Financial Management ( Please see the attachment for How and what to write on this assignment paper- Professor's Rubric).
Responses to the following should be incorporated in the case study write-up (the following also requires a fairly fulsome valuation analysis, so the appendices are likely to be more extensive than the previous cases):
· Assess Dollarama's attractiveness as an LBO candidate.
· What is Bain's strategy for Dollarama?
· What price should Bain be willing to pay (assuming a competitive process) and on what basis have you made this determination? (Hint: analyze the comparable company valuations and build an LBO model)
· What are the key drivers of value in your model (i.e., key sensitivities: sales growth, EBITDA margin, capex, exit multiple, etc.)?
Case write-ups should conform to the following guidelines, unless otherwise noted:
Cover Page:Case name, date, and team members (if a group case)
Body:Maximum of 3 pages
Exhibits:Excel exhibits should be included as appendices
Format:pdf.
Margins:Normal
Spacing:Single-spaced
Font Size:12pt
How the Financial assignment should be prepared (i.e., Rubric) as follows: Microsoft Word - 9b12N002.doc S w W12782 BAIN CAPITAL AND DOLLARAMA1 Amanda Chan and Ken Mark wrote this case under the supervision of Wayne Adlam solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail
[email protected]. Copyright © 2012, Ivey Management Services Version: 2012-03-08 INTRODUCTION On November 19, 2004, Sharon Louis, a senior associate at a large Canadian bank, was working with her team to assess a potential buyout of Dollarama, a privately owned chain of dollar stores, by Bain Capital Private Equity (Bain). Louis had been told that Bain, with a large offer, would outbid seasoned investors such as Blackstone, Onex and the Ontario Teachers’ Pension Plan. As Louis’s bank was expected to be part of the banking syndicate offering up to $600 million in deal financing to Bain, she was tasked with analyzing the transaction from both debt and equity participants’ perspectives. With 350 stores concentrated in Quebec, Dollarama was the dominant, fastest growing dollar store chain in Canada. The current Dollarama leadership team, including founder Larry Rossy, was expected to remain in place and would retain an estimated 20 per cent of the company’s equity. Bain’s plan envisioned major operational improvements and doubling the number of new store openings from the current range of 30 to 40 per year. However, Louis noted that larger retailers such as Wal-Mart Canada were expanding as well and had plans to increase their assortment of affordable items. Louis wanted to finalize her thoughts on Dollarama as a leveraged buyout (LBO) target and to understand the required operating scenarios and purchase price that would generate a 20 to 30 per cent return over five years on Bain’s investment. Concurrently, she wanted to model Dollarama’s capital structure pre- and post-transaction and scrutinize Bain’s operating strategy for its newest acquisition. PRIVATE EQUITY IN CANADA2 The Canadian private equity (PE) sector has been active since the late 1980s, with many significant transactions taking place across the spectrum from venture capital start-ups such as Sleep Country Canada and Q9 networks to LBOs such as Yellow Pages and Shoppers Drug Mark. However, the Canadian PE 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Bain Capital or Dollarama or any of its employees. 2 This section was written from the case writers’ experience. This document is authorized for use only in Bradford Gibbs's IEBEXMBA_Mar2019_M1;M2 - Financial management at IE Business School from Oct 2019 to Oct 2020. Page 2 9B12N002 marketplace was generally viewed to be not as large or active as that of the United States. Some experts attributed the smaller role of PE in Canada to three factors that define the Canadian market and economy: 1. With a heavily resource-based economy, and relatively low population relative to land mass, many businesses in Canada did not fit the initial LBO target screens and constrained growth opportunities. Additionally, only 10 per cent of private businesses were estimated to be worth over $50 million in enterprise value. For many PE firms, most Canadian companies were lacking in either size or stability to generate the 20 to 30 per cent returns demanded by limited partners (LPs) of PE funds. 2. Access to public capital in Canada was relatively easier due to lesser regulated stock markets and lower listing costs. This allowed smaller businesses to go public at an earlier stage than their U.S. counterparts and led to the popularity of venture exchanges such as the Toronto Venture Exchange. The role of the PE firm as a capital provider was considered unnecessary for many firms. 3. The Canadian market had generally been more conservative relative to the United States, meaning that firms relied less on leverage as a strategy for growth, and acquisition multiples or premiums rarely saw the same run-up as in the United States. However, these factors also led to a smaller number of players in Canada, which by 2004 was mostly dominated by public pension funds such as the Canada Pension Plan (CPP), Ontario Teachers’ Pension Plan (OTPP), Ontario Municipal Employees Retirement System (OMERS) and a handful of private firms such as Onex, Edgestone Capital and Imperial Capital. Over the last decade, many U.S. PE firms had seen and acted on attractive Canadian opportunities, believing that the U.S. PE market was overcrowded and oversaturated with capital. THE VALUE RETAIL INDUSTRY The value retail industry was generally composed of discount retailers including major big box retailers such as Wal-Mart and Costco as well as dollar stores. However, dollar stores were seen to be at the furthest end of the value spectrum and could be characterized as “deep discount” retailers. Dollarama’s management team characterized the dollar store category as consisting of “(i) deep discounts in price; (ii) convenient locations; (iii) broad offerings of everyday branded or unbranded merchandise; (iv) small, individual sized product quantities; (v) low or no-frills, self-service environment; and (vi) limited inventory.”3 While dollar stores once suffered from the perception of low quality products and inconsistent merchandise selection, the industry had taken steps to improve on those fronts. In conjunction with improving industry operating standards, increasing consumer focus on low prices and value led to more frequent visits and purchases at dollar stores. Industry studies conducted in the United States showed that all consumers, regardless of income level, were interested in “saving money on basic consumables.”4 A study conducted by Dollar General, a U.S. dollar store chain, revealed that the number of households with incomes of more than $50,000 that shopped at Dollar General stores had increased 27 per cent between 2001 and 2004.5 The average basket size per transaction in U.S. dollar stores was $8.95.6 3 Dollarama, “Prospectus for Exchange of US $200mm Notes” August 7, 2006. 4 Mintel, “Demographic Trends,” Dollar Stores — US — December 2005,, http://academic.mintel.com.proxy1.lib.uwo.ca:2048/sinatra/oxygen_academic/search_results/show&/display/id=160990/displ ay/id=160990/display/id=194595#hit1., accessed June 5, 2011. 5 http://www.dollarstoreservices.com/39.php, accessed June 5, 2011. 6 Ibid. This document is authorized for use only in Bradford Gibbs's IEBEXMBA_Mar2019_M1;M2 - Financial management at IE Business School from Oct 2019 to Oct 2020. Page 3 9B12N002 Between 2000 and 2004, the U.S. dollar store industry grew by 45 per cent to reach US$30.3 billion in sales.7 Notable competitors included Dollar General, Family Dollar, 99 Cents Only Stores and Dollar Tree. Average same-store sales increased between 1 and 3 per cent for the industry in the last fiscal year. Additionally, the dollar store segment had undergone rapid consolidation over the last decade, with the top four players representing 48 per cent of sales in 2004, up from 34 per cent in 1999.8 Louis believed that this consolidation partly contributed to increased consumer credibility in the dollar store channel, as the larger chains were able to shift away from being a “close-out” buyer to having consistent procurement programs to obtain nationally recognized brands. The top four players were also significantly growing their store footprint. While Wal-Mart, considered the leader in the U.S. retail industry, added 600 stores from 2000 to 2004, the top four U.S. dollar store chains added 5,726 stores during the same period (see Table 1).9 Table 1 Selected U.S. Retail Chains, Change in Number of Stores from 2000 to 2004 2000 Number of stores 2004 Number of stores Wal-Mart Corporation 3,076 Wal-Mart Corporation 3,668 Dollar General 4,747 Dollar General 7,211 Family Dollar 3,593 Family Dollar 5,454 Dollar Tree 1,449 Dollar Tree 2,595 Fred’s 284 Fred’s 539 Another U.S. industry trend, implemented in an attempt to generate further customer loyalty and convert the channel from being an impulse destination to a regular shopping destination, was the introduction of consumables such as grocery and health and beauty care items into the product offering. Despite the generally lower margins on food, stocking staple consumables tended to increase repeat visits and reinforced the improving consistency behind dollar store product offerings. Moreover, the addition of a broader range of items was contributing to what AC Nielsen, a research firm, called “channel blurring”: the “phenomenon where consumers do not attribute specific types of goods purchases to specific channels and where the retail offerings and environments of one channel begin to take on the qualities of other channels.”10 However, Louis believed that some retail analysts were skeptical about this strategy for the Canadian landscape, since they attributed the success in the United States to the ability of consumers to pay by using food stamps. Despite Canada’s proximity to the United States, its value retail segments