Bain Capital and Dollarama Harvard Case Solution & Analysis

Lower EBITDA multiple

Dollarama’s enterprise value to EBITSA multiplier of 2.78 times is lowest EBITDA multiplier in comparison to its competitors which means that Dollarama is an attractive leveraged buyout target because Bain Capital will be able to manage the business in order to improve its EBITDA multiplier after its acquisition.

Steady Cash Flows

Analysis of Dollarama’s cash flows during the past three years’ performance reveals that its generating steady cash flows and these cash flows are also improving year-by-year, therefore, these steady cash flows will make sure that after a leveraged buyout Dollarama can generate sufficient cash flows to finance its working capital requirements and daily cash flow needs.

Appropriate Range of Enterprise Value to EBITDA Entry Multiples

Dollarama has five competitors within the Canadian retail industry with different characteristics and different enterprise value to EBITDA multipliers ranging from 6.20 times to 13.10 times and these multipliers are based on the estimated results of 2005.

Among its key competitors, Shoppers Drug Mart (SDM) has the highest enterprise value to EBITDA multiplier of 13.10 times but considering this multiplier as valuation of Dollarama would not be a reasonable comparator because SDM operates through licensing and has no cost regarding store operations, meanwhile, its products mainly consist of drugs and medical equipments, therefore, SDM’s enterprise value to EBITDA multiplier will need to be adjusted before it can be used for valuing Dollarama.

On the other hand, Loblaw Companies Limited’s sales revenues has grown by 4.6% during the year 2002, which are quite below in comparison to Dollarama’s sales growth and its operating and net income margins are also below than that of Dollarama.

However, Forzani Group is quite similar to Dollarama in terms of EBITDA; in fact it is littler lower than Dollarama because Forzani Group expects to generate EBITDA and net income of $76.50 million and $26.49 million during the year 2005. In comparison to this Dollarama expects to generate EBITDA and net income of $109.75 and $47.68 during the same year. Therefore, its enterprise value to EBITDA multiplier of 6.20 times can be used to value Dollarama.

Meanwhile, an average enterprise value to EBITDA multiplier of 9.84 times based on five key competitors can also be used to value Dollarama because Forzani Group is a little lower enterprise in terms of EBITDA and net income, therefore, an average of five competitors will be more reasonable. On the other hand, a mid value of enterprise value to EBITDA multiplier of 9.70 times can also be used to value Dollarama’s operations. In this way, it gives a range for enterprise value to EBITDA multiplier of 6.2 times to 9.84 times.

Potential Transaction Price

Dollarama’s acquisition is a leveraged buyout and it will be financed by a syndicate finance based on three types of loan that include CAD120 million term loan ‘A’ and this loan will be raised from Canadian market. However, the acquisition price is to be calculated in USD and exchange rate of CAD1. 1923/USD has been calculated using the conversion rate applied on term ‘b’ loan, which gives a value of around $100.65 million. In addition to this, $201.3 million will also be raised under loan term ‘B’. Furthermore, $240 will be raised in the form of senior subordinate debt and this will make a total of $541.95 million in the form of loan.

Based on the EBITDA multiplier range calculated above, average valuation of Dollarama would be $941.62 million and mean value would be equal to $1,064.54 million. Meanwhile, initial valuation estimates of Louis shows that Dollarama would be valued in between $900 million to $1,200 million and average valuation of $1,050 million, which is closer to mean valuation that has been calculated above. Therefore, the acquisition price of Dollarama would be $1,064.54 million, which would be financed by long term debt of $541.95 million and difference would be financed by equity of Bain Capital of $522.59 million. In addition to this, transaction cost in the form of Luis fee of $22.5 million and Bain management fee of $3 million for three years would also be paid, therefore, this make a total transaction cost of $1,096.04 million for the acquisition of Dollarama. Moreover, a detailed calculation has been performed in excel spread sheet...............................................

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