20140223 acg case valuation -final v2 ds

Strictly confidential

Project KayakA new growth strategy tailored to Khakis 'R Us

February 24th, Los AngelesMBA Investment Bankers LLCL. Bishop, S. Dai, A. Francillard and J.D. Kahn

2

Introduction

What we know

Goal of the meeting

Goal of this meeting is to discuss the strategic options of KRS To evaluate a retail private equity acquisition; and explain how we would advise structuring a

possible sale process; LBO scenario; DCF analysis.

Background

Khakis ‘R Us (hereafter: “KRS” or “the Company”) has had a good and longstanding relationship with MBA Investment Bankers LLC (hereafter MIB);

MIB was invited by KRS to give a presentation on the strategic possibilities the Company is facing and growth alternatives: organic vs acquisition.

Valuation, growth case scenarios, and process for a potential sale situation.

KRS is considering selling the Company, although also looking to acquire another Company itself;

KRS is looking for different strategic options; Positive forecast for key assets.

Table of contents

Executive Summary

1. Strategic Options: Alternatives for growth

2. Valuation:2.1 DCF2.2 CCA & CTA2.3 LBO

3. Process for potential sale: Controlled Auction

4. Our Value Proposition

5. Our experience in (Fashion) Retail

Appendices

I. Khakis ‘R Us

II. US Retail Market

III. Valuation

IV. Potential buyers

V. Contact details

3

Executive Summary

5

DrawbacksPositiveStrategic options

Continue current strategy

Is this a long term option for the shareholders?

Is there a need to provide shareholders with capital?

Is selling the Company to PE a desired option for the shareholders?

Is there a desire with the management team to take the company private?

Recapitalization

LBO(sell to financial

company)

Sell to strategic company

MBO

Optimize current strategy; Increase value of the Company.

Is the current management team equipped to bring growth to KRS?

Dividends will impact FCF and lower the stand alone value.

Is a complete transfer of the Company a desired scenario?

A recap would provide the Company and its shareholders with capital;

Control of the Company stays with the currents shareholders;

The Company has unused borrowing capacity.

High debt positions can limit investments in the Company and thereby influence its competitive position in a negative way;Common size of recaps is about 2x EBITDA, 3x would be a stretch, 4x does not seem realistic in today’s markets.

Financial companies are looking for opportunities to invest the capital they have raised;

Financial companies can support KRS to grow though acquisitions (About Boots?);

Possibility for management to participate.

A sale to a strategic company would normally lead to the highest price;

Possibility to stay involved with the Company.

Chance that KRS will be taken private, loss of listed company status;Integration risks;They might want to change senior management and have the commitment of other management team members.

Loss of independence;Integration risks;They might want to change senior management.

Possibility for the management team to take KRS private. Financing capacity is key to realize a buy-out;

Most likely need a vendor loan from current shareholders;Shareholders will not get the best price for their shares.

1. Strategic Options: Alternatives for growthO

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AN

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RO

WTH

GR

OW

TH V

IA A

CQ

UIS

ITIO

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DCF analysis Management Case – Optimistic scenario:

Growing economy, and the immediate recovery on EBITDA in 2015 and the following years after the significant drop in 2014;

Sales projections provided by management; Stabilized days of Working Capital; EV at 7.7x EBITDA.

Bank Case – Normal growth scenario: Stable/growing economy, a moderate EBITDA recovery; Sales projections following a CAGR of 2%; Personnel expenses grow slower than sales (cost efficiencies), stabilized

days of Working Capital, Capex expenses grows as a percentage of sales base on management’s projections;

EV at 6.2x EBITDA. Slow Growth Case – Pessimistic scenario:

Sluggish economy, a slow EBITDA recovery from 2014’s drop; Sales projections follow a CAGR of 0.7% Personnel expenses are expected to grow at a slower rate than sales but

faster than in the bank case, stabilized days of Working Capital, capex expenses grows as a percentage of sales base on management’s projections;

EV at 4.8x EBITDA. Sensitivity Analysis of Management and Bank cases: Effect on the

enterprise value of an increase or decrease in growth rate and/or WACC.

DCF analysis – scenarios

Management Case Bank Case

Slow Growth

CaseEnterprise value $ 223mm $ 181mm $ 139mm

Net debt $ 30mm $ 30mm $ 30mm

Equity value $ 193mm $ 151mm $ 109mm

Market CAGR 2011-2013: 0.62%; CAGR 2013-2017: -0.08%; Market is declining and KRS is experiencing growth: higher market

share; Bank Case assumes gaining market share, but at a slower pace than is

assumed in the Management Case.

DCF analysis - Summary

WACC and growth 16% WACC based on CAPM Model

Cost of debt: 2.4% risk-free rate, 5% debt spread, 40% tax rate; Cost of equity: relevered beta of 1.45, market risk premium of

5.75%, company specific risk premium of 3% and size premium of 6.03% (Ibbotson).

2% growth for perpetuity valuation based on historical inflation – we assume that all scenarios that deviate from normal growth will tend to go back to a normal growth pattern in perpetuity.

2.1 DCF Valuation

2.2 CCA & CTA

CCA analysis Based on a set of companies provided by management for reference; Uncertainty as to the relevance of all companies; Analysis of ratios, size and margins; Decision to take out an outlier based on EBITDA margin far above the

average of the other companies and KRS’ own margin; Decision to take out a size discount: most companies listed are vastly

larger than KRS in terms of sales, which allows them to trade for a higher mutliple as a result of perceived risk reduction. In order to make them comparable, a discount of 2.0x will be applied to the average multiple;

Average multiple is found to be 8.2x; As a result, the multiple used is 6.2x.

CTA analysis Based on a set of companies provided by management; Analysis of transaction size, sales size and EBITDA margin; Decision to take out four outlier based on EBITDA margin above the

average; Average multiple is found to be 7.0x.

Company Sales (USDm)EBITDA (USDm)

Market cap (USDm)

Net Debt (USDm)

Enterprise Value (USDm)

Sales multipleEBITDA

multiple

Comparable Company 1 8 185,0 493,1 3 509,1 663,4 4 172,5 0,5x 8,5x


Comparable Company 3 441,0 27,0 108,3 109,0 217,3 0,5x 8,0x

Comparable Company 4 11 153,9 751,6 7 810,3 -715,4 7 094,9 0,6x 9,4x



Comparable Company 8 312,8 21,5 252,7 -2,2 250,5 0,8x 11,7x

Comparable Company 9 11 413,5 951,5 3 604,6 1 836,6 5 441,2 0,5x 5,7x

Average: 0,6x 8,2x

A control premium of 25% is then added based on the average provided by management and our own knowledge of the retail market.

As these are transaction multiples, a control premium is by definition already included in the multiple.

TransactionNr.

Date Buyer Target Transaction Value

Sales (USDm)

EBITDA(USDm)

EBITDA % Sales Multiple

EBITDAMultiple

1 2013 Buyer 1 Target 1 150,0 230,8 23,8 10,3% 0,7x 6,3x2 2012 Buyer 2 Target 2 70,0 72,2 9,7 13,5% 1,0x 7,2x3 2012 Buyer 3 Target 3 555,0 1 110,0 68,5 6,2% 0,5x 8,1x4 2012 Buyer 4 Target 4 290,0 557,7 53,7 9,6% 0,5x 5,4x5 2012 Buyer 5 Target 5 106,0 130,9 16,1 12,3% 0,8x 6,6x7 2011 Buyer 7 Target 7 262,9 710,5 34,1 4,8% 0,4x 7,7x8 2011 Buyer 8 Target 8 280,0 411,8 38,9 9,4% 0,7x 7,2x9 2011 Buyer 9 Target 9 28,5 50,0 3,4 6,8% 0,6x 8,4x10 2010 Buyer 10 Target 10 324,0 432,0 60,0 13,9% 0,8x 5,4x11 2010 Buyer 11 Target 11 355,0 244,8 49,3 20,1% 1,5x 7,2x13 2010 Buyer 13 Target 13 335,4 493,2 51,6 10,5% 0,7x 6,5x14 2010 Buyer 14 Target 14 62,7 95,0 10,5 11,0% 0,7x 6,0x17 2009 Buyer 17 Target 17 155,0 109,9 19,6 17,8% 1,4x 7,9x18 2009 Buyer 18 Target 18 220,0 293,3 34,4 11,7% 0,8x 6,4x19 2009 Buyer 19 Target 19 118,7 119,9 14,5 12,1% 1,0x 8,2x

Average: 0,8x 7,0x

8

Exit Exit EBITDA multiple of 7.3x, equal to the entry EBITDA multiple 2013

(i.e. acquisition price/EBITDA 2013); Exit value of $ 338mm (EBITDA 2018 of $ 46mm)

Exit will take place in 5 years in 2018

Debt of USD 14m (remaining revolver balance and PIK dividend);

Preferred stock of USD 30m; Ordinary shares of USD 299m: Cash multiples of 3.3x for ordinary shares and 2.7x for total equity.

Entry Projections used are from DCF Bank case;

Estimated purchase price of $ 215mm (EV) or 7.3x EBITDA 2013 of $30 mm;

Leverage of 4x EBITDA 2014;

Structure of the debt, including a debt servicing coverage ratio of 1.1x: $ 49mm senior debt term A (5 year, quarterly debt down

payment, 5% interest); $ 39mm senior debt term B (5 year bullet, 7% interest); $ 10mm revolving credit facitlity (5% interest);

Equity of USD 122mm: Old management rollover of $ 18mm; New management $ 2mm (with envy); Financial sponsor for $ 72mm; Preferred shares for $ 30mm (PIK 8%);

New management owns 3.5% of common equity but pays for 2.2%. The original investment is $ 2mm and will be worth $ 10mm at exit, which results in an envy ratio of 5.

2.3 LBO Valuation

Sensitivity Financial sponsor IRR increases with leverage ratio, but debt servicing

coverage ratio decreases below acceptable levels when leverage is above 4x EBITDA;

LBO becomes unprofitable if financial sponsor pays more than 225,000 for Oldco;

Small changes in the exit multiple do not deteriorate the financial sponsor IRR much;

Total entry investment (USDmm)

Exit values (USDmm)

IRRCash

multiples

Old Management 18 58 26,70% 3,2x

New Management 2 10 39,90% 5,2x

Financial Sponsor 72 230 26,70% 3,2x

Total 92 299

Valuation Summary

Sensitivity Analysis

Visual Representation of Valuation

Conclusion Based on our DCF analysis, the comparable transactions, the

comparable companies and the LBO analysis, we conclude that KRS should be able to receive an Enterprise Value between USD 195 - 220mm in a sale process;

This implies an EV/EBITDA multiple range between 6.5x to 7.3x. Please keep in mind that the price offered is not necessarily the price

KRS will receive after the Due Diligence phase; A good preparation together with a very well led controlled auction

would enable KRS to receive the highest value for their shares.

0 15.00% 15.50% 16.00% 16.50% 17.00%1.0% 185 179 173 167 1621.5% 190 183 177 171 1652.0% 194 187 181 174 1692.5% 199 192 185 178 1723.0% 205 197 189 182 176

Bank Case - Entreprise Value (USD mm)WACC

Gro

wth

Rat

es

211

171

215

191200

237

192

245

221 220

120

140

160

180

200

220

240

260

DCF Management Case DCF Bank Case CCA CTA LBO

220

195

10

Preparations

Phase 1: Approaching potential buyers

Phase 2: Selection of phase 2 potential buyers

Closing: Selection of preferred buyer

Prepare virtual dataroom

Draft IM Prepare short list

Business plan, which is foundation for forecast

23 2422212019181716151413121110987654321Week

654321Month

Contact companies from short list with NDA’s

Send potential buyers IM and process letter

Receive non-binding offers

Receive binding offers

Data room available and management presentations

Send desired buyers phase 2 process letter

Signing & Closing

Negotiate Share Purchase Agreement

Due diligence by buyer

3. Process for potential sale: Controlled Auction

11

4. Our value proposition

MIB Team is ready and eager to get to work for Khakis ‘R Us

MIB has a proven sell side M&A track record (especially in Fashion)

MIB has solid relationships with potential financial and strategic buyers1

2

3

12

Corporate Finance advisor

5. Our experience in (Fashion) Retail

Strategic advisor / Business Valuator

United States

IntermixSale of Intermix Inc. to Gap Inc.

Sole advisor to the sellerFashion Retail

Dec - 2012 Netherlands

Scotch & SodaSale of Scothc & Soda B.V. to Kellwood Company a portfolio company of Sun Capital Partners Inc.

Sole advisor to the sellerFashion Retail & Wholesale

July - 2011 United States

J. CrewSale of J. Crew, delisted by consortium of private equity partners consisting of TPG and Leonard Green & Partners


Dec - 2010 France

VilebrequinSale of Vilebrequin to G-III Apparel Group

Sole advisor to the sellerFashion Retail & Wholesale

Aug - 2012 UK / United States

All SaintsSale of All Saints to Lion Capital


May - 2011

Netherlands / United States

Hema B.V.Sale of Hema, part of Maxeda Retail Group B.V. to Lion Capital

Lead advisor to the sellersRetail

July - 2007Netherlands / United States

V&D B.V.Sale of Hema, part of Maxeda Retail Group B.V. to Sun Capital Partners


Sept - 2010Netherlands / UK

Bijenkorf B.V.Sale of the Bijenkorf, part of Maxeda Retail Group B.V. to Selfridges Group Ltd.


Jan - 2011UK / United States

Hunkemöller B.V.Sale of Hema, part of Maxeda Retail Group B.V. to Sun Capital Partners


Jan - 2011Netherlands

M&S Mode B.V.Sale of M&S Mode, part of Maxeda Retail Group B.V. to Excellent Retail Brands (part of Cool Investments)


Jan - 2011

Appendices

I. Khakis ‘R Us

15

Khahis ‘R Us (KRS)

Background

Publicly traded company in the fashion retail market;

Recently started distributing dividends;

Relatively small market capitalization (approximately $120mm);

Current trading multiple is 5x EV / EBITDA;

P/E ratio in 2013 of 20x due to lowered earnings;

Management has transitioned to Max Pleater as CEO;

Introduction of the new line of shorts designed by a public figure

was a failure.

Assumptions:

KRS operates solely in the U.S.;

Relatively low personnel expenses and high number of days of trade

receivables seem to indicate franchise stores or wholesale activities;

Potential acquisition of Canadian company About Boots is not included

in the valuation scenarios, but is considered in the different strategies;

We did not include potential synergies with a potential strategic buyer

in our valuation.

II. US Retail market

17

Development US GDP & Retail Market

Development retail market

Retail Sales account for one-third of total consumer spending , the main

engine of US economic growth;

Over the last year retail sales have risen modestly by 3.9%, less than the

6.3% annual average in the US going back to 1980;

Contributing factors to slow growth: high unemployment and sluggish wage

growth;

Across apparel categories, value growth outpaced volume growth;

CAGR 2011-2013: 0.62%;

CAGR 2013-2017: -0.08%.

Market Penetration, Market and Produce Development, Diversification.

Development US GDP

According to a recent Deloitte report, emphasis should be on:

Lean inventories and strong cash flow;

Lower payroll;

Increase share of wallet with existing customers;

Improve the customer experience and customer loyalty;

Use multi-channel shopping (in-store, online);

Reintroduce coupons;

Create private label brands;

Bank of America economist predict Q2 growth rate of 3.3% up from 2% in Q1;

Poor weather conditions Q1 of 2014 major cause of slow retail sales.

Development retail market (2007 – 2016)

Development of GDP (2001 – 2017)

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

%Δ GDP % Δ Inflation

-5.00%

-3.00%

-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

%Δ Total clothing sales

III. Valuation

19

Three scenarios

The management case assumes a CAGR of 5.4%; The average annual gross margin is of 21.5% for the

projected years;

The bank case assumes a slower sales growth of 2% annually (CAGR);

The average gross margin is 21%; Personnel expenses are assumed to grow at a

slower rate than sales due to increased efficiency;

Management Case Bank Case Slow Growth Case

Development of the three scenarios The assumptions for the coming period and as a consequence, the expected financial results of the company, are in large degree determinative for the valuation of

the Company; For this valuation we chose to work with three scenarios. By using these scenarios to calculate the cash flows, we see a picture of the value of the company

emerge in several situations; Savings of USD 3m every year from going private; Depreciation expense is consistently higher than Capex expense in the management case, and we adjust this in our three scenarios to reach an ideal complex,

which leads to a depreciation value slightly lower than the Capex values in 2018, the last year of our projection; Working capital items are assumed to increase at the same pace as either sales or cost of goods sold – accounts receivable grow with sales, accounts payable

and inventory levels increase with cost of goods sold; Capital Expenditures grow as a percentage of sales based on management’s projections; We assume that the Company will not distribute dividends any longer as it will become private; We assumed a WACC of 16.0% based on the Capital Asset Pricing Model, and a growth rate of 2% corresponding to expected inflation rate; We assumed a net debt of 30mm (50mm debt for 20mm cash); The tax rate amounts to 40%.

The slow growth case assumes the sales only grow by 0.7% for the projected years

The gross profit margin is 20.2% on average (just above historical average).

Personnel expenses are expected to grow at a slower rate than sales but faster than in the bank case;

20

Income statement – Management Case

Sales, gross margin and EBITDA margin development (2011 – 2018)

Historic and forecasted income statement (2011 – 2018)

Projected Income Statement provided by management: EBITDA increases quickly except for 2014; No dividends paid out; Low or negative change in operating Net Working Capital; Free Cash Flow goes from USD 10mm in 2013 to USD 33mm in 2018

P&L Khakis 'R Us (USD '000) 2,011.00$ 2,012.00$ 2,013.00$ 2,014.00$ 2,015.00$ 2,016.00$ 2,017.00$ 2,018.00$

act act act for for for for for

Net sales (USDmm) 635,759 585,223 557,428 540,603 621,448 658,735 698,259 726,189 Y-o-Y growth % 0 -7.9% -4.7% -3.0% 15.0% 6.0% 6.0% 4.0%Cost of goods sold & occupancy expenses 501,453 474,984 449,472 442,259 488,701 508,813 540,547 561,892 Gross profit 134,306 110,239 107,956 98,344 132,747 149,922 157,712 164,297

Personel expenses 68,349 59,642 57,770 55,928 61,434 69,095 72,545 72,196 % of sales 10.8% 10.2% 10.4% 10.3% 9.9% 10.5% 10.4% 9.9%Other operating expenses 23,874 23,619 21,218 17,245 23,347 24,418 21,446 27,648 % of sales 3.8% 4.0% 3.8% 3.2% 3.8% 3.7% 3.1% 3.8%EBITDA 42,083 26,978 28,968 25,171 47,966 56,409 63,721 64,453 Depreciation & amortization 14,578 16,389 15,865 10,312 7,219 5,414 4,602 4,142 EBIT 27,505 10,589 13,103 14,859 40,747 50,995 59,119 60,311

Interest expense (income) 3,863 3,687 3,348 3,071 2,544 2,615 2,555 2,489 Income before taxes 23,642 6,902 9,755 11,788 38,203 48,380 56,564 57,822

Income taxes 9,457 2,761 3,902 2,712 12,573 17,097 19,644 19,961 Net income 14,185 4,141 5,853 9,076 25,630 31,283 36,920 37,861

21

Income statement – Bank Case


Sales, gross margin and EBITDA margin development (2011 – 2018)Projected Income Statement on Bank case: EBITDA increases quickly, although less so than in management case; Lower capex No dividends paid out Very low change in operating Net Working Capital Free Cash Flow goes from USD 10mm in 2013 to USD 27mm in 2018

P&L Khakis 'R Us (USD '000) 2,011.00$ 2,012.00$ 2,013.00$ 2,014.00$ 2,015.00$ 2,016.00$ 2,017.00$ 2,018.00$


Net sales (USDmm) 635,759 585,223 557,428 540,603 551,415 562,443 573,692 585,166 Y-o-Y growth % 0 -7.9% -4.7% -3.0% 2.0% 2.0% 2.0% 2.0%Cost of goods sold & occupancy expenses 501,453 474,984 449,472 442,259 435,618 444,330 453,217 462,281 Gross profit 134,306 110,239 107,956 98,344 115,797 118,113 120,475 122,885




22

Income statement – Slow Growth Case


Sales, gross margin and EBITDA margin development (2011 – 2018)Projected Income Statement on Slow Growth case:• EBITDA increases less fast than in bank case;

• Lower Capex;

• Very low change in Net Working Capital;

• Free Cash Flow goes from USD 10mm in 2013 to USD 20mm in 2018.

P&L Khakis 'R Us (USD '000) 2,011.00$ 2,012.00$ 2,013.00$ 2,014.00$ 2,015.00$ 2,016.00$ 2,017.00$ 2,018.00$


Net sales (USDmm) 635,759 585,223 557,428 540,603 544,387 548,198 552,035 555,900 Y-o-Y growth % 0 -7.9% -4.7% 0.7% 0.7% 0.7% 0.7% 0.7%Cost of goods sold & occupancy expenses 501,453 474,984 449,472 442,259 434,421 437,462 440,524 443,608 Gross profit 134,306 110,239 107,956 98,344 109,966 110,736 111,511 112,292




23

Calculation WACC

Composition WACC WACC = Cost of equity * E/(E+D) + Cost of debt * D/(E+D) * (1- t) E/(E+D) = Target long-term level of equity (E) in the company's capital

structure D/(D+E) = Target long-term level of debt (D) in the company's capital

structure t = Marginal tax rate

We are using the CAPM formula to calculate the cost of equity; Cost of equity = Beta * (Market risk premium) + Risk free rate + Additional risk premium (size risk premium and company specific risk premium).

When calculating the WACC, several components must be addressed: EQUITY / (EQUITY + DEBT): The target long-term level of equity in the

company's capital structure is based on an iteration of the WACC and is: 74%;

DEBT/ (EQUITY + DEBT): The target long-term level of debt in the company's capital structure is based on an iteration of the WACC and is: 26%.

Cost of Debt: Risk free rate (2.4%): Although theoretically the longest relevant

government bond is most appropriate for stipulating the risk free rate (e.g. 30 years), in practice the 10 year government bond is frequently used because the 30 year bond is not liquid. In this valuation, the United States 10 year government bond is used and yields 2.4%;

Debt spread (5%): A company like KRS cannot raise debt at the price of a government bond, therefore we assume a debt spread between the 10 year government bond and similar corporate bonds. In this case, KRS comes closes to junk bonds ratings, which in 2013 had an average yield of approximately 7.4% according to the benchmark Bank of America Merrill Lynch High Yield Master II Index. Therefore, the debt spread we are using is 5%;

Tax (40%): We assume the average tax rate to be 40%.

Cost of Equity: Relevered Beta (1.45%): We unlevered all the levered betas of the

nine comparable companies, and then computed the mean and median. We relevered the beta using KRS’s D/E ratio and a tax rate of 40%;

Market Risk Premium (5.75%): For supplying risk bearing capital, an investor expects a return that is higher than that of risk free investments. Based on historical research, the equity risk premium is approximately 5.75%;

Additional risk premium: Because of the relatively smaller size of KRS, we added two additional risk premia to the cost of equity: Company Specific Risk Premium (3.0%): Based on the quality

of the forecasts and the swings in margins the company shows, we added a company specific risk premium of 3.0%;

Small Stock Premium (6.03%): Considering the relatively small market cap of KRS, we added a small stock premium to the cost of equity based on the Ibbotson Size Premia Yearbook. KRS appears to be in the 10th decile of the Ibbotson Size Premia, with an MVE of no greater than $254.6M, which results in a size premium of 6.03%.

24

WACC Tree

74%

26%

8.3%

Relevered Beta (2)

1.45

Market risk premium (1)

40.0%

Additional risk premium (5)

9.0%Cost of equity

19.8%

5.8%

Corporate risk premium

WACC2.4%16%

Cost of debt

After-tax cost of debt

7.4%

4.4%

Cost of equity

Cost of debt

Debt spread (4)

5.0%

Risk free rate (3)

Marginal tax rate

Notes: (1) Research based. (2) Unlevered beta of peer group relevered with company's target capital structure. (3) Yield on 10-year government bonds. (4) Spread in line with the average for the company’s bond rating. (5) Additional cost of equity to reflect company specific risks and size risk premium

25

Assumptions DCF analysis Based on the assumptions we made for the forecasted P&L statements, the NWC items and CAPEX, we calculated the expected FCFs for all three

scenarios for the five forecasted years (2014 - 2018); For the period after the forecasted years we assumed a growth rate of 2%; Additionally we assumed mid period cash flows (half year convention) and used a WACC of 16%, which is derived from the CAPM formula; We also assumed the Company would be taken private after a possible acquisition and therefore did not take into account potential dividend payouts; Finally, we are not saying potential buyers will pay this amount lump sum.

DCF analysis – Enterprise Value

Present value of cash flows

2014 2015 2016 2017 2018 FCF after planning period 34.1 FCF 25.0 22.8 29.1 32.7 33.4 Horizontal value 243.6 Discount rate 1.08 1.25 1.45 1.68 1.95 Discount rate 1.95 PV (FCF) 23.2 18.3 20.1 19.5 17.1 Value after planning period 124.9 223.1



Forecast period (USDmm) Total Enterprise Value (USDmm)

Management Case

Horizon period (USDmm)

Horizon period (USDmm) Total Enterprise Value (USDmm)

Bank Case

Forecast period (USDmm) Total Enterprise Value (USDmm)

Slow Growth Case

Forecast period (USDmm)

Horizon period (USDmm)

26

Valuation (equity and enterprise value)

Enterprise Value to Equity Value in USD millions The Bank case gives us an Enterprise Value of approximately USD180mm; The Company had a net debt position of USD 30 mm in 2013; This results in an Equity Value of USD 210mm.

180 -50

+20 150

Enterprise value Debt Cash Equity value

27

Our Insight

The value of a company is mainly influenced by the future cash flows, which is defined by the estimated growth rate of the company and its WACC;

A higher growth rate will have a positive impact on a company’s enterprise value while a higher WACC will lower a company’s enterprise value;

We assume a 2% terminal growth rate which is consistent with the expected inflation rate after the forecasted period of our valuation (2018);

Below is the outcome of a sensitivity analysis we performed, looking at half percentage changes (positively and negatively) in the WACC and growth rate;

Based on our sensitivity analysis, we can conclude that the enterprise value of KRS is between USD 171mm and USD 192mm based on the Bank Case,

and between USD 211mm and USD 237mm based on the Management Case.

Sensitivity Analysis

0 15.00% 15.50% 16.00% 16.50% 17.00%1.0% 185 179 173 167 1621.5% 190 183 177 171 1652.0% 194 187 181 174 1692.5% 199 192 185 178 1723.0% 205 197 189 182 176

Bank Case - Entreprise Value (USD mm)WACC

Gro

wth

Rat

es

223 15.00% 15.50% 16.00% 16.50% 17.00%1.0% 229 221 214 207 2001.5% 234 226 218 211 2042.0% 240 231 223 215 2082.5% 246 237 228 220 2133.0% 253 243 234 225 218 G

row

th R

ates

Management Case - Entreprise Value (USD mm)WACC

28

Comparable Company Analysis

KRS provided us with comparable companies in the retail market, we analysed these companies and concluded they were appropriate to use, except for their

size (both market cap, sales and EBITDA);

We therefore decided to apply a discount rate of 2.0x to account for the major difference in size;

We did take out a company that had too high of an EBITDA margin to be considered a comparable of the group;

We should note that these companies do differ somewhat in the target market and geographical presence;

Based on the below listed transations, we conclude that the average EV/EBITDA multiple of companies that are traded in the market is 6.2x after discount.

Source: Information provided by KRS, analysis by MIB

Company Sales (USDm)EBITDA (USDm)

Market cap (USDm)

Net Debt (USDm)

Enterprise Value (USDm)

Sales multipleEBITDA

multiple



Comparable Company 3 441,0 27,0 108,3 109,0 217,3 0,5x 8,0x




Comparable Company 8 312,8 21,5 252,7 -2,2 250,5 0,8x 11,7x

Comparable Company 9 11 413,5 951,5 3 604,6 1 836,6 5 441,2 0,5x 5,7x

Average: 0,6x 8,2x

29

KRS provided us with comparable transactions in the retail market, we analysed these transactions and concluded they were appropriate to use;

We did take out some transactions that had too high a multiple considering the EBITDA margin of those specific companies;

We should note that these companies do differ somewhat in the target market and geographical presence;

Based on the below listed transations, we conclude that the average EV/EBITDA multiple of companies that were acquired in the retail market is 7x.

Comparable Transactions Analysis

Source: Information provided by KRS, analysis by MIB

TransactionNr.

Date Buyer Target Transaction Value

Sales (USDm)

EBITDA(USDm)

EBITDA % Sales Multiple

EBITDAMultiple

1 2013 Buyer 1 Target 1 150,0 230,8 23,8 10,3% 0,7x 6,3x2 2012 Buyer 2 Target 2 70,0 72,2 9,7 13,5% 1,0x 7,2x3 2012 Buyer 3 Target 3 555,0 1 110,0 68,5 6,2% 0,5x 8,1x4 2012 Buyer 4 Target 4 290,0 557,7 53,7 9,6% 0,5x 5,4x5 2012 Buyer 5 Target 5 106,0 130,9 16,1 12,3% 0,8x 6,6x7 2011 Buyer 7 Target 7 262,9 710,5 34,1 4,8% 0,4x 7,7x8 2011 Buyer 8 Target 8 280,0 411,8 38,9 9,4% 0,7x 7,2x9 2011 Buyer 9 Target 9 28,5 50,0 3,4 6,8% 0,6x 8,4x10 2010 Buyer 10 Target 10 324,0 432,0 60,0 13,9% 0,8x 5,4x11 2010 Buyer 11 Target 11 355,0 244,8 49,3 20,1% 1,5x 7,2x13 2010 Buyer 13 Target 13 335,4 493,2 51,6 10,5% 0,7x 6,5x14 2010 Buyer 14 Target 14 62,7 95,0 10,5 11,0% 0,7x 6,0x17 2009 Buyer 17 Target 17 155,0 109,9 19,6 17,8% 1,4x 7,9x18 2009 Buyer 18 Target 18 220,0 293,3 34,4 11,7% 0,8x 6,4x19 2009 Buyer 19 Target 19 118,7 119,9 14,5 12,1% 1,0x 8,2x

Average: 0,8x 7,0x

LBO – capital structure

Projections Use of the same projections as DCF valuation.

Leverage Maximum leverage will be sought to enhance equity returns; Leverage typically takes the form of senior debt and potentially

subordinated debt; Maximum leverage determined by future free cash flows (EBITDA 2014)

of the target company; Required equity amount is subsequently determined by total acquisition

costs minus leverage obtained and existing cash.

Senior debt In most cases, maximum possible financing is based on multiples such

as Total net debt/EBITDA, we are assuming we can borrow 4x EBITDA.

Subordinated debt Used in relatively larger MBOs to obtain access to a different class of

debt providers (can be in the form of mezzanine debt). Given the expected size of the transaction we are not assuming any subordinated debt in our model.

Sources and Uses

• Purchase price1 is assumed to amount to USD 215mm, based on an EBITDA of USD 30mm and entry EBITDA multiple of 7.3x;

• Debt of USD 99mm, assuming a debt servicing coverage ratio of at least 1.1x, structured as:- senior A loan of USD 49mm (5 year quarterly debt down payment, at

5% margin);- senior B loan of USD 39mm (5 year bullet at 7% margin);- Revolving credit facility of USD 10m (5% interest).

• Equity of USD 122m:- ordinary shares of USD 72mm;- Preferred shares of USD 30mm;- Management shares of USD 20mm;

• Exit EBITDA multiple of 7.3x, equal to the entry EBITDA multiple 2013 (i.e. acquisition price/EBITDA 2013);

• Exit will take place in 5 years.

1. Purchase price = value paid for the shares + net debt2. Est. 3% transaction costs include legal, advisory and funding fees

Uses of funds (USDm) Sources of funds (USDm)

Purchase price 180 Senior debt 99

Transaction and financing costs 5 Cash 15

Refinance old debt 51 Equity 122

236$ 236$

30

Equity components

Characteristics

Structuring• Entry:

- Debt of USD 99m, maturity of 5 years;- Preferred stock of USD 30m, PIK of 8%;- Ordinary shares of USD 92m, split between PE, old

management and new management.

• Exit- Debt of USD 14m (remaining revolver balance and PIK

dividend);- Preferred stock of USD 30m;- Ordinary shares of USD 299m.

Cash multiple ordinary shares 3.3x

Cash multiple total equity 2.7x

Components

Other senior equity instrument

• Provided by financial sponsor, typically in the form of preferred shares (dependent on tax/transaction) :- preferred shares for tax purposes are viewed as equity; the dividend paid is not tax deductible, however 70% of

total dividends might be tax-free for the recipient;• No or limited repayments during term of LBO;• Return limited to fixed interest/dividend 'paid in kind' ('PIK’);• Interest/dividend should be set at arm’s length rates.

Ordinary shares

• True equity, determining ownership and control of the target company;• Direct participation in potential upside of company;• Most financial sponsors prefer management to participate in ordinary shares to maximize aligned interests;• We assumed management participation of 22% of total ordinary shares.

92 299

0

50

100

150

200

250

300

350

Entry Exit

Debt Preferred shares Ordinary shares

122 329

0

50

100

150

200

250

300

350

Entry Exit

Debt Equity

31

LBO – entry investment

Illustrative investments ($mm) Resulting total envy ratio ($mm)

Resulting shareholder structure

€520m

€50m

€150m

€320m

Use of funds Source of funds Split ordinary shares

1. MIB assumes a discount to management in the ordinary share capital; 2. Envy ratio refers to the inequality in investments terms between financial sponsors and management (in favor of management). At an envy ratio at 5x, the management is being offered the opportunity to invest in the Buy Out at 5x more favorable term than the Sponsor

€42.5m

19,6%

76,9%

3,5%

Old management rolloverFinancial sponsorNew management

New management - ordinary shares 2$ (3.5%)Old management - ordinary shares 18 (19.6%)Financial sponsor - ordinary shares 72 (76.9%)Total ordinary shares 92$ (100%)

99

18

221 30 72

92

2

0

50

100

150

200

250

Use of funds Source of funds Split ordinary share

Ordinary shares

Preferred shares

Senior debt

New management

Financial sponsor

Old management rollover

New management investment 2$ Implied percentage of equity value 2,2%Actual ownership 10Percent ownership 3,5%Resulting envy ratio 5x

32

Assumptions Indicative value ordinary shares at exit

€450m

€200m

€100m

Exit value $338mAcquisition cost $215m

5 year horizon

€50m

€150m

€320m

Indicative exit values

LBO – resulting exit values

€67.5m

€382.5m

Value ordinary shares at exit

Exit multiple = entry multiple (conservative view);

Financial sponsor IRR above minimum of 25% required in the industry;

Exit date corresponds to last year of projections.

Exit date 12/31/2018

EBITDA exit multiple 7,3xEBITDA 2018F (USDm) 46 Implied selling price (EV) (USDm) 338

Total entry investment (USDm)

Exit values (USDm) IRR Cash multiples

Old Management 18 58 26,70% 3,2x

New Management 2 10 39,90% 5,2x

Financial Sponsor 72 230 26,70% 3,2x

Total 92 299

33

34

LBO – sensitivity

Financial sponsor IRR increases with leverage ratio, but debt servicing coverage ratio decreases below acceptable levels when leverage is above 4x EBITDA;

Sales growth, exit multiple and Oldco equity value have no tangible effect on debt servicing coverage ratio;

LBO becomes unprofitable if financial sponsor pays USD 200mm for the equity value of Oldco. It is still profitable at USD 190;

Small changes in the exit multiple do not deteriorate the financial sponsor IRR much;

The old management IRR is not very sensible to either the exit multiple or the projected sales growth in 2014.

26,7% 170 000 180 000 190 000 200 0006,7x 27,3% 24,2% 21,5% 19,2%7,0x 28,6% 25,5% 22,8% 20,4%7,3x 29,9% 26,7% 24,0% 21,5%7,6x 31,1% 27,9% 25,1% 22,7%7,9x 32,2% 29,0% 26,2% 23,8%

Bank Case - Financial Sponsor IRR Oldco Equity Value

Exi

t Mul

tiple

26,7% 170 000 180 000 190 000 200 0003,0x 25,3% 23,0% 20,8% 18,9%3,5x 27,4% 24,7% 22,3% 20,1%4,0x 29,9% 26,7% 24,0% 21,5%4,5x 33,0% 29,2% 26,0% 23,2%5,0x 37,1% 32,4% 28,6% 25,3%

Oldco Equity Value

Lev

erag

e

Bank Case - Financial Sponsor IRR

26,7% -5,0% -3,0% -1,0% 1,0%6,7x 23,3% 24,2% 25,2% 26,2%7,0x 24,5% 25,5% 26,5% 27,5%7,3x 25,8% 26,7% 27,7% 28,7%7,6x 26,9% 27,9% 28,9% 29,9%7,9x 28,0% 29,0% 30,0% 31,1%

Bank Case - Old Management Rollover IRR2014 Sales Growth

Exi

t Mul

tiple

35

Visual Representation of Valuation

Based on our DCF and sensitivity analysis, we would value KRS between USD 171 - 192mm (Enterprise Value);

Based on the comparable company analysis (CCA), the Enterprise Value of KRS is approximately USD 215 - 245mm;

Based on the comparable transaction analysis (CTA), the Enterprise Value of KRS is approximately USD 191 - 221mm;

Based on the LBO analysis, the Enterprise Value of KRS is approximately USD 200 – 220mm;

Taking into account our DCF, LBO analyses, and the CCA and CTA multiples, with a larger weight given to our recommended strategy (LBO), we

conclude that KRS should be able to receive an Enterprise Value between USD 195 - 220mm in a sale process;

This implies an EV/EBITDA multiple range between 6.5x to 7.3x.

211

171

215

191200

237

192

245

221 220

120

140

160

180

200

220

240

260

DCF Management Case DCF Bank Case CCA CTA LBO

220

195

After control premium

(20%) (20%) (20%) (40%)

IV. Potential buyers

Potential Financial BuyersCompany Comments MIB contact

Lion Capital is a consumer-focused investment firm aimed at mid and large-sized, businesses in Europe and North America.

Lion Capital Many partners of Lion Capital have extensive operating experience Javier Ferran Consumer fashion investments include a/o All Saints, American Apperal, John Varvatos and Jimmy Choo Historically a turnaround specialist, although increasingly competing on more mainstream transactions

Sun Capital Partners Sun has a broad industry focus and targets companies with $30m - $3bn in sales Paul Daccus Consumer fashion investments include a/o Scotch & Soda (a leading European fashion retailer) and V&D (European department stores) UK-based PE firm based in the UK with 8 offices worldwide, a/o in New York

Apax Partners Typical deal size between $200m - $2,000m Oriol Pinya Clear focus on the consumer sector, recently acquired Cole Haan, from NIKE, Inc Originally a bank from Bahrain with a global private equity franchise

InvestCorp Typically targets 4 transactions a year, with average equity ticket of $100m-$125m Yves Alexandre Consumer investments include a/o Sur la Table (a premier kitchenware retailer and provider of culinary classes in the United States) Investment firm that principally makes direct investments in private companies, often acquiring entire portfolios of assets

Doughty Hanson Targets mature mid-market companies, where direct governance and capital investment offers potential for extra growth Mark Corbidge Consumer investments include a/o Tumi, a global premium lifestyle brand Global active private equity firm that targets a minimum equity investment of $150m

CVC Consumer investments in a/o Cortefiel (a European clothing retailer), Matahari (an Indonesian based chain of department stores) Jan Reinier Voûte Eager to do a new transaction, having missed out on a few deals A Florida based PE firm with more than $13 billion of equity capital under management and offices around the world

HIG Prefers hands-on propositions, although has recently been participating in more mainstream sale processes Mark Kelly Consumer investments include Easy Gardener Products, a leading wholesaler of landscape, lawn and garden products Global private equity firm focused on control and significant minority investments in North America and Europe

Trilantic Partners Focuses on investments in companies with an EV from $100m - $1,000m Vittorio Pignatti Consumer investments include a/o Betty Blue (a European luxury retailer with 80 mono-brand and over 1,100 multi-brand stores)

37

Potential Financial Buyers

V. Contact Details

39

Communication regarding the valuation report All communication regarding, or questions about the valuation report may be addressed to MBA Investment Bankers

Contact information

Contact details

MBA Investment Bankers

Address:1000 E Olympic Blvd, Los Angeles

CA 90021

USA

Tel: (310) 642-9753

LeRon BishopManaging DirectorCell: 949-241-4409E-mail: [email protected]

Jonathan KahnSenior ConsultantCell: 310-593-1534E-mail: [email protected]

Allie FrancillardConsultantCell: 424-702-6196E-mail: [email protected]

Dai Shiheng ConsultantCell: 949-331-5606E-mail: [email protected]

20140223 acg case valuation -final v2 ds

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