International Concepts Incorporated

1
International Concepts Incorporated

• Analysis of anAcquisition Opportunity.

2
ICI Expansion Considerations

• Could the acquisition increase ICI shareholder
  value ?
• What is the maximum offer price ?
• (What is the value of Neros future free cash
  flows?)

3
DCF Valuation Methodology

• Managements estimates for growth
• Develop pro-forma cash flow statements
• Discount the cash flows to present value using
  Ks
• Compare NPV with current market value

4
Pro Forma Income Statement - Neros Pasta Inc.
1996

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000
5
Pro Forma Cash Flow - Neros Pasta Inc.
1996

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000 250,000 1,300,000 500
,000 800,000
6
Pro Forma Cash Flow - Neros Pasta Inc.
1996
1997

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000 250,000 1,300,000 500
,000 800,000
Assets5,000,000 to 6,000,000
Debt2,500,000 to3,000,000
D/ E1
Equity 2,500,000 to3,000,000
g20
7
Pro Forma Cash Flow - Neros Pasta Inc.
1996
1997

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000 250,000 1,300,000 500
,000 800,000
900,000 300,000 300,000
20
15
Assets5,000,000 to 6,000,000
20
5
20
Debt2,500,000 to3,000,000
10
D/ E1
Equity 2,500,000 to3,000,000
g20
8
Pro Forma Cash Flow - Neros Pasta Inc.
1996
1997
25

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000 250,000 1,300,000 500
,000 800,000
25,000,000 21,250,000 900,000 300,000 300,000 2
,250,000 900,000 1,350,000 300,000 1,650,000 600
,000 1,050,000
25
20
15
Assets5,000,000 to 6,000,000
20
5
20
Debt2,500,000 to3,000,000
10
28
D/ E1
Equity 2,500,000 to3,000,000
g20
9
Pro Forma Cash Flows - Neros Pasta Inc.
1996
1997
1998
1999

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

20,000,000 17,000,000 750,000 250,000 250,000 1
,750,000 700,000 1,050,000 250,000 1,300,000 500
,000 800,000
25,000,000 21,250,000 900,000 300,000 300,000 2
,250,000 900,000 1,350,000 300,000 1,650,000 600
,000 1,050,000
31,250,000 26,562,500 1,080,000 360,000 360,000
2,887,500 1,155,000 1,732,500 360,000 2,092,500
720,000 1,372,500
39,062,500 33,203,125 1,296,000 432,000 432,000
3,699,375 1,479,750 2,219,625 432,000 2,651,625
216,000 2,435,625
10
Pro Forma Cash Flows - Neros Pasta Inc.
1999
Present Value of Free Cash Flows in 2000
Beyond

• Net sales
• Operating Expenses
• Variable Operating Costs
• Fixed Operating Costs
• Depreciation
• Financing Expenses
• Interest Expense
• Earnings Before Taxes
• Taxes (_at_40)
• Net Income
• add back Depreciation
• Operating Cash Flow
• Required Additions to Equity
• Free Cash Flow

39,062,500 33,203,125 1,296,000 432,000 432,000
3,699,375 1,479,750 2,219,625 432,000 2,651,625
216,000 2,435,625
25,951,539
( Free Cash Flow )( 1g ) Ks - g
( 2,435,625 )( 1.05 ) 0.1485 - 0.05
11
Pro Forma Cash Flows - Neros Pasta Inc.
1996
1997
1998
1999

• Free Cash Flow
• Terminal Value

800,000
1,050,000
1,372,500
2,435,625 25,951,539
3.74 per share
800,000 (1.1485)
1,372,500 (1.1485)3
1,050,000 (1.1485)2
2,435,625 25, 951,539 (1.1485)4




18, 711, 198
12
Discount Rate

• Cash Flows discounted at Ks
• Ks calculated using CAPM
• Ks KRF (MRP)b
• Ks 7.0 (6.0)1.31
• Ks 14.85

13
Discount Rate

• Cash Flows discounted at Ks
• Ks calculated using CAPM
• Ks KRF (MRP)b
• Ks 7.0 (6.0)1.31
• Ks 14.85

• Calculating new beta (reflecting change in
  capital structure)
• previous beta 1.2
• bu
• bu
• bu 0.82

BL 1(1-T)(D/S)
1.2 1(1-0.3)(.667)
bL bU(1(1-T)(D/S) 0.82(1(1-0.4)(1)) 1.31
14
Sensitivity of PV - Neros Pasta Inc.
MaxOfferPrice
Share Price
15
Alternative Valuation Method

• Market Multiples

16
Market Multiple Valuation - Neros Pasta Inc.
1999
Multiple Valuations Wv Weighted Value

• Net sales
• Net Income
• Free Cash Flow
• Discounted Cash Flows
• (for 2000 and beyond)
• Market to Book Multiple

39,062,500 2,219,625 2,435,625 25,951,539 4,32
0,000
23,437,500 24,415,875 21,920,625 25,951,539 19
,440,000
0.6 11.0 9.0 n/a 4.5
0.1 0.2 0.3 0.3 0.1 1.0
2, 343, 750 4, 883, 175 6, 576, 188 7, 785,
462 1, 994, 000 23, 532, 574
2.71 per share
23, 532, 574 (1.1485)4
13, 525, 254
17
Alternative Valuations
Market Multiples
2.71 per share
3.74 per share
Pure DCF
Current Market Price is 1.50 per share !
18
Business Justifications for Acquisitions

• Tax considerations
• Diversification
• Control
• Purchase of Assets Below Replacement Cost
• Synergy

19
The Importance of a Friendly Approach

• Recognize the value of current Nero
  management in maximizing synergy.
• Helps to reduce the premium over current
  market price.
• Also will help avoid defensive tactics such as
• Poison Pill
• Use of a White Knight

20
The Approach

• Retain Management.
• Offer should provide incentive for quick sale
  and assure the creation of value for ICI
  shareholders.
• need to balance the price to meet these
  objectives.
• Because there is a spread of 2.24 per share,
  there is room to negotiate. However caution is
  needed
• 1996 1997 1998 1999
• Forecasted Return on Equity 42 45 48
  51

21
Sensitivity of PV - Neros Pasta Inc.
Share Price
MaxOfferPrice
22
Sensitivity of PV - Neros Pasta Inc.
Share Price
MaxOfferPrice
23
The Offer Price

• Given the sensitivity of PV with respect to
  sales growth and variable costs, it may be
  prudent to revise prior estimates to arrive at a
  more conservative valuation.
• We suggest a more cautious sales growth
  forecast of 15 (as opposed to 25).

24
Equilibrium Price - Under Management Assumptions
Crossover point indicates share price at which
gains in wealth are split evenly between ICIs
and Neros shareholders.
2.62
25
Equilibrium Price - After Sales Growth Adjustment
New Crossover Point indicates share price at
which gains in wealth are split evenly between
ICIs and Neros shareholders.
2.06
26
Initial Offer Structuring the Deal

• Offer Neros management 3,090,000 (2.06
  per share for 30 stake in Neros).

50Cash
50 National Mills Stock (with 3 year restriction)
27
Final Offer to Management

• Offer Neros management 3,090,000 (2.06
  per share for 30 stake in Neros).

• Offer Neros management 3,930,000 (2.62
  per share for 30 stake in Neros).

50Cash
50 National Mills Stock (with 3 year restriction)
28
Tender Offer to Neros Shareholders

• Offer Neros shareholders the final negotiated
  price with Neros management. ( 2.06 to
  2.62 per share for remaining 70 stake in
  Neros.)Primary Incentives for Accepting the
  Offer
• The offer provides a 25 premium on current
  market value. (as compared to 10 annual
  capital gains historically)
• The offer provides liquidity.