Abercrombie & Fitch LBO (not quite the 80’s style)
by Branko Slavko Rodic, MBA '15 (3/5/14)
To paraphrase Gordon Gekko, “We pick that rabbit out of the hat while everybody sits out there wondering how we did it." Most of you recognize both the character and the line. If you don’t, it is time to rent Oliver Stone’s 1987 masterpiece, Wall Street. It’s not just because of the iconic, Oscar winning portrayal of a corporate raider by Michael Douglas, it’s because the movie is (among other things) inspired by leveraged buyouts (LBO).
The Investment Banking Immersion (IBI) team at Cornell spent almost two weeks thinking about the potential LBO of the troubled specialty retailer, Abercrombie & Fitch. For people like me who were facing an LBO for the first time, the key question was where to start. Understanding what a LBO is and how it works was essential. Here again, Cornell’s “learn by doing” approach proved to be excellent. After analyzing the current state of the specialty retail segment (lots of challenges, declining margins, pressure from online retailers) and the LBO market (still recovering from the 2009 low, with the number of deals, dollar volume and deal multiples on the rise), the teams focused on analyzing whether Abercrombie & Fitch has the characteristics of a good LBO candidate. If so, whether the LBO model outputs seem attractive to all constituents normally involved in a LBO deal.
This part involves a combination of art and science. It is difficult to make decisions about the viability of a company for an LBO with very limited knowledge and experience about the subject matter. The same goes for assumptions and projections in the LBO model itself. Based on what? Do we believe a company with deteriorating performance will start to grow its revenues? Is the eccentric CEO a solution to or root cause of the problem? What premium would get the deal done? Is the financing package viable and what is the minimum cash balance that the company needs to maintain? These questions made us all think a little harder.
With models and slide decks ready, it was time to pitch the Board (played by our mentor and second year students). The challenging questions posed to us during our presentations are meant to draw attention to the points we missed or misinterpreted. In this day and age, when it is not possible to take the company private with 10% equity / 90% debt and quickly turn it around in a booming economy like it was in the heyday of LBOs, the challenges a good banker needs to address keep piling up. Being exposed to these challenges in an educational environment is a great way to learn and proves to be a very valuable experience before our upcoming internships.
Did we pick the rabbit out of the hat with Abercrombie & Fitch? Not really. As our mentor said, time will tell whether the LBO of Abercrombie & Fitch makes sense. Regardless, the IBI team at Cornell learned a lot about leveraged buyouts.