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M&A Pitch Book- Costco and Target Proposed Merger

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Corporate Finance, Merger and Acquisition,
potential deal, Costco acquire Target.
MBA Project

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M&A Pitch Book- Costco and Target Proposed Merger

  1. 1. M&A PITCHBOOK Date : 12/10/2014
  2. 2. 2M&A PITCHBOOK – COSTCO/TARGET MERGER 12/10/2014 Background Costco acquires Target in stock exchange deal valued at $56 billion
  3. 3. 3M&A PITCHBOOK – COSTCO/TARGET MERGER 12/10/2014 Termsheet Purchase Price Total Deal Size ~$56B Implied Price per Share $88.39 ResultingCOST Ownership of TGT 100% TransactionFees $224MM Exchange Ratio 0.62 Consideration 100% stock COST will give TGT shareholders .62 shares of newly issued COST shares for every 1 share of TGT outstanding.This will be classifiedas a 368 "B" reorganizationfor tax purposes. Number of Shares to be issued 394.915 million Tax Considerations Section 368 "B" Reverse Triangular Merger Synergy Value $1B increase in Net Income from increasing ROE from 9.4% to 14% ($224M) in transactioncosts Transaction Process Requirements TGT and COST shareholders must approve the deal Social Issues TGT becomes a subsidiary of COST TGT and COST executives will remain intact Maintain both headquarters TGT will retain its current name TGT workforce will be reduced by 5% for overlaping functions
  4. 4. 412/10/2014 Retail industry overview Structure - Consolidated - Highly Competitive - High volume and Low margins Trends - Channel fragmentation - Move to supermarket category - Global competition - Online shopping Industry Estimates * High Low Mean Median EPS growth rate 15.90% 5.65% 10.18% 9.35% Revenue Growth rate 7.24% (2.54%) 3.20% 1.99% Net income growth 1.15% (35.86%) (8.68%) (7.27%) Keys to success - Superior supply chain and logistics - Customer service orientation - Attractive product display - Adapt to demand variation * Estimates for peer group – See Exhibit 1. Peers include Costco, Target, Dollar General, Family Dollar Stores, Wal-Mart, Dollar Tree, Kohl’s, Bed Bath & Beyond
  5. 5. 5 12/10/2014 Costco Wholesale Capital Structure ($17.8 billion) * 3 months ending Nov 1, 2014 Ownership by type (436.76M shares out) Top 5 holders Share Price = $142.63 (on 12/5/2014) Total Debt 30% Total Common Equity 70% Top 5 owners The Vanguard Group 5.18% Capital World investors 4.58% State Street Corp 4.28% FMR LLC 3.28% Black Rock Trust 2.68% Institutions 75% Individuals/Ins iders 0.19% State Owned Shares 0% State Owned Shares 0.07%
  6. 6. 6 12/10/2014 Target Corp. Capital Structure ($30.7 billion) Total Debt 47% Total Common Equity 53% * 3 months ending Nov 1, 2014 Institutions 90% Individuals/Insi ders 0.19% Employees 5% State Owned Shares 0.07% Public and Other 5% Ownership by type (636,964,000 shares out) State Street Global* 9.50% The Vanguard Group* 5.30% Franklin Resources Inc* 5.51% Target Corp (401K) plan 5.03% Blackrock Inc* 4.92% Top 5 holders Share Price = $73.66 ( on 12/5/2014) *also shareholders in Costco Note 70% of Target stock owned by a current investor in Costco.
  7. 7. 712/10/2014 Why is Target a good target?? Source CapitalIQ See Exhibit2a, 2b Target Corporation operates general merchandise stores in the United States and Canada, offering household essentials, food and pet supplies. See Exhibit 2(a) for details Target Corp. is a good acquisition target for the following reasons : - Strong revenues in excess of $73 billion - Strong brand name with a higher end clientele is an attractive brand extension for acquirer - Strong customer service and quality management - 1,801 stores in U.S.; 133 stores in Canada; 37 distribution centers in U.S.; 3 distribution centers in Canada; Global locations in India and Canada; - Online retailing - 366,000 employees However, this historically strong company is showing signs of weakening: - Target is currently performing below-average to average relative to its industry comparables (details follow). - Historically, stock has tracked S&P500, but is currently lagging S&P500 by ~20-30% - EBIDTA and EPS growth rate (CAGR) is declining for the past 5 years unlike its compititiors.
  8. 8. 8M&A PITCHBOOK 1/23/2013 Target Stock appears undervalued. Costco up 290% S&P up 170% TGT up 140% => recent underperformance Stock performance since 2005 Target deviating from tracking with S&P 500
  9. 9. 912/10/2014 Selected financials: Target underperforming! Source CapitalIQ See Exhibit3 (d )
  10. 10. 1012/10/2014 Selected financials: Target underperforming! Source CapitalIQ See Exhibit3 (f) (4.0) (2.0) 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Costco Wholesale Wal-Mart Stores Inc. Dollar General Family Dollar Stores Inc. Dollar Tree, Inc. Kohl's Corp. Bed Bath & Beyond Inc. Target Corp. EBITDA – 5yr CAGR 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Costco Wholesale Wal-Mart Stores Inc. Dollar General Family Dollar Stores Inc. Dollar Tree, Inc. Kohl's Corp. Bed Bath & Beyond Inc. Target Corp. Total Revenue 5yr CAGR 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Costco Wholesale Wal-Mart Stores Inc. Dollar General Family Dollar Stores Inc. Dollar Tree, Inc. Kohl's Corp. Bed Bath & Beyond Inc. Target Corp. Net Income Margin LTM (10.0) (5.0) 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Costco Wholesale Wal-Mart Stores Inc. Dollar General Family Dollar Stores Inc. Dollar Tree, Inc. Kohl's Corp. Bed Bath & Beyond Inc. Target Corp. EPS 5 Yr CAGR
  11. 11. 11Washington University Olin Business School - PMBA34 12/10/2014 Valuation #1 of Target via Market Multiples * See Exhibit3a Market Multiples* Price Range : $34.33 to $129.15 Implied Multiples Target LTM Implied Enterprise Value ImpliedEquity Value Price Per shareMarket Value Low Median High To Revenue 0.5x 0.9x 1.3x $73,703 $66,333 $52,780.7 $82.86 To EBIDTA 6.2x 10.1x 14.3x $5,720 $57,994 $44,442 $69.77 Details ImpliedEquity Value Price Per share Low Median High Low Median High To Revenue $23,300 $52,781 $82,262 $36.58 $82.86 $129.15 To EBIDTA $21,865 $44,442 $68,421 $34.33 $69.77 $107.42
  12. 12. 12 12/10/2014 Valuation #2 of Target via Comparable Transactions * See Exhibit 3a Comparable Transactions* Price Range : $25.01 to $138.61 Implied Multiples Target LTM Implied Enterprise Value ImpliedEquity Value Price Per shareMarket Value Low Median High To Revenue 0.4x 0.9x 1.3x 73,703 66,333 52,781 $82.86 To EBIDTA 7.2x 9.2x 11.9x 5,720 52,614 39,062 $61.33 To EBIT 11.3x 13.2x 17.8x 5,720 75,687 62,135 $97.55 Details ImpliedEquity Value Price Per share Low Median High Low Median High To Revenue $15,929 $52,781 $82,262 $25.01 $82.86 $129.15 To EBIDTA $27,553 $39,062 $54,625 $43.26 $61.33 $85.76 To EBIT $51,182 $62,135 $88,290 $80.35 $97.55 $138.61
  13. 13. 13Washington University Olin Business School - PMBA34 12/10/2014 Valuation #3 of Target via DCF * See Exhibit4a DCF Model - Assumptions Historical year ending February 1, Projected year ending February 1, 2012 2013 2014 2015 2016 2017 2018 2019 Sales growth NA 4.92% -0.96% 1.98% 2.23% 2.49% 2.74% 3.00% Cost of goods sold (as a % sales) 69.14% 69.40% 69.93% 69.93% 69.93% 69.93% 69.93% 69.93% SG&A (as a % sales) 20.13% 20.30% 21.08% 21.08% 21.08% 21.08% 21.08% 21.08% CapEx (as a % sales) NA 4.47% 4.76% 4.61% 4.61% 4.61% 4.61% 4.61% Depreciation (as a % of CapEx) NA 64.69% 63.65% 64.17% 73.13% 82.09% 91.04% 100.00% Additions to intangibles (amount) NA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Amortization (amount) NA 22.00 25.00 23.50 23.50 23.50 23.50 23.50 Using the DCF model we carried out analysis in Low , base and high growth environment by changing : - Terminal rate - WACC - EBITA
  14. 14. 14 12/10/2014 Valuation via DCF (cont.) * See Exhibit4a, 4b DCF Model - Share price under Low , Base and High growth forecasts $61.86 $71.25 $76.89 $66.98 $77.04 $83.08 $60.00 $65.00 $70.00 $75.00 $80.00 $85.00 SharePrice LOW BASE HIGH Min Price Max Price Price Range : $61.86 to $83.08
  15. 15. 15Washington University Olin Business School - PMBA34 12/10/2014 Target Valuation Summary and Offer $0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 $160.00 Multiples Transactions DCF $73.66 current price $88.39 initial offer $107.42 upper offer
  16. 16. 16 12/10/2014 Synergy from Costco enabling Target to meet its potential! FOR EXAMPLE: • Target is underperforming peers in ROE, ROA, and ROIC • Wal-Mart (combination of Sam’s Club and Wal-Mart) demonstrates a company combining warehouse and retail model. • If Costco can raise the ROE of the Target “subsidiary” from an equivalent of 9.4% to 14%, that is worth ~$1B/year increase in NET INCOME per year.
  17. 17. 17 12/10/2014 Bidding Strategy and Deal Structure • Tax-Free Acquisition (stock-for-stock; Section 368 “B” Reorganization) • Exchange Ratio: 0.62 (a 20% premium at pre-announcement stock prices) • Target at least 80% ownership of Target as a subsidiary to gain tax advantage. • Maintain former Costco shareholders in majority: 47% of shareholders post merger will be former Target shareholders. • Costco will take on Target’s debt and liabilities. • Anticipate a friendly merger because of significant common ownership. • Target Management: remain intact leading Target subsidiary.
  18. 18. 18 12/10/2014 Pro Forma Combined Costco Wholesale Corporation (COST) Acquisition of Target Corp. (TGT) Estimated balance sheet impact of 95.68 per share offer (100.0% Stock, 0.0% Cash) (USD in millions) Costco Target Adjustment Pro Forma TGT (Decrease) Increase Combined Cash 7,315.0 780.0 (244.8) 7,850.2 Other current assets 10,273.0 13,058.0 23,331.0 PP&E 14,830.0 30,886.0 4,482.4 50,198.4 Goodwill 0.0 0.0 0.0 34,541.3 34,541.3 Other intangibles 0.0 0.0 12,102.5 12,102.5 Other long-term assets 606.0 1,737.0 2,343.0 Total Assets 33,024.0 46,461.0 130,366.4 Current liabilities 14,405.0 13,030.0 27,435.0 Debt 5,286.0 14,332.0 0.0 19,618.0 Other liabilities 818.0 2,726.0 6,302.2 9,846.2 Preferred stock 0.0 0.0 0.0 Noncontrolling interest 212.0 0.0 212.0 Common equity to parent 12,303.0 16,373.0 (16,617.8) 61,196.9 73,255.1 Total Liabilities & Equity 33,024.0 46,461.0 130,366.4 Parity check 0.000 0.000 0.000 Total debt 5,286.0 14,332.0 19,618.0 Total capitalization 17,801.0 30,705.0 93,085.1 Total debt / Total capitalization 29.7% 46.7% 21.1% LTM EBITDA 4,249.0 5,720.0 9,969.0 Total debt / LTM EBITDA 1.2x 2.5x 2.0x
  19. 19. 19 12/10/2014 Accretion/Dilution Analysis • 100% Stock offer…no additional debt assumed by combined entity • Based on 70% of the estimated synergies expected from the merger • Based on 30% Premium which is midpoint of premium range (20 %– 40%) • Deal results in accretive EPS for shareholders • Qualify for Section 368 Reorganization Source CapitalIQ See Exhibit6a & 6b Costco Wholesale Corporation Acquisition of Target Corp. Summary impact of 95.68 per share offer (100.0% Stock, 0.0% Cash) Credit Statistics EPS Accretion / (Dilution) - % Debt / LTM EBITDA FY 2015 FY 2016 FY 2017 0.0% 8.1x 0.0% 15.1% 27.5% 40.0% 10.0% 7.5x 10.0% 12.5% 23.0% 33.7% Offer Price 20.0% 6.9x Offer Price 20.0% 10.3% 19.3% 28.5% 95.68 30.0% 6.3x 95.68 30.0% 8.5% 16.2% 24.0% 40.0% 5.7x 40.0% 6.9% 13.5% 20.1% % Stock 50.0% 5.0x % Stock 50.0% 5.5% 11.1% 16.8% 60.0% 4.4x 60.0% 4.3% 9.1% 13.8% 70.0% 3.8x 70.0% 3.2% 7.2% 11.2% 80.0% 3.2x 80.0% 2.2% 5.6% 8.9% 90.0% 2.6x 90.0% 1.4% 4.2% 6.8% 100.0% 2.0x 100.0% 0.6% 2.8% 4.9% Max Debt: 2.95x
  20. 20. 20 12/10/2014 Takeover Defenses * 3 months ending Nov 1, 2014 Summary of Defenses: Shareholder Meetings, Poison Pill & Voting - Blank Check Preferred Stock - Broker Non-Votes Allowed on Discretionary Items - Secret Ballot Voting - Poison Pill (expired 9/26/2006…none active)
  21. 21. 21 12/10/2014 Risks associated with the Transaction - Regulatory approval may be a hurdle - International expansion of Target in Canada - Creating enough synergies to cover premium paid - Integrating Costco’s warehouse efficiency model into consumer retail - Will Target accommodate. May be a hostile response. - Expanding Target grocery sales further - E-Tailing still a threat and expanding. How to improve online sales
  22. 22. 22 12/10/2014 THANK YOU Professor Armando Gomes & M&A Class Eric Haupfear Suhel Shah Tim Moore William Singleton Mohammad Alsabeeh
  23. 23. 2312/10/2014 Exhibit Selected Retailers - Key comps (All figures in USD millions) Last 12 Months (LTM) NTM Company Name Market cap LT Net debt TEV Total revenue Gross Margin EBITA Margin Revenue Growth Growth rate Est Costco Wholesale Corporation (NasdaqGS:COST) 62,709.4 (2,029.0) 60,892.4 112,640.0 12.6% 3.8% 7.12% 10.96% Dollar General Corporation (NYSE:DG) 20,696.7 2,553.1 23,249.8 18,464.5 30.7% 11.3% 7.24% 15.55% Family Dollar Stores Inc. (NYSE:FDO) 9,122.9 351.8 9,474.7 10,489.3 33.8% 7.5% 0.94% 6.95% Wal-Mart Stores Inc. (NYSE:WMT) 271,134.7 49,112.0 325,190.7 483,792.0 24.8% 7.4% 1.99% 5.65% Dollar Tree, Inc. (NasdaqGS:DLTR) 14,068.8 349.4 14,418.2 8,361.5 35.2% 14.7% 6.50% 15.90% Kohl's Corp. (NYSE:KSS) 11,526.6 4,157.0 15,683.6 18,785.0 36.5% 13.5% (2.54%) 9.63% Bed Bath & Beyond Inc. (NasdaqGS:BBBY) 13,393.7 213.4 13,607.1 11,669.8 39.3% 15.4% 1.13% 7.73% Target Corp. (NYSE:TGT) 46,918.8 13,552.0 60,470.8 73,703.0 28.8% 7.8% (0.14%) 9.06% Industry Estimates High Low Mean Median EPS growth rate 15.90% 5.65% 10.18% 9.35% Revenue Growth rate 7.24% (2.54%) 3.20% 1.99% Net income growth 1.15% (35.86%) (8.68%) (7.27%) *Source CapitalIQ Exhibit 1 : Key Industry Comps and Estimates
  24. 24. 2412/10/2014 Exhibit Exhibit 2a : Key Financial data Target Corp. * Source CapitalIQ Target Corp. (NYSE:TGT) General Merchandise Stores Employees: 366,000 Incorporated: 1902 in Minnesota, US S&P Issuer Credit Rating FC www.targetcorp.com Target Corporation operates general merchandise stores in the United States and Canada. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; music, movies, books, computer software, sporting goods, and toys, as well as electronics that consist of video game hardware and software; apparel and accessories, such as apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides food and pet supplies, including dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and home furnishings and décor, such as furniture, lighting, kitchenware etc
  25. 25. 2512/10/2014 Exhibit Exhibit 2b: Key Financial data Target Corp. Target Corp (TGT) - Key Financials For the Fiscal Period Ending 12 months Jan-29-2011A 12 months Jan-28-2012A 12 months Feb-02-2013A 12 months Feb-01-2014A LTM² 12 months Nov-01-2014A 12 months† Jan-31-2015E 12 months Jan-31-2016E 12 months Jan-31-2017E Total Revenue 67,390.0 69,865.0 73,301.0 72,596.0 73,703.0 74,479.95 76,282.74 78,727.55 Growth Over Prior Year 3.1% 3.7% 4.9% (1.0%) (0.1%) 2.55% 2.42% 3.20% Gross Profit 20,805.0 21,559.0 22,427.0 21,827.0 21,197.0 - - - Margin % 30.9% 30.9% 30.6% 30.1% 28.8% - - - EBITDA 7,336.0 7,496.0 7,550.0 6,527.0 5,720.0 6,224.35 6,863.41 7,284.53 Margin % 10.9% 10.7% 10.3% 9.0% 7.8% 8.36% 9.00% 9.25% EBIT 5,252.0 5,365.0 5,408.0 4,304.0 3,354.0 - - - Margin % 7.8% 7.7% 7.4% 5.9% 4.6% - - - Earnings from Cont. Ops. 2,920.0 2,929.0 2,999.0 1,971.0 1,524.0 - - - Margin % 4.3% 4.2% 4.1% 2.7% 2.1% - - - Net Income 2,920.0 2,929.0 2,999.0 1,971.0 1,524.0 - - - Margin % 4.3% 4.2% 4.1% 2.7% 2.1% - - - Diluted EPS Excl. Extra Items³ 4.0 4.28 4.52 3.07 2.38 3.24 3.88 4.36 Growth Over Prior Year 21.2% 7.0% 5.6% (32.1%) (36.3%) 2.39% 19.78% 12.33% Same Store Sales Growth % 2.1% 3.0% 2.7% (0.4%) NA - - - * Source CapitalIQ
  26. 26. 2612/10/2014 Exhibit Exhibit 3(a) : Valuation for Target Corp. * Source CapitalIQ Valuation of TARGETCorp. Target TGT Shares Outstanding 636.964 Total Debt (14,332.0) Cash and Equivalents 780 Stock Price (12/5/14) 73.66 COMPARABLE COMPANY ANALYSIS ( Using Multiples) Implied Multiples Target LTM Implied Enterprise Value Implied Equity Value Price Per shareMarket Value Low Median High To Revenue 0.5x 0.9x 1.3x $73,703 $66,333 $52,780.7 $82.86 To EBIDTA 6.2x 10.1x 14.3x $5,720 $57,994 $44,442 $69.77 Details Implied Equity Value Price Per share Low Median High Low Median High To Revenue $23,300 $52,781 $82,262 $36.58 $82.86 $129.15 To EBIDTA $21,865 $44,442 $68,421 $34.33 $69.77 $107.42 M&A TRANSACTION COMPARABLES Implied Multiples Target LTM Implied Enterprise Value Implied Equity Value Price Per shareMarket Value Low Median High To Revenue 0.4x 0.9x 1.3x 73,703 66,333 52,781 $82.86 To EBIDTA 7.2x 9.2x 11.9x 5,720 52,614 39,062 $61.33 To EBIT 11.3x 13.2x 17.8x 5,720 75,687 62,135 $97.55 Details Implied Equity Value Price Per share Low Median High Low Median High To Revenue $15,929 $52,781 $82,262 $25.01 $82.86 $129.15 To EBIDTA $27,553 $39,062 $54,625 $43.26 $61.33 $85.76 To EBIT $51,182 $62,135 $88,290 $80.35 $97.55 $138.61
  27. 27. 2712/10/2014 Exhibit Exhibit 3(b) : Valuation for Target Corp. * Source CapitalIQ M&A TRANSACTION COMPARABLES Implied Equity Value/ Implied Enterprise Value/ Buyer Target Target Share Price Announce Date Close Date Gross Transactio n Value Net Transactio n Value Offer Per Share % Cash % Stock Implied Equity Value Book Value Net Income Implied Enterprise Value EBIT EBITDA Revenue Clayton, Dubilier & Rice, Inc.B&M Retail Limited NA 12/3/2012 2/15/2013 931.2 869.5 NA 100.0% 0.0% 1,550.1 9.1x 25.4x 1,489.6 17.8x NA 1.3x Canada Pension Plan Investment Board; Ares Corporate Opportunities Fund III, L.P.; Ares Private Equity Group99 Cents only Stores LLC20.49 10/11/2011 1/13/2012 1,580.4 1,366.1 22.00 100.0% 0.0% 1,561.6 2.2x 20.2x 1,366.1 11.3x 9.2x 0.9x Goldman Sachs Group, Merchant Banking Division; KKR & Co. L.P.; Citigroup Private Equity LP; KKR 2006 Fund, L.P.Dollar General Corporation16.78 3/11/2007 7/6/2007 7,224.0 7,004.7 22.00 100.0% 0.0% 6,878.5 3.9x 49.9x 7,004.7 13.0x 9.5x 0.8x Federated Department Stores Inc. (nka:Macy's, Inc.)May Department Stores Co.35.35 2/27/2005 8/30/2005 16,709.6 16,647.6 35.35 50.2% 49.8% 10,323.6 2.3x 20.3x 16,647.6 13.5x 8.9x 1.2x Kmart Holding Corporation (nka:Sears Holdings Corporation)Sears, Roebuck and Co.45.20 11/16/2004 3/24/2005 19,184.5 16,312.5 50.34 44.7% 55.3% 12,074.5 2.2x 4.4x 16,312.5 12.3x 7.2x 0.4x Dollar General CorporationFamily Dollar Stores Inc.76.06 8/18/2014 NA 9,892.4 9,710.6 80.00 100.0% 0.0% 9,116.0 5.5x 25.9x 9,710.6 17.5x 11.9x 0.9x High 12,074.5 9.1x 49.9x 16,647.6 17.8x 11.9x 1.3x Median 7,997.3 3.1x 22.8x 8,357.7 13.2x 9.2x 0.9x Low 1,550.1 2.2x 4.4x 1,366.1 11.3x 7.2x 0.4x Average 6,917.4 4.2x 24.3x 8,755.2 14.2x 9.3x 0.9x
  28. 28. 2812/10/2014 Exhibit Exhibit 3(c) : Valuation for Target Corp. * Source CapitalIQ COMPARABLE COMPANY ANALYSIS (In USD millions, except per share data) Stock Price Current as %of 52-Week (%) Shares Market Enterprise Revenue EBITDA EPS Ticker Trading Data and Size 12/7/14 High Low Out. Cap Value LTM CY+1 LTM CY+1 LTM CY+1 NasdaqGS:COSTCostco Wholesale Corporation 143.25 99.8 130.8 437.8 62,709.4 60,892.4 112,640.0 114,560.8 4,249.0 4,421.6 4.65 4.80 NYSE:WMT Wal-Mart Stores Inc. 84.12 95.5 116.4 3,223.2 271,134.7 325,190.7 483,792.0 484,091.3 35,696.0 36,505.1 4.75 4.99 NYSE:DG Dollar General Corporation 68.21 99.0 128.7 303.4 20,696.7 23,249.8 18,464.5 18,930.3 2,081.9 2,138.1 3.34 3.50 NYSE:FDO Family Dollar Stores Inc. 79.78 98.5 143.4 114.4 9,122.9 9,474.7 10,489.3 10,560.0 786.5 781.5 2.49 3.00 NasdaqGS:DLTRDollar Tree, Inc. 68.41 98.2 137.9 205.7 14,068.8 14,418.2 8,361.5 8,590.5 1,228.8 1,268.3 2.91 3.11 NYSE:KSS Kohl's Corp. 57.06 89.8 117.2 202.0 11,526.6 15,683.6 18,785.0 18,897.1 2,533.0 2,524.5 4.01 4.03 NasdaqGS:BBBYBed Bath & Beyond Inc. 72.31 89.5 131.6 185.2 13,393.7 13,607.1 11,669.8 11,773.9 1,802.6 1,792.0 4.82 4.89 0 0 0.00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00 0.00 Max 143.25 99.8 143.4 3,223.2 271,134.7 325,190.7 483,792.0 484,091.3 35,696.0 36,505.1 4.82 4.99 Median 70.36 96.9 129.8 203.8 13,731.2 15,050.9 15,067.1 15,335.5 1,942.3 1,965.0 3.68 3.77 Min 0.00 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00 0.00 Mean 71.64 83.8 113.3 584.0 50,331.6 57,814.6 83,025.3 83,425.5 6,047.2 6,178.9 3.37 3.54 NYSE:TGT Target Corp. 73.66 98.5 134.8 637.0 46,918.8 60,470.8 73,703.0 74,480.0 5,720.0 6,224.3 2.38 3.24
  29. 29. 2912/10/2014 Exhibit Exhibit 3(d) : Valuation for Target Corp. * Source CapitalIQ Total Debt/ Net Debt/ EBITDA/ (EBITDA-Capex) Total Debt/ Total Debt/ TEV/Revenue TEV/EBITDA P/E Ticker Leverage and Trading MultiplesLTM EBITDA LTM EBITDA Interest /Interest Tot. Equity (%) Total Cap (%) LTM CY+1 LTM CY+1 LTM CY+1 NasdaqGS:COSTCostco Wholesale Corporation 1.2x NM 37.6x 20.0x 42.2 29.7 0.5x 0.5x 14.3x 13.8x 30.8x 29.9x NYSE:WMT Wal-Mart Stores Inc. 1.6 1.4 14.8 9.9 66.4 39.9 0.7 0.7 9.1 8.9 17.7 16.9 NYSE:DG Dollar General Corporation 1.3 1.2 23.4 19.1 51.8 34.1 1.3 1.2 11.2 10.9 20.4 19.5 NYSE:FDO Family Dollar Stores Inc. 0.6 0.4 26.2 11.7 30.0 23.1 0.9 0.9 12.0 12.1 32.0 26.6 NasdaqGS:DLTRDollar Tree, Inc. 0.6 0.3 35.3 26.7 47.8 32.3 1.7 1.7 11.7 11.4 23.5 22.0 NYSE:KSS Kohl's Corp. 1.9 1.6 7.4 5.2 82.5 45.2 0.8 0.8 6.2 6.2 14.2 14.1 NasdaqGS:BBBYBed Bath & Beyond Inc. 0.8 0.1 166.0 134.4 51.0 33.8 1.2 1.2 7.5 7.6 15.0 14.8 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Max 1.9x 1.6x 166.0x 134.4x 82.5 45.2 1.7x 1.7x 14.3x 13.8x 32.0x 29.9x Median 1.0 0.4 24.8 15.4 49.4 33.1 0.9 0.9 10.1 9.9 19.1 18.2 Min 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mean 1.0 0.7 38.8 28.4 46.5 29.8 0.9 0.9 9.0 8.9 19.2 18.0 NYSE:TGT Target Corp. 2.5x 2.4x 8.6x 5.3x 87.5 46.7 0.8x 0.8x 10.6x 9.7x 30.9x 22.7x
  30. 30. 3012/10/2014 Exhibit Exhibit 3(e) : Valuation for Target Corp. * Source CapitalIQ Total Debt/ Net Debt/ EBITDA/ (EBITDA-Capex) Total Debt/ Total Debt/ TEV/Revenue TEV/EBITDA P/E Ticker Leverage and Trading MultiplesLTM EBITDA LTM EBITDA Interest /Interest Tot. Equity (%) Total Cap (%) LTM CY+1 LTM CY+1 LTM CY+1 NasdaqGS:COSTCostco Wholesale Corporation 1.2x NM 37.6x 20.0x 42.2 29.7 0.5x 0.5x 14.3x 13.8x 30.8x 29.9x NYSE:WMT Wal-Mart Stores Inc. 1.6 1.4 14.8 9.9 66.4 39.9 0.7 0.7 9.1 8.9 17.7 16.9 NYSE:DG Dollar General Corporation 1.3 1.2 23.4 19.1 51.8 34.1 1.3 1.2 11.2 10.9 20.4 19.5 NYSE:FDO Family Dollar Stores Inc. 0.6 0.4 26.2 11.7 30.0 23.1 0.9 0.9 12.0 12.1 32.0 26.6 NasdaqGS:DLTRDollar Tree, Inc. 0.6 0.3 35.3 26.7 47.8 32.3 1.7 1.7 11.7 11.4 23.5 22.0 NYSE:KSS Kohl's Corp. 1.9 1.6 7.4 5.2 82.5 45.2 0.8 0.8 6.2 6.2 14.2 14.1 NasdaqGS:BBBYBed Bath & Beyond Inc. 0.8 0.1 166.0 134.4 51.0 33.8 1.2 1.2 7.5 7.6 15.0 14.8 0 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Max 1.9x 1.6x 166.0x 134.4x 82.5 45.2 1.7x 1.7x 14.3x 13.8x 32.0x 29.9x Median 1.0 0.4 24.8 15.4 49.4 33.1 0.9 0.9 10.1 9.9 19.1 18.2 Min 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mean 1.0 0.7 38.8 28.4 46.5 29.8 0.9 0.9 9.0 8.9 19.2 18.0 NYSE:TGT Target Corp. 2.5x 2.4x 8.6x 5.3x 87.5 46.7 0.8x 0.8x 10.6x 9.7x 30.9x 22.7x
  31. 31. 31Washington University Olin Business School - PMBA34 12/10/2014 Exhibit Exhibit 3(f) : Valuation for Target Corp. * Source CapitalIQ 3-Year Historical CAGR (%) LTM Margins (%) Liquidity Ratios LTM Activity LTM Profitability (%) Operating Statistics Revenue EBITDA EPS EBITDA Net Income Quick Current DSO DPO DIO ROE ROIC Costco Wholesale Corporation 8.2 8.9 12.1 3.8 1.8 0.6x 1.2x 0.0 30.1 30.2 17.7 11.9 Wal-Mart Stores Inc. 3.2 1.4 2.3 7.4 3.3 0.2 0.9 4.6 39.4 50.7 19.7 11.8 Dollar General Corporation 9.4 7.5 18.5 11.3 5.6 0.1 1.6 0.0 37.1 76.5 19.4 13.3 Family Dollar Stores Inc. 7.1 (0.8) (7.2) 7.5 2.7 0.2 1.9 0.0 38.4 80.6 17.4 15.2 Dollar Tree, Inc. 9.3 9.8 15.7 14.7 7.2 0.5 2.1 0.0 35.5 85.4 47.6 29.7 Kohl's Corp. (0.1) (5.3) (1.9) 13.5 4.4 0.2 1.7 0.0 70.8 151.5 14.2 9.6 Bed Bath & Beyond Inc. 8.6 3.9 11.1 15.4 8.4 0.6 2.2 0.0 57.5 137.4 28.2 23.2 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Max 9.4 9.8 18.5 15.4 8.4 0.6x 2.2x 4.6 70.8 151.5 47.6 29.7 Median 7.6 2.6 6.7 9.4 3.9 0.2 1.6 0.0 37.7 78.6 18.6 12.6 Min (0.1) (5.3) (7.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Mean 5.7 3.2 6.3 9.2 4.2 0.3 1.4 0.6 38.6 76.5 20.5 14.3 Target Corp. 2.1 (8.7) (17.9) 7.8 2.1 0.1x 1.0x 0.0 61.7 74.3 9.4 6.8
  32. 32. 3212/10/2014 Exhibit Exhibit 4(a) : DCF Valuation for Target Corp. * Source CapitalIQ Discounted Cash Flow Analysis for Target Corp. USD in millions Historical year ending February 1, Projected year ending February 1, 2012 2013 2014 2015 2016 2017 2018 2019 Sales 69865.00 73301.00 72596.00 74032.05 75685.63 77569.49 79698.41 82089.37 Cost of goods sold 48306.00 50874.00 50769.00 51773.28 52929.69 54247.14 55735.97 57408.05 Gross Profit 21559.00 22427.00 21827.00 22258.77 22755.94 23322.35 23962.44 24681.31 SG&A 14063.00 14877.00 15300.00 15602.65 15951.16 16348.19 16796.87 17300.78 EBITDA 7496.00 7550.00 6527.00 6656.11 6804.78 6974.16 7165.57 7380.53 EBITDA Margin 0.11 0.10 0.09 0.09 0.09 0.09 0.09 0.09 Less: Depreciation (2107.00) (2120.00) (2198.00) (2191.86) (2553.56) (2937.64) (3347.59) (3787.22) Less: Amortization (24.00) (22.00) (25.00) (23.50) (23.50) (23.50) (23.50) (23.50) EBIT 5365.00 5408.00 4304.00 4440.75 4227.72 4013.02 3794.48 3569.81 Less: Taxes @ 38.0% (2038.70) (2055.04) (1635.52) (1687.49) (1606.54) (1524.95) (1441.90) (1356.53) Tax-effected EBIT 3326.30 3352.96 2668.48 2753.27 2621.19 2488.07 2352.58 2213.28 Plus: Depreciation and amortization 2142.00 2223.00 2215.36 2577.06 2961.14 3371.09 3810.72 Less: Capital expenditures (3277.00) (3453.00) (3415.49) (3491.78) (3578.69) (3676.91) (3787.22) Less: Additions to intangibles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (Increase)/decrease in working capital 567.00 5306.00 14.62 16.83 19.18 21.67 24.34 Unlevered Free Cash Flow 2784.96 6744.48 1567.75 1723.30 1889.70 2068.42 2261.12
  33. 33. 3312/10/2014 Exhibit Exhibit 4(b) : DCF Valuation for Target Corp. Scenarios * Source CapitalIQ Stock Price Sensitivity Analysis for Target Corp. Share price in USD Perpetuity Growth Method WACC step Weighted average cost of capital 0.0025 35.41571384 0.075 0.0775 0.08 0.0825 0.085 0.0875 0.09 Growth rate step 0.01 28.99538994 27.06622918 25.27548174 23.60882181 22.05383379 20.59970421 19.23697134 0.0025 0.0125 30.62703303 28.56303737 26.65255029 24.87911722 23.22855328 21.68856502 20.24844532 0.015 32.39464637 30.17959022 28.1355472 26.24350859 24.48718131 22.85251968 21.3273509 Terminal 0.0175 34.31596523 31.93085581 29.73718386 27.71285314 25.83904104 24.09961396 22.48066376 growth 0.02 36.41194943 33.83440536 31.47229024 29.29974526 27.29488998 25.4390856 23.71635611 rate 0.0225 38.70755118 35.91100487 33.35827544 31.01887839 28.86720683 26.88159351 25.04358122 0.025 41.2327131 38.18537576 35.41571384 32.88750135 30.57055009 28.43950206 26.47290058 0.0275 44.02368154 40.68718374 37.66909875 34.92599913 32.42201016 30.12723632 28.01656549 0.03 47.12475759 43.45233993 40.14782215 37.15863955 34.44178477 31.96173008 29.68886914 0.0325 50.59066611 46.5247357 42.8874638 39.61454402 36.65391887 33.962996 31.50659049 0.035 54.4898132 49.95858979 45.93151008 42.32896474 39.08726639 36.15485868 33.48955924 0.0375 58.90884656 53.82167564 49.33367946 45.34498777 41.77675574 38.56590762 35.66138216 EBITDA Multiple Method Weighted average cost of capital 73.662969 0.075 0.0775 0.08 0.0825 0.085 0.0875 0.09 Exit multiple 9.5 66.98614099 66.10299065 65.23204961 64.37312139 63.52601315 62.69053553 61.86650268 0.25 9.75 68.99881574 68.0924246 67.19856405 66.31703246 65.4476319 64.59016803 63.7444501 10 71.01149048 70.08185854 69.1650785 68.26094353 67.36925064 66.48980053 65.62239752 Terminal 10.25 73.02416523 72.07129249 71.13159294 70.20485461 69.29086939 68.38943302 67.50034494 multiple 10.5 75.03683997 74.06072643 73.09810739 72.14876568 71.21248814 70.28906552 69.37829236 10.75 77.04951472 76.05016038 75.06462183 74.09267675 73.13410689 72.18869801 71.25623978 11 79.06218946 78.03959433 77.03113628 76.03658782 75.05572564 74.08833051 73.13418721 11.25 81.07486421 80.02902827 78.99765072 77.98049889 76.97734439 75.98796301 75.01213463 11.5 83.08753895 82.01846222 80.96416517 79.92440996 78.89896314 77.8875955 76.89008205 This model is provided "as is". Training The Street, Inc., S&P Capital IQ, Inc. and their affiliates have no liability arising out of the use of this model.
  34. 34. 34Washington University Olin Business School 12/10/2014 Exhibit Exhibit 5 : COMPARABLE COMPANY ANALYSIS * Source Capital IQ COMPARABLE COMPANY ANALYSIS LTM Profitability (%) Asset Turnover Ticker Name ROE ROA ROIC Total Assets Fixed Assets A/R Inventory NasdaqGS:COSTCostco Wholesale 17.7 6.4 11.9 3.6x 7.8x 0.0x 12.0x NYSE:WMT Wal-Mart Stores Inc. 19.7 7.9 11.8 2.3x 4.1x 78.7x 7.2x NYSE:DG Dollar General 19.4 10.1 13.3 1.7x 8.4x 0.0x 4.8x NYSE:FDO Family Dollar Stores Inc. 17.4 8.6 15.2 2.8x 6.1x 0.0x 4.5x NasdaqGS:DLTRDollar Tree, Inc. 47.6 20.5 29.7 2.7x 7.3x 0.0x 4.3x NYSE:KSS Kohl's Corp. 14.2 6.8 9.6 1.2x 2.1x 0.0x 2.4x NasdaqGS:BBBYBed Bath & Beyond Inc. 28.2 14.7 23.2 1.7x 7.6x 0.0x 2.6x 47.6 20.5 29.7 3.6x 8.4x 78.7x 12.0x 19.4 8.6 13.3 2.3 7.3 0.0 4.5 14.2 6.4 9.6 1.2 2.1 0.0 2.4 23.5 10.7 16.4 2.3 6.2 11.2 5.4 Target Company NYSE:TGT Target Corp. 9.4 4.5 6.8 1.6 2.4 0.0x 4.9x Source: S&P Capital IQ This model is provided "as is". S&P Capital IQ, Inc. and its affiliates have no liability arising out of your use of this model.
  35. 35. 35Washington University Olin Business School 12/10/2014 Exhibit Exhibit 6a : Accretion/Dilution ANALYSIS * Source Capital IQ Costco Wholesale Corporation (COST) Acquisition of Target Corp. (TGT) Estimated earnings impact of 95.68 per share offer (100.0% Stock, 0.0% Cash) (USD in millions) Income Statement Adjustments FY 2015 FY 2016 FY 2017 Pre-tax Adjustments Less: Additional interest expense @ 5.0% 0.0 0.0 0.0 + / ( - ): Synergies 700.0 700.0 700.0 + / ( - ): Depreciation from write-up (448.2) (448.2) (448.2) + / ( - ): Amortization from write-up (358.6) (358.6) (358.6) ( - ): Foregone interest income @ 1.0% (2.4) (2.4) (2.4) + / ( - ): Other adjustments 0.0 0.0 0.0 Total pre-tax adjustments (109.3) (109.3) (109.3) Less: taxes @ 38.0% 41.5 41.5 41.5 Total After-tax Adjustments (67.8) (67.8) (67.8) Acquirer net income (COST) 2,288.4 2,531.2 2,854.6 Target net income (TGT)** 2,310.9 2,660.1 3,107.8 Pro Forma Combined Net Income 4,531.5 5,123.6 5,894.7 Acquirer shares (COST) 441.887 441.887 441.887 New shares issued 427.831 427.831 427.831 Pro Forma Shares 869.718 869.718 869.718 Pro Forma EPS 5.21 5.89 6.78 Acquirer Stand-Alone EPS 5.18 5.73 6.46 Accretion / (Dilution) EPS Accretion / (Dilution) - USD 0.03 0.16 0.32 EPS Accretion / (Dilution) - % 0.6% 2.8% 4.9% Additional pre-tax (cushion) / synergies to breakeven (44.5) (228.5) (445.6) **Target financials calendarized to Acquirer's fiscal year end Aug-31.
  36. 36. 36Washington University Olin Business School 12/10/2014 Exhibit Exhibit 6b : Accretion/Dilution ANALYSIS * Source Capital IQ FY 2015 EPS Accretion / (Dilution) - % Offer Price 88.18 90.68 93.18 95.68 98.18 100.68 103.18 0.0% 24.0% 21.0% 18.1% 15.1% 12.2% 9.2% 6.3% 10.0% 20.8% 18.0% 15.3% 12.5% 9.8% 7.0% 4.3% 20.0% 18.2% 15.5% 12.9% 10.3% 7.8% 5.2% 2.7% 30.0% 15.9% 13.4% 10.9% 8.5% 6.1% 3.7% 1.4% 40.0% 13.9% 11.5% 9.2% 6.9% 4.6% 2.4% 0.2% % Stock 50.0% 12.1% 9.9% 7.7% 5.5% 3.4% 1.3% (0.8%) 60.0% 10.6% 8.5% 6.3% 4.3% 2.3% 0.3% (1.7%) 70.0% 9.2% 7.2% 5.2% 3.2% 1.3% (0.6%) (2.4%) 80.0% 8.0% 6.0% 4.1% 2.2% 0.4% (1.4%) (3.1%) 90.0% 6.9% 5.0% 3.2% 1.4% (0.4%) (2.1%) (3.7%) 100.0% 5.9% 4.1% 2.3% 0.6% (1.1%) (2.7%) (4.3%) FY 2016 EPS Accretion / (Dilution) - % Offer Price 88.18 90.68 93.18 95.68 98.18 100.68 103.18 0.0% 35.5% 32.8% 30.1% 27.5% 24.8% 22.1% 19.5% 10.0% 30.7% 28.1% 25.6% 23.0% 20.5% 18.0% 15.5% 20.0% 26.7% 24.2% 21.8% 19.3% 16.9% 14.6% 12.2% 30.0% 23.2% 20.8% 18.5% 16.2% 13.9% 11.7% 9.4% 40.0% 20.2% 17.9% 15.7% 13.5% 11.3% 9.2% 7.1% % Stock 50.0% 17.6% 15.4% 13.2% 11.1% 9.1% 7.0% 5.0% 60.0% 15.2% 13.1% 11.1% 9.1% 7.1% 5.2% 3.3% 70.0% 13.1% 11.1% 9.2% 7.2% 5.4% 3.5% 1.7% 80.0% 11.3% 9.4% 7.5% 5.6% 3.8% 2.1% 0.3% 90.0% 9.6% 7.7% 5.9% 4.2% 2.4% 0.7% (0.9%) 100.0% 8.1% 6.3% 4.5% 2.8% 1.2% (0.4%) (2.0%) FY 2017 EPS Accretion / (Dilution) - % Offer Price 88.18 90.68 93.18 95.68 98.18 100.68 103.18 0.0% 47.1% 44.8% 42.4% 40.0% 37.7% 35.3% 33.0% 10.0% 40.7% 38.4% 36.0% 33.7% 31.4% 29.1% 26.9% 20.0% 35.2% 33.0% 30.7% 28.5% 26.2% 24.0% 21.8% 30.0% 30.6% 28.3% 26.1% 24.0% 21.8% 19.7% 17.6% 40.0% 26.5% 24.3% 22.2% 20.1% 18.0% 16.0% 14.0% % Stock 50.0% 22.9% 20.8% 18.8% 16.8% 14.8% 12.8% 10.9% 60.0% 19.8% 17.7% 15.8% 13.8% 11.9% 10.0% 8.2% 70.0% 17.0% 15.0% 13.1% 11.2% 9.4% 7.6% 5.8% 80.0% 14.4% 12.5% 10.7% 8.9% 7.1% 5.4% 3.7% 90.0% 12.2% 10.3% 8.5% 6.8% 5.1% 3.4% 1.8% 100.0% 10.1% 8.3% 6.6% 4.9% 3.3% 1.7% 0.1%

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