Case Study

Hansson Private Label,

Inc

Augusto Peña & Guneykan Ozkaya

Venture Capital/Financing for Start-Ups: Filippo Ippolito

 1. How would you describe HPL and its position within the private label personal care
1. How would you describe HPL and its position within the private label personal care
industry?
industry?
Hansson approach to business and his vision of the growth of private label
industry allowed HPL to grow fast and achieve sustainable growth. HPL captured
28% of the 2.4 billion Dollar total wholesale sale of personal care products.
Considering personal care market controlled by large national and regional
retailers, it is important to maintain good relationships with those retailers since
retailers drive the consumer demands and 80,000 new products launched every
year, wholesale firms need to maintain good relationships with those retailers in
order to get shelf space for their products. HPL achieved to add large retailers to
its customer portfolio, maintained those relationships over years and increased
its sales consequently every year through 2003 and 2007. Hansson also managed
to keep debt levels at manageable levels in case of financial distress. In 2007 HPL
had a D/V ratio of 9.7% while competitors average is 32.9%. Considering fast
growing nature of Private Label industry, current market share of HPL and HPL’s
leverage levels compared to its competitors; HPL holds a strong position in
Private label industry and it will strengthen its positions, if it can keep its
sustainable growth while maintaining long lasting relationships with its
customers.
 2. Using assumptions made bu Executive VP of Manufacturing , Robert Gates,
2. Using assumptions made bu Executive VP of Manufacturing , Robert Gates,
estimate the project’s FCFs. Are Gate’s projections realistic? If not, what changes
estimate the project’s FCFs. Are Gate’s projections realistic? If not, what changes
might you incorporate?
might you incorporate?
Comments to the assumptions:

• Capacity utilization: A optimistic total use capacity on the last years, based on the historical data of
the company and that the retailer would request increase after the initial three years.
• Selling Price Per Unit - Growing at 2%: This growth rate is a optimistic rate If we compare with the
historical growth around 1,7%. Since this is a massive volume business this rate has a big impact on
the final decision indicator (NPV or EVA)
• Production Costs and labor cost: The growth rate are in line with the historical USA CPI.
• Cost of debt: Maintain stable even when the leverage increase, in order to make realistic they should
penalize the cost of debt as the leverage increase to reflect the broke cost and financial distress.
 3. Using CFO Sheila Dowling’s projected WACC schedule, what discount rate would
3. Using CFO Sheila Dowling’s projected WACC schedule, what discount rate would
you choose? What flaws’ if any, might be inherent in using the WACC as the discount
you choose? What flaws’ if any, might be inherent in using the WACC as the discount
rate?
rate?
- Based on the estimated new D/V (20.9%) the discount rate for that range of debt is 9.38%

Flaws: Using the same WACC for the whole project

it reflects the level of debt would be remain
constant. That is a flaw for this project when the
debt should be reducing along the time.
 4. Consider the current projections as the base scenario. Given that the customer is
4. Consider the current projections as the base scenario. Given that the customer is
only committing to 3 years of contract, develop a scenario where the customer drops
only committing to 3 years of contract, develop a scenario where the customer drops
out after 3 years and one in which he drops to 50% of demand after three years, and
out after 3 years and one in which he drops to 50% of demand after three years, and
see how this affects profitability. Also, relate these scenarios to different financing
see how this affects profitability. Also, relate these scenarios to different financing
options.
-
options.
Worst case scenario, customer drops out after 3 years
Assumptions:
1- Sales drop 100% after 3
years
2- Raw Mat. Costs., Labor
Exp, drop 100% after 3 years
 4. Consider the current projections as the base scenario. Given that the customer is
4. Consider the current projections as the base scenario. Given that the customer is
only committing to 3 years of contract, develop a scenario where the customer drops
only committing to 3 years of contract, develop a scenario where the customer drops
out after 3 years and one in which he drops to 50% of demand after three years, and
out after 3 years and one in which he drops to 50% of demand after three years, and
see how this affects profitability. Also, relate these scenarios to different financing
see how this affects profitability. Also, relate these scenarios to different financing
options.
-
options.
Bad scenario, drops to 50% of demand after three years,
Assumptions:
1- Sales drop 50% after 3
years
2- Raw Mat. Costs., Labor
Exp, SGA Exp. drop 50% after
3 years
3- Change in WC drops 50%
after 3 years.
 5. Estimate the capital structure implications of the new investment and the
5. Estimate the capital structure implications of the new investment and the
implications for the cost of capital (treating the new project as an independent firm).
implications for the cost of capital (treating the new project as an independent firm).
Consider different financing structure (all equity, all debt, 50-50)
Consider different financing structure (all equity, all debt, 50-50)
 6. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed
6. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed
with the investment?
with the investment?

Considering base scenario only (Client will not drop out after 3 years and demand will be same or at least
will not drop by 50% after 3 years) HPL should take the project. Reasons being;
1. Project has a positive NPV
2. HPL should be able to meet its customer’s demands in order to keep strong market position
3. HPL should not take the risk of losing its customers, considering their future depends on long-
term relationships with its clients.
4. Considering their low debt levels, they can increase their debt levels without increasing risk of
financial distress within company.
 Case Study
Hansson Private Label,
Inc
Thank you

Venture Capital/Financing for Start-Ups: Filippo Ippolito