JP morgan valuation training materials

„ Value based on multiples for comparable companies in sale transactions „ Includes control premium „ “Public market valuation” „ Value based on market trading multiples of comparable co

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan Neither this

presentation nor any of its contents may be used for any other purpose without the prior written consent of JPMorgan

The information in this presentation may be based upon any management forecasts provided to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction.

Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), JPMorgan and the Company may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto, so long as such disclosure is not made prior to the earlier of (x) public announcement of discussions relating to the transaction or

of the transaction itself and (y) the execution of an agreement to enter into the transaction.

JPMorgan’s policies prohibit employees from offering, directly or indirectly, 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 JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.

JPMorgan is a marketing name for investment banking businesses of J.P Morgan Chase & Co and its subsidiaries worldwide Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by J.P Morgan Securities Inc and its banking affiliates JPMorgan deal team members may be employees of any of the foregoing entities.

CONFIDENTIAL, FOR TRAINING PURPOSES ONLY

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Should our clients buy, sell or hold positions in a given security?

Research

Should our clients buy, sell or hold positions in a given security?

Acquisitions

How much should we pay to buy the company?

Acquisitions

How much should we pay to buy the company?

New business presentations

Various applications

New business presentations

Various applications

Fairness opinions

Is the price offered for company/division fair (from a financial point of

view)?

Fairness opinions

Is the price offered for company/division fair (from a financial point of

view)?

Divestitures

How much should we sell our company/division for?

Divestitures

How much should we sell our company/division for?

Hostile defense

Is our company undervalued/

vulnerable to a raider?

Hostile defense

Is our company undervalued/

vulnerable to a raider?

Public equity offerings

For how much should we sell our company/division

in the public market?

Public equity offerings

For how much should we sell our company/division

in the public market?

„ Value based on multiples for comparable companies in sale

transactions

„ Includes control premium

„ “Public market valuation”

„ Value based on market trading multiples of comparable companies

„ How does a firm’s financial performance match to market value?

„ Value based on debt

repayment and return on investment

„ Value to a financial/LBO buyer

„ Liquidation analysis

„ Break-up analysis

„ Historical trading performance

„ Private company valuation

„ Expected IPO valuation

„ Premiums paid analysis

Valuation methodologies

Discounted cash

flow analysis

Publicly traded comparable companies analysis

Comparable acquisitions analysis

Leveraged buyout/recap

Approach to valuation

In arriving at a preliminary valuation for its clients, JPMorgan utilizes several methodologies that are

consistent with industry practices

In arriving at a preliminary valuation for its clients, JPMorgan utilizes several methodologies that are

consistent with industry practices

(3) Comparable

acquisition transactions

Utilizes data from M&A transactions involving similar companies

(1) Discounted

cash flow

Analyzes the present value of

a company’s free cash flow

(2) Publicly traded comparable companies

Utilizes market trading multiples from publicly traded companies to derive value

(4) Leveraged buy out

Used to determine range of potential value for a company based on maximum leverage capacity

Equity value versus enterprise value

Enterprise value = Market value of all capital invested in a business1 (often referred to as

“transaction value”) The value of the total enterprise: market value of equity + net debt

Equity value = Market value of the shareholders’ equity (often referred to as

“offer value”) The market value of a company’s equity (shares outstanding x current stock price)

Equity value = Enterprise value - net debt2

Liabilities and shareholders’ equity Assets

Enterprise value

Net debt

Equity value

Enterprise value

1 Assume book value of debt approximates market value of debt

2 Net debt equals total debt + minority interest + capitalized leases + short-term debt - cash and cash equivalents

Equity value versus enterprise value (cont’d)

Equity value or offer value

Application example: Valuation summary

7.0x—9.0x 2008E EBITDA 8.0%—11.0%

discount rate

1.6x LTM sales 9.8x LTM EBITDA 13.3x LTM EBIT Public market

comparables 2

Precedent comparable transactions

52-week trading range

1 Share prices are based on 157.6 million diluted shares outstanding

2 Forecasts are based on JPMorgan research

3 Synergies assumed to be 6.0% of sales, capitalized at 8.0x

DCF analysis

Analyst price target

With synergies

of $1,500mm 3

Current stock price = $34.20

7.0x—9.0x 25% IRR LTM EBITDA LBO

Implied share price

DCF analysis: the process

Project the operating results and free cash flows of a business over the forecast period The typical forecast period is 10 years However, the range can vary from five to 20 years depending on the profitability horizon.

Estimate the value of the business at the end of the forecast period.

Adjust your valuation for all assets and liabilities not accounted for in cash flow projections.

Discount rate

Present value Determine a range of values for the

enterprise by discounting the projected free cash flows and terminal value to the present.

The first step in DCF analysis is projection of unlevered

free cash flows

sheet and statement of cash flows) typically provide all the necessary elements

Free cash flow is cash available to creditors and owners

after taxes and reinvestment

those projections include the effects of debt

EBIT (from the income statement)

Plus: Non-tax-deductible goodwill amortizationLess: Taxes (at the marginal tax rate)

Equals: Tax-effected EBITA

Plus: Deferred taxes1Plus: Depreciation and any tax-deductible amortizationLess: Capital expenditures

Plus/(less): Decrease/(increase) in net working investment

Equals: Unlevered free cash flow

1 Although beyond the scope of our current discussions, you should only include actual cash taxes paid in the DCF Depending on the firm and industry, you may want to

adjust for the non-cash (or deferred) portion of a firm’s tax provision The tax footnote in the financial statements will give you a good idea of whether this is a

meaningful issue for your analysis

Fiscal year ending December 31,

2001 2002 2003 2004E 2005E 2006E 2007E 2008E Net sales $400.0 $440.0 $484.0 $532.4 $585.6 $644.2 $708.6 $779.5

Less: Incr./(decr.) in working capital 10.0 8.5 7.0 5.5 4.0 Unlevered free cash flow 40.3 46.8 53.8 61.4 69.6

Unlevered FCF to acquirer $0.0 $46.8 $53.8 $61.4 $69.6

Discounted value of unlevered FCF $0.0 $44.6 $46.7 $48.4 $49.9

Discounted value of FCF 2004P—2008P $189.6

Stand-alone projections for Company X ($ millions)

JPMorgan convention is to use the

“mid-year” convention—which assumes cash flows happen midway during the year

Weighted average cost of capital (WACC) formula

capital is the weighted average of the cost of debt and the cost of equityWACC = rd * (Total debt) + re * (Total equity)

(Total cap) (Total cap)More accurately stated the formula is:

WACC = rd * [D *(1-T)] + re * E

D+E D+E

E = market value of equity

D = market value of debt

T = marginal tax rate

of interest expense to shield taxes The tax rate used should be the marginal tax rate for each specific company

¹ In order to be more accurate, the analyst should try to estimate the current market cost of debt by looking at the market cost of debt of comparable companies (with similar credit ratings)

A + B = C

FCF at 2008P EBITDA multiple of at 2008P EBITDA multiple of of total firm value Discount

rate 2004–2008 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 6.0x 7.0x 8.0x 8% $196.8 $687.5 $802.1 $916.7 $884.4 $999.0 $1,113.6 78% 80% 82%

9% 193.1 662.6 773.1 883.5 855.8 966.2 1,076.7 77 80 82

10% 189.6 638.9 745.4 851.8 828.4 934.9 1,041.4 77 80 82 11% 186.1 616.2 718.9 821.6 802.3 904.9 1,007.6 77 79 82

12% 182.7 594.5 693.5 792.6 777.2 876.3 975.3 76 79 81

Equity value Equity value per share 1 Implied perpetuity growth rate

Net debt at 2008P EBITDA multiple of at 2008P EBITDA multiple of at 2008P EBITDA multiple of Discount

rate 12/31/04 6.0x 7.0x 8.0x 6.0X 7.0X 8.0X 6.0x 7.0x 8.0x 8% $100.0 $784.4 $899.0 $1,013.6 $19.17 $21.97 $24.77 0.2% 1.3% 2.1%

9% 100.0 755.8 866.2 976.7 18.47 21.17 23.87 1.1 2.2 3.0

10% 100.0 728.4 834.9 941.4 17.80 20.41 23.01 2.0 3.1 3.9

11% 100.0 702.3 804.9 907.6 17.16 19.67 22.18 2.9 4.0 4.8

12% 100.0 677.2 776.3 875.3 16.55 18.97 21.39 3.8 4.9 5.8

Terminal values: The exit multiple method

Note: DCF value as of 12/31/04 based on mid-year convention

1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

In the EBITDA exit multiple method, a multiple is applied to the final year’s EBITDA to determine a

terminal value in the final year This terminal value is discounted to the present and added to the

PV of the cash flows

A review of the terminal value and implied perpetuity is useful to help understand the drivers of the DCF value

Terminal values: The perpetuity method

Discounted Discounted terminal value Firm value Terminal value as percent FCF at perpetuity growth rate of at perpetuity growth rate of of total firm value Discount

8% $100.0 $1,087.8 $1,192.2 $1,319.8 $26.59 $29.14 $32.26 8.6x 9.6x 10.7x 9% 100.0 905.0 977.0 1,062.0 22.12 23.88 25.96 7.4 8.0 8.8 10% 100.0 771.1 823.3 883.6 18.84 20.12 21.59 6.4 6.9 7.5 11% 100.0 668.7 708.1 752.8 16.34 17.31 18.40 5.7 6.1 6.5 12% 100.0 587.9 618.5 652.8 14.37 15.12 15.95 5.1 5.4 5.8

Note: DCF value as of 12/31/04 based on mid-year convention

1 Based on 40.0 million basic shares outstanding and 2.0 million options with a weighted exercise price of $8.13 calculated using the treasury method

In the perpetuity method the final year cash flow is used to determine the terminal value of the

cash flows

The PV of a growing perpetuity in year 5 is:

FCF * (1+g) (r - g) Thus, this PV 5 years forward must then be discounted back to the valuation date

Concluding DCF remarks

terminal values, etc.)

— NOLs

Check it with a calculator!

Additional valuation materialsLBO analysis

Comparable transactions analysis

Publicly traded comparable company analysis

Discounted cash flow

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publicly-traded companies with similar operating and financial characteristics It compares the public company value with operating statistics to calculate the valuation

multiple

in comparable acquisitions Depending on market conditions, the comparable companies' multiples may or may not be higher than comparable acquisitions’

multiples

analysts, traders, arbs, etc.) has to deal with the same problem

your company by multiplying the company’s historical and projected sales, EBIT, EBITDA, net income, book value and other key operating statistics by the respective comparable company multiples

Identifying the right peer group

„ The key to compiling a trading comparables analysis is to identify companies that are considered comparable

and that closely resemble the composition and function of the Company you are evaluating

„ SIC code search

Choosing the right metric

Industrials, Transportation, Distribution, etc.)

Biotech, etc.)

and the industry

Telecommunications Natural resources Retail/Real estate

„ Enterprise value to

— Run rate revenue (LQA)

— 2000 to 2002 revenue

— Net PPE (Latest 10-Q)

— Route miles (Latest 10-Q)

— Fiber miles (Latest 10-Q)

— Access lines (Latest 10-Q and 1-year forward)

FV/EBITDA 4 P/E 5

Company

Share price 1 % of 52-wk high Equity value 2 Firm value 3 2004E 2005E 2004E 2005E LTGR 5 2004E PEG

2 Based on diluted shares outstanding using the treasury stock method

3 Calculated using equity value plus debt

4 Based on equity analyst research reports; includes investment income

Concluding remarks on comparable companies

„ Trading comps are an important valuation metric for a number of reasons

„ Benchmark of how the equity market is valuing the company stand alone and relative to its peers

„ Every CEO knows his own multiples and those of his peers

„ Key steps for comps

„ Choose the right comparable companies and valuation metrics to focus on

„ Spread the comps correctly

„ Use the comps to determine a valuation range

„ Getting the comps correct

„ Ensure you have correctly captured the equity and net debt components

— Diluted shares (includes options using the treasury method and convertibles if in the money)

— Net debt includes preferreds, out of the money converts, capital leases, etc.

„ Ensure your income statement projections are uniform across your comps

— Adjust for extraordinary items and one time charges

— Calendarize so that projections reflect the same time periods

— Check analyst projections to make sure they are treating all expense components the same across the comps (e.g., amortization of intangibles)

„ Determining a value range

„ Thoughtfully consider the multiple range—using the mean/median is not thoughtful

„ Calculate the value correctly (Firm value versus Equity value issue)