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Onex Corporation

Canadian Private Equity | TSX: OCX January 6 , 2012

SSB Investments Rating


Price Target (C$) Price Dec. 31 (C$) Upside (%)
52 Week High ($) 52 Week Low ($) Beta

Know When to HoldEm


Summary
Despite Onex excellent track record, concerns regarding the overconcentration of voting control among management and the recent performance of current holdings leads to SSBs HOLD rating. Moreover, SSB expects poor private equity industry performance going forward due to sustained volatility in equity markets and global economic uncertainty.

HOLD
36.41 33.28 9.41 Market Data
$38.22 119 K 1.05

Highlights
Big shoes to fill. Over Onex 27 years of existence it has generated an average IRR
of 29%. The firms superlative investment record owes largely to its investment discipline and managements deep experience. However, limited partner and shareholder expectations may now be set too high, which could have adverse effects on Onex ability to maintain AUM going forward. $28.01

Avg Daily Volume Dividend Yield (%) Share Outstanding (Mil): Market Cap. (M$) Insider Holdings: B/V per share: ROE LTM (%) EPS (LTM):

0.33% 115.63 M $3.85 B $17.86 $12.86 2.62x 3.53% 23%

Concentrated voting control. Gerry Schwartz, Onex CEO, President and Chair,
holds nearly 70% of Onex voting control. Such concentration of voting rights provides little oversight with regards to managements actions and decisions. Investors must effectively put their faith in one individual, a fact that may not be palatable to many investors.

Weak investment and exit opportunities. Onex ability to reproduce its past success is highly dependent on its ability to locate profitable investments and exit existing holdings at attractive multiples. This, in turn, is dependent on the state of the global economy and the performance of public equities. Several factors, including a weak global economic recovery and uncertainty surrounding the state of the Eurozone may contribute to extreme economic uncertainty and volatility in public markets over the coming quarters. This will lead to weak investment and exit opportunities, constraining managements ability to repeat its past success.

Trailing P/E Ratio (%):


Source: Bloomberg

Extreme information asymmetry. Onex financial statements are of limited use to Share Price Movements
OCX $40 $35 $30 $25 $20 $15 S&P Private Equity Index $120 $100 $80 $60

shareholders, and inadequate information is available on many of its holdings. Consequently, financial analysis and valuation of Onex is problematic, and relies heavily on the limited information disclosed by management.

Dependent on changes in Canadian pension fund management. Pension funds


historically contribute between 60% and 70% of third-party capital to each of Onex funds. Certain trends in the Canadian pension fund industry may limit the extent to which Onex achieves growth in assets under management. Such trends include, but are not limited to: the tendency of Canadas largest pension funds to manage private equity investments in-house; the shift to defined contribution plans amongst private pension plans; and changes in pension fund regulation.

Source: S&P, Bloomberg

Company Overview
Onex is a private equity investment firm with holdings in electronics manufacturing services, aerostructures, healthcare, and a variety of other industries. Onex had revenue of C$24.4B in 2010; making it one of the largest PE and alternative asset managers in Canada.

Current Valuation Current Price (Dec.30 2011) NAV PV of Carried Interest PV of Mgmt Fee Current Value Current Implied Discount
Source: Onex Financials, SSB estimates

12-month Target Valuation $33.28 Current Price (Dec.30 2011) $29.26 Target NAV $1.09 PV of Carried Interest $3.73 PV of Mgmt Fee $34.08 12-month Target Price -2.3% Implied Growth

$31.59 $1.09 $3.73

$33.28

$36.41 9.4%

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Business Description
Fig. 1: Distribution of 3rd Party AUM
Onex Partners I Onex Partners III ONCAP 3% 2% 10% Onex Partners II Onex Credit Partners Other 19%

Onex is a publicly listed private equity (PE) firm which manages C$4.4 B of proprietary capital and C$8.9B of third-party capital (Figs.1 & 2). As a corporate entity, Onex is comprised of five closed-end equity investment funds, a real estate fund, a credit fund, and direct ownership in two businesses. Appendixes A and B provide an overview of Onex holdings and the distribution of capital and historical performance across its existing funds. President, Chair, and CEO Gerald Schwartz founded Onex in 1984. The company was publicly listed in 1987, and Gerald Schwartz remains its controlling shareholder with nearly 70% of voting control. Over the last 27 years Onex has grown to a workforce of seventy investment professionals with an average manager tenure of sixteen years. With offices in Toronto and New York City, the majority of Onex businesses are located in North America (NA) specifically, the US. However, on a consolidated basis, the company derives roughly a third of its revenues from business activities outside of NA (Fig. 3). Onex revenue is derived from three key industries: Electronic Manufacturing Services, Aerostructures, and Healthcare, which make-up 30%, 19%, and 21% of Onex consolidated revenue respectively. Over the last 5 years, Onex appears to have made an effort to diversify its portfolio across a variety of industries (Fig. 4). For example, in 2010 72% of revenue came from just 3 industries versus 88% in 2005. Details per each company can be found in Appendix C. On a holdings basis, as of Q3 2011, the largest contributor to Onex consolidated revenue is Celestica at 30%. Three companies make up roughly 62% of Onex revenue (Fig. 5). Creating Shareholder Value Onex creates shareholder value in three ways:

38%

28%

Source: Onex financials

Fig. 2: Investment of ONEXs Proprietary Capital


Large-cap Private Equity Mid-cap Private Equity Onex Real Estate 4% 3% 3% 16% 74% Cash & Near-cash Items Onex Credit Partners

Source: Onex financials

Fig. 3: Revenue by Geographic Segment (C$ M)


$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2006 2007 2008 2009 North America Europe Asia & Oceania Other 3% 20%

13%

64%

2010

1. Fees from Third-Party Assets Under Management (AUM): Onex currently manages about C$8.9B of third-party AUM on behalf of a number of institutional investors. Management fees range from 1-2% per year depending on whether or not committed capital is invested. In 2010, revenue from this business segment totalled approximately USD$90M. 2. Carried Interest: Carried interest is a reward to Onex shareholders and management based on performance. Onex earns 20% of all capital gains within a fund provided it reaches a target annualized return of 8%. Carried interest within a fund is calculated independently of other funds. Shareholders are entitled to 40% of earned carried interest, with management taking the remaining 60%. Since 2003, Onex has recognized USD$237M in carried interest through its income statement. 3. Capital Appreciation: Appreciation of the C$4.4B of Onex proprietary capital represents the largest way through which Onex creates shareholder value. Onexs goal is to grow Net Asset Value (NAV) per share by 15% per year. Since inception, Onex boasts an average IRR of 29%. This has contributed to a 17% annual compounded share price return over the last twenty years. Investment Strategy Onex is a self-described value investor as it aims to acquire companies that are undervalued. The key driver behind Onex past performance is its ability to find, manage, and exit profitable investments. The management team looks for investments in three key areas: 1. Carve-outs of subsidiaries and mission-critical supply divisions from multinational corporations 2. Operational restructurings 3. Build-ups in a wide variety of industries Onex investigates nearly 300 investment ideas per year prior to moving forward with only two or three of them. It tends to take on public or private equity investments that grant it a controlling stake. As of Q3 2011, the smallest percentage of voting shares Onex holds in a company is 50%a. Onex likes to maintain an active presence within its investments; management often takes on key managerial roles inside its investments. Onex Clients The majority of Onex third-party AUM comes from pension funds. The value contributions from this source have increased from C$916M to Onex Partners I (2003) to C$2.4B to Onex
(a) Allison Transmission: Onex has contractual rights and protections, including right to appoint members to the Board of Directors

Source: Onex financials

Fig. 4: Revenue by Industry (C$ M)


Electronics Manufacturing Service Financial Service Aero-structures Customer Support Services Healthcare Metal Service Financial Service Other Other Customer Support Services

$30,000

$25,000 $20,000 $15,000 $10,000 $5,000 $0 2006 2007 2008 2009

9% 8% 6% 5% 27% 18% 27% 2010

Source: Onex financials

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Fig. 5: 2011 Revenue (1st 9 mths)


Celestica Carestream Health Sitel Worldwide Corp. ONCAP II Co's ResCare Tropicana Las Vegas

Partners III (2009), a 2.6x increase. However, the percentage of pension fund ownership within each fund has declined over the same time period (Fig. 6).

Spirit AeroSystems TMS International Corp. The Warranty Group Skilled Healthcare Group Centre for Diagnostic Imaging Other

Industry Overview & Competitive Positioning


Fundraising Down 10.9% as of Q3 2011 In the first nine months of 2011, PE firms raised USD$192.5B globally compared to USD$216B in the same period of 2010. In aggregate, fundraising has slowed considerably from pre-recession highs (Fig. 7). Since 2009 a quarterly average of roughly USD$70B was raised by PE firms globally, versus an average of over USD$160B between 2007 and 2008. Institutional investors have recently shied away from PE due to high volatility in equity and bond markets, as well as the uncertainty surrounding the future of the global economy. The liquidity risks associated with PE investments may have contributed to this trend. Alternatively, it may be that fundraising levels are artificially constrained by the so-called denominator effect write-downs in the valuation of PE holdings have lagged more liquid holdings, artificially inflating the PE allocation beyond its target. Clearly this story needs to be monitored over the next few years. Against this backdrop ONCAP III completed fundraising in September 2011 with third-party capital commitments of nearly C$550M. ONCAP III was oversubscribed, a rarity in the current PE environment. Onex closed Onex Partners III in December 2009 with C$3.5B in thirdparty capital commitments. This represented a 70% increase in commitments from Onex Partners II. Given the poor fundraising performance in the PE industry, it is clear that Onex has a special advantage over its peers. Onex ability to attract capital owes largely to its reputation for earning consistent, outsized returns. Buyout Slow-down Buyout activity is historically correlated with equity market conditions, and the recent past is no exception. While there is a definite post-recession upward trend in global aggregate buyout deals, Q3 of this year has seen a significant slowdown; buyout deal activity decreased 23% QoQ to USD$60.6B(Fig. 8). Currently, weak deal flow is not due to a lack of funds globally, PE firms have nearly USD$1T in dry powder (un-invested capital) (Fig. 9). Instead, solid investment opportunities are relatively uncommon. Typically, investment opportunities come from two sources: public markets and carve-outs. While there exist attractive opportunities in public markets, there are fewer carve-out opportunities which represented the majority of PE investments in the past. The lack of quality carve-out opportunities is attributable to the unwillingness of cashhoarding parent companies to shed assets leading to weak corporate M&A activity (Fig. 10). In 2011, Onex completed three buyouts totalling C$976M. Over the past ten years Onex has, on average, completed roughly three deals per year valued at C$833M. As such, 2011 has been an average year for Onex in terms of buyouts. Overall, Onex is constrained by the same forces as the entire PE industry, and its buyout activity is generally correlated with global PE buyout activity. Going forward, Onex has C$1.3B in cash and roughly C$2.8B in uncalled committed capital to support its investing strategy. This glut of dry powder falls in line with the industry trend, implying that Onex and its peers have a considerable war chest of capital that must be put to use in the coming quarters. I.P.Nos Turbulent public markets in the second half of this year and cash-hoarding firms have constrained exit opportunities available to PE firms. While investors were optimistic with respect to public equity markets at the start of 2011, environmental disasters and global political gridlock have left investors unwilling to assume additional risk. Still, owing to robust capital markets in Q1 and Q2, aggregate exit values for 2011 may test prior records (Fig. 11 & 12). In Q2 alone, over 300 exits were announced globally, valued at over US$120B, which is a single-quarter record. Conversely, only 254 exits were announced globally in Q3 with a dismal value of less than US$60B. The steep QoQ drop is partially attributable to PE firms unwillingness to exit their largest holdings in volatile public markets. Indeed, only 12 exits valued over USD$1B were made in Q3 versus 21 in Q2, and no exits valued over USD$5B were made compared to three in the previous quarter.

6% 7% 10% 12%

5%

4%

1% 33%

21%

Source: Onex financials

Fig. 6: 3rd Party Committed Capital Demographics at Funds Inception


Pensions Banks & Insurance 100% 80% 60% 40% 20% 0% Onex Partners I Onex Partners Onex Partners ('03) II ('06) III ('09) Soverign Wealth Asset Managers Endowment High Net Worth

Source: RBC Capital Markets

Fig. 7: Aggregate Value & Number of PE Funds Raised (2007-11,USD$B)


Capital Raised (Billions USD) $250
Aggregate Value

Number of Funds 500 300 200 100 0


Numer of Funds

$200 $150 $100 $50 $-

400

Source: Preqin

Fig. 8: Global PE-Backed Buyout Activity


Global Value (Billions USD)
900 800 700 600 500 400 300 200 100 0

Number of Deals
$90 $80 $70 $60 $50 $40 $30 $20 $10 $-

Source: Preqin

Aggregate Deal Value

# of Deals

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Toronto CFA Society Investment Research Challenge | Student Research | In 2011 Onex fully divested two investments: Emergency Medical Services and Husky International. Both companies were sold to other PE firms for a total of roughly C$3.5B, representing a weighted average IRR of 41%. Additionally, Onex brought TMS International public in April 2011, realizing a nominal portion of the total investment in the process. Notably, all three liquidity events occurred in the first half of 2011 when markets were more stable. Onex Allison Transmission announced its IPO in March of this year. However, the IPO has not yet occurred due to poor equity market performance. Continued weakness in public markets may force Onex to hold onto its already mature holdings for longer than originally intended. Pension Plan Changes Will Impact Onex
Source: Preqin

Fig. 9: Global PE Dry Powder (2003 2011)


$1,200 $1,000 $800 $600 $400 $200 $-

(US$ B)

$700

Fig. 10: Global M&A Activity

Both globally and within Canada pension funds represent an important source of funds for PE firms. In the last decade or so, the share of pension fund assets allocated to PE has increased. The increase is part of a broader trend among pension funds towards greater diversification from traditional assets, like bonds, and public equities, to alternative assets like PE, hedge funds, and infrastructure. At Onex, pension fund commitments to the Onex Partners family of funds represent nearly 67% of third-party committed capital. Moreover, third-party capital commitments have successively increased by 60% to 70% for each fund in the Onex Partners fund family. Thus, changes in the Canadian pension fund industry have undoubtedly affected Onex growth. Going forward, three important developments in the pension fund industry will likely have a material impact on Onex: 1. Many pension funds are opting to manage PE internally, which both reduces the availability of third-party AUM to Onex and creates a more competitive PE environment. For example, Ontario Teachers Pension Plan is a direct investor in PE deals; its C$12B PE portfolio poses a real competitive threat. 2. Among private pension plans, there has been a shift from defined benefit (DB) plans to defined contribution (DC) plans that will continue for the foreseeable future. Unlike DB plans, regulatory constraints limit DC plan members ability to participate in PE. Thus the shift to DC plans may translate into a net decrease in funds available to Canadian PE firms, including Onex. 3. In December 2011, the Canadian government passed legislation to enact a new pension scheme: Pooled Registered Pension Plan (PRPP). PRPPs allow Canadians without access to work based pension plans to form collectively pooled pensions. These new pensions are being designed to emulate many of the features of DC plans. As employers opt for PRPPs, Onex may lose out on AUM growth. Competitive Environment The near- to mid-term prospects for PE do not look any more promising than in the recent past. With extreme uncertainty surrounding the Euro-zone sovereign debt crisis and a sluggish global economic recovery, public equity markets will likely continue their lacklustre performance. This means sustained competition for investment opportunities and less-thanoptimal IPO exit opportunities. In contrast, corporate M&A activity may pick up slightly given recent signs of economic stability in the US. If this happens, both carve-out and exit opportunities will improve, which may be a bright spot for the industry. Still, given the problems in the EU, debt financing for leveraged deals may still be scarce going forward. This will put continued pressure on the mid-market segment as the largest PE firms compete with the smallest for quality investments. The hypercompetitive environment that has developed within the PE industry will constrain Onex ability to effectively deploy capital over the coming quarters. In addition, Onex may start to feel pressure from LPs to utilize their C$2.8B in uncalled capital so as to begin generating yield as quickly as possible. Together, a competitive environment and LP pressures could force Onex to re-evaluate its historically successful investment strategy by venturing into new asset classes. This transition may already be underway, as Onex is one of the two final bidders for the private equity arm of AXA, the European insurance giant. Such an investment would be highly uncharacteristic for Onex, raising concerns that it may not be able to reproduce its industry-leading returns.

$600 $500 $400 $300 $200 $100 $-

USD$ B

Source: Ernst & Young, Allen Avery

$400 $350 $300 $250 $200 $150 $100 $$50

Deal Value (USD$B)

400 200 -

Aggregate Deal Value

# of Deals

Source: Ernst & Young, Preqin

Fig. 12: Quarterly Global IPO Activity


$140

IPO Value (USD$ B)

$120 $100 $80 $60 $40 $20 $-

Source: Ernst & Young, Allen Avery

Fig. 13: Comparison of Alternative Asset Managers


AUM (Bil. USD) Onex Blackstone Group Carlyle Group Apax Partners Bain Capital KKR $8.2 $43.7 $157.7 $148 $33.3 $66 Activities Buyouts in 2011 Leveraged Real Buyout (Mil. USD) Finance Estate $962 $15,900 $16,700 $8,000 $9,800 $9,200 Other

Source: Private Equity Manager, Proprietary Research

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011

# of Deals

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011

Fig. 11: Global PE Exits


1,400 1,200 1,000 800 600

Q4 '11 Q3 '11 Q2 '11 Q1 '11 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

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Fig. 14: Hawker Beechcraft Sales & Net Income (USD)


Sales $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 -$500 Net Income

Investment Summary
Leverage in Disguise Onex has no debt at the parent level and does not use debt to buy companies. Rather, debt lies within each portfolio company. These subsidiaries are responsible for their own debt financing, which is without recourse to Onex or its other portfolio companies. This policy helps to maintain the financial strength of the parent company, but also increases the credit costs for each subsidiary. Thus, while Onex investors are not directly exposed to financing risk, they indirectly face this risk through Onex holdings. Onex outsized gains, past or future, may be earned at the cost of increased financing risk through Onex its subsidiaries. Luxury Aircrafts Hit Turbulence In 2007 Onex partnered with Goldman Sachs in a deal to buy Hawker Beechcraft for USD$3.3B, of which Onex committed USD$537M. Hawker operates in the luxury avionics industry, which is highly vulnerable to economic cycles. Needless to say, this investment is not going very well for Onex. From 2008 to 2010 sales declined 21%, a trend that has continued through 2011 (Fig. 14). Both S&P and Moodys have recently downgraded their credit ratings on Hawker to Caa3 and CCC respectively. Both agencies are concerned that Hawker may be forced to restructure its USD$2B in debt. Moodys goes so far as to say that they do not believe Hawker will be able to pass certain financial covenant tests through 2012, which will not bode well for debt and shareholders. In mid-December their USD $182.9M notes, due in April 2015, were trading around 18.5 cents on the dollar. Therefore, there is a very real possibility that Onex may see its equity position in Hawker severely damaged if not completely wiped out. Hawkers poor performance calls into question Onex recent investment decisions, as it was purchased in 2007 when Onex placed nearly C$2.7B in capital. Management Handsomely Rewarded Onex compensation structure aligns the interests of management and shareholders. Specifically, Onex management is required to reinvest 25% of all gross carried interest and Management Investment Plan distributions into Onex until each manager owns at least one million shares. As a result, Onex management team is its single largest shareholder. While Onex compensation structure does much to mitigate moral hazard, overconcentration of ownership exposes outside investors to governance risks. This is elaborated on in the Risks section. The Value Investor NOT Value Investing Despite being a self-described value investor, Onexs acquisition activity seems to run contrary to the economic cycle-agnostic approach typical of value investors. Over the last fifteen years Onex has made significantly more acquisitions in bull markets than in bear markets (Fig. 15) (Appendix D). Specifically, Onex made nearly C$2.7B in acquisitions in 2007, during the run-up to the 2008-09 economic collapse. Conversely, Onex made only three acquisition valued at C$668M in 2008 and 2009 combined. This trend calls into question Onex investment discipline and its self-described value investing style. Moreover, Onex tendency to invest when equity markets perform well is a cause for concern, given extreme uncertainty surrounding near-term equity market performance. Bigger Company = Bigger Deals As a result of nearly three decades of strong results, Onex has been rewarded with increasing amounts of third-party capital. Increased AUM creates greater fees for Onex, but also necessitates larger deals, or a higher frequency of deals. Evidence of this is the growth of Onex average deal size (Fig. 16) as well as the frequency of deals (Fig. 17). The average deal in Onex history is roughly C$164M; C$219M in the last ten years, and C$314M in the last five years. It may become more of a challenge for Onex to replicate its past performance because price inefficiencies are less common in larger companies. Clock is Ticking on an Aging Portfolio Onex is sitting on a mature basket of businesses (Fig. 18). Since its inception, Onex has exited an equity investment in about 4 years on average. Since OnCap Is launch in 2003, this number has dipped to around 3.5 years. This metric does not adjust for partial exits, such as Celistica, though still provides some insight into the health and future of Onexs holdings. On an equally weighted basis the average age of fully realized investments is just over 4 years. However, Onex older funds, Onex Partners I and ONCAP II, have an average investment

2005

2006

2007

2008

2009

2010

9 Mon Ended '10

9 Mon Ended '11

Source: Hawker Beechcraft

Fig. 15: Acquisition history vs. S&P Performance (2005-12)


1800 1600
S&P 500 Price Level

$1,400 $1,200
Acquisition Size

1400 1200 1000 800 600 400 200 0

$1,000 $800 $600 $400 $200 $0 Acquisitions S&P 500

Source: Onex financials, SSB

Fig. 16: Inflation Adjusted Average Deal Size of Onex (1991-2010)


$600 $500

Average Deal Size (C$ M)

$400 $300 $200 $100 $0 1991 1995 1999 2003 2007

Source: Onex financials, StatCan

Fig. 17: Frequency of Onex Deals (1984-2011)


12 10 8 6 4 2 0

Source: Onex financials

Frequency

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Fig 18: Age of Active Investments (Years) Compared to Average Age at Exit (1984-2011) & (2003-2011)
12 10 8 6 4 2 0 Av er age A ge at Exit (si nce inception (1984)) Av er age A ge at Exit (si nce ONCAP I (2003)) Age

Source: Onex financials

age of 6.5 and 4.5 years, respectively. Specifically, Onex has held Rescare for over seven years and Casino ABS for over 10 years. Keep in mind, Allison Transmission, which Onex filed papers to IPO, but failed to pull the trigger, is about 4.5 years old. As such, Onex could find itself having to divest a large number of investments in short order, resulting in a further flood of cash-on-hand to be re-invested. Given its already flush coffers of cash and poor industry outlook, Onex will likely be rich in cash and poor in investment opportunities for the near term. The implication is that the company will struggle to meet its stated 15% NAV growth target.

Fig. 19: Revenues ($C M) & Profit Margins (2006 2010)


revenue net profit margin

Financial Analysis
Financial Statements of Limited Use to Investors Onex financial statements are fully consolidated, making any meaningful interpretation nearly impossible. The extent to which Onex financial statements can be analyzed is limited by three factors: 1. The extent to which a portfolio company contributes to Onex consolidated revenue or net income is rarely proportional to its relative contribution to Onex portfolio value. For example, in 2010 Celestica represented roughly 27% of Onex consolidated revenues yet comprises less than 5% of Onex holdings. 2. Following on the above point, if financial information on all of Onex portfolio companies were available, proper financial analysis would be possible. However, given that the majority of Onex holdings are private the requisite information is unavailable. 3. Finally, Onex constantly acquires and divests holdings, making comparison of financial results between periods problematic. For example, according to Figure 19, it appears that over the last five years Onex revenues plateaued, its operating margins improved and profit margins deteriorated. Yet, throughout this time Onex exited and partially realized investments in 6 different companies, which collectively have had a significant impacted on all three variables. These three factors call into question the relevance of Onex financial statements, both for assessing financial performance and for valuation purposes. Industry Segmented Financial Analysis

operating profit margin

$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

12% 10% 8% 6% 4% 2% 0% -2%

(USD$ M)

2006

2007

2008

2009

Source: Onex financials

2010

Fig. 20: 2010 Operating Margin, EBITDA, Revenue by Industry (USD$M)


Revenue EBITDA $8,000 $6,000 $4,000 $2,000 $0

Operating Margin 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

To mitigate the effect of asset turnover and operational differences between Onex portfolio companies on ratio analysis industry segmented analysis can be used. On these terms, it is clear that the industries Onex companies operate within have highly variable margins (Fig. 20). Moreover, performance across industries varies significantly over time (see Appendix E: Segmented Financial Analysis). Key takeaways include: 1. YoY Net Profit Margins (NPM) Up: NPM was up for Onex three largest holdings by revenue. Although Electronic Manufacturing Services (i.e. Celestica) increased its net profit by nearly 17% YoY, the net profit margin increased from 0.09% to an equally abysmal 0.1%. To further exasperate the situation, their largest customer, Research-inMotion is under hardship. Continued financial distress may adversely affect Celestica. 2. Net Income (NI) Down: Overall, NI was -USD$51M, a 145% YoY decrease. This can primarily be attributed to Customer Support Services (i.e. Sitel World Wide) and Other Industries, which lost USD$53M and USD$94M respectively. Onex shareholders have a 68% stake in Sitel, a C$340M investment. Though Sitel is up from a loss of USD$126M

Source: Onex financials

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Toronto CFA Society Investment Research Challenge | Student Research | in 2009, as of Q3 2011 Sitel still lost USD$37M. Nine months into 2011, Other Industry income was up USD$908M. However, after subtracting earnings from discontinued operations of USD $1,109 M, Other actually lost USD -$201 M year to date.

Fig. 21: Trend of Acquisitions and Share Buybacks (1997-2011)


180 160 140 120 100 80 60 40 20 0 Buybacks Number of Acquisitions 9 8 7 6 5 4 3 2 1 0

Buybacks and Dividends Maintaining a competitive dividend policy is not a top priority for Onex management as evidenced by the $0.11 per share dividend. This payment level has remained constant since 1995. The very low yield of these dividends (0.33%) and the priority of capital appreciation within Onex strategy begs the question as to why Onex pays dividends at all. Given the concentration of ownership within management and with the CEO, it is possible that this dividend policy is catered towards managements interests. Since 1997 Onex has conducted normal course issuer bid (NCIB) share buybacks amounting to 75,841,399 shares (C$1,154M at average share price of $15.22). From 2009 to 2011 Onex has bought back C$43.4M, C$49.5M, and C$91.9M respectively. Over the last decade, these share buybacks seem to increase in bull markets, and act as a return of wealth to shareholders. Analysis shows periods of buybacks are generally followed by periods of acquisitions (Fig. 21). There is a strong correlation between the pattern of buybacks and acquisitions, with a correlation of 40% when adjusted for a one year lag. Moving forward, given Onex mounting cash and its purse full of ripe businesses, it is possible that it will use some of its cash to conduct larger than normal share buybacks in the coming years.

C$ M

Source: Onex financials

Valuation
PE Discount Factor Traditionally, as is the case with Onex, PE firms trade at a discount to NAV for a number of reasons. Such reasons include: limited disclosure requirements; investment illiquidity (i.e. long lock-up periods); transaction costs incurred in the acquisition and divestiture of businesses; management and employee compensation costs; and general overhead costs. A company will also trade at a greater discount to NAV if shareholders have reservations about management or, as is the case with Onex, are concerned about management succession planning (See Risks section). Aside from these factors, a PE firm will trade at a discount to NAV if the growth in new capital commitments is greater than that of new acquisitions. Therefore, just because Onex market price is trading below its NAV does not imply that Onex is trading at a bargain. The importance of the PE discount will become clear shortly. Discounted Cash Flow (DCF) and Comparable Analysis Both DCF and comparable analysis require reliable financial data, which is not available for Onex. A DCF model hinges on the reliability of predicted future cash flows, however at both the consolidated and company-specific level such data is not available. Similarly, with comparable analysis the denominator of any multiple (i.e. price-to-earnings, price-to-book value, etc.) does not truly reflect Onex economic value and as such is of limited use. Figure 22 & Appendix F demonstrates the inappropriateness of comparable analysis. Net Asset Value (NAV) With a Sum-of-the-Parts Analysis Given the inappropriateness of traditional valuation methodologies, an alternative approach is required. The best approach is to separately value each of three means by which Onex creates shareholder value (net AUM fees, carried interest, and capital appreciation), and add them together to create a sum-of-the-parts (SOTP) valuation. Each component of the SOTP valuation is discussed below. Capital Appreciation (Appendix G) For Onex publicly traded companies, present and one year forecasted NAV valuations are computed by using present market prices and one year analysis consensus price targets. To find Onex present and forecasted NAV of Onex private holdings, historical costs for each investment are adjusted according to historical industry growth ratesb, or EV/EBITDA industry multiples as deemed fit. In some instances, current information on a company indicates that it no longer follows its industry growth path. In these situations, judgement was used to arrive at a NAV which reflects present circumstances. For example: 1. Hawker Beechcraft: For reasons previously discussed, we believe that recording the value of Onex position in Hawker at a fifth of its initial cost appropriately discounts for the risks encompassed with this holding until further notice. 2. Tropicana Casino: Tropicana is undergoing a comprehensive redevelopment and is not
(b) Source: Damodaran Online

Fig. 22: Demonstration of Unreliability of Comparable Analysis


BV FCF EBITDA AUM ($B) $23.05 12.2x $8.90 7.2x $5.51

Per Share $48.00 $0.39 Multiple Price 1.7x 14.5x

$81.6 $5.66 $281.21

Source: Bloomberg, Onex financials

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Toronto CFA Society Investment Research Challenge | Student Research | fully operational. As such, it is not reasonable to assume Tropicana is currently growing at the same rate as its industry. Until the completion of the redevelopment, the current value of Tropicana is assumed to be the price that Onex paid. After the formulation of a projected value for each public and private company, all holdings are weighted to reflect the level of Onex economic ownership and subsequently aggregated. The resultant number reflects the intrinsic value of Onex holdings. Finally, the aforementioned PE discount factor is applied, resulting in the NAV of Onex operating companies. Standard industry practice is to use a PE discount factor of 20%. However, due to opaqueness and abnormality of Onex operations and the pessimistic opinions of Onex future prospects expressed above, this report uses a 25% discount factor for private companies. Public companies are discounted by 10%, reflecting the reduced liquidity premium required for such holdings. Onex Real Estate Partners and Credit Partners was valued using their fair value, reported in Onex financial statements. For cash and near-cash assets a 0.12% annual growth rate is used. This represents 1-year interest rate implied by the current U.S. treasury yield curve. Finally, the result from the NAV of Onex holdings and the present value of its cash are added together. This results in a total NAV per share of C$29.26, and constitutes the majority of Onex share price (Fig.23). Carried Interest Carried interest was valued using a forecasted present value approach. Carried interest estimates are problematic because of the uncertainty surrounding future returns and Onex future AUM. To overcome this hurdle whilst erring on the side of caution, carried interest calculations were based only on Onex current third-party AUM. Instead of using the companys historical IRR of 29%, the future value estimate of carried interest is formulated assuming a constant IRR of 15%. This better reflects this reports cautiously pessimistic view of Onex future prospects. To discount projected carried interest back to present, a cost of equity of 12% is computed using CAPM estimation (Fig. 24) . In addition, Carried Interest is discounted a further 10% to account for uncertainty regarding the timing of investments and exits. The PV of carried interest is C$1.09 per share, constituting a small contribution to Onex share value. A sensitivity analysis with variable IRR and discount rates was employed to further examine the impact this reports assumptions had on the valuation (Fig. 25). As shown in Figure 25 varying the assumptions within the specified extremes suggests that had the historical IRR of 29% been used, an additional $1.48 could be added to the valuation. Net AUM Fees (Appendixes H) From 2003 to 2010 annual fee-based revenue has increased from C$17M to C$97M. After subtracting necessary overhead costs for the parent company, 2010 net AUM fees came in at approximately C$33M. Using this information, future net fees are forecasted via two methods: 1. Price-to-Earnings Multiple Approach: This straight forward method multiplies the total net AUM fees (C$33M) by the average P/E multiple for Canadian asset managers (14x). Using this method we calculate a PV of third-party fees of C$4 per share. 2. DCF Approach: All of our assumptions in implementing this valuation model can be found in Appendix H. The two most noteworthy assumptions are: the use of a 10% growth rate over the next 5 years as opposed to Onex targeted AUM growth rate of 15%; and that overhead costs will remain a constant 30% fraction of fees over time. Management guidance implies that the current number is closer to 25%, but a 30% fraction better represents the future economies of scale that will benefit Onex as AUM grows. Once again, management fees are discounted by a further 10% to account for uncertainty regarding the timing of investments and exits. This method yields an estimated PV of thirdparty fees of C$3.73 per share (Fig. 26). Valuation (SOTP)
$36.41 9.4%

NAV Components Public Private Oncap II Real Estate Partners Credit Partners Cash and Other Total
Source: SSB Research

Fig 23: NAV-Base Scenario per Share


Current $2.69 $10.74 $1.91 $1.15 $0.74 $12.02 $29.26 Forecast $3.99 $11.38 $2.10 $1.27 $0.82 $12.03 $31.59

Variables Risk Free Market Return Equity Premium Beta Cost of Equity
Source: Bloomberg

Fig. 24: CAPM - Cost of Equity

Percents 1.97% 11.03% 9.06% 1.06 12%

Fig. 25: Sensitivity Analysis of the Present Value (C$) of Carried Interest
IRR 5% 10% 15% 20% 25% 29% Discount 13% 0.31 0.65 1.05 1.50 2.03 2.48 Rate 12% 0.32 0.68 1.09 1.57 2.10 2.57 11% 0.32 0.70 1.13 1.62 2.17 2.66
Source: SSB Research

Fig. 26: PV of Net AUM Fees (C$) -Base Scenario


DCF Approach P/E Multiple Approach Average Net AUM Fees Discount PV of Net AUM Fees after discount Base $4.28 $4.00 $4.14 10% $3.73

Source: Proprietary research

Current Valuation Current Price (Dec.30 2011) NAV PV of Carried Interest PV of Net AUM Fees Current Value Current Implied Discount 12-month Target Valuation Current Price (Dec.30 2011) Target NAV PV of Carried Interest PV of Net AUM Fees 12-month Target Price Implied Growth
Source: Proprietary research

Fig. 27: SOTP Valuation (C$)


$29.26 $1.09 $3.73 $33.28

$34.08 -2.3% $33.28

$31.59 $1.09 $3.73

$36.41 Twelve-month Target Price (Fig. 27) The SOTP valuation finds Onex current value to be C$34.08. When compared to its current

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Fig. 28: Scenario Analysis


Bull: $41.58

price of C$33.28, the result is an implied discount of 2.3%. The 12 month target price is C$36.41 which represents a 9.4% gain over the next year. Price Range (Fig. 28) Scenario analysis was conducted to obtain a range of estimates of the target price. Besides the base case, a bull and bear case share price was calculated. The underlying assumption for the bull scenario is that the economy will experience a V-shaped recovery over the next twelve months. The underlying assumption for the bear scenario is that there will be a double -dip recession and the economy will continue to slide. To value Onex in a bull (bear) scenario, many of the assumptions were changed from the base scenario: 1. For public companies, rather than the average analyst price estimate, the highest (lowest) analyst price estimate is used Private companies NAV growth are 10% higher (lower) than under the base scenario. A growth rate of 15% (5%) is used instead of 10% for the discounted cash flow model for management fees. A multiple of 15x (13x) is used instead of 14x for the relative valuation. An IRR of 20% (10%)is used to calculate the PV of carried interest in the bull (bear) scenario.

Target: $36.41

Bear: $34.10

Source: SSB Research

2. 3.
Bull

Fig. 29: Scenario Analysis on Predicted Share Price (C$)


Target NAV $30.17 $31.59 $35.75 $0.68 $3.25 2.5% $1.09 $3.73 9.4% $1.56 $4.27 Bear Base

4.

PV of carried interests PV of net mgmt fees Target price Implied Growth


Source: SSB Research

$34.10 $36.41 $41.58 24.9%

Given these assumptions the target bull price is $41.58 which represents an implied growth of 24.9%. The target bear price is $34.10 which represents implied growth of 2.5% (Figs. 28 & 29).

Risks
Investment Risks Governance Concerns Onex shares are structured into two classes: Multiple Voting Shares (MVS) and Subordinated Voting Shares (SVS). SVSs are traded on the TSX and entitle their holders to elect 40% of Onex board members. MVSs entitle their holders to elect 60% of Onex board members. Mr. Schwartz holds all of the 100,000 outstanding MVS indirectly, and 19.5% of the SVSs directly. As such, he has the right to elect nearly 70% of Onex board giving him control of both the companys operations and governance. Therefore, Onex share structure results in a governance risk because management and oversight are controlled by one individual. Stock Illiquidity In 2011 and 2010 the average daily volume for Onex publicly traded shares were 175,967 and 266,721, respectively. On a public float of roughly 120 M shares, these volumes are extremely low. This raises concerns for institutional investors and high net worth individuals looking to enter and exit positions valued in the tens of millions of dollars. Moreover, large trades may cause share price movement, adding an extra layer of risk and complexity to the investment decision (Fig. 30). Fund Risks Exit Opportunities On an industry-wide basis, turbulence in equity markets has undermined the ability of PE firms to exit investments through IPOs. Similarly, weak corporate M&A activity has adversely impacted exits via strategic acquisitions by competitors and suppliers. This represents a significant risk to Onex. The inability to divest its holdings may severely impact the companys ability to maintain a consistent return on investment over the next few years. Investment Opportunities Global economic uncertainty, very high levels of dry powder, and a general inability to raise debt funds for large leveraged buyouts has intensified the competition for mid-market investments amongst PE firms. Onex inability to place uncalled committed capital due to these factors may significantly impact its share price performance over the near- to mid-term. Forex Risks A large portion of Onex capital is allocated to investments in companies operating in the US: 76% of consolidated revenues come from American operations. Fluctuations in foreign exchange rates between the US and Canadian dollar, may cause significant changes in the value of Onex holdings. While over the long-term foreign exchange rate gains and losses

Fig. 30: Trade Volume (2006-Present)


Average Daily Volume YTD 2010 2009 2008 2007 2006 183,724 175,967 266,721 275,852 371,499 244,880 Average Float 116,904,994 119,298,614 121,208,215 123,836,536 127,250,611 133,503,083 % of Float Traded Daily 0.157% 0.148% 0.220% 0.223% 0.292% 0.183%

Source: Annual Reports, Yahoo! Finance

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ONEX

may cancel out, volatility in exchange rates can lead to volatility in the value of realizations from Onex investments. Reputational Risk Onex ability to raise funds is largely dependent on its reputation among institutional investors. Poor performance, owing either to managements decisions or forces outside the firms control would have a material and adverse effect on Onex reputation. This would directly affect the companys ability to raise future funds, representing a medium- to long-term risk. Dependence on Trends in Pension Fund Industry Pension funds contribute 60% to 70% to each of Onex current funds, making the firm vulnerable to trends in pension fund management. Such trends include, but are not limited to: the growing tendency for large Canadian pension funds to manage PE in-house; the shift of private pension funds from DB to DC plans; and the newly created PRPP. In addition, unforeseen changes in pension fund management would affect Onex future AUM growth. Loss of Key Employees PE is a human capital intensive industry. Onex ability to locate profitable investments and exit them in a fruitful and timely manner is wholly dependent on the knowledge and talent of its management. With a team of only seventy investment professionals whose average tenure is sixteen years, Onex investment team is small and experienced. The loss of even a few key employees may severely impact Onex ability to generate the outsized returns typical of the firm. Specifically, Gerry Schwartz is arguably Onex greatest asset. If his tenure as CEO were to end abruptly, the implications for Onex share price would likely be catastrophic. Operational Risks Significant Customers Risk Six of Onex operating companies have significant customers from whom 10% or more of their revenues are derived (Appendix I). The value at cost, or market value, of those investments is C$466 M, which represents 18% of Onex total PE investments. Two companies are heavily exposed to this risk. Spirit AeroSystems, (valued at C$95 M as of September 30, 2011) derives 94% of its revenues from two customers. Celestica (valued at C$129 M) derives 20% of its revenues from Research in Motion (RIM). RIMs future is questionable, because of its recent industry-lagging performance, governance concerns, and current speculation of it being an acquisition target. The failure of Onex subsidiaries to diversify their customer base may adversely affect their performance, which would negatively affect Onex share price in the near future. Operating Liquidity Volatility in credit markets represents a risk to Onex operating companies whose loans are up for renewal in the short term. As Figure 31 shows, loans at Onex companies are not up for renewal until 2013, and the majority of renewal dates are past 2014. Moreover, 56% of debt at Onex operating companies is fixed rate, or fixed through interest rate swaps. As such, near-term volatility in credit markets does not represent a significant risk to Onex current operating companies. Increasing Commodity Prices Three of Onex operating companies are vulnerable to swings in commodity prices. Spirit AeroSystems uses significant amounts of aluminum, titanium and carbon fibre in its manufacturing operations. It has entered into long-term supply contracts to mitigate the effects of volatile commodity prices on its earnings. TMS International is highly dependent on diesel fuel prices, and consumes approximately 11 million gallons of oil per year. Finally, silver represents a significant commodity used in Carestream Healths manufacturing of imaging equipment, particularly x-ray film. Carestream uses forward contracts to manage the effect of volatile silver prices on its earnings. Decreasing Government Funding Approximately 5.5%, or $151 million, of Onex proprietary capital is invested in its healthcare segment. Performance companies in this segment is dependent on US government funding at the federal, state and municipal levels. Due to increased budgetary pressures in the US, a variety of factors may lead to diminished levels of government funding. A decrease in appropriations for services offered by Onex operating companies may materially and adversely impact the performance of those companies. Additional company-specific risks are provided in Appendix C.

Fig. 31: Consolidated Minimum Debt Repayment Requirements


Year 2011 2012 2013 2014 2015 Therafter Total
Source: Annual Reports

USD$M 242 395 2,356 1,096 468 2,132 6,689

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ONEX

Disclosures:
Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject companys securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Schulich School of Busines, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.

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Appendix A: ONEXs Structure and Funds Holdings

Source: Onex

Appendix B: Return on Invested Capital


Investment Period Direct Investments Onex Partners I Onex Partners II ONCAP I 1984-2003 2003-2006 2008-present 1999-2005 2005-2011 2011-present 27 years 2006-2008 Invested Capital $1,899 $1,561 $2,939 $208 $493 $8,447 $44 $1,303 Total Realized and Multiple of Unrealized Value Cost $4,948 $5,674 $4,804 $850 $813 $18,517 $1,428 2.9 4.2 2.3 4.1 5.8 3.3 Annual Rate of Return 27% 80% 25% 43% 57% 29% -

Onex Partners III ONCAP II ONCAP III Total


Source: Onex

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ONEX

Appendix C: Description of ONEXs Major Holdings


Name Industry Electronics manufacturing services Description Originally a division of IBM, now designs & manufactures tech components; provides supply chain support Location Ontario Risks 20% of revenues come from RIM Geopolitical Commodity pricing 54% revenues from Boeings 737 Unknown future for Boeings 787 Heavily regulated industry Commodity pricing; particularly diesel fuel. Regulation Malpractice threats Talent recruitment/retention Regulation Changes to Medicare/ Medicaid Macroeconomics of Texas & California Talent recruitment/retention IP protection regulation Regulation & compliance Economic, Voting Ownership 8%, 71%

Celestica Inc.

Spirit Aerosystems TMS International Centre for Diagnostic Imaging Inc. Skilled Health Care Group Inc. Carestream Health Inc. Rescare Inc.

Aero-structures

Originally a division of Boeing, now manufactures airplane assemblies & components to Boeing, Airbus, & military Outsourced provider of industrial services to steel mills in 10 countries globally, but with a North American focus An outpatient imaging provider operating 60 locations across 9 States A holding Co. with subsidiaries in skilled nursing, assisted living, hospice facilities and the like Designs & manufactures health imaging IT systems Offers residential & support services to people with intellectual & developmental disabilities, vocational training, and in-home assistance The worlds largest provider of extended warranty contracts sold to manufacturers, retailers, & distributers Provides customer contact centre outsourcing, primarily via telephone Market leader in the niche market of providing of commercial duty automatic transmissions Designer & manufacturer of corporate and military turboprop and jet aeroplanes Diversified global engineering & manufacturing firm; focus on energy efficient products A casino, hotel, & entertainment facility on the Las Vegas strip Manufacturer of kitchen & bath cabinets and home organization products

Kansas

4%, 64%

Metal Services Healthcare

Pennsylvania Minneapolis

25%, 85% 19%, 100%

Healthcare

California

9%, 89%

Healthcare Healthcare

New York Kentucky

37%, 100% 20%, 100%

The Warranty Group Sitel Worldwide Corp. Alison Transmission Hawker Beechcraft Corp. Tomkins Ltd. Tropicana Las Vegas Inc. RSI Home Products Inc.
Source: Onex

Financial Services Customer Care Services Other Other Other Other Other

Illinois

Regulatory concerns Geopolitical events & stresses Long accounts relievable periods Dependency on a few number of customers Supply chain risks High industry rivalry Macro-economic forces Volatility of input prices Geopolitical uncertainty Macroeconomic forces Illiquidity Debt obligations Regulation Macroeconomic trends Tied to strength of US housing market

29%, 100%

Tennessee Indiana Kansas London, UK Nevada California

68%, 88% 25%,19%, 14%, 50% 17%, 76% 20%, 50%

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ONEX

Appendix D: Comparison of Onex Acquisition Size and Volume With S&P 500
1800 1600 $1,400

S&P 500 Price Level

1400 1200 1000 800 600 400 200 0

$1,000 $800 $600 $400 $200 $0

Acquisitions
Source: Onex

S&P 500

Appendix E: Segmented Financial Analysis


Variable Electronics Manufacturing Service 2010 Revenue Cost of Sales SG&A EBITDA Operating Margin Operating Margin ex SG&A % of Total Revenue Net Income Net Profit Margin Variable $6,717 $6,173 $224 $320 4.76% 8.10% 2009 $6,909 $6,319 $224 $366 5.30% 8.54% YoY(%) -2.78% -2.31% 0.00% -12.57% Aero-structures 2010 2009 YoY(%) -7.50% -9.33% -10.55% 8.27% 2010 Healthcare 2009 YoY(%) -0.64% 2.10% -7.13% -8.26% Financial Service 2010 $1,199 $563 $450 $186 2009 YoY(%)

$4,293 $4,641 $3,578 $3,946 $178 $537 $199 $496

$6,548 $6,590 $4,866 $4,766 $716 $966 $771 $1,053

Acquisition Size (USD$ M)


$1,359 -11.77% $656 $509 $194 -14.18% -11.59% -4.12% 8.67% 2.54% -10.09% 0.00% 13.34% 5.47% $32 2.35% Total $32 2009

$1,200

-10.07% 12.51% 10.69% 17.04% 14.75% 15.98% -7.67% -5.16% -0.92% 16.67% 20.00% 16.66% 14.98% 11.22% 25.69% 27.68% -7.19% 17.62% 18.69% -5.73% $15 0.35% $14 0.30% 7.14% 15.83% 26.87% 26.54% $39 0.60% $36 0.55% Other 2010 2009 YoY(%) 2.74% -2.29% 3.27% 36.36% 1.26% 8.33% 9.03%

15.51% 14.28% 53.04% 51.73% 4.92%

27.57% 27.82% $7 0.10% $6 0.09%

2.67%

Customer Support Services 2010 2009 $1,780 $1,140 $487 $153 8.60% YoY(%) -22.42% -22.63% -22.79% -19.61% 3.62% 0.50% -20.94% -58.73% 46.81%

Metal Service 2010 2009 YoY(%)

2010

YoY(%)

Revenue Cost of Sales SG&A EBITDA Operating Margin Operating Margin ex SG&A % of Total Revenue Net Income Net Profit Margin
Source: Onex Financials

$1,381 $882 $376 $123 8.91%

$2,091 $1,472 42.05% $1,914 $1,329 44.02% $55 $122 5.83% 8.46% 8.58% $2.00 $48 $95 6.45% 14.58% 28.42% -9.60%

$2,137 $2,080 $1,282 $1,312 $600 $255 $581 $187

$24,366 $24,831 -1.87% $19,58 $19,468 -1.08% $2,599 $2,509 $2,819 $2,544 -7.80% -1.38% 0.51% -2.94%

11.93% 8.99%

32.73% 10.30% 10.25% 8.36% 20.96% 21.60%

36.13% 35.96% 5.67% -$52.00 -3.77% 7.17% 126.00 -7.08%

9.71% -12.87% 40.01% 36.92% 5.93% 44.76% 8.77% 8.38%

4.70% 100.00% 100.00% 0.00%

-$31.00 -106.45% -$94.00 $181.00 -151.93% -$51.00 $112.00 -145.54% 0.45% -146.40%

0.10% -2.11% 104.54% -4.40% 8.70% -150.55% -0.21%

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Appendix F: Comparable Analysis of Alternative Asset Managers

Name ONEX CORPORATION AMERICAN CAPITAL LTD AGF MANAGEMENT LTD BROOKFIELD ASSET MANAGENT BERKSHIRE HATHAWAY INC BLACKSTONE GROUP LP FORTRESS INVESTMENT GRP GMP CAPITAL INC

Ticker OCX ACAS AGF BAM BRK

Market Lastest Cap AUM P/E P/B billion billion 2011 2010 2009 2008 2007 2011 2010 2009 2008 $ 3.7 $ 8.9 1.5x 1.8x 1.7x 1.4x 2.6x $ 2.5 $ 53.0 8.7x 4.4x 1.3x 9.8x 14.9x 0.6x 0.2x 0.2x 1.0x $ 1.5 $ 48.4 11.1x 16.6x 5.1x 16.5x 26.7x 1.2x 1.3x 0.7x 2.6x

BX FIG GMP KKR KKR & CO LP OCH-ZIFF CAPITAL MANAGEMENT OZM PARTNERS GROUP HOLDING AG PGPHF mean median
Source: Bloomberg

2.2x 14.2x 1.6x 14.0x 2.3x 7.9x $ 17.3 n/a 7.0x 31.2x 14.9x 28.8x 17.0x 1.1x 2.0x 1.8x 3.1x 3.5x $ 192.8 n/a 17.0x 20.3x 15.5x 22.7x 18.2x 1.2x 1.2x 1.4x 1.8x 1.6x 14.9x $ 16.0 $ 164.0 11.0x 20.8x 3.8x 4.4x 2.1x 5.7x 229.9x
1.8 $ 45.4 0.5 $ 0.9 8.3x 9.0 $ 61.1 18.5x 3.5 $ 29.9 1.1x 16.2x $ 27.2 $ 57.5 11.0x $ 29.9 $ 58.2 11.0x 3.8x 7.7x 4.9x 33.3x 23.4x 10.1x 11.5x 11.2x 1.9x 2.8x 1.5x 5.5x 5.1x 3.2x

2007

2011

4.7x 4.7 4.2 5.0 1.8x 12.5x 16.4x 4.3x 11.2x 2.1x 7.3x 11.0x 3.6x 3.5x 0.5x 4.2x 5.7x 3.0 3.3 2.1 11.7 9.7 128.3x 15.4x 13.6x 11.0x 14.4x 13.1x 14.1x 29.3x 30.5x 30.2x 4.0x 2.5x 5.4x 4.4x 3.5x 9.8 16.0 7.9 38.0x 4.0x 5.4x
5.0x 0.3x 3.2x 7.4x 8.1x

P/FCF 2010 2009

4.0x 3.6x 7.9x

MarketCap / AUM EV / EBITDA TTM % 2008 2007 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 8.1x 51.7x 5.2x 4.8x 5.0x 7.8x 11.4x 0.0 38.0 69.7 5.3 5.3 21.5 25.6

Toronto CFA Society Investment Research Challenge | Student Research |

$ $ $ $

2.3x

12.2x

3.9x

7.8x

3.5x 21.7x 9.1x 8.6x 7.3x

1.4x 15.8x 16.7x 18.4x

0.6x 10.9x 8.4x 10.1x

1.5x 4.2x 0.5x 9.0x 16.1x 15.0x 23.2x 9.2x 7.1x 5.2x 10.4x 13.7x 14.2x 26.2x 6.2x 16.6x 26.0x 15.2x 13.2x 15.1x 18.5x 2.8x 3.3x 2.2x 7.9x 4.6x 47.3x 14.2x 19.5x 14.9x 18.3x 8.5x 9.4x 15.0x 17.6x 1.9x 2.4x 1.7x 4.3x 2.9x 14.1x 7.9x 3.2x 12.5x 16.4x 6.7x 10.5x

3.9 7.2x 9.0x 56.6 14.7 3.6x 11.8 13.7x 22.2x 0.0 8.0x 10.7x 13.1 6.3x 9.0x 7.2

6.4 0.0 21.4 13.2 9.5 9.0

24.5 1.4 19.1 25.2 135.6 6.8 7.6 8.2 7.2 27.9 18.0 21.7 36.2 30.6 23.0 23.7

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ONEX

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ONEX

Appendix G: NAV Valuation - Base Scenario

Source: SSB, Onex

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Appendix H: Calculation of PV of Net AUM Fees


Historical Fees AUM fees
Source: Onex

YoY growth rate

2003 $17 -

2004 $26 53%

2005 $28 8%

2006 $42 50%

2007 $52 24%

2008 $65 25%

2009 $88 35%

Assumptions Inherent in DCF Approach Variable YoY growth rate - Bear YoY growth rate - Base YoY growth rate - Bull Discount rate (CAPM) Growth rate terminal
Source: SSB and Onex

Assumption 5% 10% 15% 12% 3%

Net AUM fees/AUM fees

30%

PV of Net AUM Fees: DCF Approach with Scenario Analysis Bear AUM fees 2011E $101.85 $0.26 $0.26 $106.70 $0.28 $0.28 $111.55 $0.29 $0.29 2011E 2011E 2012E $106.94 $0.28 $0.25 $117.37 $0.30 $0.27 $128.28 $0.33 $0.30 2012E 2012E 2013E $112.29 $0.29 $0.23 $129.11 $0.34 $0.27 $147.52 $0.38 $0.31 2013E 2013E 2014E $117.90 $0.31 $0.22 $142.02 $0.37 $0.26 $169.65 $0.44 $0.31 2014E 2014E 2015E $123.80 $0.32 $0.20 $156.22 $0.41 $0.26 $195.10 $0.51 $0.32 2015E 2015E Thereafter $1,416.81 $3.68 $2.34 Thereafter $1,787.85 $4.64 $2.95 Thereafter $2,232.83 $5.79 $3.68 Total

Net AUM fees per share Discount net AUM fees per share Base AUM fees Net AUM fees per share Discount net AUM fees per share Bull AUM fees

$3.50 Total

$4.28 Total

Net AUM fees per share Discount net AUM fees per share
Source: SSB and Onex

$5.21

PV of Net AUM Fees: P/E Multiple Approach with Scenario Analysis Net AUM fees (million) Bear $33 $0.29 13x Base $33 $0.29 14x Bull $33 $0.29 15x

Net AUM fees per share Industry multiple PV of net AUM fees
Source: SSB and Onex

$3.71

$4.00

$4.28

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Appendix I: Significant Customers at Onex Operating CompaCost/FMV (C$B) Spirit Aerosystems TMS International Celestica CDI Skilled Healthcare $95.00 Number of Significant Customers 2 2 2010 % of Revenues 94% 69% Number of Significant Customers 2 2 2009 % of Revenues 96% 67%

$12.00

$129.00 $154.00 $8.00

$68.00

1 1

20%

32% 12%

1 1

17%

25% 12%

Share with significant customers


Source: Onex

Total Total Private Equity Investments

Warranty Group

$2,650.00 18%

$466.00

12%

10%

SSB Investments Page 18

Onex Corporation
Canadian Private Equity | TSX: OCX January 6 , 2012

SSB Investments Rating


Price Target (C$) Price Dec. 31 (C$) Upside (%)
52 Week High ($) 52 Week Low ($) Beta

Know When to HoldEm


Summary
Despite Onex excellent track record, concerns regarding the overconcentration of voting control among management and the recent performance of current holdings leads to SSBs HOLD rating. Moreover, SSB expects poor private equity industry performance going forward due to sustained volatility in equity markets and global economic uncertainty.

HOLD
36.41 33.28 9.41 Market Data
$38.22 119 K 1.05

Highlights
Big shoes to fill. Over Onex 27 years of existence it has generated an average IRR
of 29%. The firms superlative investment record owes largely to its investment discipline and managements deep experience. However, limited partner and shareholder expectations may now be set too high, which could have adverse effects on Onex ability to maintain AUM going forward. $28.01

Avg Daily Volume Dividend Yield (%) Share Outstanding (Mil): Market Cap. (M$) Insider Holdings: B/V per share: ROE LTM (%) EPS (LTM):

0.33% 115.63 M $3.85 B $17.86 $12.86 2.62x 3.53% 23%

Concentrated voting control. Gerry Schwartz, Onex CEO, President and Chair,
holds nearly 70% of Onex voting control. Such concentration of voting rights provides little oversight with regards to managements actions and decisions. Investors must effectively put their faith in one individual, a fact that may not be palatable to many investors.

Weak investment and exit opportunities. Onex ability to reproduce its past success is highly dependent on its ability to locate profitable investments and exit existing holdings at attractive multiples. This, in turn, is dependent on the state of the global economy and the performance of public equities. Several factors, including a weak global economic recovery and uncertainty surrounding the state of the Eurozone may contribute to extreme economic uncertainty and volatility in public markets over the coming quarters. This will lead to weak investment and exit opportunities, constraining managements ability to repeat its past success.

Trailing P/E Ratio (%):


Source: Bloomberg

Extreme information asymmetry. Onex financial statements are of limited use to Share Price Movements
OCX $40 $35 $30 $25 $20 $15 S&P Private Equity Index $120 $100 $80 $60

shareholders, and inadequate information is available on many of its holdings. Consequently, financial analysis and valuation of Onex is problematic, and relies heavily on the limited information disclosed by management.

Dependent on changes in Canadian pension fund management. Pension funds


historically contribute between 60% and 70% of third-party capital to each of Onex funds. Certain trends in the Canadian pension fund industry may limit the extent to which Onex achieves growth in assets under management. Such trends include, but are not limited to: the tendency of Canadas largest pension funds to manage private equity investments in-house; the shift to defined contribution plans amongst private pension plans; and changes in pension fund regulation.

Source: S&P, Bloomberg

Company Overview
Onex is a private equity investment firm with holdings in electronics manufacturing services, aerostructures, healthcare, and a variety of other industries. Onex had revenue of C$24.4B in 2010; making it one of the largest PE and alternative asset managers in Canada.

Current Valuation Current Price (Dec.30 2011) NAV PV of Carried Interest PV of Mgmt Fee Current Value Current Implied Discount
Source: Onex Financials, SSB estimates

12-month Target Valuation $33.28 Current Price (Dec.30 2011) $29.26 Target NAV $1.09 PV of Carried Interest $3.73 PV of Mgmt Fee $34.08 12-month Target Price -2.3% Implied Growth

$31.59 $1.09 $3.73

$33.28

$36.41 9.4%

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Business Description
Fig. 1: Distribution of 3rd Party AUM
Onex Partners I Onex Partners III ONCAP 3% 2% 10% Onex Partners II Onex Credit Partners Other 19%

Onex is a publicly listed private equity (PE) firm which manages C$4.4 B of proprietary capital and C$8.9B of third-party capital (Figs.1 & 2). As a corporate entity, Onex is comprised of five closed-end equity investment funds, a real estate fund, a credit fund, and direct ownership in two businesses. Appendixes A and B provide an overview of Onex holdings and the distribution of capital and historical performance across its existing funds. President, Chair, and CEO Gerald Schwartz founded Onex in 1984. The company was publicly listed in 1987, and Gerald Schwartz remains its controlling shareholder with nearly 70% of voting control. Over the last 27 years Onex has grown to a workforce of seventy investment professionals with an average manager tenure of sixteen years. With offices in Toronto and New York City, the majority of Onex businesses are located in North America (NA) specifically, the US. However, on a consolidated basis, the company derives roughly a third of its revenues from business activities outside of NA (Fig. 3). Onex revenue is derived from three key industries: Electronic Manufacturing Services, Aerostructures, and Healthcare, which make-up 30%, 19%, and 21% of Onex consolidated revenue respectively. Over the last 5 years, Onex appears to have made an effort to diversify its portfolio across a variety of industries (Fig. 4). For example, in 2010 72% of revenue came from just 3 industries versus 88% in 2005. Details per each company can be found in Appendix C. On a holdings basis, as of Q3 2011, the largest contributor to Onex consolidated revenue is Celestica at 30%. Three companies make up roughly 62% of Onex revenue (Fig. 5). Creating Shareholder Value Onex creates shareholder value in three ways:

38%

28%

Source: Onex financials

Fig. 2: Investment of ONEXs Proprietary Capital


Large-cap Private Equity Mid-cap Private Equity Onex Real Estate 4% 3% 3% 16% 74% Cash & Near-cash Items Onex Credit Partners

Source: Onex financials

Fig. 3: Revenue by Geographic Segment (C$ M)


$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 2006 2007 2008 2009 North America Europe Asia & Oceania Other 3% 20%

13%

64%

2010

1. Fees from Third-Party Assets Under Management (AUM): Onex currently manages about C$8.9B of third-party AUM on behalf of a number of institutional investors. Management fees range from 1-2% per year depending on whether or not committed capital is invested. In 2010, revenue from this business segment totalled approximately USD$90M. 2. Carried Interest: Carried interest is a reward to Onex shareholders and management based on performance. Onex earns 20% of all capital gains within a fund provided it reaches a target annualized return of 8%. Carried interest within a fund is calculated independently of other funds. Shareholders are entitled to 40% of earned carried interest, with management taking the remaining 60%. Since 2003, Onex has recognized USD$237M in carried interest through its income statement. 3. Capital Appreciation: Appreciation of the C$4.4B of Onex proprietary capital represents the largest way through which Onex creates shareholder value. Onexs goal is to grow Net Asset Value (NAV) per share by 15% per year. Since inception, Onex boasts an average IRR of 29%. This has contributed to a 17% annual compounded share price return over the last twenty years. Investment Strategy Onex is a self-described value investor as it aims to acquire companies that are undervalued. The key driver behind Onex past performance is its ability to find, manage, and exit profitable investments. The management team looks for investments in three key areas: 1. Carve-outs of subsidiaries and mission-critical supply divisions from multinational corporations 2. Operational restructurings 3. Build-ups in a wide variety of industries Onex investigates nearly 300 investment ideas per year prior to moving forward with only two or three of them. It tends to take on public or private equity investments that grant it a controlling stake. As of Q3 2011, the smallest percentage of voting shares Onex holds in a company is 50%a. Onex likes to maintain an active presence within its investments; management often takes on key managerial roles inside its investments. Onex Clients The majority of Onex third-party AUM comes from pension funds. The value contributions from this source have increased from C$916M to Onex Partners I (2003) to C$2.4B to Onex
(a) Allison Transmission: Onex has contractual rights and protections, including right to appoint members to the Board of Directors

Source: Onex financials

Fig. 4: Revenue by Industry (C$ M)


Electronics Manufacturing Service Financial Service Aero-structures Customer Support Services Healthcare Metal Service Financial Service Other Other Customer Support Services

$30,000

$25,000 $20,000 $15,000 $10,000 $5,000 $0 2006 2007 2008 2009

9% 8% 6% 5% 27% 18% 27% 2010

Source: Onex financials

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Fig. 5: 2011 Revenue (1st 9 mths)


Celestica Carestream Health Sitel Worldwide Corp. ONCAP II Co's ResCare Tropicana Las Vegas

Partners III (2009), a 2.6x increase. However, the percentage of pension fund ownership within each fund has declined over the same time period (Fig. 6).

Spirit AeroSystems TMS International Corp. The Warranty Group Skilled Healthcare Group Centre for Diagnostic Imaging Other

Industry Overview & Competitive Positioning


Fundraising Down 10.9% as of Q3 2011 In the first nine months of 2011, PE firms raised USD$192.5B globally compared to USD$216B in the same period of 2010. In aggregate, fundraising has slowed considerably from pre-recession highs (Fig. 7). Since 2009 a quarterly average of roughly USD$70B was raised by PE firms globally, versus an average of over USD$160B between 2007 and 2008. Institutional investors have recently shied away from PE due to high volatility in equity and bond markets, as well as the uncertainty surrounding the future of the global economy. The liquidity risks associated with PE investments may have contributed to this trend. Alternatively, it may be that fundraising levels are artificially constrained by the so-called denominator effect write-downs in the valuation of PE holdings have lagged more liquid holdings, artificially inflating the PE allocation beyond its target. Clearly this story needs to be monitored over the next few years. Against this backdrop ONCAP III completed fundraising in September 2011 with third-party capital commitments of nearly C$550M. ONCAP III was oversubscribed, a rarity in the current PE environment. Onex closed Onex Partners III in December 2009 with C$3.5B in thirdparty capital commitments. This represented a 70% increase in commitments from Onex Partners II. Given the poor fundraising performance in the PE industry, it is clear that Onex has a special advantage over its peers. Onex ability to attract capital owes largely to its reputation for earning consistent, outsized returns. Buyout Slow-down Buyout activity is historically correlated with equity market conditions, and the recent past is no exception. While there is a definite post-recession upward trend in global aggregate buyout deals, Q3 of this year has seen a significant slowdown; buyout deal activity decreased 23% QoQ to USD$60.6B(Fig. 8). Currently, weak deal flow is not due to a lack of funds globally, PE firms have nearly USD$1T in dry powder (un-invested capital) (Fig. 9). Instead, solid investment opportunities are relatively uncommon. Typically, investment opportunities come from two sources: public markets and carve-outs. While there exist attractive opportunities in public markets, there are fewer carve-out opportunities which represented the majority of PE investments in the past. The lack of quality carve-out opportunities is attributable to the unwillingness of cashhoarding parent companies to shed assets leading to weak corporate M&A activity (Fig. 10). In 2011, Onex completed three buyouts totalling C$976M. Over the past ten years Onex has, on average, completed roughly three deals per year valued at C$833M. As such, 2011 has been an average year for Onex in terms of buyouts. Overall, Onex is constrained by the same forces as the entire PE industry, and its buyout activity is generally correlated with global PE buyout activity. Going forward, Onex has C$1.3B in cash and roughly C$2.8B in uncalled committed capital to support its investing strategy. This glut of dry powder falls in line with the industry trend, implying that Onex and its peers have a considerable war chest of capital that must be put to use in the coming quarters. I.P.Nos Turbulent public markets in the second half of this year and cash-hoarding firms have constrained exit opportunities available to PE firms. While investors were optimistic with respect to public equity markets at the start of 2011, environmental disasters and global political gridlock have left investors unwilling to assume additional risk. Still, owing to robust capital markets in Q1 and Q2, aggregate exit values for 2011 may test prior records (Fig. 11 & 12). In Q2 alone, over 300 exits were announced globally, valued at over US$120B, which is a single-quarter record. Conversely, only 254 exits were announced globally in Q3 with a dismal value of less than US$60B. The steep QoQ drop is partially attributable to PE firms unwillingness to exit their largest holdings in volatile public markets. Indeed, only 12 exits valued over USD$1B were made in Q3 versus 21 in Q2, and no exits valued over USD$5B were made compared to three in the previous quarter.

6% 7% 10% 12%

5%

4%

1% 33%

21%

Source: Onex financials

Fig. 6: 3rd Party Committed Capital Demographics at Funds Inception


Pensions Banks & Insurance 100% 80% 60% 40% 20% 0% Onex Partners I Onex Partners Onex Partners ('03) II ('06) III ('09) Soverign Wealth Asset Managers Endowment High Net Worth

Source: RBC Capital Markets

Fig. 7: Aggregate Value & Number of PE Funds Raised (2007-11,USD$B)


Capital Raised (Billions USD) $250
Aggregate Value

Number of Funds 500 300 200 100 0


Numer of Funds

$200 $150 $100 $50 $-

400

Source: Preqin

Fig. 8: Global PE-Backed Buyout Activity


Global Value (Billions USD)
900 800 700 600 500 400 300 200 100 0

Number of Deals
$90 $80 $70 $60 $50 $40 $30 $20 $10 $-

Source: Preqin

Aggregate Deal Value

# of Deals

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Toronto CFA Society Investment Research Challenge | Student Research | In 2011 Onex fully divested two investments: Emergency Medical Services and Husky International. Both companies were sold to other PE firms for a total of roughly C$3.5B, representing a weighted average IRR of 41%. Additionally, Onex brought TMS International public in April 2011, realizing a nominal portion of the total investment in the process. Notably, all three liquidity events occurred in the first half of 2011 when markets were more stable. Onex Allison Transmission announced its IPO in March of this year. However, the IPO has not yet occurred due to poor equity market performance. Continued weakness in public markets may force Onex to hold onto its already mature holdings for longer than originally intended. Pension Plan Changes Will Impact Onex
Source: Preqin

Fig. 9: Global PE Dry Powder (2003 2011)


$1,200 $1,000 $800 $600 $400 $200 $-

(US$ B)

$700

Fig. 10: Global M&A Activity

Both globally and within Canada pension funds represent an important source of funds for PE firms. In the last decade or so, the share of pension fund assets allocated to PE has increased. The increase is part of a broader trend among pension funds towards greater diversification from traditional assets, like bonds, and public equities, to alternative assets like PE, hedge funds, and infrastructure. At Onex, pension fund commitments to the Onex Partners family of funds represent nearly 67% of third-party committed capital. Moreover, third-party capital commitments have successively increased by 60% to 70% for each fund in the Onex Partners fund family. Thus, changes in the Canadian pension fund industry have undoubtedly affected Onex growth. Going forward, three important developments in the pension fund industry will likely have a material impact on Onex: 1. Many pension funds are opting to manage PE internally, which both reduces the availability of third-party AUM to Onex and creates a more competitive PE environment. For example, Ontario Teachers Pension Plan is a direct investor in PE deals; its C$12B PE portfolio poses a real competitive threat. 2. Among private pension plans, there has been a shift from defined benefit (DB) plans to defined contribution (DC) plans that will continue for the foreseeable future. Unlike DB plans, regulatory constraints limit DC plan members ability to participate in PE. Thus the shift to DC plans may translate into a net decrease in funds available to Canadian PE firms, including Onex. 3. In December 2011, the Canadian government passed legislation to enact a new pension scheme: Pooled Registered Pension Plan (PRPP). PRPPs allow Canadians without access to work based pension plans to form collectively pooled pensions. These new pensions are being designed to emulate many of the features of DC plans. As employers opt for PRPPs, Onex may lose out on AUM growth. Competitive Environment The near- to mid-term prospects for PE do not look any more promising than in the recent past. With extreme uncertainty surrounding the Euro-zone sovereign debt crisis and a sluggish global economic recovery, public equity markets will likely continue their lacklustre performance. This means sustained competition for investment opportunities and less-thanoptimal IPO exit opportunities. In contrast, corporate M&A activity may pick up slightly given recent signs of economic stability in the US. If this happens, both carve-out and exit opportunities will improve, which may be a bright spot for the industry. Still, given the problems in the EU, debt financing for leveraged deals may still be scarce going forward. This will put continued pressure on the mid-market segment as the largest PE firms compete with the smallest for quality investments. The hypercompetitive environment that has developed within the PE industry will constrain Onex ability to effectively deploy capital over the coming quarters. In addition, Onex may start to feel pressure from LPs to utilize their C$2.8B in uncalled capital so as to begin generating yield as quickly as possible. Together, a competitive environment and LP pressures could force Onex to re-evaluate its historically successful investment strategy by venturing into new asset classes. This transition may already be underway, as Onex is one of the two final bidders for the private equity arm of AXA, the European insurance giant. Such an investment would be highly uncharacteristic for Onex, raising concerns that it may not be able to reproduce its industry-leading returns.

$600 $500 $400 $300 $200 $100 $-

USD$ B

Source: Ernst & Young, Allen Avery

$400 $350 $300 $250 $200 $150 $100 $$50

Deal Value (USD$B)

400 200 -

Aggregate Deal Value

# of Deals

Source: Ernst & Young, Preqin

Fig. 12: Quarterly Global IPO Activity


$140

IPO Value (USD$ B)

$120 $100 $80 $60 $40 $20 $-

Source: Ernst & Young, Allen Avery

Fig. 13: Comparison of Alternative Asset Managers


AUM (Bil. USD) Onex Blackstone Group Carlyle Group Apax Partners Bain Capital KKR $8.2 $43.7 $157.7 $148 $33.3 $66 Activities Buyouts in 2011 Leveraged Real Buyout (Mil. USD) Finance Estate $962 $15,900 $16,700 $8,000 $9,800 $9,200 Other

Source: Private Equity Manager, Proprietary Research

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011

# of Deals

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011

Fig. 11: Global PE Exits


1,400 1,200 1,000 800 600

Q4 '11 Q3 '11 Q2 '11 Q1 '11 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

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Fig. 14: Hawker Beechcraft Sales & Net Income (USD)


Sales $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 -$500 Net Income

Investment Summary
Leverage in Disguise Onex has no debt at the parent level and does not use debt to buy companies. Rather, debt lies within each portfolio company. These subsidiaries are responsible for their own debt financing, which is without recourse to Onex or its other portfolio companies. This policy helps to maintain the financial strength of the parent company, but also increases the credit costs for each subsidiary. Thus, while Onex investors are not directly exposed to financing risk, they indirectly face this risk through Onex holdings. Onex outsized gains, past or future, may be earned at the cost of increased financing risk through Onex its subsidiaries. Luxury Aircrafts Hit Turbulence In 2007 Onex partnered with Goldman Sachs in a deal to buy Hawker Beechcraft for USD$3.3B, of which Onex committed USD$537M. Hawker operates in the luxury avionics industry, which is highly vulnerable to economic cycles. Needless to say, this investment is not going very well for Onex. From 2008 to 2010 sales declined 21%, a trend that has continued through 2011 (Fig. 14). Both S&P and Moodys have recently downgraded their credit ratings on Hawker to Caa3 and CCC respectively. Both agencies are concerned that Hawker may be forced to restructure its USD$2B in debt. Moodys goes so far as to say that they do not believe Hawker will be able to pass certain financial covenant tests through 2012, which will not bode well for debt and shareholders. In mid-December their USD $182.9M notes, due in April 2015, were trading around 18.5 cents on the dollar. Therefore, there is a very real possibility that Onex may see its equity position in Hawker severely damaged if not completely wiped out. Hawkers poor performance calls into question Onex recent investment decisions, as it was purchased in 2007 when Onex placed nearly C$2.7B in capital. Management Handsomely Rewarded Onex compensation structure aligns the interests of management and shareholders. Specifically, Onex management is required to reinvest 25% of all gross carried interest and Management Investment Plan distributions into Onex until each manager owns at least one million shares. As a result, Onex management team is its single largest shareholder. While Onex compensation structure does much to mitigate moral hazard, overconcentration of ownership exposes outside investors to governance risks. This is elaborated on in the Risks section. The Value Investor NOT Value Investing Despite being a self-described value investor, Onexs acquisition activity seems to run contrary to the economic cycle-agnostic approach typical of value investors. Over the last fifteen years Onex has made significantly more acquisitions in bull markets than in bear markets (Fig. 15) (Appendix D). Specifically, Onex made nearly C$2.7B in acquisitions in 2007, during the run-up to the 2008-09 economic collapse. Conversely, Onex made only three acquisition valued at C$668M in 2008 and 2009 combined. This trend calls into question Onex investment discipline and its self-described value investing style. Moreover, Onex tendency to invest when equity markets perform well is a cause for concern, given extreme uncertainty surrounding near-term equity market performance. Bigger Company = Bigger Deals As a result of nearly three decades of strong results, Onex has been rewarded with increasing amounts of third-party capital. Increased AUM creates greater fees for Onex, but also necessitates larger deals, or a higher frequency of deals. Evidence of this is the growth of Onex average deal size (Fig. 16) as well as the frequency of deals (Fig. 17). The average deal in Onex history is roughly C$164M; C$219M in the last ten years, and C$314M in the last five years. It may become more of a challenge for Onex to replicate its past performance because price inefficiencies are less common in larger companies. Clock is Ticking on an Aging Portfolio Onex is sitting on a mature basket of businesses (Fig. 18). Since its inception, Onex has exited an equity investment in about 4 years on average. Since OnCap Is launch in 2003, this number has dipped to around 3.5 years. This metric does not adjust for partial exits, such as Celistica, though still provides some insight into the health and future of Onexs holdings. On an equally weighted basis the average age of fully realized investments is just over 4 years. However, Onex older funds, Onex Partners I and ONCAP II, have an average investment

2005

2006

2007

2008

2009

2010

9 Mon Ended '10

9 Mon Ended '11

Source: Hawker Beechcraft

Fig. 15: Acquisition history vs. S&P Performance (2005-12)


1800 1600
S&P 500 Price Level

$1,400 $1,200
Acquisition Size

1400 1200 1000 800 600 400 200 0

$1,000 $800 $600 $400 $200 $0 Acquisitions S&P 500

Source: Onex financials, SSB

Fig. 16: Inflation Adjusted Average Deal Size of Onex (1991-2010)


$600 $500

Average Deal Size (C$ M)

$400 $300 $200 $100 $0 1991 1995 1999 2003 2007

Source: Onex financials, StatCan

Fig. 17: Frequency of Onex Deals (1984-2011)


12 10 8 6 4 2 0

Source: Onex financials

Frequency

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Fig 18: Age of Active Investments (Years) Compared to Average Age at Exit (1984-2011) & (2003-2011)
12 10 8 6 4 2 0 Av er age A ge at Exit (si nce inception (1984)) Av er age A ge at Exit (si nce ONCAP I (2003)) Age

Source: Onex financials

age of 6.5 and 4.5 years, respectively. Specifically, Onex has held Rescare for over seven years and Casino ABS for over 10 years. Keep in mind, Allison Transmission, which Onex filed papers to IPO, but failed to pull the trigger, is about 4.5 years old. As such, Onex could find itself having to divest a large number of investments in short order, resulting in a further flood of cash-on-hand to be re-invested. Given its already flush coffers of cash and poor industry outlook, Onex will likely be rich in cash and poor in investment opportunities for the near term. The implication is that the company will struggle to meet its stated 15% NAV growth target.

Fig. 19: Revenues ($C M) & Profit Margins (2006 2010)


revenue net profit margin

Financial Analysis
Financial Statements of Limited Use to Investors Onex financial statements are fully consolidated, making any meaningful interpretation nearly impossible. The extent to which Onex financial statements can be analyzed is limited by three factors: 1. The extent to which a portfolio company contributes to Onex consolidated revenue or net income is rarely proportional to its relative contribution to Onex portfolio value. For example, in 2010 Celestica represented roughly 27% of Onex consolidated revenues yet comprises less than 5% of Onex holdings. 2. Following on the above point, if financial information on all of Onex portfolio companies were available, proper financial analysis would be possible. However, given that the majority of Onex holdings are private the requisite information is unavailable. 3. Finally, Onex constantly acquires and divests holdings, making comparison of financial results between periods problematic. For example, according to Figure 19, it appears that over the last five years Onex revenues plateaued, its operating margins improved and profit margins deteriorated. Yet, throughout this time Onex exited and partially realized investments in 6 different companies, which collectively have had a significant impacted on all three variables. These three factors call into question the relevance of Onex financial statements, both for assessing financial performance and for valuation purposes. Industry Segmented Financial Analysis

operating profit margin

$30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

12% 10% 8% 6% 4% 2% 0% -2%

(USD$ M)

2006

2007

2008

2009

Source: Onex financials

2010

Fig. 20: 2010 Operating Margin, EBITDA, Revenue by Industry (USD$M)


Revenue EBITDA $8,000 $6,000 $4,000 $2,000 $0

Operating Margin 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

To mitigate the effect of asset turnover and operational differences between Onex portfolio companies on ratio analysis industry segmented analysis can be used. On these terms, it is clear that the industries Onex companies operate within have highly variable margins (Fig. 20). Moreover, performance across industries varies significantly over time (see Appendix E: Segmented Financial Analysis). Key takeaways include: 1. YoY Net Profit Margins (NPM) Up: NPM was up for Onex three largest holdings by revenue. Although Electronic Manufacturing Services (i.e. Celestica) increased its net profit by nearly 17% YoY, the net profit margin increased from 0.09% to an equally abysmal 0.1%. To further exasperate the situation, their largest customer, Research-inMotion is under hardship. Continued financial distress may adversely affect Celestica. 2. Net Income (NI) Down: Overall, NI was -USD$51M, a 145% YoY decrease. This can primarily be attributed to Customer Support Services (i.e. Sitel World Wide) and Other Industries, which lost USD$53M and USD$94M respectively. Onex shareholders have a 68% stake in Sitel, a C$340M investment. Though Sitel is up from a loss of USD$126M

Source: Onex financials

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Toronto CFA Society Investment Research Challenge | Student Research | in 2009, as of Q3 2011 Sitel still lost USD$37M. Nine months into 2011, Other Industry income was up USD$908M. However, after subtracting earnings from discontinued operations of USD $1,109 M, Other actually lost USD -$201 M year to date.

Fig. 21: Trend of Acquisitions and Share Buybacks (1997-2011)


180 160 140 120 100 80 60 40 20 0 Buybacks Number of Acquisitions 9 8 7 6 5 4 3 2 1 0

Buybacks and Dividends Maintaining a competitive dividend policy is not a top priority for Onex management as evidenced by the $0.11 per share dividend. This payment level has remained constant since 1995. The very low yield of these dividends (0.33%) and the priority of capital appreciation within Onex strategy begs the question as to why Onex pays dividends at all. Given the concentration of ownership within management and with the CEO, it is possible that this dividend policy is catered towards managements interests. Since 1997 Onex has conducted normal course issuer bid (NCIB) share buybacks amounting to 75,841,399 shares (C$1,154M at average share price of $15.22). From 2009 to 2011 Onex has bought back C$43.4M, C$49.5M, and C$91.9M respectively. Over the last decade, these share buybacks seem to increase in bull markets, and act as a return of wealth to shareholders. Analysis shows periods of buybacks are generally followed by periods of acquisitions (Fig. 21). There is a strong correlation between the pattern of buybacks and acquisitions, with a correlation of 40% when adjusted for a one year lag. Moving forward, given Onex mounting cash and its purse full of ripe businesses, it is possible that it will use some of its cash to conduct larger than normal share buybacks in the coming years.

C$ M

Source: Onex financials

Valuation
PE Discount Factor Traditionally, as is the case with Onex, PE firms trade at a discount to NAV for a number of reasons. Such reasons include: limited disclosure requirements; investment illiquidity (i.e. long lock-up periods); transaction costs incurred in the acquisition and divestiture of businesses; management and employee compensation costs; and general overhead costs. A company will also trade at a greater discount to NAV if shareholders have reservations about management or, as is the case with Onex, are concerned about management succession planning (See Risks section). Aside from these factors, a PE firm will trade at a discount to NAV if the growth in new capital commitments is greater than that of new acquisitions. Therefore, just because Onex market price is trading below its NAV does not imply that Onex is trading at a bargain. The importance of the PE discount will become clear shortly. Discounted Cash Flow (DCF) and Comparable Analysis Both DCF and comparable analysis require reliable financial data, which is not available for Onex. A DCF model hinges on the reliability of predicted future cash flows, however at both the consolidated and company-specific level such data is not available. Similarly, with comparable analysis the denominator of any multiple (i.e. price-to-earnings, price-to-book value, etc.) does not truly reflect Onex economic value and as such is of limited use. Figure 22 & Appendix F demonstrates the inappropriateness of comparable analysis. Net Asset Value (NAV) With a Sum-of-the-Parts Analysis Given the inappropriateness of traditional valuation methodologies, an alternative approach is required. The best approach is to separately value each of three means by which Onex creates shareholder value (net AUM fees, carried interest, and capital appreciation), and add them together to create a sum-of-the-parts (SOTP) valuation. Each component of the SOTP valuation is discussed below. Capital Appreciation (Appendix G) For Onex publicly traded companies, present and one year forecasted NAV valuations are computed by using present market prices and one year analysis consensus price targets. To find Onex present and forecasted NAV of Onex private holdings, historical costs for each investment are adjusted according to historical industry growth ratesb, or EV/EBITDA industry multiples as deemed fit. In some instances, current information on a company indicates that it no longer follows its industry growth path. In these situations, judgement was used to arrive at a NAV which reflects present circumstances. For example: 1. Hawker Beechcraft: For reasons previously discussed, we believe that recording the value of Onex position in Hawker at a fifth of its initial cost appropriately discounts for the risks encompassed with this holding until further notice. 2. Tropicana Casino: Tropicana is undergoing a comprehensive redevelopment and is not
(b) Source: Damodaran Online

Fig. 22: Demonstration of Unreliability of Comparable Analysis


BV FCF EBITDA AUM ($B) $23.05 12.2x $8.90 7.2x $5.51

Per Share $48.00 $0.39 Multiple Price 1.7x 14.5x

$81.6 $5.66 $281.21

Source: Bloomberg, Onex financials

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Toronto CFA Society Investment Research Challenge | Student Research | fully operational. As such, it is not reasonable to assume Tropicana is currently growing at the same rate as its industry. Until the completion of the redevelopment, the current value of Tropicana is assumed to be the price that Onex paid. After the formulation of a projected value for each public and private company, all holdings are weighted to reflect the level of Onex economic ownership and subsequently aggregated. The resultant number reflects the intrinsic value of Onex holdings. Finally, the aforementioned PE discount factor is applied, resulting in the NAV of Onex operating companies. Standard industry practice is to use a PE discount factor of 20%. However, due to opaqueness and abnormality of Onex operations and the pessimistic opinions of Onex future prospects expressed above, this report uses a 25% discount factor for private companies. Public companies are discounted by 10%, reflecting the reduced liquidity premium required for such holdings. Onex Real Estate Partners and Credit Partners was valued using their fair value, reported in Onex financial statements. For cash and near-cash assets a 0.12% annual growth rate is used. This represents 1-year interest rate implied by the current U.S. treasury yield curve. Finally, the result from the NAV of Onex holdings and the present value of its cash are added together. This results in a total NAV per share of C$29.26, and constitutes the majority of Onex share price (Fig.23). Carried Interest Carried interest was valued using a forecasted present value approach. Carried interest estimates are problematic because of the uncertainty surrounding future returns and Onex future AUM. To overcome this hurdle whilst erring on the side of caution, carried interest calculations were based only on Onex current third-party AUM. Instead of using the companys historical IRR of 29%, the future value estimate of carried interest is formulated assuming a constant IRR of 15%. This better reflects this reports cautiously pessimistic view of Onex future prospects. To discount projected carried interest back to present, a cost of equity of 12% is computed using CAPM estimation (Fig. 24) . In addition, Carried Interest is discounted a further 10% to account for uncertainty regarding the timing of investments and exits. The PV of carried interest is C$1.09 per share, constituting a small contribution to Onex share value. A sensitivity analysis with variable IRR and discount rates was employed to further examine the impact this reports assumptions had on the valuation (Fig. 25). As shown in Figure 25 varying the assumptions within the specified extremes suggests that had the historical IRR of 29% been used, an additional $1.48 could be added to the valuation. Net AUM Fees (Appendixes H) From 2003 to 2010 annual fee-based revenue has increased from C$17M to C$97M. After subtracting necessary overhead costs for the parent company, 2010 net AUM fees came in at approximately C$33M. Using this information, future net fees are forecasted via two methods: 1. Price-to-Earnings Multiple Approach: This straight forward method multiplies the total net AUM fees (C$33M) by the average P/E multiple for Canadian asset managers (14x). Using this method we calculate a PV of third-party fees of C$4 per share. 2. DCF Approach: All of our assumptions in implementing this valuation model can be found in Appendix H. The two most noteworthy assumptions are: the use of a 10% growth rate over the next 5 years as opposed to Onex targeted AUM growth rate of 15%; and that overhead costs will remain a constant 30% fraction of fees over time. Management guidance implies that the current number is closer to 25%, but a 30% fraction better represents the future economies of scale that will benefit Onex as AUM grows. Once again, management fees are discounted by a further 10% to account for uncertainty regarding the timing of investments and exits. This method yields an estimated PV of thirdparty fees of C$3.73 per share (Fig. 26). Valuation (SOTP)
$36.41 9.4%

NAV Components Public Private Oncap II Real Estate Partners Credit Partners Cash and Other Total
Source: SSB Research

Fig 23: NAV-Base Scenario per Share


Current $2.69 $10.74 $1.91 $1.15 $0.74 $12.02 $29.26 Forecast $3.99 $11.38 $2.10 $1.27 $0.82 $12.03 $31.59

Variables Risk Free Market Return Equity Premium Beta Cost of Equity
Source: Bloomberg

Fig. 24: CAPM - Cost of Equity

Percents 1.97% 11.03% 9.06% 1.06 12%

Fig. 25: Sensitivity Analysis of the Present Value (C$) of Carried Interest
IRR 5% 10% 15% 20% 25% 29% Discount 13% 0.31 0.65 1.05 1.50 2.03 2.48 Rate 12% 0.32 0.68 1.09 1.57 2.10 2.57 11% 0.32 0.70 1.13 1.62 2.17 2.66
Source: SSB Research

Fig. 26: PV of Net AUM Fees (C$) -Base Scenario


DCF Approach P/E Multiple Approach Average Net AUM Fees Discount PV of Net AUM Fees after discount Base $4.28 $4.00 $4.14 10% $3.73

Source: Proprietary research

Current Valuation Current Price (Dec.30 2011) NAV PV of Carried Interest PV of Net AUM Fees Current Value Current Implied Discount 12-month Target Valuation Current Price (Dec.30 2011) Target NAV PV of Carried Interest PV of Net AUM Fees 12-month Target Price Implied Growth
Source: Proprietary research

Fig. 27: SOTP Valuation (C$)


$29.26 $1.09 $3.73 $33.28

$34.08 -2.3% $33.28

$31.59 $1.09 $3.73

$36.41 Twelve-month Target Price (Fig. 27) The SOTP valuation finds Onex current value to be C$34.08. When compared to its current

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Fig. 28: Scenario Analysis


Bull: $41.58

price of C$33.28, the result is an implied discount of 2.3%. The 12 month target price is C$36.41 which represents a 9.4% gain over the next year. Price Range (Fig. 28) Scenario analysis was conducted to obtain a range of estimates of the target price. Besides the base case, a bull and bear case share price was calculated. The underlying assumption for the bull scenario is that the economy will experience a V-shaped recovery over the next twelve months. The underlying assumption for the bear scenario is that there will be a double -dip recession and the economy will continue to slide. To value Onex in a bull (bear) scenario, many of the assumptions were changed from the base scenario: 1. For public companies, rather than the average analyst price estimate, the highest (lowest) analyst price estimate is used Private companies NAV growth are 10% higher (lower) than under the base scenario. A growth rate of 15% (5%) is used instead of 10% for the discounted cash flow model for management fees. A multiple of 15x (13x) is used instead of 14x for the relative valuation. An IRR of 20% (10%)is used to calculate the PV of carried interest in the bull (bear) scenario.

Target: $36.41

Bear: $34.10

Source: SSB Research

2. 3.
Bull

Fig. 29: Scenario Analysis on Predicted Share Price (C$)


Target NAV $30.17 $31.59 $35.75 $0.68 $3.25 2.5% $1.09 $3.73 9.4% $1.56 $4.27 Bear Base

4.

PV of carried interests PV of net mgmt fees Target price Implied Growth


Source: SSB Research

$34.10 $36.41 $41.58 24.9%

Given these assumptions the target bull price is $41.58 which represents an implied growth of 24.9%. The target bear price is $34.10 which represents implied growth of 2.5% (Figs. 28 & 29).

Risks
Investment Risks Governance Concerns Onex shares are structured into two classes: Multiple Voting Shares (MVS) and Subordinated Voting Shares (SVS). SVSs are traded on the TSX and entitle their holders to elect 40% of Onex board members. MVSs entitle their holders to elect 60% of Onex board members. Mr. Schwartz holds all of the 100,000 outstanding MVS indirectly, and 19.5% of the SVSs directly. As such, he has the right to elect nearly 70% of Onex board giving him control of both the companys operations and governance. Therefore, Onex share structure results in a governance risk because management and oversight are controlled by one individual. Stock Illiquidity In 2011 and 2010 the average daily volume for Onex publicly traded shares were 175,967 and 266,721, respectively. On a public float of roughly 120 M shares, these volumes are extremely low. This raises concerns for institutional investors and high net worth individuals looking to enter and exit positions valued in the tens of millions of dollars. Moreover, large trades may cause share price movement, adding an extra layer of risk and complexity to the investment decision (Fig. 30). Fund Risks Exit Opportunities On an industry-wide basis, turbulence in equity markets has undermined the ability of PE firms to exit investments through IPOs. Similarly, weak corporate M&A activity has adversely impacted exits via strategic acquisitions by competitors and suppliers. This represents a significant risk to Onex. The inability to divest its holdings may severely impact the companys ability to maintain a consistent return on investment over the next few years. Investment Opportunities Global economic uncertainty, very high levels of dry powder, and a general inability to raise debt funds for large leveraged buyouts has intensified the competition for mid-market investments amongst PE firms. Onex inability to place uncalled committed capital due to these factors may significantly impact its share price performance over the near- to mid-term. Forex Risks A large portion of Onex capital is allocated to investments in companies operating in the US: 76% of consolidated revenues come from American operations. Fluctuations in foreign exchange rates between the US and Canadian dollar, may cause significant changes in the value of Onex holdings. While over the long-term foreign exchange rate gains and losses

Fig. 30: Trade Volume (2006-Present)


Average Daily Volume YTD 2010 2009 2008 2007 2006 183,724 175,967 266,721 275,852 371,499 244,880 Average Float 116,904,994 119,298,614 121,208,215 123,836,536 127,250,611 133,503,083 % of Float Traded Daily 0.157% 0.148% 0.220% 0.223% 0.292% 0.183%

Source: Annual Reports, Yahoo! Finance

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may cancel out, volatility in exchange rates can lead to volatility in the value of realizations from Onex investments. Reputational Risk Onex ability to raise funds is largely dependent on its reputation among institutional investors. Poor performance, owing either to managements decisions or forces outside the firms control would have a material and adverse effect on Onex reputation. This would directly affect the companys ability to raise future funds, representing a medium- to long-term risk. Dependence on Trends in Pension Fund Industry Pension funds contribute 60% to 70% to each of Onex current funds, making the firm vulnerable to trends in pension fund management. Such trends include, but are not limited to: the growing tendency for large Canadian pension funds to manage PE in-house; the shift of private pension funds from DB to DC plans; and the newly created PRPP. In addition, unforeseen changes in pension fund management would affect Onex future AUM growth. Loss of Key Employees PE is a human capital intensive industry. Onex ability to locate profitable investments and exit them in a fruitful and timely manner is wholly dependent on the knowledge and talent of its management. With a team of only seventy investment professionals whose average tenure is sixteen years, Onex investment team is small and experienced. The loss of even a few key employees may severely impact Onex ability to generate the outsized returns typical of the firm. Specifically, Gerry Schwartz is arguably Onex greatest asset. If his tenure as CEO were to end abruptly, the implications for Onex share price would likely be catastrophic. Operational Risks Significant Customers Risk Six of Onex operating companies have significant customers from whom 10% or more of their revenues are derived (Appendix I). The value at cost, or market value, of those investments is C$466 M, which represents 18% of Onex total PE investments. Two companies are heavily exposed to this risk. Spirit AeroSystems, (valued at C$95 M as of September 30, 2011) derives 94% of its revenues from two customers. Celestica (valued at C$129 M) derives 20% of its revenues from Research in Motion (RIM). RIMs future is questionable, because of its recent industry-lagging performance, governance concerns, and current speculation of it being an acquisition target. The failure of Onex subsidiaries to diversify their customer base may adversely affect their performance, which would negatively affect Onex share price in the near future. Operating Liquidity Volatility in credit markets represents a risk to Onex operating companies whose loans are up for renewal in the short term. As Figure 31 shows, loans at Onex companies are not up for renewal until 2013, and the majority of renewal dates are past 2014. Moreover, 56% of debt at Onex operating companies is fixed rate, or fixed through interest rate swaps. As such, near-term volatility in credit markets does not represent a significant risk to Onex current operating companies. Increasing Commodity Prices Three of Onex operating companies are vulnerable to swings in commodity prices. Spirit AeroSystems uses significant amounts of aluminum, titanium and carbon fibre in its manufacturing operations. It has entered into long-term supply contracts to mitigate the effects of volatile commodity prices on its earnings. TMS International is highly dependent on diesel fuel prices, and consumes approximately 11 million gallons of oil per year. Finally, silver represents a significant commodity used in Carestream Healths manufacturing of imaging equipment, particularly x-ray film. Carestream uses forward contracts to manage the effect of volatile silver prices on its earnings. Decreasing Government Funding Approximately 5.5%, or $151 million, of Onex proprietary capital is invested in its healthcare segment. Performance companies in this segment is dependent on US government funding at the federal, state and municipal levels. Due to increased budgetary pressures in the US, a variety of factors may lead to diminished levels of government funding. A decrease in appropriations for services offered by Onex operating companies may materially and adversely impact the performance of those companies. Additional company-specific risks are provided in Appendix C.

Fig. 31: Consolidated Minimum Debt Repayment Requirements


Year 2011 2012 2013 2014 2015 Therafter Total
Source: Annual Reports

USD$M 242 395 2,356 1,096 468 2,132 6,689

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Disclosures:
Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject companys securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Schulich School of Busines, CFA Institute or the CFA Institute Research Challenge with regard to this companys stock.

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Appendix A: ONEXs Structure and Funds Holdings

Source: Onex

Appendix B: Return on Invested Capital


Investment Period Direct Investments Onex Partners I Onex Partners II ONCAP I 1984-2003 2003-2006 2008-present 1999-2005 2005-2011 2011-present 27 years 2006-2008 Invested Capital $1,899 $1,561 $2,939 $208 $493 $8,447 $44 $1,303 Total Realized and Multiple of Unrealized Value Cost $4,948 $5,674 $4,804 $850 $813 $18,517 $1,428 2.9 4.2 2.3 4.1 5.8 3.3 Annual Rate of Return 27% 80% 25% 43% 57% 29% -

Onex Partners III ONCAP II ONCAP III Total


Source: Onex

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Appendix C: Description of ONEXs Major Holdings


Name Industry Electronics manufacturing services Description Originally a division of IBM, now designs & manufactures tech components; provides supply chain support Location Ontario Risks 20% of revenues come from RIM Geopolitical Commodity pricing 54% revenues from Boeings 737 Unknown future for Boeings 787 Heavily regulated industry Commodity pricing; particularly diesel fuel. Regulation Malpractice threats Talent recruitment/retention Regulation Changes to Medicare/ Medicaid Macroeconomics of Texas & California Talent recruitment/retention IP protection regulation Regulation & compliance Economic, Voting Ownership 8%, 71%

Celestica Inc.

Spirit Aerosystems TMS International Centre for Diagnostic Imaging Inc. Skilled Health Care Group Inc. Carestream Health Inc. Rescare Inc.

Aero-structures

Originally a division of Boeing, now manufactures airplane assemblies & components to Boeing, Airbus, & military Outsourced provider of industrial services to steel mills in 10 countries globally, but with a North American focus An outpatient imaging provider operating 60 locations across 9 States A holding Co. with subsidiaries in skilled nursing, assisted living, hospice facilities and the like Designs & manufactures health imaging IT systems Offers residential & support services to people with intellectual & developmental disabilities, vocational training, and in-home assistance The worlds largest provider of extended warranty contracts sold to manufacturers, retailers, & distributers Provides customer contact centre outsourcing, primarily via telephone Market leader in the niche market of providing of commercial duty automatic transmissions Designer & manufacturer of corporate and military turboprop and jet aeroplanes Diversified global engineering & manufacturing firm; focus on energy efficient products A casino, hotel, & entertainment facility on the Las Vegas strip Manufacturer of kitchen & bath cabinets and home organization products

Kansas

4%, 64%

Metal Services Healthcare

Pennsylvania Minneapolis

25%, 85% 19%, 100%

Healthcare

California

9%, 89%

Healthcare Healthcare

New York Kentucky

37%, 100% 20%, 100%

The Warranty Group Sitel Worldwide Corp. Alison Transmission Hawker Beechcraft Corp. Tomkins Ltd. Tropicana Las Vegas Inc. RSI Home Products Inc.
Source: Onex

Financial Services Customer Care Services Other Other Other Other Other

Illinois

Regulatory concerns Geopolitical events & stresses Long accounts relievable periods Dependency on a few number of customers Supply chain risks High industry rivalry Macro-economic forces Volatility of input prices Geopolitical uncertainty Macroeconomic forces Illiquidity Debt obligations Regulation Macroeconomic trends Tied to strength of US housing market

29%, 100%

Tennessee Indiana Kansas London, UK Nevada California

68%, 88% 25%,19%, 14%, 50% 17%, 76% 20%, 50%

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Appendix D: Comparison of Onex Acquisition Size and Volume With S&P 500
1800 1600 $1,400

S&P 500 Price Level

1400 1200 1000 800 600 400 200 0

$1,000 $800 $600 $400 $200 $0

Acquisitions
Source: Onex

S&P 500

Appendix E: Segmented Financial Analysis


Variable Electronics Manufacturing Service 2010 Revenue Cost of Sales SG&A EBITDA Operating Margin Operating Margin ex SG&A % of Total Revenue Net Income Net Profit Margin Variable $6,717 $6,173 $224 $320 4.76% 8.10% 2009 $6,909 $6,319 $224 $366 5.30% 8.54% YoY(%) -2.78% -2.31% 0.00% -12.57% Aero-structures 2010 2009 YoY(%) -7.50% -9.33% -10.55% 8.27% 2010 Healthcare 2009 YoY(%) -0.64% 2.10% -7.13% -8.26% Financial Service 2010 $1,199 $563 $450 $186 2009 YoY(%)

$4,293 $4,641 $3,578 $3,946 $178 $537 $199 $496

$6,548 $6,590 $4,866 $4,766 $716 $966 $771 $1,053

Acquisition Size (USD$ M)


$1,359 -11.77% $656 $509 $194 -14.18% -11.59% -4.12% 8.67% 2.54% -10.09% 0.00% 13.34% 5.47% $32 2.35% Total $32 2009

$1,200

-10.07% 12.51% 10.69% 17.04% 14.75% 15.98% -7.67% -5.16% -0.92% 16.67% 20.00% 16.66% 14.98% 11.22% 25.69% 27.68% -7.19% 17.62% 18.69% -5.73% $15 0.35% $14 0.30% 7.14% 15.83% 26.87% 26.54% $39 0.60% $36 0.55% Other 2010 2009 YoY(%) 2.74% -2.29% 3.27% 36.36% 1.26% 8.33% 9.03%

15.51% 14.28% 53.04% 51.73% 4.92%

27.57% 27.82% $7 0.10% $6 0.09%

2.67%

Customer Support Services 2010 2009 $1,780 $1,140 $487 $153 8.60% YoY(%) -22.42% -22.63% -22.79% -19.61% 3.62% 0.50% -20.94% -58.73% 46.81%

Metal Service 2010 2009 YoY(%)

2010

YoY(%)

Revenue Cost of Sales SG&A EBITDA Operating Margin Operating Margin ex SG&A % of Total Revenue Net Income Net Profit Margin
Source: Onex Financials

$1,381 $882 $376 $123 8.91%

$2,091 $1,472 42.05% $1,914 $1,329 44.02% $55 $122 5.83% 8.46% 8.58% $2.00 $48 $95 6.45% 14.58% 28.42% -9.60%

$2,137 $2,080 $1,282 $1,312 $600 $255 $581 $187

$24,366 $24,831 -1.87% $19,58 $19,468 -1.08% $2,599 $2,509 $2,819 $2,544 -7.80% -1.38% 0.51% -2.94%

11.93% 8.99%

32.73% 10.30% 10.25% 8.36% 20.96% 21.60%

36.13% 35.96% 5.67% -$52.00 -3.77% 7.17% 126.00 -7.08%

9.71% -12.87% 40.01% 36.92% 5.93% 44.76% 8.77% 8.38%

4.70% 100.00% 100.00% 0.00%

-$31.00 -106.45% -$94.00 $181.00 -151.93% -$51.00 $112.00 -145.54% 0.45% -146.40%

0.10% -2.11% 104.54% -4.40% 8.70% -150.55% -0.21%

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Appendix F: Comparable Analysis of Alternative Asset Managers

Name ONEX CORPORATION AMERICAN CAPITAL LTD AGF MANAGEMENT LTD BROOKFIELD ASSET MANAGENT BERKSHIRE HATHAWAY INC BLACKSTONE GROUP LP FORTRESS INVESTMENT GRP GMP CAPITAL INC

Ticker OCX ACAS AGF BAM BRK

Market Lastest Cap AUM P/E P/B billion billion 2011 2010 2009 2008 2007 2011 2010 2009 2008 $ 3.7 $ 8.9 1.5x 1.8x 1.7x 1.4x 2.6x $ 2.5 $ 53.0 8.7x 4.4x 1.3x 9.8x 14.9x 0.6x 0.2x 0.2x 1.0x $ 1.5 $ 48.4 11.1x 16.6x 5.1x 16.5x 26.7x 1.2x 1.3x 0.7x 2.6x

BX FIG GMP KKR KKR & CO LP OCH-ZIFF CAPITAL MANAGEMENT OZM PARTNERS GROUP HOLDING AG PGPHF mean median
Source: Bloomberg

2.2x 14.2x 1.6x 14.0x 2.3x 7.9x $ 17.3 n/a 7.0x 31.2x 14.9x 28.8x 17.0x 1.1x 2.0x 1.8x 3.1x 3.5x $ 192.8 n/a 17.0x 20.3x 15.5x 22.7x 18.2x 1.2x 1.2x 1.4x 1.8x 1.6x 14.9x $ 16.0 $ 164.0 11.0x 20.8x 3.8x 4.4x 2.1x 5.7x 229.9x
1.8 $ 45.4 0.5 $ 0.9 8.3x 9.0 $ 61.1 18.5x 3.5 $ 29.9 1.1x 16.2x $ 27.2 $ 57.5 11.0x $ 29.9 $ 58.2 11.0x 3.8x 7.7x 4.9x 33.3x 23.4x 10.1x 11.5x 11.2x 1.9x 2.8x 1.5x 5.5x 5.1x 3.2x

2007

2011

4.7x 4.7 4.2 5.0 1.8x 12.5x 16.4x 4.3x 11.2x 2.1x 7.3x 11.0x 3.6x 3.5x 0.5x 4.2x 5.7x 3.0 3.3 2.1 11.7 9.7 128.3x 15.4x 13.6x 11.0x 14.4x 13.1x 14.1x 29.3x 30.5x 30.2x 4.0x 2.5x 5.4x 4.4x 3.5x 9.8 16.0 7.9 38.0x 4.0x 5.4x
5.0x 0.3x 3.2x 7.4x 8.1x

P/FCF 2010 2009

4.0x 3.6x 7.9x

MarketCap / AUM EV / EBITDA TTM % 2008 2007 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 8.1x 51.7x 5.2x 4.8x 5.0x 7.8x 11.4x 0.0 38.0 69.7 5.3 5.3 21.5 25.6

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$ $ $ $

2.3x

12.2x

3.9x

7.8x

3.5x 21.7x 9.1x 8.6x 7.3x

1.4x 15.8x 16.7x 18.4x

0.6x 10.9x 8.4x 10.1x

1.5x 4.2x 0.5x 9.0x 16.1x 15.0x 23.2x 9.2x 7.1x 5.2x 10.4x 13.7x 14.2x 26.2x 6.2x 16.6x 26.0x 15.2x 13.2x 15.1x 18.5x 2.8x 3.3x 2.2x 7.9x 4.6x 47.3x 14.2x 19.5x 14.9x 18.3x 8.5x 9.4x 15.0x 17.6x 1.9x 2.4x 1.7x 4.3x 2.9x 14.1x 7.9x 3.2x 12.5x 16.4x 6.7x 10.5x

3.9 7.2x 9.0x 56.6 14.7 3.6x 11.8 13.7x 22.2x 0.0 8.0x 10.7x 13.1 6.3x 9.0x 7.2

6.4 0.0 21.4 13.2 9.5 9.0

24.5 1.4 19.1 25.2 135.6 6.8 7.6 8.2 7.2 27.9 18.0 21.7 36.2 30.6 23.0 23.7

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Appendix G: NAV Valuation - Base Scenario

Source: SSB, Onex

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Appendix H: Calculation of PV of Net AUM Fees


Historical Fees AUM fees
Source: Onex

YoY growth rate

2003 $17 -

2004 $26 53%

2005 $28 8%

2006 $42 50%

2007 $52 24%

2008 $65 25%

2009 $88 35%

Assumptions Inherent in DCF Approach Variable YoY growth rate - Bear YoY growth rate - Base YoY growth rate - Bull Discount rate (CAPM) Growth rate terminal
Source: SSB and Onex

Assumption 5% 10% 15% 12% 3%

Net AUM fees/AUM fees

30%

PV of Net AUM Fees: DCF Approach with Scenario Analysis Bear AUM fees 2011E $101.85 $0.26 $0.26 $106.70 $0.28 $0.28 $111.55 $0.29 $0.29 2011E 2011E 2012E $106.94 $0.28 $0.25 $117.37 $0.30 $0.27 $128.28 $0.33 $0.30 2012E 2012E 2013E $112.29 $0.29 $0.23 $129.11 $0.34 $0.27 $147.52 $0.38 $0.31 2013E 2013E 2014E $117.90 $0.31 $0.22 $142.02 $0.37 $0.26 $169.65 $0.44 $0.31 2014E 2014E 2015E $123.80 $0.32 $0.20 $156.22 $0.41 $0.26 $195.10 $0.51 $0.32 2015E 2015E Thereafter $1,416.81 $3.68 $2.34 Thereafter $1,787.85 $4.64 $2.95 Thereafter $2,232.83 $5.79 $3.68 Total

Net AUM fees per share Discount net AUM fees per share Base AUM fees Net AUM fees per share Discount net AUM fees per share Bull AUM fees

$3.50 Total

$4.28 Total

Net AUM fees per share Discount net AUM fees per share
Source: SSB and Onex

$5.21

PV of Net AUM Fees: P/E Multiple Approach with Scenario Analysis Net AUM fees (million) Bear $33 $0.29 13x Base $33 $0.29 14x Bull $33 $0.29 15x

Net AUM fees per share Industry multiple PV of net AUM fees
Source: SSB and Onex

$3.71

$4.00

$4.28

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Appendix I: Significant Customers at Onex Operating CompaCost/FMV (C$B) Spirit Aerosystems TMS International Celestica CDI Skilled Healthcare $95.00 Number of Significant Customers 2 2 2010 % of Revenues 94% 69% Number of Significant Customers 2 2 2009 % of Revenues 96% 67%

$12.00

$129.00 $154.00 $8.00

$68.00

1 1

20%

32% 12%

1 1

17%

25% 12%

Share with significant customers


Source: Onex

Total Total Private Equity Investments

Warranty Group

$2,650.00 18%

$466.00

12%

10%

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