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BERKSHIRE PARTNERS: BIDDING PROCESS Case Solution

Introduction:

The case study revolves around the deal of acquiring an apparel company named Carter, Carter has history of 136 years in the United States and now it is one of the leading apparel companies. The company has business of manufacturing clothes for babies, young children and clothing associated with the sleepwear and playwear of the babies. The initial performance of the company was good during early 1990’s.Afterwards, the company has faced financial difficulties and during late 1990, the performance of the company has affected sustaining huge financial losses. When the management and the business model of Carterwere changed, the performance got better.

After the launch of a brand namely ‘tykes’ the company has faced quick turnaround in terms of financial performance, when the new strategic policies was implemented by the management, it has increased the company’s profit by 22%.

The improved performance of the company, has caused Berkshire to take initiative to acquire Carter, so that the productivity can be enhanced. The company was interested in making deal of full leveraged buyout. Berkshire was evaluating the deal that has been put forward, by bidding to Goldman Sachs “staple-on” financing scheme. In this case, the alternative set of financing the deal is established, which has lowered the company’s cost of debt of acquiring Carter.

Unleveraged asset value of Carter:

 

According to the analysis, the un-leveraged value of Carter, is estimated as $1899 million.The terminal value, by the process is estimated as $1705.5 million. The cash flows that are used to find out the NPV of the company and the related asset value, are based on the figures calculated by management on the realistic and reasonable assumptions.

The sales are taken in the analysis at growing trend, because on average the sales are growing, except for the year 2006.When the sales were decreased reasonably and according to the management assumptions that was not accounted for. The production cost has decreased, the profit margins were also taken on increasing trend, because it is complimentary with increasing revenues of the company. The company has expanded its operations reasonably, during the years and that showed in the performance of the company. The CAPEX has increased, because of the new plants and new ventures that the company has undertaken.

The company has relocated its production plants, caused the cost of production to decrease.The reduction of working capital requirement has also been reduced, by taking in to account these assumptions.

Most of the assumptions are same as taken by management, some of the assumptions that are taken and different from management assumptions are explained above.

WACC:

WACC can be defined, as the average return that the investors expect from the project.

The WACC calculated which is used in discounting the NPV of the CarterCompany, is estimated to be at 8.9% or approximately at 9%. The assumptions taken for calculating the percentage of company’s cost of capital are:

Underlying assumptions:

  • The beta used is 1.15 based on the average of the industry comparable available in the data from case.
  • The market risk premium is assumed at 7%, based on the risk factor and the related data for the company.
  • The tax rate used for calculating WACC is assumed at 30%.
  • The cost of equity consists of cost of normal equity, plus preference shares.
  • The cost of debt consists of long-term finance of the company. In addition, the multiple of risk free rate.
  • The growth rate of the company is assumed to be at 7%, for the purpose of the analysis.
  • Amortization and depreciation is taken,based oncurrent year sale and used the percentage, to determine the next year’s depreciation and amortization.
  • The cost of equity and cost of debt determined was, cost of equity=14%, cost of debt approx. 9%.

GOLDMAN STAPLE-ON FINANCING PACKAGE:

 

The financing package that was based on Goldman staple-on should not be opt by the company in the same way in which it is devised, alternatively the financing package that is devised in the spreadsheet analysis it should be opt by the company.

The Goldman package is very expensive, as if the rate of interest is more than 10% for the company and the plan suggest to take advantage from such loan for up to 10 years.The other loans defined in the package, are less expensive and are not utilized properly...............................................

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