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Fair Market Value of the ABC Company at 30 June 2013. July 8, 2013. Our Engagement.
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Fair Market Value of the ABC Company at 30 June 2013 July 8, 2013
Our Engagement Capstone Valuation Services, LLC (“CVS”) has prepared the attached report pursuant to our engagement by ABC Company (“ABC” or “the Company”) to provide a fair market value of the Company as of June 30, 2013 (the “Valuation Date”). CVS understands that our opinion is to be used for tax planning purposes with the contemplated restructuring. CVS performed this valuation analysis with subject company data, as well as information obtained from other sources including Capital IQ, the internet and other public and private sources. CVS has not performed any audit or other verification work on this data. The procedures CVS performed are substantially less in scope than an examination, the objective of which is the expression of an opinion on financial information. Accordingly, CVS does not express such an opinion on the Company’s operating results, projections or any of the information provided to us. Further, our valuation opinion expressed herein is contingent upon the conditions set forth in the “Statement of Assumptions and Limiting Conditions” included herein on the following page of this report. Had CVS performed additional procedures, other matters might have come to our attention that would have been reported to you and that may otherwise have altered our valuation analysis. This report was prepared under the supervision of Bruce B. Bingham, FASA, and it isfor the purpose of tax planning for ABC Company and its owners. It should not be used for any other purpose. This report contains confidential information and may not be distributed or disclosed to any other party. Capstone Valuation Services, LLC July 8, 2013
Statement of Assumptions and Limiting Conditions The general assumptions and limiting conditions pertaining to the valuation analysis are summarized below. 1. To the best of our knowledge and belief, the statements of facts contained in this document, upon which the analysis and opinions expressed are based, are true and correct. Information, estimates and opinions furnished to us and contained in this document or utilized in the formation of the value conclusions were obtained from sources considered reliable and believed to be true and correct. However, no representation, liability or warranty for the accuracy of such items is assumed by or imposed on us, and is subject to corrections, errors, omissions and withdrawal without notice. 2. This valuation opinion may not be used in conjunction with any other appraisal or study not so specified in this report. The value conclusions stated in this document are based on the assumptions described in this document. The valuation was prepared solely for the purpose, function and party identified in this report. This report may not be reproduced, in whole or in part, and the findings of this document may not be utilized by any third party for any purpose, without the express written consent of Capstone Valuation Services, LLC (“CVS”). 3. No change of any item in any part of this document may be made by anyone other than a CVS executive director, and CVS shall have no responsibility for any such unauthorized change. 4. The work papers for this engagement are being retained in our files and are available for your reference. CVS would be available to support our valuation conclusions should this be required. Those services would be performed for an additional fee. • 5. Neither all nor any part of the contents of this document shall be disseminated or referred to the public through advertising, public relations, news or sales media, or any other public means of communication or referenced in any publication, including any private or public offerings including but not limited to those filed with Securities and Exchange Commission or other governmental agency, without the prior written consent and approval of and review by CVS. • 6. Good and marketable title to the business interests and assets being appraised is assumed. CVS is not qualified to render an “opinion of title,” and no responsibility is assumed or accepted for matters of a legal nature affecting the business being appraised. No formal investigation of legal title to or liabilities against the business valued was made, and CVS renders no opinion as to ownership of the business or condition of its title. 7. CVS takes no responsibility for any events, conditions or circumstances affecting our opinion of value that take place subsequent to the valuation date. 8. This valuation analysis is based on historical and prospective financial statements. Some assumptions or projections inevitably will not materialize and unanticipated events and circumstances may occur during the forecast period. These could include changes in the economic conditions; significant increases or decreases in current interest rates and/or terms or availability of financing altogether; and/or major revisions in current state and/or federal tax or regulatory laws. Therefore, the actual results achieved during the projection period could vary from the projection. Such variations could be material and have an impact on the opinion stated herein. 9. Our work with respect to prospective financial information did not constitute an audit or an examination, compilation, or agreed upon procedures engagement of a financial forecast in accordance with standards established by the American Institute of Certified Public Accountants, and CVS does not express assurance of any kind thereon.
Table of Contents Executive Summary 5 Economic, Industry & Company Profile 7 Market Approach 12 Guideline Public Company Method 14 Guideline Transaction Method 19 Income Approach 21 WACC 26 Discounted Cash Flow 31 Calculated FMV of TIC 32 Appendix 35
Executive Summary • Capstone Valuation Services, LLC performed a valuation analysis of the Total Invested Capital (“TIC”) of ABC Company as of June 30, 2013. • CVS valued ABC Company as a going-concern. • CVS relied on the projections from ABC Company’s business plan dated June 3, 2013. • CVS relied on market information as of June 22, 2013 (the “Market Data Date”). • For the purpose of CVS’s opinion, Fair Market Value is defined in accordance with Revenue Ruling 59-60, as follows: The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. • CVS’s calculation of FMV of TIC at June 30, 2013 is as follows:
Economic, Industry & Company Profile Economic Overview • General economic outlook per The World Bank. • US Economony • Real Gross Domestic Product increased at an annualized rate of 2.5% during the first quarter of 2013. • GDP grew 2.2% for all of 2012, versus growth of 2.4% in 2010 and 1.8% in 2011. • The Conference Board (“TCB”) reported that the Composite Index of Leading Economic Indicators (“LEI”), the government’s primary forecasting gauge, declined 0.1% in March 2013 to 94.7 after increases of 0.5% in both January and February. • According to the Bureau of Labor Statistics, the Consumer Price Index (“CPI”) decreased 0.2% in March 2013 (on a seasonally adjusted basis), following no change in January and a 0.7% increase in February. • The Producer Price Index (“PPI”), which is generally recognized as predictive of near‑term consumer inflation, declined 0.6% in March 2013 (PPI for finished goods, seasonally adjusted), after increases of 0.2% and 0.7% in January and February, respectively. [Source: National Economic Review First Quarter of 2013]
Economic, Industry & Company Profile Industry Overview • Current State of the Outdoor Advertising Market • Over the five years to 2013, the industry has seen revenue fall at an average annual rate of 2.1% to $8.9 billion. • This is largely the result of budget reductions in marketing departments across client industries, particularly companies that make consumer goods. • Over 80% of outdoor advertising expenditure is related to consumer and retail trade; therefore, the industry is sensitive to fluctuations in disposable income and retail sales. • The largest participants in this industry with respect to 2013 revenue include CC Media Holdings at 13.9% market share, Lamar Advertising with 13.6% market share and CBS Corporation at 13.2% market share. • In 2013, the top three players in the industry are expected to account for 40.7% of industry revenue, suggesting substantial industry concentration. • Projected Outlook of Outdoor Advertising Market • In the five years to 2015, industry revenue is expected to increase at an annualized rate of 3.1%. • Operators will enjoy a rise in demand as businesses increase their advertising efforts. • Profits will also improve as players increase their rates and reap the benefits of a larger number of high-margin digital displays. [Source: “Billboard & Outdoor Display Advertising in the US”; May 2013; IBISWorld]
Economic, Industry & Company Profile Industry Overview (cont.) Advertiser Breakdown (by 2013 Revenue) Product Breakdown (by 2013 Revenue) [Source: “Billboard & Outdoor Display Advertising in the US”; May 2013; IBISWorld]
Economic, Industry & Company Profile Company Overview • ABC Company Worldwide is a full service media company specializing in Out-of-Home advertising, • Founded in 2001 by advertising industry veterans, ABC Company is one of the premier advertising sales organizations in the business with more than 500 employees (see Appendix C & D for historic operating results for the US and Canadian operations of ABC Company). • ABC Company provides sales, marketing, creative research and maintenance of bus, rail, bulletin, roadside billboard, telephone kiosk, street banner, shopping mall, supermarket and construction bridge advertising. In addition, ABC Company leads the way in the development and implementation of market leading digital platforms. • ABC Company’s highly experienced team of specialists furnish national and local advertisers with an exclusive and diverse selection of creative and cost-effective digital and traditional media solutions in several of the world’s largest and most demographically attractive transit markets. • XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX • Recent Transactions • XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX • 2013 Financial Performance • ABC Company generated revenue of $331.5 million for the fiscal year ended December 31, 2012. Projected pro forma 2013 revenues are significantly lower primarily due to the disposition of XXXXX operations discussed above. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) in 2012 was negative $31.3 million on a GAAP basis.
Market Approach Market Approach - Key Definitions and Valuation Factors • The market approach provides an indication of value through analysis of recent share prices of comparable publicly-traded companies. This approach relates various price/performance ratios of companies in a similar line of business to the performance of the subject company. In selecting the comparable companies, consideration is given to comparability from an investors perspective of financial condition, operating performance, and other factors. Market value of total enterprise value to performance measures (“multiples”) such as earnings, cash flows and revenues are then developed. These multiples are then applied to the same measures of the subject company’s performance to provide indications of value. • Total Enterprise Value (“TEV”) represents the market value of common equity (computed as the average of the high and low closing stock price for the 30-day period prior to and including the Market Data Date multiplied by the common shares outstanding as of the Market Data Date) plus preferred equity and minority interest, plus total debt (including capital leases), minus cash and short-term investments. • Total Invested Capital (“TIC”) is TEV, as defined above, plus cash and short term investments. • CVS’ valuation is based upon ABC Company as a going-concern.
Market Approach Guideline Company Selection • CVS established a universe of potential guideline companies through the following process: • Step1: Identified the guideline public companies listed in: • XXXXXXX Valuation Report, dated April 28, 2012. • Information Memorandum for Senior Secured US Term Loan, December 2011. • For each company identified in Step 1, CVS used Capital IQ’s comparable ‘lists’ function to determine: • All Competitors (competitors named by Company, Competitor and Third Party) • Quick Comps as determined by Capital IQ • Step 2: CVS ran a screen in Capital IQ based on the following criteria: • Publicly traded, operating or operating subsidiary with the latest day close price above USD$0.00 • Key word of outdoor advertising in the business description (used “outdoor advertising” in Capital IQ search) • Step 3: Of the 55 companies identified by the Step 1 and Step 2, we determined those that: • Were publicly traded, had actively traded equity, had adequate financial information available in Capital IQ and were primarily involved in the outdoor advertising business (based on the business description provided by Capital IQ) • See Appendix A for the companies that met the aforementioned criteria. • Step 4: Reviewed the business segments and financial information of the group of companies identified from Step 3, above, for comparability based on: • Segment business descriptions and primary industries served, segment LTM revenue as a percentage of total revenue, geographic breakdown of revenue, size by LTM revenue, projected EBITDA growth, analyst coverage • See Appendix B for details of this analysis.
Market Approach Guideline Company Selection • After applying the selection process, the following companies were selected • APG|SGA SA • Clear Channel Outdoor Holdings • JCDecaux SA • Lamar Advertising Co
Market Approach Guideline Company – Multiples • See Appendix E for the calculations of TEV for the Guideline Companies. • See Appendix F for Guideline Company comparative analysis.
Market Approach Guideline Company – Selection & Application of Multiples • CVS weighted FY 2013E at 70% and FY 2014E at 30% in determining the weighted value of TEV • CVS then added back the expected ending cash balance to determine TIC
Market Approach Guideline Transaction – Universe of Potential Transactions • CVS applied the following process in determining the universe of guideline transactions: • Step1: Ran a Capital IQ screen based on the following criteria: • Merger/Acquisition type transaction • Closed between 6/23/2010 - 6/23/2013 (three year look-back period) • Key phrases of outdoor advertising or poster advertising in the business description • Adequate financial information available in Capital IQ (implied enterprise value greater than zero) • Identified eleven possible relevant transactions • Step 2: Reviewed the business segments and financial information of the target companies identified from Step 2, above, for comparability based on: • Segment business descriptions and primary industries served, segment LTM revenue as a percentage of total revenue, geographic breakdown of revenue, size by LTM revenue, projected EBITDA growth, analyst coverage • No comparable transactions were identified from the Step 1 group. • Step 3: CVS also reviewed ABC Company’s sale of its XXXXX operations to XXXXXXXXXX for possible relevance in the valuation process. • Due to the negative LTM EBITDA of ABC Company’s XXXXX operations, there were not meaningful multiples associated with the transaction. • Projections for the XXXXXXXX business at the time of the transaction were influenced by marketing efforts and did not represent actual operating conditions of that business. • The purchase price of the transaction was influenced by the distressed nature of the sale and buyer specific synergies. • Ultimately these issues precluded us from relying on this transaction as a relevant indication of value for ABC Company’s US operations.
Income Approach Income Approach - Key Definitions and Valuation Factors • Discounted Cash Flow Method (“DCF”) • This methodology estimates the value of a business by discounting the entity’s free cash flow and continuing (“terminal”) value at the business’s weighted average cost of capital (“WACC”), a risk-adjusted discount rate. WACC = (D/V)*((1-t)*Kd) + (E/V)*Ke where t= tax rate, D= value of debt, E= value of equity, V= total value, Kd= cost of debt, Ke= cost of equity • Free cash flow is defined as debt-free net income, plus depreciation, amortization, and restructuring and non-recurring expenses, less capital expenditures, stock based compensation and changes in other assets, and adjusted for changes in working capital. • CVS utilized the projections as presented in the Company business plan dated June 3, 2013.
Income Approach Income Approach – Financial Projections Summary • The Projections (“Projections”) were updated by the Company in June, 2013 to incorporate actual performance through April 2013 with pro forma adjustments to reflect the renegotiated contract terms. • Management of the Company prepares a set of 5-year projections annually and updates the projections for actual results on a monthly basis. • The Projections reflect a bottoms-up approach on a contract-by-contract basis, with input from field personnel, and are reviewed and approved by the CFO, CEO and Chairman of the Board. • The Projections were recently updated to reflect the renegotiated contract terms with all of the transit authorities, and the loss of the XXXXX contract in XXXXXXXXXXX. • The Projections incorporate the following assumptions: • Revenue growth of 5% from 2014 through the end of the forecast period, which Management views as conservative. • Direct costs are specific to each contract and to a large extent are driven by revenue. • The majority of the direct costs incurred are the greater of (i) the contract provision for the minimum annual guarantee (“MAG”), which represents the minimum dollar amount of advertising revenue to be paid to the transit authority; or (ii) the revenue sharing agreement, which represents potential upside to XXXX XXXXX XXXXX should ABC Company exceed the MAG. • General and administrative expenses are assumed to grow at 3% per year. • Days sales outstanding (“DSO”) of 80 days through Q1 2014, then 75 days thereafter; and days payable outstanding (“DPO”) of 40 days. • Capex is generally specific to each contract and largely represents the cost to set up and maintain the outdoor signage. • The Company assumes it will win the bid to renew the XXXX XXXX XXXXX XXXXXX XXXXXX (“XXXX”) contract at the end of 2013. • Management indicated that they have received positive signals from XXXX that the Company should win the bid for renewal of the contract.
Income Approach Income Approach – Financial Projections Summary • The Projections do not include the projected cash flow from the potential winning bid for the renewal of the XXXX contract, which represents potential upside to the total indicated value. • Management acknowledged that they have received no feedback whether or not they will receive the winning bid for the renewal of the XXXXX contract. • XXXXX is the XXXXXXX XXXXX XXXXXXX of XXXXXX XXXXXXXXXXXX XXXXX (“XXX”), and the XXX is a financial review, oversight and planning agency for XXXX, XXXXX, and XXXXXX XXXXXXXXXXXX (“XXX”). • The Company already has a contract with the XXX, and the infrastructure in place to sell the advertising for XXXX. • It would not be unreasonable to assume that the Company can win the renewal of the XXXX contract, which is projected to generate annual cash flow of $1.1 million in 2013 and $1.2, $1.3, $1.3 and $1.4 million in 2014 through 2017. • The Company has not included the projected acquisition of XXXXXX XXXXXX in the Projections. • Management anticipated a November 2013 acquisition of certain identified XXXXXX XXXXX in XXXXXXX with an estimated purchase price of $10.5 million, based on the purchase price per XXXXXX from a similar acquisition they made two and a half years ago. • Management is projecting cash flows of $0.6 million for the two months ended December 2013, and $5.6, $6.1, $6.4, and $6.7 million for the fiscal years 2014 through 2017. • Management acknowledged that they most likely would be bidding against one of their competitors for the XXXX XXXXX portfolio, which could drive the purchase price higher than the $10.5 million they are projecting. • Capstone has qualitatively, but not quantitatively considered this project due to implied above market rates of return embedded in managements projections.
Income Approach Income Approach – Financial Projections Summary
Income Approach WACC - Information Sources • The estimated WACC for ABC Company was determined based on information collected from the following sources: • Capitalization ratios for the previously identified guideline companies based on their most recently issued balance sheets and market quotations for the publicly traded equity instruments for the guideline companies as of the Valuation Date. • Effective tax rates for the comparable companies based on their most recently issued income statements, if meaningful. • Five years of weekly historic equity prices for each of the guideline companies, where available. • Yields on U.S. Government securities as reported by the Federal Reserve Bank as of the Valuation Date. • Historical required rates of return for equity investments as calculated and presented in the 2013 Ibbotson Stocks, Bonds, Bills, and Inflation Valuation Yearbook as published by Morningstar. • Yields on Moody’s corporate bond indices as reported by the Federal Reserve Bank as of the Valuation Date. • Estimated future effective tax rates as projected by management. • The five year weekly historic beta for all comparable companies was calculated against the S&P 500 index.
Income Approach WACC – Estimation of Beta • To account for the effects of leverage on the volatility of equity returns, CVS unlevered and relevered the guideline company betas using the following estimates: • Total debt as a % of TIC shown for each of the comparable companies is the same data included in the calculation of the market approach multiples. • The effective tax rate for the latest fiscal year was used in cases where it was available and meaningful: • Clear Channel Outdoor Holdings Inc. - had a non-meaningful effective tax rate for the latest fiscal year. The effective U.S. federal rate of 35% was used.
Income Approach WACC – Relevered Beta
Income Approach WACC – Cost of Equity • The current yield on the 20-year U.S. Treasury bond was applied as the risk-free rate consistent with the methodology underlying the equity risk premium study. • The market risk premium used in this analysis is the long-horizon expected equity risk premium (historical) sourced from the 2013 Ibbotson Yearbook. • The size premium of 6.03% was sourced from the 2013 Ibbotson Yearbook under the assumption that the concluded value of equity for ABC Company would be between $1.1 million and $253.8 million (falls in the 10th decile). • CVS applied a -1% unsystematic risk premium to account for the conservative nature of the projections with respect to the assumptions for successful rebidding of contracts.
Income Approach WACC - Conclusion • We applied the Moody’s Baa corporate credit yield of 5.4% given the low leverage indicated by the guideline companies for the industry optimal capital structure. • The pre-tax cost of debt was tax affected using the Company’s estimated effective tax rate of 40%. • Weighting the previously derived after-tax cost of equity and after-tax cost of debt at the assumed capital structure of 24% debt and 76% equity arrives at a concluded WACC of 13.0%.
Income Approach Income Approach – DCF • Excess cash of $11.1 mm calculated based on post-restructuring cash balance less estimated restructuring expenses less normalized operating cash of $2.5 mm estimated by management. Normalized operating cash is consistent with historic requirements as well as covenant levels in restructured term loan.
Calculated Value Calculated FMV of TIC of ABC Company • CVS’ calculation of FMV of TIC at June 30, 2013 is as follows:
Certification of Value • I certify that, to the best of my knowledge and belief: • the statements of fact contained in this report are true and correct; • the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are my personal, impartial, and unbiased professional analyses, opinion, and conclusions; • neither Capstone Valuation Services, LLC nor I have any present or prospective interest in the property that is the subject of this report, and have no personal interest with respect to the parties involved; • I have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. • my engagement in this assignment was not contingent upon developing or reporting predetermined results. • my compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. • my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with generally accepted valuation standards. • the following professionals provided significant professional assistance to the person signing this report: Jeffrey Dunn, Emma Bienias, Joseph Woodmansee, and Peter Krause Bruce B. Bingham, FASA
Appendix A – Selected Guideline Company Business Descriptions
Appendix A – Guideline Company Business Descriptions – Not Selected
Appendix C – ABC Company’s Historical Income Statements • Note: The historical pro forma income statements above include only the operating results from the XXXX and XXXXX and have been adjusted to reflect the cost of sales for the year ended December 31, 2012 and for the four months ended April 30, 2013 on a cash basis. Results from the XXXX contract in 2013 have also been excluded. • (1) – Presented on a cash basis
Appendix D – ABC Company’s Historical Balance Sheets Note: The historical balance sheets presented above and on the following page include year end balances from the XXXX and XXXXXX operations only.
