The Role of the Financial Advisor in an M&A Transaction Andrea Foti 16 October, 2017
My background 2017 Investment Banking Advisory Milan 2013 Investment Banking Advisory Milan 2004 Investment Banking Advisory Milan 2001 FIG Investment Banking London 2000 Financial Institution Strategy Group (Internship) Rome 1999 Investment Banking Rome 2000 Degree in Business Rome 2
1. The Parties Involved 2. From Kick-Off to Closing 3. Strategic Variables & Valuation Metrics 3
The activities of a financial advisor The financial advisor devises and executes M&A transactions and other corporate finance projects Joint Ventures & Partnerships Financial Restructuring IPO Advisory & Fund Raising Financial Advisor Mergers & Acquisitions Tender offers / De-listings Spin-offs Valuations Fairness Opinions 4
M&A: a broad spectum of transactions to work on The definition of M&A goes beyond mergers & acquisitions and typically includes a broad range of activities: Mergers / De-Mergers Acquisitions and Divestitures LBOs & MBOs Voluntary and mandatory tender offers / De-listing Joint Ventures and Partnerships Fairness opinions and valuation of companies / assets The deals we will refer to in the following pages 5
The main parties involved in an M&A deal M&A transactions can be complicated and typically involve numerous players Both buyer and seller typically have their own team of advisors (in addition to their internal team) In order to make everything work well, all advisors must act in concert Tax Advisor Financial Advisor Buyer & Seller Legal Advisor Environmental Advisor Strategic Advisor Communication Advisor 6
For example, in a recent private equity deal Buyers Target Sellers Creval, Banco Popolare, BP Vicenza, Veneto Banca, BPER, ICCREA, BP Cividale, UBI, BP Milano, Banca Sella, Carige Lawyers Financial Advisors Tax Advisors Financial Advisors Lawyers Strategic Advisors Communication 7
Advisors are in charge of building a successful deal Each advisor needs to provide relevant analyses and answers to its client, during the whole deal Each advisor is in charge of specific activities and all of them must act together, towards a smooth and successful deal In brief, a deal is successful when: For the seller Gets the highest possible valuation Deal is completed in the shortest amount of time Confidentiality is guaranteed For the buyer Pays the lowest possible price Expected results (e.g. synergies, financial results, etc.) are achieved Post-closing risks are minimised Post-closing risks are minimised The Financial Advisor plays a pivotal role during the whole transaction 8
The tasks of Financial Advisor on a buy-side engagement Devise a transaction and discuss / assess feasibility with the client Approach the seller (or its advisor) Assess the value of the target in each round of the deal (e.g. preliminary assessment of the deal, nonbinding offer, binding offer, etc.) Coordinate and supervise the activity of all the advisors / professionals involved in the transactions Provide all relevant support to the client during the due diligence Assist the client in defining the most appropriate financial and corporate structure for the transaction Assist the client in negotiating: The economic conditions of the transaction The relevant contracts (e.g. Share Purchase Agreement, Asset Purchase Agreement, Shareholders agreement, etc.) and terms & conditions of the deal Support the buyer in negotiations with lending institutions 9
The tasks of Financial Advisor on a sell-side engagement Identify, screen and finalise a list of potential buyers (strategic and financial) together with the client Contact potential buyers Prepare and distribute the information material (e.g. teaser, information memorandum, management presentation) and support the client in the preparation of the data room Coordinate and supervise the activity of all the advisors / professionals involved in the transactions Support the client in agreeing the scope of vendor due diligence reports Provide all relevant support to the client during the due diligence Assist the client in responding to potential buyers enquiries, during the due diligence Advise the client on the relative merits, advantages and disadvantages of all offers received, and prepare a shortlist of the preferred bidders to proceed to subsequent rounds Assist the client in defining the most appropriate financial and corporate structure for the transaction Assist the client in negotiating Economic conditions of the transaction Relevant contracts (e.g. Share Purchase Agreement, Asset Purchase Agreement, etc.) and terms & conditions of the deal 10
1. The Parties Involved 2. From Kick-Off to Closing 3. Strategic Variables & Valuation Metrics 11
The steps to a typical M&A process 1. Assessment of strategic alternatives / Design of the process 2. Preparation of marketing materials 3. Execution of marketing programme 4. Due diligence 5. Final bids, negotiation and selection of buyer 6. Signing & Closing On average, M&A processes take 4 8 months to execute 12
The types of process for an Acquisition / Disposal Long A Merger typically falls in this space: D Public auction TIME FRAME 2 parties involved Time frame can be influenced by various things B Targeted solicitation C Controlled auction Short A Pre-emptive deal Low NUMBER OF BUYERS High 13
A Pre-emptive process: overview Description Screen and identify most likely buyer Very clear sense of most logical buyer Rationale Confidentiality is critical Pros Seller in strong negotiating position Maximum confidentiality Speed of execution Minimum business disruption Cons May not maximize value Tied to result of one negotiation 14
A Pre-emptive process: indicative timetable Due diligence Management presentation Draft of contracts Month-1 First interactions between parties NDA Preliminary information Month-2 Indicative offer / Letter of intent Updated non-binding offer Month-3 Negotiation of contracts Additional due diligence Binding offer Signing Month-4 Closing will depend on a number of factors (e.g. authorisation from regulatory authorities) 15
B Targeted process: overview Description High-level approach to selected potential buyers No public disclosure Credible buyers have expressed serious interest Rationale Pros Only few logical buyers Key objectives: confidentiality and limiting any business disruption Speed of execution Limited business disruption Sense of competition enabled Avoids perception that the business is being shopped Cons Risks missing buyers May not maximize value Potential for disruption due to rumours 16
B Targeted process: indicative timetable NDA Distribute info package Binding offers Prepare data room Final negotiations Indication of interest? Month-1 Month-2 Prepare info package Month-3 Data room Signing Month-4 Approach buyers Management presentation Draft of contracts Closing will depend on a number of factors (e.g. authorisation from regulatory authorities) 17
C Controlled auction: overview Range of logical buyers contacted and pre-sounded Description Typically involves formal guidelines on sale process Public disclosure not required Rationale Pros Larger group of potential buyers Provides good balance between confidentiality and value Accurate test of market price High degree of control over process Creates strong sense of competition Cons Risk of public leak May turn off some buyers May lengthen sale process 18
C Controlled auction: indicative timetable 1 st Round: Non-Binding Offers Data room Month-1 Prepare Month-2 Pre-marketing material Vendor Due Diligences Information memorandum Distribute teaser and NDA Prepare data room and management presentation Month-3 Month-4 Month-5 Month-6 Distribute Info Memo to those who signed NDA Management presentation Draft of contracts 2 nd Round: Binding Offers Final negotiations Signing Month-7 Closing will depend on a number of factors (e.g. authorisation from regulatory authorities) 19
D Public auction Description Widest range of potential buyers contacted General public disclosure through press release Rationale Pros Uncertain buyer group Transparent sale process May identify unexpected buyers Can heighten sense of competition among buyers Cons Delay in execution May result in high-traffic that interferes with business and de-stabilises management Timetable can depend on many different factors 20
1. The Parties Involved 2. From Kick-Off to Closing 3. Strategic Variables & Valuation Metrics 21
Marketing materials Teaser Info Package First marketing material No confidential information disclosed Limits the disclosure of confidential information Compresses the timetable No particular risks Risks positioning the story in sub-optimal fashion Info Memo The Info Memo is the key marketing instrument in most M&A deals Optimises positioning of investment thesis, highlighting selling points Helps buyers in understanding the story An example of Table of Contents Discloses information to competitors / clients Absorbs management time 1. Executive summary 2. History & Ownership 3. Industry 4. Business & Strategy 5. Organisation 6. Other administrative information 7. Financial information 22
Vendor Due Diligences ( VDD ) Not interesting for trade buyers Business VDD It can help private equities, but much less of a priority than in pre-2008 sale processes Private equities tend to be focussed on understanding the business and the drivers of growth during the due diligence, alongside the management team Accounting VDD Legal VDD Helps both trade buyers and private equities during the due diligence Limits the flow of questions that would absorb management time Shortens the timetable Would help to negotiate reps & warrs Can support both trade buyers and private equities, shortening the timetable But, post-2008, buyers tend to be much more careful, also in this space Tax VDD Environmental VDD Lowest priority for both trade buyers and private equities Would give preliminary comfort to buyers and would help to negotiate reps & warrs Depends on how significant environmental issues are in the deal 23
Data room Multiple due diligence at the same time, making data room available for a longer period Risk of diffusion of the documents Virtual Data Room Physical Data Room Availability 24/7 Optimises involvement / commitment of international buyers Monitoring the interest of potential buyers, real-time reports Higher level of control on the documents Can be an add-on to virtual data room, limited to selected information only Binding offers likely to be subject to supplementary due diligence Time inefficient 24
Bidding rounds One biddinground process Speed / Efficiency Pre-emptive value captured Confidentiality maximized buyers Risk of missing bidders Limits ability to manage information flow Issues on getting financed bids Two biddingrounds process Maximizes competitive tension Ability to screen buyers Manage information flow more effectively Time-consuming Risk of tactical first round bids 25
Valuation metrics Discounted Cash Flow models M&A transactions Standard market practice Trading comparables Leveraged Buyout (LBO) returns analysis EPS accretion / dilution Key for private equities Typically used by listed companies The business plan, both for the seller and the buyer, plays a key role during the whole M&A transaction and it is the key instrument for valuing a business 26
How is the M&A market performing in Italy? 27
Global M&A activity in 2017 to-date ($2.2tn) $903.6bn 44.3% $51.9bn 2.4% $659.0bn 20.2% $48.5bn 2.2% $434.6bn 19.7% $32.1bn 1.5% Source: Mergermarket 28
M&A activity in Italy In 1H2017, it reached its peak post crisis (by deal value) M&A activity (2011 1H2017) M&A Deals by Target Sector (1H2017) bn 70 60 50 40 30 20 10 0 82 120 78 68 141 97 163 64.9 509 461 420 49.3 323 40.2 336 37.7 335 26.5 26.2 28.7 232 2011 2012 2013 2014 2015 2016 1H2017 Deal value # deals 600 500 400 300 200 100 0 Ind. & Chem. 14% Life Sciences 2% Fin. Services 4% Transport 7% Other 6% 37.7 bn Consumer 67% 2017YTD has been an exceptional year for Italian M&A: 232 deals (Italian targets) worth 37.7bn vs 277 deals worth 31.6bn in 2016 The same fewer but larger deals trend is characterizing the European market The most targeted sector was Consumer Goods: 47 deals worth 25.2bn (67% of the total Italian M&A value), but largely influenced by the 24bn tie-up between Luxottica and France based Essilor Industrial & Chemical sector, with 90 deals worth 5.2bn (14% of the total Italian M&A value), recorded a significant growth reaching its highest H1 deal count Source: Mergermarket Trend Report 2011 1H2017 29
Family owned companies They continue to play a key role in Italian M&A Inbound & outbound deals in Italy (2011 1H2017) Origination of deals (2011-2016) bn 45 40 35 30 25 20 15 10 5 0 42.3 233 206 222 33 31.8 154 140 138 24.4 20.5 115 17.7 18.8 18.6 17.3 111 13.8 100 85 87 73 78 47 5.9 6.6 4.5 4.9 2011 2012 2013 2014 2015 2016 1H2017 Inbound value Outbound value Inbound deal count Outbound deal count 250 200 150 100 50 0 100% 3% 11% 11% 90% 14% 7% 24% 20% 16% 8% 80% 9% 6% 8% 70% 21% 21% 15% 8% 3% 13% 60% 6% 4% 5% 20% 50% 1% 40% 70% 30% 55% 56% 57% 61% 47% 20% 10% 0% 2011 2012 2013 2014 2015 2016 Family & Private Foreign Parent Local Parent Secondary B-O Other Inbound & outbound analysis reflects the same trend for the whole Italian market: a lower number of deals, but a higher deal value Outbound M&A activity recorded 47 deals worth 31.8bn, the largest 1H deal value since 2011 One of the most important traits of the Italian market is the high concentration of family owned businesses: on average, 50-60% of deals in Italy originate from the family decision to sell. A number of important transactions in 2016 originated from the family decision to sell: e.g. Beta Utensili, Deltatre, Gotha Cosmetics, Philippe Model, Somacis, Valtur, etc. Source: Mergermarket Trend Report 2011 1H2017, Private Equity Monitor 2011-2016 30
PE activity In 1H2017, it reached it s peak (by # of deals) PE activity (2011 1H2017) PE Deals by Target Sector (1H2017) bn 9 8 7 6 5 4 3 2 1 0 7.6 7.7 83 84 8.1 72 7.2 7.2 7 61 70 59 4.7 63 4.6 57 56 4.7 48 4.1 35 3.8 3.4 39 2.9 3.6 29 29 2011 2012 2013 2014 2015 2016 1H2017 Buyouts Exits Buyout deal count Exit deal count 90 80 70 60 50 40 30 20 10 0 mln 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Transport Consumer Ind. & Chem. Buyouts Life Sciences Exits Telecoms Other In 1H2017, PE activity suffered a slight decrease by deal value, both for buyouts and exits On the opposite, the number of buyouts recorded its peak YTD figure since 1H2008 The largest sector was Transport, mainly affected by the 1.5bn acquisition of a 10% stake of Autostrade per l Italia by Allianz Capital Partners, DIF, EDF Invest and Silk Road Fund Consumer and Industrial & Chemical sectors continue to represent the lion's share, with more than 2bn of PE deals Source: Mergermarket Trend Report 2011 1H2017 31
Thank you! 32