Corporate Restructuring

and
Business Valuation

Mercury
Athletic
Footwear

Group 1
17P109 Shristi Gupta
17P117 Vineet Kabra
17P123 Abhiroop Gupta
17P184 Aman Garg
17P231 Tushar Pansari
Case Background

Active Gear a privately held footwear company was

contemplating an acquisition opportunity in March 2007

West Coast
Case Background

Mercury Athletic Footwear Active Gear Inc. Background

• 2003: Acquired by West Coast Fashions (WCF) • 1965: Founded and produced high-quality specialty
• Unsuccessful extension into branded line of apparel shoes
• Distribution to department stores and large discount • 1970: Move into casual footwear
retailers • Distribution of casual footwear via wholesalers
• 4 major product line: Men’s and Women’s Athletic and independent distributors
and Casual footwear • Sale of athletic footwear through independent
• 2006: Revenue - $431.1 million sales representative
EBITDA - $51.8 million • 4 major product line: Men’s and Women’s Athletic
• WCF looking to sell Mercury Athletic and Casual footwear
• 2006: Revenue - $470.3 million
EBITDA - $68.7 million
• Contemplating potential acquisition

Sources of value from Acquisition

Manufacturing and Distribution Growth Potential

Synergies
Industry Overview – Athletic and Casual Footwear

• Mature Competitive industry Industry Segments

o Low Growth Athletic Segment Casual Segment
o Stable Profit Margins

• Short Production Life Cycle

o Sometimes lasting only 1 season

Basis for competition Basis for competition

• Individual firms volatile vied with each
other to anticipate and exploit trends o Brand image o Style
o So firm performance could be volatile o Specialized o Price
engineering for o General Quality
performance
• Mostly sold through non company-owned o Price
channels
o Departmental stores, independent speciality
retailers, sporting goods stores, boutiques,
wholesalers • Most North American and European
companies used independent contract
• Critical Success Factors manufacturers located in China
o Active inventory management o Little success with e-commerce
o Production lead times
WACC Calculation

Assumptions Exhibit 3 - Selected Data on Public Footwear Companies ( non ratio values in $'000)
Weighted Equity Beta
Wd 20% Equity MV avg of MV Net Debt D/E Beta Asset
We 80% $ $
D&B Shoe 4,20,098 0.0102 1,25,442 29.90% 2.68 2.27
D/E 25.00% Marina $ $
Unlevered Beta 1.37 Wilderness 12,05,795 0.0293 (91,559) -7.60% 1.94 2.03
General Shoe $ $
Levered Beta 1.57 Corp 5,33,463 0.0130 1,71,835 32.20% 1.92 1.61
Market Risk Kinseley Couler $ $
Premium 6% Products 1,65,560 0.0040 82,236 49.70% 1.12 0.86
Risk Free Rate 4.93% $ $
Victory Athletic 3,53,03,250 0.8588 76,53,207 21.70% 0.97 0.86
Cost of debt 6% Surfside $ $
corportate tax Footwear 5,70,684 0.0139 1,95,540 34.30% 2.13 1.77
rate 40% $ $
Cost of equity 14.37% Alpine Company 10,56,033 0.0257 3,00,550 28.50% 1.27 1.08
Heartland
WACC 12.22% Outdoor $ $
Footwear 14,54,875 0.0354 (97,018) -6.70% 1.01 1.05
Templeton $ $
Athletic 3,97,709 0.0097 1,69,579 42.60% 0.98 0.78
Average 1.37
Working Capital Investment Calculation with base assumptions
Projection of Selected Balance Sheet Accounts-2007-2011 (in $'000)
Assets 2007 2008 2009 2010 2011
Cash Used in Operations $ 4,161 $ 4,195 $ 4,566 $ 4,894 $ 5,130
Accounts Receivable $ 47,888 $ 48,857 $ 53,164 $ 56,978 $ 59,715
Inventory $ 83,770 $ 85,465 $ 92,999 $ 99,672 $ 1,04,460
Prepaid Expense $ 14,474 $ 14,767 $ 16,069 $ 17,222 $ 18,049
Property Plant Equipment $ 35,015 $ 37,460 $ 40,120 $ 42,972 $ 45,961
Trademarks and Other Intangibles $ 43,853 $ 43,853 $ 43,853 $ 43,853 $ 43,853
Goodwill $ 43,051 $ 43,051 $ 43,051 $ 43,051 $ 43,051
other Assets $ 11,162 $ 11,162 $ 11,162 $ 11,162 $ 11,162
Liabilities
Accounts Payable $ 18,830 $ 18,985 $ 20,664 $ 22,149 $ 23,214
Accrued Expenses $ 22,778 $ 22,966 $ 24,996 $ 26,792 $ 28,081
Deferred Taxes $ 11,654 $ 11,654 $ 11,654 $ 11,654 $ 11,654
Pension Obligations $ 9,080 $ 9,080 $ 9,080 $ 9,080 $ 9,080

Net working capital $ 1,08,685 $ 1,11,333 $ 1,21,138 $ 1,29,825 $ 1,36,059

Change in working capital $ 4,569 $ 2,648 $ 9,805 $ 8,687 $ 6,234
Enterprise Value Calculation

Assumptions

corporate tax rate 40%

WACC 9.86%

Long term growth 3%

Enterprise Value Calculation
Mercury Athletic Footwear: Valuation based on base case projections (in $'000)
2005 2006 2007 2008 2009 2010 2011
$ $ $ $ $ $ $
Revenue 358,780 431,121 479,328 489,028 532,136 570,319 597,717
$ $ $ $ $
Less Operating Expenses 423,836 427,334 465,110 498,535 522,522
$ $ $ $ $
Less Corporate Overhead 8,487 8,659 9,422 10,098 10,583
$ $ $ $ $ $ $
EBIT 31,066 42,299 47,005 53,035 57,604 61,686 64,612
$ $ $ $ $ $ $
EBIT(1-t) 18,640 25,379 28,203 31,821 34,562 37,012 38,767
$ $ $ $ $ $ $
Depreciation 8,001 9,506 9,587 9,781 10,643 11,406 11,954
Less Working Capital $ $ $ $ $ $ $
Investment 31,960 (4,645) 4,569 2,648 9,805 8,687 6,234
$ $ $ $ $ $
Less Capital Expenditures 10,790 11,983 12,226 13,303 14,258 14,943
$ $ $ $ $ $
FCFF 28,740 21,238 26,728 22,097 25,473 29,544
$
Terminal Value 443,540
$ $ $ $ $
Net FCFF 21,238 26,728 22,097 25,473 473,084
$
Enterprise Value 399,982.35
Thank You!