work sample - m&a private equity buyside advising

2/9/2009

2009 ACG Cup FinalsBuy Side Recommendations

SOX GroupAggarwal, Siddharth

Betha, SamuelDasgupta, Subhojit

Gaurav, AnanyaKaushik, Ravi

Executive Summary

FashionCo: Purchase valuation

– Enterprise Value – $80-92Mn

– Debt Financing of Deal – $25Mn

Exit scenarios: (3 years)

– Base Scenario – EV $194Mn, IRR 35%

– Upside Scenario – EV $199Mn, IRR 37%

– Downside Scenario – EV $124Mn, IRR 12%

Recommendation: Purchase FashionCo. with exit horizon of 3years

Exit strategies: IPO, strategic sale, secondary placement

Risks and mitigation

FashionCo. – Is it a good buy for Sox Group?

FashionCo:

40yrs+ history, low cost apparel – better prospects despite economic downturn

Financial strength and low debt levels (details in Appendix 1a)

Owned by passive investors not interested in apparels business

Sox Group:

Previous apparel industry experience

Better cost management: reduction of COGS by 2% and SG&A by 15%

Current Valuation:

Equity Value – $68-80Mn (inclusive of 29% control premium)

Enterprise Value – $80-92Mn

Asking price – $90Mn

Debt financing upto $37Mn (4x EBITDA) at LIBOR plus 400-500bps

Further details in Appendix 1b

Valuations: Assumptions and Base Case

Constants for all scenarios:

Purchase Price assumed at $90Mn

Debt Financing of $25Mn (3xEBITDA)

Exit EBITDA multiple (7.6) is 0.5x less than Entry EBITDA multiple (more info in Appendix 5)

IRR calculated excluding intermediate cash flows from FashionCo

Base Case

Exit Valuation (after 3 years):

– EBITDA – $25Mn

– Enterprise value – $194Mn

– Equity value – $160Mn

– IRR – 35% or 2.5x cash returns

Base Case Assumptions 2009 2010 2011

Revenue growth 0% 1% 2%

COGS savings 0% 1% 2%

SG&A savings 0.0% 7.5% 15.0%

Further details in Appendix 2a

Valuation Scenarios: Upside and Downside

Upside









SG&A savings 0.0% 7.5% 15.0%

Upside Assumptions 2009 2010 2011



SG&A savings 15.0% 15.0% 15.0%

Downside Assumptions 2009 2010 2011



SG&A savings 0.0% 0.0% 0.0%

Downside






Further details in Appendix 2b Further details in Appendix 2c

Valuation Scenarios: IRR in different scenarios

Growth Rates vs. Leverage

Expected IRR: 34-41%

Debt Financing of 30-40%

Revenue Growth 0-2%

-6% -4% -2% 0% 2% 4% 6%

0% 21% 22% 24% 25% 26% 28% 29%

10% 23% 25% 26% 28% 29% 31% 32%

20% 26% 28% 29% 31% 32% 34% 35%

30% 29% 31% 33% 34% 36% 38% 39%

40% 34% 35% 37% 39% 41% 43% 45%

50% 39% 41% 43% 45% 47% 49% 51%

Revenue Growth

Lev

erag

e

50 60 70 80 90 100 110

0% 54% 45% 37% 31% 26% 22% 18%

10% 58% 48% 41% 34% 29% 24% 20%

20% 63% 53% 45% 38% 32% 27% 23%

30% 69% 58% 50% 42% 36% 31% 26%

40% 76% 65% 56% 48% 41% 35% 30%

50% 86% 73% 63% 55% 47% 41% 35%

Lev

erag

e

Purchase Price ($Mn)

Purchase Price vs. Leverage

Expected IRR: 36-56%

Debt Financing of 30-40%

Purchase Price of $70-90Mn

Exit multiple of 7.6x

Exit Strategies

Strategy 1: IPO

Merits

– Highest potential payoff

– Motivation for management (with ESOPs)

Demerits

– Open to public scrutiny/analysts

Strategy 2: Strategic Sale

Merits

– Many potential buyers – competing companies

Demerits

– M&A deals have high failure rates

Exit Strategies

Strategy 3: Sale to another PE / financial institution (Secondaries)

Merits

– Source of liquidity for private equity investments

Demerits

– Suppressed valuation if no other bidders

Risks and mitigation

Risks Mitigation

Execution risk - management attrition Earnout structure, ESOPs

Macro-economic risk Insurance, recourse clauses

Interest rate risk Swaps, refinance debt, see appendix 3 for impact on IRR

Liquidity risk Exit scenarios, synergies from existing portfolio companies

Delayed exit Partial sell-out, see appendix 4 for impact on IRR

Competitive bids & price war Due-diligence, competitive intelligence

Final Considerations

Quality of management of FashionCo

Long term and short term strategies

Competitive landscape

Sustainable competitive advantages

Organizational culture and leadership issues

PE firm strategy

Recommendation

Purchase FashionCo– Start negotiating at $70Mn with a ZOPA of $70-90Mn

– Use maximum debt financing feasible (upto $37.2Mn)

Retain Management– Use ESOPs to motivate management team

Exit Planning– 3year horizon with $150-160Mn price

– IRR of 30-40%

Other Bargaining Chips– Earn-out clause

THANK YOU!

Appendix 1a – FashionCo: Financial Highlights

Revenue 10% 4% 3% 4%Earnings 2% 4% 3% 1%ROS 6% 8% 6% 5%ROE 23% 28% 20% 9%Debt Ratio 24% 17% 10% 50%Times Interest Earned 2.2x 3.7x 4.2x 1.9x

Cash Flows Free Cash Flow ($Mn) 0.8 16.3 12.8 NA

Leverage

Financial Highlights 2008Industry

Avg. 2008

Growth

Profitability

2006 2007

Appendix 1b – Purchase Valuation

Comparable Companies Summary of Valuations

Sales EBITDA EBIT Earnings Minimum 28.40 Fashion Co 195.00 12.20 11.40 5.76 Maximum 183.08 Multiple 0.38 4.61 6.48 8.47 Median 61.80 EV 73.62 56.26 73.83 48.77 Mean without outliers 59.36 Equity 64.62 47.26 64.83 39.77 Mean 69.67

Comparable Transactions Valuations - Range Median 40th % 60th %Selected Equity Value 61.80 53.23 64.06

Sales EBITDA Control Premium 29% 29% 29%Fashion Co 195.00 12.20 Equity with Cont Prem 79.51 68.48 82.41Multiple 0.99 7.80 Debt 11.60 11.60 11.60EV 1.00 1.00 Less Cash (2.60) (2.60) (2.60)EV 192.08 95.16 EV 88.51 77.48 91.41Equity 183.08 86.16

NAV 28.40DCF-WACC 61.80

DCF-CAPM 51.09

Appendix 2a – Base Case Income StatementIncome Statement(In $ millions)

2008 2009 2010 2011Actual Projected Projected Projected

Revenue 195.0$ 195.0$ 197.0$ 200.9$ % Growth 2.6% 0.0% 1.0% 2.0%

Cost of Goods Sold 153.6$ 150.2$ 149.7$ 148.7$ Gross Profit 41.4$ 44.9$ 47.3$ 52.2$

Gross Margin 21.2% 23.0% 24.0% 26.0%SG&A 28.4$ 28.30$ 26.52$ 26.52$ Dep & Amrt 0.8$ 0.7$ 0.6$ 1.0$ Oth Exp (Inc) 0.8$ 1.2$ 1.4$ 0.3$

Operating Income (EBIT) 11.4$ 14.6$ 18.7$ 24.4$ Operating Margin 5.8% 7.5% 9.5% 12.2%Addn Interest Exp 2.12 2.01 1.91Interest Exp (Net) 1.8$ 1.0$ 1.1$ 1.2$ Oth (Inc) Exp -$ -$ -$ -$ EBT 9.6$ 11.5$ 15.6$ 21.3$

40% Taxes 3.8$ 4.6$ 6.3$ 8.5$ Net Income avbl to Common 5.8$ 6.9$ 9.4$ 12.8$

3.0% 4.0% 4.1% 4.1%Add: Taxes 3.8$ 4.6$ 6.3$ 8.5$ Add: Interest Exp 1.8$ 3.1$ 3.1$ 3.1$ Add: Oth (Inc) Exp -$ -$ -$ -$ Plus: Dep & Amrt 0.8$ 0.7$ 0.6$ 1.0$

Adjusted EBITDA 12.2$ 15.3$ 19.3$ 25.4$ EBITDA Margin 6.3% 7.4% 7.7% 7.9%

Free Cash Flow to Firm 12.8$ 3.6$ 11.8$ 15.4$ Free Cash Flow to Equity 11.0$ (0.7)$ 7.4$ 11.0$

Fiscal Year Ended December,

Appendix 2b – Upside Case Income StatementIncome Statement(In $ millions)


Revenue 195.0$ 195.0$ 198.9$ 206.9$ % Growth 2.6% 0.0% 2.0% 4.0%







Free Cash Flow to Firm 12.8$ 8.5$ 14.3$ 15.8$ Free Cash Flow to Equity 11.0$ 4.2$ 10.1$ 11.6$


Appendix 2c – Downside Case Income StatementIncome Statement(In $ millions)


Revenue 195.0$ 195.0$ 195.0$ 195.0$ % Growth 2.6% 0.0% 0.0% 0.0%







Free Cash Flow to Firm 12.8$ 3.7$ 9.2$ 9.9$ Free Cash Flow to Equity 11.0$ (0.8)$ 4.8$ 5.4$


Appendix 3 – Valuation Scenarios: Interest Rate Risk

LIBOR Decreases

LIBOR – 300bps, Cost of debt – 750bps









SG&A savings 0.0% 7.5% 15.0%

LIBOR Increases

LIBOR – 500bps, Cost of debt – 950bps






Appendix 4 – Valuation Scenario: Delayed Exits

IRR in different cases with delayed exit

3yrs 4yrs 5yrs

Best 37% 26% 21%

Upside 35% 25% 20%

Downside 12% 9% 7%

Time to Exit

Sce

nar

io

Appendix 5 – IRRs at different Exit EBITDA Multiple

Entry at 8.1x EBITDA

Positive returns at or above:

– Base: 4x EBITDA

– Upside: 4x EBITDA

– Downside: 6.5x EBITDA

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

8.0

0 7

.50

7.0

0 6

.50

6.0

0 5

.50

5.0

0 4

.50

4.0

0 3

.50

3.0

0 2

.50

2.0

0

Exit EBITDA x

IRR

Base

Upside

Downside

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