2006 PARIS

The internet view on M&A

Changing scenario for pensions in M&A– The North American Perspective

John Hall, Mercer Human Resource Consulting

Today’s agenda

Changing scenario for pensions in M&A– Recent Changes in the UK

Richard Cousins, PWC

Changing scenario for pensions in M&A– Continental Europe

Tony Broomhead, Watson Wyatt

Changing Scenario for Pensions in Mergers and Acquisitions

North American Perspective

Tony Broomhead (Watson Wyatt, US)

Understanding the Deal and the Role of the Actuary

• Type of Buyer• Reason for Buying• Type of Deal – Stock or Asset• Whole Company or Part• Who is Advising Whom?• Friendly or Hostile Transaction?• Stage of Deal

Market Overview – North American M&A Split by Deal Size

Source: Merger Markets

Value ($bn) Volume

Year Number of Deals Value of Deals (US $Mn)2003 2,565 504,9002004 3,969 820,2002005 4,080 1,104,700

Top 5 North American Corporate Deals in US$

2004 1 – JP Morgan Chase – Bank One – Financial Services : 57.88 bn2 – Cingular Wireless – AT&T Wireless Services – Telecomms : 47.02 bn3 – Sprint Corp.– Nextel Communications – Telecomms : 40.76 bn 4 – Exelon Corporation – PSEG (Public Service Enterprise Group) – Energy, Oil & Gas : 25.97 bn

5 – Wachovia Corp. – SouthTrust Corp. – Financial Services : 14.3 bn

2005 1 – Procter & Gamble – Gillette – Consumer : 55.69 bn2 – Bank of America – MBNA Corporation – Financial Services: 34.86 bn3 – Viacom (Shareholders) – Viacom Inc – Media: 33.2 bn4 – SBC Communications Inc – AT&T Corp – Telecomms : 21.65 bn

5 – Koch Industries Inc – Georgia-Pacific Corporation – Consumer : 21.0 bn

Market Overview – Private Equity

Source: Merger Markets

There has been a consistent increase in the value of deals in $ bn over the passed 4 years

The market is expected to cool down in 2006

Top 5 North American Private Equity Deals in US$

2004 1 – Comcast Corporation/DLJ Merchant Banking Partners/Providence Equity Partners Inc./Sony Corporation of America/Texas Pacific Group – Metro- Goldwyn-Mayer : 4.85 bn 2 – Kohlberg Kravis Roberts & Co. – PanAmSat Corporation: 4.08 bn 3 – Riley Property Holdings LLC – LNR Property Corporation : 3.7 bn 4 – Boise Cascade LLC – Boise Cascade (Paper, forest products, and timberland assets) : 3.7 bn

5 – Texas Genco LLC – Texas Genco Holding Inc.: 3.65 bn

2005 1 – Clayton/Dubilier & Rice/Merrill Lynch Global Private Equity/The Carlyle Group – The Hertz Corporation: 15.0 bn 2 – Texas Pacific Group/Warburg Pincus – The Neiman Marcus Group : 5.11 bn 3 – AIG Highstar Capital/Ontario Teachers Pension Plan – InterGen (10 power stations) : 4.85 bn 4 – 3128012 Nova Scotia Limited – Fairmont Hotels & Resorts : 3.9 bn 5 – Providence Equity Partners – Kabel Deutschland GmbH (63% stake): 3.43 bn

US Pension Considerations

• Aim: Leave accrued past service benefits with seller• Only possible if buying/selling portion of business

• If transfer of liabilities:• Seller will look to value ABO (past service liabilities, no salary increases, market discount rate)• Buyer will want value at PBO or higher• Negotiate method and assumptions• Negotiate eligibility conditions

• Issues with asset transfers from qualified plans (IRC Sect. 414(l), ERISA Sect. 4044)• May need IRS and PBGC approval

Canadian Pension Considerations

• Aim: Leave accrued past service benefits with seller

• Only possible if buying/selling portion of business• Buyer must establish a qualified plan (DB or DC) for seller to avoid Regulators requiring partial wind up • Eligibility for past service benefits continues based on total service (incl. service with the buyer)

• If transfer of liabilities and qualified plan assets, likely to be share of fund on wind up valuation basis to satisfy Regulators• Provinces have differing requirements

Post-Retirement Medical Considerations

• Canada and US very similar• Not vested until retirement and typically not funded• Variety of approaches in asset deals, e.g.

• Retire and rehire those eligible for benefits• Allow to grow into eligibility with future service• If eligible, retain benefit, but defer commencement to actual retirement from buyer• If not eligible, no benefit from the seller

• If liabilities are transferred, with purchase price adjustment, seller typically requires buyer to retain plan for a period of years

Changing scenario for pensions in M&A– continental Europe

John Hall, Mercer Human Resource Consulting

Market Overview

Corporate M&A Europe

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Value of Deals (US$M)

Number of Deals

Year Number of Deals Value of Deals (US$M)2001 1,971 629,5842002 1,854 584,0042003 2,412 429,4452004 3,413 493,2162005 3,500 756,189

Source: Merger Markets

Top 5 European Corporate Deals in US$

2004 1 – Sanofi – Aventis: 70.9 bn2 – Telecom Italia – Mobile (TIM) : 25.5 bn3 – KBC Bank – Almanij : 19.2 bn 4 – Santander – Abbey National: 15.5 bn5 – Mittal Steel – LNM Holdings : 11.8 bn

2005 1 – Gas Natural SDG – Endesa: 52.3 bn2 – Telefonica – O2 : 32.0 bn3 – Vinci – Autoroutes du Sud de la France: 20.9 bn4 – Unicredito – HypoVereinsbank : 18.9 bn5 – Pernod Ricard – Allied Domecq : 16.6 bn

Market Overview

Private Equity Deals

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Total $ Million

2000 403 88,854

2001 470 93,769

2002 519 121,781

2003 881 137,658

2004 1,276 197,275

2005 1,552 272,412

Top 5 European Private Equity Deals in US$ 2004

1 – Borealis – National Grid Transco: 5.8 bn 2 – Fortress – Gemeinnuetzige Angestellt : 4.3 bn 3 – CDR/Eurazeo/Merrill Lynch – Rexel : 3.7 bn 4 – Elliott Bernerd – Chelsfield: 3.3 bn 5 – CVC/Permira – Automobile Association: 3.2 bn

2005 1 – Apax/Blackstone/KKR/Permira– TDC: 16.0 bn 2 – BNP Paribas – Galeries Lafayette : 11.1 bn 3 – Terra Firma – Viterra : 7.5 bn 4 – Access Industries – Baselle: 5.4 bn 5 – Cinven/Air France/Lufthansa – Amadeus : 5.3 bn

Overview of Regional Issues

Pan European Plans

Cross-Border Acquisitions

Sourcing and the move to the East

IFRS

Overview of German Issues

Book reserve plans

Pensionskasse

ATZ/Early retirement plans

Jubilee awards

Overview of French Issues

Top-Hat plans

Retiree health plans

DC retirement plans

Restructuring

Overview of Benelux Issues

DC plans

Collective/Industry-wide plans

Early retirement plans

Unions

Company/Fund Separation

Funding

Overview of Southern Europe Issues

Externalization of fundingIndividual and management agreementsReduction in government benefitsUnions and collective labor agreeements

Overview of Nordic Issues

DB plans

Collective/Industry-wide plans

Long-Term disability provisions

Changing Scenario for Pensions in Mergers and Acquisitions

Recent Changes in the UK

Richard Cousins

HR Transaction Services

PricewaterhouseCoopers

Agenda

• Background to UK• Recent legislation• Pensions Regulator• Impact on transaction

• M&A activity continues recovery

• Increased number of deals in UK consistent with M&A growth worldwide

• Low interest rates have contributed to an increase in the amount of debt leveraged in the average deal.

Number and Value of UK M&A Deals (over £10m)

Background to UK

• Defined benefit schemes–In deficit–Closed to new entrants–Increasing closed to future accrual of benefits–Maturing membership profile –Increasing longevity

• Recent legislation–Pension Protection Fund established–Pensions Regulator with significant powers–Pension scheme funding rules–Multi-employer regulations

Pension Regulator Powers

• Contribution Notices– Act, or failure to act, that is detrimental to the

pension scheme– Cash penalty on connected or associated

companies or individuals

• Financial support directions– May apply if a company is insufficiently resourced

to support its pension deficit– Connected or associated company to guarantee

support– Pierces corporate veil

Impact on transactions – pensions liabilities an unsecured creditor

1. Creditors with fixed charges2. Preferred creditors3. Creditors with floating charges4. Unsecured creditors5. Subordinated creditors6. Equity

Prevent reduction in security:

•Change in priority

•Reduction of capital

•Change of control

Impact on transactions – voluntary clearance

• Clearance can be obtained from Pensions Regulator• Need to understand the effect of transaction on pension

creditor• Need to engage with trustees during transaction

process

Scheme Funding Rules

• Trustee must– Adopt prudent assumptions– Understand strength of employer– Negotiate with employer

• Impact on transactions– Current degree of uncertainty– Likely to lead to increased cash

Multi-employer regulations

• Sale of a participating employer triggers buy-out/insurance debt

• Liability related to actives, pensioners, defereds of participating employer

• Impact on transactions– Buy-out debts are significantly higher than IAS19

deficit– Buy-out debts can be avoided but alternatives are

complex and challenges to agree.