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ISS REPORT: CORRECTING THE RECORD
ISS Valuation Methodology
ISS Assertion
Correcting the Record
Discounted Cash Flow
Suggests that financial advisors
fairness opinion applied NTM
EBITDA multiple for terminal
value rather than LTM multiple in
arriving at the DCF valuation
range of $39.71 - $ 51.55 per
share (pages 4 and 26)
Fairness opinion materials clearly show that calculation of terminal value is based on LTM,
not NTM multiples (page 18 of November 22 financial advisor presentation)
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This fact was explained in a conversation with ISS analysts on February 17, 2011
Therefore, no adjustment is necessary and the $39.71 - $51.55 DCF range is correct
Discounted Cash Flow
ISS calculates terminal value in
2014 by applying LTM multiples
to NTM EBITDA, yielding a
value shortfall per share of
$3.57 and an ISS DCF value
range of $43.28 - $55.12 per
share (page 26)
Applying LTM multiples to NTM EBITDA does not follow generally accepted principles of
corporate finance and overstates terminal value
In addition, ISS fails to adjust for the 2015 cash flows when it calculates terminal value in
2014, thereby double-counting the 2015 cash flow in its DCF value
-
Adjusting for 2015 cash flow, methodology used by ISS yields a difference of
approximately $1.00 per share, implying a value range of approximately $40.73 - $52.49
per share vs. fairness opinion range of $39.71 - $51.55 per share
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In addition, the ISS methodology is based on an unusual DCF period of 4 years vs.
industry standard (and period used in fairness opinion) of 5 years
Premiums Paid
Premiums paid analysis
suggests a 1-day mean premium
of 36% and 4-week mean
premium of 42% (higher than the
J.Crew transaction premiums of
16% and 33%, respectively)
(pages 6 and 33)
ISS premiums analysis reflects 1-day and 4-week prices prior to unaffected date
The Charlotte Russe premium is based on an unaffected share price approximately 7
months prior to announcement, generating 1-day and 4-week premiums of 216% and 201%
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Charlotte Russe is a clear outlier given the long time period prior to announcement and
skews the resulting premium data
Excluding the Charlotte Russe transaction, the revised mean for the 1-day and 4-week
premiums would be 14% and 22% and the median would be 4% and 20%, respectively
As calculated by ISS, J.Crews 1-day and 4-week premiums of 16% and 33% compare
favorably to the revised ISS mean and median data
Stand-alone Value
ISS concludes that the market
had already priced in skepticism
about earnings long before the
Q3 earnings announcement
(page 27)
Markets consensus estimates for Q4 were more than 50% greater than the announced
guidance
There was no indication from market pricing or analyst reports incorporating the full
magnitude of the Q4 guidance
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