Statement of Situation

Berkshire Partners, a private equity firm based in Boston, was invited to bid for Carters, the largest
branded manufacturer of toddler and baby apparel in the United States. The invitation came from
Goldman Sachs (GS), the investment bank who was running the auction. GS was also offering staple-on
financing to expedite the bid. Berkshire decided to place a bid for Carters, and intended to use a mix of
equity and debt financing to conduct the purchase. This paper advises Berkshire on the bid amount, as
well as the appropriate debt and equity ratios to maximize Berkshires rate of return on this investment.

Economic and Industry Analysis

The end of 2000 saw the culmination of a decade of rapid economic expansion. U.S. GDP growth was
4.1% in 2000, down from 4.8% in 1999. Throughout the year, there were signs of an economic slowdown,
manifested in Congress passing a major tax cut, with the hopes of stimulating consumer and business
spending. Moreover, the Federal Reserve cut interest rates 10 times in 2000. This led analysts to believe
that the Fed had sufficient information to foresee an economic slowdown.

Changes in economic perceptions are of high interest to apparel companies like Carters. The apparel
industry is very cost sensitive: fluctuations in the prices of raw materials, cost of energy and
transportation directly impact the bottom line. In slowing economic times, consumers are extremely price
sensitive, meaning manufacturers cannot easily pass down increasing costs to consumers.
Financial Analysis
Looking at Carters competitors, we found that The Childrens Place, Oshkosh BGosh and
Gymboree more closely resemble Carters in terms of asset size, sales volume and EBITDA. Per our
analysis, Enterprise value to EBITDA ratio is the most appropriate to use in order to establish our exit
multiple. We consider managements sales growth projections adequate when taking into account the

current economic environment, as well as strategies undertaken by Carters management to grow the
company and make it more efficient. Based on the DCF projections, the enterprise value gives us a
reasonable assessment of Carters intrinsic value.
Carters has reduced its costs over the last few years and has formed strategic
partnerships with major retailers like Target. Therefore, we anticipate an increase in inventory and
receivables for the next few years, manifested in our projections for changes in NWC.

With our proposed financing structure, we anticipate to generate enough cash flows to pay the senior debt
in full in the first three years of ownership. We then intend to use all available cash flows to pay off the
senior subordinated notes. The company will be able to generate free cash flows beginning in 2005. This
generates a compound annual growth rate (IRR) of 33.41%.

Recommendation

Carters represents an attractive LBO candidate because it is projected to generate increasing cash flows,
it has incredible growth opportunities both in the U.S. and overseas markets and strong assets. Our LBO
analysis shows Carters maximum purchase price at $539 million, financed with 56.9% of debt and 43.1%
of equity. We recommend that Berkshire Partners purchase Carters for that price. The reason being is that
Carters is projected to reach an enterprise value of $1018.5MM in 2006. This creates $479.6MM in
profit for Berkshire Partners if they choose to sell it in 2006. The results would be negatively affected by
a higher cost structure due to movement of some manufacturing operations offshore. We believe our
recommendation will be achieved through an efficient and strong management team leading Carter to
success.