EX-3 2 dex3.htm LEVERAGED RECAPITALIZATION TRANSACTIONS ANALYSIS Leveraged Recapitalization Transactions Analysis
Shamrock Capital Advisors, Inc.
Reddy Ice Holdings, Inc.
Leveraged Recapitalization
Proposal
July 2007
Exhibit 3


2
Table of content
I.
Leveraged recapitalization proposal
II.
Packaged ice market characteristics
III.
Reddy Ice performance
IV.
Operational improvement opportunities
V.
Reddy Ice valuation


3
Leveraged recapitalization is a better option for current
shareholders
GSO Capital Partners buyout offer for Reddy Ice substantially
undervalues the business; our DCF shows that the intrinsic
value of Reddy Ice is ~$42-$44 per share
Our proposal:
Pursue a leverage recapitalization
Raise $110M of debt
Do a self-tender for 3.3M shares (~15% of outstanding
shares) at $33 per share
Allow
some
shareholders
to
exit
at
a
higher
valuation
than
the
GSO
offer,
while
allowing
shareholders
who
appreciate
the
long-term
potential
of
the
business
to
have
the
opportunity
to
capture
a
significantly
higher
return


4
Reddy Ice business is attractive, with significant future
valuation creation opportunities
Reddy
Ice
business
is
attractive,
as
the
packaged
ice
market
is
stable
and
has
many favorable characteristics
Recession
proof,
market
dominance,
low
price
sensitivity,
highly
accretive
acquisition landscape, and high barriers to entry
While Reddy Ice management has grown the business and delivered above average
returns
to
shareholders,
significant
improvement
opportunities
still
exist
that
can
be achieved in a relatively short period of time and as a publicly traded company
Given pricing dynamics, we believe prices could be raised; a 5% increase above
current levels would increase shareholder value by ~15%
Internal efficiency opportunities and competitor’s EBITDA margin suggest that
Reddy Ice could improve its margins to ~30% in the next several years; this would
increase shareholder value by ~28%
Value creation opportunity from smaller acquisitions is significant and many
accretive deals are still available
Monetizing advertising opportunities on the bags and trucks are two other creative
ways to increase value


5
The packaged ice market is stable and has many attractive
characteristics (1 of 2)
0
20
40
60
80
100%
Market
share
Rest
of
players
Leading
player
Typical
market
share
in
focus
areas
0.0
1.0
2.0
$3.0B
2002
2.0B
2006
2.5B
Packaged
ice
market
retail
revenue
5.7%
(02-05)
CAGR
$92M
$219M
Arctic
Glacier
revenue
$236M
$333M
Reddy
Ice
revenue
Market has consistently grown in recent
years; experts think market is recession
resistant
Three largest players
dominate the market in
their territories
“Packaged ice consumption does not get impacted by
recession
as people tend to spend more of their leisure time
close to home, which increases demand for ice.”
Market expert, International packaged ice association
Pricing environment is
attractive
“Event”
driven
purchase
Ice represents a
small cost in
overall “event”
cost
Low price elasticity
Highly profitable
product for
retailers
Source: International Packaged Ice Association; Company presentations
Low
High


6
0
3
5
8
10
13X
Acquisitions
since
IPO
5.03X
2007
acquisitions
5.65X
Reddy
Ice
valuation
(pre
deal)
11.00X
EV/EBITDA
multiple
Fragmented market leads to highly accretive tuck-in
acquisitions
~200 mom and pop acquisition
targets still available
~5.3x
Multiple
arbitrage
High barriers to entry
$300M in PP&E
Estimated $400M in
replacement cost
Long term relationships
(10+ years) with high
quality customers (Wal-
Mart, 7-Eleven, etc.)
The packaged ice market is stable and has many attractive
characteristics (2 of 2)
Source:
Company
conference
calls;
Company
presentations;
Capital
IQ


7
0
100
200
300
$400M
2004
$268M
2005
$305M
2006
$333M
Reddy
Ice
ice
revenue
11.5%
(04-06)
CAGR
Revenue grew at 11.5% CAGR since
2004
0
20
40
$60M
2004
$31.8M
2005
$33.9M
2006
$51.7M
Reddy
Ice
free
cash
flow*
27.5%
(04-06)
CAGR
Reddy Ice management has significantly grown the business
since 2004
With free cash flow also showing growth
of 27.5% CAGR
Source:
Capital
IQ;
Yahoo
finance;
*
Free
cash
flow
=
cash
flow
from
operations
-
CAPEX


8
There are still significant improvement opportunities that can
be achieved and create significant value for public shareholders
Pricing
Operational efficiencies
Asset monetization
1
2
3


9
Price increase could increase revenue and EBITDA, and create
significant additional shareholder value; given pricing dynamics,
this can be achieved in the next 12-18 months
23%
15%
10%
Share price delta (%)
$38.41
$35.86
$34.38
$31.25
Implied share price
21.8
21.8
21.8
21.8
Shares outstanding (M)
$837.3
$781.8
$749.5
$681.2
Implied market
capitalization (M)
11.9
11.9
11.9
11.9
Deal Multiple
$101.1
$96.5
$93.8
$88.0
EBITDA (M)
$339.1
$333.9
$330.9
$324.5
Total Ice Revenue (M)
10% Price
increase
5% Price
increase
3% Price
increase
2006
1
Assumptions
Volume decline of 1,
2, and 5% in the 3,
5, and 10% price
increase scenarios
respectively
Incremental revenue
margin of 90%


10
EBITDA margin comparison suggests significant improvement
opportunity exists to increase EBITDA margin; we think
improvements can be achieved in the next 24-36 months
0.0
10.0
20.0
30.0%
Reddy
Ice
25.4%
Arctic
Glacier
27.0%
Arctic
Glacier
(3
year
goal)
30.0%
EBITDA
margin
Cross plant utilization of best practices could result in significant value creation
Reaching Arctic Glacier margin goal could result in additional value of ~$8.50
per share (~28%)
Production process opportunities:
Production cost and packaging
speeds per bag ranges
significantly between plants
Up to 150% and 35%
improvement opportunity
respectively
Plant automation is in early
stages
Delivery routing is not as
sophisticated as can be, as
decisions are based on driver
feedback and the process is not
systemized or computerized
~450 BPS
opportunity
2
Source: Capital IQ; Interviews


11
Other asset monetization opportunities also exist to create
additional shareholder value
Opportunity:
Bag monetization
Truck monetization
Rationale:
Potential
partners:
Sell advertising on ice bags
Sell advertising on trucks
Large reach at low cost
Attractive “shelf space”
as
packages located behind the glass
freezer door, making impressions
even to consumers not buying ice
Attractive target demographics
Low cost mobile billboard that
generates high number of
impressions
Allows partner to brand itself with
a high quality related product
Beverage companies
Theme parks
Sports teams
3
Grocery stores
Entertainment companies
Other national advertisers


12
Our analysis shows that Reddy Ice intrinsic value is $42-$44
per share
Current deal value does not maximize shareholder value and transfers
majority of the upside potential to GSO Capital Partners
Assumptions:
Organic Ice revenue growth of 6.5%
CAGR through 2011
Pricing increase of 6% in 2008
and 2009, 2.5% after
Volume growth of 2.5% CAGR
$60M of revenue and $15M of
EBITDA purchased through 2011 at
7x EV/EBITDA multiple
EBITDA margin improving to 30% by
2010
Debt at 5.3x 2007 EBITDA, 4.5x
2008 EBITDA
Terminal year 2011; exit multiple
10x EBITDA, Discount rate 10%
DCF:
20
2007
2008
2009
2010
2011
Revenue
360.30
$   
403.73
$   
451.91
$   
488.80
$   
527.55
$   
Growth
4.1%
12.1%
11.9%
8.2%
7.9%
EBITDA
94.87
       
115.06
     
134.22
     
146.64
     
158.26
     
Margin
26.3%
28.5%
29.7%
30.0%
30.0%
Net Income
24.81
       
39.18
       
44.31
       
49.25
       
56.30
       
Margin
6.9%
9.7%
9.8%
10.1%
10.7%
Free Cash Flow
53.59
       
84.75
       
60.37
       
53.18
       
58.66
       
Growth
58.1%
-28.8%
-11.9%
10.3%
Equity Value
805.04
$   
Outstanding Shares
18.53
       
Implied Share Value
43.44
$     
Deal share price
31.25
$     
% Upside
39.0%


13
0
10
20
30
$40
30
day
average
$29.46
Pre
announ-
cement
$28.52
Deal
price
$31.25
Reddy
Ice
share
price
6.1%
(30
day
average)
9.6%
(Pre
announ-
cement)
In addition, deal timing resulted in a small deal premium while
long-term prospect of business are still strong
Q2 2007 weather was weaker than
2006, but inline with 2005
GSO Capital leveraged the soft
weather to pay a small premium
While weather
impacts short term
sales, it is not a big
driver of long term
value
Long term
temperatures are
expected to be stable
Source: University of Dayton, Yahoo finance
0%
78.3
78.6
78.5
77.8
Jun
-3%
71.1
73.3
70.8
72.2
Avg.
0%
72.1
72.4
70.1
74.2
May
-9%
63.0
68.9
63.9
64.6
Apr
07 to 06
variance
2007
2006
2005
2004
Additionally, precipitation was higher
in 2007 than 2006, further impacting
outdoor events