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European Autumn Update November 2012 Thierry Monjauze Managing Director [email protected] Julien Darmon Managing Director [email protected] Red Norrie Managing Director [email protected] Francois Morin Director [email protected] 63 Brook Street London W1K 4HS United Kingdom Phone: +44 20 7518 8900 This report has been prepared by Harris Williams & Co. Ltd a registered broker-dealer and member of FINRA and SIPC, and Harris Williams & Co. Ltd, which is authorised and www.harriswilliams.com regulated by the Financial Services Authority (FRN #540892). Harris Williams & Co. is a trade name under which Harris Williams LLC and Harris Williams & Co. Ltd conduct business. Quarterly Quick Read GDP2 Manufacturing Confidence3 Consumer Confidence3 Consumer Prices3 European Economic (0.3%) +2.7% +8.0% +7.1% Environment1 Business Diversified Energy & Healthcare & Transport & ADG4 Consumer TMT6 Services Industrials5 Power Life Sciences Logistics7 Last Quarter 5.0% 7.9% 4.3% 4.6% 8.1% 8.0% 5.3% 6.6% European Equity Market8 Last Year 21.7% 21.3% 14.3% 14.2% 10.5% 18.1% 17.3% 6.9% Last 3 Years 55.7% 28.9% 28.1% 19.9% (0.4%) 8.0% 35.4% 3.2% European M&A Deal Volume (42.9%) (27.1%) (4.2%) (17.7%) (27.5%) (13.5%) (4.7%) 11.5% Activity9 Inbound M&A Deal Volume (50.0%) (57.1%) (33.3%) (25.0%) (33.3%) (20.0%) 11.1% 125.0% to Europe9 • The European M&A market declined further during the third quarter, apparent across most sectors, with Business Services M&A and Aerospace & Defense declining the most in terms of transaction volume Environment • During the quarter, inbound acquisitions from non-European buyers represented 12.2% of total European transactions, with North America accounting for 76.1% of those inbound transactions • EADS’ proposed takeover of BAE Systems has been rejected by regulators in Germany – BAE seeking to distribute capital to shareholder as an alternative. Move by The Carlyle Group to takeover Chemring abandoned ADG • Strong commercial aircraft orders supporting investment activity in the sector; early signs of growth in the business aviation sub-sector • The quarter saw strong performance from testing and inspection group Intertek, however, witnessed challenges for staffing players including Michael Page amidst a challenging employment environment in Europe Business Services • There has been continued M&A activity in the legal services sector, driven by the introduction of the Legal Services Act., which will foster greater competition • Nestle has continued to show strong revenue growth and has issued a four year bond at a record low coupon Consumer • Fundamentals continue to support a robust acquisition environment as demonstrated by several large European-led deals (Nestle, Heineken, Reckitt Benckiser and Bayer) and continued global strategic interest in the European food market (Mizkan, Hain Celestial, McCain Foods) • Industrial corporates have significant war chests of cash to be used on acquisitions, however, are being more selective on Diversified targets and more disciplined on prices Industrials • Uncertainty over the EU and a potential China slowdown have tempered multiples of publicly-traded groups • Surging energy prices are driving activity for producers and providers of oilfield products and equipment Energy & Power • National Oilwell Varco has continued its expansion with the acquisition of Robbins & Myers Healthcare & • The top ten pharmaceutical companies are forming Transcelerate Biopharma to standardise clinical trial standards Life Sciences • European M&A activity has suffered from the continuing impact of austerity measures across the Eurozone • Digital media companies have dominated VC investment in Q3 as investors target video, cloud, social and mobile TMT • The European Commission has identified cloud computing to generate about €1 trillion by 2020 across Europe Transport & • Hertz Global Holdings announced a deal to merge with Dollar Thrifty worth $2.3 billion Logistics • Value of European inbound M&A increased substantially as a result of Toyota Tsusho Corp.’s acquisition of CFAO in France Notes: For the purposes of this Quarterly Update, Europe is defined as: United Kingdom, Eire, France, DACH (Germany, Austria, Switzerland), Spain, Italy, Benelux (Belgium, The Netherlands, Luxembourg) and Scandinavia (Denmark, Norway, Sweden and Finland); Evolution calculation based on the quarter finishing 30 September, 2012 (1) For the countries based in the EU27; (2) GDP growth for Q2, 2012; (3) PMI, CCI and CPI quarterly growth shown for May-August, 2012; Building Products and Paper & Packaging; (4) Aerospace, Defense & Government Services; (5) Also includes (6) Telecom, Media & Technology; (7) Also includes Speciality Distribution; 1 (8) For all listed companies based in the countries mentioned above and with a market cap greater than €50m; (9) Change quarter over quarter European Economic Climate • European GDP contracted for the second successive quarter by 0.3% y-o-y in Q3 2012 • According to the Office for National Statistics, UK GDP grew by 1.0% in Q3 2012 and the economy has emerged from a double-dip recession • S&P slashed forecasts for the Eurozone, estimating further decline in Q4 2012, stagnation in 2013 and a return to growth in 2014 • Despite the depressed climate, corporate profits in the financial, energy & power, TMT and chemical sectors have improved Quarterly Real GDP Growth (% Y-o-Y for EU-27) 6% Key Countries (Q3 13E) UK +1.6% 4% Sweden +1.4% 2% NTM Germany +0.6% France (0.2%) 0% Netherlands (0.3%) Italy (1.5%) (2%) Spain (2.0%) (4%) (6%) Q1 08 Q4 08 Q3 09 Q2 10 Q1 11 Q4 11 Q3 12 Q2 13E Q1 14E Q4 14E Q3 15E Source: Eurostat • Eurozone downturn continued in Q3 2012 with manufacturing and services sector outputs declining • Business confidence within the EU remains depressed with the Composite Purchasing Managers Index decreasing to 45.7 in October, meaning that the EU has been contracting (i.e. below 50) for the last ten months • Consumer confidence also remained bleak in October with the Consumer Confidence Indicator falling 1.1 points over the last 3 months • Consumer Price Index increased by 5.2% in October over the last 3 months • Annual inflation rate in the EU was recorded at 2.5% in October 2012 • European exports have been boosted by the weak Euro but net growth is expected to halt as global trade slows down European Manufacturing Confidence European Consumer Confidence 10% 60 20 10% 10 5% M) 5% 55 - o - 0 0% 0% 50 (10) (5%) (20) (10%) PMI Index Value Index PMI (5%) 45 Change in PMI (M PMI Change in (30) (15%) (%) Index PriceConsumer Consumer Confidence Indicator ConfidenceConsumer (10%) 40 (40) (20%) Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 (1) (2) (3) Change (M-o-M %) Eurozone PMI CCI CPI Y-o-Y % Source: Bloomberg, Markit Economics, S&P Capital IQ Notes: (1) Purchasing Managers’ Index – A figure above 50 indicates economic growth, and below 50 indicates decline; (2) Consumer Confidence Index; (3) Consumer Price Index 2 European M&A Environment Market Observations • The European M&A market contracted 10.7% in the past quarter, with the ADG and Energy and Power sectors exhibiting the largest declines in activity • Annual senior loan volume dropped in the third quarter to circa €4.0 bn, down from €7.4 bn in the previous quarter • The average purchase multiple1 for deals larger than €1.0 bn was 8.9x EBITDA for the last twelve months ending in September, whilst deals larger than €500 million had an average multiple of 9.1x EBITDA • Equity contribution2 averaged at 53% for the last twelve months ending October 2012, compared to 47% during 2011 Source: S&P Leveraged Commentary & Data Notes: (1) Multiple of pro-forma trailing EBITDA, where pro-forma figures are available; (2) Equity contribution including retained equity/vendor financing and contributed equity Mid-Market M&A Activity – By Sector 1,600 Q3 12 Change of 1,400 Sector Q3 12 over Breakdown Q3 11 1,200 ADG 0.7% 14.3% 1,000 Energy & Power 2.6% (14.7%) Transportation & Logistics 7.9% (9.4%) 800 Healthcare 7.6% (30.3%) 600 Business Services 12.0% (25.0%) Number ofTransactions Number 400 Diversified Industrials 14.0% (33.5%) 200 TMT 29.8% (6.3%) Consumer 25.3% (21.1%) 0 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Total 100.0% (19.5%) Source: S&P Capital IQ Note: Includes closed M&A transactions of majority stakes only, where deal vale was undisclosed or between €25m – €650m, within United Kingdom, Eire, France, DACH (Germany, Austria, Switzerland), Spain, Italy, Benelux (Belgium, the Netherlands, Luxembourg) and Scandinavia (Denmark, Norway, Sweden and Finland) Buyer Segmentation Q3 20121 Transactions by Target Country 100% 5% 6% Italy 5% 6% 9% 12% 7% Spain 80% 14% 15% Benelux2 1,096 60% 15% 17% Mid-Market France Transactions 19% 40% 15% DACH3 88% 4 20% Scandinavia 33% 33% UK & Eire Strategics Financials 0% Q2-12 Q3-12 Source: S&P Capital IQ Notes: (1) Strategic buyers may include portfolio company of private equity groups (2) Benelux defined as Belgium, the Netherlands and Luxembourg; (3) DACH 3 defined as Germany, Austria, Switzerland; (4) Scandinavia defined as Denmark, Norway, Sweden and Finland European Inbound M&A Environment Market Observations • International inbound M&A volume declined by 10.7% in the third quarter with 134 transactions • The ADG and TMT sectors attracted the highest level of international inbound M&A investment whilst Transportation and Logistics exhibited the largest increase in international interest, up 125% compared to the previous quarter • North American groups dominated non-European buyers closing 102 transactions during the quarter Acquisitions by Non-European Buyers1,2 200 10,000 8,000 150 m) 6,000 € 100 4,000 Deal Value ( ValueDeal 50 Number ofTransactions Number 2,000 0 0 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 International Activity by Number International Activity by Value Non-European Buyers by Country Q3 121,2 Africa & Middle East 5% Asia (excl.