Asia Investment & Banking Conference 2018 – HSBC M&A Competition Champions (Axe Capital)

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  AIBC 2018 HSBC M&A Competition Our team in the Investment Banking Division has been selected to present a pitch book - to be termed as a ‘Strategic Review’ - to the Board of Directors of our client, Michael Kors Holdings Limited (KORS), regarding a potential acquisition target in the fashion industry in line with their growth strategy.
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  • 1. 1 August 17th, 2018 AIBC 2018 – HSBC M&A Competition Opportunity Amidst Adversity – Michael Kors Holdings Limited Amir Hisham Wanying Lin Mazen El Sabrouty
  • 2. 2FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Executive Summary Overview Current Situation • KORS is in need of a new growth driver as the affordable luxury market is expected to flatten out in the coming years Strategic Approach • American revenue dependency, brand positioning and e-commerce weaknesses are hindering the growth of Michael Kors Target Company • Burberry has robust financials and is the ideal target company which solves most if not all of Michael Kors’ growth issues Transaction Analysis Transaction Rationale • A merger with Burberry brings solutions to all of Michael Kors’ problems at once while still further fueling potential growth Synergy Realization • Synergies to be realized are estimated at $249.6m and are fully realized by Combined Group’s third year of operation Valuation Summary • Burberry has an indicative valuation range of $24.16 – $33.80; Starting bid price of $30.46 (10% Premium) Other Considerations Funding and Pro-Forma • A combination of 60% Debt and 40% Stock is recommended; The transaction is EPS accretive from FY 20 onwards Restructuring Options • Recommendation of a two-phase restructuring exercise which includes spin-off to remove conglomerate discount Risks and Mitigation • This merger faces a number of regulatory and operational risks which can be mitigated by Michael Kors’ management team Summary : Despite facing adversity in recent times, Michael Kors has a huge opportunity to grow inorganically 1
  • 3. 3FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Americas Industry Market Revenue – Affordable Luxury Stores in the U.S. KORS’ Share Price in USD (15/08/2017 – 15/08/2018) Michael Kors’ Geographical Presence Key Financial Information Sources : IBIS World, Capital IQ, Thomson One Summary : KORS is in need of a new growth driver as the affordable luxury market is expected to flatten out in the coming years 20 25 15 0 10 5 2014 20232017 17.016.8 $b 16.5 2015 2016 2018 15.5 2020 2021 16.716.7 2022 16.5 2024 16.6 16.4 16.5 16.6 2019 +1.4% +0.9% +0.7% Actual Forecast Per capita disposable income Inbound trips by non- US residents International trips by US residents Percentage of services conducted online Industry Drivers 1 2 3 4 $40 $0 10.0m $10 $50 $60 20.0m $70 $80 0.0m 30.0m 40.0m $71.32 Stock Price (Left Axis) Volume (Right Axis) FY 17 FY 18 % Change Revenue $4.49b $4.72b ▲ 5.0% EBITDA $1.12b $1.09b ▼ 2.5% EBIT Margin 20.0% 18.7% ▼ 6.5% Net Profit $552.5m $591.9m ▲ 7.1% FY 17 FY 18 % Change ROE 30.7% 32.7% ▲ 6.7% Cur. Ratio 2.10x 1.30x ▼ 36.2% D/E Ratio 8.3% 43.3% ▲418.3% 57% 57% 40% 35% 3% $4.72b FY 17 FY 18 5%3% $4.49b Retail Licensing Wholesale Jimmy Choo Current Situation – Michael Kors Holdings Limited (KORS:NYSE) 2 FY 18FY 16 FY 17 $3.5b $3.0b$3.1b -7.0% 1 1 EMEA FY 17FY 16 $1.0b FY 18 $0.9b $1.1b +5.0% 2 Asia Pacific $0.6b FY 16 FY 18FY 17 $0.2b $0.4b +66.0% 3 2 3
  • 4. 4FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Average Revenue per Store (Geographically Segmented) Asian Perception Towards Luxury Brands (Survey) Michael Kors’ E-Commerce Presence Strategies to Identify Ideal Targets Sources : IBIS World, Capital IQ, Thomson One, Deloitte, RBC Capital Markets, Company Websites, Statista Summary : American revenue dependency, brand positioning and e-commerce weaknesses are hindering the growth of KORS Strategic Approach – Problem Statement 3 $2.1m $1.8m $8.0m $2.4m $0.0m $2.0m $4.0m $6.0m $8.0m $10.0m $7.9m $9.3m $5.6m Americas $4.7m EMEA Asia Pacific $5.5m FY 16 FY 17 FY 18 Asian Disparity • Average revenue per store in Asia is doing terribly compared to the other 2 regions. • Why is the Michael Kors brand not doing as well in Asia? 1 American Dependency • This creates a huge dependency towards the American revenue stream which has been declining. • How do we do decrease that dependency? 2 Rolex Chanel Louis Vuitton Burberry Hermes Gucci 7.8% Prada Cartier Dior YSL 30.9% 21.1% 16.9% 6.6% 5.3% 3.4% 2.9% 2.7% 2.5% Brand Positioning • Many people in Asia still do not regard Michael Kors as a luxury brand. • The Asian demographic only prefer high- end luxury. • How do we reposition the Michael Kors brand to appeal to the Asian market? 3 Q: What is your favorite luxury brand? 1 2 11 25 0 10 20 301.5 0.0 0.5 1.0 FY 15 $b FY 16 FY 17 FY 18 $1.26b $1.18b $0.69b $0.77b EBIT (Left) Number of E-Commerce Sites Opened (Right) E-Commerce • Deterioration of operating income has the potential to be offset by increase in e-commerce penetration. • However, based on recent data, KORS’ e-commerce utilization has been poor. • How do we properly leverage and expand our e-commerce presence? 4 Asian Disparity • What will our approach be to better understand and improve performance in the Asian market? • Solution: Strategic Alliance American Dependency • Do we double down on America and acquire for the purpose of scale? • Solution: Scale Transaction Brand Positioning • Do we begin consolidating other high-end luxury brands to increase our high-end offering? • Solution: Scope Transaction E-Commerce • Do we try to increase our e-commerce presence by acquiring the right channels? • Solution: Vertical Integration 1 2 3 4
  • 5. 5FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. BeautyChildren’s Men’s BRBY’s Share Price in GBX (15/08/2017 – 15/08/2018) Burberry’s Geographical Presence Key Financial Information Product Offering Sources : IBIS World, Capital IQ, Company Filings, Burberry Website FY 17 FY 18 % Change Revenue £2.77b £2.73b ▼ 1.2% EBITDA £580.9m £578.4m ▼ 0.4% EBIT Margin 16.3% 17.3% ▲ 5.8% Net Profit £286.8m £293.5m ▲ 2.3% FY 17 FY 18 % Change ROE 17.3% 18.8% ▲ 8.4% Cur. Ratio 2.9x 2.8x ▼ 3.8% D/E Ratio 2.0% 1.6% ▼ 19.4% 36% 38% 39% 29% 29% 30% 22% 23% 24% 8% 7% 4%4%4% FY 16 £2.77b FY 18FY 17 £2.51b 3% £2.73b Accessories Beauty Women’s Children’s Men’s 0 1,400 2,200 200 1,600 25.0m 1,800 2,000 2,400 0.0m 5.0m 10.0m 15.0m 20.0m GBX 2,218.00 Stock Price (Left Axis) Volume (Right Axis) Summary : Burberry has robust financials and is the ideal target company which solves most if not all of KORS’ growth issues Target Company – Burberry Group Plc (BRBY:LN) 4 77% 80% 22% 19% 1% FY 17 £2.73b 1% FY 18 £2.77b Retail Wholesale Licensing Americas £0.7b FY 16 FY 17 FY 18 £0.6b£0.7b -1.7% 1 1 EMEIA £1.0b FY 16 FY 17 FY 18 £1.0b£0.9b +5.4% 2 Asia Pacific FY 17FY 16 £0.9b FY 18 £1.1b £1.1b +8.0% 3 2 3 Women’s Accessories
  • 6. 6FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Transaction Rationale Change in Geographical Revenue Segments Sources : Capital IQ, Company Filings, Euromonitor, RBC Capital Markets, Statista Transaction Rationale (Continued) Summary : A merger with Burberry brings solutions to all of KORS’ problems at once while still further fueling potential growth Transaction Rationale 5 Improves Asian Segment • Asia Pacific is the biggest geographic segment and is seeing strong growth potential. • KORS will benefit from Burberry’s sales and past investment in multiple high-profile marketing campaigns targeting APAC and particularly China. High-End Luxury Brand Repositioning • KORS will be able to phase out of its accessible luxury positioning by incorporating the “classy and exclusive” image that Burberry has. • This will also help KORS to appeal to consumers in Asia. Increases E-Commerce Presence • Burberry has extensive experience with digital marketing and e-commerce. • KORS will be able to leverage the expertise and increase sales from e-commerce while reducing the number of its physical stores. Unlocks Balance Sheet • Burberry has a Debt/Equity ratio of 1.63% and a high cash balance. • Post-merger, KORS will be able to conduct even more acquisitions with the cash from Burberry and higher debt capacity. 1 2 3 4 Improves Asian Segment 1 Increases E-Commerce Presence 3 High-End Luxury Brand Repositioning 2 Unlocks Balance Sheet 4 2.5% Chanel 2.7% 5.3% Louis Vuitton Cartier 21.1%Hermes 7.8% 16.9%Gucci 3.4% Rolex Burberry Prada Dior YSL 30.9% 6.6% 2.9% $250b $391b $640b EMEA Americas Asia Global Internet Retailing: 2017 Market Size • In Feb 2018, Burberry launched a global collaboration with Farfetch, expands reach to more than 150 countries. • This allows Burberry to reach young digital and fashion-conscious consumers, while expanding their distribution globally. Americas EMEA $1.2b Asia Pacific $1.4b $3.0b $1.1b $0.8b $0.6b KORS BRBY • Burberry’s Asia Pacific’s revenue accounts for the company’s biggest geographical revenue segment. • This allows Michael Kors to not only improve its Asian revenue segment but also decrease its dependency on its Americas segment. • Allows for Michael Kors to reposition its brand into the high-end luxury segment which Burberry is already in. • Also increases appeal in the Asian market. 64% 23% 13% EMEAAmericas Asia Pacific 29% 47% 24% Geographical Segments (Before) Geographical Segments (After) Cons • Weak Asian Presence • Depend on Americas too much. Pros • Stronger Asian Presence • More balanced geographical segments 2.0% FY 17FY 16 1.6% FY 18 3.2% BRBY’s Debt-to-Equity Ratio from FY 16 – FY 18 • BRBY’s clean balance sheet allows KORS to make more acquisitions in the future to allow for further high-end luxury brand consolidation.
  • 7. 7FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Estimated Average Annual Cost Synergies Timeline of Synergies Realization Synergies Impact on Combined Group’s EBITDA Distribution of Synergies Sources : Company Filings, Factiva, Statista Summary : Synergies to be realized are estimated at $249.6m and are fully realized by Combined Group’s third year of operation $0.25b $2.00b $2.50b $2.25b $0.00b $1.75b $2.21b $2.46b $2.08b $1.99b FY 23EFY 22EFY 20E $1.95b $2.22b $2.06b $2.31b FY 21E $2.12b FY 19E $2.37b+6.4% +11.3% +12.1% +11.7% +11.3% Without Synergies With Synergies 90% Synergies Realized 100% Synergies Realized One-off implementation cost of $101.2m $124.8m $224.6m $249.6m $249.6m $249.6m $0m $100m $200m $300m FY 20EFY 19E FY 23EFY 21E FY 22E Synergy Realization Source Item Details Value (mil) Cost Savings Employee Cost Synergies • Employee redundancies. • Board Member redundancies $138.5m Technology Integration and Optimization • Online Server Hosting • Consolidation of Software and Hardware • E-commerce platform consolidation $15.2m Marketing and Advertising • Leverage Different Distribution Channels $33.0m Revenue Improvement Segment Performance Optimization • E-commerce sales improvement • Leverage Burberry’s higher e-commerce and Asia Pacific penetration $62.9m Total : $249.6m 6 50% Synergies Realized 100% Synergies Realized 100% Synergies Realized $83.2m $149.8m $166.4m $166.4m $166.4m $83.2m $0m $50m $100m $150m $200m FY 22EFY 19E FY 21EFY 20E FY 23E $83.2m $41.6m $74.9m $83.2m KORS BRBY Synergy Distribution • KORS is expected to absorb 65% of all synergies and the remaining 35% will be assumed by BRBY. • This will allow for KORS to offer a lower premium as KORS is expecting to derive the majority of the synergies. 65% 35%
  • 8. 8FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Starting Bid Price: $30.46 Valuation Summary Football Field Chart Summary : Burberry has an indicative valuation range of $24.16 – $33.80; Starting bid price of $30.46 (10% Premium) 7 MarketValuation 12-Month Trading Range • Low : $19.02 on 09/02/2018 • High : $28.88 on 14/08/2018 Premium to Spot • Reflects illustrative 20% - 30% premium to spot price (DCF values used) Broker Price Targets • Low : J.P. Morgan • High : Credit Suisse Trading Comps – EV/NTM Sales • Large Cap High-End Luxury: 3.27x – 8.77x • Large Cap Low-End Luxury: 1.55x – 3.41x • Mid Cap Luxury: 1.73x – 2.34x Trading Comps – EV/NTM EBITDA • Large Cap High-End Luxury: 12.66x – 23.31x • Large Cap Low-End Luxury: 9.58x – 14.26x • Mid Cap Luxury: 9.50x – 13.94x Trading Comps – Price/NTM Earnings • Large Cap High-End Luxury: 19.97x – 41.19x • Large Cap Low-End Luxury: 18.08x – 26.65x • Mid Cap Luxury: 18.09x – 27.85x Fundamental Valuation Precedent Transactions – EV/EBITDA • Precedent Transactions within Luxury Industry: 12.82x – 16.87x DCF – Standalone • Assumes 5-year DCF, 7.5% WACC and 2.0% - 3.0% TGR DCF – with Synergies • Assumes 5-year DCF, 7.5% WACC and 2.0% - 3.0% TGR • Assumes $249.6 million run-rate synergies from year FY19E Cap. toPay Leveraged Buyout Analysis • Assumes 5-year hold period, 19% target IRR, 5.25x gearing, 14.0x – 15.0x entry multiple and 17.00x exit multiple Current Share Price $27.69
  • 9. 9FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Transaction Structure Accretion/Dilution Analysis Multiples Sources : Capital IQ, Thomson One, Company Filings Summary : A combination of 60% Debt and 40% Stock is recommended; The transaction is EPS accretive from FY 20 onwards Funding and Pro-Forma EPS Information Recommended Bid (10% Premium) 1.1% 6.6% -10.0% -5.0% 0.0% 5.0% 10.0% FY 19E FY 20E FY 21E (6.3%) Structure • Offer price of $30.46 at 10% premium to 10-day VWAP of $27.69. • BRBY shareholders to receive 0.171 KORS shares plus $18.28 cash consideration for each BRBY shares held. • Transaction to be implemented via a Target Scheme of Arrangement. • Transaction will be followed by a two-phased corporate restructuring exercise to allow for better utilization of resources. Combined Group • Combined group pro forma enterprise value of approximately $23 billion and is expected to remain an S&P500 company. • KORS and BRBY shareholders to own approximately 67.8% and 32.2% of the combined group, respectively. Other Details • Retain 3 of BRBY’s board directors and all of the management team. • Obtaining SEC and regulatory approvals. • BRBY shareholders approving the Scheme of Arrangement. • Obtaining court approval for the Scheme. Contribution Analysis Multiples 50.3% 36.8% 36.4% 40.3% 49.7% 63.2% 63.6% 59.7% 0% 25% 50% 75% 100% EV NOPAT (FY+1) EBITDA (FY+1) Revenue (FY+1) 10.0x 14.6x 3.4x 29.7x 20.2x 0.0x 5.0x 10.0x 15.0x 20.0x 25.0x 30.0x Revenue (FY+1) 12.8x EBITDA (FY+1) 17.6x Net Income (FY+1) 2.2x 2.7x KORS Pro-FormaBRBYKORS BRBY 8 FY 19E FY 20E FY 21E BRBY EPS $1.03 $1.09 $1.25 KORS EPS $4.78 $5.09 $5.36 Combined EPS $4.48 $5.15 $5.71 Accretion / Dilution (share) ($0.30) $0.06 $0.35 Accretion / Dilution (%) (6.3%) 1.1% 6.6% Funding Options 60% Debt + 40% Stock 20% Debt + 80% Stock Advantages • Lower cost of capital as debt is cheaper than raising equity. • Acquirer gains majority control of MergeCo. (67.8% KORS, 32.2% BRBY) • Larger opportunity for BRBY’s shareholders to participate in the synergies. • Less pressure on MergeCo's debt capacity. Disadvantages • Adds pressure to MergeCo's debt capacity. • Dilutes voting rights of existing KORS shareholders. • Makes the transaction less accretive. Option A Option B Ownership67.8% 32.2% 40% Stock + 60% Debt Funding Mix
  • 10. 10FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Two-Phase Corporate Restructuring (Project Signature) Net Value Creation Post Spin-Off Shareholders Signature Inc. Michael Kors Jimmy Choo Burberry Listed Entity Rationale Better Access to Capital Markets • Direct access to equity capital markets, funding flexibility and differentiated gearing levels. Flexibility to Pursue Distinct Aspirations • Focus on and pursue customized strategies such as dividend policies, growth strategies and innovation to achieve their respective objectives. Unlock Value for All Shareholders • Shareholders will be able to manage and rebalance their portfolio in the two pure-play entities based on their investment preference and appetite. Enhanced Investor Insight • Improved shareholder visibility on the financial performance of the separate businesses. 4 1 2 3 Sensitivity Analysis (Net Value Creation) Summary : Recommendation of a two-phase restructuring exercise which includes spin-off to remove conglomerate discount Phase 1 (Corporate Restructuring) Phase 2 (Carve-Out and Spin-Off) Shareholders Signature Inc. Michael Kors Jimmy Choo Burberry Cosmetics Co. CosmeticsIndustryP/E Restructuring Options 9 $m Current Combined Co. Industry: High-End Luxury Signature Inc. Industry: Cosmetics Cosmetics Co. Sales, 2019E 8,521.39 7,684.10 837.29 EBITDA, 2019E 1,795.88 1,565.56 230.32 Net income 2019E 1,156.33 1,005.61 150.71 Debt 8,494.17 BV of equity 7,014.65 Mkt value 15,736.70 P/Earnings 13.61x 21.19x 21.19x 26.00x 26.00x P/E value 21,306.04 3,918.52 Total of Standalone Segments 25,224.56 Less: MergeCo Market Value 15,736.70 Net value creation post spin-off 60.3% 9,487.86 19.19x 20.19x 21.19x 22.19x 23.19x 22.00x 43.7% 50.1% 56.5% 62.9% 69.3% 24.00x 45.6% 52.0% 58.4% 64.8% 71.2% 26.00x 47.5% 53.9% 60.3% 66.7% 73.1% 28.00x 49.4% 55.8% 62.2% 68.6% 75.0% 30.00x 51.4% 57.8% 64.1% 70.5% 76.9% High-End Luxury Industry P/E Sources : Capital IQ, Company Filings, Bain & Company
  • 11. 11FINAL CONFIDENTIAL AND PROPRIETARY. Permission to reprint or distribute any content from this presentation requires the written approval of Axe Capital LLC. Transaction Risks Scenario Analysis Sources: Company Filings, Company Annual Report, IBIS World Highly Likely Not Likely High ImpactLow Impact Regulatory Risks SEC Concerns (R1) FTC Concerns (R2) Operational Risks Inability to Carve Out Cosmetics Co. (O1) Synergies Not Fully Realized (O2) Post-Transaction Risks Market Value Decline Post Spin-Off (T1) Unexpected Costs of Integration (T2) R2 O1 O2T2 T1 R1 Situation Details Mitigation SEC Concerns • SEC may post questions on the transparency of the transaction and the controlling stakeholder’s identity post-merger. • Comply with disclosure requirements as directed by legal advisors. • Thoroughly discuss the post-merger ownership and leadership structure FTC Concerns • Transaction may be blocked if FTC believes it would substantially decrease competition • Divest certain business segment to maintain a market share allowed by FTC and Department of Justice if necessary. Inability to Carve Out Cosmetics Co. • There might be complications that can arise from the attempted carve- out of the beauty business and also from the following spin-off. • KORS can hire the best restructuring firms to avoid any complications to arise during the final phase of Project Signature. Synergies Not Fully Realized • Uncertainty in realization of synergies and business improvements may negatively impact EPS. • Offer via Scheme of Arrangement enables external parties to conduct thorough due diligence prior to demerger. Market Value Decline Post Spin-Off • Risk that combined market value of new Group and the spun-off entity will be less than market value of KORS immediately prior to the demerger. • Unlikely to occur since EPS is expected to be accretive. Shareholders should be informed that synergies are expected to be realized in 3 years. Unexpected Costs of Integration • Post merger integration may lead to unexpected costs which negatively affec
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