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American Greetings Case Solution

Solution Id Length Case Author Case Publisher
499 664 Words (4 Pages) Michael J. Schill Darden School of Business : UV6643
This solution includes: A Word File A Word File and An Excel File An Excel File

If one takes a detailed look at the selected financials of the listed companies, it becomes apparent that in consideration to its financial figures, the EBDITA multiple of American Greetings is not justified. In fact, the EBDITA multiple to share price ratio of American Greetings is 0.28 which is substantially below than the peer companies. From the perspective of valuation, this multiple is not suitable at all because it does not capture the future earnings of the company. In the case one wants to value American Greetings, the EBDITA multiples of close peer companies should be applied. However, the list of companies contains a diversified pool of participants that may be substantially smaller or larger in the comparison of size of American Greetings. Therefore, only those peer companies should be shortlisted which possess comparable size. Market capitalization is a suitable measure of size. In this regards, only three companies have comparable EBDITA multiples. The following table details out the calculations.

Following questions are answered in this case study solution:

  1. The shares of American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If not, what multiple of EBITDA do you think is justified? What is the implied share price that corresponds to that multiple? (Note that the EBITDA multiple, which compares Enterprise Value to EBITDA, is calculated as follows: [Book value of debt + Market value of equity] / EBITDA)

  2. As mentioned above, model the cash flows for both a bullish and bearish scenario and set out your value for the enterprise and for its shares based on these two scenarios. Be sure to fully explain your calculation of the discount rate used in your model.

  3. Do you recommend the proposed $75 million share repurchase plan? If so, what implementation issues need to be considered?

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American Greetings Case Analysis

1. The shares of American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think a 3.5 times multiple is appropriate for American Greetings? If not, what multiple of EBITDA do you think is justified? What is the implied share price that corresponds to that multiple?

If one takes a detailed look at the selected financials of the listed companies, it becomes apparent that in consideration to its financial figures, the EBDITA multiple of American Greetings is not justified. In fact, the EBDITA multiple to share price ratio of American Greetings is 0.28 which is substantially below than the peer companies. From the perspective of valuation, this multiple is not suitable at all because it does not capture the future earnings of the company. In the case one wants to value American Greetings, the EBDITA multiples of close peer companies should be applied. However, the list of companies contains a diversified pool of participants that may be substantially smaller or larger in the comparison of size of American Greetings. Therefore, only those peer companies should be shortlisted which possess comparable size. Market capitalization is a suitable measure of size. In this regards, only three companies have comparable EBDITA multiples. The following table details out the calculations.
Table 1: EBDITA Multiple

Company

Market Cap

EBDITA Multiple

Share Price

EBDITA Multiple/Sp

Blyth

 $      466.90

11.73

56.80

0.21

Central Garden & Pet

 $      392.01

7.80

8.16

0.96

Consolidated Graphics

 $      494.39

5.65

48.28

0.12

 

 

 

 

 

Average

 $      451.10

8.392

37.747

0.222

Implied Share Price

 $        37.75

 

 

 

The average EBDITA multiple comes out to be 8.392. This figure should be used for valuation. If the average EBDITA/Share price ratio of three companies is taken into account, then the implied share price comes out to be $37.75.

2. As mentioned above, model the cash flows for both a bullish and bearish scenario and set out your value for the enterprise and for its shares based on these two scenarios. Be sure to fully explain your calculation of the discount rate used in your model.

The first step in the valuation is the calculation of the WACC. The debt ratings of AG are BB+. Exhibit shows that for the prescribed ratings, the effective ten year yield is 5.8%. If 40% tax bracket is applied, then the after tax rate of debt comes out to be 3.48%. The risk free rate is assumed to equal to 10 year government bond. As the time horizon is less than a decade, inclusion of 1 month yield is not justified. Given values of beta and equity premium are taken. The cost of equity comes out as 10.95%. Market capitalization value is used in the computation of WACC. The WACC comes out to be 8.4%. The following tables explain the WACC and valuation calculations. The share price for bullish and bearish scenarios stand at $36.89 and $12.42 respectively.

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