Holmes Corp: Lbo

Viet Duong Sybil Cheng 11/17/2011 Holmes Corp: LBO Valuation 1. Sustainability – One of Holmes Corp.

major strengths is its long history of steady and predictable cash flow. Over the last five years, Holmes’ Net sales have grown from $41MM to $103MM which is approximately a growth rate of 151%. Over the same time frame Holmes’ net earnings have grown from $1M to $6. 6M which is approximately a growth rate of 560%. This history of strong earnings means we can realistically expect stable future cash flow which will be useful going forward.

Holmes’ stable earnings will also be very attractive to prospective corporate bondholders. We would most likely be able to attract a good amount of bond purchasers since there would be little risk of a default perceived due to strong and stable earnings. This fact would make it much easier to raise funds in order to pay back a bridge loan. 2. Clean Balance Sheet – Holmes Corp has a very solid balance sheet due to the fact that it is carrying zero long term debt. The lack of debt makes the LBO a substantially safer proposition.

Again the lack of debt makes Holmes very attractive to prospective corporate bond purchasers in the event that we need to issue bonds to pay-off a bridge loan. Additionally, if we decide to take on leverage from lenders after the LBO then our credit rating should be favorable due to the strong balance sheet which would mean a lower interest expense than normal. The lack of debt also means that Holmes is not currently burdened with interest payments which help its net earnings. 3.

Growth Opportunity – Holmes has seen a huge amount of growth in international markets which is evidenced by a 31% increase in net sales in the last year alone. Societe Francaise Holmes Fermonte, which was a recent acquisition, helps to promote the company’s strategy and momentum in international markets, thus increasing the overall value of the company. In year 15 $30MM in net sales were generated from international sales which make up 30% of their total net sales. If international sales continue to grow at 31% from Year 15 to 16, the company is expected to earn $41MM from the international market.Holmes’ international business is expected to see substantial growth in the future and represents a huge upside in the event of a LBO. 4.

Hockability – Holmes Corp. also looks like an attractive LBO because it has assets that can be sold off to raise cash to pay-off a bridge loan if need be. For starters, Holmes has a massive inventory of raw material worth $8. 9MM which gives praise to the term easy hockability, due to the fact that raw materials are easy to resell to other companies and suppliers. Holmes also owns $15.

MM in property, plant and equipment that is owned outright since it has no long term-debt. A sell-off of property, plant and equipment could be a useful source of cash. Additionally, Holmes also has various business divisions that could be sold off. For example, Holmes Equipment Limited in Canada, which is a division that has seen sales come to a standstill in the past two quarters, could be sold off to raise cash if needed.

5. Market Position – Holmes status as a market leader adds to its attractiveness as a LBO candidate.Holmes is firmly entrenched in the material handling and process equipment industry as evidenced by its continual growth and high performance. Their industry would also seem to be very stable and also capital intensive which would create a barrier for new competitors to enter the market.

Holmes is also solidifying its place as a strong competitor in the international markets and its acquisition of Societe Francaise Holmes Fermonte further illustrates this point. With Holmes’ favorable market position, it can be reasonably assumed that the company will see future success post LBO.