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A direct bid is organic growth which in theory is less risky than inorganic, acquisition in this
case. It is practically the reverse here as an acquisition will reduce the risk of failing to win the

license whereas a direct entry has only a 4% chance of winning and that is only after raising the
bid value (potentially over paying) by up to 70%. We therefore argue that acquiring CloundNet is
a far less risky proposition and its in line with our revised risk appetite.

Feasibility: Acquiring CloudNet requires a payment of S$2700m which could be paid from the
cash and cash-equivalents, which we proposed be maintained to take advantage of

opportunities such as this one. Besides it is just only 5% (S$2,700/S$58,000) of the total fine so
the fine cannot be a good reason not to make this investment. In any event, we should be trying

to fund this through a rights issue to reduce our current high gearing.

Recommendation
Postpone making this decision and request more information from CloudNet especially in
relation to their other digital businesses, cost structure, Average Revenue Per User (ARPU),

including the quality of controls around the reporting on their non financial targets such as
number of subscribers, customer life cycle analysis, etc. Use Appendix 2 of the case study as
benchmark to evaluate figures such as number of subscribers, ARPU etc.

Justification
An acquisition on the balance is more suitable and acceptable than a direct bid but the data we

have appears incorrect. There is time till end of 2016 to make this decision as the license
renewals are only due in 2018. We will need to try and use 2016 to correct our gearing and

environmental rack record to meet the CSF for the bid. In any event the market is not as
attractive and the main strategic advantage for entering nonetheless will be to extract cost
synergies and develop other digital capabilities so unless we secure more information from

CloudNet and other sources in a formal due diligence to validate this, we run the risk of
acquiring a data base of inactive subscribers who had perhaps deserted CloudNet following the

advent of number portability in that country.

Actions

1. Respond to CloudNet Board with an MOU for a due diligence to follow and specifically
request that the offer be left open till late in 2016.
2. Prepare the company for a rights issue in case the due diligence was to be positive.

3. Take other steps to reduce gearing inside 2016 to restore the financial health of the
company in order not to lose out on such opportunities in the future.

Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2016'
www.charterquest.co.za | Email: thecfo@charterquest.co.za