BERKSHIRE PARTNERS: BIDDING FOR CARTER’S

Submission by Group 11
 MITHUN I002
 SAGAR NADKARNI H038
 SHIVANGI TEWARI H062
 SACHIN PANDE H040
 AKASH TRIPATHI G060
1. How do financial buyers like Berkshire Partners create value? Given the opportunity, would you
invest in Berkshire as a limited partner?

Berkshire partners in the capacity of Private equity firm, after taking a position in other company plays
a dual role of both an investor and managing the acquired company. When a PE firm like Berkshire
invests in a company, they do so because they believe they can enhance the value of the asset. The
traditional model is acquiring a company experiencing financial distress due to poor management,
lack of investment or other factors. In these cases, a private equity firm can restructure the company’s
debt, install a new management team, and/or make other operational improvements to enhance
operations.

In some invest cases investment is made in companies that exhibit strong growth prospects. For these
companies, teaming with a PE firm provides access not only to capital but also a wealth of invaluable
resources, such as operational executives, industry experts, new suppliers, economies of scale and
access to new markets. A private equity sponsor can leverage its extensive network to improve
management, logistics, infrastructure and other essential components of a business that can take
years to develop separately
As a limited partner the main criteria for making an investment is the reliability of getting a proposed
return on investment. For such an assessment, limited partners looks at various factors like PE firms
management team, their asset under management and screening process for selecting prospective
firms.
Berkshire partners have a very granular screening process of selecting a firm. Berkshire reviews more
than 1200 potential deals and invests in only 5-6 firms after doing a complete due diligence. This
drastically reduces chances of selecting a wrong company. As far as Berkshire's management team (as
mentioned in exhibit 2) is concerned they have experts from various sectors such as business services,
retailing, manufacturing, communication, food processing, distribution, and IT services. So Limited
partners would know that their money is in safe hands. Finally AUM of Berkshire partners have
increased from $59 mn to $985 mn in a period of 16 years at a CAGR of 19%.
Since Berkshire has shown good performance on all three counts a limited partner would consider
investing in Berkshire as a good opportunity.

2. Is Carter's an attractive LBO candidate for Berkshire? Why is Investcorp selling?

Berkshire’s focus when analyzing an investment is on “building strong, growth-oriented companies

in conjunction with strong, equity-incented management teams”.1 If we look at Carter’s Growth
Strategy (Exhibit 5), we can see that

Carter’s is planning to capitalize on its market leader position in the children’s apparel segment by
diversifying both products and distribution channels. More tie-ups with wholesalers like Target,
entering into the discount market and new product lines like playware segments show that the
company has a clear vision of how it will grow its customer base and top line. Hence, it is growth
oriented and has definite plans of how to achieve this.

It has also maintained its focus on improving supply chain, reducing cost by offshoring
manufacturing and expanding distribution channel which will ensure that the company has a strong
base as it expands.

The management team of Carter’s is highly experienced, and has already turned around the
company since 1992, when Rowan was made CEO.

1
HBS: “Berkshire Partners: Bidding for Carter’s”, Exhibit 1a
 Hence, Carter’s satisfies the elements of Berkshire’s investment philosophy. The case also states that
despite the slump in IPO market, there is a favorable outlook for Carter’s IPO, with pricing around 16
to 18 times 2002 earnings.2 So if and when Berkshire chooses to exit, it should make a profit. Also, as
the interest rates in the US are falling, an LBO will be cheaper for Berkshire at this stage.

Investcorp’s investment philosophy is to “inject patient capital” into a company, waiting for the
business to improve and then selling it or taking it public.3 Typically, a private equity firm exits an
investment within 5-7 years. Investcorp acquired Carter’s in 1996, just as its performance had
started to turnaround. By 2000, the company’s revenue had increased at CAGR of 9.5%4, and
Investcorp was looking to exit the investment as it had achieved its purpose. Since the IPO markets
were near a standstill5, that exit route would have taken them at least another year or two. Hence,
they are selling Carter’s as they want liquidity.

3. How much cash flow will Carters generate in the next five years (2002-06) based on
management estimates?

Complete calculations are shown in the attached excel sheet.

2001E 2002P 2003P 2004P 2005P 2006P
(in thousands of dollars)
EBIT 55,100 67,600 87,300 1,09,800 1,33,500 1,40,175
Tax rate 35% 35% 35% 35% 35% 35%
EBIT x (1 - t) 35815 43940 56745 71370 86775 91113.8
Depreciation 20000 21100 21800 24400 28100 29505
CAPEX 20500 19500 21000 21500 22500 22500
Change in Working Capital 26567 9127 17379 24275 21351 9478

FCFF 8,748 36,413 40,166 49,995 71,024 88,641

4. How realistic are the management forecasts in light of Carters’ historical performance?
From the facts presented in the case it is deduced that the management has made optimistic
projections for the coming years as compared to the historical performance, however the
assumption seems reasonable, because:

 Purely based on historical performance and considering other factors to remain constant,
the revenue would grow at around 13%, but the factors like business expansion into
discount channel and strong brand name would add into the top line growth in the coming
years that supports 15% assumption.
 The Gross Profit margin growth of around 42% looks highly optimistic as compared to the
historical performance of the company. The company is positive on the Tyke’s but still the
numbers in the recent years does not support the assumptions.
 Lower cost structure and efficient operations would help to reduce the Selling and
Administrative Expenses over the years due to economies of scale.

2
HBS: “Berkshire Partners: Bidding for Carter’s”, p 6
3
HBS: “Berkshire Partners: Bidding for Carter’s”, p 2
4
Ibid
5
HBS: “Berkshire Partners: Bidding for Carter’s”, p 3
  Management’s Capital Expenditure assumptions are reasonable, considering the fact that
relatively new operational site would not require significant Capital expenditure in near
term.
 The optimism is justified with the growth strategy of Carter’s including diversifying
distribution channels, continuing with existing product offerings and complete outsourcing
of manufacturing.

5. What should the Berkshire team bid?

In order to determine bid value, we have to take into account comparable transactions in order
to arrive at bidding price for Berkshire.

Target Name Value of Transaction EBITDA Transaction Date TV/EBITDA

Too Inc 581.1 39.0 24-Aug-99 14.89
McNaughto
n Apparel
565.4 80.3 19-Jun-01 7.04
Unitog Co 370.8 42.7 24-Mar-99 8.68
Donna
Karan
247.2 28.7 27-Nov-01 8.61
Koret of CA
(Levi
141.6 15.4 29-Apr-99 9.19
Happy Kids Inc 119.6 20.4 17-Dec-99 5.85
Mean 9.04

Expected EBITDA for Carter's (2001) (in millions) 75.1

Average TV/EBITDA Multiple 9.04
Bidding price (in millions) 678.904