Transcript Slide 1

M&A and Capital Raising in a Difficult Environment
From Heaven to Hell and back?
1
2007 – A Banker’s Dream
 Extraordinary financing environment
 M&A peak in the chemical industry
 High valuation from significant demand by both strategic and financial buyers
CHEMICAL INDUSTRY M&A – DOLLAR VALUE ($ in billions)
$100
81
$80
73
M&A Trough
72
54
$60
44
42
$40
30
40
34
22
$20
$0
'00
'01
'02
'03
'04
'05
'06
'07
'08 Pending
Source: RSM EquiCo Capital Markets
* Data as of March 17, 2008; subject to change pending future updates
2
Increasing Valuations
 Chemical Industry and middle market valuations climbed from the dip in 2001 – 2002 time period
 Competitive bidding environment with financial buyers adding to the buyer pool
 Overall good economy
CHEMICAL INDUSTRY M&A VALUATION (EV/EBITDA)
10 x
10 x
9x
8x
AVG. PRICE MULTIPLES PAID BY SPONSORS (EV / EBITDA)
7.9
7.3
7.1
7.5
7.7
8.2
8.1
9x
8x
7.6
7x
7x
6x
6x
9.3
8.5
7.6
7.5
7.1
6.9
6.7
7
8.1
7.2
5.9
5x
5x
4x
4x
'00
'01
'02
'03
'04
'05
'06
Source: RSM EquiCo Capital Markets
* Data as of March 17, 2008; subject to change pending future updates
'07
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 H1
2007
Source: Standard & Poor’s
* For deals with EBITDA under $50 million
3
M&A Activity Fueled by an Abundance of Funds
 The current size of the entire bank loan market exceeds $1.5 trillion
 The institutional loan market represents slightly over $1 trillion
$1.8
$0.8
$1.6
$0.7
$1.4
$0.6
$1.2
$0.5
$1.0
$0.4
$0.8
$0.3
$0.6
$0.4
$0.2
$0.2
$0.1
$0.0
$0.0
New leveraged loan volume ($ in
trillions)
Market size ($ in trillions)
HISTORICAL GROWTH OF THE LEVERAGED LOAN MARKET
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07
Leveraged loan market size
New leveraged loan volume
Includes US dollar-denominated noninvestment-grade bank debt (TL-a, revolver and institutional term loans).
Source: Credit Suisse, LPC, as of 12/31/07
4
M&A Activity Fueled by an Abundance of Funds
 Through the third quarter of 2007, $199.4 billion was raised by U.S. private equity firms, well ahead
of the $154.1 billion raised in the first three quarters of 2006 (source: Private Equity Analyst)
 In 2007, over $500 billion was raised by private equity firms worldwide
GLOBAL PRIVATE EQUITY CAPITAL RAISED ($ in billions)
$600
$500
$400
$300
$200
$100
$0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: Thomson Financial, Private Equity Intelligence
5
However, the world changed in July…
 Appetite for large leveraged loans dried
NOTABLE TRANSACTION’S PULLED/DELAYED
up suddenly as banks were overloaded
US Borrowers
and sub-prime related troubles became
Alltel
more apparent
Chrysler
 In the first 6 months of 2007, $846.8
billion of transactions were conducted in
the U.S. while second half figures fell to
only $479.2 billion (source: Nixon
Peabody)
 $300 billion in deals were overhanging
and are still being worked out
 This number decreased to $180 billion in
April 2008
Amount
Cablevision
Chrysler Financial
Comment
$23.2B
- Transaction launch delayed
$9.2B
- Transaction launch delayed
$12.0B
- Pulled from market; bridge financing still in place
$8.0B
- Transaction still seeking clearing price/structure
Clear Channel
$22.1B
- Transaction launch delayed
First Data
$16.0B
- Transaction launch delayed
$9.0B
- Transaction launch delayed
$16.5B
- Transaction launch delayed
Harrah’s Ent.
Sallie Mae
Expedia
$3.0B
- Share buy back reduced to $750MM
European Borrowers
Alliance Boots
£9.02B
- £7.27B of Sr debt withdrawn; flexed jr capital
Maxeda
€1.08B
- Pulled from market
Springer Sci &
Business Media
€1.77B
- Pulled from market
Camaieu
€1.17B
- Reduced amount of facilities during syndication
Telenet
€2.30B
- Out to relationship banks; determining structure
Paroc
€0.83B
- Flexed: Increased margins & offering 50bps OID
phs
€1.03B
Zodiac
€1.18B
- Reduced amount of facilities. Flexed: Increased
margins & offering 50bps OID
- Incr. Margins, added 100bps OID, tightened doc’s
6
What happened by the end of 2007?
 A rapid succession of events
 The market was overheated
 Hedge funds, which had become a source of senior sub and equity, disappeared; they were storyfriendly and aggressive
 CLO’s disappeared
 High yield market dried up
 Banks were left with “Bridges to Nowhere” and immediately tightened their standards
 The CP market froze
 There were no significant transactions in August
 The U.S. central banks intervened
 Markets were hit on both sides of the Atlantic
7
What happened by the end of 2007? (continued)
 The summer events were unusual in that it was liquidity and not credit quality which spooked the
market
 At below 1%, the default rate was extremely low compared to 5% to 6% during the 2002 credit
crunch
 In September, things looked better and we seemed to head towards normalcy
 However, towards the end of 2007, the market experienced a second wave of pessimism which
continued into 2008
 Further write offs and then Bear Stearns fails
8
2008 – A Banker’s Nightmare
 Financing environment for mid to large-caps is very difficult
 M&A for deals above $250 million are greatly impacted by financing difficulties
 However, lower to middle market deals still healthy
LEVERAGED LOAN ISSUANCE ($ in billions)
$250
$200
$150
$100
$50
08
1Q
07
3Q
07
1Q
06
3Q
06
1Q
05
3Q
05
1Q
04
3Q
04
1Q
03
3Q
1Q
03
$0
Source: Reuters LPC, Dealscan, LSTA
9
Back? Signs of Life
 In April 2008, we started to see signs of life
– News that Citi is selling $10 billion of their leveraged loans and $2 billion of bond bridges has driven
market optimism
– High yield bond market is starting to gain momentum with 6 new issues priced in April
– Quarter-end amortization along with increasing repayments means cash is starting to build in investor
accounts
 M&A activities are resuming
– May 2, 2008: Avista Capital Partners and Nordic Capital Fund VII agreed to acquire ConvaTec from
Bristol-Myers Squibb Company for approximately $4.1 billion
– April 28, 2008: Mars Inc., with financial support from Warren Buffett's Berkshire Hathaway Inc.,
announced plans to acquire The Wm. Wrigley Jr. Co. for $23 billion
– April 23, 2008: Liberty Mutual Group (“Liberty Mutual”) will acquire Safeco for approximately $6.2 billion
10
Middle Market: The Safe Harbor?
 Lending activity dropped, but less dramatically than the large corporate market
 There is no market risk and no syndication risk
 Small is the sweetspot – the majority of the deals that will close in the next 12 months will be
below $500 million in value (source: Nixon Peabody survey)
 Foreign buyers are now buying and out-bidding ‘local’ buyers constrained by debt capacity
 As some people have said America is on sale and larger acquisitions can be afforded by foreign
buyers
11
Middle Market: The Safe Harbor? (continued)
 There is bifurcation in the market
 During 4Q07 there were 3339 deals worth $500 million or less and only 156 deals
worth greater than $1 billion
 Usually there are 4 times as many large deals then small deals
12
Expectations in Today’s Debt Market
Deal Component
July 20071
September 20071
RSM’s Experience Today
Senior Debt (X EBITDA)
3.0 x – 4.0 x
2.5 x – 3.25 x
2.0 x – 3.0 x
Total Debt (X EBITDA)
4.5 x – 5.5 x
4.0 x – 4.5 x
3.0 x – 4.0 x
Sub Debt Pricing
12 – 16%
15 – 18%
11 – 14%
Warrants Feature
Very Unusual
Potentially
Common
Toggle Feature (Cash / PIK)
Potentially
Very Unusual
Gone
Minimum Equity Contribution
15 – 20%
25 – 30%
30 – 45%
Recap Liquidity
Abundant
Available
Raises Red Flags
1) Source: Joint study from Oxford, Urbana Champaign and Stockholm Universities
13
LIBOR’s Downward Trend
EVOLUTION OF LIBOR
6.0%
5.7%
5.2%
5.5%
5.0%
5.2%
4.9%
4.8%
4.5%
3.9%
4.0%
3.5%
3.1%
3.0%
3.1%
2.5%
2.5%
2.7%
Fe
b14
-0
8
Ma
r-0
408
Ma
r-2
108
Ap
r-0
908
-0
8
Ja
n-2
8
-0
8
n-0
9
Ja
-2
007
De
c
-0
307
De
c
-1
407
No
v
-0
7
Oc
t-2
6
-0
7
Oc
t-0
9
-2
007
Se
p
Se
p
-0
307
2.0%
Launch Date Issuer
Corp Ratings
Implied Yield
LIBOR Floor
8-Apr-08
Macrov ision Technologies'
B3/B+
L+450
3.5% Libor Floor
1-Apr-08
Local Insight Yellow Pages
B2/B
L+550
3.75% Libor Floor
24-Mar-08
New port Telev ision
-
L+625
3.0% Libor Floor
24-Mar-08
Venture Transport
-
L+550
3.25% Libor Floor
17-Mar-08
Merisant
Caa3/CCC
L+875
3.5% Libor Floor
13-Mar-08
Abitabi-Consolidated
B2/B-
L+900
3.5% Libor Floor
Source: S&P Leveraged Commentary and Data, RBC Capital M arkets
14
New Lenders Pick Up the Slack
Jumbo LBOs struggled to syndicate in 1Q08
LBO lending fell 88% in 1Q08 to $5.4 billion from $45.9 billion in 1Q07
The largest LBO loan to clear market was just over $1 billion
Make-up of lead arrangers shifts dramatically as Institutional volume declines
New players are emerging as corporates now represent ~60% of new borrowers, up from ~20%
during Q1 2007:
1Q07
$600
$500
$400
$300
$200
$100
$0
1Q08
Ba
nk BN
P
of
Ire
la n
d
HS
BC
Ca
MS
pit
al
So
urc
e
1Q06
Cr
e
Ba dit S
u
nk
of isse
Am
e
JP rica
Go Mo
ld m rga
an n
S
Me ach
s
rri
ll L
yn
ch
Le
W hma
e ll
sF n
ar
W go
ac
ho
via
GE
CC
UB
S
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
LARGE MIDDLE MARKET INSTITUTIONAL LEAD ARRANGER
VOLUME ($ in millions)
CI
T
LARGE MIDDLE MARKET INSTITUTIONAL LEAD ARRANGER
VOLUME ($ in millions)
GE
C
Ba C
rcl
ay
s
Le
hm
W an
ac
ho
via





Source: Reuters Loan Pricing Corporation/DealScan
15
Situation in Q1 2008
 Banks were no longer liquid; for the first time the whole banking system was in doubt
 Loan default is still relatively low
– 1.50% at the end of Feb.
– 1.83% through Mar.
 But the mark to market of collateralized sub-prime loans triggered huge write-downs
 This resulted in capital adequacy issues
 This is being worked out as we speak through:
– Foreign investors
– Going to market by issuing preferred convertibles and equity
16
Summary
 Financing is available under tighter conditions
 The market has not dried out; overhang is being worked out; however, pricing is going up
 Sponsored M&A lending declined 39% from the previous quarter and 60% from the first
quarter of 2007
 With the continued availability of funds, what is happening to the M&A market and valuations?
17
2007 M&A Valuation & Volume
 Good companies are still obtaining high multiples
 Average EBITDA multiples for middle market companies declined from 6.5x in the first half of
2007 to 6.0x in the second half
 In the $10 million to $25 million deal size, there was no appreciable decline in EBITDA multiple
which is holding at 5.7x
 In the $25 million to $100 million deal size, EBITDA multiples dropped from 7.0x to 6.0x
VALUATION MULTIPLES
Total Enterprise Value/EBITDA
Enterprise Value
1st Half 2007
2nd Half 2007
$10mm - $25mm
5.7x
5.7x
$25mm - $50mm
7.0x
6.0x
$50mm - $100mm
6.9x
6.0x
$100mm - $250mm
7.8x
7.4x
Source: M ergers & Acquisitions M agazine
18
2007 Chemical M&A Valuation & Volume
 Chemical industry transaction volume fell in Q3 2007
 Backlog of pending transactions has picked up again this year and we expect the second half of
2008 to be another busy season for Chemical Industry M&A
VALUATION MULTIPLES
# of Deals
Avg. EV / EBITDA
Q1 2007
63
7.9x
Q2 2007
75
8.7x
Q3 2007
40
7.8x
Q4 2007
29
9.0x
Q1 2008 (Preliminary)
32
7.4x
Pending
52
10.1x
Source: RSM EquiCo
19
2007 Chemical M&A Valuation & Volume (continued)
 Average valuations will increase in the second half of 2008 as some large transactions close:
–
–
–
–
Agrium / UAP (closed May 7, 2008)
Carlyle / Neochimiki (closed May 9, 2008)
Incitec Pivot / Dyno Nobel
Henkel / ICI Electronic Materials
 Sub-$100 million deals on average are discounted up to 2x EBITDA compared to deals $500
million and above
VALUATION MULTIPLES
11x
10x
10.5
10.0
9.6
9x
8.5
7.8
8x
8.8
9.3
7.9
7.5
7.1
7x
8.8
9.5
9.0
7.1
6.7
7.1 7.0
7.3 7.3
7.3
7.5
7.5 7.5
6.9
6.4
6.3
5.7
6x
5x
4x
'00
'01
'02
Deals >$500mm
'03
'04
'05
Deals $100mm - $500mm
'06
'07
Pending
Deals <$100mm
Source: RSM EquiCo
20
Fine Chemical Transactions
Transaction Details
Closed
*
Target
Acquirer
($mm)
-
Revenue
$34.8
EBITDA
-
01/28/2008
Remaining 40% Stake in Mchem
01/04/2008
FineTech Laboratories
RxElite Inc.
$19.2
$6.2
-
11/30/2007
Fine Chemicals (PPG)
* ZaCh Systems
$65.0
-
$8.5
10/30/2007
SF Chem (Capvis)
* CABB (AXA Private Equity)
-
$150.0
$22.5
07/02/2007
$11.0
$5.0
-
06/18/2007
Ariane Orgachem (Aurangabad) & Ferico
(NaviBusinesses
Mumbai)
5Laboratories
Fine Chemical
-
$105.8
-
06/14/2007
Particle and Coating Technologies
-
-
-
01/09/2007
78.6% Stake in Group Novasep
* Glide Buyout, Banexi & Management
$544.0
$544.0
$85.0
12/31/2006
Remaining 39.9% Stake in Virbac Corp.
* Virbac S.A.
$44.0
$80.8
$10.5
12/02/2006
Be-Tabs Pharmaceuticals
* Ranbaxy Labortoraies
$70.0
$31.8
$9.1
10/25/2006
PLIVA D.D.
Barr Pharmaceuticals, Inc.
$2,418.7
$1,109.1
$268.6
10/22/2006
Connetics Corporation
Stiefel Laboratories
$625.0
$150.0
-
10/18/2006
Sharp & Dohme Ponders End, U.K. Plant
* Aesica Pharmaceuticals
-
-
-
09/07/2006
CarboGen-AMCIS (Solutia)
* Dishman Pharmaceuticals and Chemicals
$74.5
$68.0
$12.0
08/18/2006
Chemtec Leuna
* Minafin
-
$15.0
-
07/30/2006
Biopharmaceutical Facility (Dow)
Alexion Pharmaceuticals
-
-
-
07/05/2006
West Coast Ingredients
J.M. Huber Corporation
-
-
-
06/26/2006
Fine Chemicals Business (Clariant)
$56.5
$169.4
$5.6
05/23/2006
$20.0
$30.0
-
03/13/2006
Active Pharma Ingredient and Intermediates
Business (Lubrizol)
Novasep's
Rohner Subsidiary (Rockwood
* Arques Industries
-
-
-
02/01/2006
Specialties)
RPS Custom Synthesis (Rhodia)
* Shasun
$0.0
-
-$20.0
Foreign Buyer
Source: RSM EquiCo
* Matrix Laboratories
Transaction Value
($mm)
Albany Molecular Research Inc.
* Argos Soditic
KV Pharmaceutical
* TowerBrook Capital Partners
Auctus Management
Avg. EV/EBITDA
8.6x
21
What Will Happen?
 Will M&A dry up?
– No: Strategic buyers have very strong balance sheets, un-drawn lines of credit and very good stock
valuations and earnings
 Will Private Equity decline?
– In 2000 – 2002, total private equity deals averaged $30 billion in the U.S. and Europe
– In 2006 we saw figures of $233 billion in the U.S. and $151 billion in Europe
– There is $250 billion waiting to be invested and most PE firms are successfully raising larger funds
22
What Will Happen? (continued)
 Private equity maintains its advantages
– Do not have to please the analyst community
– No tyranny of quarterly earnings
– No Sarbanes Oxley
– They have in some cases become “hybrids”
– They often have strategic horizons which are longer than traditional strategics
– They are very quick
 Strategic buyers will probably regain some advantage
 Private equity hybrid platforms allow them to generate the synergies to be competitive against
strategics (i.e. Hexion / Huntsman)
 2002 to 2007: the “golden age” of private equity
23
Conclusion
 There is evidence that lenders are redirecting funds to the middle market
– The banks to avoid syndication risk and still generate fees
– The mezzanine players who have been starved for the past year and have an abundance of funds
– BDC’s are canvassing the market with their “one-stop-shop” financing
 Multiples have come down between ½ to 1 turn depending on the sector
– This means we are going back to 2006 which was an exciting year
– The froth is gone, sanity has come back
– We are open for business in the middle market
24
RSM EquiCo M&A Activity
TOP U.S. ADVISORS ($1 - $100m deal value)
Financial Advisor
1
2
Houlihan Lokey Howard & Zukin
Jefferies Group, Inc.
63
56
3
RSM Equico Capital Markets LLC
48
4
Citigroup, Inc.
47
5
UBS AG
42
6
Goldsmith, Agio, Helms & Co.
36
7
Goldman Sachs & Co.
35
8
Morgan Stanley
32
9
BB&T Corp.
31
9
Keefe, Bruyette & Woods, Inc.
31
GROWTH IN RSM M&A ADVISORY ACTIVITY
TOTAL LIQUIDITY CREATED BY RSM EQUICO
$6,000
70
$5,000
1,657
$4,000
$2,500
Pending
60
# Transactions
50
Deal Value
$2,000
38
$1,500
40
$3,000
1,650
5,292
$2,000
$1,000
81
CY 2001
283
314
CY 2002
CY 2003
30
10
513
0
CY 2004
52
20
792
$0
Deals
Total Deal Value (millions)
Rank
CY 2005
CY 2006
CY 2007
Total
18
24
26
36
$1,000
47
28
$500
6
$0
CY2001 CY2002 CY2003 CY 2004 CY 2005 CY 2006 CY 2007 CY 2008
Source: RSM EquiCo as of 5/11/08
25
RSM Global Presence
RSM McGladrey &
McGladrey & Pullen
(U.S.)
100 offices
4,000 employees
American Express
Tax & Business Services
2,500 employees
RSM Bently Jennison
(UK)
14 offices
1,000 employees
RSM Hemmelrath Gruppe
(Germany)
22 offices
1,000 employees
RSM EquiCo
(UK)
One office
Five employees
RSM EquiCo
(U.S.)
Four offices
150+ employees
RSM Mexico
(Mexico)
24 offices
RSM Hemmelrath
Gruppe
(China)
One Office
200 employees
RSM Nelson Wheeler
(Hong Kong)
Four offices
100 employees
RSM EquiCo
(India)
One office
25 employees
RSM Brazil
(Brazil)
6 offices
RSM Audihispana
(Spain)
14 offices
615 employees
RSM France
(France)
23 offices
1,600 employees
RSM Bird Cameron
(Australia)
30 offices
500 employees
RSM Stone Forest
(Singapore & China)
400 employees
26