Summary advanced corporate finance

VALUING HYBRID SECURITIES AND MINORITY INTERESTS

Corporate bonds that can be exchange for common equity at a predetermined conversion rate.

Conv Bonds = Debt + Equity (Call Option on Equity)

Valuation methods:

1. Company-disclosed fair value

2. Market price

3. Option pricing methods

a) Black-Sholes

b) Binomial

4. Conversion value

Black-Sholes Formula

Employee Stock Options (ESOs)

Call option on company shares, part of the employee (management) compensation (in public and private firms)

ESOs affect company valuation in two ways:

 ESOs granted in the future need to be captures in the FCF projections (cost of personnel)

 ESOs currently outstanding must be treated as a nonequity claim (and deducted from EV to estimate the value

per share)

Valuation methods:

 Company-disclosed fair value

 Option pricing models (Black e Sholes and/or Binominal Models)

 Exercise value approach

Excel files.

Noncontrolling Interests

Portion of the subsidiary’s equity not owned by the parent company

EV calculated based on consolidated FCF incorporates the noncontrolling interest value (NCIV)

NCIV valuation:

 Market value (in case of a publicly traded/listed subsidiary)

 Separate valuation DCF, MULTIPES. 26

8. VALUATION: MULTIPLES AND SUMMARY

Multiples valuation is based on processing market information on the relationship between value (market price) and

firm’s performance.

DCF is an accurate and flexible method, but largely based on subjective projections (although anchored to a deep

strategic and financial analysis). 27

Multiples complement DCF (and vice versa) to improve: accuracy, flexibility, and plausibility/reliability of valuation

process and outcomes

Multiple Valuation Process

 Select a peer group of comparables listed companies (CLC) and/or private companies involved in M&A

transactions

 Measure the current CLC market value (BEV, EV, E)

 Observe CLC’s performance: actual and forecast

 Calculate CLS’s multiples

 Analyse the relationship between multiples and performance

 Select the multiples and applied them to firm’s valuation

Multiple List

 (B)EV/Sales

 (B)EV/EBITDA

 (B)EV/EBITA

 (B)EV/EBIT

 (B)EV/NOPAT

 P/E

 P/B

(B)EV = Market Capitalization + Minorities + NFP and DE – SA

Performance:

 Last fiscal year

 Last 12 months (LTM)

 

Forward estimates Next 12 months (NTM), Next 2, 3 year

Multiple and Value Drivers

Multiples Valuation Enterprise value on: Equity value on

Sales 22 EBITDA 22 EBITA 22 Earnings 22

Large sample mean 3,1x 12,9x 40,4x 20,4x

Large sample median 2,6x 10,9x 13,4x16,3x

Large sample regression 2,2x 14,6x

Narrow sample mean 1,8x 10,7x 16,6x19,8x 28

Narrow sample median 1,3x 10,9x 17,3x 18,8x

Reference multiple 1,8x 10,9x 17,3x 18,8x

Labomar performance 2022 101.530 18.528 10.673 6.749

Labomar Enterprise value 183.006 202.552 184.877 Ref.multiple*performance

Surplus assets 1.162 1.162 1.162

Net financial position and debt eq. 29.935 29.935 29.935

Noncontrolling interests 1.235 1.235 1.235

Equity value 152.998 172.544 154.869 126.919 EV +surp-NFP-NCI

Number of shares outstanding 18.000 18.000 18.000 18.000

Value per share 8,3 9,3 8,4 6,9 Eq. value/n.shares*1000

Valution Summary

Value per share Value Max Min

(€’)

DCF base 8,8

DCF scenario 9,0 12,3 3,8

Multiples 9,3 9,3 6,9

Final value* 8,8

* Base on a judgment (not using a simple formula) 29

PART B) 1. INVESTMENT BANKING

Investment banking is the banking activity not classifiable as commercial banking.

 Commercial banking can be defined as “deposits taking and loans making”. – Commercial banks borrow money

mainly in the form of deposits (checkable or time deposits) and lend money to families (to buy a car, an

apartment, etc.) and to firms (to finance investment in fixed assets and working capital).

 Investment banking includes a rather heterogeneous set of activities, which can be classified into the following

areas.

1) Core or traditional investment banking, broken down into:

underwriting services, assisting firms raising capital on financial markets;

advisory services, assisting firms in transactions such as mergers, acquisitions, debt restructuring, etc.

2) Trading and brokerage: purchasing and selling securities by using the bank’s money (proprietary trading) or

on behalf of clients (brokerage).

3) Asset management: managing investors’ wealth. It can be broken down into two main categories:

a) traditional asset management (i.e., open end mutual funds);

b) alternative asset management, which includes real estate funds, hedge funds, private equity funds, and

any other vehicle investing in alternative asset classes.

Core investment banking: 30

1) Private Equity (Advisory)

a) Venture Capital

b) Private Equity (ss)

2) Public Equity Offerings (Advisory and Underwriting)

a) Initial Public Offerings (IPO)

b) Seasoning Equity Offerings (SEO) and Rights Offerings

3) Debt Offerings (Advisory and Underwriting)

a) Bond Offerings

b) Securitization

c) Hybrids

d) Syndicated Loan

4) Mergers and Acquisitions (Advisory)

a) Mergers and Acquisitions for Growth and Complementarities

b) Corporate Restructuring and Divestments

5) Debt Restructuring in Financial Distress (Advisory)

Firm life cycle: stages

1) Start up: have an idea for a business that meets an unmet need in the market or satisfies an existing need

(much) better.

2) Young growth: create a business model that converts ideas into potential revenues and earnings

3) High growth: build the business, converting potential into revenues

4) Muture growth: grow your business, exploiting revenues into profit

5) Mature stable: defend your business from new competitors and find new markets

6) Decline: scale down your business as market shrinks and/or find (new) businesses after a turnaround process

Financing 31

M&A restructuring 2. PRIVATE EQUITY AND VENTURE CAPITAL

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange.

Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts

of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for

private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and

to bolster and solidify a balance sheet.

A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited

liability, and General Partners (GP), who own 1 percent of shares. The latter are also responsible for executing and

operating the investment.

Private Equity: Key Roles / Agreement

Managers of private equity firms are the General partners (GP), investors are the limited partners (LP)

General partners rise first fund, limited partners commit to a certain amount of investment called committed capital.

GP draws funds usually over first 3 to 5 years, average life of fund is 10 to 13 years.

GP compensation: annual management fee of 1.5-2.5%. % of profits (usually 20%)

Effectively closed end funds with 10 to 13 year lives.

Private Equity Industry: Segmentation

Venture Capital (VC):

 Angel and Seed

 Early Stage

 Late Stage

 Venture Growth

Private Equity ss (PE)

 PE-Growth and Replacement

 Buy-out (LBO and MBO) 32

 Primary

 Secondary

 Turnaround (Distress Investing)

Fund returns excel files.

Venture Capital: Term Sheet

 VC fund typically make lumpy investments organized into sequential stages (rounds or series)

 The investment (into a round) could be spread into tranches, contingent on achieving some milestones (e.g.,

patent, prototype, partnership/customers)

 VC usually takes a minority stake – Or a majority in equity/earnings rights, but a minority in

governance/management rights

 The term sheet regulates the relationship between the VC fund and the controlling shareholder

(founder/entrepreneur and management)

 The term sheet is a corporate governance mechanism describing the basic structure of the transaction and

providing a set of protection for VC fund

Term Sheet and Valuation: Protections

Protections against (potential) losses:

1. Preferred Stock (PS)

PS has a liquidation preference over common stock.

Convertible Preferred Stock (CPS) CPS can be converted at the shareholder’s option into common stock.



Redeemable Preferred Stock (RPS) RPS is PS with no convertibility into common share that can be combined with

common stock or CPS. 

Participating Convertible Preferred Stock (PCPS) PCPS combines a position in RPS plus common stock.

Often including: mandatory conversion (contingent on a giving event) and Cap on liquidation preference.

Notice that listed companies usually issue preferred stock with a minimum cash dividend, but this is not the case in

VC. In general dividends may be either paid cash or through the issuance of new stock (payment-in-kind, PIK). In

general it is common to find a dividend preference to PS.

2. Vesting and Shareholders’ Agreement

It is the “Suspension” of the (common) stock (founder) rights, which are then gradually released: – over a period of

time (step vesting) or – at one time (cliff vesting). 33

Vesting prevents the entrepreneur (or key employees) from leaving before a certain time.

3. Shareholders’ Agreement (SA): Provisions

Change of control:

 Veto power or supermajority voting rules

 Right of first offer

 Right of first refusal

 Tag-along right

 Drag-along right

Governance and Management

 Veto / Supermajority rights on

Investment, financing, capital increase and dividends, budget and plan, management and

o organization, main projects and operations

 Information (to be provided on an interim basis)

Financials performance, balanced scorecard, projects milestones

o

Venture Capital Valuation Method

The VC method is a valuation tool commonly applied in the private equity industry.

The company value is projected for some years (say 5 years from the present), based on a “success scenario”.

Usually the relative approach is used (i.e., multiples of comparable companies).

This terminal value is then converted to a present value by applying a very high discount rate, typically between 35

and 80% per year. The resulting figure is the estimated current total value. Given the investment requested to the VC

fund, it is easy to compute the percentage of ownership it will ask.

To sum up, three variables are needed: (a) the terminal value, (b) the discount rate, and (c) the investment size.

The VC method could be applied:

• With no dilution

• With dilution

Excel files. 3. PRIVATE EQUITY (GROWTH