2018 Financial Modeling Competition - Shox Suspensions International ("Shox") Growth Equity Case Oliver Yu Master of Chemistry student, University ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2018 Financial Modeling Competition
Shox Suspensions International (“Shox”) Growth Equity Case
Oliver Yu
Master of Chemistry student, University of OxfordTable of Contents
Investment Overview 3
Investment Summary and Transaction Rationale 4
Business Overview 5
Company Overview 6
Industry Overview 7
Competitive Positioning 8
Transaction Overview 9
Key Growth Drivers and Model Assumptions 10-12
Valuation 13
Returns Analysis and Sensitivity 14
Risk Mitigation 15
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Investment Overview
Investment Recommendation and Transaction Rationale
Recommendation: Silver Lane Management should invest in Shox with a maximum price of USD 40mm at 5.28x TEV/EBITDA, signifying a 20.6% minority stake
Silver Lane’s USD 40mm all-equity investment will yield an IRR of 34.8% Shox’s premium brand and management expertise are its pivotal value drivers
IRR Money Multiple Premium products: high quality mountain bike suspension products of Shox enjoy a great reputation
2023 2024 2025 2023 2024 2025 1 and strong customer loyalty within the niche industry owing to its continuous innovation as a result of its
research and development efforts and long-term investment in assets
5.28x 31.5% 31.9% 32.4% 5.28x 3.94x 5.27x 7.12x
TEV/EBITDA
TEV/EBITDA
5.78x 4.21x 5.63x 7.60x
Multiple
5.78x 33.3% 33.4% 33.6%
Multiple
Multidimensional growth opportunities: two main strategies are to develop new powered vehicles
2
Exit
Exit
business segment and expand internationally under the leadership of experienced management team,
6.28x 35.0% 34.8% 34.8% 6.28x 4.48x 6.00x 8.09x
which will increase revenue and profit margins
6.78x 36.6% 36.1% 35.9% 6.78x 4.75x 6.36x 8.58x
7.28x 5.03x 6.72x 9.07x Low entry valuation compared to industry peers: despite lack of comparable public listed companies
7.28x 38.1% 37.4% 37.0%
3 and assumption-sensitive nature of DCF analysis, by comparing Shox’s business model to its competitors’,
• Silver Lane Management will invest USD 40mm into newly issued common shares of Shox at the end of fiscal year a TEV/EBITDA multiple of 5.28x is determined for entry valuation
2018, implying an equity value of Shox at USD 194.2mm with 8,816,371 common shares outstanding
• The equity investment will be a minority stake representing 20.6% ownership in Shox which will be constant Multiple expansion predicted: after incorporation of powered vehicles sales unit into Shox’s business
throughout the investment, assuming Shox will not issue further shares to other investment firms 4 model, analysis of comparable companies’ product portfolios suggests a strong probability of a multiple
• Base case assumes an investment horizon of 7 years and will generate an IRR of 34.8% and Money Multiple of expansion to 6.28x TEV/EBITDA upon exit in 2025
8.09x after receiving equity proceeds of USD 323.6mm from sale of the stake upon exit
• Earlier exits in 2023 or 2024 could generate higher returns but may carry significant risk depending on the Flexible exit options: as the enterprise value of Shox will reach a substantial USD 1.19bn in 2025, Silver
progress of establishing ORV sales leads, which is the biggest growth driver of the investment 5 Lane Management has multiple options to realize its investment, such as an initial public offering if it were
• IRR in the bear case (25.1% upon exit in 2025) satisfies the returns requirement of 25% or above not successful in selling the stake to a private buyer
EBITDA bridge illustrates value added by ORV business and core expansion Few risks have material impact and can be mitigated by efficient management
Deal risk: the biggest uncertainty is the probability of entering and exiting the investment at the
desired TEV/EBITDA multiples, but this problem can be solved by conducting in-depth industry
due diligence and seeking strategic buyers to maximize value of stake through synergies
Operational risk: Shox may lose its current management team who has the industry expertise
and operational experience to translate strategy into real growth, and this risk can be mitigated
by providing recommendations of management incentives and lock-in contracts to the board
Financial risk: international expansion plans expose Shox to greater risks of currency fluctuation
and operating expenses such as depreciation and amortization may build up faster than
expected, but currency hedging products are widely available for a fair price and high level of
cash flows generated by the business can be invested into PPE
Due diligence by Silver Lane Management: following the initial investment decision on Shox
as a growth equity investment, further evaluation of the company’s operational flow from
• Entry in 2018 at 5.28x TEV/EBITDA and exit in 2025 at 6.28x will give Shox an enterprise value of USD 1.19bn after manufacturing to distribution and data on the R&D process of anticipated powered vehicle
management strategies are successfully executed suspension products will be executed
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Business Overview
Company Overview
Shox is a mountain bike suspensions manufacturer based in North America Growth opportunities are product diversification and regional expansion
• Current products are suspension forks (enthusiast, performance and pro front types) • Shox plans to add powered vehicles suspensions to its product offering portfolio
distributed through aftermarket sales and full suspension systems sold directly to OEMs • Management outlines strategy to expand internationally as well as leveraging aftermarket
• Customers range from professional power sports (e.g. Crankworx, the X-Games) athletes sales performance to boost revenue and EBITDA growth, and hence enhance profitability
to recreational customers looking for high performance mountain bike accessories • North America represents 56% of Shox’s suspension product users, which suggest great
• Shox enjoys a strong reputation among professional and ultra enthusiast users, and plans top line growth potential by international expansion, subject to successful penetration
to penetrate further into the general consumer category in the near future • Strong branding and a loyal customer base distinguish Shox from its competitors
Aftermarket Sales by Product >150 Established OEM Partnerships Sales by End-destination Potential ORV OEM Partnerships
Performance 7% 2%
North America
15% Suspension Forks
Europe
Pro Front Forks
30% 55% 35% 56% Asia
Enthusiast
South America
Suspension Forks
Historical financials show strong revenue growth but decreasing profitability The two key distribution channels are aftermarket sales and sales to OEMs
USD ‘000s USD ‘000s 283,579
283,579
6.0% 240,754
240,754
5.8% 201,854 33.03%
5.7% 171,762 34.41%
171,762
201,854 37.02%
5.4% 32.96%
66.97%
65.59%
67.02% 62.98%
2015A 2016A 2017A 2018A 2015A 2016A 2017A 2018A
OEM Aftermarket
Revenue Net Earnings Margin
• Shox has been less capable to capitalize on its revenue growth to boost earnings mainly • The proportion of distribution channels has been and will likely to be constant in the future,
due to rising COGS and expenses especially stock-based compensation as both sales channels are affected by similar supply and demand dynamics
• Decreasing profitability can be improved by a new revenue stream while keeping costs low • As management predicts strong future growth in aftermarket sales, it is fair to assume the
same for OEM sales as these two channels are complementary in nature
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Industry Overview
The US bike suspensions market is predicted to continue its robust growth Global ORV market will grow in sales and sales per unit due to higher demand
USD ‘000s USD ‘000s for Sales, USD for Sales per Unit 3,350
US Mountain Bike Suspensions Sales
183,075 Global ORV Suspensions Sales
2,759
US E-Bike Suspensions Sales 3,878,364
Global ORV Sales per Unit
127,136 2,276
12.9%
CAGR 3,029,972
90,811 1,891
65,805 1,606 2,389,756
47,685
35,062 1,352 1,905,403
19,600 26,166 746,818
12,400 15,200 1,165 1,540,591
8,000 627,578 1,007
806 1,259,579
536,391 740
466,427 666 1,067,439
410,949 904,610
335,058 368,564
268,570 281,866 298,352 307,393 542,927 614,878 709,512
2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Shox can achieve multiple expansion with an increasing EBITDA CAGR Shox is undervalued at both entry and exit relative to its comparable peers
8.00x 12.5x
R2 = 0.549 LCI Industries Shox TEV/EBITDA Entry Multiple: 5.28x
7.00x y = 0.058x + 4.700 Shox TEV/EBITDA Exit Multiple: 6.28x 10.3x
9.1x
LTM TEV/EBITDA
6.00x Shox Suspensions 7.6x
5.00x 4.7x 5.3x
Thor Industries
4.00x Tenneco
3.5x
3.00x
KYB Corporation
2.00x
-30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% KYB Tenneco Thor LCII Brunswick Polaris Harley-Davidson
3-Year EBITDA CAGR
• Harley-Davidson, Polaris and Brunswick are excluded in the regression analysis since their • Both the entry and exit TEV/EBITDA multiples are lower than the arithmetic average of the
business models differ greatly from Shox’s multiples of the seven comparable companies (7.57x)
• Good linear relationship between TEV/EBITDA and 3-year EBITDA CAGR suggests if Shox’s • A multiple expansion is expected due to additional powered vehicle suspension (Off Road
EBITDA CAGR increases, Shox will be valued at a higher TEV/EBITDA multiple Vehicles and Side-by-sides) business segment which enhances valuation
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Competitive Positioning
There are few listed companies with similar business model to that of Shox but selected comparable companies suggest the range of valuation multiples suitable for Shox
Company Similarities Differences Comparability LTM TEV/EBITDA
• Identical distribution channels (OEM and aftermarket) • Varied product portfolio (automotive components and ride control
4.7x
• Similar regional distribution (focused on North America and emission solutions)
and Europe) • Lower yet more stable industry and company revenue growth rate
• Inorganic growth may skew its comparability to Shox (5
• Identical distribution channels (OEM and aftermarket) acquisitions during 2017 and 2018)
but more reliant on OEM (92% sales) 7.6x
• Sells suspension solutions but slightly more diversified product
offering (steel chassis, kitchen, etc)
• Similar product offering but for automotive
counterparts (one of the largest shock absorber and • Geographically focused on Japan and rest of Asia Pacific
3.5x
suspension systems manufacturers in the world) • Aftermarket sales as the predominant distribution channel
• Similar historical sales growth rates (around 10%)
• Product portfolio consists of predominantly snowmobiles and
• North American market leader in ORV manufacturing 10.3x
motorcycles
• Similar geographical focus (based in North America)
• Distribution through aftermarket sales but not via sales to OEM
• Different product portfolio (exclusively recreational vehicles)
• Identical geographical focus 5.3x
• Direct distribution to independent dealers only
• Different product portfolio (78% motorcycles and only 16% parts
• Similar geographical focus (based in North America but
and accessories) 12.5x
significant presence in EMEA and Asia Pacific)
• Direct distribution to independent dealers only
• Different product portfolio (marine engine, boats and fitness
equipment)
• Similar % sales in North America (66%) but more 9.1x
• Marketing as part of the business model in addition to
focused on Europe and Asia Pacific internationally
manufacturing
• Sale through independent dealers network
Mean excluding Polaris Industries, Inc., Brunswick Corporation and Harley-Davidson, Inc. (2018 Entry Multiple in IRR Analysis) 5.28x
Mean excluding Brunswick Corporation and Harley-Davidson, Inc. (2025 Exit Multiple in IRR Analysis) 6.28x
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Transaction Overview
Key Growth Drivers and Model Assumptions
• Overall revenue growth is forecast to maintain its robust historical growth rate with average YoY% increase of ~14-18% Increasing Investment in Assets
• The incorporation of ORV sales as a business segment of Shox will boost its revenue without significant additional
expenses incurred (similar manufacturing equipment and distributors relationship management) USD ‘000s 25,000
Revenue • Shox’s US aftermarket sales market share is predicted to reach 36% by 2022 as suggested by management in the bull 19,000
case, and the expansion will likely drive organic growth in its OEM sales, in addition to emerging ORV sales stream 41,516
• Domestic market dominance can extend to international businesses owing to brand effect, especially for Asian customers 12,000
7,000
• Management expects COGS and expenses to increase/decrease at the same rate as core revenue, but profit margins will 4,000 3,000 3,000 28,145
expand due to a new ORV business line added
COGS and Expenses 20,182
• Stock-based compensation will increase less dramatically due to constraint on number of executives but will remain at a 17,308
high enough level to motivate management for the delivery of better financial results 16,635 16,846 16,477
• Management outlines strategy in CIM to invest USD 10mm into capital expenditures over the next three years for
powered vehicles suspensions production
Capital Expenditure • In the assumption model, CapEx will dramatically increase after 2021, primarily due to expansion into international
2019E 2020E 2021E 2022E 2023E 2024E 2025E
markets and investing in the further advancement of ORV suspensions and core suspensions manufacturing equipment
Opening PPE Capital Expenditure
• With currently USD 35.5mm of debt, if Shox maintains the current debt repayment level (about USD 6.5mm each year) it
Repaying Debt to Lower Interest
can clear the liability completely by the end of 2024, and boost its equity value by exit in 2025
Debt Repayment
• Repaying debt at an optimal rate can preserve cash flow for operations and maintain cash balance for liquidity without 35,500
incurring high interest expenses
29,000
• Net working capital is projected by assuming a constant days sales outstanding, days in inventory and days payable
22,500
outstanding after referring to historical operating efficiency of Shox
Net Working Capital • Over the forecast period (2018 to 2025) the net working capital is predicted to increase at a CAGR of 21.5%, which 16,000
suggests its high liquidity to meet short-term obligations and invest cash into PPE if the company encounters
undersupply in the future 9,500
• Model assumes the depreciation rate (amount of depreciation as % of opening PPE balance) at 20% in base case 4,793
3,828 2,903 3,000
• The YoY % growth approach is not used because depreciation highly depends on the amount of PPE, which is unlikely to 2,016
1,169 00
Depreciation and 360
change at a steady growth rate
Amortization
• Amortization costs are predicted to remain low as tangible assets are more significant in bike suspensions industry than 2019E 2020E 2021E 2022E 2023E 2024E 2025E
intangible assets Opening Debt Balance Interest Expense
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Key Growth Drivers and Model Assumptions (continued)
Revenue growth is the most important driver among all model assumptions and the forecast figures are calculated by market sizing and management strategy outline
ORV Sales Assumptions (% Global Sales) in Bull, Base and Bear Cases ORV Sales Forecast (2019-2025) in Bull, Base and Bear Cases
USD ‘000s 178,405
Prediction Listed in Management’s Discussion
4.60% Bull Case
Bull Case 4.50% 4.55%
Base Case Base Case
3.75% 137,864 135,743
Bear Case 3.50% Bear Case
107,539 110,533
3.00%
2.50% 2.85% 90,899
2.50%
71,453
2.15% 1.90%
2.00%
59,744 57,569
1.50%
38,515 40,966
1.20%
0.90% 1.00%
0.85% 25,192 23,109 23,898
0.50% 0.70% 9,607 16,196
0.50% 15,115
5,337 10,784
6,298
0.30% 3,202
2019E 2020E 2021E 2022E 2023E 2024E 2025E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
North America Core Suspension Products Sales Forecast in Bull Case Rationale
USD ‘000s
38.7%
40.1% • ORV Sales are predicted to grow at a higher rate before 2023 than after, since powered
Prediction Listed in Management’s Discussion 36.0%
37.4%
372,701 vehicle suspensions market will be saturated and competition may increase (new pure-play
33.3% 34.6% companies or established suspension manufacturer expanding into the ORV market)
31.9% 292,225
30.6% • Even in Bull Case, ORV sales is unlikely to reach 40% of total revenue of Shox in 5 years
28.1% 234,323 27.5% (mentioned in CIM), considering the time required to build up the new segment and the
24.8% 191,604 24.7% simultaneous growth in Shox’s core suspensions businesses
27.4% 158,871 22.3%
19.4% 22.8% 99,929
115,303
134,327
20.6% • Assuming aftermarket sales will grow uniformly with OEM sales, the North America segment
67,133
86,029
16.5%
18.3% will reach 36% market share by 2022 in the Bull Case, which is very achievable as the
53,782 15.4% resulting forecast growth rates are even lower than the average historical sales growth rate
16.2% (2015-2018: 23.0%)
2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E • International Sales (Aftermarket and OEM) are predicted to grow at a double-digit rate as a
North America Sales YoY % Growth % Market Share result of regional expansion into underpenetrated markets
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Key Growth Drivers and Model Assumptions (continued)
Addition of ORV sales boosts revenue growth to a new high since 2018A EBITDA margin is expected to increase continuously over the next 7 years
19.3% USD ‘000s 24.1%
17.5% 18.2%
17.8% 17.1% 21.2%
16.0% 15.5% 189,512
15.0% 18.6%
13.9% 14.0% 17.0%
15.1% 14.8%
13.7% 14.0%
12.4%
11.8% 11.5% 140,737
105,526
83,383
62,640
52,137
40,047
27,705 28,303 32,620
25,886
2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E
International OEM Sales North America OEM Sales ORV Sales
EBITDA EBITDA Margin
International Aftermarket Sales North America Aftermarket Sales YOY % Growth
Building up of Unlevered Free Cash Flow and secure cash conversion enables further PPE investment into ORV segment and existing suspensions product development
USD ‘000s
155.6% 149.3%
• Unlevered free cash flow shows rapid growth in the future through
122.4% 107.2% 99.1% predominantly the revenue drivers, while the cash conversion
95.2% 92.2% 82.4% 77.8% 74.7% 76.5%
(FCF/EBITDA) decreases by 79.1% from 2015 to 2025
98,442 • The drop in cash conversion is a result of the management strategy
implementation in expanding product services internationally and starting
71,522 the powered vehicle business segment, which require investment in
19.8%
CAGR 55,377 manufacturing facilities, and expenses incurred in establishing dealer and
45,622 OEM partnerships in emerging markets
36,779
30,140 • Lower cash conversion does not harm the liquidity position of Shox as the
22,217 latest ratio in 2025 (76.5%) is still well above average, yet the revenue
16,144 17,553 15,989 17,357
growth opportunities more than compensate the lower liquidity
• After successful penetration into international markets, management may
2015A 2016A 2017A 2018A 2019E 2020E 2021E 2022E 2023E 2024E 2025E
outline measures to cut costs in order to boost cash conversion ratios
back to a level more than 100%
Unlevered Free Cash Flow Cash Conversion
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Valuation
Valuation football field provides an overview of Shox’s intrinsic valuation calculated by different methodologies and determines the entry TEV/EBITDA multiple to be 5.28x
DCF(Exit
DCF (Exit Multiple:
Multiple: 6.28x,
6.28x, WACC: USD ‘000s
564,612 700,792 • Trading Comparables (TEV/EBITDA) was the main valuation method used to find the intrinsic
WACC: 13.21% - 17.21%)
13.21%-17.21%) value of Shox and determine the entry TEV/EBITDA multiple in the growth equity investment
• Entry TEV/EBITDA multiple is 5.28x that gives Shox a valuation of USD 172.1mm, which is
positioned at the lower end of the valuation football field
DCF (GrowthRate:
DCF (Growth Rate:1.9%
1.9% -
- 3.9%,
466,221 522,188 • The rationale for the low intrinsic valuation is that most of the comparable companies with
3.9%, WACC: 15.21%)
WACC: 15.21%)
publicly available data have a more diversified product portfolio and different distribution
channels which may contribute to a higher multiple
TradingTrading
Comparables
Comparables
(TEV/Revenue)
(TEV/Revenue)
85,074 652,232 • The four most comparable companies used in determining the entry valuation are Tenneco,
LCI Industries, KYB Corporation and Thor Industries
• DCF method gives a higher valuation because as it discounts the future value of cash flows to
Trading Comparables 463,616 present value with a WACC rate, the value of the cash flows is derived from Shox’s future
Trading Comparables (TEV/EBIT) 176,754
(TEV/EBIT) operational performance which is not reflected in the current business model, e.g. future cash
flows include those generated from powered vehicles segment sales that do not currently
exist and are hence not captured in the valuation multiple
Trading
Trading Comparables
Comparables (TEV/EBITDA) 114,170 407,750 • DCF is very sensitive to assumption inputs (perpetuity growth rate, WACC, multiples and
(TEV/EBITDA) operational model assumptions) and less reliable than trading comparables method,
especially when management expects a business transformation and regional expansion
Enterprise Value at Entry: USD 172.1mm (TEV/EBITDA = 5.28x)
DCF Valuation Sensitivity Analysis (Bull Case) DCF Valuation Sensitivity Analysis (Base Case) DCF Valuation Sensitivity Analysis (Bear Case)
USD ‘000s USD ‘000s USD ‘000s
Perpetual Growth Rate Perpetual Growth Rate Perpetual Growth Rate
1.90% 2.40% 2.90% 3.40% 3.90% 1.90% 2.40% 2.90% 3.40% 3.90% 1.90% 2.40% 2.90% 3.40% 3.90%
Discount Rate
Discount Rate
Discount Rate
13.21% 1,300,359 1,346,074 1,396,225 1,451,489 1,512,691 13.21% 573,658 592,795 613,789 636,924 662,545 13.21% 261,055 269,989 279,791 290,591 302,553
WACC
WACC
WACC
14.21% 1,162,281 1,198,748 1,238,440 1,281,805 1,329,378 14.21% 515,285 530,551 547,168 565,321 585,236 14.21% 234,374 241,501 249,259 257,734 267,032
15.21% 1,046,395 1,075,904 1,107,810 1,142,418 1,180,088 15.21% 466,221 478,574 491,931 506,419 522,188 15.21% 212,005 217,772 224,008 230,772 238,134
16.21% 947,970 972,142 998,130 1,026,147 1,056,441 16.21% 424,484 434,603 445,482 457,210 469,892 16.21% 193,024 197,749 202,828 208,303 214,224
17.21% 863,515 883,526 904,936 927,896 952,582 17.21% 388,611 396,988 405,950 415,562 425,896 17.21% 176,752 180,663 184,847 189,334 194,159
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Returns Analysis and Sensitivity
Assuming successful implementation of the assumptions derived from the management’s strategy, the IRR ranges from 25.1% to 48.9% and MM from 4.79x to 16.20x
IRR Analysis (Bull Case) IRR Analysis (Base Case) IRR Analysis (Bear Case)
IRR IRR IRR
2023 2024 2025 2023 2024 2025 2023 2024 2025
5.28x 50.0% 47.8% 46.2% 5.28x 31.5% 31.9% 32.4% 5.28x 11.7% 17.5% 22.6%
TEV/EBITDA
TEV/EBITDA
TEV/EBITDA
Multiple
Multiple
Multiple
5.78x 52.0% 49.5% 47.6% 5.78x 33.3% 33.4% 33.6% 5.78x 13.2% 18.8% 23.9%
Exit
Exit
Exit
6.28x 54.0% 51.1% 48.9% 6.28x 35.0% 34.8% 34.8% 6.28x 14.6% 20.1% 25.1%
6.78x 55.8% 52.5% 50.1% 6.78x 36.6% 36.1% 35.9% 6.78x 15.9% 21.4% 26.2%
7.28x 57.6% 54.0% 51.3% 7.28x 38.1% 37.4% 37.0% 7.28x 17.2% 22.6% 27.3%
Money Multiple (Bull Case) Money Multiple (Base Case) Money Multiple (Bear Case)
Money Multiple Money Multiple Money Multiple
2023 2024 2025 2023 2024 2025 2023 2024 2025
5.28x 7.59x 10.44x 14.27x 5.28x 3.94x 5.27x 7.12x 5.28x 1.74x 2.63x 4.16x
TEV/EBITDA
TEV/EBITDA
TEV/EBITDA
Multiple
Multiple
Multiple
5.78x 8.12x 11.16x 15.23x 5.78x 4.21x 5.63x 7.60x 5.78x 1.86x 2.82x 4.47x
Exit
Exit
Exit
6.28x 8.66x 11.88x 16.20x 6.28x 4.48x 6.00x 8.09x 6.28x 1.98x 3.01x 4.79x
6.78x 9.19x 12.60x 17.16x 6.78x 4.75x 6.36x 8.58x 6.78x 2.09x 3.20x 5.10x
7.28x 9.73x 13.32x 18.13x 7.28x 5.03x 6.72x 9.07x 7.28x 2.21x 3.39x 5.41x
Exit TEV/EBITDA • Target internal rate of return set by Silver Lane Management is 25% or more, so the Shox
38.1% Multiple growth equity investment satisfies the returns requirement of the fund, even in its bear case
37.4%
36.6%
37.0%
7.28x • Owing to the high IRR values expected in all three cases, Silver Lane Management has no
36.1% 35.9% incentive to fund its equity investment by issuing debt
35.0% 34.8% 34.8%
6.78x
• If the fund were to issue debt, since the investment will be a minority stake, Shox’s assets
IRR
6.28x cannot be collateralized and interest rates will be high for Silver Lane (most likely debt
33.4% 33.6% instruments will be mezzanine or high-yield bond with an interest of at least 10%)
33.3% 5.78x
32.4% • In typical investments one expects a higher IRR at earlier exit years, but the IRR values of
31.9% 5.28x Shox from 2023 to 2025 are very similar in bull and base cases, because the powered
31.5%
vehicle segment begins to capture significant market share in those years and the earnings
growth compensates for the difference in investment horizon
2023 2024 2025
financialmodeling.org | © Corporate Finance Institute, all rights reserved.Risk Mitigation
The biggest risk in the growth equity investment is the exit option and justification for the multiple expansion when negotiating with future stake buyers
Risk Type Key Risk Mitigation
Strong Impact
1. Current entry valuation is based on a TEV/EBITDA multiple lower • Conduct due diligence and research into product
than market average (public listed companies) coverage of comparable companies 1
Deal Risk 2. Difficulty in selling the business in 2025 as bike suspension is a • Seek strategic buyers which may be competitors
niche industry at the desired multiple and large institutional • Vertical integration produces cost and sales
investors may not be convinced by the new valuation synergies, and boost the sale price of Shox at exit
1. Loss of current management personnel who have a track record • Incentivize and lock in management at critical 2 2
of implementing growth strategy for Shox roles
Operational Risk 2. Different customer needs or attitudes in new markets • Powered vehicle suspensions serve as a
diversification method to the product portfolio
Weak Impact
1. Currency risk as international expansion is gaining momentum • Use currency hedging products such as swaps 1 2 1
2. Depreciation and amortization may increase more quickly than and forward contracts
Financial Risk anticipated • Free cash flow is forecast to grow at a CAGR of
19.8% and can be used to replenish PPE Low Probability High Probability
Due diligence is required to ensure smooth deal process and a dual track process can maximize sale price, given the size and global presence of Shox at time of exit
Exit Options (TEV of Shox reaches USD 1,190mm in 2025) Key Due Diligence Questions for Silver Lane Management
IPO Preparation Private Sale Legal Due Diligence:
• Review contracts regarding major distributors and suppliers including key terms of agreements
• Decide on a stock exchange based on factors Parallel • Sell to strategic buyer and produce synergies in the • Check status of legal disputes with industry competitors
Process
of which will yield the most attractive price acquisition, e.g. LCI Industries which have identical • Gather information concerning the background and compensation figures of management team
and has the highest geographic sales ratio at distribution channels but different products
Operational Due Diligence:
time of exit • Sell through private placement
• Understand the distribution process through OEMs and aftermarket, and conduct interviews with Shox’s existing partners
• Investigate the terms of current leases and expense inflation risk with respect to different geographies
Bid offer satisfies the IRR requirement? • Obtain data on the research and development progress of planned powered vehicle suspension products
No • Environmental, social and governance due diligence
Yes
Financial Due Diligence:
• Confirm fairness of assumptions in investment model and research on the growth outlook of international markets
Launch IPO Sell to Private Buyer • Estimate product demand in overseas markets through polls or other methods with big sample size
financialmodeling.org | © Corporate Finance Institute, all rights reserved.You can also read
