decreased in value slightly.However, ROA and ROFA during first half of 2007 decreased close to the performance in 2005 since its profitability during this period return to its normal level. Asset turnover ratio increased continuously from 2005 to the first half of 2007,reflecting an improvement in the efficiency of asset utilization as TBC generated more revenue from expansion of its customer base domestically and internationally i.e. Heineken,and customer in Vietnam market. Financial Policy Analysis Although the debt to equity ratio as of the first half of 2007 increased from that of 2006, the amount of equity was higher than liabilities. Furthermore, interest coverage ratio increased from 25.47 times in 2006 to 42.21 times in the first half of 2007. The ratio represented that TBC enabled to repay the interest. Nevertheless, debt service coverage ratio declined due to TBC policy of dividend payment at 50% of net profit per year. In 2006, dividend payout ratio, which based on operation in 2005, equaled to 33% of net profit before a deduction of retained loss of 67.05 million baht. Therefore, the dividend payment of 60 million baht in 2006 represented 51.55% of net profit after a deduction of retained loss. In addition, during first half of 2007, TBC paid the dividend at 51.65% of the net profit. 32 2. Independent Financial Advisor Opinion 2.1 Reasonableness and Benefits of the Connected Transaction Packaging Business Expansion TBC share acquisition of 50 million share or 50% of paid-up capital is considered as an expansion in the packaging business of BJC from glass and plastic packaging material to aluminum packaging material. The expansion provides BJC a continuing growth along a growing trend of portable packaging, which correspond to changes in life-style of worldwide consumers; for example, customer needs for more convenience and single- serving-size package. In addition, BJC will get benefits from the acquisition, which are economy of scale, economy of scope, and safeguard against competitors with substitute products, especially beverage packaging such as glass bottles and plastic bottles. Furthermore, BJC also obtains benefits from gaining the market share in aluminum can market because TBC is the second largest can maker in Thailand with a market share of around 34%. BJC can also expand its customer base through TBC existing customers, most of which are famous and have strong financial status in both domestic and export market. Reduction in Opportunity Cost For business expansion, BJC can either build up a new business from scratch or acquire existing company. Furthermore, TBC share acquisition also helps BJC generate sales revenue from aluminum can business immediately compared to building an aluminum can business from scratch by itself, which requires more time to build up new factory, pitch for customers, and gain recognition from customers. Therefore, the TBC share acquisition is reasonable in term of business expansion.This business strategy will increase the competitiveness and prevent competition from substitute products at the same time, and also reduce opportunity cost from building up a new business from scratch. 2.2 Advantages and Disadvantages of the Acquisition 2.2.1 Advantages Investment in Financially Sound Company TBC is the second largest aluminum can maker in Thailand, and has a large customer base in both domestic and export market. Furthermore, TBC has a strong financial status and generate revenues of more than a billion baht per year with a net profit more than 200 million baht per year. In 2006, TBC gained a net profit of 242 million baht and a return on equity of 20.04%. Moreover, current ratio indicated that TBC has adequacy of current assets to cover current liabilities. Technology Transfer from TBC Shareholder One of TBC shareholders, Ball South East Asia Holding, is a subsidiary of Ball Corporation, which owns license of aluminum can production technology in USA. TBC acquisition provides BJC an opportunity to learn the production technology and know how of raw material procurement from Ball Corporation, the owner of aluminum can production technology from USA. This enables BJC to adopt such technology in the cost management for more efficiency. 33 2.2.2 Disadvantages BJC has to take risk from the fluctuation of aluminum price and foreign exchange. The main raw material in can production is aluminum, the price of which depends on the market price in London Metal Exchange (LME). The characteristic of aluminum is a commodity product, where its price depends not only on the supply and demand of aluminum, but also other exogenous factors such as oil price and speculation. All these factors cause a volatility in the aluminum price in the world market Based on TBC cost structure as of the first of 2007, aluminum cost represents 80.39% of total cost of good sold of TBC, while 29% of sales revenue is in US dollar. This provides TBC a partial natural hedge. In the strengthening Thai Baht situation, TBC is better off as it usually has a net outflow in US dollar. On the contrary, if Thai Baht is weakening, BJC may be adversely affected by the volatility in aluminum price and foreign exchange rate to some extent. However, TBC's Board of Directors, those who are not connected persons with BJC are veterans in aluminum packaging business. They use the strategies to manage the risk by hedging the aluminum price through pricing contract with aluminum suppliers, and through forward contracts on foreign exchange rate with financial institutions. 2.2.3 Advantages and Disadvantages of entering or not entering the Transaction If BJC decides not to acquire TBC share, BJC will lose the opportunity to expand into aluminum packaging business. Moreover, there are only a few players of aluminum can manufacturers in Thailand, and all of them already have business alliances or shareholders, which are competitors of major shareholders of BJC. Therefore, BJC is necessary to do the transaction in order to maintain its competitiveness. In addition, BJC decides to use internally generated fund or debenture.Independent financial advisor is of the opinion that BJC has adequate cash flow to conduct the transaction. Furthermore, debenture will not affect the financial condition of BJC because BJC had a debt to equity ratio equal to 0.80 times as of the second quarter of 2007. It indicated that BJC's equity is larger than debt, and the capability of BJC to repay interest expense was 7.52 times. 2.3 The Necessity of Entering into the Connected Transaction The major shareholders of TBC can be classified into 3 groups, which are: 1. The Chayavivatkuls, the owner and key man of TBC management team, owns 42% of TBC shares. 2. Ball South East Asia Holding Company Limited, aluminum can production technology owner, owns 6.67% of TBC shares. 3. Connected persons of BJC own 50% of TBC shares. BJC is necessary to undertake the transaction with the connected persons as the Chayavivatkuls, Ball South East Asia Holding Company Limited, and other shareholders do not wish to sell their TBC shares. Furthermore, by maintaining the Chayavivatkuls and Ball South East Asia Holding Company Limited as TBC shareholders will benefit BJC in that TBC will still be managed by experienced management team, and also supported by world-renowned technological expert in aluminum can production. 34 3 Fairness of the Price and the Conditions of the Connected Transaction 3.1 Fairness of the Acquisition Price The Board of Directors' Meeting of BJC No. 72 on October 18th, 2007 approved TBC shares acquisition for 50 million shares at 21.48 baht per share, totally 1,074 million baht. Independent financial advisor uses various valuation methodologies based on the audited financial statement of TBC as of 31st December 2006 because it is more reliable than the unreviewed financial statement as of 30th June 2007. Each share valuation approach is as follow: 3.1.1 Book Value Approach Based on the consolidated financial statement as of December 31st, 2006, the book value of the Company's share is as follows: Issued and Paid-up Capital 1,000.00 Million Baht Surplus revaluation of assets-the - Million Baht company Accumulated Profit Legal Reserve 6.00 Million Baht Unappropriated 292.37 Million Baht Total Equity 1,298.37 Million Baht No. of Share : Par Value at 10 Baht 100.00 Million Shares Book Value per Share 12.98 Baht According to the TBC financial statement as of December 31st, 2006, the book value approach yielded the share value of 12.98 baht per share. 3.1.2 Adjusted Book Value Approach By adjusting the value of some asset items to the appraised value, this approach reflects the share value of a firm more than the book value approach. Under the adjusted book value approach, TBC share value is derived from the total assets as of December 31st, 2006, adjusted by the surplus/discount value of fixed asset evaluated by an Independent Asset Appraiser, minus total liabilities, and divided by the number of outstanding shares. This calculated value represents the Net Asset Value (NAV) that reflects the market value better than the value derived from the Book Value Approach. The Financial Advisor adjusted the asset value based on the Asset Appraisal Report as of September 17th, 2007 prepared by Thai Property Appraisal Lynn Phillips Company Limited, a SEC certified Independent Asset Appraiser. The adjusted value of fixed assets are as follows: 35 Million Baht Book Value Apprised Assets Appraisal Surplus (December31st, 2007) Value (Discount) Land 91.95 158.73 66.78 Building and Improvement 255.35 260.00 4.65 Machines and Equipments 752.69 1,079.10 326.41 Total 1,099.99 1,497.83 397.84 The Adjusted Book Value is as follows: Million Baht Value Value Item (before Adjustment (after adjustment) adjustment) Total Assets 2,311.94 397.84 2,709.78 Total Liabilities 1,013.57 - 1,013.57 Book Value 1,298.37 - 1,696.21 No. of Outstanding Shares (Million shares) 100.00 - 100.00 Book Value Per Share (Baht per Share) 12.98 16.96 The Adjusted Book Value Approach yields the value of 16.96 baht per share 3.1.3 Market Comparable Approach The market comparable approach derives the Company's share value by comparing the statistical ratio of TBC with the listed companies in the similar business. The market comparable approach will use price per book value ratio and price per earning ratio to calculate share value. There are 13 listed companies in the packaging sector of the Stock Exchange of Thailand. Each company operates many kinds of packaging business such as plastic packages, plastic bags, metal boxes, plastic film packages, and paper boxes. There are only Alucon Public Company Limited or ALUCON, which operates in aluminum packaging such as aluminum tubes, and Crown Seal Public Company Limited or CSC, which manufactures aluminum crown caps. Like TBC, both companies use aluminum as raw materials. Therefore, the Independent Financial Advisor decided to use the price per book value ratio and price per earning ratio of these two companies as a reference for TBC share valuation. 36 P/E Multiple Approach This approach uses the earning per share of Baht 2.42 per share as of December 31st,2006 and multiply with the weighted average of Price per Earning ratio (P/E) 8.88 times of the 2 SET listed companies in the Packaging sector, as of October 8th, 2007 as follow: This approach uses the earning per share of 2.42 baht per share as of December 31st, 2006 and multiply with the market-capitalization weighted average price per earning ratio (P/E) of 8.88 times of the two comparable firms in the packaging sector, as of October 8th, 2007 to arrive at TBC share value as follow: P/E (Times) Market Capitalization (Million Baht) ALUCON 9.96 2,736 CSC 5.02 770 Weighted Average P/E 8.88 Share Value Result EPS (Baht/Share) 2.42 Share Value (Baht/share) 21.48 The P/E multiple approach at the weighted average P/E of 8.88 times results in TBC share value of 21.48 baht per share. Although P/E of Packaging sector as of October 2007 equals to 8.06 times, the Independent Financial Advisor used P/E from two listed company, which are Alucon Public Company Limited and Crown Seal Public Company Limited, because the business and size of these companies are similar to TBC. ALUCON manufactures the aerosol aluminum can, and therefore, subject to the aluminum price risk like TBC. ALUCON is also similar to TBC in size as it generated the sales revenue of 2,808.98 million baht in 2006, and 1,536.41 million baht during the first half of 2007 and had the total assets of 2,945.60 million baht as of the second quarter of 2007. As for CSC, it is a manufacturer of aluminum crown cap and proof cap. CSC, therefore, subject to the aluminum price risk and sensitive to the beverage industry likes TBC as well. In addition,CSC is similar to TBC is size as well. CSC generated the sales revenue of 2,144.86 million baht in 2006 and 1,144.50 during the first half of 2007. As of the second quarter of 2007, the total assets of CSC equaled to 2,050.07 million baht. P/BV Multiple Approach This approach uses the book value per share of Baht 12.98 per share as of December 31st , 2006 and multiply with the market-capitalization weighted average price per book value ratio (P/BV) of 1.42 times from two SET-listed comparable firms as of October 8th,2007 with the details as follow: P/BV (Times) Market Capitalization (Million Baht) ALUCON 1.64 2,736 CSC 0.66 770 Weighted Average P/E 1.42 37 Share Value Result Book Value per Share (Baht/Share) 12.98 Share Value based on P/BV (Baht/share) 18.43 The P/BV multiple approach at weighted average P/BV equals to 1.42 times results in share value of TBC equal to 18.43 baht per share. Although P/BV of Packaging sector as of October 2007 equals to 0.96 times, independent financial advisor recommended to use P/BV from 2 listed company, which are Alucon Public Company Limited and Crown Seal Public Company Limited, because they operate the business similar to TBC. Under the P/BV multiple approach, the weighted average P/BV of 1.42 times results in TBC share value of 18.43 baht per share. Although the P/BV of the packaging sector as of October 2007 equals to 0.96 times, the Independent Financial Advisor used the weighted average P/BV from the two comparable firms, which are Alucon Public Company Limited and Crown Seal Public Company Limited, because these firms they operate the business similar to TBC. 3.1.4 Discounted Cash Flow Approach Under this approach, the operating capability and future prospect of a firm was taken into consideration based on the management's prospects, the assessment of economy, and other related business factors. The free cash flows to equity (after debt repayment) are discounted to the net present value at the cost of equity with the reasonable debt-to-equity ratio to arrive at the equity value. Under this approach, the share value o directly relates to the profitability while non-cash expenses such as depreciation and amortization do not affect the calculation. The Financial Advisor developed the financial projection for a 10-year period to forecast the future cash flows. The assumptions are based on a going concern basis and there are no significant changes in fundamental policy and operating environment. The Financial Advisor also adapted the management's assumption to correspond with the economic condition at the time of the case for the purpose of evaluating the fair TBC share price to the Board of Directors of Berli Jucker Public Company Limited. If there are significant changes in the economic conditions and factors affecting TBC business from the stated assumptions, the share value derived from this approach will change accordingly,and therefore, the stated share value shall not be use as reference price for other purposes beyond this study. The cost of equity (Ke) is calculated from Capital Asset Pricing Model (CAPM). The discount rate has various factors as follows: Ke = Rf + ?(Rm-Rf) Risk free rate (Rf) = The rate of return from investment in any riskless securities Market return (Rm) = The rate of return from investment in the Stock Exchange of Thailand Beta (?) = Slope represents the relationship between stock price and the stock price index However, there is no aluminum can manufacturing company listed on the Stock Exchange of Thailand. Therefore, the Independent Financial Advisor calculated ? by using the information from the listed companies on the SET and foreign stock exchange, which operate in a business similar to that of TBC. The ? was then used to calculate the cost of equity. 38 Major Assumptions for the Discounted Cash Flow approach are as follows: (1). 10-year projection period starting from year 2007 to 2017 (2). Sales Revenue Sales Volume Currently, a can line has a maximum capacity of 900 million cans per year.TBC plans to expand a second can line in 2008, which would bring a capacity level to 1,200 cans per year. It also plans to increase the machine in the second can line to increase the capacity level to 1,400 in 2012. As for end line, the maximum capacity is fixed at 1,585 ends per year for all the projection period. Historical Projection 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 to 2017 Can Maximum 900 900 1,200 1,200 1,200 1,200 1,400 1,400 1,400 1,400 Capacity (Million Cans) Capacity 97.6 99.3 88.3 92.7 97.3 100.0 90.0 94.5 99.2 100.0 Utilization % Ends Maximum 1,585 1,585 1,585 1,585 1,585 1,585 1,585 1,585 1,585 1,585 Capacity (Million Ends) Capacity 69.9 76.3 79.9 83.7 87.6 91.8 96.2 100.0 100.0 100.0 Utilization % Domestic sales volume growth is based on the weighted average growth rate of several industries (information from Bank of Thailand ) in which TBC's customers operate i.e. beer and soft drink industries. For export market, export sales volume growth rate is based on the weighted average GDP growth rate of each country in which TBC's customers operate. Except for the sales volume growth of 19% in 2008 based on TBC budget and plan with its customers, sales volume growth of other years are projected at the rate setout below until sales volume reach the capacity limit. Can Growth Rate End Growth Rate (%) (%) Domestic Market 3.81 3.74 Export Market 7.08 7.06 2 Reference: Research Center, Krung Thai Bank 39 Sales Price per Unit Sales price per unit of can and end are varied by the price of aluminum on London Metal Exchange and other cost of production. Sales price varies in different markets. Sales price is set from the total cost of production at that time and added with the mark-up margin according to the historical average of mark-up margin in 2004, 2005, and the first h half of 2007.The mark-up margin in 2006 is excluded from the calculation as TBC had a particularly high mark-up margin from a stocking of raw material before an increase in aluminum price in mid 2006. The projected mark-up margin is as follows: Mark-up Margin (%) Domestic Market (more)