Valuation in the Current Economic

Environment

March 2011
 Macro Indicators
- US

ƒ US economy is in midst of a 
cyclical recovery
‰ S&P earnings growth on 
the rise after a difficult 2009
‰ Employment environment 
has been steadily 
improving
‰ Inflation holding firm
‰ Housing market still weak

2
 Macro Indicators
- US

ƒ Going forward, growth 
prospects are on a positive 
trajectory
ƒ CPI appears to be in check
ƒ Interest rates should remain 
low

3
 Macro Indicators
- Canada

ƒ Current outlook for the 
Canadian economy remains 
robust
‰ Leading economic indicator 
signaling strong growth 
through 2011
‰ Growth in employment 
underscores the strength of the 
economy

4
 Macro Indicators
- Canada

‰ Much like the US, CPI forecast 
at reasonable levels and interest 
rates remain low
ƒ Core inflation was a concern 
during 2010.  Core inflation has 
been trending down, well 
below target
ƒ Bank of Canada resisting 
raising interest rates
ƒ Some concern over Personal 
Savings Rate and impact on 
growth

5
 Other Indicators

ƒ Canadian dollar has moved 
past parity
‰ Strength of Canadian fiscal 
policy and higher commodity 
prices
‰ Expect Canadian dollar to 
remain at or above par in the 
medium term

6
Credit Environment

ƒ Leverage appears to be 
back
‰ 2010 set records in both 
leveraged loan and high 
yield issuances
‰ 2011 shaping up to 
surpass 2010 from a 
volume perspective
ƒ Demand for paper 
continues to be driven by 
low interest rates and 
evidence that business 
conditions have improved 
substantially

7
 Credit Environment

ƒ The current environment is 
supportive for investment
‰ For strategic buyers, earnings 
yields versus the cost to invest 
indicate a favorable 
investment environment
‰ For financial buyers, 
borrowing spreads have 
returned to pre‐recession 
levels
‰ Loan growth in US increasing

ƒ Expect this to have a positive 
impact on deal activity 

8
Deal Statistics

ƒ Availability of 
leverage has 
pushed up 
Purchase 
multiples
ƒ Equity support 
for deals (as a % 
of deal value) are 
also starting to 
approach 
historic highs

9
 Buyer Universe

Financial
ƒ PE is motivated to transact
‰ Overweighting of 2005‐2007 vintage funds
‰ 5 year investment period
‰ Management fee bias
‰ $500mm of “dry powder”

Strategic
ƒ Management/Board Confidence
ƒ Ability to pay – accumulated cash, receptivity of debt/equity 
markets

10
 Credit Market Update

Debt Multiples of Mid-Market LBO Loans Leveraged Buyout Spreads

L+ 700
6.0 x 5.61x
L+ 600
5.0 x 4.69x 4.72x 4.53x 4.25x
4.12x L+ 500
4.0 x
3.25x L+ 400
3.0 x
L+ 300
2.0 x
L+ 200
1.0 x
L+ 100
0.0 x 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 4Q10
2005 2006 2007 2008 2009 2010 4Q10
P ro Rata Institutio nal
FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA
Source: Standard and Poor’s Q410 Middle Market Lending Review
Source: Standard and Poor’s Middle Market Lending Review 4Q10

Mid-Market LBO Volume by Quarter

4.5
4.0
3.5
3.0
US$B

2.5
2.0
1.5
1.0
0.5
0.0
2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10

Institutional Pro Rata

Source: Standard and Poor’s Q410 Middle Market Lending Review

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 Credit Market Update

ƒ Banks are aggressively attempting to deploy capital
Lender
ƒ Well structured and well priced deals are being oversubscribed
Behaviour
ƒ Foreign banks cautiously returning to market

ƒ Borrowers anxious to access bank market with activity levels steadily increasing
Borrower
ƒ LBO/MBO activity remains fragile
Behaviour
ƒ Following ’08 & ’09 borrowers demanding more aggressive terms from lenders

ƒ Drawn spreads and fees have contracted 
Pricing
ƒ Undrawn fees have stabilized at around 25% of the drawn spread

ƒ 3 to 5 year commitments for corporates
Tenor ƒ 5 year committed tenors have emerged as the market norm for sponsor transactions
ƒ Longer tenors remain priced at a premium

12
 Representative Metrics
(LBO)

Market Peak September

Today
(Mid 2007) 2009

Representative Senior Metrics

Sr. Debt/Capitalization 40% to 60% 40% to 50% 40% to 50%

Sr. Debt Funding Levels up to 3.75x up to 2.0x to 2.5x up to 3.75x

Pricing (BB/BB-) BAs +275bps BAs +450bps BAs +300bps

Commitment Fee 50 to 70 bps 100 to 150 bps 75 to 100 bps

Min. EBITDA for a cash flow loan $5.0 Million $7.5 Million $5.0 Million

Term 48 to 60 months 36 months 48 to 60 months

Amortization up to 10 years up to 6 years up to 12 years

Representative Sub Metrics

Total Debt/Capitalization 50% to 70% 50% to 60% 50% to 60%

Total Debt Funding Levels up to 4.75x up to 3.0x to 3.5x up to 5.25x

Total Required IRR (incl. warrants) 14% to 16% 16% to 22%+ 14% to 16%

Commitment Fee 200 bps 200 to 300 bps 200 bps

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 The Leverage Impact on Value

Financial
ƒ Financial buyers typically use IRR in determining value 
multiples
ƒ Private Equity Groups (“PEGs”) generally target 25%‐30% IRR
ƒ Typically speaking, higher leverage availability equals higher 
enterprise values 

Strategic
ƒ Strategic buyers focus on achieving a minimum hurdle rate 
based on their WACC
ƒ The acquisition should be accretive 
ƒ Strategics don’t rely on financial engineering to generate returns

14
 The Leverage Impact on Value

ƒ The illustration is based on the following assumptions:
($ Millions)

Target IRR 30%
EBITDA  10.0
Growth Rate 10%
Sustaining Capex 3.0
Tax Rate 30%
Equity and Senior Debt Financing Only
No Multiple Expansion on Exit
Sale of the Business in 5 Years
Ability to Refinance Senior Debt on the Same Terms

ƒ The leverage impact on value for a PEG is as follows:

Market Peak 
Today
2009
(Mid 2007)

Senior Debt / Enterprise Value 60% 47%

Senior Debt / EBITDA 3.6x 2.0x

Amortization 10 7

Interest Rate 7.3% 4.4%

Value Multiple 6.0x 4.3x

15
 The Leverage Impact on Value

1) Acquisition in 2007
($ Millions)
2) ($ Millions) Closing Yr1 Yr2 Yr3 Yr4 Yr5
EBITDA 10
EV(1) / EBITDA 6.0x
Enterprise Value 60 EBITDA     10.0  11.0  12.1  13.3  14.6   16.1
less: Capex   (3.0)   (3.0)   (3.0)   (3.0)    (3.0)
Debt / EV 60%
Senior Debt        36 less: Interest   (2.6)   (2.4)   (2.1)   (1.8)    (1.6)
less: Principal   (3.6)   (3.6)   (3.6)   (3.6)    (3.6)
Amortization       10 less: Tax   (1.6)   (2.0)   (2.5)   (2.9)    (3.5)
Interest Rate 7.3% Free Cash Flow    0.2    1.1    2.1    3.3      4.5

Equity Investment       24
Assumptions: No Dividends
                        Capex = Depreciation
Note:
              (1) Enterprise Value                         No changes in working capital

3) Exit at the end of Yr5 4)
($ Millions) Closing Yr5
($ Millions)

Yr5 EBITDA     16.1 Equity Investment    (24.0)

EV/ EBITDA 6.0x Exit         89.8
Enterprise Value     96.6
IRR 30%
Cash (Net Debt)      (6.9)

Equity Value     89.8

Assumptions: 
        No Advisory Fees on Exit

16
 The Leverage Impact on Value

1) Acquisition Today
($ Millions)
2) ($ Millions) Closing Yr1 Yr2 Yr3 Yr4 Yr5
EBITDA 10
EV(1) / EBITDA 4.3x
Enterprise Value 43 EBITDA     10.0  11.0  12.1  13.3   14.6 16.1
less: Capex   (3.0)   (3.0)   (3.0)    (3.0)   (3.0)
Debt / EV 47%
less: Interest   (0.9)   (0.8)   (0.6)    (0.5)   (0.4)
Senior Debt        20
less: Principal   (2.9)   (2.9)   (2.9)    (2.9)   (2.9)
Amortization          7 less: Tax   (2.1)   (2.5)   (2.9)    (3.3)   (3.8)
Interest Rate 4.4% Free Cash Flow    2.1    2.9    3.9      4.9    6.0

Equity Investment       23
Assumptions: No Dividends
                        Capex = Depreciation
Note:                         No changes in working capital
              (1) Enterprise Value

Exit at the end of Yr5
3) ($ Millions)
4) ($ Millions) Closing Yr5

Yr5 EBITDA     16.1 Equity Investment    (22.8)

EV/ EBITDA 4.3x Exit         83.3
Enterprise Value     69.3
IRR 30%
Cash (Net Debt)     14.1

Equity Value     83.3

Assumptions: 
        No Advisory Fees on Exit

17
 Impact Of Value Based On
Economic Uncertainty

Today’s value multiples are dependent on:
ƒ Industry type
‰ Return on capital employed
‰ EBITDA margins
‰ Growth
ƒ Size
‰ Typically, the larger the deal the higher the multiple
‰ Leverage is easier to attract

18
 Impact Of Value Based On
Economic Uncertainty

1. EBITDA Sustainability (lower middle market i.e. EV<$10mm)
Financial
ƒ Lack of visibility into the future relative to history (beta increases)
ƒ PEGs may add “structure”
ƒ 10‐40% of the consideration may be in the form of a vendor‐take‐
back (“VTB”) note and/or earn‐out depending on:
‰ industry
‰ deal size (the smaller deals have more structure)
‰ competitiveness of the auction process
‰ leverage availability
ƒ If there is a VTB and the acquirer is using sub debt, the discount 
rate on the VTB should be higher then the sub debt if the VTB 
ranks junior to the sub debt lender

19
 Impact Of Value Based On
Economic Uncertainty

ƒ Diligence may be protracted
‰ less risk of PEG losing deal if exclusivity period expires
‰ buyers waiting to see if anything “comes out of the woodwork”
‰ could present opportunity for price adjustment
‰ deals not always closing on letter of intent terms

Strategic
ƒ Less uncertainty due to industry knowledge
ƒ May be able to support EBITDA forecasts through synergies
ƒ Well capitalized companies purchased weaker players

20
 Impact Of Value Based On
Economic Uncertainty

2. Exit Multiple Uncertainty
Financial
ƒ In the peak, PEGs may have modeled multiple expansion
ƒ Depending on industry, may model in multiple contraction

Strategic
ƒ No investment time horizon
ƒ Typically use capitalized cash flow approach

21
 Impact Of Value Based On
Economic Uncertainty

3. Foreign Exchange
Financial
ƒ If strong CAD favours target company (i.e. purchasing in U.S. 
dollars) PEGs will assume parity, if strong CAD works against 
target Company (i.e. selling into U.S.) PEGs will assume historic 
average.

Strategic
ƒ May be more practical

4. Pension Deficits
Financial & Strategic
ƒ Enterprise values adjusted for deficits
ƒ Must look at mandatory funding requirements on cash flow levels
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 Impact Of Value Based On
Economic Uncertainty

5. Interest Rate
Financial
ƒ Cash flow loans are typically based on floating interest rates
ƒ Expectation of rising interest rates as the economic growth returns
‰ Uncertainty with respect to timing
‰ Impact of rate increases on covenant package

Strategic
ƒ Less of an issue if conservatively capitalized

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 CDN Mid-Market M&A
The Way Forward
PEG Portfolio Exits PEG Lending by Deal Type

Source: Pitchbook Source: Thomson Reuters LPC

ƒ 2009 was a “disaster”
‰ Very few deals closed
‰ Leverage was scarce
‰ Buyers took a ‘wait and see approach’
‰ Sellers waited for the storm to pass
‰ Lenders with distressed credits were reluctant to exercise on their security as their were no bids for assets

ƒ 2010 was a year of recovery
ƒ 2011 is looking very positive
‰ Leverage returning to the market
‰ PEGs needing to “get money out”
‰ Value multiples rising (compelling owners to sell)
‰ Distressed assets finally coming to market
24