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Sponsor Based Leveraged Acquisition Market Overview and Participants

This report provides an overview of the leveraged acquisition market, focusing on sponsor-based transactions. It covers deal types, market drivers, shareholder activism, and the impact of the August correction. It also includes insights on Euro LBOs, leveraged loans, CLOs, and value creating transactions.

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Sponsor Based Leveraged Acquisition Market Overview and Participants

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  1. Sponsor Based Leveraged AcquisitionMarket Overview and Participants Joseph V. Rizzi Amsterdam Institute of Finance December, 2015

  2. Acquisition/Leveraged Finance • Transaction: Buyout, Acquisition or Recapitalization • Leverage: Resulting in highly leveraged (i.e., non investment grade) obligor – FD/EBITDA > 3X • Subject to market availability and pricing (function of risk appetite • Deal Types: Acquisition Recapitalization Refinance PTP (Public to Private) STS (Sponsor to Sponsor, aka Pass the Parcel) PE Importance: Provides 1/3 of all I/B Revenues and up to 25% of M&A Amsterdam Institute of Finance December, 2015

  3. Global M&A (3Q15) • Near Record 2007 pre crisis– $3.2T U.S. - 48% ROW - 52% • Drivers Cash Balances Low Rates Exhausted Cost Cuts and Buybacks - Activist Pent-up Demand Positive Response Confidence Rising Stock Prices • Increase in Shareholder Activism • PE: Dog that didn’t bark – Strategic Acquirers crowd-out Lowest % of M&A in years Reflects dearth of larger PTP deals Volume down 2015 v double digit M&A increase Average deal size: €375 mln v €600 mln + 2007 peak • PPX: 14X + Strategic; 10X + PE • Drop in cash in favor of stock/stock + cash All cash rebound since August, 2015 correction Amsterdam Institute of Finance December, 2015

  4. M&A Snapshot 9 mos 2015 • Mega Deals (>10B) – Record $1.19T • Return of Strategic Acquiror • Drivers Increased Stock Prices – Management confidence; Stock as Currency Positive Shareholder Reaction: Pre Crisis Reaction Pre Crisis: Negative 2012 – 1H15: 3-4% 3Q15: <0.65%> Source: S&P Capital IQ Amsterdam Institute of Finance December, 2015

  5. Exhibit ITop 10 EMEA Involvement Announced Deals 1/1/15 – 9/30/15 TargetAcquirerSize $ BG Group Royal Dutch 61B Allergan Teva 40.5B Perrigo Mylan 35.6B Baxalta Shire 33.7B Chubb ACE 28.5B Cablevision Altke 18.1B P&G Co – Beauty Coty 16.9B O2 PLC Hutchison 15.3B Alcatel Lucent Nokia 13.7B Delhalz Ahold 11.6B Amsterdam Institute of Finance December 2015

  6. Impact of August Correction Reduced Investor Risk Appetite Pricing Structuring Arrangers: Troubled syndications with more upward flex Issuers/Acquirers: Reluctance to acquire or use stock PPX: Too early to tell Amsterdam Institute of Finance December, 2015

  7. Success Factors Factors Deal Size Timing Price Financing Consideration Buyer Execution Type Tests Best Owner Iron Law Amsterdam Institute of Finance December, 2015

  8. Euro LBO • (Euro/B) 9M15 28.0 201449.0 2013 63.7 2012 29.0 2011 43.9 2010 39.4 2009 9.0 2008 69.3 2007 152.3 2006 164.5 • Country (Portfolio Concentrations %) Germany 21 UK17 France 11 Netherlands 10 Spain 8 • European PE Dry Powder (Euro/B) – 300B • Euro Focused Fundraising : 9 mos 2015 €87B v €108B in 2014 • Key Buyout Stats – 9/30/15 PPX 9.3 Eq% 41.8 FDX 4.8 Source: S&P Capital IQ Amsterdam Institute of Finance December, 2015

  9. Euro Market Leveraged Loans – 9 Mo – Continued Sluggishness 2015 2014 Change Buyouts €17 €16 5% M&A €12€21<39%> €29 €37 <20%> Leverage – Regulatory Restrictions – Staying Below 5X : 4.8X Cov – Lite: 45% of all Euro LL 2L: Weak Issuance CLO: Flat (€66B v U.S. $414B AUM) HYB: 40% Off Prior Year Mez: Replaced by HYB, unitranche and 2L Equity: 40% + Forwarded Calendar: Stronger in U.S. PPX: 9X v 10.3X in U.S. Amsterdam Institute of Finance December, 2015

  10. Collateralized Loan Obligations (CLO) Represent 50% of institutional loan investors U.S.: $417B AUM Euro: $ 65B AUM Restructure following great recessions: CLO2.0 Losses/Outflows Dodd Frank Retention Rules Driving force beyond 2L and Cov Lite Trading Amsterdam Institute of Finance December, 2015

  11. Value Creating Transactions: Questions & Framework Amsterdam Institute of Finance December, 2015

  12. M&A Danger Signs • CEO only believer: headstrong; magazine cover effect • Only revenue synergies with no investment plan • Prefunctory Due Diligence • Reservation price changes during bidding • Must close deal • Failure to identify why buyer is best owner • Emphasis on time, effort, cost and reputation sunk into deal Amsterdam Institute of Finance December, 2015

  13. Private Equity Evolution • Timeline Stone Age Bronze Age Silver Age Golden Age Back-to-the-Future Maturity (1974-84)(1985-90)(1990-2000)(2002-07)(2008-2012)(2013 - ?) Cottage Industry KKR Fund proliferation Goes global Shakeout/consolidation Exits Bootstrap deals High Yield Represents 40% higher equity levels Fund Raising of M&A smaller deals Dry Powder Mega Funds Operating improvements Diversification focus. Increase in PIPE and minority interests? • Public PE Firms – disappearing returns; lower valuations KKR 3Q15 Loss: 286 mln – first since 2011 Carlyle 3Q15 Loss: 84 mln • Joint Venture 3G/Berkshire Hathaway Amsterdam Institute of Finance December, 2015

  14. PE Sector • PE Fund Performance Persistence – declining due to competition – used to be Access Networks Signaling • Crowded (> 5,000) 2,200 funds seeking funds as of 3Q15 Dry Powder €300B • LP Selection Issues Strategy Returns Team Terms Relationship Amsterdam Institute of Finance December, 2015

  15. Private Equity Value Chain(From Financial Engineering to Value Creation) Tax – Legal – Accounting Knowledge Network Management Industry Expertise VALUE Corporate Finance Delivery Managing/ Monitoring Fund Raising Exit Investing Amsterdam Institute of Finance December, 2015

  16. Private Equity Value Added • Buy Right: PPX • Financial Engineering: FDX • Operating Improvements: (pf) EBITDA • Multiple Expansion: Exit X Amsterdam Institute of Finance December, 2015

  17. What Private Equity Firms Say They Do(Gompers, Kaplan and Mukharlyamov) USE IRR and MOIC not DCF for valuation Use comparable company multiples to calculate exit values not DCF Use flat hurdle rates (20 – 25%) not risk adjusted or CAPM based Use market timing not static tradeoff theory to set capital structure Opportunistic Exits Strategic Buyer – 50% Financial Buyer – 30% IPO – 20% Value business model and competitive position over management Emphasize growth or cost cuts Amsterdam Institute of Finance December, 2015

  18. Corporate v PE Acquirers Amsterdam Institute of Finance December, 2015

  19. Most Active Sponsors – Top 20LTM – 9/30/15 SponsorShare CVC 10.50% Apax Partners 5.30% Bridgepoint Capital 5.30% Onex Corp 3.90% Cinven Ltd 3.90% Bain Capital 3.90% Nordic Capital 3.90% Apollo Management 2.60% Wendel Investissement 2.60% Investindustrial 2.60% Clayton, Dubilier and Rice 2.60% 3i pic 2.60% Ardian 2.60% Equistone Partners 2.60% EQT Partners 2.60% Permira 2.60% Antin Infrastructure Partners SAS 1.30% Mid Europa Partners LLP 1.30% Kohlberg, Kravis & Roberts 1.30% Charterhouse Group International 1.30% Source: S&P Capital IQ Amsterdam Institute of Finance December, 2015

  20. Credit Cycle Impact on PE Investments and Performance • Up Cycle Spreads Narrow Multiples Increase Leverage Increases Exits Accelerate Fundraising Dry Powder • Characteristics Government Bond Rates High Yield Spreads Amsterdam Institute of Finance December, 2015

  21. Wheel of (Mis)fortune Superior returns Attracts capital Deals chase money Macro Financial Markets Deal market Disappoint returns Impacts fundraising Capital chasings deals Amsterdam Institute of Finance December, 2015

  22. A Typical Private Equity Structure Diagram US Investors Fund manager US Exempt Investors General Partner Carried interest partner LP A LP B LP C Non-US Investors FUND Nominee Investment Investment Investment Investment CLO Hedge funds High Yield Investors Leverage finance syndicate participants Hold Co. Bank Hold Co. Mezzanine Investors FLL Bridge finance Syndicate participants Operating Entity SLL Amsterdam Institute of Finance December, 2015

  23. Private Equity LBO Transaction Economics - $ millions - NowIn 5 yrs EBITDA of Acquired Firm 125 188 (c) Sale value @ 8 x EBITDA 1,000 1,500 Financing Plan: Equity @ .20 200 Debt @ .80 800 Total Capital Raised 1,000 Fees 30 50 Net Sale Proceeds on Exit 1,450 Original Debt 800 Less: Debt pay down over 5 years 260 Debt at end of 5 years -540 540 Return of Original Equity -200 Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710 • Share to CEO 2% points or $14.2 x 1 = $14.2 • Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 • Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 • Total Management share $71.0 (b) Equals a 28.4% compound annual rate of return on investment. (c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter. Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction Harvard Business School case 9-206-1 Rev 10/16/06 Amsterdam Institute of Finance December, 2015

  24. Pricing v Valuation Price ≠ Value eventually converge, but… using price to justify M&A – increases overpaying Most valuations are really disguised Pricings Academic Surveys – DCF Reality – Name Only TV in DCF >60% Value TV calculated using market multiple Venture Capital Valuation Football Field: Flaw of Averages V x x x Average Fit Line x x Asset DCF Comp Comp Other Value Trade Trans (ROV?) Goose that Lays the Golden Egg Story: Price v Value Amsterdam Institute of Finance December, 2015

  25. Anatomy of a Premium Stupidity & Bias Fantasy Competitive Necessity Outlook/Information Advantage Synergies Lower Buyer WACC Undervaluation ROT: Greater than 40% premium over pre-bid market price is difficult to justify for any sizeable acquisition. Amsterdam Institute of Finance December, 2015

  26. LBO Analysis Focus on return: what is the maximum price I can pay based on given set of projections and earn X% return (not risk adjusted)? Tradition Valuation = Projected cash flows Discount rate Terminal value LBO Perspective = IRR (Equity discount rate) Projected cash flows Purchase Price Sale Price (Terminal Value) Debt Policy Ratings/Corp Value Transfer from LP’s Amsterdam Institute of Finance December, 2015

  27. LBO Valuation(Pricing/Affordability) How much can I borrow (XEBITDA) Usually 4 - 6X depending on market Equity Percentage Required (% of PP) Usually 30% - 45% dependent on market Compare Market PPX IRR Adjustments FD Exit Multiple Equity PP EBITDA adjustment (pro forma EBITDA) Example – assume €100 EBITDA FDX – 5X Equity % - 35% Affordable bid 7500 or 7.5x EBITDA Amsterdam Institute of Finance December, 2015

  28. Cash Flow Available for Debt Service (CFADS) DCF Net Income + Dep/Amt +/_ Change in deferred taxes +/- Other noncash items +/- Change in working capital Cash flow from operations +After tax interest (hypo Ƭ) • CAPEX • Unleveraged FCF CFADS Net Income Dep/Amt Change in deferred taxes Other non cash changes Change in working capital Cash flow from operations Non interest expense adjustment Capex CFADS Amsterdam Institute of Finance December, 2015

  29. Converting IRR into Equivalent Multipleof Capital (MOIC) IRR Equivalent MOIC Over 6 Years 10% 1.8X 20% 3.0X 30% 4.8X 40% 7.5X 50% 11.4X Amsterdam Institute of Finance December, 2015

  30. (Ad)Venture Capital • Future Value Market Size (Year 6) 1,000 Market Share 10% Revenue 100 Revenue Multiple 5 Value 500 • Ownership Need Investment (today) 10 Required Return (40%) 7.5X Expected Exit Value 75 • Today’s Ownership Requirement Expected Exit Value (6) 75 Projected Value (6) 500 % Ownership 15% Amsterdam Institute of Finance December, 2015

  31. Fixing the Broken Deal – Price and Structural Flex Increase spread Original issue discount Eliminate PIK Reduce debt Add a subordinate tranche More equity Add covenants Reduce Price Seller Paper Originators Increase Hold Amsterdam Institute of Finance December, 2015

  32. International Valuation Valuation Convert foreign cash flows into home currency using forecast FX rates; discount using the home rates Majority method due to accounting translation focus Use local cash flows and rates; spot into home currency Terminal value growth rate at local inflation rate Complications Taxes – home and foreign Political risk – Venz, Russia Inflation and FX rates (A) Forecast foreign currency cash flows (B) Discount rate -same rate for domestic home currency -convert domestic rate to foreign by multiplying risk free rate differential - IRS -local rates (C) Resulting PV is FX – convert to domestic/home using spot Amsterdam Institute of Finance December, 2015

  33. Amsterdam Institute of Finance December, 2015

  34. Special Purpose Acquisition Companies Section 1Blank Check LBO Form entity to make unidentified acquisitions within finite time period (e.g. 18 mos) Return funds / cancel commitments if no acquisition occurs Charge fees and get carried interest Conflicts abound Amsterdam Institute of Finance December, 2015

  35. Private Debt Problem for Euro SMEs as banks retreat post crisis Europe over reliance on banks v U.S. % Banks % Non Bank Private Debt Other Europe 80 10 10 U.S. 35 55 10 Private Debt flows into Europe growing $25B Dry Powder Regulators 2019 single market project Amsterdam Institute of Finance December, 2015

  36. Exchange Rates and Cross Border M&A Does USD appreciation against Euro make Euro zone targets cheap? Pay less for Euro assets But receive less – depreciated future Euro cash flows converted back into USD Companies continue to get confused by translation accounting or are they speculating in FX Amsterdam Institute of Finance December, 2015

  37. Foreign Currency Debt Borrowing in Foreign currency different from home currency Borrower attracted by Foreign currencies with lower rates - carry trade Borrow USD Spot into home currency Risk if home currency weakens against USD – unless hedged Taking deal risk Interest rate parity ensures no free lunch Borrow in country where assets and cash flow are located to create natural hedge Beware speculating in FX using company balance sheet Amsterdam Institute of Finance December, 2015

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