l'occitane's ipo - hkex

8/18/2019 l'Occitane's Ipo - Hkex

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Ultimate recommendation: Listing on HKEX at a price of 0,99€ = appro



An IPO to get funds without entailing risks for solvability - ECM, Comp

B e n e f i t s

C o s t s a n d

d i s a d v a n t a g e s

[Diversify funding sources] New equity capital, more financial flexibility[Company ownership andownership power]

Spread the risk of ownership, can offer securities in the acquisition of othe

[Indirect advertising]Increase public awareness for the company’s product, having a listing on a

also affords the company increased credibility with the public

[Attractiveness] Raise the prestige and recognition, make the company attractive to top tal

[Costly]Important fees and incentive to pay even more to get the services of the be

Legal, accounting and marketing cost

[Regulatory requirements] Comply more strict to the some standards

[More scrutiny] More exposure, more pressure from the market

[Short-termism] May cause the company to focus more on short-term results rather than lo

AN IPO ? WHY ?



A booming company with a diversified business - ECM, Investor-side

L’OCCITANE’S STRENGTHS AND WEAKNESSES

FRANCE AS AN INVESTMENT DESTINATION

STRENGTHS

- Growth in sales and in net income lead

- Fast expansion, outstanding innovationservice) and good financial manageme

- Efficient, flexible and extendable supplbottleneck during expansions

- Market growth and good industry envir

- Recognizable brand and presence in s

- Easy access to information

OCDE; Population: 66 201 365; PIB (US$): 43 080; Currency: Euro

Doing Business Reports 2010 2009

Taxes to pay (% of EBIT) 65,8% 66,1%

Costs to export (USD/contener) $1285 $1285

Delay to exportation (day) 10 10

Investor protection Medium Medium

Information provision High High

Ease of shareholder suits Medium Medium

Recovery rate in solvability problems 44,5% 44,5%

KEY SUCCESS FACTORS

WEAKNESSES

• The beauty market worldwide can absorb a French,premium, organic-based cosmetics

• A strong trend for natural products

• A real and consistent atmosphere “South-France-

Provence”

• An efficient and growing digital strategy

• Lack of capital for expansion and maintenance due t

• A strong Brick and mortar presence meaning high co

case of slowdown

• Full package of products spread from body care to h

women and men: diversification entail a profitability r

• A culturally marked brand which can trigger one-time

(trend-risk in US markets)



HONG-KONG & PARIS appear to be the most qualitatively suitable - ECM, C

Key success Factors

- Agents need to know the company in which they invest

so that the value investors will confer to the firm can be

neither too low nor deceptive

* the company must be listed in an area where thebusiness is important

* the information flow and how it wi ll be taken by

investors must be known

- Market expectation about cash-flow and control right

and appropriate average risk/return ratio sought by

investors

* Beta of comparable companies in different markets

must be known

* Dividends expectations determine the cost of equity andhighly matter

- Fees (underwriter, lawyers, auditors) and transaction

costs matter as they increase the cost of equity

- State of the market at the time of the IPO (better to

invest at the time when a market starts to be bullish and

has a huge potential of growth), even more important

with high Beta



- For Paris or HKSE, ADR

relevant to the discussion.

- For the NYSE level 3 A

company can avoid the co

conversions since most

hence need for capital is in

Type of listing suitable fo

Factor NYSE NASDAQ LSE PARIS EURONEXT HKSE

Marketacceptance

Analyst expertise

Peer Companies

% of foreign companies

Macroeconomic situation

Language and culture

Financial success

Potential to attract average investors

Capital raised/IPO (avg)

Financing growth

Liquidity

Increased recognition benefit

Prestige

Brand recognition potential

Growth Opportunities

M&A target and process

(same currency for stock swaps)

Costs of IPO

Costs

Reporting requirements

OUR PREFERENCE ORDER #3 NO NO #1 #1

HONG-KONG & PARIS appear to be the most qualitatively suitable - ECM, C

- Considering the compan

the expansion plans focu

could be an ideal locatio

- Still, the Paris Bourse’s q

outnumber those of an

Hong Kong.

- A third alternative could

listing on Paris Euronex

diversify risk an lower t

return.

Next Step: 3 alternative



Inputs

avg debt 92,228.17 k

avg interest

expense 3,362.812 k

avg tax rate 0.226

avg d/e 0.404

beta unlevered 1.03

equity 228.185 k

Outputs

cost of debt 0.0364

levered beta 1.35

• Cost of Debt

debt = short + long term borrowFor the last nine months, we a

cost of debt = avg(Interest exp

• Levered Beta

d/e ratio, with

equity = current share capital needs (190M from the case)

Beta is re-levered using the avpast three years

Inputs

WACC in all five stock exchanges are close to each other, fitting price is

• Cost of Equity

Risk-free rate = 10 years goveL’Occitane’s development plan

• WACC

Equity used for the WACC is o

added to the future equity issu

Cost of equity HK Risk Free (Rf) 2.78

Equity Risk Premium

(ERP)

6.7

Cost of Equity (Ke) 11.83%

NYSE Rf 3.84

ERP 5.3

Ke 11.01%

NASDAQ Rf 3.84

ERP 5.3

Ke 11.01%PARIS

EURONEXTRf 3.6

ERP 5.6

Ke 11.17%

LSE Rf 4.01

ERP 5.6

Ke 11.58%



Consequences on the place of issueWACC

Debt 92,228 k

Share capital 38,232 k

Equity issuance 190,000 k

HK 9.24%

NYSE 8.97%

NASDAQ 8.97%

PARIS EURONEXT 9.09%

LSE 9.38%

- Cost of equity and WACC are lowest in New

- WACC in all five stock exchanges are close

- The relative impact of the highest WACC (L

(NYSE) would be of 800 000 euros

- The “fitting price” (relative impact of listing

exchange) would be of 513 000 euros or 22

Euronext or HKSE, respectively

Next Step:

- Checking out which issuance price these W

- Quantitatively measuring the qualitative ad

governance costs of listing on Paris Eurone

Exchange to know whether the “fitting pric

WACC in all five stock exchanges are close to each other, fitting price is

Outputs



DCF – First ballpark

2010

Est.

2011

Proj.

2012

Proj.

2013

Proj.

2014

Proj.

2015

Proj.

Net sales € 609458 € 729474 € 846737 € 950922 € 1 055 106 € 1 159 291

EBITDA 141 401 169 661 203 041 228 024 253 006 277 989

Depreciation and Amortization 29 126 35 120 42 804 48 071 53 337 58 604

EBIT 112 275 134 541 160 237 179 953 199 669 219 385

Trade receivables 57 673 62 241 72 309 81 206 90 103 99 000

Inventory 86 827 103 925 115 991 130 263 144 535 158 806

Trade payables 58 834 77 169 94 716 106 370 118 024 129 678

Capital expenditures 34 613 47 416 55 038 61 810 68 582 75 354

Tax (analyst) 0.23 0.23 0.23 0.23 0.23 0.23

Non Cash Working Capital 85 666 88 997 93 584 105 099 116 614 128 128

Change in NCWC 3 331 4 587 11 515 11 515 11 514FCF 87969.57 106561.49 113309.81 126985.13 140662.45

Perpetuity growth rate (analyst) 0.02

terminal value 1793446.238

adjusted FCF for final year 1934108.688

denominator for NPV calculation 1.1 1.21 1.331 1.4641 1.61051

NPV 79972.33636 88067.34711 85131.33734 86732.55242 1200929.325

WACC (analyst) 0.1

Value of equity 1540832.898 Value per share (with 1500000 shares) 1.027221932

Ballpark for equity value is €1,54 Billion with IPO at €1,03 - ECM, Invest

Main insights

- With unsp

growth rate10%), valu

Billion

- Price per s

1 500 000

Next Step

- Multiples c

- Sensitivity how these

according t



Assumptions:

- The beauty sector can observe a sustainab

every markets in average

- L’Occitane’s minimum sustainable profitab

be of 20%; Plowback should be near from- Beauty is a mature industry and 1.5% is re

Europe or US but could be higher for Asian

highlights)

Chart’s rationale:

- Sensibility analysis based on different stoc

excluded for irrelevance) and on potential

growth rate in the previous DCF model

Main insights:

- This sensitivity analysis highlights the stron

perpetuity growth rate on the value of firm

- NYSE should allow an higher IPO price

- Paris Euronext allows an average price bel

[1,04; 1,53].

- Due to a potentially higher perpetuity grow

higher price per share than Paris Euronext

Between €1.08 and €1,14 on top places according to growth rate - ECM, I

Cost of

Equity

Perpetuity

Growth Rate

Value of

Equity €

Price Per

Share €

HK 0.092401981 0.01 1544616.461 1.029744307

0.015 1622049.897 1.081366598

0.02 1710178.266 1.140118844

0.03 1928803.068 1.285868712

0.04 2230869.295 1.487246197

NYSE 0.08973414 0.01 1599051.123 1.066034082

0.015 1682746.718 1.121831145

0.02 1778444.41 1.185629607

0.03 2017901.603 1.345267735

0.04 2353653.692 1.569102462

PARIS

EURONEXT

0.090913932 0.01 1574532.725 1.049688483

0.015 1655375.542 1.103583695

0.02 1747618.492 1.165078994

0.03 1977533.874 1.318355916

0.04 2297764.569 1.531843046

LSE 0.093833955 0.01 1516837.645 1.011225097

0.015 1591175.377 1.060783585

0.02 1675581.34 1.117054227

0.03 1884061.478 1.256040985

0.04 2169994.643 1.446663096

DCF – Ballpark for relevant stock exchanges



Multiples confirm a ballpark between €0.62 and €1,187

L'Oréal

Market value of

equity 4

Market value of

debt

Cash and Cash

equivalent

Sales 1

EBITDA

EV 4

EV/EBITDA

EV/SALES

P/E

- Peers: companies exhibit 10- Calculation: average P/E * EPS

- Average P/E ratio: 25,942

- Theoretical EPS: 0,045818

- Price per share = € 1,187 = slightly above our first ballpark, sets a maximum

EV/SALES and EV/EBITDA

- Information source: 2010 annual report

- Peers: L’Oréal, Avon, Estée Lauder

- Average EV/Sales: 1,61

- Calculation: average EV * Sales – net debt minorities = market capitalization

- Price per share = market cap/ shares outstanding

- Price per share = € 0,62 = very low price due to selected peers, sets a

bottom limit for the ballpark

- Average EV/EBITDA: 10,805

- Calculation: average EV * EBITDA – net debt minorities = market capitalization- Price per share = market cap/ shares outstanding

- Price per share = € 0,986 = Confirms our first ballpark



An IPO at €0,99 would drive the most equity - ECM, Company versus Ba

RATIONALE

C o m p a n y

B a n k

Maximizing the par value at issuance should be logical because it would

maximize the funding obtained from the IPO.

Yet, if the price is too high, investors wont buy and the stock price will

decrease leading to long term disinterest from the investors

The tradeoff is between obtaining a 7% fixed fee on the total issuance and

making the margin on the stock price increase after issuance.

Usually-speaking, it is better not to seek a too high fee in absolute and trying

to lower the IPO price in order to make the margin which is usually of 10%

minimum over the IPO price but is uncertain

Discounted average first-day return to :

- Compensate for investors taking the risk of the IPO

- Increase the post-issue trading volume of the stock

- Ensure a wide based of owners

- Increase publicity on the opening day D i s c o u n t e d

a v e r a g e

f i r s t - d a y r e t u r n

PARIS EURONEXT

COST OF

EQUITY -

Conservative

assumption

9.09%

PERPETUITY

RATE -

conservative

assumption

1.50%

EQUITY VALUE € 1,655,375.54

NB OF SHARES 1,500

PRICE PER

SHARE 1.10 €FIRST-DAY

RETURN*10.60%

FINAL PRICE

PER SHARE € 0.9978

A 1.5% perpetuity growth is low, yet realistic. The lower the rate is, the lower

the valuation is, and the more an Investment bank can make on the first day

of trading. 1,5% is consistent with the sales growth of the cosmetics industry

in the most mature markets provided in exhibit 2: France, the US and Japanare respectively at 1.1, 1.9 and 1.5%. P

e r p

e t u i t y

r a t e

C id i l k i h i ECM I



Considering corporate governance to lock-in the price - ECM, Investor-

TWO CATEGORIES OF CORPORATE GOVERNANCE ISSUES

1- Issues that are apparent right now, that can be inferred from the past transactions and that creates conflicts wit

2- Prospective issues that might arise and effect the shareholder rights, consequential of the eventual listing in a p

1) Board : contrary to best practice, Mr Reinold Geiger holds both

CEO and Chairman position

- Can lead to “Agency Conflicts” and shareholders’ control rights can

get reduced

- If the situation does not change post IPO (highly plausible), Equity

risk premium could be higher

2) Only three independent directors- if there are less independent directors in the board ,that’s a red flag

with regard to corporate governance in the company.

- Can lead to less controlling rights, which is riskier for investments

and it would lead to a lower price

3) 25% interest held by Geiger and another management group,

financed with a €174 million debt (31st December 2009)

- Buy Out partially financed in part with debt with a senior credit

facility with a limit of 205 Million Euro

1) Listing on HKSE- With a listing on the HKSE, regulatory fra

might have impact on the rights of minor

taken into account

- Although HKEX benefits from its geograpmainland china ,it has relatively less strin

governance requirements

- One share, one vote

EXISTING ISSUES PROSPECTIVE ISSUES

C id i l k i h i ECM I




LSE NYSE

C id i t t l k i th i ECM I t




Our approach consists in analyzing the potential governance of L’Occitane through the lense of the GoveIndicator of the Institutional Shareholder Service. Then, we determine if L’Occitane is approaching toward“Dictatorship Company” or the “Democracy Company” described in the “Corporate Governance and Equitby Gompers and Ishii (Harvard) and Metrick (U Penn). Once this is done, we reflect the impact of such goshare price by taking into account the stock market performance of Dictatorship and Democracy Compan

First Step:

In light of the following ISS criteria…

B1.7: classification of the Chairman of the Board?

B1.8: are the Chairman and CEO the same person?

B3.2: how many other boards does the Chairman serve on?

S1.1: does the company have shares with different voting rights?

Also, we will look at the ownership structure of L’Occitane.

… We can conclude: Because Geiger is classified as an executive, is Chairman and CEO, this is not favorL’Occitane. However, Geiger does not sit on other boards, which mitigates the negative impact on the comConcerning shares, since we are considering Paris Euronext, we believe Geiger will probably keep more vohimself. If they list in Hong Kong, this will not be possible. Let’s note that given our estimation of total eq1.54 Billion and the 189 Million that Geiger possesses, he would theoretically own 12.27% of the companmake him a very big shareholder, which is negative for governance. All in all, L’Occitane presents major cto Geiger’s power.

C id i g t g t l k i th i ECM I t




Second step:

In light of step 1, it is possible that L’Occitane will be close to a “Dictatorship Company”. Per the authorscompanies have lower sales growth over 5 years. Indeed, over 5 years, sales growth is 44.7% for dictatorsversus 62.7% for democracy companies. Given the scoring that was used (democracy: 5 points / dictatorsand the statistical distribution of companies (average score is 8.5), an average sales growth of 51.7% seem(one point under the median for a dispersion of 9 translates into two points under the median for a dispe Therefore, sales are 7% under the average company for the dictatorship company.

We have modified our DCF accordingly: projected sales for the next five years are 7% lower. EBIT is on av18.5% of sales in the analyst’s projections so we noted EBIT as equal to 0.185*Sales for this new DCF. Thvalue of 1.38 Billion for L’Occitane, and a share price of 0.92 euros.

Conclusion:

The fact that so much power is concentrated in the hands of Geiger at L’Occitane has resulted – in our mprice that is lower by 0.1 euros. That is, approximately 9% lower.

Wrap up: Listing on HKEX



Wrap-up: Listing on HKEX

Alternatives Denomination Specifics Rationale

1 Paris

Euronext

and HK

2/3 of the

shares on Paris

Euronext with

60% Class Bshares and 40%

Class A shares

+ 1/3 of theshares on HKEX

- Paris Euronext Allows an higher IPO price

and the issuance of two different classes

of shares

- Two classes of shares would allow toraise more money and better distribute

the ownership

- Paris Euronext is also qualitatively the

best place of issuance for market

acceptance

- Hong-Kong allows to raise slightly less

capital but the financial success is

allegedly superior and it would help

M&A strategies in the Asian market

Hong-Kon

class of sh

double IPO

2 Paris

Euronext

60% Class B

shares and 40%

Class A shares

Same as above Impossible

situation,

penny stoc

3 HKEX Same as above + HKEX allows an equal

recognition benefit and better growth

opportunities

Less capit

superior c

l'occitane's ipo - hkex

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