monmouth capitalizing on distress nicolas lindstrom samuel nadeau franco perugini

MonmouthCapitalizing on Distress

Nicolas LindstromSamuel NadeauFranco Perugini

Mandate

Mandate Strategic Rationale Valuation Implementation Conclusion

How should Monmouth approach the Robertson opportunity?

Recommendation

Mandate Strategic Rationale Valuation Implementation Conclusion

Offer 2.1 NewCo shares for every 1 Robertson share; Valuing the Company at

$29.2M or $50 per share

Accretive as of 2005

Strategic Rationale

What are you buying?

Mandate Strategic Rationale Valuation Implementation Conclusion

Quality product with powerful brand name

• Reaches 2,100 wholesalers & 15,000 retailers• 137 countries

Knowledgeable & experienced staff

• Lower sales growth, margins & efficiency ratios

Highly sophisticated and far reaching distribution system

Poor Recent Performance

Monmouth Acquisition Criteria

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Major Player • Largest Domestic Manufacturer of cutter & edge tools

Stable & Broad Market • 50% Market share in clamps & vices• 4th largest in scissors & sheers

Leading Company• Leading company in it’s two main product

lines• Top competitor in other product segments

The Benefits of the Mergers

Mandate Strategic Rationale Valuation Implementation Conclusion

Reduction in Cost of Goods Sold

• 69% -> 65% of Sales

Selling, General & Administrations Costs

• 22% -> 19% of sales

Integrate Roberston’s distribution system

• Increase Monmouth’s reach for its product lines

Rationale

Mandate Strategic Rationale Valuation Implementation Conclusion

Simmons Offer

• Cash Offer: 42$• Acquired 30%• Opposed by Management

NDP Offer

• Share swap 5:1• Volatility in NDP Stock (53.1 -> 23.12)• Opposed by Simmons

Manmouth Offer

• 2:1 Share Swap: 50$• Supported by Simmons & Management (50% of ownership)

Valuation

Valuation Overview

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Standalone Assumptions

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Income Statement

• Revenue growth of 3%• COGS decrease from 68.5% to 67% of sales• Slight SG&A leverage to 21.5% of sales from 22%

Valuation

• D&A equal to Capex to reflect low growth (3%)• WACC of 9.6%; Terminal growth of 2%

Income Statement

Mandate Strategic Rationale Valuation Implementation Conclusion

Standalone Robertson P&L 2002-2007$M 2000 2001 2002 2003 2004 2005 2006 2007 CAGRSales 53.7 54.6 55.3 57.0 58.7 60.4 62.2 64.1 3.0%

Growth 1.6% 1.3% 3% 3% 3% 3% 3%COGS 35.9 37.2 37.9 38.7 39.6 40.5 41.7 43.0 2.5%Gross Profit 17.8 17.4 17.4 18.2 19.1 19.9 20.5 21.2 4.0%

SG&A 11.5 11.9 12.3 12.5 12.6 13.0 13.4 13.8D&A 2.4 2.3 2.1 2.2 2.2 2.3 2.4 2.4EBIT 3.9 3.2 3.0 3.5 4.2 4.7 4.8 4.9 10.5%

Interest Expense 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8EBT 3.1 2.4 2.2 2.7 3.4 3.9 4.0 4.1Taxes 1.2 1.0 0.9 1.1 1.4 1.5 1.6 1.7Net Income 1.9 1.4 1.3 1.6 2.1 2.3 2.4 2.5 13.8%

Operating leverage from SG&A optimization

Working Capital

Mandate Strategic Rationale Valuation Implementation Conclusion

Assumes flat WC ratios

Working Capital$M 2002 2003 2004 2005 2006 2007Accounts Receivable 8.0 8.2 8.5 8.7 9.0 9.3

% Sales 14.5% 14.5% 14.5% 14.5% 14.5% 14.5%Collection Period 53 53 53 53 53 53

Inventory 18.0 18.4 18.8 19.2 19.8 20.4% COGS 47.5% 47.5% 47.5% 47.5% 47.5% 47.5%Collection Period 173 173 173 173 173 173

Accounts Payable 2.0 2.0 2.0 2.1 2.1 2.2% Total Expenses 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%Days Payable Out 14 14 14 14 14 14

Working Capital 24.0 24.6 25.3 25.9 26.7 27.5Change in WC 0.6 0.6 0.6 0.8 0.8

ComparablesCompany Operating Margin Return on Capital Price/Earnings Debt to Cap Asset BetaLincoln Electric 15% 12% 12.4x 17% 0.63Snap On 10% 11% 14.4x 19% 0.85Stanley Works 15% 14% 11.6x 24% 0.73

Average 13.3% 12% 12.8x 20% 0.74Median 15.0% 12% 12.4x 19% 0.73

Robertson 5.4% 4.0% 13.5x 37% 1.00

Comparable Companies

Mandate Strategic Rationale Valuation Implementation Conclusion

Robertson is slightly more levered

WACC

Mandate Strategic Rationale Valuation Implementation Conclusion

Re-levering the comparable betas provides a Robertson beta of 1

Robertson WACC Cost of Debt (Assumed BBB) 6.1%Tax Rate 40%After Tax Cost of Debt 3.6%

Market weight of Debt 37%

Risk Free Rate (30Y Treasury) 4.1%Beta 1.00Market Risk Premium 6.0%Size Discount 3.0%Cost of Equity 13.1%

Market Weight of Equity 63%

WACC 9.6%

Robertson BetaAverage Unlevered 0.74D/E 0.59Tax Rate 40%Levered Beta 1.00

DCF

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Depreciation offsets capex

Discounted Cash Flow Working Capital$M 2003 2004 2005 2006 2007 TerminalEBIT 3.5 4.2 4.7 4.8 4.9Less: Cash Taxes 1.4 1.7 1.9 1.9 2.0NOPAT 2.12 2.54 2.79 2.88 2.96

Add: D&A 2.2 2.2 2.3 2.4 2.4Less: Capex 2.2 2.2 2.3 2.4 2.4Less: Change in WC 0.6 0.6 0.6 0.8 0.8

FCFF 1.5 1.9 2.2 2.1 2.2 29PV Factor 0.91 0.83 0.76 0.69 0.63

PV FCFF 1.35 1.59 1.65 1.46 1.37 18.42

DCF - Standalone

Mandate Strategic Rationale Valuation Implementation Conclusion

$25.40 standalone intrinsic value; stock most likely bid up due to takeover buzz

DCF ValuationPV 2003-2007 7.4PV Terminal 18.4Enterprise Value 25.8Less: Debt 12.0Plus: Cash 1.0Equity Value 14.8Shares Out 584,000Per Share 25.4

Implied Forward P/E 9.1x

Deal Proposal

Mandate Strategic Rationale Valuation Implementation Conclusion

Minimum offer price needs to be $50 for support, therefore offer $50.

Deal StructureMonmouth Share Price 24$ Robertson Offer Share Price 50$ Exchange Ratio 2.1xRobertson Shares out 584,000 MergeCo Shares Issued to Robertson 1,216,667 Monmouth Shares Out 4,210,000 Total MergeCo Shares 5,426,667

Pro-Forma P&L

Mandate Strategic Rationale Valuation Implementation Conclusion

Monmouth takeover would lead to outsized growth and leverage

PF Robertson P&L 2002-2007$M 2000 2001 2002 2003 2004 2005 2006 2007 CAGRSales 53.7 54.6 55.3 58.6 62.1 65.9 69.8 74.0 6.0%

Growth 1.6% 1.3% 6% 6% 6% 6% 6%COGS 35.9 37.2 37.9 39.8 41.6 43.5 45.4 48.1 4.9%Gross Profit 17.8 17.4 17.4 18.8 20.5 22.4 24.4 25.9 8.3%

SG&A 11.5 11.9 12.3 12.3 12.4 12.5 13.3 14.1D&A 2.4 2.3 2.1 2.3 2.5 2.7 2.9 2.9EBIT 3.9 3.2 3.0 4.2 5.6 7.2 8.2 8.9 24.3%

Interest Expense 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8EBT 3.1 2.4 2.2 3.4 4.8 6.4 7.4 8.1Taxes 1.2 1.0 0.9 1.4 1.9 2.6 3.0 3.2Net Income 1.9 1.4 1.3 2.0 2.9 3.8 4.4 4.9 30.2%

Shares Out 584,000 584,000 584,000 584,000 584,000 584,000 584,000 584,000EPS 3.25 2.36 2.23 3.49 4.93 6.58 7.60 8.33

Accretion/Dilution Analysis$M 2003 2004 2005 2006 2007Acquirer Net Income 11.0 11.9 12.8 13.8 15.0Acquirer EPS 2.61 2.83 3.04 3.28 3.56

Pro-Forma Robertson EBIT (incl Synergies) 4.2 5.6 7.2 8.2 8.6Interest Expense 0.8 0.8 0.8 0.8 0.8Income Taxes 1.4 1.9 2.6 3.0 3.1Pro-Forma Robertson Net Income (Pre-Fee) 2.04 2.88 3.84 4.44 4.86One-Time Restructuring Charges (severance) (0.3)Professional Fees (0.29)Issuance Fees (1.17)Robertson Pro-Forma Net Income 0.27 2.88 3.84 4.44 4.86

MergeCo Net Income 11.3 14.8 16.6 18.2 19.9PF MergeCo Shares Out 5,426,667 5,426,667 5,426,667 5,426,667 5,426,667PF EPS 2.08 2.72 3.07 3.36 3.66Accretion (Dilution) (0.54) (0.10) 0.03 0.08 0.10Accretion (Dilution) % -20% -4% 1% 3% 3%

Accretion/Dilution

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Deal turns accretive in 2005 from Synergies

Implementation

Timeline

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2003Apr May June Jul

Hire BankersSubmit LOI at 2.1x Share RatioDue DiligencePrepare Legal DocsIssue New EquityClose Deal

Ownership Structure

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Swap Ratio 2.1X

Monmouth78%

Simmons7%

Rationale

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Reduce sales Force/Marketing

• Reduce 3%

Operating Backs store

• 2%

Long-term timeline

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Medium-Long Term2003 2004 2005 2006 2007

Monmouth Shareholder CommunicationLayoff Overlapping EmployeesIntegrate Product SegmentsMerge Distribution SystemsImplement Inventory Management

Management Recommendation

Mandate Strategic Rationale Valuation Implementation Conclusion

Integrate product lines

• Reduce inventories• Increases efficiency

Reduce advertising expense

Build on distribution

Conclusion

Mandate Strategic Rationale Valuation Implementation Conclusion