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GALi koval strategic alternative analysisNadeya HassanKatarzyna Krzeptowski SabalaLuoheng Huang

Faculty Advisor: Joseph Vu

Table of ContentsExecutive Summary3

Business Description5

Gali Koval Overview7

Retail & Apparel9Industry Analysis

Valuation 12

Scenario #1 19Synergy

Scenario #2 23Leverage Buyout

Valuation Ranges 27

Strategic Buyers 29

Brand Name, Licensing 37 & TrademarkIndustry Analysis

Trademark Dispute 41

Comprehensive 47 Recommendation

Questions 49

Appendix 50Executive summaryExecutive SummaryMotivation for Reemergence:July 2012, principal on the companys debt came dueDefaulted on principle payments and unable to refinanceCurrently in Chapter 11 receivershipCompany equity holders proposed a plan for reemergenceRejected by bankruptcy courtDebt holders have taken control of the companySet to propose a plan for exit since they have no interest in continuing businessAlternatives to Maximize Value of Business:1. Gali Koval sold to larger industry peers such as PVH Corporation or LVMH GroupConservative sale range of $346MM to $434MM, or an optimistic range of $447MM to $613MM with synergies2. Gali Koval sold to a private equity buyer to expand new sales channelsRealizable transaction consideration between $655MM to $841MM

Business descriptionBusiness DescriptionGali Koval Corporation engages in sales of mens clothing and luxury products Headquarted in New York, NYOperates 99 stores and distributes to upscale department storesHas direct sales channels in all major U.S markets, small international presence and meaningful online sales10 stores in Europe and AsiaSourced from independent manufacturersMost manufacturing takes place outside the U.SWorkforce approximately 3,500 employees Experience senior management team

Gali Koval is known for high quality product and commands a premium priceAll products are branded with Gali Koval trademarkBrand name maintained luxury image, worn by celebrities and high profile executivesGali Koval does not currently license its brands to third parties

Gali koval overviewGali Koval Overview2007: Gali Koval acquired by private equity firm for $1.1 billionAcquisition funded with 65% debt and 35% equityBelieved there was an opportunity to expand international operations and salesAttempted to expand internationally in 2008 and 2009, but has since closed some of these new outlets2009: Gali Koval lost a large department store customerDue to disagreements about pricing and marketing strategy

Since global recession in 2008-2009, luxury brands have seen performance suffer

Revenue (000s) & Margin TrendsRevenue:Plummeted sharply during financial crisisHas recently stabilized, but results continue to be below 2007 levels EBITDA:Margin reduction in recent years is mainly a result of significant lost revenuesCompanys cost cutting efforts have not kept pace with declines in revenue

Retail & ApparelIndustry BackgroundIndustry History2010Consumer Spending on Apparel$191.3 billionDisposable Personal IncomeIncreased 3.6% (0.7% in 2009)Imported Apparel$71.40 billionExports of U.S-Made Clothing$4.51 billionUS Retail Sales$219.23 billionMens Apparel Retail SalesAccounted for 28% of US Retail Sales

2011Consumer Spending on ApparelIncrease of 3.8% from 2010: $198.7 billionDisposable Personal IncomeIncreased to 3.8% from 2010Imported ApparelIncrease of 8.8% from 2010: $77.66 billionExports of US-Made ClothingIncrease of 13.7% from 2010: $5.13 billionUS Retail SalesIncrease of 5.9% from 2010: $226.52Mens Apparel Retail SalesAccounted for 28% of US Retail Sales

Source: Standard & Poors Industry Surveys-Apparel & Footwear: Retailers and Brands

Industry Background ForecastsOverview-Post Financial CrisisExpected unemployment rate of 8.2% with continued improvement through 2015, project a rate of 7.0%Change in spending and savings patternsMore responsible/constrained consumer will force the sector to adjust lower sustainable levels of demandWill lead investors to lower their long-term secular growth expectationRecession sharpened the consumers value focused and increased the retailer consideration set by 4%*GDP grew 1.3% in second quarter of 2012, projected 2.2% growth for end of 2012

Luxury Goods MarketBain & Co. estimated worldwide sales growth for luxury goods will be between 6%-7%Highest growth would come from Asia (excluding Japan) at 16.5%, Americas (5%-7%) and Europe (3.75%)Within emerging markets, sales forecasted to increases 18%-22% in China, 14% in Latin America, and 8.75% in the Middle East

Source: Standard & Poors Industry Surveys-Apparel & Footwear: Retailers and Brands

Valuation Trading ComparablesComparable companies consist of publicly traded companies in the Apparel IndustryThey have similar products, business models, and growth to Gali Koval Tend to be slightly larger as smaller companies have greater difficulty adhering to the high compliance costs of being publicly tradedEV/EBITDA multiples imply a valuation range of $202MM to $430MMMedian multiple of 5.9x leads an implied valuation of $282MM

Transaction ComparablesComparables consist of six acquisitions within the Apparel IndustryIncludes two strategic acquisitions and four leverage buyoutsAll transactions in cashGali Koval should pursue similar deal structure to receive immediate payment

EV/EBITDA multiple implies a valuation range of $330MM to $590MMMedian multiple of 8.0x results in an implied valuation of $385MM

Financial Projections2013-2016 Assumptions:Management plan used as givenNet Working Capital (NWC) in 2012: $87.917MNWC= Current Asset Current Liabilities + Current Portion of DebtCompany was taken over by debt holders and no current debt is accountedProjections of NWC for 2013-2016: 26.6% Will be held constant with 2012 percentage of revenue 2017 Assumptions:Revenue growth percentage from 2016 will be held constantCompany Owned Stores: 4.8%Department Stores: 2.5%Online Stores: 10%Expenses (as a percentage of revenue) held constantCOGS: 40%SG&A: 39.5%Depreciation held constant at 2.6% of revenueCapital Expenditures held constant at 2.5% of revenueNWC held constant at historical percentage of 26.6% of revenuePost 2017 Assumptions:Unlevered Free Cash Flow to firm will grow 2.0% in perpetuityFinancial Projections

WACC CalculationsWeighted Average Cost of Capital calculation based on several underlying assumptions from publicly available sources and industry research

Cost of Debt: 8.99%Implied CCC credit rating based on Standard & Poors Indicative Ratios for measuring financial riskYield on 20 yr. Corporate Bond at CCC rating is 8.99%

Cost of Equity (as determined by CAPM): 12.09%Equity Risk Premium: 8.23%1Risk Free Rate: 2.02%2Beta: 1.22Un-levered Beta of Apparel Industry: 1.053Tax Rate: 35.0%Book Value of Debt to Market Capitalization Ratio : 26.20%3

Unique Risk Premium of 3.0% is added due to the situation that Gali Koval is in bankruptcy

Calculated WACC Value: 13.79% Sources: 1. Bloomberg Terminal indicates Market Return on US Equity 10.25%, effective January 2013 2. Using 20 yr. treasury yield as proxy, quoted from US Department of Treasury, January 2013 3. Assumed BV of Debt = MV of Debt; thus, BV of Debt to MV of Equity is a reasonable proxy for MV of Debt to MV of Equity

Discounted Cash FlowDiscounted Cash Flows Analysis projected financial statementsCalculated WACC of 13.79%, and assumed Terminal Growth Rate of 2.0%Results in intrinsic value of $315MMImplied valuation range of $282MM to $358MM

Scenario #1SynergyDCF with SynergiesIf Gali Koval Corporation is purchased by a strategic buyer, it could anticipate a premium over the intrinsic valuation due to revenue and cost synergies from scalability

Synergy Assumptions:Revenue$14MM revenue synergies in 2013, increases $2MM/yr. until reaching $20MM in 2016, revenue synergies in 2017 held constant as 2016$7.5MM/yr. of lost revenue due to store closingsGross MarginWill remain the same level as percentage of revenue as outlined in financial statement projectionsGross Margin is projected at 60% of revenue and the industry average of about 51%1Synergies wont have any improvement in Gross MarginSG&A cost savings $8MM/yr. cost savings due to store closings$25MM one time cost reduction due to distribution center rationalization in 2013$3MM one time expense due to store closings in 2013$10MM one time saving through management and back office reductions in 2013Depreciation, Capital Expenditures, and Net Working Capital will remain at stated percentage of revenue as outlined in financial statement projectionsSources: 1. Bloomberg TerminalDCF with SynergiesDiscounted Cash Flow Analysis from projected realizable synergies, calculated WACC of 13.79%, and terminal growth rate of 2.0%

Results in intrinsic valuation with synergies of $384MM, assuming all synergies are realizedImplied valuation with synergies from $346MM to $434MM

Its possible that after being acquired by a healthy strategic buyer, Gali Kovals WACC will return back to the industry average and no unique risk premium related to bankruptcy will need to be added In this case, WACC=10.79%Results an optimistic intrinsic value with synergies range of $447MM - $613MM

DCF with Synergies

Scenario #2Leverage Buy-OutLeverage BuyoutA private equity buyer will pursue a different strategy to expand revenue after acquiring Gali KovalA new line of products at a lower price point will be sold thro