Zegona Com Regulatory News (ZEG)

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ZEGONA COMMUNICATIONS PLC ("Zegona")

LEI: 213800ASI1VZL2ED4S65

 14 MAY 2020

ZEGONA ANNOUNCES 2019 RESULTS

London, England, 14 May, 2020 - Zegona Communications plc (LSE: ZEG) announces results and publishes its Annual Report for the year ended 31 December 20191. Highlights include:

PROGRESS AT EUSKALTEL, DIVIDEND POLICY CONFIRMED

· Positive operational developments at Euskaltel: including a new five year Business Plan designed to double the customer base, grow revenues to over €1.2bn and EBITDA to over €470m by expanding nationally using the Virgin brand.

· Q1 growth and limited impact of Covid-19 at Euskaltel: growth in all financial metrics, national expansion program ready for launch, full year guidance reconfirmed and expects to pay €0.17 per share dividend in July.

· Zegona confirms it will pass through 100% of the Euskaltel dividend: expects to declare an interim dividend of 2.6p per share in July which equates to an annualised yield of 5.2%2.

Enquiries

Tavistock (Public Relations adviser)

Tel: +44 (0)20 7920 3150

Lulu Bridges - lulu.bridges@tavistock.co.uk 

Jos Simson - jos.simson@tavistock.co.uk

About Zegona

Zegona was established in 2015 with the objective of investing in businesses in the European Telecommunications, Media and Technology sector and improving their performance to deliver attractive shareholder returns. Zegona is led by former Virgin Media executives Eamonn O'Hare and Robert Samuelson.

About Euskaltel

Euskaltel S.A. ("Euskaltel") is the leading converged telecommunications provider in the North of Spain, with its network covering 2.3 million households. It provides high speed broadband, data rich mobile, advanced TV and fixed communications services to residential and business customers under the Euskaltel, R Cable and Telecable brands. During 2020, Euskaltel intends to expand its addressable footprint to 18m households through its national expansion plan using the Virgin brand. Euskaltel is a public company traded on the stock markets of Bilbao, Madrid, Barcelona and Valencia.

1. Zegona has also issued, posted, or made available to shareholders, the Notice of Annual General Meeting and Form of Proxy for the Annual General Meeting. These documents are also available on the Zegona's website at www.zegona.com

2. Based on the closing price of Zegona's shares on 13 May 2020 of £0.89.

ZEGONA COMMUNICATIONS PLC

Annual Report

For the Year Ended 31 December 2019

STRATEGIC REPORT | CHAIRMAN'S STATEMENT

I am pleased to present Zegona's annual report for 2019. This year we made significant progress in working constructively with all stakeholders to put in place the foundations needed for Euskaltel to return to growth.

Investment in Euskaltel

Early in 2019, we increased our investment in Euskaltel, eventually becoming the largest shareholder with 21.3%. At the same time, we continued to engage constructively with the Euskaltel Board of directors and other major shareholders with the objective of improving the performance of the business. This resulted in Euskaltel making a number of changes in the second half of the year that Zegona believes have been positive. In particular, Euskaltel's shareholders ratified the appointment of José Miguel García (the ex-CEO of Jazztel) as CEO and Robert Samuelson and I were appointed to the Euskaltel Board on 10 July 2019.

Since then, Euskaltel has made a series of encouraging changes. In addition to José Miguel's arrival, there have been changes to key leadership positions including a new Chairman, CFO and Company Secretary and the Board has recently resolved to become more focused by reducing in size from 13 to 11. A new streamlined organisation structure has also been put in place with key new hires and a 25% reduction in the senior executive team. Euskaltel has also renegotiated its wholesale access agreements with Orange and Telefonica and signed an agreement to use the Virgin brand to expand nationally.

In March 2020, Euskaltel published its 2020-2025 Business Plan setting out its key strategic initiatives and its ambition to double the size of its customer base and grow revenues to over €1.2bn and EBITDA to over €470m by 2025. The plan details the actions being taken to grow in its existing core regions, to expand using the Virgin brand to offer high value services to customers across Spain, and to continue to drive operational efficiencies through a single integrated organisation.

These changes are already delivering positive results, with Euskaltel returning to growth in both revenue and profitability in the fourth quarter of 2019, with the trend continuing in the first quarter of 2020. Euskaltel has also reported that the early impact of the Coronavirus pandemic ("Covid-19") has been "limited and controlled," enabling it to reconfirm its full year guidance for 2020, reconfirm that it still intends to pay a final dividend of €0.17 per share in July and confirm that it is ready to begin its national expansion program.

We believe that the changes put in place during the second half of 2019 and Euskaltel's 2020-2025 Business Plan set the business on an exciting growth trajectory. We think the combination of increasing its market footprint in its current regions with a continued focus on operating efficiency will lead to positive results for the existing business. Additionally, addressing the 85% of the Spanish market where Euskaltel is not currently present using the well-recognised Virgin brand creates a major new growth driver which we expect to transform the financial profile of the business. Moreover, José Miguel and members of his team have an excellent track record of building a highly valued national business from their time at Jazztel, which makes us confident in their national expansion plans.

Outlook

In our view, the underlying outlook for telecommunications businesses in Spain continues to be fundamentally sound, which provides Euskaltel with a solid foundation for growth. The telecommunications market in Spain continues to be competitive but rational, with most players seeking to build profitable growth and we continue to believe Euskaltel can be successful in the national market with a well-designed and well-targeted offering.

The broader Spanish economy has continued to perform well, with GDP growth of 2.0% in 2019 and, before the outbreak of Covid-19, GDP growth of 1.6%1 was expected in 2020. It is still too early to tell what the impact of Covid-19 will be, although many commentators are forecasting significant but relatively short-lived declines in GDP which could impact Euskaltel. Like many other telecommunications businesses, Euskaltel has historically proved to be resilient during a downturn, even growing revenue each year during the last financial crisis. Encouragingly, Euskaltel has already announced that it has not seen a significant impact on its business and financial results during the first quarter of 2020.

Beyond Spain, we continue to see a very healthy environment for investments across the broader European TMT2 landscape. There was an increase in deal activity in 2019 and we have also seen growth in the availability of assets. We continue to evaluate new acquisition opportunities and actively pursue those which meet our rigorous financial and strategic criteria.

Dividends

We remain committed to paying dividends to our shareholders and we intend, for the foreseeable future, to promptly return all dividends we receive from Euskaltel to our shareholders. During 2019, we paid €9.9 million in dividends, representing a total of 5p per share. Euskaltel has already confirmed that it intends to pay a dividend of €0.17 per share in July 2020 and we intend to pass through 100% of this dividend once we receive it. We expect to declare an interim dividend of 2.6p per share in July, which equates to an annualised yield of 5.2%3.

Board Changes

We are reshaping our Board and committees to create a more independent structure in line with good corporate governance. We have recently appointed two new independent Non-Executive Directors, Kjersti Wiklund and Suzi Williams, with very strong industry and governance credentials. Two Directors are also stepping down from the Board, Murray Scott and Mark Brangstrup Watts. This leaves us with a more effective and efficient Board structure with two Executive Directors and four fully independent Non-Executives.

In addition, Suzi will become the chair of the Nomination and Remuneration Committee at the next Annual General Meeting ("AGM") and we intend to appoint one of our Non-Executives as a Senior Independent Director. We expect to announce this appointment after the AGM. With these changes, all Non-Executive Directors and all Board committees are fully independent. We believe this is the right Board structure to support Zegona's future development.

Zegona is committed to delivering a high standard of corporate governance and I am delighted that our governance structure is continuing to develop alongside our operations. We are already benefitting from Suzi and Kjersti's wealth of industry knowledge and governance experience. Mark and Murray have served on the Board for around five years and in this time have made hugely valuable contributions to the establishment and development of Zegona. We greatly appreciate the assistance they have provided to both the business and the management team and look forward to continuing to work with Mark in his role as a shareholder.

Annual General Meeting

Zegona's 2020 AGM will be held at 12:00 p.m. on 9 June 2020 at 10 Snow Hill, London EC1A 2AL. Further details on the 2020 AGM and the business to be conducted on the day can be found on pages 86 to 94. We will ensure that appropriate social distancing measures are in place and my colleagues and I look forward to meeting you in June.

Eamonn O'Hare

Chairman and Chief Executive Officer

13 May 2020

1As published by the European Commission in February 2020.

2 Technology, media and telecommunications.

3 Based on the closing price of Zegona's shares on 13 May 2020 of 89p.

4 Pending her re-election at the AGM.

Strategy

We seek to provide shareholders with an attractive total return, primarily through appreciation in the value of Zegona's assets, and we believe that opportunities exist to create significant value for shareholders. Our strategy focusses on making investments in strategically sound businesses within the European TMT sector that require active change to realise their full value, thereby creating significant long-term returns through fundamental business improvements. While the main elements of Zegona's strategy are set out below, our overall strategic approach is to deal with each opportunity and situation presented to us individually as it arises. For example, in the case of Zegona's current investment in Euskaltel, our strategy has been to increase our ownership position and seek to work constructively with the Euskaltel Board and management to improve the performance of the business.

We evaluate potential investments using a disciplined set of financial and strategic criteria. We focus on:

· Target businesses with an enterprise value range of £1-3 billion, although we may deviate outside of this range if we believe the returns are sufficiently attractive;

· TMT, network-based communications and entertainment businesses, primarily in Europe;

· Strategically sound businesses with established market positions and limited expected downside risk, but which have scope for fundamental improvement that is realistically achievable;

· Moderate leverage (usually 3-4x EBITDA8); and

· Multiple viable exit options pre-identified.

Many businesses across the TMT sector currently deliver sub-optimal returns which could be significantly improved. We work with management to deliver fundamental business improvements, such as:

· Changing the businesses' market positions;

· Being actively involved in the management of the businesses to drive operational improvements;

· Instilling strong discipline around cost efficiency;

· Investing in products, services and other value-accretive activities to drive top line growth;

· Focussing on operating profitability and cash generation;

· Ensuring a balanced and efficient capital structure; and

· Value enhancing bolt-on acquisitions/divestments.

Buyer interest is stimulated as the performance of each investment improves, providing Zegona with a range of options to crystallise the value it has created:

· We identify the optimal time to crystallise the value we have created, with flexibility to adapt to market changes and other opportunities, to maximise shareholder value;

· Zegona's publicly listed structure allows shareholders to realise value at any time and provides multiple options for value delivery; and

· Following a successful crystallisation, any surplus value will be reinvested or returned to shareholders.

5 Quad play: customers with four services (pay TV, fixed voice, broadband and mobile).

6 Business to Business

7 Those with holdings in 3% or more of the issued ordinary shares of the Company are listed on page 41.

8 Operating profit excluding depreciation of property, plant and equipment and amortisation of intangible assets.

Zegona is currently organised into two segments:

(i) investment in Euskaltel, which comprises Zegona's share of the profit of Euskaltel and dividend income (and the movements in fair value of the investment prior to recognising Euskaltel as an associate); and

(ii) central costs, which comprises costs incurred in supporting Zegona's corporate activities, including staff and premises costs related to the management team, ongoing costs of maintaining the corporate structure, evaluating new acquisition opportunities and executing acquisition and disposal activities.

Review of investment in Euskaltel

Strategic developments

During 2019, we sought to increase our existing 15% ownership of Euskaltel through market purchases or privately regulated transactions up to a maximum of an additional 12.5% of the outstanding issued share capital of Euskaltel at a price we considered attractive for our shareholders based on prevailing market conditions. To fund this, in February 2019 we received gross proceeds of £100.5 million pursuant to a non pre-emptive institutional placing (the "Placing") and entered into debt facilities with Barclays and Virgin in January 2019. To date, we have drawn down £10 million under these facilities. Zegona now owns the largest shareholding in Euskaltel with 21.3%.

At the same time, we continued to engage constructively with the Euskaltel Board and other major shareholders with the objective of improving the performance of the business. This eventually resulted in Euskaltel making a number of changes in the second half of the year that Zegona believes have been positive for the business. In particular, José Miguel García (the ex-CEO of Jazztel) was appointed as CEO of Euskaltel by its Board with unanimous agreement on 5 June 2019, and his appointment was overwhelmingly endorsed by Euskaltel's shareholders at the Extraordinary Shareholder Meeting on 10 July 2019. At the same shareholder meeting, Eamonn O'Hare and Robert Samuelson were also confirmed as proprietary9 directors on Euskaltel's Board.

Since appointing José Miguel, Euskaltel has made significant progress in developing and implementing a new plan for the business. Highlights include:

· Integrating three operating companies into one business. This is designed to simplify operations and reduce costs. A new organisation structure has been implemented, with key hires on board, including a new Chairman, CFO and Company Secretary and a significantly streamlined senior executive team. This has created clearer accountability for results and a stronger and more agile leadership. Euskaltel is also creating a single technical platform, whilst integrating the sales strategies of its existing three brands, taking best practice from each and expanding the more efficient on-line/direct channels.

· Improving the customer proposition. Euskaltel is focussed on reducing churn and enabling ARPU10 growth. A new mobile offer has been launched in partnership with Samsung, giving customers a high-quality handset and large data allowance at highly attractive rates. In addition, Euskaltel has increased broadband speed for its customers at no extra cost. A carefully targeted 'more-for-more' price rise has also been implemented.

· Expanding nationally. On 12 February 2020, Euskaltel announced that it had signed a trademark licence agreement to use the Virgin brand in Spain to drive its expansion into the 85% of Spain where Euskaltel is not present today and, on 23 March 2020, Euskaltel confirmed that it is ready to being its national expansion strategy and already has access to over 13 million homes in Spain. Pilot tests have successfully been carried out with customers around Spain who have access to all convergent fixed and mobile phone services, ultra-fast broadband and 4K TV.

· Euskaltel believes that expanding nationally will enable it to offer customers in these regions great value, high quality quad-play services, leveraging Euskaltel's existing advanced capabilities. Using the Virgin brand will accelerate growth in this untapped market for Euskaltel. The national expansion strategy is also supported by a new wholesale agreement giving Euskaltel long-term access to Orange's fibre network covering 14 million households and access to data-rich mobile services across Spain. In addition, Euskaltel has also announced the renewal of its mobile access agreement with Telefonica on improved financial terms.

Operational and Financial performance

On 26 February 2020, Euskaltel reported significantly improved operating KPIs for the year. In 2019, Euskaltel grew its fixed subscribers by 8,757, with 17,700 broadband net additions and 46,900 postpaid mobile net additions. This is the first year of customer growth after two years of subscriber losses. The number of products and services also grew with more convergent customers, reaching an average of almost 3.7 services per subscriber. In the B2B market, Euskaltel similarly increased its customer base materially during 2019, reaching a record high of 15,263 customers (31 December 2018:14,827).

Euskaltel's financial results were also strong, with revenues returning to growth in Q4 2019. Actions taken to create a single unified operational platform serving Euskaltel's multiple regional brands have already resulted in material cost savings, with SG&A11 expenses 11% lower than Q4 2018. These savings, along with improvements in Euskaltel's main wholesale agreements with Orange and Telefonica, resulted in EBITDA for Q4 2019 reaching a record level of €92 million, an increase of almost 8%. This represents the second consecutive quarter of EBITDA growth. For the full year 2019, EBITDA grew 2.4% to €344 million, profit after tax remained stable at €62 million and operating cash flow increased by 4% to €190 million.

Euskaltel continued to report growth in its key operating and financial results in the first quarter of 2020. Euskaltel recorded a sixth consecutive quarter of growth in fixed line customers, with 400 new users and 3,000 broadband net additions, driven mainly by the expansion that has taken place outside the Group's three traditional regions. Euskaltel saw a second consecutive quarter of revenue growth with 0.1% in Q1 2020 compared to the same period in 2019. Operating efficiencies also delivered savings that contributed to EBITDA of €88 million, which was an increase of 8.1% compared to the same period in 2019.

Euskaltel also reported that the impact of the Covid-19 pandemic was limited and controlled. Restrictions on customer portability imposed due to the State of Emergency have resulted in an approximately 50% reduction in both daily gross adds and churn from normal levels, resulting in a stable customer base. There has also been a limited impact on revenue from unpaid bills and customers suspending services so far and mitigation measures are already in place to limit the impact of this in future. The financial position of the business remains strong with continued operating cash flow generation. At the end of the first quarter of 2020, Euskaltel had €98 million of cash, which was increased by €150 million in April due to the full drawdown of its revolving credit facility.

As a result of the strong first quarter results and the limited impact of Covid-19, Euskaltel also confirmed that, subject to approval from shareholders, it still intends to pay the final instalment of the dividend against 2019 results of €0.17 on 5 July 2020. Euskaltel also reconfirmed its guidance for 2020 and indicated that the national expansion plan is ready for full commercial launch.

Investment performance

Zegona had previously concluded that it did not have significant influence over Euskaltel and therefore accounted for its investment in Euskaltel as a financial asset carried at fair value through profit and loss in accordance with IFRS 9 Financial Instruments. As more fully discussed in note 3 to the Financial Statements, during the second half of 2019, Zegona identified certain factors that indicated that from 10 July 2019 Zegona has the ability to participate in Euskaltel's financial and operating policy decisions and therefore accounted for its investment in Euskaltel as an associate using the equity method.

In the period to 10 July 2019, the investment in Euskaltel segment generated finance income of €38.0 million (2018: €12.5 million), being dividend income of €10.2 million (2018: €7.5 million) and a gain on the fair value of the investment of €27.9 million (2018: €5.1 million). The gain in fair value reflects the increase in the Euskaltel share price from €6.99 at 31 December 2018 to €8.09 at 9 July 2019. The increase in dividend income reflects an increase in dividend per share paid by Euskaltel from €0.278 per share in 2018 to €0.310 per share, together with an increase in Zegona's ownership since the start of 2019.

During the second half of 2019, Zegona's share of Euskaltel's profit was €9.1 million, which reflects Zegona's 21.3% share of Euskaltel's adjusted net profit of €42.9 million for the period from 10 July 2019 (2018: €nil).

The fair value of Zegona's investment in Euskaltel was €341.6 million at 31 December 2019 (2018: €187.3 million) with the increase due to a combination of an increase in the number of shares owned and a 28.3% increase in Euskaltel's share price during the year.

Review of Zegona's corporate and other activities

Zegona's corporate and other activities resulted in an operating loss of €6.0 million (2018: €4.7 million) plus net finance income of €1.0 million (2018: €2.1 million), contributing a total loss for the year of €5.0 million (2018: €2.6 million).

Operating loss

Operating costs totalled €6.0 million (2018: €4.7 million) and include: (1) €5.6 million (2018: €3.9 million) related to Zegona's ongoing corporate operations, with the increase primarily due to higher bonuses paid to management; and (2) €0.3 million (2018: €0.8 million) for significant project costs, which in 2019 were principally advisory and other professional fees incurred on projects related to increasing Zegona's influence over Euskaltel.

Net finance income

The net finance income comprises a net foreign exchange gain of €1.4 million (2018: €2.4 million) plus a gain on fair value of the contingent consideration from the sale of Telecable of €0.2 million (2018: €0.2 million), less interest on bank borrowings of €0.7 million (2018: €nil). The change in fair value during 2019 reflects a revision to the timing of receipt of the contingent consideration.

The net gain on foreign exchange principally arises from the revaluation of the investment in Euskaltel (prior to classification as an associate), whose shares are quoted in euros, within Zegona Limited and Zegona Communications plc, a company with a functional currency of British pounds sterling ("Sterling").

Key performance indicators and non-GAAP measures

As Zegona does not currently have an operating business, there are limited material key performance indicators that provide a useful measure of Zegona's business performance and position other than financial measures defined by generally accepted accounting principles ("GAAP") such as IFRS with the exception of:

Value of Main Assets per share

Zegona's principal asset is its 21.3% ownership of Euskaltel, where it is the largest shareholder. Zegona believes it is helpful for its shareholders to be aware of the development in the value of Euskaltel, and to understand what this represents in terms of value of the Euskaltel investment and Zegona's net cash position (its "Main Assets") per Zegona share, especially since Zegona no longer accounts for its investment in Euskaltel at fair value, and how this compares to the market value of Zegona's shares, and also how this value compares to the Net Invested Capital and Preferred Return threshold under Zegona's incentive scheme12.

The value of Zegona's Main Assets per share is a computation of the Sterling equivalent of the fair value of Zegona's investment in Euskaltel, its cash and cash equivalents and its bank borrowings, divided by the total number of shares outstanding13 as follows:

9 Proprietary director means a director of a company who is the beneficial owner of or is able, either directly or indirectly, to control more than 15% of the ordinary share capital of the company.

10 Average revenue per user.

11 Selling, General and Administrative.

12 As defined on pages 29 and 34.

13 No value for Zegona Management and Core Investor Incentive Schemes is included.

Principal and emerging risks

We have carried out robust assessments of the principal risks facing Zegona including those that would threaten our business model, future performance, solvency or liquidity. Detailed consideration is given to all of these risk factors by the Audit and Risk Committee and the board of Directors (the "Board").

Principal and emerging commercial risks

The description, impact and mitigation of these risks are set out below:

Risks related to the investment in Euskaltel

At 31 December 2019, Zegona's sole investment was its holding of approximately 21% of Euskaltel. The value of this investment is dependent on Euskaltel's performance, which could, in turn, be adversely impacted by risks that Euskaltel is exposed to. Some of these risks are common to telecommunications operators in Spain and others that are specific to Euskaltel itself. Whilst not exhaustive, Zegona believes the most significant of these risks are:

· Spanish economy and Covid-19: Deteriorating economic conditions and rising unemployment rates could have a significant impact on Euskaltel's performance. The Spanish economy has experienced healthy growth in recent years following a significant downturn in 2012 and 2013, which was expected to continue in 2020. Spain has, however, been severely impacted by Covid-19 and in mid-March imposed a strict lockdown with restrictions being eased from the beginning of May 2020. It is still difficult to tell what the impact will be for the Spanish economy generally and telecommunication providers in general, although Euskaltel has already announced that the outbreak has been "limited and controlled". Despite the relatively limited impact on Euskaltel so far, there remains a risk that the Spanish economy in general and Euskaltel's performance and its equity value in particular could be negatively impacted in the medium and longer term. This impact could come either directly from the disruption related to restrictions to address Covid-19 in early 2020, or from a longer-term economic decline caused indirectly by the outbreak.

· Competitive environment: Euskaltel faces significant competition from both established and new competitors that provide similar services in Spain. This competition includes offers with aggressive discounts and could negatively impact Euskaltel's business. To compete effectively, Euskaltel will need to continue to successfully design and market its services and anticipate and respond to competitive factors. If it is unable to do this, results could fall substantially short of current expectations.

· Delivery of change programme: José Miguel García has instituted a comprehensive and wide-ranging organisational and operational change programme across all aspects of Euskaltel's business, which Zegona fully supports. While this programme has already delivered significant benefits, there still remains a considerable amount of work to be done. There is a risk that, if these improvements are not delivered, this could have an adverse effect on Euskaltel's business.

· Success of national expansion: A key part of Euskaltel's growth strategy is to expand nationally using the Virgin brand to offer high value services to customers across Spain. While this provides a significant opportunity, it is a logistically complex project that requires acquiring customers in a competitive market. There is a risk that, if the project is not as successful as hoped, this could have a negative impact on Euskaltel's performance and on the value of Zegona's investment.

We regularly review the risk-adjusted returns of the Euskaltel investment and consider whether it is appropriate to retain ownership or continue increasing our shareholding in Euskaltel.

The appointment of Zegona's Chief Executive Officer Eamonn O'Hare and Chief Operating Officer Robert Samuelson as proprietary directors on Euskaltel's Board enables them to take a hands-on role in delivering tangible improvement actions within the Euskaltel business, including national expansion in partnership with Virgin.

Acquisition of targets

The success of Zegona's future investment strategy depends on our ability to identify and successfully acquire available and suitable targets. There is a risk that we will not be able to:

· identify available targets based on competition in the marketplace;

· identify suitable targets at a price that allows for acceptable returns;

· obtain any consents or authorisations required to carry out an acquisition;

· procure the necessary financing, be this from equity, debt or a combination; or

· be successful in the acquisition of an identified target under all or any market conditions.

In making acquisitions, there is also a risk of unforeseen liabilities being later discovered which were not uncovered or known at the time of the due diligence process. In pursuit of new acquisition targets, significant abort costs may be incurred if we are not able to complete the proposed acquisition (for example, because Zegona has been outbid by a competitor), which may deplete Zegona's cash and available liquidity.

We have a disciplined approach to valuation and, ultimately, we are only prepared to make investments at the right price and after undertaking a very structured and thorough due diligence process. When evaluating potential investments, we focus on targets that have strong fundamentals, high-quality offerings and leading market positions but which are underperforming their potential and have scope to generate sustainable performance and cash flow improvements.

The success of Zegona's acquisitions depend on our ability to implement the necessary strategic, operational and financial change programmes in order to refocus the acquired business and improve its performance. Implementing these change programmes may require significant modifications, including changes to business assets, operating and financial processes, business systems, management techniques and personnel, including senior management. There is a risk that we will not be able to successfully implement such change programmes within a reasonable timescale and cost.

As Covid-19 outbreaks continue across Europe, it is possible that access to significant debt and equity financing may become more difficult, thus temporarily impacting Zegona's ability to complete new acquisitions in a reasonable timeframe. Zegona believes that, as countries begin to ease restrictions in the coming months and economic activity begins to recover, the difficulties in accessing debt and equity financing will reduce.

Key management

Zegona's operations are currently managed by the Chief Executive Officer, supported by the Chief Operating Officer and Chief Financial Officer. The absence or loss of key management, due to Covid-19 or other reasons, could significantly impede our financial plans and the execution of our planned strategy with respect to the Euskaltel business, as well as other plans, though there has been no such absence or loss since Zegona was founded. Zegona will continue to monitor the Covid-19 situation and do all it can to ensure the safety of key management and all employees.

We aim to retain our key staff by offering remuneration packages at market rates, as well as long term incentives through the issue of management shares and other management incentive plans. The management team is small which places a natural limit on the volume of deal flow that can be addressed. The management team itself along with the Non-Executive Directors continually challenges the focus of the business and the allocation of resources amongst projects.

Disposal of investments

Our ability to dispose of Zegona's investment at the optimum time, and the availability of a suitable buyer who is willing and able to acquire the investment at an acceptable price or in a deal with an acceptable structure, is key to the success of our strategy. There is a risk that such suitable buyers cannot be identified, thus reducing the returns on investments.

We have proven our ability to execute our strategy since the formation of Zegona and consideration is given to an exit strategy as part of the acquisition process.

Brexit

The uncertainty and unpredictability concerning the UK's legal, political and economic relationship with the EU following the UK's exit from the EU may continue to be a source of instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border co-operation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise) for the foreseeable future. Such continued uncertainty could have an adverse impact on the number or attractiveness of acquisition opportunities available to Zegona.

The long-term effects of Brexit will depend on any agreements (or lack thereof) between the UK and the EU and, in particular, any arrangements for the UK to retain access to EU markets either during the current transitional period or more permanently. Additionally, the exchange rate of Sterling vis-a-vis other currencies may continue to be relatively volatile, which could result in increasing costs of non-sterling denominated expenses and other obligations. Furthermore, UK regulatory requirements could be subject to significant change and could place an additional burden on Zegona.

Foreign exchange

Foreign currency translation risk exists due to certain Zegona companies operating, and having equity denominated, in a different functional currency (Sterling) to that of the investment in Euskaltel (euro) and of many of our likely acquisition targets. Transactional foreign currency risk is limited and the principal ongoing impact is that fluctuations in the Sterling/euro rate could have a significant impact on the Sterling value of the investment in Euskaltel, meaning that the Sterling value of the proceeds from any future sale of Euskaltel shares that Zegona may distribute to shareholders may be reduced.

The Board and the Chief Financial Officer control and monitor financial risk management, including foreign currency risk, in accordance with the internal policy and the strategic plan defined by the Board.

Longer term viability statement

1. Zegona's prospects

In accordance with provision 31 of the UK Corporate Governance Code, we have assessed Zegona's prospects over a longer period than the twelve months required by the "going concern" provision. This assessment has taken into account Zegona's current position, our strategy, the risk appetite of the Board and the principal risks and uncertainties which are described in detail in this Strategic Report.

Zegona does not control any operating businesses and, currently, the most significant factor affecting Zegona's prospects is delivering additional value from the investment in Euskaltel.

2. The assessment period

We continue to believe that three years - in this case the three years to December 2022 - is the appropriate period over which Zegona should assess its viability for the following reasons:

· Three years is considered to be an appropriate period over which to assess the impact that we have had on Euskaltel; and

· We have reasonable clarity over a three-year period, which enables us to make an appropriate assessment of Zegona's principal risks.

3. The assessment process and key assumptions

The Directors approve a forecast on an annual basis which is sufficiently detailed to explain all cash inflows and outflows and includes a description of all reasonably possible risks and opportunities. Each month, the Board is provided with an analysis of actual performance against the forecast. Given the straightforward nature of Zegona's financial operations at this point, this forecast is considered appropriate to form the base model for the viability assessment.

The forecast takes into account Zegona's dividend policy to pass through the Sterling equivalent of all dividends received from Zegona's investment in Euskaltel to shareholders and factors in the successful fundraising in early 2019 from both issuing new ordinary shares and entering into loan facilities.

In preparing the viability assessment, we have deliberately sought to include a significant element of conservatism into the base model even before applying further sensitivities. In particular, the assessment includes the following key assumptions:

· Zegona will not acquire another business, or dispose of its investment in Euskaltel, during the assessment period. This is a particularly conservative assumption since any new acquisition would be expected to have a significant positive impact on Zegona's viability, both through contributing operating cash flows and the fact that sufficient additional funds could also be raised to ensure Zegona's viability in the longer term. Despite the fact that Zegona is hopeful that a successful acquisition will be made during the assessment period, given the uncertainty over the timing and size of it, it was not considered appropriate to include it in the assessment. Similarly, a disposal of the investment in Euskaltel would be expected to have a significant positive impact on Zegona's viability, through sale proceeds, therefore it was not considered appropriate to include it in the assessment;

· Zegona will incur substantial abort costs on failed transactions without taking actions; and

· Zegona has drawn down £10 million from its current debt facility with Barclays, which expires on 14 January 2021. Under the facility agreement, Zegona can no longer draw the remaining amount. The £10 million credit facility provided by Virgin matured on 30 April 2020. Zegona expects to refinance the current debt facility during the assessment period in a similar amount and on similar terms as the existing facility. This is considered to be reasonable given the small size of the facility compared to the value of the Euskaltel shares that it is secured on. In the unlikely event that the facility agreement is not refinanced, the current pledge to Barclays on Euskaltel shares will cease and therefore Zegona could, if additional liquidity was needed, sell part of its shareholding in Euskaltel.

In addition to the already deliberately conservative base model, we also considered the principal and emerging risks discussed under section 3 above to determine how far they had already been captured in the base model and whether any of them needed to be further considered in assessing viability as shown below. Each of these principal risks take account of the impact of Covid-19 as an emerging risk:

Based on the evaluation of the principal risks above, combined with a consideration of a number of other factors (including the different ways Covid-19 could be expected to impact Zegona) the Directors identified a severe but plausible downside scenario which was further used to stress test the base numbers.

The downside scenario includes a number of negative developments occurring in combination without considering the impact of a number of achievable mitigating actions. The scenario includes: a reduction in the amount of debt facility that can be refinanced from £30 million to £15 million; a doubling of abort costs; and a significant increase in operating costs resulting from a range of sources.

4. Results of the assessment

The assessment showed that in both the base case and the downside scenario, Zegona would have sufficient cash and liquid resources to continue in operation throughout the assessment period without taking any mitigating actions available to it.

Given the small size of the drawn portion of Zegona's existing facility compared to the value of the Euskaltel shares that it is secured on, Zegona believes it is probable it will be able to refinance the facility. However, the assessment also shows that, if the facility was not refinanced, Zegona would still have sufficient cash and liquid resources to continue in operation throughout the assessment period, although this would be after deploying one or more of a range of the available mitigating actions. These include reducing discretionary expenditure, selling part of Zegona's investment in Euskaltel or retaining part of the Euskaltel dividend.

5. Viability statement

Taking into account Zegona's current position and principal and emerging risks and uncertainties, the Directors confirm that we have a reasonable expectation that Zegona will be able to continue in operation and meet its liabilities as they fall due over the three years to December 2022.

Corporate social responsibility

We recognise our obligations to act responsibly, ethically and with integrity in its dealings with staff, suppliers and the environment as a whole. We are committed to being a socially responsible business.

Our people

We value and respect the unique contributions of each individual, and we are committed to ensuring that every employee is treated with dignity and respect, and has a meaningful opportunity to contribute to Zegona's success.

Zegona's employees are encouraged to actively engage with charitable activities and are supported in any such efforts.

Zegona recognises that a productive workforce requires a breadth of experience and perspectives achieved through hiring individuals with diverse experience. Board Directors and senior managers have been appointed in order to bring required skills, knowledge and experience. On 5 February 2020, two female independent Non-Executive Directors were appointed to the Board, improving Zegona's diversity. The Nomination and Remuneration Committee will continue to consider the diversity of the Board for further new appointments.

The table below shows the breakdown of our workforce at the end of 2019. As noted above, since then, two female directors have been appointed to the Board.

This breakdown excludes directors of companies in liquidation at 31 December 2019. Senior management is per the definition in section 414C of the UK Companies Act 2006.

Culture

Ethical values and behaviours are embedded in the corporate culture which the Board upholds. The Directors foster a culture where transparency, openness, integrity and constructive challenge are actively encouraged and the Board engages regularly with senior management to ensure a positive culture.

Human rights

As part of our effort to conduct business in an ethical manner, Zegona has not engaged in and will not engage in business practices or activities that compromise fundamental human rights.

Environmental matters

We are committed to minimising Zegona's impact on the environment and seek to encourage our employees to recycle, minimise energy wastage, and do their part to ensure that Zegona acts responsibly.

Since 1 October 2013, the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 has required all UK quoted companies to report on their greenhouse gas (GHG) emissions, which are classified as either direct or indirect and which are divided further into Scope 1, Scope 2 and Scope 3 emissions. Direct GHG emissions are emissions from sources that are owned or controlled by Zegona. Indirect GHG emissions are emissions that are a consequence of Zegona's activities but that occur at sources owned or controlled by other entities.

Scope 1 emissions: Direct emissions from sources controlled by Zegona.

Scope 2 emissions: Indirect emissions attributable to Zegona due to its consumption of purchased electricity.

Scope 3 emissions: Other indirect emissions associated with activities that support or supply Zegona's operations.

Zegona is required to report Scope 1 and 2 emissions for its reporting year to 31 December 2019. Scope 3 is not yet mandatory, however, we have again chosen to report Scope 3 emissions. Zegona has no Scope 1 emissions.

All emission factors have been selected from the emissions conversion factors published annually by Defra and the International Energy Agency. Scope 2 emissions have gone up due to an increase in Zegona's office space.

Board engagement with our key stakeholders

Section 172 of the Companies Act 2006 requires a Director of a company to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing this, section 172 requires a Director to have regard, among other matters, to: the likely consequences of any decision in the long term; the interests of the company's employees; the need to foster the company's business relationships with suppliers, and others; the impact of the company's operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly with members of the company.

The Directors give careful consideration to the factors set out above in discharging their duties under section 172. More information about who our key stakeholders are and how we engage with them is provided on page 24.

The Strategic Report was approved by the Board on 13 May 2020 and is signed on its behalf by:

Eamonn O'Hare

Chairman and Chief Executive Officer

Eamonn O'Hare, Chairman and CEO (appointed 19 January 2015)

Eamonn has spent over two decades as a board member and senior executive of some of the world's fastest growing consumer and technology businesses. From 2009 to 2013 he was CFO and main board director of the UK's leading entertainment and communications business, Virgin Media. Eamonn helped lead the successful transformation of this business and its strategic sale to Liberty Global for US$24 billion, crystallising US$14 billion of incremental shareholder value. From 2005 to 2009, he served as the CFO for the UK division of one of the world's largest retailers, Tesco plc. Before joining Tesco, Eamonn was CFO and main board director of Energis Communications and helped lead the turnaround of this high profile UK telecommunications company. Prior to this, he spent 10 years at PepsiCo Inc. in senior executive roles in Europe, Asia and the Middle East. Eamonn's early career was spent in the aerospace industry with companies that included Rolls Royce and British Aerospace.

Eamonn is a proprietary director of Euskaltel. He also serves as a non-executive director on the main board of Dialog Semiconductor Plc, a leading edge consumer technology business that provides critical components for the world's most successful mobile device brands. The fees for these appointments are disclosed in the Directors' Remuneration Report on page 38.

Eamonn has a degree in Aerospace Engineering from the Queen's University Belfast and an MBA from the London Business School.

Robert Samuelson, Executive Director and COO (appointed 19 January 2015)

Robert was Executive Director Group Strategy of Virgin Media from 2011 to 2014, during which time he was centrally involved in the sale of the business to Liberty Global and in the post-merger integration process. Prior to this, Robert was a managing partner at Virgin Group with global responsibility for developing and realising returns from Virgin's telecommunications and media businesses. Before joining Virgin Group, Robert was a director at Arthur D Little Ltd, where he co-led the European corporate finance practice, providing strategic advice to major European telecommunications operators. His early career was spent with British Aerospace and Royal Ordnance in engineering and production management roles.

Robert is a proprietary director of Euskaltel and the fees for this appointment are disclosed in the Directors' Remuneration Report on page 38.

Robert studied Natural Sciences at Cambridge University and has an MBA from Cranfield School of Management.

Mark Brangstrup Watts, Non-Executive Director (appointed 19 January 2015 and resigned 12 May 2020)

Mark co-founded the Marwyn asset management group in 2002 and has many years of experience deploying private equity investment strategies in the public markets. The Marwyn funds' highly acquisitive portfolio companies have delivered approximately 100 bolt-on acquisitions with Mark offering significant mergers and acquisitions, equity capital markets and corporate finance experience.

Mark brings his background in strategic consultancy to the management team having been responsible for strategic development projects for international clients including Ford Motor Company (US), Cummins (Japan) and 3M (Europe).

Mark is a managing partner in Marwyn Capital LLP and Marwyn Investment Management LLP. Mark is currently an executive director of Le Chameau Group Plc, Safe Harbour Holdings Plc and Wilmcote Holdings Plc. Mark is also a non-executive director of Marwyn Asset Management Limited (which, as at the date of approval of the Annual Report, holds 19.16% of the share capital of Zegona in its capacity as agent for an on behalf of its discretionary managed clients) and was previously a non-executive director of BCA Marketplace Plc, Advanced Computer Software Plc, Entertainment One Ltd, Melorio Plc, Inspicio Plc and Talarius Plc, amongst others.

Mark was a member of the Nomination and Remuneration Committee but will not stand for re-election at the 2020 AGM and has stepped down from the Board with effect from 12 May 2020.

Murray Scott, independent Non-Executive Director (appointed 31 July 2015)

Murray has almost 20 years of experience in the international telecommunications sector, ranging from the then start-ups Equant and Interoute to BT plc, where he served as CFO for the UK products sub-division of BT Global Services which had revenues of £1.6 billion. After leaving BT, Murray successfully pursued a career as an interim director and consultant for a number of years before being appointed as Finance Director of Premia Solutions Limited, an insurance intermediary, on 1 January 2020.

Murray studied Natural Sciences at Cambridge University and qualified as a Chartered Accountant with KPMG LLP in London.

Murray is a member of the Audit and Risk Committee and the Nomination and Remuneration Committee. Murray is not standing for re-election to the Board at the 2020 AGM.

Richard Williams, independent Non-Executive Director (appointed 9 November 2015)

Richard has spent most of his career in European telecommunications, most recently as a Director of Investor Relations at Altice, and prior to that, Virgin Media. Richard is a qualified Chartered Accountant and has held financial planning roles at Walt Disney and ITV Digital. He joined Telewest Communications in 1999 in an investor relations role. Telewest later merged with NTL and was rebranded to Virgin Media. Richard led Virgin Media's investor relations activity through to the acquisition of the company by Liberty Global in 2013. Richard then joined Altice, where he supported the company's IPO and Altice's acquisition of SFR and Portugal Telecom, before eventually leaving the company.

Richard is Chair of the Nomination and Remuneration Committee and is a member of the Audit and Risk Committee. Richard will step down as Chair of the Nomination and Remuneration Committee following the 2020 AGM but will continue to be a member of the committee.

Ashley Martin, independent Non-Executive Director (appointed 6 February 2017)

Ashley brings a wealth of complementary experience to the Board. Ashley was Audit Committee Chair at Rightmove plc from 2009 to 2018 and, in that role, gained valuable insight into an entrepreneurial, high-growth consumer technology business. On 1 September 2018, Ashley was appointed as a non-executive director of the international research data and analytics group YouGov plc. Ashley has also enjoyed a successful executive career spanning 35 years in larger listed companies, with a particular focus on mergers and acquisitions. Ashley was Global Chief Financial Officer of private equity-backed Engine Holding LLC, and was previously the Group Finance Director of Rok plc, the building services group, and Group Finance Director of the media services company, Tempus plc.

Ashley qualified as a Chartered Accountant with Armitage & Norton (now part of KPMG).

Ashley is Chair of the Audit and Risk Committee and a member of the Nomination and Remuneration Committee.

Kjersti Wiklund, independent Non-Executive Director (appointed 5 February 2020)

Kjersti brings significant experience from a series of senior global telecommunications roles, including as director of group technology operations at Vodafone and chief operating officer of VimpelCom. Kjersti has also held senior executive positions at Kyivstar, Digi Telecommunications and Telenor.

Kjersti has also gained valuable insight into an entrepreneurial, high growth consumer technology company as Remuneration Committee Chair at Trainline plc. She was previously a non-executive director of Laird plc in the UK, Cxense ASA and Fast Search & Transfer ASA in Norway and Telescience Inc in the USA and is currently a non-executive director of Babcock International Group PLC and Spectris PLC.

Kjersti is a member of the Audit and Risk Committee.

Suzi Williams, independent Non-Executive Director (appointed 5 February 2020)

Suzi brings skills and experience from over 25 years in telecommunications, media and consumer businesses in the UK and internationally. As Chief Brand and Marketing Officer at BT, she was part of the team who transformed the business. Prior to that, she was Commercial Development Director at Capital Radio Group and held senior leadership roles at Orange, the BBC, KPMG Consulting, and Procter & Gamble Europe.

A board member at The AA since 2015, Suzi was Chairman of its Remuneration Committee until November 2019. She currently sits on its Risk & Nomination Committees. In January 2020, she joined the board of WorkSpace Group and sits on all of its board committees. Suzi also advises a number of early stage technology and AI businesses.

Suzi is a member of the Nomination and Remuneration Committee and, subject to her re-appointment at the 2020 AGM, will become the Chair of this committee.

Overview

This report is presented separately for the sake of clarity. Nevertheless, it forms part of the Directors' Report and has been approved by the Board and signed on its behalf as though it were a part of the Directors' Report.

We recognise the importance of sound corporate governance commensurate with the size of Zegona and the interests of shareholders, and remain committed to developing the corporate governance arrangements as the business further evolves.

The following sections of this report show how Zegona applies the main provisions set out in the 2018 UK Corporate Governance Code (the "Code"), issued by the Financial Reporting Council ("FRC"), as would be required by the Listing Rules of the Financial Conduct Authority ("FCA") if Zegona were admitted to the Premium segment of the Official List, and how Zegona meets the relevant information provisions of the Disclosure and Transparency Rules of the FCA (the "DTR").

Zegona's principal risks are described on pages 9 to 11. The Directors' Report on pages 40 to 42 also contains information required to be included in this statement of corporate governance.

The Board of Directors

Zegona is led and controlled by an effective Board. The Board at the date of approval of this report comprises two Executive Directors and five Non-Executive Directors. The two Executive Directors are Eamonn O'Hare (Chairman and Chief Executive Officer ("CEO")) and Robert Samuelson (Chief Operating Officer ("COO")). The Non-Executive Directors are Murray Scott, Richard Williams, Ashley Martin, Kjersti Wiklund and Suzi Williams. Murray is not standing for re-election at the 2020 AGM. Mark Brangstrup Watts, who served as a Director for five years, is also not standing for re-election at the 2020 AGM and stepped down from the Board with effect from 12 May 2020.

Biographical details of all Directors and details of their committee membership at the date of approval of this report appear on pages 16 to 18. Consideration of the Board size and composition is kept under regular review by the Nomination and Remuneration Committee.

Eamonn O'Hare, as the Chairman and CEO, is primarily responsible for the running of the Board and for the day-to-day running of Zegona. All Board members have full access to Zegona's advisers for seeking professional advice at Zegona's expense and our culture is to openly discuss any important issues and frequently engage with Board members outside of formal meetings. Operating and financial responsibility for all subsidiary companies is the responsibility of the Board.

The Board has adopted a Board Charter, available on Zegona's website, which sets out:

· the Board's collective vision on Zegona's strategy and objectives;

· the Board's approach to the conduct of its business and the parameters within which it will operate, including the management of any Board or investor disagreements; and

· the Board's agreed focus areas for further action.

Board interaction

The Board meets formally at least six times a year but also frequently meets additionally on an ad hoc basis where necessary. Meetings are prepared for using a standing agenda which is updated to incorporate any ad hoc business or matters of interest. The Board is presented with papers from management to support its discussions including financial information, information on investor relations and details of acquisition targets and deal progress. External advisors are also invited to meetings from time to time to advise Board members directly where this is felt necessary.

The Executive Directors actively and constructively encourage challenge and seek input from the Non-Executive Directors to draw on their extensive experience and knowledge. They believe that the role of the Non-Executive Directors in providing independent challenge is a vital component of an effective Board.

Board committees

The Board has established two principal committees, the Audit and Risk Committee and the Nomination and Remuneration Committee, to assist it in the execution of its duties. If the need should arise, the Board may set up additional committees as appropriate. The committees' terms of reference are available on Zegona's website, www.zegona.com, or by request from the Company Secretary. Each of the committees is authorised, at Zegona's expense, to obtain legal or other professional advice to assist in carrying out its duties. No person other than a committee member is entitled to attend the meetings of these committees, except by invitation of the chairman of that committee.

Current membership of the committees is shown on pages 16 to 18. The composition of these committees is reviewed regularly, taking into consideration the recommendations of the Nomination and Remuneration Committee.

Independence of the Board

The Code specifies that the Board should identify in the annual report each Non-Executive Director it considers to be independent. The Board considers that Ashley Martin, Murray Scott, Richard Williams, Kjersti Wiklund and Suzi Williams are independent Non-Executive Directors for the purposes of the Code and have no relationships or circumstances which are likely to affect, or could appear to affect, their judgement as Directors.

Similarly, although Mark Brangstrup Watts represents a significant shareholder, is interested in Core Investor Shares of Zegona Limited (as detailed in note 21 to the Financial Statements), and is a beneficial owner of Axio Capital Solutions Limited ("Axio" or the "Company Secretary"), which provides certain company secretarial & administration services and financial & accounting services to Zegona, the Board considers that he nonetheless, during his term in office, had the characteristics of an independent Non-Executive Director on the basis that:

· his extensive experience as a non-executive director means he was capable of maintaining the independent character and judgement necessary to fulfil the role; and

· he was independent of the Executive Directors.

The Board is therefore confident that Mark's ability to fulfil the role of Non-Executive Director was not fettered.

Board and committee attendance

Attendance at the Board and committee meetings held during 2019 was:

The number of Board meetings held reflects the ongoing assessment of Zegona's options for the investment in Euskaltel over the year.

Board and Committee changes

During 2019, Korn Ferry, a leading executive search consulting firm, was engaged to identify a suitable individual to join Zegona's Board. Other than the engagement to search for an additional independent non-executive Director, Zegona has no other connection with Korn Ferry. Following a rigorous series of interviews with members of the Board and management team, Kjersti Wiklund and Suzi Williams were identified as outstanding candidates and, on the recommendation of the Nomination and Remuneration Committee and taking into account that Murray Scott will not be standing for re-election at the 2020 AGM, both were appointed with effect from 5 February 2020. On this date, Kjersti was appointed to the Audit and Risk Committee and Suzi was appointed to the Nomination and Remuneration Committee. Biographical details about Kjersti and Suzi can be found on pages 17 and 18. The Board will seek to appoint one of the independent non-executive directors to be the Senior Independent Director ("SID") following the 2020 AGM.

Kjersti and Suzi have been provided with extensive written information on Zegona on both its:

· business and financial documents, including analysts' reports, management accounts, budget, shareholder register and other key agreements and contracts; and

· corporate governance documents, including Board Charter, committee terms of reference, voting reports from the 2019 AGM, Board effectiveness evaluation and Zegona's policies and procedures.

They have also spent time with Zegona's Executive Directors and management team to review and understand all aspects of Zegona's business. In addition, they have both visited the Euskaltel headquarters in Spain and met with key members of the Euskaltel management team, including the Chairman, CEO and CFO. 

Mark Brangstrup Watts stepped down from the Board with effect from 12 May 2020. Following his resignation, the Nomination and Remuneration Committee is now solely comprised of independent Non-Executive Directors. In addition, Suzi Williams, if re-elected at the 2020 AGM, will take over as Chair of the committee. The Board believes that these changes further strengthen the independence and capability of the committee and demonstrate Zegona's intent to continue to challenge and enhance its corporate governance framework as the business grows and evolves.

Directors' terms of service

Zegona's Articles of Association require each Director to retire from office and offer themself for re-election or election, as the case may be, at each AGM. Accordingly, each of the Directors will retire from office at the 2020 AGM and, with the exception of Murray Scott and Mark Brangstrup Watts, seek to be re-elected by Zegona's shareholders. The Chairman is satisfied that the performance of all of the Directors continues to be effective and demonstrates their ongoing commitment to the role and as such supports their re-election.

The Executive Directors have service contracts which may be terminated on no less than 12 months' notice by either party. The Non-Executive Directors each have current service contracts which can be terminated on 6 months' notice. All Non-Executive Directors' continued service is dependent on annual re-election by shareholders and the annual Board effectiveness review. Details of the unexpired terms of the service contracts are set out in the Directors' Remuneration Report.

Directors' indemnities

As permitted by the Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third party indemnity provision as defined by section 234 of the Companies Act 2006 (the "Act"). The indemnity was in force throughout 2019 and is currently in force. This confirmation is given and should be interpreted in accordance with the provisions of section 236 of the Act.

Zegona also purchased and maintained throughout the year Directors' and Officers' liability insurance.

Conflicts of interest

Zegona's Articles of Association provide for a procedure for the disclosure of and management of risks associated with Directors' conflicts of interest. Zegona's Board Charter sets out the process for managing significant Board or investor disagreements and/or conflicts. Notwithstanding that no material conflict of interest has arisen in the year, the Board considers these procedures to have operated effectively.

Company secretary

Axio acts as Zegona's named company secretary and assists the directors in ensuring Zegona is managed, controlled and administered within the parameters of its governing and constitutional documents. All directors have access to the advice of Axio, which is responsible for advising the Board on all governance matters. Axio is regulated by the Jersey Financial Services Commission.

Compliance with the UK Corporate Governance Code

The Code sets out a number of principles in relation to: board leadership and company purpose; division of responsibilities; composition, succession and evaluation; audit, risk and internal control; and remuneration. A copy of the Code is available on the FRC's website at www.frc.org.uk.

Following admission to the Main Market, save as set out below, the Board has voluntarily (as Zegona has a Standard Listing) complied with the Code applicable to non-FTSE 350 companies, so far as practicable. Details and explanations of non-compliance with the Code are set out below:

Combined Chairman and CEO

Provision 9 of the Code recommends that the roles of Chairman and the Chief Executive Officer should not be occupied by the same person and that the Chairman should be independent on appointment; Zegona does not comply with this requirement. The Board believes that Eamonn O'Hare's skills, knowledge and leadership enable him to effectively perform both roles and that, at this time, distinguishing between these roles would be of no additional benefit to Zegona.

Separation of the roles was determined to be a low priority in a corporate governance review completed by an external party (Ernst & Young LLP, "EY") in 2017. In addition, this matter was actively re-considered as part of the exercise to develop Zegona's Board Charter and as part of Zegona's annual assessment of Board effectiveness. The Board remains aware of this area of non-compliance and considers the continued appropriateness of these two roles remaining combined on a regular basis giving due regard to shareholder concerns and the time commitment required for each role as the business evolves. Zegona maintains a schedule of matters reserved for the Board which prevents Eamonn from authorising certain corporate actions without a formal resolution of the Board.

Appointment of a Senior Independent Director

Provision 12 of the Code provides that one Non-Executive Director should be appointed as a SID to provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders. Zegona does not currently have a SID and this has been the subject of active consideration since Zegona's formation, including as part of the independent corporate governance review completed by EY in 2017 and the exercise to develop Zegona's Board Charter. The Board fully recognises the value that can be provided by a SID and will seek to appoint one of the independent Non-Executive Directors to be the SID following the 2020 AGM.

Publication of internal policy documents

Provision 14 of the Code recommends that the responsibilities of the chair, chief executive, SID, board and committees be set out in writing, agreed by the Board and made publicly available.

Zegona has clear terms of reference for each of its committees, a Board Charter and a set of matters reserved for the Board, each of which is publicly available on Zegona's website. As Zegona currently has a combined CEO and Chairman (as described above), Zegona has not felt the need to delineate these roles in further detail. Zegona will formalise the responsibilities of the SID as part of the appointment process.

Independence of Board committees

During 2019, the Nomination and Remuneration Committee was comprised solely of Non-Executive Directors, however provision 32 of the Code recommends remuneration committees to be comprised of independent Non-Executive Directors. As noted above, Mark Brangstrup Watts was not fully independent. Mark resigned from the committee with effect from 12 May 2020. As a result, the committee comprises now solely independent Non-Executive Directors. The Audit and Risk Committee also currently comprises of independent Non-Executive Directors.

Employee engagement

Provisions 2, 5 and 6 provide guidance for the implementation of procedures meant to ensure Zegona engages with and monitors its workforce. Given Zegona currently has only five employees (excluding directors), the Board believes the implementation of any formal steps or procedures to engage with the workforce are not required as informal communications occur regularly between all employees and the Executive Directors, including weekly team meetings.

Evaluation of the Board, committees and individual Directors

The Board has conducted an annual evaluation of its own performance and that of its committees by means of a questionnaire requiring written responses from the Directors. To ensure objectivity, the questionnaire was designed in consultation with EY. The questionnaire was drafted having regard to the balance of skills, experience, independence and knowledge contributed by its members, as well as the successful operation of the Board as a unit, its diversity and other factors relevant to its effectiveness.

The resulting report, analysing responses and drawing anonymous conclusions, was sent to each Director for consideration and discussed at a meeting of the whole Board. The Board agreed that the key findings of this discussion will be used as a basis to develop a workshop to be facilitated by EY when the Board is able to meet face-to-face. The objective of this workshop will be for the Board to discuss the key issues that it feels will enable it to be more effective in the future and identify tangible actions.

Whistleblowing policy

All employees are encouraged to raise genuine concerns about possible improprieties in the conduct of Zegona's business, whether in matters of financial reporting or other malpractices, at the earliest opportunity and in an appropriate way. Zegona has put in place a whistleblowing policy to facilitate this.

The aims of this policy are:

· to encourage employees to report suspected wrongdoing as soon as possible, in the knowledge that their concerns will be taken seriously and investigated as appropriate, and that their confidentiality will be respected;

· to provide employees with guidance as to how to raise those concerns; and

· to reassure employees that they should be able to raise genuine concerns in good faith without fear of reprisals, even if they turn out to be mistaken.

Share dealing

Zegona has in place systems to ensure compliance by the Board, Zegona and its applicable employees in relation to dealings in securities of Zegona and Euskaltel and has adopted a share dealing code for this purpose. We believe that the share dealing code adopted by the Board is appropriate for Zegona's size and complexity and that it complies with the EU Market Abuse Regulation (2014/596/EU). The Board complies with these provisions and takes all reasonable steps to ensure compliance by Zegona's 'applicable employees'.

Relations with Zegona's stakeholders

Zegona does not currently have an operating business and, until it does so again, has a very limited number of stakeholders given that Zegona has no customers and its suppliers are primarily professional advisers. All Directors have frequent interactions with Zegona's small workforce.

The Board is always available for communication with shareholders and the Executive Directors frequently engage constructively with current and potential shareholders, with feedback regularly discussed in depth at Board meetings. Extensive discussions were also held with Zegona's major shareholders as part of the Placing as well as a large number of prospective shareholders. All shareholders have the opportunity, and are encouraged, to attend and vote at the general meetings during which the Board is available to discuss issues affecting Zegona. Barclays Bank plc, as Zegona's joint corporate broker, provides reports and attend Board meetings, as appropriate, to provide feedback to the Non-Executive Directors on shareholders' views. These views were actively considered in the Board's decision to undertake the buyback programme, which was announced in January 2020.

Annual general meeting

The next AGM will be held at 10 Snow Hill, London, EC1A 2AL at 12:00 p.m. on 9 June 2020. The AGM is an opportunity for shareholders to vote on certain aspects of Zegona's business. The Directors will also be available to answer any shareholder questions prior to and after the meeting.

Audit and Risk Committee Report

I am pleased to present the 2019 report of the Audit and Risk Committee (the "A&RC"). The A&RC is an essential part of Zegona's governance framework, to which the Board has delegated oversight of Zegona's financial reporting, internal controls, risk management and the relationship with the external auditor.

In discharging its duties, the A&RC embraces its role of protecting the interests of shareholders with respect to the integrity of financial information published by Zegona and the effectiveness of the audit process. The A&RC's role and responsibilities are set out in its terms of reference, which are available on Zegona's website and from the Company Secretary.

Committee membership and meetings

The membership of the A&RC during 2019 continued to be Ashley Martin (Chairman), Murray Scott and Richard Williams, all of whom are independent Non-Executive Directors as required by provision 24 of Code. The Board has determined that Ashley Martin has recent and relevant financial experience due to his previous CFO roles at listed and private equity backed businesses. All three A&RC members qualified as Chartered Accountants. In line with the Code, the A&RC as a whole possesses competence relevant to the sector in which Zegona operates through the digital media and consumer experience of Ashley Martin and the telecommunications experience of Richard Williams and Murray Scott. Kjersti Wiklund was appointed to the A&RC on 5 February 2020 bringing additional IT and telecommunications experience to the A&RC.

The A&RC normally meets at least three times a year with additional meetings arranged if necessary. In 2019, the A&RC met in March, September and December and has subsequently met in May 2020. The scheduling of these meetings is designed to be aligned with the financial reporting timetable, thereby enabling the A&RC to review the interim financial report, the audit plan ahead of the year end audit and the annual report, as well as to maintain a view of the internal controls and risk management processes throughout the year.

The Company Secretary acts as secretary to the A&RC. The A&RC invites the Chief Financial Officer to all meetings and other members of the finance and management team as may be appropriate for the business of the meeting, as well as senior representatives of the external auditor. The A&RC meets separately with the external auditors to seek their views without management present, and the A&RC Chair keeps in touch with the Chief Financial Officer as well as other members of the management team and the lead audit partner periodically outside of formal meetings. The A&RC has the right to invite any other Directors and/or employees to attend meetings where this is considered appropriate.

The A&RC Chair reports formally to the Board on the key matters considered at each A&RC and minutes of those meetings are circulated to the Board.

Committee effectiveness

The effectiveness of the A&RC was considered by the Board as part of the annual Board effectiveness evaluation. The feedback was positive and confirmed that the A&RC remains effective and provides robust challenge.

Activities during the year

Since the last Audit and Risk Committee Report, the A&RC has undertaken the following activities:

Financial reporting:

· Confirmed that the Financial Statements were fair balanced and understandable. In this respect, the A&RC considered, inter alia:

• the key messages in the annual report and their consistent application in the front and back end of the report;

• the disclosures in connection with the accounting for Euskaltel as an associate;

• the completeness of the key risks identified;

• whether the whole story is presented and whether any sensitive material has been omitted;

• whether the absence of any non-GAAP key performance indicators is appropriate; and

• whether there is a clear and cohesive framework for the annual report.

· Reviewed the going concern assumption and the assessment forming the basis of the longer term viability statement. The A&RC reviewed the work undertaken by management to assess Zegona's resilience to the principal risks under various stress test scenarios and confirmed that a 3-year assessment period remained appropriate.

· Considered the key judgements and estimates made by management in preparing the Financial Statements, as follows:

- Date of accounting for Euskaltel as an associate - the A&RC reviewed and challenged the evidence to support the effective date of gaining significant influence over Euskaltel as being 10 July 2019 and was satisfied with the conclusion reached;

- Valuation of the contingent consideration - the A&RC reviewed the detailed local tax and legal advice and related probabilities associated with the gaining of merger approval from the Spanish Tax Authorities in order to facilitate settlement of the contingent consideration from the sale of Telecable SA in 2017. The A&RC was satisfied with the conclusion reached and resulting valuation; and

- Accounting for Euskaltel as an associate and the related purchase price adjustments to determine the level of goodwill and intangible assets to be recorded in the Statement of Financial Position - the A&RC reviewed the comprehensive valuation work undertaken by management for both intangible assets and the fair value of tangible and other assets. We concluded that the accounting and related disclosures in relation to Euskaltel were appropriate. KPMG also audited the application of IAS 28 and the principles of IFRS 3, and the related disclosures.

In all of the above judgements, the A&RC also considered the work undertaken by KPMG and reports to the A&RC in support of the position adopted by management.

Other considerations:

· Reviewed the effectiveness of Zegona's risk management and internal controls and disclosures made in the annual report on this matter, including the review of an annual assurance statement provided by management assessing the effectiveness of Zegona's risk management and internal control systems;

· Reviewed and agreed the scope of the audit work to be undertaken by the external auditor and assessed the audit and non-audit fees to be paid, as well as the independence and objectivity of the auditor;

· Considered the effectiveness of the external audit process, following the receipt of feedback from the management team, Executive Directors, Non-Executive Directors and other service providers involved in the audit process by way of a questionnaire;

· Reviewed and made a recommendation to the Board with regard to the re-appointment of the external auditor, taking into account auditor effectiveness and independence, partner rotation and other factors which may impact the external auditor's re-appointment;

· Reviewed the interim Financial Statements, including the critical accounting judgements and estimates used in preparing them;

· Reviewed management's updates to Zegona's main control document, the Financial Position and Prospects memorandum. The A&RC also reviewed the updates made to Zegona's risk register; and

· Reviewed Zegona's whistleblowing policy and anti-bribery and anti-corruption policy.

Independence of the external auditor

KPMG was appointed as Zegona's external auditor on 15 December 2016, with no changes to the key audit partner since appointment.

During 2019, non-audit fees were pre-approved in relation to KPMG's agreed upon procedures on the interim financial statements for the six months ended 30 June 2019. The fees for these procedures totalled €11,000, which is significantly lower than the audit fees for the Financial Statements for the year ended 31 December 2019 and therefore auditor objectivity and independence is not deemed to be compromised by the level of non-audit fees.

The A&RC has set a threshold of €11,000 (£10,000) for pre-approving non-audit fees. All of KPMG's services have been pre-approved and reported to the A&RC.

Risk management and internal control systems

The Board is responsible for establishing and maintaining Zegona's system of internal control and reviewing its effectiveness. The Board has delegated the duty to keep under review the adequacy and effectiveness of Zegona's internal financial controls and internal control and risk management systems to the A&RC.

Internal control systems are designed to meet the particular needs of Zegona and the particular risks to which it is exposed. The procedures are designed to manage rather than eliminate risk and, by their nature, can only provide reasonable but not absolute assurance against material misstatement or loss.

Zegona does not have a separate internal audit function as the Board does not feel this is currently necessary due to the size of the business and the simplicity and low volume of transactions, coupled with the nature and the extent of internal controls and Board oversight and involvement. The A&RC will continue to regularly review the need for an internal audit function as the business evolves and develops.

A risk assessment that identifies the strategic, operational and financial risks facing the business and considers the appropriate mitigating controls has been prepared as a means of identifying and monitoring risks. This assessment is continually monitored by the management team and reviewed and discussed by the A&RC at least twice per year. The assessment has continued to be updated to best reflect the risks arising from Zegona's increasing ownership interest in Euskaltel and those applicable to its ongoing strategy.

Zegona has in place numerous internal controls in relation to financial reporting including:

· principal strategic, commercial, competitive, financial and regulatory risks are assessed and quantified by executive management following which they are considered by the Board;

· a team of professional advisors including legal, capital markets, M&A, accounting, regulatory, and PR providing advice to management and the Board;

· a schedule of matters reserved for the Board to ensure that the Board is involved in all key decisions of the business;

· regular updates directly from the CEO of Euskaltel on the competitive landscape and on the prospects for the business;

· a comprehensive risk register which is reviewed at least bi-annually and updated to take account of developments within the Group;

· a comprehensive system of budgeting, forecasting and monthly reporting including analysis of variances

· segregation of responsibilities for those responsible for preparing information from those reviewing information to reduce risk of error; and

· an in-house treasury function responsible for managing cash, foreign exchange risk and ensuring compliance with banking and loan agreements.

Through the above procedures the Board with advice from the A&RC has considered all significant aspects of internal control up to the day of this report. No significant control findings or weaknesses have been identified from this review.

Ashley Martin

Chairman of the Audit and Risk Committee

Nomination and Remuneration Committee Report

The roles and responsibilities of the Nomination and Remuneration Committee (the "N&RC") are set out in its terms of reference, which are available on Zegona's website and from the Company Secretary.

The membership of the N&RC during 2019 continued to be Richard Williams (Chairman), Mark Brangstrup Watts, Murray Scott and Ashley Martin, all of whom were Non-Executive Directors, and all of whom were independent except Mark. Mark Brangstrup Watts resigned from the N&RC with effect from 12 May 2020. Suzi Williams was appointed to the N&RC on 5 February 2020 and, subject to her re-appointment at the 2020 AGM, will become the chair of the N&RC. The members of the N&RC are now fully independent.

Suzi has considerable experience in the field having been the chair of the Remuneration Committee at AA plc from August 2017 to October 2019. She is also a member of the Nomination and Remuneration Committees at Workspace Group plc.

The N&RC normally meets twice a year with additional meetings arranged if necessary. In 2019 the N&RC met seven times. The scheduling of the formal N&RC meetings is designed to be aligned with the N&RC's recurring annual activities, including setting of bonus metrics and evaluation of performance against them, and review of the annual remuneration report contained within the annual report.

Since the last Nomination and Remuneration Committee Report, the N&RC has undertaken the following activities:

· Reviewed the bonuses for the Executive Directors and management team for 2019;

· Reviewed the remuneration package for the Executive Directors and management team for 2020, including bonus metrics;

· Assessed the potential value of the Management Shares;

· Reviewed the Articles of Association of Zegona Limited, which contain the terms of the management incentive scheme;

· Reviewed the Directors' remuneration policy and the nomination and remuneration disclosures in the annual report;

· Evaluated the performance of the Board, its committees and its individual Directors; and

· Conducted and finalised the recruitment process for the two new independent Non-Executive Directors and reported its recommendations to the Board.

Richard Williams

Chairman of the Nomination and Remuneration Committee

Directors' Remuneration Report

The information included in this report is not subject to audit other than where specifically indicated. The activities and composition of the Nomination and Remuneration Committee (the "Committee") are set out above on page 28.

Annual Statement - overview from the Chairman of the Nomination and Remuneration Committee

I am pleased to introduce the Directors' Remuneration Report for the year ended 31 December 2019, which includes my statement and the annual report on remuneration for the year.

The Directors' remuneration policy was approved at the AGM of the Company held on 10 June 2019. The substance of the policy has not changed since the 2019 AGM. Full details of the existing remuneration policy are set out of pages 29 to 34 of Zegona's 2018 Annual Report which is available on Zegona's website at www.zegona.com.

The annual report on remuneration gives details on the amounts earned in the year ended 31 December 2019 and how the Directors' remuneration policy will be applied in 2020 and will be subject to an advisory vote at the 2020 AGM.

Our remuneration philosophy is that executive remuneration should be simple and transparent, support the delivery of the business strategy and pay for performance.

In determining the level of pay and bonuses for the Executive Directors, the Committee recognised that management had achieved substantial progress in improving operational and strategic performance at Euskaltel, that Eamonn O'Hare has not received a pay rise since 2015, and that both Eamonn and Robert Samuelson waived their 2018 bonus entitlement to help achieve a critical and successful equity raise in January 2019. The Committee also noted that a key element of their long-term incentive, the exercise of their management shares, would not deliver value if exercised today, nearly five years since they were first issued.

The Executive Directors met the majority of their indicators of achievement in relation to the 2019 bonus objectives and Eamonn O'Hare was rewarded with 94% and Robert Samuelson with 100% of their maximum bonus opportunity of 100% of salary.

Although the Committee feels it is important to remunerate and incentivise the Executive Directors through their basic pay, benefits and annual bonus, the Committee feels very strongly that Executive Directors' long-term incentives should be linked to the creation and delivery of real returns to shareholders. A key element of Zegona's remuneration framework for the Executive Directors and senior management is their Management Shares, which were designed to provide ongoing remuneration in complete alignment with shareholders and have been in place since before Zegona's IPO. It is anticipated that the exercise of Management Shares could result in management receiving ordinary shares, which could potentially be a substantial amount.

The Management Shares are entitled to a return of 15% of the growth in value14 of Zegona since the date the ordinary shares were first admitted to trading on the AIM Market of the London Stock Exchange, subject to shareholders achieving a 5% preferred return per annum on a compounded basis on their net invested capital (the "Preferred Return"). The holders of Management Shares may initially exercise their shares three to five years post the acquisition of Telecable (the initial exercise period) and, even though Zegona entered this initial exercise period on 14 August 2018, the Preferred Return was not achieved between this date and 31 December 2019 and therefore the Management Shares would have delivered no value if they had been exercised in 2019 nor would they have if they were exercised today.

The effects of Covid-19 on the global economy and stock market were not fully apparent at the time that the Committee approved basic salary increases and bonus payouts. The longer-term impact of Covid-19 on Zegona and Euskaltel's likely performance remains unknown. However, the Committee is taking steps to ensure that payouts under the 2020 bonus scheme would not artificially benefit from the fact that share prices are generally currently depressed by the Covid-19 outbreak.

On behalf of the Nomination and Remuneration Committee

Richard Williams

Chairman of the Nomination and Remuneration Committee

13 May 2020

14 Growth in value is calculated by deducting the aggregate invested capital from the sum of Zegona's market capitalisation and the aggregate of all dividends and capital returns made to Zegona's shareholders.

Annual Report on Remuneration

In recognition of the fact that Robert Samuelson had received no increase in base salary since 2015, the Committee awarded a 7% increase to his base salary, effective from 1 January 2019. No other changes have been made to Directors' base remuneration throughout 2019.

It is not expected that there will be any significant change in the way that the remuneration policy will be implemented in 2020 as compared to how it has been implemented previously.

Effective from 1 January 2020, the Committee awarded an increase of 12.6% to Eamonn O'Hare's base salary partly in recognition of the fact that he had received no increase in base salary since 2015. The Committee also awarded an 11.7% increase to Robert Samuelson's base salary which recognises his role in supporting Euskaltel's partnership with Virgin and his ongoing contribution to this aspect of Zegona's plan to create value from its investment in Euskaltel. Both of these increases were effective from 1 January 2020.

The Committee believes the most effective approach is to award bonuses at its discretion based on the Executive Directors' performance in achieving objectives agreed with the Committee. The overall framework for the Executive Directors' annual bonus arrangements for 2020 will remain the same as in 2019, with a maximum bonus opportunity of 100% of salary. The Committee has put in place specific objectives to measure management's performance against, which have been clearly communicated to the management team. The Committee considers that the strategic performance indicators they include are commercially sensitive so will disclose the nature of those indicators on a retrospective basis.

If there are significant changes to the business during 2020, for example due to a fundamental change in nature of the investment in Euskaltel, the Committee will re-evaluate this methodology for awarding bonuses. This will include, where appropriate, designing different qualitative or quantitative criteria for the awarding of bonuses (or a portion thereof) that properly reflect those changes to the business. At all times, the Committee will seek to align management remuneration to Zegona's strategy.

The following information provided in this part of the Directors' Remuneration Report is subject to audit.

Total remuneration

All Directors have entered into service agreements with Zegona. Remuneration of the Directors during the year under the terms of their service agreements are detailed below.

Executive Directors

In the interests of clarity, since the Executive Directors' salaries are set and paid in Sterling, the table has been presented in both Sterling and euros (Zegona's presentational currency). These tables only include remuneration received by the Executive Directors in respect of their employment by Zegona. The fees received from their appointments as proprietary directors of Euskaltel are disclosed on page 38.

Taxable benefits include car allowance and personal tax advice. Pension contributions are made to the individual's private pension arrangements or paid in lieu of such arrangements.

None of the Executive Directors' remuneration in 2019 was attributable to share price growth. No discretion has been exercised to determine remuneration as a result of either share price appreciation or deprecation. Details on Zegona's management incentive scheme (the value of which is based on share price but would have delivered no value had it been exercised in 2019) are provided on pages 82 and 83.

The Executive Directors met the majority of their indicators of achievement in relation to the 2019 bonus objectives and Eamonn O'Hare was rewarded with 94% and Robert Samuelson with 100% of their maximum bonus opportunity of 100% of salary. This was evaluated as follows:

The Committee used its discretion to increase Robert Samuelson's percentage award from 94% to 100% to reflect his strong personal performance.

As context, the Executive Directors did meet several indicators of achievement in relation to the 2018 bonus objectives, however they waived their 2018 bonuses in order to maximise the cash raised from the Placing.

The Committee believes the Directors' remuneration policy in respect of Executive Directors operated as intended in terms of Zegona's performance and quantum.

Non-Executive Directors

There is no element of the Non-Executive Directors' remuneration that is linked to the performance of the business, with the exception of Mark Brangstrup Watts (who resigned with effect from 12 May 2020) who holds a beneficial interest in the Core Investor Shares as explained further in this report.

The remuneration of the Non-Executive Directors during the year is detailed below. In the interests of clarity, since the Non-Executive Directors' salaries are set and paid in Sterling, the table has been presented in both Sterling and euros (Zegona's presentational currency).

Incentive schemes

Through Zegona's incentive arrangements, the following shares (collectively, the "Incentive Shares") have been issued in Zegona Limited (a subsidiary of Zegona Communications plc):

· A ordinary shares to management ("Management Shares"); and

· B ordinary shares to the core investor ("Core Investor Shares").

On exercise, the value of the Managements Shares and Core Investor Shares may be delivered either through the issue of ordinary shares in Zegona Communications plc or in cash.

The incentive schemes entered their initial exercise period on 14 August 2018. As the Preferred Return was not achieved between this date and 31 December 2019, the incentive schemes have not been exercised and would have delivered no value if they had been exercised in 2019.

Once the Preferred Return has been met, the participants in the Management Shares are entitled to 15% of the growth in value of Zegona and the participants in the Core Investor Shares are entitled to 5% of the growth in value of Zegona, provided that Zegona's ordinary shareholders have achieved a 5% Preferred Return per annum on a compounded basis on their net invested capital.

To explain how the Incentive Shares operate, an illustration is provided below of how much would be earned by the holders of the Incentive Shares if they had exercised them on 31 December 2019. The illustration assumes that the exercise was based on the market value of Zegona's ordinary shares at the hypothetical exercise date and, since the deemed market capitalisation of £222.0 million was less than the Preferred Return target of £271.3 million, the holders of the Incentive Shares would not have received any payment. At the same time, Zegona's Main Assets16 were worth £303.7 million but holders of the Incentive Shares cannot receive any payments for this value until it is crystallised.

Directors' interests in the incentive schemes

Eamonn O'Hare and Robert Samuelson hold 3,050 million and 1,525 million Management Shares. No Management Shares were awarded during the year (2018: nil). The total Management Shares held by Directors as at 31 December 2019 were as follows:

Under the arrangements pursuant to which the Management Shares were issued to Executive Directors, the Executive Directors are entitled to keep their Management Shares for a period of time if they are terminated, save if they are terminated for cause. The time period is two exercise periods, save in the case of death or permanent disability when it is until the end of the current exercise period.

Mark Brangstrup Watts holds a beneficial interest in the Core Investors Shares issued to Marwyn Long Term Incentive GP Limited as General Partner to Marwyn Long Term Incentive LP on 23 January 2015. The award value of the Core Investors Shares at the time of issue was £26,500.

Directors' interests in ordinary shares

The Committee intends to keep under consideration the need to adopt formal guidelines in connection with the building of shareholdings in Zegona by Executive Directors. During the year, no such formal requirements or guidelines were adopted and the Committee remains of the view that no such requirements or guidelines are currently needed given that the Executive Directors acquired ordinary shares in the Placing and their interests are significantly aligned with shareholders through their participation in the incentive scheme.

The Directors had the following beneficial interests in the ordinary shares:

The following information provided in this part of the Directors' Remuneration Report is not subject to audit.

Performance graph

The total shareholder return graph below shows the value as at 31 December 2019 of £100 invested on IPO on 19 March 2015, compared with £100 invested in the OMSCI Europe/Communication Telecom Services Index. The Committee considers this index to be appropriate for the purposes of this comparison because it includes mostly European telecommunications companies. The data shown below assumes that all cash returns to shareholders made by Zegona (including the share buyback following acceptance of the tender offer during 2017) are immediately reinvested in ordinary shares.

As discussed on page 8, since Zegona acquired its investment in Euskaltel, the market value of Zegona's shares has typically been less than the value per share of Zegona's Main Assets19. At 31 December 2019, the value of Zegona's Main Assets was worth the equivalent of £1.37 per Zegona share (2018: £1.36). This value was 26% higher than Zegona's share price on 31 December 2019 of £1.09 (2018: 14% higher than Zegona's share price of £1.19).

Chief Executive Officer (CEO) remuneration and relative importance of spend on pay

The table below shows the total remuneration for the CEO (Eamonn O'Hare) and his annual bonus as a percentage of the maximum that could have been paid in respect of each financial year:

The table below shows the salary, benefits and annual bonus for the CEO and average of all of Zegona's employees (excluding Non-Executive Directors):

The table below shows the total pay for all of Zegona's head office employees (as per the table above) compared to distributions paid to shareholders:

Service contract duration

* Under the terms of the service agreements, these appointments are contingent on annual re-election by shareholders and completion of the annual Board effectiveness review.

Other than payments for notice periods, the service agreements contain no entitlements to termination payments. There are no malus or clawback provisions in respect of base salary, pension contributions or benefits, however, the Committee retains discretion to apply such provisions in the case of any bonus award paid to an Executive Director whose appointment is subsequently terminated.

External appointments

Executive Directors are allowed to accept external appointments with the consent of the Board as long as these are not likely to lead to conflicts of interests or significant time commitments. Executive Directors are allowed to retain the fees paid.

During 2019, Eamonn O'Hare earned and retained Non-Executive Director fees in relation to his external appointments of €193,767 and €40,000 in relation to his appointment as a propriety director of Euskaltel.

During 2019, Robert Samuelson earned and retained €68,000 in relation to his appointment as a proprietary director of Euskaltel.

Reappointment

Under the terms of Zegona's Articles of Association, all Directors will be proposed for re-election at the 2020 AGM except Murray Scott and Mark Brangstrup Watts who will not be standing for re-election. All Board members have service contracts and details of the unexpired terms of these service contracts are set out above.

Compensation for loss of office following a change of control

The Directors are not entitled to any special compensation for loss of office pursuant to their directorship or employment contracts following a change of control. However, certain changes of control will entitle the Directors to exercise rights held by them as holders of Management or Core Investor Shares pursuant to the long-term incentive plan in force in respect of Zegona.

Statement of voting at general meeting

The following table sets out the voting in respect of the resolutions to approve the Directors' Remuneration Report and the Directors' Remuneration Policy at the 2019 AGM:

Richard Williams

Chairman of the Nomination and Remuneration Committee

13 May 2020

15 The Non-Executive Directors have not received any other form of remuneration during the current or prior year.

16 The value of Zegona's main assets is the Sterling equivalent of the fair value of Zegona's investment in Euskaltel and its net cash position on 31 December 2019 as discussed on page 8.

17 Calculated in accordance with Zegona Limited's Articles of Association as the sum of Zegona Communications plc's subscription proceeds minus dividends and capital returns.

18 Calculated in accordance with Zegona Limited's Articles of Association as the volume weighted average mid-market price of Zegona Communications plc's ordinary shares for the previous 30 trading days to 31 December 2019.

19 The value of Zegona's main assets is the Sterling equivalent of the fair value of Zegona's investment in Euskaltel and its net cash position as discussed on page 8.

20 Period from incorporation on 19 January 2015 to 31 December 2015.

21 Eamonn did meet several indicators of achievement in relation to his 2018 bonus objectives, however Eamonn waived his 2018 bonus in order to maximise the cash raised from the Placing.

Result

For the year ended 31 December 2019, Zegona's profit before tax was €42.1 million (2018: €9.9 million). Other comprehensive gain was €15.2 million (2018: loss of €2.5 million). Therefore, the total comprehensive income for 2019 was €57.3 million (2018: €7.4 million). Reviews of performance, likely future developments and corporate responsibility are set out in the Strategic Report on pages 1 to 15.

Dividends

Zegona declared an interim dividend, in lieu of a final dividend for 2018, on 31 January 2019 at a rate of 2.5 pence per share, totalling £3.2 million. The dividend was paid on 1 March 2019.

Zegona declared an interim dividend on 2 August 2019 at a rate of 2.5 pence per share, totalling £5.5 million. The dividend was paid on 6 September 2019.

Zegona declared a second interim dividend, in lieu of a final dividend for 2019, on 6 February 2020 at a rate of 2.0p per share, totaling £4.4 million. The dividend was paid on 6 March 2020.

Dividend resolution

A resolution to confirm, approve and ratify the second interim dividend, in lieu of a final dividend for 2019, is proposed for the 2020 AGM. Future dividends will be considered by the Board on an ongoing basis in accordance with Zegona's dividend policy.

Authority to make distributions in specie

At the general meeting on 22 September 2017, the shareholders approved a resolution to permit the Board to satisfy the payment of any dividends declared by Zegona wholly or partly by the distribution of shares in Euskaltel or any successor entity of Euskaltel, from time to time.

Events since the end of the financial year

On 7 January 2020, Zegona announced the commencement of a buyback programme of its ordinary shares for an aggregate purchase price of up to £10 million to run until the end of March 2020 (the "Buyback Programme"). Zegona's Board set a buyback policy that allowed shares to be acquired at prices up to the Underlying Asset Value Per Share (defined for any day as the value in Sterling on the previous trading day of Zegona's investment in Euskaltel (using the €/£ FX rate on that day) and net cash balance divided by the number of Zegona ordinary shares in issue). During the Buyback Programme, which ended on 31 March 2020, Zegona purchased and cancelled an aggregate of 2,442,447 shares for a total of £2,461,592.

The rapid spread of Covid-19 has had an unprecedented global impact on people's day-to-day lives, the economy in which they live and has resulted in volatility on equity markets, with significant declines seen globally. Zegona has reviewed its cash flow forecasts and concluded that the going concern basis remains an appropriate basis of preparation for these Financial Statements given the likely cash flow impact on operations within the 12 months from the date of signing this report.

Powers for the Company buying back its own shares

The shareholders have passed a resolution to authorise Zegona to make market purchases of up to 10% of its current issued ordinary share capital (within specified price parameters). A resolution to renew this authority is proposed for the 2020 AGM. It is intended that we will exercise this authority only if the Board considers that it is in the best interests of Zegona at the time. Any shares repurchased by Zegona may be held in treasury and subsequently resold for cash, cancelled or used for employee share scheme purposes.

Capital structure

At 31 December 2019, Zegona's capital structure was comprised of 221,935,177 ordinary shares. As a result of the Buyback Programme, this was reduced to 219,492,730 ordinary shares at the date of approval of this report. The holders of ordinary shares have the right to receive notice of, attend and vote at all general meetings. Holders of ordinary shares have the right to participate in dividends and any surplus capital on a winding up pari passu as amongst themselves. Where the winding up of Zegona Communications plc entails or is concurrent with the winding up of its subsidiary, Zegona Limited, the assets available for distribution among the holders of ordinary shares will be reduced by such amount as is required to satisfy the rights (if exercised) of Management Shares and Core Investor Shares in Zegona Limited (as detailed in note 21 to the Financial Statements).

Significant agreements subject to change of control provisions

Zegona Limited has issued Management Shares and Core Investor Shares as part of Zegona's incentive arrangements. On a change of control of Zegona, subject to the requirements of the Articles of Association of Zegona Limited, the Management Shares and Core Investor Shares can be exercised with their value being delivered either through the issue of ordinary shares or in cash.

Substantial shareholders

At 31 December 2019 and up to the date of approval of this report, Zegona had been notified under DTR 5 of the following holdings in 3% or more of the issued ordinary shares, which are all held indirectly by asset managers:

The percentage holdings at 13 May 2020 reflect the reduction in shares in issue following the completion of the Buyback Programme on 31 March 2020. During 2020, Invesco, Legal & General and AXA's shareholdings fell below 3%.

Contracts of significance

Mark Brangstrup Watts is an ultimate beneficial owner of Axio. Zegona entered into an agreement with Axio dated 19 December 2016 pursuant to which Axio provides certain company secretarial & administration services and financial & accounting services. Either party may terminate the agreement upon the giving of three months' written notice. During 2019, services totalling €354,182 were received from Axio (2018: €598,027).

Mark Brangstrup Watts is a designated member of Marwyn Capital LLP ("Marwyn"). Zegona entered into an agreement with Marwyn dated 14 March 2016 pursuant to which Marwyn provides office accommodation, services and supplies. Either party may terminate the agreement upon the giving of one month's written notice. During 2019, services totaling €68,717 were received from Marwyn (2018: €68,095).

Independent auditor

KPMG has expressed its willingness to continue to act as auditor to Zegona and a resolution for its re-appointment will be proposed at the 2020 AGM. KPMG has confirmed that it remains independent of Zegona.

Disclosure of information to the auditor

Each of the persons who is a Director at the date of approval of this report confirms that, so far as the Director is aware: there is no relevant audit information of which Zegona's auditor is unaware; and each Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that Zegona's auditor is aware of that information.

Statement of going concern

The Directors have considered all available information, including specific consideration of forecast financial information, about the possible future outcomes of events and changes of conditions, and the realistically possible responses to such events and conditions that are available to the Directors. The Board considers that there are no material uncertainties affecting Zegona's ability to continue in business or meet its liabilities as they fall due for the next 12 months and therefore believes it is appropriate to prepare the Financial Statements on the going concern basis.

By order of the Board

Eamonn O'Hare

Chairman and Chief Executive Officer

13 May 2020

22 Mark Brangstrup Watts is a Non-Executive Director of Marwyn Asset Management Limited and was a Non-Executive Director of the Company until 12 May 2020.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Strategic Report, Directors' Report, Directors' Remuneration Report, Corporate Governance Report and the Zegona group and parent company Financial Statements in accordance with applicable law and regulations.

Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law, they are required to prepare the Zegona group Financial Statements in accordance with International Financial Reporting Standards as adopted by the European Union ("EU IFRS") and applicable law, and have elected to prepare the parent company Financial Statements on the same basis.

Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable, relevant and reliable;

· state whether they have been prepared in accordance with EU IFRS;

· assess the group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

· use the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

· the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the parent company and the undertakings included in the consolidation taken as a whole;

· the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· the Annual Report as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess Zegona's position and performance, business model and strategy.

By order of the Board

Eamonn O'Hare

Chairman and Chief Executive Officer

13 May 2020

Robert Samuelson

Chief Operating Officer

13 May 2020

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The Financial Statements of Zegona Communications plc (registered number 09395163) were approved by the Board of Directors on 13 May 2020 and were signed on its behalf by:

Eamonn O'Hare

Director

Robert Samuelson

Director

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The Financial Statements of Zegona Communications plc (registered number 09395163) were approved by the Board of Directors on 13 May 2020 and were signed on its behalf by:

Eamonn O'Hare Robert Samuelson

Director Director

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.

The notes on pages 59 to 85 form an integral part of these Consolidated Financial Statements.