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JP Morgan Deal Case Study 2012 - BMW and Harley Davidson
 

JP Morgan Deal Case Study 2012 - BMW and Harley Davidson

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JP Morgan Case Study Competition 2012

JP Morgan Case Study Competition 2012

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    JP Morgan Deal Case Study 2012 - BMW and Harley Davidson JP Morgan Deal Case Study 2012 - BMW and Harley Davidson Presentation Transcript

    • Case Study- The Deal 2012 Potential Acquisition of Harley-Davidson by BMW AG 1
    • Overview • Motorcycle Industry • Brief Profile – BMW AG • Brief Profile – Harley Davidson Slide 3-5 Deal Rationale 6 Key Issues to consider while acquiring Harley Davidson 7 Valuation drivers of Harley Davidson 8 Valuation Summary Credit Worthiness of BMW AG • KMV Model • Credit Metrics Analysis 9 - 14 Agenda Valuation Methodologies • DCF – Including Synergies • Market Multiples • Comparable Transactions 15 16- 18 Bidding Strategy and Deal Structure 19 Value Creation Analysis 20 Accretion Dilution Analysis 21 Evaluation of Alternatives 22 Merits and Demerits of Valuation Methodologies used Appendix 23 - 24 25 2
    • Industry Analysis- Motorcycles Global market value 2006-2010 76 15.00% 74 10.00% 72 5.00% 68 66 0.00% 64 -5.00% 62 60 European market : CAGR @ 3.3% Asia-Pacific markets: CAGRs @ 6.5%, between 2010 and 2015 % growth $ billions 70 Industry Overview  Global motorcycles sales stagnated between 2006 and 2010 but volume sales increased during the same period  Total global motorcycle revenues in 2010: $63 billion  The market is expected to grow at a CAGR of 6% for the period between 2010 and 2015 -10.00% 58 56 -15.00% 2006 2007 2008 $ billion 2009 2010 % growth Global market segmentation, by region ‘10 Five Forces Analysis Buyer Power 5 3.80% 4 3 Threat of substitutes 2 20.50% Asia Pacific Supplier Power 1 43.20% 0 Americas Europe Middle East and Africa Threat of new entrants *Source:: Datamonitor Industry report October 2011 32.50% Degree of rivalry 3
    • Brief Profile – BMW AG Business Portfolio Mission :  To be the world’s leading provider of premium products and premium services for individual mobility.  BMW AG headquartered in Munich, Germany manufactures and sells luxury cars and motorcycles worldwide.  It owns and produces the MINI marque, and is the parent company of Rolls-Royce.  BMW produces motorcycles under BMW Motorrad and Husqvarna brands.  In 2010, the BMW group produced 1,481,253 automobiles and 112,271 motorcycles across all its brands. Key Pillars of Strategy :  Growth  Shaping the future  Profitability  Access to technology and customers BMW AG - Acquirer Goals and Objectives Recent Investments  Investments in new products and in the expansion of international production network -around € 3.7 billion (2011).  Investment company BMW i Ventures set up in February 2011 – for assessing strategic investments in innovative mobility service providers  Acquired 15 entities of the ING Car Lease Group (ICL Group) 2012 Y-o-Y growth 52% EPS 29% ROE 76% EBT 57% EBIT 33% EBITDA 14% Revenue 0% 20% 40% 60% 80% *Source: BMW AG annual report and company website 4
    • Brief Profile – Harley Davidson Business Portfolio Strategy :  Sustain a loyal brand community active through clubs, events, and a museum.  Harley-Davidson Motor Company, produces heavyweight motorcycles and a complete line of motorcycle parts, accessories and general merchandise.  Harley-Davidson motorcycles have a distinctive design and exhaust note and is known for the tradition of heavy customization 3.0% 4.3% 3.3% 4.9% 16.8%  Harley-Davidson Financial Services provides motorcycle financing to Harley-Davidson dealers and customers in the U.S. and Canada 0.4% 5.9% US Europe Japan By Region Canada 67.7% Australia Motorcycles 17.5% Parts & Accessories By Product Line General Management 76.2% Others Others Fig: Distribution of Sales (in millions) by region *Source: Harley Davidson annual report and company website Fig: Distribution of Sales (in millions) by product lines 5 Harley Davidson- Potential Target Goals and Objectives
    • Harley Davidson will help BMW AG to reach out to the American market Market Expansion  Harley Davidson currently has a 55.7% of the US market and BMW Motorcycle is a relatively small player. BMW can leverage the existing dealer and distribution network of Harley in the US to bolster its own sales Deal Rationale  Similarly, Harley Davidson will have a foray into the European market where BMW AG has a strong presence Addition of new product lines to existing product portfolio  Amongst the 5 segments of the total heavyweight motorcycle market, BMW is present in 3 of them (Sport Bikes, Touring, Street Bikes) and Dirt Bikes (through Husqvarna)  It does not have a presence in the popular Cruiser segment where Harley Davidson is a major player  By acquiring Harley Davidson, it can expand its portfolio to be a major player in this category Cost synergies  With a successful merger, BMW AG can exploit the existing product development practices of Harley Davidson and apply them to their own stable  Both companies can realize cost synergies and product development 6
    • Key issues to consider as part of acquisition of Harley Davidson Financial Issues Business Issues  What would be the revenue growth rate for next 10 years and terminal growth rate of Harley Davidson?  How much market expansion can be achieved by the acquisition of Harley Davidson?  How much premium above the share price should be given while deciding the bid price?  What is the shareholding pattern of Harley Davidson? Is it highly fragmented or are there few shareholders with high stake?  What would be the acquisition structure? Would BMW AG purchase assets or stocks of Harley Davidson?  How would the transaction be funded?  Is the acquisition of Harley Davidson in line with long term goals of BMW AG?  What would be the effect on credit rating of BMW AG if large amount of debt is taken to finance the acquisition?  Should BMW AG retain top management team of Harley Davidson?  If cash position of BMW AG worsens due to this acquisition, what would be its effect on future dividend policy of BMW AG?  What would be the competitors’ reaction? Operational Issues Marketing Issues  What are the existing distributional channels of Harley Davidson and how can they be utilized most efficiently after the acquisition?  What would be the effect on the brand equity of BMW AG?  What would be the effect on relationships of existing key suppliers & customers of both BMW AG and Harley Davidson ? M&A Issues  What would be the payment structure? Would BMW AG pay in cash or its stock?  Are the values and employee culture of both the companies compatible with each other?  How would the advertising campaigns of BMW AG be affected by inclusion of new brands in its portfolio?  How much operational costs can be reduced by increased operational efficiency due to economies of scale achieved through the acquisition of Harley Davidson? Source: Team Analysis  Would there be any regulatory issues in this acquisition?  What will be the brand strategy in markets where brands of both these companies are competing with each other? 7
    • Valuation Drivers Volume growth in different regions • Harley-Davidson has a very small market share in Europe. • On the other hand, BMW is a very big name in Europe with a large market share and vast distribution networks. • This will help Harley in expanding its sales in the European region • As the European crisis comes to an end, spending on cult brands like Harley shall revive and thus boost Harley‟s sales. • Also, the last few years have seen a good growth in the women‟s segment bikes. Earnings Harley Davidson Valuation Drivers Revenue • EBITDA Margin of Harley-Davidson is about 12% as compared to 18% for BMW • Productivity of Harley is expected to increase with time when acquired by BMW • With time, due to cost synergies, EBITDA margin for Harley Davidson is expected to increase to 14% in the base case scenario • It is expected to increase to 16% in the best case scenario • Apart from distribution network and cost synergies, other synergies expected are in product development and R&D. 8
    • Three Primary Valuation Methodologies DCF This methodology values a company as sum of its free cash flows over a forecasted period and the terminal value at the end of forecast period Values a target company by referencing key financial ratios of peer group companies. Harley Davidson Valuation Transaction Comparable Market Multiples Values a target company by referencing M&A transaction multiple paid in recent times by companies involving business operations of similar nature, size and similar M&A motives Contribution to Final Value Range 40% 20% 40% Range of share price for target company The Market Multiples method is applicable for a non-strategic buyer. It does not account for the premium a strategic buyer would pay. Hence we assigned a lesser weightage to this method. 9
    • DCF Valuation - Share price ranges from $24.67 – $35.52 Scenario Analysis : Changing growth rates 5.43 Sales Growth Rates First 3 Years 4-6 Years 6-10 Years EBIT Growth Rates 5.0% First 3 Years 6.0%-8.0% 4-6 Years 8.0%-10.0% 6-10 Years 12%-13.5% 13.5%-15% 15%-16% Firm Value 9224 Equity Value 8224 Price Per Share 35.52 Assumptions:Global motorcycle industry growth considered Operating Margin due to synergies improved to 16% Sales Synergies increase to 10% Worst Case Scenario Sales Growth Rates First 3 Years 4-6 Years 6-10 Years Firm Value Equity Value Price Per Share Metrics used in DCF WACC 9.71% Perpetual Growth 1.50% Debt # of Shares 1000.01 231.519 Key pointers to growth rates • Revenue growth rates assumed includes the price mix growth and the volume mix growth rates by region. • Price mix is the major driver of the revenue growth • Perpetual growth rate does not exceed the average long term growth of the groups individual geographical segment Detailed calculations are furnished in appendix 6.0% 6.0% 6.0% EBIT Growth Rates First 3 Years 4-6 Years 6-10 Years 12% 12% 12% 6711 5711 24.67 Assumptions:Global motorcycle industry growth considered Synergies not realized Base Case Scenario Sales Growth Rates First 3 Years 4-6 Years 6-10 Years Firm Value Equity Value Price Per Share EBIT Growth Rates 3.0%-4.0% First 3 Years 4.0%-6.5% 4-6 Years 6.5%-8.0% 6-10 Years 7968 6968 30.10 Assumptions:Operating Margin due to synergies improved to 14% Sales Synergies increase to 8% 10 12%-12.5% 12.5%-13.5% 13.5%-14.0% Harley Davidson Valuation 5.42 Best Case Scenario
    • DCF Valuation – Sensitivity Analysis Assumptions and Findings Harley Davidson Valuation  We have assumed a 10% shift in all the four parameters and have evaluated the share price variation and have found the following results  Harley Davidson‟s Share price is most susceptible to change in EBIT(which is due to change in operational efficiency) – As Harley Davidson is already pursuing operational efficiency drives, the share prices are expected to rise due to increase in margins  Share prices are also highly sensitive to WACC which is dependent on the capital structure of the firm. With de-gearing and the up gradation of Moody‟s and Fitch rating the WACC would be lower in the coming years and we expect the share price to go up 11
    • Market Multiples EV/Revenue EV/EBITDA P/E Harley Davidson Valuation Assumptions • # of shares 231 m., WACC=9.71% • # of companies considered 6* • Share prices are PV of expected share prices in 2012 and 2013, discounted at WACC * List of companies used for calculating market multiple is furnished in appendix 12
    • Market Multiples Average Share Prices Calculation of share price Median (2) P/E - (2) - EV/EBITDA (4) EV/Revenue 15 3 17 2 19 - 1 (1) -6 -4 -2 0 Harley Davidson Valuation Average Prices 11 5 2 4 6 Average values used for calculating market cap EBITDA 794.57 Revenue 5061.20 Earnings Per Share 1.73 Debt 344.65 Cash 1153.74 # of Shares 231.5 mn WACC 10% * List of companies used for calculating market multiple is furnished in appendix All numbers are in USD Methodology* • Calculate expected market cap in 2012E and 2013E from each market multiple • Discount expected market cap by WACC of Harley Davidson • Divide the PV of market cap by the of shares outstanding to obtain share prices • Final share price range is calculated by taking average share prices from each market multiple 13
    • Transaction Comparables Share Prices Share Prices in $ 60 Median Low 50 50 40 30 20 Harley Davidson Valuation High Calculation of share price 41 37 31 31 24 21 12 16 10 0 FV/EBITDA FV/EBIT Average Transaction comparables Methodology • • • • • * List of companies used for calculating transaction comparable is furnished in appendix 10 Transactions are used to calculate the transaction comparable ranges Calculate expected market cap in 2012E and 2013E from each transaction comparable Discount expected market cap by WACC of Harley Davidson Divide the PV of market cap by the number of shares outstanding to obtain share prices. Final share price range is calculated by taking average share prices from each transaction comparable. 14
    • Valuation Summary Selected Valuation Ranges 30 14 Trans. Comparables 39 11 Market Mult 16 36 25 DCF 0 5 10 15 20 25 30 35 40 45 Share Price Share Prices DCF Valuation Market Multiples Trans. Comparables Final Share Price Lower Range Median Upper Range Weights 25 11 17 16 30 13 31 24 36 16 41 30 40% 20% 40% Valuation • Median share price for Opco. division of Harley Davidson is 25 USD • BMW can bid in the region of 18 – 31 USD per share 15 Harley Davidson Valuation 16 Final Price
    • KMV methodology to estimate credit worthiness Credit Worthiness of BMW AG Overview • KMV* methodology estimates the firm‟s probability of default on the debt repayments thus provides an estimate of the firm‟s creditworthiness. • Using this methodology the equity of the firm can be seen as a call option on the firm‟s assets. Asset Ownership Asset Value > Debt Value Bankrupt • Calculating market value of assets using options framework as shown in the figure alongside Other key terminologies used • Default Point – If asset value drops below this value then company will default – Generally taken as market value of debt to be repaid at any time t • DD (Distance-to-Default) – Number of standard deviations asset value must deviate from its mean to drop below “Default Point” • EDF (Estimated Default Frequency) – Probability that market value of assets will drop below “Default Point” and company will default Source: http://www.ma.hw.ac.uk/~mcneil/F79CR/Crosbie_Bohn.pdf * KMV: (Vasicek/ Kealhofer Model) 16
    • KMV Model Results: BMW AG has a credit rating of “A” KMV Calculation Steps KMV(After Merger) KMV Calculation(BMW) Description (Share Price) x (Shares Outstanding) FYE March 2011 2012 FYE March 2012 Market value of equity Equity MV 38.54 44.18 Equity MV 48.69 Balance sheet Equity Volatility 29% 29% Equity Volatility 29% Liability 63.382 86.542 Liability 87.175 Asset MV 100.98 106.82 Asset MV 111.26 Asset Volatility 10.97% 9.80% Asset Volatility 10.39% Default Point 43.69 61.56 Default Point 61.88 Distance-toDefault 5.174 4.323 Distance-toDefault 4.271 Book Liabilities Market value of assets Black-Scholes Option-pricing model Asset volatility Black-Scholes Option-pricing model Default Point Liabilities payable within one year. (Asset MV - Default Point) Distance-to-Default(DD) -------------------------------------(Asset MV * Asset Volatility) Estimated Default Frequency One-to-One association with Distance-to-Default using Empirical distribution of Asset value KMV Assumptions  Risk Free Rate = 1.5%  EDF in next year calculated for one FY * Source: www2.standardandpoors.com/spf/pdf/fixedincome/relationship_between.pdf KMV Inference  BMW has DD ratio of 4.271 for next year after merger which corresponds to EDF ~ 0.057%  EDF ~ .057% corresponds to avg. credit rating of „A‟ Credit Worthiness of BMW AG Variable
    • Credit Metrics Analysis of BMW AG Financial Ratios to measure credit worthiness BMW Daimler Volkswagen AG FY12 (E) FY11 FY11 EBITDA Margin 16.62% 21.10% PAT Margin 8.08% ROCE Others FY11 FY11 FY11 24.00% 17.50% 14.87% 17.10% 20.60% 7.09% 5.32% 9.67% 2.24% 0.98% 4.91% 9.24% 11.10% 10.11% 8.24% 6.04% 4.87% 3.26% 31.85% 23.70% 25.80% 57.07% 163.73% 166.41% -281.25% RCF/Net Debt 31.32% 20.84% 17.90% 52.85% 158.02% 144.65% -274.44% 10.59% 11.14% 5.56% 19.06% 51.40% -17.73% 27.69% 3.18 2.58 1.46 1.59 2.34 0.75 0.72 Debt/Gross Cash Accruals 4.38 3.89 4.04 1.73 4.41 2.16 1.29 9.51 8.50 18.89 9.84 1.57 3.95 2.65 Working Capital Cycle 48.48 48.39 52.81 127.04 -28.62 -5.09 -4.26 RATING Coverage FY11 Debt/EBITDA Leverage Renault FCF/Debt Cash Flow Peugeot FFO/Net Debt Profitability Fiat A A A- A- BB BB+ BB+ EBIT/Interest expense The credit worthiness of BMW after acquisition of Harley has not been affected, as seen from the above financial ratios. Source: S&Ps rating criteria Credit Worthiness of BMW AG BMWHarley
    • Bidding Strategy – Recommend an initial bid of $23.8/share Bidding Strategy  Lower bound is $16.5 per share which is derived with worst case scenario with no synergies .  We advise BMW AG to bid only for the OpCo division of Harley Davidson. The reason not bid for the FinCo division of Harley is BMW has a much bigger and established financial services division of its own Share price calculated (Median) Market Value Financed Through Cash (80%) Financed Through Debt(20%) $ 23.8 $ 5512.43 mn $4409.95 mn $ 1102.49 mn  The deal is structured as an cash deal since synergies are expected to be realized to a good extent.  In addition to this BMW has huge cash reserves on its balance sheet and the acquisition of Harley Davidson will not affect it drastically. Considering the fact that we wish to acquire only OpCo , the bid is reasonably good. Source: Team Analysis , Details furnished in appendix Bidding Strategy  Upper bound - $30.3 per share which includes the DCF value of BMW and 100% of synergies realized in best case scenario. This is calculated using the three valuation methodologies combined Deal Structure at Base Price
    • The deal creates a value of $ 2.1 per share for the BMW shareholders incorporating synergies created 5.8 3.33 True price paid $104.95 Total Target price $102.85 95.8 BMW Target value: Synergy value: Total target value: 101.61 3.33 104.95 Less “True price” Value creation (102.85) 2.10 Harley-OpCo Synergies BMW-Harley Value Creation for BMW = $2.1/share of Harley Davidson Value creation # shares of Harley outstanding # shares of BMW outstanding BMW Share Price (2012E) OpCo-Harley Value (without synergy) OpCo-Harley Value per share on BMW BMW-Harley expected Share Price Synergy Total Value from Harley & Synergy Total Value from Harley & Synergy per share of Harley Price Paid to Harley per share Value Creation to BMW shareholders per share of Harley Total Value Creation to BMW shareholders ($ mn) 231.52 655.11 95.79 3813.56 5.82 104.95 3.33 5998.02 25.91 23.81 2.10 485.59 Value Creation Analysis 105.0
    • Merger can result in an immediate increase of $ 9.18 in share price Accretion – Dilution on Assumed deal structure BMW (2012E) BMW-Harley (2012E) P/E ratio 8.74 8.74 EPS ($) 10.96 12.01 Share Price $95.79 $104.97 Increase in share price $9.18 % increase in share price 9.58% Assumptions:  Expected Share Price is calculated using the same P/E ratio for 2012; and assumed the same for the merged entity  P/E Ratio is assumed to be the same which is 8.74 as per the current market price * Details in appendix is Accretion Dilution Analysis Years
    • Alternate Options for BMW AG- Victory Motorcycles, USA Royal Enfield, India Victory Motorcycles, USA Triumph Motorcycles, UK Strong brand and presence in premium segment of motorbikes •Oldest motorcycle brand in the world. • Operates in niche segment • Premium models: Bullet, Thunderbird, Interceptor • Created by Polaris – direct competitor of HD • Operates in touring , sports touring and cruiser •segments. •Largest surviving UK motorcycle mnfg, since 1902. • Operates in all segments of motorbike Presence in growing economies across the world • Huge potential of Indian market (Rising income levels) • GDP growth of 7-8 % • Saturated growth of US motorbike market • GDP growth of 1.5 % - 2% • Declining growth of European market • GDP growth - 0.5 - 1% Company’s potential for having growth • Revenue(Y-o-Y growth)– 40 % • EBITDA margin – 11% • PAT margin – 5.6 % • Revenue(Y-o-Y)– 27% • PAT margin – 7.4 % • PAT (Y-o-Y) – 46% • Revenue(Y-o-Y)– 11% • PBIT margin – 6.5 % • PBIT (Y-o-Y) – 48% Opportunity to improve profitability of local businesses, sustainably • Increasing dealer network (currently-230) • Current waiting time – 5 mths •New plants( current utilization -100%) •Focus on product innovation and increasing speed to market. • Needs Lean mfg and low cost purchasing • Stagnant Production facilities - opening plants in Thailand • Large no of variants to be supported Synergies possible with BMW’s current portfolio in motor bikes • RE is in Cruisers (350 – 700 cc) •Hence its line extension for BMW and opens Indian market for BMW motorbikes. • BMW technical expertise and lean manufacturing techniques can increase PAT margins for Victory • Triumph – a major competitor for BMW • Can help in gaining economies of scale. Evaluation of Alternatives Goals & Objectives 22
    • Merits and demerits of valuation methodologies(1/2) Benefits Limitations Discounted Cash Flow (DCF) Method Is not affected by temporary market factors  If confident on assumptions and projections, it‟s the most sound method for valuation  Accuracy highly dependent on the assumptions taken  Growth Rate  Terminal Value  WACC/ Discount Rate Allows future operating strategy of the company to be taken into account  Forecasting future performance is subjective  Less relevant for early stage companies  Not constrained with non-negative values  More weight on the terminal value  Can be applied to any level of aggregation  Can give a very wide range of value  Can deal with complex situations also  WACC assumes constant capital structure  DCF does not take into account debt obligations Comparable Transaction Method  Based on publicly available information hence transparent  Assumes past appropriately  Realistic – Gives an idea about actual premium paid in the successful transactions  Not relevant for unprofitable companies  Buyer synergies impacts the price paid for the acquired companies  Includes premium in strategic acquisitions  Not relevant in high volatility environment  Works only if comparable transactions/ their data 23 exist   Helps to indicate the plausibility of „control premium‟ through the past transactions Recent transactions can reflect sentiment towards an industry Source: Team analysis the investor acquirers valued the target Valuation Methodologies  
    • Merits and demerits of valuation methodologies(2/2) Benefits Limitations Companies Multiples Method Effective since uses public data that is readily available  Does not include any control premium  Comparable company data‟s reliability is subjective  Highly transparent  Contain the irrationality associated with stock market  Less biased compared to DCF method   Simple and less resource intensive Less comparable if the companies chosen does not trade robustly  Market efficiency ensures that market growth, industry trends are taken into account  If a comparable company metric is negative the method cannot be applied  Projected information taken from third parties hence less biased  Accounting policies of the two companies may be different which may complicate comparability  Comparable companies‟ projected data may be unavailable  Valuation Methodologies  Factors like the companies risk, growth potential are ignored Source: Team analysis 24
    • Appendix 25
    • World Map showing countries where Harley Davidson bikes are sold 26
    • BMW-Harley projected Balance Sheet 27
    • BMW-Harley projected Balance Sheet 28
    • OpCo-Harley Davidson DCF Valuation (Best Case – Full Synergies) Harley Davidson Valuation 29
    • OpCo-Harley Davidson DCF Valuation (Base Case) Base Case 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales $4,662 5071 5355 5710 6030 6428 6788 7237 7714 8146 8683 $561 610 643 714 754 804 882 941 1041 1100 1216 12% 12% 13% 13% 13% 13% 13% 14% 14% 14% EBIT % margin 37% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6% 36.6% NOPAT 356 387 407 453 478 509 560 596 660 697 771 189 200 213 225 240 253 270 288 304 Valuation Methodologies Tax Rate Terminal Value 324 Plus: Depreciation & Amortization Less: Capital Expenditures Less: Increase in Net Working Capital 174 3.7% 189 19 198 208 219 230 241 253 266 279 293 308 3.91% 3.89% 3.83% 3.81% 3.75% 3.73% 3.68% 3.62% 3.60% 3.55% 16 12 15 13 17 15 19 20 18 22 4.0% FCFF 322 394 411 461 486 525 574 619 689 726 809 No. of years 0.00 1 2 3 4 5 6 7 8 9 10 Value multiple 0.91 0.83 0.75 0.68 0.62 0.56 0.51 0.47 0.42 0.39 0.39 PV 358 339 347 332 326 324 318 321 308 312 3847 Cash and Cash Equivalents $1,097 WACC 9977 10.00% Perpetuity Growth 1.75% Firm Value 8,228 Debt 1,000 Equity Value 7,228 # of Shares 231.519 Price Per Share 31.22 30
    • OpCo-Harley Davidson DCF Valuation (Worst Case) Harley Davidson Valuation 31
    • Mergers/ Partnerships across the industry Date Target Acquirer Reason Feb ’12 Peugeot GM Revitalizing European operations and reducing capital expenditure May ’11 Chrysler Fiat Increase in production capacity and using Chrysler’s brand image to launch Fiat diesel vehicles in the US Dec ’10 Suzuki Volkswagen Exploit utility in making small, fuel efficient cars and give Suzuki access to investment funds Mar’10 Volvo Car Corp. Zhejiang Geely Holding Group Produce luxury brands in China while maintaining access to US market Mar ’10 Renault Nissan Increase economies of scale for both and focus on emerging markets Mar ‘08 Jaguar & Land Rover Tata Motors Acquire a global footprint and enter the highend premier segment of the global automobile market June ‘05 Ferrari Mubadala Development Co. To develop dynamic new strategies especially in the Middle East and North African market 32
    • Appendix – Companies considered for market multiples Honda KTM Mitsubishi Piaggio Suzuki Yamaha Motor EV/Revenue EV/EBITDA Harley Davidson Valuation Company P/E Firm Value(US $mm) Market Cap(US $mm) 2012E 2013E 2012E 2013E 2012E 2013E 51,799 58,280 0.4 0.38 3.6 3.2 8.7 7.5 789 575 1.23 1.12 9.7 8.5 29.2 21 11,093 5,415 0.44 0.4 6.2 5.3 12.8 8.9 1,494 912 0.75 0.69 5.5 4.7 14.1 10.8 6088 11521 0.18 0.17 1.9 1.7 11.6 10.5 6195 3363 0.37 0.34 5.9 4.7 11.8 7.9 33
    • Appendix – Companies considered for transaction multiples Date Feb-12 Jan-08 Mar-04 Jul-04 Jul-05 Jan-10 Apr-09 May-02 May-09 Mar-00 Target/Acquirer Peugot-GM Chrysler-Fiat Suzuki-Volkswagen Ferrari-ESOP Ferrari-MedioBancaSpa Chrysler-CerebrusCapital Volvo-Zhejiang Porsche-Volkswagen Jaguar-TataMotors Ferrari-Mubadala FV/EBITDA 2.1x 3.2x 6.7x 9.3x 16.0x 4.8x 19.2x 9.4x 2.2x 8.9x Harley Davidson Valuation S.No 1 2 3 4 5 6 7 8 9 10 FV/EBIT 7.0x 10.9x 22.1x 22.3x 38.3x N/A N/M 18.3x 3.5x 15.8x 34
    • KMV Calculations FYE March Equity MV Equity Volatility Liability Asset MV Asset Duration Volatility 2012 (E) 48.69 29.00% 87.977 10.332% 111.260 1 Default Point d1 d2 N(d1) N(d2) Distanceto-Default 62.28 2.47 2.37 0.993 0.991 4.261 35
    • Appendix – Company Statistics and Deal Structure Company Information BMW Harley Davidson Total Shares Outstanding Net Income (2011) EPS Current Price PE Multiple Equity Market Value Total Debt Outstanding Total Market Value Debt/ Market Value 655.11 $6006 $9.22 $74.25 8.74x $48,642 $ 39388 $88030 44.74% Tax Rate Total Shares Outstanding Net Income 2011 EPS Per Share Current Price PE Multiple Equity Market Value Total Debt Outstanding Total Market Value Debt/ Market Value 231.51 $599 $2.58 $42.00 16.27x $9723 $1000 $10123 9.8% 33.54% Deal Structure (including only OpCo ) Given Share price by the acquirer Market Value Financed Through Cash (80%) Financed Through Debt (20%) 23.8 $5512.43 4409.95 1102.49 Maximum Bidding Price Median Price for Base Case Minimum Bidding price 30.3 23.8 16.5 36
    • Appendix – References  JPMC deal document  Annual Report of BMW 2011-12  Annual Report of Harley Davidson 2011-12  Datamonitor Industry Reports- Motorcycle Industry October 2011  http://www.bloomberg.com accessed on August 10, 2012  10-K filing of Harley Davidson 2011  Annual reports of Triumph motorcycle, Royal Enfield and Indian Motorbikes  http://www.ma.hw.ac.uk/~mcneil/F79CR/Crosbie_Bohn.pdf August 10, 2012 accessed 37 on