Okay, so good afternoon or good morning or good evening depending on where you're joining from. My name is Maria Weber, I'm a trainer at FE and I'm going to be talking to you about mergers and acquisitions for roundabout the next hour.

So the files that you're gonna need for today's session, you can access in the resources section or through the link in the chat, but I know sometimes the chat can be blocked depending on security settings, but you can always access them via Felix.

So just to show you where they are in case you don't have them.

If you go into Felix topics and then Felix live.

And then once you in Felix live, if you navigate about halfway down the page to today's session, which is m and a, the forecast, because that's what we focusing on.

So M&A, the forecast and if you click in there you will find the files that you need.

And those of you that have been in the previous two sessions with my colleague Phil, he would have been using the same model.

So even though you might have some files downloaded, I would recommend definitely downloading, especially this top file calculations empty because I've got the complete model except for the calculations tab filled out because that's what we are gonna be working on today.

So you also have an empty version of the model and then I would also download the full version. If you don't have it at the end of the session, I might just talk you through some tax calculations on the full version.

Okay. But for now, the file I'm working in is the top one, calculations empty as we go along. If you do have questions, please feel free to put them in the Q&A pod and you can always ask questions after the session via link in the form at the end of the session or the one in the chat or just contacting us via Felix. Okay, I am going to get going.

Just a quick overview of what we're gonna be focusing on today.

So M&A is obviously a very big topic.

We are not gonna be doing everything today.

We are gonna be focusing on the forecast.

So I'm going to focus on the calculations that are a bit more advanced.

If you've seen a basic M&A model before, it's likely that you wouldn't have seen these calculations in detail.

So we are gonna be looking at synergies and cost savings.

We are going to be looking at another kind of synergy, which is CapEx synergy as well.

We are going to be looking at modeling the financing costs and then hopefully at the end we'll have time to just bring this together in the tax calc, which I'll show you on the solution. But as we go, we are gonna be looking at one big tax impact, which is linked with our step ups.

So that's what we focusing on on all of those calculations go into preparing forecast, financials post deal because we want to then be able to do the analysis on those forecast financials to look at things like impact on credit ratings, potentially whether the deal is EPS, accretive or dilutive.

And that is the focus of next week's Felix live. Okay, so for now we are in the post deal phase but not the analysis yet. So first session with my colleague Phil.

Not last week, the week before he was more focused on this pre-deal phase, looking at structuring of the deal, the sources of funds, the uses of funds, calculating goodwill.

Part of that goodwill is stepping up your assets or down your assets, dependently and liabilities to fair value.

And then anything that's not allocated to those net assets is treated as goodwill. That's got deferred tax implications.

We'll have a bit of a chat about that as we go along.

So that is pre-deal stuff. Then on the deal date, we have got an opening balance sheet and that was the focus of last week's session with full, coming up with this deal date, balance sheet, taking the target plus the acquirer, putting them together and then bringing in the deal effects, adjusting for goodwill, step-ups, zeroing out the targets equity, so consolidation principles and that's what we folded last week.

Don't worry if you weren't part of those sessions. Hopefully you'll still be able to follow along today.

And today we are in this post deal phase.

Our aim is to prepare the new co income statement, balance sheet and cashflow statement.

Now by new co we just mean consolidated.

So instead of just the acquirer on their own, we are gonna absorb the target into those results and prepare consolidated financials.

Part of that is also taking into account all of these deal impacts and a lot of that is gonna come through in the calcs, which is where our focus is going to be.

Then next week we look at analysis, EPS, secretion, et cetera.

So if you have downloaded those files, for those of you that have just joined, you can find it with the link in chat.

If you don't have access to chat under the resources section or just by going to Felix, going to Felix live and going to today session, we are gonna be using the top file for the majority of the session, bio Monsanto calculations empty.

Let's have a quick flip through this model to just familiarize ourselves with it. Those of you that have seen it before, nice little bit of recap if you've never seen it before.

Let's just look at what is in here. So first of all, we are going to go to would help if I had Thanks sorted out. So we have got on the model intro tab.

This is where our circular switch is. So on the model intro tab, please make sure that switch is off. We do wanna be working with the switch off.

We wanna be working with iterations off, right? So alt ft to just double check your settings, enable iterative calculations switched off.

And then when we ready we'll put iterations on turn, switches on. Okay, so that is the first thing to check. Then we have got some on the assumptions tab. Assumptions tab.

We have got the acquirer being buyer and they are a European company, German company. So their financials are in Euro.

We have then got the target being Monsanto. Monsanto is a US company, US company in US dollars.

So very important is we need to convert from Euro, from US dollars into Euro, right? We cannot be doing consolidations with two different currencies.

So you'll notice the rest of the analysis here.

Typical things that you will see on this assumptions tab, sources and uses of funds.

We have got sources and uses in US dollars initially because the target is US dollar based, but then we have it in Euro using that FX rate.

And then I'm not gonna go through all of these other assumptions now I'll come back and pick what we need when we need it.

But you will see we've got debt assumptions as part of this deal.

We issuing a convertible bond, we are also taking on some debt. There's also an equity issuance and then we have got our goodwill calculation, very important part of an acquisition and part of that goodwill, we've got the step ups on these assets that we'll talk about when we get there, right? So that is the assumptions tab.

If we go down to the acquirer tab, so this is a forecast standalone for buyer.

They are the acquirer.

You can see that their forecast is in Euro, their year end is December.

And we have got standard income statement, balance sheet, cashflow statement.

So three statement model forecast results, Monsantos STA buyer standalone.

On the next tab we have got Monsanto, the target, their forecast financials are in US dollars.

Their year end is in August. So we have got two issues here.

The difference in currencies, we already said we need to put everything into euros so we can consolidate.

Second issue is different year ends.

So we need to calendarize and we are gonna calendarize to the acquirer's year end, which is a December year end.

So in our consolidation in our forecast, what we are gonna be using is not this target local FX tab.

We are going to be using the next tab, which is target calendar and we've put that into Euro.

So we are working in Euro now and we have Calendarized Monsanto's results to be in line with buyers and that is 31st of December.

Okay? So crucial in modeling when it comes to working in different currencies.

Make sure you're not going to the wrong tab and picking up a USD amount that you're just adding to a euro amount. Obviously that's wrong. Okay, so this tab we're gonna be using for the target standalone as if there were no acquisition. Then we have got the opening balance sheet.

And the opening balance sheet is using basic consolidation principles that Phil would've gone through last week. If you missed that session, you've got the recording if you want to watch it, but the target and the acquirer are added together.

And in this model the acquisition date is December, 2016.

So you take the standalone balance sheet of the acquirer standalone balance sheet of the target and then we have got our adjustments zeroing out existing equity in the target, putting in goodwill, stepping up the assets, for example, putting in changes to financing.

And we end up with a consolidated balance sheet as at the deal date.

What we are gonna be doing now is post deal looking forwards.

So if we just skip over the calcs tab for now and go to the new co tab. As I've said, this is just consolidated results after acquisition.

We have got in Euro income statement, balance sheet and cashflow statement.

And this would be modeled using normal modeling approach in the sense that if you've done a three statement model, we start with the income statement except we leave out interest because we know interest depends on cash, short term debt, et cetera. So we do income statement, accept interest, then we do balance sheet, accept cash and revolver, right? Because that we get from the cashflow statement that we then link up to the balance sheet and then we do our interest, which creates a circular.

Put that in. So if you've done a three statement model, you can do this, right? Same approach. However, what is different is the consolidation aspect.

So consolidation aspect, company A, which is buyer, the acquirer, company B, Monsanto the target, add them together and then adjust for any deal impacts like synergies, refinancing, new financing, tax changes.

So I'm not gonna go through all of that in an hour. We don't have time.

So you've got the solution here.

You can see we split out sales between the target and the acquirer. Then we add in any sales synergies, some items we just combine together.

So if you look up here in my formula bar, we've got acquirer and target and then we've got coming through from our calcs tabs, some of the adjustments that we are making.

So I've just highlighted in yellow where we've got this link to the calcs tab that we are working on. So you can see how this flows through.

Okay, income statement is done by taking acquirer plus target and then any adjustments because of the deal balance sheet is done using the same approach, acquirer plus target. And then any adjustments because of the deal.

But the cashflow statement is done using the income statement and balance sheet we've created.

If you look at the formulae in the cashflow statement section, we are not going to the acquirers tab and the targets tab and adding together, that would be too complicated 'cause then we'd have to make all the adjustments we've made again.

So what we do for the cashflow statement is we take the income statement and balance sheet we've just produced and we build the cashflow statement from that. Okay, so let's get going with the CALS tab and then as we go, I'll just show you. So the bits highlighted in yellow, that's what is pulling through or affected by the LK tab.

And you will notice I've only highlighted from 2017 onwards, even though we have got some historic data in here, the historic data, it's just so we could look at, you know, things in the past compare ratios maybe.

But what we are looking for is a forecast deal.

Date is December, 2016.

So first year post deal is 2017 December. Okay, so this is the forecast element I'm focusing on.

So let's go to our Calcs tab. For those of you that have just joined, I am in the calculations empty spreadsheet in our calcs tab.

We are going to start off with looking at synergies.

Now you may have come across synergies before, right? So synergies typically I've got a slide, I'm not gonna go through all the detail in the slide.

I wanna get more practical and do the model. But when it comes to syn, that's obviously very important in mergers and acquisitions.

So you need to try estimate these synergies.

You could look at historical transactions where synergies have been announced, take guidance from that.

Obviously management guidance on what synergies are expected to be.

And there's various sources of synergy.

I think the ones we might have seen before in more simple models would be definitely cost synergies. Those are the most common.

Bringing two entities together. I don't need, for example, two HR departments.

So I have some cost savings there. Revenue synergies, a bit harder to achieve.

But that's not just from adding the two companies together.

Company A plus company B'S revenue.

Remember this is additional revenue that wouldn't be generated by standalone companies because maybe I've got cross-selling opportunities, I've got better distribution channels, I can go into different geographies that I didn't have access to before.

So revenue synergies.

Then something that you might not have seen in a simple model is CapEx synergies. And that's what we're gonna look at in our calculations.

The need for less CapEx spend because maybe the two companies have an overlap in manufacturing processes and there's some spare capacity.

So instead of having to spend a lot on PP and e each company separately, we need to spend a little bit less because we can leverage off each other's capacity and then there might be a release of working capital as well.

One off release, maybe we don't need as much working capital anymore.

Now when it comes to synergies, the run rate synergies, run rate is full achievement of synergies.

What are the annual synergies expected to be once they achieved? But we've gotta be realistic in realizing we are not gonna hit that run rate from day one of the acquisition.

So we need to make assumptions about the timing of achievement of synergy.

And we also have to recognize that there are likely to be restructuring costs.

I mean you're not going to achieve these synergies without making some changes, restructuring things, and that costs money. For example, redundancy packages, consultant fees.

So all of that needs to be built into our synergies.

Let's get going with our calculations. So again, I'm sorry, I know I'm repeating myself, but I've seen some people joining. Welcome.

We are in the calculations empty file and I'm looking at the calcs tab.

So we start off with synergies that you may have seen before in a simple model, we have estimated here run rate synergies of 1.5 billion.

Now this was taken from the deal announcement, but 1.5 billion is run rate synergies.

We then assuming that we're going to achieve 25% of those synergies in the first year, 50% second year, 75% third year, and then we hit the full run rate after that, 80% of these synergies are assumed to be cost synergies, which means revenue synergies are going to be one minus that 80%, which is 20%.

So let's work out our cost synergies in year one.

Let's do it for year one, then we can copy to the right.

So if total synergy run rate 1.5 billion, I expect to achieve 25% of that in year one.

And of that 80% is estimated to be cost synergies.

That equates to 300 of cost savings in my first forecast year.

Forecast Revenue synergies, we've estimated to be 20% of the total.

So I do exactly the same calculation except instead of using 80%, I use 20%.

So 1.5 billion times the run rate achievement of 25% times the 20% revenue synergy. So that would be 75 from revenue synergies to achieve these synergies, we estimate restructuring costs of 200 per year.

And then you can see once full run rate is achieved, we have got no more restructuring cost and this is an assumption that we have made.

So let's copy those to the right and let's see how it flows through into that combined income statement. So select everything, control R to copyright.

We can just double check.

We know we've done everything correctly here because in the final year of our forecast we should have achieved that 1.5 billion.

And I can see if I add together the 1.2 and the 300 revenue synergy, I've got that full 1.5.

Let's see flow through of this to our new company income statement.

And by NewCo, remember we mean consolidated combined group.

So the way we've modeled this is we've got the acquirers forecast sales on a standalone basis.

The targets forecast sales on a standalone basis, and then we put in those revenue synergies.

So you can see linking through from our calcs G nine revenue synergies that then gives total combined sales. We've then got, if we go down to the cost section, we've got standalone cost of the acquirer plus standalone cost of the target for the different elements, SG n a research and development.

And then we bring in the fact that first of all, we're going to have cost synergies expected of 300 in the first year.

That's a positive because it reduces that deduction and then those aren't gonna come for free.

We do have to have some restructuring going on.

So we've got the 200 coming out and that is the flow through of these cost and revenue synergies.

Just keeping an eye on the chat and the q and a, but if you do have do have questions, please do ask. Okay, so that you might have seen before, right? Looking at cost and revenue synergies in a simple m and a model, we don't really forecast a full income statement, balance sheet, cashflow statement, we just forecast certain key line items.

So we can do some e p s analysis here. We've got the full income statement, balance sheet cashflow.

Let's look at something you may not have come across before.

So I'm just gonna go back to, sorry on the wrong screen there.

I'm just gonna go back to my calculations tab and let's talk about these cap X synergies. So like I said earlier, by bringing these two companies together, we potentially don't have to spend as much money investing in new property plant and equipment because there can be some overlap between the two.

And we are estimating CapEx savings per year from the first forecast. You're one 50 then 300, 300 and 300.

Now before we go do the depreciation on those CapEx synergies, let's start doing the pp and e calculation because this is what we need the CapEx for. This is what we need the depreciation for.

So we shouldn't be doing calcs just 'cause for the sake of it.

We do the calcs as we need them.

So what I'm doing here in row 23 onwards, we have got PP&E base calculation, and you would've seen this before in any simple model.

We start with the beginning balance of pp and e, we then add CapEx, we subtract depreciation, and actually we've got three depreciation lines and we end up with our ending balance of pp and e that would then go onto our balance sheet.

Now what makes this different to a standalone company's base calc is we have got consolidated PP&E as our starting point.

Now where I'm going to get that from is in our PP&E ending balance in 2016.

I'm going to go to the opening balance sheet tab and in the opening balance sheet, I'm not gonna do the formula just yet, but let's go to our opening balance sheet.

I'm just zoom in a little bit on the opening balance sheet.

If you go to the PP&E line, this is where the acquirer and the targets PP&E have been added together on deal date. But then we recognize when we calculated goodwill, there was a step up in property, plant and equipment and that step up was 9 51 euro.

So my starting point of the two companies PP&E together is 19,481.9. I need to include that step up there.

I can't just go take the individual uh, models, figures, right? So that's my starting point. Let's put that in. So 19,481.7, that becomes the beginning balance in the first forecast year, and I'll just reveal my formulae on the right.

Then I need to say, okay, the two companies separately, what was their forecast CapEx on a standalone basis? What would they be spending on CapEx? So I'm gonna go get that from their individual models.

So for the acquirer, we obviously go to the acquirer tab and CapEx is in row 98. So let's go to our acquirer tab.

Let's go down to the balance sheet calculations.

And there we have in row 98, we've got the CapEx.

So CapEx in row 98. Just be careful which year you are picking.

Remember our deal date is December 16, so the first forecast year is December 17.

So picking up column G, so CapEx of 2,703 in column G plus, let's go find the targets, standalone CapEx. And for that, remember we said we've got to go to the calendarized euro financials of the target. And because of how we've built these models, we've got matrix integrity, if you've heard that term.

We've got all the years in the same columns.

And also for our models we've got our elements in the same lines for the target and the acquirer. So we got CapEx in row 98 as well.

So CapEx in row 98 and column G again for the target, go pick up that nine 11.

And there we have forecast CapEx to standalone companies added together.

Now we say wait a minute, things are different now because these two companies are coming together, they don't actually have to spend as much on CapEx and this is where the CapEx synergies come in.

So we are gonna go and pick up that CapEx synergy assumption from row 13 and I'm gonna make that a negative because it reduces the CapEx spend. So I'm gonna multiply by negative one to give me a reduction in CapEx.

So that's the addition part of my base analysis originally planned CapEx for the two standalone companies and then saying, okay, actually there's gonna be some savings here. We don't need to spend as much now we need to do the depreciation and we're gonna follow the same approach.

What's the originally forecast depreciation based on the original asset amounts of the individual companies based on the original planned CapEx of the uh individual companies. Let's go get their depreciation figures.

I'm gonna pick these up from the income statement and we do exactly the same thing. Go to the acquirers tab and I'm going to scroll all the way up to the income statement. Row 18, I've got depreciation in column G depreciation.

Remember we 2017 first forecast year.

And then I'm going to add to that the targets calendarized euro earnings going up or not earnings financials, again row 18 column G I pick up their depreciation And originally forecast depreciation is 2,290.8.

Okay? Now we need to say okay, things have changed that's originally planned, two companies standalone, we are now bringing together as part of an acquisition.

So we are going to actually have less depreciation now because we've got less CapEx spend.

That 2 2 9 oh is based on the original CapEx spend assumptions.

So now we're gonna have lower depreciation.

So instead of trying to squeeze this into one cell as a calculation, we've got a separate calculation for that above.

So if we scroll up depreciation on CapEx synergies in row 15 onwards, We saving an amount every single year, right? And I'm assuming that my PP&E'S depreciated over 10 years.

So all I'm gonna do is I'm gonna say right that 2017 PP&E 2017 PP&E capital expenditure, that's no longer happening.

What would the depreciation on that have been? So I go pick up that one 50 and be careful to lock onto that, right? You need to use your dollar signs F four because we're gonna copy this to the right and I want to lock onto the 2017 CapEx saving only and I divide that by the number of years.

So lock onto that as well because when we copy to the right, we obviously want to stay locked onto that 10 years.

So 15 is the depreciation that would have been incurred on that 150 of CapEx. I copy that to the right and that's 15 per year. Now this is a bit monotonous, we've just gotta do the same thing for that 2018 CapEx.

That 2018 CapEx is now no longer happening.

So the depreciation is also no longer gonna be happening.

Go up lock on to that 300 CapEx divide by the 10 year assumption copy to the right, exactly the same thing for the 2019 CapEx.

So locking on to the 300 saved in 2019, dividing by the 10 year depreciation period, locking onto that as well and copying to the right.

And then finally doing it for the 2020 forecast depreciation, even though we are not gonna be copying to the right, I am still going to lock onto that.

And so we have depreciation of 30 in total over the years. If we sum up, so just a simple sum function, we've got the total depreciation saved as a result of not doing that CapEx and that is what we are going to go pick up in our PP&E calc. We said original depreciation of 2,290.8, but that expense is too high, it's gonna be less than that.

And so I keep this depreciation as a positive, it's a saving.

Remember we are showing our costs as negative, so cost saving would be a positive.

My depreciation going forward is going to be a little bit less.

Any questions please do ask.

Just keeping an eye on the chat and the Q&A pod.

Okay, so let's do the last piece of our PP&E calculation.

This piece of the calculation relates to the step up in property, plant and equipment. When we buy another company, we've gotta look at the fair value of the net assets that we are buying and we might have to step up or step down our assets liabilities.

Here we have stepped up our PP&E by 951.

So there's going to be extra depreciation on that because now we've got a higher PP&E balance for accounting purposes. We need to write that off over time.

So we have got a calculation in row 32 onwards to depreciate that increased value of PP&E.

Let's go pick up that step up and we are gonna pick that up from our opening balance sheet. So going back to the opening balance sheet, if you look in column H for PP&E.

We've got the step up of 951 and that step up of 951 links back to the assumptions tab.

I'm not gonna go all the way back there, but increased value of PP&E of 951, that becomes the beginning balance of PP&E for the first forecast year.

And it's just the pp and e step up, right? We just depreciating this extra value and the time period over which I am depreciating this over is on the assumptions tab.

So I'm going to lock on to that original step up value.

So lock onto F35 and divide that by the number of years we depreciating over.

And if you go all the way back to your assumptions tab and you scroll down to row, where are we? 39? 39.

We've got the step up in PP&E.

Don't be put off by the fact that we've picked, we are using a figure of 951, that 1000 is in US dollars and we need a Euro figure, right? So that's a US dollar figure.

We've got a euro figure which is correct, but we need that 10 year period.

So we depreciating the step up over 10 years. Lock onto that. Don't forget your F4 because when we copy to the right, we wanna keep dividing by 10 and I'm gonna make my depreciation a negative. So just multiply by minus one.

And so that step up is going to be reduced every year.

And remember that step up, we don't need to add on separately.

We all we need from the step up is just the depreciation line.

We need that depreciation for the step up.

The value of that 951 step up is already included in our opening balance of consolidated PP&E.

So don't go double count and add the two together.

All we are doing here is we are just looking at the depreciation element of that. Now to be robust, we should include a min function in our depreciation calcs.

The min function should ensure that we stop depreciating once the asset's fully written off here. I haven't done that just in the interest of time, but if you look at the solution we have built in a min so that you don't depreciate more than the opening balance of that asset.

So the reason we needed this depreciation is so we can finish our PP&E balance.

So the last piece of the puzzle here is in row 29 to link to that additional depreciation, keep it as a negative because it reduces the value of my property, plant and equipment.

And if we do a sum function that will leave me with a property plant and equipment balance of 2275 at the end of the first forecast year.

And if we select everything and copy it to the right, I've done something wrong, uh, would make sense. Don't forget, let's just copy to the right our PP&E step up depreciation as well.

I need to copy that to the right. Okay, Sorry and I'm being very silly here. Let me just try that third time. Lucky guys I missed out copying the beginning balance to the right.

I'm thinking and this, I mean I would say it's to show you to sense check your models, but it's because I made a mistake.

But the reason I know I made a mistake is guys, how on earth can my PP&E go from 2,575 to 972 immediately? I know that that is wrong. Okay, so just double check.

I forgot to copy everything to the right including my opening balance and that now actually does not make me panic because it looks reasonable, right? So the 23,542 is what it should be at the end of the last year.

Okay, let's see the link. We don't just wanna be stuck in the calcs, let's not lose sight of the big picture. Why are we doing this calculation? It's so I can prepare a three statement model for the combined entity so that I can do some analysis on that.

So let's go to the three statement model for the combined entity on the new co tab and let's just see where these things tie in.

So on my NewCo tab row 22 depreciation, we are adding the three pieces of depreciation together.

Row 27, 28 and 29, 27, 28 and 29.

It's the standalone depreciation as originally forecast plus the reduction in depreciation because I'm gonna have less CapEx plus the extra depreciation because I increased the balance of those assets with a step up on acquisition.

So three things together is my forecast depreciation.

If we keep scrolling down, the next place we see a link to PP&E is obviously in the balance sheet.

So in my balance sheet row 48 that is linking straight to that bottom line closing PP&E balance my base calculation.

And then let's not forget about the cashflow statement. Cashflow statement, we add back depreciation, which we would just link to the income statement, but then we need CapEx. And if you have a look at what we've added for CapEx, we've got from the calculations tab 25 and 26.

So to remind us what 25 and 26 is, it's the standalone CapEx as originally forecast adjusted for the CapEx synergy. So that is our PP&E calculation.

Last thing, while we are on PP&E, let's just have a quick chat about the deferred tax when you step up these assets and my colleague Phil, if you were in the Felix live sessions week before, last and last week, I know he went through this in quite a bit of detail talking about the tax on the step very briefly in a share deal where you buying the shares of the target as opposed to buying the individual assets and liabilities and buying shares, the tax authorities do not recognize the increased value of the assets. So we step up the assets for accounting purposes, but the tax authorities say those assets have not actually changed hands, the company still owns them.

All that's happened is now there's just different shareholders in the company.

So the tax authorities, tax base or value of those assets does not step up in line with accounting.

Now if we were to sell these assets tomorrow we would make a profit because they valued higher. So if I were to sell these assets tomorrow, I would pay tax on that.

And so we recognize a deferred tax liability and that deferred tax liability unwinds over time because every year my accounting value of the assets comes closer to the tax value of the assets because as I go through time I am depreciating the amount I stepped up those assets by.

And so every year the deferred tax liability will unwind by the amount of the depreciation and amortization of what I stepped up. So if we have a look at this deferred tax liability, I'm skipping over the debt fees, we don't have time for that, let's go straight to the deferred tax liability, the ending balance of that deferred tax liability, we can go pick that up from the opening balance sheet.

So on the opening balance sheet you will see under the liability section we've got deferred taxes, deferred taxes, we've got this extra deferred tax that's being recognized on acquisition because of the step ups 5,325.6.

So that is my starting balance of the deferred tax liability every year that liability is reducing because I'm writing off the value of the assets.

Now this is the relevant line I need to link to.

I need to go link to that depreciation on the step up.

This is what's unwinding. I can't just stop there.

I've gotta multiply that by the tax rate because remember that's a depreciation figure. I'm looking at the tax implication of this.

So I'm gonna multiply by the target company's marginal tax rate because remember the step ups relating to the targets assets to get the target company's marginal tax rate, I need to go all the way back to the assumptions tab to row 40.

So in row 40 target company's marginal tax rate and just lock onto that because we're gonna be copying this to the right and we get 33.3 as being the unwinding of this deferred tax liability.

So your deferred tax liability is reducing each year.

Now you might be thinking if you haven't seen this model before, if you're not familiar with the step up to me and this is an important skill, big picture step back. Sometimes we're so focused in the detailed calculations that we forget to do a sense check guys, how can I have a deferred tax liability of 5.3 billion when all I've stepped up by PP&E by is 951? That to me just looks weird.

But that deferred tax liability does not just relate to the PP&E, it relates to other asset step ups as well.

So if you go back to the assumptions tab on the assumptions tab, if you look at the step ups from row 37 onwards, now bear in mind these are US dollars, we have converted those step up into euro.

So if you just go to column G, this is all now in euro, in column G, don't worry about the hashtag values, it's just 'cause I've got formula all over the place.

So if you look at this goodwill calculation, there is the step up in brand value, huge step up brands internally recognized, internally generated brands can't be recognized for accounting purposes as intangibles but acquired brands can.

So we've got this recognition of brand value coming onto the books and we've got the PP&E step up and that deferred tax liability relates to both of them so that we've got the sum of the step ups times by the marginal tax rate of the target. And you'll notice the small unwinding, it's only unwinding by 33 per year.

And the reason is because these brands are not amortized.

If the brands were amortized included in that deferred tax, we would also unwind the amortization of the brands.

But in this case these brands are not being amortized. So the brand value, deferred tax liability will effectively remain on the books until those brands are sold or until they're written down if they impaired for accounting purposes. Okay? So that is something you may not have seen before, that deferred tax liability on those assets step-ups and where this flows through to, if you have a look in our balance sheet, in the balance sheet, let me just go back, sorry to the calcs tab and let's just copy this across.

I know it always looks a bit alarming when we've got hash values all over the place, but it's because I've got these formula being shown, let's copy that deferred tax to the right And so that ending balance of deferred tax is just the deferred tax on the step ups.

So in my consolidated balance sheet, if we go to the new code tab, if we look in row 61 for deferred taxes, my deferred taxes is not just that calculations tab that I've worked out, it's the deferred tax projection for standalone acquirer plus the target. And then in addition we've got the step up so we adding acquire at target and step up deferred tax.

Okay, I'm very conscious of the time, I still have to do the interest with you and if possible I wanna have a quick chat through the tax call at the end. Let's get going with interest.

Any questions I will stick around a little bit afterwards if anyone does have questions, but obviously if you have them in the meantime please put them into the Q&A box, right? Let's go back to our calcs tab and let's have a look at interest. So to speed things up, I've left in here the acquisition debt.

So acquisition debt, we've got debt coming onto the books as part of the acquisition of 42,722.

And we assuming that that is being amortized and you'll see if you look in detail at the model, there's actually an amortization switch that you can turn on and off.

We've got the switch on, we are assuming amortization per year of 2,500.

Okay? So that is the date being brought onto the books as a result of the acquisition, it excludes the convertible.

There's also a convertible bond that's being brought on.

If we go down to the interest calculations.

So interest calcs we would be doing last, right? So you do your income statement balance sheet cashflow and now we come to do the interest calcs.

I just want to get you to conceptually understand that we can't just go and take interest of the target interest of the acquirer, add them together and then maybe make a few small adjustments because we've got to use the new cash position of the combined entity.

So if you go to the income statement of the acquirer and the target in their interest line, there's interest on long-term debt and interest on short-term debt revolver. And then there's also cash interest.

So if you look at the net interest figure interest on cash balances, all we want from the acquirer and the target is their long-term interest expense, then I need to recognize and say okay, on that long-term interest expense there's gonna be some adjustments, right? I've brought new debt onto the books.

So we've got acquisition debt also part of the acquisition debt is the convertible bond. So the acquisition debt, that's what's in that calc above.

And then we've got the convertible bond as well and we might have refinanced the targets debt so that we do all here long-term debt then have a look.

I switch to using the new company's short-term interest expense or interest income because I've got to look at the cash or revolver position of the combined entity.

There's so many changes happening because of this acquisition.

I can't just go look at the cash of the acquirer cash of the target.

Things are changing. Okay, so here we've got acquirer, target acquisition debt, convertible bond, part of the acquisition debt just modeled separately.

And then we've got the new company interest income interest expense on cash and revolver. Let's do the calculations.

So we are gonna calculate this as we would in any three statement model, right? We are going to pick up on buyer's long-term interest expense.

I'm gonna go to the acquirer's tab, I'm going to find their long-term interest rate.

So if we go to the acquirer tab and I go down, I think this is roundabout in the nineties, balance sheet assumptions, there we go. Interest rates on long-term debt row 92.

So in row 92 I've got the long-term debt interest rate.

And remember we are in column G because we in 2017, I'm multiply that by the average of the debt on the balance sheet. So if we scroll up, we have got long term debt and we're gonna use column F and G average, right? Because we are looking at 2017 interest.

So I want the closing balance from 2016 closing balance from 2017 and I'm gonna make that a negative multiply by minus one.

So I've got my acquirer standalone forecast, long-term debt interest.

I'm now going to do the same for the target. Exactly the same calculation.

So we are going to go to the targets balance sheet, make sure we are using the calendarized euro one.

We're gonna go down again to row 92 I think it was.

There we go. Interest rates on long-term debt, interest rates on long-term debt.

We picking up from row from column G and I multiply that by the average of the long-term debt balance. So scroll up to your balance sheet.

Long-term debt is in row 67 and we use the average of column F and G last year closing balance, this year's closing balance and I'm gonna multiply by minus one.

Now you might be thinking, but what if we are refinancing that targets date often as part of an acquisition, we refinanced the date.

So what if I'm refinancing that debt? Do you agree If that debt is being refinanced, I want a zero over there.

If that debt is being refinanced because the debt disappears, it's not gonna be there anymore.

So what we have and what you might see in more complex models is we've gotta refinancing switch.

And that refinancing switch is on our assumptions tab.

It's not a circular switch, it's just to be able to turn refinancing on and off.

So if you go to your assumptions tab row 35, if that is on one, that means we are going to refinance the debt.

And so I want interest to be zero, right? Because it doesn't exist anymore.

If I turn that to zero, it means we are not going to refinance the debt.

Now you will notice top left hand corner, this is a named sell, it's called refinance.

So when I do my formula, instead of me coming here and clicking on the sell, I can just type in the name refinance. So guys, one means the debt will be refinanced and you can see if you go up to your sources and uses of funds, uses of funds, target net debt refinancing, yes it's a use of funds, it is being refinanced.

If we switch that to zero, row 35, if we switch that to zero targets, net debt not being refinanced.

So look disappears right from the uses of funds.

So let's leave that on one so it's still on one and all I'm going to do now is if we go back to my calcs tab that I was busy with my original formula that I had for interest, all I'm gonna do is I'm going to amend it by multiplying by one minus that cell refinance.

So just type in the word refinance because it's a named cell and let me just expand my formula box up at the top so you can see the full formula fitting onto the screen.

And by me multiplying by one minus refinance, if the switch is on, I'm multiplying by one minus one which is zero.

If the switch is off, it'll be zero. So then I'm multiply by one minus zero, I'm multiplying by one.

So that is a way to incorporate flexibility into the model that you might not have seen if you've looked at a more simple M&A model.

Okay, so in this case we are refinancing that debt goes away so the interest goes away. However that is replaced with the acquisition debt I'm taking on. And we have got the acquisition debt interest rate in row 55 and I multiply that by the average of the acquisition debt balance and we've got that here in row 50 and I wanna make that a negative.

So that's additional interest that's going to be paid.

And then part of the acquisition we also taking on a convertible bond.

So it's not included in that acquisition debt. Okay, that's probably probably a loan here. We issuing a bond.

So there's additional interest that we're gonna have to pay.

I'm going to pick up that bond from the opening balance sheet.

From the opening balance sheet.

I can see that convertible bond and this is already in euro.

Be careful if you go back to the assumptions tab, pick up the Euro convertible bond amount, not the dollar.

So there's my convertible bond, I'm going to lock onto that because it's not amortizing, the balance is not gonna change and I'm going to multiply that by the interest rates on my convertible bond and that's given to me in the calculations tab and I'm gonna multiply by minus one.

So there we have got our convertible bond.

Finally we are going to say, okay, let's look at the short-term position.

Now I can't go look at acquire and target, too many things have changed.

I need the new cash balance or the new revolver balance and I'm gonna get that from NewCo. And guys, that's why we do interest lost, right? Interest is modeled at the end.

So I'm gonna go get NewCo short-term interest expense.

So I'm going to go pick up in my assumptions, I've got the short term interest rate and I multiply by the average, go to the new co tab and I go to my balance sheet.

I find short term debt and we've got nothing there but obviously we're gonna model it in and I multiply by minus one but we've got no interest short term in the first year.

And then interest income on the cash balance, I do exactly the same thing.

I go pick up interest rate on cash in row 53, that's north 0.1% and I times buy the average of the new co cash balance.

So we take last year, this year closing balance and don't multiply by minus one, this is an income figure and we get 1.7, add everything up and we get our interest for the new company on a consolidated basis, taking into account the refinancing, taking into account the new debt that's coming on, taking into account the cash and short-term revolver position.

We've got interest and this I'm not gonna copy to the right or actually let me copy to the right, why not? Okay, copy that to the right and just to show you, this flows into your income statement just like we would with any normal three statement model.

If you go to your NewCo tab, if you go to the income statement and you go look at interest interest, we link with a switch.

So if the circular switch is on, then give me the interest I've just calculated otherwise give me zero, okay? I'm aware that our hour is up. However, I cannot resist wanting to show you the tax calculation very briefly, just I wanna talk about one or two things. So obviously if you have to log off, you've got stuff to do, please by all means do that. Thank you for your participation. But if you've got five more minutes, I'm going to keep going. I just wanna show you that tax calc for this.

What I'm going to do is I'm going to go to the full file.

So the full file completed file, I've already got that open, don't worry, you don't necessarily need to open it.

Maybe just watch what I'm doing.

What I am going to do is I'm going to turn iterations on because I wanna show you something with the interest. So I'm just going to go to the model intro tab, I'm going to go to the circular switch, I'm going to turn that on.

I get the warning because I've got iterations off.

So alt ft and I enable iterative calculations.

Okay, now let's go to my calcs tab again and I just wanna show you the tax calculation because there's something you might not have seen in the tax calc before. Okay? So tax calculation, we start off in row 71 with combining the two standalone companies originally forecast tax expenses.

So I've got buyer, the acquirer's tax expense plus Monsantos tax expense.

The target added together, that is obviously now no longer accurate because we've made a number of amendments.

And so that's what we need to now bring in to adjust this tax figure.

So we have got the two standalones brought together and now we're gonna correct that for acquisition effects.

First thing we're gonna do is we're going to look at one of the easier things to understand, which is synergy, right? In our spreadsheet we have got the synergy and the synergy is going to lead to more profit, right? We've got cost savings, we've got more revenue, we've got a little bit of expenses, but that leads to more profit and that's going to lead to more tax.

So tax is a negative, right? It's an expense.

So this is going to increase the tax that I have to pay because I have got increased profit, right? So increased profit means increased tax.

So that is a negative. Always important to keep in mind. Is this a negative or a positive? Logically right? Expenses a negative so I'm going to have to pay more tax, I add onto that negative, right? Then I'm gonna have less depreciation because of the decreased CapEx spend, I'm not spending as much on my fixed assets anymore. Part of the synergy and part of that is I'm gonna be losing depreciation, right? We said we're gonna have less depreciation because of that CapEx spend each year and if I have less depreciation, I am going to increase my profit.

Depreciation is an expense. So less depreciation means more profit, which means more tax.

So same as above, this increases my tax expense.

And then I've gotta say what about the financing costs? That tax of 2,313 is based on interest of the two standalone companies and I know that that interest is no longer accurate because the target's interest has disappeared. If I refinance, I'm bringing on new debt, I'm bringing on the convertible.

So I've gotta take this change in interest into account and that's why we have here in row 66 the original standalone interest of the two companies added together.

So this is what goes into the original tax cals and then I compare that to what the actual interest should be now and that difference has a tax impact.

So standalone what it would be, what went into the original tax cos the adjusted interest expense, what it is now in the combined entities and that difference has a tax impact.

So you take the difference and multiply it by the marginal tax rate.

And logically let's just think well this increase or decrease profit, I have got more interest, right? More interest.

So therefore less profit.

I've got interest of two eight versus interest originally.

Forecast of 813 more interest means less profit.

Less profit means less tax.

And that's why this is a positive. Tax expense is a negative.

This is like an income effectively because I'm reducing the tax expense.

Okay? And that is the second last thing I wanna show you.

The very last thing I just wanna make you aware of is because we are incorporating interest directly into this tax, there we go.

I've got interest coming into my tax cu directly.

The minute I put tax in the income statement, it's gonna create a circular because it's introducing interest into the income statement. And we know interest in the income statement causes a circular.

So last thing I wanna show you.

If you go back to your NewCo tab and you go to the tax line, in the tax line, if you just look up here at the top of my screen to see the formula, you can see just like with interest, we link it to a circular switch.

We say if the switch is on, give me the tax, otherwise give me nothing.

So it's because I've introduced interest directly into my tax calc and now the minute I put it in the income statements, it's gonna create that circular just like interest does. Okay? So that is the final thing I wanted to show you.

So thank you very much for your participation.

Please do give us feedback in the form and let us know how you found things.

If you do have any questions, please do ask.

I'll stick around now for a few minutes or you can always contact us after the fact. Thank you very much. All the best.

And do join us next week for the analysis part of m and a.