25575 SPRING 2022
Individual Assignment
Your team is still celebrating the success of the Hibbett deal when your boss is approached by one of your oldest corporate clients who needs your advice on a possible acquisition deal.
Specifically, your client is thinking about buying a specific company and your task is to provide advice on the the structuring of the deal and its possible profitability.
As it is customary in this situation, the output of your effort will be a PowerPoint presentation and an Excel file containing your valuation and profitability models.
V.F. Corporation (VFC) one of your clients operating in the lifestyle apparel and footwear industry is looking to acquire Caleres, Inc. (CAL), a company that engage retail and wholesale of footwear.
V.F. Corporation has initiated talks with Caleres, and there is a reasonable expectation of being able to complete an acquisition for a price between $27.50 and $31.25 per share (representing approximately 10% to 25% purchase premium on the October 14 trading price of the stock).
The output of your work will be a presentation (PowerPoint or similar) containing:
- A brief presentation of the target company.
- A brief presentation of the industry.
- The proposed structure of the deal (financing and offer structure).
- A profitability analysis including your assumption on deal synergies.
Your deliverable will be a PDF file with your presentation and an Excel file with the profitability analysis.
1. Company Presentation
The goal of this section is to give the reader a clear picture of the target company, its business model, growth opportunities and financial situation. After reading this section the client should understand the current financial situation of the company and its prospects.
You should try to provide a complete picture of the company including:
- Historical Profitability and growth
- Leverage and financial soundness
- Future prospects
To complete this section, you should find all the relevant information in FactSet. You can also find information on the website of the company. If you are interested in having a better grasp on the industry where the company operates you can check this industry report on IBIS World via the UTS library. The industry outlook section of the report can be particularly useful, especially to think about scenarios and synergies.
2. Industry Outlook
The goal of this section is to give the reader a clear picture of the US Footwear Wholesaling and retail industry (this is the industry of the target according the NAICS classification), its current state and its future prospects. After reading this section the client should understand what the main risks and growth drivers in this industry are and how these translate into the assumptions you have embedded into your profitability model.
You can find information on the state and prospect of the industry in FactSet. You can also find this industry report on IBIS World via the UTS library. The industry outlook section of the report can be particularly useful, especially to think about scenarios and synergies.
3. Deal Structure
The talks between your client and the target have settled on a deal for the acquisition of the equity of the target where all the existing debt of the target will be ported into the new entity.
You should consider two different deal structures for the deal:
- One where the amount of equity and debt used to finance the deal are chosen to maximize the profitability for the acquirer under your “baseline” scenario with synergies (see paragraph 5 below for a description of the scenarios).
- One where the deal is financed with equity only.
As usual if the equity only structure is optimal for profitability, your two structures will be the same.
3.1 Funding and Financing Costs
After consulting with your capital markets division, you estimate that the deal could be financed with a combination of the following sources of funds:
| Instrument | Rating | Size Limit | Interest Rate | Financing Fee |
| Term Loan B | AA | 2.75x EBITDA | LIBOR + 1.00% | 1.00% |
| Subordinated Note | B | 4.0x EBITDA | 6.00% | 3.00% |
| Revolving Credit Facility | LIBOR + 2.00% | 1.00% |
The maximum size for all forms of external financing is measured as a multiple of the LTM EBITDA of the combined entity. For sake of simplicity, you can assume that all sources of debt have maturity of 10 years (outside your modelling horizon). The term loan has 5% annual mandatory repayment.
Please note that the acquirer has an existing unsecured term loan. For the purpose of this valuation, you can assume that LIBOR and ABR is the same rate.
The Revolving credit facility is not to be used for financing the deal. It will be activated only in case of bankruptcy.
The company should also close every year with at least $300m in cash. Loan covenants require at least 10% equity in the company.
4. Profitability Analysis
The goal of this section is to provide the reader with an estimate of the profitability of the deal (Accretion in your year 1, the first full year after the pro-forma) under a number of possible scenarios.
4.1 Operating Scenarios
You will have to analyse the profitability of the deal under two operating scenarios.
- Baseline. This scenario will be based on your best assumptions on the evolution of the two firms standalone.
- Pessimistic. This scenario is designed to capture a pessimistic outlook.
This is not a “major stress” scenario, but simply a scenario where the economic environment for the next 2-3 years is unfavourable, in line with “tough times” (but not exceptionally so) for this industry.
4.2 Synergies
You will have to model three scenarios for your synergies
- Baseline. This scenario will be based on your best assumptions on the deal synergies assuming an ordinary evolution economic environment.
- Pessimistic. This scenario is designed to capture your assumptions on the deal synergies if the evolution of the economic environment is unfavourable (the pessimistic environment previously described). To be clear this is not a pessimistic scenario for the synergies, but your assumption of synergies in the pessimistic operating scenario. If you think that the economic environment has no effect on your ability of extracting synergies, this scenario would be the same as the baseline.
- No Synergies. This scenario simply assumes zero synergies.
5. Structure of the presentation
There is no formal requirement on the length of your presentation but from the example posted you will see that this type of document usually has between 15 and 30 slides including appendices. Here is an example breakdown of the body of the presentation.
| Part | Length |
| Presentation of the Target | 3-5 |
| Presentation of the Industry | 3-5 |
| Deal Structure | 2-4 |
| Profitability Analysis | 4-8 |
You will not be judged on the length of the presentation but on the quality of the content. Do not pad your deck with useless junk to make volume.
All the important information should be included in the body of the presentation. The appendix should contain additional information that may be useful for the reader but not essential to understand your proposal.
The Deal Structure portion of the presentation should contain: the presentation of the optimized deal structure and the analysis of the leverage and liquidity of the resulting entity under the two possible deal structures (optimized and equity only) and the two operating scenarios. From reading this part the reader should understand how the credit risk of the company will evolve. For example, would the pessimistic scenario push the company close to default if we use the optimized financing structure?
The Profitability Analysis should present and justify all your key assumptions (both operating and synergies) and present the profitability of the deal under different combinations of scenarios and deal structures.
6. Data and Examples
Financial data can be found in FactSet. Instruction on how to access the data can be found in the after class videos.
Firm and industry reports can also be downloaded IBIS World via the library.
The best assignments from previous years will be provided as a reference. These are provided only as an example of our expectations. They should not be followed closely because the content of the assignment has changed! For example, they contain a long part on the valuation of the target (DCF and multiples) that is not part of the assignment this year. I will also upload a real pitchbook to give you a feeling for the style.
The knowledge necessary to complete the assignment will be covered in the subject, with the theoretical aspects analysed in class and the technical components (including how to use the excel models and how to access information in FactSet) explored in the valuation exercises.
Specifically:
| Component | Covered in |
| M&A Valuation | Weeks 8 and 9 |
You should start working on the assignment as soon as possible.
7. Submission
You will submit:
- A PDF file with your presentation names A3_XXXXX.pdf
- An excel file with your M&A profitability model A3_XXXXX.xlsx
Where XXXXX is your Student ID. Files with wrong names or wrong format will attract 1-point penalty. The PDF file should not be included into the zip file.
Your Excel file should not contain links to any external spreadsheet. So be careful with your cut and paste.
| ATTENTION To check if your worksheet has links to external sources you can use the Excel tool available in Data Tab >> Queries & Connections Group >> Edit Links button. You can find a more complete explanation at this LINK. |
The file will be submitted electronically using the electronic drobox that can be found in
Canvas. The same place where you have downloaded the assignment file from.
See Canvas for the deadline of this assignment.
8. Marking Guide
| Component | Value | Below Expectations (1 – 4) | Meets Expectations (5 – 7) | Exceeds Expectations (8 – 10) |
| Presentation of the target | 10 | The information presented is insufficient or confusedThe reader is left without a clear understanding of the target company | The information is sufficient and well presentedThe reader is left with a reasonable understanding of the target company | The information is completeEvery major aspect of the company is well presented |
| Industry Outlook | 10 | The information presented is insufficient or confusedThe reader is left without a clear understanding of the value drivers of the industry. | The information is sufficient and well presented.The reader is left with a reasonable understanding of the industry. | The information is completeEvery major aspect of the industry is well presented |
| Baseline Op. Scenario | 10 | The scenario is poorly builtThe assumptions are not well motivated | The assumptions are reasonable and well motivated | The scenario is economically coherentThe justification of the assumptions is well founded and based on multiple objective elements |
| Pessimistic Op. Scenario | 10 | The scenario is poorly builtThe assumptions are not well motivated | The assumptions are reasonable and well motivated | The scenario is economically coherentThe justification of the assumptions is well founded and based on multiple objective elements |
| Baseline Syn. Scenario | 10 | The scenario is poorly builtThe assumptions are not well motivated | The assumptions are reasonable and well motivated | The scenario is economically coherentThe justification of the assumptions is well founded and based on multiple objective elements |
| Pessimistic Syn. Scenario | 10 | The scenario is poorly builtThe assumptions are not well motivated | The assumptions are reasonable and well motivated | The scenario is economically coherentThe justification of the assumptions is well founded and based on multiple objective elements |
[Continues in the next page]
| Component | Value | Below Expectations (1 – 4) | Meets Expectations (5 – 7) | Exceeds Expectations (8 – 10) |
| Deal Structure | 10 | The optimal structure is poorly designedThe consequences for the leverage and liquidity are not properly assessed | The optimal structure is properly designedThe consequences for the leverage and liquidity are properly assessed | The optimal structure is highly optimized and well presentedThe consequences for the leverage and liquidity are assessed from multiple points of view and present a clear picture of the credit risk of the company |
| Profitability analysis | 10 | The analysis is missing or incompleteThere are significant methodological errors | The analysis is complete and methodologically correct | The analysis is very well presentedThe analysis presents a complete picture of the profitability of the deal under a wide range of possible scenarios |
| Presentation: structure and content | 10 | The structure of the presentation is difficult to follow (uninformative titles, lack of chapter dividers, …) | The presentation is well structured | The presentation is informative and easy to followThe presentation presents a coherent narrative structure |
| Presentation: quality | 10 | There are frequent spelling and punctuation errorsThe language is often non correct and does not convey financial concepts in an effective wayThere is not a common graphic style and colour paletteGraphs and tables are badly formatted | There are only minor spelling and punctuation errorsThe language is correct, and the financial terminology properly usedThere is evidence of editing to make the presentation feel unitary | The presentation has a truly professional tone and feelThe language is very effective, and the key ideas presented in a succinct but clear way |
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