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Rutvik will begin with the evaluation of the three companies for an LBO followed up with an in-depth
analysis of the chosen company & its macro-economic outlook.
Dharmanshu would then take up the investment highlights for the PQR Capital followed up with a
Comparables Valuation.
I would then move on to the DCF & LBO analysis followed up with a strategic buyer recommendation
for the chosen company in 2021.
We identify Columbia Sportswear as a good LBO candidate due to some reason assigned in the
following slides as well as suggest reason for not picking the other two companies. Then we describ
Columbia Sportswears valuation was arrived at using four methods, while the premium was arrived
using an conservative case estimates for the Buyout. We have also outlined Adidas as a strategic exit
for Columbia Sportswear, which we would look at in depth late in the slides.
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Thanks Dharmanshu!!
Base Case with a CAGR of 5.97% as per consensus estimates over the projection period.
Upside Case where the company performs better than the industry with a CAGR of 7.65%
Moving on to WACC:
Risk Free Rate: 20 year US Treasury Bond Rate at 1.9%, Cost of Pre Tax Debt from Comparable
Companies rated Debt, Equity Risk Premium from Damodaran July, 16 estimates at 6.3% and 5 year
Regression Beta at 0.96
LTM EBIDTA has been taken to value Terminal Value, & our Tornado Chart reveals a valuation range
of 63 to 80 dollars for different simulated cases.
As per William Blair Leveraged Market Survey, we have targeted a leverage EBIDTA multiple in the
band of 6.0x to 6.5x.
Debt is broken down into two components Term Loan & High Yield Bond.
The Term Loan of 1.5 billion dollars is at 32% of the total sources of fund. Its interest rate is the sum
of floating libor and a fixed spread. The floating libor is plotted from the Eurodollar futures and fixed
spread of 250 basis points obtained from the debt ratings of comparable companies.
The second part of leverage is High Yield Debt at 8.7% of the total sources of funds.
Exit Multiple is taken at 13.9x equal to the implied entry EBIDTA multiple.
The Revenue & other projections are as taken in the DCF, with five different cases of Base, Sponsor,
Management & two downside cases.
Thus, with the Sponsor case the entire deal yields us an IRR of 24.14% and cash return of 2.948x with
exit in 2021.
We shortlisted five companies viz Nike, Addidas, VF Corp, Under Armour & Lululemon. We negated
Nike on the basis of a strong US presence and its lack of focus on outdoor adventure sports category.
On the other hand Addidas has shown interest in this segment when it acquired Five Ten USA, a
climbing and hiking apparel & shoes Company. VF Corp was negated as it has directly competing
brands like The North Face & Timberland. Lululemon was negated due to abysmal performance &
low growth prospects. UnderArmour & Addidas both could be a strategic buyer, but Underarmour
was ruled out as 87% of its revenues come from North America, similar to Columbia.
Addidas has developed a comprehensive five year strategic roadmap till 2020 called Creating the
New where they are focussing on organic growth through its brands viz. Addidas, Reebok &
TaylorMade. A key focus being generating strong cash flows.
Bu 2021, Addidas having implemented its plan, would be intent to grow inorganically by acquiring
strong niche sports brands up for sale, while the PQR capital would be looking to make an exit from
Columbia Sportswear.
Moving on to Synergies:
First, Financial Synergies in term of predictable & stable cash flows: At present 75% revenues of
Columbia Sportswear are concentrated in last two quarters, while Addidas has a spike in the first
two.
Second, Geographical & Product Expansion: At present only 20% revenues of Addidas come from
North America, where it has a clear intention of growing. Acquiring Columbia Sportswear would
strengthen In US. Further Addidas would strengthen its position in outdoor adventure sports
category where it is a minor player.
Third, Economies of Scale: Both Addidas & Columbia Sportswear have their manufacturing
outsourced in the China & South-East Asia region. At present COGS of Columbia are 25% of Addidas
in value terms. Merging the two would build economies of scale in production.
Fourth, Acquiring Brand Names: Addidas would acquire four prominent brand names each successful
in its niche segment.
Fifth, Combination of different functional strengths: Columbia is strong in product design including
electronics, material & graphic design while Addidas being strong in marketing, sales, distribution &
supply chain management.
Thus owing to the above factors, we recommend Addidas as the Strategic Buyer of Columbia
Sportswear in 2021.
We first prepared a shortlist of potential acquirers.