USE APV valuation
IF3115 Coursework IF3115 Alternative Investments and Private Equity Coursework Introduction The Bunhill Partners and William’s case illustrates some of the key issues facing buyout firms when bidding for a company. In addition to fundamental analysis of the target company and due diligence, buyout fund executives must forecast future cash flows, determine appropriate capital structures for the company in light of the company’s future cash flow and market conditions, value the company, decide how much to pay for the company against competitive bids, and understand the motivations of the key players involved in the process, including company management. The central decision you must make is to decide if Bunhill should make a bid for William’s and, if so, how much to bid. This decision must be made in the overall context of William’s situation and potential competitive bids, not based only on the valuation calculation. Both Bunhill and William’s are fictional and thus all of your work needs to be based on information contained in the case and not on research from secondary sources found via the internet. Submission The deadline for submission is 4pm Monday 18th November and the standard penalties for late submission will apply. You are required to submit: 1. An Excel spreadsheet containing the workings for three valuations of William’s: i. Assuming the forecasts provided by William’s management. ii. Assuming historical sales growth rates and EBITDA margin (assume Depreciation and Amortisation and Capital Expenditure remain the same as assumed by management, and working capital continues to be 18% of Net Sales). iii. Using your own assumptions regarding growth rates and margin. 2. A PowerPoint Deck of no more than 15 slides which contains you answers to the following questions: i. Would you make a bid for William’s and if so, how much would your equity bid be? ii. How did you arrive at your answer to (i)? Include factors beyond valuation which might affect William’s attractiveness as a buyout candidate and the appropriate price to pay. As you are going to be graded on the contents of the slide deck and will not have the opportunity to make the presentation yourself you can add commentary in the ‘notes’ section under each slide as necessary to clarify points made on the slides. Objectives and Grading The objective of this assignment is to show that you can use the techniques you have learnt on this module to: • Apply the techniques for modelling and valuing private equity deals. • Recognise the necessity and importance of making business decisions when available information is incomplete and imperfect • Appreciate the long-term perspective required for successful alternative and private equity investment and how fair-minded, ethical behaviour supports good performance. The way I will mark your assignment is as follows: • Valuation (30%): Have you applied the correct techniques and assumptions to arrive valuations that are both accurate and realistic? • Content (30%): Does you presentation utilise the key information contained in the case which is necessary for Bunhill to make an informed decision? • Bid Proposal (20%): Is your final proposal well-reasoned, realistic and consistent with the information contained in your slide deck? • Presentation (20%): Is your proposal clearly presented and easily interpreted by the reader? IF3115 Case Study Bunhill Partners and William’s In 2021, Boston-based private equity firm Bunhill Partners was considering a leveraged buyout (LBO) of the Gordon William Co., a leading producer of baby, and children’s apparel. Bunhill Partners, which had extensive experience investing in the retail and manufacturing sectors, was initially drawn to William’s because of the strong brand name the company had developed during its 120-year history, as well as for the strength of the senior management team. To investigate the option of a potential LBO, Bunhill assembled a team which would have less than four weeks to move through all the stages of a Morgan Stanley led auction—from initial research and due diligence to valuation and bid strategy. In addition to running the auction and thereby serving as William’s agent, Morgan Stanley would be offering financing. Under this arrangement, the winning bidder would have the option to finance the deal through a prepackaged capital structure proposed by Morgan Stanley. William’s William’s was founded in 1901 in Charlotte, North Carolina and over the course of 120 years the company became one of the largest branded manufacturer of toddler and baby apparel in the United States as well as a leading maker of young children’s clothing. Dividing its market into five segments—newborn, baby sleepwear, baby playwear, young children’s sleepwear, and young children’s playwear—the company sought to outfit children for the first six years of life. In the early 2010s, the company found itself struggling having developed unprofitable product lines in swimwear and underwear, and many of its more decorative features (zippers, cut bows, etc.) were not well received by consumers. In 2012, the company installed a new management team led by CEO Robert Frederick, with the intention of “steering it back to its core niche of soft, comfortable clothing.” Frederick arrived with 30+ years of experience in the industry most recently running WG Corporation. Many members of his executive team were also former managers with WG Corporation. With a strategy of simplifying William’s products, Frederick and his team returned to producing what they called “high-volume, basic apparel.” Product design remained relatively consistent from year to year: About two-thirds of the apparel was carried forward from season to season with the same fabric and construction, varying only through color and artistic layout. Frederick and his team also focused on improving the capabilities of their supply chain while exploring offshore sourcing options. Throughout the company’s history, it had relied on domestic manufacturing to produce its clothing. But amidst an increasingly global environment in which more and more U.S. companies were outsourcing production abroad, Frederick sought cost improvements and “manufacturing flexibility” through manufacturing abroad. In 2014, William’s closed two of its domestic sewing plants and made plans to close six additional sewing plants and its main textile mill. Central America and Mexico soon became the company’s first international production sites. By 2016, with operating and financial performance beginning to turn around, William’s was acquired in a leveraged buyout by Moneycorp a Dubai based private equity firm. Moneycorp paid $480 million. This included $130 million in senior debt and $210 million in subordinated debt. The purchase was consistent with the firm’s philosophy of injecting capital into North American and European companies and waiting for the business to improve before selling it or taking it public. At the time of the Moneycorp LBO, William’s was doing business with over 400 wholesale accounts, including department stores, national chains, and specialty stores. It had also established a major domestic presence with its outlet stores: The company operated roughly 150 retail outlet stores across the country. Consumers could purchase William’s merchandise through these outlets stores at a deep discount, with the outlet stores offering new products, holdovers from excess inventory, as well as assorted William’s brand accessories and licensed products. Beginning in 2020, William’s launched a new brand called Nippers. A departure from its two mainstay brands, William’s and William’s Classics, the Nippers brand was aimed at the discount channel. Its introduction coincided with a series of conversations with executives from Dollar General, a general merchandise retailer. Dollar General was interested in expanding the store’s offerings in baby and children’s “lifestyle” clothing. With the assurance that William’s could keep its shelves “automatically replenished,” the companies struck a long-term deal in which the Nippers brand was made immediately available at all 1,000+ Dollar General stores across the country. By 2021, Frederick seemed to have William’s on a path of operational and financial success. From 2012 to 2020, the company increased revenue at a compound annual growth rate of 9.5%, with earnings before income, taxes, depreciation, and amortization (EBITDA) increasing 22.1%. (See Exhibit 1 for selected financials.) Analysts attributed much of the company’s growth to improved brand recognition, a lower cost structure, expansion into the discount channel, and the movement of some manufacturing operations offshore. Up for Sale In mid-2020, having watched over the growth of its investment in William’s, Moneycorp decided it was time to sell its stake in the company. Moneycorp typically looked at a range of exit options, but at the time the initial public offering (IPO) market was at a near standstill. In Bunhill’s view Moneycorp might have been able to take William’s public in 12-24 months, but they wanted liquidity, so to sit and take another year or two to work out of a public stock was not something they wanted. Moneycorp had a network of investors who funded them, but needed to demonstrate good returns coming out to help them keep raising money. Thus, they were looking to generate a win through the sale of William’s. Amidst rumors that a handful of potential strategic buyers had passed on the deal, Moneycorp initiated an auction among financial buyers. Moneycorp justified this choice by stating “William’s business is not particularly affected by to economic swings thus we think that it is a company that financial buyers will find attractive”. Bunhill Partners Bunhill Partners was founded in the early-2000s by five Bayes alumni committed to creating a private equity firm based on successful relationships, hard work, analysis, and open decision making. By 2021, the firm comprised roughly 10 managing directors, 4 principals, 12 investment staff, and 2 advising directors. In a given year, the firm reviewed some 1,200 potential deals, with the intention of whittling the pool down to five to six closed deals. For each deal under serious consideration, Bunhill formed a deal team comprising four to five people. A managing director served as lead partner for each team. A team would typically contain an additional managing director, a principal, and one or two investment staff. While the deal team took responsibility for making a recommendation and then doing due diligence and bringing back an investment package the ultimate investment decision rested with the firm as a whole. In analyzing a potential deal, Bunhill relied largely on its internal staff to carry out the analysis and rarely relied on consultants. The firm used law firms to carry out due diligence on contracts, leases, patents, and trademarks and PwC handled the firm’s accounting due diligence, which principally involved looking at quality of earnings. Bunhill believed that getting capital structure right was an art, not a science. Understanding that holding the purchase price constant and increasing leverage increased equity returns they felt that the equity portion of the capital structure needed to be at least 25% in order to achieve the desired ratings outcome and demonstrate to lenders that Bunhill was making a serious commitment. After taking an equity position in a private business, Bunhill saw its role as supporting management in a variety of ways, including a) helping to prioritize key objectives, b) reviewing organizational design, c) helping to build the bench of key managers, and d) even leading the integration process in the event of a subsequent acquisition. Bunhill’s typical exit strategy was a sale of the company, rather than an IPO, by a ratio of about four to one. The firm’s conditions for exiting via an IPO were threefold: 1) a strong brand, 2) strong growth potential, and 3) a dramatic need for capital. Unlike many other private equity firms that often used an IPO to close out their ownership stake, Bunhill was more likely to initiate an IPO in the middle of its ownership with the intention of staying involved with the management and helping the company to grow. In many cases, a follow-on offer would ensue. Bunhill’s Bid for William’s When Bunhill Partners received an invitation to participate in the auction for William’s, the investment team was initially optimistic about a potential match between the two organizations. The firm had developed a focus on “building strong, growth-oriented companies in conjunction with strong, equity-incented management teams.” Bunhill viewed William’s not simply as an apparel company in the retail space, but more as a consumer products company. William’s being a really strong brand that could be leveraged across multiple channels was something that they found very appealing. Initial Meeting In late 2020 Bunhill’s five-member team traveled to New York to meet with William’s management. The William team included the CEO, president of marketing, executive vice president of operations, executive vice president of global sourcing, and CFO. The meeting provided an opportunity for the respective managers to get to know one another, to discuss the ground rules for the auction, and to begin a dialogue about the future growth strategy for William’s. The Bunhill executives were very impressed with the William team, acknowledging their experience, commitment,