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Congoleum

Case
Salom Lema
Francesco La Masa
Mehdi Boucetta

Financial Analysis and Management


Spring 2016
23/05/2015

Congoleum Corporation - Overview


Key Figures

Organization and Projected deal

> Created in 1911 in Pensylvania


> Rapid growth to become the US
leading producer of floor
coverings by the 1940s
> The corporation widened the scope
of its activities in the decades 6080
> 1978 : 576 M Sales, 42M$ Profits

Organization

Proposed Deal

Corporation active in three product


market segments
> Home furnishing
> Shipbuilding (Bath Iron Works)
> Auto and Industrial Distribution

> Congoleum Corporation was the target


of the largest leveraged buyout ever
operated to date. Two phases:

551
576

Sales (M$)

30%

AID

38%

27%

BIW

41%

43%

HF

+13% p.a
345

251

21%

386 377 396

389

216

295

190 188

Acquiring and integration of BIW by


the hoding company (92,3M$)
Acquiring of the rest of the
company for $371,3M
> Financed by $379,6M of debt
securities, preffered stock and
bank loans
> All players involved would get titles
with the same composition of
securities

Offer (June 79)


On

69 70 71 72 73 74 75 76 77 78

Sales

Assets

Purchase of Congoleum stock


for $38 per share (vs market
closing price of $25,375 the day
before)
Congoleum Case.pptx

Valuation I Sum of the Parts method

Justification and assumtions

Sum of the parts computation

> Technique generally used to value


conglomerate with separate types of
activities
> Assumptions
Net income from Lazard est.
Median P/E multiple computed
with available data. Differences
with Lazad explained by the lack of
data
> Results to be considered as a low
valuation
P/E of the conglomerate of 6,63x
vs global multiple of 10,65x
EPS of [US$ 24,89 39,98]

Congoleum Case.pptx

Valuation II Discounted Cash Flows method (1)


Unlevered Free Cash Flows computation

Actual
UFCF Calculations
Operating income (Exhibit 15)
95,50
Less: corporate expenses
7,50
depreciation & amortization
6,70
Earnings before interest and taxes
80,30
EBIT (1-tc)
Adjustments
Add back depreciation & amortization (b)
Less capital expenditures
Less investment in working capital required
UFCF

1979e
1980e
1981e
1982e
1983e
1984e 1985ee
105,90 111,50 132,20 158,70 175,90 166,10
8,60
4,30
5,10
5,90
6,80
7,60
7,50
35,51
36,26
37,07
37,95
21,23
89,80
71,69
90,84 115,73 113,15 137,27
46,70
37,28
47,24
60,18
58,84
71,38
78,52
35,51
-15,00
-2,00
55,79

36,26
-16,20
-14,00
53,30

37,07
-17,50
-23,30
56,45

37,95
-18,90
-11,20
66,69

21,23
-20,40
-12,80
59,41

31,42
-31,42
-18,94
59,57

Congoleum Case.pptx

Valuation II Discounted Cash Flows method (2)


Computing the cost of Capital
Cost of Equity

Cost of Debt

> Use of the CAPM


Risk free rate of 9,5%
Risk Premium of 8,6%
> Betas calculated for every year using the formula
starting from the 1,25 of 1979 with a 0,08 D/E ratio

> Amounts considered by tsubstracting the forcasted


repayments to the debt initial values
> Cost of debt estimated by computing a weighted
average interest rate on the instruments listed on
Exhibit 14
> The D/E ratio moves substancially during the period:
Pre LBO : 0,08
1980 : 12,6
1984 : 0,8

Cost of Equity
D/E
Beta
Cost of Equity
RF
9,50%
MRP
8,60%

1979
0,08
1,250
20,25%

1980
12,6
9,051
87,34%

1981
3,9
3,633
40,75%

1982
1983
2,9
2,0
3,012
2,436
35,40% 30,45%

1984
1,3
1,985
26,57%

1985
0,8
1,700
24,12%

Congoleum Case.pptx

Valuation II Discounted Cash Flows method (3)


Computing the cost of Capital
Capital Structure and WACC
Debt
Bank Debt
Senior Notes
Subordinated Notes
Equity
Preferred Stock
Debt / FV
Equity / FV
Pref Stock / FV
D/E
Beta
Cost of Equity
Cost of Debt
WACC

1979 pre

0,08
1,250
20,25%
6,44%

1979
327
120
115
92
26,00
26,2
86,2%
6,9%
6,9%
12,6
9,051
87,34%
6,44%
11,5%

1980
1981
1982
1983
1984
295,062 263,124 231,186 199,248 167,31
103,334 86,668 70,002 53,336 36,67
107,364 99,728 92,092 84,456 76,82
84,364 76,728 69,092 61,456 53,82
75,70 90,67 116,77 158,54 209,00
26,2
26,2
26,2
26,2
26,2
74,3% 69,2% 61,8% 51,9% 41,6%
19,1% 23,9% 31,2% 41,3% 51,9%
6,6%
6,9%
7,0%
6,8%
6,5%
3,9
2,9
2,0
1,3
0,8
3,633 3,012 2,436 1,985 1,700
40,75% 35,40% 30,45% 26,57% 24,12%
6,44% 6,44% 6,44% 6,44% 6,44%
12,6% 12,9% 13,5% 14,3% 15,2%

Congoleum Case.pptx

Valuation II Discounted Cash Flows method (4)


DCF computation
Results
> EBIT (1-t) growth at an estimated 10%
per year (based on past years Balance
Sheets)
> Normalization of the UFCF assuming a
constant evolution of the Working
Capital and a maturity phase with
Deperciation = CAPEX
> Terminal value computed with the
following formula

Terminal Value
UFCF 1985
59,57
Growth
8%
WACC
15,2%
Term Value 827,34

Congoleum Case.pptx

Valuation II Discounted Cash Flows method (5)


Terminal value calculation
Results

Discounted Cash Flows

> Cash flows discounted using the


different WACCs to reflect the change
in capital structure
> Equity Value obtained by taking the cash
held by Bath Iron Works and substracting
the values of preffered shares and stock
options exercisable by the management

Congoleum Case.pptx

Conclusions

$ 70,00

> We used the case informations


to compute a price per share
through two different
methods
Sum of the Parts
Discounted Cash Flows

Price per share is USD

$ 60,00

$ 50,00

$ 40,00

$ 30,00

$ 20,00

$ 10,00
Lazard Valua on

DCF post- LBO

Sum of the parts

Market share price

Median

> These methos were then


compared to Lazard Valuation
> We notice that the 38$ per
share lies on the upper range
of the median we computed

Congoleum Case.pptx