Ducati & Texas Pacific Group †a ”Wild Ride” Leveraged Buyout

Ducati & Texas Pacific crowd A Wild Ride Leveraged Buy give away 1. What is the nature of the opportunity? Could the Ducati defacement be expanded beyond motorcycles? Why or why not? TPG system is to invest in under rankd firms that usually hand been poorly managed. The enthronements be key in privately hold firms that be either unlisted from the stock or that is being delisted from the stock exchange under the LBO process. TPG regards to invest in firms with a healthy basis notwithstanding that be sustain upright about problems that TPG believes that they trickister fix.Does Ducati live up to this? TGP has the opportunity, if the visual sense goes through, to purchase a coercive stake in Ducati Mec sewerico, producer of the best motorcycles in the world. The article describes that Ducati was in a great positioning of becoming for street bikes as what Harley-Davidson was for cruisers. They withstand a recognized crisscross, in spite of limited marketplaceing, associated with gamy feat, i. e. high quality and high technology. Their bikes crushed the competition and won the World Superbike championships for some(prenominal)(prenominal) years in a row 1990, 1991, 1992, 1994 and 1995.Their racing performance indicated on technical brilliance which is save what street bike customers prefer and accordingly they had customers on the tolerate lists to buy their bikes. The core business possible harvest was rented as high when comparing their number of sales to Harley-Davidson sales. In addition, to this the market didnt foresee some(prenominal) new entrants of street bikes which too gain in their favor. The manucircumstanceuring fundamentals were strong with low fixed costs re honorariumable to high levels of outsourcing, 85 %. They offered the customers 15 models of bikes in four families founded on vii various engines.Furthermore, the most expensive part of an engine is the crank cases and cylinders moreover Ducati can keep the se costs low since they set about high levels of calibration of their engines and therefore only necessity dickens crank cases and three cylinders beca drop. every these fixingss make Ducati look like an attractive brand that should gather in a prosperous economy. But they were under great financial pressure and set about severe problems in both manufacturing and financing. They had no money and werent allowed to sweep up every either which ca utilize extreme grips on payments to key suppliers.Therefore their factor was full of unfinished/almost-finished bikes. This affected their sales and extended their customer wait lists but it also affected suppliers and approximately of them went cashboxrupt. Ducati were short on functional capital and the business was so entangled with Cagiva Group, which Ducati was a part of, that the degrees on Ducatis performance was not transparent at all. In the time span from 1993 to 1995 there was only a dependable balance sheet from 199 5. TPG managed to assemble the profit and losses for the other years. completely this together indicates a really poorly handled management.The forecasted EBIT for 1996 was negative and there was an impending chance that Ducati went bankrupt since they couldnt meet there payments. This lack of enhancer has do it hard to find financing. TPG can succeed if they manage to public figure a model that captures their pay clog goal times three in three to five years. They essential to find out what the Ducati should be earning and well-nigh these assets construct an international company. TPG can pay to take over a mismanaged company under financial pressure/ excruciation but that know great effectiveness in their strong brand and manufacturing fundamentals.To make this manoeuvre they need to apply a capable management team that can build up both the brand and the company. They need arrange the financing to be able to recover from the distress and to die making some money. But a s they state in the article they bequeath start out to write at least a thousands of checks on their first day. Ducati brand could and should probably be extended beyond motorcycles thus far though a first step is to limiting the wad, take control over and build up the company. There for it big businessman not be a fair idea, at least not the first thing to start with.As I already pointed out Ducati is in a great position to imitate, for street bikes, what cruisers are for Harley-Davidson. Harley-Davidson has succeeded in creating a life-style brand with as very much as 15% of its sales, with a growth potential, coming from just habiliment and mechanical accessories. Ducati could look at the products Harley-Davidson is selling and how their selling them. They could also compare with a car company, like Ferrari, that has a lot of vesture and accessories that they sell. Ducati has a great potential to extend beyond motorcycles with motorcycle clothing and accessories and me chanical accessories.There are probably a lot of motorcycle stores that would want to sell their products and they could also sell them through their own shops and from online shops. It is just the imagination, costs and the combination of a balanced brand expansion that sets the limits. 2. How does this partake in differ from a typical deal in the US? In terms of deal flow generation, due intentness process, negotiations and context? rent flow generation The deal flow is the ability used by equity firms to reveal attractive potential investment candidates, i. e. the ability to concede deal flow.This flow is generated from a wide range sources, from for instance the experience and net encounter built up by working in circumstantial businesses to the network of senior corporate executives and it is this flow that discover opportunities that otherwise would provoke gone by unnoticed. Now days investment banks generally works as agents that sells the opportunity to invest for a fee paid by the seller in a sale process akin to an auction. To dish out Cagiva through its financial distress the Castiglioni brothers wanted to get a duad loan from DMG so they contacted Razzano but he wasnt interested in crossing them a loan agreement.Instead he saw the potential of an investment and contacted Halpern since they were looking for a joint investment. payable diligence Due diligence is the valuation process undertaken before the parties sign the deal to identify the future of the potential investment but also to estimate the beseeming price for the investment. Equity firms usually creates a model on several hypotheses that captures the payback of the investment. Due diligence is a vital process in investigating the financial health, technology, the market, and the current management.A lot of different sources are used and in connection to this the investing firm usually signs a confidential agreement. The due diligence process generally starts after the parties befuddle gestural a Letter of Intent and paves the path to further negotiations mingled with them. TPG defend signed a Letter of Intent with the Castiglioni brothers and are hard to build a model that captures their payback. The problem for them is to separate the intertwined Ducati from Cagiva to find out what the Ducati should be earning to be able construct an international company some these assets.Negotiation If the sale is conducted through an auction by an investment bank intermediate the due diligence process often manoeuvres to a final exam proposal by the bidders and this is where the negotiation phase starts with chosen bidders. The negotiations then lead to an agreement betwixt the parties. According to the article the negotiations in the US are take one more in a linear path but the negotiations with Cagiva can best be described as a aeronaut path. TPG has been negotiated with Ducati for almost a year. This is probably were the cultural difference is most prom inent.Americans chose to cover every issue separately step by step and after every talk ofion they want to include this in the contract between the parties. Italians see the whole picture in every discussion so when the Americans have decided something new in the next step of the precoess the Italians want to go back to the previous steps and re discuss them. Furthermore, Italians dont like do business if they cant impudence the other part in America you dont have to feel the trust since you include every little detail in the arrangement otherwise you can get sued. perhaps that is why the Castiglioni brothers might not trust TPG if they are not willinging to re discuss everything again. Maybe that is why they are trying to shop the deal to others veritable(a) though they have signed a Letter of Intent with TPG. This would never happen in America. But they have not participated in any meetings and in America it would probably not be hard to sign a contract under an LBO situation . TPG believed that their behavior replicated an act of trying to back out of the deal. Context LBOs in U. S. eems much more organised than in Italy but at the akin time this might make it harder to find interesting targets that have the same growth potential or at least the competition of acquire them might be harder. The reading of the high-yield markets in Europe compared to US differ since the markets in Europe was not as developed as the US market. This made it harder for TPG to accomplish the same level of leverage as in the US. Halpern compare the debt-to-equity ratio as 21 in Italy compared to 31 in the U. S.On the other hand TGP were looking for companies that had grown hastily but sedate was arranged as subatomic company and in Italy companies aspired to be small because of the fact that they then paid less tax. In ready to pay even less tax it wasnt uncommon, according to Halpern, to find relatively small companies with as much as 50 subsidiaries. This is usually n ot the case in the U. S. To overcome the aim to stay small and to not go public Tremonti Law allowed companies that went public in 1996 a two years tax relief. 3. What is the value of Ducati at the time of the deal?How much should TPG be willing to pay for 51 percent of the equity? transport assume that the target retort is 35 percent (annualized). Observe that you are required to value the firm. For the valuation of Ducati, observe that since this is a leveraged buyout, the debt-to-equity ratio will change drastically, and you need to handle this in the appraisal model you use. Furthermore, you need to think about the inputs you shall use in the valuation. How do you determine return on assets? Which find issue rate of interest should be used? Which risk allowance should be used?Etc. To value Ducati we can use the APV-model. APV treats the firm as it is all equity financed. A fitted unleveraged beta for the estimation is a beta in the same perseverance that is all equity fin anced and the article states that Harley-Davidson dont have any long-term debt which means that their beta is unleveraged. I will therefore use their beta of 1. 09. We will use CAPM to discount the cash flows and a rationale of thumb to know which rate to use is to match the risk free rate with the country that we are going to invest in. The 10-year giving medication confederation is 6. 4% in both the US and Italy so this wouldnt have caused any trouble here. Since the 10-year bond is 6. 74% in both countries we will not add any extra country risk for the investment. The risk premium that we are going to use is 7. 5%. TABEL 119961997199819992000200120022003 EBIT-5. 4+58. 2+79. 4+96. 3+111+123. 3+146 - revenuees(53. 5%)0-31. 1-42. 5-51. 5-59. 4-6. 6-72. 3-78. 1 +Depreciation+6+7. 3+9. 1+11. 1+13. 5+15. 7+18. 1+20. 7 +Amortization+24. 7+24. 7+24. 7+28. 5+28. 5+28. 5+28. 5+28. 5 -Capex-12. 9-15. 5-20-24-22-24-24-25 Change in Working metropolis (see TABEL 2)-0. 9-1. -32. 9-17. 3-2. 9-11. 2-10. 5-10. 3 Total cash flow 13. 342. 317. 843. 168. 766. 37580. 8 +1229. 8 TABEL 199519961997199819992000200120022003 Cash9. 411. 322. 689. 837. 279. 987. 2132. 2 6%6%6%6%6%6%6% action cash required 9. 411. 322. 628. 532. 636. 2138. 841. 344 Accounting receivables 8084. 583. 2124. 5139. 9141. 6152161. 4170. 6 Inventory5537. 249. 265. 461. 768. 172. 676. 380. 2 Other3. 32. 22. 73. 21516. 81819. 120. 2 reliable assets147. 7135. 2157. 7221. 6249. 2262. 7281. 4298. 1315 Accounting payable4030. 350. 478. 794. 4104. 1110. 9116. 6122. 6 Other11. 39. 410. 13. 27. 88. 79. 49. 910. 5 Current Liabilities 51. 339. 760. 991. 9102. 2112. 8130. 3126. 5133. 1 Working Capital 96. 495. 596. 8129. 7147149. 9161. 1171. 6181. 9 Change in Working Capital 0. 9 1. 3 32. 9 17. 3 2. 9 11. 2 10. 5 10. 3 CAPM Re= Rf+? (Rm-Rf) = 0. 0674 + 1. 09 x 7. 5 = 14. 92% Terminal value by with a multiple TPG is willing to pay 400-500 billion lire for 100% of Ducati. try value 280+140=420-40=380 Earnings multip le (Enterprise value)/(EBITA for 1995)=380/60. 4=6. 3 (how legion(predicate) times this years profit is TPG willing to pay for Ducati)We use the multiple on EBITA for 2003 ? 195. 2 x 6. 3 = 1229. 8 (this have to be discounted to present value we will therefore add it to 2003) look on of Ducati if it was all equity financed 13/1. 1492 + 42. 3/1. 14922 + 17. 8/1. 14923 + 43. 1/1. 14924 + 68. 7/1. 14925 + 66. 3/1. 14926 + 75/1. 14927 + 1310. 6/1. 14928=602. 3 billion lire But Ducati has liabilities so we need to value that as well. TABEL 319961997199819992000200120022003 Net interest expenses1131. 128. 928. 123. 117. 912. 36. 3 Tax shields(53. 5%) 5. 916. 615. 51512. 49. 66. 6The tax shields illustrate how much less taxes Ducati postulate to pay because of the interest expenses and that is what we need to discount in order to value Ducati. 5. 9/1. 1125 + 16. 6/1. 11252 + 15. 5/1. 11253 + 15/1. 11254 + 12. 4/1. 11255 + 9. 6/1. 11256 + 6. 6/1. 11257 = 56. 7 billion lire look on of Du cati 602. 3+56. 7=659 billion lire Value of equity= 659-280=379 billion 4. Should Halpern consider applying a country risk premium in determining the appropriate discount rate for Ducati? They should not consider applying a country risk premium since the Italian the long government bond of Italy and the US are the same, i.. . 6. 74%. 5. Should Halpern walk away from this deal? Why or why not? Ducati has a lot of problems that I already covered under the first question. But as a summery are under great financial pressure and have faced severe problems in both manufacturing and financing. The reporting of their financial performance is not transparent at all instead it is entangled with the Cagiva Group. This has made it hard for TPG to hunt financing to the LBO. It is perhaps not a impress but they have a problem with their working capital and the payment delays leave them with a lot of unfinished bikes.This has lead to a reduction of their sales and enlarged wait lists. Then we ha ve a sternly manage management by the Castiglioni brothers who continues to shop around for other deals even though they signed the Letter of Intent. There is also the risk of insolvency of Ducati and unsuccessful person of Cagiva which have made TPG worried about the Italian legacy. A bankruptcy of Cagiva after a closed deal could lead to a delay of the deal for up to four years and this would be cost them a lot of money. The deal also has a lot of benefits.Ducati is the world preeminent manufacturer of motorcycles and if managed well they could probably be profitable very soon. They already believe that this want be a problem with Minoli as CEO. The brand is well-known and easy for investors to understand. This opens up the opportunity for IPO which could in fact obtain higher sales compared to trading. TPG has worked with the deal for one year so they have really had time have to plan for the changes in the Ducati. 6. If TPG pursues the deal and purchases a stake in Ducati, w hat are the critical steps that TPG inevitably to take in order to make the deal successful? beguile be specific in your answer First of all they need to get the Castiglioni brothers to stop shopping around for other deals. They have signed the deal through the Letter of Intent and it is the brothers and Cagiva responsibility to follow the contract. Maybe easier said than done be the negotiations must continue in order to get a deal. TPG also need to finish their due diligence model so to that they can identify the future of the potential investment but also to estimate the proper price for the investment. It is hard to close a deal otherwise.The due diligence is also important in investigating the financial health, technology, the market, and the current management. If they sign the deal TPG can expect to take over a mismanaged company under financial distress that has great potential through its strong brand and manufacturing fundamentals. To make this work they need to use a cap able management team that can build up both the brand and the company. They also need to start up and arrange the NewCO establishment, the senior debt and write at least thousands of checks on their first day.