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TRANSACTION ADVISORY SERVICES March/April 2006 The Changing Canadian M&A Market FEI Canada Breakfast Seminar TRANSACTION ADVISORY SERVICES March/April 2006 The Changing Canadian M&A Market FEI Canada Breakfast Seminar Confidential 0

Date Private and Confidential M&A Market Participants Confidential 1 Date Private and Confidential M&A Market Participants Confidential 1

M&A Market Participants n Market participants and their roles are changing in today’s transaction M&A Market Participants n Market participants and their roles are changing in today’s transaction environment: Ø Strategic Acquirers Ø Private Equity Groups Ø Public Markets Confidential 2

strategic acquirers Confidential 3 strategic acquirers Confidential 3

Strategic Acquirers n Corporate strategy has increasingly included mergers, acquisitions and divestitures n Many Strategic Acquirers n Corporate strategy has increasingly included mergers, acquisitions and divestitures n Many corporations have established Chief Development Officers (CDO) to lead these efforts. An E&Y survey found: Ø 45% of respondents have no other role and 38% combine the corporate development role with strategy Ø 73% reported to the “C” suite n CDO is a position versus a role, with responsibility for: Ø “Transaction life cycle” Ø Corporate governance and transaction process Ø Pipeline development and link to strategy Confidential 4

Strategic Acquirers (cont’d) CDO – Functional Skills Note: Percentage is of total population – Strategic Acquirers (cont’d) CDO – Functional Skills Note: Percentage is of total population – 175 all Companies Confidential 5

private equity groups (PEGs) Confidential 6 private equity groups (PEGs) Confidential 6

Private Equity Groups n PEGs represent a large and growing source of capital (funds Private Equity Groups n PEGs represent a large and growing source of capital (funds raised 2001 -2004): Source: Thomson Macdonald Confidential 7

Private Equity Groups (cont’d) n PEG funds were invested in a diverse set of Private Equity Groups (cont’d) n PEG funds were invested in a diverse set of transaction types: Source: Thomson Macdonald Confidential 8

Private Equity Groups (cont’d) n The growth in private equity groups also masks some Private Equity Groups (cont’d) n The growth in private equity groups also masks some important underlying changes: Ø Buy out pools now represent nearly half of the private equity universe Ø Private-independent fund managers gain importance: —Account for close to 40% of capital under management —Gaining share as they draw commitments from institutional investors and reorganize from corporate funds Confidential 9

Private Equity Groups (cont’d) Ø These fund managers generally have a diverse background (investment Private Equity Groups (cont’d) Ø These fund managers generally have a diverse background (investment banking, legal and operational) and have a strong understanding of return/risk Ø Vendors may prefer to deal with PEGs: —Not a competitor and therefore less concerns with confidentiality —Clear financial metrics —May have greater structuring flexibility (e. g. , vendor retains a minority stake) Confidential 10

income trusts Confidential 11 income trusts Confidential 11

Income Trusts Source: Scotia Capital Confidential 12 Income Trusts Source: Scotia Capital Confidential 12

Income Trusts (cont’d) – Total Issuance Source: Scotia Capital Confidential 13 Income Trusts (cont’d) – Total Issuance Source: Scotia Capital Confidential 13

Income Trusts (cont’d) – IPO Size Distribution (20012006 YTD) Confidential 14 Income Trusts (cont’d) – IPO Size Distribution (20012006 YTD) Confidential 14

Income Trusts (cont’d) – Leverage and Yield IPO Leverage Income Trust IPO Yield Source: Income Trusts (cont’d) – Leverage and Yield IPO Leverage Income Trust IPO Yield Source: Scotia Capital Confidential 15

Income Trusts (cont’d) – Retained Interest (20012006 YTD) Source: Scotia Capital Confidential 16 Income Trusts (cont’d) – Retained Interest (20012006 YTD) Source: Scotia Capital Confidential 16

implications for transactions Confidential 17 implications for transactions Confidential 17

Implications for transactions n There is a robust market for Canadian companies: Ø Significant Implications for transactions n There is a robust market for Canadian companies: Ø Significant interest from strategic purchasers, both within Canada and internationally Ø Broad availability of capital: —Private market through PEGs —Public market, where Income Trusts provide attractive valuations Confidential 18

Implications for transactions (cont’d) n A recent Ernst & Young survey on mid-market companies Implications for transactions (cont’d) n A recent Ernst & Young survey on mid-market companies revealed some interesting insight: —Of companies which used an advisor, 37% were sold to purchasers outside Canada — 21% of vendors were acquired by a financial buyer. Confidential 19

Financing in Today’s M&A Market Confidential 20 Financing in Today’s M&A Market Confidential 20

Overview: State of the Capital Markets n As the economy firms and absolute interest Overview: State of the Capital Markets n As the economy firms and absolute interest rates remain relatively low, lenders and investors are becoming increasingly more comfortable with higher leverage levels Confidential 21

Overview: Leverage Has Increased in the Market 5. 3 x 4. 5 x 4. Overview: Leverage Has Increased in the Market 5. 3 x 4. 5 x 4. 1 x Source: S&P/Loan Pricing Corporation Confidential 22 3. 7 x 3. 8 x 4. 0 x 4. 4 x

Overview: Leverage Has Increased in the Market (cont’d) Includes 2 nd lien debt which Overview: Leverage Has Increased in the Market (cont’d) Includes 2 nd lien debt which pushes up senior leverage Source: Bank of America/S&P/Loan Pricing Corporation Confidential 23

Overview: Leverage Has Increased in the Market (cont’d) n The oversupply of funds also Overview: Leverage Has Increased in the Market (cont’d) n The oversupply of funds also resulted in lenders relaxing covenant levels Ø In particular, average debt to EBITDA covenants for LBO financings increased dramatically in 2005 Source: Reuters Loan Pricing Corporation/Deal Scan Confidential 24

Availability of Non-Traditional Financing n There has been an ongoing shift away from traditional Availability of Non-Traditional Financing n There has been an ongoing shift away from traditional bank structures to multi-tiered structures Risk EQUITY SUB DEBT SCLs / High yield notes ABLs Bank / Senior Notes 5 10 15 20 25 30 35 Target Return % p. a. Confidential 25

Availability of Non-Traditional Financing (cont’d) COMPANY SIZE: Very Small Typically has limited resources and Availability of Non-Traditional Financing (cont’d) COMPANY SIZE: Very Small Typically has limited resources and no track record. Small Mid-Size Possibly has high growth potential, but often with limited track record. Typically has proven track record and continued growth potential. Substantial assets/stock available for collateral. LOW Large Known track record and risk. Strong financial flexibility. Commercial Paper Risk Private Placement Senior Notes and Senior Unsecured Debt Asset Monetization Senior Secured Debt Second Lien Notes High Yield Notes Subordinated Debt HIGH Confidential Private Equity Public Equity 26

Second Lien Loans n Second lien and high yield markets continue to gain momentum Second Lien Loans n Second lien and high yield markets continue to gain momentum Ø Second liens loans require on average 300 to 400 bps spread premium over traditional senior debt Source: S&P/Loan Pricing Corporation Confidential 27

Second Lien Loans (cont’d) n Often called “Secured Senior Notes” or “Second Lien Secured Second Lien Loans (cont’d) n Often called “Secured Senior Notes” or “Second Lien Secured Notes, ” they are similar to other high yield bonds – except they are secured n Second Lien Debt or Second Collateral Loans (SCL) are often viewed as a substitution for more expensive private or public mezzanine debt Ø Second lien lenders generally offer terms and pricing that are more flexible than an unsecured mezzanine provider Ø Second lien loans carry less onerous prepayment penalties Ø Terms on the second lien loans are shorter than traditional mezzanine debt at 3 to 5 years, however the loans can be structured with a longer tenor n In a cash-flow based second lien loan, the amount of the loan is determined by using an EBITDA multiple, whereas the amount of asset based second lien loans are based on appraisal valuations n The second lien loan is behind the senior debt for repayment priority with respect to collateral proceeds, but ranks ahead of other unsecured senior debt such as trade payables Confidential 28

Second Lien Loans (cont’d) n Second lien loans can be more attractive than subordinated Second Lien Loans (cont’d) n Second lien loans can be more attractive than subordinated or mezzanine debt because often pricing does not require warrants thus the issuer may avoid giving up equity n Prepayments are also more flexible than mezzanine or high yield debt n Second lien debt can often achieve similar leverage to that of mezzanine debt n In general, pricing for subordinated debt has decreased significantly as a result of increased competition and as second lien debt gains greater market acceptance Ø Second lien loans require a return of approximately 10% to 15% Confidential 29

M&A implications Confidential 30 M&A implications Confidential 30

Average Debt/EBITDA Ratio for Transactions with Second Lien Loans 5. 1 x 4. 2 Average Debt/EBITDA Ratio for Transactions with Second Lien Loans 5. 1 x 4. 2 x Source: S&P/Leveraged Commentary & Data Confidential 31

…and an Increase in Purchase Price Multiples 7. 1 x 7. 2 x 6. …and an Increase in Purchase Price Multiples 7. 1 x 7. 2 x 6. 8 x 6. 9 x 5. 4 x 6. 4 x 8. 0 x 6. 9 x 7. 2 x 7. 8 x 7. 4 x 6. 1 x 6. 0 x Source: S&P/Loan Pricing Corporation Confidential 8. 0 x 32 7. 4 x 7. 3 x 6. 4 x 7. 0 x

summary Confidential 33 summary Confidential 33

Financing Summary n Capital market conditions have improved dramatically over the last year and Financing Summary n Capital market conditions have improved dramatically over the last year and there is substantial liquidity in the market n There is a great deal of institutional money chasing very few quality opportunities n Accordingly, debt leverage has increased in all markets and pricing has declined n Mezzanine providers are being squeezed by both the Second Lien Loan (Junior Secured) and High Yield Debt markets n Second lien loans have provided access to high ratio/leveraged finance without typical equity dilution, filling the gap between senior and mezzanine debt and allowing purchase multiples to increase Confidential 34

eyorenda. com ERNST & YOUNG ORENDA CORPORATE FINANCE INC. © 2005 Ernst & Young eyorenda. com ERNST & YOUNG ORENDA CORPORATE FINANCE INC. © 2005 Ernst & Young Orenda Corporate Finance Inc. A Member of Ernst & Young Global Confidential 35

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