iRobot LBO Acquisition Project
Alin Dev
Ankita Jain
Sameer Mittal
iRobot - Business Model
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iRobot Corporation designs and builds robots for the consumer, government, and industrial markets.
The company offers consumer products, such as floor vacuuming robots, floor washing robots, pool cleaning robots, gutter cleaning robots, and programmable robots.
Its government and industrial products include the 510 PackBot line of small, unmanned ground robots; and the 310 small unmanned ground vehicle (SUGV) and 320 SUGV multi-purpose ground robots that perform battlefield reconnaissance and bomb disposal, as well as the 210 Negotiator for state and local police, and first responders.
The company also provides 1Ka Seaglider, an underwater vehicle designed for oceanic missions to measure temperature, salinity, depth-averaged current, and other data for scientific and military planners.
It sells its robots through chain stores and other national retailers, as well as through its on-line store to consumers, the U.S. military, and other government agencies worldwide.
iRobot Corporation was incorporated in 1990 and is headquartered in Bedford, Massachusetts.
Source: Yahoo Finance
iRobot - Business Model
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Focus on key robotic-specific technologies
iRobot’s performance compared to the industry
In the recently ended third quarter, iRobot's top line surged 28% year on year from increased demand in the home robots division and higher product prices.
There have been substantial increase in sales through internet retail channels. The bottom got an impressive 101% boost to $14.1 million.
Five-year revenue growth stands at an impressive 20.8% CAGR, along with five-year gross profit growth of a strong 23.4%.
Analyst projected EPS growth over the next 5 years is 22.50%.
Net institutional shares purchased over the current quarter at 3.1M, which is 12.59% of the company's 24.62M share float which indicates strong bullish sentiment for the stock.
Entering iRobot at a higher multiple might be sensible given the strong product portfolio and constantly growing product portfolio through innovative additions.
iRobot is in advanced stages of product development for the health care & oil exploration industry. These segments are not yet tapped fully to their potential by the existing players. We expect significant growth in iRobot’s revenue in next couple of years.
Several indicators point to the robotics industry being on an exponential growth path. Key enabling technologies, such as Artificial Intelligence, energy storage, computer hardware, sensors, and actuators are steadily improving, and revenues are also increasing
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Good LBO Candidate - iRobot
Steady and predictable cash flow There is significant growth potential in the automation sector. iRobot’s because of it’s technical excellence has great potential in capturing a significant market segment.
Heavy asset base for loan collateral High Base asset base in terms of high quality research labs.
Strong management team Attracts talented young professionals from Ivy league schools like MIT. The Co Founders has over 20 years of experience in technical innovation and management.
Strong, defensible market position Current market leaders in automated home maintenance products. They are also market leaders in the industrial and defense remote presence robots.
Viable exit strategy Strong business model and penetration into new market segments e.g. healthcare would easily attract strategic and financial buyers.
Limited working capital requirements Minimal requirement except for normal recurring trade payables, expense accruals and operating leases, all of which can be funded through working capital, CFO and the working capital line of credit.
Minimal future capital requirements Management currently does not anticipate significant investment in property, plant and equipment, and believe that the outsourced approach to manufacturing provides them with flexibility in both managing inventory levels and financing the inventory.
Potential for expense reduction The company has insignificant debt compared to Equity. Credit Stats looks good even after leveraging the company up to a level of 4-5 times EBITDA.
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iRobot – Innovative product line
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iRobot – Growth Strategies
WHAT • Focus on Core markets
Floorcare
Unmanned Ground Robots
• Do Fewer things better
Leverage technology developed by others
• Invest in the Future
Focused on emerging high potential markets enabled by our technology
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WHY ? • Vast market opportunities
$6 billion annual market
8,000 unit requirement for SUGV/ 4000 unit requirement for throwable robot
• Play to market leading technology strengths
Platforms, autonomy/navigation, manipulation
• Huge addressable market
Health Care
Oil & Gas
Retail
iRobot – Key Growth Potentials
Expect strong growth in Home robots to continue in future years
Moving new products, such as the Roomba 700 series and new Scooba, into mass retail from their current limited web-based distribution this year.
Early stage in robotics industry; Likely to see Healthcare pilots
iRobot is developing robotic solutions to help people live independently for longer to address current aging demographics and rising healthcare costs. iRobot in association with InTouch health has already fielded 400 remote presence robots to assist specialist doctors in urban areas.
Passage of FY12 defense budget near-term will improve Government
visibility.
Scope of expanding into emerging markets.
Organic growth in all three geographic areas, including North America, Europe, and Asia, from current low market penetration and the higher performance Roomba going mainstream.
Outsourcing of Production.
iRobot has recently started outsourcing the manufacturing to Chinese manufacturers. There are significant opportunities for cost savings and expansion of EBITDA.
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iRobot – Innovative Products for future growth
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Intellectual Property – key asset for iRobot
92 US Patents to date with more than 148 pending US patent applications
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46%
54%
U.S. Patents
Home Gov't & Industrials
41%
59%
Home Robot Patents
Dry Floorcare Other
iRobot’s - Target Audience
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Dry Floor Care – Huge Addressable Markets
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8%
91%
1%
US & Canada $1.75 billions
iRobot
Vaccums
Others
5%
92%
3%
Asia Pacific $1.7 billions
iRobot
Vaccums
Others
10%
87%
3%
EMEA $2.1 billions
iRobot
Vaccums
Others
1%
98%
1%
Latin America – 200 Million
iRobot
Vaccums
Others
Business Risks and Mitigating Factors - Suppliers
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• Gives iRobot the opportunity to sell their products to countries other than the United States.
• Availability of skilled labor in the emerging economies at a lower price compared to the US.
• Efficient Supply Chain and significant cost savings.
• Large dependence on several single outsourced contract manufacturers.
• All contract manufacturers for home robots located in China
• Lack of direct control over production capacity and delivery schedules
• Lack of direct control over quality assurance, manufacturing yields and production costs
• Lack of enforceable contractual provisions over the production and costs of consumer products
Business Risks and mitigating factors – Customers
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• Contracts with the government will lead to stable and significant revenue
• Use of iRobot’s products in critical government project improve the technical credibility of iRobot’s product in the eyes of customer.
• Plans to expand into the healthcare market
• Dependence on the U.S. federal government for a significant portion of revenue approx. 50%
• Contracts with the U.S federal
government which could give priority to the government orders before the more profitable commercial orders.
• IP rights – harming ability to compete
Business risks and mitigating factors - Competitors
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• Possible competition from developers of robot floor
cleaning products, small unmanned ground
vehicles, established government
contractors developers of small unmanned
underwater vehicles.
• High Barriers to entry because of High R&D Cost and lack of talented employee pool.
• Already established government contracts are difficult for the competitors to break in.
iRobot – Committed & highly skilled Management
Colin M. Angle – Co Founder, CEO and Chairman of the board
Angle is an industry pioneer with more than two decades of experience.
B.S. in Electrical Engineering and an M.S. in Computer Science, MIT
Dr. Tom Wagner - Chief Technology Officer
Prior experience at the Defense Advanced Research Projects Agency (DARPA), the research and development agency of the U.S. Department of Defense, where he managed programs in robotics, communications, command and control, tele-health and artificial intelligence.
Jeffery A. Beck - President Home Robots Division
Jeff Beck brings more than 20 years of high-technology leadership to iRobot. Prior to joining iRobot, Beck served as senior vice president and general manager of the aerospace and defense division of AMETEK, Inc.
Captain Robert L. Mosses - President Govt. & Industrial Robots Division
Prior to joining iRobot in 2003, Moses served as a career naval officer. As director of contracts for the Naval Air Systems Command, he supervised more than 800 employees and planned, negotiated and administered contracts worth more than $20 billion annually.
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iRobot - Financial Growth - Analysts
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Revenue, USD Millions
$299
$401 $467
$525
$604
$695
$800
$920
2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E
EBITDA, USD Millions
$21
$47
$71.00 $83.00
$101.00
$124.00
$152.00
$185.00
2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E
Assuming the growth rates as projected by the management and after adjustment by the JP Morgan Analysts report. Approximately Growth Rate of 14%-15% YoY in Revenue
iRobot - Financial Growth - Conservative
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Revenue, USD Millions
$299
$401 $467
$525 $590
$663
$745
$836
2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E
EBITDA, USD Millions
$21
$47
$71 $83
$98
$118
$141
$168
2009 2010 2011 2012 E 2013 E 2014 E 2015 E 2016 E
Assuming a conservative growth rate in the range of 10-12% YoY in Revenue
iRobot Valuation – APV Method
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APV Method
Assumptions:Terminal Perpetuity Growth: 3.0% Assumed perpetual growthCost of Capital: Pre-tax cost of debt 9.1% weighted average cost of debt After-tax cost of debt 6.5% Assume 28.3% effective tax rate Unlevered cost of equity 13.0% Risk free rate ( assumed 4%) + assumed 9% market premium for equity Levered cost of equity 25.0% Assumed minimum LBO hurdle Assumed LT Debt/Total Capitalization 46.7% Target Wtd Avg Cost of Capital 16.4%
Projected Years Ending December 31,Free Cash Flow 2012 2013 2014 2015 2016EBITDA 82,922 100,640 124,112 152,036 185,125 Less: Depr & Amort 14,196 15,910 17,883 20,149 22,749 EBIT 68,726 84,730 106,229 131,887 162,376 Taxes (19,468) (24,001) (30,091) (37,360) (45,996) After Tax EBIT 49,258 60,728 76,137 94,527 116,380 Plus: Depr & Amort 14,196 15,910 17,883 20,149 22,749 Less: Capex (17,629) (18,664) (21,477) (24,701) (28,386) Plus/Minus Ch in NWC (8,091) (5,965) (6,853) (7,876) (9,036) Free Cash Flow (Unlevered, After Tax) 37,734 52,009 65,690 82,100 101,707
NPV of FCF @ Unlevered Cost of Equity 225,206
Terminal Value - - - - 1,047,587 Implied Multiple of EBITDA 5.7x NPV of TV @ Unlevered Cost of Equity 568,588
Value of Tax ShieldInterest Expense 32,730 31,724 29,519 26,093 21,158 Tax shield 9,271 8,987 8,362 7,391 5,993 NPV @ Pre-tax cost of debt 31,588
Total APV 825,383
Perp growth vs. APV825,383
0.0% 681,431 1.0% 721,417 2.0% 768,674 3.0% 825,383 4.0% 894,693 5.0% 981,330
iRobot – Peer Group Attributes
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Company Industry/Sector Technology Based Market Leader Large Markets Expanding Markets
iRobot
Appliances/Consumer Goods;
Defense Products & services *** *** *** ***
FLIR Systems Inc
Defense Products &
Services/Industrial goods *** ** *** ***
Bruker Corporation Scientific instruments/Technology *** ** *** **
Heico
Defense Products &
Services/Industrial goods *** *** *** **
Cognex Scientific instruments/Technology *** ** *** ***
United Technologies Aerospace Technologies *** *** *** ***
iRobot Valuation – Comparable Company Analysis
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Comparable Company Analysis
iRobot FLIR Bruker United Tech Heico CognexStock price(50 day avg) 31.8 26.0 13.1 76.3 57.7 P/E trailing 22.6 18.9 24.1 13.8 35.2 20.4 P/E forward 12.4 12.4 PEG Ratio 1.22 0.98 1.2
Profit Margin 8.15% 13.68% 5.18% 8.35% 9.64% 22.24%Operating margin 10.21% 22.81% 11.0% 15.02% 18.21% 27.26%EBIT ( Mn $) 45.74 358.10 172.70 235.81 285.90 427.98 Revenue ( Mn $) 448 1,570 1,590 58,090 725 318 EBITDA (Mn $) 55 442 226 10,000 150 97 EBITDA Margin 12.3% 28.1% 14.2% 17.21% 20.6% 30.37%Total debt ( Mn $) - 248 313 11,360 100 -Market capitalization ( Mn $) 800 3,910 2,010 66,370 2,420 1,450 D/E - 16.01 51.92 47.52 0.02 -Enterprise Value ( Mn $) 800 4,158 2,323 77,730 2,520 1,450 equity betas 1.47 1 1.19 1.15 1.2 1.41
EV/Revenue 1.54 2.4 1.34 1.25 3.30 3.88 EV/EBITDA 12.59 9.41 10.28 7.77 16.80 15.03
EV/EBITDA (median) 10.3 iRobot has a range of businesses, we have selected the median of the closest companies
9.3 10.3 11.3 EV/EBITDA(ttm) 659,523 730,602 801,680 EV/EBITDA(forward) 769,416 852,338 935,261
On the basis of Comparable analysis and the APV method we decide the to pay 730 million as the base price for iRobot. Though for the sensitivity analysis we have considered a range of purchase price and calculated the corresponding IRR for the equity sponsor. Range of purchase price considered in the analysis is 730 million to 805 million.
iRobot – Peer Group Multiple Values
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EV / EBITDA
EV
/ R
EV
EN
UE
FLIR
BRKR
CGNX
UTX
HEI
IRBT
0
0.5
1
1.5
2
2.5
3
3.5
4
6 7 8 9 10 11 12 13
iRobot Valuation – Model Basic Assumptions
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• Available debt has been assumed to be 5 times of EBITDA. This is in accordance to the information available in the Berkshire case.
• Though debt is only 48% in the recommended capital structure, we cannot go beyond this based on the interest coverage and the information available in The Pitchbook decade report.
• Interest rate on the senior debt and the working capital line has been taken from the Berkshire case.
• We are assuming a 0.5% commitment fees on the unused working capital line.
• 3% is the financing fees
• 1% is the transaction expense
• Mezzanine gets an 8% warrant
• Management has 20% initial contribution in the equity. Their existing stake in equity is 12%.
• Management has further been given a 10% options. The strike price is the going in valuation.
iRobot – LBO Model
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SOURCES
Revolving Credit Facility 10,000 1.3% 0.1x Senior Unsecured Note 250,000 33.4% 3.5x Mezznine Debt and warrant 100,000 13.3% 1.4x
Total Debt 360,000 48.0% 5.1x Common Equity
Management 77,862 10.4% 1.1x
Sponsor 311,446 41.6% 4.4x Total Equity 389,308 52.0% 5.5x Total Sources 749,308 100.0% 10.5x
USES
Purchase Price 730,602
Plus: debt assumed 0
less: excess cash 0
Total Purchase Price 730,602 97.5%
Financing Fees 11,400 1.5%
Transaction Expenses 7,306 1.0%
Total Uses 749,308 100.0%
w/o fees w/ fees
Purch Price/LTM Full Year 2011 EBITDA 10.3x 10.5x
Purch Price/Forward 2012 EBITDA 8.8x 9.0x
Assumption: the excess cash is given out in the form of dividends to the shareholders at the time of purchase
iRobot – LBO Model ( Return Analysis)
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RETURNS ANALYSIS
Investor Ownership Options Ownership
Sponsor 311,446 80.0% 65.6% Management 77,862 20.0% 16.4%Management options 10.0% 10.0%Mezznine warrants 8.0% 8.0%Total Equity 389,308 100.0% 0.0% 100.0%
Mult. Of
2011 2012 2013 2014 2015 2016 IRR Invest.
Equity Returns At 10.5x Sponsor (311,446) - - - - 1,254,044 32.1% 4.0x Management (77,862) - - - - 465,746 43.0% 6.0x
At 8.5x Sponsor (311,446) - - - - 1,011,160 26.6% 3.2x Management (77,862) - - - - 368,000 36.4% 4.7x
% of $ Ownership2011 2016
2016 EBITDA 185,125 185,125 185,125
Exit Multiple 8.5x 10.5x 11.5x
Total Ent. Value 1,581,327 1,951,578 2,136,703
Plus: Option proceeds 38,931 38,931 38,931
Plus: Warrant proceeds 31,145 31,145 31,145
Less: Net Debt (110,000) (110,000) (110,000)
Common Equity Value 1,541,403 1,911,653 2,096,778
Assuming the exit multiple remains the same as the entry multiple or even contracts
iRobot-LBO Model ( Return Analysis)
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Debt Returns At 10.5x Mezznine debt (100,000) - - - - - Closing Fee 3,000 - - - - - Repayments - - - - - - Balance payment - - - - - 100,000 Interest payment 12,000 12,000 12,000 12,000 12,000Equity kicker 152,932Net Loan (97,000) 12,000 12,000 12,000 12,000 264,932 30.1% 2.7x
At 8.5x Mezznine debt (100,000) - - - - - Closing Fee 3,000 - - - - - Repayments - - - - - - Balance payment - - - - - 100,000 Interest payment - 12,000 12,000 12,000 12,000 12,000 Equity kicker 123,312Net Loan (97,000) 12,000 12,000 12,000 12,000 235,312 27.5% 2.4x
Senior debt (Rev, senior unsecured) (260,000) - - - - - Closing Fee 8,400 - - - - - Repayments - 12,570 27,566 42,827 61,692 105,345 Balance payment - - - - - 10,000 Interest payment 20,830 19,824 17,619 14,193 9,258
Net Loan (251,600) 33,400 47,390 60,446 75,885 124,603 9.0%
iRobot – Return Sensitivity Analysis – Aggressive Growth Assumptions
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The column on the left has different purchase prices for iRobot. We have assumed the debt to be constant at 360 million. The equity contribution from the financial sponsor will increase with the increase in purchase price.
Exit Mult. IRR Exit Mult. IRR0 0
8.5x 26.6% 8.5x 36.4%9.5x 29.5% 9.5x 39.9%
10.5x 32.1% 10.5x 43.0%11.5x 34.6% 11.5x 45.9%12.5x 36.9% 12.5x 48.6%13.5x 39.0% 13.5x 51.1%
Sponsor IRR
Exit Mult. IRR Purchase Price Sponsor Contribution0 0 8.5x 9.5x 10.5x 11.5x 12.5x
8.5x 27.5% 730,000 26.5% 29.4% 32.1% 34.5% 36.8% 370,0009.5x 28.8% 745,000 25.5% 28.4% 31.1% 33.5% 35.8% 385,000
10.5x 30.1% 760,000 24.7% 27.5% 30.2% 32.6% 34.9% 400,00011.5x 31.3% 775,000 23.8% 26.7% 29.3% 31.7% 33.9% 415,00012.5x 32.5% 790,000 23.0% 25.8% 28.4% 30.8% 33.1% 430,00013.5x 33.7% 805,000 22.3% 25.1% 27.6% 30.0% 32.2% 445,000
Exit Multiple
Management returns
Mezznine returns
Spronsor returnsThe sensitivity analysis is on the basis of aggressive growth assumptions. These assumptions are in sync with the management and the analyst reports.
iRobot – Return Sensitivity Analysis – Conservative Growth Assumptions
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The column on the left has different purchase prices for iRobot. We have assumed the debt to be constant at 360 million. The equity contribution from the financial sponsor will increase with the increase in purchase price.
The sensitivity analysis is on the basis of conservative growth assumptions. The analyst growth assumptions have been reduced to account for uncertainty.
Exit Mult. IRR Exit Mult. IRR0 0
8.5x 24.1% 8.5x 33.5%9.5x 26.9% 9.5x 36.9%
10.5x 29.6% 10.5x 40.0%11.5x 32.0% 11.5x 42.8%12.5x 34.2% 12.5x 45.5%13.5x 36.3% 13.5x 47.9%
Sponsor IRR
Exit Mult. IRR Purchase Price Sponsor Contribution0 0 8.5x 9.5x 10.5x 11.5x 12.5x
8.5x 26.4% 730,000 24.0% 26.9% 29.5% 31.9% 34.2% 370,0009.5x 27.7% 745,000 23.1% 25.9% 28.5% 31.0% 33.2% 385,000
10.5x 28.9% 760,000 22.2% 25.1% 27.6% 30.0% 32.3% 400,00011.5x 30.0% 775,000 21.4% 24.2% 26.8% 29.1% 31.4% 415,00012.5x 31.2% 790,000 20.6% 23.4% 25.9% 28.3% 30.5% 430,00013.5x 32.2% 805,000 19.9% 22.6% 25.2% 27.5% 29.7% 445,000
Exit Multiple
Spronsor returns Management returns
Mezznine returns
Conclusion
iRobot has excellent product portfolio and strong expected revenue growth.
Entry multiple at 10.5 x trailing EBITDA
The economy is pretty flat, so we are seeing market paying up for growth stories, and in that case 10.5 x could be reasonable versus some other growing brands.
Potentially a good buy since there is strong expected growth.
Even after significant multiple contraction to 8.5 from 10.5 we can achieve an IRR of 27%
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References
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• iRobot’s 2010 Annual Report 10k
• iRobot MorningStar Management Presentation - 11/10/2011
• Analyst Day Presentation Q3 2011
• JP Morgan Analyst Report - 11/01/2011
• Benchmark Analyst Report - 12/09/2011
• Yahoo Finance
• Bloomberg Terminal
• inFinancials
• Tuck School Note on LBO Valuation
• Berkshire Partners: Bidding for Carter’s