Merger Acquisition Recommendation 1 RUNNING HEAD: Merger Acquisition Recommendation

Merger Acquisition Recommendation

Merger Acquisition Recommendation Introduction In 2010 NBTY Inc. completed a merger with an associate of The Carlyle Group, under the agreements terms the Carlyle associate obtained 100% of NBTYs equity. The Carlyle Group is an international alternative asset manager of various assets from investors assets mainly in private equity, real estate and credit alternatives. The

Merger Acquisition Recommendation 2 companys investments is mainly concentrated focusing on aerospace and defense, healthcare, the technology industry and communication. The Carlyle Group has $90.6 billion of assets under management committed to 66 funds as of June 30, 2010. The Carlyle Group employs more than 880 people in 19 countries. In the aggregate, Carlyle portfolio companies have more than $84 billion in revenue and employ more than 398,000 people around the world, (Comtex News, 2010). NBTY, Inc had production capabilities which included the creation and testing of a many of vitamins and mineral supplement products. NBTY was an international vertically integrated manufacturer, selling a variety of vitamins and supplements. NBTY marketed several thousand products using many brands. The company recorded revenues close to three billion during the 20 fiscal year which is an increase of about 10% over fiscal year 2009, (Datamonitor, 18/3/2010). NBTY employed about 15,000 people and conducted business mainly the United Kingdom (UK) and the US. In this paper, Team A analyses the Carlyle Group and NBTY Inc.s alternatives and make a recommendation of a financial decision. The paper includes a justification for the recommendation. In addition, Team A also creates a pro forma cash flow budget for the Carlyle Group for the last five years (UOPX, 2011). The Carlyle Groups Assessment of NBTY Inc. NBTY planned to increase wholesale trade in international markets and in the United States and international markets. The company planned to build up its business through increasing sales in natural food, healthy eating products, the use of merchandizing strategies which would increasing consumer demand through the help of consumer education and social media. However, the extended economic situation,

Merger Acquisition Recommendation 3 bordering on recession, had negatively affected the nutritional supplement industry and impeded planned growth. The supplements markets deterioration continues to affect sales. This went further to affect NBTYs ability to access capital markets and credits were not coming at all. NBTYs funds under their credit facilities started to impact on operations and sales. In some instances, there was a bit of bad publicity in the nutritional supplement market which is dependent of positive consumer opinion in terms of safety, quality and effectiveness. In addition, Carlyle observed that NBTY would have some problems abiding by new government regulation, within America and other foreign governments. This aspect could augment NBTYs operations and investment costs considerably which in turn would adversely impact NBTYs financial performance. Based on NBTYs assessment of the factors that could affect its business, production, marketing, wrapping, cataloging, distribution and trading of products would be open to scrutiny because the regulators of Food and Drug Administration (FDA) and the Federal Trade Commission (FTC) are always inspecting vitamin and supplements products. In case of government actions, NBTY would increase operational costs and there can be lost of income from products that may be put on recall or recommended to be removed from complete circulation. The Definitive Proxy Statement with regards to the intended Carlyle and NBTY merger revealed that Merrill Lynch and Center-view contacted all capable interested parties to state their interest in the NBTYs lines of business. Consequently, many interested bidders asked for more information. Merrill Lynch and Center-view provided the same information to all parties offered assistance to any company that would need further understanding of the requirements. Merrill Lynch and Center-view also provided

Merger Acquisition Recommendation 4 convincing qualitative judgments about distinctions between the vitamins and supplements industry, how they conduct financial matters, and their operating styles and where they stand in trying to acquire NBTY. In addition, information was also given about the selected comparable companies that could affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis, (Comtex News, 2010). Merrill Lynch and Center-view provided the following parameters for all interested parties that NBTY shareholders have the following expectations by looking at: Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) Per Share merger Range CY2010E EBITDA CY2010E EBITDA $43.75 - $53.75 $47.00 - $58.50 Consideration $55.00 $55.00 (Comtex News, 2010)

Based on this background, the Carlyle Group decided to make a move to out bid other parties for the merger acquisition of NBTY.

Carlyle Alternatives Carlyle's had to consider an attractive premium for NBTY because other privateequity groups expressed a keen interest in the company, including the common front presented by Bain Capital and Blackstone Group; and Apollo Global Management. In addition, the initial provisions allowed NBTY, for a month, to seek for a proposal that can beat the offer than the Carlyle Group. NBTY has roughly $450 million in existing

Merger Acquisition Recommendation 5 debt on its balance sheet. More than half of NBTYs revenue comes from direct sales of its products through outlets such as Target and Wal-Mart. There are many retail stores under the NBTY banner in numerous countries. Main stores in the US are the Vitamin World and Holland and Barrett in Europe (Comtex News, 2010). Carlyle examined the stock based compensation expenditure which can be handled in the form of cash expenses to determine unrestricted free cash flow during the forecasted period. In addition, there can be costs to NBTY that is not accounted for in the present count of shares. Carlyle estimated the array of acquisition variables which are factored in current NBTY forecasts, historical information and relative selling multiples. Carlyle designed a comparative analysis to determine how far other competitors would go based on their financial capabilities and credit worthiness. Carlyle computed the current market assessment of the unrestricted free cash flows of NBTY using discount rates ranging that reflect Merrill Lynch and Center-view's estimates of NBTY's weighted average cost of capital on vitamins and supplements market comparables, and subtracted net debt. Carlyle Group knew that a merger with NBTY can provide possible gains, including the opportunity to be part of an organization that has a big asset size and better poise in the market to achieve greater economies of scale. Carlyle had to consider the following merger funding alternatives:
1. Comparative Ratios - The following are two metrics on which Carlyle Group can

use to acquire NBTY based on the results on their investigation:

Price - Earnings Ratios (P/E Ratio) - Carlyle Group can implement this market value ratio, (market price per share/earnings per share)

Merger Acquisition Recommendation 6 to formulate a proposal based NBTY earnings. An examination of the price-earnings across the board for the stocks in the vitamin and supplements market would accord Carlyle Group an obvious direction for the aimed price-earnings ratio range (Emery et. al., 2007. p68).

Enterprise-Value-to-Sales Ratio (EV/Sales) - Carlyle Group can implement the market value ratio and offer that takes into consideration NBTYs assets, liabilities and products. The price-to-sales ratio is always used as a gauged of how other firms and manufacturers in vitamin and industry are doing.

2.

Discounted Cash Flow (DCF) This market value activity, which is a fundamental valuation tool used in mergers and acquisitions (M&A), can provide an analysis to verify whether a NBTYs present worth based in its assessed future cash flows is true. Forecasted free cash flows (net income + depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the NBTYs weighted average costs of capital (WACC). After looking at how to financially fund the merger in a cost effective manner,

The Carlyle Group should begin the process of assessing the net advantage to merging (NAM). The NAM provides the Carlyle Groups shareholders to see the benefits of the merger because the entire market value of Carlyle Group after the mergers net of the cost of completing the transaction and (2) the total market value of the firms before the merger, should show an increase in value (Emery et. al., 2007. P739). When the net

Merger Acquisition Recommendation 7 advantage to merging is positive, the merger would increase the wealth of Carlyle Group shareholders, then they shall support the merger (Emery et. al., 2007. P739). Decision Leading to Recommendation Financial decisions, particularly the Carlyle Group and NBTY Inc merger, should be handled with caution. The principal motive behind the merger is to create synergy that makes the value of the combined companies greater than the sum of the two parts, (Cicarini, 2007 p26) the quest for diversification, growth, increase in supply chain pricing power, eliminate competition and most of all, increase performance while reducing cost, the decision making process must be handled with utmost care. With such an agenda at the fore front, both companies must use an Optimal Decision Making Process and work hard to supplement their existing dynamic financial decision making policies on liquidity, working capital, inventories. Capital budgeting projects, capital structure, dividends etc, while making sure these policies interact continually. Recommendation of a financial decision The Carlyle Group should incorporate the use of capital rationing financial policies in order to maximize more profit in the NBTY Inc. merger. By acquiring NBTY, the Carlyle Group would incorporate a marketer and distributor of a broad line of highquality, value-priced nutritional supplements in the United States and throughout the world. Furthermore, with the use of capital rationing, the Carlyle Groups anticipated performance of the NBTY assets will be high. At this point in the decision making process, all financial evaluations have proven that the Carlyle Group and NBTY Inc. merger will see an overwhelming respond of success if they optimize their decision making process using Comparative Ratios.

Merger Acquisition Recommendation 8 Justification for our recommendation Comparative ratio analysis and explanation of a range of accounting ratio would provide a better understanding of the financial condition and performance of a business concern. The following are the advantages of using comparative ratio analysis: 1. To calculate profitability: Any business has many profitability ratios and any form of comparative ratio analysis can help to measure the productivity of the business. The Carlyle Group would discover the earning capacity of NBTY Inc. 2. To compute solvency: The Carlyle group can also measure the solvency of NBTY. Solvency ratios show the connection between the liabilities and assets of NBTY. 3. Comparative analysis performance: The Carlyle Groups use of comparative in years leading to the merger. It is justifiable for the Carlyle group to use Price - Earnings Ratios (P/E Ratio) for the merger acquisition deal. Based on the information provided by Merrill lynch and Center-view, the Carlyle Group can implement this market value ratio, (market price per share/earnings per share) to formulate a proposal based NBTY earnings. The Carlyle group would agree to acquire all of the outstanding common shares of NBTY for $55.00 per share in cash, representing a premium of approximately 57% over NBTY's average closing share price during the 30 trading days ended July 14, 2010, (Comtex News, 2010). The transaction will be valued at $3.8 billion. Based on the above decision, the Carlyle group can implement the flowing:

Merger Acquisition Recommendation 9 Merger arbitrage: by implementing a risk arbitrage, the Carlyle group will perchance the stock of NBTY Inc as well as put its own stock on short sale and gain more value in the future. Depository receipts: The Carlyle Group can provide depository receipts in the countries, out of the US, where NBTY operates. Consequently, the depository receipts will give the Carlyle Group profit coming from the spread between the real value and the perceived value of NBTY Inc.s securities. Convertible bond arbitrage: The Carlyle Group can create convertible bonds specified so much Carlyle Group shares. Due to the envisaged profitability of the merger acquisition, Carlyle Group and NBTY would create a positive credit spread, there is a positive stock price stipulated in the merger, and the low interest rate of the merger funding would yield positive results. Conclusion Entering into this merger can help the Carlyle Group to expand not only their cash flow but their market as well. In this situation NBTY, Inc. will be benefiting from the merger with Carlyle because Carlyle is a much larger company that can provide them with more resources. Our report shows that the net income would increase. One change that NBTY is going to have to adjust to is that they are no longer going to be a publically traded company because Carlyle is a privately owned corporation. This merger is in the best interest of all parties involved.

Merger Acquisition Recommendation 10

References Comtex News (2010) 8-K: Central Pacific Financial Corp (provided by EDGAR Online 8-K Glimpse) Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management. Upper Saddle River, NJ: Prentice Hall.

Merger Acquisition Recommendation 11 Joo D. Cicarini Jr. (2007) International Business Economics Aalborg University Masters Thesis Levy, Haim, and Marshall Sarnat. Capital Investment and Financial Decisions. 5th ed. New York: Prentice Hall, 1994. NBTY, Inc. Annual Report On Form 10-K For The Fiscal Year Ended September 30, 2009 Pinches, George E. Essentials of Financial Management. 5th ed. New York: HarperCollins, 1996. Scott, David F., Jr., and others. Basic Financial Management. Upper Saddle River, NJ: Prentice Hall, 1999 United States Securities Exchange Commission Form s_4 for NBTY Inc., 2020