Hog Wild for a Buyout?

March 18, 2010

Could Henry Kravis handle a hog? Harley-Davidson’s shares revved up this week on talk of a leveraged buyout, and Mr. Kravis’ firm, Kohlberg Kravis Roberts, was one name mentioned. The iconic motorcycle maker can absorb plenty more debt, though the price tag and the cyclical nature of the business mean a deal would be no easy ride.

Harley has roared back to life, overtaking frets about its aging customer profile and younger bikers opting for rival brands like Ducati. At around $28 apiece, Harley’s shares are more than triple their recession low, including Tuesday’s 6 percent bounce. Figure any deal would require a premium of at least 30 percent, and the implied equity valuation would be about $8.5 billion.

The company is expected by analysts to generate earnings before interest, tax depreciation and amortization (EBITDA) of $950 million in 2011. Strip out Harley’s financing arm for simplicity and adjust for its $1.7 billion of cash, and that price tag would peg its enterprise value at a little more than 5.8 times EBITDA. That’s a bit rich but not outrageous.

Of course, any Harley buyer would scrutinize the financial services unit, which is used to extend credit to the Milwaukee manufacturer’s customers. It had $5.1 billion of receivables at the end of last year, and heavy borrowing at the parent company would risk trashing the finance arm’s ability to fund itself.

But with careful structuring, there seems to be room to gear up. Only $600 million of Harley’s $5.7 billion of debt relates to the manufacturing part of the business, according to Wells Fargo estimates. For leveraged buyouts, depending on the deal, banks are starting to stretch to debt multiples of 5.5 times EBITDA. At that multiple, KKR or another private equity buyer could borrow some $4.6 billion and would need to stump up about $3.9 billion of equity or 46 percent of the total price — a big but feasible sum.

This back-of-the-envelope scenario suggests any buyout would run close to the limits. But the idea of Mr. Kravis or another buyout baron cruising off with Harley isn’t entirely hog-wild.


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“earnings before interest, tax depreciation and amortization (EBITDA)” – you missed a comma there, if only we could depreciate tax !

Don’t forget about free cash flows.

Posted by Ghandiolfini | Report as abusive

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Posted by Friday links: a bullish extreme Abnormal Returns | Report as abusive

hello. “Live TO Ride” is a symbiotic relationship of core customers to a specific product. it is eternal if the product remains true. i am always dumbfounded by their financial losses, as their prices are slightly above value.
ownership changes have cost product integrity, and harmed value. this American icon satisfies a tiny and self destructive market. without faulting people wanting out, this is an illusion of grandeur inflated unrealistically.

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