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Introduction
Agenda
This presentation will cover the following topics:
1
Overview of Rothschild Inc. Role of valuation in restructuring Valuation methodologies and mechanics Comparable companies analysis Precedent transactions analysis Discounted cash flows analysis
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World-leading position Restructuring advisor of the year Acquisitions Monthly Awards 2009 and 2010 M&A Bank of the year Acquisitions Monthly Awards 2005 and 2007 Restructuring deal of the year IFR Awards 2009, Acquisitions Monthly Awards 2006 and 2008 Leading restructuring advisor in France restructuring league tables as of January 2010 280 deals worldwide totaling $267 billion in 2008 39 deals over $1 billion in 2008 Recognition from peers and industry with awards from Financial News and Acquisitions Monthly Key focus on advice Mergers & Acquisitions Corporate Restructurings Structured Finance and Securitization Strategic Advisory Services Objective financial advice Objective, senior banker value-added advice unencumbered by the need to cross sell other products Industry expertise Dedicated sector teams provide experience, knowledgeable advice, industry analysis and contacts Rothschild culture A culture of innovation, client service and integrity that has resulted in a reputation for value added practical advice. Rothschild seeks to foster and grow long term relationships with our clients
Most Innovative in Corporate Restructuring "Rothschild has been active in virtually every type of transaction, every sector and every geography. The Banker Restructuring Adviser of the year Debt Advisory House of the Year Restructuring Adviser of the year Restructuring Deal of the Year: Eurotunnel M&A Bank of the Year Restructuring Advisor of the Year Restructuring Deal of the Year
2009 Turnaround and Restructuring Adviser of the Year Buy-side Mandate of the Year: CVC Capital Partners acquisition of a 25.01% stake in Evonik Industries
Global Deal of the Year 2008 RBS-led consortium acquisition of ABN AMRO Mid Market Financial Adviser 2008 & 2007
2008 Transaction of the Year Award Remy International Americas Restructuring Deal of the Year 2006
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Toronto Washington
Seoul
120 in US and Canada 100 in Asia 30 in Australia 25 in Latin America 40 in Africa and ME 48 offices in 34 countries Dedicated sector teams providing in-depth industry expertise Rothschild is exclusively focused on M&A advisory, financing and restructuring services No conflicts from underwriting, sales, trading and research activities
Sao Paulo
Offices
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10 Lazard
Completed deals by value (1 Jan to 30 Sep 2009) Source Thomson Reuters 2 Oct 2009
US M&A 1 2 3 4 5 6 7 8 9 Morgan Stanley Goldman Sachs Citi JP Morgan Evercore Partners BoA/ML Barclays capital Rothschild Blackstone Group
US$bn
No
295.6 104 232.4 222.8 197.9 154.0 148.1 133.5 73.7 71.6 62.3 84 68 93 16 79 46 39 10 58
2010
2009
2009
2009
Volkswagen AG / Porsche SE
BM&F
Rio Tinto
10 Credit Suisse
Announced deals by value (1 Jan to 30 Sep 2009) Source Thomson Reuters 2 Oct 2009
Acquisition of Dr. Ing. h.c. F. Porsche AG (EV of 12.4bn), via acquisition of an initial 42% stake plus put/call arrangement for the remaining 58% 2009
Financial adviser to S&N on its defence and subsequent recommended 10.2bn cash offer from Carlsberg and Heineken consortium 2008
$1.7bn disposal of its 40.0% interest in the Cortez Gold Mine to Barrick Gold Corporation
2008
2008
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Currently composed of 100 bankers globally with offices in New York, London, Paris, Frankfurt, Milan and Singapore Advisory focus with no conflicts from sales and trading or research activities Lender negotiations (waivers, amendments, forbearance agreements) Capital raising (rights offerings, rescue financing, DIP and exit financings) Exchange offers (debt-for-debt, debt-for-equity, hybrid) Distressed M&A Pre-packaged and pre-negotiated chapter 11 Traditional chapter 11 Strong relationships and credibility among various players in the process, including: (i) financing sources both debt and equity, (ii) banks, (iii) bondholders, (iv) financial and legal advisors, and (v) financial sponsors The Rothschild teams success in restructuring and debt advisory is a result of:
2009 Restructuring House of the Year Most Innovative in Corporate Restructuring Debt Advisory House of the Year Restructuring Adviser of the year
Depth of professional and transactional experience and a broad mix of skills represented by Rothschild bankers Demonstrated industry expertise in various industries and an extensive range of contacts among financial buyers Commitment to the highest standards of integrity, confidentiality and client service Creative and resourceful approaches to maximization of value for Rothschilds clients
Strong US debt advisory & restructuring presence
2008 Transaction of the Year Award Remy International Restructuring Deal of the Year: Eurotunnel
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Mergers & acquisitions Fairness opinions New business projects Defense Capital raises Exchange offers Rights offers Basically any time a company modifies its ownership, operations or capital structure
Beginning of the case DIP financing, priming, cash collateral Middle of the case Business plan, asset sales, credit bidding, fraudulent conveyance and other avoidance actions End of the case Disclosure Statement and Plan of Reorganization
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Government agencies
Board
Secured lenders
Trade creditors
Company
Unsecured lenders
Management
Old equity
Subordinated lenders
The Company often serves as the honest broker to resolve competing stakeholder views on value
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Secured lenders Obtain as much debt in the restructured entity as possible If forced to accept equity, argue for the lowest defensible value Unsecured lenders Obtain some debt in the restructured entity, if possible Otherwise, argue for the highest defensible value Subordinated lenders Argue for the highest defensible value, if they are close to being "in the money" Seek affirmative litigation recoveries that may sidestep priority rules Trade creditors Avoid liquidation, continue to transact business during the restructuring and with the reorganized entity Pursue critical vendor motions
Old equity In the case of private money, obtain releases Assess the opportunity to invest capital through a new money plan Public equity rarely plays a role in insolvent restructurings Management Keep the business together, avoid piecemeal M&A or outright liquidation Identify and side with the "winning party" Minimize leverage in the reorganized company Board of directors If the company is solvent, maximize shareholder value If the company is insolvent, maximize value for all stakeholders Obtain releases Government agencies IRS, PBGC, SEC, FERC
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Liquidation value
Liquidation value determines the net proceeds generated by liquidating or selling off each of the Targets assets independently, or in clusters, for fairmarket value In most cases, the going-concern value exceeds liquidation value because the collection of assets produces a greater return when pooled together in a productive fashion within an operating business than when sold-off/disposed of individually in a liquidation (particularly if there are significant liabilities such as environmental clean-up, asbestos claims, severance or other liabilities that significantly offset gross liquidation proceeds)
Under the Best Interest Test and pursuant to the bankruptcy code, the creditors of a company emerging from bankruptcy must recover more value under a Plan of Reorganization than the value achievable in a liquidation of the Targets assets
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Other Analyses
Fixed asset appraisals Trading price of public securities Net operating loss carryforward (NOL) Other multiples
% Weighting
% Weighting
% Weighting
% Weighting
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Total Enterprise Value / Revenue Total Enterprise Value / EBITDA Total Enterprise Value / EBIT Total Equity Value / Net income Standard multiples utilized by investment bankers tend to vary from company to company and from industry to industry and can at times be somewhat esoteric. Some examples by industry are: Cable, telecom and subscription-based businesses: value per subscriber (e.g. $3,500 per subscriber) Oil exploration and mining businesses: value per unit of reserve or unit of production (e.g. $10 per barrel of oil) Power businesses: value per unit of capacity (e.g. $10 / kwH) Real estate and retail: value per square foot (e.g. $50 / square foot) multiples are the ratio of a measure of the Targets value (Enterprise Value or Equity Value) to its financial (or operating) results
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A comparable peer group should embody the same business and financial attributes such that their public trading values represent a reasonable proxy for those of the company under consideration
Select Comparable Company Universe
Relevant attributes include: Business mix (products, markets served, distribution channels, etc.) and respective weight of each product Industry group Geographic location Cyclicality Seasonality Operations (production processes, critical inputs/ components) Financial parameters (leverage, historical and future growth rates, margins, dividend yield) Markets Size (revenues, assets, market capitalization) Shareholder base
Customers Once the comparable companies are chosen, the implied value of the asset / company is calculated by multiplying its EBITDA, sales, operating income, operating cash flow, net income, book value and other key operating statistics by the respective comparable company multiples Financial data should be adjusted to exclude non-recurring items and should be adjusted on a pro forma basis for certain material corporate events such as recent mergers, stock splits, financings, etc.
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An effective indication of public market value since it utilizes public data that is readily available highly transparent Market efficiency ensures that trading values reflect industry trends, business risk, market growth, etc. Can be utilized in the context of a break-up analysis or divisional valuation Widely recognized methodology used by public equity analysts Projected information comes from third party sources (theoretically less biased compared to those used in a companys DCF) Information is also useful to determine debt capacity for a reorganized company
Reliability depends upon the level of and robustness of comparable company data (no two companies are truly identical) Does not include a control premium Accounting policies can differ from one company to another complicating comparability If certain Target and/or comparable company metrics are negative, then multiples are irrelevant Comparable projected data may not be available or be difficult to obtain/assess Cyclicality is not reflected based on historical data and, often, limited projected information Less reliable if comparable set does not trade robustly Often need to adjust for leverage, liquidity and control Many feel that the stock market is emotional and sometimes fluctuates irrationally
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Enterprise Value
(2)
TEV / Revenue LTM 1.2 x 1.0 x 0.6 x 0.9 x 0.8 x 1.4 x 0.6 x 1.4 x 1.1 x 0.9 x 0.9 x 0.7 x 0.6 x CYE2010 1.1 x 0.9 x n.a. 0.9 x 0.8 x 1.3 x 0.6 x 1.3 x 1.1 x 0.9 x 0.9 x 0.8 x 0.6 x
(3)
TEV / EBIT LTM 11.8 x 9.3 x n.a. n.a. 10.5 x 12.9 x 13.3 x 13.3 x 12.9 x 11.5 x 11.8 x 10.5 x 9.3 x CYE2010 10.2 x 7.9 x
(3)
TEV / EBITDA CYE2011 8.0 x 7.8 x n.a. n.a. 5.6 x n.a. 10.7 x 10.7 x 8.7 x 8.0 x 7.9 x 7.3 x 5.6 x LTM 6.4 x 6.1 x 8.1 x n.a. 6.2 x 7.0 x 6.7 x 8.1 x 6.9 x 6.7 x 6.5 x 6.2 x 6.1 x CYE2010 5.8 x 5.6 x n.a. n.a. 5.0 x 6.5 x 5.8 x 6.5 x 5.8 x 5.8 x 5.8 x 5.6 x 5.0 x
(3)
CYE2011 1.1 x 0.9 x n.a. 0.8 x 0.7 x 1.3 x 0.6 x 1.3 x 1.1 x 0.9 x 0.8 x 0.7 x 0.6 x
CYE2011 5.3 x 5.2 x n.a. n.a. 3.4 x n.a. 6.0 x 6.0 x 5.5 x 5.0 x 5.3 x 4.7 x 3.4 x
$4,624.5 4,387.4 524.0 754.6 1,360.0 1,850.3 1,396.1 $4,624.5 3,118.8 2,128.1 1,396.1 1,057.3 524.0
$6,767.7 5,265.8 1,257.2 1,240.9 1,310.3 4,367.9 1,666.7 $6,767.7 4,816.8 3,125.2 1,666.7 1,283.8 1,240.9
n.a. n.a. 8.0 x 11.2 x 10.4 x 11.2 x 10.4 x 9.5 x 10.2 x 8.0 x 7.9 x
Target Com pany EBITDA LTM EBITDA 2010E EBITDA Selected Range $200 $221 Mean 6.7x 5.8x Median 6.5x 5.8x Multiple Range Low 6.2x 5.6x
(4)
Im plied Range Low $1,240 $1,235 $1,225 High $1,380 $1,279 $1,325
Notes: (1) Based on fully-diluted shares outstanding (2) Market capitalization plus net debt (3) Based on Wall Street estimates (4) Based on upper and lower quartile
Comparable company analysis implies an Enterprise Value of approximately $1,225 million to $1,325 million
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Precedent Transactions Analysis is a common form of valuation that applies multiples derived from analyzing prices paid by purchasers for similar companies to the operating statistics of the company being valued (the Target) Precedent Transactions Analysis is a Relative Valuation because it is premised on the concept that one can assess the valuation of a Target based upon what third parties paid for similar assets The valuation technique is similar to a Comparable Companies Analysis, except one is analyzing what a purchaser actually paid in a previous acquisition, which incorporates the premium to gain control of the Target (the Control Premium)
Traditionally, the implied control premium which a purchaser typically pays over and above the current market trading price (assuming a publicly traded company) is approximately 20-30% (although premiums vary to a wide degree) This premium reflects a market clearing price required to incentivize the previous owners to sell their shares and reflects the acquirors willingness to pay the seller for potential cost savings/synergies that can be generated in a combination as well as the strategic value of Target ownership Total Enterprise Value / Revenue Total Enterprise Value / EBITDA Total Equity Value / Net Income
Generally, the precedent transaction data are expressed in the form of valuation multiples such as: Precedent transaction multiples are ratios of what an Acquiror paid for a Target in terms of Enterprise Value and Equity Value to the Targets own financial data
Just as in the Comparable Companies Analysis, standard multiples calculated tend to vary from company to company and from industry to industry
Analyze Data and Identify Appropriate Valuation Range
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Potentially highly effective determinant of value when many comparable precedent transactions exist Incorporates payment of control premium Reflects value actually paid to acquire a comparable company Based on publicly available data often highly transparent Not highly dependent on assumptions and projections Realistic in the sense that past transactions were successfully completed at certain premiums Indicates a range of plausibility for premiums offered May demonstrate trends such as consolidation, foreign purchaser and financial sponsor activity, frequency of types of transactions, etc. Recent transactions can reflect supply and demand for assets and general investor sentiment toward an industry
Assumes previous acquirors appropriately valued target Works well only when relevant recent comparable precedent transactions exist Technique limited by the amount of data that is publicly available concerning transactions Public data on past transactions can be misleading, limited or nonexistent May not reflect recent information relative to Target industry prospects/competitive dynamics Market cycles and volatility may affect historical valuation levels Buyer synergies and transaction structure impact multiples paid for acquired companies May include price premium in strategic transactions Entirely based on historical results Often requires adjustments for leverage, liquidity, control, and unique value transfers Most unreliable method in times of high volatility Limited relevance for unprofitable companies
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LTM
0.32 1.48 0.89 2.16 0.76 2.32 1.59 0.71 0.95 0.80 0.97 0.71 0.30 0.40 0.40 0.50 1.30 0.50
CFY
N/A 1.44 N/A 2.04 0.84 2.34 N/A 0.74 0.97 N/A N/A 0.70 N/A N/A N/A N/A N/A 0.49
FY + 1
N/A 1.36 N/A 1.96 0.80 2.47 N/A 0.76 1.08 N/A N/A 0.61 N/A N/A N/A N/A N/A 0.42
LTM
9.8 8.7 6.9 13.9 6.8 24.5 10.8 7.2 7.9 4.4 N/A 4.7 4.7 5.0 6.1 6.2 13.6 6.2
CFY
N/A 8.1 N/A 11.2 7.9 19.9 N/A 6.5 8.3 N/A N/A 4.3 N/A N/A N/A N/A N/A 4.8
FY + 1
N/A 7.5 N/A 10.1 7.0 27.3 N/A 6.3 7.8 N/A N/A 4.1 N/A N/A N/A N/A N/A 4.6
Plastic raw materials & isocyanate First Chemical Holdings Chemical & inorganic products Polyethylene resins Chemical & inorganic products Petrochemicals & refining Specialty chemicals Chemicals and plastics Saudi Basic Industries Corp Braskem SA Texas Petrochemicals INEOS Enterprises Limited Chemtura Corporation Access Industries
Source: Public filings and news articles Note: Reflects financial results for last 12 months ended prior to announcement of transaction
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EBITDA
LTM
Low Low er Quartile Mean Median Upper Quartile High 0.32x 0.77 1.06 0.92 1.35 2.16
CFY
0.74x 0.84 1.21 0.97 1.44 2.04
FY + 1
0.76x 0.80 1.19 1.08 1.36 1.96
LTM
4.4x 6.9 8.5 7.9 9.8 13.9
CFY
6.5x 7.9 8.4 8.1 8.3 11.2
FY + 1
6.3x 7.0 7.7 7.5 7.8 10.1
Target Com pany EBITDA LTM EBITDA 2010E EBITDA Selected Range $200 $221 Mean 8.5x 8.4x Median 7.9x 8.1x Multiple Range Low 6.9x 7.9x
(2)
Im plied Range Low $1,380 $1,742 $1,550 High $1,960 $1,830 $1,900
Precedent transaction analysis implies an Enterprise Value of approximately $1,550 million to $1,900 million
Source: Public filings and news articles Note: Reflects financial results for last 12 months ended prior to announcement of transaction (1) Due to the shift in industry multiples since prior to 2007 and dated nature of the transactions, Rothschild excluded transactions announced prior to 2007. The median of LTM EBITDA multiples pre-2007 is 6.8x. The median of LTM EBITDA multiples post-2007 is 7.9x. Petkim Petrokimya Holdings transaction is considered an outlier and is excluded (2) Based on upper and lower quartile
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Discounted Cash Flow (DCF) value represents the present value of unlevered cash flows to all providers of capital discounted at the weighted average cost of capital (WACC) Incorporates detailed assumptions about future cash flow generating ability and most closely represents the theoretical economic worth of the business (represents the Intrinsic Going-Concern Valuation)
Unlevered free cash flow is defined as EBITDA, less unlevered cash tax payments, less capital expenditures and changes in working capital DCF analysis is a theoretical valuation technique which values a company / asset as the discounted sum of its:
Calculate Projected Target Unlevered FCFs and Appropriate Discount Rate
Unlevered (before financial costs) free cash flows (this is not operating cash flow) over some forecast period (usually 5 years), and Terminal value at the end of the forecast period (usually Year 5) Trading Comps multiples of Year 5 cash flow, EBITDA, Sales, etc. M&A Comps multiples of Year 5 cash flow, EBITDA, Sales, etc. Perpetual Growth Rate (Gordon Growth Model) Perpetual value = (final year cash flow x (1 + growth rate)) / (discount rate growth rate)
The cash flow streams and terminal value are discounted at the companys appropriate weighted average cost of capital
Calculate the Enterprise Value
Because the accuracy of the DCF is highly dependent on a number of assumptions including financing performance, WACC assumptions and terminal value assumptions, valuations are expressed as a range of values determined by a range of values for key variables
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WACC 12.1% Mid-Year Convention Discount Factor (Mid-Year) Present Value of Unlevered Free Cash Flow s
Exit EBITDA Multiple Terminal Value PV of TV PV of Unlevered Free Cash Flow s Illustrative Enterprise Value Implied EV / LTM EBITDA Terminal Value as a % of EV
Grow th Rate in Perpetuity Terminal Value PV of TV PV of Unlevered Free Cash Flow s Illustrative Enterprise Value Implied EV / LTM EBITDA Terminal Value as a % of EV
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Discount Rate
Im plied EV / LTM EBITDA Sensitivity Table Exit EBITDA Multiple 13.0% 12.5% 12.0% 11.5% 11.0% 6.0x 7.2x 7.3 7.4 7.6 7.7 6.5x 7.6x 7.7 7.9 8.0 8.2 7.0x 8.0x 8.2 8.3 8.5 8.6 7.5x 8.4x 8.6 8.7 8.9 9.1 8.0x 8.8x 9.0 9.2 9.4 9.5 Discount Rate
Im plied EV / LTM EBITDA Sensitivity Table Grow th Rate in Perpetuity 13.0% 12.5% 12.0% 11.5% 11.0% 2.0% 5.8x 6.1 6.4 6.7 7.1 2.5% 6.0x 6.3 6.6 7.0 7.4 3.0% 6.2x 6.5 6.9 7.3 7.8 3.5% 6.4x 6.8 7.2 7.6 8.2 4.0% 6.7x 7.1 7.5 8.0 8.6 Discount Rate
DCF analysis implies an Enterprise Value of approximately $1,375 million to $1,650 million
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Firm specific: Debt / Equity Levered Beta Tax Rate Cost of Equity (Ke) Cost of Debt (Kd) Cost of Debt After-Tax (Kd AT) Weighting of Debt Weighting of Equity WACC Captial Structure Sensitivities Debt / Total Capital 0.00% 10.00% 20.00% 30.00% 40.00% 50.00%
1 Debt includes preferred stock
1
Target Debt to Equity Ratio Formula: B-levered = B-unlevered * (1+ (1- tax rate)*(D/E)) Based on Marginal Tax Rate Formula: Ke = risk free rate + Levered Beta x (Market Risk Premium) Firm's current avg. rate or based on recent comparable financing Formula: (Pre-Tax Cost of Debt) * (1 - tax rate) Based on Debt to Equity Ratio Based on Debt to Equity Ratio
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Comp. Co.
$1,225
$1,325
Prec. Tran.
$1,550
$1,900
DCF
$1,375
$1,650
Range
$1,380
$1,630
$1,000 $1,100 $1,200 $1,300 $1,400 $1,500 $1,600 $1,700 $1,800 $1,900 $2,000
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The three traditional valuation methodologies calculate the Enterprise Value or going-concern value of the business Ultimately, each method should be use d in conjunction and weighted according to the appraisers own judgment Valuation is an exercise in judgment that requires a substantial understanding of the Debtors business plan and the shortcomings and flaws of all three methods The result is the value or cash flows generated by the operating assets of the Debtor However, the value available to creditors and other stakeholders in a reorganization is the Total Value of the Debtor which may or may not equal the Enterprise Value The Total Value of the Debtor equals the Enterprise Value of a Debtor plus all value or cash flows generated by non-operating assets Non-operating assets can include: Excess cash Net operating loss carry-forwards / tax refunds Assets held for sale Non-operating notes receivables Other non-operating assets Litigation claims
Remember: Valuation employs fundamental tools but depends greatly on the investment bankers judgment
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Due to various market dislocations, market trading value is often not the best indicator of value for a bankrupt company
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Valuation in a restructuring
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Valuation in a restructuring
Contested valuations Introduction
One of the central components of a chapter 11 case is the enterprise value ascribed to the reorganized entity (the Reorganization Value or Plan Value) The Reorganization Value determines the size of the pie to be distributed to constituents and is therefore of paramount importance Considering allocation of value is a zero sum process because variance in the Reorganization Value will inherently transfer value from one party to another The Plan Value is determined by the Debtors and their advisors and disclosed in the Debtors Plan of Reorganization solicitation document (the Disclosure Statement) Threshold for approval is two-thirds in dollar amount and one-half in number Parties with standing have a voice in court and can object to the Plan Value When a party with standing objects to the valuation set forth in the Disclosure Statement, the Court will have a hearing to determine valuation considered a contested valuation or valuation fight
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Valuation in a restructuring
Hierarchy of claims and interests
Value flows through the waterfall:
Secured debt (mortgages, liens, etc.) Administrative claims (professional fees, etc.) Unsecured debt and other unsecured obligations Subordinated claims Preferred equity Common equity
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Valuation in a restructuring
Contested valuations Motivations of various constituents
Valuation fights are generally driven by the fact that constituents in chapter 11 cases have different motivations vis-vis Plan Value
Typically most concerned with getting paid out in cash / refinanced DIP Lenders May have bias towards low valuation in certain circumstances
Paid to the extent of the collaterals value. Must be paid in cash or debt, not equity (unless otherwise agreed to) Pre-Petition Secured Lenders Inability to cram up with equity
May not want valuation to be too low as this could result in being under-collateralized Risk of losing secured rights on portion of claim deemed by the court to be unsecured
All of equal rank unless expressly subordinated. Claim can be paid in any current (cash, debt and equity) Unsecured Creditors Typically want to assert a valuation higher than that asserted by DIP lenders and pre-petition secured lenders May not want valuation to be too high as this could mean recovery to common / preferred equity holders Recovery to old equity usually means less or no equity to unsecured creditors Typically assert the highest valuation in order to position themselves as much in the money as possible
Old Equity
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Case study
Overview
Company description
H. Miller Chemical Corporation (H. Miller or the Company) is in the commodity chemical business and produces large quantities of ammonia LTM sales of $1,050 million and EBITDA of $125 million Due to the robust economic growth, the Company has grown and plans to expand current production capabilities due to outlook for the business and price increases for ammonia
In January 2007, Poor Allocator Investments (Poor Allocator), a large private equity firm, takes H. Miller private in a transaction valued at $1 billion
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Case study
Deal details
The company finances the acquisition with $200 million of equity, $350 million of bank debt and $450 million of bonds
The deal is predicated on LTM EBITDA of $125 million and projected 2007 EBITDA of $138 million
$1,000 = 125
= 8.0x
$1,000 = 138
= 7.25x
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Case study
Projections
At the time of the acquisition, Poor Allocator views the business as having a great future. They believe that the market does not fully understand the long-term growth story of China and the robust growth of developing economies which they expect to increase revenue and earnings more rapidly than the Company anticipates. They also believe that they can take 2% - 3% of the costs out of the business over the next 3 years
Poor Allocators projections for H. Miller and resulting IRR ($ in millions)
2006A Revenue EBITDA % margin Capex % of sales EBITDA - Capex Interest expense (1) Interest coverage IRR $1,050 125 11.9% 74 7.0% 52 2007 $1,150 138 12.0% 81 7.0% 58 54 1.1x 54% 2008 $1,275 163 12.8% 89 7.0% 74 54 1.4x 63% 2009 $1,400 189 13.5% 98 7.0% 91 54 1.7x 57% 2010 $1,550 220 14.2% 109 7.0% 112 54 2.1x 52% 2011 $1,700 255 15.0% 119 7.0% 136 54 2.5x 48% CAGR 10.1% 15.3%
(2)
Poor Allocator closes the transaction and pops champagne. The Miller family that owned the business for the last 50 years (and knows everything about this business) does the same Poor Allocator, based on their projections and assuming the same exit multiple as the purchase price, believes the investment will generate a significant IRR for the fund
(1) Interest expense assumes no debt paydown (2) Interest coverage calculated as the (EBITDA-Capex)/Cash Interest
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Case study
Comparable company analysis
Trading comps ($ in millions)
Share Com pany Resnick Partners, Inc. Moneymaker Company Jindal's Sw indal Co. Get Rich Quick Incorporated Mitch Corp. A+ Chemicals Rothschild Commodity Harvey Biz Co. Price $56.96 13.10 10.00 14.08 113.69 81.04 11.97 8.64 Market Value $300 426 730 680 282 236 311 385 Debt $124 120 376 181 120 100 137 127 Preferred Equity -----50 --Cash ($45) (55) (295) (150) (122) (80) (40) (50) Enterprise Value $379 491 811 711 280 306 408 462 Low Mean Median High EV / Revenue LTM 1.0x 0.8 0.5 0.6 0.8 1.1 1.2 0.9 0.5x 0.9 0.9 1.2 2007 0.9x 0.7 0.4 0.5 0.6 1.0 0.5 0.8 0.4x 0.7 0.7 1.0 EV / EBITDA LTM 8.2x 7.8 6.0 6.2 9.0 8.5 7.4 7.6 6.0x 7.6 7.7 9.0 2007 7.4x 7.0 5.3 5.4 8.3 7.7 6.8 6.9 5.3x 6.9 7.0 8.3
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Case study
Developments
1
For the first half of 2007, the Companys results meet its plan. Chemical and market indices trade up as the business continues to perform well. The bank debt and bonds continue to trade near par. EBITDA outperforms 1H 2007 by $2 million
Pricing chart Company securities vs. market indices
100 80
60 40
20 -Dec-06
Jun-07
Dec-07
Dec-09
FY ended Dec-06 Plan Actual Variance LTM EBITDA multiples Median $125 125 --
7.7x
7.8x
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Case study
Developments (contd)
2
Beginning in mid 2007, performance begins to falter. The housing and debt markets are starting to show cracks and the Companys results are slightly below plan. Managements view is that the shortfall is just a short-term economic hiccup. Poor Allocator remains pleased with their investment. EBITDA underperforms 2H 2007 by $10 million
Pricing chart Company securities vs. market indices
100 80
60
40 20
-Dec-06
Jun-07
Dec-07
Dec-09
FY ended Dec-06 Plan Actual Variance LTM EBITDA multiples Median $125 125 --
7.7x
7.8x
7.4x
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Case study
Developments (contd)
3
In the first half of 2008, the Company becomes more concerned as the subprime crisis spreads across the globe. Demand for product falls as do market prices. The outlook is highly uncertain. The Company determines the situation is not a short-term phenomenon and starts to defer capex spending to maximize cash flow. EBITDA underperforms 1H 2008 by $25 million
Pricing chart Company securities vs. market indices
100
80
60 40
20
-Dec-06
Jun-07
Dec-07
Dec-09
FY ended Dec-06 Plan Actual Variance LTM EBITDA multiples Median $125 125 -7.7x
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Case study
Developments (contd)
4
The second half of 2008 is a disaster. With the failure of Lehman, the financial markets seize and global demand comes to a halt. The Companys profitability falls into a tailspin and its bank debt and bonds trade at discounts to par value. The Company retains Weil Gotshal and Rothschild to review strategic alternatives. EBITDA underperforms 2H 2008 by $70 million
Pricing chart Company securities vs. market indices
100 80 60 40 20 -Dec-06
Jun-07
Dec-07
Dec-09
FY ended Dec-06 Plan Actual Variance LTM EBITDA multiples Median $125 125 --
7.7x
7.8x
7.4x
6.5x
5.5x
5.5x 2008 EBITDA of $68 implies a valuation of $374 million. Remember that Poor Allocator purchased the Company for $1 billion 2 years prior
The Company files for bankruptcy one day prior to the January 15, 2009 maturity date
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The business plan
The Company creates a new business plan. The new projections are compared to the prior projections below:
New projections ($ in millions)
2008A Revenue EBITDA % margin Capex % of sales $755 68 9.0% 23 3.0% 2009 $705 60 8.5% 28 4.0% 2010 $800 80 10.0% 40 5.0% 2011 $910 100 11.0% 55 6.0% 2012 $1,000 120 12.0% 60 6.0% 2013 $1,070 150 14.0% 64 6.0% CAGR 11.0% 25.7%
Variance ($ in millions)
2008 Revenue EBITDA % margin Capex % of sales ($520) (95) (3.8%) (67) (4.0%) 2009 ($695) (129) (5.0%) (70) (3.0%) 2010 ($750) (140) (4.2%) (69) (2.0%) 2011 ($790) (155) (4.0%) (64) (1.0%)
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The business plan
At the time of the reforecast, comparable companies were trading in the 6.0x range. The Company had approximately $800 million in debt
Trading comps ($ in millions)
Share Com pany Resnick Partners, Inc. Moneymaker Company Jindal's Sw indal Co. Get Rich Quick Incorporated Mitch Corp. A+ Chemicals Rothschild Commodity Harvey Biz Co. Price $35.77 8.23 6.28 8.84 71.40 50.90 7.52 5.43 Market Value $188 268 458 427 177 148 195 242 Enterprise Value $384 453 749 614 320 348 407 437 Low Mean Median High EV / Rev. LTM 0.8x 0.6 0.3 0.4 0.6 0.9 1.0 0.7 0.3x 0.7 0.7 1.0 EV / EBITDA LTM 6.6x 6.2 4.4 4.6 7.4 6.9 5.8 6.0 4.4x 6.0 6.1 7.4
(2)
$298 418
(1) Assumes bank debt will get par before bonds get recovery (2) Calculated off 2008A EBITDA of $68 million
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Valuation range considerations
Below is an illustrative valuation range that constituencies could ascribe to the Debtor
Equity
EBITDA
Banks Bonds
The Companys investment bankers view of enterprise value for H. Miller is $330 million to $560 million
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Valuation comparison
Company valuation ($ in millions)
Methodology Comparable Companies Analysis Precedent Transactions Analysis Discounted Cash Flow Analysis Range of Total Enterprise Value Low $330.0 460.0 365.0 $360.0 Mid $360.0 540.0 407.5 $400.0 High $390.0 620.0 450.0 $440.0 Weighting 45.0% 10.0% 45.0% 100.0%
Comp. Co.
$330
$390
Comp. Co.
$400
$510
Prec. Tran.
$460
$620
Prec. Tran.
$520
$700
DCF
$365
$450
DCF
$575
$750
Range
$360
$440
Range
$500
$655
$0
$150
$300
$450
$600
$750
$0
$150
$300
$450
$600
$750
The banks endorse the Companys valuation because it provides them with the vast majority of the value. The unsecured creditors object and argue for a higher valuation
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Assumptions
Comparison of assumptions ($ in millions) Company Unsecured Creditors
Unsecured creditors believe Companys EBITDA projection is too low
$60 million
$70 million
6.0x
Company provides little weight to precedents prior to the financial collapse, arguing they have limited use as an appropriate indication of current value
6.5x
Unsecured creditors argue that two of the comps selected by the Companys financial advisor are not appropriate because they are larger than H. Miller (Jindals and Get Rich)
9.0x
9.9x
10%
Unsecured creditors included 4 additional transactions (which happened to have higher multiples) that they believed to be comparable
2%
3%
As one would expect, the Company and unsecured creditors propose valuations with substantially different assumptions
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Proposed Plans
New exit financing raised by third party
Total Claim Banks Bonds (1) Old equity Total $350 450 N/A $800
De bt -----
Note that financing parties will only finance on historical results (vs. projections) at current market senior debt leverage multiples Cyclical companies should have less leverage
Total Claim Banks Bonds (1) Old equity Total $350 450 N/A $800
Debt -----
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Value distribution
Trading value range prior to Plan Plan TEV
Potential recovery to banks under each plan as TEV rises Potential recovery to bonds under each plan as TEV rises
How a stakeholder structures its recovery is often dependent on its risk tolerance and assessment of the Companys prospects
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Strategy for old equity
Given valuation range that would put old equity in the money is so much higher than reasonable valuation range ($800 million assuming no other claims), Poor Allocator may consider the following alternatives to retain a stake in the Company:
Hire advisors and lawyers that can adequately highlight the cyclical nature of the business to the courts Argue to obtain warrants so that they receive some portion of the upside Holding up the process (i.e. nuisance value) may provide them with consideration If Poor Allocator truly believes in the upside story, they may consider providing new equity at some agreed valuation Cash may be required to take banks out at par and fund an exit Junior securities could receive PIK interest until cash flow increases to support higher debt
Poor Allocator sponsored plan ($ in millions)
Bank debt Unsecured PIK debt Equity Plan TEV Total Claim Banks Bonds Old equity Poor Alloc. Total $350 450 N/A N/A $800 $200 150 400 $750 Total Value $350 400 --$750 Recovery % of claim 100.0% 88.9% N/A N/A 93.8% Pro form a equity ow nership -62.5% 37.5% -100.0%
Poor Allocator paid $150 million to purchase 37.5% of the equity at a $750 million TEV another highly leveraged transaction
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