Project 1, 2024 S1 FINAL

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Apr 3, 2024

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/ 1 BANK3600 BANKING IN PRACTICE PROJECT 1 - SEMESTER 1, 2024 The Case Your group is a team ( ‘ Team ’ ) within the Corporate Lending Department of one of Australia’s largest bank s, ANZ Banking Group Limited (ASX: ANZ). A copy of ANZ’s latest Annual Report (2023) is available on the following link: https://www.anz.com/content/dam/anzcom/shareholder/ANZ-Annual-Report-2023.pdf Your Team ’s role within ANZ is to assess commercial lending applications, and you have been asked to evaluate a request from the bank’s client, Nick Scali Limited (ASX: NICK), for a loan with a term of eight years. A copy of NICK’s latest Annual Report (2023) is available on the following link: https://assets.nickscali.com/media/wysiwyg/pages/Annual_Reports/NS_AnnualReport_202 3_WEB.pdf Nick Scali is a large Australian furniture retailer that primarily sells its products through traditional ‘bricks -and- mortar’ (that is, physical) stores and showrooms. NICK intends to acquire the leading ASX-listed, online furniture and household goods retailer, Temple and Webster Limited (ASX: TPW). The most recent TPW Annual Report (2023) is linked below: https://www.templeandwebstergroup.com.au/Investor-Centre/?page=reports NICK has approached you, at ANZ Bank, to arrange a loan of $1.25 billion to fund the entire purchase of TPW . Your job is to assess the merits of the application. Company Descriptions and Strategic Plans Nick Scali has a long history in Australia (dating back to 1962) and listed on the Australian Stock Exchange (ASX) in 2004. The company has since grown to be one of Australia’s largest furniture retailers and imports over 12,000 containers of furniture per year. NICK does not manufacture furniture itself, and instead imports the majority of the product it sells to customers in its Australian and New Zealand based stores.

/ 2 The company expanded its store network through the recent (2021) acquisition of Plush-Think Sofas and now has a combined total of 107 physical locations. NICK has a longer-term store network target of 170-180 stores across Australia and New Zealand. Most of NICK’s existing stores are leased, although the company also has eleven ‘owned’ properties. NICK wants to aggressively increase its market share while maintaining its primary value proposition: offering quality furniture at affordable prices in convenient locations. The company is performing well and bounced back strongly from the Covid disruptions (and associated supply chain issues), more than doubling its net profit since 2020. NICK’s Board of Directors believes that the company can substantially increase shareholder value by expanding its homewares business though the online retail channel. As such, the Board has decided to acquire Temple and Webster Limited , Australia’s leading online -only homewares and furniture retailer. Temple and Webster was established in 2011 and listed on the ASX in 2015. The company has scaled up quickly and now offers customers over 200,000 products from independent designers and suppliers, and from its private label collection, entirely via its website (that is, TPW has no physical stores). TPW aims to be the top-of-mind retailer of furniture and homewares in Australia within 3-5 years. This ambition, if attained, represents a direct threat to the more traditional retailing business of Nick Scali . NICK believes that the proposed combination of the complementary businesses will future-proof the company and enable it to extract purchasing and distribution efficiencies, thereby improving profit margins. TPW has performed strongly in recent years and has a strong balance sheet, with ample cash and no debt. As such, TPW launched a $30 million stock buyback in 2023 as part of a broader capital management plan. Proposed Funding Structure Nick Scali seeks a term loan of $1.25 billion to fund the entirety of the TPW acquisition (including integration costs). NICK’s preferred term for the loan is eight years. Because of the size of the proposed borrowing, NICK’s management expects that ANZ Bank will look to syndicate the loan. NICK’s management believes that the additional cash flows and cost savings from the TPW acquisition will be sufficient to allow it to service the term loan and repay the principal when due.

/ 3 The Boards of both NICK and TPW have negotiated this transaction over several months and have agreed on a fair price for the acquisition. NICK and TPW have agreed to execute the takeover via a Scheme of Arrangement (a friendly takeover), pending shareholder and court approval. You are not required to determine whether the acquisition itself makes sense from a valuation perspective (that is, you should take it as given that the terms of the proposed takeover have been agreed and endorsed by the competition regulators). As such, you do NOT need to complete a valuation analysis. The final stage of the takeover process depends on your assessment of the proposed funding of the acquisition. As part of this process, you are required to demonstrate your understanding of financial intermediation theory and apply these concepts throughout the project. In summary, Nick Scali Limited would like to borrow $1.25 billion from ANZ Banking Group (and, possibly, a syndicate of banks) in order to buy all of the shares (schemes of arrangement are ‘all -or- nothing’) of Temple and Webster Limited , and fully consolidate TPW into its existing corporate structure (thereby delisting TPW from the ASX). Financials Nick Scali management have supplied you with financial forecasts (that NICK’s management team themselves have prepared) for the duration of the proposed loan. These forecasts are presented on a consolidated basis and therefore reflect the performance of the combined business (that is, post acquisition). The financial forecasts for NICK – as provided by NICK management – accompany this briefing paper on Canvas (on an Excel spreadsheet). Given the size of the proposed loan, along with ANZ’s internal policy restrictions, and the regulatory restrictions under which the bank operates, the proposed loan may require syndication. NICK has offered ANZ the role of Mandated Lead Arranger (MLA) on the loan based on its existing relationship with the company. Your Team’s Tasks Your Team (as part of the Corporate Lending Department of ANZ Banking Group ) is required to complete each of the following two tasks: 1. Prepare a Pitch Deck for submission (in Week 6) to the ANZ Executive Management Team (using PowerPoint, with the format below). The Pitch Deck should focus on your overall recommendations regarding the proposed loan including the analysis you performed to arrive at your recommendation.

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/ 4 The Pitch Deck should detail your proposed loan terms based on your analysis of NICK’s ability to service the borrowing. You are required to be specific about all terms of the loan. 2. Present your analysis and recommendations as a team to the ANZ Executive Management Team in Week 8. Following your presentation, you will be required to address specific questions (in a panel Q&A session) that the Executive Management Team might have regarding your analysis and recommendations. The format and content of the project deliverables are set out below. 1. Pitch Deck The Pitch Deck is to be developed over Weeks 2 to 6 and is to be submitted in a style that will enable the ANZ Executive Management Team to clearly understand your recommendations. It should be presented in a professional, business-like manner (this requirement forms part of the assessment). The Pitch Deck is due for submission by 5pm on Monday April 1, 2024. The following Pitch Deck structure is provided as a guide . You may make amendments to this structure as your team sees fit, but you must strictly stick to a maximum of nineteen pages of content . Appendices may be added, but may not be any more than five pages (that is, the total length of your presentation pack must not exceed twenty-four pages, including up to five pages of appendices). The appendices should include details of the financial ratios that you calculated and included in your presentation pack. Please number all slides in your presentation pack. You must ensure that all sources are properly referenced and that you provide a full reference list (this is the only page not included in the overall page count). Item Page 1. Title Page: 1 Including logos, date and title. 2. Table of Contents: 2 Detailing all sections in the pitch presentation. 3. Executive Summary and Transaction Overview: 3 Summary of the presentation and your key recommendations, including the key terms of the loan. 4. Team and Bank Introduction: 4-5 ANZ’s track record in this sector (consumer cyclicals), including league tables. 5. Company and Industry Overview: The Acquirer 6-7

/ 5 Charts and commentary describing NICK , as well as the current market environment and industry trends. 6. Company and Industry Overview: The Target Charts and commentary describing TPW , as well as the current market environment and industry trends. 8-9 7. Financial Projections and Analysis: Include the calculation and analysis of key financial ratios of the combined entity, taking into account the desired loan. If you choose not to proceed with the loan, you must still present this analysis to provide justification for your decision. 10-13 8. Risks: Detail the key risks which might impact NICK’s ability to service the loan. 14-16 9. Loan Structure and Pricing: Detail all terms of the loan, as well as suitable justification for your pricing recommendations. If you choose not to proceed with the loan, you should expand on the risks section (Section 8) and provide justification for your decision. 17-18 10. Proposed Offer Structure to Participant Banks: 19 Justify your proposed syndicate and detail the expected participation size of each bank in the syndicate. The item numbers below correspond to the item numbers in the Pitch Deck above. Items 1 to 4 These items should provide introductory information about the bank, the Team and an Executive Summary. Item 5 and 6 You are required to provide a description of both NICK’s and TPW’s operations and analyse the current and projected operating environment for each business and the market for their products. These are essential components of any loan assessment. This credit work should include a proper assessment of the macro-economic environment and the impact that these circumstances will have on the firms’ industry. Item 7 You are required to complete a financial analysis (predominantly post-acquisition) of NICK . You are left to determine the appropriate financial metrics to analyse (some are more important than others, so make sure you focus on the most appropriate metrics), but you might consider the following categories: 1. A 5C’s evaluation 2. Leverage ratios 3. Liquidity ratios 4. Efficiency ratios 5. Profitability ratios

/ 6 As a starting point, the analysis should be conducted on the current full year financials (FY 2023), but the half-year results (H1 2024, released in February) might be an important supplement to your analysis. NICK’s financial forecasts (as discussed above), which incorporate the impact of the loan financing and expansion of the c ompany’s activities following the TPW acquisition, are also fundamental to this analysis. Information on the aforementioned ratios is available in Credit Analysis and Lending Management, co-authored by Sathye and Bartle (2017). A link containing the relevant sections is available on Canvas in the Reading List provided. Item 8 Undertake an assessment of the loan’s risks, including business risks, market risks, and any other key risks that you consider relevant to NICK and its expanded operations. Item 9 You are required to propose loan syndication arrangements for NICK’s proposed loan facility. The proposal should set out: 1. Whether ANZ should participate in the proposed funding and whether it should seek to act as MLA for the syndicated loan. 2. The portion of the syndicated loan facility that ANZ should retain (that is, the amount of its participation). 3. The recommended pricing of the loan (expressed as either a margin over floating rates or an eight-year fixed rate). 4. The supporting arguments and rationale used for your recommendations. Item 10 You are required to develop and justify the structure of the loan to be offered to potential participant banks (with ANZ as the MLA, if you decide to participate). 2. Presentation – to be delivered during the Week 8 workshop Teams will present their findings and recommendations to ANZ’s Executive Management Team (the Panel) during Week 8. Each Team will be allocated a time to present in the normal workshop occurring on Thursday, April 18. All presentations will be conducted in person. Each member of the Team must present on at least one of the topics drawn from the Pitch Deck. Presentation times should be evenly distributed between Team members across a total presentation time of 15 minutes. The Executive Management Team will then ask questions regarding your analysis and recommendations for a further 5-10 minutes.

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/ 7 Submission Pitch Deck – submission due date and time – 5pm on Monday, April 1 A link will be provided in the Assessment Folder on Canvas for your submission. One member of your Team should submit the Pitch Deck in PowerPoint format on behalf of the Group. A late submission penalty will be applied consistent with Business School practice if your submission is not received on time. As this is a Group assessment, no Simple Extensions will be provided. Your submission should include a cover page (do not use the cover page template) indicating Team number, the student names and student numbers. Disclaimer All companies included in this project ( NICK, TPW and ANZ ) are real companies. However, the scenario as described (that is, NICK’s acquisition of TPW ) is fictitious and is proffered for the purposes of the project only.