Berkshire Carter S LBO Case Study

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They focus on quality over quantity and tend to have a maller set of deals they think will be successful and devote their resources to conduct in-depth analysis to uncover all necessary information and thorough due diligence for each deal. At times when they feel their team could do with some assistance, they bring in industry’ experts to help with the decision making process. Despite these detailed Steps, the ultimate decision lies with the entire firm. They engaged in leveraged buyouts (LBOs), growth capital, and privatization. In LBOs, they use capital structures to find the best combination of price, leverage and returns.

In order to demonstrate a serious commitment and to achieve a desired rating, they decided in a minimum capital structure of at least 25% equity whereas debt is roughly 4 to 5 times EBITDA depending on market conditions. They also support its management by assisting in setting priorities right for the future of the firm, reviewing the organizational structure to ensure it runs optimally, helping to build the management and leading the integration process in the event of an acquisition. 2. Does Carters fit with the Berkshire investment philosophy? Why is Investcorp selling?

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Yes, Carters does fit with the Berkshire investment philosophy. At this stage, Carters has developed a huge presence and brand in the kids apparel segment with the potential of expanding into other consumer good owing to the brand halo effect and existing distribution channels and Berkshire has extensive experience investing and running businesses in the retail sector. Berkshire could add value to Carters by mutually deciding financial strategies to enhance the companys balance sheet in order to exit Carters at a later date through an IPO if required. Also,

Berkshire can help Carters expand into other areas of consumer products to diversify their portfolio and generate additional revenues. Carters has already shown major potential as a sound financial investment. Investcorp S. A acquired Carters in a leveraged buyout in 1 996 for approximately $208 million. The underlying strategy behind this buyout was to wait patiently, for the budding business to improve and appreciate into a more valuable proposition to sell at a later stage. From 1992 to 2000, the company grew at a rate of 9. 5% compounded with their EBITDA increasing at the rate Of 22.

From the time Investcorp bought. Carters to 2001, the company had significantly improved brand recognition, lowered their cost structure, expanded into the high volume, low margin discount channel route and moved some of their manufacturing to the cheaper markets abroad. In a matter of about 5 years, Investcorp had seen their invest grow multi-fold and felt it was time to cash-in while the company was at it’s peak. 3. How much firm free cash flow will Carters generate in the next five years (2002-2006) based on management estimates? have used the numbers given by the anagement’s projections for 2001-2006 in Exhibit 7A.

The managements forecasts seem to be a bit optimistic in light of Carters historical performance. Although these optimistic forecasts could be justified by qualitative reasoning like established brand name, distribution channels, the potential success of Tyke’s, the potential acquisition of other profitable organizations or entry into other possible consumer goods products, however, solely based on the historical data and assuming all other factors remain the same, the projections are optimistic. The Net Sales are xpected to grow at an average rate of 13% going as high as 15% consistently from 2001 to 2004.

I would agree that Carters could see a high growth in revenue initially; I have my doubts about its sustainability. The average growth rate seen in the historic data is an average of a modest with 14% growth rates seen only in a couple of years. Berkshire needs to understand that Carters has made good progress that may not stagnate. Also, Carter’s is assuming CAGR of 90. 4% for revenues from Tyke’s. Although it may succeed in doing so initially, it may not sustain in the long run. The Gross Profit argins are expected to consistently grow at an average of about 42% every year.

Although I think an initial jump in profit margins may be possible, in line with my expectations about revenues, would expect the gross profit, too, to decline over the years. I assume there will be a rise in S, G & A costs costs initially, as the company progresses, it will be able to be more efficient and reduce these costs overtime. agree with the management’s projections of Capex and would use the same. 5. What should the Berkshire team bid for Carters? Although its not binding, would still use the finance offered by Goldman Sachs given the ease of availability and their involvement with the deal.

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Berkshire Carter S LBO Case Study. (2017, Jul 18). Retrieved from

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