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Operaciones de Inversión Módulo A: Operaciones Corporativas Adolfo Castellano Socio Lener Corporate Finance [email protected] Madrid, 5 de octubre de 2015 www.lener.es 1 OPERACIONES DE INVERSIÓN 1 •Las operaciones corporativas: ¿cuándo se plantean? – – – – 2 3 •Breve introducción a la valoración de empresas en el contexto actual •Los procesos de compra venta de empresas – – – – 4 5 Cambios en el entorno competitivo Desarrollo corporativo de la compañía Accionariado y equipo gestor Circunstancias intrínsecas de la compañía: incorporación de nuevos socios Subasta agresiva. VDD, VDR, Stapled Finance, Draft SPA Negociación bilateral Subasta controlada El papel del asesor •Adquisiciones Apalancadas - LBOs •Caso práctico 2 INDICE Las operaciones corporativas. ¿Cuándo se plantean? – Desarrollo corporativo de la compañía. – Entrada en el accionariado del equipo gestor. – Incorporación de nuevos socios. Soporte del crecimiento. – Cambios en la estructura accionarial del negocio. Evento de liquidez. – Cuestiones sucesorias. – Salida natural de un inversor financiero. – Motivaciones estratégicas (escisiones, ventas de filiales, etc.). – Otros (procesos de venta en concurso de acreedores, liquidaciones, refinanciaciones, etc.). 3 Madrid, 5 de Octubre de 2015 4 Valuation Training Training & Development Table of Contents 1. Comparable Valuation Analysis 1.1 Overview of Valuation 1.2 Comparable Analysis 1.2.1 Comparable Company Analysis 1.2.2 Comparable Transaction Analysis 1.2.3 Useful Hints 1.4 Summary of Valuation Methods 2. Discounted Cash Flow Analysis 2.1 Introduction 2.2 Cost of Capital 2.2.1 Determine Target Capital Structure 2.2.2 Determine Cost of Capital 2.2.3 Determine Cost of Equity 2.2.4 Calculate WACC 2.2.4.1 Special Topic: Equity Risk Premium 2.2.4.2 Special Topic: Convertible Debt 2.2.4.3 Special Topic: Iterative WACC Method 2.2.4.4 Special Topic: Pre-tax WACC 2.2.4.5 Special Topic: Venture Capital 5 Valuation Training Training & Development Table of Contents (cont’d) 2.3 2.4 2.5 2.6 Free Cash Flow Projections Terminal Value Growth and Value Inflation, FX and Cost of Capital 3. 3.1 3.2 3.3 3.4 3.5 3.6 Sum-of-the-Parts Valuation Value of the Company Synergies Risks Controlling and Minority Investments Pro Forma Adjustments for Recent Events Financial and Other Liabilities Appendix A. Glossary of Terms 6 1. Comparable Valuation Analysis 1. Comparable Valuation Analysis 1.1 Overview of Valuation Valuation Training Overview of Valuation Introduction “Valuation” depends on your perspective Buyer’s Perspective Seller’s Perspective What is it WORTH? What will it COST? What can I AFFORD? What is it WORTH? What will I GET FOR IT? 9 Valuation Training Overview of Valuation What are “Comps”? There are two types of “comp”: “Public comps” The analysis of the public market valuations of companies comparable (hence the term “comps”) to the subject of the assignment (“Target”) “Transaction (or deal or M&A) comps” The analysis of the values attributed by a [change of control] transaction to companies that are similarly comparable “Comps”valuation analysis constitutes a relative, as opposed to absolute, valuation methodology Comps provide a sanity check to more detailed valuation tools by illustrating how other market participants valued similar assets under similar circumstances The purpose of these materials is to provide you with a framework upon which, with experience, you will be able to develop a thorough understanding of these two fundamental strands of valuation 10 Valuation Training Overview of Valuation How Important Are They? Almost every single project that becomes involved in requires advice on some aspect of valuation. Examples include: Valuing a company/subsidiary for IPO(1)/Sale Valuing a target for acquisition Determining a break-up valuation Delivering a fairness opinion There are three principal approaches to valuation: Discounted cash flow (“DCF”) Transaction comps Public comps “Doing the comps” has four stages: Selecting the right comps Inputting the correct data Interpreting the results Applying the results COMPS ARE THEREFORE FUNDAMENTAL TO THE WORK OF IBK ____________________ (1) Initial public offering 11 Valuation Training Overview of Valuation Valuation Process Market Information Comparable Company Analysis Comparable Transaction Analysis Current Market Valuation In-Depth Analysis DCF Analysis Company Valuation Action: • Acquire • Sell • Keep 12 Valuation Training Overview of Valuation Frequently Used Valuation Methods Public Market Valuation Share Price Market Perception Liquidity Investor behaviour Market Dynamics Comparable Companies Benchmark with peers Identifies company value on a stand-alone basis Private Market Valuation Comparable Transactions DCF Implied strategic value Intrinsic Value of Concern Identifies what buyers have been prepared to pay Identify key value drivers Valuation sensitivities Quantify synergies May reflect takeover battle Regulatory Asset Value Value of regulatory assets (typically utilities) Exposure to regulatory risks 13 Valuation Training Overview of Valuation Alternative Valuation Methodologies Replacement Cost Analysis Estimate replacement cost of productive assets (buildings, plants) Useful in “build or buy” decision Ignores operational aspects EVA APV Based on same Based on same principles as DCF principles as DCF valuation valuation Essentially aimed Slightly more at managerial complex than performance DCF evaluation Aimed at separating operational and financial value created Real Options Valuation of “real” assets using option theory Useful when faced with highly uncertain outcomes Complex calculation Alternative approaches may be used to supplement traditional valuation methodologies 14 1. Comparable Valuation Analysis 1.2 Comparable Analysis 1.2.1 Comparable Company Analysis Valuation Training Overview of Valuation Key Valuation Methods Analysis of Comparable Companies Publicly traded companies Analysis of Comparable Transactions Discounted Cash-flow Analysis (DCF) Comparable operations and financial structure Considerations paid in transactions involving comparable companies Valuation based on NPV of projected Free Cash Flows Valuation with multiples Valuation with multiples WACC used as basis for discount factor Multiples show how the market values the future outlook of a company Multiples are a reflection of the strategic value of a company Includes takeover premium DCF requires in-depth analysis of the company and access to relevant data + MARKET INTELLIGENCE CONCLUSIONS REGARDING VALUATION 16 Valuation Training Comparable Company Analysis Purpose Valuation method based on comparing the company being valued to similar companies Analysis performed with multiples: • • • • • Enterprise value as a multiple of Sales Enterprise value as a multiple of EBITDA Enterprise value as a multiple of EBIT Enterprise value as a multiple of Customers Equity value as a multiple of Net Income, etc. 17 Valuation Training Comparable Company Analysis Comparable Companies vs Transactions Aggregate Value Comparable Companies Analysis Comparable Transactions Analysis Market value of a standalone company Consideration paid by an acquiror for the whole of a company Value includes takeover premium (“premium for control”) Reference Date Value of a company’s shares today Multiples are expressed relative to current or future expected performance Value paid in transactions in the past Multiples are expressed relative to historical financials of target company 18 Valuation Training Comparable Company Analysis Getting the Right Results ... … requires the right input Time of Valuation Accuracy of Data Quality of Data Appropriateness of Data – Current valuation for comparable companies – Announcement date for comparable transactions Reflecting business prospects – Research analysts estimate for comparable companies On a normalised Basis Alternatively Garbage In ... … Garbage Out 19 Valuation Training Comparable Company Analysis Comparable Company Analysis Identification of Comparable companies which trade publicly Appropriate valuation benchmarks Appropriate multiple range Comparability Companies should have similar operating and financial characteristics and be of similar size (e.g. Pharma companies) Preferably companies in same industry or with similar characteristics in related industries, and geography. But: Companies are rarely directly comparable Historical data can be misleading or unavailable 20 Valuation Training Comparable Company Analysis Comparability of Companies Similar companies with respect to operating and financial characteristics Operating Industry and business economics Sales volume Earnings growth/margin Profitability Cash flow pattern Cyclicality Regulatory environment Financial Gearing Capital structure Accounting policies Dividend policy Liquidity of stock Very suitable Direct Competitors Size of public float Controlling shareholders Less suitable Similar business Suppliers/Customers 21 Valuation Training Comparable Company Analysis Multiple Analysis Calculation: Value= Appropriate Multiple x Metric Example: Comps analysis results in average multiple of 10x EBITDA for sector. Example company can now be valued based on the sector Example company EBITDA x Multiple = Enterprise Value - Net Debt of Case Company = Equity Value Shares Issued & Outstanding Price per Share per Comps Analysis 1,500 x 10 15,000 2,000 13,000 1,000 13 22 Valuation Training Comparable Company Analysis Multiple Analysis Example 1 EBITDA Multiple EBITDA EV EBITDA Earnings before interest, taxes, depreciation and amortisation Example 2 P/E Multiple Equity Value Share Price = Net Income EPS 23 Valuation Training Comparable Company Analysis Relevant Multiples for Selected Industries Airline : EV/EBITDA, EV/Sales Banks : P/Book Chemicals : EV/EBITDA Cement : EV/EBITDA, P/E Drinks : EV/Sales, EV/EBITDA Healthcare : P/E, PEG Insurance : P/Embedded Value Mobile Communications : EV/Sales, R&D/Assets Semiconductors : EV/EBITDA Engineering : P/E, EV/EBITDA Retailing : EV/Sales, EV/EBIT, EV/EBITDAR Oil : EV/CF, EV/EBITDA Utility : Div. Yield, EV/EBITDA 24 Valuation Training Comparable Company Analysis Enterprise and Equity Value Enterprise Value (EV) = Equity Value + Net Debt ND Market Value of Equity = Share Price x Number of Shares in issue, for each class of share (including preference if deemed to be equity) EV EqV Enterprise Value - Net Debt = Equity Value Net Debt = Short and Long-Term Debt + Finance Leases + Other Interest Bearing Liabilities + Preferred shares (if deemed to be debt) + Minority Interest - Cash - Liquid Short Term Investments 25 Introduction to Multiples Comparable Company Analysis Book Concepts Market Concepts Equity Fixed Assets Market value of equity (eg. market cap) Minority Interest Market value of minority interests Net Debt Market value of net debt Enterprise Value Working Capital Capital Employed = Financing 26 Valuation Training Comparable Company Analysis Enterprise and Equity Value Revenue EBITDA EBIT Enterprise Value (available to all stakeholders) Interest Taxes Equity Value (available to shareholders) Net Income Debtholders Shareholders Government 27 Valuation Training Comparable Company Analysis The Mathematics of Valuation Multiples Profit & Loss Valuation Balance Sheet Enterprise Value (“EV”) Capital Employed = = Debt, net of cash, at market value(1) Debt, net of cash, at book value + + Minority interests at market value(1) Minority interests at book value + + Preference shares at market value(1) Preference shares at book value + + Market value of ordinary shares Ordinary shareholders’ funds Sales EV/Sales EBITDA EV/EBITDA EV/EBIT EBIT Interest Minority interests Preference dividends Ordinary earnings PER ____________________ (1) Where market value is not available, estimated market value should be used if the item is material, otherwise book value may be used 28 Valuation Training Comparable Company Analysis Price Earnings Ratio (P/E) Most widely quoted valuation multiple in the equity markets P/E measures the price and prospects for growth which investors attach to a company’s earnings Implications of a P/E higher than the market or sector average How P/Es evolve over time Share Price = EPS x P/E P/E = Share Price EPS P/E = Market Capitalisation Net Earnings 29 Valuation Training Comparable Company Analysis Earnings per Share (“EPS”) Used in P/E calculation Yardstick for acquisition/valuation decisions EPS = Net Earnings Weighted Average Number of Shares Outstanding During the Period Diluted EPS Cash EPS “Net” = after interest and taxes “Operating Earnings” = earnings from continuing operations Exceptional/non-recurring items to be excluded Historic and prospective 30 Valuation Training Comparable Company Analysis Review of Share Capital Shares authorised Shares issued Shares issued minus Treasury Stock = Shares Issued and Outstanding Shares listed Public/Free Float Diluted shares 31 Valuation Training Comparable Company Analysis Exceptional/Non-Recurring Items As Reported Restated EBIT 100 Restructuring Charge (50) Pre tax Profit 50 Tax (50%) Net Income (25) EBIT 100 Pre tax Profit 100 Tax (50%) (50) Net Income 50 25 32 Valuation Training Comparable Company Analysis Factors Which Influence P/E Multiples Growth prospects Cost of capital Leverage Accounting periods Cross-border differences Drawback of P/E Analysis Accounting treatment Non-cash items Non-allowance for capital risk/time value of money 33 Valuation Training Comparable Company Analysis Drawback of P/E Analysis 2014 2015 €5,000,000 €3,000,000 60% 75% Operating Profits 2,000,000 750,000 (Provision)/Writeback (900,000) 450,000 PBT 1,100,000 1,200,000 30% 30% 770,000 840,000 Turnover Cost of Sales Tax Rate PAT 34 Valuation Training Comparable Company Analysis PE/G Ratio: Adjusting for Growth Analyse company’s P/E in relation to earnings growth prospect PE/G = P/E LT Growth Rate The higher the PEG, the more you pay for growth Company A: P/E = 25 growth 17% PEG: 1.47 Company B: P/E = 16 growth 10% PEG: 1.60 35 1. Comparable Valuation Analysis 1.2 Comparable Analysis 1.2.2 Comparable Transaction Analysis Valuation Training Comparable Transaction Analysis Key Valuation Methods Analysis of Comparable Companies Analysis of Comparable Transactions Publicly traded companies Comparable operations and financial structure Valuation with multiples Multiples show how the market values the future outlook of a company Considerations paid in transactions involving comparable companies Valuation with multiples Multiples are a reflection of the strategic value of a company Discounted Cash-flow Analysis (DCF) Valuation based on NPV of projected Free Cash Flows WACC used as basis for discount factor DCF requires in-depth analysis of the company and access to relevant data Includes takeover premium + MARKET INTELLIGENCE CONCLUSIONS REGARDING VALUATION 37 Valuation Training Comparable Transaction Analysis Purpose Valuation method based on comparing value of a company to prices paid for similar companies Analysis performed with multiples: • Transaction value as a multiple of Sales • Transaction value as a multiple of EBITDA • Transaction value as a multiple of EBIT • Transaction value as a multiple of Customers • etc. 38 Valuation Training Comparable Transaction Analysis Comparable Companies vs Transactions Aggregate Value Comparable Companies Analysis Comparable Transactions Analysis Market value of a standalone company Consideration paid by an acquiror for the whole of a company Value includes takeover premium (“premium for control”) Reference Date Value of a company’s shares today Multiples are expressed relative to current or future expected performance Value paid in transactions in the past Multiples are expressed relative to historical financials of target company 39 Valuation Training Comparable Transaction Analysis Comparable Transactions Rationale Determine value of transaction Determine multiples compared to target’s financial performance and pre-announcement market value Determine control premium of specific industries Comparability Companies involved in transactions should have similar operating and financial characteristics and be of similar size Recent transactions more accurate than transactions completed in the distant past But: Transactions are rarely directly comparable Transactions may include different synergy rationale Public data can be misleading or unavailable Acquisition multiples can vary widely No current P/E or multiple benchmark Misleading interpretation of same financial figures and paid consideration. 40 Valuation Training Comparable Transaction Analysis Comparable Transactions Analysis is performed on announcement date Valuation of Consideration If cash offer, equity value is calculated as amount offered per share times the target’s diluted shares outstanding at the time of the transaction If share offer equity value equals the exchange ratio multiplied by acquirer’s share price one day prior to announcement multiplied by target’s diluted shares outstanding at time of transaction Structural Differences Hostile/friendly, stock/cash, on/off-balance sheet debt. Acquisition Multiples Based on LTM Availability? 41 Valuation Training Comparable Transaction Analysis Key Elements Announcement date (analysis is performed on announcement date data) Acquirer Target name and business description (for comps table. Easy to confuse companies) Transaction summary Acquisition vs merger Bid currency - shares vs cash % of company acquired Hostile/friendly Equity value Gross up if acquisition < 100% Based on fully diluted 42 Valuation Training Comparable Transaction Analysis Key Elements (cont’d) Aggregate value - take net debt from latest financial statement of target Acquisition multiples Based on Latest Twelve Months (“LTM”) Forward multiples based on research published around time of transaction Premium to unaffected share price 1 day/4 weeks prior to announcement, but check share price development Check when rumors first appeared in press 43 Valuation Training Comparable Transaction Analysis Key Calculations Shares Outstanding: For Acquisition Comparables, shares outstanding consist of the following Shares outstanding (as of the latest financials available); plus, Options outstanding (if in-the-money); plus Shares pursuant to convertible securities (if in-the-money) Convertible debt Convertible preferred Offer Price Per Share = price per share offered by the acquirer. In the case of an offer that includes stock, use the acquirer's stock price one day prior to the announcement times the exchange ratio Offer Value = offer price per share x shares outstanding (as calculated above) – cash proceeds from options Transaction Value = offer value + non-convertible debt + non-convertible preferred + minority interest – cash and marketable securities 44 1. Comparable Valuation Analysis 1.2 Comparable Analysis 1.2.3 Useful Hints Valuation Training Useful Hints Useful Hints As companies usually grow, forward multiples should decrease. Any increase of forward multiples should be double-checked Sales multiples < EBITDA multiples < EBIT multiples < PE Multiples The last historical aggregates (EBITDA, EBIT, NI, Net Debt) should be checked against Research Report used. Any discrepancy should be understood before inputting numbers Exclude extraordinary/exceptional/non-recurring items Some companies have more than one class of share capital, review notes in annual reports Check for recent stock splits, rights issues Check for recent acquisitions/disposals Bid premium in the share price Any out of the range company should be double-checked Any re-treatment of information should be footnoted Check for cyclicality when comparing companies in different markets 46 Valuation Training Useful Hints Outliers and Averages Outliers can significantly affect the result Check median vs mean Exclude outliers if justified Use industry sector subgroups Consider using weighted averages Depressed or negative financials Exclude extraordinaries/exceptionals Normalize financials Certain outliers are meaningful and should not be excluded 47 Valuation Training Useful Hints Normalize for Non-recurring Items Adjust for one-time items that are not expected to be part of the normal course of business in the future Goal = evaluate the on-going business, earnings and cash flows Common examples Restructuring charge Gain/(Loss) on sale of assets Legal settlements Where to find non-recurring items Separate line item in IS Contained in other line items – Other income/expenses – SG&A, COGS MD&A Section, footnotes and company press releases for detailed discussion 48 Valuation Training Useful Hints Potential Pitfalls of Comparable Company Analysis Negative Earnings Loss-making Risk of bankruptcy Use DCF Absence of Historical Information Recent business transformation Recent IPO, privatisation Absence of comparable companies Use DCF Use DCF 49 1. Comparable Valuation Analysis 1.4 Summary of Valuation Methods Valuation Training Summary of Valuation Methods Overview of Valuation What is a company worth? Analyse all available valuation methods Weight the results appropriately Use judgement Reasonable, defensible numbers and approach Exclude outliers Calculate ranges, not specific values Perform sensitivities Calculate implied valuation and multiples 51 Valuation Training Summary of Valuation Methods Example of a Valuation Summary Methodology ■ Current ■ Pre-leak ■ 12 months low-high pre leak Analysts’ price target ■ Range of available analysts’ price targets Comparable company valuations ■ EV/EBITDA - EV/EBIT Comparable acquisition ■ EV/EBITDA Sum-of-the-Parts ■ DCF scenario 1 ■ DCF scenario 2 Transaction Trading Share price Commentary Implied Value 52 Valuation Training Summary of Valuation Methods Standardized Model: Example of a Summary Output Public Trading Comparables (1) Mkt Public Acquisition Comparables DCF LBO 8,665 7,000 (2) Enterprise Value Current EV 6,240 6,853 5,408 4,362 3,900 3,616 3,380 4,576 3,339 5,000 3,616 3,680 3,380 3,328 2,712 2,712 2,658 2,080 Market Valuation Revenue EBITDA EBIT PE Revenue EBITDA EBIT PE DCF LBO n.m. 2015 Basis Selected Multiple Range Value per Share (3) #Calc - #Calc 2,600x 416x 181x 68x 2,600x 416x 181x 68x 9.0% - 11.0% 0.80x - 1.30x 8.0x - 13.0x 15.0x - 20.0x 25.0x - 35.0x 1.30x - 1.50x 11.0x - 15.0x 15.0x - 20.0x 40.0x - 50.0x 8.0x - 10.0x n.m. 10.43 - 22.47 21.98 - 41.24 16.28 - 24.65 15.78 - 22.09 22.47 - 27.28 33.54 - 48.95 16.28 - 24.65 25.24 - 31.55 54.62 - 71.40 37.47 - 55.98 Source: Company (1) Market Valuation reflects the 52 week high/low closing share price range of #Calc to #Calc (2) Current Enterprise Value is based on a closing price of 50.00 as at March 6, 2015 (3) Value per Share is based on 108.0 million shares and net debt of $953.8 million 53 Valuation Training Summary of Valuation Methods Valuation Expertise Company Market Investors Management Track Record Competitors Valuation = Theory + Industry Knowledge Core Business Focus Regulator Growth & Margins Industry Cycle Capitalisation Timing 54 2. Discounted Cash Flow Analysis 2. Discounted Cash Flow Analysis 2.1 Introduction Valuation Training Overview of Valuation Key Valuation Methods Analysis of Comparable Companies Analysis of Comparable Transactions Publicly traded companies Comparable operations and financial structure Valuation with multiples Multiples show how the market values the future outlook of a company Considerations paid in transactions involving comparable companies Valuation with multiples Multiples are a reflection of the strategic value of a company Discounted Cash-flow Analysis (DCF) Valuation based on NPV of projected Free Cash Flows WACC used as basis for discount factor DCF requires in-depth analysis of the company and access to relevant data Includes takeover premium + MARKET INTELLIGENCE CONCLUSIONS REGARDING VALUATION 57 Valuation Training Overview of DCF Analysis Discounted Cash Flow Analysis (DCF) DCF is the only means of coming close to determine the true value of a company Comparable valuation analysis provides an indication of what buyers may be prepared to pay To do so, the DCF model must be a realistic economic model of the subject company Need to have a good understanding of the company, and, in particular, of the relationship between Sales and earnings Cash flow and profit and loss Balance sheet and profit and loss A properly thought through DCF model will give you a thorough understanding of the company 58 Valuation Training Overview of DCF Analysis Discounted Cash Flow Analysis (DCF) DCF valuation equals the intrinsic value of a company DCF value equals the sum of the net present value (NPV) of: Projected free cash flows (FCF) Projected Terminal Value NPV is calculated using a weighted average cost of capital (WACC) 59 Valuation Training Overview of DCF Analysis Discounted Cash Flow Analysis (DCF) Theoretical valuation based on projected free cash flows (FCF) Subjective forecasts based on assumptions Potential bias (run sensitivities) Requires scrutiny of key value drivers Flexible analysis Analysis of synergies, growth scenarios, margin improvements Incremental effects Highly sensitive to changes in: Growth rates and margin assumptions Terminal value estimate Assumed discount rate (beta, market conditions) DCF results should always be presented as a range of estimated values 60 Valuation Training Overview of DCF Analysis Methodology 1. Forecast of unlevered FCFs 2. Calculate Terminal Value 3. Determine discount rate 4. Discount FCFs and terminal value 5. Arrive at Aggregate Value 6. Add equity investments if appropriate 7. Take off net debt and minorities 8. Equity Value 61 2. Discounted Cash Flow Analysis 2.2 Cost of Capital Valuation Training Cost of Capital Cost of Capital - Overview A significant assumption in the DCF analysis is the choice of a discount rate The cost of capital represents the required rate of return given The risks inherent in the business The industry The uncertainty regarding the company’s future cash flows (volatility) The assumed capital structure of the business Cost of capital is always forward-looking An investor contributes capital with the expectation that the riskiness of cash flows will be offset by an appropriate return Cost of capital based on comparable companies The cost of capital is typically estimated by studying capital costs of existing investment opportunities which are similar in nature and risk to the one being analysed The cost of capital is related to the risk of the investment, not the risk of the investor and therefore, is always a function of the investment 63 Valuation Training Cost of Capital Cost of Capital - Overview DCF valuation requires accurate calculation of the cost of capital – WACC is one of the most important value drivers WACC is a company’s cost of capital – Based on the risks inherent in the business – Based on an assumed capital structure of the business – Based on comparable companies – Based on theory of risk and return correlation (CAPM) AND – Always forward looking, not historical – Always a function of the investment, not the investor – Always based on market values, not book values Statistical reliability, data and information issues 64 Valuation Training Cost of Capital Academic Theory: WACC without Tax Cost of Capital % ke WACC kd 0% Debt Gearing 65 Valuation Training Cost of Capital Academic Theory: WACC with Tax Advantage of Debt Cost of Capital % re WACC rd (1-t) 0% Debt Gearing 66 Valuation Training Cost of Capital Academic Theory: WACC with Tax Advantage and Default Risk Cost of Capital % re WACC Net rd 0% Debt Gearing 67 Valuation Training Cost of Capital WACC Formula The cost of capital is equal to the weighted average of the cost of debt and the cost of equity Weighted Average Cost of Capital (WACC ) = rd × (1 − t ) D = Market Value of Debt E = Market Value of Equity t = Marginal Tax Rate rd = Return on Debt re = Return on Equity D E + re × D+E D+E 68 Valuation Training Cost of Capital WACC Methodology 1. Determine target capital structure Debt portion Equity portion Other 2. Determine cost of debt Riskfree rate Bond spread Marginal tax rate 3. Determine cost of equity according to CAPM Riskfree rate Beta Equity risk premium 4. Calculate weighted average of the cost of debt and the cost of equity 69 Valuation Training Cost of Capital 1. Determine Target Capital Structure Calculating WACC requires estimating the target market value weights for the capital structure of the company Consider historical and actual capital structure Consider how company may finance itself in the future Analyse industry average capital structure Capital structure decision will be affected by Business risk Asset type Costs of financial distress Taxes Dividend flexibility Regulatory restrictions Rating requirements 70 Valuation Training Cost of Capital 1. Determine Target Capital Structure (cont’d) Components of capital Spontaneous Finance Trade creditors and Accruals Short Term debt Debt Capital Long Term debt Hybrid Instruments Equity Debt or Equity Equity 71 Valuation Training Cost of Capital 1. Determine Target Capital Structure (cont’d) Market Value PV of financial distress PV Tax Shield Value if all-equity financed Optimal Debt Ratio 72 Valuation Training Cost of Capital 2. Determine Cost of Debt Risk free rate kd = (rf + bond spread) Determine the long term cost of debt for the target company Obtain market quotes for current long term debt funding Determine cost of debt for companies with comparable risk profile The cost of debt will be higher with Business risk (cash flow characteristics) Level of gearing in a business The required return on debt “rd” is directly observable in the market Yield-to-maturity on the applicable debt Typically expressed as a spread on top of the riskfree rate Yield represents the market’s expectation of future returns 73 Valuation Training Cost of Capital 2. Determine Cost of Debt (cont’d) Straight Investment Grade Debt Yield-to-maturity reflects market expectations of future returns After tax cost of debt assurance, company can use tax shield Below Investment Grade Debt Yield spread over risk free rate reflects assessment of default risk High yield market not liquid Use rating and sector comparables (where available) as a proxy High yield spreads extremely volatile The tax benefit of debt financing is included in the cost of capital, not in the Free Cash Flow (unlevered FCF) Assumes that target company is profitable and has enough pre-tax profit to shield with interest expense It is usually assumed that the beta of debt is close to zero, which is generally true 74 Valuation Training Cost of Capital 2. Determine Cost of Debt (cont’d) Case Study - Which Cost of Debt? The company has a ten year bond outstanding with a coupon of 7% that matures in 2 years and yields 6% The company has a long-term S&P rating of BBB, which in today’s environment would imply a spread over government bonds of 230bp The company treasurer has told you that he has a short term line of credit from his local commercial bank that provides most of his financing and currently costs the company 4.5% From the annual report you can calculate that the average interest rate is 5.5% The company has just issued a ten year convertible bond that yields 5.0% 75 Valuation Training Cost of Capital 3. Determine Cost of Equity: CAPM and Risk Equity investors expect a higher return for accepting higher risk Cost of Equity Risk 76 Valuation Training Cost of Capital 3. Determine Cost of Equity: CAPM and Risk (cont’d) There are two types of risk, specific risk and market risk: Specific risk of company Good or bad management decisions Loss or gain of major customers Development/failure of a new technology Introduction/failure of major products Also called unsystematic risk 77 Valuation Training Cost of Capital 3. Determine Cost of Equity: CAPM and Risk (cont’d) Market risk - economic factors Interest rate changes Growth in economy Unanticipated inflation Government policy Also called systematic risk Some shares/investments are more affected by market risk than others, this is what Beta measures 78 Valuation Training Cost of Capital 3. Determine Cost of Equity: CAPM and Risk (cont’d) Market risk is unavoidable Specific risk can be avoided through diversification The CAPM concludes that the assumption of systematic risk is rewarded with a risk premium Risk of Portfolio Specific risk Market risk Number of Shares in Portfolio 79 Valuation Training Cost of Capital 3. Determine Cost of Equity: CAPM The equity cost of capital is equal to the expected rate of return for a firm’s equity Cost of equity can be estimated using the Capital Asset Pricing Model (CAPM) Investors expect risk free rate as minimum return Higher risk will result in higher return ERP Equity investment has exposure to market risk Beta Cost of Equity (which has no tax advantage): rf re = rf + βx ERP 80 Valuation Training Cost of Capital 3. Determine Cost of Equity: Methodology Estimating WACC... 3. Determine cost of equity according to CAPM 3.1 Establish levered betas for comparable companies 3.2 Unlever betas for comparable companies 3.3 Choose an average unlevered beta based on comparables 3.4 Lever this average beta based on target capital structure 3.5 Calculate levered cost of equity according to re = rf + β * ERP 81 Valuation Training Cost of Capital 3. Determine Cost of Equity: Beta Beta is measured with a linear regression between past returns on the stock in question and past returns on a broad market index Use Bloomberg, this allows you to change assumptions if needed – Use standard 2 year historical time period – Broad market index that is related to investment (S&P500, DAX100) Always use adjusted beta (now raw beta), there are statistical reasons for this Always calculate betas based on a range of comparable companies 82 Valuation Training Cost of Capital 3. Determine Cost of Equity: Beta (cont’d) Checks – Check correlation coefficient (R2) e.g. an R2 of 31% implies that 31% is market risk, 69% is diversifiable risk (not rewarded) – Check alpha (intercept of regression line, should be zero) – Check impact of historical time period – Check for unusual events during time period Historical betas may not be a good indicator of future risk Consider using Barra’s Predicted Betas if historical betas are deemed irrelevant 83 Valuation Training Cost of Capital 3. Determine Cost of Equity: Beta (cont’d) The overall market has β = 1, most large companies have betas in the range 0.5 - 1.5 Beta is higher in firms with High financing gearing High operational gearing, i.e. a high ratio of fixed to variable costs Cyclical firms 84 Valuation Training Cost of Capital 3. Determine Cost of Equity: Beta (cont’d) Market Risk β=1 Beta 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.00 1.0 0.6 to r y nc ia ls Se c lo g Fi na ch no Te tri al s er al In d Se yc on -C C yc l N G en lic al SE FT us rv ic e s re ll S A G lC on ic a B ha oo ds s su R m er es o ur ce st rie as i c In du er v lS ic a yc l s s ic e s ci al ds N on -F i G oo na n C C on su m er U til it ie s 0.4 lic al yc on -C N 1.00 0.9 0.9 0.8 1.00 1.3 1.3 1.1 Sector Source: London Business School Risk Measurement Survey: Based on UK FTSE All Share Index 85 Valuation Training Cost of Capital 3. Determine Cost of Equity: Beta (cont’d) Company and sector betas reflect existing gearing levels - they are inherently levered betas For the cost of equity calculation, we need can a beta that reflects our chosen target capital structure Establish levered betas for comparable companies Unlever these betas based on the current capital structure of each comparable company Choose an average unlevered beta based on comparables Lever this unlevered beta based on the target capital structure This beta gives us a levered cost of equity that is then used in the CAPM formula to determine the cost of capital 86 Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta Levered beta obtained from comparable companies: gearing ratio βlev u x (1 + D (1-t) ) E To calculate unlevered beta for each company: βu = = lev 1 + (D/E)(1-t) D = Debt E = Equity t = Marginal tax rate This assumes that the beta of debt is equal to zero, which is generally true 87 Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta (cont’d) To calculate unlevered beta, we need to calculate the gearing ratio (D/E) and marginal tax rate of all comparable companies Always use market values of equity (and where deemed appropriate, of debt) Market vs Book Value of Debt Weighting is always based on market value, not book value Market value of equity (= market capitalisation) Market value of debt is usually close to book value In most cases, book values are a good approximation of the market value of debt Market value may be substantially different if Riskfree interest rates have shifted substantially Credit profile of the company has changed 88 Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta (cont’d) When calculating gearing ratios, use net debt Cash & Equivalents Debt Net Debt Total Capital Equity 89 Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta (cont’d) Net Debt method for unlevering betas is most appropriate Gross Debt Method ■ Method Description ■ The market or book value of interest bearing debt is used to unlever(1) the company Equity Beta Net Debt Method ■ The Gross Debt Method does not net out Cash ■ ■ ■ Rationale ■ The Gross Debt method assumes that any cash balance is operating cash or restricted in some way, and cannot be used to net down debt Therefore, under this method, we assume that the observed Equity Beta fully takes into account the balance sheet leverage (and the associated interest payments the firm must make) ■ ■ The effect of this leverage will lead to a higher Levered Beta ■ Net Debt is used to establish the Current Debt Level which is used in unlevering(1) the observed Equity Beta Net Debt includes Interest Bearing Debt less Cash The Net Debt Method implicitly assumes that the market considers a company’s cash position in determining the relative movements of a company’s stock versus the market For example, If you have two identical companies with the same amount of debt, the one with a cash balance should have a lower observed Equity Beta (even though both companies have the same underlying unlevered beta) This is because the market gives the company with cash “credit” for having lower financial risk than the one without 90 ____________________ (1) Unlevering Beta neutralises the effect of financial leverage from the observed Equity Beta Unlevered Beta = (Levered Beta/(1 + ((1 - Tax Rate) * Debt/Equity)). Assumes Beta of debt equals zero Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta (cont’d) Additional Issues Hybrid instruments Decide if instrument is equity or debt-like Count as debt if interest is tax-deductible Operating leases Include leases as part of debt in the capital structure Determine market value (or book, if unavailable) and cost of debt (interest) Minority interest Determine market value and cost of equity of minority interest Approximate with book value if no other information available If the minority interest has the same risk as the company, add minority interest to the value of equity 91 Valuation Training Cost of Capital 3. Determine Cost of Equity: Unlevered Beta (cont’d) Data sources for Betas: Source Comment Bloomberg Adjusted Beta Barra – Historical/Local/ Global Predicted Beta The adjusted Beta is derived by the following formula: adjusted ß = 0.33 + 0.66 x raw (unadjusted) ß Regression of historical weekly return (2 years) of shares and the corresponding market index Various assumptions can be customized on screen (duration, index, interval) Historical Betas typically based on 60 month returns Forecasted beta derived from Barra risk model, with 13 fundamental/ financial risk factors Risk factors include attributes such as size, yield, P/E ratio Risk factors reestimated on a monthly basis to reflect changes in company’s underlying risk structure Better forecast of market sensitivity as fundamental changes in the company’s operations and specific events are captured Difficult to judge outcome of risk model Merrill Lynch Beta Book Regression of historical monthly returns (52 weeks) of shares and corresponding returns of the market index (S&P 500) over a five year period LBS Beta Regression of historical monthly returns of shares and corresponding returns of the market index over a five year period; betas updated quarterly Bloomberg’s Adjusted beta provides the most transparent and widely used Beta measure 92 Valuation Training Cost of Capital 3. Determine Cost of Equity: Equity Risk Premium The higher the risk of an investment, the higher the expected return Equity Risk Premium (ERP) is differential between the return of the stock market and the risk free rate ERP = Return of Market - Risk Free Rate Return of Market = Dividend Payments + Capital Gains and Losses 93 Valuation Training Cost of Capital 3. Determine Cost of Equity: Equity Risk Premium (cont’d) Within the financial community, there is no clear consensus over what number should be used for the equity risk premium in the calculation of the cost of capital We recommend the use of an equity risk premium of 6.0% based on Evidence from historical record of equity returns in the United States and Europe However, the entire record of market returns is not large enough to measure the ERP with sufficient statistical precision A broad range of studies that are consistent with an ERP significantly less than the historical averages Recommended Equity Risk Premium (globally): 6% 94 Valuation Training Cost of Capital 3. Determine Cost of Equity: Riskfree Rate The riskfree rate is represented by a long term government bond yield (ideally swap rate) German Federal Government 10-year Bund yield UK Treasury 10-year Bond yield The horizon of the risk-free rate must correspond to the horizon of the equity risk premium 95 Valuation Training Cost of Capital 4. Calculate WACC: Bringing it All Together WACC = rd × (1 − t ) D E + (rf + β u ⋅ ERP ) × D+E D+E Example Assumptions Risk-free Rate Cost of Equity Cost of Debt WACC Risk-free Rate rf 4.50% 10-year German Government Bond yield Target Capital Structure E/D 60% / 40% Equity Risk Premium ERP 6.00% Unlevered Beta βu 0.60 Average unlevered beta of Comparable Copmanies Tax Rate t 40% Marginal tax rate Levered Beta βlev 0.84 At target capital structure Levered Cost of Equity (after-tax) rE 9.54% Cost of Debt (pre tax) rD 5.40% Cost of Debt (after-tax) rD *(1- t) 3.24% Weighted Average Cost of Capital WACC 7.02% Long term target capital structure EURIBOR + 50bp (cost of debt for comparable investment) After-tax 96 Valuation Training Cost of Capital Don’t forget If the target business or project is in a different country or sector than the bidder, the appropriate discount rate is that of the target not the bidder Always use market values of equity (and where deemed appropriate, of debt) Focus on long term cost of applicable debt securities Always calculate on an after-tax basis (tax shield of debt) The discount rate should be a true WACC, not some sort of hurdle rate Always use the same currency as the cash flows Always perform sensitivities on target capital structure WACC sensitivity analysis must not replace FCF scenarios 97 Valuation Training Cost of Capital Multi-business WACC Consider estimating separate WACCs for each business unit and geographic segment WACC may be substantially different if Different tax rates Different capital structures Different universe of comparable companies Different business risk Regulated vs. non-regulated business Incorporate multi-business concept into DCF Calculate separate DCFs with separate WACCs for all business units Calculate weighted-averages of all business unit WACCs for use in one DCF Division 1 Division 2 Division 3 Division 4 WACC 1 WACC 2 WACC 3 WACC 4 98 Valuation Training Cost of Capital Changes in WACC over Time There may be reasons why WACC could change during the forecast period – Anticipated changes in capital structure Initial restrictions on leverage – Anticipated changes in fundamental business risk Fundamental change in business strategy (Start-up companies) Fundamental change in economic, regulatory environment (deregulation) – Term structure of yield curve is inverted (short term interest higher than long term) In such cases, apply a different WACC for different time periods in the DCF analysis 99 2. Discounted Cash Flow Analysis 2.3 Free Cash Flow Projections Valuation Training Discounted Cash Flow Analysis 1. Project Unlevered Free Cash Flows DCF is based on the net present value of unlevered free cash flows EBITDA Less: Depreciation and tax deductible amortisation Equals: EBITA Less: Taxes (at the marginal tax rate) Equals: Tax-Effected EBITA Less: Increase in working capital Plus (less): Deferred Taxes Plus: Depreciation and tax deductible amortisation Less: Capital expenditures Less: Changes in other assets and liabilities Equals: Unlevered Free Cash Flows 101 Valuation Training Discounted Cash Flow Analysis 2. Calculate Present Value of Unlevered Free Cash Flows Present value of cash flow stream Present Value = in Excel = FCF1 + FCF2 + FCF3 (1 + r )1 (1 + r )2 (1 + r )3 NPV (r, FCF1 : FCFN ) + ... + FCFN (1 + r )N Mid-year convention Assumes that cash flows occur in the middle of the period Often better approximates the time the cash is actually received Discount cash flows by a period of one-half year less Present Value = in Excel = FCF1 + FCF2 + FCF3 (1 + r )0.5 (1 + r )1.5 (1 + r )2.5 0.5 NPV (r,FCF1 : FCFN ) * (1 + r ) + ... + FCFN (1 + r )N −0.5 102 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Methodology Develop an integrated historic perspective of the company’s performance Understand the industry sector and competitive position of the company Analyse last 3-5 years’ financial statements Focus on key value drivers Understand sustainability of company’s rate of return “Top down” better than “bottom up” approach Develop financial forecasts and analyse relevant scenarios (sensitivity analyses) Step back and interpret the numbers: do they seem to make sense? 103 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Specific Factors Length of Forecast Period Theoretical period until company’s growth equals economy’s growth, and company’s ROC driven by competition down to level of COC Up to 10 year period common in practice Shorter periods sometimes less desirable because of terminal value influence on overall value Longer periods suitable Finite life projects (contracts, agreements) Long asset lives (pipelines, nuclear plants) Early negative cash flow 104 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Specific Factors Associates Where income from associate(s) is a significant component of profits Estimate separately the true value of the investment Add value back to total value of company as part of sum-of-the-parts analysis Exclude income from associate from FCF Dividends received from such associate(s) should not be included in FCF 105 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Specific Factors Cyclicality Cash flows should reflect Business cycle of company Commodity price cycle etc. In practice cycles hard to forecast... ... therefore, some use mid-point of price cycle after first projection years Beware of timing differences of FCFs with this approach Scenario analysis 106 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Uncertainty How to model risky situations? Investment in an untested business strategy Risk of technological failure Adjust expected cash flows, not discount rate Use probability weighted scenario analysis Examples Multiply NPV with the probability of success Use real options approach Decision tree analysis Calculate probability based on measure of volatility Multiply NPV with probability of success 107 Valuation Training Discounted Cash Flow Analysis Free Cash Flow Projections - Step back from the numbers “Sanity Check” on the main components of FCF Compare sales growth assumptions Underlying market industry dynamics Long term economic growth (inflation) Check reasonableness of Gross and EBIT margins Avoid “hockey sticks” Pay special attention to Capex requirements “Please my Lord keep me as I am” analysis 108 2. Discounted Cash Flow Analysis 2.4 Terminal Value Valuation Training Discounted Cash Flow Analysis Terminal Value The present value of the free cash flow of the company after the explicit forecast period Methods of estimation Perpetuity formula usually used Exit multiples Regulatory asset value Liquidation value Break-up value Replacement cost used in regulatory models rarely used 110 Valuation Training Discounted Cash Flow Analysis Terminal Value - Perpetuity Formula Theoretically most correct method Capitalises FCF after forecast period as a growing perpetuity Estimated Terminal Value then discounted to present day at company’s cost of capital Terminal Value = FCFN ⋅ (1 + g ) (WACC − g ) 111 Valuation Training Discounted Cash Flow Analysis Terminal Value - Perpetuity Formula FCF Normalised to allow sufficient Capex and change in Working Capital to permit projected growth to occur Capex often (sometimes always) underestimated when modelling Rate at which FCF is estimated to keep growing Normal minimum: g = 0 Normal maximum: assumed rate of nominal GDP/industry growth Run sensitivities on g g 112 Valuation Training Discounted Cash Flow Analysis Terminal Value - Adjustments Terminal value year in a DCF reflects the steady-state perpetual cash flows Terminal Value = FCFN ⋅ (1 + g ) (WACC − g ) If the free cash flow in year N does not represent a steady state for the future (i.e., a normalized cash flow), then adjustments must be made Typically, these adjustments include revising the relationship between revenues, EBIT and capital spending to correspond with the perpetual growth rate: Sustainable revenue growth Sustainable EBIT margin Sustainable working capital needs Sustainable capital expenditure and corresponding depreciation 113 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments to Working Capital Funding requirements for working capital in the terminal year of a DCF need to reflect growth of working capital at the perpetual growth rate Illustrative example Constant growth at 5% Change in net working capital in terminal year reflects growth at 5% Growth Income Statement Revenues Opex Working Capital Schedule Working Capital Assets Working Capital Liabilities Net Working Capital 1 2 Year 3 5% 5% 5% 4 5 5N 5% 5% 5% CAGR 100.0 (50.0) 105.0 (52.5) 110.3 (55.1) 115.8 (57.9) 121.6 (60.8) 121.6 (60.8) 5.0% 5.0% 60.0 15.0 45.0 63.0 15.8 47.3 66.2 16.5 49.6 69.5 17.4 52.1 72.9 18.2 54.7 72.9 18.2 54.7 5.0% 5.0% 5.0% (2.1) (2.3) (2.4) (2.5) (2.6) (2.6) 5.0% (1) Change in Net Working Capital (1) For illustrative purposes, working capital assets equal 60% of revenues, working capital liabilities equal 30% of Opex 114 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments to Working Capital (cont’d) Illustrative example Growth is changing year-on-year Change in net working capital in terminal year needs to be adjusted (manually) to reflect perpetual growth at 5% Growth Income Statement Revenues Opex Working Capital Schedule Working Capital Assets Working Capital Liabilities Net Working Capital 1 2 Year 3 4 5 5N 5% 5% 8% 4% 3% 5% CAGR 100.0 (50.0) 105.0 (52.5) 113.4 (56.7) 117.9 (59.0) 121.5 (60.7) 121.5 (60.7) 5.0% 5.0% 60.0 15.0 45.0 63.0 15.8 47.3 68.0 17.0 51.0 70.8 17.7 53.1 72.9 18.2 54.7 72.9 18.2 54.7 5.0% 5.0% 5.0% (2.1) (2.3) (3.8) (2.0) (1.6) (2.6) (7.2%) (1) Change in Net Working Capital (1) For illustrative purposes, working capital assets equal 60% of revenues, working capital liabilities equal 30% of Opex 115 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments: Depreciation to Capex Ratio Capex requirements in the terminal year of a DCF need to reflect capital needs to grow business at the perpetual growth rate Capex often underestimated In addition, depreciation is typically not reflecting steady state growth, because it reflects capex fluctuations over the useful life cycle Therefore, always adjust relationship of depreciation to capex in terminal year to reflect perpetual growth Determine the level of capex in the terminal year, which supports perpetual growth of the business Adjust depreciation to reflect steady-state depreciation corresponding to perpetual growth 116 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments: Depreciation to Capex Ratio (cont’d) Illustrative example Constant growth at 5% Capex and depreciation in terminal year reflect growth at 5% Growth 1 2 Year 3 4 5 5N 5% 5% 5% 5% 5% 5% Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 15.0 105.0 105.0 (10.5) 15.8 110.3 110.3 (11.0) 16.5 115.8 115.8 (11.6) 17.4 121.6 121.6 (12.2) 18.2 127.6 (12.2) 18.2 Capex / Assets Depreciation-to-Capex 15.0% 66.7% 15.0% 66.7% 15.0% 66.7% 15.0% 66.7% 15.0% 66.7% 15.0% 66.7% CAGR 5.0% 5.0% 5.0% 5.0% 117 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments: Depreciation to Capex Ratio (cont’d) Illustrative example Capex growth is changing year-on-year Capex in terminal year needs to be adjusted (manually) to reflect capital needs at perpetual growth of 5% Depreciation needs to be adjusted (manually) to reflect steady state depreciation corresponding to perpetual growth Growth 1 2 Year 3 5% 5% 2% 4 5 5N 0% 0% 5% Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 15.0 105.0 105.0 (10.5) 15.8 110.3 110.3 (11.0) 16.1 115.3 115.3 (11.5) 16.1 119.8 119.8 (12.0) 16.1 123.9 (12.0) 18.0 Capex / Assets Depreciation-to-Capex 15.0% 66.7% 15.0% 66.7% 14.6% 68.6% 13.9% 71.8% 13.4% 74.6% 15.0% 66.7% CAGR 4.6% 4.6% 1.7% 4.2% 118 Valuation Training Discounted Cash Flow Analysis Terminal Value – Adjustments: Depreciation to Capex Ratio (cont’d) 100% Illustrative example Capex growing at a constant rate Useful life of 40 years The Depreciation to Capex ratio reaches a constant percentage only after 40 years 90% 80% Depreciation/CapEx 70% 60% 50% 40% 30% 20% 10% 0% 0 10 20 30 40 50 Period (years) CapEx Growth = 0% CapEx Growth = 2% CapEx Growth = 4% CapEx Growth = 1% CapEx Growth = 3% CapEx Growth = 5% 119 Valuation Training Discounted Cash Flow Analysis Terminal Value – Alternative Method: Value Driver Approach Instead of the perpetuity formula, growing free cash flow is expressed in terms of its value drivers ROIC Growth The value driver approach expresses the fact that firms need to reinvest an adequate amount of net capital expenditures to sustain growth over time g FCFN +1 ⋅ 1 − ROIC Terminal Value = (WACC − g ) The expression g/ROIC represents the proportion of free cash flows invested in new capital The relationship of WACC and ROIC determines the potential for value creation If WACC = ROIC, terminal growth will add no additional value, because the return associated with growth equals the cost of capital If WACC < ROIC, terminal growth adds value If WACC > ROIC, terminal growth destroys additional value Under the same assumptions, this method leads to the same result as the perpetuity formula 120 Valuation Training Discounted Cash Flow Analysis Terminal Value - Exit Multiples Exit Multiples capture the continuing value of a business past “terminal point” of analysis Commonly used method that is intuitive and easy to calculate Use multiples that produce an aggregate enterprise value Sales EBITDA EBIT Be realistic on multiples At time of exit, company assumed to have reached steady state: no dramatic growth anticipated Difficulties in using current multiples in predicting future values Use range of multiples 121 Valuation Training Discounted Cash Flow Analysis Terminal Value - Checks If TV more than 50% of overall value, check assumptions The shorter the forecast period, the greater the proportion of value from TV Fast-growth companies may have negative FCF during forecast period, offset by positive TV Cross-check the relationship of capex to depreciation in TV Cross-check TV calculation by linking multiple and perpetuity methods at different discount rates Don’t forget to discount back the TV! The Terminal Value is often a significant proportion of the total value. Think through the assumptions carefully 122 2. Discounted Cash Flow Analysis 2.5 Growth and Value Valuation Training Growth and Value Determinants of Growth Size of the firm Smaller firms typically grow faster As firms grow larger, it becomes more difficult to maintain high growth Current growth Current growth gives an indication of the Market dynamics Market size and opportunities determine growth Length of high growth period depends on market barriers to entry, competitive advantages Growth rates of comparable companies give an indication of average growth in the sector Regulated industries Growth in a regulated system may be limited by the regulator (RPI - X) regulation 124 Valuation Training Growth and Value Growth Characteristics Stable Growth 2-stage Growth 3-Stage Growth High Growth Firms Stable Growth Firms Risk High risk (beta > 1) Low risk (beta < 1) Return on Capital High ROC ROC close to WACC Leverage Little or no debt Medium to high leverage (A to BB rating) Capital Expenditure Generally high capex Generally low capex Dividend Payout Little or no dividends High dividends Cash Flow Characteristics High growth, high risk Stable growth 125 Valuation Training Growth and Value Where does Value come from? Illustrative example of a simplified company model Beginning Assets 100 Useful life of assets 10 y Opex (% of revenues) 50% Tax 30% Base Case: Growth Return on investment (ROIC) (1) 10% WACC 10% 0% 126 (1) Defined as EBIT / Total Assets Valuation Training Growth and Value WACC = ROIC , Growth = 0% At zero growth and with WACC = ROIC, NPV is equal to current value of assets (=100) Simplified Growth Model (nominal) WACC ROIC Growth Pre-tax Post-tax 10% 7% 10% 0% Year 1 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 0.0% 0.0% 0.0% Pre-tax Return Post-tax Return 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 0.0% 0.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 100.0 0.0% 0.0% 0.0% NPV of FCF 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 P&L Revenues Opex Depreciation Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 10.0 100.0 10N CAGR 0.0% 0.0% 0.0% 0.0% 127 Valuation Training Growth and Value WACC = ROIC , Growth = 3% At WACC = ROIC, growth does not impact valuation Simplified Growth Model (nominal) WACC ROIC Growth Pre-tax Post-tax 10% 7% 10% 3% Year 1 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 41.2 (20.6) (10.3) 42.4 (21.2) (10.6) 43.7 (21.9) (10.9) 45.0 (22.5) (11.3) 46.4 (23.2) (11.6) 47.8 (23.9) (11.9) 49.2 (24.6) (12.3) 50.7 (25.3) (12.7) 52.2 (26.1) (13.0) 52.2 (26.1) (13.0) 3.0% 3.0% 3.0% Pre-tax Return Post-tax Return 10.0 7.0 10.3 7.2 10.6 7.4 10.9 7.6 11.3 7.9 11.6 8.1 11.9 8.4 12.3 8.6 12.7 8.9 13.0 9.1 13.0 9.1 3.0% 3.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (13.0) 4.0 10.3 (13.4) 4.1 10.6 (13.8) 4.2 10.9 (14.2) 4.4 11.3 (14.6) 4.5 11.6 (15.1) 4.6 11.9 (15.5) 4.8 12.3 (16.0) 4.9 12.7 (16.5) 5.1 13.0 (17.0) 5.2 13.0 (17.0) 5.2 134.4 3.0% 3.0% 3.0% NPV of FCF 100.0 103.0 (10.3) 13.4 106.1 106.1 (10.6) 13.8 109.3 109.3 (10.9) 14.2 112.6 112.6 (11.3) 14.6 115.9 115.9 (11.6) 15.1 119.4 119.4 (11.9) 15.5 123.0 123.0 (12.3) 16.0 126.7 126.7 (12.7) 16.5 130.5 130.5 (13.0) 17.0 134.4 P&L Revenues Opex Depreciation Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 13.0 103.0 10N CAGR 3.0% 3.0% 3.0% 3.0% 128 Valuation Training Growth and Value WACC < ROIC , Growth = 0% WACC < ROIC increases valuation Simplified Growth Model (nominal) Pre-tax WACC ROIC Growth 8% 10% 0% Year 1 Post-tax 6% 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 0.0% 0.0% 0.0% Pre-tax Return Post-tax Return 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 0.0% 0.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 125.0 0.0% 0.0% 0.0% NPV of FCF 125.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 P&L Revenues Opex Depreciation Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 10.0 100.0 10N CAGR 0.0% 0.0% 0.0% 0.0% 129 Valuation Training Growth and Value WACC < ROIC , Growth = 3% WACC < ROIC increases valuation, growth magnifies the effect Simplified Growth Model (nominal) Pre-tax WACC ROIC Growth 8% 10% 3% Year 1 Post-tax 6% 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 41.2 (20.6) (10.3) 42.4 (21.2) (10.6) 43.7 (21.9) (10.9) 45.0 (22.5) (11.3) 46.4 (23.2) (11.6) 47.8 (23.9) (11.9) 49.2 (24.6) (12.3) 50.7 (25.3) (12.7) 52.2 (26.1) (13.0) 52.2 (26.1) (13.0) 3.0% 3.0% 3.0% Pre-tax Return Post-tax Return 10.0 7.0 10.3 7.2 10.6 7.4 10.9 7.6 11.3 7.9 11.6 8.1 11.9 8.4 12.3 8.6 12.7 8.9 13.0 9.1 13.0 9.1 3.0% 3.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (13.0) 4.0 10.3 (13.4) 4.1 10.6 (13.8) 4.2 10.9 (14.2) 4.4 11.3 (14.6) 4.5 11.6 (15.1) 4.6 11.9 (15.5) 4.8 12.3 (16.0) 4.9 12.7 (16.5) 5.1 13.0 (17.0) 5.2 13.0 (17.0) 5.2 206.8 3.0% 3.0% 3.0% NPV of FCF 153.8 103.0 (10.3) 13.4 106.1 106.1 (10.6) 13.8 109.3 109.3 (10.9) 14.2 112.6 112.6 (11.3) 14.6 115.9 115.9 (11.6) 15.1 119.4 119.4 (11.9) 15.5 123.0 123.0 (12.3) 16.0 126.7 126.7 (12.7) 16.5 130.5 130.5 (13.0) 17.0 134.4 P&L Revenues Opex Depreciation Asset Schedule Beginning Assets Depreciation Capex Ending Assets 100.0 (10.0) 13.0 103.0 10N CAGR 3.0% 3.0% 3.0% 3.0% 130 Valuation Training Growth and Value WACC > ROIC , Growth = 0% WACC > ROIC decreases valuation Simplified Growth Model (nominal) WACC ROIC Growth Pre-tax Post-tax 12% 8% 10% 0% Year 1 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 40.0 (20.0) (10.0) 0.0% 0.0% 0.0% Pre-tax Return Post-tax Return 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 10.0 7.0 0.0% 0.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 10.0 (10.0) 7.0 83.3 0.0% 0.0% 0.0% 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 100.0 (10.0) 10.0 100.0 P&L Revenues Opex Depreciation NPV of FCF Asset Schedule Beginning Assets Depreciation Capex Ending Assets 10N CAGR 83.3 100.0 (10.0) 10.0 100.0 0.0% 0.0% 0.0% 0.0% 131 Valuation Training Growth and Value WACC > ROIC , Growth = 3% WACC < ROIC decreases valuation, growth magnifies the effect Simplified Growth Model (nominal) WACC ROIC Growth Pre-tax Post-tax 12% 8% 10% 3% Year 1 2 3 4 5 6 7 8 9 10 40.0 (20.0) (10.0) 41.2 (20.6) (10.3) 42.4 (21.2) (10.6) 43.7 (21.9) (10.9) 45.0 (22.5) (11.3) 46.4 (23.2) (11.6) 47.8 (23.9) (11.9) 49.2 (24.6) (12.3) 50.7 (25.3) (12.7) 52.2 (26.1) (13.0) 52.2 (26.1) (13.0) 3.0% 3.0% 3.0% Pre-tax Return Post-tax Return 10.0 7.0 10.3 7.2 10.6 7.4 10.9 7.6 11.3 7.9 11.6 8.1 11.9 8.4 12.3 8.6 12.7 8.9 13.0 9.1 13.0 9.1 3.0% 3.0% Cash Flows Depreciation Capex Free Cash Flow Terminal Value 10.0 (13.0) 4.0 10.3 (13.4) 4.1 10.6 (13.8) 4.2 10.9 (14.2) 4.4 11.3 (14.6) 4.5 11.6 (15.1) 4.6 11.9 (15.5) 4.8 12.3 (16.0) 4.9 12.7 (16.5) 5.1 13.0 (17.0) 5.2 13.0 (17.0) 5.2 99.5 3.0% 3.0% 3.0% 103.0 (10.3) 13.4 106.1 106.1 (10.6) 13.8 109.3 109.3 (10.9) 14.2 112.6 112.6 (11.3) 14.6 115.9 115.9 (11.6) 15.1 119.4 119.4 (11.9) 15.5 123.0 123.0 (12.3) 16.0 126.7 126.7 (12.7) 16.5 130.5 130.5 (13.0) 17.0 134.4 P&L Revenues Opex Depreciation NPV of FCF Asset Schedule Beginning Assets Depreciation Capex Ending Assets 10N CAGR 74.1 100.0 (10.0) 13.0 103.0 3.0% 3.0% 3.0% 3.0% 132 Valuation Training Growth and Value NPV Summary At a growth of 0.0% 83.3 WACC 8% 9% 10% 11% 12% 8% 100 89 80 73 67 9% 113 100 90 82 75 ROIC 10% 125 111 100 91 83 11% 138 122 110 100 92 12% 150 133 120 109 100 8% 100 79 65 55 48 9% 127 100 82 70 61 ROIC 10% 154 121 100 85 74 11% 181 142 118 100 87 12% 208 164 135 115 100 At a growth of 3.0% 74.1 WACC 8% 9% 10% 11% 12% 133 Valuation Training Growth and Value Summary A simple model with constant return and growth illustrates the sources of value in a business At zero growth and WACC = ROIC, value of a business is equal to current (fair) value of assets WACC < ROIC increases valuation WACC > ROIC decreases valuation Growth magnifies the valuation effect But, growth does not impact valuation if WACC = ROIC The above simple relationships can be used as a check in every DCF model 134 2. Discounted Cash Flow Analysis 2.6 Inflation, FX and Cost of Capital Valuation Training Inflation, FX and Cost of Capital DCF Analysis with FX, Inflation Effect Project cash flows in nominal foreign currency Use consistent relationship between interest, inflation, FX rates and WACC Understand foreign accounting principles Rules for inflation adjustments FX adjustments Check for re-valuations Understand taxation principles Effective taxation Tax credits Use appropriate transfer pricing 136 Valuation Training Inflation, FX and Cost of Capital Inflation Be consistent in handling inflation Discount nominal cash flows at nominal WACC (Discount real cash flows at real WACC) 1 + Nominal Interest Rate 1 + Real Interest Rate = 1 + Inflation Rate Be consistent between interest, inflation, FX rates and WACC Use interest-rate parity to forecast FX rates Use inflation assumptions based on interest-rate parity Use WACC based on interest-rate parity 137 Valuation Training Inflation, FX and Cost of Capital Important Note on Risk Should political and “additional” risk be part of WACC or part of cash flow projections? No, should not be part of WACC, instead consider reflecting “additional” risk in cash flow projections • Cash flow scenarios require careful thought and provide better insights into the problem – Know the reasons, effects, and timing of the risk • “Fudge” factors in the WACC distort otherwise careful analysis – Investors can diversify most of the risks – Many risks in a country are idiosyncratic, they don’t apply equally to all industries Incorporating risks in cash flows helps to achieve a much better understanding of explicit risks and their effects on cash flows than does a simple “premium” added to WACC 138 Valuation Training Discounted Cash Flow Analysis Remember Value creating actions Increase in free cash flows Increase in expected growth rate in earnings Length of high growth period Reduced cost of capital Value neutral actions Stock dividends Accounting changes that are cash-neutral Acquisitions at full value 139 3. Sum-of-the-Parts Valuation 3. Sum-of-the-Parts Valuation 3.1 Value of the Company Valuation Training Sum-of-the-Parts Valuation Company Valuation NPV of Market Value of Total Free Cash Non-operating Enterprise Flows Assets and Value Investments Less Less Net Debt Provisions Equity Value Standalone Net Synergies Equity Value to Acquiror 142 Valuation Training Sum-of-the-Parts Valuation Enterprise and Equity Values PV of FCF yields Enterprise Value of company before adjustments for non-operating assets and investments Non-operating assets include Discontinued operations Investments in unconsolidated/unrelated subsidiaries Unrealised capital gains in investment portfolio Provisions include Extraordinary items e.g. restructuring provisions Pension provisions minus plan assets (net liabilities) Environmental provisions, litigation expenses and other contingent liabilities likely to materialise Always check to avoid double-counting: Is the item included in NPV of operating cash flows? OR: Is the item included in non-operating assets or provisions? 143 Valuation Training Sum-of-the-Parts Valuation Enterprise and Equity Values Value of non-operating assets should be estimated by Their own cash flows and discount rates Reference to market values e.g. real estate, investment trusts Independent appraisal e.g. pension fund, environmental liability Addition/subtraction of non-operating items will give a total Enterprise Value for the company i.e. overall value of claims on company from all holders of its securities 144 Valuation Training Sum-of-the-Parts Valuation Enterprise and Equity Values Enterprise Value (adjusted for non-operational items) minus Short-term debt minus Long term debt minus Capital leases minus Pension and other provisions minus Minority interests minus Other non-working capital interest bearing liabilities minus Preference shares minus Options, warrants and convertibles (or treat on a fully diluted basis) plus Surplus cash and equivalents and liquid short-term investments = Equity Value 145 Valuation Training Sum-of-the-Parts Valuation Company Valuation Value creating actions Increase in free cash flows Increase in expected growth rate in earnings Length of high growth period Reduced cost of capital Acquisitions at less than full value Value neutral actions Stock dividends Accounting changes that are cash-neutral Acquisitions at fair value 146 3. Sum-of-the-Parts Analysis 3.2 Synergies Valuation Training Sum-of-the-Parts Valuation Synergies Synergies are one of the main reasons for justifying acquisitions ... … but over-estimation of synergies is a major reason for under-performing acquisitions Synergies should be Separately and clearly identified Justified very specifically Include investments and costs to achieve synergies Understand management’s synergy projections What is the source of the synergies How reliable are synergy assumptions What are the implementation plans Sensitivities 148 Valuation Training Sum-of-the-Parts Valuation Synergies Sources Volume synergies Enlarged customer base Use of overcapacity Critical size Cross-selling … Cost synergies Reduced overhead costs (headquarters, controlling, treasury, IT, customer services) Reduced purchasing costs (energy, raw materials) … 149 Valuation Training Sum-of-the-Parts Valuation Synergies Sources (cont’d) Investment synergies Reduced capex needs through shared plants Insurance needs Financial synergies Enhanced access to capital and favorable financing terms (“lower WACC”) Tax efficiency Hedging of cash flows Other synergies Regulatory reviews Working capital efficiency improvements 150 Valuation Training Sum-of-the-Parts Valuation Modelling Synergies Use DCF or relative ratios to determine synergies Size and duration of synergies Analyze ratios (% cost savings; % of sales) Perform sensitivities Include costs and investments for achieving synergies Transaction costs (always treat separately) Restructuring costs, severance pay Plant shutdown Additional capex requirements Include tax effects Timing of synergies Upfront investment needs Phase-in of benefits Possible delays 151 3. Sum-of-the-Parts Analysis 3.3 Risks Valuation Training Sum-of-the-Parts Valuation Risks Risks are different from sensitivity scenarios Events that change the market environment Events with lasting effect on business operations Events that change the company does business Risks should be Separately and clearly identified Specific to the valuation target (generic risks should not be part of valuation) Risks are negative, chances are positive Understanding risks What is the source of the risk? How likely are the risks? What are mitigating factors? 153 Valuation Training Sum-of-the-Parts Valuation Risks (cont’d) Evaluating risks Estimate effects on value (magnitude) Estimate probability of occurring Calculate the probability-weighted average effect on value How reliable are estimates of the effects and probabilities? A useful analogy to evaluating risks is to ask: What would it cost to insure the risk? Business Value including Risk Assessment = NPVBaseCase + ∆NPVRisk 1 ⋅ Probability Risk 1 + ∆NPVRisk 2 ⋅ Probability Risk 2 + ... 154 Valuation Training Sum-of-the-Parts Valuation Examples of Risks Market risks External risks Technological failure, obsolescence Uninsured accidents, catastrophic events Legal/litigation risks Supply risks Loss/gain of customer groups Drop/jump in prices Increase/decrease in competition Change in regulations Paradigm shift in the market Drop/jump in purchasing costs Supply disruptions Financial risks Hidden assets/liabilities Financial distress, risk of bankruptcy FX 155 3. Sum-of-the-Parts Valuation 3.4 Controlling and Minority Investments Valuation Training Sum-of-the-Parts Valuation Valuing Control Achieving control over a company provides additional value to the acquiror Control premium Value of the control premium in a valuation is inherent in the assumptions Business projections Synergies Value of gaining control Changes in the way the company is managed and run Benefits and perquisites of being in control (decision making) Replacement of management, key personnel Implementation and extraction of synergies Quality of business A company that is well managed and well run provides less increase in value from gaining control of the company A badly managed company might provide more opportunities for value creation 157 Valuation Training Sum-of-the-Parts Valuation Key Ownership Thresholds Parent Ownership of Subsidiary 50 - 100% Greater than 80% 50% 20 - 49% Financial Accounting Methods (IAS / US GAAP) Consolidation Consolidate for tax and book purposes (US GAAP) Proportionate consolidation Equity method accounting in most cases Pro rata share of earnings reporting on one line of the income statement Under 20% Typically cost accounting Only dividends received included in income 158 Valuation Training Sum-of-the-Parts Valuation Accounting for Investments Equity method Investment is recorded in the balance sheet as the share of net assets plus un-amortised goodwill – US GAAP: Share of net assets plus unimpaired goodwill Line item in P&L (usually between operating profit and profit before tax) – Income from associates = Share of profit after tax less goodwill amortisation Cost method Cost of the investment is recorded in the balance sheet under “Investments” Dividend income is included in P&L as and when received A write down of the asset value may occur if necessary Proportionate consolidation Used for joint ventures in some countries Each line item is incorporated into group accounts at the ownership percentage Goodwill is recorded in the balance sheet and amortised through the P&L 159 Valuation Training Sum-of-the-Parts Valuation Minority Interests Wholly Owned Majority Owned Majority and Minority Owned HoldCo HoldCo HoldCo 100% Sub A 100% 100% Sub B Sub A 51% Sub B All lines for both Sub A and Sub B are consolidated No minority interest All multiples meaningful However, consolidated results include only 51% of Sub B’s earnings Only earnings multiples are meaningful, therefore, unless: All lines for both Sub A and Sub B are consolidated 100% Market/book value of minorities is added to Enterprise Value Sub A 49% Assoc B Only Sub A is consolidated 49% of Assoc B’s PBT and tax charge (only) will be included in consolidated results Ensure Assoc B’s contribution is included in EBITDA, EBIT for calculation purposes Turnover multiples are not meaningful 160 3. Sum-of-the-Parts Valuation 3.5 Pro Forma Adjustment for Recent Events Valuation Training Sum-of-the-Parts Valuation Recent Events Events may not yet be reflected in a valuation if they occurred after the last financial information of a target company was published Acquisitions and disposals Investments, large capital expenditures Restructuring Write-up/down of assets Changes in liquidity (net debt) What is the effect of these changes on valuation? Value enhancing: gains over fair value Value neutral: at fair value Value reducing: loss over fair value Note: dividend payout between last reported net debt and the date of valuation is not a value-neutral effect, if these dividends go to the seller instead of the acquiror Events are value-neutral if they occur at fair value 162 Valuation Training Sum-of-the-Parts Valuation Case Study: Recent Events Your company has agreed to buy a target company for EUR 2.0 billion. Between agreement and closing, the target company has made the following announcement: The target company agrees to buy a company for EUR 100 million The target company agrees to sell two businesses to a competitor for E50m The target company announces a restructuring program with investments of EUR 40 million and expected annual benefits of EUR 10 million over the next five years The target company announces that its capex has been higher by EUR 50 million due to an exceptional investment What is the impact on the valuation of the target company? 163 3. Sum-of-the-Parts Valuation 3.6 Financial and Other Liabilities Valuation Training Sum-of-the-Parts Valuation Financial and Other Liabilities All financial and other cash-relevant liabilities and provisions have to be reflected in a valuation Equity value = Enterprise value - Net Debt (including all cash-relevant liabilities and provisions) Use market value whenever possible Use special methods to determine NPV of liability where market value is not available (e.g. operating leases) Avoid double-counting Only include items that are not yet reflected in the operating cash flows of the valuation Financial investment in subsidiaries Only include cash-relevant liabilities in a valuation Unfunded pension liabilities Nuclear liabilities Environmental liabilities 165 Valuation Training Sum-of-the-Parts Valuation Financial and Other Liabilities (cont’d) Do not include non-cash provisions Deferred taxes Do not include liabilities that are part of the going concern of the business or that are typically balanced items, or already included in the cash flows Working capital Tax assets and liabilities Funded pension plan (if no over/underfunding) 166 Valuation Training Sum-of-the-Parts Valuation Financial and Other Liabilities Cash-relevant financial liabilities Short term debt Long term debt Hybrid financing instruments Leases Pension liabilities Environmental liabilities Contingent liabilities Contractual obligations Cash-relevant financial assets Cash & equivalent Marketable securities Long term financial investments Real estate and land (only if non-operating, i.e. monetizable) 167 Valuation Training Sum-of-the-Parts Valuation Leases Leases are financial obligations for future payments and can therefore be treated like debt There are two classes of leases Operating leases are short term, cancelable contracts – Do not appear on the balance sheet (off-balance sheet financing) – Lease payments are included with other operating costs Capital leases are long term leases over most of the estimated economic life of the asset – Accounted for as if the lessee had purchased the asset and borrowed the funds – Present value of lease payments is on both assets and liabilities side of balance sheet 168 Valuation Training Sum-of-the-Parts Valuation Leases (cont’d) Operating Leases Lease Payment Lessee (User) Lessor (Owner) Right to use Asset Rent expense on operating leases PV of future payments on operating leases Capital Leases Lease Payment Lessee (User) Lessor (Owner) Right to use Asset Balance sheet liability of capital lease Book value of capital lease asset 169 Valuation Training Sum-of-the-Parts Valuation Leases (cont’d) Accounting for leases in valuation Look for leases on balance sheet and in footnotes Capital leases – Treat balance sheet liability as debt Operating leases – Look for footnote describing present value of operating leases, or – Estimate market value of lease, i.e. the net present value of future lease payments Make sure leases are not double-counted as part of free cash flows and as part of net debt 170 Valuation Training Sum-of-the-Parts Valuation Off-balance Sheet Liabilities Off-balance sheet financing provides company with an opportunity to Releasing value from capital generating assets and reallocating resources within existing or new businesses Strengthening companies’ balance sheet by applying off-balance sheet treatment to such financing Transferring or re-allocating structure risks to parties willing or best able to support or manage these risks Inappropriate and undisclosed off-balance sheet financing can also lead to corporate problems Enron collapse Abengoa? The impact and value of off-balance sheet liabilities on valuation has to be analysed on a case-by-case basis 171 Valuation Training Sum-of-the-Parts Valuation Off-balance Sheet Liabilities: Example Equity Securitisation ParentCo Proceed Dividend NewCo (SPV) Using untapped debt capacity at the operating asset level Monetise tied-up equity Free up resources that can be re-allocated to other ventures Debt Service Notes Proceed Participation Equity securitisation consists in monetising future dividend streams generated by participation in single or portfolio of projects Dividend OpCo 1 OpCo 2 OpCo 3 Fundamentally, all equity securitisation have common features The investment are already funded through a mix of (structured) debt and equity and are substantially generating cash flows The shareholding and dividend streams are re-assigned to a newly created SPV Debt investors rely solely on the dividend stream of the investments to repay debt 172 Appendix A. Glossary of Terms Valuation Training Glossary of Terms Beta Reflects the correlation of a stock with the overall market Used to determine the cost of capital according to CAPM CAPM Capital Asset Pricing Model DCF Discounted Cash Flow Analysis EBIT Earnings before Interest and Taxes EBITDA Earnings before Interest, Taxes, Depreciation and Amortisation Enterprise Value Reflects the overall value of an enterprise to its stakeholders (shareholders and bondholders) Enterprise Value = Equity Value + Net Debt ERP Equity Risk Premium EPS Earnings per Share Equity Value Equity Value = Enterprise Value - Net Debt Value of a company to its shareholders FCF Free Cash Flows Cash Flows before Financing (before serving debt and equity) 174 Valuation Training Glossary of Terms FFO Funds from Operations (or Cash Flow from Operations) NAV Net Asset Value NPV Net Present Value PE Price-Earnings Ratio PE = Share Price / Earnings per Share PEG PE Growth Ratio PEG = PE / Earnings growth RAB Regulatory Asset Base TV Terminal Value in Discounted Cash Flow analysis WACC Weighted Average Cost of Capital Discount rate used in discounted cash flow analysis 175 Madrid, 5 de Octubre de 2015 176 Sell-Side Transactions 177 Introduction A seller has three means of effecting a disposal: Sale Theoretically, and generally, the value maximising route due to the synergies that a trade buyer may achieve In recent years, financial buyers have been prepared to pay high prices reflecting their financing advantages (increase in leverage) and, often, part of the synergy benefits that would arise from combining the business with a similar business in their portfolio IPO Usually chosen due to the absence of premium paying buyers due, for example, to: Scale of the business Anti-trust issues Financial predicament of buyers (i.e. the industry) Spin-off Generally used when the seller has no use for the proceeds. Breakdown of conglomerates. May anticipate future sale. Potential sale by shareholders in the future (i.e. stock sales), after lock up period 178 Objectives, Means and Requirements Objectives Maximise disposal value Minimise impact of non-disposal (failure) Disclosure of commercially sensitive information to competitors Impact on employee morale Means Competitive sale process Competition may or may not be real: the perception is key “Dual track”: running a sale and IPO process in parallel Requirements Attractive asset; and/or Credible business strategy (e.g. turnaround story) At least one (keen) buyer 179 Options Broad Auction Description Pros Cons Accelerated Auction Negotiated Sale Two-stage process with broad universe of strategic and financial buyers Accelerated one-stage auction with small group of strategic buyers One-to-one negotiation with preferred buyer Broad solicitation ensures value maximisation if no "obvious" buyers Competition between key buyers ensures value maximisation May extract a premium price for exclusivity Specified timetable Speed/specified timetable Maximum confidentiality Limited disruption to business High degree of confidentiality Delay/price erosion if interest from potential buyers over-estimated May not achieve full value given lack of competitive pressure Difficult to control timetable Slow timetable Potentially disruptive to business/management Difficult to maintain confidentiality THE TWO-STAGE PROCESS IS USUALLY THE MOST APPROPRIATE 180 Overview of Typical Two-Stage Process Strategic Assessment Valuation Identification of potential buyers Determine strategy to maximise shareholder value Preparation “Round 1” “Round 2” Information memorandum Confirm interest of potential buyers Management presentation Data room Sign confidentiality agreements Data room visits Legal documentation Contact potential buyers re: interest Circulate information memorandum Circulate contract documentation Final Negotiations Finalise and sign sale and purchase agreement Finalise and sign other agreements Announcement and Completion Announce transaction Regulatory filing Shareholder approval (if applicable) Completion Generate definitive Generate indicative proposals (“second proposals (“first round round bids”) bids”) Selection of preferred buyer(s) 181 The Lawyers’ Perspective Seller’s Objective: Minimise legal commitments given Data Room Sale & Purchase Agreement Warranties Buyer’s Objective: Legal Documentation Maximise legal protection received Seller discloses information Buyer Confirms information provided by seller Discovers new information (which may be material) Seller asked to confirm Conventional matters True and fair accounts No other material liabilities Good title to assets No abnormal/onerous contracts Information disclosed is materially accurate (except as disclosed in Disclosure Letter) Confirmation that disclosures are accurate Seller discloses exceptions to the warranties [Blanket] disclosure of Data Room (highly contentious) Indemnities Seller commits to meet future claims arising out of specific (identified) matters Covenants Seller/buyer commits to some future undertaking, for example File regulatory submission Manage business in normal course Obtain third party consents Disclosure Letter 182 Stage I - Strategic Assessment Objective Mechanics Identify the strategy most likely to maximise value Review the business: Internal presentation/discussion Review of business plan Valuation: To seller To potential buyers (including potential synergies and/or LBO capital structure) Identification of potentially interested parties Assessment of likely level and nature of potential interest Timing Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage I Stage II Stage III Stage IV Stage V Stage VI 183 Stage II - Preparation Overview Ensure that the data required for the process is: Objective Sufficient in scope for potential buyers to make meaningful proposals Clear in the form in which it is presented Mechanics Prepare documentation Set up data rooms Collate and copy information Create comprehensive index Timing Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage I Stage II Stage III Stage IV Stage V Stage VI 184 Stage II - Preparation Summary of Documentation Document Objectives/Contents Prepared by Confidentiality Agreement Maintain confidentiality of process; standstill; no poaching Round 1 Letter Sets out how Round 1 will be run and the form/content of indicative proposal required. Accompanies Information Memorandum Information Memorandum Basis for submitting meaningful proposals Bank/Seller Round 2 Letter Sets out how Round 2 will be run and the form/contents of final proposal required Bank Data Room Rules How to arrange a data room visit; what you can/can’t copy Data Room Contents Full index of the contents of the data room Lawyers Bank Bank/Lawyers Lawyers 185 Stage II - Preparation Summary of Documentation (cont’d) Document Objectives/Contents Prepared by Management Presentation Brings the information memorandum to life; puts management in the spotlight Bank/Seller Vendor’s Due Diligence Report (“Long Form” Report) Business report prepared by seller’s accountants for assignment to successful purchaser Accountants Sale and Purchase Agreement The terms of the sale Lawyers Disclosure Letter Seller discloses exceptions to the warranties Lawyers [Shareholders’ Agreement Sets out the relationship between the shareholders Lawyers] [Subscription Agreement Sets out the terms for the issue of new capital by the business Lawyers] 186 Stage II - Preparation Confidentiality Agreement Objective Process Establish legal obligations regarding the maintenance of confidentiality Lawyers produce draft Seller and lawyers finalise Bank/seller sends out to potential purchasers Signed Covering letter requesting sign and return Contents Potential purchasers mark up Bank/lawyers agree response with seller/lawyers Finalise and sign See next page for discussion CONFIDENTIALITY AGREEMENTS ARE DIFFICULT TO POLICE FULLY IN PRACTICE 187 Stage II - Preparation Confidentiality Agreement (cont’d) Contents Typical Negotiation Issues Definition of confidential information Standard wording Restrictions on to whom information may be disclosed Require party to maintain log of those who receive information Use of information Any restriction on use requires careful consideration to avoid constituting a standstill Obligations to destroy/return information Standstill No poaching Exceptions Require a certificate of compliance Certain advisers require one copy of any internally produced analysis to be kept as back-up to any advice given Destruction of electronically stored info may not be practically possible Carve out for third party offer Time limitation Level down to which “no poaching” applies Time limitation Standard wording No obligations to proceed with discussions Standard wording Term Governing law Purchasers may attempt to limit to e.g. 12 months/2 years Seller requires no term, i.e. shelf life of confidentiality Standard wording Rights and remedies Standard wording 188 Stage II - Preparation Information Memorandum Objectives Contents Provide sufficient information (descriptive and quantitative) to enable potential buyers to submit meaningful non-binding proposals (first round bids) Maximise the attractions of the business Disclaimer Executive summary Key selling points Business overview Organisation, management and employees Legal and regulatory Future prospects Upside potential Financial information Appendices: Product catalogues Site layout plans, etc. Detailed information 189 Stage II - Preparation Data Room Objective Contents Organisation Minimise warranties provided by seller through fullest possible disclosure of documentation General Corporate Subsidiaries Transactions at undervalue Licences and consents Litigation Environmental Consequences of proposed transaction Accounts and financial VDR vs. “traditional” Data Room Data compiled/organised by seller/lawyers At least two rooms Usually provided and staffed by the lawyers/accountants Identical documentation in each Standard process (i.e. forms) for photocopy and additional information requests, as well as register of attendance Commercial Taxation Properties Employees Pensions Insurance Intellectual property 190 Stage II - Preparation Sale and Purchase Agreement Objective Contents Mechanics Set out clearly the terms and conditions of the transaction Minimise the potential for misunderstanding Provide an agreed mechanism for settling subsequent events See overleaf (TBP) The first draft is usually provided by the seller’s lawyers (in auction processes) The buyer’s lawyers review the first draft A meeting is typically then held to discuss/agree differences of opinion regarding matters of principle The draft is revised and recirculated Markups of the draft circulate until the document is agreed It is then signed by the principals This is often the trigger point for disclosure by publicly quoted companies 191 Stage II - Preparation Sale and Purchase Agreement Contents Interpretation Conditions Sale and purchase of shares Consideration Pre-completion conduct Termination rights Guarantees and indemnities Pensions Name and use of marks Reorganisation Transitional services General Confidential information Governing law and jurisdiction Completion net asset adjustment Completion Warranties Limitation of claims Comment Standard wording Anti-trust approvals Listing of any consideration shares Shareholder approval Mechanical May include deferred consideration Earn-out Completion accounts Escrow security for warranty claims Carry on business in ordinary course Don’t strip out value Breach of warranty discovered prior to completion Completion accounts to determine price adjustment Transfer of shares/assets, payment of consideration, satisfaction of inter-company accounts See previous discussion Overall liability cap Consideration received Different caps for different aspects De minimis threshold per claim Threshold for initial claim Payment of excess or aggregate amount Set-offs, for example: Insurance claims (compulsory to claim) Tax reclaims No liability if results from purchaser’s actions See previous discussion Agree valuation and apportionment mechanics in detail Governs right of use and records any transfer/licences Any agreed steps required to effect transaction Nature of services, term and remuneration Other matters Refreshes confidentiality agreement Seller’s domicile 192 Stage II - Preparation Sale and Purchase Agreement Schedules Comment The subject(s) of the transaction Factual determination of the entities/assets being sold Definitions Standard wording Warranties See previous discussion Completion balance sheet Accountants input key Warranties See previous discussion Details of properties Factual details Pension arrangements See previous discussion Transitional services See previous discussion Tax covenant and warranties Risk of secondary tax liabilities remains with seller 193 Stage III - Round 1 Summary Objectives Mechanics Timing Determine bona fide interest of potential buyers Elicit meaningful proposals from such parties Ensure process is seen as a “level playing field” for all parties Select preferred buyers for further consideration Contact potential buyers Negotiation of confidentiality agreements Distribution of Round 1 letter accompanied by information memorandum Interface with interested parties, including responding to requests for further information Comparison, clarification and evaluation of proposals Selection of candidate(s) for Round 2 Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage I & II Stage III Stage IV Stage V Stage VI THE KEY CHALLENGE IS TO KEEP POTENTIAL BUYERS TO THE TIMETABLE 194 Stage IV - Round 2 Summary Objectives Mechanics Elicit negotiable proposals from preferred buyers Select chosen buyer(s) for final negotiation: Price Conditions (contract mark-up) Timing Round 2 letter setting out procedures for arriving at final offers Distribution of sale and purchase agreement and other legal agreements Data room management Respond to requests for further information Management presentations Site visits Comparison, clarification and evaluation of Round 2 proposal Preliminary assessment of any non-cash consideration proposed Selection of chosen preferred bidder(s) Timing Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage III Stage IV Stage V Stage VI MAINTAINING MOMENTUM AND, PARTICULARLY, THE IMPRESSION OF A COMPETITIVE PROCESS IS KEY 195 Stage V - Final Negotiations Summary Objective Mechanics Timing Complete transaction subject to third party approvals (Stage VI) [Final due diligence on commercially sensitive information] Negotiation of documentation: Sale and purchase agreement Disclosure letter Tax indemnity [Shareholders’ agreement] [Subscription agreement] Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage IV Stage V Stage VI FINAL NEGOTIATIONS MUST BE COMPLETED AS SOON AS POSSIBLE - SELLER’S NEGOTIATING POSITION VIS-À-VIS OTHER BUYERS WEAKENS RAPIDLY 196 Stage VI - Announcement and Closing Objective Requirements Mechanics Timing Complete transaction Obtain regulatory/other clearances as necessary [Obtain shareholders’ approval for transaction] File regulatory/other submissions Preparation and release of: Formal announcement [Presentation to analysts/press] [Circular to shareholders] [EGM results announcement] Weeks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Stage V Stage VI MINIMISE THE RISKS OF NON-COMPLETION 197 EL PROCESO DE INVERSION Y DESINVERSION EN OPERACIONES DE PRIVATE EQUITY Madrid, 5 de octubre de 2015 198 Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 199 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 200 Aspectos preliminares de una operación – Principales características de una compañía target Fases de una inversión: SEMILLA – Aportación de recursos en una fase anterior al inicio de las operaciones de la compañía ARRANQUE (“Start-up”) – Financiación inicial que abarca desde la primera puesta en marcha del negocio hasta el punto de equilibrio (i.e. los ingresos cubren los costes operativos) EXPANSIÓN – Financiación del crecimiento de una empresa que ya genera beneficios ADQUISICIONES APALANCADAS (“Leveraged Buy Out” o “LBO”) – Adquisición de empresas mediante su apalancamiento financiero y contribución adicional de capital por parte del inversor (LBO, MBO, MBI, etc.) Si bien parte de la presente exposición resulta aplicable a los 4 supuestos anteriormente indicados, la misma se centrará en la adquisición de compañías maduras mediante operaciones de LBO Generación de Caja (+) LBO (-) 201 Vida de una empresa Aspectos preliminares de una operación – Principales características de una compañía target A la hora de considerar una compañía como objetivo para un LBO, deben considerarse de manera principal los siguientes factores: 1. 2. Factores Operativos: a. Posición de mercado liderazgo en b. Equipo directivo sólido y con un buen track record c. Consideraciones de la industria (fragmentación, capacidad de crecimiento, plataforma para futuras adquisiciones, etc.) d. Instalaciones / Patrimonio inmobiliario e. Resistencia a los ciclos Deuda f. Existencia de áreas palpables de mejora (ahorros, sinergias, etc.) Capital Características financieras a. Precio b. Capacidad de generación de caja, y por ende de apalancamiento c. Cash Flows estables d. Bajas necesidades de inversión (CAPEX) y apalancamiento operativo (Circulante) e. Visibilidad en la salida el Cash Flow – Inversión en entidad generadora de caja Salida Operación Estructura – Utilización de caja para amortizar deuda Valoración – Generación de valor y salida Mult. Salida X X X Valor FFPP Entrada Purchase MúltIplo Compra X X X 25% TIR Valor FFPP Salida Exit 202 Aspectos preliminares de una operación – Generación de valor en la compra Creación de Valor por parte del Inversor Financiero Valor La creación de valor para el inversor se genera por: 1. Crecimiento en ingresos y rentabilidad 3. Desapalancamiento 4. Expansión de múltiplo entre la entrada y la salida Apalancamiento Incicial 66%/33% 2. Gestión de las inversiones (CAPEX) y fondo de maniobra Valor de la Inversión Tiempo 203 Aspectos preliminares de una operación – El problema de la asistencia financiera Artículo 81 LSA. Asistencia financiera para la adquisición de acciones propias. “La sociedad no podrá anticipar fondos, conceder préstamos, prestar garantías ni facilitar ningún tipo de asistencia financiera para la adquisición de sus acciones o de acciones de su sociedad dominante por un tercero.” … Artículo 150 LSC. Asistencia financiera para la adquisición de acciones propias y de participaciones o acciones de la sociedad dominante. 1. La sociedad anónima no podrá anticipar fondos, conceder préstamos, prestar garantías ni facilitar ningún tipo de asistencia financiera para la adquisición de sus acciones o de participaciones o acciones de su sociedad dominante por un tercero. La prohibición de la asistencia financiera en el Ordenamiento español dificulta a priori las operaciones de LBO, si bien existen diversas estructuras habitualmente utilizadas para circunvalar dicha prohibición Pronunciamientos recientes: Sección 28ª de la Audiencia Provincial de Madrid: Interpretación restrictiva del artículo 81 de la LSA. “… Esta situación tampoco aparece comprendida en la prohibición del Artículo 81 del TRLSA, precepto que debe ser interpretado restrictivamente y que requiere que se preste específicamente para la adquisición de acciones, como motivo determinante de la operación. Si la finalidad financiera no existe o no es esencial, y prevalece otra, ya no puede afirmarse que se incurra en tal prohibición…” Estructuras habitualmente empleada: 1. 2. Vehículo constituido por el comprador adquiere la compañía objetivo. La deuda permanece en el vehículo que utiliza los dividendos de la entidad adquirida para repagar intereses y amortizar el capital a. Distribución de reservas / amortización de capital / prima de emisión b. Consolidación fiscal c. Deducibilidad fiscal del fondo de comercio Posterior fusión del vehículo con la compañía adquirida a. Mecanismos (operativos y financieros) para evitar la impugnación de la fusión 204 Aspectos preliminares de una operación – Principales fases y características de un proceso de adquisición Dependiendo del tipo de operación, las fases de un proceso pueden variar, si bien todas las transacciones siguen un esquema similar: 1. Identificación de la compañía objetivo 2. Contactos preliminares 3. Due diligence inicial 4. Presentación de una propuesta inicial / Firma de un Acuerdo de Intenciones 5. Due Diligence adicional medioambiente, etc.) (asesores, auditores, abogados, comercial, 6. Negociaciones con accionistas / equipo directivo 7. Preparación de la financiación de la operación 8. Acuerdo, firma y cierre de la transacción 205 9. El día después – Plan Estratégico Aspectos preliminares de una operación – Los Consorcios de Fondos Cada vez se observa de manera más habitual que dos o más fondos acudan conjuntamente a procesos de compra, o analicen de forma combinada oportunidades de adquisición Permiten a los fondos abarcar su espectro de cobertura y llegar a operaciones más grandes; mega deals Permiten asimismo compartir la experiencia, los ángulos y conocimientos de los diversos participantes Reduce el número de competidores Diversifican el riesgo No obstante lo anterior: Ralentizan la gestión y disminuyen la capacidad de maniobra (movimiento al ritmo del más lento de los socios) En operaciones de tamaño mediano resulta más complicado En los casos de minorías, la falta de control implica una hipótesis de precio más bajo (en la salida), generalmente un apalancamiento menor, y por tanto un impacto negativo en la valoración ofrecida al vendedor Ejemplos relevantes en España: Amadeus (Cinven – BC Partners), Itevelesa (Apax – Vista Capital), Holmes Place (Mercapital – Dinamia), Iberostar (Carlyle – Vista Capital), Cortefiel (CVC-Permira-PAI), etc. 206 El Proceso de Adquisición – La financiación de la operación La financiación de la operación se lleva a cabo mediante el empleo de deuda financiera y capital del fondo adquirente Fuentes tradicionales de capital para operaciones lideradas por fondos de capital riesgo Componentes del capital Deuda Senior • A plazo • Líneas de Crédito • • • • 30%-60% de los fondos totales EURIBOR + 200-400 bps 6-8 años Sin tramos PIK, warrants, etc. Deuda Subordinada 10%-25% de los fondos totales T + 350-650 7-10 años Si son bonos, a partir de €100 mm • Senior/Sub notes • Second lien • • • • • Mezzanine Tradicional • Hasta €200 mm • 9-10 años • PIK y/o Warrants Preferred stock/Mezzanine securities • • • • Deuda Sub. (con.) Acciones preferentes PIK Warrants / Equity Kickers • • • • 0%-35% del capital Retornos entre el 10-20% 7–10+ años Paquetes menores Acciones Ordinarias • Capital Social • Préstamo Participativo • • • • • 20%-40% del total capital TIR 25%+ en operaciones estándar 3-7 años Estrategia de salida Importe depende de cada operación • Totalmente subordinada a tramos anteriores • 7 años. Se prepaga siempre con Capital en salida Principales características Normalmente con garantías y cláusulas más restrictivas Periodo de amortización del principal de 6-8 años Prioridad en quiebra, liquidación, concurso, etc. Cupón más bajo: ~ EURIBOR +200-400 bps Mayor riesgo / sin garantías específicas Estructuras bullet (e.g. 10 NC/5) Plazo superior a 7 años Cupón más alto ~ actualmente 10%-12%, con PIK y Warrants Gran variedad de estructuras: Obligaciones convertibles, canjeables, preferentes, sólo PIK, PIK+Warrants, etc. TIR esperada superiores al 12-13% Subordinación legal y estructural Riesgo más elevado Préstamos participativos minoran ligeramente el riesgo y conllevan ventajas/escudos fiscales TIR 25%+ 207 Case Study: Avanza Agrupación para el Transporte Descripción de la Compañía y las Partes • Avanza Agrupación para el Transporte, S.A. (“Avanza”) es uno de los principales operadores del sector de transporte de pasajeros en autobús en España, y líder en gestión de estaciones de autobús. Cuenta con más de 3.000 empleados y una flota de más de 1.100 vehículos. Antes de la transacción estaba controlada por 5 grupos familiares Principales Magnitudes Financieras (€ mm) Ventas EBITDA Margen 217,0 193,9 183,3 20,9% • Doughty Hanson es una de las firmas de capital riesgo independientes más importantes de Europa con oficinas en Londres, Frankfurt, Munich, Milán, París y Estocolmo, además de Madrid, donde está presente desde septiembre de 2006. Doughty Hanson fue fundada en 1985 y desde entonces ha realizado inversiones en más de 100 empresas por un importe total de €23.000 mm Descripción de la Operación • El proceso de venta se inició en septiembre, mediante el contacto con un amplio abanico de inversores, que quedaron reducidos a 4 en la fase final del proceso • Análisis complejo del activo, dadas sus peculiaridades estructurales y la relación especial con las Administraciones Públicas • Los accionistas de Avanza llegaron a un acuerdo para la venta del 100% de sus acciones a la firma de capital riesgo europea Doughty Hanson el pasado 12 de diciembre, por un importe superior a los €600 mm1 • La financiación de la operación fue facilitada por HVB y Mizuho, bancos sin presencia física en España en sus divisiones de adquisiciones apalancadas, con una estructura innovadora de amortización de la deuda Fuente: Factiva, Mergermarket, Capital IQ 1 Fuente: Expansión (%) 240,0 20,9% 38,0 2003 Noticias 25,0% 17,7% 34,3 2004 45,4 2005 60,0 2006E “El fondo británico Doughty Hanson conducirá los autobuses de Auto Res. La firma cierra su primera operación en España por cerca de €600 mm. Tras una dura subasta, la entidad de capital riesgo ha logrado hacerse con el control de Avanza, segundo operador de transporte de viajeros por carretera”. Expansión, 13 de diciembre de 2006 “La firma de capital riesgo Doughty Hanson, anunció ayer que cerró un acuerdo con los accionistas de Avanza para hacerse con el control de la operadora con mayor presencia en el sector de los autobuses urbanos, la segunda en importancia en operaciones de largo recorrido y la mayor operadora de estaciones de autobuses. Aunque no trascendió la cifra oficial por la que se cerró la venta, fuentes cercanas a la operación señalaron que el acuerdo rondaría los 650 millones de euros”. Gaceta de los Negocios, 13 de diciembre de 2006 208 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 209 Principales Acuerdos en Operaciones de Private Equity – Acuerdo de Accionistas Si los directivos son accionistas, la relación queda recogida en el Acuerdo de Accionistas. En caso contrario se negocian acuerdos específicos de manera independiente El Acuerdo de Accionistas cubre las relaciones entre todos los partícipes en el capital de la compañía una vez concluya la compra. Incluye por tanto al inversor financiero, equipo directivo y accionistas salientes que invierten / reinvierten y, en ocasiones, a las entidades financieras que participan en la operación, y que recientemente están aportando de manera puntual o permanente parte de los fondos propios de las operaciones De manera general, el Acuerdo de Accionistas comprende los siguientes aspectos: 1. Estructura del capital y división del mismo 2. Modalidades de acciones 3. Nombramiento del equipo directivo y del Consejo de Administración de la entidad 4. Derechos y obligaciones de los accionistas y directivos, y remuneración de las acciones / participaciones 5. Toma de decisiones accionariales, mayorías, bloqueos, resolución de conflictos entre accionistas, etc. 6. Sujeción de las acciones a la permanencia en la compañía (para el equipo directivo) 7. Derechos de venta, recompra, adquisición preferente, valoración/precio, restricciones y penalizaciones a la transmisión, casos de muerte o incapacidad, etc. 8. Derechos de arrastre (drag along) y acompañamiento (tag along) 9. Protección de accionistas minoritarios 210 Principales Acuerdos en Operaciones de Private Equity – Contratos de Financiación Acuerdo de Financiación (Contrato de préstamo) 1. Importe concedido (habitualmente al vehículo), propósito y disposición de fondos 2. Tipo de interés, devengo de intereses y periodos 3. Amortización ordinaria, anticipada y obligatoria 4. Duración y vencimiento 5. Impuestos 6. Variación de circunstancias y declaraciones formales 7. Obligaciones del prestatario 8. Indemnizaciones, pagos (proporcionalidad e imputación), comisiones, costes y gastos 9. Cesión del préstamo 10. Agente, comunicaciones, plazos, ley y jurisdicción aplicable 11. Garantías del prestatario (en el mismo documento o en otro contrato) Contrato entre Prestamistas (intercreditor agreement) 1. Acuerdo entre todas las entidades financieras que participan en la operación 2. Orden de prelación de los créditos, subordinaciones legales y estructurales, prioridad en la amortización, y control de la compañía en casos de insolvencia 211 3. Excepciones a las obligaciones generales, al orden habitual de pago establecido, amortizaciones anticipadas en caso de exceso de caja, etc. Principales Acuerdos en Operaciones de Private Equity – Contrato de Compraventa Acuerdo formalizado habitualmente entre el vehículo de los inversores (un vehículo canaliza las inversiones de diversos accionistas) y los vendedores Principales cláusulas de un Contrato de Compraventa: 1. Compraventa – Objeto 2. Precio y pago del mismo 3. Acciones simultáneas a la compraventa 4. Declaraciones y garantías de los vendedores 5. Declaraciones y garantías del comprador 6. Responsabilidad de los vendedores (indemnizaciones, límites cuantitativos y temporales) 7. Procedimientos 8. Otros pactos (notificaciones, confidencialidad, gastos, anuncios, invalidez, etc.) 9. Legislación aplicable y jurisdicción 10. Anexos y otros 212 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 213 Aspectos relevantes en la negociación de la inversión – Protección de la entidad de private equity Manifestaciones y Garantías del vendedor – Cobertura, plazos, límites, ajustes al precio y escrow / retención de precio Obligación de reinversión de los vendedores Obligación de no competencia Seguros de cobertura de riesgos específicos (fiscales, medioambientales, contingencias laborales, etc.) “Protección” de las entidades que financien la operación en el contrato de financiación – Límites de la capacidad de involucración en la actividad de la compañía – Conflicto cuando el banco es inversor y financia simultáneamente una operación Protección de los accionistas minoritarios – Derecho de arrastre (drag along), Bloqueo de decisiones, ventas forzosas, etc. Protección del equipo directivo – Obligación de vender, bajo rendimiento, conflictos de interés en la salida, incumplimiento del Plan de Negocio, etc. 214 Aspectos relevantes en la negociación de la inversión – Protección de los accionistas minoritarios Pactadas y reflejadas en el Acuerdo de Accionistas Derecho de acompañamiento (tag along), derechos de tanteo, etc. Limitación de las manifestaciones y garantías, en función de capacidad de influencia en la gestión Entrega de información periódica Derecho de Separación y capacidad de bloquear determinadas decisiones críticas Régimen de la transmisión de las participaciones / acciones (ejecución forzosa, adquisición preferente, opciones de compra, de venta, cruzadas, salida del accionista principal del capital, etc.) Permanencia, confidencialidad y no competencia del equipo directivo 215 Aspectos relevantes en la negociación de la inversión – Protección y acuerdos con el equipo directivo Pactadas y reflejadas en el Acuerdo de Accionistas Garantías otorgadas por los directivos en su faceta de tales (vs. accionistas), tanto en la inversión como en el momento de la desinversión Obligación de inversión en el proyecto: Envy Ratio – Ratchets – Retribución variable (acciones liberadas o con cargo a beneficios futuros) por rendimiento (cumplimiento del Plan de Negocio) y retornos del fondo en la operación Régimen de la transmisión de las participaciones / acciones (ejecución forzosa, adquisición preferente, opciones de compra, de venta, cruzadas, salida del accionista principal del capital, etc.) Permanencia, prestaciones accesorias (p.ej. confidencialidad) y no competencia (todas ellas durante la inversión y a posteriori) Good leaver / bad leaver (Venta forzosa participaciones, precio, etc.) 216 Aspectos relevantes en la negociación de la inversión – Acuerdos con los accionistas salientes Manifestaciones y Garantías – Cobertura, plazos, límites, ajustes al precio y escrow / retención de precio Colaboración y permanencia Obligaciones de reinversión Obligación de efectuar inversiones adicionales en la compañía Otras obligaciones (alquiler de locales, permanencia en el Consejo, relaciones comerciales con clientes y/o proveedores, etc. No competencia Confidencialidad 217 Case Study - The Colomer Group (Revlon Professional Products) Descripción de la Compañía Descripción de la Transacción • The Colomer Group (“TCG”) se crea tras la escisión de Revlon Professional Products del Grupo Revlon, siendo adquirida por CVC y la familia Colomer • TCG, con sede en Barcelona, produce y comercializa un amplio abanico de productos de belleza, tanto para el sector profesional, como para el sector del gran consumo • Sus productos están enfocados al cuidado del cabello y de las uñas bajo diversas marcas, entre las que se encuentran Revlon, Llongueras, Intercosmo o American Crew • El grupo se estructura en tres divisiones: – Profesional: productos enfocados al sector profesional – Gran consumo: productos destinados al mercado minorista, distribuidos en droguerías o pequeñas peluquerías – Étnicos: productos capilares para el mercado afro-americano • Sus productos se distribuyen en más de 40 países funcionando a través de dos divisiones geográficas: – EEUU: con 3 centros de producción en el país – Resto del mundo: con centros de producción en España, Italia y Méjico, desde las cuales se distribuye al Norte y Sur de Europa, Norte de África y Suramérica • En febrero del año 2000, la familia Colomer junto a CVC adquirieron Revlon Professional Products, posteriormente TCG, división de productos profesionales del Grupo Revlon Presencia Geográfica • El grupo fue adquirido por Revlon en 1978 a la familia Colomer, incorporando las distintas adquisiciones realizadas durante la década de los 90, destacando Creative Nail Design (1995), American Crew (1996) y African Pride (1999) • El valor de la transacción ascendió a $325 mm, incluyendo el paquete de deuda. En 2002 los accionistas refinanciaron la compañía con un préstamo de $305 mm financiado por un consorcio de bancos liderados por Societe Generale y BBVA Estructura Accionarial Carlos Colomer y otros 25% CVC 75% Múltiplos de la Transacción Múltiplos Entrada CVC (feb. 2000) ($ mm) 1999 Valor Compañía 325,0 Ventas 353,0 0,9x EBITDA 52,8 6,2x EBIT 45,9 7,1x Presencia de TCG Fuentes: Información pública obtenida de Factiva, Mergermarket, información de sus páginas web, Registro Mercantil 218 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 219 Valoración de la inversión en cartera – Principales parámetros Desde el momento de la compra de una entidad hasta la desinversión en la compañía adquirida, los gestores de un fondo de capital riesgo utilizan diversos sistemas de valoración de su cartera de participadas Mediante estos sistemas los partícipes en el fondo (“limited partners”) deben ser capaces de evaluar el comportamiento de las compañías y su situación en un momento dado en el tiempo, sin tener que esperar por tanto a la desinversión, lo cual otorgaría poca claridad y visibilidad a los inversores durante la vida de un fondo, que puede prolongarse durante periodos de más de 10 años A continuación repasamos brevemente los principales habitualmente utilizados por las entidades de private equity: sistemas y parámetros 1. Valor de la inversión a. Especialmente para inversiones recientes b. Pierde valor a medida que transcurre tiempo desde la inversión, ya que únicamente refleja el precio y condiciones de mercado existentes en el momento en el que se realizó la inversión c. Actualización si se da entrada a un nuevo inversor (este sistema puede ocasionar errores, en función de las características particulares y condicionantes del nuevo inversor: prima de control, inversión estratégica, etc.) d. La no actualización del valor puede llevar a pensar que se ha producido un deterioro del activo no adecuadamente reflejado por el fondo 220 Valoración de la inversión en cartera – Principales parámetros (Cont.) 2. Múltiplos sobre beneficios u otro parámetro contable a. Aplicación de un múltiplo sobre ventas, EBITDA, EBIT(A), FCF, EBITDACAPEX, Beneficio Neto, etc. b. Premisa de un negocio que genera beneficios recurrentes a futuro c. Múltiplos de compañías cotizadas comparables, o … d. Múltiplos de transacciones comparables e. Requiere identificación de beneficios “normalizados”. extraordinarios, ventas u operaciones puntuales, etc. f. Exclusión de Inclusión de activos periféricos no generadores de caja g. Aplicación de comparables apropiados, algo no siempre fácil de determinar h. Aplicación de posibles descuentos y ajustes al múltiplo (mercado, iliquidez, dependencias puntuales, calidad de los beneficios, alto apalancamiento, etc.) i. Determinación del valor de los fondos propios, una vez sustraído todo el coste y valor del endeudamiento neto financiero j. Otros factores 221 Valoración de la inversión en cartera – Principales parámetros (Cont.) 3. Valor de los Activos Netos a. Valor de un negocio como valor de los activos netos del mismo b. Empleado en compañías cuyo valor deriva principalmente del valor de sus activos, más que en la capacidad para generar beneficios a futuro (inmobiliarias, entidades de inversión, patrimoniales, etc.) c. Posibilidad para compañías en liquidación, o en pérdidas d. Valor de activos periféricos, bases imponibles negativas y otros e. Raramente utilizado por los fondos 222 Valoración de la inversión en cartera – Principales parámetros (Cont.) 4. Descuento de Flujos de Caja a. Valor presente de los flujos de caja (o beneficios) que la entidad generará a futuro b. Técnica comúnmente utilizada, tanto por fondos como por asesores financieros c. Este sistema conlleva la utilización de una serie de hipótesis para determinar las proyecciones futuras del negocio, el valor terminal del mismo, tipo de descuento a aplicar a los flujos de caja futuros, etc. d. Como consecuencia de lo anterior, el resultando obtenido puede verse influido sensiblemente por pequeñas modificaciones en las hipótesis iniciales e. Empleado en negocios maduros. Para negocios en crecimiento, expansión, en fase de reestructuración o en pérdidas es poco utilizado 223 Valoración de la inversión en cartera – Principales parámetros (Cont.) 5. Otros a. b. Criterios específicos de valoración del sector i. Utilizados en sectores específicos (Hostelería, negocios de suscripción, medios, etc.) ii. Contratos a largo plazo o con características especiales para su valoración de forma independiente del resto del negocio iii. Concesiones (duración, condiciones, etc.) Disponibilidad de precios de mercado i. Participaciones en compañías cotizadas valoradas a valor de mercado, salvo que existan situaciones especiales que incidan sobre el mismo (bajo free float, prima de control, intervención pública, etc.) 224 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 225 Principales estrategias de desinversión – El proceso de desinversión: Consideraciones generales preliminares Planteamientos iniciales y finales de la salida Preparación de la empresa para la desinversión Alineamiento con el resto de accionistas TIR DESINVERSIÓN Preparación del equipo directivo para la venta y el proceso Consecución del Plan de Negocio – Recorrido / Oportunidad para el nuevo inversor Modalidades compradores de proceso – selección de Momento del mercado – apetito por el activo, interés por el sector Acercamientos no solicitados – Oportunidades puntuales Plazos estándar de desinversión del Fondo 226 Principales estrategias de desinversión – Buy-backs (recompra por parte de otros accionistas) El inversor financiero se desprende de su participación mediante la venta a otros accionistas de la compañía Habitual en la venta de participaciones minoritarias, si bien se dan supuestos de venta de mayorías Diversas posibilidades: Venta al equipo directivo (inversor y normalmente accionistas originales o traídos por el fondo de capital riesgo), a otro inversor financiero, accionistas minoritarios, etc. En ocasiones se combina con una ampliación de capital y entrada de un nuevo accionista que apoya a los existentes no desinversores Existe asimismo la posibilidad de venta de la participación a la compañía en los casos en los que el apalancamiento financiero es bajo, el equipo directivo está involucrado, etc. Supuestos de procesos de venta en marcha con resultados no satisfactorios para alguno de los socios Derechos de adquisición preferente previsto en los Estatutos / Acuerdo de Socios que limiten otras alternativas 227 Protección en la venta (cláusula anti-embarassment) Ejemplos: TCB, Bodybell, Hospitén Principales estrategias de desinversión – Secondary Buyouts Venta de una compañía participada a otro inversor financiero. El proceso de desinversión puede ser una simple sustitución del inversor financiero, venta del 100% del capital, incorporación al capital de directivos que no participaban en el mismo, salida e incorporación de nuevos directivos, etc. Ventajas COMPRADOR VENDEDOR Adquisición de una compañía ordenada y estructurada Proceso de Due Diligence ya realizado Compañía habituada a la titularidad de un fondo, y al apalancamiento financiero Continuidad del equipo directivo (normalmente habitual) Posibilidad de continuar con el desarrollo y crecimiento de la compañía, y llevarla a una siguiente fase de su expansión (fondos de mayor tamaño) Alternativa cada vez más habitual de salida, y más empleada sobre el IPO, y fuente de liquidez para casas de menor tamaño Seguridad sobre la reputación y delivery del comprador Incremento de la competitividad y, a priori, de la valoración obtenida en la venta Desventajas Peor valor estratégico que una compra a un industrial Percepción de pago de sobreprecio Titularidad anterior puede haber “cortado toda la grasa” y hacer potenciales mejoras difíciles de obtener Riesgo de única alternativa para una inversión poco exitosa para el vendedor Los inversores pueden percibir la compra como un “cambio de cromos” entre firmas de capital riesgo, con el único objeto de percibir comisiones Problemas de valoración del activo (sólo basado en LBO) La evolución de la compañía puede sufrir como consecuencia de una visión estratégica a corto/medio plazo Disminución de la posibilidad de obtener retornos elevados La valoración puede sufrir en las últimas fases de los procesos Venta vs. Recapitalización financiera Inexistencia de “strategic premium” del comprador Posible percepción de falta de capacidad del fondo para vender activos fuera de procesos abiertos o a inversores industriales en procesos restringidos Ejemplos: Parques Reunidos, Svenson, Mivisa, Dorna, Itevelesa, Saprogal, etc. 228 Principales estrategias de desinversión – Venta a un Industrial Las sinergias operativas deben tener su reflejo en la obtención de un precio superior al vendedor No obstante el comprador puede sufrir restricciones que le impidan alcanzar el precio exigido/deseado por el fondo desinversor (apalancamiento, múltiplos propios de cotización, percepción del mercado de sobrepago, etc.) Menor preocupación por la calidad del equipo directivo Due Diligence enfocado más a aspectos de integración y sinergias que a la detección de contingencias No necesitan conocimiento ni entendimiento de la industria, lo cual les otorga una ventaja frente a competidores puramente financieros Posibles problemas de competencia Procesos internos de decisión más lentos que los de un inversor financiero No preocupados por una salida a futuro, dado que esto se ve como una situación poco probable en el momento de la compra 229 Ejemplos: Cervezas Alhambra, Integral Press, CESA, Panzani Principales estrategias de desinversión – Mercados Cotizados Venta en Bolsa 1. Venta de participaciones en compañías cotizadas 2. Infrecuente en LBOs, dada su habitual exclusión de los mercados cotizados una vez concluida la operación 3. Sí se da en la toma de participaciones minoritarias en compañías cotizadas por fondos especializados en este tipo de operaciones, y Hedge Funds OPV (Salidas a Bolsa) 1. Preparación previa intensa de la compañía para el proceso 2. Baja liquidez y apetito del mercado español hacen que esta vía no sea la habitual en procesos de desinversión 3. Proceso: Folleto, Valoración Inicial, Roadshow, Ofertas indicativas, Fijación final del precio, Inicio de cotización Desinversiones Post OPV 1. Ofertas secundarias 2. Incremento del free float de la entidad que facilita operación, salvo que la desinversión incluya personas “clave” para la compañía 3. Precio influido por OPV, si el plazo temporal no es lo suficientemente amplio Ejemplos: Clínica Baviera, GAM, Vueling, Yell, William Hill, etc. 230 Principales estrategias de desinversión – Recapitalizaciones Una recapitalización o refinanciación del pasivo financiero de una entidad adquirida por un fondo consiste en el reapalancamiento de dicha entidad mediante el aumento de la deuda soportada, directa o indirectamente, por la compañía Los fondos obtenidos son utilizados para el pago de un dividendo extraordinario a los accionistas Esta operación puede realizarse: 1. En el momento de la adquisición (finalizado el cierre), una vez el comprador se familiarice con la compañía objetivo y descubra nuevas fuentes adicionales de financiación (p.ej. Sale & Leaseback de activos), o 2. Con posterioridad, como consecuencia de: i. La amortización progresiva de la deuda de adquisición ii. La mejora de los resultados operativos y generación de caja de la compañía adquirida iii. La mejora de las condiciones ofrecidas por las entidades financieras, que permitan el incremento de la deuda de la compañía Procedimiento cada vez utilizado con mayor frecuencia y antelación por parte de los 231 inversores financieros como alternativa a la desinversión, y sistema de mejora de la TIR de la inversión Ejemplos: Mivisa, Ahold, Zena, Cortefiel, Itevelesa, Parques Reunidos, Dorna, etc. Principales estrategias de desinversión – Reconocimiento de Minusvalías y Reembolso de Préstamos Uno de los primeros síntomas de que una inversión no evoluciona de forma favorable: Incumplimiento de covenants del contrato de financiación, con la consiguiente solicitud de waivers Cuando suceden estos hechos, y dependiendo de la gravedad del incumplimiento, las entidades financieras pueden adoptar diversas medidas, que van desde la concesión del waiver sin más, hasta la venta de su participación en el préstamo / bonos afectados, a un valor inferior al nominal (a descuento) En ocasiones se procederá simultáneamente a realizar una ampliación de capital cuyos fondos se emplearán para amortizar deuda, reduciendo la presión financiera de la compañía Resulta extremadamente infrecuente que un inversor financiero reconozca una minusvalía en una compañía de su cartera de participadas, manteniendo el valor en libros de la misma hasta que la situación se haya deteriorado hasta tal punto (quiebra, suspensión de pagos, etc.) que deba proceder a reconocer una minusvalía o un write off (eliminación) de la inversión El resultado final es la pérdida económica de todas las partes involucradas: El fondo pierde todo o parte de su inversión, los bancos todo o parte de la financiación, y el equipo directivo no ve cumplidas sus expectativas Ejemplos: Paconsa, Grupo Labiana, Vanyera, Fairchild Dornier, Kierkert 232 Case Study – Svenson I y II Descripción de la Compañía Descripción de la Adquisición Svenson es líder en el sector de tratamientos y servicios capilares especializados en España y Alemania Nazca Capital adquirió el 100% del capital de Svenson a través de una operación de LBO¹ en marzo de 2002 Su gama de productos y servicios incluye tanto soluciones preventivas como soluciones de integración, diferenciando cuatro líneas de negocio: Tratamientos capilares con supervisión médica Productos cosméticos especializados como complemento a los tratamientos Sistemas de integración sin cirugía Microinjertos realizados en clínicas concertadas Svenson cuenta con una red de 55 centros, todos ellos en propiedad, en tres países (España, Alemania y Portugal), estando presentes en las principales ciudades de España y Alemania y ampliando recientemente sus actividades a Portugal Desde 2003 la compañía ha realizado 17 aperturas en España, todas ellas con éxito Actualmente, la compañía cuenta con más de 500 empleados y una base de 15.000 clientes Ventas estimadas en 2006 de ~ €50 mm, y EBITDA superior a los €11 mm Presencia Geográfica Red de Centros en España y Portugal Coruña Vigo Gijón Santander Bilbao Oviedo Hamburgo Pamplona ZaragozaSabadell Badalona Castellón Badajoz Palma Valencia (2) Córdoba Sevilla (2) Alicante Murcia Granada Málaga Almería Hannover Dortmund Dusseldorf Köln Frankfurt Elche Las Palmas Jerez Berlín Barcelona (4) Madrid (6) Lisboa En el periodo de inversión, y tras la entrada de un nuevo equipo gestor, la compañía realizó con gran éxito 17 nuevas aperturas en España Apoyado por el gran crecimiento en España, en marzo de 2004 adquiere Svenson Haar Studios, compañía gemela en Alemania. Contaba con 11 centros En octubre 2004 dieron entrada en el capital de la compañía a un Family Office español En 2005, siguiendo con el plan de expansión previsto, Svenson amplió su presencia geográfica con la entrada en Portugal, abriendo un centro en Lisboa y adquiriendo un centro en Alemania Descripción de la Desinversión A comienzos de 2005, Nazca comienza un proceso de análisis de refinanciación de la compañía, que finalmente derivó en un proceso de venta dadas las excelentes perspectivas que existían para la venta, y el interés que el sector generaba en potenciales compradores S. Sebastián Vitoria Logroño Valladolid Red de Centros en Alemania En ese momento la compañía contaba con 25 centros en España con unas ventas de €12,5 mm Tenerife Mannheim Stuttgart Leipzig Tras una subasta restringida extremadamente competitiva, el equipo gestor junto a un grupo de inversores financieros liderados por Investindustrial adquieren Svenson por un valor compañía de €121 mm El paquete de deuda alcanzó niveles de ~8,0x EBITDA. Nazca multiplica su inversión por 9,0x Estructura Accionarial Nurnberg Equipo Directivo 20% Munich Investindustrial 55% BBVA 25% Fuentes: Información pública obtenida de Factiva, Mergermarket, información de sus páginas web, Registro Mercantil ¹ Incluye la adquisición de Alemania 233 Agenda Aspectos Preliminares Principales Acuerdos en Operaciones de Private Equity Aspectos Relevantes en la Negociación de la Inversión Valoración de la Inversión en Cartera – Parámetros Generales Estrategias de Salida El Proceso de Desinversión – Mecanismos y Estrategias 234 El Proceso de Desinversión – Mecanismos y Estrategias Negociación (no-subasta) Subasta Controlada Subasta Abierta Mayor número de compradores Valor Maximiza competencia y precio Mayor atractivo para los compradores Mayor velocidad de ejecución Calendario Mayor flexibilidad Mayor confidencialidad, menor interrupción del negocio Otras Cuestiones Mayor probabilidad de éxito Menor riesgo de consecuencias negativas de fracaso de la venta 235 Descripción de un Proceso de Desinversión Fase de Preparación Fase de Ejecución Duración estimada 6-8 semanas 10-12 semanas Objetivos principales Preparar documentación de la compañía Contratación de asesores independientes Selección de potenciales compradores Contactar con potenciales compradores Estructurar el proceso de venta Maximizar el precio de venta del activo Cerrar la transacción Un proceso de venta completo suele tener una duración aproximada de entre 16 y 20 semanas 236 Preparación del Proceso La elaboración del “Cuaderno de Información” es una de las fases críticas del proceso, ya que debe existir un equilibrio adecuado entre la información facilitada, para maximizar el valor de la compañía, y el mantenimiento de la necesaria confidencialidad de aspectos clave del negocio (si bien este aspecto cobra menor relevancia si se consideran exclusivamente inversores financieros) Preparación de materiales de marketing Visitas a la compañía Reuniones con la Dirección Recopilación de información Estructura típica del documento Resumen ejecutivo Atractivos de la inversión Descripción del sector Descripción del negocio / activos Análisis financiero y operativo Análisis del sector / mercado Aprobación de accionistas y equipo directivo Resumen financiero Plan de negocio (proyecciones financieras) Materiales de promoción, en su caso 237 Fase de Ejecución PRIMERA ETAPA SEGUNDA ETAPA Marketing Due Diligence TERCERA ETAPA Estructuración Negociación Contacto con los socios potenciales seleccionados Distribución del cuaderno de información previa firma Cierre del acuerdo de confidencialidad Solicitud de ofertas indicativas que incluyan las condiciones necesarias para realizar la transacción y demuestren el interés en el activo Selección de candidatos para la fase restringida del proceso en base a la recepción de ofertas indicativas Preparación de la presentación del Equipo Directivo¹ ¹ Documento preparado por los asesores junto al equipo directivo para ser presentado a los socios potenciales en una segunda etapa 238 Fase de Ejecución (cont.) PRIMERA ETAPA SEGUNDA ETAPA Marketing Due Diligence¹ TERCERA ETAPA Estructuración Negociación Entrega del Vendor Due Diligence1 a los socios potenciales Reuniones de trabajo de los compradores con el equipo gestor Organización de visitas a la empresa Coordinación de solicitudes adicionales de información Asistencia en reuniones con responsables de áreas de negocio Mantenimiento de diálogos constantes con socios potenciales Supervisión de visitas al Data Room Cierre ¹ Auditoría y valoración de posibles contingencias de la compañía en los ámbitos legal, fiscal, laboral, financiero y medioambiental realizada por los asesores de los socios potenciales 239 Fase de Ejecución (cont.) PRIMERA ETAPA SEGUNDA ETAPA Marketing Due Diligence TERCERA ETAPA Estructuración Negociación Cierre Elaboración y revisión de la documentación legal Contrato de compraventa Acuerdos de accionistas Contrato de financiación Solicitud de ofertas formales Valoración de ofertas Definición del calendario de cierre 240 Fase de Ejecución (cont.) PRIMERA ETAPA SEGUNDA ETAPA Marketing Due Diligence TERCERA ETAPA Estructuración Consideración del periodo de exclusividad Selección de oferta óptima Negociación de términos y condiciones Negociación del precio final Otras consideraciones y negociaciones Negociación Cierre 241 Fase de Ejecución (cont.) PRIMERA ETAPA SEGUNDA ETAPA Marketing Due Diligence TERCERA ETAPA Estructuración Negociación Cierre Obtención de autorizaciones pertinentes de los órganos de administración respectivos, competencia, etc. Formalización y firma del contrato Publicidad, en su caso Cierre formal de la transacción 242 El Proceso de desinversión – Mecanismos y estrategias de desinversión El proceso de desinversión comienza desde la negociación de la inversión. Los acuerdos que se alcancen en el momento inicial determinarán, o podrían determinar, la salida de la inversión de forma relevante 1 Cláusulas Contractuales Tag Along o Derecho de Arrastre (unido al Derecho de Información) Drag Along o Derecho de Acompañamiento, especialmente como protección para los accionistas minoritarios Otorgamiento de Manifestaciones y Garantías: Gestores/Accionistas Minoritarios/Inversor Financiero Plazos preestablecidos para el inicio del proceso 3 Incentivos para el equipo directivo en la desinversión – bonos, ratchet, incremento de la participación según TIR inversor financiero, obligación de permanencia, etc. Evitar o minimizar el riesgo del conflicto de interés del equipo, especialmente en Secondary Buyouts, o desmotivación en la venta a un inversor industrial COMPAÑÍA, Bloqueos y resolución (Derechos de Adq. Pref.) ACUERDOS Y PROCESO Opciones de Compra-Venta Opciones de Compra y Opciones de Venta Compra y venta forzosa Precio Mecanismos y Plazos de ejecución Good Leaver / Bad Leaver – Condiciones y consecuencias de la no permanencia en la ejecución de las opciones 2 Sistemas de Incentivos Por el otorgamiento de R&W Incentivos para los asesores de la operación 4 Salvaguardia post-desinversión Inexistencia de Garantías prestadas por el fondo, limitación cuantitativa/temporal y/o cobertura mediante un seguro Limitación de otras responsabilidades Salvaguardia de conflictos/responsabilidades en Secondary Buyouts, y ayuda al equipo en negociaciones con el comprador Cláusula Anti embarassment 243 Oficinas Madrid Pº. de la Castellana, 23, 1º 28046 Madrid t. +34 913 912 066 f. +34 913 102 222 Barcelona Avda. Diagonal, 418, 2ª “Casa de les Punxes” 08037 Barcelona t. +34 933 426 289 f. +34 933 015 050 Oviedo Pl. de la Constitución, 8, 1º-2ª 33009 Oviedo t. +34 985 207 000 f. +34 985 212 027 Valladolid C/ Pío del Río Hortega, 8, 1º 47014 Valladolid t. +34 983 218 904 f. +34 983 309 777 Vigo C/ Colón, 12, 3ª y 4ª 36201 Vigo t. +34 986 442 838 f. +34 986 226 110 Sevilla C/ Fernández y González, 2 41001 Sevilla t. +34 954 293 216 f. +34 954 293 377 244
