DUCATI	  CASE	  STUDY	                  	  Anastasia Karpova	  Ekaterina	  Nere8na	  Ali	  Baris	  Sahin	  Sena	  Secilmis...
Agenda	   Company	  snapshot	                  3	   SWOT	  Analysis	                     4	   Benefits	  for	  the	  seller...
Company	  Snapshot	       Global	  Brand	  Recogni8on	  	                                   Company	  is	  in	  financial	 ...
SWOT	  Analysis	  	    STRENGHTS	                                                          	                              ...
Benefits	  and	  costs	  for	  Cas8glioni	  Brothers	  	    With	  current	  management	  Duca8	  will	    bankrupt	  in	  ...
Turnaround	                                               Methods	                                                 Assump8...
LBO	  valua8on	                                        Base	  case	  projec?ons	             	  	                      199...
Valua8on	  results	  ________________________________________________	                                          100	      ...
Exit	  op8ons	   Possible	  Exit	                                                                                   	     ...
Walk	  away	  or	  complete?	   Possibility	  to	  walk	  away	   Lecer	  of	  Intent:	  “Agreement	  to	  make	  an	  agr...
Recommenda8on	   Recommenda8on	           –  TPG	  should	  close	  the	  deal	           –  Pay	  $140	  million	  with	 ...
Actual	  Facts	           –  1996	  	  TPG	  purchased	  51%	  stake	  of	  Duca?	  for	  $325	  ml*.	           –  1998	 ...
Ques8ons	  &	  Remarks	  
Appendix	  –	  Turnaround	  Cont’d	    •  Financial	  Restructuring	               The	  issue	  of	  the	  working	  capi...
Appendix	  –	  Turnaround	  Cont’d	    •  Re-­‐vitalize	  the	  rela?onship	  with	  sellers	                The	   rela?o...
Appendix	  –	  Walk	  away	  or	  complete?	  •           In	   order	   to	   decide	   whether	   to	   walk	   away	   ...
Appendix	  –	  Lis8ng	  Requirements	      Lis8ng	  Standards	  -­‐	  United	  States	                    	  	            ...
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  1. 1. DUCATI  CASE  STUDY    Anastasia Karpova  Ekaterina  Nere8na  Ali  Baris  Sahin  Sena  Secilmis  Alfio  Shkreta    (equal  contribu8on)  
  2. 2. Agenda   Company  snapshot   3   SWOT  Analysis   4   Benefits  for  the  seller   5   Turnaround   6   Valua?on  summary   7   Exit  op?ons   9   Recommenda?on   11  
  3. 3. Company  Snapshot   Global  Brand  Recogni8on     Company  is  in  financial  distress   1 –  Race  winner  in  World  Championships   5 –  32.7%  decrease  in  volume  growth   –  31.7%  decrease  in  revenue   –  15  models  in  4  motorcycle  families   –  102%  decrease  in  EBIT   Efficient  Produc8on   –  Debt/Equity  is  100%   2 –  85%  of  components  are  outsourced     –  High  level  of  standardiza?on   World  Market  Share  in  Sports  Niche   Delivering  High  Margins       3 –  EBITDA  Margin  is  21%   –  ROA  is  30%     5%   6%   4%   Duca?     Honda   25%   Kawasaki   Compe88ve  Landscape   19%   Suzuki   Yamaha   –  4%  share  in  World   4 –  5%  share  in  Europe   24%   17%   BMW   Harley   –  30%  share  in  Tour  Motorcycle       3  
  4. 4. SWOT  Analysis     STRENGHTS     OPPORTUNITIES       –  High  barriers  to  entry   –  Capacity  to  expand  its  market  share   –  Market  segmenta?on     –  Capitalize  on  diversified  product  lines   –  Top-­‐?er  technology,  top-­‐notch  engineers     –  Geographical  benefits   –  Great  consumer  franchise       WEAKNESSES   THREATS     –  Poor  Management   –  On  the  verge  of  bankruptcy   –  Financially  intertwined  with  Cagiva’s   –  Low  switching  cost  for  the  customers   troubled  subsidiaries   –  Higher  produc?on  efficiency  from  rivals   –  Manufacturing  boclenecks       4  
  5. 5. Benefits  and  costs  for  Cas8glioni  Brothers     With  current  management  Duca8  will   bankrupt  in  1997   Presale  forecast   –  $130-­‐170    Million  for  51%  of  the  stake  sold   to  TPG  with  possible  earn  out  of  $65  million   Total  debt  payments   EBIT   based  on  EBITDA  target   –  Addi?onal  financing  for  Cagiva  core  division   –  Lower  cost  of  capital  (Deutche)   20,2   16,9   18,7   17,2   The  “Lollipop”  effect   12,8   16,6   12,1   –  Chairman  with  limited  competencies   34,9   15,9   45,8   47,3   52,3   51,4   0,0   –  Front  page  in  newspapers   –  Retain  of  control  in  “public  eyes”   Loss  of  control     –  Limited  nego?a?on  power  due  to   bankruptcy  and  no-­‐shop   Revenue  Growth  %   EBITDA  marging   –  Realloca?on  of  Duca?  cash  flows  to  Cagiva   15%   15%   13%   12%   12%   12%   11%   –  Use  Duca?  assets  as  a  collateral   –  Presence  in  luxury  motorcycles  niche   24%   14%   11%   7%   5%   4%   50%   –  R&D  team  and  developments   1997   1998   1999   2000   2001   2002   2003   5  
  6. 6. Turnaround   Methods   Assump8ons   Brand  awareness   Base  /  Low  case   –  “the  Ferrari  on  two  wheels”   Long  term  revenue  growth –  Duca?  experience            9%  /  6%   Sales   Distribu?on  system   Revenue  growth  in  1997                  100%  /  80%   Introduce  apparel  and  non-­‐motorcycle  products           Working  capital  management   Base  /  Low  case   Accounts  receivable   –  Increase  inventory  turnover    60  /  90  days   Opera?ng   –  Improve  collec?on  policy   Inventory    40  /  70  days   efficiency   Supplier  rela?onships   Accounts  payable   –  Payments  schedule    50  /  60  days   Materials  /  Revenue   –  Outsourcing    48%  /  53%     Develop  new  products   Base  /  Low  case   R&D   Retain  leader  posi?on  in  racing   R&D  /  Revenue            2%  /  1%   Implement  racing  technology  to  street  motorcycles   6  
  7. 7. LBO  valua8on   Base  case  projec?ons       1996 1997 1998 1999 2000Total revenues,  $ mln 130 260 322 368 408 Growth % -32% 100% 24% 14% 11%EBITDA 16 65 86 104 122 EBITDA margin 13% 25% 27% 28% 30% Growth % -58% 292% 34% 20% 17%Net Debt 182 161 156 127 97 Valua?on,  $  mln   EV/EBITDA  mul?ple  EV/EBITDA 16 20  EBITDA 122 17  EV 1927 14   13  Debt 97Equity 1829Horizon  IRR 35%Present  Equity  Value 551 Porsche   KTM     Yamaha   Harley   Davidson  Purchase  price  51% 281 7  
  8. 8. Valua8on  results  ________________________________________________   100   150   200   250   300   350   400   450   500   550   Ini8al  Offer   130   230   Con?gent  earn-­‐out   LBO     280   358   16x-­‐20x  Exit  EBITDA   DCF     130   560   Base/  Low   Trading  Comparables   340   420   1997E;  13x-­‐16x  EV/EBITDA   8  
  9. 9. Exit  op8ons   Possible  Exit     Rationale for IPO Borsa Italiana NYSE   –  Sale  to  a  strategic  buyer     Market Capitalization $192.2 bln $7,277 bln   –  Secondary  LBO  (sale  to  another  PE  firm)   Underpricing premium +20.4% +17.6%   –  Ini?al  Public  Offering(  IPO)   Expected returns +1.5% +0.34%     Underwriter’s fee 1.5-2% large cap 7% Method     4-5% small cap –  Book  Building    (99.3%  of  deals  in  1995-­‐2004)   Listing requirements No book value Book and MC >10 bln lira market –  Auc?on     25% equity float requirements No + profitability –  Fixed  Price  Public  Offer     3y balance sheets –  Hybrid  Methods   Tax Income tax 27% reduction 19% Lock-up period Voluntarily 180 days Other  Op8ons     –  Full  exit     60   Numbers  of  IPO   48   8   50   Capital  raised,  bl.  EUR   6   –  Par?al  exit   40   33   30   21   4   IPO  op8ons   20   12   15   13   2   10   –  Stock  Exchange:  Borsa  Italiana,  NYSE,  Other     0   0   1995   1996   1997   1998   1999   2000   Source:  Arosio,  2000;  Gajewski,  2006;  Ricer,  2003;         9      
  10. 10. Walk  away  or  complete?   Possibility  to  walk  away   Lecer  of  Intent:  “Agreement  to  make  an  agreement”   –  Binding  provisions:  walk  away  fee,  break  up  fee,  no  shop  clause  etc.   –  Pre  Contractual  Liability  in  European  Law   –  Breach  of  exclusivity  clause  by  Duca?   –  Cagiva  cannot  demand  walk  away  fee  and  should  reimburse  the  cost  incurred  by  TPG   Complete  the  deal   Since  internal  value  received  from  valua?on  is  higher  than  the  deal  price  TPG  should  proceed  with  the  deal   Threats   –  Possible  bankruptcy   –  Op?mis?c  projec?ons   –  Vola?le  equity  market  in  unstable  economy         10  
  11. 11. Recommenda8on   Recommenda8on   –  TPG  should  close  the  deal   –  Pay  $140  million  with  earn-­‐out  provision   –  IPO  in  3  years   Terms  of  deal   –  No  shop  agreement   –  Walk  away/break  up  fee:  redeem  $7-­‐8  mln  due  diligence  cost.   –  Working  Capital  Adjustments  Term:    $30mln   –  Earn  out  term:  $65  mln  if  EBITDA  in  1997  exceeds  90bln  lira     –  Pre-­‐emp?ve  right  to  purchase     –  Control  of  Board       –  Covenant  with  legal  en?ty  to  avoid  bankruptcy   –  Management  op?on:  10%  op?on  granted  in  case  of  IPO         10  
  12. 12. Actual  Facts   –  1996    TPG  purchased  51%  stake  of  Duca?  for  $325  ml*.   –  1998    TPG  purchased  most  of  the  remaining  shares   –  1999      Listed  on  Borsa  Italiana  and  NYSE,  TPG  sold  65%  of  its  shares  s?ll  remaining  majority  shareholder   –  2005      TPG  sold  remaining  shares  to  Inves?ndustrial  Firms  (Italian  Private  Equity  Firm)     11  
  13. 13. Ques8ons  &  Remarks  
  14. 14. Appendix  –  Turnaround  Cont’d   •  Financial  Restructuring   The  issue  of  the  working  capital  is  a  major  problem  for  Duca?.  The  fact  that   the   accounts   payable   have   been   “mushroomed”   to   100   days   was   a   relief   for   the  short  term  goal’s  of  the  firm.  Yet  because  suppliers  were  not  being  paid   and  the  major  financial  distress  that  the  enterprise  was  facing  would  result   ul?mately   in   0   supplies.   These   would   ruin   the   company.   In   order   to   avoid   such   a   scenario   TPG   would   need   to   inject   capital   star?ng   in   the   year   1996   and  that  would  recapitalize  the  firm  and  allow  it  to  operate  normally.   •  Stronger  product  name   The   best   racing   bikes   were   manufactured   by   Duca?   affirming   it-­‐self   as   superior   firm   with   edge-­‐cuqng   engines.   Being   so   widely   exposed   to   the   media   will   further   increase   the   customer   base   .   It   will   help   the   new   management   launch   a   more   efficient   marke?ng   campaign   that   would   adver?se   the   new   products   introduce   to   the   market.   Another   strategic   change   is   the   seqng-­‐up   on   complementary   products   such   as     motorcycle   helmets,  accessories  and  clothes.    
  15. 15. Appendix  –  Turnaround  Cont’d   •  Re-­‐vitalize  the  rela?onship  with  sellers   The   rela?onship   with   sellers   is   to   be   much   becer   managed   and   the   result   would   be   a   stable   rela?on.   Nurturing   trust   among   the   two   par?es,   by   fulfilling   payments   on   due   ?me,   will   increase   Duca?’s   efficiency   and   lower   the  number  of  motorcycles  laying  around  in  the  produc?on  plant.   •  Energe?c  and  close-­‐knit  R&D  team   The   engineers   of   the   R&D   team   of   Duca?,   especially   the   racing   one,   are   praised   for   the   high   quality   of   the   products   that   they   deliver.   The   very   compe??ve   environment   that   exists   in   the   racing   industry   pushes   for   constant   innova?on.   Ul?mately   the   fana?cs,   loyal   and   prospec?ve   customers  of  Duca?  will  benefit  from  the  edge-­‐cuqng  technologies  that  will   be  made  available  to  street  motorcycles.    
  16. 16. Appendix  –  Walk  away  or  complete?  •  In   order   to   decide   whether   to   walk   away   or   quickly   complete   the   deal,   deal   terms   should   be   assessed.   However,   before   doing   that   legal   result   of  walk  away  should  be  determined.  •  In   lecer   of   intent   there   is   an   exclusivity   clause.   It   means   that   Cagiva   should   not   shop   the   deal.   Although   it   is   not   provided   in   the   case   in   return   of  no-­‐shop  clause  Cagiva  might  have  demanded  a  walk  away  fee.  It  is  a  fee  that  obliges  buyer  to  pay  the  agreed  amount  if  buyer  decides  not  to   complete  the  deal.  Different  from  U.S.  law,  European  Law  recognizes  pre-­‐contractual  liability.  Therefore,  as  we  do  not  know  the  applicable  law,   we   have   to   take   that   into   considera?on.   Nevertheless,   as   Cagiva   has   been   in   breach   of   no-­‐shop   clause   which   is   also   a   binding   term   of   lecer   of   intent,   walk   away   from   buyer   would   be   jus?fied   and   buyer   would   not   be   required   to   pay   walk   away   fee.   Buyer   even   may   be   rewarded   its   damages  (such  as  due  diligence  costs)    since  seller  has  been  in  breach  of  no-­‐shop  clause.  That  is  to  say,  without  being  held  liable  TPG  can  walk   away  from  this  deal.  •  Arer  coming  to  the  conclusion  that  TPG  can  walk  away,  it  remains  to  discuss  whether  TPG  should  walk  away  from  deal  or  complete  to  deal.  For   that  purpose  terms  of  the  deals  should  be  analyzed  to  see  how  advantageous  they  are  and  to  what  extent  they  meet  the  concerns  of  TPG.  •  Terms:    •  No  shop  clause:  Explana?on  and  defini?on  made  above.  •  Walk  away  fee:  Explana?on  and  defini?on  made  above.  •  Break  up  fee:  Break  up  fee  is  the  reverse  of  walk  away  fee.  It  has  to  be  paid  by  seller  to  buyer  in  case  seller  decides  not  to  complete  the  deal.  In   the  case  it  is  not  stated  that  break  up  fee  is  determined.  If  there  is  it  is  advantageous.  However,  even  there  is  not  a  set  break-­‐up  fee  if  it  is   European   Law   is   to   be   applied   to   contract.   For   its   break   up   buyer   will   be   held   liable   under   pre-­‐contractual   liability.   However,   if   U.S.   law   will   be   applied,  there  is  a  slight  chance  based  on  promissory  estoppel  to  held  seller  liable  for  the  damages.  •  Working  capital  adjustments  term:  According  to  deal,  not  all  of  the  purchase  price  will  be  paid  to  Cagiva.  Deal  provides  that  a  part  of  deal   price  will  be  paid  to  company  so  that  it  is  working  capital  requirements  are  met.  This  is  a  quite  advantageous  term  as  most  essen?al  problem  of   Duca?  is  working  capital  and  it  will  decrease  the  probability  of  Duca?  to  go  bankrupt.  In  addi?on  as  Cagiva  will  have  49%  percent  of  the  Duca?   arer  closing  the  deal,  49%  of  this  amount  shall  be  deemed  to  be  paid  to  Cagiva.  •  Covenant  with  the  legal  en8ty  selling  Duca8  to  technically  avoid  insolvency:  It  is  also  a  term  to  avoid  insolvency.  •  Earn   out   term:   This   term   will   allow   TPG   to   pay   somewhere   between   20-­‐25%   of   the   deal   price   on   the   condi?on   that   previously   set   EBITDA   targets  are  met.  This  also  decrease  the  probability  of  TPG  facing  a  loss  arising  from  failure  to  improve  Duca?’s  performance.        •  Control  of  Board:  According  to  deal  TPG  will  control  the  board  un?l  TPG’s  interest  drop  under  10%.  It  is  also  a  very  advantageous  term  that   ensures  that  TPG  will  achieve  its  goals.  It  especially  takes  TPG’s  par?al  exit  from  the  investment.  However,  it  should  be  noted  that  it  may  not   bind   third   par?es   but   only   Cagiva.   In   addi?on   there   is   a   term   to   avoid   bot   party   to   collect   majority   of   public   shares   in   IPO.   It   also   ensures   that   management  will  remain  at  TPG.    With  all  these  provisions  deal  set  in  a  way  to  make  sure  that  TPG  will  achieve  its  goals.  Source  Balz  2004;  Tene,  2006  
  17. 17. Appendix  –  Lis8ng  Requirements   Lis8ng  Standards  -­‐  United  States                               Round-­‐lot  Holders   400  U.S.   Alterna8ve  #3  -­‐  Affiliated  Company         Public  shares   1,100,00  outstanding   For  new  en??es  with  a  parent  or  affiliated       Market  Value  of  Public  Shares   $40  million   company  listed  on  the  NYSE       IPOs,  Spin-­‐offs,  Carve-­‐Outs,  Affiliates   $100  million   Global  Market  Capitaliza0on     $500  million           Opera0ng  History   12  months   Financial  Criteria               Alterna8ve  #1  -­‐  Earnings  test       Alterna8ve  #4  -­‐  Asset  and  Equity       Aggregate  pre-­‐tax  income  for  last  3  years   $10  million   Global  Market  Capitaliza0on   $150  million   Minimum  in  each  of  the  most  2  recent       Total  Assets   $75  million   years;  Third  year  must  be  posi0ve   $2  million   Stockholders  Equity   $50  million                   Alterna8ve  #2a  -­‐  Valua8on  with  Cash  Flow       REITs       Global  Market  Capitaliza0on   $500  million   Stockholders  Equity   $60  million   Revenues  (most  recent  12-­‐month  period)   $100  million           Adjusted  Cash  Flow:       Funds  and  BDCs       Aggrehate  for  the  last  3  year       Net  Assets   $60  million   All  3  years  must  be  posi0ve   $25  million           Source:  NYSE  EURONEXT  
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