Valuation in the Current Economic Environment-March 2011

8/6/2019 Valuation in the Current Economic Environment-March 2011

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Valuation in the Current EconomicEnvironment

March 2011


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2

Macro Indicators- US

USeconomyisinmidstofacyclicalrecovery

S&Pearningsgrowthontheriseafteradifficult2009

Employmentenvironment

hasbeensteadilyimproving

Inflationholdingfirm

Housingmarketstillweak


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3

Macro Indicators- US

Goingforward,growthprospectsareonapositivetrajectory

CPIappearstobeincheck

Interestratesshouldremain

low


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4

Macro Indicators- Canada

CurrentoutlookfortheCanadianeconomyremains

robust

Leadingeconomicindicatorsignalingstronggrowththrough2011

Growthinemploymentunderscoresthestrengthoftheeconomy


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5

Macro Indicators- Canada

MuchliketheUS,CPIforecastatreasonablelevelsandinterest

rates

remain

low Coreinflationwasaconcern

during2010. Coreinflationhasbeentrendingdown,wellbelowtarget

BankofCanadaresistingraisinginterestrates

SomeconcernoverPersonalSavingsRateandimpacton

growth


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6

Other Indicators

Canadiandollarhasmovedpastparity

Strength

of

Canadian

fiscal

policyandhighercommodityprices

ExpectCanadiandollartoremainatoraboveparinthe

mediumterm


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7

Credit Environment

Leverageappearstobe

back 2010setrecordsinboth

leveragedloanandhighyieldissuances

2011shapinguptosurpass2010fromavolumeperspective

Demandforpapercontinuestobedrivenby

lowinterestratesandevidencethatbusinessconditionshaveimprovedsubstantially


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8

Credit Environment

Thecurrentenvironmentissupportiveforinvestment

Forstrategicbuyers,earningsyieldsversusthecosttoinvestindicateafavorableinvestmentenvironment

For

financial

buyers,

borrowingspreadshavereturnedtoprerecessionlevels

LoangrowthinUSincreasing

Expectthistohaveapositiveimpactondealactivity


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9

Deal Statistics

AvailabilityofleveragehaspushedupPurchasemultiples

Equitysupportfordeals(asa%

ofdealvalue)arealsostartingtoapproachhistorichighs


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Buyer Universe

Financial

PEismotivatedtotransact

Overweightingof20052007vintagefunds

5yearinvestmentperiod

Managementfeebias

$500mmofdrypowder

Strategic

Management/BoardConfidence

Abilitytopay accumulatedcash,receptivityofdebt/equity

markets

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11

Debt Multiples of Mid-Market LBO Loans

4.69x 4.72x

5.61x

4.53x

3.25x

4.25x4.12x

0.0 x

1.0 x

2.0 x

3.0 x

4.0 x

5.0 x

6.0 x

2005 2006 2007 2008 2009 2010 4Q10

FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA

Source: Standard and Poors Middle Market Lending Review 4Q10

Mid-Market LBO Volume by Quarter

0.0

0.5

1.0

1.5

2.02.5

3.0

3.5

4.0

4.5

2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10

U

S$

B

Institutional Pro Rata

Source: Standard and Poors Q410 Middle Market Lending Review

Lever aged Buyout Spreads

L+ 100

L+ 200

L+ 300

L+ 400

L+ 500

L+ 600

L+ 700

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4Q10

Pro Rata Institutional

Source: Standard and Poors Q410 Middle Market Lending Review

Credit Market Update


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Credit Market Update

12

Drawnspreadsandfeeshavecontracted Undrawnfeeshavestabilizedataround25%ofthedrawnspreadPricing

3to5yearcommitmentsforcorporates 5yearcommittedtenorshaveemergedasthemarketnormforsponsortransactions Longertenorsremainpricedatapremium

Tenor

Banksareaggressivelyattemptingtodeploycapital Wellstructuredandwellpriceddealsarebeingoversubscribed Foreignbankscautiouslyreturningtomarket

Lender

Behaviour

Borrower

Behaviour

Borrowersanxioustoaccessbankmarketwithactivitylevelssteadilyincreasing LBO/MBOactivityremainsfragile Following08&09borrowersdemandingmoreaggressivetermsfromlenders


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Representative Metrics(LBO)

13

Market Peak

(Mid 2007)

September

2009Today

Representative Senior Metrics

Sr. Debt/Capitalization 40% to 60% 40% to 50% 40% to 50%

Sr. Debt Funding Levels up to 3.75x up to 2.0x to 2.5x up to 3.75x

Pricing (BB/BB-) BAs +275bps BAs +450bps BAs +300bps

Commitment Fee 50 to 70 bps 100 to 150 bps 75 to 100 bps

Min. EBITDA for a cash flow loan $5.0 Million $7.5 Million $5.0 Million

Term 48 to 60 months 36 months 48 to 60 months

Amortization up to 10 years up to 6 years up to 12 years

Representative Sub Metrics

Total Debt/Capitalization 50% to 70% 50% to 60% 50% to 60%

Total Debt Funding Levels up to 4.75x up to 3.0x to 3.5x up to 5.25x

Total Required IRR (incl. warrants) 14% to 16% 16% to 22%+ 14% to 16%

Commitment Fee 200 bps 200 to 300 bps 200 bps


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The Leverage Impact on Value

Financial

FinancialbuyerstypicallyuseIRRindeterminingvalue

multiples PrivateEquityGroups(PEGs)generallytarget25%30%IRR

Typicallyspeaking,higherleverageavailabilityequalshigher

enterprisevalues

Strategic

Strategicbuyersfocusonachievingaminimumhurdlerate

based

on

their

WACC Theacquisitionshouldbeaccretive

Strategicsdontrelyonfinancialengineeringtogeneratereturns

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Theillustrationisbasedonthefollowingassumptions:

TheleverageimpactonvalueforaPEGisasfollows:

TargetIRR 30%EBITDA 10.0GrowthRate 10%SustainingCapex 3.0TaxRate 30%EquityandSeniorDebtFinancingOnlyNoMultipleExpansiononExitSaleoftheBusinessin5YearsAbilitytoRefinanceSeniorDebtontheSameTerms

($Millions)

15

MarketPeak(Mid2007) Today

SeniorDebt/EnterpriseValue 60% 47%SeniorDebt/EBITDA 3.6x 2.0xAmortization 10 7

InterestRate 7.3% 4.4%ValueMultiple 6.0x 4.3x

2009


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1) 2)

3) 4)

Yr5EBITDA 16.1EV/EBITDA 6.0xEnterpriseValue 96.6Cash(NetDebt) (6.9)EquityValue 89.8

Assumptions:NoAdvisoryFeesonExit

($Millions)ExitattheendofYr5

($Millions) Closing Yr1 Yr2 Yr3 Yr4 Yr5

EBITDA 10.0 11.0 12.1 13.3 14.6 16.1less:Capex (3.0) (3.0) (3.0) (3.0) (3.0)less:Interest (2.6) (2.4) (2.1) (1.8) (1.6)less:Principal (3.6) (3.6) (3.6) (3.6) (3.6)less:Tax (1.6) (2.0) (2.5) (2.9) (3.5)

FreeCashFlow 0.2 1.1 2.1 3.3 4.5Assumptions:NoDividends Capex=Depreciation Nochangesinworkingcapital

($Millions) Closing Yr5EquityInvestment (24.0)Exit 89.8IRR 30%

16

EBITDA 10

EV(1)/EBITDA 6.0x

EnterpriseValue 60Debt/EV 60%SeniorDebt 36Amortization 10InterestRate 7.3%EquityInvestment 24Note: (1)EnterpriseValue

Acquisitionin2007($Millions)


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1) 2)

3) 4)

Yr5EBITDA 16.1EV/EBITDA 4.3xEnterpriseValue 69.3Cash(NetDebt) 14.1EquityValue 83.3

Assumptions:NoAdvisoryFeesonExit

($Millions)ExitattheendofYr5

($Millions) Closing Yr1 Yr2 Yr3 Yr4 Yr5

EBITDA 10.0 11.0 12.1 13.3 14.6 16.1less:Capex (3.0) (3.0) (3.0) (3.0) (3.0)less:

Interest (0.9)

(0.8)

(0.6)

(0.5)

(0.4)less:Principal (2.9) (2.9) (2.9) (2.9) (2.9)less:Tax (2.1) (2.5) (2.9) (3.3) (3.8)

FreeCashFlow 2.1 2.9 3.9 4.9 6.0Assumptions:NoDividends Capex=Depreciation Nochangesinworkingcapital

($Millions) Closing Yr5EquityInvestment (22.8)Exit 83.3IRR 30%

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EBITDA 10

EV(1)/EBITDA 4.3x

EnterpriseValue 43Debt/EV 47%SeniorDebt 20Amortization 7InterestRate 4.4%EquityInvestment 23Note: (1)EnterpriseValue

AcquisitionToday($Millions)


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Impact Of Value Based OnEconomic Uncertainty

Todaysvaluemultiplesaredependenton:

Industrytype

Returnoncapitalemployed

EBITDAmargins

Growth

Size

Typically,

the

larger

the

deal

the

higher

the

multiple Leverageiseasiertoattract

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1. EBITDASustainability(lowermiddlemarketi.e.EV


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Diligencemaybeprotracted

lessriskofPEGlosingdealifexclusivityperiodexpires

buyers

waiting

to

see

if

anything

comes

out

of

the

woodwork couldpresentopportunityforpriceadjustment

dealsnotalwaysclosingonletterofintentterms

Strategic

Lessuncertaintyduetoindustryknowledge

MaybeabletosupportEBITDAforecaststhroughsynergies

Wellcapitalizedcompaniespurchasedweakerplayers

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2. ExitMultipleUncertainty

Financial

Inthepeak,PEGsmayhavemodeledmultipleexpansion

Dependingonindustry,maymodelinmultiplecontraction

Strategic

Noinvestmenttimehorizon

Typicallyusecapitalizedcashflowapproach

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5. InterestRate

Financial

Cashflowloansaretypicallybasedonfloatinginterestrates

Expectationofrisinginterestratesastheeconomicgrowthreturns

Uncertaintywithrespecttotiming

Impactofrateincreasesoncovenantpackage

Strategic

Lessofanissueifconservativelycapitalized

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CDN Mid-Market M&AThe Way Forward

2009wasadisaster

Veryfewdealsclosed

Leveragewasscarce

Buyerstookawaitandseeapproach

Sellerswaitedforthestormtopass

Lenderswithdistressedcreditswerereluctanttoexerciseontheirsecurityastheirwerenobidsforassets

2010wasayearofrecovery

2011islookingverypositive

Leveragereturningtothemarket

PEGsneedingtogetmoneyout

Valuemultiplesrising(compellingownerstosell)

Distressedassetsfinallycomingtomarket24

Source:Pitchbook Source:ThomsonReutersLPC

PEG Portfolio Exits PEG Lending by Deal Type

Documents

Valuation in the Current Economic Environment-March 2011