i n v e s t m e n t b a n k i n g presentation to the alliance
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I N V E S T M E N T B A N K I N G
Presentation to The Alliance
2
M O R G A N K E E G A N
M O R G A N K E E G A N
RebsamenInsuranceRebsamenInsurance
• Commercial and retail banking
• Approximately 1,400 offices
• Geographic footprint in the South, Southeast, Texas and parts of Midwest
• Commercial and personal insurance broker
• Ranks among 50 largest insurance brokers in the United States
• Founded 1928
• Listed on New York Stock Exchange; symbol RF
• Market capitalization in excess of $15 billion
• Included in S&P500, Fortune 500 and Forbes 500
• Over $80 billion in assets
• Among 15 largest financial services providers in the nation
• Approximately 16,250 employees
Full-Service Investment Bank:
• Equity Capital Markets
• Fixed Income Capital Markets
• Private Client Services
• Investment Advisory
Morgan Keegan Quick Facts:
• Headquarters: Memphis, TN
• Offices: Over 200 including New York, Chicago, Atlanta, Boston and many cities located in the South, Southeast, Texas, and parts of the Midwest.
• Employees: Approximately 2,400
• Registered Reps: Approximately 1,000
• Wholly-owned subsidiary of Regions Financial Corp.
INTRODUCTION
3
M O R G A N K E E G A N
M O R G A N K E E G A N
SECTION 1 Current Market Conditions Tab A
SECTION 2 Strategic Alternatives Tab B
SECTION 3 Recapitalization Overview Tab C
SECTION 4 Process Considerations Tab D
LIQUIDITY AND EXIT STRATEGIES
4
M O R G A N K E E G A N
M O R G A N K E E G A N
CURRENT MARKET CONDITIONS
SECTION 1
5
M O R G A N K E E G A N
M O R G A N K E E G A N
■ Equity sponsor fundraising reached unprecedented levels in 2005- 159 firms raised new funds- $86.2 in total buyout/mezzanine
capital raised
■ 67% increase over 2004- Q4 2005 was the largest single
quarter raise in history
■ Supply is significantly outstripping demand- Many firms turning away investors- Excess capital eventually finding its
way into funds, creating excess liquidity
- Supporting near-high valuation multiples
RECORD PRIVATE EQUITY FUNDRAISING
Source: Thomson Venture Economics
Historical LBO/Mezzanine Fundraising
120 87 92 129 159 49 58 49 36
$46.8
$26.0$30.1
$51.6
$13.8
$24.3
$18.1
$30.1
$86.2
0
20
40
60
80
100
120
140
160
180
2001 2002 2003 2004 2005 Q1 '05 Q2 '05 Q3 '05 Q4 '05
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100Funds $
6
M O R G A N K E E G A N
M O R G A N K E E G A N
■ Sponsored transaction volume experiencing record growth:
- 23% increase from 2004 to 2005
- 50% CAGR from 2001 to 2005
■ Supported by favorable leverage environment
■ $125 billion in equity capital yet to be invested
■ 2006 deal flow continues at a record pace
- Record amount of funds raised in 2005
- $30 billion in loans floated in Q1 2006 to finance LBOs, highest quarterly level in history
RECORD SPONSOR TRANSACTION VOLUME
Source: S&P LCD
$15 $15 $22 $25 $24$10 $10 $15
$30$48
$41$57
$86$103
$68
$32 $36
$76
$145
$167
$0B
$50B
$100B
$150B
$200B
$250B
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Equity Other Sources
U.S. Sponsored Volume For the Years Ended 1996 – 2005
7
M O R G A N K E E G A N
M O R G A N K E E G A N
■ Purchase multiples remain at near-high levels
- Sponsor-to-sponsor transactions continue to generate premium valuations
- Approximate 10% premium to all other LBO transactions
■ Year-to-date transaction experience supports the thesis of continued premium valuations
Source: S&P LCD
LBO TransactionsFor the Years Ended 2002 – 2005
7.2 x 7.2 x
7.5 x
8.2 x
6.76.8
7.2
8.1
6.5 x
7.0 x
7.5 x
8.0 x
8.5 x
2002 2003 2004 2005
Me
an
Mu
ltip
le
Sponsor-to-Sponsor All Other
PREMIUM VALUATION MULTIPLES
Source: S&P LCD
Mean Historical Multiples of Enterprise Value to Trailing EBITDALeveraged Transactions < $250M
For the Years Ended 2001 – 2005 and LTM 3/2006
5.8 x 5.8 x
6.3 x
6.6 x
7.5 x
7.1 x
4.8 x
5.3 x
5.8 x
6.3 x
6.8 x
7.3 x
7.8 x
2001 2002 2003 2004 2005 LTM 3-06
Me
an
Mu
ltip
le
8
M O R G A N K E E G A N
M O R G A N K E E G A N
2.7 x3.0 x 2.8 x
3.2 x3.8 x
3.5 x
0.9 x
0.9 x 1.3 x
1.5 x
1.5 x
1.3 x
0.0 x
1.0 x
2.0 x
3.0 x
4.0 x
5.0 x
6.0 x
2001 2002 2003 2004 2005 YTD
To
tal
Deb
t/E
BIT
DA
Senior Debt/EBITDA Subordinated Debt/EBITDA
Average Debt Multiples for Highly Leveraged Loans
For the Years Ended 2001 – 2005 and YTD 2006
3.9 x4.1 x
4.7 x
3.6 x
5.3 x
3.463.75 3.86
4.36
4.8
4.354.07
4.43 4.47
5.29
5.8
5.15
0.0 x
1.0 x
2.0 x
3.0 x
4.0 x
5.0 x
6.0 x
2001 2002 2003 2004 2005 YTD
Mea
n M
ult
iple
<$500M Transaction Value >$500M Transaction Value
4.8x
Source: S&P LCD
■ In general, lenders remain aggressive
- Despite numerous Fed rate hikes, continued strong demand for acquisition financing has resulted in attractive leverage multiples
- Exceptional credits and credits with equity sponsors are finding total leverage of up to 5.5x EBITDA
- Second-lien market remains a viable and cost-effective alternative to traditional subordinated debt financing
ACCOMMODATING LEVERAGED LOAN MARKET
9
M O R G A N K E E G A N
M O R G A N K E E G A N
MARKET PERFORMANCE
Relative Performance HistoryJanuary 1, 2003 – March 31, 2006
80
90
100
110
120
130
140
150
160
170
180
190
1/1/
03
2/1/
03
3/1/
03
4/1/
03
5/1/
03
6/1/
03
7/1/
03
8/1/
03
9/1/
03
10/1
/03
11/1
/03
12/1
/03
1/1/
04
2/1/
04
3/1/
04
4/1/
04
5/1/
04
6/1/
04
7/1/
04
8/1/
04
9/1/
04
10/1
/04
11/1
/04
12/1
/04
1/1/
05
2/1/
05
3/1/
05
4/1/
05
5/1/
05
6/1/
05
7/1/
05
8/1/
05
9/1/
05
10/1
/05
11/1
/05
12/1
/05
1/1/
06
2/1/
06
3/1/
06
4/1/
06
DJIA Nasdaq S&P 500
DJIANasdaqS&P 500
■ Healthy general economic conditions and investor appetite continue to support major indices:
- Dow Jones Industrial Average: +33%
- S&P 500: +47%
- Nasdaq: +76%
10
M O R G A N K E E G A N
M O R G A N K E E G A N
Number of All Domestic IPOsYearly Statistics
CY 2001– YTD March 2006
Dollar Volume of All Domestic IPOsYearly Statistics
CY 2001 – YTD March 2006
■ Currently there are over 80 IPOs in backlog.
■ The current deals in backlog are expected to raise over $15 billion (includes over-allotment).
IPO MARKET UPDATE
92 86 83
254
224
47
0
50
100
150
200
250
300
2001 2002 2003 2004 2005 YTD 2006
$39.5
$25.9
$14.2
$47.2
$36.4
$7.6
$0
$10
$20
$30
$40
$50
2001 2002 2003 2004 2005 YTD 2006
(in b
illio
ns)
11
M O R G A N K E E G A N
M O R G A N K E E G A N
Median Post-Deal Market CapitalizationCY 1996 – CY 2005
IPO MARKET UPDATE
$90 $107 $133
$277
$391
$673
$330 $354 $364$306
$0
$100
$200
$300
$400
$500
$600
$700
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
(in m
illio
ns)
■ Market remains receptive to small-cap IPOs for companies that are:
- Profitable
- Have exhibited historical growth
- Viable near-term growth opportunities
■ Financial sponsor-backed offerings draw increased investor interest
- Business viewed as “institutionalized”
- Sponsors typically retain meaningful equity position post-IPO
■ Despite investor’s appetite for quality, small-cap IPOs, median post deal market capitalization remains above $300 million:
- Institutional investors limited in their ability to invest in small or micro-cap companies
- Small-cap companies commanding similar or premium valuations to those of the public markets through alternative exit strategies
Registered IPO Volume2004 - Present
$5.0$2.0
$3.8$5.9 $7.0
$3.8$6.6
$2.9 $4.0$1.0
$4.0$8.5
$10.2
$12.2
$3.9
$5.2
$4.5
$6.1$6.6
$1.0$0
$5
$10
$15
$20
Q1 '04 Q2 '04 Q3 '04 Q4 '04 Q1 '05 Q2 '05 Q3 '05 Q4 '05 Q1 '06 Q2 '06
(in b
illio
ns)
SponsorNon-Sponsor
12
M O R G A N K E E G A N
M O R G A N K E E G A N
STRATEGIC ALTERNATIVES
SECTION 2
13
M O R G A N K E E G A N
M O R G A N K E E G A N
STRATEGIC ISSUES
MarketFactors /Timing
OperationalIssues
ManagementIncentives &Ownership
RetainingOperating
Control Desire toRemainInvolved
CapExNeeds
Partial Liquidity toRemaining
Owners
Exit for Minority
Shareholders
FamilySuccession
Issues
GrowthCapital
StrategicIssues
14
M O R G A N K E E G A N
M O R G A N K E E G A N
STRATEGIC ALTERNATIVES
IMMEDIATE LIQUITY
CO
NTIN
UED
OP
ER
ATIN
G C
ON
TR
OL
STATUS QUO
IPO
RECAP
SELL/MERGE
• Limited ability to monetize equity• Total operating control
• Significant partial liquidity if desired• Retained operating control with increased governance,
regulation
• Partial liquidity based on client’s desires
• Retained operating control with increased board governance
• Regular interaction with equity sponsor
• Complete liquidity• Limited ongoing operating
control, if any
15
M O R G A N K E E G A N
M O R G A N K E E G A N
RECAPITALIZATION OVERVIEW
SECTION 3
16
M O R G A N K E E G A N
M O R G A N K E E G A N
PRIVATE EQUITY REQUIREMENTS
■ Management strength and depth
■ Growth opportunities:
- Organic
- External
■ Low customer concentration
■ Solid cash flows
■ Attractive, near-term return on capital investment
■ Viable exit opportunities
17
M O R G A N K E E G A N
M O R G A N K E E G A N
• Specialty distribution business
• Trailing twelve month sales of $100 million; EBITDA of $20 million; Company has $30 million of debt
• 100% owned by founder
• Founder seeking liquidity and diversification
• Company agrees to consummate recapitalization with Equity Partners Co.
• Valuation agreed to as follows:
SCENARIO:
CASE STUDY: Acme Distribution
(in thousands)
TTM EBITDA 20,000$
EBITDA Multiple 8.0 x
Enterprise Value 160,000$
Less: Debt 30,000
Equity Value 130,000$
18
M O R G A N K E E G A N
M O R G A N K E E G A N
SOURCES and USES
Amount Equity Amount
Sources of Funds (in thousands) Owned Uses of Funds (in thousands)
Senior Debt (3.5x EBITDA) 70,000$ 0% Cash to Shareholders 105,500$
Mezzanine Debt (1.0x EBITDA) 20,000 0% Retire Debt 30,000
Common Equity - Equity Capital Co. 45,500 65% Equity Reinvestment 24,500
Common Equity - Founder 24,500 35%
160,000$ 100% 160,000$
Result: Owner receives pre-tax net proceeds of $105.5 million in cash and retains a 35% ownership interest in the Company.
Net
Owner Proceeds Reinvest Proceeds
Founder 130,000$ 24,500$ 105,500$
Ownership
Owner Before After
Founder 100% 35%
Equity Capital Co. 0% 65%
100% 100%
19
M O R G A N K E E G A N
M O R G A N K E E G A N
RECAPITALIZATION RESULTS
Diversify personal net worth• Receive 81% of business’ equity value in
cash at close• Proceeds from the transaction are non-
recourse• No personal guarantees on senior or any
other financing
Maintain operating control• Continuity of management• Financial partner who “buys in” to
strategic plan
Maintain substantial investment in the business
• Own 35% of the equity in the business (before incentive plans)
• Expectation is that remaining investment will be worth at 2x – 3x the value of the amount reinvested in 5 years
Access to virtually unlimited growth capital
• Opportunity to make strategic acquisitions
• Enhances flexibility and agility
20
M O R G A N K E E G A N
M O R G A N K E E G A N
MEZZANINE INVESTMENT TERMS
Traditional mezzanine financing takes the form of Senior Subordinated Notes with detachable Stock Purchase Warrants
■ Typical terms in today’s market- 10-14% cash interest rate- 0 – 4% PIK interest rate- Detachable stock purchase warrants- 5 – 7 year maturity- Prepayment protection
■ Minimal equity dilution- Target returns of 15 – 20%
■ Governance- No board control
21
M O R G A N K E E G A N
M O R G A N K E E G A N
DIVIDEND RECAPITALIZATION CASE STUDY
Result: Owner receives dividend of $50 million in cash and retains a majority ownership interest in the Company.
(in thousands)
TTM EBITDA 20,000$
EBITDA Multiple 8.0 x
Enterprise Value 160,000$
Less: Debt 30,000
Equity Value 130,000$
Amount Amount
Sources of Funds (in thousands) Uses of Funds (in thousands)
Senior / Mezzanine Debt (4.0x EBITDA) 80,000$ Dividend to Shareholders 50,000$
Refinance Existing Debt 30,000
80,000$ 80,000$
Ownership
Owner Before After
Founder 100% 90%
Mezzanine 0% 10%
100% 100%
22
M O R G A N K E E G A N
M O R G A N K E E G A N
PROCESS CONSIDERATIONS
SECTION 4
23
M O R G A N K E E G A N
M O R G A N K E E G A N
STEPS TO MAXIMIZING YOUR PROBABILITY OF SUCCESS
HIRE EXPERT PROFESSIONALS
• Proficient at planning and orchestrating a process that maximizes value
• Well versed in a variety of transaction structures
• Recognizes and avoids common deal killers
• Proven ability to access buyers/investors
• Able to clearly communicate the Company’s story
• Enables management to focus on the business, not managing a transaction
24
M O R G A N K E E G A N
M O R G A N K E E G A N
Marketing
Materials Preparation
Closing
Negotiation & Due
Diligence
PlanningUnderstand objectives of shareholders and management:
•Shareholder interests
•Deal timeline
•Transaction structure
•Continuity of management
•Confidentiality
Establish valuation parameters:
•Perform various financial analyses
•Review subjective valuation factors
Assemble comprehensive buyers list:
•Understand rationale for each likely buyer
Process Steps
PROCESS OVERVIEW: Planning
25
M O R G A N K E E G A N
M O R G A N K E E G A N
Marketing
Materials Preparation
Closing
Negotiation & Due
Diligence
PlanningPerform extensive due diligence:
•Anticipate buyer and data room issues and requests
•Analyze any existing diligence issues or concerns
Create a persuasive and descriptive memorandum:
•Effectively communicate value proposition
•Provide sufficient detail to explain evolution of the business and the Company’s markets
Draft solicitation letter describing the opportunity.
Process Steps
PROCESS OVERVIEW: Materials Preparation
26
M O R G A N K E E G A N
M O R G A N K E E G A N
Marketing
Materials Preparation
Closing
Negotiation & Due
Diligence
Planning
Craft positioning strategy:
•Customize the strategy for each buyer
Evaluate staple financing:
•Arrange preliminary lender presentations
•Establish financing terms
Approach potential buyers and coordinate execution of confidentiality agreements.
Distribute confidential memorandum.
Initial follow-up by senior-level professionals:
•Ensure buyer is focusing on key positioning points
•Answer initial questions•Verbally communicate timelines and deadlines
Continuous dialogue with all interested parties prior to initial indication due date:
•Reiterate positioning•Answer questions•Determine interest level of prospective buyers
Process Steps
PROCESS OVERVIEW: Marketing
27
M O R G A N K E E G A N
M O R G A N K E E G A N
Marketing
Materials Preparation
Closing
Negotiation & Due
Diligence
Planning
Evaluate indications of interest based on:
Valuation, Ability to close, Structure, Form of consideration, Timing, Level of review, Additional due diligence
Assemble a management presentation:
• Address key buyer issues• Rehearse presentation with
management• Coordinate data room
Select groups to invite to management meetings:
• Focus on unique positioning for each buyer
• Communicate timeline and deadline for letter of intent
• Gain better understanding of buyer’s rationale for an acquisition
• Understand financing issues
Facilitate follow-up due diligence requests.
Conduct due diligence on buyers.
LOI vs. Marked-Up Purchase Agreement.
Achieve concessions prior to selecting purchaser.
Process Steps
PROCESS OVERVIEW: Negotiation & Due Diligence
28
M O R G A N K E E G A N
M O R G A N K E E G A N
Marketing
Materials Preparation
Closing
Negotiation & Due
Diligence
PlanningPrepare closing and responsibilities schedule.
Maintain back-up buyer interest.
Facilitate negotiations between all parties: buyers, lenders, lawyers, accountants.
Assist buyer with finalizing financing, if necessary.
Drive schedule to closing.
CLOSE.
Process Steps
PROCESS OVERVIEW: Closing
29
M O R G A N K E E G A N
M O R G A N K E E G A N
SAMPLE TIMELINE
Month
MAY JUN JUL AUG SEP
Morgan Keegan retained and begins due diligence
Morgan Keegan due diligence visits
Morgan Keegan refines valuation
Morgan Keegan / Company develop complete buyers list
Morgan Keegan / Company prepare confidential memorandum
Marketing calls by Morgan Keegan
Negotiate confidentiality agreements
Distribute confidential memorandum
Prepare management presentation
Prepare due diligence materials and assemble data room
Receive initial indications of interest
Analyze initial bids
Select buyers to attend management presentations
Commence management presentation visitsData room visits
Management presentations
Facility tours
Draft Definitive Agreement and prepare schedules
Distribute Definitive Agreement
Receive final offers with marked-up Definitive Agreement
Negotiate offers with prospective investor(s)
Sign Definitive Agreement with winning bidder(s)
File for requisite regulatory approval (if necessary)
Conduct confirmatory due diligence
Environmental audit / other
Close transaction
Phas
e I
Phas
e II
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