Relative Valuation (Reverse) Flashcards
Yes, typically. If it appears on the front page of the 10-k, then yes.
RSUs are not part of the basic share count. Due to conservatism, they should be added to diluted shares.
Non-vested RSUs would NOT be on the front page of the 10-K
Is restricted stock part of the basic share count?
Are RSUs part of the basic shares count?
Of restricted stock and RSU (vested vs non vested), which would NOT be included in the front 10-Ks share count?
Pg 125 Relative valuation
If the company is operationally and financially healthy, market value and book value should be similar.
Look for the latest round of debt issuance and get that interest rate and then calculate from there. See the below.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/mktvalofdebt.htm
In EV calculation, do you use market value or book value of debt?
How do you estimate market value of debt?
Acquiree (company being acquired).
Operational
Industry, products, distribution channels, customers/consumers, patents, geography
Financial
Credit risk/Financial performance
Other
SIZE!
Hostile vs friendly
Strategic vs financial
Economic/market conditions
When choosing a precedent transaction to analyze, do you match the company you are analyzing to the precedent transaction’s acquirer or acquiree?
What are those characteristics?
Interest, taxes, dividends received, working capital
CFO adjustments, CapEx, gains/losses on investments, debt issuance/repayment, cash from stock, treasury stock, dividens paid
What is excluded from EBITDA that is adjusted for in CFO?
What is excluded from EBITDA but adjusted for throughout the entire cash flow statement?
Utilize previous analyses
Utilize public filiings that may indicate competitors to a company
Capital IQ, Bloomberg, etc
What are more practical ways to gather a peer set?
No, treat it as straight debt. Adjustments won’t be made until the convertible bond becomes in-the-money.
Do you make any adjustments to EV if the convertible bond is out-of-the money?
Pg 51 Relative Valuation
Implied offer value = 4.245
Implied transaction value = 8.24
In 2006, KKR, Silver Lake, and Co. acquired a 80.1% stake in Philips Semiconductors for euro 3.4 billion. The LBO consortium assumed euro 4 billiion in debt.
What is the implied offer value and implied transaction value?
Restricted stock and restricted stock units (RSUs)
What are the 2 categories of restricted stock awards?
Its value on the balance sheet.
Yes.
What is carrying value?
Is preferred stock sometimes covertible into common stock?
Pull documents for the acquiree for (typically) the LTM as of the transaction announcement date.
10-K, annual report, 10-Q, S-4, 8-K
In precedent transactions analysis, you pull documents for which company (acquirer or acquiree) and for which timeframe?
Which documents should you pull?
CapEx, depreciation, taxes
What does EBITDA not capture that is extremely important?
Equity value = current market price per share
Offer value = offer price per share
Equity value = total diluted shares: the company repurchases stock from the proceeds of the options and subtracts those number of shares.
You do that because companies would repurchase shares to diluted the effect of exercised employee options.
Offer value = total potential shares, which is basic shares + all outstanding in-the-money shares BUT THEN you subtract the proceeds
The proceeds from the options could be used to pay off the acquisition, thus you subtract it.
However, both approaches yield the same result!!!! They are just two different mechanical ways of reflecting what actually happens
What is the difference between equity value and offer value?
- Potentially having to separate a division within a company
- Extreme size differentials
- Public vs private companies
What are 3 challenges in selecting a peer set?
Adjust for non-recurring items
What do you do to the income statement to show a more accurate reflection of operations?
Cost reduction, revenue enhancement, and CapEx savings
Transaction Value / Target’s EBITDA + Annual expected synergies
What are the three main types of synergies?
What is the adjusted EBITDA multiple formula as a result of synergies?
LTM
Take the latest FYE (fiscal year end), add the most recent period, and then subtract that same period that occured 1 year earlier.
LTM captures most recent data, compares companies on the same timeframe, and it takes into account the seasonality effect
When calculating historic multiples, which timeframe is typically used? How do you derive this timeframe?
Why use LTM for historical performance?
Operational
Industry, products/services, distribution channels, customers/consumers, technology, geographic region
Financial
Most important: size (annual revenue, equity value, EV)
Credit Risk and Financial performance
Credit risk
Leverage/coverage ratios and credit ratings
Financial Performance
Operating margins, growth
What 2 attributes do professionals examine to determine a peer set for a company? Explain the attributes.
Restricted shares issued do not come with any offsetting cash from the person awarded the share, whereas stock options come with cash from the person receiving the option.
Restricted shares = no cash to company
Options = cash to company and used to buy back shares
What is the biggest difference between restricted shares and stock options?
The football field
What type of analysis shows the various ranges for offer prices/share?
Different
Merger consequences looks at accretion/dilution impacts to EPS and is typically the result of a strategic merger. Whereas LBO analysis is a financial acquisition in which the sponsor is looking to exit in 5-10 years.
Similar
Both look at impacts to the balance sheet and subsequent leverage and coverage ratios
How is mergers consequences anaylsis similar and different from LBO analysis?
A transaction that utilizes both debt and equity to fund an acquisition
What is a mixed consideration transaction?
Offer value = gaining ownership
Transaction value = true cost of an acquisition
Offer value allows the acquirer to gain ____ of the company, but transaction value reflects the _____ of acquiring the company.
Current EV/Equity value in the numerator and forward looking metric in the denominator.
Forward looking statsitic use a current figure in the ____ and a forward looking figure in the ____.
P/E multiple / Projected annual EPS growth
What is the PEG formula?
Typically, there is Common Stock A and Common Stock B shares. Differentiating features include voting privileges, conversion factors, dividends, private vs public, etc
Explain, generally, dual share characteristics.
C.O.M.P.S. analysis
Credit risk
Operational charcteristics
Market factors
Performance (financial)
Size
Setting aside operational, financial, and size characteristics in determining a peer group, what is another way to decide on a peer group?
The impact on taxes.
When normalizing past EBIT, what is important to consider?
Principal amount of convertible bond / conversion price
Ex: Adjusted NI
$502.6 million
What is the underlying shares increase formula (convertible bond)?
What is the adjusted NI formula to account for the interest expense as a result of a convertible bond?
Example:
A company has a 4% coupon, $100 million convertible bond, a 35% tax rate, and $500 million of reported NI. Show the adjusted NI.
- Take the multiples and multiply it by the target’s EBITDA to get the transaction value
- Subtract net debt, value of preferred stock, minority interest and add equity interest to get offer value
- Divide by diluted shares outstanding to derive implied offer price
Once you have the TV/EBITDA multiples from previous transactions, what do you then do to derive implied offer price/share?
You subtract equity interest but add non-controlling interest
Is equity interest subtracted or added to EV?
Historical multiples help to validate whether forward multiples are realistic/sustainable
Numerator = current statistic
Denominator = historical or forward looking statistic
Equity investors = forward looking
Debt investors = historical results
Why would a finance professional use both historical and forward multiples?
For both forward and historical multiples, the numerator is ____ while the denomintor is ___ or ____?
Equity investors typically look at ____ projections, whereas debt providers look at ____ results.
EBIT increases, taxes increase, NI increases
EBIT decreases, taxes decrease, NI decreases
What is the effect on EBIT, taxes, and NI when you adjust for a loss/charge?
What is the effect on EBIT, taxes, and NI when you adjust for a gain/income?
EBIT
Operating income = EBIT. Thus, take operating income and find D/A in the cash flow statement, and add that to operating income. Thus, you will get EBITDA.
Operating Income equals which financial metric?
How do you derive EBITDA when the line item on the income statement is Operating Income?
Review Appendix starting on pg. 174. They are advanced topics that I did not study as of June 10th 2018
You want to analyze only the companies core operations. Also, it could significantly alter the multiples if non-recurring items are not adjusted.
Why do professionals adjust for non-recurring items while conducting comparables analysis?
Pg 114/115 Relative valuation
MD&A and footnotes of non-recurring charges buried in SG&A expense and/or COGS
Where do professionals find descriptions of material non-recurring charges?
Unaffected stock price
Higher
Lower
Premiums are calculated using the target’s ____.
During boom times, multiples tend to be ____.
During boom times, premiums tend to be _____.
Debt (cash) and the acquirer’s shares
What are the two most common forms of currency to acquire a target?
Choice B dilutes shares the least
Which option would dilute shares the least?
A company’s stock is 15/share
Choice A:
The company issues 100 options with a strike price of $10/share
Choice B:
The company issues 30 restricted shares
Yes!!!!
Are ADRs already incorporated into the total shares outstanding count?
Offer value of equity + total debt + value of preferred stock + minority interest - cash/cash equivalents
What is the formula for transaction value?
Coupon, principal, conversion price, maturity date, conversion ratio
What information do you need to perform convertible bond analysis?
All interest bearing liabilities.
Yes! Capital leases are classified as debt
Interest bearing debt
notes payable, current portion of long term debt, balance of long term note, capitalized leases, revolving credit facility
For EV calculation purposes, what should be classified as debt?
Are capital leases classified as debt?
Which of the following would be considered debt for EV calculation purposes:
Notes payable, Accounts payable, accrued expenses, current portion of long term debt, balance of long term note, capitalized leases, other current liabilities, revolving credit facility
Market value
Two methods
- Derive a comparable P/E ratio and multiple that by the earnings on the investee found on the income statement
- Derive a comparable market value / book value ratio, and multiply it by the carrying value (book value) on the balance sheet
In valuing equity interest, do you use carrying value (book value) or market value?
If the market valuation is not available in the footnotes or easily derived because of indicating % ownership, then how do you derive market value?
It is the general value of a company viewed relative to peers, inherently, or intrinsically
Public comparables analysis and DCF analysis
What is an appraisal valuation?
What are the 2 most common types of appraisal valuations?
The value of a firms debt and equity holdings. Essentially, the value of the entire firm (including both debt and equity).
Market value of equity + net debt + preferred stock + minority interest
Or
Market value of equity + Value of debt + value of preferred stock + minority interest - Cash/Cash equivalents
What is enterprise value?
- 11x pre synergies
- 8.6x post synergies
In 2005, Wrigely announced its acquisition of the confectionary assets of Kraft Foods with a transaction value of $1.18 billion. The confectionary assets of Kraft had LTM EBITDA of $107 million. Expected annual cost savings were $30 million.
- Calculate LTM EBITDA multiple ex synergies
- Calculate LTM EBITDA including synergies
The number of shares each of the target’s shareholders will receive per 1 share of the acquirer’s shares.
= Offer price per share / acquirer’s price per share x % stock consideration
What is the exchange ratio?
Basic shares + Potential shares from outstanding in-the-money options + Potential shares from in-the-money convertible securities
What is Total Potential Shares?
The summation of all debt and shareholders equity
What is total capitalization?
Strategic and financial buyers.
What are the 2 types of buyers regarding M&A?
Reduces the size of the multiple
What do synergies do to the pre-synergies TV/LTM EBITDA multiple?
Historical, because forward projections are less relevant once the two companies are integrated
Are historical multiples or forward multiples more relevant in M&A analyses? Why?
Value of cash portion (per share) + Value of shares received portion (per share)
OR
Value of cash portion (per share) + (acquirer’s share price x exchange ratio)
What is the Blended Offer Value (per share) formula?
Minority passive < 20%
Minority active 20% - 50% ownership
Majority >50%
What are the 3 levels of ownership and show % ownership?
The numerator is typically equity value or EV, which must be match according the the earnings profile of the capital holder. Equity value should be matched with income after interest expense has been paid. EV needs to be matched with income that hasn’t been paid to debtholders. It needs to include income to both debt and equity holders.
Describe the idea of numerator/denominator consistency.
To correct the inconsistency of multiples in a less than 100% acquisition of a firm
Simply divide the offer value by the % stake
No
What is the gross up method used for?
How do you gross up offer value?
Do you gross up debt value?
A parent company owns a subsidiary that has a 20% ownership by other investors. That 20% is labeled on the balance sheet as the non-controlling interest. The other 80% is already consolidated into the parent’s balance sheet.
Yes, adjust it to market value!
Describe non controlling interest.
Do you adjust non-controlling interest to fair value?
Debt that is not convertible
What is straight debt?
Pg 171 relative valuation
Pg 165 relative valuation
- Remove debt principal from balance sheet
- Add incremental share issuance based on principal and conversion price
- Remove interest expense from income statement (account for taxes)
What are the 3 adjustments to make when a convertible bond is in-the-money?
(Offer price per share x Total potential shares) - option proceeds
It is the offer value of the company’s equity.
Premium is the difference between the unaffected stock price and the offer price per share.
What is offer value?
What is the premium discussed in an acquisition?
Pg. 203 relative valuation
Yes, because it is the more conservative approach.
Show multiple views, one including non-vested RSU, and one excluding non-vested RSUs
In short, should you include non-vested RSUs in your equity value derivation?
Because diluted shares includes basic shares plus in other shares that could arise from options and convertible securities.
Why are diluted shares included in offer value, etc?
EBIT
EBITDA. Remember, just a PROXY since it excludes D/A, interest expense and taxes, all of which are considered in operating cash flow.
What is the metric for a company’s operating profit?
What is used as a proxy for FCF or operating cash flow?
Predetermined level that a company’s share price must reach in order to convert the principal of a bond into equity
In-the-money convertible bond = company share price is equal to or greater than the conversion price
Key adjustments:
- removal of bond from balance sheet
- increase in equity issuance
- removal of after-tax interest expense related to the bond
Assumptions:
Assume that all convertible bond investors would convert to equity upon maturity
In regards to a convertible bond, what is the conversion price?
When is a convertible bond in-the-money?
What are the key adjustments once a bond becomes in-the-money?
For valuation purposes, what is assumed about convertible bonds?
Pg 57 relative valuation
Convertible bonds, restricted stock, restricted stock units, dual shares, ADRs
In addition to options, what are other considerations in deriving fully diluted shares?
Potential for synergies
What is one of the biggest factors aside from C.O.M.P. analysis to include in selecting prior deals for precendent transactions anaylsis?
Public comparables = current price per share is greater than the exercise price
Acquisition comparables = offer price per share is greater than the exercise price
In public comparables equity value, options are in the money when ____?
In acquisition comparables offer value, options are in the money when ____?
- 600 million
- 725 million
- 6.2x
- 11.3x
Mandalas corporation acquired a 72% stake in Holistic Living business for $432 million. Tea Garden retained 28% of its stake in the business. Mandalas corporation also assumed $125 million in debt in this transaction. Holistic Living business had $117 million in LTM EBITDA and $53 million in LTM net income.
- Calculate implied offer value
- Calculate implied transaction value
- Calculate multiple of LTM EBITDA
- Calculate multiple of LTM NI
- Identify a deal list
- Gather relevant financial information
What are the first 2 steps in precedent transactions analysis?
Equity holders, debt holders, preferred stockholders, and minority interest holders
Diluted shares outstanding
Outstanding
Only in-the-money
There are time constraints on when an option can be exercised. Thus, the option could be in the money but if it is restricted by time, then it can’t be exercised.
Use outstanding and in-the-money options to derive fully diluted shares
Who are the 4 main capital funders in a company?
Equity value is derived by using basic shares outstanding or diluted shares outstanding?
Does equity value use outstanding options or exercisable options?
Does equity value use in-the-money options are all options?
Other than strike price in relation to current price, what determiens if an option can be exercised?
In short, you use _____ and ____ options to derive total diluted shares.
To compare companies on the same platform to show relative value. Essentially, it is an apples to apples comparison.
Equity ratios apply to equity shareholders.
EV multiples apply to both debt and equity holders since EV is unlevered, thus is the value of debt and equity holders.
What is the purpose of multiples?
Equity multiples apply to which investors in a company?
EV multiples apply to which investors in a company?
Legal settlements, restructuring charges, asset impairment charges, gains/losses on the sale of a division, one-time tax benefits
What are common examples of non-recurring items?
Leverage ratio
Coverage ratio
Debt/Total Capitalization
What are the three ratios to determine credit risk?
Appraisal value values the intrinsic worth of company and/or does so against its peerset (public comparables analysis and DCF analysis)
M&A valuation takes into account premiums paid above appraisal (standalone value) to reflect the purchase price in an acquisition
What is the difference between appraisal value and M&A value?
