Luxottica, Cole National, Acquisition Dynamics in the Optic Sector - DDIM 2011, Group 9

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Finance case on the Acquisition price for Cole National by Luxottica.

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  • POST INTEGRATION ACTIONS Important for success: START PLANNING EARLY  no wait until the deal is officially enacted Decide a POST INTEGRATION PLAN that would be implemented after acquisition by a post integration team made by representatives of both parties The plan must concern: ROAD MAP DOCUMENT: to explain the acquisition an communicate new strategies and business objectives based on the original rationale for the transaction to all the members of the two companies. Stress the importance of communication btw all members. CULTURE plan: full assessment of corporate strategy of both parties. Identify factors of culture that are incompatible, identify areas of compatibility and focus on actions to implement desired factors and practices (try to capture best practices of the acquired company) HUMAN RESOURCES plan: creation of a cross company committee with managers and union representatives of both parties to Focus on employees and corporate governance matters: carefully think about allocation of responsibilities both at top positions and at lower levels. The committee is in charge of: - Being sure that everybody has understood the rationale for the acquisition. - Do not impose chances and new corporate values ( might make internal resistances to arise) BUT: - Due diligence of the target, assessment of existing roles and practices in place, eliminate what is very not in line and integrate best practices. - Negotiations with unions representatives. - Implement a measurement system and a continuous benchmarking process for the first period. PRODUCT AND TECHNOLOGIES INTEGRATION PLAN: D efine the go-forward product mix, set priorities for new product development and define feedback mechanisms to track progress and obstacles. OPERATIONS INTEGRATION PLAN prepare a detailed plan for operations, including all functional areas, such as accounting, distribution, engineering, manufacturing, marketing, purchasing, and sales. 
  • The main factors we consider in assessing the suitability of the several companies as comparables were Business Model, Size/MarCap and Market Coverage. Regarding Business Model, only those companies with a business model based on optical retailing were selected.   As far as size, we used market capitalization as a proxy of size. In this regard we considered as comparable only those companies with a MarCap in between US$ 200 Million and US$ 900 million.   Concerning market coverage, domestic market leader have been preferred from the others. Even if this measures is not the most objective one, in fact, it could probably gives us some useful hints for comparables ’ selection.   It would be beneficial to run an analysis based also on companies' financial leverage. However, due to the lack of data, we could not perform it.
  • We chose the multiples of 2004, the year of the offer, for DeRigo, OPSM and Grandvision. For what concerns Fielmann we decided to do the average of the multiple of the years 2003 and 2004 in order to overcome the distortion created by the German healthcare reform (higher sales in 2003 and lower sales in 2004). After calculating the EV we subtracted the net debt in order to obtain the equity value. Net debt, in particular, was composed by: Long-term debt + Accrued Interests – Cash and Equivalents. Dividing the EV by the fully diluted outstanding share (17.5 ml) let us find the price per share. In this case Price per Share represents the fair value of the company without taking in consideration possible synergies that can be created putting Cole National and Luxottica together.
  • The stability of the industry allows us to take in consideration also a transaction of the year ‘98.
  • We used the same procedure we performed for the market comparables. We used Ebitda multiples of the selected Transaction, we calculated EV and from it we derived Equity value and Price per Share. In this case Price per Share represents a good proxy of how much companies paid in the past for similar transactions ( it could include possible synergies, mark-ups, ect.).
  • Even if the price that LUX has to pay to conclude the deal will be higher than the one it offered at the beginning, the choice to counter bid Moulin’s last offer of 25 US$ per share is justified by the estimated value of synergies emerging from the acquisition
  • N.B.: Comparing the EBITDA margins of the comparable companies that we considered in the calculation of the share price with that of Cole National, we can see that the CNJ value is far below the average level. For this reason we can expect that a possible future acquisition of the company by Luxottica could increase this margin increasing the value of the share of CNJ. We have also to remember that we can take advantage of the bargaining power derived from the previously stipulated break-up fees that are quantifiable in 0,6857$ per share.
  • Luxottica, Cole National, Acquisition Dynamics in the Optic Sector - DDIM 2011, Group 9

    1. 1. Luxottica – Cole National Acquisition Dynamics in the Optic Sector Group 9 Yu Yu Gao Yi Ling Sun Marta Caccamo Marta Cenni Flavia Assogna Wei Liu Daniele Corti Vito Margiotta
    2. 2. <ul><li>26 January 2004: Luxottica (LUX) agreed to buy Cole National Corp for US$ 22,5 cash per share </li></ul><ul><ul><li>Total deal value US$ 662 million (market value US$ 401 million, net debt US$ 261 million) </li></ul></ul><ul><li>19 April 2004: counter bid by Hong Kong Moulin International. Bid price: US$ 25 per share in cash. </li></ul><ul><ul><li>HAL Trust was rumored to be supporting Moulin counter bid to obtain full control over Pearle Europe </li></ul></ul><ul><li>Postposition of the Extraordinary General Meeting planned for April 20 </li></ul><ul><li>And of April: LUX still stuck on its proposal. CNJ obligated to pay a US$ 12 million fee if the merger agreement would have terminated for a superior acquisition by another party. </li></ul>SETTING THE SCENE <ul><li>October 2003: Cole National received an unsolicited non-binding proposal to acquire the company for US$ 19,65 per share </li></ul><ul><ul><li>Deal value US$ 321 million </li></ul></ul>
    3. 3. WORLD LEADER Prescription Frames & Sunglasses <ul><li>FULLY INTEGRATED VALUE CHAIN </li></ul><ul><li>IN-HOUSE PRODUCTION </li></ul><ul><li>( 85% Italy – 15% China ) </li></ul><ul><li>100% EXTERNAL SOURCE OF RAW MATERIALS </li></ul>The Bidder : LUXOTTICA
    4. 4. Largest optical retailer in North America through acquisition of LensCrafters and Sunglass Hut Sales by Product and Category Sales by Geographic Area LUX ’s Sales
    5. 5. <ul><li>7.6% of US 17 bln ophtalmology market </li></ul>HAL CNJ Pearle Europe 79% 19.2% 21% Things Remembered Cole Vision <ul><li>Licensed Brands : >1200 stores in US and Canada suburban areas operated through a series of advanced tech centralized labs </li></ul>Managed Vision : care benefits to employers, HMOs and other US organizations Pearl Vision : >850 corpo owned and franchised shops in malls in US, Canada, Puerto Rico and Virgin Islands The Target : COLE VISION
    6. 6. <ul><li>INDUSTRY FACTS </li></ul><ul><li>Vertical integration trend </li></ul><ul><li>Consolidation </li></ul><ul><li>Licence rotation </li></ul>Potential Synergies <ul><li>Empire Building : Cole and Luxottica are already market leaders in US, together </li></ul><ul><li>Complementarity : Luxottica serves mainly urban high-traffic areas, Cole is concentrating on suburban </li></ul><ul><li>Higher negotiating power and lower cost of development of exclusive lines </li></ul><ul><li>Gain control of 21% of Pearle Europe , one of its top clients </li></ul><ul><li>Defend from HAL leading position in EU retail </li></ul>Why?: 1+1 > 2
    7. 7. STEPS TO VALUE CREATION Rationale for the acquisition Extracting synergies <ul><li>New optical business model </li></ul><ul><li>Expanding into a new segment (vision care services) through CNJ's controlled business Cole Managed Vision </li></ul><ul><li>Develop new product </li></ul><ul><li>• Improved distribution channel </li></ul><ul><li>Warehouse, IT </li></ul><ul><li>Platforms </li></ul><ul><li>• Increased leverage with </li></ul><ul><li>Suppliers </li></ul><ul><li>• Licensed brands </li></ul><ul><li>• Franchising </li></ul><ul><li>• Lab networks </li></ul><ul><li>Industry trends: </li></ul><ul><li>- Verticalization </li></ul><ul><li>- Consolidation </li></ul><ul><li>- Licence rotation </li></ul><ul><li>Expanding in the European market </li></ul><ul><li>Defending from HAL leading positon in Eu retail market </li></ul>Opportunities
    8. 8. Post integration actions Please see additional notes below.
    9. 9. MARKET COMPARABLES
    10. 10. Main business: Optical Retail The company operates 3 different businesses: Cole Licensed Brands, Pearle Vision and Cole Managed Vision. 21% participation in Pearle Europe (the third largest optical retailer in Europe with around 700 million USD of annual sales and 1200 locations) Approximately 3000 stores - 400 in franchising Mar ket Cap italization: US$ 321 Million in euro 7.6% US Market (US$ 17 Billion) COMPANY OVERVIEW
    11. 11. <ul><li>Business Model </li></ul><ul><ul><ul><ul><ul><li>Size </li></ul></ul></ul></ul></ul><ul><ul><li>Market Coverage </li></ul></ul><ul><ul><ul><ul><li>Financial Leverage </li></ul></ul></ul></ul>Optical retailing MarCap US$ 200 – 900 millions Strong market presence Lack of data Please see additional notes below.
    12. 12. Mainly present in US and Mexico through 490 vision centers, the company has been closed to bankruptcy in 2001 and it is actually still undergoing a major restructuring process. Not suitable for comparison.   The company operates through 9 owned and 5 franchises managed stores. Too small in size for comparison. COMPARABLES ’ ANALYSIS 1/3 National Vision Emerging Vision De Rigo One of Europe ’ s largest optical retailer. Retail operations represent 70% of company ’ s total revenues. Roughly one third of company ’ s stores are under franchise contract. Very internationalized – active in over 80 countries worldwide.
    13. 13. COMPARABLES ’ ANALYSIS 2/3 Alain Afflelou One of the largest French optical retailers. Franchise business accounts for 95% of its total revenues (in this respect the business model of this company it is not suitable for comaprison with our). Not active internationally. OPSM Grand Vision The largest French optical retailer, multibrand. Mainly active in the French domestic market (47%), UK (40%). The remaining part comes form rest of Europe. Market leader in Australia, multibrand (5 brands owned). Broad product offering; 590 stores in 5 different countries – Australia and Hong Kong being the major ones.
    14. 14. COMPARABLES ’ ANALYSIS 3/3 Fielmann The largest German optical retailer. Most of the revenues (85%) come from the domestic German market. Particular attenction has to be given on the impact the recent change in legislation - German healthcare reform - had on the company. EBITDA for 2004 is, in fact, expected to decrease by roughly 40%. Oakley Paris Miki Japanese large optical retailer. Mainly active in the domestic market. The company has recently undergone a strategic shift toward franchise business, that now accounts for 47% of its total revenues. American producer of sunglasses and prescription lenses; operates marginally in retail market. Business Model not suitable for comparison.
    15. 15. Selected COMPA RABLES - De Rigo - OPSM - Grand Vision - Fielmann
    16. 16. MULTIPLE SELECTION <ul><li>EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn ’ t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings. </li></ul><ul><li>P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don ’ t have this kind of data, we won ’ t take it into consideration. </li></ul><ul><li>EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk. </li></ul>
    17. 17. MULTIPLE SELECTION <ul><li>EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn ’ t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings. </li></ul><ul><li>P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don ’ t have this kind of data, we won ’ t take it into consideration. </li></ul><ul><li>EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk. </li></ul>OUR CHOICE = EV/EBITDA EV/EBITDA is not influenced by the capital structure and by differences in accounting standards (given that the relative size of D&A to EBIT is very large, the distortion could be sensible)
    18. 18. PRICE CALCULATION Assumptions: We will look at the 3 months average instead of point-in-time. This will give us a fairer view of the company value. We decided to eventually adjust values that include specific unusual events or extraordinary performances due to external factors. FINAL PRICE PER SHARE = US$ 22.03 Please see additional notes below. See appendix 1 for further details
    19. 19. TRANSACTION COMPARABLES
    20. 20. TRANSACTION COMPARABLES SELECTION Main Variables: Deal value (we look for similar value transaction); Date of the deal (too old transactions are difficult to compare); Target sector (only “ Optical Retail ” ); Please see additional notes below. <ul><li>From the analysis we selected the following 3 comparables: </li></ul><ul><li>ECCA-USA / Thomas Lee Part.; </li></ul><ul><li>OPSM Australia / Luxottica; </li></ul><ul><li>Grandvision / Halt Trust. </li></ul>
    21. 21. PRICE CALCULATIONS Please see additional notes below. In this case Price per Share represents a good proxy of how much companies paid in the past for similar transactions ( it could include possible synergies, mark-ups, ect.). FINAL PRICE PER SHARE = US$ 30.09 See appendix 2 for further details
    22. 22. Even if the price that LUX has to pay to conclude the deal will be higher than the one it offered at the beginning, the choice to counter bid Moulin’s last offer of 25 US$ per share is justified by the estimated value of synergies emerging from the acquisition. SYNERGIES !! LUX CNJ LUX CNJ SYNERGIES INCREASE TOTAL VALUE
    23. 23. FINAL CONSIDERATIONS
    24. 24. Observing the prices got from transaction and market comparables analysis and taking into account the synergies that can arise from the deal, we estimate a reasonable price range in between 25 and 27 $ per share. Please see additional notes below.
    25. 25. appendix
    26. 26. Appendix 1: Price per share evaluation – market multiples
    27. 27. Appendix 2: Price per share evaluation – transaction multiples

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