How much cash will Carters generate in the next 5 years 2002-06 based on management estimates?
The present value of cash flow for next five years based on the management assumptions is $1764. Working is shown in the exhibits below.
How realistic are management forecast in light of Carters historic performance?
After analyzing the case study and looking at the past financial performance, it seems that the management has made more realistic assumption and has been successful in achieving this. As discussedin thiscase that previously, the company hadsome strategic problems, due to which it developed new strategies and forecasted revenues, which made it successful in meeting itstargets.
What price should the BP team bid?
The bid price set is the highest that the buyer is willing to pay for a good. After analyzing the future(five years) cash flow to equity based on management’s assumption, the bid price should be around $417 million because the estimated cash flow to the equity would be $417 million thus,the bid price should not be more than this. However, before bidding, other non-financial factors must be considered such as any synergy between other group companies.
Exhibits:-
| Assumptions | |||
| Debt Beta | 0.2 | Assumed | |
| Target E/EV | 90.0% | ||
| Target D/EV | 10.0% | ||
| Risk Free | 5.2% | ||
| MRP | 6.0% | ||
| Tax Rate | 35.0% | ||
| Staple Financing, in millions | |||||
| LIBOR | 4.3% | ||||
| Revolver | 60 | 7.3% | LIBOR + 3.00% | ||
| Term Loan B | 125 | 8.05% | LIBOR + 3.75% | ||
| Senior Sub | 175 | 10.88% | |||
| Total Debt | 300 | ||||
| Cost of Debt | 6.4% | ||||
| New WACC | 10.56% | ||||
| Selected Data on Transactions Comparable to Carter's (in millions of dollars over the previous 12 months except where noted) | ||||||||||
| Target Name | Acquirer Name | Value of Transaction | Target: Revenues | EBIT | EBITDA | Pretax Income | Net Income | Transaction Date | Value of Trans / EBITDA | |
| Too Inc | Financial buyers | 581.1 | 376.9 | 28.5 | 39.0 | 28.5 | 17.1 | 24-Aug-99 | 14.9x | |
| McNaughton Apparel Group | Jones Apparel Group | 565.4 | 521.9 | 67.6 | 80.3 | 43.5 | 25.7 | 19-Jun-01 | 7.0x | |
| Unitog Co | Cintas Corp | 370.8 | 275.2 | 25.3 | 42.7 | 20.2 | 12.5 | 24-Mar-99 | 8.7x | |
| Donna Karan International | LVMH SA | 247.2 | 662.9 | 23.3 | 28.7 | 20.8 | 18.4 | 27-Nov-01 | 8.6x | |
| Koret of CA (Levi Strauss) | Kellwood Co | 141.6 | 295.4 | 11.2 | 15.4 | 5.0 | 2.3 | 29-Apr-99 | 9.2x | |
| Happy Kids Inc | HIG Capital LLC | 119.6 | 170.1 | 19.9 | 20.4 | 18.6 | 9.1 | 17-Dec-99 | 5.8x | |
| Average | 9.0x | |||||||||
| Median | 8.6x | |||||||||
| Carter EBITDA from Exh 4 | $ 61.14 | |||||||||
| Purchase Price using average mult | $ 553.01 | |||||||||
| Expected 2001 EBITDA from Carter Forecast | $ 75.10 | |||||||||
| Purchase Price using average mult | $ 679.25 | |||||||||
| Fore casted Financial Data and Ratios, Exhibit 7a | |||||||
| 2001E | 2002P | 2003P | 2004P | 2005P | 2006P | ||
| Net Sales | 537,300 | 618,800 | 711,600 | 817,300 | 938,800 | 985,740 | |
| % growth | 13.8% | 15.2% | 15.0% | 14.9% | 14.9% | 5.0% | |
| Management | 13.8% | 15.2% | 15.0% | 14.9% | 14.9% | 5.0% | |
| Gross Profit | 221,900 | 260,900 | 302,400 | 348,300 | 400,400 | 420,420 | |
| margin | 41.3% | 42.2% | 42.5% | 42.6% | 42.7% | 42.7% | |
| Management | 41.3% | 42.2% | 42.5% | 42.6% | 42.7% | 42.7% | |
| SG&A | 146,800 | 172,200 | 193,300 | 214,100 | 238,800 | 250,740 | |
| % of sales | 27.3% | 27.8% | 27.2% | 26.2% | 25.4% | 25.4% | |
| Management | 27.3% | 27.8% | 27.2% | 26.2% | 25.4% | 25.4% | |
| EBITDA | 75,100 | 88,700 | 109,100 | 134,200 | 161,600 | 169,680 | |
| % of sales | 14.0% | 14.3% | 15.3% | 16.4% | 17.2% | 17.2% | |
| Depreciation | 20,000 | 21,100 | 21,800 | 24,400 | 28,100 | 29,505 | |
| EBIT | 55,100 | 67,600 | 87,300 | 109,800 | 133,500 | 140,175 | |
| % of sales | 10.3% | 10.9% | 12.3% | 13.4% | 14.2% | 14.2% | |
| Capex | 20,500 | 19,500 | 21,000 | 21,500 | 22,500 | 22,500 | |
| % of sales | 3.8% | 3.2% | 3.0% | 2.6% | 2.4% | 2.3% | |
| Management | 3.8% | 3.2% | 3.0% | 2.6% | 2.4% | 2.3% | |
| 2002 | 2003 | 2004 | 2005 | 2006 | |||
| FCF | |||||||
| EBIT | 67.6 | 87.3 | 109.8 | 133.5 | 140.2 | ||
| -Interest Payments | 29.1 | 28.7 | 28.3 | 27.9 | 27.5 | ||
| EBT | 38.5 | 58.6 | 81.5 | 105.6 | 112.7 | ||
| -Taxes | 13.5 | 20.5 | 28.5 | 37.0 | 39.4 | ||
| Net Income to Equity | 54.1 | 66.8 | 81.3 | 96.5 | 100.7 | ||
| +D&A | 21.1 | 21.8 | 24.4 | 28.1 | 29.5 | ||
| -Capex | 19.5 | 21.0 | 21.5 | 22.5 | 22.5 | ||
| -dNWC | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| -Debt Paydown | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | ||
| Cash Flow to Equity | $55.7 | $67.6 | $84.2 | $102.1 | $107.7 | ||
| Bid price | $417.35 | ||||||
| Terminal Value | $2,690.4 | ||||||
| Debt Outstanding | $275.0 | ||||||
| Total Cash Flows to Berkshire | $55.7 | $67.6 | $84.2 | $102.1 | $2,523.1 | ||
| NPV | $1,763.8 |
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