Monmouth
Capitalizing on Distress
Nicolas Lindstrom
Samuel Nadeau
Franco Perugini
Mandate
How should Monmouth approach the
Robertson opportunity?
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Recommendation
Offer 2.1 NewCo shares for every 1
Robertson share; Valuing the Company at
$29.2M or $50 per share
Accretive as of 2005
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Strategic Rationale
What are you buying?
Quality product with powerful brand name
Knowledgeable & experienced staff
Highly sophisticated and far reaching distribution system
• Reaches 2,100 wholesalers & 15,000 retailers
• 137 countries
Poor Recent Performance
• Lower sales growth, margins & efficiency ratios
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Monmouth Acquisition Criteria
Major
Player
Stable &
Broad
Market
Leading
Company
• Largest Domestic Manufacturer of cutter & edge tools
• 50% Market share in clamps & vices
• 4th largest in scissors & sheers
• Leading company in it’s two main product lines
• Top competitor in other product segments
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
The Benefits of the Mergers
Reduction in Cost of Goods Sold
• 69% -> 65% of Sales
Selling, General & Administrations Costs
• 22% -> 19% of sales
Integrate Roberston’s distribution system
• Increase Monmouth’s reach for its product lines
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Rationale
Simmons Offer
• Cash Offer: 42$
• Acquired 30%
• Opposed by Management
NDP Offer
• Share swap 5:1
• Volatility in NDP Stock (53.1 -> 23.12)
• Opposed by Simmons
Manmouth Offer
• 2:1 Share Swap: 50$
• Supported by Simmons & Management (50% of ownership)
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Valuation
Valuation Overview
Robertson Standalone
Income Statement
Working Capital
Standalone Valuation
DCF
Multiples
Proforma
Accretion/Dilution
Mandate
Strategic Rationale
PF DCF Value
Valuation
Implementation
Conclusion
Standalone Assumptions
Income Statement
• Revenue growth of 3%
• COGS decrease from 68.5% to 67% of sales
• Slight SG&A leverage to 21.5% of sales from 22%
Valuation
• D&A equal to Capex to reflect low growth (3%)
• WACC of 9.6%; Terminal growth of 2%
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Income Statement
$M
Sales
Growth
COGS
Gross Profit
2000
53.7
SG&A
D&A
EBIT
11.5
2.4
3.9
11.9
2.3
3.2
12.3
2.1
3.0
0.8
3.1
1.2
1.9
0.8
2.4
1.0
1.4
0.8
2.2
0.9
1.3
Interest Expense
EBT
Taxes
Net Income
35.9
17.8
2004
58.7
3%
39.6
19.1
2005
60.4
3%
40.5
19.9
2006
62.2
3%
41.7
20.5
2002-2007
2007 CAGR
64.1
3.0%
3%
43.0
2.5%
21.2
4.0%
12.5
2.2
3.5
12.6
2.2
4.2
13.0
2.3
4.7
13.4
2.4
4.8
13.8
2.4
4.9
10.5%
0.8
2.7
1.1
1.6
0.8
3.4
1.4
2.1
0.8
3.9
1.5
2.3
0.8
4.0
1.6
2.4
0.8
4.1
1.7
2.5
13.8%
Standalone Robertson P&L
2001
2002
2003
54.6
55.3
57.0
1.6%
1.3%
3%
37.2
37.9
38.7
17.4
17.4
18.2
Operating leverage from SG&A optimization
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Working Capital
$M
Accounts Receivable
% Sales
Collection Period
Working Capital
2002
2003
2004
8.0
8.2
8.5
14.5% 14.5% 14.5%
53
53
53
2005
8.7
14.5%
53
2006
9.0
14.5%
53
2007
9.3
14.5%
53
Inventory
% COGS
Collection Period
18.0
47.5%
173
18.4
47.5%
173
18.8
47.5%
173
19.2
47.5%
173
19.8
47.5%
173
20.4
47.5%
173
Accounts Payable
% Total Expenses
Days Payable Out
2.0
3.9%
14
2.0
3.9%
14
2.0
3.9%
14
2.1
3.9%
14
2.1
3.9%
14
2.2
3.9%
14
24.0
24.6
0.6
25.3
0.6
25.9
0.6
26.7
0.8
27.5
0.8
Working Capital
Change in WC
Assumes flat WC ratios
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Comparable Companies
Company
Lincoln Electric
Snap On
Stanley Works
Average
Median
Robertson
Operating Margin
15%
10%
15%
Comparables
Return on Capital Price/Earnings Debt to Cap Asset Beta
12%
12.4x
17%
0.63
11%
14.4x
19%
0.85
14%
11.6x
24%
0.73
13.3%
15.0%
12%
12%
12.8x
12.4x
20%
19%
0.74
0.73
5.4%
4.0%
13.5x
37%
1.00
Robertson is slightly more levered
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
WACC
Robertson WACC
Cost of Debt (Assumed BBB)
Tax Rate
After Tax Cost of Debt
Market weight of Debt
6.1%
40%
3.6%
37%
Risk Free Rate (30Y Treasury)
Beta
Market Risk Premium
Size Discount
Cost of Equity
Market Weight of Equity
4.1%
1.00
6.0%
3.0%
13.1%
63%
WACC
Robertson Beta
Average Unlevered
D/E
Tax Rate
Levered Beta
0.74
0.59
40%
1.00
9.6%
Re-levering the comparable betas provides a Robertson beta of 1
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
DCF
Discounted Cash Flow
2003
2004
3.5
4.2
1.4
1.7
2.12
2.54
2.2
2.2
2.2
2.2
0.6
0.6
1.5
1.9
0.91
0.83
1.35
1.59
$M
EBIT
Less: Cash Taxes
NOPAT
Add: D&A
Less: Capex
Less: Change in WC
FCFF
PV Factor
PV FCFF
2005
4.7
1.9
2.79
2.3
2.3
0.6
2.2
0.76
1.65
2006
4.8
1.9
2.88
2.4
2.4
0.8
2.1
0.69
1.46
2007 Terminal
4.9
2.0
2.96
2.4
2.4
0.8
2.2
29
0.63
1.37
18.42
Depreciation offsets capex
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
DCF - Standalone
DCF Valuation
PV 2003-2007
PV Terminal
Enterprise Value
Less: Debt
Plus: Cash
Equity Value
Shares Out
Per Share
Implied Forward P/E
7.4
18.4
25.8
12.0
1.0
14.8
584,000
25.4
9.1x
$25.40 standalone intrinsic value; stock most likely bid up due to takeover
buzz
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Deal Proposal
Deal Structure
Monmouth Share Price
$
24
Robertson Offer Share Price
$
50
Exchange Ratio
2.1x
Robertson Shares out
584,000
MergeCo Shares Issued to Robertson 1,216,667
Monmouth Shares Out
4,210,000
Total MergeCo Shares
5,426,667
Minimum offer price needs to be $50 for support, therefore offer $50.
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Pro-Forma P&L
$M
Sales
Growth
COGS
Gross Profit
2000
53.7
SG&A
D&A
EBIT
11.5
2.4
3.9
11.9
2.3
3.2
12.3
2.1
3.0
0.8
3.1
1.2
1.9
0.8
2.4
1.0
1.4
0.8
2.2
0.9
1.3
Interest Expense
EBT
Taxes
Net Income
Shares Out
EPS
35.9
17.8
2004
62.1
6%
41.6
20.5
2005
65.9
6%
43.5
22.4
2006
69.8
6%
45.4
24.4
2002-2007
2007 CAGR
74.0
6.0%
6%
48.1
4.9%
25.9
8.3%
12.3
2.3
4.2
12.4
2.5
5.6
12.5
2.7
7.2
13.3
2.9
8.2
14.1
2.9
8.9
24.3%
0.8
3.4
1.4
2.0
0.8
4.8
1.9
2.9
0.8
6.4
2.6
3.8
0.8
7.4
3.0
4.4
0.8
8.1
3.2
4.9
30.2%
PF Robertson P&L
2001
2002
2003
54.6
55.3
58.6
1.6%
1.3%
6%
37.2
37.9
39.8
17.4
17.4
18.8
584,000 584,000 584,000 584,000 584,000 584,000 584,000 584,000
3.25
2.36
2.23
3.49
4.93
6.58
7.60
8.33
Monmouth takeover would lead to outsized growth and leverage
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Accretion/Dilution
Accretion/Dilution Analysis
2003
2004
11.0
11.9
2.61
2.83
$M
Acquirer Net Income
Acquirer EPS
Pro-Forma Robertson EBIT (incl Synergies)
Interest Expense
Income Taxes
Pro-Forma Robertson Net Income (Pre-Fee)
One-Time Restructuring Charges (severance)
Professional Fees
Issuance Fees
Robertson Pro-Forma Net Income
MergeCo Net Income
PF MergeCo Shares Out
PF EPS
Accretion (Dilution)
Accretion (Dilution) %
2005
12.8
3.04
2006
13.8
3.28
2007
15.0
3.56
4.2
0.8
1.4
2.04
(0.3)
(0.29)
(1.17)
0.27
5.6
0.8
1.9
2.88
7.2
0.8
2.6
3.84
8.2
0.8
3.0
4.44
8.6
0.8
3.1
4.86
2.88
3.84
4.44
4.86
11.3
5,426,667
2.08
(0.54)
-20%
14.8
5,426,667
2.72
(0.10)
-4%
16.6
5,426,667
3.07
0.03
1%
18.2
5,426,667
3.36
0.08
3%
19.9
5,426,667
3.66
0.10
3%
Deal turns accretive in 2005 from Synergies
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Implementation
Timeline
Apr
2003
May
June
Jul
Hire Bankers
Submit LOI at 2.1x Share Ratio
Due Diligence
Prepare Legal Docs
Issue New Equity
Close Deal
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Ownership Structure
Monmouth
78%
Swap Ratio
2.1X
Simmons
7%
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Rationale
Reduce sales Force/Marketing
• Reduce 3%
Operating Backs store
• 2%
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Long-term timeline
2003
Medium-Long Term
2004
2005
2006
Monmouth Shareholder Communication
Layoff Overlapping Employees
Integrate Product Segments
Merge Distribution Systems
Implement Inventory Management
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
2007
Management Recommendation
Integrate product lines
• Reduce inventories
• Increases efficiency
Reduce advertising expense
Build on distribution
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion
Conclusion
Mandate
Strategic Rationale
Valuation
Implementation
Conclusion