Net Present Value and Mercury

Jide Wintoki From: Richard Smith, Scott Mitchell, Zack Gregory Re: Mercury Athletic Acquisition Based on our analysis of Mr. Liedtke’s base case projections for a potential acquisition of Mercury Athletic, we have concluded that this is a positive net present value project, and that AGI should proceed with the acquisition. Under Mr. Liedtke’s operating assumptions, we calculate the value of Mercury’s discounted cash flows to be $624.446 million, and the acquisition price to be $156.643 million, yielding a net present value of $467,804 for AGI. Our calculations indicate that this project becomes even more attractive financially when potential favorable synergies between AGI and Mercury are taken into account. A real options valuation (details below) involving inventory management and the women’s casual line indicates that an additional $22.365 million of value would be created by the successful implementation of fairly simple operating synergies in those two areas alone. Considering that far more possible synergies and savings are a possibility for AGI and Mercury post-acquisition, we believe this acquisition would be an appropriate strategic move for AGI to improve its own performance and to compete on a more level playing field with the larger companies in the industry. Methodology/Supporting Assumptions To estimate the price of acquiring Mercury, we averaged the P/E multiples of comparable companies in the industry and applied that multiple to Mercury’s 2006 net income to arrive at a likely purchase price. P/E was used because we believe it is the most accurate reflection of the market’s view of Mercury’s recent performance and value. Kinsley Coulter and Templeton Athletic were used as the two comparable companies because, along with AGI and Mercury, they are the only other companies in the industry with annual revenue of less than $1 billion (Marina Wilderness also has revenue less than $1 billion, but because it is the fastest- growing company in the industry