Global Investment BankingIntroduction June 2015 Notice to Recipient Confidential “Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of AmericaCorporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., which are both registered broker dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered (the “Company”) in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than asspecifically contemplated by a written agreement with us. These materials are based on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise reviewed by us. We assume no responsibility for independent investigation or verification of such information (including, without limitation, data from third party suppliers) and have relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the managements of the Company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the bestcurrently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar with the business and affairs of the Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materials are not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security in connection therewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared with a view toward public disclosure under applicable securities laws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without our prior written consent. These materials may not reflect information known to other professionals in other business areas of Bank of America Corporation and its affiliates. Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, assetand investment management, financing and strategic advisory services and other commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds thatinvest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, potential counterparties or any other company that may be involved in a transaction. Products and services that may be referenced in h t e accompanying materials may be provided through one or more affiliates of Bank of America Corporation. We have adopted policies and guidelines designed to preserve the independence of our research analysts.The BAC Group prohibits employees from, directly or indirectly, offering a favorable research rating or specific price target, or offering to change a rating or price target to a subject company as consideration or inducement for the receipt of business or for compensation and the BAC Group prohibits research analysts from being directly compensated for involvement in investment banking transactions. We are required to obtain, verify and record certain information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company inaccordance, as applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States. We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to anysuch tax statement in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support thepromotion or marketing of the transaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor. Notwithstanding anything that mayappear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2014 Bank of America Corporation. Mergers & Acquisitions 2 3. Investment Banking Overview 1 2. Enfoca’s Sale of Maestro to Falabella Peru 13 4.Global Investment Banking Introduction Table of Contents 1. Equity Capital Markets 19 . Investment Banking Overview . Media & Telecom Financial Institutions Group Financial Sponsors Energy & Power I-banking is an intermediary between providers and users of capital.What is Investment Banking? Providers of Capital Mutual funds 401(k) funds Venture capital firms Private equity/LBO shops Corporations Governments Individuals Users of Capital Investment Banking Product Groups Mergers & Acquisitions (M&A) Leveraged Finance Capital Markets Equity Capital Markets Debt Capital Markets Capital Structure & Advisory Solutions Corporations Public and private Governments Public sector organizations Schools Hospitals Multilateral institutions Industry Groups Consumer/Retail Diversified Industrials Technology. working across a broad range of products and industry groups 1 . Mergers & Acquisitions . sell or hold positions in a given security? Valuation Hostile defense Is our company undervalued/ vulnerable to a raider valuation? Public equity offerings For how much should we sell our company/division in the public market? New business presentations Various Applications 2 Debt offerings What is the underlying value of the business/assets against which debt is being issued? .Mergers & Acquisitions Why is valuation important? Divestitures How much should we sell our company/division for? Acquisitions How much should we pay to buy the company? Fairness opinions Is the price offered for our company/division fair (from a financial point of view)? Research Should our clients buy. Mergers & Acquisitions Scope of Work Key Objectives Maximize speed of transaction Limit strain on management team (buyer "beauty contest") Maximize purchase price through competitive process Limit/manage information leaks Maximize certainty of close Stages of Compact Sale Process 3 Define transaction strategy Merrill Lynch to perform due diligence Begin commitment for stapled financing Merrill Lynch to prepare Teaser Prepare Descriptive Memorandum (DM) Prepare Confidentiality Agreement (CA) Select and approach potential strategic and financial buyers Distribute/negotiate CAs Prepare audited financials Phase 2: Confirmatory Diligence and Final Bids (~4 Weeks) Phase 1: Marketing and Initial Bids (~4 Weeks) Preparation / Contact Buyers (4-6 Weeks) Finalize audited financials Deliver DMs to potential buyers Maintain dialogue with potential buyers Begin management presentation and data room preparation Begin drafting Sale and Purchase Agreement (SPA) Solicit non-binding indications of interest Interview first round bidders Collect feedback through Merrill Lynch system Invite selected buyers to second round Distribute SPAs Maintain dialogue with potential buyers Hold management presentations Allow site visit(s). as appropriate Allow access to virtual data room and confirmatory due diligence Solicit binding proposals Final Negotiation & Signing (1-2 Weeks) Receive and evaluate binding proposals Negotiate as required Finalize and execute SPA Make public announcement . Mergers & Acquisitions Valuation Methodologies Valuation Methodologies 1 2 Publicly Traded Comparable Companies Analysis Comparable Transactions Analysis 4 Discounted Cash Flow Analysis Leveraged Buyout/ Recap Analysis "Public Market Valuation" "Private Market Valuation" "Intrinsic" value of business Value to a financial/LBO buyer Value based on market trading multiples of comparable companies Value based on multiples paid for comparable companies in sale transactions Present value of projected free cash flows Value based on debt repayment and return on equity investment 4 3 Applied using historical and prospective multiples Does not include control premium Includes control premium Incorporates both shortterm and long-term expected performance Risk in cash flows and capital structure captured in discount rate Other Liquidation analysis Break-up analysis Historical trading performance Expected IPO valuation Discounted future share price EPS impact Dividend discount model . Mergers & Acquisitions The Valuation Process 1 2 Publicly Traded Comparable Companies Utilizes market trading multiples from publicly traded companies to derive value Comparable Acquisition Transactions Utilizes data from M&A transactions involving similar companies 3 4 Discounted Cash Flow Analyzes the present value of a company's free cash flow Leveraged Buy Out Used to determine range of potential value for a company based on maximum leverage capacity Determining a final valuation recommendation is a process of triangulation using insight from each of the relevant valuation methodologies 5 . small capitalization and poorly followed stocks may not reflect fundamental value Different accounting standards Different level of information according to national stock market requirements 6 . industry trends. lower or the same as the average of the sample May be short term divergences from fundamental value Thinly traded. etc Basic tool for estimating market value Provides check for DCF Values obtained are reliable indicators of the value of firm for minority investment Cons Difficult to identify 100% comparable companies Must make the difficult decision whether the company being analyzed is valued higher.Mergers & Acquisitions 1 Publicly Traded Comparable Companies Pros Market values incorporate perception of all investors reflecting firm prospects. market growth. business risk. Mergers & Acquisitions 1 Comps Main Considerations Operational Financial Industry Cyclicality Product Growth prospects Markets Size Distribution channels Margins Customers Leverage Seasonality Shareholder base (influence of a large shareholder) Cyclicality Key comparables must be in same business as target 7 . particularly forward-year P/E estimates Consensus prospective EPS figures available Distorted by different accounting practices. consumer sectors Equity Value/Net income Price/EPS (P/E) – Equity Value/After-Tax Cash flow Price/Book Value 8 Independent of leverage Equity Value/Book Equity Valuation multiple can be calculated on both a latest twelve months ("LTM") and a forecasted basis Useful for capital intensive industries and financial institutions Reflects long-term profitability outlook Distorted by different accounting practices.) Commonly Used Multiples Multiple Typical valuation measures include: Enterprise Value/EBITDA Enterprise Value (EV) multiples – EV/EBITDA – EV/EBIT – EV/Sales Price/Earnings (P/E) P/E to Growth (PEG) Pros Good ratio in cyclical industries Good for cross-country comparisons Independent of leverage Distorted by differing tax rates in comps Widely used by investors. etc. particularly depreciation Highly sensitive in cyclical companies Can be distorted by leverage Distorted by different depreciation/accounting policies EV/EBITDA is a better ratio Distorted by accounting differences Need profitability cross-check Enterprise Value/EBIT – – Equity Value multiples – Cons Performance Measures Growth Rates Sales Operating Income Net Income Margins/Profitability Gross margin EBITDA margin EBIT margin Net income margin Operating margin Return on total invested capital (industrial companies) Return on equity (FIG) Capitalization/Credit Leverage and liquidity ratios Coverage ratios . particularly depreciation Highly sensitive in cyclical companies Can be distorted by leverage Normalizes P/E ratios for growth prospects Widely used in industrial. EPS.Mergers & Acquisitions 1 Selecting Relevant Metrics It is important to select the appropriate metrics the companies in a peer group trade off of (revenue. EBITDA. major potential liabilities When seeking guidance regarding structure. divestitures. reverse mergers. hostile transactions. margins. profitability) 9 Considerations Technical transaction elements (deal protection. clients. relative market position. management) Other value drivers (synergies. not be considered as a comparable transaction Acquisitions of a minority interest (not a change of control transaction) Rumored or withdrawn transactions Recent deals are typically a more accurate reflection of the values buyers are willing to pay Remember that some transactions are more relevant than others when selecting a range of multiples for valuation . key objective is to find the most comparable businesses Similar industries with similar products or services Size. conditions to closing) Social issues (board seats. try to locate transactions in a similar industry as well Some types of transactions should. lenders to understand the: Valuation of a company Structuring of a potential transaction Current state of M&A in a specific industry (number and relative value) Examines a group of transactions to identify a median/range/trend of: The multiple (of cash flow. stock acquisitions. generally. asset vs.Mergers & Acquisitions 2 Comparable Acquisition Transactions Overview Assists investment bankers. operating profit. consideration. and many others If possible. tax benefits) When valuing a company. bankruptcy-related acquisitions. earnings or other industry metrics) paid for a target The premium paid to gain control of a target ("control premium") Business fundamentals of a target (revenue/earnings growth. the situation surrounding the acquisition is crucial Scenarios could include: LBO’s. Mergers & Acquisitions 3 Discounted Cash Flow Overview Discounted cash flow analysis is based upon the theory that the value of a business is the sum of its expected future free cash flows. but certain rules of thumb always apply 10 Do not simply plug numbers into equations You must apply judgment in determining each assumption . based on several key projections and assumptions Free cash flows – Terminal value – What is the projected operating and financial performance of the business? What will be the value of the business at the end of the projection period? Discount rate – What is the cost of capital (equity and debt) for the business? Depending on practical requirements and availability of data. DCF analysis can be simple or extremely elaborate There is no single "correct" method of performing DCF analysis. particularly if no comparable publicly-traded companies or precedent transactions are available DCF analysis is a forward-looking valuation approach. discounted at an appropriate rate DCF analysis is one of the most fundamental and commonly-used valuation techniques Widely accepted by bankers. corporations and academics – Corporate clients often use DCF analysis internally – One of the most heavily used valuation techniques in M&A transactions DCF analysis may be the only valuation method utilized. Mergers & Acquisitions 3 11 DCF Analysis Process Projections/FCF Project the operating results and free cash flows of the business over the forecast period (typically 10 years. but can be 5–20 years depending on the profitability horizon) Projections/FCF Terminal Value Estimate the exit multiple and/or growth rate in perpetuity of the business at the end of the forecast period Discount Rate Estimate the company’s Weighted Average Cost of Capital (WACC) to determine the appropriate discount rate range Present Value Determine a range of values for the enterprise by discounting the projected free cash flows and terminal value to the present Adjustments Adjust the resulting valuation for all assets and liabilities not accounted for in cash flow projections . net of excess cash Present value obtained is the value of assets. assuming no debt or excess cash ("firm value" or "enterprise value") Debt associated with the business is subtracted (and excess cash balances are added) to determine the present value of the equity ("equity value") Cash flows are discounted at a weighted-average cost of capital DCF Of Unlevered Cash Flows Most common in valuation of financial institutions Projected income and cash-flow streams are after interest expense and net of any interest income Present value obtained is the value of equity Cash flows are discounted at the cost of equity 12 .Mergers & Acquisitions 3 Free Cash Flows (Levered and Unlevered) DCF Of Unlevered Cash Flows Focus of these materials Projected income and cash-flow streams are free of the effects of debt. Enfoca’s Sale of Maestro to Falabella Peru . 1x LTM EBITDA (1) This transaction represents: ― The largest retail transaction in Peru in the last 7 years ― The first exit of Enfoca’s portfolio and sale of its first investment ― The largest sale of a business managed by a Private Equity fund in Peru Enfoca and Maestro Highlights Enfoca. Broker Research. took control in 2009 and achieved full ownership in 2012 As of December 2013. Excludes Pesquera Diamante. equity value). 2014 Enfoca announced the sale of 100% of Maestro Peru to Falabella Peru (through Sodimac) for S/.Enfoca’s Sale of Maestro Peru to Falabella US$714 million TEV (1) Has agreed to sell 100% of To September 2014 BofAML acted as Financial Advisor to Enfoca BofA Merrill Lynch’s Role BofAML acted as financial advisor to Enfoca The transaction highlights BofAML’s leading position as an M&A advisor in Peru and its ability to maximize value for its clients Transaction Summary On September 17. one of the largest private equity firms in Peru with over US$ 700 million in assets under management. (2) Displays companies where Enfoca has a controlling stake. (1) Based on publicly available information. implying an enterprise value multiple of 16.800 employees Maestro has a ~41% share of the Peruvian modern home improvement market by sales Enfoca Investment Portfolio (2) Home improvement Home Improvement Modern Channel Education Promart 14% Tiles and sanitary Healthcare 45% Peru Source: Press releases.404 million (US$492mm. holds investments in 7 companies (ex-Maestro) operating in markets with high growth potential Maestro began operations in 1994 under the name “Ace Home Center”. Maestro had 30 stores (16 of which are in Lima) and over 3. and Apoyo Consultoria Retail report (2013). Company public filings. 13 41% Media . 1. Enfoca acquired a minority stake in 2007. Apoyo Consultoria Retail report (2013) and Kantar Worldpanel. led by experienced management team • ____________________ Source: Company filings. 14 5 Undisputable Market Leadership HI Modern Channel Market Shares in Peru PF Sales: ~US$1BN Market share: 85% Promart • 8 14% 45% 41% Peru .000 Inhabitants • Favorable long-term macroeconomic environment • Underpenetrated home improvement market with ample room for growth 211 66 • Leading home improvement player in Peru focused on the most attractive customer segments • Differentiated service model resulting in high customer loyalty • Unique store footprint with nationwide presence and capacity to continue expanding in a profitable manner 20 10 Proven growth with profitability and operational track record Highly trained and skillful workforce.Maestro Peru: A Unique Investment Opportunity Key Investment Highlights Low Home Improvement Stores Penetration (1)(2) M2 per 10. MM) 30 1. 15 LTM 2009 2013 LTM 2009 .Maestro’s Impressive Track Record Under Enfoca Proven Track Record of Expansion (1994–2013) Founded by the Vurnbrand Family under the brand "Ace Home Center” New entrants compete with a similar product matrix New business strategy with a project-based focus Opens 11 new stores 2009-2013 2002.520 133 127 2013 LTM 12 55 659 2009 2013 ____________________ Source: Company filings and Wall Street Research.2009 1997-2002 1994-1997 Store Evolution 30 Sales (S/. MM) Enfoca takes control Continues expansion in Lima and accelerated growth in provinces EBITDA (S/.469 1. 2014 “The acquisition increases Falabella’s sales mix both to Peru – from 21% to 24% . September 26.” Broker 5. banner rationalization. and that some evident synergies might make the deal accretive in the medium term. 16 Oct-14 S&P 500 0 Oct-14 IPSA “Maestro should help extend Falabella’s dominance of the underpenetrated.000 98% 14.” Broker 4. 2014 18.” Broker 1. 2014 92% 8.” Broker 3.000 96% 12. in areas including procurement.000 100% 16. September 10. September 17. pricing.000 102% “The acquisition makes strategic sense and has lower risks than entering markets in which Falabella has less experience. October 1.000 84% Sep-14 Sep-14 Falabella Oct-14 Falabella Volume (‘000) ____________________ Source: Broker Research.000 90% 6. in our view. fragmented and fast-growing Peruvian market. Factiva News. September 22.Favorable Market Reaction Upon Announcement Falabella’s Share Price Performance Indexed 104% Broker Commentary Stock closed 2. 2014.000 94% 10.and to home improvement.4% up after 5 trading days. advertising and back office.1% up following announcement and 4. Falabella’s strongest format.000 88% 4.000 86% 2.” Broker 2. 2014 “We see potential synergies representing 400bps of Sodimac’s and Maestro’s combined sales. 2014 . even amidst a general market decline Volume (‘000) 20. FactSet as of October 31.000 “We believe this was the right strategic move in the Peruvian DIY industry. 14 $227 • Exploit Maestro’s consumer finance upside potential through increased in-store sales penetration and decreasing marginal costs (-) Cash & Equivalents 6. Figures converted at an FX rate of 2.14. 17 other revenue enhancements Analysts estimate combined EBITDA margin expansion of approximately 400bps as a result of synergies .14) 16.855 PEN/USD. Company public filings and Wall Street research.30. (1) Based on publicly available information.30. overhead and back-office expense reductions (+) Total Debt 6.30.Financial Highlights and Potential Synergies Acquisition Price and Enterprise Value (1) Potential for Significant Synergies Item • Gross margin expansion through improved US$MM competitive position and procurement Equity Value $492 • Significant SG&A.1x • Consolidation of distribution centers and routes • Improve profitability of private label products and ____________________ Source: Press releases. Balance sheet data as of 6.14 ($6) = Enterprise Value $714 EV / EBITDA 2013 15.30.3x EV / EBITDA LTM (6. the transaction represents one of the highest valued in the Latin American retail space The market welcomes inorganic growth initiatives with compelling strategic rationale ─ With a combined market share of ~85%.Key Lessons Learned International investors have faith in Peru’s long-term potential.1x. despite a temporary deacceleration in economic growth ─ Although expected real GDP growth decreased to ~3. a strong rebound is expected for 2015 and 2016.1% for 2014. making Peru one of the fastest growing economies in the region ─ Peru’s highly underpenetrated home improvement market and expanding middle class offer significant upside potential in the retail space Scalable franchises with leading market positions command premium valuations ─ 18 At an implied EV / LTM EBITDA multiple of 16. Sodimac and Maestro will become the undisputable leaders of the Peruvian home improvement industry ─ Research analysts expect a combined EBITDA margin expansion for Maestro and Sodimac of ~400 bps due to synergies . Equity Capital Markets . founders (estate planning) management and employees Corporate governance and SOX compliance Distraction for management Set a public market valuation “Fishbowl” existence De-lever the balance sheet 19 Disclosure of information to competitors / vendors Prestige & publicity Fees & expenses Upgrade management & attract/retain good employees Accurate financial reporting Establish an acquisition currency Vulnerability & change of control Alternative to Sale of Company Alternative to Sale of Company .Initial Public Offerings 26 Why Go Public? IPO: The first sale of stock by a private company to the public Benefits Considerations Fund growth Dilution of ownership Liquidity for financial sponsors. Calls • Group Events • Internet Roadshow .) Due Diligence/Preparation: • Legal Preparation • File the Prospectus • SEC Review 3.) Pricing: • Allocation • Stock begins trading 2.) 5.) Buildbook: • Gather feedback from Salesforce • Institutional / Retail • Market Message 4.The Life of an IPO and Add-On 20 1.) Win Mandate 6.) Launch Deal: • Investor Targeting • Sales Teach-In • Mgmt Presentation • Schedule Booking Roadshow: • One-on-Ones / Conf. top end is target Roadshow feedback and bookbuilding Set offer price and complete allocation of the shares . bottom end is “hook”.Price Discovery A price discovery process .the marketing process collects and interprets market information to optimize pricing Set initial wide range 21 Research analyst vetting process Discussions between Company and Bookrunner to refine range Preliminary prospectus price range.
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