IBD Masterclass - Technical Tools for Success part2 by Coaching Assembly

IBD Masterclass Technical tools for Success

19 November 2014

Table of content I.

What You Need to Prepare For

II.  Tell Me About a Deal You Know III.  Key Concepts – Technical Interviews IV.  Understanding the Capital Structure V.

DCF

VI.  Multiples VII.  LBO VIII.  Merger Model CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

What You Need To Prepare For

Key subjects Be prepared. Donâ&#x20AC;&#x2122;t read a book the day before an interview as you will be expected to understand things rather than learn them by heart Basic Accounting Restructuring and Capital Structure

Discounted Cash Flows

Technical Interview Preparation Trading Multiples

Leveraged Buyout

Transaction Multiples

Key skills for Corporate Finance jobs Technical Skills Mergers & Acquisitions Restructuring

ECM

DCM

Leveraged Finance Private Equity

++ +++ ++

Soft Skills

+++ ++ +++

Comments Requires good understanding of major Corporate Finance Concepts + Strong interpersonal skills Strong technical skills and requires particularly strong negotiation skills Strong understanding of capital market and Corporate Financing needs + strong relationships with investor ecosystem Idem as ECM

++ ++ + +/ + + +

+++ ++ ++

Requires investor mind set and transactional spirit

Idem as Leveraged Finance Particularly technical if in Credit Hedge Funds 5

Analyst Work & Tell Me About a Deal You Know

Different deal situation Type of situations

Type of deals IPO

Buy-side Acquisition

A deal or live situation Sell-side

Merger

Restructuring Company Sale A pitch

Board

Others

Financing - Equity

Financing - Debt

What you will do as a junior analyst Company profiles

What? Business overview Key financials Key stakeholders Share price performance

LBO model

Why? Calculation of returns What sort of capital structure? What sort of growth prospect?

DCF

Process

Why? Intrinsic value of the business What WACC for the business

Internal Working Group List Organize work streams External

Teaser and Information Memorandum

Merger Model

When? When you want to sell a business When you want to buy a business and propose the opportunity What?

Multiples What?

Why? Accretion/ dilution Financial impacts ROI Impacts on ownership

Full company overview

Organize Due Diligence phase with different advisors on the deal Organize calls and meetings with different stakeholders

Transaction multiples Trading multiples

Client Financial and strategic analysis

Why? How does the business compare to other similar businesses?

Deals / transaction experience TELL ME ABOUT A DEAL THAT INTERESTED YOU RECENTLY

§  Know buyer and seller §  Know the price and the multiples (Purchase Price / EBITDA) if they are readily available §  If public deal find the investor presentation: http://www.publicisgroupe.com/en/media/display/id/6879

§  If US IPO go on sec.gov: for twitter you will find the S1-Form there:

http://www.sec.gov/Archives/edgar/data/1418091/000119312513424260/d564001ds1a.htm#toc564001_6

§  http://dealbook.nytimes.com/ §  Discuss the dynamics of the deal – how it developed, if anyone else was interested, and what implications it has for the industry

DISCUSSING TRANSACTION EXPERIENCE

§  You need to know your deal inside out §  Brief overview of the transaction, buyer and seller (describe the companies, give approximate financial revenue, EBITDA, market cap – figures

§  §  §  §  §  §

Transaction rationale: Why did the company you were representing want to sell / buy? What was your role on this deal? Describe the deal process (broad, targeted auction, financing Any obstacle to getting the deal done? Data about the market (trends , competition etc.) Valuation

Real work examples WHAT’S IN A PITCHBOOK

§  Bank “credentials” (similar deals they’ve done to “prove” their expertise) §  Summary of a company’s options (“strategic alternatives” in banker-speak) §  Valuation and appropriate financial models (for example, if you’re pitching for an IPO you might show where the IPO proceeds would go)

§  Potential acquisition targets (buy-side M&A deal) or potential buyers (sell-side M&A deal). This is not applicable for equity/debt deals.

§  Summary and key recommendations. TYPICAL SELL-SIDE M&A DEAL

§  Meet with company, create initial marketing materials like the Teaser and Information Memorandum (IM), and decide on potential buyers

§  Send out Executive Summary to potential buyers to gauge interest §  Send NDAs (Non-Disclosure Agreements) to interested buyers along with more detailed information like the Offering Memorandum, and respond to any follow-up due diligence requests from the buyers

§  Set a “bid deadline” and solicit written Indications of Interest (IOIs) from buyers §  Select which buyers advance to the next round §  Continue responding to information requests and setting up due diligence meetings between the company and potential buyers

§  Set another bid deadline and pick the “winner.” §  Negotiate terms of the Purchase Agreement with the winner and announce the deal CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Real work examples – cont’d TYPICAL BUY-SIDE M&A DEAL

§  Spend a lot of time upfront doing research on dozens or hundreds of potential acquisition targets, and go through

multiple cycles of selection and filtering with the company you’re representing §  Narrow down the list based on their feedback and decide which ones to approach §  Conduct meetings and gauge the receptivity of each potential seller §  As discussions with the most likely seller become more serious, conduct more in-depth due diligence and figure out your offer price §  Negotiate the price and key terms of the Purchase Agreement and then announce the transaction DEBT ISSUANCE DEAL

§  Meet with the client and gather basic financial, industry, and customer information §  Work closely with DCM / Leveraged Finance to develop a debt financing or LBO model for the company and figure out what kind of leverage, coverage ratios, and covenants might be appropriate §  Create an investor memorandum describing all of this §  Go out to potential debt investors and win commitments from them to finance the deal WHAT DO YOU FIND IN A PROFILE

§  Should cover: ―  Business description, headquarters, key executives and latest news ―  Share price performance chart and the key historical and projected financial metrics and multiples ―  Key shareholders ―  Breakdown of financial metrics (sales, EBITDA, EBIT) CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Learn about specific deals Preparing deals is extremely important as it will show that i) you have some sort of interest for the business and ii) you understand the dynamics of a deal Key things to prepare

Key sources of information

Context: players, geography, sector and different stakeholder

MergerMarket

Sort of deal (IPO, spin-off, merger, acquisition, restructuring etc…)

Dealbook (NY times)

Financial aspects of the deal

SEC.gov

Rationale of the deal: why did this deal happen?

Financial times

Your opinion: why do you think it’s good/ bad – cheap/ expensive etc… CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Prepare and answer in a case study While working on a case study, you need to make sure you think about the entire deal ecosystem/ environment What sort of questions to you need to ask?

How can you answer?

What is the deal about? IPO, Merger, Partnership, Fund Raising…?

What are the resources? Equity, cash, debt others…?

What is the best solution? Type of deals and how to go forward

Who are the different stakeholders? Equity holders, external investors, debt providers, employees…?

What are the different options? Sale, acquisition, capital raise…?

Is it feasible? Strategically, financially etc…

Who are the different stakeholders? Equity holders, external investors, debt providers, employees…? What is the issue? Lack of cash, expansion, diversification, size down…?

What is your rationale? Why do you intend to pursue a route more than another one?

What are the risks? Execution risks, interlopers risks etc…

Example of a M&A deal (pitch) In the example of an M&A deal, what should you cover? What is the issue/ current situation? Company wants to diversify? Management wants to sell? Stakeholders Who is involved? Who will be concern?

Equity/ Debt providers

Current clients or suppliers

Others Management, Governmentâ&#x20AC;Ś?

What is the right option?

Financial aspects

Strategic aspects

Risk aspects

Why are we the best for this sort of situation

Team

Experience

Different available options What are the different routes which can be explored?

Overview of a process timetable ACTIVITY

STAGE 1

Contact Potential Buyers CA's Signed OM's sent to buyers

STAGE 2

MONTH Apr

May

15 Apr

22 Apr

29 Apr

Jun

Aug

Sep

Oct

Nov

6 May

1 May

15 Jun

First Round Offers

15 Jun

Evaluation of Offers

15 Jun

Due Diligence Data Room Access Management Presentations Site Visits

STAGE 3

Jul

26 Jun 2 Jul

12 Aug

7 Jul 3 Jul

16 Jul 6 Jul

15 Jul

22 Jul

Second Round Binding Offers

13 Aug

Evaluation of Second Round Offers

13 Aug

Negotiate and Execute Contracts Announcement Close Transaction

19 Aug

20 Aug

10 Sep 11 Sep 1 Oct

Key Concepts â&#x20AC;&#x201C; Technical Interviews

Basic Accounting

Structure of the 3 financial statements Balance Sheet

P&L

Current assets Cash, Accounts Receivables

Sales Cost of goods sold (COGS) excl. D&A

Long term assets PP&E, Intangibles

Short term liabilities Short term debt, Accounts Payables Long term liabilities Long term debt

Cash flow from Operations Performance of the period, Variation in working capital etc…

Gross profit/ margin

Operating costs/ SG&A excl. D&A Personnel, marketing, others

Cash flow from investing activities Capital expenditure, Addition of intangible, Acquisitions etc…

EBITDA Depreciation and amortization (D&A) Operating profit/ EBIT

Equity

Cash Flow Statement

Cash flow from financing activities Dividends paid, Interests paid, Principal on debt paid, debt raised, equity raised etc…

Net interest expenses/ income Tax Net Income

Structure of the 3 financial statements It is absolutely vital to understand these relationships before any analysis and modelling exercise Opening balance sheet

P&L / Income Statement

Cash flow statement

Closing balance sheet

Current + long term assets

Revenue

EBIT

Current + long term assets

+ Cash

- COGS

+ D&A

+ Cash

+ Inventory

= Gross profit

+ other non-cash charges

+ Inventory

+ Accounts receivable

- Costs of personnel

- Increase in inventories

+ Accounts receivable

+ PP&E

- Marketing expenses

- Increase in receivable

+ PP&E

+ Intangible assets

- Other SG&A (excl. D&A)

+ Increase in payable

+ Intangible assets

+ Others

= EBITDA

= Operating cash flow

+ Others

= Total Assets

- D&A

- Net interest paid

= Total Assets

= EBIT

- Tax paid

Liabilities

- Non-recurring items

= Net operating cash flow

Liabilities

+ Accounts payable

- Net interest expenses

- Capital expenditure

+ Accounts payable

+ Short term debt

= Profit before taxes

- Dividends

+ Short term debt

+ Long term debt

- Taxes

+/- change in equity

+ Long term debt

+ Others

= Net Income

+/- change in debt

+ Others

= Total liabilities

- Dividends

= Movement in cash

= Total liabilities

Equity = assets - liabilities

= Retained earnings

Equity = assets - liabilities

Accounting – Interview Questions •  What are the three main financial statements? •  What is the difference between the income statement and statement of cash flows? •  Walk me through the major line items of an Income Statement •  What are the three components of the Statement of CF? •  What are the components of the balance sheet? •  How are the three main financial statements connected? •  What are the links between the balance sheet and income statement? •  What are the links between the balance sheet and the cash flow statement? •  How would a $10 increase in depreciation expense affect the three financial statements? CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Accounting – Interview Questions •  What is working capital? How do you compute it? •  Do you know some industries where the working capital usually is negative? Is it a good or bad thing generally speaking? •  What is the cash impact of a working capital increase? •  Inventories increase from year 1 to year 2, what is the impact for the Company? •  My suppliers shorten the payment period, what is the impact for the Company? •  Where do you find dividends? •  What is a capital lease? •  What is an operating lease?

Enterprise Value and Key Valuation Methodologies

Enterprise Value Calculation This is a basic calculation of Enterprise Value (further adjustments are usually needed such as pensions, leases, minority interests, JV etcâ&#x20AC;Ś) Net Debt

Enterprise Value (excluding adjustments)

Total Equity Value (including adjustments)

Total Equity Value

Total financial debt - cash

Enterprise Value 23

Overview of valuation methodologies RELATIVE VALUATION COMPARABLE COMPANY ANALYSIS

PRECEDENT TRANSACTIONS ANALYSIS

ESTIMATED VALUE RANGE

DCF ANALYSIS

LBO ANALYSIS

ABSOLUTE VALUATION CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Example of a “summary valuation” page A preliminary valuation implies a value for ABC of c.$160 - $230 $160 EV/EBITDA 2013E

$230

100

200

Trading comparables EV/EBITDA range implied by average of peers +/- 0.5x EV/EBITDA 2014E

Precedent transactions EV/EBITDA range implied by precedent transactions

EV/LTM EBITDA

LBO Range implied by 20%-25% IRR with exit in year 5 at entry multiple = exit

EV/ LTM EBITDA

DCF Value range implied by 8%-10% WACC and 2%-3% perpetuity growth rate

EV/EBITDA 2013E

180

160

260

140

240

220

320

Enterprise value

Understanding the Capital Structure

Understanding the Capital Structure is paramount The Capital Structure of a company has substantial impacts on many aspects of a Merger or an Acquisition Capital Structure

Weighted average cost of capital (“WACC”)

§  WACC is impacted by the debt/ equity mix of the company

LBO valuation

§  LBO transaction valuation is very often dictated by the maximum leverage (amount of debt) and minimum equity requirements

Accretion/ dilution and IRR

§  Debt vs. equity §  Dilution to existing shareholders §  Convertible securities (i.e. bonds with the options to be converted into equity)

Enterprise Value

Comments

+ Market value of the equity (Offer price per share * diluted shares outstanding)

Convertible securities may have conversion rights upon change of control

+ Net debt

Book value of debt only approximates market value Prepayment costs etc.

(Total balance sheet debt - cash) + Others (Preferred, minorities and debt-liked items) CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Risk and returns across the capital structure Risk and returns for a particular stakeholder depend on where it is located in the capital structure High High Common stock

Preferred stock

Subordinated debt

Associated risk

Senior subordinated debt

Expected returns

Senior, unsecured debt Senior secured junior lien debt

Low

Senior secured debt

Low 28

Capital Structure basics To understand a capital structure, one has to well identify stakeholders by risk and reward allocation §  Equity instruments have a residual claim

Equity

Returns for common stock

on assets and bear the first risk of loss (i.e. shareholders will be the last stakeholders to be paid in the case of a sell of a company) ―  In return of taking the highest risk,

returns associated to equity is usually unlimited

Purchase price per share

―  Returns are in the form of dividends

and capital increase

§  Debt instruments has a priority claim on

Returns for bonds

the assets of the company (i.e. in case of a sale of a company, debt holders will be the first to receive payment)

Debt

―  In return of taking “low” level of risk,

debt returns are generally capped (interests and principal repayments)

Value at maturity

―  Capital appreciation is possible if

securities are bought and sold on a secondary market CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

DCF

Intrinsic value – Discounted Cash Flow (“DCF”) A method estimating the intrinsic value of a business How to run a DCF

Introduction

Free cash flows

§  The DCF analysis estimates the net present value of the future cash flows of a company to the providers of capital of this company

§  It is an approach which aims at capturing the intrinsic value of a business

Key comments

§  Cash flows used are the “Free Cash Flows to the

Firm” (FCF) or Unlevered Free ash Flows: the cash flow generated by the company independently of its capital structure

§  The DCF valuation is as good as the forecast cash flows ―  If the analyst has only 3-year projections, the output

will only be some sort of a cross check

―  If the analyst is valuing a mine, with a finite life and

very predictable cash flows, the DCF valuation will be fairly accurate

§  A DCF valuation will tend to be higher than the other methods as it is supposed to capture 100% of the intrinsic value of a business

FCF

Norm

Normalized free cash flow Terminal value calculated using multiple method or Gordon-Shapiro method

1.  Build the operating model and projections for the business

2.  Calculate Normalized Free Cash Flow based on §  Normalized revenue growth §  Normalized margins §  Normalized D&A §  Normalized Working Capital §  Normalized Capital expenditure

3.  Calculate Terminal Value based on Normalized Free Cash Flow

4.  Discount FCF and TV using an appropriate

“WACC” (weighted average cost of capital) 31

Topline - drivers Macro-economic environment

Sector

Volume

Geography

Price

Sales

COGS as % of sales

Gross profit

Costs - drivers Macro environment (inflation)

Company stage

Fixed costs

Sales

Variable costs as % of sales

Evolution of fixed costs

Cost base

EBITDA

Main cash flow items - drivers

Working capital

Capital expenditure

Inventories

Acc. Receivable

Account Payable

Others

Driven by sales, in # of days of sales

Driven by cost base, in # of days of cost base

How much inventories does the company need to cover its sales?

How long do clients take to pay the company?

Include other current assets and liabilities â&#x20AC;&#x201C; driven as a % of sales

How long does the company take to pay its suppliers?

Maintenance

Growth

Capital expenditure in order to maintain assets base and current activities â&#x20AC;&#x201C; driven in % of sales

Capital expenditure in order grow the company and its assets base and expand activities â&#x20AC;&#x201C; driven in % of sales

Sales implicitly integrate the company run rate

Sales is a good growth proxy

Depreciation & PP&E - drivers

- Depreciation Opening

+ Capital expenditure

Closing PP&E

PP&E

§  Look at depreciation period of PP&E in financial reports Depreciation of existing PP&E Depreciation + Depreciation of new PP&E (capital expenditure)

§  §  §  §  §

(annex) If data is not available, depending on type of assets, assume depreciation period and linear depreciation (i.e. same amount each year) PP&E of $100m, depreciated over 10 years, depreciation of $10m per year Assume same depreciation period for capital expenditure If capex of $10m in year 0 and depreciation period of 10 years, there will be $1m depreciation per year, related to this capex over the next 10 years Do the same for each year

From the operating model to the free cash flow A FCF is the cash flow generated by a business independently of its capital structure Comments

§  The first step in a DCF analysis is to build an operating model of the business the analyst wants to estimate the value for

―  The operating model is either built

by the bank or provided by the client

§  Once the operating model is set up,

calculate the unlevered free cash flow ―  The DCF aims at estimating the

value of an asset regardless of its own capital structure

―  All items linked to capital structure

have to be stripped off: interests, dividend, debt repayment and issue, equity issue, share buy-backs etc…

§  Taxes are calculated on EBIT §  Depending on the business, the projections horizon can vary, but it is common to request/ build a 10-year horizon operating model

Simplified financial statements – levered cash flows Levered financials (in $m except specified)

Unlevered financials

2013E

2014E

2015E

2013E

2014E

2015E

Revenue Growth%

150

165 10.0%

183 11.0%

150

165 10.0%

183 11.0%

EBITDA Margin %

30 20.0%

35 21.0%

40 22.0%

30 20.0%

35 21.0%

40 22.0%

D&A As % of revenue EBIT Margin % Net interest expenses

(5) 3.5% 25 16.5% (3)

(6) 3.5% 29 17.5% (3)

(6) 3.5% 34 18.5%

(5) 3.5%

(6) 3.5%

25 16.5%

29 17.5%

34 18.5%

(3)

Profit before tax Margin %

22 14.5%

26 15.7%

31 16.9%

25 16.5%

29 17.5%

34 18.5%

Taxes Effective tax rate %

(4) 20.0%

(5) 20.0%

(6) 20.0%

(5) 20.0%

(6) 20.0%

(7) 20.0%

Net Income Margin %

17 11.6%

21 12.6%

25 13.5%

Simplified Cash flow statement EBITDA Dividend Taxes Variation in WC Capital expenditures Net debt service (principal and interests) Cash flow

30 (8) (4) 3 (5) (13)

35 (8) (5) 3 (5) (13)

40 (8) (6) 4 (6) (13)

(5) 3 (5)

(6) 3 (5)

(7) 4 (6)

Weighted average cost of capital The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.

Equity

Assets

Debt

Calculation of the WACC Comments

Cost of equity §  Market risk premium: global risk premium (Bloomberg gives this data) §  Beta: indication of volatility of the company stock vs. market (data can be found on Bloomberg or on the Barra database)

Market risk premium: 6.50%

Cost of equity

Cost of debt §  Credit spread = cost of debt – risk free rate §  If the company is listed and mature, credit spread is an average of its current spread on its debt §  Credit spread can also be benchmarked to recent peers debt issuances

WACC calculation (example)

Levered company Beta: 1.209

Equity risk premium: 7.86%

Risk free rate: 2.00%

Cost of equity: 9.86%

Target E/(E+D) = 40%

Cost of debt

Target leverage/ long term financing structure §  Reflects long term leverage in the industry (e.g. what the leverage should be in 10 years, at a sustainable level in the industry) Small cap premium §  Small cap companies have to incurred a particular premium as judged riskier (the data can be found in the Ibbotson reports, which run linear regression of returns for different classes of companies) §  The premium is added to the final calculation of the WACC

Credit spread: +4.50%

Target D/(E+D) = 60%

Risk free rate: 2.00%

WACC: 7.10%

Pre-tax cost of debt: 6.50%

Post-tax cost of debt: 5.20%

Marginal tax rate: 20%

Calculate the cost of equity - details

Market risk premium

Levered company Beta

Build your own return analysis

Peers D/E and Beta

Or Â

Database such as Bloomberg

Peers average unlevered Beta

Or Â

Peers average unlevered Beta

Specialised research (Ibbotson, Damodaran etcâ&#x20AC;Ś)

Releverred Beta to target D/E ratio

Calculate the cost of debt - details

Average credit spread

Credit spread per security (comps)

Peers debt issues

Yield

Average yield

Associated risk free rate

Take risk free rate with similar maturity (Government bond) and extrapolate associated risk free rate

Average credit spread (difference with risk free rate)

Associated credit spread

How to get to normalized cash flow For businesses which do not have a finite life, the analyst needs to determinate what the normalized cash flow is Forecasts (in $m except specified) Revenue Growth% EBITDA Margin % D&A As % of capex

Extrapolation

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

Norm.

150

165 10.0%

183 11.0%

201 10.0%

220 9.0%

237 8.0%

254 7.0%

269 6.0%

282 5.0%

294 4.0%

303 3.0%

30 20.0%

35 21.0%

40 22.0%

45 22.1%

49 22.3%

53 22.4%

57 22.5%

61 22.6%

64 22.8%

67 22.9%

70 23.0%

(5) (6) (6) (8) (9) (9) (10) (10) (10) (11) 111.1% 111.1% 111.1% 109.7% 108.3% 106.9% 105.6% 104.2% 102.8% 101.4%

EBIT Margin %

25 16.5%

Taxes Effective tax rate %

(5) (6) (7) 20.0% 20.0% 20.0%

EBITDA Taxes Variation in WC Capital expenditures As % of revenue FCF Growth %

29 17.5%

30 (5) 3 (5) 3.1% 23

35 (6) 3 (5) 3.4%

34 18.5%

36 18.0%

40 18.2%

44 18.4%

47 18.6%

51 18.9%

(7) (8) (9) (9) (10) 20.0% 20.0% 20.0% 20.0% 20.0%

40 (7) 4 (6) 3.8%

45 (7) 3 (8) 3.8%

49 (8) 3 (8) 3.7%

53 (9) 2 (9) 3.7%

57 (9) 2 (9) 3.7%

61 (10) 1 (10) 3.6%

(11) 100.0%

54 19.1%

57 19.3%

59 19.5%

(11) 20.0%

(12) 20.0%

64 (11) 1 (10) 3.6%

67 (11) 0 (10) 3.5%

70 (12) (11) 3.5%

15.7%

16.4%

4.7%

7.5%

6.9%

6.2%

5.4%

4.6%

3.7%

2.8%

Foreseeable future

Long term growth rate (aligned to inflation) Long term sustainable margin D&A as % of capex @ 100% meaning that the company invest in capex as much as it consumes in its operations Impact of variation of working capital trends to 0 (cash neutral) â&#x20AC;&#x201C; growth more linked to inflation than increase in volumes The company invests enough to continue operations

Trends to normalized year

How to calculate the Terminal Value The TEV is the value of the business at the end of the horizon, it will have to be discounted to the present Gordon Shapiro approach

§ Formula:

Multiple approach

§ Formula: TEV =

Norm Cash flow * (1+g)

(WACC – g)

Most commonly used

TEV =

Normalized aggregate * multiple

TEV =

Normalized EBITDA * EV/EBITDA

§ Where g is the perpetual growth rate of the business – supposed to be aligned to inflation @ c.2.50% - 3.50%

§ The Terminal Value is a value of the business when the company reached a steady state of cash flow

§ EV/EBITDA multiple must be carefully chosen based on current trading comparable and taken into account a multiple compression

Example based on previous financials:

§ g = 2.50%

§ Normalized EBITDA: $70m

§ WACC = 7.10% (assuming no small cap premium)

§ Current EV/ EBITDA multiple: 18.0x

§ Normalized cash flow = $47m

§ Multiple including compression: 15.0x

TEV =

47 * (1+2.5%)

TEV =

70 * 14.0 15.0

TEV =

$1,044m 50

(7.10% – 2.50%) $1,052m

Calculate the Enterprise Value and build sensitivities Discount the FCF and terminal value using the calculated WACC Calculation of Enterprise Value Forecasts (in $m except specified) EBITDA Taxes Variation in WC Capital expenditures FCF

Extrapolation

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

Norm.

30 (5) 3 (5)

35 (6) 3 (5)

40 (7) 4 (6)

45 (7) 3 (8)

49 (8) 3 (8)

53 (9) 2 (9)

57 (9) 2 (9)

61 (10) 1 (10)

64 (11) 1 (10)

67 (11) 0 (10)

70 (12) (11)

Discount period WACC Discount factor

0.5 7.10% 97%

1.5 7.10% 90%

2.5 7.10% 84%

3.5 7.10% 79%

4.5 7.10% 73%

5.5 7.10% 69%

6.5 7.10% 64%

7.5 7.10% 60%

8.5 7.10% 56%

9.5 7.10% 52%

Discounted FCF

Sum of discounted cash flows and TEV

9.5 7.10% 52% Discounted TEV

548

Sensitivities

§ The sum of the discounted CF and of the TEV is the Enterprise

Enterprise value in $m

§ Discount period: we use mid-year period convention

WACC range

Value of the business

Perpetuity growth range 799

Cash flow is generating all over the year, to reflect this we discount the cash flow from the middle of each year Discount factor =

1,052

799

Comments

§ Discount factor is calculated as follow

TEV

2.00%

2.25%

2.50%

2.75%

3.00%

6.10%

932

977

1,029

1,088

1,157

6.60%

827

862

900

943

993

7.10%

743

770

799

832

869

7.60%

674

695

718

744

772

8.10%

616

633

652

672

694

(1 + WACC) ^ (discount period)

From the Enterprise Value to Equity Value It is important to have an idea of both the Enterprise Value and Equity Value General

§  Once the analyst has estimated the enterprise

value through a DCF analysis, the final step is to deduct the Equity Value of the business

To get to a value per share Enterprise Value - Net debt

§  The value of the equity obtained, will be the intrinsic value of the equity

- Minority interest

―  It will be the theoretical value of the shares

if these ones were fully prices

+ Investment in associates = Equity Value / NOSH

Value per share

§  Calculation of the Equity Value from the

Enterprise Value may include more adjustments (debt-liked items such as leases, pensions etc.)

DCF – Interview Questions •  Walk me through a DCF? •  Walk me through how you get from Revenue to Free Cash Flow in the projections. •  What do you usually use for the discount rate? •  How do you calculate WACC? •  How do you calculate the Cost of Equity? •  Let’s say that you use Levered Free Cash Flow rather than Unlevered Free Cash •  Flow in your DCF – what is the effect? •  How do you calculate the Terminal Value? •  What’s an appropriate growth rate to use when calculating the Terminal Value? •  How do you select the appropriate exit multiple when calculating Terminal Value? CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright

Multiples

Multiples – trading comparables A benchmarking method to value a company Introduction

§  Value a company comparing its trading and operating performance to the one of its peers

§  This methodology assumes efficient financial markets ―  The value of a listed company is fully reflected in its

share price

How to run a trading comparables analysis 1.  Create a pool of listed peers

§  Carefully select peers §  Key criteria: sector, size, geographies, growth profile etc. 2.  Select the relevant multiples to be used

§  Key multiples include: ―  EV/ Revenue ―  EV/ EBITDA

§  Possible retreatment of EBITDA to EBITDAR (i.e.

EBITDA before rent), EBITDA vs. earnings multiples

3.  Calculate last 12 months and forward looking multiples set

―  P/E

Key comments

§  When using this valuation method, it is vital to keep consistency in the calculation of the multiples

―  Numerator and denominator of the multiple have to be

consistent: if we adjust the EV for Investment in associates, the analyst needs to be sure that EBITDA reflects it

§  Value drivers are: growth and margin evolution §  The multiples do not take into account any control

§  Calculate Enterprise Value for all peers §  Be consistent in the different adjustments 4.  Calculate averages and median

§  Calculate relevant multiples average §  Deduct a valuation range 5.  Apply the multiple range to the valued company’s relevant aggregates

§  Apply valuation range to relevant financial aggregates (Revenue, EBITDA, EBITDAR…)

Multiples – key considerations Enterprise value vs. equity value multiples ENTERPRISE VALUE

SALES EBITDAR EBITDA

RETURNS TO EQUITY AND DEBT

ENTERPRISE VALUE • EV / SALES • EV / EBITDAR • EV / EBITDA • EV/ EBIT

RETURNS TO EQUITY

EQUITY VALUE • P / E

EBIT

NET INCOME

Selecting the peer universe BROAD UNIVERSE

REFINED SET INDUSTRY

§  LOOK AT BROKER AND RESEARCH REPORTS §  CAPITAL IQ / FACTSET SCREENING §  ASK YOUR TEAM

PRODUCTS SCALE GEOGRAPHY GROWTH PROFILE FINANCIAL STRUCTURE

Example of a trading multiples page A benchmarking method to value a company

Example of a trading multiples page â&#x20AC;&#x201C; contâ&#x20AC;&#x2122;d A benchmarking method to value a company

Multiples – precedent transactions A benchmarking method to value a company and the premium for its control Introduction

How to run a precedent transactions analysis

§  Compares the multiples implied by selecting M&A transactions involving companies with similar characteristics

§  Multiples are “real” in the sense previous buyers agreed to pay the price

§  Carefully select peers §  Key criteria: sector, size, geographies, growth profile etc.

2.  Select the relevant multiples to be used

§  Possible retreatment of EBITDA to EBITDAR (i.e.

Key comments

EBITDA before rent), EBITDA vs. earnings multiples

§  While in theory the analyst should calculate forward looking multiples, the date is usually not available – historical multiples are generally retained

- Reliability +

1.  Create a pool of listed peers

Sources of information: Transaction announcement Investors presentation Latest financial report Dedicated database Broker notes issued at the time of the deal Press, mergermarket

Company sources Third party sources

§  Drawback is that transactions happened in the past, in another environment (economic, social etc…)

§  The multiples take into account a control premium –

transaction multiples are generally higher than trading multiples

3.  Calculate multiples set

§  Calculate Enterprise Value for all peers §  Be consistent in the different adjustments §  Ideally it would be great to have the forward looking multiples but, at the moment of the transaction, the buyer must have had private information about the target to draw its own forecasts

4.  Calculate averages and median

§  Calculate relevant multiples average §  Deduct a valuation range 5.  Apply the multiple range to the valued company’s relevant aggregates

§  Apply valuation range to relevant financial aggregates (Revenue, EBITDA, EBITDAR…)

Example of a transaction multiples page A benchmarking method to value a company and the premium for its control

Multiples – key considerations

Overview

Trading comparables

Transactions comparables

Estimate the current value of a business vs. listed peers

Estimate the transaction value of a business vs. precedent transactions

Your multiples needs to be consistent. Make sure that Enterprise Value and Aggregates integrate the same “value” and “information” (i.e. investment in JV)

Calculation

In general, you are free to calculate whatever type of multiples you want as long as they are relevant. Most relevant metrics are EV/EBITDA, EV/Revenue, P/E etc. If you can calculate forward looking multiples (ie EV/EBITDA N+1), do it

Premium

How to choose peers

Information

Does not include any premium for control

Include a premium for control (enterprise value will integrate a premium paid by the buyer)

Industry, geography, size etc…

Industry, geography, size, buyer etc…

CapitalIQ, Thomson Reuters, Google Finance, Company website etc…

CapitalIQ, Thomson Reuters, Google Finance, Company website, MergerMarkets, Press etc…

LBO

Overview of a LBO analysis A method which estimates the value of a business for a financial buyer Introduction

§  A leveraged buyout valuation estimates the value of a

business, to a financial investors who wants to achieve a target return based on: ―  Internal rate of return (“IRR”) ―  Cash on cash multiple/ money multiple (“CoC”)

§  It is a very “individual” valuation, which depends on the

amount of debt which can be raised for a LBO transaction, the price of the debt etc…

Key comments

§  Returns expected depends on the nature of the assets

(infrastructure, startup etc…) and on the nature of the investors (private equity firm, venture capital firm, infrastructure fund, pension fund etc…)

§  In a LBO transaction, the main factors which determinate

How to run a LBO valuation

1.  Build the operating model and projections for the business

2.  Set the maximum amount of debt which can be raised to finance the transaction, based on:

―  Type of asset ―  Current debt market dynamics and macro-economic

environment

―  Capacity of the business to repay the debts

3.  Assume value at exit 4.  Calculate returns and run returns sensitivities on ―  Exit year ―  Leverage ―  Acquisition and exit multiple

a return are: ―  Time ―  Capital structure at acquisition ―  Business performance of the asset during the holding

period

LBO â&#x20AC;&#x201C; key considerations Financial leverage $100m valuation

Equity

Enterprise Value

Debt

Company repays debt

Equity Debt

Operating leverage

Enterprise Value

Equity Debt

Company is acquired at 10.0x EBITDA of $10m Company performs well and reach EBITDA of $15m and is sold 10.0x EBITDA

Multiple expansion

Enterprise Value

Equity

Debt

Equity

Debt

Company is acquired at 10.0x EBITDA of $10m The sector becomes more attractive and the company is sold 15.0x EBITDA of $10m 57

LBO – Interview Questions •  Walk me through a basic LBO model. •  Why would you use leverage when buying a company? •  What variables impact an LBO model the most? •  What is an “ideal” candidate for an LBO? •  How would you determine how much debt can be raised in an LBO and how many tranches there would be? •  Let’s say we’re analyzing how much debt a company can take on, and what the terms of the debt should be. What are reasonable leverage and coverage ratios? •  What is the difference between bank debt and high-yield debt? •  What is a dividend recapitalization (“dividend recap”)?

Merger Model

Merger model guided tour COMPANY INPUT

MERGER MODEL

OUTPUTS

Pro forma financials Buyer

Combination

Accretion/ dillution

Buyer + Target

Leverage

Target Shareholding

Contribution analysis: how does it look like? CONTRIBUTION (%) ACQUIRER

TARGET

COMBINED

ACQUIRER

TARGET

ENTERPRISE VALUE METRICS Revenues 2014E

800

300

2015E

850

330

2014E

2015E

Current Market

@ 25% Premium

EBITDA

Enterprise Value

61 Â

Phone Interview Preparation Sheet

Phone Interview Preparation Sheet First-round phone interviews are generally very predictable, and because they are conducted over the telephone, the interviewer will not be able to tell that you’re referring to reference materials while responding. Thus it makes sense to have this sheet available during the call: FINANCIAL STATEMENTS

§  3 Financial Statements: a)  b)  c)

Income Statement Cash Flow Statement Balance Sheet Statement

INCOME STATEMENT

Revenue - COGS Gross Profit - Other Operating Expenses (SG&A etc.) Operating Income (EBIT) - Non-operating Expenses (Interest Expense) EBT (Earning Before Tax) - Taxes Net Income CASH FLOW STATEMENT

1.  2.  3.

Cash Flow From Operating Activities Cash Flow From Investing Activities Cash Flow From Financing Activities

BALANCE SHEET

ASSETS Current Assets Cash & Equivalents Short Term Investments Inventories PP&E (Property Plant & Equipment) TOTAL ASSET LIABILITIES Current Liabilities Accounts Payable Short Term Debt Long Term Debt TOTAL LIABILITIES TOTAL SHAREHOLDER EQUITY ASSETS = LIABILITIES + EQUITY 63

Phone Interview Preparation Sheet – Cont’d First-round phone interviews are generally very predictable, and because they are conducted over the telephone, the interviewer will not be able to tell that you’re referring to reference materials while responding. Thus it makes sense to have this sheet available during the call: VALUATION TECHNIQUES

§  Enterprise Value = Equity Value (Market Cap.) + Debt – Cash + Preferred Equity + Minority Interest §  Equity Value = Share Price * Shares Outstanding §  Valuation Techniques: a)  b)  c)

DCF Comparable Company Analysis Precedent Transaction Analysis DCF

COMPARABLE COMPANY

§  Valuing a company based on its §  Valuing a company based on future cash flows and using a discount rate to value the NPV (Net Present Value) of those cash flows

the valuation of similar companies within the same field

PRECEDENT TRANSACTION

§  Valuing a company based on past transaction of similar companies within the same field

§  Multiple: metric used for valuation §  PE Multiple (Equity Multiple) §  EBITDA Multiple (Enterprise Value Multiple) §  Revenue Multiple (Enterprise Value Multiple) 64

§  What do Investment Banks do? §  Provides advisory and due diligence for M&A, Equity and Debt Financing §  Typical day? §  Financial modelling, pitch books, due diligence §  Why Investment Banking? §  Best learning experience available §  Why this Bank? §  Reputation §  Exposure to senior ppl §  Deal flow

Contacts Online Preparation Materials

Free CV Template

Numerical Test Preparation

Video, interview questions lists and guides http://www.coachingassembly.com/prepare/ We provide you with an empty CV template to help you format your CV the “Investment Banking” way http://www.coachingassembly.com/resume-cv-template/ Prepare your numerical and verbal tests with CoachingAssembly and JobPrep Test (discount code: “coaching”) http://www.coachingassembly.com/prepare/

Thomas Viguier email: thomas.viguier@coachingassembly.com tel: +44 74 53 62 38 17 Guillaume Tardy-Joubert email: guillaume.tardy-joubert@coachingassembly.com tel: +44 74 56 88 60 80 CoachingAssembly. All rights reserved. Any unauthorised copying, duplication, reproduction, re-selling, distribution or other commercial use will constitute an infringement of copyright