lbo valuation process

Private Equity

Linköping

January 8, 2009

Stefan Glevén

® 2008 EQT – All Rights ReservedStrictly private and Confidential

“In finance, Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.”

“Growth can come from a rational organization of talents”

David Ricardo (1772-1823)

Private EquityPrivate Equity – A catalyst for growth?

2


Agenda

I. Introduction to EQT

II. Private Equity

- Process

- Valuation

- Financing

- Value Creation & Exit

III. EQT Infrastructure

3


New York

Copenhagen

Oslo

Stockholm

MunichZurich

Frankfurt

Shanghai

EQT in brief

Founded 1994

Almost 200 employees - 11 offices

80+ Senior Industrialists

Around €11 billion capital raised in 11funds with four investment strategies

– Equity– Expansion Capital– Opportunity– Infrastructure

Invested in more than 70 companies, realizing 37 exits

Top quartile performance over time

Helsinki

Hong Kong

Industrial approach to private equity

Warsaw

4


Industrial heritage

Access to industrial leaders and companies through relationship with Wallenberg family and its tradition of building and developing companies

► Active, long-term owner of highly successful international industrial companies

► Support portfolio companies in their strategic and financial development

► International network used to exchange experience, knowledge and competence

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6


Agenda


II. Private Equity

- Process

- Valuation

- Financing



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Transaction Process

Target identification

Due Diligence

Deal Execution Ownership Exit

8


Deal Sources

Families/corporations seeking partners for the development of their companies

Non-core divisions in large corporations

Privatizations

Forced divestitures

PTP (public-to-private)

From other PE houses and other Funds

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Key Participants

FinancialSponsor

Auditors / Accountants

M&A Bankers

Lawyers

Industry Specialists

Investment Committee

Leverage Finance Bankers

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Agenda


II. Private Equity

- Process

- Valuation

- Financing



11


General Valuation

Discounted cash flow valuation (DCF)

Comparable valuation based on trading comparables

– EV/EBITDA…

Comparable valuation based on precedent transactions

– EV/EBITDA…

There are primarily three valuation techniques used when valuing a company

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General ValuationEnterprise value is the actual economic value of a company

debtNet

EBITDA x Multiple

+= Equity value

Debt - Cash

Enterprise value

13


LBO ValuationLBO valuation of a company is dependent on projections, debt structure and required return

Main assumptions:

Projections for income statement and operational balance sheet

– Dependent on market, market position, management, profitability, cost structure etc

Debt structure

– Dependent on cash flow generation and banks willingness to finance the investment

Exit multiple

– Dependent on company and industry profile

Required return for the investment

– Dependent on EQT

Most important is to build a solid Base Case, based on assumptions for growth, margins and cash flow

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General Valuation

Year 0 Year 1 Year 2 Year 3 Year 4Revenues 100 110 121 133 146Growth % 10% 10% 10% 10%EBITDA 12.0 13.2 15.7 17.3 20.5EBITDA Margin % 12.0% 12.0% 13.0% 13.0% 14.0%

Free Cash Flow 7.0 8.0 10.0 12.0 15.0

Net Debt/EBITDA 5.0xDebt Year 0 60

Net Debt 60 53 45 35 23

Year 4EV/EBITDA Multiple: 7.0xEBITDA 20.5Enterprise Value: 143Debt: 23Equity Value: 120

Step 1. Define Base Case

Step 2. Define Debt Structure

Step 3. Define Exit Multiple

Required IRR 30%Step 4. Define Required IRR

Year 0Debt 60Equity 42Enterprise Value 102EV/EBITDA 8.5x

EV = 102

Illustrative Example

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Valuation Summary

70 75 80 85 90 95 100 105 110 115 120 125 130

110LBO:20-25% IRR; 6x-7x EBITDA Exit

130DCF:7.5%-8.0% WACC; 6x-7x EBITDA TV

105Trading Comparables:7x-8x 2009E EBITDA

110Trading Comparables:11x-12x 2009E EBIT

115Precedent Transactions:8x-9x LTM EBITDA

95

105

95

100

105

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Illustrative Example


Agenda


II. Private Equity

- Process

- Valuation

- Financing



17


Senior Debt

Mezzanine

Unsecured Note

Common Equity/Shareholder Loan

Senior Debt

2nd Lien Loan

2nd Lien Note

Unsecured Note

Mezzanine

PIK Loan PIK Note

Common Equity/ Shareholder Loan

The Past… Before Lehman

General debt FinancingDebt financing is a fundamental component for a leveraged buy-out

Senior Debt

PIK

Common Equity/Shareholder Loan

After Lehman

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LBO Loan Volume Annual Senior LBO Loan Volume

€0B

€20B

€40B

€60B

€80B

€100B

€120B

€140B

€160B

2003 2004 2005 2006 2007 YTD 2008

( € in billions) ( € in billions)

€0B

€20B

€40B

€60B

€80B

€100B

€120B

€140B

1998 2000 2002 2004 2006 20080

40

80

120

160

200

240

280

320

1Q 2Q 3Q 4Q Deal Count*

Source: Standard & Poor’s LCD

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Debt VolumesLBO volume has been significantly lower in YTD 2008


Impact on Leveraged Finance Transactions

5.9x

4.5x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

2007 3Q08

34%

44%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2007 YTD Sep 2008

10.1x

8.7x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

2007 3Q08

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 Jan-Sep 08

Sr Only Sr + 2nd Lien Sr + Mezz Sr + 2nd Lien + Mezz

LBO Debt Structure Average Leverage

Average Purchase Multiple Average Equity Contribution

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The debt structures has clearly changed during 2008


Agenda


II. Private Equity

- Process

- Valuation

- Financing



21


The Path to Value CreationThere are several ways to create value in a portfolio company

Sales Growth

Margin Expansion

Strategic re-positioning

Debt pay down

• Accelerate organic opportunities• Add-on acquisitions to expand product range and/or

geographical reach and/or provide synergies

• Operational Improvements• Product mix enhancement

• Equity “Story” Improvement• Consolidation, Critical Mass

• Using the target company’s cash flows to increase the equity component of enterprise value by repaying debt

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PeopleEQT appoints key personnel

- The chairman always appointed from EQT network of international experienced industrialists

- EQT partner always member of the board as owner but never chairman

- EQT active in assisting in the recruitment of first line management

- Internationally experienced executives appointed to the board or as consultants

StrategyBoard defines and monitors roadmap for creating shareholder value

- Strategic positioning

- Internationalization- M&A- Financing issues- Preparation for exit

EQT contributes industrial and financial expertise

IncentivesBoard, management and owners interests are aligned through investmentsCommon mindset established through

- Joint business plan- Transparency- Open

communication

Industrial Acceleration

EQT

Industrialists

Management Team

Network

Industrial Acceleration

EQT’s Industrial Acceleration Strategy

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• Has delivered on the plan? (financials)• Has the right structure? (reporting etc)• More to do? (marginal return)

• Equity Markets• Debt Markets• Competing Offerings

• Return vs requirements• Need for exits (fund raising etc)• Portfolio Management issues

• Many• Willing• Able

EQT has not made a good deal until exit – the goal is to achieve a return of at least 2-4 times investment in three to five years

Exit General

Company

Market

Buyers

EQT

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Focus on Growth and Efficiency Proven Ability to Drive Growth

Debt pay-down

Strategic re-positioning

Marginimprovements

Revenue growth

Historic Breakdown of Value Creation

3%

19%

36%

42%

0%

20%

40%

60%

80%

100%

EQT Value CreationEQT has historically created value through accelerated revenue growth, increased efficiency and strategic re-positioning

20%

13%12%

Employee growth Sales growth EBITDA growth

Average growth of all EQT portfolio companies in Europe (1)

(1) Includes organic and acquisitive growth. Analysis based on Carl Zeiss having acquired Sola and Dragoco Haarmann & Reimer. If base for these acquisitions is adjusted, EQT portfolio companies recorded an average +10% employee growth, +11.3% sales growth and +18% EBITDA growth

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Agenda


II. Private Equity

- Process

- Valuation

- Financing



26


EQT InfrastructureThe EQT Infrastructure fund was launched in November 2008

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EQT Infrastructure

Fund size: ~€1.2 billion

Focus on Northern and Eastern Europe

– Advising teams in Stockholm, Helsinki, Munich and New York

Medium-sized infrastructure operating assets/companies – control or co-control positionsPrimary targets;– Regulated basic infrastructure (e.g. power generation, power transmission and

distribution, wind power, gas pipelines, telecom)– Concession-based essential infrastructure (e.g. airports, ports, toll roads, rail

transport, water and waste treatment facilities)

1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity”

EQT will invest €6–7 billion in infrastructure assets in the next years with a focus on the Northern and Eastern Europe

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Infrastructure - macro perspectiveEQT Infrastructure

Global need for new and improved infrastructure

– Rising global population

– Focus on competitiveness

– Huge investment need (some €52 trillion for basic infrastructure worldwide through 20301)

Privatization important part of infrastructure investment solution - risk split, free up capital, strengthen competitiveness

Decreased government spending on infrastructure

1. Source: OECD “Infrastructure to 2030 Telecom, Land, Transport, Water and Electricity” 29


Infrastructure fundamentals

Source: OECD

Decreased government spending on infrastructure

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lbo valuation process

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