A Case Study On Prada and Its Solution

INTRODUCTION
Prada is an Italian brand with luxury collections involved into it and deals with
leather handbags, travel accessories, shoes, ready to wear items, perfumes and
other fashion accessories involved into it. The brand was founded in the year
1913 by Mario Prada.
In today’s business Prada is involved in hosting seasonal runway shows on the
international magazines and calendars.
Prada has actively engaged architects and other person to design flagship stores
in various locations.
Prada is also actively involved in the business of eyewear which is manufactured
by Luxottica. The brand is also involved in the business of fragrance for both
men and women. In year 2007 Prada started manufacturing mobile phones with
the help of LG electronics. Watch business was also started in the year 2007 but
the same was suspended in year 2012.Prada is actively involved in various
culture activities like films, art and others.
Issue 1
What are the pro and cons for Prada to be listed in Hong Kong? You might
analyse the issue from the family and minority shareholders perspective, from
the company point of view (finance, strategy…) and from the lead banks
perspective.
An IPO goes well only when any company has a growth-oriented story that needs
to be financed. In this way IPO can act as an effective marketing tool .If a newly
introduced brand want to tap the market at the earliest ,listing on the stock
exchange in the same particular region can raise the profit of that particular
brand such was the case which was observed with Prada’s Hong Kong listing.
There are also downsides involved into it as to have a company publicly listed.
Firstly,if the situations are bad enough than the listing of such company can be a
curse. From above all these there is always a pressure from the investor end to
always post a good quantum of profit with a growth prospects can also lead to a
very short term thinking process that can create a very negative effect on the
way a brand a managed .It always means to devalue the long term desirability in
a favour of short term growth.This is the reason the company are not willing to
bring their IPO and want to remain as a privately owned company instead of
public company. If the company is a privately owned company disclosure for the
same is not required to be done about the managing status of the firm.
According to one of the famous persons Rotaliid you grow too fast there is a risk
to overexpose yourself. Growth can be fast because there’s money from the IPO”
(The Business of Fashion, 2020)

Issue 2
Risk of being listed
The risk that company may face on listing are detailed as under:
(a) Higher disclosure and accountability;
(b) Increase in compliance burden;
(c) Approvals and documentation;
(d) Market sentiments play a key role in determining the valuation of company
Risk of getting listed
The major risk of getting listed has been witnessed in the case of Prada itself
which is market condition. The company has tried multiple times to get listed
and was unable on account of unfavourable market conditions. Further, listing
involves lot of compliances and disclosure of information which private
companies are not required to disclose. Restriction on transferability of shares is
waived off when shares are listed on stock exchange.
Issue 3
The Forward PE and Forward EV/EBITDA has been computed by taking simple
average of the P/E and EBITDA comparable as provided under Exhibit 3. For the
purpose of computation of P/E, EPS per share of comparable companies has been
computed. Post computation of EPS, the same is divided by market price of share
to determine the P/E ratio for three years.
Similarly for EV/EBITDA, enterprise value has been computed by using the
formula equity + debt – any cash and cash equivalent in the books of the
company.
Based on above, the simple average P/E of the industry has been computed at
19.94 for 2011 e and EV/EBITDA has been determined at 12.27 for 2011e.
Post above computation, the EPS per share for 2011 for Prada has been
determined and the said EPS is multiplied to determine Price and a premium of
20% has been charged to estimate probable IPO price.
Further for EV/EBITDA ratio, EBITDA has been determined and EV is computed.
Also, the current debt and cash has been adjusted to determine the market
capitalisation of equity.
The price computed on the above methodology is 3.19 and 3.42 for P/E and
EV/EBITDA Multiple. Since EBITDA is a more appropriate model, the same may be
chosen for the purpose of computation of IPO price.
Issue 4
Part 1
The Discounted Cash Flow Method has also been used to determine the IPO
share price under the given case and circumstance.

The computation of free cash flow has been done in the following manner:
Step 1: EBIT has been determined based on given data;
Step 2: Tax rate has been taken at 27%
Step 3: EBIT post tax has been computed to determine EBI
Step 4: Depreciation and amortisation is added to same
Step 5: Capital Expenditure has been reduced
Step 6: Change in working capital has been reduced;
Free cash flow is computed for six years ranging from 2011 to 2016
Part 2
WACC has been computed by taking 10 year government bond yield rate of
3.55% as increased by risk premium of the Prada equity. The rate of discounting
or WACC shall be 8.55% is because yield on 10 year security shall represent the
risk free rate of return of the market and 5% shall represent the additional risk of
the equity shares of the company. Thus, computation of WACC shall be 8.55%
which is simple addition of risk free rate of return + Risk premium.
Part 3
The perpetual growth rate has been assumed to be 2.5% and 2016e free cash
flow to firm has been determined at 763.11 Million. The same has been increase
by growth and divided by the resultant of WACC and growth to determine the
terminal value under DCF technique.
For EV EBITDA measure EV has been computed previously and imported to
determined the simple average terminal value of the company. The said amount
has been determined at 10464.28 Millions.
Based on above computation, the share price under DCF technique has been
determined at 3.04 per share which is lower than the value computed under
multiples as there is premium accounted for the purpose of computation of share
price under multiples.
Part 4
The pre money share price has been computed in the following manner:
Step 1: Computation of Present value of firm by discounting the cash flow of the
firm.
Step 2: Reducing the Debt from the enterprise value
Step 3: Adding cash and cash equivalent to determine equity market
capitalisation
Step 4: Dividing the market capitalisation with the number of shares outstanding
to determine the share price
Based on above computation, the share price under DCF technique has been
determined at 3.04 per share which is lower than the value computed under

multiples as there is premium accounted for the purpose of computation of share
price under multiples.
Further, post money share price shall remain same assuming that the company
issues new share at the said price, since data regarding the same is absent in
the case study.
References
The Business of Fashion. (2020, March 20). To IPO, or Not to IPO. Retrieved from
www.businessoffashion.com: https://www.businessoffashion.com/articles/intelligence/ipo-
ipo