M&AProcessandStrategic Motives

Case:DavidM.Dodson

ADAPsAcquisitionPursuedforTwoMonthsNow!

DealProcess
Preparation Marketing Prelim. Evaluation Evaluationand Clarificationof IndicativeBids ShortListBidders Confidentiality Agreements Dispatchof Information Memorandum IndicativeBids Management Presentation DataRoomDue Diligence RevisedBid IncludingMarkUp toSharePurchase Agreements PhaseIII 1 2Months PhaseIV 1 2Months PhaseV 1 3Months
2

Final Evaluation

Negotiations &Closing

Initiationof Contract PreparationWork Identificationof PotentialBuyers Marketing Documents

Evaluationof Offers Selectionof PreferredBidders FinalOffersand Negotiationof SPA

FinalNegotiations Information Concept Signing Closing

PhaseI 1 3Months

PhaseII 1Month

FiveStagesofFriendlyM&ADeals

Screening potential deals

Reaching aninitial agreement

Conducting due diligence

Settingthe nal agreement

Closing

RiteAidgaveanImpressionthatitsa RaceAmongMultipleBidders
Negotiation Tactics Keepingthe Communication Grey Showingoff Itsless Desperate GettingDodson toTerms
4

MultiTasking
Talkingto Advisors Negotiating withFund Providers ThirdParty Verification DueDiligence

Negotiating withIB

Communication withStake Holders

TalkingtoADAP

Dodson

Negotiatingfor Documents

InternalandExternalExperts
IB StrategicAdvisors Tax Experts LegalExperts Accountants FinancialPartners IndustrySpecialists InvestorRelation/ Communication FCC MikeHammer(DLJ) RichardTadler (TA Associates) DickFloor BOAandanInvestor RiteAid PeterBartlett(DLJ)

StakeholdersInvolvement
FCC Public Shareholders BOD AntiTrustDivision Customers Employees Banks Involved Involved RiteAid

Involved

Involved Involved

RoleofAdvisors
Developlistofbuyers

SellersAdvisors

Analyzehowdifferent buyerswouldevaluate company

Determinevalueofthe companyandadvise selleronprobable sellingpricerange

Preparedescriptive materialsshowing strongpoints

Contactbuyers

Controlinformation process

Controlbidding process

Adviseonthestructure ofthetransactionto givevaluetobothsides

Ensureallnonfinancial termsaresettledearly

Smooth postagreement documentation

RoleofAdvisors

BuyersAdvisors

Thoroughlyreview target&subs

Adviseon probableprice range

Adviseontarget's receptiveness

Evaluatetarget's optionsand anticipateactions

Devisetactics

Considerrival buyers

Recommend financialstructure andplanfinancing

Adviseoninitial approachand followup Arrangethe purchaseofshares throughatender offer

Functionasliason

Adviseonthe changingtactical situation

Helparrangelong termfinancingand assetsales

ObjectivesofFCC(SearchFund)andtheDeal
Industrieswithcompaniesthat growintobigbusiness IndustriesoutofFavor

Funeral Homes

PawnShops

AssistedLiving
Industriesweredealcould bedone Companywithsalesof$50 100Million

ElectricEnergy

Furniture Manufacturing

Retail

Canonebuy,JustbecausesomethingisforSale?
10

ObjectivesofFCC(SearchFund)andthe AutomobileIndustry
Industrieswithcompaniesthat growintobigbusiness IndustriesoutofFavor Industriesweredealcould bedone Companywithsalesof$50 100Million Industryin consolidation phase Revenue:$4 billion Alltimehighin no.ofautomobile inoperations HighestAverage ageof automobiles

Marketgrowth: 6.5%

Analystexpected declineinsales

Canonebuy,JustbecausesomethingisforSale?
11

Passive Investors Useestimated cashflows currently present

Strategic Investors Useestimated synergiesand changesthat areforecastto arisethrough integrationof operations withtheir own

Financial Investors Valuedonthe basisof reorganized and refinanced operations

Managerial Investors Valuethefirm basedontheir ownjob potentialand abilityto motivatestaff and reorganizethe firms operations MBOsand LBOs

12

WhataretheOffBookLiabilitiesRiteAidwill BundlealongwithADAP?

Unwanted Asset Unwanted Resources

Unwanted Human Resource Unwanted Receivables

UnwantedTop Management Unwanted Liabilities

RiteAidintendtosellADAPtorefocusonDrugstoreBusiness 13

WhowillleadADAP?
Resignationof ADAPsPresident andVPOperations MBOisProposedto managethecrisis

OperationalFocused BODwillhelpin repositioningthe firm

14

Can$75MillionbeaBenchmarkFigure?

Yesitappears

$60to$70 millionoffered byFCCProvesit

Noserious Valuation ExerciseDone

15

WasFinancingCapabilityofDodsona RealConcern?
Dodsonis expectedtoraise $20 $25million Nostrong managementfor ADAPasofnow

Itsasearchfund

Noconcrete agreementdrawn fromfund providers

Noconcrete agreementwith DLJ

16

ProsandConsofHavingSingleIBby FCCandRiteAid
Leaningwillbebasedon sizeoffee,followon businesses,loyalty, credibilityofbuyerand seller PeterisseniortoHammer Easytransferofdata

Higherprobabilityof transactionsuccess

Hammertobepromotedto ManagingDirector

Nofeessupportfor financing

Dodsonwillgetpreferential treatmentoverotherbuyers whoarenotretainingDLJ

Dodsonwilllikelygetalast lookatthedealbeforeit closeswithanotherbuyer

Nonetheless,asageneral rule,thebuyerprefersto havethesamebankasthe seller;thoughtheseller shouldneverallowthebank torepresentbothsides

17

WhyPeterwasDemandingforaninitialValuationof DodsonbeforeGettingConnectedtoRiteAid?

IBfeesarebased onDealSize

Showsthe confidenceabout theBuyer

Toknowthe volumeof financingrequired

Toroundupon thecompetitors
18

Financing
Senior Debt
ExpectedIRR ProportionofFunding($ Million) DLJProposedFee DLJProposedOtherTerms 8% 30 35 1%

Subordinate Debt
20% 10 2.5%

Equity
35% 20 25 5% 1BoardSeat 1NonVoting ObserverSeat

DodsonsRequirement for DLJshelp

Yes

No

No

19

DataUsedinDueDiligence
StoreLevelP&LStatement StoreLevelB/S Leases FixedAssets WorkersCompensationClaims UnionAgreements PensionandHealthBenefitPlans EmployeeSeveranceAgreements

Seven Boxes

MostlyLegalisticDueDiligence

20

SourcesofValueCreationasIdentifiedthrough DueDiligence HiddenValue ofLand HiddenValue ofNotes Receivable

ClosingStores andCreating EBITDAValue

OnecannotexpectmorethanthisfromaNonSpecializedPEInvestor
21

WhyDodsonwantedaPreemptive Bid?
Tomoveupon arrangingfinance Desperatetohave thedeal

Nottolandupin higherpriceforthe dealdueto competitivebidders

Testingthe intentionsofthe seller

22

WhyDLJDelayedSendingPurchasing/ SaleAgreementtoDodson?
Tryingtoropein otherbiddersto thedeal Exhibitinglow desperateness

Waitingtoagree forfinancing supportfromDLJ

23

CanFCCprovideGuaranteefor$42 MillionLeaseofADAP?

WilltheLessor acceptFCCs guarantee?

HowFCCwill provideits Guarantee?

Willthe OwnersofFCC accept?

24

ThirdPartyOpinionsonADAP
GLCapital
Inappropriatenessin operations

TA Associates

InflatedWageRates HighRealEstateCosts PoorInformationSystems

25

WhatHammerwastryingtogetoutof theDeal?

HammersProposed EngagementLetter

Termsof Funding

26

WasDLJworkingforIncomingInvestor thanDodson?
Wantedto supportinraising Equity Wantedtodefine theconstituents ofBoard

Demanding higherownership right

27

ChallengesinM&A
TaxIssues LegalIssues Transaction vs.Daily Business

Asymmetry Information TaxIssues Integration Issues

Strategy

OnceinaLife Time Transaction

Seller
Pricing

Confidentiality

LegalIssues

IncentivePlan

Buyer

Pricing

TellingStory

Career

Synergies
Information Asymmetry
28

RacetotheFinishLine
Eachbidderwouldbe givenatwohour management presentation Eachbidderwouldbe expectedtosubmita bidwithintendaysof thepresentation Whoevergetsthere torequestedprice firstgetsthedeal

Nofullauction Twoorthreeotherbidders Expectingsomethingclosetothe$70million Bidinthehigh$60swaswhattheywereexpecting

72

DueDiligenceFindings Support
Informationwasreasonablywell organizedbecausetheyhadtheauction Bunchoffilesofmostlylegalisticdue diligence TherewerepeoplerepresentingRiteAid whomcouldquestionbequestioned

FirstAppearance
Undermanagedsituation Somehiddenvalueonthebooksinterms oflandandnotesreceivable Therewerefewopportunitiestoclose storesandcreateinstantEBITDAvalue

$42millioninleaseobligationsthatRiteAidhadguaranteedonbehalfofADAP RiteAidwouldstillberesponsibleforthis$42millionevenafterthesaleofADAP WouldbeabigissuewiththeBoardofRiteAid,andDodsonwouldneedtoassurethemthat Falconcouldmeettheseobligations

74

Disagreement
Falcon
Equity+seniordebt

Rite
Seniordebt,subordinateddebt,andtheequity funding

NotinterestedinDLJSupport

DLJSupportisatypeofinsuranceonfinancingthe deal

25%shouldbesetaside,withhisstakebeing15 20%

12.5%ofthetotalequitybesetasidefor management,with7.5%forDodson

Wantedoperatorsandbusinesspeoplewhocould helprunthecompany.BelievedthatDLJ incorrectlyviewedtheFalconinvestorsasDodson pawns,ratherthancommittedandindependent investors.

Boardwouldserveafinancialoversightfunctionand thattheinvestorsshouldhaveproportionalBoard representation 86

ShouldDodsonconductmoreduediligence?
Withmoredue diligenceconducted, thereislessriskof Dodsonnegotiatinga poordeal Doesnotindicate specificdecisionpoints atwhichDavidmadea goornogodecision onthedeal Moretimeshouldallow Dodsontostepback andunemotionally reviewtheinvestment decision

YES!

102

ShouldDodsonconductmoreduediligence?
Atleastoneotherbidder,and perhapstwomore,andDodsoncan notaffordfortheracetoendina tie.Hisbeliefthatinstitutionalmoney (representedbyTVC)willbechosen overhimunlesshewinstherace,is credible. Duediligencerequirespayingfor professionalservices(legal, accounting,etc.)whichcancostalot ofmoney

Alwaystimetodomoreduediligence afteradealisstruck

Anymaterialdifferencesfromthe representationsthatRiteAidwill maketocloseadealcanbe compensatedbyreductiontothe agreeduponprice.

NO!

RiteAidsdesiretohaveacleandeal, thecompanywillworkhardtomake sureadealissuccessfulonceonehas beenstruck

Dodsoncouldnotaffordtowastehis resourcesonthisdealuntilhehadan exclusiveagreement

Postponingduediligenceuntilafter obtainingexclusivityonthedeal appearswise

103

EvaluationofDodsonEffort
DoneWell HealthyInteractionswithRiteAids bankers EffortswithAdvisors,Investors,and Representatives NegotiationswithhisInvestmentBankers toSecureFunding HandlingoftheNegotiationMeeting PricingDecision SearchforInformation SimultaneousApproach PerseveranceandResourcesRenting Threesequentialletters Accomplishedhisgoalofgettingtheseller tothenegotiatingtable Inapositionpotentiallytoclosethedeal 111 TobeImproved Shouldhavecreatedmoreclarityon Financing Shouldhaveinvolvedmoreexpertsat appropriatetime ShouldbeveryseriousonDueDiligence Shouldbemoretacticalwhendealingwith information

DodsonsProposedArrangementwithDLJ
Whichonewillyou choose?

UseDLJtoraisethe seniordebt UseDLJtoraiseequity andsubordinateddebt Keepstalling

123

WhatShouldbethecompositionofBoard?
Dodson:Operators (peoplewithexperience managinglarge corporations)whocan helphimmakedecisions Hammer:Boardserving asameansforthe investorstomaintain somefinancialoversight

WhatisyourChoice?
125

PlanningfortheMeeting!
Dodson DickFloor Hammer
DodsonscontinueduseofFloorslegalservicesdependonDodsongettingagooddeal NeedstomaintainagoodrelationshipwithAlexGrass,hecannottaketoughnegotiatingstances DodsoncouldtaketheleadrecognizinghemayneedasignificantamountofFloorsassistance

Bestcandidatetoleadthenegotiations,ifDodsonchoosesnottoo,becauseofhisexperienceand alignedincentiveswithDodson AlsobecausehisalignedincentivesandhislackofaneedforagoodrelationshipwithGrass,Floor shouldtakealltoughbargainingpositions

Mainconcernisclosingthedeal,andnotnecessarilysecuringagoodpriceorkeepingDavidasa happyclient(itisunlikelythatDodsonwillrequireregularinvestmentbankingservicesafterthedeal isfinished) ShouldtakeasupportiveroletoDodsonandFloor

FloorandDodsonsincentivesarealigned FloorandHammerhavemuchgreaterexperienceinacquisitionsthanDodson

130

ProcessofPreparingOffering Memorandum

Maysetupadata roomanduse confidentiality agreementstopermit accesstointerest partiespracticingdue diligence

Asignedletterof intentsignalsthe willingnessofthe partiestomovetothe nextstep (usually includesanoshop clauseanda terminationorbreak fee)

Legalteamchecks documents, accountingteammay seekadvancetax rulingfromCRA

Finalsalemayrequire negotiationsoverthe structureofthedeal including: Taxplanning Legalstructures

150

WhyDodsonnotseenasaserious InvestorforADAP?
Noprior experiencewith Automobiles Managingayoung searchfund

Earliermanaged businesswas irrelevanttoADAP

Inefficientinitial communication
163