Aircel Fiesta 2011 Ad Honerem - A Cross Border M&A Event Round - II - Finsoc, FMS Delhi Presents

Aircel Fiesta 2011

          Finsoc, FMS Delhi

              Presents

Ad Honerem – A Cross Border M&A Event

              Round – II

Instructions

      The objective of the case study is to identify a suitable target for the acquiring company and
       citing reasons for the same
      Deliverable for this round is a 6 slide presentation containing the following points:
            o Slide 1 – Team name, team members’ names, institute name, email addresses and
                phone numbers
            o Slides 2 to 6 – Not limited to the following topics: understanding the economy and
                the industry and the key growth drivers, understanding of the buy-side company,
                understanding the target companies and the preferred choice, synergies if any etc.
      Assumptions and any data taken apart from the case must be clearly stated in the footnotes
      The ppt file should be named as TeamName_Institute.ppt/pptx
      The deadline for submission is 1st December, 23:59:59

Italy - Introduction

Italy has a diversified industrial economy, which is divided into a developed industrial north,
dominated by private companies, and a less-developed, welfare-dependent, agricultural south, with
high unemployment. The Italian economy is driven in large part by the manufacture of high-quality
consumer goods produced by small and medium-sized enterprises, many of them family-owned. Italy
has moved slowly on implementing needed structural reforms, such as reducing graft, overhauling
costly entitlement programmes, and increasing employment opportunities for young workers,
particularly women. These conditions will be exacerbated in the near term by the global economic
downturn; but in the longer term, Italy's low fertility rate and quota-driven immigration policies are
expected to strain its economy. The Italian government has struggled to limit government spending,
but Italy's exceedingly high public debt remains above 115 per cent of GDP, and its fiscal deficit - just
1.5 per cent of GDP in 2007 - exceeded 5 per cent in 2009, as the costs of servicing the country's debt
rose. A tax amnesty program implemented in late 2009 to repatriate untaxed assets held abroad has
netted the federal government more than $135 billion. The Italian economy measured Euro 1.6 trillion
in 2008 and accounted for 13 per cent of the total EU economy.

Italy - Key information

Italy is a high-income country; however, the near-flat population growth and rise in the ageing
population have dampened the overall automobile demand.

State of the industry - Automobile industry

Italy is the third largest automotive market in Europe after Germany and France, and accounted for
14-16 per cent of the total vehicle sales of the EU countries. In 2008, 2.2 million new cars were sold
in Italy, down 13 per cent on 2007. Since 2003, vehicle sales have declined by an annual average of
0.8 per cent, in contrast to the EU average growth of 1.4 per cent. Despite this decrease, Italy is still
the second largest market in the EU, before the UK and France. Based on the ACEA estimates, sales
of new cars during 2009 are likely to stay below 2 million vehicles, down 10 per cent on 2008.

Italy's output of light vehicles fell from 1.5 million units in 2001 to under 1 million in 2005, in line
with Fiat's diminishing market share in Italy and abroad. In 2006 and 2007, performance picked up
strongly again, with an increase to 1,232 thousand units. However, in 2008, this fell again to 974
thousand units, down 21 per cent over 2007. Italian production in 2008 was 5.5 per cent of total EU
production. Production of heavy commercial vehicles (trucks and buses) was 50 thousand units in
2008, which was down 5.7 per cent on 2007, but up 5 per cent annually since 2003. Production of
heavy vehicles is 6.9 per cent of total EU production.

Passenger car - Player-wise market share in 2007

Source: Wards Auto

                                Passenger car - Annual sales trend

Source: Wards Auto

Auto components industry

Historically, Italian component suppliers have relied heavily on the Fiat Group for their prosperity.
They consist of large groups which are, or were, either subsidiaries of Fiat, such as Magneti Marelli
and Teksid, or hundreds of smaller groups which are also usually reliant on Fiat but from a more
indirect, second or third tier perspective. However, in the past three years, Fiat has sold many of its
supplying divisions and reduced the number of its first-tier suppliers from 2,000 to about 330 today,
outsourcing larger components and modules. These 330 suppliers account for 80 per cent of the OEM
market. Foreign system suppliers have gained easy access to the Italian and European markets by
taking over divested companies. As a result of their incorporation in an international structure, these

companies are now much less reliant on Fiat. Next to these large suppliers, Italy has a lot of small and
medium-sized parts makers. These have been quite successful in recent years, having seen their
exports grow and their dependence on Fiat shrink. Still, their future position is increasingly insecure,
due to consolidation and globalization.

Total consumption of parts and components in 2007 was calculated at Euro 32 billion, and parts for
vehicles constituted Euro 29 billion of this total. Total consumption increased by 5.2 per cent annually
between 2003 and 2007. Consumption equals 9.7 per cent of total EU consumption. Italy is the fifth
largest market in the EU, after France and the UK, but before Sweden and Poland. The OEM market
is estimated at Euro 21.5 billion, or about 75 per cent of total consumption. The after-market was
estimated at around Euro 10 billion in 2007. The after-market decreased slightly during the past two
years. Though the OEM market is expected to continue to grow, the after-market will stabilize at best.

Production quality and competitiveness are increasing, which is emphasized by a sharply growing
trade surplus. With production increasing to Euro 39 billion in 2007, Italy is still Europe's third largest
producer (behind Germany and France) with a share of 13 percent of total EU production. Parts for
vehicles constituted Euro 35 billion of this total.

Imports of auto components

Total imports of parts and components reached Euro 14 billion in 2008. Parts for vehicles constituted
Euro 12 billion of this total. The average annual increase in total imports between 2003 and 2008 was
6.4 per cent, which was higher than the EU average of 5.8 per cent. The share of EU imports is 6.1 per
cent. Italy is ranked Number 6 in Europe, after Belgium and Spain, but before the Netherlands and
Poland. Italy had a positive trade balance of Euro 8.7 billion in 2008, meaning that it exported 64 per
cent more than it imported.

Imports from other EU countries amounted to 78 per cent of total imports, which was lower than the
EU average of 84 per cent. Imports from EU countries increased by 5.2 per cent during the past five
years. The leading EU suppliers were Germany (share of 27 per cent, CAGR of 4 per cent), France
(15 per cent, 3 per cent) and Poland (7.6 per cent, 12 per cent). The share of imports sourced in
developing countries reached 14 per cent of total imports, which was higher than the EU average of
7.6 per cent. Imports from developing countries increased by 19 per cent during the period covered,
just higher than the EU average growth of DC imports of 16 per cent. The leading DC suppliers were
China, Turkey, and India.

Exports of auto components

Total exports of parts and components reached Euro 22 billion in 2008. Parts for vehicles constituted
Euro 19 billion of this total. The average annual increase in total exports between 2003 and 2008 was
7.1 per cent, which was higher than the EU average of 6.4 per cent. The share of EU imports is 9.1 per
cent. Italy is ranked Number 3 in Europe, after Germany and France, but before Spain and the Czech
Republic.

Between 2003 and 2008, the compound annual growth of exports for the main product categories was
5.8 per cent. The largest of the main product categories were other parts and accessories (Euro 5.9
billion), engines and parts (Euro 4.3 billion) and drivetrain (Euro 3.6 billion). The highest annual
growth was recorded for vehicle electric (10 per cent), engines and parts (9 per cent) and trailer parts
and components (9 per cent).

Of the after-market product groups, batteries (Euro 329 million), v-belts (Euro 194 million) and
gaskets (Euro 151 million) registered the largest exports in 2008. The highest average annual growth
was recorded for batteries (21 per cent), wipers (17 per cent) and gaskets (7 per cent).

Project T – A leading gear manufacturer looking to acquire company in Europe
Company overview

•   The group has over 50 years' experience in the auto component industry
•   The company operates state-of-the-art facility in the auto-component hub in Western India
•   The group generated turnover of more than USD 24 million in FY 2008
•   The company has production capacity of one million precision machined components and 18
    million transmission gears

Business Overview

•   The company manufactures
         – Gears for motorcycles and Trucks /Cars.
         – Shafts for Trucks.
         – Chain wheel sprockets and
         – Assemblies and sub-assemblies for 2vand 4 wheelers
•   It is a major supplier to leading automobile companies like Bajaj Auto, etc

Target Overview

•   The company is a also a major exporter to various geographies like US and is willing to expand
    its foot-print in Europe
•   The target could be a company in the same segment i.e. gears, shafts, chain wheel sprockets, etc.
    and have major European automobile companies as their clients

Specifications

•   The target could be in Italy, Germany, France
•   Turnover of the target could be in the range of USD 10 to 20 million
•   The company has sufficient reserves and bank support to complete the acquisition

Target Companies Description

Company A – Promoters of an Italian auto component manufacturer looking for strategic exit

Company overview:

   •    The company is mainly into (85% of net sales) design and production of braking systems,
        electro-pneumatic components and shock absorbers for industrial and commercial vehicles
   •    The company also manufactures (15% of net sales) solid rubber wheels
   •    The company has a wide product range - key products being clutch servo units, operating and
        braking cylinders, valves, etc.
   •    The company has strong presence in Italy apart from other European countries, Russia and
        South Mediterranean countries.
   •    The company supplies directly to select few Italian commercial vehicle manufacturers and a
        large number of spare parts and after-market manufacturers
   •    Sales breakup (estimates based on FY 2008 net sales) is as follows:
             10% - a major Italian commercial vehicle manufacturer
             45% - other OEMs (mainly Italian)
             25% - public authorities, after-market (bus fleet managers)
             20% - private after-market

Financial overview:

   •    The company recorded net sales of EUR 6 million for FY 2008 with EBITDA of EUR 1.3
        million
   •    The company is budgeting net sales of EUR 7.5 million for FY 2009 with EBITDA of ~EUR
        2.5 million

Transaction overview:

    •   The promoters do not have a strong succession plan and wish to retire from the business.
        They are therefore seeking majority divestment.

Company B: Leading Italian lighting components manufacturer

Company overview:

    •   The company is a leading automotive lighting equipments manufacturer with more than six
        decades vintage
    •   The company operates out of a famous automotive hub of Italy and its products reach out to
        more than 80 countries worldwide

    •   Products: The company boasts of one of the most extensive range of matching quality
        lighting equipment for the automotive market with a portfolio of more than 3,500 items
        broadly covering:
        • All type of lighting applications: front side & rear lamps, number plate lights, headlamps,
            universal applications, trailer lights, work lamps, beacons and LED versions
        • All main make / model combinations
        • All market segment: passenger vehicles, light commercial vehicles and trucks

•   Order fulfilling capabilities:
        • Six million parts delivered per year
        • 600,000 order lines filled per year
        • Order fill rate and delivery response time in the line with most stringent spare parts
           market needs
        • The latest radio frequency materials handling technology providing fast accurate order
           dispatch

    •   Production technology: All production processes are performed in full compliance with
        European Union regulation standards (E-mark), quality requirements (ISO 9001) and best
        manufacturing practices. Major technologies used are:
        • Injection moulding - single & multi-colour
        • Vacuum metallizing
        • Assembling systems with ultrasonic, hot-plate, vibration welding and polymer resin

Financial overview:

   •    The company recorded net sales of ~ EUR 16 million for FY 2008 with EBITDA of ~ EUR
        1.7 million

Transaction overview:

   •    The shareholders seek a strategic exit

Company C

Company overview:

    •   It is a family owned Italy-based company
    •   The products are traded by it in 70 countries in the world
    •   It has commercial sites in European countries like Sweden, France and Germany
    •   The company has production plants in 11 countries

    •   Products: The company offers a huge range in the braking spare parts industry and has many
        offerings including:
        • Integrated engineering services including brake discs, brake callipers, brake pumps, side
            wheel modules and complete braking system for cars and Commercial Vehicles
        • Brake discs, brake callipers, brake pumps, light alloy wheels and complete braking
            systems for motorcycles

    •   Product development and quality assurance: 60 years' field experience in development,
        engineering and laboratory tests to achieve the highest in product quality
        • For development - optical simulation, CAD stations, rapid prototype facilities
        • For quality assurance - optical validation laboratory, waterproofing, corrosion, heat
            resistance & vibration testing
        • State of the art tools ensure product quality from design through to production

Financial overview:

•    The company recorded net sales of ~ EUR 14.43 million for FY 2008 with EBITDA of ~
         EUR 1.69 million

 Sales      EBITDA     Net Income     MCap     EV
 14.43      1.69       .43            6.92     10.21

Company D

Company Overview:

    •    It is an Italy based holding company in the power transmission systems sector
    •    4 Business units:

            i.   Division designed for use with earth-moving machines, agricultural tractors, forklift
                 trucks, light commercial vehicles, mining applications, automobiles and stationary
                 applications
           ii.   Division for gears and components designed for auto, agricultural, and earth-moving
                 sectors, materials handling applications, gardening and power-tools
          iii.   Division for specialized tractors created for third-parties and for the provision of
                 engineering and outsourced production services
          iv.    Division for the production of inverters for industrial environments and the
                 renewable energy field and for management systems for electric and hybrid power
                 trains

Financial Overview (millions)

    •    The company recorded net sales of ~ EUR 9.63 million for FY 2008 with EBITDA of ~ EUR
         0.65 million

 Sales      EBITDA     Net Income     MCap     EV
 9.63       .65        -.97           2.41     5.59

Transaction Overview

A previous foreign acquirer tried to acquire this company a year ago but the deal fell through.

Company E

Company Overview:

    •    It is an Italy-based company operating in the automotive sector
    •    The company operates through 2 business divisions
    •    It has multiple brands sold in different parts of the world
    •    It is one of the major partners of car manufacturers in the world
    •    The company has a huge global presence in 3 continents and 13 countries

•   The company has a total of 39 plants across the world
    •   The company has a young and relative less professional management but still the company is
        growing around industry average

    •   Products: The company offers 2 product lines as follows:
           • Systems of engine and cabin filtration
           • Suspension components

Financial Overview (millions)

   •    The company recorded net sales of ~ EUR 12.41 million for FY 2008 with EBITDA of ~
        EUR 1.14 million

Sales      EBITDA    Net Income     MCap       EV
12.41      1.14      .26            3.88       5.72