Equity Partners Infrastructure Company No. 1 Limited
Independent Adviser’s Report 7 June 2012
KordaMentha confirms that it: (a) has no conflict of interest that could affect its ability to provide an unbiased report; and (b) has no direct or indirect pecuniary or other interest in the proposed transaction considered in this report, including any success or contingency fee or remuneration, other than to receive the cash fee for providing this report. KordaMentha has satisfied the Takeovers Panel, on the basis of the material provided to the Panel, that it is independent under the Takeovers Code for the purposes of preparing this report.
Table of contents
1 Introduction ...... 1
2 Overview of EPIC ...... 3
3 The Proposed Transaction ...... 11
4 Agreed Net Asset Value Per Share ...... 13
5 Valuation ...... 15
6 Merits of Proposed Transaction ...... 23
Appendix 1: Sources of information ...... 27
Appendix 2: Qualifications and declarations ...... 28
Appendix 3: Comparable companies ...... 30
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1 Introduction
1.1 Background Equity Partners Infrastructure Company No. 1 Limited (EPIC) is a widely held, unlisted New Zealand company. It was established in 2007 to invest in infrastructure assets and entities that own or operate infrastructure assets. Equity Partners Infrastructure Management Limited (EPIM), a wholly owned subsidiary of Pyne Gould Corporation Limited (PGC), previously performed the role of manager of EPIC’s investments and operations pursuant to a Management Agreement dated 26 April 2007 (the Management Agreement). The Management Agreement provided that EPIC may terminate the agreement if there is a change of control of EPIM or its holding company without the prior written consent of EPIC. EPIM sought that consent in October 2011 as a result of the takeover offer by Australasian Equity Partners Fund No.1 LP (AEP) of PGC. The independent directors of EPIC concluded that they could not give that consent on the basis of advice to EPIC that a change of control of EPIM could constitute a change of control for the purposes of the shareholders’ agreement for its Moto Hospitality Limited (Moto) investment. To do so could have triggered pre-emptive rights requiring EPIC’s shareholding in Moto to be offered for sale to other Moto shareholders. On 13 February 2012 EPIC and EPIM signed a Deed of Termination of Management Agreement (Termination Deed). The Management Agreement terminated at 5pm on 13 February 2012. Pursuant to the Termination Deed, EPIC agreed to make total payments to EPIM of $8,850,459. These termination and performance fees (Termination Payments) are proposed to be satisfied by EPIC issuing ordinary shares or ordinary shares and cash. EPIM’s parent company Equity Partners Asset Management Limited (EPAM) and Torchlight Fund No. 1 LP (Torchlight) are associated parties of EPIM for the purposes of the Takeovers Code. They held 16.4% of EPIC’s shares on issue. EPIC issued 5,960,000 shares to EPIM at 45 cents per share in respect of the Termination Payments (Tranche 1), which brings the combined EPIM and associated parties’ shareholding to 19.9%. On 11 May 2012 these shareholdings were consolidated under Torchlight Securities Limited (TSL) (which now holds 19.9% of EPIC’s shares). EPIC proposes to issue a further 13,707,687 shares to EPIM at 45 cents per share to satisfy the balance of the Termination Payments fully in shares (Tranche 2).
1.2 The Takeovers Code Rule 6 of the Takeovers Code (the Code) prohibits: a person who holds or controls less than 20% of the voting rights in a code company from increasing its holding or control of voting rights (together with its associates) beyond 20%; and a person holding or controlling 20% or more of the voting rights in a code company from increasing its holding or control of voting rights; unless the person and that person’s associates comply with the exceptions to this fundamental rule.
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One of the exceptions, set out in Rule 7(d) of the Code, enables a person and its associates to increase their holding or control of voting rights by an allotment of shares if the allotment has been approved by an ordinary resolution of the code company. The proposed issue by EPIC of a further 13,707,687 shares to EPIM would increase the combined EPIM and TSL shareholding to 27%. EPIC is seeking shareholder approval to issue the Tranche 2 shares (the proposed transaction). We understand shareholders will vote on an ordinary resolution in respect of the issue of the Tranche 2 shares at a meeting of EPIC’s shareholders.
1.3 KordaMentha’s role Rule 18 of the Code requires the directors of a code company to obtain an Independent Advisor’s Report to be included in the notice of meeting (the Report). The Report has been prepared to assist those persons who may vote to approve the allotment of shares to consider the merits of the proposed transaction, which is the approach adopted by independent advisers when reporting under the Takeovers Code. The term ‘merits’ has no definition either in the Takeovers Code itself or in any statute dealing with securities or commercial law in New Zealand. While the Takeovers Code does not prescribe a meaning of the term ‘merit’, it suggests that merits include both positives and negatives in respect of a proposed transaction. KordaMentha has evaluated the proposed transaction by reviewing the following factors: the net asset value (NAV) per share established and agreed between EPIC and EPIM utilised for the purpose of the proposed Tranche 2 share issue; the valuation multiples implied by the proposed transaction (and comparison to broadly comparable companies) on the Moto investment, EPIC’s only substantial investment; the counter-factual scenario where EPIC does not issue any further shares to EPIM but pays the balance of Termination Payments, in cash in accordance with the Termination Deed; any other advantages or disadvantages for EPIC shareholders from accepting or rejecting the proposed transaction. EPIC and EPIM have already agreed the $8,850,459 of Termination Payments to terminate the Management Agreement. We understand from EPIC’s lawyers that EPIC’s shareholders do not need to give their approval for this transaction. Since that transaction has been agreed, the Report does not consider the merits of the transaction to terminate the Management Agreement only the merits of allotting shares under Tranche 2 in consideration for EPIC meeting its liability to pay the Termination Payment.
1.4 Other The sources of information, to which we have had access and upon which we have relied, are set out in Appendix 1 of this report. This report should be read in conjunction with the statements and declarations set out in Appendix 2 regarding our independence, qualifications, general disclaimer and indemnity and the restrictions upon the use of this report. References to $ relate to New Zealand dollars and £ relate to pound sterling, unless specified otherwise. References to years or financial years mean financial year end 31 March and 31 December for EPIC and Moto respectively. Please note tables may not add due to rounding.
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2 Overview of EPIC
2.1 Investments EPIC’s investment strategy, as set out in its prospectus, is to identify and acquire interests in high-quality and high-yielding infrastructure assets that meet the following criteria: the investment must be reasonably expected to add shareholder value, by being yield accretive and/or by increasing the potential for capital gains; the investment must be an infrastructure asset (or exhibit the characteristics of an infrastructure asset); the investment must be in OECD or OECD like countries; the investment should preferably operate in a clearly defined and transparent regulatory environment; and EPIC should preferably invest as a co-investor alongside at least one other major infrastructure investor, and the asset must have a manager with appropriate expertise. Following an IPO in June 2007, which raised approximately $95 million, EPIC purchased shares in Thames Water Utilities Limited (Thames Water) for approximately £33 million. This investment was subsequently sold in in December 2011. In June 2009, EPIC made one other substantial investment (£26.69 million) in Moto, a UK motorway service operator; and two other relatively small investments were made in September 2008 in Arqiva Limited (Arqiva) (£1.45 million) and Wales & West Utilities Limited (Wales & West) (£0.64 million). These are EPIC’s current investments.
2.2 Shareholdings Prior to issue of the Tranche 1 and Tranche 2 shares EPIC was controlled 16.4% by associated parties of EPIM (as defined in the Takeovers Code):
Pre Issue Shares %
EPAM 15,000,000 11.1% Torchlight Fund No1 LP 7,222,222 5.3% 16.4% Associated Parties EPIM 150 – Others 113,462,437 83.6% Total 135,684,809 100.0%
As a result of the issue of the Tranche 1 shares in March 2012, shares controlled by EPIM’s associated parties increased to 19.9%:
Post Issue Tranche 1 Shares %
EPAM 15,000,000 10.6% Torchlight Fund No1 LP 7,222,222 5.1% 19.9% now held by TSL EPIM 5,960,150 4.2% Others 113,462,437 80.1% Total 141,644,809 100.0%
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2.3 Financial Position As at 31 January 2012, EPIC had reported net assets of $44 million (32 cents per share) represented primarily by cash and $38 million of investments:
Summary financial position $000
Assets Cash & Deposits 9,086 Investments 38,176 Receivables & Other 641 Total Assets 47,903
Liabilities Trade Payables 328 Moto Performance Fee (EPIM) 3,531 Total Liabilities 3,859
Net Assets 44,043
Shares on Issue 135,685 Book Value NAV/Share $ 0.32
EPIC’s major investment is its 17.49% stake in Moto, which is held within a 100% controlled subsidiary, EPIC Bermuda Holdings Limited (EBHL) as shown in the table below:
Investments breakdown $000
Arqiva Investment 1,839 Arqiva Loan Notes 1,078 Wales & West Investment 864 Wales & West Loan Notes 202 EPIC Bermuda Holdings Limited 34,192 Investments 38,176
A brief summary of EPIC’s investments and its key liabilities is as follows: Arqiva Investment: In September 2008, EPIC acquired a 0.071% indirect interest in Macquarie UK Broadcast Holdings Limited (MBH), the ultimate parent of Arqiva, a UK based broadcast and transmission service provider. This investment is recorded in EPIC’s financial statements at fair value based on a discounted cashflow methodology. Arqiva Loan Notes: As a component of the indirect investment in MBH, EPIC also received an indirect interest in loan notes issued by MBH. EPIC holds an indirect interest in 460,504 loan notes with face value of £1 per note. The loan notes are valued at amortised cost net of unrealised exchange losses and interest impairments. The loan notes are not able to be sold separately from the equity investment. Wales & West Investment: In September 2008, EPIC purchased a 0.097% indirect interest in MGN Gas Networks (UK) Limited (MGN), the ultimate holding company of Wales & West, a UK based gas network provider. This investment is recorded in EPIC’s financial statements at fair value based on a discounted cashflow methodology.
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Wales & West Loan Notes: As a component of the indirect investment in MGN, EPIC also received an indirect interest in loan notes issued by MGN. EPIC holds an indirect interest in 94,395 loan notes with face value of £1 per note. The loan notes are recorded at face value adopting the 31 March 2011 NZD/GBP exchange rate of 0.4737. The loan notes are not able to be sold separately from the MGN investment. EPIC (Bermuda) Holdings Limited: On 19 June 2009, EPIC acquired 17.49% of the issued share capital of Moto International Holdings Limited (MIHL). MIHL has a 100% interest in the shares in Moto, a leading motorway and trunk-road service area operator in the UK. On 18 March 2011, EBHL participated in the recapitalisation in Moto to avoid dilution of its investment at a cost of $11.7 million. As part of this recapitalisation, EBHL’s shareholding is now split between holding companies but its effective shareholding of MIHL remains unchanged at 17.49%. Moto’s (unaudited) earnings before interest, tax, depreciation and amortisation (EBITDA) for FY10 and FY11 were £60 million and £77 million respectively. However, as a result of the high level of gearing of Moto, the net losses for the same periods were £43 million and £32 million respectively. The reported book value of Moto reflects the equity method of accounting and is recorded at cost (plus additional recapitalisation of $11.7 million) adjusted for gains and losses since the original investment. As such, the reported book value of the Moto investment does not necessarily reflect its fair value. The equity method of accounting has been adopted because, although EPIC owns less than 20% of Moto, it has a significant influence through the ability to appoint one director. Moto Performance Fee liability: relates to a provision for the (potential) fee payable to EPIM in respect of Moto’s performance. This fee is based on the internal rate of return (IRR) achieved on the Moto investment. The calculation and payment of the fee is governed by the Performance Fee Agreement between EPIM and EPIC. The key terms of this agreement are discussed later in the Report and this fee has been agreed under the Termination Deed. We have also been advised by EPIC management that EPIC has a contingent liability in respect of a performance fee obligation payable by EPIC to Macquarie Infrastructure and Real Assets (Europe) Limited (Macquarie) in respect of its sale of shares in Thames Water. The terms and calculation of the performance fee payable to Macquarie are being disputed. Management advise us that the estimated outcome of the dispute is that EPIC will be required to pay Macquarie a performance fee of between nil and £3.9m. Macquarie has indicated that it intends to pursue legal action. EPIC has engaged its own legal advisors.
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2.4 Moto description Moto is one of the UK's largest operators of motorway service areas with some 60 locations and over 6,000 staff that offer fuel, refreshment, and shopping services. Its amenities include restrooms, play areas, baby feeding and changing stations, business lounges and meeting rooms. Moto’s partners include retailer Marks & Spencer, which operates Simply Food stores at a number of Moto locations. Moto is owned by a consortium of shareholders including Australian and European Funds and EPIC. It is asset managed by Macquarie. In the 12 months to December 2011 Moto achieved EBITDA of £77 million, £17 million higher than FY10, however suffered a net loss before tax of £32 million driven by depreciation and high debt servicing costs.
Moto’s financial performance (£m) FY10 FY11 Turnover 848 864 Operating Costs (788) (787) EBITDA 60 77 Depreciation (31) (31) Interest (72) (78) Net Profit/(Loss) Before Tax (43) (32)
Moto’s debt facilities were restructured in 2011 and long term borrowings at the end of FY11 comprised £400 million of senior debt, £171 million of corporate bonds, less £23 million of capitalised debt costs1:
Moto’s financial position (£m) FY10 FY11
Cash 26 31 Current Assets 49 34 Fixed Assets 596 588 Total Assets 672 653
Short Term Borrowings 762 – Current Liabilities 58 53 Long Term Borrowings – 548 Other Term Liabilities 0 0 Total Liabilities 821 602
Net Assets (149) 51
Whilst debt reduction was achieved through 2011 and new facilities are now in place the business remains highly leveraged. The corresponding interest burden continues to impact on the liquidity of the business. Given Moto’s leveraged position potential purchasers may consider any sale as “distressed” and we consider the realisation of EPIC’s investment in Moto would be difficult to achieve in the current circumstances. The prevailing economic climate in UK is also unhelpful as it remains at risk of falling back into recession. The on-going issues in Europe and the Eurozone also continue to affect Moto.
1 December 2011 quarterly report for Moto’s operating subsidiary
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2.5 EPIC Financial Performance The financial performance of EPIC for FY10, FY11 and six months (unaudited) to September 2011 is summarised below:
Summary financial performance ($000) FY10 FY11 6m Sept 11
Interest, Dividends & Other 5,808 4,243 2,717 Share of (loss)/Gain of associate (Moto) 1,617 (1,339) (8,666) Operating Revenue 7,425 2,904 (5,949)
Unrealised Forex (3,842) 1,087 (97) Change in fair value of derivatives 7,199 – – Impairments (Moto) – (19,705) – Gains & Losses 3,357 (18,618) (97)
Auditors' Fees 145 114 29 Directors' Fees 133 208 80 Other Expenses 629 1,078 902 EPIM Management Fee 1,503 1,586 752 EPIM Performance Fee (Moto) 3,531 – – Expenses 5,941 2,986 1,763
EBIT 4,841 (18,700) (7,809)
Finance Costs 3,208 4,416 2,814
Net Profit/(Loss) Before Tax 1,633 (23,116) (10,623)
Revaluation of Investments – – 4,065 Share of Associate Revaluation Reserve (Moto) 236 – (323) Share of Associate Cash Flow Hedge Reserve (Moto) (5,221) (366) 192 Loss on translation of foreign associate (Moto) (6,200) (2,373) (1,699)
Comprehensive Loss Before Tax (9,552) (25,855) (8,388)
Key points to note from the statements of financial performance include: dividend income reduced substantially between FY10 and FY11 as a result of Moto’s decision in September 2010 to suspend dividend payments. The Moto acquisition was concluded in FY10 and an EPIM performance fee of $3.5 million in respect of the Moto investment was provided in the FY10 year; the $19.7 million impairment in FY11 reflected primarily a $2 million unrealised capital gain on the increased value of UK assets offset by a $21.4 million unrealised loss due to currency movements; and EPIC also equity accounted for a $1.6 million gain in FY10 and a $1.3 million loss in FY11 in Moto. In the six months to September 2011, EPIC equity accounted for $8.7 million of Moto’s losses. EPIC’s financial performance is affected by the accounting treatment of its investments. We have not reviewed or relied upon the financial performance of EPIC in our analysis.
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2.6 Management Agreement
2.6.1 Management Agreement EPIC’s management is outsourced to EPIM, a wholly owned subsidiary of PGC, pursuant to the Management Agreement.
PGG Limited
100%
Perpetual Group Limited
100%
Torchlight Investment Torchlight Fund Group Limited No 1 LP
100% 5.3%
EPAM 11.06% 100% Management Agreement EPIM EPIC
Source: Companies Office The Management Agreement is for a term of 25 years (from 2007), although it may be terminated on any earlier date, in accordance with its terms. The principal duties of EPIM under the Management Agreement are to: run EPIC’s day to day operations, including without limitation investor communications, coordinating payment of dividends, preparing financial information and managing compliance by EPIC with all regulatory and listing requirements from time to time; manage EPIC’s investments, including without limitation advising on and implementing EPIC’s investment strategy and managing EPIC’s debt level, currency exposure and cashflows; explore opportunities for EPIC to exit investments and advising on such exit opportunities; identify and implement appropriate risk management policies and procedures in respect of EPIC’s investments and report on the adequacy and effectiveness of those policies and procedures on a regular basis; and identify, assess and advise on any proposed investments for EPIC and to conduct in respect of any proposed investments such due diligence, investigation or analysis as reasonably required.
2.6.2 Fees The Management Agreement between EPIC and EPIM specified that three categories of fee are payable to EPIM: Management Fee – equal to 1% per annum of the gross value of the assets of EPIC calculated and paid monthly; Additional Investment Transaction Fee – payable at a rate of 1% of the value actually invested if EPIM identifies, assesses and advises on an investment; and
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Additional Investment Performance Fee – negotiated in good faith between the EPIM and EPIC in respect of additional investment which shall: be payable only if the return on the additional investment (in respect of capital and/or income) exceeds a certain agreed level; and reflect international market practice in respect of similar assets of similar values. The following fees have been paid to EPIM by EPIC (in the past two years ten months):
EPIM Fees $
FY10 1,503,254 FY11 1,585,740 10 Months to 31 January 2012 1,135,470
Source: September 2011 Interim Accounts, January 2012 Management Accounts Following the redemption of the shares in Thames Water (completed in December 2011) EPIC paid EPIM $634,170 and $1,312,636 in respect of retainer and redemption fees. These are in addition to those noted above. Moto is the only “Additional Investment” for the purpose of the Management Agreement. The key terms of the Moto Performance Fee are summarised below.
2.6.3 Termination EPIC could terminate the Management Agreement by giving not less than six months’ notice to EPIM. The compensation payable to EPIM was set at an amount equal to five times the fees payable in respect of Management Fees for the period of 12 months before notice of termination is given. In addition to standard termination for breach and insolvency clauses, EPIC may terminate the agreement if there is a change in control of the Manager unless approved by EPIC.
2.6.4 Moto Performance Fee Agreement The Management Agreement provides that the Additional Investment Performance Fee in respect of Moto (the Moto PFA) (an Additional Investment for the purposes of that agreement) would be negotiated in good faith between the EPIM and EPIC and only payable if the return on Moto in respect of capital and/or income, exceeds a certain agreed level. We understand that the key terms of the Moto PFA are: EPIM was entitled to be paid a Performance Fee in respect of the Moto on the occurrence of a Realisation Date; a Realisation Date was deemed to have occurred when (among other things) EPIC sells all or part of its holding in Moto, the Management Agreement is terminated, Moto completes an IPO or on 20 June 2019. the Performance Fee calculation was based on the IRR of the Moto investment exceeding 9% per annum. The fee was based on 20% of the uplift above the 9% IRR hurdle rate; and the Performance Fee was payable within 10 days after the Realisation Date.
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2.7 The Termination Deed In the process of negotiating the termination of the Management Agreement, EPIC and EPIM agreed to certain terms and conditions which varied some of those included in the Management Agreement and the Moto PFA. Pursuant to the Termination Deed, EPIC has agreed to make total payments to EPIM of $8,850,459 represented by:
Termination Payments $
Management fees 716,400 Termination fees 4,836,107 Performance fees 3,297,952
A brief description of these components is as follows: Management Fees: represent the Management fees that would have been payable to EPIM if notice of termination was given by EPIC in July 2012 and is also consideration for seconding EPIM staff to EPIC for a period of twelve months post termination. This has been calculated on the basis of twelve times the December 2011 management fee paid to EPIM ($59,700). Termination Fees: are calculated based on five times the estimated fees payable to EPIM in the 12 months to July 2012. July 2012 being the notional effective date that notice of termination would have been given. The twelve month fee estimate is based on actual fees for August to December 20l1 and an estimate for January to July 2012. We note EPIM waived the notice period under the Termination Deed. Performance Fees: represent the amount payable in respect of the Moto PFA. We have been advised that Performance Fees were negotiated between the parties. We note the Directors of EPIM and EPIC engaged Deloitte to review the calculations of the Termination Fees, which confirmed that they were in line with the negotiated terms agreed between the parties. We have not reviewed or verified the calculation of the Termination Payments, which is outside the scope of our work to comment on the merits of the proposed transaction – being the issue of Tranche 2 shares. Much of the information set out above is for shareholders’ information purposes only.
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3 The Proposed Transaction
3.1 The Proposed Transaction The Termination Payments will be satisfied by EPIC: issuing shares to EPIM at an agreed price of 45 cents per share; and in respect of any outstanding balance after the issue of shares, by payment to EPIM in cash. The shares are proposed to be issued in two Tranches: Under Tranche 1, EPIC issued 5,960,000 shares to EPIM in May 2012 to bring EPIM and its Associates up to a 19.9% shareholding in EPIC; and Under Tranche 2, an additional 13,707,687 shares are proposed to be issued, subject to the approval of EPIC’s shareholders in accordance with rule 7(d) of the Takeovers Code (this is the proposed transaction). If shareholders approve the Tranche 2 issue of a further 13,707,687 shares to EPIM, those shareholders not associated with EPIM would control 73% of EPIC’s shares:
Post Issue Tranche 1 & 2 Shares %
TSL and EPIM 41,890,059 27.0% Others 113,462,437 73.0% Total 155,352,496 100.0%
To the extent any balance of the Termination Payments remain outstanding following the issue of shares (i.e. in the event that shareholders do not approve the issue of Tranche 2 shares), outstanding amounts attributable to Management and Termination fees are payable in cash (or potentially shares if EPIC is able to) no later than 90 days after the shareholder meeting date. Other outstanding amounts will be satisfied by the payment of cash on the earlier of: the date that is five years after the shareholders meeting date; the date upon which EPIC realises its investment in Moto; or an earlier date specified by EPIC. Any cash amounts to be paid by EPIC later than 90 days after the meeting date shall accrue interest monthly at the Reuters 1 year swap mid-rate on page “ICAPAUKIWISWAP” (Reuters rate) (2.44% at 6 June 2012). Such interest is to be paid annually. The Report considers the merits of the proposed transaction, including counter factual scenarios where EPIC does not issue the Tranche 2 shares to EPIM but pays the balance of Termination Payments, in cash in accordance with the Termination Deed.
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3.2 Valuation of outstanding Termination Payments (if paid in cash) The table below shows that total Termination Payments of $8.9 million are payable under the Termination Deed, of which $2.7 million has already been met with the Tranche 1 issue of shares:
Termination Tranche 1 Balance in $000 Cash terms payments allocation shares or cash
Termination fees 4,836 (2,682) 2,154 Due 90 days post shareholders meeting Management fees 716 – 716 Due 90 days post shareholders meeting Performance fees 3,298 – 3,298 Earlier of 5 years or when Moto is realised Termination Payments 8,850 (2,682) 6,168
If shareholders do not accept the Proposed Transaction, then the Termination Deed provides for the $6.2 million balance of the Termination Payments to be paid in cash. If this occurs then $2.9 million would be due 90 days after the shareholders meeting to consider the issue of the Tranche 2 shares and the balance on the earlier of the date that is five years after the shareholders meeting date; the date upon which EPIC realises its investment in Moto; or a date specified by EPIC. We have assessed the net present value (NPV) of the deferred cash settlement terms at $5.8 million. Key assumptions underpinning our calculation are: that EPIC would minimise the NPV of the cash settlement by deferring payment to five years after the shareholders meeting unless there is a value enhancing alternative; EPIC would pay interest on amounts owed based on the Reuters rate (currently 2.44%); and a discount rate of between say 4% and 6%, which reflects that the amounts owed are a debt obligation of EPIC. We have made a broad estimate of an appropriate discount rate after considering an appropriate after-tax cost of debt funding for EPIC.
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4 Agreed Net Asset Value Per Share Under the Proposed Transaction, EPIC will satisfy the remaining Termination Payments by issuing shares at an agreed price of 45 cents per share. However, our analysis on the preceding page shows that the remaining financial obligation ($6.2 million) has an NPV of $5.8 million when we take account of the deferred cash settlement terms. The NPV of $5.8 million divided by the number of shares proposed to be issued under Tranche 2 arrives at a value per share of 42 cents. In order for the proposed transaction to be reasonable, on a valuation basis, we would expect the value of EPIC’s shares being issued to EPIM to be less than or equal to 42 cents per share, which represents the NPV of the counterfactual scenario of meeting the remaining financial obligations in cash with deferred payments. Pursuant to the Termination Deed, the Directors of EPIC and EPIM engaged Deloitte to review the reasonableness of the assumptions, methodology and accuracy of the calculations used to assess the NAV of EPIC. Deloitte adopted a sum-of-the-parts approach to assessing EPIC’s NAV based on information provided by EPIC and EPIM. Deloitte classified the key components into three broad categories: verifiable amounts, such as receivables and cash balances that can be verified to source documents; amounts dependant on third party actions and therefore not in the control of EPIC or its management, including: the tax deductibility and GST treatment of the Termination Payments; Performance Fees potentially payable to Macquarie regarding Thames Water (currently under dispute) and future performance fees on Arqiva and Wales and West (which were assumed at nil in the Deloitte analysis); and investment valuations in respect of the Moto, Arqiva and Wales & West.
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Deloitte’s analysis concluded with a potential valuation range of 28 cents to 38 cents per share as shown in the table below.
Deloitte NAV 13 February 2012 ($000) Low High
EPIC level verifiable amounts Cash & Deposits 9,054 9,054 Receivables & Other 396 396 Trade Payables (366) (366) Termination Payment (EPIM) (8,850) (8,850) 233 233
Amounts dependent on third party actions Performance Fees (7,374) – Tax & GST 51 1,030 (7,323) 1,030
Investee Company valuation assumptions Moto 41,336 46,296 Arqiva 2,633 2,705 Wales & West 989 1,086 44,958 50,087
Equity 37,868 51,350
Shares on Issue (000) 135,685 135,685 NAV/Share $ 0.28 $ 0.38
From this analysis the key issues affecting the NAV of EPIC are the: Termination Payments payable to EPIM ($8.9 million) – the Termination Deed is signed and dated 13 February 2012 and the liability represents EPIC’s contractual obligation to pay (either in shares or cash) the Termination Payments to EPIM. We note that this liability has reduced following the Tranche 1 share issue. (potential) performance fee payable following the realisation of the Thames Water investment ($7.4 million) – Management estimate the liability in respect of this fee may fall somewhere between the range of nil and £3.9 million ($7.4 million). tax deductibility of the performance fees noted above ($980k) – Management continue to liaise with IRD in respect of this issue. value of Moto. This investment has an important bearing on the NAV of EPIC and is discussed in detail below. The Directors of EPIC subsequently negotiated an agreed notional value of 45 cents per share with EPIM. The negotiated issue price of 45 cents per share is more favourable to EPIC’s existing shareholders than the NAV assessed by Deloitte and the value based on the book value of assets and liabilities as at 31 January 2012 (the latest Financial Accounts available).
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5 Valuation To evaluate the pricing of the proposed transaction we have valued EPIC’s shares. We have valued EPIC using a sum of the parts approach, which involves valuing key investments separately. There are four methodologies commonly used for valuing businesses: capitalisation of earnings; discounted cash flow (‘DCF’) analysis; estimate of proceeds from an orderly realisation of assets; and industry rules of thumb. Each of these valuation methodologies is appropriate in different circumstances. A key factor in determining which methodology is appropriate is the actual practice commonly adopted by purchasers of the type of businesses involved. We have used a combination of capitalisation of earnings, DCF analysis and book values to value EPIC’s investments.
Capitalisation of earnings The capitalisation of earnings methodology requires an assessment of the maintainable earnings of the business and the selection of an appropriate capitalisation rate, or earnings multiple. This methodology is most appropriate where there is a long history of relatively stable returns and capital expenditure requirements are neither large nor irregular. In practice, it is often difficult to obtain accurate forecasts of future cash flows and therefore the capitalisation of earnings methodology is often used as a surrogate for the DCF methodology. Three commonly used approaches to the capitalisation of earnings methodology are the capitalisation of: EBITDA by an appropriate EBITDA multiple to obtain an enterprise value (which comprises the value of the enterprise’s debt and equity); EBIT by an appropriate EBIT multiple to obtain an enterprise value; or tax-paid profits at an appropriate price earnings (‘PE’) multiple to obtain the value of the subject business’ equity. PE multiples are commonly used in the context of the share market, however EBITDA and EBIT multiples are more commonly used in valuing whole businesses for acquisition purposes. The choice between EBITDA and EBIT multiples is usually not critical and typically gives broadly similar results.
Discounted cash flow It is a fundamental principle that the value of an asset or business is represented by its expected future cash flows, discounted to present value at a rate which reflects the risk inherent in those cash flows. This approach, referred to as the DCF methodology, is particularly suited to situations where a business is in a growth phase or requires significant additional investment to achieve its projected earnings. The DCF methodology requires considerable judgement in estimating future cash flows and the valuer generally places significant reliance on medium to long term projections prepared by management. The DCF valuation methodology can also be very sensitive to changes in underlying assumptions.
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Notwithstanding these limitations, DCF valuations are appropriate where current earnings are not representative of reasonable expectations of future earnings.
5.1 Moto valuation We have adopted the capitalisation of earnings and DCF methodologies in valuing Moto. We are not aware of any industry rules of thumb appropriate for valuing Moto’s business. Where a company is operating in a mature industry and has relatively stable earnings, the capitalisation of earnings methodology can provide a reliable means of valuing the company. Moto operates in a fairly mature industry. Due to its high leverage Moto’s equity value is highly sensitive to the earnings multiple and estimate of sustainable earnings. Given these circumstances, it is important that the result of our multiple based valuation is cross-checked to the DCF.
5.1.1 Capitalisation of earnings We set out at Appendix 3 a set of listed companies and their EBITDA multiples which we consider to be broadly comparable to Moto. We have adopted EBITDA multiples due to: PE multiples need to be applied to positive earnings, and are generally not appropriate for companies with significant leverage; and wide variances in depreciation and amortisation between some of the comparable companies, therefore we have used an EBITDA multiple to avoid any distortions caused by different accounting policies.
Earnings The table below shows the EBITDA as presented in the financial accounts for December 2011 quarterly report for Moto’s operating subsidiary.
Moto EBITDA Performance (£000) FY10 FY11
EBITDA 60,184 77,066 Amortisation (PCPs and deferred CP Plus costs) (435) (435) Loss on disposal of fixed assets 6,591 381 Management Incentive Plan 9,553 – Adjusted EBITDA 75,893 77,012
We note that businesses often experience costs associated with management incentive plans and disposal of assets in the ordinary course of business. So while it may be appropriate to measure management performance on adjusted EBITDA, care needs to be taken in arriving at sustainable earnings for the purpose of valuation. Based on the information above, we have adopted a range of £70 million to £75 million for sustainable EBITDA after allowing for potential future expenses from disposal of assets and management bonuses, while acknowledging that these expenses are unlikely to occur in every period.
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EBITDA multiple Comparable multiples are generally derived by using two sources of information: (1) earnings multiples based on the current share price of comparable trading companies; and (2) earnings multiples based upon recent transactions involving acquisitions of comparable companies. Given EPIC has a minority shareholding in Moto we have based our analysis on comparable trading multiples, which typically exclude a premium for control and which we consider directly comparable. We note that there are very few listed company’s which are directly comparable to Moto. Therefore, we have considered multiples for a number of listed companies which operate in industries which are only broadly comparable to Moto. Appendix 3 shows EBITDA trading multiples for listed companies that are broadly comparable to Moto. The table below summarises the median EBITDA multiples for companies which share characteristics similar to Moto.
Forecast EBITDA multiples Low Median High
Service stations with convenience stores 5.0x 6.0x 8.1x UK retail 4.5x 5.9x 7.5x Hospitality 5.2x 6.0x 8.8x Franchisee restaurants 3.8x 4.7x 6.4x Overall EBITDA multiple 3.8x 5.8x 8.8x
Observed trading multiples should be adjusted for various factors such as relative size, growth, profitability, risk and return on investment. There are no listed UK companies that operate in all of Moto’s market segments. However, we note that the following categories are broadly comparable: Service stations with convenience stores: none of the companies in this category are based in the UK, however their operations are broadly similar to Moto. We note that these companies generally don’t have the same hospitality and retail presence as Moto. UK retail: these companies are based in the UK, they range in size but are predominantly larger than Moto. While Moto has a significant retail presence, only a portion of its earnings are retail related. Hospitality (excluding Autogrill): these companies are based in the UK and have operations which are broadly comparable to Moto’s catering operations. We note that the capital expenditure (capex) requirements for some of these businesses are proportionally less than for Moto which leads to higher EBITDA multiples Hospitality (Autogrill): Autogrill SpA (‘Autogrill’) provides food, beverage and retail services for travellers in Italy and internationally. We consider Autogrill to be broadly comparable to Moto and note its EBITDA multiple is 5.6x. Franchisee restaurants: This category includes companies which operate a large number of franchised restaurants (e.g. Burger King or Starbucks). A key feature of these companies is that they do not own the brands underlying the stores they operate.
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Capitalisation of earnings valuation summary Interpretation of multiples is inherently subjective. In determining the appropriate multiple to apply to Moto’s normalised EBITDA we have made allowances for various factors such as relative size, growth, profitability, risk and return on investment. We have assessed an EBITDA multiple for Moto in a range of 6x to 8x, after taking into account the: trading EBITDA multiple for Autogrill is 5.6x; median EBITDA multiple of all the comparable listed companies is 5.8x; highest EBITDA multiple for the listed service stations with convenience stores is 8.1x; and we have erred on the side favourable to a seller of Moto (i.e. EPIC shareholders in the proposed transaction). Normally, we would not conclude on a multiple as high as 8x at the upper end of our valuation range for Moto but have done so to highlight the upper limit of what we consider Moto might trade at. Applying our assessed EBITDA multiple range of 6.0x to 8.0x to normalised EBITDA of £70 million to £75 million, results in a valuation range of nil to $32.4 million for EPIC’s interest (assuming Moto is a limited liability company with no parent guarantee), as set out in the table below.
Valuation range £million (except where otherwise stated) Low High
Sustainable EBITDA 70.0 75.0 EBITDA multiple 6.0x 8.0x Enterprise value 420 600 Net debt1 (510) (510) Equity value (90) 90 Proportion held by EPIC 17.49% 17.49% EPIC’s investment in Moto (£ millions) (15.7) 15.7 GBP:NZD exchange rate 0.4856 0.4856 EPIC’s investment in Moto ($ millions) (32.4) 32.4
Based on the capitalisation of earnings approach EPIC’s investment in Moto appears to have value up to $32.4 million at the high end of the range.
5.1.2 Discounted cash flow Key valuation parameters that we have used in our DCF valuation are set out below.
Forecast Any valuation by its very nature must attribute a current value that reflects the expected future financial performance of the subject business. Consequently, information regarding the expected future performance such as financial projections is vital to the valuation exercise. We have been provided with the FY12 budget and projections for FY13 to FY17 (together “financial projections”). The financial projections were prepared by Moto’s management team for the Moto’s executive committee. The financial projections are not publically available.
1 We have deducted net debt of $510 million, based on Moto’s debt balance adjusted for cash at bank. Cash at bank does not include cash which is required to be held onsite for normal trading.
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We have not reviewed the forecasts and projections prepared by Moto’s management in any way. However we have adjusted the forecast because the planned replacement capex in the financial projections is low relative to historical capex. We have only adjusted for capex and have otherwise adopted the financial projections, which include aggressive growth projections, which we consider would be unlikely to be adopted by a prospective purchaser of Moto.
Terminal Value Assumptions Terminal value is calculated by assuming terminal year unlevered free cash flows grow in perpetuity at the terminal growth rate. We have adopted a terminal growth rate of 2.0%, which is in line with current inflation forecasts for the UK.
WACC Based on our analysis we have estimated Moto’s post-tax nominal WACC to be in a range of 9.2% to 10.2%. For the purpose of our valuation we have adopted a WACC of 9.7%, being the midpoint of our assessed range. Our WACC estimate has been determined as follows: D E WACC R (1 T ) R d c D E e D E where:
Rd = Pre-tax cost of debt = 9.0% to 10.0%, based on Moto’s current senior debt interest rates. This range is less than Moto’s marginal cost of borrowing, however we consider this reasonable when combined with reduced leverage in the long term.
Tc = Marginal corporate tax rate = 22% based on the long run expectation for UK corporate tax rates. D / (D + E) = Target gearing (where E represents market capitalisation) = between 50% and 60%, based on our review of broadly comparable listed companies. This is equivalent of D / E of between 100% and 150%.
Re = Cost of equity = 11.3% to 13.8% We have determined the cost of equity using the Capital Asset Pricing Model adjusted to include a size premium, which uses the following formula:
Re R f e (Rm R f ) SCRP where:
Rf = Risk free rate = 3.3% (30 year UK government bond yield)
a = Asset Beta = 0.50 to 0.60 (based upon a review of the betas of comparable companies set out at Appendix 3)
e = Equity Beta = a (1+D/E) = 1.00 to 1.50
Rm- Rf = Expected excess return, after investor taxes, on the market portfolio of equity investments = 5.0% for the UK SCRP = Small company risk premium = 3.0% based on the 2011 Ibbotson Valuation Yearbook.
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DCF valuation summary The results of the DCF valuation are summarised below:
DCF (£million except where otherwise stated)
Enterprise value 769 Net debt (510) Equity value 259
Proportion held by EPIC 17.49% Minority discount 15.00%
EPIC’s investment in Moto (£ millions) 38.5
GBP:NZD exchange rate 0.4856
EPIC’s investment in Moto ($ millions) 79.3
We have applied a minority discount of 15%. Normally we would expect a discount of 20% to 25% for a small parcel of shares, but have adjusted this discount to a lower level to account for: no shareholder having control over Moto as other shareholders are other pension and infrastructure funds; EPIC’s 17.49% shareholding allows it more control than a very small parcel of shares (e.g. 1,000 shares held by a retail investor); and EPIC’s representation on Moto’s board. The DCF valuation approach indicates a value for EPIC’s investment in Moto of $79.3 million, based on Moto managements’ EBITDA projections (which as noted, include aggressive growth projections).
5.1.3 Moto valuation summary Our valuation results for EPIC’s investment in Moto are summarised below.
Low High Capitalisation of earnings nil $32.4 million Discounted cash flow $79.3 million
Based on the two valuations assessments, we consider EPIC’s investment in Moto to be option-like, with value if management can achieve the aggressive projected growth and minimal value otherwise. This makes the valuation of Moto inherently uncertain and credible valuation assessment lies in a very wide range. We note that if EPIC were to attempt to sell its investment in Moto at the date of the Report it would be more likely to achieve a valuation in the range assessed using valuation multiples ($nil to $32.4 million). We do not consider it likely that the business could be sold for the value based on the DCF valuation at the current time, as any prospective purchaser will be likely to revise down Moto’s managements projections in due diligence. For the purpose of this report, we have assessed a very wide valuation range for EPIC’s investment in Moto between $32.4 million and $55 million.
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Our range has been determined as follows: Low-end of the range: is based on the high-end of the valuation range assessed using the capitalisation of earning approach. High-end of the range: is based on the mid-point of the high-end of the valuation range assessed using multiples and the value assessed using the DCF approach. This assumes a purchaser would be willing to factor in an element of the potential growth in the value of Moto although not to the full extent of the aggressive financial projections prepared by Moto management. We consider this represents a relatively optimistic scenario and hence have adopted it at the high-end of our range.
5.2 Valuation of EPIC’s other investments The Arqiva and Wales & West investments have a combined book value of $4 million. The NAV of EPIC is not sensitive to the assessed value of these relatively small investments. We note the book value of the investments at 31 January 2012 largely represents their assessed fair value in the 30 September 2011 Interim Accounts (also $4 million). EPIC had an investment bank undertake a portfolio valuation in December 2011, which arrived at a value for these investments of $3.79 million and received a highly speculative and highly conditional offer from a third party to acquire these investments for $3.62 million. We have assessed the value of these investments between $3.6 million to $4.0 million, although note that we have not undertaken a detailed valuation.
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5.3 EPIC valuation summary Set out below is the assessment of EPIC’s share value prior to issuing shares as part of the Proposed Transaction.
KordaMentha ($ millions) Low High
Cash 9.1 9.1
EPIM debt (5.8) (5.8)
Thames Water performance fee (7.4) –
Deferred tax asset 0.1 1.1
Miscellaneous amounts (0.1) 0.0
Investments Moto 32.4 55.0
Arqiva and Wales & West 3.6 4.0
Net assets 32.0 63.3
Shares outstanding (millions) 141.6 141.6
Net asset per share ($) 0.23 0.45
Our analysis provides a very wide NAV range of 23 cents to 45 cents per share. We understand that the last parcel of shares traded in EPIC was sold at a price of 23 cents per share in early May. However, we have placed limited reliance on this transaction, which was for a small parcel of shares and is not necessarily representative of market value. The share price implied by the Proposed Transaction (42 cents per share when adjusted for the counter-factual of paying in cash with deferred settlement terms) is at the high-end of the range that we have assessed is appropriate for EPIC’s shares.
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6 Merits of Proposed Transaction The Takeovers Code requires the independent adviser to form an opinion as to the merits of the Proposed Transaction and in doing so to take into consideration issues wider than just valuation. In this section we consider the Proposed Transaction; potential outcomes of the Proposed Transaction; fundamentals of EPIC; and our assessment of value of EPIC.
6.1 The Proposed Transaction EPIC’s Management Agreement terminated at 5pm on 13 February 2012. Pursuant to the Termination Deed, EPIC agreed to make total payments to EPIM (the manager) of $8.9 million. The Termination Payments will be satisfied by EPIC: issuing shares to EPIM at an agreed notional NAV of 45 cents per share; and in respect of any outstanding balance after the issue of shares, by payment to EPIM in cash. The shares are proposed to be issued in two Tranches: Under Tranche 1 ($2.7 million), EPIC issued 5,960,000 shares to EPIM in March 2012 to bring EPIM and its associate parties up to a 19.9% shareholding in EPIC; and Under Tranche 2 ($6.2 million), an additional 13,707,687 shares are proposed to be issued, subject to the approval of EPIC’s shareholders in accordance with rule 7(d) of the Takeovers Code (this is the proposed transaction). EPIC is seeking shareholder approval to issue the Tranche 2 shares. The Report has been prepared to assist those persons who may vote to approve the allotment of shares to consider the merits of the proposed transaction. EPIC and EPIM have already agreed the $8.9 million of Termination Payments to terminate the Management Agreement. We understand from EPIC’s lawyers that EPIC’s shareholders do not need to give their approval for this transaction. The Report does not consider the merits of the transaction to terminate the Management Agreement only the merits of allotting shares under Tranche 2 in consideration for EPIC meeting its liability to pay the Termination Payments.
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6.2 Potential outcomes of the Proposed Transaction
6.2.1 Shareholders approve the Proposed Transaction Following the issue of Tranche 1, shareholders associated with EPIM currently control 19.9% of EPIC. If shareholders approve the Tranche 2 issue, parties associated with EPIM will control 27.0% of EPIC, as illustrated below:
Pre Tranche 2 shares Post Tranche 2 shares Shares % Shares %
TSL and EPIM 28,182,372 19.9% 41,890,059 27.0% Others 113,462,437 80.1% 113,462,437 73.0% Total 141,644,809 100.0% 155,352,496 100.0%
6.2.2 Shareholders reject the Proposed Transaction If shareholders do not accept the Proposed Transaction, then the Termination Deed provides for the $6.2 million balance of the Termination Payments to be paid in cash. If this occurs, then $2.9 million is due within 90 days and the balance ($3.3 million) on the earlier of: the date that is five years after the shareholders meeting date; the date upon which EPIC realises its investment in Moto; or a date specified by EPIC. Any cash amounts to be paid by EPIC after 90 days (i.e. $3.3 million) accrue interest at the Reuters rate. We have not reviewed EPIC’s ability to meet its obligations in cash in detail but note that EPIC had $9.1 million of cash at January 2012 and a contingent liability in respect of the Thames Water performance fee of up to $7.4 million. In the event that EPIC has to pay this amount in full it would not have sufficient funds to pay the Termination Payments from available cash. It may be difficult for EPIC to raise debt given it has no cash earnings (Moto does not pay a dividend) and given Moto’s debt position. It is uncertain if EPIC could raise funds to pay the Termination Payments, in the event shareholders do not accept the Proposed Transaction. We have assessed the NPV of the $6.2 million liability payable in cash at $5.8 million, after taking into account the deferred settlement terms. The NPV of $5.8 million divided by the number of shares proposed to be issued under Tranche 2 arrives at a value per share of 42 cents. In order for the proposed transaction to be reasonable, on a valuation basis, we would expect the value of EPIC’s shares being issued to EPIM to be less than or equal to 42 cents per share.
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6.3 EPIC’s Fundamentals EPIC invests in infrastructure assets and entities that own or operate infrastructure assets. EPIC has cash, one substantial investment in a minority shareholding in Moto, a non-dividend paying and heavily indebted UK motorway service operator; and two other relatively small investments in Arqiva and Wales & West. EPIC also has reported liabilities and contingent liabilities in respect of performance fee obligations for Moto and its sale of shares in Thames Water. At 31 January 2012, EPIC had reported net assets of $44 million (32 cents per share), represented primarily by cash and $38 million of investments.
6.4 Pricing and valuation The Directors of EPIC and EPIM engaged Deloitte to review the reasonableness of the assumptions, methodology and accuracy of the calculations used to assess the NAV of EPIC. Deloitte confirmed that the calculations were reasonable. We have undertaken our own valuation analysis, which is summarised below:
Low High
Net equity value ($ millions) 32.0 63.3
Shares outstanding (millions) 141.6 141.6
Net equity value per share ($) 0.23 0.45
For the purposes of the Report, we have assessed a valuation range for EPIC’s equity in a very wide range between 23 cents and 45 cents per share. Key points to note in connection with the valuation range that we have assessed for the purposes of the Report are: EPIC’s reported NAV of 32 cents per share is near the mid-point of our assessed range; at the low-end of the range we have valued Moto at $32.4 million using the high-end of the valuation range assessed using valuation multiples; at the high-end of our range we have assumed the: o contingent liability related to the Thames Water performance fee will be settled at $nil cost to EPIC; and o value of EPIC’s investment in Moto at $55 million. This is between the high-end of the multiples based valuation and the DCF valuation. We note that the DCF valuation for Moto relies on aggressive growth assumptions that we consider are likely to be discounted by a prospective purchaser of Moto. We consider it optimistic that were EPIC to sell its investment in Moto, as at the date of the Report, it would be able to realise a value as high as $55 million. The share value in the Proposed Transaction is set at a notional amount of 45 cents per share. We have determined the NPV of the counter-factual scenario of paying the outstanding Termination Payments in cash (on deferred terms) at 42 cents per share. The share price implied by the Proposed Transaction (42 cents per share) is at the high-end of the range that we have assessed for EPIC’s shares.
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6.5 Concluding remarks We have assessed a very wide valuation range for EPIC between 23 cents and 45 cents per share. We note that this range represents our estimate of value for 100% of EPIC and we would not expect minority parcels to necessarily trade at this level. Key benefits of the Proposed Transaction for EPIC’s shareholders include: that the obligation to pay outstanding Termination Payments will be met by allotting shares, rather than cash. In the event that EPIC has to pay its contingent obligation in respect of the Thames Water performance fee in full it would not have sufficient funds to pay the Termination Payments from available cash. It may be difficult for EPIC to raise debt given it has no cash earnings (Moto does not pay a dividend) and given Moto’s debt position. It is uncertain if EPIC could raise funds to pay the Termination Payments, in the event shareholders do not accept the Proposed Transaction; and the allotment of shares is at a price which is at the high-end of the valuation range assessed in the Report. The issue of shares will have a diluting effect on existing shareholdings. EPIM and TSL will together control 27% of EPIC’s shares, which will allow them to block any special resolutions and increase the probability that they could pass and block ordinary resolutions. Acceptance or rejection of the Proposed Transaction is a matter for individual shareholders based on their own views as to value and future market conditions, risk profile, liquidity preference, portfolio strategy, tax position and other factors. In particular, taxation consequences will vary widely across shareholders. Shareholders will need to consider these consequences and, if appropriate, consult their own professional adviser.
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Appendix 1: Sources of information
Documents relied upon Documents relied upon include, but are not limited to, the following: EPIC’s Annual Report 2010 and 2011 and Interim Report September 2011; EPIC shareholder notices; Bell Capital Partners Moto Strategic Review December 2011; PGC website: http://www.pgc.co.nz/; Moto website: http://www.moto-way.com/; Report prepared by Deloitte; EPIC management accounts; Moto financial projections; Capital IQ website www.capitaliq.com; Financial statements of the comparable companies set out in Appendix 4; and Other publically available information. We have also had discussion with some of EPIC’s Directors and management executives in relation to the nature of the business operations, and EPIC’s specific risks and opportunities for the foreseeable future.
Reliance upon information In forming our opinion we have relied upon and assumed, without independent verification, the accuracy and completeness of all information that was available from public sources and all information that was furnished to us by EPIC and its advisers. We have no reason to believe any material facts have been withheld. We have evaluated that information through analysis, enquiry and examination for the purposes of forming our opinion but we have not verified the accuracy or completeness of any such information. We have not carried out any form of due diligence or audited the accounting or other records of EPIC. We do not warrant that our enquiries would reveal any matter that an audit, due diligence review or extensive examination might disclose.
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Appendix 2: Qualifications and declarations
Qualifications KordaMentha is an independent New Zealand Chartered Accounting practice, internationally affiliated with the KordaMentha group. The firm has established its name nationally through its provision of professional financial consultancy services with a corporate advisory and insolvency emphasis, and because it has no business advisory, audit or tax divisions, avoids any potential conflicts of interest which may otherwise arise. This places the firm in a position to act as an independent adviser and prepare independent reports. The persons responsible for preparing and issuing this report are Grant Graham (BCom, CA); Shane Bongard (BCom (Hons)); Martin Burrows (BABA, CA) and Shaun Hayward (BCom and BProp). All four have significant experience in providing corporate finance advice on mergers, acquisitions and divestments, advising on the value of shares and undertaking financial investigations.
Disclaimers It is not intended that this report should be used or relied upon for any purpose other than as an expression of KordaMentha’s opinion as to merits of the proposed transaction. KordaMentha expressly disclaims any liability to any EPIC equity security holder that relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose. This report has been prepared by KordaMentha with care and diligence and the statements and opinions given by KordaMentha in this report are given in good faith and in the belief on reasonable grounds that such statements and opinions are correct and not misleading. However, no responsibility is accepted by KordaMentha or any of its officers or employees for errors or omissions however arising (including as a result of negligence) in the preparation of this report, provided that this shall not absolve KordaMentha from liability arising from an opinion expressed recklessly or in bad faith.
Indemnity EPIC has agreed that, to the extent permitted by law, it will indemnify KordaMentha and its partners, employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of this report. This indemnity does not apply in respect of any negligence, misconduct or breach of law. EPIC has also agreed to indemnify KordaMentha and its partners, employees and officers for time incurred and any costs in relation to any inquiry or proceeding initiated by any person except where KordaMentha or its partners, employees and officers are guilty of negligence, misconduct or breach of law in which case KordaMentha shall reimburse such costs.
Independence KordaMentha does not have at the date of this report, and has not had, any shareholding in, or other relationship, or conflict of interest with EPIC that could affect its ability to provide an unbiased opinion in relation to this transaction. KordaMentha has been confirmed as being free of conflict by the Takeovers Panel for the purposes of the Takeovers Code. KordaMentha will receive a fee for the preparation of this report. This fee is not contingent on the success or implementation of the Proposed Transaction or any transaction complementary to it. KordaMentha has no direct or indirect pecuniary interest or other interest in this transaction.
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We note for completeness that a draft of this report was provided to EPIC and its legal advisers, solely for the purpose of verifying the factual matters contained in the report. While minor changes were made to the drafting, no material alteration to any part of the substance of this report, including the methodology or conclusions, were made as a result of issuing the draft.
Consent KordaMentha consents to the issuing of this report, in the form and context in which it is included, in the information to be sent to EPIC shareholders. Neither the whole nor any part of this report, nor any reference thereto may be included in any other document without the prior written consent of KordaMentha as to the form and context in which it appears.
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Appendix 3: Comparable companies
Forecast Capitalisation Company Country EBITDA Debt/Equity Asset Beta (£ millions) Multiple
Service stations with convenience stores Statoil Fuel & Retail Norway 1,644 6.3x 30% n/a Petrol d.d. Ljubljana Slovenia 319 8.1x 137% 0.20 Concern Galnaftogaz Ukraine 151 5.6x 112% 0.30 TravelCenters of America USA 91 5.0x 200% 0.56 Service stations median 6.0x 125% 0.30
UK retail Tesco UK 25,767 6.3x 32% 0.53 Wm Morrison UK 6,791 5.9x 21% 0.36 J Sainsbury UK 5,733 5.9x 38% 0.50 Marks & Spencer UK 5,534 5.7x 37% 0.62 Next UK 4,969 7.5x 12% 0.72 WH Smith UK 663 4.5x 26% 0.55 Halfords UK 543 5.7x -8% 0.70 Lookers UK 242 7.3x 66% 0.98 Retail median 5.9x 29% 0.59
Hospitality
Compass Group UK 11,984 8.8x 7% 0.62 Autogrill Italy 1,558 5.6x 80% 0.68 Restaurant Group UK 527 6.0x 8% 0.82 Greggs UK 485 5.2x -4% 0.58 Prezzo UK 156 6.6x 0% 0.97 Hospitality median 6.0x 7% 0.68
Hospitality – franchisees
AmRest Poland 272 6.4x 54% 0.41 Restaurant Brands NZ 101 5.1x 6% 0.44 Carrols Restaurant Group USA 73 4.0x 216% 0.64 Ibersol1 Portugal 66 4.7x 35% 0.62 Collins Foods Australia 59 4.0x 104% n/a Franchisees median 4.7x 54% 0.53
Overall median 5.8x 33% 0.60
Statoil Fuel & Retail Statoil Fuel & Retail ASA operates as a road transportation fuel retailer. It offers energy products, such as LPG, heating oil, and kerosene; marine fuel comprising marine gasoil and heavy fuel; and chemicals. It also provides aviation fuels, including kerosene grade jet fuel and gasoline fuel to various air carriers at approximately 85
1 Comparable company multiples for Ibersol are historical.
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airports; and aviation products and services to the Norwegian defence forces. It serves customers in Norway, Sweden, Denmark, Poland, Latvia, Lithuania, Estonia, Russia, and internationally.
Petrol d.d. Ljubljana Petrol d.d. Ljubljana engages in the trading of petroleum products; and sale of supplementary merchandise and services in Slovenia and internationally. Its products include diesel, heating oil, aviation fuels, fuel oil, bitumen coal, lubricants, chemical products, liquefied petroleum gas, natural gas, and tyres. It provides energy services consisting of energy supply, systems services, financing, planning and construction of new plants, project leadership, supervision of operations, servicing, and maintenance and repair, as well as motivation of energy consumers; and operates an oil laboratory that offers testing and analysing for petroleum products, lubricants, and chemical products. Its service station network comprises 313 service stations in Slovenia, 79 in Croatia, 38 in Bosnia and Herzegovina, 5 in Serbia, 3 in Kosovo, and 3 in Montenegro.
Concern Galnaftogaz OJSC Concern Galnaftogaz engages in the retail and wholesale of petroleum products in Ukraine. It operates approximately 340 filling stations and is also involved in the retail of consumer goods and services through a network of 280 convenient stores at its filling complexes and outside.
TravelCenters of America TravelCenters of America LLC operates and franchises travel centers primarily along the United States interstate highway system. It offers diesel fuel and gasoline; operates full service restaurants under the Iron Skillet, Country Pride, Buckhorn Family Restaurants, and Fork in the Road brands; and operates quick serve restaurants primarily under the brand names of Arby's, Burger King, Pizza Hut, Popeye's Chicken & Biscuits, Starbuck's Coffee, Subway, and Taco Bell. It operates and franchises approximately 230 travel centres in 41 states and in Canada.
Tesco Tesco plc operates as a grocery retailer in the United Kingdom. It operates stores that primarily offer food products, as well as general merchandise, clothing products, and electrical products. Tesco also provides telecom, retail banking, financial, and insurance services. It operates approximately 5,000 stores.
Wm Morrison Wm Morrison Supermarkets plc engages in the retail sale of grocery products in the United Kingdom. It offers a range of products, including groceries; fresh and frozen food products; beers, wines, and spirits; health and beauty products; household products; baby products; entertainment; and meat products. It also involves in the whole sale of produce; manufacturing and distribution of fresh food products; processing of fresh meat; packaging of produce; baking operations; and development and investment of properties. It operates 455 stores.
J Sainsbury J Sainsbury plc engages in retailing, financial services, and property investment businesses in the United Kingdom. It operates a range of store formats, including convenience and supermarkets that offer various food, and complementary non-food products and services primarily under the Sainsbury’s brand. It also provides an Internet-based home delivery shopping service. It operates a total 557 supermarkets and 377 convenience stores. It holds 304 freehold and long leasehold properties and 41 stores in property joint ventures.
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Marks and Spencer Marks and Spencer Group plc engages in retailing clothing, food, and home products in the United Kingdom and internationally. Its clothing products include womenswear, lingerie, menswear, school wear, and kids wear; and shoes and slippers, as well as offers accessories, handbags and purses, bags and briefcases, ties, jewellery, and beauty products. It markets its products through operating 705 stores in the United Kingdom and 361 wholly owned, partly owned, and franchised stores internationally in 42 countries, as well as through online.
Next Next plc operates retail stores in Europe, the Middle East, and Asia. It is involved in retailing clothes, footwear, and accessories for women, men, and children, as well as offers a range of home products. It operates a chain of approximately 500 stores in the United Kingdom and Eire under the Next Retail brand name; and approximately 180 stores under the Next International brand name in continental Europe, Scandinavia, Russia, the Middle East, India, and Japan.
WH Smith WH Smith plc operates retail stores under the Travel and High Street names primarily in the United Kingdom. It sells newspapers, magazines, books, confectionery, and impulse products, as well as entertainment products. It also offers a range of books, stationery, magazines, and gifts through whsmith.co.uk; and personalized cards and gifts through funkypigeon.com.
Halfords Halfords Group plc engages in retailing automotive, leisure, and cycling products. It offers car maintenance products, including car parts, servicing consumables, workshop tools, and body repair equipment; and car enhancement comprising in-car entertainment systems, cleaning products, accessories, interior and exterior car styling products, navigation systems, and alloy wheels. It also sells new cycles; cycle accessories, such as lights, locks, and cycle safety helmets; car travel equipment, which include roof boxes and cycle carriers; travel accessories that comprise batteries, safety equipment, and child car seats; and outdoor leisure equipment. It sells its products through operating 473 stores in the United Kingdom and the Republic of Ireland.
Lookers Lookers plc engages in the sale, hire, and maintenance of motor vehicles and motorcycles in the United Kingdom. It sells new and used cars, tires, oil, franchise parts, and accessories, as well as offers vehicle servicing and repair. It also engages in arranging vehicle financing and related insurance products. It operates 119 motor franchise dealerships representing 33 marques in 71 sites.
Compass Group Compass Group plc provides contract foodservice and support services to its clients. It offers various foodservice solutions ranging from free-flow restaurants to formal dining, grab and go deli and café outlets to hospitality services, and vending; and a range of support services, such as cleaning, building operations and maintenance, business and office, logistics and transport, outdoor, project management, and security. Compass Group was the previous owner of Moto, which it sold to a consortium led by Macquarie Bank in 2006.
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Autogrill Autogrill S.p.A. provides food and beverage, and retail services for travelers in Italy and internationally. It offers food and drinks; and everyday items, such as newspapers and magazines, tobacco products, toys, and other food and nonfood items, as well as fuel principally in airports, motorway rest stops, and railway stations under concession contracts, as well as in high street, shopping centers, trade fairs, museums, and other cultural facilities. It manages approximately 5,300 points of sales in 1,200 locations.
Restaurant Group The Restaurant Group plc operates restaurants and pub restaurants primarily in the United Kingdom. It operates 400 restaurants and pub restaurants under the Frankie & Benny’s, Chiquito, Garfunkel’s, Home Counties, and Brunning & Price brand names in airports.
Greggs Greggs plc operates as a bakery retailer in the United Kingdom. It offers fresh bakery goods, sandwiches, drinks, and savories, as well as coffee, buns, porridge pots, and doughnuts. It operates approximately 1,570 shops.
Prezzo Prezzo plc engages in the operation of 184 Italian restaurants under the Prezzo brand in the United Kingdom.
AmRest AmRest Holdings Spólka Europejska engages in the operation of approximately 680 quick service and casual dining restaurants, mainly in Europe. It operates the Kentucky Fried Chicken, Pizza Hut, Burger King, and Starbucks brand restaurants in Poland, the Czech Republic, Hungary, Russia, Serbia, Croatia, Bulgaria, and Spain, as well as Applebee’s brand restaurants in the United States. It also operates its own brands on the basis of franchise agreements and through company owned restaurants in Spain and France.
Restaurant Brands Restaurant Brands New Zealand Limited owns and operates 89 KFC, 82 Pizza Hut, and 37 Starbucks Coffee quick-service and take-away stores in New Zealand.
Carrols Carrols Restaurant Group Inc. owns and operates 298 Burger King, 91 Pollo Tropical and 158 Taco Cabana quick-casual and quick-service restaurants in 17 states in the United States.
Ibersol Ibersol S.G.P.S. S.A. owns and operates a network of restaurant units primarily in Portugal and Spain. It operates 395 company-owned restaurant units and 24 franchised restaurant units under the Pizza Hut, Pasta Caffé, Pans & Company, Kentucky Fried Chicken, Burguer King, O’ Kilo, Bocatta, Café Sô, Quiosques, Pizza Móvil, Flor d’Oliveira, Sol, Sugestões e Opções, José Silva Carvalho, Catering, and Solinca Eventos e Catering brand names.
Collins Foods Collins Foods Limited owns and operates 121 KFC and 27 Sizzler restaurants in Australia.
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