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VALUATION OF THE HALUD BRAND

INTERNATIONAL DEVELOPMENT MANAGEMENT ESPAÑOLA, S.A.

“““““LA INFORMACION CONTENIDA EN ESTE DOCUMENTO, PROPIEDAD DE IDM ESPAÑOLA ES ESTRICTAMENTE CONFIDENCIAL, QUEDANDO PROHIBIDA SU REPRODUCCION TOTAL O PARCIAL O LA UTILIZACION INDEBIDA SIN SU CONSENTIMIENTO PORESCRITO, RESERVANDOSE LAS ACCIONES LEGALES A QUE HUBIERA LUGAR EN FUNCION DE LOS PERJUICIOS OCASIONADOS A IDM ESPAÑOLA, S.A. O A SUS CLIENTES ”””””THE INFORMATION CONTAINED IN THIS DOCUMENT IS PROPERTY OF IDM ESPAÑOLA,S.A. AND IT IS STRICTLY CONFIDENTIAL. NO PART OF IT MAY BE REPRODUCED OR UNDULY USED WITHOUT ITS WRITTEN PERMISSION. ACCORDINGLY ANY DAMAGES INFLICTED TO IDM ESPAÑOLA, S.A. OR ITS CLIENTS WILL BE ADEQUATELYPROSECUTED”””””

PADRE DAMIAN, 23 - 28036 MADRID - TEL. (34) 913-533-810 - FAX (34) 913-596-988 - E-MAIL: [email protected] - http://www.infonegocio.com/idmespa

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IDM ESPAÑOLA, S.A.

INTRODUCTION

This document is a selected summary on the different materials developed by IDM Española, S.A., in order to solve a real businesssituation for which its services were solicited. With the only purpose of preserving client’s confidentiality, some identities, productsor dates might have been deliberately altered.

This document is a selected summary on the different materials developed by IDM Española, S.A., in order to solve a real businesssituation for which its services were solicited. With the only purpose of preserving client’s confidentiality, some identities, productsor dates might have been deliberately altered.

The company Halud, S.A. manufactures and distributes fresh food FMCG, being leader of the Spanish market in the segment oftraditional-recipe products. The investment group Saramu, owner of Halud, S.A. wants to pledge as collateral for a new loan solici-ted for the support of new investments, the Halud brand, which obviously needs to be valued.

(This document was developed in collaboration with the leading Industrial Property Agency Clarke, Modet & Co. who additionallychecked the status of the Halud brand at Patent Offices)

The company Halud, S.A. manufactures and distributes fresh food FMCG, being leader of the Spanish market in the segment oftraditional-recipe products. The investment group Saramu, owner of Halud, S.A. wants to pledge as collateral for a new loan solici-ted for the support of new investments, the Halud brand, which obviously needs to be valued.

(This document was developed in collaboration with the leading Industrial Property Agency Clarke, Modet & Co. who additionallychecked the status of the Halud brand at Patent Offices)

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INDEX

∗INTRODUCTION ON THE DIFFERENT BRAND VALUATION METHODS

∗VALUATIONS SUMMARY

∗HISTORICAL COSTS METHOD

−DESCRIPTION AND RESULTS

−CALCULATION MODEL

∗EXPECTED PROFITABILITY METHOD: NET PRICE-PREMIUMS OPTION


−HYPOTHESES


∗EXPECTED PROFITABILITY METHOD: POTENTIAL BRAND-ROYALTY SAVINGS OPTION


−HYPOTHESES AND CALCULATION MODEL

∗MARKET METHOD

∗INTRODUCTION ON THE DIFFERENT BRAND VALUATION METHODS

∗VALUATIONS SUMMARY

∗HISTORICAL COSTS METHOD



∗EXPECTED PROFITABILITY METHOD: NET PRICE-PREMIUMS OPTION


−HYPOTHESES


∗EXPECTED PROFITABILITY METHOD: POTENTIAL BRAND-ROYALTY SAVINGS OPTION


−HYPOTHESES AND CALCULATION MODEL

∗MARKET METHOD

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BRAND VALUATION METHODS USED

∗ Given the nature of brands as intangible assets, high precaution and the use of at least two different valuationmethods generating consistent results, are essential. The methods used for the valuation of the Halud brand, werethe following:

− Historical Cost Method: Present value of all past investments made for the advertising and promotion of thebrand and to obtain the current awareness and penetration levels

− Expected Profitability Method: Present value of the future profitability surpluses or potential brand-royaltysavings

− Market Method : Valuation based in recent equivalent transactions, publicly traded companies or acquisitionproposals

∗ Given the nature of brands as intangible assets, high precaution and the use of at least two different valuationmethods generating consistent results, are essential. The methods used for the valuation of the Halud brand, werethe following:

− Historical Cost Method: Present value of all past investments made for the advertising and promotion of thebrand and to obtain the current awareness and penetration levels

− Expected Profitability Method: Present value of the future profitability surpluses or potential brand-royaltysavings

− Market Method : Valuation based in recent equivalent transactions, publicly traded companies or acquisitionproposals

BRIEF DESCRIPTION

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VALUATIONS SUMMARY

∗ The different valuations of the Halud brand , obtained with each one of the three methods used, arethe following:

Method Valuation (Pta million)

Historical costs 7,050

Net price-premiums 6,235

Potential brand-royalty savings 6,293

∗ The different valuations of the Halud brand , obtained with each one of the three methods used, arethe following:

Method Valuation (Pta million)

Historical costs 7,050

Net price-premiums 6,235

Potential brand-royalty savings 6,293

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HISTORICAL COSTS METHOD

∗In order to be conservative, only the most relevant expenses/investments incurred in the last 5 years on brand imagedevelopment efforts, were considered:

−Advertising, advertising/POS materials, media, merchandising, children’s club, promotions, promotional gifts,entry-fees to different channels/retail outlets and brand management

∗Other items such as foreign promotional expenses, development of proprietary packagings, advertising in distributionvehicles, guided factory tours, commercial department employee-uniforms and rigorous quality controls, which have asubstantial impact in brand development and accounting for more than 150 Pta million per year, were not considered

∗In order to be conservative, only the most relevant expenses/investments incurred in the last 5 years on brand imagedevelopment efforts, were considered:

−Advertising, advertising/POS materials, media, merchandising, children’s club, promotions, promotional gifts,entry-fees to different channels/retail outlets and brand management

∗Other items such as foreign promotional expenses, development of proprietary packagings, advertising in distributionvehicles, guided factory tours, commercial department employee-uniforms and rigorous quality controls, which have asubstantial impact in brand development and accounting for more than 150 Pta million per year, were not considered

∗The historical costs valuation of the Halud brand , considering only the (1992-96) period and shown in Table # 1 fol-lowing, is Pta 7,050 million

∗The historical costs valuation of the Halud brand , considering only the (1992-96) period and shown in Table # 1 fol-lowing, is Pta 7,050 million

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A D V E R T I S I N G , P R O M O T I O N A L A N D 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6B R A N D M A N A G E M E N T E X P E N S E S( P T A M I L L I O N )A D V E R T I S I N G 3 9 2 . 6 3 8 2 . 3 4 8 3 . 2 2 8 5 . 2 3 6 2 . 7C O M M E R C I A L S U P P O R T I N G A C T I V I T I E S 1 0 0 . 8 1 2 3 . 6 1 9 9 . 2 2 3 9 . 7 3 2 1 . 1P R O M O T I O N A L D I S C O U N T S 5 5 0 . 0 6 4 4 . 1 6 3 5 . 9 6 2 8 . 4 6 4 3 . 9P R O M O T I O N A L G I F T S 3 1 . 0 4 0 . 5 3 6 . 3 3 4 . 1 3 1 . 6B R A N D M A N A G E M E N T 1 . 0 1 . 0 1 . 0 1 . 0 1 . 0T O T A L 1 , 0 7 5 . 4 1 , 1 9 1 . 5 1 , 3 5 5 . 8 1 , 1 8 8 . 4 1 , 3 6 0 . 3

G D P D E F L A T O R ( % ) 8 0 . 6 8 4 . 9 8 9 . 1 9 2 . 9 9 6 . 9

( M I L L I O N O F 1 9 9 7 P T A )A D V E R T I S I N G 4 8 7 . 3 4 5 0 . 2 5 4 2 . 5 4 1 4 . 6 3 7 4 . 3C O M M E R C I A L S U P P O R T I N G A C T I V I T I E S 1 2 5 . 1 1 4 5 . 6 2 2 3 . 7 2 5 7 . 9 3 3 1 . 3P R O M O T I O N A L D I S C O U N T S 6 8 2 . 7 7 5 8 . 2 7 1 3 . 9 6 7 6 . 4 6 6 4 . 5P R O M O T I O N A L G I F T S 3 8 . 5 4 7 . 7 4 0 . 7 3 6 . 3 3 2 . 2B R A N D M A N A G E M E N T 1 . 2 1 . 2 1 . 1 1 . 1 1 . 0T O T A L 1 , 3 3 4 . 8 1 , 4 0 2 . 9 1 , 5 2 1 . 9 1 , 3 8 6 . 3 1 , 4 0 3 . 3

H A L U D B R A N D V A L U A T IO N 7 , 0 4 9 . 9( A D D I N G Y E A R L Y T O T A L S , M I L L I O N O F 1 9 9 7 P T A )

HISTORICAL COSTS METHOD (1992-96)TABLE # 1: CALCULATION MODEL

SOURCE: HALUD, S.A.

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EXPECTED PROFITABILITY METHODNET PRICE-PREMIUMS OPTION

∗This method is based on the calculation of the overall present value of the future net price-premiums to be obtained over equivalentcompeting products. First the net differential per unit for each of the main products is calculated:

− Starting from the average retail price differential achieved against competitor’s products, the price differentials at wholesalelevel are calculated. This differential is increased or diminished by the production cost differentials versus competing products,and finally accounting for the differentials on advertising and promotional expenses per unit

∗The resulting net price-premiun per unit for each product is then multiplied by its sales in units, in order to obtain the product’s netpremium. The total net premiums are obtained by adding those of each one of the products considered

∗This method is based on the calculation of the overall present value of the future net price-premiums to be obtained over equivalentcompeting products. First the net differential per unit for each of the main products is calculated:

− Starting from the average retail price differential achieved against competitor’s products, the price differentials at wholesalelevel are calculated. This differential is increased or diminished by the production cost differentials versus competing products,and finally accounting for the differentials on advertising and promotional expenses per unit

∗The resulting net price-premiun per unit for each product is then multiplied by its sales in units, in order to obtain the product’s netpremium. The total net premiums are obtained by adding those of each one of the products considered

∗ The expected profitability valuations of the Halud brand, according to the net price-premiums option and shown in Tables # 2 and 3following, are:

Comparison with Competitor # 1 Comparison with Competitor # 2 Comparison with Competitor # 3

Halud brand valuation Pta 6,235 million Pta 10,330 million Pta 6,094 million

∗ The valuation based on the comparison with competitor # 1 is considered the most appropriate, given its strong leadership position inproduct C’s segment, and its co-leadership position with Halud, S.A. in product A’s segment

∗ The expected profitability valuations of the Halud brand, according to the net price-premiums option and shown in Tables # 2 and 3following, are:

Comparison with Competitor # 1 Comparison with Competitor # 2 Comparison with Competitor # 3

Halud brand valuation Pta 6,235 million Pta 10,330 million Pta 6,094 million

∗ The valuation based on the comparison with competitor # 1 is considered the most appropriate, given its strong leadership position inproduct C’s segment, and its co-leadership position with Halud, S.A. in product A’s segment

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NET PRICES-PREMIUM OPTIONS

∗ A starting hypothesis was that distribution channels obtained similar profit margins in each segment with the products fromthe different competitors

∗ According to the information supplied by Halud, S.A. all production cost differentials were considered equivalent for all compe-titors. The only exception was product A from Competitor # 2, which costs were considered identical to those of Halud, S.A.

∗ Promotional costs were not considered, given the non-availability of reliable data for the different competitors. Therefore, onlywere accounted for advertising costs, for which public data were available

∗ Only the three most relevant products of Halud, S.A.’s portfolio were considered: Products A, B and C, for which the Haludbrand had also the highest influence

∗ Given the different trends followed by the unit sales for the selected products in recent years, future sales were estimated asstagnant at the 1996 levels as precaution

∗ Additionally, given the volatility overtime of net price-premiums, the use of a discount rate equivalent to 3 times the prevailingSpanish Central Bank real discount rate was considered appropriate

∗ A starting hypothesis was that distribution channels obtained similar profit margins in each segment with the products fromthe different competitors

∗ According to the information supplied by Halud, S.A. all production cost differentials were considered equivalent for all compe-titors. The only exception was product A from Competitor # 2, which costs were considered identical to those of Halud, S.A.

∗ Promotional costs were not considered, given the non-availability of reliable data for the different competitors. Therefore, onlywere accounted for advertising costs, for which public data were available

∗ Only the three most relevant products of Halud, S.A.’s portfolio were considered: Products A, B and C, for which the Haludbrand had also the highest influence

∗ Given the different trends followed by the unit sales for the selected products in recent years, future sales were estimated asstagnant at the 1996 levels as precaution

∗ Additionally, given the volatility overtime of net price-premiums, the use of a discount rate equivalent to 3 times the prevailingSpanish Central Bank real discount rate was considered appropriate

TABLE # 2: HYPOTHESES

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P R O D U C T A H A L U D , S .A . C O M P E TITO R # 1 C O M P E TITO R # 2 C O M P E TITO R # 3R E TA IL P R IC E 66.00 53.00 57.50 54.50W H O L E S A L E P R IC E 49.68 39.89 43.28 41.02W H O L E S A L E P R IC E D IF F E R E N TIA L 9.78 6.40 8.66M IN U S A D D ITIO N A L P R O D U C TIO N C O S T (1.5) 0.00 (1.50)P L U S A D V E R TIS IN G (0.13) 0.31 6.87 1.80D IF F E R E N TIA L S TO TA L 8.46 13.14 8.83U N ITS (M IL L IO N ) 57.3N E T D IF F E R E N TIA L (P TA M IL L IO N ) 484.9 753.2 506.1

P R O D U C T B H A L U D , S .A . C O M P E TITO R # 1 C O M P E TITO R # 2 C O M P E TITO R # 3R E TA IL P R IC E 51.80 49.50 44.50 46.50W H O L E S A L E P R IC E 51.80 49.50 44.50 46.50W H O L E S A L E P R IC E D IF F E R E N TIA L 2.30 7.30 5.30M IN U S A D D ITIO N A L P R O D U C TIO N C O S T 0.50 0.50 0.50P L U S A D V E R TIS IN G 0.31 0.00 1.80D IF F E R E N TIA L S TO TA L 3.11 7.80 7.60U N ITS (M IL L IO N ) 9.4N E T D IF F E R E N TIA L (P TA M IL L IO N ) 29.3 73.6 71.7

P R O D U C T C H A L U D , S .A . C O M P E TITO R # 1 C O M P E TITO R # 2 C O M P E TITO R # 3R E TA IL P R IC E 55.43 57.92 52.50 57.50W H O L E S A L E P R IC E 42.31 44.21 40.07 43.89W H O L E S A L E P R IC E D IF F E R E N TIA L (1.90) 2.24 (1.58)M IN U S A D D ITIO N A L P R O D U C TIO N C O S T (0.90) (0.90) (0.90)P L U S A D V E R TIS IN G 6.19 6.21 0.00D IF F E R E N TIA L S TO TA L 3.39 7.54 (2.48)U N ITS (M IL L IO N ) 13.0N E T D IF F E R E N TIA L (P TA M IL L IO N ) 44.0 98.0 (32.20)

D IF F E R E N TIA L S TO TA L (P TA M IL L IO N ) 558.2 924.8 545.6S P A N IS H C E N TR A L B A N K D IS C O U N T R A TE 5.25%1997 IN F L A TIO N F O R E C A S T 2.20%IM P L IC IT R E A L D IS C O U N T R A TE 2.98%A P P L IE D R E A L R A TE M U L TIP L IE R 3A P P L IE D R E A L D IS C O U N T R A TE 8.95%H A L U D B R A N D V A L U T A T IO N (N E T P R E S E N T V A L U E , P TA M IL L IO N ) 6,234.8 10,329.5 6,094.0

NET PRICE-PREMIUMS OPTION

SOURCES: HALUD, S.A., INFOADEX

TABLE # 3: CALCULATION MODEL

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THE EXPECTED PROFITABILITY METHODPOTENTIAL BRAND-ROYALTY SAVINGS OPTIONS

∗ This method is based on the calculation of the net present value of the hipothetical future brand-royalty savings that by owning thebrand will be obtained

∗ In the case of Halud S.A., a brand licencing contract was signed with American Halud Corporation in 1984

− The compensation clauses of this contract included payments of 5% royalties, with an initial franchise of 5 million units

− Another clause requested a minimum contribution of 4% from American Halud Corporation’s revenues for the purchasing of ad-vertising media

∗ This method is based on the calculation of the net present value of the hipothetical future brand-royalty savings that by owning thebrand will be obtained

∗ In the case of Halud S.A., a brand licencing contract was signed with American Halud Corporation in 1984

− The compensation clauses of this contract included payments of 5% royalties, with an initial franchise of 5 million units

− Another clause requested a minimum contribution of 4% from American Halud Corporation’s revenues for the purchasing of ad-vertising media

∗ The expected profitability valuation of the Halud brand, according to the potential brand-royalty savings option, shown in Table # 4following, is Pta 6,293 million

∗ The expected profitability valuation of the Halud brand, according to the potential brand-royalty savings option, shown in Table # 4following, is Pta 6,293 million

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POTENTIAL BRAND-ROYALTY SAVINGS OPTIONTABLE # 4: HYPOTHESES AND CALCULATION MODEL

SOURCE: HALUD, S.A.

N E T S A L E S P T A M IL L IO NP R O D U C T A 2 , 9 3 8 . 4P R O D U C T B 5 3 0 . 9P R O D U C T C 6 1 1 . 4P R O D U C T D 2 3 . 6P R O D U C T E 4 6 0 . 6P R O D U C T F 2 9 . 2P R O D U C T G 5 8 . 0P R O D U C T H 8 0 5 . 6P R O D U C T I 3 8 1 . 2P R O D U C T J 6 6 5 . 2O T H E R P R O D U C T S 1 , 2 8 3 . 7T O T A L 7 , 7 8 7 . 7

S A V IN G S 3 7 7 . 0C O N T R IB U T IO N T O A D V E R T IS IN G M E D IA E X P E N S E S 3 1 1 . 5M IN U S : A D V E R T IS IN G E X P E N S E S 1 2 5 . 1N E T S A V IN G S 5 6 3 . 4H A L U D B R A N D V A L U A T I O N 6 , 2 9 3 . 0( N E T P R E S E N T V A L U E , P T A M IL L IO N )

∗ Given the different trends followed by the unit sales of the Halud brand products in recent years, it was consideredappropriate to use the 1996 sales for growing products, and the lowest sales levels during the (1991-96) period fordeclining products, as stagnant sales estimates for the future

∗ As precaution, a real discount rate equivalent to 3 times the prevailing Spanish Central Bank real discount rate wasused

∗ Given the different trends followed by the unit sales of the Halud brand products in recent years, it was consideredappropriate to use the 1996 sales for growing products, and the lowest sales levels during the (1991-96) period fordeclining products, as stagnant sales estimates for the future

∗ As precaution, a real discount rate equivalent to 3 times the prevailing Spanish Central Bank real discount rate wasused

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MARKET METHOD

∗ Economic Analysis Pta Milion*Offered price 8,500- 1995 Book value of shareholder’s equity net 2,331 of intangible assets- 1995 estimate of book value assets 329

under-valuation ____

1995 Valuation of intangible assets 5,840

1997 Valuation update of intangible assets 6,286

∗ Unfortunately after repeated efforts, it was imposible to obtain a confirmation from the financial intermediary onoffer’s validity at present

∗ Economic Analysis Pta Milion*Offered price 8,500- 1995 Book value of shareholder’s equity net 2,331 of intangible assets- 1995 estimate of book value assets 329

under-valuation ____

1995 Valuation of intangible assets 5,840

1997 Valuation update of intangible assets 6,286

∗ Unfortunately after repeated efforts, it was imposible to obtain a confirmation from the financial intermediary onoffer’s validity at present

∗ In the case of Halud, S.A. it was possible to estimate a minimum value for its intangible assets using a 1995acquisition offer for its share capital, considered at the time inadequate by its owners

− On the 8th of August, 1995 the owners of Halud, S.A. received, through a financial intermediary, an acquisi-tion offer for all company’s equity of Pta 8,500 million

∗ In the case of Halud, S.A. it was possible to estimate a minimum value for its intangible assets using a 1995acquisition offer for its share capital, considered at the time inadequate by its owners

− On the 8th of August, 1995 the owners of Halud, S.A. received, through a financial intermediary, an acquisi-tion offer for all company’s equity of Pta 8,500 million

SOURCES: HALUD, S.A., FINANCIAL INTERMEDIARY

Economy & Finance

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