Berkshire Carter S LBO Case Study

Topics: Discounted cash flow, Inventory, Free cash flow Pages: 8 (2246 words) Published: March 31, 2015
1. How does Berkshire Partners create value?
Berkshire partners believes in creating values “based on successful relationships, hard work, analysis, and the open decision making of all individuals” (Partners) They do not see the acquiring company as just a financial investment but as an investment in a relationship between two living entities. They work hard in collaboration with the acquired firm to do the analysis and research and consult all individuals in both firms regarding the future of the company. They focus on quality over quantity and tend to have a smaller set of deals they think will be successful and devote their resources to conduct in-depth analysis to uncover all necessary information and thorough due diligence for each deal. At times when they feel their team could do with some assistance, they bring in industry experts to help with the decision making process. Despite these detailed steps, the ultimate decision lies with the entire firm. They engaged in leveraged buyouts (LBOs), growth capital, and privatization. In LBOs, they use capital structures to find the best combination of price, leverage and returns. In order to demonstrate a serious commitment and to achieve a desired rating, they decided in a minimum capital structure of at least 25% equity whereas debt is roughly 4 to 5 times EBITDA depending on market conditions. They also support its management by assisting in setting priorities right for the future of the firm, reviewing the organizational structure to ensure it runs optimally, helping to build the management and leading the integration process in the event of an acquisition.

2. Does Carters fit with the Berkshire investment philosophy? Why is Investcorp selling? Yes, Carters does fit with the Berkshire investment philosophy. At this stage, Carters has developed a huge presence and brand in the kids apparel segment with the potential of expanding into other consumer good owing to the brand halo effect and existing distribution channels and Berkshire has extensive experience investing and running businesses in the retail sector. Berkshire could add value to Carters by mutually deciding financial strategies to enhance the company’s balance sheet in order to exit Carters at a later date through an IPO if required. Also, Berkshire can help Carters expand into other areas of consumer products to diversify their portfolio and generate additional revenues. Carters has already shown major potential as a sound financial investment. Investcorp S.A. acquired Carters in a leveraged buyout in 1996 for approximately $208 million. The underlying strategy behind this buyout was to wait patiently, for the budding business to improve and appreciate into a more valuable proposition to sell at a later stage. From 1992 to 2000, the company grew at a rate of 9.5% compounded with their EBITDA increasing at the rate of 22.1%. From the time Investcorp bought. Carters to 2001, the company had significantly improved brand recognition, lowered their cost structure, expanded into the high volume, low margin discount channel route and moved some of their manufacturing to the cheaper markets abroad. In a matter of about 5 years, Investcorp had seen their invest grow multi-fold and felt it was time to cash-in while the company was at it’s peak. 3. How much firm free cash flow will Carters generate in the next five years (2002-2006) based on management estimates? I have used the numbers given by the management’s projections for 2001-2006 in Exhibit 7A. EBITDA and EBIT margins are calculated per the formula are in line with management projections. I have assumed the difference between EBITDA and EBIT to be the figure for Depreciation and Amortization. I expect Carters to generate free cash flows for the years 2002-2006 based on the following key drivers as follows: (Values in Thousands of US Dollar)

Net Sales

Cited: Foundation, T. (2013, December 18). Tax Foundation. Retrieved March 28, 2015, from
Partners, B. (n.d.). Our Partnership. Retrieved March 24, 2015, from
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