Butler Capital Partners and Autodistribution

Case Analysis

Corporate Valuation

Butler Capital Partners and Autodistribution

NOVA SBE . New University of Lisbon

Group 10: Aron Ceccarelli, no 479 Bruno Carvalho, no16 Diogo Santos, no 21 Maria Eneva, no 424 Maria Lobanova, no 456

Applied Corporate Finance _ Case 3: Butler Capital Partners and Autodistribution

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Index

Page

Executive Summary 2

1. Background and Theoretical Approach 3

1.1. Autodistribution 3

1.2. French Private Equity Market 4

1.3. Butler Capital Partners 4

1.4. Drivers for Value Creation 5

1.5. Risk Analysis 6

1.6. Pan-European Expansion 7

2. Valuation 8

2.1. Multiples Approach 8

2.2. Discounted CF Approach 9

2.2.1. Part 1 . APV 9

2.2.2. Part 2 . WACC 17

3. CEO Compensation 19

4. Final Conclusions and Recommendations 20

Applied Corporate Finance _ Case 3: Butler Capital Partners and Autodistribution

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Executive Summary

Autodistribution (AD) is operating in the auto parts after-market industry in France, being the leader in the independent wholesaler segment by the end of 1998 with a 33% market share. AD is also present in seven different countries, mainly through the acquisitions of distressed companies, which allowed them to be the largest independent wholesaler in Europe as well. Its organization can be divided into three business areas: the Company Buying Unit (CBU), the company-owned wholesalers and the auto-centers.

The drivers of value creation are three: sales growth (organic and by turnover acquisition), returns and leverage. Actually AD can expand its business in France and outside due to similar fragmented markets in Italy, Spain and UK. This geographic growth opportunity for the company has a relatively tight time horizon and growth opportunities will fade away. E-commerce can also further sales growth. ROIC can be improved through NOPAT (cost reduction, back-office optimization and logistics improvement) and through minimization of WCR.

However, this strategy will put AD under great stress, increasing greatly the operational risk. Not only AD lacks people with relevant international experience, but his corporate organization and culture are not ready to execute such an aggressive expansion strategy. Moreover, we think that Paul-Marie Chavanne, given his entrepreneurial spirit and international experience, is a strong candidate to CEO. In the same time we believe that an salary adjusted with a market benchmark, a consistent bonus related with the performance of the company (with EVA-based metrics) and stock options should be proper incentives. Furthermore Autodistribution should hire new talents that can change an association-type culture to a corporation-type one.

As a private equity Butler intends to acquire AD through a leveraged buyout and sell it afterwards to achieve at least an annualized IRR of 30%. The price proposed to BCP is FF3.455 million and the deal will be structured as a LBO, in a partnership with BNP. A preliminary multiple-based analysis points to a slightly lesser value but DCF analysis values the company in excess of FF5.000. The fully diluted market value of equity (FF 3.055 million), however comes very close of the equity value we can obtain without the build-up strategy (FF3.000). The main features of our valuation include an unlevered beta of 0,43, an unlevered cost of equity of 7,84%, an average cost of debt of 5,7% (after negotiation of a 0,25% spread haircut and adjusting for the warrants), average ROIC of 11% but matching the cost of capital in perpetuity. The forecasted value of equity in 2006 is FF6.253 million; so, the annualized IRR is 23,8%. If BCP state this rate in absolute terms they should only accept in the absence of projects with larger IRR; conversely, if it is an average IRR, this project is interesting and should be accepted.

There is a major risk of over-leveraging the company: the planned debt levels had to suffer significant changes due to inefficiency of allocation. In fact, the company could not generate funds to serve all the planned debt in the long term.

Applied Corporate Finance _ Case 3: Butler Capital Partners and Autodistribution

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1. Background and Theoretical Approach

1.1. Autodistribution

AD was created in 1962 as an automotive part purchasing association of independently owned affiliates, functioning as an intermediary between them and their suppliers with the objective of obtaining discounts from the suppliers, generating altogether big volume of sales. Historically, French automotive parts market was fragmented, meaning that it was composed by small independent wholesalers and private companies without any significant market share. Autodistribution saw an opportunity to grow and succeed through enlarging its market share and so it started an expansion buying its affiliates as well as unaffiliated independent companies. AD had know-how in their industry, it used to buy underperforming or distressed companies and improve them significantly. Actually AD was growing through these acquisitions, creating value by using their knowledge and experience in an industry. However, potential acquisitions within the France were limited, company estimated that in some years there will be no space to grow further through acquisitions in the home market and so they realized the need to bring their business abroad. In late 1970fs AD already had been present in seven countries outside France, but only through one international subsidiary, AD International, ADI. ADI was generating sizable purchasing volume allowing get an additional discounts from the suppliers.

In the late 90fs Autodistribution was the largest French independent wholesaler, having one third of market share in independent wholesale segment and about 10% of the total market. AD network jointly had generated revenues of about $1,2billion, almost twice as much as aggregate revenues of their major