Strategic investment criteria

1. Strategic investment criteria Olivier LEVYNE (November 7th, 2008) Global Investment Banking

2. Analysis of an investment opportunity: main principles Data on Carrefour and Wal Mart Example: investment opportunity for Wal Mart

3. 1. Analysis of an investment opportunity: main principles

4. 1. Introduction to strategic investment decisions • The NPV is one of the drivers of the decision as the valuation of the target generally relies on the Discounted Cash Flows approach • But the investment decision relies on other criteria: • It must be EPS accretive in order to create shareholders value • It must be acceptable from a banking point of view • These criteria enable to define the modality of the transaction: • Cash offer • Share offer • Mix offer • Beyond industrial considerations, the decision is eventually based on a sensitivity analysis

5. 2. Purchaser ’s EPS accretion / dilution in a cash offer • PER = Price/EPS. ie: Price = PER x EPS . Hence, if the PER is stable (no change in the market status of the share): • D.Price = PER x D.EPS • Taking into account that, under IRFS, the goodwill is no more amortized: Share of the target’s net profit (Post tax interest expenses) ______________________ Impact of the acquisition on the acquirer's net profit= DRNA • Accretive cash tender offer if, for a 100% acquisition of the target’s capital: NPT > i.V where: • NPT = target’s net profit • i = post tax cost of debt [ie: pretax cost of debt x (1 – corporate tax rate)] • V = target value (ie: market cap. + premium) Then: V/NPT < 1/i =Cash PER Hence: Accretive Cash tender if: Target PER < Cash PER • EPS accretion= (EPS after– EPS before) / EPS before The number of the acquirer’s shares is unchanged. Then, with NPA = acquirer’s net profit EPS accretion= (NPAafter– NPAbefore) / NPAbefore= DNPA/ NPAbefore

6. 3. Purchaser ’s EPS accretion / dilution in a share offer • A share tender offer consists in proposing to the target’s shareholders to swap their (listed) shares for the bidder’s listed securities. • These securities generally correspond to new shares issued by the bidder • The exchange parity generally includes a 20%-30% premium on the target share price • The goodwill corresponds to the difference between: • the valuation of the target (ie the number of shares issued by the bidder x the last price of the bidder share) • the equity group share of the target x % purchased (ie 100% if the bidder had no interest in the target’s capital before the tender offer)

7. 4. Banks’ constraints / main covenants • Gearing: Net debt / Equity <1 • Debt coverage: Net debt / EBITDA < 3 • Interest coverage: EBIT / net financial expenses > 4

8. 2. Data on Carrefour and Wal Mart

9. Carrefour and Wal Mart- Datastream information - 9 -

10. WM and Carrefour- P&L, balance sheet

11. 3. Example: Investment opportunity for Wal Mart

12. Introduction • Wal Mart is indisputably the world leader of the retail sector • The purchase of its challenger would make sense from an industrial point of view: • Their retail networks prove a geographical complementarity: • No WM stores in France • The merger would enable cost synergies: • Cuts in head office costs • Decrease in the costs of goods sold thanks to an increasing bargaining power towards suppliers • Carrefour is listed on the Paris Stock Exchange. Therefore, the purchase of a controlling stake requires the launching of a tender offer : • Either in cash (take over bid) • Or in shares • Or in the background of a mix offer • The market cap of Carrefour is around 23 bn € (ie: 30 bn $)

13. Cash offer- Balance sheet impacts • Assumed premium: 30% • Carrefour valuation: 39 bn $ (corresponding to an increase in the net financial debt) • Based on a 15 bn $ equity, the implied goodwill would be 24 bn $ • Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing debt (9 bn $) • The implied gearing ratio is unacceptable for the banks (114% vs a target 100% ratio)

14. Cash offer- EPS accretion/dilution • Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM would: • Consolidate 100% of Carrefour’s net profit • Pay interest expenses based on a 6% pretax cost of debt • The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered • Significant accretive impact (6% in the base case) but the transaction is not acceptable from a banking point of view

15. Share offer- Balance sheet impacts • Assumed premium: 30% • Carrefour valuation: 39 bn $ (corresponding to an increase in the net financial debt) • Based on a 15 bn $ equity, the implied goodwill would be 24 bn $ • Based on a 56.13$ price per WM share, WM would issue 697 million new shares • Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing debt (9 bn $) • The implied gearing ratio is acceptable for the banks (39% vs a target 100% ratio)

16. Share offer- EPS accretion/dilution • Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM would consolidate 100% of Carrefour’s net profit • The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered • Whatever the premium on Carrefour above 30%, the share offer is dilutive from an EPS point of view because the implicit PER of the target (Carrefour: 16.3) is equal or higher than the PER of the buyer (WM: 15.7)

17. Mix offer- Balance sheet impacts • It is possible to offer a 50% premium assuming a mix offer which would be 60%-80% paid in cash