Berkshire Partners: Bidding For William Carterâ€™s Case Solution
On the other hand, several assumptions have also been used in calculating the total value of the company which are as follows:
- It is assumed that all the financial projections made by the management are accurate and reasonable.
- Working capital is assumed to be 6% of the total EBITDA.
- Depreciation is also assumed to be 2% of the total EBITDA.
- Terminal growth rate is assumed to be 4%.
- It is further assumed that the tax rates, working capital and depreciation rates will not be change in the subsequent years.
Evaluation of the Staple-on financing package by Goldman:
The financing solution proposed by the Goldman Sachs appears to be expensive for the Berkshire, according to this package, Berkshire will raise finance from three sources i.e. revolver loan, term loan and senior subordinated loan notes. The revolver loan is relatively cheap while and the senior subordinated loan notes are the most expensive.
The total cost of debt of the staple-on financing package will be 18.36%, it can be said that this cost is higher as compare to the other alternatives because of the fact that highest proportion of debt will be obtain from the source which have the highest cost and the least debt finance will be obtained from the source which have the lowest cost.
Alternative Financing Package:
As per the alternative financing package, all the loans, which will be required to purchase the William Carter Company, will be raised from two sources, which are revolver loan and term loan. The loan will be obtained from these sources just because of the fact that the interest rates will be low on the financing from these sources as compared to the financing from subordinated debt. The interest amount will be based on LIBOR plus 3% and LIBOR plus 3.75% on revolver and term loan respectively and the cost of debt would be almost 10.75% million of the alternative financing package.
Advantages of the alternative financing solution:
The main advantage of the alternative financing package is the savings in the interest costs, the interest cost will reduce by almost 50% under the alternative financing package, this will also improve the cash flow position of the company and this will also improve the profitability position of the William Carter and Berkshire as well. In addition to this, the alternative financing package will allow management to redeem the loan after five years, under the staple-on financing package proposed by the Goldman Sachs, the loan will be redeem in three stages and the final repayment would be after ten years.
It can be said that redemption of loan after five years will have very positive consequences on the gearing position; the amount of debt finance owed by the Berkshire would be minimal after five years. This would allow the company to obtain further finance in order to exploit the opportunities that pertains with the William Carter at that time.
Drawbacks of the alternative financing solution:
Apart from the above-mentioned advantages, there are many drawbacks of the alternative financing package as well, it is highly likely that the management of Berkshire will find it very difficult to obtain such high amounts from these sources. Usually the revolver and term loans are for a small amount and the senior subordinated loan notes are issued for relatively higher amounts. Furthermore, the risk involved in the project to acquire William Carter will also make it very difficult to obtain loans at these cheap interest rates. Moreover, the management have to redeem the loan after just five years which might be very difficult for the company.
In staple-on financing package, the loan will have to be repaid in three segments, which might be flexible for the company however, under the alternative financing package; the loan will have to be repaid in a single instalment just after five years. Given the much anticipated relocation of the production plant also makes it very difficult for the management to repay the loan on time as they will have to invest heavily in the capital expenditure and in other costs as well. If somehow the management arranges the money for the repayment of the debt finance, it would face some negative consequences for the operations and growth of the business, as the money that needs to be used in the expansion will be used in repaying the loans……………..
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