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RADY ADVISORSTM.
OLIVER BINZ | ALLISON NOEL | LAUREN VOLLON | SARAH FELDMAN JANUARY 21, 2015
MEDIACO INVESTMENT OPPORTUNITY
COMPANY OVERVIEW
Publicly-traded with two reporting units, MediaCo and ApparelCo
Market cap of $550M
Publishes periodicals; operates a website and a TV production company
Slow or no organic growth
Develops, sources, markets, and distributes fashion-forward apparel and accessories
Growing, but margins low due to high SG&A costs
ParentCo
MediaCo
ApparelCo
OPERATING PERFORMANCE OF MEDIACO
0%
2%
4%
6%
8%
10%
12%
14%
$0
$100
$200
$300
$400
$500
$600
2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
EB
ITD
A M
AR
GIN
SA
LE
S ($
MIL
LIO
NS
)
Sales EBITDA margin
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
$0
$50
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$300
$350
2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
EB
ITD
A M
AR
GIN
SA
LE
S ($
MIL
LIO
NS
)
Sales EBITDA margin
OPERATING PERFORMANCE OF APPARELCO
INDUSTRY OVERVIEW
Media
• Recent consolidation of content publishers
• Little to no revenue growth for the foreseeable future
• Print and TV performing in line with general markets
Fashion
• Highly cyclical
• Comparable company trading multiples cover a wide range
• Growth expected to be in mid-to-low single digits
WHAT TO DO?
Improve the value of ParentCo to satisfy shareholdersObjective
OpportunityBid on FashionCo for $111M
If bid is rejected, restructure and streamline to drive shareholder value
OPERATING PERFORMANCE OF FASHIONCO
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
$0
$50
$100
$150
$200
$250
2012 2013 2014 2015F 2016F 2017F 2018F 2019F
EB
ITD
A M
AR
GIN
SA
LE
S ($
MIL
LIO
NS
)
Sales EBITDA margin
NON-FINANCIAL CONSIDERATIONS
• Balancing interests of all shareholders and board members
• Protecting brand and company images
• Short-term and long-term stability
VALUATION METHODS
Perpetuity growth method, based on the PV of future cash flows
Captures intrinsic value
Based on comparable transactions between 2012 and 2014
Based on implied EV/EBITDA multiple
Based on comparable firms’ EV/EBITDA multiples
DCF
Precedent
Comparables
Multiple
Appendix
* Made assumptions on the following:• Cost of debt• Market value of equity
• Market risk premium• Risk-free rate
• Beta
MEDIACO (STAND-ALONE) VALUE
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
DCF Precedent Multiple Comparables
Range of valuations ($ millions)Summary• DCF valuation: $324M-$390M• Uses WACC of 6.5-8%• Implied growth rate is slightly negative
• Precedent transactions: purchased company within +/- 1 of MediaCo’s EV/Revenue or EV/EBITDA
• Outliers removed
• Implied EV/EBITDA multiples (5.2x and 6.4x)
• EV/EBITDAs from comparable companies (6.4x-8.4x)
APPARELCO (STAND-ALONE) VALUE
$-
$50
$100
$150
$200
$250
DCF Precedent Multiple Comparables
Range of valuations ($ millions)Summary• DCF valuation: $100M-$130M• Uses WACC of 8.7-10.2%• Implied growth rate is 2%
• Precedent transactions: purchased company within +/1 of ApparelCo’sEV/Revenue or EV/EBITDA
• Outliers removed
• Implied EV/EBITDA multiples (4.2x and 5x)
• EV/EBITDAs from comparable companies (8.7x-12.7x)
FASHIONCO (STAND ALONE) VALUE
$-
$50
$100
$150
$200
$250
DCF Precedent Multiple Comparables
Range of valuations ($ millions)Summary• DCF valuation: $90M-$120M• Uses WACC of 8.5-10%• Implied growth rate is 1-1.5%
• Precedent transactions: purchased company within +/1 of FashionCo’s EV/Revenue or EV/EBITDA
• Outliers removed
• Implied EV/EBITDA multiples (5.2x and 6.3x)
• EV/EBITDAs from comparable companies (8.7x-12.7x)
PARENTCO + FASHIONCO (COMBINED) VALUE
$200
$300
$400
$500
$600
$700
$800
DCF Precedent Multiple Comparables
Range of valuations ($ millions)
Summary• DCF valuation: $540M-$650M• Uses WACC of 7-8.5%• Implied growth rate is ~0%
• Precedent transactions: purchased company within +/1 of ParentCo+FashionCo’sEV/Revenue or EV/EBITDA
• Outliers removed
• EV/EBITDAs from comparable companies range from 4.5x-15x
• EV/EBITDAs from comparable companies range from 7.6x-9.6x
STRATEGIC ALTERNATIVES
Primary options:
1. Bid on FashionCo
2. Sell ApparelCo
3. Make no sales or acquisitions
a. Split MediaCo from ApparelCo
b. Stock buy-back and financial restructuring
c. Manage SG&A
d. Purchase alternative media firm
** Assumptions going forward: ParentCo borrow EBITDA*2 at Risk-free rate + 250bp• Borrowing capacity = $168M• Cost of debt = 4.5%
STRATEGIC ALTERNATIVES
Option 1: Bid on FashionCo for $111M
• Stand-alone value of FashionCo is $90-$120M • Synergies from merging FashionCo with ApparelCo savings of $2M
annually due to SG&A cost reduction• Discount rate of 9.3% (WACC of combined FashionCo and ApparelCo)• Perpetuity valued at $21M (takeover premium)
* Fair Value of buying FashionCo = at least $111M * Walk-away offer: if higher, could make loss
STRATEGIC ALTERNATIVES
Option 1: Bid on FashionCo for $111M (cont’d)
• If bid is accepted LBO• Borrow at 4.5%, maximum of $168M• Expected Free Cash Flows per year from FashionCo = $9M
• If financing everything with debt, we can pay at most $200M ($168M-debt and $32M-equity) to break even
• Want to pay less to enhance shareholder wealth by increasing ROE
STRATEGIC ALTERNATIVES
Option 2: Sell ApparelCo
• Stand-alone value is $145-$155• Currently under-valued in the market though• Also has grow opportunities in the future• Futhermore, selling would upset the Masterson family!
* Recommendation: keep ApparelCo (ParentCo can increase returns to shareholders in other ways)
STRATEGIC ALTERNATIVES
Option 3: Split ApparelCo and MediaCo
• No synergies between firms*• Set up two separate entities– allocate appropriate share volume to each
shareholder in both firms• Shareholders will be able to diversify efficiently according to their
personal risk preferences
* Merton (1999): Companies shouldn’t diversify their operations when there are no synergies. Shareholders can diversify for idiosyncratic risk more efficiently.
STRATEGIC ALTERNATIVES
Option 4: Stock buy-back + financial restructuring
• $168M value with low cost of debt• Tax exemptions/benefits (deferred tax gain interest on the amount)• Value for shareholders stock price + premium and optimization of return on equity
Before• Average FCF MediaCo = $26M• Average FCF ApparelCo = $6M• ROE = $32M/$549M(market cap) = 5.8%
AfterTake on $168M in debt $381M equityAverage FCF = $25M ($32M-4.5%*$168M)ROE = 6.4%
STRATEGIC ALTERNATIVES
Option 5: Look into purchasing synergistic media company
• Focus on firm with• Internet capabilities• Ability to capture new customers that are younger than 45
• Consolidation in sector need to purchase firms to create growth• Ex. Lee Entreprice, McClatchy Co.
• Could generate growth for MediaCo + ParentCo! (needs further research*)
* We at RadyAdvisorsTM would be delighted to look into this for you!
STRATEGIC ALTERNATIVES
Option 6: Manage SG&A
• ApparelCo could reduce SG&A by 2% if they achieved greater scale• As company grows, look for opportunities to decrease SG&A
NEXT STEPS
1. Bid $111M for FashionCo
a. If bid is accepted, split MediaCo from ApparelCo+FashionCo
2. If FashionCo rejects bid
a. Split MediaCo from ApparelCo
b. Stock buy-back and financial restructuring
3. Look into purchasing media firm
4. As company grows, focus on managing costs such as SG&A
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