also has minority interests in nuclear
Because of further significant price reductions related power stations. The consequences resulting from the
to the liberalization of the German electricity market valuation-method-related adjustment of the disposal
on the one hand and an increase of electricity costs and amortizations had to be taken into account
supplied on the other, lower EBIT is expected for in connection with the electricity procurement cost
1999. from such nuclear power stations by corresponding
For the years 2000 until 2002, further price reduc- reductions.
tions are expected in all customer segments. How-
ever, the sales of PreussenElektra will remain approx- After subtracting interest expenses, the terminal value
imately at 1999 levels because of more electricity results in pretax earnings which, due to positive long-
supplied, particularly in the area of electricity trading, term price expectations, have improved compared
and because of the consolidation of EZH. with the earnings level during the first projection
period.
PreussenElektra is responding to the price pressure
with additional cost-management programs which Future business success beginning in 2003 will not
lead to a noticeable reduction of production costs in necessarily be achieved during the year 2003, but
the forecast. Furthermore, the standardization of constitutes a representative earnings level only for the
forecast assumptions with Bayernwerk regarding fu- long-term future.
ture expenses related to nuclear-waste management
leads to a significant relief of production costs.
Consideration must also be given to the fact that (b) Special Values
historically PreussenElektra had to bear significant
Separately Valued Financial Assets
financial burdens because of the feeding-in of wind-
generated energy which will be reduced due to the
The sum of the separately valued financial assets
amendment of the Electricity Feed-in Act.
valued from a going-concern point of view amounts
These positive earnings effects will not, however, to EUR 13,946 million which is comprised as
make up for expected price declines. Eventually, a follows:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 165
PreussenElektra Special Tax Values
Separately valued financial assets — going concern PreussenElektra has special tax values of EUR52
EUR in
millions million which are mainly allocable to positive EK 40
Shares valued at stock market price 3,839
and EK 45 positions. With respect to the method-
Shareholdings valued at earnings value 4,028 ological procedure of determining the value reference
Financial assets valued at book value 6,079 is made to section 2.b)(4)(b).
Sum of separately valued
Financial assets 100.00% 13,946 Real Estate not Necessary for the Business
Operations
In the shareholdings valued at stock market prices, PreussenElektra shows the following figures:
Sydkraft AB, RWE AG, BEWAG AG as well as
different special securities funds are included as PreussenElektra
Real estate not necessary for business operations
material individual assets; these assets represent
approximately 91% of the total amount of the stock EUR in millions
market valuation. For BEWAG AG the average price Present value (after sales cost) 58
during a 260 day period did not represent the trend Trade tax: –4
so that the average price during a 38 day period was Typical income tax: –8
applied. Net proceeds 100.00% 45
The shareholdings valued at the simplified earnings
value include as material assets EWE Aktiengesell- The real estate not necessary for business operations
a
schaft, Hamburgische Electricit¨ tswerke AG, is comprised of numerous properties, with and
Energie-Aktiengesellschaft Mitteldeutschland EAM, without buildings. The developed properties mainly
rhenag Rheinische Energie AG, Berliner Erdgass- include residential properties and installations no
peicher Besitz und Verwaltungsges. b.R. and longer necessary for business operations. The value
a ¨
Fr¨ nkisches Uberlandwerk AG; EWE Aktiengesell- stated is based on market values which were deter-
a ¨
schaft and Fr¨ nkisches Uberlandwerk AG valued mined by using experts, indicative land values and
according to the multiplier method, the other men- proceeds from recent sales. With respect to determin-
tioned companies were valued according to a differ- ing the net proceeds reference is made to section 2.b)
ent simplified earnings value method. These assets (4) (c).
represent approximately 53% of the total amount of
the earnings valuation. The remaining assets are (c) Business Value
allocable to more than 80 additional companies.
The earnings value of the operating business and the
The shareholdings valued at book value mainly special values add up to a total value for Preus-
include liquid cash funds amounting to approximately senElektra of EUR19,225 million.
EUR5 billion as well as shareholdings in BKW FMB
Energie AG, VEAG Vereinigte Energiewerke AG and PreussenElektra
Stadtwerke Bremen AG; these assets represent ap- Business value as of 1/1/2000
proximately 95% of the total amount of the valuation
EUR in millions
at book value. The remaining assets are allocable to
more than 180 additional companies. Earnings value of the operating business 4,911
Special values:
In addition, financial assets intended to be sold had Shareholdings going concern: 13,946
to be valued, for which an amount of EUR270 Shareholdings to be sold: 270
million was set. These are the shares in the Uranit Tax values: 52
GmbH which are to be sold in the year 2000 based Real estate not necessary for business operations: 45
on their estimated sales proceeds. This amount is Sum of special values 14,314
within the scope resulting from the current contract
Business value 100.00% 19,225
negotiations.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
166 Merger Report VIII. Exchange Ratio
(2) Oil: VEBA Oel AG
(a) Earnings Value of the Operating Business
The valuation basis for VEBA Oel and its subsidiar-
ies appears as follows:
VEBA Oel
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1997 1998 1999 2000 2001 2002 2003 et. seq.
EUR in EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions millions
Net sales 8,825 6,946 7,206 12,228 12,698 13,122
Production costs –8,227 –6,404 –6,635 –10,770 –11,099 –11,370
Gross margin 598 542 571 1,458 1,599 1,752
Other operating expenses and earnings –301 –166 –251 –947 –908 –919
EBIT 297 376 320 511 691 833 863
Interest earnings –19 –10 –29 –223 –172 –138 –91
Pretax operating earnings 278 366 291 288 518 695 772
Corporate taxes –213 –267 –289 –321
Operating earnings after taxes 75 252 406 452
Minority Shareholdings –3 –3 –3 –3
Retained foreign earnings –107 160 –185
Additional interest earnings from retained
earnings 2003 et seq. 53
Gross distribution –35 89 218 502
Personal income tax 35% 12 –31 –76 –176
Net distribution –23 58 142 326
Capitalization interest ratte 6.83% 6.83% 6.83% 5.83%
Cash value factor 0.93611 0.87630 0.82032 14.08268
Cash value –21 51 116 4,597
Earnings value of the operating business as of 1/1/2000 100% 4,742
The historical figures for the years 1997 until 1999 also did not increase as much in 1999 because of
were adjusted for extraordinary business events in high inventories.
particular restructuring expenses and non-periodic
items. Furthermore, the earnings from shareholdings Because of this development net sales (excluding
and good-will amortizations as well as hidden petroleum tax) declined from about EUR8.8 billion
reserves disclosed during the capital consolidation by 21% to approximately EUR6.9 billion in spite of
have been eliminated. the first time consolidation of VEBA Oil & Gas
GmbH (VOG) and will likely increase slightly in
The development of sales and earnings for the entire 1999 to EUR7.2 billion. The adjusted gross sales
division in the years 1997 until 1999 was decisively revenue of the division deteriorated from 1997 to
characterized by the price development on the mar- 1998 particularly because of the crude oil price-
kets for crude oil and products. While the average related decline of upstream earnings which could not
price of Brent crude oil in 1997 was US$19.10/blue be compensated by the increase in downstream
barrel (bbl), it dropped to US$12.74/bbl in 1998, and earnings because of better margins. Improved up-
during the first six months of 1999 reached a low stream earnings in 1999 caused by the recovery of
point of less than US$10/bbl. In the second half of the crude oil price were burdened by high expenses
1997 crude oil prices increased to more than for new projects, higher amortizations and a strong
US$25/bbl. In 1998 product prices did not drop to decline of the refinery margins caused by the delayed
the same extent as crude oil prices; however, they product price increase.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 167
Effective December 31, 1999/January 1, 2000, VEBA for the implementation of the ‘‘Auto Oil Program’’
Oel has acquired an additional 43% of ARAL AG in will, however, have a counteracting effect.
which it formerly held a 55.9% shareholding, as well
Earnings from petroleum distribution on the whole-
as the Emsland petroleum refinery including the
sale level are of subordinated importance compared
distribution and the shares in pipeline companies of
with petroleum processing because of the low mar-
Wintershall AG. Through the acquisition of the
gins obtainable on these very efficient markets.
additional voting and equity rights in ARAL AG and
Because of generally constant distributed or sold
the first-time inclusion in the division’s consolidated
volumes, distribution or trading margins, as well as
financial statements of VEBA Oel, sales, revenues
costs generally stable results are planned during the
and expenses for the entire division will increase
first projection period.
noticeably beginning in the year 2000 compared with
the previous years. To this extent, the figures of the Primary factors influencing Petrochemicals earnings
forecast calculation are no longer comparable to the are the petrochemicals margin and processing costs.
adjusted historical data. Also the deterioration of Because of the dependancy of the petrochemicals
interest earnings in the entire division in 2000 business on the cyclical derivatives market (like
compared with 1999 is mainly because of this plastics for the automotive and packaging industry)
acquisition. the petrochemicals margin is subject to strong cycli-
cal fluctuations over time. During 1999 the industry
The business area Exploration and Production
is at the end of a downcycle and therefore the margin
represented by the activities of VOG plans to
at a low point. Because of the industry-wide antici-
increase 1999 production of 52.9 million barrel oil
pated start of an upcycle beginning in 2000, sustained
equivalents (MMBOE) to 71.0 MMBOE on the
strong margin increases in the forecast period are
medium term. Regional expansion centers are located
assumed from currently EUR76/t to EUR103/t in the
in the Near and Middle East, North Africa, South
year 2000. Furthermore, a volume increase of approx-
America and the North Sea. In addition to the
imately 13% for the year 2000 compared with 1999
volume-related earnings increases, further earnings
and maintaining the achieved sales volume for the
improvements are to be achieved in the forecast
remaining forecast period is planned. The valuation
period by restructurings as well as a more efficient
auditors have based the sustained earnings of the
composition of the product portfolio. With respect to
business area on a petrochemicals margin correspond-
the crude oil price, which is the material forecast
ing to the long term average. In relation to the
figure, a price of US$19/bbl for 2000 and of
processing costs the statements regarding the business
US$18/bbl after 2001 is assumed, provided that world
area Refining apply correspondingly with respect to
market demand increases further.
the sustained earnings improvement caused by struc-
Strategic business area Refining, combines the tural measures and the expiration of amortizations on
processing and distribution of petroleum products on past large investments.
a wholesale level. The main factors influencing
The business area Marketing (Fuels) is the main
operating earnings for petroleum processing are the
contributor to the division’s results in addition to the
refinery margins of the Ruhr Oel system as well as
business area Exploration & Production. Forecast
the processing costs. After the sharp decline of
earnings contain declining growth margins coupled
refinery margins to approximately EUR15/t in 1999
with slight increases of fuel sales, and increasing
caused by a steep increase of crude oil prices
contribution to earnings from the convenience store
combined with stagnating product prices because of
business as well as synergies from the assumption of
high inventories, a step-by-step recovery to the 1998
complete control over ARAL. The deterioration of
level with approximately EUR24.5/t is anticipated.
the remaining operating expenses and revenues and
Processing costs are mainly capacity-dependent fixed
of the interest earnings for the total division during
costs which can be significantly reduced in the
2000 compared with 1999 is mainly due to the
forecast period in connection with structural measures
acquisition of the additional ARAL shares as well as
regarding the Gelsenkirchen facilities. A further
the Emsland refinery.
sustained reduction in processing costs will result
from the exploration of amortizations on former large For the business unit Marketing (Heating Oil),
investments. Additional amortizations on investments declining product margins and a lower market vol-
ume are planned. Further concentration to the higher-
margin retail customer business, improved product
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
168 Merger Report VIII. Exchange Ratio
qualities as well as internal cost improvements will Real estate not necessary for the business
more than compensate for market-related earnings operations
reductions.
The following figures appear for VEBA Oel:
The division’s EBIT increase during 2001 compared
with 2000 is mainly resulting from volume-related VEBA Oel
earnings increases in the business area Exploration Real estate not necessary for business operations
and Production as well as the end of the one-off
structural expenses during the year 2000. The further EUR in
millions
earnings improvement during 2002 is mainly due to
the continued increase in petrochemicals margins. Present value (after sales cost) 90
Trade tax: –6
The expected sustained production increase for the Typical income tax: –10
business area Exploration and Production is expressed
in the EBIT after 2003. Thus, future business success Net proceeds 100.00% 74
for this business area after 2003 does not appear
already during the year 2003, but constitutes an Real estate not necessary for business operations is
earnings level which is representative only for the comprised of numerous domestic properties, with and
longer-term future. In the Petrochemicals business without buildings, some of which are encumbered
area, the petrochemicals margin in the terminal value with hereditary building rights. The developed
was reduced to the long-term average. Furthermore, properties mainly include an administrative building
operating valuation discounts were made to the as well as properties with residential buildings. In
forecast volume of the synergies expected from the determining the market values, experts and indicative
integration of ARAL as well as to cost reductions land values were used and proceeds from recent sales
related to several structural programs. were taken into account. With respect to determining
the net proceeds, reference is made to
The increased interest earnings compared with 2002
section 2.b)(4)(b).
are due to the calculation pursuant to section 2.b)
(2) (b). In addition, interest earnings from retained
foreign earnings take effect with respect to the net (c) Business Value
distribution after 2003, see section 2.a).
The earnings value of the operating business and the
(b) Special values special values add up to a total value for VEBA Oel
of EUR 5,270 million.
Separately Valued Financial Assets
The sum of the separately valued financial assets Veba Oel
Business value as of 1/1/2000
valued from a going-concern point of view amounts
to EUR89 million. EUR24 million are allocable to EUR
two shareholdings which were valued according to in millions
the simplified earnings value method. The remaining Earnings value of the operating business 4,742
EUR65 million relate to more than 10 shareholdings Special values:
which have either been included with their pro-rata Shareholdings going concern: 89
equity or with their book value. Tax values: 365
Real estate not necessary for
Special Tax Values business operations: 74
Sum of special values 528
VEBA Oel has special tax values amounting to
EUR 365 million. These are mainly additional value Business value 100.00% 5,270
amortizations resulting from the planned transforma-
tion of hidden reserves into tax depreciable assets. In
addition the values of domestic trade tax losses ¨
(3) Chemicals: Degussa-Huls AG
carried forward and foreign losses carried forward (a) Earnings Value of the Operating Business
were included. With respect to the methodological
procedure of the value determination reference is The valuation basis for the Group Division Degussa-
made to section 2.b)(4)(b). u
H¨ ls appears as follows:
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 169
¨
Degussa-Huls
Earnings value of the operating business as of 1/1/2000
adjusted Forecast Projection
1998 1999 2000 2001 2002 2003 et seq.
EUR in EUR in EUR in EUR in EUR in EUR in
millions millions millions millions millions millions
Net sales 11,878 11,514 12,367 13,300 14,140
Production costs –9,066 –8,646 –9,225 –9,935 –10,513
Gross margin 2,812 2,868 3,142 3,365 3,627
Other operating expenses and earnings –2,156 –2,212 –2,344 –2,425 –2,557
EBIT 656 656 798 940 1,070 1,131
Interest earnings –136 –167 –200 –196 –190 –204
Pretax operating earnings 520 489 598 744 880 927
Corporate taxes –184 –228 –272 –289
Operating earnings after taxes 414 516 607 638
Minority Shareholdings –7 –9 –10 –10
Retained foreign earnings –180 –222 –268
Additional interest earnings from retained earnings
2003 et seq. 75
Gross distribution 227 285 330 703
Personal income tax 35% –79 –100 –115 –246
Net distribution 147 185 214 457
Capitalization interest rate 7.15% 7.15% 7.15% 6.15%
Cash value factor 0.93327 0.87099 0.81287 13.21747
Cash value 137 161 174 6,041
Earnings value of the operating business as of 1/1/2000 100.00% 6,514
The Group Division Chemicals legally emerged from The development of the Chemicals Division was
u
the merger of Degussa AG and H¨ ls AG with characterized in the reference period of 1997/98 until
economic effect as of October 1, 1998. The most 1999 by the recession in South-East Asia and the Far
recent historical year is for the purpose of the East as well as by the economic difficulties in Russia.
forecast the financial year related to the calendar year The reduced Asian business and its consequences for
1999. The financial year 1997/98 documented by a the price development also in other regions affected
pro forma statement as of September 30, 1999 is the fourth quarter of 1998 as well as the first quarter
considered as a further historical year. of 1999. Since the second quarter of 1999 an
improvement in volume and price development
The historical figures 1998 and 1999 have been started.
adjusted by changes to the scope of consolidation,
The HEALTH AND NUTRITION Segment will
extraordinary business events, in particular, by re-
presumably achieve in 1999 sales of
structuring expenses and non-recurring items. Further-
EUR2,120 million, down 3% year-on-year. This
more, earnings from shareholdings as well as good-
corresponds to 22% of total segment sales (excluding
will amortizations were eliminated.
precious metals sales).
u
In 1997/98, Degussa-H¨ ls had adjusted sales of For the first projection period the sales of the
EUR11,878 million, of which EUR1,748 million are strategic business area ASTA Medica shall grow
allocated to precious metals sales. The adjusted EBIT after stagnation in 2000 with moderate annual growth
u
amounted to EUR656 million. Degussa-H¨ ls obtained rates of more than 6% which are below the market
a gross margin of 6.5% adjusted by the precious growth rate. The relatively low margin for pharma-
metal sales. ceutical companies will be improved in the first
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
170 Merger Report VIII. Exchange Ratio
projection period by the introduction of new products, The sales and earnings growth expected for the first
continued cost management and regional expansion projection period of the business area Creanova
of the business, but will, furthermore, be affected by essentially results from raw materials for coating.
high research and distribution expenses. Those sales shall, with an annual increase of approxi-
mately 7%, be 3% per year higher than the market
In the strategic business area Dental the high growth rate. The market share gain shall result from
domestic share of sales – 55% – resulted in a the globalization of the Europe-leading position in
dependency on German health politics and caused a polyester resins and the starting of a new site as well
significant decline in 1997/98 earnings because of as the construction of a full isophorone line in
legislated cost reduction measures. The 1999 financial Mobile/U.S.A. Additional site optimization and struc-
year brought a significant increase in earnings. tural measures will contribute to increasing earnings.
For the future, the business area expects an increase Upon the start of the restructuring of the business
of sales above the market growth inter alia by the area Industrial Chemicals the growth margin will be
introduction of innovative products and the regional doubled in 1999 despite reduced sales. Earnings will,
expansion of the business by 8% per year, whereby in particular, be achieved in the business unit
the market share of presently approximately 8% shall Bleaching Chemicals which with its main product
be expanded in the still partly fragmented dental hydrogen peroxide supplies mainly the paper and
market. The earnings in the first projection period textile industry and covers approximately 20% of a
will be increased; it will, however, be impacted by world market characterized by overcapacities.
changes to health-care legislation, which are notori- The market of the business area Industrial Chemicals
ously hard to predict. will grow moderately by 3% per year on average in
In 1999, the earnings from the business area Feed the forecast period with, however, significant regional
Additives were significantly reduced compared with differences. However, due to the targeted capacity
the previous year (Asian crisis) because of the sudden restrictions in recent years, a price recovery can be
reduction of demand and significant price reductions. especially expected for hydrogen peroxide, so that
The earnings situation will improve significantly sales in the second forecast years will show a higher
because of the high market growth and by the start of rate of increase than the market. Margins will also
the recovery of the sales prices, by topping up the improve in the 2000 financial year because of price
present overcapacities as well as by the expansion of effects and restructuring measures. In the medium
high-margin niche businesses. term the high level will be maintained. In the long
term overcapacities could influence the margins.
In the strategic business area Stockhausen increased Fine Chemicals’ 1999 earnings were down signifi-
sales are expected for the future which will be cantly year-on-year because of slightly reduced sales.
slightly over the market growth of 6% per year, The reason was the influence of the Asian Crisis as
primarily caused by higher volumes. The largest well as significantly higher amortizations because of
growth increase will be in the year 2000 in which the high investments for production sites of Standard and
present production bottlenecks will be overcome by Advanced Intermediates. Sales and earnings of the
two new super absorber sites. Earnings will also business area Fine Chemicals were dominated by the
improve because of more favorable raw material business unit which manufactured interim products
costs in the forecast period compared with 1999. The for the Life Science Industry.
sales and earnings development of the business area
will be supported by the strong world market The strategic business area Fine Chemicals is, with
position. On the other hand, Stockhausen is exposed the exception of the area DMT and electrolytic
on the sales side to the market power of a small follow-up products, also a business area in progress.
number of large customers as Procter & Gamble and The continuation of the high investment activity will,
Kimberley Clark. therefore, also impact the EBIT in the following
years so that an improved but only average margin
The SPECIALTY PRODUCTS Segment will pre- can be expected. The high market growth of up to
sumably achieve 1999 sales of EUR1,909 million, 10% per year achieved with pharmaceutical in-
approximately 20% of the sales (without precious termediates as well as the high value added portion
metals sales) of all segments in the Group Division of the Advanced Intermediates, however, suggests a
Chemicals. long-term further increase in margins.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
Merger Report VIII. Exchange Ratio 171
In the POLYMERE AND INTERMEDIATES Seg- tion of production sites and a successful opening of
ment earnings which are reduced compared with the the markets in the U.S.A., a medium-term margin
previous years will be expected with sales of recovery and margin contributions can be expected.
EUR1,871 million in 1999, which are 20% of the
The PERFORMANCE MATERIALS Segment will
sales (excluding precious metals sales) of all seg-
in 1999 presumably achieve sales of
ments. The principal reason for the overproportional
EUR3,196 million which will constitute 34% of the
earnings decrease was current overcapacities in the
sales (excluding precious metals sales) of all seg-
phenol market which by increasing raw material
ments of the Chemicals Division. It generates the
prices resulted in a substantial margin deterioration as
absolutely highest earnings contributions at average
well as the effects of the regional economic crisis at
operating margins.
the beginning of the year.
The business area Sivento generates earnings that are
The market growth for the strategic business unit
significantly above average. In the past decisive
o
R¨ hm in the relevant partial markets is projected at
earnings drivers were the aerosiles distributed by the
2% up to 4% per year. The assumed average sales
u
world market leader Degussa-H¨ ls.
growth of approximately 6% per year for the first
projection period appears to be achievable by the For the first projection period essential sales increases
expansion of the special products. Earnings will for special oxides and functional silanes are expected.
essentially be improved by cost optimization. The increase is also based on the expansion of the
production capacities by which the global supply
Margins for Oxo Products of the Business Unit
capabilities of silanes will be established and by
Oxeno have reached in the fourth quarter of 1998
which new large customers shall be supplied with
and in the first quarter of 1999, respectively, historic
standard aerosiles. The earnings after amortization
lows. Despite the recovery in the interim, the
will further improve in the first projection period, but
earnings level of the financial year 1997/98 will not
at a slightly slower rate than the sales due to the
again be reached in the financial year 1999. The
investments supporting the growth strategy.
economic development will significantly be positively
impacted by the production conversion to Oxo The business area Filling Systems and Pigments
alcohol which has a higher value and a better cost achieves above-average margins because of its strong
structure. With regard to the C4-Products, the leading position as system supplier for the rubber industry as
position in Europe shall be expanded in the forecast well as due to its worldwide position in all areas.
period. On the basis of the forecast increase in sales Earnings and sales increases of the business area
volume, a corresponding earnings increase is ex- result mainly from the unit rubber silanes, the market
pected in the less volatile market. of which will in the medium term grow by approxi-
mately 20% per year. A further expansion of the
The business area Phenol Chemistry is with its
capacities accompanied by sales growth in the high-
principal products Phenol and Acetone the market
margin area will further increase this unit’s
leader with a world market share of 15% (captive use
profitability.
included). With reference to the relevant free trading
market, the market share is even significantly higher. The areas (precious metals, automotive catalysts,
Because of the Asian crisis the demand for Phenol cerdec) which are combined in the new business area
was also reduced in Europe in first-half 1999; in the DMC2 (Degussa Metal Catalysts Cerdec) contributed
second half demand improved. Because of over- in the past with a significant underproportional
capacity, higher raw material prices increases could amount to the Performance Material Segment which
only be passed on to some extent. A significant has the highest earnings. For the future, an improve-
margin deterioration was the consequence. ment of the profitability is expected without having
DMC2 catch up to the high-margin business areas.
At the beginning of 2000, production capacity of the
Beginning in 2001 a significant upward trend can be
business area Phenol Chemistry will increase by 400
expected for automotive catalysts, since at this point
kt per year Phenol by the startup of a new production
further qualifications with the U.S. auto industry will
site in Mobile/U.S.A. It is expected for the first
result in earnings and sales increases.
projection period that margins and margin contribu-
tions will hit rock bottom in 2000/2001, which will In the SERVICE AREAS Segment sales of
be significantly lower than the long-term medium EUR426 million are expected in 1999. Infracor will
value for a considerable time. With increased utiliza- in the future most likely reach an even result.
English Translation of the German Merger Report (Verschmelzungsbericht), only for convenience. The German document shall prevail.
172 Merger Report VIII. Exchange Ratio
Creavis expects slightly higher research costs for the Special Tax Value
forecast period. The earnings situation of the business
u
For Degussa-H¨ ls special tax values of
area Bank distinguished itself in the past by an
EUR53 million have been determined which relate, in
above-average equity margin for the banking sector
particular, to the values of the domestic losses carried
and a favourable expenditure-income ratio. For the
forward. In addition, the values of the foreign losses
future, moderately increasing annual earnings are
carried forward and positive EK-45 positions have
expected from the volume growth in the credit
been taken into account. With regard to the method-
business by having at the same time a slight
ological procedure reference is made to section
reduction of interest margins and stagnating commis-
2. b) (4) (b).
sion earnings. Small earnings contributions result
from the sales of the Other Businesses. Real Estate not Necessary for the Business
The investments of the total Group Division are Operations
substantially above the long-term average in the u
For Degussa-H¨ ls the following values appear:
period from 1998 to 2001 and will result at the end
of the first projection period to a level of amortiza- ¨
Degussa-Huls
Real estate not necessary for business operations
tion which will exceed the expected reinvestment
rate. The valuation auditors, therefore, have for the EUR
in millions
purpose of the determination of the future business
success in 2003 added a valuation premium on the Present value (after sales cost) 242
Trade tax: –35
EBIT level compared with the last forecast year of
Typical income tax: –55
the first projection period. Operating related valuation
discounts on the EBIT level in particular in the Net proceeds 100.00% 152
Health and Nutrition, Special Products discounts had
to take into consideration that the overproportional Real estate not necessary for business operations is
growth of the first projection cannot be consid