Valuation for Restoration Hardware Buy-Out

I see on the front page of the SF Chronicle Business section that an East Coast private Equity firm,Catterton Partners of Greenwich, CN is buying Marin-based Restoration Hardware for $267M.
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/11/09/BUCFT8TDC.DTL&type=business
The stock almost doubled on the news but let's take a look at the Free Cash Flow (FCF), at least to the extent that we have information (and time). "Last year, it earned $3 million on revenue of $713 million; in 2005 it lost $29 million on $582 million in revenue", the Chron reported. That is a 0.4% Net Income return on Sales. Not so impressive to me. If I owned the company and that was the return I would be having serious sit-downs with management. And that was the good year. Those returns are a little shocking to me since every time I've ever bought anything at R.H. I have paid top dollar so where is the company spending? On the millions of catalogues? I get 3 each time they mail them out. (= waste) They speculate that while 1/3 of their business is mailorder now and that it will grow to 1/2. No small feat in growth objectives. I will add that RH does carry quality product lines. But what about FCF? Net Income needs certain add-backs like Depreciation, Amortization (D/A) and other non-cash outlays. Unless they have huge D/A charges, that will not add much cash. Doing reverse math, how much FCF/year should $267M buy you? Well, if you just put the money in the bank you could make 5.5% or $14.6M. The 30-year "long bond" (Tsy) yields about 4.75% or $12.68M per year and that is the "risk-free rate". So what rabbit will RH pull out of their hat to beat that? Certainly with a very leveraged deal (50%) there is less cash spent for the PE firm, less FCF that must fall to the bottom, and enough cash to meet interest payments. But I think RH should take the deal and run to the bank. (They are saying they have until 12/13/07 to solicit bids and must pay $10.68M termination fee if they bow out of this deal.) They got a very good price here. Take it.

Interestingly on the strategic front "Catterton has $2 billion invested in what it calls 'the middle-market consumer sector'." It was one of two private-equity firms buying Outback Steakhouse's parent firm earlier this year. Other holdings include Brach's Confections Inc., P.F. Chang's China Bistro, Build-A-Bear Workshop and Baja Fresh Mexican Grill." Not so sure Restoration Hardware is the same "middle market" (towel racks for $200) but they must have something in mind...