Berkshire Partners

1
Berkshire Partners
2
History of Carters Inc.

• Founded in 1865 in Needham, Massachusetts
• Manufacturer of baby, toddler, and young children
  apparel in the U.S.
• Company divided into 5 segments
• Financial distress due to unprofitable product
  lines in the early 1990s

3
New Management

• In 1992 new management was installed
• new CEO of Frederick J. Rowan
• Revamp of organization structure and corporate
  strategy
• Implemented lower cost structure, expansion into
  discount channel, moved manufacturing operations
  offshore, and improved brand recognition

4
New Management

• In 1996 operating and financial performance
  turnaround resulted in buyout by InvestCorp at
  208 million
• In 2000 launched new brand called Tykes

5
Porters Generic Competitive Advantages
6
(No Transcript)
7
(No Transcript)
8
(No Transcript)
9
Why sell Carters Inc.?

• Investors at InvestCorp wanted returns for their
  financing
• Initial Public Offering (IPO) market was at a
  near standstill
• Quick liquidity needed by InvestCorp
• Decided to auction the company to financial
  buyers
• One potential buyer was the private equity firm
  of Berkshire Partners in a LBO scheme

10
The Appeal of Carters

• Long-term success in a competitive, non-seasonal
  industry
• Power of brand name
• Strong senior management team
• Success after prior acquisition by InvestCorp
• Increased revenues and EBITDA
• Lower cost structure
• Expansion into discount channel (Target)
• Offshore manufacturing

11
Private Equity Firms

• PE firms raise money (from university endowments,
  pension funds, insurance companies, financial
  institutions, and wealthy individuals)
• use these funds, in addition to debt, to purchase
  firms
• e.g., AIG, Blackstone Group, Enron, Lehman
  Brothers, KKR

12
Berkshire Partners

• Previous investment industries include
  manufacturing, retailing, transportation,
  consumer products
• Acquisitions take the form of recapitalizations,
  leveraged buyouts, growth capital investments,
  industry consolidations, privatizations
• Generally seek market leaders, strong financial
  history, effective management team, sustainable
  (non-cyclical) earnings growth
• Acquisitions typically range between 200M and
  2B (translating into equity investments of
  50-500M

13
LBO-Leveraged Buyout

• Acquisition of another company involving
  significant amount of borrowed money to meet the
  cost of acquisition
• Without having to commit a lot capital

14
Synergies of the LBO

• Carters Perspective
• Berkshires expertise in operational and
  strategic relating to retailing and manufacturing
  industry.
• Berkshire has greater access to the capital
  market (i.e. IPO)

15
Synergies of the LBO

• Berkshires Perspective
• Carters has its own competitive niche market
  segment and competent management group
• Carters needs advisor with similar business
  acumen

16
Staple Financing

• Adviser (Goldman Sachs) to the seller (Carters)
  also offers financing to the prospective buyer
  (Berkshire Partner)
• Prearranged financing options package
• Became a
• common practice

17
Staple Financing

• Conflict of interest
• Berkshire vs. Goldman Sachs
• Berkshire was offered similar terms by the market
  ? no conflict of interest

18
Why use Staple Financing?

• Hinder rivals bids
• Provide confidentiality of the auction
• Expedite financing process
• Offered as an option, but not a requirement

19
Valuation Techniques

• Discounted Cash Flow Method
• Method of Comparables

20
Discounted Cash Flow MethodFree Cash Flow
EBIT(1-Tax) Depr Del(WC) - Del(Capex)All
values are in millions
2001E 2002E 2003E 2004E 2005E 2006E
Sales 537.30 618.80 711.60 817.30 938.80 985.74
EBIDTA 75.10 88.70 109.10 134.20 161.60 169.68
EBIT 55.10 67.60 87.30 109.80 133.50 140.18
Depr. 20.00 21.10 21.80 24.40 28.10 29.51
Capex 20.50 19.50 21.00 21.50 22.50 22.50
Del (Capex) (1.00) 1.50 0.50 1.00 0.00
21
Discounted Cash Flow MethodFree Cash Flow
EBIT(1-Tax) Depr Del(WC) - Del(Capex)
1996 1997 1998 1999 2000 2001
Sales 318 363 408 415 471 415
WC 71 87 99 82 84 94
WC/Sal. 0.2225 0.2410 0.2437 0.1966 0.1989 0.2256
Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180 Average WC/Sales Ratio (Trend Analysis) 0.2180
2001E 2002E 2003E 2004E 2005E 2006E
WC 117.16 134.93 155.16 178.21 204.70 214.94
Del (WC) 17.77 20.23 23.05 26.49 10.24
22
Discounted Cash Flow Method
Cost of Debt Cost of Debt Cost of Debt Cost of Debt Cost of Debt
Debt Type Amount Maturity Contribution Rate of Return
Revolver 60 5 0.1026 9.00
Loan B 125 7 0.2991 9.75
Senior Debt 175 10 0.5983 10.88
Cost of Debt 10.35 (weighted average of above debts) Cost of Debt 10.35 (weighted average of above debts) Cost of Debt 10.35 (weighted average of above debts) Cost of Debt 10.35 (weighted average of above debts) Cost of Debt 10.35 (weighted average of above debts)
Cost of Equity 40 (typical in LBO transactions) Cost of Equity 40 (typical in LBO transactions) Cost of Equity 40 (typical in LBO transactions) Cost of Equity 40 (typical in LBO transactions) Cost of Equity 40 (typical in LBO transactions)
23
Discounted Cash Flow Methodwacc wdkd(1-t)
weke
Wd 63.5 70 74
We 36.5 30 26
WACC 18.54 16.35 14.99
Note A The higher limit of wacc is set by having a minimum limit of 130 million as equity. Note A The higher limit of wacc is set by having a minimum limit of 130 million as equity. Note A The higher limit of wacc is set by having a minimum limit of 130 million as equity. Note A The higher limit of wacc is set by having a minimum limit of 130 million as equity.
Note B The lower limit of wacc is set by a minimum 25 as equity stake and an expected IPO price of 648-730 million dollars. (IPO price 16-18 times 2002 Earnings) Note B The lower limit of wacc is set by a minimum 25 as equity stake and an expected IPO price of 648-730 million dollars. (IPO price 16-18 times 2002 Earnings) Note B The lower limit of wacc is set by a minimum 25 as equity stake and an expected IPO price of 648-730 million dollars. (IPO price 16-18 times 2002 Earnings) Note B The lower limit of wacc is set by a minimum 25 as equity stake and an expected IPO price of 648-730 million dollars. (IPO price 16-18 times 2002 Earnings)
24
Discounted Cash Flow MethodPV (FCF)
FCF/(1wacc)t
2001E 2002E 2003E 2004E 2004E 2005E 2006E
FCF - 44.89 52.45 66.73 66.73 80.71 103.37
At wacc 18.54 At wacc 18.54 At wacc 18.54 At wacc 18.54 At wacc 18.54 At wacc 18.54 At wacc 18.54 At wacc 18.54
PV(FCF) - 37.87 37.32 40.06 40.87 40.87 44.16
At wacc 16.35 At wacc 16.35 At wacc 16.35 At wacc 16.35 At wacc 16.35 At wacc 16.35 At wacc 16.35 At wacc 16.35
PV(FCF) - 38.58 38.74 42.37 42.37 44.05 48.49
At wacc 14.99 At wacc 14.99 At wacc 14.99 At wacc 14.99 At wacc 14.99 At wacc 14.99 At wacc 14.99 At wacc 14.99
PV(FCF) - 39.04 39.66 43.88 43.88 46.15 51.41
25
Discounted Cash Flow MethodTV
FCF(1g)/(wacc-g), g 3 PV (TV)
TV/(1wacc)t
At wacc 18.54
TV 685.09
PV (TV) 292.68
At wacc 16.35
TV 797.85
PV (TV) 374.36
At wacc 14.99
TV 887.77
PV (TV) 441.50
26
Discounted Cash Flow Method
Total NPV 492.26 574.55 641.78
Total Debt 360 360 360
Total Equity 132.96 214.55 281.78
IPO Launch Price (16 Times 2002 Earnings) 648.96 IPO Launch Price (16 Times 2002 Earnings) 648.96 IPO Launch Price (16 Times 2002 Earnings) 648.96 IPO Launch Price (16 Times 2002 Earnings) 648.96
IPO Launch Price (18 Times 2002 Earnings) 738.08 IPO Launch Price (18 Times 2002 Earnings) 738.08 IPO Launch Price (18 Times 2002 Earnings) 738.08 IPO Launch Price (18 Times 2002 Earnings) 738.08
Price Range 492-641 million (Total Enterprise Value) Price Range 492-641 million (Total Enterprise Value) Price Range 492-641 million (Total Enterprise Value) Price Range 492-641 million (Total Enterprise Value)
27
Method of Comparables

• Comparable company analysis
• Nike, Jones Apparel Group, Tommy Hilfiger, Liz
  Claiborne
• Average Revenue multiple 0.89
• Market Value of Carter using Revenue multiple
  480 mil
• Average EBIDTA multiple 5.87
• Market Value of Carter using Revenue multiple
  441 mi
• Average Revenue multiple 13.12
• Market Value of Carter using Revenue multiple
  226 mil

28
Current Recommendations

• Valuation
• price range 450-500 million
• 450 million- EBITDA multiple approach
• 500 million- Discounted cash flow approach

29
Recommendations for the Future

• Access to capital markets
• Relationship experience useful for MA and IPO
• Synergies of operational strategic expertise
  between Berkshire Carters
• Discount chain outsourcing

30
Questions?

• Presented by
• Tessa Maher
• Bebe Oh
• Fei Qi
• Satrajit Saha
• Priyanka Gupta