Appendix 1

Conservative Approach

Estimation of Firm Value

(in FFr million) 1989 1990 1991 1992 1993 1994 1995
Sales 337.4 380.0 418.0 451.4 478.5 500.1 522.6
Cost of Goods Sold (104.9) (114.4) (125.1) (133.6) (141.6) (148.0) (154.7)
General Admin Expense (197.6) (222.5) (237.8) (248.7) (263.2) (275.0) (287.4)
EBIT 34.9 43.1 55.0 69.1 73.7 77.0 80.5
Tax rate on EBIT 37% 37% 37% 37% 37% 37% 37%
NOPLAT 22.0 27.1 34.7 43.5 46.4 48.5 50.7
Depreciation 11.7 19.0 20.0 22.6 23.9 25.0 26.1
Amortization - 3.3 3.3 3.3 - - -
Increase in Working Capital (8.0) (7.1) (6.3) (5.1) (4.0) (4.2)
Capital Expenditure (20.0) (20.9) (22.6) (23.9) (25.0) (26.1)
Free Cash Flow 21.5 30.0 40.6 41.4 44.5 46.5
4.5%
Terminal Value (1994) 533.4
WACC, based on beta = 0.8 13.22% 0 1 2 3 4 5
Discounted Cash Flow 21.5 26.5 31.7 28.5 27.1
PV (end of 1990)
FCF 135.2
Terminal Value 324.7
Entity Value 459.9
Debt (37.0)
Non-Operating Assets -
Firm Value 422.9

If Beta = 0.8 0.9 1 1.1 1.2

Cost of Equity = 14.06% 14.56% 15.06% 15.56% 16.06%
WACC = 13.22% 13.66% 14.11% 14.55% 15.00%
Firm value = 422.9 401.2 381.5 363.6 347.1

Estimation of WACC
Rf 10.06% Long term Gov. bond
Rm 5%
Beta 0.8 (the range of 0.8 - 1.2 would be used as sensitivity analysis)
Cost(E) 14.06%
Cost(D) 10.00% Assume AA grade for now
Eff. Tax% 37.00%
Cost(D) net 6.30%
Debt 37
Equity 303 (*)
Debt/Value 10.88%
WACC 13.22%

(*) Estimation of Equity

After LBO, the Total Financing would be 340 million
We took the value of Total financing in the post-LBO scenario as a proxy to that of Acova on a standalone basis

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 Appendix 1
Conservative Approach

Hence the equity value of Acova = [340 - 37] 303 million

Assumptions

1. A conservative approach was adopted with lower sales growth than the fiqures projected by Baring.
2. Perpetual sales growth rate was projected as 4.5% which sounds achievable and reflects the worst scenario.
3. Cost of debt was 10.00%, based on the assumption that the Acova deserved a AA grade

Data adopted in this computation

Operating Working Capital 63.1 71.1 78.2 84.4 89.5 93.5 97.7
Excess Cash - - - - - - -
Working Capital 63.1 71.1 78.2 84.4 89.5 93.5 97.7
as % of sales 18.7% 18.7% 18.7% 18.7% 18.7% 18.7% 18.7%

Sales Growth % 12.6% 10.0% 8.0% 6.0% 4.5% 4.5%

% of sales
Cost of Goods Sold 31.1% 30.1% 29.9% 29.6% 29.6% 29.6% 29.6%
Selling, G&A (Excl. Amortization 58.6% 58.6% 56.9% 55.1% 55.0% 55.0% 55.0%
Depreciation 3.5% 5.0% 4.8% 5.0% 5.0% 5.0% 5.0%
Capital Expenditure 5.3% 5.0% 5.0% 5.0% 5.0% 5.0%

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 Appendix 2
Baring's Approach

Estimation of Firm Value

(in FFr million) 1989 1990 1991 1992 1993 1994 1995
Sales 337.4 380.0 419.9 464.0 510.4 561.4 617.6
Cost of Goods Sold (104.9) (114.4) (125.1) (137.3) (151.1) (166.2) (182.8)
General Admin Expense (197.6) (222.5) (238.9) (255.7) (280.7) (308.8) (339.7)
EBIT 34.9 43.1 55.8 71.0 78.6 86.5 95.1
Tax rate on EBIT 37% 37% 37% 37% 37% 37% 37%
NOPLAT 22.0 27.1 35.2 44.7 49.5 54.5 59.9
Depreciation 11.7 19.0 20.0 23.2 25.5 28.1 30.9
Amortization - 3.3 3.3 3.3 - - -
Increase in Working Capital (8.0) (7.5) (8.2) (8.7) (9.5) (10.5)
Capital Expenditure (20.0) (21.0) (23.2) (25.5) (28.1) (30.9)
Free Cash Flow 21.5 30.1 39.8 40.8 44.9 49.4

Terminal Value (1994), based on P/E multiple as 13 13 708.1 6.2%

WACC, based on beta = 0.8 13.22% 0 1 2 3 4 5
Discounted Cash Flow 21.5 26.5 31.1 28.1 27.3
PV (end of 1990)
FCF 134.6
Terminal Value 431.0
Entity Value 565.6
Debt (37.0)
Non-Operating Assets -
Firm Value 528.6

If Beta = 0.8 0.9 1 1.1 1.2 1.3 1.4

Cost of Equity = 14.06% 14.56% 15.06% 15.56% 16.06% 16.56% 17.06%
WACC = 13.19% 13.66% 14.11% 14.55% 15.00% 15.44% 15.89%
Firm value = 529.1 520.8 513.1 505.6 498.2 490.9 483.8

Estimation of WACC
Rf 10.06% Long term Gov. bond
Rm 5%
Beta 0.8 (the range of 0.8 - 1.2 would be used as sensitivity analysis)
Cost(E) 14.06%
Cost(D) 9.62% Assume AA grade for now
Eff. Tax% 37.00%
Cost(D) net 6.06%
Debt 37
Equity 303 (*)
Debt/Value 10.88%
WACC 13.19%

(*) Estimation of Equity

After LBO, the Total Financing would be 340 million
We took the value of Total financing in the post-LBO scenario as a proxy to that of Acova on a standalone basis
Hence the equity value of Acova = [340 - 37] 303 million

Assumptions
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 Appendix 2
Baring's Approach

1. Cost of debt was 9.62%, based on the assumption that the Acova deserved a AA grade

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 Appendix 3
Post-LBO scenario
Debt Schedule and NI

(thousands of FFr) 1990 1991 1992 1993 1994 1995 1996 1997 1998
Beginning debt-Sr. debt 190,000 185,000 175,000 160,000 140,000 115,000 90,000 65,000 40,000
Interest-Sr. debt (12%) 12,350 22,200 21,000 19,200 16,800 13,800 10,800 7,800 4,800
Principle-Sr. debt 5,000 10,000 15,000 20,000 25,000 25,000 25,000 25,000 40,000
Ending debt-Sr. debt 185,000 175,000 160,000 140,000 115,000 90,000 65,000 40,000 -

Beginning debt-Sub. debt 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000
Interest-Sub. debt (13.5%) 4,388 8,775 8,775 8,775 8,775 8,775 8,775 8,775 8,775
Principle-Sub. debt - - - - - - - - 65,000
Ending debt-Sub. debt 65,000 65,000 65,000 65,000 65,000 65,000 65,000 65,000 -

Beginning debt-WC loan 31,800 28,441 35,495 33,523 32,806 31,261 23,226 7,802 (16,017)
Interest-WC loan(11%) 1,749 3,129 3,904 3,688 3,609 3,439 2,555 858 (1,762)
Principle-WC loan 3,359 (7,054) 1,972 717 1,545 8,035 15,424 23,819 (46,660)
Ending debt-WC loan 28,441 35,495 33,523 32,806 31,261 23,226 7,802 (16,017) 30,643

Consolidated Interest &

26,846 37,050 50,651 52,380 55,729 59,049 62,554 66,252 70,153
Principle repayment
Consolidated Ending debt 278,441 275,495 258,523 237,806 211,261 178,226 137,802 88,983 30,643

EBIT (Baring's Approach) 43,071 55,847 70,990 78,600 86,460 95,106

Earnings after interest + debt 16,225 18,797 20,339 26,220 30,731 36,057 (assume 37% tax rate)
NI (Baring's Method) 10,222 11,842 12,814 16,518 19,360 22,716
Interest+Debt / EBIT 62% 66% 71% 67% 64% 62%

EBIT (Conservative Approach) 43,071 55,028 69,070 73,693 77,009 80,475

Earnings after interest + debt 16,225 17,978 18,419 21,313 21,280 21,426 (assume 37% tax rate)
NI (Conservative Approach) 10,222 11,326 11,604 13,427 13,407 13,498
Interest+Debt / EBIT 62% 67% 73% 71% 72% 73%

Positive NI was generated with either method, yet was a lot lower than the EBIT

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 Appendix 3
Post-LBO scenario

WACC immediately after LBO (with data from "Baring's Approach)

Immediately after LBO Before LBO

L-T debt 255 75% 37
Equity 85 25% 363
Total Financing 340 100% 400

Rf 10.06% 10.06% 10.06% 10.06% 10.06% 10.06% 10.06% 10.06% 10.06% 10.06% 10.06%
Rm 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Original Beta (before LBO) 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Unlevered Beta 0.75 0.85 0.94 1.03 1.13 1.22 1.32 1.41 1.50 1.60 1.69
Relevered Beta (after LBO) 2.17 2.44 2.72 2.99 3.26 3.53 3.80 4.07 4.34 4.62 4.89

Cost (E) w/ Relevered Beta 20.9% 22.3% 23.6% 25.0% 26.4% 27.7% 29.1% 30.4% 31.8% 33.1% 34.5%
* Cost (D) 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2%
Eff. Tax rate 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0%
Cost (D) net 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7%
Equity / Value 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Debt / Value 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% 75%
WACC 14.38% 14.72% 15.06% 15.40% 15.74% 16.08% 16.42% 16.76% 17.10% 17.44% 17.78%

* Estimation of Cost (D)

Given 3 types of debt would be incurred after the LBO, the Arithmetic mean of the interest rate of these 3 would
be used as proxy to cost of Debt (before tax)
Type of Debt Interest Rate
Senior Debt 12.0%
Mezzanine Debt 13.5%
WC loan 11.0%
Arithmetic Mean 12.2%

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