GOLDMAN STAPLE-ON FINANCING PACKAGE:
The financing package that was based on Goldman staple-on should not be opt by the company in the same way in which it is devised, alternatively the financing package that is devised in the spreadsheet analysis it should be opt by the company.
The Goldman package is very expensive, as if the rate of interest is more than 10% for the company and the plan suggest to take advantage from such loan for up to 10 years.The other loans defined in the package, are less expensive and are not utilized properly.
The alternative:
the alternative suggested by the calculations and combinations given in the excel sheet says that, the company should not borrow senior subordinate notes from year 1 in spite of that, the loan should be undertaken from year 5.After the maturity of loan 1 named revolver. Afterwards that loan is taken. Before that, the company should continue to finance its operations, by the two less expensive loans having less interest rate and other than that, some portion of cash reserves available with the company can be utilized.
Berkshire Partners Bidding For Carter Harvard Case Solution & Analysis
If the interest expense of the company has increased to the large extent, it would be difficult for the company in the end to pay off the debts and the deal would not then be termed as beneficial one.
Advantages and disadvantages of the package:
Advantages- Less risky - Less expensive - Stable gearing position - Reasonable time determined for the loan of higher rate of interests. |
Disadvantages- The management should determine new plans and terms. - Difficult and lengthy terms and conditions. - Might suffer cash shortage if cash reserves are utilized - CAPEXwill suffer. - Growth rate will deteriorates. |
THE COST OF DEBT UNDER BOTH THE MODELS ARE:
Cost of debt under staple-on finance scheme is approx. = 20%
The cost of debt under the given set of assumptions and plan is approximately 11%, during the initial process of acquiring the Carter.During later stages, the expensive loan can also be obtained to finance the project.
Assumptions taken for the new financing package:
- Interest rates are not taken to be affected by the inflation rate.
- The amount of debt and terms of debt, will also not affect the interest rates given in the case.
- Labor is taken as constant number from the case and not changed during the loan period.
- The tax rates are taken as 30%.
SHOULD BERKSHIRE UNDERTAKE THE DEAL?
The obvious answer to this question is yes, Berkshire should continue to make this deal happen by the terms and condition, as described in the alternative package suggested. The NPV calculated for determining the asset value is also positive, and shows healthy performance of the company. The CarterCompany is growing at a good rate and by the acquisition of a company that is moving forward in the direction of success, is beneficial for Berkshire as well. The management of the company is doing great that’s why the Berkshire has achieved reasonable success, by acquiring the company Carter this deal would be turned as fruitful for the Berkshire partners,
Furthermore, it can be said that, the option that has been mentioned in the calculations as alternative would be less expensive in all respects, so that the company’s financing cost would also not be increased and in long term, the deal would benefit both the parties’ i.e. ,the Carter and the Berkshire as well.
EXHIBITS:
EXHIBIT 1
| Amount in million | Free Cash Flow | |||||
| Year | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 |
| EBTDA | $ 75.10 | $ 88.70 | $ 109.10 | $ 134.20 | $ 161.60 | $ 169.68 |
| -Amo & Dep | $ 20.49 | $ 23.60 | $ 27.14 | $ 31.17 | $ 35.81 | $ 37.60 |
| EBIT | $ 54.61 | $ 65.10 | $ 81.96 | $ 103.03 | $ 125.79 | $ 132.08 |
| -Taxes | $ 16.38 | $ 19.53 | $ 24.59 | $ 30.91 | $ 37.74 | $ 39.62 |
| -Interest | $ 21.36 | $ 24.60 | $ 28.29 | $ 32.50 | $ 37.33 | $ 39.19 |
| Net Income | $ 16.86 | $ 20.96 | $ 29.08 | $ 39.62 | $ 50.73 | $ 53.26 |
| +Amo & Dep | $ 20.49 | $ 23.60 | $ 27.14 | $ 31.17 | $ 35.81 | $ 37.60 |
| -Capex | $ 20.50 | $ 19.50 | $ 21.00 | $ 21.50 | $ 22.50 | $ 22.50 |
| +/- NWC | $ 16.69 | $ 12.00 | $ (17.97) | $ 2.83 | $ 9.21 | $ (12.08) |
| Unlevered FCF | $ 33.54 | $ 37.06 | $ 17.25 | $ 52.12 | $ 73.25 | $ 56.28 |
| DCF | $ 30.78 | $ 31.21 | $ 13.33 | $ 36.96 | $ 47.67 | $ 33.61 |
| Terminal Value | $ 1,705.58 | |||||
EXHIBIT 2
| Calculation of WACC | |
| Cost of equity | 14% |
| Weight of Equity | 37% |
| Cost of Debt | 8.8% |
| Weight of Debt | 63% |
| Risk-free Rate | 6% |
| Tax Rate | 30% |
| Beta* | 1.15 |
| Premium* | 7% |
| WACC | 8.971% |
EXHIBIT3
| ALTERNATIVE FINANCE PLANNING | |||||
| REVOLVER | TERM LOANB | SENIOR SUBORD. | TOTAL | ||
| YEAR1 | 4.38 | 10.0625 | 14.4425 | ||
| 2 | 4.38 | 10.0625 | 14.4425 | ||
| 3 | 4.38 | 10.0625 | 14.4425 | ||
| 4 | 4.38 | 10.0625 | 14.4425 | ||
| 5 | 4.38 | 10.0625 | 14.4425 | ||
| 6 | 10.0625 | 19.03125 | 29.09375 | ||
| 7 | 10.0625 | 19.03125 | 29.09375 | ||
| 8 | 19.03125 | 19.03125 | |||
| 21.9 | 50.3125 | 57.09375 | 149.43125 | ||
| COST OF DEBT | 5.11% | 5.64% | 7.61% | 18.4% | |
| 10.75% |
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