Giddy | Corporate Valuation for SBI Capital Markets

DC Gardner Training

Corporate Valuation
for
SBI Capital Markets

Prof. Ian Giddy
New York University

This course employs a "Strategic Corporate Valuation" approach
Corporate valuation involves the application of analytical methods of valuation to help determine the company's business and financial strategy. Different valuation approaches are adapated to different situations, to identify how to increase the value of the business through M&A, restructuring techniques and leveraged financing instruments.

The Course
This course offers an in-depth study of the strategic applications of corporate valuation techniques with a special emphasis on the sources of value creation in leveraged corporate financing and mergers and acquisitions. Starting with the company's "value drivers," we introduce the key decisions - investment, financing and risk management - that contribute to shareholder value. Running through the computations of corporate valuation, we discover the assumptions behind common models and ratios. We apply this to several case studies, revealing also how lbuyouts, divestitures or acquisitions can alter the value of a company.

The course will include case studies of actual corporations and how valuation methods influence their strategy, as well as hands-on exercises, and will give participants the opportunity to demonstrate their understanding of techniques through presentations and discussions.

Who Should Attend?
The seminar is of relevance to mid-leveal and senior SBI Caps professionals who combine investment banking experience with some understanding of the priniples and tools of corporate finance. These individuals' value to clients may be enhanced by an understanding of advanced corporate valuation techniques and the related principles of mergers and acquisitions, divestitures, and leveraged buyouts.

What to Expect from the Course

Learn or update fundamental corporate finance skills through hands-on applications
Identify the key value drivers as well as the vulnerabilities of a business
Master methods to calculate the cost of capital
Apply and critique corporate valuation models, including asset-based, comparables and cash flow methods
Learn when to apply what model, including option-based and rival-advantage models
Identify appropriate valuation techniques for situations such as risky acquisitions, synergistic mergers, divestitures, and leveraged recapitalizations
Apply the principles of corporate valuation to both public and private companies

Suggested Pre-Course Reading

Methods of Corporate Valuation
Notes on cost of capital and capital structure
Note on Leveraged Buyouts

Outline of Workshop

Date	Topics	Resources
Day One	Driving Corporate Value Why valuation matters -- and why most companies are undervalued The 5 principles of corporate finance The corporate value drivers, and how to change them Valuation as a tool to discover restructuring opportunities Measuring value: implementing the free cash flow approach Case study: Actavis Free Cash Flows. Free cash flow computations Valuing a company at the equity level versus whole-firm value Basic valuation methods How business risk combined with financial risk influences investors' return expectations Case study: Autolinks. Delegates evaluate the business and financial risk of this private company, and how it impacts the company's value. Valuing the Business Valuation methods as corporate decision-making tools Asset-based valuation Using comparables EBITDA and enterprise value Discounted cash flow analysis Case Study: Valuing Actavis We practice using the DCF method Measuring the weighted-average cost of capital Case study: Active Generation. The Lebanese owner of a private fitness-center network aims to sell to a strategic buyer, but wants to get the best price. What method should he use to value the business? Valuing a private company and raising private equity Valuation for a start-up business Valuing a business in a developing country Case study: Tropical Paper Products. Can you develop a valuation for this Central American company to help it raise private equity financing? Strategic Valuation: The Option to Expand The method of "option-based valuation" for a strategic investment What do we need to know? Case Study: Disney Mexico. Disney's proposed new theme park in Mexico has a negative net worth, according to conventional DCF methods. Delegates will analyze how option-based valuation techniques can offer insight into why the company places a positive value on such a risky investment.	Presentations Strategy and valuation Valuation methods Option-based valuation Case Studies Actavis FCF Autolinks Actavis Valuation Active Generation Tropical Paper Products Spreadsheets actavis_fcf.xls valuedrivers.xls P/E Ratios Industry ratios actavis_ev.xls Cost of capital spreadsheet beta.xls actavis_valuation active_generation Tropical Paper Valuation-related spreadsheets equityasoption.xls Equity variance data
Day Two	Applying Valuation Methods to Mergers, Acquisitions and Divestitures Corporate M&A strategy: how to win, how to lose Sources of value gains from acquisitions Example: Orascom Construction. Should this Middle Eastern company expand through acquisitions of local cement companies? Restructuring checklist Total cost computation Identification and valuation of operational synergies Identification and valuation of control gains Case study: The Acquisition of Celtel An analysis of the stand-alone and merged value of two mobile phone companies helps to focus on the individual gains from synergy Valuation for financial buyers Implementing a sponsor buyout: senior, mezzanine and equity finance The "PE Method" of valuation: how price is driven by financing Case study: LBO Valuation of Actavis. A private equity perspective on the value of a business. Valuation for Divestitures Break-up valuation method Example: John Deere. Should an agricultural equipment company spin off its finance division? What is the company's break-up value? When should a company divest a business? Example: Pinault-Printemps-Redoute -- Divestiture of Finaref If the company does not divest, who will do it for them? Case study: Caterpillar. Delegates learn how to perform a before-and-after divestiture analysis for a construction equipment company. Valuation and Exit Private equity entry and exit valuation Debt capacity and exit analysis Case study: Reykjavik Fleet Leasing. Exit value estimation. Summary and Recap	Presentations Merger Valuation Divestitures Case Studies Celtel Pinault-Printemps-Redoute Caterpillar Spreadsheets mtc-celtel.xls actavis_lbo.xls johndeere.xls breakup.xls lbo_exit.xls
Day Three	Acquisition Finance How can the Financing be Tailored to the Company's Situation? Financing Considerations: Maturity, Currency, Rate Reset Period, Flexibility Case Study: Photronics. Financing acquisitions at a technology company Finding the optimal financing mix: debt, equity or mezzanine? The players and the market today: LBO funds, private equity houses, advisory firms and others Acquisition lending Assets versus cash flows as support for leverage Role of Revolving Credit Facilities Syndicated Acquisition Bank Credit Case study: Funding the Valvex Acquisition. We examine the pricing and syndication structure of a term acquisition loan and revolver. Sale leaseback and other asset-based funding Securitisation as an acquisition finance tool Group assignment: Madras Appliances. How could this acquisition be financed? Whole business securitization: Heathrow Acquisition Financing Instruments Second lien financing Case study: CUSA Busways. How second-lien lending contributed to the leveraged buy-out of a bus company. Second lien termsheet analysis Subordinated unsecured finance High-yield bonds Pay-in-kind (PIK) notes Case study: Sealy PIK Holdco PIKs Case study: Jefferson Smurfit. Participants identify the factors that determine the rating of this "Holdco PIK" Mezzanine and more Warrant notes Case study: Woodstream. Who gets the warrants, and what are they worth? What is the effective cost of financing to the company? Convertible notes and preferred stock Performance-linked participation debt: an alternative form of mezzanine Case study: Suriname Hydropower. Exit without an exit event? Subordinated vendor financing Equity, including hybrids in acquisition finance (Lottomatica) Case study: Reclamation Group. In this example of a company using leverage to effect a change in control, we discuss the financing options.	Presentations Acquisition Finance Instruments Case Studies Photronics Valvex Acquisition Madras Appliances CUSA Busways Second lien facility Sealy PIK Jefferson Smurfit Woodstream Mezz Woodstream Woodstream Termsheet Suriname Hydro Reclamation Group Spreadsheets madras_appliances.xls woodstream.xls financing_abc.xls
Day Four	Leveraged Buyouts Private Equity Leveraged Buyouts: Basic Economics for Late-stage Deals Private Equity Funds What makes a business suitable for a PE buyout? Leverage and required returns on equity The equity instruments: examples Deal Logic for Leveraged Acquisitions The keys to LBO value: valuation of the company, valuation of the LBO gains, assessment of debt capacity The special situation of LBO valuation (financing-driven valuation) Structuring sponsor and management incentives and gains - envy factor Adding value -- post-LBO restructuring Illustration: the acquisition of TDC Group Assignment: The LBO of AGI Modelling the Deal Debt capacity analysis and computations for leveraged finance The 12-step method Focus: synthetic ratings and debt pricing Modelling the LBO cash flows Focus: private equity exit strategies Group Assignment: Debt capacity for ISS Cash flow analysis: LBO entry and exit valuation Cash flow analysis: key corporate numbers Cash flow analysis: key predictions Cash flow analysis: financing assumptions Cash flow analysis: sponsor and management IRR Improving the Return: Exploiting Senior Loans, Mezzanine, and Quasi-Equity Instruments Senior-sub structure in leveraged finance Second lien notes Mezzanine instruments: PIKs and warrant notes Seller notes, earnouts, and participation finance Integrating Case Study: Flexics Rivals teams employ the tools and ideas of the course to a competitive situation featuring a leveraged buyout and sale to a strategic buyer. They negotiate key features, including: - Valuation of the target - Raising the funding - Terms of payment - Summary "term sheet" agreement Summary and Conclusions	Presentations LBO Leverage LBO Analysis Case studies The LBO of AGI Nukem Security LBO of ISS iss_financials Cognis Refinancing Flexics Articles PE Alchemy Debt-to-EBITDA Spreadsheets leverage_effect.xls beta_and_leverage.xls ratings.xls active_generation_lbo.xls lbocapacity2.xls iss_solution.xls flexis.xls

Additional Resources
Books
Valuation for Mergers, Buyouts and Restructuring, by Enrique Arzac

Background Reading
Critique of Valuation Methods
Private Equity Valuation Guidelines
A Company in One Page
The Fool's Method
Warren's World
Real options valuation

Useful Links
finance.yahoo.com and finance.google.com (summary data and financials)
morningstar.com (summary financials)
investinginbonds.com (treasury rates, corporate bond prices and ratings)
standardandpoors.com (bond ratings)
bondsonline.com (corporate bond spreads)
damodaran.com (industry ratios)
advfn.com (corporate financial ratios)

About the Instructor

Ian Giddy is a professor of finance at New York University, USA. He has taught finance at NYU, Columbia, Wharton, Chicago and abroad for the past thirty years. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, Dr Giddy has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous financial institutions and corporations in Europe, North America, the Middle East and Asia. He has lectured in more than forty countries, and has been involved in corporate finance for over 15 years. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia, and The Hudson River Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica.