1

Operating Cash Flows

legland@hec.fr
legland@hec.fr 1

NET ASSET COMPARISON DISCOUNT FUTURE

VALUE WITH RECENT CASH FLOWS
TRANSACTIONS

HOW TO VALUE A BUSINESS?

VALUATION OF OTHER METHODS:

INVESTMENT PROJECT - Valuation of brands
- Valuation scenarios
- Special Situations: Start-Up
Companies loss, LBO ...

legland@hec.fr
 4 Valuation Families 2

Investment
Assets Comparatives Dynamic Projects

Assets owned by Comparisons Based on what Specifically

the company with recent the company can enhances an
minus debt transactions or generate in the investment project
listed companies future or a Start-Up

Revalued Net Earning Forecasting Net Present Value

Asset Multiples Cash Flow or Internal rate of
Sales multiples, Dividends Return
EBITDA or EBIT Payback

Easy to use
Static Takes into account the future
No consideration of the future Reliable forecasts?

legland@hec.fr
 5

Medica’s 2010 Initial Public Offering (IPO) on Euronext Paris

IPO planned for 2010. Medica intends to carry out a €c260m capital increase.
The proceeds used to finance growth strategy, and pay-off part of debt.
Medica company background and description
Medica is a key player (French 3rd) in the temporarily or permanently care of
dependent people. The firm operates in two sectors:
ü 1 – EHPAD, which provide accommodation for dependent elderly,
(retirement homes), and catering for permanently dependent people (107
homes, 8,726 beds).
ü 2 - The healthcare sector, mainly through care units specialising in
psychiatric care (37 healthcare establishments, 2,316 beds).
Medica operates mainly in France and has been active in Italy since 2005. The
firm’s main competitors are: Orpéa, Korian, Le Noble Age.
Medica sales rose from € 70m in 2000, to €481m in 2009, (+ 24% p.a.).

legland@hec.fr
6 Consider you are in Q1 2010 before
Financial Analysis MEDICA Initial Public Offering (IPO)
1 - Carry out a financial analysis of MEDICA
Valuation Range based on Multiples
2 – Which peer (Appendice 1) is the most comparable to MEDICA? Why? Calculate
2009 EBITDA, EBIT, P/E multiple for it.
3 - Which share price valuation range you recommend for MEDICA IPO? (14.2m shares)
DCF Errors and simulation
4 - Without re-making the calculations, look carefully at DCFs (appendix 3), from
different brokers’ notes. Which methodology is right and has no major methodological
mistake? Which mistakes have been done in the three wrong DCFs?
5 - You are provided with a DCF valuation simulation table based on +/- 10% on a) the
Cost of Capital, b) Growth rate to Infinity, c) Terminal Value. What do you conclude?
Synthesis: Recommended Valuation range
6 - On the basis of the various calculations that you have made, which share price
range would you finally recommend for MEDICA IPO in January 2010? Why?
7 - IPO impact on MEDICA:a) Bal. Sheet b) P&L c) Cost of Capital? Should the IPO have
been done through the selling of existing shares, would your answer have been
different?

legland@hec.fr
1 - Carry out a financial analysis of MEDICA
 2 - Among Medica’s comparable peers (Appendice 1), which one, is the most
comparable to Medica? Why? Calculate 2009 EBITDA multiple , EBIT multiple, P/E
for this most comparable competitor. Medica: 14.2m issued shares outstanding

Korian:
ü Most comparable
revenue growth
rate
ü Roughly same
level of debt as
Medica
ü Profitability taken
as well into
account also less
relevant

Korian:
Enterprise Value: Market caps+ Net Fin Debt = € 627m + € 542m = € 1 169m
2009 EBITDA multiple: (€ 627m + € 542m) / € 92m = 12,7 x
2009 EBIT multiple: (€ 627m + € 542m) / € 63m = 18,5x
2009 PER multiple: de Korian: € 627m / € 24m = 26,1 x 8
 3 - Which share price valuation range do you recommend for Medica IPO, 9

based on 2009 available informations? 14.2m issued shares outstanding.

EV / EBITDA multiple: Korian 2009 EV/EBITDA = 12,7 x
Medica: Korian multiple -1 point to take into account lower growth rate
EV = (Korian multiple – 1) x Medica 2009 EBITDA = 11,7 x € 83m = € 971m
Equity value = € 971m - € 769m = € 202m / 14,2 million shares = € 14,2

EV / EBIT multiple: Korian 2009 EV/EBIT = 18,5 x

Medica: Korian multiple -2 points to take into account lower growth rate
EV = (Korian multiple – 2) x Medica 2009 EBIT = 16,5 x € 64m = € 1 056m
Equity value = € 1 056m - € 769m = € 287m / 14,2 million shares = € 20,2

PE multiple: Korian 2009 P/E = 26,1x

Medica being loss making in 2009, impossible to us it for 2009
And P/E could only be used if similar level of financial debts.

Medica IPO: Proposed share price valuation range, based on Multiples:

EV/EBITDA method: € 14,2 EV / EBIT method: € 20,7

legland@hec.fr
 Valuation Of Equity

Discounted Cash Flows: DCF (1/2)

1. Computing the Value of a firm’s Capital Employed (aka Enterprise
Value: EV) by discounting the future Free Cash Flows using the
Principle WACC as discount rate
2. Getting the Equity Value by deducting the value of Net Debt from the
Enterprise Value computed through the DCF method
§ In practice, the valuation of FCF to infinity is impossible. We split the EV into two
streams of FCF:
n
FCFFt
− Explicit horizon EVExplicit = å
Valuing the t =1 (1 + WACC ) t
Enterprise Value EV = EVExplicit + EVTerminal
1 FCFFn +1
− Terminal horizon EVTer min al = x
(1 + WACC ) WACC - g
n

§ Equity Value (EqV) is obtained by deducting (adding) the value of the

rights to FCFs that do not belong (belong) to shareholders
Valuing Equity § In practice, we have EqV = EV – ND with ND: Value of Net Debt
Value
§ Other adjustments may also be required given consolidation methods,
tax issues and some exceptional items that may not have been taken into
account in FCFs but have an impact on EqV

legland@hec.fr
 Valuation Of Equity

Discounted Cash Flows: DCF (2/2)

+¥
FCFFt
EV = å
t =1 (1 + WACC ) t
1. FCFt = Constant
FCFF
EV =
Free Cash Flows
WACC
Assumptions 2. FCFt+1 = FCFt x (1+g)
FCFF1 with g = annual growth rate of FCF
EV = assuming g < WACC
WACC - g
3. If g > WACC, same reasoning as for DDM
§ Reminder: WACC is different from ke used in DDM. It represents the
weighted average return required by all investors in Capital Employed

ü Intrinsic model that captures the effect on Value of business

characteristics (product mix, cost structure, geographical exposure) and
their impact in the future
Pros & Cons
û Value very sensitive to terminal value and WACC
û Method depends on quality of business plan which needs to be credible

legland@hec.fr
 Start-up development emotion : From Euphoria to Depression 12

EUPHORIA
THRILL
ANXIETY

EXCITEMENT
DENIAL

Point of maximum
financial risk FEAR

OPTIMISM

DESPERATION
OPTIMISM Point of maximum
financial opportunity
PANIC “Maybe investing in the
market isn’t my bag of
“Wow, I feel great beans”
about this investment.”
CAPITULATION
RELIEF

DESPONDENCY
HOPE
DEPRESSION

legland@hec.fr
 5
Valuation multiples
• P / E or PER :
– PER = Market Value of Equity / Net Income
– PER = Share Price / Earning Per Share
– -> Market Capitalization = Net Profit x PER
– -> Share Price = Earnings Per Share x PER
– Average PER: 12x to 14x (Min: 5x - Max: 30x)

• Multiples of Enterprise value:

– EV = Market Value of Equity + Net Financial Debt
– EV / Sales
– EV / EBITDA,
– EV / EBIT

• The most commonly used multiple is:

– Enterprise Value / EBITDA
– EV / EBITDA means: 8x (min: 6x - Max: 10x)

legland@hec.fr
 7
How Define the profile of a company for an investor ?
• Combination of Growth and Performance

P / E (x)
“Growth "Star –

High
Share Price / EPS
Stock” Blue Chip "

“Yield
Low "Problem" stock”

Low High

Dividend Yield (%)

Dividend per share / Share Price

legland@hec.fr
Which traditional valuation methods work?
7

INVESTMENT
TRADITIONAL METHOD BRAND VALUATION PROJECTS
Asset: NAV, RNA, TBV Relief from Royalty NPV
Peers Multiples: P/E, EVs, P/B Income split IRR
Flows: DCF, DDM Cost approach PB
Excess Earning
Goodwill Impairments
VALUE CREATION
Firm
Shareholders
CORPORATE Specific projects or situations
M&A
VALUATION Investment

NON-CONVENTIONAL
REAL OPTIONS VALUATION METHODS CONTROL
Scenario based Start-up PREMIUM
Probability based Pre-money
Distressed SYNERGIES
Equity Kicker Multipless
NPV

legland@hec.fr
 Creating Shareholder Value: 4
Return on equity > Cost of equity
Shareholders await a minimum rate of return on
equity
Fixed assets Equity
Capital Asset Pricing Model:
Cost of equity:
Working Net Financial = rf + Beta × (rm - rf)
Capital Debt =
Requirement Risk-free rate (10y Governent Bond Yield 2% to 3%)
Capital Invested +
Employed Capital β Risk coeff. (β: 0.5x to 3x) x Equity Risk prem. (6% to 8%)

• Creating Shareholder Value:

Return on Equity ( "ROE") - Cost of equity ( ”COE") > 0
• If ROE> COE: Market Value Equity > Book Value (" Net Assets ")
• If ROE <COE: Market Value Equity < Book Value(" Net Assets ")
• When the Return On Equity increases, the value of the business increases

legland@hec.fr