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Question 2: Perform SWOT analysis of Meralco. What makes this company an attractive acquisition target?
Question 3: Calculate Meralco WACC based on Exhibit 6. You may use a market risk premium of 6%. Use
the target capital structure indicated on this Exhibit. You may also assume that the BV of debt in 2009 is the
same as 2008. Prices and instructions are on your student spreadsheet. Utilize covariance formula in the
student spreadsheet. The PBR scheme is intended to regulate the returns of Meralco so we will go with the
target capital structure (for now let's assume the government will find a way to claim back any excesses
over this target). For the risk free rate, apply the appropriate formula on Exhibit 6 to the Exhibit 9 data.
7%
Question 4: What are MVP's alternative courses of action? Define tag-along and right of first refusal.
A tag along right will entitle the minority shareholder to participate in the sale at the same time for the
same price for the shares. The minority shareholder then 'tags along' with the majority shareholder's sale.
Tag along rights are usually worded to state that if the tag along procedures aren't followed then any
attempt to buy shares in the company is invalid and won't be registered.
Tag along clauses are designed to protect the minority shareholders from being left behind when a majority
shareholder decides to sell their shares. If a minority shareholder held 10% of the shares in a company, it
would be difficult to sell as most buyers will want 100% of a company. This puts minority shareholders a
risk of being forced to sell their shares at a price which is substantially much lower or has no relationship to
the actual value of the company. Without tag along rights, minority shareholders may find that they hold
unsalable or devalued shares.
Right of first refusal is a contractual right, but not obligation, to enter into a business transaction with a
person or company before anyone else can. If the entity with the right of first refusal declines to enter into a
transaction, the owner of the asset who offered the right is free to open the bidding up to other interested
parties.
Question 5: Run multiples valuation of Meralco (EV/Revenue, EV/EBITDA, EV/EBIT). Compare the
value of Meralco per share to the purchase price being contemplated in late 2009.
Question 6: Run DCF valuation of Meralco until 2028. How might you estimate synergy value in your
DCF calculation? Is the synergy value consistent with the purchase price premium over the current market
price of Php 186?
Refer to Valuation tab.
Question 7: What would you do if you were MVP (considering the interests of the seller)? If you decide to
buy more Meralco shares, how much would you bid per share if you were MVP and why? What would you
do about the tender offer issue?
buy and why does
t are the goals of
ared to show
ve acquisition target?
f first refusal.
me time for the
hareholder's sale.
wed then any
nd when a majority
s in a company, it
ity shareholders a
as no relationship to
nd that they hold
ransaction with a
clines to enter into a
o other interested
). Compare the
y value in your
the current market
88,644
3,799
966
842
7,857
7,273
109,381
13,722
29,302
1,116
425
44,565
153,946
9,985
2,918
56
37
20,968
(1,511)
200
32,653
18,879
18,173
16,997
11,736
9,494
4,000
4,121
1,232
84,632
–
30,052
3,787
2,584
238
36,661
121,293
153,946
Exhibit 6
Manila Electric Company
Parent Company Statements of Income
Years Ended December 31
*From 2010 to 2011, obtained from Final Determination for the Second Regulatory Period; From 2012 to 2014, amounts are casewriter's esti
**Casewriter's estimates
Exhibit 11
Financial Forecast
Source: http://www.treasury.gov
WACC 7%
Assumptions
Debt 22,787 Exhibit 5: interest-bearing only
Equity 49,894 Exhibit 5: total equity
Total Value 72,681
Cost of Equity 6%
Exhibit 7: Risk-free rate estimated for the
Risk-free rate 1.87% Philippines using an indirect method
Beta 0.9533207843 Beta Tab: Covariance formula
Unlevered Beta 0.6061577241
Beta from ERC 1.25
Market Risk Premium 6% Given
Cost of Debt 9%
Interest expense 3007 Exhibit 6: interest expenses for 2008
Total interest-bearing debt 22,787 Exhibit 5: interest-bearing only
Interest rate 13%
Tax Rate 30%
WACC Calculation Risk-free rate
Weight (TaCost WACC
Cost of Debt 45% 9% 4% rf USA
Cost of Equity 55% 6% 3% CPI USA
100% 7% CPI PH
CRP
5.44571735319894%
### ### ###
Earnings before interest and taxes (EBIT) 18,094 18,366 20,186
Depreciation 4,848 5,545 6,072
Net Change in Working Capital (14) (16) (36)
Capital Expenditures (7,183) (7,391) (8,094)
Free Cash Flow 15,745 16,504 18,128
Terminal Value 0 0 0
Total Free Cash Flow 15,745 16,504 18,128
Time Value of Money 0.92 0.84 0.77
Discounted Cash Flow 14,445 13,891 13,998
Valuation Multiples
As of June 2009 2010 Forecast
Forecasted Revenue 190,367 36,566
Forecasted EBITDA 11,659 22,942
Forecasted EBIT 7,077 18,094
Summary:
Aboitiz Power Corporation engages in power generation, distribution, and retail operations, as well as provides power services in the Philip
18 cities and municipalities in central Luzon, Visayas, and Mindanao with an aggregate land area of approximately 5,305 square kilometers
in Cebu, the Philippines. Aboitiz Power Corporation is a subsidiary of Aboitiz Equity Ventures, Inc.
Compañía General de Electricidad S.A. engages in the generation, transmission, and distribution of electricity. The company was founded i
Energy Development Corporation engages in the exploration, development, and operation of geothermal energy projects in the Philippines
Hokkaido Electric Power Co., Inc. engages in the transmission and distribution of electricity in Hokkaido, Japan. The company was founded
Hokuriku Electric Power Company supplies electricity through integrated power generation, transmission, and distribution systems in Japan
Petron Corporation is an oil refining and marketing company, processes crude oil into a range of petroleum products. The company was fou
Philippine Long Distance Telephone Company provides telecommunication services in the Philippines. The company was founded in 1928 an
Shikoku Electric Power Company, Incorporated is an electric utility, engages in the generation, transmission, distribution, and sale of electr
The Tata Power Company Limited engages in the generation, transmission, distribution, and trade of electricity primarily in India. The com
Source: www.capitaliq.com
Exhibit 13
Trading Multiples on Meralco and Comparable Companies
As of June 2009
ell as provides power services in the Philippines. It has interests in 7 distribution utilities that supply electricity to franchise areas covering approximate
of approximately 5,305 square kilometers, as well as serves approximately 740,833 customers. The company was founded in 1998 and is headquarter
of electricity. The company was founded in 1905 and is based in Santiago, Chile.
thermal energy projects in the Philippines. The company was founded in 1976 and is headquartered in Pasig City, the Philippines.
kkaido, Japan. The company was founded in 1951 and is headquartered in Sapporo, Japan.
mission, and distribution systems in Japan. The company was founded in 1951 and is headquartered in Toyama, Japan.
petroleum products. The company was founded in 1933 and is based in the Philippines.
nes. The company was founded in 1928 and is headquartered in Makati City, the Philippines.
ansmission, distribution, and sale of electricity in Japan. The company was founded in 1951 and is headquartered in Kagawa, Japan.
e of electricity primarily in India. The company was founded in 1915 and is based in Mumbai, India.
Price/DEPS
46.43
10.86
8.64
42.13
NM
23.48
NM
12.95
29.15
20.90
nes.
Japan.
Note: This table presents the historical stock prices of Meralco (MER) versus the Philippine Stock Exchange Index (PSEi)
Beta 0.953320784
hange Index (PSEi)
Copy and paste this into your internet browser for a tutorial on beta calculation:
faculty.babson.edu/academic/Beta/CalculateBeta.htm
OR
You can refer to the instructions below for the beta calculation.
Beta Calculation
Copy both of the closing price columns into a new spreadsheet. They should be in order from newest to oldest from top to
bottom, respectively. To obtain the correct format for calculation we must convert these prices into return percentages. To do
this we just take the price from today minus the price from yesterday and divide the answer by the price of yesterday. The
result is the percentage change. Below is a picture showing this in Excel. Figure 1 is of the formulas and Figure 2 is of the
result.
Figure 1: Formulas
Figure 2: Results
The calculation of beta through regression is simply the covariance of the two arrays divided by the variance of the array of
the index. The formula is shown below.
One advantage we discussed earlier is the ability to gauge the reliability of your beta. This is done by calculating the r-squared.
From here we input the two arrays containing the percentage changes. Below is this formula in Excel.
R-Squared = RSQ(D2:D99,E2:E99)
Source: www.investopedia.com
newest to oldest from top to
into return percentages. To do
y the price of yesterday. The
ulas and Figure 2 is of the
y the variance of the array of