Case for Analysis: Valuating a target Enterprise and expected Synergies

Rahul Vadera, CFO of Prime Widgets Ltd., was checking out Singham Alpha Mallets Ltd.,
with a view to acquiring it for reaping some synergies in operation. He was confident after
meetings with his CxO colleagues that the present management of SAM could be
significantly improved. In addition, as he could see, valuable synergies over a period of time.
SAM: Financial Highlights for the year ended 31March2012
`lakhs
Sales
1000
COGS as % on Sales
60%
Admin Expenses
150
Depreciation (SLM@8%p.a.)
50
Interest Income on investments
20
PBT
180
Paid Up capital (10 lakh shares @`10each)
100
Free Reserves
1600
Debt @10% interest
600
Capital Expenditure
20
Increase in NWC
9
Increase in Deferred Tax Liability
20
It was feasible to make projections with reasonable confidence for 7 upcoming years. The
planned strategic initiatives and best business practices brought in were expected to yield
following improvements (All amounts are in ` lakhs and growth rates are per annum):
Sales would grow @10%p.a. for first four upcoming years and @5% for last three.
Cost of Goods sold would remain 60% of sales.
Selling and Administrative Expenses would grow @5% every year
Depreciation would continue to be SLM@8%. This was also as per IT method.
Interest income earned would be 25 p.a. for first two upcoming years, 30 p.,a. for next
two years and then 35 p.a. thereafter.
Long-term Debt (@10% interest) will annually increase by @10% to sustain growth.
Capital Expenditure would be 20 p.a. for two upcoming years and 15 p.a. thereafter.
Net Current Assets would increase by 10% of incremental sales every year.
Income Tax rate is expected to remain stable @35%.
Increase in Deferred Tax Liability for upcoming seven years is expected to be 10, 24, 28,
15, 19, 21 and 10 respectively.
That makes the Cashflow projection as given in table 1. As seen there, the Status Quo
valuation of SAM Ltd., by conservative estimates of the Enterprise DCF was ` 26.16 crores.
Nett of debt, that would be over 20 crores. The intrinsic valuation per share of the 10 lakh
shares of SAM Ltd., as seen by Vadera, thus stood at `200.
With better business practices and management brought by PWL control, Vadera was
confident that SAML would achieve 15%p.a. growth for the first four years, 10%p.a. for the
next three and 5%p.a.forever after that. As seen in table 2, the intrinsic value then would be
`35.67 crores. Nett of present debt 6 crores, this would be roughly `30 crores, i.e. a per share
value of `300. Vadera thus could negotiate a control premium of upto `100 per share.
Vadera also foresaw synergies between PWL and SAML being realized in the form of
economies of scale by joint purchasing, resulting in the COGS/Sales ratio reducing by 1%
p.a. for each of the first three years and stabilize thereafter. As seen in table 3, the Enterprise
value would be `61.84 crores, i.e. `560 per share, or a pure synergy premium of `260.
Vadera wondered what offer he should make to SAML and the public for getting controlling
equity in SAML.
M&A, Symbiosis SCMHRD, PGDF Dilip Thosar, Dec.2012

Page 1

of 4

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

Case for Analysis: Valuating a target Enterprise and expected Synergies

Actual

SAML: Status Quo

`lakhs
Net Sales
COGS
Admin and Gen Expenses
Depreciation
Total Expenses
PBIT/EBITA
Less Tax on EBITA
NOPAAT
Addback Depreciation
CashFlow from Operations
Increase in NWC (NCA)
Less Capital Expenditure
Free CashFlow
Interest Income
tax on interest income
Interest income net of tax
FCF available to investors
Continuing Value @ no growth
Continuing Value @5% growth
Total FCF
Discounting factor (WACC)
1+disc factor
PV of FCF
NPV of Enterprise (0,5% growth)
Equity Paid up capital
Reserves
Networth
Debt
Debt:Equity
Cost Of Debt (Post-tax)
Cost of Equity (post-tax)
WACC

Parameter
Value
p.a.growth10%4yrs 5%after
COGS/Sales
60%
p.a.growth
5%
p.a.SLM
8%

Tax/EBITA

35%

NWCIncr/Sales
10%
p.a. 20for2yrs,15after
p.a.25/2yrs,30/3, 35

growth
growth

FY11-12
1,000
600
150
50
800
200
70
130
50
180
9
20
151
20
7
13
164

Projections
FY12-13
1,100
660
158
52
869
231
81
150
52
202
10
20
172
25
9
16
188

FY13-14
1,210
726
165
53
945
265
93
173
53
226
11
20
195
25
9
16
211

FY14-15
1,331
799
174
54
1,027
304
107
198
54
252
12
15
225
30
11
20
245

FY15-16
1,464
878
182
56
1,116
348
122
226
56
282
13
15
253
30
11
20
273

FY16-17
1,537
922
191
57
1,171
367
128
238
57
295
7
15
273
35
12
23
296

FY17-18
1,614
969
201
58
1,228
387
135
251
58
309
8
15
287
35
12
23
309

FY18-19
1,695
1,017
211
59
1,287
408
143
265
59
324
8
15
301
35
12
23
324

0
5%

2,616
3,772
10 lakh shares @face `10

p.a.growth

10%

Given

12%

3,105
164
10.57%
1.1057
164

188
10.54%
1.1054
170

211
10.52%
1.1052
173

245
10.50%
1.1050
181

273
10.49%
1.1049
183

296
10.47%
1.1047
179

309
10.45%
1.1045
170

324
10.43%
1.1043
161

100
1600
1700
600
35.29%
6.5%
12%
10.57%

100
1723
1823
660
36.20%
6.5%
12%
10.54%

100
1865
1965
726
36.95%
6.5%
12%
10.52%

100
2030
2130
799
37.49%
6.5%
12%
10.50%

100
2218
2318
878
37.90%
6.5%
12%
10.49%

100
2413
2513
966
38.45%
6.5%
12%
10.47%

100
2618
2718
1063
39.11%
6.5%
12%
10.45%

100
2829
2929
1169
39.92%
6.5%
12%
10.43%

M&A, Symbiosis SCMHRD, PGDF Dilip Thosar, Dec.2012

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

3,105
10.43%
1.1043
1,399

Page 2

6,262
6,262
10.43%
1.1043
2,555

of 4

Case for Analysis: Valuating a target Enterprise and expected Synergies

SAML: under PWL control
`lakhs
Net Sales
COGS
Admin, selling and Gen Expenses
Depreciation
Total Expenses
PBIT/EBITA
Less Tax on EBITA
NOPAAT
Addback Depreciation
Gross CashFlow from Operations
Increase in NWC (NCA)
Less Capital Expenditure
Free CashFlow from Operations
Interest Income
tax on interest income
Interest income net of tax
FCF available to investors
Continuing Value @ no growth
Continuing Value @5% growth
Total FCF
Discounting factor (WACC)
1+disc factor
PV of FCF
EDCF NPV (PWL control)
@growth
Equity Paid up capital
Reserves
Networth
Debt
Cost Of Debt (Post-tax)
Cost of Equity (post-tax)
WACC

Actual

Projections

0
1
2
3
4
5
6
7
Thereafter
Parameter
Value FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 FY18-19 no growth 5%growth
p.a.growth15%4yrs10%3y5%after
1,000 1,150
1,323
1,521
1,749
1,924
2,116
2,328
COGS/Sales
60%
600
690
794
913
1,049
1,154
1,270
1,397
p.a.growth
5%
150
158
165
174
182
191
201
211
p.a.SLM
8%
50
52
53
54
56
57
58
59
800
899
1,012
1,141
1,287
1,403
1,529
1,667
200
251
310
380
462
521
588
661
Tax/EBITA
35%
70
88
109
133
162
182
206
231
130
163
202
247
300
339
382
430
50
52
53
54
56
57
58
59
180
215
255
302
356
396
440
489
NWCIncr/Sales
10%
9
15
17
20
23
17
19
21
p.a.20for2yrs,15after
20
20
20
15
15
15
15
15
151
180
218
267
318
363
406
453
p.a.25for2yrs,30for3,35after
20
25
25
30
30
35
35
35
7
9
9
11
11
12
12
12
13
16
16
20
20
23
23
23
164
196
234
286
337
386
428
475
growth
0
4,557
growth
5%
9,191
164
196
234
286
337
386
428
475
4,557
9,191
10.57%
10.54%
10.52%
10.50%
10.49%
10.47%
10.45%
10.43%
10.43%
10.43%
1.1057
1.1054
1.1052
1.1050
1.1049
1.1047
1.1045
1.1043
1.1043
1.1043
164
177
192
212
226
234
235
237
2,053
3,750
3,567
5,263
0
5%
100
100
100
100
100
100
100
100
1600
1723
1865
2030
2218
2413
2618
2829
1700
1823
1965
2130
2318
2513
2718
2929
p.a.growth
10%
600
660
726
799
878
966
1063
1169
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
6.5%
Given
12%
12%
12%
12%
12%
12%
12%
12%
12%
10.57%
10.54%
10.52%
10.50%
10.49%
10.47%
10.45%
10.43%

M&A, Symbiosis SCMHRD, PGDF Dilip Thosar, Dec.2012

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

Page 3

of 4

Case for Analysis: Valuating a target Enterprise and expected Synergies

Actual

SAML: under PWL control with synergies

`lakhs
Net Sales
COGS
Admin, selling and Gen Expenses
Depreciation
Total Expenses
PBIT/EBITA
Less Tax on EBITA
NOPAAT
Addback Depreciation
Gross CashFlow from Operations
Increase in NWC (NCA)
Less Capital Expenditure
Free CashFlow from Operations
Interest Income
tax on interest income
Interest income net of tax
FCF available to investors
Continuing Value @ no growth
Continuing Value @5% growth
Total FCF
Discounting factor (WACC)
1+disc factor
PV of FCF
EDCF NPV (PWL control+synergy)
Equity Paid up capital
Reserves
Networth
Debt
Cost Of Debt (Post-tax)
Cost of Equity (post-tax)
WACC

Parameter
Value
p.a.growth15%4yrs 10%3y 5%after
COGS/Sales: 60%, -1%for 3yrs
p.a.growth
5%
p.a. SLM
8%

Tax/EBITA

35%

NWCIncr/Sales
p.a. 20for2yrs,15after

10%

p.a.25for2yrs,30for3, 35after

growth
growth

Projections

0
FY11-12
1,000
600
150
50
800
200
70
130
50
180
9
20
151
20
7
13
164

1
FY12-13
1,150
679
158
52
888
262
92
171
52
222
15
20
187
25
9
16
203

2
FY13-14
1,323
767
165
53
986
337
118
219
53
272
17
20
235
25
9
16
251

3
FY14-15
1,521
867
174
54
1,095
426
149
277
54
331
20
15
296
30
11
20
316

4
FY15-16
1,749
997
182
56
1,235
514
180
334
56
390
23
15
352
30
11
20
371

5
FY16-17
1,924
1,097
191
57
1,345
579
203
376
57
433
17
15
401
35
12
23
423

6
FY17-18
2,116
1,206
201
58
1,465
651
228
423
58
481
19
15
447
35
12
23
470

7
FY18-19
2,328
1,327
211
59
1,597
731
256
475
59
534
21
15
498
35
12
23
521

164
10.57%
1.1057
164

203
10.54%
1.1054
184

251
10.52%
1.1052
206

316
10.50%
1.1050
234

371
10.49%
1.1049
249

423
10.47%
1.1047
257

470
10.45%
1.1045
258

521
10.43%
1.1043
259

100
1600
1700
600
6.5%
12%
10.57%

100
1723
1823
660
6.5%
12%
10.54%

100
1865
1965
726
6.5%
12%
10.52%

100
2030
2130
799
6.5%
12%
10.50%

100
2218
2318
878
6.5%
12%
10.49%

100
2413
2513
966
6.5%
12%
10.47%

100
2618
2718
1063
6.5%
12%
10.45%

100
2829
2929
1169
6.5%
12%
10.43%

0
5%

Thereafter
5%growth

10,069
10,069
10.43%
1.1043
4,537

6,184

p.a.growth

10%

Given

12%

M&A, Symbiosis SCMHRD, PGDF Dilip Thosar, Dec.2012

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

Page 4

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