Mergers, Acquisitions &
Company Valuation
Approaches & Application
COM 240
March, 2014
Presented By: Jordan Anderson, CFA
Agenda
A primer on mergers, acquisitions and company valuation
Section I
� Institutional Asset Management: ‘Day-in-the-life-of’ a Finance Professional
Section II
� Intro to Mergers and Acquisitions (M&A)
Section III
� Valuation - Laying the Groundwork
Section IV
� Comparable Company Trading Multiples
Section V
� Precedent Transaction Multiples
Section VI
� Discounted Cash Flow
Section VII
� Other Approaches to Value and Conclusions
1
Institutional Asset Management: ‘Day-inthe-life-of’ a Finance Professional
SECTION I
Day-in-the-life-of A Finance Professional
� Introduction & background
� What is “Institutional Portfolio Management”?
� What does a Portfolio Manager do?
� Asset purchases
� Asset management
� Asset sales
� How applicable are the concepts covered in COM 240 in ‘real world’ finance?
� Cash budgets
� Break even analysis
� Time value of money
� Sources of capital (debt and equity)
� Impact of leverage
� Derivatives
� Valuation techniques
� Valuation tools (ie: MS Excel)
� Other business skills (accounting, economics, organizational behavior, marketing, etc.)
Finance jobs rely heavily on financial acumen, deal sense, and interpersonal skills
3
Intro to Mergers and Acquisition
SECTION II
M&A Overview
M&A involves a buyer and seller of a business, but both parties do not need to be willing
� Mergers and/or acquisitions is defined as the consolidation of two going concern businesses
� Merger is the combination of two companies to form a new company
� Acquisition if the purchase (take over) of one company by another
� Rationale for mergers
� Synergies
� Economies of scale
� Diversification
� Increase supply chain pricing power
� Reduce competition
� CEO empire building
Two Playing Fields
Public Market
5
Private Market
Two Teams
Buy Side
Sell Side
Two Play Books
Friendly
Hostile
Global and North American M&A Activity
Global M&A Volume (2000 – 2013)
(US$Bn)
4,623
� Global M&A volumes have been relatively
flat since the global financial crisis
3,914
3,336
3,173
2,953
� Approximately 2.8 trillion of enterprise value
changes hands each year globally
� North America accounts for 1.3 trillion
of that amount
� Canada is a very small
proportion of the North American
M&A market
2,722 2,775 2,728 2,815
2,302
2,065
1,750
1,318 1,456
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(1)
2013
North American M&A Volume (2000 – 2013)
(US$Bn)
1,730
1,697
1,780
1,281
1,276
1,114
910
871
519
2000
2001
2002
906
1,000
1,100 1,129
608
2003
2004
2005
2006
US
2007
2008
Canada
Global M&A volumes increased slightly in 2013 compared to 2012
6 Source: Dealogic M&A Analytics, Thomson Reuters – Mergers and Acquisitions Review, Merger Market – The Future of M&A in the Americas,
Allen and Overy – M&A Index, Q3 2013
(1) 2013 Q3 Annualized
2009
2010
2011
2012
(1)
2013
M&A Disciplines and Tactics
Effective M&A requires coordinated effort amongst various constituents of a deal team
Financial
Strategic
Financial Advisor
� Valuation
discrepancies
� Synergies
� Accretion / dilution
Corporate Management
� Industrial logic
� Growth and market
scale
� Cost synergies
� Vertical integration
Accountants
Tactical
Legal
Financial Advisor /
Legal
Legal Counsel
� Tactics and strategies
� Economic
� Market practice
� Game theory
� Regulatory
restrictions
� Diversification
� Accounting for
business
combinations
Due Diligence / Other
�
�
�
�
7
PR / lobbying
Technical Due Diligence (environmental, market, engineering)
HR / Labour Consultants
Integration Consultants
� Corporate law /
Directors’ duties
� Regulatory
environment
� Competition law /
National Interest
policies
Valuation – Laying the Groundwork
SECTION III
Introduction – Why Value a Business?
� Valuations are undertaken in a variety of scenarios, as outlined below
Valuation Scenarios
Key Consideration
Public Equity Offerings
How much is a company or division worth in the public markets?
Debt Offering
What is the available cash flows for debt service and related default risk plus assessment of recovery?
Acquisitions
How much is the target company worth and what is the value of the potential synergies if realized?
Divestitures
How much can a company or division be sold for?
Public Defense
On what basis does a proposed acquisition not fully value a target company?
Fairness Opinions
Is the price offered for a company or division fair from a financial point of view?
Research
Should the firm’s clients buy, hold or sell positions in a particular security?
� Ultimately, the market will determine the value of a company – investment banks try to determine how the value being
assigned in the market relates to the underlying company value
� Company valuation can be accomplished through a number of complimentary methodologies, as outlined in this
presentation
Valuation is a frequent and important exercise
9
Laying the Groundwork – Common Approaches to Value
Discounted Cash Flow
� Forecasting of
future free cash
flows, discounting
at appropriate
discount rate
Comparable
Company
Trading Multiples
�
Public Market Valuations
P/E, EV/EBITDA,
P/NAV, P/CFPS
are common
Precedent
Transaction
Multiples
Approaches
Approaches
to Value
to Value
�
Benchmarking
of a company to
its publicly-traded
peers using
trading multiples
�
Private Market Valuations
�
Benchmarking
of a company
using multiples
implied by
relevant
transactions
Similar multiples
to trading
multiples are
employed
Approaches
to Value
Three approaches are often cited, though two can be broadly classified as multiple analyses;
DCF is the most intensive, and is reserved for situations requiring the greatest diligence
10
Laying the Groundwork – Valuation Terms
Equity Value
� Value of the shareholders’ interest in a company
� Other terms include: market capitalization, market value, offer value (in an acquisition context)
Enterprise Value (“EV”)
� Value of all stakeholders’ interests in a company
� Includes all forms of capital, including equity, debt (net of cash), preferred stock, convertible stock, minority
interest, etc.
� Other terms include: firm value, aggregate value, total enterprise value (“TEV”)
EBITDA
� Acronym for ‘earnings before interest, taxes, depreciation & amortization’
� Provides a simple proxy for operating cash flow attributable to the entire enterprise
� Removes effects of capital structure, taxes, capital spending, and minority interest
Earnings
Approaches
to Value
� Reflects income attributable to shareholders of a company
� Provides a measure of profitability on a net basis, after account for the effects of capital structure, taxes, and
capital spending
� Also referred to as net income, or EPS if expressed on a per share basis
Multiples
11
� Provides a measure of valuation in relation to an underlying financial or operating metric
� Common multiples include P/E, EV/EBITDA, P/NAV, P/CFPS, though other industry-specific multiples exist
� Allows for relative comparisons between similar publicly-traded companies and/or similar transactions
Comparable Company Trading Multiples
SECTION IV
Steps to Trading Comps
Step 1
�
Determine a peer group
(or ‘comp set’)
Step 6
Step 2
�
�
Apply appropriate multiple
range to forecast metrics
to arrive at an implied
valuation range
Gather appropriate
financial information
Steps to
Trading Comps
Step 5
Step 3
�
�
Forecast subject
company’s financial and
operating performance
(using analyst forecasts,
management forecasts,
or proprietary model)
Input financial and
operating details into
Excel (adjusting for
anomalies and
one-time items)
Step 4
�
Calculate relevant
historical and forward
multiples (forward
multiples typically based
on analyst forecasts)
Trading comparables are often the most frequently conducted valuation exercise, as they
demonstrate the value public market investors would attribute to similar companies
13
Defining a Comp Set and Gathering Data
� Companies are typically defined to be ‘comparable’ either in terms of operations or in terms of financial comparability
� Companies are operationally comparable if they operate in the same or similar business segments, focus on similar
geographies, employ similar supply/distribution/marketing strategies, etc.
� Companies are financially comparable if they have similar financial metrics, such as market capitalization, enterprise
value, sales, EBITDA, EPS, etc.
� Other factors include comparative growth rates, margins, taxes and location of operations
� Very few ‘perfect’ comparables will ever exist for a given company
� Often identifying comparables is more of an art than a science
� However, while no two companies will be exactly comparable based on all the metrics above, differences in these
operational or financial characteristics can be used to explain differences in market valuations
� A more selective and focused peer group will be superior to a broader, unselective group
� Some companies will have very few publicly-traded comparables, in which case a higher degree of subjectivity (and often
creativity) will be required, and more emphasis would be placed on alternative valuation methodologies
� Financial and operating metrics for comparable companies will almost always come from public disclosure (quarterly and
annual financial statements and MD&A)
� Normalizing profitability metrics, such as EPS and EBITDA, is important so as to remove the confounding effects of any onetime items that would corrupt associated multiples
� Transactions or corporate events that occur subsequent to a reporting date (such as major asset divestures or purchases,
equity raises, debt issuances, etc.) must be pro-forma’d as the market will immediately reprice the company’s shares to
reflect the development
Defining an appropriate ‘comp set’ is a subjective process,
and considers both operational and financial comparability
14
Which is the Relevant Multiple?
� We use trading multiples to allow for relative comparisons between similar publicly-traded companies
� The relevant trading multiples will vary by industry
� Certain multiples that are the foundation of analysis in a given industry may be irrelevant in another
Senior Mining
Financial
Operational
Retail
Timberlands
Technology
P/CFPS & P/NAV
P/E & EV/EBITDA
EV/EBITDA
P/Revenue
EV / oz.
EV / sq. ft. Retail
EV/Acre
EV/Pg. View & EV/User
While P/E and EV/EBITDA are typically the most quoted multiples,
the most appropriate multiple to consider varies by industry
15
Example Comp Set
Paper & Forest Product Comparables
(in C$ millions, unless noted)
Building Materials
Weyerhaeuser
Sino-Forest
West Fraser
Canfor Corp.
Norbord
Louisiana-Pacific
TimberWest
Ainsworth
Western Forest Products
Interfor
Acadian Timber
Share
Price (1)
$39.37
$14.05
$26.92
$5.79
$0.99
$4.69
$3.86
$1.00
$0.24
$2.60
$8.15
Market
Cap. (1)
$8,321
$3,119
$1,154
$826
$428
$490
$300
$100
$112
$123
$135
Net
Debt
Enterprise
Value (1)
$4,717
$126
$589
$303
$564
$395
$292
$507
$153
$163
$68
$12,808
$3,245
$1,743
$1,392
$991
$685
$592
$607
$265
$285
$203
Average
Pulp
Mercer International
Tembec
Canfor Pulp Income Fund
SFK Pulp Fund
$0.59
$0.55
$3.01
$0.22
$26
$55
$215
$20
$1,309
$462
$154
$206
$1,335
$500
$369
$226
Average
Paper & Packaging
Domtar
Cascades
Fraser Papers
$21.26
$5.43
n/a
$883
$535
n/a
$2,343
$1,805
$86
$3,226
$2,340
$86
Average
Newsprint
AbitibiBowater
Catalyst Paper
$0.16
$0.18
$9
$69
$6,386
$897
Average
Total Average
Total Average (Excl. High & Low)
Notes:
(1) Based on share prices as of July 30, 2009 and diluted shares outstanding (treasury stock method)
(2) Based on research analyst consensus estimates
(3) Total Cap. = Net Debt + Preferred Shares + Minority Interests + Book Value Equity
(4) Market Value of Equity
16
$6,545
$966
(2)
2008A
EV / EBITDA
2009E
(2)
2010E
2008A
Net Debt / EBITDA
2009E
2010E
Price /
Book
EV
Net Debt /
Equity(4)
Cap. (3)
1.7
1.5
0.6
0.6
1.1
0.4
0.4
0.6
0.3
0.3
1.1
x
x
x
x
x
x
x
x
x
x
x
36.8%
3.9%
33.8%
21.8%
56.9%
57.7%
49.3%
83.5%
57.7%
57.1%
33.6%
56.7%
4.0%
51.1%
36.7%
131.8%
80.5%
97.1%
nmf
136.3%
132.9%
50.6%
48.4%
5.6%
23.8%
15.1%
58.4%
23.1%
30.1%
74.7%
31.9%
30.6%
34.9%
neg
5.0 x
13.6 x
20.9 x
neg
neg
neg
neg
neg
23.4 x
12.2 x
nmf
3.8 x
neg
neg
neg
neg
nmf
nmf
n/a
neg
10.9 x
20.3 x
2.9 x
11.3 x
14.0 x
13.6 x
22.9 x
16.1 x
26.4 x
n/a
12.1 x
10.0 x
neg
0.2 x
4.6 x
4.6 x
neg
neg
neg
neg
neg
13.3 x
4.1 x
nmf
0.1 x
neg
neg
neg
neg
nmf
nmf
n/a
neg
3.7 x
7.5 x
0.1 x
3.8 x
3.0 x
7.7 x
13.2 x
7.9 x
22.0 x
n/a
6.9 x
3.4 x
15.0 x
7.3 x
15.0 x
5.4 x
1.9 x
7.6 x
0.8 x
44.7%
77.8%
34.2%
12.3 x
29.0 x
3.2 x
4.8 x
nmf
neg
14.1 x
neg
9.8 x
neg
5.2 x
10.1 x
12.1 x
26.8 x
1.3 x
4.4 x
30.0 x
neg
5.9 x
neg
9.7 x
neg
2.2 x
9.2 x
0.1
0.2
0.4
0.0
x
x
x
x
98.0%
92.4%
41.8%
91.2%
nmf
nmf
71.9%
nmf
87.8%
58.4%
23.3%
28.8%
12.3 x
14.1 x
8.4 x
11.1 x
18.0 x
7.0 x
0.2 x
80.9%
71.9%
49.6%
3.8 x
7.7 x
neg
8.0 x
6.2 x
neg
5.9 x
6.3 x
neg
2.7 x
5.9 x
neg
5.8 x
4.8 x
neg
4.3 x
4.8 x
neg
0.4 x
0.4 x
n/a
72.6%
77.1%
100.0%
nmf
nmf
n/a
50.6%
58.3%
22.5%
5.7 x
7.1 x
6.1 x
4.3 x
5.3 x
4.6 x
0.4 x
83.3%
n/a
43.8%
11.0 x
5.1 x
9.8 x
5.8 x
7.8 x
4.6 x
10.7 x
4.7 x
9.6 x
5.4 x
7.6 x
4.2 x
neg
0.1 x
97.6%
92.9%
nmf
nmf
nmf
50.1%
8.1 x
7.8 x
6.2 x
7.7 x
7.5 x
5.9 x
0.1 x
95.2%
n/a
50.1%
11.7 x
10.9 x
8.4 x
8.1 x
11.7 x
11.3 x
7.3 x
6.2 x
8.2 x
5.9 x
6.9 x
6.4 x
0.6 x
0.5 x
62.8%
64.0%
77.2%
78.8%
39.8%
39.0%
Precedent Transaction Multiples
SECTION V
Steps to Precedent Transactions
Step 1
�
Determine an appropriate
list of transactions
Step 6
Step 2
�
�
Apply appropriate multiple
range to subject company
metrics to arrive at an
implied valuation range
Gather appropriate
financial information
Steps to
Precedent
Transactions
Step 5
�
Step 3
�
Input subject company’s
comparable financial and
operational performance
(using analyst forecasts,
management forecasts,
or proprietary model)
Input financial and
operational details into
Excel (i.e. equity bid
value and implied
enterprise value),
normalizing for nonrecurring items
Step 4
�
Calculate relevant historical
and then-forward multiples
(forward multiples typically
based on then-current analyst
forecasts)
Precedent transaction analysis is a key valuation methodology in an M&A process
18
Defining a Transaction List
� Similar to defining a comp set, the process of selecting a list of relevant transactions is somewhat subjective
� Ideally, the characteristics of a relevant transactions will all be broadly comparable to circumstances of the subject
company
� Like trading comparables, operational and financial comparability should be considered
� Furthermore, it is important to understand the nature and underlying details of each transaction so as to understand any
differences in valuation
� i.e. premiums paid, type of acquisition, the then-current market and industry environment
� The number of comparable transactions will vary depending on relevance and availability
Defining a list of relevant transactions is subjective and requires
a strong understanding of each transaction’s unique characteristics
19
Comparison to Trading Multiples
� While the concepts of ‘equity value’ and ‘enterprise value’ still exist in an acquisition context, they have slightly different
meanings than in a trading multiple context
� In a transactional context, they represent the consideration paid to equityholders and the implied bid value on an
enterprise value basis, respectively
� We calculate the equity bid value as follows:
Equity Bid Value = Total Shares Outstanding (Fully Diluted) x Offer Price / Share – Option Proceeds
� Similar to in a trading multiple context, this value reflects equity value, but at a bid price instead of at the market trading
price; it also considers the effect of the exercise of options on a change-of-control (shares outstanding will also reflect the
option exercise)
� Enterprise value, in this context, employs the equity bid value rather than standard market capitalization, and is then referred
to as the total transaction value
� Debt may require adjustment for change of control puts (at a premium to face value)
� Relevant multiples to employ vary by industry in a similar manner to trading comps
� Comparable transactions may ‘go stale’ over time; however, usually a number of years of relevant transactions will be
considered (for example, to consider the range of values ascribed over an industry cycle)
� Precedent transaction multiples will, by definition, be higher as they have a control premium implicit
Metrics are principally the same as with trading multiples,
but are tailored to adjust for transactional effects
20
Example Precedent Transactions
Heavy Equipment Precedents
Ann.
Enterprise
Date
27-Feb-07
06-Oct-06
18-Jul-06
24-May-06
28-Mar-06
20-Dec-05
07-Apr-05
08-Jul-03
18-Dec-02
28-Nov-02
29-Aug-02
19-Jul-02
17-May-02
18-Mar-02
01-Jan-02
27-Jun-01
20-Apr-01
29-Nov-00
28-Jun-99
16-Jun-98
18-Feb-98
07-May-96
Acquiror
AB Volvo
Ripplewood Holdings / Oak Hill Cap.
Sunbelt Rentals Inc
Diamond Castle Holdings
Wolseley plc
Allis-Chalmers Energy Inc
Odyssey Investment Partners
JLG Industries
Rent-A-Center
Finning International
Ramirent OY
Terex Corp
Terex Corp
Manitowoc Co
National Equipment Services
Terex Corp.
Toromont Industries Ltd
Finning International
Atlas Copco AB
United Rentals Inc.
Volvo Construction Equipment
Lucas Industries
Average
Average excluding high and low
Median
21
Target / Description
Ingersoll-Rand - Road Paving Assets
Atlas Copco - Rental Business
Nationsrent Companies, Inc.
NES Rentals Holdings Inc
Brandon Hire plc
Specialty Rentals Tools, Inc.
Neff Corp
OmniQuip business unit of Textron
295 Rent-Way stores
Three South American Caterpillar dealerships
Bautas of Veidekke AS
Genie Holdings Inc
Demag Mobile Cranes
Grove Worldwide
Brambles equipment rental business in N.A.
CMI Corp
Powell Equipment Ltd.
Hewden-Stuart Plc
Rental Services Corp.
U.S. Rentals Inc.
Samsung Heavy Industries (90%)
Varity
Value
$1,303
$3,799
$1,049
$815
$159
$82
$568
$100
$102
$64
$118
$436
$150
$271
$95
$175
$45
$568
$1,607
$876
$695
$2,061
Enterprise Value / LTM
Revenue
EBITDA
EBIT
Price /
EBITDA
EBIT
Book
Margin
Margin
1.5x
2.8x
1.4x
1.4x
1.5x
2.8x
2.0x
0.5x
0.8x
0.9x
1.2x
0.8x
0.4x
0.4x
n/a
0.8x
0.5x
1.5x
2.5x
2.1x
1.1x
0.9x
n/a
6.8x
5.2x
6.4x
7.1x
10.3x
5.3x
n/a
n/a
n/a
4.3x
10.7x
n/a
n/a
n/a
n/a
n/a
4.1x
6.8x
6.1x
n/a
8.1x
12.9x
n/a
13.8x
n/a
14.8x
18.1x
10.8x
n/a
n/a
n/a
n/a
39.3x
n/a
n/a
n/a
n/a
n/a
10.2x
14.0x
13.7x
n/a
12.5x
n/a
n/a
2.2x
4.5x
3.2x
3.7x
n/a
n/a
n/a
n/a
n/a
1.1x
n/a
1.0x
n/a
1.5x
n/a
1.4x
1.7x
2.8x
n/a
2.5x
n/a
42.0%
27.4%
21.5%
21.1%
27.0%
38.0%
n/a
n/a
n/a
27.0%
7.3%
n/a
n/a
n/a
n/a
n/a
36.8%
36.7%
34.0%
n/a
10.7%
11.7%
n/a
10.3%
n/a
10.1%
15.3%
18.9%
n/a
n/a
n/a
n/a
2.0%
n/a
n/a
n/a
n/a
n/a
14.7%
17.8%
15.0%
n/a
6.9%
1.3x
1.3x
1.2x
6.8x
6.6x
6.6x
16.0x
13.8x
13.8x
2.3x
2.2x
2.2x
27.4%
28.0%
27.2%
12.3%
12.7%
13.2%
Discounted Cash Flow
SECTION VI
“Intrinsic value can be defined simply: It is the discounted value of the
cash that can be taken out of a business during its remaining life.
The calculation of intrinsic value, though, is not so simple.”
Warren Buffett
23
What is Discounted Cash Flow?
� Discounted cash flow, or DCF, is the most in-depth and diligenced valuation methodology employed for large, cash flowing
businesses
� In most circumstances, trading comps and precedent transactions are often used as confirmatory measures for a DCF
approach (although trading comparables and precedent transactions may be employed as primary methodologies in
certain circumstances)
� DCF measures the inherent value of a firm by forecasting cash flows and valuing those cash flows today by employing a
discount rate
� It does not rely on comparable companies or transactions to arrive at a value estimate, and is accordingly much more
tailored than the prior approaches
� DCF can be considered on the basis of all capital providers to the firm (free cash flow to the firm or unlevered free cash flow)
or on the basis of strictly equity capital providers (free cash flow to equity or levered free cash flow)
� The latter can be derived from the former by removing the tax sheltered cost of the company’s debt
� Companies without near-term cash-flowing operations may be difficult to model
� Typically, valuators would be provided with a management forecast to work with as a foundation
� Inherent optimism within a management forecast is expected
Discounted cash flow is a pillar of company valuation
24
Steps to Discounted Cash Flow
Step 1
�
Forecast operating results
down to EBITDA and free
cash flow
Step 6
�
Step 2
�
Interpret results and
perform sensitivity
analysis / create and
adjust scenarios
Estimate terminal value
post-forecast period by
either a perpetuity
method (GRIP) or exit
multiple
Steps to
Discounted
Cash Flow
Step 5
Step 3
�
�
Determine range of
implied values
Calculate appropriate
discount rate
Step 4
�
Discount future cash flows
and terminal value to present
using the selected discount
rate
Forecasting the company’s operations often requires the highest level of diligence
25
Choosing a Discount Rate
� The Capital Asset Pricing Model is typically employed to arrive at an appropriate discount rate
� The cost of equity is used if discounting cash flows to equity
RE = RF + β x (RM – RF)
� A weighted average cost of capital (“WACC”) is used if discounting cash flows to the firm, and incorporates the after-tax
costs of debt and equity in appropriate proportions
WACC = wERE + (1-tC) x wDRD
� The risk-free rate is generally a benchmark government bond, such as Bank of Canada notes or LIBOR
� Betas are often acquired through third-party data sources such as Bloomberg
� As betas aren’t available for private companies, determining a discount rate for a private company can be more difficult
and usually requires analysis of the betas of comparable public companies
� The market risk premium (RM – RF) is widely debated (and can vary between arithmetic and geometric averages of historical
periods or forward projection) and is generally considered to be approximately 5% for North American markets; this is meant
to represent the historical average of the risk premium assigned to investing in the equity market versus the risk-free rate
� Choosing a discount rate often incorporates a level of subjectivity
� Current turmoil in the equity markets has made determining a risk premium difficult; this has made selecting a discount
rate an even more challenging endeavour
While grounded in finance theory, selecting an appropriate
discount rate is often difficult and is necessarily subjective
26
Example Discounted Cash Flow Model
Typical DCF Summary Output
CAGR
For the year ended December 31,
(C$000s)
EBITDA
EBITDA Margin (%)
Less: Other Taxes
Less: Unlevered Cash Taxes
Effective Cash Tax Rate
Less: Capital Expenditures
Capital Intensity
Add/(Less): Change in W / C
Free Cash Flow
Year End
Cash Flow Timing
Years from Valuation Date
Partial Year Adjustment
Discount Factor
Discounted Cash Flows
Summary
GRIP
Terminal Value
Cash Flow Timing
Years from Valuation Date
Discount Factor
2008E
26,956
6.8%
2009E
65,658
15.2%
2010E
68,314
15.6%
2011E
68,500
15.3%
(414)
0.0%
(3,265)
1.2%
(7,723)
15,554
(1,241)
0.0%
(10,125)
3.6%
(5,820)
48,472
(1,655)
0.0%
(8,700)
3.1%
(586)
57,373
31-Dec-08
01-Jul-08
0.501
1.000
0.949
14,761
31-Dec-09
01-Jul-09
1.503
1.000
0.855
41,436
31-Dec-10
01-Jul-10
2.503
1.000
0.770
44,185
EBITDA
302,382
299,556
31-Dec-12
4.504
6.005
31-Dec-12
5.005
2012E
53,985
12.3%
Terminal
59,911
13.2%
(2,068)
(3,525)
3.3%
(5,300)
1.8%
(2,827)
54,780
(2,482)
(2,658)
2.9%
(6,150)
2.2%
1,731
44,426
(2,482)
(19,471)
32.5%
(4,600)
1.6%
(3,120)
30,238
31-Dec-11
01-Jul-11
3.503
1.000
0.694
38,007
31-Dec-12
01-Jul-12
4.504
1.000
0.625
27,765
31-Dec-12
31-Dec-12
5.005
1.000
0.593
DCF Assumptions
Year End
31-Dec-07
Valuation Date
WACC
31-Dec-07
11.0%
0.625
0.593
Discounted Terminal Value
188,980
177,670
Growth in Perpetuity
Terminal Year EBITDA Mult.
1.0%
5.0x
Discounted Cash Flows
PV of Tax Shield
166,154
34,727
166,154
34,727
Net Debt (Q4 2007)
Currency Addition
-
Enterprise Value
389,862
378,552
-
Assumed Growth Rates After 2009E
Tax Shield
Terminal UCC
157,957
Tax Rate
32.5%
CCA Rate
23.0%
WACC
PV of Tax Shield
27
11.0%
34,727
EBITDA Grows at Target Margin of
Capital Intensity
13.0%
2.5%
Tax Rate in Perpetuity
35.0%
08E-10E
59.2%
08E-12E
19.0%
Other Approaches to Value & Conclusion
SECTION VII
What is Leveraged Buyout?
� A leveraged buyout (“LBO”) is an acquisition where the purchase price is financed through a combination of equity and debt,
and in which the cash flows or assets of the target are used to secure and repay the debt
� The debt effectively serves as a lever to increase returns, as debt usually has a lower cost of capital than the equity
� Many corporate transactions are partly funded with debt, but the term LBO is most often associated with acquisitions by
financial sponsors or private equity firms
� LBOs can also be referred to as management buyouts or “MBOs”
� Although financial sponsors often compete with corporates for acquisitions, they look at acquisitions differently leading to a
unique valuation approach called an LBO model or LBO valuation
� Financial sponsors can rarely achieve any synergies with an existing business
� Financial sponsors are not concerned with earnings or cash flow accretion / dilution
� Typically, private equity firms have an investment hold period of five to seven years before they look to exit the business
� Valuation in an LBO context is similar to DCF, but the focus is on forecasting free cash flow to equity (after interest
payments) and determining the levered internal rate of return (“IRR”)
� Businesses which are most often targeted for LBOs are businesses that generate stable, predictable cash flows in order to
service the debt and businesses which have been underperforming and can be turned around with operational
enhancements in a short period of time
� LBOs rarely occur in cyclical commodity industries like mining or oil & gas
Leveraged buyouts required a unique valuation approach
29
Other Approaches to Valuation & Conclusion
� Other approaches to valuation exist, but are often more
tailored to the unique circumstances of the subject
company
� For example, companies facing financial distress may be
valued on a liquidation basis, i.e. the realizable market
value of the company’s assets
� Also, companies with a high dividend may be valued
based on dividend yield
� Even with sophisticated methodologies, valuing a company
is challenging and is ultimately more of an art than a
science
� There is no ‘right answer’ – in most scenarios, a range of
values from a variety of approaches are presented in a
graph format to illustrate overlap
� Understanding the benefits and drawbacks of different
valuation approaches is as important as knowing how to
execute them
Sample ‘Football’ Chart
Range of Value
Trading Comps
17.0
Precedent Transactions
17.0
Liquidation Value
8.0
37.0
13.0
Discounted Cash Flow
25.0
$0
$10
$20
40.0
$30
Company Value (C$ millions)
Company valuation is more of an art than a science
30
29.0
$40
$50