Maverick

Acquisition of livious
apparel, Inc. by
Gaspier jeans, Inc

Acquisition of livious apparel

MergerProposal Discussion
Over the last few days, Gaspier Jeans, Inc. has been in talks for a merger with Livious Apparel, Inc. In order to
discuss the details of the deal, Joan Ryan, Chief Executive Officer, Gaspier Jeans met Owen Trint, Vice President,
Livious Apparel, Inc. on a pleasant Monday morning in Boston, Massachusetts.
Joan: Good morning Owen! Good to see you after so long.
Owen: Good morning! Yeah, its been quite a while.
Joan: Yes.. and I think its great that we are meeting today because we are really looking forward to start
working with your company. And as such, we should decide on the terms of the transaction as soon as
possible.
Owen: I completely agree with you. Lets bell the cat!
Joan: You told me that you were going to decide on your final offer price based on your board meeting last
week. So what do you have for me?
Owen: Yes, we did have a board meeting last week and we have decided on a consideration of $550 million for
a 100 percent stake in our company. However, you will receive dividend payments of $130 million immediately
after the deal.
Joan: Looks like the quote is above the range we had in mind.
Owen: Well, the company has been doing really well for the past three years and is poised to perform even
better in the next few years. I think you need to consider the fact that this company is going to be worth $800
million in five years, which speaks volumes about the potential of the company and the industry.
Joan: Ok, let me to talk to my valuation experts and get back to you with our offer price in a couple of days.
Does that work?
Owen: That should work. Lets connect once you have an offer price. Have a good day!

Campus MaverickRound 1

Acquisition of livious apparel, Inc.

Merger Details

Action Items for Deloitte

Later that day, Joan sent out a mail to his valuation experts (Deloitte) describing his conversation with Owen
and also providing some company-specific information as follows:

1. We have an offer price of $490 million in mind, with all other conditions as-is from our discussions with
Owen. Assuming Livious Apparel shareholders agree to this price, should we proceed with the merger?

We believe a merger will result in significant synergies due to economies of scale in manufacturing and
marketing, as well as significant savings in general and administrative expenses.

2. What is the highest price per share that we can pay for Livious Apparel?

As part of my initial analysis, I had prepared the pro-forma financial statements for Livious Apparel, assuming
the merger takes place (refer to table 1). The financials include all the synergistic benefits from the merger.
Livious Apparel will require investments each year for continuing operations, along with sources of financing
(refer to table 2)
I think that the capital structure at Livious Apparel is not optimal. If the merger takes place, we will
immediately increase its leverage with a $110 million debt issue, which would be followed by a $130 million
dividend payment to us. This will increase Livious Apparels debt-to-equity ratio from 0.50 to 1.00.
At the end of five years, I think the company will have $320 million in debt, and currently, both companies
can borrow at Moodys Baa-rated corporate bond rate.
The current share price of Gaspier Jeans is $87.35 and the company has 13.5 million shares of equity
outstanding. Livious Apparel has 7 million shares of equity outstanding. The expected market return is 15.65
percent.
I think the current cost of capital for Gaspier Jeans is 11.00 percent. I believe the volatility of Livious Apparels
stock is close to the median of the volatility of guideline companies. Further, I do not believe in using the
mid-year discounting convention while analyzing the investments.
I am looking to close out the transaction as of April 30, 2015, which leaves you with very little time to
perform the analysis. But as always, I know you will get through it and come back to me with the best possible
solution/advice.

DatasheetSubject

3. Instead of an all cash deal, if we consider an equity exchange, what exchange ratio would make the merger
terms equivalent to the original merger price of $490 million?
4. We want to improve the shareholder value of the merged entity and would like to do some restructuring
of the business segments and operations of Livious Apparel. Please help us identify strategies to improve
earnings growth?
5. We see that their e-commerce segment is struggling. Do you suggest we exit this line of business or are
there ways to improve the financials for this segment?
6. Assuming you are the client contact for Joan from Deloitte, please analyze the information above and
respond to Joan accordingly. Your deliverable should be a power point presentation (not more than 8-10
slides, with a separate slide for each response) and an Excel model which shows all the calculations.
Points to note:
You can refer to any publicly available data source.
Please use analysis and gathered some information on the subject companies, guideline companies, and the
industry below.
All the market data used should be as of the transaction close date.
List out your assumptions clearly and provide the rationale/source for each assumption.

Campus MaverickRound 1

Acquisition of livious apparel, Inc.

DatasheetCompany

Table 1Financial Statement Projections for Livious Apparel, Inc.

Table 3Guideline Companies (as of 04/30/2015)

Fiscal Year Ending April 30

2016
Sales (all
segments)
Production costs

2017

$698,000,000

2018

$835,000,000

$938,000,000

2019
$1,055,000,000

2020
$1,165,000,000

Company

Book Value of Debt

($000s)

Market Value of Capital

($000s)

Levered Equity Beta

Abercrombie & Fitch Co.

344

1,921

1.58

Kate Spade & Company

411

4,580

2.11

490,000,000

590,000,000

650,000,000

725,000,000

800,000,000

Bebe Stores, Inc.

264

0.98

Depreciation

54,000,000

64,000,000

74,000,000

84,000,000

84,000,000

Guess? Inc.

1,563

1.45

Miscellaneous
expenses

65,000,000

75,000,000

85,000,000

95,000,000

100,000,000

Express Inc.

EBIT

89,000,000

106,000,000

129,000,000

151,000,000

Interest

19,000,000

22,000,000

24,000,000

Taxable income

70,000,000

84,000,000

Taxes (38.50%)

26,950,000

Net income

43,050,000

1,353

18,319

1.16

The Gap, Inc.

139

383

1.83

181,000,000

Aeropostale, Inc.

108

120

0.75

25,000,000

27,000,000

Joes Jeans, Inc.

3,112

1.02

105,000,000

126,000,000

154,000,000

270

1,652

1.28

32,340,000

40,425,000

48,510,000

59,290,000

51,660,000

64,575,000

77,490,000

94,710,000

2019

2020

American Eagle Outfitters,

Inc.

Table 2Sources of Finance

Fiscal Year Ending April 30
2016

2017

2018

Investments

Net working
capital

$17,500,000

$22,500,000

$25,500,000

$28,500,000

$29,500,000

Non-current
assets

15,000,000

25,000,000

18,000,000

12,000,000

7,000,000

Total

32,500,000

47,500,000

43,500,000

40,500,000

36,500,000

Sources of
financing

32,500,000

20,000,000

22,000,000

14,000,000

9,000,000

New debt

27,500,000

21,500,000

26,500,000

27,500,000

Profit retention

32,500,000

47,500,000

43,500,000

40,500,000

36,500,000

Total

26,950,000

32,340,000

40,425,000

48,510,000

59,290,000

Campus MaverickRound 1

Datasheet

DatasheetKey segments

Gaspier Jeans, Inc.

Gaspier Jeans, Inc. is one of the world's largest branded-apparel companies. The company designs, markets, and
sellsdirectly or through third parties and licenseesproducts that include jeans, casual and dress pants, tops, shorts,
skirts, jackets, footwear, and related accessories for men, women, and children around the world. The company is
headquartered in Charlotte and has over 8,000 employees. The companys products are sold in approximately 30,000
retail locations worldwide, including approximately 2,200 retail stores, both franchised and company operated, and shopin-shops dedicated to their brands.
The acquirer has the following broader strategies:
Drive the profitable core business
Expand the reach of their brands and build a more balanced portfolio
Become a world-class omni-channel retailer
Leverage its global scale to improve the cost structure
Livious Apparel, Inc.
Livious Apparel, Inc. is a wholesale distributor and retail seller of premium denim apparel and sportswear. As of December
31, 2014, the company operated 152 stores with operations in four continents. Livious is headquartered in Boston and
has over 5,000 employees.
Livious Apparel outsources all of its manufacturing to third parties on an order-by-order basis. The Company has contract
manufacturers in the United States for its womens and mens denim, knits, and fleece products and Mexico for its kids
denim, adult denim shirts and jackets, knits, and fleece products. Livious Apparel also has contract manufacturers in Asia,
including Sri Lanka, China, Pakistan, and India for knit shirts, outerwear, woven shirts, and non-denim bottoms. The
company has two distribution centers in the Los Angeles area, with one center supporting the design team (fabrics, trims,
and samples library) and warehousing raw materials and unwashed goods. The other center handles the distribution of all
finished goods, except those destined for Europe, Middle East, and Africa (EMEA) markets.
Livious Apparels Premium Jeans has two primary category of products: Premium Denim Jeans and Sportswear. From 2012
to 2014, the companys product mix for mens clothing changed from 28 percent sportswear and 72 percent jeans to 46
percent sportswear and 54 percent jeans. Conversely, the product mix for womens clothing has shifted from 26 percent
sportswear and 74 percent jeans in 2012 to 35 percent sportswear and 65 percent jeans in 2014.
In addition to apparel-related products, the Company also sells fashion accessories that complement its clothing lines and
licenses its brand name to third parties for the manufacture and sale of designated products.

Livious ApparelKey Segments

Americas
Retail
The company operated 147
retail stores including 102
full-price stores and 45 outlet
stores in the United States
and Canada (excluding three
stores that were slated to be
closed shortly
after the transaction).
The United States comprised
a substantial majority of
locations, with 91 full- price
stores and 43 outlet stores.
The size of a full-price store
is typically 1,700 square feet
and showcases the full range
of branded merchandise.
The retail stores are designed
to emphasize a Malibu
hippie-bohemian chic
image through the use of
hand-hewn hickory pecan
wood.

Americas
Wholesale
The wholesale segment sells
Livious Apparel products to
large, upscale department
chains, specialty stores, and
third-party e-commerce sites
that have the image and
merchandising expertise that
the company expects for the
effective presentation of its
products.
The wholesale segments
sales declined primarily
as a result of changes in
consumer preferences for
cleaner and less embellished
styles, while the company
elected not to adjust the
brands image and premium
positioning by pursuing
transient fashions.

Global Retail
and Wholesale
The segment sells products
through a variety of
channels, including
subsidiaries, joint ventures,
and distributors and sales
agents who sell to upscale
boutiques in their respective
territories.
The segment also included
four full-price stores and two
outlet stores in Germany,
three full-price stores and
one outlet store in the
United Kingdom, two fullprice stores and two outlet
stores in Japan, two fullprice stores in Hong Kong,
one full-price store and one
outlet store in Austria, and
one outlet store each in the
Netherlands and Ireland.

E-Commerce

Sales for e-commerce

(excluding those sold
through Americas
Wholesale) are made
through a third-party,
Non Stop. Non Stop
holds merchandise on
consignment which allows
them to accept and fulfill
customer orders. Non
Stop receives a sales
commission of
15.0 percent.
The Company continues
to build a team to
manage its e-commerce
operations and is currently
considering bringing all
e-commerce operations
in-house.

Livious Apparels outlet

stores are a hybrid model,
selling both discounted
retail transfers and products
designed exclusively for
outlets.

Campus MaverickRound 1

DatasheetKey

Latest Twelve Months (As

of April 30, 2015)

Datasheet: Industry overview

Family clothing stores in
the United States

Americas Retail

Americas
Wholesale

Global Retail and

Wholesale

E-Commerce

Revenue Share (%)

60.0%

20.0%

15.0%

5.0%

EBITDA Margin (%)

25.6%

18.4%

21.9%

-36.9%

US Apparel Market Sales

(US$ billion, 20102018)

US Apparel Market Sales

(US$ billion, 20102018)

E-Commerce Segment
Metrics

Fiscal Year Ended April 30

2013

2014

2015

2016

Revenue Growth (Y-o-Y)

10.0%

13.0%

16.0%

12.5%

EBITDA Margin

-15.6%

-18.3%

-20.0%

-36.9%
During the recession, the family clothing stores industry revenue declined. However, the industry has fareed better than
similar industries due to the fact that some of the products offered are considered necessities for consumers. As a result,
revenue has increased at an average annual rate of 2.2 percent to $100.0 billion, over 2009-2014, despite the marginal
increase of 0.4 percent in 2014.
IBISWorld forecasts a continued and steady recovery for the family clothing stores industry, with revenue anticipated to
grow at an average annual rate of 2.1 percent over 20142019, to reach $109.2 billion. As the economy recovers and
consumer sentiment rebounds, shoppers will increasingly purchase clothes for fashion rather than just for function. New
stores will likely open to meet the growing demand, pushing up the total number of family clothing retailer locations to
an estimated 51,271 in 2019.
However, threats loom from competing industries, especially the e-commerce and online auctions industry. These
e-tailers offer consumers convenience not found in traditional brick-and-mortar stores, as well as selection and price
comparison abilities. This competing industry is set to expand its reach, posing a potential threat to the family clothing
stores industry.
Womens clothing accounts for 59.1 percent of industry revenue, nearly double the share of mens apparel, which
brings in 33.4 percent of revenue. Women purchase a wider variety of items to suit different occasions. Formal wear
includes pieces such as suits, blazers, tailored pants, and coats; casual clothes include jeans and knit and woven shirts
and shorts. Casual clothes are more widely worn since their acceptance is nearly universal, especially as office attire
policies have become more lax over the past decade. However, their demand is also more volatile as excessive purchases
of casual clothes are considered discretionary. During the past five years, the womens casual-wear product segment has
grown to about 32.6 percent. Formal wears share of revenue (13.4 percent) has remained fairly flat. However, its higher
price point has helped it retain its share.
While men cut clothing expenditure during the recession, their purchasing patterns have not completely rebounded.
As in the womens segment, casual clothes are more commonly bought than formal ones. Jeans and t-shirts are much
more in demand than tailored slacks and sport coats. For men, the formal wear segment (8.8 percent of industry
revenue) has shrunk much more quickly than its casual counterpart (17.4 percent of industry revenue), with increasingly
relaxed work environments. Other mens apparel (7.2 percent of industry revenue) includes sleepwear, outerwear, and
custom-made garments.
Childrens apparel accounts for a much smaller 7.5 percent of revenue. This is because the average price of kids clothes
is significantly lower than the price for a designer dress or a formal suit jacket.

Campus MaverickRound 1

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