Fin 573 Module 3

Investment Banking: Financial Analysis
Professor Rob Metzger & Professor Jim Bertram
Module 3: Comparable Precedent Transaction Analysis
Table of Contents
Lesson 3-1: Similarities and Differences Between Public and Transaction Comparables Analysis .......2
Similarities and Differences Between Public and Transaction Comparables Analysis ......................................... 2
Lesson 3-2: Comparable Precedent Transaction Analysis .................................................................6

Steps to Performing Comparable Precedent Transaction Analysis ...................................................................... 6
Finding Transaction Comparables ......................................................................................................................... 7
Unique Aspects of Spreading a Transaction Comparable ..................................................................................... 9
The Final Analysis is the Same ............................................................................................................................. 13
Advantages and Disadvantages of Comparable Precedent Transaction Analysis .............................................. 16
Lesson 3-3: Building a Valuation Summary .................................................................................... 19

Building a Valuation Summary ............................................................................................................................ 19
1
Lesson 3-1: Similarities and Differences Between Public and Transaction

Comparables Analysis
Similarities and Differences Between Public and Transaction Comparables Analysis
In this module, we will now review the other multiples based valuation technique,
comparable precedent transactions analysis. As you can see, there are many
similarities between public trading and transaction comparables analysis. Both are
market-based in that the market is setting the value. Investors buying and selling shares
in the public market for public comps and a buyer and a seller agreeing on an
acquisition price in the case of a transaction, both are multiples based. Judgment is
required to select suitable comparable companies and in adjusting financial information
in both cases, and the process of spreading and adjusting financial information is
essentially the same.
2
That said, there are a few differences that are worth pointing out. Public comps are
based on a trading price which changes each day in the stock market, and on current
financial results which get updated each quarter. While transaction comps are based on
an acquisition price that set when a deal is announced and on financial results publicly
available prior to the announcement date. Trading comps are current and transaction
comps are historical. Also, transaction multiples tend to be calculated using trailing, 12
month results, LTM results. While public multiples are both trailing and projected.
3
Transaction multiples reflect a change of control premium, while public multiples reflect
a minority stake interest. Transaction valuations can also reflect synergies if the buyer is
a strategic buyer and potential tax benefits and all of that can factor in and result in
higher multiples. When the target is a public company, acquisition premiums can be
calculated and considered as well.
4
Lastly, once transaction comparables are spread, they do not need to be updated,
whereas public companies need to be updated as stock prices change and new filings
become available.
5
Lesson 3-2: Comparable Precedent Transaction Analysis
Steps to Performing Comparable Precedent Transaction Analysis
The steps for performing precedent transaction analysis are virtually the same as with
public comparable company analysis. Step one is to understand the business you're
valuing and to find and select transactions, where comparable businesses have been
acquired. Step two, is to locate the necessary deal related and financial information for
the company, which has been acquired. Step three, spread and adjust the transaction
and financial information for the company, which has been acquired. Step four,
benchmark operating and growth metrics for the acquired company's and compare
those to the business you're valuing. At this point, you might decide to modify your
universe of comparable acquisitions. Step five, lastly calculate the appropriate multiples
for all the comparable transactions, and then consider which range of multiples should
be applied to the earnings of the business you're valuing.
6
Finding Transaction Comparables
At this point, let me highlight that in addition to the attributes you used in selecting public
comparables, with transaction comparables, you need to also consider when the
transactions were announced. Generally speaking, the more recent the date of the
transaction, the better as the market environment will likely be similar to the current
market environment. Transaction specific factors could also be considered. Things like
synergies, tax attributes was the target distressed, etc. And lastly but importantly, is
there reliable information about the transaction and the financial performance of the
acquired business so that you can spread the transaction? This is why you generally
need to find businesses which were publicly traded at the time that they were acquired.
7
Because finding comparable transactions can be more difficult than finding publicly
traded comparables, here are some helpful suggestions. Look at Merger and
Acquisition databases. Look at the M&A history of the company you are valuing.
Look at and review the M&A history of the public companies you have selected and
spread. Look deeply into merger proxies and tender offer documents for the comparable
transactions you find, is there could be additional transaction comparable information in
those. And lastly, look at research reports.
8
Unique Aspects of Spreading a Transaction Comparable
When spreading transaction comparables, there are a few important issues to be aware
of that impact your analysis, and they are listed on this slide. Let's go through each in a
little bit more detail.
9
When spreading an acquisition, fully diluted shares should include restricted stock units,
as they will fully vest as part of the transaction, and should also include all outstanding
options versus just exercisable options. Again, because all options will vest as part of
the transaction. Also, total enterprise value should include any debt prepayment
penalties triggered by the transaction.
10
Understanding the form of consideration the acquiring company is using in the

transaction is critically important to determining the value per share being paid.
Consideration can be cash, shares of the acquired company stock, or combination of
the two. If the consideration in stock only, the price used to value the business is the
offer price per share. If consideration is shares of the acquired company stock, an
exchange ratio needs to be used to determine the value per share to use in calculating
the equity value. The exchange ratio determines how many shares of the acquiring
company stock a selling shareholder receives for each share of selling company stock
owned. As such, that exchange ratio times the value per share of the acquirer's stock
equals to the value delivered for each share of stock in the company being acquired.
When both cash and shares of acquiring stock are used as consideration, both the cash
per share and the value of the acquirer shares given needs to be multiplied by the fully
diluted shares outstanding of the selling company to calculate equity value for the
transaction.
When analyzing the acquisition of a public company, an acquisition premium can be

calculated and considered. To calculate the premium, you divide the offer price per
share by the unaffected trading price per share minus one. The unaffected trading price
is the trading price before the stock price reflects the potential transaction. Due to the
impact of rumors, you might have to go back 30 or 60 days prior to the announcement
to find the unaffected price.
11
Lastly, when calculating transaction multiples, it's valuable to look at multiples both on a
pre and post synergy basis when synergy mounts are announced as part of the
transaction disclosure. Here's an example of the impact synergies can have on implied
multiples, which as you can see, can be significant.
12
The Final Analysis is the Same
As you can see from this slide, the comparable precedents transactions analysis model
works the same way as the public company comparables model. It pulls the various
transactions spreads to generate operating evaluation statistics. Which can then be
used to create benchmarking and valuation summary pages.
13
Let's go back to the sportsman's warehouse example and have a look, so back to our
sportsman's warehouse example. Now looking at precedent transaction comparables, I
have selected three companies here that were public companies that were acquired to
use for our analysis. As I mentioned with public house, we could spread more
transactions and probably would but for illustration purposes, let's look at these three.
The first company is Bass Pro acquiring Cabela's, the next transaction was a
consortium of private equity firms led by BC partners acquiring PetSmart. And lastly,
Monomoy capital acquiring West Marine, and so those are the companies we're going
to look at. You can see that the implied multiples for those transactions are here,
enterprise value to Ebitda ranging from as high as 10. In the case of the compel
Cabela's deal, the low multiple here was the West Marine at almost eight times Ebitda.
And so in the middle is the PetSmart deal, about nine times, and when we look at the
median and average of this group, it's around nine times as well.
14
But let me move into looking at the template here, because it is similar to the public
companies but there are some differences. So it's probably worth taking a look at that,
as you can see, the layout of this is very similar to the public company comps model.
But here on the left hand side of the spreadsheet, you have kind of more information
about the transaction. A little bit of information about the target company and then also
a description of the acquiring company, where the information around the transaction
was pulled from. Here, there are less columns here, because you're really focused more
on LTM numbers versus historical and projected that the analysis tends to focus on
trailing 12 months. In this situation, the deal took place at a time where there weren't
stub period so you could work purely off of the 10-K. It is important to note as we talked
about, that these deals can be financed different ways and consideration can take the
form of cash or stock or both. In this case, it was 100 cash deal, so it's a cash offer price
times the number of fully diluted shares get you to the implied equity value. You add the
debt, subtract the cash to get to an enterprise value and then therefore, you can see
here the enterprise value to adjusted Ebitda multiple for this transaction was 10.2 times.
So we do that for all three of the transactions in this case, and then we can move to our
valuation summary.
15
And like I did with the public comparables here I've highlighted in green, the focus areas
enterprise value to ebitda. Multiples is what we'll focus on but there's also enterprise
value to revenue and ebit here is talked about before. It's a trailing 12 months Ebitda
that we're looking at, so these multiples range from eight to 10 times with nine roughly in
the middle. If we follow the same pattern where we look at Sportsman's warehouse
here. It's the trailing 12 months Ebitda that we're looking at for sportsman's warehouse,
which was 146 million. And we apply these multiples to that number, you get a range of
implied enterprise values for sportsman's warehouse, that ranges from 1.1 billion up to
1.5 billion with 1.3 billion roughly in the middle. As a reminder, at the time that we did
this enterprise value, a trading basis for sportsman's warehouse was about 456 million.
This highlights the issue with precedent transactions analysis, it is a historical analysis.
These deals are historic deals that we're all done pre COVID and as a result, the
earnings levels, the multiples are all reflective of a pre COVID environment. And today,
as as we all know, we're in a post COVID environment, so this points out one of the
challenges with president comps analysis.
Advantages and Disadvantages of Comparable Precedent Transaction Analysis
16
In conclusion, let's talk about the pros and cons to comparable precedent transactions
analysis. The pros are its market based analysis is based on actual acquisition multiples
and premiums paid for similar companies. Its current recent transactions trend to reflect
prevailing M and A capital market and general economic conditions. Relativity multiples
approach provides straightforward reference points across sectors and time periods,
simplicity. Key multiples for a few selected transactions can anchor valuation objectivity.
It's precedents based and therefore avoids making assumptions about the company's
future performance.
17
On the consideration side, it's market based multiples can be skewed depending on
capital markets and our economic environment at the time of the transaction. Time lag
president transactions by definition have occurred in the past and therefore may not be
truly reflective of current market conditions difficult to find. It can be sometimes difficult
to find a robust universe of precedent transactions related to this availability of
information. Information may be insufficient to determine transaction multiples for many
comparable acquisitions. And, lastly and acquirers, basis for valuation. Valuation can be
based on a buyer's expectation regarding the target's future financial performance,
which is typically not publicly disclosed rather than on reported LTM financial
information.
18
Lesson 3-3: Building a Valuation Summary
Building a Valuation Summary
Now that we've completed both public and transaction comparables analysis, we can
start to compile evaluation summary page, which will help us ultimately zero in on a
range of value for the business we're analyzing. It is important to point out that the
ranges on the valuation summary page, sometimes referred to as a football field
because it looks like one, can be total enterprise value, equity value, or price per share.
As such, it's important that we make it clear on your summary page, what the ranges a
value represent. As Sportsman's Warehouse is a public company and therefore people
tend to refer to its stock price when discussing value, we have used implied prices per
share for this summary.
19
Let's take a look. The yellow line on this chart at $10.40 a share represents the trading
price of Sportsman's Warehouse on January 19th of 2022 when I perform this analysis.
The green line at $18 per share represents the offer price made by Great Outdoors in
February of 2021. Using the range of total enterprise value to next fiscal year plus one
EBITDA multiples of 5 1/4 to 5 3/4 derived from our analysis of the public comparables
and applying them to Sportsman's Warehouse, next fiscal year plus one EBITDA of
115.8 million gets us a range of implied stock prices for Sportsman's Warehouse of
1385 to 1517. This assumes zero net debt and fully diluted shares outstanding of 43.88
million. This range is above the trading price, but below the Great Outdoors takeover
price. If we look at implied values per share based on transaction comparables analysis,
where we derived a range of enterprise value to LTM EBITDA multiples of eight to 10
times and apply them to Sportsman's Warehouses, LTM EBITDA of 146.3 million. We
get a range of implied stock prices for Sportsman's Warehouse of 2667 to 3334. Again,
assuming zero net debt and fully diluted shares outstanding of 43.88 million. This range
is substantially higher than the trading price and the Great Outdoors offer price. This
range is misleading, as it's unlikely that a buyer would apply pre COVID transaction
multiples to EBITDA that is inflated by a COVID lift as such. In order to get another
perspective, I decided to apply the pre-COVID multiples to Sportsman's Warehouse's
forward EBITDA as the COVID lift is projected to subside. This range, which is
represented by the dotted orange box, is 2111 to 2639 per share. Still higher than both
the trading price and the Great Outdoors offer price, but closer to the $18 level. This
approach of taking the pre-COVID multiples and applying them to normalized earnings
is likely what Great Outdoors did and supporting their $18 per share offer price.
20
Because Sportsman's Warehouse is expected to have higher normalized earnings in

the future, it's not surprising that the orange dotted box is above $18 per share. Based
on the two multiples based valuation approaches and this summary of them, it does
appear that Sportsman's Warehouse might have been undervalued in January of 2022.
Performing both discounted cash-flow analysis and leveraged buyout analysis would
help us to further inform that point of view. We will now turn to cash flow-based
valuation techniques, which will allow us to fill in those ranges on the evaluation
summary page.
21

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Investment Banking: Financial Analysis

Professor Rob Metzger & Professor Jim Bertram

Module 3: Comparable Precedent Transaction Analysis

Lesson 3-2: Comparable Precedent Transaction Analysis .................................................................6

Lesson 3-3: Building a Valuation Summary .................................................................................... 19

Lesson 3-1: Similarities and Differences Between Public and Transaction

Similarities and Differences Between Public and Transaction Comparables Analysis

Lesson 3-2: Comparable Precedent Transaction Analysis

Steps to Performing Comparable Precedent Transaction Analysis

Finding Transaction Comparables

Unique Aspects of Spreading a Transaction Comparable

Understanding the form of consideration the acquiring company is using in the

When analyzing the acquisition of a public company, an acquisition premium can be

The Final Analysis is the Same

Advantages and Disadvantages of Comparable Precedent Transaction Analysis

Lesson 3-3: Building a Valuation Summary

Building a Valuation Summary

Because Sportsman's Warehouse is expected to have higher normalized earnings in

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