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    Interco

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    Prithviraj Radhakrishnan
    Interco has four divisions: retail, apparel, footwear, and furniture. While apparel and retail previously made up 59% of revenue, they now account for 40% as the company has shifted emphasis to shoes and furniture. Profits have dropped in retail and apparel. City Capital has acquired 8.7% of Interco shares and proposed buying more at $64 per share. Interco may be undervalued due to poor performance in the apparel division dragging down the stock price. City Capital's offer of $64 per share is low compared to industry standards, as Interco is the market leader.

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    Interco

    Uploaded by

    Prithviraj Radhakrishnan
    123 views3 pages
    Interco has four divisions: retail, apparel, footwear, and furniture. While apparel and retail previously made up 59% of revenue, they now account for 40% as the company has shifted emphasis to shoes and furniture. Profits have dropped in retail and apparel. City Capital has acquired 8.7% of Interco shares and proposed buying more at $64 per share. Interco may be undervalued due to poor performance in the apparel division dragging down the stock price. City Capital's offer of $64 per share is low compared to industry standards, as Interco is the market leader.

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    Interco has four divisions: retail, apparel, footwear, and furniture. While apparel and retail previously made up 59% of revenue, they now account for 40% as the company has shifted emphasis to shoes and furniture. Profits have dropped in retail and apparel. City Capital has acquired 8.7% of Interco shares and proposed buying more at $64 per share. Interco may be undervalued due to poor performance in the apparel division dragging down the stock price. City Capital's offer of $64 per share is low compared to industry standards, as Interco is the market leader.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    123 views3 pages

    Interco

    Uploaded by

    Prithviraj Radhakrishnan
    Interco has four divisions: retail, apparel, footwear, and furniture. While apparel and retail previously made up 59% of revenue, they now account for 40% as the company has shifted emphasis to shoes and furniture. Profits have dropped in retail and apparel. City Capital has acquired 8.7% of Interco shares and proposed buying more at $64 per share. Interco may be undervalued due to poor performance in the apparel division dragging down the stock price. City Capital's offer of $64 per share is low compared to industry standards, as Interco is the market leader.

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    INTERCO CASE STUDY

    SOLUTION

    PGP31302
    DEWANSH zANWAR
    Interco:
    Interco has 4 divisions – retails, apparel, footwear and furniture. The company has been
    moving from apparel and general retail (from 59% to 40%) but it still forms large chunk of its
    revenue. It aspires to improve long term sales and improve return on shareholder’s equity.
    Currently the imports have been hurting the profitability of the Interco. As profit drops in
    retail and apparel, its emphasis on shoes and furniture have increased.

    Is Interco rightly valued:


    The sales of Interco has been rising, with 4.04% in 1987 and 13.39% in 1988. Earnings has
    been growing from 4.51% growth in 1987 to 13.97% in 1988. Apparel business earnings
    dropped from 6.7mn in 1986 to 2mn in 1988, which is 19.7 overall drop in earnings. Hence
    though overall company performance has been improving not all the departments are
    showing sign of improvement.
    Bad performance in apparel group is taking the stock price of Interco down. Hence it may be
    undervalued because of few divisions.
    City capital is trying to acquire Interco. It already acquired 8.7% shares and proposed buying
    more at 64/share.
    Deals (a) One day 4 weeks 52 weeks 52 weeks
    low high
    1Q 1988 19 62.3% 95.5% 159.5% 16.7%
    2Q 1988 9 68.6% 91.3% 182.8% 31.5%
    3Q 1988 (b) 12 36.5% 9.9% 181.3% 2.6%
    1988 40 56.00% 80.9% 171.3% 15.8%
    Rales 17.9% 59.1% 137.3% 17.2%

    Value Interco = discounted first 10 flows + TV10/(1+r)^10


    Value Interco equity = Value Interco – 318.5
    Price per share = value of equity / 37.5mn shares
    Stock price for Interco
    14 times 15 times 16 times
    10% 80 84 87
    11% 74 77 81
    12% 69 72 74
    13% 64 66 69
    14% 59 61 64
    Interco is market leader. Looking at the proposals made, City’s offer are low compared to
    industry standard.

    2. When will a firm not be rightly priced?


     When there is uncertainty in estimation and hence too much importance is given to
    some initial known information
     When there is uncertainty on the part of firm’s aspired growth through means like
    acquisition
     When there is uncertainty in overall macro-economic environment and hence due to
    high fluctuation in interest rates etc. might change the valuation
     If given above factors are not uncertain but the method used is incorrect.
     When though others things might be right but there are technical errors-Calculating
    wrong beta, WACC, cash flow or other input parameters used in valuation
     Reliance on comparable company multiples
     When revenue expectations are not balanced and may be too optimistic expectations
    and inconsistency with operating expenses

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