European Winter Update February 2013 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 (0.1%) +2.6% (2.3%) (0.4%) Environment1 Business Diversified Energy & Healthcare & Transport & ADG4 Consumer TMT6 Services Industrials5 Power Life Sciences Logistics7 Last Quarter 1.4% 6.1% 4.2% 4.0% (2.2%) 0.4% 1.6% 5.4% European Equity Market8 Last Year 19.3% 19.4% 14.4% 13.0% (2.1%) 20.5% 13.4% 13.0% Last 3 Years 36.4% 13.4% 23.3% 17.2% (7.5%) 0.4% 26.1% 7.3% European M&A Deal Volume (62.5%) 2.3% (18.8%) 3.3% (44.8%) (22.9%) (15.6%) (16.1%) Activity9 Inbound M&A Deal Volume 0.0% 133.3% (5.6%) 0.0% 0.0% (66.7%) (30.0%) (77.8%) to Europe9 Sources: Eurostat, Bloomberg, Markit Economics, S&P Capital IQ • European M&A activity declined across nearly all sectors in Q4 2012, falling 27% compared to Q4 2011, as macro-economic M&A concerns persisted. Only Business Services and Diversified Industrials saw quarter-on-quarter increases in activity Environment • Within Europe, Scandinavia accounted for 19% of overall European activity by volume compared to 15% in Q3 2012. UK & Eire fell from 33% to 28% by volume during the same period • Boeing’s 601 deliveries and over 1,200 orders allowed it to surpass European rival Airbus for the first time since 2002. However, teething issues have seen the grounding of all new 787 Dreamliners ADG • The outlook for aerospace orders remains strong, but headwinds are expected in defence as governments reduce spending on armed forces • The increasingly competitive environment for government contracts is likely to lead to industry consolidation amongst UK business services providers Business Services • M&A activity in the HR outsourcing industry has remained robust in 2012 with ADP, Insperity and Paychex each making acquisitions • Following a Christmas trading period seeing discounting by many high-street retailers to sure sales in the UK, retail chains Blockbuster, HMV and Jessops all entered administration, with difficult trading conditions expected to continue throughout Consumer 2013 • According to Markit, UK consumer spending in December 2012 dropped 1.7% year-on-year and 0.9% month-on-month as shoppers pursued online bargains rather than turn to high street retailers for their Christmas shopping • The Eurozone’s industrial production declined further in Q4 2012 with industrial output at its lowest point in nearly three Diversified years. The decline has been felt across the board with capital goods production falling at its steepest pace since 2009 Industrials • Recent improvements in the US economic outlook have driven gains in European Diversified Industrial equities in the second half of the quarter • Norwegian upstream capital spending hit a record $25 billion in 2012, while M&A activity increased by 70% to $3.9 billion Energy & Power • UK utilities have instituted a series of gas and electricity price hikes amidst increased wholesale energy costs and government social schemes • M&A activity in UK and US healthcare is expected to rise in 2013 following new regulations designed to enhance private Healthcare & sector activity in the NHS and regulation imposed by the healthcare reform law in the US Life Sciences • Baxter International, the world’s second largest provider of dialysis products, agreed to buy Swedish competitor Gambro for €2.5 billion • The value of M&A in the sector decreased as firms opted for smaller, strategic buys, with the number of deals in Europe in TMT Q4 2012 dropping 17% year-on-year, while deal value fell 58% over the same period • Global mobile advertising spend doubled last year and is expected to reach $37 billion by 2016 • UPS abandoned the €5.2 billion takeover offer for TNT Express due to opposition from the European Commission amidst Transport & antitrust concerns Logistics • Manchester Airport Group agreed to acquire Stansted Airport for £1.5 billion 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 31 December, 2012 (1) For the countries based in the EU27; (2) Year-on-year GDP growth for Q3, 2012; (3) PMI, CCI and CPI quarterly growth shown for September-December, 2012; (4) Aerospace, Defence & Government Services; (5) Also includes Building Products and Paper & Packaging; (6) Telecom, Media & Technology; (7) Also includes Speciality Distribution; (8) For all listed companies based in the countries mentioned above and with a market cap greater than €50m; (9) Change from Q3 2012 to Q4 2012 1 European Economic Climate • Final data from Eurostat showed that the Eurozone GDP contracted by 0.1% y-o-y in Q3 2012, in-line with preliminary estimates for the quarter and confirming a technical recession • Britain's economy shrank 0.3% in Q4 2012, signalling output was stagnant over the whole of last year and increasing the prospect of a triple-dip recession, according to forecasts from the National Institute of Economic and Social Research • Fitch estimates the Eurozone contracted by 0.5% in 2012 and expects stagnation in 2013, followed by a modest return to growth of 1.2% in 2014 Quarterly Real GDP Growth (% Y-o-Y for EU-27) % Y-o-Y Growth 6% Key Countries Q3 12A Q3 13E Germany +0.9% +0.9% 4% Sweden +0.3% +1.0% 2% UK +0.0% +0.6% France 0.0% (0.1%) 0% Netherlands (1.5%) (0.0%) Spain (1.5%) (1.6%) (2%) Italy (2.4%) (1.0%) (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, latest available data as of January 29th, 2013 • The Eurozone Composite Purchasing Managers Index registered a nine-month high of 47.2 in December, in-line with the annual average but still below levels indicating growth (>50.0) • Industrial output across the Eurozone declined by 0.3% in November, representing the third consecutive monthly fall and underperformance versus consensus estimates • Consumer confidence remained depressed in December with the Consumer Confidence Indicator declining 0.6 points relative to the September figure • Inflation across the 17 European Union countries was unchanged at an annual rate of 2.2% both in November and December • Unemployment rate in the Eurozone rose to a record high of 11.8% in November from 11.7% in October • European Central Bank held its benchmark interest rate at 0.75% for a sixth straight month 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%) Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 (1) (2) (3) Change (M-o-M %) Eurozone PMI CCI CPI Y-o-Y % Sources: 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 middle-market decreased by 13.3% in Q4 2012, the third successive quarter of contraction. Deal volume fell to levels not seen since Q3 2009. The decline was primarily driven by the Consumer and TMT sectors which exhibited the largest absolute reduction in activity • Senior loan volume in LBOs for the 3 months to 30th November 2012 increased to circa €7.9 billion, up from €5.2 billion for the 3 previous months • The average purchase multiple1 for LBOs with purchase price of less than €250 million was 7.4x EBITDA during the eleven months ending in November 2012 • Equity contribution2 in LBOs averaged 52% for 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 Middle-Market M&A Activity – By Sector 1,600 Q4 - 12 Change of 1,400 Sector Q4 - 12 over Breakdown Q4 - 11 1,200 ADG 0.3% (76.9%) 1,000 Energy & Power 1.7% (46.7%) Transportation & Logistics 7.7% (22.3%) 800 Healthcare 6.7% (33.3%) 600 Business Services 14.2% (17.7%) Number ofTransactions Number 400 Diversified Industrials 16.6% (30.4%) 200 TMT 29.1% (16.6%) Consumer 23.7% (34.6%) 0 Q4-10 Q2-11 Q4-11 Q2-12 Q4-12 Total 100.0% (26.9%) 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 Q4 20121 Transactions