PRADA’S HONG KONG IPO

Case Study
 Table of Content

Answer 1..........................................................................................................................................3

Pros..............................................................................................................................................3

Cons.............................................................................................................................................4

Answer 2..........................................................................................................................................5

Risks associated with listing........................................................................................................5

Answer 3..........................................................................................................................................6

PE Ratio.......................................................................................................................................6

EBITDA ratio...............................................................................................................................7

Answer 4..........................................................................................................................................8

DCF Valuation for IPO................................................................................................................8

References......................................................................................................................................10
Answer 1

Prada consented to move into the IPO, the initial public offering to raise capital. This is a fruitful

method for raising capital since it permits numerous new investors to sell the shares of a

company. There are a few advantages of the IPO, including the appeal of working for a publicly

listed firm, which gives the opportunity to top ability to have equity in the company. It

additionally takes into consideration greater liquidity and urges the company to keep on selling

shares as long as there is a market for them (Fleischer, 2007). Notwithstanding, it additionally

brings significantly more examination, taking into account that publicly exchanged firms have a

large group of different administrative bodies and laws regulating them? business to secure

investors including having a required board of directors (Investopedia, n.d.).

Pros

Hong Kong's stock exchange had built up itself as a significant trading place, bested the IPO

revenue graphs in 2009 and 2010, and began to draw remote issuers. Its greatest intrigue was the

10% to 15% price premium organizations that may anticipate from different markets, which

experts ascribed to local investors to ' get ' what China would mean for a company. Prada ticked

the majority of the crates for a global listing there: a strong financial reputation, a predictable and

developing nearness in China, and a growth story sponsored by a valid marketable strategy.

With extravagance multiples at a three-year high and in accordance with the 10-year normal, the

planning seemed ideal (Tebben, 2007).

One issue was that investors expected Hong Kong IPO revenues to go to business growth in

Asia, while Prada's IPO will for the most part be a secondary offering. Another worry was that
the pending Milan IPOs of the famous Italian sportswear company Moncler and the shoemaker

Ferragamo could demoralize investors ' hungers for Prada's shares.

Notwithstanding quick access to funds, the IPO will likewise advance potential financing for

both the company and its proprietors. Through listing, Prada could get to new debt and equity

markets and use shares as a collateral in acquisitions (Emmitt, 2001).

Furthermore, by setting a price and a competitive stock market, listing will make it simpler for

proprietors to take an interest in greater equity sales following a one-year lock-up period, or to

utilize stock as collateral for loans. Hong Kong's stock market was likewise engaging starting

there of view, as the liquidity it gave made it simpler to gather follow-up funds. Meanwhile,

Prada will have the option to tap an enhanced global institutional financial specialist base. U.S.

what's more, European investors, just as Asian investors, may partake in Hong Kong IPOs with

less dynamic remote interest (Zingale, 2006).

Being the principal Western extravagance listing in Hong Kong, Prada will likewise impart a

reasonable sign about its Asian aspirations and raise brand acknowledgment in Asia. Likewise,

the IPO will make it feasible for Prada to furnish representatives with stock-based motivating

forces and to set up an administration framework to address the plain contribution of the family

in management.

"Opening up to the world" included considerable expenses: while a little rate for Hong Kong and

one generally saved for super IPOs, 1.9% of IPO sales will go to bank charges. A further 2.5

percent will go to lawyers ' and examiners ' charges and costs for listing, arbitration, commercial,

and so forth. The IPO would likewise take significant management time(Ishijima, 2000).

Cons
The proceeding with expenses of "being public" were likewise high. This remembered

announcing for day by day financial statements and intermediary reports, public relations system,

examiner and speculator gatherings, news releases, and so forth. The media ought to be basic, as

one of the objectives of the Hong Kong IPO was to contact Asian clients. Hong Kong investors

likewise had unique educational needs.

' For Prada's situation, they would bring about capital additions tax and retain profit tax in Italy.

This would be unfamiliar to them, as Hong Kong had no capital additions tax, no sales tax or

VAT and a base income tax.

Another worry for the family was that it is mindful to new shareholders and have less

opportunity of training. While the chance of a takeover was low considering the 80 percent

shareholding the family would keep up, there would in any case be strain to deliver transient

outcomes and meet the investigator's conjectures (Barone, 2011).

Prada is customarily an exceptionally European nation, so moving to Hong Kong decreases the

European effect on the way of life of the business. Financially, be that as it may, it is a savvy

choice since China has great IPO backing and it should be a profitable spot to dispatch the IPO.

Prada and different organizations working globally face the threat of the exchange rate moving

against them. At the point when the cash debilitates, a lot of cash can be lost.

Answer 2

Risks associated with listing

The risk that the necessary subsidizing won't be expanded if the market doesn't acknowledge the

IPO price.
There is lost control and more grounded issues with the organization because of new

shareholders who reserve the option to cast a ballot and can successfully control the choices of

the company through the board of directors. There is an expanded risk of lawful or

administrative issues, for example, private protections class activities and investor activities

(Doyle,2010).

Changes in the offer price of a company can be an interruption for management that can be made

up for and evaluated based on stock execution as opposed to base on genuine financial outcomes.

Techniques used to swell the estimation of the shares of a public company, for example, the

utilization of exorbitant debt to repurchase shares, can build the risk and volatility of the

company.

Inflexible leadership and administration by the Board of Directors can make it progressively hard

to keep up great supervisors ready to face challenges.

Answer 3

Another decision for Prada is a vital coalition with other private equity firms that look for a

reasonable return on their venture. Private equity and financial accomplice speculation are

unmistakable from the public offering, as the shares are not sold on the market and the

arrangement is made exclusively to the included gatherings. Private equity firms commonly sell

their shares after they have exchanged the co-proprietorship (Giuli, 2014).

To request to decide Prada's equity worth in the feeling of a key relationship, we should initially

gauge the valuation of the company. We will utilize the Bulgari Enterprise Value to Revenue

ratio of multiple times; Prada's 2011 revenue are equivalent to 2017.

PE Ratio
The company's anticipated P/E is additionally used to compare current earnings with anticipated

future earnings, just as to improve comprehension of what profits will resemble without charges

and other bookkeeping changes. In the event that future earnings are anticipated to expand, the

anticipated P/E would be lower than the present P/E. This computation is often used to liken one

company to another with a forward-looking.

Trailing P/E depends on what has just been finished. This uses the present offer price and looks

at the total EPS earnings in the course of the most recent a year. The P/E ratio can be impacted

by non-working profits, for example, the selling of part of the company. This may increment

drastically for the present year or quarter. However, it cannot be duplicated again and again. In

this way, PE Ratio without NRI is a more dependable valuation marker than PE Ratio (Espinasse,

2014).

Contingent upon the most recent a year, the P/E ratio of Prada is 31.62. This is equivalent to

earnings return of around 3.2%.

EBITDA ratio

EUR 1 million (exhibit 3), the Enterprise Value is therefore EUR 6051.3 million. So we'll 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.

Also, because financial investors do not really want to be part of day-to-day activities, the issue

of dilution control is not as bad as in the IPO.

If well handled, a strategic alliance could turn out to be a win - win approach, in which the

financially troubled Prada will earn turnaround and return funding, private equity investors

would get higher returns if Prada strengthened its finances and increased its overall value.

Answer 4

DCF Valuation for IPO

For the figuring, we accept that Prada's anticipated revenue growth rate for each market in 2012

is equivalent to CAGR, prompting a complete offer of € 2,376.41 million out of 2012. What's

more, we expect that Prada's growth rate would standardize to a comparable degree of by and

large market growth from 2013 onwards. We assume that the growth rate in different nations is

equivalent to that of Japan. The absolute sales of Prada will hence reach EUR 3092.43 million by

2016, with a yearly growth pace of 6.65 percent from 2013 to 2016. We likewise expect that the

since quite a while ago run by and large sales will develop at a 5% rate for each annum after

2016, Allowing China's anticipated inflation rate premium of roughly 3.2 percent in 2013. Along

these lines, we expect that Prada's Free Cash Flow (FCF) will ascend at a similar rate as its

revenue.

For the beta of Prada, the normal beta of 1.02 is utilized by comparable extravagance firms. At

that point we utilize the geometric normal return of 10.58% for the Hong Kong Hang Seng Index

from 1991 to 2011 as an intermediary for market return (Piergentili, 2012).

The risk-free rate is 3% as of January 2011, in view of the 10-year Hong Kong government

security yield. The necessary return on Prada's equity is hence 10.73 percent.

The current debt/resource ratio of Prada SpA is 1155.9/2366 = 48.85 percent and this will

decrease to 35.86 percent on the off chance that we assume that EUR 20 0 million of the EUR

1.5 billion IPO sales will be utilized to limit debt and EUR 300 million will be put into Prada

SpA. The debt cost of Prada is determined to be LIBOR in addition to 2.50, which is 4.074

percent based on the year Euro LIBOR pace of 1.574 percent toward the finish of January 2011.

The tax rate is 34.7%. Along these lines, we have the WACC and the interest of the firm as

appeared in the table.

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