Acquisition strategy for luxury furniture wholesaler

SStrengths

Leading wholesaler in the market of luxury furniture distribution

Transparently communicated strategy, clear dividend policy

High EBITDA margins

Weaknesses

High – compared to peer companies – debt level, suppressing potential for consolidation

No triggers for higher market price

Sluggish revenue growth

Opportunities

Many target companies offering attractive potential to expand operation

Competitors seem to operate single-track, not diversified businesses

Low sector consolidation – companies tend to operate on their own account

”Furniture are where its at”

Threats

Strong, cut-throat competition lacking trust towards peers

Poland being net importer of furniture

Export of furniture from Poland in constant decline as opposed to the imports

No Polish brands of furniture

W

O T

Your Company

Major assumptions for target company valuation

Non-representative data has been rejected (red shading)

Target companies’ value is given as "private / non-public enterprise value"

Valuation is based on sector average and sector leader indicators

Valuation ignores premium on top of current market „capitalisation”

Indicators of peer companies EV / EBITDA 2012 P /E 2012Wholesaler XYZ 9.8x 21.8xWholesaler XZY 10.8x 20.5xWholesaler ZXY 28.1x 39.2xWholesaler ZYX 10.9x 20.9xWholesaler YZX 8.9x 19.9xHurtownik YXZ 9.7x 38.9xAverage: 10.0x 20.8xMax 10.9x 21.8x

Indicators of peer companies EV / EBITDA 2012 P /E 2012Retailer XYZ 10.5x 21.0xRetailer XZY 27.5x 49.3xRetailer ZXY 11.9x 19.0xRetailer ZYX 11.2x 40.6xRetailer YZX 12.0x 21.3xRetailer YXZ 10.9x 20.0xAverage 11.3x 20.3xMax 12.0x 21.3x

P EV Kapitalizacja = FV =

Share price Average and Max valuation Capitalisation Company valuation

Company APavg = 6.55Pmax = 6.87

Company BPavg = 37.05Pmax = 38.8

Company AEVavg = 65.52Evmax = 68.67

Company BEVavg = 100.4Evmax = 104.97

Company ACapitalisation=67.1

Company BCapitalisation=102.5

Company AFV = 67.1 m PLN

Company BFV = 136.5 m PLN

Synergy Your Company + A Your Company + B

Revenue growth

Diversification of revenue streams

horizontal merger

vertical merger

Cost-cutting:Economies of scale owing to better P&E* efficiency

Greater purchasing power vis-à-vis suppliers

Elimination of intermediaries in a supply chain

Improvement in logistics and distribution

Closing the targets’ headquarters

Transfer of technology or know-how from one firm to the other

* Plant & Equipment

Synergy Your Company + A Your Company + B

Redundant Asset Reduction Tax Reduction

Depreciation tax shields deriving from the step-up in basis following the purchase transaction

Transfer of Net Operating Losses (NOL) from the target to the buyer

FinancialReducing WACC* by Optimizing the Use of Debt Tax Shields

Coinsurance Effects

Total of Synergies 9 8

* Weighted average cost of capital

ProfitabilityName Operating margin Profit margin EPS

Wholesale 0.83% -3.63% -WIG 6.45% 4.80% -

Company A 1.50% 1.00% 0.315

Enterprise valueName P/E EV/P EV/EBIT P/R P/OM

Wholesale 7.27 0.6 14.97 0.16 4.56WIG 9.82 1.19 13.93 0.66 7.5

Company A 20.80 0.21 10.33 0.21 14.20

ProfitabilityName Operating margin Profit margin EPSRetail 1.64% -1.66% -WIG 6.5% 4.80% -

Company B 7.00% 3.20% 1.83

Enterprise valueName P/E EV/P EV/EBIT P/R P/OMRetail 11.24 0.74 16.47 0.3 6.54WIG 9.82 1.19 13.93 0.66 7.5

Company B 20.30 0.89 11.08 0.67 9.51

Target companies – fundamental indicators

Company A Company B

Company A Company B

Many synergies in case of M/A

Diversification of revenue streams

Better value for shareholders

Highly profitable

Attractive valuation

Seemingly fundamentally healthy

Low profitability indicators

Target companies – fundamental indicators

92%

8%

Your Company + Company A

Your CompanyCompany A

Post-transaction shareholder structure50/50 Financing – new shares + debt

89%

11%

Your Company + Company B

Your CompanyCompany B

Acquisition FinancingNet Debt / EBITDA

Your Company + Company A

Your Company + Company B

1.652.09

2.35

3.043.05

3.99

New shares 50/50 Shares + Debt Debt

Acquisition FinancingEPS Analysis

Your Company + Company A

Your Company + Company B

101% 101%108% 113%118%

128%

New shares 50/50 Shares + Debt Debt

100% - EPS of Your Company

Acquisition FinancingSummary

Financing of choice – 50/50 shares + debt. Rationale:

High EPS for this transaction – 13% increase

Net Debt / EBITDA increases to 3.04 – level acceptable in the wider market

Shareholders of Your Company are left with 89% of shares outstanding. Increase in EPS compensates for that

If acquisition was financed with debt, EPS would grow by 28%, however, that operation would dramatically increase indebtedness (thus further suffocating the Company) – and that would be against

shareholder interest

WWeaknesses

• High – compared to peer companies – debt level, suppressing potential for consolidation

• No triggers for higher market price

• Sluggish revenue growth

OOpportunities

• Many target companies offering attractive potential to expand operation

• Competitors seem to operate single-track, not diversified businesses

• Low sector consolidation – companies tend to operate on their own account

• ”Furniture are where its at”

TThreats

• Strong, cut-throat competition lacking trust towards peers

• Poland being net importer of furniture

• Export of furniture from Poland in constant decline as opposed to the imports

• No Polish brands of furniture

Twoja Firma

Debt increases, but high profitablility and synergies will allow for the debt to be repaid faster

Revenue increases considerably with transaction – Company B becomes customer of Your Company plus syneergies generate further revenue growth

Acquiring retailer by wholesaler fundamentally diversifies the business (veritical merger)

Major synergies are going to be higher profitability and lower distribution costs – greater competitiveness

Your Company, thanks to retailer, will benefit from „furniture in fashion” trend and thus will participate in dynamic market growth

Higher cost efficiency will enable Your Company to pose greater threat to furniture importers

Your Company + Company B

Company B + Your CompanyMatch made in heaven