BAIN CAPITAL AND DOLLARAMA Harvard Case Solution & Analysis



Question 4

The explicit free cash flows for Dollarama for the period 2006-2010 have been forecasted in excel spreadsheet as shown in exhibit 1 in the appendices. These are based on following assumptions:

  • We have taken EBITDA and then deducted depreciation and interest to arrive at EBT. We assume the interest already provided is the right amount as calculated for holding period.
  • The taxes provided in LBO-IS sheet have been used for the holding period.
  • Depreciation is the only non-cash expense and it has been added back to compute the unlevered FCF.
  • We assume the projections given in exhibits to be accurate.

Question 5

The APV for Dollarama has been computed using an LBO model of valuation. We have taken the unlevered FCF calculated in previous question. The assumptions are:

  • We have computed the unlevered cost of equity by using capital asset pricing model.
  • The risk free rate for 10 years’ t bills in US has been used.
  • We have taken average of the equity beta of all comparable companies to compute our asset beta.
  • Market return has been assumed to be 4.5%, slightly higher than Rf.
  • We have taken all the multiples of EV/EBITDA of all the comparable companies and taken their average value. This is done to identify the most suitable exit multiple in order to use for Dollarama for computing its exit value. This is shown in exhibit 2 in the appendices.
  • The PV of tax shield has been computed by calculating the historical average interest rate and average tax rates. This is shown in exhibit 3 in the appendices.
  • EV and tax shield PV have been added to arrive at the APV of Dollarama which is $ 1.680 billion.


Question 6

The exit date for Bain Capital would be 2010 and the exit multiple is going to be same EV/EBITDA multiple as at the start of the year which is 11.1 times. This has been assumed as same because anything above this would be considered as an aggressive assumption; therefore, a more conservative approach has been taken here. Based on this the LBO model has been developed and the impact on the internal rate of return has also been calculated.

The calculations are shown in the table in exhibit 4 suggesting an IRR of 3.72% for Bain Capital at Exit. When Bain would exit the investment, then the company needs to benchmark its performance against the computed IRR based on the price that it would pay to acquire Dollarama. Secondly, Bain can also benchmark its performance against the other similar LBO acquisitions if the company has made in the past and lastly, it can compare the performance with its peer companies for similar transactions that they might have conducted.

BAIN CAPITAL AND DOLLARAMA Harvard Case Solution & Analysis




Question 7

The valuation estimates as a starting point have determined the true value of Dollarama to fall in the range of 900 million to 1.2 billion. Therefore, this would be the lowest price that would be acceptable by Dollarama. On the other hand, Bain would be willing to pay a maximum price of $ 1.68 billion as computed by LBO model for Dollarama. Finally, from a qualitative perspective the deal has scope because the cash position of the company is going to improve as shown in the model spreadsheet in excel.

Dollarama is for sure a good LBO target for Bain Capital, however, Bain Capital needs to analyze all the risks to which it is exposed to. For example, the dependence of Dollarama is very high on the Chinese companies as all the merchandise that is sold by the company at stores is made by them. If in future the prices of this merchandise are increased by those Chinese companies, then it is going to create a negative impact upon the sales of Dollarama and as a result it is also going to have a significant impact on the success of the LBO which Bain Capital is thinking over to undertake.


Exhibit 1: LBO Model APV Valuation

    2,006 2007200820092010
Net Sales$740,855$887,281$1,003,899$1,124,016$1,247,737

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