RELATIVE VALUATION
-Parvesh Aghi
Fundamental Principles of Relative Valuation
2
Relative Valuation
In discounted cash flow valuation, the
objective is to find the value of assets,
given their cash flow, growth, and risk
characteristics.
In relative valuation, the objective is to
value assets based on how similar
assets are currently priced in the
market.
Quantum of the cash flows
3
Two components to relative valuation
Standardizing
the prices*
* by converting prices into
multiples of earnings,
book values, or sales
Find similar
firms**
** risk, growth potential, and
cash flows
4
Price to Sales ratio or Market Cap/ sales
Company A
Company B
Market Cap
Rs 100 crores
Rs 100 crores
Sales
Rs 50 crores
Rs 100 crores
Price to sales ratio
2
1
Conclusion : Company is clearly expensive
But if Company A sales are growing at 50% per annum and expected to grow
for next 5 years at the same rate and company B sales are not at all growing
…..which is better ?
5
USE OF RELATIVE VALUATION
Most equity research reports and many
acquisition valuations are based on a
comparison of a company to comparable firms,
using a multiple such as PE as the basis.
In fact, firms in the same business as the firm
being valued are called comparable, though
that is not always true.
6
Reasons for Popularity
Less time &
resource
intensive
It is easier to
sell
It is easier to
defend
Reflects the
current
market mood
7
Potential Pitfalls
Comparable firms from the same industry : key
variables such as risk, growth, or cash flow potential
are ignored
Multiples reflect the market mood : Too high / low
valuations
Lack of transparency regarding the underlying
assumptions : vulnerable to manipulation : almost any
value can be justified.
8
STANDARDIZED VALUES AND MULTIPLES
» To compare the values of similar firms in the market ,
we need to standardise the values in some ways by
scaling them to a common variable.
1. To the earnings the firms generate ( EPS/EBIT
EBIDTA
2. To the book value
3. To the revenues that firms generate
4. To the Firm’s operational performance measures
that are specific to firms / sectors ( production
capacity/ subscribers / natural reserves)
9
Multiples
Earnings
Multiples.
Book Value
Multiples.
Revenue
Multiples.
SectorSpecific
Multiples.
10
Earnings Multiples
Price/
Earning Ratio
(MPS/EPS)
PE ratio :
when buying a
stock
EV/ EBIDTA:
when buying a
business
Enterprise
value* /
EBIDTA
Enterprise
value / EBIT
* value of the
operating
assets of the
firm.
In a multiple, we should be consistent on numerator and denominator part. If numerator
is equity value then denominator should be measure of equity not firm and visa versa.
.
11
Multiples should be consistent
»Both the value (the numerator) and the
standardizing variable ( the denominator) should
be to the same claimholders in the firm.
»For example :
»Numerator = Market value of a equity/ firm /
enterprise
»Denominator = could be EPS /EBIT or EBITA or
EBIDTA
12
Book Value Multiples
Price / Book
Value of equity
Enterprise
Value/ Book
Value of assets.
13
Revenue Multiples
Price –to
Sales ratio*
Enterprise
Value /
Sales
*Market value of equity / revenues.
14
Sector-Specific Multiples
EV / Ton of steel
(Steel
Producers)
EV/Kwh
(electric
generation)
EV / Per square
foot
(retailers)
EV / Subscriber
(cable TV/
Telecom)
EV / Per
Employee.
15
»You would have seen that all multiples are not
used at a time to value a company. Which
multiple is more relevant to value a particular
company depends on various factors including
industry in which the company is operating, stage
of industry, focus of investors/traders etc.
16
Examples
» Let’s understand this with couple of real examples:
» One of the recent and most talked about deal happened in the recent
past was Facebook acquired Whatsapp. Everybody was surprised
with the $19 billion valuation paid for Whatsapp. What was the basis
of that valuation? Revenue, EBIT, EBITDA or Net Income?.
» The answer might surprise you. Basically none of them as currently
Whatsapp does not have any revenue stream (app is free for
subscriber and company is not advertising on its app). So what made
Facebook paid $19 billion fortune. Actually Facebook paid $19 billion
for 450 million existing user base of Whatsapp. And this is what the
key valuation metrics which market and investors are focusing on in
social networking companies (Facebook, Twitter, Linkedin etc.).
17
»Based on user number, Facebook paid around
$42 per user for Whatsapp compared to $130 per
user valuation what Facebook is having. This is
how this industry is currently being valued by
investors and traders.
18
RIGHT MULTIPLES
Multiple
EV/Sales
EV/EBITDA
EV/EBIT
P/E Multiple
EV/operating matrix
Positive
Limitation
1. Not effected by accounting policy differences Does not capture profitability part of
in comaparable companies
comaprable companies
2. Can be used for the industry where profitability
is negative. E,g, e commerce and electric
vehicles
3. EV based multiples are not effected by
differnces in capital structure
Conclusion
Can be used for the industry where profitability
is negative. Or where profitability margins are
in a standard range.
Can be used for almost every industry except,
1. Less effected by accounting policy differences Can not be used for the industry having loss making industry, banking and financial
than other profit margins
negative ebitda
companies
2. Captures picture of profitability of comparable
This multiple is more useful specially in case of
companies, which is not the case with ev/sales
capital intensive industry, compared to ev/ebit
multiple
margin
3. EV based multiples are not effected by
Huge D&A exp can distort earnings in capital
differnces in capital structure
intensive industry if we use EBIT
4. Not effected by non operating items of income
and expenses.
1. Captures picture of profitability of comparable
Can be used for almost every industry except,
companies, which is not the case with ev/sales Can not be used for the industry having loss making industry, banking and financial
multiple
negative ebitda
companies
2. EV based multiples are not effected by
We should avoid using this multiple for capital
differnces in capital structure
intensive industry
3. Not effected by non operating items of income
Huge D&A exp can distort earnings in capital
and expenses.
intensive industry if we use EBIT
1. Captures picture of profitability of comparable Effected by capital structure differences
companies, which is not the case with ev/sales
Can be applied in the industry having negligible
multiple
leverage.
Effected by non operating items of
income and expenses
Most effected by accounting policy
differences
Can be used for industry not having sales, but
subscribers etc
does not capture financial performance Eg, Whatsapp, and other app based
of comparable companies
companies
19
MULTIPLES USED
104
Sector
Multiple Used
Rationale
Cyclical Manufacturing
PE, Relative PE
Often with normalized
earnings
Growth firms
PEG ratio
Big differences in growth
rates
Young growth firms w/
losses
Revenue Multiples
What choice do you have?
Infrastructure
EV/EBITDA
Early losses, big DA
REIT
P/CFE (where CFE = Net
income + Depreciation)
Big depreciation charges
on real estate
Financial Services
Price/ Book equity
Marked to market?
Retailing
Revenue multiples
Margins equalize sooner
or later
Relative PE = PE of Firm / PE of Market
.
Thus, a firm which has historically traded at half the market PE (Relative PE =
0.5) is considered over valued if it is trading at a relative PE of 0.7.
What to control for
21
FOUR BASIC STEPS TO USING MULTIPLES
DEFINE
DESCRIBE
ANALYSE
APPLY
22
FOUR BASIC STEPS TO USING MULTIPLES
Multiple is defined
consistently and
measured uniformly.
Distributional
characteristics of a
multiple.
Analyse the multiple
Finding the right
firms to use for
comparison, and
controlling for
differences.
23
1.Multiple is defined consistently and measured uniformly
Even the simplest multiples can be defined
differently by different analysts.
Price-earnings (PE) ratio.
• There are a number of variants on the PE ratio.
• While the current price is used in the numerator
• The earnings per share in the denominator can be the EPS from
the most recent financial year (yielding the current PE), the last
four quarters of earnings (yielding the trailing PE), or expected
EPS in the next financial year (resulting in a forward PE).
• The first step when discussing a valuation based on a multiple is
to ensure that everyone in the discussion is using the same
definition for that multiple.
24
Consistency
Every multiple has a numerator and a
denominator. The numerator can be either an
equity value (such as market price or value of
equity) or a firm value or enterprise value .
The denominator can be an equity measure
(such as earnings per share, net income, or
book value of equity) or a firm measure (such
as operating income, EBITDA, or book value of
capital).
25
Consistency
The numerator and denominator are defined
consistently.
If the numerator for a multiple is an equity
value, then the denominator should be an
equity value as well.
If the numerator is a firm value, then the
denominator should be a firm value as well.
26
Consistency
To illustrate, the price-earnings ratio is a
consistently defined multiple, since the
numerator is the price per share (which is an
equity value) and the denominator is earnings
per share (which is also an equity value).
So is the enterprise value to EBITDA multiple,
since the numerator and denominator are both
firm value measures.
27
Uniformity
With both earnings and book value measures, there is another
component to be concerned about, and that is the accounting
standards used to estimate earnings and book values.
Differences in accounting standards can result in very different
earnings and book value numbers for similar firms.
Companies that use aggressive assumptions in measuring
earnings will look cheaper on earning multiples than firms that
adopt conservative accounting practices
This makes comparisons of multiples across firms in different
markets, with different accounting standards, very difficult.
28
2.Distributional characteristics of a multiple
When using a multiple, it is always
useful to have a sense of what a high
value, a low value, or a typical value for
that multiple is in the market.
In other words, knowing the
distributional characteristics of a multiple
is a key part of using that multiple to
identify under- or overvalued firms.
29
Distributional characteristics of a multiple
» It is difficult to look at a number and pass
judgment on whether it is too high or low without
the knowledge of cross distribution of a multiple.
»The table below summarizes the average and
standard deviation for three widely used multiples
US companies
Current PE
Price-to book Equity
EV/EBITDA
Average
48.12
7.14
26.52
Median
23.12
2.53
8.64
235.64
65.44
250.54
Minimum
.10
.00
0.00
Maximum
10,081
4,447
11,322
Standard dev
30
31
Right Skewed distribution
32
Distributional characteristics of a multiple
The lowest value that any company can register on any
multiple is zero , whereas the highest values are unbounded.
As a result , the distribution for theses multiples are skewed
towards the positive values.
The average values for multiples will be higher than median
values
The median values is more representative
The median values should be used whether the stock is
cheap or overvalued instead of average
33
Time variation in multiples
»Multiples can change over time
US Stocks
Average
Median
% of firms
with PE ratios
Jan 00
52.16
24.55
65.33
Jan 01
44.99
14.74
63.00
Jan 02
43.44
15.50
57.06
Jan 03
33.36
16.68
49.99
Jan 04
41.40
20.76
58.18
Jan 05
48.12
23.21
56.43
»2000 was the peak of market bubble.
»Multiples during recession will decrease
34
35
36
37
3.Analyse the multiple
»In discounted cash flow valuation the value of a
firm is a function of three variables , namely
Its capacity to generate cash
flows.
Its expected growth in these
cashflows
The uncertainty associated
with these cash flows
38
Analyse the multiple
Every multiple, whether it is of earnings, revenues, or book
value, is a function of the same three variables—risk, growth,
and cash flow generating potential.
The assumptions in a relative valuation are implicit and
unstated, whereas those in discounted cash flow valuation
are explicit.
Intuitively, then, firms with higher growth rates, less risk, and
greater cash flow generating potential should trade at higher
multiples than firms with lower growth, higher risk, and less
cash flow potential.
39
Analyse the multiple
We can use simple discounted cash
flow models for equity and enterprise
value (EV) and use them to derive the
multiples.
In the simplest discounted cash flow
model for equity, which is a stable
growth dividend discount model, the
value of equity is:
40
Analyse the multiple
Where DPS1 is the expected dividend
in the next year, ke is the cost of equity,
and gn is the expected stable growth
rate.
Dividing both sides by the earnings,
you obtain the discounted cash flow
equation specifying the PE ratio for a
stable growth firm:
41
Math
42
Analyse the multiple
Dividing both sides by
the book value of equity,
you can estimate the
price–book value ratio
for a stable growth firm:
43
Math
44
MULTIPLES – Key driver
45
4.Application Tests
Finding the right firms
to use for comparison,
and controlling for
differences
46
Application Tests
Multiples are used in
conjunction with
comparable firms to
determine the value
of a firm or its equity.
47
What is a comparable firm ?
Firms within the
same
industry/businees
Firms with similar
cashflows
,growth potential
and risk
A telecom firm can be compared to a software firm , if two are
Identical in terms of cashflows , growth & risk
48
Controlling for differences across firms
No matter how carefully you construct your list
of comparable firms, you will end up with firms
that are different from the firm you are valuing.
The differences may be small on some variables
and large on others, and you will have to control
for these differences in a relative valuation.
There are three ways of controlling for these
differences: subjective adjustments, modified
multiples, and sector or market regressions.
49
Subjective Adjustments
The multiple is calculated for each of the comparable firms, and the
average is computed.
To evaluate an individual firm, you then compare the multiple it trades
at to the average computed; if it is significantly different, you make a
subjective judgment about whether the firm's individual characteristics
(growth, risk, or cash flows) may explain the difference.
Thus, a firm may have a PE ratio of 22 in a sector where the average
PE is only 15, but you may conclude that this difference can be
justified because the firm has higher growth potential than the average
firm in the industry.
50
Subjective Adjustments
»EPD
51
Subjective Adjustments
If, in your judgment, the difference
on the multiple cannot be
explained by the fundamentals, the
firm will be viewed as overvalued
(if its multiple is higher than the
average) or undervalued (if its
multiple is lower than the average).
52
Modified Multiples
In this approach, you modify the multiple to take into account the
most important variable determining it—the companion variable.
Thus, the PE ratio is divided by the expected growth rate in EPS
for a company to determine a growth-adjusted PE ratio or the
PEG ratio.
These modified ratios are then compared across companies in a
sector.
The implicit assumption you make is that these firms are
comparable on all the measures of value, other the one being
controlled for.
53
Modified Multiples
» The P/E ratios and expected growth rates in EPS over the next five years, based on
consensus estimates from analysts, for the firms that are categorized as beverage
firms are summarized in the following table:
54
Modified Multiples
55
Sector Regressions
When firms differ on more than one variable, it becomes
difficult to modify the multiple to account for the
differences across firms.
You can run a regression of the multiple against the
variables and then use this regression to find the
predicted value for each firm.
This approach works reasonably well when the number
of comparable firms is large and the relationship
between the multiple and the variables is stable.
56
Market Regressions
Searching for comparable firms within the sector in
which a firm operates is fairly restrictive, especially
when there are relatively few firms in the sector or when
a firm operates in more than one sector.
Since the definition of a comparable firm is not one that
is in the same business but one that has the same
growth, risk, and cash flow characteristics as the firm
being analyzed, you need not restrict your choice of
comparable firms to those in the same industry.
57
Market Regressions
The regression introduced in the previous
section controls for differences on those
variables that you believe cause multiples to
vary across firms.
Based on the variables that determine each
multiple, you should be able to regress any
multiple (PE, EV/EBITDA, PBV) against the
variables, using all of the firms in the market in
your sample.
58
Market Regressions
You can then use the
market regression to
get predicted values
for individual
companies.
59
Market Regressions
A company that trades at a
PE ratio lower (higher)
than the predicted PE from
the market regression is
undervalued (over valued)
relative to the market.
60
Predicted PE vs Actual PE - Regression
61
Market Regressions
You can then use the market
regression to get predicted values
for individual companies.
A company that trades at a PE ratio
lower (higher) than the predicted
PE from the market regression is
undervalued (over valued) relative
to the market.
62
Market Regressions
The first advantage of this approach over the
subjective comparison across firms in the same
sector is that it does quantify, based on actual
market data, the degree to which higher growth
or risk should affect the multiples.
It is true that these estimates can have error
associated with them, but this error is a
reflection of the reality that many analysts
choose not to face when they make subjective
judgments.
63
Market Regressions
Second, by looking at all firms in the market,
this approach allows you to make more
meaningful comparisons of firms that operate
in industries with relatively few firms.
Third, it allows you to examine whether all
firms in an industry are under- or overvalued
by estimating their values relative to other
firms in the market.
64
MULTIPLES – Key driver
65
Steps in performing comparable company analysis
Find the right comparable companies
Gather financial information
Setup the comps table
Calculate the comparable ratios
Use the multiples from the comparable companies to value the
company in question
66
»Limitations of Statistical Techniques
»
Statistical techniques are not a panacea
for research or for qualitative analysis. They are
tools that every analyst should have access to,
but they should remain tools. In particular, when
applying regression techniques to multiples, we
need to be aware of both the distributional
properties of multiples that we talked about
earlier in the chapter and the relationship among
and with the independent variables used in the
regression.
67
»
The fact that multiples are not normally distributed can pose problems when using standard regression
techniques. These problems are accentuated with small samples, where the asymmetry in the distribution can be
magnified by the existences of a few large outliers.
» �
In a multiple regression, the independent variables are themselves supposed to be independent of each other.
Consider, however, the independent variables that we have used to explain valuation multiples – cash flow potential
or payout ratio, expected growth and risk. Across a sector and over the market, it is quite clear that high growth
companies will tend to be risky and have low payout. This correlation across independent variables creates
�multicollinearity� which can undercut the explanatory power of the regression.
» �
Earlier in the chapter, we noted how much the distributions for multiples changed over time, making
comparisons of PE ratios or EV/EBITDA multiples across time problematic. By the same token, a multiple regression
where we explain differences in a multiple across companies at a point in time will itself lose predictive power as it
ages. A regression of PE ratios against growth rates in early 2005 may therefore not be very useful in valuing stocks
in early 2006.
» �
As a final note of caution, the R-squared on relative valuation regressions will almost never be higher than
70% and it is common to see them drop to 30 or 35%. Rather than ask the question of how high an R-squared has to
be to be meaningful, we would focus on the predictive power of the regression. When the R-squared decreases, the
ranges on the forecasts from the regression will increase. As an example, the beverage sector regression (from
illustration 7.3) yields a forecasted PE of 32.97 but the R-squared of 51% generates a range of 27.11 to 38.83 for the
forecast with 95% accuracy; if the R-squared had been higher the range would have been tighter.
»
»
68
Limitations of Statistical Techniques
Statistical techniques are not a panacea for research or for qualitative analysis. They are tools that every analyst should have access to,
 The fact that multiples are not normally distributed can pose problems when using standard regression techniques. These problems are acce
 In a multiple regression, the independent variables are themselves supposed to be independent of each other. Consider, however, the indepe
 Earlier in the chapter, we noted how much the distributions for multiples changed over time, making comparisons of PE ratios or EV/EBIT
 As a final note of caution, the R-squared on relative valuation regressions will almost never be higher than 70% and it is common to see the
69
»BACK UP SLIDES
70
Find the right comparable companies
This is the first and probably the hardest (or most subjective)
step in performing ratio analysis of public companies.
The very first thing an analyst should do is look up the
company you are trying to value on Morning star or
valueresearch so you can get a detailed description and
industry classification of the business.
The next step is to search either of those databases for
companies that operate in the same industry and that have
similar characteristics. The closer the match, the better.
71
»The analyst will run a screen based on criteria
that include:
»Industry classification
»Geography
»Size (revenue, assets, employees)
»Growth rate
»Margins and profitability
72
Gather financial information
Once you’ve found the list of companies
that you feel are most relevant to the
company you’re trying to value it’s time to
gather their financial information.
Once again, you will probably be working
with Morning Star or Value research and
you can easily use either of them to import
financial information directly into Excel.
73
Gather financial information
The information you need will
vary widely by industry and the
company’s stage in the business
lifecycle. For mature businesses,
you will look at metrics like
EBITDA and EPS, but for earlier
stage companies you may look at
Gross Profit or Revenue.
74
Setup the comps table
» In Excel, you now need to create a table that lists all the
relevant information about the companies you’re going to
analyze.
» The main information in comparable company analysis
includes:
» Company name
» Share price
» Market capitalization
» Net debt
» Enterprise value
» Revenue
» EBITDA
» EPS
» Analyst estimates
75
Calculate the comparable ratios
» With a combination of historical financials and analyst
estimates populated in the comps table, it’s time to start
calculating the various ratios that will be used to value the
company in question.
» The main ratios included in a comparable company analysis
are:
» EV/Revenue
» EV/Gross Profit
» EV/EBITDA
» P/E
» P/NA
» P/B
76
Use the multiples from the comparable companies to value the company
in question
» Analysts will typically take the average or median of the
comparable companies’ multiples and then apply them to
the revenue, gross profit, EBITDA, net income, or
whatever metrics they included in the comps table.
» In order to come up with a meaningful average, they often
remove or exclude outliers and continually massage the
numbers until they seem relevant and realistic.
» For example, if the average P/E ratio of the group of
comparable companies is 12.5 times, then the analyst will
multiply the earnings of the company they are trying to
value by 12.5 times to arrive at their equity value.
77
Interpreting the results
»Once the numbers are complete and the comps
table is finalized, it’s time to start interpreting the
results. One way to use the information is to look
for companies that are overvalued or
undervalued. Comps can help you uncover the
opportunities, but the results need to be
interpreted carefully as they don’t include any
qualitative factors whatsoever.
78
»To properly evaluate the numbers in the comps
table you have to understand why numbers are
what they are. Why does Company A trade at a
discounted EV/EBITDA multiple to Company B?
»Is it because it’s undervalued and a good buying
opportunity?
»Or, is it because it has a much lower growth rate
and requires more capex spending?
79
»Even though Company A trades at a lower
multiple, it might actually be “more expensive”
than Company B!
»The is where the art of being a great financial
analyst comes into play.
»
80
Company Name
Infosys Ltd
Wipro
Tata
Consultancy
services
HCL
Technologies
EV/Sales
x
3.7x
2.5x
Valuation
EV/EBITDA
EV/EBIT
x
x
13.4x
14.6x
10.5x
12.1x
P/E
x
21.4x
16.7x
5.4x
18.2x
19.1x
25.7x
2.3x
9.4x
10.9x
14.2x
Tech Mahindra
1.8x
8.9x
10.7x
14.6x
Average
Median
3.2x
2.5x
12.1x
10.5x
13.5x
12.1x
18.5x
16.7x
81
Market Data
Financial Data
Price
Market Cap
EV
Sales
EBITDA
EBIT
Earnings
(Rs/share)
(Rs crores)
(Rscrores)
(Rs crores)
(Rs crores)
(Rs crores)
(Rs crores)
Infosys Ltd
775
3,30,416
3,07,848
82,675
23,052
21,041
15,410
Wipro
249
1,50,461
1,48,948
59,574
14,232
12,284
9,022
Tata
Consultancy
services
2165
8,11,828
7,97,818
1,46,463
43,817
41,761
31,562
HCL
Technologies
1063
1,43,998
1,39,982
60,427
14,869
12,796
10,120
659
63,583
61,281
34,742
6,871
5,742
4,354
Company
Name
Tech
Mahindra
82
Market Data
Company
Name
The CocaCola
Company
Pepsico,
Inc.
Dr Pepper
Snapple
Group,
Inc.
Monster
Beverage
Corporatio
n
National
Beverage
Corp.
Financial Data
Valuation
Price
Market
Cap
EV
Sales
EBITDA
($/share)
($M)
($M)
($M)
($M)
($M)
($M)
x
x
x
x
38.14 1,68,041 1,85,122
46,854
13,104
11,127
7,381
4.0x
14.1x
16.6x
22.8x
81.37 1,23,883 1,43,824
66,415
12,344
9,878
5,618
2.2x
11.7x
14.6x
22.1x
EBIT Earnings
EV/Sales
EV/EBITD
EV/EBIT
A
P/E
52.31
10,326
12,764
5,997
1,319
1,103
620
2.1x
9.7x
11.6x
16.7x
69.62
11,618
11,004
2,246
606
584
357
4.9x
18.1x
18.9x
32.5x
20.81
964
968
645
78
66
41
1.5x
12.5x
14.6x
23.5x
Average
2.9x
13.2x
15.3x
23.5x
Median
2.2x
12.5x
14.6x
22.8x
83
84
85
86
87
Multiple
EV/Sales
EV/EBITDA
EV/EBIT
P/E Multiple
EV/operating matrix
Positive
Limitation
Conclusion
Can be used for the industry where
1. Not effected by accounting policy
Does not capture profitability part of profitability is negative. Or where profitability
differences in comaparable companies
comaprable companies
margins are in a standard range.
2. Can be used for the industry where
profitability is negative. E,g, e commerce and
electric vehicles
3. EV based multiples are not effected by
differnces in capital structure
1. Less effected by accounting policy
Can not be used for the industry
differences than other profit margins
having negative ebitda
2. Captures picture of profitability of
comparable companies, which is not the case
with ev/sales multiple
3. EV based multiples are not effected by
differnces in capital structure
4. Not effected by non operating items of
income and expenses.
1. Captures picture of profitability of
comparable companies, which is not the case Can not be used for the industry
with ev/sales multiple
having negative ebitda
2. EV based multiples are not effected by
differnces in capital structure
3. Not effected by non operating items of
income and expenses.
Effected by capital structure
1. Captures picture of profitability of
comparable companies, which is not the case differences
with ev/sales multiple
Effected by non operating items of
income and expenses
Most effected by accounting policy
differences
does not capture financial
Can be used for industry not having sales, but performance of comparable
subscribers etc
companies
Can be used for almost every industry
except, loss making industry, banking and
financial companies
This multiple is more useful specially in case
of capital intensive industry, compared to
ev/ebit margin
Huge D&A exp can distort earnings in capital
intensive industry if we use EBIT
Can be used for almost every industry
except, loss making industry, banking and
financial companies
We should avoid using this multiple for
capital intensive industry
Huge D&A exp can distort earnings in capital
intensive industry if we use EBIT
Can be applied in the industry having
intangible leverage.
Eg, Whatsapp, and other app based
companies
88
CASE STUDY
CAMPBELL TO
ACQUIRE SNYDER’SLANCE, INC. TO
EXPAND IN FASTERGROWING SNACKING
CATEGORY
89
About Snyder’s-Lance
Snyder's-Lance, Inc.,
headquartered in Charlotte,
NC, manufactures and
markets snack foods
throughout the United States
and internationally.
Snyder's-Lance's products
include pretzels, sandwich
crackers, pretzel crackers,
potato chips, cookies, tortilla
chips, restaurant style
crackers, popcorn, nuts and
other snacks.
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About Snyder’s-Lance
Products are sold under the Snyder's
of Hanover®, Lance®, Kettle Brand®,
KETTLE® Chips, Cape Cod®, Snack
Factory® Pretzel Crisps®, Pop
Secret®, Emerald®, Late July®,
Krunchers! ®, Tom's®, Archway®,
Jays®, Stella D'oro®, Eatsmart
Snacks™, O-Ke-Doke®, Metcalfe's
skinny®,
Products are distributed nationally
through grocery and mass
merchandisers, convenience stores,
club stores, food service outlets and
other channels
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Campbell Soup Company
is a multi-national food
company headquartered
in Camden, N.J., with
annual sales of
approximately $8.1
billion.
They make a range of
high-quality soups and
simple meals, beverages
and snacks.
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Highlights
Campbell to acquire Snyder’s-Lance for $50.00 per share in an all-cash transaction
Combination of Campbell’s baked snacks portfolio and Snyder’s-Lance’s
complementary portfolio creates a snacking platform with approximately $4.7 billion
net sales on a pro forma basis
Campbell’s annual net sales expected to exceed $10 billion
Expects approximately $170 million in cost synergies by end of fiscal 2022;
additionally, expects to achieve a majority of Snyder’s-Lance’s existing cost
transformation program
Acquisition expected to be accretive to Campbell’s Earnings Per Share (EPS) in
fiscal 2019
93
» CAMDEN, N.J. and CHARLOTTE, N.C., Dec. 18,
2017 - Campbell Soup Company (NYSE: CPB) and
Snyder’s-Lance (NASDAQ: LNCE) today announced
that the companies have entered into an agreement
for Campbell to acquire Snyder’s-Lance for $50.00
per share in an all-cash transaction.
» The purchase price represents a premium of
approximately 27 percent to Snyder’s-Lance’s closing
stock price on Dec. 13, 2017, the last trading day
prior to media reports regarding a potential
transaction. The acquisition, which has been
approved by the
94
» Boards of Directors of both companies, will enable
Campbell to expand its portfolio of leading snacking
brands.
» Snyder’s-Lance is a leading snacking company that
manufactures and markets snack food throughout the
United States. The company’s portfolio includes wellknown brands such as Snyder’s of Hanover, Lance,
Kettle Brand, KETTLE chips, Cape Cod, Snack
Factory Pretzel Crisps, Pop Secret, Emerald and
Late July. Snyder’s-Lance has leading market
positions in its core categories including pretzels,
sandwich crackers, kettle chips, deli snacks and
organic and natural tortilla chips.1
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Acquisition and Snyder’s-Lance Highlights:
»Combines the strengths of both organizations to
drive sales growth and expand Campbell’s
footprint in the $89 billion U.S. snacking market,
which had a three-year compound annual growth
rate (CAGR) of nearly 3 percent2 Snyder’sLance reported $2.2 billion in net sales for the
trailing 12 months ended Sept. 30, 2017 From
calendar 2012-2016, Snyder’s-Lance net sales
grew at an 11.5 percent CAGR; organic net sales
outpaced category growth with a 4 percent CAGR
»
96
»The acquisition of Snyder’s-Lance will accelerate
Campbell’s access to faster-growing distribution
channels including the convenience and natural
channels
97
COMPARABLE DEAL ANALYSIS
SNYDER
Equity
Value
5,224
(All
Enterprise
Value
6,320
ENTERPRISE VALUE
EQUITY
LTM
sales
LTM
EBIDTA
LTM
EBIT
LTM PE
2.8x
22.2x
33.9x
74.9x
Numbers are in USD millions except per share data)
98
DETAILS
99
ENTERPRISE VALUE
100
KEY FINANCIALS
101
EQUITY CONSIDERATION
102
TREASURY STOCK METHOD
103
104
Comparison of Multiples
IPO Valuation
Choice of the Multiple Depends on Industry, Profitability, Accounting Regimes
Multiple
Advantage
 Meaningful for loss-making companies
 Very limited impact of
accounting differences
Disadvantage

Does not take differences in profitability
into account

No distortions based on different
depreciation policies

Does not take differences in capital
expenditures into account
EV / EBIT

Valuation based on quality of operation

Possible distortions based on different
accounting policies
EV / Capital
Employed

Based on invested capital, which
determines potential earnings power

Focuses on earnings to shareholders

Accounting differences may distort true
measures of earnings

“Cash is king”

Does not take differences in capital
expenditures into account

Based on equity, which determines
earnings power

Does not take differences in profitability
into account
EV / Sales
EV / EBITDA
P/E Ratio
Price / CFPS
Price / Book
26

Does not take differences in profitability
into account
 Distortions through accounting differences
»Limiting the use of banknotes has also been
recommended by health experts, as one of the
effective measures everyone can take. They are
potentially one of the most contaminated objects
with high circulation.
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