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Statement of Situation

Berkshire Partners, a private equity firm based in Boston, was invited to bid for Carters, the largest

branded manufacturer of toddler and baby apparel in the United States !he invitation came from

"oldman Sachs #"S$, the investment bank who was running the auction "S was also offering staple%on

financing to e&pedite the bid Berkshire decided to place a bid for Carters, and intended to use a mi& of

equity and debt financing to conduct the purchase !his paper advises Berkshire on the bid amount, as

well as the appropriate debt and equity ratios to ma&imi'e Berkshires rate of return on this investment

Economic and Industry Analysis

!he end of ())) saw the culmination of a decade of rapid economic e&pansion US "*P growth was

+- in ())), down from +.- in /// !hroughout the year, there were signs of an economic slowdown,

manifested in Congress passing a ma0or ta& cut, with the hopes of stimulating consumer and business

spending 1oreover, the 2ederal 3eserve cut interest rates ) times in ())) !his led analysts to believe

that the 2ed had sufficient information to foresee an economic slowdown

Changes in economic perceptions are of high interest to apparel companies like Carters !he apparel

industry is very cost sensitive4 fluctuations in the prices of raw materials, cost of energy and

transportation directly impact the bottom line 5n slowing economic times, consumers are e&tremely price

sensitive, meaning manufacturers cannot easily pass down increasing costs to consumers

Financial Analysis

6ooking at Carters competitors, we found that !he Childrens Place, 7shkosh B"osh and

"ymboree more closely resemble Carters in terms of asset si'e, sales volume and 8B5!*9 Per our

analysis, 8nterprise value to 8B5!*9 ratio is the most appropriate to use in order to establish our e&it

multiple :e consider managements sales growth pro0ections adequate when taking into account the

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current economic environment, as well as strategies undertaken by Carters management to grow the

company and make it more efficient Based on the *C2 pro0ections, the enterprise value gives us a

reasonable assessment of Carters intrinsic value

Carters has reduced its costs over the last few years and has formed strategic

partnerships with ma0or retailers like !arget !herefore, we anticipate an increase in inventory and

receivables for the ne&t few years, manifested in our pro0ections for changes in ;:C

:ith our proposed financing structure, we anticipate to generate enough cash flows to pay the senior debt

in full in the first three years of ownership :e then intend to use all available cash flows to pay off the

senior subordinated notes !he company will be able to generate free cash flows beginning in ())

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