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Page 1: Succeeding in today's M&A environment

www.pwc.com/Transaction Services

Succeeding in today’s M&A environment

April 2014 Strictly private and confidential

Leanne Sardiga 312-298-3183 [email protected]

Bob Forbes 312-298-6506 [email protected]

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PwC

Topics for discussion

M&A trends in today’s retail & consumer market

Acquisition considerations

Focus areas for compliance and Internal Audit

Divestitures – Market trends for buyers & sellers

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M&A trends in today's retail & consumer market

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Retail and consumer deals market – US

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391 290 316 327 350 272

1,023

685 823 851 885

847

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

0

200

400

600

800

1,000

1,200

1,400

1,600

2008 2009 2010 2011 2012 2013

To

tal v

alu

e (

$ i

n M

illio

ns)

Deals

by v

olu

me

Non-disclosed Disclosed Value

In USD million, except

number of deals

2011 2012 2013

# of deals Total deal

value

% value

mix

# of deals Total deal

value

% value

mix

# of deals Total deal

value

% value

mix

$50 to $100M 32 2,260 5% 37 2,669 3% 29 2,120 2%

$100M to $250M 36 5,789 12% 35 5,331 6% 33 5,465 5%

$250M to $500M 21 7,211 15% 20 6,714 8% 23 8,097 7%

$500M to $1B 11 7,773 16% 14 9,908 12% 22 15,426 14%

> $1B 13 21,610 46% 23 56,100 67% 19 75,532 70%

Subtotal >$50M 113 44,644 95% 129 80,722 96% 126 106,640 98%

<$50M 214 2,517 5% 221 3,187 4% 146 2,019 2%

Total (w/disclosed values) 327 47,161 100% 350 83,909 100% 272 108,660 100%

Source: PwC Analysis of Thomson Reuters data

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Rising M&A activity in R&C amidst a challenging environment

• R&C annual deal value exceeded $100 billion for the first time since 2007

• Fundamentals incentivizing M&A are strong - i.e. high demand

- Strengthened corporate balance sheets

- Ongoing access to capital and financing – PE firms are active

- Low growth - but some signs of improvement

• Supply of quality deals is low – very competitive

• Fast changing business environment

• M&A comes into focus…. inorganic tool to drive growth (top line and bottom line)

• Heightened risk for M&A execution

- Overly optimistic/unrealistic forecasts?

- Supportable synergies?

- Identify and assess the risk? Access restrictions?

- Aggressive/sustainable accounting model?

- Deal fever

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Source: PwC Analysis of Thomson Reuters data

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Acquisition considerations

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Return on acquisition (RoAcq)

Successful acquirers approach acquisitions from an enterprise perspective, not internal organization or process.

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Business levers Description

Commercial • Products

• Customers

• Competitors

• Markets

Operations • Systems

• Costs direct/indirect

• People

• Compliance

People • CEO

• Key executives

• Talent

• HR policies

• Benefits

Stakeholders/

compliance

• Regulatory or market constraints

• Financial reporting alignment

• Policies and procedures

• Tax reporting

• FCPA compliance

• Regulatory approval

Capital structure • Working capital

• Debt and debt like

• Leverage

• Capital spending

• Equity

RoAcq

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Acquisition approach

Leading companies transition ownership and responsibility from Deal evaluation to integration within the first 100 days.

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Deal Evaluation

• Develop deal thesis

• Assess talent, operations, and systems

• Identify risk areas

• Estimate synergies

• Conduct preliminary integration planning

• Define deal structure

• Understand financial reporting

requirements

Go/No-Go

Decision

Integration

• Deploy communication strategy

• Establish transition management

office (TMO) governance &

accountability

• Execute cross functional

integration plans

• Validate and achieve synergies

• Manage integration costs

• Meet regulatory requirements

• Mitigate risks/protect baseline

Price

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Public deals often carry more risk than private deals

Comprehensive Due Diligence is required:

• Time and information limitations/access restrictions

- Public information is not sufficient

• Limited contractual protection - Seller reps & warranties do not survive closing and there is seldom an indemnification escrow

• Control premiums are often paid

- Base value vs. Synergy value in evaluating price and returns

- Risks & confidence level needs proper assessment

• Audited financials are based on GAAP and history,

- Deal value is based on cash flows and the future

- Often can’t assess value drivers from data in a 10K

Challenges to overcome

• Buyers should insist on being informed - push the process to obtain non-public data

- Management reports

- Interim data

- Basis of accounting judgments

• Confidentiality of competitive data can be navigated

- Clean Rooms

- Use of third parties

• Information and access limitations mean buyers must make a risk-based assessments

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Select questions management and the board may consider asking to evaluate its current deal process

1. To what extent do we have a robust and “best in class” deal process, from developing a deal pipeline to diligence to integrating and monitoring success?

2. What is the acquisition strategy and how is it linked to our corporate strategy?

3. What is the level of deal expertise and readiness within our organization? What are the gaps?

4. What are our standards for due diligence? - functions involved, scope, level of detail, use of external parties?

5. What are our minimum criteria/standards for approving a particular transaction?

i. EPS, ROI, synergy targets, due diligence scope, integration plan, team members?

6. How have past deals performed and how is that monitored?

i. Is there a regular process for monitoring both the base business and synergies, led by someone independent of the business leader?

ii. How does the organization learn from past deals to improve its deal process?

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Select questions management and the board may consider asking before approving an acquisition

1. For a particular deal, what is the deal strategy and associated value drivers and risks? What is the plan to ensure they are properly evaluated?

2. What diligence was performed and what were the significant limitations, if any?

3. Was the diligence objective? What was the level of access and any restrictions?

4. What has been the communication process throughout the diligence process?

i. To what extent have all members of the deal team (internal and external) been able to voice their opinion?

ii. Do your advisors have the expertise and courage to speak against CEO/management if necessary?

iii. Was the board provided the full report of the provider, and given a chance to ask questions, or just a summary provided by management?

5. How were the diligence findings incorporated into the deal model, deal terms, and integration plan?

i. How did you assess both the baseline and the forecast?

ii. What are the key assumptions behind the synergies in the deal model? How have these been validated? To what extent are the synergies “priced in” to the offer?

iii. Who other than the investment banker was involved in the detailed modelling/review and what is their level of M&A expertise?

iv. How were risks mitigated?

v. What is the impact to year one and ongoing EPS?

vi. What is the integration and communication plan, including key team leads?

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Focus areas for compliance and Internal Audit

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Four areas for Internal Audit and compliance initiatives

• Core Compliance

• Commercial

• Financial Systems

• Tax, Legal & HR

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IMO

Core

Compliance

Commercial

Tax, Legal

& HR

Financial

Systems

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Traditional focus areas

• Internal Controls

- Target environment’s risk threshold

- Policies and procedures

- Key controls

- Foreign Corruption Practices Act (FCPA)

• Certification Processes

- Maintaining Buyer’s 404 compliance

- Maintaining cross-company 303 compliance

• Document Retention

- Records management programs

- Nexus Tax concerns

• Training & Tools

- Compliance and other training for new employees

- Tools to manage compliance processes

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Core

Compliance

IMO

Training

& Tools

Document

Retention

Certification

Processes

Internal

Controls

Core

Compliance

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Value added areas for consideration

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• Order to Cash

- Order management

- Fulfillment, billing, collections & returns management

• Procure to Pay

- Conflicts & risk within Target’s contracts

- T&C normalization

- P-card policies & controls

- Delegation of authority

• Supply chain

- Inventory policies & procedures

- Food safety

- Vendor allowances & promotions

- Retail theft

• Synergy Attainment

- Synergy measurement & tracking

Core

Compliance

IMO

Order to

Cash Procure to

Pay

Supply

Chain

Synergy

Attainment

Training

& Tools

Document

Retention

Certification

Processes

Internal

Controls

Core

Compliance

Commercial

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Value added areas for consideration (continued)

• License Assurance

- Licenses purchased support licenses utilized

• System Integrity

- Security procedures in line with policy

- Proper delegation of authority

• System Integration Integrity

- Integration roadmap does not interfere with controls environment

- Reporting integrity

• Third Party Compliance

- Contractual terms in line with policy

- System access relevant to role

- Adequate controls

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Core

Compliance

IMO

Order to

Cash Procure to

Pay

Supply

Chain

Synergy

Attainment

Training

& Tools

Document

Retention

Certification

Processes

Internal

Controls

License

Assurance

System

Integrity

System

integration

integrity Third party

contract

compliance

Core

Compliance

Commercial

Financial

Systems

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Value added areas for consideration (continued)

• Import and Export Compliance

- Potential CTPAT implications associated with the new entity

- Consolidated claims management reporting procedures

• Tax Audit Compliance

- Tax transfer of local licensing issues

- Tax credit positions may be impacted as a result of transaction

• Insurance Coverage Alignment

- Adequacy of current coverage

- Need for incremental insurance policies

• Employee Related

- Adequacy of payroll controls

- Healthcare compliance

- Corporate card controls

- Travel & expense

- Whistle blowing April 2014

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Tax, Legal

& HR Financial

Systems

Core

Compliance

IMO

Order to

Cash Procure to

Pay

Supply

Chain

Synergy

Attainment

Training

& Tools

Document

Retention

Certification

Processes

Internal

Controls

License

Assurance

System

Integrity

System

integration

integrity Third party

contract

compliance

Core

Compliance

Commercial

Financial

Systems

Import

and Export

Compliance

Tax audit

compliance

Insurance

coverage

alignment Employee

policies

Tax, Legal

& HR

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Divestitures – Market trends for buyers and sellers

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Defining divestiture deal value

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Transaction proceeds/asset

• Divestiture strategy

• Business case, financial model and data

• Divestiture preparation and deal process/auction

• Transaction structure including form of consideration (cash,

debt, equity, earn outs), working capital, net debt and purchase

price adjustments; reps and warranties, escrows and

indemnifications; and tax structure

Transition costs/separation

• Transition services agreements (TSAs) costs – costs to

provide temporary functions needed by the seller

• Separation costs – costs to segregate the business from the

remaining operations

Parent/stand-alone optimization/on-going

• Internal considerations– impact to other seller businesses from

separation of target (customer impacts, etc.)

• Strategic considerations – Post-deal contractual relationships,

competitive and geographical ramifications

• Stranded costs – costs that cannot be conveyed to the buyer

(corporate overhead, excess post deal infrastructure, etc.) which

remain with parent

Key components of value: Workstreams that drive deal value:

Value

Ta

ctica

l e

xe

cu

tio

n

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Key trends – Sellers face a more rigorous divestiture process than in years past, particularly in the PE world

Buyers continue to demand more from Sellers thus increasing the challenges to maximize deal value

• Sellers are expected to highlight value to Buyers

• Buyers demand comprehensive linkage of deal drivers and underlying data

• Buyers require greater depth of detail to support their investment case

• Multiple Buyers as auctions have become more prevalent

• Buyers are increasingly seeking 3rd party perspective

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Past Current

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Divestiture Services, done properly, benefit all parties, and more importantly, adds value to the transaction, however US market practice and consistency still varies

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Why

Divestiture

Services?

Advantages for the business

• Minimizes disruption to the business – only need to discuss things once

• No surprises – early identification of issues allows management to anticipate buyer concerns and develop consistent responses

• All parties talk about numbers management understands

• Allows management early ownership of the process and to be well prepared

• Consistent message/story and supporting analysis to answer buyer’s questions

Advantages for sellers

• Factual accuracy is resolved before issuance of Offering Memorandum

• Reduces value erosion and optimizes negotiating position

• Allows more bidders to remain in auction process longer

• Objective and independent view to balance Offering Memorandum

• More consistent and reliable bids from potential buyers

• Improves speed to market

• Reduce post-close adjustments and liabilities

• Increase odds for smooth transaction closing and post-close transition

• Ability to provide branded deliverables

Advantages for acquirers

• Greater clarity on business drivers and enterprise value

• Confidence in basis for offers – underpins financing

• Saves time, cost and aggravation

• Better use of time in exclusivity phase

• Limits broken deals due to surprises

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This content is for general information purposes only, and should not be used as a substitute

for consultation with professional advisors.

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