Ridiculous valuation! This is a ridiculous deal for Cerberus. So many issues with the Valuation TD prepared.
The implied Fwd EBITDA multiple on the DCFs are a mere ~4.6x – 6.4x well below precedents
On the DCF the working capital adjustment in 2021 represents ~C$4.70 per share (there are alternative ways to fund this at lower capital costs). Working capital provided only $38MM YTD (vs. a use of cash of $20MM in 9Mo 2019). So not sure what the right working capital adjustment should be but $4.70 per share seems high.
On the DCF management includes a change of control payment and a Creditor Make-Whole, I am not certain that this transaction warrants the CoC as the Schwartz family appears to maintain it post closing. Alternatively this highlights different considerations for the Class A vs. Class B as the burden of the CoC is squarely on the Class B/Minority shareholders?
On TD’s Precedent Transactions:
The valuation range applied is materially lower then the comps provided:
Home: 7x-9x for home products is below the average and median of the range (11.7x and 12.5x respectively) and below all but two of the eight precedents
Juvenile: 7x-9x for Juvenile is well below the average and median range (11.1x and 10.6x respectively) and below all but one of the eight transactions
Sporting Goods: 8x-10x for Sporting goods is below the average and median (10.9x and 10.5x respectively) and bellow all but two of the eight precedent transactions
TD uses a highly adjusted LTM EBITDA, the $119.6MM is below the actual and forecast EBITDA range from 2017-2022, including 2019 which was $126.6MM and their own forecast for 2021 of $161.3. This fictitious LTM number makes wholly unreasonable ‘Management’ changes of $17.2MM without any description the other adjustments are also suspect.
Again there is a working capital adjustment that is worth ~C$4.38 per share, I cannot recall seeing a NWC adjustment for precedent transactions, and it is not clear they applies the same adjustments to the precedent transactions they are comparing too.
Once applied the Total Enterprise Value from the precedents implies a 6.4x-8.4x LTM EBITDA multiple, this is on the highly adjusted LTM number and the TD high-end implied, 8.4x, is only above only two of the 24 precedent transactions TD used (8.2x – 16.0x range excl. Min & Max)
To apply such harsh critiques to the precedents while ignoring the fact that interest rates are at unprecedented lows, and the multiples Private Equity has paid has exceed even the pre-financial crisis period, highlights how big a steal this deal is for management and Cerberus.