ducati case study
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DUCATI CASE STUDY
Anastasia Karpova Ekaterina Nere8na Ali Baris Sahin Sena Secilmis
Alfio Shkreta (equal contribu8on)
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
Company Snapshot
Global Brand Recogni8on
– Race winner in World Championships
– 15 models in 4 motorcycle families
Efficient Produc8on
– 85% of components are outsourced
– High level of standardiza?on
Delivering High Margins
– EBITDA Margin is 21%
– ROA is 30%
Compe88ve Landscape
– 4% share in World
– 5% share in Europe
– 30% share in Tour Motorcycle
Company is in financial distress – 32.7% decrease in volume growth
– 31.7% decrease in revenue
– 102% decrease in EBIT
– Debt/Equity is 100%
4%
25%
17%
24%
19%
5% 6% Duca?
Honda
Kawasaki
Suzuki
Yamaha
BMW
Harley
3
1
2
3
4
5
World Market Share in Sports Niche
SWOT Analysis
THREATS
– On the verge of bankruptcy
– Low switching cost for the customers
– Higher produc?on efficiency from rivals
OPPORTUNITIES
– Capacity to expand its market share
– Capitalize on diversified product lines
– Geographical benefits
STRENGHTS
– High barriers to entry
– Market segmenta?on
– Top-‐?er technology, top-‐notch engineers
– Great consumer franchise
WEAKNESSES
– Poor Management
– Financially intertwined with Cagiva’s
troubled subsidiaries
– Manufacturing boclenecks
4
Benefits and costs for Cas8glioni Brothers
50% 24% 14% 11% 7% 5% 4%
15% 15% 13% 12% 12% 12% 11%
1997 1998 1999 2000 2001 2002 2003
Revenue Growth % EBITDA marging
34,9 15,9 45,8 47,3 52,3 51,4 0,0
12,8 20,2 16,9 16,6 18,7 17,2
12,1
Total debt payments EBIT
Presale forecast
5
With current management Duca8 will bankrupt in 1997
– $130-‐170 Million for 51% of the stake sold to TPG with possible earn out of $65 million based on EBITDA target
– Addi?onal financing for Cagiva core division
– Lower cost of capital (Deutche)
The “Lollipop” effect – Chairman with limited competencies
– Front page in newspapers
– Retain of control in “public eyes”
Loss of control – Limited nego?a?on power due to
bankruptcy and no-‐shop
– Realloca?on of Duca? cash flows to Cagiva
– Use Duca? assets as a collateral
– Presence in luxury motorcycles niche
– R&D team and developments
Turnaround
Opera?ng efficiency
Sales
R&D
Working capital management
– Increase inventory turnover – Improve collec?on policy
Supplier rela?onships – Payments schedule – Outsourcing
Brand awareness – “the Ferrari on two wheels” – Duca? experience
Distribu?on system Introduce apparel and non-‐motorcycle products
Develop new products
Retain leader posi?on in racing
Implement racing technology to street motorcycles
Base / Low case Accounts receivable
60 / 90 days Inventory 40 / 70 days Accounts payable
50 / 60 days Materials / Revenue
48% / 53%
Base / Low case Long term revenue growth
9% / 6% Revenue growth in 1997
100% / 80%
Base / Low case R&D / Revenue 2% / 1%
Assump8ons Methods
6
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
EV/EBITDA 16 EBITDA 122 EV 1927 Debt 97 Equity 1829 Horizon IRR 35% Present Equity Value 551 Purchase price 51% 281
Base case projec?ons
14 13
17
20
Porsche KTM Yamaha Harley Davidson
EV/EBITDA mul?ple Valua?on, $ mln
LBO valua8on
7
100 250 200 150 350 300 500 450 400 550
LBO 16x-‐20x Exit EBITDA
DCF Base/ Low
Trading Comparables 1997E; 13x-‐16x EV/EBITDA
280
130
358
560
420 340
________________________________________________ Valua8on results
Ini8al Offer Con?gent earn-‐out
230 130
8
Possible Exit
– Sale to a strategic buyer
– Secondary LBO (sale to another PE firm)
– Ini?al Public Offering( IPO)
Method
– Book Building (99.3% of deals in 1995-‐2004)
– Auc?on
– Fixed Price Public Offer
– Hybrid Methods
Other Op8ons
– Full exit
– Par?al exit
IPO op8ons
– Stock Exchange: Borsa Italiana, NYSE, Other
v
Exit op8ons
9
12 15 13 21
33
48
0
2
4
6
8
0 10 20 30 40 50 60
1995 1996 1997 1998 1999 2000
Numbers of IPO Capital raised, bl. EUR
Source: Arosio, 2000; Gajewski, 2006; Ricer, 2003;
Rationale for IPO Borsa Italiana NYSE
Market Capitalization $192.2 bln $7,277 bln
Underpricing premium +20.4% +17.6%
Expected returns +1.5% +0.34%
Underwriter’s fee 1.5-2% large cap 4-5% small cap
7%
Listing requirements No book value MC >10 bln lira 25% equity float No + profitability 3y balance sheets
Book and market requirements
Tax Income tax reduction 19%
27%
Lock-up period Voluntarily 180 days
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
Walk away or complete?
10
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
Recommenda8on
10
– 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)
Actual Facts
11
Ques8ons & Remarks
• 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.
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.
Appendix – Turnaround Cont’d
• 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
Appendix – Walk away or complete?
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
Appendix – Lis8ng Requirements
Source: NYSE EURONEXT