Strategic investment criteria
Olivier LEVYNE
(November 7th, 2008)
Global Investment Banking
-2-
1.
Analysis of an investment opportunity: main principles
2.
Data on Carrefour and Wal Mart
3.
Example: investment opportunity for Wal Mart
1. Analysis of an investment opportunity: main principles
-3-
1. Introduction to strategic investment decisions

The NPV is one of the drivers of the decision as the valuation of the target generally relies on the Discounted
Cash Flows approach

But the investment decision relies on other criteria:
 It must be EPS accretive in order to create shareholders value
 It must be acceptable from a banking point of view

These criteria enable to define the modality of the transaction:
 Cash offer
 Share offer
 Mix offer

Beyond industrial considerations, the decision is eventually based on a sensitivity analysis
2. Purchaser ’s EPS accretion / dilution in a cash offer

PER = Price/EPS. ie: Price = PER x EPS . Hence, if the PER is stable (no change in the market status of the share):

D.Price = PER x D.EPS

Taking into account that, under IRFS, the goodwill is no more amortized:
Share of the target’s net profit
(Post tax interest expenses)
______________________
Impact of the acquisition on the acquirer's net profit= DRNA

Accretive cash tender offer if, for a 100% acquisition of the target’s capital: NPT > i.V where:
 NPT = target’s net profit
 i = post tax cost of debt [ie: pretax cost of debt x (1 – corporate tax rate)]
 V = target value (ie: market cap. + premium)
Then: V/NPT < 1/i =Cash PER
Hence: Accretive Cash tender if: Target PER < Cash PER

EPS accretion= (EPS after– EPS before) / EPS before
The number of the acquirer’s shares is unchanged. Then, with NPA = acquirer’s net profit
EPS accretion= (NPA after– NPA before) / NPA before= DNPA/ NPA before
3. Purchaser ’s EPS accretion / dilution in a share offer

A share tender offer consists in proposing to
the target’s shareholders to swap their
(listed) shares for the bidder’s listed
securities.
NPA
NPB
nA
nB
CA
CB
: Net profit of the acquirer (A)
: Net profit of the target (B)
: Number of A shares before the tender offer
: Number of B shares
: Price per A share
: Price per B share
 These securities generally correspond to new shares
The share offer is accretive if : EPSA after the transaction > EPSA before the transaction
issued by the bidder

The exchange parity generally includes a
20%-30% premium on the target share price

The goodwill corresponds to the difference
between:
 the valuation of the target (ie the number of shares
issued by the bidder x the last price of the bidder
share)
 the equity group share of the target x % purchased (ie
100% if the bidder had no interest in the target’s
capital before the tender offer)
NPA
NPA  NPB
>
CB
nA
n A  ( .nB )
CA
NPA
NPA  NPB
>
n AC A  n B C B
nA
CA
NPA  NPB
NPA
>
nAc A  nB cB
n AC A
(NPA + NPB) nACA > NPA (nACA + nBCB)
nACANPB > nBCBNPA
n AC A
>
NPA
CA
>
NPA
nA
CA
>
EPS A
nB C B
NPB
CB
NPB
nB
CB
EPSB
ie PERA > PERB
4. Banks’ constraints / main covenants

Gearing:
Net debt / Equity <1

Debt coverage:
Net debt / EBITDA < 3

Interest coverage:
EBIT / net financial expenses > 4
2. Data on Carrefour and Wal Mart
-8-
Carrefour and Wal Mart
- Datastream information
DATAST REAM EQUITIES
Mnemonic - U:WMT
Local Code - U93114210
Current Price
12 Mth Range
High
Low
WAL MART STORES
Geography Code - US
Exchange - New York
56.1300
63.1700
42.9000
04/11/08
11/ 9/08
9/11/07
05/11/08 13.12
Industry Group - BDRET
Sector - GNRET
Fin.Yr LocStd
I/B/E/S
01/08 07/08 01/09 01/10
3.16
3.38
3.49
3.83
17.8
16.6
16.1
14.6
91.7%
11.55 (%=Rel to S&PCOMP)
EPS
PE
Price Change
1mth
3mth
12mth PE Rel.
(U$)
-6.0%
-7.0%
27.5% P/Cash
(E)
0.7%
11.9%
43.2%
Relative to S&PCOMP
Dividend Rate (U$)
0.95
2.7%
18.8%
90.4% Dividend Yield
1.69
Dividend Cover
3.6
Market Value (U$)
220813.9M Div Last Fin Year
0.88
Adjusted to (E)
171451.4M Last Div Paid QTR(U$)
0.2375 Tax- G
Pay Date 02/09/08 XD Date 13/08/08
P rice and Index (rebased)
70
(U$)
1/06
1/07
1/08
Total sales
Pre-T ax Prof.
Publ. EPS
Cash EPS
Mkt to Bk Val
ROE (%)
60
50
40
30
20
N D J F M A M J J
WAL MART STORES
S&P 500 COMPOSITE (PI)
-9-
A S
O
312B
345B
375B
17358M 18968M 20198M
2.68
2.92
3.16
3.93
4.49
4.86
3.61
3.23
3.15
21.90
19.67
20.18
No. Shares in Issue
3933975(000s)
Volume
23056.0(000s)
Percentage of free float
57%
Volatility
4
Beta
0.299
Correlation
0.208
Source: Thomson Datastream
DATAST REAM EQUITIES
Mnemonic - F:CRFR
Local Code - G012017
Current Price
12 Mth Range
High
Low
Price Change
1mth
(E)
-1.4%
Relative to FSBF120
11.9%
Market Value (E)
05/11/08 13.17
CARREFOUR
Geography Code - FR
Exchange - Paris-SBF
33.1550 14:01
53.7400
5/12/07
24.6800 16/10/08
3mth
-4.4%
EPS
PE
12mth PE Rel.
-32.3% P/Cash
16.9%
8.2%
23371.04M
P rice and Index (rebased)
60
Fin.Yr LocStd
I/B/E/S
12/07 06/08 12/08 12/09
2.66
2.68
2.76
2.89
12.5
12.4
12.0
11.5
133.5%
5.80
(%=Rel to DS Index)
Dividend Rate (E)
1.35 F
Dividend Yield
4.06
Dividend Cover
2.0
Div Last Fin Year
1.08
Last Div Paid YR (E)
1.08 Tax- N
Pay Date 23/04/08 XD Date 18/04/08
(E)
Total sales
Pre-T ax Prof.
Publ. EPS
Cash EPS
Mkt to Bk Val
ROE (%)
50
40
30
20
N D J F M A M J J
CARREFOUR
SBF 120 (PI)
Industry Group - FDRET
Sector - FDRGR
A S
O
12/05
74497M
2700M
2.58
5.11
3.33
18.60
12/06
12/07
77901M 82148M
2795M 2812M
2.64
2.66
4.78
5.71
3.41
3.52
25.39
22.82
No. Shares in Issue
704903(000s)
Volume
5543.8(000s)
Percentage of free float
86%
Volatility
8
Beta
0.709
Correlation
0.444
Source: Thomson Datastream
WM and Carrefour
- P&L, balance sheet
In million
EBITDA
EBIT
Interests
Net profit
In million
Fixed assets
GW
WCR
Total employed
Equity group share
Minority interests
Provisions
Net debt
Total capital invested
- 10 -
WM
Carrefour
$
€
30 902
5241
24 058
3411
1 946
571
14 043
1869
WM
$
104 066
0
3 361
_____
107 427
Carrefour
€
30 622
0
-9 391
_____
21 231
71 837
0
0
35 590
_____
107 427
11 762
1 302
1 328
6 839
_____
21 231
3. Example: Investment opportunity for Wal Mart
- 11 -
Introduction

Wal Mart is indisputably the world leader of the retail sector

The purchase of its challenger would make sense from an industrial point of view:
 Their retail networks prove a geographical complementarity:

No WM stores in France
 The merger would enable cost synergies:


Cuts in head office costs

Decrease in the costs of goods sold thanks to an increasing bargaining power towards suppliers
Carrefour is listed on the Paris Stock Exchange. Therefore, the purchase of a controlling
stake requires the launching of a tender offer :
 Either in cash (take over bid)
 Or in shares
 Or in the background of a mix offer

The market cap of Carrefour is around 23 bn € (ie: 30 bn $)
Cash offer
- Balance sheet impacts

Assumed premium: 30%
 Carrefour valuation: 39 bn $ (corresponding to an increase in the net financial debt)
 Based on a 15 bn $ equity, the implied goodwill would be 24 bn $

Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing
debt (9 bn $)

The implied gearing ratio is unacceptable for the banks (114% vs a target 100% ratio)
Fixed assets
GW
WCR
Total employed
Equity group share
Minority interests
Provisions
Net debt
Total capital invested
Gearing
WM
$
104 066
0
3 361
_____
107 427
Carrefour
€
30 622
0
-9 391
_____
21 231
Carrefour
$
39 438
0
-12 095
_____
27 344
71 837
0
0
35 590
_____
107 427
11 762
1 302
1 328
6 839
_____
21 231
15 148
1 677
1 710
8 808
_____
27 344
50%
52%
52%
Acquisition Restatements
$
$
15 148
-15 148
23 981
_____
39 130
_____
-15 148
0
-15 148
39 130
_____
39 130
_____
-15 148
Conso
$
143 504
23 981
-8 734
_____
158 752
71 837
1 677
1 710
83 528
_____
158 752
114%
Cash offer
- EPS accretion/dilution

Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM would:
 Consolidate 100% of Carrefour’s net profit
 Pay interest expenses based on a 6% pretax cost of debt

The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered
0%
9%

10%
8%
20%
30%
7%
40%
6%
5%
50%
4%
Significant accretive impact (6% in the base case) but the transaction is not acceptable from a banking point of
view
Share offer
- Balance sheet impacts

Assumed premium: 30%
 Carrefour valuation: 39 bn $ (corresponding to an increase in the net financial debt)

Based on a 15 bn $ equity, the implied goodwill would be 24 bn $

Based on a 56.13$ price per WM share, WM would issue 697 million new shares

Carrefour would be fully consolidated by WM then WM would have to consolidate Carrefour existing
debt (9 bn $)

The implied gearing ratio is acceptable for the banks (39% vs a target 100% ratio)
Fixed assets
GW
WCR
Total employed
Equity group share
Minority interests
Provisions
Net debt
Total capital invested
Gearing
WM
$
104 066
0
3 361
_____
107 427
Carrefour
€
30 622
0
-9 391
_____
21 231
Carrefour
$
39 438
0
-12 095
_____
27 344
71 837
0
0
35 590
_____
107 427
11 762
1 302
1 328
6 839
_____
21 231
15 148
1 677
1 710
8 808
_____
27 344
50%
52%
52%
Acquisition Restatements
$
$
15 148
-15 148
23 981
_____
39 130
_____
-15 148
39 130
-15 148
0
_____
39 130
_____
-15 148
Conso
$
143 504
23 981
-8 734
_____
158 752
110 967
1 677
1 710
44 398
_____
158 752
39%
Share offer
- EPS accretion/dilution

Assuming a 100% shareholding in Carrefour (following a tender offer and a squeeze out), WM would consolidate 100%
of Carrefour’s net profit

The following table presents the sensitivity of the EPS accretion/dilution rate to the premium offered
0%
3%

10%
2%
20%
30%
1%
40%
0%
-2%
50%
-3%
Whatever the premium on Carrefour above 30%, the share offer is dilutive from an EPS point of view because the
implicit PER of the target (Carrefour: 16.3) is equal or higher than the PER of the buyer (WM: 15.7)
Mix offer
- Balance sheet impacts

It is possible to offer a 50% premium assuming a mix offer which would
be 60%-80% paid in cash
Sensitivity of the gearing ratio
% paid in cash
39%
0%
10%
0%
43%
42%
20%
52%
51%
40%
62%
62%
60%
73%
74%
80%
86%
88%
100%
101%
105%
Premium
20%
30%
40%
39%
50%
50%
62%
62%
75%
76%
91%
93%
110%
114%
Sensitivity of the interest cover ratio
% paid in cash
1061%
0%
10%
0%
10,6
10,6
20%
9,4
9,2
40%
8,4
8,2
60%
7,6
7,3
80%
6,9
6,7
100%
6,3
6,1
Premium
20%
30%
10,6
10,6
9,1
9,0
8,0
7,9
7,1
7,0
6,4
6,2
5,9
5,7
40%
38%
49%
62%
77%
95%
118%
40%
10,6
8,9
7,7
6,8
6,0
5,5
50%
37%
49%
62%
78%
98%
122%
Sensitivity of the debt cover ratio
% paid in cash
118%
0%
10%
0%
1,2
1,2
20%
1,3
1,4
40%
1,5
1,5
60%
1,7
1,7
80%
1,8
1,9
100%
2,0
2,1
50%
10,6
8,8
7,6
6,6
5,9
5,3
Sensitivity of the EPS accretion/dilution
% paid in cash
0%
0%
10%
0%
3%
2%
20%
4%
3%
40%
5%
4%
60%
6%
5%
80%
7%
7%
100%
9%
8%
20%
20%
Premium
30%
1,2
1,2
1,4
1,4
1,6
1,6
1,8
1,8
1,9
2,0
2,1
2,2
Premium
30%
1%
0%
2%
1%
3%
2%
4%
3%
6%
5%
7%
6%
40%
1,2
1,4
1,6
1,9
2,1
2,3
50%
1,2
1,4
1,7
1,9
2,1
2,4
-2%
0%
1%
2%
4%
5%
50%
-3%
-1%
0%
1%
3%
4%
40%