THE NEXT WAVE OF M&A IN RETAIL AND FASHION

Overview - Portugal

June 2014

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CONTEXT

Background Portugal Full member of EU for more than 25 years Founding member of the Eurozone Part of Schengen Agreement Portugal has a transparent and mature real estate market

Context Small southern European open economy Highly vulnerable Caught in full by economic crisis

Restructuring intense political effort to attract foreign investment Credit crunch and the austerity measures imposed by the bailout from the IMF, EU

and ECB: fall in prices which is now giving rise to a wide range of opportunities

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Fast growth in the 90ies which further accentuates in the first decade of the 21st century

Historically: a market that was shaped up by legal contingencies Unfavorable lease law Distinct legal frameworks for lease of high street retail and tenancy in shopping centre Consequences: Retail concentrates in shopping centres; High street retail is very

underdeveloped

Volume of investment in the real estate market was at its best around 1,3 billion euro/year in 2006 and 2007

Players: both domestic and international investors

In the fashion sector Tradition in textile industry: mostly to export to international brands All major international apparel brands

SHAPING UP OF THE RETAIL MARKET

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2008 to 2010: accentuated slowdown - Reasons:

Economic crisis, credit crunch, decrease of consumer market

Real estate retail market is mature/saturated

SLOWDOWNFonte: ICSC

2009/2010 still some investment: real estate market is slow to react

2011/2012: investment disappears/ zero openings of shopping centres

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During 3 years: Correction of prices Optimization of business Shutdown or relocation of stores Adaptation to the consumer: increased proximity and convenience commerce increase of promotions and loyalty plans

Second semester 2013 and 2014: turnaroundDrivers: very good quality of retail assets price adjustment perception that the lowest point in the cycle has been reached

REBALANCING & TURNAROUND

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Economic growth, clear restart of the market: relevant acquisitions in the pipeline.

Return of real estate investment in 2013: 80% is carried out by institutional investors: investment funds (private equity) 70% of investment is FDI 50% is in the retail market

Investors’ profile Institutional investors (including PE funds) Family offices Private investors Origin : Brazil/ China/ Angola/ Germany

Investments’ profile Diverse: from opportunity acquisitions to value enhancement driven long term deals

CURRENT TRENDS: MARKET SITUATION AND PERSPECTIVES

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The fashion and accessories market in Street retail locations grew counter cycle during the crisis:

Intense opening of international luxury apparel brands in prime locations

2 reasons

Increased demand for luxury brands by growing tourism of non-European origin as a result of successful strategy to attract foreign wealthy individuals: golden visa and non-dom tax system

Renovated offer of high street retail space due to new legal framework

HIGH STREET RETAIL

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Despite the increase of high street retail, shopping centres are still dominant in the retail market

Stock of shopping centres is around 3,6 million sqm of GLA distributed by 170 shopping centres

SHOPPING CENTRES

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Shopping centres correspond to 80% of the market; retail parks 12% and factory outlets 6%

Offer of shopping centres is relatively recent: average 13 years

Already a few relevant openings (over 100.000 sqm GLA)

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RentsPrime locations: Increase of demand and increase of rentNon-prime locations: Economic downturn: decrease of available income

and demand; no credit; increase of available retail sqm

Consequence: owners are available to renegotiate rents, accept grace period, accept fit out expenses, accept variable rents

OTHER KEY FACTORS

Yields: Decrease continuously until 2007; then abrupt

increase; now starting to decrease again.

Financing: Acquisitions still depend on relevant percentage of

equity Retail is traditionally a hard sector to bank as it is

closely linked to the economy and consumer’s discretionary spending

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During economic downturn: Economic weakness - too many shops, too few shoppers - causes pressure on prices Works as a driver for consolidation: M&A is a potential salvation for some low margin chains Deals ensure organizational shake ups Opportunistic deals

Now that economy is pulling itself out of recession: investment in retail is returning Environment is once again right for retail consolidation Larger companies look for growth without oversaturating the market Smaller firms look for financial boost and to get to the next level

Importance of M&A: Retailers may be unable to count on consumer spending as much as in the past to sustain

growth A major effect of the recent downturn is the increase of the consumer savings rate

Good reason to believe there will be a new wave of M&A in retail

M&A - DRIVERS

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Acquisition by a larger retail rival: Knowledge of the market More realistic expectations More interest in long term gains

Acquisition by private equity investor: Usually strict growth strategy that includes an exit deadline (5 years or less) Pressure to grow on a schedule that may not line up with the economy and consumption Often burden the company with debt that can be difficult to overcome

Currently very diverse acquisition profiles and players are still at play in retail M&A market: New wave of interest from institutional investment funds: relevant acquisitions in the pipeline High street retail: presence of the brand; part of an internationalization strategy; belief in long

term value enhancement (also in connection with programs for the renovation of Lisbon and Porto traditional commerce locations)

Still some discount deals (distressed assets)

PLAYERS - PRIVATE EQUITY VS. INDUSTRY PURCHASER

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Asset deal (or acquisition of going concern)Pros: Risk of transfer of liability to the purchaser is lower (encumbrances/ leases/ priviledged credits)Cons: Triggers real estate transfer taxes payable by the purchaser May trigger reassessment of the property which for the purchaser means higher annual real estate tax Triggers capital gains taxation in the hands of the seller

Share deal (possibly preceded by spin off into a newco) - usually the preferred solutionPros: Avoids real estate transfer taxes Use of exempt local vehicles to optimize taxation of capital gains or dividends (real estate investment fund/

real estate investment company) Possible tax neutrality Possible use of tax losses Fiscally efficient model for investors to provide shareholder debt and to facilitate future refinancing when

debt markets return to equilibriumCons: Liability of newco for debts prior to spin off up to the amount of assets transferred

TYPICAL TRANSACTION STRUCTURE

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Securing future incomes: rental guarantee in a shopping centre acquisition: Tenants usually provide guarantee for rents (bank guarantee; security deposit; group

guarantee) Due diligence: identification of any contingencies in connection with the agreements (change of

control clauses in lease agreements; non-transferability of guarantees) The buyer should also require the seller to provide estoppel certificates (e.g., no defaults, no

prepaid rent, status of security deposits and the like) from each of the tenants prior to closing

Contractual risk limitation in the SPA: Flexibility Seller pre [or post] closing action in order to secure continuation of lease agreements and

guarantees Representations and warranties as to transferability and continuation of such agreements and

guarantees Indemnity mechanism to cover loss in case of breach of the seller’s representations and

warranties or failure to perform covenants Purchase price adjustment mechanisms to cover for loss of cash flows or pay indemnity

SELECTED LEGAL ISSUES OF INVESTMENT IN RETAIL SECTOR

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