Country Report - SpainM&A update

Autumn 2013

Improving economic indicators including GDP, export figures, labour costs andunemployment rates suggest that Spain is exiting a period of deep recession andbuilding a foundation to leverage growth. Low company valuations, technologicalexpertise, a skilled workforce and an increasingly competitive business environmentwill trigger a rise in M&A volumes.

The key observations from our research:

Large Spanish companies are increasingly targetingoverseas businessesThe focus is shifting from deleveraging to growth via internationalexpansion. The main rationale behind these acquisitions is entering newmarkets and geographies rather than accessing product portfoliosand technological expertise.

Spain is a buyers’ marketThe impact of the financial crisis has created opportunities for local andforeign investors to acquire attractively-priced mid-sized companies anddistressed assets across a range of sectors. Spanish companies infinancial distress which need to rebuild their balance sheets have loweredprice expectations.

Private equity (PE) is active in the marketPE is targeting the steeply-discounted property portfolios of Spanishbanks, as well as divesting pre-crisis acquisitions to trade buyers andother PE funds. Tourism and hospitality is a particularly attractive sector,and small and medium-sized enterprises (SMEs) geared towards exportswill be targeted as export volumes grow.

Investors are entering the market through acquisitionsand joint venturesIn order to complete deals, buyers need to fund them through higher levelsof equity than debt, or negotiate vendor financing. Alternative sources ofcapital are slowly becoming available which will drive M&A activity.

“With deleveraging processesalmost complete, Spanishcompanies are lookingto increase their size andglobal presence throughinternational acquisitions.Foreign investors are takingadvantage of low valuationsto acquire in Spain.”Andy CurrieManaging Partner, Catalyst Corporate Finance

Spain reaches an inflection point

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Country Report - Spain M&A update

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Increased exports, enhancedcompetitiveness, growing consumerconfidence and the opening of creditlines are greatly helping Spain’seconomic recovery. GDP fell by just 0.1%in the second quarter of 2013, comparedto 0.5% in the same period last year, andgrowth is expected by the end of 2013.With company valuations still low, now isa good time to invest in well-managedand good-quality manufacturing andservice companies.

Access to capital is improving

There are signs that the debtdeleveraging process is nearingcompletion, with a significant proportionof Spanish companies reaching debtlevels of 2-3x EBITDA, see Figure 2.Banks have increased their capital basethrough the sale of non-strategicindustrial assets and real estateportfolios. Large private sectorcorporates have also been sellingassets to strengthen their balancesheets. Repsol sold off €5 billion of

assets in the past year, most recentlyits liquefied natural gas business toShell, in order to upgrade its creditrating. Companies are therefore nowbetter placed for new investment.

The financial system restructuringprocess continues to be a key focus inSpain, with commercial and savingsbanks consolidating in order to meetstrict capital requirements and avoidfinancial distress in an increasinglycompetitive market. The number ofbanks decreased from 50 in 2009 to12 in 2012. With Nationalised banksNCG Banco and Catalunya Banc still upfor sale and a potential merger betweenUnicaja, Banco Mare Nostrum andIbercaja-Liderbank, this figure is likelyto fall to nine.

Banks are currently reluctant to lendover 3x EBITDA, but are showinginterest in financing solid investmentprojects, which will help reactivate theM&A market.

Economic recovery supports new investmentThe debt deleveragingprocess is nearing

completion

Healthcare Renewable Energy Waste Management

The Spanish health service is ranked 7thglobally by the World Health Organisationin terms of quality and efficiency and isattracting private investmentReforms to the health system are drivingM&A as hospitals are privatisedMadrid regional government aims to save€500 million through the privatisation of sixpublic hospitals and 27 health centresIn December 2012, BUPA acquired a 50%stake in Torrejón Hospital and the remaining40% stake in Manises Hospital for €78 million

Spain is among the global market leaders inwind and solar energyRenewable energy output has doubled in sixyears, with sales volumes of solar thermalenergy rising 92.8% in 2012 to 3,430 GWhInnovative sector with high growth potentialas Spain endeavours to meet green energytargetsIn July 2013, UK private equity firmHgCapital, together with Plenium Partners,acquired a 45.8% stake in Hidrodata, aproducer of wind, hydraulic, solar andbiomass energy

Spain generates 150 million tonnes of wasteper year and the sector is valued at €7.8 billionFragmented sector with over 10,000companies and good opportunities forconsolidationGovernment legislation to reduce dependencyon landfill will lead to significant investment inenergy-from-wasteIn June 2013, UK-based private equity houseTriton Partners acquired Spanish recyclingand industrial waste management companyBefesa Medio Ambiente for €1.075 billion(also see ‘Trade perspective: SAICA’; page 4)

Figure 1: Selected sectors being targeted by UK investors

Source: Catalyst Corporate Finance

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Country Report - Spain M&A update

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Spain continues toattract significant

levels of FDI

In March 2013, the Spanishgovernment launched FOND-ICOGlobal, a public venture capital fundwith initial capital of €1.2 billion. Thefund will provide financing to innovativeSMEs that have struggled to securebank loans in order to promotecompetitiveness and internationalgrowth by matching investments fromthe private sector.

Investor confidence is growing

With the number of new foreign directinvestment (FDI) projects rising to 274 in2012, Spain is ranked fourth in Europe interms of attractiveness to foreigninvestors, behind the UK, Germany andFrance. Structural reforms, lower wagesand higher productivity have increasedcompetitiveness and strengthenedinvestor confidence in the Spanishmarket. The majority of investment camefrom the USA, Germany and the UK;business services and software receivedthe most funding, although FDI inflowalso increased in the chemicals,automotive and financial services sectors.

Due to the downturn in the internalmarket, Spanish companies have beenforced to focus on international trade.In 2012, for the first time since it joinedthe EU, Spain reported a current

account balance surplus (€7.7 billion in2012), with exports rising 3.8% to reacha historical high of over €222 billion.Continuing geographic diversificationhas led to a significant increase inexports to Africa, Latin America, NorthAmerica and Asia, with major sectors interms of total exports includingequipment, food, chemicals,automobiles and semi-manufacturedgoods. Success over the last 15 yearsin the development of technology inengineering and construction has ledto growth in exports of infrastructurerelated to the power and electricity,water management systems andrail sectors.

Figure 2: Non-financial companydebt has fallen 18% since 2009

Source: Banco de España (figures from July)

Market Entry Case Study:Host Europe Group

The strategic importance of SpainHost Europe identified Spain as a key market for growth. In2010, the company launched its Spanish operations underthe Webfusion brand, with the aim of becoming a leadingmarket player by offering an extensive product portfolioincluding its virtual private servers and e-marketing tools.Competitors include Dada Group and Arsys Group,recently acquired by German group United Internet for€140 million.

Acquisition used to consolidate position inSpanish marketIn January 2012 Host Europe acquired Spanish sharedhosting and domain registry services companyRedCoruna, attracted by its strong track record in webhosting, with 100,000 domain names under management,and 40% growth rate over three years. The transaction wasin line with Host Europe’s strategy to increase itsinternational presence, and could also be used as aplatform to cross over into Portugal.

1,300

1,400

1,200

1,000

1,100

€b

illio

n

2009 2010 2011 2012 2013

Pre-financial crisis level (2007)

UK-based internet & web hosting services providerHost Europe has established leading market positions in domain registration and application, cloud andmanaged hosting for SMEs, and has recently been acquired by private equity firm Cinven for €509 million.

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Country Report - Spain M&A update

Companies areachieving growth by

making overseasacquisitions

M&A volumes set to recoverWe are seeing increased signs ofconfidence returning to the marketand expect to see M&A activity start torecover from its post-financial crisislows, with the number of domestic andinbound deals set to increase in thesecond half of the year.

Alternative financing options (such asFOND-ICO Global) are becoming available,valuation gaps are narrowing (in some casesbecause companies are in financial distress)and cross-border deals are increasing, withacquirers from Asia and Latin Americahelping to boost volumes. For example,Mexican bus transportation Grupo ADOrecently acquired passenger road transportcompany Grupo Avanza for €800 million.

Spanish companies are focusingon overseas growth and rebuildingbalance sheets

Larger Spanish companies are targetinggrowth by making overseas acquisitions.Accessing new markets, rather thanexpanding technical capabilities or productportfolios, is their primary focus.

In April 2013, Spanish elevatormanufacturer Orona acquired Brazil-based AMG Elevadores, with theintention of increasing revenues in theBrazilian market to €100 million by 2018.

In February 2013, Carlyle-backed ApplusServicios Tecnologicos, a testing,inspection and certification firm,announced the acquisition of Chineseengineering and automotive designcompany EDI. The transaction will enableApplus to consolidate its position inChina and help its objective to provideglobal coverage to international clients.

Spanish firms which need to rebuildbalance sheets and strengthen marginshave been divesting non-essential assetsand focusing on core businesses.Overseas buyers are stepping in toacquire distressed assets at low prices.

In line with its 2012-14 business planto generate €300 million in capital gainsafter failing a stress test, in January 2013Banco Popular Español completed the€135 million divestment of its debtcollection business to KG EOS Holding,a German provider of information, arrearsand receivables management services.

Fomento de Construcciones y Contratas(FCC) continued with its divestment planand realised capital gains of €81 millionthrough the sale of the remaining 50%stake in Proactiva Medio Ambiente,the Spanish provider of water andwaste management in Latin America,to Veolia Environnement for €268 millionin June 2013.

“At SAICA we are looking to generate growththrough overseas acquisitions.We havedeveloped excellent technology and humancapital, so our predominant focus is increasingmarket share.We’ve done this successfully in theUK since 2006 by gaining a significant marketshare in the packaging industry, investing in astate-of-the-art £290 million recycled paper milland guaranteeing raw material supply byacquiring Futur Recycling, Houghton’s WastePaper, Stirling Fibre and Cutts Recycling &WasteManagement in 2011/2012.”

Pedro GascónManaging Director, SAICA

SAICA is an integrated consumerpackaging group that was advisedby Catalyst Corporate Finance onits four UK acquisitions.

“70% of Spanish companies are SMEs and it’sdifficult for them to jump directly into foreignmarkets. They will either be taken over by largerplayers or must merge with other domestic firmsto reach the necessary scale to competeinternationally.”

Trade perspective: SAICACatalystCorporateFinanceLLP2013

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Country Report - Spain M&A update

Access to Europe andLatin America

enhance Spain’sattractiveness to

foreign companies

Foreign investors are targetingnew technologies and access todifferent geographies

Overseas firms are using an investment inSpain as a platform to access the Europeanand Latin American markets.

US biopharmaceutical firm OPKOHealth will establish a presence inEurope with the recently-announced€14 million acquisition ofpharmaceutical, nutraceutical andveterinary product manufacturerFarmadiet.

Westcon Group, a US distributor ofcommunications, network infrastructure,data centre and security solutions, hasacquired Madrid-based IT solutions andservices group Afina for €51 million inorder to access the €235 billion ITmarket in Latin America, as well asconsolidate its position in Iberia andNorth Africa.

Many Spanish companies have developedtechnological expertise which make themattractive acquisition targets.

In 2012, Belgian IT andtelecommunications infrastructuremanagement services providerEconocom Group acquired Ermestel inorder to access its expertise in thevirtualisation and cloud computingservices market.

Natural language and intelligentconversation startup company INDISYSwas acquired by US multinational Intel inSeptember 2013 for around €20 million.The transaction will enable Intel tobenefit from INDISYS’ voice recognitiontechnology and expertise in artificialintelligence.

Case Study: CareFusion’s acquisition of SENDAL

M&A strategyThis transaction is in line with CareFusion’s strategy ofglobal expansion in the Infection Prevention business line.

Despite the relatively small size of the target, theacquisition will support CareFusion’s growth plans byintroducing its products into SENDAL’s existingcommercial network and enhancing its presence andexpertise in the non-dedicated infusion market.

The deal also complements CareFusion’s traditionalstrength in its core business and grants access to leadingmarket share in certain products and geographies.

Acquisition challengesThe main challenge is to overcome the cultural differencesbetween a listed US multinational and a Spanish family-owned business.

For example, an acquirer of this scale would typically beexpecting the seller to have a detailed understanding ofhistorical and future performance and present keycustomer relationships and opportunities.

Trust is a key issue in the Spanish business market so it isgreatly beneficial to work with a local advisor, and withfamily-owned businesses, both the acquirer and the sellermust consider the potential future involvement of majorstakeholders, such as family members and employees.

Catalyst’s Spanish Mergers Alliance partner is advising CareFusion, the US medical technologymultinational, on the acquisition of SENDAL from GED Private Equity. SENDAL is a Spanish manufacturerof disposable speciality medical products that primarily serves the Western European market.

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Country Report - Spain M&A update

Igor Gorostiaga, CorporateFinance Division ManagingPartner of Catalyst’s Spanishpartner firm, discusses M&Atrends and investmentopportunities in Spain.

Q. How would you describe theM&A market in Spain?It is a buyer-controlled market wherethe investors have negotiatingstrength following the reduction inprice expectations by sellers. Dealvolumes have clearly decreased sincethe beginning of the financial crisis(from 881 in 2007 to 256 in 2012, seeFigure 3) and market activity iscurrently low.

However, there are positive signs thatM&A activity will increase following anumber of outbound deals amongmid-sized industrials. For example,Orona Group has recently acquiredBrazil’s AMG Elevadores, andOrmazabal, which supplies integralsolutions to medium voltagedistribution systems, has bought USbroadband communications servicesprovider CURRENT Group.

Q. How has the deleveragingprocess affected M&A activity?There is no major difference in formsof financing. However, the market is ata stage where, in order to complete adeal successfully, buyers need

access to a larger base of equityrather than debt, or negotiatestructures that involve greaterfinancing by the seller (such asvendor financing or earn outs).Magnum Capital Industrial Partnerscompleted its recent €80 millionsecondary buy-out (SBO) of flavoursand fragrances firm Iberchem withoutany debt financing.

Q. Is Spain an attractivedestination for investors?Yes. The general perception is thatdomestic consumption levels havebottomed out, and so medium-termprospects are positive. Due to thedomestic market downturn, companyvaluations have decreased.

Furthermore, many Spanishcompanies have been able tocompete in the international market,even with internal credit constraints,by undergoing organisationalrestructuring and makingmanufacturing processes moreefficient. They are therefore now morecompetitive and, with recent labourmarket reform, will become more so,bringing interesting opportunities forforeign investors.

Spain is also a means of accessingthe European market. The most activeforeign investors in Spain in the lastfive years have come from the USAand the UK, see Figure 4. Acquirerscan also access the Latin Americaneconomies and benefit from goodlocal knowledge, an establishedcontact network and the highestnumber of double taxation andinvestment protection agreements inthe region.

Q. What are Spanish companieslooking for in their overseasinvestments?Most of the Spanish companiesinvesting abroad have alreadydeveloped very good product rangesand are therefore focusing on

accessing new markets. For somesectors, such as renewable energy,power transportation and distribution,and construction engineering, thegrowth of the domestic marketbetween 1997 and 2007 led to thedevelopment of excellent technologyand technical expertise. Thesecompanies are now investingworldwide, or even making domesticacquisitions of smaller buttechnologically-focused companies.

Q. How is private equityapproaching Spain?Private equity activity has droppedcontinuously since 2010 in terms oftransaction value, but we have seena renewed interest in inboundinvestment from foreign investorssuch as HIG, Blackstone, KKR andCinven. During the last 12 months,the market has been involved in someinteresting transactions, such as theacquisition of Softonic by PartnersGroup (growth transaction in theinternet sector) and the purchase ofa 39% stake in Bridgepoint-backedDorna Sports by the CanadaPension Plan Investment Board for€390 million. One of the main reasonsfor the decrease in domestic PEactivity has been finance limitations.International investors that do not haveto rely on financing in Spain can takeadvantage of this situation.

Our perspective on M&A trends in Spain

No. o

f dea

ls

USA GermanyFrance ItalyNetherlandsUK0

50

100

150

200

Figure 4: USA and UK areleading inbound M&A

2007 2010 2011 20122008 2013Sept

2009

Domestic Inbound Outbound

0100200300400500600700800900

Figure 3: M&A activity

Source: Corpfin (2007 - Sep 2013)

Source: Corpfin (2007 - Sep 2013)

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Country Report - Spain M&A update

Challenging economic conditions andfinancing limitations resulted in adecrease in the value and volume ofdeals in 2012, but private equity hascontinued to invest in Spain, with 24buy-outs completed at a combinedvalue of €3 billion.

Foreign private equity firms havebegun targeting the steeply-discounteddistressed property assets of Spanishbanks and cash-strapped governmentorganisations.

HIG Capital beat rival bids from LoneStar Funds, Apollo Global Managementand Colony Capital to acquire a 51%stake in ‘bad bank’ Sareb’s €100 million“Bull Portfolio”, part of a €90 billioncollection of repossessed real estate.

Madrid’s regional government and citycouncil sold portfolios of 3,000residential flats and 1,860 rent controlledproperties to Goldman Sachs and Azora(for €201 million) and Blackstone (for€126 million) respectively.

M&A volumes have remained steady in2013.16 PE-backed buy-outs at a totalvalue of €1.8 billion have been

completed so far this year and largeinternational PE houses have set aside€12.7 billion to invest in Spain.Specific sectors of interest includetourism & hospitality, with hotelproperties representing high performingassets at low valuations, and healthcare,in light of the reorganisation of publicly-funded services. SMEs, particularlydistributors geared to exports, are alsoattractive targets as export volumescontinue to grow.

Private equity funds are looking to divesthighly leveraged acquisitions completedprior to the financial crisis.

Spanish firm MCH Private Equity soldits 80% stake in air gun ammunitionmanufacturer Gamo Outdoor, boughtin 2007 for €70 million, to PE houseBruckmann Rosser Sherrill & Co for€80 million.

As well as secondary buy-outs,exit activity includes trade sales.Germany-based United Internet recentlyannounced the €140 million acquisitionof web hosting and domain registrationservices firm Arsys Internet fromThe Carlyle Group and Mercapital.

PE prepares to invest €12.7 billion in Spain

Figure 5: Selected recent M&A transactions

PE is competingfor distressed

property assets

Source: Corpfin, Mergermarket

Target Acquirer Deal ValueDate Target company Country Target activities Acquirer Country (€m)

Oct-13 Bahia de Bizkaia Electricidad (25%) Spain Combined cycle power plant BP Plc UK 135

Oct-13 Puerto Venecia Shopping Centre (50%) Spain Retail park Orion Capital Managers UK 146

Sep-13 Fogg Spain Hotel & travel search website Skyscanner UK nd

Sep-13 NH Hoteles (4.34%) Spain Hotel management Taube Hodson Stonex, BlackRock UK, USA 44

Sep-13 London Luton Airport Group (90%) UK Airport management Aena, Axa Private Equity Spain, France 502

Jul-13 IACP Jevsa Spain Rubber manufacturing SPC Europe UK nd

Jul-13 Hidrodata (45.75%) Spain Renewable energy production HgCapital, Plenium Partners UK, Spain nd

Jul-13 Caesar (50%) & Banke (50%) Hotels UK, France Hotel management Derby Hotels Collection Spain 120

Jun-13 Befesa Medio Ambiente Spain Recycling & waste management Triton Partners UK 1,075

Feb-13 Enterprise Group UK Infrastructure maintenance Ferrovial Spain 443

Dec-12 Torrejón (50%) & Manises (40%) Hospitals Spain Hospital management BUPA UK 78

Dec-12 EPDL UK Wind power equipment manufacturing Ormazabal Ikusi Spain nd

Oct-12 SinDelantal Internet Spain Online food ordering service Just Eat Holding UK nd

Oct-12 Euskaltel (48.1%) Spain Telecommunications services Investindustrial, Trilantic Capital Partners UK, USA 190

Mar-12 Houghton's Waste Paper UK Recycling services SAICA Spain nd

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