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Estimated LBO Valuation - Overview
American Eagle Outfitters, Inc.
LBO Scenario #1a, Case 1
(Dollars and Shares in Thousands, Except Per Share Amounts)
Executive Summary
This valuation of American Eagle Outfitters, Inc. indicates a gross selling price of the company's assets of $4,179,425 at 01/31/2012, the
end of the first forecast year of the company's five year plan (Multi-year Scenario #1a). This valuation is before consideration of the
liabilities of the company at 01/31/2012, which are forecasted to be $474,262. The analysis assumes that the sellers of the company pay
off / retain all of these liabilities at the time of sale and, therefore, the sellers keep net pretax proceeds of $3,705,163 (i.e., $4,179,425
minus $474,262 =$3,705,163) after they pay off the company's liabilities. In addition to paying the sellers $4,179,425, the investors must
also pay transaction expenses of $73,140, resulting in a total selling price of $4,252,565 ($4,179,425 plus $73,140 =$4,252,565).
Based on this valuation, equity and subordinated investors who acquire the company's assets realize pretax annual rates of return over
their four year investment period of 25.0% and 12.5%, respectively.
Introduction
This LBO valuation analysis estimates the total selling price of American Eagle Outfitters, Inc. ("the company") assets to investors at
01/31/2012 (the end of the company' s first forecast year), subject to a number of assumptions and estimates. The total selling price is
equal to the gross selling price of the company's assets (the amount paid to American Eagle Outfitters, Inc.'s sellers), plus transaction
expenses (primarily fees paid by investors to advisors and lawyers). Key assumptions and estimates include:
the assets of the company at 01/31/2012.
the financing provided by, and the rates of return required by, the sources of the total selling price, i.e., commercial banks,
subordinated debt investors and equity investors.
the sales, profit, asset and liability management plans contained in American Eagle Outfitters, Inc.'s five year forecast.
the EBITDA (earnings before interest, taxes depreciation and amortization) multiple used at the end of the five year forecast period to
estimate the gross selling price of the company at that point in time. This gross selling price, minus the liabilities of the company
retained / paid off by the investors at the end of the investors four years of ownership, is a proxy for the pretax residual value of the
investor's ownership interests in American Eagle Outfitters, Inc. after four years of ownership.
The estimated total selling price at 01/31/2012 is a unique amount that is derived from the accounting and mathematical interaction of
these assumptions and estimates. Accordingly, changing any of the assumptions or estimates will change the estimated total selling price
of American Eagle Outfitters, Inc.
Gross selling price estimates that equal the value of a company's tangible assets or less indicate the company's financial forecast
(especially the sales and profit forecast) does not support a valuation above the value of the company's assets, resulting at best in a
"book value" transaction in which the company's sellers realize net pretax proceeds in an amount similar to the net worth of the company.
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Generally, one or more of the following changes in assumptions and estimates will increase the estimated total selling price of American
Eagle Outfitters, Inc. at 01/31/2012 above the amount determined in this LBO Valuation #1a, Case 1:
higher forecasts of the value of tangible assets at the end of the first forecast year (01/31/2012).
lower investor required rates of return and, generally, a higher proportion of debt financing vs. equity financing.
higher sales and increased EBITDA amounts during the forecast period. Higher operating profits relative to the current five year plan
will provide additional cash to pay down bank debt.
improved working capital management and lower capital expenditures during the forecast period.
a larger estimated EBITDA multiple at the end of the five year forecast period, which is supported by favorable sales and EBITDA
trends.
LBO Valuation #1a, Case 1
This valuation of American Eagle Outfitters, Inc. indicates a gross selling price of the company's assets of $4,179,425 at 01/31/2012, the
end of the first forecast year of the company's five year plan (Multi-year Scenario #1a). This valuation is before consideration of the
liabilities of the company at 01/31/2012, which are forecasted to be $474,262. The analysis assumes that the sellers of the company pay
off / retain all of these liabilities at the time of sale and, therefore, the sellers keep net pretax proceeds of $3,705,163 (i.e., $4,179,425
minus $474,262 =$3,705,163) after they pay off the company's liabilities. In addition to paying the sellers $4,179,425, the investors must
also pay transaction expenses of $73,140, resulting in a total selling price of $4,252,565 ($4,179,425 plus $73,140 =$4,252,565).
A number of assumptions have an important impact on the gross selling price estimate of the company, including:
The amount of tangible assets of the company at 01/31/2012, the date of sale, that can be used to support bank
borrowi ngs, and the amount banks wil l lend against these assets.
At 01/31/2012, the company's total assets are $1,909,817, with accounts receivable of $37,684, inventory of $310,064 and
auction value of property plant and equipment of $663,120. Applying bank advance rates (percent of loan to asset collateral
value) of 80.0%, 50.0% and 50.0%, respectively, these assets allow the investors to borrow a total of $516,739 of the
$4,252,565 total selling price.
Bank loans are generally the least expensive form of financing (usually based on the prime rate or LIBOR), followed by
subordinated debt (18% rate of return and higher depending on risk) and common and preferred stock (25% rate of return and
higher depending on risk). In this analysis, it is assumed that 20.0% ($850,513) of the purchase price of the company is in the
form of owners equity and that the difference between the total selling price ($4,252,565) and the sum of bank borrowings and
owners equity ($516,739 plus $850,513 =$1,367,252) is provided by subordinated debt investors ($2,885,313).
It is also assumed that the equity investors require a pretax annual rate return of 25.0% on their investment over their four years
of ownership; and that subordinated debt investors require a pretax annual rate return of 12.5%, 10.0% per year in cash
interest payments and an equity ownership interest in the company (realized when the company is sold four years hence) that
boosts the pretax annual rate return to 12.5% over the four year investment period.
The operati ng pl an duri ng the forecast peri od, especial ly the growth i n net sales duri ng the peri od; and forecasted
EBITDA, parti cularl y the amount and trend i n EBITDA toward the end of the fi ve year forecast peri od.
Year-to-year changes in net sales, years one-through-five of the forecast period, are 3.0%, 3.0%, 3.0%, 3.0% and 3.0%,
respectively. Net sales growth is usually the principal driver of profitability; asset requirements; and attitudes toward the
effectiveness of management and the attractiveness of the market for a company's goods and services. Generally, the lower
the growth trend in sales, the lower the business valuation.
EBITDA generally equals operating profits, plus non-cash expenses, such as depreciation. Forecasted EBITDA for each of the
years one-through-five is $404,054, $440,014, $453,458, $464,062 and $474,983, respectively. The year-to-year changes
result principally fromchanges in operating profits.
Asset and li abi li ty management during the forecast peri od.
Please note that actual asset and liability amounts reflected on fiscal year end balance sheets are highly influenced by the
company's "annual run rate" (actual monthly sales times 12) toward the end of each fiscal year. Accordingly, it is a good idea to
model each year in the forecast using the single year model, which forecasts the year by month, and to make adjustments to the
annual forecast assumptions as necessary.
Asset management has to do principally with collecting accounts receivable within the payment terms offered to customers;
managing inventory to prescribed turnover metrics; and investing in capital assets on time and in amounts sufficient to achieve
forecasted net sales and profits.
Forecasted number of days sales in accounts receivable at fiscal year end for each of the years one-through-five of the
forecast are 4.5, 4.5, 4.5, 4.5 and 4.5, respectively. When comparing these statistics to the company's standard credit
terms, one needs to keep in mind the year-to-year growth rates in net sales and seasonal sales patterns. For example,
high growth rates in annual net sales and/or concentration of sales in the company's fourth quarter will tend to result in the
number of days in accounts receivable exceeding the company's normal vendor credit period.
Forecasted number of days cost of sales in inventory at fiscal year end for each of the years one-through-five of the
forecast are 61.2, 61.2, 61.2, 61.2 and 61.2, respectively. Again, one needs to keep in mind the year-to-year growth rates
in net sales and seasonal sales patterns. For example, high growth rates in annual net sales will tend to result in
increasing number of days in inventory (inventory build exceeding past practices) to insure inventory levels are sufficient
to satisfy forecasted, future demand.
Forecasted capital expenditures for years one-through-five of the forecast are $120,000, $120,000, $120,000, $120,000
and $120,000, respectively vs. forecasted depreciation expenses of $100,000, $100,000, $100,000, $100,000 and
$100,000, respectively. Capital expenditures in excess of depreciation are funded either through improved working capital
management, company profits or external financing (e.g., bank loans).
Liability management has to do principally with paying accounts payable and accrued expenses within the payment terms
offered by vendors; and managing borrowings/credit facilities within the terms agreed to with lenders.
Forecasted number of days cost of sales in accounts payable at fiscal year end for each of the years one-through-five of
the forecast are 34.1, 34.1, 34.1, 34.1 and 34.1, respectively. Again, one needs to keep in mind the year-to-year growth
rates in net sales and seasonal sales patterns. For example, high growth rates in annual net sales and/or concentration of
sales in the company's fourth quarter will tend to result in the number of days in accounts payable exceeding the
company's normal vendor payment period. The same is true with the number of days operating expenses in accrued
expenses, which are forecasted to be 45.0, 45.0, 45.0, 45.0 and 45.0 in years one-through-five of the forecast,
respectively.
Bank advance rates (percent of loan to asset collateral value) assumptions for years one-through-five of the forecast,
respectively, are as follows:
Accounts receivable: 80.0%, 80.0%, 80.0%, 80.0% and 80.0%.
Inventory: 35.0%, 50.0%, 50.0%, 50.0% and 50.0%.
Plant and equipment: 50.0%, 50.0%, 50.0%, 50.0% and 50.0%.
Based on these advanced rates and forecasted bank borrowings at years' end one-through-five, the company has net
availability (total availability minus bank loans outstanding) of $533,121, $1,103,652, $1,217,631, $1,341,206 and
$(1,410,488), respectively. Bracketed numbers represent forecasted bank borrowings in excess of total availability - an
unsustainable situation which calls into question the feasibility of the capital structure put in place by the investors in the
company. Again, it is a good idea to model each year in the forecast using the single year model, which forecasts the year
by month, to insure that the forecasted bank borrowing amounts, both at fiscal year end and interimbalance sheet dates,
comply with bank credit agreements.
Forecasted EBITDA coverage of required debt service (EBITDA divided by the sum of total interest expense and required
loan principal payments) for years one-through-five of the forecast are -428.48, 0.71, 1.76, 1.84 and 1.93, respectively.
Debt service ratios that are less than 1.50 indicate an incongruity between company profitability and balance sheet debt,
which will generally indicate a need to reduce the gross selling price.
EBITDA multiple used at the end of the five year forecast peri od to esti mate the gross sel li ng price of the company at
that poi nt i n time.
Residual EBITDA multiple estimates between 5.0 and 8.0 are customary. The lower end of the scale is usually associated with
steady trend, slower growth, less profitable businesses.
The EBITDA multiple used to estimate the gross selling price of American Eagle Outfitters, Inc. at 01/31/2016 (the end of the
buyer's four years of ownership) is 10.0. This multiple, times EBITDA of $474,983 in the final forecast year results in a gross
selling price / residual value estimate for the company of $4,749,830 at 01/31/2016.
This valuation is before consideration of the liabilities of the company at 01/31/2016, which are forecasted to be $2,306,033.
The analysis assumes that the investors in the company pay off / retain all of these liabilities and, therefore, the investors keep
net pretax proceeds of $2,443,797 (i.e., $4,749,830 minus $2,306,033 =$2,443,797) after they pay off the company's liabilities.
This $2,443,797 is then distributed to the equity and subordinated debt investors, resulting in those investors realizing pretax
annual rates of return over their four year investment period of 25.0% and 12.5%, respectively.
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