Leveraged Buyouts – An Overview

Dan KatsikasChief Financial Officer, Bear Stearns Merchant BankingDecember 8, 2006

Agenda

IntroductionOverview of Private Equity Firm & Fund StructuresAnatomy of an LBOKeys to Successful BuyoutsCase Studies

Selected BSMB Investments

Alternative investments comprise over 20% of the investment market

Real Estate6.7%

Hedge Funds7.7%

Traditional investments78.6%

Private Equity7.0%

North America% of Total Assets

Source: Russell Survey on Alternative Investing 2005-2006 based on 327 large organizations managing tax-exempt assets

What is private equity?

Investing in securities of a company, usually not public, through a negotiated processIncludes investments in the following categories:

Venture Capital

• Equity capital for the creation or expansion of smaller companies, usually in high tech or emerging industries• Investment across separate stages: seed stage, second stage, third stage, late stage

Buyout

• Equity capital for the acquisition of larger and mature companies with established cash flows• Investments are financed using a mix of debt and equity

Special Situations

• Equity capital for financially and/or distressed companies

Mezzanine

• Debt capital between equity and debt for acquisition of refinancing transactions• Participating in equity appreciation through conversion features such as warrants, etc.

The basics of buyouts

Raise capital in limited partnershipsFind businesses with strong cash flow potentialReduce risk by a high degree of control and legitimate access tonon-public informationPrudent use of leverageAlign interests with management through significant incentives, triggered upon a liquidity eventIlliquid asset class, requires a long term commitmentPotential profits realized through various exit strategies: initial public offerings (IPOs), trade sales, refinancings

Evolution of the private equity industry

Overheated stock market

Tech / Telecom bubble

Abundant fundraising

Economicboom

Non U.S. buyouts

Valuation decline

Tighter credit

Asset deflation

Recession

Significant corporate

restructuring

Robust financing markets

Strategic buyers on the sidelines

Record low interest rates

Larger buyouts and mega funds

DevelopingHY market

More sophisticated financial

engineering

Increasing deal size

Growing M&A

Loan market

Club deals

Under exploited balance sheets

Underperforming economy

Metromedia

Recapitalization through equity

markets

Multiple contraction

Recession

HLT regulation

Improving economic fundamentals

Source: JP Morgan

Managing wealthy Americans’ money

Primarily new ventures

Infancy

Growth

Roaring

Recession

Rebirth and bull market

Recession

Resurgence

Pre-1980 Early 80s Late 80s Early 90s Late 90s 2000-2001 2002-Q306 YTD

Record levels of private equity funds have been raised increasing the buying power of investors

94

160173

7 14 2032 33

55

95 105

173

106

6850

0

25

50

75

100

125

150

175

200

225

250

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 3Q06YTD

U.S.($ in billions)

Source: Morgan Stanley, The Private Equity Analyst

230

Annualized

As a result, major private equity firms continue to grow in size, expanding the buying power of mega-funds

Selected closed U.S. funds($ billion)

Private equity funds currently fundraising ($ billion)

(1) Blackstone plans to raise an additional $4.4bn to reach a total of $20bn(2) Includes $5bn publicly traded investment vehicle; excludes €4.5bn European fund Source: Buyouts Magazine, Private Equity News, JPMorgan

15.6 15.2 14.0

10.0 10.08.0 7.8

6.5 6.0

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

$20.0

Blac

ksto

ne (

1)

TPG

Perm

ira

Apo

llo

Bain

Cap

ital

War

burg

Pin

cus

Firs

t R

eser

ve

MD

P

JC F

low

ers

16.515.0

10.0 9.0 8.0

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

$20.0

$22.0

KKR

(2)

Car

lyle

Gol

dman

Sac

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Thom

as H

. Le

e

Prov

iden

ce

21.520.0

Growth in fund size has driven growth in LBO volume and average deal size

* YTD as of 11/13/06** Based on S&P sample setSource: Thomson Financial; Standard & Poor’s

U.S. LBO Volume Average LBO Size**($ in millions)

389

540

716 706

972

1,102

$0

$200

$400

$600

$800

$1,000

$1,200

2001 2002 2003 2004 2005 1H06

12 25 25

75

142

271

$0

$30

$60

$90

$120

$150

$180

$210

$240

$270

$300

$330

2001 2002 2003 2004 2005 2006YTD*

0

100

200

300

400

500

600

700

$ in billions Number of deals

310

Annualized

Increased competition and capital have driven up purchase prices

Price / Adjusted EBITDA

5.9 5.8

6.3 6.6

7.5 7.6 7.6

6.3

6.8 6.76.9

8.0

8.5 8.5

6.46.7

6.9

7.5

8.18.4 8.4

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

2000 2001 2002 2003 2004 2005 1H2006

<250M $250mm to $499mm >$500mm

Source: Harris Williams, Portfolio Management Data

Drivers of increased multiples

Macroeconomic growthQuality of businessesIncreased efficiency in marketCompetitionAvailable leverage

Leverage levels have been creeping up along with valuations

Source: Lehman Brothers, Standard & Poor’s

Average total debt / EBITDA

6.0

5.0 5.0

4.2 4.1 4.0

4.64.8

5.35.0

5.6

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 1Q06 2Q06

Large LBO (>50M EBITDA)

Average: 4.9x

Average debt multiples of middle market LBO loans

3.53.4 3.4

3.12.8 3.1 3.0 3.0

3.4

3.9

0.1 0.2

0.10.5

0.90.3

1.3 1.2

0.70.8

0.6

0.7 0.8

0.8

0.4 0.6

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

1997 1998 1999 2000 2001 2002 2003 2004 2005 1H2006

1st Lien Debt 2nd Lien & Other Sr. Debt Sub Debt

Source: Portfolio Management Data, Standard & Poor’s

For the years ended December 31, 1997-2005 and the quarter ended June 30, 2006

Private equity players have become more competitive with strategic buyers in terms of acquisition multiples

Source: Harris Williams, Portfolio Management Data

5.96.4

6.7 6.77.3

8.7 8.5 8.5

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

<$100mm $100mm to$249mm

$250mm to$499mm

>= $500mm

Sponsor Strategic

Price/Adjusted EBITDA MultiplesFor the Year Ended December 31, 2000

Price/Adjusted EBITDA MultiplesFor the Trailing Twelve Months Ended October 31, 2005

6.1

7.2

7.9 8.0

6.8

7.5

8.3

9.8

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

<$100mm $100mm to$249mm

$250mm to$499mm

>= $500mm

Sponsor Strategic

∆ of 1.8x∆ of 2.3x ∆ of 0.4x

∆ of 0.3x

Firm and Fund Structures

Private equity firms

Fund structures• Committed capital, partnership structures• Run by General Partner and Management Company• How do PE firms make their money?

Management FeesCarried InterestTransaction Fee splitsPrincipal co-investment

• Waterfalls• Firm structures

CEO, COO/CFODeal TeamsOperating Partners

ManagementCompany

ManagementCompany

General Partner

Domestic Fund, L.P.

OffshoreFund, L.P.

Internal Co. Investment Vehicle

Private equity firms - Structure

Fees

Portfolio Companies

Carried Interest

Employees GeneralPartner

GeneralPartner

DomesticFund, L.P.

DomesticFund, L.P.

OffshoreFund, L.P.

OffshoreFund, L.P.

Internal Co-investmentVehicle

Internal Co-investmentVehicle

Portfolio CompaniesPortfolio Companies

How do PE firms differentiate themselves?

Returns and track record

26.8%

12.4%

7.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Above Median Private Equity Manager All Private Equity S&P

NB: 10-year returns through 12/31/05.Source: Lehman Brothers, Thomson Venture Economics/National Venture Capital Association’s Private Equity Index

Above median PE

vs. S&P: + 1950 bps

All PE

vs. S&P: + 510 bps

Other Differentiating Factors

Diversity of team• Operating Partners and Deal Executers

Sector focus

Access to proprietary deal flow

Depth of experience• Investing across multiple cycles

Speed to close• Dedicated lines of credit/all equity closes

Anatomy of an LBO

Anatomy of an LBO

What is an LBO?Who is a good LBO candidate?Who are the players?• Private equity firms

Co-investors

• Acquisitive companies• Senior lenders

Acquisition debt and revolvers

• Subordinated lendersHedge Funds

• Company management

Key factors in executing an LBO

Industry and company dynamicsA stand-alone investment thesis

ValuationLeverage availableExit strategyManagement, management, management!

Extensive Due Diligence

Example: Gator Industries, Inc.Dollars in thousands

Assumptions:Acquisition price (6.0x 2005 EBITDA) $ 1,200.0Date of investment 12/31/05Hold period 5 yearsSale price (6.0x 2010 EBITDA) 1,650.0Sale date 12/31/10Financable leverage (4.5x 2005 EBITDA) 900.0Financable equity commitment 300.0Assumed total cost of debt 13.0%

Company Financial Projections:

2005A 2006 2007 2008 2009 2010 CAGR$ 1,250.0 4.6%

6.6%

5.9%

275.0(75.0) 200.0

-

200.0(80.0)120.0

75.0(70.0)(20.0)

$ 105.0

$ 1,200.0

260.0(70.0) 190.0

-

190.0(76.0)114.0

70.0(70.0)(18.0)

$ 96.0

Revenues$ 1,000.0 $ 1,050.0 $ 1,100.0 $ 1,150.0

EBITDADepreciation/Amortization

200.0(50.0)

215.0(55.0)

230.0(60.0)

245.0(65.0)

EBIT 150.0 160.0 170.0 180.0

Interest expense, net - - - -

Pre-tax income 150.0 160.0 170.0 180.0Taxes (at 40%) (60.0) (64.0) (68.0) (72.0)

Net income 90.0 96.0 102.0 108.0

Depreciation/Amortization 50.0 55.0 60.0 65.0Capex (60.0) (60.0) (65.0) (65.0)Changes in working capital (10.0) (12.0) (14.0) (16.0)

Free Cash Flow $ 70.0 $ 79.0 $ 83.0 $ 92.0

Example: Gator Industries, Inc. - UnleveredUnlevered Case:

2005A 2006 2007 2008 2009 2010

Pro-forma transaction adjustments:

(Investment)/Sale proceeds (1,200.0) - - - - 1,650.0 Net cash to sponsor $ (1,200.0) $ 79.0 $ 83.0 $ 92.0 $ 96.0 $ 1,755.0

Status quo pre-tax income 150.0 160.0 170.0 180.0 190.0 200.0

-200.0(80.0)120.0

75.0(70.0)(20.0)105.0

-190.0(76.0)114.0

70.0(70.0)(18.0)

96.0

Interest expense - - - -Pro-forma pre tax income 150.0 160.0 170.0 180.0

Taxes (at 40%) (60.0) (64.0) (68.0) (72.0)Pro-forma net income 90.0 96.0 102.0 108.0

Depreciation/Amortization 55.0 60.0 65.0Capex (60.0) (65.0) (65.0)Changes in working capital (12.0) (14.0) (16.0)Pro-forma free cash flow 79.0 83.0 92.0

1.46Times equity returned13.2%IRR

Example: Gator Industries, Inc. - LeveragedLeveraged Case:

2005A 2006 2007 2008 2009 2010

Pro-forma transaction adjustments:

(Investment)/Sale proceeds (300.0) - - - - 750.0 Net cash to sponsor $ (300.0) $ 8.8 $ 12.8 $ 21.8 $ 25.8 $ 784.8

Status quo pre-tax income - 160.0 170.0 180.0 190.0 200.0

(117.0) 83.0

(33.2)49.8

75.0(70.0)(20.0)

34.8

(117.0) 73.0

(29.2)43.8

70.0(70.0)(18.0)

25.8

Interest expense - (117.0) (117.0) (117.0) Pro-forma pre tax income - 43.0 53.0 63.0

Taxes (at 40%) - (17.2) (21.2) (25.2)Pro-forma net income - 25.8 31.8 37.8

Depreciation/Amortization 55.0 60.0 65.0Capex (60.0) (65.0) (65.0)Changes in working capital (12.0) (14.0) (16.0)Pro-forma free cash flow 8.8 12.8 21.8

2.62Times equity returned24.5%IRR

Other Considerations of Buyout

Management equity rolloverOption incentivesShareholders AgreementControl and governance (BOD)Tax structures• C-Corp versus LLC• Preferred versus common

Keys to Success

Management, management, management!Buy rightGrow rightExit rightMitigate risk• Vigilant oversight• Activism• Prudent use of leverage• Structure

Case Studies

Business Description: Producer and marketer of premium air filled bedding products

Investment Rationale:– Category creator– Enormous growth opportunities– High cash flow generation and rapid senior debt

repayment– Compelling retailer economics

Sourcing:– Relationship with management– Met with Aero owner who spent winters in Florida– Trivest closed deal five months after meeting

Structure: Senior and subordinated debt

Value-Add:– Provided deep equity opportunities– Mandated product offering expansion– Shifted advertising focus– Built out finance and accounting departments

Case Study: Aero Products International, Inc.A Trivest Partners, L.P. portfolio company

Date: April-01

Invested: $30mm

Realized: $179mm

Gross IRR: 220%

Multiple: 6.1x

$31

$17

LTM 05/30/01 LTM 11/30/02

EBITDA from Investment to Sale

• Entry Multiple: 5.2x EBITDA• Exit Multiple: 7.6x EBITDA

($ in

mill

ions

)

Business Description: Private label, mall-based specialty retailer of women’s wear-to-work and weekend casual appareland accessories

Investment Rationale:– Non-core division of Limited Brands– Opportunity to rationalize costs and expand– Strong and experienced management team– Attractive and relatively underserved customer base

Sourcing:– Retail industry expertise – Prior success with corporate orphans– Favorable valuation and ability to close quickly– Reputation as value-added partner

Structure: Tax-efficient, seller paper, 30 day close

Value-Add:– Accelerated rebranding– Developed “stand-alone” infrastructure for brand– Developed the accessory store within-a-store concept

Date: Nov-02

Invested: $63mm

Realized: $253mm

Unrealized*: $412mm

Total*: $665mm

Gross IRR*: 124%

Multiple*: 10.6x

* Unrealized value based on NWY’s closing market price of $13.08 as of September 29, 2006.

$97

$46

FYE '02 LTM 7/31/06

CAGR=23%

• Entry Multiple: 3.3x EBITDA• IPO Multiple: 9.1x 2004E EBITDA

($ in

mill

ions

)

EBITDA from Investment to LTM 7/31/06

Case Study: New York & Company (NYSE: NWY)

Business Description: Global leader in the hearing, eye, face, head and respiratory segment

Investment Rationale:– Strong and stable cash flow– Strong management team– Attractive platform with accelerating new product

introduction pace– Increasing margins through productivity improvement– Ongoing distributor consolidation favors leading

suppliers

Sourcing:– Relationship with Seller and past history with

management– Industrial and Consumer Products industry expertise

Structure: Primarily preferred position

Value-Add:– Initiated several cost-saving efforts– Advised on numerous add-on acquisitions and one

business line divestiture– Led recapitalization; returned $68.1 million

CAGR=21%

($ in

mill

ions

)

Case Study: Aearo Technologies

Date: Apr-04

Invested: $80mm

Realized: $338mm

Gross IRR: 125%

Multiple: 4.2x

• Entry Multiple: 6.7x EBITDA

• Exit Multiple 9.5x EBITDA

$85

$58

LTM 12/31/03 LTM 12/31/05

EBITDA from Investment to LTM 12/3/05

The future of private equity

Here to stay• More than 175 funds with > $1 billion of committed capital

Increasing flight to qualityOperational experts on staffLarger fund sizes means access to more companies• Deals exceeding $40 billion are possible

Hedge funds entering marketRegulatory oversight

Announced Target Name Deal size* ($ billion)

2006 $33.0

1988 $30.1

2006 $27.4

2006 $26.6

2006 $17.4

2006 $16.3

2005 $15.3

2006 $15.3

2005 $15.0

2005 $12.5

* Deal size includes equity and debtSource: Morgan Stanley, news runs, Merger Market

• 9 of the 10 largest global private equity transactions have been announced during the past 18 months

• Growing importance of PE consortia

Record sizes of announced deals in recent yearsSponsor(s)