Advisory Valuation in the context of Goodwill Impairment ...mayafiles.tase.co.il/RPdf/723001-724000/P723899-01.pdf · Traditional coffee (Doncafe, brands Moment, Minas, Strong, Il

Strauss Coffee B.V Advisory Valuation in the context of Goodwill Impairment Testing under IAS 36 related to Strauss Adriatic d.o.o

20 March 2012 Reliance Restricted

Dear Mr. Morgan:

In accordance with our engagement letter dated 23 June, 2009 and statement of work dated 25 December, 2011, Ernst & Young (Israel) Ltd. (“EY”) is pleased to present the following report (the “Report”) assessing whether impairment of the Goodwill ("the Goodwill") recorded at Strauss Coffee B.V., related to Strauss Adriatic d.o.o., is required as of 31 December 2011 ("the Valuation Date). Our work was performed giving consideration to International Accounting Standard No.36 "Impairment of Assets" ("IAS 36").

The Engagement was approved by Tomer Goldner, Strauss Coffee B.V controller.

The scope of our analysis included interviewing Management about the business; consideration of applicable economic, industry, and competitive environments, including relevant historical and future estimated trends; consideration of any business plans, future performance estimates or budget for Strauss Adriatic d.o.o; Impairment analysis of Strauss Adriatic according to IAS 36; preparation of a narrative report summarizing the methodology employed in our analysis, the assumptions on which our analysis was based, and our conclusion in respect to the above impairment test

We authorized Strauss Coffee B.V. and its parent company, Strauss Group Ltd. to disclose this Report as part of its financial statements as of 31 December 2011.

EY has provided Strauss Coffee B.V. valuation services which include Impairment analysis of the goodwill recorded at Strauss Coffee B.V., related to Strauss Adriatic d.o.o., as of June 30, 2009, Decmber 31, 2009 and December 31, 2010.

The members of our engagement team have no direct or indirect financial interest in the property that is the subject of this assignment, nor do they have any direct or indirect personal interest with respect to the property or parties involved in the

assignment. Neither our employment nor our compensation in connection with the report is in any way contingent on the recommendations reached or values estimated, and this report sets forth all of the assumptions and limiting conditions affecting the analysis, values, and recommendations contained herein. For Limiting Conditions see Appendix III.

We appreciate the opportunity to provide our valuation services to Strauss Coffee B.V.. Please do not hesitate to contact Einat Sperling at +972- 3- 568- 7484 if you have any questions about this engagement or if we may be of any further assistance.

Sincerely yours,

Ernst & Young (Israel) Ltd.

Ernst & Young (Israel) Ltd. 3 Aminadav Street Tel Aviv 67067 Israel

Reliance Restricted Mr. Todd Morgan, CEO Strauss Coffee B.V. Prof J H Bavincklaan 2 Amstelveen, NOORD-HOLLAND NETHERLANDS 1183 AT

20 March 2012

Abbreviations

Abbreviations

20 March 2012 STRAUSS ADRIATIC Impairment

€, EUR Euro

Acquirer or the Client Strauss Coffee B.V.

AFH Away from home

ASP Average sales price

BS Balance sheet

Business Plan The business plan of Strauss Adriatic provided by the Management of Strauss Adriatic as of the ValuationDate

CAGR Compound average growth rate

CAPEX Capital expenditures

CAPM Capital asset pricing model

CGU Cash generating unit

DCF Discounted cash flows

Dec##F For balance sheet discussion forecasted twelve month period ended 31 December 20##

Dec##A For balance sheet discussion actual twelve month period ended 31 December 20##

EBIT Earnings before interest and tax

EBITDA Earnings before interest, tax, depreciation and amortization

EY Ernst & Young (Israel) Ltd.

FDI Foreign direct investments

FCF Free cash flow

FS Financial statements

FY Financial year

FY##A For P&L discussion actual twelve month period ended 31 December 20##

FY11B For P&L discussion budget for twelve month period ended 31 December 2011

FY1#F For P&L discussion forecast twelve month period ended 31 December 201#

FYROM Former Yugoslav Republic of Macedonia

Abbreviations

Abbreviations

20 March 2012 STRAUSS ADRIATIC Impairment

R&G Roasted and ground

GDP Gross domestic product

GTP Growth to perpetuity

IAS International accounting standards

IFRS International financial reporting standards

Industry Coffee industry

m Millions

Management Management of Strauss Adriatic

NBV Net book value

PL Profit and loss

Report This report, dated 20 March 2012

Rf Risk-free rate

Rm Market rate of return

Strauss Group Strauss Group Ltd.

The Company or Strauss Adriatic Strauss Adriatic d.o.o

Valuation Date 31 December, 2011

WACC Weighted average cost of capital

Contents

Contents

20 March 2012 Strauss Coffee B.V Imp test_Dec11_ Final_Signed.docx

Executive Summary 1

1. Executive Summary ........................................................................................................................ 2

2. Valuation Results ............................................................................................................................ 5

Strauss Adriatic Overview 6

3. Incorporation - Milestones ............................................................................................................... 7

4. Key Financial Data .......................................................................................................................... 8

Market Overview 10

5. Macroeconomic outlook..................................................................................................................11

6. Market Overview ............................................................................................................................12

Valuation Methodology 16

7. Value in Use - Discounted Cash Flows ...........................................................................................17

8. Discount Rate ................................................................................................................................19

Valuation Analysis 22

9. Business Plan - Main Assumptions .................................................................................................23

10. Valuation Results ...........................................................................................................................29

Appendices 30

11. Weighted Average Cost of Capital ..................................................................................................31

12. Sensibility analysis .........................................................................................................................32

13. Sensitivity Analysis .........................................................................................................................33

14. Sources of Information ...................................................................................................................33

15. Statement of General Assumptions and Limiting Conditions ...........................................................35

16. Engagement team education details ...............................................................................................38

Executive Summary


1

Executive Summary

1. Executive Summary

2. Valuation Results

Executive Summary : Executive Summary

Executive Summary


2

Background

We understand that in 2003, Strauss Coffee B.V. (previously Elite International B.V.) established its first Joint Venture in Serbia & Montenegro, a region with a long tradition of high coffee consumption, by acquiring shares in Doncafe Group (to date: Strauss Adriatic d.o.o.) . In 2005 Strauss Coffee B.V. acquired its partner's shares and became the sole owner of Strauss Adriatic. We understand that Strauss Coffee wishes to conduct its annual goodwill impairment test in accordance with IAS 36 regarding its holdings in Strauss Adriatic.

The Acquirer

Strauss Coffee BV, is fully owned by Strauss Group. Strauss Coffee B.V. is Strauss Group's arm for Coffee activities with head office in Amsterdam, Netherlands, and a global presence of in 14 markets in Europe (Ukraine, Poland, Romania, Bulgaria, Serbia, Russia and others), Latin America and Israel, including six production plants in five countries

Strauss Coffee B.V. currently employs approximately 6,000 people in its various locations

Strauss Group is traded on the Tel Aviv stock exchange in Israel.


Executive Summary


3

Scope of our work

The management of Strauss Coffee B.V. engaged EY to provide advisory valuation services in relation to the goodwill impairment test of Strauss Adriatic in accordance with IAS 36, in connection with the acquisition of Strauss Adriatic. We understand that Management wishes to perform the annual goodwill impairment test relating to the goodwill that resulted from the acquisition of Strauss Adriatic, in accordance with International Accounting Standards (“IAS”), and and more specifically IAS 36 "Impairment of Assets".

According to IAS 36 an asset is impaired when its carrying amount exceeds its recoverable amount. IAS 36 paragraph 18 defines “Recoverable Amount” as “the higher of an asset’s Fair Value Less Costs to Sell and its Value in Use”. IAS 36 defines “Fair Value less Costs to Sell” as “the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal” and “Value in Use” as the “present value of the future cash flows expected to be derived from an asset”.

The estimation of the Value in Use was performed through the application of the Discounted Cash Flow Valuation Method and according to the requirements of IAS 36. Detailed description of the approach is presented in section “Valuation Methodology”.

This valuation Report is subject to the attached “Statement of General Assumptions and Limiting Conditions” and our work was based on data, information and assumptions Provided to us by Management.


Executive Summary


4

Key financials of Strauss Adriatic’s business plan

The key parameters incorporated in the Business Plan as provided by the Management are summarized in the following points.

� Planed revenue growth from FY11A to Terminal year experiencing a CAGR of approximately 2.4%.

� EBITDA is expected to grow at a CAGR of 31.6% during FY12B - Terminal year, while EBITDA margin is expected to increase from 3.4% in FY12B to 9.8% in the Terminal year.

� In FY11A the Company had an EBIT of EUR 36 thousand.

� Management assumes that only in FY16F the Company will achieve similar revenue and profitability levels as in FY08A, mainly due to:

� The effect of the slow recovery from the economic downturn.

� The changes it intends to implement in the raw materials of its products in order to lower the COGS.

� Moving from internal distribution system to an external one, with higher margins.

EBITDA and EBIT Source: Management

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

EUR

'000

EBITDA EBIT

EBITDA margin and Net sales Source: Management

0%

2%

4%

6%

8%

10%

12%

0

10,000

20,000

30,000

40,000

50,000

60,000

EUR

'000

Net sales EBITDA margin

Executive Summary : Valuation Results

Valuation Results


5

Valuation Results

EY performed the valuation of goodwill of Strauss Adriatic, based on the valuation approach and methodologies set out in this Report, which are in alignment with IAS 36 requirements. The results of the value of goodwill of Strauss Adriatic under the “Value In Use” premise may be summarized as follows: Valuation summary Currency: € 000 100% basis Present value of FCF 7,254 Plus: Terminal value 24,179 Enterprise value 31,433 Book value 40,753 Impairment 9,320 Source: EY valuation Ref: Summary of Values - valuation results on a 100% basis - Section SV - Summary of Values

According to information provided by Management, the carrying amount of Strauss Adriatic as of the Valuation Date is €40.8 m.

The exchange rate EUR/RSD as of the valuation date was 104.6.

The analysis of the valuation results is presented in section “Valuation Analysis”.

Strauss Adriatic Overview


6

Strauss Adriatic Overview

3. Incorporation - Milestones

4. Key Financial Data

Strauss Adriatic Overview : Incorporation - Milestones

Incorporation - Milestones


7

Strauss Adriatic d.o.o is the second largest coffee manufacturer and wholesaler in Serbia, founded in 1992 as a family business. In 2003, Strauss Coffee B.V. established its first Joint Venture in Serbia & Montenegro, a region with a long tradition of high coffee consumption, by acquiring shares in Doncafe, a family-owned coffee company established by the Bajcetic family, which reached a leading position as the second largest coffee company in Serbia. Strauss Adriatic entered to the market of Bosnia and Herzegovina in 2004. In 2005 Strauss Coffee B.V. acquired its partner's shares and became the sole owner of Strauss Adriatic d.o.o.

In March 2000, the Company launched its first branded coffee “Doncafe”. This brand has received numerous recognitions and awards. “Kafa C” trade name was purchased in May of 2005. This coffee has a long history in the market of former Yugoslavia. Since the completion of the acquisition, the Company has opened a new factory in 2007. With a daily production capacity of five tons of coffee.

The headquarters of Strauss Adriatic are located in Simanovci.

The key Company products can be divided into three main categories:

� Traditional coffee (Doncafe, brands Moment, Minas, Strong, Il Maestro and C kafa);

� Instant coffee (Doncafe Instant, Doncafe Ice and Café Bianco); and

� Espresso (Aromatico, Cremoso and Vendosso).

The Serbian coffee market is dominated by two players Droga Kolinska group and Strauss Adriatic. As per Management information, the main competitor in Serbia’s coffee market is Grand (member of the Droga Kolinska group). According to a market research conducted by AC Nielsen, the estimated market share of the Droga Kolinska group is 46.2% as of the end of 2011, out of which Grand holds 33.6% and Bonito (economy segment) 11.1%, while the market share of Strauss Adriatic is 34.4% together with C kafa (economy segment).

Doncafe Logo Source: Doncafe

Strauss Adriatic Overview : Key Financial Data

Key Financial Data


8

Financial Data

The Company’s functional currency is RSD. The financial statements have been translated to EUR, which is the Company’s presentation currency, according to IAS 21 "The effects of changes in foreign Exchange Rates". The following analysis is based on FY08A – FY10A audited FS and FY11A audited financial data provided by Management, translated to EUR figures, including exchange rate difference effects.

Income statement

The table on the left hand side represents PL statement of the Company for financial years FY08A - FY11A.

� Revenue has decreased in FY09A and FY10A by approximately 20% compared with FY08A, mainly due to the global economic downturn which impacted coffee consumption in general, and specifically decreased the consumption of the modern, more expensive coffee types. Net sales grew in FY11A as a result of the increase in coffee prices to customers.

� EBITDA dropped from 6.2% of revenue in FY09A to 1.9% in FY10A and 1.1% in FY11A. According to Management, the decrease is mainly due to the global downturn impact and the rising of prices of raw materials, which resulted in a decrease in the overall Serbian coffee market, which coincided with an increase in Company's COGS due to the high prices of coffee beans.

Historical PLCurrency: € 000 FY08A FY09A FY10A FY11A Gross sales 57,586 45,622 47,739 53,985 Variable direct selling expenses 6,644 5,047 6,293 7,999 Net sales 50,942 40,574 41,446 45,986 COGS 35,526 27,080 30,640 36,031 Gross profit 15,416 13,494 10,806 9,955 S&M 10,006 9,857 9,078 8,356 G&A 1,997 1,878 2,014 1,840 EBITDA 4,729 2,511 633 524 EBITDA margin 9.3% 6.2% 1.5% 1.1% Depreciation 1,317 752 918 765 EBIT 3,412 1,759 (286) (241) EBIT margin 6.7% 4.3% (0.7%) (0.5%) Interest and other 286 113 (259) (192) EBT 3,127 1,647 (27) (433) EBT Margin 6.1% 4.1% (0.1%) 0.9% Taxes 68 30 68 0 Net Income 3,059 1,617 (95) (433) Net income margin 5.3% 3.5% (0.2%) (0.8%) Source:Strauss Adriatic financial statements Ref: Historical Profit and Loss - Section PL - Profit and Loss Analysis

Strauss Adriatic Overview : Key Financial Data

Key Financial Data


9

BS

The table to the left hand side has been comprised from actual figures recorded as at Dec08A, Dec09A, Dec10A and Dec11A in the Company's audited FS provided by Management.

Current assets

The Company's current assets' balance is comprised mainly of trade receivebels and inventory. The decrease in the current assets' balance experienced in FY09A compared with FY08A is the result of the decrease in Comany operations due to the economic downturn, which, to date, still has an impact on the Company's results.

Non-current assets

Non-current assets balance is mainly comprised of fixed assets. The decrease in the non-current assets' balance is the result of the Company's strategy to lower CAPEX levels and improve its cost structure.

Current liabilities

Current liabilities are mainly compridsed of trade and other payables. The Current liabilities' balance declined from its level as at FY08A, due to the decrease in coffee volumes sold.

Long term liabilities

Long term liabilities are comprised mainly of the shareholdres loan which remained unchanged during the presented period.

Historical BS Currency: € 000 Dec08A Dec09A Dec10A Dec11A Assets Cash & cash equivalents 1,589 4,196 3,085 2,588 Current assets 22,802 14,034 16,512 15,447 Non-current assets 12,239 11,589 10,341 9,476 Total assets 36,630 29,819 29,938 27,511 Liabilities Current liabilities 7,703 3,093 5,448 3,616 Long term debt and group loan 17,908 16,306 16,154 16,154 Other long term liabilities - 106 1 8 Total liabilities 25,611 19,504 21,603 19,777 Equity 11,018 10,315 8,335 7,734 Source: Management Ref: Balance Sheet 2 - Section BS - Balance Sheet Analysis

Market Overview


10

Market Overview

5. Macroeconomic outlook

6. Market Overview

Market Overview : Macroeconomic outlook

Macroeconomic outlook


11

Economic overview

� The Serbian economy’s real GDP growth experienced in 2010 and 2011 is primarily due to increased consumer demand and export activity. CAGR of the GDP in the period 2005-2009 was 10.6%. According to the estimates of Global Insight (as of January 2012) real GDP is expected to grow at a CAGR of 4.11% from 2012 to 2016.

� FDI dropped in 2007 due to a slower pace of privatization following political instability. FDI did not recover fully until 2010 due to the global economical downturn. Accroding to the latest etsimates of UniCredit (as of December, 2011) the Net FDI as percent of GDP is expected to grow at a CAGR of 3.84% during 2011 to 2013.

� In the period 2005-2007, the National Bank of Serbia implemented a restrictive monetary policy, which resulted during that period in an appreciation of the Serbian Dinar by 20.5% in real terms in comparison to the EUR. In 2008 Serbian Dinar devaluated and at the yearend, EUR1 equalled 94.53 Serbian Dinars. Instability of the currency has continued in 2009-2011, resulting in a change in value of the Serbian Dinar in both directions, reaching a value of 104.6 as at 31 December, 2011.

� The corporate tax rate in Serbia is 10%.

� During 2011-2016 the unemployment rate is expected to decline from 23% to 18%, which is another indication that Serbia is expected to continue its recovery from the downturn.

� According to economical projections as described above, it seems likely to assume that the Serbian economy is expected to return to its growth rates of before the economical downturn starting 2014, while experiencing slight improvements in the macro-econimical factors in the preceding years.

Projected real GDP growth

3.8%

-3.5%

1.0%1.8%

1.0%

2.9%

4.0% 4.1% 4.4%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY08A FY09A FY10A FY11A FY12F FY13F FY14 FY15 FY16

Real GDP (annual growth %)

Unemployment projections

14

16.9

20.0

22.8 22.6 21.5

20 19

18

0

5

10

15

20

25

2008A 2009A 2010A 2011A 2012F 2013F 2014F 2015F 2016F

Percentage

unemployment rate

Market Overview : Macroeconomic outlook

Coffee market


12

Industry overview

Background

According to the market analysis of AC Nielsen as of November 2011, coffee market in Serbia is by far the biggest in the Adriatic region (this region includes Serbia, Bosnia and Herzegovina, Slovenia, Croatia, Montenegro, FYROM and Albania). Total coffee market of the Adriatic region is estimated, as per Company’s analysis, at 66,796 tonnes, of which Serbia’s market is estimated at 25,352 tonnes. Bosnia and Herzegovina is in the second place with 15,100 tonnes. In terms of coffee consumption per capita, per Management information, Serbia and Macedonia holds second place with 3.5 kg, (but above the average of 3.3 kg) after Bosnia and Herzegovina with 4.0 kg. According to information provided by Management, traditional, or Turkish coffee, holds a special place in Serbian culture. It is linked to tradition, relaxation and bonding, and it is perceived to be a social lubricant. Traditional coffee’s market share, as described on the adjacent chart, is estimated by Management to be 89% of the total coffee market in Serbia as of November of 2011. According to Business Monitor International, although traditional coffee’s position is strong, in recent years instant coffee has gained popularity among younger consumers. To this end, local producers have increased their focus on instant coffee branding, which is expected to drive volume growth in the coming years. As per the market analysis of AC Nielsen, in 2011 traditional coffee’s market share has decreased by 8.4% in comparison with the same period in the 2010. During the same time period, instant coffee has experienced a growth of 27.2%. However, per Management, traditional coffee consumption is not expected to decrease despite the growth in modern coffee consumption.

Market Risks

The following are the major risks associated with the coffee industry in Serbia:

� Continuance of world economic downturn.

� Entrance of new global competitors, who can achieve significant market share, or strengthening of current competitors.

� Drastic change in raw material prices

� Change in customers taste and preferences

� Demographic changes – Serbia's estimated annual population growth is -0.4%.

Coffee sales volume in Serbia (2011) Source AC Nielsen:

Total instant Coffee11%

Total Ground and Bean Coffee89%

Market Overview : Macroeconomic Outlook

Ground Coffee Market


13

Traditional Coffee Market

Since Serbian coffee market is primarily oriented towards traditional coffee, companies which dominate this segment dominate the whole market as well. Traditional coffee market in Serbia is dominated by two companies, Droga Kolinska Group and Strauss Adriatic.

Main brands of Droga Kolinska Group are Grand Kafa, Bonito and Barcaffe. The Droga Kolinska Group holds 48.3% of traditional coffee market in Serbia, compared to 48.6% in 2010. Its main brand Grand Kafa holds 34.8% of the market in 2011.

Strauss Adriatic’s main brands include Doncafe and C Kafa. The Company's traditional coffee market share is 34.4%, in comparison to 35.1% in 2010. The main brand of Strauss is Doncafe, which holds 20.8% of the Serbian traditional coffee market.

Market shares of these two companies on the Serbian's traditional coffee market have changed slightly in comparison to previous year. Strauss Adriatic currently holds 34.4% of the market, in comparison to 35.1% in 2010.

Similar trends can be observed for main brands of these two companies. The market share of Doncafe in this year is 20.8%, and a year ago it held 22.1% of the market. Its main competitor, Grand Kafa holds 34.8% in 2010, in comparison to 37.9% of the market in previous year.

As per Management information, traditional coffee in 2011 was mainly sold in medium and small grocery shops. These two points of sale account for 63% of traditional coffee sold in Serbia with small grocery shops holding the first place in sales with 39% share of the market. In second place are the medium grocery stores with 24% and supermarkets follow with 22%.

Company's sales by point of sale, as of 2011 Source: Management

Small shops38%

Medium shops25%

Supermarkets21%

Hypermarkets4%

Coffee shops6%

Other6%

Market Overview : Macroeconomic Outlook

Ground and Bean Coffee market


14

Retail sales volume for main products by sale channel – Roasted & Ground coffee

� The Company sells its products through two main channels – traditional trade and modern trade. The traditional trade channel is focused on small shops, while the modern trade channel is mainly via medium shops, supermarkets and hypermarkets.

� The following table presents sales data of the Company's brands by sale channel in FY09A – FY14F according to Management's estimations:

In tons FY09A FY10A FY11A FY12B FY13F FY14F FY09A FY10A FY11B FY12F FY13F FY14F Traditional trade Doncafe Moment MainStream 1,391 1,208 1,033 1,052 1,057 1,062 19.7% 14.9% 13.3% 13.0% 13.0% 13.0% Doncafe Minas MainStream 1,551 1,380 919 985 990 995 22.0% 17.0% 11.8% 12.2% 12.2% 12.2% Doncafe Strong MainStream 201 168 166 204 205 206 2.8% 2.1% 2.1% 2.5% 2.5% 2.5% C Kafa Economy 1,544 3,133 2,715 2,665 2,678 2,691 21.9% 38.6% 34.9% 33.0% 33.0% 33.0% Fort Economy - - 19 180 181 182 - % - % 0.2% 2.2% 2.2% 2.2% Maestro MainStream 20 - - - - - 0.3% - % - % - % - % - % Maxima 7 - - - - - 0.1% - % - % - % - % - % Total traditional trade 4,714 5,888 4,852 5,085 5,111 5,136 66.8% 72.5% 62.4% 62.9% 62.9% 62.9% Modern trade Doncafe Moment MainStream 775 603 812 806 810 814 11.0% 7.4% 10.4% 10.0% 10.0% 10.0% Doncafe Minas MainStream 824 748 747 751 755 759 11.7% 9.2% 9.6% 9.3% 9.3% 9.3% Doncafe Strong MainStream 124 137 173 152 153 154 1.8% 1.7% 2.2% 1.9% 1.9% 1.9% C Kafa Economy 605 747 1,191 1,285 1,292 1,298 8.6% 9.2% 15.3% 15.9% 15.9% 15.9% Fort Economy - - - - - - - % - % - % - % - % - % Maestro MainStream 12 (1) - - - - 0.2% (0.0%) - % - % - % - % Maxima 4 - - - - - 0.1% - % - % - % - % - % Total modern trade 2,344 2,234 2,923 2,995 3,010 3,025 33.2% 27.5% 37.6% 37.1% 37.1% 37.1% Total R&G 7,058 8,122 7,775 8,080 8,121 8,161 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Source: Management

� As demonstrated in the above table, Strauss Adriatic intends to preserve its sales volumes via traditional sales channels and at the same time increase its sales through the more profitable modern trade channels.

Valuation Methodology


15

Valuation Methodology

7. Value in Use - Discounted Cash Flows

8. Discount Rate

Valuation Methodology : Value in Use - Discounted Cash Flows

Value in Use - Discounted Cash Flows


16

Methodology

In order to determine the Value in Use of Strauss Group’s investment in Strauss Adriatic, the guidelines of IAS 36 were taken into account when estimating the CGU’s future cash flows. In this context, the Income Approach/Discounted Cash Flow Method was applied.

IAS 36 clarifies that the following elements should be reflected in the calculation of an asset’s Value in Use:

� An estimation of the future cash flows the entity expects to derive from the CGU;

� Expectations about possible variations in the amount or timing of those future cash flows;

� The time value of money, represented by the current market risk free rate of interest;

� The price for bearing the uncertainty inherent in the CGU; and

� Other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the CGU.

The Standard also clarifies that the second, fourth and fifth of these elements can be reflected either as adjustments to the future cash flows or adjustments to the discount rate.

According to IAS 36 (paragraphs 39, 44, 50, 52 and 55) estimates of future cash flows shall include:

� Projections of cash inflows from the continuing use of the CGU;

� Projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the CGU; and

� Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.

Furthermore, future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from:

� Future restructuring to which an entity is not yet committed; or

� Improving or enhancing the CGU’s performance.

� Additionally, estimates of future cash flows shall not include:

– Cash inflows or outflows from financing activities; or

– Income tax receipts or payments.

Valuation Methodology : Value in Use - Discounted Cash Flows

Value in Use - Discounted Cash Flows


17

Discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of:

� the time value of money; and

� the risks specific to the CGU for which the future cash flow estimates have not been adjusted.

In general, the DCF method measures the present value of the anticipated future benefits of an asset. Usually, the expected future, net income, or cash flow is projected and then discounted to present value at an appropriate rate. The discount rate should reflect the time value of money, inflation, and the investment risk inherent in owning the subject CGU versus other market alternatives. The most important element of the DCF method is its strong link to the underlying concept of the present worth of future benefits generated by an asset or pool of assets. As we used Company’s cash flows in real terms, we did not include the effects of inflation and exchange rate changes in Discount rate.

The DCF method is based on the premise that the value of a company is dependent upon returns generated over and above the rate of return (i.e. cost of capital) commensurate with the perceived risk of the investment.

In the application of the DCF method there are two variations of the cash flows to be used: the firm and the equity valuation. The equity valuation approach estimates the value of the equity of a company by estimating total company’s value and subtracting from this the market value of any debt used to fund operations. Total company value comprises the following basic components:

� The present value of cash flows from operations during a forecasted period of operating the company plus the value of any long-term participating interests, marketable securities, non-operating excess cash and other assets not essential to operations as of the valuation date.

� An estimate of the "residual value", which is the present value of the company attributable to operations beyond the forecast period.

Cash flow from operations is the difference between operating cash inflows and cash outflows adjusted for the cash taxes payable.

This after tax cash flow represents cash available to pay dividends to shareholders, interest to lenders or re-invest in the company for future capital gains. Cash outflows include any additional investments in both working capital and fixed assets, which are necessary to support the company's business strategy as reflected in its cash inflows.

In our analysis we have used the firm valuation approach of DCF. The cash flows considered are post-tax cash flows and have been discounted with post-tax discount rates which would equal pre-tax cash flows when discounted with pre-tax discount rates. The pre-tax discount rates are also presented for disclosure compliance requirements, according to IAS 36. Both projections and discount rate are in real terms Euro.

Valuation Methodology : Discount Rate

Discount Rate


18

Abbreviations: D debt E equity Ke cost of equity Kd after tax cost of debt

Abbreviations: Ke cost of equity Rf risk free rate Β systematic risk coefficient Pm equity premium C country risk premium

By definition, the WACC reflects the risk of the company as a whole and the minimum return required by all fund providers. The estimated WACC is then adjusted accordingly for premiums/ discounts in order to estimate the appropriate discount rates (required returns) by assessing the extent to which the risk profile of the assets or liabilities under review vary from the overall risk profile of the company.

The application of the income approach requires the determination of an appropriate discount rate with which future cash flows are discounted to their present value. The discount rate must reflect the time value of money and the risk associated with projected future cash flows. It is derived on the basis of the expected return on, and the price of, the best alternative use for the capital, assuming it is not invested in the asset to be valued.

The WACC is derived by weighting the cost of equity and the cost of debt with their respective weights relative to the total market value of invested capital. For the determination of the WACC, each component was considered separately as presented in the current section. Arithmetically, the formula for calculating the WACC is:

KdDE

DKeDE

EWACC **+

++

=

For the estimation of the cost of equity, the Capital Asset Pricing Model (“CAPM”) was applied. Arithmetically, the formula for calculating the Cost of Equity is:

)(* CPmRfKe ++= β

Risk-free rate (Rf)

We have considered for a risk free rate the yield terms maturity of a 15 years Euro zone Composite AAA bond as of the Valuation Date, adjusted to reflect real yield, assuming 2% long term inflation in the Euro zone, providing us with a risk free rate of 0.96%.

Market Risk Premium (Rm-Rf)

The market risk premium (the price of risk) is the difference between the expected rate of return on the market portfolio and the risk-free rate. Historical capital market investigations have shown that investments in shares generate between 4% and 7% higher returns than investments in low-risk debt securities.

In this valuation study, we have applied a 7.72% Market Risk Premium, comprised of 6% equity risk premium based on the historical equity risk premium of developed markets plus 1.72% additional country specific risk premium, based on the real spread between Serbia government bonds and Euro zone bonds with same time to maturity.


Discount Rate


19

Abbreviations: Kd after tax cost of debt C country risk premium RD sector’s bonds’ average yield Tax rate long term tax rate

Beta

The average market risk premium must be modified to reflect the specific risk structure. The Capital Asset Pricing Model accounts for the company-specific risk within the beta factor. Beta factors represent a weighting figure for the sensitivity of the company’s returns compared to the trend of the entire market. They are thus a measure of volatility for the systematic risk. Beta factors of more than one reflect a higher volatility than the market average. Beta factors are ideally determined with reference to the entire equity market, since the concept of systematic and specific risk requires that individual shares are measured in relation to the market portfolio.

In the calculation of Strauss Adriatic’s WACC, the adjusted beta of the peer group was unlevered based on the peer group’s capital structure and then relevered based on the median capital structure. The betas were provided by Bloomberg Financial Markets, and were estimated using a regression analysis based on weekly five-year data for the period. The unlevered Beta of Peer companies as provided by Bloomberg equals 0.65.

Size premium

As we have included additional country risk premium (1.72%) to capture the difference between the global and local environment, we estimated the size premium from a local market point of view. We have included additional 1.98% size premium in our calculations, while considering the value of the Company compared to the Serbian market capitalization.

Specific risk premium

We have included 3.5% specific risk premium in our calculations, while considering risks related to the Company projections and market situation.

Cost of Debt Computation

In the calculation of the required rate of return for an investment, the cost of external financing, such as the cost of long and short term debt should be added to the required rate of return. Arithmetically, the formula applied for the calculation of the cost of debt is:

)1(*)( taxrateRCKd D −+=

In order to represent the Cost of Debt of the Target, we included a spread of the Euro Industrial AA/AA+ bonds over the Euro zone bonds, equals 0.54%, in real terms. We incorporated this spread to the adjusted to long term inflation rate, the country risk and risk free rate to achieve the Cost of Debt. Tax effect was also taken into consideration. We concluded a 3.21% real Cost of Debt for the Target.

WACC Derivation (in real terms) Net Debt / Enterprise Value 12.84% Country Risk Premium 1.72% Equity Risk Premium 6% Size Premium 1.98% Specific Company Risk 3.5% Unlevered Beta 0.65 Relevered Beta 0.74 Risk Free Rate 0.96% Market Risk Premium 7.72% Cost of Equity, real 12.16% Corporate Bond Spread 0.54% Cost of Debt (pre-Tax) 3.21% Tax Rate 10.0% After Tax Cost of Debt 2.89% WACC, real 11% Source: Bloomberg, E&Y, Company, European Central Bank


Discount Rate


20

WACC

By incorporating all the above mentioned data, and after applying the peer companies' average capital structure, we determined the WACC to be 10.97%, in real terms, and the pre-tax WACC to be 11.7%. The peer companies data as well as the data required to derive the discount rate are presented in the Appendix section “Weighted Average Cost of Capital”.

Valuation Analysis


21

Valuation Analysis

9. Business Plan - Main Assumptions

10. Valuation Results

Valuation Analysis : Valuation Results

Business Plan - Main Assumptions


22

Prospective financial performance

Our work was based on the Business Plan of Strauss Adriatic, for the period 2012 – 2016, as provided by Management. The business plan has been approved by Management to be used for impairment testing purposes in accordance with IAS 36 requirements. Projections are in local currency translated to EUR according to exchange rate as of the Valuation Date. Historical and projected cash flows

Currency: €000 FY08A FY09A FY10A FY11A FY12B FY13F FY14F FY15F Terminal

year

Gross sales 57,586 45,622 47,739 54,017 57,090 57,397 57,781 58,359 58,359 Variable direct selling expenses 6,644 5,047 6,293 7,999 8,850 8,896 8,948 9,038 9,038 Net sales 50,942 40,574 41,446 46,018 48,240 48,500 48,833 49,321 49,321 COGS 35,526 27,080 30,640 36,052 37,217 36,679 36,867 35,953 34,671 Gross profit 15,416 13,494 10,806 9,966 11,023 11,821 11,966 13,368 14,650 S&M 10,006 9,857 9,078 8,101 8,292 8,495 8,529 8,614 8,614 G&A 1,997 1,878 2,014 1,829 1,778 1,759 1,759 1,776 1,776 OPEX 12,004 11,735 11,091 9,930 10,070 10,254 10,288 10,391 10,391 EBIT 3,412 1,759 (286) 36 953 1,567 1,678 2,977 4,259 D&A 1,317 752 918 765 671 639 607 576 576 EBITDA 4,729 2,511 633 801 1,624 2,206 2,285 3,554 4,836 Interest and other 286 113 (259) - - - - - - Tax 68 30 68 29 30 28 30 54 426 Net Income 3,059 1,617 (94) 6 923 1,539 1,648 2,756 3,833 Source: Management & Strauss Adriatic financial statements Ref: CF projections - Section FC - Forecast




23

Revenue

Strauss Adriatic’s gross revenue is expected to increase from approximately €46 M in FY11A to €49.3 M in FY2016F. As shown inthe following table, the main portion of gross revenue is generated by traditional coffee – between 82% - 92% in the presented period.

As per Management information, the main reason for the increase in gross sales is the increase in R&G prices to clients, as a result of the increasing prices of coffee grains around the world. Revenue per product type FY09A FY10A FY11A FY12B FY13F FY14F Traditional (R&G) ASP (in €) 5.3 4.9 6.3 6.5 6.5 6.5 Volume (in tons) 7.1 8.1 7.8 8.1 8.1 8.2 Gross sales 37.5 39.9 49.2 52.4 52.7 52.9 Instant ASP (in €) 17.4 19.2 19.8 15.8 15.8 15.8 Volume (in tons) 0.02 0.01 0.01 0.01 0.01 0.01 Gross sales 0.3 0.2 0.2 0.2 0.2 0.2 Capucino ,Mixes ASP (in €) 7.0 7.0 7.0 7.3 7.3 7.3 Volume (in tons) 0.1 0.1 0.1 0.1 0.1 0.1 Gross sales 0.7 0.9 0.7 0.9 0.9 0.9 Other coffee ASP (in €) - n/a n/a - - - Volume (in tons) - - - - - - Gross sales - 3.6 0.8 - - - AFH ASP (in €) 14.5 13.8 11.8 11.3 11.1 11.1 Volume (in tons) 0.3 0.2 0.2 0.2 0.2 0.2 Gross sales 4.2 2.8 2.1 2.2 2.2 2.3 Private Label ASP (in €) 3.6 2.1 4.0 4.1 4.1 4.1 Volume (in tons) 0.0 0.1 0.1 0.1 0.1 0.1 Gross sales 0.1 0.3 0.5 0.6 0.6 0.6 Green Coffee 2.8 - - - - - Export - 0.2 0.4 0.8 0.8 0.8 Modern 8.2 4.4 4.0 4.7 4.7 4.8 Total gross sales 45.6 48.0 54.0 57.1 57.4 57.8 Source: Management Ref: Revenue by product type - Section PL - Profit and Loss Analysis

Gross sales by product type Source: Management

37.5 39.9 49.2 52.4 52.7 52.9

8.2 4.4

4.0 4.7 4.7 4.8

0

10

20

30

40

50

60

70

FY09A FY10A FY11A FY12B FY13F FY14F

Milli

ons E

uro

Traditional (R&G) Modern

Gross sales by product type Source: Management

82.1% 83.3% 91.1% 91.8% 91.8% 91.6%

17.9% 16.7% 8.9% 8.2% 8.2% 8.4%

0

0

0

1

1

1

1

FY09A FY10A FY11A FY12B FY13F FY14F

Perc

ent

Traditional (R&G) Other




24

OPEX

Strauss Adriatic’s OPEX for the period FY08A - FY15F are presented in the table below. OPEX are expected to be between €10.1 m and €10.4 m in the projected period, representing an increase in OPEX margin from circa 20.9% to circa 21.1% of revenue. As can be seen in the table below, projected OPEX as a % of revenue, decline significantly in comparison to FY09A and FY10A levels of 29%-27% of revenue, respectively.

The decline in OPEX is explained by the decline in marketing expenses as part of the planned cuttbacks. Management claims that the coffee market was highly influenced by the global downturn and the local population preference to consume traditional over modern coffee. Thus, Management decided to invest less in marketing and, for the time beeing avoid market education regarding premium coffee consumption. S&M expenses represent 82.3% - 82.9% of OPEX in the projected period.

No significant D&A changes are projected over the period shown in the table below.

OPEX FY08A – Terminal year Currency: € FY08A FY09A FY10A FY11A FY12B FY13F FY14F FY15F Terminal year

S&M 10,006 9,857 9,078 8,101 8,292 8,495 8,529 8,614 8,614 G&A 1,997 1,878 2,014 1,829 1,778 1,759 1,759 1,776 1,776 OPEX 12,004 11,735 11,091 9,930 10,070 10,254 10,288 10,391 10,391 EBIT 3,412 1,759 (285) 36 953 1,567 1,678 2,977 4,259 D&A 1,317 752 918 765 671 639 607 576 576 EBITDA 4,729 2,511 633 801 1,624 2,206 2,285 3,554 4,836 KPI's: S&M 19.6% 24.3% 21.9% 17.6% 17.2% 17.5% 17.5% 17.5% 17.5% G&A 3.9% 4.6% 4.9% 4.0% 3.7% 3.6% 3.6% 3.6% 3.6% OPEX 23.6% 28.9% 26.8% 21.6% 20.9% 21.1% 21.1% 21.1% 21.1% EBIT 6.7% 4.3% (0.7%) 0.1% 2.0% 3.2% 3.4% 6.0% 8.6% D&A 2.6% 1.9% 2.2% 1.7% 1.4% 1.3% 1.2% 1.2% 1.2% EBITDA 9.3% 6.2% 1.5% 1.7% 3.4% 4.5% 4.7% 7.2% 9.8% Source: Management Ref: CF projections - Section FC - Forecast




25

EBITDA - EBIT

The economic downturn which began in the end of FY08A, resulted in a shrinkage of the Serbian coffe market, which has since retained lower market volumes. Together with the increasing commodity prices, specifically coffee beans prices, this had a major impact on the Company's profitability, expressed in a decrease in EBITDA from EUR4.7 m in FY08A to EUR0.8 m in FY10A. Along with the expected slow economical recovery, the Serbian coffee market is projected to return to its market volumes of before the crisis, as indicated by the increase in the Company's EBITDA in FY11A compared to FY10A. Strauss In addition, in order to mitigate its challenges, the Company shifted from an internal distribution system to external distribution. The main future impact this change in distribution channels is higher proportion of retail sales with higher margins and lower discounts, and lower proportion of wholesales and key accounts sales with lower margins and higher discounts. This will positively impact both the EBIT and EBITDA of the Company in the projected years. In accordance, the Company expects both EBIT and EBITDA to maintain its FY11A growth trend, and grually increase over the years of 2012 - 2016.

As per Management information, additional key factors for EBITDA growth will be appreciation of prices to customers, COGS reduction by changing the coffee blend in favor of cheaper coffee sorts and future growth in sales of R&G coffee, due to its higher profitability.

The evolution of both EBITDA and EBIT is depicted in the following graph: Company's EBITDA and EBIT for the projected period Source: Management

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

FY08A FY09A FY10A FY11A FY12B FY13F FY14F FY15F Terminal year

Thou

sand

EUR

EBIT EBITDA




26

Working Capital

The following table presents the projected WC of Strauss Adriatic for the period FY12B-FY15F and historical figures relating to FY08A - FY11A: Currency: € 000 Dec08A Dec09A Dec10A Dec11A Dec12B Dec13F Dec14F Dec15F Terminal Working Capital 14,572 10,934 11,026 11,723 12,267 12,185 12,276 12,165 12,165 Change in WC n/a (3,638) 27 698 543 (82) 91 (111) - WC (%) of net sales 29% 27% 27% 25% 25% 25% 25% 25% 25% Change in WC (%) of net sales n/a (9.0%) 0.1% 1.5% 1.1% (0.2%) 0.2% (0.2%) - % Source: Management Ref: Working Capital - Section WC - Working Capital

The Company projects a decrease in WC ratio (WC as of net sales) to 25% in 2012 and beyond, compared to WC ratio of 29%-26% in the historical period. As per management, the main reason for the WC ratio decrease is the planned change in the inventory, mainly increasing cheaper traditional coffee volumes while reducing the more costly modern coffee volumes of inventory. This change of the inventory's coffee blend mix is intended to result in COGS reduction.




27

Capital Expenditure

Strauss Adriatic’s CAPEX figures for Dec12B – Dec15F, as provided by Management, are presented in the table below. The increase in CAPEX in 2012 is the rest of the planned purchase of a catalytic unit for R200 machine and its installation. We assumed that in the terminal year, CAPEX shall equal D&A.: CAPEX Currency: € 000 Dec08A Dec09A Dec10A Dec11A Dec12B Dec13F Dec14F Dec15F Dec16F CAPEX (1,092) (1,098) (1,129) (245) (497) (287) (287) (290) (576) (%) of net sales (2.1%) (2.7%) (2.7%) (0.5%) (1.0%) (0.6%) (0.6%) (0.6%) (1.1%) D&A 1,317 752 861 765 671 639 607 576 576 Source: Management Ref: CAPEX - Section BS - Balance Sheet Analysis


Valuation Results


28

Valuation Inputs

We have developed a DCF model, which is comprised of the following stages:

1. 1st Stage: Calculation of Free Cash Flow according to the Business Plan of Management for the four year explicit forecast period.

2. 2nd Stage – Perpetuity: Calculation of the Terminal Free Cash Flow ("Terminal value").

Terminal Value - Perpetuity

The calculation of the FCF to perpetuity was based on the projected Net sales for FY15F, incorporating a terminal year Net sales GTP factor equal to 0%. The COGS were calculated based on the representative long term COGS margin, affected by the planned change in raw materials' costs, according to Management estimations. The OPEX were calculated based on the projected cost structure for FY15F, as per Management's business plan.

As per Management information, effective tax rate for the period FY12B – FY17F is approximately 2% (based on 10 year tax benefit the Company acquired, as a result of an investment in a new plant, as per Serbian tax legislation). We incorporated a tax charge equal to 10%, with accordance to the Serbian corporate tax, for the calculation of terminal period cash flows.

Valuation Results

Strauss Adriatic’s enterprise value according to the Value In Use premise on a 100% basis is estimated at €31.4 m.

According to data provided by Management, Strauss Adriatic's carrying amount as of Dec11A is €40.8 m. See build-up in the adjacent table.

By applying the valuation methodology, as described previously, on the data provided by the Management, the impairment of the CGU is estimated at €9.3 m. The respective calculation is presented in the tables to the left.

Valuation results

Currency: € 000 FY12B FY13F FY14F FY15F Terminal

year Net sales 48,240 48,500 48,833 49,321 49,321 COGS 37,217 36,679 36,867 35,953 34,671 Gross profit 11,023 11,821 11,966 13,368 14,650 S&M 8,292 8,495 8,529 8,614 8,614 G&A 1,778 1,759 1,759 1,776 1,776 OPEX 10,070 10,254 10,288 10,391 10,391 Operational profit 953 1,567 1,678 2,977 4,259 Add/(Less): D&A 671 639 607 576 576 Change in WC 543 (82) 91 (111) - CAPEX (497) (287) (287) (290) (576) FCF 1,670 1,838 2,089 3,153 4,259 PV factor @ 11.7 % 0.946 0.846 0.757 0.678 Present value of FCF 1,579 1,555 1,582 2,137 Terminal year cash flow 4,259 Long term growth - % Capitalization rate 11.7% Value at end of period 36,266 PV factor 0.678 Terminal value 24,579

Sum of PV of FY12-FY16 6,854 Terminal value 24,579 Total EV 31,433 Carrying amount 40,753 Implied impairment 9,320 Source: Valuation Ref: Valuation results - Section FC -Forecast

Carrying amountCurrency: € 000 100% basis Equity 7,734 Shareholders Loans 16,154 Goodwill 19,945 Cash&Cash equivalents (2,589) Real estate (491) Investment Value 40,753 Source: EY valuation Ref: Summary of Values - valuation results on a 100% basis - Section SV - Summary of Values


Previous valuations


29

Previous Impairment tests

In the past three years we have performed several impairment test analyses of the goodwill recorded at Strauss Coffee B.V. related to Strauss Adriatic d.o.o.. The following table summarizes the enterprise value at each valuation date: Currency: € 000 Enterprise value Jun-09 51,572 Dec-09 52,516 Dec-10 42,202 Dec-11 31,433 Source: Valuation

Due to the slow recovery of the Serbian economy from the latest economic crisis, Strauss Adriatic is currently facing various challenges on the Serbian coffee market, as mentioned in previous sections of this valuation.

In order to represent its current performance and take into account certain level of uncertainty regarding the future of the Serbian coffee market, the Company significantly lowered its future projections to be more conservative:

� Revenue growth rates for FY12B – FY15F were lowered to 4.9%, 0.5%, 0.7% and 1%, respectively, compared to rates of 5.36%, 3.1%, 2.3% and 1.5% that were projected last year for the same period.

� In its current projections, Management lowered the Company's projected gross profit margin to levels of 23%-30% compared to 30%-34% projected last year. As previously mentioned, this decrease in profit margins is the result of the Company's estimations regarding the COGS required to support the changes in customers' taste and the respective sales strategy of the Company.

� Similarly, EBITDA margin is now projected to reach 3.4%, 4.5%, 4.7% and 7.2% of revenue in the years FY12B – FY15F, respectively, compared to 6.7%, 9.2%, 10.3% and 11.7% projected for that period last year. The lower EBITDA margins are mainly the result of the lower revenue growth rates assumed as well as increased COGS levels assumed at the Company's current projections.

� Also, 0% long term real growth was estimated in the terminal value calculations, compared to terminal growth rate of 1.5% projected last year.


Comparison of actual and budgeted financial results for FY11A


30

Budget versus actual financial results

Revenue

Revenue for FY11A are lower than the budget in approximately 0.5%.

COGS

COGS levels are the most significant difference between FY11A financilal results and FY11B. COGS climbed from budgeted amount of €32.6m to actual amount of €36m and caused the gross margin to fall from budgeted gross margin of 29.5% to actual gross margin of 21.7%. According to Management, the major reason for the increase in COGS is the change in sales channels. Per Management, the Company was expected to sell larger quantities through retailers, which represent higher margins and lower discount rates. Contrary to the Company's plans, traditional coffee in 2011 was mainly sold in medium and small grocery shops which had a negative impact on COGS levels and profitability rates.

OPEX

Actual OPEX in FY11A was lower by approximately 20% Compared to FY11B, mainly due to cutbacks in the Company's S&M levels.

EBIT & EBITDA

The difference in profitability rates is mainly due to the aforementioned higher COGS levels in FY11A compared to FY11B, resulted in lower than expected EBIT & EBITDA margins, -0.52% and 1.14%, respectively, compared to an EBIT & EBITDA margins budget of 3.7% and 5.35%.

FY11B vs. FY11A P&L Currency: € 000 FY11B FY11A Net Sales 46,178 45,986 COGS 32,574 36,031 Gross Profit 13,604 9,955 S&M 10,009 8,356 G&A 1,890 1,840 OPEX 11,899 10,196 EBIT 1,705 (241) D&A 764 765 EBITDA 2,469 524 Source: The Management & financial statements

Appendices


31

Appendices

11. Weighted Average Cost of Capital

12. Sensibility analysis

13. Sensitivity Analysis

14. Sources of Information

15. Statement of General Assumptions and Limiting Conditions

16. Engagement team education details

Appendices : Sensibility analysis

Weighted Average Cost of Capital


32

Peer group Currency: m EUR currency Equity Net Equity Debt/Equity Effective Unlevered Levered Debt Market Market Tax Beta Beta (a) (Asset) Value Rate Strauss Group - STRS IT NIS 0.67 1,690.0 4,961 32.7% 31% 0.55 Starbuks Corporation - SBUX US USD 1.18 (1,501) 34,296 (4.4%) 29% 1.21 Nestle - NESN VX CHF 0.76 14,508 166,963 8.7% 24% 0.71 Associated British Food plc GBP 0.74 1,285 8,722 14.7% 13% 0.65 Kraft Foods Inc - KFT US USD 0.70 26,902 66,006 41% 27% 0.54

WACC Derivation (in real terms) Net Debt / Enterprise Value 12.84% Country Risk Premium 1.72% Equity Risk Premium 6% Size Premium 1.98% Specific Company Risk 3.5% Unlevered Beta 0.65 Relevered Beta 0.74 Risk Free Rate 0.96% Market Risk Premium 7.72% Cost of Equity, real 12.16% Corporate Bond Spread 0.54% Cost of Debt (pre-Tax) 3.21% Tax Rate 10.0% After Tax Cost of Debt 2.89% WACC, real 11% Source: Bloomberg, E&Y, Company, European Central Bank

Appendices : Sensibility analysis

Sensitivity Analysis


33

Sensitivity analysis Implied EV Growth rate/Pre-tax discount rate

10.5% 11.0% 11.5% 11.7% 12.5% 13.0% 13.5% 0.0% 34,347 33,097 31,956 31,433 29,948 29,060 28,237 0.5% 35,722 34,347 33,097 32,526 30,910 29,948 29,060 1.0% 37,241 35,722 34,347 33,721 31,956 30,910 29,948 1.5% 38,929 37,241 35,722 35,032 33,097 31,956 30,910

Source: Valuation Ref: Valuation results - Section FC - Forecast

Implied impairment Growth rate/Pre-tax discount rate

10.5% 11.0% 11.5% 11.7% 12.5% 13.0% 13.5% 0.0% 6,406 7,656 8,797 9,320 10,805 11,693 12,516 0.5% 5,031 6,406 7,656 8,227 9,843 10,805 11,693 1.0% 3,512 5,031 6,406 7,033 8,797 9,843 10,805 1.5% 1,824 3,512 5,031 5,721 7,656 8,797 9,843

Source: Valuation Ref: Valuation results - Section FC - Forecast

Appendices : Sources of Information

Sources of Information


34


Our work was based on the following sources of information:

� Business Plan of the Strauss Adriatic for the period 2011 – 2015;

� IFRS Financial Statements as of 31 December 2008, 2009, 2010 and 2011 for the Company;

� Financial Figures of Strauss Adriatic as of 31 December, 2011;

� Information (Annual Reports) / assumptions as provided by the Management.

� Databases (Bloomberg, Ibbotson, ASE, HTPC) and other sources of information that are deemed reliable from EY, but we accept no responsibility for their accuracy.

� Country Intelligence Report: Serbia, January 16, 2012, Global Insight.

� Data from various analyst reports concerning the historical, current and prospective position of the coffee industry, as well as the performance of comparable companies;

� Unicredit economics & FI/FX research as of Q1 2012;

� AC Nielsen retail audit research as of November 2011;

� Information obtained during meetings and discussions with Strauss Adriatic’s Management;

� Information relating to rates which have been used were obtained through the Internet:

– European Banking Federation (EURIBOR home page) - http://www.euribor-ebf.eu/euribor-org

– European Central Bank - http://www.ecb.int

– BSE (Belgrade Stock Exchange jsc) - http://www.belex.rs/eng

– Ministry of Finance of the Republic of Serbia, and

– National Bank of Serbia

� Other published literature or available material.

Information, estimates, and opinions obtained from the above are considered adequate in the context of our work. Our work has not been designed to verify the accuracy or reliability of any information supplied to us and nothing in this Report should be taken to imply that we have conducted any procedures or market investigations in an attempt to verify or confirm any of the information furnished to us. In this respect, we

Appendices : Sources of Information



35

have performed the following procedures to provide the indication that the numbers presented in the report are reasonable:

� We discussed the reports with the Management

� We analyzed the past performance of the Company

� We compared the past performance of the Company with the projected cash flows

� We compared Company’s past performance and projected cash flows with the Peer group financials.

Appendices : Statement of General Assumptions and Limiting Conditions

Statement of General Assumptions and Limiting Conditions

17 February 2010 Reliance Restricted

36

General limitations to our engagement

This advisory valuation Report is subject to the following general assumptions and limiting conditions:

� Subject to the other limitations set forth below, nothing has come to our attention to cause us to believe that the facts and data set forth in this Report are not correct.

� This Report is based on, and limited to, our knowledge and experience with the valuation and other issues addressed herein. We did not conduct an audit, review or compilation of any historical or prospective financial information included in this Report in accordance with accounting standards. Accordingly, we do not express an opinion or offer any form of assurance as to such information. This Report is not a fairness opinion, investment advice, or legal advice. This Report is not intended to be used, and neither you nor any other taxpayer may use it, to avoid penalties that may be imposed under applicable tax laws.

� We did not investigate title to the business or assets the subject of this Report. We have relied on representations of the owner with respect thereto and we may assume that (i) title is good and marketable, (ii) the business or assets are not subject to any liens or encumbrances, (iii) there is full compliance with all applicable laws and regulations (including, without limitation, those relating to usage, environmental, zoning and similar requirements), and (iv) all licenses, certificates of occupancy, consents, and legislative or administrative permits from any governmental authority or agency, private entity or organization required for any use of the property relating in any way to this Report or the services underlying it have been or can be obtained or renewed. We assume no responsibility for any legal description of any property.

� This Report has been prepared solely for the purpose set forth in the applicable Statement of Work and may not be used for any other purpose. Neither this Report, nor any portion, abstract or summary hereof, may be disclosed publicly through any other public (or private) media without our prior written consent.

� Our recommendations of fair value are as of the effective date specifically set forth in this Report. Changes in market conditions could result in substantially different valuations than those indicated at the effective date. We assume no responsibility for changes in market conditions after the effective date and we have no obligation to update the Report, or our recommendations, analyses, conclusions or other documents relating to our services after the effective date for any reason.

� We assume no responsibility for the inability of the owner to locate a purchaser for its business or assets at the value set forth in this Report.

� We have been provided with written and oral information, as well as data in electronic form, relating to the business or assets that we analyzed. We have relied upon this information to prepare this




37

Report and have no responsibility to verify independently its accuracy or completeness. We assume no responsibility for the completeness or accuracy of information furnished by others, including your management.

� We may have derived certain historical financial data used in our valuation from audited and/or unaudited financial statements, which are the responsibility of management. Financial statements may include disclosures required by generally accepted accounting principles. We have not verified independently the accuracy or completeness of the data we derived and do not express an opinion or offer any form of assurance as to it or the underlying financial statements.

� The estimates of cash flow data included herein are solely for use in the valuation analysis and are not intended for use as forecasts or projections of future operations. We have not performed an examination or compilation, nor have we performed an agreed-upon procedures engagement, with respect to the cash flow data in accordance with any accounting standards, and, accordingly, do not express an opinion or offer any form of assurance as to that data or their underlying assumptions. Furthermore, estimated and actual results will usually differ because events and circumstances frequently do not occur as expected, and those differences may be material.

� We assume no responsibility for any financial or tax reporting judgments, which are the responsibility of management.

� We are not required to furnish additional work or services, or to give testimony, or be in attendance in court with reference to the business or assets we analyzed or this Report.

� We have not made any determination whether there have been any violations of fraud and abuse laws or regulations or any other law. We assume no responsibility to provide any legal advice and recommend that you consult your legal counsel with respect to legal matters.

� To the fullest extent permitted by applicable law, the Client shall indemnify, defend and hold harmless EY, its affiliates and the other EY Entities and their respective assignees, subcontractors, members, shareholders, directors, officers, managers, partners, employees, agents and consultants (collectively, "Indemnitees"), from and against all (A) claims and causes of action, pending or threatened, of any kind (whether based on contract, tort or otherwise) by third parties, including any affiliate of the Client, related to or arising out of the disclosure of any Report or any portion, abstract or summary thereof by, through or at the request of the Client or the use or reliance on, any Report or any portion, abstract or summary thereof, by any person or entity that obtains access to it, directly or indirectly, from, through or at the request of the Client, and (B) liabilities, losses, damages, costs and expenses (including, without limitation, reasonable outside attorneys' fees and the allocable costs of in-house counsel) suffered or incurred by any of the Indemnitees in connection with any claims or causes of action described in clause (A) above, except as finally




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determined to have resulted solely from EY’s fraud or willful misconduct. Our overall liability is limited to one time the fees actually paid to EY in respect of our services.

Appendices : Engagement team education details

Engagement team education details


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Einat Sperling, Partner, Valuation and Business Modelling, TAS in Ernst & Young Israel.

Einat is a Partner in the Valuation & business Modelling practice in Tel Aviv. Einat has been with Ernst & Young for 11 years at the Transaction Advisory Services group and has 13 years of experience.

Einat has served Ernst & Young’s clients in Israel and across the globe with Valuations, Modeling, Restructuring, and related financial advisory. Einat lead major valuation projects in the past few years for business, tax and accounting purposes including: Impairment tests, Purchase Price Allocation, ESOP according to IFRS and US GAAP. Einat was involved in transactions and valuation of businesses in different industries (Technology, Retail, Food and Beverages, Industrial products, Pharmaceuticals, Banking, Communications, Real Estate etc.) that resulted value of billions of US$.

Einat has a BA in Economics and Administrative from the Technion – Israeli Institute of Technology, Haifa, and MBA from Recanati Business School in Tel-Aviv University. She is a Certified Public Accountant in Israel.

Documents

Advisory Valuation in the context of Goodwill Impairment ...mayafiles.tase.co.il/RPdf/723001-724000/P723899-01.pdf · Traditional coffee (Doncafe, brands Moment, Minas, Strong, Il