4 JULY 2006

TWIN TRACKS

A BROKER’S PERSPECTICVE

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Overview

A marketing exercise to trade buyers and / or private equity buyers is undertaken at the same time as an IPO

Accelerated IPO is a variant

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Rationale

Maximise value

Maintain competitive tension

Safety net

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Requirements for benefits to exceed costs

Company must be able to attract either Trade or Private Equity investors and also have the qualities required to achieve a successful IPO

Expectation of equality of valuations or genuine uncertainty over which route will deliver most value

Ambivalence of shareholders / management over outcome

Management capacity to cope with additional workload

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Methodology

Single adviser takes responsibility for managing entire process

Separate corporate finance adviser for IPO

IPO is treated as a trade buyer

Broker “bids” on basis of what they believe the pre-new money market capitalisation will be

Submission of indicative bids and conditions required to progress through bidding rounds

Due diligence is conducted alongside other trade / private equity bidders

Lawyers & accountants for IPO can be same as those preparing the Vendor Due Diligence

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Methodology (continued)

Broker submits final “bid” on back of a pre-marketing exercise

Assuming broker’s “bid” is still acceptable, a formal investor roadshow is undertaken to raise all funds

Broker undertakes pricing on back of roadshow and submits final “offer”

Completion on Admission

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Key issues for the broker

Level of confidence in valuation and overall achievability

Who pays fees in the event of failure ?– Legal & accountancy fees as well as broker’s costs

Access to “IPO” level due diligence

Access to management

Access to customers

Full or partial exit for existing shareholders

Exclusivity

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Key issues for the broker (continued)

Damage to institutional relationships if IPO is trumped by trade / private equity bidder at the last moment

Reputational risk amongst other advisers

Underwriting

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Areas of complexity

Competing bids are not comparable– Clean exit vs continuing involvement– Minimum working capital required for IPO compared to trade sale where

business often sold on debt free / cash free basis or with an adjustment mechanism based on completion accounts

Competitive process can make normal levels of director warranty caps and institutional lock-ins more difficult to achieve

Synchronisation of key IPO and trade sale events means timetable slippage can have significant adverse consequences for IPO

Availability of management for roadshow meetings can conflict with M&A process

Success of aftermarket may be compromised if IPO “bid” price has exhausted all possible buyers

Early IPO planning difficult to achieve

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Fees

Higher than normal to reflect risk

Ability of broker to charge abort fees in event of failure depends on role within initial scoping of project

Abort fees of lawyers and accountants is critical if not commissioned by Company

Broker abort fees can be ratcheted to reflect work stages– On completion of Due diligence– On completion of pre-marketing– On commencement of formal marketing– On completion of formal marketing / submission of fully financed, firm offer

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Case Study – Autoclenz Holdings PLC

Sale by Yule Catto PLC of 100% of the shares in Autoclenz

Twin track run by Gazelle Corporate Finance

PLC formed to acquire Autoclenz and float in December 2005

Total consideration £18m– £13m placing– £5m debt– No new working capital required

Advisory fees paid by Newco PLC. Placing commissions paid by Yule Catto

IPO offered the vendors more certainty

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Conclusions

Effective method for ensuring competitive tension and maximising value but only appropriate in certain circumstances

– Mature companies– Genuine uncertainty over which track will generate greatest value– Ambivalence of management / shareholders over outcome

Not usually necessary to continue with twin track until final moment, although vendor may wish to in order to retain competitive tension