Tiffany should go public since an IPO would be able to bring in fresh equity to fund growth, and to establish a relatively liquid and efficient market for the company's shares. Tiffany has a strong brand and would be able to attract investors during the IPO process. Tiffany option of IPO was favorable since it had positive operating results for the past months. Since the terms of renegotiating the terms of the GECC revolving credit were not encouraging , management of Tiffany consideration of getting funding via the IPO route made sense. IPO would help the management of Tiffany to repay GECC completely and free the company to make alternative borrowing arrangements. Since the operating cash-flows where not steady, refinancing by additional debt was not the right choice. The right way was to go for equity and raising private equity was tough so IPO made more sense. The recommended issue size was 4 million shares at price range between 21-23 $ per share. Question 1b:
When evaluating companies using comparable firms , the firms need to public companies. The firm should be from similar industry, business model, profitability, size, growth and geography. Since the operating margins for diversified retailers are very different from the Tiffany therefore it is not the right comparable. Thus, while Tiffany's revenue growth closely resembles that of other Jewellery Retailers, its margins are higher like Speciality Retailers. .For selecting the right comparables, I will be looking at companies with similar revenue growth rates, which is for the Jewellery Retailers. Question 1c:
The average Enterprise value /operating income multiple of comparable jewelry retailers is around 7.27x. We shall use this multiple of 7.27x for valuation purposes. At 7.27x, the enterprise value of Tiffany's is $ 157.68 (21.9 * 7.27) million. Of this value, the value of debt is $ 49 million, giving us an equity value of $ 108 million. The multiple of EV to Operating income is commonly used in the retail industry for valuing. However, for the purpose of valuation by multiple, it is advisable to ignore Barry. Jewellers Inc. as these companies vary significantly in asset and sales structure from Tiffany. Enterprise value is arrived by adding net debt to market capitalization of the companies.
The price range for Tiffany IPO is between $21-23 per share. This is much closer to the lower end of the price band and therefore further under pricing would not be advisable. Through book building, Tiffany is able to attract investors for 16 million compared to the actual issue of 4 million shares. Hence, it can be said that since the investors have expressed interest at the lower band of the price range, and no further under pricing is required. Hence, moderate under pricing in the range of 5% to 10%. is appropriate. Question 2:
The lease option is better and cheaper because of the following reasons:- Tax Advantage. An operating lease is not considered to be a purchase, but rather a tax deductible overhead expense. Therefore, Amazon Mines can deduct 100% of their lease payments. Equipment purchased with a bank loan must be depreciated over a period of years, which often exceeds the useful life of the equipment. Lesser Liability. Because an operating lease is not considered a long-term debt or liability, it does not appear as debt on Amazon Mines financial statement, thus making it more attractive to traditional lenders when Amazon Mines need them by improving Amazon Mines financial ratios. All loans appear on Amazon Mines balance sheet. Fixed Rates. Leases have rates that are fixed. Most term loans are adjustable. All equity-lines/line-of-credits are adjustable. Therefore more interest risk in case of loan. Lesser Down payment. With leasing, there is very little money down - perhaps only the first and last month’s payment is due at the time of the lease. Since a lease does not require a down payment, it is...
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