4. Executive Summary
• Motivation for Reemergence:
• July 2012, principal on the company‟s debt came due
• Defaulted on principle payments and unable to refinance
• Currently in Chapter 11 receivership
• Company equity holders proposed a plan for reemergence
• Rejected by bankruptcy court
• Debt holders have taken control of the company
• Set to propose a plan for exit since they have no interest in continuing business
• Alternatives to Maximize Value of Business:
• 1. Gali Koval sold to larger industry peers such as PVH Corporation or
LVMH Group
• Conservative sale range of $346MM to $434MM, or an optimistic range of
$447MM to $613MM with synergies
• 2. Gali Koval sold to a private equity buyer to expand new sales channels
• Realizable transaction consideration between $655MM to $841MM
6. Business Description
• Gali Koval Corporation engages in sales of men‟s clothing and luxury
products
• Headquarted in New York, NY
• Operates 99 stores and distributes to upscale department stores
• Has direct sales channels in all major U.S markets, small international presence and
meaningful online sales
• 10 stores in Europe and Asia
• Sourced from independent manufacturers
• Most manufacturing takes place outside the U.S
• Workforce approximately 3,500 employees
• Experience senior management team
• Gali Koval is known for high quality product and commands a premium price
• All products are branded with “Gali Koval” trademark
• Brand name maintained luxury image, worn by celebrities and high profile
executives
• Gali Koval does not currently license its brands to third parties
8. Gali Koval Overview
• 2007: Gali Koval acquired by private equity firm for $1.1 billion
• Acquisition funded with 65% debt and 35% equity
• Believed there was an opportunity to expand international operations and sales
• Attempted to expand internationally in 2008 and 2009, but has since closed some of these new outlets
• 2009: Gali Koval lost a large department store customer
• Due to disagreements about pricing and marketing strategy
• Since global recession in 2008-2009, luxury brands have seen performance
suffer
Revenue:
• Plummeted sharply during Revenue (‘000s) & Margin
financial crisis Trends
• Has recently stabilized, but results
continue to be below 2007 levels
EBITDA:
• Margin reduction in recent years is
mainly a result of significant lost
revenues
• Company‟s cost cutting efforts
have not kept pace with declines
in revenue
10. Industry History
2010 2011
• Consumer Spending on Apparel • Consumer Spending on Apparel
• $191.3 billion • Increase of 3.8% from 2010: $198.7 billion
• Disposable Personal Income • Disposable Personal Income
• Increased 3.6% (0.7% in 2009) • Increased to 3.8% from 2010
• Imported Apparel • Imported Apparel
• $71.40 billion • Increase of 8.8% from 2010: $77.66 billion
• Exports of U.S-Made Clothing • Exports of US-Made Clothing
• $4.51 billion • Increase of 13.7% from 2010: $5.13 billion
• US Retail Sales • US Retail Sales
• $219.23 billion • Increase of 5.9% from 2010: $226.52
• Men‟s Apparel Retail Sales • Men‟s Apparel Retail Sales
• Accounted for 28% of US Retail Sales • Accounted for 28% of US Retail Sales
Source: Standard & Poor‟s Industry Surveys-Apparel & Footwear: Retailers and Brands
11. Industry Background Forecasts
• Overview-Post Financial Crisis
• Expected unemployment rate of 8.2% with continued improvement through 2015, project a rate of 7.0%
• Change in spending and savings patterns
• More responsible/constrained consumer will force the sector to adjust lower sustainable levels of demand
• Will lead investors to lower their long-term secular growth expectation
• Recession sharpened the consumer‟s value focused and increased the retailer consideration set by 4%*
• GDP grew 1.3% in second quarter of 2012, projected 2.2% growth for end of 2012
• Luxury Goods Market
• Bain & Co. estimated worldwide sales growth for luxury goods will be between 6%-7%
• Highest growth would come from Asia (excluding Japan) at 16.5%, Americas (5%-7%) and Europe (3.75%)
• Within emerging markets, sales forecasted to increases 18%-22% in China, 14% in Latin America, and 8.75% in
the Middle East
Consumer Spending (2011)
Apparel
5% 3% Food
8%
Other durables
7% Cars
20%
4% Energy
Other services
6%
Recreation and travel services
15% Restaurants
Housing
22%
5% 5% Health Care
Other Nondurables
Source: Standard & Poor‟s Industry Surveys-Apparel & Footwear: Retailers and Brands
13. Trading Comparables
• Comparable companies consist of publicly traded companies in the Apparel
Industry
• They have similar products, business models, and growth to Gali Koval
• Tend to be slightly larger as smaller companies have greater difficulty adhering to the high compliance costs
of being publicly traded
• EV/EBITDA multiples imply a valuation range of $202MM to $430MM
• Median multiple of 5.9x leads an implied valuation of $282MM
14. Transaction Comparables
• Comparables consist of six acquisitions within the Apparel Industry
• Includes two strategic acquisitions and four leverage buyouts
• All transactions in cash
• Gali Koval should pursue similar deal structure to receive immediate payment
• EV/EBITDA multiple implies a valuation range of $330MM to $590MM
• Median multiple of 8.0x results in an implied valuation of $385MM
15. Financial Projections
• 2013-2016 Assumptions:
• Management plan used as given
• Net Working Capital (NWC) in 2012: $87.917M
• NWC= Current Asset – Current Liabilities + Current Portion of Debt
• Company was taken over by debt holders and no current debt is accounted
• Projections of NWC for 2013-2016: 26.6%
• Will be held constant with 2012 percentage of revenue
• 2017 Assumptions:
• Revenue growth percentage from 2016 will be held constant
• Company Owned Stores: 4.8%
• Department Stores: 2.5%
• Online Stores: 10%
• Expenses (as a percentage of revenue) held constant
• COGS: 40%
• SG&A: 39.5%
• Depreciation held constant at 2.6% of revenue
• Capital Expenditures held constant at 2.5% of revenue
• NWC held constant at historical percentage of 26.6% of revenue
• Post 2017 Assumptions:
• Unlevered Free Cash Flow to firm will grow 2.0% in perpetuity
17. WACC Calculations
• Weighted Average Cost of Capital calculation based on several underlying assumptions
from publicly available sources and industry research
• Cost of Debt: 8.99%
• Implied CCC credit rating based on Standard & Poor‟s Indicative Ratios for measuring financial risk
• Yield on 20 yr. Corporate Bond at CCC rating is 8.99%
• Cost of Equity (as determined by CAPM): 12.09%
• Equity Risk Premium: 8.23%1
• Risk Free Rate: 2.02%2
• Beta: 1.22
• Un-levered Beta of Apparel Industry: 1.053
• Tax Rate: 35.0%
• Book Value of Debt to Market Capitalization Ratio : 26.20%3
• Unique Risk Premium of 3.0% is added due to the situation that Gali Koval is in bankruptcy
• Calculated WACC Value: 13.79%
Sources: 1. Bloomberg Terminal indicates Market Return on US Equity 10.25%, effective January 2013
2. Using 20 yr. treasury yield as proxy, quoted from US Department of Treasury, January 2013
3. Assumed BV of Debt = MV of Debt; thus, BV of Debt to MV of Equity is a reasonable proxy for MV of Debt to MV of Equity
18. Discounted Cash Flow
• Discounted Cash Flows Analysis projected financial statements
• Calculated WACC of 13.79%, and assumed Terminal Growth Rate of 2.0%
• Results in intrinsic value of $315MM
• Implied valuation range of $282MM to $358MM
20. DCF with Synergies
• If Gali Koval Corporation is purchased by a strategic buyer, it could
anticipate a premium over the intrinsic valuation due to revenue and
cost synergies from scalability
• Synergy Assumptions:
• Revenue
• $14MM revenue synergies in 2013, increases $2MM/yr. until reaching $20MM in
2016, revenue synergies in 2017 held constant as 2016
• $7.5MM/yr. of lost revenue due to store closings
• Gross Margin
• Will remain the same level as percentage of revenue as outlined in financial statement
projections
• Gross Margin is projected at 60% of revenue and the industry average of about 51%1
• Synergies won‟t have any improvement in Gross Margin
• SG&A cost savings
• $8MM/yr. cost savings due to store closings
• $25MM one time cost reduction due to distribution center rationalization in 2013
• $3MM one time expense due to store closings in 2013
• $10MM one time saving through management and back office reductions in 2013
• Depreciation, Capital Expenditures, and Net Working Capital will remain at
stated percentage of revenue as outlined in financial statement projections
Sources: 1. Bloomberg Terminal
21. DCF with Synergies
• Discounted Cash Flow Analysis from projected realizable
synergies, calculated WACC of 13.79%, and terminal growth rate of
2.0%
• Results in intrinsic valuation with synergies of $384MM, assuming all
synergies are realized
• Implied valuation with synergies from $346MM to $434MM
• It‟s possible that after being acquired by a healthy strategic
buyer, Gali Koval‟s WACC will return back to the industry average and
no unique risk premium related to bankruptcy will need to be added
• In this case, WACC=10.79%
• Results an optimistic intrinsic value with synergies range of $447MM -
$613MM
24. Leverage Buyout
• A private equity buyer will pursue a different strategy to expand revenue
after acquiring Gali Koval
• A new line of products at a lower price point will be sold through mainstream
department stores and retail outlets
• Financial Projections:
• Revenue
• $7.5MM/yr. reduction at company owned stores due to store closings
• Strategy of selling in new channels will result in a revenue of $103.2MM and grow at a rate of 20%
until reaching $225MM in 2016
• Growth rate in 2017 will drop to 5% after a rapid growth period
• 12.5% of 2012 level revenue from upscale department stores will be lost every year beginning in
2012 until reaching half of 2012 level in 2016
• 2017 will be held constant as 2016
• Gross Margin
• Remain flat at a percentage of 58.3% (2012 level) of revenue
• SG&A
• $3MM one time expense due to store closings in 2013
• SG&A (excluding savings from store closings) as a percentage of revenue will decrease 150bps
each year until 2016
• 2017 will hold at a constant rate as 2016
• $8MM/yr. cost savings due to store closings
• Depreciation, Capital Expenditures, and Net Working Capital will remain at stated
percentage of revenue as outline in financial statement projections
25. Leverage Buyout
• Financial Structure Assumptions:
• Purchase price of $700MM
• Require IRR of 20.0%
• Senior Debt of 4.0x 2012A EBITDA, Subordinated Debt of 7.0x 2012 A EBITDA
• Cost of Senior Debt is 2.8% (3-month LIBOR+250bps)1
• Cost of Subordinated Debt is 5.1% (3-month LIBOR+480bps)1
• No debt exists at the time of deal since company was taken over
• Exit multiple of 7.0x, 1.0x lower than the median of comparable transactions due to
company‟s bankruptcy situation
Sources: 1. Bloomberg Terminal
26. Leverage Buyout
• Return Analysis
• Valuation range of $655MM to $841MM
• Assuming financial sponsor must ensure 20.0% IRR, it would be limited to paying $733MM
• Attractiveness of Leverage Buyout
• Stable cash flows allow for consistent debt repayment and potential for future profitable growth
• The opportunity to expand through new channels will substantially increase Gali Koval‟s revenue
• Acquirer will offer strong financial support for new market strategy
28. Valuation Ranges
• Ranges determined through sensitivity or multiples analysis:
• Discounted Cash Flow- $282MM to $358MM
• Leverage Buyout- $655MM to $841MM
• DCF + Synergies- $346MM to $434MM
• Transaction Comparable - $330MM to $590MM
• Trading Comparable- $202MM to $430MM
• Discounted Cash Flow from a leverage buyout exceeds ranges of other
valuations
• Illustrates a premium the bondholders would receive if sold to private equity firm
30. LVMH Overview
• Founded in 1854 and based in Paris, France
• Sector: Services
• Industry: Jewelry Stores
• Manufactures luxury products
• Wines and Spirits, Fashion and Leather Goods, Perfumes and Cosmetics, Watches
and Jewelry, and Selective Retailing business groups
• Several Fashion & Leather brands: Louis Vuitton, Fendi, Marc Jacobs, Givenchy and Pucci
• Operates 3,040 stores worldwide
• Operates retail stores under the brand names of DFS, Miami
Cruiseline, Sephora, and Le Bon Marché Rive Gauche for travelers
LVMH Revenue ($Millions) 2011 Revenue by
25 21.5
Geographic Region
20 18.1 10%
15.6
15 13.2 13.1 France
12%
20% Other Markets
10 Revenue Asia
5 22% Japan
0 28%
United States
8%
2008 2009 2010 2011 2012
Sources: www.lvmh.com/invesot-relations
31. LVMH Overview
Acquisitions
• Les Tanneries Roux- France 60 Forecasted Growth from Operations
54.4
• Acquired Les Tanneries in May 2012 49.9
50
• Supplies leather goods 46.2
42.8
• Organic revenue growth of LVMH 39.5
$ Millions USD
40 36.7
increased by 10% in the first half of
2012 after acquisition 30 26.7
• Bulgari 20
10.3 11.4
• Acquired Bulgari in 2011 for $5.2 10 7.7 8.4 9.3
6.2 7.3 7.9
4.5 5 5.6
billion
• Proposed an action to double the 0
size of its watches and jewelry unit 2012 2013e 2014e 2015e 2016e 2017e
• Profit from recurring operations Sales Operating Profit Net Income
increased by 87% as a result of
Bulgari‟s performance
Sources: Yahoo! Finance (Exchange rate of 1.3058 on 15 March 2013)
Thomas Reuters (Forecasted Growth form Operations)
32. LVMH Overview
• Strategic Fit:
• Based on Gali Koval‟s initial attempt to expand internationally, LVMH
provides major markets geographically
• Due to its brand development strategy and more than 3,000 stores
worldwide
• Supports the growth of the brands by respecting their identity and their
creative positioning
• Strength of star brands with solid financial structure and geographical
balance of revenue
• Concerns/Risk:
• Sole purpose is not strictly in the retail/apparel industry
• Main focus on prestige/luxury brands with considerable growth
• Headquartered in France and most business is conducted overseas
• Continuous Europe‟s sovereign debt crisis and Eurozone crisis can affect
performance in European markets
Source: www.lvmh.com/investor-relations
33. PVH Overview
• Founded in 1881 and is based in New York, New York
• Sector: Consumer Goods
• Industry: Textile: Apparel Clothing
• Ticker Symbol: PVH
• Leases and operates approx. 1,000 retail locations
• Markets products through wholesale to national and regional department, mid-tier
department, mass market, and specialty and independent stores; and retail stores, as
well as through e-commerce Website
• Operates as an apparel company in the United States, Canada, Europe, and
internationally
• Brand portfolio includes:
• Calvin Klein, Tommy Hilfiger, IZOD, Heritage
PVH Revenue ($ billions) 2011 Revenue by
6 Geographic Region
5.5
5 4.64
4.5 Europe
4
3.5 PVH Revenue 21% 27%
3 2.43 2.49 2.40 North
2.5 (in billions)
2 America
1.5 52%
1 Other
2008 2009 2010 2011
Source: Yahoo! Finance
34. PVH Overview
Acquisitions
• Calvin Klein 2011 Revenues: $5.9B
• Acquired Calvin Klein in 2003 for approximately $3.0
Billion from Warnaco Group Tommy Hilfiger Calvin Klein Heritage Brands
• Continued expansion of men's sportswear business
• Growth after the acquisition rose at a 13% compound
annual growth rate
• Generated approximately $2.8 billion in global retail
stores after the buyout $1,775B
$3,051B
• Tommy Hilfiger $1,065B
• Acquired Tommy Hilfiger in 2010 for approximately
$3.0 Billion from Warnaco Group
• Focused expansion in Europe and Japan
• Growth after acquisition rose at a 13% compound
annual growth rate Planned Annual Top Line Growth
• Growth opportunities remain to drive Tommy Hilfiger ($ billions)
from $4.6 billion in worldwide retail revenues in 2010 2011A 2014E
to over $6.5 billion
$10
$7.6 $7.3
• Heritage Brands $5.6
• Acquired in 2010 $3.4 $3.7
• 10% revenue increase after acquisition in 2010
• Incurred $3.3 billion in worldwide retail revenue
in 2010 Calvin Klein Tommy Hilfiger Heritage
Brands
• Forecasted growth of 4.0 billion
Sources: Yahoo! Finance
PVH.com
35. PVH Overview
• Strategic Fit:
• Continued opportunities for PVH through license and brand extensions
and international expansion, the next leg growth for firm
• Estimated EV/EBITDA of 8.2x
• Believe sales growth in the low- to mid single digit range
• Value in management‟s long-term strategy:
• Contains structural improvements to the operating model
• Established a vast distribution network
• Spans lower-priced discount channels, department stores and high-end retail
boutiques
• Concerns/Risk:
• With targeted 8%-10% growth rate for Calvin Klein and Tommy
Hilfiger, there is a risk of saturations and overextension in the labels
• Operates in a extremely competitive consumer market that is affected
by macro/consumer trends
• Challenges in getting more floor space in department stores for new
Source: Morningstar
launches as retailers push for more private-label merchandise
36. Recommended Buyer
• PVH Corporation
• Successfully evolved into a diverse portfolio firm
• Exposure across a number of company-owned brands, licenses, and
apparel categories
• Established vast distribution network
• Thus cross-selling and promotional opportunities
• Reaching international presence is next goal
• Record of success with acquisitions
• Calvin Klein doubled global retail sales and est. 13% compound annual
growth rate in 2003
• Build dominant position in fragmented categories
• Such as men‟s dress shirts and neckwear
• Perfect fit for Gali Koval to be incorporated
Source: Morningstar & PVH.com
38. Brand Name
• Apparel and accessories industries remains extremely
competitive and highly fragmented
• Getting into business is easy, staying in is much more difficult
• Start-up companies are undercapitalized and lack broad-based global sourcing
• Lack marketing muscle to build exposure and brand loyalty among customers
• Small firms often seek to be acquired by larger companies to expand sales
• Strong brand image is crucial
• Manufacturers have more price flexibility by creating “must-have” perception
• Brand extension can strengthen the perception of value associated with
brand
• Established brand names:
• Convey image of quality
• Builds customer loyalty
• Translate to repeat business
Source: Standard & Poor‟s Industry Surveys-Apparel & Footwear: Retailers and Brands
40. Licensing & Trademarks
• Licensing is means for companies to extend their product lines
• Key element of integrated brand-marketing program
• Enables a company to extend its brand into new categories
• 2011, brand owners collected $5.3 billion in licensing royalty revenue
in North American
• Increase of 5.0% from 2010
• Trademarks/brands royalty revenue was 17% of total- $910MM
• Trademarks help identify and distinguish a brand name
• Company name and logo are the most valuable assets
• Gives you exclusive rights for the company to use
• Can sue subsequent parties for trademark infringement
Source: Standard & Poor‟s Industry Surveys-Apparel & Footwear: Retailers and Brands
42. Trademark Dispute
• Situation Summary:
• Gali Koval never authorized MJD, a maker of fine watches, to use the Gali Koval
trademark
• MJD willfully infringed the Gali trademark by selling imitation watches under the
Gali trademark without license
• MJD had been operating from 2008-2010 while using the Gali Koval mark in
connection with the manufacture, distribution and sale of watches
• Under belief, MJD had full knowledge of Gali Koval‟s trademark and intentionally
used it to:
• Drive in customers
• Increase profits
MJD Sales of Gali Branded Watches ($K)
43. Trademark Dispute
• Reasons to Sue MJD:
• MJD had no authorization to use „Gali‟ trademark to:
• Manufacture, distribute, or sell the watch
• MJD is not associated with Gali Koval through:
• Sponsorship, approval, or endorsement
• MJD willfully infringed the „Gali‟ trademark without license
• Under belief they had full knowledge of Gali Koval and intentionally use it to drive customers
and increase profits
• Potential Harm to Gali‟s Business:
• Unfair competition and false designation of origin
• Gali Koval prestige brand image is negatively affected
• Misleads consumers of the value and premium price
• Missed the opportunity to collect additional revenue through the sales of the brand
name watches
• Missed opportunity to expand in the accessories market internationally
• Alternatives to Settle Dispute in Trademark Infringement:
• 1. Legal Dispute- Proceed to Court
• 2. Brand Name Licensing with MJD
Source: Bloomberg Terminal Law
44. Trademark Dispute
• Assumptions-Legal Dispute:
• Royalty Rate: 6.0%
• Based on average trademark valuation of similar merchandising licenses agreements 1:
• Royalty Rate 5.0%: Dussault Apparel Inc. & Gene Simmons Company and USPA Accessories LLC
• Royalty Rate 7.0%: Guess Inc. & Marc Fisher Footwear
• WACC: 13.79%
• Based on previous WACC calculation of Gali Koval
• Signifies that risk of cash flows is the same as overall risk of Gali Koval
• The court case will last for 2 years
• Licensing Fees:
• Total damage fee of 5.43MM, and discount back to PV is $4.23MM
• If cash is needed in the short term, a provided discount of 70% results in a settlement price of
$3.80MM
Source: 1. Bloomberg Terminal Law
45. Trademark Dispute
• Assumptions- Future Cooperation
• Royalty Rate: 6.0%
• Based on average trademark valuation of similar merchandising licenses agreements1:
• Royalty Rate 5.0%: Dussault Apparel Inc. & Gene Simmons Company and USPA Accessories LLC
• Royalty Rate 7.0%: Guess Inc. & Marc Fisher Footwear
• WACC: 13.79%
• Based on previous WACC calculation of Gali Koval
• Signifies that risk of cash flows is the same as overall risk of Gali Koval
• MJD revenue will grow at 15%/yr. for the next 5years
• Licensing Fees
• Future licensing cash flow will result in a Present Value range of $8.8MM-$10.3MM
Source: 1. Bloomberg Terminal Law
46. Trademark Dispute
• Recommendation:
• Unless Gali Koval needs immediate payment to pay back any costs, Gali
would benefit establishing a relationship with MJD:
• Based on previous MJD sales growth of the Gali-branded watches, it provides a
platform for the Gali brand name to expand
• Thus, generating more revenues for future growth
• Competitive advantage to use MJD established market internationally
• Gali Koval does not have a market share for watches
• Can use MJD‟s networks and resources to develop other accessories and/or luxury
products
• To prevent further trademark infringements, Gali should be more inclined to
license its brand to third parties
• Or, register its trademark internationally to compete with other prestige brand names
• Opportunity to firmly establish Gali Koval‟s brand name internationally
48. Comprehensive Recommendation
• Recommendation:
• Sell Gali Koval to a private equity firm
• Leverage buyout establishes a consideration value of $733MM
• LBO analysis results in a price range of $655MM to $841MM
• Valuation range higher than alternatives
• Offers debt-holders the best feasible price
• Acquirer will offer a strong financial support in the expansion of the low-
priced product line
• Change in business structure can result in future operating growth
• Change in financial structure can improve operating efficiency
• Settle trademark dispute with MJD
• Future license fees add about $9.53MM in 5yrs.
• Sensitivity analysis future licensing fees range from $8.82MM to $10.32MM
• Deal Structure:
• Similar all cash acquisitions within the apparel industry
• Acquirers are capable of paying in all cash, thus bondholders will receive
immediate payment
