Bain Capital and Dollarama

Case Solution


Bain capital is considering to buyout Dollarama and the senior associate at a large bank of Canada is asked to give recommendation on whether to go ahead with the buyout or not. $600 million have been offered by the bank to deal in financing of Dollarama by Bain Capital Private Equity (Bain) who is the acquirer. Operating scenarios have been given along with different financing structure with different strategic perspectives.

The main thing to be considered is the ability of Dollarama to be a successful buyout for Bain Capital. That means that it would be necessary to conclude whether Dollarama would be able to repay its debt provided by the Canadian Bank. This analysis would be completely based on the financial management and it is related to mergers and acquisitions.

This analysis will comprise of the current estimate of the value of Dollarama. Moreover, the implications that would be needed to increase the sales of the company, along with the reduction in its costs. Apart from this, the projection for the future would also be done in this analysis in order to compete in the coming years as well as make profits. The projection would be compared with the current and actual sales revenue, cost of sales and major expenses in order to decide the future plans. Management should be confirmed that the Leveraged Buy Out (LBO) is fruitful for Bain Capital.

Autonomous Valuation of Dollarama

The foremost estimation of Dollarama could fall between, let say, around $900 million to $1.2 billion; however, it is not as simple as it looks. Its valuation should be concluded on the basis of its exit and entry multiples. The point is to evaluate how much, in real terms, Bain is going to be better off following the acquisition of Dollarama, in the time horizon of the next five years.
In order to understand the value of Dollarama, Bain should first determine the roots to complete exit and entry multiples, which is solely dependent on the performance of Dollarama. In the discussion, we would identify that how the multiples are affecting the purchase price of Dollarama and along with the internal rate of return. Once the critical success factors for Dollarama have been identified, then further conclusion would reveal the ways to finance Leveraged Buyout (LBO).

Thus, in order to do so, we would look in the forecasted calculations over the time horizon of five years (2005-2009).

Dollarama generated earnings before interest and tax and depreciation allowance of $91960 on sales of $584603 in 2004. This is the example of impressive result as it represents around 17% of sales in 2004. Dollarama has been able to maintain its gross profit margins of around 30% from 2001 to 2005, which means that the managements are putting efforts to maintain its market position. These figures are in line with that of competitors that are currently presented in the market as shown in exhibit 4.

It would be correct to evaluate that Dollarama has strong policy making team that is consistent to make Dollarama compete in the industry well. Dollarama is planning to open up to 50 stores a year for the next five year time horizon. This could be indicated by the new store growth rate which is around 14% in 2005. The approximate cost of opening up the new store is $600,000 and it would yield a turnover of around $1.8 million that shows that the payback period is just below two years. This could be healthy investment that Dollarama make in the upcoming five years. Sales revenues would increase sharply and also, Dollarama could expand further in the industry and exploit it.

It is very crucial for Bain to understand the future environment in which Dollarama would pass, in order to evaluate his judgment regarding acquisition. The current growth rate is critical in this scenario as Bain would want that the company should prosper with this rate in the future as well.

Subsequently, it is difficult to compare the position of Dollarama with the Canadian companies such as Loblaw, Sears, Shoppers Drug mart and Canadian Tire due to the fact that these companies provide different nature of goods with difference in size and the company scale. However, it would make sense to compare and contrast Dollarama with the companies that has similar earnings before interest and tax. Therefore, in this situation, we can easily compare Dollarama with some American companies such as 99 cents only stores, Dollar General Corporation and Family Dollar Store…………………….

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