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MERGERS & ACQUISITIONS MASTERCLASS

Opportunities, strategies, and risks

MEDIA PARTNER:

AGENDA
Chair: Mark Paganin SF Fin, Partner, Clayton Utz >> M&A megatrends: assessing the opportunities in the domestic and international markets - Richie Baston, Director, Azure Capital >> Innovations in M&A deal strategies, business models and techniques - Aaron Hood, Executive Director, Catalyst Investment Managers >> A snap-shot view of the regulatory developments and impact on deal approval - Russell Philip, Partner, Corrs Chambers Westgarth

AGENDA cont
>> 10:10am Networking & refreshment break >> Linking due diligence to the value of the deal - Roger Port SF Fin, Partner, PwC >> Panel discussion: identifying the hot sectors and the top sources of deal flow - Aaron Hood, Executive Director, Catalyst Investments - Russell Philip, Partner, Corrs Chambers Westgarth - Roger Port SF Fin, Partner, PwC >> 12:00pm Event Close

M&A megatrends: assessing the opportunities in the domestic and international markets
Richie Baston, Director, Azure Capital

M&A megatrends: assessing the opportunities in the domestic and international markets

Todays Themes

1. Mega Capex Cycle 2. Funding Challenges Driving Earlier Exits for Independent Miners 3. Food Security as a Driver for Agricultural Activity

Committed Capex in Australia At the end of October 2011, there were 102 projects at advanced stage of development with a record capital expenditure of $231.8 billion (74% y.o.y increase).
New Capital Expenditure (2010-11 dollars)

Projected Capex Oct 10: $A133bn, 10% of GDP (1% pa net addition) May 11: $A173bn, 13% of GDP (1% pa addition) Oct 11: $A232bn. 17% of GDP (1-2% of GDP pa addition) Formidable list of projects awaiting approval/ feasibility ($A224bn)

Sourc e:

BREE, Mi ning Industr y Maj or Pr ojec ts ( October 2011).

Advanced Minerals & Energy Projects (1/2)

Sourc e:

BREE, Mi ning Industr y Maj or Pr ojec ts ( October 2011).

Advanced Minerals & Energy Projects (2/2) Mostly in petroleum, mostly in WA

Value of advanced projects by commodity Value of advanced projects by state

Sourc e:

BREE, Mi ning Industr y Maj or Pr ojec ts ( October 2011).

10

Hydrocarbon Industry: Planned Capital Expenditure A small number of oil & gas projects account for a large percentage of the planned capital expenditure in Western Australia.
Proj ect Ow ners Location Proj ect Capex (A$bn) 1.4 First Prod.

Macedon

BHP B, Apache Chevron, Shell, ExxonMobil, Osa ka Gas, Tokyo Gas, Chubu Woodside Shell Chevron, Apache, KUFPEC, Shell Woodside, BP, Chevron, BHP B, Shell Inpex, Total Woodside, ConocoPhillips, Shell, Osaka Ga s Hess

Exmouth Basin, WA Barrow I sland, WA Carnarvon Basin, WA Browse Basin, WA Carnarvon Basin, WA Browse Basin, WA Browse Basin, WA. NT processing Bonaparte Basin, NT Carnarvon Basin, WA

2013

Gorgon

35

2014

Pluto 2 & 3 Prelude Wheatstone Brow se Ichthys Sunrise WA-390-P

20 12 29 38 34 14 N/A

2015 2016 2016 2017 2017 2017 N/A

Sourc e:

ABARE: Miner als and Energ y D evelopment Projects R eport, C ompany Announcements.

11

Resulting Revenue Impact Resource service companies are performing very strongly with mining, marine and civil contractors being the standout performers.
Mining services companies HY on HY growth PE firms sniffing around mining services

Sourc e:

Company Announc ements , Azur e Anal ysis , Marc h 2012.

12

Private Companies are Performing Strongly Private companies with exposure to the mining capex cycle are also performing very strongly.
Selected Private Companies year on year revenue growth

Sourc e:

Company Acc ounts, Az ure Anal ysis, M arc h 2012.

13

International Buyers Want Exposure to the Capex Cycle FLSmidth & Co and Weir Group Plc were recently involved in an intense bidding war for mining services company Ludowici.
28 Feb: Takeover Panel allows FLSs bid
Share price

10 Feb: Weir first offer $7.92

23 Jan: FLS first offer $7.20 18 Jan: Ludowici preoffer share price $3.50

13 Mar: Weir withdraws from bidding 24 Feb: FLS counter offer $11.00 23 Feb: Weir counter offer $10.00

14 Feb: Takeover Panel application Feb: FLS counter offer $10.00 16 from Weir (truth in takeover test)

Sourc e:

Bloomberg, M ergerMar ket.

14

Private Equity Activity Services Companies

Date Feb 2012 PE Firm Target Target Description

Marine services for the oil & gas industr ies Remote facilities management & accommodation services to the resources sector Pr ovider of hir e equipment for heavy earthmoving Pr ofessional servic es provider to the offshore oil and gas industry Pr ovider of equipment of underground mine communic ation and tracking Pr ovides crushing and screening products and services to the mineral resources industry Supplier of hire equipment to the mining, construction and industrial industries Spec ialised equipment & fuel services to mining, construction, agriculture & transport industries

Feb 2012 Dec 2011

Nov 2011

Mar 2011

Mar 2011

Dec 2010

Dec 2010
Sourc e: MergerMar ket.

15

Todays Themes

1. Mega Capex Cycle 2. Funding Challenges Driving Earlier Exits for Independent Miners 3. Food Security as a Driver for Agricultural Activity

16

Equity Issues Late 2010 and early 2011 were reasonably strong for equity issuance in the metals and mining sector. 2H2011 was weak whilst 1H2012 is off to cautious start.
Metals and mining company equity issuance over A$10m (2006-2012 YTD)

Source:

ThomsonO ne, primary and secondary issuances included.

17

Securing Funding: Continuing Post-GFC Volatility

Market volatility: Equities, FX, Credit

90 80 70 60 Pe rcent 50 40 30 20 10 0 450 400 350 300 250 200 150 100 50 0 -50 -100 00 1100 1000 900 800 700 600 500 400 300 200 100 0 08 09 10 11 12 GFC Greek-Euro crises I & II

AUD/USD, 1m, implied volatility (%)

"Fear index" (S&P 500 volatility VIX index)

Basis poin t

Emerging market sovereign default insurance, right

01 02 03 04

US corporate default insurance, left

05

06

07

Source: NAB Global Markets Research, Reuters EcoWin

Basis poin t

18

Securing Funding: Junior Resource Companies ...further explanation of scarcity of funding

Capital Expenditure Capex Blow -outs (A$b)

Independent mining companies with large capex requirements continue to have difficulty in obtaining funding without a first class asset Economic uncertainty, and the recent volatility in commodity markets have reduced the banks willingness to lend, particularly European banks Dramatic costs blow outs on major projects result in risk aversion especially for those without a track record
Karara (Gindalbie)

Sino Iron (CITIC)

19

Commodity Prices Most commodity prices are still a long way short of historical highs, with the exception of iron ore, coking coal, copper and gold.
5 year trading range, spot price & consensus forecasts (real)
Current spot pr ice 5 year trading range Consensus long ter m real price

% of Current Spot Price

1. Sourc e: Bas ed on 2 year tradi ng range onl y. Bloomberg as at 27 M ar 2012, Energ y & M etals C onsens us F orecasts Januar y 2012 Report.

20

The Mining Value Creation Curve

100%
Indicative Value (% of NPV)

Steady State Commence Operations Construction DFS Financin g

75%

50% PFS Discovery JORC Resource Speculation (Higher Risk)

Seed

JORC Reserve

25%

Investment Analysis
Public Equity

Revaluation (Lower Risk)

Time

Equity / Project Finance

21

The Mining Value Creation Curve Prior to the GFC, companies had more opportunities to Preindependently develop projects. 100%
Indicative Value (% of NPV)
G F C

Steady State Commence Operations Construction

75% DFS 50% PFS Discovery JORC Resource Speculation (Higher Risk)
Seed

Financin

JORC Reserve

25%

g Paladin Kayalekera (2009), Langer Heinrich (2006) Mirabela Santa Rita (2009) Anvil Kinsevere (2009) Lynas Mt Weld (2008) FMG Cloudbreak (2006) Equinox Lumwana (2006) Revaluation (Lower Risk)
Time

Investment Analysis
Public Equity

Equity / Project Finance

22

The Mining Value Creation Curve however, post GFC, companies are finding it harder to fund project development. We see a trend of companies existing earlier. 100%
Indicative Value (% of NPV)
Post-GFC Extract Resources Chalice Gold Mines Aurox Phillips River Citadel Mantra Riversdale

Steady State

75%
African Iron Giralia

Commence Operations Construction Financin g

DFS PFS JORC Reserve

Ferraus Meridian Minerals

50%

25%

Discovery JORC Resource Speculation (Higher Risk)

Seed

Investment Analysis
Public Equity

Revaluation (Lower Risk)

Time

Equity / Project Finance

23

Historical and Forecast Free Cash Flow Majors The hugely cash generative majors are choosing to re-invest into own operations, capital management strategies and some major Tier 1 assets where available.
BHP Billiton Rio Tinto Xstrata

Operating Cash Flow

Capex

For ecast Operating Cash Flow

For ecast Capex

Net cash flow

Source:

RBC Capital Markets: Commodity Assumption Rev ision, Mar 2012.

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Historical and Forecast Free Cash Flow Mid Tiers Mid tier companies with operating assets (= strong cash generation ability) are well positioned to acquire second tier assets and accelerate growth of target companies.
OZ Minerals Western Areas Mount Gibson

Operating Cash Flow

Capex

For ecast Operating Cash Flow

For ecast Capex

Net cash flow

Source:

RBC Capital Markets: Australia Div ersif ied Metals & Mining, Mar 201 2.

25

Recent Iron Ore Acquisitions in Africa by Chinese (1/2) Strategics remain a very important alternative funding source e.g. African iron ore investment by Chinese groups show comfort in managing geopolitical risk. Date Target Value (US$) Stake Acquirer
Jan 2010 $244m 12.5% (company)

Chinese Railway Materials

Tonkolili Iron Ore Project

Mar 2010 Bong Mining Project

$68m

60%

Mar 2010 Simandou Mining Project

$1,350m

up to 45%

Source:

RBC.

26

Recent Iron Ore Acquisitions in Africa by Chinese (2/2)

Date

Acquirer

Target

Value (US$)

Stake

Jul 2010 Tonkolili Iron Ore Project

$1,500m

25%

Shandong Iron & Steel

Aug 2010 Kalia Iron Project

$1,240m

Earn-in agreement (up to 50%)

Source:

RBC.

27

Todays Themes

1. Mega Capex Cycle 2. Funding Challenges Driving Earlier Exits for Independent Miners 3. Food Security as a Driver for Agricultural Activity

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Supply - Arable Land Less global land per capita available for farming.
Arable land and population (billions)

Source:

Chinas arable land declined over 11% from 2000 to 2008 due to urbanization US Conservation Reserve Program unlikely to release material amounts of land South America potential however large structural (particularly transport logistics) constraints US Dept of Ag forecasts just 4.5% growth pa in Brazilian agriculture land area over the next 10 years.
FAOStat.

29 29

Arable Land Per Capita Australia has a very high arable land per capita ratio at over 2 hectares per person.
Histor ical and forecast arable land per capita

Australia

1. 2.

FAOSTAT, Country Stat, http://faostat.f ao.org/ esa.un.org/upp, World Population Database

30 30

Commodity Prices Global agriculture prices have historically moved with other commodities but have yet to reach the recent levels achieved by metals and energy.
Agriculture vs. all commodities 1

1. Source:

Indexed to 100 (Jan 1983) (real) Bloomberg as at 22 Nov ember 2010 using S&P GSCI.

31 31

Agricultural Land The Australian agricultural land market is larger than the commercial property market exceeding A$300 billion in 2010.
Land values by use 20101 Rural values by state (AUD 2010) 1

Pa stor al Wheat shee p High rainfal l

A$ billion Residential Rural Commercial Other Total $2,829 $306 $291 $190 $3,614

NT $600m QLD $63bn WA $29bn SA $25bn

NSW $113bn VIC/ACT $68bn

TAS $7bn

1.

ABS, National Accounts 2010.

32 32

Recent Agricultural M&A Activity

Date Feb 2012 Sep 2011 Jul 2011 Jan 2011 Nov 2010 Jul 2010 Apr 2010 Sep 2009 Apr 2009 n.a. n.a. Stake 10% 75% 99% 100% 70% 51% 100% 100% 100% n.a. n.a.

Acquirer

Target

Target Description
Leading consumer brands in baking, dairy, home ingr edients and edible oils Food distr ibutor

One of the lar gest sugar mills Large agr icultural land portfolio

Pr operty trust holding investments across 21 A U & NZ v iney ards

Pr oducer of milk, dairy and nutritional products based in NZ Sugar producer/ex porter and development of renew able energy products

Grain accumulation & marketing Cattle company Wholesale fund ow ning cattle / sheep production in A U Qatari agriculture and livestock developer
33

Multiple individual A U far ms Multiple individual A U far ms

What Might These Megatrends Mean for M&A in 2012?

1. Continued cautious investment in mining services business by sponsors, particularly those with growing pains and those with exposure beyond the current capex cycle 2. Independents selling more pre-development mining assets prior to construction funding OR partnering with strategies to mitigate funding and political risk 3. Mid tier mining companies utilising their cash generation capacity and becoming more acquisitive 4. Despite high $A continue offshore investment in Australia farmland and food related businesses as long term hedge against global shortages and price inflation

34

Azure Capital Limited ACN 107 416 106

PO Box Z5340 Perth Western Australia 6831 Level 34 Exchange Plaza 2 The Esplanade Perth Western Australia 6000 Phone: +61 8 6263 0888 Fax: +61 8 6263 0878

Innovations in M&A deal strategies, business models and techniques

Aaron Hood, Executive Director, Catalyst Investment Managers

catalyst

M&A Masterclass Perth March 2012

Introduction to Catalyst
Catalyst is currently investing its 8th buyout fund and has in excess of A$1b under management. We currently have 2 investments managed from its Perth office.

Home & Decor Holdings (H DH) Establis hed in December 2010 HDH a cquired specia lty retailers Adairs and Dusk Dusk is b ased in Perth and is Australias leading specialty retailer of candles, home fragrance & giftw are products, w ith over 70 stores at acquisition Value creation w ill be driven by Australia w ide store roll out in both concepts, plus increasingly selling hig her margin ow n brands HDH may look to acquire other specialty retail businesses in the home and decor segment in Australasia

Bhagw an M arine - Acquired in M arch 2012 Bhagw an M arine is the pre-eminent provider of vessels and marine personnel to the Oil & Gas industry in Australia The business currently operates in ex cess of 50 vessels, has a presence in key port locations in WA, NT and Q ld and has a blue chip customer base Catalyst acquired a minority interest in M arch 2012 and provided growth capital to ex pand the vessel fleet. The founding Kannikoski family continue to hold a majority shareholding The Kannikoski family w ere seeking a partner that could help strengthen the balance sheet to ensure the business remains market leader, ahead of an eventual IPO

38

Topics to cover
Valuation & leverage Strategies for getting the deal done Public vs Private Treaty Distressed investing Expansion/Growth capital

39

Valuation & Leverage

Leverage is below the peak, but multiples are climbing:

40

Valuation Expectations
Firms pay for growth ...

ASPAC is not expecting strong growth however ...

41

Strategies for getting the deal done

It is not about financing or debt arrangement anymore (and never should have been) You have to find good businesses Funding will follow Local knowledge, self generated origination and relationships are the key Family businesses and divisions of corporates are still the best sources

42

Private vs. Public

P2Ps are difficult to complete & quite rare in practice Catalyst has completed 2 out of 38 transactions The failure rate is quite high Emotional & powerful shareholders (e.g Flight Centre & Qantas) Attracts counter-bidders (e.g PearlStreet, Directors take a different course (e.g Fosters, Orica, Perpetual etc)

43

Special Situations / Distressed Investing

What is it: Special situations investors look at businesses in financial distress as opportunities for turning the business around outside insolvency by contributing new capital and reviving management. The influx of new funding has the potential to facilitate a restructure of Australian debt outside of formal insolvency.

Who is involved: Specialist turn-around funds Hedge funds Debt traders / Principal desks of Investment Banks

44

Loan to own

45

Distressed Investing Long Process

46

Expansion/Growth Capital Experience

Catalyst currently has 2 investments in its current fund defined as Growth/Expansion Deals

Morris Corporation - Acquired in De cember 2011 Morris Corporation is Australia's leading speci alist provider of catering, a ccommodation and facilities management services to the remote flyin fly-out (FIFO) resources industry The business provides both outsourced facilities management services for FIFO camp ow ners, as well as operating a portfolio of company ow ned and operated sites in the Bowen Basin and Pilbara regions Catalyst acquired a 49% interest in M orris in December 2011 to support the business as it pursues an array of growth opportunities The ex isting shareholders w ere looking for a partner that could provide assistance in corporatisation as w ell as capital to pursue further build , ow n operate camp developments

Bhagw an M arine - Acquired in M arch 2012 Bhagw an M arine is the pre-eminent provider of vessels and marine personnel to the Oil & Gas industry in Australia The business currently operates in ex cess of 50 vessels, has a presence in key port locations in WA, NT and Qld a nd has a bl ue chip customer base Catalyst acquired a minority interest in M arch 2012 and provided growth capital to ex pand the vessel fleet. The founding Kannikoski family continue to hold a majority shareholding The Kannikoski family w ere seeking a partner that could help strengthen the balance sheet to ensure the business remains market leader, ahead of an eventual IPO

47

Catalyst Investment Managers Pty Limited Level 9, 151 Macquarie Street Sydney NSW 2000 Level 4, 91-93 Flinders Lane Melbourne VIC 3000 Level 17, Exchange Plaza , 2 The Esplanade Perth 6000 www.catalystinvest.com.au

A snap-shot view of the regulatory developments and impact on deal approval

Russell Philip, Partner, Corrs Chambers Westgarth

REGULATORY DEVELOPMENTS AND IMPACT ON DEAL APPROVAL

FINSIA M&A Masterclass

Presenter:

Russell Philip Partner

28 March 2012

6426630/2

INTRODUCTION

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INTRODUCTION
CURRENT REGULAT ORY ISSUES

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OVERVIEW OF THE AUSTRALIAN REGULATORY ENVIRONMENT

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THE AUSTRALIAN REGULATORY ENVIRONMENT

Takeovers of publicly listed Australian companies, and unlisted Australian companies with more than 50 members, are regulated under Chapter 6 of the Corporations Act Mixture of black letter and fuzzy letter law ASIC and the Takeovers Panel are the principal regulators in this field If the target is listed on ASX, the ASX Listing Rules also apply Other regulatory bodies may become involved, depending upon the industry sector, the effect of the acquisition on competition and whether the bidder is a foreign person

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REGULATORY FRAMEWORK: CORPORATIONS ACT

Responsible for administration of the Australian Corporations Act Responsible for administration of the Australian Corporations Act Broad powers to enforce, modify the provisions of, and grant exemptions Broad powers to enforce, modify the provisions of, and grant exemptions from, the Corporations Act from, the Corporations Act Publishes Regulatory Guides setting out its policy in exercising powers Publishes Regulatory Guides setting out its policy in exercising powers A peer review body, which is the main forum for resolving takeover A peer review body, which is the main forum for resolving takeover disputes until the bid period has ended disputes until the bid period has ended Makes declarations of "unacceptable circumstances and wide ranging Makes declarations of "unacceptable circumstances and wide ranging consequential orders consequential orders Issues Guidance Notes as to how it will exercise these powers Issues Guidance Notes as to how it will exercise these powers Power to decide appeals from ASICs decisions on modifications and Power to decide appeals from ASICs decisions on modifications and exemptions concerning takeovers exemptions concerning takeovers Primary responsibility under the Act for schemes of arrangement Primary responsibility under the Act for schemes of arrangement Only ASIC and certain other government authorities can commence Court Only ASIC and certain other government authorities can commence Court proceedings between announcement and end of bid period proceedings between announcement and end of bid period Panel may refer a question of law to the Court - this does not happen very Panel may refer a question of law to the Court - this does not happen very often often
28 March 2012 55

ASIC ASIC

TAKEOVE RS TAKEOVE RS PANEL PANEL

COURTS COURTS

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REGULATORY FRAMEWORK: SPECIFIC REGULATIONS

SECURITIES MARKET SECURITIES MARKET
ASX LIS TING RULES ASX LIS TING RULES

ASX Listing Rules will apply if bidder or target is listed, ie continuous ASX Listing Rules will apply if bidder or target is listed, ie continuous disclosure, 15% threshold, related party provisions etc disclosure, 15% threshold, related party provisions etc ASX is responsible for ensuring compliance with ASX Listing Rules ASX is responsible for ensuring compliance with ASX Listing Rules ASIC is responsible for market supervision and ensuring compliance with ASIC is responsible for market supervision and ensuring compliance with ASIC Market Integrity Rules ASIC Market Integrity Rules Foreign entities may need to obtain prior approval from the Federal Foreign entities may need to obtain prior approval from the Federal Treasurer, through FIRB Treasurer, through FIRB Approval is compulsory for any direct investment of >10% by a foreign Approval is compulsory for any direct investment of >10% by a foreign government or their related entities, irrespective of size and also in some government or their related entities, irrespective of size and also in some sensitive areas (ie media) sensitive areas (ie media) M&A prohibited if likely to substantially lessen competition in a market M&A prohibited if likely to substantially lessen competition in a market Parties to voluntarily notify or can be compelled by ACCC Parties to voluntarily notify or can be compelled by ACCC Contravention may result in injunctions to prevent closing, or penalties Contravention may result in injunctions to prevent closing, or penalties and divestiture orders for completed transactions. and divestiture orders for completed transactions.

ASIC MARKE T ASIC MARKE T INTEGRI TY RULES INTEGRI TY RULES

FOREIGN INV ESTM ENT

FOREIGN FOREIGN ACQ UISI TIONS AND ACQ UISI TIONS AND TAKEOVE RS ACT TAKEOVE RS ACT FOREIGN IINVES TMENT FOREIGN NVES TMENT REVIEW BOARD (FIRB) REVIEW BOARD (FIRB)

COMPETITION
COMPE TI TION AND COMPE TI TION AND CONS UMER ACT CONS UMER ACT AUS TRALIAN AUS TRALIAN COMPE TI TION AND COMPE TI TION AND CONS UMER CONS UMER COMMISSION (ACCC) COMMISSION (ACCC)

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REGULATORY FRAMEWORK: SPECIFIC REGULATIONS

FINANCIAL SECT OR FINANCIAL SECT OR
FINANCI AL SECTOR FINANCI AL SECTOR (SHARE HOLDINGS) ACT (SHARE HOLDINGS) ACT AUS TRALIAN AUS TRALIAN PRUDENTI AL & PRUDENTI AL & REGULATO RY REGULATO RY AUTHO RI TY (APRA) AUTHO RI TY (APRA)

Approval required for acquisition of >15% of the shares in banks, building Approval required for acquisition of >15% of the shares in banks, building societies, credit unions and insurance companies societies, credit unions and insurance companies APRA (acting on the delegated authority of the Treasurer) may declare an APRA (acting on the delegated authority of the Treasurer) may declare an "unacceptable shareholding situation" and seek such orders it considers "unacceptable shareholding situation" and seek such orders it considers appropriate (including divestiture of, or restraining the exercise of rights appropriate (including divestiture of, or restraining the exercise of rights attached to, shares) attached to, shares) If the target has an interest in television or radio station, acquisition of shares in it is subject to restrictions Requirements to notify if seeking control (ie >15% or practical control over programming / operations / board) Restrictions on controlling multiple licences Special Federal, State and Territory legislation may apply to mining (such Special Federal, State and Territory legislation may apply to mining (such as under State Agreements), gambling, casinos, trustee companies, as under State Agreements), gambling, casinos, trustee companies, airlines, airports, essential services (ie gas and electricity) and key airlines, airports, essential services (ie gas and electricity) and key infrastructure (such as roadways) infrastructure (such as roadways)

MEDIA
BRO ADCAS TING BRO ADCAS TING SERVICES ACT SERVICES ACT AUS TRALIAN AUS TRALIAN COMMUNI CATIO NS & COMMUNI CATIO NS & MEDIA AUTHORI TY MEDIA AUTHORI TY

OTHER SO URCES OF OTHER SO URCES OF REGULATIO N REGULATIO N

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CURRENT REGULATORY ISSUES

TRUTH IN TAKEOVERS

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TRUTH IN TAKEOVERS

Market participants Market participants should be held to their should be held to their best and final statements best and final statements "A bidder cannot depart from a no "A bidder cannot depart from a no increase statement even if it increase statement even if it compensates those who have sold compensates those who have sold on-market" on-market"

A compensation policy would allow a bidder to A compensation policy would allow a bidder to press holders into accepting early by using a no press holders into accepting early by using a no increase statement and improve the consideration increase statement and improve the consideration later only if necessary for the bid to succeed later only if necessary for the bid to succeed

Summit Resources "The Panel considers the truth in takeovers policy to be a fundamental tenet of the Australian takeovers regime and unwarranted departures by takeovers participants from statements they make to the market are to be taken very seriously"

Rinker / CEMEX Rather than shoot the shareholder by not allowing Rinker shareholders to retain the increased consideration (ie trying to unscramble the egg), ASIC instead requested that the Panel allow affected shareholders to be compensated.

MYOB The Panel ordered market participants depart from unqualified intention statements, as to hold them to such statements would result in unacceptable circumstances

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CASE STUDY
FLSMIDTH GIVES INDICATIVE NO NBINDING SCHEME PROPOSAL TO LUDOWI CI ($7.20) THE AUS TRALIAN REPEATS THE REUTE RS ARTI CLE FLSMIDTH RE TRACTS STATEMENT AND RESERVES RIGHT TO INCREASE PRI CE WEIR MAKES TAKEOVE RS PANEL APPLICATIO N FLSMIDTH SIGNS MIA AND INCREASES OFFER P RICE TO $10.00 IN LINE WI TH UNDERTAKING FLSMIDTH INCRE ASES OFFER P RICE TO $11.00

FLSMIDTH CEO RESPONDS NO WHE N AS KED WHE THE R HE WOULD CONSIDE R RAISING THE BI D PRICE O F $7.20 (REUTERS ARTI CLE )

WEIR GIVES INDICATIVE NO NBINDING SCHEME PROPOSAL TO LUDOWI CI ($7.92)

PANEL ACCEP TS FLSMIDTH UNDERTAKING ALLO WI NG INCRE ASED OFFER S UBJECT TO OUTCOME OF PANE L PROCEEDI NGS

WEIR GIVES BI NDI NG PROPOSAL FOR $10.00 SUBJECT TO PANEL DECLARI NG UNACCEP TABLE CIRCUMS TANCES IN RELATION TO FLSMIDTH PROPOS AL

P ANEL DECL ARES UNACCEP TABLE CIRCUMSTANCES, AND REQUIRES COMPENS ATION LUDOWICI RECOMMENDS FLSMIDTHS OFFER

VS

NO INCREASE WITHOUT DISCLAIMER NO MI A WITHOUT CONDITION PRECEDENT

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PRICING CHART (ASX: LDW)

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SO WHERE TO FROM HERE?

The decision in Ludowici has left the market in an even greater state of uncertainty the Panel had the opportunity to put its foot down, but chose not to foreclose on a potential auction Is the real policy 'best price wins, and that compensation for departing from a best and final statement is just a cost to be factored into doing a deal? Ludowici shareholders have resoundingly benefitted in this case... but at what cost to market integrity? Is it time to change the policy?

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CURRENT REGULATORY ISSUES

ENFORCING THIRD PARTY RIGHTS TRIGGERED ON A TAKEOVER

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CROWN JEWEL DEFENCES

An arrangement with a third party concerning the companys key assets which is triggered in the event of a takeover bid Common examples include:
Pre-emptive rights exercisable upon a change of control in joint venture agreements Accelerated repayment obligations under debt facilities if a change of control occurs Termination of leasing arrangements if a change of control occurs

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CASE STUDY 1: PRE-EMPTIVE RIGHT ARRANGEMENTS

RE AMP Shopping Centre Trust (ART)
n

AMP Life

AMP Life claimed it had pre-emptive rights to acquire 5 shopping centres (which made up 63% of ARTs assets) if Centro replaced the RE of ART without its consent Panel declared that unacceptable circumstances existed because:
n

Co-owner

Co-owner

the pre-emptive rights would deter a bid for ART by a bidder that was not acceptable to AMP Life the pre-emptive rights had not been adequately disclosed to unitholders unitholders had not consented to the grant of the pre-emptive rights

5 shopping centres (63% of ARTs assets)

n

Panel ordered AMP Life to refrain from exercising its pre-emptive rights
29 March 2012 65

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CASE STUDY 2: BOARD CHANGE TRIGGERING ACCELERATED REPAYMENT OF FINANCING

n

Effecting a Board spill would trigger a previously undisclosed review event under existing financing arrangements, potentially resulting in an accelerated repayment obligation arising Takeovers Panel declines to conduct proceedings
The relevant clauses do not affect the voting power of shareholders in RCL, or act as a fetter on their voting discretion.

Distinguished the AMP decision

The assets over which AMP Life had a right to purchase were seen irreplaceable and uniquely valuable Vs a right to require repayment of debt which is common to all lenders
n

Curiously, the intentions of the lender were not considered by the Panel

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29 March 2012

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WHERE DOES THIS LEAVE US?

n

Whether third parties can enforce rights triggered on a takeover bid is likely to depend upon:
n n

the nature of the rights themselves and their likely effect on control whether they have been disclosed to target shareholders previously, and the nature of that disclosure whether target shareholders have consented to the grant of the third party rights

Is it fair that the Panel can deny an innocent third party the ability to enforce their contractual rights? How do third parties protect their rights?

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

67

CURRENT REGULATORY ISSUES

PRODUCTION TARGETS

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

68

DISCLOSURE OF PRODUCTION TARGETS

n

What is a production target? How do they fit within JORC? If they are just a target, how can they be misleading? What is all the fuss about?

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

69

RECAP ON THE JORC CODE

Figure 1, JORC. General relationship between Exploration Results, Mineral Resource s and Ore Re serve s

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

70

FORWARD LOOKING STATEMENTS AND PROSPECTIVE FINANCIAL INFORMATION

n n

Production targets are clearly forward looking Need a reasonable basis for making forward looking statements
n n n

Producing assets Development assets Greenfields exploration assets

Disclosure of supporting information to enable users to assess relevance and reliability Is a disclaimer enough?

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

71

WATCH THIS SPACE!

n

The outcome of the ASX review should provide significant clarity on what is acceptable regarding disclosure of production targets
n

Expected late 2012

The ability to provide such information, and extent of accompanying disclosure, is likely to depend upon confidence levels in economically extracting the ore from the ground Until further guidance is available, extreme caution should be exercised in disclosing production targets

REGULATO RY DEVELOPME NTS AND IMPACT O N DE AL APP ROVAL

29 March 2012

72

PROFILE
Qualifications Masters of Laws, University of Sydney (2004) Bachelor of Laws / Bachelor of Commerce, University of Western Australia (1997) Graduate Diploma in Applied Finance and Investment with FINSIA Career Summary
Russell specialises in advising public and private companies on a wide range of corporate transactions, including regulated and unregulated mergers and acquisitions, foreign investment matters, equity and hybrid fundraisings, corporate reconstructions, capital management and general corporate and compliance matters. He has significant experience in the mining, mining services, technology and financial services industries. Russell is the course facilitator for the Australian Institute of Company Directors in The Boards role in M&A transactions, and is a guest lecturer at the University of Western Australia on corporate law related matters.
Russell Philip Partner Tel +61 8 9460 1673 Mob 0400 299 098 russell.philip@corrs.com.au

January 2012

73

Networking refreshment break

30 Minutes, recommence workshop at 10.40am

Linking due diligence to the value of the deal

Roger Port SF Fin, Partner, PwC

pwc.com.au

Linking Due Diligence to the Value of the Deal

Presentation to Finsia M&A Workshop Roger Port 28 March 2012

Agenda

Deal Readiness Value Drivers Vendor Due Diligence

FINSIA PwC

March 2012 77

Deal Readiness

FINSIA PwC

March 2012 78

Why does M&A consistently fail to meet its objectives?

It is consistently reported that the majority of M&A transactions fail to add value for shareholders: 70% of acquirers better off if acquisitions not undertaken 83% of mergers produced no net shareholder value benefit two thirds of merged groups perform well below industry average There is no easy answer to the question some possible reasons include: poorly defined strategy or overly optimistic objectives inadequate transaction due diligence bad management and ineffective post acquisition execution changes in market conditions and competition
FINSIA PwC March 2012 79

Is it any surprise that M&A regularly fails? the M&A context is often complex
Actions of competitors Changing market conditions

Limited time

Management incentives

Incomplete information

Availability and cost of finance

Ego

Organisational culture

Risk appetite

Shareholder requirements

Access to M&A skills

Management distraction

Integration issues
FINSIA PwC

Clash of cultures
March 2012 80

Linking due diligence to the value of the deal

A standard checklist approach fails to reflect the unique characteristics of each company and each deal Effective due diligence requires an understanding of internal situation, capabilities and strategy, and a tailored and realistic assessment of the keys to realising value from the deal Deal readiness and preparation is critical as time and information is often limited, and major decisions need to be made quickly Multi-disciplinary skills are required to contribute to a successful due diligence investigation valuation, commercial, financial, legal and technical An overriding value focus is critical to the effectiveness of the due diligence process

FINSIA PwC

March 2012 81

What is due diligence?

Investigation of a target based on a sound understanding of the acquirers current strategy, situation, skill base and vulnerabilities Investigation of value assumptions which assists to explain the value proposition and provides effective input into the final investment decision Provides insight into potential deal breakers, significant risks and commercial issues Considers the post acquisition integration plan and realisation of material synergy benefits

FINSIA PwC

March 2012 82

Deal readiness
Many companies are consistently underprepared for M&A activity whether they are a potential target or an acquirer M&A is a skill that must be developed Experience suggests that frequent M&A participants have better prospects of success some empirical evidence to this effect An incomplete transaction can be a valuable learning experience, which can inform corporate strategy including future M&A transactions Deal readiness activities can inform corporate strategy, lead to greater understanding of value drivers and improve the resilience of the business Deal readiness can be considered from a buyer and a sellers perspective

FINSIA PwC

March 2012 83

Deal readiness divestment framework

Divestment strategy and enhanced business planning should be undertaken early to achieve the optimum divestment result Common consequences of being under-prepared are: significant value can be lost due to a valuation discount being applied by the buyer to offset perceived unknowns or risks; or a buyer is deterred due to perceived risks associated with the opportunity, thereby reducing competitive tension in the process.

Divestment Framework

Stage 1 Strategic Options Review

Stage 2 Preparing Business for Sale

Stage 3 T ransaction Execu tion

Determi ne shar ehold er objecti ves

Prepare d etail ed strategic plan

Strateg y & planning

Transaction op tions analysi s

Opti mise bus ines s operation s

Deal & market anal ysis

Assess valu e and buyer uni ver se

Sanitise f inancial/l egal/tax records

Transaction proc ess & negotiation

Establish preferr ed strategy

Oth er sharehol der plann ing (e.g. tax)

Settlem en t and compl etio n

PwC

84

Deal readiness review of value drivers

Key Influencing Factors (examples):

Barri ers to en try
Strength of br ands and rel ated intellectual property Scal e of operations and rel ati ve effici enc y Production know how Strength of dis tribution networ ks Sal es r elations hips and s trength of cus tomer c ontracts

Other Key Factors

Intern al Factor s
Future earni ngs and cas h flow

profil e (including opportuni ties and risks)

Bal ance s heet compositi on Strength of manag ement team and

gover nanc e s truc tur e

Organis ati onal capabiliti es & c ulture Simplicity of owners hip struc ture Potenti al for oper ational

Su pply Characteristics
Level of c onc entr ation and flexi bility of s uppl y Generic vs . s pecialis ed natur e of inputs Market bas ed vs . neg oti ated prici ng of inputs Nature of any s uppl y contrac ts ( pricing, tenure)

Key In dustry Play ers

Level of c ompetiti on / concentr ati on and c onduc t of players Competitors as potenti al acquirers (and extent of any synergies and cons olidati on benefits ) Over all industr y gr owth and trends Over all industr y margins and retur ns

Cu stom er Ch aracteri sti cs

Level of c onc entr ation (and thus r elianc e) Spr ead of c hannels and routes to mar ket Customer stic ki ness Nature of any c ustomer relati onshi ps and/or contrac ts Market tr ends

impr ovement (and/or s ynergies)

Ability to retai n key employees Lac k of percei ved liabilities fr om

historical events
Quality of s ys tems and proc ess es

(IT, acc ounti ng, c ontract variations)

Extent of any sur plus assets and

liabilities Ext ern al F actor s

Comparabl e c ompany trading and

Al ternativ es
Existence of any alter nati ve products and s er vices New tec hnol ogical devel opments and other innovati ons

historic industr y trans acti on multipl es

State of debt and eq uity mar kets Impact of any potenti al reg ulator y

chang es

PwC

85

Maximising value from deal readiness

Demon stratin g the strengths and potent ial of the Busine ss is key t o value max imisation

Be P

r epa

r ed
Effective negotiat ion with attention to detail

+
T i gh o t Pr c e ss
Competit ive tension Prepare for and pre-empt like ly quest ion s/ issues

Identify growth option s for inve stors / buyers

Quantify valuable synerg ie s for key trade buyers

Active management to realise the value from deal readine ss activitie s and planning

Shareholder value

Exceed inve stor / buyer expectations

Strict timetable

Th e Busin ess

Lack of focus in managin g the business durin g the sale / se lldown proce ss

Lack of confidentiality

Delay s in agreein g term s and condition s

Incomplete / poor quality of inform ation

Concealment of issue s

and to minim ise the impact of potential risks and process complexit ies

PwC

86

Value Drivers

FINSIA PwC

March 2012 87

Value driver decision tree

Produc t base Rev enue Price Vo lumes Existi ng p ro ducts New products Customer va lue p r oposi tio n Comp et itive ten sio n Demand -- c onsumer se ntiment Capa city

Cas h cos ts

Sel lin g Conv er sion Reso ur ce acqui sition Over head Ta x rates Inter nal capital structur e Incent ives Re ceiv able s Inven tor ies Cr ed itor s Inn ovation Ma rketi ng Peop le Proce ss In terest r a tes Mar ket risk Syst ema tic risk correl atio n Gear in g du ra tion of co mp etitive ad vanta ge spec i ic r is ks f

Tax r ate

Enterpr is e value Eq uity val ue

Wo rking c apita l

Fixed capi tal Debt

Cor porate V alue

Mi nority Gov er nance Dis counts Size Mar ketab il ity/liqui dity Ove rh ang

Wei ghte d Av er age Cost of Capi tal Compet itive adva ntage p er iod

FINSIA PwC

March 2012 88

Weighted average cost of capital assessment

Accurate cost of capital assessment is critical to target evaluation and transaction pricing Cost of capital is a key component of the value equation and whether shareholder value is enhanced Some acquirers underestimate the true cost of capital, or have poorly developed frameworks for accurate and robust assessment Weighted average cost of capital (nominal or real, after tax basis) needs to be effectively linked to cashflow assessment Topical current issue low bond rates and how to incorporate into cost of capital assessment low bond rates do not necessarily mean reduced risk of equity investment

FINSIA PwC

March 2012 89

Quality of earnings
Objective of quality of earnings analysis is to provide a sound basis for the assessment of sustainable future earnings or cashflows Reported earnings can incorporate the impact of many factors: Effect of changes in market conditions Changes in profitability as volumes, costs and prices change Relative bargaining power of customers and suppliers Effect of discontinued operations Acquisition or commencement of new businesses Private owner and related party transactions One-off transactions and incidence of disputes and variations Changes in accounting policies and practice
FINSIA PwC March 2012 90

Quality of earnings
Earnings trends can be obscured without specific recognition and understanding of these factors Robust assessment of recent earnings provides effective insights into the key value drivers of significance to the target business The impact of changes in volumes, prices and costs should be analysed Reported earnings and EPS impact of the acquisition likely to be critical for most buyers

FINSIA PwC

March 2012 91

Working capital and cashflows

Focus on value: Working capital impacts price and funding

Net cash m ovem ent fro m 1 M arch 2011 to 16 Au gust 2011

1 0,0 00 8,0 00 6,0 00 4,0 00 2,0 00 (2 ,00 0) (4 ,00 0) (6 ,00 0) (8 ,00 0) 1 1 r a M 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - - - - - r r r r r r r r r r r r r r r r r a a a a a a a a a a a p p p p p p M M M M M M M M M M M A A A A A A - - - - - - - - - - - - - - - - 3 5 7 9 1 3 5 7 9 1 1 2 4 6 8 1 1 0 2 1 1 1 1 2 2 2 2 2 3 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - - - - - r r r r r p p p p p y y y y y y y y y y y y A A A A A a a a a a a a a a a a a - - - - - M M M M M M M M M M M M - - - - - 4 6 8 0 0 - - - - - - 4 6 8 0 2 4 2 2 2 3 3 2 4 6 8 0 2 1 1 1 2 2 2 1 1 No r ma lised ne t ca sh mo ve me nt 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - n n n n n n n n u u u u u u u u J J J J J J J J - - - - - - - 3 5 7 9 1 3 1 1 1 1 5 7 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - l l l l l l l n n u u u u u u u u u J J J J J J J J J - - - - - - - - 1 3 5 7 9 1 3 9 0 1 1 2 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - l l l l l l l l u u u u u u u u J J J J J J J J - - - - - - - 5 7 9 1 3 5 7 9 1 1 1 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 - - - - g g g g g u u u u u A A A A A - - - - 8 0 2 1 1 1 1 4 6

Ow ne r in ject ion s/withd raw als int o bu sine ss

Cum ul ativ e n et c ash mo vem ent

FINSIA PwC

March 2012 92

Composition and quality of assets and liabilities

Traditional financial due diligence has focussed on assets and liabilities on the balance sheet Forecast cashflows and transaction price likely to imply a substantially different value for the underlying assets and liabilities of the target Substantial values for intangible assets are often paid, particularly in the services sector compare net tangible assets per share and price paid per share Prominent intangible assets can include: Customer contracts and relationships Brands Franchise agreements Goodwill (location, assembled workforce, know-how, excess capacity, growth)
FINSIA PwC March 2012 93

Composition and quality of assets and liabilities

Due diligence on these intangible assets is likely to require a multidisciplinary approach (beyond traditional balance sheet due diligence) covering: Management of customer contracts and customer engagement Brand management and marketing effectiveness Workforce retention and integration/cultural fit issues Cost of excess capacity and strategies for growth An accurate picture of these intangible assets (and effective management of these assets post acquisition) is likely to be critical to the acquisition strategy A preliminary purchase price allocation exercise will highlight the intangible asset values and the potential profile of amortisation affecting the reported earnings in future years
FINSIA PwC March 2012 94

Post acquisition synergy benefits

Due diligence on material synergy benefits is required pre-acquisition simple high level identification is not enough High level pre-acquisition estimates of synergy benefits, cost to achieve and time taken are often too optimistic Development of a synergy realisation plan is essential if these are material to the transaction the management team charged with achieving the synergies needs to be closely involved in this due diligence work in the pre-acquisition phase Cultural issues need attention and careful but decisive management The cost of delay in the realisation of synergy benefits is high speed over precision is likely to be better

FINSIA PwC

March 2012 95

Vendor Due Diligence

FINSIA PwC

March 2012 96

Vendor due diligence rationale

Assists a vendor to maintain control over the sale process and the release of information to potential bidders Facilitates competitive tension between bidders as bidders can be brought up to speed very quickly Independent review provides confidence in the robustness of data and reduces the likelihood of any surprises arising from bidders Opportunity for the vendor to review and assess upsides and risk areas to optimise negotiating position Mitigates attempts by bidders to use due diligence and exclusivity period to negotiate better terms An integrated vendor due diligence report provides the vendor with a unique opportunity to have input into the bidders view of the commercial, strategic and financial position of the business
FINSIA PwC March 2012 97

Vendor due diligence advantages

Vendors Minimises disruption to the underlying business and its management as there is only one full scope due diligence process Allows management early ownership to address any diligence issues Facilitates managements understanding of the sale process Purchasers Can aid in saving time, cost and aggravation through a detailed independent view of the business Confidence in the basis for offers and underpins the financing process Better due diligence outcome as it is less rushed and the team has better access to the business Better use of buyers time in exclusivity phase
FINSIA PwC March 2012 98

Vendor due diligence disadvantages

Preparation of a vendor due diligence report takes time which might delay the start of a sale process The time involved in preparation may potentially distract management from day-to-day operations The vendor incurs the cost of the vendor due diligence report regardless of whether or not a sale is realised Further due diligence will still be required (although on a limited basis) Confidentiality may be compromised by providing such a detailed report earlier than normal in the transaction timeline

FINSIA PwC

March 2012 99

Thank you

Roger Port Email: roger.port@au.pwc.com

PANEL DISCUSSION
Identifying the hot sectors and the top sources of deal flow
Chair: Mark Paganin SF Fin, Partner, Clayton Utz
Aaron Hood, Executive Director, Catalyst Investments Russell Philip, Partner, Corrs Chambers Westgarth Roger Port SF Fin, Partner, PwC

Chairs closing remarks

Mark Paganin SF Fin, Partner, Clayton Utz

Upcoming West Australian Events

YFP WHOS IN THE ROOM? Networking cocktails
29 March 2012

YFP INSIDE THE BOARDROOM Ashurst

4 April 2012

YFP INSIDE THE BOARDROOM Bankwest

2 May 2012

LEADERSHIP LUNCHEON Hon Christian Porter MLA

22 June 2012