My name's Phil Sparks. Welcome to this session to this webinar on M&A deal structures. I'll be taking you through this session today. It'll be an hour long broadly the session is gonna be split into two halves. So this session is actually the first of five sessions on M&A transaction a reasonably complex M&A transaction. and so this is very much the setting up of the next f 4 sessions. So we're gonna split this into roughly two sections. The first 30 or so minutes, we're basically going to be looking at a little bit of theory about complex M&A transactions. And there's an assumption here that you know a little bit a little bit of finance, a little bit of modeling a little bit of how deals work. And this is starting to deal with more complex transactions. So what we're gonna do for the first half an hour is really just think about some of those more complex angles, more complex decisions and assumptions in relation to setting up a fairly substantial acquisition. So we're gonna spend a little bit of time looking at that., We'll, I've got a few slides which are fairly self-explanatory, fairly easy to follow, and that'll give our session a little bit of structure. That'll be about half an hour, just dealing with a few of those nuances. and slightly esoteric parts of an M&A transaction. And then the second half, we're gonna turn to a fairly big model, a fairly big spreadsheet that basically tracks a large acquisition transaction. It's from a few years ago where Bayer, the European company pharmaceuticals company bought Monsanto and basically, we'll, we're gonna use that spreadsheet over the next four or five weeks of these sessions. So today isn't producing the spreadsheet. What it's doing is just looking at the structure of the spreadsheet, looking at some of the assumptions that we've put in place in that spreadsheet, and hopefully finding our way around that spreadsheet a little bit. And then when we come back over the next four sessions, we'll gradually populate that spreadsheet. We'll gradually fill in the details of that spreadsheet. So we need stay to set things up, to basically get things in place so we understand how that spreadsheet's going to, going, going to work. We'll actually use, we'll use the completed spreadsheet, which might seem slightly odd because we're gonna spend the next four weeks producing it. But I'm gonna use the completed spreadsheets just to go, just to go through the structure of that spreadsheet so you understand how it works. And then when we come back over the next four weeks we'll use part complete versions of that spreadsheet, and we'll gradually populate that spreadsheet as that model as we go. So without further ado, off we go. We're gonna look at some slides, some theory in relation to complex, more complex acquisition transactions. So we start here with basically just the basics of a transaction. How how would you buy another company? Now, traditionally you would imagine most people, when they think about a, pen isn't working, there we are. That's better. When we think about a transaction, a purchase transaction, an acquisition, we think about this bottom right hand box. We think about a big listed company buying another big listed company. So we think, if you've been watching the news recently, we think of, for instance, Microsoft buying Activision Blizzard. Which again if you're keeping up to date with the financial press you'll know that that's been stuck in with the competition authorities recently, particularly in the UK. But it looks like the rumors are that that's gonna now get waved through a few changes in the transaction. So that's gonna go ahead. So there we have huge software company second biggest company in the world at the moment, according to market capitalization, buying another enormous software games company. and that's what we mean here. That's what we mean. A listed company buying another listed company, as it says here, highly regulated. Both companies act and rules and regulations of the stock exchange in whichever jurisdiction the transaction is happening. Lots of rules and regulations about the due diligence that needs to happen about the information that has to be posted the structure of the transaction, all that kind of stuff. On the other side, on the other quadrant, we've basically got a company buying the assets of another business. And what that means is not necessarily buying the shares of the business, but buying the assets out of a particular business. So basically cherry picking the assets that you particularly want. So you might decide you want the PP&E, you want the inventory, but you don't want the receivables, you know, you don't want certain of the PP&E, you only want some of the PP&E and so on. So basically, cherry picking the assets out to buy a particular business. Now, you might wonder why on earth a company does that rather than just buying the shares. And the reason why is that they get the ability to pick and choose. So they might say, we want those assets, but we actually don't want those, liabilities. And so it gives them the purchase of the ability to say, we don't want those sort of historic tax risks. We don't want maybe some warranty, potential warranty claims from the previous period which is one, why the assets kind of clean for that business, and it gives them the ability to, uh, to, to, to do that. other reasons why you might have a business that is part of a much larger single company and you're just dry. You're just buying out just certain sections just part of an organization. You don't wanna buy the whole thing. You don't want to buy all of the pieces of that of that business. other issues might be in relation to tax. Now, if you basically buy a business, sorry, if you buy the assets out of a business, then you'll buy them at their current fur value. And if those assets have perhaps had a historic value in the balance sheet of the target, but you buy those businesses and fur value them upwards, which is what the accounting legislation says that you should do, you pay, you buy them at fair value, and that fair value might be significantly higher. Now, that therefore means that your depreciation, but more importantly, your tax depreciation, the asset of value for tax purposes basically is going to be higher. So you are gonna get a higher tax deduction for those higher value assets. Whereas if you buy the shares of a company, you buy the shares of a company, then the ownership of those assets hasn't changed. It's the ownership of the shares that have changed, not the ownership of the assets themselves, and therefore, the local tax jurisdiction. The local tax plan will say the, the values of those assets haven't gone up, and therefore you won't get an increase in tax depreciation and increase in the tax writing down allowance of those assets going forward. So there are tax issues in relation to in relation to how you buy a business. Also, there are tax issues for the seller as well. If you buy the assets out of a business, that's likely to crystallize a gain for the seller because the, the assets are actually being bought at a higher value. Whereas if you buy the shares of a business, particularly if you, there's a share for share exchange, particularly if the consideration is shares in the new company then that might not trigger a capital gain for the original shareholders. So that's one complexity that we're going to deal with. The second thing that we're going to look at and just need to move my papers around a little bit is basically how we finance the business how we finance the acquisition. And we've got a little table here saying you can finance with debt, or you can finance it with equity. So what are the pros and cons of each? Well, hopefully lots of you will know about this already. The relative cost of equity and debt is known as ke and kd. So that is the rate of return or the cost to the borrower of raising money through equity or raising money through debt. So, kd is largely the interest that you would pay on, uh, debt net of tax. ke is the rate of return required by your shareholders in by way of both dividends and also capital growth in general, ke is significantly greater than kd for lots of reasons. , Interest is tax deductible. Debts tends to be less risky because it's often secured on or on on a particular asset. So for those reasons, kd is lower than ke. So you might say, why doesn't a business always, always finance? It's always finance an acquisition with debt. And the answer is, it's really about this thing here, consolidated debt. And basically what you need to do is you need to look at the consolidated debt position to work out how much you can, borrow to work out how much you can borrow as a function of the of the acquisition. And you've gotta think in terms of an accounting entry, you've gotta think in terms of how debt is accounted for. So what would your consolidated debt position be? It would be the debt of the acquiring company before the transaction, plus the debt of the acquired company, the target company and then finally, the debt that is used to finance the transaction, the deal debt. You add all of those things three up, and you get the consolidated debt after the acquisition. And then what you need to do, as you normally would do, is you will look at a ratio of, for instance, debt over, EBITDA and look at that ratio, but always, always on a consolidated host deal basis. And you might find that as a result of the amount of debt on your balance already and the amount of debt on the targets balance sheet, and also the debt that you want to raise, you can't actually raise that much money. A bank won't lend you that much money. So that's the limitation in terms of how much debt, you can raise to finance the acquisition. What about equity? What are the pros and cons of equity? Well, you might be able to raise the equity because you're not facing the same, uh, debt restrictions. but increasing equity might lead to dilution, and particularly your existing shareholders. If they're at, at, at a certain sort of hurdle amount. So maybe they own just over 50% or just over 25%, or just over 10% of your business, and you are gonna issue new debts to somebody else, then that is going to dilute their shareholding. And they take, may take a very dim view of that. They may not approve the transaction if the ownership is gonna be diluted. Second thing is, by raising equity, you might have something called flowback. And what happens there, and it's often a function of when a transaction happens across borders, basically the new target shareholders. So if you issue shares to target shareholders they may sell the shares in you in the new company very soon after the transaction. Particularly, as I say, if it's across borders. And they don't particularly want to own shares in a foreign company. So if lots of people sell their shares and what happens to the share price, the share price goes down. So again, you might end up with this lots of selling, lots of selling of your shares after the deal. So you've gotta sort of balance the two. And therefore, what we tend to end up with for most transactions is percentage, a certain percentage of debt and a certain percentage of equity a hybrid, a mix of the two. Okay. We're gonna look at a couple of other slides. And I'm just gonna move on if I can find my mouse, which just disappears there. It's we're gonna consider earnouts. And another element of the consideration when we look to buy a company. So we might just, we might, we might not just buy the company today with cash, with equity. What we might do is agree to a payment, an extra payment, somewhere down the line. So it's a very common or common element of a transaction. You basically agree to pay a certain amount, but also for there to be some sort of an amount or some con contingent consideration somewhere, uh, down the line, maybe in two years, we'll give you another 10 million pounds or another $10 million. If your earnings hit budget for the next two years, something like that. So this seems, this seems like a very good idea. It seems like a really good idea. Basically, you want the transaction to be successful. You are buying the company because you want its profits to help your total profits. And basically if the profits are very good, then you're happy to pay a little bit more for that business. But if the, if the profits don't turn out to be quite as good as you anticipated, then the purchase price sticks at the original amount without that additional contingent consideration on top. So it sounds like a good idea. It's also particularly a good idea if you are buying a private company. And a lot of the managers, the senior managers of the organization have shares in the target company. Because they in turn will benefit from that contingent consideration. And so if they stay with the business, continue working for the business, they will be really motivated to improve the performance, to, to really drive the performance forward so they get that extra contingent consideration. So it's j it's, it's quite a common element of a lot of, big transactions. The question is how does it get accounted for? and the accounting for contingent consideration is relatively complex. But the key elements here, and I've got it on the screen here, the really key part of this is in this top left hand box. So of course, we're gonna, we have an obligation, we're going to pay this amount in the future. So basically, how do we account for that? Well, we account for it, and it depends on what the nature of the contingent consideration is. So if, and I think it's almost easier to do the bottom bit here, if the contingent consideration is a fixed number of share, then basically the entry goes straight to equity, goes straight to equity. It isn't a liability in the, the balance sheet, it just goes straight to equity.

It's in whole numbers of shares and also associated with that, once it's been posted to equity once, that's it. You don't remeasure it, you don't, you don't change it, you don't adjust it. It's a one-off entry to equity. However, if it's anything else, if it's a number, if it's a percentage of shares, excuse me, or it's a cash transaction or even an asset transaction, then it's counted as a liability. It's the point of the deal parked in the balance sheet as a liability. And then every year end, it's remeasured, it's remeasured with the fur value of that liability. So the percentage will, you know, if there's a likelihood of paying it out if it adjusts, if there's some sort of adjustment, you know, if it's some sort of ratchets due withthe amount of profits, then you'll basically change that each year end. So that the liability, hopefully when you get to the end, when you get to that contingent consideration being paid out, the liability is pretty close, uh, to what you're actually gonna pay out. Okay. That's contingent consideration. We're gonna look at another couple of complexities and one of the other complexities to deal with, and we've talked a little bit about tax already. We've talked a little bit about tax already. We have often in a transaction, in an acquisition, we often create a deferred tax liability. Just need to move something around on screen.

Okay so, excuse me. So we often have something called a deferred tax liability, and I just want to explain how this works. Now, this is often a result of assets step up, and the easiest way to think about this is in relation to PP&E. So if we basically buy some PP&E land and buildings as part of a transaction, as part of transaction and particularly if we are looking at the purchase of a business with shares then as we've said already the ownership of those assets doesn't actually change. So the target company owns those assets. We go and buy the shares in the target company. It's still the target company that owns those assets. Therefore, for the tax authorities, there's been no change of ownership. The assets are still valued at their historic tax base, and therefore there's no change in tax depreciation or the writing down allowance associated with those assets. So there's an example here of how it's going to work. So we basically go and buy a business, and it's got PP&E of 100, but we decide that the fair value of those assets is actually 50 higher. So we put a fair value adjustment through, and that's actually a consolidation adjustment as you bolt the two companies together, and it increases the value, the PP&E those assets on a consolidation up to 150. However, the tax man is gonna say the asset value hasn't changed. They're still worth a hundred, assuming that a hundred is the fair value, is the historic value of those assets. So he says, nothing's gonna change. I'm not gonna give you more tax writing down allowance, more tax depreciation on those assets. So that's what happens. At the point of the deal. However, theoretically at the point of the deal, we've said that the tax man thinks that we've got assets worth a hundred, but we've just valued them at 150. If three or four days after the deal we sold those assets, then there would suddenly be a gain, there would be a taxable gain on the value of those assets, and that would be 50, the a hundred and a hundred, value that the tax authorities ascribed to those assets versus the 150, which we are saying is now the fair value. So there's value, there's a gain of 50 so therefore, assuming that the tax rate is 30%, we would then end up with a tax bill of 1550 of gain times, 30%, 15 of tax liability. So therefore, we create a deferred tax liability, i a potential future tax liability at the point of consolidation at the point of the deal when we step up the value of those assets. So that's the entries that we end up with. On cons on consolidation, on consolidation, when up with the assets carried at 150 with an associated deferred tax liability, which is the tax rate multiplied by the step up in value. Part two, think about what happens in the future. So over the next few years, the depreciation on consolidation is basically going to be higher because it's based on the 150 value rather than the a hundred value. We've stepped up the assets, we've stepped up the asset value, and therefore depreciation going forward is basically going to be higher. So my profits, my income statement is going to actually have a higher depreciation charge and therefore slightly lower profits. But as we go over time, as that depreciation hits those PP&E numbers, then theoretically the value of the asset is falling in real life, and therefore the potential taxable gain is also falling. So if we basically say after a couple of years we've depreciated the asset from 150 down to a hundred, then that gap between the a hundred of real value and the tax written down value is going to start shrinking, and therefore the potential deferred tax liability is also going to shrink. So therefore, by tax charge, basically reduces slightly reduce, my tax charge reduces slightly. And that basically is because we take that deferred tax liability and we gradually feed it in. We gradually reduce it every year into the tax charge so that by the time we get to the end of the, um, assets life, both the deferred tax liability has gone, and the carrying value of the asset has also gone been written down fully to zero. So really quite a complex issue. This is why we end up with deferred tax liability when we do step ups of value. Final, final set of complex complexity here. So the last section that we're gonna look at is just how we actually go about modeling, um, a fairly complex M&A transaction. Now, I'm assuming that most of you have done some simple M&A transaction, some simple acquisition. So I'm not gonna sort of reinvent the wheel, I'm not going to sort of go through every sort of nuance and every detail of what we do. We are just gonna focus on some of the more complex areas here. So we're gonna set up a model to do this and we'll have a fairly sizable assumptions section, which we're gonna look at in a few minutes for our big spreadsheets. So we'll have all of those assumptions all in one place. And there's just a fairly long list of things that we need to think about. So things like the premium paid, the structure of the financing, any assets, step up, foreign currency rates, and all the things associated with that. So things like fees things like the depreciation life the marginal tax rates associated with fees and associated with the tax extra tax depreciation. This is gonna enable us to calculate goodwill and also enable us to car calculate things like deferred tax liability as well. And then we do, what we then do is we use all of those inputs to construct a model, a combined model, um, for the business. And we can call this NewCo, or we can call this a combo model. Basically, it's a combination of the target company and the acquirer, and it's a combination of both of those. It's looking at the income statement, the, the combined balance sheets and the combined cash flows of those two businesses on consolidation, um, after the deal. And when we've got that combination, what we then do is we basically look at and analyzing it. We under, we, we want to find out is this a good deal or not. And the absolutely key measure, the measure that basically you need to focus on initially is this one here. What happens to earnings per share? Does earnings per share go up, I use the tion, or does it go down? Is the dilution of earnings per share? Reason for that? Just think about that logically. If you are a shareholder in the existing acquiring company in the acquirer and you have, a certain anticipated earnings per share over the next three or four years, and the company comes along to you and says, we would like to buy this other business, the first thing you're gonna say is, how is that gonna help me? Is that going to be good for me? And earnings for share is the key figure. It's basically you saying, my share of the earnings of the business is this, is that gonna go up or down? Because in turn, that's likely to influence the share price. if the energy share goes up, the share price is likely to go up. If I want to sell out I'm gonna see a nice healthy profit and vice versa. So this is really important. And of course, there's lots of steps to this. You bolt on the new company, you add on their new profitability. But if there's if it's financed with debts, you need to take away the the extra interest on the new debt. And then if it's financed with equity, you need to divide that pro forma net income, that new net income for that combined company by a larger number of shares because you've issued some equity. And therefore it's likely that that dividing by a larger number of shares is gonna significantly spread the net income across a wider number of shareholders. And really, that's, those are the drivers that you need to look at and examine to work out whether and by how much the owners per share has increased or decreased. So we're just gonna look at a couple more of these slides. Just a couple of these things that we might need to think about some other complexity as we come to our model. So the first thing is, what about calendarization? Now, what do we mean by calendarization? It's fairly likely if you acquire another company that that might not have the same year end. Now, in a perfect world we'd acquire a company on the 31st of December. Both the acquiring company and the targets would also have year ends of the 31st of December. And that would make it everything very neat and tidy in the real world. That's not what happens. Competition authorities come along and say, hang on a sec, we need to examine this. Just wait a few months. So therefore, it pushes the acquisition date back. Also it could be that the companies have got different year ends. So if one company has a junior end and another company has a December year end, then really you, you need to kind of marry the two. You need to kind of work out you need to basically combine them or bring them back to the same common year end to be able to make to be able to add up properly the income statements, and work out what your annual results are gonna look like. Now, we've got a very simple example here. This is how you do it. It's relatively simple. It assumes that the income statements is relatively smooth over time. So similar results every month, you know, it's relatively steady. It's not a very seasonal business. If you had a very seasonal, highly seasonal business, then you might need to look at quarterly reporting and sort of divide up the quarters. So we've got a very simple example here. We've got a target that's got a year ends of September, and we've got an acquirer that's actually, and this is typo, I'm afraid, which actually has a December year end. So what we've got here is we want to basically take the target and basically transfer it shuffle it around a little bit to give us a December year end position. So I'm just gonna just do one of these. I'm gonna say, what's the sales figure, for to the 31st of December, 2017. And so what we do is we basically take the September 17, numbers. So that's for a full year. so what we want is we want the last nine months from January to September. So we take nine twelfths of 200, and then we take, the 30th September, 2018. Basically, we want the October and November, December at the end of 2017, which basically is gonna give us three 12th times 300. If you basically add those two numbers up, then you get a number of 225 for that 12 month period to the end of September 17. And you can see that makes sense. That makes sense. It's an assumption, of course, it is an assumption. We're assuming everything is smooth and steady, but I think this is a, this is a reasonable assumption to make. And then finally last thing we're going to look at is we're just gonna have a little look at some transaction assumptions, particularly in relation to the particularly in relation to the to the debt and to equity we're raising. So just a little bit more complexity in here. We're not just gonna call it, gonna call it just debt. So different sorts of debts. We're gonna start in the middle. So we might raise a loan but it'll be nice if our model had a little bit of flexibility. So we could look at, for instance, the difference between an amortizing loan and a bullet loan amortizing loan were you make repayments every year and they pay down some of the principles, some of the original capital value. And you also pay interest as you go along or a bullet loan where all you do is you pay the interest every year and you make a single, very large repayment of the principle right at the very end. Now, which is best, it depends on the cash generation of the combined businesses. If the cash generation is very strong in the early years, then it makes sense to take an amortizing loan. It's almost certainly cheaper, has a lower rate of interest. Whereas if you are basically spending a lot of money combining the two businesses linking up logistics, if it takes a while for any synergies to start coming through, then you might be a bit short of cash in the short term. So maybe a bullet loan makes a little more sense. Gonna end up generating cash a few years out, and that enables you to generate cash, which enables you to repay the repay the loan. Couple of other aspects bridging loan. You might see this term basically a very short term loan for between for a short term period between the deal being done and a completing fully a few, a few months later. Now, this is often used for working capital finance. So if you've got some sort of working capital adjustments as a result of the deal we'll look at that when we come to completion Mechanics, it might mean that you have a very short term loan just covering some ebbs and flows and shifts within our working capital. We might have a little bit of cash. Now, it's fairly unlikely unless you are Apple, that you've got enough cash shown the balance sheet to be able to buy a target business outright. But you might have some cash on the balance sheet, and we might use that for some of the incidental expenses associated with the transaction. And finally, equity just gonna look at equity a little bit. We normally think in terms of equity, issuing equity to the new to the, to the existing target shareholders. But it might be a little bit different. What we might do is something called a secondary issue. And so rather than going to the shareholders of the target company, we issue shares to our existing shareholders or to the existing markets and basically generate cash, which in turn we use to go and buy the buy the target company. And we might do that because it's just easier to do that to take our existing to issue shares onto the market. It might give our existing shareholders the opportunity to increase their stake, um, but probably if we do that, we're gonna have to issue the shares at a little bit of a discount. Because if someone can buy a share on the marketplace at the moment for, say, $10, and we say, would you like to buy some more shares at $10? Why would they buy those new shares where they can buy shares on the market of $10 anyway? So we might need to issue the shares that say $9 70. Give them a little bit of a discount, a little bit of encouragement to buy these new shares, a little bit like you would do with a rights issue. And the final slide a little bit on fees. If we're paying fees associated with the transaction, then of course we need to pay the fees in. We need to pay the fees in cash. But where does the other side go? Well, if they're just straightforward advisory fees, so banks and so on, just advising on the transaction, we just expense them. We expense 'em to the income statements, whether the transaction happens or not, it's just a current period cost. However, if we pay fees on raising debt, then basically what happens is we park a negative amount alongside the debt, alongside the debt. So as a negative liability, it reduces the debt slightly, and then we gradually amortize or feeds that into the interest line in the income statement over the period of the loan. And then finally, what about equity fees associated with raising equity? Just basically get posted straight to equity. They effectively reduce the equity, the, the value of the equity that we have, uh, raised. And again, just goes straight to equity. No adjustment, no change, no amortization, nothing. It just goes straight to equity in one lump. Okay? So what we're gonna do next is we're basically gonna open up a spreadsheet. And what I want you to do is I want you, hopefully you've seen the four spreadsheets in the resources. So go and grab those four spreadsheets, and we're gonna look at one, which is the m and a transaction, and we want the full version. And basically what this transaction is looking at is it's basically Bayer, which was a European pharmaceuticals company, and it bought Monsanto back in 2018. Now, just a little point, Bayer is a European company, so therefore its accounts are in Euros. Monsanto is a US company, therefore its accounts are in dollars. And there's just so there's gonna be some transaction here. There's gonna be some translation here between currencies, and there's just one number I just want to point out here. It's here. It closed at $128 per share. So hopefully we can go and look at our spreadsheets and make sure that our spreadsheet is capturing that amount. So I'm gonna open the spreadsheets, and here it is. You can see it at the top in the, in the line at the very top of the screen. Hopefully you just about see that. It says advanced m and a modeling bayam on Santo full. So if you can make sure you've got that spreadsheet open, then you can follow along as we go. So M&A modeling, Bayer, Monsanto full. There we are. So if you grab that, now, as I say, I'm looking at the full version of this because the what we're mainly looking at is the assumptions page, and the assumption page sort of makes more sense when it links into some of the final amounts. So things like goodwill are populated on this. You can see how the goodwill is calculated as we come back to this over the next few weeks, which we will, this will form the basis of our next few webinars. We'll gradually look at certain parts of the spreadsheet at the forecasting of numbers at the consolidated opening balance sheets and so on. And we will populate some of those sort of as we go through our, our webinar. So we're gonna go back I'm just gonna show you the nature of the spreadsheet, the structure of the spreadsheet, and then we're gonna come back to this assumptions tab. And the assumptions tab is basically the key. That's what we're gonna work through for the remaining sort of 20 minutes or so, just understanding this. So the assumptions tab, just gonna give a quick little overview, and then we'll come back and look at detail in a little moment. So the assumptions tab basically is a, has got a lot of assumptions about the nature of the transaction. So you can see you've got stuff about the acquirer, and I just wanted to point out one number. We've got assumptions. Let me move my keyboard. We've got assumptions about the target. And we've got in the middle of this, we've got basically $128 as the purchase price. We've got an FX rate of not 0.95, just kinda highlight that. We've then got terms to do with the acquisition, which is basically all about the debt and equity, the split of debt and equity. We've got, uh, if we go to the top, we then have a sources and uses of funds, sources and uses in the normal way, as you would have with most M&A transactions. Then want to just look at the next tabs, just so we can see what the structure of the spreadsheet looks like. The next three tabs, the acquirer, target, and calendar targets are all basically standalone spreadsheets, standalone forecasts with the results, historic results, and the forecast results, uh, for the two businesses. So the acquirer is Bayer's results. You can see that there's the real results here in blue which their historic results for two to 2014 and 2015 we're assuming that the transaction actually happens at the end of December 16. So therefore these figures here 16, 17, 18, 19 to 20 are all forecast figures. In the middle of 2016, we're forecasting what the results are going to be. And that's just then a fairly standard three statement model. So we've got an income statement, we've got a balance sheet, and then a little bit further down. We've got a cash flow all in euros, all at December year end. And it's interesting just look at this, at the end of the year, December 16, bay has 910 of nine 10 million euros of cash. So it has a little bit of ready cash, a little bit of cash there. That's December year end. And basically everything is in Euros. We turn to Monsanto. Monsanto is the target, and basically this is in US dollars. It's in US dollars and also if I just look at these, numbers at the top, it has an August year end. So we're gonna need to calendarize these amounts. We're gonna have to take, the numbers to the end of August, and if we're, and we need to shuffle them around a little bit. So if we're looking as a December year, what we're gonna need to do, for instance, for 2016 is we're gonna need to take August as the eighth month. We need to take eight 12th of the year to August 16, and then four twelfths of the year to August 17. And that's going to give us the year end figure for December 16. So we've basically got, on the next tab, we've basically got exactly that. And you can see there's a calendarization, um, percentage that represents the period from the 1st of January to the 31st of August is 66.8% of the year. And then if we look at this calculation, basically it looks it's quite a clever calculation. It basically says, if the last year ends that we've got, for Monsanto is after the last year ends for Bayer, then basically adds the numbers basically if the last year ends is before Monsanto's year end, then do it the other way round. So it's quite a clever calculation, but the imp interesting thing is it says at the end here multiplied by fx. So we can see that we're multiplying by that North 0.95 FX rate, and I think it's just worth pausing at that point. If I look up here, top left hand side, you can basically see that, not that one, sorry, I need to click on a different tab. You can basically see, if I go, sorry I think it thought I was editing, editing a cell. If I go up to the top left hand side, you can basically see that there are a fairly large number of named ranges, including fx, uh, which is really useful to do. If you name something like your FX rates, you can use that, number all the way through your calculations all the way through your spreadsheets. And it's also very useful if you look into, if you jump into a particular cell and you can see multiplied by fx, it's very obvious what that calculation is doing. It doesn't just say, go to sheet one column, yeah sort of cell C43. it's very clear what it's doing. Then what I've got over the next few tabs, it's basically all of the calculation building up to the combined business for this combo this acquisition. So I start off with an opening balance sheet. I'm constructing the opening balance sheet as at December 16. And we've got all of those normal things that you would do when you start constructing an opening balance sheet. So you can see that I'm zeroing out, I'm getting rid of the goodwill on the targets balance sheet. I'm getting rid of their long-term debt because we're refinancing. I'm getting rid of the shareholders' equity because effectively that disappears on consolidation. I'm then replacing it with the new debts and the new, equity that I raised those two numbers there. And then I have a goodwill calculation at the end. And it's not just goodwill. We also have some intangible assets. So we're fair valuing the brand. We're fair valuing the brands, the Monsanto brands. I bring those onto the balance sheet as part of my step up my fair valuing of assets. I then have some fairly clever calculations. Again, things like, if I look at PP&E, PP&E is fairly complex because I've got existing PP&E I've got existing depreciation, but I also have those step up and the new depreciation as a result. So I've got some of those subsidiary calculations that are a result of what I've done on the transaction. And then I've got NewCo over here, and that's the combined businesses that's bolting the two businesses together and looking at what they result. And you can see if I scroll down, I'm only really doing this from the end of 2016 forward. Because that's when we buy that's when we buy the business. And then at the end, I've got analysis, and you can see that the very first thing I do is earnings per share, accretion or dilution. So this is where I work out whether this is a good deal or not. Okay. I go back to the very beginning, go back to my assumptions tab, and I'm just gonna look through the assumptions tab for 10 minutes or so. Just so we understand our way around this. And this is all about understanding the setup of this transaction, the setup of this spreadsheet. So let's have a little look route look through this assumptions page. So we start right from the beginning, and as we've said before, we've basically got some information about Bayer, the acquiring company. And the really perhaps key number here is the share price at, at the point of the acquisition, which is a hundred 0.5 euros. And that's important because if we're going to go and buy Monsanto with new equity then we need to know how many shares we're gonna have to issue, because then in turn, we can work out the dilution for the existing shareholders. We've then got Monsanto's market capitalization as well. And we've got that 128 dollars in here. That leads to a, that implies, an offer premium, control premium of 43.8%, which is a really large, really substantial premium, isn't it? I mean, we'd normally expect premiums of somewhere between 20 and 40%. So this is right at that sort of top end, you know, really desirable company. You know, they really wanted this business and were prepared to pay for it. Worth noting that lots of the stuff on hip, particularly on this left hand side, is in US dollars. This a US company you're going to buy, so we need to work out what you're gonna pay for it in US dollars. We're gonna look at the equity and debt split in US dollars before we then bring it back into euros. And I think it's worth just highlighting that number there. 56.9, that's what we're valuing at Monsanto at 56.9 billion US dollars to buy this business. So a very substantial transaction. We've seen that before the FX rates, and again, just have a little look over at the top left hand side of the spreadsheet, it tells you that's named range. It tells you that is called fx. It then have, lots of stuff about the equity and debt and we've got a split in terms of equity. We're basically saying we're gonna raise $19 billion of equity. Again, it links back to the real transaction. And we've got some fees the percentages that go with that. So, 0.3 advisory fee, 2% equity fees and, so on. But we've got a few little switches that I just wanna bring your attention to, which are really quite clever. They give you, they give the model some flexibility. So I think really quite useful to look at. So, first thing, secondary issue. So basically, this is, assuming this is making, this is wondering or giving us the option to say either that 19 billion of us dollar equity is either listed on the stock market, it goes onto the stock market. There are new shareholders buy this, and then we use the cash to go and buy Monsanto or also, and that's if we have that as a one on here or alternative, you flick it to a zero, then basically we are giving that $19 billion of equity to the existing Monsanto shareholders. If we basically have a second reissue issue, we issue it onto the stock market, then there's a 5% discount. So we raise a little bit less we have to price it at a little bit less than our current, share price. We also have fees down here. And we're, as part of that 19 billion, we're gonna raise 4 billion by way of a convertible bond. So again, we're making the debt equity structure relatively complex here. So we're assuming a bond of four billion as part of that overall 19 billion of new equity. We then have, the balance, which is made up by debt. So we start with our $56.9 billion of consideration to buy the equity we take away 19. And even I could do the maths that therefore leaves $37 billion that we need to raise through debt. Again, I've got some fees and some interest, but there were a couple of switches at the bottom of here as well. So first thing I'm gonna do is I'm gonna say what about amortizing or bullets? And I've got a little switch here, one or zero one for an amortizing loan, zero for a bullet. So I can basically put this in. I can give myself that option, and then I can turn the switch on or off, see what happens to my accretion and dilution, see what happens to my debt, over the first few years of the transaction. And then I've also got another option here that basically says, do I refinance the debt on Monsanto's balance sheets, yes or no, one for refinance? Zero no refinancing. So again, what that does is it changes the sources and uses table if I need to refinance the debt, obviously if I do need to refinance the debt, then I basically, one of my uses of funds is to repay the debt, but then the balance is then going to be I need to raise some more debt to replace it. I've then got a little set a little set of entries down here, which are about the fur valuing of Monsanto and some assumptions, again, roughly in line with the original transaction. First thing is that there's a brand value which is $15 billion, which we're going to bring on. Now, remember that brands, you can't create a brand on your balance sheet, on your own balance sheet. Brands only arrive according to all of the accounting rules. Basically, when you take over another business, and if you take over another business at that point the accounting will say, you can ascribe a value for the brand that you have bought and bring that on as part of the intangible assets. And of course, that's also going to impact the goodwill. Effectively, your goodwill will go down by the extent of those intangible assets, that brand that goes onto your balance sheet. Brands generally have an infinite life and therefore they aren't depreciated or amortized. They are basically just subject to an annual permanent review. We then also have PP&E step up Of a billion dollars and we're saying that, um, we're going to bring, we're going to increase the value of the PP&E that we have bought. We're gonna depreciate it over 10 years, and then we have a target marginal tax rate, so us marginal tax rate, and that enables us then to create a deferred tax liability, uh, on the balance sheet. When we take over this business, we've got, another couple of assumptions down at the bottom. The dividend payout ratio, we're assuming for the business, when we've combined the two businesses together. And also the new code that combined marginal tax rates, which is slightly lower because it's a combination of US and Europe which is slightly lower than the targets marginal tax rates., Just gonna go up and have a look, first of all at the Goodwill calculation. So up here I've got that 54. Now, you might say if you paying attention, you might say that's not the same as the 56 equity price. And the reason why is basically because that one purchase price is in US dollars. This one is in Euros. So the, you were calculating the purchase price in Euros. And then we have some fairly normal adjustments. So here is the book value of assets. Here's the existing goodwill on Monsanto's balance sheet, which we're gonna remove a couple of, of other aspects. The 14 and the 9 is basically, the 14 and the nine is the 15 or 15 billion US dollars of brand, which we're multiplying by North 0.95 to get the Euro equivalent. And also the PP&E step up is which again, we multiply by 0.95 to get the 951. And then associated, finally associated with that, we have the deferred tax liability with those two items. So effectively, 35% of those two items gives you the associated deferred tax liability, which reduces the goodwill because that is also an entry that's gonna go onto our balance sheet. Final, our sources and uses of funds. So again, we start in US dollars. You should be recognizing this number already. This is the one that's in blue on the left hand side. This is the equity value. So here's our biggest use of funds buying the shares of the target company. If we've got the refinancing switch turned on, then we also have that refinancing fee number there, which is straight from the balance sheet of on Sanso. And then we have a bundle of fees, which is all of those things on the left hand side, all of those 1%, 2% multiplied by the accuracy value of the debt value. Interesting. If you look at all of them, they all say net of tax, assuming these fees are tax deductible. And then that's our jet, that's our use of funds on the other side. We've got the two items that you should be familiar with. The four of the 4 billion of convertible bonds and the 15 of equity. Those, those two items that together add up to 19. We've then got the debt, which is basically, this is the balancing figure. This is the balancing figure. And there's a final little piece here, which is we are using some of Bayer's cash to basically pay for the incidentals as a result of the transaction. And just interestingly, if you add up all of the fees, you can see at the bottom of the spreadsheet down here, you get 573 for the fees. And we're just assuming that we'll pay that in cash. Monsanto, as we remember, at 910 million euros of cash, so therefore is well able to afford that half a billion euros of cash. In terms of the fees. And then the final piece over here, you can see that All of these items over on the right hand side are just that source of uses of funds, which is all in US dollars, basically converted, multiplying by fx, that fx named range. So it's basically saying here are, here's the source of use of funds, but now in Euros. So we can use this then to go and drive all of our later calculations. The last number I'm gonna look at, I promise, is this thing here, which is the shares issued, which is basically the equity issuance divided by the 15 billion of equity issuance divided by the bay at share price of a hundred 0.5. And that gives me 149 million shares that I need to issue to, in this case, it's to the market because we've got a secondary issue here, rather than going straight to Monsanto 149 million shares going straight onto the market. And then when we get to our analysis, we can use that number to work out the dilution of the business. Sorry, the dilution of the shareholder. Okay. And that's just about as quick a whistle stop tour as I can do around this spreadsheet 20, 25 minutes or so. And that basically sets us up for the next thre sorry, for the next, four sessions. So what we've done here is we've basically looked at lots of the complexity surrounding more advanced m and a transactions and we've rattled through that fairly quickly. And then what we've looked at is we've looked at a fairly big complex spreadsheet, and we've seen that a lot of these aspects, so things like different tranches of debt secondary issues and or issues to the target shareholders and those sort of things. They're all combined in this we've looked at calendarization of the target results and FX rates because the two businesses are in different different currencies. And you can see all of that is sitting in this fairly big spreadsheet. , So my suggestion is if you're interested in this, have a look through this spreadsheet, have a little read through this spreadsheet, so if you can follow some of the calculations in this spreadsheet. See if you can follow this through. And then next time what we'll do is we'll move on to actually constructing the spreadsheet. We'll actually look at constructing the opening balance sheet, that consolidation of the opening balance sheet and the complexity associated with that. And what we'll do next time is I'll basically, we'll put up a part done spreadsheet so that we can gradually complete the spreadsheets together, which will be perhaps a little more a little bit more involving I'll give you a little bit more opportunity for activity. Okay. I hope that's useful. Any questions? I'm around for another few minutes. I hope that's useful. Do remember to fill in the feedback form, so that we know whether what we're producing, what we're, covering is useful to you. And I look forward to seeing some names next time in a week's time when we move on to some of the some of the populating of, this model. Okay. If any questions, if there's no questions it's exactly six o'clock, so that's exactly an hour exactly where I want it to be after an hour. So as I say, I'll stick around for another couple of minutes, if you've got any questions. Otherwise, have a good weekend and look forward to seeing you in a week's time. Okay, thanks. Thanks very much.