Exhibit 99.(c)(3)
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STRICTLY CONFIDENTIAL
DRAFT FOR INTERNAL DISCUSSION PURPOSE ONLY
PROJECT G
BASE LINE VALUATION
AND
TOB PREMIUM ANALYSIS
AUGUST, 2000
KPMG CORPORATE FINANCE
Table of Contents
I. Introduction V. TOB Premium Analysis
1.1 Background
1.2 Purpose and outline of the report
1.3 Definition of Fair market Value
1.4 Valuation Date
1.5 Scope of Procedures
1.6 Limitation and Assumptions
II. Significant events occurred since July 1999
2.1 Purchase of the headquartered land and building
2.2 Loan transaction to G
III. Executive Summary
3.1 FMV of G's equity
3.2 TOB Premium
IV. Base Line Valuation
4.1 Analysis of the valuation methodology
4.2 Quoted Share Price Method
4.3 Income Approach: DCF Method
STRICTLY CONFIDENTIAL, DRAFT FOR INTERNAL DISCUSSION PURPOSE ONLY
PROJECT G - BASE LINE VALUATION AND TOB PREMIUM ANALYSIS
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I. Introduction
1.1 Background
Minolta Co., Ltd. (hereafter, "Minolta") acquired effectively 57.1% of "G",
which is listed in the NYSE. The purpose of the acquisition was to maintain the
strategic competitiveness in the printer business. Since then, Minolta has been
undertaking the role of assisting "G" management in developing and attaining
objectives and goal of "G", together with providing financial support. Due to
the fact of the worldwide competitiveness getting intensified, Minolta considers
it necessary to reinforce the worldwide business strategy. In order to pursue
the difficult mission, making G as its 100% owned subsidiary becomes an integral
part of its key objectives.
1.2 Purpose and outline of the report
The following report is prepared by KPMG Corporate Finance (hereafter, "KPMG"),
based on the request from Minolta, to analyze and examine the points indicated
below.
- - Analysis of the fair market value of G
G's share is traded in the stock market, however, it is also necessary to
perform financial analysis focusing G's financial status, including the
profitability and financial capability to sustain the continuity of G on a going
concern basis. KPMG performed the valuation analysis of G's equity by applying
several methodologies that are commonly used for the valuation practice.
- - Analysis of TOB premium
G will become 100% owned subsidiary of Minolta by purchasing all (or the grater
part) of floating stocks if tender offer is successful. KPMG performs the
analysis of TOB premium, based on the case studies of the companies which became
the private after TOB process.
The purpose of this report is to provide the useful point of view for Minolta's
management, from the financial aspects, in order to make the necessary decision
for going private of G.
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1.3 Definition of Fair Market Value
The Fair Market Value ("FMV") is defined as a value at which a willing seller
and a willing buyer, both being informed of the relevant facts about business,
could reasonably conduct a transaction, neither party acting under compulsion to
do so. Meanwhile, TOB premium can be considered as the distinct concept from
FMV, since the premium itself is influenced by several specific factors, for
example, expectation of the probability of de-listing after completing TOB
process.
1.4 Valuation Date
June 30, 2000
1.5 Scope of Procedures
In order to perform the analysis, the following information have been provided
from Minolta.
- - Copy of the Stock Purchase Agreement, dated June 7th, 1999.
- - Form 10-K, Annual Report for the fiscal year ended 1999.
- - MQMS Consolidated Balance Sheet (Q4, 2000).
- - MQMS-Minolta Business Plan (FY2000~FY2003).
- - Outline of the land transaction by MIC.
- - Outline of the loan conditions from MLT to MQMS.
KPMG was not able to perform any further and detailed research such as the
interview to MQMS management.
1.6 Limitation and Assumptions
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This report has been prepared to analyze FMV and TOB Premium based on the
assumption that G becomes 100% owned subsidiary and de-listing afterwards,
solely for the purpose of providing the useful basis of management decision and
should not be used for any other purposes. Except as specifically stated in the
report, neither our report nor its contents is to be referred to or quoted in
whole or in part, in any registration statements, prospectus, public filing,
loan agreement, or other agreement or document without our prior written
approval. In addition, except as set forth in the report, our analysis and
report presentation are not intended for general circulation or publication, nor
are they to be reproduced or distributed to third parties without our written
consent.
This analysis contemplates facts and conditions existing as of the Valuation
Date. Events and conditions subsequent to that date may have a profound effect
upon the results of our analysis.
We have neither audited nor independently verified the information supplied by
Minolta. We have assumed that all information furnished is complete and accurate
to describe the status and prospects of G at the Valuation Date from an
operating and financial point of view. As part of this engagement, we have
relied upon publicly available data from recognized source of financial
information, which have not been verified in all cases.
We do not express an opinion, or any other from of assurance, on the
reasonableness of the underlying assumptions, or whether any of the prospective
financial statements used are presented in conformity with any professional
presentation guidelines. Further, there will usually be differences between
prospective and actual results, because events and circumstances frequently do
not occur as expected and these differences may be material.
We assume no responsibility for legal matters including interpretations of
either the law or contracts. We have made no investigation of legal title and
have assumed that owner's claims to property are valid. We have given no
consideration to liens or encumbrances. We assumed that all required licenses,
permits, etc. are in full force and effect.
Neither KPMG nor any individual signing or associated with this report shall be
required to give testimony or appear in court or other legal proceedings unless
specific arrangements have been made in advance.
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II. Significant events occurred since July 1999
2.1 Purchase of the headquartered land and building
G had concluded the lease agreement for the headquartered land and building with
W.P.Carey. Due to the deterioration of the financial status of G, Minolta
Investment Company ("MIC"), a US wholly owned subsidiary of Minolta, made a
decision to purchase the headquartered land and building from W.P.Carey. The
financing related to the transaction was done by Minolta. Currently, MIC
invoices the lease fee to G, taking into the related expense such as the finance
cost and the real estate retention costs.
2.2 Loan transaction to G
MIC loaned US$12.8 million on June 1999, and US$30 million during the period
from November 1999 to February 2000, respectively. The loan on June 1999 was
used for the repayment to Foothill Credit Facility and for the funding of
re-purchase of European and Australian subsidiaries. The loan during the period
from November 1999 to February 2000 was to apply for G's working capital. The
interest rate is LIBOR + 2.5%, and share certificates of European and Australian
Subsidiaries was held as a morgage.
The background of the aforementioned events was caused by the deterioration of
G's financial status and symbolizes that G's external financing capability could
be worsened.
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III. Executive Summary
3.1 FMV of G's equity
As a result of the analysis, G's FMV per share by applying the several valuation
methodologies can be described as below.
Quoted Share Price Method 2| 3| 4| 5| 6|
- ------------------------- --------|--------------------------------
High and Low of the analyzed period o--------------------- o
$2.66 $5.27
Quoted Share Price Method o---- o
- ------------------------- $3.82 $4.33
Average of the Analyzed Period
Discounted Cash Flow Method o---o
- --------------------------- $4.1 $4.6
The FMV per share is estimated in the
approximate range of $3.82 - $4.6
3.2 TOB Premium
Base Line Value (FMV) $4
TOB Premium 40% (Premium % based on the Case Study of US market.)
Offer price (Per share) $5.6
NUMBER OF SHARES
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Common Stock 13,266,131
Option 1,740,911
Total number of stock (100%) 15,007,042
minus Stocks owned by Minolta -7,570,000
Target number of share to purchase 7,437,042
CURRENT OWNED STOCKS Additional stocks Total owned stocks (%) Total amount
(in ,000 US$)
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7,570,000 7,437,042 15,007,042 (100%) 41,647
5,936,338 13,506,338 (90%) 33,243
4,435,634 12,005,634 (80%) 24,840
Above simulation is based on the case that the other shareholders accept
TOB offer price at $5.6 per share, and the offer price movement
does not take into the consideration.
IV. Base Line Valuation
G's stocks have been traded at NYSE, even after the acquisition of 57.1% by
Minolta. Taking into account that the stock price can be considered most
objective, because the price itself is constituted as a result of transaction
done by many investors based on their own perspective and valuation from several
aspects.
Meanwhile, because the trading in the stock market can be executed based on
the limited information such as publicly available data, the stock price is
affected irrationally by the effect such as the distribution of the rumor or
the market manipulation. KPMG considered the several valuation approaches
comprehensively in order to analyze the current FMV of G's stock.
4.1 Analysis of the valuation methodology
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In estimating the value of a company on a going concern basis, there are a
number of widely used and accepted valuation approaches. These commonly accepted
approaches for developing the FMV of the business are 1) Income Approach, 2)
Market Multiple Approach, and 3) Cost Approach. It should be noted that no
single approach automatically yields a definitive valuation.
4.1.1 Market Approach
The market approach is the methodology to estimate the value of the company by
applying the publicly traded price of the subjected company or the similar
publicly traded companies ("the comparable companies"). The example of the
publicly traded price is 1) the subjected company's own stock price in the stock
market, or 2) the comparable companies' stock price in the market, 3) the
trading price based on the past acquisition case. The methodology which uses 1)
is called "Quoted Share Price Method", the methodology which uses 2) is called
"Market Multiple Method", and the methodology which uses 3) is called
"Acquisition Multiple Method".
(1) Quoted Share Price Method
This methodology estimates the value of the company by analyzing the subjected
company's stock quotation in the market during specific period. The subjected
company G is still listed in NYSE so that this methodology can be considered
relatively objective.
(2) Market Multiple Method
This methodology estimates the value of the company by comparing the subject
company to similar publicly traded companies (or the "Comparable Companies". In
this approach, market multiples are derived from the financial data and stock
prices of similar publicly traded companies. These market multiples are applied
to the financial data (earnings, cash flow, book value, and etc.) of the subject
company to arrive at an indication of fair market value. Although, no single
company will exactly resemble the company to be valued, several selected
companies can provide a good collective benchmark.
KPMG performed the comparative analysis of the similar publicly traded
companies, however, there were no reasonably comparative companies with G taking
the enterprise scale, financial status (especially the current financial status
of G) into the consideration. For the comparative company analysis, please refer
to the attachment.
4.1.2 Income Approach
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Under the income approach, value of a company is basically derived from profits
the business generates in the future. In this valuation method, the subjected
company's future projection provides the basis. Discounted Cash Flow Method
("DCF") and Capitalization of Maintainable Earnings ("CME") can be considered as
the representative method.
(1) DCF method
In DCF method, all future benefits to be derived from the subjected company are
discounted by the appropriate discount rate to the present value. This
methodology is based on the concept that the future profit or free cash flow
derived from the subjected company's business will return to the investors who
initially invested to the business, and the investors judge the appropriateness
of the invested amount by considering the future distributive profit and the
business risk.
(2) CME method
In CME method, the subjected company's value is estimated by the capitalized
maintainable income based on the past financial performance and the foreseenable
future profit. "Maintainable Earnings" stands for the profit level in which the
subjected company can generate under the normal circumstances.
The business plan from FY 2000 to FY 2003 which was prepared by G management was
available for the preparation of this report. KPMG performs DCF method based on
the provided business plan, together with an in-depth analysis of the risk
surrounding G.
4.1.3 Cost Approach
The cost approach focuses on the balance sheet of a business. Adjusted Net Book
Value Approach is considered to be a representative method. This method is based
on the assumption that a value of business ownership interest can be supported
by the prices which investors need to pay if the same business were to be
reconstructed (or replacement value) or the prices which the subject company can
expect to receive in disposing its assets (liquidation value). Thus, the book
value adjusted to approximate the FMV of the assets owned and liabilities
assumed is considered to be the value of business ownership interests. For the
purpose of the analyzing the FMV of G's equity, the Adjusted Net Book Value
Method was excluded because the method had limited applicability in terms of
valuing a company on a going concern basis, and valuing intangible/off-balance
sheet assets such as goodwill.
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4.1.4 Valuation Methodologies, applied for G
Based on the consideration of each valuation methodologies, "Quoted Share Price
Method" of the market approach and DCF Method of the income approach were
applied in order to estimate the FMV of G's equity.
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4.2 Quoted Share Price Method
G's share is traded in NYSE. The quoted share price in the market can be
considered as fair and objective due to the fact that various investors trade
the stock based on their own perspective and valuation. Meanwhile, the quoted
share price may reflect the supply and demand of the market, or any specific and
irregular matters, so that it is necessary to perform the analysis of history of
Quoted Share Price in the market for certain period of time.
4.2.1 Point of the valuation
- - Analysis Period
June 1999 - June 30th, 2000
The share purchase agreement was concluded as of June 7th, 1999 and TOB
was executed in July. Therefore, for the purpose of analyzing the
quoted share price, the analysis period should be focused after the
announcement of TOB.
- - Calculation Method
1. Taking the highest quoted share price and the lowest quoted
share price during the analysis period as the range.
2. Simple average of the daily quoted share price during the
analysis period.
3. Weighted average of daily quoted share price by using the
daily traded volume during the analysis period.
4.2.2 Results of the analysis
The result of our analysis based on the quoted share price method is described
below.
High and Low of the analysis period $5.27 - $2.66
Average (Simple and Weighted) of the quoted share price $4.33 - $3.82
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4.3 Income Approach : DCF Method
Under the DCF Method, the projected future cash flow is discounted to the
present value by applying the appropriate discount rate. Therefore, two
valuation components such as the projection and the discount rate give the
significant impact to the result.
4.3.1 Business Projection
The projection itself is stated as "the management target", prepared by G
management. Looking back to the financial result for the fiscal year 1999, G
accounted for net loss of 27,448 thousands US$ not only by the amortization of
goodwill as a result of buying back the European and the Australian
subsidiaries, as well as the restructuring cost, but also the cost increase and
the general expense increase. G management estimated the financial projection as
below:
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
Sales (Growth ratio) 221,286 358,936 427,686 510,117 607,039
(62%) (19%) (19%) (19%)
Gross Profit (GPR) 44,281 99,161 116,560 137,732 163,901
(20%) (28%) (27%) (27%) (27%)
SGA (SGA ratio) 67,038 83,991 95,374 107,635 125,050
(30%) (23%) (22%) (21%) (21%)
Profit before tax (Profit ratio) -27,628 8,534 15,286 24,826 34,725
(2%) (4%) (5%) (6%)
(1) Verification of the business projection
KPMG was not able to perform the verification of the presented business
projection such as the detail assumptions, the extent of G management
commitment, and the possibility of the actualization of estimated figures. As a
result, it is difficult to verify the reliability of the presented business
projection. Therefore, for the purpose of performing the analysis of G's FMV,
KPMG considered not only the
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business projection, but also the financial risk which is possible to analyze
based on the available information.
(2) Growth rate of perpetuity value
The growth assumption of 0% to 1% based on the minimum growth was taken into
account for the FCF after the fiscal year 2003.
4.3.2 Cash Flow Adjustment
Certain cash flow adjustments were made to the projected earnings before
interest and tax (EBIT) in order to calculate the free cash flow.
(1) Depreciation expense / Capital expenditure
Depreciation expense and the capital expenditure is based on the provided
business projection, prepared by G management. However, KPMG was not able to
verify the reasonableness, as well as the detailed capital expenditure plan due
to the limited access to the information source.
(2) Amortization of Goodwill
The difference of purchased value and the net asset book value of European and
Australian subsidiary has been accounted for as "Goodwill". The amortization
expense is tax deductible, so that it is treated as the cash flow adjustment.
(3) Changes in working capital
The projected net working capital balance for the period between 2000 ~ 2003 is
in the range of 9% ~ 13% against the gross sales amount and the range can be
considered as reasonable. For the DCF valuation purposes, changes in working
capital of the projected net balance was applied.
(4) Interest expense
The projected interest expense was applied as the cash flow adjustment.
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4.3.3 Discount rate
Weighted Average of Cost of Capital ("WACC") was applied for the discount rate.
In order to determine the WACC, we have applied the following formula:
WACC = (COST OF EQUITY) X (WEIGHT OF EQUITY) + (COST OF DEBT) X (WEIGHT OF DEBT)
Where as the cost of equity ad cost of debt are calculated as shown below:
Cost of Equity = Risk Free Rate + (Equity Premium x Beta)
Cost of Debt = Borrowing rate x (1- tax rate)
The following factors were considered in calculation of WACC.
(1) Risk Free Rate: Yield of 20 years Treasury Coupon Bond, 5.4%.
(2) Equity Risk Premium: 8.5% (Ibbotson Associate, 1999)
(3) Market beta: 1 (G's own adjusted beta was 0.5, which is statistically
considered as outlyer so that KPMG applied 1for the valuation purpose.)
(4) Cost of Debt: 8.2%, based on the actual borrowing cost of FY 1999.
(5) Effective tax rate: 37%
(6) Risk Premium
1 Small Company Risk Premium: 3% (Ibbotson Associates, 1999)
2 Financing Risk Premium: 3% (Taking into account that G cannot
finance independently to sustain future growth.)
4.3.4 Other matters
G has the net operating loss carried forward, which can be offset against the
future taxable income. However, KPMG was not able to verify the possibility of
the realization of tax merit in the future as well as the available amount to
utilize for the future. KPMG taking 50% discount against the calculated value of
the net operating loss as the realization risk.
4.3.5 Results of the analysis
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Taking the aforementioned matters into the consideration, the equity value based
on the DCF Method was in the range of US$ 61,632 thousands to US$ 54,366
thousands. As a result of the analysis, the FMV of G per share was estimated as
below.
-------------------
US$ 4.6 - US$ 4.1
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V. TOB Premium Analysis
Purchasing the equities which are held by the minority shareholders by way of
TOB for the purpose of de-listing the subsidiary is the meaningful opportunity
for the majority shareholder to pursue the reorganization of business structure
based on the long term strategy. Simultaneously, after the success of TOB, there
will be no option left for the minority shareholders to sell its stocks.
Usually, TOB premiums provide the best opportunity for the minority shareholders
to accept TOB since the premium virtually represents the rationally estimated
future benefit.
KPMG performed the analysis of TOB premium paid, based on the publicly announced
data of recent TOB transactions that went private after the completion.
Average Deal Size Average Purchased Price per share Premium
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1 days 5 days 30 days
144 million US$ 10.3 US$ 38.3% 36.9% 44.7%
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TOB offer price, based on the FMV analyzed by KPMG and the necessary acquisition
cash can be analyzed as below.
Base Line Value (FMV) $4
TOB Premium 40%
Offer price (Per share) $5.6
NUMBER OF SHARES
Common Stock 13,266,131
Option 1,740,911
Total number of stock (100%) 15,007,042
minus Stocks owned by Minolta -7,570,000
Target number of share to purchase 7,437,042
CURRENT OWNED STOCKS Additional stocks Total owned stocks (%) Total amount
(in ,000 US$)
-----------------------------------------------------------------------------------------
7,570,000 7,437,042 15,007,042 (100%) 41,647
5,936,338 13,506,338 (90%) 33,243
4,435,634 12,005,634 (80%) 24,840
Above simulation is based on the case that the other shareholders accept TOB
offer price at $5.6 per share, and the offer price movement does not take into
the consideration.
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