Holmes Corp: LBO Valuation
1. Sustainability – One of Holmes Corp. major strengths is its long history of steady and predictable cash flow. Over the last five years, Holmes’ Net sales have grown from $41MM to $103MM which is approximately a growth rate of 151%. Over the same time frame Holmes’ net earnings have grown from $1M to $6.6M which is approximately a growth rate of 560%. This history of strong earnings means we can realistically expect stable future cash flow which will be useful going forward. Holmes’ stable earnings will also be very attractive to prospective corporate bondholders. We would most likely be able to attract a good amount of bond purchasers since there would be little risk of a default perceived due to strong and stable earnings. This fact would make it much easier to raise funds in order to pay back a bridge loan.
2. Clean Balance Sheet – Holmes Corp has a very solid balance sheet due to the fact that it is carrying zero long term debt. The lack of debt makes the LBO a substantially safer proposition. Again the lack of debt makes Holmes very attractive to prospective corporate bond purchasers in the event that we need to issue bonds to pay-off a bridge loan. Additionally, if we decide to take on leverage from lenders after the LBO then our credit rating should be favorable due to the strong balance sheet which would mean a lower interest expense than normal. The lack of debt also means that Holmes is not currently burdened with interest payments which help its net earnings.
3. Growth Opportunity – Holmes has seen a huge amount of growth in international markets which is evidenced by a 31% increase in net sales in the last year alone. Societe Francaise Holmes Fermonte, which was a recent acquisition, helps to promote the company’s strategy and momentum in international markets, thus increasing the overall value of the company. In year 15 $30MM in net sales were generated from...
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