Acquisition Finance Structuring Structuring The Deal

1. Acquisition FinanceStructuringStructuring The Deal Joseph V. Rizzi Amsterdam Institute of Finance 10-12 October, 2016 Login to our free WIFILogin: AIFGUEST Password: welcome@aif Share your AIF experience @AIFknowledge #AIF

2. Structuring Joseph V. Rizzi Amsterdam Institute of Finance October, 2016

3. M&A Process • Translate General Strategy into M&A Strategy • Determine Screening Criteria • Identify Targets • Screen/Prioritize • Output: Target with Investment Thesis (Business Case) • Outcome: Go forward decision • Next Step: Contact Target • Valuation (synergies, sensitivity analysis, walk-away price) • Due Diligence • Deal Structure • Negotiation • Pro forma business model • Integration Planning (degree/scope of integration, etc.) • Output: Due Dili Report; Full/Final Business case including Final Financials • Outcome: Go/No Go Decision; Close the Deal • Leadership • PMI Project Office/Team • 100 Day Plan • Communication Plan • Operating Integration • Customer Integration • Cultural Integration • Performance & Synergy Tracking • Fix/Adjust Process • Post Closing Evaluation • Outcome: Accomplish Investment Thesis Amsterdam Institute of Finance October, 2016

4. Issues in Structuring a Deal • Goal of deal structure should be to maximize value – but different parties have different objectives. • Some Buyer Shareholder Objectives: - Minimize after-tax price paid for the acquisition - Minimize the dilution of their pre-merger ownership stake - Protect deal • Some Seller Shareholder Objectives: - Maximize after-tax price received - Minimize risk of the offer (for a given dollar value of the deal) e.g. termination and go shop Amsterdam Institute of Finance October, 2016

5. Conflicting Agendas for Sellers and BuyersTaking a comprehensive view of the operational and market pressures faced by both parties in the transaction helps to balance conflicting agendas and improve the odds of successful deal execution • Buyer • Lower Price • Highlight liabilities and risks • Challenge run rates and forecasts • Understand sustainability • Develop advantage over other bidders • Analyze costs and synergies in detail • Maximize warranties and indemnifications • Balance exclusivity and break-frees • Common Goals • Preserve value • Reduce uncertainty • Create efficient tax structure • Minimize distractions • Maintain credibility • Enhance reputation • Separate smoothly • Minimize post-closing disputes Seller Maximize Value • Create competitive environment among bidders • Avoid surprises from bidders’ diligence • Control information release • Balance length of process against stakeholder expectations • Limit warranties and indemnifications Buyer Seller Maximize Value Lower Price Common Goals Amsterdam Institute of Finance October, 2016

6. Documents Acquisition NDA LOI Offering Memorandum SPA Financing Bank Book Term Sheet Commitment Letter Fee Letter Credit Agreement(s) Intercreditor Agreement(s) Security Document Amsterdam Institute of Finance October, 2016

7. Deal Terms • Price • Form of Transaction • Form of Payment • Control and Governance • Social Issues • Timing and Deadlines • Transaction Hedges Amsterdam Institute of Finance October, 2016

8. Transaction and Structuring Overview Transaction Environment Creditors Rights Regulatory and Antitrust Contract Structuring Environment Business Plan Market Conditions Securities Deal Accounting Financial Preferences Transaction Characteristics Corporate Law Tax Competing Bidders Amsterdam Institute of Finance October, 2016

9. Summary of Complicating Factors Contract Form Consideration Pricing Conditions Repos and Warranties Indemnities Change of Control Covenants Corporate Notice Percent by Region/State Lock-Up/Break Up Fee/No Shop Pills/Defenses Merger/Consolidation Competing Bids Size Financial Strength Dilution Analysis Strategic Fit Tax Capital Gains to Seller WHT on divs and int Basis NOL’s Interest deductibility Tax treaties Consolidation Exit planning Antitrust Hart/Scott/Rodino Sherman Act HHI European Commission Monopolies & Mergers Commission Securities Notice S/H Vote Tenders Preemption Rights Triggers Accounting Goodwill Fair Market Value Net Worth Consolidation Rating Agencies Regulatory Bankruptcy Framework (Inter-creditor Concerns) Subordination Guarantees Amsterdam Institute of Finance October, 2016

10. How Do I Pay: Cash, Stock or Combination Buyer Issues Share Valuation: avoid using undervalued shares Synergy Risk: use cash if synergy risk low to retain upside Market Risk: who bears risk of shares charging price post offer/pre close Fixed price: seller assumes risk Fixed share: buyer assumes risk Collars/caps: share Dilution Earnings Book value Ownership Taxes Asset write-up Tax domicile Credit Ratings Seller Issues Valuation: DD on buyer Taxes: defer seller capital gains taxes Liquidity: share float, lock-ups and Regulation Rights Amsterdam Institute of Finance October, 2016

11. Forward/Reverse Triangular Mergers Issues: tax, accounting Forward: Target merges into buyer’s wholly owned subsidiary with subsidiary as Continuing entity Pre transaction Post close Buyer Buyer Subsidiary Target Subsidiary (including old target) Reverse: Target merges into buyer’s wholly owned subsidiary with target as continuing entity. Subsidiary shares converted into target shares; shares converted into buyer shares Pre transaction Post close Buyer Buyer Subsidiary Target Target (including subsidiary) Amsterdam Institute of Finance October, 2016

12. Negotiated Cash Merger Timeline HSR Review Period (30 Calendar Days) Pre-Commencement Calendar Day 1 Calendar Calendar Calendar Week 7 Period (1 Week) Day 10 Day 30 Week 2 Day 20 Day 40 • Engage • Investment • Bankers • Prepare Merger • Agreement, • Stockholders • Agreement & HSR • Premerger • Notification • Due Diligence • Fairness Opinion • Issued and Boards • Approve Merger • Agreement • Arrange Financing • Determine • Structure (Tax, • Accounting, Form, • Consideration) • Sign Merger • Agreement & • Stockholders • Agreement • File HSR • Premerger • Notification • Commence • Preparation of • Preliminary • Proxy Materials • (Schedule 14A) • Issue Press • Release • File 8Ks and • Schedules 13D • HSR • Waiting • Period • Expires, • Assuming • No Second • Request • Print and Mail • Proxy Materials • To Target • Stockholders • (Assumes • Definitive • Proxy Materials • Are Available) • File • Preliminary • Proxy Materials • (Schedule 14D) • with SEC • Target • Stockholder • Meeting • Close • Merger Amsterdam Institute of Finance October, 2016

13. Critical Path & Decision Framework Bank Financing Floating- Rate Credit Rating Asset Carveout Securitization \ Prop Co Acquisition Bridge Takedown Determine Capital Structure Fixed- Fixed Income Rate Refinance Bridge Hedge No Action Target Credit Rating Financial Flexibility Bank Funding Equity / Near Equity Advisory / Origination Underwriting Product Execution Amsterdam Institute of Finance October, 2016

14. Mechanics • Purchase/Sale • Nondisclosure Agreement • Offering Memorandum • Data Room • Letter of Intent • Sale and Purchase Agreement • Financing • Commitment Letter(s) • Term Sheet • Credit Agreements • Intercreditor Agreements Amsterdam Institute of Finance October, 2016

15. Structuring Perspectives Business Legal Entity Basis Bankruptcy Payment Priorities Provisions Reps/Warranties: What are the facts? Operating Covenants: Pre Close Financial Covenants: Preserve deal Remedies Structures to reduce credit risk Guarantees Indemnities Pledges of Stock Subordination Deposits / Escrows Amsterdam Institute of Finance October, 2016

16. Acquisition Agreement(Sale & Purchase Agreement) Parties Definitions Form: Merger, Tender, Asset Sale,… Consideration: Type, Payment, Mechanics, Calculation,… Reps/Warranties: Duration, Survival Target: MAC Buyer: Issue when stock used Ordinary Course Covenants: Target will operate as usual during signing/closing gap period Other Agreements: Filings, Meetings,… Closing Conditions: Regulatory, Shareholder Termination & Expenses: Drop Dead Fee, Drop Dead Date, Termination Fees Other Stuff: Choice of Law, Specific Performance Amsterdam Institute of Finance October, 2016

17. Legal Issues Involved in Financing the Transaction Commitment Letters MAC Due Diligence Syndication Flex Marketing Periods Fraudulent Conveyance Loan Documentation Intercreditor Covenants Conditions See: lma.eu.com/documents for drafts Amsterdam Institute of Finance October, 2016

18. Creating the Capital Structure • Rule of Thumb Measures • Balance Sheet Model • Cash Flow Model • Detailed Model • Matching markets to the need • Reverse inquiry • Projections (amortization capability) Amsterdam Institute of Finance October, 2016

19. Deal Financial Arithmetic Amsterdam Institute of Finance October, 2016

20. Financing Need As a Starting Point • Purchase Price + Expenses • Minimum/Maximum • Recapitalization Dividend • Debt Refinancing • Callability • Premiums • Tax Issues • Expenses • Other Uses Amsterdam Institute of Finance October, 2016

21. Structuring Framework Senior Secured First Lien • Revolver • Tied to advance against current assets • Crossing liens • Term Loan A • Macro: Ratio of 3-4x EBITDA • Micro: Amortization analysis tied to cash flow in years 1-7 • Term Loan B • Senior debt ratio less Term Loan A amortization • 1% P.A./Balloon Second Lien • Macro: 0.5-1x EBITDA • Limited amortization • Longer term Senior/Subordinated Unsecured • Other Debt • Total Debt/EBITDA less Senior Debt/EBITDA • Equity • Funding need less Total Debt/EBITDA Amsterdam Institute of Finance October, 2016

22. Sizing the Revolver • Current Asset approach • Use standard advance rates • Accounts Receivable 80% • Inventory 60% • PP&E/Net 40% • Consider the following factors • Seasonal Needs • Future Working Capital Growth • Unexpected Liquidity Needs Amsterdam Institute of Finance October, 2016

23. Sizing the Term Loans • Term Loans = Maximum Senior Debt - Revolver • Focus is on Free Operating Cash Flow • Market conditions also dictate the maximum tenor of the loan and the amount required to be amortized • Acceptable asset coverage is also a consideration in determining the size of the term loans Amsterdam Institute of Finance October, 2016

24. Add-On Term Loans • Typical bank financings as structured as follows: Revolving Credit Term Loan A (amortising) Term Loans B & C (bullet/balloon) • T/LC Rare Large unfunded revolvers are seldom used today due to the fact that it is capital unfriendly to banks and companies don’t like to pay for unused commitments. In the interest of keeping flexibility for the long term, additional indebtedness baskets should be negotiated upfront. This allows companies to access either the bank or bond markets under their existing credit agreements and saves the costs of having to refinance. Amsterdam Institute of Finance October, 2016

25. Junior Capital • Long Term Debt = Max Total Debt - Max Senior Secured Debt • Senior unsecured • Sub Debt • Other – unitranche, PIK, … • Equity: • Equity = Total Uses - Max Total Debt • Common • Hybrids • Convertibles • Preferred Amsterdam Institute of Finance October, 2016

26. Dell – EMC: Study in Structuring • Largest LBO and Largest Tech M&A at $67B Equity Provided by Michael Dell, Silver Lake and Temasek • PPX: 67B/6.3 = 10.6x • Financing SOURCESUSES Tracking Stock 18B (Seller Finance?) Equity + Fees 67B Debt 4.5 – 50 B Refinance 8B New Equity 4B Excess Cash TBD (3-21B) _____ 75B 75B • Debt: FD/EBITDA – 5.7x Bank Revolver 10 T/L 3 Investment Grade 17 HYB 10 Other 8 48B Amsterdam Institute of Finance October, 2016

27. Subordination Senior lenders are concerned with the implications of having high yield investors at the table during a restructuring. EURO High Yield investors to date have not been as vocal as senior bank lenders, viewing the issue as one of pricing rather than principle. All other things being equal, sophisticated investors will probably price structural subordination at premium. Amsterdam Institute of Finance October, 2016

28. Contractual SubordinationU.S. Holding Company High Yield Bonds Subordination Agreement 100% Equity Interest To what restructuring Issues Issues Senior Secured Loan Intermediate Holding Company Guarantees Operating Company Operating Company Operating Company Cash Assets Amsterdam Institute of Finance October, 2016

29. Structural Subordination Issues Holding Company High Yield Bonds 100% Equity Interest Senior Secured Loan Issues Intermediate Holding Company Support Package Operating Company Operating Company Operating Company Amsterdam Institute of Finance October, 2016

30. Structuring Covenants – Preserving the deal or – I love you just the way you are! • There are no standard covenants. • They must be tailored to fit each deal and loan structure. • The steps in structuring the covenants are: • Identify the risks (business, financial and structural) • Select Covenants to monitor the risks • Need to prioritize the risks to monitor because it will be impossible to monitor every risk • The time and cost to monitor the covenants must be considered (i.e., sometimes one covenant can cover multiple risks) • Set Appropriate Levels • Want the covenants to trigger a warning before any principal or interest payments become delinquent. Need to factor in any seasonal needs to the covenant levels. Amsterdam Institute of Finance October, 2016

31. Excess Cash Flow Sweep • Definition: Portion (usually 50%) of surplus cash (defined term) used to prepay loan facilities • Use: 55% of Transactions Amsterdam Institute of Finance October, 2016

32. Financial Covenants as Endangered SpeciesMaintenance v Occurance Major Covenants (financial maintenance) – Industry Variation CAPEX Debt Service Fixed Charge Funded Debt Net Worth Earnings note – currently only one or two financial covenants (fD/EBITDA, EBITDA/I) Reason for Decline Institutional Loan Investors High Yield Market Competition Amsterdam Institute of Finance October, 2016

33. Integration Strategy Must Match Deal Thesis/Strategy “Scale” deals “Scope” deals Most acquirers fail to consider how deal type impacts what you integrate and how you handle people issues Amsterdam Institute of Finance October, 2016