Free Cash Flow and Butler

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Introduction

Butler Capital Partners (Butler) is an investment fund founded in 1990. Butler closed its first private equity fund, European Strategic Fund, in 1991. This first fund was mainly focusing on small family owned enterprises and on divisions of larger companies. Mainly of his first success he closed in 1998 his second fund, Private Equity II, and Butler became one of the largest independent funds in France. With his second fund he would focus on investments in France on a larger scale. On April 29, 1999, a new investment opportunity arose for Butler: Autodistribution (AD). AD is an entrepreneurial firm and has become the largest independent automotive parts wholesaler in France by the end of the 1990s.

This report starts with an analysis of the opportunities and risks for the AD deal and determines whether Butler should make a proposal or not. Hereafter, a valuation of AD is given. In the next paragraph the chances for European expansion are evaluated. Then the structure of the compensation package to Chavanne is determined and at the end a short conclusion of this case is given.

1. Should Walter Butler Submit a Proposal for AD? What is the nature of the opportunity?

Autodistribution in the auto market
First we focus on the future outlook for AD in the auto market. In 1962 AD started as an automotive parts purchasing association controlled by independently owned affiliates. By the 1980s, AD began to acquire wholesales and the purchasing power of AD grew. In 1976 the network of AD expanded abroad, through an international subsidiary of AD (AD International). At the end of 1998 AD was the largest independent wholesaler of automotive parts in France and even in Europe. The outlook in the auto market is favorable with a growth of 2 to 3% in the foreseeable future due to the growing number of cars in circulation, an aging car fleet, increased technical complexity of car parts, new legislation requiring more frequent vehicle inspections and deregulations to meet European standards. To maintain its good position in the market and to generate sustainable growth, AD made four strategy elements to forward the company. First, it will pursue an aggressive acquisition program to build up the organization. For the approximately first three years it will focus on expanding in France and thereafter it will make acquisitions outside France (in Europe). Second, it will increase efficiency within the organization's existing subsidiaries. Third, it will improve central organization through the elimination of back-office expenses and better coordination of logistic. Finally, it will increase the purchasing power of the central buying unit (CBU) by increasing demand garnered through acquisitions made before, increase the percentage of purchases affiliates and subsidiaries made through CBU and/or by increasing the supplier base. With these four elements of AD's strategy it expects that AD will make/keep a powerful presence in not only France, but also in whole Europe. Looking at the company information at exhibit 19a, AD has performed quite well in 1998 compared to UK companies and most of the US companies. For example the net income multiple for AD, two UK comparable companies (Partco and Fine List) and the average are 21.63, 11.6, 7.6 and 18.44 respectively. The revenues of AD in 1998 are 884.40, while the revenues of the two UK companies are 696.96 and 620.90 (in millions of USD). However, the range of revenues between the US companies is really big. Furthermore, one can see from the figures that AD has relatively high sales, but small margins on those sales (see gross margin). Overall, given the information above, we can note that the position for AD in the auto market is strong.

Opportunities, risks and some constraints
As concluded above, AD is currently an attractive company in the auto market. But, to solve the question whether Butler should buyout this company, let us first analyze the...
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