MA AND INVESTMENT BANKING Case Study Acquisition of
M&A AND INVESTMENT BANKING Case Study: Acquisition of Bulgari 1
Bulgari overview Company description 2010 A revenues breakdown Bulgari S. p. A. (“Bulgari”) is an Italy-based company engaged in the production and sale of luxury products. Founded by Sotirio Bulgari in 1905, it has its flagship store in Via dei Condotti (Rome) The main divisions of the company are: n Jewellery n Watches n Perfumes and cosmetics n Accessories n Hotels (Milan, Bali, Tokio and London) Bulgari distributes its products through a network of exclusive stores in the world's major cities, as well as franchise stores, directly and through its subsidiaries Nicola Bulgari Francesco Trapani Others 50. 6%(1) Bulgari S. p. A. 2 49. 4% Source: Fact. Set as of 01 March 2011. (1) 50. 2% of the Company share capital is bound to the shareholders’ pact. (2) Assuming conversion of convertible bond outstanding. By geography Total 2010 A: € 1, 069 m 2011 E key financials Ownership structure Paolo Bulgari By product (2)
Bulgari share price performance since IPO Share price performance Bulgari at IPO n Market capitalisation: € 335 m n Revenues 1995 A: € 198 m n Number of shops: 36 Bulgari in March 2011 n Market capitalisation: € 2, 664 m n Revenues 2010 A: € 1, 069 m n Number of shops: 174 Price (€) Volumes (millions) 3 Source: Fact. Set as of 01 March 2011. .
Bulgari SWOT analysis Key strengths/opportunities üBrand image üStrong competitive position in the jewellery segment üHigh operating leverage üStrong emphasis on innovation üExposure to the Chinese market − Recently signed distribution agreement with Hengdeli Holding üLate-cycle dynamics üSuccessful Beauty & Skincare division üGrowing Accessories division üImproving in-store service and introduction of CRM marketing 4 Key threats/weaknesses ORecently organic growth lagging key peers ORelatively high exposure to the highly competitive Japanese market OVisibility and magnitude of the recovery of the watches division still limited OPotential pressure on margins deriving from rising raw material prices OHigh exposure to exchange rate fluctuations
Share price performance of key luxury players Sector share price performance rebased to Bulgari share price (€) The luxury sector had performed strongly in the twelve months before the transaction 5 Source: Fact. Set as of 01 March 2011.
Valuation methodologies Comment Fundamental valuation DCF n Intrinsic valuation; discounts expected future cash flows n Allows fundamental view on input assumptions n Allows to implement sensitivities on operating and financial assumptions to take into consideration medium / long term prospects Relative valuation Comps Compacqs Brokers’ target prices n Can be used as a relative benchmark to understand if price offered is in line with market valuation of similar assets n Relatively easy application for equity investors n Luxury sector focused on roll-forward EV / EBITDA and P / E n Can be used as a relative benchmark to understand if price offered is in line with valuation levels observed in similar transaction n Relatively easy application for equity investors n Main focus on EV / LTM EBITDA multiple Potential concerns n Potentially difficult to estimate long-term model assumptions n Could lead to over/undervalue the company if assumptions are too aggressive / conservative specificity of the company n Operators in the same sector could have different growth, profitability and risk characteristics n Valuation influenced by market bubbles / downturns widely n Many transactions involved small companies with high growth profile or distressed assets with limited profitability n Potentially high variance between minimum and analysts n Should reflect “consensus” market views n Limited visibility on the assumptions / maximum target price Control methodologies n Influence by short-term market fluctuations n Does not strictly reflect long-term potential of the company 6 ? n Transaction multiples paid in the luxury sector vary n “Fair value” of the asset according to financial n Sanity check for fundamental and relative valuation ? n Difficult to select an appropriate comps set to reflect methodologies used for valuation n No possibility to perform sensitivities Market prices Relevance for Bulgari ? ? ?
Brokers’ views on Bulgari Positioning and valuation considerations On our PT, the stock would trade at a 5% premium to the sector on CY 12 E PE or 17. 5 x, still not cheap…Our Dec-11 DCF based price target is based on the following factors: 2011 E-2015 E explicitly forecast, medium term growth 6%, terminal growth 3%, WACC 9. 7%. This gives us a price target of € 6. 4 and an Underweight recommendation. ” JP Morgan, 19 January 2011 In our opinion, Bulgari shares do not currently look cheap on any metric. We argue that Bulgari should trade at most in line with its luxury peers, given its below-industry-average margins and returns, historically high cost inflation, and unfavourable geographical mix and product exposure. Furthermore, the company has had a track record of earnings disappointments over the last three years. Our price target of € 5. 80 is based on a luxury sector average 2011 E P/E multiple. ” Citi, 26 January 2011 In our view, Bulgari is set to significantly increase its long-term growth potential by concentrating investments in emerging markets in the coming years. Following management comments at the 4 Q sales results we expect the focus of the FY 2010 results presentation and the Basel Watch fair (both in March) to be on these initiatives, i. e. , on 2011, the “Year of China”. . . Bulgari remains one of the most attractive brand assets in luxury goods. Our € 10. 8 12 -month price target implies 43% upside. ” 7 Source: Company information. Goldman Sachs, 27 January 2011 Our DCF model (wacc of 8. 6% and g of 2. 5%) reached an equity value of EUR 7. 41/share. A valuation based on 2011 E stable market ratios (2. 6 x sales, 10. 0 x EBITDA, and 19. 1 x EPS) leads to a fair value of EUR 6. 75/share. The average of the two confirms a target price of EUR 7. 07/share implying an Exit P/E 11/12 E of 23. 2/17. 3 x, basically in-line (2% discount) with an historical 2004 -07 average of 23. 7 x… ” Banca IMI, 03 March 2011 Our target price is DCF-driven. We assume organic 10 -year sales growth of c. 4% compound for Bulgari, which we believe to be fairly conservative. We estimate that the operating margin will return slowly to 15%. We assume that the 15% tax rate is sustainable, in line with the company's indications. We use a long-term WACC of 9. 5%. This reflects a risk-free rate of 4. 5% and a market risk premium of 4. 5%, with a beta of 1. 1 x. The terminal growth rate (2%) is also in line with the assumptions we use in general for the luxury sector, reflecting its above-average growth prospects. ” Deutsche Bank, 7 March 2011 We expect luxury goods companies to see a sharp rebound in margins in 2010, often close to the latest cyclical peaks. We believe however that not all forces that contributed to the recovery last year will push in the same direction in 2011… We believe hard luxury players are more at risk of disappointing market expectations this year, while we expect soft luxury to deliver steady margin progress. ” Unicredit, 11 March 2011
DCF valuation overview n For illustrative purposes, below we report the DCF valuation of Bulgari published by Bank of America / Merrill Lynch Equity research on 27 January 2011 (1) 8 Source: Bank of America / Merrill Lynch. (1) Research report assumed no conversion of outstanding convertible bond.
Trading multiples and margins of main luxury players Bulgari Soft goods luxury players Competitor 1 C. 2 Group. A Hard goods luxury players Group. B C. 3 C. 4 C. 5 C. 6 C. 7 Average: 12. 1 x Average: 10. 7 x Average: 10. 8 x Average: 9. 6 x Average: 21. 6 x Average: 19. 3 x Average: 19. 0 x Average: 16. 9 x Average: 24. 0% Average: 24. 3% EV / EBITDA 2011 E EV / EBITDA 2012 E P / E 2011 E P / E 2012 E EBITDA margin 2011 E 9 Source: Company information, Fact. Set as of 01 March 2011. Note: Multiples fully diluted, calendarised to December year-end.
Comparable transactions multiples 10
Voluntary tender offers in Italy Majority transactions 11
Market views on Bulgari Prior to 07 March 2011 (Announcement date) Brokers’ recommendations and target prices Selected brokers’ comments Investing in Bulgari now requires confidence not only in the company’s cost control ability, which has been successfully proven, but in its ability to address the three key structural challenges we identified a long time ago for the full brand re-launch – namely, how to deliver the right like-for-like growth after an era of strong investments: i) the watch business underperformance over the last decade (E 100 m lower sales since 2000); ii) the low productivity of the network; and iii) the leather goods offering and positioning. We believe the brand image is intact as proven by the unabated strength of jewelry, although it can be further nourished by appropriate products and marketing actions. Deutsche Bank, 07 February 2011 Bulgari should benefit from broad-based strength in luxury demand downside risk seems limited by its perennial corporate activity appeal (as one of the most attractive jewellery brands in the luxury space). However, an unproven track record in high-end male watches (which will take some time to build) and demanding valuation (even after factoring substantial margin recovery in the next years) keep us on the sidelines, especially considering that recent rotation out of luxury stocks made the likes of LVMH or Swatch look better value than before, we think. Credit Suisse, 27 January 2011 Bulgari reported Q 4 10 Sales after market close up 20. 5% reported and 11% organic, higher than consensus but close to our estimates and we believe buy side expectations. Reported Sales up 20. 5% came in a tad higher than we expected (1. 7% ahead) on forex, they were in line on organic sales growth with JPME. JP Morgan, 26 January 2011 12 Source: Fact. Set, brokers’ reports.
Valuation key reference points n Number of shares outstanding: 349 m Bulgari key data(1) n Market price on 01 March 2011: € 7. 72 n Net debt and other adjustments(2): (€ 4 m) Key metrics DCF n n n EBITDA LTM: € 154 m EBITDA 2011 E: € 193 m EBITDA 2012 E: € 227 m EPS 2011 E: € 0. 28 EPS 2012 E: € 0. 37 Illustrative valuation results (€ per share) n WACC: ? n TGR: ? n Relevant peers: ? n Relevant multiples? Comps n Relevant transactions: ? Compacqs Brokers’ target prices Market prices n Min: ? n Max: ? n Min market price in the period March 2010 -March 2011: € 5. 34 (9 February 2010) 9. 6 x-15. 1 x n Max market price in the period March 2010 -March 2011: € 8. 37 (20 December 2010) Mkt price as of 01 March: € 7. 72 13 Implied EV / EBITDA 2011 E Source: Company information, Fact. Set as of 01 March 2011. (1) Forecasts as per brokers’ consensus. (2) Including conversion of € 150 m Bulgari convertible bond.
Potential partners / buyers overview Key financials 2011 E Market cap Revenues Net debt/(cash) EBITDA Net debt / EBITDA Major shareholder(1) GROUP A € 56, 286 € 21, 948 m € 2, 099 m € 5, 632 m 0. 4 x − Economic 48% − Voting 64% GROUP B € 13, 991 m € 15, 063 m € 3, 781 m € 1, 920 m 2. 0 x − Economic 41% − Voting 56% Competitor 5 € 25, 031 m € 7, 220 m (€ 1, 882 m) € 1, 849 m NM − Economic 9% − Voting 49% Competitor 6 € 16, 167 m € 5, 188 m (€ 1, 762 m) € 1, 409 m NM − Economic 24% − Voting 43% 14 Source: Company information, Fact. Set as of 01 March 2011. Note: Data calendarised to December year end and converted into € at spot exchange rate as of 01 March 2011. (1) Fully diluted holdings, net of treasury shares.
Key data for accretion / (dilution) and leverage analysis GROUP A GROUP B COMPETITOR 5 COMPETITOR 6 Price per share (€) € 7. 72 € 115. 3 € 110. 3 € 41. 9 € 310. 4 # of shares out. 349 m 488 m 127 m 597 m(1) 54 m(2) € 2, 693 m € 56, 286 m € 13, 991 m € 25, 031 m € 16, 167 m 0 € 2, 099 m € 3, 781 m (€ 1, 882 m) (€ 1, 762 m) EBITDA 2011 E € 193 m € 5, 632 m € 1, 920 m € 1, 849 m € 1, 409 m Net income 2012 E € 123 m € 3, 337 m € 1, 073 m € 1, 490 m € 1, 108 m Cost of debt NA 5. 5% 6. 0% Marginal tax rate NA 33. 3% 21. 0% 19. 6% Market cap Net debt / (cash) 15 Source: Fact. Set. (1) # of equivalent shares. Each share having 10 economic rights. (2) # of equivalent shares. Each share having 5 economic rights.
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