Valuation Training

Strictly Private and Confidential

Investment Banking

To the extent your pitch book contains references to swaps, you are required to include the following mandatory footnote on the first page where such swap reference appears, including the appropriate swap product partner area.This discussion is provided for informational purposes only. For further information regarding swaps, please contact [Insert appropriate swap product partner area] (e.g., [the Derivatives Solutions Group at (212) 723-6333.], [the FX Advisory Group at (212) 723-3657.], [the Commodities Group at (713) 752-5222.], [the LatAm Derivatives Group at (212) 723-1232.]).

Table of Contents

1. What are we Valuing? 1

A. Valuing a Public Company 2

B. Valuing a Private Company 3

2. Valuation Methodologies 4

A. Comparable Companies 6

B. Precedent Transactions 9

C. Discounted Cash Flow 12

D. Leveraged Buy-out 19

1. What are we Valuing?

· When we value a firm we are essentially attempting to put a value on the equity and the debt injected into the company· Both debt and equity holders have a claim on the assets and the profits generated by those assets

– As mentioned above, the claim that debt holders have on the profits generated is usually already agreed (e.g. interest)– Equity holders are then entitled to the remaining profit of the company (net profit)

· Given that equity and debt holders are entitled to a proportion of profits, several of the methods that we use to value firms are based on the profit streams of companies and this is what we will focus on today – However depending on the industry you work in, different valuation methodologies exist some of which may not be based on profits

· Note that for publicly listed companies, market values already exist and enterprise value can be calculated from market data – However the methodologies discussed today are also used by analysts to determine whether a publicly listed company is over/

under-valued and what is a “fair value” for a company

What is a Firm and What are we Trying to Value? A business can have many components to its capital structure, all of which have some form of claim on the overall business. Firm value represents the aggregate value of all interests in a business.

Minority Interests

Pref. Shareholders

Common Shareholders

Creditors

Firm Value

· A firm is a group of assets (and associated liabilities) that is used to produce output through the transformation of inputs (e.g. labour, materials, property etc.) and in doing so generate profit for its owners

· Equity, put simply, is the money that is injected into the company by the owners of the company in return for shares

Firm Value is the collective value of all stake holdings (equity, debt, etc.) with claims on a valued asset (e.g. operating assets) or economic streams (e.g. revenue, EBITDA) generated by such assets.

· Debt is money which is borrowed from investors and financial institutions and has an agreed rate of return (e.g. interest) and repayment terms between the company and the lender

1 What are we Valuing?

A. Valuing a Public Company

The Composition of Enterprise ValueFor a public company, we are able to calculate firm value based on publicly available information.

Net Impact of Options = No. of Options x (Share Price – Avg. Exercise Price)

In-the-Money Convertible Securities Potential Shares from In-the-Money Convertibles x Share Price

Total Debt = Debt (LT, ST, Out-of-the-money Convertible) + Finance Leases

Market Capitalisation = Share Price x Number of Shares

Liquid Resources Cash + Marketable Securities

Market Value of JVs and Associates

Market Value of Minority Interests

+

+

+

–

–

+

Value of shares in the market

Value of shares potentially issued from options, net of cash received

Value of shares potentially issued from convertible securities (see later)

Bank loans, overdrafts, bonds, convertible debt as well as finance leases

Not only cash in the bank, but also securities held by the company readily saleable

Interests in companies partially owned but which the company does not have control (owns <50%)

Interests of third parties in subsidiaries under the company’s control (owns >50%)

Equity Value

Net Debt

2 Valuing a Public Company

B. Valuing a Private Company

Valuation MethodologiesThe most commonly used methodologies in our advice to clients are outlined below.

Multiples Based Valuation Cash Flow Based Valuation

Comps Based Valuation (Inc. Sum-of-the-Parts) Discounted Cash Flow Precedent Transactions Leveraged Buy Out A B C D

· Multiples-based technique with reference to relevant publicly-traded market prices

· Based on relative valuations of public companies that are most comparable to our target

· Valuation multiples of such companies are applied to earnings metrics of our target company (e.g. sales, EBITDA) to derive valuation

· Multiples-based technique with reference to relevant completed M&A transactions

· Similar to comps based valuation

· Multiples are applied to earnings metrics – sales, EBITDA

· Most common methodology to estimate the fundamental of “intrinsic” value

· Valuation is based on cash flows attributable to the firm, irrespective of capital structure

· Value equal to the sum of the present values of such cash flows

· Discounted Cash Flow valuations are founded on the premise that company value is equal to the value of future cash flows generated by the company and available to be paid out to investors, discounted at the required rate of return demanded by investors

· Valuation based on the maximum amount a potential private equity investor can afford to pay for the business to achieve a target return

3 Valuing a Private Company

2. Valuation Methodologies

Summary Financial Data – Company A

Fiscal Year Ending 31 December

£ Million, Unless Otherwise Stated 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

P&L

Sales 1,000.0 1,082.0 1,157.7 1,221.4 1,270.3 1,317.3 1,356.8 1,390.7 1,418.5 1,446.9 1,475.8 1,505.3

Growth 8.2% 7.0% 5.5% 4.0% 3.7% 3.0% 2.5% 2.0% 2.0% 2.0% 2.0%

EBITDA 130.0 162.3 196.8 224.7 241.4 256.9 271.4 278.1 283.7 289.4 295.2 301.1

Growth 24.8% 21.3% 14.2% 7.4% 6.4% 5.6% 2.5% 2.0% 2.0% 2.0% 2.0%

Margin 13.0% 15.0% 17.0% 18.4% 19.0% 19.5% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Depreciation (50.0) (54.1) (60.2) (64.7) (68.6) (72.4) (74.6) (76.5) (78.0) (79.6) (81.2) (82.8)

% Sales 5.0% 5.0% 5.2% 5.3% 5.4% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%

EBIT 80.0 108.2 136.6 160.0 172.8 184.4 196.7 201.7 205.7 209.8 214.0 218.3

Growth 35.3% 26.3% 17.1% 8.0% 6.7% 6.7% 2.5% 2.0% 2.0% 2.0% 2.0%

Margin 8.0% 10.0% 11.8% 13.1% 13.6% 14.0% 14.5% 14.5% 14.5% 14.5% 14.5% 14.5%

Cash Flow

CapEx (67.5) (68.7) (69.8) (71.2) (73.4) (76.1) (76.1) (76.5) (78.0) (79.6) (81.2) (82.8)

% Sales 6.8% 6.4% 6.0% 5.8% 5.8% 5.8% 5.6% 5.5% 5.5% 5.5% 5.5% 5.5%

CapEx/Depreciation 135.0% 127.0% 116.0% 110.0% 107.0% 105.0% 102.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital (50.0) (54.1) (57.9) (61.1) (63.5) (65.9) (67.8) (69.5) (70.9) (72.3) (73.8) (75.3)

% Sales (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)% (5.0)%

Change in Working Capital 4.1 3.8 3.2 2.4 2.4 2.0 1.7 1.4 1.4 1.4 1.5

Our analysis will be based on the following dummy company, Company A.

Company A

4 Valuation Methodologies

1,160

1,392

1,696

2,035

1,200

1,799

1,600

1,781

2,138

1,889

2,267

2,419

2,332

1,862

500 1,000 1,500 2,000 2,500 3,000

Comparables

Comparables – 20% Premium

SOTP

SOTP – 20% Premium

Precedents

DCF

Simple LBO

Valuation SummaryBased on various valuation methodologies, we have arrived at the following range of values for Company A.

Company A

1

2

3

4

5

6

7

5 Valuation Methodologies

A. Comparable Companies

Comps Based Valuation (Inc. Sum-of-the-Parts)

· Based on relative valuations of public companies that are most comparable to our target

· Valuation multiples of such companies are applied to earnings metrics of our target company, e.g. sales, EBITDA to derive valuation

· Compare and benchmark company on both qualitative and quantitative metrics. Examples of such metrics include – Sales and EBITDA growth – EBITDA margin and future margin uplift – Geographic Diversification – Quality of Brand and international potential – Stage in company lifecycle, etc.

· Decide whether company should be placed on a valuation multiple at a discount or a premium to the different comps given the metrics analysed above and value it at a suitable multiple

· Using this analysis we can also look at whether current publicly listed companies are undervalued or overvalued compared to its peer group

The Concept of MultiplesThe principal of comps based valuation is based on comparing our target company to publicly listed companies to derive a “fair” valuation.

6 Comparable Companies

Comparable Companies Analysis

Calculating Comp-based ValuationsBased on our comparable companies analysis, Target Company A is valued between £1,160m and £1,781m on a trading basis and between £1,392m and £2,138m on a take-out basis.

Company A

EV / Sales EV / EBITDA

CompanyShare

Price (p)Market

Cap (£m)Enterprise Value (£m) 2014 2015 2016 2014 2015 2016

2014–2016 Sales CAGR

2014–2016 EBITDA CAGR

2014 EBITDAMargin

Company B 375 5,025 6,556 2.1x 1.9x 1.8x 10.5x 8.6x 8.2x 8.0% 13.3% 22.0%

Company C 1,052 768 968 1.3x 1.2x 1.2x 9.3x 7.3x 7.3x 5.4% 12.7% 17.0%

Company D 786 3,276 3,576 1.6x 1.5x 1.5x 8.9x 7.7x 7.6x 5.0% 7.9% 19.4%

Company E 105 1,074 1,199 1.1x 1.1x 1.0x 9.2x 8.9x 8.3x 4.9% 4.9% 11.8%

Company F 832 202 252 1.5x 1.3x 1.2x 14.5x 9.3x 9.2x 9.9% 25.3% 14.0%

High 5,025 6,556 2.1x 1.9x 1.8x 14.5x 9.3x 9.2x 9.9% 25.3% 22.0%

Mean 2,069 2,510 1.5x 1.4x 1.3x 10.5x 8.4x 8.1x 6.7% 12.8% 16.8%

Median 1,074 1,199 1.5x 1.3x 1.2x 9.3x 8.6x 8.2x 5.4% 12.7% 17.0%

Low 202 252 1.1x 1.1x 1.0x 8.9x 7.3x 7.3x 4.9% 4.9% 11.8%

Indicative Valuation – Company A£ in Millions

Multiple Value

Low High Low High

2015E Sales £1,082 1.1x 1.9x £1,136 £2,056

2015E EBITDA £162 7.3x 9.3x £1,184 £1,507

Implied EV £1,160 £1,781

Implied 2014E EBITDA Multiple 7.1x 11.0x

Take-out Premium 20%

Implied EV (Inc. Premium) £1,392 £2,138

Implied 2014E EBITDA Multiple 8.6x 13.2x

1

2

Takeout Multiples and Control Premia· However, when public companies are acquired, a premium is

usually paid to the current share price to persuade shareholders to cede control of the company to the acquiror – This is known as the control premium and varies from market

to market · Valuations including a premium are known as “takeout valuations”

7 Comparable Companies

Sum-of-the-PartsIf a company is comprised of several separate distinct parts, we may value it based on fair valuations for each part of the business.

Company A

EBITDA Multiple Valuation

Company A 2015E EBITDA Low High Low High

Beer £62.8 9.5x 10.5x £596.7 £659.5Juice 11.0 8.0 9.2 88.3 101.5Soft Drinks 44.0 12.0 13.5 527.8 593.8Wine 23.7 9.0 10.2 213.3 241.7Spirits 20.8 13.0 14.1 270.1 292.9Group Total £162.3 10.5x 11.6x £1,696 £1,889Take-out Premium 20%Take-out SOTP Value 12.5x 14.0x £2,035 £2,267

3

4

Comps Based Valuation (Inc. Sum-of-the-Parts)

· Several companies can be split into separate and distinct operating assets

– Companies can be split into parts by operation or by geography for example

· Each part can therefore be valued individually to come up with a sum-of-the-parts valuation

· Whilst each part can be valued in various ways, we commonly use a range of valuation multiples for each part to derive a fair value for the company

– With public companies, this sum-of-the-parts valuation can then be used to see whether the company is currently over or undervalued at the current share price and whether there is value to be “released” from breaking up the company

Implied Multiple

8 Comparable Companies

B. Precedent Transactions

Precedent Transaction

· Similar to comps based valuation, multiples are applied to earnings metrics based on analysis of historical transactions

· Principles of precedent transactions are very similar to comparable companies analysis, although there are a few key differences which need to be highlighted

· Transaction multiples are generally historic (last twelve months or LTM) to the extent possible and not forward-looking like comps

· Transaction multiples will generally include a control premium and so the value derived is a take-out multiple rather than a trading multiple

· Comps use current market data and as such are based on current investor sentiment on a particular sector. However, since transactions are historic, the market may have evolved significantly since then and the multiple may not be relevant any more

· There may be factors that are particular to a relevant transaction e.g. structure that may have had an impact on valuation

Principles of Precedent TransactionsThe principles of precedent transaction analysis are very similar to comparable companies analysis, although thereare some key differences.

9 Precedent Transactions

Example Calculation· Company B acquires 75% of Target 1 for an equity value of £750m· Company B has net debt outstanding of £250m· Target 1 reported 2013 Sales and EBITDA of £900m and £120m and recently

reported 3Q14 Sales and EBITDA of £750m and £105m for the first nine months ended 31 September 2011. In 3Q10 it reported Sales and EBITDA of £650m and £100m respectively for first nine months ended 31 September 2013

Calculating Precedents· When calculating precedent transactions, we need to calculate the implied EV as

well as the most recent LTM metric (e.g. Sales, EBITDA, EBIT)

· Note however that on several occasions, not enough data will be in the public domain to calculate a multiple

· The calculation of EV is as presented previously, however, there are some key points to take into consideration when analysing precedent transactions:– Is the transaction value stated the amount paid for equity or the total

company?– In several cases, the acquiror does not purchase 100% of the company and as

a result the equity value stated needs to be grossed up to 100% to calculate the correct value

– Does the value stated include the net value of options?

· When calculating LTM metrics, we will use the last reported numbers, taking into account the last interim results the company has released– LTM EBITDA = Last Reported Full Year EBITDA + Last Reported Interim

EBITDA – Prior Year Interim EBITDA– Note that if the last reported numbers are the full year results, we do not need

to make any adjustment for interims

Calculating Precedent TransactionsWhen calculating enterprise value in precedent transactions, you need to make sure you are calculating a value for100% of the company.

Price Paid (£m) 750

Percent Acquired 75.00%

Implied Equity Value 1,000

Net Debt 250

Implied EV 1,250

FY13 Sales 900

Plus: 3Q14 Sales (L9M) 750

Less: 3Q13 Sales (L9M) (650)

LTM Sales 1,000

Implied EV / LTM Sales 1.3x

FY13 EBITDA 120

Plus: 3Q14 EBITDA (L9M) 105

Less: 3Q13 EBITDA (L9M) (100)

LTM EBITDA 125

Implied EV / LTM EBITDA 10.0x

10 Precedent Transactions

Calculating Precedent-Based ValuationsWhen choosing valuing companies based on precedent transactions, whilst qualitative and quantitative comparisonsshould be made, you will also need to look at details around the transaction to determine the correct multiple.

Precedent Transactions

EV / LTM

Date Announced Target Acquiror Transaction Value (£m) Sales EBITDA EBIT

5 June 2014 Target 1 Company C 1,250 1.3x 10.0x 16.3x

2 January 2014 Target 2 Company C 230 3.0x 12.3x 25.4x

26 May 2013 Target 3 Company A 500 1.1x 12.6x 14.4x

1 April 2013 Target 4 Company B 150 3.1x 13.4x 19.1x

21 February 2013 Target 5 Company D 2,000 2.0x 13.0x NA

High 2,000 3.1x 13.4x 25.4x

Mean 826 2.1x 12.2x 18.8x

Median 500 2.0x 12.6x 17.7x

Low 150 1.1x 10.0x 14.4x

Choosing Multiples· When choosing what multiple to apply to an LTM earnings figure, there may be

some precedent transactions which are more relevant than others– Here for example, only transactions 1–5 are relevant from all available

precedent transactions· As with comps, quantitative and qualitative comparisons between companies is

forms the basis of your judgement· However, there are other factors that may need to be accounted for which are

transaction specific such as– Was the acquisition, an acquisition of a minority stake?– Did the acquiror already own a stake in the target?– What was the strategic rationale behind the transaction?

Precedent Transactions

EV / EBITDA Value

Low High Low High

LTM Sales £1,000 1.1x 3.1x £1,100 £3,100

LTM EBITDA £130 10.0x 13.4x £1,300 £1,737

Implied EV £1,200 £2,419

Implied LTM EBITDA Multiple 9.2x 18.6x

5

Company A

11 Precedent Transactions

C. Discounted Cash Flow

Discounted Cash Flow – Key Building BlocksWith a DCF valuation, we are attempting to put a value on the future operating cash flows of the company that areavailable to be paid out to both equity and debt investors.

1. FCF for 10 Years 2. WACC 3. Terminal Value 4. NPV

Free Cash Flow

EBITDA

CapEx

Change in WC (Rec –Pay + Inv)

Tax on Operating Profit

WACC =

E/(E+D)*Cost of Equity +

D/(E+D)*Cost of Debt

Cost of Equity =

Rf + beta*(EMRP)

Cost of debt = (Rf + Credit differential)

*(1-t)

Proportion of Debt and Equity

Apply a multiple to the Terminal EBITDA

Net Present Value

FC1*(1+WACC)-1

+ FC2*(1+WACC)-2

+ FC2*(1+WACC)-3

+ .... +

(FC10+TV)*(1+WACC)-10

FCFTx(1+g)

K – g=

–

–

–

=

Using DCF Method

Using Multiple Method

12 Discounted Cash Flow

The amount of cash that a company has left over after it has paid all of its expenses, but before any payments or receipts of interest or dividends, before any payments to or from providers of capital and adjusting tax paid to what it would have been if the company had no cash or debt

Calculating the FCF

A Basic Definition of Free Cash Flow is

Sales X

Operating Costs (X)

EBIT X

Depreciation X

Amortisation X

EBITDA X

Changes in Working Capital X/(X)

Operating Cash Flow X

Tax Paid (X)

CapEx (X)

FCF before Interest X/(X)

Interest Paid (X)

Free Cash Flow X/(X)

13 Discounted Cash Flow

Calculating the WACC

· After calculating the required rates of return for both debt and equity investors, we then weight these required returns according to a target capital structure for the company, to come to an overall cost of capital for the company

The WACC for a company is calculated from a specific formula. Citi have issued guidelines for estimating the correctparameters for this calculation.

Weighted Average Cost of Capital (WACC) =Cost of Equity x (Equity/(Debt + Equity)) + Cost of Debt x (Debt/(Debt + Equity)) x (1 – Tax Rate)

WACC Calculation – Company A· The Cost of Equity is based on the CAPM and the following formula

where KE is the cost of equity Rf is the risk free rate and (Rm – Rf) is known as the equity market risk premium

· The EMRP is estimated by Citi to be between 5–7%

· Relevant government bonds are used for the risk free rate

· The Beta is calculated by taking an average of asset betas of comparable public companies

· Tax rate is usually the company specific tax rate

· Industry average is usually used for debt/capitalisation unless a specific target is known for the company

KE = Rf + β(Rm – Rf)

WACC Analysis

Low High

Cost of Equity 3.8% 3.8%

Risk Free Rate (30 Year) 3.8% 3.8%

Equity Market Risk Premium 5.0% 7.0%

Equity Beta 1.07 1.07

Adjusted Equity Market Risk Premium 5.4% 7.5%

Sovereign Risk Premium 0.0% 0.0%

Inflation Differential 0.0% 0.0%

Small Cap Premium 0.0% 0.0%

Cost of Equity 9.1% 11.3%

Cost of Debt

Risk Free Rate (10 Year) 3.8% 3.8%

Credit Spread 1.0% 2.0%

Inflation Differential 0.0% 0.0%

Cost of Debt (Pretax) 4.8% 5.8%

Effective Marginal Tax Rate 30.0% 30.0%

Cost of Debt (Aftertax) 3.4% 4.1%

Debt/Capitalisation (Market) 30.0% 30.0%

WACC 7.4% 9.1%

14 Discounted Cash Flow

· Once we have derived an overall required rate of return for the company, the cost of capital, we are able to value the value of the cash flows generated by the company in terms of how much it is worth today, the Present Value– The value of £1 tomorrow is worth less than the value of £1 today

· Say an investor has £100 to invest today and his required rate of return is 10%– In 1 year, he will want to receive 10% of £100 = £10 in addition to the £100. Therefore, to the investor, receiving £110

in one year is equivalent to receiving £100 today, i.e. £110/1.1 = £100– In 2 years, he will want to receive 10% of £100 and 10% of £110 in addition to the original

£100 = £100 x 1.1 x 1.1 = £121– In 3 years… etc.

· We use this concept therefore to derive the following formula for the present value of future cash flows which fall at the end of the year in every year from now

Where CF is the cash flow in its respective year and K is the required rate of return (the WACC)

The Concept of Present ValueWhen deriving a value for a company’s cash flows, we need to take into account the future timing of the cash flows in the forecast period.

PVCF1 CF2 CF3 CF4

(1+K)1 (1+K)2 (1+K)4(1+K)3= + + + + …

15 Discounted Cash Flow

· Cash flows for a company are continuous and do not fall to the investor at the end of the year in every year as the formula in the previous slide suggests

· We generally therefore use a mid-year convention, where we assume for valuation purposes that the cash flows that are generated in every year fall in the middle of the year and we value them on that basis

· In order to do this, we need to divide the formula in the previous slide by (1+K)0.5 to essentially shift cash flows back by half a year

· As a result the formula on the previous slide changes to as follows

Mid-year Cash Flow ConventionA company’s cash flows are continuous and we need to account for this in valuing cash flows over the forecast period by using the mid-year convention.

16 Discounted Cash Flow

PVCF1 CF2 CF3 CF4

(1+K)0.5 (1+K)1.5 (1+K)3.5(1+K)2.5= + + + + …

· Whilst we have discussed valuing cash flows over a discrete period of time (e.g. 10 years), we also have to value the cash flows of the company post the forecast period into perpetuity

· The value of the cash flows into perpetuity is known as the Terminal Value and can be calculated in one of two ways– Applying an multiple to a profit metric (e.g. EBITDA) in the final year (Comps Method)– Consider the “steady state” of the company and value its future cash flows based on an assumption as to the average long term growth

rate of the cash flows into perpetuity (DCF Method)· Both methods can be used as a cross check against each other to see if the result is sensible· However note that the value derived is the value of the cash flows into perpetuity at the end of the forecast period (e.g. in 10 years time if

the forecast period is 10 years long) and therefore needs to be discounted back to present value– However, note that we do not use the mid-year convention for discounting back

Terminal ValueThe terminal value of a company is the future value of the cash flows of the company after the forecast period and into perpetuity.

DCF Method· For this, there are two steps to be taken

– Calculate adjusted terminal year CF accounting for any exceptional items and equalising CapEx and depreciation· In the long term CapEx = depreciation and so if CapEx is

higher than depreciation we need to add the difference to the final year FCF and conversely if lower

– Assume a perpetuity growth rate (g)· The FV of the terminal value is then derived from the

following formula

Comps Method· The approach used here is the same as in our comps

based valuation focusing on average trading multiples of comparable companies

· You can use any profit metric you see suitable, although EBITDA most commonly used

· Note that the metric used should be excluding any exceptional items

· Assuming a 9.0x EBITDA multiple we derive a terminal value (future value) of £301m x 9 = £2,710m

FCFT x (1+g)

(K – g)

17 Discounted Cash Flow

Discounted Cash Flow ModelYear Ending 31 December

£ in Millions 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Sales 1,082 1,158 1,221 1,270 1,317 1,357 1,391 1,419 1,447 1,476 1,505EBITDA 162 197 225 241 257 271 278 284 289 295 301Depreciation (54) (60) (65) (69) (72) (75) (76) (78) (80) (81) (83)EBITA 108 137 160 173 184 197 202 206 210 214 218Taxes (41) (48) (52) (55) (59) (60) (62) (63) (64) (65)Taxed EBITA 96 112 121 129 138 141 144 147 150 153CapEx (70) (71) (73) (76) (76) (76) (78) (80) (81) (83)Deprecation 60 65 69 72 75 76 78 80 81 83(Increase)/Decrease in WC 4 3 2 2 2 2 1 1 1 1Other 0 0 0 0 0 0 0 0 0 0Unlevered FCF 90 109 119 128 138 143 145 148 151 154Time Period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5WACC 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3%Discount Factor 0.96 0.89 0.82 0.76 0.7 0.65 0.6 0.55 0.51 0.47PV of FCF 86 97 97 97 97 92 87 82 77 73PV of Forecast Cash Flows 884

Terminal EBITDA

Final YearFCF

Using Comps Method Using DCF Method

Terminal EBITDA 301EBITDA Multiple 9.0xFV of Terminal Value 2,710Discount Factor 0.45PV of Terminal Value 1,226

Implied Enterprise Value 2,111

Final Year Cash Flow 154Perpetuity Growth Rate 2.0%Terminal FCF 157WACC 8.3%FV of Terminal Value 2,518Discount Factor 0.45PV of Terminal Value 1,139Implied Enterprise Value 2,024

EBITDA Multiple

8.5x 9.0x 9.5x

WACC

7.8% 2,117 2,189 2,260

8.3% 2,043 2,111 2,179

8.8% 1,971 2,036 2,101

Property Growth Rate

1.5x 2.0x 2.5x

WACC

7.8% 2,092 2,202 2,332

8.3% 1,934 2,024 2,129

8.8% 1,799 1,873 1,9596

6

Company A

18 Discounted Cash Flow

D. Leveraged Buy-out

· In a leveraged buyout the principle is as follows– A company is acquired for a given price through a combination of debt funding (usually between 50–70% of total funding) and equity

from the private equity firm– Over the next few years, the company increases its profitability and also uses its cash generated to pay down the debt that the PE firm

has used to acquire the business– In the medium term, usually 3–5 years, the company is sold, based on a higher EBITDA with the proceeds being used to pay back debt

(which is now lower than when the company was acquired originally) and the difference in the exit price and the level of debt goes to the private equity player

· The private equity player generates returns from selling its equity in the business for a substantially higher price and as such, we can derive a maximum price payable today for the company by setting a level of target returns for the private equity player

Principles of an LBOGiven the increase in M&A activity by private equity players, working out how much they can potentially pay to generate a required return has become a key driver of valuation.

On Acquisition 2013 2014 215 On Exit

Debt Equity

19 Leveraged Buy-out

· We have acquisition of the target for £1,500m financed through £900m of funded debt and £600m equity

· Every year the company generates cash and by 2018, the net debt of the company is only at c.£600m

· We have assumed an exit at 9.0x EBITDA in 2018 valuing the company at c.£2,300m on exit– Given implied net debt of c.£600m in 2018, this implies an equity value of c.

£1,700m on exit· The internal rate of return (IRR) is the return made on the investment and is the

same in principle to the discount rate– The IRR is the rate of return on the investment where the present value of

the future cash flows to the equity investor at that rate is equal to the initial value of equity used to buy the business

· The IRR in this case is 29.8%, i.e. £1,705m discount back 4 years at a rate of 20.0% gives us a value of £822m

· Therefore based on a value on exit, we are able to calculate the maximum price payable by a firm today to generate a given return

Example LBO ModelGenerally speaking, a private equity player will look to generate returns in excess of 20%, although this will vary from sector to sector.

Max Price Calculation – Company A

Company A

EBITDA 257Exit Multiple 9.0xExit Value 2,312Less: Net Debt (607)Implied Equity Value 1,705EV on Acquisition 1,500Less: Net Debt on Acquisition (900)Equity Value on Acquisition 600Cash on Cash Return 2.8xImplied IRR 29.8%

Cash Flow Statement – Company A£ of Million 2015 2016 2017 2018EBIT 137 160 173 184

Depreciation (60) (65) (69) (72)EBITDA 197 225 241 257Change in WC 4 3 2 2Net Interest (61) (57) (52) (46)Tax (23) (31) (36) (42)Capex (70) (71) (73) (76)Change in Net Debt 47 69 82 96Starting Net Debt 900 853 785 702Closing Net Debt 853 785 702 607

Exit Valuation – Company AEBITDA 257Exit Multiple 9.0xExit Value 2,312Less: Net Debt (607)Equity Value 1,705Target IRR 20.00%Discount Factor 0.48Implied Current Value of Equity 822Plus: Net Debt on Acquisition 900Implied Acquisition Value 1,722

Target IRR

15.0% 17.5% 20.0% 22.5% 25.0%

Exit Multiple

8.0x 1,728 1,660 1,598 1,543 1,493

8.5x 1,801 1,727 1,660 1,600 1,546

9.0x 1,875 1,795 1,722 1,657 1,598

9.5x 1,948 1,862 1,784 1,714 1,651

10.0x 2,022 1,929 1,846 1,771 1,7047

7

20 Leveraged Buy-out

IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, byyou for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction"). Accordingly, you should seek advicebased on your particular circumstances from an independent tax advisor.

In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivativestransaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument.

Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite orpurchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential theinformation contained herein and the existence of and proposed terms for any Transaction.

Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accountingcharacterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b)there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as tosuch legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions withrespect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction.

We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may alsorequest corporate formation documents, or other forms of identification, to verify information provided.

Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and arenot intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may ormay not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or ouraffiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time.

Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable ornegative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained inresearch reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking andresearch personnel to specifically prescribed circumstances.

[TRADEMARK SIGNOFF: add the appropriate signoff for the relevant legal vehicle]

© 2014 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2014 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2014 Citigroup Inc. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2014 Citigroup Global Markets Limited. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2014 Citibank, N.A. London. Authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

© 2014 [Name of Legal Vehicle] [Name of regulatory body.] All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce our own environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citi’s unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change Position Statement, the first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology, and other carbon-emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh of carbon neutral power for our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing of electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy and mitigation