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Table of Contents
1. What are we Valuing?
2. Valuation Methodologies
A. Comparable Companies
B. Precedent Transactions
12
D. Leveraged Buy-out
19
When we value a firm we are essentially attempting to put a value on the equity and the debt injected into the company
Both debt and equity holders have a claim on the assets and the profits generated by those assets
As mentioned above, the claim that debt holders have on the profits generated is usually already agreed (e.g. interest)
Equity holders are then entitled to the remaining profit of the company (net profit)
Given that equity and debt holders are entitled to a proportion of profits, several of the methods that we use to value firms are based on the
profit streams of companies and this is what we will focus on today
However depending on the industry you work in, different valuation methodologies exist some of which may not be based on profits
Note that for publicly listed companies, market values already exist and enterprise value can be calculated from market data
However the methodologies discussed today are also used by analysts to determine whether a publicly listed company is over/
under-valued and what is a fair value for a company
Firm Value is the collective value of all stake holdings (equity, debt, etc.) with claims on a valued asset
(e.g. operating assets) or economic streams (e.g. revenue, EBITDA) generated by such assets.
Market Capitalisation =
Share Price x Number of Shares
+
Value of shares potentially issued from
convertible securities (see later)
+
Total Debt =
Debt (LT, ST, Out-of-the-money Convertible) + Finance Leases
Liquid Resources
Cash + Marketable Securities
+
Market Value of Minority Interests
Net
Debt
Valuation Methodologies
The most commonly used methodologies in our advice to clients are outlined below.
Precedent Transactions
2. Valuation Methodologies
Company A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
1,000.0
1,082.0
1,157.7
1,221.4
1,270.3
1,317.3
1,356.8
1,390.7
1,418.5
1,446.9
1,475.8
1,505.3
P&L
Sales
Growth
EBITDA
8.2%
130.0
Growth
Margin
Depreciation
% Sales
EBIT
13.0%
(50.0)
5.0%
80.0
Growth
Margin
8.0%
162.3
7.0%
196.8
5.5%
224.7
4.0%
241.4
3.7%
256.9
3.0%
271.4
2.5%
278.1
2.0%
283.7
2.0%
289.4
2.0%
295.2
2.0%
301.1
24.8%
21.3%
14.2%
7.4%
6.4%
5.6%
2.5%
2.0%
2.0%
2.0%
2.0%
15.0%
17.0%
18.4%
19.0%
19.5%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
(54.1)
5.0%
108.2
(60.2)
5.2%
136.6
(64.7)
5.3%
160.0
(68.6)
5.4%
172.8
(72.4)
5.5%
184.4
(74.6)
5.5%
196.7
(76.5)
5.5%
201.7
(78.0)
5.5%
205.7
(79.6)
5.5%
209.8
(81.2)
5.5%
214.0
(82.8)
5.5%
218.3
35.3%
26.3%
17.1%
8.0%
6.7%
6.7%
2.5%
2.0%
2.0%
2.0%
2.0%
10.0%
11.8%
13.1%
13.6%
14.0%
14.5%
14.5%
14.5%
14.5%
14.5%
14.5%
Cash Flow
CapEx
% Sales
CapEx/Depreciation
Net Working Capital
% Sales
4Change
Valuation
Methodologies
in Working
Capital
(67.5)
(68.7)
(69.8)
(71.2)
(73.4)
(76.1)
(76.1)
(76.5)
(78.0)
(79.6)
(81.2)
(82.8)
6.8%
6.4%
6.0%
5.8%
5.8%
5.8%
5.6%
5.5%
5.5%
5.5%
5.5%
5.5%
135.0%
127.0%
116.0%
110.0%
107.0%
105.0%
102.0%
100.0%
100.0%
100.0%
100.0%
100.0%
(50.0)
(54.1)
(57.9)
(61.1)
(63.5)
(65.9)
(67.8)
(69.5)
(70.9)
(72.3)
(73.8)
(75.3)
(5.0)%
(5.0)%
4.1
(5.0)%
3.8
(5.0)%
3.2
(5.0)%
2.4
(5.0)%
2.4
(5.0)%
2.0
(5.0)%
1.7
(5.0)%
1.4
(5.0)%
1.4
(5.0)%
1.4
(5.0)%
1.5
Valuation Summary
Company A
Based on various valuation methodologies, we have arrived at the following range of values for Company A.
5 Valuation Methodologies
A. Comparable Companies
6 Comparable Companies
Company A
Based on our comparable companies analysis, Target Company A is valued between 1,160m and 1,781m on a trading
basis and between 1,392m and 2,138m on a take-out basis.
Comparable Companies Analysis
EV / Sales
EV / EBITDA
Share
Price (p)
Market
Cap (m)
Enterprise
Value (m)
2014
2015
2016
2014
2015
2016
Company B
375
5,025
6,556
2.1x
1.9x
1.8x
10.5x
8.6x
8.2x
8.0%
13.3%
22.0%
Company C
1,052
768
968
1.3x
1.2x
1.2x
9.3x
7.3x
7.3x
5.4%
12.7%
17.0%
Company D
786
3,276
3,576
1.6x
1.5x
1.5x
8.9x
7.7x
7.6x
5.0%
7.9%
19.4%
Company E
105
1,074
1,199
1.1x
1.1x
1.0x
9.2x
8.9x
8.3x
4.9%
4.9%
11.8%
Company F
832
202
252
1.5x
1.3x
1.2x
14.5x
9.3x
9.2x
9.9%
25.3%
14.0%
5,025
6,556
2.1x
1.9x
1.8x
14.5x
9.3x
9.2x
9.9%
25.3%
22.0%
Indicative
Valuation Company
A
Mean
2,069
2,510
1.5x
1.4x
1.3x
10.5x
8.4x
8.1x
6.7%
12.8%
16.8%
1.5x
1.3x
1.2x
9.3x
8.6x
8.2x
5.4%
12.7%
17.0%
Company
High
in Millions
Median
1,074
1,199
Multiple
Low
202
1
2015E Sales
2015E EBITDA
Implied EV
7Take-out
Comparable
Companies
Premium
252
Value
1.1x
1.1x
1.0x
8.9x
Low
High
Low
High
1,082
1.1x
1.9x
1,136
2,056
162
7.3x
9.3x
1,184
1,507
1,160
1,781
7.1x
11.0x
20%
20142016
Sales CAGR
20142016
EBITDA CAGR
2014 EBITDA
Margin
Sum-of-the-Parts
Company A
If a company is comprised of several separate distinct parts, we may value it based on fair valuations for each part of
the business.
Comps Based Valuation (Inc. Sum-of-the-Parts)
Several companies can be split into separate and distinct operating assets
Companies can be split into parts by operation or by geography for example
Each part can therefore be valued individually to come up with a sum-of-the-parts valuation
Whilst each part can be valued in various ways, we commonly use a range of valuation multiples for each part to derive a fair value for
the company
With public companies, this sum-of-the-parts valuation can then be used to see whether the company is currently over or undervalued at
the current share price and whether there is value to be released from breaking up the company
EBITDA Multiple
Company A
2015E EBITDA
Valuation
Low
High
Low
High
9.5x
10.5x
596.7
659.5
Beer
62.8
Juice
11.0
8.0
9.2
88.3
101.5
Soft Drinks
44.0
12.0
13.5
527.8
593.8
Wine
23.7
9.0
10.2
213.3
241.7
20.8
13.0
14.1
270.1
292.9
10.5x
11.6x
Spirits
Group Total
Take-out Premium
Take-out SOTP Value
8 Comparable Companies
162.3
1,696
20%
Implied Multiple
12.5x
14.0x
1,889
2,035
2,267
B. Precedent Transactions
9 Precedent Transactions
10 Precedent Transactions
Example Calculation
Company B acquires 75% of Target 1 for an equity value of 750m
Company B has net debt outstanding of 250m
Target 1 reported 2013 Sales and EBITDA of 900m and 120m and recently
reported 3Q14 Sales and EBITDA of 750m and 105m for the first nine months
ended 31 September 2011. In 3Q10 it reported Sales and EBITDA of 650m and
100m respectively for first nine months ended 31 September 2013
Price Paid (m)
750
Percent Acquired
75.00%
1,000
Net Debt
Implied EV
250
1,250
FY13 Sales
900
750
(650)
LTM Sales
1,000
1.3x
FY13 EBITDA
120
105
(100)
LTM EBITDA
125
10.0x
Company A
When choosing valuing companies based on precedent transactions, whilst qualitative and quantitative comparisons
should be made, you will also need to look at details around the transaction to determine the correct multiple.
Precedent Transactions
EV / LTM
Date Announced
Target
Acquiror
Sales
EBITDA
EBIT
5 June 2014
Target 1
Company C
1,250
1.3x
10.0x
16.3x
2 January 2014
Target 2
Company C
230
3.0x
12.3x
25.4x
26 May 2013
Target 3
Company A
500
1.1x
12.6x
14.4x
1 April 2013
Target 4
Company B
150
3.1x
13.4x
19.1x
21 February 2013
Target 5
Company D
2,000
2.0x
13.0x
NA
2,000
3.1x
13.4x
25.4x
826
2.1x
12.2x
18.8x
High
Mean
Precedent Transactions
Choosing Multiples
500
Median
EV / EBITDA
Low
Low
Value
High
Low
High
LTM Sales 5
1,000
1.1x
3.1x
1,100
3,100
LTM EBITDA
130
10.0x
13.4x
1,300
1,737
1,200
2,419
Implied EV
11 Precedent Transactions
9.2x
18.6x
2.0xmultiple to apply to an
12.6x
17.7x may be
When choosing what
LTM earnings figure, there
some precedent transactions which are more relevant than others
Here for example,
only transactions 1510.0x
are relevant from all available
150
1.1x
14.4x
precedent transactions
As with comps, quantitative and qualitative comparisons between companies is
forms the basis of your judgement
However, there are other factors that may need to be accounted for which are
transaction specific such as
Was the acquisition, an acquisition of a minority stake?
Did the acquiror already own a stake in the target?
What was the strategic rationale behind the transaction?
=
EBITDA
2. WACC
WACC
=
E/(E+D)*Cost of Equity
+
D/(E+D)*Cost of Debt
3. Terminal Value
Using DCF Method
FCFTx(1+g)
Kg
CapEx
Change in WC
(Rec Pay + Inv)
Cost of Equity
=
Rf + beta*(EMRP)
Cost of debt =
(Rf + Credit differential)
*(1-t)
Proportion
of Debt and Equity
4. NPV
=
FC1*(1+WACC)-1
+
FC2*(1+WACC)-2
+
FC2*(1+WACC)-3
+ ....
+
(FC10+TV)*(1+WACC)-10
X
(X)
EBIT
Depreciation
Amortisation
EBITDA
X/(X)
X
Tax Paid
(X)
CapEx
(X)
X/(X)
(X)
X/(X)
WACC Analysis
KE = Rf + (Rm Rf)
Low
High
Cost of Equity
3.8%
3.8%
3.8%
3.8%
5.0%
7.0%
Equity Beta
1.07
1.07
5.4%
7.5%
0.0%
0.0%
Inflation Differential
0.0%
0.0%
0.0%
0.0%
Cost of Equity
9.1%
11.3%
Cost of Debt
Risk Free Rate (10 Year)
3.8%
3.8%
Credit Spread
1.0%
2.0%
Inflation Differential
0.0%
0.0%
4.8%
5.8%
30.0%
30.0%
3.4%
4.1%
30.0%
30.0%
7.4%
9.1%
PV =
CF1
(1+K)1
CF2
(1+K)2
CF3
(1+K)3
CF4
(1+K)4
Where CF is the cash flow in its respective year and K is the required rate of return (the WACC)
PV =
CF1
(1+K)0.5
CF2
(1+K)1.5
CF3
(1+K)2.5
CF4
(1+K)3.5
Terminal Value
The terminal value of a company is the future value of the cash flows of the company after the forecast period and
into perpetuity.
Whilst we have discussed valuing cash flows over a discrete period of time (e.g. 10 years), we also have to value the cash flows of the
company post the forecast period into perpetuity
The value of the cash flows into perpetuity is known as the Terminal Value and can be calculated in one of two ways
Applying an multiple to a profit metric (e.g. EBITDA) in the final year (Comps Method)
Consider the steady state of the company and value its future cash flows based on an assumption as to the average long term growth
rate of the cash flows into perpetuity (DCF Method)
Both methods can be used as a cross check against each other to see if the result is sensible
However note that the value derived is the value of the cash flows into perpetuity at the end of the forecast period (e.g. in 10 years time if
the forecast period is 10 years long) and therefore needs to be discounted back to present value
However, note that we do not use the mid-year convention for discounting back
Comps Method
The approach used here is the same as in our comps
based valuation focusing on average trading multiples of
comparable companies
You can use any profit metric you see suitable, although EBITDA
most commonly used
Note that the metric used should be excluding any
exceptional items
Assuming a 9.0x EBITDA multiple we derive a terminal value
(future value) of 301m x 9 = 2,710m
DCF Method
For this, there are two steps to be taken
Calculate adjusted terminal year CF accounting for any
exceptional items and equalising CapEx and depreciation
In the long term CapEx = depreciation and so if CapEx is
higher than depreciation we need to add the difference to the
final year FCF and conversely if lower
Assume a perpetuity growth rate (g)
The FV of the terminal value is then derived from the
following formula
FCFT x (1+g)
(K g)
2014
1,082
162
(54)
108
Company A
2015
1,158
197
(60)
137
2016
1,221
225
(65)
160
2017
1,270
241
(69)
173
(41)
(48)
(52)
(55)
(59)
96
112
121
129
(70)
(71)
(73)
60
65
(Increase)/Decrease in WC
Other
Terminal
EBITDA
EBITDA Multiple
FV
of Terminal
Unlevered
FCFValue
Discount Factor
PV of Terminal Value
Time Period
Taxes
Taxed EBITA
CapEx
Deprecation
90
2022
1,447
289
(80)
210
2023
1,476
295
(81)
214
(60)
(62)
(63)
(64)
(65)
138
141
144
147
150
153
(76)
(76)
(76)
(78)
(80)
(81)
(83)
69
72
75
76
78
80
81
83
0
301
9.0x
2,710
119
0.45
1,226
2.5
0
154
109
0.5
1.5
WACC
8.3%
8.3%
Discount Factor
Implied Enterprise Value
0.96
0.89
86EBITDA Multiple
97
PV of FCF
PV of Forecast Cash Flows
WACC
8.5x
0.82
2,111
97
9.0x
9.5x
2,260
2,043
2,111
2,179
1,971
2,036
2,101
2,117
8.3%
8.8%
884
8.3%
2,189
7.8%
Terminal
2024
EBITDA
1,505
301
(83)
218
2021
1,419
284
(78)
206
128
Terminal
138FCF
WACC
2.0%
143
3.5
FV of Terminal Value
4.5
Discount Factor
8.3%
PV of Terminal Value
8.3%
8.3%
Implied Enterprise Value
0.76
97
0.7
97
145
5.5
0.65
92
148
151
157
154
8.3%
6.5
7.5
8.5
2,518
9.5
0.45
8.3%
8.3%
8.3%
1,139
8.3%
2,024
0.6
0.55
0.51
87
Property Growth
82
77Rate
0.47
73
1.5x
2.0x
2.5x
2,092
2,202
2,332
8.3%
1,934
2,024
2,129
8.8%
1,799
1,873
1,959
7.8%
WACC
Final Year
FCF
D. Leveraged Buy-out
Principles of an LBO
Given the increase in M&A activity by private equity players, working out how much they can potentially pay to generate a
required return has become a key driver of valuation.
In a leveraged buyout the principle is as follows
A company is acquired for a given price through a combination of debt funding (usually between 5070% of total funding) and equity
from the private equity firm
Over the next few years, the company increases its profitability and also uses its cash generated to pay down the debt that the PE firm
has used to acquire the business
In the medium term, usually 35 years, the company is sold, based on a higher EBITDA with the proceeds being used to pay back debt
(which is now lower than when the company was acquired originally) and the difference in the exit price and the level of debt goes to the
private equity player
The private equity player generates returns from selling its equity in the business for a substantially higher price and as such, we can derive
a maximum price payable today for the company by setting a level of target returns for the private equity player
19
Leveraged Buy-out
Company A
Generally speaking, a private equity player will look to generate returns in excess of 20%, although this will vary from
sector to sector.
Cash Flow Statement Company A
of Million
2015
2016
2017
2018
EBIT
Depreciation
EBITDA
Change in WC
Net Interest
Tax
Capex
Change in Net Debt
Starting Net Debt
Closing Net Debt
137
(60)
197
4
(61)
(23)
(70)
47
900
853
160
(65)
225
3
(57)
(31)
(71)
69
853
785
173
(69)
241
2
(52)
(36)
(73)
82
785
702
184
(72)
257
2
(46)
(42)
(76)
96
702
607
257
9.0x
2,312
(607)
1,705
20.00%
0.48
822
900
1,722
257
Exit Multiple
9.0x
Exit Value
Target IRR
15.0%
17.5%
20.0%
22.5%
8.0x
1,728
1,660
1,598
1,543
1,493
8.5x
1,801
1,727
1,660
1,600
1,546
9.0x
1,875
1,795
1,722
1,657
1,598
9.5x
1,948
1,862
1,784
1,714
1,651
10.0x
2,022
1,929
1,846
1,771
1,704
Exit Multiple
20
Leveraged Buy-out
25.0%
2,312
(607)
1,705
EV on Acquisition
1,500
(900)
600
2.8x
29.8%
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2014 Citigroup Global Markets Inc. Member SIPC. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
2014 Citibank, N.A. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
2014 Citigroup Inc. All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
2014 Citigroup Global Markets Limited. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. All rights reserved. Citi and Citi and Arc Design are trademarks
and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
2014 Citibank, N.A. London. Authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by
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Inc. or its affiliates and are used and registered throughout the world.
2014 [Name of Legal Vehicle] [Name of regulatory body.] All rights reserved. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.
Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce our own environmental
footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citis unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change Position Statement, the first US financial institution to do
so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology, and other carbon-emission reduction activities; (c) committing to an
absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh of carbon neutral power for our operations over the last three years; (e) establishing in 2008
the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing of electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks
and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.
Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.