cfo and capital market financing for inorganic growth · · 2016-06-30cfo and capital market...

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CFO and Capital Market Financing for Inorganic Growth

คณุพรเทพ ศรีสอ้าน กรรมการผูจ้ดัการ

บจ. เดอะควอนทก์รุป๊

Module 5: CFO and Capital Market Financing

What is M&A? Key Questions for M&A M&A process and preparation Roles of Key Parties Key Success Factors Case Study

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Outline:

WHAT IS M&A?

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What is M&A?

5

“ A buyout is an investment transaction by which an entire company

or a controlling part of the stock of a company is sold. A firm buys out a

stake of a company to strengthen its influence on the company's

decision-making body. ”

“ Mergers and Acquisitions (M&A) refers to the aspect of corporate

strategy, corporate finance and management dealing with the buying, selling and merging of different companies. ”

Merger VS Acquisition

Merger

A merger is a non-cash exchange offer of

common shares of companies of similar sizes

The parties decide before the merger the

surviving entity and the branding or co-

branding

A merger can have co-brands such as

Chase-JP Morgan, UBS Warburg, Exxon-

Mobil, Daimler-Chrysler

Overtime, the combined entities in a merger

typically transform into using a single brand

over the long-run. Deutsche Bank (BT, Alex

Brown, Morgan Grenfell), Chase (Chemical

Bank)

Whatever makes best business sense is the

best policy

Acquisition

Minority acquisitions

> 25% veto rights

Majority acquisitions

50% control

>75% supermajority

Acquisition currency

Cash

Securities

Premiums paid for control

6

Global M&A Overview

Quarterly Global M&A Growth

7

2,415

1,713

2,0962,275 2,307

2,219

3,266

4,086

632

2008 2009 2010 2011 2012 2013 2014 2015 2016

Q1 M&A value Q2 M&A value Q3 M&A value Q4 M&A value

Deal Value (USD bn)

CAGR: 7.8%

Source: MergerMarket

Energy, Mining and Utilities

21%

Pharma Medical &

Biotech12%

Consumer10%

Financial Services

7%

Industrial & Chemicals

12%

Technology7%

Telecom7%

Others24%

Global M&A Activities

8

M&A Sector Breakdown by Deal Value

2015USD 4.1 tn

2014USD 3.3 tn

25.1%1Q2016

USD 2.9tn

Energy, Mining and Utilities

15%Pharma

Medical & Biotech

13%

Consumer12%

Financial Services

12%


11%

Technology10%

Telecom6%

Others21%

Energy, Mining and Utilities12%

Pharma Medical &

Biotech13%

Consumer6%

Financial Services8%


22%

Technology8%

Business Services

6%

Others25%


55

33

62

47

7074

56

48

13

2008 2009 2010 2011 2012 2013 2014 2015 2016

Q1 M&A value Q2 M&A value Q3 M&A value Q4 M&A value

Southeast Asia M&A Overview

Southeast Asia M&A Trend

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Value of Deals (USD bn)

CAGR: -1.4%


Southeast Asia M&A Sector Breakdown

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Southeast Asia M&A Sector Breakdown by Deal Value

2014USD 55.4 bn

-14.3%

Real Estate21%

Transport8%

Energy, Mining, Utilities20%TMR

8%

Consumer3%

Construction8%

Industrials, Chemicals

2%

Others30%

Real Estate18%

Transport16%

Energy, Mining, Utilities15%TMR

6%

Consumer11%

Construction11%

Industrials, Chemicals

10%

Others13%

2015USD 47.5 bn


KEY QUESTIONS FOR M&A

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Key Questions for M&A

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Strategic Rationale

Valuation

Transaction Structure

Financing

Why

How much

How

How to pay for it

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2

3

4

Strategic Rationale: M&A Strategic Rationales

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Cost reduction

Operational synergy

Geographic expansion

Something Different

Value chain benefits

Technology & Know how

More of the same

Value Creation Acquisition of

Technology / Patent

Increased Bargaining Power: with suppliers / customers

Expanding Sales / Expanding Market Share

Broaden Customer Base

Size Rationalization / Economies of Scale and Scope

Costs Rationalization Tax Benefits

Expanding the portfolio

Why?

Strategic Rationale: Successful M&As are like a triathlon:

the winner masters all three areas

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Strategic rationale Acquisition process+ Integration+

Don’t overpay Adequate resources and

management capability

Scale

Scope

Market Power

Skill

Stand-alone value of target

Synergies not given away

Thorough due diligence

“guilty until proven innocent”

Good project management

Fusion of cultures

Manage transition phase

1 2 3

Why?

Valuation: Multi-Disciplinary Approach

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Multiples Method

Earnings Multiples can only be used when

there are earnings. Without earnings then

we would need to switch to B/S multiples

Selection of which multiples to be used is crucial as an efficient market is likely to

adjust multiples to reflect level and earnings

and cyclicality

DCF Method

The use of DCF is highly recommended, as it

disciplines the process of capital budgeting

and provides understanding of risk-reward

dynamics, and also reflect “Normalization

Earnings”

Generally, multi-disciplinary approaches for valuation will be utilized in M&A activities.

Which method to focus on depends on where we are in the cycle

Nonetheless, DCF is the only method that covers all aspects that are unique and specific on the

business

Balance Sheet Multiples:EV/ICP/BVEV/TonReplacement: IC per ton

Earnings Multiple:EV/FCFP/CFFOEV/EBITDAP/E

Normalized Earnings

DCFCyclicality Normalization

“The DCF Paradigm”

How much?

Valuation: Methodology

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Description

Comments

Requires significant input and information from the company being

valuedIssues

Discounted Cash Flow (DCF)

Comparable Multiples Asset-based Valuation

NPV derived from discounting of projected cash flows

Requires appropriate discount rate

(leverage ratio & cost of debt and

equity)

Primary method of valuation

Provides customised financial

forecasts and valuations independent

of the company’s capital structure

Use of relevant multiples from:

Comparable companies with

similar characters

Comparable (actual)

transactions

Secondary method of valuation

Simple “benchmark” market

valuations against similar companies

and/or transactions

Valuation influenced by many external factors including market conditions

Excludes a number of company

specific factors (e.g. growth, etc.)

Valuation based on the total combined market value of all assets

Secondary method of valuation

Provide valuations from the capital expenditure perspectives (build vs.

buy analyses)

Excludes “intangible value” of the

business, including:

Brand premium

Management expertise

Valuation is widely perceived among the general public as a science. In practice, it is more of an

art and there is no single correct answer to what is the value of a company. It is a common

practice for financier to use a “multi-disciplinary” approach.

How much?

Transaction Structures: Transactional Issues

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Asset-Deal Amalgamation Share-Deal

Cash-needs (bridge

financing)

Yes, for payment and

subscription of new shares and

may required cash to repay

loan/debenture

None

(unless bond-redemption

is considered)

Yes, for payment

and subscription of

new shares issued only

Ease of Implementation

Liquidation and Tax audit Required for dissolved entityTax audit required,

but not liquidationNot required

Tender offer

/ Delisting of SellerYes

Not required,

New Co. automatically listedYes

Shareholders Voting rights (under SET regulations)

Common shareholders cannot vote

All can voteCommon shareholders

cannot vote

Need creditor’s consent Yes Yes No

Utilization of tax loss carried forwards

Yes for Buyer, No for Seller No for Both Yes for both

Tax to companies Transfer tax on Seller's assets No No

BOI tax benefit Need BOI approval Need BOI approval No need for BOI approval

1 2 3

How?

Transaction Structure

All transactions will involve a number of issues which will need identifying and structuring to

ensure that the execution is as smooth as possible.

Shareholding

Structure & regulation

Asset or share

transaction

Method of payment

Tax & duties

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2

3

4

Major shareholder groups/ Shareholding Structure

Shareholding limits (i.e. Foreign shareholding limit)

Buyer to purchase shares or assets

Merger type also include amalgamation

Cash or share or both

All payment upfront or in intervals/deferred payment

Earn-out (bridge valuation gap)

Tax implications for buyer and seller

How?

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Transaction Structure: Shareholding issues

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The single most important thing when assessing the potential of a target is the owners’ identification

and whether these shareholders are willing to sell:

Ownerships can be shared by group of shareholders rather than one individual shareholder

Fragmented ownership would make completion more difficult

From time to time, there will be limits set for foreign shareholding as dictated by either article of

association (can be changed) or law

0% 25% 50% 75% 100%

Veto rights Control Super majority Total controlRights:

Ownership:

None

Examples of

Industries

subject to

foreign limits

Banking Telecommunications and

Airline

How?

Financing: Acquisition Package

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Source Cost Consideration

Internal CashLeast

expensive Tenor mismatch

Internal Debt Capacity Cost mismatch

Target Debt Capacity Currency mismatch

Sub. / Lev. Debt Capacity Covenant / Collateral

Mezzanine Debt Ring Fence

(Project vs. Corp. Finance)

Convertible Bonds Refinance risk

Equity Most expensive

How to pay for it?

M&A PROCESS AND PREPARATION

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Right Approach to the Transaction

Benefits Considerations

Pre-emptive Approach

to One Bidder

(“Bilateral”)

▲ Speed and simplicity if successful

▲ Least disruptive to the business

▲ Greater confidentiality

▲ Preserves options

▼ Having no competitive tension (1 bidder at a

time), thus might not achieve the highest

valuation

▼ Less certainty of closure

▼ If the deal is off, overall process will be delay as

the process will have to start all over again

Targeted Process

(“Limited Auction”)

▲ Approach most committed potential

partners (5-10)

▲ More certainty than one-on-one

▲ Limited disruption of business

▲ Clear competition between rivals creates

price tension

▼ Maintenance of confidentiality is a challenge

relative to One-on-one

▼ Great demand on management time

▼ Possibility of missing less obvious partners

Controlled Process

(“Full Auction”)

▲ Potentially maximize price

▲ Most certainty of closure

▼ Greater risk of loss of confidentiality (highest

possible number of bidders)

▼ Higher depress of disruption

▼ Time-consuming process

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Transaction Process Timeline

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Negotiations Closing

Perform Vender Due Diligence Data collection and perform

the valuation exercise Identify transaction rationales Identify suitable structure Conduct internal reorganization

(if required)

Prepare Definitive Agreements

Review and negotiate terms and conditions on definitive agreements (DA)

Fulfilling Conditions Precedent

Sign DA

Tender offer (if required)

Transaction Completion

Approximately 8 weeks Approximately 4 Weeks

Finalize all agreements

(i.e. SPA, SHA)

Engage advisors;

Prepare IMCompletion

Due Diligence by Investor

Non-binding offer

Provide necessary document in the dataroom

Q&As from investor, management interview and / or site visit

Finalize pricing terms and conditions

Binding offer

Approximately 8 weeks Approximately 4 weeks

ValuationIM Preparation

Release IM

Sell Side

Buy Side

Preliminary valuation, strategic rationale and business due diligence

Negotiation and preliminary agree on valuation, major terms and conditions

Review and negotiate terms and conditions on definitive agreements (DA)

Finalize acquisition package

Fulfilling Conditions Precedent

Sign DA

Tender offer (if required)


Thorough due diligence Q&As from investor, management

interview and / or site visit Finalize pricing Arrange financing and post-

acquisition plan

Public Tender Offer Process

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Within 15 days

Submission of T/O for Securities

(Form247-4)

Within 3 days

Opinion of the Independent Financial Advisor in relation

to the T/O(Form 250-2)

Day 20

Day 21

Submission of Report of Preliminary Tender

Offer Result (Form 247-6)

Day 25 - 45

End of T/O Period

Within 5 days

Submission of Report of the Tender Offer

Result(Form 256-2)

Day 1

Start of T/O Period

Within 7 days

Submission of T/O Statement of

Intention(Form 247-3)

The last day that offerees can revoke their tendered

shares

Vendor Due Diligence (VDD)

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Topic Potential Benefits

Accounting and tax

Legal

Environmental

Reconciliation of accounting numbers and identify key risks involving the followings:

sources of each income and expense (i.e. quality of earnings)

accounting policies

quality of financials

Identify potentials tax liabilities

Identify key risks of legal issues such as:

Agreements between suppliers and customers

Licenses pertaining to each businesses

Any potentials liabilities that may arise out of “material agreements”

Identify key risks pertaining to environmental issues such as;

Waste management involving toxic waste and water etc.

Level of pollution from manufacturing plants Layout and storage area of hazardous materials

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2

3

The key objective of a VDD is to identify key risks and the potential solutions to solve and mitigate such risks.

Key Terms of Non-binding Offer

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Key Issues Terms and Conditions

Stake % stake

Considerations Total consideration and / or earn-out

Due Diligence Usually 2-3 months Key due diligence items and topics

Closing Date

Corporate Governance

Tag and drag along rights The right to appoint Board Member and investment committee Customary dead lock provision

Exclusivity # of days from submission date of NBO or execution of the Formal

Agreement

Law Law of country to be agreed on

Other key conditions

Non-competition Related party transaction Key management continue in their current role and capacity

Key Terms of Share Purchase Agreement

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Conditions Precedent

Shareholder approvals (seller and purchaser) Antitrust regulatory clearance Financing Purchaser conducting satisfactory due diligence Condition to be satisfied at discretion of either party Consequences of failure to satisfy conditions: break free or payment of

costs Long stop date / waiver of conditions

Consideration

Types: Cash / Shares Assumption or repayment of debt

Structures: Debt free/ cash free deals Completion accounts Deferred consideration Earn-outs Locked box structures

Business terms Non-competition Related party transaction

Key Terms of Share Purchase Agreement (Cont’d)

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Representation, Warranties

and Indemnities

Accounting and financial

Commercial

Taxation

Properties

Employees, pensions and incentives

Limitation of liability

Minimum threshold and maximum claims

Pre-completion covenants

Access to management and information Conduct of business in ordinary courses Capital expenditure Disposal of assets Non-routine borrowings / payments Giving of guarantees / indemnities Payment of dividends

Completion

Stock transfer forms and share certificates Corporate books Directors / auditors’ resignations Completion board minutes Consideration

ROLES OF KEY PARTIES

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CFO’s Roles

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CFO(with assistance from FA)

Shareholders / Board / Management / Lenders

Advisors(Financial / Lawyer /

Accountant)

Seller / Buyer(s)

Regulators(SET / SEC / BOT)

CFO’s Roles

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Engage advisors;



Non-binding offer

Binding offer


Release IM

Coordinate in information sharing and discuss transaction rationales

Assist in providing expert view on industry and financial forecast

Solicit and appointment of financial advisors, lawyer and accountant

Review and negotiate terms and conditions on Definitive Agreement

Approval from BOD, SEC, SET, and BOT (if required)

Review disclosure documents (if required)


Answer question from investor(s), coordinate management interview and / or site visit

Finalize pricing terms and conditions

Approval from BOD, SEC, SET, and BOT (if required)

Sell Side

Buy Side

Discuss transaction rationales Assist in providing expert view

on industry and financial forecast

Solicit and appointment of financial advisors, lawyer and accountant

Review and negotiate terms and conditions on DA

Finalize acquisition package Approval from BOD, SEC,

SET, and BOT (if required)

Review disclosure documents (if required)

Review Tender Offer Statement of Intent (if required)


Perform financials due diligence Attend management interview and

/ or site visit Finalize pricing Arrange financing and post-

acquisition plan Approval from BOD, SEC, SET, and

BOT (if required)

SET Approval Requirements

There’re 4 criteria that SET applies to determine the transaction size as follow

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Criteria Transaction Size Calculation

Net Tangible

Asset (NTA)Stake x NTA of target

NTA of listed company

Value of

ConsiderationValue of consideration

Total assets of listed company

Net Profit Stake x Net profit of target

Net profit of listed company

Value of

Issued

Securities

Number of newly issued shares

Number of issued and paid up

shares

ThresholdSET

Disclosure

Circular to

S/H

S/H

Approval

SET

Approval

X < 15%

X < 15% +

issue

securities

15% ≤ x <

50%

X ≥ 50%

X ≥ 100%

Backdoor Listing and Related Party Transaction

Backdoor Listing Criteria

1. Transaction size more than or equal to the listed company, or

2. Change control at listed company, or

3. Existing shareholders of the listed company are diluted to less than 50%

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Size Transaction Size Consideration Approval Requirement

Small ≤ 0.03% NTA Approval from Management Committee

Medium 0.03% < x < 3% NTA Approval from Board of Director

Large ≥ 3% NTA Approval from Shareholders

Backdoor Listing Criteria

Approval Requirement for Related Party Transaction

Financing Considerations

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Company’s debt

repayment capability

Company’s current

restricted covenants

Security Offered

Long-term capital structure

Future financing requirements

Degree of flexibility matching principle

Principle repayment options

Financial Advisor’s Roles

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Engage advisors;



Non-binding offer

Binding offer


Release IM

Data collection, review company business

Perform the valuation exercise and recommend pricing range

Discuss transaction rationales Solicit and facilitate discussion

with the Investor(s)

Liaise with the Company and legal advisor in preparation of DA

Assist the Company in reviewing and negotiating terms and conditions on DA

Assist with any required approvals

Assist the company in corporate formalities and fulfilling Condition Precedent

Assist the Company in steps leading to the signing of DA


Prepare disclosure documents (if required)

Assist in dataroom preparation and manage the flow of information and requests from investor(s)

Assist in arranging management interviews and/or site visits


Sell Side

Buy Side

Preliminary valuation, strategic rationale and business due diligence

Negotiation and preliminary agree on valuation, major terms and conditions

Solicit and appointment of advisors (i.e. Legal, Tax)


Finalize acquisition terms and conditions


Check Conditions Precedent Transaction Completion Prepare disclosure documents

(if required) In case of Tender offer,

submission of T/O statement of intention, report of T/O result and solicit an IFA (if required)

Thorough due diligence Q&As from investor, management

interview and / or site visit Finalize pricing and economic

model Financing plan (if required) Post-acquisition plan Assist with any required approvals

Accounting and Tax Advisor’s Roles

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Engage advisors;



Non-binding offer

Binding offer


Release IM

Data collection Conduct accounting and tax

vendor due diligence (if required)

Advice a suitable and tax efficient structure for the transaction

Assist on fulfilling Conditions Precedent (if needed)

Dataroom and Q&A support on financials and tax (if required)

Sell Side

Buy Side

Perform a thorough due diligent review accounting and tax

Prepare a due diligence report Advice a suitable and tax efficient

structure for the transaction

Check the Conditions Precedent (if needed)

Legal Advisor’s Roles

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Engage advisors;



Non-binding offer

Binding offer


Release IM

Data collection Conduct legal vendor due

diligence (if required) Prepare a summary report of

the key issues and suggest on possible solutions

Prepare and review NDA

Prepare Definitive Agreements


Assist in fulfilling Conditions Precedent

Dataroom and Q&A support on financials and tax (if required)

Sell Side

Buy Side

Prepare and review NDA (if required)


Finalize acquisition package

Assist in checking Conditions Precedent

Perform a thorough due diligent review accounting and tax

Prepare a due diligence report

KEY SUCCESS FACTORS

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Key Success of M&A Transaction FactorsSell-side

Identify key issues and prepare possible solutions in

advance

Provide relevant documents in a timely manner

Disclose the right information to the right parties

Provide the clear process timeline and expectations

to the potential buyers

Stick to the timeline and maintain a competitive

environment

Review and negotiate all terms in all definitive

agreement before signing

Avoid insider trading

Be aware of each party’s interest and limitation

Comply with rules and regulation

Buy-side Do not overpay and / or over-financing

Hedge information asymmetry with earn-out types

of agreement

Identify transaction rationales and potential

synergies

Thorough Due Diligence on the Target

Be realistic about information availability and plan to

bridge the gaps between seller and buyer

Review and negotiate all terms in all definitive

agreement before signing

Stick to the given timeline

Avoid insider trading

Comply with rules and regulation

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Be prepared Be well supportedDon’t bite more than

you can chew

1 2 3

WORKSHOP / CASE STUDYCFO and Capital market financing for inorganic growth

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Case Study:

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BJC’s Acquisition of Big C Thailand

Case Study: BJC’s Acquisition Big C Thailand

42Source: IFA report prepared by Maybank KimEng and The Quant Group

Target

Big C Supercenter Public Company Limited (“Big C”) operates hypermarket and

supermarket business in Thailand; Big C the second largest hypermarket and supermarket

player in Thailand with a network of over 700 stores nationwide (Big C Supercenter. Big C

Markets, Mini Big Cs, and Pure Drugstores)

2015 revenue is THB 133.7 billion and EBITDA of THB 12.9 billion

Purchase Price THB 252.88 per share, for a total equity consideration of THB 208.6 billion

Net debt is THB 9.8 billion, thus enterprise value is THB 218.5 billion

Acquired Stake 58.55% held directly and indirectly by Geant International BV

41.44% from public shareholders through mandatory tender offer

Transaction Financing 100% debt financing through 12-month maturity bridging loan

Seller Geant International BV, a holding company within Casino Group

Public shareholders, consisting primarily of Chirathivat family members

Strategic Considerations to the Transaction

Advantages

• Short-cut to modern retail business; immediate ramp-up to 700 stores

• Immediate synergies with existing operations

• Well-positioned for growth toward AEC • Diversification of BJC’s businesses in

packaging goods and services, consumer goods, and medical goods

• Consistent with BJC’s goal to secure own distribution channels

Disadvantages

• Increased financial liabilities and interest expenses

• Impact to BJC’s ability to pay dividends

• BJC’s limited experience in operating retail business

• Less flexibility in operation as both BJC and Big C are listed in SET, where any transactions are subject to SEC and SET regulations

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Potential Synergies

Commercial

synergy1

Store optimization program to increase sales and

density through store conversion

Implementation of centralized planning Access to land

Purchasing

synergy 2 Higher bargaining power to dictate terms with

suppliers

Cost synergy3 Costs optimization through share of various

assets and processes such as:

Logistics (distribution and warehouse)

Administrative departments

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Value Consideration

45

At 252.88 THB/share, the implied EV/EBITDA multiple is 16.9x

Comparable share price using various methodologies

DCF

Market

Comparable

Thai

Comparable

EV / EBITDA

LTM

2016E

P / E

LTM

2016E

Precedent Transaction Comparable

Regional

Comparable

EV / EBITDA

LTM

2016E

P / E

LTM

2016E

LTM

VWAP Previous 30, 60, 180, 360 Days

Research Analyst Consensus

Offer price = 252.88 THB/ShareAs-is

Synergy Value

179.9

194.9

236.5

220.2

240.4

210.4

154.8

154.0

176.6

165.0

213.0

197.0

194.1

222.5

240.2

262.6

244.6

265.7

232.5

172.3

171.5

195.2

182.3

236.7

219.8

214.6

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Q & A

cfo and capital market financing for inorganic growth · · 2016-06-30cfo and capital market...

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