Bain Capital and Dollarama Harvard Case Solution & Analysis

Assessment of Dollarama's Attractiveness as an LBO Candidate

Experienced and Efficient Management

Long association of Rossy and other members with Dollarama for around 25 years confirmed that the management had complete knowledge of the business, which allowed the management to control the business operations effectively. For the mean time, Rossy was willing to continue working at Dollarama that would help Bain Capital Private Equity in order to manage the business operations after its acquisition.

Tangible Assets

Dollarama owns around 349 corporate stores, which are the core assets of business and leveraged buyout will help Bain Capital in order to negotiate with the bank for securing debt capital because bank will need tangible assets as collateral of debts and Dollarama’s corporate stores can be used in this regard.

Low Capital Expenditure Requirements

Since, Dollarama owns its corporate store and it needs not to incur capital expenditure on a regular basis, which are necessary to be incurred in case of franchise store business where companies have to rebuilt their franchise store that required capital expenditure of around $125000 to $255000). Meanwhile, franchise businesses are required to pay monthly loyalty fees that are equal to 6% of their net sales. Therefore, Dollarama will not be required to make capital expenditure on regular basis and no royalty fee will be needed, which will leave enough cash and Bain Capital can use that surplus cash for payment of interest and principle in case of leveraged buyout.

Lower Working capital requirements

Dollarama’s most of the sales are in cash and its does not allow credit because the value of its merchandise has the price of just one dollar each and it makes sense for not offering a credit facility. Therefore, Dollarama has no substantial investment in trade receivable, which minimizes the high working capital requirements.

Surplus Assets

Dollarama owns four warehouses with capacity to store the merchandise of 735 stores, however, it currently has only 349 stores and its warehouse facility is excessively underutilized and Bain Capital can sell off the extra warehouse after the acquisition in order to generate cash for business and loan repayment. However, Dollarama is expecting to expand its business in future that will require more warehouse facility, therefore, Bain Capital can rent the extra storage capacity, which will generate additional cash inflows for its business.

Businesses Lacking a Succession Plan

Rossy is looking for a strategic direction and expansion strategies; meanwhile, making decisions regarding store development and site selection that shows other family members especially his son is not very much involved in business operation at strategic level, which will create difficulties of succession planning in near future and Rossy will be more concerned about losing its established business by his inexperienced son. Hence, he will be more willing to sell his business at a reasonable price, which will give more bargaining power to private equity investors for negotiation on acquisition price. Meanwhile, Bain Capital can use the future expected results to secure loan from bank.

Low or Zero Leverage Ratios

Dollarama has not leveraged its business with debt in order to gain the tax shield advantage, therefore, Dollarama’s nil commitment for debt payments will enhance the cash flows and Bain Capital will be in a better position to negotiate with bank for good credit terms and low interest rates because the financial risk will only be limited to the debt secured by Bain Capital.

Listing on Stock Exchange

Dollarama is listed on stock market that will enable Bain Capital to secure debt capital easily, meanwhile, its valuation can easily be made through its stock valuation and bank will be more willing to lend money for stock listed company.

Multi-Pricing Strategy

Consideration of offering more products at higher price will increase the sales revenue of Dollarama and multi price strategy for charging prices among $1 to $3 for its different products will be introduced in order to cover the high quality products that are being considered to be launched post-acquisition.

Improvements in Inventory Management

Currently, Dollarama stores do not use bar code on inventory items, which causes difficulties in stock count and takes time as well as cost in order to count the inventory every month. Thus, introduction of barcode system and use of point of sale devices will enable the real time maintenance of inventory record and will save cost of inventory management.

Accept Debit Card Transactions

Currently, Dollarama only offers cash sales and do not accept credit card or sales on credit terms and research has revealed that debit card transactions have more tendencies to occur in contrast to cash sales, therefore, introduction of debit card facility will increase revenues of Dollarama........................

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Senior Researcher large Canadian bank mandated to study the potential Bain Capital redemption Dollarama. Bank offers $ 600 million in financing transactions with Bain Capital Private Equity (Bain), the acquirer. Its role is to contemplate the potential financial structures, various scenarios of the potential of different strategic directions, and finally, to assess the ability to repay their debts Dollarama after. "Hide
by Ken Marcus, Amanda Chan, Wayne Adlam Source: Richard Ivey School of Business Foundation 15 pages. Publication Date: Mar 08, 2012. Prod. #: W12782-PDF-ENG

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