1. Confidential 0 The Changing Canadian M&A Market FEI Canada Breakfast Seminar T RANSACTION A DVISORY S ERVICES March/April 2006

2. Confidential 1 M&A Market Participants Date Private and Confidential

3. Confidential 2 M&A Market Participants Market participants and their roles are changing in today’s transaction environment:  Strategic Acquirers  Private Equity Groups  Public Markets

4. Confidential 3 strategic acquirers

5. Confidential 4 Strategic Acquirers Corporate strategy has increasingly included mergers, acquisitions and divestitures Many corporations have established Chief Development Officers (CDO) to lead these efforts. An E&Y survey found:  45% of respondents have no other role and 38% combine the corporate development role with strategy  73% reported to the “C” suite CDO is a position versus a role, with responsibility for:  “Transaction life cycle”  Corporate governance and transaction process  Pipeline development and link to strategy

6. Confidential 5 Strategic Acquirers (cont’d) Note: Percentage is of total population – 175 all Companies CDO – Functional Skills

7. Confidential 6 private equity groups (PEGs)

8. Confidential 7 Private Equity Groups PEGs represent a large and growing source of capital (funds raised 2001-2004): Source: Thomson Macdonald

9. Confidential 8 Private Equity Groups (cont’d) PEG funds were invested in a diverse set of transaction types: Source: Thomson Macdonald

10. Confidential 9 Private Equity Groups (cont’d) The growth in private equity groups also masks some important underlying changes:  Buy out pools now represent nearly half of the private equity universe  Private-independent fund managers gain importance: —Account for close to 40% of capital under management —Gaining share as they draw commitments from institutional investors and reorganize from corporate funds

11. Confidential 10 Private Equity Groups (cont’d)  These fund managers generally have a diverse background (investment banking, legal and operational) and have a strong understanding of return/risk  Vendors may prefer to deal with PEGs: —Not a competitor and therefore less concerns with confidentiality —Clear financial metrics —May have greater structuring flexibility (e.g., vendor retains a minority stake)

12. Confidential 11 income trusts

13. Confidential 12 Income Trusts Source: Scotia Capital

14. Confidential 13 Income Trusts (cont’d) – Total Issuance Source: Scotia Capital

15. Confidential 14 Income Trusts (cont’d) – IPO Size Distribution (2001-2006 YTD)

16. Confidential 15 Income Trusts (cont’d) – Leverage and Yield IPO LeverageIncome Trust IPO Yield Source: Scotia Capital

17. Confidential 16 Income Trusts (cont’d) – Retained Interest (2001- 2006 YTD) Source: Scotia Capital

18. Confidential 17 implications for transactions

19. Confidential 18 Implications for transactions There is a robust market for Canadian companies:  Significant interest from strategic purchasers, both within Canada and internationally  Broad availability of capital: —Private market through PEGs —Public market, where Income Trusts provide attractive valuations

20. Confidential 19 Implications for transactions (cont’d) A recent Ernst & Young survey on mid-market companies revealed some interesting insight: —Of companies which used an advisor, 37% were sold to purchasers outside Canada —21% of vendors were acquired by a financial buyer.

21. Confidential 20 Financing in Today’s M&A Market

22. Confidential 21 Overview: State of the Capital Markets As the economy firms and absolute interest rates remain relatively low, lenders and investors are becoming increasingly more comfortable with higher leverage levels

23. Confidential 22 Overview: Leverage Has Increased in the Market Source: S&P/Loan Pricing Corporation 5.3 x 4.5 x 4.1 x 3.7 x 3.8 x 4.0 x 4.4 x

24. Confidential 23 Overview: Leverage Has Increased in the Market (cont’d) Source: Bank of America/S&P/Loan Pricing Corporation Includes 2 nd lien debt which pushes up senior leverage

25. Confidential 24 Overview: Leverage Has Increased in the Market (cont’d) Source: Reuters Loan Pricing Corporation/Deal Scan The oversupply of funds also resulted in lenders relaxing covenant levels  In particular, average debt to EBITDA covenants for LBO financings increased dramatically in 2005

26. Confidential 25 Availability of Non-Traditional Financing Target Return % p.a. Risk 510152025 3035 EQUITY SUB DEBT SCLs / High yield notes ABLs Bank / Senior Notes There has been an ongoing shift away from traditional bank structures to multi- tiered structures

27. Confidential 26 Availability of Non-Traditional Financing (cont’d) COMPANY SIZE:Very SmallSmallMid-SizeLarge Typically has limited resources and no track record. Possibly has high growth potential, but often with limited track record. Typically has proven track record and continued growth potential. Substantial assets/stock available for collateral. Known track record and risk. Strong financial flexibility. LOW HIGH Risk Commercial Paper Private Placement Senior Notes and Senior Unsecured Debt Asset Monetization Senior Secured Debt Subordinated Debt High Yield Notes Private EquityPublic Equity Second Lien Notes

28. Confidential 27 Second Lien Loans Second lien and high yield markets continue to gain momentum  Second liens loans require on average 300 to 400 bps spread premium over traditional senior debt Source: S&P/Loan Pricing Corporation

29. Confidential 28 Second Lien Loans (cont’d) Often called “Secured Senior Notes” or “Second Lien Secured Notes,” they are similar to other high yield bonds – except they are secured Second Lien Debt or Second Collateral Loans (SCL) are often viewed as a substitution for more expensive private or public mezzanine debt  Second lien lenders generally offer terms and pricing that are more flexible than an unsecured mezzanine provider  Second lien loans carry less onerous prepayment penalties  Terms on the second lien loans are shorter than traditional mezzanine debt at 3 to 5 years, however the loans can be structured with a longer tenor In a cash-flow based second lien loan, the amount of the loan is determined by using an EBITDA multiple, whereas the amount of asset based second lien loans are based on appraisal valuations The second lien loan is behind the senior debt for repayment priority with respect to collateral proceeds, but ranks ahead of other unsecured senior debt such as trade payables

30. Confidential 29 Second Lien Loans (cont’d) Second lien loans can be more attractive than subordinated or mezzanine debt because often pricing does not require warrants thus the issuer may avoid giving up equity Prepayments are also more flexible than mezzanine or high yield debt Second lien debt can often achieve similar leverage to that of mezzanine debt In general, pricing for subordinated debt has decreased significantly as a result of increased competition and as second lien debt gains greater market acceptance  Second lien loans require a return of approximately 10% to 15%

31. Confidential 30 M&A implications

32. Confidential 31 Average Debt/EBITDA Ratio for Transactions with Second Lien Loans Source: S&P/Leveraged Commentary & Data 4.2 x 5.1 x

33. Confidential 32 …and an Increase in Purchase Price Multiples Source: S&P/Loan Pricing Corporation 7.8x 8.0x 7.4x 6.1x 6.0x 6.4x 7.0x 7.4x 7.3x 7.1x 7.2x 6.8x 6.9x 5.4x 6.4x 6.9x 7.2x 8.0x

34. Confidential 33 summary

35. Confidential 34 Financing Summary Capital market conditions have improved dramatically over the last year and there is substantial liquidity in the market There is a great deal of institutional money chasing very few quality opportunities Accordingly, debt leverage has increased in all markets and pricing has declined Mezzanine providers are being squeezed by both the Second Lien Loan (Junior Secured) and High Yield Debt markets Second lien loans have provided access to high ratio/leveraged finance without typical equity dilution, filling the gap between senior and mezzanine debt and allowing purchase multiples to increase

36. Confidential 35 © 2005 Ernst & Young Orenda Corporate Finance Inc. A Member of Ernst & Young Global E RNST & Y OUNG O RENDA C ORPORATE F INANCE I NC. eyorenda.com

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