Valuation Fundamentals

Part One

The session lays the foundations to build a solid understanding of business and equity valuation techniques, in the context of mergers, acquisitions and capital markets. The most common valuation methodologies are introduced, together with the underlying theory. The concepts of enterprise value and equity value are explained, using simple but rigorous exercises. Finally, the basics of implied valuation multiple and discounted cash flow valuation are introduced. Case studies are used throughout the session based on real European companies.  

1.Valuation fundamentals

• The importance of valuation in corporate finance
• Valuation theory and framework: Three fundamental approaches
  • Assets
  • Earnings
  • Market
• The basis for calculating the present value of future money
• Application: Overview of the major valuation techniques
  • Discounted cash flow analysis
  • Trading comparables valuation analysis
  • Transaction comparables analysis
  • Net assets and other ‘industry’ metrics
• Derivation of enterprise values using a fundamental valuation approach
• Early-stage businesses: valuation in the absence of profits
• Enterprise vs. equity value
  • Understanding the difference
  • The components of the ‘bridge’ between the two
• Case Study I: Equity bridge – exercise and worked example

2.Discounted Cash Flows

• Presenting unlevered free cash flows as a basis for business valuation
  • Components and drivers of cash flow
• Discounting future cash flows: methodology

• Building a discounting model
• Mid-year adjustments
• Calculating the terminal value
• Perpetuity growth method
• Exit multiple methods

• Calculating the weighted average cost of capital
  • Establishing the company’s cost of debt
  • Cost of equity: understanding the risk-free rate, the equity risk premium and beta
  • Optimal capital structure using peer analysis
  • Unlevering and relevering the beta
  • Calculating WACC – case study

• Applying the calculated WACC to our discounting model

• Calculating enterprise and equity values
• Sanity checks
  • Implied multiples and growth rates
  • Percentage of value in the terminal period

• Case Study II: We will introduce a diverse, multinational company valuation in the oilfield services industry, with emphasis on the calculation of WACC
• Case Study III: Perform a DCF on a broadcast satellite business, taking presented cash flows and understanding the sensitivity of the valuation to key inputs – WACC and terminal value

Part Two

3. Comparable M&A Transactions (‘CoTrans’)

• Difference between the equity valuation techniques based on trading (market) multiples and precedent M&A transaction multiples
• Selection of transactions and information gathering
• Issues with sourcing data: which period’s EBITDA?
  • Example to illustrate the importance of insight
• Control premium and synergies
• Practical issues with transaction comparables
• Analysis and summary output
• Case Study IV: Valuation of a control transaction in the Building Materials sector

4. Comparable Market Traded Companies (‘CoCos’)

• Screening companies to identify a suitable comparable set
• Review publicly available data (including from databases) on the comparables
• Issues in assessing the data:
  • Cleaning non-recurring items from earnings and resulting tax adjustment
  • Calendarization issues
  • Last-Twelve Months (LTM) analysis
  • Outliers
  • The pros and cons of forward-looking and historical multiples, based on
    • Revenue
    • EBITDA
    • EBIT
    • P / E
  • Determining an appropriate range
  • Calculating the valuation of a company
    • Enterprise value
    • Net debt calculations, other possible adjustments e.g. minority interests, JVs, equity method investments
    • Fully diluted: number of shares and value of share options
    • Equity value per share
  • Troubleshooting and checking the output
  • Applying the results
  • Case Study V: Fair valuation of a soft drinks business. We will identify a broad peer group and the most appropriate comparables. From the range of multiples observed, which will also include transaction comparables, we then perform an enterprise valuation analysis based on EV/Sales, EV/EBITDA and other key multiples.

5. Sum of the parts

• Understanding a situation where all methods are

• Where a business has several divisions 
• Sector-specific multiples

• Case Study VI: ‘Sum of the parts’ valuation of an oilfield services group

6. Conclusion

• Review of all material, key messages and key learnings
• Revisit case studies as necessary
• Opportunity for discussion