Acova Radiateurs

Harvard Business School Case #

Case Software # XLS-585

295150

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Exhibit 1A Current Market for Decorative Radiators

Country
France
Germany
Belgium
United Kingdom
Italy, Spain, Holland

Total
Radiators
Sold/Year

Decorative
Radiators Share of
Total

(mm units) % Units

2.20
15
5.50
9
1.00
6
4.36
5

% Units
25
15
10
8

Comments
Acova had 75% of market
Zehnder was leader with 25% market share
Acova held 80% of market
Believed to have high potential
Not well developed, but growth opportunities

Exhibit 1B Forecasted Market Growth (volume)

Hot water radiators

Towel dryers
Electric dryers

1988-1989
6.0%
45.0
20.0

1990
2.5%
25.0
20.0

1991
2.5%
20.0
20.0

1992
2.5%
15.0
20.0

1993
2.5%
10.0
20.0

1994
2.5%
10.0
20.0

Exhibit 1C Forecasted Market Shares in French

Radiator Market by Company
Company
Acova
Zehnder
Other/Finimetal ...
Market size

1989
75%
25%
-FFr 400mm

1994
57%
18%
25%
FFr 840mm

Exhibit 2 Acova Financial Statements (millions of FFR)

Sales
Other products
Purchases/material cost
Other expenses
Net interest
Taxes
Net Income
Assets:
Cash
Accounts receivable
Inventory
PPE
Total Assets
Liabilities:
Accounts payable
Deferred tax
Provisions
Bank debt
Net worth
Liabilities and Net Worth
Other Information
Capital expenditures

1989
337.4
3.5
340.9
(104.8)
(199.6)
36.5
(3.7)
32.8
(12.9)
19.9

1988
280.6
4.4
285.0
(82.8)
(174.3)
27.9
(0.7)
27.2
(10.3)
16.9

1987
227.3
1.5
228.8
(55.2)
(141.6)
32.0
(1.4)
30.6
(14.5)
16.1

12.5
115.0
33.9
161.4
72.5
233.9

5.2
100.1
33.7
139.0
55.6
194.6

10.7
80.4
18.8
109.9
36.5
146.4

88.1
5.0
5.3
37.0
135.4
98.5
233.9

79.9
0.0
5.6
45.0
130.5
64.1
194.6

71.7
0.0
6.7
15.2
93.6
52.8
146.4

29.0

27.5

19.0

1986
183.2
2.0
185.2
(47.7)
(113.7)
23.8
(0.4)
23.4
(11.7)
11.7

1985
144.5
0.0
144.5
(37.4)
(94.2)
13.0
0.3
1 3.2
(6.2)
7.0

Exhibit 3 Acova Projections Based on Acquisition Date of July 1,1990 (thousands of FFr)

Sales
Percentage change
Purchase/material costs
Purchase margin
Percentage
Production costs
Commercial costs
Advertising expense
Administrative expense
Transportation costs
Participation salaries
EBIT
Interest income of Target Co.
Total interest expense
Acquisition costs
Pretax profit
Taxes @ 37%
Net income
Depreciation
Amortization of acquisition costs
Capital expenditures
Change in net working capital
Cash flow available
Additional Balance Sheet Information
Working capital
Percentage of sales
Cash

Actual
1989
337,400

--

1990
380,000
12.63%
(114,380)
265,620
69.90%
(106,400)
(45,600)
(19,000)
(36,100)
(11,400)
(4,000)
43,120
801
(18,487)
(3,333)
22,102
8,178
13,924
19,000
(3,333)
(20,000)
(7,898)
8,359

1991
419,900
10.50%
(125,130)
294,770
70.20%
(115,934)
(47,880)
(19,665)
(37,905)
(12,597)
(4,800)
55,989
613
(34,104)
(3,333)
19,165
7,091
12,074
20,000
(3,333)
(25,000)
(7,461)
2,946

Projected
1992
463,990
10.50%
(137,341)
326,649
70.40%
(126,205)
(50,274)
(20,353)
(39,800)
(13,920)
(5,200)
70,897
852
(33,679)
(3,333)
34,737
12,853
21,884
25,000
(3,333)
(25,000)
(8,245)
16,972

63,162
18.70%
7,500*

71,060
18.70%
2,300

78,521
18.70%
2,530

86,766
18.70%
2,783

(104,931)
232,469
68.90%
(94,472)
(40,488)
(16,870)
(32,053)
(10,122)
(3,557)
34,907
3,399
(7,119)
0
31,187
11,539
19,648
11,700
0
(29,000)

* The balance of 7,500 does not match the Exhibit 3 cash balance of 12,500 because Acova used 5,000 of cash to pay taxes owed.

1993
510,388
10.00%
(151,075)
359,313
70.40%
(138,826)
(55,301)
(22,389)
(43,780)
(15,312)
(6,500)
1,114
(31,663)
0
46,656
17,263
29,394
25,000
0
(25,000)
(8,676)
20,717

1994
561,427
10.00%
(166,182)
395,245
70.40%
(152,708)
(60,832)
(24,627)
(48,158)
(16,843)
(7,000)
85,077
1,391
(29,184)
0
57,284
21,195
36,089
25,000
0
(25,000)
(9,544)
26,545

95,443
18.70%
3,061

104,987
18.70%
3,367

-197.562

-222.500

-238.781

-255.752

-282.108

Estimation of Firm Value

Sales
COGS
General Admin Expense

1989
337
(105)

1990
380
(114)

1991
419.9
(125)

1992
463.99
(137)

1993
510.388
(151)

1994
561.427
(166)

1994

Rf
Rm
Beta
Cost
Cost (D)
Eff tax%
Cost (D) net
Debt

10.06%
5%
0.8
14.06%
9.60%
37.00%
6.05%
37.00

Exhibit 4 Acova Projected Debt Schedule (thousands of FFr)*

1990

1991

1992

1993

1994

1995

1996

1997

1998

190,000
12,350
5,000
185,000

185,000
22,200
10,000
175,000

175,000
21,000
15,000
160,000

160,000
19,200
20,000
140,000

140,000
16,800
25,000
115,000

115,000
13,800
25,000
90,000

90,000
10,800
25,000
65,000

65,000
7,800
25,000
40,000

40,000
4,800
40,000
0

Beginning debt-Sub. debt

Interest payments-Sub. debt (13.5%)
Principle payments-Sub. debt
Ending debt-Sub. debt

65,000
4,388
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
0
65,000

65,000
8,775
65,000
0

Beginning debt-WC loan

Interest payments-WC loan (11%)
Principal payments-WC loan
Ending debt-WC loan

31,800
1,749
3,359
28,441

28,441
3,129
(7,054)
35,495

35,495
3,904
1,972
33,523

33,523
3,688
717
32,806

32,806
3,609
1,545
31,261

31,261
3,439
8,035
23,226

23,226
7,802 (16,017)
2,555
858 (1,762)
15,424
23,819 (46,660)
7,802 (16,017)
30,643

Yearly Debt Schedule:

Beginning debt-Sr. debt
Interest payments-Sr. debt (12%)
Principle payments-Sr. debt
Ending debt-Sr. debt

*1990 figures reflect a half-year's worth of interest payments, to reflect timing of transaction.

Exhibit 5A Deal Structure (millions of FFr)

Source
Equity
Management
Employees
Baring Capital Investors
Mezzanine Debt
Senior Debt
Total Financinga

Funding Provided
2
3
80
65
190
340

Notes:
Senior Debt will have an interest rate of 12% and an 8.5-year term.

Mezzanine Debt will be subordinated to senior debt, have an interest

rate of 13.5%, 9-year maturity, with warrants such that the projected
IRR after 4 years is 22% with an exit P/E of 13.

Equity: Management will get warrants exercisable at a minimum

share price of 2.2 times nominal value. After full dilution, Baring
Capital Investors will hold 79% of total equity.

Offer is conditional on satisfactory due diligence, satisfactory legal

audit on brands and licenses, and agreement with management.

Exhibit 5B Projected Returns to Investors Assuming Exit December 31, 1993 (millions of FFr)
Business value
Acquisition loans
Mezzanine
Equity value
Management share (7.9%)
Mezzanine share (12.9%)
Baring Capital share (79.0%)
IRR calculations
Mezzanine cash flow
Baring Capital cash flow
a

608.1a
115.4b
65.0
422.7
33.5
54.4
334.8
Year 0
(65)
(80)

1
4.388
0

2
8.775
0

3
8.775
0

4
115.182c
334.8

IRR
23%
43%

Casewriter's note: 608.1 EBIT (1-t) 13. It appears that BCI actually used an EBIAT multiple rather than a P/E multiple.

Assumes warrants exercised in 1993 and proceeds (13.0 MF from mezzanine and 11.6 MF from management) used to
pay down debt.
b

115.182 = 65.000 + 8.775 + 41.407. The 41.407 comes from the 54.4 of equity minus the 13.0 to exercise warrants.

Yearly Discounting
Ending MV of equity
Ending Debt+equity
Debt/capital
Equity/capital
Asset Beta
Equity Beta
Cost of equity

Closing

1989

1990

1991

1992

1993
422.7
660.506
0.360036
0.639964
0.8

Exhibit 6 Market Interest Rates (March 1990)

U.S. Long-Term Government
U.S. Short-Term Government

8.79%
8.61%

AAA
AA
A
BBB
BB
B

9.33%
9.62%
10.11%
10.51%
12.71%
15.11%

France Long-Term Government

France Short-Term Government
Exchange Rate US$/FFr

10.06%
10.66%
0.1738

Source: Compiled from Standard & Poor's Bond Guide, April 1990 and
Datastream