Mercury Athletic

Topics: Free cash flow, Discounted cash flow, Cash flow Pages: 7 (800 words) Published: September 24, 2013
RE: Mercury Athletic valuation and acquisition recommendations

We believe that Mercury is an appropriate target for AGI since an acquisition can be an excellent growth opportunity. First, through the acquisition AGI can take the advantages of some existing synergies. Acquiring Mercury would expand AGI’s business size and consequently produce the “one plus one is greater than two” effect. This acquisition would double AGI’s revenues, increase its leverage with contract manufacturers, and also help to expand its presence with key retailers and distributors. Moreover, if negotiated well, AGI could acquire Mercury for a lower price than the actual price of Mercury; earning more than what they’ve paid. This will be discussed further in the recommendation.

Secondly, acquiring Mercury is a lower risk way for AGI to increase their growth rate. Mercury has a high growth rate of revenue, which may compensate for the low growth rate of revenue for AGI. Further, since the women’s casual line is going to be closed or consolidated, the rest of the three segments of Mercury show prosperous future prediction in margins and growth. This reflects a good acquisition opportunity.

Finally, acquainting Mercury is ease of integration. This is because Mercury and AGI both are the footwear industry. And the main products of Mercury are athletic and casual footwear that are similar with AGI’s products. Both of the companies’ manufacturers are located in China, so they can enjoy the geographical advantage of sharing resources and infrastructure with each other.

After reviewing Liedtke’s projections, we determined that they seem reasonable overall. One area we may consider altering is the revenue projections. The Revenue growth for each firm seems a bit aggressive. The growth rate of Men’ Athletic Footwear continue decline from 15.39% in 2007 to 5% in 2011 while it was 15.39% and 44.24% in 2005 and 2006. The growth rate of Men’s Casual Footwear remain stable around 2%-3% while historical number is negative. Some of these projections for revenue could be tweaked down, however, they still appear to be projected within reason.

One approach to determine the value of Mercury was to use the discounted cash flow model. After the free cash flows were determined for 2007-2011, we then obtained a terminal value. Summing these value up and then taking the present value gives us a reasonable estimate of the value of Mercury Athletic. The calculations are presented in the exhibits and the table below:

 
1
2
3
4
5
 
2007
2008
2009
2010
2011
Revenue
479,329
489,028
532,137
570,319
597,717
Operating Expenses
423,836
427,333
465,110
498,535
522,522
SG&A
8,487
8,659
9,422
10,098
10,583
Operating Income
47,006
53,036
57,605
61,686
64,612
Taxes (40%)
(18,802)
(21,214)
(23,042)
(24,675)
(25,845)
NOPAT
28,203
31,822
34,563
37,012
38,767
Plus: Depreciation
9,587
9,781
10,643
11,406
11,954
Less: CAPEX
11,983
12,226
13,303
14,258
14,943
Less: Change NWC
4,567
2,649
9,805
8,687
6,233
FCF
21,240
26,727
22,097
25,473
29,545
Terminal Value
 
 
 
 
349,526
 

379,071
Discounted Cash Flows
19,125
21,671
16,133
16,746
224,396
Present Value of all Cash Flows
 
 
 
 
298,071

The value we concluded to can be considered a conservative estimate. First, the equity market risk premium is a conservative estimate given that we used a higher risk free rate obtained from 20-yr treasury rates. Second, our terminal value is based on the quoted GDP growth rate given from the Presidential 2014 Budget projections. This can be viewed as a conservative growth rate as the growth in the footwear industry may not mirror actual GDP growth. Finally, we looked at EBITDA multiples of comparable companies to check the reasonableness of our valuation. The comparables and their corresponding EBITDA multiples are present below:

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