Courtesy Translation
PARMALAT S.P.A.
INFORMATION MEMORANDUM
FOR THE ACQUISITION OF
LACTALIS AMERICAN GROUP, INC.
Prepared pursuant to Article 5 of the Regulations adopted by the Consob with Resolution No. 17221 of March 12, 2010, as amended by Resolution No. 17389 of June 23, 2010, and pursuant to Article 71 of the Regulations adopted by the Consob with Resolution No. 11971 of May 14, 1999, as amended
May 2012
This Information Memorandum has been made available to the public at the registered office of Parmalat S.p.A. (4 Via delle Nazioni Unite, Collecchio, Parma), on the website of Parmalat S.p.A. (www.parmalat.com) and through Borsa Italiana S.p.A. (6 Piazza degli Affari, Milan) Financial Highlights of the Issuer
Reporting year ended December 31, 2011
Historical data Pro forma data (in millions of euros)
Revenues 4,538.0 5,241.6
EBITDA (1) 374.1 433.6 EBITDA per share (in euros) (1) 0.21 0.25
Net profit 170.9 188.5 Earnings per share (in euros) – basic 0.10 0.11
Cash flow from operating activities (2) 284.6 302.8 Cash flow from operating activities per share (in euros) (2) 0.16 0.17
Shareholders’ equity attributable to parent company shareholders 3.630.2 3.156.6
Net financial assets 1,518.4 796.6
Number of shares 1,755,401,822 1,755,401,822
(1) The Group defines EBITDA as the net profit for the year before depreciation and amortization and writedowns, financial income and expense, other income from and expenses on equity investments, interest in the result of companies valued by the equity method, other nonrecurring income and expense unrelated to regular operations and income taxes for the year. Because EBITDA are not identified as an accounting parameters in the IFRSs, their quantitative determination method is not necessarily the same for all users. EBITDA are a parameter used by the Group’s management to monitor and assess operating performance. Specifically, management believes that EBITDA provide an important measure of the Group’s operating performance because they are not affected by the impact of different criteria applied to determine taxable income, the amount and characteristics of employed capital and depreciation and amortization policies. The criteria applied by the Group to determine EBITDA are not necessarily consistent with those adopted by other groups and, consequently, the corresponding amounts could not be comparable.
(2) Determined as the sum of the cash flows from operations of Parmalat and LAG and the activities related to the distribution of Lactalis Group products in the American Continent, adjusted to take into account the flows from the pro forma adjustments that had an impact on the cash flows from operations (President royalties and transaction’s financing). Please note that LAG’s cash flows from operations were taken from LAG’s 2011 annual financial statements and converted into euros at the average exchange rate for the year, amounting to 1.39196 U.S. dollars for one euro.
CONTENTS
DEFINITIONS ...... 5
INTRODUCTION ...... 11
1. RISK FACTORS ...... 14
1.1 RISKS RELATED TO POTENTIAL CONFLICTS OF INTEREST ARISING FROM THE RELATED‐PARTY TRANSACTION 14 1.2 RISKS AND UNCERTAINTIES THAT COULD HAVE A MATERIAL IMPACT ON THE ISSUER’S ACTIVITIES RESULTING FROM THE TRANSACTION ...... 15
2. INFORMATION ABOUT THE TRANSACTION ...... 18
2.1 OVERVIEW OF THE TRANSACTION’S MODALITIES, TERMS AND CONDITIONS ...... 18 2.1.1. DESCRIPTION OF THE COMPANY AND BUSINESS OPERATIONS SUBJECT OF THE ACQUISITION ...... 18 2.1.2. TRANSACTION’S MODALITIES, TERMS AND CONDITIONS ...... 22 2.1.3. METHODS FOR DETERMINING THE CONSIDERATION AND ASSESSMENT OF ITS FAIRNESS COMPARED WITH MARKET VALUES FOR SIMILAR TRANSACTIONS ...... 29 2.1.4. FINANCING SOURCE SELECTED FOR PAYMENT OF THE PRICE ...... 33 2.2 MOTIVATION FOR AND PURPOSES AND BENEFITS OF THE TRANSACTION ...... 33 2.2.1. MOTIVATION FOR THE TRANSACTIONS SPECIFICALLY WITH REGARD TO THE ISSUER’S MANAGEMENT OBJECTIVES ...... 33 2.2.2. PROGRAMS DEVELOPED BY THE ISSUER WITH REGARD TO LAG ...... 34 2.2.3. PROGRAMS DEVELOPED BY SOFIL S.A.S. WITH REGARD TO THE ISSUER ...... 35 2.3 TRANSACTIONS WITH LAG AND THE LACTALIS GROUP ...... 36 2.3.1. RELATED PARTIES INVOLVED IN THE TRANSACTION ...... 36 2.3.2. SIGNIFICANT TRANSACTIONS EXECUTED BY THE ISSUER, DIRECTLY OR INDIRECTLY THROUGH ITS SUBSIDIARIES WITH THE COMPANY SUBJECT OF THE TRANSACTION THAT WERE OUTSTANDING WHEN THE TRANSACTION WAS EXECUTED ...... 37 2.3.3. SIGNIFICANT TRANSACTIONS EXECUTED BY THE ISSUER, ITS SUBSIDIARIES, ITS EXECUTIVES AND THE MEMBERS OF ITS BOARD OF DIRECTORS WITH THE PARTY WHOSE ASSETS ARE BEING ACQUIRED ...... 37 2.3.4 IMPACT OF THE TRANSACTION ON THE COMPENSATION OF THE MEMBERS OF THE MANAGEMENT ENTITIES OF THE COMPANY AND/OR ITS SUBSIDIARIES ...... 38 2.3.5 LISTING OF ANY MEMBERS OF THE MANAGEMENT AND CONTROL ENTITIES, GENERAL MANAGERS AND EXECUTIVES OF THE COMPANY INVOLVED IN THE TRANSACTION ...... 38 2.3.6 TRANSACTION APPROVAL PROCESS ...... 38 2.4 DOCUMENTS AVAILABLE TO THE PUBLIC AND WHERE THEY MAY BE CONSULTED ...... 39
3. EFFECTS OF THE TRANSACTION ON THE FINANCIAL POSITION, INCOME STATEMENT AND CASH FLOW ...... 40
3.1 EFFECTS OF THE TRANSACTION ON THE FINANCIAL POSITION, INCOME STATEMENT AND CASH FLOW ...... 40 3.2 SIGNIFICANT EFFECTS OF THE TRANSACTION ON KEY FACTORS THAT AFFECT AND CHARACTERIZE THE ISSUER’S ACTIVITIES AND ON THE TYPE OF BUSINESS CARRIED OUT BY THE ISSUER ...... 40 3.3 ANY IMPLICATIONS OF THE TRANSACTION FOR THE STRATEGIC GUIDELINES APPLICABLE TO COMMERCIAL, FINANCIAL AND CENTRALIZED SERVICE TRANSACTIONS BETWEEN COMPANIES OF THE PARMALAT GROUP ...... 40
4. INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS DATA OF THE ACQUIRED ACTIVITIES ...... 41
4.1. INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOW DATA FOR THE ACQUIRED EQUITY STAKE FOR THE REPORTING YEARS ENDED JANUARY 1, 2012 AND JANUARY 2, 2011...... 41 4.1.2 NOTES TO THE FINANCIAL STATEMENTS ...... 44
5. PRO FORMA FINANCIAL INFORMATION OF THE ISSUER ...... 46
3 5.1 FOREWORD ...... 46 1 INTRODUCTION ...... 46 2 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION ...... 47 2.1 PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...... 47 2.2 PRO FORMA CONSOLIDATED INCOME STATEMENT ...... 50 2.3 NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION ...... 51 2.3.1 BASIS OF PRESENTATION AND ACCOUNTING PRINCIPLES USED ...... 51 2.3.2. DESCRIPTION OF THE TRANSACTIONS ...... 51 2.3.3 DESCRIPTION OF THE PRO FORMA ADJUSTMENTS MADE TO PREPARE THE PRO FORMA CONSOLIDATED FINANCIAL INFORMATION ...... 52 2.4 PRO FORMA PER SHARE INDICATORS OF THE GROUP ...... 59 2.4.1 SCHEDULE COMPARING HISTORICAL AND PRO FORMA PER SHARE INDICATORS AT DECEMBER 31, 2011 59
6. BUSINESS OUTLOOK OF THE ISSUER AND ITS GROUP ...... 61
6.1 OVERVIEW OF THE ISSUER’S OPERATING PERFORMANCE SINCE THE END OF THE REPORTING YEAR COVERED BY THE LATEST PUBLISHED FINANCIAL STATEMENTS ...... 61 6.2 GUIDANCE ABOUT A REASONABLE PROJECTION OF THE RESULTS FOR THE CURRENT YEAR ...... 61
7. ANNEXES ...... 62
4 DEFINITIONS
A list of the main terms used in this Information Memorandum is provided below
“Acquisition” The purchase of the Equity Stakes by Parmalat.
“Borsa Italiana” Borsa Italiana S.p.A., with registered office at 6 Piazza degli Affari, in Milan.
“Brazil Subdistribution Agreement” The agreement by virtue of which LEA will appoint Lactalis Brazil as the exclusive distributor of the Lactalis Group products (excluding the Parmalat Group) in Brazil. This Agreement must be executed by the Closing Date on terms and conditions substantively equivalent to those of the Distribution Agreement.
“BSA” B.S.A. S.A., with registered office at 33 avenue du Maine – Tour Maine‐Montparnasse, (75015) Paris (France), entered into the Paris (France) Registre du Commerce et des Sociétés under Identification No. 557 350 253 R.C.S. Paris.
“BSA International” B.S.A. International S.A., with registered office at 5 Place du Champ de Mars – boite 20 (1050) Brussels (Belgium), entered into the Brussels (Belgium) Registre des Personnes Morales under Identification No. 443.205.173 RPM Bruxelles.
“Buyer,” “Issuer,” “Parmalat” or “Company” Parmalat S.p.A., with registered office at 4 Via delle Nazioni Unite, in Collecchio (Parma), Tax I.D. and Parma Company Register No. 04030970968,
“Closing” The implementation of the Transaction, through the transfer of title to the Equity Stakes and payment of the Provisional Price, subject to the concurrent signing of the Distribution Agreement, the Galbani Licensing Agreement, the Président Licensing Agreement, the Brazil Subdistribution Agreement and the Mexico Subdistribution Agreement, and, more in general, the performance of all acts and transactions scheduled for execution on the Closing Date pursuant to the Sales Agreement.
5 “Closing Date” The date falling between July 2 and July 31, 2012, or any date that the parties may mutually agree to, pursuant to the Sales Agreement, by which the Closing is expected to take place.
“Companies Subject of the Acquisition” LAG and its subsidiaries, as listed in Section 2.1.1. below, Lactalis Brazil and Lactalis Mexico.
“Consob” The National Commission for Companies and the Securities Markets, with registered office at 3 Via G.B. Martini, in Rome.
“Distribution Agreement” The distribution agreement that BSA and LEA are required to execute on the Closing Date, with a wording consistent with the one annexed to the Sales Agreement. By virtue of this agreement, LEA shall have the right to distribute, on an exclusive basis and with the option to appoint subdistributors, the Lactalis Group products (excluding the Parmalat Group) in the American Continent for a period of 20 years, extendible for additional periods of 5 years each.
Equity Stakes The LAG Shares and the equity stakes corresponding, in the aggregate, to the entire equity capital of Lactalis Brazil and Lactalis Mexico.
“Fairness Opinion” The professional opinion rendered by Mediobanca on May 22, 2012 with regard to Parmalat’s interest in executing the transaction and the benefits and substantive fairness of the transaction’s terms.
“Galbani” Egidio Galbani S.p.A., with registered office at 8 Via Togliatti, in Melzo, Tax I.D. No. 03419280965 and Milan Company Register No. 1672952.
“Galbani Licensing Agreement” The agreement licensing the use of the trademark that Galbani and LAG are required to execute on the Closing Date, with a wording consistent with the one annexed to the Sales
6 Agreement. By virtue of this agreement, LAG shall have the right to use, on an exclusive basis and with a sublicensing option, the “Galbani” trademarks for the production and sale of dairy products in the American Continent for a period with an initial term of 20 years, extendible for additional periods of 5 years each.
“Groupe Lactalis” Groupe Lactalis S.A., with registered office at 10 rue Adolphe Beck, (53000) Laval (France), entered into the Laval (France) Registre du Commerce et des Sociétés under Identification No. 331 142 554 R.C.S. Laval.
Independent Auditors Pricewaterhouse Coopers S.p.A., with registered office at 91 Via Monte Rosa, in Milan.
“Information Memorandum” This information memorandum.
“Issuers’ Regulations” The Regulations adopted by the Consob with Resolution No. 11971 of May 14, 1999, as amended.
“Lactalis Brazil” Lactalis do Brazil, ‐ Comercio, Importação e Exportação de Laticinios Ltda, with registered office at 2012 Faria Lima, in São Paulo (Brazil).
“Lactalis Group” The group of companies comprised of BSA and its direct and indirect subsidiaries.
“Lactalis Mexico” Lactalis Alimentos Mexico Sociedad de Responsabilitad Limitada, with registered office at 104 Protasio Tagle, San Miguel Chapultepec 11850, México City (Mexico).
“LAG” Lactalis American Group, Inc., with head office at 2376 South Park Avenue, Buffalo, NY 14220 (USA), Employer Identification No. 39‐1429105,
“LAG Common Shares” All of the 10,000 common shares, without par or “Common Shares” value, corresponding to 100% of the LAG common stock.
“LAG Group” The group of companies comprised of LAG and it direct and indirect subsidiaries, as listed in
7 Section 2.1.1. of this Information Memorandum.
“LAG Preferred Shares” All of the 1,400 Series A Preferred Shares, par value USD100,000 each, corresponding to 100% or “Preferred Shares” of the LAG preferred stock.
“LAG Shares” The Common Shares and Preferred Shares collectively representing in the aggregate LAG’s entire share capital.
“LEA” Lactalis Export Americas SAS, with registered office at 16 Avenue Jean Jaurès – Immeuble Orix (94600) Choisy Le Roi (France), entered into the Creteil (France) Registre du Commerce et des Sociétés under Identification No. 751 701 756 R.C.S. Creteil.
“Mediobanca” Mediobanca – Banca di Credito Finanziario S.p.A., with registered office at 1 Piazzetta Enrico Cuccia, in Milan, Tax I.D. and Milan Company Register No. 00714490158, entered into the Register of Banks and Bank Groups under No. 10631.0, Parent Company of the “Mediobanca” banking group.
“Mexico Subdistribution Agreement” The agreement by virtue of which LEA will appoint Lactalis Mexico as the exclusive distributor of the Lactalis Group products (excluding the Parmalat Group) in Mexico. This Agreement must be executed by the Closing Date on terms and conditions substantively equivalent to those of the Distribution Agreement.
“MTA” The online securities market organized and operated by Borsa Italiana.
“Parmalat Group” Parmalat and its subsidiaries, in accordance with Article 93 of the TUF.
“Pledge” The pledge that encumbers the LAG Shares to secure the obligations undertaken by BSA Finances Snc and BSA under a loan agreement that they executed on April 25, 2005 with a pool of banks headed by Société Générale.
8 “Président Licensing Agreement” The agreement licensing the use of the trademark that BSA and LAG are required to execute on the Closing Data, with a wording consistent with the one annexed to the Sales Agreement. By virtue of this agreement, LAG shall have the right to use, on an exclusive basis and with a sublicensing option, the “Président” trademark for the production and sale of dairy products in the American Continent for a period of 20 years, extendible for additional periods of 5 years each.
“Price” The total consideration owed by Parmalat for the sale of the Equity Stakes, amounting to the algebraic sum of (i) the amount of USD904 million and (ii) the amount of the Net Financial Position at Closing, subject to adjustment, as explained below.
“Provisional Price” The amount of USD904 million.
“Related‐party Committee” or “Committee” Parmalat’s Internal Control and Corporate Governance Committee, comprised exclusively of Independent Directors, designated in the Related‐party Procedure as the committee with jurisdiction over reviewing related‐party transactions.
“Related‐party Procedure” or “Procedure” The Procedure Governing Transactions with Related Parties approved by Parmalat’s Board of Directors on November 11, 2010.
“Related‐party Regulations” The Regulations setting forth provisions governing related‐party transactions adopted by the Consob with Resolution No. 17221 of March 12, 2010, as amended.
“Sales Agreement” The agreement for the sale of the Equity Stakes executed on May 29, 2012 by Parmalat, as buyer, and BSA, BSA International and Groupe Lactalis, as sellers.
“Sellers” BSA, BSA International and Groupe Lactalis.
9 “Transaction” The transaction described in this Information Memorandum, the subject of which is the Acquisition, conditional on the concurrent execution of the Distribution Agreement, the Galbani Licensing Agreement, the Président Licensing Agreement, the Brazil Subdistribution Agreement and the Mexico Subdistribution Agreement.
“Uniform Financial Code” or “TUF” (for its Legislative Decree No. 58 of February 24, 1998, abbreviation in Italian) as amended.
10 INTRODUCTION
This Information Memorandum (the “Information Memorandum”) was prepared by Parmalat S.p.A. (the “Buyer,” the “Issuer,” “Parmalat” or the “Company”) pursuant to Article 71 of the Regulations adopted by the Consob with Resolution No. 11971 of May 14, 1999, as amended (the “Issuers’ Regulations”), and Article 5 of the Regulations governing related‐party transactions, adopted by the Consob with Resolution No. 17221 of March 12, 2010, as amended (the “Related‐ party Regulations”), and Article 9 of the Procedure Governing Transactions with Related Parties approved by Parmalat’s Board of Directors on November 11, 2010 (the “Related‐party Procedure” or the “Procedure”).
The Information Memorandum was prepared to provide the shareholders and the market with exhaustive information about a transaction aimed at broadening the product line offered by the Parmalat Group, through the Group’s entry into the soft cheese and fresh cheese market segments, and strengthening the Group’s presence in the American Continent (the “Transaction”).
The Transaction will be implemented through the purchase (the “Acquisition”) by the Issuer, directly or through wholly owned subsidiaries, of the shares representing the entire equity capital of Lactalis American Group, Inc. (“LAG”) and of equity stakes representing the entire equity capital of Lactalis do Brazil – Comercio, Importação e Exportação de Laticinios Ltda (“Lactalis Brazil”) and Lactalis Alimentos Mexico S. DE RL (“Lactalis Mexico”), conditional on the concurrent execution of the following agreements:
(a) a distribution agreement between Lactalis Export Americas SAS (“LEA”) and B.S.A. S.A. (“BSA”), by virtue of which LEA, a recently established wholly owned subsidiary of LAG, shall have the right to distribute, on an exclusive basis and with the option to appoint subdistributors, the products of the Lactalis Group (excluding the Parmalat Group) in the American Continent for a period of 20 years, extendible for additional periods of 5 years each (the “Distribution Agreement”);
(b) a licensing agreement between LAG and Egidio Galbani S.p.A. (“Galbani”), by virtue of which LAG shall have the right to use, on an exclusive basis and with a sublicensing option, the “Galbani” trademark for the production and sale of dairy products in the American Continent for a period of 20 years, extendible for additional periods of 5 years each (the “Galbani Licensing Agreement”).
(c) a licensing agreement between LAG and BSA, by virtue of which LAG shall have the right to use, on an exclusive basis and with a sublicensing option, the “Président” trademark for the production and sale of dairy products in the American Continent for a period of 20 years, extendible for additional periods of 5 years each (the “Président Licensing Agreement”).
(d) a subdistribution agreement between LEA and Lactalis Brazil, by virtue of which LEA shall appoint Lactalis Brazil exclusive distributor of the Lactalis Group products (excluding the Parmalat Group) in Brazil, on terms and conditions substantively equivalent to those of the Distribution Agreement (the “Brazil Subdistribution Agreement”).
(e) a subdistribution agreement between LEA and Lactalis Mexico, by virtue of which LEA shall appoint Lactalis Mexico exclusive distributor of the Lactalis Group products (excluding the Parmalat Group) in Mexico, on terms and conditions substantively
11 equivalent to those of the Distribution Agreement (the “Mexico Subdistribution Agreement”).
More specifically, the following items are included in the Acquisition:
(i) 10,000 common shares, without par value, corresponding to 100% of the LAG common stock (the “Common Shares”), currently held by BSA; and
(ii) a total of 1,400 Series A Preferred Shares, par value USD100,000 each, corresponding to 100% of the LAG preferred stock (the “Preferred Shares” and, together with the Common shares, the “Shares”), including 650 Preferred Shares currently held by BSA and 750 Preferred Shares currently held by Groupe Lactalis S.A. (“Groupe Lactalis”), which may be transferred to BSA by the closing date, as explained in detail below.
(iii) equity stakes corresponding to 100% of the equity capital of Lactalis Brazil including 99.99% currently owned by BSA International and 0.01% currently owned by BSA; and
(iv) equity stakes corresponding to 100% of the equity capital of Lactalis Mexico including 99.98% currently owned by BSA International and 0.02% currently owned by BSA.
* * * * *
Purpose of this Information Memorandum
As explained above, the purpose of this Information Memorandum is to comply with the disclosure requirements of Article 71 of the Issuers’ Regulations and Article 5 of the Related‐party Regulations.
Please note that the Consob, by a communication dated May 24, 2012, asked the Issuer to add the following disclosures and information to the Information Memorandum:
1. ʺa description of the main industrial synergies referred to in the press release published on May 22, 2012 at the Consob’s request, listing (i) the activities that the company’s management plans to implement to obtained increased cash flows compared with the standalone plans of the parties involved in the LAG acquisition and quantification of the increase; (ii) the investment required to implement the abovementioned activities; and (iii) the implementation timing of the activities.”
This information is provided in Section 2.2.2. of this Information Memorandum.
2. ʺThe Directors’ thoughts with regard to the possibility of achieving the synergies expected from the LAG acquisition by means of alternative transactions, such as, for example, execution of commercial agreements for the distribution of the products of the two entities involved in the transaction, joint purchasing of raw materials and sharing of the respective competencies.”
This information is provided in Section 2.2.2. of this Information Memorandum.
3. ʺThe Directors’ thoughts with regard to the fact that the transaction was approved by a Board of Directors elected by the Shareholders’ Meeting of June 28, 2011 for a term of just one year, with the election of a new Board expected at a Shareholders’ Meeting that, as announced, has been postponed to May 31, 2012.”
This information is provided in Section 2.3.6. of this Information Memorandum.
12 Please also note that the Consob asked Sofil SAS, Parmalat’s Controlling Shareholder, to forward to the Issuer, for inclusion in this Information Memorandum, information “concerning the timing based on which Lactalis decided that the project to integrate the abovementioned activities in the packaged milk sector was not a priority and the reasons why the integration of the activities of the Parmalat Group with those of the Lactalis Group was not included in the Issuer’s future plans, as described at that time in the Memorandum.”
This information forwarded by Sofil is provided in Section 2.2.3. of this Information Memorandum.
13 1. RISK FACTORS
A description of the main risks and uncertainties inherent in the Transaction is provided below, with special emphasis on those related to its status as a related‐party transaction and those that could have a material impact on the Issuer’s activities. The content of this Risk Factors, should be read in conjunction with the other information provided in this Information Memorandum.
1.1 Risks Related to Potential Conflicts of Interest arising from the Related‐party Transaction The Transaction, in addition to constituting a significant acquisition pursuant to Article 71 of the Issuers’ Regulations, qualifies as a related‐party transaction because:
(a) Parmalat, who is a participant in its capacity as buyer of the Equity Stakes, is controlled by BSA, who is a participant in its capacity as seller of all of the LAG Common Shares, 650 LAG Preferred Shares and minority stakes in Lactalis Brazil and Lactalis Mexico. The following companies are also controlled by BSA:
(i) Groupe Lactalis, who is a participant in its capacity as seller of 750 LAG Preferred Shares;
(ii) BSA International, who is a participant in its capacity as seller of majority stakes in Lactalis Brazil and Lactalis Mexico;
(b) LAG, who is a participant in its capacity as licensee of the “Président” trademark, pursuant to the Président Licensing Agreement, and, through its LEA subsidiary, as distributor, pursuant to the Distribution Agreement, is controlled by BSA, who, in turn, is a participant in its capacity as licensor and supplier, respectively, pursuant to the abovementioned agreements;
(c) Galbani and LAG, who are participants in their capacities as licensor and licensee of the Galbani trademarks, respectively, pursuant to the Galbani Licensing Agreement, are both controlled by BSA. The Transaction’s risk profiles arising from the presence of potential conflicts of interest have to do with the possibility that the Transaction may entail terms different from those that would have been applies in an arm’s length transaction.
In this regard, it is worth mentioning that the fairness of the Transaction’s terms was confirmed by a special fairness opinion provided by Mediobanca – Banca di Credito Finanziario S.p.A. (“Mediobanca”), in its capacity as independent expert hired to support Parmalat’s Internal Control and Corporate Governance Committee, comprised exclusively of Independent Directors, designated in the Related‐party Procedure as the committee with jurisdiction over reviewing related‐party transactions (the “Related‐party Committee” or the “Committee”), as explained in greater detail in Section 2.1.3. below.
Please note that Yvon Guérin, Parmalat’s Chief Executive Officer, and the Directors Antonio Sala and Daniel Jaouen are officers of Lactalis Group companies. Consequently, at a meeting held by Parmalat’s Board of Directors on May 22 and 28, 2012, they disclosed any interest that they may have in the Transaction, directly or on behalf of third parties, by virtue of the abovementioned posts they held, specifying the type, terms, origin and scope of said interest, thereby providing the disclosures required pursuant to Article 2391 of the Italian Civil Code.
1.2 Risks and Uncertainties that Could Have a Material Impact on the Issuer’s Activities Resulting from the Transaction
The risks and uncertainties that could have a material impact on the Issuer’s activities resulting from the Transaction are reviewed below.
1.2.1 Risks and Uncertainties Related to the Terms of the Sales Agreements
Consistent with best market practices for transactions of this type, the Sales Agreement contains a series of representations and warranties provided by BSA, BSA International and Groupe Lactalis (the “Sellers”), as well as compensation obligations and limitations, exclusively of a timing nature (there being no stipulations concerning maximum amount, deductibles and inconsequential claims), with regard to the liability of the Sellers for violations of the abovementioned representations and warranties.
The Sellers shall be responsible for any violations of the Sellers’ representations and warranties, notice of which is given to the Sellers by and not later than the tenth anniversary of the Closing for violations of the so‐called legal warranties (ownership, status, capacity, authorization, etc.) or the fifth anniversary of the Closing for all others, except for violations of the representations and warranties concerning issues related to taxation, labor laws, employee benefits, environmental regulations and product liability, for which the Sellers shall continue to be liable provided notice of such violations is given to the Sellers not later than 20 business days past the statute‐of‐limitations deadline applicable to each violation, pursuant to law.
The damage compensation obligations set forth in the Sales Agreement for violations of the Sellers’ representations and warranties constitute an exclusive, independent and separate remedy, the applicability of different and/or additional remedies beyond those contractually stipulated being expressly excluded, particularly with regard to the warranties for defects and lack of quality referred to in Articles 1490 and 1497 of the Italian Civil Code. The parties specifically intended to establish complete and exhaustive rules governing the contractually stipulated warranties, also with regard to the timing and modalities for the exercise of the corresponding rights, which include provisions that are incompatible with statutory rules, particularly with regard to the short statute‐of‐ limitations deadlines referred to in Article 1495 of the Italian Civil Code.
The clauses of the agreement were negotiated with the aim of providing the buyer with the most ample protection possible. Moreover, should there occur or arise shortfalls in asset values, capital losses or prior‐period losses attributable to the Companies Subject of the acquisition or their business activities that are not covered by representations or warranties or with regard to which it would otherwise be impossible to obtain compensation for the corresponding damages from the Sellers, such events could have adverse effects on the
15 activities and/or financial position, income statement and/or cash flow of the Parmalat Group.
1.2.2. Risks and Uncertainties Related to the Acquisition
The Acquisition subject of this Information Memorandum entails the risks typical of investments in large equity stakes in companies that are not publicly traded and, more specifically, the possibility that the value of the acquired equity stakes could be impaired due to factors not foreseeable at the time the Acquisition was completed. The occurrence of such circumstances could have a negative impact on the financial position, income statement and cash flow of the Parmalat Group, even though the Sellers’ indemnification obligations were negotiated with the aim of providing the buyer with the most ample protection possible.
The Acquisition also entails risks that are typical of the integration into an existing group, with all of the complexities related to the integration of activities, products and sales channels, coordination of research and development activities and management of the Companies Subject of the Acquisition. Consequently, the process of integrating the acquired activities could be completed with a timing and modalities that are different from those currently being planned, with higher costs than those projected at this point. The occurrence of such a circumstance could have adverse effects on the activities and/or financial position, income statement and/or cash flow of the Parmalat Group.
1.2.3. Risks Related to Brand Migration
The marketing strategy in the retail channel that will be adopted after the Acquisition calls for the use of Galbani as the dedicated brand for Italian cheeses sold in the United States and Président as the brand for “specialty” cheeses, so as to benefit from the economies of scale created by optimizing advertising expenses and from the possibility of increasing distribution in the United States.
The migration from the Sorrento and Precious brands currently used to the Galbani brand, for products that in 2011 accounted for about one‐third of the revenues of the LAG Group, is an important element of LAG’s growth acceleration strategy and is crucial for the optimum success of the Acquisition. Even though LAG developed a program to facilitate the transition and planned adequate marketing investments (vetted by Parmalat), there is no assurance that this strategy can be effectively implemented or that it will be well received by consumers.
1.2.4. Risks Related to Activities in the Emerging Countries
As a result of the Transaction, specifically by virtue of the Distribution Agreement described below, Parmalat will broaden its sales presence in Latin America.
These types of activities will expose Parmalat to limited risks (which, incidentally, are known to the Issuer due to its operations in Latin America) related to: (i) the challenge of dealing with multiple local competitors; (ii) the variety of consumer tastes and preferences;
16 (iii) the potential of changes in the political and economic situation in the different countries; (iv) potential changes in the regulatory framework and possible imposition of new tariffs and/or other protectionist measures; (v) the occurrence of terrorist acts or similar events, conflicts or political instability.
1.2.5. Risks and Uncertainties Related to the Financial Structure of the Transaction
The Issuer intends to cover its Price payment obligation with internally generated funds and, consequently, there are no specific risks and uncertainties related to the financial structure of the transaction.
1.2.6. Risks Related to the Preparation of Pro Forma Data
The document entitled “Pro Forma Consolidated Statement of Financial Position at December 31, 2011 and Pro Forma Consolidated Income Statement for the Year Ended on December 31, 2011 of Parmalat S.p.A.“ approved by the Company’s Board of Directors on May 28, 2012, included in Chapter 5 of this Information Memorandum, presents the pro forma consolidated statement of financial position at December 31, 2011, the pro forma consolidated income statement for the year ended on December 31, 2011 of Parmalat and the accompanying notes (the “Pro Forma Consolidated Financial Information”). The Pro Forma Consolidated Financial Information were prepared for the purpose of presenting the main effects of the Acquisition and of the execution of certain licensing and distribution agreement (together with the Acquisition, the “Transactions”). More specifically, the Pro Forma Consolidated Financial Information, which were reviewed by the Independent Auditors, who issued their report on May 29, 2012, were prepared with the aim to simulate, using accounting policies consistent with the historical data and compliant with the applicable legislation, the main effects of the Transactions on the financial position and income statement of the Group, as if the Acquisition had taken place on December 31, 2011, for financial position purposes, and January 1, 2011, for income statement purposes. Because pro forma data are prepared to reflect retroactively the effects of subsequent transactions, despite complying with generally accepted regulations and using reasonable assumptions, there are limits entailed by the very nature of the pro forma data. Therefore, it is important to keep in mind that, had the Transactions actually occurred on the dates assumed above, the effects would have not necessarily been the same as those presented in the Pro Forma Consolidated Financial Information. Moreover, due to the different purposes for which pro forma and historical financial data are prepared and the different methods applied to compute the effects of the Transactions on the pro forma consolidated statement of financial position and the pro forma consolidated income statement, these documents should be read and interpreted without seeking an accounting linkage between them. Lastly, please keep in mind that the Pro Forma Consolidated Financial Information do not intend in any way to represent a projection of future results of the Group and, therefore, should not be used to that effect.
17 2. INFORMATION ABOUT THE TRANSACTION
2.1 Overview of the Transaction’s Modalities, Terms and Conditions
The Transaction consists of the Acquisition, conditional on the concurrent execution of the Distribution Agreement, the Galbani Licensing Agreement, the Président Licensing Agreement, the Brazil Subdistribution Agreement and the Mexico Brazil Subdistribution Agreement.
As mentioned in the introduction, the Acquisition concerns:
(a) all of the LAG Shares, including the 750 Preferred Shares, currently held by Groupe Lactalis, which Groupe Lactalis may transfer to BSA by the Closing Date, as explained below;
(b) the equity stakes representing 100% of the equity capital of Lactalis Brazil, currently held 99.99% by BSA International and 0.01% by BSA; and
(c) the equity stakes representing 100% of the equity capital of Lactalis Mexico, currently held 99.98% by BSA International and 0.02% by BSA.
The Acquisition is governed by a special sales agreement executed on May 29, 2012 by Parmalat, as the buyer, and BSA, BSA International and Groupe Lactalis, as sellers (the “Sales Agreement”), the main terms and conditions of which are described in Section 2.1.2. below, which should also be consulted for a description of the main terms and conditions of the Distribution Agreement, the Galbani Licensing Agreement and the Président Licensing Agreement.
2.1.1. Description of the Company and Business Operations Subject of the Acquisition
The company subject of the acquisition is Lactalis American Group, Inc., a company established in accordance with the laws of the state of Delaware, with head office at 2376 South Park Avenue, Buffalo, NY 14220, Employer Identification No. 39‐1429105, with approved, subscribed and paid‐in share capital consisting of: (i) a total of 10,000 Common Shares, without par value; and (ii) 1,400 Preferred Shares, par value USD100,000 each.
LAG is a holding company that heads a group of companies engaged in the production and distribution of cheese and other dairy products. These companies, which have about 1,675 employees, are active mainly in the United States, selling to distributors, club stores, supermarket chains and producers.
The LAG Group manufactures and sells both brand‐name products and private‐label products. The portfolio of proprietary and licensed brands includes both international brands, such as “Galbani” and “Président” (including “Rondelé”), and established local brands, such as “Sorrento,” “Precious” and “Mozzarella Fresca.”
The Sorrento brand, which is marketed on the East Coast of the United States, is used for a series of Italian‐style cheeses distributed through the retail channels and the catering and industrial channels, while the Precious brand, which is marketed on the West Coast of the United States, is used for Italian‐style cheeses sold mainly through the retail channel.
These brands, together with other proprietary brands, contributed to the success of the LAG Group in terms of consumer loyalty, market position and revenues.
Within the framework of the Transaction, the LAG Group will acquire the right of use, on an exclusive basis, the Président and Galbani brands over the long term, consistent with a retail‐market strategy aimed at achieving faster growth that that of the market as a whole.
In the United States, the Galbani brand enjoys an established position in the Italian cheese segment, while the Président brand has an established position in the specialty cheese segment. Both segments have a high growth potential, with substantial margins, and are highly attractive to local consumers.
Insofar as sales channels are concerned, the Group’s products are sold through the retail channel, which encompasses two types of product offers at the same sales locations:
• The so‐called “dairy” area, in which the products sold generally consist of “mass market” products, such as ricotta, mozzarella “blocks” and “snack” cheese. Because of the type of products and competitive dynamics, this channel has lower contribution margins than the deli channel.
• The so‐called “deli” area, in which the product selection is more sophisticated, with products characterized by their foreign origin or viewed as “specialties.” In this area, LAG sells such as products “fresh” mozzarella, camembert and brie, both imported and produced locally. This channel has higher contribution margins
Major customers in the retail channel include Walmart, Costco, Trader Joe and Wegmans.
The LAG Group also has a strong position in the business‐to‐business channel (catering, industrial and powdered milk), with such customers as Sysco and U.S. Foodservice.
To better respond to the needs, peculiarities and different dynamics of the various channels and market segments, LAG’s commercial organization includes four divisions devoted, respectively, to the dairy channel, the deli channel, the B2B channel (which includes catering, industrial and ingredients) and the export channel.
Cheese products are manufactured mainly at five plants evenly distributed throughout the United States, with locations in Buffalo (New York), Nampa (Idaho), Belmont (Wisconsin), Merrill (Wisconsin) and Tipton (California).
In addition, by virtue of the execution of the Distribution Agreement, the LAG Group will become the exclusive distributors of Lactalis Group products for the entire American Continent. with access to the rapidly growing markets of Latin America.
As of the date of this Information Memorandum, the Lactalis Group was comprised of the following companies:
19 • Sorrento Lactalis Inc., a company established in accordance with the laws of the state of Delaware, with head office at 2375 South Park Avenue, Buffalo, NY 14220 (USA), Employer Identification No. 82‐0446704, which operates production facilities in South Park/Buffalo (New York) and Nampa (Idaho);
• Lactalis USA, Inc., a company established in accordance with the laws of the state of Wisconsin, with head office at 8100 Hywy K S Merrill, WI 54452 (USA), Employer Identification No. 39‐1080029, which operates production facilities in Belmont (Wisconsin) and Merrill (Wisconsin);
• Lactalis Deli, Inc., a company established in accordance with the laws of the state of Delaware, with head office at 950 Third avenue, New York, NY 10022 (USA), Employer Identification No. 20‐3619629, which distributes gourmet cheeses of the Lactalis Group, produced locally or imported, through the deli channel (Deli national and Deli Export), dairy stores (Retail Dairy) e catering (Foodservice);
• Mozzarella Fresca Incorporated, a company established in accordance with the laws of the state of California, with head office at 615 N. Burnett Rd, Tipton, CA 93272 (USA), Employer Identification No. 68‐0427484, which operates a production facility in Tipton (California);
• Lactalis Export Americas SAS, a company under French law, with registered office at 16 Avenue Jean Jaurès – Immeuble Orix (94600) Choisy Le Roi (France), entered into the Creteil (France) Registre du Commerce et des Sociétés under Identification No. 751 701 756, which handles all of the cheese import‐export activities of the Lactalis Group in the American Continent.
• Lactalis Retail Dairy, Inc., a company established in accordance with the laws of the state of Utah, with head office at 2376 South Park Avenue, Buffalo, NY 14220 (USA), Employer Identification No. 87‐0325640, which distributes products through the following channels: dairy stores (Retail Dairy), catering (Foodservice) and Industrial (Industrial Ingredients);
• S.C.C. Properties Inc., a company established in accordance with the laws of the state of New York, with head office at 2376 South Park Avenue, Buffalo, NY 14220 (USA), Employer Identification No. 16‐1399292, which owns the properties used by the LAG Group (except for the property in Tipton, California, which is owned by Mozzarella Fresca Incorporated).
20 A chart showing the structure of the LAG Group as of the date of this Information Memorandum is provided below:
LINT Business
LACTALIS INTERNATIONAL
Lactalis do Brazil LTDA LACTALIS AMERICAN GROUP
Lactalis Alimentos Mexico S.DE RL
100.0% 100.0% 60.0% 100.0%
Sorrento Lactalis Inc. Lactalis U.S.A. Inc. Lactalis Deli Inc. Mozzarella Fresca Inc.
40.0%
100.0% 100.0%
Lactalis Retail SCC Properties Dairy Inc.
The acquisition also includes the recently established companies Lactalis Brazil and Lactalis Mexico.
Lactalis Brazil, a company under Brazilian law with registered office at 2012 Faria Lima, São Paulo (Brazil), approved, subscribed and paid‐in share capital of 1,800,000 BRL, is a company whose corporate purpose is to distribute, import and export dairy products.
Lactalis Mexico, a company under Mexican law with registered office at 104 Protasio Tagle, San Miguel Chapultepec 11850, Mexico City, approved, subscribed and paid‐in share capital of 3,000 MXN, is a company whose corporate purpose is to produce, distribute, market, import and export dairy products and food products of an type.
The companies subject of the Acquisition also operate in Latin America, Brazil primarily, which is a rapidly growing market, where the average contribution margin is higher than in North America, due in part to a line of products with a high value added (specialty cheese).
2.1.2. Transaction’s Modalities, Terms and Conditions
Sales Agreement
The Acquisition’s modalities, terms and conditions are governed by the Sales Agreement executed by the parties on May 29, 2012.
Pursuant to this agreement, Parmalat shall buy from the Sellers, who will sell them, the Equity Stakes, effective as of the Closing Date, as defined below.
Groupe Lactalis shall have the option of selling to BSA, by the Closing Date, the 750 LAG preferred shares it holds, it being understood that on the Closing Date BSA shall sell the abovementioned Preferred Shares to the Buyer, effective as of the said Closing Date. The sale of the 750 LAG Preferred Shares shall not relieve Groupe Lactalis of the obligations undertaken under the Sales Agreement, specifically with regard to those arising from the representations and warranties provided by the Sellers and related indemnification obligations.
However, Parmalat reserved the right to designate by the same date one or more wholly owned subsidiaries that, pursuant to and for the purposes of Article 1401 of the Italian Civil Code, will acquire all of the rights and assume all of the obligations of the Buyer arising from the Sales Agreement. In such a case, the Equity Investments will be acquired by the specially designated company/companies, it being understood that Parmalat shall be jointly liable for the exact performance of all of the obligations undertaken by the abovementioned company/companies in connection with the Sales Agreement.
The total consideration for the sale of the Equity Stakes (the “Price”) is equal to the algebraic sum of (i) the amount of USD904 million and (ii) the amount of the Net Financial Position at Closing and shall be subject to adjustment, if any, as explained below.
The Net Financial Position at Closing shall be computed based on the data shown in the combined financial statements of the Companies Subject of the Acquisition at the end‐of‐
22 month date nearest to the Closing (the “Financial Statements at Closing”), certified by Ernst & Young, in its capacity as independent auditor of LAG, which shall be prepared in accordance with US GAAP and delivered to the Buyer within 60 days from the Closing Date.
For the purpose of the provisions outlined above. “Net Financial Position at Closing” shall be understood to mean the sum of the following line items in the Financial Statements at Closing:
Cash and cash equivalents
+ Current financial assets
‐ Current and non‐current financial liabilities.
The Net Financial Position at Closing, computed as above, shall be final and binding on the parties, unless the Financial Statements at Closing and/or the computation of the Net Financial Position at Closing are challenged by the Buyer within 20 business days from their receipt. In the event of a challenge, if the parties are unable to reach an agreement regarding the challenged items within 10 Business Days, the determinations concerning the computation of the Net Financial Position shall be left to a firm of independent auditors, chosen jointly by the parties among the so‐called “Big Four” or, if the parties cannot reach an agreement, chosen by the Chief Judge of the Court of Milan (the “Expert”). The Expert shall serve as Arbitrator, pursuant to and for the purposes of Article 1349, Section 1, and Article 1473 of the Italian Civil Code, judging in equity, and shall render a decision within 20 Business Days from the date of his/her appointment. The Expert’s decision shall be final and binding on the parties.
On the Closing Date, conditional on the transfer of title to the Equity Investments, Parmalat (and/or the company/companies it may have designated) shall pay to the Sellers the provisional consideration, amounting to USD904 million (the “Provisional Price”).
The amount of the Net Financial Position at Closing shall be paid by Parmalat (and/or the company/companies it may have designated) to BSA, if positive, or by BSA to Parmalat (and/or the company/companies it may have designated), if negative, under any circumstances, within 15 Business Days after the expiration of the challenging deadline, if there is no challenge, or from the date of the Expert’s decision, in the event of a challenge.
The price was stipulated at the amount mentioned above, based on the Enterprise Value of the Companies Subject of the Acquisition, estimated at December 30, 2012 (year‐end closing date for the companies of the LAG Group) to be equal to USD904 million, assuming that the EBITDA of the Companies Subject of the Acquisition for the 2012 reporting year is equal to USD95.2 million, in which:
“Enterprise Value of the Companies Subject of the Acquisition at December 30, 2012” or “Enterprise Value” shall mean the EBITDA of the Companies Subject of the Acquisition for the 2012 reporting year multiplied by 9.5;
23 “EBITDA of the Companies Subject of the Acquisition for the 2012 Reporting Year” or “EBITDA” shall mean the sum of the following line items in the Price Revision Financial Statements, (as defined below):
EBIT
+ Depreciation, amortization and writedowns of non‐current assets
– Non‐recurring and extraordinary income (expense)
Should the Enterprise Value of the Companies Subject of the Acquisition at December 30, 2012 be equal to an amount different from USD904 million, due to EBITDA of an amount different from USD95.2 million, the Price shall be adjusted, upwards or downwards, to reflect the actual amount of the Enterprise Value, it being understood that Enterprise Value amounts greater than USD960 million or smaller than USD760 million will not be taken into account for price adjustment purposes. More specifically:
- if the Enterprise Value is lower than USD904 million, BSA shall pay the difference to Parmalat (and/or the company/companies it may have designated), it being understood that the amount thus owed by BSA may not be greater than USD144 million;
- if, on the other hand, the Enterprise Value, is higher than USD904 million, Parmalat (and/or the company/companies it may have designated) shall pay the difference to BSA, it being understood that the amount thus owed by Parmalat may not be greater than USD56 million.
The Enterprise Value of the Companies Subject of the Acquisition at December 30, 2012 shall be computed based on the data shown in the combined financial statements of the Companies Subject of the Acquisition at December 30, 2012 (the “Price Revision Financial Statements”), certified by Ernst & Young, in its capacity as independent auditor of LAG, which shall be prepared in accordance with US GAAP within 60 days from the Closing Date of the 2012 reporting year.
The Enterprise Value of the Companies Subject of the Acquisition at December 30, 2012, computed as above, and the related Price adjustment shall be final and binding on the parties, unless the Price Revision Financial Statements and the computation of the EBITDA, the Enterprise Value and/or any Price adjustment are challenged by the Buyer within 20 Business Days from their receipt. In the event of a challenge, if the parties are unable to reach an agreement regarding the challenged items, the determinations concerning the computation of the Enterprise Value and/or any Price adjustment shall be left to the Expert, who shall serve as Arbitrator, pursuant to and for the purposes of Article 1349, Section 1, and Article 1473 of the Italian Civil Code, judging in equity, and shall render a decision within 20 Business Days from the date of his/her appointment. The Expert’s decision shall be final and binding on the parties.
The amount owed as price adjustment shall be paid by BSA to Parmalat (and/or the company/companies it may have designated) or, alternatively, by Parmalat (and/or the company/companies it may have designated) to BSA within 15 business days from the date
24 of delivery of the Price Revision Financial Statements or, in the event of a challenge, from the date of the Expert’s decision.
To secure performance of its payment obligations, if a Price adjustment is required, BSA agreed to use, alternatively, one of the following instruments:
(i) an escrow deposit of USD144 million held at a bank or financial intermediary of international standing acceptable to Parmalat;
(ii) a bank surety, on sight, in the amount of USD144 million, provided by one or more banks or financial intermediaries of international standing acceptable to Parmalat;
(iii) cash available to Parmalat, by means of irrevocable instructions or equivalent instrument acceptable to Parmalat, in the amount of USD144 million drawn from the revolving loan facility provided to BSA Finances by a pool of banks, headed by Société Générale, on April 25, 2011.
Please note that the fairness of the Transaction’s conditions was confirmed by a special fairness opinion provided by Mediobanca, in its capacity as an independent expert hired to provide support the Related‐party Committee, as explained in detail in Section 2.1.3. below.
Unless otherwise agreed to in writing by the parties, the Transaction is expected to close on a date falling between July 2 and July 31, 2012 (the “Closing Date”), upon the execution of the Distribution Agreement, the Président Licensing Agreement, the Galbani Licensing Agreement, the Brazil Subdistribution Agreements and the Mexico Subdistribution Agreements, concurrently with the performance of all of the actions and transactions that may be appropriate or necessary for the implementation of the Sales Agreement (the “Closing”).
The Closing is subject to the following conditions precedent being fulfilled:
(a) The condition that:
(i) by and not later than the Closing Date, the pledge encumbering the LAG Shares to secure the obligations undertaken by BSA Finances and BSA in connection with a loan agreement that the abovementioned companies executed on April 25, 2011 with a pool of banks headed by Société Générale (the “Pledge”) will have been cancelled; and that
(ii) by the same date, the Buyer will have received from the Sellers satisfactory evidence of said cancellation. (b) The condition that the representations and warranties provided by the Sellers pursuant to the Sales Agreement are true and accurate on the Closing Date.
The condition precedent set forth in Item (b) above is being adopted exclusively for the benefit of the Buyer, who, therefore, shall have the right to waive it and, consequently, agree to the closing still taking place on the Closing Date.
The Sales Agreement also includes an interim management clause, pursuant to which the Sellers agree, for the time period from the date of execution of the Sales Agreement and the
25 Closing Date to ensure that the companies subject of the Acquisition are managed in accordance with sound and regular management criteria, which entail a prohibition to execute extraordinary transactions, unless otherwise agreed to in writing by the parties.
In addition, pursuant to the Sales Agreement, the Sellers and Groupe Lactalis are required to provide a structured series of representations and warranties, in line with best practices for transactions of this type, including, inter alia, representations and warranties to the effect that:
• the companies of the LAG Group were duly established, exist and are solvent;
• title to the Equity Stakes rests with the Sellers and the permits and authorizations required to operate the activities carried out by the LAG Group were properly obtained;
• the real and personal property and the tangible and intangible assets used by the LAG Group for its activities are duly owned and suitable for their intended purposes;
• the relevant contracts executed by the LAG Group are valid, effective and are being duly complied with;
• the provision governing financial statements and accounting records, taxation, labor relations, employee benefits and environmental issues are being complied with
• there are no significant product liability or litigation issues.
The indemnification obligations of the Sellers in the event of a violation of the representations and warranties they provided are not subject to limitations of a quantitative type (maximum amount, inconsequential claims, deductibles).
The Sellers shall be responsible for any violations of the representations and warranties of the Sellers, notice of which is given to the Sellers and Groupe Lactalis by and not later than the tenth anniversary of the Closing for legal warranties (ownership, status, capacity, permits, etc.), or the fifth anniversary of the Closing for all other warranties, except for violations of the representations and warranties concerning issues related to taxation, labor laws, employee benefits, environmental regulations and product liability, for which the Sellers shall continue to be liable provided notice of such violations is given to the Sellers not later than 20 business days past the statute‐of‐limitations deadline applicable to each violation, pursuant to law.
The damage compensation obligations set forth in the Sales Agreement for violations of the representations and warranties of the Sellers constitute an exclusive, independent and separate remedy, the applicability of different and/or additional remedies beyond those contractually stipulated being expressly excluded, particularly with regard to the warranties for defects and lack of quality referred to in Articles 1490 and 1497 of the Italian Civil Code. The parties specifically intended to establish complete and exhaustive rules governing the contractually stipulated warranties, also with regard to the timing and modalities for the exercise of the corresponding rights, which include provisions that are incompatible with statutory rules, particularly with regard to the short statute‐of‐ limitations deadlines referred to in Article 1495 of the Italian Civil Code.
26 The obligations undertaken by the Sellers pursuant to the Sales Agreement constitute joint obligations.
The Sales Agreement is governed by Italian law, with exclusion of the provision on international private law.
All disputes arising from the Sales Agreement shall be submitted to a board of three arbitrators, who shall rule in equity and pursuant to law, with each party being entitled to appoint one arbitrator and the two arbitrators thus appointed designating the chairman of the board of arbitrators. Should the two arbitrators fail to reach an agreement, the chairman shall be appointed by the Chief Judge of the Court of Milan.
The Court of Milan shall have sole jurisdiction over disputes that pursuant to law cannot be submitted to arbitration.
Distribution Agreement
By virtue of the Distribution Agreement, which shall be executed by BSA and LEA on the Closing Date, BSA shall grant to LEA the right to distribute, on an exclusive basis, the products of the Lactalis Group (excluding the Parmalat Group) throughout the American Continent, i.e., in all countries and territories located in North America, Central America, South America and the Caribbean.
By virtue of the abovementioned agreement, LEA shall have the right to appoint subdistributors, other than its subsidiaries, without having to request the prior approval of BSA.
Pursuant to the Distribution Agreement, the price that LEA shall pay to BSA to buy the different products shall be set annually in accordance with the full cost/plus pricing method.
Specifically, the price will be determined based on such cost components as the direct variable cost (raw materials/ingredients, packaging materials), variable production costs (labor, energy, etc.), fixed direct industrial costs (depreciation and amortization, maintenance, etc.), indirect fixed costs (back office, logistics, planning, insurance, etc.) and other financial expense related to production investments.
The price thus determined shall be increased (“plus factor”) by an amount that will be defined on an annual basis, initially set at 2%.
With regard to products manufactured by external suppliers of BSA, LEA’s purchase price under the Distribution Agreement shall be equal to the price charged to BSA, increased by 0.5%.
The purchase price of the different products will not change for the entire reference year. However, it may be modified at any time, with the joint agreement of both parties, upon the occurrence of the following circumstances: a fluctuation of the direct variable cost and the direct variable production costs ranging between ± 2% and ± 5%, compared with the previous year, or a substantial impact of the financial expense incurred for production investments or a significant change in the quantity of products purchased by LEA.
27 The Distribution Agreement also requires that, in the event of circumstance liable to have a significant impact on the economic and financial position of BSA or LEA or the profitability of the Distribution Agreement, the parties shall discuss and/or modify, at any time during the year, the percentage price increase applied as “plus factor.”
The Distribution Agreement shall have a term of 20 (twenty) years, counting from the Closing Date, with automatic renewals for additional periods of 5 (five) years, unless cancelled by either party on notice of at least 6 (six) months.
LEA shall have the right to cancel the Distribution Agreement at any time on notice of at least 6 (six) months.
The Distribution Agreement shall include representations and warranties with related compensation obligations for BSA.
The Distribution Agreement shall be governed by the laws of the State of New York (USA) and the courts of that state shall have sole jurisdiction over any dispute that may arise from the abovementioned Agreement.
Galbani Licensing Agreement
By virtue of the Galbani Licensing Agreement, which Galbani and LAG shall execute on the Closing Date, LAG shall be granted the right to use the “Galbani” brands, on an exclusive basis, to produce and sell dairy products throughout the American Continent, i.e., in all countries and territories located in North America, Central America, South America and the Caribbean.
By virtue of the abovementioned agreement, LAG shall have the right to appoint subdistributors, other than its subsidiaries, without having to request Galbani’s prior approval.
Pursuant to the Galbani Licensing Agreement, LAG shall pay to Galbani, within 30 days from the end of each quarter, royalties equal to 5% of the net revenues generated by the sale of products sold under the licensed brands in the territories covered by the exclusive rights. The Galbani Licensing Agreement also calls for the payment by Galbani to LAG of a fixed contribution equal to 3% of the net revenues generated by the sale of products bearing the licensed brands in the territories covered by the exclusive rights for services aimed at promoting and advertising the products subject of the Galbani Licensing Agreement, which LAG agrees to provide.
No royalty shall be owed by LAG for intercompany sales, sales of products bearing brands different from the licensed brands and “endorsed product” sales.
The Galbani Licensing Agreement shall have a term of 20 (twenty) years, counting from the Closing Date, with automatic renewals for additional periods of 5 (five) years, unless cancelled by either party on notice of at least 6 (six) months.
LAG shall have the right to cancel the Galbani Licensing Agreement at any time on notice of at least 6 (six) months.
28 The Galbani Licensing Agreement shall include representations and warranties with related compensation obligations for Galbani.
The Galbani Licensing Agreement shall be governed by the laws of the State of New York (USA) and the courts of that state shall have sole jurisdiction over any dispute that may arise from the abovementioned Agreement.
Président Licensing Agreement
By virtue of the Président Licensing Agreement, which BSA and LAG shall execute on the Closing Date, BSA shall grant to LAG the right to use the “Président” brand, on an exclusive basis, to produce and sell dairy products throughout the American Continent, i.e., in all countries and territories located in North America, Central America, South America and the Caribbean.
By virtue of the abovementioned agreement, LAG shall have the right to appoint subdistributors, other than its subsidiaries, without having to request the prior approval of BSA.
Pursuant to the Président Licensing Agreement, LAG shall pay to BSA, within 30 days from the end of each quarter, royalties equal to 2% of the net revenues generated by the sale of products sold under the licensed brands in the territories covered by the exclusive rights.
No royalty shall be owed by LAG for intercompany sales, sales of products bearing brands different from the licensed brands and “endorsed product” sales.
The Président Licensing Agreement shall have a term of 20 (twenty) years, counting from the Closing Date, with automatic renewals for additional periods of 5 (five) years, unless cancelled by either party on notice of at least 6 (six) months.
LAG shall have the right to cancel the Président Licensing Agreement at any time on notice of at least 6 (six) months.
The Président Licensing Agreement shall include representations and warranties with related compensation obligations for BSA.
The Président Licensing Agreement shall be governed by the laws of the State of New York (USA) and the courts of that state shall have sole jurisdiction over any dispute that may arise from the abovementioned Agreement.
2.1.3. Methods for Determining the Consideration and Assessment of Its Fairness Compared with Market Values for Similar Transactions
As mentioned earlier in this Memorandum, the Price was stipulated as the sum of the Enterprise Value and the Net Financial Position at Closing.
The Enterprise Value was determined as amounting to USD904 million, equal to the EBITDA of the Companies Subject of the Acquisition projected in the Business Plan for the 2012 reporting year, totaling USD95.2 million euros, multiplied by 9.5, with the resulting amount being defined as the “Provisional Price.”
29 The Net Financial Position at Closing shall be the one reported at the end‐of‐month date nearest to the Closing and shall be verified through the preparation of audited interim financial statements.
A price adjustment mechanism based on the EBITDA actually reported in 2012 has also been provided for. The Provisional Price shall be adjusted, up or down, based on the EBITDA actually reported in 2012 by the Companies Subject of the Acquisition, which shall be appropriately tested and discussed by the parties and to which the abovementioned multiple shall be applied. The difference between the Enterprise Value computed based on reported EBITDA and the Enterprise Value based on Business Plan EBITDA shall constitute an upward price adjustment, if positive, or a downward price adjustment, if negative (“Price Adjustment”).
The Enterprise Value shall be subject to a floor and cap amounting to USD760 million and USD960 million, respectively.
The Sellers shall provide Parmalat with appropriate guarantees, as mentioned earlier in this Memorandum, to secure payment of the Price adjustment.
Estimating Methods adopted
The estimating methods adopted to quantify the Enterprise Value are those generally used in valuation practices: • Discounted cash flow (DCF); • Multiples for comparable transactions; • Stock market multiples for comparable companies.
The main method used was that of the discounted Cash Flow, because it makes it possible to quantify the business plans of companies subject of the valuation process, taking into account their industrial specificities and allowing the performance of sensitivity analyses. The methods used for comparison purposes were those of the multiples for comparable transactions and stock market multiples.
Discounted Cash Flow Method (Main Method)
The DCF method is based on the general assumption that the value of a company is equal to present value of all cash flows that it will be able to generate in the future.
According to this method, the value of a company is equal to the sum of i) the cash flows from operations generated in the years taken as the time horizon of analytical projection, appropriately discounted at a rate equal to the weighted average cost of capital (WACC), and ii) the terminal value (TV), understood as the present value of the cash flows from operations that the company will continue to generate during periods subsequent to the explicit projection periods.
The cash flow from operations used is the result of the following formula:
+ Earnings before interest and taxes (EBIT)
30 ‐ Income taxes on EBIT + Depreciation and amortization/Provisions of a non‐cash nature ± Changes in net working capital ‐ Investments in non‐current assets
The discount rate, equal to the Weighted Average Cost of Capital (WACC) is defined by the following formula:
WACC = Kd x (1‐t) x D/(D+E) + Ke x E/(D+E) where:
Kd x (1‐t) = cost of debt, net of tax effect, where “t” is the reference tax rate
Ke = cost of equity capital
D = net financial position
E= value of equity capital
The DCF method was applied to the Business Plan prepared by the LAG Group (Best Case) and to the plan resulting from a sensitivity analysis conservatively performed by Parmalat (Conservative Case). This method was also used to estimate the value of the synergies.
The definition of the reference valuation range for determining the Price was developed based on the valuations resulting from both scenarios (Best Case and Conservative Case).
Multiples for Comparable Transactions (Comparison Method)
This method consists of computing the implied multiples in transactions involving companies active in the same industry.
The transactions taken into considerations were acquisitions executed from 2007 to present involving the acquisition of control of groups/business operations active in the Dairy industry and certain operators specialized in the cheese sector, mainly in North America and Europe.
The analysis focused on the EBITDA multiples for the year before the transaction’s closing.
Please note that these multiples reflect a strategic premium, i.e., a control premium paid to the seller.
The sample’s average and median multiples were found to be consistent with the multiple used to determine the Price.
31 Stock Market Multiples for Comparable Companies (Comparison Method)
This method is based on computing the multiples reflected in the stock market capitalization of listed companies in the same industry.
The panel used was comprised of companies active in the U.S. dairy industry and the Parmalat Group, which is also active in the North American market, for which the EBITDA multiple was used.
The sample’s average and median multiples were found to be consistent with the multiple used to determine the Price, taking also into account the fact that these multiples do not reflect i) any control premium, and ii) the potential value of synergies, typical of transactions between industrial businesses.
It is worth mentioning that the fairness of the Transaction’s terms was confirmed by a special fairness opinion provided by Mediobanca in its capacity as independent expert hired to support the Related‐Party Committee during the Transaction’s preparatory phase and negotiation phase and to render a professional opinion about Parmalat’s interest in executing the Transaction and the benefits and substantive fairness of the Transaction’s conditions (the “Fairness Opinion”).
In this regard, please note that the Committee selected Mediobanca taking into account its established reputation for independence, reliability and professionalism, as well as its familiarity with the Parmalat Group, developed in the course of earlier assignments.
Mediobanca is one of the credit institutions that, on April 25, 2011, provided BSA Finances with a syndicated facility that was used to finance the voluntary tender offer for Parmalat, launched by the Lactalis Group and refinance the existing indebtedness of the Lactalis Group. Mediobanca’ commitment amounted to about 420 million euros at the end of April 2012, as against a total utilization of the facility amounting to 6.7 billion euros.
The abovementioned transactions were not deemed to be sufficient to jeopardize Mediobanca’s independence the purposes of the assignment in question. More specifically, with regard to Mediobanca’s involvement with the abovementioned syndicated facility, please keep in mind that Mediobanca played no part in structuring and negotiating the facility and that the share of the facility syndicated by Mediobanca does not provide it special rights compared with the other lender banks.
Upon accepting the assignment, Mediobanca informed Parmalat that it was not aware of any situation that could give rise to a conflict of interest with regard to the performance of the assignment and agreed to manage any potential conflict‐of‐interest situations that may arise in a manner that would not be detrimental to the Company’s interest, in accordance with the provisions of Directive 2004/39/EC and related second‐level provisions, as well as the provisions enacted to incorporate the Directive into the Italian legal system and implement it, and the policy adopted by Mediobanca to manage conflicts of interest.
As required by Article 5 of the Related‐party Regulations, Mediobanca’s Fairness Opinion and the opinion rendered by the Committee are annexed to this Information
32 Memorandum. These document are also available on the Company website (www.parmalat.com).
2.1.4. Financing Source Selected for Payment of the Price
The Issuer intends to cover the Price payment obligations with internally generated funds.
2.2 Motivation for and Purposes and Benefits of the Transaction
2.2.1. Motivation for the Transactions Specifically with Regard to the Issuer’s Management Objectives
The Transaction is designed to achieve two strategic objectives: expanding the presence of the Parmalat Group to geographic regions where it does not currently operate, such as the United States, Brazil and Mexico, and increase within its product portfolio the weight of items with a higher value added.
The Transaction will provide Parmalat with access to the most important dairy market at the international level: that of the United States. This entry will occur through LAG, a group that, over the past ten years, has shown an ability to generate strong growth in revenues and profitability and has already launched an interesting strategy to speed up its growth rate.
Insofar as increasing the weight of products with a greater value added is concerned, please note that the LAG Group operates in the profitable segments of soft cheese and fresh cheese, which are currently largely absent from Parmalat’s product portfolio. The Transaction will enable Parmalat to provide other Group companies, Parmalat Canada in particular, with important manufacturing, sales and distribution knowhow.
Parmalat’s management believes that that the Transaction will also improve the Company’s position in Latin America, expanding its presence to new markets, such as Mexico and Brazil, and opening the Venezuelan and Colombian markets, where Parmalat is already present, to LAG’s products. Moreover, the Distribution Agreement will significantly broaden the Group’s presence in the countries of Central and South America, where the cheese market is projected to enjoy high growth rates. More specifically, the compound annual growth rate (CAGR) projected for Brazil cheese market, the largest market in South America, for the 2012‐2016 period is 7.4% (Euromonitor data, Packaged Food: Euromonitor from trade sources/national statistics, April 18, 2012).
Lastly, the Transaction is highly relevant strategically over the medium term, considering the potential changes in the Canadian milk supply system and dairy market.
The anticipated opening of the border would provide growth opportunities for Parmalat’s and LAG’s plants and products in North America. Specifically, if the cost of milk used for cheese production were to become comparable in the United States and Canada, important gains in efficiency could be achieved, due in part to the favorable geographic distribution of the production facilities. In such a scenario, the mozzarella production facilities of the LAG Group could enable the Parmalat Group to become more competitive in the Canadian market. At the same time, the plant for the production of cheddar cheese in Winchester
33 (Ontario), which has partly unused production capacity, would provide the LAG Group with an opportunity to broaden its product portfolio without expanding its organization.
From this standpoint, the Transaction enables the Parmalat Group to pursue a strategy that is already being implemented by its main competitors, such as Kraft, Saputo, Agropur and Chobani, who cover the entire North American territory and have production facilities located near the U.S.‐Canadian border.
Insofar as the benefits of the Transaction are concerned, please note that, as explained in detail in Chapter 5, Section 5.2.1. below, starting with the 2011 pro forma data, there is an increase in Parmalat’s profitability per share, measured both in terms of EBITDA (up about 19%) and earnings per share (up 10%).
Parmalat’s management believes that the full implementation of LAG’s development plan and the realization of the identified synergies could produce a further improvement of these indicators.
2.2.2. Programs Developed by the Issuer with Regard to LAG
By executing the Transaction, Parmalat intends to carry out a marketing strategy, which will be implemented gradually in the second half of 2012, based on using Galbani as the dedicated brand for Italian cheeses sold in the United States and Président as the brand for “specialty” cheeses, so as to benefit from the economies of scale created by optimizing advertising expenses and from the possibility of increasing distribution in the United States. In addition, the shift from Sorrento and Precious branded products to the Galbani brand will make it possible to position these products more effectively in the U.S. market, due to Galbani’s established Italian identity.
To that effect, LAG developed a marketing plan to facilitate the transition of its current customers, which requires an appropriate level of investments that Parmalat intends to maintain in order to achieve an increase of its market share and profitability.
Moreover, consistent with the motivation for the transaction stated in Section 2.2.1. above, Parmalat intends to realize cost synergies deriving mainly from two factors: the presence of both Parmalat Canada and LAG in the cheese sector and the geographic proximity of the respective production units. The main advantages include:
• Greater negotiating power in procurement transactions:
the Group’s presence both in Canada and the United States could bring an advantage also in the procurement area because it will increase the negotiating power of local subsidiaries; benefits are expected in the procurement of packaging materials, chemicals, ingredients and machinery from North American suppliers used both by LAG and Parmalat Canada;
• optimization of the utilization rate of production capacity available at the production facilities of Parmalat Canada and LAG;
• exchange of manufacturing, sales and distribution knowhow and development of a synergistic product catalog for the Canadian and U.S. market.
34 Specifically, Parmalat Canada will be provided with an important opportunity to develop exports, as the Transaction will make it possible to increase sales in the United States of cheddar cheese produced and successfully sold by Parmalat Canada under the “Black Diamond” brand. The cheese will be produced at a plant in Winchester (Ontario) with milk imported from the United States in accordance with current laws.
Parmalat’s management believes that the implementation of specific initiatives in the areas described above could result in the realization of synergies estimated at about USD35 million a year, starting in 2014, after investments estimated at about USD12 million.
Parmalat intends to immediately implement the provisions of the Distribution Agreement, pursuant to which the LAG Group will become exclusive distributor of the Lactalis Group’s products for the entire American Continent.
At this point, Parmalat is not considering any significant restructuring and/or reorganization plan for the LAG Group.
Lastly, Parmalat’s Board of Directors and management believe that the synergistic benefits available to the two groups can be maximized only through a direct management of the activities headed by Parmalat and LAG. The development of commercial agreements related to the distribution of products can lead to the acquisition of short‐term economic advantages. but would make it impossible to maximize the typical benefits of an integrated management approach typical of an industrial operator focused on establishing a long‐term presence. Instead, the Parmalat Group, through the Acquisition, intends to significantly accelerate its growth and development strategy in the American Continent.
2.2.3. Programs Developed by Sofil S.a.s. with Regard to the Issuer
The information that the Consob requested from Sofil and Sofil forwarded to Parmalat is provided below.
In the Prospectus published in May 2011 within the framework of its tender offer for Parmalat, Sofil explained the development programs that it planned to implement, which included “extraordinary transactions aimed at fostering the growth and/or integration of the two groups.”
The tender offer for Parmalat was developed exclusively based on analyses performed on publicly available Parmalat data and, consequently, the programs presented in the Prospectus in relatively broad terms were based on that source of information.
Following the acquisition, Sofil gained a more in‐depth knowledge of Parmalat, thanks in part to field visits in the various countries where Parmalat operates and meetings between the management teams of both groups. These analyses brought into focus the development potential of the North American and South American markets, the commercial and industrial synergies available with Parmalat’s organizations that already operated in those regions, as well as opportunities for further growth in the dairy product category, all
35 strategic options that could not be fully assessed on the date when the Prospectus was prepared.
The programs presented in the Prospectus included the intention to strengthen Parmalat’s product portfolio in the cheese area. This approach is reflected in the extraordinary transaction involving the sale to Parmalat of the American operations of the Lactalis Group, in view of the high growth potential offered by the dairy market in the American Continent, the profitability of this product category and the important synergies available with the organizations of the Parmalat Group that already operate in that area.
The possibility of transferring to Parmalat the activities of the Lactalis Group in the French and Spanish market for packaged milk, presented by way of example in the Prospectus, are not viewed as having priority status at this point, due to the current condition of the target markets in Europe, rather static and with less attractive growth opportunities.
Therefore, these transactions. which did not have priority status when the preliminary phases of the Transaction got under way, are not currently being considered by Sofil. However, the plans for the development of the packaged milk business, as a fundamental component of the strategy of both groups, are still in place.
2.3 Transactions with LAG and the Lactalis Group
2.3.1. Related Parties Involved in the Transaction As stated in the Introduction, the Transaction qualifies as a related‐party transaction because:
(a) Parmalat, who is a participant in its capacity as buyer of the Equity Stakes, is controlled by BSA, who is a participant as the seller of all of LAG Common Shares, 650 LAG Preferred Shares and minority interests in Lactalis Brazil and Lactalis Mexico. The following companies are also controlled by BSA:
(i) Groupe Lactalis, who is a participant as the seller of 750 LAG Preferred Shares;
(ii) BSA International, who is a participant in its capacity as the seller of majority interests in Lactalis Brazil and Lactalis Mexico.
(b) LAG, who is a participant in its capacity as licensee of the “Président” trademark, pursuant to the Président Licensing Agreement, and as distributor, pursuant to the Distribution Agreement, is controlled by BSA, who, in turn, is a participant in its capacity as licensor and supplier, respectively, pursuant to the abovementioned agreements;
(c) Galbani and LAG, who are participants in the capacity as licensor and licensee of the Galbani trademark, respectively, are both controlled by BSA.
36 The chart below presents the simplified structure of the Lactalis Group, showing the individual equity stakes held in the companies parties to the Transaction on the date of this Information Memorandum.
2.3.2. Significant Transactions Executed by the Issuer, Directly or Indirectly Through Its Subsidiaries with the Company Subject of the Transaction That Were Outstanding When the Transaction Was Executed
As of the date of this Information Memorandum, there were no significant transactions executed by the Issuer, directly or indirectly with LAG or other companies of the LAG Group and no such transaction will be outstanding on the Closing Date.
2.3.3. Significant Transactions Executed by the Issuer, Its Subsidiaries, Its Executives and the Members of Its Board of Directors with the Party Whose Assets Are Being Acquired
The Issuer executed a cash pooling contract concerning the management of liquid assets with B.S.A. Finances, a company controlled by BSA. This contract is described in an information memorandum for highly material related‐party transactions published on October 13, 2011, which is available on the Company website (www.parmalat.com).
Please note that Yvon Guérin, Parmalat’s Chief Executive Officer, and the Directors Antonio Sala and Daniel Jaouen are officers of Lactalis Group companies. Consequently, at meetings held by Parmalat’s Board of Directors on May 22 and 28, 2012, they disclosed any interest that they may have in the Transaction, directly or on behalf of third parties, by virtue of the abovementioned posts they held, specifying the type, terms, origin and scope of said interest, thereby providing the disclosures required pursuant to Article 2391 of the Italian Civil Code.
37 2.3.4 Impact of the Transaction on the Compensation of the Members of the Management Entities of the Company and/or Its Subsidiaries
The Transaction will have no impact on the Compensation of the Members of the Board of Directors of Parmalat and/or Its Subsidiaries.
2.3.5 Listing of Any Members of the Management and Control Entities, General Managers and Executives of the Company Involved in the Transaction
Except as specified in Section 2.3.3. above, no members of the Board of Directors and Board of Statutory Auditors and executives of the Issuer or any of the Issuer’s subsidiaries are involved in the Transaction as related parties.
2.3.6 Transaction Approval Process
The Company’s management began the Transaction analysis process in December 2011.
The Issuer’s Board of Directors, elected by the Shareholders’ Meeting on June 28, 2011, reviewed the characteristics of the Transaction together with management, starting in January 2012. The various preparatory and negotiation phases for the Transaction continued uninterrupted until May 2012 in accordance with the procedural process described below.
More specifically, because the Transaction qualifies as a highly material related‐party transaction, Parmalat adopted all of the measures an safeguards required by the procedure.
The Committee participated both to the preparatory phase and the negotiation phase by attending meetings, receiving comprehensive and timely information and exchanging documents prepared for the purpose of the Transaction. The Committee requested clarifications from and submitted its remarks to the Company departments responsible for handling the preparatory phase and the negotiations. During the preliminary phase, the Committee met on December 15 and 22, 2011 and February 13, 2012.
On January 27, 2012, further to a recommendation by the Committee, Parmalat retained the services of Mediobanca, asking it to support the Committee as an independent expert, both during the Transaction’s preparatory phase and negotiation phase, and prepare a report setting forth a professional opinion about Parmalat’s interest in executing the transaction and the benefits and substantive fairness of the Transaction’s conditions (“Fairness Opinion”). On the same date, Parmalat’s Board of Directors retained the services of Mediobanca, asking it to provide the Company with consulting services and support with regard to, inter alia, the valuation of the Companies subject of the Acquisition and any potential synergies, the organization of the Acquisition process and the negotiation of the terms of the Transaction.
In March/April 2012, Parmalat’s management, together with its financial advisor, visited LAG’s headquarters in Buffalo, NY, and its main production facilities, analyzing and reviewing in detail the operations of the LAG Group together with LAG’s management.
38 In May 2012, subsequent to the abovementioned activities, Parmalat’s operating units involved in the preparatory phase, each for the areas under its jurisdiction and with the support of advisors, assessed the benefits of the Transaction and developed their conclusions, which were later presented to the Board of Directors.
On April 2 and 19, 2012 and May 9, 11, 21 and 22, 2012, the Committee continued its review of the Transaction with Mediobanca’s support.
On May 22, 2012, the Committee received Mediobanca’s Fairness Opinion, stating that the Transaction’s conditions were fair. On the same date, the Committee rendered a unanimous favorable opinion for the execution of the Transaction.
On May 22, 2012, Parmalat’s Board of Directors unanimously approved the Transaction. Earlier on the same day, the independent Directors met for consultation purposes.
On May 28, 2012, Parmalat’s Board of Directors approved the text of the Sales Agreement and the ancillary agreements conveying to the Chairman of the Board of Directors the power required to execute the Sales Agreement.
As required by Article 5 of the Regulations, Mediobanca’s Fairness Opinion and the opinion rendered by the Committee are annexed to this Information Memorandum. These documents are also available on the Company website (www.parmalat.com).
With regard to the request for information issued by the Consob on May 24, 2012, please note that the Shareholders’ Meeting planned to approve the 2011 financial statements, originally convened for April 20, 2012 (date when the term of office of the current Board of Directors was due to expire), was postponed to May 31, 2012 due to the need to amend the consolidated financial statements to reflect the impact of the award handed down in the Canadian arbitration proceedings (activated against Parmalat Canada by the Ontario Teachers Pension Plan Board in connection with the Liquidity Payment Agreement executed by the abovementioned parties on June 29, 2004), as announced by a press release issued on April 13, 2012. The decision to revoke the Shareholders’ Meeting and reschedule it for a later date was made by the Board of Directors relying in part on the advice of counsel and the opinion of the Board of Statutory Auditors, who believed tat it was mandatory to comply with the deadline of Article 154 ter, Section 1‐bis, of the Uniform Financial Code by which financial documents must be made available to the public, and in consultation with the Consob.
The current Board of Director thought it appropriate to complete the valuation and decision making process, having already obtained all of the elements necessary for that purpose after an in‐depth preparatory and negotiating process, there being no objective reason for postponing a decision..
2.4 Documents Available to the Public and Where They May Be Consulted
This Information Memorandum and its Annexes are available to the public at the Company’s registered office, at 4 Via delle Nazioni Unite, in Collecchio (Parma), on the Issuer’s website (www.parmalat.com) and through Borsa Italiana S.p.A. at 6 Piazza degli Affari, in Milan
39 3. EFFECTS OF THE TRANSACTION ON THE FINANCIAL POSITION, INCOME STATEMENT AND CASH FLOW
3.1 Effects of the Transaction on the Financial Position, Income Statement and Cash Flow
The Company prepared this Information Memorandum in accordance with Article 5, Section1, of the Related‐party Regulations, which requires the publication of an information memorandum whenever a highly material transaction is executed, even if by an Italian or foreign subsidiary.
In this regard, please note that the price is greater than 100 million euros, which is the Procedure’s threshold for identifying highly material transactions.
Moreover, the Transaction exceeds the following additional thresholds of Annex 3 to the Related‐party Regulations:
(a) Consideration relevance index:
21.9%
(b) Assets relevance index:
6.9%
(c) Liabilities relevance index:
6,1%
Pro forma financial data are provided in Chapter 5 below.
3.2 Significant Effects of the Transaction on Key Factors that Affect and Characterize the Issuer’s Activities and on the Type of Business Carried Out by the Issuer
The significant effects of the transaction on key factors that affect and characterize the issuer’s activities and on the type of business carried out by the issuer are described above, in Sections 2.2.1. and 2.2.2. of in this Information Memorandum.
3.3 Any Implications of the Transaction for the Strategic Guidelines Applicable to Commercial, Financial and Centralized Service Transactions Between Companies of the Parmalat Group
The implications of the transaction for the strategic guidelines of the Parmalat Group are described in Sections 2.2.1. and 2.2.2. of in this Information Memorandum.
40 4. INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS DATA OF THE ACQUIRED ACTIVITIES
Foreword
As a result of the Acquisition, Parmalat will own the entire share capital of Lactalis American Group, Inc. The highlights of the income statement, statement of financial position and statement of cash flows of the LAG Group are reviewed in the Section that follows.
4.1. Income Statement, Statement of Financial Position and Statement of Cash Flow Data for the Acquired Equity Stake for the Reporting Years Ended January 1, 2012 and January 2, 2011.
The reclassified consolidated statement of financial position and the consolidated net financial position at January 1, 2012 and January 2, 20111, the reclassified consolidated income statement and the consolidated statement of cash flows for the reporting years ended January 1, 2012 and January 2, 2011 (the “2011 Reporting Year” and the ”2010 Reporting Year,” respectively) of the LAG Group are provided below. The data were taken from the consolidated financial statements of the LAG Group for the reporting years ended January 1, 2012 and January 2, 2011 (the “LAG Financial Statements”), reclassified in accordance with the presentation format used by the Parmalat Group to prepare its own financial statements and converted into euros from their original currency (the U.S. dollar – USD). The LAG Financial Statements were audited by Ernst & Young LLP, who issued a report without qualification on April 23, 2012.
1 As allowed under U.S. tax laws, the closing date of the LAG financial statements coincides with the Sunday that is nearest to December 31. Reclassified Consolidated Statement of Financial Position
(in millions of euros) At January 1, 2012 At January 2, 2011
NON‐CURRENT ASSETS 180.3 186.9 Goodwill 34.3 33.2 Trademarks with an indefinite useful life 1.7 1.6 Other intangible assets 16.4 21.2 Property, plant and equipment 119.3 121.1 Other financial assets 5.4 4.7 Deferred‐tax assets 3.2 4.9
CURRENT ASSETS 141.3 96.4 Inventories 53.9 45.6 Trade receivables 55.6 41.0 Other current assets 7.3 3.1 Cash and cash equivalents 24.5 6.8
TOTAL ASSETS 321.6 283.3
SHAREHOLDERS’ EQUITY 255.3 221.8 Equity attributable to the shareholders of the Parent Company 255.3 221.8 Equity attributable to minority shareholders ‐ ‐
NON‐CURRENT LIABILITIES 11.3 11.5 Non‐current financial liabilities 0.1 0.1 Deferred‐tax liabilities 11.2 11.4
CURRENT LIABILITIES 55.0 49.9 Current financial liabilities ‐ ‐ Trade payables 41.9 33.5 Other current liabilities 13.1 15.7 Income taxes payable ‐ 0.7
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 321.6 283.3
42 Reclassified Consolidated Income Statement
(in millions of euros) 2011 Reporting Year 2010 Reporting year
REVENUES 663.2 599.8 Net sales revenues 659.6 597.6 Other revenues 3.7 2.2
Cost of sales (555.5) (491.1) Selling expenses (18.5) (17.8) General expenses (52.4) (52.2) Other income and expense ‐ Litigation‐related expenses -- ‐ Sundry income and expense (0.1) 1.5
EBIT 36.7 40.2
Financial income 0.0 0.5 Financial expense (0.2) (0.2)
PROFIT BEFORE TAXES 36.5 40.4
Income taxes (12.2) (13.9)
NET PROFIT 24.3 26.6
Condensed Consolidated Statement of Cash Flows
(in millions of euros) 2011 Reporting Year 2010 Reporting year
Cash flow from operating activities 27.3 42.0
Cash used in investing activities (11.5) (31.0)
Cash flow from/(used in) financing activities 0.4 (10.3)
Increase in cash and cash equivalents 16.2 0.8
Condensed Consolidated Net Financial Position
(in millions of euros) 2011 Reporting Year 2010 Reporting year
Liquid assets 24.5 6.8 Current financial debt - - Net current financial debt (24.5) (6.8) Non‐current financial debt 0.1 0.1 Net financial position (24.4) (6.7)
43 Based on available data, the aggregate operating results of the LAG Group for the first quarter of 2012 show an increase compared with the same period last year, but short of the revenue and profit targets for the first three months of 2012.
4.1.2 Notes to the Financial Statements
Reclassified Consolidated Income Statement
In the 2011 Reporting Year, the revenues of the LAG Group grew by 10.6% compared with the 2010 Reporting Year, rising from 599.8 million euros to 663.2 million euros. This increase is chiefly the result of higher sales volumes due mainly to the following factors: i) new sales agreements, particularly in the United States, that generated growth in some segments, such as the “Deli” segment; ii) the development and launch of new products; iii) the launch of marketing programs with a short‐term focus; and iv) only marginally, sales price increases. Please note that sales revenues with data stated in the original currency (USD) show an increase of 16.1% in the 2011 Reporting Year compared with the 2010 Reporting Year.
The cost of sales rose by 13.1%, growing from 491.1 million euros in the 2010 Reporting Year to 555.5 million euros in the 2011 Reporting Year. This increase reflects primarily the impact of higher raw material costs and a gain in sales volumes, offset in part by reductions in some production costs made possible by the commissioning of new production facilities during the reporting period. Please note that the cost of sales with data stated in the original currency (USD) shows an increase of 18.8% in the 2011 Reporting Year compared with the 2010 Reporting Year.
Selling and general expenses were substantially in line in the two years under review.
EBIT were down 8.8%, falling from 40.2 million euros in the 2010 Reporting Year to 36.7 million euros in the 2011 Reporting Year. This negative change is due mainly to the abovementioned increase in raw material costs, offset only in part by an increase in sales volumes. In some instances, due to binding contracts with its customers, the LAG Group was unable to updated its price lists sufficiently to cover the abovementioned increase in raw material costs.
The income tax rate was substantially in line in the two years under review, amounting to 34.3% in the 2010 Reporting Year and 33.5% in the 2011 Reporting Year.
As a result of the factors discussed above, the net profit for the year contracted by 8.6%, decreasing from 26.6 million euros in the 2010 Reporting Year to 24.3 million euros in the 2011 Reporting Year. Excluding the translation effect, i.e., with data stated in U.S. dollars, the net profit shows a smaller decrease of 4%: USD24.3 million in the 2011 Reporting Year and USD26.6 million in the 2010 Reporting Year. Condensed Consolidated Statement of Cash Flows
The LAG Group generated cash flows of 16.2 million euros in the 2011 Reporting Year and 0.8 million euros in the 2010 Reporting Year. More specifically, operating activities generated cash flows totaling 42.0 million euros in the 2010 Reporting Year and 27.3 million euros in the 2011 Reporting Year. This negative change was due mainly to: i) the abovementioned decrease in profitability experienced by the LAG Group during the period under review; ii) the impact of the shorter payment terms stipulated with some suppliers; and iii) higher average raw material prices, which caused a rise in the average levels of inventory and trade receivables but not of trade payables.
Investing activities absorbed cash amounting to 31.0 million euros in the 2010 Reporting Year and 11.5 million euros in the 2011 Reporting Year. The outlays incurred in 2011 refer mainly to investments aimed at maintaining the current level of production capacity, while those incurred in 2010 included significant investments made by the LAG Group at its Nampa plant to increase production capacity.
Financing activities absorbed cash amounting to 10.3 million euros in the 2010 Reporting Year due to the repayment of outstanding credit lines owed both to Groupe Lactalis companies and financial institutions. In 2011, cash flows related to financing activities involved inconsequential amounts Condensed Net Financial Position
The net financial position of the LAG Group at January 2, 2012 and January 1, 2011 substantially coincided with its liquid assets, as the financial debt of the LAG Group did not represent a material amount.
45 5. PRO FORMA FINANCIAL INFORMATION OF THE ISSUER
5.1 Foreword
This chapter incorporates the document entitled “Pro Forma Consolidated Statement of Financial Position at December 31, 2011 and Pro Forma Consolidated Income Statement for the Year Ended December 31, 2011 of Parmalat S.p.A.,” prepared to represent the main effects of the Acquisition on the financial position and income statement of the Group. The abovementioned document, approved by the Company’s Board of Directors on May 28, 2012, was audited by the Independent Auditors, who issued a report on May 29, 2012 (see Annex), regarding the reasonableness of the underlying assumptions adopted, the correctness of the methodology applied and the correctness of the measurement criteria and the accounting principles applied.
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 2011 AND PRO FORMA CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2011 OF PARMALAT S.P.A.
1 INTRODUCTION
This document presents the pro forma consolidated statement of financial position at December 31, 2011 and pro forma consolidated income statement for the year ended December 31, 2011 of Parmalat S.p.A. (hereinafter “Parmalat” or the “Company” and, collectively with its subsidiaries, the “Group”), accompanied by the explanatory notes (the “Pro Forma Consolidated Financial Information”). The Pro Forma Consolidated Financial Information were prepared for the purpose of including them in the Information Memorandum prepared pursuant to Article 71, section 1 of the regulations implementing the Italian Legislative Decree n° 58 of February 24, 1998, adopted by CONSOB with Resolution n° 11971 of May 14, 1999, as subsequently amended and integrated. More specifically, the Pro Forma Consolidated Financial Information were prepared to represent the main effects on the Group’s consolidated statement of financial position at December 31, 2011 and the consolidated income statement for the year ended December 31, 2011 of the following transactions:
• the purchase of shares representing the entire share capital of Lactalis American Group, Inc. (hereinafter the “Acquisition”);
• the execution of certain licensing and distribution agreement (jointly also referred to as the “Commercial Agreements”).
The Acquisition and the Commercial Agreements (collectively the “Transactions”) described in detail in Section 2.3.2 below, will be financed with liquid assets held by Parmalat and currently invested in a cash pooling arrangement in effect with B.S.A. Finances snc.
The Pro Forma Consolidated Financial Information were prepared with the aim to simulate, using accounting policies consistent with the historical data and compliant with the applicable legislation, the main effects of the Transactions on the Group’s financial position and income statement as if the Transactions had taken place on December 31, 2011, for financial position purposes and January 1, 2011, for income statement purposes.
46 Please keep in mind that, as mentioned above, all information provided in the Pro Forma Consolidated Financial Information represent a simulation, provided exclusively for illustration purposes, of the potential effects that could result from the Transactions. More specifically, because the pro forma data are prepared to reflect retroactively the effects of subsequent transactions, despite compliance with generally accepted regulation and the use of reasonable assumptions, there are limits entailed by the very nature of the pro forma data. Therefore, it should be understood that if the transactions had actually occurred on the dates assumed above, the effects would have not necessarily been the same as those presented in the Pro Forma Consolidated Financial Information. Moreover, in view of the different purposes served by pro forma data and historical financial data and the different methods used to compute the effects of the Acquisition on the pro forma consolidated statement of financial position and the pro forma consolidated income statement, these documents should be read and interpreted without seeking to establish an accounting linkage between them.
Lastly, please keep in mind that the Pro Forma Consolidated Financial Information do not intend in any way to represent a projection of future results of the Group and, therefore, should not be used for that purpose.
The Pro Forma Consolidated Financial Information should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2011, approved by the Company’s Board of Directors on April 13, 2012 (the “Consolidated Financial Statements”) and audited by the Independent Auditors PricewaterhouseCoopers S.p.A., who issued a report on said financial statements without qualifications.
2 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
This section includes the pro forma consolidated statement of financial position at December 31, 2011 (the “Pro Forma Consolidated Statement of Financial Position”) and the pro forma consolidated income statement for the year ended December 31, 2011 (the “Pro Forma Consolidated Income Statement”) and the accompanying notes.
2.1 Pro Forma Consolidated Statement of Financial Position
The schedule that follows presents, broken down by type, the pro forma adjustments made to depict the significant effects of the Transactions on the consolidated statement of financial position of the Group at December 31, 2011.
47 Pro forma adjustments Pro forma Consolidated statement Pro forma reclassified consolidated of financial position of consolidated Recognition of the Transactions statement of the Group statement of financial Transactions costs financial position position of LAG (in millions of euros) (A) (B) (C) (D) TOTAL
NON‐CURRENT ASSETS 2,125.8 182.0 ‐ ‐ 2,307.8 Goodwill 445.4 35.4 ‐ ‐ 480.8 Trademarks with an ‐ ‐ indefinite useful life 594.9 1.7 596.6 Other intangible assets 43.7 16.9 ‐ ‐ 60.6 Property, plant and ‐ ‐ equipment 899.0 122.9 1,021.9 Investments in ‐ ‐ associates 60.1 ‐ 60.1 Other financial assets 7.1 1.8 ‐ ‐ 8.9 Deferred‐tax assets 75.6 3.3 ‐ ‐ 78.9
CURRENT ASSETS 2,671.3 141.8 (735.3) (1.9) 2,075.9
Inventories 378.6 59.3 ‐ ‐ 437.9 Trade receivables 525.8 59.5 ‐ ‐ 585.3 Other current assets 209.1 7.5 ‐ ‐ 216.6 Cash and cash ‐ equivalents 303.3 15.5 (1.9) 316.9 Current financial assets 1,254.5 ‐ (735.3) ‐ 519.2
Assets held for sale 3.0 ‐ ‐ ‐ 3.0
TOTAL ASSETS 4,800.1 323.7 (735.3) (1.9) 4,386.6
SHAREHOLDERS’ EQUITY 3,655.3 263.0 (735.3) (1.3) 3,181.7 Equity attributable to the shareholders of the Parent Company 3,630.2 263.0 (735.3) (1.3) 3,156.6 Equity attributable to minority shareholders 25.1 ‐ ‐ ‐ 25.1
NON‐CURRENT LIABILITIES 421.0 11.6 ‐ ‐ 432.6 Financial liabilities 8.0 0.1 ‐ ‐ 8.1 ‐ ‐ Deferred‐tax liabilities 170.3 11.5 181.8 Provisions for ‐ ‐ employee benefits 89.0 ‐ 89.0 Provision for risks and charges 147.2 ‐ ‐ ‐ 147.2 Provision for liabilities for contested preferential and prededuction claims 6.5 ‐ ‐ ‐ 6.5
CURRENT LIABILITIES 723.8 49.1 ‐ (0.6) 772.3 Financial liabilities 31.4 ‐ ‐ ‐ 31.4 Trade payables 540.1 ‐ ‐ 575.7
48 35.6 Other current liabilities 146.3 13.5 ‐ ‐ 159.8
Income taxes payable 6.0 ‐ ‐ (0.6) 5.4
Liabilities directly attributable to assets held for sale ‐ ‐ ‐ ‐ ‐ TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 4,800.1 323.7 (735.3) (1.9) 4,386.6
49
2.2 Pro Forma Consolidated Income Statement
The schedule that follows presents, broken down by type, the pro forma adjustments made to depict the significant effects of the Transactions on the consolidated income statement of the Group for the year ended December 31, 2011.
Pro forma adjustments Pro forma Consolidated income reclassified Pro forma consolidated statement of the Intercompany Financing of the consolidated income statement Group transactions Transactions income statement of LAG (In millions of euros) (A) (B) (C) (D) TOTAL
REVENUES 4,538.0 704.5 (0.9) ‐ 5,241.6 Net sales revenues 4,491.2 704.2 (0.9) ‐ 5,194.5 Other revenues 46.8 0.4 ‐ 47.2
Cost of sales (3,568.2) (589.0) 0.9 ‐ (4,156.3) Selling expenses (436.6) (21.9) ‐ (458.5) General expenses (302.6) (55.6) ‐ (358.2) Other income and expense ‐ ‐ ‐ ‐ Litigation‐related expenses (8.1) ‐ ‐ (8.1) ‐ Sundry income and expense (23.1) 0.7 ‐ (22.4)
EBIT 199.4 38.7 ‐ ‐ 238.1
Financial income 59.7 0.0 ‐ (11.1) 48.6 Financial expense (16.2) (0.2) ‐ (16.4) Interest in the result of companies valued by the equity method 0.1 ‐ ‐ ‐ 0.1 Other income from and expenses on equity investments 8.1 ‐ ‐ ‐ 8.1
PROFIT BEFORE TAXES 251.1 38.5 ‐ (11.1) 278.5
Income taxes (80.2) (12.9) ‐ 3.1 (90.0)
NET PROFIT 170.9 25.6 ‐ (8.0) 188.5
Minority interest in net profit (0.5) ‐ ‐ ‐ (0.5) Group interest in net profit 170.4 25.6 ‐ (8.0) 188.0
50 2.3 Notes to the Pro Forma Consolidated Financial Information
2.3.1 Basis of Presentation and Accounting Principles Used
The Pro Forma Consolidated Financial Information were prepared in accordance with Consob Communication No. DEM/1052803 of July 5, 2001, which governs the methodology applied to prepare pro forma data. More specifically, the Pro Forma Consolidated Statement of Financial Position and the Pro Forma Consolidated Income Statement were prepared by restating the Group’s historical data, taken from the Consolidated Financial Statements, with the aim of simulating the main effects that the Transactions could have on the financial position and income statement.
Unless otherwise stated, the accounting principles adopted to prepare the Pro Forma Consolidated Financial Information were the same as those used to prepare the Consolidated Financial Statements, i.e., the International Financial Reporting Standards issued by the International Accounting Standards Board and adopted by the European Union (“IFRSs”).
Please also note that all data provided in this document are in millions of euros, unless otherwise stated.
2.3.2. Description of the Transactions
As explained in Section 1 above, the transactions subject of the pro forma adjustments concern the acquisition of Lactalis American Group, Inc. (hereinafter “LAG”) and the execution of certain Commercial Agreements. More specifically:
LAG Acquisition
The subject of the Acquisition includes:
(i) 10,000 common shares without par value, corresponding to 100% of LAG’s common stock, currently held by B.S.A. S.A. (“BSA”); and
(ii) a total of 1,400 Series A preferred shares, par value USD100,000 each, corresponding to 100% of LAG’s preferred stock, including 650 preferred shares currently held by BSA and 750 preferred shares currently held by Groupe Lactalis S.A. (“Groupe Lactalis”)
Commercial Agreements
The implementation of the Acquisition is conditional on the execution of the following Commercial Agreements:
Distribution Agreement
The transactions include a distribution agreement with BSA, pursuant to which Lactalis Export Americas SAS will have the right to market, on an exclusive basis, the products of the Lactalis Group in the American Continent for a period of 20 years (the “Distribution Agreement”). Basically, by virtue of this agreement, Parmalat will take over a business that represents certain business operations of Lactalis International, a subsidiary of BSA.
51 Galbani Licensing Agreement
The licensing agreement with Egidio Galbani S.p.A. provides the Group with the right to use the Galbani brand, on an exclusive basis, to manufacture and sell cheese in the American Continent for a period of 20 years. Please note that, by virtue of earlier agreements with Egidio Galbani S.p.A., LAG already uses the Galbani brand to manufacture and sell certain products and, as a result of this use, recognized royalty expenses consistent with the abovementioned licensing agreement.
Président Licensing Agreement
The licensing agreement with BSA provides the Group with the right to use the “Président” brand, on an exclusive basis, to manufacture and sell cheese in the American Continent for a period of 20 years. Please note that LAG already produces and sells certain products using the Président brand by virtue of agreements that do no empower BSA to charge any royalties.
Ancillary Transactions
As part of the Transaction, Parmalat will also acquire Lactalis do Brazil – Comercio, Importação e Exportação de Laticinios Ltda (“Lactalis Brazil”) and Lactalis Alimentos Mexico S.DE RL (“Lactalis Mexico”), currently subsidiaries of BSA International. These companies were not operational at December 31, 2011 and held exclusively liquid assets of inconsequential amount resulting from the subscription of their equity capital. As explained later in these notes, the effect resulting from the acquisition of these companies was not reflected in the pro forma statements because it was not material.
2.3.3 Description of the Pro Forma Adjustments Made to Prepare the Pro Forma Consolidated Financial Information
An overview of the pro forma adjustments made to prepare the pro forma consolidated financial information is provided below.
PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
A) Consolidated Statement of Financial Position of the Group
The column includes the consolidated financial position of the Group at December 31, 2011, taken from the Consolidated Financial Statements
B) Pro forma Reclassified Consolidated Statement of Financial Position of LAG The column includes the pro forma consolidated financial position of the LAG Group, determined as shown in the schedule provided below:
52
Pro forma adjustments Reclassified consolidated Pro forma reclassified Adjustment of LAG to the statement of financial consolidated statement of accounting principles position of LAG financial position of LAG adopted by Parmalat (in millions of euros) (B.1) (B.2) TOTAL (B)
NON‐CURRENT ASSETS 185.8 (3.8) 182.0 Goodwill 35.4 ‐ 35.4 Trademarks with an indefinite useful life 1.7 ‐ 1.7 Other intangible assets 16.9 ‐ 16.9 Property, plant and equipment 122.9 ‐ 122.9 Investments in associates ‐ ‐ ‐ Other financial assets 5.6 (3.8) 1.8 Deferred‐tax assets 3.3 ‐ 3.3
CURRENT ASSETS 145.5 (3.7) 141.8 Inventories 55.5 3.8 59.3 Trade receivables 57.3 2.2 59.5 Other current assets 7.5 ‐ 7.5 Cash and cash equivalents 25.2 (9.7) 15.5 Current financial assets ‐ ‐ ‐
Assets held for sale ‐ ‐ ‐
TOTAL ASSETS 331.3 (7.6) 323.7
SHAREHOLDERS’ EQUITY 263.0 ‐ 263.0 Equity attributable to the shareholders of the Parent Company 263.0 ‐ 263.0 Equity attributable to minority shareholders ‐ ‐ ‐
NON‐CURRENT LIABILITIES 11.6 ‐ 11.6 Financial liabilities 0.1 ‐ 0.1 Deferred‐tax liabilities 11.5 ‐ 11.5 Provisions for employee benefits ‐ ‐ ‐ Provision for risks and charges ‐ ‐ ‐ Provision for liabilities for contested preferential and prededuction claims ‐ ‐ ‐
CURRENT LIABILITIES 56.7 (7.6) 49.1 Financial liabilities ‐ ‐ ‐ Trade payables 43.2 (7.6) 35.6 Other current liabilities 13.5 ‐ 13.5 Income taxes payable ‐ ‐ ‐
Liabilities directly attributable to assets held for sale ‐ ‐ ‐
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 331.3 (7.6) 323.7
B.1) Reclassified Consolidated Statement of Financial Position of the LAG Group
The data in this column correspond to the consolidated financial position of the LAG Group at December 31, 2011, taken from the consolidated financial statements of LAG for the years ended January 1, 2012 and January 2, 2011,2 audited by Ernst & Young LLP, which issued a report without qualifications on April 23, 2012 (the “2011 LAG Financial Statements”). The LAG Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“US‐GAAP”) and in U.S. dollars. Consequently, the statement of consolidated financial position of the LAG Group was reclassified in accordance with the format adopted by the Parmalat Group to prepare its financial statements and translated into euros at the exchange rate in effect on May 24, 2012 (1.2557 USD for one euro), which is the latest available exchange rate on the date closest to the date of acquisition. Please note that the abovementioned reclassifications had no effect on the shareholders’ equity of the LAG Group.
B.2) Adjustment to the Accounting Principles Adopted by Parmalat
The data in this column shows certain reclassifications made to the reclassified consolidated statement of financial position of LAG to make it consistent with the IFRS accounting principles adopted by the Parmalat Group. More specifically:
• The financial assets held by LAG at December 31, 2011 include 3,8 million euros for spare parts and equipment to maintain plant and machinery. In accordance with Paragraph 8 of IAS 16 – Property, Plant and Equipment, this amount was reclassified to Inventory.
• LAG’s Trade payables at December 31, 2011 are shown net of certain trade receivables. In accordance with the provisions of the IFRSs, these trade receivables, amounting to 2.2 million euros, do not meet the requirements for offsetting and are shown separately.
• LAG accounts for checks issued to a supplier by reducing the liability towards the supplier and recognizing a liability for checks outstanding. In this way, the liquid asset amount does not change until the outstanding check is collected. Consistent with the approach adopted by Parmalat in similar circumstances, the issuance of check, even when uncollected, requires recognizing a decrease in cash and the corresponding trade payable. Consequently, this reclassification reduced trade payables and liquid assets by 9.7 million euros.
Please note that, even though the 2011 LAG financial statements were the subject of a preliminary review in terms of the potential effects resulting from the adoption of the IFRSs, the possibility that further differences may arise when a detailed analysis is completed cannot be excluded.
C) Recognition of the Transactions
This column presents the pro forma effects arising from the recognition of the Transactions. In this regard, please note that the Acquisition qualifies as a transaction under common control, i.e., as a business combination in which the companies that are parties to the business combination (Parmalat and LAG, in this case) are controlled by the same entity
2 As allowed under U.S. tax laws, the closing date of the LAG financial statements coincides with the Sunday that is nearest to December 31. For the purpose of preparing this document, this misalignment with the Group, which always closes its financial statements at December 31, is not deemed to be material.
54 (BSA) both before and after the business combination and the control is not temporary. These transactions are recognized in accordance with the provisions of IAS 8, i.e., in accordance with the concept of a true and fair presentation of the transaction, and the provisions of OPI 1 (preliminary guidance by Assirevi regarding IFRSs) concerning the “accounting treatment of business combinations under common control in the separate and consolidated financial statements.”
The selection of the accounting principle for the transactions in question must be guided by elements described above, which recommend adopting the principle of the continuity of values for the net transferred assets. Consequently, the net assets must be recognized at the values at which they were carried before the transaction in the accounting records of the companies that are parties to the business combination or, if available, their values in the consolidated financial statements of the common parent. In this specific case, the Company opted for using the net book values at which the net assets were carried before the transaction in the accounting records of the companies that are parties to the business combination.
Consequently, the data shown in this column reflect the following pro forma adjustments:
Acquisition’s Consideration
The Price is equal to the algebraic sum of (i) the amount USD904 million; and (ii) the amount of LAG’s net financial position at closing, adjusted as defined below.
The Price was stipulated in the abovementioned amount based on the aggregate enterprise value of the LAG Group, Lactalis Brazil and Lactalis Mexico estimated at December 30, 2012 (year‐end closing date for the companies of the LAG Group), provisionally amounting to USD904 million, determined on the combined EBITDA of LAG Group, Lactalis Brazil and Lactalis Mexico.
Therefore, should the enterprise value of LAG Group, Lactalis Brazil and Lactalis Mexico at December 30, 2012 be different from USD904 million, due to the fact that EBITDA are different from USD95.2 million, the Price will be adjusted, upward or downward, to reflect the actual amount of the enterprise value, it being understood that enterprise value amounts greater than USD960 million or lower than USD760 million will not be taken into account for price adjustment purposes.
The acquisition’s price used for the purpose of preparing the Pro Forma Consolidated Financial Information was USD923.4 million equal to 735.3 million euros. More specifically:
(amounts in millions) USD EUR(**)
Enterprise Value 904.0 719.9 LAG’s net financial position at December 31, 2011 (*) 19.4 15.4
Price 923.4 735.3
55 (*) Determined based on LAG’s consolidated financial statements at December 31, 2011 and pro‐forma adjustments.
(**) Converted at the exchange rate of 1.2557 USD for one euro (exchange rate at May 24, 2012).
The Price will be paid using the Group’s liquid assets.
Lastly, please note that the acquisition of Lactalis Brazil and Lactalis Mexico will require an outlay exactly equal to the liquid assets held by these companies on the acquisition date. Consequently, the acquisition of these companies will not require a material pro forma adjustment.
Impact on Shareholders’ Equity
As recommended in OPI1, in the case of transactions under common control recognized based on the continuity of values of the acquired companies, any difference between the Price and the net carrying amount of the acquired assets and liabilities – 472.3 million euros in this case – shall be recognized as an adjustment to the reserves in the consolidated shareholders’ equity attributable to the Parmalat Group. More specifically:
(in millions of euros)
Price (735.3) Net carrying amount of the acquired assets and liabilities at December 31, 2011 263.0
Estimated effect on shareholders’ equity (472.3)
Please note that the final effect of the Acquisition on the Group’s shareholders’ equity will depend on the value of the consolidated shareholders’ equity of the LAG Group on the acquisition date, determined in accordance with the IFRSs, and the final definition of the Price.
D) Costs of the Transactions
This column includes nonrecurring costs that the Group expects to incur to execute the Transactions, estimate at 1.9 million euros. It also shows the corresponding tax effect, amounting to 0.6 million euros, estimated based on the tax rate applicable to Parmalat, equal to 31.40% (27.50% for the corporate income tax – IRES and 3.90% for the regional tax – IRAP).
56 PRO FORMA CONSOLIDATED INCOME STATEMENT
A) Consolidated Income Statement of the Group
The data in this column correspond to the Group’s income statement for the reporting year ended December 31, 2011, taken from the Consolidated Financial Statements.
B) Pro forma Reclassified Consolidated Income Statement of LAG
The data in this column correspond to the pro forma reclassified consolidated income statement of the LAG Group, determined as shown in the table below:
Pro forma adjustments Pro forma reclassified LAG’s reclassified consolidated consolidated income LINT Président Intercompany income statement carve‐out royalties transactions statement of LAG (in millions of euros) (B.1) (B.2) (B.3) (B.4) TOTAL (B)
REVENUES 663.2 54.7 ‐ (13.4) 704.5 Net sales revenues 659.6 54.7 (10.1) 704.2 Other revenues 3.7 ‐ ‐ (3.3) 0.4
Cost of sales (555.5) (43.6) ‐ 10.1 (589.0) Selling expenses (18.5) (1.7) (1.7) ‐ (21.9) General expenses (52.4) (6.5) ‐ 3.3 (55.6) ‐ ‐ ‐ ‐ ‐ ‐ Litigation‐related expenses ‐ ‐ ‐ ‐ ‐ Sundry income and expense (0.1) 0.8 ‐ ‐ 0.7
EBIT 36.7 3.7 (1.7) ‐ 38.7
Financial income 0.0 ‐ ‐ ‐ 0.0 Financial expense (0.2) ‐ ‐ ‐ (0.2) Interest in the result of companies valued by the equity method ‐ ‐ ‐ ‐ ‐ Other income from and expenses on equity investments ‐ ‐ ‐ ‐
PROFIT BEFORE TAXES 36.5 3.7 (1.7) ‐ 38.5
Income taxes (12.2) (1.3) 0.6 ‐ (12.9)
NET PROFIT 24.3 2.4 (1.1) ‐ 25.6
Minority interest in net profit ‐ ‐ ‐ ‐ ‐ Group interest in net profit 24.3 2.4 (1.1) ‐ 25.6
57 B.1) LAG’s Reclassified Consolidated Income Statement
The data in this column correspond to the reclassified consolidated income statement of the LAG Group for the year ended December 31, 2011, taken from the LAG 2011 Financial Statements. As mentioned earlier in these notes, the LAG 2011 Financial Statements were prepared in accordance with US GAAP and in U.S. dollars. Consequently, the LAG 2011 Financial Statements were reclassified in accordance with the format adopted by the Parmalat Group to prepare its financial statements and was translated into euros at the average exchange rate for the year, equal to 1.39196 U.S. dollars for one euro. Please note that these reclassifications had no impact on the net profit.
B.2) Economic Effects of the Distribution Agreement
This column reflects an estimate of the potential effects of the Distribution Agreement for the year ended December 31, 2011. More specifically, the products of the Lactalis Group were already distributed in the American Continent by Lactalis International. In practice, by signing the Distribution Agreement, Parmalat (through LAG) takes over the business activities currently carried out by Lactalis International. The data in this column correspond to an income statement that reflects the revenues and expenses generated by the abovementioned distribution activities, taken from the financial statements of Lactalis International at December 31, 2011.
B.3) Président Royalties
This column reflects an estimate of the economic effects of the royalties for the Président brand. As mentioned earlier in these notes, the implementation of the Transactions will include the signing of a licensing agreement with BSA, pursuant to which the Group will have the right to use the Président brand on an exclusive basis. Please note that, in the year ended December 31, 2011, LAG used the Président brand in accordance with agreements pursuant to which no royalties were charged by BSA. This adjustment, which reflects the effects of the abovementioned agreement, as if it had been signed January 1, 2011, was determined by applying to the revenues booked in 2011 by LAG for Président branded products the percentage of 2%, as required by the Président Licensing Agreement. It also reflects the corresponding tax effect, amounting to 0.6 million euros, determined based on the income tax rate applicable to LAG (35%).
B.4) Intercompany Transactions Between LAG and the LINT Carve‐out
This column reflects the effect of the elimination of intercompany transactions between LAG and the LINT carve‐out in the year ended December 31, 2011.
C) Intercompany Transactions
This column reflects the effect of the elimination of intercompany transactions between entities included in the Pro Forma Consolidated Income Statement in the year ended December 31, 2011.
58 D) Financing of the Transaction
This column includes an estimate of the economic effect related to the financing of the Transaction. More specifically, as mentioned earlier in these notes, the Acquisition’s consideration will be paid using liquid assets held by the Group. Consequently, this column shows the derecognition of the financial income accrued in 2011 on the liquid assets earmarked for the acquisition. This effect, amounting to 11.1 million euros, was computed by applying to the Provisional Price an average annual rate on deposits of 1.54%, considering that, in 2011, Parmalat’s liquid assets were never lower than the Provisional Price.
The column also reflects the corresponding tax effect, amounting to 3.1 million euros, determined based on the income tax rate applicable to Pamalat in this case (27.50%).
* * * * * *
Please note that in accordance with method provided in Consob Communication No. DEM/1052803 of July 5, 2011 for the purpose of developing pro forma data, the Pro Forma Consolidated Income Statement does not reflect:
• the nonrecurring economic effects of the Acquisition, estimated at 1.9 million euros, before the corresponding tax effect, estimated at 0.6 million euros; and
• an estimate of the effects of the synergies that Parmalat expects to realize through the Transactions, including: i) the opportunity to increase Parmalat Canada’s exports; ii) Greater negotiating power in procurement transactions with common suppliers of LAG and Parmalat Canada in North America; iii) optimization of the utilization rate of production capacity available at Parmalat Canada’s production facilities; and iv) acquisition of manufacturing, sales and distribution knowhow.
2.4 Pro Forma Per Share Indicators of the Group
2.4.1 Schedule Comparing Historical and Pro Forma Per Share Indicators at December 31, 2011
The schedule below shows the main indicators used by the Issuer to monitor the operating and financial performance of the Parmalat Group, both on an absolute amount basis and a per share basis, determined based on historical data and pro forma data for the year ended December 31, 2011.
2011 historical data 2011 pro forma data
(in millions of euros)
EBITDA (1) 374.1 433.6 EBITDA per share (in euros) (1) 0.21 0.25
Net profit 170.9 188.5
59 Earnings per share – basic (in euros) 0.10 0.11
Cash flow from operating activities (2) 284.6 302.8 Cash flow from operating activities per share (in euros) (2) 0.16 0.17
Net financial assets 1,518.4 796.6
Number of shares 1,755,401,822 1,755,401,822
(1) The Group defines EBITDA as the net profit for the year before depreciation and amortization and writedowns, financial income and expense, interest in the result of companies valued by the equity method, other income and expense and income taxes for the year. Because EBITDA are not identified as an accounting parameters in the IFRSs, their quantitative determination method is not necessarily the same for all users. EBITDA are a parameter used by the Group’s management to monitor and assess operating performance. Specifically, management believes that EBITDA provide an important measure of the Group’s operating performance because they are not affected by the impact of different criteria applied to determine taxable income, the amount and characteristics of employed capital and depreciation and amortization policies. The criteria applied by the Group to determine EBITDA are not necessarily consistent with those adopted by other groups and, consequently, the corresponding amounts could not be comparable.
(2) Determined as the sum of the cash flows from operations of Parmalat and LAG and the activities related to the distribution of Lactalis Group products in the American Continent, adjusted to take into account the flows from the pro forma adjustments that had an impact on the cash flows from operations (President royalties and transaction’s financing). Please note that LAG’s cash flows from operations were taken from LAG’s 2011 annual financial statements and converted into euros at the average exchange rate for the year, amounting to 1.39196 U.S. dollars for one euro
60 6. BUSINESS OUTLOOK OF THE ISSUER AND ITS GROUP
6.1 Overview of the Issuer’s Operating Performance Since the End of the Reporting Year Covered by the Latest Published Financial Statements
In the first quarter of 2012, the Group’s revenues increased by 5.9% compared with the same period in 2011, rising from 1,033.2 million euros in the three months ended March 31, 2011 to 1,094.2 million euros in the quarter ended March 31, 2012. This increase is due mainly to the combined effect of: i) higher sales volumes, particularly in Australia; an ii) list price increases implemented in 2011 in virtually all of the main target markets, except for Africa.
EBITDA grew to 75.1 million euros in the first quarter of 2012, or 4.9 million euros more (+7.0%) than the 70.2 million euros earned in the same period last year. This improvement is due to: i) the effect of the increase in sales prices mentioned above, offset in part by higher costs for some raw materials; and ii) nonrecurring costs incurred in the first three months of 2011, such as those caused by a fire at Centrale del latte di Roma and the floods in the Queensland region of Australia.
The net profit for the first quarter of 2012 totaled 33.9 million euros, down 32.3% compared with the corresponding quarter a year ago, when it amounted to 50.1 million euros. This decrease is due mainly to: i) nonrecurring income of about 9 million euros reported in the first quarter of 2011 following the successful conclusion of a dispute with the antitrust authorities in South Africa; and ii) an increase in income tax expense, which rose from 12.2 million euros in the first three months of 2011 to 17.5 million euros in the first quarter of 2012. These negative effects were offset only in part by a gain in net financial income.
At March 31, 2012, the net financial position was positive by 1,517.6 million euros, roughly the same as at the end of 2011.
6.2 Guidance About a Reasonable Projection of the Results for the Current Year
Despite persisting negative economic conditions in some of the areas where the Parmalat Group operate and continuing strong competition, overall profitability is expected to hold fairly steady in 2012. 7. ANNEXES
‐ Fairness Opinion Prepared by Mediobanca
‐ Opinion of the Internal Control and Corporate Governance Committee
‐ Report of the Independent Auditors on the Review of the Pro Forma Consolidated Income Statement and Statement of Financial Position Data at December 31, 2011
62 This is a courtesy translation from Italian. The Italian version is the only official one.
Milan, May 22, 2012
Parmalat S.p.A. Via delle Nazioni Unite, 4 43044 Collecchio (Parma)
To the attention of the Internal Control and Corporate Governance Committee
Gentlemen:
Whereas: a) Parmalat S.p.A. (“Parmalat” or the “Company”) is a publicly traded Italian company that heads a group specialized in processing, transforming and distributing milk and dairy products, fruit juices and fruit beverages (the “Parmalat Group”), with 2011 consolidated revenues of 4.5 billion euros. b) BSA S.A. (“BSA”), 100% controlled by the Besnier family, is a French company that heads a group engaged in purchasing, transforming and marketing dairy products (the “BSA Group”), with consolidated revenues in excess of 10.0 billion euros. c) In 2011, initially through market purchases and later through a voluntary tender offer (“TO”), BSA acquired control of Parmalat, directly and indirectly, with a total equity stake currently equal to 82.4%. d) Parmalat is considering the possibility of purchasing from the BSA Group certain American assets specialized in the production and distribution of cheese products (the “Transaction”), which include: − The Lactalis American Group (“LAG”), which operates the BSA Group’s activities engaged in the production and sale of cheese in the U.S. market, with revenues of 918.1 million USD and EBITDA of about 81.0 million USD in 2011, five production facilities in the United States and a total of about 1,700 employees at December 31, 2011. For 2012, the Business Plan, as defined below, projects revenues of 983.3 million USD and EBITDA of 88.3 million USD; net cash totaled about 32.0 million USD at December 31, 2011. − The activities engaged on an exclusive bases in the distribution of BSA Group products throughout the Americas(“LINT Americas”), with revenues of 54.8 million euros and EBITDA of 3.7 million euros in 2011; LINT Americas has no employees on its payroll. For 2012, the Business Plan projects revenues of 65.5 million euros and EBITDA of 4.9 million euros. e) The Transaction is consistent with the strategy announced by BSA when it launched the TO, aimed at “contributing to the expansion of Parmalat and its brands, both in Italy and
1
internationally, and enable the two groups, both leaders in the food industry but in complementary product categories and geographic regions. to offer a complete range of dairy products.”
f) In recent months, Parmalat, directly and with the support of its independent auditors and advisors, carried out due diligence activities concerning LAG and LINT Americas that included meetings with LAG’s management and an analysis, verification and validation of i) the business plan prepared by the BSA Group (the “Business Plan”), for which it also developed specific sensitivity analyses, and ii) the synergies estimated by the BSA Group resulting from the integration of Parmalat Canada Inc., a wholly owned subsidiary of Parmalat (“Parmalat Canada”), and LAG. More specifically, Parmalat entrusted the performance of the due diligence activities to a Steering Committee, comprised of senior Company managers, and involved in the process all the managers of its operational functions, whose reports validating the Business Plan and the synergies, which were part of the documents submitted to Parmalat’s Board of Directors, were included among the supporting documents used for this fairness opinion. g) Based on the analyses performed by Parmalat’s management and summarized in the documents prepared for the April 20, 2012 and May 22, 2012 meetings of the Board of Directors, the Transaction is strategically highly significant for Parmalat, specifically because: − it provides access to one of the world’s most important dairy markets, such as that of the United States; − within Parmalat’s product portfolio, it increases in the weight of the categories with a high value added, such as cheese; − it allows the acquisition of a manufacturing platform in the United States judged of adequate technological standing; − it strengthens Parmalat's position in Latin America, particularly the Brazilian market, which is the continent’s largest with a projected annual growth rate of about 7%; − it creates important synergies resulting, inter alia, from the proximity of the manufacturing and commercial organizations of Parmalat Canada and LAG, including the integration of the manufacturing knowhow of Parmalat Canada in the hard cheese area (cheddar cheese) and of LAG in the soft cheese area (mozzarella, ricotta, etc.); − it provides an opportunity to use throughout the Americas two global brands of the BSA Group, i.e., Galbani (for Italian cheeses) and Président (for specialty cheeses), for which LAG will receive an exclusive license for the abovementioned territory.
h) Following the conclusion of the negotiations carried out by Parmalat and BSA with the support of the respective advisors, the Transaction is expected to take place on the following terms (the “Consideration”): − The Transaction’s provisional price shall be computed by applying to the aggregate EBITDA of LAG and LINT Americas projected in the 2012 Business Plan a multiple of 9.5 times (“Enterprise Value”); LAG’s net financial position at the end-of-month date nearest to the closing date, verified by means of an audited interim balance sheet, shall be algebraically added to the Enterprise Value (the “Provisional Price”); − The Provisional Price shall be adjusted up or down based on the EBITDA actually reported by LAG and LINT Americas in 2012, which shall be appropriately verified and discussed by the parties and to which the multiple mentioned above shall be applied; the difference between the Enterprise Value computed based on the actual 2
EBITDA and the Enterprise Value computed based on the Business Plan’s EBITDA will represent the price adjustment, upward, if positive, or downward, if negative (the “Price Adjustment”); − The Consideration shall be equal to the algebraic sum of the Provisional Price and the Price Adjustment; − The Consideration shall be subject to an Enterprise Value floor and cap, amounting to 760 million USD and 960 million USD, respectively; − The Sellers, as defined below, shall provide Parmalat with appropriate guarantees to secure payment of the Price Adjustment. Based on the data of the 2012 Business Plan and LAG’s net cash at December 31, 2011, the Consideration can be provisionally determined at 923 million USD. i) The Transaction is governed by a sale and purchase agreement between BSA SA and Groupe Lactalis SA (the “Sellers”), on the one hand, and Parmalat, on the other hand, (the “Sale and Purchase Agreement”) calling for, inter alia, the provision of warranties and indemnities by the Sellers to Parmalat. j) Concurrently with the implementation of the Transaction, LAG and BSA shall execute a distribution agreement providing LAG with the exclusive right to distribute all of the products of the Lactalis Group throughout the Americas (the “Distribution Agreement”). The Distribution Agreement shall have a duration of 20 years and shall be governed by terms consistent with those reflected in the Business Plan. k) Concurrently with the implementation of the Transaction, LAG shall execute a licensing agreement with BSA and Egidio Galbani SpA for the exclusive right to use throughout the Americas the Président brand and certain Galbani brands, respectively (the “Licensing Agreement”); the Licensing Agreement shall have a duration of 20 years and shall be governed by terms consistent with those reflected in the Business Plan. l) The Transaction qualifies as highly material transaction in accordance with the Procedure Governing Transactions with Related Parties approved by Parmalat’s Board of Directors on November 11, 2010 (the “Procedure”) in implementation of statutory requirements and pursuant to the provisions of the “Regulations Setting Forth Provisions Governing Related-party Transactions” adopted by the Consob with Resolution No. 17221 of March 12, 2010 (the “Regulations”). m) In this regard, as required by the Procedure, prior to their submission to the Board of Directors for approval, highly material related-party transactions are preliminarily reviewed by Parmalat’s Internal Control and Corporate Governance Committee (the “Committee’), which is required to render a detail opinion as to Parmalat’s interest in executing the Transactions and whether its terms are substantively beneficial and fair (the “Opinion”). The Opinion is binding in terms of its effect on the resolutions adopted by Parmalat’s Board of Directors.
n) Pursuant to the Procedure, for the purpose of rendering the Opinion, the Committee may enlist the support, at the Company’s expense, of independent experts chosen by the Committee, provided the experts enjoy an established reputation of professionalism and competence regarding the issues subject of the consulting services and are not in a conflict of interest with regard to the transactions that are being analyzed.
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The foregoing considerations having been stated, on January 27, 2012, the Committee awarded to Mediobanca – Banca di Credito Finanziario SpA (“Mediobanca”) the assignment to support it, in the capacity as independent expert, during the preparatory phase and the phase of the negotiations between Parmalat and the BSA Group for the Transaction, and render its professional opinion as to Parmalat’s interest in executing the Transactions and whether its terms are substantively beneficial and fair (the “Fairness Opinion”). On the same date, Parmalat awarded to Mediobanca the assignment to assist the Company as financial advisor in the Transaction. In this regard, pursuant to Section 6.1.2 of the Procedure, the expert appointed by the Committee may also serve as expert appointed by the Company.
Mediobanca, as part of its investment banking activities and the professional support it provides to companies, carries out on a regular basis advisory assignments in connection with acquisitions, divestments, mergers, stock listings, securities underwritings and placements, and issuance of fairness opinions.
For the purpose of performing this assignment, Mediobanca primarily used the following documents it received from the BSA Group and Parmalat, as well as publicly available information: − Vendor Due Diligence (“VDD”) prepared by Ernst & Young (“E&Y”), dated March 8, 2012; − Management Presentation – Presentation to Parmalat’s Management, prepared by BSA’s management, dated March 16, 2012; − Transaction presentation documents prepared by Parmalat for the April 20, 2012 and May 22, 2012 meetings of the Board of Directors, which contain remarks by Parmalat’s management regarding the Transaction’s industrial viability; − Supplemental information received from LAG and the BSA Group in response to questions by Parmalat, Mediobanca and Parmalat’s independent auditors; − Financial due diligence document prepared by Parmalat’s independent auditors, dated May 15, 2012; − LAG consolidated financial statements for the 2007-2011 reporting years; − Current trading data for the first quarter of 2012 for LAG and LINT Americas; − Broker research and financial statements of comparable companies; − Financial data and parameters taken from Bloomberg; − Term sheets of the sales agreements and the licensing and distribution agreements; − Parmalat’s Related-party Procedure.
In accordance with the assignment it received, Mediobanca relied on the truthfulness, accuracy and completeness of the financial, contractual, accounting, tax-related and other information it reviewed, without performing any independent verification or control of other type of the information. The analysis of the Transaction was performed based on the going concern assumption and does not take into account the possible occurrence of extraordinary and unforeseeable events, such as, the following non-exhaustive list being provided merely by way of example, changes in economic, financial, monetary, political or market conditions, or actions taken by public or government entities or regulatory authorities of the relevant industries or the securities markets that could have an impact on the Transaction.
Our analysis did not include identifying or quantifying any contingent liabilities (or shortfalls in the value of expected assets), taking instead into account the information provided in the financial statements and accounting schedules supplied and communicated to the 4
management of BSA and Parmalat, as well as the attestations contained in the documents prepared by Parmalat’s management after completing the due diligence process. In addition, we did not perform any independent appraisal of the values of the individual assets and liabilities of LAG, LINT Americas and/or Parmalat Canada (including off-balance-sheet assets and liabilities). The value of LAG and LINT Americas used to determine the fairness of the Consideration, to the extent that it was based in part on projected data, is predicated on actual occurrence of the hypotheses and assumptions used to develop the corresponding projections. The fairness analysis that we performed was based, inter alia, on the assumption that the profitability and cash flow targets of the Business Plan of LAG and LINT Americas, prepared by the management of the BSA Group, will be achieved: a critical review of these projections would require a more in-depth industrial and business analysis that the one we performed for the purpose of rendering this opinion and competencies different from those of an investment bank.
Moreover, this opinion does not concern the terms set forth in the Sale and Purchase Agreement, the Distribution Agreement and the Licensing Agreements and is based on the assumption that these terms are in line with market terms and best practices and consistent with the base assumptions of the Business Plan.
In accordance with the terms of the assignment, Mediobanca’s professional support is being provided “independently of the qualification that the Transaction will be relevant for the purpose of applying the rules of the Procedure and Regulations (e.g., less material or highly material transaction, regular transaction, etc.).” Consequently, any consideration about the materiality thresholds of the Transaction pursuant to the Procedure and Regulations, the determination of which entirely the responsibility of Parmalat’s governance bodies, shall be expressly excluded from the subject of this opinion.
Our analysis is necessarily based on the information that you provided to us and we are under no obligation to update or modify this opinion based on additional information or circumstances or event occurring after the date when this opinion was prepared.
Within the scope and with the limits explained above, it is our opinion that, on today’s date, the Transaction is in Parmalat’s interest and that the Consideration should be deemed to be fair from a financial standpoint, based on valuations performed with criteria that are well established in the professional practice (discounted cash flow method, multiples for comparable transactions and stock market multiples), and in view of the following considerations and based on the assumption that:
− Parmalat believes, as indicated in the documents prepared by management for the April 20, 2012 and May 22, 2012 meetings of the Board of Directors, that the Transaction has a significant strategic and industrial value and will enable LAG and Parmalat Canada to realized important synergies, estimated at full capacity at about 35 million USD a year. − The acquisition process was carried out in accordance with established practice criteria, with Parmalat having obtained access to documents about the targets that it deemed adequate, over a reasonable length of time and with the involvement of advisors (independent auditors, legal counsel, financial consultants) providing support in the due diligence and negotiation processes. − Based on the available data, the aggregate operating results of LAG and LINT Americas for the first quarter of 2012 show an increase compared with the same period last year,
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but short of the revenue and profit targets for the first three months of 2012. In any event, the Price Adjustment mechanism is protective of Parmalat in that it makes it possible to base the Consideration on the results that will be actually achieved by LAG and LINT Americas in 2012 and not on projected data. The 2012 reporting year is the first year of the Business Plan and, consequently, has a “signaling” significance with regard to the ability of LAG and LINT Americas to achieve results in line with targets. − The Sellers shall provide Parmalat with appropriate guarantees for transactions of this type (bank surety, an escrow account or similar instrument) to secure the Price Adjustment. − LAG’s net financial position used as a reference for determining the Consideration will be computed based on an audited interim balance sheet.
This fairness opinion is consultative, is neither binding nor mandatory and does not constitute an expert appraisal or valuation report in accordance with current laws. In any event, the Committee is the only entity with jurisdiction over the decision to issue a favorable decision about the Transactions, and on which terms and conditions, even when it uses the support of independent consultants, as it does in this case.
Our opinion was prepared and is being issued to Parmalat exclusively for the specific purpose mentioned above. Consequently, it may not be used for different purposes, nor viewed separately from the context within which it was developed or separately from the supporting documents that you supplied to us and may not be disseminated, transferred, reproduced or cited, in whole or in part, or mentioned without our prior written consent, except, obviously, for Parmalat’s need to comply with statutory obligations and obligations arising from financial market regulations.
Sincerely.
MEDIOBANCA [signatures]
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Courtesy Translation
OPINION OF THE INTERNAL CONTROL AND CORPORATE GOVERNANCE
COMMITTEE, ACTING IN ITS CAPACITY AS THE COMMITTEE WITH
JURISDICTION OVER THE REVIEW OF RELATED-PARTY TRANSACTIONS,
PROVIDED PURSUANT TO CONSOB REGULATIONS No. 17221
The Internal Control and Corporate Governance Committee of Parmalat S.p.A., acting in its capacity as the committee of independent directors for the review of related-party transactions, pursuant to Article 8 of Consob Regulations No. 17221 and in accordance with the Procedure
Governing Transactions with Related Parties approved by the Board of Directors of Parmalat S.p.A. on November 11, 2010 (the “Procedure”), was promptly informed of the negotiations launched in connection with the possibility of acquiring from the BSA Group certain American assets specialized in the production and distribution of cheese (the “Transaction”). The reference is to:
- Lactalis American Group (“LAG”), which heads the activities of the BSA Group in the production and sale of cheese in the U.S. market. LAG, which reported revenues of USD912.9 million and
EBITDA of USD81.0 million in 2011, produces and markets its products thanks to five production units located in the territory of the United States and had about 1,700 employees at December 31,
2011.
- The business operations of Lactalis International, a BSA Group company specialized in the distribution of cheese and other dairy products in the international markets (“LINT Americas”).
More specifically, LINT Americas handles the distribution of the products of the BSA Group in
North and South America. It reported revenues of 54.8 million euros and EBITDA of 3.7 million euros in 2011.
The Committee believes that it is appropriate to preface its remarks by pointing out that the transaction is consistent with the strategy announced by BSA when it launched the tender offer, aimed at “contributing to the expansion of Parmalat and its brands, both in Italy and internationally, and allowing the two groups, both leaders in the food industry, but in complementary product categories and geographic regions, to offer a complete range of dairy products.”
Immediately upon the start of the negotiations, the Committee began the process of selecting an independent expert (hereinafter the “financial advisor” or simply the “advisor”) to support it in the
2 performance of its tasks and the functions assigned to the committee of independent directors pursuant to the Procedure. At the end of this process, the assigned was entrusted to Mediobanca.
The Committee kept constantly in contact with management and the advisor about the development of the negotiations in the course of frequent meetings held specifically to discuss the issues at hand
(see meetings held on December 15 and 22, 2011, February 13, 2012, April 2 and 19, 2012 and
May 9, 11, 21 and 22, 2012). The meetings of April 2, 2012 and May 11, 21 and 22, 2012 were attended by representatives of Mediobanca who shared information about the progress of the negotiations and the valuation methods, explained the analyses and the findings generated by the work carried out in performance of their assignment, and provided answers to requests for clarifications formulated during meeting discussions about the various issues and topics addressed by the financial advisor in the performance of its assignment. The Chairman of the Board of
Directors and members of the Board of Statutory Auditors also attended Committee meetings as invited guests. The Oversight Entity was thus able to monitor the compliance of the work performed with the principles of the Consob regulations and the provisions of the Procedure.
In addition to the support provided by Mediobanca, the Committee was also assisted by PwC, as accounting due diligence expert, and Studio D’Urso, Gatti e Bianchi in Milan for the legal due diligence and legal and contract support in connection with the Transaction.
The foregoing having been stated, the Committee took an active role in the Transaction’s negotiations and preparatory phase (as required by the Procedure), also receiving complete and timing information from Parmalat management and the advisor, availing itself of the option to request information and submit recommendations to the Managing Entities and the persons responsible for handling the negotiations, as shown in the minutes of the abovementioned meetings.
The Chairman of the Committee attended the technical meetings held by the Mediobanca team and the Société Générale team, the later in its capacity as advisor to the B.S.A. Group.
3 The main issues analyzed by the Committee for the purpose of rendering a detailed opinion about the Company’s interest in executing the transaction and the fairness of the transaction’s economic conditions included the following:
1. the strategic reasons why the Managing Entities selected LAG and LINT as potential targets
for acquisition by the Company;
2. an analysis of the business plan prepared by LAG’s management and its feasibility, also in
light of the competitive and regulatory environment, reviewing actions that could be
implemented to mitigate the risks inherent by definition in any future event;
3. the synergies realizable between the two groups (LAG and Parmalat);
4. the valuation methods used to define the Enterprise Value, first, and the price determination
criteria, later.
With regard to Item 1 and Item 3, in part, the Committee wishes to point out that the Transactions should make it possible, inter alia, to achieve the following strategic objectives:
• entry into one of the world’s most important dairy markets, such as that of the United States of
America (USA);
• within Parmalat’s product portfolio, increase in the weight of the categories with a high value
added: LAG operates in the profitable segments of soft and fresh cheeses, which, until now,
have been almost completely absent from Parmalat’s international portfolio;
• exploit export opportunities from Canada, through the development of sales in the United States
of cheddar cheese with the Black Diamond brand;
• strengthen Parmalat's position in Latin America; the Company will be able to reach these
markets, Brazil and Mexico in particular, with cheese manufactured in Canada, the United
States and Europe;
• use of the presence both in Canada and the United States to the Company’s advantage also in
the procurement area, because Parmalat’s negotiating strength will be increased in North
4 America, while optimizing the utilization level of the production capacity available at Parmalat
Canada’s plants.
With regard to Item 2, LAG’s industrial plan was analyzed during a series of meetings ad in-depth review sessions and discussions between the Lactalis and Parmalat teams, at the end of which
Parmalat’s management indicated that it was comfortable with the plan. Nevertheless, taking a prudent approach, a sensitivity analysis was developed using a more conservative industrial plan.
The results for the first quarter of 2012 confirmed that growth was occurring compared with the previous year, but not yet in line with the plan.
With regard to Item 3, Parmalat’s management, after performing its own analyses, expressed a positive opinion with regard to the feasibility of realizing the synergies, summarized in a nutshell in
Item 1, deriving from the integration of LAG into the Parmalat Group and its Canadian subsidiary in particular. We must immediately point out that, in the consideration determination process, only
30% of the total value of the synergies identified in the industrial plan was granted to LAG. The balance was not valued and, consequently, excluded from the computation of the sales price (see next item).
Lastly, with regard to Item 4, please note that the valuation methods used to define the economic conditions of the Transactions were those generally used in regular practice. More specifically, the results obtained with a) the discounted cash flow method (main method) and b) the method of multiples for comparable transactions (comparison method) are explained below.
For purposes that are relevant to this report, please note that the Committee discussed in detail and later shared with the financial advisor the methodologically relevant variables adopted in the estimating process based on the DCF method, applied both to the Best Case (i.e., the business plan validated by Parmalat’s management) and the “Conservative Case (i.e., the business plan based on more conservative assumptions for a sensitivity analysis). As mentioned earlier, in both scenarios used (Base Case and Conservative Case) only up to 30% of the value of the synergies was used and
5 the corresponding cash flows were discounted to present value at a cost of capital increased to reflect the specific risk profile. By combining the results achieved and applying the DCF method to both scenarios used, the following results were obtained:
• a wider range of values attributable to the assets (LAG plus LIT), with the lower end at
USD787 million (the lower value in the USD787-930 million interval defined in the
Conservative Case) and the upper end at USD1,002 million (equal to the higher value in the
USD842-1,002 million interval defined in the Best Case);
• a narrower range of values attributable to the assets (LAG plus LIT) obtained in both
scenarios used for the DCF method: in this range, the lower end is USD842 million (equal to
the lower value of the Best Case, see above) and the upper end is USD930 million (equal to
the higher value in the Conservative Case, see above).
The second method used consists of computing the implied multiples that underlie transactions for companies active in the same industry.
In this regard, we took into consideration acquisitions completed from 2007 to present involving the acquisition of control of groups/business operations in the dairy industry and, in that area, an even narrower sample for the cheese sector in the United States and Europe.
The analysis was then limited to EV/EBITDA multiples computed based on historical profitability data. The sample analyzed shows average and median multiples of about ten times EBITDA and up to 11 times when only companies in the cheese sector are considered. Please note that these multiples reflect a strategic premium, i.e., a control premium paid to the seller.
Lastly the Committee wishes to point out that, following the negotiations conducted in recent weeks and the valuations outlined above, the Transaction’s economic conditions were defined as follows:
• the closing price will be initially computed based on a multiple of 9.5 times the aggregate
EBITDA of LAG and LINT, applied to the 2012 EBITDA projected in the budget (“Enterprise
6 Value”). LAG’s net financial position at June 30, 2012, or different end-of-month date nearest
to the closing date will be added algebraically to the abovementioned amount;
• the price will then be adjusted, up or down, based on the EBITDA actually reported by LAG
and LINT in 2012, to which the same multiple mentioned above will be applied, it being
understood that the consideration may not be less than USD760 million (floor) or more than
USD960 million (cap); in both cases the amounts shall be understood as being before the
adjustment resulting from the computation of the net financial position (NFP). Lactalis will
provide Parmalat with adequate contractual guarantee to secure the payment of the price
adjustment.
After completing its analysis, the Committee specifies that it based its opinion as to the Company’s interest in executing the acquisition of LAG and LINT based also on the following considerations:
1. The price determined at the end of the negotiations and agreed to by the parties (an EV of
USD904 million, without considering the NFP) is at the low end of the price range selected by
the advisor for the Best Case (USD842-1,002 million) and at the high end of the Conservative
Case (USD787-930 million). This means a purchase price in line with the most conservative
valuations developed by the independent expert.
2. The multiple that should be applied to EBITDA to quantify the consideration, equal to 9.5, is
lower than the observed average and median multiples (10 for companies in the dairy sector)
for transactions involving controlling stakes in comparable companies. When the sample is
narrowed to companies in the cheese sector, particularly homogeneous for LAG, the observed
multiple was 11 times EBITDA.
3. As mentioned, the value assigned to the synergies that the Transaction is expected to generate
was taken into account only partially for price definition purposes: only 30% of the estimated
total value of the synergies was used for this purpose. Therefore, the Committee believes that,
7 once fully operational, the integration of LAG and LINT into the Parmalat Group will bring
additional benefits that will make the Transaction even more attractive.
Lastly, the Committee wishes to point out that the agreement with the B.S.A. Group call for a possible adjustment to the stipulated consideration, which will be adjusted up or down based on the
EBITDA actually reported by LAG and LINT in 2012, to which the same multiple as the one mentioned above will be applied, again with the same cap and floor mentioned above, thereby providing greater protection for Parmalat’s interest.
The foregoing considerations having been stated, at a meeting held on May 22, 2012, the
Committee reviewed the fairness opinion issued by Mediobanca and the related supporting documents and, having obtained from the financial advisor all requested clarifications, the
Committee unanimously concluded that the acquisition of LAG and LINT, on the terms listed above, is in the interest of Parmalat S.p.A. and that the Transaction’s terms are fair from an economic standpoint.
Consequently, the Committee expressed a favorable opinion for the Transaction’s execution.
Marco Reboa (Chairman)
Nigel Cooper
Riccardo Zingales
Milan, May 22, 2012
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