Transcript BILLOW BUTLER & COMPANY, L.L.C.

April 8, 2004
Chicago Bar
Association
Mergers &
Acquisitions
Subcommittee
M E M B E R
Discussion Topics
Valuation Methodologies
Current Market Conditions
Billow Butler & Company
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Valuation Methodologies
Public
Companies
Comparable
Transactions
Analysis of valuation multiples of comparable publicly-traded companies
to gain insight into multiples for privately-held companies. Traditionally,
small private companies are acquired at a discount to public multiples.
Analysis of valuation multiples implicit in recent acquisitions involving
comparable private and public companies. Takes into consideration
premiums/discounts for size of transactions.
Discounted
Cash Flows
Analysis of future cash flows and residual value discounted to the present
using a return on capital rate required by investors; requires the
development of a 5-year financial plan.
Leveraged
Buyout
Analysis of the purchase price a financial investor group could pay given
various return to investors parameters; heavily dependent on the debt
markets; requires the development of a 5-year financial plan.
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Quality of Earnings
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Historical Track Record of Growth & Profitability
Past or Current Trends Benefiting / Impacting the Company
Customer Base Profile; Concentration; Contracts
Quality of Earnings: Persistence / Variability
Achievability of Projected Financial Results
Prospects and Opportunities for Continued Growth
New Product Initiatives
Capacity and Nature of Equipment and Facilities to
Accommodate Future Growth
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Add-Backs
 Add-backs are items (normally expenses) that are currently incurred
by the company that may not be incurred under the control of a
prospective buyer
 These may include such discretionary items as:
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Above-market executive compensation
Consulting fees paid to investors or investor groups
Family-member compensation
Perquisites: autos, life insurance, travel, etc.
 The other category of add-backs includes extraordinary or one-time
items, such as the gain on sale of assets, life insurance proceeds, an
unusual bad debt write-off, moving expenses, etc.
 It is important that each add-back can be tied back to the company’s
financial statements
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Add-Back Schedule
2001
2002
2003
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Extraordinary Gain (loss)
On Sale of Assets
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Other
Other
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Above Market Salaries
_______________(name)
_______________(name)
Bonus
_______________(name)
_______________(name)
Perquisites
Travel & Entertainment
Auto Expenses
Dues & Subscriptions
Medical Reimbursements
Other
Other
Non-Recurring Charges
One-Time Excessive
Bad Debt Write-Off
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Adjusted Income Statement
($ in thousands)
Net Sales
2001
$50,000.0
Fiscal Years Ending December 31,
2002
2003
2004 (E)
$60,000.0
$72,000.0
$90,000.0
2005 (P)
$108,000.0
Cost of Goods Sold
30,000.0
36,000.0
43,200.0
54,000.0
64,800.0
Gross Profit
20,000.0
24,000.0
28,800.0
36,000.0
43,200.0
Selling, General & Administrative
12,500.0
15,000.0
18,000.0
22,500.0
27,000.0
(150.0)
(50.0)
0.0
0.0
(200.0)
(50.0)
(400.0)
0.0
(200.0)
(50.0)
0.0
(250.0)
(200.0)
(50.0)
0.0
0.0
0.0
0.0
0.0
0.0
Adjusted Selling, General & Administrative
12,300.0
14,350.0
17,500.0
22,250.0
27,000.0
Adjusted Operating Income
$7,700.0
$9,650.0
$11,300.0
$13,750.0
$16,200.0
S,G&A Adjustments
Above Market Compensation
Owner's Pequisites
Acquisition Costs
Non-Recurring Expenses
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Public Companies
($ in millions)
Company Name
CSS Industries Inc. (CSS)
LTM
Revenue
Valuation Multiples
EBITDA
EBIT
Revenue
EBITDA
EBIT
$541.0
$65.0
$50.8
0.8x
6.8x
8.7x
Jarden Corp. (JAH)
587.4
108.3
93.3
2.1x
11.3x
13.1x
New England Business Service Inc. (NEB)
633.9
84.4
54.1
0.9x
6.9x
10.7x
20.9
1.3
0.9
1.3x
NM
NM
1,174.8
142.0
89.4
1.2x
9.5x
15.2x
Mean
1.2x
8.6x
11.9x
Median
1.2x
8.2x
11.9x
Next Inc. (NXTI)
Tupperware Corp. (TUP)
Mean
Median
Less: Size Discount of 35.0%
5.6x
5.3x
Plus: Change of Control Premium of 32.0%
7.4x
7.0x
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Comparable Transactions
($ in millions)
Announced
Date
Target
28-Jan-04
Imperial PlasTech
20-Oct-03
Landis Plastics Inc.
1-Oct-03
Acquiror
Target Business Description
Petzetakis
Manufactures plastic pipe for the construction,
oil and gas, industrial markets
Berry Plastics (Goldman Sachs)
W.L. Plastics, LLC
10-Sep-03
Enterprise
Value
LTM
Revenue
Valuation Multiples
EBITDA
EBIT
Revenue
EBITDA
EBIT
NA
NA
NA
NA
NA
NA
NA
Manufactures injection molded and
thermoformed plastic packaging for dairy and
other food products
$228.0
NA
NA
NA
NA
6.3x
NA
PW Poly and Merit Capital
Manufactures high-density polyethylene pipe
$17.6
$19.0
NA
NA
0.9x
NA
NA
Quail Piping Products
J-M Manufacturing
Two HDPE pipe plants located in Magnolia,
Arkansas and Kingman, Arizona
NA
NA
NA
NA
NA
NA
NA
25-Aug-03
Performance Plastics Products Inc.
Edlon Inc.
Manufactures plastic lined pipe products in the
United States, Mexico and Canada
NA
NA
NA
NA
NA
NA
NA
26-Jun-03
Dura-Line Corp of Emerson Electric
(2)
Co.
Sun Capital Partners Inc.
Manufactures high-density polyethylene pipe,
duct, and conduit products
$6.0
$54.7
NA
($9.3)
0.1x
NA
NM
10-Mar-03
Uponor ETI Co. of Uponor Oyj
PW Eagle Inc.
Manufactures plastic water and sewer pipe
systems
$27.3
$89.5
$7.2
$2.7
0.3x
3.8x
10.2x
28-May-02
Berry Plastics Corp
Goldman Sachs Group Inc
Manufactures and markets plastic containers,
aerosol overcaps, drink cups, and house ware
products
$1,377.4
$468.6
$106.2
$55.9
2.9x
13.0x
24.7x
16-Aug-01
Triple S Plastics Inc
Eimo Oyj
Manufactures thermoplastic components for
automotive, consumer, medical, and
telecommunications markets
$30.5
$155.2
$15.0
$9.1
0.2x
2.0x
3.4x
11-Dec-00
Ameriduct Worldwide Inc.
Lamson & Sessions Co.
Manufactures high-density polyethylene pipe,
duct, and conduit products
$65.0
$41.0
$8.0
NA
1.6x
8.2x
NA
25-Sep-00
Pyramid Industries Inc.
Lamson & Sessions Co.
Manufactures custom fiber optic conduit
systems
$51.9
$50.8
$8.8
NA
1.0x
5.9x
NA
Mean
1.0x
6.5x
12.7x
Median
0.9x
6.1x
10.2x
(1)
(3)
(1) EBITDA multiple based on Plastics News release dated October 20, 2003.
(2) Estimated using the 9 months ended June 30, 2003 based on EMR Form 10-Q dated August 12, 2003.
(3) Based on information provided by PWEI Form 8-K/A dated May 29, 2003 and PWEI Form 10-Q dated November 14, 2003.
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Discounted Cash Flows
Calculate Adjusted Free Cash Flow**
Internal Financial Statements
Revenues
Less: Cost of Goods Sold
Gross Margin
Less: Selling, General & Administrative
Operating Income
Less: Taxes
Net Income
+
Adjustments
to
Adjustments
to
Operating
Income
Operating
Income
Plus: Owner Perquisites
Plus: One-time Expenses
Plus: Synergies
Plus: Depreciation
Less: Change in Working Capital
Less: CapEx
Free Cash Flow
** Debt-Free Analysis
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Discounted Cash Flows
($ in thousands)
Free Cash Flow Calculation
Projected Fiscal Years Ending December 31,
2008
2007
2006
2005
2004
EBIT
$3,686
$4,162
$4,649
$5,179
$5,755
Marginal Tax Rate
40.0%
40.0%
40.0%
40.0%
40.0%
$2,212
$2,497
$2,790
$3,107
$3,453
Depreciation & Amortization
660
619
610
606
608
Decrease (Increase) in Working Capital
(250)
(274)
(302)
(332)
(365)
Capital Expenditures
(150)
(500)
(500)
(500)
(500)
$2,472
$2,342
$2,598
$2,882
$3,196
Tax-affected EBIT
Free Cash Flow
Discounted Cash Flow Valuation
Discount Rate
EBITDA Terminal
Multiple
Flows
Value
Enterprise Value
Less: Debt
Equity
Value
Plus: Cash
$17,653
$14,065
$21,929
7,864
15,344
23,208
6.5
7,864
16,623
24,486
20,210
$8,340
$15,627
$23,967
$19,691
6.0
8,340
17,047
25,387
6.5
8,340
18,468
26,808
22,532
$8,865
$17,401
$26,266
$21,990
6.0
8,865
18,983
27,848
6.5
8,865
20,564
29,430
5.5 x
15.0%
Terminal
$7,864
5.5 x
17.5%
Cash
6.0
5.5 x
20.0%
Present Value
$4,276
$4,276
$4,276
$0
$0
$0
18,932
21,111
23,571
25,153
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Leveraged Buyout
 Senior Debt Financing
– Senior debt to cash flow of 2.5 – 3.5x
– Total debt to cash flow of 3.5 – 4.5x
 Mezzanine Financing
– Seek total return of 18% – 22%
– With or without equity participation
 Private Equity Contribution
–
–
–
–
Attention paid to underperforming portfolio companies
Eager to make new investments
Being pushed to invest up to 35% in equity
Return expectations lowered to 20+%
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Valuation Summary
($ in thousands)
EBITDA Multiple Range
Enterprise Value Range
Low
High
Low
7.4x
$24,719
7.2x
$22,825
Comparable Public Companies Analysis
7.0x
Comparable Transactions Analysis
6.5x
Discounted Cash Flows Analysis
6.8x
-
7.6x
$23,967
-
$26,808
Leveraged Buyout Analysis
6.0x
-
6.3x
$21,000
-
$22,000
ENTERPRISE VALUE RANGE
-
High
-
$25,991
$25,283
$22,000
$26,000
Company
Implied
Statistic
Multiple Range
2003 Actual
Low
High
Net Sales
$20,723
1.1 x
-
1.3 x
EBITDA
3,511
6.3 x
-
7.4 x
Net Sales
$20,010
1.1 x
1.3 x
EBITDA
$3,308
6.7 x
7.9 x
Net Sales
$22,804
1.0 x
-
1.1 x
EBITDA
4,346
5.1 x
-
6.0 x
TTM at June 30, 2004
2004 Estimated
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Reasons for Differing Multiples
Perceived Ability to Generate Future Cash Flow
Financial
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Size
Historical revenue growth
Margins relative to peers
Potential synergies
Earnings history
Asset utilization
Asset intensity
Excess capacity
Cash conversion cycle
CAPEX requirements
Intangible
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Growth opportunities
Strength of management team
Market position
Strength of distribution channels
Industry outlook
Proprietaries, patents, know-how
Customer diversity and tenure
Technical capabilities
Reputation and goodwill
Barriers to entry
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Beauty is in Eye of Beholder
Buyer A
Final Purchase Price
$67 Million
Buyer B
Buyer C
Buyer D
Buyer E
Buyer F
ACTUAL TRANSACTION
Plastic Processor
Initial Indications of Interest
Buyer G
Buyer H
Buyer I
Buyer J
$0
$10
$20
Interested Party
$30
$40
Winning Bidder
$50
$60
$70
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Historical Deal Multiples
14.0x
12.0x
10.8x
10.0x
8.0x
10.7x
9.5x
7.5x
8.3x
8.6x
8.9x
1993
1994
1995
9.9x
8.4x
8.1x
7.5x
8.0x
2000
2001
2002
2003
6.0x
4.0x
2.0x
0.0x
1992
1996
1997
1998
1999
EBITDA
Source: Mergerstat
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Multiples by Deal Size
16.0
14.4
14.0
12.0
11.6
10.7
10.0
Multiple
10.0
8.9
8.4
8.3
7.6
8.0
6.3
6.0
4.2
4.0
2.0
0.0
<$25
$25-$100
$100-$250 $250-$1,000
Transaction Size
EBIT
>$1,000
EBITDA
Source: US Bancorp Piper Jaffray
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Billow Butler & Company
Billow Butler & Company, L.L.C.
Billow Butler & Company, L.L.C. is an investment bank dedicated to advising middle market business owners on the sale of
their companies. With backgrounds at leading investment and commercial banks, law firms and financial consulting firms, our
professionals bring a level of expertise, integrity and professionalism to the middle market that is traditionally only available to
owners of larger companies. Our clients are located across the U.S. and typically own companies valued up to $100 million.
They are entrepreneurs and private equity groups that intend to sell an entire company or they are larger, public companies that
desire to divest a division. But, no matter their size, location or ownership, our clients engage us with a common goal in mind maximize net proceeds, to ensure transaction closure and achieve the best possible terms with confidentiality, speed and
minimal burden on themselves and their corporate staff. Since its inception in 1997, Billow Butler & Company has successfully
closed over 25 transactions.
Darrell M. Butler
Managing Director
Mr. Butler has been involved in mergers and acquisitions for more than 13 years, participating in more than 100 transaction
assignments ranging in value from $3 million to $200 million. Mr. Butler has spoken before members of the Institute of
Management Accountants, the Chicago Bar Association and industry trade associations on topics involving corporate finance
and deal-making.
Prior to co-founding Billow Butler & Company, he was an accomplished associate/vice president at a leading national
investment bank, where he was formally recognized as Top Associate for leading the company in deals closed and fees
generated. Mr. Butler spent more than seven years at Arthur Andersen as a financial consultant to Fortune 1000 clients. In
addition to earning consistently outstanding marks during his tenure at Andersen, he is proud to have received the Sequoia
Award for mentoring in support and development of his staff. He is currently the treasurer of a not-for-profit educational
corporation and previously served six years as treasurer of a $1.2 million not-for-profit corporation.
Mr. Butler holds an M.B.A. in Financial Management and Strategy from The University of Chicago Graduate School of
Business and a B.S. in Finance, with honors, from the University of Illinois-Urbana/Champaign.
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