case analysis landmark facility

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 CASE STUDY: BROADWAY INDUSTRIES
ACQUISITION OF LANDMARK
FACILITY SOLUTIONS
Deal Valuation and Synergy Analysis

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Broadway Industries, a facility services company based out of Newark, New Jersey is eyeing to
acquire Landmark Facility Solution, a large integrated player based out of Sacramento area
offering its services to multiple commercial customers. The acquisition was pursued with an
expectation of growing market presence, improve growth and reward shareholders with better
earnings prospects through synergy benefits. This document discusses that why it was important
for Broadway to acquire Landmark (synergy), was it possible for synergies to materialize in real
sense, should Broadway really acquire Landmark, what should be the fair valuation of
Landmark, how the acquisition should be financed (equity / debt / mix), what is the extent of
equity dilution happen because of such acquisition and what is the cost of such dilution.

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Contents
Why Broadway should acquire Landmark Facility Solution (Synergy).................................................2
 Integrated player with diversified offering.......................................................................................3
 Gain in market share.........................................................................................................................4
 Operational efficiency and cost optimization...................................................................................4
 Ability to command premium pricing...............................................................................................5
 Opportunity to gain from Landmark’s expertise and developing a learning curve to improve
existing operation of Broadway and create new line of opportunities....................................................5
Will synergies materialize in real sense......................................................................................................6
Discounting rate to be used for valuing the acquisition............................................................................7
Choice of alternative to finance the deal and Broadway’s capability to service debt obligation.........8
Valuation of both standalone companies and combined firm post acquisition and fair value of
Landmark...................................................................................................................................................11
Quantum of dilution for Broadway shareholder and cost of such dilution..........................................12
Annexure 1: Broadway Financial and Common Size.............................................................................13
Annexure 2: Landmark Financials and Common Size..........................................................................14
Annexure 3: Standalone Projection (Pre-acqusition).............................................................................15
Annexure 4: Combined Financials (Post- Acquisition) – Optimistic Case...........................................16
Annexure 5: Combined Financials (Post- Acquisition) – Pessimistic Case..........................................17
Annexure 6: Debt Repayment and Interest Coverage under different options...................................18
Annexure 7: Valuation...............................................................................................................................19
Annexure 8: Comparable..........................................................................................................................20

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Why Broadway should acquire Landmark Facility Solution (Synergy)
Broadway Industries (Broadway), based in Newark, New Jersey, founded in 1982, by Tim

Harris, CEO and President, was a facility services company and provides janitorial services,

floor and carpet maintenance, HVAC and other building maintenance in the eastern United

States. It had 12 regional offices from New England to Florida, and served industrial, retail,

manufacturing, government, and education facilities. In year 2014, the company projected sales

were US$ 161.9 million growing at a 4-Yr CAGR of 4%. The company was earning a gross

margins of ~8% and net margins of ~3%. Net profit in last five years had been in tight range of

US$4.2 – 4.6 mn. (Refer Annexure 1)

Facility management services industry was worth US$ 120 bn in the U.S. in 2013. Within

this, the integrated facility-services segment growth had been steady over last decade and the

same was expected to growth at 6% p.a. till 2016. However, the market for single-service

contracts player like Broadway and others was forecasted to grow at 4% annually. Broadway

growth was aligned to industry growth and in absence of any new proposition the company

growth was not expected to outpace industry in future as well.

Landmark Facility Solutions (Landmark), founded in 1956 as a regional janitorial services

provider to commercial facilities in the Sacramento area, grew quickly to become a large

integrated provider to commercial customers. By early 2014, the company serviced more than

300 mn sqft and had more than 20 regional offices, in Calfornia, Arizona, Oregon, Washington,

and British Columbia. Its major clients included large hospitals, and several Fortune 500

biotechnology and pharmaceutical companies. The company had won several accolades and been

named regional supplier of the year. Its services were highly respected and in western United

States, it was known for its high quality services and technical expertise and hence mostly

command premium pricing.

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In last five years sales grew between 4 to 5% and last 4-Yr CAGR was 4.5%. Year 2014 was

expected to report sales of US$ 345.5 mn. While the gross margins had been steady at little over

10%, jump in overhead cost led to fall in operating margins from 2.8% in 2010 to 0.9% in 2014

(E) and hence net margins from 1.8% to 0.6%. Net profit fell from US$ 5.2 mn in 2010 to US$

2.0 mn in 2014. (Refer Annexure 2)

It became important for Tim, to search for alternative and follow the path of M&A to look

for inorganic growth opportunity and became an integrated player in pursuit of business risk

diversification, opportunity to tap newer geographies and improve growth prospects. Hence the

acquisition of Landmark will result in following synergy benefits to Broadway as a combined

entity:

 Integrated player with diversified offering  Facility management service provider in the

U.S. offer comprehensive line of services including janitorial solutions, HVAC,

commercial cleaning, facility engineering, energy solutions, landscaping, parking and

security. The industry is highly fragmented with few large integrated player and several

small regional private players. The environment offers opportunity for large integrated

players that operate in multiple line of services and across geographies. Such players

diversify their service offering and often provide bundle / integrated offers. Large

commercial players also prefer single point of contact for all their requirement and hence

prefer integrated players over standalone service providers. Advantage to integrated

players are that they leverage economies of scale and offer compelling value proposition

to gain premium pricing. Combination of Broadway and Landmark will create one such

integrated service provider with bigger and diversified solutions, larger footprints and

customer base.

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 Gain in market share  As per the case, recently there had been consolidation in the

industry leading to emergence of few integrated players with larger footprints.

Acquisition would provide Broadway a bigger market and large comprehensive portfolio

of products and services which enable them to offer better bundled services to its existing

customers of combined entity and also provide access to markets where it had no

presence. Landmark’s building and engineering solutions could help Broadway gain

market share in East Coast. Further, Landmark will open options for Broadway to enter

high-tech biotechnology, and pharmaceutical industries in its home market and help them

to gain market share in this segment in eastern U.S. Lastly, Tim’s goal to enter West

Coast can also be met and help Broadway to make a national integrated player which

should add to market share, sales, profitability and hence valuation.

 Operational efficiency and cost optimization  Landmark had reached to bottom

quartile of facility management companies in last few years due to fall considerable and

consistent fall in operating margins. Relying on Tim’s belief, the fall in margins was

driven by managerial complacency and cost mismanagement. The acquisition will enable

Broadway:

o To replace current management team, cut executive pay, reduce non-essential

marketing expenses and optimize shared services cost by reducing redundant staff

and office spaces which will help to improve the margins of combined entity

substantially. Harris is known for cultivating the culture of operational efficiency

and hence is eyeing for restoring Landmark operating margins back to 3%.

o Net working capital (non-cash) to sales ratio, another important driver of

efficiency measurement, of Landmark was expected to fall from an average of 7%

of sales to

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 aligned with Broadway metrics of average 5% of sales driven by improvement in

processes.

 Ability to command premium pricing  Landmark had ability to command premium

pricing for its high-quality services and expertise. The acquisition was expected to enable

Broadway to exploit this competency and broaden its footprints leveraging Landmark’s

brand and improve its pricing power and hence sales and margins.

 Opportunity to gain from Landmark’s expertise and developing a learning curve to

improve existing operation of Broadway and create new line of opportunities 

Landmark was a highly respected player for its expertise and cutting edge solution.

Broadway’s staff and operations would be exposed to such high end culture which

enables improvement in efficiency and help to serve better, design better and innovate

better.

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Will synergies materialize in real sense
Previous section have highlighted several rationale behind acquisition of Landmark. But

there can be numerous reasons which may lead to non-materialization of above synergies.

Without discussing in detail following are the broad reasons why the synergies may not deliver

benefits:

 Cultural integration issues or inability to integrate cultural differences of two

different entity into a combined entity

 Lack of clarity and execution of post-merger integration process with respect to

identification and elimination of redundancies, reduction of common overhead

expenses, reduction in manpower and identification of process gaps.

 Change in external factors and market dynamics leading to shut down of business,

loss of revenues, falling short of projections and hence losses.

 Failure to determine ability to manage large diversified business when a standalone

private player acquire a large diversified player. Combined entity would be double

the size of Broadway, with coast-to-coast operations.

 Often judgment of commanding premium pricing and hence accommodating loss of

revenue in lieu of gain in margins result in a double edge sword when such

expectation turn futile and the same was also highlighted as a concern by the

appointed task force.

 Error in estimates leading to over valuation of target and hence payment of significant

premiums for expected synergy benefits which results a lower number.

 Choosing a wrong mix of financing to finance the deal and hence end up taking

excessive debt on books leading to rise in bankruptcy risk.

Amidst above highlighted concerns of possibilities of non-materializing of synergies,

there exists a strong case that there are substantial benefits for Broadway to go and acquire

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Landmark.

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Discounting rate to be used for valuing the acquisition
Unlevered beta = Levered beta / [1 + D/E * (1-tax rate)]
Using information given in exhibit 4 of the case, unlevered beta of comparable has been
computed and average of the same taken to compute industry average at 1.1 times. Further, under
both alternative, D/E ratio of Broadway (combined operations) was taken which resulted in D/E
of 2.8 times in case of 1st alternative and 0.6 times in case of 2nd alternative. These two metric
along with tax rate at 35% is used to derive levered beta under both options. Using exhibit 5,
risk- free rate (10-Yr Treasury Rate) and market risk premium is taken at 2.56% and 5.9%
respectively to derive cost of equity at 21.0% and 11.6% respectively under both options. This
also reveals the fact how considerable exposure to external debt raises risk and hence increases
cost of equity. In case of 1st alternative beta risen to 3.13 times which highlight the underlying
risk of this alternative compare to 1.5 times in case of 2 nd options. Cost of debt was 5.5% in case
of 1st alternative and 5% in case of 2nd option and using post tax cost of debt, WACC is derived at
8.19% and 8.54% respectively.
This is to note here that although cost of capital or WACC is lower in case of 1st
alternative at 8.19%, the same reveals a substantial risk given substantial rise in D/E to nearly 3
times and cost of equity at 21%.
Pre Acq Post Acq

Broadway Existing New @ 100% debt financing New @ 1:1 financing

Long term debt 8.30 120.00 60.00
Equity 43.13 43.13 103.13
Total Capital 51.43 163.13 163.13

Debt % 16.1% 73.6% 36.8%

Equity % 83.9% 26.4% 63.2%

D/E 0.19 2.78 0.58

1st Alternative (100% Debt) 2nd Alternative (50% Debt)

Broadway D/E 2.8 0.6
Unlevered Beta 1.1 1.1
Tax Rate 35% 35%

Levered Beta 3.13 1.54

Risk-free rate 2.56% 2.56%

Market risk premium 5.90% 5.90%

Cost of Equity (CAPM) 21.0% 11.6%

Cost of Debt (Pre-tax) 5.50% 5.00%

Cost of Debt (Post-tax) 3.58% 3.25%

Debt portion 73.6% 36.8%

Equity portion 26.4% 63.2%

WACC 8.19% 8.54%

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Choice of alternative to finance the deal and Broadway’s capability to service
debt obligation
As per the case, there are two alternative to finance the deal – 100% debt financing or a

mix of 50% debt and 50% equity. It is important to understand current capital structure of

Broadway to evaluate the impact of each alternative. As seen in previous section, the current

capital structure of Broadway comprises 16% debt and 84% equity. Currently it has operating

profit of US$ 7 to 8 mn and has annual interest cost obligation of US$ 0.4 mn besides annual

principal obligation of US$0.4 mn.

In case of first alternative (100% debt financing), leverage ratio of Broadway will jump

substantially taking debt to 74% of total capital and equity at 26% or D/E ratio will jump to 3

times from current 0.2 times. While in second alternative (50% debt), leverage ratio will jump

moderately taking debt to 37% and equity at 73% or D/E ratio will jump to 0.58 times.

The principal repayment obligations while in the first alternative starts at US$ 5 mn from

2017 onwards for subsequent six years and finally a bullet repayment of US$ 90 mn in 2023, the

same in case of second alternative comes as one single bullet repayment of US$ 60 mn in the

year of maturity in 2020.

Interest rate in case of 100% debt financing is 5.5% while in case of 50% debt financing

is 5% p.a. The same when compared with Broadway’s standalone operating profit reveals a bleak

picture in case of 1st alternative, where the entity has operating profit lower than interest cost

obligation in year 2015 and 2016. This shows how risky this proposition is and becomes

excessive dependent on Landmark’s performance and profitability at least in first two years. For

later period, the company expected to generate sufficient profit to take care of both new and old

loans interest

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obligation. The same does not seems to be a challenge when evaluated under second alternative

where interest coverage is above 1 starting from 2015. (Annexure 3)

However, this is not the right way of looking and evaluating financing option without

taking into consideration the financial of combined entity. When looked in combination and

ignoring all other elements, both financing pose no problem as far as the repayment obligation is

concerned. In case of first alternative, under optimistic scenario, against a total interest obligation

of US$ 7.0 mn, the combined operating profit is expected to be US$ 14.91 mn resulting in an

interest coverage of 2.13 times in 2015 and rising further from thereon in subsequent period. The

same is 1.98 times in 2015 and rising further in subsequent period in case of pessimistic scenario

when combined operating profit is US$ 13.84 mn. In case of second alternative, the interest

coverage rises to 4.39 and 4.07 in 2015 under optimistic and pessimistic scenario respectively.

(Annexure 4, 5 and 6)

When looked in isolation both options appear viable when compared on the basis of

combined financials. Organization uses debt as it provides tax shield and hence improve profits

for shareholder. The organization run for the shareholder and not for servicing the debt holders.

Tim Harris must appreciate the fact that although 100% debt financing will provide the highest

tax shield but at the same time will eat away nearly 50% of profits compared to second

alternative which generate substantial profits.

Tenure of debt for 100% debt financing is long and is ending in 2023 and hence will

continue to have impact on profitability. The same is not the case in 50% debt financing where

the tenure is ending in 2020. When both options are compared net profit is substantially higher in

case of 50% debt financing. Similar is the case also when combined financials under pessimistic

case are evaluated. Besides, 100% debt financing also increases the D/E ratio at Broadway

substantially

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to 2.8 times which risen only to 0.58 times in case of 50% option. This poses significant threat to

credit rating and further debt raising capacity of Broadway if Tim chooses to go with first option.

Another important factor to consider is beta which rises to as high as 3.13 times vs. 1.54 times

between both alternatives respectively. Lastly, the cost of equity for Broadway will become

significantly higher and become a challenging task to justify shareholder expectation if he

chooses to go with 100% debt financing.

Based on above analysis, it is advisable to go with second alternative and finance the deal

with 50% debt and 50 % equity.

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Valuation of both standalone companies and combined firm post acquisition
and fair value of Landmark
Based on both optimistic and pessimistic scenarios, both companies have been valued on

a standalone basis post acquisition and fair of landmark under both options is derived. Valuation

has been derived only based on 50% debt and 50% equity financing. 100% financing option has

been ignored as the same has not been recommended as a viable option.

While the fair value of Landmark under both options is US$ 66.05 mn and US$ 45.48 mn

respectively, the fair value of Broadway is US$ 87.77 mn and US$ 77.11 mn. Both put together

the value of combined firm is US$ 153.83 or $154 mn and US$ 122.59 mn or US$ 123 mn

respectively. (Annexure 7)

Landmark’s deal price at US$ 120 million is 82% premium to fair value at US$ 66.05 mn

under optimistic case. The deal value results in an implied price-to-earnings ratio of 33.9 times

year 2015 earnings which represents reasonable valuation compared to its peers which are

trading between 28 times to 41 times. However, on market capitalization-to-sales ratio basis the

deal is reasonably under priced at 0.33 times 2015 sales compared to 0.44 times to 0.60 times run

rate of comparable in the market (Annexure 8).

In the short term, Broadway should gain benefits because of cost optimization resulting

out of the synergy benefits. But the speed at which Broadway will monetize these opportunities

will decide its future performance and will remain a key monitorable. Even though the deal price

is substantially higher than the fair value derived, Broadway should go ahead with the deal given

the combined synergies of this deal is a big positive for Broadway.

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Quantum of dilution for Broadway shareholder and cost of such dilution
As seen in below table, 40% equity ownership in combined firm is valued at US$ 61.53

mn in case of optimistic scenario and US$ 49.04 mn in case of pessimistic case. While the

former implies that the Landmark shareholders receive a premium of US$ 1.53 mn the latter

signifies a discount of US$ 11 mn.

Taking optimistic scenario the deal results in dilution in Broadway’s EPS of 39% to

Broadway equity owners.

In US$ Million Optimistic Pessimistic

Value of Combined Firm 153.83 122.59
Equity Raised (40% ownership) 61.53 49.04
Dilution when US$ 60 mn is raised 39.0% 48.9%

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Annexure 1: Broadway Financial and Common Size
In US$ Million 2010 2011 2012 2013 2014 [E] 2010 2011 2012 2013 2014 [E]
Income statement
Net sales 137.8 143.5 149.5 155.3 161.9 100.00% 100.00% 100.00% 100.00% 100.00%
COGS 126.1 131.5 137.1 142.5 148.6 91.51% 91.64% 91.71% 91.76% 91.79%
Gross profit 11.7 12.0 12.4 12.8 13.3 8.49% 8.36% 8.29% 8.24% 8.21%
Operating expenses 2.9 2.9 2.9 3.0 3.0 2.10% 2.02% 1.94% 1.93% 1.85%
Depreciation and amortization 1.8 2.2 2.5 2.8 2.9 1.31% 1.53% 1.67% 1.80% 1.79%
Operating profit 7.0 6.9 7.0 7.0 7.4 5.08% 4.81% 4.68% 4.51% 4.57%
Interest expensea 0.4 0.4 0.4 0.4 0.4 0.28% 0.25% 0.27% 0.25% 0.23%
Income taxes 2.3 2.3 2.3 2.3 2.5 1.68% 1.59% 1.54% 1.49% 1.52%
Net income 4.3 4.2 4.3 4.3 4.6 3.12% 2.96% 2.87% 2.77% 2.82%
EPS $1.23 $1.21 $1.22 $1.23 $1.30
Dividends $0.24 $0.24 $0.24 $0.24 $0.24

Balance sheet
Cash 1.8 1.0 1.9 1.5 2.1 2.59% 1.37% 2.38% 1.79% 2.39%
Accounts receivable 13.1 13.5 14.6 15.2 16.2 18.82% 18.12% 18.01% 18.14% 18.66%
Other current assets 2.8 4.0 4.1 4.2 4.2 4.02% 5.37% 5.06% 5.01% 4.84%
Current assets 17.7 18.5 20.6 20.9 22.5 25.43% 24.86% 25.45% 24.94% 25.89%
Net PP&E 16.0 17.4 18.6 19.7 20.9 22.99% 23.34% 22.98% 23.52% 24.02%
Investments and other assets 35.9 38.6 41.8 43.2 43.5 51.58% 51.81% 51.57% 51.55% 50.10%
Total assets 69.6 74.5 81.1 83.8 86.8 100.00% 100.00% 100.00% 100.00% 100.00%

Accounts payable 9.3 9.9 10.4 11.0 11.5 13.36% 13.29% 12.83% 13.13% 13.24%
Long-term debt, current portionb 0.4 0.4 0.4 0.4 0.4 0.57% 0.54% 0.49% 0.48% 0.46%
Current Liabilities 9.7 10.3 10.8 11.4 11.9 13.94% 13.82% 13.32% 13.60% 13.70%
Long-term debt 8.2 7.7 8.7 8.3 7.9 11.78% 10.33% 10.73% 9.90% 9.10%
Accrued expenses and deferred taxes 11.6 12.8 13.1 13.3 13.0 16.67% 17.18% 16.16% 15.87% 14.97%
Other non-current liabilities 11.0 11.2 12.5 11.4 10.9 15.80% 15.03% 15.42% 13.60% 12.55%
Total liabilities 40.5 42.0 45.1 44.4 43.7 58.19% 56.37% 55.64% 52.98% 50.33%
Shareholders 'equity 29.1 32.5 36.0 39.4 43.1 41.81% 43.63% 44.36% 47.02% 49.67%
Total liabilities and equity 69.6 74.5 81.1 83.8 86.8 100.00% 100.00% 100.00% 100.00% 100.00%
a
Interest rate on long-term debt outstanding is at 4.5% per year.
b
Principal amount of long-term debt is amortized at $0.4m per year.

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Annexure 2: Landmark Financials and Common Size
In US$ Million 2010 2011 2012 2013 2014 [E] 2010 2011 2012 2013 2014 [E]
Income statement
Net sales 289.9 304.1 316.4 329.0 345.5 100.00% 100.00% 100.00% 100.00% 100.00%
COGS 259.4 273.1 284.1 295.3 310.4 89.48% 89.81% 89.79% 89.76% 89.84%
Gross profit 30.5 31.0 32.3 33.7 35.1 10.52% 10.19% 10.21% 10.24% 10.16%
Operating expenses 20.9 21.6 26.7 28.6 30.3 7.21% 7.10% 8.44% 8.69% 8.77%
Depreciation and amortization 1.6 1.6 1.7 1.7 1.8 0.55% 0.53% 0.54% 0.52% 0.52%
Operating profit 8.0 7.8 3.9 3.4 3.0 2.76% 2.56% 1.23% 1.03% 0.87%
Interest expense 0.0 0.0 0.3 0.2 0.0 0.00% 0.00% 0.09% 0.06% 0.00%
Income taxes 2.8 2.7 1.3 1.1 1.1 0.97% 0.90% 0.40% 0.34% 0.30%
Net income 5.2 5.1 2.3 2.1 2.0 1.79% 1.67% 0.74% 0.63% 0.56%
EPS $1.30 $1.27 $0.58 $0.52 $0.49
Dividend $0.20 $0.20 $0.20 $0.20 $0.20

Balance sheet
Cash 3.6 4.2 3.3 1.5 0.4 4.57% 5.05% 3.55% 1.63% 0.40%
Accounts receivable 20.7 22.0 29.3 30.4 31.0 26.30% 26.33% 31.84% 32.45% 32.76%
Other current assets 6.3 5.1 4.9 5.0 4.9 8.01% 6.10% 5.33% 5.34% 5.18%
Current assets 30.6 31.3 37.5 36.9 36.3 38.88% 37.48% 40.72% 39.41% 38.33%
Net PP&E 3.1 5.1 7.2 9.2 11.2 3.94% 6.16% 7.88% 9.78% 11.80%
Investments and other assets 45.0 47.1 47.3 47.6 47.2 57.18% 56.36% 51.41% 50.81% 49.87%
Total assets 78.7 83.6 92.0 93.7 94.6 100.00% 100.00% 100.00% 100.00% 100.00%

Accounts payable 5.6 5.3 7.6 8.9 10.4 7.12% 6.34% 8.26% 9.50% 10.99%
Bank borrowing 0.0 0.0 4.0 2.5 0.0 0.00% 0.00% 4.35% 2.67% 0.00%
Current Liabilities 5.6 5.3 11.6 11.4 10.4 7.12% 6.34% 12.61% 12.17% 10.99%
Accrued expenses and deferred taxes 13.9 13.9 15.0 15.3 15.5 17.66% 16.63% 16.30% 16.33% 16.38%
Other non-current liabilities 16.6 17.5 17.0 17.3 17.9 21.09% 20.94% 18.48% 18.47% 18.91%
Total liabilities 36.1 36.7 43.6 44.0 43.8 45.87% 43.92% 47.39% 46.96% 46.28%
Shareholders' equity 42.6 46.9 48.4 49.7 50.8 54.13% 56.08% 52.61% 53.04% 53.72%
Total liabilities and equity 78.7 83.6 92.0 93.7 94.6 100.00% 100.00% 100.00% 100.00% 100.00%

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Annexure 3: Standalone Projection (Pre-acqusition)
Landmark Financials
In US$ Million 2015 2016 2017 2018 2019
Net sales 362.8 380.9 400.0 420.0 441.0
Operating profit 5.4 5.7 6.0 6.3 6.6
Net income 3.5 3.7 3.9 4.1 4.3
Depreciation and amortization 2.1 2.4 2.7 3.0 3.3
Change in net working capital 1.3 1.3 1.4 1.5 1.6
Capital expenditure 3.6 3.8 4.0 4.2 4.4
Total FCF 0.7 1.0 1.2 1.4 1.6

Broadway Financials
In US$ Million 2015 2016 2017 2018 2019
Net sales 168.4 175.1 182.1 189.4 197.0
Operating profit 6.7 7.0 7.3 7.6 7.9
Interest expense 0.4 0.4 0.4 0.4 0.4
Net income 4.1 4.3 4.5 4.7 4.9
Depreciation and amortization 3.1 3.3 3.5 3.7 3.9
Change in net working capital 0.4 0.4 0.4 0.4 0.4
Capital expenditure 4.2 4.4 4.6 4.7 4.9
Total FCF 2.8 3.1 3.3 3.5 3.7
*Numbers in the exhibits are based on the assumption Broadway does not acquire Landmark.

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Annexure 4: Combined Financials (Post- Acquisition) – Optimistic Case
Landmark
In US$ Million 2015 2016 2017 2018 2019 2020
Sales Growth 5% 5% 5% 5% 5% 4%
Sales 362.8 380.9 400.0 420.0 441.0 458.6
Operating Margin 1.50% 2.00% 2.50% 3.00% 3.00% 3.00%
Capital Expenditure % of sales 1% 1% 1% 1% 1% 1%
Depreciation 2.1 2.4 2.7 3 3.3 3.6
Non-cash Net WC as % of sales 7.00% 6.50% 6.30% 6.00% 5.50% 5.50%
Net WC 25.39 24.76 25.20 25.20 24.25 25.22

Net sales 362.78 380.91 399.96 419.96 440.96 458.59

Operating profit 5.44 7.62 10.00 12.60 13.23 13.76
Net income 3.54 4.95 6.50 8.19 8.60 8.94
Depreciation and amortization 2.10 2.40 2.70 3.00 3.30 3.60
Increase in net working capital (0.1) (0.6) 0.4 0.0 (0.9) 1.0
Capital expenditure 3.63 3.81 4.00 4.20 4.41 4.59
Total FCFF 2.12 4.18 4.76 6.99 8.43 6.99

Broadway
In US$ Million 2015 2016 2017 2018 2019 2020
Sales Growth -10.00% -10.00% 9.00% 9.00% 9.00% 4.50%
Sales 145.71 131.14 142.94 155.81 169.83 177.47
Gross Margin 8.50% 8.50% 9.00% 9.00% 9.50% 9.50%
Opex as % of sales 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Capex as % of sales 2.10% 2.10% 2.10% 2.10% 2.10% 2.10%
Depreciation 3.1 3.3 3.5 3.7 3.9 4.1
Non-cash Net WC as % of sales 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%
Net WC 7.65 6.89 7.50 8.18 8.92 9.32

Net sales 145.7 131.1 142.9 155.8 169.8 177.5

Gross profit 12.4 11.1 12.9 14.0 16.1 16.9
Opex 2.9 2.6 2.9 3.1 3.4 3.5
Operating profit 9.5 8.5 10.0 10.9 12.7 13.3
Interest expense 0.4 0.4 0.4 0.4 0.4 0.4
Net income 5.9 5.3 6.2 6.8 8.0 8.4
Depreciation and amortization 3.1 3.3 3.5 3.7 3.9 4.1
Increase in net working capital (0.9) (0.8) 0.6 0.7 0.7 0.4
Capital expenditure 3.1 2.8 3.0 3.3 3.6 3.7
Total FCFF 7.05 6.85 6.38 6.84 7.88 8.62

Combined (100% debt financing)

In US$ Million 2015 2016 2017 2018 2019 2020
Sales 508.49 512.05 542.90 575.76 610.78 636.06
Operating Profit 14.91 16.14 20.00 23.51 25.97 27.07
Interest Expense - Old Loan 0.40 0.40 0.40 0.40 0.40 0.40
Interest Expense - New Loan 6.60 6.60 6.60 6.33 6.05 5.78
Net Income 5.14 5.94 8.45 10.91 12.69 13.58
Depreciation and amortization 5.20 5.70 6.20 6.70 7.20 7.70
Increase in net working capital (0.96) (1.40) 1.06 0.68 (0.21) 1.37
Capital expenditure 6.69 6.56 7.00 7.47 7.98 8.31
Total FCFF 9.16 11.03 11.14 13.83 16.31 15.61

Combined (50% debt financing)

In US$ Million 2015 2016 2017 2018 2019 2020
Sales 508.49 512.05 542.90 575.76 610.78 636.06
Operating Profit 14.91 16.14 20.00 23.51 25.97 27.07
Interest Expense - Old Loan 0.40 0.40 0.40 0.40 0.40 0.40
Interest Expense - New Loan 3.00 3.00 3.00 3.00 3.00 3.00
Net Income 7.48 8.28 10.79 13.07 14.67 15.38
Depreciation and amortization 5.20 5.70 6.20 6.70 7.20 7.70
Increase in net working capital (0.96) (1.40) 1.06 0.68 (0.21) 1.37
Capital expenditure 6.69 6.56 7.00 7.47 7.98 8.31
Total FCFF 9.16 11.03 11.14 13.83 16.31 15.61

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Annexure 5: Combined Financials (Post- Acquisition) – Pessimistic Case
Landmark
In US$ Million 2015 2016 2017 2018 2019 2020
Sales Growth 5% 5% 5% 5% 5% 4%
Sales 362.8 380.9 400.0 420.0 441.0 458.6
Operating Margin 1.50% 2.00% 2.50% 2.50% 2.50% 2.50%
Capital Expenditure % of sales 1% 1% 1% 1% 1% 1%
Depreciation 2.1 2.4 2.7 3 3.3 3.6
Non-cash Net WC as % of sales 7.00% 7.00% 7.00% 6.50% 6.50% 6.50%
Net WC 25.39 26.66 28.00 27.30 28.66 29.81

Net sales 362.78 380.91 399.96 419.96 440.96 458.59

Operating profit 5.44 7.62 10.00 10.50 11.02 11.46
Net income 3.54 4.95 6.50 6.82 7.17 7.45
Depreciation and amortization 2.10 2.40 2.70 3.00 3.30 3.60
Increase in net working capital (0.1) 1.3 1.3 (0.7) 1.4 1.1
Capital expenditure 3.63 3.81 4.00 4.20 4.41 4.59
Total FCFF 2.12 2.27 3.87 6.32 4.69 5.32

Broadway
In US$ Million 2015 2016 2017 2018 2019 2020
Sales Growth -15.00% -15.00% 8.00% 8.00% 8.00% 3.50%
Sales 137.62 116.97 126.33 136.44 147.35 152.51
Gross Margin 8.50% 8.50% 9.00% 9.00% 9.50% 9.50%
Opex as % of sales 2.40% 2.40% 2.40% 2.40% 2.40% 2.40%
Capex as % of sales 2.10% 2.10% 2.10% 2.10% 2.10% 2.10%
Depreciation 3.1 3.3 3.5 3.7 3.9 4.1
Non-cash Net WC as % of sales 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%
Net WC 7.23 6.14 6.63 7.16 7.74 8.01

Net sales 137.6 117.0 126.3 136.4 147.4 152.5

Gross profit 11.7 9.9 11.4 12.3 14.0 14.5
Opex 3.3 2.8 3.0 3.3 3.5 3.7
Operating profit 8.4 7.1 8.3 9.0 10.5 10.8
Interest expense 0.4 0.4 0.4 0.4 0.4 0.4
Net income 5.2 4.4 5.2 5.6 6.5 6.8
Depreciation and amortization 3.1 3.3 3.5 3.7 3.9 4.1
Increase in net working capital (1.3) (1.1) 0.5 0.5 0.6 0.3
Capital expenditure 2.9 2.5 2.7 2.9 3.1 3.2
Total FCFF 6.94 6.57 5.78 6.16 7.03 7.66

Combined (100% debt financing)

In US$ Million 2015 2016 2017 2018 2019 2020
Sales 500.39 497.89 526.29 556.39 588.31 611.10
Operating Profit 13.84 14.75 18.34 19.50 21.49 22.29
Interest Expense - Old Loan 0.40 0.40 0.40 0.40 0.40 0.40
Interest Expense - New Loan 6.60 6.60 6.60 6.33 6.05 5.78
Net Income 4.44 5.04 7.37 8.31 9.77 10.48
Depreciation and amortization 5.20 5.70 6.20 6.70 7.20 7.70
Increase in net working capital (1.38) 0.19 1.82 (0.17) 1.94 1.42
Capital expenditure 6.52 6.27 6.65 7.06 7.50 7.79
Total FCFF 9.06 8.84 9.64 12.48 11.72 12.98

Combined (50% debt financing)

In US$ Million 2015 2016 2017 2018 2019 2020
Sales 500.39 497.89 526.29 556.39 588.31 611.10
Operating Profit 13.84 14.75 18.34 19.50 21.49 22.29
Interest Expense - Old Loan 0.40 0.40 0.40 0.40 0.40 0.40
Interest Expense - New Loan 3.00 3.00 3.00 3.00 3.00 3.00
Net Income 6.78 7.38 9.71 10.47 11.76 12.28
Depreciation and amortization 5.20 5.70 6.20 6.70 7.20 7.70
Increase in net working capital (1.38) 0.19 1.82 (0.17) 1.94 1.42
Capital expenditure 6.52 6.27 6.65 7.06 7.50 7.79
Total FCFF 9.06 8.84 9.64 12.48 11.72 12.98

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Annexure 6: Debt Repayment and Interest Coverage under different options
New Loan Servicing (100% debt financing) - US$ Mn Optimistic Case Pessimistic Case
Total Broadway Broadway Broadway Broadway
annual Standalone Int combined Standalone Int combined
Year Op Loan Bal Interest Repayment Cl Loan Bal obligation incl Op Profit coverage profit Int Cov Op Profit coverage profit Int Cov
old loan
2015 120.00 6.60 - 120.00 7.40 6.74 0.96 14.91 2.13 6.74 0.96 13.84 1.98
2016 120.00 6.60 - 120.00 7.40 7.00 1.00 16.14 2.31 7.00 1.00 14.75 2.11
2017 120.00 6.60 5.00 115.00 12.40 7.28 1.04 20.00 2.86 7.28 1.04 18.34 2.62
2018 115.00 6.33 5.00 110.00 12.13 7.58 1.13 23.51 3.50 7.58 1.13 19.50 2.90
2019 110.00 6.05 5.00 105.00 11.85 7.88 1.22 25.97 4.03 7.88 1.22 21.49 3.33
2020 105.00 5.78 5.00 100.00 11.58
2021 100.00 5.50 5.00 95.00 11.30
2022 95.00 5.23 5.00 90.00 11.03
2023 90.00 4.95 90.00 - 95.75

New Loan Servicing (50% debt financing) - US$ Mn Optimistic Case Pessimistic Case
Total Broadway Broadway Broadway Broadway
annual Standalone Int combined Standalone Int combined
Year Op Loan Bal Interest Repayment Cl Loan Bal obligation incl Op Profit coverage profit Int Cov Op Profit coverage profit Int Cov
old loan
2015 60.00 3.00 - 60.00 3.80 6.74 1.98 14.91 4.39 6.74 1.98 13.84 4.07
2016 60.00 3.00 - 60.00 3.80 7.00 2.06 16.14 4.75 7.00 2.06 14.75 4.34
2017 60.00 3.00 - 60.00 3.80 7.28 2.14 20.00 5.88 7.28 2.14 18.34 5.39
2018 60.00 3.00 - 60.00 3.80 7.58 2.23 23.51 6.91 7.58 2.23 19.50 5.74
2019 60.00 3.00 - 60.00 3.80 7.88 2.32 25.97 7.64 7.88 2.32 21.49 6.32
2020 60.00 3.00 60.00 - 63.80

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Annexure 7: Valuation
Landmark - Optimistic Scenario 2015 2016 2017 2018 2019 2020 Landmark - Pessimistic Scenario 2015 2016 2017 2018 2019 2020
FCFF 2.12 4.18 4.76 6.99 8.43 6.99 FCFF 2.12 2.27 3.87 6.32 4.69 5.32
Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61 Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61
PV of FCFF 1.95 3.55 3.72 5.04 5.60 4.27 PV of FCFF 1.95 1.93 3.02 4.56 3.11 3.25
Sum of PV of FCFF 24.12 Sum of PV of FCFF 17.83

Terminal Growth 4% Terminal Growth 4%

Terminal Yr FCFF 4.44 Terminal Yr FCFF 3.38
Terminal Value 97.83 Terminal Value 74.49
PV of Terminal Value 59.83 PV of Terminal Value 45.55

Enterprise Value 83.95 Enterprise Value 63.38

Less: Non Current Liabilities (17.90) Less: Non Current Liabilities (17.90)
Equity Value 66.05 Equity Value 45.48

Broadway - Optimistic Scenario 2015 2016 2017 2018 2019 2020 Broadway - Pessimistic Scenario 2015 2016 2017 2018 2019 2020
FCFF 7.05 6.85 6.38 6.84 7.88 8.62 FCFF 6.94 6.57 5.78 6.16 7.03 7.66
Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61 Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61
PV of FCFF 6.49 5.82 4.99 4.93 5.23 5.27 PV of FCFF 6.40 5.57 4.52 4.44 4.67 4.69
Sum of PV of FCFF 32.73 Sum of PV of FCFF 30.28

Terminal Growth 4% Terminal Growth 4%

Terminal Yr FCFF 5.48 Terminal Yr FCFF 4.87
Terminal Value 120.75 Terminal Value 107.33
PV of Terminal Value 73.84 PV of Terminal Value 65.63

Enterprise Value 106.57 Enterprise Value 95.91

Less: Non Current Liabilities (18.80) Less: Non Current Liabilities (18.80)
Equity Value 87.77 Equity Value 77.11

Combined Firm - Optimistic Case 2015 2016 2017 2018 2019 2020 Combined Firm - Pessimistic Case 2015 2016 2017 2018 2019 2020
FCFF 9.16 11.03 11.14 13.83 16.31 15.61 FCFF 9.06 8.84 9.64 12.48 11.72 12.98
Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61 Discounting Factor at 8.54% 0.92 0.85 0.78 0.72 0.66 0.61
PV of FCFF 8.44 9.36 8.71 9.97 10.83 9.55 PV of FCFF 8.34 7.50 7.54 8.99 7.78 7.94
Sum of PV of FCFF 56.85 Sum of PV of FCFF 48.10

Terminal Growth 4% Terminal Growth 4%

Terminal Yr FCFF 9.93 Terminal Yr FCFF 8.26
Terminal Value 218.59 Terminal Value 181.82
PV of Terminal Value 133.67 PV of Terminal Value 111.19

Enterprise Value 190.53 Enterprise Value 159.29

Less: Non-Current Liabilities (36.70) Less: Non-Current Liabilities (36.70)
Equity Value 153.83 Equity Value 122.59

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Annexure 8: Comparable
In US$ Mn Comparable Company 1 Comparable Company 2 Comparable Company 3
Sales $13,945.7 $6,417.2 $836.9
Net income $219.4 $123.8 $12.1
EPS $0.95 $1.84 $0.55

Share price $26.76 $46.83 $22.73

Number of shares outstanding 231.2 67.3 22.0
Market capitalization $6,186.9 $3,151.7 $500.1
Debt $5,887.0 $355.0 $289.0
Assets $10,267.1 $3,465.9 $862.4
Equity beta 1.69 1.25 1.56

P/E 28.20 25.46 41.33

Market Cap to Sales 0.44 0.49 0.60

D/E 1.0 0.1 0.6

Equity Beta (levered) 1.7x 1.3x 1.6x
Unlevered Beta 1.0x 1.2x 1.1x
Average Unlevered Beta 1.1x

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