Comparables Analysis, Precedent Transactions
Wednesday November 5, 2014
In partnership with:
Hank Xu
FIG Portfolio Manager
This presentation is for informational purposes only, and is not an offer to buy or sell or a
solicitation to buy or sell any securities, investment products or other financial product or service,
an official confirmation of any transaction, or an official statement of Limestone Capital Investment
Club. Any views or opinions presented are solely those of the author and do not necessarily
represent those of Limestone Capital.
Session Instructors
MICHAEL KARP
Student Advisor
B.COMM / B.COMP. CISC 2015
Industry Experience
 Canaccord Genuity, Investment Banking
(Full time 2015, summer 2014)
 National Bank Financial, Investment Banking
(Summer 2013)
 BluMont Capital (Summer 2012)
HANK XU
RILEY WEBB
FIG Portfolio Manager
B.COMM 2015
Energy Portfolio Manager
B.COMM 2015
Industry Experience
 Credit Suisse, Investment Banking (Full time
2015, summer 2014)
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Industry Experience
 TD Securities, Investment Banking (Full time
2015)
I. Recap of EV and Multiples
Enterprise Value
How is Enterprise Value Calculated?

Two ways to think about Enterprise Value (EV)
• Value of the firm entire capital structure / “value of the firm’s assets”: both debt and equity
• Theoretical takeover price (no control premium)
Enterprise Value = Market Cap. + Preferred Equity + Minority Interest + Debt - Cash
Why do we use Enterprise Value?
Enterprise Value
Equity
Preferred Shares

Net Debt
Minority Interest


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Market cap. only measures the equity value
• Ignores the rest of the capital structure
Enterprise value represents the value of the firm to both
debt and equity holders
• The market value of all capital invested in the
business
Multiples using EV are more “comparable”
Multiples
What are multiples?


How long before I get my money back?
When we buy stock, we are paying to “own” a piece of a
company’s cash flows
• Although we don’t receive the cash, market price
should adjust to reflect changes in expectations of
these projected cash flows
Multiples: how much the market is valuing a company
relative to the value stakeholders are receiving, e.g. how
much cash that company is generating

Equity Multiples




Assume price to earnings ratio of 5
• Paying $5 for $1 of earnings
• 5 years before those earnings add up to original
price paid
Enterprise Multiples

Price / Earnings: how much are shareholders paying for
$1 of earnings?
Price / Book: how much are shareholders paying for $1 of
equity book value?
• Book represents book value of equity per share
Price / Tangible Book Value
• Tangible Book Value does not include intangible
assets like patents and Goodwill
Price / Cash Flow
• Operating cash flow per share


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Enterprise Value (EV) / EBITDA: how much are
stakeholders (both bondholders and shareholders) paying
for $1 of EBITDA generation?
EV / EBIT
EV / Revenue
II. Comparable Companies Analysis
Comparable Companies Analysis
Overview
What is comparable
Overview
companies analysis?



Looking at similar companies and seeing how they are
valued on a multiples basis
• Common multiples include EV / EBITDA, EV /
Revenue, P / B
Taking the average (median) multiple
• e.g. 6.0x EV / EBITDA
Apply to target company’s metric to get implied valuation
• Target company’s EBITDA is $5 mm
• 6.0 x $5 mm = $30 mm  implied enterprise value
Valuing a House




Issues

Similar to valuing a house
Look at how much surrounding houses are worth relative
to square feet (or other metric)
Find median price-to-square feet multiple
Apply this multiple to number of square feet in target
house to get implied valuation


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Are mansions comparable to a shack?
• Size must be comparable
What other features might affect how much houses are
worth?
• Number of garage doors?
• Number of bedrooms? Bathrooms?
• Furnished?
Should price-to-square-feet be the only multiple?
Comparable Companies Analysis
Process
Step 2: “Spread Comps”
Step 1: Selecting the Universe



Operational Characteristics
• Industry
• Products
• Business Segments – is this a pure play?
• Location – different tax codes
• Listing Market – U.S.? Canada? Shanghai?
• Cyclicality
• Customers
• Distribution channels
Financial Characteristics
• Size (Market Capitalization / EV)
• Leverage (Debt)
• Projected growth
• Risk profile
• Shareholder base

Process of pulling comparable company data, from
sources such as
• Bloomberg
• Capital IQ
• U.S. Companies: 10-K, 10-Q, MD&A
• Canadian Companies: Annual / Quarterly Reports,
MD&A, AIF
• Oil & Gas Companies: NI 43-101
• Mining Companies: NI 51-101
• Financial Institutions: OSFI website
Issues with quick & dirty sources (Bloomberg & CapIQ)
• EV calculation almost always “wrong”
Step 3: Establishing the Multiple Range
Step 4: Finding Implied Value
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Comparable Companies Analysis
Sample Output – Morguard North American Residential REIT
Price /
Company
Unit Price
Market Cap
EV
LTM FFO
Boardwalk REIT
$59.41
CAP REIT
$2,844.1
$5,225.0
17.8x
18.8x
17.9x
19.9x
$21.67
$2,232.4
$4,748.0
15.0x
13.8x
13.4x
InterRent REIT
$5.94
$339.5
$689.0
20.2x
16.2x
Milestone REIT
$9.70
$357.4
$1,173.3
nmf
Pure Multi-Family
$4.50
$108.4
$259.0
True North REIT
$8.56
$158.5
$481.9
Average
Morguard NA Res
•
•
$9.23
$270.2
$1,380.7
FY1 FFO
FY2 FFO
LTM AFFO
FY1 AFFO
FY2 AFFO
NAV
20.9x
19.9x
0.90x
69.2%
5.4%
15.9x
15.7x
15.2x
0.85x
80.4%
5.3%
13.8x
23.4x
19.0x
15.9x
1.03x
60.7%
5.4%
10.8x
9.7x
nmf
14.5x
12.3x
0.88x
87.8%
6.6%
22.0x
10.8x
9.0x
23.9x
12.7x
10.5x
0.86x
107.1%
6.5%
15.2x
11.7x
10.6x
16.5x
13.3x
12.2x
0.93x
109.2%
5.9%
18.0x
13.7x
12.4x
19.9x
16.0x
14.3x
0.91x
85.7%
5.9%
10.9x
12.3x
10.5x
11.7x
13.6x
0.80x
88.2%
6.0%
11.5x
Why is the company that we are trying to analyze, not included in the comps set average?
Why does it say nmf?
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FY1 AFFO Payout
Implied Cap Rate
Comparable Companies Analysis
Establishing the Multiple Range
Closest
Comparable A
4.0x
Low
Closest
Comparable A
5.0x
6.5x
Median
Mean
Selected Multiple Range
Note: This example is unrelated to the Morguard example
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Closest
Comparable C
6.0x
7.0x
High
Comparable Companies Analysis
Implied Valuation
Price /
Company
Unit Price
Market Cap
EV
LTM FFO
Boardwalk REIT
$59.41
CAP REIT
$2,844.1
$5,225.0
17.8x
18.8x
17.9x
19.9x
$21.67
$2,232.4
$4,748.0
15.0x
13.8x
13.4x
InterRent REIT
$5.94
$339.5
$689.0
20.2x
16.2x
Milestone REIT
$9.70
$357.4
$1,173.3
nmf
Pure Multi-Family
$4.50
$108.4
$259.0
True North REIT
$8.56
$158.5
$481.9
Average
Morguard NA Res
•
•
$9.23
$270.2
$1,380.7
FY2 AFFO
NAV
20.9x
19.9x
0.90x
69.2%
5.4%
15.9x
15.7x
15.2x
0.85x
80.4%
5.3%
13.8x
23.4x
19.0x
15.9x
1.03x
60.7%
5.4%
10.8x
9.7x
nmf
14.5x
12.3x
0.88x
87.8%
6.6%
22.0x
10.8x
9.0x
23.9x
12.7x
10.5x
0.86x
107.1%
6.5%
15.2x
11.7x
10.6x
16.5x
13.3x
12.2x
0.93x
109.2%
5.9%
18.0x
13.7x
12.4x
19.9x
16.0x
14.3x
0.91x
85.7%
5.9%
10.9x
12.3x
10.5x
11.7x
13.6x
0.80x
88.2%
6.0%
Finding an implied value
• Take median multiple (e.g. EV / LTM
Sales, EV / ‘13E EBITDA)
• Multiply with BestBuy’s
corresponding metric (e.g. LTM
Sales, ’13E EBITDA)
• Valuation typically presented in a
range (low & high)
• “Low” does not mean taking
the minimum
How would I find an implied valuation
from an EV multiple?
FY1 FFO
FY2 FFO
LTM AFFO
FY1 AFFO
11.5x
FY1 AFFO Payout
Multiple
Implied Cap Rate
Price/ Share
Low
Mean
High
Metric
Low
Mean
High
P / LTM FFO
15.0x
18.0x
22.0x
$0.85
$12.69
$15.28
$18.63
P / FY1 FFO
10.8x
13.7x
18.8x
$0.76
$8.18
$10.39
$14.26
P / FY2 FFO
9.0x
12.4x
17.9x
$0.90
$8.16
$11.21
$16.13
P / LTM AFFO
15.9x
19.9x
23.9x
$0.79
$12.55
$15.71
$18.87
P / FY1 AFFO
12.7x
16.0x
19.9x
$0.63
$8.03
$10.09
$12.51
P / FY2 AFFO
10.5x
14.3x
19.9x
$0.75
$7.89
$10.76
$14.89
0.8x
0.91x
1.0x
$11.50
$9.73
$10.43
$11.88
$9.60
$11.98
$15.31
P / NAV
Avg. Implied Share Price
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Comparable Companies Analysis
Industry Specific Multiples
Natural Resources
EV / EBITDAR


Consumers / Retail


EV / Researchers or Scientists
Healthcare / Pharma / Biotech
Energy
Financial Institutions
Metals & Mining
Real Estate
Technology, Media, Telecom
EV / mboe / d (production)
EV / 2P Reserves
P / NAV
P / DACF
Price to Book
P / Tangible Book
EV / AUM




FIG & Real Estate


EV / tonnes / d (production)
EV / Reserves
P / NAV
P / FFO
P / AFFO
P / NAV
EV / tonnes / d (production)
EV / Reserves
P / NAV
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P / NAV: used in mining and energy
NAV is a DCF on each of a company’s
assets, using a different discount rate
for each project
EV / Production
Measured in BOE / day (barrels of oil
equivalent) or Tonnes / day (metric
tons)
EV / Reserves
EV / Proven Reserves (1P)
EV / Proven + Probable (2P)
1P  90%, 2P  50%, 3P  10%


P / B and P / E for banks
EV / AUM for asset management firms
• AUM = Assets Under
Management
P / FFO for REITs
• FFO = Funds from Operations
• Net Income + D&A
P / AFFO
• AFFO = Adjusted Funds from
Ops
• Net Income + Rent Increases +
Certain CAPEX Items
III. Precedent Transactions
Precedent Transactions
Similar to comparables analysis, but focused on transactions






Comparable transaction analysis - looks at historical transactions
Similar multiples, but EV is based on EV paid as opposed to market-implied EV
• EV Paid / EBITDA, EV Paid / Revenue
Valuation derived from precedents will typically be higher than comparables and DCF because of control premium
Control premium:
• Synergies
• Ability to control timing of cash flows
• Ability to change management, improve business
Valuing a House Example: Precedents are similar to valuing your house based on how much surrounding houses were
bought for on a price-to-square-feet basis
Many more screening criteria and qualitative factors to analyze, including:
• Time of deal announcement / closing
 A transaction pre-2008 is not comparable to a transaction post-crisis
 Private equity firms were willing to pay much higher premia back then as credit markets were loose and more liquid
• Type of acquirer
 A strategic buyer is able to pay a much higher premium due to ability to realize perceived synergies post-acquisitions, as opposed to a
private equity firm / financial buyer, which cannot
• Transaction type
 Friendly? Hostile?
 Was acquirer public or private? Was target public or private?
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Precedent Transactions
Sample Output
Enterprise Value /
Date
Announced
Acquirer Target
03/11/2010
30/10/2010
22/06/2010
15/04/2010
01/10/2009
A
B
C
D
E
K
L
M
N
O
01/07/2009
06/07/2008
F
G
P
Q
09/11/2008
H
R
21/06/2008
I
S
20/03/2007
J
T
Transaction
Type
Public / Public
Public / Public
Public / Private
Public / Public
Sponsor /
Private
Public / Public
Sponsor /
Public
Sponsor /
Public
Sponsor /
Public
Public / Private
Purchase
Equity Enterprise LTM
LTM
LTM
Consideration Value
Value
Sales EBITDA EBIT
LTM
EBITDA
Margin
Equity Value /
Premiums Paid
LTM
Days Prior to Unaffected
Net Income
1
7
30
Cash
Cash / Stock
Cash
Stock
Cash
$1,600
900
600
1,300
200
$1,900
1,200
800
1,350
250
1.5x
1.2x
1.1x
1.6x
1.3x
8.0x
7.6x
7.1x
8.5x
7.7x
9.1x
8.7x
8.1x
12.5x
9.2x
18%
16%
15%
19%
17%
13.6x
13.9x
12.0x
14.4x
13.3x
30%
29%
NA
29%
NA
27%
32%
NA
36%
NA
33%
31%
NA
34%
NA
Stock
Cash
2,800
1,600
3,000
2,000
1.4x
1.2x
8.0x
7.5x
10.7x
9.3x
18%
15%
17.7x
12.4x
33%
38%
31%
42%
36%
43%
Cash
900
950
1.2x
7.3x
8.3x
16%
13.1x
34%
35%
36%
Cash
1,300
1,800
1.0x
7.2x
8.3x
13%
16.0x
35%
37%
39%
Cash
370
600
0.9x
6.5x
8.1x
14%
10.6x
NA
NA
NA
Mean
Median
1.2x
1.2x
7.5x
7.5x
9.2x
8.9x
16%
16%
13.7x
13.4x
33%
33%
34%
35%
36%
36%
High
Low
1.6x
0.9x
8.5x
6.5x
12.5x
8.1x
19%
13%
17.7x
10.6x
38%
29%
42%
27%
43%
31%
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Precedent Transactions
Advantages & Disadvantages
Advantages



Advantages

Market-based
• Based on actual acquisition multiples paid for
comparable companies
• Recent transactions reflect current market trends,
economic conditions, etc.
Simple to use
• Recent, key transactions provide a benchmark
acquisition multiples
Objective
• Based on actual acquisitions, does not make
assumptions about the future



15
Time lag
• Markets could be very different during the time the
acquisition took place
Lack of comparable acquisitions
• May be difficult to find recent acquisitions with
similar deal terms, line of business, financial ratios,
scale, context, etc.
Information could be hard to find
• Private and / or small transactions sometimes have
very little data
Each acquisition is unique
• Different deal terms
• Different motivations, plans to turn around business
• Different synergies to be realized
Next Session
Questions?
See you tomorrow at 8:00PM in GDS 120 for
the session on DCF modelling
The slides from today’s session can be found at
limestonecapital.ca under the Education tab
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