It is early in October 2002, and your investment bank has been hired by the management team at Dick’s Sporting Goods (DKS) to determine a valuation/ offering price for their stock’s IPO.
About Dick’s Sporting Goods: DKS, headquartered in Pittsburgh, Pennsylvania, was founded when Dick Stack opened his first store in 1948 with $ 300 from his grand-mother’s cookie jar. This company is growing rapidly and plans to use the IPO proceeds for store openings and acquisitions. DKS operates more than 130 stores in twenty-five states, primarily in the eastern United States. The store format is a large big-box store containing smaller shops featuring sporting goods, apparel, and footwear for activities ranging from football and golf to hunting and camping. Besides brands such as Nike and Adidas, Dick’s carries Ativa, Walter Hagen, and others exclusive to the company. At the time of the IPO, the DKS management team included the founder’s son, Ed, who holds 37% ownership in the company, and the investment firm Vulcan Ventures(founded by
former Microsoft executive Paul Allen), which owns 12% of DKS as a result of a private equity investment.
Industry/ Market Overview: With the rise of big-box retailers, sporting goods retail-ers were consolidating. In 1997 and 2001, Gart Sports Company (GRTS) acquired Sport Mart Inc. and OSH Sporting Goods, respectively. Private equity and venture capital firms held equity investments within the industry. DKS was the first retailer to launch an IPO in three months; from the beginning of July 2002 until the time of offering, it had been the lowest combined IPO tally since the second quarter of 1978. In 2002, other retail IPOs had mixed success. Big 5 Sporting Goods’ stock price had declined by 23% because its private equity investor, Leonard Green & Partners LP, raised $ 105 million in June 2002. Market conditions for equity capital raises were unfavorable, and during the DKS road show, many of the institutional investors expressed concerns that the suggested IPO range of $ 15 to $ 18 per share was too high. VALUATION ASIGNMENT
a. Based on the DKS financial data (Exhibit P8-14.3) and sporting goods retailer market comparables valuation (Exhibit P8-14.4), estimate an implied equity valuation for the firm for its initial public offering. Calculate an implied equity valuation range based on the comparable enterprise-valuation multiples (EV/ Revenue, EV/ EBIT, EV/ EBITDA). Determine an IPO price range for an estimated 9.47 million shares of equity outstanding.
b. In your opinion, are the selected publicly traded sporting goods companies shown in Exhibit P8-14.4 good choices for market comparables for DKS? Why or why not?

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