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COURSEWORK ASSIGNMENT: The Intended Learning Outcomes of the Assignment are: ? Critically assess fundamental features of corporate valuation

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COURSEWORK ASSIGNMENT:

The Intended Learning Outcomes of the Assignment are:

? Critically assess fundamental features of corporate valuation.

? Compare, contrast and differentiate the fundamental features of a range of key business valuation models.

? Critically evaluate and assess the empirical research literature and case studies in corporate valuation.

Assignment – River Island Clothing Case Study

Required:

From a consideration of the case study background and synthesis of the data contained in the information pack attached (pages 9-25) relating to River Island Clothing Co Limited; you will prepare a valuation report in which you will critically evaluate, analyse, discuss and comment upon the key issues in the valuation of River Island Clothing Co Limited. The report will explicitly address the following matters:

a) An analysis of the current business and financial situation of River Island Clothing Co

Limited.

b) A discussion and analysis of your forecast of the company’s future expected economic benefits stream.

c) An appraisal and assessment of the appropriate weighted average cost of capital to be applied in the valuation.

d) A quantitative assessment of value using a discounted cash flow methodology and a relative valuation approach.

e) An appraisal and discussion of the key assumptions contained within the valuation and a sensitivity analysis showing how value might change given a range of appropriate assumptions.

f) A brief critical evaluation of the methodologies applied, analysing issues which in this specific valuation may impact upon the propriety of the value conclusion.

g) A conclusion of value, with a recommendation for the maximum price to be offered per share.

The report will be assessed and marked on the level of consideration and knowledgeable discussion of the appraisal of value, not on a “right” value. Your report for Section A must not materially exceed 4,000 words in length.

Word Count:

The coursework word count is a MAXIMUM OF 4,000 WORDS (THERE IS NO ±10%

MARGIN) excluding the reference list, bibliography, appendices, the cover page, abstract, glossary and list of tables, figures, charts and abbreviation. Tables are expected to be primarily for the presentation of numerical data. Work that exceeds 4,000 words will not be read beyond the stated word count. The word count should be stated at the top of your submission.
Formatting:

The work should be word-processed. Font size should be between 12 and 14 and ‘easy to

read’ e.g. Calibri, Arial, Times New Roman. Line spacing should be between 1.5 and 2 with

(approx.) 4 cm margins all around. The Header must include the student number and the

Footer must include a page number.

Written Report:

You need to read the requirements of the assignment very carefully and ensure that your

analysis is well focused on the main relevant issues. The following are some general

guidelines. River Island Clothing Co. Limited is a real company and to fulfil the requirements

of your assignment you should use the latest available financial information on the company

and the main competitors, information from the company’s website, as well as information

from newspapers. Some of the above information to get you started is included in the

information pack. The use of literature and referencing is one of the main weaknesses

encountered in the work of past cohorts. Your analysis needs to be embedded into the

relevant theory and empirical evidence. Although this is a report, you would notice that you

are required to ensure that your arguments reflect the “latest academic thinking”! Therefore,

relevant recent references need to be discerningly used to support and strengthen your

arguments. It is not a competition to maximise the number of references, but markers will

look for the appropriateness and quality of the references and evidence of wider reading,

beyond the module reading list. You must include a list of references at the end of your

assignment, not a bibliography. In other words, the reference list must include only sources

referred to in the text of your assignment and must comply with the style specified in the

Module Handbook. This requirement relates to the Marking Criteria that require your work to

be well researched and findings fully evaluated. Your assignment needs to provide evidence

of well-developed analytical skills and satisfy the Marking Criteria. To give you just some

examples, you are expected to demonstrate awareness of the relevant literature by explicitly

refer to the literature; show that you researched your work well by referencing your sources

of information; fully evaluate findings and conclusions by comparing your findings with

related studies found in the literature.

In conclusion:

? Read the assignment very carefully and identify the exact requirements.

? Research the relevant issues thoroughly before embarking on the assignment.

Textbooks are key reading but not enough at this level.

? Use references appropriately to support and substantiate your analysis, as well as

demonstrate that your knowledge of the literature is appropriate for this level.

? Ensure that the information used is up-to-date and acknowledge the source of any

material, such as tables and figures, included in your assignment. Above all, use your

assignment as a learning tool and enjoy it!

Your Essay Should:

? Be written in a plain style, using subheadings and lists where appropriate.
? Be properly referenced acknowledging all the sources you have used, and only the sources you have used.

? Include evidence of locating and reading sources beyond the suggested initial reading.
River Island Clothing Co. Limited

It was Friday the 25th

February 2022, the sun was shining in a cloudless sky after a

period of heavy rain and Martin Halusa, the chairman of Apax Partners, one of the

world’s leading private equity firms, was driving to meet his valuation team, for a first

meeting on the potential River Island bid. It was only a week ago that he had been

directly approached by Richard Bradbury to start confidential exploratory discussions

on a possible leveraged buyout of the company he left in 2010. Richard was a long

serving chief executive of River Island who had taken early retirement from the

company in 2010, with a payout of some £15m.

Martin had taken some convincing that the Lewis family, who own River Island,

would be open to an offer. The family with Bernard Lewis at the head had run the

company since it started in 1948. Bernard was just about to celebrate his 95th

birthday and Richard felt confident that now was the time for a buyout approach.

In the car Martin played back the podcast recording of his initial meeting with Richard

and dwelled on the long history of the potential target.

It was seventy three years ago that Lewis had opened his first “shop” aged 20 selling

fruit and vegetables from a corrugated iron shed on a bombsite on Holloway Road,

north London, and he had now become the patriarch of a business empire.

While others struggled in the past, River Island had gone from strength to strength.

Even though the like-for-like sales across the high street falling in recent years as a

result of the global recession, River Island is believed to be in a good position to its

competitors in the past 12 months across its over 350 stores. The latest accounts

filed at Companies House show River Island had a loss in pre-tax profits to (£32m)

for the year to December 26 2020, a 37.1% decrease in pre-tax profits to £28.5m for

the year to December 28 2019,a 51.3% decrease in pre-tax profits to £45.3m for the

year to December 29 2018, a 32.9% decrease in pre-tax profits to £93m for the year

to December 30 2017, a decrease of 7% to £138.6m for the year to December 31

2016, a small 1.9% increase to £148.6m for the year to December 26 2015 and a

substantial increase of 69.3% in the year of 2014. The company is still opening new

stores with expansion in Moscow, Australia, Holland and Poland, in addition the

family’s near term expansion strategy seems to be concentrating on evaluating the

potential in the USA market.

Lewis has always shunned the limelight, yet despite the low profile few in the retail

industry make the mistake of underestimating him. Philip Green, the owner of

Arcadia and BHS, describes him as a brilliant retailer. “He is an old-style

dyed-in-the-wool retailer, which they do not manufacture anymore,” said Green.

Fruit and veg had always been the Lewis family business. During the Second World

War the family sold their wares from the back of a lorry. When Lewis left the air force

in 1946 he opened his greengrocer’s shop at 478 Holloway Road – today the site is

a River Island store. But within two years of opening his greengrocer’s he had

realised that his future did not lie in cabbages and carrots. So in 1948 Bernard Lewis

– and his brothers David, Godfrey and Geoffrey – opened “Lewis” a womenswear

shop in Mare Street Hackney, east London. Within 10 years they had a chain of

shops across Britain
with stores in Brighton, Hull and Glasgow as well as London. By 1980 Godfrey and

Geoffrey had left the business and most of the shops had been rebranded as

Chelsea Girl. It would not be the last time that Lewis reinvented the retailer. In 1988

River Island began to replace Chelsea Girl.

Richard Hyman, chairman of Verdict research, the retail research consultancy,

believes that the reinvention of the brand is one of the reasons that Lewis has

survived while so many of his high-street rivals have faltered. “They have invented

three separate businesses, transforming Lewis Separates into Chelsea Girl and

Chelsea Girl into River Island,” said Hyman. “The timing has been impeccable.

Bernard has a natural instinct. You cannot teach timing like that at a business

school.” Lewis was also one of the first retailers to bring design in-house and to

move production overseas.

By the early 1990s Chelsea Girl was no more, replaced by River Island. The

business went from strength to strength, driven by Bernard Lewis. Over the past

decade River Island’s success has enabled Lewis Trust Holdings – the family’s

ultimate holding company – to pay hundreds of millions of pounds in dividends.

Eleven members of the family, an Israeli company and Guernsey-based offshore

trusts now own stakes of between 3% and 18% in the business.

The success on the high street has enabled the Lewis family to invest in property

and other businesses and the family empire now extends much further than River

Island. The Lewis Trust Group owns hotels in Europe, Israel and America. Although

one of the younger members of the Lewis family had been appointed chief executive

of River Island, Richard Bradbury held the belief that the older family members would

soon want to retire and the family would be open to an approach so that they could

concentrate on their other interests, which also embraced a large property division.

Martin mulled over these issues and concluded that any approach would have to be

very attractive for the Lewis family to give up what has obviously been an

exceptional cash generating company.

He decided that he must stress, to his team, the importance of the initial approach

valuation being set at the right level. Although, not at such a value that the assets will

have to sweat too hard for good returns to be made when they float the company in

a few years’ time, or decide upon a trade sale exit route.

John Megrue, Chairman of Apax Partners in the USA and head of their retail group,

called Martin on his mobile phone cautioning him and suggesting that the retail

sector did not appear to be a good play at the moment, unless the business was unique and its franchise was in growth markets with a strong online presence.

Martin was lost in thought when he pulled into the car park of 33 Jermyn Street, where he had arranged to meet the valuation team. Richard Bradbury would also be

at the meeting and Martin wanted this to be a positive meeting which would take the bid forward. He mentally prepared himself to give a detailed briefing to his team.
Financial Market Data as of 15th

February 2022

15 year UK Gilt yields as of 17 January 2021 – 1.356%

10 year UK Gilt yields as of 15 January 2021 – 1.191%

30 year UK Gilt yields as of 15 January 2021 – 1.298%

(Source: Marketwatch)

UK Equity risk premium – 5.00% (Fernandez, 2014)

Corporate tax rate 19% (with effect from 2017)

Fernandez, P. (2014). Market Risk Premium used in 88 countries in 2014: A survey.