Healthcare Industry Limited Steamboat Capital Limited 10 April 2014 Shareholders call for Abano Chairman?s resignation Healthcare Industry Limited (HIL) and Steamboat Capital Limited (Steamboat) two major, long term shareholders in Abano Healthcare Group Limited (Abano) are calling for the resignation of the Abano Chairman Trevor Janes. and Steamboat (who own approximately 19% of Abano?s shares) said in a joint statement: ?We have lost confidence in Mr Janes' ability to act in the best interests of the Company and its shareholders. His actions as Chairman give rise to questions of independence, objectivity and that of keeping shareholders fully informed in a timely and accurate manner. ?We are passionate about this business succeeding, but the performance picture painted by the Board is very inaccurate. The company?s debt has ballooned by 650 per cent since FY10 and is growing at a much faster rate than profits. Ordinary dividends are fiat, barely covered by profits, and the Company has in recent years routinely missed broker medium-term EBITDA forecasts by on average The decision to become activist shareholders was not made ?Should Mr Janes refuse to resign, we will seek to re?run that part of the 2013 AGM relating to ordinary resolution number two re-election of the Abano chairman. We have asked the company to respond by Wednesday 16 Aprii 2014." An area of growing concern has been the loose use of the term ?independence? when communicating with shareholders. independence is a fundamental shareholder safeguard and particularly reiied upon by Mum and Dad investors. At the time of the 2013 AGM Mr Janes, who was up for re-election, described himseif to shareholders as being independent when in fact he was not. Due to his role as Deputy Chair of the Accident Compensation Corporation (ACC), a substantial shareholder in Abano, Mr Janes had a ?disqualifying relationship? under the NZX Listing Rules meaning that he should not have been described as independent. This was not the first time that Mr James? independence has been called into question. In 2007, during the Masthead partial takeover offer, Abano announced that Mr Janes had been incorrectly listed as an independent director. A further misuse of the term Independence occurred when a Grant Samuel report was used to effectively repei expressions of interest in Abano by Archer Capitai (last proposal was at $7.80 which was never put to shareholders). Contrary to repeated claims by Abano, the Grant Samuel report which was billed at the 2013 AGM as a ?major announcement? was not independent because Grant Samuel was in fact an adviser to Abano. Moreover, Grant Samue|?s valuation and methodology were fundamentally flawed. A review of the Grant Samuel report by Kordalvlentha, commissioned by HIL, estimates that Grant Samuel overstated the value of Abano by $2.44 - $2.89 (mid-point This equates to an overvaluation by Grant Samuel of around 40%. The Kordaivlentha downward adjustment ieads to a revised price of $6.46 per share (revised mid-point price). Mr Hutson and Mr Reeves have laid out their concerns in a letter to the Abano Board and a separate letter to all shareholders. [Attached] ?The evidence we have gathered creates a damming picture regarding governance and financial performance.? ?We believe the Board needs to be overhauled in an orderly fashion and that it shouid include directors with appropriate and practicai industry, operating and clinical experience in line with the company's strategy. ?Our plan also involves a focus on executional rigour. We seek a halt to dental acquisitions for the time being to de-risk the balance sheet and simplify the change agenda. And, we need to substantially improve the performance of existing assets. We believe that there needs to be far greater financial alignment between management and shareholders. These changes will take time there is no quick fix but they are fundamental to turning this business around.? ?We simply can't sit back and do nothing. We are large shareholders, and our options are very limited. It's a case of rolling our sieeves up and seeking solutions. 80 we have channelled our energies into mapping a way forward that will bring a halt to issues that are eroding shareholder value. Abano needs a fresh start beginning with new leadership." A website has been set up to provide Abano shareholders access to all our information and to enable everyone to review the facts and make up their own minds. Ends For further inquiry contact: Geoff Senescall Senescall Akers 021 481234 Healthcare Industry Limited Steamboat Capital Limited 10 April 2014 To our fellow shareholders in Abano Healthcare Group Performance Speaks Louder Than Words Heaithcare industry Limited (HIL) and Steamboat Capital Limited (Steamboat) are iong-term shareholders in Abano Healthcare Group Limited (Abano). We write to encourage you to act with us to change the ieadership of the Board of Directors at Abano to ensure protection and growth of the Company. and Steamboat own? approximately 19% of Abano?s shares. Mr James? actions give rise to questions of independence, objectivity and keeping shareholders fully informed in an accurate and timely manner. We have lost confidence in his ability to act in the best interests of the Company and its shareholders. We call for the resignation of the Abano Chairman, Trevor Janes. Should the Chairman refuse to resign, we wiil seek to re?run that part of the 2013 AGM relating to ordinary resolution number two re-election of the Abano chairmanz. We have asked the Company to respond by Wednesday 16 Aprii 2014. We attach a copy of the letter sent today to Abano that outlines concerns about Abano misinformation and new information we have identified, as well as the change agenda we seek. We think shareholders should have time to consider all this material and therefore we propose a date of 27 May 2014 for any possible election re-run. The 2013 AGM vote reiating to the re-election of the Abano Chairman was flawed. The Company's dental margins remain woefui. Shareholders are being exposed to increasing financiai risk without a corresponding increase in financial returns. We seek change, starting at the top. We believe that if all shareholders had an accurate picture of the Company's finances and performance, the result of the 2013 AGM would have been different. i-liL asked advisors Kordalvlentha to review the Abano commissioned Grant Samuel report presented at the 2013 AGM. They have identified a number of fundamentai flaws in the Grant Samuel report. When HIL played a role in stopping the 2007 Crescent takeover proposal in respect of Abano, Hit. did it because it had a strong belief in the Company and its future. and Steamboat have not seen this vision realised. We have estabiished the website to provide you with easy access to our anaiysis, our thinking and the issues that are important to ali shareholders. We hope this information is of value to you. We await a response from the Company to our recornmendation(s) and wit! update shareholders once we have received a meaningful reply. 1 Steamboat has a relevant interest in shares held by associated entities. ?This is not a formal request under section 121 ofthc Companies Act. We are giving the company the opportunity to do the right thing. Black November (2013, Abano AGM) We believe that shareholders were suppiied misleading information prior to, and during, the 2013 annual meeting of Abano (2013 AGM) and that accordingiy the vote on the re-election of the Abano Chairman, Trevor Janes was flawed. The Chairman has failed to accept responsibility for his actions. Exampies inciude: ?i1 November 2013 - Mr Janes seeks re?eiection incorrectly as an ?independent? director rather than disclose his disqualifying relationship (with the Accident Compensation Corporation). See attached NBR articles. 0 26 November - At the AGM At the meeting, Mr Janes presented headlines from a report produced by Grant Samuel. Described by the Company as a ?major announcement?, no copies and no detaiis of the report were provided ahead of the shareholder vote conducted just one hour later. The Grant Samuel report is not independent despite being touted as such by the company because Grant Samuel was an advisor to Abano. it is also deepiy flawed. See attached Kordall/ientha review that quantifies a downward adjustment of $2.67 per share equivalent to 30% and a revised valuation of $6.46 per share (mid?point price). Performance Abano?s strategy is not working. in particular the Company's dental acquisition strategy. - More debt, but same resuit - The Company's debt mountain is baliooning (650% increase since Debt is growing at a much faster rate than profits available to shareholders (littie or no increase since Abano?s dental EBITDA margins, at ?lO%5, are haif those of a typical, standalone single dental practices. 0 More risk, but same reward Ordinary dividend payments are flat (21 cents)? and barely covered by profits.3 More hope, but same disappointment The Company has routineiy missed broker medium- tenn EBITDA forecasts in recent years by on average The Way Forward Abano requires a fresh start, led by an appropriately qualified and suitably aiigned chairman and supported by a board consisting of executives with reievant practicai industry, operating and clinical experience in line with the company's strategy. We seek an orderiy transition over time. We seek an immediate halt to dental acquisitions in order to simplify the change agenda, and de-risk the baiance sheet. A measured, operations-driven approach will accelerate the rate of improvement in operating performance, ?nancial returns to shareholders, and reduce risk. Given Abano?s highly leveraged balance sheet, we support a review to improve alignment between executive compensation and shareholder returns. We invite you to reguiariy visit our website for the latest information regarding our planned next steps. 3 Abano Annual Reports FY2010 and Barr 1 August 2013. 4 Underlying NPAT for FY2010 S3.l1n, FY2012 $3.0m, FY2013 $4.5m Source: Abano financial statements. 5 Abano 2013 AGM, Abano ?nancial statements, HIL analysis {after costs and a share of HQ costs). 1? Abano Annual Report. Since FY2009. 3 Total dividends for FY2010 $3.3m, 1 53.3111, FY2012 FY2013 $3.6m Source: Barr reports. See note 4 above for Underlying NPAT. 9 For details see the attached letter. Healthcare Industry Limited 10 April 2014 NZX Limited Head of Regulation PO Box 2959 WELLINGTON Dear Sirs, Abano Heaithcare Group - Grant Samuel valuation (Accuracy I Tirneiiness I Independence) I write on behaif of Healthcare Industry Limited (Hii_) with regards to the valuation report produced by Grant Samuel (GS), commissioned by Abano Heaithcare Group Limited (Abano). HIL owns approximately 15% of Abano's shares. We attach a copy of a review of the GS report conducted by Kordalvlentha (Korda) on behalf of HIL. Korda estimate a downward revision of $2.44 - $2.89 (mid?point $2.67) per Abano ordinary share to the GS valuation. This equates to a 38% reduction to the mid-price calculated by GS. This represents a material downward adjustment to a revised $6.46 per Abano share. Furthermore, very limited highiights of the GS report (primarily the valuation price range) were presented to Abano shareholders at the Abano 2013 AGM held on 26 November 2013. Abano labelled the GS document ?a major announcement?. The AGM represented the first time Abano sharehoiders became aware of the GS report. Shareholders attending the AGM were not provided with a copy of the report at the meeting. Abano claims the report was only finished a few hours before the AGM started. One hour later Abano shareholders were asked to cast their vote with regard to various ordinary resoiutions including the re~e|ection of the Chairman, Trevor Janes. We attach copies of commentary relating to the NZ Shareholders Association (NZ SA) where the Association has taken the iead in discussing the same two issues we raise here, namely: a The accuracy of valuation reports a The timeliness of key material provided to shareholders ahead of an AGM We note from the reply to the NZ SA that the NZX is responsibie in the first instance for policing the filing of valuation reports lodged on the NZX platform. We note GS own internal ?margin for error? tolerances Discrepancies in the Abano commissioned Grant Samuel report exceed this tolerance by a wide margin. In addition to the accuracy and timeliness of the GS report we also draw to your attention to the liberal and prominent use of the word ?independent? by Abano when referencing the Grant Samuei report. The report is not independent. Nor is it a merits report. It was commissioned by and paid for by Abano. Likewise, we HIL, arranged for the Korda review, which is not iabelled ?independent?. HIL seeks a meeting with yourselves to discuss: - The process by which such a document was able to be loaded onto the NZX platform given its materiality and relevance to an AGM taking place simultaneously. What actions the NZX proposes to take to correct the current position. - The review process the NZX will undertake mindful of the role of the NZX Chairman as advisor to Abano and the fact that several Abano Directors sit on the NZX Disciplinary Tribunal. We consent to the disclosure of our name and the details of this complaint to Abano. We look forward to receiving your early repiy. Yours faithfully Peter Hutson Director Healthcare industry Limited Healthcare Industry Limited Steamboat Capital Limited 10 April 2014 Board of Directors Abano Healthcare Group Limited Level16 West Plaza Building 3 7 Albert Street Auckland Dear Directors, Re: Abano Chairman resign or re-run AGM We write on behalf of Healthcare Industry Limited (HIL) and Steamboat Capital Limited (Steamboat). H11. and Steamboat ownl approximately 19% of Abano?s shares. in recent weeks we have unsuccessfuliy sought dialogue with the non?conflicted members of the Abano board with regard to the chairmanship of Abano i-leaithcare Group Limited and the future direction of the Company. We are now forced to cali for the resignation of the Abano Chairman, Trevor Janes. We believe that shareholders were supplied misleading information prior to, and during, the 2013 annual meeting of Abano (2013 AGM) and that accordingly the vote on the re?election of the Abano Chairman, Trevor Janes, was flawed. Should the Chairman refuse to resign, we will seek a re-run of that part of the 2013 AGM relating to ordinary resolution number two re-election of the Abano Chairmanz. We look forward to the company?s constructive response by Wednesday 16 Aprii 2014. We have set out in this letter Abano misinformation, new information and the change agenda we seek. We think shareholders should have adequate time to consider the issues and therefore propose 27"? May 2014 for any possible election re-run. The lapses in corporate governance at Abano set out in this letter are linked to growing concerns we have regarding Abano's financiai performance, especially the core dental division. Abano?s long-run Dental EBITDA margin at 10%3 is less than half that of a typical ?one man band? standalone dental practice.? We believe that Abano's corporate dental model is simply not working. The ballooning debt, calls for investor cash5 and flat dividends barely covered by profits, are unacceptable to us as shareholders - and are avoidable. We seek change. Fresh leadership and new standards, starting at the top. We seek the resignation of the Chairman foilowed by an orderly overhaul and transition of the Board over time in line with the underlying needs of the business. I Steamboat has a relevant interest in shares held by associated entities. 3This is not a formal request under section 121 ofthe Companies Act. We are giving the company the opportunity to do the right thing. 3 For the period 1 to FY2013 (both inclusive). Dental EBITDA margin is after share ofl-IQ costs Source: Abano ?nancial statements and AGM presentations Abano Annual Report FY2012. 5 Abano undertook an 518.5 million capital raising in September 2013. Abano has stated in an announceinent dated 18 March 2014 that: ?Based on current projections, the Company will not need to raise additional capitai or increase debt facilities in the foreseeable future to be abie to fund the planned acquisition and growth strategy investments." However. Deutsche broker report dated 20 December 20i3 assumes that further capital will he required in FY2015 and FY2016. Greater emphasis on proven executional experience and clinical expertise and understanding is required - plus representation from Australia consistent with the Company's strategy and ever increasing weighting towards Austra|ian~based activities. Australia now accounts for 50% of Abano?s saless. Extracting greater value from Abano's dentai activities wiil take time to correct. Not more bank debt and shareholders? cash. We seek an immediate halt to the acquisition of dental practices, while vaiue is created from the existing 150 practices already owned by Abano. Black November (2013) The Chairman of Abano, Trevor Janes, sought re-eiection at the 2013 AGM as an independent director he was not independent. Due to his roie as Deputy Chairman of the Accident Compensation Corporation (ACC), a substantial shareholder in Abano, Mr Janes had a ?disquaiifying reiationship? under the NZX listing rules which meant that he should not have been described as independent at, and in the notice of meeting for, the 2013 AGM. The issuing of a ?unique? waiver East month by the NZX to ACC, and which appears to potentially benefit Mr Janes, raises serious questions. This is not the first time Mr Janes? independence has been called into question. in 2007, during the Masthead partial takeover offer, Abano announced that Mr Janes had been incorrectly listed as an independent director of the Company in a previous announcement made by the Company. This misrepresentation of the status of Mr Janes as an independent director was just the start of a series of disturbing events leading up to his re?election at the 2013 AGM. An ?i1 November 2013 Misrepresentation. Notice of meeting. Mr Janes seeks re?election incorrectiy as an ?independent? director which is inconsistent with his disqualifying relationship (with ACC). November 2013 Timeliness of release of forecasts. In its November 2013 valuation report, prepared using non?pubiic Abano forecasts and all relevant information known to Abano directors, Grant Samuel forecast for FY2014 for Abano7. The amount forecast was materially less than the most recent market consensus forecast for Abano had completed a capital raising only the month before this downgrade was published. We believe that this raises serious issues as to the timing of the release of the Grant Samuel report - and when Abano became aware of the divergence between the Grant Samuel forecasts and the broker forecasts. 19 November 2013 - inconsistent behaviour and faiiure to disclose ahead of the AGM. Archer Capital?? submitted a revised indicative takeover proposal of $7.80 per share to Abano on 19 November 2013. in contrast to Archer's prior proposai of $7.14 which Abano released to the market within a few business hours of receiving it, on this occasion Abano elected not to advise the market until 26 November on the day of the 2013 AGM, one week later. 26 November 2013 Grant Samuel report delivered iate, not independent and flawed. Mr Janes, on behalf of Abano, presented highiights from a Grant Samuei report, iabelled as a ?major announcement? by Abano, at the 2013 AGM itself. Shareholders at the AGM were not given copies of the report nor provided details of the report prior to voting one hour later. As at FY2013 as stated in Abario 2013 AGM presentations. 7 Forecast amount was EBIT 3 in :1 report dated 12 August 2013 Deutsehe Craigs forecast FY2014 EBIT ofS20m. In a report dated 31 July 2013 Barr forecast FY2014 EBIT ofS23.4m. The variattce between the mid point ofthese forecasts and the Grant Samuei forecast was negative 18%. 9 Through a representative of its adviser Maequarie Capital in separate conversations with Mr Janes and Mr Keys. Contrary to Abano?s repeated claims, the Grant Samuel report is not independent because Grant Samuel was an advisor to Abano. Furthermore, the report?s key conclusions are materially flawed as identified in a report commissioned by HIL from Kordaivleritha. 26 November 2013 Shareholders wrongiy advised at the AGM and ahead of the re- election vote. Mr Janes advised shareholders that Archer?s proposal of $7.80 was received ?towards the end of last week?. it was not. it was received the previous Tuesday, 19 November. In response to the proposal of 19 November 2013, Mr Janes wrote in an emaii at 9.12am on Friday 22 November 2013: ?Your indicated price of $7.80 is not cornpeliing enough to persuade the Board that it shouid change its 26 November 2013 Shareholders fed mixed messages at the AGM and ahead of the re- election vote. Mr Janes advised shareholders that the Archer proposal had to light other opportunities for our company, all at higher indicative values However, the next morning (27 November 2013) Mr Janes, post the re?election vote, talking on Radio New Zealand"? was reported as follows: Abano had been approached by other companies after the Archer-Hutson move came to light but it had wanted to wait until after Tuesday's meeting, Mr Janes said. "There's definitely interest in what we're doing, that's not surprising, but there's nothing of anv substance at the moment."" he said. Not surprisingly, one month later Abano advised that all other offers from third parties had come to nothing ?invalid or more work needed to be done." 12 We believe that Abano has abused the core principles that lay at the very heart of any AGM process accurate and timely information and shareholders? trust. Mr Janes, as Chairman, is accountable for this behaviour. November 2013 was a very black month in Abano?s history. We expect better governance standards of our Company. Performance Abano?s strategy is not working. In particular its dental acquisition strategy. The company's debt mountain is ballooning (650% increase since Debt is growing at a much faster rate than pro?ts (negligible increase since Ordinary dividend payments are flat? and barely covered by profits?. 1 Abano?s dental performance is poor despite Abano?s ciaims to the contrary Abano lags behind its competitors on key metrics - organic sales growth? and EBITDA pro?tability?. At the 2013 AGM, and in subsequent releases, Abano presented misleading and incorrect performance comparisons with its peers relating to sales growth and EBITDA margins?. We 27 November 2053. Emphasis added. '2 Abano December 2013 Newsletter, Radio NZ 23 December 2013. '3 Source: Abane Annual Reports FY2010 and Barr 1 August 20 i3 '4 Underlying NPAT for FY2050 S4.4n1, 1 in, FY2012 $3.0m, FY2013 $4.5m Source: Abano ?nancial statements. '5 Ordinary dividends per share have been 2] cents since 2009. '6 Total dividends for FY2010 $3.3m, I $3.3m, FY2012 $3.4m, FY2013 $3.6m Source: Barr reports. See note 14 above for Underlying NPAT. '7 FY10-FY13, Analysis ofcompany ?nancial accounts and practice expansion {organic vs acquisition). Source: HIL commissioned anaiysis of Abano accounts. '3 FY2013, Company accounts and interviews with industry participants. '9 At the 2013 AGM Abano, comparing its dental business to Dental Corporation, 1300 Smiles and Paci?c Stniies stated: ?So we achieved the fastest percentage growth in revenues and compounding annual growth over the last three years." And ?Dentai Partners ranks second with a believe that this was intended to give shareholders confidence that the dental business of Abano is best of breed. It is not. 2 Lumino?s profit performance is woeful - The ?nanciai performance of Abano?s NZ dentai division, Lumirio, signi?cantly iags its nearest rivai, Dental Corporation NZ by some distance. Lurnino, which has been in business for 10 years, is three times the size of its competitor?, yet its EBJTDA margin is haif that of its rival?. Abano piaces great emphasis on transferring Lumino?s experience to Dental Partners in Australia. Lumino has its own performance issues to address first. 3 Abano?s debt I risk profile is not consistent with the low returns to shareholders Abano's FY14F debt position, at 3.4 xs debt I is similar to that of a private equity investment where typical target returns are circa 20% 25%. In contrast, Abano's IRR return since becoming a dental focused group is circa investment returns to Abano sharehoiders are not commensurate with the financial risks related to Abano's increasing debt profile. 4 Abano's head office cost is similar to profits available to shareholders Abario head office costs since Trevor Janes became Chairman (exciuding Archer bid costs) has been similar to the company?s reported NPAT (profits available to shareholders)?. 5 Abario has missed broker forecasts by some distance since Trevor Janes became chairman Abano has routinely suffered from broker downgrades to pro?t forecasts since Decent ber 2011. Broker report -Ve Variance Dec 2011 Barr forecast FY13 EBITDA of $32m. Actual $28m25 I Mar 2013 Barr forecast FY14 EBITDA of $39rn. Latest forecast $28m26 ($12m) I Mar 2013 Barr forecast FY15 EBETDA of $42m. Latest forecast $34m27 I Abano continues to makes promises to the ?nancial community, and by extension shareholders, but fails to deliver because nothing has changed. Same leadership, same results. The Way Forward Abano needs a fresh start. a based board Starting with an appropriateiy quaiified and suitably aligned chairman and supported by a board consisting of executives with relevant practicai industry, operating and clinical experience in line with the Company's strategy. We seek an orderly transition over time. - Focus on executional rigour - We seek an immediate hait to dentai acquisitions in order to sirnpiify the change agenda and de?risk the baiance sheet. A measured, operations?focused approach will accelerate the rate of improvement in operating performance and improve financial returns to shareholders. range in EBITDA margin from ahead of both Dental Corporation and Paci?c Smiles." Sales data compared two very different forms ofgrowth it business models, namely acquisition vs organic. EBETDA margin calculations for certain competitors understated and Abano?s margins do not include share ofHQ costs unlike its competitors that do (they are dental only focused businesses, not part of a conglomerate}. 3" Calculated by reference to reported sales for FY2013. 1? EBITDA margin for Lumino is 9% for FY2013 and for Dental Corporation NZ is i8% for FY2013. Source: Company accounts, HIL commissioned analysis of Abano Annual Reports and presentations and after share oft-IQ costs. 33 Source: Barr broker report dated 19 March 20 i 4. 33 Calculated by reference to change in the Abano share price and dividends over the period from 24 December 2009 to 8 March 2014. 34 Reported NPAT FY2012 $1.6m, FY2013 $2.8m, FY2014 $4.3m. Head office costs are for FY2012 $2.6m, FY2013 $2.6m, $2.9m Source: Abano accounts, Grant Samuei and Barr reports 35 Grant Samuel report. 26 Barr 19 March 2014. 37 Barr 19 March 2014. 0 Greater financial alignment between management and shareholders We support a review to improve aiignment between executive compensation and sharehoider returns. Conclusions The approach by Archer was designed to bring about a fair outcome for shareholders and a diplomatic solution that would cause the least disruption and risk to the business. Unfortunately, shareholders were never given a choice and that opportunity has gone. The alternative option do nothing and watch value continue to be destroyed is not an option we are prepared to accept. Ail shareholders deserve better. Hence our current actions. The current impasse is deepiy regrettable as are the behaviours and standards modelled by the Chairman. We seek an end to reckless tactics and demand a responsible democratic process going forward. We hope the Chairman will do the responsibie thing and resign. In summary, we are reluctant ?activists? who seek improved stewardship of our investment. We beiieve this starts with the resignation of the Chairman and an end to debt?fuelled and shareholder?funded acquisition of dentai practices. We look forward to your constructive response by Wednesday 16 Aprii 2014. Yours sincerely Peter Hutson James Reeves Director, Healthcare Industry Limited Director, Steamboat Capital Limited K0rdaMentha Valuation review 1' connection with Abano Healthcare Group Limited Kordalvlentha 1 Introduction 1.1 Background Abano Healthcare Group Limited (?Abano? or ?the Company?) is a listed company traded on the NZX Main Board, which is an investor and operator in the private heaithcare market in New Zealand, Australia and South East Asia. The Company operates businesses in four sectors: dentai; diagnostics; audiology; and rehabilitation. On 7 August 2013, Abano announced it had received and rejected a non-binding indicative proposal from an unnamed suitor, which invoived the potential acquisition of 100% of Abano?s shares. On 16 September 2013, Abano advised the NZX that the suitor was a consortium (?the Consortium?) comprising Archer Capital Pty Limited in conjunction with Mr Peter l-iutson (through Healthcare Industry Limited the largest shareholder in Abano) and Mr James Reeves (through Steamboat Capital Limited, another shareholder in Abario). Abano has refused to grant the Consortium due diligence access that it required to make a formal offer. Abano appointed Grant Samuel Associates Limited (?Grant Samuel?) to prepare a valuation report on Abano (?the GS Report?). That report was made publicaliy available on 26 November 2013, the day of Abano?s annuai meeting. The Consortium has subsequently withdrawn its takeover proposal. 1.2 Scope of Work HIL has appointed Kordalvientha to undertake a review of the GS Report. We have not been engaged to undertake a valuation of Abano and expressly note that we have not done so. We understand, from that our report will be made publicly avaiiable and that it wiil be provided to the Financial Markets Authority and NZX Market Surveiliance Panel. KordaMentha has prepared numerous independent Adviser?s Reports required under the Takeovers Code, including for Abano in connection with: a partiai takeover offer made by Masthead Portfoiios Limited in 2007; a fuil takeover offer made by Crescent Capital Partners in 2007; and the sale of Bay Audiology to Group Pty Limited in 2009. KordaMentha won INFINZ independent Report of the Year in 2012 and 2013 for its reports prepared in connection with takeover offers for Turners Growers and Acurity Health respectiveiy. The sources of information, to which we have had access and upon which we have relied, have been limited to what is set out in the GS Report as weil as other publiciy availabie information. We have not had access to Abano management or any private and confidential information of the Company. We have relied upon and assumed, without independent verification, the accuracy and completeness of ail information that was availabie from the GS Report and public sources. This Report should be read in conjunction with the statements and declarations set out in Appendix 1 regarding our independence, quaiifications, general disclaimer and indemnity and the restrictions upon the use of this Report. References to are to New Zealand doiiars, uniess specified otherwise. References to financiai years or mean Abano?s ?nancial year end 31 May uniess speci?ed otherwise. Please note tables may not add due to rounding. Page 1 KordaMentha 2 Executive Summary HIL has appointed KordaMentha to undertake a review of the GS Report. The sources of information, to which we have had access and upon which we have reiied, have been limited to what is set out in the GS Report as well as other publicly available information. Signi?cantly, we have not had access to Abano management or any private and confidential information of the Company, and this has prevented us from undertaking any form of comprehensive valuation of the Company ourselves. Key issues identified by us in our valuation review and their impact on Grant Samuel?s valuation include: Denier? - We have identi?ed two key issues in respect of Grant Samuei?s vaiuation of the Dental business: Grant Samuel has assessed Dental EBITDA for valuation purposes at $27 million. This is in excess of FY14 forecast EBITDA of $22.9 million. This is because it has assumed all of the dental practices already acquired in FY14 and those stiil to be acquired between the GS Report and the end of the financial year were acquired at the beginning of Abano?s financial year. We can see some merit in this approach for the businesses already acquired (although it could be argued it is overly aggressive because comparable companies do not have similar adjustments made when assessing their multiples). However, Grant Samuel has also included 18 dental practices which were expected to be acquired between 31 October 2013 and 31 May 2014. The effect of Grant Samuel's methodology is that future acquisitions made at a muitiple of say EBITDA are then re?rated at its assessed valuation multiple of 8.5?9.5x EBITDA. We understand that there is significant uncertainty as to whether this level of acquisition activity will be completed by 31 May 2014. Public announcements since have shown that as at 2 April 2014 only six acquisitions had been made in the second half of FY14. in the absence of Grant Samuel knowing these acquisitions were certain or near certain to occur then we do not consider the approach to include full?year earnings from dental practices yet to be acquired to be appropriate. Fundamentally, if this approach were adopted, it could be used to include acquisitions beyond the current year, which would produce anomaious results. Grant Samuei has adopted a multipie of 8.5?9.5x forecast normalised EBITDA for the dental business. it is unclear how Grant Samuei has assessed its multiple range, but it appears to have been influenced by Grant Samue|?s understanding that Dental Corporation was acquired for a multiple of 9.1x forecast EBITDA. Our analysis, and that of brokers that cover Abano, shows the Dental Corporation transaction had a multiple of 9.1x historical (not forecast) Abano itself has reported that the muitiple was 9.1x historical annualised earnings. Forecast multiples are typically lower than historical ones (due to expected growth in EBITDA) and therefore correcting Grant Samuel?s analysis for this error should in and of itself result in a lower valuation multiple. The G3 Report has no discussion around how comparable Abano is to the comparable transactions and listed companies. Our analysis shows Abano has lower profitability and return on assets than the comparabies. Based on our analysis, we consider an EBITDA multiple of 8.0--9.0x FY14 earnings to be appropriate after considering: - The geography of the Abano Dental business, which has a significant proportion of its business in New Zealand compared to the Australasian comparable companies which operate mostly in Australia. - The relative size, profitability, risk and return on assets of the Abano Dental business compared to Australasian comparable listed company and transactions. - The control premium that would apply to a 100% shareholding in the Abano dental business. I The Abano Dental business has signiticantiy lower EBITDA margins than its competitors and this has persisted over a number of years. Page 2 Korclalvlentha - The Abano Dental business?s potential for improved profitability. - That 20% of Paci?c Smiles was acquired at the end of its FY12 for 6.6x FY12 EBITDA. Adjusting this multiple for a hypothetical control premium of say 25% would give a multiple of 8.2x EBITDA. - We consider that it is unlikely that the Abano Dental business would attract a multiple of forecast EBITDA as high as 9.1x because Dental Corporation was acquired based on 9.1x historical EBITDA. Although the Dental Corporation transaction is the most comparable to Abano's Dental business, it is considerably larger, generates higher EBITDA margins and for reasons discussed above forecast multiples are generally lower than historical multiples. Removing the impact of the 18 stores not acquired at valuation date and adopting our assessment of an appropriate multiple would lower Grant Samuel?s valuation of Abano by $1.39 to $1.57 per share. Biagnestics The key issue with the valuation of Diagnostics is that the Aotea Pathology business, which we understand makes up around half of Diagnostics EBITDA, has a fixed term contract expiring in October 2015 and therefore future earnings beyond that date are highly uncertain. This does not appear to have been appropriately factored into Grant Samuel's analysis given it applies EBITDA multiples of to Diagnostics. It is also unclear that Grant Samuel has made allowance for Abano having less than 100% interests in both of its Diagnostics businesses. We consider a multiple of 6.0x would be more appropriate. We note that Barr and Deutsche Bank (brokers that cover Abano) have valued Diagnostics as follows: in a broker note dated ?l2 August 2013, Deutsche Bank applied an EBITDA multiple of 6.0x to the whole of the Diagnostics business. In a broker note dated 13 November 2013, Barr applied an multiple of 4.5x to Pathology and ?.5x to Radiology. The weighted average of these multiples is 5.8x. It is also not discussed in the GS Report why valuation is assessed at $6 million when forecast FY14 EBITDA is $4.8 million. In the absence of an explanation we would adopt $4.8 million. Adopting a multiple of 6. Ox forecast EBITDA of $4.8 million would lower Grant Samuel?s valuation of/lbano by $0.51 to $0.81 per share. gay tnternatiarial Grant Samuel says it has valued the Australian business on a liquidation basis. This has been done by applying multiples of 7.0?8.0x to store EBITDA with no deduction for any Bay International overhead costs) and then applying a notional deduction of one year's overhead costs, presumably for costs associated with closing Bay internationals head office. The Asian business has been valued by applying a multiple of 0.75?1.0x of current year revenue. Our key concerns are: - Under a liquidation scenario, where no overheads are taken into account when assessing EBITDA, we presume Grant Samuel anticipates that the individual stores will be sold. If so, a multiple of 7.0?8.0x appears very high when typically small businesses are sold at multiples of 3.0-4.0x EBITDA. Alternatively, if a multiple of 7.0-8.0x is adopted to reflect an acquisition of a large group of stores, we can see no reason to remove the Bay international overheads, which would be incurred in administering the group of stores. - Based on our indicative calculations to replicate Grant Samuel's numbers, it appears that no discount has been applied to reflect the lack of control and marketability associated with a 50% shareholding. We note that if Grant Samuel?s approach were adopted but an EBITDA multiple range of were applied to the Australian stores EBITDA this would value 50% of Bay International at $6.3 million to $9.4 million, which is in line with recent broker valuations. if this estimate were adopted it would lower Grant Samuelis valuation of Abano by $0.51 per share. Valuation impact Summarised, the net effect of the key issues identified in our review would be to lower Grant Samuel?s valuation of Abano by $2.42 to $2.89 per share. Page 3 KordaMentha ?tiher issues We also note that Grant Samuel has undertaken a valuation report, not an Independent Adviser?s Report provided to sharehoiders in connection with an offer received under the Takeovers Code. An Independent Adviser's Report, requires that an adviser consider the merits (advantages and disadvantages) of an offer and consider wider issues than just price. it would need to consider issues such as: The counter?tactuai to a successful takeover where the Company continues with its existing ownership and has to fund the projected acquisition of dental practices on both sides of the Tasman. Work would need to be done to consider Abano?s maximum borrowing capacity and what options Abano has available if debt capacity is exhausted such as another rights issue from shareholders. - The existing share ownership of Abano and the impact that has on the likelihood of any alternative offers. This is particularly relevant given strategic 15% shareholding. Any aiternative bidder woutd require HiL?s acceptance in order to achieve a full takeover under the Takeovers Code. We understand that this report is being made pubiiciy avaiiable. in the event that a takeover offer is made, acceptance or rejection of that offer is a matter for individuai shareholders based on their own views as to value and future market conditions, risk profile, liquidity preference, portfoiio strategy, tax position and other factors. in particular, taxation consequences will vary widely across shareholders. Shareholders would need to consider these consequences and, if appropriate, consult their own professional adviser. Page 4 KorolaMentha ti 3 Company profile A description of Abano?s business is set out in the GS Report, which we do not repeat here. However, because certain terms wilt be referred to in this report we set out a very high level overview of Abano. Abano operates across four segments of the healthcare market as follows: Figure 3.1: Abano?s segments and businesses Segment Division and shareholding Business Dentai, at October 2013, comprised 79 'Lumino? branded dental practices in New Zeaiand and 88 dental practices in Australia. Both businesses are 100% owned by Abano. The dental division effectively represents a roll up strategy of acquiring and consolidating dental practices on both sides of the Tasman in what are highly fragmented markets. Both businesses are protecting to make substantiai levels of acquisitions. Diagnostics comprises a 55% sharehoicling in Aotea Pathology and a 70% shareholding in insight+Ascot Radiology. Aotea provides community pathology services to several DHBS in the region under a contract which expires on 31 October 2015. Insight-I-Ascot Radiology operates from five tocations in Auckland. Rehabilitation comprises a 100% sharehoiding in the Orthotic Centre, which provides clinical orthotic services from six centres throughout New Zealand. Revenues are predominantly funded by ACC and DHBs. Audiology comprises a 50% shareholding in Bay internationai. At October 2013, Bay international had 33 stores and testing locations in Australia and 20 stores in Asia. Abano was previously an owner of Bay Audiology, which operated in New Zeaiand and was sold in 2009. It now has the international business only. The other 50% of Bay International is owned by interests associated with Mr Peter Hutson, one of the original founders of Bay Audiology. Page 5 egg KordaMentha 3.1 Financial overview Abano?s segmental EBETDA results for forecast for FY14 (prepared at the time of the GS Report); and adopted by Grant Samuel in its valuation are summarised as follows: Table 3.1: Underlying EBITDA1 of Abano Group segments FY13 FY14 EBITDA for 5 million Actual Forecast vatuation Dental 20.8 22.9 27.0 Diagnostics (Abano share} 4.8 4.8 6.0 Rehabilitation 2.5 2.4 2.4 Corporate (2.6) (3.3) (2.9) Total? 25.5 26.8 32.5 Source: The G3 Report Grant Samuel has adopted for valuation above FY14 Forecast. This is discussed Eater in this Report. 1 The EBITDA reported excludes acquisition and divestment costs. 2 Excludes Audiology. Page 6 . .. KordaMentha 4 Valuation analysis We set out beiow key findings from our review of the GS Report. Where we do not discuss vaiuation issues that does not imply we necessarily agree with Grant Samuel's approach. 4.1 Valuation methodology Grant Samuel's valuation of Abano has been estimated on the basis of fair market value for 100% of the business and accordingly incorporates a premium for control. Grant Samuel notes that the value assessment is in excess of the level which shares in Abano could be expected to trade on the sharemarket in current market conditions. Grant Samuel has adopted a capitalisation of earnings methodology on the basis that the business units of Abano have consistent earnings and predictable cashflows. Grant Sarnuei also notes that in its experience comparabie businesses are transacted using earnings multiple. in a vaiuation exercise of this nature, we wouid normally assess value using a variety of approaches. We concur with Grant Samuel that the capitalisation of earnings methodology is a useful valuation approach in this circumstance We would have also adopted discounted cashfiow analysis in the event that forecast information was avaiiable. We do not know if the necessary information was avaiiable to Grant Samuei to undertake a DCF valuation. 4.2 Summary of Grant Samuel?s Valuation Grant Samuel vaiued the equity in Abano between $169.3 rniilion and $205.0 rniliion as at 31 October 2013, as summarised below: Table 4.1: Grant Samue|?s valuation summary miilions except where othenivise stated Low High Dental 229.5 256.5 Diagnostics (excluding minority interests) 39.3 45.3 Rehabilitation 9.8 12.0 Corporate overhead (20.0) (22.8) Enterprise value 258.4 291.0 investment in Bay international 16.? 19.8 Net debt for vaiuation purposes (105.8) (105.8) Equity value 169.3 205.0 Fully diiuted shares on issue (millions) 20.4 20.4 Value per share ($l'share) 8.30 10.05 Source: The G8 Report We discuss the key findings of our review under the headings summarised in the table above. Page 7 4.2. ?i Dental A summary of the calculations used by Grant Samuel in determining the value of the Dentai business is set out in the tabie below: Table 4.2: Dental valuation summary million Low High Valuation EBITDA 27.0 27.0 Muttiple 8.5x 9.5): Enterprise Value 229.5 256.5 Source: The G8 Report This range implies the foliowing valuation multiples: Table 4.3: implied multiples Low High Multiple of historical EBITDA (FY13) 11.0x 12.3x Multipie of forecast EBITDA (FY14) 10.0x 1t.2x Source: The G8 Report and Kordaiirientha analysis. The implied historical and forecast EBITDA multiples for Grant Samuel's valuation of Dental are significantiy higher than key Australasian comparable transactions, particuiarly the most comparable transaction (Dental Corporation), which was acquired in 2013 at a historicai annualised EBITDA multiple of 9.1x. Vatuation Grant Samuel has assessed Dentai EBITDA for valuation purposes at $27 million. This is in excess of FY14 forecast EBITDA of $22.9 million. Grant Samuel says this is because it has assumed all of the dental practices already acquired in FY14 and those to be acquired between the GS Report and the end of the financial year were acquired at the beginning of Abano?s financial year. Net Debt has been adjusted to reflect the cost of acquiring the dental practices. This approach is effectively a normalisation adjustment to reflect the upiift from these acquisitions. We can see some merit in this approach for the businesses already acquired. Although it could be argued it is overly aggressive because comparabie companies do not have similar adiustments made when assessing their multipies. Grant Samuel has also included 18 dental practices which were expected to be acquired between 31 October 2013 and 31 May 2014. Grant Samuei has taken the projected full-year earnings from those dental practices in its assessment of and capitalised that by its assessment of an earnings multiple. The effect of Grant Sarnuel?s methodology is that future acquisitions made at a multiple of say 3.5-4.0x are then re?rated at its assessed valuation multiple of 8.5?9.5x against and earnings stream which has not yet been acquired let alone generated by the dental business. We estimate the impact of this approach is to increase Grant Samuel?s valuation of Abano by $17 to $20 million (approximately $0.80 to $1.00 per share). This estimate is based on a totai purchase price to acquire the 18 dental practices of $14.9 miliion (as set out in the GS Report) and acquiring those dentai practices at an estimated muitiple of 4.0x. We understand that there is significant uncertainty as to whether this levei of acquisition activity will be completed by 31 May 2014. Public announcements since have shown that at 2 Aprii 2014 only six acquisitions had been made in the second haif of FY14. However, at a more fundamentai ievel, the question arises as to why it would be appropriate to uplift value by $0.80 to $1.00 per share for future acquisitions which Abano had not yet made and any new owner of the business couid make themseives. Page 8 Korda entha EBITDA multiple Grant Samuel has adopted a multiple of forecast normalised EBITDA for the dental business. it is unclear how Grant Samuel has assessed its multiple range. Grant Samuel sets out comparable transaction analysis for the global dental sector. There are a wide range of comparable transactions and some are more comparable to Abano than others. The GS Report has limited discussion on which comparables are considered most appropriate. We consider the key and most comparable transactions are those that have occurred in Australasia. In particular, acquisition of Dental Corporation in May 2013. A summary of the Australasian valuation multiples is set out in the table below: Table 4.4: Australasian EBITDA multiples Grant Samuel Company Historical Forecast Historical Forecast Notes Dental Corporation na 9.1x ?9.?lx na 2013 transaction multiple (Acquisition of 100%} Dental Partners na ?i1.1x 8.7): na 2012 transaction multiple (Abano?s acquisition of 30%) Pacific Smiles 8.8x na *6.6x na 2012 transaction multiple (Acquisition of 20%) Dental Corporation 8.0x na 8.0x na 2011 transaction multiple (Acquisition of 30%) 1300 Smiles l3.3x 11.6x *?l3.3x 11.6x Trading multiple as at 22 November 2013 Source: Capital lQ, company ?nancial accounts, company announcements/disclosures and the GS Report. Note: ?na? represents ?not available?. We have excluded acquisition costs for those multiples where information is available to do so. The G8 Report says that Dental Corporation was acquired for a multiple of 9.1x forecast Our analysis, and that of brokers that cover Abano, shows the transaction in fact had a multiple of 9.1x historical annualised (after removing acquisition costs). Abano itself refers to it as a historical annuallsed multiple. There is an important distinction between historical and forecast multiples. Forecast multiples are typically lower than historical ones (due to expected growth in EBITDA) and therefore correcting Grant Samuel's analysis for this error should in and of itself result in a lower valuation multiple assessment. We cannot calculate Dental Partners multiple of ?l1.1x forecast EBITDA from public information. We estimate the deal was undertaken at approximately 8.7x historical reported Deutsche Bank (as at 30 July 2013) estimated the deal was done at approximately 7.0x historical trailing EBITDAZ. Given an expected uplift in earnings, we would expect the forecast EBITDA multiple to be significantly less than ll.lx, although the Company and Grant Samuel may have specific information leading to the estimate of l'l.'lx. The G8 Report says that 20% of Pacific Smiles was acquired at a historical multiple of 8.8x, it appears that this estimate is based on Paci?c Smiles FY11 financial accounts. This transaction occurred at the end of Pacific Smiles 2012 financial year. Using Pacific Smiles FY12 accounts, we have calculated an multiple for Pacific Smiles of 6.6x. We also note that Grant Samuel?s estimate of Pacific Smiles enterprise value is incorrect because it is showing the value of equity implied by the transaction. In order to consider which transactions and companies are most comparable to Abano, we have compared the Abano Dental business to its peers (where information is available). The key metrics which we have considered are: - margins; - Return on assets; and Relative size. 1 We note Grant Samuel say the implied enterprise value was AUD 374 million. However, this refers to the equity value, excluding the proposed earn-out, not enterprise value. 2 This estimate includes adjustments. Page 9 KordaMentha Table 4.5 sets out the EBITDA margins for the Abano Dental business and other comparabie companies (both iisted and acquired). For completeness we have shown EBITDA margins calcuiated based on both gross revenue (which is the totai revenue paid by customers) and reported revenue (which in some cases are after deductions to dentists).' Table 4.5: EBITDA margin comparison Calculation based on Gross revenue Reported revenue Subject?s financial! year FY11 FY12 FY1 3 FY11 FY12 FY1 3 Abano Dental business 10.6% 12.3% 11.7% 10.6% 12.9% 13.6% 1300 Smiies 24.0% 22.3% 21.9% 31.3% 28.7% 30.0% Dentai Corporation? na na na 19.7% 19.1% 19.2% Paci?c Smiles na na na 17.0% 18.1% 21.3% Source: Capitai i Q, company ?nanoiai accounts and company announcements/disciosures- Note: ?na? represents ?not avaiiabie?. Where the information is avaiiabie, we have exciuded acquisition costs. Table 4.5 shows that the Abano Dental business has historically earned an EBITDA margin considerably less than its comparable companies. Ali else being equai, we would expect a business which generates a higher EBITDA margin to be valued at a higher EBITDA multiple, as this goes to its quaiity of earnings. Table 4.6 sets out the return on assets for the Abano Dental business and other comparabie companies (both iisted and acquired). Tabie 4.6: Return on assets?? Subject?s ?nancial year FY11 FY12 FY13 Average Abano Dental business 9.1% 11.1% 10.3% 10.2% 1300 Smiles 27.8% 25.7% 23.5% Dental Corporation 11.9% 10.3% 10.9% 11.0% Paci?c Smiles na 19.9% 23.9% 21.9% Source: Capitai lQ, company tinanciai accounts and company announcements/disciosures. Note: he? represents ?not avaiiabie?. Where information is avaiiabie, we have exciuded acquisition costs. This analysis is indicative only and any direct comparisons reiy on broadiy comparable accounting treatment of acquisition and assets across the companies. Table 4.6 shows that the Abano Dental business has an average return on assets of approximately 10%. This is less than Dental Corporation and significantly less than 1300 Smiles and Pacific Smiles. Abano Dental is shown before an allocation of corporate head office costs. If these were allocated, then the Abano Dental business wouid have a lower return on assets. The Abano Dentai business is approximately one-third the size of Dentai Corporation (based on EBITDA). Typicaliy, larger businesses tend to have higher EBETDA multiples. 1 Grant Samuel report EBITDA margins as a proportion of reported revenue. We understand this involves a combination of revenues because Abano?s Austraiian business reports revenue after deductions to dentists where its New Zeaiand business does not. To be consistent, a better measure of EBITDA margins is based on ["083 revenue. Due to a change in its financiai year, FY11 is a nine month period to 31 March 2011 for Dental Corporation. Also, the EBITDA margin for its FY13 period is calculated based on a seven month period to 31 October 2012. 3 We have calculated return on assets as EBIT divided by average assets the return is unlevered and pre- tax). Page 10 Based on our above analysis, we consider an EBETDA multiple of to be appropriate to apply to an estimate of normalised forecast EBITDA of the Abano dental business. We have arrived at this estimate after considering the following: The geography of the Abano Dental business, which has a signi?cant proportion of its business in New Zealand compared to the Australasian comparable companies which operate mostly in Australia. The relative size, risk and return on assets of the Abano Dentai business compared Australasian the comparable listed company and transactions. 0 The control premium that would apply to a 100% shareholding in the Abano dental business. - The Abano Dental business has significantly iower EBITDA margins than its competitors and this has persisted over a number of years. - The Abano Dental business's potential for improved profitability. That 20% of Paci?c Smiles was acquired at the end of its FY12 for 6.6x FY12 EBITDA. Adjusting this multiple for a hypothetical control premium of say 25% would give a multiple of 8.2x EBITDA. We consider that it is unlikely that the Abano Dental business would attract a forecast EBITDA as high as 9.?ix. This is based on Dental Corporation being acquired based on 9.1x historical EBITDA. Dental Corporation is a considerably larger business, which generates higher EBITDA margins. 4.2.2 Diagnostics Abano has a 55% shareholding in Aotea Pathology and a 70% shareholding in insight+Ascot Radiology. It is not clear how Grant Samuel has factored into its analysis that Abano has a less than 100% interest in these businesses. We would not expect a control premium to be attached to these valuations. A summary of the calculations that appear to have been used by Grant Samuel in determining the vaiue of the Diagnostics business is set out in the table below: Table 4.7: Diagnostics valuation summary miltion Low High Valuation EBETDA 6.0 6.0 Multiple 6.6x 7.6x Enterprise Value 39.3 45.3 Source: The G8 Report It is not discussed in the GS Report why valuation EBITDA is assessed at $6 million when forecast FY14 is $4.8 million. In its report, Grant Samuel combines the Pathology and Radioiogy earnings, but it is unclear if it has broken down the earnings to apply different multiples to each business. Grant Samuel does not discuss why a multiple of 6.6-7.6x is appropriate for Abano's 55% shareholding in Aotea Pathology and 70% shareholding in insight+Ascot Radiology. It has shown comparable transactions and listed company multiples of which we note: Comparable transactions have a median forecast EBITDA multiple of 8.4x, but there is a wide range between 5.0x and 13.4x. Comparable listed companies are much larger and more diversified than the Diagnostics business. The smallest listed company in the sample is Vision Institute with a market capitalisation of AUD 114 miliion and a historical EBETDA rnuitiple of 6.0x. The key issue with the valuation of Diagnostics is that the Aotea Pathoiogy business, which we understand makes up around half of Diagnostics EBITDA, has a fixed term contract expiring in October 2015. Grant Samuel says that in its opinion these contracts should be on an evergreen basis, which would enable the owners to invest in people, processes and technology with a degree of certainty. However, the reality is that these contracts are not on an evergreen basis and therefore future earnings beyond that date are highiy Page 11 KordaMentha uncertain. We consider a lower multiple would be appropriate across all of Diagnostics. We note that Barr and Deutsche Bank (brokers that cover Abano) have valued Diagnostics as follows: 0 In a broker note dated 12 August 2013, Deutsche Bank appiied an EBITDA multiple of 6.0): to the whole of the Diagnostics business. a in a broker note dated 13 November 2013, Barr appiied an EBITDA multiple of 4.5x to Pathoiogy and 7.5x to Radiology. The weighted average of these multiples is 5.8x. 4.2.3 Rehabilitation A summary of the calculations used in determining Grant Samuel?s vaiuation of the Rehabilitation business is set out in the table below: Table 4.8: Rehabilitation valuation summary million Low High Valuation EBETDA 2.4 2.4 Multiple 4.0x 5.0x Enterprise Value 9.6 12.0 Source: The G8 Report Although Grant Samuei does not explain its earnings assessment or multiple, the valuation outcome for Abano is relativeiy insensitive to the Rehabilitation valuation. 4.2.4 Corporate Overhead Grant Samuel has made a valuation deduction for ongoing corporate overheads. it is unclear how Grant Samuel has valued corporate overheads, but it appears to be as follows: Table 4.9: Corporate overheads valuation summary million Low High Valuation EBITDA (2.9) (2.9) Multiple 6.9x 7.9x Enterprise Value (20.0) (22.8) Source: The G8 Report Grant Samuel does not explain in the GS Report why a multiple of is appropriate. We wouid adopt a weighted average of the valuation multiples for the Abano business using Grant Samuel's assessments). Broker reports say that in the event of someone acquiring 100% of Abano; deiisting the Company; and potentially breaking up the component parts for sale, a significant corporate overhead reduction could be achieved. estimate between 50% and 100% of costs could be saved. For illustrative purposes, if 50% of the corporate overheads were saved this would increase Abano's value by $0.49 to $0.56 per share. in Grant Samue|?s standaione valuation, it has not considered any potential synergies or cost savings to a 100% owner of Abano. It is highly uncertain as to the quantum of corporate head office costs which wouid be saved by a 100% owner of Abano. In the absence of further information, it would be presumptive for us to assume that costs currently incurred by Abano at head office would not be needed by a 100% owner. To make an accurate assessment of any potential cost savings would require a detailed review of corporate head office costs to determine what services are performed for the segmental businesses. Saving 100% of corporate overheads would probabiy depend on a break-up strategy and even then may prove optimistic. Page t2 .4- KordaMentha 4.2.5 investment in Bay international The GS Report says Bay lnternationai is currently loss making in Australia and possibly breakeven in Asia. Across all of Bay International, it is forecast to lose $4.6 million in FY14. Grant Samuel says it has valued the Australian business on the basis of a liquidation by applying multiples of 7.0??8.0x the store EBETDA with no deduction for any overhead costs) and then made a notional deduction of one year's overhead costs, presumably for costs associated with closing Bay lnternationafs head office. Asian business has been valued by applying a multiple of 0.75?1.0x current year revenue. Given the iimited narrative provided by Grant Samuel on this vaiuation, there are a number of issues. However, our key concerns are: Under a liquidation scenario, where no overheads are taken into account when assessing EBETDA, we presume Grant Samuel anticipates that the individuai stores will be soid. if so, a multiple of 7.0-8.0x appears very high when typically small businesses are sold at muitipies of 3.0?4.0x EBITDA. Alternatively, if a multiple of is adopted to reflect an acquisition of a large group of stores, we can see no reason to remove the Bay International overheads, which would be incurred in administering the group of stores. - Based on our indicative calculations to replicate Grant Samuel's numbers, it appears that no discount has been applied to reflect the lack of control and marketability associated with a 50% shareholding. We note that if Grant Samuei?s approach were adopted but an multiple range of 3.0?4.0x were applied, this wouici value 50% of Bay internationai at $8.3 rniliion to $9.4 miliion, which compares to recent broker valuations of $4.7 million by Barr ('13 November 2013) and $9.0 million by Deutsche Bank (12 August 2013). 4.2.5 Net Debt for Valuation purposes Grant Samuel have assessed net debt for valuation purposes at 31 October 2013 of $105.8 million, which includes $14.9 million for the purchase of dental practices between 31 October 2013 and financial year end at May. Page KordaMentha Appendix 1: Qualifications and declarations Qualifications KordaMentha is an independent New Zeaiand Chartered Accounting practice, internationaily affiliated with the KordaMentha group. The firm has established its name nationaily through its provision of professionai financial consultancy services with a corporate advisory and insolvency emphasis, and because it has no business advisory, audit or tax divisions, avoids any potential conflicts of interest which may otherwise arise. This places the firm in a position to act as an independent adviser and prepare independent reports. Disclaimers This report has been prepared for HIL and should not be used or reiied upon for any purpose other than as an expression of KordaMentha?s opinion on the GS Report. Kordalvlentha expressly disclaims any liability to any other party who reiies or purports to rely on this Report for any purpose. This report has been prepared by KordaMentha with care and diligence and the statements and opinions given by KordaMentha in this report are given in good faith and in the belief on reasonable grounds that such statements and opinions are correct and not misieading. However, no responsibility is accepted by Kordaivlentha or any of its officers or employees for errors or omissions however arising (inciuding as a resuit of negligence) in the preparation of this report, provided that this shall not absolve KordaMentha from liability arising from an opinion expressed recklessly or in bad faith. indemnity HIL has agreed that, to the extent permitted by law, it will indemnify KordaMentha and its partners, employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of this report. This indemnity does not apply in respect of any negligence, misconduct or breach of law. Hlt. has aiso agreed to indemnify Kordalvientha and its partners, employees and officers for time incurred and any costs in reiation to any inquiry or proceeding initiated by any person except where Kordaivientha or its partners, employees and officers are guilty of negligence, misconduct or breach of law in which case KordaMentha shall reimburse such costs. Consent KordaMer1tha consents to the issuing of this report, in the form and context in which it is included, to the public. Neither the whoie nor any part of this report, nor any reference thereto may be included in any other document without the prior written consent of Kordalvlentha as to the form and context in which it appears. Pageid 13 April 2012, Sean Hughes, CEO, Financial Markets Authority, Wellington. By email Dear Sean, Re: lssue with independent reports Recently Kermadec Property Fund put a proposal to its shareholders to internalise its external management contract. contemporaneously, it purchased the ongoing business of Augusta Funds Management which was also the external manager of Kermadec and changed its name to Augusta Funds Management. Because of the nature of the transaction, the independent directors of Kermadec commissioned an appraisal of the proposal from Price Waterhouse Cooper. This is available in the investor section at . This report concluded that while the deal was ??'fully priced? there was potentially some limited upside for Kermadec shareholders. Despite misgivings about various aspects of the deal, shareholders supported it and it was easily passed. My concern revolves around the fact that there were several errors in the independent report. The main one was in the table at Clause 23 (repeated at clause 115) where the FY 11 NTA pre the deal was shown as 78c per share and the NTA post deal was at 77.9c per share. The correct figure was in fact 72c per share post deal. At the time of the transaction, the shares were trading at a discount to NTA of13%. Depending on your point of view, this error could be material to shareholder investors who sought value based on discount to NTA. Unless the future prospects were seen as improving as a result of the transaction, the share price could potentially fall if the market maintained a similar discount of the price to NTA. In reality, the price has not materially changed since the transaction was passed, so clearly some revaluation occurred. There were also errors in the table at clause 122, most notably that the Vital Healthcare Trust AUM was reported at whereas it was $O.53b. This error meant the multiple should have been 2.1?x rather than the 3.7x reported. 1 queried these matters with PWC several days prior to the meeting. They con?rmed the errors and described them as ?typos? which did not affect their opinion about the deal. They also told me that the directors were made aware of the errors. i suggested that an explanation should be given at the SGM. A corrected slide was shown very briefly during the Chairman?s address, but nothing was said until I raised the issue from the floor in question time. I - O9-309-5268 I ca :12 I co nz Corporate oh Box 6330 City Accounts PO Box 42-139 Orakei Auckianii 1745 zeazana I have since discussed the general issue of report errors and responsibility with another provider (Grant Samuel}. Their view is that material errors (which they de?ned as between 5% and 10% in a ?gure or ratio) should be disclosed as fulsomely as possible. I have no wish to pillory PWC on this matte r, and the information is provided as by way of example. However, errors in "?independent? reports seem to fall into something of a no man?s land. I would assume that normal disclosure rules apply, but this would be a responsibility of the company rather than the report author. On the other hand, reports must be submitted to NZX who presumably vet them, but can hardly be expected to have detailed knowledge that might discover such errors. Never~the?less, the directors may well feel that such scrutiny is sufficient (possibly not after and be reluctant to comment for fear that the whole process might be put in jeopardy. (Note that have absolutely no reason to believe that was the case here.) Equally, they may have considered that the errors were in their opinion minor and did not affect the conclusions in the report. i would be interested in view on how errors in independent reports should be dealt with, both in terms of the regulatory requirements, and in terms of providing best practise disclosure. Further there could be a case for providing guidelines to the market that would ensure consistency in the way any errors are dealt with. Your assessment and comments would be appreciated. Kind regards, John Hawkins Chairman I - O9-309-5260 I aditiinfginzsiiarehoiders co nz i con: Corporate CS7 PO Box 6310 Aucisiand City I Accounts PO Box 42-139. Orakeieuckland 17-45 New Your query regarding Appraisal Reports ol?2 Subject: Your query regarding Appraisal Reports From: "Sue Brown" Date: 8:52 a.m. To: CC: "Garth Stanish" Dearlohn Thank you for your letter of 13 April 2012, addressed to Sean Hughes, regarding Augusta Group Limited. Sean has asked me to respond. You asked for ourviews on how errors in independent reports should be dea_lt with from a regulatory perspective and also as a matter of best practice, and whether FMA would consider issuing best practice guidelines, to ensure consistency in approach? As you know, the primary regulatory responsibility for independent Appraisal Reports lies with NZX. The rules provide the framework within which Appraisal Reports are required and has the role in approving people to provide these reports. While, as you say, this role doesn?t extend to vetting the Appraisal Report prior to it being released to she reholders we expect that any complaints about factual errors in a report that are potentially material to the opinion being expressed by the Report would be addressed by NZX. We note that the Appraisal Report will be provided to shareholders as part ofthe material received by them to enable them to vote on the particular transactions in question and, as such, is subject to the provision of the Listing Rules that provides that ?Each notice of meeting of holders of Securities shall contain or be accompanied by sufficient explanation to enable a reasonable person to understand the effect of the resolutions proposed in the notice of meeting.? This provides a regulatory mechanism by which NZX may investigate any particular issues with Appraisal Reports. in the event there were concerns about a particularAppraisal Report, communication with NZX and their subsequent actions should answer those concerns. Depending on the nature of the error, it may be appropriate for a correcting statement to be issued by the Appraiser. Should there still be issues following any action by NZX then potentially there are options open to FMA, such as the issuing ofa corrective order under Part 5 of the Securities Markets Act 1988 (SMA), though naturally we would hope that such a step would not be necessary. Additionally, as part of general responsibility to review NZX we review complaints logs relating to Listed issuers as well as NZX ?les concerning the approval of Independent Appraisers. On that basis, and on the basis of the information we currently have, it doesn?t seem to us that best practice guidelines as to the correction of mistakes in Appraisal Reports is required at this stage. We will certainly, however, talk through your questions with NZX and will keep the matter under review. with this in mind, we?d be very grateful if you would let my colleague Garth Stanish (Manager, Markets infrastructure and Oversight Providers, who l"ve copied on this message) know of any further examples you identify. Kind regards Sue sure Eirown Head of Primary Regulatory Operations i ttfiart-zeta T: 64 4 471 7665; M: 6-41 21 334 420 7:50 In auews November 29. 2013 I The National Business Review David Listed companies? lack of disclosure and transpar- ency leading up to annual meetings is vexing the Shareholders? Association. and association chair- man lohn Hawkins told the Nntforml Business Review it might raise the matter with regulators if there is no improvement. The Association has crit- icised several companies in recent months over their behaviour in the lead-up to annual meetings. including Rakon, A2 Corporation and Thewarehouse. [taken was the worst case. An hour before its meeting in September the company announced a forecast for a $54 rniliion for the ?nan? cialyear. As it was, about 17% of shareholders voted against Rakon chairman Bryan Mogrit:lge's re-election, while 19% voted against executive director Darren Robinson. Speaking the fotlow- ing week. Sharehoiders' Association acting chair- man Grant Diggle told NBR ONLINE the last-minute release of signi?cant infor- mation robbed sharehold- ers who had already cast proxy votes the chance to reconsider. Mr I-Iawitins says the Association's main con- cerns are timely disclosures approaching AGMS and a lack of su?iciently detailed resolutions in the notice of meeting. ?in our view. it's inap- propriate for companies to be releasing signi?cant information on the morn- ing of the meeting where it may have had quite a bear- ing on how shareholders vote." In Ral-ton?s case. Mr Hawkins says he is not sug- gesting any iaws were bro- ken. He suggests market rules be tweaked so com- panies are deterred from making last-minute disclo- sures - although he admits that will not be an easy thing to do. ?it is an area we may pursue with the regulators. is a preferred approach but. if we don?t see iznprovements. then clearly we would have to iook at whatever options are available." NZX. rules state :11} notic- es of meeting are required to contain or be accompa- nied by sufticient explana- tion to enable a reasonable person to untierstand the I 3 JOHN Persuasion preferred but keeping his options open effect of the resolutions proposed. MANSORS jswessans 163 Queen St, Aucltiand Tel: (09) 303 2839 c: They also state compa- nies must make continu- ous disclosure. releasing information to the market that any reasonable per- last -tveelt-s-it are- house Group meeting. Mr l~Iawkins criticised the board for not clearly expiaining the need to increase its director remu- neration - while noting its chagrin and promise to do better. Mr Hawkins told NBR he does not have concerns over the Ahano Healthcare Group meeting this week, at which shareholders were provided with a clear and detailed explanation about a proposed rise in direc- tors? fees. At the Abano meeting. the board released an inde- pendent report into the company. prompted hy rt possible hostile takeover by former director Peter iiutson and associate James Reeves. backed by private equity ?rm Archer Capital. Mr Hawkins didn't see that as a problem. saying: ?The board is completely entitled, I think, to take advice to make sure that what it's saying is fair and reasonable." NZK is the market oper- ator and regulator, while the Financial Markets Authority enforc- es the Securities Act and oversees the practices and disclosures of listed com? panies. NZX head of corpo- rate communications Kate McLaughlin says NZK does not comment on individual issuers. ?There are no particular requirements concerning the release of information around the time of the annual meeting, although it is good practice for issu- ers to reiease copies of the chairrnan?s and chief exec- utive's addresses before the meeting to ensure there is no concern that price-sen- sitivo information is pro- vided to the meeting that has not been previously released." In lune, the FMA pub- lished its generai obliga- tion review of NZX, which said the regulator was con- cerned at the low number of referrals to tile NZ Mar- kets Discipiinary Tribunal - about 10% of the market rules breaches identi?ed by the tnaritet operator. The report says NZX may .-be placing a high threshold on the level of breach that is referred to .. .. mil at tor this week, NZ): Regulation published its enforcement policy. which states it will not investigate every matter brought to its attention. The document says: Regulation will consider, amongst other matters. its enforcement priorities. the severity and extent of the alleged non- compliance. the impact of the alieged non com- pliance including the risk and extent of loss likely to arise. the nature and qual- ity of any evidence already available on the matter. relevant precedent. wheth- er another regulator has jurisdiction in respect of the matter and the regula- tory outcome that would be likely to be achieved if enforcement action were taken." In July. the Sharehold- ers? Association cont- plained to NZ.X'about a share spike leading up to Rakon?s announcement that it would sell 80% of its Chinese join:-venture factory in Chengdu for million and take a $32 million impairment. The company later explained to NBR its Chi- nese partner released information to the Shena- lien stock exchange hours before the NZX-listed com- pany sought a trading halt on its shares. .. am. 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BED ma?a magnum a mu: comma? sun? 5 :3 imam auzmi ?uanouuo 332.3 .5 I umma 6225 .3 m.u__..Eou on .u.uEw m?m?sn m.us.2mm..~ NZX chair silent on ACC director Trevor anes? independence The National Page 1 of 2 Th tvteeting Place of lnteiigent Bosiess Wednesday 19 March 2614 1-lotTopics: Budget 2014 i Chorus triai trial 1 Recent poll resuits ZX chair siient on ACC rector Trevor dance? in ep endence ?;g,Paict content Duncan Bridgeman Wednesday March '19, 2614 1 1 comment NZX chairman Andrew Harmcs is not commenting on a reguiatory decision to waive independent director requirements in relation to Accident Compensation Corporation (AC6) board members. But the waiver, issued eariier this month. has raised eyebrows in the investment community. particuiartv as to how it affects ACC director Trevor James and his position as independent chairman of NZX-listed Abano Healthcare The waiver is provided on conditions, including that ADC holds a relevant interest in no more than 15% of the issuer's voting securities and A005 internai policies are fotlowed. Of interest is not so much the waiver itsett but the existing rules that it bypasses. bringing into question whether Mr Janes shouid have been considered "independent" at Abano over the past 18 months since ACC has a substantial shareholding in the company. Trevor James Mr James was appointed a director of ACC in September 2022 and is chairman oi investment comrnittee. The government insurer has a 6.2% stake in Abano. 3 According to NZX Regulation, absent the waiver. if Act?. were a substantial -9 i. .. - security holder in an issuer, then any person who is a director of both ACC Abano Heallhcare 12- and that issuer would be deemed to have a "disqualifying relationship" and month price history couid not be considered to be an "independent director" of the issuer for the purposes of the listing rules. Related links - Abano sees smaller annual sales on strong kiwi doiiar, takeover bid hit bottom line Yet Mr Janes has been deemed to be an independent Abano director during a time when Abano has aggressively defended a takeover otter from one of its shareholders. it is not the first time Mr Janes? independence has been queried at Abano. Ahano says In November 2007 the company was forced to correct his titie as he was earnings before rninorities deemed not to be independent due to his role as a director of Saivus to beat Grant Samuel estimate it-si1ent?acc? anes-indeper1clence?. .. I 9/ 03/2 01 4 NZX chair sitent on ACC director Trevor Janes? independence I The National Page 2 of 2 Strategic investments, which was a substantial security holder of Abano at that time. According to the market announcement, that ?constitutes a disqualifying relationship under NZSX Listing Rule The 200? correction was made when Abano was in the throes of defending a partial takeover offer from Mark Stewart's Masthead Portfolios. It prompted a bitter response from Mr Stewart, who said it was ciear that Mr Janes had a conflict of interest. "As a result of this prevarication, Mr Janes has been able to play a significant part in board deliberations regarding our offer. Indeed, we have been surprised by the very negative attitude towards our offer, which has been put on the table in good faith." The foilowing year, after Masthead's offer was rebuffed by shareholders. Mr Janes was back as an independent director. But the Masthead situation is similar to the current situation due to ?vtrJanes? dual roles with ACC and Abano and another acrimonious takeover play by shareholders Peter l-tutson and James Reeves going on behind the scenes. Mr James led Abano?s defence of the takeover approach, which he described as unsolicited and well below fair value. However. as per the listing roles, he shouid not have been deemed an independent director during this time. Mr Janes did not return calls requesting a response to questions. Mr t-iarmos himself is in a difficult position because his law firm. i-tarmos Horton Luslr advises Abano. He told NBR ONLINE that he comment on the situation. "Given that t?m chairman of NZX, on that sort of a specific regulatory enquiry I suggest you run it by NZX Regulation. I don?t really think it's appropriate for me to comment in fact the board doesn't get invoived in the detail of regulatory decisions, it reviews them in hindsight as a governance mechanism." Asked what advice Hermes Horton Lush have given Abano and Mr Janes in relation to director independence. he also declined to comment. "You wouldn't expect me to comment on ctient matters either." Last week an NZX spokesman told NBR the waiver was unique and NZX was not responding to an application from a particular issuer. It is understood the issue was raised last April. Copyright Protected More by Duncan Bridgeman niw on I ?1