ASSIGNMENT 2: PRADA
Refer to the HBS case "Prada: To IPO or Not to IPO" and answer the questions below.
Note: Complete the related textbook chapters (RWJJ Chapters 14, 15 & 19) before attempting this case.
WHAT IS THE PROBLEM SAID TO BE FACING PRADA?
Prada got some financial trouble.
First, Prada failed for several times to IPO due to various reasons like SARS, financial crisis, etc.
Second, because of the long-term debt maturing in one year, Prada needed to raise more than 1 billion euros immediately.
Third, Prada at the same time wanted to expand the Asia market which has the highest growth rate and has great potential.
Therefore, due to these problems, Prada was in desperate demand of a huge amount of money and it is quite urgent. However, due to the failure of several times of IPO, Prada was not quite sure which approach it should take to raise the capital.
LIST THE ALTERNATIVE METHODS PRADA COULD USE TO REFINANCE ITS MATURING DEBT. IN ADDITION TO THE MANY ALTERNATIVES MENTIONED IN THE CASE (START BY LISTING THOSE, GROUPING THEM IN THE TWO BROAD CATEGORIES OF "DEBT" AND "EQUITY"), WHAT OTHER VARIATIONS OF THESE DEBT AND EQUITY CHOICES CAN YOU IDENTIFY (TRY TO GIVE TWO OR THREE OTHERS)?
IPO in HK; HKDR; Strategic partnership
Euro/dollar bond; Dim sum bond; Traditional corporate bond
ADR( American depository receipt); hybrid Eurodollar bond
USING LVMH AND LI & FUNG (LF, OWNER OF TRINITY BRAND) AS BENCHMARKS, PROPOSE A METHOD TO ESTIMATE PRADA'S COST OF EQUITY CAPITAL. HINT: "DIVIDEND DISCOUNT MODEL" (RWJJ PP. 401-402). SEE EXHIBIT 10. ASSUME THAT DIVIDENDS FOR THESE COMPARABLES ARE PROJECTED TO GROW AT 5%.
LVMH: R=Div/P + g = 1.77% + 5% = 6.77%
Li & Fung: R = Div/P + g = 1.89% + 5% = 6.89%
Prada: R= (6.77% + 6.89%)/2 = 6.83%
USING LVMH AND LI & FUNG AS BENCHMARKS, ESTIMATE THE MARKET VALUE OF PRADA'S EQUITY CAPITAL (MARKET CAP, IN EURO) BASED ON THE FOLLOWING RATIOS FOUND IN EXHIBIT 10: PRICE-EARNINGS (P/E), PRICE-TO-BOOK VALUE OF EQUITY (P/BOOK), PRICE-TO-SALES (P/SALES), PRICE-TO-CASH-FLOW (P/CF), AND PRICE-TO-FREE-CASH-FLOW (P/FCF). USE THE MOST RECENT DATA FOR PRADA (2011).
EXPECTED MARKET CAP
E = 253.6
Book = 2366
Sales = 2046.7
OCF = 367.7
FCF = 79.5
Expected Market Cap
=(8770.756+15568.28+4512.9735+7357.677+1840.0275)/5= 7609.94 million Euro
Therefore, the market value of Prada's equity capital (market cap) is estimated to be 7609.94 million Euro.
BASED ON YOUR AVERAGE ESTIMATE OF PRADA'S MARKET CAP IN QUESTION 4 (AVERAGE ACROSS METHODS FOR LVMH AND LF), WHAT PERCENTAGE OF ITS EQUITY OWNERSHIP WOULD THE OWNERS (THE BERTELLI AND PRADA FAMILIES - ASSUME THEY OWN 100%) HAVE TO SELL IF THE OBJECTIVE IS TO RAISE 1 BILLION EURO?
Therefore, the owners have to sell 13.146% of its equity ownership to raise 1 billion euro.
WOULD YOU NECESSARILY ADVISE PRADA TO RECAPITALIZE (I.E., CHANGE ITS CAPITAL STRUCTURE) IN THE PROCESS OF REFINANCING? IF SO, HOW AND WHY? IF NOT, WHY NOT? WHAT ARGUMENTS CAN YOU MAKE TO SUPPORT YOUR RECOMMENDATION?
I would advise Prada to recapitalize.
Prada now is bearing too much long-term debt, which leads to its financial trouble and cause impact on its operation of the company. Also, compared to other luxury fashion firms, Prada's debt-to-asset ratio is much higher.
I would advise Prada to IPO because first, issuing debt will undoubtedly put more pressure to the company's financial trouble. Second, issuing "dim sum bond" involves some exchange risk. Furthermore, selling some portion of the firm to the private equity...
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