Denise Metselaar 2577801

Lisa Tieleman 2603783

Michelle Velthuizen 2533788

Date 12/05/2017
Course Corporate Finance
University VU University Amsterdam

Case study: Beter Bed Holding

This paper outlines the valuation of Beter Bed Holding in different chapters. First, Beter Bed
Holdings main activities, position in the market and opportunities will be discussed. Second,
the companys financial policy will be described. Lastly, Beter Bed Holding will be valuated
based on a DCF method and compared to other multiples.

Beter Bed Holding; operations and positions

Beter Bed Holding (BBH) operates in the retail and wholesale business and sells beds and
mattresses. The companys slogan is to give the customers a comfortable and healthy night's
rest for an affordable price. The products are offered online on the website as well as offline
in stores. BBHs stores are situated all over Europe, including the Netherlands, Germany,
Spain and France. The firms main objective is to become market leader in all the countries in
which they operate.

In order to describe BBHs positioning and opportunities in the industry Porters 5 forces will
be used. These 5 forces are related to competition and are stated as follow: direct
competition, threat of substitutes, bargaining power of suppliers, bargaining power of buyers
and threat of new entrants. These forces will be applied to Beter Bed Holding and
opportunities that arise from this will be discussed.

Porters 5 forces
According to the website detailhandel.info 793 bed and mattress stores were open in the
Netherlands in 2016. Beter Bed owned 100 of these stores, which is 3 stores more than the
company had the year before. In other countries Beter Bed also owned relatively more stores
than in 2015. Furthermore, the sales noticeable increased compared to 2015. This means that
the company is battling direct competition well. The company still has some opportunities
online.

Beds and mattresses are not likely to be substituted. All people need to sleep every night or
day. Furthermore, wealth has and still increases in (parts of) the world, which means that
more people can afford a bedframe and mattress to sleep on.

The power of suppliers is relatively big, since Beter Bed Holding does not produce the
bedframes and mattresses. The products are bought from suppliers which means that the
company is partly dependent on them. BBH has a code of conduct for their suppliers that
state that suppliers need to take the environment and their employees into account. This
lowers the supply of suppliers for the company which means that suppliers power increases
even more. The company can start producing the products in house which will make them
less dependent.

Consumers also have much power in this market nowadays, because of high transparency.
They are able to check prices of different beds on the internet and compare them to each
other. Beter Bed Holding should try to offer the best price-quality proportion and good
services to satisfy the consumers.

About new entrants the report states the following: At every moment new entrants can step
into the market and they can come up with new and better products. So this is always a threat
to BBH. The company acknowledges new entrants as a threat and tries to stay ahead of
them.

Financial policy
The companys main financial objective is to keep a healthy capital position. BBH prefers to
stay debt-free which has been achieved over the last two years. The capital position is
maintained by trying to follow certain regulations the company has made for themselves. For
example, the net interest-bearing debt/EBITDA ratio may never exceed two and the solvency
ratio must be at least 30%. The shareholders are of great importance for the company. To
reward them the company wants to maximize the return on equity. At least 50% of the
realised net profit are paid back to the shareholders.

BBH is not a risk-taking company, so the company is probably able to cover unexpected
losses and other negative events that may arise. Stakeholders prefer a company who is not
relatively risk-taking, because the stock will be less risky as well. This policy might attract
some new investors. Next to that, suppliers want to work with BBH as well. There is a high
certainty that Beter Bed Holding will live up to their obligations. In short BBHs financial
policy provides them with equity and partners to co-operate with which is positive.

On the other hand, a firm can be too safe. It can affect shareholders in a negative way,
because the allocation of capital is not optimal. Cost of debt is relatively cheaper than cost of
capital due to tax advantages. Debt can be used to invest and obtain more profit and attract
new investors. Taking on debt can be beneficial for shareholders, because the value of the
firm might increase. In this case, MM does not hold. It is advised to change the debt-free part
of the financial policy.

DCF model
Now Beter Bed Holding B.V.s position in the industry, opportunities and financial policy
have been highlighted, a valuation of the company will be conducted. The capital structure of
Beter Bed Holding B.V. consists primarily of equity. Therefore, under the assumption that
this will continue in the future, the APV model is used for the valuation.

To estimate the cost of capital, Ra, the CAPM model is used. Three things are needed: the
risk-free rate, the beta of the security and the expected market return. The risk-free rate of
Beter Bed Holding decreased relatively over the last
years. In 2016, the risk-free rate was -0,52%. It is
assumed that this will approximately be the same over
the next couple of years. The beta of the security is
assumed to be 1, because Beter Bed operates in a
low-risk industry. The expected market return is assumed
to be 11,63%, which is based on the long term average
return of the market calculated by S&P 500. Plugging
these numbers into the formula as seen on the image on the right, will give a Ra of 11,63%.
The calculations of the CAPM can be found in the appendix.

Free cash flows

First, a growth rate to apply to the future NOPAT, and other variables, needs to be calculated.
The reasoning behind the growth rate is as follows: First, the average change of the EBIT
over the past 5 years is calculated. This resulted in a growth rate of 3,86%. Due to the high
volatility of the EBIT, we assumed a lower growth rate would be more appropriate.
According to the BBH annual report, the expected growth rate of the market was 2,8%.

Therefore, the NOPAT over the future years is calculated by multiplying the NOPAT of the
previous year with a growth rate of 2,8%. To get the free cash flow (FCF), depreciation has to
be added to the NOPAT and capital expenditures and changes in net working capital have to
be subtracted. The same growth is used to predict these variables. Changes in net working
capital resulted in a negative outcome, which can be explained by an 11.3 million increase
in current liabilities according to the annual report. The assumptions and calculations that
have been made for the FCF, can also be found in the appendix.

The valuation of Beter Bed Holding

To valuate Beter Bed Holding, the PV of FCF and the PV of the terminal value are needed.
The PV of FCF is discounted at Ra, because the APV model is used for the valuation. The PV
of the terminal value is discounted at Ra minus the same growth rate of 2,8% as used before.

To get the valuation of Beter Bed Holding B.V. the PV of FCF and the PV of the terminal
value are summed up, which gives a final valuation of approximately 1,3 billion.

Lastly, the final valuation and the calculations can also be found in the appendix.
Valuation of multiples
Blokker Holding has been chosen as a comparison, because Leen Bakker is a part of it and
sells beds as well. Other companies, like Swiss Sense and Auping, have been considered, but
the annual reports were not available. It has been decided to compare the quick and current
ratio, because it shows the liquidity of the companies. To extend the comparison the profit
margin and ebit margin will be calculated as well. Different notations for the formulas are
used, because all annual reports report differently on current and fixed assets for example.

The quick ratio has been calculated by subtracting inventory and add cash to the current
assets and divide it by the short term liabilities:
Blokker Holding: (108.068 + 50.803) / 221.927 = 0.716
Beter Bed Holding: (96.668 - 61.884 + 21.792) / 64.387 = 0.879

The current ratio has been calculated by adding cash to the current assets and divide it by the
short term liabilities:
Blokker Holding: (108.068 + 393.156 + 50.803) / 221.927 = 2.49
Beter Bed Holding: (96.668 + 21.792) / 64.387 = 1.84

The profit margin has been calculated by dividing net income by net sales:
Blokker Holding: -52.395 / 2.109.396 = -0.02
Beter Bed Holding: 14.588 / 410.457 = 0.04

The EBIT margin has been calculated by dividing EBIT by revenue:

Blokker: -76.460 / 2.109.396 = -0.04
Beter Bed Holding: 26.035 / 410.457 = 0.06

A decent solvency ratio can not be obtained because the lack of long term liabilities of BBH.

Comparison
Beter Bed Holding performs better than Blokker Holding according to the quick ratio, profit
margin and EBIT margin, but do not perform better according to the current ratio. The
difference in quick ratio can be explained by the fact that Beter Bed Holding has less
inventory. As shown in the calculations, Blokker Holding did not make any profit at all. Beter
Bed Holding has a positive net income and EBIT which shows that the company has
performed better.