Deals, Dollars, and Disputes MAXIMIZING VALUE MINIMIZING RISK A Summary of Private Equity Transactions for the Quarter Ended March 31, 2015 CONTENTS Our Process and Methodology................................................. 1 Summary of Q1 2015 PE Firm Transaction Activity................. 2 Volume and Value of PE Deals Decreased in Q1 of 2015 ............................. 2 Distribution of Deal Values for the Trailing Five Quarters............................ 3 Top 20 PE Firm Transactions by Deal Value Completed During Q1 2015 ............................................................................................................. 5 Acquisitions, Divestitures, and Secondary Buyouts During the Trailing Five Quarters ................................................................... 6 Transaction Analysis by Industry ................................................................... 7 Featured Transactions and Insights ........................................ 8 FCPA Risk Mitigation – International Private Equity Targets ....................... 8 Value Opportunity in Market Reaction to Accounting Issues? ................. 11 Introduction We are pleased to present you with our Deals, Dollars, and Disputes report for the quarter ended March 31, 2015. Our quarterly report involves a study of the merger and and acquisition transactions involving private equity firms (“PE firms”) during the Our Objective recent quarter and over the past five quarters. Our objective in preparing this report is to provide a general overview of the volume and value of transactions during the year along with an analysis of trends when compared to prior periods. As an independent consulting firm with financial and accounting expertise, we are committed to contributing thought leadership and relevant research regarding business and valuation matters to assist our clients in today’s fast-paced and demanding market. This report is just one example of how we intend to fulfill this commitment. We appreciate your comments and feedback and welcome requests for any additional analysis that you might find helpful. Floyd Advisory APRIL 2015 Deals, Dollars, and Disputes | Q1 2015 | Floyd Advisory Our Process and Methodology We studied financial data for transactions involving PE firms, both as buyers and sellers, over the past five quarters for target companies headquartered in North America. As part of our review, we gathered and analyzed relevant transaction information and data such as industry sector, equity interest, and deal structure, and created a database for our further analyses. From this information, we analyzed market trends by industry, common attributes, valuation premiums, and other characteristics. We have prepared this report applying our professional judgment to these analyses. For the purposes of this report, the transaction data we have analyzed is limited to publicly available information. Page 1 Floyd Advisory | Q1 2015 | Deals, Dollars, and Disputes Summary of Q1 2015 The first quarter of 2015 experienced a significant dip in both value and PE Firm Transaction Activity activity compared to the fourth quarter of 2014. Volume and Value of PE Deals Decreased in Q1 of 2015 NORTH AMERICAN PE DEAL LANDSCAPE Trailing Five Quarters as of March 31, 2015 900 $140 ■ No. of Announced Deals ■ No. of Completed Deals Total Value of Completed Deals 800 OF DEALS (in Billions) VALUE TOTAL $120 700 759 743 686 700 $100 651 600 635 624 597 500 539 $80 510 400 $60 NO. OF DEALS 300 $40 200 $20 100 0 $0 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Source: Zephyr Note: Includes data for which transaction details were reported and available. The first quarter of 2015 experienced a significant dip in both value and activity compared to the fourth quarter of 2014. The total value of completed deals decreased 24% and both announced and completed deals decreased more than 13% each. Many in the industry anticipated such first-quarter results given the continued climate of high valuations and increasing competition within the merger and acquisition markets. When comparing year-over-year results, this year’s first quarter scored significantly lower in terms of deal activity, but still slightly higher in terms of completed deal value relative to a year ago. In Q1 2015, the value of the top 20 completed North American deals was 33% more than those during the first quarter of 2014, driving at least in part this lower-activity/higher-value trend. Page 2 Deals, Dollars, and Disputes | Q1 2015 | Floyd Advisory Over the last five quarters, there has been an average of eight percent more deals announced than deals completed. Numerous factors including regulatory approval, break-ups, and terminations can explain the variance between deals being announced and those completed. The variance is also partly explained by the difficulties around confirming completions when transactions involve privately-held companies. Distribution of Deal Values for the Trailing Five Quarters The two graphs (shown below and on the next page) illustrate subsets of value, segmenting total quarterly PE acquisitions and PE divestitures, respectively. The transaction data behind the percentages depicted in these graphs does not encompass secondary buyouts, wherein both the buyer and seller groups included PE firms. DISTRIBUTION OF VALUE – PE ACQUISITIONS ■ Less than $50M ■ $50M – $499M ■ $500M – $999M ■ $1B – $2B ■ Greater than $2B “A rising economy and the increased availability of financing continue Q1 12% 43% 28% 17% 0% 2015 to give middle market company founders, and their private equity Q4 partners, reason to sell 2014 8% 37% 8% 35% 13% their companies and take advantage of high exit Q3 multiples.” 2014 9% 25% 14% 29% 23% “Private Equity Gearing up for Exits,” Nasdaq.com, 3/23/2015. Q2 2014 7% 20% 15% 18% 40% Q1 2014 11% 37% 23% 13% 16% Source: Zephyr Note: Includes data for which transaction details were reported and available. Two acquisition trends appear within the North American PE market over the past four quarters. First, there has been a steady decrease in the total value of acquisitions greater than $2 billion. Second, there has been more investment in the lower-middle market range ($50 million to $500 million). High prices and stiff competition could be partly accountable for these trends, but another dynamic may be the abundance of blockbuster deals over the past year. In a recently published article, The Wall Street Journal surmised that the private equity industry is apparently “fresh out of fat targets.”1 This may bear some truth throughout the past quarter, however PE firms are still sitting on sizeable funds awaiting investment. 1 Kessler, A. “The Glory Days of Private Equity are Over”, The Wall Street Journal, 3/29/2015. Page 3 Floyd Advisory | Q1 2015 | Deals, Dollars, and Disputes For PE divestitures, the graph below illustrates a seller’s market that is still thriving. PE firms have been able to part ways with their portfolio companies for sums greater “To be sure, private than $2 billion with relative consistency for the past three quarters. This uninterrupted equity firms will try to streak could be due to sustained low interest rates and strengthening equity markets innovate in their quest resulting in confident buyers. for better performance. But when it comes to fundamental structure, DISTRIBUTION OF VALUE – PE DIVESTITURES few firms will deviate ■ Less than $50M ■ $50M – $499M ■ $500M – $999M ■ $1B – $2B ■ Greater than $2B sharply from what has worked for them for decades. If there is Q1 0% 19% 21% 12% 47% 2015 movement, it will be glacial.” Q4 2014 0% 18% 13% 16% 53% Primack, D. “Private equity is changing slower than you’ve heard,” Fortune, 3/31/2015. Q3 2014 1% 20% 14% 11% 54% Q2 2014 1% 34% 33% 16% 17% Q1 2014 1% 24% 22% 20% 33% Source: Zephyr Note: Includes data for which transaction details were reported and available. Page 4 Deals, Dollars, and Disputes | Q1 2015 | Floyd Advisory Top 20 PE Firm Transactions by Deal Value Completed During Q1 2015 “Petsmart’s $8.7 billion sale to a consortium led by private Deal Value equity firm BC Partners is a big PE Deal Acquiring Entity Target Primary US USD Target Seller year-end coup for hedge fund Role(s) Type (Advisors) SIC Description (in Millions) Jana Partners. The deal is also the second major leveraged $11,184 Buyer, Safeway Inc. Jana Partners LLC, MAJ "AB Acquisition LLC Online groceries retailer, buyout spurred on by the Barry 1 Seller Shareholders (Cerberus Capital Supermarket operator Rosenstein-run activist fund in Management LP)” 2014, after the firm urged the sale of supermarket chain Safeway $8,700 Buyer, Petsmart Inc. Jana Partners LLC, MAJ BC Partners LTD, Online pet supply retailer, in the first half of the year. In 2 Seller Longviews Asset La Caisse de Depot Pet grooming services, Pet hotel Safeway and now Petsmart, Jana Management LLC, et Placement du services, Pet supplies retailer, identified large publicly traded Shareholders Quebecm Stepstone Pet training services, retailers that could be swallowed Group LLC Veterinary services up by private equity firms in spite of their reticence to do $8,100 Buyer, Indcor Properties Inc. The Blackstone Group LP MAJ Global Logistics Warehouses and industrial mega buyouts and doubts about 3 Seller Properties LTD, properties real estate services the ability of banks to finance GIC PTE LTD highly leveraged deals amid new regulations.” $6,205 Seller Rockwood Kohlberg Kravis Roberts & MAJ Albemarle Speciality chemicals 4 Holdings Inc. Company LP, Shareholders Corporation