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Key Valuation Methodologies Click to edit Master title style
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Overview of Key Valuation Methodologies
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Overview The analyst has different valuation methods he/she can use. He/she has to be careful about the values they will provide
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Overview of valuation methodologies RELATIVE VALUATION COMPARABLE COMPANY ANALYSIS
PRECEDENT TRANSACTIONS ANALYSIS
ESTIMATED VALUE RANGE
DCF ANALYSIS
LBO ANALYSIS
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Comparing valuation methodologies METHOD
PROS
CONS
COMPARABLE LISTED COMPANIES
Market efficiency should ensure that trading values reflect industry trends, business risk and market growth Well understood methodology and primary driver of most public company analyst valuations
× Truly comparable companies are rare and differences are difficult to account for
PRECEDENT TRANSACTIONS
Reflects value that purchasers have been prepared to pay for control of ‘similar’ assets Indicates a range of premia offered (for publicly listed companies)
× Past transaction are rarely directly comparable either due to company specific factors or the fact that acquisitions happened at a different point in the cycle × Public data on past transactions can be incomplete, non-existent or misleading
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Comparing valuation methodologies METHOD
PROS
CONS
DCF
Reflects fundamental value of a company’s cash flows Less influenced by public market conditions Synergy values can be built in by modelling their cash flows
× Valuation highly sensitive to underlying cash flows assumptions, terminal value and discount rate × Terminal value often represents a significant proportion of total value × Often viewed as subject to ‘manipulation’ of assumptions and therefore less reliable
LBO
Provides a valuation that is independent of stock and M&A markets Determines value that a private equity firm is theoretically able to pay
× Standalone LBO will underestimate strategic sale value by ignoring synergies with acquirer × Value obtained is sensitive to projections and views on acquisition price and exit multiple
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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
80
180
260
160
140
240
220
320
Enterprise value
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