1. CONFIDENTIAL Valuation Research Corporation Legal Symposium Key Value Drivers and Valuation Methodology for State Alcohol Businesses March 7 – 9, 2011 0

2. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Discussion topics Overview of valuation methodology Valuation within the alcohol business Looking at the existing business Valuation approach Optimizing State alcohol businesses 1

3. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Privatization and valuation Many States are currently exploring privatization of their alcohol businesses  To increase revenue to the State by profitably growing the business  To support an immediate financial need (e.g. fill a budget gap)  Reposition the business for long term sustainability  Comply with legislative mandates Valuation is an essential initial step in the privatization process Valuation also provides an opportunity to examine the business for arenas of growth and optimization 2

4. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Value definition Definition of Value  Fair Market Value (“FMV”) is defined as the amount at which the subject assets would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts Assumptions  The Definition of FMV may require certain “normalization adjustments”. The adjustments may include provisions for:  Taxes  Expenses associated with State controls (i.e. boards, commissions, etc.)  Expenses associated with above/below market compensation  Rent versus property ownership  Working capital  Other 3

5. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Valuation approaches Income approach (Discounted Cash Flow)  Value of the business is equal to the present value of its future cash flows  Anticipated future cash flows are discounted at a rate commensurate with the risk characteristics of the cash flows. Market comparables support discount rate  Market comparable approach  Estimate value by applying market multiples from similar businesses that are publically traded, to the businesses earnings, sales, or other market indicators  Market multiples are adjusted for differences in sustainable growth, profit margins, asset returns, size and leverage  Market transaction approach  Estimate value by applying transaction multiples from ownership interests the have been sold subject to market indicators  Transaction multiples are adjusted for factors such as profitability and sales terms  Cost approach  Estimate value by determining the market cost to replicate the existing assets of the business 4

6. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Valuation approaches, continued Applications  Market approaches  Lack of true comparable companies or transactions in this industry  Market multiples may not reflect the specific time horizons associated with a desired license arrangement  Multiples typically reflect an investment in an ongoing business operation (perpetual)  Cost approach  Requires detailed appraisal of each asset  Does not capture goodwill value of ongoing business  Approach utilized  Discounted cash flow  Ability to reflect different assumptions and factors associated with desired licensing arrangements or time horizons  Ability to discretely incorporate various forecasted growth and margin assumptions 5

7. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Privatization, valuation, and the ABC business Privatization of the alcohol control business is particularly difficult due to the dual nature of the system - business and regulatory – and the widely differing expectations of stakeholders  Legislatures  Governors and executive branch  ABC boards and commissioners  Management and employees  ABC customers  Employees and labor organizations  Civic groups, advocacy organizations and the press  Local officials Comprehensive valuation encompasses both business and regulatory functions 6

8. CONFIDENTIAL January 10, 2011 Valuation Research Corporation The value of State alcohol businesses is determined by the level of control and how the business is organized 7 Business manager + branch offices State Government Private Wholesaler RetailTech, etc. Retail Decision-MakingFinances Public Alcohol Control Board Government programs Regulatory bodies Management Team Wholesale / Distribution Options Public or Private Vendor/Partner Options Customers Consumers State Agency Private Manager Distribution Agent Tech, etc. Tax, License 3 rd party Private Business manager + branch offices Retail options may include: State-run ABC stores State contracted agencies or agencies operating on commission Privately operated retail outlets

9. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Looking at the existing business Alcoholic beverage control optimization is the act of balancing revenue targets and socially responsible consumption Unlike license states, control states must consider revenue derived from both taxes and operations  Excise tax revenue increases with the quantity of alcohol sold and the tax rate  Sales tax revenue increases with the quantity and price of alcohol sold and the tax rate  Operational revenue increases with mark-up and decreases with expenses These revenue streams are increased and decreased through the use of Value Levers Control states disproportionately distort the alcoholic beverage market through an unequal use of these levers across beverage types 8

10. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Levers within an ABC system: value drivers  Levers that add value to the alcoholic beverage business All States control the distribution and sale of alcohol. The designation of “control” or “license” does not necessarily mean that one group has stricter regulations than the other. “Control” can be defined within a framework of Value Levers – both Value Drivers and Value Moderators –along the different tiers of the ABC business 9 LeverDescription Availability  Quality (e.g. specific stores / locations)  Retail penetration rate (# of stores per capita)  Hours and days of sale  Harmonization of beer and wine Product  Number of SKU’s  Approval of specific products Pricing  Post and hold legislation  Variable pricing  Minimum pricing Marketing  Total advertising spend  Point-of-sale marketing Exclusivity  Brand  Geography

11. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Levers within an ABC system: value moderators  Levers that restrict value in the alcoholic beverage business 10 LeverDescription Social responsibility  Substance abuse education  Law enforcement Taxes  Amount of excise tax or mark-up  Sales taxes  Other taxes (e.g. mixed beverage)

12. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Value levers within the ABC tiers These levers exist within the tiers of the ABC system. The value of the business is determined by the control of these value drivers. 11 Tier 1 Supplier Tier 2 Wholesaler Tier 3 Retailer  Availability (hours and days of sale)  Pricing regulations  Marketing restrictions  Product (SKU’s)  Marketing restrictions  Exclusivity (brand and geography)  Pricing regulations Control Mechanism  Social responsibility Consumer

13. CONFIDENTIAL January 10, 2011 Valuation Research Corporation A look at value moderators: taxes and mark-up 12 *2007 Revenue data from the Distilled Spirits Council of the United States Tax rates and mark up have a dramatic impact on where value resides Mark-up, Excise, and Sales Tax Revenue Per Capita* Sales tax Excise tax/mark-up ABC Profits

14. CONFIDENTIAL January 10, 2011 Valuation Research Corporation A look at value drivers: availability/points-of-sale Control states tend to have more total venues for alcohol purchase, but fewer where spirits are sold Reduced availability of one type of alcoholic beverage leads drinkers in certain jurisdictions to substitute across beverage types reflected in the state’s low spirits consumption rate Control States *Per 100,000 residents. Figures from NABCA Survey Book 2008 13 Per Capita Off-premise Liquor Outlets*

15. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Value drivers in action: higher tax revenue for higher margin products 14 Spirits consumption level Spirits consumption increase Annual increase in tax revenue Scenario A Equal to border States 6.9%$9MM Scenario B Equal to Average for all control States 10.1%$15MM Scenario C Equal to Average for all license States 21%$23MM In many control states spirits consumption is low relative to other alcohol products The following value drivers may contribute to lower than average consumption  Little or no marketing of spirits  Limited availability compared to beer and wine  Relative cost of alcohol by type Imagining a shift (not increase) in consumption from beer to spirits in Control State X by harmonizing marketing, pricing, and availability across beverage types, we see the following net increase in tax revenues:

16. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Initial valuation methodology Purpose  Explore the order of magnitude of value levers  Intended to encourage discussion but not to provide precise indications of business value Assumptions for Privatization Scenarios  Excise and other beverage taxes are not treated as revenue  Corporate income taxes paid at 40%  Law enforcement, alcohol education and city/county distributions are not deducted  Revenue changes are based on changes in volume consumed with no changes in price assumptions  Private operators will use leased facilities Information Utilized in Analysis  Historical financial performance of ABC  Industry forecasts  Risk Management Associates  Historical financial performance of various public companies 15

17. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Valuation process Analyze historical operating trends of the operations (may be wholesale, retail or both Research various industry data sources for historical and forecasted trends, growth expectations, and cost structures Consider traditional valuation methodologies to develop indications for the various scenarios developed Investigate publically traded comparable companies Research comparable transactions Compile, research and synthesize control state trends for comparison and benchmarking Analyze and conclude indications for the various operational alternatives and scenarios Present results to appropriate stakeholders 16

18. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Considerations Sale or license Number and type of participants Consumption trends (absolute and relative) Price control Advertising control Structures of neighboring states Level and trend of taxation (absolute and relative) Method of taxation Own or lease stores or distribution facilities Other 17

19. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Valuation example (retail operations) Sales  Liquor, mixed beverage and wine expected growth (volume and price) expectations over expected time horizons (licensed or sale) Cost of sales  Historical levels (actual and percent of sales of units)  Public company levels  Market prices and mix of products sold Operating expenses  Historical levels (actual and percent of sales of units)  Public company levels  Consideration of extraordinary, nonrecurring and other operating changes Capital expense and depreciation  Own or lease Working capital requirements  Historical  Changes in working capital due to changes in structure Discount rate  Application of WACC based on publically traded comparables 18

20. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Options for capitalizing on value 19 Products  Increase number of SKUs available - If state continues to run wholesale operations, establish looser criteria for delisting products, including: –Tiered product selections, with stringent criteria for products always available on shelves - If state steps away from wholesale operations, limit products available by requiring annual brand registration with registration fees to cover cost of quality testing Exclusivity  Create an economy of scale at the wholesale level through exclusivity: - Limit the number of wholesalers to two or three statewide to ensure that wholesale costs aren't’t passed along in the form of high retail prices - Establish exclusive relationships between wholesalers and suppliers by brand Pricing  Remove uniform price restrictions

21. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Options for capitalizing on value 20 Marketing  View marketing from the perspective not of increasing consumption, but of encouraging alcohol business already existent customers to trade up by brand and beverage type: - Harmonize marketing restrictions across beverage types - Allow point of sale advertising  Create a comprehensive marketing plan - Marketing statewide by consumer cluster and category management, using promotions and advertising to get customers in the store, will improve sales - Coordinate marketing campaigns with those of suppliers to stretch marketing dollars and avoid oversaturation Availability  Harmonize hours and days of sale along with point-of-sale across beverage types - Allow sale of spirits everywhere beer is sold

22. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Options for capitalizing on value 21 Other  Take advantage of private sector expertise through contracting private management operation of ABC system  Eliminate redundant control mechanism (state and local overlap)  Protect local revenue share by using a percentage of licenses or fees to cover local enforcement costs

23. CONFIDENTIAL January 10, 2011 Valuation Research Corporation Process to pursue P3/restructuring options 22 Evaluate current performance of the business 1 Develop valuation model and evaluation criteria 2 RFP preparation RFP process and award 3 4 Analysis of current revenues, costs, and growth Comparison of State to other control state systems Summary of relative position of State Provide a view on future business performance based on various scenarios Consider the impact of value drivers (e.g. availability, etc.) and moderators (e.g. competition) Attract high quality potential private sector partners Develop deal structure that maximizes return to the state while providing adequate incentive to private parties Stakeholder communications Develop procurement documentation, manage bidder communications, and establish data room for due diligence Provide support to evaluation team and prepare documentation to support award Transition 5 Facilitate transition from current management structure to future structure