Intro：

· Prada(1913): Italian brand, acquired and sold such as Helmut Lang, Jil Sanders, Amy Fairclough and

Fendi .

The problem for Prada:

Need to raise a series of alternative plan and strategy to raise capital

1. To raise money in the short-term to pay off debt (at least 1 billion euro) which due in next six and

twelve months , and half of them due in next quarters.

2. Besides, realize the expected growth of Asian market, especially China, need to raise extra capital

and strengthen the brand image in Asian market to enter markets before other competitors to

dominate market.

3. Have three choices: raise money by an initial public offering(IPO), strategies partnership, or raising

debt, while each of them will bring Prada opportunities and disadvantages.

Current market conditions and future conditions next few years: Global Luxury Industry: A rapid

growth market.

1. Nearly no economic decline in recent years, keep increasing Increased from 1994 and 2010, has

annual 2% growth rate since 2007, witnessed 1% annual growth rate between 2007 and 2010.

2. Not affected by economy crisis. ( such as 9/11 to global financial crisis)

3. Customers used to mostly come from developed countries such as Europe(37%) and America (31%)

4. Retail market is the best channel in the luxury market, the growth rate from 2010 and 2011 for retail

market is 22.8%.Retail market accounts for 54.3% of total in 2009, and accounts for 70.8% of the total

in 2011.

5. Global luxury markets promoted by the emerging markets nowadays which is a big change. The

market share from Asia-Pacific market

accounts for 11% in 2007 till 18% in 2010. Higher demand in developing countries in Asian(10%-11%

increase) especially China (15%-20% increase), whose revenue comes from retail market, will be the

focus for fashion industry. China is expected to

6. LGM growth in countries such as Brazil(largest market in Latin America) and India is restricted by

regulation and tax barrier, which remained as the potential markets.

7. Compared to other countries, the middle east countries has low population density, while the demand

for high-end products from these countries keep increasing.

8. Expected to have more steadily growth in the future: because more and more people move from

middle class to higher class, increasing demand for high-end products.

<>Why did Prada need additional capital

>>Prada's debt that is maturing over the near term has to be serviced and then they need access to large scale
equity financing ove the next few months in order to service the depts
>>Prada also require financing to pursue expansion opportunities in Asia (notably China) and given the nature of
the fashion industry which does better on brand awareness funding that enables Prada to obtain market
awareness is sought

Why did Prada choose to issue its IPO in Hong Kong? What were the advantages and disadvantages of doing
so?
<>Prada decided to IPO in Hong Kong because it has less rules and regulations and more importantly, it's close
to the Chinese investor who wants to invest in luxury goods companies
<>Also, most luxury goods companies are relying on China consumption for their growth, so they want to be
close to the market.
Advantages
<>The company will be able to fetch all the markets in Hong Kong
<>it's close to the Chinese investor who wants to invest in luxury goods companies
Disadvantage
If in case the government introduces new rules and regulations to govern the IPO then the company will be on
the losing size

What circumstances might make a foreign IPO ineffective for a company like Prada?
<>If the MNC offers a large number of stocks locally as this ensures a more liquid and active local secondary
market for the stock, making trading them easier for the local investors

<>Other financing options were available to Prada

1. Sale to a strategic buyer through the M&A market
2. Sale to a private equity firm
3. Private placement, often as a pre-IPO step
4. Joint ventures and strategic alliances
5. Refinancing to release funds for partial exit

<>The currency exposure risks did Prada face was the large transaction in a developing nation
<> The company have hedged against them
The company seem to manage most risks, such as exposure from a large transaction in a developing nation,
which can be hedged with financial instruments, including currency futures, swaps, or options.
ily-owned private company such as Prada.

There will be dilution effect of the IPO impacting the control of the company for a family-
owned private company such as Prada.

Executive Summary

Prada S.p.A., founded in 1913, is an Italian fashion label specializing luxury goods for

men and women. Through a turbulent period of brand acquisitions during 2000-2005, Prada has

both acquired and sold many of its subsidiary brands like Helmut Lang, Jil Sanders, Amy
Fairclough, and Fendi. The Global Luxury Fashion Industry is expecting a more organic steady

growth in the future, while noticing a new shift in the Luxury Fashion Industry dynamic towards

Asia, hoping that this new change the global environment will drive its growth. In January 2011,

Prada had to decide on how to pay the large portion of its long-term debt and to expand into Asia.

The Board hired investment bank Grupo Capo Milano to prepare different alternatives for raising

over 1 billion euros within the next six to 12 months.

Grupo Capo Milano came up with three different alternatives for Prada to consider: Prada

can raise money by an initial public offering (IPO), strategic partnership, or debt. Each of these

options presents different opportunities and drawbacks for Prada, with respect to its future

sustainability.

Given the situation at Prada and projection of future cash flows, Prada should proceed with an

IPO in Hong Kong. This option would help pay back part of its debt, lower the financial distress,

and further strengthen its brand image in Asia

1. The Luxury good market (LGM) segment is considered to be a very good growth market.

The market contains some very special and interesting characteristics that distinguish itself from

other traditional markets that have been exposed to traditional financial analysts. One of the first

characteristics of the LGM is that throughout the recent years, data have shown that the market

suffers from little to no economical cyclical downturns; for instance from 9/11 to the global

financial crisis in 2008 and 2009, the LGM has proved its potential as it continued to attain a

positive growth rates in those years.

Traditionally the LGM sales around the world mainly stem from highly developed

regions. Europe and the America consisted of the main proportion of sales, respectively these

regions accounted for 37 percent and 31 percent of the LGM. During most recent years, however,

there seems to be a shift in the paradigm of the LGM, as the new worldwide spending on luxury

market seems to have a growing focus on emerging markets. The main drive of the LGM’s

growth mainly comes from the Asian market and China’s economic growth. The market share of
the Asian-Pacific market excluding Japan started from 11% of the global market in 2007, and

already reached 18% of the global market share in 2011.

It is expected that the Chinese market for luxury good is rapidly growing and may surpass

the U.S as the biggest luxury good market with an estimated CAGR of the Luxury Market Value

in China from 2008-11 of 25%. Although throughout the world there are other emerging markets

that experience high level of economic growth, for example India’s and Brazil’s LGM growths

have been hindered by regulatory issues and high import duties.

As Asia is becoming one of the main markets for the LGM after Europe, it is important

for Prada to realize this in its upcoming decision in its IPO and position itself to utilize the rapid

growth factors that are in the Asia-Pacific region. Due to these circumstances in the outlook of the

LGM, Prada should position itself corporate prominence prominently in the Asian market. As

retail is confirmed to be the best performing channel in the LGM, as the numbers show that from

2010 to 2011 alone the percentage increase of the retail distribution channel alone was 22.8%.

Prada’s positioning is consistent with the changing dynamic of the LGM. In 2009, retail

accounted for 54.3% sales of Prada, while in 2011 the percentage of retail composed of 70.8% of

Prada’s sales.

2. In order to raise 1 billion euros over the time frame of 12 months, Prada has to consider

between different sources of capital, and between different tradeoffs. The top priority for them is

to weigh the cost of different alternatives. For instance, going public entails direct costs, which

include underwriting, audit, listing and other fees, and indirect costs, such as preparation time,

roadshow, and responsibilities. Using debt, on the other hand, raises company financial distress

cost and places company to a riskier situation. Prada managers need to carefully weigh the cost

and benefits between different options. Using equity enables the investors and business owners

the opportunity to develop a long term relationship throughout their joint business endeavor. The

cash flow generated can be used for follow-on investments rather than towards the loan debt. In

using debt, lender does not gain ownership; therefore, the entrepreneur is able to maintain
 maximum control over their business. The interest on debt financing is also tax deductible. The

second priority they need to consider is their brand image going forward. Unfavorable news

about their debt level or failure in launching another IPO could significantly hamper their

reputation and especially their expansion plan to Asia. For example, using debt provides a strong

signaling effect to investors than using equity; however, in the Asian culture, the investors value

highly the stock of a fashion company, thus further strengthen the image of Prada in this market.

Finally, Prada also needs to think about their level of control that after the strategic move.

Bertelli, CEO of Prada, believed that the success of the firm today was a result of his family’s

collaborative efforts; therefore, they disfavored the option of going public. The company needs to

think about the future of the brand Prada after paying off all the current debts.

3. There are three differences sources of capital that Prada should consider: Initial Public

Offering, Debt, and Strategic Partnership. We discuss each source and give the valuation of the

firm and equity for each source below.

- Initial Public Offering (IPO)

Given Prada’s financial position, an IPO would help Prada raise the fund to pay off its

debts which are maturing in the next 6 to 12 months. Thus, an IPO would improve Prada’s debt

to asset ratio and lower the financial distress of the company. Moreover, an IPO would enhance

Prada’s liquidity and cash position, enabling it to finance its expansionary business plans in Asia.

Another advantage of an IPO is that it can boost the brand image of Prada in the market. By

opting for an IPO, Prada would be able to increase customer and investor confidence in the

company due to strict listing and disclosure requirements. Thus, Prada could improve its sales

and receive healthy boost for future plans, such as a strategic merger and acquisition or a

subsequent initial public offering.

However, a disadvantage of IPO is that it dilutes the control of the existing owners of the

company. Prada’s shares would be traded publicly and part of its ownership would be distributed

to new investors. Being a leading luxury brand, Prada would want to retain as much control as
 much as possible to preserve its authenticity. Therefore, an IPO might hinder Prada’s future

decision making process. Another disadvantage of IPO is that it takes from 6 months to a year to

file an IPO. Also, opting for an IPO would require Prada to disclose certain confidential

information, which might benefit its competitors.

DCF Valuation for IPO: (see Table 3)

For the valuation, we assume Prada’s expected growth rate in sales in each region in 2012

is equal to the CAGR, leading to total sales of €2,376.41 million in 2012. In addition, we assume

the growth rate for Prada to normalize to the similar level of overall regional growth rate from

2013 (p.3), and assume growth rate in other countries equal to that of Japan. Hence, Prada’s total

sales will reach €3092.43 million by 2016, with an annual growth rate of 6.65% from 2013 to

2016. We also assume that the long run overall sales will grow at a 5% rate per annum after

2016, giving premium for the expected inflation rate of China of roughly 3.2% in 2013.

Subsequently, we assume that the free cash flow (FCF) of Prada will grow at the same pace as its

sales. (See Tables 1 & 2)

For the beta of Prada, we use the average beta of 1.02, of comparable luxury firms (p.19).

Then, we use the geometric average return of 10.58% for the Hang Seng Index in Hong Kong

from 1991 to 2011 as a proxy for the market return. The risk free rate is 3% as of January 2011,

based on the yield of 10-year Hong Kong government bond. Hence, the required return of Prada’s

equity is 10.73%. Prada SpA’s current Debt/Asset ratio is 1155.9/2366 = 48.85% and this would

drop to 35.86% if we assume €20 0 million out of the €1.5 billion proceeds from the IPO would

be used to reduce debt, and €300 million will be injected to Prada SpA. Prada’s cost of debt is

estimated to be LIBOR plus 2.50, which is 4.074% based on the 12-months Euro LIBOR rate of

1.574% at the end of January 2011. Tax rate is 34.7%. Thus we have WACC and value of the

firm as in table 3.

- Strategic partnership:
 Another option for Prada is strategic partnership with other private equity firms, who

demand a reasonable return for their investment. Private equity and financial partner funding is

different from a public offering as the shares are not traded in the market and the agreement is

made exclusively to relevant parties. The private equity firms usually sell their stakes after they

have turned the company around.

In order to find the equity value of Prada under strategic partnership, first we will

compute the Enterprise Value. We would use the Bulgari’s Enterprise Value to Sales ratio of three

times; the 2011 sales of Prada equals 2017.1 million euros (exhibit 3), therefore, the Enterprise

Value is 6051.3 million. Then we use the following formula:

Equity value = Enterprise Value + Cash and equivalents - Debts - Preferred stocks - Minority

Interest = 6051.3 + 96.6 - 1150 - 0 - 0 = 4,997.9 million euros.

If instead, we use the E/V ratio similar to Burberrys (2.7) and Tiffanys (2.3), the Equity value will

be lower at 4,392.77 million and 3,585.93 million, respectively.

By choosing this option, Prada would improve its debt-to-asset ratio similar to an IPO.

Also, since financial partners do not necessarily want to be part of the daily operations, the

problem of control dilution is not severe as in an IPO. If managed well, strategic partnership

could turn out to be a win-win strategy in which the financially distressed Prada would get

funding to turnaround and in return, the private equity investors would get higher returns if Prada

did improve its financials and increase its overall value. However, the decisions made by these

private equity firms might be focusing on short term gains rather than on the benefit of the

company in the long run. Furthermore, similar to IPO, the tax shield will be reduced.

- Debt:

The final option is to finance its new growth and future strategy is debt. In the past, two

of Prada's competitors Bulgari and LVMH have already issued debt in the Euromarkets. The

option was also viable for Prada S.p.A, as it is stated that there is a 750 Million Euro market for

Prada’s bond at Libor plus 2.50 percent for a 5 year bond, One of Prada’s other routes to debt
 could be in the U.S market that offers a lower LIBOR rate; however, Prada would be faced with

the disadvantage of being the first mover in the U.S bond market at its level. Other option of debt

that Prada can issue the newly popular "dim-sum" bond that many investors expect low yields out

from, in return for anticipation for Yuan appreciation. However, as previously mentioned, there

are attractive markets for Prada to issue new debt into the public. The option itself would not be

Prada's best action, due to the fact that Prada itself already has a dangerous debt level that is due

to mature in the future, while at the same time even though the "dim sum" bonds do offer low

yields for Prada, the bonds have small maturity of only 2-3 years, therefore their purpose would

not serve well for Prada's long term strategies, while it increases greatly the toxic level of the

corporation.

Assuming Prada wants to raise 1.5 Billion in upcoming funds it would need to issue Debts in

more than one market, Due to the characteristic of the “Dim Sum” bond only having short term

maturity from 2-3 years only the U.S market and Euro Market are a Viable option for Prada SpA.

To understand the cost of debt in different markets, see Table 4.

DCF Valuation for Debt: (see Table 5)

Prada SpA’s current Debt/Asset ratio is 48.85% and this would increase to 68.7% if we assume

the firm takes on new debt of €1.5 billion. In addition, the tax rate for Prada is 34.7%. Then we

recalculate WACC and firm value as the table 5.

- For Prada, there should be a preference for equity rather than for debt:

While one main advantage of debt issuance is the additional tax shield that comes with

interest payments, issuing debt would increase the financial distress of the company. Since Prada

is already experiencing serious financial problems, further debt issuance may cost more than

expected. A high level of debt would degrade the rating of Prada in the fashion market. Given

Prada’s current financial position, it is likely that the downside of additional debts would offset

the interest tax shield that comes with it. Also, if Prada is issuing the increasingly popular “dim

sum bonds,” whose an inherent disadvantage is their short-term maturity and low-yield, which
 may not attract many investors given the large size of the debt issue and the uncertainty of the

appreciation of the yuan against the dollar in the coming months or years. Another disadvantage

of issuing debt is that, since Prada need more than €1 billion to repay its loan, it would need to

issue debt in several different markets to raise sufficient funds, and therefore be exposed to

exchange rate risk.

- Also, Prada should have preference for different countries regarding the type of capital:

If Prada chooses to raise capital by debt, they should prefer to raise capital in the US over

Europe since the interest rate in US is lower. If they choose to raise capital by equity, Prada

should consider the immediate benefit for public listing in Hong Kong instead of other countries.

Hong Kong is a hot market in IPO, the demand is strong, and their valuation was higher than

what Prada could have received in Europe. In terms of an Asian expansion, an IPO in Hong Kong

would give them more than enough exposure to step in this profitable market. In considering

between countries, Prada also needs to take into consideration the complicated tax treatment in

different regions.

- For Prada, there should also be a preference regarding the types of investors:

The type of investor is also a very important factor for Prada to consider when it chooses

to conduct its IPO is not. Since IPO belongs to the LMG and is actually one of the largest luxury

brands in the world, Prada’s brand identity is also very important for its image. As it sales is

directly dependent on how the public views the value of the brand. That is why it is important for

Prada to find different types of investors that would maximize the brand’s public perception.

Ideally when the Prada conduct its IPO, it would want its shareholders to not only view the Prada

shares as a commodity, but would value the share in its intrinsic value as well. With investors that

have intrinsic value with the share, they will hold onto to the share longer and would be less

likely to sell Prada’s share out in the market. This would maintain the luxury image of the brand

as it is not anymore a commodity than is being freely traded around the market, but an exclusive

share that everyone would want to own. Due to this factor, the types of investor that would be
more prone in an emerging market economy, as the luxury market in these regions carry more

prestige, Status recognition and extravagance and in return Prada shares in these markets would

carry more intrinsic and value to both the investors and the company.

4. Looking into three different options, debt provides the firm with the highest value; IPO

and strategic partnership come second and third. This is relevant to the pecking order of

financing. If one relies merely on this data, one would conclude debt would be a viable option.

However, if we use realistic assumptions and consider the long-term sustainability of the firm,

Prada should proceed with an IPO. To maximize the value of the company through financing and

support the Asian expansion, Prada needs to conduct an IPO in the Hong Kong market.

Difficulties with tax treatment and dilution at the beginning will gradually disappear due to the

effects of better management and experiences.

The IPO would provide an opportunity for Prada to refresh and strengthen its brand image

to the Asian market. Moreover, Prada would be able to increase customer confidence by opting

for an IPO due to the strict listing and disclosure requirements. With all the advertising efforts for

an IPO, Prada’s sales figures could be expected to receive a healthy boost. Furthermore, an IPO

would increase Prada’s ability in recruitment and loyalty. The creation of an employee stock

option would be able to lower the agency cost for the company as the employees that hold shares

of the company would tend to be more motivated and have more loyalty towards the company. It

would also help Prada for future need of strategic mergers and acquisition (M&A), as they could

be partly financed with Prada’s common shares offering

Table 1. Prada Expected Sales

Italy Rest of North Asia- Japan Other Note
Europe America Pacific countries

Current sales 393.3 450.5 294.9 645.7 220.9 11.8

(€ millions)

Expected 1.0% 1.6% 0.8% 51.1% 8.7% -28.5% Assuming

growth rate in equals
2012 CAGR
Sales by 2012 397.23 457.71 297.26 975.65 240.12 8.44 2376.41
(€ millions)

Percentage of 16.72 19.26% 12.51% 41.06% 10.10 0.36%

sales % %

Expected 4.5% 4.5% 4.5% 10.5% 1.5% 1.5% From page 3

annual growth
2013-16

Sales by 2016 473.71 545.83 354.49 1454.60 254.85 8.95 3092.43

(€ millions)

Normalized 0.75% 0.87% 0.56% 4.31% 0.15% 0.01% 6.65%

annual growth
rate
Table 2. Free Cash Flow Projection
Year 2011 2012 2013 2014 2015 2016 2017

FCF (€ millions) 191.0 221.8 236. 252.2 269.0 286.9 Growth: 5%

5
Table 3. IPO Valuation
Initial Public Offering

rE 10.73%

rD 4.074%

Tax rate 34.7%

D/V 35.86%

E/V 64.14%

rWACC 7.84%

Value of Firm (€ millions) 11935.455

Value of Equity (€ millions) 7655.401

Table 4. Estimated Cost of Debt

U.S Market
Euro Market

Funds Raised for Prada SpA €750 Million €750 Million

12 month LIBOR 1.57% 0.83%

Cost of Issuing Debt 4.07% 3.33%

Interest Cost per year €30.555 Million € 24.975 Million

Annual Tax Shield (Tax Rate of 34.7%) € 10.6 Milliion € 8.67 Million

Table 5. Debt Valuation

Debt

rE 10.73%

rD 4.074%

Tax rate 34.7%

D/V 68.70%

E/V 31.30%

rWACC 5.19%

Value of firm (€ millions) 13260.364

Value of equity (€ millions) 4150.4938

Contents
Background 3
1. What is the current and future outlook for the luxury goods
segment over the next couple of years? How should Prada
position itself to prosper in this market? 3
2. Consider the pros and cons of the following methods for
Prada to raise capital, including an assessment of local versus
foreign markets and the types of investors: 2. IPO 3. Strategic
partnership 4. Issue debt? 4
3. How would you recommend the board of directors proceed?
5

Background
Prada currently requires a significant amount of capital both to re-finance debt that is
maturing in the next six to twelve months and to finance its intended growth into the
Asian (especially Chinese) markets. Since financial markets are aware of Prada’s
pressing need to raise capital, it is important for the board of directors to develop a
credible strategy for raising the necessary capital of at least €1 billion. Although the
press has been suggesting that Prada will do an initial public offering, the company
has tried this several times in the past with no success, mainly because of bad timing
(9/11, the SARS outbreak, and the ongoing global financial crisis and European
sovereign debt crisis). The board has approached Guido Santini of the investment
bank Grupo Capo Milano to come up with a number of credible alternatives and a
strategy for raising the needed capital.

1. What is the current and future outlook for the luxury

goods segment over the next couple of years? How
should Prada position itself to prosper in this market?
Luxury goods segment proved to be resilient to the economic crises and had
consistently grown from 1994 till 2010.The luxury industry grew approximately by 2%
per year until 2007, and by 1% per year from 2007 to 2010. Beginning from 2010,
the global luxury goods market started a new growth phase driven by emerging
markets. This was a significant change as growth was usually driven by the
developed markets, especially the US.

Prada needs to support a global portfolio of leading luxury brand. Following the
series of acquisitions and consistent with its attempt to become one of the top global
brands Prada consistently worked on expanding its global footprint by opening and
running its own stores around the world. In the future it should try expanding in the
Asian Market as the growth rate is on a rise compare to others parts of the world.
Also due to this more and more people are moving from middle class to a higher
class, which will increase the demand for luxurious products. Middle Eastern
countries might hold a lower population density compare to other countries, but the
demand for these high end products has been increasing at a pace. Prada can
capture a large market by opening its number of shops all around Asia and Middle
East and can enjoy a high profit gains before other competitors enter the market.

2. Consider the pros and cons of the following methods for

Prada to raise capital, including an assessment of local
versus foreign markets and the types of investors: IPO,
Strategic partnership and Issue debt?
Equity IPO in Hong Kong

Pros Cons

1. Higher valuation than listed in 1. HK market has lower liquidity

Europe
2. Potential tax problems
2. Aim to get closer to the Asian market

HKDR
Pros Cons

1. Listed in Milan but also can be bought and 1. May have lower valuation than
sold by investors in Hong Kong. IPO in Hong Kong

2. Help future negotiation in China 2. Higher cost than IPO

Strategic partnership

Pros Cons

1. Current price for PE transaction is 1. Higher cost than other alternatives

attractive
2. May cause partially loss of control of the
2. Higher premium corporation

Issuing Debt

Pros Cons

1. Easily Accessible 1. Further potential financial problem in the long haul

2. Tax shield 2. Higher leverage ratio

3. Low Yield

In my contemplation I choose IPO over Debt and Strategic partnership. Compare to

issuing debt, an IPO will not add any more burden to the company’s balance sheet,
which for Prada, was already showed a sign of insolvency and over leveraged.
Another issue is that no firms in this industry have ever raised money in US bond
market. Although “dim sum bond” – a Chinese Yuan denominated bonds issued in
Hong Kong could be the best alternative to this situation, however, the short life and
the exchange risk it involved are its most disadvantages. Considering the sale some
portion of the firm to the private equity firms to raise capital? For this deal, it seems
that they will not only offer a sizeable premium to the family, but also to offer some
important positions on the board too. But, compare to IPO, it will not increase
Prada’s publicity through this method. And also, an IPO in Hong Kong will give the
company more opportunity to expand their Asia market, especially in China and
Japan. Choosing a Strategic Partnership would be just like giving that huge potential
profit away.

3 .How would you recommend the board of directors

proceed?
The best solutions for Prada to solve this problem is to raise capital in the stock
market, which we could refer as IPO. For Prada, there are a number of alluring
reasons for to undertaking an IPO. The most obvious, and perhaps the most
powerful, reason a private corporation would take this step is the access to much
needed capital at, typically, much higher multiples than would be available in private
transactions. This infusion of new money will allow the company to reduce its
outstanding debt, enhance product development, or commit to expansion in Asia or
Middle East or to a more sophisticated, broader-based advertising campaign. The
capital provided by an IPO will also increase the company’s net worth, making the
company more attractive to lenders, who might then loan the company additional
funds at more favourable rates, providing a means of entry into different capital
markets for different projects.

The growth Prada is looking in Asia to increase its revenue and to become a leading luxury
brand in the world, given the current market conditions listing in Hong Kong might appears to
be the best choice after all. Going public manifests itself once a market is established for the
company's stock. If a sufficient volume of shares trade on a daily basis at a positive,
balanced multiple of the company's earnings, the company may be able to use its own stock
as currency to acquire other companies, thereby preserving cash for other purposes. This
would also be more able to accomplish an acquisition that is not taxable to the selling
company or its shareholders, which could reduce the acquisition p

ASSIGNMENT 2: PRADA

Refer to the HBS case "Prada: To IPO or Not to IPO" and answer the questions below.

Note: Complete the related textbook chapters (RWJJ Chapters 14, 15 & 19) before
attempting this case.

WHAT IS THE PROBLEM SAID TO BE FACING PRADA?

Prada got some financial trouble.

First, Prada failed for several times to IPO due to various reasons like SARS, financial crisis,
etc.

Second, because of the long-term debt maturing in one year, Prada needed to raise more
than 1 billion euros immediately.

Third, Prada at the same time wanted to expand the Asia market which has the highest
growth rate and has great potential.

Therefore, due to these problems, Prada was in desperate demand of a huge amount of
money and it is quite urgent. However, due to the failure of several times of IPO, Prada was
not quite sure which approach it should take to raise the capital.

LIST THE ALTERNATIVE METHODS PRADA COULD USE TO REFINANCE ITS

MATURING DEBT. IN ADDITION TO THE MANY ALTERNATIVES MENTIONED IN THE
CASE (START BY LISTING THOSE, GROUPING THEM IN THE TWO BROAD
CATEGORIES OF "DEBT" AND "EQUITY"), WHAT OTHER VARIATIONS OF THESE DEBT
AND EQUITY CHOICES CAN YOU IDENTIFY (TRY TO GIVE TWO OR THREE OTHERS)?

EQUITY
IPO in HK; HKDR; Strategic partnership

DEBT

Euro/dollar bond; Dim sum bond; Traditional corporate bond

OTHER VARIATIONS

ADR( American depository receipt); hybrid Eurodollar bond

USING (LF, OWNER OF TRINITY BRAND) AS BENCHMARKS, PROPOSE A METHOD TO

ESTIMATE PRADA'S COST OF EQUITY CAPITAL. HINT: "DIVIDEND DISCOUNT MODEL"
(RWJJ PP. 401-402). SEE EXHIBIT 10. ASSUME THAT DIVIDENDS FOR THESE
COMPARABLES ARE PROJECTED TO GROW AT 5%.

LVMH: R=Div/P + g = 1.77% + 5% = 6.77%

Li & Fung: R = Div/P + g = 1.89% + 5% = 6.89%

Therefore,

Prada: R= (6.77% + 6.89%)/2 = 6.83%

USING LVMH AND LI & FUNG AS BENCHMARKS, ESTIMATE THE MARKET VALUE OF
PRADA'S EQUITY CAPITAL (MARKET CAP, IN EURO) BASED ON THE FOLLOWING
RATIOS FOUND IN EXHIBIT 10: PRICE-EARNINGS (P/E), PRICE-TO-BOOK VALUE OF
EQUITY (P/BOOK), PRICE-TO-SALES (P/SALES), PRICE-TO-CASH-FLOW (P/CF), AND
PRICE-TO-FREE-CASH-FLOW (P/FCF). USE THE MOST RECENT DATA FOR PRADA
(2011).

EXPECTED MARKET CAP

P/E=(18.62+50.55)/2=34.585,

E = 253.6

34.585*253.6= 8770.756

P/Book=(3.38+9.78)/2=6.58

Book = 2366

6.58*2366= 15568.28

P/Sales=(2.78+1.63)/2=2.205

Sales = 2046.7

2.205*2046.7= 4512.9735

P/CF=(13.94+26.08)/2=20.01
OCF = 367.7

20.01*367.7= 7357.677

P/FCF=(18.53+27.76)/2=23.145

FCF = 79.5

23.145*79.5= 1840.0275

Expected Market Cap

=(8770.756+15568.28+4512.9735+7357.677+1840.0275)/5= 7609.94 million Euro

Therefore, the market value of Prada's equity capital (market cap) is estimated to be
7609.94 million Euro.

BASED ON YOUR AVERAGE ESTIMATE OF PRADA'S MARKET CAP IN QUESTION 4

(AVERAGE ACROSS METHODS FOR LVMH AND LF), WHAT PERCENTAGE OF ITS
EQUITY OWNERSHIP WOULD THE OWNERS (THE BERTELLI AND PRADA FAMILIES -
ASSUME THEY OWN 100%) HAVE TO SELL IF THE OBJECTIVE IS TO RAISE 1 BILLION
EURO?

1000/7609.94= 13.146%

Therefore, the owners have to sell 13.146% of its equity ownership to raise 1 billion euro.

WOULD YOU NECESSARILY ADVISE PRADA TO RECAPITALIZE (I.E., CHANGE ITS

CAPITAL STRUCTURE) IN THE PROCESS OF REFINANCING? IF SO, HOW AND WHY?
IF NOT, WHY NOT? WHAT ARGUMENTS CAN YOU MAKE TO SUPPORT YOUR
RECOMMENDATION?

I would advise Prada to recapitalize.

WHY:

Prada now is bearing too much long-term debt, which leads to its financial trouble and cause
impact on its operation of the company. Also, compared to other luxury fashion firms,
Prada's debt-to-asset ratio is much higher.

HOW:

I would advise Prada to IPO because first, issuing debt will undoubtedly put more pressure
to the company's financial trouble. Second, issuing "dim sum bond" involves some exchange
risk. Furthermore, selling some portion of the firm to the private equity firms will not increase
Prada's publicity. Last but not least, finding a strategic partnership would lose the potential of
expanding the Asia market. Therefore, compared to all the other alternatives, I advise Prada
to IPO, which can not only relive its current debt burden, but also help to expand the huge
and potential Asia market.

FINALLY, PROPOSE A FEW "OUT-OF-THE-BOX" ALTERNATIVES OUTSIDE THE

DEBT/EQUITY CATEGORIES. HINT: ANALYZE THE EFFICIENCY OF ITS BALANCE
SHEET AND THE NATURE OF ITS EXPENSES.
From the balance sheet we can find that Prada's inventory level is relatively high. So Prada
can put more efforts on its supply chain management, trying to improve the efficiency of its
supply chain. Prada can use some lean production strategy to optimize its inventory level
and minimize its inventory cost. As long as assets are liquidized, Prada can improve its cash
flow, pay back its debt and expand its market.