LEVERAGED BUYOUT OF AEROPOSTALE
DEB SAHOO, MBA, ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGAN, ANN ARBOR
April 25, 2011
TABLEOFCONTENTS
Executive Summary
LBO Rationale
Financials
Industry Comparables
Financial Statements Projections Assumptio...
EXECUTIVE SUMMARY
3
EXECUTIVESUMMARY
Price PerformanceTarget Overview
•Ticker: ARO
•Market Cap: $2,100MM
•Number of Shares: 81.8MM
•2011 EBITD...
COMPANY OVERVIEW
5
COMPANYOVERVIEW
Products and ServicesCompany Overview
Operates as a mall-based specialty retailer of casual
apparel and ac...
LBO RATIONALE
7
LBORATIONALE
Strong FinancialsValue Creation
8
•Excellent brand recognition
•Potential for SG&A expense reduction; Already...
FINANCIALS
9
FINANCIALS
Five Year Income Statement
10
All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Jan-1...
FINANCIALS
Five Year Balance Sheet
11
All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Jan-10 3...
FINANCIALS
Five Year Cash Flow Statement
12
All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Ja...
FINANCIALS
Five Year Key Annual Ratios
13
Ratios - Annual 5 Yr AVG 31-Jan-11 29-Jan-10 30-Jan-09 31-Jan-08 31-Jan-07
Valua...
INDUSTRY COMPARABLES
14
INDUSTRYCOMPARABLES
Comparables
15
INDUSTRYCOMPARABLES
Capitalization Comparison
16
All values in millions of U.S. Dollar, except per share items. Shares Lon...
INDUSTRYCOMPARABLES
Margin Comparison
17
All values in millions of U.S. Dollar, except per share items.
LTM as of 19-Apr-2...
FINANCIAL STATEMENTS PROJECTIONS ASSUMPTIONS
18
FINANCIALSTATEMENTSPROJECTIONSASSUMPTIONS
Income Statement and Cash Flow Statement Assumptions
19
Income Statement Project...
TRANSACTION ANALYSIS
20
TRANSACTIONANALYSIS
Fully Diluted Shares and Purchase Price Calculation
21
Public (1) / Private (2) 2
Entry EBITDA Multipl...
TRANSACTIONANALYSIS
Sources and Uses of Funds
22
% of Total
Equity % Amount Sources 1/1/2011 Cumulative Pricing
Revolving ...
TRANSACTIONANALYSIS
Financing Fees Amortization
23
Base Size (%) ($)
Revolving Credit Size $300.0 1.750% $5.3
Term Loan A ...
TRANSACTIONANALYSIS
Income Statement Projection
24
$ in Millions
Historical Period Projection Period
LTM Pro forma Year 1 ...
TRANSACTIONANALYSIS
Balance Sheet Projection and Adjustments
25
$ in Millions
Projection Period
Opening Pro Forma Year 1 Y...
TRANSACTIONANALYSIS
Cash Flow Statement Projections
26
$ in Millions
Projection Period
Year 1 Year 2 Year 3 Year 4 Year 5 ...
TRANSACTIONANALYSIS
Debt Schedule
27
$ in Millions
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Y...
TRANSACTIONANALYSIS
Free Cash Flow , Capitalization and Credit Statistics Summary
28
Projection Period
LTM Pro forma Year ...
RETURN ANALYSIS
29
RETURNANALYSIS
Return Analysis
30
$ in Millions
Initial Sponsor Equity $1,037.3 100%
Initial Rollover Equity - 0%
Initial ...
RETURNANALYSIS
IRR Sensitivity Analysis w.r.t Entry Multiple and Exit Multiple Assuming Exit in 2016
31
IRR Sensitivity An...
RETURNANALYSIS
Alternative Financing Structures and Corresponding IRRs
39.2%
32
5 Year IRR 34.1% 31.5% 29.3% 26.6%
Structu...
EXIT STRATEGIES
33
EXITSTRATEGIES
Potential Strategic Buyers
34
Company Business Description Acquisition Rationale
•Focuses on casual wear fo...
EXITSTRATEGIES
Potential Financial Buyers
35
Private Equity Firm Industry Focus Comments
•Consumer Retail
•Media and telec...
36
Prepared
by
Deb Sahoo
MBA, Ross School of Business
University of Michigan, Ann Arbor
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09. lbo of aeropostale (deb sahoo)

  1. 1. LEVERAGED BUYOUT OF AEROPOSTALE DEB SAHOO, MBA, ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGAN, ANN ARBOR April 25, 2011
  2. 2. TABLEOFCONTENTS Executive Summary LBO Rationale Financials Industry Comparables Financial Statements Projections Assumptions Transaction Analysis Return Analysis 3 7 9 14 18 20 29 2 Company Overview 5 Exit Strategies 33
  3. 3. EXECUTIVE SUMMARY 3
  4. 4. EXECUTIVESUMMARY Price PerformanceTarget Overview •Ticker: ARO •Market Cap: $2,100MM •Number of Shares: 81.8MM •2011 EBITDA: $445 MM •LTM P/EPS: 10.31 •Total Enterprise Value: $2,447.5MM •5 Year Sales Growth: 14.9% •5 Year EBITDA Growth: 23.9% •5 Year Avg. ROE: 50.4% •Leverage: 0.0x •Price to Book Value: 5.0x •Price to Sales: 1.0x •S&P Rating: NA Key Financials •Company: Aeropostale •Headquarter: New York, New York •CEO: Julian R. Geiger •Number of Employees: 17,828 •Specialty retailer of casual apparel and accessories •Designs, markets and sells casual sportswear and other fashion merchandise under its own brands, principally targeted at customers 11 to 18 years old •Products are sold at stores or at organized sales events at college campuses Valuation 4 •Stock Price: $25.68 •52 Week High: $32.24 •52 Week Low: $21.26 •Stock Beta: 0.28 Offer Price per Share $33.18 Fully Diluted Shares 81.8 Equity Purchase Price $2,713.1 Plus: Existing Net Debt (265.6) Enterprise Value $2,447.5 Purchase Price Exit Year 2016 Entry Multiple 5.5x Exit Multiple 5.5x IRR 39.2% Cash Return 5.2x Return
  5. 5. COMPANY OVERVIEW 5
  6. 6. COMPANYOVERVIEW Products and ServicesCompany Overview Operates as a mall-based specialty retailer of casual apparel and accessories Designs, markets, and sells merchandise principally targeting 14 to 17 year-old young women and men Offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, and outerwear, as well as accessories, including sunglasses, belts, socks, and hats Also offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12 Company sells its products through its e-commerce Website, aeropostale.com As of March 15, 2010, it operated 895 Aeropostale stores in 49 states and Puerto Rico; 44 Aeropostale stores in Canada; and 15 P.S. from Aeropostale stores in 6 states CustomersIndustry Comparables 6 • Outerwear •Footwear •Swimwear •Tank tops •Shirts •Jeans •Underwear •Accessories •Fleece. Principally targeting 14 to 17 year-old young women and men
  7. 7. LBO RATIONALE 7
  8. 8. LBORATIONALE Strong FinancialsValue Creation 8 •Excellent brand recognition •Potential for SG&A expense reduction; Already decreasing for the last five years •Growth potential in emerging markets •Potential to enter new market segments •Adequate strategic buyers such as GAP stores •Increased dominant position in 7-12 age segment will increase visibility in investor community for IPO •Adequate number of PE firms such as Bain Capital (took Gymboree private) with matching investment criteria Viable Exit Strategy •Strong defensible market position •Produces easily recognized clothing styles •Loyal and established customer base •Very different selling strategy compared to Abercrombie & Fitch and American Eagle Outfitters Industry Positioning •Large amount of cash in hand •High ROE •Heavy Asset Base for loan collateral •Clean balance sheet with low Leverage •Predictable and steady cash flow in the past •Lowest P/E in the industry
  9. 9. FINANCIALS 9
  10. 10. FINANCIALS Five Year Income Statement 10 All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Jan-10 30-Jan-09 31-Jan-08 31-Jan-07 Sales/Revenue 2,400.4 2,230.1 1,885.5 1,590.9 1,413.2 Cost of Goods Sold (COGS) incl. D&A 1,513.6 1,383.0 1,231.3 1,037.7 957.8 COGS excluding D&A 1,455.6 1,330.1 1,185.6 1,000.9 927.8 Depreciation & Amortization Expense 58.0 52.9 45.8 36.8 30.0 Depreciation -- -- -- -- -- Amortization of Intangibles -- -- -- -- -- Gross Income 886.9 847.1 654.2 553.2 455.4 SG&A Expense 499.4 464.5 405.9 345.8 289.7 Other Operating Expense 0.0 0.0 0.0 -4.1 0.0 EBIT (Operating Income) 387.5 382.7 248.3 211.5 165.7 Nonoperating Income (Expense) - Net 0.0 0.1 0.5 -2.5 7.1 Nonoperating Interest Income -- 0.1 0.5 6.6 7.1 Other Income (Expense) 0.0 0.0 0.0 -9.0 0.0 Interest Expense 0.1 0.0 0.0 0.0 0.0 Unusual Expense (Income) - Net 0.7 0.0 0.0 0.0 -2.1 Fixed Assets Impairment -- -- -- 9.0 -- Legal Claim Expense -- -- -- -- -2.1 Other Unusual Expense 0.7 0.0 0.0 -9.0 0.0 Pretax Income 386.7 382.8 248.8 209.0 174.8 Income Taxes 155.3 153.3 99.4 79.8 68.2 Income Taxes - Current Domestic 132.6 156.0 96.2 92.7 78.7 Income Taxes - Current Foreign 3.9 1.5 0.2 0.1 0.0 Income Taxes - Deferred Domestic 18.7 -4.7 3.3 -12.6 -10.5 Income Taxes - Deferred Foreign 0.1 0.5 -0.2 -0.4 0.0 Consolidated Net Income 231.3 229.5 149.4 129.2 106.6 Net Income 231.3 229.5 149.4 129.2 106.6
  11. 11. FINANCIALS Five Year Balance Sheet 11 All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Jan-10 30-Jan-09 31-Jan-08 31-Jan-07 Assets Cash & ST Investments 265.6 347.0 228.5 111.9 276.3 Total Accounts Receivable 0.0 0.0 0.0 0.0 0.0 Inventories 156.6 132.9 126.4 136.5 101.5 Other Current Assets 47.4 50.1 39.0 36.3 21.0 Total Current Assets 469.6 530.0 393.9 284.7 398.8 Net Property, Plant & Equipment 299.2 251.6 249.0 213.8 175.6 Intangible Assets 0.0 -- -- -- 1.4 Other Assets 4.3 4.4 2.5 2.6 1.6 Total Assets 773.1 785.9 645.4 501.1 577.4 Liabilities & Shareholders' Equity Accounts Payable 103.0 90.9 77.2 99.4 63.9 Income Tax Payable 10.0 26.9 10.9 27.4 37.8 Other Current Liabilities 103.0 124.1 87.3 70.6 63.1 Total Current Liabilities 216.1 241.8 175.4 197.4 164.8 Provision for Risks & Charges 10.8 10.1 22.5 18.9 15.9 Deferred Taxes 7.4 -6.4 -12.5 -13.1 -3.8 Other Liabilities 106.2 105.9 105.0 100.6 88.3 Total Liabilities 340.5 351.4 290.4 303.8 265.3 Common Equity 432.6 434.5 355.1 197.3 312.1 Common Stock Par/Carry Value 0.9 1.4 0.9 0.9 0.6 Additional Paid-In Capital/Capital Surplus 195.4 171.8 146.0 124.1 101.4 Retained Earnings 389.8 922.8 693.3 543.9 414.9 Cumulative Translation Adjustment/Unrealized For. Exch. Gain 2.4 0.0 0.0 0.0 0.0 Other Appropriated Reserves -2.8 -7.0 -9.0 -4.7 -5.3 Treasury Stock -153.0 -654.5 -476.1 -466.9 -199.5 Total Shareholders' Equity 432.6 434.5 355.1 197.3 312.1 Liabilities & Shareholders' Equity 773.1 785.9 645.4 501.1 577.4
  12. 12. FINANCIALS Five Year Cash Flow Statement 12 All figures in millions of U.S. Dollar, except per share items 31-Jan-11 29-Jan-10 30-Jan-09 31-Jan-08 31-Jan-07 Operating Activities Net Income before Extraordinaries 231.3 229.5 149.4 129.2 106.6 Depreciation, Depletion & Amortization 58.7 52.9 45.8 36.8 30.0 Deferred Taxes & Investment Tax Credit 18.8 -4.2 3.0 -13.0 -10.5 Other Funds 8.6 5.9 8.6 8.4 -6.3 Funds from Operations 317.4 284.0 206.8 161.4 119.9 Changes in Working Capital -53.7 50.4 -4.6 9.7 57.5 Inventories -23.1 -5.6 9.1 -35.0 -9.6 Accounts Payable 11.9 13.2 -21.7 35.5 6.8 Other Accruals -37.5 44.1 13.2 13.7 57.7 Other Assets/Liabilities -5.0 -1.3 -5.2 -4.4 2.6 Net Operating Cash Flow 263.7 334.4 202.1 171.1 177.4 Investing Activities Capital Expenditures 100.8 53.9 83.0 82.3 44.9 Purchase/Sale of Investments 0.0 0.0 0.0 76.2 -56.2 Net Investing Cash Flow -100.8 -53.9 -83.0 -6.1 -101.1 Financing Activities Cash Dividends Paid 0.0 0.0 0.0 0.0 0.0 Change in Capital Stock -250.5 -163.8 -2.9 -258.7 -89.0 Repurchase of Common & Preferred Stk. -257.5 -174.3 -6.7 -266.7 -91.4 Sale of Common & Preferred Stock 7.0 10.5 3.8 8.0 2.4 Issuance/Reduction of Debt, Net 0.0 0.0 0.0 0.0 0.0 Change in Long-Term Debt 0.0 0.0 0.0 0.0 0.0 Other Funds 5.1 1.2 1.5 5.5 7.6 Net Financing Cash Flow -245.4 -162.6 -1.4 -253.2 -81.5 Exchange Rate Effect 1.0 0.5 -1.1 0.0 -- Miscellaneous Funds 0.0 0.0 -0.0 0.0 0.0 Net Change in Cash -81.4 118.4 116.6 -88.1 -5.2
  13. 13. FINANCIALS Five Year Key Annual Ratios 13 Ratios - Annual 5 Yr AVG 31-Jan-11 29-Jan-10 30-Jan-09 31-Jan-08 31-Jan-07 Valuation Price/Earnings 12.7x 9.7x 9.7x 9.6x 16.3x 18.2x Price/Sales 1.1x 0.9x 1.0x 0.7x 1.3x 1.4x Price/Book Value 5.8x 4.7x 4.7x 4.0x 9.5x 5.9x Enterprise Value/EBIT 6.3x 4.6x 4.5x 4.8x 8.3x 9.5x Enterprise Value/EBITDA 5.4x 4.0x 3.9x 4.0x 7.1x 8.1x Enterprise Value/Sales 0.9x 0.7x 0.8x 0.6x 1.1x 1.1x Profitability Gross Margin 35.3% 36.9% 38.0% 34.7% 34.8% 32.2% Operating Margin 14.3% 16.1% 17.2% 13.2% 13.3% 11.7% Net Margin 8.7% 9.6% 10.3% 7.9% 8.1% 7.5% Return on Assets 26.3% 29.7% 32.1% 26.1% 24.0% 19.7% Return on Equity 50.4% 53.4% 58.1% 54.1% 50.7% 35.7% Efficiency Inventory Turnover 9.8x 10.5x 10.7x 9.4x 8.7x 9.9x Days of Inventory on Hand 37.4 34.9 34.2 39.0 41.9 36.8 Payables Turnover 15.1x 15.9x 16.5x 13.8x 13.1x 16.0x Days of Payables Outstanding 24.4 23.0 22.1 26.4 27.8 22.8 Total Asset Turnover 2.9x 3.1x 2.8x 2.9x 3.2x 2.4x Working Capital Turnover 10.0x 9.5x 7.7x 8.6x 18.2x 6.0x Liquidity Current Ratio 2.09 2.17 2.19 2.25 1.44 2.42 Quick Ratio 1.43 1.45 1.64 1.52 0.75 1.80 Cash Ratio 1.24 1.23 1.43 1.30 0.57 1.68 Credit Analysis Net Debt/EBITDA -0.8x -0.6x -0.8x -0.8x -0.5x -1.4x Net Debt/(EBITDA-Capex) -1.1x -0.8x -0.9x -1.1x -0.7x -1.8x Net Debt/Total Capital -70.2% -61.4% -79.9% -64.4% -56.7% -88.5%
  14. 14. INDUSTRY COMPARABLES 14
  15. 15. INDUSTRYCOMPARABLES Comparables 15
  16. 16. INDUSTRYCOMPARABLES Capitalization Comparison 16 All values in millions of U.S. Dollar, except per share items. Shares Long LTM as of 19-Apr-2011 Price Shares Out Equity Enterprise Total Total Term D/ Company Name Ticker (19-Apr-2011) Outstanding Diluted Value Value Debt Assets Debt D+E Aeropostale, Inc. (ARO-US) ARO 25.68 81.8 92.8 2,382.1 1,834.5 0.0 773.1 0.0 0.00x Abercrombie & Fitch Co. (ANF-US) ANF 68.13 87.2 89.9 6,121.5 5,185.1 68.6 2,931.1 68.6 0.03x American Eagle Outfitters, Inc. (AEO) AEO 15.84 194.7 201.8 3,196.8 2,349.2 0.0 1,860.4 0.0 0.00x Benetton Group SpA (BEN-IT) BEN 7.56 182.7 172.3 1,302.8 2,102.9 958.2 3,714.7 872.5 0.33x Guess?, Inc. (GES) GES 38.49 92.3 92.1 3,545.5 3,150.2 14.4 1,630.3 12.2 0.01x Urban Outfitters, Inc. (URBN) URBN 31.43 162.3 170.3 5,353.6 4,643.0 0.0 1,756.5 0.0 0.00x Mean 31.19 133.49 136.54 3,650.40 3,210.83 173.53 2,111.04 158.87 0.06x Median 28.56 127.28 131.55 3,371.15 2,749.71 7.20 1,808.46 6.11 0.01x Valuation Comparison All values in millions of U.S. Dollar, except per share items. Price to Price LTM as of 19-Apr-2011 Book to Company Name Ticker Sales EBITDA LTM FY1 FY2 Sales EBIT EBITDA Value Sales Aeropostale, Inc. (ARO-US) ARO 2,400.4 445.5 10.31 11.01 9.86 0.76x 4.7x 4.1x 5.02x 0.99x Abercrombie & Fitch Co. (ANF-US) ANF 3,468.8 509.6 40.80 23.22 15.15 1.49x 18.5x 10.2x 3.14x 1.76x American Eagle Outfitters, Inc. (AEO) AEO 2,967.6 462.8 22.63 15.34 13.46 0.79x 7.4x 5.1x 2.28x 1.08x Benetton Group SpA (BEN-IT) BEN 2,716.8 293.8 8.83 11.15 9.81 0.73x 12.5x 6.7x 0.61x 0.44x Guess?, Inc. (GES) GES 2,487.3 480.6 12.38 11.36 9.95 1.27x 7.6x 6.6x 3.37x 1.43x Urban Outfitters, Inc. (URBN) URBN 2,274.1 515.3 19.64 18.39 15.35 2.04x 11.2x 9.0x 3.66x 2.35x Mean 2,782.9 452.4 20.9 15.9 12.7 1.3x 11.4x 7.5x 2.6x 1.4x Median 2,716.8 480.6 19.6 15.3 13.5 1.3x 11.2x 6.7x 3.1x 1.4x Price / EPS Enterprise Value /
  17. 17. INDUSTRYCOMPARABLES Margin Comparison 17 All values in millions of U.S. Dollar, except per share items. LTM as of 19-Apr-2011 Company Name Ticker FY-1 FY0 LTM FY-1 FY0 LTM FY-1 FY0 LTM FY-1 FY0 LTM Aeropostale, Inc. (ARO-US) ARO 38.0 36.9 36.9 17.2 16.1 16.1 19.5 18.6 18.6 10.3 9.6 9.6 Abercrombie & Fitch Co. (ANF-US) ANF 56.2 57.1 57.1 4.0 8.1 8.1 12.2 14.7 14.7 2.7 4.3 4.3 American Eagle Outfitters, Inc. (AEO) AEO 33.9 34.7 34.7 8.6 10.7 10.7 13.4 15.6 15.6 5.7 6.1 6.1 Benetton Group SpA (BEN-IT) BEN 43.4 9.6 9.6 6.49 5.80 5.80 11.54 10.81 10.81 5.94 4.97 4.97 Guess?, Inc. (GES) GES 44.2 43.7 43.7 17.1 16.6 16.6 20.1 19.3 19.3 11.4 11.5 11.5 Urban Outfitters, Inc. (URBN) URBN 40.6 41.2 41.2 17.5 18.2 18.2 22.3 22.7 22.7 11.3 12.0 12.0 Mean 43.7 37.3 37.3 10.7 11.9 11.9 15.9 16.6 16.6 7.4 7.8 7.8 Median 43.4 41.2 41.2 8.6 10.7 10.7 13.4 15.6 15.6 5.9 6.1 6.1 EBIT Margin % EBITDA Margin % Net Margin %Gross Margin % Stock Performance Comparison All values in millions of U.S. Dollar, except per share items. LTM as of 19-Apr-2011 Company Name Ticker High Low Beta 1 Week 1 Month 3 Months 6 Months 9 Months 1 Year 2 Years 3 Years 5 Years Aeropostale, Inc. (ARO-US) ARO 32.24 21.26 0.28 (1.61) 7.45 1.02 (3.60) (10.52) (15.75) 23.94 28.44 88.33 Abercrombie & Fitch Co. (ANF-US) ANF 70.35 29.94 1.96 0.29 28.64 33.93 57.53 103.01 44.68 185.54 (8.01) 16.12 American Eagle Outfitters, Inc. (AEO) AEO 18.43 11.35 0.92 0.64 5.74 10.08 (2.76) 33.00 (10.71) 3.13 (5.09) (24.33) Benetton Group SpA (BEN-IT) BEN 9.18 5.74 0.53 (2.30) 6.59 8.30 (7.24) 0.66 (12.49) (4.11) (42.54) (51.29) Guess?, Inc. (GES) GES 51.53 30.54 1.64 (2.21) 0.57 (8.62) (6.67) 17.74 (17.10) 57.49 (3.85) 81.09 Urban Outfitters, Inc. (URBN) URBN 40.84 29.03 0.85 (0.41) 0.58 (10.30) 7.34 (2.42) (17.22) 79.39 (0.95) 33.07 Mean 38.07 21.32 1.18 (0.80) 8.42 6.68 9.64 30.40 (2.57) 64.29 (12.09) 10.93 Median 40.84 29.03 0.92 (0.41) 5.74 8.30 (2.76) 17.74 (12.49) 57.49 (5.09) 16.12 52 Week Price Change %
  18. 18. FINANCIAL STATEMENTS PROJECTIONS ASSUMPTIONS 18
  19. 19. FINANCIALSTATEMENTSPROJECTIONSASSUMPTIONS Income Statement and Cash Flow Statement Assumptions 19 Income Statement Projection Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales (% growth) 15.0% 15.0% 12.0% 9.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cost of Goods Sold (% sales) 65.0% 64.0% 62.0% 61.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% SG&A (% sales) 20.0% 19.0% 18.0% 17.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Other Expense / (Income) (% of sales) - % - % - % - % - % - % - % - % - % - % Depreciation & Amortization (% sales) 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Amortization (% sales) - % - % - % - % - % - % - % - % - % - % Interest Income 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Cash Flow Statement Projection Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Capital Expenditures (% sales) 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Balance Sheet Assumptions Balance Sheet Projection Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Days Sales Outstanding (DSO) - - - - - - - - - - Days Inventory Held (DIH) 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Prepaids and Other Current Assets (% sales) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Days Payable Outstanding (DPO) 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Accrued Liabilities (% sales) 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Other Current Liabilities (% sales) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
  20. 20. TRANSACTION ANALYSIS 20
  21. 21. TRANSACTIONANALYSIS Fully Diluted Shares and Purchase Price Calculation 21 Public (1) / Private (2) 2 Entry EBITDA Multiple 5.5x LTM 1/1/2011 EBITDA 445.0 Enterprise Value $2,447.5 Less: Total Debt - Less: Preferred Securities - Less: Noncontrolling Interest - Plus: Cash and Cash Equivalents 265.6 Equity Purchase Price $2,713.1 Premium Calculation (If Public) Stock Trading at (If Public) $25.68 Implied Premium Paid (If Public) 29% Purchase Price Implied Offer Price per Share $33.18 Stock Trading at (If Public) $25.68 Basic Shares Outstanding 81.8 Plus: Shares from In-the-Money Options - Less: Shares Repurchased - Net New Shares from Options - Plus: Shares from Convertible Securities - Fully Diluted Shares Outstanding 81.780 Number of Exercise In-the-Money Tranche Shares Price Shares Proceeds Tranche 1 - - - - Tranche 2 - - - - Tranche 3 - - - - Tranche 4 - - - - Tranche 5 - - - - Total - - - Conversion Conversion New Amount Price Ratio Shares Issue 1 - - - - Issue 2 - - - - Issue 3 - - - - Issue 4 - - - - Issue 5 - - - - Total - Options/Warrants Calculation of Fully Diluted Shares Outstanding Convertible Securities
  22. 22. TRANSACTIONANALYSIS Sources and Uses of Funds 22 % of Total Equity % Amount Sources 1/1/2011 Cumulative Pricing Revolving Credit - - % - x - x L+325 bps Term Loan A 1,000.0 35.7% 2.2x 2.2x L+300 bps Term Loan B 300.0 10.7% 0.7x 2.9x L+350 bps Term Loan C - - % - x 2.9x L+350 bps 2nd Lien - - % - x 2.9x L+350 bps Senior Notes 200.0 7.1% 0.4x 3.4x 3.000% Senior Subordinated Notes - - % - x 3.4x 10.000% Sponsor Equity 100% 1,037.3 37.0% 2.3x 5.7x Rollover Equity 0% - - % - x 5.7x Management Equity 0% - - % - x 5.7x Cash on Hand 265.6 9.5% 0.6x 6.3x Total Sources $2,802.9 100.0% 6.3x 6.3x Multiple of EBITDA Sources of Funds % of Total Amount Uses Purchase Target Equity $2,713.1 96.8% Repay Existing Debt - - % Noncontrolling Interest - - % Financing Fees 34.5 1.2% Investment Banking Fees 27.1 1.0% Legal Fees 27.1 1.0% Other Fees and Expenses 1.0 0.0% Miscellaneous Expenses 1 - - % Miscellaneous Expenses 2 - - % Total Uses $2,802.9 100.0% Uses of Funds Offer Price per Share $33.18 Fully Diluted Shares 81.8 Equity Purchase Price $2,713.1 Plus: Existing Net Debt (265.6) Enterprise Value $2,447.5 Purchase Price Exit Year 2016 Entry Multiple 5.5x Exit Multiple 5.5x IRR 39.2% Cash Return 5.2x Return
  23. 23. TRANSACTIONANALYSIS Financing Fees Amortization 23 Base Size (%) ($) Revolving Credit Size $300.0 1.750% $5.3 Term Loan A 1,000.0 1.750% 17.5 Term Loan B 300.0 1.750% 5.3 Term Loan C - - - 2nd Lien - - - Senior Notes 200.0 2.250% 4.5 Senior Subordinated Notes - 2.250% - Senior Bridge Facility 200.0 1.000% 2.0 Senior Subordinated Bridge Facility - 1.000% - Other Financing Fees & Expenses - Total Financing Fees $34.5 Financing Fees Fees Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Term 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Revolving Credit Size 6 $0.9 $0.9 $0.9 $0.9 $0.9 $0.9 - - - - Term Loan A 5 3.5 3.5 3.5 3.5 3.5 - - - - - Term Loan B 7 0.8 0.8 0.8 0.8 0.8 0.8 0.8 - - - Term Loan C 7 - - - - - - - - - - 2nd Lien - - - - - - - - - - - Senior Notes 10 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Senior Subordinated Notes 10 - - - - - - - - - - Senior Bridge Facility 10 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Senior Subordinated Bridge Facility 10 - - - - - - - - - - Other Financing Fees & Expenses 10 - - - - - - - - - - Annual Amortization $5.8 $5.8 $5.8 $5.8 $5.8 $2.3 $1.4 $0.7 $0.7 $0.7 Administrative Agent Fee 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Amortization of Financing Fees
  24. 24. TRANSACTIONANALYSIS Income Statement Projection 24 $ in Millions Historical Period Projection Period LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2008 2009 2010 1/1/2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales $1,590.9 $1,885.5 $2,230.1 $2,400.0 $2,400.0 $2,760.0 $3,174.0 $3,554.9 $3,874.8 $4,029.8 $4,191.0 $4,358.6 $4,533.0 $4,714.3 $4,902.9 % growth NA 18.5% 18.3% NA 7.6% 15.0% 15.0% 12.0% 9.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cost of Goods Sold 1,001.0 1,185.6 1,330.1 1,455.6 1,455.6 1,794.0 2,031.4 2,204.0 2,363.6 2,417.9 2,514.6 2,615.2 2,719.8 2,828.6 2,941.7 Gross Profit $589.9 $699.9 $900.0 $944.4 $944.4 $966.0 $1,142.6 $1,350.9 $1,511.2 $1,611.9 $1,676.4 $1,743.5 $1,813.2 $1,885.7 $1,961.2 % margin 37.1% 37.1% 40.4% 39.4% 39.4% 35.0% 36.0% 38.0% 39.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Selling, General & Administrative 345.8 405.9 464.5 499.4 499.4 552.0 603.1 639.9 658.7 604.5 628.7 653.8 679.9 707.1 735.4 % sales 21.7% 21.5% 20.8% 20.8% 20.8% 20.0% 19.0% 18.0% 17.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Other Expense / (Income) (4.1) - - - - - - - - - - - - - - EBITDA $248.2 $294.0 $435.5 $445.0 $445.0 $414.0 $539.6 $711.0 $852.5 $1,007.5 $1,047.8 $1,089.7 $1,133.2 $1,178.6 $1,225.7 % margin 15.6% 15.6% 19.5% 18.5% 18.5% 15.0% 17.0% 20.0% 22.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Depreciation & Amortization 36.8 45.8 52.9 58.0 58.0 55.2 63.5 71.1 77.5 80.6 83.8 87.2 90.7 94.3 98.1 Amortization - - - - - - - - - - - - - - - EBIT $211.4 $248.2 $382.6 $387.0 $387.0 $358.8 $476.1 $639.9 $775.0 $926.9 $963.9 $1,002.5 $1,042.6 $1,084.3 $1,127.7 % margin 13.3% 13.2% 17.2% 16.1% 16.1% 13.0% 15.0% 18.0% 20.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% Interest Expense Revolving Credit Facility - - - - - - - - - - - Term Loan A 60.0 55.9 47.2 33.1 12.5 - - - - - - Term Loan B 19.5 19.4 19.7 19.9 20.4 10.7 - - - - - Term Loan C - - - - - - - - - - - Existing Term Loan - - - - - - - - - - - 2nd Lien - - - - - - - - - - - Senior Notes 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 Senior Subordinated Notes - - - - - - - - - - - Commitment Fee on Unused Revolver 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Administrative Agent Fee 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Cash Interest Expense $87.2 $83.0 $74.5 $60.7 $40.6 $18.3 $7.7 $7.7 $7.7 $7.7 $7.7 Amortization of Deferred Financing Fees 5.8 5.8 5.8 5.8 5.8 5.8 2.3 1.4 0.7 0.7 0.7 Total Interest Expense $92.9 $88.7 $80.3 $66.4 $46.4 $24.1 $9.9 $9.1 $8.3 $8.3 $8.3 Interest Income - - - - (1.0) (4.6) (9.9) (15.4) (21.2) (27.2) Net Interest Expense $88.7 $80.3 $66.4 $46.4 $23.1 $5.3 ($0.8) ($7.1) ($12.9) ($18.9) Earnings Before Taxes 270.1 395.8 573.4 728.6 903.8 958.6 1,003.3 1,049.7 1,097.1 1,146.5 Income Tax Expense 102.6 150.4 217.9 276.9 343.4 364.3 381.3 398.9 416.9 435.7 Net Income $167.4 $245.4 $355.5 $451.7 $560.3 $594.3 $622.1 $650.8 $680.2 $710.9 % margin 6.1% 7.7% 10.0% 11.7% 13.9% 14.2% 14.3% 14.4% 14.4% 14.5% LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Income Statement Assumptions 2008 2009 2010 1/1/2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales (% YoY growth) NA 18.5% 18.3% NA 7.6% 15.0% 15.0% 12.0% 9.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cost of Goods Sold (% margin) 62.9% 62.9% 59.6% 60.7% 60.7% 65.0% 64.0% 62.0% 61.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% SG&A (% sales) 21.7% 21.5% 20.8% 20.8% 20.8% 20.0% 19.0% 18.0% 17.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Other Expense / (Income) (% of sales) (0.3%) - % - % - % - % - % - % - % - % - % - % - % - % - % - % Depreciation & Amortization (% of sales) 2.3% 2.4% 2.4% 2.4% 2.4% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Amortization (% of sales) - % - % - % - % - % - % - % - % - % - % - % - % - % - % - % Interest Income 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Tax Rate 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% Income Statement
  25. 25. TRANSACTIONANALYSIS Balance Sheet Projection and Adjustments 25 $ in Millions Projection Period Opening Pro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2011 (+) (-) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Cash and Cash Equivalents $265.6 (265.6) - - - - - $204.1 $719.1 $1,257.6 $1,820.8 $2,409.9 $3,025.9 Accounts Receivable - - - - - - - - - - - - Inventories 156.6 156.6 196.6 222.6 241.5 259.0 265.0 275.6 286.6 298.1 310.0 322.4 Prepaids and Other Current Assets 47.4 47.4 27.6 31.7 35.5 38.7 40.3 41.9 43.6 45.3 47.1 49.0 Total Current Assets $469.6 $204.0 $224.2 $254.4 $277.1 $297.8 $509.4 $1,036.6 $1,587.8 $2,164.2 $2,767.0 $3,397.3 Property, Plant and Equipment, net 299.2 299.2 354.4 417.9 489.0 566.5 647.1 730.9 818.1 908.7 1,003.0 1,101.1 Goodwill and Intangible Assets - 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 2,280.4 Other Assets 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 Deferred Financing Fees - 34.5 34.5 28.7 23.0 17.2 11.4 5.6 3.4 2.0 1.3 0.7 0.0 Total Assets $773.1 $2,822.4 $2,892.0 $2,979.9 $3,067.9 $3,160.4 $3,446.8 $4,055.5 $4,692.5 $5,358.9 $6,055.3 $6,783.0 Accounts Payable 103.0 103.0 147.5 167.0 181.2 194.3 198.7 206.7 214.9 223.5 232.5 241.8 Accrued Liabilities 10.0 10.0 27.6 31.7 35.5 38.7 40.3 41.9 43.6 45.3 47.1 49.0 Other Current Liabilities 103.0 103.0 82.8 95.2 106.6 116.2 120.9 125.7 130.8 136.0 141.4 147.1 Total Current Liabilities $216.0 $216.0 $257.9 $293.9 $323.3 $349.3 $359.9 $374.3 $389.3 $404.9 $421.1 $437.9 Revolving Credit Facility - - - - - - - - - - - - - Term Loan A - 1,000.0 1,000.0 863.3 672.7 378.8 - - - - - - - Term Loan B - 300.0 300.0 297.0 294.0 291.0 284.6 - - - - - - Term Loan C - - - - - - - - - - - - - Existing Term Loan - - - - - - - - - - - - - 2nd Lien - - - - - - - - - - - - - Senior Notes - 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 Senior Subordinated Notes - - - - - - - - - - - - - Other Debt 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 Other Long-Term Liabilities 106.2 106.2 106.2 106.2 106.2 106.2 106.2 106.2 106.2 106.2 106.2 106.2 Total Liabilities $340.4 $1,840.4 $1,742.6 $1,585.0 $1,317.6 $958.2 $684.3 $698.7 $713.7 $729.3 $745.5 $762.3 Noncontrolling Interest - - - - - - - - - - - - - All Shareholders' Equity 432.7 982.0 (432.7) 982.0 1,149.4 1,394.8 1,750.4 2,202.1 2,762.4 3,356.8 3,978.9 4,629.7 5,309.9 6,020.7 Total Shareholders' Equity $432.7 $982.0 $1,149.4 $1,394.8 $1,750.4 $2,202.1 $2,762.4 $3,356.8 $3,978.9 $4,629.7 $5,309.9 $6,020.7 Total Liabilities and Equity $773.1 $2,822.4 $2,892.0 $2,979.9 $3,067.9 $3,160.4 $3,446.8 $4,055.5 $4,692.5 $5,358.9 $6,055.3 $6,783.0 Balance Check 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Net Working Capital (12.0) (12.0) (33.6) (39.6) (46.3) (51.5) (54.7) (56.8) (59.1) (61.5) (63.9) (66.5) (Increase) / Decrease in Net Working Capital 21.6 5.9 6.7 5.2 3.2 2.2 2.3 2.4 2.5 2.6 Opening Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Balance Sheet Assumptions 2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Days Sales Outstanding (DSO) - - - - - - - - - - - - Days Inventory Held (DIH) 39.3 39.3 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 Prepaid and Other Current Assets (% of sales) 2.0% 2.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Days Payable Outstanding (DPO) 25.8 25.8 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 30.0 Accrued Liabilities (% of sales) 0.4% 0.4% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Other Current Liabilities (% of sales) 4.3% 4.3% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Balance Sheet Current Assets Current Liabilities Adjustments
  26. 26. TRANSACTIONANALYSIS Cash Flow Statement Projections 26 $ in Millions Projection Period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Operating Activities Net Income $167.4 $245.4 $355.5 $451.7 $560.3 $594.3 $622.1 $650.8 $680.2 $710.9 Plus: Depreciation & Amortization 55.2 63.5 71.1 77.5 80.6 83.8 87.2 90.7 94.3 98.1 Plus: Amortization - - - - - - - - - - Plus: Amortization of Financing Fees 5.8 5.8 5.8 5.8 5.8 2.3 1.4 0.7 0.7 0.7 Changes in Working Capital Items (Inc.) / Dec. in Accounts Receivable - - - - - - - - - - (Inc.) / Dec. in Inventories (40.0) (26.0) (18.9) (17.5) (5.9) (10.6) (11.0) (11.5) (11.9) (12.4) (Inc.) / Dec. in Prepaid and Other Current Assets 19.8 (4.1) (3.8) (3.2) (1.5) (1.6) (1.7) (1.7) (1.8) (1.9) Inc. / (Dec.) in Accounts Payable 44.5 19.5 14.2 13.1 4.5 7.9 8.3 8.6 8.9 9.3 Inc. / (Dec.) in Accrued Liabilities 17.6 4.1 3.8 3.2 1.5 1.6 1.7 1.7 1.8 1.9 Inc. / (Dec.) in Other Current Liabilities (20.2) 12.4 11.4 9.6 4.6 4.8 5.0 5.2 5.4 5.7 (Inc.) / Dec. in Net Working Capital 21.6 5.9 6.7 5.2 3.2 2.2 2.3 2.4 2.5 2.6 Cash Flow from Operating Activities $250.1 $320.6 $439.1 $540.2 $649.9 $682.6 $712.9 $744.5 $777.6 $812.1 Investing Activities Capital Expenditures (110.4) (127.0) (142.2) (155.0) (161.2) (167.6) (174.3) (181.3) (188.6) (196.1) Other Investing Activities - - - - - - - - - - Cash Flow from Investing Activities ($110.4) ($127.0) ($142.2) ($155.0) ($161.2) ($167.6) ($174.3) ($181.3) ($188.6) ($196.1) Financing Activities Revolving Credit Facility - - - - - - - - - - Term Loan A (136.7) (190.6) (293.9) (378.8) - - - - - - Term Loan B (3.0) (3.0) (3.0) (6.4) (284.6) - - - - - Term Loan C - - - - - - - - - - Existing Term Loan - - - - - - - - - - 2nd Lien - - - - - - - - - - Senior Notes - - - - - - - - - - Senior Subordinated Notes - - - - - - - - - - Other Debt - - - - - - - - - - Dividends - - - - - - - - - - Equity Issuance / (Repurchase) - - - - - - - - - - Cash Flow from Financing Activities ($139.7) ($193.6) ($296.9) ($385.2) ($284.6) - - - - - Excess Cash for the Period - - - - $204.1 $515.0 $538.6 $563.2 $589.1 $616.0 Beginning Cash Balance - - - - - 204.1 719.1 1,257.6 1,820.8 2,409.9 Ending Cash Balance - - - - $204.1 $719.1 $1,257.6 $1,820.8 $2,409.9 $3,025.9 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cash Flow Statement Assumptions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Capital Expenditures (% of sales) 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cash Flow Statement
  27. 27. TRANSACTIONANALYSIS Debt Schedule 27 $ in Millions Projection Period Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Forward LIBOR Curve 3.00% 3.00% 3.15% 3.30% 3.60% 4.00% 4.35% 4.80% 4.85% 5.10% 5.25% Cash Flow from Operating Activities $250.1 $320.6 $439.1 $540.2 $649.9 $682.6 $712.9 $744.5 $777.6 $812.1 Cash Flow from Investing Activities (110.4) (127.0) (142.2) (155.0) (161.2) (167.6) (174.3) (181.3) (188.6) (196.1) Cash Available for Debt Repayment $139.7 $193.6 $296.9 $385.2 $488.7 $515.0 $538.6 $563.2 $589.1 $616.0 Total Mandatory Repayments MinCash (3.0) (3.0) (3.0) (3.0) (3.0) - - - - - Cash From Balance Sheet - - - - - - 204.1 719.1 1,257.6 1,820.8 2,409.9 Cash Available for Optional Debt Repayment $136.7 $190.6 $293.9 $382.2 $485.7 $719.1 $1,257.6 $1,820.8 $2,409.9 $3,025.9 Debt Schedule Term Loan A Size $1,000.0 Spread 3.000% Term 5 years Repayment Schedule - % - % - % - % - % 100.0% Beginning Balance $1,000.0 $863.3 $672.7 $378.8 - - - - - - Mandatory Repayments - - - - - - - - - - Optional Repayments (136.7) (190.6) (293.9) (378.8) - - - - - - Ending Balance $863.3 $672.7 $378.8 - - - - - - - Interest Rate 6.00% 6.15% 6.30% 6.60% 7.00% 7.35% 7.80% 7.85% 8.10% 8.25% Interest Expense 55.9 47.2 33.1 12.5 - - - - - - Term Loan B Size $300.0 Spread 3.500% Term 7 years Repayment Schedule 1.0% Per Annum, Bullet at Maturity Beginning Balance $300.0 $297.0 $294.0 $291.0 $284.6 - - - - - Mandatory Repayments (3.0) (3.0) (3.0) (3.0) (3.0) - - - - - Optional Repayments - - - (3.4) (281.6) - - - - - Ending Balance $297.0 $294.0 $291.0 $284.6 - - - - - - Interest Rate 6.50% 6.65% 6.80% 7.10% 7.50% 7.85% 8.30% 8.35% 8.60% 8.75% Interest Expense 19.4 19.7 19.9 20.4 10.7 - - - - - Senior Notes Size $200.0 Coupon 3.000% Term 10 years Beginning Balance $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 Repayment - - - - - - - - - - Ending Balance $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 Interest Expense 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
  28. 28. TRANSACTIONANALYSIS Free Cash Flow , Capitalization and Credit Statistics Summary 28 Projection Period LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2008 2009 2010 1/1/2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sales $1,590.9 $1,885.5 $2,230.1 $2,400.0 $2,400.0 $2,760.0 $3,174.0 $3,554.9 $3,874.8 $4,029.8 $4,191.0 $4,358.6 $4,533.0 $4,714.3 $4,902.9 % growth NA 18.5% 18.3% NA 7.6% 15.0% 15.0% 12.0% 9.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Gross Profit $589.9 $699.9 $900.0 $944.4 $944.4 $966.0 $1,142.6 $1,350.9 $1,511.2 $1,611.9 $1,676.4 $1,743.5 $1,813.2 $1,885.7 $1,961.2 % margin 37.1% 37.1% 40.4% 39.4% 39.4% 35.0% 36.0% 38.0% 39.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% EBITDA $248.2 $294.0 $435.5 $445.0 $445.0 $414.0 $539.6 $711.0 $852.5 $1,007.5 $1,047.8 $1,089.7 $1,133.2 $1,178.6 $1,225.7 % margin 15.6% 15.6% 19.5% 18.5% 18.5% 15.0% 17.0% 20.0% 22.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Capital Expenditures 82.3 83.0 54.0 100.9 100.9 110.4 127.0 142.2 155.0 161.2 167.6 174.3 181.3 188.6 196.1 % sales 5.2% 4.4% 2.4% 4.2% 4.2% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Cash Interest Expense 87.2 83.0 74.5 60.7 40.6 18.3 7.7 7.7 7.7 7.7 7.7 Total Interest Expense 92.9 88.7 80.3 66.4 46.4 24.1 9.9 9.1 8.3 8.3 8.3 Free Cash Flow EBITDA $414.0 $539.6 $711.0 $852.5 $1,007.5 $1,047.8 $1,089.7 $1,133.2 $1,178.6 $1,225.7 Less: Cash Interest Expense (83.0) (74.5) (60.7) (40.6) (18.3) (7.7) (7.7) (7.7) (7.7) (7.7) Plus: Interest Income - - - - 1.0 4.6 9.9 15.4 21.2 27.2 Less: Income Taxes (102.6) (150.4) (217.9) (276.9) (343.4) (364.3) (381.3) (398.9) (416.9) (435.7) Less: Capital Expenditures (110.4) (127.0) (142.2) (155.0) (161.2) (167.6) (174.3) (181.3) (188.6) (196.1) Less: Increase in Net Working Capital 21.6 5.9 6.7 5.2 3.2 2.2 2.3 2.4 2.5 2.6 Free Cash Flow $139.7 $193.6 $296.9 $385.2 $488.7 $515.0 $538.6 $563.2 $589.1 $616.0 Cumulative Free Cash Flow 139.7 333.3 630.2 1,015.4 1,504.1 2,019.1 2,557.6 3,120.8 3,709.9 4,325.9 Cash - - - - - $204.1 $719.1 $1,257.6 $1,820.8 $2,409.9 $3,025.9 Revolving Credit Facility - - - - - - - - - - - Term Loan A 1,000.0 863.3 672.7 378.8 - - - - - - - Term Loan B 300.0 297.0 294.0 291.0 284.6 - - - - - - Term Loan C - - - - - - - - - - - Existing Term Loan - - - - - - - - - - - 2nd Lien - - - - - - - - - - - Other Debt 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 Total Senior Secured Debt $1,318.2 $1,178.5 $984.9 $688.0 $302.8 $18.2 $18.2 $18.2 $18.2 $18.2 $18.2 Senior Notes 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 Total Senior Debt $1,518.2 $1,378.5 $1,184.9 $888.0 $502.8 $218.2 $218.2 $218.2 $218.2 $218.2 $218.2 Senior Subordinated Notes - - - - - - - - - - - Total Debt $1,518.2 $1,378.5 $1,184.9 $888.0 $502.8 $218.2 $218.2 $218.2 $218.2 $218.2 $218.2 Shareholders' Equity 982.0 1,149.4 1,394.8 1,750.4 2,202.1 2,762.4 3,356.8 3,978.9 4,629.7 5,309.9 6,020.7 Total Capitalization $2,500.2 $2,528.0 $2,579.8 $2,638.4 $2,704.9 $2,980.6 $3,575.0 $4,197.1 $4,847.9 $5,528.1 $6,238.9 % of Bank Debt Repaid - 10.7% 25.6% 48.5% 78.1% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% % Debt / Total Capitalization 60.7% 54.5% 45.9% 33.7% 18.6% 7.3% 6.1% 5.2% 4.5% 3.9% 3.5% EBITDA / Cash Interest Expense 5.1x 5.0x 7.2x 11.7x 21.0x 55.0x 137.0x 142.4x 148.1x 154.1x 160.2x (EBITDA - Capex) / Cash Interest Expense 3.9x 3.7x 5.5x 9.4x 17.2x 46.2x 115.0x 119.6x 124.4x 129.4x 134.6x EBITDA / Total Interest Expense 4.8x 4.7x 6.7x 10.7x 18.4x 41.8x 105.6x 120.4x 136.5x 142.0x 147.7x (EBITDA - Capex) / Total Interest Expense 3.7x 3.4x 5.1x 8.6x 15.0x 35.1x 88.7x 101.1x 114.7x 119.3x 124.0x Senior Secured Debt / EBITDA 3.0x 2.8x 1.8x 1.0x 0.4x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x Senior Debt / EBITDA 3.4x 3.3x 2.2x 1.2x 0.6x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x Total Debt / EBITDA 3.4x 3.3x 2.2x 1.2x 0.6x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x Net Debt / EBITDA 3.4x 3.3x 2.2x 1.2x 0.6x 0.0x (0.5x) (1.0x) (1.4x) (1.9x) (2.3x) Historical Period Capitalization Credit Statistics Free Cash Flow
  29. 29. RETURN ANALYSIS 29
  30. 30. RETURNANALYSIS Return Analysis 30 $ in Millions Initial Sponsor Equity $1,037.3 100% Initial Rollover Equity - 0% Initial Management Equity - 0% Total Initial Equity $1,037.3 100% Projection Period Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Entry EBITDA Multiple 5.5x EBITDA $414.0 $539.6 $711.0 $852.5 $1,007.5 $1,047.8 $1,089.7 $1,133.2 $1,178.6 $1,225.7 Exit EBITDA Multiple 5.5x Enterprise Value at Exit $2,277.0 $2,967.7 $3,910.4 $4,688.5 $5,541.0 $5,762.6 $5,993.1 $6,232.9 $6,482.2 $6,741.5 Less: Net Debt Revolving Credit - - - - - - - - - - Term Loan A 863.3 672.7 378.8 - - - - - - - Term Loan B 297.0 294.0 291.0 284.6 - - - - - - Term Loan C - - - - - - - - - - Existing Term Loan - - - - - - - - - - 2nd Lien - - - - - - - - - - Senior Notes 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 Senior Subordinated Notes - - - - - - - - - - Other Debt 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 18.2 Total Debt $1,378.5 $1,184.9 $888.0 $502.8 $218.2 $218.2 $218.2 $218.2 $218.2 $218.2 Less: Cash and Cash Equivalents - - - - 204.1 719.1 1,257.6 1,820.8 2,409.9 3,025.9 Net Debt $1,378.5 $1,184.9 $888.0 $502.8 $14.1 ($500.9) ($1,039.4) ($1,602.6) ($2,191.7) ($2,807.7) Less: Fees and Expenses Investment Banking Fees (1% of Transcation Value) 22.8 29.7 39.1 46.9 55.4 57.6 59.9 62.3 64.8 67.4 Legal Fees (1% of Transaction Value) 22.8 29.7 39.1 46.9 55.4 57.6 59.9 62.3 64.8 67.4 Other Fees and Expenses ($1MM) 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Toal Fees and Expenses 46.5 60.4 79.2 94.8 111.8 116.3 120.9 125.7 130.6 135.8 All Equity Value at Exit $851.9 $1,722.4 $2,943.1 $4,091.0 $5,415.1 $6,147.3 $6,911.7 $7,709.8 $8,543.2 $9,413.3 Cash Return 0.8x 1.7x 2.8x 3.9x 5.2x 5.9x 6.7x 7.4x 8.2x 9.1x Sponsor IRR Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sponsor Equity % 100% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Initial Equity Investment ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) ($1,037.3) Equity Proceeds $851.9 - - - - - - - - - $1,722.4 - - - - - - - - $2,943.1 - - - - - - - $4,091.0 - - - - - - $5,415.1 - - - - - $6,147.3 - - - - $6,911.7 - - - $7,709.8 - - $8,543.2 - $9,413.3 IRR (17.9%) 28.9% 41.6% 40.9% 39.2% 34.5% 31.1% 28.5% 26.4% 24.7% Returns Analysis
  31. 31. RETURNANALYSIS IRR Sensitivity Analysis w.r.t Entry Multiple and Exit Multiple Assuming Exit in 2016 31 IRR Sensitivity Analysis w.r.t Exit Multiple and Exit Year Assuming 4.6x Entry Multiple IRR - Assuming Exit in 2016E Exit Multiple 39.2% 4.5x 5.0x 5.5x 6.0x 6.5x4.0x 65.5% 69.1% 72.3% 75.4% 78.2% 4.5x 50.0% 53.2% 56.1% 58.9% 61.5% Entry 5.0x 40.4% 43.4% 46.2% 48.8% 51.2% Multiple 5.5x 33.7% 36.5% 39.2% 41.6% 43.9% 6.0x 28.5% 31.2% 33.8% 36.1% 38.3% 6.5x 24.3% 27.0% 29.4% 31.7% 33.8% IRR - Assuming 5.5x Entry Multiple Exit Year 2016 2017 2018 2019 202039.2% 34.5% 31.1% 28.5% 26.4% 4.5x 33.7% 30.5% 28.0% 26.0% 24.4% Exit 5.0x 36.5% 32.6% 29.6% 27.3% 25.4% Multiple 5.5x 39.2% 34.5% 31.1% 28.5% 26.4% 6.0x 41.6% 36.3% 32.5% 29.6% 27.3% 6.5x 43.9% 38.0% 33.8% 30.7% 28.2%
  32. 32. RETURNANALYSIS Alternative Financing Structures and Corresponding IRRs 39.2% 32 5 Year IRR 34.1% 31.5% 29.3% 26.6% Structure 1 2 3 4 5 Base Structure 1 Structure 2 Structure 3 Structure 4 Revolving Credit Size $300.0 $300.0 $300.0 $300.0 $300.0 Revolving Credit Draw - - - - - Term Loan A 1,000.0 800.0 750.0 500.0 400.0 Term Loan B 300.0 300.0 150.0 150.0 50.0 Term Loan C - - - - - 2nd Lien - - - - - Senior Notes 200.0 100.0 100.0 150.0 50.0 Senior Subordinated Notes - - - - - Sponsor Equity 100% 1,037.3 1,337.3 1,537.3 1,737.3 2,037.3 Rollover Equity 0% - - - - - Management Equity 0% - - - - - Cash on Hand 265.6 265.6 265.6 265.6 265.6 Other Source - - - - - Total Sources of Funds $2,802.9 $2,802.9 $2,802.9 $2,802.9 $2,802.9 Target Equity Purchase Price $2,713.1 $2,713.1 $2,713.1 $2,713.1 $2,713.1 Repay Existing Bank Debt - - - - - Noncontrolling Interest - - - - - Financing Fees 34.5 34.5 34.5 34.5 34.5 Investment Banking Fees 27.1 27.1 27.1 27.1 27.1 Legal Fees 27.1 27.1 27.1 27.1 27.1 Other Fees and Expenses 1.0 1.0 1.0 1.0 1.0 Miscellaneous Expenses 1 - - - - - Miscellaneous Expenses 2 - - - - - Total Uses of Funds $2,802.9 $2,802.9 $2,802.9 $2,802.9 $2,802.9 Sources of Funds Uses of Funds Financing Structures
  33. 33. EXIT STRATEGIES 33
  34. 34. EXITSTRATEGIES Potential Strategic Buyers 34 Company Business Description Acquisition Rationale •Focuses on casual wear for consumers ages 18 through 22 •Has over 300 locations in the United States, and is expanding internationally •Can reduce capacity in the industry by combining with Aeropostale •Will give offer market entry to a different segment •Target market largely consists of price conscious though still fashion oriented teens to adults •The clothing is more affordable than its other Gap, Inc., counterparts •Strategically fits into the business model •Reduces capacity and give a loyal customer base •Fashion retailer headquartered in Columbus, Ohio and New York, New York[2] •Operates over 550 stores in the United States and generates $1.8 billion in annual sales • Primarily associated with women brands, will give a foothold in the men’s clothing.
  35. 35. EXITSTRATEGIES Potential Financial Buyers 35 Private Equity Firm Industry Focus Comments •Consumer Retail •Media and telecommunications •Industrials •Technology •Travel/leisure •Health care •Bought Gymboree for $1.8B • •consumer/retail •Media •Telecommunications •Industrials •Technology •Travel/leisure •Health care •In the past have acquired Neeman Markus, J. Crew. •Chemicals •Consumer products •Energy & natural resources •Financial services •Health care •Industrial •Media and communications •Technology • Was interested in buying American Eagle
  36. 36. 36 Prepared by Deb Sahoo MBA, Ross School of Business University of Michigan, Ann Arbor

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