2006 PARIS The internet view on M A

2006 PARIS

The internet view on M&A

Today’s agenda Changing scenario for pensions in M&A– The North American Perspective Tony Broomhead, Watson Wyatt Changing scenario for pensions in M&A– Continental Europe John Hall, Mercer Human Resource Consulting Changing scenario for pensions in M&A– Recent Changes in the UK Richard Cousins, PWC

Changing Scenario for Pensions in Mergers and Acquisitions North American Perspective Tony Broomhead (Watson Wyatt, US)

Understanding the Deal and the Role of the Actuary • Type of Buyer • Reason for Buying • Type of Deal – Stock or Asset • Whole Company or Part • Who is Advising Whom? • Friendly or Hostile Transaction? • Stage of Deal

Market Overview – North American M&A Split by Deal Size Value ($bn) Source: Merger Markets Volume

Top 5 North American Corporate Deals in US$ 2004 1 – JP Morgan Chase – Bank One – Financial Services : 57. 88 bn 2 – Cingular Wireless – AT&T Wireless Services – Telecomms : 47. 02 bn 3 – Sprint Corp. – Nextel Communications – Telecomms : 40. 76 bn 4 – Exelon Corporation – PSEG (Public Service Enterprise Group) – Energy, Oil & Gas : 25. 97 bn 5 – Wachovia Corp. – South. Trust Corp. – Financial Services : 14. 3 bn 2005 1 – Procter & Gamble – Gillette – Consumer : 55. 69 bn 2 – Bank of America – MBNA Corporation – Financial Services: 34. 86 bn 3 – Viacom (Shareholders) – Viacom Inc – Media: 33. 2 bn 4 – SBC Communications Inc – AT&T Corp – Telecomms : 21. 65 bn 5 – Koch Industries Inc – Georgia-Pacific Corporation – Consumer : 21. 0 bn

Market Overview – Private Equity There has been a consistent increase in the value of deals in $ bn over the passed 4 years The market is expected to cool down in 2006 Source: Merger Markets

Top 5 North American Private Equity Deals in US$ 2004 1 – Comcast Corporation/DLJ Merchant Banking Partners/Providence Equity Partners Inc. /Sony Corporation of America/Texas Pacific Group – Metro. Goldwyn-Mayer : 4. 85 bn 2 – Kohlberg Kravis Roberts & Co. – Pan. Am. Sat Corporation: 4. 08 bn 3 – Riley Property Holdings LLC – LNR Property Corporation : 3. 7 bn 4 – Boise Cascade LLC – Boise Cascade (Paper, forest products, and timberland assets) : 3. 7 bn 5 – Texas Genco LLC – Texas Genco Holding Inc. : 3. 65 bn 2005 1 – Clayton/Dubilier & Rice/Merrill Lynch Global Private Equity/The Carlyle Group – The Hertz Corporation: 15. 0 bn 2 – Texas Pacific Group/Warburg Pincus – The Neiman Marcus Group : 5. 11 bn 3 – AIG Highstar Capital/Ontario Teachers Pension Plan – Inter. Gen (10 power stations) : 4. 85 bn 4 – 3128012 Nova Scotia Limited – Fairmont Hotels & Resorts : 3. 9 bn 5 – Providence Equity Partners – Kabel Deutschland Gmb. H (63% stake): 3. 43 bn

US Pension Considerations • Aim: Leave accrued past service benefits with seller • Only possible if buying/selling portion of business • If transfer of liabilities: • Seller will look to value ABO (past service liabilities, no salary increases, market discount rate) • Buyer will want value at PBO or higher • Negotiate method and assumptions • Negotiate eligibility conditions • Issues with asset transfers from qualified plans (IRC Sect. 414(l), ERISA Sect. 4044) • May need IRS and PBGC approval

Canadian Pension Considerations • Aim: Leave accrued past service benefits with seller • Only possible if buying/selling portion of business • Buyer must establish a qualified plan (DB or DC) for seller to avoid Regulators requiring partial wind up • Eligibility for past service benefits continues based on total service (incl. service with the buyer) • If transfer of liabilities and qualified plan assets, likely to be share of fund on wind up valuation basis to satisfy Regulators • Provinces have differing requirements

Post-Retirement Medical Considerations • Canada and US very similar • Not vested until retirement and typically not funded • Variety of approaches in asset deals, e. g. • Retire and rehire those eligible for benefits • Allow to grow into eligibility with future service • If eligible, retain benefit, but defer commencement to actual retirement from buyer • If not eligible, no benefit from the seller • If liabilities are transferred, with purchase price adjustment, seller typically requires buyer to retain plan for a period of years

Changing scenario for pensions in M&A– continental Europe John Hall, Mercer Human Resource Consulting

Market Overview Source: Merger Markets

Top 5 European Corporate Deals in US$ 2004 1 – Sanofi – Aventis: 70. 9 bn 2 – Telecom Italia – Mobile (TIM) : 25. 5 bn 3 – KBC Bank – Almanij : 19. 2 bn 4 – Santander – Abbey National: 15. 5 bn 5 – Mittal Steel – LNM Holdings : 11. 8 bn 2005 1 – Gas Natural SDG – Endesa: 52. 3 bn 2 – Telefonica – O 2 : 32. 0 bn 3 – Vinci – Autoroutes du Sud de la France: 20. 9 bn 4 – Unicredito – Hypo. Vereinsbank : 18. 9 bn 5 – Pernod Ricard – Allied Domecq : 16. 6 bn

Market Overview Private Equity Deals 300 1, 750 250 1, 500 1, 250 200 1, 000 150 750 100 50 250 0 0 2001 2002 2003 2004 2005

Top 5 European Private Equity Deals in US$ 2004 1 – Borealis – National Grid Transco: 5. 8 bn 2 – Fortress – Gemeinnuetzige Angestellt : 4. 3 bn 3 – CDR/Eurazeo/Merrill Lynch – Rexel : 3. 7 bn 4 – Elliott Bernerd – Chelsfield: 3. 3 bn 5 – CVC/Permira – Automobile Association: 3. 2 bn 2005 1 – Apax/Blackstone/KKR/Permira– TDC: 16. 0 bn 2 – BNP Paribas – Galeries Lafayette : 11. 1 bn 3 – Terra Firma – Viterra : 7. 5 bn 4 – Access Industries – Baselle: 5. 4 bn 5 – Cinven/Air France/Lufthansa – Amadeus : 5. 3 bn

Overview of Regional Issues §Pan European Plans §Cross-Border Acquisitions §Sourcing and the move to the East §IFRS

Overview of German Issues §Book reserve plans §Pensionskasse §ATZ/Early retirement plans §Jubilee awards

Overview of French Issues §Top-Hat plans §Retiree health plans §DC retirement plans §Restructuring

Overview of Benelux Issues §DC plans §Collective/Industry-wide plans §Early retirement plans §Unions §Company/Fund Separation §Funding

Overview of Southern Europe Issues §Externalization of funding §Individual and management agreements §Reduction in government benefits §Unions and collective labor agreeements

Overview of Nordic Issues §DB plans §Collective/Industry-wide plans §Long-Term disability provisions

Changing Scenario for Pensions in Mergers and Acquisitions Recent Changes in the UK Richard Cousins HR Transaction Services Pricewaterhouse. Coopers

Agenda • • Background to UK Recent legislation Pensions Regulator Impact on transaction

Number and Value of UK M&A Deals (over £ 10 m) • M&A activity continues recovery • Increased number of deals in UK consistent with M&A growth worldwide • Low interest rates have contributed to an increase in the amount of debt leveraged in the average deal.

Background to UK • Defined benefit schemes – In deficit – Closed to new entrants – Increasing closed to future accrual of benefits – Maturing membership profile – Increasing longevity • Recent legislation – Pension Protection Fund established – Pensions Regulator with significant powers – Pension scheme funding rules – Multi-employer regulations

Pension Regulator Powers • Contribution Notices – Act, or failure to act, that is detrimental to the pension scheme – Cash penalty on connected or associated companies or individuals • Financial support directions – May apply if a company is insufficiently resourced to support its pension deficit – Connected or associated company to guarantee support – Pierces corporate veil

Impact on transactions – pensions liabilities an unsecured creditor 1. 2. 3. 4. 5. 6. Creditors with fixed charges Preferred creditors Creditors with floating charges Unsecured creditors Subordinated creditors Equity Prevent reduction in security: • Change in priority • Reduction of capital • Change of control

Impact on transactions – voluntary clearance • Clearance can be obtained from Pensions Regulator • Need to understand the effect of transaction on pension creditor • Need to engage with trustees during transaction process

Scheme Funding Rules • Trustee must – Adopt prudent assumptions – Understand strength of employer – Negotiate with employer • Impact on transactions – Current degree of uncertainty – Likely to lead to increased cash

Multi-employer regulations • Sale of a participating employer triggers buyout/insurance debt • Liability related to actives, pensioners, defereds of participating employer • Impact on transactions – Buy-out debts are significantly higher than IAS 19 deficit – Buy-out debts can be avoided but alternatives are complex and challenges to agree.