2.4 Changes in the scope of consolidation and structure of the PZU Group

On 28 September 2016, negotiations were launched to conclude a transaction for PZU acting in a consortium with Polski Fundusz Rozwoju S.A. (“PFR”) to acquire a significant equity stake in Pekao from UniCredit S.p.A. (“Seller”, “UniCredit”; PZU, PFR and the Seller are collectively referred to as the “Parties”), which ended on 8 December 2016.

The PZU Management Board and the PZU Supervisory Board expressed their consent for the execution of a share purchase agreement with UniCredit for a stake in Pekao (“SPA”) and other agreements necessary for the planned transaction.

On 8 December 2016, PZU and PFR signed the SPA with UniCredit.

The essence of the transaction arising from the SPA was the acquisition, by PZU acting in a consortium with PFR, of a significant (ultimately approx. 32.8% of the total number of votes) equity stake in Pekao (“Transaction”).

On 29 March 2017, the PZU Management Board and the PZU Supervisory Board of agreed to enter into an annex to the SPA with UniCredit and PFR and to enter into annexes to the consortium agreement and the shareholder agreement with PFR. Then, on 29 March 2017, PZU, PFR and UniCredit signed an annex to the SPA, which was to simplify the structure of the transaction, consisting primarily of replacing an indirect acquisition of the equity stake in PZU (acquisition of a special purpose vehicle from UniCredit) with a direct acquisition. The transaction was not conducted in two stages, as was originally assumed, and will be executed by applying a structure involving a direct acquisition by PZU and PFR of all Pekao shares forming the subject matter of the Transaction in one tranche on the Transaction closing date, i.e. 7 June 2017. PZU directly acquired a stake in Pekao representing approximately 20% of the total number of votes and at the same time PFR directly acquired a stake in Pekao representing approximately 12.8% of the total number of votes.

As a result of this transaction PZU considers to have acquired control over Pekao on 7 June 2017. Analysis of the considerations taken into account to determine control is presented in section 5.4.1.

The price agreed by the parties is PLN 123 per share, which entailed the total price of PLN 10,589 million for the whole stake to be acquired by PZU and PFR, of which the price for the stake to be acquired by PZU was PLN 6,457 million. The price also included payment for the acquired right to the dividend of PLN 8.68 per share, or PLN 456 million in total, in accordance with the 19 April 2017 resolution adopted by the Pekao Ordinary Shareholder Meeting. The SPA does not provide for the possibility of an adjustment of the purchase price.

The execution of the Transaction was contingent on the fulfillment of the conditions precedent specified in the SPA, which included in particular:

• (i) obtaining the consents of anti-monopoly authorities in Poland (the consent was issued on 6 April 2017) and Ukraine (PZU was informed of the granting of consent on 27 March 2017), and
• (ii) obtaining by the Seller, PZU SA and PFR the relevant consents or decisions of the Polish Financial Supervision Authority (KNF) (the consent was issued on 4 May 2017).

The SPA contains a full list of representations and warranties by the Seller regarding the stake to be purchased and the business standing and condition of Pekao and other members of the Pekao Group. Moreover, the SPA provides for a waiver of liability in favor of PZU and PFR for any losses resulting from regulatory changes affecting Pekao’s existing Swiss franc-denominated loan portfolio. The parties agreed that the said waiver of liability will not exceed the agreed amount and will be available to PZU and PFR in principle for a period of 3 years after the acquisition by PZU and PFR of the stake in Pekao.

Under the SPA, PZU and PFR agreed with the Seller on the rules of non-competition applicable to the Seller and members of its group as well as the rules prohibiting the solicitation of key Pekao staff.

Due to the need to ensure a proper spin-off of Pekao from the Seller’s group, the Parties executed a contract governing the basic rules for the spin-off (in the IT context) of Pekao from the Seller’s group. The contract in particular sets forth the rules for ensuring the continuity of provision of process support services based on the IT systems in place in Pekao and governs the rules and costs associated with securing Pekao’s self-sufficiency following the execution of the Transaction in the context of access to services and rights to software.

Acquisition of PIM, Pekao TFI, Pekao PTE and Xelion

The Parties also agreed that their intention was for PIM (and hence indirectly Pekao TFI), Pekao PTE and Xelion to be full members of the Pekao Group. At the moment of the acquisition of Pekao shares, PIM and Xelion were Pekao’s (and indirectly also PZU’s) associates in which Pekao held, respectively, 49% (PIM, which in turn held 100% of Pekao TFI) and 50% (Xelion). Pekao PTE was a subsidiary in which Pekao held a 65% stake.

Shareholder agreement between PZU and PFR

In connection with the SPA, PZU and PFR also entered into a consortium agreement on 8 December 2016. The consortium agreement defined the mutual rights and obligations of PZU and PFR in respect of the execution and closing of the Transaction and the mutual cooperation between PZU and PFR in connection with the SPA and the Transaction (“Consortium Agreement”).

On 23 January 2017, PZU and PFR signed a shareholder agreement (“Shareholder Agreement”). The governing law for the SPA, the Consortium Agreement and the Shareholder Agreements is Polish law.

On 29 March 2017, PZU and PFR signed an annex to the Shareholder Agreement aimed at adapting it to the new structure of the Transaction.

The Shareholder Agreement was entered into because PZU and PFR intend to: build Pekao’s long-term value, implement a policy aimed at ensuring Pekao’s development, financial stability and effective and prudent management following the closing of the share purchase transaction and ensure the application of proper corporate governance standards by Pekao.

The essence of the Shareholder Agreement is to define the rules of cooperation between PZU and PFR following the acquisition of the equity stake in Pekao and the rights and obligations of the parties as Pekao shareholders, in particular pertaining to agreeing on the manner of joint exercise of voting rights from the shares held and the implementation of a common long-term policy for Pekao’s business aimed at attaining the said objectives.

In particular, the provisions of the Shareholder Agreement cover the following issues:

PZU and PFR have undertaken to each other to vote in favor of resolutions on the distribution of profit and the disbursement of dividends, in accordance with the rules and within the boundaries set by the applicable provisions of law and KNF’s recommendations and in accordance with Pekao’s existing practice;

• subject to certain explicit exceptions, in situations where PZU and PFR are unable to reach an agreement on how to exercise their voting rights, PZU will determine the manner of voting and PFR will be required to vote in accordance with PZU’s decision;
• mutual undertakings of PZU and PFR aimed at curtailing each party’s ability to dispose of their Pekao shares as well as a contractual right of priority in the event that either party intends to sell all or any of its Pekao shares;
• the right of either party to execute the repurchase of shares held by the other party in the event of its termination of the Shareholder Agreement;
• the rules of cooperation and mutual relations between PZU and PFR on one side and the entity providing PFR with financing for the purpose of acquiring the stake in Pekao. PZU and PFR signed an additional trilateral agreement with the said entity in order to clarify the parties’ mutual relationships in the context of the wording of the Shareholder Agreement and the financing documentation for PFR;
• the manner of conduct by the parties aimed at monitoring the parties’ performance of the obligations arising from the Act on Offerings and preventing the obligation to announce a tender offer to subscribe for the sale of Pekao shares in accordance with the provisions of the said Act.

The Shareholder Agreement came into force on the date of execution of the Transaction to acquire Pekao shares by PZU and PFR.

The Shareholder Agreement was concluded for a definite period of 5 years from its entry into force and cannot be terminated by any of the parties within 12 months from its entry into force.

Provisional purchase price allocation of the acquisition of Pekao

The purchase price allocation of the Pekao share purchase as at the date of the assumption of control was based on data as at 31 May 2017. There were no significant differences in accounting data between 31 May 2017 and 7 June 2017.

By the publication date of the consolidated financial statements, the process of settling the acquisition of Pekao has not been completed. A credible and reliable calculation of the fair value of acquired assets and liabilities requires a large amount of data to be collected and processed in order to make correct calculations. Consequently, this process could not be completed between the date of obtaining control and the date of signing the consolidated financial statements. The PZU Group decided to prepare a provisional purchase price allocation of the acquisition transaction, in which:

• the goodwill shown in Pekao’s financial statements was written off;
• the intangible assets not previously included in Pekao’s financial statements were recognized;
• the assets and liabilities shown in Pekao’s financial statements were remeasured to fair value: credit portfolio, portion of the real property portfolio (owner-occupied property, investment property and property held for sale), financial assets held to maturity (previously measured by Pekao at amortized cost) and available for sale (previously measured by Pekao at historical cost);
• no contingent liabilities that would require recognition were identified;
• no potential indemnification assets that would require recognition were identified.

As at the date of signing the consolidated financial statements, some of the processes have not been completed, including the measurement of loan receivables and properties held by Pekao. The provisional purchase price allocation of the acquisition, as presented below, includes the measurements based on the best knowledge as at the date of signing the consolidated financial statements. They may however be revised by the date of the final purchase price allocation.

The final purchase price allocation will be presented after all the fair value measurement process is completed for all the properties, i.e. no later than on 6 June 2018. The final purchase price allocation will be presented in the condensed interim consolidated financial statements of the PZU Group for the period ended 30 June 2018. The consolidated financial statements contain the provisional fair value of the acquired assets and liabilities.

The tables below present the reconciliation of the carrying amount of the acquired assets and liabilities to their fair value and the recognized amounts of intangible assets.

In the purchase price allocation of the acquisition, the PZU Group reduced the price paid by PLN 456 million, which was the price for the right to receive a dividend payable from profits earned by Pekao before the date of obtaining control; as at the date of obtaining control that amount was presented as receivable and it was received on 6 July 2017.

Goodwill will not reduce taxable income.

On 11 December 2017, Pekao acquired 14,746 shares in PIM, which represented 51% in PIM’s share capital and 51% of all the votes at the PIM’s Shareholder Meeting. As a result, Pekao is now the sole shareholder in PIM and indirectly holds a 100% stake in the share capital of Pekao TFI. Consequently, the PZU Group believes that it acquired control over those companies and consolidates them.

Final purchase price allocation of the PIM share purchase transaction

Goodwill will not reduce taxable income.

On 4 November 2016, Alior Bank purchased Bank BPH’s Core Business. The identifiable acquired assets and assumed liabilities as at the acquisition date are presented below, taking into account the adjustments made in the valuation period.

Financial data pertaining Pekao prepared in accordance with IFRS in relation to the period in which Pekao was controlled by the PZU Group included in the consolidated profit and loss account are presented in section 2.3.

Because of the lack of significance, the data of other companies acquired in 2017 (Revimed sp. z o.o, NZOZ Trzebinia, Battersby Investments SA, Tulare Investments sp. z o.o., PZU Corporate Member Limited) are not presented.

2.4.7.1. Consolidated profit and loss account including acquired entities

The table below presents the amounts of PZU Group’s revenues and profits, including financial data of acquired subsidiaries, calculated as if the acquisition date for all the mergers conducted during the year was the beginning of the year.