1. Sponsor Based Leveraged Acquisition Market Overview
Joseph V. Rizzi
Amsterdam Institute of Finance
October, 2014

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 October, 2014

3. Global M&A (1H14) 7 Year High – 1.77T U.S. - 41% ROW - 59% Drivers
Cash Balances
Low Rates
Exhausted Cost Cuts and Buybacks
Pent-up Demand
Positive Response
Confidence
Rising Stock Prices
Increase in Hostile T/O
20% of total v single digits post crisis
PE: Dog that didn’t bark – Strategic Acquirers crowd-out
20% of total v 27% 4 year average
Reflects dearth of larger PTP deals
Volume up 6% 2014 v double digit M&A increase
PPX: 14X+
Drop in cash in favor of stock/stock + cash
All cash at lowest level since 2001
Averages reflect return of the “big deal”
Amsterdam Institute of Finance October, 2014

4. M&A Snapshot 1H14 Activity 1H14 1H13 Return of Strategic Acquiror
Volume ($B) 1,768 1,023
Size (> 10B)
Return of Strategic Acquiror
Holcim – LaFarge April, 2014: $39.5B
Numericable – SFR March, 2014: $23.3B
Facebook – WhatsApp February, 2014: $19.5B
Suntory – Beam January, 2014: $15.7B
Bayer – Merck Cons May, 2014: $14.2B
Drivers
Increased Stock Prices – Management confidence; Stock as Currency
Positive Shareholder Reaction: One Day Indexed Buyer Stock Price Reaction
1H14 2.9%
2H13 3.6%
1H13 3.1% % % %
<1.9%>
<1.3%>
Source: S&P Capital IQ
Amsterdam Institute of Finance
October, 2014

5. Success Factors Timing Price Financing Consideration Buyer Execution
Deal Size
Timing
Price
Financing
Consideration
Buyer
Execution
Type
Tests
Best Owner
Iron Law
Amsterdam Institute of Finance October, 2014

6. Euro LBO 7/31/14 38.8 UK 28.57% 7/31/14 225 58.4 (Euro/B) Country
7/31/
Country
UK %
France %
Germany %
Netherlands %
Spain %
European PE Dry Powder (Euro/B) – European Focused Fundraising
7/31/
Key Buyout Stats – 7/31/14
PPX 9X
Eq% 35%
FDX 5X Source: S&P Capital IQ
Amsterdam Institute of Finance October, 2014

7. Euro Market European LL Volume: Leverage Up: 5X+
Highest Level Post Crisis June/July
YTD Volume €59.5B up 19% same period 2013/LY
Includes M&A and PE
Leverage Up: 5X+
Return of Cov-lite: Reduced Terms
2L Increasing
CLO:
Returning – 6 Mo 16 v 20 for YE13
Costs dropped from E to E+100 1H14
MEZ N/A: 2L Wipeout
HYB (7/31/14): €61.3B v €47.2B LY
Amsterdam Institute of Finance October, 2014

8. 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, 2014

9. 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, 2014

10. Private Equity Evolution
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?
Amsterdam Institute of Finance October, 2014

11. PE Sector
PE Fund Performance Persistence – declining due to competition
Access
Networks
Signaling
Crowded (> 5,000)
2,200 funds seeking funds as of July, 2014
Raise $750B
Dry Powder
LP Selection Issues
Strategy
Returns
Team
Terms
Relationship
Amsterdam Institute of Finance October, 2014

12. 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, 2014

13. Private Equity Value Added
Buy Right: PPX
Financial Engineering: FDX
Operating Improvements: (pf) EBITDA
Multiple Expansion: Exit X
Amsterdam Institute of Finance October, 2014

14. 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
Amsterdam Institute of Finance October, 2014

15. Most Active Sponsors - LTM
Sponsor Share
CVC %
Carlyle Group %
Astorg Partners %
Permira %
Clayton, Dubilier & Rice %
Goldman Sachs %
Montagu Private Equity %
Advent International %
Bain Capital %
Koch Industries %
Cinven Ltd %
Apollo Management %
Bridgepoint Capital %
Teachers’ Private Capital %
Investcorp %
Triton Managers %
Ardian %
Electra Partners %
ATP Private Equity Partners %
3i pic %
Source: S&P Capital IQ
Amsterdam Institute of Finance
October, 2014

16. 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, 2014

17. 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, 2014

18. 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, 2014

19. Private Equity LBO Transaction Economics
- $ 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, 2014

20. 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?)
Goose that Lays the Golden Egg Story: Price v Value
Amsterdam Institute of Finance October, 2014

21. 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, 2014

22. 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 Discounted rate Terminal value LBO Perspective = IRR (Equity discount rate) Purchase Price Sale Price (Terminal Value) Debt Policy Ratings/Corp Value Transfer from LP’s
Amsterdam Institute of Finance October, 2014

23. 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 October, 2014

24. 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
Amsterdam Institute of Finance October, 2014

25. 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, 2014

26. 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
Projected Value 500
% Ownership 15%
Amsterdam Institute of Finance October, 2014

27. Fixing the Broken Deal – Price and Structural Flex
Increase spread Recycled
Original issue discount
Eliminate PIK
Reduce debt
Add a subordinate tranche
More equity
Add covenants
Reduce Price
Seller Paper
Amsterdam Institute of Finance October, 2014