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STRICTLY CONFIDENTIAL

FOR USE IN THE IB CHALLENGE


CASE STUDY ONLY

2015 UBS Investment Banking Challenge


Corporate finance overview

April 2015

Table of contents
Section 1

Introduction to UBS

Section 2

Why would a company engage in M&A activity?

Section 3

Valuation methodologies

Section 4

Determining the offer price

17

Section 5

Takeover bid versus scheme of arrangement

19

Section 6

Q&A

21

Section 1

Introduction to UBS

UBS is the leading investment bank in Australia


UBS has successfully maintained its position as the leading investment bank in the Australian market over a
long period of time
Australian advisory transactions (2014)1,2
Rank

Rank value
(US$bn)

Financial adviser

Market
share (%)

Number of
deals

Best Investment Bank (2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013)
Best M&A DealTransurban Consortium/QML (2014), NSW Ports Consortium (2013), Foxtel/Austar
(2012), Noble/Gloucester Coal (2009), St George/Westpac (2008), AGL/Alinta (2006), Foodland (2005)

UBS

38.0

35.1

30

Goldman Sachs

37.6

34.8

29

Credit Suisse

32.1

29.7

15

Citi

31.9

29.4

Deutsche Bank

30.4

28.1

10

Macquarie

30.0

27.7

42

Morgan Stanley

27.5

25.5

15

BAML

26.7

24.7

12

Rothschild

20.6

19.1

14

ASIAMONEY

10

JP Morgan

20.6

19.0

12

Best Investment Bank (2008, 2009, 2010, 2011, 2012)

2013

2012

2011

2010

2009

UBS

Goldman Sachs

2008

2007

10

16

15

12

12

20

Deutsche Bank

14

11

Macquarie

Morgan Stanley

10

10

15

17

18

17

10

Rothschild

11

12

15

10

20

15

JP Morgan

12

BAML

Best IPOHealthscope (2014), Virtus Health (2013), QR National (2010), Boart Longyear (2007)
Best Equity-Linked DealSuncorp (2013, 2012), ANZ (2011), Westpac (2009)
Best Local Bond DealAOFM (2013), BP (2012), AOFM (2011),Tabcorp (2009),
AMP (2008), Swiss Re (2007)

Best M&A Adviser (2009, 2010, 2011)

Rank

Citi

Best Equity House(2006, 2007, 2010, 2011, 2012, 2013)

Best Equity Arranger in Australia (2007, 2009, 2010, 2011, 2012)

Australian advisory transactions (20072013)3

Credit Suisse

Most Innovative DealWestfield/Scentre demerger (2014), Origin Energy EUR500m hybrid (2011);
PBL Media spin off and LBO (2006)

Source:
Thomson Financial, UBS
Notes:
1
Any Australian involvement, 2014 completed deals for the year ending December 2014
2
Total market share may be greater than 100% as full credit is given to each eligible adviser
3
Any Australian involvement, completed deals

Best IPOFonterra (2012), QR National (2010); Trade Me (2011)


Best M&A Foxtel/Austar (2012), AMP/AXA (2011);
Vodafone/Hutchison (2009)

Best Investment Bank (2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013)
Best M&A Bank (2005, 2006, 2012)
Best Overall Broker (2006, 2007, 2008, 2009, 2010, 2011, 2012)
Best Research, Derivatives, ECM & Dealing (2003, 2004, 2005, 2006,
2007, 2009, 2010, 2011, 2012, 2014)
Best Equity Capital Markets Bank (2010, 2011, 2012, 2013, 2014)

Best Investment Bank (2007, 2009, 2010, 2011, 2013)


Corporate Finance House of the Year M&A (2011)
Corporate Finance House of the Year Equity (2010, 2011, 2013)
M&A of the YearNSW Ports Consortium (2013), AMP/AXA (2011)
IPO of the YearTrade Me (2012), QR National (2011)

Australian landmark M&A transactions


Some of our more complex and high profile recent transactions include

Current

Current

Current

February 2015

Financial Adviser to NSW Treasury


on the c.A$20 billion NSW
Electricity Networks transaction

Financial Adviser to BHP Billiton on


the demerger of its non-core assets
to form South32

Financial Adviser to Recall Holdings


Limited in relation to the A$2.2
billion takeover proposal by Iron
Mountain Incorporated

Financial Adviser to Wilmar and


First Pacific in relation to the A$2.0
billion acquisition of Goodman
Fielder

February 2015

February 2015

December 2014

November 2014

Financial Adviser to Coca-Cola


Amatil ('CCA') in relation to the
US$500 million investment by The
Coca-Cola Company into CCA
Indonesia

Financial Adviser to Federation Centres


on its merger with Novion Property
Group to create one of Australia's
leading REITs, with A$22.2 billion in
assets under management across the
full retail asset spectrum

Financial Adviser to Hoyts Group on


its sale to ID Leisure Ventures
Limited for an undisclosed sum

Lead Financial Adviser to TPG


Capital, PAG Asia Capital and
Ontario Teachers Pension Plan in
relation to the A$1.2 billion
acquisition of DTZ

November 2014

October 2014

August 2014

July 2014

Sole Financial Adviser to Expedia


Inc on the A$703 million
acquisition of 100% of Wotif
Group by way of a Scheme of
Arrangement

Sole Financial Adviser to Aristocrat


Leisure on the US$1.3 billion
acquisition of Video Gaming
Technologies

Financial Adviser to Australian


Retail Investments in relation to
Woolworths Holdings' A$2.2 billion
acquisition of David Jones and
A$213 million takeover bid for the
minorities in Country Road

Financial Adviser to Aurizon


Holdings in relation to its A$1.4
billion joint bid with Baosteel
Resources International for Aquila
Resources

Investment Banking at UBS


Investment banking in
its traditional form is
concerned with
advising corporate
clients on mergers and
acquisitions (M&A), as
well as raising funds in
the capital markets

Information
barrier
Investor Client Solutions

Corporate Client Solutions

Equities Trading & Sales

Mergers and Acquisitions

Rates & Credit Trading and


Sales

Equity Capital Markets


Debt Capital Markets

Foreign Exchange
Leveraged Capital Markets
Securities Research
(also behind research information barrier)

Corporate Lending

Prime Services

Industry sector teams

Public information

Non-public information
Support functions / logistics

Section 2

Why would a company engage in M&A activity?

Why would a company engage in M&A activity?


A company can engage
in M&A activity for a
variety of reasons

Business growth
M&A activity allows a company to grow more rapidly than would otherwise be possible
through its existing operations
When a company acquires another company, it gains control of the targets assets, enabling
the acquirer to utilise them to maximise market share and cash flows earned

Synergies
Synergies exist when a company can acquire another company and extract additional value
from the ownership of that company. They make the target company more attractive and
valuable to the acquiring company than it would be on a stand-alone basis

Common synergies include centralisation of certain activities (such as marketing, accounting


and back-office functions) and sharing of certain assets

Strategic advantages
A strategic acquisition can often benefit the business operations of the acquiring company by
expanding operations to include downstream or upstream functions related to the acquirers
business
This often allows exposure to growing markets or businesses which may not be presently
within the field of expertise of the acquirer

Section 3

Valuation methodologies

Valuation methodologies
Company valuation is a
critical part of M&A
advice and there are
three principal
methodologies

Discounted cash flow (DCF) valuation


Has a strong theoretical basis and is commonly used in specific industries
(e.g. mining) and in the valuation of start up projects where near term earnings may be volatile
Assumes that the value of a company is equal to the risk adjusted present value of its future
cash flows
Determines net present value based on free cash flow, terminal value and cost of capital

however, remember
that valuation is an art
not a science and no
single valuation
method will provide
the right answer

Relative valuation
Most appropriate for businesses with a substantial operating history and a consistent earnings
trend that is sufficiently stable to be indicative of ongoing earnings potential
Involves capitalising earnings based on comparative trading or transaction multiples and gives
an indication of value relative to a companys peers
in the real estate sector another common relative valuation measure is premium / discount
to net tangible assets (NTA)
Leveraged buyout (LBO) analysis
Leveraged buyouts are acquisitions funded with a significant proportion of debt (leverage) and
little equity
LBO analysis determines returns based on acquisition price and optimal leverage
It is used almost exclusively for financial sponsor or private equity transactions
9

Industry specific valuation techniques


While all valuation
perspectives are
important, the
approach to valuation
varies from industry to
industry and company
to company

General industrials,
Consumer etc.

Assumed to be infinite life assets

Mining

Finite life asset

Common to consider comparable trading multiples and a DCF model

Most common approach is DCF

Infrastructure

Similar to mining, typically also finite life assets


Most common approach is DCF

Financial
institutions

Focus on post-interest cash flows

Real estate

Assumed to be infinite life assets

Use Dividend Discount Model (DDM), as opposed to DCF model

Common approaches include trading multiples, NAV and DCF

10

Company valuekey principles


Company value can be
expressed in two ways

Market capitalisationrepresents the equity value of a firm

Market
capitalisation

Shares
outstanding

Share
price

Enterprise valuerepresents total firm value (both debt and equity)

Enterprise
value

Net
debt

(total debt
less cash)

Market
capitalisation

Hybrids

(i.e. convertible
notes)

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DCF valuation
DCF valuation is the
process of discounting
future cash flows

Model layout and presentation

Models need to be thoughtfully constructed. This is important to ensure model integrity and the ability to
convey information to the appropriate users. Criteria for good model design include:
accuracy

Key components of a model include:

flexibility
ease of understanding
summary page
assumptions (e.g. depreciation policy, product price, volume growth, tax rate)
NPV outcome
NPV sensitivities
financial statements (profit and loss, balance sheet, cash flow)
detailed calculations

identify key variables


start from base year and project forward for each variable

Keep it simple!

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DCF valuation
Sensible cash flow
forecasts are the key to
any DCF valuation

Forecasting future cash flows

A cash flow forecast should be prepared on an assumed time frame (do not forecast out too long because
estimates may become unreliable, generally 10 years is acceptable)

Although there are several variations of cash flow that can be used, in order to value a firm as a whole, it is
common to use the Free Cash Flow available to both debt and equity holders
Free Cash Flow to Firm (FCFF)
Description

Represents the free cash flow available to all members of the firm including both debt
holders and equity holders

Discount rate

Weighted average cost of capital (WACC)

Cash flow calculation

EBIT
- Tax
- Increase in working capital
- Capex
+ Depreciation
= FCFF

Future estimates should be driven by a set of growth and margin assumptions which will help deliver the
future EBIT. These drivers should be based on historical, industry and economic data as well as any
published management guidance

Cash flows are then discounted back to present value using the relevant discount rate (i.e. WACC)

13

DCF valuation
Terminal value

A second component of a DCF valuation is the terminal value

This represents the value of the firm in perpetuity and is based around a perpetual growth rate (usually
equal to the growth rate of the economy in which the company principally operates)

The formula for calculating the terminal value is

TV

Final cashflow (1 g )
WACC g

The terminal value should then be discounted back using the appropriate discount rate

Calculating value per share

Combining the present value of future cash flows together with the present value of the terminal value
returns the total enterprise value for the firm

Deducting the net debt (total debt less cash) from enterprise value allows for a firms equity value to be
calculated, which in turn can be used to calculate fair value per share

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DCF valuation

The appropriate discount rate will depend upon


the rates of return on an investment demanded
by the providers of capital (debt or equity)
The WACC represents the average cost of
borrowing across equity and debt, weighted by
the relative amounts of each used in the capital
structure of the firm

a REIT is not subject to any tax shield on the


debt it has in its capital structure

Cost of debt

A key component of any DCF calculation is the


discount rate applied to future cash flowsused
to derive the present value of those cashflows in
"today's dollars"

Cost of hybrids

Cost of equity

What is WACC?

Target weightings in
optimal capital
structure

Equity risk
premium
5.7%

Geared equity
beta
0.800.90

Cost of equity:
9.910.4%

60%

Cost of debt:
7.5%

25%

Cost of hybrid:
8.0%
(assumed interest
cost on nonpublicly traded
convertible note)

15%

Risk free rate


5.3%

Debt risk
premium
2.20%

Depends on
particular hybrid
instrument

WACC
9.09.3%

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Relative valuation

Relative valuation is based on the principle of capitalising earnings based on comparable trading or
transaction multiples

Multiples can be applied to a number of different earnings (or cash flow) measures including EBITDA,
EBIT or NPAT. EBITDA often allows a comparison between many different companies as it is not
affected by differences in the treatment of depreciation and amortisation or capital structure choices

Multiples are an attractive valuation tool because they are easy to compute, however they are static
in nature

Common multiples include


Enterprise Value/EBITDA (EV/EBITDA)
Enterprise Value/EBIT (EV/EBIT)
Market Capitalisation/NPAT (P/E)

When using a multiple for valuation purposes, care should be taken to ensure that the assumptions and
circumstances underlying the multiple are clearly understood

It is also important to ensure that companies with comparable operations are selected (quality of
comparables is more important than quantity)
Low

Midpoint

High

Comparable trading or transaction multiple

8.0x

9.0x

10.0x

Forward EBITDA ($m)

100

100

100

Implied enterprise value ($m)

800

900

1,000

Less net debt ($m)

250

250

250

Implied equity value ($m)

550

650

750

Shares on issue (m)

100

100

100

Implied value per share ($)

5.50

6.50

7.50

Computing a multiple valuation EV/EBITDA

Note:
1 Start with a midpoint multiple (i.e. the average EV/EBITDA multiple of a group of comparable companies) and then adjust upwards and
downwards to create a valuation range

16

Section 4

Determining the offer price

Offer level determinants


The value of a takeover
offer is a key
determinant in the
outcome of a deal, as
well as the reaction of
the target board and
shareholders

What determines offer level?

The value of 100% of a company may differ from


the value of its portfolio interests

The owner of 100% of a company has direct access


to cash flow and taxable income, controls the board
of directors, appoints senior management and
controls all investment, financing and
strategic decisions

As a result, a premium, known as a control premium,


is offered when a company makes a bid for 100%
of another company
Empirical evidence of this premium is observed in
the level of takeover premia and in the Australian
market this is, on average, in the range of 20-40%

it should be noted that this is not the sole


determinant of the quantum of takeover offer
and computing an offer value is not as simple as
adding a 30% premium to a base case
valuation or the last traded price of the target

The offer price will be based upon

valuation

the strategic significance of the target

expected synergy levels

ability of the bidder to increase future value


through improved operational processes and
capital structure

other parties competing to acquire the target

growth profile of the target

Australian takeover premiaacquisitions


>A$50m since 2003
45%

c.40%

40%

c.35%

35%

30%

c.30%

25%
One day

One week

Four weeks

Note:
1 Represents average of premium to spot price in time period
following announcement

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Section 5

Takeover bid versus scheme of arrangement

Takeover structuresScheme vs. off-market takeover


There are two main
ways to implement a
takeoveran offmarket offer and a
scheme of
arrangement

Off-market takeover offer


Description

Not only a hostile structurecan be efficient for


agreed deals
Offer to all shareholders with statutory obligation
under Chapter 6 on bidder to proceed
Offer may be conditional, but no self-defeating
conditions

Timetable regulated by Corporations Act


Ultimate length subject to acceptances and
compulsory acquisition process

Bidders statement must contain all material


information
Targets statement must include Boards
recommendation and all material information

Timetable

Documentation

Scheme of arrangement

Requires Target board support, so only possible if


friendly
Bidder and Target sign an implementation
agreement to initiate the process which is subject to
Court approval
ASIC must confirm no objections to scheme
Timetable largely driven by Corporations Act and
Court
More certain timetable than offer
Target takes primary responsibility for Scheme
Booklet
ASIC has a 14 day review before the Booklet is
presented to the Court

Independent
expert

Independent experts report required if: (a) bidder holds more than 30% of target, or (b) common directors.
But, in any case, frequently used by targets as defence strategy or to support a scheme

Compulsory
acquisition

90% of all shares, and


75% of the securities that the bidder offered to
acquire

Of those shareholders who attend and vote at the


meeting: 50% in number, and 75% in value

Deal protection

Bidder subject to statutory obligation to proceed


with bid

Lack of statutory requirement to proceed has seen


some foreign bidders walk away from schemes with
minimal consequence
Break fees and minimal conditions the key protection

Other
considerations

Scope to structure conditions that a Court may


object to under a Scheme and to change terms and
conditions during offer period
Investors rarely accept conditional offers
conditions may be dropped during offer

Perception of agreed deal potentially reduces third


party / interloper interest
Flexibility in structuring complex transactions,
though limited flexibility post first Court hearing
All or nothing outcome100% shares acquired
if Scheme approved or no shares acquired
20

Section 6

Q&A

This presentation has been prepared by UBS AG and/or its affiliates (together, UBS) for the exclusive use of the party to whom UBS delivers this presentation (the Recipient) using information provided by the Recipient and other publicly available information. You
acknowledge and agree UBS has not independently verified the information contained herein, nor does UBS make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this presentation. This
presentation should not be regarded by the Recipient as a substitute for the exercise of its own judgment and the Recipient is expected to rely on its own due diligence if it wishes to proceed further.
The valuations, forecasts, estimates, opinions and projections contained herein involve elements of subjective judgment and analysis. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other
business areas or groups of UBS as a result of using different assumptions and criteria. This presentation may contain forward-looking statements. UBS undertakes no obligation to update these forward-looking statements for events or circumstances that occur subsequent to
such dates or to update or keep current any of the information contained herein. Any estimates or projections as to events that may occur in the future (including projections of revenue, expense, net income and stock performance) are based upon the best judgment of UBS
from the information provided by the Recipient and other publicly available information as of the date of this presentation. Any statements, estimates or projections as to UBS fees or other pricing are accurate only as at the date of this presentation. There is no guarantee that
any of these estimates or projections will be achieved. Actual results will vary from the projections and such variations may be material.
This presentation may also contain references to UBS Research. The UBS Research Department produces research independently of all other UBS business areas and UBS AG business groups and no other person or department within UBS may directly or indirectly offer or
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Research is produced for the benefit of the firms investing clients. The primary objectives of each analyst in the research department are: to analyse the companies, industries and countries they cover and forecast their financial and economic performance; as a result, to form
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UBS 2015. Key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

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