Corticeira Amorim

COLEGIO UNIVERSITARIO DE ESTUDIOS FINANCIEROS BACHELOR’S DEGREE IN BUSINESS ADMINISTRATION

CORTICEIRA AMORIM

PRIVATE EQUITY

Author: Borja de Tavira de Gregorio

Tutor: Ramón Arocena Soria

MADRID, ABRIL DE 2020

INDEX

1. INTRODUCTION ...... 3 2. SCREENING CRITERIA ...... 3 2.1 ACTIVITY ...... 3 2.2 HISTORY ...... 5 2.3 OWNERSHIP STRUCTURE ...... 6 2.4 TOP LINE GROWTH ...... 7 2.5 MARKET SHARE EVOLUTION ...... 9 2.6 FUTURE GROWTH LEVERS ...... 10 2.7 COMPETITIVE ADVANTAGE ...... 11 2.8 COST STRUCTURE ...... 13 2.9 CASH CONVERSION ...... 15 2.10 MANAGEMENT TEAM ...... 16 3. MACRO ANALYSIS ...... 18 3.1 CORK INDUSTRY ...... 18 3.2 WINE INDUSTRY ...... 20 3.3 EXCHANGE RATES ...... 22 3.4 CONSTRUCTION ...... 23 4. MICRO ANALYSIS ...... 25 5. VALUATION BENCHMARK ...... 26 6. FINANCING STRUCTURES ...... 27 7. FINAL DECISION ...... 30 7.1 CORTICEIRA’S SCENARIO ...... 30 7.2 BUSINESS PLAN ...... 31 7.3 ENTRY AND EXIT ANALYSIS ...... 34 8. FINAL DECISION ...... 35 9. CONCLUSION ...... 36 10. ANNEX ...... 37 11. BIBLIOGRAPHY ...... 41

1. INTRODUCTION

Corticeira Amorim SGPS SA (from now on it will be addressed as “Corticeira” or the “Company”) is a Portuguese holding company, which operates in the cork and cork derivatives sector.

The final goal of the project is to determine whether Corticeira Amorim is a good investment opportunity or not. The investment would be carried out through a Leveraged Buyout operation of Private Equity, in order to then sell it after a period of five years at a highest profit possible.

In order to see its profitability, the company will be analyzed by comparing its main KPIs and figures with its main competitors, as well as its macro and microenvironment. By doing this, it will be possible to determine how well it has performed in the past years and forecast predictions for the corporate for the coming years.

2. SCREENING CRITERIA

2.1 ACTIVITY

The company has its headquarters in Mozelos, Santa Maria da Feira (Portugal). Among their main products we would highlight cork stoppers, composite cork and floor and wall coverings. The final use of their products is very diverse, going from wine products, automotive or aerospace pieces, to even sports or construction products. It operates in over a hundred countries, reaching a sales volume of over €760 million. Furthermore, they have a market capitalization of €1,167 million, which makes them one of the largest corporations in Portugal. They have been pioneers of their sector for over a century.

Among cork’s main characteristics we would highlight its impermeability to gases and liquids. This combined with the fact that over 50% of its total volume is air (which makes it a very light product) makes it an extremely versatile commodity. Furthermore, it can be combined with other products, in order to adjust some of its properties. This allows the firm to operate through these different divisions:

• Cork stoppers: this division is the core business of the company, as it represents around 70% of their consolidated sales revenue. Corticeira is the world’s market leader, with around a 40% market share, and a yearly production of over 5.5 billion stoppers. Their range in quality and prices is large, allowing them to compete in the premium market, as well as in the low to mid-quality one. The best quality cork is used to produce cork stoppers, while the leftovers have as a final destination the other divisions. Therefore, the main focus in this project will be on this Business Unit.

• Floor and wall coverings: this section accounts for 13.6% of total consolidated sales. All of its products are cork based. They have a better acoustic and thermal isolation performance than its competitors, as well as to be the leaders for both production and distribution in this division. It is mostly destinated to indoor due to its comfort when walking on it.

• Composite cork: despite of being the 3rd largest one, it is still a representative division, as it represents around 12.7% of sales. It is dedicated to the production of granulated cork, agglomerates and cork composites. Its final destinations are very diverse, as it satisfies the demand of footwear, construction, aerospace, automotive or even sports businesses.

• Raw materials: it accounts for only a 1.8% of the total sales. Cork as a commodity itself is not very profitable. The value of it is only added once it is processed, and with Corticeira’s know-how it is transformed into a very profitable good. This division is in charge of guaranteeing the necessary supply of cork for the different business units.

• Insulation cork: this represents for around a 1.5% of the group’s total revenue. It focuses in the production of insulation materials and only natural cork is used. The properties of cork provide a high level of acoustic, thermal and anti-vibration insulation.

Consolidated Sales by Business Unit

Cork stoppers 70,3% Floor and wall coverings 13,6% Composite cork 12,7% Raw materials 1,8% Insulation cork 1,5%

Figure 1 – Consolidated Sales by BU Source: Annual Report 2018. Own elaboration Figure 1 - Consolidated Sales by BU Almost 30% of the cork is destined to construction, including here the following divisions: Floor and Walls Coverings, Composite and Insulation cork. When it comes to infrastructure, the group has under its management 35 industrial plants 52 distribution companies and 254 key distribution players, distributed all around the world.

2.2 HISTORY

The origins of the company date back to 1870, when the Amorim family began their activity with the foundation of Antonio Alves Amorim´s manual cork stoppers factory. It is in 1922 when the first company, under the name of Amorim&Irmaos, Lda. is born. It was not until 1963 that Corticeira Amorim was formed, with the goal of making the most of at least 70% of the waste produced by Amorim&Irmaos, Lda, through other purposes such as producing cork agglomerates. Through the 1960s, 70s and 80s, the Amorim Group reaches its first international agreements through purchases and subsidiaries in different countries (Spain, Morocco, Switzerland, Canada or Sweden). In April 1988, the company is listed in the Euronext Lisbon stock exchange market. In the 90s, the company continued growing both organically and through acquisitions, a strategy that was to be maintained over time. In 2010 Amorim Florestal, S.A. creates its R&D department, crucial in future innovations such as NDTech. The company has been recognized many times for its sustainability contribution (such as the 2004 FSC certification or the 2012 Seal of Sustainability). In 2014 Amorim Ventures was launched to promote the design of new cork products, as well as new potential cork-related businesses.

2.3 OWNERSHIP STRUCTURE

The shareholding structure of Corticeira is quite simple and has been very stable over the years. 51% of the company is in the hands of the partnership called Amorim Investimentos e Participacoes, which is evenly held by the two family offices “Herederos de Americo Ferreira de Amorim” and “Antonio Ferreira de Amorim”. In addition, and out of this partnership, each of those family offices hold just over 10% stake. The remaining 28% of Corticeira Amorim’s ownership is related to its free float. As mentioned in the Intermoney report (find reference in Bibliography), when the company came public the free float was around 49%, but dropped to 9% in 2009, hitting its lowest point, which then increased in the search for a higher liquidity (IMV, Corticeira Coverage, 2019)

Direct Ownership

Free Float 28% Amorim Investimentos e Participaçoes, SGPS, SA 51% Antonio Ferrera de Amorim 10.5% Herederos de Americo Ferrera de Amorim 10.5%

Figure 2 – Direct Ownership Source: Bloomberg Figure 2 - Direct Ownership

2.4 TOP LINE GROWTH

Over the past years Corticeira has shown a strong growth in its consolidated sales. During this period the company recorded an 8.0% CAGR growth, and an overall 36.2% in that four-year time span.

Consolidated Sales

763.12 701.61 641.41 560.34 604.8

2014 2015 2016 2017 2018

Figure 3 – Consolidated Sales (thousands of €) Source: Annual Reports. Own elaboration Figure 3 - Consolidated Sales (thousands of €) The increase in its total revenue was achieved through both organic growth and acquisitions.

When it comes to organic growth, the business unit that helped the most was stoppers. This BU’s total revenue managed to grow at a 10.6% CAGR, amounting for a total of 49.4% overall growth in the past four years. Part of it was organic, as the company managed a constant increase in its cork stoppers production over the past years. As shown in Figure 10 (please refer to annex), the units produced by the company went from 4 to 4.8 billion (5.5 billion if Bourrassé and Sodiliége are included) in only four years.

On the other hand, the other divisions were not as successful as the previous one, having even negative growth rates some of them. Floor and Wall coverings, which is the second biggest business unit had a negative growth rate of 0.9% during that interval. Both the Composite and Insulation divisions managed a growth of around 20% in the same time period.

As for growth through acquisitions, Corticeira went through several relevant operations. These acquisitions provided them of a higher competitivity and market share.

• In early 2018 Corticeira Amorim purchased 70% of Elfverson & Co AB, a Swedish company which is the world leader for premium quality wooden tops for closures for alcoholic drinks and spirits. Elfverson has been operating for over 140 years. The contract also gave Corticeira a put option in order to complete the purchase of the remaining 30% of the company in 2020 if desired. The price, which will also depend on the performance of the company over these two years, will be based on the one agreed in 2018. The operation, which had a total cost of €5.5 million, provides Corticeira of growth in the wooden stoppers segment.

• In 2017 Corticeira Amorim went through two expansionary operations. To begin with, they purchased 60% of Etablissements Christian Bourrassé for €29 millions. It is a French corporate, which produces natural cork stoppers and operates in France, Spain, Italy and Chile mainly. This company fully owns SOCORI, S.A. and CORPACK BOURRASSÉ, S.A., and the three of them all together constitute the Bourrassé Group. Corticeira Amorim will be able to purchase the remaining 40% of the company in 2022, fixing its price in relation to Bourrassé’s performance at the moment and having the one paid in 2017 as a reference. Bourrassé´s turnover for the previous year amounted for a total of €55 million. Secondly, the Amorim Group agreed to go through the acquisition of the 100% of shares of the French company Sodiliége. Their core business is the production and distribution of bartop closures for alcoholic and spirit drinks. The fact of Sodiliége being well known for the quality of its product, and that it is an important player when it comes to the Cognac Region, gives Corticeira a great opportunity to strengthen up its position in this market. The operation amounted to €3 million. Both companies still operate under their own identities.

• In 2015, the raw materials business unit acquired a new preparation and storage plant in Ponte de Sôr. This operation provides them a larger warehousing space as well as expanding their area available for cork preparation.

2.5 MARKET SHARE EVOLUTION

When analyzing Corticeira’s market share it is best to focus in the cork stoppers market, as it is the one that provides 70% of the company’s total revenues. As this industry is highly atomized and only a few players are listed companies, Corticeira is going to be compared with its main peers.

Since Corticeira has around 40% of the whole cork stoppers market share, the only real thread to them is the French company OENEO (Nomacorc too, but at a much lower scale). However, other companies, such as Guala or AMCOR, which do not operate with cork, are also big competitors to Corticeira. Both companies produce aluminum closures and compete with Corticeira specially in the mid to low-quality wines and spirits, as premium tend to go for cork.

During the past four years, Corticeira’s market share has had an important rise, as it went from below 28% to 32% in only four years. OENEO also managed to follow this trend, as it increased its market share in almost the same amount as Corticeira. However, both Guala and AMCOR failed in increasing their market share, as it dropped in over 4% for both firms in this time span.

Stoppers Market Share 0,40

0,30

0,20

0,10

0,00 2014 2015 2016 2017 2018

AMORIM OENEO GUALA AMCOR

Figure 4 – Stoppers Market Share Source: Company’s Annual Reports. Own elaboration Figure 4 - Stoppers Market Share

2.6 FUTURE GROWTH LEVERS

The cork stoppers division foresees continuing its sales growth in 2019 at a higher speed than market average. In order to achieve this, quality, innovation, sustainable growth and operating efficiency are their main goals. Some of the objectives settled by the company will be the following: • Achieve a higher efficiency in the use of Raw Material cork • Increase the in-house activities for part of the outsourcing done by the company • Manage the product portfolio in accordance with the availability of raw materials as well as guaranteeing the supply of stoppers that meet market requirements • Continue the current digitalization path

As for the Floor and Wall Coverings business unit, the new management team has changes planned ahead, in order to swift the negative trend. Their priorities are: • Redesign the supply chain • Innovate towards a higher sustainability of their products • Reduction of operating costs

Furthermore, new product WISE is being launched in 2019, and it will help to improve this division’s results.

The composite cork division will focus on the improvement of its operating activities’ efficiency. Meanwhile, objectives for the insulation business unit will be set in increasing its number of sales. Moreover, both of them will also focus on the development and launching of new products of their respective businesses. The organic growth trend of the company is set to continue. However, as the cork industry has gone through a market consolidation over the past years, it is also presumable that they might continue with the acquisition of smaller firms.

2.7 COMPETITIVE ADVANTAGE

When it comes to players, the cork industry is highly atomized, as a lot of agents participate in it. The total amount of companies that operate in this (rather small) industry amounts for almost seven hundred, and around 50% of them have five employees or less. Therefore, the four companies listed beneath would be the real threads to Corticeira’s activity:

OENEO Group

It is a French holding company which divides its activity in winemaking and wine closures (represents more than half of its activity). They own Piedade and DIAM, which both of them are devoted to the production of cork stoppers. They are Corticeira’s main competitor. DIAM is focused in high-end technical stoppers, for spirits and both still and sparkling wines. They give a high importance to the preservation of aromas in their cork, for a successful tasting. DIAM, Mytik DIAM and Altop DIAM would be their three kind of high-quality stopper lines. On the other hand, Piedade would be the mid-quality stoppers producer.

They have a market capitalization of around €559.5 million, reaching an EBITDA in the last exercise of $268 million. They had a constant growth for the past years, and predictions tell they will continue with the same trend. The Oeneo Group is the second largest producer for cork stoppers, with around 2.25 billion units.

Guala Closures Group

Italian company with a market capitalization of around €358.36 million, as well as an annual EBITDA of €104.5 million in the previous year. Its core business is producing stoppers and closures for a large range of bottles, such as beverages, oil, pharma or wine among others. Wine would be their main destination (around 80% of their production). The company believes that through technology it can achieve a better product compared to the cork ones. That is why the group’s main product are the aluminum stoppers, as they

believe it is the best way to avoid oxidation of wine and the cork-taint. Furthermore, it seeks for simplicity, as it is easier to open.

AMCOR

Listed company dedicated to the packaging of all kinds of products (beverages, food, healthcare, pet care, capsules). It has a market capitalization of $12.6 billion. AMCOR is the leader in the flexible packaging segment, and is also very strong in the rigid packaging segment. Its sales amounted to almost a total of $9,458 million, while its EBITDA was $1,394 million. However, despite of these impressive figures, only a 4% of it amounts for its closure’s activity. It works mostly with aluminum and are a direct competitor to Corticeira.

NOMACORK

Nomacorc is part of a holding company named Vinventions. Its core business is the production of stoppers. Vinventions is the owner of other stoppers brands, though not as big as Nomacorc. Among them, Syntek, Ohlinger and Alplast.

The company is not listed and does not make its numbers public.

Figure 5 – Competitor’s logos Source: OENEO, Amcor, Guala closures, Nomacorc (corporates’ webs) Figure 5 - Competitor's logos Furthermore, the cork industry has high barriers of entry, which makes it very positive as the probability of strong potential competitors arising fast is very low. The first reason would be due to the difficulty of reaching new agreements with the cork oak areas owners. These kinds of agreements are always closed for very long terms, due to the cork long

growing cycles. Another difficulty would be reaching the level of know-how needed to compete in this industry. Dealing with cork to produce closures can be difficult due to many technical factors that had to be taken into account in order to preserve wine in proper conditions. And for this reason, most customers will be reluctant to swift to a new unknown product, rather to buy it from a company which has longtime performed in this industry. Therefore, Corticeira has a competitive advantage here, as it is already well known by the customers. Relationships of the companies with their customers are strong, and it is difficult for new commers to beat that barrier. Moreover, as it has been operating for around 150 years, it does not only have the know-how of the business, but very long- term agreements stablished with its cork suppliers.

When it comes to the bottom-line growth, both EBITDA and EBIT have had a constant growth over the past four years. Corticeira has managed to outperform the market averages for both indicators. As for EBITDA, the market CAGR growth stands at 9.95%, while Corticeira grew by 11.5%. However, if only the Cork Stoppers Business Unit is taken into account, it grew at an impressive 18.6%, overpassing its main competitor OENEO’s 13.5% growth. When it comes to EBIT, the market CAGR stood at 7.82%, while Corticeira did at 12.4%, leaving them as the leaders in this variable.

2.8 COST STRUCTURE

For the past years the Company held a very stable cost structure, with variable costs representing a larger share of the total amount (around a 59%). Meanwhile, fixed costs represent around a 41% of the total. This is beneficial, as it can protect the company in a downturn of the industry, as it happened in 2018. Furthermore, if the market records a significant growth, purchasing power should help to lower costs.

(thousands of €) 2014 2015 2016 2017 2018 Average Variable Costs 276,757 289,187 306,707 328,098 376,661 315,482 % of total costs 58.43 57.37 59.09 57.76 59.87 58.50 Fixed Costs 196,861 214,893 212,357 239,917 252,472 223,300 % of total costs 41.57 42.63 40.91 42.24 40.13 41.50 Total Costs 473,618 504,080 519,064 568,015 629,133 538,782 Table 1 – Costs structure Source: Annual Reports. Own elaboration

Table 1 - Costs Structure However, this cost structure loses an operating leverage possibility in a growth scenario, since as sales grow, variable costs do too, not letting margins increase at a higher pace.

The company’s EBITDA margin can be improved, as it is two percent below market average (which sits at 19.7%). When looking at this period, Corticeira is underperforming not only with the consolidated numbers, but also when it comes to the cork stoppers Business Unit, as their mean for the past four years is 16.7%. Nonetheless, as Table 24 (Annex) shows, this division had a very positive evolution over the past years. 2018 breaks this constant growing path, as a result of the considerable increase in raw materials during that year for the whole industry. Taking into account that this Business Unit accounts for around 70% of the firm’s total revenues, it should be interesting to keep improving its costs efficiency, as it would make a great difference in the overall numbers. Both OENEO and Guala were more efficient in the past four years, as they achieved an average of 23.2% and 18.6% respectively.

With respect to the other divisions (results shown in Table 28 and 29 in the annex), Floor and Walls Coverings, which is the second highest contributor to the company’s sales had a decreasing trend since 2014, with a negative 3% overall growth drop. The management team has been replaced this year, hoping for an increase in the operating efficiency of the supply chain, as well as an increase in the Business Unit’s profitability.

The other divisions’ margin remained more less constant until 2018, staying around 14%. In the overall picture, 2018 was the toughest year as a result of the costs increase.

2014 2015 2016 2017 2018 EBITDA margin 15.5% 16.6% 19.1% 19.0% 17.6% Table 2 – EBITDA margin Source: Annual Reports. Own elaboration Table 2 - EBITDA margin

2.9 CASH CONVERSION

The conversion rate shows the percentage of cash that is left available to pay debt, with respect to that year’s EBITDA. As shown in the below table the company had over the years a remarkable cash conversion rate. It has been constant, as it was able to maintain it around 60% for the five-year time span.

In 2018 the firm’s change in working capital was smooth, since both Trade Payables and Receivables grew more or less evenly. The purchase of the firm Elfverson favored an increase in CAPEX for the company. Furthermore, Corticeira also purchased Cosabe- Companhia Silvo-Agrícola da Beira S.A. for €5.5 million. This company has as its main asset Herdade da Baliza, an oak cork forest area consisting of 2,866 hectares and located in Castelo Branco.

As mentioned before, in 2017 the company went through two important acquisitions (Bourrassé and Sodiliége), which had a large impact in its conversion rate. To begin with, these operations involved the increase in CAPEX, as €9.7 million of fixed tangible assets were included in the consolidated figures. Besides, a €19 million liability was recorded in reference to the remaining 40% stake in Bourrassé. In addition to this, both companies had a certain quantity of trade payables, which together with the increase of Corticeira’s payables (as a result of a higher production) led to an even larger increase in Trade Payables. All these resulted in a high positive impact in change in working capital.

In 2016 Trade Receivables increased as a result of a higher company’s activity (sales grew by 6%). This, together with the decrease in Trade Payables led to a severe negative change in working capital. The decrease in the suppliers’ balance happened, as reflected in the company’s annual report, due to earlier payment of 2016 campaign purchases than in 2015.

In 2015 Trade Receivables grew slightly, while Trade Payables diminished slightly. This two combined led to a negative impact in change in working capital. From all the CAPEX, €21 million correspond to the cork stoppers BU. The large investment targeted improving quality, product performance and operating efficiency.

(thousands of €) 2014 2015 2016 2017 2018 EBITDA 86,722 100,720 122,347 133,594 133,984 Capex (21,220) (31,394) (33,575) (43,739) (57,581) Change in WC (11,437) (4,058) (20,530) 21,383 1,033 Cash Available for Debt Service 54,065 65,268 68,242 111,238 77,436 Cash Conversion 62% 65% 56% 83% 58% Table 3 – Cash Conversion (thousands of €) Source: Annual Reports (2014-2018). Own elaboration Table 3 - Cash Conversion (thousands of €) The company has maintained very stable period levels for both collection and payment over the past years. As the table below shows, the firm takes eight days less (on average) to collect from its clients than to pay their suppliers. This is a remarkable indicator, as it allows them to generate positive cash flows. It is important that, even though it is good, it still has margin for improvement.

(days) 2014 2015 2016 2017 2018 Avg Average Collection Period 79.86 79.99 80.74 87.19 83.46 82.34 Average Payment Period 88.86 87.75 77.34 100.95 95.73 90.24 Table 4 – Average Periods Source: Annual Reports (2014-2018). Own elaboration Table 4 - Average Periods 2.10 MANAGEMENT TEAM

Corticeira Amorim recognize that their daily challenge is to search for young and talented people, as success depends on them. The Group has over 4,400 employees, out of which around 3,000 live in Portugal. They have a largely diverse workforce, due to the multiple technical functions needed (production, maintenance, planning, logistics or R&D).

Here we are going to focus in the board of directors, which consists of the following six people.

Antonio Rios de Amorim: He is the main figure in the board of directors, both Chairman and Chief Executive Office since March 2001. He is Americo Amorim’s nephew, and with it the fourth-generation family member managing the company. Experience has proven that the Amorim family has a great knowledge of how to run this business, otherwise they would have not been able to compete at such a high level for such a long

time. He received an undergraduate degree from the University of Birmingham. He is also a Chairman to the Associacao Portuguesa da Cortica.

Nuno Filipe Vilela Barroca de Oliveira: He entered the board of directors in March 2003, but it was not until September 2005 that he finally became the Vice Chairman of the company. In the period of 2000 – 2005 he also served as Executive Director for Barrancarnes. He is part of the board of directors in 19 different companies. He graduated in the Portuguese Catholic University.

Fernando José de Araujo dos Santos Almeida: In March 2010, he became the executive director of the company. He received his undergraduate from the University of Porto. He is also part of the board of directors of Amorim Revestimentos SA, and Director & Manager at Amorim Cork Services Lda.

Cristina Rios de Amorim Baptista joined the board of directors in July 2012. She also holds the position of Chief Financial Officer since 2003. She counts with an important international experience, since she has worked for large corporates in Madrid and London. Furthermore, she graduated in Economics and Management at the Universidad Catolica Portuguesa, and coursed her MBA in University of Birmingham.

Juan Ginesta Viñas joined the board of directors as a non-executive one back in 2012. He has had a very extensive professional experience in managing businesses, as he has played important roles such as General Manager at Hunter Douglas or CEO at Torras Domenech.

Alexandra Ramos Amorim, also a non-executive director, joined Amorim in (Investimentos e Participaçoes) back in 2002. Alongside with two degrees (marketing and hospitality) both from EHTE, she also counts with a great job experience. She has been CEO for Naturaleza S.G.P.S and Director of Marketing for JW Burmester, among other things. Furthermore, she founded Associacao Bagos D’ouro.

3. MACRO ANALYSIS

Macro refers to all the factors which are out of the company´s control and that they cannot interfere in. The global economic outlook is expected to weaken past these years of healthy growth. The United States entering in a commercial war with China rises uncertainty for investors. Furthermore, the possibility of implementing import tariffs and other protectionists measures could harm international trade. In addition to this, the possibility of the United Kingdom leaving the European Union adds a higher uncertainty to the near future scheme. In regard to the emerging and developing economies it is expected a temporary decline in their growth rates. Even though the global economy is expected to grow at a 3.7% growth rate in 2019, it will decrease in the upcoming years (IMF, World Economic Outlook Update January 2019, 2019).

3.1 CORK INDUSTRY

Montado (cork oak forest) area represents a 23% of Portugal’s total forest area and it is mostly located in the Alentejo area (around 84% is located there). Portugal is the undisputed world leader when it comes to cork exports, with a 62% of the total. The country has experienced a 4.4% CAGR in its exports for the last decade, going from €698.3 million to €986.3 million. For cork stoppers, the CAGR figure is slightly higher, at a 4.6%.

Over the past years the cork industry has gone through a consolidation process. The devastating effects of the 2008 crisis over many small companies, together with the bigger corporations acquiring smaller ones, led to a big drop in the number of cork players. Currently 685 companies operate in it, while in 2008 the figured amounted for 781. However, the figure has had a smooth growth over the past years.

Portugal’s cork exports main destination is France, which purchases 18.9% of the country’s production. The United States, which happens to be the second highest destination, has increased considerably its importing values between 2009 and 2017.

RAW CORK PRODUCTION COUNTRY FOREST ACRES % OF WORLD ACRES PRODUCTION (TONS) % TOTAL PRODUCTION Portugal 736,775 34.4 100,000 49.65 Spain 574,248 26.8 61,504 30.53 Morocco 383,120 17.9 11,686 5.80 Algeria 230,000 10.7 9,915 4.92 Tunisia 85,771 4.0 6,962 3.46 France 65,228 3.0 6,161 3.06 Italy 64,800 3.0 5,200 2.58 Total 2,139,942 100 201,428 100,00 Table 5 – Raw Cork Production Source: Cork Quality Council, APCOR 2018 report. Own elaboration Table 5 - Raw Cork Production • Cork cycles

When dealing with this commodity, it is truly important to understand the relevance of time, for both its harvests and relations with suppliers. Cork can only be collected from the tree once this one reaches 25 years of age. After this first harvest, the cork will be collected every nine (up to twelve) years, when it is again fully grown. For this reason, Corticeira always seeks to stablish longtime relationships with its suppliers, in order to make it utterly stable and profitable for both parts. The fact that the firm has already been operating for almost 150 years, is a big competitive advantage, as many long-term relations have been already stablished along time.

Figure 6 – Cork Harvest Source: 56 Figures Figure 6 - Cork Harvest

• Cork price

In 2008 with the financial crisis, global cork demand severely decreased, which lead to a reduction in the cork collection, and much of it was left in the unharvested cork oak trees. During the next year the demand increased, and as a result to that all the cork was collected from the montados, leading to a shortage of cork itself and an increase in prices. The problem showed up in 2017, when as a result of the shortage of cork in the forests (due to the collection of the 100% in 2009 instead of 2008) prices increased. This led to lower margins in the following two years and interrupting a constant growth of the sector in all of its key figures. It has been in 2018 when the real consequences showed up, as prices increased by 17%. It is important to highlight here that worse figures were recorded, not due to a worse performance, but to a slowdown of the market consequence of 2008 crisis, which should not be any problem for the upcoming years. Prices are expected to stabilize in the upcoming years and therefore margins should increase again.

The below table displays the evolution of the price for each arroba of cork for the past decade.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 25.09 € 24.86 € 26.10 € 24.93 € 26.63 € 29.53 € 30.08 € 30.56 € 33.51 € 40.26 € Table 6 – Cork Price Evolution (per arroba) Source: APFC April 2019. Own elaboration Table 6 - Cork Prive Evolution 3.2 WINE INDUSTRY

Trends in the wine industry are key to Corticeira’s general performance, due to the large share of the consolidated revenues that the stoppers business units imply. Therefore, there are several factors to be analyzed.

Despite of having some ups and downs over the past two years, the global wine production has not been very volatile since the beginning of the Century, as it has more or less moved in the range of 260-280 mhl per year. However, 2017 had a big drop (8%) due to very hard climate conditions during that year, specially droughts and frosts, which heavily impacted in that year’s harvest. As a result of this, 2018 had very positive figures

with a large bounce back in production, as it increased by 17%. Global wine production reached its record for the previous 15 years, with a total of 293 mhl. The strong growth in production in Italy, France and Spain (three main wine producers) pulled this trend upwards, alongside with a smoother growth in other countries, such as Germany or Romania. For 2019 global wine production is expected to lower down to 260-265 mhl, a level which is expected to be maintained after these two volatile years (continuing with the previous trend).

Since 2000, the global grape production has increased at a 1% CAGR per year, despite of a decrease in the vineyard areas of 3% during the same time span. Spain remains as the country with the largest vineyard surface (including all wine grapes, table grapes and raisins). After Asia’s strong growth in vineyard’s areas for over a decade, it finally slowed down, and is reaching a stabilization phase.

When it comes to global wine consumption, we can see that there has been a tendency towards stability since 2009. After having grown smoothly in the past four years, due to the stabilization of the market in Europe and the increasing consumption in China and USA, 2018 suffered a decrease by 0.3%, as a result of the lower production of the previous year. The United States have been the largest consumer for the past decade, and they have maintained a constant growth in its per capita consumption. Highest per capita consumers are Portuguese, followed by French (both over 50L/year).

The Asia-Pacific has experienced a very strong growth over the past fifteen years when it comes to wine consumption. China now ranks fifth and has had a very positive trend, with an increase in its per capita wine consumption by 77% between 2000 and 2017. In 2018 the figures decreased, following the whole industry’s numbers. Despite all this overall growth, China’s per capita consumption is still low, being only 3.3 liters. South Korea and Japan would be the highest from Asia at 7.7 and 7 liters per person. Wine consumption in Australia is increasing too.

Of course, not all traded wine implies a business opportunity for the company. From all the traded wine, around 54% of it is bottled, which together with sparkling wine (totals for 9%) is the share from where Corticeira can benefit. When it comes to sparkling wines,

Spain, France and Italy account for around 91% of the EU member total exports. The rest involves bulk wine or Bag in Box (BiB), which does not use cork for its closures, but plastic taps. Around 20 billion bottles are produced each year, and out of those 60% are bottled with cork stoppers.

• Over the past years the market has suffered a slow premiumization, or in other words, a higher tendency for premium wines rather than mid to low- quality. In 2018 global wine consumption rose by 0.5%, meanwhile premium wine consumption grew by 3.5%. Out of Wine’s Spectator Top 100 wines of 2016, 89% of them used natural cork stoppers.

• Organic and biodynamic wines have become a strong trend for the past years. The IWRS expects this market to grow at a 9.2% between 2017 and 2022.

• Lastly, the craft beer market has had a rocket growth over the past decade. It is expected to grow at an 8% CAGR over the next years. Even though cork is not the most common closure for beers, it is used by a small share of breweries. It is yet to be determined the profitability of this business, as it still is very young.

3.3 EXCHANGE RATES

As mentioned before, the United States have been an important cork importer for the past decade. Corticeira Amorim’s biggest share of sales comes from Europe, as it represents over 70% of its total revenue. This implies that almost 30% of their sales come in a different currency to euro. Meanwhile, almost the totality of its costs come in euros. Therefore, a drop in foreign currencies value would diminish margins for international trade.

Fluctuations in exchange rates could penalize Corticeira Amorim, as a potential devaluation of the US Dollar would lead to a decrease in American consumption, as it becomes more expensive for them. Taking into account that around 17% of the sales come from the United States, an impact, though not huge, would be suffered by the company’s normal activity.

Consolidated sales by geographical area

EU* 58.50% USA 16.80% Portugal 7.30% Rest of America 6.20% Australasia 5.80% Rest of Europe 4.00% Africa 1.60% Table 7 – Consolidated Sales by Geographical Area Source: 2018 Annual Report. Own elaboration Table 7 - Consolidated Sales by Geographical Area Furthermore, as United States is entering a commercial war with China, its growth is expected to slow down for the following three years. This could also harm the USD strength compared to the EURO, leading to a drop in the consumption from the Americans. Due to the volatility of exchange rates, it is something to definitely take into account, as it could be a potential risk to Corticeira’s numbers.

The sterling pound exchange rate does not have such a high effect on total sales. The United Kingdom is a relevant client to Corticeira, but not big enough for it to become a problem if trends change. However, it is worth mentioning that a potential Brexit could devaluate the Sterling Pound’s value compared to the Euro.

*1. Portugal excluded. Norway and Switzerland included.

3.4 CONSTRUCTION

Floor and Wall Coverings and Insulation Business Units amount for 15.1% of the company consolidated revenues. Both of these divisions are strictly linked to the volatile construction sector. Since 2010 the industry has increased its activity and very well recovered from the 2008 financial crisis, that lead to a heavy decrease in its activity. The residential construction industry grew at a 6.1% CAGR between 2014 and 2018; and is expected to increase this rate to 6.7% for the upcoming years until 2023. For commercial construction the forecasted growth is even higher, at an 8% CAGR. (Business Wire, Global Building Construction Industry Report, 2019)

Germany is situated as the main cork importer for construction and decoration means. Most of these exports are destined to European countries, nonetheless, countries such as Russia, the USA, Canada or China are large importers too. In terms of quantity much of the cork is destined towards construction (around 70%), while the rest goes to other uses such as cork stoppers or other products. However, value wise it represents a much lower share of the total, being just 24.4% (in contrast with stoppers being 73.3%).

Imports of Cork as a Construction Material

60,00 50,50 50,00 42,40 36,10 40,00 32,10 30,00 20,00 9,60 11,80 9,60 12,50 10,00 3,70 5,90 6,40 6,20 4,10 6,50 4,20 4,20 -

Italy China Spain USA Japan Austria Canada France Poland Russia Germany Belgium Netherlands Switzerland United Kingdom Other Countries

Figure 7 – Imports of Cork as a Construction Material (millions of €) Source: APCOR 2018. Own elaboration Figure 7 - Imports of Cork as a Construction Material (millions of €) The United States, which as aforementioned, has been the second largest cork importer for the past decade. The value of their cork imports destined for construction increased by an outstanding 46% between 2009 and 2017, reaching a total of €36 million. Germany, which happens to be the first one, increased its imports from €31.3 million to €50.5 million between 2008 and 2017, representing a 61% increase. These two countries together represent a 35.1% of the total, and the fact that they increased at such a big rate is extremely positive. The overall Portugal cork exports destined to construction increased by 5.5% between 2012 and 2017.

4. MICRO ANALYSIS

Micro refers to all the factors which are not out of the company´s control and that they can interfere in. Here are some of the main factors which benefit the firm:

Corticeira is by far the company with highest market share, market capitalization and trade sales from their sector. The fact that the company is so large, allows them to cut shorter in operating costs. Having a cost advantage can allow the company to lower its prices below competitor’s and maintain their margins. Or if not, leave them at a market level with higher margins. However, their current margins are below market average, meaning this that they have the potential to accomplish it if management of costs becomes more efficient.

• As aforementioned, the process of harvesting cork is uncommon, as this one takes from nine to twelve years to fully grow back. Therefore, contracts with the cork oak forest owners have to be long term, in order for it to be fully profitable and stable for both parts. This mindset is applied by all the players in this industry, not just Corticeira. Therefore, it is difficult to arrange new agreements with cork suppliers. Here the company has a big competitive advantage against its competitors. Corticeira has been operating for very long time, around 150 years. Having such as long background implies having dealt with this situation for many years, and therefore, many of these contracts secured.

• Research & Development has played a key role for the company over the last years, especially when it comes to solving the TCA problem. Cork taint has been a big problem for the industry for a very long time. It refers to a wine fault that appears in some wines as they age and can only be detected once opened. This imperfection can ruin both the smell and taste, and it affects to all kinds of wine (irrespective of quality). It is usually accused to cork and in fact, it is referred to as corked or corky wine. After long investigations, Corticeira have launched NDtech, which is the first natural cork with a non-detectable TCA performance. After this products success, NDtech was expanded to sparkling wines too. Moreover, Corticeira launched the Helix stopper in collaboration with O-I

Packaging Solutions. These closures do not require any kind of corkscrew, as it has an easy opening system by just twisting the cork stopper, which also allows to reseal it back. Wine maintains its properties as it remains isolated without letting air in, due to the effect of the threads inside the bottle. Twin Top or Neutrocork have been other very successful stoppers for the company.

Figure 8 – Helix Stopper Source: Amorim Figure 8 - Helix Stopper

• With the previously mentioned purchase of Herdade de Baliza, the company begins itself as a forest owner. The goal with this area is to develop an intensive cork oak plantation, by increasing both the density of trees and the speed of the cork’s growing cycle. This operation is going to allow the company to have a slightly more vertical integrated structure (still heavily dependent on suppliers), as well as a reduction in operating costs due to the existence of more accessible raw materials. Besides, if the intensive cork oak plantation goals are successful, it can imply an inflection point for the company’s activity.

5. VALUATION BENCHMARK

The Valuation Benchmark consists on compering certain ratios of the company with its competitors’, in order to see how well they did. Therefore, in this section Corticeira’s multiples EV/EBITDA and EV/EBIT will be compared with its main two competitors, OENEO and Guala. AMCOR figures cannot be treated as equal, as closures only represent 4% of their business. Since Nomacorc is not listed, it was not possible to have access to these figures. No other cork stoppers companies are listed.

Market cap EV Net debt EV/EBITDA EV/EBIT CORTICEIRA 1,167.33 1,306.34 139.01 9.75x 12.72x OENEO 559.48 607.98 48.50 10.27x 13.45x GUALA 358.36 811.72 453.36 9.84x 16.78x Median 9.84x 13.45x Average 9.95x 14.32x Table 8 – Valuation Benchmark (millions of €) Source: Own elaboration Table 8 - Valuation Benchmark (millions of €) As seen in the table above, Corticeira is trading at a discount compared with its main competitors in EV/EBITDA and EV/EBIT terms. In relation to EV/EBITDA, Corticeira is valued at 9.75x its EBITDA, while the market average is above Corticeira’s multiple, as it outperforms both OENEO and Guala. As for EV/EBIT, the company is again trading at a discount compared to its peers. However, difference among them here is higher, as Corticeira is valued at a 12.72x EBIT, while market average equals 14.32x. This last multiple allows us to see the comparison taking into account each companies’ depreciation and amortization policy. For both multiples Corticeira sits under the market median.

6. FINANCING STRUCTURES

After analyzing Screening Criteria, Macro and Micro, the next step would be to oversee the financing structure used to complete the operation. In order to see how much debt the company is going to be able to repay in the future, it was assumed that the company will have a similar cash available for debt service during the following years. A 10% margin was applied over the cash available for debt, in order to reach the final repayment capacity. That way, if any year the company has less cash available it will still be able to reach its debt payment requirements. It is highly improbable that this margin will not be sufficient, as sales are expected to increase in the following years, as well as some variable costs to decrease, therefore the upcoming scenarios are optimistic.

(thousands of €) Total Revenue 763,117 Variable Costs 376,661 Gross Margin 386,456 Fixed Costs 252,472 EBITDA 133,984 Capex (57,581) Change in WC 1,033 Cash available for debt service 77,436 Safety Margin (7,743.6) Repayment Capacity 69,692.4 Table 9 – Repayment Capacity Source: Own elaboration Table 9 - Repayment Capacity It is going to consist of two different loans, representing each 50% of the total. The Euribor rate is common to both, and it is the one corresponding to December 31st, 2018. By that time the rate sat below zero, at -0.129. The conditions for each loan are different and they are reflected in the table underneath.

TOTAL DEBT 571,046.35 Years Interest Yearly Payment Amortizing Senior Loan 285,523.17 6 3% Principal + Interests Bullet Payment Loan 285,523.17 7 5% Interests Table 10 – Loan Conditions (thousands of €) Source: Own elaboration Table 10 - Loan Conditions (thousands of €) After doing the corresponding calculations, it has been determined that Corticeria can undertake a total debt of €571,046,350. This figure represents a 43.71% of the company’s total enterprise value in 2018, which amounts for €1,306.34 million.

Table 10 displays the expected debt payments that Corticeira is going to undertake during the following seven years. Figures have been calculated with the date from the above table.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Principal A 47,587.20 47,587.20 47,587.20 47,587.20 47,587.20 47,587.20 - Interest A 8,197.37 6,831.14 5,464.91 4,098.69 2,732.46 2,317.97 - Total A 55,784.57 54,418.34 53,052.11 51,685.88 50,319.65 49,905.17 - Principal B ------285,523.17 Interest B 13,907.83 13,907.83 13,907.83 13,907.83 13,907.83 13,907.83 13,907.83 Total B 13,907.83 13,907.83 13,907.83 13,907.83 13,907.83 13,907.83 299,431.01 TOTAL 69,692.40 68,326.17 66,959.94 65,593.71 64,227.49 63,813.00 299,431.01 Table 11 – Debt Payments (thousands of €) Source: Own elaboration Table 11 - Debt Payments (thousands of €) As Table 11 shows, the Amortizing Senior Loan is to be paid in a shorter period, but the principal payment is constant along the years. The interests diminish as there it less principal left to pay. On the other hand, the principal of the Bullet Payment Loan is only paid on the last year, while the interests are constant along all the period.

Table 12 - Free Cash Flow The Table above shows the remaining Free Cash Flow of Corticeira if it were to start with the payment of its debt in 2018. The company would have no problems in meeting its financial obligations because, even though calculations were made to see the maximum repayment capacity, the safety margin was taken into account.

7. FINAL DECISION

7.1 CORTICEIRA’S SCENARIO

Corticeira has grown at a higher rate than market over the past years in both Sales and EBITDA terms. Furthermore, the company’s market share has had a constant increasing trend, which together with its high cash conversion rate shows the company’s current financial strength. 2018 had lower results, not due to a lower demand or worse performance, but a high increase in operating costs of the industry. Nonetheless, as these prices are expected to suffer a big drop, margins should heavily increase in the upcoming years.

For the Macroeconomic overview, it is important to highlight the slow-down of the Global Economy. Even though a slight lower consumption is expected, the effect will be mitigated as the company is expected to maintain its sales growth patern. Both Wine and Cork industries are expected to go through a stability period during this near future. Other factors such as premiumization, the craft beer boost or the increase in organic wines invite to be optimistic. Besides, the construction industry is expecting to slightly increase its growth rate over the following years.

One of the main competitive advantages for the company is cost related, due to the high size and trading volume, the company has a large potential to cut its costs shorter. Furthermore, as it has been operating for long time now, they have a guaranteed supply due to the long-term relationships committed with the cork oak forest owners. Their R&D strategy has differentiated them from their peers, thanks to their high innovative new products.

Using the previous lines as a summary to the complete analysis, it can be said that Corticeira Amorim is a good investment opportunity, due to its good prospects. Additionally, as it was explained in the earlier section, the company has a large capacity to repay debt, being this another suitable reason for proceeding with the Leverage Buyout Operation.

7.2 BUSINESS PLAN

The goal of this section is to project the consolidated company’s results for the next five years. In order to do this, historical trends, future macro and micro indicators and several calculations were taken into account to finally meet the company’s performance figures.

The company expects to keep on growing in sales in the upcoming years. However, as the world economic growth is slowing down, a smaller sales CAGR is being forecasted for the upcoming years. In contrast with the 8% yearly average growth of Corticeira over the past years, a 6.3% rate is expected for the upcoming four years. This figure is closer to market’s growth over the past years, even though this one is expected to decrease too.

Regarding variable costs, they are expected to have a slight decrease in the first year as the cork price/arroba should suffer a considerable drop. Once the prices stabilize back, alongside with the other higher variable expenses (due to the higher volume traded), then these costs will gain more importance. These grew on average around 8% yearly, however for the upcoming years a drop to 5% CAGR is expected. Fixed costs should maintain a constant growth over the upcoming years, as possible new acquisitions can arise, as well as higher trading volume, new costs will appear. Their historical growth also indicates it. Costs expectations can be seen in Table 35 (Annex).

As for Capex, even though it is presumable that the company might undergo through new acquisitions, Expansion Capex was not taken into account. It was forecasted for Maintenance Capex to preserve its growth for the next years, though at a lower rate. As production is going to increase in the following years it is assumed that this one will too.

The Working Capital has been calculated based on the company’s past years Average Collection and Payments Periods (Check Table 35 the complete calculations). Both Trade Receivables and Trade payables were needed for this part, which were calculated through the Average Periods and Total Costs and Total Revenues that had already been forecasted for the Business Plan.

(days) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Average Collection Period 79.86 7.99 80.74 87.19 83.46 82.25 82.72 83.27 83.78 83.10 Average Payment Period 88.86 87.75 77.34 100.95 95.73 90.13 90.38 90.90 93.62 92.15 Table 13 – Average Periods Source: Own elaboration Table 13 - Average Periods In regard to debt, it has been explained in the previous passage that Corticeira has a repayment capacity of €571,046,350. The remaining 735,286,700€ will be financed through Sponsor Equity. From the Total Debt, Tranche A and Tranche B will represent equal parts. The current Enterprise Value of the firm amounts for 1,306,336,700€, result of adding the market capitalization to their Net Financial Debt.

SOURCES OF FUNDS Sponsor Equity 735.29 Total Debt 571.05 Tranche A - Amortizing debt 285.53 Tranche B - Bullet Debt 285.53 Total 1,306.34 Table 14 – Sources of Funds (millions of €) Source: Own elaboration Table 14 - Sources of Funds (millions of €) Despite of a slowdown of the company’s sales growth rate during the following years, Corticeira will manage to increase its operating margin, as it benefits from the drop in the cork prices. With it, this result is now more aligned with their market competitors.

Historical Financials Budget Business Plan (thousands of €) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Total Revenue 560.34 604.8 641.411 701.609 763.117 808.141 858.246 918.409 975.350 1033.481 % Growth n.a. 7.9% 6.1% 9.4% 8.8% 5.9% 6.2% 7.0% 6.2% 6.0%

Gross Margin 283.583 315.613 334.704 373.511 386.456 427.71 464.88 508.53 540.87 571.63 % Margin 50.6% 52.2% 52.2% 53.2% 50.6% 52.9% 54.2% 55.4% 55.5% 55.3%

EBITDA 86.722 100.72 122.347 133.594 133.984 156.31 175.02 195.47 209.04 219.89 % of Sales 15.5% 16.7% 19.1% 19.0% 17.6% 19.3% 20.4% 21.3% 21.4% 21.3%

Capex 21.22 31.394 33.575 43.739 57.581 64.49 71.58 77.31 85.04 91.00 % of Sales 3.8% 5.2% 5.2% 6.2% 7.5% 8.0% 8.3% 8.4% 8.7% 8.8% Change in WC (11.44) (4.06) (20.53) 21.38 1.03 (11.68) (4.19) (4.14) 2.15 (2.55) % of Sales (2.0%) (0.7%) (3.2%) 3.0% 0.1% (1.4%) (0.5%) (0.5%) 0.2% (0.2%)

Operating Cash Flow 54.07 65.27 68.24 111.24 77.44 80.14 99.25 114.03 126.15 126.34

% of EBITDA 0.62 0.65 0.56 0.83 0.58 0.51 0.57 0.58 0.60 0.57 Debt Amortization (47.59) 47.59 47.59 47.59 47.59 Interests (22.11) (20.74) (19.37) (18.01) (16.64)

Free Cash Flow 54.065 65.268 68.242 111.238 77.436 10.44 30.92 47.07 60.55 62.11 Net Debt 571.046 513.015 434.505 339.852 231.710 122.008 x Leverage 4,26x 3.28x 2.48x 1.74x 1.11x 0.55x Table 15 – Business Plan (thousands of €) Source: Own elaboration Table 15 - Business Plan (thousands of €) With the predicted figures the company will have a 122,008,000€ Net Financial Debt remaining in five years, as not only part of the Debt has been repaid, but also Cash Flows have been accumulating over the past years.

Initial Debt 571,046.35 Repaid Debt 237,935.98 Outstanding Debt 333,110.37 Cash Flows 211,101.90 Net Financial Debt 122,008.00 Table 16 – Net Financial Debt (thousands of €) Source: Own elaboration Table 16 - Net Financial Debt (thousands of €) After analyzing the firm’s estimations and Business Plan, the following step is to evaluate the returns of the operation once it is completed.

7.3 ENTRY AND EXIT ANALYSIS

In order to see the overall profitability of the investment, it is necessary to compare several entry and exit parameters, being EV/EBITDA the main one. In the analysis we will assume that the multiple remains constant at 9.75x.

ENTRY VALUATION Entry EV/EBITDA 9.75x EBITDA at Entry 133,984 Enterprise Value 1,306,337 Table 17 – Entry Valuation (thousands of €) Source: Own elaboration Table 17 - Entry Valuation (thousands of €) The origin of the funds destined to cover the Enterprise Value, which tops €1.3 Billion, has been previously reflected in Table 14. After the operation is completed, the exit EV/EBITDA multiple will have the following picture:

EXIT VALUATION Exit EV/EBITDA 9.75x EBITDA at Exit 219.89 Enterprise Value 2,143,887 Table 18 – Exit Valuation (thousands of €) Source: Own elaboration Table 18 - Exit Valuation (thousands of €) From all the funds destined to complete the investment, €139,009,000 will cover the company’s current Net Financial Debt. The remaining €1,167,328,700 represents the Equity destined for the Seller. Both together amount for €1,306,336,700, quantity which represents the current Enterprise Value.

USES OF FUNDS Equity Value for Seller 1,167,328 Net Debt to be Refinanced 139,009 Total (Enterprise Value) 1,306,336.7 Table 19 – Uses of Funds (thousands of €) Source: Own elaboration Table 19 - Uses of Funds (thousands of €) The following table displays the evolution for the return figures for each year, being 2023 the relevant one as it is the one in which the investment ends.

RETURNS dic-19 dic-20 dic-21 dic-22 dic-23 EBITDA at exit 156.31 175.02 195.47 209.04 219.89 Exit EBITDA Multiple 9,75x 9,75x 9,75x 9,75x 9,75x Enterprise Value 1,523.97 1,706.44 1,905.85 2,038.11 2,143.89 Net Debt at Exit 513.01 434.51 339.85 231.71 122.01 Sponsor Equity at Exit pre MIT 1,010.96 1,271.93 1,566.00 1,806.40 2,021.88 Equity Invested 735.29 735.29 735.29 735.29 735.29 IRR % 37% 32% 29% 25% 22% CoC 1,37x 1,73x 2,13x 2,46x 2,75x Table 20 – Returns (thousands of €) Source: Own elaboration Table 20 - Returns (thousands of €) 8. FINAL DECISION

Having already analyzed the Entry and Exit Parameters, this section will be dedicated to the returns of the operation, in order to then take the final decision. The following table shows the comparison in Net Debt, Equity Value and Enterprise Value between 2018 and 2022.

Equity Value Private Equity Entry Private Equity Exit Net Debt 571.05 122.01 Equity Value 735.29 2,021.88 Enterprise Value 1,306.34 2,143.89 Table 21 – Equity Value (thousands of €) Source: Own elaboration Table 21 - Equity Value (thousands of €) As displayed in the previous table, the Private Equity must undertake a payment amounting a total of €735,286,700 in the year 2018, while receiving a quantity of €2,021,878,638 in 2022 at the sale. For this period, the operation will have a 22% Internal Rate of Return every year. Besides, the Cash-on-Cash multiplier will equal 2.75x. As the Private Equity would be close to tripling the money invested, the final decision of the project is to undergo with the investment and acquire Corticeira.

Investment in 2018 735.29 Ending Equity Value in 2023 2,021.88 IRR % 22% CoC 2,75x Table 22 – Investment Cash-on-Cash and IRR (thousands of €) Source: Own elaboration

Table 22 - Investment Cash-on-Cash and IRR (thousands of €) 9. CONCLUSION

During this project all the relevant factors surrounding Corticeira Amorim SGPS SA have been cautiously analyzed in order to determine whether it would be interesting to invest in it through a Leveraged Buyout Operation, or not.

Due to the promising estimations for the company’s near future performance and the supposition that the operation is undertaken by using as much debt as the Repayment Capacity allows, a 2.75x rate of return would result from this investment. Therefore, as a result of this investigation it is determined that it should be a highly profitable operation for the Private Equity and should definitely acquire it.

10. ANNEX

Stoppers Production in Units 6 5.5 4.7 4.8 5 4.4 4 4.2 4 3 2 1 0 2014 2015 2016 2017 2018 2018*

Figure 9 – Stoppers Production in Units Source: Annual Reports (2014-2018). Own Elaboration * 2018 including Bourrassé and Sodiliege Figure 9 - Stoppers Production in Units

Corticeira Amorim 2014 2015 2016 2017 2018 Sales 560.34 604.8 641.41 701.61 763.12 EBITDA 86.72 100.72 122.35 133.59 133.98 EBIT 64.38 75.66 96.03 103.9 102.7 EBITDA margin 0.155 0.167 0.191 0.190 0.176 Table 23 – Corticeira Results (thousands of €) Source: Annual Report. Own elaboration Table 23 - Corticeira Amorim Results (thousands of €) Corticeira Amorim (Stopper’s BU) 2014 2015 2016 2017 2018 Sales 357.3 392.8 422.7 477 534 EBITDA 46.83 62.75 75.60 91.35 92.76 EBIT - - - - - EBITDA margin 0.131 0.160 0.179 0.192 0.174 Table 24 – Corticeira Stopper’s BU Results (thousands of €) Source: Annual Report. Own elaboration Table 24 - Corticeira Stopper's BU Results (thousands of €) Guala Closures 2014 2015 2016 2017 2018 Sales 487.8 520.5 500.3 534.8 543.1 EBITDA 90.4 103.3 100.7 103.2 82.5 EBIT 51 65.7 69.7 69.71 48.37 EBITDA margin 0.185 0.198 0.201 0.193 0.152 Table 25 – Guala Closures Results (thousands of €) Source: Annual Report. Own elaboration Table 25 - Guala Closures Results (thousands of €)

OENEO 2014 2015 2016 2017 2018 Sales 151 171 211 247 268.2 EBITDA 35.70 42.40 48.26 55.80 59.20 EBIT 31.83 35.76 41.47 45.20 EBITDA margin 0.236 0.248 0.229 0.226 0.221 Table 26 – OENEO Results (thousands of €) Source: Annual Reports. Own elaboration Table 26 - OENEO Results (thousands of €) AMCOR 2014 2015 2016 2017 2018 Sales 300.8 396 342 322.14 315.08 Table 27 – AMCOR Sales (thousands of €) Source: Annual Report. Own elaboration Table 27 - AMCOR Sales (thousands of €) Sales 2014 2015 2016 2017 2018 CAGR Overall Stoppers 357,302 392,825 422,766 477,058 533,980 0.106 0.494 FWC 116,363 109,843 117,128 121,536 112,179 (0.009) (0.036) Composite 84,282 99,980 100,085 98,777 102,171 0.049 0.212 Insulation 10,014 10,040 11,440 10,859 11,979 0.046 0.196 RM 131,373 135,437 148,634 156,074 186,446 0.091 0.419 Holding 6,859 2,215 2,785 2,566 4,422 (0.104) (0.355) Adjustment (145,853) (145,440) (161,426) (164,991) (188,060) - - Total 560,340 604,800 641,411 701,609 763,117 0.080 0.362 Table 28 – Sales by BU (thousands of €) Source: Annual Reports. Own elaboration Table 28 - Sales by BU (thousand of €) EBITDA 2014 2015 2016 2017 2018 CAGR Overall Stoppers 46,830 62,753 75,604 91,350 92,755 0.19 0.98 FWC 15,520 8,173 12,732 8,284 2,965 (0.34) (0.81) Composite 7,748 14,585 16,989 15,010 10,319 0.07 0.33 Insulation 1,653 1,241 2,157 1,680 642 (0.21) (0.61) RM 17,492 16,988 18,328 22,375 30,464 0.15 0.74 Holding (1,806) (2,771) (3,266) (5,189) (3,397) 0.17 0.88 Adjustment (402) (249) (196) 85 236 - - Total 87,437 100,969 122,544 133,510 133,748 0.11 0.53 Table 29 – EBITDA by BU (thousands of €) Source: Annual Reports. Own elaboration Table 29 - EBITDA by BU (thousands of €) (%) 2014 2015 2016 2017 2018 AMORIM 0.28 0.27 0.29 0.30 0.32 OENEO 0.12 0.12 0.14 0.16 0.16 GUALA 0.38 0.35 0.34 0.34 0.33 AMCOR 0.23 0.27 0.23 0.20 0.19 Table 30 – Stoppers Global Market Share Source: Own elaboration

Table 30 - Stoppers Global Market Share TOTAL DEBT 555,810.77 EV 1,306,336.7 % 42.55% Table 31 – Debt to EV (thousands of €) Source: Own elaboration Table 31 - Debt to EV (thousands of €) Corticeira EV 1,306,336.7 Eq value 1,167.33 EV/EBITDA 9.75x NFD 139,009 EV/EBIT 12.72x EBITDA 133.98 EBIT 102.7 Table 32 – Corticeira Amorim Valuation Benchmark (thousands of €) Source: 2018 Annual Report. Own elaboration Table 32 - Corticeira Amorim Valuation Benchmark (thousands of €) GUALA Closures EV 811,722 Equity 358.36 EV/EBITDA 9.84x NFD 453.362 EV/EBIT 16.78x EBITDA 82.50 EBIT 48.37 Table 33 – Guala Closures Valuation Benchmark (thousands of €) Source: 2018 Annual Report. Own elaboration Table 33 - Guala Closures Valuation Benchmark (thousands of €) OENEO EV 607.98 Equity 559.48 EV/EBITDA 10.27x NFD 48.50 EV/EBIT 13.45x EBITDA 59.20 EBIT 45.20 Table 34 – OENEO Valuation Benchmark (thousands of €) Source: 2018 Annual Report. Own elaboration Table 34 - OENEO Valuation Benchmark (thousands of €) (thousands of €) 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Accounts Rec 122.61 132.55 141.88 167.60 174.48 182.10 194.52 209.53 223.87 235.28 Total Revenues 560.34 604.80 641.41 701.61 763.12 808.14 858.25 918.41 975.35 1.033.48 Accounts Pay 115.30 121.18 109.99 157.10 165.01 160.95 169.18 180.05 196.55 205.41 Total Costs 473.62 504.08 519.06 568.02 629.13 651.84 683.23 722.94 766.31 813.59 Working Capital 7.30 11.36 31.89 10.51 9.47 21.15 25.34 29.48 27.32 29.87 Change in WC n.a 4.06 20.53 -21.38 -1.03 11.68 4.19 4.14 -2.15 2.55 Table 35 – Change in WC (thousands of €) Source: Own elaboration Table 35 - Change in WC (thousands of €)

11. Figures Index Figure 1 - Consolidated Sales by BU ...... 5 Figure 2 - Direct Ownership ...... 6 Figure 3 - Consolidated Sales (thousands of €) ...... 7 Figure 4 - Stoppers Market Share ...... 9 Figure 5 - Competitor's logos ...... 12 Figure 6 - Cork Harvest ...... 19 Figure 7 - Imports of Cork as a Construction Material (millions of €) ...... 24 Figure 8 - Helix Stopper ...... 26 Figure 9 - Stoppers Production in Units ...... 37

12. Tables Index Table 1 - Costs Structure ...... 14 Table 2 - EBITDA margin ...... 14 Table 3 - Cash Conversion (thousands of €) ...... 16 Table 4 - Average Periods ...... 16 Table 5 - Raw Cork Production ...... 19 Table 6 - Cork Prive Evolution ...... 20 Table 7 - Consolidated Sales by Geographical Area ...... 23 Table 8 - Valuation Benchmark (millions of €) ...... 27 Table 9 - Repayment Capacity ...... 28 Table 10 - Loan Conditions (thousands of €) ...... 28 Table 11 - Debt Payments (thousands of €) ...... 29 Table 12 - Free Cash Flow ...... 29 Table 13 - Average Periods ...... 32 Table 14 - Sources of Funds (millions of €) ...... 32 Table 15 - Business Plan (thousands of €) ...... 33 Table 16 - Net Financial Debt (thousands of €) ...... 33 Table 17 - Entry Valuation (thousands of €) ...... 34 Table 18 - Exit Valuation (thousands of €) ...... 34 Table 19 - Uses of Funds (thousands of €) ...... 34 Table 20 - Returns (thousands of €) ...... 35 Table 21 - Equity Value (thousands of €) ...... 35 Table 22 - Investment Cash-on-Cash and IRR (thousands of €) ...... 36 Table 23 - Corticeira Amorim Results (thousands of €) ...... 37 Table 24 - Corticeira Stopper's BU Results (thousands of €) ...... 37 Table 25 - Guala Closures Results (thousands of €) ...... 37 Table 26 - OENEO Results (thousands of €) ...... 38 Table 27 - AMCOR Sales (thousands of €) ...... 38 Table 28 - Sales by BU (thousand of €) ...... 38 Table 29 - EBITDA by BU (thousands of €) ...... 38 Table 30 - Stoppers Global Market Share ...... 39 Table 31 - Debt to EV (thousands of €) ...... 39 Table 32 - Corticeira Amorim Valuation Benchmark (thousands of €) ...... 39 Table 33 - Guala Closures Valuation Benchmark (thousands of €) ...... 39 Table 34 - OENEO Valuation Benchmark (thousands of €) ...... 39 Table 35 - Change in WC (thousands of €) ...... 39

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