Question: Vardon Golf Ltd. is a privately held maker of golf clubs. For decades, it produced a full range of clubs, but recently most of its
Vardon Golf Ltd. is a privately held maker of golf clubs. For decades, it produced a full range of clubs, but recently most of its sales have come from hybrids, clubs that combine the best attributes of fairway woods and long irons. The company also produces putters that are starting to find some traction among professionals and low‐handicap amateurs. The company is profitable, but Cooper Palmer, a private equity firm based in London, believes that it has underperformed relative to its potential.
You are an analyst at Cooper Palmer and have been asked to perform a valuation of Vardon Golf. Financial data for 2012, the year just past, include the following:
| Revenue | £10,000,000 |
| Earnings before income and tax | 2,000,000 |
| Taxes on EBIT | 600,000 |
| Cash | £200,000 |
| Working capital requirement (WCR) | 1,500,000 |
| Net fixed assets (NFAs)* | 7,500,000 |
| Total invested capital | £9,200,000 |
* Net fixed assets = Property, plant and equipment, net of depreciation.
If the company continues under current management, the following performance parameters are expected:
| Annual revenue growth* | 4% |
| EBIT margin | 20% |
| Tax rate | 30% |
| Cash as a % of revenue | 2% |
| WCR as a % of revenue | 15% |
| NFA as a % of revenue | 75% |
| Continuing value growth rate for NOPAT | 2% |
* For the years 2013 through 2017.
However, the partners at Cooper Palmer are convinced that if they ran the company, Vardon could realize growth opportunities and operating efficiencies not expected under current ownership. For example, cost savings would boost EBIT margins, and improved asset utilization would reduce required investments in WCR and NFA. Based on your discussion with the partners, you reestimate the parameters as follows:
| Annual revenue growth | 6% |
| EBIT margin | 22% |
| Tax rate | 30% |
| Cash as a % of revenue | 2% |
| WCR as a % of revenue | 12% |
| NFA as a % of revenue | 65% |
| Continuing value growth rate for NOPAT | 3% |
Required
- Assuming a 5‐year explicit forecast horizon and an opportunity cost of capital of 9%, estimate the value of Vardon Golf under current ownership.
- Reestimate the value of Vardon Golf based on the partners' assessments of potential operating improvements. Vardon's current owners are willing to sell the company for £17.75 million. Is that an attractive price for Cooper Palmer?
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