UGG Valuation Stand Alone

and with Synergies

Shubhabrata Basu

IIM Indore

UGG's Valuation Stand Alone

Financial ratio
Current Ratio
Quick Ratio
A/P Turnover
Inventory Turnover
A/R Turnover
Total Debt/Total Net Worth
Total Debt/Assets
Total Debt/(D+E)
Operating Margin
Net Profit Margin
RoE
RoA
Growth in Revenue
Net Working Capital/Sales
Capital Expenditure/Sales
Depreciation/Sales
Net Working Capital/Gross Profit
Capital Expenditure/Gross Profit
Depreciation/Gross Profit
Capital Expenditure/Depreciation
Working Capital Change/Gross Profit
All numbers are annualized as follows:
Semi-annual sales, CoGS, Dep/Ammor,
Gross Profit by 2x, Semiannual EBIDTA
scaled by 4x, Semiannual Capex by 3x

Definition
Current Asset/Current Liability
(Current Assets-Investors)/Current Liabilities
(A/c payable/CoGS)*365
(Inventory/CoGS)*365
(A/c receivable/Sales)*365
Total Liabilities/Equity (w/o preferred shares & deferred
shares
same
same
(EBIT)/Sales
(Net Income)/Sales
Net Income/Net Worth
Net Income/Assets

[Current Assets-Current Liabilities (w/o debt)]/Sales

[Current Assets-Current Liabilities (w/o debt)]/Assets

1996

1997

1.16
0.34
16
47.4
15.5
228.20%

1.52
0.92
14.8
24.1
19.4
141.90%

46.80%
69.50%
1.21%

39.00%
58.70%
1.83%

13.41%
11.51%
1.34%
0.92%
120.24%
14.04%
9.65%
145.46%

-1.50%
9.81%
1.33%
0.92%
98.31%
13.28%
9.17%
144.88%

Cost of Capital and Discounted Cash Flows

1

3
4

Cash Flow Assumptions

EBITDA
Depreciation & Ammortization (D&A)
Working Capital Change
CapEX
Tax Rate
Discount Rate WACC (kc) Assumptions
Weight of debt - wd
Weight of equity - we
Risk Free Rate - Rf
Debt Premium
Cost of debt - kd (before tax)
Cost of debt - kd (after tax)
Beta (B)
Market Risk Premium (MRP)
Cost of Equity - ke
WACC (Kc)
Terminal Value Assumptions
FCF Terminal growth
Debt + Preferred Value
Net debt
Preferreds

46.00%

given in case
given in case
given in case
given in case
given in case

35.00%
65.00%
6.20%
1.25%
7.45%
4.02%
1
6.50%
12.70%
9.66%

for UGG - given in case

for UGG - given in case
given in case
given in case
Rf + debt premium
kd(before tax)*(1-T)
given in case
given in case
Rf+Beta*(Rm-Rf)
Wd*Kd(1-T) + We*Ke

4.00% assumed - long term GDP growth

$161.14
$21.61

given in case
given in case

UGGs Stock Price Stand Alone

Time Gross
Year Period Profit

1997
1998
1999
2000
2001
2002

1
2
3
4
5

EBIDTA -(D&A) EBIT

233.5
244.5
270.0
284.9
294.9

58.3
74.0
91.9
99.9
104.6

PV of
Assets
Less: Net Debt +
Preferred
PV of
Equity
Outstanding Shares
(millions)
Stock Price

18.6
21.5
22.1
22.3
22.3

39.7
52.5
69.8
77.6
82.3

EBIT(1-T) +D&A -CapEx

21.4
28.4
37.7
41.9
44.4

18.6
21.5
22.1
22.3
22.3

40.1
27.5
27.8
25.8
26.3

- WC
Chng

26.5
24.1
19.9
13.7
7.4

403.7
$182.7
5
$220.9
5
12.5
$17.68

> $ 13.75

Price Not Good

Enough

Subtotal

Terminal
Value

Discounted
Total
Value

-26.6 FCF2003 -26.6

-1.8 *(1+g) /
-1.8
12.1 ( WACC- 12.1
24.7 g)
24.7
33.0
607.1 640.2

-24.2
-1.5
9.2
17.1
403.7

Synergy Calculation
Saskatchewan
Wheat Pool
1

3
4

Cash Flow Assumptions

EBDITA Improvements
Estimated Synergies (% of potential) year 1
Estimated Synergies (% of potential) year 2
Estimated Synergies (% of potential) year 3 & beyond
Growth in EBDITA improvement after year 3
Restructuring cost (before tax)
Tax Rate
Discount Rate WACC (kc) Assumptions
Weight of Debt (wd)
Weight of Equity (we)
Risk Free Rate (Rf)
Debt Premium
Cost of Debt (kd) (before tax)
Cost of Debt (kd) (after tax)
Beta (B)
Market Risk Premium (Rm-Rf)
Cost of Equity (ke)
WACC (kc)
Terminal Value Assumptions
FCF terminal growth of synergies
Expected Synergies
Competition Risk Factor
Implementation Risk Factor

ALT-Man

$46
33.30%
66.70%
100.00%
2.00%
$29
46.00%

$56
33.30%
66.70%
100.00%
2.00%
$31
46.00%

35.00%
65.00%
6.20%
1.25%
7.45%
4.02%
1.00
6.50%
12.70%
9.66%

35.00%
65.00%
6.20%
1.25%
7.45%
4.02%
2.00
6.50%
12.70%
9.66%

2.00%

2.00%

35.0%
35.0%

50.0%
50.0%

Year

EBDITA
(Improv)

Time

SWP ALTMAN

1997
1998
1999
2000
2001
2002

1
2
3
4
5

15.3
30.7
46.0
46.9
47.9

18.7
37.3
56.0
57.1
58.3

Synergy Valuation from Competing Firms

Total Syn
Total Syn after
One Time Costs
before tax
tax
Terminal Value
SWP

14.5
14.5
0.0
0.0
0.0

Total

Discounter
Value

ALTMAN SWP ALTMAN SWP ALTMAN SWP ALTMAN SWP ALTMAN SWP ALTMAN

15.5
15.5
0.0
0.0
0.0

0.8
16.2
46.0
46.9
47.9

3.2
21.8
56.0
57.1
58.3

0.5
8.7
24.8
25.3
25.8

1.7
0.5
1.7
0.4
1.6
11.8
8.7 11.8
7.3
9.8
30.2
24.8 30.2 18.8 22.9
30.8
25.3 30.8 17.5 21.3
31.5 344.0 418.8 369.8 450.2 233.2 283.9
TOTAL 277.2 339.5
ALTMA
SWP N
277.21 339.50

PV of Synergies
Expected Synergies = (PV of Synergies)*(1-competition risk factor)*(1-Implementation Risk
Factor)
117.12 84.88
Outstanding Shares (millions)
12.50 12.50
Price/Share (from synergy)
9.37 6.79
Maximum Price payable per share
SWP

ALTMAN

$27.05

$24.47

Proposed

>>

$13.75

What did You Recommend & What

Happened???
UGG Board blocked the hostile bid of ALTMAN in 1997 by
Asking double the price
Used a Poison Pill & a court battle
Also Archer-Daniels Midland Co. came as a White Knight buying 42% of the
shares
In 1998 ALTMAN merged to form Agricore Co-Op. Ltd.
In 2001 UGG & Agricore merged on an all stock deal with a closing price of
$12.25. Agricore controlled 55% shares of combined entity
There would be cost savings of $50 million and the combined entity to control 35%
of Canadian grain handling market when Govt. relaxes its monopoly