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Quest™

Quest™. Pan-European M&A: The return of the LBO FCF yield. 20 th August 2012. Quest™ helpline +44 (0)20 7523 8493 quest@canaccordgenuity.com. Recap: June CITN note and presentation. “M&Ayhem: Feeling Hot, Hot, Hot….” CITN 22 nd June – noted pick up in M&A in selected sectors

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Quest™

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  1. Quest™ Pan-European M&A: The return of the LBO FCF yield 20th August 2012 Quest™ helpline +44 (0)20 7523 8493 quest@canaccordgenuity.com

  2. Recap: June CITN note and presentation • “M&Ayhem: Feeling Hot, Hot, Hot….” CITN 22nd June – noted pick up in M&A in selected sectors • Featured Stocks / takeover candidates mainly from Tech, Media, Telco, Industrials:CSR – Value released via major investment from SamsungTomTomNokiaNCC GroupSpirentITVITEAegis – Bought by DentsuEuromoneyInformaKPNVirgin MediaFennerBodycoteIMI Chemring – Approach from Carlyle – Preliminary talksSmiths Group Page 1

  3. M&A Pan-Euro Hot Spots and themes (newest in blue) • UK technology 3 takeovers by North American counterparts in a year: Logica/CGI (19% LBO FCF Yield), Autonomy/HP, Misys/Vista Equity Intel 15% investment in ASML, CSR investment from Samsung. Sector has high Cash flow returns + net cash. Top 30 US tech have potential US$430bn of cash outside US. Enough for top 10 European tech names twice inc. 30% premium. Deal rationale varies. To save on R&D, scale – global customer base, synergies, valuation. Other tech – SAP – cloud acquisitions, Dell cloud acquisition. • Health CareLinde buying Lincare $2.7bn. Buffett backed US dialysis clinic DaVita acquiring HealthCare Partners. Fresenius buying Rhoen Klinikum €3.1bn, US Aetna/Coventry Health Care ($5.7bn) • Telecoms Carlos Slim (America Movil stakebuilding – offer for 28% in KPN (€8 a share), + buying 23% Telekom Austria. Vodafone – Cable & Wireless Worldwide 12% LBO FCF yield. Private equity interest (Apax?) in VMed, Everything Everywhere (£8bn UK JV T-Mobile and Orange). Euro Telecoms: 4G auctions + high capex in next-generation networks (4G auctions). Traditional Revenues under pressure. • Media Dentsu buying Aegis £3.2bn, public / private consolidation (Publicis/BBH, WPP/AKQA) • Overseas buyers BRIC Buying: China Three Gorges – EDP, Camargo (Brazil)/Cimpor (Portgual), Genivar (Canada)/WSP (11%), Alimentation Couche-Tard (Canada)/Statoil Fuel/Retail, Hong Kong Ex/LME US Tech buying UK Tech, Walgreen/Alliance Boots (KKR est making 2.7x investment) Hotels: Nelson Peltz/Stake in Intercontinental Hotels, Accor – Motel 6 chain sold to Blackstone • Consumer Buying Emerging growth: Pfizer Infant Nutrition (Nestle outbid Danone), Brand add-ons Diageo – Brazilian Cachaca maker, A-B Inbev / Modello (outstanding majority), Heineken / Asia Pacific Breweries • ResourcesGlencore/Xstrata, PTT (RD Shell)/Cove, Cairn/ Nautical Petroleum, BP/TNK, North Sea Exploration, China National Gold/African Barrick Gold • Financials Quiet • Others Elect Equip: Eaton Corp $12.6bn purchase of Cooper industries (9%), Carlyle approach for Chemring • Pharma: Watson buying Actavis GDF Suez / International Power, UPS buying TNT express (19% FCF yield) Areas of high/Increasing activity Areas oflow activity Page 2

  4. M&A: Another way of thinking about value (LBO FCF yields) • Equity investors are not buying but others are starting to take a view • Buyers – Corporates, overseas buyers, pockets of private equity, activists – selected sectors “Valuations in Europe are making a lot of sense to us….. In times of crisis, people become much more short-term focused. [We are taking] a long-term view”Carlos García Moreno, CFO of América Móvil. Re Stakebuilding in KPN, Telekom Austria Global (debt + other)/EBITDAR Corporate sector debt is low Global free cash flow yield And cash flows are cheap to buy! Free cash after interest, tax and net capex but before acquisitions and dividends Page 3

  5. Hot spots are often characterised by strong cash flows, low debt The Finance Director’s dilemma: • What to do with the cash? Increase investment – Capex or M&A (just in time capex) Remain cautious – Hoard/run ungeared balance sheet Return to shareholders – Increased dividends / buybacks • M&A route tempting, especially where organic growth is under pressure Global (debt+other)/EBITDAR Global CFROC +12m Page 4

  6. Value tools: Quest™ LBO FCF yields & screen High level screening metric of the type favoured by private equity – identifies pre-tax cash flow yield on EV. Assesses cash flow available to prospective purchasers, after meeting its operating and capex needs but before financing costs or tax May be compared with required rates of return to see if company initially meets its funding cost Uses historic and consensus forecasts of EBITDA, capex and working capital needs to estimate ‘normalised’ cash flow Good track record when there is a pick-up in M&A activity (first introduced by Quest™ in 2002 - Newsletter #11) Plenty of high (Double digit) yields DIY private equity toolkit – LBO superscreen - Identify companies which could generate significant value either off or on-market LBO FCF yield calculation • LBO spreadsheet data updated weekly Page 5

  7. Pan-Euro sector LBO FCF yields inc pension 8 August Page 6

  8. LBO Screens - Technology UK: 3 takeovers by North American counterpart in a year: Logica/CGI (19% LBO FCF Yield), Autonomy/HP, Misys/Vista Equity Partners+ Samsung / CSR. Deal rationale varies. To save on R&D, scale – global customer base, synergies, valuation. Other recent developments: Nokia only 6%. Was 13% (Share price rise plus falling profits. CSR 9.6%. Was 22% (Share price rise post Samsung investment)See also: Canaccord Technology note: ‘Cloud, Connectivity and Consolidation’ – Featured: CSR, Dialight, Endace, FFastFill, Iomart, Monitise, Ubisense Page 7

  9. LBO Screens - Telecoms Telecoms Carlos Slim (America Movil stakebuilding – offer for 28% in KPN (€8 a share), + buying 23% Telekom Austria Vodafone – Cable & Wireless Worldwide 12% LBO FCF yield. Private equity interest (Apax?) in VMed, Everything Everywhere (£8bn UK JV T-Mobile and Orange). Euro Telecoms: 4G auctions + high capex in next-generation networks (4G auctions). Traditional Revenues under pressure. Page 8

  10. LBO Screens – Media – convergence? Media Dentsu agreed bid for Aegis (14%); Public buying private: Publicis / BBH, WPP / AKQA Page 9

  11. LBO Screens – Health Care Health Care Linde buying Lincare $2.7bn Sorin – prospective PE involvement Buffett backed US dialysis clinic DaVita acquiring HealthCare Partners. Aetna buying Coventry health Fresenius buying Rhoen Klinikum €3.1bn. (Post deal Rhoen = 3%) Page 10

  12. LBO Screen Industrials – UK - top yields Page 11

  13. LBO Screen Industrials – Europe ex UK - top yields Lots fitting criteria: See Q-files for full list – stocks bettween €500m and €10bn shown below Page 12

  14. LBO Screen – UK Retail Retail Watch out for the year end balance sheet making the debt/cash position look artificially attractive Some speculation on M&S Page 13

  15. LBO framework: Summary of considerations Page 14

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