Strategic Level Paper
F3 – Financial Strategy Senior Examiner’s Answers SECTION A
Answer to Question One
(a)(i) Valuation of Company NN (excluding potential synergistic benefits and integration costs) NN: Recent sale of a 5% parcel of shares A 5% parcel of shares recently changed hands for EUR 3.0 million, giving an estimated total market capitalisation of EUR 60 million. At an exchange rate of C$/EUR 3.000, this translates into a cost to Aybe of C$20 million. However, care needs to be taken here as this valuation is already six months out of date and was for a non-controlling 5% stake and not the entire share capital (for which a premium would normally be payable). Nonetheless, this may be a reasonable guide to the minimum price that NN’s shareholders might accept. A bid price based on this single transaction plus a premium of, say, 20%, would indicate a minimum price of EUR 72 million. P/E basis Proxy company QQ has a P/E of 9 and this is an appropriate basis on which to value NN. However, NN is at a slightly different stage in its business cycle and has not completed the initial period of most rapid growth. Therefore this result is likely to provide a minimum price only and Aybe may need to consider offering a higher price based on a P/E ratio of, say, 12. Note, however, there is also a valid reason for lowering the P/E ratio to reflect the fact that the value of a private company is generally lower than that of a quoted company due to the difficulty in realising value by selling shares and the lack of a transparent market price. We could therefore value NN using a P/E ratio of, say, 70% of QQ’s P/E ratio of 9. That is, a P/E ratio of 6.3. We could also use Aybe’s P/E ratio of 5 (5 = 115.2/23 at the end of 2009) which gives an even lower valuation and is a further indication that Aybe’s shareholders may not be prepared to value NN’s shares at as high a multiple of earnings as 9 times.
F3
1
September 2010