The Deal

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This presentation contains the analysis of a prospective acquisition of Bulgari by LVMH. This exercise was done as a part of a case study competition conducted by JPMorgan. The presentation covers various aspects like DCF Valuation, Trading comps, Transaction Comps, Synergy estimation, Acquisition financing etc.

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  • really good work ! could you please send me the slides and your work to nicolo.frigato@gmail.com ?

    thank you :)
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  • great presentation, could you share the ppt at alperisikel@hotmail.com please?

    thank you
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  • Hello Sir. Is it possible to fwd the Presentation to gmdr200@gmail.com
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  • Hello, this presentation looks great! Would it be possible the ppt please at aronchimba@yahoo.it? many many thanks!
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  • Hello Mr Author, I am MBA student who is studying LUXE MBA Program, I like your PPT very much. COuld you please kindly share with this PPT for my learning purpose? Many thanks. Haiping
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  • The Deal

    1. 1. THE DEAL JPMorgan Investment Banking Competition Anirban Ray | Sumit Thawrani | Akash Gehani MDI Gurgaon LVMH BVLGARI
    2. 2. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    3. 3. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    4. 4. Luxury Sector | Overview <ul><li>High profitability sector </li></ul><ul><ul><li>Increasing number of entry barriers </li></ul></ul><ul><ul><li>Strong profitability linked to brand strength </li></ul></ul><ul><ul><li>Allows them to significantly increase their selling prices over time </li></ul></ul><ul><li>Democratisation of consumer appetite for luxury brands, especially among the young </li></ul><ul><li>Increased level of economic inequality around the world </li></ul><ul><ul><li>Global wealth of HNWIs is poised to grow by 6.8% p.a. until 2011 </li></ul></ul><ul><ul><li>9.5% in the Middle East and 8.5% in Asia, but only 4.3% in Europe </li></ul></ul>Characterized by their cyclical nature and structurally higher growth profile than the world economy Profitability Across Key Selected Luxury Product Categories Luxury Goods Sales Growth vs. OECD GDP Growth Source: Merrill Lynch Equity Research & The Economist Intelligence Unit Gross Margins (%) Operating Margins (%) Leather Goods & Shoes 35%-80% 20%-50% Ready to wear 50%-65% 5%-20% Cognac & Champagne 30%-40% 25%-35% Jewellery & Watches 55%-70% 15%-20% Perfumes & Cosmetics 55%-70% 15%-20% Writing Instruments & Lighters 15%-35% 5%-12% Tableware 10%-50% 0%-10%
    5. 5. Growth Potential | Geographical Perspective <ul><li>Japan holds the key </li></ul><ul><ul><li>Most important market for a luxury retailer, consumes luxury items at twice the rate of the Americans </li></ul></ul><ul><li>Expenditure levels in Italy and in France are skewed </li></ul><ul><ul><li>Due to the contribution from tourism, especially from Russian and Japanese visitors </li></ul></ul><ul><li>Growth potential </li></ul><ul><ul><li>US conceals considerable growth potential </li></ul></ul><ul><ul><li>Emerging economies like China & Russia </li></ul></ul><ul><ul><li>By 2014, emerging markets could become the #1 consumers of luxury goods in the world and represent a quarter of Luxury sector sales </li></ul></ul>
    6. 6. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    7. 7. Why should LVMH acquire Bulgari? <ul><li>Jewellery and Watches Division </li></ul><ul><ul><li>Selective Retailing, Perfumes & Cosmetics, and Watches & Jewelry have low profitability relative to sales </li></ul></ul><ul><ul><li>Bulgari has strong presence in JWA and Perfume divisions </li></ul></ul><ul><li>Bulgari gets 21% of sales from Japan </li></ul><ul><ul><li>LVMH gets only 13% sales from Japan </li></ul></ul><ul><li>High Degree of Verticalisation in watch movements and components </li></ul><ul><li>152 DoS and 97 Third party monobrand stores (Q1FY08) </li></ul>
    8. 8. Bulgari Product Segments | Projected Revenue Growth <ul><li>Jewellery </li></ul><ul><ul><li>Growth rate to slow to 7% in 08E due to recessionary pressures in US and Europe </li></ul></ul><ul><li>Watches </li></ul><ul><ul><li>Expect sales to fall by 1% in 08E </li></ul></ul><ul><ul><li>Company reports: shortage of components and delay in backward integration will impact the Watches division </li></ul></ul><ul><li>Accessories </li></ul><ul><ul><li>‘ Accessorization’ process is ongoing: consumers show strong willingness to spend </li></ul></ul><ul><ul><li>Expect segment to grow by 6% in 08E </li></ul></ul><ul><li>Perfumes </li></ul><ul><ul><li>Expect owned subsidiary retail stores to improve margins and bring incremental revenues </li></ul></ul>
    9. 9. DCF Valuation <ul><li>Assumptions </li></ul><ul><li>Assuming 16% incremental ROCE based on the trend of last 10 years </li></ul><ul><li>Bulgari’s sales after 2012 are forecasted based on the trend in sales growth in last 5 years </li></ul><ul><li>Assuming a terminal growth of 2% </li></ul><ul><li>Risk Free Rate: 3.72% (10 year U.S. Government bond yield) </li></ul><ul><li>Market risk premium of 4.5% has been assumed </li></ul><ul><li>Beta value=1.26 (Source: Financial Times, Website) </li></ul><ul><li>WACC 9.07% (Calculation) </li></ul>Bulgari DCF Valuation Present Value of Cash Flows 887 Present Value of Terminal Value 1596 Firm Value 2483 - Net Debt/(Cash) 141 Equity Value 2342 Equity Value per Share (€) 7.82
    10. 10. Cost of Acquisition To determine the feasible acquisition price to LVMH, Bulgari has been valued on the basis of following three models Discounted Cash Flow <ul><li>Evaluates an enterprise based on expected cash flows in the future </li></ul><ul><li>Fair Value of Bulgari share: € 7.82 </li></ul><ul><li>Firm Value*: € 2,482 million </li></ul><ul><li>Uses ratios to value a company based on similar listed companies </li></ul><ul><li>Fair Value of Bulgari share: € 7.38 </li></ul><ul><li>Firm Value*: € 2,284 million </li></ul>Trading Multiples Transaction Multiples <ul><li>Incorporates target premium into valuation based on similar transactions </li></ul><ul><li>Fair Value of Bulgari share: € 8.24 </li></ul><ul><li>Firm Value*: € 2651 million </li></ul>Based on this, range for the transaction share price can be from € 7.38 to € 8.24 Current Bulgari share price**: € 4.53 Acquisition premium (to 6 months): 20% 6 months average price: € 6.91 Acquisition FV: € 2.74-3.18 billion
    11. 11. Valuation Drivers for Bulgari     Long Term EBIT Margin (%)   13.40% 14.40% 15.40% 16.40% 17.40% Long Term Growth 1% 7.08 7.12 7.16 7.20 7.23 1.50% 7.39 7.43 7.47 7.50 7.54 2% 7.74 7.78 7.82 7.86 7.89 2.50% 8.15 8.18 8.22 8.26 8.30 3% 8.62 8.66 8.70 8.73 8.77 WACC (%) 7.1% 8.1% 9.1% 10.1% 11.1% Terminal Growth 1.0% 7.4 7.3 7.2 7.0 6.9 1.5% 7.7 7.6 7.5 7.4 7.2 2.0% 8.1 8.1 7.8 7.7 7.6 2.5% 8.5 8.5 8.2 8.1 8.0 3.0% 8.9 8.9 8.7 8.6 8.5 Long Term Growth Rate & EBIT Margin Capital Structures & Terminal Growth of Cash Flows
    12. 12. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    13. 13. BCG Matrix for Bulgari Jewelry & Watches Perfume Accessories
    14. 14. BCG Matrix for LVMH Jewelry & Watches Perfume Wine & Spirits Fashion & Leather goods Selective Retailing
    15. 15. Synergies | Jewellery and Watches <ul><ul><li>Tag Heuer’s expertise in retail distribution can be leveraged </li></ul></ul><ul><ul><li>LVMH has been successful in centralizing the manufacture of movements </li></ul></ul><ul><ul><li>H.Finger AG and Leschot S.A will strengthen internal production of manufactured movements </li></ul></ul><ul><ul><li>Daniel Roth and Gerald Genta will give LVMH group access to exclusive luxury watch segment </li></ul></ul>LVMH BULGARI Jewellery <ul><li>Chaumet and DeBeers to expand its store networks </li></ul><ul><li>Strong research and innovation base </li></ul><ul><li>New Parentesi openwork collection, B.zero1 line extended with new products based on the famous Turbogas motif </li></ul>Watches <ul><li>Tag Heuer’s new high-end Grand Carrera line was a huge hit </li></ul><ul><li>Both Hublot and Zenith have posted strong revenue growth in Q308 </li></ul><ul><li>Verticalisation process in watch-making and is fully backward integrated </li></ul><ul><li>Bvlgari-Bvlgari and Assioma D augmented Bulgari‘s offering in the precious watch segment </li></ul>
    16. 16. Synergies | Perfumes and Cosmetics <ul><ul><li>Strong presence in Europe but relatively new to high growth markets like China, Russia, Middle East </li></ul></ul><ul><ul><li>Sephora retail network is extremely strong </li></ul></ul><ul><ul><li>LVMH can leverage on Bulgari’s Owned subsidiary direct distribution strategy and push its own brands </li></ul></ul><ul><ul><li>Strong team of Dermatologists and Cosmeticians, resulting in R&D synergies </li></ul></ul>LVMH BULGARI Perfumes <ul><li>Success of new products like Dior Homme Sport </li></ul><ul><li>Growth driven by innovation and expansion on flagship lines like Christian Dior, Givenchy </li></ul><ul><li>New launches of Bulgari Pour Femme and Jasmin Noir </li></ul><ul><li>Now at worldwide position 9 in perfumes </li></ul>Cosmetics <ul><li>New launches of Capture skin care line and Phenomen’ Eyes mascara </li></ul><ul><li>Portfolio replete with iconic Italian, French, American brands </li></ul><ul><li>Won the Prix Italie 2008 award for innovation, design, texture and communication </li></ul>
    17. 17. Synergies <ul><li>Capex Efficiency </li></ul><ul><ul><li>LVMH’s better sales/capex and EBIDTA/capex ratios will help improve Bulgari’s efficiency ( assuming 60% closure in gap) </li></ul></ul><ul><li>Operational Synergies </li></ul><ul><ul><li>We expect 5% more sales and 10% less costs </li></ul></ul><ul><ul><li>Leverage on Bulgari’s extensive network of 152 Dos and 97 Third party monobrand stores </li></ul></ul><ul><ul><li>Owned subsidiary direct distribution strategy of Bulgari can boost the Return on Sales </li></ul></ul><ul><li>Tax Synergies </li></ul><ul><ul><li>Will arise due to impairment of goodwill of the acquired company (assumption: goodwill be impaired only in 2 nd year of acquisition) </li></ul></ul>LVMH Bulgari Incremental sales/capex 1.44 1.06 Incremental EBIDTA/capex 0.37 0.19 Synergies Realized (€mn)
    18. 18. Strategic Fit – Value chain match-up Purchase from Suppliers Technology Operations Marketing Sales & Distribution Service Jewelry & Watches Wine & Spirits Perfumes Fashion & Leather goods Accessories Selective Retailing No synergy Strong synergy Medium synergy
    19. 19. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    20. 20. Financing Options <ul><li>The options we worked on are </li></ul><ul><li>All cash deal (50% debt + 50% Reserves) </li></ul><ul><ul><li>Natural choice for LVMH given the amount of cash on its balance sheet </li></ul></ul><ul><ul><li>Shows the confidence of the acquirer in the deal (Signaling effect) </li></ul></ul><ul><ul><li>Cheapest source of finance </li></ul></ul><ul><ul><li>Expedites the transaction </li></ul></ul><ul><li>50% Equity + 50% Debt </li></ul><ul><ul><li>Can be used in case cash is needed for funding other ventures </li></ul></ul><ul><ul><li>Involves dilution of equity up to 5% </li></ul></ul><ul><ul><li>Debt will affect Bulgari’s credit rating </li></ul></ul><ul><ul><li>Lower synergy due to issue expense </li></ul></ul>All Cash Deal Equity-Debt Deal Total Value of Synergies (m€) 967.75 937.58 Synergy per share (€) 3.23 3.13
    21. 21. Determination of Acquisition price <ul><li>For this acquisition, EV/EBIDTA  14.65x and EV/Sales  2.14x </li></ul><ul><li>Transactions involving international luxury peers, EV/EBIDTA  12.9x and EV/Sales  2.405x </li></ul><ul><li>Range of famous jewellery collections like Parentesi, Tubogas, Bulgari Bulgari, Astrale and Allegra </li></ul><ul><li>Exclusive watch brands like Daniel Roth and Gerald Genta </li></ul><ul><li>Stores in NYC Fifth Avenue , Ginza Towers in Tokyo, twin-stores in Omotesando </li></ul>Final Acquisition Price Equity Value to Acquirer Equity Value: Standalone € 3332.4mn € 555.4mn € 2777mn € 2342mn € 184mn € 2483mn Premium Paid Less: Net Debt Enterprise Value Synergies Stand-Alone Valuation Transaction Valuation
    22. 22. Agenda <ul><li>Luxury Goods Industry </li></ul><ul><ul><li>Overview </li></ul></ul><ul><ul><li>Geographic Perspective </li></ul></ul><ul><li>Why acquire Bulgari? </li></ul><ul><ul><li>Rationale </li></ul></ul><ul><ul><li>Product Segments: Projected growth </li></ul></ul><ul><ul><li>Bulgari: Valuation </li></ul></ul><ul><ul><li>Valuation Drivers </li></ul></ul><ul><li>Synergies </li></ul><ul><ul><li>BCG Matrix </li></ul></ul><ul><ul><li>Comparative Analysis </li></ul></ul><ul><ul><li>Post-Merger Projections </li></ul></ul><ul><ul><li>Strategic Fit – Value Chain Match-up </li></ul></ul><ul><li>Final Acquisition </li></ul><ul><ul><li>Financing Options </li></ul></ul><ul><ul><li>Final Price </li></ul></ul><ul><ul><li>Rationale: Premium paid </li></ul></ul><ul><li>Current Outlook & Alternatives </li></ul><ul><ul><li>Right year for Acquisition? </li></ul></ul><ul><ul><li>Alternatives </li></ul></ul>
    23. 23. 2008 | Right year for acquisition? <ul><li>Europe is decreasing significantly </li></ul><ul><li>Japan has entered into a recession and US is far from recovery </li></ul><ul><li>For the first time, currency fluctuations may have +ve impact </li></ul><ul><ul><li>USD and Yen have recovered against the € </li></ul></ul><ul><li>Emerging markets still growing </li></ul>-3% -7% -2% +2% Russia China India Brazil Population 145mn 1.3bn 1.1bn 190mn HNWI(‘07) 138000 415000 123000 143000 Luxury Goods market (‘07) % of total market 3,6 €B 2,1% 4,5 €B 2,7% 0,6 €B 0,4% 1,3 €B 0,8% Expected growth (5yrs) 20% 30% 25% 35%
    24. 24. Alternatives for LVMH <ul><li>Bulgari – acquisitions more likely in the ‘hard’ segment such as Watches and Jewellery </li></ul><ul><ul><li>LVMH can gain essential know-how in movements and can gain critical mass against the retailers </li></ul></ul><ul><li>Concerns - Returns on investment take a long time </li></ul><ul><ul><li>Fendi – 6 years for acceptable level of profitability </li></ul></ul><ul><ul><li>Christian Dior Couture – operating margins < 10% </li></ul></ul><ul><ul><li>Yves Saint Laurent Couture – not profitable as of 2007 </li></ul></ul><ul><li>No real major consolidation in the short term - due to current financial crisis </li></ul><ul><li>Long term - there should be a wave of consolidation in the sector, especially cosmetics sector, both in mass distribution and in selective retail channels </li></ul>
    25. 25. Thank You
    26. 26. References <ul><li>“ The Deal” Case Study – JPMorgan </li></ul><ul><li>The Brave New World of M&A – Boston Consulting Group, July 2007 </li></ul><ul><li>World Wealth Report - CapGemini & Merrill Lynch, 2008 </li></ul><ul><li>Merrill Lynch Luxury and Lifestyle Certificate - April 2007 </li></ul><ul><li>Bulgari Group First Half 2008 Results – August 2008 </li></ul><ul><li>LVMH Group First Half 2008 Results – August 2008 </li></ul><ul><li>“ Eurozone – Long Term Strategy” Research report – Natixis Securities, October 2007 </li></ul><ul><li>“ Analyst Research Report – Bulgari SpA” – Citigroup, May 2008 </li></ul><ul><li>“ Analyst Research Report – Bulgari SpA Q208 Results Preview” – JPMC, July 2008 </li></ul>
    27. 27. WACC Calculation <ul><li>Assumptions </li></ul><ul><li>Risk free rate : US 10 year treasury bond yield </li></ul><ul><li>Equity risk premium : 4.5% </li></ul><ul><li>Beta taken from Financial Times </li></ul><ul><li>Debt premium : spread over US treasury yield for Bulgari </li></ul><ul><li>Tax rate : Average for Bulgari </li></ul><ul><li>Share price : Average for last 6 months </li></ul>Back Risk free rate 3.72% Equity risk premium 4.50% Beta 1.26 Cost of equity 9.4% Debt premium 1.50% Gross cost of debt 5.22% Tax rate 12.00% Net cost of debt 4.59% Share price ( € ) 6.91 Shares issued (m) 299.53 Market capitalisation (m € ) 2,070 Net debt - book (m € ) 150 Enterprise value (m € ) 2,220 WACC 9.07

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