Hsbc Holdings Plc · LSE:HSBA
Hsbc — Investor Presentation (June 2005)
50 slides from Hsbc's investor presentation, Jun 15, 2005
Slide 1: Insurance Solutions for M&A Risks
Insurance Solutions for M&A Risks 15 June 2005
Slide 2: UK M&A - Private Equity Perspective
UK M&A - Private Equity Perspective Graeme Strommen, National Head of Leveraged Finance MME
Slide 3: Content
Content 8Market Overview - Transaction Highlights 8Fund Raising 8Current Issues - Market Conditions 8Valuations 8What next ?
Slide 4: UK Buyout Market - Deals sub €1bn
UK Buyout Market - Deals sub €1bn (source Unquote) Deal Flow:- Sub €25m-100m €100m-1billion 8133 Transactions 849 Transactions 8Value €4.6bn 8Value €14.5bn 835% value increase 8130% value increase
Slide 5: Private Equity Activity
Private Equity Activity (source unquote) €100m-1bn Deals JP Morgan 3 Barclays Private Equity 3 Legal & General Ventures 3 3i 3 €25m-100m LDC 5 Barclays Private Equity 4 Gresham 4 3i 4 ECI 4 Sub €25m Northern Ventures 6 ISIS 5 Aberdeen Murray Johnstone 4 Barclays Ventures 4
Slide 6: Transactions €1bn+
Transactions €1bn + 84 investments total €6.7bn (€11.7bn 2003) 8Largest UK deal €2.6bn AA by CVC and Permira 8Charterhouse €1.9bn acquisition of Saga 8Allianz €1.2bn buyout of Four Seasons 8Apax/Permira €1bn take private of New Look
Slide 7: Fund Raising
Fund Raising ‘Let the battle commence !’ 8Recent surge in buyout firms raising increasingly large equity funds, however, debt portion of buyout deals may become harder to finance 8Significant fund raising activity taking place in USA and Europe. In Europe there are over 50 funds on the road with tar
Slide 8: Current Issues - Market Conditions
Current Issues - Market Conditions 82 tier market - Large LBOs vs Mid Market - Different characteristics 8LBO market - Credit markets losing a degree of momentum (Debenhams) - High Yield Bond market difficult for new issues - Dual track approach 8MME market - Less demanding multiples - Volumes demon
Slide 9: Current Issues - Valuations
Current Issues - Valuations PE Ratios Debt multiples highest since 1999 £10-50m - 13.5 £25-100m - 14x Distortion of valuations leading to narrowing of gap £100m+ - 15x between private and plc plc - 16.5x 3i’s return of £500m to shareholders - financial media view that they see the current market as
Slide 10: Secondary buy-outs v's Trade Buyers
Secondary buy-outs v’s Trade Buyers 8 In 2004, secondary MBO’s represented 37% of all deals by value (2003 21%) 8 2004-05 starting to see the return of some trade buyers - recent examples include Astron (RR Donnelly), Quorn (Premier Foods) 8 With increased trade interest there are fewer quality deal
Slide 11: What next?
What next? 8 Impact of inland revenue changes - still unresolved 8Sustainability of valuations 8Debt multiples peaked? 8Conflicting dynamics 8UK growth prospects v Europe
Slide 12: Introduction to Case Study
Introduction to Case Study Producers and bottlers of fizzy drinks Shareholding - 80% PE, 6% CEO, 2% FD, 12% Other Employees Incorporated 1962, refinanced 1995, MBO 2001 IPO or Sale? How can transactional insurance products / services help the sellers of UK Pop?
Slide 13: Warranty Insurance - Minimising Seller Risk in Tenders
Warranty Insurance - Minimising Seller Risk in Tenders 4PE Partners is winding down one of its funds (PEI) 4CEO looking to retire, FD joined 2 years ago 4CEO / FD only willing to give warranties up to limited £ 8Can Insurance be structured by sellers to offer the buyer comfort? 8How should they cont
Slide 14: Can Insurance be Structured by Sellers to Offer the Buyer Comfort?
Can Insurance be Structured by Sellers to Offer the Buyer Comfort? 4Seller Side Policy: •Protect the Management up to Warranty Cap or lower • Defence Costs Erode Limit of indemnity 4Issue: Warranty Quantum Offered may not be sufficient for potential bidders Solution 4 Buyer Side Policy: • Indemnifie
Slide 15: How Should they Control the Process?
How Should they Control the Process? 8HSBC approached by Sellers at an early stage 8Seller controls information flow 8Seller controls how insurers approached 8 Seller controls when insurer approached 8Limited lead insurers in Market 8Release policy to preferred bidder via data room or release 8Comme
Slide 16: How Much Cover Should Be Sought?
How Much Cover Should Be Sought? 4 Low Warranty Cap 4 Minimum Attachment Point - typically 2% deal value 4 Sellers and Buyers may share attachment point exposure 4 Buyer then takes out policy up to level of comfort required 4 Layering of Insurance depending on limit
Slide 17: Buyer Policy - The Potential Structure
Buyer Policy - The Potential Structure 35 Limit: £10,000,000 Rate: 3% 30 Premium: £300,000 Seller Risk 20 Limit £20,000,000 Buyer Risk £ million Rate: 3.75% of Limit Premium: £750,000 Primary Layer 10 Excess Layer 0
Slide 18: Issues the Buyer Faces
Issues the Buyer Faces 4 Process • Taking over the process • Obtaining a quotation • Policy Negotiations 4 Jurisdiction - buyer / regulatory tax issues 4 Pricing - Who pays? 4 Policy Exclusions • Specific indemnities / known matters • Future Warranties • Tax Disclosures • Completion Accounts/ Price
Slide 19: Environmental Liabilities
Environmental Liabilities 4Factory is a key asset £5million 4In preparation for MBI, Environmental Consultants engaged (2000) 4Discovered pre 1962 contamination of groundwater - oil storage tanks 4Clean-up costs estimate in 2000: £300,000 - £3,000,000 4Will the pollution have to be cleaned up ? 4Who
Slide 20: Historical Pollution
Historical Pollution 700,000 factories and areas of unlicensed filled ground dating from 1850 4Environmental Protection Act 1990 (enacted 2000) requires local authorities to search out and remediate Contaminated Land 4Strict Liability applies 4Legislation becoming more consistent and stringent acros
Slide 21: 1962 Map
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Slide 22: 2000 Environmental Investigations
2000 Environmental Investigations 1. Pollution of aquifer (groundwater) – statutory offence 2. Contaminate private drinking water abstraction 3. Explosive gases entering nearby houses Properties Chalk Aquifer Private Abstraction
Slide 23: 2000 Advice
2000 Advice 4Contamination did not exceed clean-up standards at the time 4Regulator did not require remediation but could not rule out future remediation requirements 4If remediation required, then cost could be from £300K to £3million 4PE Partners decided to accept the risk but to monitor the situa
Slide 24: Deal Options
Deal Options Seller Buyer 4Ignore ? X X 4Reduce Asset Price ? X (ü) 4Escrow / Fund ? X X 4Clean up voluntarily ? X (ü) 4Indemnity ? X (ü) 4Insurance ? ? ?
Slide 25: Environmental Liability Insurance
Environmental Liability Insurance 4Seller, buyer & funders can all rely upon policy 4Multi year policy (up to 10 years available) 4Multi-assignment in the future 4Covers Future legislation changes 4Known & Unknown Pollution 4Insured’s Business Interruption 4On and off-site Clean-up Costs 4Legal Defe
Slide 26: Outcome
Outcome 4Environmental Liability Policy bought 4Coverage: Known and unknown pre-existing pollution 4First Named Insured: Buyer 4Additional Insured: Seller & Funders 10 year duration £5million total cover £50K Retention £75K premium (one-off) paid for by Sellers
Slide 27: Environmental Liabilities
Environmental Liabilities 4Will the Contamination have to be cleaned up ? 4Who would pay for this if the original polluter no longer exists ? 4How to manage the uncertainty using insurance ?
Slide 28: Insurance Due Diligence
Insurance Due Diligence 4Grown through acquisition - insurance costs increased 4Claim for mesothelioma lodged and deafness issues 4No historic information regarding historical insurances 4Are the assets and revenues protected? 4Are the liabilities protected? 4Will the existing insurance transfer to
Slide 29: Objective - Due Diligence
Objective - Due Diligence Focus:- 4 Evaluation 4 Protection 4 Reliance 4 Return
Slide 30: Objective - Due Diligence
Objective - Due Diligence Finding the ideal balance between the Seller’s and Buyers requirements. Maximum Cash Out Minimum Cash In Minimum Retained Liability Minimum Assumed Liability Minimum Extra Costs Incurred Maximum Economic Protection
Slide 31: Due Diligence - Risk Mitigation
Due Diligence - Risk Mitigation 4 Businesses need to look closely at the risks they are exposed to and examine ways to minimise or even eliminate such risks. 4 There should be: è An appropriate risk management structure è Detailed Health & Safety Policy è Non-onerous contract terms & conditions è Co
Slide 32: Due Diligence - Risk Transfer Options
Due Diligence - Risk Transfer Options 4 Transfer to insurance market [some self-insurance] 4 Transfer of risk from the purchaser to the vendor, or vice versa through the terms of the Sale & Purchase Agreement 4 Self-Insurance - retaining the risk on balance sheet All elements of self-insurance shoul
Slide 33: Due Diligence - Assets & Revenues
Due Diligence - Assets & Revenues Question 1: Are the assets and revenues of UK Pop protected? [Sub-question: What are the key asset and revenue exposures?] 4 Damage to the Buildings, Machinery, Plant, Stock 4 Reliance upon particular plant / machinery - ‘bottlenecks’ 4 Engineering risks [breakdown,
Slide 34: Due Diligence - Assets & Revenues
Due Diligence - Assets & Revenues Example: Reliance upon particular plant / machinery - ‘bottlenecks’ Solutions for UK Pop: Some of the issues: 4 All Risks Business Interruption 4Short Indemnity Period - 24 months coverage with £40m sum insured 4Expensive equipment and 36-month Indemnity Period - 10
Slide 35: Due Diligence - Liabilities
Due Diligence - Liabilities Question 2: Are the liabilities of UK Pop protected? [Sub-question: What are the key liability exposures?] 4 Infringement of others’ Brand Image 4 Product Contamination / Recall - third party losses 4 Injury or disease of employees 4 Infringement of employees’ rights 4 En
Slide 36: Due Diligence - Liabilities
Due Diligence - Liabilities Example: Injury or disease of employees [asbestos, deafness, asthma, stress …] Some of the issues: Solutions for UK Pop: 4 Lack of protection against 4 Insurance solutions: accumulation of £25,000 each 4 Capping the deductibles at £250,000 loss deductibles without premium
Slide 37: Due Diligence
Due Diligence Question 3: Will the existing insurance transfer to Newco? 4 Property Damage / Business Interruption [inc. Terrorism] …….….ü 4 General Liability ………………………………………………………..ü 4 Employers’ Liability / Workers’ Compensation ..…………………...ü 4 Motor Damage / Liability ….…………………………………………..ü 4 Cred
Slide 38: Objective - Due Diligence
Objective - Due Diligence A well-conducted Insurance Due Diligence exercise will give the parties the tools they need, it is up to them how they are used. Focus :- Evaluation - As an aid to negotiation [both of price and terms of sale & purchase agreement] Protection - Statement of Adequacy Reliance
Slide 39: Prospectus Insurance
Prospectus Insurance 4Raising capital and selling shares through placing / offer and admission shares to stock exchange 4Directors nervous of corporate governance / exposures 4Corporate finance adviser wants indemnity and warranties 8Who is exposed? 8Are the Directors covered by existing directors i
Slide 40: Initial Public Offering
Initial Public Offering “Corporate Finance Adviser” – valuation - £100 million 4 PE I fund (£40 million), CEO (£3 million and FD - £1 million) - £44 million 4 Increased capital for expansion – new money - £5 - 10 million Plan: Placing and admission to AIM – raise £50 - £55 million and issue prospect
Slide 41: Who is assuming risk?
Who is assuming risk ? Who At How Risk Directors Executive – CEO / FD etc. ØLaw – FSMA / Companies Acts a ØContractual through NOMAD Agreement Non-Exec - New a Company ØThrough Mem / Arts of Company In Indemnifying Directors a ØLaw – FSMA / Companies Act ØContractual through NOMAD Agreement Directly
Slide 42: Quantum and Exposure Period
Quantum and Exposure Period Admission to AIM Profits warning 70 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 Year Issue: When will a claim occur? 6 year statutory time limitation what about after-market What it the maximum loss? Amount raised? Legal costs?
Slide 43: Existing Directors Insurance
Existing Directors Insurance Directors Insurance – “indemnifies the Directors and Officers for Loss arising from alleged wrongful acts in performing their duties.” Are they covered? 4 Material transaction 4 Prospectus Exclusion – no cover 4 Advise insurer – offers to remove exclusion for additional
Slide 44: Who is assuming risk?
Who is assuming risk ? Who At Directors How Risk Insurance Directors Executive – CEO / FD ØLaw a a ØContractual - ? Non-Exec - New Provided wrongful act a a Company In Indemnifying Directors a a Ø Mem / Arts ØLaw Directly a r ØContractual Shareholders Selling shareholders ? ØContractual r Controllin
Slide 45: Quantum and Exposure Period
Quantum and Exposure Period Admission to AIM Profits warning 70 (extended cover) 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 Year Issue 4Renewal: Insurer changed – imposes prior circumstances exclusion and retro date inception 4Profits warning – accounting issue – prospectus claim covered
Slide 46: Prospectus Insurance
Prospectus Insurance Prospectus Insurance – “indemnifies the Insureds for Loss arising from Securities Claims arising during the Period of Insurance” Definition 4 Loss - damages, settlements, legal costs 4 Securities Claims - any alleged misrep, error or omission in issue documents [&/or claims unde
Slide 47: Who is assuming risk?
Who is assuming risk ? Who At Prospectus How Risk Insurance Directors Executive – CEO / FD ØLaw a a ØContractual Non-Exec - New a a Company In Indemnifying Directors a a Ø Mem / Arts ØLaw Directly a a ØContractual Shareholders Selling shareholders ? a ØContractual Controlling shareholders ØLaw a a C
Slide 48: Outcome
Outcome 4 Directors’ Insurance arranged to provide on-going protection of board but excluding Prospectus – Limit Insurance: £10 million – Period: Annual – Premium: £15,000 plus taxes 4 Prospectus Insurance arranged;- 4 Insured : Directors, Company, Selling Shareholders (CEO and FD), Controlling Shar
Slide 49: Did they IPO?
Did they IPO ? 4Drinks sector hit by scare of Citrix 2 in Europe 4Investors nervous of sector 4………100% sale preferred by sellers
Slide 50: Thank you for listening
Thank you for listening Questions ?