Leveraged Acquisition Finance Market Overview

1. Acquisition FinanceMarket Overview Structuring The Deal Joseph V. Rizzi Amsterdam Institute of Finance 10-12 October, 2016 Login to our free WIFILogin: AIFGUEST Password: welcome@aif Share your AIF experience @AIFknowledge #AIF

2. Sponsor Based Leveraged AcquisitionMarket 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 + 2007 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 LoanIssuer 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 Deals1/1/16 – 6/30/16 TargetAcquirerUSD Monsanto Bayer 61B Syngenta CAAC 46B Johnson Tyco 27B Credit Agricole Sacam 20B LSE Deutsche Boerse 12B Sanofi Amral Roehringer 12B Media Mylan 10B Medivation Sanofi 8B Supercell Tenent 8B FCC Contrel 8B 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 Factors 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 • €160B • €150B • € 70B • € 10B • € 40B • € 40B • € 30B • € 60B • € 50B • € 45B 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 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 (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 • 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 VALUE Corporate Finance Delivery Managing/ Monitoring Fund Raising Exit Investing 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 Amsterdam Institute of Finance October, 2016

19. Most Active Sponsors – Top 20LTM – 1H16 Sponsor Share Ardian 7.29% Carlyle Group 6.25% CVC 6.25% Bridgepoint Capital 5.21% Kohlberg, Kravis & Roberts 5.21% Cinven Ltd 3.13% EQT Partners 3.13% PAI Management 3.13% Permira 3.13% Apollo Management 2.08% Bain Capital 2.08% BC Partners 2.08% Blackstone Group 2.08% Charterhouse Equity Partners 2.08% Clayton, Dubilier & Rice 2.08% Eurazeo 2.08% FSN Capital A/S 2.08% Gilde Investments 2.08% Hellman & Friedman 2.08% KIRKBI A/S 2.08% 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 Superior returns Attracts capital Deals chase money Macro Financial Markets Deal market Disappoint returns Impacts fundraising 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 High Yield Investors Leverage finance syndicate participants Hold Co. Bank Hold Co. Mezzanine Investors FLL Bridge finance Syndicate participants SLL Operating Entity Amsterdam Institute of Finance October, 2016

23. Private Equity LBO Transaction Economics (History) - $ 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 October, 2016

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?) 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) Projected cash flows 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 CFADS Amsterdam Institute of Finance October, 2016

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 October, 2016

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 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 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

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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