Carters Notes v2.docx - How does Berkshire Partners create...

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How does Berkshire Partners create value? William Carter Company has an extensive 136-year history producing infant, baby, and children apparel. In recent years, the company has experience robust growth, increasing yearly revenue by 9.5% and, though significant cost cutting, increasing yearly EBITDA by 22.1%. 1 Even with its extensive history and strong financial performance, there is great potential for further growth for Carter’s. Berkshire Partners appreciates the value potential of Carter’s, seeing the company as consumer-products company with the potential for many channels beyond children’s apparel. Utilizing low-cost leverage, Berkshire can support expansion through acquisitions and increased product lines and sales channels. To align management with its mission of value creation, Berkshire can provide attractive incentive structures to meet key objectives, source new management to assist with the expansion, and improve the organizational structure to achieve a unified goal. Berkshire has experience with leverage buyouts for retail companies, having both the ability to raise financing and improve operations over the life of its investment. In addition to a revolver loan, Berkshire can access debt that is currently 4.6 times the last twelve months of EBITDA for a weighted average interest of 9.7%, nearly doubling the total debt of the company and reducing interest expense by approximately 1.8% (see Figure 1). Using more affordable debt and defining a growth strategy, Berkshire can leverage Carter’s to achieve optimal capital structure that will support its expansion of high-growth product lines, increased retail stores, and acquisitions in large and fragmented markets. Figure 1. Berkshire Source of Funds Sources of Funds USD Maturity (Years) Fully Drawn Cost x EBITDA % Senior debt Revolver (not drawn) 60,000 LIBOR + 3.0% 0.9x Term Loan B 125,000 7 LIBOR + 3.75% 1.9x 41.7% Subordinated debt Senior Subordinated Debt 175,000 10 10.88% 2.7x 58.3% Total debt 300,000 4.6x 100.00% LIBOR 4.3% 8.0500% Does Carters fit with the Berkshire investment philosophy? Why is Investcorp selling? Berkshire often invests in low-beta companies with a mission to grow the company and increase overall value. Comparable retail apparel companies to Carter’s are heavily correlated with the market with betas close to 1, as shown in Figure 2. Figure 2. Comparable Retail Apparel Companies to Carter’s 1 Baker and Quinn. Bershire Partners: Bidding for Carter’s. Harvard Business School, August 2011. Page 2.
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The low beta allows Berkshire to leverage the companies without overly amplifying risk, enabling it to use debt for increased growth and still maintain tolerable risk for its equity position. The IPO market is “at a near standstill”, signaling the market may be weak and companies undervalued. 2 The currently low values for the market may not reflect all of the growth potential for Carter in its share price, giving greater returns to leverage buyout now and an exit in an improved market. As shown in Exhibit 8 of the case, comparable companies are currently trading at an average of 13.55 times earnings, and IPO pricing
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