Caraco Pharmaceutical Laboratories (CPD) Inactive
Filed: 18 Apr 11, 12:00am
Exhibit (c)(2)(i)
Discussion Materials Regarding
January 7, 2011
Project GIBSON
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Table of Contents
I. Income Statement Discussion
II. Discounted Cash Flow Analyses
III. Market Valuation Metrics
IV. Potential Talking Points with Sun
Table of Contents
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Income Statement Discussion
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I/S - Original Model (Dec. 22, 2010)
Income Statement Discussion
§ Shown is the Income Statement from to Dec. 22, 2010, prior to the adjustments due to the Consulting
audit that demonstrated problems with manufacturing operations
audit that demonstrated problems with manufacturing operations
§ Revenues, expenses and EBIT are shown by operating unit: Distribution, Contract Manufacturing and
GIBSON Manufacturing
GIBSON Manufacturing
§ Assumptions:
§ Distribution will end at year end 2012
§ Manufacturing will recommence January 2012
§ Based on Management’s projections
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I/S - New Model (Jan. 5, 2011)
§ Shown is the Income Statement as of January 5, 2011
§ Revenues, expenses and EBIT are shown by operating unit: Distribution, Contract Manufacturing and
GIBSON Manufacturing
GIBSON Manufacturing
§ Assumptions:
§ Distribution will end at year end 2012
§ Manufacturing will recommence March 2012, two months later than original plan (December
22,2010)
22,2010)
§ Includes additional changes by management to reflect new assumptions regarding contract
manufacturing and other items
manufacturing and other items
§ Based on Management’s projections
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Income Statement Discussion
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§ Shown is a comparison of the original model as of December 22, 2010 and Company’s revised model as
of January 5, 2010
of January 5, 2010
§ Based on Management’s projections
I/S Comparison - Dec. 22, 2010 vs. Jan. 5, 2011
-
Comparison = New Model - Original Model.
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Income Statement Discussion
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I/S Scenario 1 - Shut Down Mar. 31, 2011
§ Assumed that GIBSON’s manufacturing operations are discontinued March 31, 2011
§ Contract manufacturing assumed to continue as detailed in the Company plan (January 5, 2011)
§ GIBSON manufacturing expense assumptions:
Expense | 2012P (‘000s) | Expense % Remaining |
Material Charges | $434 | 0% |
Salaries & Wages(1) | 14,129 | NA |
Operational Supplies | 531 | 25% |
Chemical & Solvents | 247 | 0% |
Repairs & Maintenance | 608 | 25% |
Utilities | 1,146 | 25% |
Freight | 74 | 0% |
Legal & Professional(2) | 5,200 | NA |
Facility Maintenance & Security | 566 | 75% |
All Other Manufacturing Expense | 9,511 | 50% |
(1) Removed salary expenses allocated to Manufacturing for: Manufacturing, Packaging, Facilities, QC & QA, Commercial, Sales & Marketing, Salary Adjustments
and Bonus Payments; for 2012 $10.4 million eliminated and $3.8 million remain.
and Bonus Payments; for 2012 $10.4 million eliminated and $3.8 million remain.
(2) Removed Lachman Expense each year; for 2012 $3.8 million eliminated and $1.4 million remain.
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Income Statement Discussion
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I/S Scenario 1 - Shut Down Mar. 31, 2011
§ Shown is the income statement from Jan 5, 2011 adjusted to assume a plant shut down March 31, 2011
(see assumptions on prior page)
(see assumptions on prior page)
§ Assumes in-licensing capital expenditure of $10 million each year beginning 2012; amortized over 5
years
years
§ Flatline manufacturing expenses in future years, post 2012
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Income Statement Discussion
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I/S Scenario 2 - Shut Down Mar. 31, 2012
§ Assumed that GIBSON’s manufacturing operations are discontinued as of March 31, 2012
§ Contract manufacturing revenue and expenses per Management’s guidance, increased due to the site
transfer of select products from the GIBSON facility
transfer of select products from the GIBSON facility
§ GIBSON manufacturing expense assumptions from previous assumptions page
§ Flatline manufacturing expenses in future years, post 2013
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Income Statement Discussion
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I/S Scenario 3 - Jan. 5, 2011, Delayed 2 Quarters
§ Based on Management projections from January 5, 2011 with Manufacturing revenue and Material Costs
delayed 2 quarters
delayed 2 quarters
§ Assumes in-licensing capital expenditure of $10 million each year beginning 2012; amortized over 5
years
years
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Income Statement Discussion
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I/S Comparison - Jan. 5, 2011 vs 2 Quarters Adjustment
§ Shown is a comparison of January 5, 2011 model and the January 5, 2011 model adjusted assuming
manufacturing delayed 2 quarters
manufacturing delayed 2 quarters
§ January 5, 2011 model and the January 5, 2011 2Q delayed model are adjusted for in-licensing capital
expenditure of $10 million each year beginning 2012; amortized over 5 years
expenditure of $10 million each year beginning 2012; amortized over 5 years
Comparison = New Model - New Model (Delayed Two Quarters).
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Income Statement Discussion
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Discounted Cash Flow Analyses
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Key Assumptions Underlying our Analysis
Discounted Cash Flow Analyses
§ At the instruction of the Independent Committee (the “Committee”), we have performed discounted cash
flow analyses on different potential operating scenarios:
flow analyses on different potential operating scenarios:
– Base Case: Management’s current forecast through fiscal year 2016, which reflects the resumption of
GIBSON’s manufacturing activities in fiscal year 2012 (the “Forecast”) in addition to ongoing contract
manufactured business
GIBSON’s manufacturing activities in fiscal year 2012 (the “Forecast”) in addition to ongoing contract
manufactured business
– Scenario 1: The Forecast, with manufacturing activities terminating on March 31, 2011
– Scenario 2: The Forecast, with manufacturing activities terminating on March 31, 2012
– Scenario 3: Management’s current forecast above; however, adjusted assuming the ability to manufacture
products is delayed a further two quarters
products is delayed a further two quarters
§ We have been advised by the Committee that the Forecast examined by us has been reasonably
prepared on a basis reflecting the best currently available estimates and judgments of the senior
management of GIBSON
prepared on a basis reflecting the best currently available estimates and judgments of the senior
management of GIBSON
§ For scenarios involving the termination of manufacturing activities, we have relied on the advice of the
Committee regarding certain assumptions (e.g., shutdown costs, liquidation proceeds, etc.) to enable this
analysis and express no opinion with respect to the estimates and judgments on which those
assumptions are based
Committee regarding certain assumptions (e.g., shutdown costs, liquidation proceeds, etc.) to enable this
analysis and express no opinion with respect to the estimates and judgments on which those
assumptions are based
§ Further, we acknowledge to the Committee that adjustments to these assumptions may have a material
effect on the outcome of the discounted cash flow analysis
effect on the outcome of the discounted cash flow analysis
§ Finally, we are not expressing any opinion as to the relative merits of any alternative operating scenario
that might exist for GIBSON or the effect of any other transaction in which GIBSON might engage
that might exist for GIBSON or the effect of any other transaction in which GIBSON might engage
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Base Case - New Plan (January 5, 2011)
§ Based on GIBSON’s balance sheet and
cash flow projections for 2011-2016
cash flow projections for 2011-2016
§ EBITDA exit multiples ranging from 8.0x
to 10.0x
to 10.0x
§ Discount rates ranging from 11.0% to
15.0%
15.0%
§ Present value as of January 31, 2011
§ Net working capital (per Management
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
§ Reflects GIBSON’s common shares
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
Parameters
GIBSON Stand-Alone (Price Per Share)
Exit Multiple Range
Discounted Cash Flow Analyses
Discount
Rate
Rate
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Scenario 1 - Cease Manufacturing March 31, 2011
Parameters
GIBSON Stand-Alone (Price Per Share)
Discounted Cash Flow Analyses
§ Based on GIBSON’s balance sheet and
cash flow projections for 2011-2016
cash flow projections for 2011-2016
§ EBITDA exit multiples ranging from 8.0x
to 10.0x
to 10.0x
§ Discount rates ranging from 11.0% to
15.0%
15.0%
§ Present value as of January 31, 2011
§ Net working capital (per Management
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
§ Reflects GIBSON’s common shares
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
§ Flatlined manufactured operating expenses
after 2012
after 2012
Exit Multiple Range
Discount
Rate
Rate
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Scenario 2 - Cease Manufacturing March 31, 2012
Parameters
GIBSON Stand-Alone (Price Per Share)
Discounted Cash Flow Analyses
§ Based on GIBSON’s balance sheet and
cash flow projections for 2011-2016
cash flow projections for 2011-2016
§ EBITDA exit multiples ranging from 8.0x
to 10.0x
to 10.0x
§ Discount rates ranging from 11.0% to
15.0%
15.0%
§ Present value as of January 31, 2011
§ Net working capital (per Management
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
§ Reflects GIBSON’s common shares
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
§ Flatlined manufactured operating expenses
after 2013
after 2013
Exit Multiple Range
Discount
Rate
Rate
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Scenario 3 - New Plan (Two Quarter Delay)
Parameters
GIBSON Stand-Alone (Price Per Share)
Discounted Cash Flow Analyses
§ Based on GIBSON’s balance sheet and
cash flow projections for 2011-2016
cash flow projections for 2011-2016
§ EBITDA exit multiples ranging from 8.0x
to 10.0x
to 10.0x
§ Discount rates ranging from 11.0% to
15.0%
15.0%
§ Present value as of January 31, 2011
§ Net working capital (per Management
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
balance sheet projections) and capital
expenditures (includes $10 million per
year beginning 2012) held constant
throughout scenarios
§ Reflects GIBSON’s common shares
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
outstanding per 10Q as of 9/30/10, includes
Series B shares which convert 1:1
Exit Multiple Range
Discount
Rate
Rate
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Market Valuation Metrics
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Selected Publicly Traded Companies
Note: No selected company is directly comparable to GIBSON.
Market Valuation Metrics
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Market Performance of Selected Companies
Last Twelve Months
Source: FactSet as of January 5, 2011.
Market Valuation Metrics
(71.9%)
(9.6%)
25.1%
Last Three Years
(21.6%)
12.3.%
8.1%
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Selected Company Operating Metrics
3 Year Revenue CAGR (FY 2007-2010E)
3 Year EBITDA CAGR (FY 2007-2010E)
LTM Gross Profit Margin %
LTM EBITDA Margin %
Median: 8.1%
Market Valuation Metrics
Sources: SEC filings, CapitalIQ and FactSet Research Systems. Data as of January 05, 2011.
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Selected Company Revenue Valuation Multiples
EV / LTM Revenue
EV / CY 2011P Revenue
EV / CY 2010E Revenue
Market Valuation Metrics
Sources: SEC filings, CapitalIQ and FactSet Research Systems. Data as of January 05, 2011.
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Selected Company EBITDA Valuation Multiples
EV / LTM EBITDA
EV / CY 2010E EBITDA
EV / CY 2011P EBITDA
Market Valuation Metrics
Sources: SEC filings, CapitalIQ and FactSet Research Systems. Data as of January 05, 2011.
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Selected M&A Transactions
Sources: Capital IQ and public company filings.
Market Valuation Metrics
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Premiums in Public Acquisitions
§ William Blair analyzed 241 domestic public transactions announced since January 1, 2000 in which
1.0% to 49.9% of the target’s equity was acquired with the acquiror owning greater than 50.1% but
less than 99% of the target prior to the transaction. Upon completion of the transaction the acquiror
owned 100% of the target.
1.0% to 49.9% of the target’s equity was acquired with the acquiror owning greater than 50.1% but
less than 99% of the target prior to the transaction. Upon completion of the transaction the acquiror
owned 100% of the target.
§ William Blair compared the price of each transaction to the closing price of the target stock one day,
one week, one month, 90 days, 180 days, and 360 days prior to the announcement of the
transaction
one week, one month, 90 days, 180 days, and 360 days prior to the announcement of the
transaction
Source: FactSet Research Systems. Data as of December 28, 2010.
Market Valuation Metrics
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Premiums in Public Acquisitions
§ William Blair analyzed 42 domestic public transactions announced since January 1, 2000 in which
15% to 35% of the target’s equity was acquired with the acquiror owning between 65% to 85% of
the target prior to the transaction. Upon completion of the transaction the acquiror owned 100% of
the target.
15% to 35% of the target’s equity was acquired with the acquiror owning between 65% to 85% of
the target prior to the transaction. Upon completion of the transaction the acquiror owned 100% of
the target.
§ William Blair compared the price of each transaction to the closing price of the target stock one day,
one week, one month, 90 days, 180 days, and 360 days prior to the announcement of the
transaction
one week, one month, 90 days, 180 days, and 360 days prior to the announcement of the
transaction
Source: FactSet Research Systems. Data as of December 28, 2010.
Market Valuation Metrics
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Preliminary Talking Points
for Sun Negotiation
for Sun Negotiation
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Preliminary Talking Points for Sun Negotiation
§ The announced premium on December 6, 2010 of 5% represents a below median premium for the
transaction. This is the case for both:
transaction. This is the case for both:
– Public company acquisitions generally
– Public company acquisitions where the buyer owned greater than 50.1%, but less than 99.9% prior to
acquiring the remaining shares
acquiring the remaining shares
– Public company acquisitions where the buyer owned greater than 65.0%, but less than 85% prior to
acquiring the remaining shares
acquiring the remaining shares
§ At a proposed offer price per share of $4.75, it is not clear that the value of the shares has been
maximized
maximized
– The Independent Committee may want to consider an alternative to the current business plan, whereby
all manufacturing activities at the plant cease as soon as possible
all manufacturing activities at the plant cease as soon as possible
– The Independent Committee may consider other possible alternatives including finding alternative buyers
for the minority shares
for the minority shares
– The minority shareholders may not sell, leaving Sun as owner of less than the 90% threshold to complete
a squeeze out merger
a squeeze out merger
– Exploration of all of these alternatives take time and will delay a possible transaction with Sun
Potential Talking Points with Sun
In an attempt to maximize the potential value obtained in a possible transaction with Sun, we believe
the following points represent some of the key themes that should be developed during future
negotiations:
the following points represent some of the key themes that should be developed during future
negotiations:
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Preliminary Talking Points for Sun Negotiation (ctd.)
§ The announced share price has been deemed unsatisfactory by the market
– Immediately following the announcement, the stock price increased to a high of $5.29 on December 13th
due to the expectation that a higher price would be achieved
due to the expectation that a higher price would be achieved
– There have been numerous shareholder lawsuits filed against the Company on the basis that $4.75 per
share is inadequate
share is inadequate
– The Company has received correspondence from existing shareholders (including large institutional
investors) stating their opposition to the deal given the proposed price per share
investors) stating their opposition to the deal given the proposed price per share
§ To ensure an expeditious transaction is achieved, it is imperative that the Company achieve a
higher share price than $4.75 that will enable broad support from the minority shareholders. If not,
the deal will encounter several challenges:
higher share price than $4.75 that will enable broad support from the minority shareholders. If not,
the deal will encounter several challenges:
– Enhanced legal costs
– Delayed closing
– Deterioration of the value of the Company (i.e., lost employees, strained customer relationships,
distraction from consent decree remediation work, etc.)
distraction from consent decree remediation work, etc.)
Potential Talking Points with Sun
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