Corporate_Finance_Deep_Diagnostics_3 by Sutherland Global Services

Case Study and Sample Slides US: Cash Handling Systems

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US: Cash Handling Systems Client • The client is the Investment Banking Team of a leading US based employee-owned wealth management firm with with nearly $97 billion in client assets, offices in the US, Europe and Asia and serving clients across the globe

Project Scope • Sutherland closely assisted the client on a time sensitive deal within the US Cash Handling Segment: • In analyzing industry trends • Identifying potential acquirers and drafting their respective detailed company profiles • By detailing acquisition strategy of key market participants

Sutherland’s Solution • SGS conducted extensive secondary research to size the US Cash Handling industry segment: • And included a detailed industry overview which included important insights on the industry structure, recent events, key business drivers, trends and challenges and threats and opportunities • Identified each of the main end markets (Financial Institutions, Retail, Gaming and Cash in Transit), described recent trends and challenges in each of these end markets and identified the top players for every end market • Included an articulate Precedent Transaction Analysis that described recent acquisition deals within the cash handling industry • Included a detailed Comparable Company Analysis • Identified top potential acquirer companies, included company profiles for each one of them with a close focus on their financial analysis and acquisition strategy

• Benefits to the Client • Associating with the SGS team provided the Client with timely access to requisite research reports that helped in making informed decisions, reducing the turn around time for the deal execution and optimizing costs

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Industry Overview Disclaimer 

US cash handling products, counting / sorting / scanning etc., were approximately sized at $1 billion in 2007



Cash is here to stay – Inspite of the threat from plastic and e-money, cash transactions account for almost 50% of all payments by value. There exist immense potential with more than three-fourth trillion of dollar bills in 2005 (Federal Bank of New York) and eight billion worth of coins in 2007 in circulation (XXX estimates)

Cash Handling Systems

– Primarily caters to Banking / Financial services, Retail, Gaming, Cash in Transit Operators and Amusement services – Industry requires constant innovation and R&D on account of increased complexity and volumes in the cash handling / management resulting in large number of patents held by most companies 

Cash in transit operators

Retail and Gaming Back Office

Financial Institutional Back Office

Increasing circulation of counterfeit notes is also leading to significant growth in the cash handling products

– Recurring revenues constitute major pie of revenues due to 2-5 years in annual contracts thereby making customer retention a top priority

Retail and Gaming Front Office

Financial Institutional Front Office

– Increasingly a lot of retail and banking companies are moving to outsourcing the cash handling services to cash in transit operators leading to significant cost saving

Consumer

– Margin pressure is forcing the major players to shift their manufacturing base to China 

China has also emerged as a producer of cheap unbranded cash handling products resulting in fierce competition

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Industry Structure Disclaimer  Automated cash handling is the process of dispensing, counting and tracking cash through specially designed hardware and

software systems  The industry is highly fragmented and split between hundreds of small regional players with handfuls of big players operating

at global level  Significant cross selling opportunities exist for players with multiple products (breadth of front office and back office products)  Major clientele includes Banking / Financial services, Retail, Gaming, Cash Logistics services and Amusement services Money Handlings

Cash (coins, bills, vouchers)

E-money

Institutional Customers

Retail Customer

ATMs

Plastic money

Vending machine / components

Front office / TAU (Teller Assisted Units)

Back Office

Product vending machines – Currency validation components

Sorter

Gaming

Scanner

Ticket kiosks

Counter

Others

Dispenser

Banknote packaging

Software

Coin wrapper

Currency strapper

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EndDisclaimer Markets Financial Institutions  US commercial banking industry

grew at a CAGR of 5.5% during the period 2002-06 and is expected to grow at 4.4% between 2006-11  Banks are refocusing their

investments on branch banking, with a significant amount dedicated to teller automation  Increase of counterfeit money and

issuance of new banknotes in many countries is leading to significant rise in cash handling products  Demand for promoting accuracy

and efficiency in cash management by Basel II is expected to lead in significant demand  Outsourcing of cash handling

operations by central and local banks to cash logistics companies emerging as a major trend resulting in growth of cash logistics providers

Retail  The US retail industry is a $2.9

trillion industry in 2007  Escalating costs of cash handling at

the point of sale and cash back office is driving retailers to increase their focus on achieving better efficiencies in cash handling  On the consumer side there is

increasingly strong focus on providing self-service solutions such as currency converters  Approximately three billion worth

of coins were redeemed at supermarket machines in 2007  On the business processing side

retailers are increasingly seeking services of cash in transit operators (CIT)  Top Players ► XXX

Gaming  The US casinos and gaming industry

generated total revenues of $86.6 billion in 2006, representing an increase of 5.4% compared to 2005  Casino gaming is a growth industry

with resilience to economic downturns - State Governments use gaming as a mean to raise tax receipts during difficult times  Gaming operators keep a close eye

on cost and cash handling - require sophisticated and cost effective solutions for in-house processing of coins and banknotes  Despite advent of electronic

payment, customers still prefer the sound of coins paid out in cash  Top Players ► Global Cash Access ► Cash Systems

► Cummins Allison

 Top Players

Cash in Transit (CIT)  The US cash handling (cash in transit

) market stood at $ 2.9 billion in 2005 (RBC Capital Markets)  The players in the CIT space are

expanding their service offerings to include fully outsourced cash handling services including ATM servicing and cash logistics services such as currency and deposit processing, coin sorting and wrapping, and servicing of safes apart from the armored carriers  Most of the CIT players are

capitalizing on the trend towards outsourcing of vaulting and cash processing operations (backroom operations) by banks and retail customers  Brink’s, Garda, Loomis, Dunbar and

Pendum are the major CIT players in US  Top Players

► Cummins Allison ► Cash Guard AB

► De La Rue ► Cummins Allison

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Threats & Opportunities Disclaimer Threats / Challenges  Product innovation remains a key challenge  Increasing use of cash recyclers, as is the trend in Asia and Europe, by banks and retailers posses a significant threat

 Emergence of players manufacturing multicurrency equipments pose a significant challenge for the existing players to customers operating on global scale. Some such players include – Wenzhou Huangwei Enterprise Incorporation – Bcash Mechatronics  Piracy of intellectual property by Chinese firms  Emergence of low cost manufacturing capabilities of the Chinese firms would also result in significant threat to the margins of industry players  Increasing e-payments and emergence of wireless technology for transferring money through mobile/wireless pose a long term threat  Chinese, Japanese and European government’s view to treat currency processing and authentication as national security issue puts US cash handling equipment manufacturers at a competitive threat

Opportunities  Product expansion  Teller Assist Units (TAU) - renewed focus on branch banking and automation for cross-selling opportunities has resulted in a lot of focus on TAU segment from leading suppliers such as De La Rue, XXX Nixdorf and Glory  Coin converters and redeemers - Increasing focus on self service solutions by retailers offers significant growth opportunity  XXX  New customer segments - passport & identity cards validation, voting systems, mail room equipment provide new opportunities to leverage the existing technology  Emerging trend by retailers and banks to bring about efficiencies through outsourcing of end to end cash processing services offers opportunities for industry players to expand the service offering  Counterfeit currency  Rising circulation of counterfeit dollar bills in countries like china, Korea is leading to significant demand of currency validator  Increasing regulation from central banks on bank branches to have a currency sorter / validator (e.g. India)

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TopDisclaimer Potential Acquirers  Top 5 potential acquirers – – – – –

XXX DXX OXX TXX HXX

Focus and Financial Capability of Acquirer

3.3

NCR Corporation, $6,044.0

WMS, $539.8 2.8

Oberthur Technologies, $699.2

Crane, $2,256.9

Dover, $6,511.6

Wincor Nixdorf, $2,851.0

Honeywell , $31,367.0

2.3

De La Rue, $1,386.0

Diebold, $2,911.0

1.8

Toshiba, $62,027.3

Giesecke & Devrient, $1,854.2 1.3

Global Cash Access, $598.7

0.8 1.2

1.7

2.2

2.7

Strategic Fit (Product, Technology and Customer Base)

Note: The strategic fit for companies is taken on subjective analysis of potential product, technology and customer synergies with maximum weightage given to technology. The financial capability is based on company’s leverage, historical acquisitions trends and future outlook.

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Precedent Transaction Analysis Disclaimer

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XXXDisclaimer Inc. Company Overview 

   

M&A Strategy

XXX Inc founded in 1991, offers a range of 4th Wall solutions for the retailers storefront consisting of self-service coin counting, e-payment solutions, entertainment services, money transfer and self-service DVD rental XXX has over 70 United States and international patents covering various aspects of coin service business Provide money transfer services in 142 countries XXX is spread across US, Canada, Puerto Rico and UK Company is headquartered at Bellevue, US

Financial Overview ($ in millions, except per share data) FYE 12/31 Revenue Growth EBITDA EBIT EPS

2006 $534.4 NA 105.9 46.8 0.7

LTM $613.0 NA 121.0 55.0 0.9

2007E $553.0 3.48% 119.0 50.0 0.7

2008E $605.0 9.40% 133.0 59.0 0.9

($ in millions, except per share data) Share Price (1/15/08) 52-Week High 52-Week Low Fully-diluted Shares Outstanding Equity Market Value (+) Total Debt (+) Minority Interest (+) Preferred Stock (-) Cash & Equivalent Enterprise Value

$26.55 34.97 24.69 28.29 737.0 272.37 (32.70) – (3.70) 972.94

Enterprise Value to: CY 2007E Revenue CY 2008E Revenue CY 2007E EBITDA CY 2008E EBITDA

1.8x 1.6x 8.2x 7.3x

Net Debt / EV Net Debt / EBITDA

0.3x 2.2x

Name

Target Business Description

GroupEx Financial Corp Travelex Money Transfer Ltd

Provide electronic money transfer services Provide money transfer services

62.0

5.8

Red Box Automated Retail LLC

Provide DVD rental services

Amusement Factory LLC

Provide amusement vending services

Mundo Commun Network Inc

Nation

Net Sales ($mn)

Transaction Rational

Value ($ mn) 60.0(100.0% stake) (Buy in 2007) 26.6 (100.0% stake) (Buy in 2006)

Geographic expansion

20.0 (47.3% stake) (Buy in 2005)

Product expansion

60.0

36.0 (100.0% stake) (Buy in 2005)

Enhancement of operational efficiencies

Manufacture and wholesale prepaid cards

NA (100.0% stake) (Buy in 2005)

Expansion of products, customer base and distribution network

American Coin Merchandising

Own and operate coinoperated amusement devices

220.0

Cellcards of Illinois LLC

Retail pre-paid cellular calling cards

Product expansion

235.0 (100.0% stake) Expansion of products, (Buy in 2004) customer base and distribution network NA (100.0% stake) (Buy in 2004)

Expansion of products, customer base and distribution network

Possible reasons to acquire Target:  Introduced a new design of coin-counting machine for the financial institutions market in 2006 and focused to grow in this market  Focused on international growth and exploring opportunities to acquire companies to add complementary products and services to the existing product lines  Growth strategy is based on cross-selling the full range of products and services to retailers  Existing strong service network would cater to the service needs of the customer base of the target immediately  Consistent and diversified revenue streams and stable operating cash flow  Tie-ups with renowned retail chains and network carriers for its various product and service offerings

Source: Annual report FY 2006 as available on company’s website

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XXX Inc. Company Overview 

   

M&A Strategy

XXX founded in 1952, is a provider of information technology solutions, ATM machines, electronic cash registers, electronic point-of-sale-systems, PC and server based retail systems for the retail and banking sectors Major shareholders include Fidelity International Ltd.– 7.84% Company is headquartered at Paderborn, Germany, and it employs 8,300 people The Company’s production facilities are located in Paderborn (Germany) Singapore, Shanghai and Sao Paolo XXX has a presence in over 90 countries, with its direct subsidiaries in 36 nations

Financial Overview 2007 $3,114.6 332.1 254.6 4.8

Share Price (1/15/08) 52-Week High 52-Week Low Fully-diluted Shares Outstanding Equity Market Value (+) Total Debt (+) Minority Interest (+) Preferred Stock (-) Cash & Equivalent Enterprise Value

LTM $3,114.6 323.7 254.6 4.8 $80.24 108.8 73.1 33.1 2,653.9 296.5 8.6 39.5 2,919.5

2008E $3,330.1 6.92% 365.0 283.9 5.78

Name

Business Description

BEB IndustrieElektronik AG Wincor AutoTell LLC Wincor Nixdorf Engineering GmbH Banksys-Third Party Services

Developer of image recognition software Developer of ATM software & hardware Provider of computer consulting services Provider of ticket distribution services Manufacturer of vending & back taking machines

Prokent AG

Transaction Nation Switzerland

Net Sales ($mn) 22.1

U.S

Germany

9.7

Belgium

Germany

4.8

Value ($ mn) Rational Undisclosed (Buy in 2005) Undisclosed (Buy in 2003) 0.7 (Sell in 2003) Undisclosed (Buy in 2003) Undisclosed (Buy in 2002)

Technological expansion Geographical expansion Loss making division Product line expansion Entry to reverse vending market

Possible reasons to acquire Target:  Strong Operating Model: XXX Nixdorf has been generating a steady operating cash flow ($261 million) which is a clear indication of its proven business model & its ability to fund M&A activity

($ in millions, except per share data) FYE 09/30 Revenue Growth EBITDA EBIT EPS

Target

2009E $3,568.2 7.15% 275.5 317.7 6.55

Enterprise Value to: CY 2007E Revenue CY 2008E Revenue CY 2007E EBITDA CY 2008E EBITDA

0.9x 0.9x 8.8x 8.0x

Net Debt / EV Net Debt / EBITDA

0.09x 0.82x

Dividend Yield

3.3%



Growth opportunity: The company’s banking division is involved with several U.S banks for pilot projects, which, if successful could translate in to a substantial order base. Target’s service suite & its established network would be complimentary in achieving this goal



The company has been expanding in Asia with above average sales growth. Target’s world-wide presence will help in faster roll out of its products and services in this growing market



R&D strength: The company spent $127 million towards R&D in 2006, emphasizing its role in future growth. This increases the prospect of acquiring a target with strong R&D capabilities



Positive outlook: Over the medium term, the Company forecasts above-average growth and margin progression for its banking division, indicating substantial operating cash flows and sufficient headroom for any M&A activity

Source: Reuters, Annual report FY 2006 as available on company’s website

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XXX Inc. Company Overview 

  

M&A Strategy

XXX founded in 1852, is a privately owned technology group, specializing in securities printing, manufacturing of currency processing equipment and supplier of smart cards XXX is a family owned company held by XXX and headquartered at Munich, Germany XXX group comprises of 50 subsidiaries and joint ventures globally, and employs 8,295 people The company operates in all major markets of Europe, Asia and North & South America targeting central and commercial banks, banknote printers, security transport companies, casinos, restaurant chains and retailers.

Financial Overview ($ in m illions , except per s hare data) FYE 12/31 Revenue Growth EBITDA EBIT EPS

2005 $1,765.5 209.0 115.4 NA

Share Price (1/15/08) 52-Week High 52-Week Low Fully-diluted Shares Outstanding Equity Market Value (+) Total Debt (+) Minority Interest (+) Preferred Stock (-) Cash & Equivalent Enterprise Value

2006 $1,854.2 5.0% 217.1 133.3 NA NA

63.3 148.8 -

2007E NA NA NA NA NA

2008E NA NA NA NA NA

Enterprise Value to: CY 2007E Revenue CY 2008E Revenue CY 2007E EBITDA CY 2008E EBITDA Net Debt / EV Net Debt / EBITDA Dividend Yield

Target Name

Transaction

Business Description Nation

Jiangxi G&D Chip Production/sale of China Card Systems cards & card systems South Secure technology Altech NamITech Africa provider Secunet AG

IT security services

Germany

Net Sales ($mn) 88.0 NA 47.0

Value ($ mn)

Rational

16.1(5.1% stake) (Buy in 2006) 2.4 (11% stake) (Sale in 2006) Undisclosed (Buy in 2004)

Expansion of cards unit Sale of minority stake Expansion into IT security

Possible reasons to acquire Target:  Cash surplus: G&D is a cash rich company (surplus of $149 million) with very low leverage which places it in a strong position to acquire a medium to small sized target in the industry  Customer groups: The company provides organizations in financial, retail, transport, gaming and leisure industry across the world with its currency processing equipments, similar to the customer groups mapped by the target  R&D strength: G&D gives high priority to R&D, investing 5.8% of its turnover and employing 735 employees in these activities, and a target with strong R&D focus will be a favorable business fit  Healthy future outlook: Over the medium term, the company reports strong order situation in all three divisions, which should strengthen the operating cash flows even further and provide headroom flexibility in a merger/acquisition situation

NM -

Source: Annual report FY 2006 as available on company’s website

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XXX Inc. Company Overview 

 



M&A Strategy

XXX, founded in 1813, is a commercial security printer, papermaker and provider of cash handling equipment and software solutions to banks and retailers worldwide Major shareholders include Barclays Global (13.27%) and company headquartered at Hampshire, UK The company owns 19 manufacturing facilities in 10 countries in Europe, North America, Africa, Asia and CIS and it employs 6,000 people with a presence across 31 countries Company produces over 150 national currencies and security documents. 5000 banks and cash in transit companies in 60 countries are users of its cash systems

Financial Overview

Target Name Currency Systems International ATS Money Systems Inc. Ascom Cash Handling Unit DLAR Cash Systems (Italy) Sequoia Voting Systems

2007 $1,344.7 236.9 184.2 0.93

LTM $1,377.3 263.5 202.8 1.03

2008E $1,408.1 2.23% 268.7 208.9 1.07



2009E $1,452.8 3.18% 287.3 224.5 1.06



 Share Price (1/15/08) 52-Week High 52-Week Low Fully-diluted Shares Outstanding Equity Market Value (+) Total Debt (+) Minority Interest (+) Preferred Stock (-) Cash & Equivalent Enterprise Value

$17.3 19.6 13.0 150.0 2,598.1 44.4 10.4 129.1 2,481.9

Enterprise Value to: CY 2007E Revenue CY 2008E Revenue CY 2007E EBITDA CY 2008E EBITDA

1.8x 1.7x 9.2x 8.6x

Net Debt / EV Net Debt / EBITDA

NM NM

Dividend Yield

2.3%

Nation US US

12.3

S.Africa

Italy

74.7

Transaction Value ($ mn) Rational 54.5 Cost saving (Buy in 2001) synergies 13.9 Cost saving (Buy in 2001) synergies 12.7 Geographical (Buy in 2001) expansion 1.8 Corporate (Buy in 2004) restructuring 16 Loss making (Buy in 2005) division

Possible reasons to acquire Target:

($ in millions, except per share data) FYE 03/31 Revenue Growth EBITDA EBIT EPS

Business Description Manufacturer of money sorting machines Manufacturer of currency counting systems Provide cash handling services Cash handling unit of De La Rue in Italy Manufacturer of voting systems in U.S

Net Sales ($ mn) 51.0



Cash surplus: XXX has positive group cash flows ($129 million) and very low leverage, which places it in a strong position to expand inorganically by acquiring the target U.S. focused: The company places additional emphasis on key growth markets, particularly North America Increased the size and quality of its North American sales force Number of product upgrades and replacements have been launched that have assisted further growth Customer groups: The company caters to organizations in financial, retail, transport, gaming and leisure industry across the world with its cash systems products, specifically the desktop products (coin sorters, counters) R&D strength: In FY 2007, the company invested $36.4 million in R&D. Prospect of acquiring the target having strong R&D focus Positive outlook: Over the medium term, the company forecasts above-average underlying growth and margin progression for its cash handling division

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End of Presentation