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THE NEXT WAVE OF M&A IN RETAIL AND FASHION THE NEXT WAVE OF M&A IN RETAIL AND FASHION

THE NEXT WAVE OF M&A IN RETAIL AND FASHION - PowerPoint Presentation

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THE NEXT WAVE OF M&A IN RETAIL AND FASHION - PPT Presentation

Overview Portugal June 2014 CONTEXT Background Portugal Full member of EU for more than 25 years Founding member of the Eurozone Part of Schengen Agreement Portugal has a transparent and mature real estate ID: 199769

amp retail market fashion retail amp fashion market investment real shopping estate centres increase street economic acquisition high growth

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Slide1

THE NEXT WAVE OF M&A IN RETAIL AND FASHIONOverview - Portugal

June

2014Slide2

CONTEXT

Background Portugal

Full

member of EU for more than 25 years

Founding member of the EurozonePart of Schengen AgreementPortugal has a transparent and mature real estate marketContextSmall southern European open economyHighly vulnerableCaught in full by economic crisisRestructuringintense political effort to attract foreign investmentCredit crunch and the austerity measures imposed by the bailout from the IMF, EU and ECB: fall in prices which is now giving rise to a wide range of opportunities

M&A IN RETAIL AND FASHION Slide3

Fast growth in the 90ies which further accentuates in the first decade of

the 21st

century

Historically: a market that was shaped up by legal contingenciesUnfavorable lease lawDistinct legal frameworks for lease of high street retail and tenancy in shopping

centreConsequences: Retail concentrates in shopping centres; High street retail is very underdeveloped Volume of investment in the real estate market was at its best around 1,3 billion euro/year in 2006 and 2007Players: both domestic and international investorsIn the fashion sectorTradition in textile industry: mostly to export to international brandsAll major international apparel brands

SHAPING

UP OF THE RETAIL MARKET

M&A IN RETAIL AND FASHION Slide4

2008 to 2010: accentuated slowdown - Reasons:

Economic

crisis, credit crunch, decrease of

consumer market Real estate retail market is mature/saturated

SLOWDOWNFonte: ICSC2009/2010 still some investment: real estate market is slow to react

2011/2012

: investment

disappears/ zero openings of shopping centres M&A IN RETAIL AND FASHION Slide5

During 3 years:Correction of prices

Optimization of business

Shutdown or relocation of stores

Adaptation to the consumer: increased proximity and convenience commerce increase of promotions and loyalty plans

Second semester 2013 and 2014: turnaroundDrivers: very good quality of retail assetsprice adjustment perception that the lowest point in the cycle has been reachedREBALANCING & TURNAROUND

M&A IN RETAIL AND FASHION Slide6

Economic growth, clear restart of the market: relevant acquisitions in the pipeline.Return of real estate investment in 2013:

80% is carried out by institutional investors: investment funds (private equity)

70% of investment is FDI

50% is in the retail market Investors’ profileInstitutional investors (including PE funds)Family offices

Private investorsOrigin : Brazil/ China/ Angola/ Germany Investments’ profileDiverse: from opportunity acquisitions to value enhancement driven long term deals CURRENT TRENDS: MARKET SITUATION AND PERSPECTIVESM&A IN RETAIL AND FASHION Slide7

The fashion and accessories market in Street retail locations grew counter cycle during the crisis:

Intense opening

of international luxury apparel brands in prime

locations2 reasonsIncreased demand for luxury brands by growing tourism of non-European

origin as a result of successful strategy to attract foreign wealthy individuals: golden visa and non-dom tax systemRenovated offer of high street retail space due to new legal frameworkHIGH STREET RETAILM&A IN RETAIL AND FASHION Slide8

Despite the increase of high street retail, shopping centres are still dominant in the retail market

Stock of shopping

centres

is around 3,6 million sqm of GLA distributed by 170 shopping centres

SHOPPING CENTRESM&A IN RETAIL AND FASHION Shopping centres correspond to 80% of the market; retail parks 12% and factory outlets 6%Offer of shopping centres is relatively recent: average 13 yearsAlready a few relevant openings (over 100.000 sqm GLA)Slide9

RentsPrime locations:

Increase

of demand and increase of

rentNon-prime locations: Economic downturn: decrease of available income and demand; no credit; increase of available retail

sqmConsequence: owners are available to renegotiate rents, accept grace period, accept fit out expenses, accept variable rentsOTHER KEY FACTORS

Yields:

Decrease continuously until 2007; then abrupt increase; now starting to decrease again.

Financing:

Acquisitions

still

depend on relevant

percentage of equity

Retail is traditionally a hard sector to bank as it is closely linked to the economy and consumer’s discretionary spending

M&A IN RETAIL AND FASHION Slide10

During economic downturn:Economic weakness - too many shops, too few

shoppers - causes

pressure on prices

Works as a driver for consolidation: M&A is a potential salvation for some low margin chainsDeals ensure organizational shake ups Opportunistic deals

Now that economy is pulling itself out of recession: investment in retail is returningEnvironment is once again right for retail consolidation Larger companies look for growth without oversaturating the marketSmaller firms look for financial boost and to get to the next levelImportance of M&A: Retailers may be unable to count on consumer spending as much as in the past to sustain growth A major effect of the recent downturn is the increase of the consumer savings rate Good reason to believe there will be a new wave of M&A in retail

M&A - DRIVERS

M&A IN RETAIL AND FASHION Slide11

Acquisition by a larger retail rival:Knowledge of

the

market

More realistic expectationsMore interest in long term gains Acquisition by private equity investor:

Usually strict growth strategy that includes an exit deadline (5 years or less) Pressure to grow on a schedule that may not line up with the economy and consumption Often burden the company with debt that can be difficult to overcomeCurrently very diverse acquisition profiles and players are still at play in retail M&A market:New wave of interest from institutional investment funds: relevant acquisitions in the pipelineHigh street retail: presence of the brand; part of an internationalization strategy; belief in long term value enhancement (also in connection with programs for the renovation of Lisbon and Porto traditional commerce locations)Still some discount deals (distressed assets)

PLAYERS - PRIVATE EQUITY VS. INDUSTRY PURCHASER

M&A IN RETAIL AND FASHION Slide12

Asset deal (or acquisition of going concern)Pros:

Risk of transfer of liability to the purchaser is lower (encumbrances/ leases/

priviledged

credits)Cons: Triggers real estate transfer taxes payable by the purchaserMay trigger reassessment of the property which for the purchaser means higher annual real estate taxTriggers capital gains taxation in the hands of the seller

Share deal (possibly preceded by spin off into a newco) - usually the preferred solutionPros:Avoids real estate transfer taxes Use of exempt local vehicles to optimize taxation of capital gains or dividends (real estate investment fund/ real estate investment company)Possible tax neutralityPossible use of tax lossesFiscally efficient model for investors to provide shareholder debt and to facilitate future refinancing when debt markets return to equilibriumCons:Liability of newco for debts prior to spin off up to the amount of assets transferred

TYPICAL TRANSACTION STRUCTURE

M&A IN RETAIL AND FASHION Slide13

Securing future incomes: rental guarantee in a shopping centre acquisition:

Tenants usually provide guarantee for rents (bank guarantee; security deposit; group guarantee)

Due diligence: identification of any contingencies

in connection with the agreements (change of control clauses in lease agreements; non-transferability of guarantees)The buyer should also require the seller to provide estoppel certificates (e.g., no defaults, no prepaid rent, status of security deposits and the like) from each of the tenants prior to closing

Contractual risk limitation in the SPA: FlexibilitySeller pre [or post] closing action in order to secure continuation of lease agreements and guarantees Representations and warranties as to transferability and continuation of such agreements and guarantees Indemnity mechanism to cover loss in case of breach of the seller’s representations and warranties or failure to perform covenants Purchase price adjustment mechanisms to cover for loss of cash flows or pay indemnity

SELECTED LEGAL ISSUES OF

INVESTMENT

IN RETAIL SECTOR

M&A IN RETAIL AND FASHION Slide14