Valuation+in+the+Context+of+a+Restructuring+ (3 23 10)

 

March 23, 2010

Strictly private and confidential

 Valuation in the context of a restructuring  restructuring 

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Introduction

 Ag  A g en end da

This presentation presentation will cover the following topics:

1

Overview of Rothsc Rothsc hild Inc.

2

Role of valuation valuation i n restructuring

3

Valuation methodologies and mechanics 

 

Comparable companies analysis Precedent transactions analysis Discounted cash flows analysis

4

Valuation Va luation in a restructuring

5

Case Ca se stud y

1

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Overview of Rothschild Inc.

 

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Overview of Rothschild Inc.

Rothsc othschild hild - Pre Premier mier international international investment bank bank 2009 EMEA Restructuring Deal of the Year Year – IMO Car Wash

World-leading positio n World-leading  Restructuring advisor of the year –  Acquisitions  Acquisitions Monthly Awards Awards 2009 and 2010  M&A Bank of the year –  Acquisitions  Acquisitions Monthly Awards Awards 2005 and and 2007

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Restructuring deal of the year – IFR –  IFR Awards 2009, 2009, Acquisiti  Acquisitions ons Monthly Awards Awards 2006 and 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



2009 Restruct 2009 Restruct uring House of t he Year 

 

2009 European Restructuri ng House of th e Year  Year 

2009 Turnaround and 2009 Restructuring Re structuring Adviser of the Year  Buy-side Mandate of the Year: CVC Capital Partners’ acquisit ion of a 25.01% 25.01% stake in Evonik Evo nik Ind Industrie ustries s

Global Deal of the Year 2008 RBS-led consortium acquisition of ABN AMRO Mid Market Financial  Ad vi ser 

Key focus on advice  Mergers & Acquisitions  Corporate Restructurings  

Structured Finance and Securitization Strategic Advisory Services

Most Innovative Innova tive i n Corporate Restructuring "Rothschild has bee been n active in virtually every type of transaction, every sector and every eve ry geograp geography.“ hy.“ – The Banke Banker  r  Restructuring  Adv is er of the year  Debt Advisory House of t he Year  Restructuring  Adv is er o f t he y ear  Restructuring Deall of the Year: Dea Eurotunnel M&A Bank of the Year

Objective fi nancial advice Objective  Objective, senior banker value-added advice unencumbered by the need to cross sell other products

Restructuring Re structuring Advi sor

Industry expertise

of t he Year  Year  Restructuring Deal of the Year 



Dedicated sector teams provide experience, experience, knowledgeable advice, industry analysis and contacts

Rothschild culture Rothschild   A culture of innovation, client service service and integrity that has resulted resulted in a reputation reputation for value added practical advice. Rothschild seeks to to foster and grow long term relationships with our clients

2008 & 2007

2008 200 8 Transaction of t he Year  Aw ard – Remy Int ern ati on al  Am eri ericas cas Restructuring Deal of the Year 2006

Global focus on advice, excellence excellence in our c hosen markets markets 3

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Overview of Rothschild Inc. Global experience with local experts Overview 

Worldwide reputation for excellence, objectivity and impartial advice  – 289 deals worldwide worldwide totaling $192bn in 2008  – Restructuring Advisor Advisor of the Year   – Acquisitions Monthly Monthly Awards 2009 and 2010



Stockholm

Toronto Washington

Montreal New York

 – 950 corporate finance bankers bankers worldwide

Moscow Manchester  Leeds Frankfurt Warsaw Birmingham Prague Kiev London Budapest Paris Milan Bucharest Sofia Barcelona Istanbul Lisbon MadridRome  Ath ens Tel Aviv  Abu Dhabi

Mexico City

Beijing

Seoul

 – 640 in Europe including CEE and Russia Tokyo

 – 120 in US and and Canada

Shanghai Dubai

Mumbai

Delhi Hanoi

 – 100 in Asia

Hong Kong

 – 30 in Australia

Manila Kuala Lumpur  Ho Chi Minh City Singapore

 – 25 in Latin America America

Jakarta

Sao Paulo

 – 40 in Africa and ME  – 48 offices in 34 countries

Johannesburg Sydney

 – Dedicated sector teams providing in-depth industry expertise

 Auc klan d

Melbourne Wellington

Offices

Global perspective and scale

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Rothschild is exclusively focused on M&A advisory, financing and restructuring services  – No conflicts from underwriting, sales, trading and research activities

4

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Overview ofe Rothschild Inc.nt houses Rothsc othschild hild is one on of the few few independent independe hou ses with a leading leading M&A market market position positi on Gl ob ob al al M& A

US$b n

No

1

Morg Mo rgan an St Stan anle ley y

381. 38 1.0 0 15 154 4

2

Citi Ci ti

350 50.2 .2 14 146 6

3

Gold Go ldma man n Sa Sach chs s

313. 31 3.9 9 14 143 3

4

BoA/ Bo A/ML ML

283. 28 3.0 0 12 124 4

5

JP Mo Morg rgan an

222. 22 2.0 0 16 168 8

6

UBS UB S

211. 21 1.6 6 14 149 9

7

Deut De utsc sche he Ba Bank nk

186. 18 6.7 7 13 133 3

8

Roths Ro thschil child d

159 59.0 .0 14 146 6

9

Cred Cr edit it Su Suis isse se

154. 15 4.8 8 11 112 2

10 La Laza zard rd

149. 14 9.9 9 11 112 2

 Amer ican Airl ines

Sadia

CF Industries

Constellation Energy

$4.5bn share swap with Perdigão Perdi gão S.A.

 Advising on $2.1bn $2.1bn offer to to acquire Terra Industries Defense against Agrium’s hostile unsolicited offer 

 Advice regarding EDF’s $4.5bn acquisition of a 49.99% stake in Constellation’s nuclear assets

 Advising on strategic strategic alternatives Current

Current

Current

Current

Fomento Economico

Cedar Fair 

British Energy

Unibanco

Lead financial adviser to BE on its £12.5bn recommended sale to EDF

$45bn merger of Unibanco and Banco Banco Itau

Mexicano S.A.B. de C.V. C.V.

Completed deals by value (1 Jan to 30 Sep 2009) Source Thomson Re Reuters uters 2 Oct 2009

US M& A

US$b n

No

1

Morg Mo rgan an St Stan anle ley y

295. 29 5.6 6 10 104 4

2

Gold Go ldma man n Sa Sach chs s

232. 23 2.4 4

84

3

Citi

222.8

68

4

JP Morgan

197.9

93

5

Ever Ev erco core re Pa Part rtne ners rs

154. 15 4.0 0

16

6

BoA/ML

148.1

79

7

Barc Ba rcla lays ys ca capi pita tall

133. 13 3.5 5

46

8

Ro th th sc sc hi hi ld ld

73.7

39

9

Blac Bl acks ksto tone ne Gr Grou oup p

71.6 71 .6

10

62.3 62 .3

58

10 Cr Cred edit it Su Suis isse se

 Announced deals by value value (1 Jan to 30 Sep 2009) Source Thomson Reute Reuters rs 2 Oct 2009

5

$7.7bn acquisition of FEMSA Cerveza by Heineken N.V.

$2.4bn sale of Cedar Fair to Apollo Management

2010

2009

2009

2009

Volkswagen AG /

Scottish & Newcastle

BM&F

Rio Tinto

$20bn merger with Bovespa Bove spa Holdi Holding ng

$1.7bn disposal of its 40.0% interest in the Cortez Gold Mine to Barrick Gold Corporation

2008

2008

Porsche SE

 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

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Overview ofleading Rothschild Inc. Rothschild is i s a lea ding provid p rovider er of debt debt advisory & restructurin restruc turing g services 2010 201 0 Restruct Restruct uring  Adv is er of the year 

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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 conflicts from sales and trading or research activities activities

2009 EMEA Restructuring Deal

 – Lender negotiations (waivers, amendments, forbearance agreements)

of Year – IM Year IMO O Carthe Wash

 – Capital raising (rights offerings, rescue financing, DIP and exit financings)  – Exchange offers (debt-for-debt, debt-for-equity, hybrid)  – Distressed M&A

2009 European Restructuri ng House of th e Year  Year 

 – Pre-packaged and pre-negotiated chapter 11  – Traditional chapter 11

2009 Turnaround and 2009 Restructuring Re structuring Adviser of the



Strong relationships and credibility among various players in the process, including: (i) financing sources – both debt and equity, (ii) banks, (iii) bondholders, bondholde rs, (iv) financial and legal advisors, and (v) financial sponsors

Year  

2009 Restructuring House of t he Year 

The Rothschild team’s success in restructuring and debt advisory is a result of:  – Depth of professional and transactional experience and a broad mix of skills represented by Rothschild Rothschild bankers  – Demonstrated industry expertise in various industries and an extensive extensive range of contacts contacts among financial buyers

Most Innovative in Corporate Restructuring

 – Commitment to the the highest standards of integrity, confidentiality and client service  – Creative and resourceful approaches to maximization of value for for Rothschild’s clients

Debt Advisory Debt House of the Year  Restructuring  Adv is er o f t he y ear 

Strong US debt debt advisory & restructuring presence

2008 Transaction o f th e Year Year  Awar d – Remy Int ernat io nal Restructuring Deal of the Year: Deal Eurotunnel

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Role of valuation in restructuring 

 

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Role of valuation in restructuring  Valuation Va luation overview / considera cons ideration tions s 

Valuation is the cornerstone of investment banking

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Whether a transaction involves M&A, restructuring or financing, virtually every investment banking activity is influenced or driven by valuation analysis:  – Determining the price an Acquiror should should pay for a “Target” company  – Establishing an appropriate value expectation for a target company seeking seeking a sale of its business  – Valuing a company that is emerging from bankruptcy as part of a Plan of Reorganization  – Structuring the terms of a new preferred equity security  – Valuing a division of a public company to assess potential after-tax after-tax divestiture proceeds

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Valuation has its roots in corporate corporate finance theory and is a balance between “art” and “science” The “science” of valuation includes understanding fundamental fundamental corporate finance concepts such as:  – Net present value (NPV): the the value of a series of cash flows after discounting discounting to account for risk and timing  – Capital Asset Pricing Model (CAPM): a model used to calculate the the expected return of a stock based primarily on expected risk  – Weighted Average Cost of Capital (WACC): (WACC): the expected return on a portfolio of all of a Target’s securities securities and is utilized in DCF valuations and capital budgeting decisions

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The “science” of valuation also includes understanding understanding the methods for appropriately identifying and compiling data to value a business Valuation is also an “art” that requires considerable judgment to to interpret the significant amount of data (financial, (financial, operating, macroeconomic, etc.) that investment investment bankers must compile and analyze as they prepare a valuation

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Role of valuation in restructuring 

 Ap  A p p l i c at atii o n o f v al alu u at atii o n Ou t -o f -c o u r t v al u at i o n 

Mergers & acquisitions

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Fairness opinions

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New business projects

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Defense

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Capital raises

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Exchange offers

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Rights offers

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Ch ap t er 11 v al u at i o n 

Beginning of the case  – DIP financing, priming, cash collateral collateral

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Middle of the case  – Business plan, asset sales, credit bidding, fraudulent conveyance and other avoidance actions

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End of the case  – Disclosure Statement and Plan of Reorganization

Basically any time a company modifies its ownership, operations or capital structure

Our focus today will be the appli application cation of valuation in a Chapter Chapter 11 context 9

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Role of valuation in restructuring  Importance of valuation The valuation of a company is crit ical in a restruc restruc turi ng as various stakeholders with c ompeting i nterests are vying f or a piece of the company

Government agencies

Board

Secured lenders

Trade creditors

Company

Unsecured lenders

Management

Old equity

Subordinated lenders

The Compa Company ny often serves serves as as the “ honest broker” to resolve competing competing stakeholder views on value 10

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Role of valuation in restructuring  Motivations of key players players Depending on the valuation of the company, different stakeholders are either "in the money" or "out of the money." Those creditors that are more senior in the capital structure (i.e., Secured Lenders) are the first to be in the money. If  value remains, it goes to more junior creditors and then to equity

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Secured Se cured lenders

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 – In the case of private money, obtain releases

possible  – If forced to accept equity, argue for for the lowest defensible value

 – Assess the opportunity to invest capital through a “new mone money” y” pla plan n  – Public equity rarely plays a role in insolvent restructurings

Unsecured lenders 

Management

 – Otherwise, argue for the the highest defensible value

 – Keep the business together, avoid avoid piecemeal M&A or outright liquidation

Subordinated lenders

 – Identify and side with the the "winning party"

 – Argue for the highest defensible defensible value, if they are close to being "in the money"

 – Minimize leverage in the reorganized company 

Board of directors

 – Seek affirmative litigation recoveries recoveries that may sidesidestep priority rules

 – If the company is solvent, maximize shareholder value

Trade creditor s

 – If the company is insolvent, maximize value for all

 – Avoid liquidation, continue to transact business during the restructuring and with the reorganized entity

stakeholders  – Obtain releases

 – Pursue critical vendor motions

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Old equity

 – Obtain as much debt in the restructured entity entity as

 – Obtain some debt in the restructured entity, entity, if possible

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Government agencies  – IRS, PBGC, SEC, FERC

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Role of valuation inro lerestructuring  The business plan and its role The business plan of the Debtor Debtor i s of central impor tance when when valuing an enterprise 

The business plan is the forecast or projections of the business, generally prepared by the management of the

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Debtors The business plan should, to the best of the management’s ability, forecast the cash flows of the business taking into account internal and external drivers  – Internal drivers include growth, company-specific company-specific revenue and cost characteristics, planned investments in capital goods, among many others  – External drivers include macro trends in the Debtor’s industry, macro-economic conditions, and actions of competitors

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The business plan evolves during the course of the bankruptcy process and its development is an iterative one between the management of the Debtor, its advisors and its stakeholders  – Management initially prepares the business plan with the aid of its advisors  – The Board of Directors then then reviews and approves the business business plan  – The Company presents its business plan to its creditors and other stakeholders stakeholders as a basis for negotiations negotiations and the creation of the Plan of the Reorganization

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Since the business plan drives the valuation analysis, it can be a source of conflict among the stakeholders stakeholders and their respective advisors

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Role ofvaluations valuation in restructuring  Types of valua tions Go i n g -c o n c er n v al u e 

Generally, the most common types of valuation seek

L i q u i d at i o n v al u e 

to determine the “going-concern value” of a business in which the company being valued value d (or “Target”) is assumed to operate indefinitely 

The objective of a going-concern valuation is to value the future earnings power and cash generating capability of the collection of assets that make up the Target’s operating business as well as any nonoperating or intangible assets that are owned by the Target



Non-operating assets may include ownership interests in other companies, net operating losses (NOLs), etc. and intangible assets may include trademarks, brands, customer lists, technology know-how, etc.

Liquidation value determines the net proceeds generated by “liquidating” or selling off off each of the Target’s 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 as environmental clean-up, asbestos claims, severance or other liabilities that significantly offset gross liquidation proceeds)

Under the “ Best Intere Under Interest st Test” Test” and pursuant to the bankrup bankrup tcy cod e, the creditor creditor s of a company emerging emerging from bankrup tcy mu st recover more value under a Pla Plan n of Reorganiza Reorganization tion than the value achievable achievable in a liquidation of t he Target’s Target’s assets 13

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methodologies logies and mechanics  Valuation methodo

 

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 Valuation methodo methodologies logies and mechanics methodol ogies Three primary valuation methodologies Comparable Company Compa ny Analysis Analysi s Values a target company by reference to publiclytraded companies with similar products or services and similar operating and financial characteristics

% Weighting

Precedent Transactions Tra nsactions A nalysis Values a company by reference to acquisition multiples paid in recent transactions involving similar businesses and operations

% Weighting

Discounted Cash Flows Analysis Values a company as the sum of its unlevered (before financing costs) free cash flows over a forecast period and the company’s terminal value at the end of the forecasted period

% Weighting

Other Analyses 

Fixed asset appraisals

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Trading price of public securities

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Net operating (“NOL”) loss carryforward Other multiples

% Weighting

Enterprise Enterpris e Value Value range

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 Valuation methodo methodologies logies and mechanics Comparable Compara ble companies comp anies analysi analysis s Overview 

Comparable Companies Analysis is a common common form of valuation that applies multiples derived from “comparable”



publicly traded companies to the operating statistics of the company being valued (the “Target”) Comparable Companies Analysis is a “Relative “Relative Valuation” because it is premised on the the concept that the public equity markets value fundamentally similar, or “comparable”, companies on a relatively consistent basis

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By analyzing certain key ratios and operating data for each public company in a “comparable” universe, investment bankers determine, within a range, how public equity markets markets may value companies similar to the Target Generally, the “comparable data” are expressed in the form of valuation multiples such as:  – Total Enterprise Value / Revenue

Often not used the context of ain restructuring since distressed companies usually have no earnings

 – Total Enterprise Value / EBITDA  – Total Enterprise Value / EBIT

multiples are the ratio of a measure of the Target’s value (Enterprise Value or Equity Value) to its financial (or operating) results

 – Total Equity Value / Net income 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. esoteric. Some examples by industry are:  – Cable, telecom and subscription-based subscription-based businesses: value per subscriber (e.g. $3,500 per subscriber) subscriber)  – Oil exploration and mining businesses: value per unit of reserve or unit of production (e.g. (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)

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 Valuation methodologies and mechanics methodologies Comparable companies analysis (cont’d) Steps

Comments 

Select Comparable Company Universe

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 A comparable peer group should embody the same same business and financial attributes attributes such that their their public trading values represent a reasonable proxy for those of the company under consideration Relevant attributes include:  – Business mix (products, markets served, distribution distribution channels, etc.) and respective weight of each product  – Industry group  – Geographic location  – Cyclicality

“ Spre Spread” ad” Comp Compara arable ble Company Financial Data

 – Seasonality  – Operations (production processes, processes, critical inputs/ components)  – Financial parameters (leverage, historical historical and future growth rates, rates, margins, dividend yield)  – Markets  – Size (revenues, assets, market capitalization)  – Shareholder base

Calculate Comparable Company Multiples 

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 – Customers Once the comparable companies are chosen, the implied value valu e 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 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.

 An aly ze Data an d Id ent entif if y  Appr  Ap pr op ri ate Val uat uatio io n Ran ge

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 Valuation methodo methodologies logies and mechanics  As  A s s es ess s m ent o f c o m p arab arabll e co c o m p ani anies es anal analy ysis  Advan  Ad van tag tages es 

 An effective indication of public market value since it

Issues 

utilizes public data data that is readily available – highly transparent 

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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 company’s DCF) Information is also useful to determine debt capacity for a reorganized company

of comparable company data (no two companies are truly identical)  

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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

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Less reliable if comparable set does not trade robustly

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Often need to adjust for leverage, liquidity and control

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Reliability depends upon the level of and robustness

Many feel that that the stock stock market is “emotional” and sometimes fluctuates irrationally

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 Valuation methodologies and mechanics methodologies Precedent transactions analysis Steps

Comments 

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 company being valued (the “Target”)

Select Precedent Transaction Tra nsaction Universe

“ Spre Spread” ad” Pre Precede cedent nt Transaction Financial Data



 –

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 to a Comparable Companies Analysis, except 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” premium” which a purchaser typically pays pays over and above the current current market trading price (assuming a publicly traded company) is approximately 20-30% (although premiums vary to a wide degree)  –

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Calculate Precedent Transaction Tra nsaction Multiples

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This “premium” reflects a “market clearing” price required to incentivize the previous owners to sell their  shares and reflects the acquiror’s 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

Generally, the precedent transaction data are expressed in the form of valuation multiples such as:  –

Total Enterprise Value / Revenue Revenue

 –

Total Enterprise Value / EBITDA

 –

Total Equity Value / Net Income

Precedent transaction multiples are ratios of what an  Acquiror paid for a Target in terms of Enterprise Value and Equity Value to the Target’s 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

 An aly ze Data an d Id ent entif if y  Appr  Ap pr op ri ate Val uat uatio io n Ran ge

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 Valuation methodo methodologies logies and mechanics  As  A s s es ess s m ent o f p r ec eceden edentt t r ans ansac actt i o n s an anal aly ysis  Advan  Ad van tag tages es 

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Potentially highly effective determinant of value when

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 – Reflects value actually paid to acquire a comparable company

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Based on publicly publicly available available data – ofte often n highly transparent

Realistic in the sense that past transactions were successfully completed at certain premiums  – Indicates a range of plausibility for premiums offered

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many comparable precedent transactions exist  – Incorporates payment of “control premium”

 – Not highly dependent on assumptions and projections 

Issues

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

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target Works well only when relevant recent re cent 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

May demonstrate trends such as consolidation,

Buyer synergies and transaction structure impact multiples paid for acquired companies

foreign purchaser and financial sponsor activity, frequency of types of transactions, etc.

 – May include price premium in strategic strategic transactions

Recent transactions can reflect supply and demand for assets and general investor sentiment toward an industry

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 Assumes previous acquirors appropriately appropriately valued

Entirely based on historical results Often requires adjustments for leverage, liquidity, liqui dity, control, and unique value transfers Most unreliable method in times of high volatility Limited relevance for unprofitable companies

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 Valuation methodo methodologies logies and mechanics Selected Se lected precedent precedent transactio tr ansaction n analy analysis sis Precedent Pre cedent transactions (currencies in millio ns) Implied Dat e  An nc .

Tar ge t

Targe Tar ge t Des cr ip ti on

Acqu Ac qu ir er

Feb- 09

Nov a Chemic als Co Corp.

Ethy lene / poly ethy lene

Jul-0 -08 8

Her ercu culles

Jun- 08 Mar - 08

Enterpr ise Value Multiples Re v e n u e EBITDA

En t e r p r i s e Valu e

LTM

Int'l Petr oleum Inv es tment Co.

$2,328

0.32

N/A

N/A

9.8

N/A

N/A

Spec eciial altty ch che emica calls

Ashlland Ash

$3,333

1.48

1.44

1.36

8.7

8.1

7.5

RA GG-Stif tu tung / Ev onik Indus tr ies

Indus tr ial c hemic als

CV C Capital Par tner s Ltd.

$20,150

0.89

N/A

N/A

6.9

N/A

N/A

Dy no Nobel

Ex plos iv e pr oduc ts

Inc itec Piv ot

$3,015

2.16

2.04

1.96

13.9

11.2

10.1

Feb- 08

Poly nt S.p.A .

Or ganic anhy dr ides & der iv ativ es

Inv es tIndus tr ial Holdings

 € 437

0.76

0.84

0.80

6.8

7.9

7.0

Oc t- 07

Petkim Petr okimy a Holdings

Petr oc hemic als

Tur c as Petr ol

$3,932

2.32

2.34

2.47

24.5

19.9

27.3

 Aug-07

Quattor Petroquim Petroquimica ica

Polyethylene / propylene

Petroleo Brasileiro Brasileiro

$2,358

1.59

N/A

N/A N/

10.8

N/A

N/A

Jul- 07

Ly ondell Chemic al

Chemic als & plas tic s

Bas ell NV

$18,659

0.71

0.74

0.76

7.2

6.5

6.3

Jul- 07

Hunts man Cor p

Chemic al & inorganic pr oduc ts

Hex ion Spec ialty Chemic als

$10,186

0.95

0.97

1.08

7.9

8.3

7.8

May - 07

Pioneer Co

Chor -alkali and r elated pr oduc ts

Olin Cor p

$409

0.80

N/A

N/A

4.4

N/A

N/A

Feb eb-0 -07 7

Millen enni nium um Ino norg rgan aniic Che Chem micals

Che hem mical & ino norg rgan aniic pro produ duct cts s

Nat atiion onal al Tita tani nium um Dioxi oxide de (C (Cri rist stal al))

$1,300

0.97

N/A

N/A

N/A

N/A

N/A

Nov-06

Borsodch Bo rsodchem em

Pla lasti stic c raw mate ateria rials ls & iso isocyanat cyanate e First Chemical Hol oldi dings ngs

$171,848

0.71

0.70

0.61

4.7

4.3

4.1

Sep ep-0 -06 6

Hun unttsm sma an Cor orp ps (E (EU Pol olym ymer er))

Chemica call & ino norg rgan aniic pro prod duc ucts ts

Saud udii Bas asiic Ind ndus usttri ries es Corp

 € 826

0.30

N/A

N/A N/ A

4.7

N/A

N/A

 Apr- 06 Feb eb-0 -06 6

Polite oliteno no Industria Industria e Com Comercio ercio SA Hun unttsm sma an (U (US Buta tadi dien ene e/MTBE)

Polyethylene resins Chemica call & ino norg rgan aniic pro produ duct cts s

Braskem SA Texa xas s Pet Petro roch chem emiica calls

$205 $262

0.40 0.40

N/A N/A

N/A N/A

5.0 6.1

N/A N/A

N/A N/A

Oc t- 05

Innov ene Inc

Petr oc hemic als & r ef ining

INEOS Enter pr is es Limited

$10,700

0.50

N/A

N/A

6.2

N/A

N/A N/

Mar - 05

Gr eat La Lakes Ch Chemic al Co Cor poration

Spec ialty ch c hemic als

Chemtur a Co Cor poration

$2,081

1.30

N/A

N/A

13.6

N/A

N/A

Feb- 05

Bas ell

Chemic als and plas tic s

A c c es s Indus tr ies

 € 4,400

0.50

0.49

0.42

6.2

4.8

4.6

CFY

FY + 1

LTM

CFY

FY + 1

Source: Public filings and news articles Note: Reflects financial results for last 12 months ended prior t o announcement of transaction

22

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Selected precedent transaction analysis (cont’d) Precedent Pre cedent transactions (currencies in millio ns) Enter pris e Value Multiples   Re v e n u e

L TM

CFY

(1)

EBITDA

FY + 1

L TM

CFY

FY + 1

Lo w

0.32x

0.74x

0.76x

4.4x

6.5x

6.3x

Lower Quartile

0.77

0.84

0.80

6.9

7.9

7.0

Mean

1.06

1.21

1.19

8.5

8.4

7.7

Median

0.92

0.97

1.08

7.9

8.1

7.5

Upper Quartile

1.35

1.44

1.36

9.8

8.3

7.8

High

2.16

2.04

1.96

13.9

11.2

10.1

Target Co m p an y

M u l t i p l e Ran g e

EBITDA LTM EBITDA 2010E EBITDA Se l e c t e d Ran g e

   

$200 $221

M e an    

8.5x 8.4x

M e d i an    

7.9x 8.1x

Low    

6.9x 7.9x

(2)

Hi g h    

9.8x 8.3x

Imp lied Range Range Low

Hi g h

  $1,380   $1,742   $1,550

  $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 t o 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 EBITDA multiples post-2007 is 7.9x. 7.9x. Petkim Petrokimya Holdings transaction is is considered an outlier and is excluded excluded (2) Based on upper and lower quartile

23

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Disco iscounted unted cash flow analysi analysis s Steps

Comments 

Review Target Historical/Projected Financial Results 



Calculate Projected Target Unlevered Unleve red FCFs FCFs and  Ap pr op ri ate Di sc ou nt Rate 

Calculate the Terminal Value 

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 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:  –

Unlevered (before financial costs) costs) free cash flows (this is not operating cash cash flow) over some forecast forecast period (usually 5 years), and

 –

Terminal value at the end of the forecast period (usually (usually Year 5)

Terminal values can be calculated in one of several ways:  –

Trading Comps multiples of Year 5 cash flow, EBITDA, EBITDA, Sales, etc.

 –

M&A Comps multiples of Year 5 cash flow, EBITDA, EBITDA, Sales, etc.

 –

Perpetual Growth Rate (Gordon Growth Model)  – Perpetual value = (final year cash cash flow x (1 + growth rate)) / (discount rate – growth rate)

The cash flow streams and terminal value are discounted at the company’s appropriate weighted average cost of capital  –



Calculate the Enterprise Value

24

WACC = after-tax after-tax cost of debt x D / (D+E) + cost of equity x E / (D+E)

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 valu es for key variables

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics  As  A s s es ess s m ent of DCF analy anal y s i s  Advan  Ad van tag tages es  



Provides rational economic framework for valuation

Issues 

The accuracy of DCFs is highly dependent upon multiple

Ties value to risk-adjusted cash generation versus other valuation techniques which may be influenced by accounting treatment or prevailing market influences

variables  – Target projections and and resulting free free cash flow (FCF)

 Allows for detailed detailed assessment of a Target’s specific forecasted financial performance including sensitivities to financial results based upon different operating strategies and different economic assumptions

 – Discount rate assumptions

 – Terminal valuation methodology methodology and assumptions assumptions



The terminal value often represents a significant percentage of total DCF value which results in the valuation being largely dependent upon terminal value assumptions vs.



Theoretically sound and method depending on level of confidence in the the most projections assumptions 



Not influenced by temperamental market conditions or noneconomic factors



 Allows future expected operating operating strategy to to be incorporated into the model

Target operating assumptions When utilizing the growing perpetuity method as part of a terminal valuation, a DCF valuation works most effectively when a Target’s growth prospects are at or below the projected economy’s growth levels  – The perpetuity growth growth terminal value value method assumes assumes steady state (mature and sustainable) FCF  – May have limited relevance relevance for early stage stage companies



 



25

DCF does not consider debt obligations at the Target which may have prepayment penalties Forecasting future performance is inherently subjective Values can vary over a wide range and thus be of limited usefulness WACC does not necessarily account for projection risk and assumes constant capital structure

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Illustrativ Illus trative e DCF DCF ana analys lysis is DCF analysis ($ in millions) Projection Period Sales COGS SG&A EBITDA % Mar gi n Deprec iation & A mortiz ation EBIT % Mar gi n Cas h Tax es EBIT (tax -ef f ec ted) + Deprec iation & A mortiz ation - Capital Ex penditures - Inc reas e (Dec reas e) in Wor king Capital Un l e v e r e d Fr e Cas h Fl o w

  37.5%

2010P

2011P

2012P

2013P

2014P

  $1,500   (985)   (315)   $200   13.3%   (180)   20   1.3%

  $1,575   (1,024)   (331)   $221   14.0%   (189)   32   2.0%

  $1,654   (1,067)   (347)   $240   14.5%   (198)   41   2.5%

  $1,736   (1,111)   (365)   $260   15.0%   (208)   52   3.0%

  $1,823   (1,167)   (383)   $273   15.0%   (219)   55   3.0%

  $1,914   (1,206)   (402)   $306   16.0%   (230)   77   4.0%

 

   

     

WA CC   12.1% Mid-Y ear Conv ention Dis c ount Fac tor ( Mid-Y ear) Pr e s e n t V al u e o f Un l e v e r e d Fr e e Cas h Fl o w s Ex it EBITDA Multiple Terminal V alue

 

PV of TV PV of Unlev ered Free Cas h Flow s Il l u s t r at i v e En t e r p r i s e V al u e Implied EV / LTM EBITDA Terminal V alue as a % of EV

  $1,210   444   $1,653   8.3x   73.2%

26

L TM

7.0x   $2,144

(7)   12   180   (90)   (15)   $87  

(12)   20   189   (95)   (16)   $98  

  0.5   0.944   $93

(16)   26   198   (99)   (17)   $109  

  1.5   0.842   $91

(20)   33   208   (104)   (17)   $119  

  2.5   0.751   $90

(21)   34   219   (109)   (18)   $125  

  3.5   0.670   $84

(29) 48 230 (115) (19) $144

  4.5   0.597   $86

Grow th Rate in Perpetuity Terminal V alue

 

3.0%   $1,620

PV of TV PV of Unlev ered Free Cas h Flow s Il l u s t r at i v e En t e r p r i s e V al u e Implied EV / LTM EBITDA Terminal V alue as a % of EV

  $914   444   $1,358   6.8x   67.3%

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Illustrative DC DCF ana analysi lysis s – Se Sensit nsitivit ivit ies Exit Multiple Method

Perpe tuity Method

Illustr ative Enter Enter pris e Value ($ in m illions)

Illustr ati ative ve Enter Enter pris e Value ($ in in m illions) Gro w th Rate Rate in Per Per pet uity

Exit EBI BITD TDA A M ul ti pl e

  $1,653   e    t   13.0%   a    R  12.5%    t   n  12.0%   u   o   c  11.5%   s

         

   i

   D 

11.0%

6.0x $1,433 1,460 1,488 1,516

         

  1,546

6.5x $1,516 1,545 1,575 1,605

         

  1,637

7.0x $1,599 1,630 1,662 1,694

         

  1,727

7.5x $1,682 1,715 1,749 1,783

         

  1,818

8.0x $1,765 1,800 1,835 1,872

  1,909

  $1,358   e  13.0%    t   a    R  12.5%    t   n   u  12.0%   o   c  11.5%   s

         

   i

   D 

11.0%

2.0% $1,158 1,214 1,276 1,344

 

  1,421

 

13.0%

   R    t   n     u   o   c    s    i      D

12.5% 12.0% 11.5% 11.0%

6.0x 7.2x 7..3 7 7.4 7. 7.6 7. 7.7 7.

   

6.5x 7.6x 7.7 7.9 8.0 8.2

   

1,482

3.0%   $1,238   1,304   1,377   1,460  

         

1,552

3.5% $1,284 1,356 1,437 1,528

         

  1,631

4.0% $1,336 1,415 1,504 1,605

  1,721

Gro w th Rate Rate in Per Per pet uity

Exit EBI BITD TDA A M ul ti pl e

   

 

Imp lied EV / LTM EBI BITD TDA A Sens itivit y Table

Im plie d EV EV / LTM EBI BITD TDA A Sens itiv ity Table

  e     t   a

2.5%   $1,196   1,257   1,324   1,399

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

  e     t   a    R    t   n     u   o   c    s    i    D  

13.0% 12.5% 12.0% 11.5% 11.0%

   

2.0% 5.8x 6 6..1 4 6.7 7.1

   

2.5% 6.0x 6 6..3 6 7.0 7.4

   

3.0% 6.2x 6 6..5 9 7.3 7.8

   

3.5% 6.4x

   

6 7..8 2 7.6 8.2

4.0% 6.7x 7 7..1 5 8.0 8.6

DCF DC F analysis impl i mplies ies an Enterpr Enterprise ise Value Value of approxim appro ximately ately $1, $1,37 375 5 mil millio lio n to $1,6 $1,650 50 mil millilion on

27

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Illustrative DC DCF analysis analysis – WAC WACC C components   Illust rative Weight Weight ed Average Cost of Capital Capital W A CC Co m p o n en t

E x p l an a t i o n o f A s s u m p t i o n

Market based: R is k F r e e R a t e U n l ev e r e d C om pa r a b l e C o m pa n y B et a US Mark et R isk Prem ium

3 .9 5 % 3.70% 1 . 20 76.50% .2 0 %

Firm specific: D e b t / E qu i t y L ev e r ed B e t a T ax R a t e Cost of Equity (K e)

10 Year US T reasur y Average (m ean) unlevered Beta for peer group Im plied Equity Risk Prem ium per Ibbotson ((2009) 2 00 4 )

25 . 0 0% 1 .3 9

T arget D ebt to Equity Ratio Form ula: B- levered = B-unlevered * (1+ (1- tax rate)*(D /E))

3 8. 0 0% 1 3. 9 3%

B a s e d o n M ar g i na l T a x R at e Form ul ula: Ke = risk fr free rate + Levered Beta x (Market Ri Risk Pr Prem iu ium )

Cost of Debt (Kd)

8 . 0 0%

Firm 's 's c ur urrent avg. rate or based on recent c om om pa parable financing

Cost of Debt After-Tax (K d AT)

4 . 9 6%

Form ula: (Pre-Tax Cost of Debt) * (1 - tax rate)

W eighting of Debt W eighting of Equity

2 0. 0 0 % 8 0. 0 0 %

W A CC

1 2. 1 3 %

B a s e d o n D e b t t o E q ui t y R a t i o Based on Debt to Equity Ratio

 Captial Structure Se Sensitivities nsitivities 1

Deb t / T o t al C ap i t a l

1

Deb t / Eq u i t y

L ev e r e d B et a

Co s t o f Eq u i t y

Il l u s t r a t i v e C o s t o f Deb t

WA C C

0 . 00 % 1 0. 0 0 % 2 0. 0 0 % 3 0. 0 0 %

0 .0 % 1 1 .1 % 2 5 .0 % 4 2 .9 %

       

1 .2 0 1 .2 8 1 .3 9 1 .5 2

12 1 2 .6 % 13.2% 13 13.9% 13 14.9% 14

7.00% 7.50% 8.00% 8.50%

12 . 5 9% 12 . 3 3% 12 . 1 3% 12 . 0 0%

4 0. 0 0 % 5 0. 0 0 %

6 6 .7 % 1 0 0 .0 %

   

1 .7 0 1 .9 4

16 1 6 .2 % 17.9% 17

9.00% 9.50%

11 . 9 3% 11 . 9 2%

1

28

Debt De bt in incl clud udes es pr pref efer erre red d sto stock ck

abc ab c

 

397167

 Valuation methodo methodologies logies and mechanics Resulti Re sulting ng ente enterpris rprise e valuation valuation range Valuation Va luation and weighting ($ ($m) m) M e t h o d o lo g y

Low

Comparable Companies A naly s is Prec edent Tr Tr ans ac tions An Analy s is Dis c ounted Cas h Flow An A naly s is Ran g e o f To ta tal En t er er pr p r is is e V al u e

       

Mid

$1,225 1,550 1,375 $1,380

       

$1,275 1,725 1,513 $1,500

       

Hi g h

We i g h t i n g

$1,325 1,900 1,650 $1,630

       

33.3% 33.3% 33.3% 100.0%

Selected Sele cted valu ation r ange ($m)

Comp. Co.

$1,225

$1,325

Prec. Tran.

DCF

Range

$1,550

$1,375

$1,380

$1,900

$1,650

$1,630

$1,000 $1,100 $1,200 $1,300 $1, 400 $1,500 $1, 600 $1,700 $1,800 $1,900 $2, 000 29

abc ab c

 

397167

 Valuation methodologies methodologies and mechanics Total Value Value versus versu s Enterpris Enterpr ise e Value Value

The total value available to stakeholders in a restructuring is equal to the value of the operating assets or enterprise plus the value of all non-operating non-operati ng assets held by the Debtor 



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 weighted according to the appraiser’s own judgment  – Valuation is an exercise in judgment that that requires a substantial understanding of the Debtor’s business 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 the Debtor 



However, the value available to creditors creditors and other stakeholders in a reorganization is the Total 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 generated by non-operating assets  – Non-operating assets can include:  – Excess cash  – Net operating loss carry-forwards carry-forwards / tax refunds  – Assets held for sale  – Non-operating notes receivables  – Other non-operating assets  – Litigation claims

Remember: Remembe r: Valuation Valuation employs f undame undamental ntal tools but d epe epends nds grea greatly tly on th e investment banker’s banke r’s judgment 30

abc ab c

 

397167

 Valuation methodologies methodologies and mechanics  All t ern  A ernat atii v e met m eth h o d o l o g i es  Al ter ternat nativ ive e metho met ho do lo gi es inc i nc lu de:  Fixed asset appraisals  Use of other multiples / valuation metrics 

Trading prices of Debtor’s public securities

 A benc b enc hm hmark ark th at many m any mar market ket par parti ti ci pan ts us use e when wh en valu v aluin ing g a com c om pan pany y is i s mark m arket et valu v aluati ati on of th e Debto r’ s pub p ub li cl y trad t raded ed securities  This method requires some insight into the Debtor’s eventual Plan of Reorganization and its total claims pool  Bonds trade on an assumption in the market on a rate of return and expected time of emergence from bankruptcy  To calculate a Debtor’s market valuation one must make assumptions for several factors:  – Administrative / priority priority claims  – Secured claims  – Unsecured claims 

 – Expected cash at emergence emergence The treatment of the different types of claims are by no means standard; stakeholder recoveries vary based on the facts and circumstances of each case  – The secured claims plus administrative and priority claims less cash effectively effectively constitute, constitute, in most cases, cases, the net debt of the the reorganized firm  – Depending on a company’s received debt capacity, unsecured claimants claimants are generally the the recipient of any remaining debt capacity and the new equity of the reorganized firm  – As a result, identifying the current current trading price of the secured secured debt plus plus the trading price price of the unsecured unsecured bonds multiplied multiplied by the total unsecured claims pool approximates the total enterprise value of the firm  – Raises several methodological methodological questions including whether:  – Trading values of junior junior securities should value more senior claims at par   – To add the trading trading value of equity that may be out of the money  – Analysis makes implicit assumptions about treatment in Plan of Reorganization Reorganization

Due to various marke markett dis locations, market market trading value is often not th e best best ind icator of value for a bankrupt com pany 31

abc ab c

 

restructuring  turing   Valuation in a restruc

 

397167

 Valuation in a restructuring  restructuring  Conte onteste sted d valuations valuations – Introduction 

One of the central components of a chapter 11 case is the enterprise value ascribed to the reorganized entity (the “Reorganizat “Reorg anization ion Value” or “Plan Value”)  – The Reorganization Value determines the size of the “pie” to be distributed to constituents and is therefore therefore of paramount importance  – Considering allocation of value is a zero sum 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 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  number   – Parties with “standing” have a voice in court and can object to the Plan Value



33

When a party with standing objects to the valuation set forth forth in the Disclosure Statement, the Court will have a hearing to determine valuation – considered a contested contested valuation or “valuation fight”

abc ab c

 

397167

 Valuation in a restructuring  restructuring  Hiera ierarchy rchy of claims and intere i nterests sts Value Va lue flows throug h the waterfall:

The asset (the business, cash, etc.)

The government (taxes owed) Debtor-in-possession financing Value flows downstream

Secured debt (mortgages, liens, etc.)  Ad mi ni st rat iv e claim cl aims s (pro (p ro fes si on al fees, f ees, etc.) et c.) Unsecured debt and other unsecured obligations Subordinated claims Preferred Prefe rred equit y Common equity

34

abc ab c

 

397167

 Valuation in a restructuring  restructuring 

Conte onteste sted d valuations valuations – Motivations of va various rious constituents

Valuation fights are generally driven by the fact that constituents in chapter 11 cases have different motivations visà-vis Plan Value

DIP Lenders



 

Typically most concerned with getting paid out ou t in cash / refinanced



 

May have bias towards low valuation va luation in certain circumstances



 

Paid to the extent of the collateral’s value. Must be paid in cash or debt de bt,, not equity (unless otherwise agreed to)  –

Pre-Petition



 

Secured Se cured Lenders

Typically want to assert a rela r elatively tively low lo w valuation  –



 

Old Equity

35

Potential Pote ntial to equitize claim

May not want valuation to be b e too low as this could cou ld result in being “under-collateralized”  –

Unsecured Creditors

Inability to cram up with equity

Risk of losing s ecured rights rights on portion of claim deemed by the the court to be unsecured unsecured

 All of equal rank unless unless expressly subordinated. Cla Claim im can can be paid in any current (cash, (cash, debt and equity)



 



 

Typically want to assert a valuation higher than that asserted by DIP lenders and pre-petition secured lenders



 

May not want valuation to be b e too high as this could co uld mean recovery to common / preferred equity holders



 

Recovery to old equity usually means mea ns less or no equity to unsecured unsecured creditors c reditors



 

Typically assert the highest valuation in i n order to position themselves as much “in the money” as possible

abc ab c

 

Case study 

 

397167

Case study  Overview

Company descript descript ion 

H. Miller Chemical Corporation (“H. (“H. Miller” or the “Company”) is in the commodity chemical chemical business and produces large quantities of ammonia  – LTM sales of $1,050 million million and EBITDA of $125 million  – Due to the robust economic economic growth, the Company Company has grown and plans to expand current current production capabilities due to outlook for the business and price increases for ammonia

Characteristics Cha racteristics of the business 

In the commodity chemical business, chemicals are produced on a massive scale using relatively simple molecules at the lowest possible cost and sold in bulk



Large scale needed to stay competitive



Very capital intensive industry



Volatile performance and highly dependent on the business cycle

 

10% - 15% EBITDA margins during normal operating environments environments (mid single digits after after capex) Public trading multiples of comparable companies ranged from 6x – 9x; the Company’s multiple, prior to transaction, transaction, was 7.2x

In January January 2007, 2007, Poor Alloc ator Investments Investments (“ Poor Alloc ator” ), a large private equity equity firm, takes H. Miller private pr ivate in a transactio n valued at $1 bil billilion on 37

abc ab c

37

 

397167

Case study  Deal De al details detail s

The company finances the acquisiti on w ith $200 $200 million of equity , $35 $350 0 million of b ank debt and $450 $450 million of bonds 

The deal is predicated on LTM EBITDA of $125 million and projected 2007 EBITDA of $138 million

Prior to deal deal – Ca Capital pital structure ($ in millions)

Post deal deal – Ca Capital pital structure ($ in millions )

 Am o un t Mu lt ip le s Bank debt Equity (1) TEV

   

$100 800

 

$900

 Am o u n t M u lt ip le s Mat u r it y

0.8 x 7.2 x

Bank debt Bonds

   

Equ tyV TiE

   $1,2 00 00 0

2006A EBITDA

(1) Market value

=

$1,000 125

= 8.0x

2.8 x Jan. 2009   6.4 x Jan. 2012   8.0 x Poor Allocator offered a 12.5% takeover premium above current market capitalization of $800 million + $100 million of debt

Purchase price multiples ($ in millions) Purchase price

$350 450

Purchase price 2007E EBITDA

=

$1,000 138

= 7.25x

Rat ate e

5.0% 8.0%

abc ab c

38

 

397167

Case study  Projections

 At th the e ti me o f t he ac qu is isit it i on , Poor Poo r A ll oc ato atorr v iew s t he b us in ess as h avi ng a gr eat f ut ur e. They Th ey believe that the market market does not fu lly un derstand the long-term growth s tory of China and and th e robust grow th of developing economies which they expect expect to in crea crease se revenue revenue and earnings earnings more rapidly than the Company Company anticipates. The They y also believe that they can can take 2% 2% - 3% of the costs out of the business over the next 3 years Poor Allocator’s projections for H. Miller Miller and resulting IR IRR R ($ in milli ons) 2006A

2007

2008

2009

2010

2011

CA GR

$1,050

  $1,150

  $1,275

  $1,400

  $1,550

  $1,700

  10.1%

EBITDA % margi n

  125   11.9%

  138   12.0%

  163   12.8%

  189   13.5%

  220   14.2%

  255   15.0%

  15.3%

Capex % of s al es

 

Rev enue

 

EBITDA - Capex

 

74 7.0%

   

52

81 7.0%

   

89 7.0%

   

98 7.0%

   

109 7.0%

 

119 7.0%

 

 

58

 

74

 

91

 

112

 

136

  

54 1.1x

  

54 1.4x

  

54 1.7x

  

54 2.1x

  

54 2.5x

 

54%

 

63%

 

57%

 

52%

 

48%

(1)

Notice that interest coverage is 1.1x forward year projections

Interest expense Interest coverage IRR





(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 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 paydown (2) Interest coverage calculated as the (EBITDA-Capex)/Cash (EBITDA-Capex)/Cash Interest

abc ab c

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397167

Case study 

Comparable company analysis Trading Tra ding comp s ($ in millions) Sh ar e Co m p an y Res nic k Partners , Inc . Money maker Company Jindal's Sw indal Co. Get Ric h Quic k Inc orporated Mitc h Corp.  A+ Chem Chemicals icals Roths c hild Commodity Har v ey Biz Co.

               

Pr i c e $56.96 13.10 10.00 14.08 113.69 81.04 11.97 8.64

M ar k e t                

V al u e $300 426 730 680 282 236 311 385

Pr e f e r r e d                

De b t $124 120 376 181 120 100 137 127

Eq u i t y

               

-----50 ---

En t e r p r i s e                

Cas h ($45) (55) (295) (150) (122) (80) (40) (50)

               

V al u e $379 491 811 711 280 306 408 462

Low M e an M e d i an Hi g h

EV / Re v e n u e

EV / EBITDA

               

L TM 1.0x 0.8 0.5 0.6 0.8 1.1 1.2 0.9

               

2007 0.9x 0.7 0.4 0.5 0.6 1.0 0.5 0.8

               

L TM 8.2x 7.8 6.0 6.2 9.0 8.5 7.4 7.6

               

2007 7.4x 7.0 5.3 5.4 8.3 7.7 6.8 6.9

       

0.5x 0.9 0.9 1.2

       

0.4x 0.7 0.7 1.0

       

6.0x 7.6 7.7 9.0

       

5.3x 6.9 7.0 8.3

abc ab c

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397167

Case study  Developments 1

For the first fir st half of 20 2007 07,, the Company Company’s ’s results resu lts m ee eett its plan. p lan. Chemical Chemical and market ind ices trade tr ade up as the business continu es to perform well. The The bank debt and bonds contin ue to trade near near par. EBITD EBITDA A out perfo performs rms 1H 200 2007 7 by $2 mill ion Pricing chart – Company securities securities vs. market market indices 100 80 60 40 20 -Dec -06

Jun-07

Dec -07

Jun-08

Bank Debt due 2009

FY e n d e d De c -06 Plan  Actual V ar i an c e

     

LTM EBITDA multiples Median  

1H e n d e d J u n -07

$125 125 -7.7x

       

$70 72 $2 7.8x

Bonds due 2012

2H e n d e d De c -07  

Dec -08

$68

S&P 500

1H e n d e d J u n - 08  

Jun- 09

$75

S&P Chemic al Index

2H e n d e d De c -08  

Dec - 09

$88

1H e n d e d J u n -09  

$85

2H e n d e d De c -09  

$104

abc ab c

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397167

Case study 

Developments (cont’d) 2

Beginning in mid 2007 2007,, performance performance begins to falter. The housi ng and debt markets are are starting to show c racks and the C Company’s ompany’s results are slightly below pl an. Ma Manageme nagement’s nt’s view is that the shortf all is just a shor t-te t-term rm economic hiccup . Poor Poor A llocator remains pleased pleased with their in vestment. EBITDA EBIT DA underperfo un derperforms rms 2H 200 2007 7 by $10 milli on Pricing chart – Company securities securities vs. market market indices 100

80 60 40 20

-Dec -06

Jun-07

Dec -07

Jun- 08

Bank Debt due 2009

FY e n d e d De c -06 Plan  Actual V ar i an c e

     

LTM EBITDA multiples Median  

1H e n d e d J u n -07

$125 125 -7.7x

       

2H e n d e d De c -07    

Dec - 08

Bonds due 2012

$70 72 $2

 

$68 58 ($10)

7.8x

 

7.4x

1H e n d e d J u n -08  

Jun- 09

S&P 500

$75

2H e n d e d De c -08  

Dec -09

S&P Chemic al Index

$88

1H e n d e d J u n -09  

$105

2H e n d e d De c -09  

$84

abc ab c

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397167

Case study 

Developments (cont’d) 3

In the first half of 2008, 2008, the Company Company becomes more concerned as as the subprime cris is spreads across the globe. De Demand mand for product falls as do market prices. The The outlook is highly un certain. The Company determines determines the situ ation is n ot a shor t-te t-term rm ph enomenon and starts to defe deferr capex spending to maxim ize cash flow. flo w. EBIT EBITDA DA underperforms underperfo rms 1H 200 2008 8 by $25 $25 mill ion Pricing chart – Company securities securities vs. market market indices 100

80 60 40 20

-Dec -06

Jun- 07

Dec -07

Jun-08

Bank Debt due 2009

FY e n d e d De c - 06 Plan  Ac tual  Actual V ar i an c e

     

LTM EBITDA multiples Median  

1H e n d e d J u n - 07

$125 125 -7.7x

       

$70 72 $2 7.8x

2H e n d e d De c -07    

Dec -08

Bonds due 2012

1H e n d e d Ju n - 08

 

$68   58   ($10)  

$75 50 ($25)

 

7.4x

6.5x

 

Jun- 09

S&P 500

2H e n d e d De c- 08  

Dec -09

S&P Chemic al Index

$88

1H e n d e d J u n - 09  

$105

2H e n d e d De c - 09  

$84

abc ab c

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397167

Case study 

Developments (cont’d) 4

The secon second d half of 2008 2008 is a dis disaster. aster. With the failure failur e of Lehman, the financial financ ial markets seize and global demand comes to a halt. The The Company’s Company’s pr ofitability falls i nto a tailspin and its bank debt and bonds trade at at discount s to par par value. value. The Company reta retains ins Weil Weil Gotshal and Rothsch Rothsch ild to review review “ strategic alternatives” . EBIT EBITDA DA und underperfor erperfor ms 2H 20 2008 08 by $70 $70 mill ion Pricing chart – Company securities securities vs. market market indices 100 80 60 40 20 -Dec -06

Jun- 07

Dec -07

Jun-08

Bank Debt due 2009

FY e n d e d De c -06 Plan  Ac tual V ar i an c e

     

1H e n d e d J u n -07

$125 125 --

     

$70 72 $2

7.8x

Bonds due 2012

2H e n d e d De c -07    

Dec- 08

Jun- 09

S&P 500

1H e n d e d J u n -08

S&P Chemic al Index

2H e n d e d De c - 08

 

$68   58   ($10)  

$75   50   ($25)  

$88 18 ($70)

 

7.4x

6.5x

5.5x

LTM EBITDA multiples Median

 

7.7x

 

 

 

Dec -09

1H e n d e d J u n -09  

2H e n d e d De c -09

$105

 

$84

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 fil es for bankr upt uptcy cy on e day day pri or to t he January 15, 15, 200 2009 9 matur maturity ity date

abc ab c

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397167

Case study 

The bus business iness plan pl an The Company Company creates creates a new business plan. The new projections are compared to the prior projections below: New Ne w projection s ($ in millions) 2008A Rev enue EBITDA % mar gi n

   

Capex % of s al es

   

2009

$755

2010

 

$705

 

68   9.0%  

60 8.5%

 

23 3.0%

   

$800

 

80   10.0%

 

28 4.0%

2011

   

100   11.0%

40 5.0%

$910

   

Prior projections ($ in millions) 2008

2009

2010

2011

Rev enue

  $1,275

  $1,400

  $1,550

  $1,700

EBITDA % mar gi n

 

163   12.8%

 

189   13.5%

 

220   14.2%

  255   15.0%

Ca% peoxf s al es

  

  

  

  

9 7.08%

98 7.0%

109 7.0%

119 7.0%

Variance ($ in millions) 2008

2009

2010

2011

Rev enue

 

($520)  

($695)  

($750)  

($790)

EBITDA % margi n

   

(95)   (3.8%)  

(129)   (5.0%)  

(140)   (4.2%)  

(155) (4.0%)

Capex % of s al es

   

(67)   (4.0%)  

(70)   (3.0%)  

(69)   (2.0%)  

(64) (1.0%)

2013

CA GR

  $1,000

  $1,070

  11.0%

 

 

  25.7%

120   12.0%

55 6.0%

2012

   

150   14.0%

60 6.0%

   

64 6.0%

abc ab c

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397167

Case study 

The bus business iness plan pl an  At th e ti me of o f t he r efo eforr ecas t, com c om par abl e co mp mpani ani es w ere t rad in g in th the e 6.0x r ang e. The Co mp any had approximately $800 $800 million i n d ebt Trading Tra ding co mps ($ in millions) Co m p an y

Sh ar e

M ar ke ke t

En t e r p r i s e

EV / Re v .

Pr i ce

Val u e

V al u e

L TM

EV / EBITDA L TM

Res nic k Partner s , Inc . Money maker Company Jindal's Sw indal Co. Get Ric h Quic k Inc orpor ated

       

$35.77 8.23 6.28 8.84

       

$188 268 458 427

       

$384 453 749 614

       

0.8x 0.6 0.3 0.4

       

6.6x 6.2 4.4 4.6

Mitc h Corp.  A+ Chem Chemicals icals Roths c hild Commodity Har v ey Biz Co.

       

71.40 50.90 7.52 5.43

       

177 148 195 242

       

320 348 407 437

       

0.6 0.9 1.0 0.7

       

7.4 6.9 5.8 6.0

       

0.3x 0.7 0.7 1.0

       

4.4x 6.0 6.1 7.4

Low M e an M e d i an Hi g h

Pre-petition Pre -petition capital structure ($ in milli ons) Tr ad ad i n g

M ar k et et

Pric Pr ic e

Value Val ue

TEV TE V

     

   

 Am o un t

Bank debt (s ec ured) Bonds (uns ec ur ed) To t al

     

$350 450 $800

   

85% 15%

$298 68 $365

Im pl pl i e d (1)

$298 418

(1) Assumes bank debt will will get par before bonds get get recovery (2) Calculated off 2008A EBITDA EBITDA of $68 million

Leverage

   

4.4x 6.1x

(2)

abc ab c

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397167

Case study 

Valuation Va luation range considera consi derations tions Below is an illus trative valuation valuation range that constituencies could ascribe to the Debtor  Debtor 

Valuation Va luation range ($ in mi llions)  

      A       D       T       I       B       E

 $100   $90

   

5.0x $500 450

         

         

400 350 300 250 200

$80 $70 $60 $50 $40

     

5.5x $550 495

         

440 385 330 275 220

     

6.0x $600 540

         

480 420 360 300 240

               

EBI BITD TDA A Mu lt ip le 6.5x   7.0x   $650   $700   585   630   520 455 390 325 260

         

560 490 420 350 280

         

7.5x $750 675 600 525 450 375 300

     

8.0x $800 720

         

640 560 480 400 320

     

8.5x $850 765

         

680 595 510 425 340

     

9.0x $900 810

         

720 630 540 450 360

Equity

Banks Bonds

The Company’s Company’s i nvestment banker’s banker’s view of ente enterpris rpris e value for H. Miller Miller i s $330 $330 millio n to $560 $5 60 mil millilion on

abc ab c

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397167

Case study 

Valuation Va luation comparison Co m p an y v al u at i o n ($ i n m i l l i o n s ) Met h o d olo gy

Un s ec u r ed c r ed i t o r s v al u at i o n ($ i n m i l l i o n s )

Low

Compara rab ble Co Companies A na naly si sis Pr ec ec ed edent Tr an ans ac ac titions An Analy si sis Dis c ounted Cas h Flow A na naly s is Range of of Tota Totall Enterpri Enterpri s e Va Val u

Comp. Co.

       

$330.0 460.0 365.0 $360.0

 $330

M id        

$360.0 540.0 407.5 $400.0

       

Hi g h

We i g h t i n g

M e t h o d o lo g y

$390.0 620.0 450.0 $440.0

       

Compar ab able Companies An Analy si sis Pr ec ec ed edent Tr an ans ac ac titions An Analy si sis Dis c ounted Cas h Flow A na naly s is Ran ange ge of Tota Totall Enterprise Enterprise Value Value

Comp. Co.

$390

$460

Prec. Tran.

DCF

$365

Range

$360

$0

$150

$300

45.0% 10.0% 45.0% 100.0%

Low

$620

400.0 520.0 575.0 $50 $5 00.0

       

455.0 610.0 662.5 $575.0

$400

$440

$750

We i g h t i n g

510.0 700.0 750.0 $655.0

       

$520

Prec. Tran.

33.3% 33.3% 33.3% 100.0%

$700

$575

$75

$500

Range

$600

       

Hi g h

$510

DCF

$450

$450

       

Mid

$0

$150

$300

$450

$655

$600

$750

The banks endorse the Company’s Company’s v alua aluation tion beca because use it pr ovides them wit h the vast majority of the value. The unsecured creditors obj ect and and argue for a higher valuation valuation

abc ab c

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397167

Case study 

 As  A ssumptions

Comparison of assumptions ($ in millions) Company

2009 EBITDA estimate

Unsecured Unsecure d Cre Creditors ditors

$60 million

$70 million

Comparable Compara ble companies multip le

6.0x

6.5x

Precedent Pre cedent transaction mul tiple

9.0x

DCF assumption

WACC

Perpetuity Pe rpetuity grow th rate

Company provides little weight to precedents prior to the financial collapse, arguing they have limited use as an appropriate indication of current value

12%

2%

9.9x

Unsecured creditors believe Company’s EBITDA projection is too low

Unsecured creditors argue that two of by the comps selected the Company’s financial advisor are not appropriate because they are larger than H. Miller (Jindal’s (Jin dal’s and Get Rich)

10% Unsecured creditors included 4 additional transactions (which happened to have higher multiples) that they believed to be comparable

3%

 As on e woul wo ul d expec ex pec t, t he Comp Co mp any and un uns s ecu ecurr ed cr c r edi edito to rs pr op os e v alu ati ation on s wi w i th substantially different assumptions

abc ab c

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397167

Case study  Proposed Propos ed Plans Plans New exit financing raised by third party

Value distributable to stakeholders

Company (bank (bank endorsed) plan ($ in million s) Ba n k d e b t

 

$150

Note that financing

Equity Pl an T EV

   

250 $400

parties will only finance on historical results (vs. projections) at current market senior debt leverage multiples

T o t al C l ai m

New exit financing raised by third party

Value distributable to stakeholders

Ba nks Bonds (1) Old equity

   

Total

 

C as h

De b t

Eq u i t y

$350   450   N/A  

$150 ---

     

----

$800

$150

 

--

 

T o t al V al u e

       

$200 50 --

   

$350 50 --

  100.0%   11.1% N/A

 

$400

50.0% 50

 

$250

Re c o v e r y % o f c l ai m

Pr o f o r m a e q u it y o w n e r s h ip    

80.0% 20.0% --

Cyclical companies should have less leverage

100.0%

Unsecured creditors creditors co mpeting plan ($ in million s) Bank debt Equity

   

$200 400

Pl an TEV

 

$600

To t al Cl ai m

Cas h

De b t

Eq u i t y

Banks Bonds (1) Old equity

   

$350   450   N/A  

$200 ---

     

----

Total

 

$800

$200

 

--

 

To t al V al u e

   

$150 250 --

 

$400

 

Remember Re member the waterfall! w aterfall! (1) Analysis assumes small amount amount of trade claims remain unimpaired

Re c o v e r y % o f c l ai m

Pro form a e q u it y o w n e r s h ip

   

$350 250 --

  100.0%   55.6% N/A

   

37.5% 62.5% --

 

$600

75.0% 75

 

100.0%

 

Financing commitment was obtained with support from distress funds who own the bonds Leverage appears reasonable at 3.3x 2009E EBITDA of $60 million (Company’s view) or 2.9x 2009E EBITDA of $70 million (Bonds (Bo nds’’ vie view) w)

50

abc ab c

 

397167

Case study 

Strategy Stra tegy for old ol d equity Given valuation range that would put o ld equity in t he money is so mu ch hi gher than reasonable Given reasonable valuation range ($80 ($800 0 million assumi ng no other claims), Poor Poor A llocator may con sider the follow ing alte alternatives rnatives to r eta etain in a stake in the Company:  

Hire advisors and lawyers that can adequately highlight hi ghlight 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 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 sponso red plan ($ in million s)

Bank debt Uns ec ur ed PIK debt Equity

   

$200 150 400

Pl an TEV

 

$750

T o t al Cl ai m Banks Bonds Old equity Poor A lloc .

   

Total

 

Cas h

De b t

$350   450   N/A   N/A  

$350   -  ( 150)   --  

$800

$200

 

 

-150 ---

$150

To t al V al u e

Eq u i t y      

-250 150 --

 

$400

 

Re c o v e r y % o f c l ai m

Pro form a e q u it y o w n e r s h ip

   

$350 400 ---

  100.0%   88.9% N/A N/ N/A

   

-62.5% 37.5% --

 

$750

93.8% 93

 

100.0%

   

Poor Allo cator paid $150 $150 milli on to purch ase 37. 37.5% 5% of t he equity equity at a $75 $750 0 million milli on TEV – another highly levera leveraged ged transaction