Berkshire Berkshire PartnersPartners

History of Carter’s Inc.History of Carter’s Inc. Founded in 1865 in Founded in 1865 in

Needham, Needham, MassachusettsMassachusetts

Manufacturer of Manufacturer of baby, toddler, and baby, toddler, and young children young children apparel in the U.S.apparel in the U.S.

Company divided Company divided into 5 segmentsinto 5 segments

Financial distress Financial distress due to unprofitable due to unprofitable product lines in the product lines in the early 1990’searly 1990’s

New ManagementNew Management

In 1992 new management was In 1992 new management was installedinstalled new CEO of Frederick J. Rowannew CEO of Frederick J. Rowan

Revamp of organization structure Revamp of organization structure and corporate strategyand corporate strategy

Implemented lower cost Implemented lower cost structure, expansion into discount structure, expansion into discount channel, moved manufacturing channel, moved manufacturing operations offshore, and improved operations offshore, and improved brand recognitionbrand recognition

New ManagementNew Management

In 1996 operating and financiIn 1996 operating and financial performance turnaround real performance turnaround resulted in buyout by InvestCorsulted in buyout by InvestCorp at $208 millionp at $208 million

In 2000 launched new brand cIn 2000 launched new brand called alled TykesTykes

Porter’s Generic Porter’s Generic Competitive AdvantagesCompetitive Advantages

Carter's Inc. Total Net Sales

$0

$100,000

$200,000

$300,000

$400,000

$500,000

1996 1997 1998 1999 2000

Year

In T

hous

ands

of D

olla

rs

Carter's Inc. Net Income

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

1996 1997 1998 1999 2000

Year

In T

hous

ands

of D

olla

rs

Carter's Inc. ROE

-0.0500

0.0000

0.0500

0.1000

0.1500

0.2000

1997 1998 1999 2000

Year

Per

cent

Why sell Carter’s Inc.?Why sell Carter’s Inc.?

Investors at InvestCorp wanted reInvestors at InvestCorp wanted returns for their financingturns for their financing

Initial Public Offering (IPO) markInitial Public Offering (IPO) market was at a near standstillet was at a near standstill

Quick liquidity needed by InvestCQuick liquidity needed by InvestCorporp

Decided to auction the company tDecided to auction the company to financial buyerso financial buyers One potential buyer was the private One potential buyer was the private

equity firm of Berkshire Partners in equity firm of Berkshire Partners in a LBO schemea LBO scheme

The Appeal of Carter’sThe Appeal of Carter’s

Long-term success in a competitive, noLong-term success in a competitive, non-seasonal industryn-seasonal industry

Power of brand namePower of brand name Strong senior management teamStrong senior management team Success after prior acquisition by InvestSuccess after prior acquisition by Invest

CorpCorp Increased revenues and EBITDAIncreased revenues and EBITDA Lower cost structureLower cost structure Expansion into discount channel (TarExpansion into discount channel (Tar

get)get) Offshore manufacturingOffshore manufacturing

Private Equity FirmsPrivate Equity Firms

PE firms raise money (from PE firms raise money (from university endowments, pension university endowments, pension funds, insurance companies, funds, insurance companies, financial institutions, and financial institutions, and wealthy individuals)wealthy individuals)

use these funds, in addition to use these funds, in addition to debt, to purchase firmsdebt, to purchase firms

e.g., AIG, Blackstone Group, e.g., AIG, Blackstone Group, Enron, Lehman Brothers, KKREnron, Lehman Brothers, KKR

Berkshire PartnersBerkshire Partners

Previous investment industries include Previous investment industries include manufacturing, retailing, transportation, manufacturing, retailing, transportation, consumer productsconsumer products

Acquisitions take the form of Acquisitions take the form of recapitalizations, leveraged buyouts, growth recapitalizations, leveraged buyouts, growth capital investments, industry consolidations, capital investments, industry consolidations, privatizationsprivatizations

Generally seek: market leaders, strong Generally seek: market leaders, strong financial history, effective management financial history, effective management team, sustainable (non-cyclical) earnings team, sustainable (non-cyclical) earnings growthgrowth

Acquisitions typically range between $200M Acquisitions typically range between $200M and $2B (translating into equity investments and $2B (translating into equity investments of $50-500Mof $50-500M

LBO-Leveraged BuyoutLBO-Leveraged Buyout

Acquisition of another company Acquisition of another company involving significant amount of involving significant amount of borrowed money to meet the borrowed money to meet the cost of acquisitioncost of acquisition

Without having to commit a lot Without having to commit a lot capital capital

Synergies of the LBO Synergies of the LBO

Carter’s Perspective:Carter’s Perspective:

Berkshire’s expertise in Berkshire’s expertise in operational and strategic relating operational and strategic relating to retailing and manufacturing to retailing and manufacturing industry.industry.

Berkshire has greater access to Berkshire has greater access to the capital market (i.e. IPO) the capital market (i.e. IPO)

Synergies of the LBOSynergies of the LBO

Berkshire’s PerspectiveBerkshire’s Perspective

Carter’s has its own competitive Carter’s has its own competitive niche market segment and niche market segment and competent management groupcompetent management group

Carter’s needs advisor with Carter’s needs advisor with similar business acumensimilar business acumen

Staple Financing Staple Financing

Adviser (Goldman Sachs) to the Adviser (Goldman Sachs) to the seller (Carter’s) also offers seller (Carter’s) also offers financing to the prospective financing to the prospective buyer (Berkshire Partner) buyer (Berkshire Partner)

Prearranged financing options Prearranged financing options package package

Became a Became a

common practicecommon practice

Staple FinancingStaple Financing

Conflict of interestConflict of interest Berkshire vs. Goldman SachsBerkshire vs. Goldman Sachs

Berkshire was offered similar terBerkshire was offered similar terms by the market ms by the market no conflict of no conflict of interestinterest

Why use Staple Financing?Why use Staple Financing?

Hinder rivals bids Hinder rivals bids Provide confidentiality of Provide confidentiality of

the auctionthe auction Expedite financing process Expedite financing process Offered as an option, but not Offered as an option, but not

a requirement a requirement

Valuation TechniquesValuation Techniques

Discounted Cash Flow MethodDiscounted Cash Flow Method

Method of ComparablesMethod of Comparables

Discounted Cash Flow MethodDiscounted Cash Flow Method

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

All values are in millionsAll values are in millions

20012001EE

20022002EE

2003E2003E 20042004EE

20052005EE

20062006EE

SalesSales 537.3537.300

618.80618.80 711.60711.60 817.3817.300

938.80938.80 985.74985.74

EBIDTEBIDTAA

75.1075.10 88.7088.70 109.10109.10 134.2134.200

161.60161.60 169.68169.68

EBITEBIT 55.1055.10 67.6067.60 87.3087.30 109.8109.800

133.50133.50 140.18140.18

Depr.Depr. 20.0020.00 21.1021.10 21.8021.80 24.4024.40 28.1028.10 29.5129.51

CapexCapex 20.5020.50 19.5019.50 21.0021.00 21.5021.50 22.5022.50 22.5022.50

Del Del (Capex(Capex))

(1.00)(1.00) 1.501.50 0.500.50 1.001.00 0.000.00

Discounted Cash Flow MethodDiscounted Cash Flow Method

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

19961996 19971997 19981998 19991999 20002000 20012001

SalesSales 318318 363363 408408 415415 471471 415415

WCWC 7171 8787 9999 8282 8484 9494

WC/WC/Sal.Sal.

0.2220.22255

0.24100.2410 0.24370.2437 0.1960.19666

0.19890.1989 0.22560.2256

Average WC/Sales Ratio (Trend Analysis) = 0.2180Average WC/Sales Ratio (Trend Analysis) = 0.2180

2001E2001E 2002E2002E 2003E2003E 2004E2004E 2005E2005E 2006E2006E

WCWC 117.1117.166

134.93134.93 155.16155.16 178.2178.211

204.70204.70 214.94214.94

Del Del (WC)(WC)

17.7717.77 20.2320.23 23.0523.05 26.4926.49 10.2410.24

Discounted Cash Flow MethodDiscounted Cash Flow Method

Cost of DebtCost of Debt

Debt TypeDebt Type AmounAmountt

MaturityMaturity ContributiContributionon

Rate of Rate of ReturnReturn

RevolverRevolver 6060 55 0.10260.1026 9.00%9.00%

Loan BLoan B 125125 77 0.29910.2991 9.75%9.75%

Senior Senior DebtDebt

175175 1010 0.59830.5983 10.88%10.88%

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

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

Discounted Cash Flow MethodDiscounted Cash Flow Method

wacc = wwacc = wddkkdd(1-t) + w(1-t) + weekkee

WWdd 63.5%63.5% 70%70% 74%74%

WWee 36.5%36.5% 30%30% 26%26%

WACCWACC 18.54%18.54% 16.35%16.35% 14.99%14.99%

Note A:Note A: The higher limit of wacc is set by having a The higher limit of wacc is set by having a minimum limit of 130 million as equity.minimum limit of 130 million as equity.

Note B:Note B: The lower limit of wacc is set by a The lower limit of wacc is set by a minimum 25% as equity stake and an expected IPO minimum 25% as equity stake and an expected IPO price of 648-730 million dollars. (IPO price = 16-18 price of 648-730 million dollars. (IPO price = 16-18 times 2002 Earnings)times 2002 Earnings)

Discounted Cash Flow MethodDiscounted Cash Flow MethodPV (FCF) = FCF/(1+wacc)^tPV (FCF) = FCF/(1+wacc)^t

2001E2001E 2002E2002E 2003E2003E 2004E2004E 20052005EE

2006E2006E

FCFFCF -- 44.8944.89 52.4552.45 66.7366.73 80.7180.71 103.37103.37

At wacc = 18.54%At wacc = 18.54%

PV(FCPV(FCF)F)

-- 37.8737.87 37.3237.32 40.0640.06 40.8740.87 44.1644.16

At wacc = 16.35%At wacc = 16.35%

PV(FCPV(FCF)F)

-- 38.5838.58 38.7438.74 42.3742.37 44.0544.05 48.4948.49

At wacc = 14.99%At wacc = 14.99%

PV(FCPV(FCF)F)

-- 39.0439.04 39.6639.66 43.8843.88 46.1546.15 51.4151.41

Discounted Cash Flow MethodDiscounted Cash Flow MethodTV = FCF(1+g)/(wacc-g), g =3%TV = FCF(1+g)/(wacc-g), g =3%

PV (TV) = TV/(1+wacc)^tPV (TV) = TV/(1+wacc)^t

At wacc = 18.54%At wacc = 18.54%

TV = 685.09TV = 685.09

PV (TV) = 292.68PV (TV) = 292.68

At wacc = 16.35%At wacc = 16.35%

TV = 797.85TV = 797.85

PV (TV) = 374.36PV (TV) = 374.36

At wacc = 14.99%At wacc = 14.99%

TV = 887.77TV = 887.77

PV (TV) = 441.50PV (TV) = 441.50

Discounted Cash Flow MethodDiscounted Cash Flow Method

Total NPVTotal NPV 492.26492.26 574.55574.55 641.78641.78

Total DebtTotal Debt 360360 360360 360360

Total EquityTotal Equity 132.96132.96 214.55214.55 281.78281.78

IPO Launch Price (16 Times 2002 Earnings) = 648.96IPO Launch Price (16 Times 2002 Earnings) = 648.96

IPO Launch Price (18 Times 2002 Earnings) = 738.08IPO Launch Price (18 Times 2002 Earnings) = 738.08

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

Method of ComparablesMethod of Comparables

Comparable company analysis:Comparable company analysis: Nike, Jones Apparel Group, Tommy Nike, Jones Apparel Group, Tommy

Hilfiger, Liz ClaiborneHilfiger, Liz Claiborne Average Revenue multiple = 0.89Average Revenue multiple = 0.89 Market Value of Carter using Market Value of Carter using

Revenue multiple = 480 milRevenue multiple = 480 mil Average EBIDTA multiple = 5.87Average EBIDTA multiple = 5.87 Market Value of Carter using Market Value of Carter using

Revenue multiple = 441 miRevenue multiple = 441 mi Average Revenue multiple = 13.12Average Revenue multiple = 13.12 Market Value of Carter using Market Value of Carter using

Revenue multiple = 226 milRevenue multiple = 226 mil

Current Current Recommendations Recommendations

Valuation:Valuation: price range: $450-500 millionprice range: $450-500 million $450 million- EBITDA multiple $450 million- EBITDA multiple

approachapproach $500 million- Discounted cash $500 million- Discounted cash

flow approachflow approach

Recommendations for Recommendations for the Futurethe Future

Access to capital marketsAccess to capital markets Relationship & experience Relationship & experience

useful for M&A and IPOuseful for M&A and IPO Synergies of operational & Synergies of operational &

strategic expertise between strategic expertise between Berkshire & Carter’sBerkshire & Carter’s

Discount chain & outsourcingDiscount chain & outsourcing

Questions?Questions?

Presented by:Presented by: Tessa MaherTessa Maher Bebe OhBebe Oh Fei QiFei Qi Satrajit SahaSatrajit Saha Priyanka GuptaPriyanka Gupta