1. Acquisition Finance Market Overview Structuring The Deal
Joseph V. Rizzi
Amsterdam Institute of Finance
10-12 October, 2016
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2. Sponsor Based Leveraged Acquisition Market Overview and Participants
Joseph V. Rizzi
Amsterdam Institute of Finance
October, 2016

3. 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: Substantial source of investment banking revenues and M&A volume
Amsterdam Institute of Finance October, 2016

4. Global M&A (1H16) Off Record 2015 by 19% - slowest opening in 2 years
Factors
Cash Balances
Low Rates
Positive Response
Confidence
Volatile Stock Prices
Increase in Shareholder Activism
Political – Antitrust, Brexit
PE: Dog that didn’t bark – Strategic Acquirers crowd-out
Lowest % of M&A in years
Reflects dearth of larger PTP deals
Volume down 2016 v double digit M&A increase
Average deal size: €375 mln v €600 mln peak
PPX: 14X + Strategic; 10X + PE
Drop in cash in favor of stock/stock + cash
Amsterdam Institute of Finance October, 2016

5. Top 10 Leveraged Loan Issuer Country 1H16 (Based on Volume)
France 22% UK 20% Germany 12% Netherlands 10% Italy 6.5% Belgium 6% Spain 5% Sweden 3% Switzerland 3% Denmark 2%
Amsterdam Institute of Finance October, 2016 4

6. Top 10 EMEA Involvement Announced Deals 1/1/16 – 6/30/16
Target Acquirer USD
Monsanto Bayer B
Syngenta CAAC B
Johnson Tyco B
Credit Agricole Sacam B
LSE Deutsche Boerse 12B
Sanofi Amral Roehringer 12B
Media Mylan B
Medivation Sanofi B
Supercell Tenent B
FCC Contrel B
Amsterdam Institute of Finance October, 2016

7. Impact of Market & Political Uncertainty
Investor Risk Appetite Pricing Structuring Arrangers: Increased syndications risk Issuers/Acquirers: Increased deal risk Brexit
Amsterdam Institute of Finance October, 2016

8. Success Factors Timing Price Financing Consideration – Stock/Cash
Deal Size
Timing
Price
Financing
Consideration – Stock/Cash
Buyer
Execution
Deal Type
Tests
Best Owner
Iron Law
Amsterdam Institute of Finance October, 2016

9. Annual European Buyout Transaction Volume
1H15 € 20B
1H16 € 35B
Amsterdam Institute of Finance
October, 2016 8

10. Collateralized Loan Obligations (CLO)
Represent 50% of institutional loan investors
Restructure following great recessions: CLO2.0
Losses/Outflows
Dodd Frank Retention Rules
Driving force beyond 2L and Cov Lite
Trading
Amsterdam Institute of Finance October, 2016

11. Value Creating Transactions: Questions & Framework
1. How will transaction achieve our goal?
Acquisition Strategy
2. Which companies are good targets?
Strategic Fit
Search Screen
3. Best transaction types?
M&A v Alliance
JV and Minority Interests
4. Available Synergies?
Scale, Scope and Skill
Strategic and Due Diligence
5. What is target worth to us and potential bidders?
DCF, Comps (trading, transaction)
ROV
6. Target assessment?
Shareholder value
Economic profit, other
7. Risks?
Cost of Capital Analysis
Sensitivity, Scenario and Simulation
8. Deal Structure?
Asset v Stock
Cash v Stock
Fixed v Contingent
Integration
Absorption v Preservation
Symbiosis v Holding
Negotiations
Planning and Strategies
Amsterdam Institute of Finance October, 2016

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 October, 2016

13. Private Equity Evolution
Timeline
Stone Age Bronze Age Silver Age Golden Age Back-to-the-Future Maturity
( ) ( ) ( ) ( ) ( ) ( ?)
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
Joint Venture
3G/Berkshire Hathaway
Increased Competition From Corporate Strategic Acquirers
Amsterdam Institute of Finance October, 2016

14. PE Sector
PE Fund Performance Persistence – declining due to competition – KSF
Access
Networks
Signaling
Crowded (> 5,000)
1,000 funds seeking funds as of 3Q16
Dry Powder €300B
LP Selection Issues
Strategy
Returns
Team
Terms
Relationship
Amsterdam Institute of Finance October, 2016

15. Private Equity Value Chain (From Financial Engineering to Value Creation)
Tax – Legal – Accounting Knowledge
Network Management
Industry Expertise
Corporate Finance Delivery
VALUE
Fund
Raising
Investing
Managing/
Monitoring
Exit
Amsterdam Institute of Finance October, 2016

16. Private Equity Value Added
Buy Right: PPX
Financial Engineering: FDX
value transfer
Operating Improvements: (pf) EBITDA
Multiple Expansion: Exit X
Amsterdam Institute of Finance October, 2016

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 October, 2016

18. Corporate v PE Acquirers
Valuation
WACC based DCF
Equity returns and cost of equity based
Debt Capacity
Investment Grade (company determined)
Maximum debt capacity (lender/market determined)
Residual Value
Growing Prep
Exit X
Value Added
Synergies
Financial Engineering
Search
Focused
Opportunistic
Affordability
Dilution
IRR on required equity
Deal Size
Large
Depends
Capital Structure
Permanent
Temporary
Debt Structure
Simple
Complex
Flexibility
No financial covenants
Cov-lite
Horizon
Long Term
5+ years
Integration Risk
High
Low
Thesis
Strategic
Transaction
Hurdle Rate
Risk Adjusted
Flat
Amsterdam Institute of Finance October, 2016

19. Most Active Sponsors – Top 20 LTM – 1H16
Sponsor Share
Ardian %
Carlyle Group %
CVC %
Bridgepoint Capital %
Kohlberg, Kravis & Roberts %
Cinven Ltd %
EQT Partners %
PAI Management %
Permira %
Apollo Management %
Bain Capital %
BC Partners %
Blackstone Group %
Charterhouse Equity Partners %
Clayton, Dubilier & Rice %
Eurazeo %
FSN Capital A/S %
Gilde Investments %
Hellman & Friedman %
KIRKBI A/S %
Most Active Sponsors reflects activity based upon all sponsors named on a transaction. Share is based upon transaction count.
Source: S&P Global
Amsterdam Institute of Finance
October, 2016

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 October, 2016

21. Wheel of (Mis)fortune Macro Financial Markets Deal market
Superior returns
Attracts capital
Deals chase money
Macro
Financial Markets
Disappoint returns
Impacts fundraising
Deal market
Capital chasings deals
Amsterdam Institute of Finance October, 2016

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
Leverage finance
syndicate participants
Hold Co.
High Yield
Investors
Bank
Hold Co.
Mezzanine
Investors
Bridge finance
Syndicate participants
FLL
SLL
Operating Entity
Amsterdam Institute of Finance October, 2016

23. Private Equity LBO Transaction Economics (History)
- $ millions -
Now In 5 yrs EBITDA of Acquired Firm (c) Sale 8 x EBITDA 1,000 1,500 Financing Plan: Total Capital Raised 1,000 Fees Net Sale Proceeds on Exit 1,450 Original Debt 800 Less: Debt pay down over 5 years 260 Debt at end of 5 years Return of Original Equity -200 Net gain to be allocated % to mgmt options 71(a) 20% to general partner % to limited partners 497 (b) Total 710
Share to CEO 2% points or $ 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 Rev 10/16/06
Amsterdam Institute of Finance October, 2016

24. Pricing v Valuation V x x x Average Fit Line 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
Asset DCF Comp Comp Other
Value Trade Trans (ROV?)
Amsterdam Institute of Finance October, 2016

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 October, 2016

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) Purchase Price Sale Price (Terminal Value) Debt Policy Ratings/Corp Value Transfer from LP’s and Banks
Amsterdam Institute of Finance October, 2016

27. PE Screening (1H16)
A. Estimate purchase price based on comparable transaction expressed as EBITDA multiple – currently around 10x – 11x
B. Determine required equity component based on current market conditions – currently 40% - 45%
C. Estimate maximum debt capacity as EBITDA multiple – 6x regulatory soft threshold
D. Maximum purchase equal to B plus C above
E. Calculate exit price based on target growth, exit year and exit multiple
(assumed exit multiple equal to entry multiple (A-above))
F. Subtract remaining debt in exit year to get equity value
G. Calculate IRR – difference between B and F
- accept iff > hurdle
Amsterdam Institute of Finance October, 2016 26

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
No interest expense adjustment
Capex
Amsterdam Institute of Finance October, 2016

29. Converting IRR into Equivalent Multiple of 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 October, 2016

30. (Ad)Venture Capital Future Value Ownership Need
Market Size (Year 6) 1,000
Market Share 10%
Revenue
Revenue Multiple
Value
Ownership Need
Investment (today)
Required Return (40%) 7.5X
Expected Exit Value
Today’s Ownership Requirement
Expected Exit Value (6) 75
Projected Value (6)
% Ownership 15%
Amsterdam Institute of Finance October, 2016

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 October, 2016

32. International 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 October, 2016

33. Amsterdam Institute of Finance
October, 2016

34. Special Purpose Acquisition Companies Blank 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 October, 2016

35. 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 October, 2016

36. 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 October, 2016