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Case 43

Company Valuation

American Greetings

Group 1
M. Faizan Wajid 20110332

Ali Zafar Haider 20110168

Waseem Akram 19110277

American Greetings
Executive Summary:
American Greetings is a greeting card seller based in United States; it is the second largest
player in the market with annual revenue of around $1.7 billion with Hallmark being the largest
player in the industry with $4 billion annual revenue. Primarily, American Greetings is offering
greeting cards through traditional retail channels and online platforms as well. In addition to
greeting cards, company is also providing number of various other products including giftwrap,
candles and party goods. American Greetings owns a number of major brands including Carlton
Cards, Gibson, Recycled Paper Greetings, Papyrus and Design Ware. Apart from these brands,
company also owned a number of different characters including Care Bears, Strawberry Shortcake,
Holly Hobbie, The Get Along Gang and The Nickelodeon Character. Through licensing these
characters, company was able to earn some extra revenue.

Industry Conditions:
At that time, the greetings card industry was dominated by Hallmark which was owned by
Hall family. Hallmark had an annual revenue of about $4 billion dollar. Hallmark was based in
Kansas City but it expanded its operations to 100 countries. According to the market analysts, the
market had already declined by 9 percent and was expected to decline further in next four years.
Mintel maintained that the best-case scenario would lead to 4 percent decline the market whereas
in worst-case scenario, overall market for greeting cards may decline by 16 percent which was
huge. This market contraction was a significant concern for both of the firms including Hallmark
and American Greetings. There could be various reasons for such a shrink the industry, but the
major reason was the substitution of other social media networks. Technological advancements
and these different social media platforms such as Facebook had provided a more convenient
platform for expressing love for beloved ones or exchanging greetings. American Greetings
introduced electronic cards those could be sent through online websites and they also placed kiosk
at different retails stores where customers could customize their own greeting cards. They
expanded their distribution system to ensure the presence in dollar stores as well. Considering the
situation of the industry, it was evident that American Greetings was facing some major challenges
at that time but despite of these challenges, people continued to buy greeting cards.

The time at which case is being discussed is 1st January, 2012. At that time, the share price of
American Greetings was about $12.51. Unlike many other organizations, fiscal year of American Greetings
ends in February. According to the valuations, the PE ratio of the firm was 6 times and its EV to EBITDA
ratio was 3.5 times. American Greetings had an annual revenue of $1.7 billion dollar in last year.
Considering the industry conditions and firm’s performance, there were major concerns about the growth
and future of the firm because for the last years, the revenue growth had been nearly zero percent.

The case talks about the four problems.

1. Is 3.5x value justifiable? If not, what would be the value of the multiple and corresponding share
2. Financial Forecast 2012-2015? Company Value and Share Price?
3. Key Drivers for Valuation
4. Should it buy $75M shares? What should be the share price?

EBITDA Multiple:
We had to determine if 3.5 times multiple was appropriate for American Greetings?
And If not, what multiple of EBITDA was justified? Furthermore, what was the implied share
price that corresponds to that multiple? Based on the past performance and the expected
performance of the company, we have determined that the 3.5 EBITDA multiple is not justified.
The formula used by American Greetings to calculate their Enterprise value does not take into
account the total cash and cash equivalents that have to be subtracted. If we correct this mistake,
then the enterprise value comes out to be 628.36 million. Accordingly, the EV/EBITDA multiple
for the given EBITDA of 204 million turns out to be 3.08 instead of 3.5. The firm has experienced
increased its sales through increased spending on marketing and through expanding into new
products, and it enjoys the second largest market position. Therefore, we can reasonable expect
that the company could be able to achieve a multiple equivalent to that of the industry’s average.
If shares of American Greetings were able to trade at an industry average EBITDA
multiple of 7.47, the enterprise value of the company would be estimated at $1526.54 (7.47*204)
and the estimated equity value of the company would be $1291.9 (1526.54-235(debt)). By using
the eestimated equity value/Shares outstanding, the valuation would create an American
Greetings’ implied share price of $33.71 (1291.90/38.32). The share price calculated by using the
industry’s average EBITDA multiple creates a much better position for American Greetings
relative to the one it currently holds.

Financial Forecast and Determining Discount Rate:

The key drivers of used in our models are
 Free cash flow forecasts
 Revenue growth
 Weighted cost of capital
 Tax rate
 Terminal value.
Using these key drivers, we were able to calculate the present value of the firm in each of
our three scenarios, which in turn, allowed us to determine the share price under each scenario.
The model shows that variation in any of these key drivers results in a significantly different
enterprise value.
With the information provided in the case the WACC was calculated to be 8.510%. The
market value of debt and equity were 235 million and 479 million respectively which resulted in
weights of 32.91% debt and 67.09% of equity. The return on debt was equal to 5.8% which
corresponded to the BB+ bond rating of American Greetings. In addition, to determine the cost of
equity, we were given the firm’s beta along with the risk-free rate and the market risk premium.
We utilized the CAPM model to find the cost of equity to be:
CAPM = Rfr + β*(Market Risk Premium)
CAPM= 2.8%+1.63*5%= 10.95%
The following formula was used to calculate WACC:
WACC = Re*We + Rd*Wd*(1-t)
WACC= 10.95%*67.09% +5.8%*32.91%*(1-39%) =8.510%

Due to the mixed views of in the industry analysts regarding the future of the greeting card
industry, we decided to forecast for three possible scenarios that were in line with the analyst’s
expectations. The scenarios were:
 Bullish View
 Bearish View
 Average View
Factors that remained constant among all the scenarios included that the WACC was the
same, the terminal growth rate was equivalent to 3.3% for all the scenarios (this rate was
determined through the expected growth of the real GDP of the US economy), depreciation was
considered to be zero in all the cases due to lack of information, the net working capital turnover
and fixed asset turnover were fixed at the average values calculated from the past data (this implied
that the utilization of working capital and fixed assets was constant). However, the net working
capital turnover ratio and fixed asset turnover ratio are determined through net sales, therefore,
changing sales would give us the change in net working capital and change in CAPEX.

Bullish View:
In a bullish market, American Greetings’ sales would grow to a long-term high of 3% and
their operating margin be maintained at 9%. With a discount rate of 8.51%, the present value of
the company is $1052 and has a stock price of $21.33.
Bearish View:
In a bearish market, American Greetings’ sales would not grow, and their operating margin
would slowly decline from 7% to 6%. With a discount rate of 8.51%, the present value of the
company is $1010 and has a stock price of $20.23.
Average View:
In an average market, American Greetings’ sales growth would be steady at 1.5% and their
operating margin would be maintained at 8%. With a discount rate of 8.51%, the present value of
the company is $1027 and has a stock price of $20.68.

Share Repurchase:
American greetings, standing at 1st January 2012 were thinking of share repurchase of 75M,
before the end of their financial year in February 2012. The present total number of outstanding shares of
American Greetings was 38.32 Million priced at $12.51. The total number of shares to be repurchased
were $5.99 remaining 32.33 M shares in the market but we used the weighted average for market shares
to be included for this year’s income statement to calculate the accurate number of shares for the financial
year of 2011 so that to find the earning per shares can be computed accurately for this year’s financial

The formula to calculate the weighted average number of shares for 2011 is given as

The amount calculated given as


A= 38.32 M


C= 5.99 M

D= 0

Hence, the number of repurchased to be added in this year EPS calculation are 0.99M

So, the year end number of shares are 37.32M.

WACC Calculation:
With the new number of shares, the value of weighted average cost of capital is
calculated again, because the number of shares decreased and the price of share increased
keeping the P/E multiple constant.
The Earnings per Share came out to be 2.191 and consequently, the price of the share now
calculated is 13.145

Keeping in considerations these new values, the value of WACC is calculated as

WACC= K(e).W(e)+ K(d)W(d)(1-t)

Turned out to be 8.55, higher than the previous WACC calculated without the buyback

Having the new number of shares, new price, new value of equity and new WACC, the financial
forecast of the company is done again for all the three view

 Bullish View
 Average View
 Bearish View

Bullish View:
Bullish view is the optimistic view of the investors. According to this view,

Revenue growth was taken as 3%

Operating margin growth as 9%

The new share price is calculated to be as $ 21.68

Bearish View:
Bearish view is the pessimistic view of the investors. According to this view,

Revenue growth was taken as 0%

Operating margin growth as 6%

The new share price is calculated to be as $ 20.57

Average View:
Average view is the middle of the bullish and bearish view. According to this view,

Revenue growth was taken as 1.5%

Operating margin growth as 7.5%

The new share price is calculated to be as $ 21.03

So, we noticed that the value of the shares prices increased a bit with share repurchased
which means that we should go for this option.

A comparison chart is made for share prices of American Greetings, given as
Doing the company analysis and valuation, and considering different
views, we came up with following recommendations,

1. Company should focus its operations more towards young generation

2. Company should go for a share buyback option.

In real case, company dealt in the same sector and went for the share repurchase after one
year and eventually its share price went up to $19 in 2013 which is closest to our
calculation of after repurchase calculation and the Weiss Family bought back a larger
amount of shares turning American Greetings from a publicly traded company to a
private company.