The Deal 2012 IIML ArrowHeads

7/31/2019 The Deal 2012 IIML ArrowHeads

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Motorbike Industry Analysis

HarleyDavidso

n

Team ArrowHeads IIM Lucknow

-6

-4

-2

0

2

4

-5 -3 -1 1 3 5

Reveu

egrowth

% Change in number of players

Heavy Motorcycle Industry

Maturesector

Factor Level

Competition Medium

Concentration High

Life cycle stage Mature

Capital intensity Medium

Technology Change Medium

Regulations Light

Demographics

Leisure and sports

GDP growth

Per capita income

Innovation

Demand

DriversLuxury productHigh dependence ondisposable income

Source: datamonitor


3/17

Value Drivers

IIM Lucknow

Factor Impact Sustainability

Loyal customerbase

High revenue due to repeat purchases.HD is in the business of selling lifestyle nottransportation

High sustainability in short term ( dueto aging of existing customers)

Product technicalcompetence

High revenue due to innovative designs Difficult to replicate due to presence ofpatents

Large dealershipnetwork

Higher sales due to large distributionnetwork ( Over 1650 independent dealers)

Easier to replicate as most of thedealers are independent dealers

Supplier relations Lower cost due to efficient operations.Through supplier advisory council ( SAC)they have fostered close relations withtheir suppliers. Most of their suppliers arelocated within 160 miles.

Difficult to replicate due as theserelationships are forged over long term

Operationalefficiency

Lower costs. Harley Davidson hassucceed in reaping benefits of economiesof scale through mass customization (Over 36 models manufactured on sameplatforms)

Replicable by Japanese companieswhich are known for their operationalefficiency

Complementaryproducts

Higher revenue through selling relatedproducts like Financing and merchandisebusiness

Difficult to replicate by immediatecompetitors as need to compete in adifferent market

Team ArrowHeads

HarleyDavidson


4/17

SWOT Analysis

STRENGHTSGlobal Market Leader

Economies of Scale

Ability to raise debt at lower cost

Customer loyalty Is the key to HarleyDavidson

Innovative Culture

WEAKNESSESWeak R&D (R&D as % of Revenue = 0%)

Bad acquisition

Lacking online presence

Japanese bikes are less costly

OPPORTUNITIES

More financial leverage could helpearnings

Emerging market have potential

Fragmented market providesopportunities

Online market opportunities could providemore benefits

THREATS

Volatile currencies could hurt bike sales

Volatile revenue

Bad economic conditions

Government regulations

Substitute products

SWOT

HarleyDavidson



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Competitor Analysis

Polaris

Global leader inATVs, ORVs

Gaining presencein cruiser andtouring bikes

More aesthetically

pleasing bikes

Honda, Yamaha,Suzuki

Strong brandpresence in Asia

Cheaper andshorter waiting time

Strong R&D Strong competitors

as auto partssuppliers

Custom Bikes

Acceleratingdemand for custombikes

Major players:AmericanIronHorse

Motorcycle, BigDog Motorcycles

HarleyDavidso

n


*ATV: All Terrain Vehicles; ORV: Off Road

Vehicles

Company Revenues (Mn) Growth

Honda 16,464 13%

Yamaha 11,343 -3%

Suzuki 3,256 -1%

Kawasaki 2,997 15%

HD 5,312 9%

Polaris 146 79%


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BMW


Should BMW acquire FinCo also?

10

15

20

25

30

2007 2008 2009 2010 2011

LeasingFinancing

New vehicles financed by BMWFinancial Services

in %

2000

2500

3000

3500

2007 2008 2009 2010 2011

Contract portfolio of FinancialServices Segment

in 1000 units

31%

30.9%

27.7%

9.6% AmericaEU Bank

EMEA

Asia Pacific

Retail customer financing ofBMW Financial Services 2011

CurrentScenari

o

Proof

Impact

Expansion ofFinancial services

by BMWDiversification inChinese & Indian

mkt24.74% of

revenues fromfinancial services

Verdict

ACQUIREFINCO

EffectsInorganic Growth in North

AmericaShared resources in China, India

Source: BMW Annual Report, 2011


8/17

BMW


Creditworthiness: Deserving of creditAble to honor promises and pay debts back

Long Term Rating

S&P RatingMoodys Rating

Apr 2005 - Nov 2008 A

Nov 2008 - Feb 2009 A-

Feb 2009 - till date A

Sep 2005 - Nov 2008 A-1

Nov 2008 - Apr 2009 A-2

Apr 2009 - Sep 2010 A-3

Sep 2010 - Jul 2011 A-2

Short Term Rating

Moodys Rating

Apr 1999 - Apr 2009 P-1

Apr 2009 - Jul 2011 P-2

Jul 2011 - till date P-1

These ratings suggest sound solvency position for debt with a maturity ofmore than one year.

The ratiossuggest that

liquiditycondition of

the companyis also

solvent.

Source: BMW Annual Report, 2011


9/17

Valuatio

n


DCF Valuation: Key inputs and assumptions

Rf 4.5%Rm-Rf 5%u 1.893

Ke 13.9%Kd 6.70%

D/V0.2532

Cost of Capital

Growth Rate 4%COGS 58%SG&A 18.50%Cap Ex 3.60%

WACC 11.6%

Assumptions

COGS, Operating Expense and SG&A expense are at industry average The Debt to Equity ratio is 25%, again at industry average

Tax rate27.6%

Stable Growth Rate 3%Op Exp 22.10%WC 1.30%Tax Rate 27.60%

Estimated Share Price $22.86

Source: Harley Davidson Annual Report, 2011; ycharts; datamonitor


10/17

IIM LucknowTeam ArrowHeads

Valuatio

n

Valuation using trading multiples:Key inputs and assumptions

HarleyDavidson

Polaris

Industries

Midas

Honda

Motor

Brunswick

ThorIndustries

Thomson

Reuters

RevenueGrowth

EBITDA MarginEBIT MarginCash Flow

MarginEnterprise Value Multiples

Enterprise Value calculated on market prices. Equity value as on 15th June

To estimate the industry average, mean and median of the comparablesused

Fair value calculated using these four ratios Average of the four taken as Fair Value of Harley Davidson Any outlier ratio below Avg/3 and above Avg*3 is excluded

Estimated SharePrice

$53.08

Source: Harley Davidson Annual Report, 2011; ycharts; datamonitor


11/17

Synergies

TheDeal


HardSynergies

SoftSynergies

Economies of Scale

Technologies ofBMWBack OfficeSynergiesCross SellingGeographicalExpansion for both

companiesOperationalEfficiencies

COSTIncreased

bargaining power

SALESImproved sales and

distribution channels

EFFICIENCYInflux of

consolidatedtechnologies

Cost Reductiona) Reduction in redundancy in workforce, production overheadsb) Shared backend operations

Sales Enhancement

a) Opening of new geographies to both HD and BMW Efficiency Increase

a) BMW, being a technology focused company, is expected tobring new technological innovations to Harley Davidson


12/17


TheDeal

Synergies: Cross Selling

Cross

selling

Customer BasedGeographically

Based

Customers of HD

Customers of BMW

HD BMW

NorthAmerica

Europe

HD BMW

SynergyLevelWeak Stron

gThe strong brand loyalty of Harley customers makes customer based synergy weakAlmost exclusive geographical operations strengthens the Geographically Based synergy


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TheDeal

Synergies: Valuation

Sales increase by 2%

COGS decrease by 1% OpEx decrease by 3% WACC changes to 10.1% Stable growth of 3%

Conclusion: Value (in Mn $)

HD BMWConsolidated

InvestedCapital

16,203

99,280 1,15,303

(+) ExcessCash 1,910 7,755 9,665

(-) Debt 5,723

39,91

9 45,64212,21

Main Assumptions


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Final Recommendations


Fair Value ofHarley

Davidson

DCF Method

Comparables

$22.86 $5,257.75

$53.09$12,210.42

Share price EquityValue

DCF method gives an estimate of the intrinsic value of the firm

as determined by the expected future growth Multiples method presents a better picture of the prevailing

market conditions To offer a price for acquisition, multiples method is a better

indicatorNegotiations could be done between $12,210 and $13,063 MnOffer share price between $53.09 and $56.80

Premium paid between $938.12 Mn and$853.58 Mn

Value of synergies between $2616 Mn and$2434 Mn

TheDeal


15/17

Deal Sourcing


Current situationCurrent D/E 1.33

Equity 67,117

Debt 89,266

About 57 % of the deal funding neededcan be sourced through debt

The remaining 43% of the funding canbe sourced through new issue of equityby BMW

This enables the firm to maintain itsexisting debt structure

Funding SourcesAmount to be financed 16,023

From Debt 9,146

Amount from new issue 6,877

Structure after the deal

Overall debt 96,142

Overall equity 76,263

New D/E 1.3301

Estimated cost of debt= 6.7%Estimated cost of equity = 11.6 %

FinalImpact


16/17


Strategies

DifferentTime Zone

DifferentCompanies

DifferentSegments

Other Options

Current scenario isseen as non-

supportive foracquisitionsCredit crunch andhigh interestchargesCould be a better

option to delay thedealContrarianapproach suggestthat this is the rightmoment as price of

firms is at minimum

To expand in Cruiserbike segment, Polaris

motors could be achoice.The limited size andgeographicdistribution could be alimiting factor in this

dealHusaberg, asubsidiary of KTMmotors ltd is also apotential candidate,but has limited

exposure to American

If BMW doesnt want

to expand in heavy

motorcycles,Scooterette segmentcan also be attractiveHigh potential growthLesser profit marginsBMW Brand dilution

is the biggest problem

FinalImpact


17/17


Thank You

Documents

The Deal 2012 IIML ArrowHeads