JP Morgan Case Study Competition 2012

1. Case Study- The Deal 2012
Potential Acquisition of Harley-Davidson by BMW AG
1

2. Overview
• Motorcycle Industry
• Brief Profile – BMW AG
• Brief Profile – Harley Davidson
Slide
3-5
Deal Rationale
6
Key Issues to consider while acquiring Harley Davidson
7
Valuation drivers of Harley Davidson
8
Valuation Summary
Credit Worthiness of BMW AG
• KMV Model
• Credit Metrics Analysis
9 - 14
Agenda
Valuation Methodologies
• DCF – Including Synergies
• Market Multiples
• Comparable Transactions
15
16- 18
Bidding Strategy and Deal Structure
19
Value Creation Analysis
20
Accretion Dilution Analysis
21
Evaluation of Alternatives
22
Merits and Demerits of Valuation Methodologies used
Appendix
23 - 24
25
2

3. Industry Analysis- Motorcycles
Global market value 2006-2010
76
15.00%
74
10.00%
72
5.00%
68
66
0.00%
64
-5.00%
62
60
European market : CAGR @ 3.3%
Asia-Pacific markets: CAGRs @ 6.5%,
between 2010 and 2015
% growth
$ billions
70
Industry Overview
 Global motorcycles sales stagnated between
2006 and 2010 but volume sales increased
during the same period
 Total global motorcycle revenues in 2010:
$63 billion
 The market is expected to grow at a CAGR of
6% for the period between 2010 and 2015
-10.00%
58
56
-15.00%
2006
2007
2008
$ billion
2009
2010
% growth
Global market segmentation, by region
‘10
Five Forces Analysis
Buyer Power
5
3.80%
4
3
Threat of substitutes
2
20.50%
Asia Pacific
Supplier Power
1
43.20%
0
Americas
Europe
Middle East and Africa
Threat of new
entrants
*Source:: Datamonitor Industry report October 2011
32.50%
Degree of rivalry
3

4. Brief Profile – BMW AG
Business Portfolio
Mission :
 To be the world’s leading provider of
premium products and premium services for
individual mobility.
 BMW AG headquartered in Munich,
Germany manufactures and sells luxury cars
and motorcycles worldwide.
 It owns and produces the MINI marque,
and is the parent company of Rolls-Royce.
 BMW produces motorcycles under BMW
Motorrad and Husqvarna brands.
 In 2010, the BMW group produced
1,481,253 automobiles and 112,271
motorcycles across all its brands.
Key Pillars of Strategy :
 Growth
 Shaping the future
 Profitability
 Access to technology and customers
BMW AG - Acquirer
Goals and Objectives
Recent Investments
 Investments in new products and in the
expansion of international production
network -around € 3.7 billion (2011).
 Investment company BMW i Ventures set up
in February 2011 – for assessing strategic
investments in innovative mobility service
providers
 Acquired 15 entities of the ING Car Lease
Group (ICL Group)
2012 Y-o-Y growth
52%
EPS
29%
ROE
76%
EBT
57%
EBIT
33%
EBITDA
14%
Revenue
0%
20%
40%
60%
80%
*Source: BMW AG annual report and company website
4

5. Brief Profile – Harley Davidson
Business Portfolio
Strategy :
 Sustain a loyal brand community active
through clubs, events, and a museum.
 Harley-Davidson Motor Company, produces
heavyweight motorcycles and a complete
line of motorcycle parts, accessories and
general merchandise.
 Harley-Davidson motorcycles have a
distinctive design and exhaust note and is
known for the tradition of heavy
customization
3.0%
4.3%
3.3%
4.9%
16.8%
 Harley-Davidson Financial Services provides
motorcycle financing to Harley-Davidson
dealers and customers in the U.S. and
Canada
0.4%
5.9%
US
Europe
Japan
By
Region
Canada
67.7%
Australia
Motorcycles
17.5%
Parts &
Accessories
By
Product
Line
General
Management
76.2%
Others
Others
Fig: Distribution of Sales (in millions) by region
*Source: Harley Davidson annual report and company website
Fig: Distribution of Sales (in millions) by product lines
5
Harley Davidson- Potential Target
Goals and Objectives

6. Harley Davidson will help BMW AG to reach out to the American market
Market Expansion
 Harley Davidson currently has a 55.7% of the US market and BMW Motorcycle is a relatively
small player. BMW can leverage the existing dealer and distribution network of Harley in the
US to bolster its own sales
Deal Rationale
 Similarly, Harley Davidson will have a foray into the European market where BMW AG has a
strong presence
Addition of new product lines to existing product portfolio
 Amongst the 5 segments of the total heavyweight motorcycle market, BMW is present in 3 of
them (Sport Bikes, Touring, Street Bikes) and Dirt Bikes (through Husqvarna)
 It does not have a presence in the popular Cruiser segment where Harley Davidson is a major
player
 By acquiring Harley Davidson, it can expand its portfolio to be a major player in this category
Cost synergies
 With a successful merger, BMW AG can exploit the existing product development practices of
Harley Davidson and apply them to their own stable
 Both companies can realize cost synergies and product development
6

7. Key issues to consider as part of acquisition of Harley Davidson
Financial Issues
Business Issues
 What would be the revenue growth rate for next 10 years and
terminal growth rate of Harley Davidson?
 How much market expansion can be achieved by the
acquisition of Harley Davidson?
 How much premium above the share price should be given
while deciding the bid price?
 What is the shareholding pattern of Harley Davidson? Is it
highly fragmented or are there few shareholders with high
stake?
 What would be the acquisition structure? Would BMW AG
purchase assets or stocks of Harley Davidson?
 How would the transaction be funded?
 Is the acquisition of Harley Davidson in line with long term
goals of BMW AG?
 What would be the effect on credit rating of BMW AG if large
amount of debt is taken to finance the acquisition?
 Should BMW AG retain top management team of Harley
Davidson?
 If cash position of BMW AG worsens due to this
acquisition, what would be its effect on future dividend policy
of BMW AG?
 What would be the competitors’ reaction?
Operational Issues
Marketing Issues
 What are the existing distributional channels of Harley
Davidson and how can they be utilized most efficiently after
the acquisition?
 What would be the effect on the brand equity of BMW AG?
 What would be the effect on relationships of existing key
suppliers & customers of both BMW AG and Harley Davidson ?
M&A Issues
 What would be the payment structure? Would BMW AG pay in
cash or its stock?
 Are the values and employee culture of both the companies
compatible with each other?
 How would the advertising campaigns of BMW AG be affected
by inclusion of new brands in its portfolio?
 How much operational costs can be reduced by increased
operational efficiency due to economies of scale achieved
through the acquisition of Harley Davidson?
Source: Team Analysis
 Would there be any regulatory issues in this acquisition?
 What will be the brand strategy in markets where brands of
both these companies are competing with each other?
7

8. Valuation Drivers
Volume growth in different regions
• Harley-Davidson has a very small
market share in Europe.
• On the other hand, BMW is a very big
name in Europe with a large market
share and vast distribution networks.
• This will help Harley in expanding its
sales in the European region
• As the European crisis comes to an
end, spending on cult brands like
Harley shall revive and thus boost
Harley‟s sales.
• Also, the last few years have seen a
good growth in the women‟s segment
bikes.
Earnings
Harley Davidson Valuation Drivers
Revenue
• EBITDA Margin of Harley-Davidson is
about 12% as compared to 18% for
BMW
• Productivity of Harley is expected to
increase with time when acquired by
BMW
• With
time,
due
to
cost
synergies, EBITDA margin for Harley
Davidson is expected to increase to
14% in the base case scenario
• It is expected to increase to 16% in the
best case scenario
• Apart from distribution network and
cost synergies, other synergies
expected are in product development
and R&D.
8

9. Three Primary Valuation Methodologies
DCF
This methodology values a
company as sum of its free
cash flows over a forecasted
period and the terminal value
at the end of forecast period
Values a target company by
referencing key financial
ratios of peer group
companies.
Harley Davidson Valuation
Transaction
Comparable
Market Multiples
Values a target company by
referencing M&A transaction
multiple paid in recent times
by companies involving
business operations of
similar nature, size and
similar M&A motives
Contribution to Final Value Range
40%
20%
40%
Range of share price for target company
The Market Multiples method is applicable for a non-strategic buyer. It
does not account for the premium a strategic buyer would pay.
Hence we assigned a lesser weightage to this method.
9

10. DCF Valuation - Share price ranges from $24.67 – $35.52
Scenario Analysis : Changing growth rates
5.43
Sales Growth Rates
First 3 Years
4-6 Years
6-10 Years
EBIT Growth Rates
5.0%
First 3 Years
6.0%-8.0%
4-6 Years
8.0%-10.0%
6-10 Years
12%-13.5%
13.5%-15%
15%-16%
Firm Value
9224
Equity Value
8224
Price Per Share 35.52
Assumptions:Global motorcycle industry growth considered
Operating Margin due to synergies improved to 16%
Sales Synergies increase to 10%
Worst Case Scenario
Sales Growth Rates
First 3 Years
4-6 Years
6-10 Years
Firm Value
Equity Value
Price Per Share
Metrics used in DCF
WACC
9.71%
Perpetual Growth
1.50%
Debt
# of Shares
1000.01
231.519
Key pointers to growth rates
• Revenue growth rates assumed includes the price mix growth
and the volume mix growth rates by region.
• Price mix is the major driver of the revenue growth
• Perpetual growth rate does not exceed the average long term
growth of the groups individual geographical segment
Detailed calculations are furnished in appendix
6.0%
6.0%
6.0%
EBIT Growth Rates
First 3 Years
4-6 Years
6-10 Years
12%
12%
12%
6711
5711
24.67
Assumptions:Global motorcycle industry growth considered
Synergies not realized
Base Case Scenario
Sales Growth Rates
First 3 Years
4-6 Years
6-10 Years
Firm Value
Equity Value
Price Per Share
EBIT Growth Rates
3.0%-4.0%
First 3 Years
4.0%-6.5%
4-6 Years
6.5%-8.0%
6-10 Years
7968
6968
30.10
Assumptions:Operating Margin due to synergies improved to 14%
Sales Synergies increase to 8%
10
12%-12.5%
12.5%-13.5%
13.5%-14.0%
Harley Davidson Valuation
5.42
Best Case Scenario

11. DCF Valuation – Sensitivity Analysis
Assumptions and Findings
Harley Davidson Valuation
 We have assumed a 10% shift in all the
four parameters and have evaluated the
share price variation and have found the
following results
 Harley Davidson‟s Share price is most
susceptible to change in EBIT(which is
due to change in operational efficiency) –
As Harley Davidson is already pursuing
operational efficiency drives, the share
prices are expected to rise due to increase
in margins
 Share prices are also highly sensitive to
WACC which is dependent on the capital
structure of the firm. With de-gearing and
the up gradation of Moody‟s and Fitch
rating the WACC would be lower in the
coming years and we expect the share
price to go up
11

12. Market Multiples
EV/Revenue
EV/EBITDA
P/E
Harley Davidson Valuation
Assumptions
• # of shares 231 m., WACC=9.71%
• # of companies considered 6*
• Share prices are PV of expected share prices in 2012 and 2013, discounted at WACC
* List of companies used for calculating market multiple is furnished in appendix
12

13. Market Multiples
Average Share Prices
Calculation of share price
Median
(2)
P/E
-
(2) -
EV/EBITDA
(4)
EV/Revenue
15
3
17
2
19
- 1
(1)
-6
-4
-2
0
Harley Davidson Valuation
Average Prices
11
5
2
4
6
Average values used for calculating market cap
EBITDA
794.57
Revenue
5061.20
Earnings Per Share
1.73
Debt
344.65
Cash
1153.74
# of Shares
231.5 mn
WACC
10%
* List of companies used for calculating market multiple is furnished in appendix
All numbers are in USD
Methodology*
•
Calculate expected market cap in 2012E and
2013E from each market multiple
•
Discount expected market cap by WACC of
Harley Davidson
•
Divide the PV of market cap by the of shares
outstanding to obtain share prices
•
Final share price range is calculated by taking
average share prices from each market multiple
13

14. Transaction Comparables
Share Prices
Share Prices in $
60
Median
Low
50
50
40
30
20
Harley Davidson Valuation
High
Calculation of share price
41
37
31
31
24
21
12
16
10
0
FV/EBITDA
FV/EBIT
Average
Transaction comparables
Methodology
•
•
•
•
•
* List of companies used for calculating transaction comparable is furnished in appendix
10 Transactions are used to calculate the
transaction comparable ranges
Calculate expected market cap in 2012E and
2013E from each transaction comparable
Discount expected market cap by WACC of Harley
Davidson
Divide the PV of market cap by the number of
shares outstanding to obtain share prices.
Final share price range is calculated by taking
average share prices from each transaction
comparable.
14

15. Valuation Summary
Selected Valuation Ranges
30
14
Trans. Comparables
39
11
Market Mult
16
36
25
DCF
0
5
10
15
20
25
30
35
40
45
Share Price
Share Prices
DCF Valuation
Market Multiples
Trans. Comparables
Final Share Price
Lower Range
Median
Upper Range
Weights
25
11
17
16
30
13
31
24
36
16
41
30
40%
20%
40%
Valuation
• Median share price for Opco. division of Harley Davidson is 25 USD
• BMW can bid in the region of 18 – 31 USD per share
15
Harley Davidson Valuation
16
Final Price

16. KMV methodology to estimate credit worthiness
Credit Worthiness of BMW AG
Overview
• KMV* methodology estimates the firm‟s probability
of default on the debt repayments thus provides an
estimate of the firm‟s creditworthiness.
• Using this methodology the equity of the firm can be
seen as a call option on the firm‟s assets.
Asset
Ownership
Asset
Value
>
Debt
Value
Bankrupt
•
Calculating market value of assets using options
framework as shown in the figure alongside
Other key terminologies used
• Default Point
– If asset value drops below this value then company
will default
– Generally taken as market value of debt to be repaid
at any time t
•
DD (Distance-to-Default)
– Number of standard deviations asset value must
deviate from its mean to drop below “Default Point”
•
EDF (Estimated Default Frequency)
– Probability that market value of assets will drop below
“Default Point” and company will default
Source: http://www.ma.hw.ac.uk/~mcneil/F79CR/Crosbie_Bohn.pdf
* KMV: (Vasicek/ Kealhofer Model)
16

17. KMV Model Results: BMW AG has a credit rating of “A”
KMV Calculation Steps
KMV(After
Merger)
KMV
Calculation(BMW)
Description
(Share Price) x (Shares
Outstanding)
FYE March
2011
2012
FYE March
2012
Market value of equity
Equity MV
38.54
44.18
Equity MV
48.69
Balance sheet
Equity
Volatility
29%
29%
Equity
Volatility
29%
Liability
63.382
86.542
Liability
87.175
Asset MV
100.98
106.82
Asset MV
111.26
Asset Volatility 10.97%
9.80%
Asset Volatility 10.39%
Default Point
43.69
61.56
Default Point
61.88
Distance-toDefault
5.174
4.323
Distance-toDefault
4.271
Book Liabilities
Market value of assets
Black-Scholes Option-pricing
model
Asset volatility
Black-Scholes Option-pricing
model
Default Point
Liabilities payable within one year.
(Asset MV - Default Point)
Distance-to-Default(DD) -------------------------------------(Asset MV * Asset Volatility)
Estimated Default
Frequency
One-to-One association with
Distance-to-Default using
Empirical distribution of Asset
value
KMV Assumptions
 Risk Free Rate = 1.5%
 EDF in next year calculated for one FY
* Source: www2.standardandpoors.com/spf/pdf/fixedincome/relationship_between.pdf
KMV Inference
 BMW has DD ratio of 4.271 for next year after
merger which corresponds to EDF ~ 0.057%
 EDF ~ .057% corresponds to avg. credit rating
of „A‟
Credit Worthiness of BMW AG
Variable

18. Credit Metrics Analysis of BMW AG
Financial Ratios to measure credit worthiness
BMW
Daimler
Volkswagen
AG
FY12 (E)
FY11
FY11
EBITDA Margin
16.62%
21.10%
PAT Margin
8.08%
ROCE
Others
FY11
FY11
FY11
24.00%
17.50%
14.87%
17.10%
20.60%
7.09%
5.32%
9.67%
2.24%
0.98%
4.91%
9.24%
11.10%
10.11%
8.24%
6.04%
4.87%
3.26%
31.85%
23.70%
25.80%
57.07%
163.73%
166.41%
-281.25%
RCF/Net Debt
31.32%
20.84%
17.90%
52.85%
158.02%
144.65%
-274.44%
10.59%
11.14%
5.56%
19.06%
51.40%
-17.73%
27.69%
3.18
2.58
1.46
1.59
2.34
0.75
0.72
Debt/Gross
Cash Accruals
4.38
3.89
4.04
1.73
4.41
2.16
1.29
9.51
8.50
18.89
9.84
1.57
3.95
2.65
Working Capital
Cycle
48.48
48.39
52.81
127.04
-28.62
-5.09
-4.26
RATING
Coverage
FY11
Debt/EBITDA
Leverage
Renault
FCF/Debt
Cash Flow
Peugeot
FFO/Net Debt
Profitability
Fiat
A
A
A-
A-
BB
BB+
BB+
EBIT/Interest
expense
The credit worthiness of BMW after acquisition of Harley has not been affected, as
seen from the above financial ratios.
Source: S&Ps rating criteria
Credit Worthiness of BMW AG
BMWHarley

19. Bidding Strategy – Recommend an initial bid of $23.8/share
Bidding Strategy
 Lower bound is $16.5 per share which is
derived with worst case scenario with no
synergies .
 We advise BMW AG to bid only for the
OpCo division of Harley Davidson. The
reason not bid for the FinCo division of
Harley is BMW has a much bigger and
established financial services division of
its own
Share price calculated
(Median)
Market Value
Financed Through Cash
(80%)
Financed Through
Debt(20%)
$ 23.8
$ 5512.43 mn
$4409.95 mn
$ 1102.49 mn
 The deal is structured as an cash deal since
synergies are expected to be realized to a
good extent.
 In addition to this BMW has huge cash
reserves on its balance sheet and the
acquisition of Harley Davidson will not affect
it drastically.
Considering the fact that we wish to acquire only OpCo , the bid is reasonably
good.
Source: Team Analysis , Details furnished in appendix
Bidding Strategy
 Upper bound - $30.3 per share which
includes the DCF value of BMW and 100%
of synergies realized in best case scenario.
This is calculated using the three valuation
methodologies combined
Deal Structure at Base Price

20. The deal creates a value of $ 2.1 per share for the BMW shareholders
incorporating synergies created
5.8
3.33
True price paid
$104.95
Total Target price
$102.85
95.8
BMW
Target value:
Synergy value:
Total target value:
101.61
3.33
104.95
Less “True price”
Value creation
(102.85)
2.10
Harley-OpCo
Synergies
BMW-Harley
Value Creation for
BMW = $2.1/share of
Harley Davidson
Value creation
# shares of Harley outstanding
# shares of BMW outstanding
BMW Share Price (2012E)
OpCo-Harley Value (without synergy)
OpCo-Harley Value per share on BMW
BMW-Harley expected Share Price
Synergy
Total Value from Harley & Synergy
Total Value from Harley & Synergy per share of Harley
Price Paid to Harley per share
Value Creation to BMW shareholders per share of Harley
Total Value Creation to BMW shareholders ($ mn)
231.52
655.11
95.79
3813.56
5.82
104.95
3.33
5998.02
25.91
23.81
2.10
485.59
Value Creation Analysis
105.0

21. Merger can result in an immediate increase of $ 9.18 in share price
Accretion – Dilution on Assumed deal structure
BMW (2012E)
BMW-Harley (2012E)
P/E ratio
8.74
8.74
EPS ($)
10.96
12.01
Share Price
$95.79
$104.97
Increase in share price
$9.18
% increase in share price
9.58%
Assumptions:
 Expected Share Price is calculated using the same P/E ratio for 2012; and
assumed the same for the merged entity
 P/E Ratio is assumed to be the same which is 8.74 as per the current market price
* Details in appendix
is
Accretion Dilution Analysis
Years

22. Alternate Options for BMW AG- Victory Motorcycles, USA
Royal Enfield, India
Victory Motorcycles, USA
Triumph Motorcycles, UK
Strong brand and
presence in
premium segment
of motorbikes
•Oldest motorcycle brand in the
world.
• Operates in niche segment
• Premium models: Bullet,
Thunderbird, Interceptor
• Created by Polaris – direct
competitor of HD
• Operates in touring ,
sports touring and cruiser
•segments.
•Largest surviving
UK motorcycle mnfg,
since 1902.
• Operates in all
segments of motorbike
Presence in
growing economies
across the world
• Huge potential of Indian
market (Rising income levels)
• GDP growth of 7-8 %
• Saturated growth of US
motorbike market
• GDP growth of 1.5 % - 2%
• Declining growth of
European market
• GDP growth - 0.5 - 1%
Company’s
potential for
having growth
• Revenue(Y-o-Y growth)– 40 %
• EBITDA margin – 11%
• PAT margin – 5.6 %
• Revenue(Y-o-Y)– 27%
• PAT margin – 7.4 %
• PAT (Y-o-Y) – 46%
• Revenue(Y-o-Y)– 11%
• PBIT margin – 6.5 %
• PBIT (Y-o-Y) – 48%
Opportunity to
improve
profitability of local
businesses,
sustainably
• Increasing dealer network
(currently-230)
• Current waiting time – 5 mths
•New plants( current utilization
-100%)
•Focus on product
innovation and increasing
speed to market.
• Needs Lean mfg and low
cost purchasing
• Stagnant Production
facilities - opening
plants in Thailand
• Large no of variants to
be supported
Synergies possible
with BMW’s
current portfolio in
motor bikes
• RE is in Cruisers (350 – 700 cc)
•Hence its line extension for
BMW and opens Indian market
for BMW motorbikes.
• BMW technical expertise
and lean manufacturing
techniques can increase
PAT margins for Victory
• Triumph – a major
competitor for BMW
• Can help in gaining
economies of scale.
Evaluation of Alternatives
Goals & Objectives
22

23. Merits and demerits of valuation methodologies(1/2)
Benefits
Limitations
Discounted Cash Flow (DCF) Method
Is not affected by temporary market factors

If confident on assumptions and projections, it‟s the
most sound method for valuation

Accuracy highly dependent on the assumptions taken

Growth Rate

Terminal Value

WACC/ Discount Rate
Allows future operating strategy of the company to
be taken into account

Forecasting future performance is subjective

Less relevant for early stage companies

Not constrained with non-negative values

More weight on the terminal value

Can be applied to any level of aggregation

Can give a very wide range of value

Can deal with complex situations also

WACC assumes constant capital structure

DCF does not take into account debt obligations
Comparable Transaction Method

Based on publicly available information hence
transparent

Assumes past
appropriately

Realistic – Gives an idea about actual premium paid
in the successful transactions

Not relevant for unprofitable companies

Buyer synergies impacts the price paid for the
acquired companies

Includes premium in strategic acquisitions

Not relevant in high volatility environment

Works only if comparable transactions/ their data 23
exist


Helps to indicate the plausibility of „control premium‟
through the past transactions
Recent transactions can reflect
sentiment towards an industry
Source: Team analysis
the
investor
acquirers
valued
the
target
Valuation Methodologies



24. Merits and demerits of valuation methodologies(2/2)
Benefits
Limitations
Companies Multiples Method
Effective since uses public data that is readily
available

Does not include any control premium

Comparable company data‟s reliability is subjective

Highly transparent

Contain the irrationality associated with stock market

Less biased compared to DCF method


Simple and less resource intensive
Less comparable if the companies chosen does not
trade robustly

Market efficiency ensures that market growth,
industry trends are taken into account

If a comparable company metric is negative the
method cannot be applied

Projected information taken from third parties hence
less biased

Accounting policies of the two companies may be
different which may complicate comparability

Comparable companies‟ projected data may be
unavailable

Valuation Methodologies

Factors like the companies risk, growth potential are
ignored
Source: Team analysis
24

25. Appendix
25

26. World Map showing countries where Harley Davidson bikes are sold
26

27. BMW-Harley projected Balance Sheet
27

28. BMW-Harley projected Balance Sheet
28

29. OpCo-Harley Davidson DCF Valuation (Best Case – Full Synergies)
Harley Davidson Valuation
29

30. OpCo-Harley Davidson DCF Valuation (Base Case)
Base Case
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Sales
$4,662
5071
5355
5710
6030
6428
6788
7237
7714
8146
8683
$561
610
643
714
754
804
882
941
1041
1100
1216
12%
12%
13%
13%
13%
13%
13%
14%
14%
14%
EBIT
% margin
37%
36.6%
36.6%
36.6%
36.6%
36.6%
36.6%
36.6%
36.6%
36.6%
36.6%
NOPAT
356
387
407
453
478
509
560
596
660
697
771
189
200
213
225
240
253
270
288
304
Valuation Methodologies
Tax Rate
Terminal Value
324
Plus: Depreciation &
Amortization
Less: Capital
Expenditures
Less: Increase in Net
Working Capital
174
3.7%
189
19
198
208
219
230
241
253
266
279
293
308
3.91%
3.89%
3.83%
3.81%
3.75%
3.73%
3.68%
3.62%
3.60%
3.55%
16
12
15
13
17
15
19
20
18
22
4.0%
FCFF
322
394
411
461
486
525
574
619
689
726
809
No. of years
0.00
1
2
3
4
5
6
7
8
9
10
Value multiple
0.91
0.83
0.75
0.68
0.62
0.56
0.51
0.47
0.42
0.39
0.39
PV
358
339
347
332
326
324
318
321
308
312
3847
Cash and Cash
Equivalents
$1,097
WACC
9977
10.00%
Perpetuity Growth
1.75%
Firm Value
8,228
Debt
1,000
Equity Value
7,228
# of Shares
231.519
Price Per Share
31.22
30

31. OpCo-Harley Davidson DCF Valuation (Worst Case)
Harley Davidson Valuation
31

32. Mergers/ Partnerships across the industry
Date
Target
Acquirer
Reason
Feb ’12
Peugeot
GM
Revitalizing European operations and reducing
capital expenditure
May ’11
Chrysler
Fiat
Increase in production capacity and using
Chrysler’s brand image to launch Fiat diesel
vehicles in the US
Dec ’10
Suzuki
Volkswagen
Exploit utility in making small, fuel efficient
cars and give Suzuki access to investment
funds
Mar’10
Volvo Car
Corp.
Zhejiang Geely
Holding Group
Produce luxury brands in China while
maintaining access to US market
Mar ’10
Renault
Nissan
Increase economies of scale for both and
focus on emerging markets
Mar ‘08
Jaguar &
Land
Rover
Tata Motors
Acquire a global footprint and enter the highend premier segment of the global
automobile market
June ‘05
Ferrari
Mubadala
Development
Co.
To develop dynamic new strategies especially
in the Middle East and North African market
32

33. Appendix – Companies considered for market multiples
Honda
KTM
Mitsubishi
Piaggio
Suzuki
Yamaha Motor
EV/Revenue
EV/EBITDA
Harley Davidson Valuation
Company
P/E
Firm Value(US
$mm)
Market Cap(US
$mm)
2012E
2013E
2012E
2013E
2012E
2013E
51,799
58,280
0.4
0.38
3.6
3.2
8.7
7.5
789
575
1.23
1.12
9.7
8.5
29.2
21
11,093
5,415
0.44
0.4
6.2
5.3
12.8
8.9
1,494
912
0.75
0.69
5.5
4.7
14.1
10.8
6088
11521
0.18
0.17
1.9
1.7
11.6
10.5
6195
3363
0.37
0.34
5.9
4.7
11.8
7.9
33

34. Appendix – Companies considered for transaction multiples
Date
Feb-12
Jan-08
Mar-04
Jul-04
Jul-05
Jan-10
Apr-09
May-02
May-09
Mar-00
Target/Acquirer
Peugot-GM
Chrysler-Fiat
Suzuki-Volkswagen
Ferrari-ESOP
Ferrari-MedioBancaSpa
Chrysler-CerebrusCapital
Volvo-Zhejiang
Porsche-Volkswagen
Jaguar-TataMotors
Ferrari-Mubadala
FV/EBITDA
2.1x
3.2x
6.7x
9.3x
16.0x
4.8x
19.2x
9.4x
2.2x
8.9x
Harley Davidson Valuation
S.No
1
2
3
4
5
6
7
8
9
10
FV/EBIT
7.0x
10.9x
22.1x
22.3x
38.3x
N/A
N/M
18.3x
3.5x
15.8x
34

35. KMV Calculations
FYE
March
Equity MV
Equity
Volatility
Liability Asset MV
Asset
Duration
Volatility
2012 (E)
48.69
29.00%
87.977
10.332%
111.260
1
Default
Point
d1
d2
N(d1)
N(d2)
Distanceto-Default
62.28
2.47
2.37
0.993
0.991
4.261
35

36. Appendix – Company Statistics and Deal Structure
Company Information
BMW
Harley Davidson
Total Shares Outstanding
Net Income (2011)
EPS
Current Price
PE Multiple
Equity Market Value
Total Debt Outstanding
Total Market Value
Debt/ Market Value
655.11
$6006
$9.22
$74.25
8.74x
$48,642
$ 39388
$88030
44.74%
Tax Rate
Total Shares Outstanding
Net Income 2011
EPS Per Share
Current Price
PE Multiple
Equity Market Value
Total Debt Outstanding
Total Market Value
Debt/ Market Value
231.51
$599
$2.58
$42.00
16.27x
$9723
$1000
$10123
9.8%
33.54%
Deal Structure (including only OpCo )
Given Share price by the acquirer
Market Value
Financed Through Cash (80%)
Financed Through Debt (20%)
23.8
$5512.43
4409.95
1102.49
Maximum Bidding Price
Median Price for Base Case
Minimum Bidding price
30.3
23.8
16.5
36

37. Appendix – References
 JPMC deal document
 Annual Report of BMW 2011-12
 Annual Report of Harley Davidson 2011-12
 Datamonitor Industry Reports- Motorcycle Industry October 2011
 http://www.bloomberg.com accessed on August 10, 2012
 10-K filing of Harley Davidson 2011
 Annual reports of Triumph motorcycle, Royal Enfield and Indian Motorbikes
 http://www.ma.hw.ac.uk/~mcneil/F79CR/Crosbie_Bohn.pdf
August 10, 2012
accessed
37
on