1. DUCATI
CASE
STUDY
Anastasia Karpova
Ekaterina
Nere8na
Ali
Baris
Sahin
Sena
Secilmis
Alfio
Shkreta
(equal
contribu8on)

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. 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. 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. 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. 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. LBO
valua8on
Base
case
projec?ons
1996 1997 1998 1999 2000
Total 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 97
Equity 1829
Horizon
IRR 35%
Present
Equity
Value 551 Porsche
KTM
Yamaha
Harley
Davidson
Purchase
price
51% 281
7

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. 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. 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. 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. 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. Ques8ons
&
Remarks

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. 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. 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. 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