5. As a teaser, we begin where we aim to end… …understanding multiple valuation techniques Indicative and preliminary valuation range of EUR 1.9 billion to EUR 2.1 billion at this early stage of due diligence Indicative, preliminary valuation range EV EV/EBITDA 2006 1.8b - 2.2b 9.5x - 11.5x 1.9b - 2.1b 10.0x - 11.0x 1.8b - 2.3n 9.4x - 12.2x 1.5b - 1.7b 7.9x - 9.0x
8. Introduction to value Historical cost around EUR 2.0 million Economic value around EUR 1.8 million Replacement cost around EUR 1.5 million Market value around EUR 5.5 million Value of an asset (or company) is determined subjectively; to A it might be worth more than to B
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12. DCF valuation approach i.e. we need some basic understanding of accounting To understand cash flows, we also need to understand the profit & loss statement and the balance sheet To understand Free Cash Flows, we need to understand cash flows In order to derive to a DCF, we need to develop an understanding about discounting (WACC) and about Free Cash Flows We will apply a ‘bottom-up’ approach is assessing DCF
17. Case assignment I: Balance sheet Oprichtingsbalans Assets EUR Liabilities & Equity EUR Kraam 0 Eigen vermogen 18,000 Voorraad 0 Bankschuld 6,000 Nog te ontvangen 0 Kas 24,000 Nog te voldoen 0 Totaal 24,000 Totaal 24,000
18. Case assignment I: Balance sheet Per: 01/01 Assets EUR Liabilities & Equity EUR Kraam 20,000 Eigen vermogen 18,000 Voorraad 0 Bankschuld 6,000 Nog te ontvangen 825 Kas 3,175 Nog te voldoen 0 Totaal 24,000 Totaal 24,000
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21. Case assignment II: Profit and loss Profit and loss EUR Sales 49,500 COGS -18,500 Gross profit 31,000 SG&A -17,100 EBIT 13,900 Interest -360 PBT 13,540 Tax -3,453 Net income 10,087 Note: We assume we pay out 70% of our profit as a dividend, which equals to EUR 7,061, i.e. the remainder (EUR 3,026) will be transferred to Retained Earnings
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28. Case assignment III: Cash Flow EBIT 13,900 + Depreciation 2,000 = Operating cashflow before changes in WC 15,900 Change in inventory -990 Change in receivables -41 Change in payables 0 Income tax expense -3,453 Cash from operating activities 11,416 Acquisition of PPE -2,000 Cash from investing activities -2,000 Paydown of debt -1,000 Interest expense -360 Dividend paid -7,061 Cash from financing activities -8,421 = Net increase in cash (A + B + C) 995 + Cash at 1 January 2007 3,175 = YE cash 4,170
32. Balance sheet: accounting vs. economic Accounting ≠ Economic Balance sheet Assets Liabilities & Equity Operating fixed assets 20,000 Operating current liabilities 0 Operating current assets 1,856 Debt 5,000 Non-operating assets 0 Equity 21,026 Cash 4,170 26,026 26,026 Valuation steps Determine economic value of all operating assets / liabilities Determine economic value of all non-operating assets / liabilities Determine value of cash Determine value of debt Determine value of EQUITY
33. Balance sheet: accounting vs. economic Accounting ≠ Economic Balance sheet Assets Liabilities & Equity Operating fixed assets 20,000 Operating current liabilities 0 Operating current assets 1,856 Debt 5,000 Non-operating assets 0 Equity 21,026 Cash 4,170 26,026 26,026 Valuation steps Determine economic value of all operating assets / liabilities Determine economic value of all non-operating assets / liabilities Determine value of cash Determine value of debt Determine value of EQUITY
38. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
39. DCF overview MV of interest-bearing debt MV of minority interests Corporate value MV of financial fixed assets 1 Value of Operations Free Cash Flow WACC Terminal value Equity value MV of other financial liabilities 2 MV preferred equity Excess cash & marketable securities 1 3+4 6 5 2 7 7 7 7 7 7 = input = output B/S P&L Cash Flow Accounting Notes: 1) including non-operating investments 2) including underfunded pension plans Enterprise value is the equivalent of Value of Operations
40. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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45. Case assignment V: Free Cash Flow Free Cash Flow statement 2008 Revenues EBIT + Depreciation – Sustaining investments in tangible assets CBIT Cash taxes CBNI Expansion capex Working capital investments FCF
47. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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49. Forecasting financial statements Profit & loss account Standard model Consider Revenue growth % growth GDP, market growth, inflation, volume vs. price, price pressure, product mix, acquisitions/disposals Gross margin % of revenues price pressure, efficiency, product mix, raw material costs Operating costs growth % growth sales growth, variable vs. fixed costs, inflation, wage costs, efficiency Depreciation % of opening tangible fixed assets accounting policy change, large investments (current & historic) Amortisation % of opening intangible fixed assets goodwill: linear write-off and no additions
50. Forecasting financial statements Profit & loss account Standard model Consider Dividend pay-out ratio % of net earnings before extraordinaries percentage of earnings or stable DPS growth Preferred interim dividends % of preferred share capital outstanding Preferred interim dividend % of preferred dividends Interest on debt interest rate maturity of debt, default spread Interest on cash interest rate current market rate
51. Forecasting financial statements Balance sheet Standard model Consider Stock days days of incr. revenues efficiency of working capital, seasonality Trade debtors days days of incr. revenues efficiency of working capital, country mix, seasonality, annual average Other debtors % of incr. revenues timing, annual average, constituents Operating cash % of incr. revenues idem stock days, industry average Trade creditors days days of total incr. costs idem trade debtors Other creditors % of incr. revenues idem other debtors Cash flow statement Capital expenditure (expansion and sustaining) % of incr. resp total revenues large investments, maintenance vs. expenditure
59. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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64. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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79. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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82. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
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85. The concept of Terminal Value (cont ’d) Explicit forecast period Terminal Value 2007 ∞ 2011 2015 2013 2007 2007 ∞ ∞ Terminal value
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88. Overview DCF approach 2. Forecasting 4. Discount rates 1. Determine operating Free Cash Flows 3. Discounting 5. Discount the Free Cash Flows 6. Shortcut to determine Terminal Value 7. All other valuable items
89. A recap of all topics covered today = input = output MV of interest-bearing debt MV of minority interests Corporate value MV of financial fixed assets 1 Value of Operations Free Cash Flow WACC Terminal value Equity value MV of other financial liabilities 2 MV preferred equity Excess cash & marketable securities B/S P&L Cash Flow Accounting Notes: 1) including non-operating investments 2) including underfunded pension plans Enterprise value is the equivalent of Value of Operations
91. Let ’s see whether we gained some more insight Indicative and preliminary valuation range of EUR 1.9 billion to EUR 2.1 billion at this early stage of due diligence Indicative, preliminary valuation range EV EV/EBITDA 2006 1.8b - 2.2b 9.5x - 11.5x 1.9b - 2.1b 10.0x - 11.0x 1.8b - 2.3n 9.4x - 12.2x 1.5b - 1.7b 7.9x - 9.0x
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