Berkshire Partners

History of Carters Inc.

Founded in 1865 in Needham, Massachusetts Manufacturer of baby, toddler, and young children apparel in the U.S. Company divided into 5 segments Financial distress due to unprofitable product lines in the early 1990s

New Management
In 1992 new management was installed new CEO of Frederick J. Rowan Revamp of organization structure and corporate strategy Implemented lower cost structure, expansion into discount channel, moved manufacturing operations offshore, and improved brand recognition

New Management
In

1996 operating and financial performance turnaround resulted in buyout by InvestCorp at $208 million In 2000 launched new brand called Tykes

Porters Generic Competitive Advantages

Carter's Inc. Total Net Sales

In Thousands of Dollars

$500,000 $400,000 $300,000 $200,000 $100,000 $0 1996 1997 1998 Year 1999 2000

Carter's Inc. Net Income

In Thousands of Dollars

$20,000 $15,000 $10,000 $5,000 $0 -$5,000 1996 1997 1998 Year 1999 2000

Carter's Inc. ROE

0.2000 0.1500
Percent

0.1000 0.0500 0.0000 -0.0500 1997 1998 Year 1999 2000

Why sell Carters Inc.?

Investors at InvestCorp wanted returns for their financing Initial Public Offering (IPO) market was at a near standstill Quick liquidity needed by InvestCorp Decided to auction the company to financial buyers

One potential buyer was the private equity firm of Berkshire Partners in a LBO scheme

The Appeal of Carters

Long-term success in a competitive, nonseasonal industry Power of brand name Strong senior management team Success after prior acquisition by InvestCorp Increased revenues and EBITDA Lower cost structure Expansion into discount channel (Target) Offshore manufacturing

Private Equity Firms

PE firms raise money (from university endowments, pension funds, insurance companies, financial institutions, and wealthy individuals) use these funds, in addition to debt, to purchase firms e.g., AIG, Blackstone Group, Enron, Lehman Brothers, KKR

Berkshire Partners

Previous investment industries include manufacturing, retailing, transportation, consumer products Acquisitions take the form of recapitalizations, leveraged buyouts, growth capital investments, industry consolidations, privatizations Generally seek: market leaders, strong financial history, effective management team, sustainable (non-cyclical) earnings growth Acquisitions typically range between $200M and $2B (translating into equity investments of $50500M

LBO-Leveraged Buyout
Acquisition of another company involving significant amount of borrowed money to meet the cost of acquisition Without having to commit a lot capital

Synergies of the LBO

Carters Perspective:

Berkshires expertise in operational and strategic relating to retailing and manufacturing industry. Berkshire has greater access to the capital market (i.e. IPO)

Synergies of the LBO

Berkshires Perspective

Carters has its own competitive niche market segment and competent management group Carters needs advisor with similar business acumen

Staple Financing
Adviser (Goldman Sachs) to the seller (Carters) also offers financing to the prospective buyer (Berkshire Partner) Prearranged financing options package Became a common practice

Staple Financing
Conflict of interest

Berkshire vs. Goldman Sachs Berkshire was offered similar terms by the market no conflict of interest

Why use Staple Financing?

Hinder

rivals bids Provide confidentiality of the auction Expedite financing process Offered as an option, but not a requirement

Valuation Techniques

Discounted Cash Flow Method

Method of Comparables

Discounted Cash Flow Method

Free Cash Flow = EBIT(1-Tax) + Depr Del(WC) - Del(Capex) All values are in millions

2001E
Sales

2002E
618.80

2003E
711.60

2004E
817.30

2005E
938.80

2006E
985.74

537.30 55.10 20.00

EBIDTA 75.10
EBIT Depr.

88.70
67.60 21.10

109.10
87.30 21.80

134.20
109.80 24.40

161.60
133.50 28.10

169.68
140.18 29.51

Capex
Del (Capex)

20.50

19.50
(1.00)

21.00
1.50

21.50
0.50

22.50
1.00

22.50
0.00

Discounted Cash Flow Method

Free Cash Flow = EBIT(1-Tax) + Depr Del(WC) Del(Capex) 1996
Sales

1997
363

1998
408

1999
415

2000
471

2001
415

318

WC WC/Sal.

71 0.2225
2001E

87 0.2410
2002E 134.93

99 0.2437
2003E 155.16

82 0.1966
2004E 178.21

84 0.1989
2005E 204.70

94 0.2256
2006E 214.94

Average WC/Sales Ratio (Trend Analysis) = 0.2180

WC Del (WC)

117.16

17.77

20.23

23.05

26.49

10.24

Discounted Cash Flow Method

Cost of Debt
Debt Type
Revolver Loan B Senior Debt

Amount

Maturity

Contribution

Rate of Return

60 125

5 7

0.1026 0.2991

9.00% 9.75%

175

10

0.5983

10.88%

Cost of Debt = 10.35% (weighted average of above debts)

Cost of Equity = 40% (typical in LBO transactions)

Discounted Cash Flow Method

wacc = wdkd(1-t) + weke
Wd
We WACC

63.5%
36.5% 18.54%

70%
30% 16.35%

74%
26% 14.99%

Note A: The higher limit of wacc is set by having a minimum limit

of 130 million as equity.

Note B: The lower limit of wacc is set by a minimum 25% as

equity stake and an expected IPO price of 648-730 million dollars. (IPO price = 16-18 times 2002 Earnings)

Discounted Cash Flow Method

PV (FCF) = FCF/(1+wacc)^t

2001E
FCF

2002E 44.89 37.87

2003E 52.45 37.32

2004E 66.73 40.06

2005E 80.71 40.87

2006E 103.37 44.16

At wacc = 18.54%
PV(FCF)

At wacc = 16.35%
PV(FCF)

38.58
39.04

38.74
39.66

42.37
43.88

44.05
46.15

48.49
51.41

At wacc = 14.99%
PV(FCF)

Discounted Cash Flow Method

TV = FCF(1+g)/(wacc-g), g =3% PV (TV) = TV/(1+wacc)^t
At wacc = 18.54% TV = 685.09 PV (TV) = 292.68 At wacc = 16.35% TV = 797.85

PV (TV) = 374.36
At wacc = 14.99% TV = 887.77 PV (TV) = 441.50

Discounted Cash Flow Method

Total NPV Total Debt 492.26 360 574.55 360 641.78 360

Total Equity

132.96

214.55

281.78

IPO Launch Price (16 Times 2002 Earnings) = 648.96

IPO Launch Price (18 Times 2002 Earnings) = 738.08

Price Range = $492-$641 million (Total Enterprise Value)

Method of Comparables
Comparable company analysis: Nike, Jones Apparel Group, Tommy Hilfiger, Liz Claiborne Average Revenue multiple = 0.89 Market Value of Carter using Revenue multiple = 480 mil Average EBIDTA multiple = 5.87 Market Value of Carter using Revenue multiple = 441 mi Average Revenue multiple = 13.12 Market Value of Carter using Revenue multiple = 226 mil

Current Recommendations
Valuation: price range: $450-500 million $450 million- EBITDA multiple approach $500 million- Discounted cash flow approach

Recommendations for the Future

Access to capital markets Relationship & experience useful for M&A and IPO Synergies of operational & strategic expertise between Berkshire & Carters Discount chain & outsourcing

Questions?

Presented by:
Tessa Maher Bebe Oh Fei Qi Satrajit Saha Priyanka Gupta