BNP - Training 2009

Valuation fundamentals
Introduction to BNP Paribas's methodology
CFYETS - October 2009
STRICTLY CONFIDENTIAL
Section
Introduction 1
- Seminar schedule and objectives
- BNP Paribas Corporate Finance
- Business Valuation Team
- Introduction to Corporate Valuation
Back to basics - Financial analysis wrap-up 2
Cost of capital calculation 3
Valuation methodologies 4
Appendix
CFYETS – October 2009 2

Introduction
Seminar schedule
9:00 – 9:30 Introductory presentation

Wednesday
21/10 9:30 – 13:00 Financial analysis
09:00 – 13:00 From firm value to share price
Thursday 22/10 14:00 – 14:30 Case study introduction

14:30 – 20:30 Financial analysis workshop
9:00 – 11:00 Financial analysis case study debriefing
Friday 23/10 11:00 – 13:00 Multiples

14:00 – 20:00 Multiples workshop
8:00 – 11:00 Multiples case study debriefing

11:00 – 13:00 Cost of capital calculations
Monday 26/10
14:00 – 16:00 DCF
16:00 – 18:30 DCF workshop
9:00 – 11:00 DCF case study debriefing
Tuesday 27/10 11:00 – 13:00 Notions of value creation & restated net worth
13:00 – 13:30 Valuation wrap-up
Introduction – Seminar schedule and objectives CFYETS – October 2009 3

Introduction
Seminar objectives
Based on a combination Financial analysis

of a theoretical and
practical approach, this Corporate valuation
seminar aims at Theory
Trading and transaction multiples
providing CF young
professionals with a Cost of capital computation and DCF
thorough overview of in-
house corporate
valuation approaches
Practical aspects of the valuation exercise
Recommended methodologies (BVT guidelines)
Specific issues
Sources of data
Presentation of internal models
Trading multiples model
Practice
Transaction model
Discount rate calculation model
DCF model
Case study
Acquisition of Numico by Danone in 2007
Introduction – Seminar schedule and objectives CFYETS – October 2009 4

Section
Introduction 1
Appendix

Introduction
BNP Paribas Corporate Finance
Global network of 400

professionals with four
central offices (Paris,
London, Hong Kong and
New York) with local
teams dedicated to
execution
Netherlands Russia Asia:
UK
Business Germany 97
Valuation Belgium professionals
Team
France
USA Japan
Advisory for Spain Italy China
Korea
Listed
Companies Taiwan
UAE
India
Thailand Vietnam
Europe:
Equity Capital
260 Malaysia
Markets professionals Singapore
Indonesia
Brazil
Restructuring North & South

Advisory America:
23
professionals
Industrial &
Consumer
Support Media & Transport & Real Estate / Financial
Goods / Healthcare Energy
Service / Telecom Environment Hotels / Retail Institutions
Construction
Chemicals
Introduction – BNP Paribas Corporate Finance CFYETS – October 2009 6

Section
Introduction 1
Appendix

Introduction
Business Valuation Team - Key assignments
Could be used as an experienced execution resource when performing corporate valuations for deals
involving listed companies. The team is also involved in unlisted M&A and privatisation transactions
Execution whenever valuation aspects are critical
Involved in all fairness opinions and squeeze-outs
Could be requested by Corporate Finance management to give its views on specific valuations
Valuation tools Develops new valuation standards and models for Corporate Finance
and standards
Promotes valuation techniques and provides training within BNP Paribas through external seminars
Training and
Provides methodological support on complex valuation issues when requested by Corporate Finance
Hotline
professionals
The team has acquired substantial experience in corporate valuation for industry & services. Specific
Know-how & know-how has been developed for the valuation of banking, insurance and property businesses
Quality control
Ensures consistency for valuations performed within Corporate Finance upon request
Cross-sector The BVT works closely with sector or geographical teams at most stages of a deal, to which it brings
approach its financial and methodological expertise
The BVT works closely with Equity Capital Markets (ECM) on IPOs and privatisations
ECM
Valuation Fairness Opinion Committee

committees Valuation Committee
Introduction – Business Valuation Team CFYETS – October 2009 8

Introduction
Business Valuation Team
Four full-time
professionals, headed
by Xavier Le Roy,
dedicated to critical
corporate valuation
exercises and fairness
opinion issuance SUPERVISION MANAGEMENT
Supervision carried
out by Pascal Quiry,
an established M&A
professional with a
strong academic
background
Pascal Quiry Xavier Le Roy

Managing director Vice president
Head of European Head of BVT
Execution Teams
PERMANENT MEMBERS
Thibaud De Maria Olivier Simon Damien Anzel Javier Rodriguez

Associate Associate Associate Associate
Introduction – Business Valuation Team CFYETS – October 2009 9

Section
Introduction 1
Appendix

Introduction
Introduction to Corporate Valuation – Objectives and framework of Corporate Valuation
Corporate valuation is performed with a view to:

Establishing the relevance of a particular investment (capital budgeting)
Comparing prices with intrinsic values (M&A, structured finance)

Object
Laying out a negotiation strategy (M&A, structured finance)
Determining an investment strategy (portfolio management)
Determining the company's prospects and corporate strategy
In a pitch
There is no commitment, but it could be a key marketing point.
It is well known that BNP Paribas has high standards in the valuation process
Risks: image, inconsistencies, market turmoil, legal
In practice :
- Bulge brackets are very aggressive

- Use the conditional tense: “On the assumption”, insist on price range rather than value and do not
Framework commit on any final conclusions
- Do not hesitate to discuss with sector head and / or Business Valuation Team
For an M&A mandate
Carry out valuation for listed and unlisted companies
As part of an IPO
Equity Capital Market is a key player
For a third party (fairness opinions)

Handled directly by BVT as there is a high legal risk
Introduction – Introduction to Corporate Valuation CFYETS – October 2009 11

Introduction
Introduction to Corporate Valuation – Key approaches
Intrinsic approach Analogical approach Book value approach

The main approaches
By discounting free cash flows at the By comparing figures with implicit Restated net worth method
expected rate of return: the DCF stock market valuation of comparable
method firms: the trading multiples valuation
Turns out to be a mix of previous
methods
By using real option valuation By comparing figures issued from
methods comparable deals: the transaction
multiples method
Financial view of balance sheet
Intrinsic approach Analogical approach Book value approach
NPV
(FCFE@ ke) Market
Ve Ve multiples or Ve
NPV Trading transaction
(dividends multiples or multiples
NPV (FCFF VMI @ke) transaction VMI Restated VMI
multiples (PE, P/CF, value of
@k) EV EV EV
PBR) capital
(EV/Sales,
NPV (debt employed
EV/EBITDA,
flows (P+I) EV/EBIT) Vd Vd
Vd
@ kd)
Note: k: cost of capital, ke: cost of equity, kd: cost of debt

Introduction
Introduction to Corporate Valuation – Methodology
OVERVIEW
Generally, a valuation exercise is carried out with a view to determining the value of a company’s shareholding capital or
outstanding shares
In this respect, two methodologies are commonly used to value equity
Indirect method
- Aims at valuing the company’s operating assets
- The “enterprise” value is first calculated, from which the value of the net financial debt and other adjustments are then
deducted to derive the equity value
Direct method
- Aims at valuing equity directly, without intermediary value of operating assets
FOCUS ON DIRECT AND INDIRECT METHODS
Indirect methods Direct methods

(including DCF and multiples) (including DDM and PE ratio)
Equity value
Enterprise value - =
Net financial debt
(and other adjustments)

Introduction
Introduction to Corporate Valuation – Methodology (cont’d)
A valuation exercise KEY VALUATION METHODOLOGIES

can be carried out by
implementing a Fundamental valuation method
fundamental valuation Discounted free cash flows or dividend approaches attempt to determine the company’s intrinsic value, in
method or an accordance with the financial theory by discounting cash flows to their present value using the required rate of return
analogical approach - The DCF method aims at valuing the company as a whole, after deduction of the net financial debt, the remainder being
the value of the company’s shareholders’ equity
- The DDM implies that the value of the share is equal to the present value of all the cash flows its owner is entitled to
Comparative approach is possible only if markets are assumed to be in equilibrium
Compares enterprise with similar assets or equities (multiples method)
The company is valued at the multiple of its profit-generating capacity
The approach is global because it is based on the overall returns that assets are expected to generate
SUMMARY
Indirect approach Direct approach
Intrinsic value method Present value of free cash flows discounted at the
Present value of dividends or free cash flows to equity
(discounted present Weighted average cost of capital (k) – value of net
at the cost of equity capital: ke
value of finance flows) debt
Peer comparison
method
EBITDA / EBITA multiple – value of net debt Multiple (PE ratio) x net income
(multiples of comparable
companies)

Introduction
Introduction to Corporate Valuation – From Enterprise Value to Equity Value
There are several

restatements to be ENTERPRISE VALUE
deducted from / added
to the Enterprise value Net financial debt = Financial debt - cash & cash equivalent
in order to obtain Equity Net financial It is common practice to use book value of debt when computing the net debt of a company
value debt
(-) However, market value of financial debt might differ significantly in some cases, when all or part of it is listed or
traded over the counter
Please see Appendix for
further details Pension provisions = (Projected Benefit Obligation - Fair Value of plan Assets) x (1 - Tax rate)
Pension
provisions For Defined Benefit regimes only
(-) Take Pension provisions net of deferred tax in the balance sheet if PBO and FVA are not available
Other debt-like items = Debt-like provisions x (1 – Tax rate)

Other debt-like items, after normative tax if provisions are non tax deductible upon booking, may include:
Other debt-like Provisions for restructuring charges / redundancy (if not recurring)
items Provisions for legal claims

(-) Environmental provisions, provisions for severance payment redemption, etc.
Note that operational provisions, including warranty provisions, are excluded

See detailed footnotes relating to provisions and check what provisions are tax deductible
Include financial stakes in associates, financial stakes in JVs (if not related to the Company's business and not
Non-operating in cash flows), other non-operational financial assets, other non-operating assets (land, buildings)
assets Use market value of assets if listed or PE ratio / MBR
(+)
Alternatively book value can be used
Minority Market value can be used

interests PE ratios / MBR can be used to derived the Equity value
(-) Alternatively book value can be used
EQUITY VALUE

Introduction
Introduction to Corporate Valuation – From Equity Value to price per share
In order to obtain the

Share Price of the NUMBER OF OUTSTANDING SHARES
company, the Equity
value computed has to Treasury shares are own shares that have been bought back by the company or that are held by controlled
be divided by the diluted affiliates
Treasury shares
number of shares (-) Treasury shares are to be deducted from the outstanding number of shares
Pay attention to share buy-back policy
As a reminder, an option
is in the money when
the price of the Take into account the potential dilution by considering in the money options only
underlying asset is Use of the treasury share method in order to calculate the number of new shares issued
above/below the strike Shares from Do not rely upon option valuation provided under IFRS
price for call and put exercise of stock
options respectively, options
meaning that there is (+) Number of outstanding options x (Stock Price – Option Strike Price)
New shares created =
some intrinsic value Stock Price
To be computed only if the probability of conversion is high, i.e. when bonds are “in” or close to being “in the
money”
Use the following formula
Shares from the
exercise of New shares created = Number of outstandin g bonds x Conversion ratio
convertible
bonds Do not forget to deduct amount converted from debt
(+)
Debt to be deducted following the conversion = Number of converted bond securities x Strike price
Alternatively, the treasury method can be implemented
DILUTED NUMBER OF SHARES

Section
Introduction 1
Appendix

Back to basics - Financial analysis wrap-up
Introduction
It is a rational study of a company both through economic and financial data

Its role is to look at the past to assess the present situation and to forecast the future
What is It is a tool used by existing and potential shareholders of a company as well as by lenders:
financial For shareholders, financial analysis aims at assessing whether the company is able to create value
analysis for? For lenders, financial analysis assesses the solvency and the liquidity of a company
To understand the business of the valued company i.e.

Its products, its market positioning within a sector, its manufacturing process, its strategy
Why carry out To understand the financial strengths and weaknesses of the valued company i.e.
a financial Its accounting standards, its activity, its growth and margins profile, its financial structure and
analysis when returns it can generate

performing a To identify the value drivers
valuation To avoid mistakes and to identify possible valuation issues derived from accounting practices in
exercise? annual reports i.e.
Debt like provisions, leasing practices, tax loss carry forwards, re-valuation of assets, dilutive
instruments, etc.
To match published data as per accounting standards with business plan provided
Back to basics – Financial analysis wrap-up CFYETS – October 2009 18

Roadmap for a financial analysis
1 First, have a good understanding of the business...
2 …and the accounting choices made by the company...
3 Wealth creation...
4 …needs investments...
5 …that should be financed...
…and have an adequate return.

6

Analysis of the valued company / activity 1
Understanding the
business
Analysis of the Description: products, geographical area, segmentation etc.

company’s Analysis: growth and maturity, risk and sensitivity to economic environment
market Positioning of the company: market share, competitors, strength and weakness
Sector notion: Group of firms that intervene in the same production process
Production Production systems: project, plants,
process Investments: innovation in the product vs. innovation in the production process
The three functions of distribution :

logistics (transport and warehousing)
Distribution advice and services
network financial
Key function: flow of information from producer to consumer and vice-versa
Shareholders: internal or external

People The management: remuneration
The culture and values of the company
PRODUCT LIFE CYCLE
Introduction Growth Maturity Decay
Revenues
Profits

Accounting choices
2
Accounting choices
Notes to the financial FINANCIAL VIEW OF P&L ACCOUNT FINANCIAL VIEW OF BALANCE SHEET
statements:
• Accounting principles Revenues - operating

• Consolidation methods expenses (cash)
• Goodwill, trademarks Operations
• Provisions Shareholders’ equity
• Inventories = EBITDA
• Non-consolidated
affiliates + Fixed assets
- D&A
Minority interests
Investments
Capital employed
Invested capital
= EBIT
Debt-like provisions
(pension liabilities,
+ restructuring, etc.)
+ financial result
Capital structure
= Earnings before taxes

Working capital
+ (incl. WC like Net financial debt
provisions)
+ exceptional items
Exceptional items and - taxes - minority interests
taxes
= Net income

P&L analysis
3
Wealth creation
Sales evolution: price vs. volume, Insight on volumes and valuation of inventories
organic vs. external Growth rate
Production
How operating profit
Sales Comparison with market growth rate and Production / revenues

price indices
is formed
Foreign exchange effects

Growth, volume and wage level effects:
personnel costs / average number of employees
Growth Productivity of personnel:
Personnel
Margins - Revenue / average personnel
EBITDA & costs
Explanation of changes in margins - Production / average personnel
EBITA
- Added value / average personnel
Financial income:
financial products from marketable securities (excluding participation in affiliates), interests and assimilated
products, write-off of provisions for financial risks and losses, positive exchange rate differences, net proceeds from
Net sale of marketable securities
financial Financial expenses:
expense /
How operating profit
interest and assimilated charges, negative exchange rate differences, net losses from sale of marketable securities,
income
amortisation of premiums upon reimbursement of bonds, provisions for financial risks and losses, possible
is allocated
adjustments for leasing, etc.

Linked to the Company’s financial policy and interest rates evolution
Associates / Share of income of companies consolidated using equity method

Minority Income tax
interests & Minority interests: in which affiliates generate positive net income?
income tax
Non Components include disposal of assets, capital gains / losses, exceptional provisions (restructuring, other) changes in
recurring accounting policy goodwill impairment
items

Squeeze on profit margins – Illustrations
3
Wealth creation
No cost control Decrease in growth rate of revenues / sustained growth rate of

expenses
Expenses Expenses
-
- - -
- - Revenues Revenues
+
+
+ +
+ +
Important increase in the cost of a production item Low decrease in revenues but constant raise in expenses
Delayed increase in revenues due to inertia
Revenues
+ +
Expenses
- Expenses
- + + +
- -
- -
+ Revenues
+
Strong growth of revenues that remains higher than Low growth of revenues but slow decrease of expenses due to
growth in expenses productivity gains for instance
Revenues
+
+ Expenses Revenues
+ + +
+
+ + +
Expenses

Analysis of working capital
4
Investments
WC is liquid from a BS perspective, but is permanent from a going concern standpoint

Beware of possible seasonality of activity and related seasonality of WC (leads to change in normative WC and
therefore change in net debt)
Nature of WC Therefore, year-end WC is only for informative purposes
Normative WC has to be taken into consideration (with management’s help)
Specific cases (negative WC etc.)
WC ratio (% of revenues) = WC
Revenues
Global WC WC
Turnover ratio (in days of revenues) = x 365
ratios Revenues
Beware: WC implicitly includes VAT, while revenues are usually net of VAT and sales taxes
Receivables
Receivables turnover =
A x 365
Revenues including taxes
Payables
U
Payables turnover = x 365
Annual purchases inc. taxes
Specific
turnover ratios
Inventories and work in progress
O
Inventory turnover = x 365
Annual revenues excl. taxes
Inventory of raw materials

oRaw materials turnover = x 365
Annual purchase of raw materials excl. taxes

Analysis of capital expenditures
4
Investments
ANALYSIS OF INDUSTRIAL FACILITIES DEPRECIATION
Main key ratio:

Capex
Ratio (1):
Depreciations Low ratio (1): < 30% means that industrial facilities
are old and it will be necessary to make investments
Net fixed assets soon in order to reduce production costs
Ratio (2):
Gross fixed assets
High growth company Project too big
Capex
Capex
Analysis of investment policy
Operating
Operating
cash flows
cash flows
Heavy investments, highly profitable Ageing of industrial facilities
Operating
cash flows Operating
cash flows
Capex
Capex

Analysis of financing – Static approach
5
Financing
CAN THE COMPANY PAY BACK ITS DEBT?
Debt maturity repayment

Based on the business plan
- Are operating cash flows sufficient to pay back debt?

- Can the company raise equity capital ?
Debt service coverage ratios (excluding companies under LBOs)
- Financial debt / EBITDA: more than 4x, may be critical

- EBIT / net financial charges: lower than 3x, may be critical
- Gearing (net debt / SHE + MI): not a comprehensive indicator of solvency (depends on operating cash flow – to be
used mainly in cases of bankruptcy)
- Simplistic approach, but broadly used
RISKS OF LIQUIDITY AND WORKING CAPITAL FINANCING
Risks of liquidity
Gap between the liquidity of assets and debt maturities
Liquidity ratios
- Current assets / current liabilities (quick ratio)

- Current assets w/o inventories / current liabilities (liquidity ratio)
- Cash and marketable securities / current liabilities (Acid test)
Financing of working capital:
WC is permanent (economic approach)
Necessary to finance it through permanent resources (beware of WC seasonality)
Danger of financing WC with short term revolving credit lines

Analysis of financing – Dynamic approach
5
Financing
ANALYSIS OF FINANCING – DYNAMIC APPROACH

Operating cash flows:
Main parameters : growth rate of the activity, evolution of margins, evolution of WC
DSCR (Debt Service Coverage Ratio):
- Operating cash flows / yearly pay-back of principal and interest: lower than 1 time, critical (used in project finance)
Financing of the company:
How the company has financed its growth?
Relationship between distribution policy (pay-out ratio) and investments
Analysis of the evolution of indebtedness :
- Issue of debt to finance investments or to reduce equity?

- Pay back debt to improve financial structure, to replace expensive debt or as a result of a lack of growth
opportunities?
No rigid rules for financial structure (in terms of valuation issues)
However:
The amount of investment should not be determined by operating cash flows (but rather decided in terms of value
creation)
Cash producing divisions (“cash cows”) should not finance high growth ones (“stars”)

ROCE, ROE and Gearing
6
Return
Definition:
EBIT x (1-TR)
ROCE ROCE =
(Return On Where: CE
Capital - TR: normative tax rate
Employed) - CE: gross capital employed (gross GW) at the beginning of the period
- EBIT: EBIT (before goodwill impairment under IFRS and US GAAP)
ROE EBT x (1-TR) EBT x (1-TR) after MI

Definition: ROE = or ROE =
(Return On
Equity) SHE + MI SHE
D
Definition: L=
SHE + MI
Leverage Leverage formula: ROE = ROCE + (ROCE – Kd) x L

(Gearing)
Where: kd: cost of debt
If ROCE > Kd et L > 0, then ROE > ROCE, but the level of risk is higher
In any case, the leverage does not create any value

Section
Introduction 1
Appendix

Cost of capital calculation
Introduction
The cost of capital is the annual cost (interest rate) that the firm has to pay (to its providers of funds,
both debt and equity) to finance its assets
Definition
It is then the minimum rate of return expected by these providers of funds (/stake holders)
The Capital Asset Pricing Model (CAPM) is a widely used model by the market assessing a best
estimation of the minimum return expected by an investor
Model’s main assumption: markets are efficient (all investors have the same level of information)
CAPM Model‘s conclusion:
Profitability is directly linked to risk
Expected rate of return is only linked to non diversifiable risk or systemic risk (tax, inflation, war etc.)
and not to specific risk which is included in the cash flows
RISKS AND RETURN
Risk
Systemic risk Specific risk
Cost of capital Cash flows
Cost of capital calculation CFYETS – October 2009 30

Definition and formula
The cost of capital is the minimum rate of return on the company’s investments that would
satisfy both shareholders (cost of equity) and lenders (cost of debt)
Definition
The cost of capital is the company’s total cost of financing
k V + kd (1 − T )Vd
kc = e e = WACC k e = rf + β e (k em − rf )
Ve + Vd
Indirect Where: Where

calculation kc: cost of capital ke: market cost of equity
ke: market cost of equity rf: risk free rate

or
kd: market cost of debt βe: equity beta
Traditional
formula T: corporate tax rate kem: total expected market return
Ve: market value of equity
Vd: market value of net debt
WACC: weighted average cost of capital
βe
βa =
k c = rf + β a (k em − rf ) V
1 + (1 − T ) × d
Ve
Direct Where
Main assumptions
calculation βa: asset beta
Financial structure does not have any impact
or either on the cost of capital or on value βe: equity beta
Modern formula kc is then calculated as the cost of equity of a T: corporate tax rate
debt free company Ve: market value of equity
Where : βa = beta of assets or “unlevered beta” Vd: market value of net debt

Indirect versus direct formula
Direct formula is more Pros Cons

appropriate / easy to use
Use it at least as a sanity
check
“User-friendly”, to the extent that it is generally Difficult to define a target gearing ratio, easy to
used by the banks and understood by the clients be undermined
Takes into account the presence of tax shields Hard to assess the right cost of debt for the
when appropriate chosen target capital structure
Indirect
Very sensitive to changes in financial structure
formula
and may lead to major errors if all parameters
are not accordingly modified
Better illustrates the fact that cost of capital Clients are more familiar with the traditional
reflects the risk of Economic Asset formula
Solves the issue of determining a target gearing Generally leads to higher cost of capital than the
and a market cost of debt traditional formula
Direct formula Allows an easier comparison between When a company is highly leveraged for a short
companies in the same sector (asset betas within period of time, one cannot deny that the tax
the same sector should be similar; if not, you shield must be valued
have to understand discrepancies)

Indirect versus direct formula (cont’d)
COMMENTS
The indirect method is based on two strong underlying assumptions

The normative capital structure
The cost of debt to be retained at such capital structure
However, these two assumptions may lead to potential errors

It is difficult to define a target gearing ratio, easy to be undermined
No consistency between the gearing ratio and the cost of debt
Moreover, we believe that the value of a company is not significantly sensitive to its capital structure:
In fact, the main impact on value of indebtedness is the present value of tax shield on interests payments
However, there are costs linked to an excessive use of debt including bankruptcy costs, investor taxation, signal to the
market, etc., which could reduce, or entirely offset, the tax benefits
COST OF CAPITAL VS. WACC
16%
14%
12%
10%
8%
6%
4%
2%
Gearing (Financial debt / Equity)
-
- 10% 25% 50% 75% 100% 150% 200%
Cost of capital WACC Cost of equity Post-tax cost of debt

Key components – Risk free rate & Equity market risk premium
The expected return is the RISK FREE RATE

average of possible market
returns weighted by their By definition, risk free assets are those whose return is certain, i.e. government bonds, assuming no risk of bankruptcy
likelihood of occurring. It is usually appropriate to match up the duration of the discount rate with the duration of the cash flows being considered
Based on the market A 10-year duration is market practice
expected return, the equity
market risk premium can In corporate finance and valuation, this leads to the use of long-term sovereign bond rates as proxies for risk-free rates
be derived by deducting the The risk free rate used in practice are 10-year German Bund (Euro), Gilt (UK) and T-Bond (US)
risk free rate Note that a long-term government bond rate is the sum of the following items:
Real short-term interest rate
Current risk free rates are Expected inflation rate, which gives the short-term nominal risk free rate
3.2% in Europe, 3.5% in Yield curve risk spread, which gives the long-term risk free rate
UK and 2.9% in the US Credit risk
In practice, generally
accepted ex-post equity EQUITY MARKET RISK PREMIUM
market risk premia are
4/6% in continental Europe The equity market risk premium is the difference between the expected return on common stocks and the return on
and 5/7% in the US. Ex- government bonds (usually 10-year government bonds yield)
ante data currently This relates to the excess return that an individual stock or the overall stock market provides over a risk-free rate.
approximate 8/10% The excess return compensates investors for taking on the relatively higher risk of the equity market
Such premium can be calculated either as:
Note that due to current Ex-post (historical): statistical analysis of past excess return of stocks with respect to bonds
market conditions, - Calculated as the difference between the historical average return on common stocks and the average returns on both
characterised by a material short-term and long-term treasury securities
volatility, average data - Can be calculated over a variety of historical periods using several observation intervals. However, the premium
instead of spot data are changes significantly when the sample period is altered
highly recommended Ex-ante (forward looking): expected current excess return of stocks with respect to bonds
- Based on market dividends or earnings forecasts to perpetuity

Key components – Beta
COMMENTS
The non-diversifiable risk for any stock is measured by the covariance of its returns with returns on the “market portfolio”
(usually an equity index is used as a proxy) and is defined as the equity beta of the stock (ße)
Betas observed on the markets are equity betas and crystallize the risks attached to the firm’s operations along with
its financial structure
The impact of the company’s capital structure can be stripped out by calculating an unlevered / asset beta
More intuitively, the beta accounts for the slope of the regression of the security returns versus the ones of the markets
In other terms, it measures the deviation between the future cash flows of the asset and those of the markets
The beta could also be seen as a measure of a security sensitivity to the returns of the market portfolio
Note that averages of
If ße >1, the security amplifies market variations (“aggressive stock”)
equity betas are If ße <1, the security is less affected by market fluctuations (“defensive stock”)
meaningless Bear in mind that:
Betas do not obviously measure all the stock risks and return (other factors could be size, illiquidity, country risk, etc.)
Also, betas of equity
affiliates should be taken Regression correlation factor (R2) could sometimes be very low
into account when their Equity betas also reflect the risk of associated companies (equity-consolidated companies)
value represents a
significant portion of the
firm’s equity value
FORMULA SIMPLIFIED FORMULA
Asset beta is linked to equity beta through the For companies with a low leverage, βd is frequently
following formula: assumed to be nil, therefore the formula can be
simplified as follows:
V
Legend
β e + (1 − T ) × β d d βe
Ve βa =
- βa: Asset beta
βa = V
- βe: Equity beta V 1 + (1 − T ) × d
1 + (1 − T ) × d Ve
- βd: Debt beta Ve
- T: Corporate tax rate
- Ve: Market value of equity
- Vd: Market value of net debt

Key components – Beta (cont’d)
Recent market DEBT BETA REVISED ASSET BETA CALCULATION I

conditions, shaken up by
the credit crunch, have For weakly-levered companies, it is reasonable to Formula equivalent to the one presented on the previously slide assuming
turned the spotlight on assume that the debt beta is equal to zero that debt beta is not nil
credit spread and However, for highly levered companies, the debt
pension liabilities beta cannot be considered as nil V
β e + β d (1 − T )x d
Assuming that debt beta is nil is a strong Ve Credit Spread
For indicative purposes,

βa = with βd =
assumption, which could lead to substantial errors in Vd Erm
their related impacts on 1 + (1 − T ) ×
the case of highly levered companies Ve
the asset beta calculation
are presented here It could lead to an under-estimation of the cost
of capital, hence to an over-valuation of the Where - βd: Asset beta - Ve: Market value of equity
company’s operating assets - βe: Equity beta - Vd: Market value of net debt
- βd: Debt beta - Erm: Equity market risk premium
- T: Corporate tax rate
PENSION BETA REVISED ASSET BETA CALCULATION II
The traditional calculation of the cost of capital using

de-leveraged beta disregards by default adjustments
of the risk of pension assets and liabilities
Ve Vd  VPA VPL 
The formula used to correct the effect of liabilities on βOA = × βE + × βD −  × β PA − × β PL 
VOA VOA  VOA VOA 
the beta of a company’s equity generally fails to take
into account the risk of its pension plans and/or its
value
Based on a research paper*, an alternative Where: - βOA: Operating asset beta - VOA: Value of operating assets
- βe: Equity beta - βPA: Pension asset beta
calculation can be implemented to derive the
- βd: Debt beta - βPL: Pension liabilities beta
operating asset beta taking into account the
- Ve: Market value of equity - VPA: Value of pension asset
additional risk attached to the pension assets
- Vd: Market value of net debt - VPL: Value of pension liabilities
and liabilities
*Note: “Do a firm’s equity returns reflect the risk of its pension plan?”, Li Jin, Robert C. Merton and Zvi Bodie, Journal of Financial Economics, July 2006

Rolling discount rate
Applying a constant COMMENTS

discount rate can
sometimes lead to In some specific cases of highly levered companies, the firm’s capital structure ends up impacting the underlying value of
material distortions the asset mainly due to the obvious effect of tax benefits
mostly driven by This concerns infrastructure and project-type of assets (including Highways, Pipeline, Gas Storage, etc.)
significant variations of
market parameters, beta, A rolling discount rate (WACC or cost of equity) makes it possible to crystallize the additional risk attached to the asset,
gearing, cost of debt or specifically relating to the capital structure, which theoretically should yield a higher return
inflation projections
A rolling discount rate is

a time-varying discount EXAMPLE OF A ROLLING COST OF EQUITY
rate based on
parameters that change Note: Figures provided in million US Dollar
over time on an annual Levered cost of equity, assuming a 85% gearing, is 9.7% in
basis 12,000 2009e, whilst unlevered cost of equity tends to 8% by 2018e 10.0%
In this example, a cost of 10,000 9.5%

equity is derived to
discount dividend
8,000 9.0%
streams paid out by an
oil pipeline
6,000 8.5%
The firm’s enterprise
value is calculated every 4,000 8.0%
year on a rolling basis
applying an appropriate 2,000 7.5%
discount rate reflecting
the capital structure over
- 7.0%
time
2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e
Net debt (LHS) Equity value (LHS) Rolling cost of equity (RHS)
Source: BNP Paribas estimates

The case of emerging markets based assets
Discount rate must be Investors investing in emerging markets tend to face three types of specific risks including:
denominated in the same Country risk: including political risk and currency risk
Key risks faced
currency as financial Systemic market risk: business risk equivalent to sector risk in mature markets
projections
by investors
Liquidity risk: size risk equivalent to liquidity risk in mature markets
If the devaluation risk is The country risk premium can be derived as the difference between a local government bond
changing over time, cash denominated in US dollar or euro and default-free US dollar or euro denominated government bonds
flows can be converted How to Bonds must have an equivalent maturity (10-year maturity is market practice)
into reference currency estimate the Beware of the underlying liquidity of the government bonds
(US dollar or euro) country risk
A discount rate in Credit Default Swaps (“CDS”) can also be used
premium
reference currency will CDS are always seen as an accurate proxy due to the lack of underlying asset
similarly be used Alternatively, a benchmark analysis, derived from regression calculation, can also be performed
Nominal cash Where:

flows in rf : Risk free rate (ref. currency)
reference
currency kc$ / € = r f + β a × E RP + C RP βa: Asset beta
(including US ERP: Equity market risk premium (ref. currency)
dollar or in
euro)
CRP: Country risk premium (ref. currency)
Cost of capital
calculation
Nominal cash Where:
flows in local ILCY : local inflation
(1 + k c$ / € ) × (1 + I LCY )

currency with
no devaluation k LCY
= −1 I$/€ : US or EU inflation
(1 + I $ / € )
c
risk (except
inflation
spread)

Section
Introduction 1
- Key steps in a valuation exercise
- Intrinsic valuation: Discounted Cash Flows
- Analogical valuation: Trading & transaction multiples
- Premium / discount at a glance
- Share price performance analysis and market perception
- Introduction to restated net worth
- Introduction to value creation
Appendix

Valuation methodologies
Key steps in a valuation exercise
Business/activity
Discounted cash flows

Consistency with the business plan Net financial debt
Discount rate: direct vs indirect, parameters
Accounting choices Cash flows: FCFF, FCFE or dividends
Terminal value: Gordon Shapiro, CFF or other
Sensitivity analysis Debt-like provisions
Wealth creation Financial & non operating

Trading multiples assets and associates
Broker consensus Valuation
Restatements: Pensions, dilution, MI, leases, range
financial assets, specific IAS issues, etc.
Investment Mainly EV multiples Minority interests
requirements
Transaction multiples Dilutive instruments

Relevant transactions
Financing Latest published accounts prior to transaction
Restatements if any and if info is available
Mainly EV multiples
Others
Share price performance analysis

Return & market premium if listed
Purpose Objective
Valuation methodologies – Key steps in a valuation exercise CFYETS – October 2009 40

Section
Introduction 1
Appendix

Intrinsic valuation: Discounted Cash Flows – Introduction
The DCF valuation DEFINITION APPROACH

methodology is doubtlessly
the most widely used The DCF approach is an intrinsic valuation The DCF methodology is based on discounted future
methodology, which is based on: cash flows which can be:
valuation methodology in
the financial community Forecast financials, which generally refer to a Free cash flows to firm to derive an Enterprise
business plan or an operating model value
A discount rate representing the expected return
of the asset Dividends to compute an Equity Value
Note that the DCF
approach is not a relevant This section aims at explaining the underlying Free cash flows to equity to calculate an Equity
valuation methodology to fundamentals behind the DCF valuation value
∞
The formula is as follows:
∑
value companies in Accordingly, it provides an overview of the Cash flowi
extreme situations mechanics of a DCF valuation Value =
(1 + r )i
(including bankruptcy) Guidelines to build up an operating model are i =1
not tackled
Where r is the discount rate
A study carried out by

McKinsey suggests that a CORRELATION BETWEEN SHARE PRICE AND DCF VALUE
strong correlation exists
between a company’s Market value /
share price and the Book value
company’s valuation based
on a DCF approach
DCF value /
Book value
Source: McKinsey
Valuation methodologies – Intrinsic valuation: Discounted Cash Flows CFYETS – October 2009 42
Intrinsic valuation: Discounted Cash Flows – Cash flow definition
EBITDA
- Non cash items in EBITDA
Free cash- - Normative tax on EBIT (EBITxTR)
flows to firm
- Change in working capital
(FCFF)
- Capex
= Free cash flow to firm (FCFF)
Dividends
Dividends Pay-out ratio x net income
Maximum cash available to shareholders
EBITDA
- Non cash items in EBITDA

- Normative tax on EBIT (EBITxTR)
Free cash- - Change in working capital
flows to equity - Capex
(FCFE) - Net interest expenses
+ Capital increase / (reduction)
+ New borrowings / (Debt repayment)
= Free cash flow to equity (FCFE)
Intrinsic valuation: Discounted Cash Flows – Methodology
METHODOLOGY
Methodology includes the following key steps:

Calculate future cash flows (FCFF, dividends or FCFE) based on financial projections
Choose the method to estimate the terminal value at the end of the explicit horizon of the financial projections
Calculate the present value of the discounted cash flows with the appropriate discount rate
The total value, equivalent to the Enterprise value, is equal to:
n
Value =
∑
i =1
Cash flowi
(1 + r )i
+
TVn
(1 + r ) n
Discount rate:
FCFF: cost of capital (r = WACC)
Dividends and FCFE (r = ke)
Theoretically, the three methods should lead to the same results, however:
Dividends require an assumption in terms of pay-out policy, which is determinant of the value
FCFE implicitly values an underlying capital structure. Value of equity depends on the assumed leverage
Tax benefits may be different whether they are integrated into the flows as for the FCFE approach or into the
discount rate as for the FCFF approach
As a consequence, a DCF based on FCFF is the most reliable method
Intrinsic valuation: Discounted Cash Flows – Financial projections
A discounted cash flow valuation is based on financial projections, which can:

Financial Either be provided by the firm’s management in the form of a Business Plan, reflecting the most
projections accurate views of how the business is expected to perform in the future
Or, alternatively be built up on the basis of broker consensus
Key items part of the financial projections generally include:

Top line P&L projections including Sales, EBITDA and EBITA
Key metrics Projected cash items including capital expenditures along with the depreciation policy and change in
working capital
Simplified balance sheet with a view to calculating a return on capital employed
The explicit forecast period range between a minimum of three to five years and ten years ideally
Note that the shorter the explicit forecast period is, the greater the terminal value will be in relative
terms
Terminal value representing more that 50% of the enterprise value can be considered as artificially
Explicit high
forecast period Accordingly, in some specific cases, it is worthwhile and advisable extending the explicit forecast period
in order to reflect the different stages of maturity of the firm
In that case, a fading period / extrapolation of the explicit forecast period leads to the normative year,
which is then retained as a basis of the terminal value calculation
Note that it is of the utmost importance to check that, at the end of the explicit period, the
implied profitability can be considered as sustainable to perpetuity
Sustainability
A fading period is frequently built up in order to progressively shift down to a normative year that is
of assumptions
more conservative than the final year of the Business Plan
Intrinsic valuation: Discounted Cash Flows – Estimating the terminal value
The terminal value is the The Gordon Shapiro-type terminal value calculation is a widely used formula
residual value of the It assumes that the company's free cash flow will grow at a constant rate to perpetuity after an explicit
business at the end of period
the explicit cash flow The formula is as follows:
projections in the
FCFn +1
business plan
TVn =
Gordon
WACC − g
Mainstream
methodologies include Shapiro-type
the Gordon Shapiro growth to Where
formula and the cash perpetuity - FCFn+1: Normalised free cash flow in the first year after the explicit forecast period
flow fade formula - g: growth rate to perpetuity
Alternatively, an exit
multiple can be retained Key issues include the determination of the normative cash flow and the growth-to-perpetuity rate
Such terminal value assumption is consistent if:
Note that these Retained growth rate must be consistent with the maturity of the company and its growth perspectives
methodologies are only
Normalised profitability (measured by ROCE*) must be realistic given the cost of capital level
applicable to valuation
based on free cash flows
to firm
No economic profitability can be sustained for ever and any company's ROCE must gradually converge
For the valuation of towards its cost of capital
banks and financial Decrease generally with business maturity (competition, erosion of margins, consolidation etc.)
institutions, the terminal
value is generally The cash flow fade model:
calculated on the basis of Cash flow fade Defines a time period during which the company's ROCE derives from:
a required equity model
- Either a decrease in margins or
- A decrease in asset turnover ratio
Ultimately, ROCE reaches cost of capital
At the end of the period, the firm value is equal to the book value of Capital Employed
*Note: Return On Capital Employed is equal to EBITA x (1-Tax) / Capital employed
Section
Introduction 1
Appendix

Trading & transaction multiples – Introduction
The multiples approach is an analogical valuation method according to which the value of a company's operating assets or
equity can be inferred from multiples calculated on a sample of listed comparable companies or on a sample of comparable
transactions, in a given industry
This requires the following assumptions:
Financial markets to be in equilibrium
Comparable assets to be as similar as possible: same level of risk, growth and profitability
The value of the target company is calculated by applying multiples calculated on a sample of comparable companies or
transactions to the target’s financials:
Target value = Multiple × Target financials
Note that the Main drivers of multiples:

comparability of a
transaction is also based Growth expectations
on the level of - The higher the expected growth, the higher the multiples
shareholding (minority
vs. majority stake) Risks (operating or financial)
- The higher the risk, the lower the multiples
- Sensitivity to the risk of assets depends on capital structure (the higher the leverage, the higher the sensitivity)
Interest rates
- The higher the interest rates, the lower the multiples
Size / liquidity
- The bigger the company, the higher the multiples
Valuation methodologies – Analogical valuation: Trading & transaction multiples CFYETS – October 2009 48
Trading & transaction multiples – Respective methodologies
Note that trading TRADING MULTIPLES

multiples are calculated
on the basis of financial Trading multiples can be used to value a target company from the perspective of a public market investor
projections, generally Trading multiples reflect the range of value investors are prepared to pay to gain exposure to a stock in a given sector
over a three year period Thus, they reflect the value of a non-controlling stake (control premium is excluded)
Although, transaction Trading multiples can only be considered as relevant in certain types of contexts:
comparables can be Trading multiples should be a favoured methodology within the context of an IPO
derived from projected Trading multiples cannot be used as a central methodology for M&A transactions
financials, they are most
commonly calculated on
the basis of historical or TRANSACTION MULTIPLES
LTM (Last Twelve The transaction multiples methodology is an analogical valuation approach based on precedent comparable transactions,
Month) financials which have occurred in a given industry over a certain period of time
The context of the transaction must be as comparable as possible (percentage acquired, type of acquirer, etc.)
Note that a valuation based on transaction multiples reflects the amount that investors are willing to pay for a strategic
stake in the target company with similar characteristics as the sample of transactions
It is a critical valuation methodology when valuing a controlling stake
Accordingly, transaction multiples may integrate the investor’s perception of potential synergies
The method’s key advantage is that it relies on actual transactions and thus best approximates how much investors would
be ready to pay to acquire a stake in a company similar to the target that is being valued
Yet, a valuation based on transaction multiples might be limited due to the following factors:
Time constraint
- Past transactions are rarely comparable over a long period of time since multiples vary in line with market changes
Full comparability
- Transaction values incorporate features, which are inherent to each deal
Availability of information
- Reliable financial information are sometimes unavailable especially for private transactions
Trading & transaction multiples – Key Enterprise Value & Equity Value multiples
Note that real or

operational multiples, Value of equity + Value of net debt & other EV adjustment s
EV / sales =
including EV/Reserves Sales
(oil & gas) and
EV/Subscribers (TMT) in Value of equity + Value of net debt & other EV adjustment s
are also quite common Enterprise EV / EBITDA =
value multiples EBITDA
but should be considered
as a second choice in a
valuation perspective as Value of equity + Value of net debt & other EV adjustment s
EV / EBITA =
they assume normative EBITA
profitability
Value of equity Value of equity + Value of minorities

Price / Earnings ratio = Recurring earnings (group share)
or
Recurring earnings
(PE ratio)
Value of equity + Value of minorities

EBITDA - Tax - Net interest exp. - Capex - ∆WC
Price to cash flow ratio = or
Equity value (PCF) Value of equity
multiples EBITDA - Tax - Net interest exp. - Minority interest in NI - Capex - ∆WC
Value of equity
Book value of shareholders' equity
Price to book ratio = or

(PBR) Value of equity + Value of minorities
Book value of total shareholde rs' equity
Trading & transaction multiples – Roadmap
1 Set up a relevant sample of comparable listed companies or transactions
2 Calculate the key projected, historical or LTM Profit & Loss metrics of each peer
3 Calculate the enterprise value of comparable listed companies or transactions
4 Compute the trading or transaction multiples
5 Derive a range of trading or transaction multiples to apply to the target financials
6 Derive a range Enterprise Value or Equity Value of the target
Trading & transaction multiples – Regression analysis
METHODOLOGY
A regression analysis is based on the linear least squares fitting technique, which makes it possible to find the best fitting
straight line through a given set of points (one point per comparable)
The overall quality of a regression analysis is measured by the square of the correlation coefficient (R²), which gives the
proportion of the variance in y attributable to the variance in x
A regressions analysis should be used as a sanity check to ensure consistency across the sample
In some specific industries, including FIG, a regression analysis can even be used as a core valuation methodology
For a sufficient number of comparables, if the R² is:
Above 50%, the regression can be considered relevant
Between 25% and 50%, the regression may not be fully relevant
Below 25%, the regression reveals inconsistencies in the sample, and the calculation of the multiples should be amended
EXAMPLE OF A REGRESSION ANALYSIS

This example of
regression analysis 2010e EV/Sales multiple vs. 2010e EBITDA margin
shows a strong
1.6x Axon
correlation between EV /
Sales multiples and y = 12.38x - 0.4946
EBITDA margin within 1.2x R² = 87.1%
European IT Services Indra Sistemas
large caps 0.8x Logica
Sopra TietoEnator
The coefficient of Capgemini
0.4x GFI Devoteam
determination R² is
87.1%
-
4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
Section
Introduction 1
Appendix

Premium / discount at a glance – Introduction
The “Fair value” of a company should be seen as a stand alone reference or floor value
Note that the “Fair value” differs from the “Investment value”
Reference The “Fair value” is derived from a discounted cash flow valuation approach, which should also be put
value into the perspective of the current market value
Based on the market value, the “Investment value” crystallizes the value attached to the operational
and financial synergies potentially achieved by a given investor
The control premium is the excess price over the reference value paid by an investor for a given target
Control premium, depending on the market and its regulation, tends to approximate 30%
Strategic &
control The control premium also refers to a strategic upside or “a call over an alternative strategy”
premium The premium is mostly derived from the net present value of expected synergies
There is a clear correlation between the value of expected synergies and the premium paid
As the opposite of the control premium, a minority discount may in practice reflect the fact that a minority
shareholder has less control over the firm’s cash flows than the majority shareholder
A minority shareholder is not in a position to decide the firms’ strategic policy, appoint members to
the Board of Directors and gain full access to sensitive information
However, since the right of dividends is equal among shareholders, regardless of their shareholding,
a discount based on a the level of shareholding is not appropriate
Therefore, in practice, a premium may conversely be attached to a minority stake if it enables its
Discounts acquirer to go through a shareholding threshold or provides it with an additional power / influence
Additional discounts can also be encountered including:
Size discount
Illiquidity discount
Holding & conglomerate discount
Premium for socially responsible investment and cluster-level competencies or sector and climate
discounts
Valuation methodologies – Premium / discount at a glance CFYETS – October 2009 54

Premium / discount at a glance – Market premium
COMMENTS
Parallel to the share price performance, a market premium analysis can be performed as part of a valuation exercise
Note that compared to standard intrinsic and extrinsic valuations, a market premium analysis will generally be
considered as representing a valuation benchmark rather than a specific valuation methodology
A market premium analysis can be conducted within the perspective of an industry or a country
KEY EUROPEAN IT SERVICES TRANSACTIONS SINCE 2003
Note: Bubble size indicates the total EV of the transaction – Note: Premium calculated over the one-month average share price
For example, key
European transactions in 80%
the IT Services industry
since 2003 suggest an 70%
Detica Group / BAE Systems
average premium over
the one-month average Xansa / Steria
60%
share price of 31%
50%
Pinkroccade / Getronics
SI International / Serco
40%
Unilog / LogicaCMG
Silicomp / France Télécom
Average: 31% Synstar PLC / Hew lett-Packard
Axon Group / HCL
30%
Transiciel / Cap Gemini
TietoEnator / Cidron Services Oy
20% WM-data / LogicaCMG
Novo Group / WM Data
Atos Origin / PAI Partners
10% ITNET / Serco
TDS / Fujitsu
Assystem / Brime Technologies
-
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: Company data, Datastream, mergermarket, Thomson One Banker, press release

Premium / discount at a glance – Market premium (cont’d)
A similar market analysis 2002 – H1 2009 AVERAGE MARKET PREMIUM BY COUNTRY

can be carried out on a
country basis Note: Premium calculated over the one-month average undisturbed share price
Since 2002, average 100%

82%
premium of transactions
80%
in Europe, of which total
consideration is at least 60% 50% Average: 48% 48% 42%
€1 billion, is 48%
40% 36% 39%
40%
Premiums calculated
over an undisturbed 20%
share price are generally
-
higher that those derived
France Germany Italy Netherlands Spain Sw itzerland UK
from a potentially
disturbed share price
2002 – H1 2009 AVERAGE MARKET PREMIUM BY COUNTRY AND TYPE OF TRANSACTION
Note: Premium calculated over the one-month average undisturbed share price Legend Average per country Hostile Friendly
140%
119%
120%
100%
80% 70%
59% 58% 63%
51% 48% 53%
60% 46% 40%
34% 36% 33%
40%
15%
20%
-
France Germany Italy Netherlands Spain Sw itzerland UK
Source: Company data, Datastream, mergermarket, Thomson One Banker, press release

Premium / discount at a glance – Synergy valuation
Synergies relate to the improvement of a risk/return ratio of a company following the improvement of the
quality of its earnings as a result of a merger/acquisition/diversification move
Therefore, synergies may involve creation of barriers to entry, decrease in the risk of operating cash
What are flows, etc.

synergies? Synergies can be commercial, industrial or administrative
It should be noted that financial synergies do not exist
Synergies result from a reduction in charges or an improvement in sales that leads to the value of the
whole being greater than the sum of the values of the parts
The most accurate valuation methodology is to set up a NPV calculation based on post-tax cash flows
It is recommended to value synergies over an explicit period of time (fading)
The underlying assumption being that, the acquirer will at some point re-allocate part or all of
synergies to its clients, employees and suppliers due to competition pressure
Alternatively, a calculation of a Gordon Shapiro-based terminal value can be carried out
Key valuation parameters may be defined as follows:
Discount rate: Acquirer's cost of capital
Corporate tax rate: Acquirer's normative tax rate
How to value Phasing:
synergies? - Progressive increase to 100% over [X] years

- Full synergies over a [X] year period
- Progressive decline over [X] years to no synergies
One-off/restructuring costs are usually factored in with a possible phasing
- Such costs may be expressed as a percentage of run-rate synergies
At last, the value of synergies may also be computed using the multiples method
The sector multiple may be used as a reference to set the synergy multiple
For information/benchmark purposes, the FT Lex Column also provides an indicative methodology
- The total value of synergies is equal to 10x post-tax run-rate synergies

Premium / discount at a glance – Synergy valuation (cont’d)
Stopping redundant projects

Research & Eliminating overlap in research capacities
development
Developing new products through transferred technology
Pooled purchasing due to higher volumes

Procurement Standardising products
Eliminating overcapacity
Manufacturing Transferring best operating practices
Cross-selling of products
Using common channels
Sales &
marketing Transferring best practices
Lowering combines marketing budget
Distribution Consolidating warehouses and distribution network
Exploiting economies of scale in finance and accounting and other back-office functions
Administration Consolidating strategy and leadership functions

Premium / discount at a glance – Synergy valuation – Case study
In this case study, KEY ASSUMPTIONS

information is inspired
from a recently Valuation as at June 30, 2009
completed transaction, Run-rate period: 2013e-2016e
on which BNP Paribas Synergies as communicated by the acquirer
acted as Financial
Advisor On average, 60% from revenue synergies and 40% from costs synergies over 2009e-2013e
No implementation costs assumed by the acquirer as the two companies will operate on a standalone basis
Note that projected Valuation assumptions
synergies presented in
Cost of capital: 10.5%
this material have been
slightly adjusted for Tax rate assumptions as are follows:
education purposes - Cost synergies taxed using the acquirer normative tax rate (i.e. 35%)
- Net revenue synergies taxed using the acquirer & target blended tax rate (35% and 28% respectively i.e. 31%)
FADING OF SYNERGIES (EURm)
500 125%
400 100%
300 75%
200 50%
100 25%
- -
2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e
Pre-tax net revenue synergies (LHS) Pre-tax cost synergies (LHS) Phasing (RHS)
Source: Company data, BNP Paribas estimates

Premium / discount at a glance – Synergy valuation – Case study (cont’d)
METHODOLOGY I – FULL FADING

Based on a full
fading, NPV of (EURm) 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e
synergies is
EUR2.3 billion Phasing / fading 58% 64% 72% 93% 100% 100% 100% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% -
(implied run-rate Incremental revenue 224 328 401 481 571 571 571 571 514 457 399 342 285 228 171 114 57 -
multiple is 4.2x) Costs of incremental revenue (60) (129) (152) (179) (208) (208) (208) (208) (187) (166) (146) (125) (104) (83) (62) (42) (21) -
Net revenue synergies 165 199 248 302 363 363 363 363 326 290 254 218 181 145 109 73 36 -
Cost synergies 155 155 147 208 188 188 188 188 169 151 132 113 94 75 56 38 19 -
Net synergies 320 354 395 510 551 551 551 551 496 441 386 331 275 220 165 110 55 -
Normative tax (105) (116) (129) (167) (179) (179) (179) (179) (161) (143) (125) (107) (90) (72) (54) (36) (18) -
Net after tax synergies 214 238 266 343 372 372 372 372 335 298 260 223 186 149 112 74 37 -
Year 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 11.25 12.25 13.25 14.25 15.25 16.25 17.25
Discount factor 98% 88% 80% 72% 65% 59% 54% 48% 44% 40% 36% 33% 29% 27% 24% 22% 20% 18%
Discounted synergies 209 210 213 248 243 220 199 180 147 118 94 73 55 40 27 16 7 -
METHODOLOGY II – GORDON SHAPIRO BASED TERMINAL VALUE CALCULATION

Based on a
(EURm) 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e Norm.
Gordon Shapiro
based terminal Incremental revenue 224 328 401 481 571 571 571 571 571 571 571 571 571 571 571 571 571 571 571
value calculation, Costs of incremental revenue (60) (129) (152) (179) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208) (208)
NPV of Net revenue synergies 165 199 248 302 363 363 363 363 363 363 363 363 363 363 363 363 363 363 363
synergies is Cost synergies 155 155 147 208 188 188 188 188 188 188 188 188 188 188 188 188 188 188 188
EUR3.4 billion Net synergies 320 354 395 510 551 551 551 551 551 551 551 551 551 551 551 551 551 551 551
(implied run-rate Normative tax (105) (116) (129) (167) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179) (179)
multiple is 6.2x)
Net after tax synergies 214 238 266 343 372 372 372 372 372 372 372 372 372 372 372 372 372 372 372
with no growth to
perpetuity Year 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 11.25 12.25 13.25 14.25 15.25 16.25 17.25 17.25
Discount factor 98% 88% 80% 72% 65% 59% 54% 48% 44% 40% 36% 33% 29% 27% 24% 22% 20% 18% 18%
Discounted synergies 209 210 213 248 243 220 199 180 163 148 134 121 109 99 90 81 73 66 66
Source: Company data, BNP Paribas estimates

Section
Introduction 1
Appendix

Share price performance analysis and market premium – Introduction
Share price performance SHARE PRICE PERFORMANCE & MARKET PERCEPTION ANALYSIS – METHODOLOGY
and market premium
analysis usually provide A share price performance and marker perception analysis represents a key valuation benchmark in a valuation exercise
highly relevant valuation It is generally made up of an:
benchmarks Analysis of the recent share price performance
Analysis of the market consensus

Note that these items are
considered as valuation Analysis of the current momentum
benchmarks and not as a Also, note that due to the recent credit crunch, a review of the company’s CDS and credit rating has become standard and
valuation methodology in some cases critical
strictly speaking
In the specific case of a merger with a partial or total stock payment, an analysis of the market parity can also be performed
KEY COMPONENTS OF A SHARE PRICE PERFORMANCE & MARKET PERCEPTION ANALYSIS
Share price performance & market

perception analysis
Share price performance Daily volumes and stock Market consensus

Newsflow analysis
analysis liquidity analysis analysis
Absolute terms and relative Review of CDS & rating Analysis of market parity
terms vs. key peers & evolution (if relevant)
reference index over a 1Y,
3Y or 5Y period
Valuation methodologies – Share price performance analysis and market perception CFYETS – October 2009 62
Section
Introduction 1
Appendix

Introduction to restated net worth – Definition
DEFINITION
RNWV remains a wealth-oriented and static method for measuring the value of a company in that it does not factor in the
value of the company’s future earnings – It is thus of limited use, but can be used, for example, to value:
A company which has some operating assets with a market value that is higher than the cash flow that they are
able to generate – e.g. vineyards
Management companies and financial holding companies which have minority holdings
Note that a SOTP A more dynamic form of RNWV is used on a regular basis – the sum-of-the-parts (SOTP) method:
analysis can alternatively
be carried out on the The sum-of-the-parts method involves valuing the different segments of a company’s business separately, with a
basis of trading multiples
view to operations continuing
Using this method, the specific features of each business can be factored in including risk, growth and margins
KEY STEPS IN A SUM-OF-THE-PART ANALYSIS

Bear in mind that group
enterprise value
Subsidiary A Subsidiary B Subsidiary C Subsidiary D Subsidiary E Subsidiary F
adjustments, which
include intra-group net Specific discount
rate
financial debt and head
EBITDA PE ratio x Net
office costs, have to be Cash flows Cash flows Cash flows Cash flows
multiple Income
deducted from the group
- - - - -
enterprise value to derive
the group equity value Net fin. debt
- Net fin. debt Net fin. debt Net fin. debt Net fin. debt
= = = = = =
Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary
equity value equity value equity value equity value equity value equity value
Ownership
+ + + + + +
=
GROUP ENTERPRISE - Group enterprise GROUP EQUITY
Enterprise value adjustments include intra-group value adjustments
=
VALUE VALUE
net financial debt and headquarter costs
Valuation methodologies – Introduction to restated net worth CFYETS – October 2009 64

Section
Introduction 1
Appendix

Introduction to value creation – Introduction
KEY PRINCIPLES
The main goal of a company is to create value for its shareholders – Possible returns include dividends and capital gains
The rule of thumb is that if the return on investments is inferior to the cost of capital, capital is paid back to shareholders
As a consequence, investors will impose value-creating strategies whether they are supported by management or not
Higher margins or more sales are not enough since capital efficiency is also sought (fewer fixed assets and WC)
Enhanced importance of communication – Strategies and their value creation
Development of corporate governance
HOW VALUE IS CREATED?
Value is created if Enterprise Value > Capital Invested
CFn+1 CFn+2 CFn+3 CFn+4 CFn+5 …
Fair value
Book value of equity
Enterprise
employed
of equity
Value
Capital
Book value 2009e 2010e 2011e 2012e 2013e …

Fair value
of net debt
of net debt @ kc
FCFFn+1 FCFFn+2 FCFFn+3 FCFFn+4 FCFFn+5 FCFF∞
Valuation methodologies – Introduction to value creation CFYETS – October 2009 66

Introduction to value creation – Value creation
VALUE CREATION THROUGH ACQUISITIONS
In an acquisition, value is created if:

(Market value of target + premium paid) < (PV of CF + NPV of synergies)
In efficient markets, value is created if premium < NPV of synergies
Synergies are to be found in:
Revenues Capital expenditures
Operating costs Working capital
But not in cost of capital - Diversification does not add value
- Financial structure does not add value
- Except for re-ratings due to size, but not always
VALUE CREATION MEASUREMENT
Historical accounting measurement:

EPS: Earning per share
ROCE / CFROI: Return on capital employed / Cash flow return on investment
ROE: Return on equity
Advanced measurement:
Market:
- MVA: Market value added MVA = Market capitalisation + Market value of debt − Capital employed
- TSR: Total shareholder return
Economic (intrinsic):
- EVA: Economic value added
- NPV: Net present value

Introduction to value creation – Economic value creation
METHODOLOGY
Expected value creation is equal to the present value of EVA® (Economic Value Added), where:
EVA = ( ROCE − k c ) × CE (Beginning of period)
One can demonstrate that:
Value creation =
∑
i
EVAi
(1 + k c )i
or Enterprise value = CE +
∑
i
EVAi
(1 + k c )i
EVA is also viewed as a relevant measurement of value creation and emphasizes the importance of the ROCE ratio and
its comparison to kc (or WACC)
KEY STEPS TO INTRINSIC VALUE CREATION
Expected return on capital

employed
Spread
Cost of capital
Intrinsic value creation
Expected growth rate

Introduction to value creation – Value creation drivers and cash flows
A business generates KEY DRIVERS

value through top line
growth, optimal opex Value creation, in an unchanged assets perimeter, depends on:
management, capital Sales (growth, market strategy and position) and operating margin (costs management and scale effects)
efficiency and gains Net capex and change in WC (stock efficiency and management of receivables / payables)
above invested capital
Value creation in a changing perimeter depends on the envisioned transaction:
New projects could create value if they can generate a return above their hurdle rate
Note that investing in an Acquisition could create value when it generates synergies above the premium paid
activity with a lower cost
Reorganisation of activities does not create value (unless they generate industrial synergies)
of capital does not
necessarily create value
CASH FLOWS
Key value drivers remain
the cash flow generation Legend
based on EBITA, Capex EVA®
EVA
and changes in working
Capital employed …
capital
Expected value
creation
Enterprise
Value
2009e 2010e 2011e 2012e 2013e …

Book value of
capital employed @ kc
FCFFn+1 FCFFn+2 FCFFn+3 FCFFn+4 FCFFn+5 FCFF∞

Introduction to value creation – Wrap-up
Rating Pros Cons
Simple concept Highly influenced by market volatility

Not applicable to unlisted companies
It is an absolute figure vs. a spread
MVA
Reflects the total value rather the
annual value created
Market
Measures the shareholder’s return Influenced by market volatility when
over a medium- to long-term period calculated over a short period of time
TSR
Easy to benchmark Highly driven by capital structure and
pay-out assumptions
Simple indicator leading to the Restricted to one year

concept of cost of capital
EVA® Difficult to calculate over a period of
time
Economic
Market practice Difficult to calculate based on
Valuable tool for strategic analysis external sources of information
NPV

It is an absolute figure vs. a spread
Simple concept Subject to manipulation
ROCE Accurate measure of return Meaningless in certain industries

such as Financial Institutions
Does not factor in cost of capital
Simple concept Subject to manipulation
Accounting ROE

Accurate measure of return
Accurate indicator when analyzing
Risk of distortion due to changes in
capital structures
Financial Institutions Does not factor in cost of equity
Simple metric Subject to manipulation
Straightforward to estimate Highly driven by capital structure
EPS
Market practice used as a key metric

assumptions
by the investor community Does not factor in cost of equity

Introduction to value creation – Wrap-up (cont’d)
COMMENTS
Until the mid-1980s, companies mainly communicated their net profit/loss or EPS, which remain parameters highly
subject to manipulation widely called “window dressing” including adjustments of exceptional items, provisions, etc.
Second-generation accounting indicators focusing on profitability, including ROE, appeared but remained
inadequate when skilfully leveraged by raising financial leverage
Economic metrics emerged in the 1990s with a view to measuring value or returns compared to cost of capital employed
The NPV indicator, which provides an exact measure of the value created, then came up
More recently, market indicators, including MVA and TSR, became more and more popular although they remain highly
sensitive to the stock market
Parallel to that, performance variables, known as value drivers or KPIs, are also used as key metrics by companies
EVOLUTION OF KEY VALUE CREATION INDICATORS
Highly subject to
manipulation Accounting indicators Economic indicators Market indicators
Net profit EPS EPS growth ROE
EBIT ROCE
EBITDA
CFROI
Operating cash
flow ROCE-WACC
NPV
NAV, EVA, MVA & TSR
Strong influence of Profit (80s) Profitability (90s) Value (90s+)

financial market

Appendix
Section
Introduction - Additional materials 1
Detailed enterprise value adjustments roadmap 2
Additional Corporate Valuation issues 3
European & US market parameters 4

Appendix – Introduction - Additional materials
BNP Paribas Corporate Finance – 2008 league tables – Announced transactions
WORLDWIDE – (US$bn) EUROPE – (US$bn) FRANCE – (US$bn)
Deal # of Deal # of Deal # of

Rank Advisor Rank Advisor Rank Advisor
value deals value deals value deals
1 Goldman Sachs 831.5 342 1 JP Morgan 521.0 199 1 BNP Paribas 87.5 58
2 JP Morgan 778.6 382 2 Goldman Sachs 518.7 156 2 JP Morgan 87.2 30

3 Citi 705.1 343 3 Citi 443.5 131 3 Citi 74.5 33
4 UBS 574.0 352 4 UBS 370.3 174 4 Rothschild 66.3 80
5 Morgan Stanley 558.0 343 5 Deutsche Bank 351.2 197 5 Merrill Lynch 49.0 23
6 Merrill Lynch 515.6 283 6 Credit Suisse 340.0 162 6 Morgan Stanley 46.9 27
7 Credit Suisse 485.7 328 7 Morgan Stanley 294.2 169 7 UBS 46.2 39
8 Deutsche Bank 440.5 283 8 Merrill Lynch 292.4 146 8 Calyon 44.2 36
9 Barclays Capital 319.9 108 9 BNP Paribas 219.2 93 9 Societe Generale 36.0 25
10 BNP Paribas 269.0 120 10 Lazard 191.0 142 10 Lazard 26.7 52
11 Lazard 247.8 210 11 Centerview Partners 173.4 2 11 Goldman Sachs 21.9 26
12 Rothschild 191.8 289 12 Barclays Capital 144.2 28 12 Gleacher Partners 21.6 3
13 Centerview Partners 188.1 10 13 Rothschild 143.8 224 13 Deutsche Bank 20.2 14
14 Bank of America Securities 173.6 69 14 Nomura 101.3 49 14 Nomura 19.5 11
15 Nomura 138.8 157 15 Societe Generale 88.4 42 15 HSBC 17.8 23

16 RBS 117.0 111 16 Mediobanca 87.8 88 16 Mediobanca 11.7 6
17 Wachovia Corp 90.1 41 17 Dresdner Kleinwort 72.6 36 17 PK Corporate Finance 8.9 1
18 Societe Generale 88.5 44 18 Moelis 63.4 3 18 RBS 8.5 15
19 Mediobanca 87.8 88 19 HSBC 61.5 59 19 Credit Suisse 7.7 9
20 Moelis 83.2 12 20 RBS 57.7 82 20 Hawkpoint Partners 6.2 7
Source: Thomson Reuters
Introduction - Additional materials CFYETS – October 2009 73

Business Valuation Team – Selected credentials
May 2009 March 2009 March 2009 March 2009 March 2009 November 2008
FRANCE FRANCE ITALY ITALY SPAIN FRANCE
FIG Casinos & hotels Insurance Insurance Energy Defence
For the acquisition of Independent financial Advisor to Fairness Opinion for Fairness Opinion for Advisor to
advisor to Accor, Colony
and Groupe Lucien
Barrière for the sale by
Colony to Accor of its in the context of its in the context of its
15% stake in merger with merger with in the context of its in the context of the
public takeover bid on disposal of its 20.8%
stake in
Is being advised by
November 2008 October 2008 October 2008 September 2008 August 2008 July 2008
FRANCE FRANCE ITALY HUNGARY COLOMBIA ITALY
Defence Real Estate Energy Energy FIG Energy
Fairness Opinion for Advisor to Fairness Opinion for Hostile takeover bid Fairness Opinion for Fairness Opinion for
In its defence against
for the acquisition of a

in the context of an asset portfolio of energy assets
in the context of the in the squeeze-out of in the context of its for-share swap from
disposal of its 20.8% minority shareholders in merger with transaction with
stake in
was advised by

Business Valuation Team – Selected credentials (cont’d)
July 2008 July 2008 July 2008 June 2008 May 2008 May 2008
FRANCE FRANCE SPAIN CZECH REPUBLIC SPAIN CAMEROON
Energy Energy Insurance Pharmaceuticals Metals Telecoms
Fairness Opinion for Advisor to Fairness Opinion for Advisor to Fairness Opinion for For the privatisation of
in the context of its in the context of its

merger with merger with for the acquisition of a on the share exchange
50% stake in for its acquisition of ratio of its merger with
The Government of
Cameroon
was advised by
April 2008 April 2008 March 2008 January 2008 January 2008 December 2007
INDONESIA RUSSIA RUSSIA SPAIN FRANCE FRANCE
FIG Mining Energy Environment Energy Software
Fairness Opinion for Advisor to Fairness Opinion on its Fairness Opinion for their Advisor to Fairness Opinion for
capital increase and tender offer on
conversion rates within
the framework of its spin-
for the combination of its
for the acquisition of a for acquisition of off
spot and future trading
majority stake in a 25% stake of HISUSA, holding platform with for its acquisition of
company of
was advised by

November 2007 October 2007 September 2007 September 2007 July 2007 June 2007
FRANCE SPAIN FRANCE FRANCE SPAIN FRANCE
Software Energy Software Real Estate Metals Media
Advisor to Fairness Opinion for Advisor to For its simplified tender Fairness Opinion for Advisor to
offer on
for the acquisition of on the Share exchange for its acquisition of

for the public tender offer
for its acquisition of ratio in the context of its 41.4% of
initiated by
merger with
was advised by
May 2007 May 2007 May 2007 April 2007 April 2007 February 2007
SPAIN NIGERIA NIGERIA FRANCE MALYSIA KOREA
Real Estate Oil & Gas Oil & Gas Software FIG Oil & Gas
Fairness Opinion for For the privatisation of For the privatisation of Advisor to Fairness Opinion for Fairness Opinion for
Port Harcourt Refineries Kaduna Refineries
on the share exchange ratio

on the price paid to for the sale of treasury
in the context of its merger
acquire in the context of the shares representing
with
The Nigerian The Nigerian undertaking of 28.4% of its share capital
Government Government RHB Capital Berhad
was advised by was advised by

February 2007 January 2007 January 2007 December 2006 November 2006 July 2006
SINGAPORE HUNGARY FRANCE SPAIN NIGERIA BELGIUM
Energy Telecoms Insurance Transport Telecom Diversified Industrials
Fairness Opinion for For the acquisition of For the buy-out of In the announced merger of For the privatisation of Hostile take over bid
its minorities by Nigerian In its defence against
Telecommunications
a Fairness Opinion on the

on the price share exchange ratio to the
offered to acquire board of
HTCC The Nigerian Bureau of
Public Enterprises was
was advised by advised by was advised by
was advised by was provided by
July 2006 June 2006 May 2006 January 2006 April 2006 March 2006
CHINA/HONG-KONG FRANCE/USA SPAIN / UK ABU DHABI FRANCE FRANCE
Transport Telecom Equipment Directories Utilities Chemicals Utilities
Fairness Opinion for Fairness Opinion for Advisor to For the privatisation of In its spin-off of For the sale of its stakes in
electricity and water utilities
ADDC & AADC
for the sale of its 59.9%

in the context of its
for its merger with stake in its directories
merger with
subsidiary
the French Government

was advised by was advised by was advised by

September 2005 July 2005 May 2005 December 2004 November 2004 July 2004
UNITED KINGDOM UNITED KINGDOM ITALY MOROCCO FRANCE FRANCE
IT Services Spirits & Wine Transport Telecom Utilities Media
For the agreed offer for Fairness Opinion for Financial advisor as Joint For the acquisition of
Global Co-ordinator of the IPO, Joint Bookrunner IPO, Joint Global
global offering and Joint Coordinator
Bookrunner of the & Bookrunner
institutional offering
for the acquisition of
was advised by was advised by
June 2004 May 2004 February 2004 January 2004 September 2003 May 2003
ITALY USA FRANCE FRANCE NETHERLANDS FRANCE
Media Media Consumer Goods Pharmaceuticals Airlines Oil & Gas
Fairness Opinion for For the regrouping of the Fairness Opinion for For its offer on For the acquisition of Fairness Opinion for
the buyers’ consortium main assets and activities of Coflexip SA
BC Partners, CVC, Vivendi Universal
Investitori Associati, Entertainment and NBC by
Permira, for the simplification of its shares
for the acquisition of capital structure by for its merger with
merging with its 54% Technip-Coflexip
shareholders the holding
company GESPARAL French Treasury
was advised by was advised by was advised by

Appendix
Section

Appendix – Detailed Enterprise value adjustments roadmap
Detailed checklist of key enterprise value adjustments
Straight non-listed long term debt (fixed / variable rate)

Book value
Calculation of market value in specific cases including out-of-market interest rates
Straight listed long term debt (fixed / variable rate)
Market value (Quote x Nominal per bond x number of bonds)
Capital lease obligations
Refer to finance leases (on balance sheet) or operating leases (off balance sheet), when restatement is
Long term & appropriate / recognised as market practice
short term Convertible bonds
financial debt Use of market value when available
If “in the money”, the bond can be fully converted (increase the number of shares by the total number of
shares created and exclude the bond’s book value from financial debt) or the treasury method can be
implemented (in which case the bond’s book value should be included in the net financial debt)
Short term debt
Net financial debt Book value – Market value close to book value since close to maturity
(+) Fair value hedge instruments
If fixed rate debt is hedged, subtract the fair value of derivative instruments from its market value
Book value to be retained

Cash & cash
Cash equivalents are marked to market in IFRS
equivalents
Restricted cash should be excluded from cash for the calculation of the net financial debt calculation
Securitization
Increase net financial debt position by the amount of securitized receivables that appear off balance-
sheet (non-recourse) and add back the same amount to the total working capital
Other working capital adjustments
Others Increase / decrease net financial position by the difference between normative working capital and
working capital in latest balance-sheet to smooth seasonality out
Cash from dilutive financial instruments
Nil if treasury shares method is used – Strike x Number of shares created otherwise
Detailed enterprise value adjustments roadmap CFYETS – October 2009 80

Appendix – Detailed Enterprise value adjustments roadmap
Detailed checklist of key enterprise value adjustments (cont’d)
Financial assets (including Associates & Equity investments)

Market value to be used if listed, otherwise use PE ratio or MBR to value non-listed assets is recommended
Make sure that contributions from financial assets are not included in the financial projections
Financial assets
Other financial assets sale
(-)
Includes Assets held for sale, held for trading and available for sale, Loans & Receivables, Investments held to maturity
Make sure that contributions from the assets are not included in the financial projections
Liabilities associated to these assets should also be included
Employee benefits* (including other post-employment benefits, healthcare and other long-term benefits)
Debt-like
Use the pension deficit (PBO - FVA) after normative tax if pension provisions are non tax deductible upon booking
Items Other debt-like provisions
(+)
Provisions for restructuring charges after normative tax if provisions are non tax deductible upon booking
Market value to be used if listed, otherwise:

Minority interests
- if minority interests are spread across the whole group, group's PE ratio or MBR can be used
(+)
- if minority interests are isolated in separate entities book value or subsidiary specific PE ratio / MBR can be used
Deferred tax Tax loss carry-forwards to be valued separately and taken into account in the EV adjustments
assets (- Valuation based on a NPV calculation based on the company’s taxable profit projections discounted at the cost of capital
)
Dividend payment
Increase net debt position by the total amount of dividend paid once share becomes ex-div
Share buybacks / issue
Increase / decrease net debt position by the total amount of shares bought back / issued since last balance sheet date and
Subsequent reduce / increase the number of shares accordingly
events
(+/-) Acquisition / disposal
If the acquisition is included into the financial forecasts, increase net debt position by the total consideration for the
acquisition (unless transaction is partly / entirely equity-financed, in which case the understanding number of shares may
already include the new shares issued)
If the disposal is included into the financial forecasts, reduce debt position by the total consideration for the acquisition
Note: *Use the book value if no information available. Also, in case the plan is overfunded, check if funds are recoverable
Detailed enterprise value adjustments roadmap CFYETS – October 2009 81

Appendix
Section

Additional Corporate Valuation issues
Consolidation methodologies – Introduction
Consolidating a set of PURPOSE OF CONSOLIDATED FINANCIALS

financial statements aims
at presenting the The rule is that any firm which controls companies exclusively or which exercises significant influence over them should
financial statements as prepare consolidated accounts and management reports at group level
those of a single Note that control or influence is based on voting rights rather than on economic control, i.e. ownership
economic entity (IAS, Consolidated accounts must be certified by statutory auditors and made available
27.4)
Companies in the scope of consolidation include:
The parent company
Companies in which the parent company owns directly or indirectly at least 20% of the voting rights
The exception is that a subsidiary should be excluded from the consolidation scope when the parent entity loses power
to govern its financial and operating policies
This happens when the subsidiary goes into receivership
CONSOLIDATION METHODOLOGIES
There are three different
methods of consolidation.
The implementation of
Type of relationship Type of company Consolidation method %*
which depends on the
level of control or
influence exercised by Control Subsidiary Full consolidation >50%
the parent company over
its subsidiary
Joint control Joint venture Proportionate consolidation 33% - 50%
Significant influence Associate Equity method 20% -50%
*Note: Indicative percentage of voting rights that may vary according to the shareholding structure
Additional Corporate Valuation issues CFYETS – October 2009 83

Consolidation methodologies – Full consolidation
Full consolidation aims at Financial accounts of a subsidiary are fully consolidated if the parent company:
merging the financial Holds, directly or indirectly, over 50% of the voting rights
accounts of a subsidiary Or, has the power to govern financial and operating policies of the subsidiary under a special
with the ones of the
agreement
parent company
DEFINITION The appointment or removal of the majority of the members of the Board also allows the parent
Minority interests in the company to fully consolidate a subsidiary
balance sheet represent Full consolidation consists in replacing the subsidiary’s shares in the balance sheet of the parent
the share attributable to company by all the subsidiary’s assets, liabilities, equity, revenues and costs
minority shareholders in
In case the subsidiary is not 100% owned, minority shareholders will have a right over a portion of the
the shareholders’ equity
subsidiary’s assets and liabilities
and in the net income of
full consolidated
subsidiaries
EXAMPLE OF FULL CONSOLIDATION OF A 75% STAKE IN A SUBSIDIARY COMPANY
Parent company Subsidiary Consolidated entity

Balance
sheet
Investment in Shareholders’ Shareholders’ Investment in Shareholders’

Assets 48
subsidiary 15 equity 70 equity 40 subsidiary 0 equity 85 *
Minority
Other assets 57 Liabilities 2 Liabilities 8 Other assets 105 interests 10
Liabilities 10
Profit &
Charges 80 Net sales 100 Charges 30 Net sales 38 Charges 110 Net sales 138
Loss
Net income 20 Net income 8 Net income group

share 26
Minorities 2
*Note: Shareholders’ equity calculated as 70+75%*40-15=85. Minority interests is calculated as 25%*40=10

Consolidation methodologies – Proportionate consolidation
Compared to full The proportionate consolidation method is used to consolidate the accounts of a company jointly
consolidation, controlled by a limited number of partners (usually joint ventures)
proportionate Key factors determining whether a company can consolidate proportionately a joint venture include:
consolidation merely
aims at transferring a A limited number of partners share control, with no partner in a position to claim exclusive control
portion of a company’s DEFINITION A shareholders’ agreement outlining and defining how this joint control is to be exercised
assets, liabilities,
revenues and charges Similar to full consolidation, proportionate consolidation consists in replacing the subsidiary’s shares in
the balance sheet of the parent company by the assets, liabilities and equity of the joint venture, but
Note that the only for the portion controlled by the parent
proportionate Proportionate consolidation does not entail minority interests to appear in the balance sheet
consolidation method is
rare under US GAAP and
is expected to be soon
excluded from IFRS
EXAMPLE OF A PROPORTIONATE CONSOLIDATION OF A 33% STAKE IN A JOINT VENTURE

Balance
sheet

Assets 30
subsidiary 6 equity 62 equity 24 subsidiary 0 equity 64 *
Other assets 58 Liabilities 2 Liabilities 6 Other assets 68 Liabilities 4

Profit &
Charges 80 Net sales 100 Charges 30 Net sales 36 Charges 90 Net sales 112
Loss
Net income 20 Net income 6 Net income 22
*Note: Shareholders’ equity is calculated as 64 = 62+33%*24-6

Consolidation methodologies – Equity method of accounting
The equity method of The equity method of accounting can be performed when the parent company has a significant
accounting is influence over the associate’s conduct of business
implemented when a Significant influence over the operating and financial policy of a company is assumed when the
parent company parent holds, directly or indirectly, at least 20% of the voting rights
exercises significant
The method consists in replacing the carrying amount of the shares held in an associate – “equity
influence over the DEFINITION
operating and financial
affiliate” or “associated undertaking” – with the corresponding portion of the associate’s shareholders’
policy of another equity
company The equity method of accounting is also frequently used to revalue certain participating interests
In the consolidated
entity’s balance sheet,
the investment in the
subsidiary includes the
historical cost of the
investment plus accrued
EXAMPLE OF EQUITY CONSOLIDATION OF A 20% STAKE IN AN ASSOCIATE
income minus dividends
paid by the associated
company to the parent
company (and minus
impairments)
Balance
sheet

Assets 35
Note that the main subsidiary 3 equity 58 equity 25 subsidiary 5* equity 60 **
difference between the
Other assets 57 Liabilities 2 Liabilities 10 Other assets 57 Liabilities 2
equity method and non
consolidated stake lies in
the consolidation of a
Profit &
portion of the subsidiary’s Charges 80 Net sales 100 Charges 30 Net sales 35 Charges 80 Net sales 100
Loss
net income (vs dividends Income from

Net income 20 Net income 5 Net income 21
only otherwise) associates 1
Note: *Investment in subsidiary is calculated as 25*20%=5 ** Shareholders’ equity is calculated as 60 = 58+5-3

Pension provisions
Only defined benefit Commitment to make contributions on a regular basis on behalf of the employee into a fund
plans are liabilities for the No promise from the company to the employee that it will pay an already established pension
company Defined
contributions
Even though markets (DC) plans No risk borne by the company
recovery since 2005 No accounting restatements: contributions are booked as costs
have eased concern on
the part of investors and
credit rating agencies, The company will have to pay an already established pension to the employee
the evolution of pension Pension plan may be funded (investments are paid into a fund and generate returns) or not
assets and liabilities Defined
remain a key point to benefit (DB)
monitor plans Whole risk supported by the company
IAS 19 requires the company to provision future employee benefits
DB PENSION PLAN, THE TWO MAIN COMPONENTS
Projected benefit obligation (“PBO”)*, is the net present value of the anticipated pension payments that will be incurred
in the future for services rendered in the past. It thus represents the future obligations / liabilities toward employees
It is based on actuarial and financial assumptions (these main assumptions are disclosed in the annual report footnotes)
such as: wage inflation, expected final salary, turnover and expected retirement date, discounts rate, etc.
Fair value of assets (“FVA”) is the market value of the stocks, bonds, real estate, and other assets that are in the portfolio
Comparing PBO to FVA, we defined the pension plan as:

overfunded if FVA > PBO
underfunded if FVA < PBO
PBO – FVA is the funded status
*Note: In the US, some companies calculated an “ABO” (accumulated benefit obligation) which differs from the PBO as it assumes no wage inflation

Pension provisions (cont’d)
IAS rules require companies to cover future employee benefits, and therefore to provision PBO minus
The main accounting FVA:
issues relating to the However, assumptions used to assess PBO and FVA can change from one year to another and
Balance Sheet are: therefore PBO - FVA could be very volatile due to changes in stock market conditions during the
• the corridor system financial year and in actuarial or financial assumptions
• the provision booked in
the BS Actuarial changes: defined as Variations in PBO - FVA due to changes in assumptions
In order to avoid accounting in the companies’ P&L the impact of FVA - PBO changes, generating high
volatility in companies’ financial results, companies can choose not to book the change when changes
are limited or can amortise significant actuarial changes over several years, thanks to the corridor
system
The corridor
system Corridor system:
The system aimed at spreading actuarial gains and losses over future periods
Corridor thresholds are equal to +/- the highest of the following two amounts:
- 10% of PBO
- 10 % of FVA
If actuarial changes (gains or losses) do not breach the corridor limits, companies can choose not to
book the changes in the P&L
If actuarial gains and losses breach the corridor, the portion in excess of the 10% threshold is
recognised on the balance sheet as income or expenses to be deferred and is spread over the
average remaining working lives of participating employees
Provision booked in the balance sheet:

PBO - FVA – unrecognised actuarial differences – other amortisable changes
other amortisable changes include amortisation of prior service cost and amortisation of transition
Provision
assets or liability
booked in the
BS Deferred tax assets:
Pension provisions booked in the P&L are generally not tax deductible. The tax deduction only
applies when the expenses are recognised. A deferred tax asset is therefore booked in the balance
sheet which represents the amount of tax that will be saved

PROFIT & LOSS – COMPONENTS OF PENSION EXPENSES
Components making up the expense for the financial year:

Service cost: present value of benefits acquired by employees during the financial year (operating charge)
Interest cost: increase in PBO due to the impact of 1 year less of discount than the previous year in the PBO valuation
Expected return on dedicated plan assets (if any)
Actuarial gains and losses
- recognised as profit/loss immediately

- unrecognised if without the corridor limits (deferment profit/loss)
Other amortisable changes and other expenses
Two components are financial items under the current IAS rule:
Possibility of recording the expense as a single amount under operating expenses
Or possibility of separating the two financial components from the total expenses and to record them into the financial
result
CASH FLOW – PENSION ACCOUNTING AND CONTRIBUTIONS

Payments made by the company:
Direct payments to employees are booked as repayments of the “pension debt”, they are not accounted as expenses in
the P&L
Payments to third parties (pension funds, insurance companies, etc) to cover the company’s obligations are booked as
additional assets to cover the pension liability
Payments received by the company from third parties managing the plan assets are deducted from plan assets
Direct payments by third parties to employee reduce both actuarial losses and the plan assets managed by those
third parties
Balance sheet pension provision changes each year as follows:
Pension provision year n = Pension provision year n-1 + P&L pension expenses - pension cash flows

The impact on net debt should equal the amount a company would have to pay a third party in order to
outsource the liability
As such, we include net pension liabilities (pension liability – fair value of dedicated assets) in
net debt
Impact on net Net pension liability = (PBO – FVA) x (1 - tax rate)

debt or Net pension liability = (PBO – FVA) – deferred tax assets related to pension provision
If the amount of deferred tax assets generated by pension provision is provided in the company’s
annual report
We regard only pension service costs as real operating costs with cash effects
The interest charge is assimilated to an investment charge which should be restated below EBIT with
financial charges
IAS rules do not provide for a compulsory treatment of P&L pension expenses, they can be (i) all booked
as a single operating cost or (ii) split between an operating cost (service cost) and financial costs
Profit & Loss
Aggregates If case (i) Adjusted EBITDA = EBITDA + Total net pension cost - Service cost
Adjusted EBIT = EBIT + Total net pension cost - Service cost
If case (ii), no adjustment

Other debt-like provisions
Provisions need to be classified into the following categories:

Key points to bear in Debt-like provisions (other than pensions): for example restructuring provisions, environmental
mind relating to debt-like damage, etc
provisions adjustments
Working capital provisions: for example provisions for sales returns; after-sale warranty provisions,
are the following:
• BS financial analysis etc
• Accounting treatment See notes to financial statements to find details on the provisions, in order to classify them as net debt or
• P&L financial analysis working capital
BS financial
• Valuation Main issues in identifying the nature of the provisions:
analysis
Recurrence: linked to regular operations or exceptional
Value taken into account in the books: present value is not allowed under IFRS (except for pensions)
Deferred tax asset
Make sure that you take into account provisions net of the potential deferred taxes linked to them
Please note that several provisions are already deducted from the assets side, such as bad
debts, provisions on inventories
IAS (37) does not allow a provision to be created for the mere possibility of something occurring in the
Accounting future. There must be an actual obligation and future settlement must be probable and measurable
treatment General provisions and provisions for major repairs and maintenance are not allowed under IFRS
Restructuring provisions: although allowed under IFRS these are likely to be lower and recorded later
Provisions classified as debt: The relating charge must be eliminated from the P&L, in order to avoid
double counting them
P&L financial
analysis* Provisions classified in working capital: Make sure that the related charge is accounted for above
EBITDA in the P&L, so that the charge (which is a non-cash item) is set off by the positive change
under working capital in the cash flow
Be careful not to double count the provision in the flows when it is already booked as debt-like
Valuation For WC-like provisions, flows to be taken either above EBITDA or separately in the flows, not twice
*Note: Consistency with balance sheet required

Non operating assets
How to account for assets such as

Associates
Main issue JVs
Financial assets
Other non operating assets
Good understanding of the consolidation method used for the asset is needed: proportional (often
JVs), equity method (associates) or not consolidated
Accounting Beware that in IAS financial assets (non consolidated) are put in 3 possible categories:
treatment “held for trading” booked at fair value
“held to maturity” booked at amortised cost
“available for sale” booked at fair value
General guideline:
Sum-of-the-parts approach
Value each asset at its fair value
Proportional consolidation - Two situations:

Same business and same region: work on a consolidated basis / same discount rate / same
Valuation multiples
impacts Different business or different region: separate valuation if possible
Associates:
Financial analysis: the P&L line is a net income line and the BS shareholders equity
Valuation: Market value if available, P/E or P/B multiples and DDM
Other non operating assets (buildings, land, etc.): market value if available, restate rentals, think
about the capital gain tax issues

Dilutive instruments – Stock-options
Under IFRS, share-based payments are considered as an “economic advantage” remunerating

services rendered by the employee
Basic The allocation of shares or share options to the employee is a substitute for salary, and can be
principles considered as similar to a purchase of service, which must be accounted for by the company when the
service is provided
IFRS treatment is broadly similar to US GAAP
Up until now, in European countries, companies have not recorded any, or only a partial, expense for
Potential stock compensation.
impact on In transitioning to IFRS, companies are allowed to record an expense only for options granted after
issuer’s P&L Nov-7, 2002 Therefore, there is likely to be some kind of ramp-up period with regard to the P&L impact
in the coming years (probably until 2009 or 2010)
Recognition of a charge in the P&L, corresponding to the fair value of the share-based payment and
expensed over the vesting period. Fair value is added to equity
Fair value must be calculated at grant date and take into account potential cancellations
(expected resignations, probability of target performances not being reached, etc.)
Accounting
The fair value calculated at grant will not vary with changes in underlying stock price (“historical
treatment
cost”). It can only be adjusted in case of a change in assumptions on the potential number of
shares to be issued (ie, turnover of employees, etc). The impact of such changes will be accounted
for through the P&L, in accordance with IAS 8 rules

Dilutive instruments – Stock-options (cont’d)
MAIN IMPACTS TO BEAR IN MIND
Financial Analysis
For comparison purposes, we recommend that you do not restate the P&L from expenses related to stock-
options schemes
Similarly, fair value of these schemes should not be subtracted from equity in the Balance Sheet
Valuation – Trading multiples
Under IAS, the information available in the balance sheet is the “historical” fair value of a stock-option
scheme (fair value at grant). This value remains unchanged throughout the duration of the scheme and does not
correspond to its fair value at the date the valuation exercise is performed:
1 If the amount of potential stocks to be issued is significant: calculate the fair value of the schemes at valuation
date. Method cumbersome to implement (binomial tree model to be used for each scheme)
2 Or use the treasury shares (currently used in trading multiples model), i.e. potential dilution, depending on
the strike price vs current share price: much more simple method, but does not take into account the “time value”
of the options
In any case, the stock-option expense in the P&L has to be eliminated
Under IAS, all treasury shares should be deducted from equity and should not be treated as cash
equivalents. Number of shares used in trading multiples model should be adjusted consequently
Valuation – DCF (impact of potential stock-options plans in business plans)

This expense is a non-cash charge and should be eliminated in the cash flows : i.e. expense added back
into the flows, minus related deferred tax assets
Potential impact in future flows will only consist of the spreading of the expense over the vesting period
However, if the business plans provided by your clients include estimated stock-options costs, this charge
needs to be restated

Dilutive instruments – Stock-options (cont’d)
EQUITY-SETTLED PLANS CASH-SETTLED PLANS

Two basic types of
share-based employee
compensation: Comments Comments
• Equity-settled plans
• Cash-settled plans The company receives services from the employee The company receives services in exchange for
in exchange for equity instruments. In other words, amounts based on the value of the shares or share
the employee receives shares or share options options. In other words, the employee still
as part of his/her remuneration in place of a receives cash, but it is calculated based on the
cash salary or bonus value of the equity instrument at that time
Valuation impacts Valuation impacts
Equity-settled plans do not have any effect on the Cash-settled plans lead to the recognition of a
net worth of the entity (until they are actually liability
exercised) Unlike equity-settled plans, cash-settled plans will
When computing multiples, EBITDA, EBITA and net generate a cash-out for the entity and no shares will
income should be adjusted for equity-settled be issued
instrument expenses, as their impact is taken into These instruments do not have any impact on the
account in the diluted number of shares (otherwise calculation of the diluted number of shares
double-counting)
Provision recognised at the valuation date should
For a DCF valuation be included in other debt-like provisions. It should
Since these expenses are non-cash charges, add be noted that these provisions are not tax
back P&L expenses relating to existing stock deductible, so don’t forget to take the tax effect into
option plans to the free cash flow. account (as for pension deficits in most countries)
Make sure that the tax computation is based on an Check that expenses related to cash-settled plans
EBITA before share-based payment, as they are not vested at the valuation date are included in
not tax-deductible (in most countries) EBITDA forecasts of the company (as they are not
Don’t forget to include these dilutive instruments in recognized in the balance sheet yet)
the calculation of the diluted number of shares

Dilutive instruments – Convertible bonds
At issue: the value of the debt component would typically be the present value of the future payments
Under IAS 32 a standard Accounting discounted at the prevailing market rate for a similar debt instrument
convertible bond is split for the debt During the life of the CB: the value of the bond component is adjusted to reach the redemption price
into its component parts component at maturity
with:
• The debt component
In case of redemption: the carrying value of the liability is eliminated with the payment of the principal
reflected along with other
debt instruments At issue: typically calculated as the difference between the CB price and the bond value; or measured
• The equity component using an option pricing model
reflected in equity During the life of the CB: remains in equity (reserves) unchanged
Accounting
for the option In case of conversion: option component transferred out of reserves into Share Capital and Share
component Premium with the bond component
In case of redemption: the option value remains in equity (can be reclassified from one kind of reserve
to another)
Financial Analysis - Current treatment

If the instrument is out of the money: Considered as financial debt, at book value
The P&L comprises:
Financial If it is in the money: treasury shares method applied, i.e. dilution (see stock-options). Make sure you
• the accrued cash
coupon / YTM analysis & exclude the related financial interest expenses from the P&L
• the accretion of the IFRS (IAS 39) IFRS ruling on Financial and hybrid instrument
liability component up to IFRS accounting treatment: Market value of financial instruments is booked at issue date and does
the repayment amount. not change over time, including exchangeable bonds
This part is non-cash
If listed instrument: Market value (which integrates both components of the title)
If unlisted instrument:
Financial Value the instrument thanks to ECM models (possible if the underlying asset is listed)
analysis &
IFRS (IAS 39) If impossible, use the treasury shares method as no better estimate can be made
New shares created = # of outstanding bonds x [(conversion ratio x Bond Price – (1xNominal bond Price)]
Bond Price

Operating / financial lease
A lease is an agreement INTRODUCTION

whereby the lessor gives
the lessee the right to From an accounting stand point, and when consolidated accounts are prepared, leases are separated into two categories:
use an asset for an Operating leases (off-balance sheet commitment, expense part of the operating expenses in the P&L)
agreed period of time in Finance leases (on balance sheet)
return for a future
payment or a series of Each standard has its own method to distinguish the two categories:
future payments US GAAP: FAS 13, 4 criteria
French GAAP : OEC 29, also 4 criteria consistent with US standards
IFRS : IAS 17, classification should depend on the substance of the transaction (who is bearing the risks and the
advantages linked to the lease contract depending on the professional judgment of the auditor) rather than on the form of
the contract
Rating agencies account for all the leases as finance leases when computing credit and financial ratios
RATING AGENCIES APPROACH
Rating agencies adjust the financial ratios of corporate lessees by capitalising all their assets under operating leases and
the related liabilities considering that it reflects their expected financial debt obligation
Rating agencies use traditionally two methods to perform such restatement:

Apply a multiple to the actual rental expense of the last published annual report
Calculate the present value of the forecast minimum rental expenses over the remaining life of the lease whenever the
information is available

Operating / financial lease (cont’d)
The implicit interest FINANCIAL ANALYSIS

expenses on the lease
are defined as the P&L
company’s current cost SG&A expense is reduced by the operating lease expense: EBITDA is increased by the operating lease expense
of debt times the D&A expense increases by the implicit lease depreciation: EBITA is increased by the implicit interest expense on the
estimated lease
lease
obligation
Interest expense is increased by the implicit interest expense on the lease: Net income is unchanged
The implicit lease Balance sheet

depreciation is defined as Net debt is increased by the lease amount (computed based on the net present value of lease payments or with a
the difference between multiple of rental expense)
the total rental expense
Fixed assets are increased by the same amount
and the implicit lease
interest expenses Cash flow statement
Funds from operations are increased by the implicit lease depreciation expense
Financing cash flows are increased by implicit interests
When performing a
VALUATION IMPACTS
valuation exercise, one
should look at three Reconsolidating operating leases in a valuation leads to the following adjustments:
issues before deciding
DCF:
whether or not to
consolidate operating - The financial portion of the rental expenses should be removed from the FCFF in the Enterprise Value computation as
leases: they are considered financing flows, thereby increasing the EV
• IFRS treatment - Implicit depreciation is added to the fixed assets annual depreciation
• Market practice - Total lease obligation is added to net debt
• Amounts at stake
Multiples:
- Consolidating operating leases helps to make companies more comparable

- For EV-based multiples only
- Add to EV the amount of the lease: Use EBITDAR instead of EBITDA

Purchase Price Allocation (“PPA”)
Purchase price allocation COMMENTS

(PPA) is mandatory for
all companies using Goodwill is the part of the price paid by the bidder that cannot be allocated to an existing asset of the target at the
IFRS, in the 12 months acquisition date. It can be viewed as the recognition in the balance sheet of the ability of the target to generate additional
following the closing date profits in the future
of an acquisition According to IFRS 3, goodwill is not amortized but tested for impairment each year. Consequently, if the target does not
realise profits as expected when acquired, the target will be considered to have been overpaid for and an impairment
expense will be booked
The cost of a business Impairment of goodwill creates volatility in the financial statements and may significantly impact earnings (Vodafone or
combination is equal to France Telecom for example)
the total consideration Main impacts for companies:
paid by the acquirer to
Assets and liabilities of the acquired company are now recorded at fair value
the sellers
New assets must be recognized (client relationship, backlog, etc.)
This cost must be
allocated by:
• Recognising the
acquiree’s identifiable DETERMINATION OF GOODWILL
assets and liabilities at
their fair value at the date Fair value adjustments = Fair value – Book value
of acquisition
• Recognising goodwill,
equal to the difference
between:
- the cost of the business
combination and
-the share of the acquirer
in the restated net worth
of the acquiree
Price Target Goodwill before Tangible Intangible Liabilities* Residual

EqV PPA assets assets Goodwill
*Note: Liabilities with lower fair value than book value

Appendix
Section

Appendix – European & US market parameters
Market parameters in Euro – Associés en Finance - Methodology
METHODOLOGY
Associés en Finance’s model, Trival, is based on a 3D approach where each share is represented in the “market plan” with
its own characteristics including risk, return and liquidity
Shares that are located above the plan have an expected return higher than the market, and are therefore under valued
while shares under the market plan are over valued
Trival explains more than 65% of the changes in share price
Recently, approximately 450 companies in the euro zone were included in Trival
For each company, Trival computes:
An expected return, i.e. the discount rate equalizing the free cash flow to equity (i.e. net of financial costs) and the
market value of the underlying share
A beta, representing the risk of the underlying share
A liquidity ratio
PROJECTED FREE CASH FLOW TO EQUITY

Trival’s matrix
Years EPS growth Pay-out
Period 1 1-9 Market forecasts, convergence towards a target financial Depends on the sector
structure
Convergence towards the target financial structure of the

Period 2 9 - 15 Depends on the sector
sector. ROE equal to 10% for the whole company sample
Liquidity Risk
Return Source: Associés en Finance
European & US market parameters CFYETS – October 2009 101

Market parameters in US dollars – BNP Paribas Equities - Methodology
METHODOLOGY
Like Exane BNP Paribas, BNP Paribas Equities methodology is based on the Gordon-Shapiro formula. Assuming that the value of a
share is equal to the present value of its forecasted dividends
i =∞ DIVt ,t +i
Ct = ∑ PDR t = TRA t − TL10 t
i =0 (1 + TRAt ) i
Where:
Ct : Value of the index at the date of computation
DIVt : Dividend forecasted in year i, equal to the product of the expected EPS by the Pay-out
TRA t : Investment rate return determined by equalising the value of the index at the date of computation and the present value of
dividends
PDRt : Equity risk premium at the date of computation
TL10 t: Market rate for a sovereign bond with a maturity of 10 years
PROJECTED DIVIDENDS
Years EPS growth Pay-out
Period 1 1 IBES Depends of the sector
Period 2 1-6 Depends on the sector Depends on the sector
Computed using a geometric sequence. The common ratio

Period 3 After 6 Transition
includes 2 factors: inflation and real growth of earnings
Source: BNP Paribas Equities

Market parameters in Euros – Historical data
The Euro expected return 5-YEAR EURO EXPECTED RETURN EVOLUTION

has decreased over the
last seven months after 14%
the historical highs of
12%
February 2009
10%
The Euro expected return
is now 9.88% vs. 12- 8%
month and 5-year 6%
averages of 11.99% and
9.33% respectively 4%
2%
Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
10-year Euro risk free rate European equity market risk premium
Since Euro risk free rates

are at historical lows to
reflect declining 5-YEAR EURO EQUITY MARKET RISK PREMIUM
expectations in terms of
inflation and GDP growth,
equity market risk 12%
premium recently went
through the roof mainly 10%
due to a global repricing
of risk 8%
The Euro equity market 6%

risk premium reached
4%
10.95% in February 2009
2%
This is to be compared
with 12-month and 5-year
averages of 8.65% and
5.58% respectively Source: Associés en Finance

Market parameters in US dollars – Historical data
The US expected return 5-YEAR US EXPECTED RETURN EVOLUTION

has decreased over the
last seven months after 12%
the historical highs
beginning of 2009 10%
8%
6%
The US expected return is
now 10.47% vs. 12-month
4%
and 5-year averages of
11.37% and 9.60% 2%
respectively Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
10-year US risk free rate US equity market risk premium
5-YEAR US EQUITY MARKET RISK PREMIUM

The US equity market risk
premium reached 9.36% 10%
in December 2008
8%
This is to be compared
with 12-month and 5-year
averages of 8.20% and 6%
5.47% respectively
4%
2%

Market parameters in euros & US dollars – Data
Equity market risk

Risk free rate Expected return
premium
Spot 3.22% 6.66% 9.88%

Europe 1-month average 3.24% 6.91% 10.15%
3-month average 3.29% 7.38% 10.67%
6-month average 3.28% 8.06% 11.34%
9-month average 3.23% 8.73% 11.96%
12-month average 3.34% 8.65% 11.99%
Source: Associés en Finance
Equity market risk

Risk free rate Expected return
premium
Spot 3.32% 7.15% 10.47%

US 1-month average 3.39% 7.23% 10.62%
3-month average 3.50% 7.38% 10.88%
6-month average 3.29% 7.87% 11.16%
9-month average 3.08% 8.27% 11.35%
12-month average 3.18% 8.20% 11.37%

This presentation has been prepared by BNP PARIBAS for informational purposes only. Although the information contained in this presentation has been
obtained from sources which BNP PARIBAS believes to be reliable, it has not been independently verified and no representation or warranty, express or
implied, is made and no responsibility is or will be accepted by BNP PARIBAS as to or in relation to the accuracy, reliability or completeness of any such
information.
Opinions expressed herein reflect the judgement of BNP PARIBAS as of the date of this presentation and may be subject to change without notice if BNP
PARIBAS becomes aware of any information, whether specific or general, which may have a material impact on any such opinions.
BNP PARIBAS will not be responsible for any consequences resulting from the use of this presentation as well as the reliance upon any opinion or
statement contained herein or for any omission.
This presentation is confidential and may not be reproduced (in whole or in part) nor summarised or distributed without the prior written permission of BNP
PARIBAS.
© BNP PARIBAS. All rights reserved.

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Valuation fundamentals

Introduction to BNP Paribas's methodology

CFYETS - October 2009

CFYETS – October 2009 2

9:00 – 9:30 Introductory presentation

09:00 – 13:00 From firm value to share price

Thursday 22/10 14:00 – 14:30 Case study introduction

9:00 – 11:00 Financial analysis case study debriefing

Friday 23/10 11:00 – 13:00 Multiples

8:00 – 11:00 Multiples case study debriefing

9:00 – 11:00 DCF case study debriefing

Introduction – Seminar schedule and objectives CFYETS – October 2009 3

Based on a combination Financial analysis

Introduction – Seminar schedule and objectives CFYETS – October 2009 4

CFYETS – October 2009 5

Global network of 400

Restructuring North & South

Introduction – BNP Paribas Corporate Finance CFYETS – October 2009 6

CFYETS – October 2009 7

Valuation Fairness Opinion Committee

Introduction – Business Valuation Team CFYETS – October 2009 8

Pascal Quiry Xavier Le Roy

Thibaud De Maria Olivier Simon Damien Anzel Javier Rodriguez

Introduction – Business Valuation Team CFYETS – October 2009 9

CFYETS – October 2009 10

Corporate valuation is performed with a view to:

Comparing prices with intrinsic values (M&A, structured finance)

Determining an investment strategy (portfolio management)

Determining the company's prospects and corporate strategy

Risks: image, inconsistencies, market turmoil, legal

- Bulge brackets are very aggressive

For a third party (fairness opinions)

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 11

Intrinsic approach Analogical approach Book value approach

Intrinsic approach Analogical approach Book value approach

Note: k: cost of capital, ke: cost of equity, kd: cost of debt

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 12

FOCUS ON DIRECT AND INDIRECT METHODS

Indirect methods Direct methods

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 13

A valuation exercise KEY VALUATION METHODOLOGIES

Indirect approach Direct approach

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 14

There are several

Other debt-like items = Debt-like provisions x (1 – Tax rate)

items Provisions for legal claims

Note that operational provisions, including warranty provisions, are excluded

Minority Market value can be used

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 15

In order to obtain the

Alternatively, the treasury method can be implemented

DILUTED NUMBER OF SHARES

Introduction – Introduction to Corporate Valuation CFYETS – October 2009 16

CFYETS – October 2009 17

It is a rational study of a company both through economic and financial data

To understand the business of the valued company i.e.

analysis when returns it can generate

Back to basics – Financial analysis wrap-up CFYETS – October 2009 18

1 First, have a good understanding of the business...

2 …and the accounting choices made by the company...