Case PRIVATE EQUITY CASE-MERGER CONSOLIDATION

Case PRIVATE EQUITY CASE: MERGER CONSOLIDATION
The questions below COMBINE the Ohio & PT acquisitions as if they are a single company…
…to make this Final Exam Assignment doable in a reasonable time frame. Learning Objectives
At the end of the course, to apply the financial analysis
and decision making techniques to size-up a business and make
a recommendation about its value.
Reading Sections of the Cohen Finance Workbook as necessary for review, and Wk1-6 Solutions as necessary.
1 Look at beginning and end of case to see what is going on.
2 Closely examine the questions you have to answer - they simplify the case
situation to create a doable final exam assignment.
3 Figure out what weekly solutions and Cohen Finance Workbook sections you might need to review.
4 Proceed to answer the questions, one-at-a-time, as you refer to the your needed explanatory material. Questions ANSWER IN THE TABS
Q1 Calculate the cost of capital (k-wacc) for the two acquisition companies combined, as if they are a single company (Column D on Q1 tab)
Page 7 of the case has the inputs; supply missing inputs using judgment and what you learned in this course.
Q2 Complete the FCF Valuation and the Market Multiples Valuation. Some data is entered for you; some you must enter.
The yellow-shaded cells guide you. Data is for Ohio and PT companies combined.
Explain what your analysis tells you about the likely value of these companies (combined as if it was a single company).
Q3 Calculate the debt capacity of the combined PT companies (see Financial Statements tab). Disregard the yellow-shaded
panels on the Q3 tab - use only the debt capacity panel. Explain how much additional debt can be borrowed
based on your analysis.
Q4 Answers here pull together the analysis you did for Q1, Q2 and Q3. See the questions on the Q4 tab. THERE IS NO SINGLE CORRECT ANSWER.
THE PURPOSE OF THE ASSIGNMENT IS TO DEMONSTRATE
WHAT YOU HAVE LEARNED TO DO IN THIS COURSE.
USE TEMPLATE RESULTS , CASE FACTS, AND YOUR JUDGMENT.
ACT LIKE A PROFESSIONAL…NOT LIKE A STUDENT. THUMBNAIL SKETCH:
BRIEF ANALYSIS
DUPONT RATIOS
HISTORICAL RAI/S & B/S FORECAST
TIE
NORMAL DEBT RATIO WORKING CAPITAL I/S, B/S, & RATIOS
STOCK PRICE
MKT CAP
EXTENDED ANALYSIS
FULL RATIOS
LIQUIDITY
LEVERAGE
ASSET USE
PROFITABILITY
VALUATION
GROWTH
CAPITAL BUDGETIN OP & CAP NATCF, NPV, IRR, PAYBACK FINANCING EFN ANALYSIS STEPS:
1-HISTORICAL RATIOS
2-K-WACC
3-CAPITAL BUDGETING
4-FORECAST & EFN
5-EQUITY VALUATION
6-FINANCING
VALUATION DEBT EQUITY DEBT EQUITY
EBIT CHART income risk control mktblty flexblty timing K-WACC ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT INCOME STATEMENT
Revenue
Cost of sales
Gross profit
Other operating income
Other operating expenses
Total cost and expenses
Operating profit (EBIT)
Interest, finance costs
Profit before tax
Income tax
Net profit after tax
Dividends
Reinvested in the business BALANCE SHEET
ASSETS
LIABILITIES AND EQUITY
Current assets
Current liabilities
Cash
Trade payables
Investments
Other accruals
Trade receivables
Tax liabilities
Inventories
Short-term loans, leases
Non-current assets
Non-current liabilities
Property, plant & equipmen
Loans, debt, leases due after 1 year
Investment property
Retirement benefit obligation
Goodwill
Deferred tax liabilities
Total non-current liabilities WORKING CAPITAL
changes spontaneously with revenue
?what levels of ca, cl, s-t loans?
CAPITAL BUDGETING
?which projects to accept?
FINANCING
?how much debt capacity? COST OF DEBT K-WACC
Stockholder's equity (Net worth)
Preferred stock
Common stock
Additional paid-in-capital
Retained earnings OPERATING LEVERAGE
FINANCIAL LEVERAGE
Total assets Total liabilities & equity COST OF EQUITY
VALUATION
CASH FLOW
COST OF CAPITAL in thousands
Sales
CGS
GM
Operating Expenses
Depreciation
EBITDA
Adjustments
Adjusted EBITDA OHIO PT
2005
20,041
7,547
12,494 MD PT
COMBINED
2005
2005
17,726
37,767
7,093
14,640
10,633
23,127 3,137
378
9,357
1,359
10,716 5,883
308
4,750
1,500
6,250 9,020
686
14,107
2,859
16,966 Assets
Cash
A/R
Prepaid expenses
Total Current Assets 1,342
5,916
129
7,387 653
4,239
104
4,996 1,995
10,155
233
12,383 PPE - net
Other assets
Total Assets 1,677
456
9,520 1,538
108
6,642 3,215
564
16,162 527
200
226
953 919
264
0
1,183 1,446
464
226
2,136 Long-Term Liabilities
LTD
Total Liabilities 597
1,550 1,047
2,230 1,644
3,780 Shareholder's Equity
Total Equity 7,970 4,412 12,382 Total Liabilities & Shareholder's Equity 9,520 6,642 16,162 Liabilities & Shareholder's Equity
Current Liabilities
Accrued expenses
Accounts payable
Current portion of LTD
Total Current Liabilities A
B
C
D
E
F
G
1 COMPUTE WEIGHTED AVERAGE COST OF CAPITAL
2
FIND INPUT DATA ON PAGE 7 OF CASE
3 BASIC:
Formula
Equation
4 COST OF DEBT:
5
Coupon Rate
0.00% given
6
Marginal Tax Rate
0.0% given
7
Cost of Debt
0.00% b5*(1-b6)
k-d = I x (1- t)
8
weight of debt
0%
d ÷ d+e
9
10 COST OF EQUITY:
11
Risk-Free Rate
0.00% given
12
Equity Risk Premium
0.00% given
R-m - R-f
13
Beta
0.00 given
14
Cost of Equity
0.00% b11+(b13*b12)
k-e = R-f + [ß x (R-m - R-f)]
15
weight of equity
100% 1-b8
e ÷ d+e
16
17 Weighted-Average Cost of Capital
0.00% (b8*b7)+(b15*b14)(k-d x wt-d)+(k-e x wt-e)
18
19 Q1-Calculate the cost of capital (k-wacc) for the two acquisition companies combined, as if they are a single company (Column D on Q1 tab)
20 Page 7 of the case has the inputs; supply missing inputs using judgment and what you learned in this course.
21 Explain your anaysis in this answer box.
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36 A
1
2
3
4
5
6
7
8
9
10
11
12
13
14 PERIOD
YEAR 2005
0 17
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
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42
43
44
45
46
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49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69 C D E F G 0.0%
0.0
0.0
0.0 15
16
18 B FREE-CASH-FLOW VALUATION OF EQUITY
Assumptions:
PERIOD
YEAR
Profit from operations (EBIT)
Income tax rate
Depreciation & amortization expense
Net working capital from balance sheet forecast
Capital expenditures
Long-term growth rate
Wt-Avg. C of C (K-wacc)
Market Value of Debt
Number of Shares
Redundant Assets 2005
0 0.0 2006
1
20173.0
35.0%
600.0
2326.0
3600.0 2007
2
23238.0
35.0%
1200.0
2434.0
3600.0 2008
3
26757.0
35.0%
1800.0
2996.0
3600.0 2009
4
30785.0
35.0%
2400.0
3690.0
3600.0 2010
5
30785.0 no growth in 2010
35.0%
2400.0
3690.0
3600.0
0.0% enter this
enter this
not applicable
not applicable 2006
1
13112.5
600.0
13712.5
(2326.0)
(3600.0)
7786.5 2007
2
15104.7
1200.0
16304.7
(108.0)
(3600.0)
12596.7 2008
3
17392.1
1800.0
19192.1
(562.0)
(3600.0)
15030.1 2009
4
20010.3
2400.0
22410.3
(694.0)
(3600.0)
18116.3 7786.5 EBIT after tax (EBIAT)
+ Depreciation
=Cash Flow from Operations (CFFO)
+/- Change in Net Working Capital
+/- Capital Expenditures
=Free Cash Flow (FCF)
+Terminal Value (TV)
=Sum of FCF + TV
Present Value
- Market Value of Debt
= Valuation of Equity
+Redundant assets
=Adjusted Value of Equity
/ Number of Shares
Value of Equity per Share H USE ANSWER BOXES BELOW STARTING AT ROW 68 12596.7 15030.1 18116.3 Peer C
0.0
3.0
0.0
0.0 Peer D
0.0
3.0
0.0
0.0 2010
5
20010.3
2400.0
22410.3
0.0
(3600.0)
18810.3
#DIV/0!
#DIV/0! #DIV/0!
0.0
#DIV/0!
0.0
#DIV/0!
0.0
#DIV/0! MARKET MULTIPLES (COMPARABLES) VALUATION OF EQUITY
Market Multiples of Peers
Price /revenue market multiple of peer company
Price/EBITDA market multiple of peer company
Price /Earnings market multiple of peer company
Mkt Val of Eq/Book Val mkt mult of Equity of peer
Target company data
Target company revenue
Target company EBITDA
Target company earnings (net income)
Target company book value of equity
Target company number of shares Peer A
0.0
3.0
0.0
0.0 Peer B
0.0
3.0
0.0
0.0 Average
Peer E
Mkt Mult
0.0
0.0 do not use
3.0
3.0 use this one
0.0
0.0 do not use
0.0
0.0 do not use 0.0 do not use
0.0 enter the number
0.0 do not use
0.0 do not use
0.0 not applicable from col B from Col G
BxC
C/B55
Target Co Average Aggregate Per Share
Valuation Calculations
Data
Mkt Mult Valuation Valuation
Valuation based on avg revenue market multiple
0.0
0.0
0.00
#DIV/0!
Valuation based on avg EBITDA market multiple
0.0
3.0
0.00
#DIV/0!
Valuation based on avg earnings market multiple
0.0
0.0
0.00
#DIV/0!
Valuation based on avg book value market multip
0.0
0.0
0.00
#DIV/0!
Summary map
FREE CASH FLOW MODEL
REVENUE MARKET MULTIPLE
EBITDA MARKET MULTIPLE
EARNINGS MARKET MULTIPLE
BOOK VALUE MARKET MULTIPLE
CURRENT MARKET PRICE
Q2-Complete the FCF Valuation and the Market Multiples Valuation. Some data is entered for you; some you must enter.
The yellow-shaded cells guide you. Data is for Ohio and PT companies combined, as if they are a single company. 70
71 Explain what your analysis tells you in this box.
72
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99 adjust function
if less than 5
peers I J K L A B C D E F G H I J K L M FINANCING (DEBT-EQUITY) DECISION
USE ANSWER BOXES BELOW STARTING AT ROW 72
2 Inputs:
3 External Financing Needed
0 from forecast
disregard yellow-shaded rows, per instructions
4 Existing Common Shares
0 from company info
5 Existing Long-Term Debt
0 from most recent historical balance sheet
6 Interest Rate on Existing Debt
0.0% from company info
7 Interest Rate on New Debt
0.0% given
8 Boom EBIT
0 arbitrarily above optimistic forecast
9 Bust EBIT
0 arbitrarily below pessimistic forecast
10 Income Tax Rate
0.0% from income statement
11 Share Price
$
- from market info
12 Equity
0 from most recent historical balance sheet
1 13
14 Results:
15
16 EBIT IF DEBT IS USED
IF EQUITY IS USED
BOOM
BUST
BOOM
BUST
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0! 17 Interest expense - old
18 Interest expense - new
19 Profit before tax
20 Income tax
21 Net profit
22 Shares
23 Shares - new
24 Earnings per share
25 Coverage ratio
26
27
28
29
30
31
32
33
34
35
36
37
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39
40 EBIT CHART
$ 12.00
$ 10.00
$ 8.00
EPS
$ 6.00
$ 4.00
$ 2.00 debt EPS $ 0.00
0 0
EBIT 41
42
43
44
45 EBIT
debt EPS
equity EPS 0
#DIV/0!
#DIV/0! 0
#DIV/0!
#DIV/0! 46
47
48 Indifference point calculation:
49
50 Common shares
51 Income tax rate
52 Interest expense
53
54 EBIT
55 Interest expense
56 EBT
57 Income tax
58 EAT
59 EPS
60
61
62 Debt capacity calculation:
63
64 EBIT
65 Interest coverage ratio per rating
66 AVAILABLE FOR INTEREST Debt
0
0.0%
0
#DIV/0!
0
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0! Bust
0
0
#DIV/0!
0.0%
#DIV/0!
0
#DIV/0! Equity
#DIV/0!
0.0%
0
#DIV/0! Indifference EBIT
0
#DIV/0!
#DIV/0!
#DIV/0!
#DIV/0! Indifference EPS Boom
0
0
#DIV/0!
0.0%
#DIV/0!
0
#DIV/0! Indiff.
#DIV/0!
0 BBB rating chosen
#DIV/0!
0.0%
Credit rating
#DIV/0!
Interest coverage ratio
0
Debt ratio - approximate
#DIV/0! 67 Interest rate
AAA
68 DEBT CAPACITY
27.3
69 Existing debt
12.6%
70 EXCESS DEBT CAPACITY
71
72 Q3-Calculate the debt capacity of the combined PT companies (see Financial Statements tab). Disregard the yellow-shaded
73 panels on the Q3 tab - use only the debt capacity panel. Explain how much additional debt can be borrowed
74 based on your analysis.
75 Answer in this box.
76
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97 AA A
BBB
BB
B
CCC
18 10.4
5.9
3.4
1.5
0.5
36.1% 38.4% 43.7% 51.9% 74.9% 100.6% Q4-Answers here pull together the analysis you did for Q1, Q2 and Q3.
a Write a short statement describing the 'business risk' of the physical therapy business…
…including pros and cons…from the viewpoint of growth and stability of revenue and EBITDA. b The case tells you that the 'buyer's side' valuation uses an EBITDA multiple of 3x and a 'seller's side' valuation
uses an EBITDA multiple of 8x. The market multiples analysis in Q2 used 3x. Do a sensitivity analysis
using 8x and cite the range of values you get with market multiples compared to the valuation with
FCF. For Q4b, only cite the results. You will render your recommendation later, in Q4c. c Considering your answers to Q4a and Q4b above, recommend the price that should be offered by ACE to buy the
combined PT companies. Use metrics you calculated and those in the case (hard data) as well as other case
information (soft data) to justify your recommendation. d Given the price you recommended in Q4c and the debt capacity you calculated in Q3, and knowing that
the policy of ACE is to borrow 50% of the price they pay, is the debt capacity high enough to provide the money
they need? Explain fully. e Suppose ACE sells the combined PT companies exactly two years after buying it. The sales price is 50% higher
than the valuation you recommended in Q4c. Calculate the rate of return ACE will have earned on its
investment. HINT: Use IRR and don't forget how they financed the purchase. f Based on what you learned about LBOs in the LBO Overview and LBO Video, and what you learned about Private Equity in the Surowiecki article,
explain why you think Aaron Brown's deal is or is not a leveraged buyout. g Considering the structure of this deal and its potential rate of return, explain why you think it is either fair or unfair. From a
public policy standpoint, should private equity deals be subject to an 'excess rate of return' tax? Why or why not?