Firm Valuation

1
Firm Valuation

• Lecture 7

2
Trading and Operating Comparables

• Aggregate Value
• Market Value
• Revenue
• EBITDA
• EBIT
• Net Income
• Total Debt
• Book Value/Share
• EPS
• LTM Revenue, Net Income, EBITDA growth rates
• P/E
• TSR

3
Profile of Home Depot Lowes

• HD Lowes
• Market Cap 78.6B 46.6B
• Enterprise Value 84.7B 49.1B
• 1 yr TSR (9.5) 4.3
• 3 yr TSR 8.4 (6.3)
• 2007 AV/EBITDA 7.0X 7.0X
• 2007E P/E Ratio 11.9 13.9
• 2008E P/E Ratio 10.7 12.2
• Credit Rating Aa3/AA A1/A

4
ROIC and P/E Multiples
5
Aggregate Value Analysis

• Purchase price per share
  12
• Premium to Current price 20
• Fully Diluted Shares Outstanding 100M
• Implied Equity Value
  1.2B
• Plus Net Debt 0.4B
• Implied Aggregate Value
  1.6B
• Current EBITDA
  150M
• Implied AV/EBITDA 10.6X

6
Financial Outlook Analysis
7
Characteristics of Top Performing Firms

• Capital Efficiency
• Working Capital Efficiency
• Increasing Return on Invested Capital
• Rising Incremental Relative P/E values
• Bottomline
• Limited Capital Requirements and High NOPAT
  margins generate strong ROIC

8
Sale Process Alternatives

• One Party- Negotiated Sale Contact One Party
• Controlled Limited Auction
• Open Broad Auction
• Publicly Announce Pursuing Strategic Alternatives

9
Factors in the Decision

• Shareholder
• Marketing
• Senior Management
• Employees
• Contract
• Community

10
Factors in the Decision

• Marketing
• Confidentiality
• Number of potential Bidders
• Timing
• Information Flow

11
Factors in the Decision

• Senior Management
• Willingness to stay on
• Depth of the team
• Contracts/Severance
• Incentive-Stay Pay Agreements

12
Factors in the Decision

• Employees
• Future Opportunity
• Benefits
• Job Security
• Culture

13
Factors in the Decision

• Structure of the Deal
• Representations and Warranties
• Indemnifications
• Closing Conditions