SpinoffandEquityCarveOut

Case:NestleandAlcon TheValueof aListing

NeedforRestructuring
Achievegrowth andsurvive GainBetter Competitive Position Focusoncore activities Achieve economiesof scale FundsRaising Utilizationof Excesscash

TaxPlanning& Costreduction

Bailouttakeover

Diversificationand Undiverisification

FamilySeparation

Warding off Predators

ReasonsforCarvingOutAlcon
Markettoreflect thefullvalueof Alcon Onlyfoodand beverageanalysts followNestlegroup Pharmaceutical Analystdonot considerAlcon beingpartofNestle Tocomeout conglomerate discount

PayingofNestles debttomaintain stellarcreditrating

Canuse appropriatemarket multiple

Canusestock optiontopay compensation

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UnbundlingtheValueofNestle
Food and Beverage (F&B) Industry EBITDA %F&B Enterprise Company Industry Value EBITDA Multiples Cadbury Schweppes 51% 15,518 1,511 10.3 Campbell 91% 16,254 1,475 11.0 Danone NA 21,854 2,138 10.2 General Mills 100% 28,104 1,484 18.9 Heinz 100% 19,855 1,912 10.4 Kellog 100% 18,262 1,640 11.1 Kraft 100% 33,082 6,608 5.0 Nestle 94% 97,500 7,662 12.7 Unilever NA 50,038 NA NA Mean 11.2 Median 10.7

Pharma Company % Pharma Enterprise EBITDA Company Industry Value EBITDA Multiples Allergan 63% 9,728 434 22.4 Bausch & Lomb** 15% 2,150 222 King 86% 10,429 426 24.5 Teva 88% 8,345 448 18.6 Forest 100% 14,128 449 31.5 Mean 24.2 Median 23.4
** Not included in analysis because only 15% of its business is in pharmaceuticals
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UnbundlingtheValueofNestle
Valuation of Nestle's Parts Enterprise EBITDA Value EBITDA Multiples Nestle F&B 78,249.25 6,978.70 11.2 L'Oreal 9,100.00 NA Alcon 16,568.09 683.3 24.2 Ex. 9 (EBITDA of 2 000) Nestle 103,917.34 7,662.00 13.6
Nestl'sActualmarketmultiple(EBITDAMultiple)=12.7 Discountinvalue=103,917.34 (12.7*7662)=US$6609.94Millions
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WhatistheParticipationofAlconin Group?
5%ofsales 12%ofEBIT

twicetheNestle groupsgrowthrate

Nestles EBITDA multiple:12.7X(in linewith competitors)

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WhyEquityCarveOut?
Spinoffs

SplitOff

Equity CurveOut

Restructuring

SplitUps

Divestitures

Tracking Stock

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Spinoffs

Spinoffoftenfollowstheinitialsaleofup to20%ofthesharesinaninitialpublic offering(IPO) transactionknownasan equitycarveout EquityCurve Out Creationofsubsidiaryallowsparent toseparateriskofsubsidiary businessfromitscoreoperations shareholdersdecidewhetherto increaseordecreasetheirownrisk

SplitOff

Restructuring

SplitUps

Divestitures

Tracking Stock

Newspunoffstockhasnoequityclaimon theassetsorcashflowsoftheoldparent company

100

SpinOffs
Stage1
Parent Firm ParentFirm Shareholders

Stage2
Parent Firm ParentFirm Shareholders

Subsidiary

SubsidiaryStock PaidtoShareholders AsDividend

ParentShareholders OwnBothParent& SubsidiaryStock

Subsidiary Independent ofFormer Parent

101

Trackingstocksareseparateclassesofcommon stockofparentcorporation Spinoffs Alsoknownasletterstock,targetedstock,and designerstocks

SplitOff

EquityCurve Out

Company'sbusinessoperationsaresplit intotwoormorecommonequityclaims, butbusinessesremainaswhollyowned segmentsofsingleparent

Restructuring
Compensationoftrackingcompany's managerscanbebasedonfinancial resultsandstockpriceoftrackingstock

SplitUps

Divestitures

Tracking Stock

80%offirmsissuingtrackingstocksusea dividendprocessbutsomefirmsusetheissuance oftrackingstockasasourceofcash

102

TrackingStocks
TrackingStocks Issuedbythe ParentFirm
Parent Firm Parent Common Sub 1 Tracking Stock Sub 2 Tracking Stock Sub 3 Tracking Stock

Valueofthe TrackingStock Dependsonthe Performanceof Subsidiary

Subsidiary 1

Subsidiary 2

Subsidiary 3

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Needfor
Spinoffs

SplitOff

EquityCurve Out

Restructuring

SplitUps

Divestitures

Tracking Stock

Bringmorefocus Avoidoverlapofcapabilities Improvevaluationmultiplesforcore business Attempttoimproveshareprice Separatepoorperformers Resultedintakeover Subsidiarytruevaluehidden Preferenceforpureplay(singleindustry) securities Increasedavailabilityofinformation Management'sinabilitytomanage complexorganizations Selloffssharpenfocus,getridofpoorfit subsidiaries,eliminatenegativesynergy

Companiessplitintotwoormoreparts Accomplishedusuallybyinitialcarveouts,followedbyspinoffsofindividualparts Anewclassofstockiscreatedforeachoftheparentssubsidiaries,Currentparentshareholdersreceivea 104 dividendofeachnewclassofstock,andSometimestheremainingcorporateshellisdissolved

Spinoffs Avariationofaspinoffinwhich someparentcompany shareholdersreceivesharesina subsidiaryinreturnfortheir parentshares

SplitOff

EquityCurve Out

Restructuring
Frequentlyusedwhenaparent ownsalessthan100%investment stakeinasubsidiaryinorderto reducepressureonthespunoff firmsshareprice,because shareholderswhoexchangetheir stockarelesslikelytosellthenew stockand

SplitUps

Divestitures

Tracking Stock

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SplitOff
Stage1
Parent Stock Subsidiary Stock Subsidiarystock nowheldbyformer parentshareholders. Parenthasno relationshipwithformer subsidiary Subsidiary Independent ofFormer Parent

Stage2
Former ParentFirm Shareholders

Parent Firm

ParentFirm Shareholders

Parent Firm

Subsidiary

Note:Iftheparentcannotexchangeallofitssubsidiaryshares,itwillspinoffanyremainingsharestocurrentshareholdersona proratabasis. 106

Spinoffs

Motives
SplitOff EquityCurve Out

Restructuring

SplitUps

Divestitures

Tracking Stock

Deconglomeration Movingawayfromthecore business Assetsareworthmoretothe buyerthantotheseller Satisfyinggovernment requirements Correctingpastmistakes Assetshavebeeninterfering withprofitableoperationof otherbusinesses
107

Sellingcorporationtypicallyreceivesconsiderationfortheassetssold cash,securities, orotherassets.Sellscrownjewelssotheyrenotattractiveanymore

Divestiture
Proceed to Negotiated Settlement Reactive Sale Pursue Alternative Bidders Potential Seller Public Sale or Auction Proactive Sale Private One on One or Controlled Sale Public Sale or Auction Private One on One or Controlled Sale Sequenceofevents: 1.Qualifiedbidderssignnondisclosure /receiveprospectus 2.Submissionofnonbindingbids expressedasrange 3.Bidsrankedbyprice,financing ability,formofpayment,formof acquisition;andeaseofdeal 4.Bestandfinaloffers

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Spinoffs

EquitycarveoutisanIPOofsome portionofthecommonstockofa whollyownedsubsidiary

EquityCurve Out

SplitOff

Restructuring

Publicmarketvaluefor operationsofsubsidiary becomesestablished Financialreportsareissuedon thesubsidiaryoperations

SplitUps

Divestitures

Tracking Stock

Parentfirmstendtoberelatively unfocused carveoutsarean opportunitytoimprovefocus Subsidiariesgainpartialfreedomto pursueownactivities

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WhatEffectaCarveoutWould haveonNestles Overall Valuation?

Motivation
Marketforcorporatecontrol Assetare morevaluabletoalternativemanagement team Unlockinghiddenvalue Improvingmanagementincentives Managingagencycosts Divisionnolongerhasastrategicfit Returningtothecorebusiness Undiversifying Buyersmightsimplybewillingtopaytoo much Settingupasubsequentcontroltransaction Threatofacquisition Superiorperformancemeasurement Reductioninbureaucracy Tax/regulatoryfactors Bondholderwealthexpropriation Ifsellingnewlyissuedsubshares,thennon taxableandIfsellingsharesownedby parent,thentaxableongain!
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Spinoffs

SplitOff

EquityCurve Out

Restructuring

SplitUps

Divestitures

Tracking Stock

EquityCarveOuts
InitialPublicOffering PrivateFirmSells APortionofItsEquity tothePublic SubsidiaryEquityCarveOut ParentFirmSells APortionofIts SubsidiaryStock tothePublic Cash Public/Private EquityMarkets

Stock

Cash

Subsidiary Stock

Public/Private EquityMarkets

Subsidiaryof ParentFirm

111

PossibleAlternatives
US

Switzerland

MovetoUS.,becomeaUS corporationandlistinUS

3
Nestle

ListinZurich

StayinSwissanddirectly listinUS ListinZurichandIssue ADR

1
Alcon
4

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PossibleAlternatives
US

Switzerland

Advantages ReincorporateAlconasaUSbasedsubsidiary KeepHQs,topmanagement,andR&Dfacilitiesin Texas FromUS revenues:53%andoperatingincome: 58% MoveAlcontoUSandincorporateitasaUSfirm ListinNewYork Sensibleoption Alconsoperationsanditsnatural investorbasearemainlyUSbased Disadvantages FullysubjecttoUScorporateincometax NotabletoclaimdeductionsinUSforroyalty paymentspaidtoSwissparentcompany Managementsignaledthatthisisnotanoption NestlewouldnotmoveAlconoutofSwitzerland RenamethefirmAlcon,Inc.ratherthanAlcon.AG., Amendtheincorporationdocumentationtoconform toUSstandardswhereverpossible Createaboardofdirectors,withprominent independentUSbusinessfigures;structurethe boardtoresembleotherUSboardswith characteristicssuchasstaggeredterms RegularlyquarterlyreportingofearningsunderUS GAAP DividendpaymentsinUSDbyestablishingahedging facilityconvertingdividendsdeclaredinSwissFrancs 139 intodollardenominatedpayments

3
Nestle

1
Alcon

PossibleAlternatives
US

Switzerland

3
Nestle

Advantages SimpletoIPOAlconinZurich SwisssubsidiaryofanotherSwiss company AlreadyoperatedunderSwiss securitieslaws Wouldsimplifyrelationsbetween NestleandAlcon Minimizefutureadministrativecosts ofoutstandingcommonshares WouldlimitNestleandits underwriterstothepoolofcapitalin Switzerland Switzerlandisadevelopedmarket withfewrestrictions Disadvantages USinvestorshavetodealinforeign currencyincurringhighertransaction costsmakingthesharelessattractive USpensionandMFsarerestricted frombuyingforeignshares LimitAlconsinvestorsbase
140

1
Alcon

PossibleAlternatives
US

Switzerland

3
Nestle

Advantages Avoidspotentialproblemofflowback sinceAlconssharestradedonlyin NewYork Alconwillbeabletofullyenjoythe benefitsofbeingaUSfirmwitha primarylistinginNewYorkwithout anyofthedrawbacksof reincorporatingasaUSfirm Helptargetspecialtypharmaceutical investors Disadvantages Accountingstandardsanddisclosure rules Efficiencyofbusinesspractices Governanceconcerns Legalregimes Transactioncosts ForcedtoabidebyUSaswellasSwiss securitieslaws notalwaysconsistent witheachother Tradingnormallyseemedtocenteron onemarket,eveniftheshareswere initiallyintroducedintwoplaces
141

1
Alcon

PossibleAlternatives
US

Switzerland

3
Nestle

1
Alcon

Advantages Mostfamiliarinstrument MaybetargetedbyUSpharma funds Maybeseenascandidateforinternationaldiversifications Minimizescrossnationaldifferencesinsecuritiesregulations andtradingconventions ListedonNYSE,AMEX,andNASDAQ Formofequityownership IssuedagainstsharesrepresentedthroughADS Canbeissuedformorethanoneunderlyingshareorfora fractionofshare ADRratio Reversibleprocess ConsiderationindecidingADRratio ~matchingofvalueof sharesofUScompaniesinthesameindustrybybundlinga specificno.ofsharesintooneADR Europeancompanies:72% AsianCompanies:21% LatinAmericaandAustralia:7% Top50ADRprogramsrepresented>90%oftradingvolumein 1999 NonUSfirmsraisingequityinUS Programmanagementdoneby Citibank,JPMorgan Othersimilarstructures GDR,EDR,IDR Accessmoreinvestors Broadershareholderbase Increasesliquidityofsharesandmakingitlessrisky Goodcorporategovernance filingUSGAAPaccounts, meetingcertainstandardsofcorporategovernance Increasedfirmsvaluation Crosslistedfirmshavehigherreturnsandalowercostof capital MaymakeafirmanditsproductsmorerecognizableinUS Maybeusefulasanacquisitioncurrency Easierforforeignfirmstocompeteformanagerialtalentsince theycanoffermanagersstockoptionsintheformofADRs Mayalsoincreaseexecutivepay universeofcomparable companiesbroadenstoUSandglobalfirmswhichusuallyhave higherlevelsofcompensation

142

PossibleAlternatives
US

Switzerland

3
Nestle

1
Alcon

Disadvantages Donoteliminatecurrencyrisk MaynotretainitsSwissidentity Requiresmoretransparencyin operationsandresults Maybecomeatakeovercandidate UnderminingNestles corporate cultureandprotectionitenjoysfrom takeover Activeinvestors:hedgefundsand specializedsectorfunds ListAlconinSwitzerlandandissue ADRinUS StillUSinvestorshaveanunderlying economicexposuretoUSD/CHF exchangerate

143

ADRMechanics

144

FactorsConsideredforIssuingADRs
Visibility Broader investorbase More sophisticated investorbase Acquisition currency

Investorbase withdifferent preferences

Accessto retailinvestors

Stockoptions foremployees
145

TypesofADRs
Level I Level II Level III Shares offered and listed on a US exchange AMEX NASDAQ NYSE Rule 144 A GDR Global offering of securities outside issuer's home market

Description

Unlisted

Trading SEC Registration US reporting requirements

OTC market

Listed on a US stock exchange AMEX NASDAQ NYSE

Private placement to QIB

Registered Registered Registered under under Form F-6 under Form F-6 forms F1 and F6 Exempt under Rule 12g3-2(b)

Form 20-F

Form 20-F

US private placement US exchange market Non US exchange Varies depending on structure of US None offering Varies depending on structure of US Exempt under rule offering 12g3-2(b)

Features

Can raise new capital No new capital Most eloborate form of ADR Most basic form can be issued Higer liquidty and Issuer cannot Financial raise capital statements need visibility Wide bid-ask to be prepared IPO type prospectus No SEC approval required spread as per US GAAP to be filed

No standard structure Heterogeneous in nature

146

Marketdisciplinefailsincase
Marketexpectations aboutpriceconvergence aretimeboundedand marketliquidityis limited

Marketsegmentation duetodifferentmarket characteristics

Differentmarket characteristics

Differentindex membership

Homebias

152

KeyCharacteristicsofAlternativeExit andRestructuringStrategies

174

ChoiceofRestructuringMethods Spinoffs
Parent'spotentialpositiontocreatevaluethroughskills,systems,orsynergiesisweak Parentsandsubsidiarieshaveconflictsofinterest

Equity carveouts

Firmscaneasilyseparatesubsidiaries Bringaddedattentiontosubsidiarieswithhighmarginsandgrowth Providecapitalforacquisitionsorotherinvestments Allowdivisionmanagerstotakeprimaryresponsibilityforfinancingandinvestmentdecisions Subsidiariesmayhavebetteraccesstocapital Takeadvantageofparent'sdebtrating Seekfundingfromcapitalmarketsinsteadofoverstatingbudgetingneedstoparent Fundprojectsthatotherwisewoulddepressparent'searnings

175