Prompt

The client is a large European insurance company which offers several types of insurance
(home, life, etc.). The client has identified an interesting target in the United States. This
target is listed on the US stock exchange, and specializes in major risk insurance (ie, serious
accidents with very low probability: plane crash, nuclear explosion, tsunami, etc.).
Is the target interesting?

NB: bonus point to note that this is the acquisition of XL Group by AXA in Sept-18.

Clarifying questions:
- What is the size of each player in terms of market capitalization or book value?
$100bn and $12bn respectively.
- Does the client already have a large risk business in the US?
Yes, but very small.

Question 1: What are the usual valuation methods?

- Discounted Cash-flow;
- Multiple of EBITDA;
- Transaction multiple;
- Others: Price/Book, P/E...

We are interested in the EBITDA multiple.

The median multiple of comparable companies is 5 time. The target is 6times (at the price at
which the target is ready to be sold)

What is the valuation?

$12bn. That is, EBITDA is $2bn.

To have a fair price in line with the market, post-synergies the target must therefore be
worth $12bn at 5x EBITDA, so EBITDA = $2.4bn.
The synergies must therefore generate (2.4-2=) $400m of recurring EBITDA. So, we will try
to quantify the synergies.

What potential synergies do you think of?

I am thinking of cost synergies and revenue synergies.

Could you help the client calculate synergies?

We will calculate the revenue synergies. The target has 2 Business Units. The first generates
$8bn turnover, the second $9bn. The merger will increase the turnover of these BUs
respectively by +1.8% and +0.9%.

On BU 1, we therefore have +$144m in turnover. On BU 2, we get +$81m. That is a total of

synergies of $225m. However, we must not forget that we are thinking in terms of EBITDA,
so we must subtract the costs associated with generating this additional turnover.

Given that the EBITDA margin is 20%, what is the valuation of these synergies?
20% of 225 = $45m, ~10% of expected incremental. We will look at the cost side.

Knowing that the cost synergies are $300m, what can you conclude?
300 + 45 < $400m.

We must therefore explore these synergies, and work on:

- Post-Merger Integration assumptions;
- The control premium which is not taken into account;
- The potential growth opportunities of the current activity (cross-geographies, cross-
clients)…