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Strictly Private and Confidential

Case Study: LBO


Presentation to Sponsors

Team Seven
Heather Jiang, Bryan Koch, Jake Mattison, Austin Pritchett, Steve Tabor

Williams-Sonoma Overview
Financial Highlights, Timeline and LBO Candidacy

Deal Overview
Why Go After Williams-Sonoma
Our proposal is to LBO WSM and immediately sell the
Williams-Sonoma brand in order to focus on the faster growing
brands.
The majority (54%) of WSM revenue is generated by West Elm
and Pottery Barn which are better positioned to take advantage
of the growing housing and consumer discretionary markets
Williams-Sonoma Branded stores are only growing 0.01% while
the other brands are growing at 8%
Pottery Barn and West Elm are able to quickly identify and
capitalize on trends as they design 90% of their own products

Historical Performance Stock Performance


WSM is converging with Consumer Discretionary Index
40%
30%
20%
10%
0%
-10%

Over 80% of furniture is made-to-order thus reducing the need


for costly inventory
Williams-Sonoma Inc. (NYSE:WSM) - Share Pricing

Pottery Barn and West Elm have been able to leverage the
showrooming approach to retail were they utilize small retail
operations to drive significant online sales
WSM was trading at a premium to the consumer discretionary
index over the last year but recently began to converge
The Williams-Sonoma brand is tied closely to the luxury
products market as people tend to be able to afford the luxury
items sold in those stores at times when the luxury market at as
a whole is improving
The West Elm and Pottery Barn brands are more closely
correlated with consumer discretionary spending
The luxury and consumer discretionary markets were growing
at similar rates for the last 2 years but recently the consumer
discretionary market has started to take off

S&P 500 Sector Indices - Consumer Discretionary Sector Index (^SP500-25) - Index Value
S&P 500 Index (^SPX) - Index Value

Consumer Discretionary Index vs Luxury Index


30%
20%
10%
0%
-10%

S&P 500 Apparel, Accessories & Luxury Goods (Sub Ind) Index
S&P 500 Sector Indices - Consumer Discretionary Sector Index

Source: WSM 2014 Investor Presentation and Capital IQ

LBO Timeline and Strategy


Strong margins and Low Leverage

WSM currently trades at 9.7x LTM EBITDA


Share price has fallen 5% since January 26th compared to a 3% return on the S&P500.
Shares influenced by negative revenue guidance per managements conference call
EBITDAR Margins remain healthy at 14% and are above close peers
Growth remains strong with new store openings planned: 3 year revenue CAGR of 8.1%
Rebounding housing market acts as a strong tailwind

In 1956 Chuck Williams, turned a


passion for cooking and eating with
friends and opened a store in
Sonoma, California, to sell the
French cookware
High-quality products for the
kitchen and home

Firm remains under levered at 0.0x LTM Debt/EBITDA However: $1.8 billion in pro-forma
capitalized debt if leases are treated as debt-like

243 Retail Locations

Given recent stagnation in WSMs stock, a premium of 10-15% could result in a deal. Equates
to at least $87.70/share or an equity check of at least $3.1 billion

3.8% FY14 Revenue Growth

6,600 sqf per store

Transaction would be completed at 13.5x EBITDAR, similar retail transactions recently


completed in the 8.0x 9.0x range
Resulting leverage places WSM at 7.8x Debt/EBITDAR for 2015, dropping to 6.9x by 2017
70.5% of total senior debt paid down by year 6 and 83.3% paid down by year 7

A key component of this deal involves selling the WSM core kitchen retail brand, preliminary
work can be done before LBO closes to find buyers

LBO Timeline

Begin IPO / Exit Process


Inc. CAPEX Focus on West Elm and Rev. Growth

Year

2015

2016

2017

WSM Kitchen Retail Sale


May 2015

October 2015

4 Source: JPMorgan, Bloomberg, Capital IQ

CAPEX cut Management Focuses on Operations / Cost cutting

2018

2019

Financial Highlights
Historical Performance

Highlights

$mm

Williams-Sonoma (WSM), is a large household goods and


furniture firm in the U.S. with revenue CAGR over last 3 years at
8.1%, above industry average at 7.2%
Growing brand equity abroad via entering new markets such as
the Philippines and Mexico

4,388
4,043
3,721

3,504

Strong and stable operating results (EBITDAR CAGR of 12.4%


over the last five years), with steady Capex at 5% of Sales over
last 3 years
The majority of WSMs property is leased, limiting the
companys ability to convert EBITDAR to free cash flow; but
rent expense has remained stable over last 3 years at 4.8% of
sales

310
2010

2011

2012

Revenue

287

191

171

Gross Profit

880

816

754

708

656

1,801

1,704

1,592

1,460

1,374

Diversified revenue streams across strong brands and multiple


channels positioning WSM to capture an significant share
within the home furnishings space

FY2014 Revenue Contribution in Percentage

4,699

246

2013
EBITDAR

2014
FCFF

FY2014 Performance Compared to Peers


$mm

11,881
Pbteen; 6% Other; 3%
Pottery Barn Kids; 13%
Pottery Barn; 43%
West Elm; 14%

Retial ; 54%

E-Commerce; 46%

4,699

4,620
1,793

957

1,801

Williams-Sonoma; 21%

BBBY

Revenue by Brands
5

Revenue by Channels

Source: Capital IQ, Morgan Stanley Research Report, UBS Research Report

1,867

WSM

Revenue

1,866
691 208
91

657 309

750

182 75

Restoration Hardware Pier 1 Imports

Gross Profit

EBITDA

Net Profit

WSM as an LBO Candidate


Historical Revenue by Brands

Highlights

$mm

Performance differs by brand; revenue CAGR over last 3 years


for Pottery Barn, West Elm, Pottery Barn Kids, PbTeen and
Williams-Sonoma are 8.1%, 25.8%, 6.2%, 7.1% and 0.01%,
respectively
There are opportunities for operational enhancement, including
sale of the non performing Williams-Sonoma flagship stores,
better working capital management and CapEx reductions
Minimum debt and interest expense (Adj. Debt/EBITDAR of
0.26x over last 3 years), providing space for leverage
Viable strategic buyers for the company or some of its brands
Meaningful cost savings by reducing expenditures on organic
cottons and socially responsible sourced wood

$mm

3.50x

350.0
300.0

2.7x

2.5x

2.2x

2.2x

2.9x
2.1x

200.0

183.4

2.7x

2.6x

2.1x

2.0x

210.4

222.9

197.5

192.8

625

336

430

531

669

994

981

978

995

1,601

1,753

1,911

2,022

FY2011

FY2012

FY2013

FY2014

Pottery Barn Kids

West Elm

Williams-Sonoma

3.00x

Pottery Barn

(2)

$mm

1,276
1,160
1,106

2.50x

657

714 742

587 598 620


445

523 536

1.00x

100.0

0.50x

50.0
FY2010

FY2011

FY2012

FY2013

Historical EBITDA
6

522

1.50x

150.0

0.0

261

598

2.00x

Adj. Debt/EBITDAR

250.0

246

558

Sales per Square Foot by Brands

500.0
400.0

220

Pbteen

Historical Leverage (1)


Adj. Debt/(EBITDAR - CapEx)
450.0

212

FY2014

West Elm

Pottery Barn

Williams-Sonoma Pottery Barn Kids

0.00x

FY2012

Source: Capital IQ, Wall Street Research


1 Adjusted debt / EBITDAR is calculated as a sum of adjusted rent and total debt capacity divided by LTM EBITDAR and is a relevant
leverage ratio for the retail industry
2 Calculated based on 2014 Form 10-K

FY2013

FY2014

Market Overview
High Yield Bond and Consumer

Overview of Consumer Market


Highlights
Consumer confidence has been trending upward over the last
two quarters of 2014

Consumer Confidence
150
120

With consumer confidence rising spending on household


furniture and kitchen upgrades will increase
New home sales have been climbing consistently since the
crash and will continue to do so in 2015. Expect strong furniture
sales to continue as well

90
60
30

New home permits have been climbing throughout the end of


2014 into the beginning of 2015 which means new homes are
on the way and new furniture will continue to be needed

New Home Sales


1500
1200
900
600
300
0
8

Source: Bloomberg

Homebuilders
5000
4000
3000
2000
1000
0

New Home Permit / Beginning Construction

Overview of HY Bond Market


Leaders in HY Bond Issuances 2014

Highlights
High yield bond flow has been relatively stable throughout the
first quarter and a half of 2015, signifying a rather positive
outlook from the market. (Below)
Many of the largest banks have been leading the market in the
issuance of HY Bonds. (Right)
There is a money in the market that will be willing to fund an
LBO of Williams-Sonoma.

HY Bond Issuance Per Quarter Last Two Years


$ Bn
200,000

300

$183,141.2

160,000
120,000

250

$143,741.1
$112,916.1

$111,890.7

$125,225.2

200

$110,313.4
$91,625.5

150

80,000
$45,797.1
40,000
0

50
2Q13

3Q13

4Q13

1Q14
Amount

100

Source: Thomson One, Bloomberg

2Q14

$101,852.8
3Q14
# Issuances

4Q14

1Q15

2Q15

LBO Model
Assumptions, Comps and Return Analysis

10

Summary of Assumptions

Revenue growth slows down in 2015 2016 due to fewer store openings
SG&A expense improves due to managements focus on operating with few employees and outsourcing some manufacturing operations
Capex is cut immediately post-LBO to 1% of sales in order to meet debt payments, however, Capex can be increased by 2018 in reparation for an exit
via an IPO or sale to strategic
This implies that new store openings will temporarily cease or meaningfully slow down
Inventories days outstanding is improved as management shifts focus from opening new stores to improving operational efficiency, potential
efficiencies include consolidating the supply chain from the current 50 countries to fewer than 20
WSM is the 22nd largest importer of shipping containers in the U.S.

11

Sources and Uses


Economics of a leveraged buyout hinge on the amount of
rent adjusted leverage that Williams-Sonoma could absorb
in todays markets

Average Leverage of Large LBOs

OCC guidance on leveraged lending standards suggests


that leverage not exceed 6.0x and that at least 50 percent
of total debt to be repaid by the tenor year of the raised
debt

6.0x

Due to cost synergies and optimistic forecasts, many


recent transactions have garnered greater than 6.0x
leverage in some case exceeding 8.0x on a pro-forma
basis

3.0x

Despite Williams-Sonoma's strong cash flow, the


companys significant amount of operating leases limits its
ability to raise significant funds requiring a 40 percent
equity check from a sponsor

0.0x

12

7.0x

5.0x
4.0x

2.0x
1.0x
2004

2005

2006

2007

2008

Other Debt

2009

2010

2011

First-Lien Debt

2012

2013

2014

Return Analysis
Summary Financial Ratios (1)
PF 2015
2016

Economics of a leveraged buyout hinge on the amount of rent


adjusted leverage that Williams-Sonoma could absorb in
todays markets
OCC guidance on leveraged lending standards suggests that
leverage not exceed 6.0x and that at least 50 percent of total
debt to be repaid by the tenor year of the raised debt
Due to cost synergies and optimistic forecasts, many recent
transactions have garnered greater than 6.0x leverage in
some case exceeding 8.0x on a pro-forma basis
Given the aggressive debt pay down and the sale of the
Williams-Sonoma kitchen division, leverage ratios should not
raise an issue amongst regulators

EBITDAR

2017

$599.6

$564.6

$601.3

EBITDAR/Cash Interest
EBITDAR-CapEx/Cash Interest

1.8x
1.2x

2.2x
2.1x

2.5x
2.3x

Senior Debt/EBITDAR

2.4x

2.2x

1.7x

7.9x
46.2%

8.0x
48.6%

6.9x
51.9%

Total Debt/EBITDAR
Equity as % of Total Capitalization

- 83% Senior Debt paid down by year 7


- Debt / EBITDAR never in excess of 8.0x
Despite Williams-Sonoma's strong cash flow, the companys
significant amount of operating leases limits its ability to raise
significant funds requiring a 36 percent equity check from a
sponsor
Williams-Sonoma
Kitchen Division
Williams-Sonoma Division Revenue
Implies EV/Sales Multiple
Sales Proceeds

Pro Forma
2014
$944.7
2.0x

2015
$956

Cumulative Senior Debt Paydown

Year 6

Year 7

70.5%

83.3%

Returns Summary to Equity Holders(1)


EBITDAR
Exit Multiple:
Projected
Fiscal Year
2016
2017
2018
2019
12.5x
$967
$979
$991
$1,003
13.5x
14.5x

4 Year
5 Year
2020
2021
15.4%
16.6%
$1,015
$1,027
19.0%
19.3%
22.3%

6 Year
17.4%
19.6%

21.8%

21.5%

PF 2015

2016

TV/Sales

1.72x

2.03x

TV/EBITDAR

13.5x

14.3x

$1,889.3
Multiple Analysis(1)

Transaction Value
After
tax Amount
( tax = 20%)
$1,511.4
13 1 Adjusted
debt / EBITDAR
is calculated as a sum
of adjusted rent and total debt capacity divided by LTM EBITDAR
$8,074.0

Comparable Company Analysis


Highlights

Selected Companies

Our comparable companies were chosen primarily on the basis


of similar business models, product mix, and revenue drivers
EBITDA margins of our comparable companies were also very
similar, with a very narrow range (9.6% to 14.4%). WSM
EBITDA margin came in near the high end of the range at
14.0%, only trailing Bed Bath and Beyonds 14.4%
While it proved difficult to find comparable companies of similar
size, we were able to find multiple domestically focused
companies with similar business models and product mix
We chose to exclude Home Depot and Lowes from our comp
set due to their size. We also chose to exclude pure play
mattress retailers due to their narrow focus

Relative Weightings Assigned

Relative Valuation

We gave the highest weight (40%) to Restoration Hardware (RH)


RH has the most similar business model, is closest in size to WSM,
and also has similar margins (RH 12.7% EBITDAR margin)

Based on the forward EV/EBITDAR ratios of comparable


companies we value WSM at $79.12/share, slightly higher
than the recent closing price of $76.91 (4/24/15)

Pier 1 (PIR) and Bed Bath & Beyond (BBBY) also received higher
weights (20% each), as they both provide a diverse mix of products
in the home furnishing segment

If we valued WSM strictly based on its closest comp (RH),


WSM would be valued at $110.73/share

Ethan Allen and Havertys received the lowest weights (10% each)
as they are more narrowly focused in the furniture segment

Based on relative valuation, we fell that WSM is


underpriced relative to comparable companies, making
them an even stronger candidate for a leveraged buyout

14

-See Appendix for detailed comparable company metrics and summary statistics

Appendix

15

Appendix: Comparable Companies


Comparable Company Detailed Metrics

Total Revenue
(NTM)

WSM

RH

Relative Valuation
PIR

BBBY

$4,989.7 $2,162.9 $1,948.4 $12,273.


1
698.5
273.7
189.3
1,763.5

EBITDAR (NTM)
EBITDAR Margin
(NTM)
14.0% 12.7%
9.7%
Net Income (NTM)
316.9
121.3
76.6
Net Debt
-221.0
225.1
106.7
Shareholders'
Equity
1,224.7 702.9
337.2
S/O
91.6
39.8
90.0
76.9
91.8
13.2
Current Share
Price
Equity Value
7,048
3,666
1,196
6,827
3,891
1,303
Enterprise Value
EV/EBITDAR
9.8x
14.2x
6.9x
Comparable Company
Summary
Statistics
Price/Earnings
22.2x
30.2x
15.6x

Relative weights
assigned
Total Revenue (NTM)
EBITDAR (NTM)
EBITDAR Margin
(NTM)
Net Income (NTM)
Net Debt
Shareholders' Equity
S/O
Current Share Price
Equity Value
Enterprise Value
16
EV/EBITDAR
Price/Earnings

High

Low

HVT
$815.2

93.9

78.1

14.4%
978.11
514.40

11.9%
47.40
13.00

9.6%
30.5
-23.7

2,743.2
185.6
72.5

376.1
28.9
25.3

292.0
22.6
22.5

13,462
13,976
7.9x
13.8x

733
511
746
487
7.9x
6.2x
15.5x
16.7x
Weighte
d
Mean Median average WSM

40%
20%
20%
$12,273
$786 $3,597 $1,948
1,764
78
480
189
14.4%
978
514
2,743
186
91.89
13,462
13,976
14.2x
30.2x

ETH
$786.2

9.6% 11.7%
31
251
(24)
167
292
890
23
73
13.29
45.12
511
3,914
487
4,081
6.2x
8.6x
13.8x
18.4x

11.9%
77
107
376
40
25.34
1,196
1,303
7.9x
15.6x

10%
10%
$3,870 $4,989.7
517 698.5
12.0%
267
213
964
76
58.71
4,522
4,735
10.1x
21.2x

14.0%
316.9
-221.0
1,224.7
91.642
76.91
7,048
6,827.2
9.8x
22.2x

WSM Valuation EV/EBITDAR


Implied
Share
Price
$49.93
$79.12

EV/
Equity

EBITDAR
EV
Value
Min
6.2x
$4,355 $4,576
Mean
10.1x
$7,030 $7,251
$10,14
Max
14.2x
$9,927
8 $110.73

Appendix: Potential Buyers


Highlights

Potential Financial Backers for LBO

Due to the large amount of equity required to perform a


leveraged buyout of WSM, our potential buyers are limited to
the largest private equity firms, although we see the potential
for smaller firms to co-invest in the deal
Our selected potential buyers all have a history of making large
investments in the domestic retail sector, including multiple
leveraged buyouts
Due to the unique nature of our proposed transaction, we feel
that there is potential to have co-investors in the LBO
transaction, followed by the sale of the Williams-Sonoma
segment to a strategic buyer

Potential Williams-Sonoma Strategic Buyers


We identified multiple home appliance manufacturers and
retailers, who we expect could benefit from obtaining the
Williams-Sonoma cookware/light appliance segment, gaining
the ability to cross-sell amongst different brands
Electrolux Group focused on expanding through acquisitions,
acquisition of GE appliances for $3.3 billion expected to close
later this year, strong balance sheet with over $8bn in cash
Whirlpool Corporation already owns KitchenAid, investment
grade credit rating (Fitch/S&P - BBB, Moodys Baa2)
17

2nd largest specialty retailer


after WS

Subsidiary of Otto GMBH

Appendix: WSM Ownership Profile


Ownership Summary Common Stock Held

Detailed Institutional Ownership


Traditional Investment
Managers

Institutions

Hedge Fund
Managers

8% 4%

Government Pension
Sponsors

Individuals/Insiders

88%

Banks/Investment
Banks

Public and Other

8% 2% 1%
3%

1%

85%

Family Offices/Trusts
Other

Notable Insiders

Ownership Commentary

James A McMahan Former Director Emeritus


6,119,466 shares (6.7% CSO)

Insiders control a relatively small amount of total shares


outstanding (<8%)

We expect that most institutional owners (88.7%) would


readily accept a modest premium to WSMs current stock price
given the recent run up in price

Patrick J. Connolly Chief Strategy & Business


493,136 shares (0.5% CSO)

Laura J. Alber Chief Executive Officer


350,189 shares (0.4% CSO)
18

Williams-Sonoma lacks any significant activist investor, we


believe that once a takeover offer is made, activists will enter
into the stock as the LBO story unfolds

Appendix: Model

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Appendix: Model

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Appendix: Model

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Appendix: Model

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Appendix: Model

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Appendix: Model

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Appendix: Model

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