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An IPO to get funds without entailing risks for solvability - ECM, Company-side
Costs and
disadvantages
Benefits
AN IPO ? WHY ?
Spread the risk of ownership, can offer securities in the acquisition of other companies
[Indirect advertising]
Increase public awareness for the companys product, having a listing on a stock exchange
also affords the company increased credibility with the public
[Attractiveness]
Raise the prestige and recognition, make the company attractive to top talent
[Costly]
Important fees and incentive to pay even more to get the services of the best banks
Legal, accounting and marketing cost
[Regulatory requirements]
[More scrutiny]
[Short-termism]
May cause the company to focus more on short-term results rather than long-term growth
2010
65,8%
2009
66,1%
$1285
10
$1285
10
Investor protection
Information provision
Ease of shareholder suits
Recovery rate in solvability problems
Medium
High
Medium
44,5%
Medium
High
Medium
44,5%
STRENGTHS
WEAKNESSES
Lack of capital for expansion and maintenance due to the fast expansion
A strong Brick and mortar presence meaning high costs and difficulties in
case of slowdown
Full package of products spread from body care to household goods for
women and men: diversification entail a profitability risk
A culturally marked brand which can trigger one-time sales in some markets
(trend-risk in US markets)
Factor
NASDAQ
NYSE
LSE
PARIS EURONEXT
HKSE
Market acceptance
Analyst expertise
Peer Companies
% of foreign companies
Macroeconomic situation
Language and culture
Financial success
A third alternative could therefore be a crosslisting on Paris Euronext and HKSE in order to
diversify risk an lower the required rate of
return.
Prestige
Brand recognition potential
Growth Opportunities
Costs
Reporting requirements
OUR PREFERENCE ORDER
#3
NO
NO
#1
#1
WACC in all five stock exchanges are close to each other, fitting price is low
Inputs
Cost of equity
HK
Inputs
avg debt
Cost of Debt
92,228.17 k
avg interest
expense
3,362.812 k
0.226
avg d/e
0.404
beta unlevered
1.03
equity
228.185 k
Outputs
cost of debt
0.0364
levered beta
1.35
NYSE
NASDAQ
3.84
ERP
5.3
Ke
11.01%
Rf
3.84
ERP
5.3
Ke
11.01%
PARIS
Rf
EURONEXT
ERP
LSE
Levered Beta
3.6
5.6
Cost of Equity
Ke
11.17%
Rf
4.01
ERP
5.6
Ke
11.58%
WACC
WACC in all five stock exchanges are close to each other, fitting price is low
Outputs
Consequences on the place of issue
WACC
Debt
92,228 k
Share capital
38,232 k
Equity issuance
190,000 k
The relative impact of the highest WACC (LSE) over the lowest
(NYSE) would be of 800 000 euros
HK
9.24%
NYSE
8.97%
NASDAQ
8.97%
PARIS EURONEXT
9.09%
LSE
9.38%
Next Step:
-
Ballpark for equity value is 1,54 Billion with IPO at 1,03 - ECM, Investor-side
2012
Proj.
2013
Proj.
609 458
729 474
846 737
950 922
1 055 106
1 159 291
141 401
169 661
203 041
228 024
253 006
277 989
29 126
35 120
42 804
48 071
53 337
58 604
112 275
134 541
160 237
179 953
199 669
219 385
Trade receivables
57 673
62 241
72 309
81 206
90 103
99 000
Inventory
86 827
103 925
115 991
130 263
144 535
158 806
Trade payables
58 834
77 169
94 716
106 370
118 024
129 678
Capital expenditures
34 613
47 416
55 038
61 810
68 582
75 354
Tax (analyst)
0.23
0.23
0.23
0.23
0.23
0.23
Net sales
EBITDA
Depreciation and Amortization
EBIT
85 666
88 997
3 331
87969.57
93 584
4 587
106561.49
2014
Proj.
Main insights
2010
Est.
105 099
11 515
113309.81
2015
Proj.
116 614
11 515
126985.13
128 128
11 514
140662.45
0.02
1793446.238
1934108.688
1.1
1.21
1.331
1.4641
1.61051
79972.33636 88067.34711 85131.33734 86732.55242 1200929.325
0.1
1540832.898
1.027221932
Next Step
-
Multiples cross-checking
Sensitivity analysis to check out
how these figures will vary
according to the stock exchanges
Between 1.08 and 1,14 on top places according to growth rate - ECM, Investor-side
DCF Ballpark for relevant stock exchanges
Cost of
Equity
HK
NYSE
PARIS
EURONEXT
LSE
0.092401981
0.08973414
0.090913932
0.093833955
Perpetuity
Growth Rate
Value of
Equity
Price Per
Share
0.01
1544616.461
1.029744307
0.015
1622049.897
1.081366598
0.02
1710178.266
1.140118844
0.03
1928803.068
1.285868712
0.04
2230869.295
1.487246197
0.01
1599051.123
1.066034082
0.015
1682746.718
1.121831145
0.02
1778444.41
1.185629607
0.03
2017901.603
1.345267735
0.04
2353653.692
1.569102462
0.01
0.015
0.02
0.03
1574532.725
1655375.542
1747618.492
1977533.874
1.049688483
1.103583695
1.165078994
1.318355916
0.04
2297764.569
1.531843046
0.01
1516837.645
1.011225097
0.015
1591175.377
1.060783585
0.02
1675581.34
1.117054227
0.03
1884061.478
1.256040985
0.04
2169994.643
1.446663096
Assumptions:
- The beauty sector can observe a sustainable growth of 5% in almost
every markets in average
- LOccitanes minimum sustainable profitability is of 10%; ROE should
be of 20%; Plowback should be near from 40%
- Beauty is a mature industry and 1.5% is realistic growth rate for
Europe or US but could be higher for Asian markets (see green
highlights)
Charts rationale:
- Sensibility analysis based on different stock markets (Nasdaq
excluded for irrelevance) and on potential changes in the perpetuity
growth rate in the previous DCF model
Main insights:
- This sensitivity analysis highlights the strong impact of the
perpetuity growth rate on the value of firm equity.
- NYSE should allow an higher IPO price
- Paris Euronext allows an average price belonging to the bracket
[1,04; 1,53].
- Due to a potentially higher perpetuity growth rate, HKEX allows an
higher price per share than Paris Euronext or NYSE
P/E
- Peers: companies exhibit 10
- Calculation: average P/E * EPS
- Average P/E ratio: 25,942
- Theoretical EPS: 0,045818
-
Price per share = 1,187 = slightly above our first ballpark, sets a maximum
L'Oral
Market value of
equity
Market value of
debt
Cash and Cash
equivalent
Sales
EBITDA
EV
AVON
Este
Lauder
3136200000 1228400000
1550400000
1179900000 1120700000
3791100000
1267900000 1116500000
EV/EBITDA
EV/SALES
An IPO at 0,99 would drive the most equity - ECM, Company versus Bank-side
Company
The tradeoff is between obtaining a 7% fixed fee on the total issuance and
making the margin on the stock price increase after issuance.
Usually-speaking, it is better not to seek a too high fee in absolute and trying
to lower the IPO price in order to make the margin which is usually of 10%
minimum over the IPO price but is uncertain
Discounted
average
first-day return
Perpetuity
rate
Bank
RATIONALE
A 1.5% perpetuity growth is low, yet realistic. The lower the rate is, the lower
the valuation is, and the more an Investment bank can make on the first day
of trading. 1,5% is consistent with the sales growth of the cosmetics industry
in the most mature markets provided in exhibit 2: France, the US and Japan
are respectively at 1.1, 1.9 and 1.5%.
Discounted average first-day return to :
- Compensate for investors taking the risk of the IPO
- Increase the post-issue trading volume of the stock
- Ensure a wide based of owners
- Increase publicity on the opening day
COST OF
EQUITY Conservative
assumption
PERPETUITY
RATE conservative
assumption
EQUITY VALUE
PARIS EURONEXT
HONG-KONG
9.09%
9.24%
1.50%
2.00%
1,655,375.54
1,710,178.26
NB OF SHARES
PRICE PER
SHARE
FIRST-DAY
RETURN*
FINAL PRICE
PER SHARE
1,500,000,000
1.10
1.14
10.60%
15.40%
0.9978
0.9878
1- Issues that are apparent right now, that can be inferred from the past transactions and that creates conflicts with shareholders interests
2- Prospective issues that might arise and effect the shareholder rights, consequential of the eventual listing in a particular exchange
EXISTING ISSUES
1) Board : contrary to best practice, Mr Reinold Geiger holds both
CEO and Chairman position
- Can lead to Agency Conflicts and shareholders control rights can
get reduced
- If the situation does not change post IPO (highly plausible), Equity
risk premium could be higher
2) Only three independent directors
- if there are less independent directors in the board ,thats a red flag
with regard to corporate governance in the company.
- Can lead to less controlling rights, which is riskier for investments
and it would lead to a lower price
3) 25% interest held by Geiger and another management group,
financed with a 174 million debt (31st December 2009)
- Buy Out partially financed in part with debt with a senior credit
facility with a limit of 205 Million Euro
PROSPECTIVE ISSUES
1) Listing on HKSE
-
NYSE
HKEX
Our approach consists in analyzing the potential governance of LOccitane through the lense of the Governance Risk
Indicator of the Institutional Shareholder Service. Then, we determine if LOccitane is approaching towards the
Dictatorship Company or the Democracy Company described in the Corporate Governance and Equity Prices Paper
by Gompers and Ishii (Harvard) and Metrick (U Penn). Once this is done, we reflect the impact of such governance on the
share price by taking into account the stock market performance of Dictatorship and Democracy Companies of the paper.
First Step:
In light of the following ISS criteria
Second step:
In light of step 1, it is possible that LOccitane will be close to a Dictatorship Company. Per the authors, these
companies have lower sales growth over 5 years. Indeed, over 5 years, sales growth is 44.7% for dictatorship companies
versus 62.7% for democracy companies. Given the scoring that was used (democracy: 5 points / dictatorship: 14 points)
and the statistical distribution of companies (average score is 8.5), an average sales growth of 51.7% seems reasonable
(one point under the median for a dispersion of 9 translates into two points under the median for a dispersion of 18).
Therefore, sales are 7% under the average company for the dictatorship company.
We have modified our DCF accordingly: projected sales for the next five years are 7% lower. EBIT is on average equal to
18.5% of sales in the analysts projections so we noted EBIT as equal to 0.185*Sales for this new DCF. This gives us a new
value of 1.38 Billion for LOccitane, and a share price of 0.92 euros.
Conclusion:
The fact that so much power is concentrated in the hands of Geiger at LOccitane has resulted in our model in a share
price that is lower by 0.1 euros. That is, approximately 9% lower.
Denomination
Paris
Euronext
and HK
Specifics
Rationale
2/3 of the
shares on Paris
Euronext with
60% Class B
shares and 40%
Class A shares
+ 1/3 of the
shares on HKEX
Paris
Euronext
HKEX
60% Class B
shares and 40%
Class A shares
Limit
Paris Euronext Allows an higher IPO price Hong-Kong does not allow dualand the issuance of two different classes class of shares and the costs of a
of shares
double IPO would be too high
Two classes of shares would allow to
raise more money and better distribute
the ownership
Paris Euronext is also qualitatively the
best place of issuance for market
acceptance
Hong-Kong allows to raise slightly less
capital but the financial success is
allegedly superior and it would help
M&A strategies in the Asian market
Same as above
Impossible macroeconomic
situation, all the more so for a
penny stock