Luxottica – Cole National

Acquisition Dynamics in the Optic Sector

Group 9

Yu Yu GaoYi Ling Sun

Marta CaccamoMarta Cenni

Flavia AssognaWei Liu

Daniele CortiVito Margiotta

26 January 2004: Luxottica (LUX) agreed to buy Cole National Corp for US$ 22,5 cash per share

– Total deal value US$ 662 million (market value US$ 401 million, net debt US$ 261 million)

26 January 2004: Luxottica (LUX) agreed to buy Cole National Corp for US$ 22,5 cash per share

– Total deal value US$ 662 million (market value US$ 401 million, net debt US$ 261 million)

19 April 2004: counter bid by Hong Kong Moulin International. Bid price: US$ 25 per share in cash.

– HAL Trust was rumored to be supporting Moulin counter bid to obtain full control over Pearle Europe

19 April 2004: counter bid by Hong Kong Moulin International. Bid price: US$ 25 per share in cash.

– HAL Trust was rumored to be supporting Moulin counter bid to obtain full control over Pearle Europe

Postposition of the Extraordinary General Meeting planned for April 20

And of April: LUX still stuck on its proposal. CNJ obligated to pay a US$ 12 million fee if the merger agreement would have terminated for a superior acquisition by another party.

Postposition of the Extraordinary General Meeting planned for April 20

And of April: LUX still stuck on its proposal. CNJ obligated to pay a US$ 12 million fee if the merger agreement would have terminated for a superior acquisition by another party.

October 2003: Cole National received an unsolicited non-binding proposal to acquire the company for US$ 19,65 per share

– Deal value US$ 321 million

SETTING THE SCENE

WORLD LEADERPrescription

Frames & Sunglasses

• FULLY INTEGRATED VALUE CHAIN

• IN-HOUSE PRODUCTION ( 85% Italy – 15% China )

•100% EXTERNAL SOURCE OF RAW MATERIALS

The Bidder: LUXOTTICA

Largest optical retailer in

North America through

acquisition of LensCrafters and Sunglass

Hut

Sales by Product and Category Sales by Geographic Area

LUX’s Sales

• 7.6% of US 17 bln ophtalmology market

HAL

CNJ

Pearle Europe

79%

19.2%

21%

Things Remembered

Cole Vision

Licensed Brands: >1200 stores in US and Canada suburban areas operated through a series of advanced tech centralized labs

Managed Vision: care benefits to employers, HMOs and other US organizations

Pearl Vision: >850 corpo owned and franchised shops in malls in US, Canada, Puerto Rico and Virgin Islands

The Target: COLE VISION

INDUSTRY FACTS

• Vertical integration trend

• Consolidation • Licence rotation

Potential Synergies

Empire Building: Cole and Luxottica are already market leaders in US, together

Complementarity: Luxottica serves mainly urban high-traffic areas, Cole is concentrating on suburban

Higher negotiating power and lower cost of development of exclusive lines

Gain control of 21% of Pearle Europe, one of its top clients

Defend from HAL leading position in EU retail

Why?:

1+1>2

STEPS TO VALUE CREATION

Rationale for the acquisition

Extracting synergies

Opportunities

• New optical business model

• Expanding into a new segment (vision care services) through CNJ's controlled business Cole Managed Vision

• Develop new product

• Improved distribution channel

• Warehouse, ITPlatforms

• Increased leverage withSuppliers

• Licensed brands• Franchising• Lab networks

• Industry trends:- Verticalization - Consolidation

- Licence rotation

• Expanding in the European market

• Defending from HAL leading positon in Eu retail market

Post integration actions

Please see additional notes below.

MARKET

COMPARABLES

Main business: Optical RetailThe company operates 3 different businesses: Cole Licensed Brands, Pearle Vision and Cole Managed Vision.

21% participation in Pearle Europe

(the third largest optical retailer in Europe with around 700 million USD of annual sales and 1200 locations)

Approximately 3000 stores - 400 in

franchising

Market Capitalization:US$ 321 Million in euro

7.6% US Market (US$ 17 Billion)

COMPANY OVERVIEW

- Business Model

- Size

- Market Coverage

- Financial Leverage

Optical retailing

MarCap US$ 200 – 900 millions

Strong market presence

Lack of data

Please see additional notes below.

Mainly present in US and Mexico through 490 vision centers, the company has been closed to bankruptcy in 2001 and it is actually still undergoing a major restructuring process. Not suitable for comparison.

The company operates through 9 owned and 5 franchises managed stores. Too small in size for comparison.

COMPARABLES’ ANALYSIS 1/3National Vision

Emerging Vision

De Rigo

One of Europe’s largest optical retailer. Retail operations represent 70% of company’s total revenues. Roughly one third of company’s stores are under franchise contract. Very internationalized – active in over 80 countries worldwide.

COMPARABLES’ ANALYSIS 2/3Alain Afflelou

One of the largest French optical retailers. Franchise business accounts for 95% of its total revenues (in this respect the business model of this company it is not suitable for comaprison with our). Not active internationally.

OPSM

Grand Vision

The largest French optical retailer, multibrand. Mainly active in the French domestic market (47%), UK (40%). The remaining part comes form rest of Europe.

Market leader in Australia, multibrand (5 brands owned). Broad product offering; 590 stores in 5 different countries – Australia and Hong Kong being the major ones.

COMPARABLES’ ANALYSIS 3/3Fielmann

The largest German optical retailer. Most of the revenues (85%) come from the domestic German market. Particular attenction has to be given on the impact the recent change in legislation - German healthcare reform - had on the company. EBITDA for 2004 is, in fact, expected to decrease by roughly 40%.

Oakley

Paris Miki

Japanese large optical retailer. Mainly active in the domestic market. The company has recently undergone a strategic shift toward franchise business, that now accounts for 47% of its total revenues.

American producer of sunglasses and prescription lenses; operates marginally in retail market. Business Model not suitable for comparison.

Selected

COMPARABLES

- De Rigo

- OPSM

- Grand Vision

- Fielmann

MULTIPLE SELECTION

• EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn’t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings.

• P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don’t have this kind of data, we won’t take it into consideration.

• EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk.

MULTIPLE SELECTION

• EV/Sales: this multiple is mostly used for the evaluation of start-up companies characterized by low levels of sales. For mature sectors it doesn’t reflect the different levels of efficiency of the companies. Moreover, this multiple lacks with the connection with earnings.

• P/E: this multiple is mostly influenced by the capital structure of the firms. Since we don’t have this kind of data, we won’t take it into consideration.

• EV/EBIT: it could be influenced by different accounting standards and ways to depreciate and amortize. Since we are comparing companies from different countries, we prefer to avoid this risk.

OUR CHOICE = EV/EBITDA

EV/EBITDA is not influenced by the capital structure and by differences in accounting standards (given that the relative size of D&A to EBIT is very large, the distortion could be sensible)

PRICE CALCULATION

Assumptions:We will look at the 3 months average instead of point-in-time. This will give us a fairer view of the company value.We decided to eventually adjust values that include specific unusual events or extraordinary performances due to external factors.

FINAL PRICE PER SHARE = US$ 22.03

Please see additional notes below.

See appendix 1 for further

details

TRANSACTION COMPARABLES

TRANSACTION COMPARABLES SELECTION

Main Variables:

Deal value (we look for similar value transaction);

Date of the deal (too old transactions are difficult to compare);

Target sector (only “Optical Retail”);

Please see additional notes below.

From the analysis we selected the following 3 comparables:• ECCA-USA / Thomas Lee Part.;• OPSM Australia / Luxottica;• Grandvision / Halt Trust.

PRICE CALCULATIONS

Please see additional notes below.

In this case Price per Share represents a good proxy of how much companies paid in the past for similar transactions ( it could include possible synergies, mark-ups, ect.).

FINAL PRICE PER SHARE = US$ 30.09

See appendix 2 for further

details

Even if the price that LUX has to pay to conclude the deal will be higher than the one it offered at the beginning, the choice to counter bid Moulin’s last offer of 25 US$ per share is justified by the estimated value of synergies emerging from the acquisition.

SYNERGIES!!

LUXCNJ

LUX

CNJ

SYNERGIES INCREASE TOTAL VALUE

FINAL CONSIDERATIONS

Observing the prices got from transaction and market comparables analysis and taking into account the synergies that can arise from the deal, we estimate a reasonable price range in between 25 and 27 $ per share.

Please see additional notes below.

appendix

Appendix 1: Price per share evaluation – market multiples

Appendix 2: Price per share evaluation – transaction multiples