1. Precedent Transaction Valuation
Now let's work through our precedent transaction analysis,
you'll notice it's fairly similar to the comparable company table up above,
however, there are some differences. First you'll notice the date.
Remember, we want to use relatively recent transactions,
then you see the acquirer and the target listed. We also have the
targets of share price and the price the buyer offered, this allows us
to calculate the control premium. Remember, buyers usually have to pay a
premium in order to induce target company shareholders to actually sell.
After that, the table looks very similar to the above.
Notice that we have already calculated the multiples for you,
we figure if you can calculate these once, then you can calculate them
a million times. Also notice that we are focused on enterprise value here,
we discussed how enterprise value is the effective purchase price of the
target company. The equity is acquired, but the acquirer must do something
with the target company's debt, usually pay it off.
The average median, et cetera, are also calculated.
So we'd like you to calculate the control premium and the target company
valuation. Again, you only need to work in the gray shaded cells.
So do your best, and then we'll work through this together.
Okay. So let's work through this together. We'll zoom in, Control+Alt+Plus.
We'll start by calculating the control premium. So we just take the offer
price divided by the share price, subtract one,
and we can see the control premium, copy that down.
And again, the control premium's usually in the range of
20% to 30%. Now notice, we do actually have
a negative premium, this is called a takeunder. So it's
fairly rare, but it does happen. And actually, if you go and look
at the average and the median, all of that,
notice we're also excluding the bottom four transactions in this analysis
as well. And that's because, again, this... When you see a takeunder, again,
that's abnormal. So you probably do not want to include that in the
comp set, and then you can see that
these three transactions happened quite a bit ago relative to the other
transactions, but we already calculated all the multiples for you.
So we excluded these four transactions. Now, let's go down and calculate
the valuation of this target company. In this case, we have three years
of EBITDA multiples, 2022 actual, 2023 and 2024 forecasts.
So we've already pulled down the median multiples and we've already referenced
the appropriate EBITDA from the DCF model. So now, just take our EBITDA
times our EBITDA multiple, do it three times since we're using three different
time periods, and we've calculated the enterprise value.
And we can go and reference net debt, again, on the DCF model,
we want it to be a positive number though, so again,
we'll multiply it by negative one. And we'll just reference that,
copy it down. From there we can calculate
the hypothetical market cap, we have enterprise value, we subtract net debt,
and we get our market cap, and you can see these numbers line
up, market cap at offer, this is, again, our hypothetical
buy out market cap. We'll reference the shares outstanding again,
just copy those down. Then what we can do is
we'll skip that column for now, we'll take the
buy out market cap, divide it by the
shares outstanding. Copy that down. Okay, so we're looking at $12 to $13
per share for this company. What's the company currently trading at?
Well, we actually also have that on our DCF model.
So we'll reference that, it was trading at $7.25. So we'll just reference
that again, copy that down, and then we can calculate
the hypothetical control premium. So those are very, very high premiums,
if... This is a fictitious company, but if I owned a share and
it was trading at $7.25, and I got an offer of an 80%
premium, I would probably take that any day of the week.
So, congratulations, you just finished your precedent transactions analysis.
Again, we calculated the enterprise value, we deducted net debt, we got
the market cap, or what would be the buy out market cap.
We divided by shares, we calculated again what the offer price might be,
we compared it to the current share price. Again, you can see we
have very, very healthy premiums. So again, congratulations on
completing the precedent transaction analysis. Next thing we're going to
do, we're going to summarize all of our analysis in a football field
chart, see you there.
2. Let's practice!