Valuating an unquoted company for the purpose of a takeover

Discussion in 'Chit Chat' started by The_Spoon, Mar 24, 2011.

  1. The_Spoon


    Hello everyone, I hope someone is able to offer me some guidance here.

    I'm currently finishing my final year of Uni and as part of one of the modules I am analysing a takeover (not a merger) from some time in the last 10 years.

    I have chosen the takeover of GoFly by EasyJet back in 2002 and am coming to the end of my writeup but would like to clarify if the valuation methods I have used make logical sense. The marks for the work come mainly from the valuation so am quite focused on getting this right. The basic order of that section of the writeup is thus:

    a) Calculation of NAV & TAV, explaining what they are and that TAV would be the minimum "floor value" the company would expect to pay as it is comprised of the current & fixed assets

    b) Explain that the company would need to payoff or shoulder any existing liabilities of the company to be acquired - giving the Enterprise value (with calculation) Then explaining that the difference between the price paid and the enterprise value must represent the value placed by easyjet on the intangible company assets & current/future earning power

    c) Derive implied share price of GoFly shares and use EPS from latest accounts to give an implied P/E ratio. Compare this to Easyjet & other industry players to state if this implies a belief that GoFly would grow quicker or slower than the rest of the industry - backed up by calculating historic growth of GoFly compared to industry as a whole (Still need to get the industry information)

    d) Calculate EBITDA, explain what it is and give EBITDA multiple in relation to price paid for the company - compare this to similar takeovers (If I can find EBITDA multiple of other airline takeovers in news reports)

    --This is where I'm not sure if it is appropriate--

    e) State that as Easyjet doesn't want to just sell off assets then they would expect the profit generated to be at least to remain the same level as it is currently, therefore dividing the EBITDA by the WACC of Easyjet (as in a perpetuity) gives the present value of the "profit stream" that they would acquire.... then add this to the enterprise value to give a total company value. (I am not sure if this is a correct method of doing things, but the price generated by this method is actually only out by £9million on the final accepted price - which for a £374 million takeover seems quite accurate!)

    f) Calculate and do the same with the Free Cash Flow, when divided by WACC it comes to £324m vs £374 paid by EasyJet - this is without adding the enterprise value onto it - should that be done also?

    g) Calculate and compare the various ratios, Price/Book, Price/CashFlow & Price/Sales to state if they are above or below easyjet and what this means (Haven't done this part yet)

    The literature also mentions methods such as the dividend discount model and discounted cash flows - I'm not sure of the best way to approach these, Dividend discount can't really be done as the company didn't pay any dividends, but the Discounted cash flow is causing me some confusion as I'm not really sure how far into the future it should go - hence the reason for calculating as a perpetuity instead with the logic that the company would expect it to at least continue generating the figures it does currently, therefore a perpetuity should give the minimum value of the earnings capacity.

    I know this is a long and rambling post but if anyone can give any input I'd be very grateful! It's worth noting that I have the accounts for GoFly & EasyJet and also full access to Bloomberg so I can get pretty much any figures required for calculations with relative ease.