Trading and Transaction Multiples - unipveconomia.unipv.it/sitonuovo/userfiles/piero/file/Comparable Company... · firm’s ownership in a subsidiary is between 50% ... • EPS ’02

Trading and Transaction Multiples

Strictly Private & Confidential

Trading Comparables

Introduction

What is it? Use of Trading Multiples

Trading Comparables

Valuation tool based on how comparable

companies are valued by the stock market as a

multiple of profit, sales or other parameters

Assumes that the stock market is relatively

efficient in valuing comparable companies

Importance

Buy-side M&A high

Sell-Side M&A high

Merger of Equals high

Initial Public Offering high

Add-on financings low

Share repurchases low

Leveraged Buy-out low

Identify Comparable

Companies

Select

Appropriate

Multiples

Calculate

Multiples

Check and

Interpret the

Results

Most Widely Used Valuation Tool

1

Identify Comparable Companies

Identify Companies with Similar Business Mix, Size, Operations and Capital Structure

Trading Comparables

Growth

/

Risk

Business Mix

Products

Markets Served

Customers

Size

Assets

Revenues

Profitability

Operations

Production Process

Operational Gearing

Capital Structure

Leverage

Dividend Payout

Talk to the right people – Industry Teams

Previous presentations

Equity research reports

Competition section in 10K / Prospectus

Other sources: Hoover’s in-depth records

2

Select Appropriate Multiples

Equity Value Multiples Enterprise Value Multiples

Trading Comparables

Capital Structure ―as is‖

Denominator after interest expense

Main multiples are

– P/E ratio

– Price/Book ratio

– PEG ratio

Unlevered Capital Structure

Denominator before interest expense

Main multiples are

– EV / Sales

– EV / EBITDA

– EV / EBIT or EV / EBITA

– EV / Capital Employed

– EV / Subscribers (telecom, similar ratios

based on operating figures in other industries)

Enterprise Value vs. Equity Value Multiples

3


Multiple Advantage Disadvantage

EV / Sales

Meaningful for loss-making companies

Very limited impact of accounting differences

Does not take differences in profitability into account

EV/EBITDA No distortions based on different

depreciation policies Does not take differences in capital intensity

into account

EV/EBIT(A) Takes capital intensity into account Possible distortions based on different

accounting policies

EV / Capital

Employed

Based on invested capital, which determines potential earnings power

Does not take differences in profitability into account

Distortions through accounting differences

EV / Subscriber

(or other metrics) Based on industry-specific value-driver Does not take profitability into account

P/E Ratio Focuses on earnings to shareholders

Does not take risk profile based on differences in leverage into account

Accounting differences

Price / Book Based on equity, which determines

earning power Does not take differences in profitability

into account

Choice of the Multiple Depends on Industry, Profitability, Accounting Regimes

Trading Comparables

4


Industry Multiple Comment

Banks Price / Book Equity is limiting factor

Always look at ROE at the same time

Telecom EBITDA

No. of subscribers defines maximum revenues

Once the network is built, depreciation is not very relevant because no need for near-term replacement capex

Industrial EBITA Depreciation is good proxy for replacement capex

Heterogeneous set of companies with different capital intensities

Different Industries May Use Different Multiples

Trading Comparables

5


Period Advantage (+)/ Disadvantage(-)

Trading Comparables

Last calendar year

Last twelve months (LTM)

Current calendar year

Next calendar year

+ Enables consistent comparison with historic /

future calendar years

— Can be over by several months, and therefore of

limited interest for stock market

+ Provides the most recent historic information

— But might be different from the future

+ Usually the period that the stock market focuses

on most

— Clearly some degree of uncertainty over the year

end result

+ Focuses on future revenue and profit

+ Especially relevant for fast-growing companies

— Projections become less accurate the further you

go into the future

Chosing the appropriate period

___________________________

Note: NB. Always calendarize financial years to calendar years unless otherwise directed.

6

Calculate Multiples – The Numerator

Enterprise Value Constituents Capital Providers / Recipients

Trading Comparables

Calculating Enterprise Value

Common Shareholders

Creditors

Minority Owners

Non-Consolidated Companies

Market Capitalisation

+ Net Debt

Bank Debt

+ Bonds

+ Finance Leases

+ Preferred Stock

– Cash

– Securities

+ Minority Interest

+ Minority Interest (at market value if available)

– Investments/Associates (at market value if available)

7


Make Sure that Numerator and Denominator are Consistent!

Trading Comparables

Market Cap

Net Debt

Bank Debt

Bonds

Leases

Preferred Stock

Cash

Securities

Minority interest

(market value)

Investments and

Affiliate (market

value)

Enterprise Value

Net Income

Taxes

Net Interest

Interest Expense

Interest Income

Minority interest in

net income

Income from

Investments and

Affiliates

Sales/

EBITDA/

EBIT

Levered MultipleUnlevered Multiple

Assume full ownership of subs

Unlever

Numerator

Denominator

8


Basic market capitalization = share price of common shares x common shares outstanding

Take shares outstanding from latest interim report / 10Q and check news for stock split / capital

increases (Bloomberg / Extel / Factset are not always correct but should be used as a cross checks)

Check for multiple classes of shares (A + B / Voting + Non-Voting)

Fully diluted shares outstanding (treasury stock method)

– Fully diluted market capitalization assumes that all in-the-money options become exercised; thereby

increasing the share capital

= basic shares outstanding

+ in-the-money options adjustment

Calculating Market Capitalization on a Fully-Diluted Basis is More Accurate, but the

Impact is Usually Low

Trading Comparables

9


Convertible bonds are debt that can be converted into equity at an agreed conversion price

Treatment of convertible bonds in a comparable company analysis depends on whether the bonds are

―in-the-money‖ or ―out-of-the-money‖:

Enterprise Value Calculation – Convertibles

Trading Comparables

“Out-of-the-money” “In-the-money”

Equity Value < Face Value

– Treat as Financial Debt

Equity Value > Face Value

– Treat as Equity

– Adjust no. of shares

– Adjust interest expense

How to Treat Convertibles

10


Enterprise Value Calculation – Investments / Affiliates

Trading Comparables

Investments (<20% ownership)

– Dividend income is recorded as earned

– Gains/losses in fair value are recorded in

income statement

Affiliates (20% – 50% ownership)

– Firm records proportional stake in earnings on

income statement (income from affiliate)

– Earnings represent increase in investment

account

– Dividends represent return on capital

(reduction in account)

Treat them as ―non-core‖

– Do not include dividend income/share in

earnings

in EBIT

– Deduct investment/affiliate from market

capitalization to get to Enterprise Value

• At market value if available (i.e. quoted

stake)

• At book value if market value not available

Treat them as ―core‖

– Include dividend income/share in earnings in

EBIT

– Do not adjust market capitalization

Accounting for Investments / Affiliates How to Treat in Comps

11


What is Minority Interest?

Enterprise Value Calculation – Minority Interest

Trading Comparables

Item on liability side of balance sheet when a

firm’s ownership in a subsidiary is between 50%

and 100%

Firm fully consolidates the subsidiary’s

revenues, profits and assets

Minority interest represents the share of the

subsidiary’s equity not owned by the firm

Add to market capitalisation in your enterprise

value calculation

– Revenues and EBITDA/EBIT include 100%

of the subsidiary’s revenues profit

– Enterprise value needs to assume full

ownership of subsidiaries

Use market value if available

– In particular when subsidiary is quoted

– Cross check book value of minority interest

with minority interest in net income

How to Treat in Comps

12

Calculate Multiples – The Denominator

Look for non-recurring items in P&L, Cash Flow Statement, Management’s Discussion & Analysis of

Financial Results and Notes to Financial Statements

Adjust Net Income also for tax-effect of non-recurring items

Footnote your adjustments!

Exclude Non-Recurring Items

Trading Comparables

13

Check and Interpret the Results

Check inputs against sources

Sanity checks

– Profit Trend

• EPS ’02 > EPS ’01

• P/E ’02 < P/E ’01

– Relative Multiple Comparison

• EBIT Multiple > EBITDA Multiple > Revenue Multiple

– Compare multiples to outside sources (e.g. research reports)

Identify and check outliers. Explain them

Comparable companies used in formal valuations will come under intense scrutiny and therefore

require the highest level of care in preparation and checking

Make 100% sure that the client’s multiples are correct (―career check‖)

After Checking Your Inputs, Always Perform Sanity Checks and Understand Outliers

Trading Comparables

14

Reasons why companies trade at different multiples


Understand Why the Companies in Your Universe Trade at Different Multiples

Trading Comparables

Long-term Growth/Risk

“Fundamental”

Other

“Imperfections”

Historic / projected growth rates

Competitive position

Leverage (P/E Ratios)

Capital intensity (EBITDA multiples)

Margins (Revenue Multiples)

Quality of earnings (i.e. Aggressive accounting)

Quality of business mix

Regulatory environment

Free float

Market listing (where listed)

Market has different expectations to the broker you used!

Mistake or imprecision in spreading comp!

15

Transaction Multiples

Introduction

What is it? Use of Transaction Multiples


Valuation based on implied multiples of

precedent transactions (sales, profit or other

parameters)

Allows a potential acquiror to assess the price

range which vendors have been willing to accept

for a company/asset with similar characteristics

Dependant on the accurate application of

precedent multiples that are relevant benchmarks

to the company/asset in question

Importance

Buy-side M&A high

Sell-side M&A high

Leveraged buy-out medium

Merger of equals medium

Share repurchases low

Initial Public Offering none

Add-on financings none

Identify TransactionsFind

Information

Calculate

Multiples

Check and

Interpret the

Results

Most Important in M&A Situations

16

Include Exclude


Private Deals where majority was acquired

Tender offer for majority of the shares

Purchase of minority stake which enabled

acquiror to take control (use judgment)

IPOs

Share Repurchases

Block Trades

Failed Transactions (usually)

Identify Transactions

Types of Transactions

17

Gain a clear understanding of the target company’s business including:

– Primary competitors

– Major deals

Define target sector


Understand Target and Target Sector


Check for any previously existing deal sheets in order to verify the completeness of any new deal runs

Request a deal run around the target’s business (go back only 2 to 5 years maximum)

– Place criteria that limits the scope (size of deals, geographic region, public, majority control, etc.)

Sanity check data – ensure that primary competitors and the major deals are within the received

information; otherwise, understand why they have not been incorporated


Choosing the Transaction

18

Difference whether public vs. private target/bidder

– Tender (offer) documents filed with relevant stock exchange

– Target company annual report, interims

– Equity research reports

– 8K (US) / disclosure document if transaction is deemed material

– Public announcement (e.g. Regulatory News Service in the UK)

Company website, News run


Source Transaction Data

Useful Databases (use with caution!)

- SDC Platinum (industry standard)

- Dealogic / M&A Global

Find Information

– Dealogic / M&A Global

– Thomson One Banker

– M&A Monitor

– Bloomberg

– Internal Deal Database

19

Example

Calculate Multiples – Enterprise Value

0

50

100

150

200

250

300

Purchase

Price for

60% Stake

Implied

Value of

Stake Not

Bought

Net Debt Minority

Interest

Investments Implied

Transaction

Value

As for Trading Multiples…but Remember to Take into Account Percentage Acquired


A buys a 60% stake in B for €120mn

B has net debt of €40mn

B has minority interest of €20mn

B has investments of €10mn

€120mn

€80mn

€40mn

€20mn

€10mn

€250mn

Enterprise Value is €250mn

20

Typical Issues How to Deal With Them


In the acquiror’s press release, it does not say

whether the purchase price relates to equity

value or assumes a debt-free company

Part of the purchase price is contingent on a

certain future performance of the company

(―earn-out‖)

Purchase price usually means price to acquire

the equity

Add net debt to calculate the implied enterprise

value

Include the earn-out in your transaction value,

unless you have reason to believe that the

underlying performance criteria will not be met

(the same applies to any other deferred

consideration)

In share deals, apply the exchange ratio using the acquiror’s share price on the day before the

announcement

In offers where shareholders have the choice between cash or shares, use cash-based price as this is

independent of the quality of the acquiror’s stock (footnote share alternative)

Ensure that all shareholders are being treated equally

Get the Transaction Value Right!

Calculate Multiples – Private Transactions

Use your Judgement!

21

Profit Trend

– EPS ’02 > EPS ’01

– P/E ’02 < P/E ’01

Relative Multiple Comparison

– EBIT Multiple > EBITDA Multiple > Revenue Multiple

Compare multiples to outside sources

Make 100% sure that transactions made by the client are correctly calculated (―career check‖)



As for Trading Comps

22


“Landmark” Transactions


Source: Company filings, press releases.

Sales EBITDA EBITAProd hlm

(USD)Cap hlm (USD)

Dec-05 China Fujian Sedrin InBev 750 750 4.02x 13.1x 18.7x 104.2 n.a.

Aug-05 Russia ITB Heineken 356 507 2.20x 17.4x n.a. 187.8 133.4

Jul-05 Colombia Bavaria SABMiller 4,824 7,806 3.90x 10.1x n.a. 287.0 195.1

Aug-04 Russia SUN Interbrew Interbrew 1,093 1,457 2.20x 11.8x 24.5x 84.2 n.a.

Jul-04 Canada Molson Adolph Coors 3,594 4,611 2.39x 10.9x 12.3x 221.1 n.a.

Mar-04 Brazil AmBev Interbrew 10,607 21,495 4.91x 14.4x 18.5x 331.7 190.7

Feb-04 Denmark Carlsberg Breweries Carlsberg 2,490 8,131 1.39x 7.9x 13.5x 100.4 n.a.

Jan-04 Germany Holsten Carlsberg/Bitburger 657 1,339 1.44x 8.8x 11.8x 152.1 n.a.

Sep-03 Germany Spaten/Dinkelacker Interbrew 600 550 1.37x 9.1x n.a. 109.9 n.a.

Aug-03 Costa Rica/Nicaragua FIFCO Heineken 229 916 n.a. 15.8x n.a. 482.1 n.a.

May-03 Italy Birra Peroni (pre earn-out) SABMiller 283 653 1.15x 12.7x n.a. 145.0 n.a.

May-03 Portugal Centralcer Scottish & Newcastle 565 746 2.60x 9.6x n.a. 226.1 n.a.

May-03 Austria BBAG Heineken 1,698 2,131 2.10x 10.2x 23.9x 163.9 n.a.

May-02 USA Miller Brewing Company SAB 2,993 4,993 1.02x 8.2x 10.5x 99.9 n.a.

May-02 Brazil Quilmes (Quinsa) AmBev 490 1,732 2.19x 9.4x 19.6x n.a. n.a.

Feb-02 Finland Hartwall ABP (OYL) Scottish & Newcastle 1,787 1,974 2.81x 10.1x 14.0x 122.9 n.a.

Dec-01 United Kingdom Carling Brewers Adolph Coors 1,727 1,727 0.84x 8.1x 14.1x 146.4 n.a.

Aug-01 Germany Becks Interbrew 1,575 1,575 2.10x 13.0x 23.9x 276.4 n.a.

Jun-00 United Kingdom Bass Interbrew 2,144 3,459 1.26x 9.5x 14.4x 178.3 n.a.

May-00 Denmark Orkla Carlsberg 9,972 14,662 n.a. 6.3x n.a. n.a. n.a.

Mar-00 France Kronenbourg Scottish & Newcastle 3,059 3,059 2.14x 13.1x 19.4x 257.1 n.a.

EV/Consideration Paid

(USDm)Implied EV (USDm)Country Target Acquiror

23

Use qualitative judgement – do not just jump into the numbers

Choose a meaningful analysis period – n.b. “valuation bubbles”

Eliminate extremes, having understood them

A limited number of appropriate and accurate transactions is useful – quality not quantity

Look for trends

Triple check



Remember!

24

Appendix

Sample Trading ComparablesAppendix

Trading Comps

Dec-06 Dec-07 Dec-08 Dec-06 Dec-07 Dec-08

Europe

Carlsberg A/S 6,608 2,701 9,772 10.4x 8.9x 8.1x 24.7x 19.6x 15.9x

Carlsberg A/S (Ex-prop) 5,535 2,701 8,699 9.2x 7.9x 7.2x 20.7x 16.4x 13.4x

Heineken NV 22,622 2,077 26,439 11.2x 10.0x 9.0x 24.6x 19.8x 16.8x

InBev 35,771 6,533 55,366 13.1x 11.2x 9.9x 24.2x 20.3x 16.7x

SABMiller plc 29,160 4,685 35,758 13.1x 11.3x 9.8x 25.5x 21.3x 18.3x

Scottish and Newcastle plc 10,099 3,163 13,622 13.1x 12.4x 11.6x 21.4x 20.5x 18.9x

North America

Anheuser-Busch Cos Inc 24,902 5,479 30,381 9.7x 9.1x 8.8x 18.7x 17.1x 16.2x

Molson Coors Brewing Co. 6,549 1,398 8,079 11.6x 10.6x 9.5x 25.4x 20.1x 16.5x

Average 11.4x 10.2x 9.3x 23.1x 19.4x 16.6x

Other Europe

Anadolu Efes 3,172 517 3,771 10.3x 9.3x 7.5x 20.8x 17.7x 14.2x

Efes Breweries Intl. 916 253 1,176 15.3x 10.9x 8.3x 65.3x 32.4x 17.9x

Baltika 5,614 58 5,672 10.2x 9.1x 8.7x 17.0x 15.9x 13.6x

Average 13.8x 13.0x 12.3x 40.1x 37.7x 33.9x

Notes

(1) Share prices and exchange rates as of 09 November 2007

(2) Financials calendarised to 30-Dec y/e; Excl. exceptional items; proforma recent acquisitions; EBITDA incl. income from associates; Minority Interests Valued at Illustrative Market Value.

EV/EBITDA Cash P/EEV

(EURm)

Equity Value

(EURm)

Net Debt

(EURm)

25

Sample Trading Comparables – Mature Beer Appendix

Transaction Comps


(USD)Cap hlm (USD)

Aug-06 Canada Sleeman Sapporo 356 356 1.92x 12.5x 17.0x 250.0 n.a.

Jul-04 Canada Molson Adolph Coors 3,594 4,611 2.39x 10.9x 12.3x 221.1 n.a.

Feb-04 Denmark Carlsberg Breweries Carlsberg 2,490 8,131 1.39x 7.9x 13.5x 100.4 n.a.

Jan-04 Germany Holsten Carlsberg/Bitburger 657 1,339 1.44x 8.8x 11.8x 152.1 n.a.

Sep-03 Germany Spaten/Dinkelacker Interbrew 600 550 1.37x 9.1x n.a. 109.9 n.a.

May-03 Italy Birra Peroni (pre earn-out) SABMiller 283 653 1.15x 12.7x n.a. 145.0 n.a.

May-03 Portugal Centralcer Scottish & Newcastle 565 746 2.60x 9.6x n.a. 226.1 n.a.

May-03 Austria BBAG Heineken 1,698 2,131 2.10x 10.2x 23.9x 163.9 n.a.

Apr-03 United Kingdom HP Bulmer Scottish & Newcastle 262 442 1.21x 7.1x 12.2x n.a. n.a.

May-02 USA Miller Brewing Company SAB 2,993 4,993 1.02x 8.2x 10.5x 99.9 n.a.

Feb-02 Finland Hartwall ABP (OYL) Scottish & Newcastle 1,787 1,974 2.81x 10.1x 14.0x 122.9 n.a.

Dec-01 United Kingdom Carling Brewers Adolph Coors 1,727 1,727 0.84x 8.1x 14.1x 146.4 n.a.

Aug-01 Germany Becks Interbrew 1,575 1,575 2.10x 13.0x 23.9x 276.4 n.a.

Jul-01 Germany Diebels Interbrew 100 125 1.41x 7.8x 21.8x 85.9 n.a.

Nov-00 Switzerland Feldschlösschen Carlsberg 493 493 0.85x 6.9x 14.5x 205.4 n.a.

Aug-00 Portugal Centralcer Scottish & Newcastle 139 283 n.a. 8.6x n.a. 104.9 n.a.

Jun-00 United Kingdom Bass Interbrew 2,144 3,459 1.26x 9.5x 14.4x 178.3 n.a.

May-00 United Kingdom Whitbread Interbrew 662 662 0.40x 5.6x 10.1x 65.0 n.a.

May-00 Denmark Orkla Carlsberg 9,972 14,662 n.a. 6.3x n.a. n.a. n.a.

Mar-00 France Kronenbourg Scottish & Newcastle 3,059 3,059 2.14x 13.1x 19.4x 257.1 n.a.



26

Sample Trading Comparables – Emerging Beer Appendix

Transaction Comps


(USD)Cap hlm (USD)

Aug-06 Vietnam Foster's Vietnam Asia Pac Breweries (Hein JV) 105 105 4.02x 28.0x 104.4x 141.3 95.5

Aug-06 India Foster's India Ops and Brand SABMiller 120 120 8.46x 95.1x 221.4x 518.9 342.9

May-06 Romania Interbrew Efes (JV take out) InBev 27 53 n.a. n.a. n.a. 44.2 35.4

Jan-06 Russia Krasny Vostock Efes Breweries International 360 390 n.a. n.a. n.a. 149.4 39.0

Jan-06 Russia Yarpivo Minority Take-out BBH/Baltika 234 622 n.a. 12.2x 16.4x 117.3 103.6

Jan-06 Bosnia-Hertzegovina Banjalucka Pivara Altima Partners 14 26 1.35x 10.4x -14.4x 76.0 25.8

Dec-05 China Fujian Sedrin InBev 750 750 4.02x 13.1x 18.7x 104.2 n.a.

Sep-05 China K.K. InBev 62 62 n.a. 4.1x n.a. 22.8 20.5

Aug-05 Russia ITB Heineken 356 507 2.20x 17.4x n.a. 187.8 133.4

Jul-05 Russia Stepan Razin Heineken 119 119 n.a. n.a. n.a. 85.2 n.a.

Jul-05 Russia Baikal Heineken 48 48 n.a. n.a. n.a. 80.6 n.a.

Jul-05 Colombia Bavaria SABMiller 4,824 7,806 3.90x 10.1x n.a. 287.0 195.1

Jul-05 Russia Tinkoff InBev 201 201 4.74x n.a. n.a. n.a. 87.6

May-05 Russia Patra Heineken 71 71 n.a. n.a. n.a. 100.9 n.a.

Apr-05 China Snowland Brewery China Resources Brewery (SABM) 15 15 n.a. n.a. n.a. 13.6 10.7

Dec-04 India UB Scottish & Newcastle 171 456 n.a. n.a. n.a. 138.2 n.a.

Sep-04 China Lion Nathan China China Resources Brewery 71 154 n.a. n.a. n.a. 70.3 29.8

Oct-04 Russia Sobol Heineken 22 22 n.a. n.a. n.a. 111.6 n.a.

Aug-04 Russia Volga Heineken 74 74 n.a. n.a. n.a. 105.6 n.a.

Aug-04 Russia Shikhin Heineken 99 99 n.a. n.a. n.a. 98.5 n.a.

Aug-04 Serbia-Montenegro 7 Septambar (Zajecar Brewery) Efes Breweries International 15 23 n.a. n.a. n.a. 51.4 22.6

Aug-04 Russia SUN Interbrew Interbrew 1,093 1,457 2.20x 11.8x 24.5x 84.2 n.a.

Jun-04 China Zhejiang Brewery Interbrew 53 76 n.a. 11.6x n.a. 38.0 n.a.

Jun-04 China Harbin Anheuser-Busch 675 787 4.38x 17.5x 31.6x 68.4 n.a.

Mar-04 Brazil AmBev Interbrew 10,607 21,495 4.91x 14.4x 18.5x 331.7 190.7



27

Documents

Trading and Transaction Multiples - unipveconomia.unipv.it/sitonuovo/userfiles/piero/file/Comparable Company... · firm’s ownership in a subsidiary is between 50% ... • EPS ’02