luxottica, cole national, acquisition dynamics in the optic sector - ddim 2011, group 9
DESCRIPTION
Finance case on the Acquisition price for Cole National by Luxottica.TRANSCRIPT
Luxottica – Cole National
Acquisition Dynamics in the Optic Sector
Group 9
Yu Yu GaoYi Ling Sun
Marta CaccamoMarta Cenni
Flavia AssognaWei Liu
Daniele CortiVito Margiotta
26 January 2004: Luxottica (LUX) agreed to buy Cole National Corp for US$ 22,5 cash per share
– Total deal value US$ 662 million (market value US$ 401 million, net debt US$ 261 million)
26 January 2004: Luxottica (LUX) agreed to buy Cole National Corp for US$ 22,5 cash per share
– Total deal value US$ 662 million (market value US$ 401 million, net debt US$ 261 million)
19 April 2004: counter bid by Hong Kong Moulin International. Bid price: US$ 25 per share in cash.
– HAL Trust was rumored to be supporting Moulin counter bid to obtain full control over Pearle Europe
19 April 2004: counter bid by Hong Kong Moulin International. Bid price: US$ 25 per share in cash.
– HAL Trust was rumored to be supporting Moulin counter bid to obtain full control over Pearle Europe
Postposition of the Extraordinary General Meeting planned for April 20
And of April: LUX still stuck on its proposal. CNJ obligated to pay a US$ 12 million fee if the merger agreement would have terminated for a superior acquisition by another party.
Postposition of the Extraordinary General Meeting planned for April 20
And of April: LUX still stuck on its proposal. CNJ obligated to pay a US$ 12 million fee if the merger agreement would have terminated for a superior acquisition by another party.
October 2003: Cole National received an unsolicited non-binding proposal to acquire the company for US$ 19,65 per share
– Deal value US$ 321 million
SETTING THE SCENE
WORLD LEADERPrescription
Frames & Sunglasses
• FULLY INTEGRATED VALUE CHAIN
• IN-HOUSE PRODUCTION ( 85% Italy – 15% China )
•100% EXTERNAL SOURCE OF RAW MATERIALS
The Bidder: LUXOTTICA
Largest optical retailer in
North America through
acquisition of LensCrafters and Sunglass
Hut
Sales by Product and Category Sales by Geographic Area
LUX’s Sales
• 7.6% of US 17 bln ophtalmology market
HAL
CNJ
Pearle Europe
79%
19.2%
21%
Things Remembered
Cole Vision
Licensed Brands: >1200 stores in US and Canada suburban areas operated through a series of advanced tech centralized labs
Managed Vision: care benefits to employers, HMOs and other US organizations
Pearl Vision: >850 corpo owned and franchised shops in malls in US, Canada, Puerto Rico and Virgin Islands
The Target: COLE VISION
INDUSTRY FACTS
• Vertical integration trend
• Consolidation • Licence rotation
Potential Synergies
Empire Building: Cole and Luxottica are already market leaders in US, together
Complementarity: Luxottica serves mainly urban high-traffic areas, Cole is concentrating on suburban
Higher negotiating power and lower cost of development of exclusive lines
Gain control of 21% of Pearle Europe, one of its top clients
Defend from HAL leading position in EU retail
Why?:
1+1>2
STEPS TO VALUE CREATION
Rationale for the acquisition
Extracting synergies
Opportunities
• New optical business model
• Expanding into a new segment (vision care services) through CNJ's controlled business Cole Managed Vision
• Develop new product
• Improved distribution channel
• Warehouse, ITPlatforms
• Increased leverage withSuppliers
• Licensed brands• Franchising• Lab networks
• Industry trends:- Verticalization - Consolidation
- Licence rotation
• Expanding in the European market
• Defending from HAL leading positon in Eu retail market
Post integration actions
Please see additional notes below.
MARKET
COMPARABLES
Main business: Optical RetailThe company operates 3 different businesses: Cole Licensed Brands, Pearle Vision and Cole Managed Vision.
21% participation in Pearle Europe
(the third largest optical retailer in Europe with around 700 million USD of annual sales and 1200 locations)
Approximately 3000 stores - 400 in
franchising
Market Capitalization:US$ 321 Million in euro
7.6% US Market (US$ 17 Billion)
COMPANY OVERVIEW
- Business Model
- Size
- Market Coverage
- Financial Leverage
Optical retailing
MarCap US$ 200 – 900 millions
Strong market presence
Lack of data
Please see additional notes below.
Mainly present in US and Mexico through 490 vision centers, the company has been closed to bankruptcy in 2001 and it is actually still undergoing a major restructuring process. Not suitable for comparison.
The company operates through 9 owned and 5 franchises managed stores. Too small in size for comparison.
COMPARABLES’ ANALYSIS 1/3National Vision
Emerging Vision
De Rigo
One of Europe’s largest optical retailer. Retail operations represent 70% of company’s total revenues. Roughly one third of company’s stores are under franchise contract. Very internationalized – active in over 80 countries worldwide.
COMPARABLES’ ANALYSIS 2/3Alain Afflelou
One of the largest French optical retailers. Franchise business accounts for 95% of its total revenues (in this respect the business model of this company it is not suitable for comaprison with our). Not active internationally.
OPSM
Grand Vision
The largest French optical retailer, multibrand. Mainly active in the French domestic market (47%), UK (40%). The remaining part comes form rest of Europe.
Market leader in Australia, multibrand (5 brands owned). Broad product offering; 590 stores in 5 different countries – Australia and Hong Kong being the major ones.
COMPARABLES’ ANALYSIS 3/3Fielmann
The largest German optical retailer. Most of the revenues (85%) come from the domestic German market. Particular attenction has to be given on the impact the recent change in legislation - German healthcare reform - had on the company. EBITDA for 2004 is, in fact, expected to decrease by roughly 40%.
Oakley
Paris Miki
Japanese large optical retailer. Mainly active in the domestic market. The company has recently undergone a strategic shift toward franchise business, that now accounts for 47% of its total revenues.
American producer of sunglasses and prescription lenses; operates marginally in retail market. Business Model not suitable for comparison.
Selected
COMPARABLES
- De Rigo
- OPSM
- Grand Vision
- Fielmann
MULTIPLE SELECTION
• EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn’t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings.
• P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don’t have this kind of data, we won’t take it into consideration.
• EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk.
MULTIPLE SELECTION
• EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn’t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings.
• P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don’t have this kind of data, we won’t take it into consideration.
• EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk.
OUR CHOICE = EV/EBITDA
EV/EBITDA is not influenced by the capital structure and by differences in accounting standards (given that the relative size of D&A to EBIT is very large, the distortion could be sensible)
PRICE CALCULATION
Assumptions:We will look at the 3 months average instead of point-in-time. This will give us a fairer view of the company value.We decided to eventually adjust values that include specific unusual events or extraordinary performances due to external factors.
FINAL PRICE PER SHARE = US$ 22.03
Please see additional notes below.
See appendix 1 for further
details
TRANSACTION COMPARABLES
TRANSACTION COMPARABLES SELECTION
Main Variables:
Deal value (we look for similar value transaction);
Date of the deal (too old transactions are difficult to compare);
Target sector (only “Optical Retail”);
Please see additional notes below.
From the analysis we selected the following 3 comparables:• ECCA-USA / Thomas Lee Part.;• OPSM Australia / Luxottica;• Grandvision / Halt Trust.
PRICE CALCULATIONS
Please see additional notes below.
In this case Price per Share represents a good proxy of how much companies paid in the past for similar transactions ( it could include possible synergies, mark-ups, ect.).
FINAL PRICE PER SHARE = US$ 30.09
See appendix 2 for further
details
Even if the price that LUX has to pay to conclude the deal will be higher than the one it offered at the beginning, the choice to counter bid Moulin’s last offer of 25 US$ per share is justified by the estimated value of synergies emerging from the acquisition.
SYNERGIES!!
LUXCNJ
LUX
CNJ
SYNERGIES INCREASE TOTAL VALUE
FINAL CONSIDERATIONS
Observing the prices got from transaction and market comparables analysis and taking into account the synergies that can arise from the deal, we estimate a reasonable price range in between 25 and 27 $ per share.
Please see additional notes below.
appendix
Appendix 1: Price per share evaluation – market multiples
Appendix 2: Price per share evaluation – transaction multiples