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Ultimate recommendation: Listing on HKEX at a price of 0,99 = approx. 10.

5 HKD

An IPO to get funds without entailing risks for solvability - ECM, Company-side

Costs and
disadvantages

Benefits

AN IPO ? WHY ?

[Diversify funding sources]

New equity capital, more financial flexibility

[Company ownership and


ownership power]

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]

Comply more strict to the some standards

[More scrutiny]

More exposure, more pressure from the market

[Short-termism]

May cause the company to focus more on short-term results rather than long-term growth

A booming company with a diversified business - ECM, Investor-side


KEY SUCCESS FACTORS

FRANCE AS AN INVESTMENT DESTINATION

OCDE; Population: 66 201 365; PIB (US$): 43 080; Currency: Euro

Growth in sales and in net income leading to growing ROE

Doing Business Reports


Taxes to pay (% of EBIT)

2010
65,8%

2009
66,1%

Fast expansion, outstanding innovation (process, product,


service) and good financial management

Costs to export (USD/contener)


Delay to exportation (day)

$1285
10

$1285
10

Efficient, flexible and extendable supply chain preventing


bottleneck during expansions

Investor protection
Information provision
Ease of shareholder suits
Recovery rate in solvability problems

Medium
High
Medium
44,5%

Medium
High
Medium
44,5%

Market growth and good industry environment

Recognizable brand and presence in specialized reviews

Easy access to information

LOCCITANES STRENGTHS AND WEAKNESSES

STRENGTHS

The beauty market worldwide can absorb a French,


premium, organic-based cosmetics
A strong trend for natural products
A real and consistent atmosphere South-FranceProvence
An efficient and growing digital strategy

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)

HONG-KONG & PARIS appear

to be the most qualitatively suitable - ECM, Company-side

Key success Factors


-

Agents need to know the company in which they invest


so that the value investors will confer to the firm can be
neither too low nor deceptive
* the company must be listed in an area where the
business is important
* the information flow and how it will be taken by
investors must be known

Market expectation about cash-flow and control right


and appropriate average risk/return ratio sought by
investors
* Beta of comparable companies in different markets
must be known
* Dividends expectations determine the cost of equity and
highly matter

Fees (underwriter, lawyers, auditors) and transaction


costs matter as they increase the cost of equity

State of the market at the time of the IPO (better to


invest at the time when a market starts to be bullish and
has a huge potential of growth), even more important
with high Beta

HONG-KONG & PARIS appear

to be the most qualitatively suitable - ECM, Company-side

Factor

NASDAQ

NYSE

LSE

PARIS EURONEXT

HKSE

Type of listing suitable for LOccitane

Market acceptance

Analyst expertise

- For Paris or HKSE, ADR programs are no longer


relevant to the discussion.

Peer Companies
% of foreign companies

- For the NYSE level 3 ADR program so that the


company can avoid the costs and hassles of currency
conversions since most expansion operations and
hence need for capital is in Asia.

Macroeconomic situation
Language and culture
Financial success

Potential to attract average investors

Next Step: 3 alternatives

Capital raised/IPO (avg)


Financing growth
Liquidity

Considering the companys growth prospects and


the expansion plans focused on Asia, Hong Kong
could be an ideal location.

Still, the Paris Bourses qualitative benefits


outnumber those of an international IPO in
Hong Kong.

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.

Increased recognition benefit

Prestige
Brand recognition potential
Growth Opportunities

M&A target and process


(same currency for stock swaps)
Costs of IPO

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

avg tax rate

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

Risk Free (Rf)


2.78
Equity Risk Premium
6.7
(ERP)
Cost of Equity (Ke) 11.83%
Rf

3.84

ERP

5.3

Ke

11.01%

Rf

3.84

ERP

5.3

Ke

11.01%

PARIS
Rf
EURONEXT
ERP

LSE

debt = short + long term borrowings for each period.


For the last nine months, we annualized the figure.
cost of debt = avg(Interest expense)/ avg(debt)

Levered Beta

d/e ratio, with


equity = current share capital + expected capital
needs (190M from the case)
Beta is re-levered using the average tax rate for the
past three years

3.6

5.6

Cost of Equity

Ke

11.17%

Risk-free rate = 10 years government bonds, for


LOccitanes development plans are long-term

Rf

4.01

ERP

5.6

Ke

11.58%

WACC

Equity used for the WACC is once again share capital


added to the future equity issuance (hypothesis).

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

Cost of equity and WACC are lowest in New York

Share capital

38,232 k

WACC in all five stock exchanges are close to each other

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%

The fitting price (relative impact of listing on proper stock


exchange) would be of 513 000 euros or 228 000 for Paris
Euronext or HKSE, respectively

NASDAQ

8.97%

PARIS EURONEXT

9.09%

LSE

9.38%

Next Step:
-

Checking out which issuance price these WACC will be related to


Quantitatively measuring the qualitative advantages and
governance costs of listing on Paris Euronext or Hong-Kong Stock
Exchange to know whether the fitting prices are too high ot not

Ballpark for equity value is 1,54 Billion with IPO at 1,03 - ECM, Investor-side

DCF First ballpark


2011
Proj.

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

Non Cash Working Capital


Change in NCWC
FCF
Perpetuity growth rate (analyst)
terminal value
adjusted FCF for final year
denominator for NPV calculation
NPV
WACC (analyst)
Value of equity

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

Value per share (with 1500000 shares)

1.027221932

With unspecific inputs (perpetuity


growth rate at 2% and WACC at
10%), value of equity reaches 1,54
Billion

Price per share for an issuance of


1 500 000 000 shares is 1,027

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

Multiples confirm a ballpark between 0.62 and 1,187

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

EV/SALES and EV/EBITDA


- Information source: 2010 annual report
- Peers: LOral, Avon, Este Lauder

Average EV/Sales: 1,61


Calculation: average EV * Sales net debt minorities = market capitalization
Price per share = market cap/ shares outstanding
Price per share = 0,62 = very low price due to selected peers, sets a
bottom limit for the ballpark

L'Oral
Market value of
equity
Market value of
debt
Cash and Cash
equivalent
Sales

Average EV/EBITDA: 10,805


Calculation: average EV * EBITDA net debt minorities = market capitalization
Price per share = market cap/ shares outstanding
Price per share = 0,986 = Confirms our first ballpark

EBITDA
EV

AVON

Este
Lauder

43628640263 18509166000 5201487000


1591300000

3136200000 1228400000

1550400000

1179900000 1120700000

19495800000 10731300000 7795800000

3791100000

1267900000 1116500000

43669540263 20465466000 5309187000

EV/EBITDA

11,5189629 16,14123038 4,755205553

EV/SALES

2,239946053 1,907081714 0,681031709

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

Maximizing the par value at issuance should be logical because it would


maximize the funding obtained from the IPO.
Yet, if the price is too high, investors wont buy and the stock price will
decrease leading to long term disinterest from the investors

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

Considering corporate governance to lock-in the price - ECM, Investor-side


TWO CATEGORIES OF CORPORATE GOVERNANCE ISSUES

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
-

With a listing on the HKSE, regulatory framework and how that


might have impact on the rights of minority shareholders must be
taken into account
Although HKEX benefits from its geographical proximity to
mainland china ,it has relatively less stringent corporate
governance requirements
One share, one vote

Considering corporate governance to lock-in the price - ECM, Investor-side


LSE

NYSE

HKEX

Considering corporate governance to lock-in the price - ECM, Investor-side

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

B1.7: classification of the Chairman of the Board?


B1.8: are the Chairman and CEO the same person?
B3.2: how many other boards does the Chairman serve on?
S1.1: does the company have shares with different voting rights?
Also, we will look at the ownership structure of LOccitane.
We can conclude: Because Geiger is classified as an executive, is Chairman and CEO, this is not favorable for
LOccitane. However, Geiger does not sit on other boards, which mitigates the negative impact on the company.
Concerning shares, since we are considering Paris Euronext, we believe Geiger will probably keep more voting rights for
himself. If they list in Hong Kong, this will not be possible. Lets note that given our estimation of total equity equal to
1.54 Billion and the 189 Million that Geiger possesses, he would theoretically own 12.27% of the company. That would
make him a very big shareholder, which is negative for governance. All in all, LOccitane presents major concerns relative
to Geigers power.

Considering corporate governance to lock-in the price - ECM, Investor-side

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.

Wrap-up: Listing on HKEX


Alternatives

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

Same as above + HKEX allows an equal


recognition benefit and better growth
opportunities

Less capital to be raised but


superior chance of success

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