M&A AND INVESTMENT BANKING

Case Study: Acquisition of Bulgari

1

Bulgari overview Company description 2010A revenues breakdown

Bulgari S.p.A. (“Bulgari”) is an Italy-based company engaged in the production and sale of luxury products.

Founded by Sotirio Bulgari in 1905, it has its flagship store in Via dei Condotti (Rome)

The main divisions of the company are:

Jewellery

Watches

Perfumes and cosmetics

Accessories

Hotels (Milan, Bali, Tokio and London)

Bulgari distributes its products through a network of exclusive stores in the world's major cities, as well as franchise stores, directly and through its subsidiaries

Ownership structure

Nicola

Bulgari

Paolo

Bulgari

Francesco

Trapani Others

Bulgari S.p.A.

50.6%(1)

49.4%

Source: FactSet as of 01 March 2011. (1) 50.2% of the Company share capital is bound to the shareholders’ pact.

(2) Assuming conversion of convertible bond outstanding.

2011E key financials

Revenues 1,158

EBITDA 193

% margin 16.7%

EBIT 122

Net Income 92

Net Debt -

Market capitalization 2,664

( € in millions)

(2)

By product By geography

Total 2010A: €1,069m

Jewellery

45.7%

Watches

20.1%

Perfumes /

Cosmetics

23.0%

Accessories

8.3%

Hotels / others

2.9%Italy

11.1%

RoEurope

23.7%

Americas

13.0%

Japan

18.5%

China

17.2%

ME

6.7%

Others

9.8%

2

Bulgari share price performance since IPO Share price performance

Jul-95 Aug-96 Oct-97 Nov-98 Dec-99 Feb-01 Mar-02 May-03 Jun-04 Aug-05 Sep-06 Oct-07 Dec-08 Jan-10 Mar-11

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

20

Volume (in millions) Bulgari S.p.A. Luxury Index

Source: FactSet as of 01 March 2011.

.

Pri

ce (

€)

Volu

mes (m

illions)

Bulgari at IPO Market capitalisation: €335m Revenues 1995A: €198m Number of shops: 36

Bulgari in March 2011 Market capitalisation: €2,664m Revenues 2010A: €1,069m Number of shops: 174

3

4

Bulgari SWOT analysis Key strengths/opportunities Key threats/weaknesses

Brand image

Strong competitive position in the jewellery segment

High operating leverage

Strong emphasis on innovation

Exposure to the Chinese market

− Recently signed distribution agreement with Hengdeli Holding

Late-cycle dynamics

Successful Beauty & Skincare division

Growing Accessories division

Improving in-store service and introduction of CRM marketing

Recently organic growth lagging key peers

Relatively high exposure to the highly competitive Japanese market

Visibility and magnitude of the recovery of the watches division still limited

Potential pressure on margins deriving from rising raw material prices

High exposure to exchange rate fluctuations

5

Share price performance of key luxury players Sector share price performance rebased to Bulgari share price (€)

The luxury sector had performed strongly in the twelve months before the transaction

Source: FactSet as of 01 March 2011.

Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Mar-11

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

35.9%

44.8%

31.6%

49.0%

33.7%34.5%

10.9%

Bulgari S.P.A. LVMH Moet Hennessy Louis Vuitton PPR S.A. Compagnie Financiere Richemont S.A.Swatch Group AG MSCI Textile Apparel & Luxury Goods MSCI Europe

Compacqs

Brokers’

target prices

DCF

Comps

Intrinsic valuation; discounts expected future cash flows Allows fundamental view on input assumptions Allows to implement sensitivities on operating and

financial assumptions to take into consideration medium / long term prospects

“Fair value” of the asset according to financial analysts

Should reflect “consensus” market views

Can be used as a relative benchmark to understand if price offered is in line with market valuation of similar assets

Relatively easy application for equity investors Luxury sector focused on roll-forward EV / EBITDA and

P / E

Comment Potential concerns

Relevance for

Bulgari

Fu

nd

am

en

tal

valu

ati

on

Market prices

Rela

tive v

alu

ati

on

C

on

tro

l m

eth

od

olo

gie

s

Potentially difficult to estimate long-term model assumptions

Could lead to over/undervalue the company if assumptions are too aggressive / conservative

Difficult to select an appropriate comps set to reflect specificity of the company

Operators in the same sector could have different growth, profitability and risk characteristics

Valuation influenced by market bubbles / downturns

Can be used as a relative benchmark to understand if price offered is in line with valuation levels observed in similar transaction

Relatively easy application for equity investors Main focus on EV / LTM EBITDA multiple

Transaction multiples paid in the luxury sector vary widely

Many transactions involved small companies with high growth profile or distressed assets with limited profitability

Potentially high variance between minimum and maximum target price

Limited visibility on the assumptions / methodologies used for valuation

No possibility to perform sensitivities

Sanity check for fundamental and relative valuation Influence by short-term market fluctuations

Does not strictly reflect long-term potential of the company

6

Valuation methodologies

?

?

?

?

?

Brokers’ views on Bulgari

Source: Company information.

Our DCF model (wacc of 8.6% and g of 2.5%) reached an equity value of EUR 7.41/share. A valuation based on 2011E stable market ratios (2.6x sales, 10.0x EBITDA, and 19.1x EPS) leads to a fair value of EUR 6.75/share. The average of the two confirms a target price of EUR 7.07/share implying an Exit P/E11/12E of 23.2/17.3x, basically in-line (2% discount) with an historical 2004-07 average of 23.7x…”

Banca IMI, 03 March 2011

Our target price is DCF-driven. We assume organic 10-year sales growth of c.4% compound for Bulgari, which we believe to be fairly conservative. We estimate that the operating margin will return slowly to 15%. We assume that the 15% tax rate is sustainable, in line with the company's indications. We use a long-term WACC of 9.5%. This reflects a risk-free rate of 4.5% and a market risk premium of 4.5%, with a beta of 1.1x. The terminal growth rate (2%) is also in line with the assumptions we use in general for the luxury sector, reflecting its above-average growth prospects.”

Deutsche Bank, 7 March 2011

We expect luxury goods companies to see a sharp rebound in margins in 2010, often close to the latest cyclical peaks. We believe however that not all forces that contributed to the recovery last year will push in the same direction in 2011… We believe hard luxury players are more at risk of disappointing market expectations this year, while we expect soft luxury to deliver steady margin progress.”

Unicredit, 11 March 2011

On our PT, the stock would trade at a 5% premium to the sector on CY12E PE or 17.5x, still not cheap…Our Dec-11 DCF based price target is based on the following factors: 2011E-2015E explicitly forecast, medium term growth 6%, terminal growth 3%, WACC 9.7%. This gives us a price target of €6.4 and an Underweight recommendation.”

JP Morgan, 19 January 2011

In our opinion, Bulgari shares do not currently look cheap on any metric. We argue that Bulgari should trade at most in line with its luxury peers, given its below-industry-average margins and returns, historically high cost inflation, and unfavourable geographical mix and product exposure. Furthermore, the company has had a track record of earnings disappointments over the last three years. Our price target of €5.80 is based on a luxury sector average 2011E P/E multiple.”

Citi, 26 January 2011

In our view, Bulgari is set to significantly increase its long-term growth potential by concentrating investments in emerging markets in the coming years. Following management comments at the 4Q sales results we expect the focus of the FY2010 results presentation and the Basel Watch fair (both in March) to be on these initiatives, i.e., on 2011, the “Year of China”... Bulgari remains one of the most attractive brand assets in luxury goods. Our €10.8 12-month price target implies 43% upside.”

Goldman Sachs, 27 January 2011

Positioning and valuation considerations

7

DCF valuation overview

Source: Bank of America / Merrill Lynch. (1) Research report assumed no conversion of outstanding convertible bond.

For illustrative purposes, below we report the DCF valuation of Bulgari published by Bank of America / Merrill Lynch Equity research on 27 January 2011

(1)

(1)

8

9

Trading multiples and margins of main luxury players

Hard goods luxury players Soft goods luxury players Bulgari

EV / EBITDA 2011E

EV / EBITDA 2012E

P / E 2011E

P / E 2012E

EBITDA margin 2011E

Source: Company information, FactSet as of 01 March 2011. Note: Multiples fully diluted, calendarised to December year-end.

13.9x 12.5x

18.6x

9.9x 9.6x 9.7x 10.4x 12.6x

10.2x 9.8x

Average: 12.1x Average: 10.7x

11.8x 10.7x

17.0x

8.6x 9.0x 8.8x 9.2x 11.2x 9.1x 8.8x

Average: 10.8x Average: 9.6x

29.2x 21.9x

33.3x

19.5x 14.8x

18.4x 18.6x 19.1x 16.9x 22.6x

Average: 21.6x Average: 19.3x

21.8x 18.7x

30.0x

16.9x 13.1x

16.5x 16.6x 16.8x 14.6x 19.7x

Average: 19.0x Average: 16.9x

16.7%24.3% 32.2% 25.6%

12.7%

25.1%19.7%

25.5% 27.2% 24.7%

Average: 24.0% Average: 24.3%

Competitor1 C.2 GroupB C.3 C.5 C.4 C.6 C.7 GroupA

10

Comparable transactions multiples Implied EV Enterprise Value / LTM LTM Margins

Ann. Date Acquiror Target Target Country % Acquired Value (€m) Sales EBITDA EBIT EBITDA EBIT

Oct-10 LVMH Hermes France 20% 7,861 3.72x 12.0x 13.8x 31% 26.8%

May-10 Qatar Holding Harrods UK 100% 1,741 na na na na na

Apr-10 Richemont Net-A-Porter UK 67% 395 2.92x 23.4x 27.0x 12% 10.8%

Dec-09 Tivoli (Greenwill) Smythson UK 100% 20 1.13x na na na na

Nov-09 Mittal Group Escada Germany 100% 200 0.37x nm nm na na

Oct-09 Al Hassan Bin Al Nuaimi Christian Lacroix France 100% 70 2.33x na na na na

Sep-09 Broadwick Group Aquascutum UK 100% na na na na na na

Sep-08 Onward Holdings Jil Sander Germany 100% 212 1.69x nm nm nm nm

Sep-08 LVMH Royal van Lent Netherlands 100% 300 3.00x na na na na

Aug-08 Carlyle Moncler Italy 48% 408 1.59x 10.4x 15.3x 15% 10.4%

Jun-08 3i Antichi Pellettieri Italy 49% 365 1.14x 6.9x 9.0x 16% 12.7%

Jun-08 L Capital Princess Yachts International UK 70% 313 1.28x 10.5x 11.8x 12% 10.8%

Apr-08 Labelux Bally Switzerland 100% 378 1.65x na na na na

Apr-08 LVMH Hublot Switzerland 100% 308 3.22x na 15.7x na 20.5%

Jan-08 L'Oréal YSL Beauté France 100% 1,150 1.77x 12.4x 17.8x 14% 0

Nov-07 3i Agent Provocateur UK 80% 105 4.58x 28.1x na 16% na

Sep-07 Luxottica Oakley USA 100% 1,630 2.58x 18.2x 26.1x 14% 9.9%

Sep-07 Oak Tree Conbipel Italy 100% 200 0.68x 11.5x nm 6% nm

Jul-07 CVC Samsonite USA 100% 1,250 1.51x 10.9x 12.8x 14% 11.8%

Jul-07 M1 Group Façonnable France 100% 153 0.95x na na na na

Jul-07 Permira Valentino Fashion Group Italy 100% 4,477 2.22x 14.4x 18.3x 15% 12.2%

Jul-07 Permira Hugo Boss Germany 9% 3,291 2.14x 13.3x 16.8x 16% 12.7%

Jun-07 Bain Bavaria Yachtbau Germany 100% 1,300 4.79x 16.3x 17.2x 29% 27.8%

Mar-07 Europeenne Participations Industrielles Bonpoint France 70% na na na na na na

Feb-07 Towerbrook Capital Partners Jimmy Choo UK 100% 281 3.52x nm nm nm nm

Oct-06 Candover Ferretti Italy 60% 1,722 2.24x 14.5x 17.8x 15% 12.6%

Sep-06 Aber Diamond Corp Harry Winston USA 47% 423 1.75x na 28.3x na 6.2%

Jun-05 CVC, PAI, Permira Cortefiel Spain 100% 1,452 1.49x 10.1x 15.4x 15% 9.7%

May-05 Poltrona Frau Cassina Italy 100% 140 1.14x 9.6x 22.8x 12% 5.0%

May-05 Onward Kashiyama Joseph UK 100% 204 2.33x 11.8x 13.4x 20% 17.4%

Nov-04 Hicks Muse Tate & Furst Jimmy Choo UK 78% 144 3.63x 27.7x 34.2x 13% 10.6%

Jan-04 Luxottica Cole National USA 100% 502 0.52x 13.8x nm 4% na

Mar-04 PPR Gucci Group Italy 32% 9,009 3.48x 24.3x nm 14% nm

Sep-02 Permira Ferretti Italy 100% 751 2.02x 10.9x 14.3x 19% 14.1%

Mar-02 Marzotto Valentino Italy 100% 240 2.07x nm nm nm nm

Dec-01 PPR Gucci Group Italy 20% 9,335 3.71x 21.6x nm 17% nm

Nov-01 LVMH Donna Karan USA 100% 316 0.42x 8.2x 16.6x 5% 2.5%

Nov-01 LVMH Fendi Italy 26% 1,280 5.23x 16.9x 17.5x 31% 30.0%

Mar-01 Luxottica Sunglass Hut International USA 100% 727 1.03x 8.7x 13.8x 12% 7.5%

Feb-01 Gucci Group Bottega Veneta Italy 67% 253 4.89x na na na na

Sep-00 Nordstrom Façonnable France 100% 193 4.32x 19.9x 23.2x 22% 18.6%

Jul-00 Richemont(Cie Fin) Les Manufactures Horlogeres Switzerland 100% 1,982 8.82x 38.3x 43.5x 23% 20.3%

Nov-99 Gucci Sergio Rossi Italy 70% 133 2.29x 17.1x na 13% na

Oct-99 Prada Fendi Italy 51% 794 7.11x nm nm nm nm

Sep-99 Lvmh Moet Hennessy Tag Heuer Switzerland 0% 792 2.80x 17.9x 10.5x 16% 26.8%

Sep-99 Prada Church & Co UK 100% 170 1.36x 14.8x 19.6x 9% 6.9%

Aug-99 Prada Jil Sander Germany 52% 200 1.81x na 31.1x na 5.8%

Mar-99 PPR Gucci Group Italy 44% 5,998 6.29x 23.3x 27.3x 27% 23.0%

Total Average 2.63x 16.2x 19.9x 15.6% 13.6%

Total Median 2.18x 14.5x 17.5x 15.0% 11.8%

11

Voluntary tender offers in Italy Majority transactions

Market views on Bulgari Prior to 07 March 2011 (Announcement date)

Brokers’ recommendations and target prices

Bulgari should benefit from broad-based strength in luxury demand and downside risk seems limited by its perennial corporate activity appeal (as one of the most attractive jewellery brands in the luxury space). However, an unproven track record in high-end male watches (which will take some time to build) and demanding valuation (even after factoring substantial margin recovery in the next years) keep us on the sidelines, especially considering that recent rotation out of luxury stocks made the likes of LVMH or Swatch look better value than before, we think.

Credit Suisse, 27 January 2011

Bulgari reported Q4 10 Sales after market close up 20.5% reported and 11% organic, higher than consensus but close to our estimates and we believe buy side expectations. Reported Sales up 20.5% came in a tad higher than we expected (1.7% ahead) on forex, they were in line on organic sales growth with JPME.

JP Morgan, 26 January 2011

Selected brokers’ comments

Source: FactSet, brokers’ reports.

Investing in Bulgari now requires confidence not only in the company’s cost control ability, which has been successfully proven, but in its ability to address the three key structural challenges we identified a long time ago for the full brand re-launch – namely, how to deliver the right like-for-like growth after an era of strong investments: i) the watch business underperformance over the last decade (E100m lower sales since 2000); ii) the low productivity of the network; and iii) the leather goods offering and positioning. We believe the brand image is intact as proven by the unabated strength of jewelry, although it can be further nourished by appropriate products and marketing actions.

Deutsche Bank, 07 February 2011

Premium / (Discount) vs.

Brokers TP (€) Rating Date 01-Mar-11 forecast date

J.P. Morgan 6.50 Sell 26-Jan-11 (15.8%) (13.8%)

Societe Generale 5.70 Sell 27-Jan-11 (26.2%) (25.9%)

Credit Suisse 6.90 Hold 27-Jan-11 (10.6%) (10.3%)

Goldman Sachs 10.80 Buy 27-Jan-11 39.9% 40.4%

Raymond James 8.00 Hold 27-Jan-11 3.6% 4.0%

Natixis 8.00 Hold 27-Jan-11 3.6% 4.0%

CA Cheuvreux 7.50 Hold 27-Jan-11 (2.8%) (2.5%)

BofA Merrill Lynch 9.00 Buy 27-Jan-11 16.6% 17.0%

Unicredit 6.00 Sell 28-Jan-11 (22.3%) (22.2%)

Deutsche Bank 7.90 Hold 07-Feb-11 2.3% 2.9%

Berenberg 8.60 Hold 15-Feb-11 11.4% 12.6%

Citi 5.80 Sell 24-Feb-11 (24.9%) (20.8%)

BNP Paribas 8.00 Hold 25-Feb-11 3.6% 5.3%

Banca IMI 7.07 Hold 03-Mar-11 (8.4%) (8.0%)

UBS 8.00 Hold 03-Mar-11 3.6% 4.1%

Average 7.58 (1.8%) (0.9%)

Median 7.90 2.3% 2.9%

Median 5.70 (26.2%) (25.9%)

Median 10.80 39.9% 40.4%

12

13

Valuation key reference points

Source: Company information, FactSet as of 01 March 2011. (1) Forecasts as per brokers’ consensus.

(2) Including conversion of €150m Bulgari convertible bond.

Compacqs

Brokers’

target prices

DCF

Comps

WACC: ? TGR: ?

Min: ?

Max: ?

Relevant peers: ? Relevant multiples?

Key metrics Illustrative valuation results (€ per share)

Implied EV /

EBITDA 2011E

Market prices

Relevant transactions: ?

Min market price in the period March 2010-March 2011: €5.34 (9 February 2010)

Max market price in the period March 2010-March 2011: €8.37 (20 December 2010)

Bulgari key

data(1)

Number of shares outstanding: 349m

Market price on 01 March 2011: €7.72

Net debt and other adjustments(2): (€4m)

EBITDA LTM: €154m

EBITDA 2011E: €193m

EBITDA 2012E: €227m

EPS 2011E: €0.28

EPS 2012E: €0.37

5.7 8.4

3.0 6.0 9.0 12.0 15.0

9.6x-15.1x

Mkt price as of 01 March:

€7.72

14

Potential partners / buyers overview

Competitor 5

Competitor 6

GROUP A

GROUP B

Revenues Net debt/(cash) EBITDA Market cap

Source: Company information, FactSet as of 01 March 2011. Note: Data calendarised to December year end and converted into € at spot exchange rate as of 01 March 2011.

(1) Fully diluted holdings, net of treasury shares.

€21,948m

€15,063m

€7,220m

€5,188m

€2,099m

€3,781m

(€1,882m)

(€1,762m)

€5,632m

€1,920m

€1,849m

€1,409m

€56,286

€13,991m

€25,031m

€16,167m

Net debt / EBITDA

Key financials 2011E

0.4x

2.0x

NM

NM

Major shareholder(1)

− Economic 48%

− Voting 64%

− Economic 41%

− Voting 56%

− Economic 9%

− Voting 49%

− Economic 24%

− Voting 43%

15

Key data for accretion / (dilution) and leverage analysis

Price per share (€)

# of shares out.

Market cap

Net debt / (cash)

EBITDA 2011E

Net income 2012E

Cost of debt

Marginal tax rate

€7.72

349m

€2,693m

0

€193m

€123m

NA

NA

€115.3

488m

€56,286m

€2,099m

€5,632m

€3,337m

5.5%

33.3%

€110.3

127m

€13,991m

€3,781m

€1,920m

€1,073m

6.0%

33.3%

€41.9

597m(1)

€25,031m

(€1,882m)

€1,849m

€1,490m

6.0%

21.0%

€310.4

54m(2)

€16,167m

(€1,762m)

€1,409m

€1,108m

6.0%

19.6%

Source: FactSet.

(1) # of equivalent shares. Each share having 10 economic rights.

(2) # of equivalent shares. Each share having 5 economic rights.

GROUP A GROUP B COMPETITOR 5 COMPETITOR 6