German M&a: Post-crisis Deal Structures, Frankfurt

Roundtable Discussion

German M&A: Post-Crisis Deal Structures Frankfurt

Q3 2009

Sponsors

www.mergermarket.com/events/

Roundtable Discussion

02

german m&a: post-crisis deal structures

Contents Speakers around the table

03

Transcription of the discussion

04

Duff & Phelps: Where the debt breaks

10

Latham & Watkins: Foreign investments under closer scrutiny - Recent changes to the German Foreign Trade Act and the German Foreign Trade Regulation

12

Historical data

16

Roundtable Discussion

03

Speakers around the table Robert A. Bartell CFA

Dr. Dirk Oberbracht

Managing Director

Partner

Duff & Phelps

Latham & Watkins LLP

Guy Street

Prof. Dr. Bernhard Schwetzler

Partner Deloitte & Touche GmbH

Chair of Financial Management and Centre for Corporate Transactions HHL - Leipzig Graduate School of Management

Catherine Raisig Managing Editor Remark, The Mergermarket Group

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

04

With current M&A and corporate finance related activity in Germany low, this roundtable event held in Q3 2009 in Frankfurt examined the impact that the financial crisis has had on deal structuring. The following is an edited transcript of the discussion.

Do you feel that deal structures have changed in the course of the financial crisis and if yes, how? Robert Bartell (RB): RB: We see larger buyouts being replaced with more mid-sized buyouts. For the time being, we will not read about multi-billion Euro transactions on the front page of the FT. Sponsors that were doing those deals are now very interested in transactions that are between €100m to €500m. Furthermore, we have seen sponsors more interested in businesses and industries that have market growth opportunities, even if they are traditional buyout funds. Obviously, one sector where there’s a big buzz is clean technology and renewable energy, but there are other areas where even a buyout fund can participate if they believe there is a high potential for growth, rather than just something that they can leverage assets against.

Dr. Dirk Oberbracht (DO): DO: There has been a big change in deal structures due to the lack of financing available to private equity firms. This has meant that the way in which they approach investments has altered and they are increasingly looking at doing more minority investments; distressed M&A deals; or investing in debt instruments. We are also seeing that they are looking at companies they were interested in over the last couple of years, but that they may not have been able to win at auction. Private equity firms are now coming back and saying that these are great companies and start investing to hold, or to own the company eventually. Some of these investors have lots of cash or few, if any, difficulties financing bigger transactions. It is also a very good time for trade buyers and you see very big transactions going on – in particular, in industries like software, energy and the like.

Guy Street (GS): GS: I think there are different environments for private equity sponsors and trade buyers. For trade buyers, their situation is very sector related and they are taking advantage of lower prices, but I do not think seller’s expectations have decreased so much that there is now a real boom in terms of M&A. With regards to private equity related activity, the statistics here in Germany show that in

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

the first half of the year activity levels were down on those of 1995 and there were no buyouts worth over €100m completed. In the third quarter, I think we saw three or four such deals. Right now, new debt is limited to packages of around €200m and constructing a package is very difficult, so there’s virtually no syndication. Every deal takes longer and you have to calculate considerable breakup costs if you don’t complete a deal. Many sponsors have not really been in the market; they’ve been looking at origination and have been kept busy with their portfolios, searching for small niche add-ons to ensure they are positioned, but being very selective about what they actually look at. It also makes a big difference if a sponsor’s raised a fund in the last year or two, i.e. is the sponsor at the beginning of his fund, or in the later stage of a previous fund, where perhaps he’s put a fair bit of equity in portfolios that are now highly leveraged?

Prof. Dr. Bernhard Schwetzler (BS):

BS: From a theoretical perspective, I should add that it is not just the uncertainty that has been increasing and seriously hampering businesses and transactions. Another factor is the imbalance in the informational symmetry between the parties. The perceived or actual difference in the information level of the parties has proven to be one of the major deal breakers. However, there are instruments such as earn-outs designed exactly to bridge these gaps and I feel that in the current market environment it is these instruments that are being applied.

Roundtable Discussion

05

How are the buyers of distressed assets protected from liabilities? DO: The big theme here is how to get rid of debt. Obviously, there are many companies with a debt burden accrued during the era of cheap financing in the past years. These debts now need to be restructured and that essentially raises the question of how to get rid of the debt. On the back of this we see debt-to-equity swaps, packed solutions wherein the equity sponsor is working together with the senior syndicate to try and get rid of mezzanine and second tier lenders, then bond restructurings. RB: I have been surprised to see sponsors working with senior lenders to come up with strategies in a pre-pack to sort or push out the mezzanine. We will see more of that as the market improves and then the question of value in debt, and where debt breaks, is only going to get more complex. I predict that it will not be uncommon for some of these businesses to be almost given away because they require either liability assumptions and pensions, or they’re haemorrhaging money and require significant investment in the next year. Most businesses face severe pressure on the top line, regardless of industry, whether they’re a law firm, advertising agency, or in the automotive industry - everybody’s top line is really pinched. As a consequence, trade players are very interested in making deals happen because there is so much pressure to grow revenues and earnings as a listed company today. GS: We have seen waivers, resets and equity being topped up by the sponsors who have been holding their positions. Banks have been happy to do that, because normally the new equity will want a write-down and that’s not really something the banks have been eager to do, so accounting areas have been playing a role there. As the economy picks up, you’ve still got the equity hole there with these companies and, although the ratios may look a little better, effectively, they are going to be trading at a competitive disadvantage, which is going to continue. As the markets brighten up, there will be a move towards structured deleveraging and we’re going to see a lot of new equity situations happening.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

06

BS: Something to keep in mind is that some major obstacles in German bankruptcy law make it difficult to buy assets out of a distressed firm, or a firm that is in bankruptcy. One thing that we see is that the tax loss going forwards is extremely difficult to get used by other investors. This turns out to be a major obstacle in buying assets or transferring assets out of a bankrupt company in Germany, but that’s just a side effect.

What is the future of the LBO market? RB: I would be surprised if there were any mega-buyouts in the near future, since they require significant bank financing. The deal you can get done today is modest compared to before, but the fact of the matter is that even on a modest leverage - so say that one third of an enterprise value is debt financed versus 75% or more two years ago – the expected returns are still very attractive, at around 15%, versus what public indices have done historically. I know that right now many buyout funds and their LPs are thinking, “this should be an asset class that does 25%” and ultimately it will come back to that expectation, but if you actually have very low leverage, getting a 15% or 17% return is still pretty attractive. In addition, the probability of financial distress is much lower and you actually have a balance sheet that allows you to invest in the business and potentially make acquisitions. We may even see an era where companies in the private equity space are held for eight years, rather than three, and they start to pay dividends to their investors. I think the look and feel of how returns are realised may change. DO: In all probability, I don’t think you will see mega-buyouts because of the financing situation, which is very different from the situation in 2006 and 2007. This trend will continue, but I think banks will be more open to make acquisition finance available in a syndicate. The pieces will be small, making it a more burdensome effort to secure the debt. KKR, for example, did collateral bond financing when they purchased a brewery business in Asia. This means you may see very tailor-made financing structures to complete a bigger investment, or portfolio transaction where a private equity sponsor is using the balance sheet of one of its portfolio companies to acquire the business, for instance. GS: Vendor financing is one deal structure being discussed now. However, there are a number of issues around vendor financing for the seller and, therefore, there has to be a sort

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

“I feel it is important that the non-executive team be an independent third party providing an objective analysis.” Robert A. Bartell

Roundtable Discussion

07

of special situation that allows that to happen, but by using vendor financing we will see deals getting above the €400€500m mark. So, there are a number of situations out there where people are looking to see the logic of the deal and find the structures that allow them to do it. But, unless you have a business plan that you can actually really rely on, this should not be attempted due to the complexities and amount of time, and money, that you have to invest. BS: We are seeing increasing numbers of small deals and more sophisticated deals, using what I described earlier as instruments designed to bridge the information asymmetries. Having said that, I feel the current major challenge to private equity firms is running their portfolio companies. Not in terms of generating new business, but how to exit. Private equity firms have to face the fact that they are stuck in their portfolio firms and, for as long as they are, they have to somehow get deeper into operating the business. They will have to deal with certain things more directly, really running them. People working for private equity companies come from the financing side and only the minority are directly tied to the operating business.

Introduction to Fairness Opinions BS: Fairness opinions were not known in Germany, I believe, until the very end of the 1990s. There are still many people out there who believe that it’s just a new trick of the investment banks to increase fees from their clients. The breakthrough for fairness opinions came via a regulation implemented in German takeover law and related to the target company’s management making a statement on the fairness of the takeover offer that it received. This was the starting point for fairness opinions becoming a regular tool in capital market transactional communication because, in many of the cases, the manager hired an investment bank, or adviser, to write the fairness opinion that supported the view of the management. Up until 2005/2006, many fairness opinions were written by small advising companies, or advisers with no clear standards about the content; the disclosure rules; or how to deal with conflicts of interest, since often the provider of the fairness opinions were also involved in the transaction and sometimes got a fee that depended on the success of the transaction. As a

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

08

consequence, the German Association of Financial Analysts set up an expert group and we developed guidelines and standards to address the issues of conflicts of interest and disclosure rules. One of the initial ideas was a recommendation that any adviser involved in the transaction should not be allowed to provide a fairness opinion. However, after some discussion, we came to a more moderate view, saying that such a relationship should be disclosed along with the fee structure and the fee depended on the success of the transaction. We now annually evaluate the disclosure quality of the fairness opinions and we see that the quality is getting into the standards that we developed.

Are fairness opinions just a tool to make more money for investment banks? RB: Relative to the size of the fee that big firms get, the fairness opinion fee is a rounding error for many, so I do not buy into the view that fairness opinions are being promoted to increase revenues. They are instead intended to be delivered and relied upon by the board of directors or the supervisory board, not management. I feel it is important that the non-executive team be an independent third party providing an objective analysis. In many places, regulations have already been adopted, even if they are not legally required. For example, in the US the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD), has specific requirements of investment banks issuing fairness opinions necessitating them to disclose their fee structure and all relations with the company. They have to specifically list out all their assumptions, but most importantly, they also need to have a different internal fairness opinion committee that accepts the engagement and reviews it separately from the deal team that works on it. Having said that, there are situations right now in which it may be reasonable to sell a company at four times EBITDA when comparables trade at six; similarly, there are situations in which a public company has a takeover offer and the premium isn’t 50%, which is obviously easier for a board to recommend to its shareholders. In each of these cases, there is an underlying story that has not been told that could be explored more in fairness opinions.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Is there a correlation between having had a fairness opinion and the success of the deal? GS: In my opinion, fairness opinions are a strategy for management or supervisory boards and not really a driver within deals. I feel that they are a necessary tick-the-box action, but I do not think they will become a formal requirement since they have become more or less best practice in situations in which you actually need them. I do not see any kind of extra deal certainty stemming from them. BS: It is difficult to judge because in most of the cases these fairness opinions are not published, so we cannot see differences between deals which have had a fairness opinion and those that have not. The cases I mentioned earlier are the rare ones in which fairness opinion actually became public because the management referred to, and attached it in, a subsequent statement. I believe, however, that an increasing portion of deals will have a fairness opinion attached to the statement due to the legal protection that a fairness opinion can offer. DO: Fairness opinions are linked to people seeing risk materialise where they never expected it to and so they are trying to protect themselves more. There is a greater willingness to spend some money on protecting oneself against risk than there used to be, this could lead to an increase in fairness opinions.

Roundtable Discussion

09

Will the importance of fairness opinions change as we come out of the financial crisis? Could they become a mandatory part of an M&A transaction? BS: Our strategy when developing these standards was actually to hope for the regulators to make it a legal standard. However, even without it being a legal requirement for an M&A transaction, as transactions become riskier, informational asymmetries are becoming more serious and as the liability and risk of shareholder litigation increases, managers will be drawn to this instrument. Government support would be nice to have, but I believe that we will in fact not need it in order to make fairness opinions the common standard in Germany. GS: I do not believe there is any sense in the market that this is something that is on the radar for the regulators and I think as long as best practices are established, there will be no need. It is one of those areas where unless there is some sort of scandal, or crisis, I cannot imagine it coming on the radar. RB: I think there is more potential regulation in the form of a solvency opinion. In the UK, for example, there is already a great emphasis on this, with pension trustees involved and having some protection. This ensures that the company’s post structure is able to make its contributions. I believe there should be scrutiny of the reasonableness of the projections to ensure that dividends, demergers or assets sales do not impair unsecured creditors, pensions, landlords and passive minority interest type creditors that are greatly harmed once a buyout does not work. The protection of creditors in general is something that’s going to be focussed on in the next wave of transactions.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

10

Where the Debt Breaks Robert A. Bartell, CFA (Managing Director, London) and Dr. Christian Aders (Managing Director, Munich)

Income approach

Market multiple approach

The income approach faces limitations in the current economic environment, including:

The market multiple approach has a multitude of questions as well:

• Challenges in estimating the Cost of Capital - Which risk-free rate should be used? - What is the proper equity risk premium? - How did the collapse in the financial industry affect my firm’s beta? • Assessing the reasonableness of financial projections - Are the projections aggressive or conservative given the current environment? - How do we treat the Net Operating Losses, a tax asset, of a company? - What is the amount of “new money” necessary for a company to achieve its business plan?

• Should a valuation use current, historical or projected multiples? • Is the current EBITDA appropriate for applying to the multiple? • Will the historical peak-to-trough cycle of a company match the future peak-to-trough?

The “Red Zone”

Positive Equity Value

Low Multiple

Senior Debt

High Multiple

Second Lien Term Loan / Mezzanine Debt

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Enterprise Value

Valuation-driving market multiple selections are even more critical if the value falls within the ‘Red Zone’ in which slight adjustments could dramatically affect a conclusion.

To assess the financial viability of a company, long-term projected performance needs to be reviewed in conjunction with the current situation. Companies that look solvent today may not be solvent tomorrow. A simple example comparing two companies with similar free cash flow but different capital structures demonstrates the importance of not only measuring the current health of a company but also estimating its future strength.

Step 2: Cash Flows Assess Company Liquidity Can cash flows pay debt obligations?

Which company is in a better position? Step 1: Balance Sheet Assessing Where the Debt Breaks Is enterprise value greater than outstanding debt? (€ in 000s) Company 1 Enterprise Value

€300,000

Debt Securities Senior Debt

(125,000)

Second Lien Term Loan / Mezzanine Debt

(100,000)

Aggregate Equity Value Surplus/(Deficit)

€75,000 1 2

(€ in 000s)

EBITDA Capex: Taxes FCF1

250 10 25 215

Principle Due: Interest Due: Total Fixed Charges

200 85 285

Fixed Charge Coverage Ratio2:

0.75x

EBITDA Capex: Taxes FCF1

250 10 25 215

Principle Due: Interest Due: Total Fixed Charges

100 85 185

Fixed Charge Coverage Ratio2:

1.16x

Free Cash Flow “FCF” = EBITDA - Cash Taxes - Capital Expenditures Fixed Charge Coverage Ratio = FCF/Fixed Charges

Step 3: Conclude Which Company is in Better Position?

Company 2 Enterprise Value

Roundtable Discussion

11

€140,000

Debt Securities Senior Debt

(125,000)

Second Lien Term Loan / Mezzanine Debt

(100,000)

Aggregate Equity Value Surplus/(Deficit)

-€85,000

In the first scenario, Company 1’s enterprise value exceeds the outstanding debt but Company 1 may not have the ability to refinance in the current environment.

In the second scenario, Company 2’s enterprise value is less than the outstanding debt but Company 2 should have the ability to service upcoming payments.

Solvency Tests Balance Sheet: Pass Cash Flow: Fail

Solvency Tests Balance Sheet: Fail Cash Flow: Pass

Duff & Phelps is well positioned to provide a debtor, creditor or security trustee an independent going concern business enterprise value and expert testimony. We are confident in assessing and defending ‘where the debt breaks’ in connection with negotiations amongst various stakeholders.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

12

Foreign Investments under Closer Scrutiny – Recent Changes TO the German Foreign Trade Act and the German Foreign Trade Regulation Dr. Dirk Oberbracht and Dr. Wilhelm Reinhardt

Background On 6 March 2009, the German Federal Council (Bundesrat) approved the amendments to the German Federal Trade Act (Außenwirtschaftsgesetz – AWG) and the German Foreign Trade Regulation (Außenwirtschaftsverordnung – AWV) and were adopted by the German Parliament. The new law will allow stricter control of the acquisition of German companies by foreign investors.

Current Legal Situation Currently, legal transactions and acts in foreign trade may be restricted to guarantee vital security interests of the Federal Republic of Germany; to prevent a disturbance of the peaceful coexistence between nations; or to prevent a major disruption of the foreign relations of the Federal Republic of Germany, e.g. restrictions on the import and export of weapons and military equipment. The acquisition of, or participation of, a German company that produces certain types of military and intelligence products by a non-resident investor has to be reported to the Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie – BMWi). The BMWi may prohibit the acquisition where necessary in order to safeguard the security interests of the Federal Republic of Germany.

The Amendments to the AWG and AWV The recent amendments broaden the scope of the AWG and the AWV. The BMWi is entitled to examine the acquisition of holdings in German companies by foreign investors, regardless of the industry sector in which the target company is active and to prohibit the acquisition or issue formal directives. Foreign investments may be restricted if the public safety and order within the meaning of Articles 46 and 58 (1) of the EC Treaty are threatened by the acquisition.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

1. Which transactions are affected? Affected are transactions by which a non-EU resident investor acquires a direct or indirect holding in a resident company, provided that the holding presents at least 25% of the voting rights in such a company. a) Resident company and non-EU investor A resident company is a company with its registered office or seat of management in the territory of the Federal Republic of Germany. A non-EU investor is an investor with its registered office or seat of management outside the European Communities. Branch offices and places of business in the EU of such investors are also considered as non-EU offices. On the other hand, nonEU investors from member states of the European Free Trade Association (Iceland, Liechtenstein, Norway, Switzerland) are treated as EU investors. The BMWi may also examine the acquisition of a holding in a resident company by an EU investor, if a non-EU investor owns at least 25% of the voting rights in the EU investor and there are indications that an abusive structure or a bypass transaction was undertaken to avoid an examination. Conversely, this means that acquisitions by EU investors that are majority-owned by non-EU investors, in principle, should not be under examination. This should also apply to private equity investors, which often use acquisition vehicles with registered seats in the Netherlands or Luxembourg that are owned by nonEU entities. This structure is often chosen for tax reasons and not to avoid an examination pursuant to the AWG. b) Investment threshold Investments may only be examined, if the non-EU investor holds 25% or more of the voting rights in the resident company after the acquisition of the holding. Not only is the acquisition of a direct holding subject to the new regulation, but also indirect acquisitions. An indirect holding exists, for example, when a non-EU investor acquires a resident company, which holds shares in another resident company. Also, transactions outside Germany - similar to merger control according to anti-trust law - may fall under the new regulation, e.g. the acquisition of a US

company holding more than 25% of the voting rights in a German company. As such, a transaction is usually subject to foreign law and it is doubtful whether the prohibition of the transaction by the BMWi will lead to the nullity of the transaction and whether the BMWi may enforce the reversal of the transaction. At least, the BMWi should be able to install measures such as to restrict the exercise of voting rights in the resident company in order to enforce the prohibition. Similar cases are known in anti-trust law. Furthermore, in calculating whether the non-EU investor reaches the relevant 25% voting rights threshold, voting rights in a resident company held by a third company are attributed to the non-EU investor, if the investor owns 25% or more of the voting rights in such other company or, if the non-EU investor has entered into an agreement on the joint exercise of voting rights with such other company. c) Public safety and order A transaction may only be prohibited if it poses a threat to public safety and order. In addition, such threat has to be factual and significant enough to affect a basic interest of the society. According to the German legislator’s explanation, the terms public safety and order are to be construed narrowly and each individual situation needs to be reviewed carefully taking into consideration the case law of the European Court of Justice (ECJ). In order to meet concerns that the new rules may violate European law, in particular free movement of capital and freedom of establishment, a reference to Articles 46 and 58 (1) of the EC Treaty was incorporated in the new Section 7 (1) no. 4 AWG late in the drafting process, thereby making reference to the ECJ case law with respect to Articles 46 and 58 (1) of the EC Treaty. So far, the ECJ has ruled that public order may be affected in the areas of telecommunication and electricity, or the guarantee of services with strategic importance.

2. Examination Procedure a) Competency and review period The BMWi has the right to choose to examine a transaction and to prohibit the acquisition. There is no requirement for the investor to notify the BMWi of a planned acquisition. However, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) and the German Federal Cartel Office will transmit information on transactions with which they are concerned to the BMWi. The BMWi will inform the acquirer via an administrative act of the decision to

Roundtable Discussion

13

examine the transaction within a period of three months from the execution of the share purchase agreement or, in takeover cases, the publication of the announcement to make a public tender offer or of the acquisition of control. Should the BMWi not exercise this right within the three month period, it is excluded from a prohibition or issuance of formal directives under the AWG/AWV at a later point in time. The examination procedure has two phases: (1) In a first step, the BMWi decides to exercise its examination right within three months from the execution of the purchase agreement or, in takeover cases, the publication of the announcement to make a public tender offer or of the acquisition of control. (2) In case the BMWi decides to examine the transaction within this period, the BMWi will notify the acquirer who is then obliged to submit a complete documentation regarding the acquisition. Which documents will have to be provided is to be published by a circular form placed by the BMWi in the German Federal Gazette (Bundesanzeiger). Within two months from the submission of the complete documentation, the BMWi will decide whether it prohibits the acquisition or issues formal directives, to the extent that this is necessary in order to guarantee public safety and order in the Federal Republic of Germany. In any case, the prohibition or issuance of formal directives requires the consent of the German Federal Government. b) Voluntary application In order to have legal certainty at an earlier point in time, the acquirer may apply for a clearance certificate from the BMWi stating that the acquisition poses no concerns. In the application for the planned acquisition, the acquirer and its field of business have to be described in general terms. The clearance certificate is deemed as having been issued if the BMWi does not open the examination procedure within one month from receipt of the application. It is to be expected that the closing of M&A transactions will often be made subject to the condition precedent that such a clearance certificate has been issued.

3. Legal Consequences Transactions that may be subject to an examination procedure can be executed. The underlying contracts are valid, but remain subject to a subsequent condition until the expiration of the examination procedure. In case of a prohibition, the transaction has to be reversed which means that the acquired participation has to be retransferred to the seller.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

14

Violations of the prohibition or formal directives may be punished by a fine of up to €500,000.

4. Issuance of Formal Directives In order to enforce a prohibition, the BMWi may order the necessary measures. In particular, the BMWi may restrict the exercise of voting rights by the acquirer in the acquired company, or nominate a trustee for the reversal of the transaction.

Conclusion In comparison to the original draft, the final version of the amendments has materially been mitigated. Originally, investments by any foreign investor, including EU investors, could have been subject to an examination. Given the final version of the amendments, it can be expected that the BMWi will only examine transactions in a few cases. In any case, the bar for a prohibition of a transaction is set quite high. Also, investors face only little administrative efforts due to the amendments of the AWG, as acquisitions do not have to be notified to authorities and the formalities of the application for a clearance certificate should be manageable and similar to the documentation provided in connection with an application for merger control clearance. It is a major improvement that investors can now achieve transaction security within one month in straightforward cases. This tool may also be useful for sellers in an auction process in order to select the bidders. As regards to transaction documentation, it is recommended that the share purchase agreements or public takeover offers provide for the condition precedent that the clearance certificate has been issued; or is deemed to have been issued; or that the relevant examination periods have expired. Furthermore, the agreements could contain detailed provisions on the reversal of the transaction in cases where the transaction has been prohibited.

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

15 015

“as transactions become riskier, informational asymmetries are becoming more serious and as the liability and risk of shareholder litigation increases, managers will be drawn to [FAIRNESS OPINIONS]” Prof. Dr. Bernhard Schwetzler

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

16

HISTORICAL DATA Top 20 German M&A transactions, Q1-Q3 2009 Ranking Announced Status Target company date

Target sector

Hypo Real Estate Financial Holding AG (81.00% stake) Services Daimler AG (9.10% stake) Industrials & Chemicals Commerzbank AG (25.00% Financial stake) Services VNG-Verbundnetz Gas AG Energy, (47.90% stake) Mining & Utilities E.ON AG (13 hydro power Energy, plants in Bavaria) Mining & Utilities RWE Westfalen Weser Energy, Ems AG (20.03% stake) Mining & Utilities Danisco Sugar A/S Consumer (Anklam factory) Mitteldeutsche Energy, Braunkohlengesellschaft Mining & mbH Utilities IDS Scheer AG TMT Deutsche Schiffsbank AG Financial (12.00% stake) Services Porsche Automobil Industrials & Holding SE (5.00% stake) Chemicals

Target country

Bidder company

1

Jun-09

C

2

Mar-09

C

3

Jan-09

C

4

May-09

P

5

Jun-09

P

6

Jan-09

C

7

Feb-09

C

8

Feb-09

C

9 10

Jul-09 Aug-09

C C

11

Aug-09

C

12

Apr-09

P

Stadtwerke Bremen AG (25.90% stake)

13

Apr-09

C

DAWAG

14

Sep-09

C

BRAHMS AG

15

Jun-09

P

Stadtwerke Bremen AG (25.10% stake)

16

Sep-09

P

Easycash GmbH

17

Jun-09

C

RMG Group

18

Feb-09

C

19

Jul-09

P

20

Aug-09

C

Hanseatische VerlagsBeteiligungs AG (23.00% stake); Kieler Nachrichten (24.50% stake); Leipziger Verlags-und Druckerei GmbH & Co. KG (44.90% stake); Luebecker Nachrichten GmbH (49.00% stake) Infineon Technologies AG TMT Germany Golden Gate Capital (Wireline Communications business) Kalle GmbH Industrials & Germany Silverfleet Capital Chemicals Partners LLP

C = Completed; P = Pending; L = Lapsed

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Energy, Mining & Utilities Real Estate Pharma, Medical & Biotech Energy, Mining & Utilities Business Services Industrials & Chemicals TMT

Germany SoFFin

Bidder country

Seller company

Seller country

Germany

Deal value (€m) 2,960

Germany Aabar Investment PJSC United Arab Emirates Germany SoFFin Germany

1,954 1,770

Germany EnBW Energie Baden- Germany Wuerttemberg AG

EWE AG

Germany

1,200

Germany Oesterreichische Austria Elektrizitaetswirtschaft AG Germany RWE AG Germany

E.ON AG

Germany

1,000

Germany

800

Germany

730

NRG Energy Inc; URS Corporation

USA

404

HypoVereinsbank AG Piech family (private investors); Porsche family (private investors) Freie Hansestadt Bremen (City of Bremen) Vereinte Dienstleistungsgewerkschaft HBM BioVentures AG

Germany

401 400

Germany

390

Germany

360

Germany

360

Germany Suiker Unie

Municipal communities (Germany) Netherlands Nordzucker AG

Germany J&T Finance Group AS; Severoceske Doly

Czech Republic

Germany Software AG Germany Commerzbank AG

Germany Germany

Germany Qatar Holding LLC

Qatar

Germany EWE AG

Germany

Germany Meravis Wohnungsbau- Germany und Immobilien GmbH Germany Thermo Fisher Scientific Inc

USA

Germany EWE AG

Germany

Germany Ingenico SA

France

Germany Honeywell International Inc Germany Verlagsgesellschaft Madsack GmbH & Co KG

USA

Freie Hansestadt Bremen (City of Bremen) Warburg Pincus LLC Triton Partners

Germany

Axel Springer AG

USA United Kingdom

Switzerland 330 Germany

320

USA

290

United Kingdom Germany

286 263

Infineon Technologies AG

Germany

250

Montagu Private Equity GmbH

Germany

213

Roundtable Discussion

17 Top 20 private equity buyout and exit transactions, Q1-Q3 2009 Ranking Announced Status Target company date

Target sector

Target country

Bidder company

Bidder country

Seller company

1

Sep-09

C

BRAHMS AG

2

Sep-09

P

Easycash GmbH

3

Jun-09

C

RMG Group

4

Jul-09

P

Medical, Pharma & Biotech Business Services Industrials & Chemicals TMT

Germany Thermo Fisher Scientific Inc

USA

HBM BioVentures Switzerland 330 AG

Germany Ingenico SA

France

Warburg Pincus LLC Triton Partners

5

Aug-09

C

6

Aug-09

P

Infineon Technologies AG (Wireline Communications business) Kalle GmbH Industrials & Germany Silverfleet Capital Chemicals Partners LLP Aleo Solar AG Industrials & Germany Robert Bosch GmbH Chemicals

7

Jul-09

C

LEWA GmbH

Industrials & Germany Nikkiso Co Ltd Chemicals

Japan

8

Jun-09

P

Neumayer Tekfor GmbH

USA

9

Apr-09

P

10

Aug-09

C

TMD Friction Holdings GmbH Actebis Holding GmbH

11

Jul-09

C

Industrials & Germany AXA Private Equity; Chemicals Barclays Private Equity Ltd; Fifth Third Bancorp; Gartmore Direct Fund II Scottish LP; ING; Landesbank Baden-Wuerttemberg; Nationwide Private Equity Fund LLC; NIBC Bank NV Industrials & Germany Pamplona Capital Chemicals Management LLP Business Germany Droege Capital GmbH Services TMT Germany Rutland Fund II

12

Jan-09

C

13

Aug-09

P

14

Apr-09

C

15

Jul-09

C

16

Mar-09

C

17

Feb-09

C

18

Sep-09

P

19

Mar-09

C

20

Jan-09

C

Germany Honeywell International USA Inc Germany Golden Gate Capital USA United Kingdom Germany

CeDo Folien und Haushaltsprodukte GmbH ddp Deutscher Industrials & Germany BLUO SICAV SIF Depeschendienst GmbH; Chemicals Evotape S.p.A; Rohner AG; The BEA Group Hallhuber GmbH Consumer Germany Change Capital Fund II LP Inc Heinrich Berndes Consumer Germany Palace Park Haushaltstechnik GmbH & Investments Ltd Co. KG (34.30% stake) Samas GmbH & Co KG Consumer Germany Innovation Change (94.00% stake) GmbH; Samas GmbH & Co KG (MBO Vehicle) innovatis AG Pharma, Germany Roche Diagnostics Ltd Medical & Biotech Integrata AG (91.04% Business Germany Cornerstone Equity stake) Services Investors EliteMedianet GmbH TMT Germany Tomorrow Focus AG (36.93% stake) Pro2 Anlagentechnik GmbH Meade Instruments Europe GmbH & Co. KG

C = Completed; P = Pending; L= Lapsed

Industrials & Germany Deutsche KWKChemicals Gesellschaft mbH Consumer Germany Bresser GmbH

United Kingdom Germany

Infineon Technologies AG

Germany Switzerland USA Germany

USA Germany

Deal value (€m)

USA

290

United Kingdom Germany

286

Montagu Private Germany Equity GmbH Germany HANNOVER Finanz GmbH; Marius Eriksen (private investor) Germany Deutsche Beteiligungs AG; Quadriga Capital Services GmbH

250 213 192

172

172

TMD Friction Luxembourg 100 Luxembourg Sarl ARQUES Germany 93 Industries AG Delton AG Germany 61

United Kingdom Luxembourg ARQUES Industries AG United Kingdom United Kingdom

Seller country

Stefanel GmbH

Germany

30

Italy

25

CFC Industrie Germany 23 Beteiligungen GmbH & Co KGaA Samas NV Netherlands 20 Ventizz Capital Germany Partners Advisory AG Logica plc United Kingdom Burda Digital Germany Ventures GmbH; EliteMedianet Beteiligungs GbR Alkane Energy plc United Kingdom Meade USA Instruments Corporation

15 15 13

9 9

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Roundtable Discussion

18

German M&A trends All German M&A

German buyouts

Period

Volume

Value(€m)

Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Total

132 157 140 183 134 149 183 196 155 151 177 198 173 156 174 174 143 154 155 113 115 96 92 3,500

11,591 16,455 10,359 19,066 14,810 38,950 13,670 26,740 26,375 10,428 18,720 27,641 14,693 31,450 24,943 12,215 4,983 16,886 48,384 14,271 6,616 7,411 3,662 420,319

Avg. deal size (€m) 88 105 74 104 111 261 75 136 170 69 106 140 85 202 143 70 35 110 312 126 58 77 40

German exits Period

Volume

Value(€m)

Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Total

12 9 15 17 18 16 16 16 16 15 19 29 25 26 21 23 11 24 20 5 9 10 10 382

3,322 3,325 1,397 3,240 4,329 1,708 3,995 3,211 847 3,185 3,571 7,617 7,203 7,647 5,502 3,253 1,348 4,088 2,045 147 52 317 1,303 72,652

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Avg. deal size (€m) 277 369 93 191 241 107 250 201 53 212 188 263 288 294 262 141 123 170 102 29 6 32 130

Period

Volume

Value(€m)

Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Total

22 28 28 40 25 33 40 44 41 44 40 58 38 35 38 39 34 48 37 17 16 17 17 779

1,276 6,886 5,806 5,250 2,596 8,293 5,702 8,911 2,178 4,663 5,609 14,605 6,213 7,124 4,058 2,105 1,566 10,831 3,242 193 63 303 662 108,135

Avg. deal size (€m) 58 246 207 131 104 251 143 203 53 106 140 252 164 204 107 54 46 226 88 11 4 18 39

German M&A all sector analysis YTD 30 September 2009 Sector Financial Services Energy, Mining & Utilities Industrials Consumer TMT Business Services Pharma, Medical & Biotech Real Estate Construction Defence Leisure Transportation Agriculture Total

Value (€m) 5,489 4,530 3,601 1,115 969 968 462 393 142 20

Sector

Volume

Industrials Consumer Business Services TMT Energy, Mining & Utilities Financial Services Pharma, Medical & Biotech Construction Leisure Transportation Real Estate Defence Agriculture

90 47 36 35 27 26 19 7 6 6 2 1 1 303

17,689

Notes: Based on announced deals, excluding lapsed and withdrawn bids Based on dominant geography of target being Germany Based on dominant sector of target YTD 2009 is from 01 January to 30 September

70

50,000

60

40,000 150 30,000 100 20,000

German private equity buyout trends

12,000 10,000

40 8,000 30 6,000 20

50

10,000

volume

4,000

10

0

0

2,000 0

0

value( m)

volume

fesgusfgs

German M&A sector split by volume, Q1 2004-Q3 2009

16,000 14,000

50 number of deals

number of deals

200

60,000

value of deals ( m)

German M&A trends

250

German private equity buyout trends value of deals ( m)

GERMan M&a trends

Roundtable Discussion

19

value( m)

German M&A sector split by value, Q1 2004-Q3 2009

German M&A sector split by volume, Q1 2004-Q3 2009

German M&A sector split by value, Q1 2004-Q3 200

<1% 2% 2%

<1%

<1%

2%

2%

Industrials

6%

5%

Consumer

29%

3%

<1%

<1% Financial Services

5%

Business Services

32%

9%

Energy, Mining & Utilities

Consumer

6%

Financial Services

TMT

Pharma, Medical & Biotech

9%

Business Services

Construction

Pharma, Medical & Biotech

Leisure Transportation

Real Estate

20%

Real Estate

12%

Construction

Defence

16%

Energy, Mining & Utilities Industrials

TMT

Defence

Agriculture

26%

12%

German private equity exit trends 35

German private equity exit trends

9,000 8,000

30

number of deals

6,000

20

5,000

15

4,000 3,000

10

value of deals ( m)

7,000 25

2,000 5

1,000

0

0

volume

value( m)

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Transparency. Confidence. Trust.

These values are the bedrock of our financial system. They can’t be bought, sold or traded. Since 1932, Duff & Phelps has worked with clients to embrace and protect these fundamental ideals. We deliver reliable, independent advice and counsel across a broad spectrum of complex financial issues. From valuation, investment banking advisory and corporate finance consulting to tax and dispute resolution, we apply proven technical skills and industry expertise to help our clients address their most pressing financial needs. Duff & Phelps. Advice you value.

www.duffandphelps.de Investment banking services in Europe are provided by Duff & Phelps Securities Ltd. Duff & Phelps Securities Ltd. is authorized and regulated by the Financial Services Authority. Investment Banking services in France are provided by Duff & Phelps SAS.

The Art of Client Service… Abu Dhabi Barcelona Beijing * Brussels Chicago Doha Dubai Frankfurt Hamburg Hong Kong London Los Angeles Madrid Milan Moscow Munich New Jersey New York Orange County Paris Rome San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C.

At Latham & Watkins, our mission is to provide client service that is perfectly adapted to the unique positions of the businesses and organizations we assist. Each of our 28 offices in Europe and around the world is a gateway to a powerful global practice that leverages the networked expertise of approximately 2,000 attorneys in a wide spectrum of transactional, litigation, corporate and regulatory areas and in a multitude of jurisdictions. For more information, contact any of our German offices or visit us on our web site at www.lw.com.

Frankfurt

Hamburg

Munich

Reuterweg 20 60323 Frankfurt am Main Germany

Warburgstrasse 50 20354 Hamburg Germany

Maximilianstrasse 11 80539 Munich Germany

Tel. : +49.69.6062.6000 Fax : +49.69.6062.6700

Tel. : +49.40.4140.30 Fax : +49.40.4140.3130

Tel. : +49.89.2080.3.8000 Fax : +49.89.2080.3.8080

www.lw.com * Autumn 2009 Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy and affiliated partnerships conducting the practice in Hong Kong and Japan. © 2009 Latham & Watkins. All Rights Reserved.

Roundtable Discussion

22 022

German M&A: Post-Crisis Deal Structures www.mergermarket.com/events/

Any queries regarding this publication or the data within it should be directed to: Afi Ofori European/African Account Director, Remark Tel: +44 (0) 207 059 6191 E-mail: [email protected]

Remark, Part of The Mergermarket Group

www.mergermarket.com 80 Strand London, WC2R 0RL United Kingdom

11 West 19th Street, 2nd Floor New York, NY 10011 usa

t: +44 (0)20 7059 6100 f: +44 (0)20 7059 6101 [email protected]

t: +1 212 686-5606 f: +1 212 686-2664 [email protected]

Suite 2001 Grand Millennium Plaza 181 Queen’s Road, Central Hong Kong t: +852 2158 9700 f: +852 2158 9701 [email protected]

Disclaimer This publication contains general information and is not intended to be comprehensive nor to provide financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or your business. Before taking any such decision you should consult a suitably qualified professional adviser. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither Mergermarket nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.

Remark EVENTS AND PUBLIC ATIONS

Remark, the events and publications arm of The Mergermarket Group, offers a range of publishing, research and events services that enable clients to enhance their own profile, and to develop new business opportunities with their target audience.