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Ultimate recommendation: Listing on HKEX at a price of 0,99€ = appro
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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 ?
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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)
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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
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- 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
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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%
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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
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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
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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
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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
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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
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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
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Considering corporate governance to lock-in the price - ECM, Investor-
LSE NYSE
C id i t t l k i th i ECM I t
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Considering corporate governance to lock-in the price - ECM, Investor-
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
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Considering corporate governance to lock-in the price - ECM, Investor-
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
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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
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